Lukoil avoids Western sanctions wrath

By bne IntelliNews January 24, 2023

While many Russian energy companies have been hit hard by fallout from the war in Ukraine, the country’s second biggest oil producer Lukoil has remained relatively unscathed. 

The EU debates internally sanctions against the major Russian energy companies but “currently, we do not have such debates” about Lukoil, an EU diplomat told Politico last week. The Russian company retains a strong lobbying network in Europe, Martin Vladimirov, a senior energy researcher at Bulgaria’s Centre for the Study of Democracy think-tank, told the news agency.

“They have convinced European policymakers that Lukoil is supporting Ukraine and the management of Lukoil is against the war.”

It is true that Lukoil was the only Russian energy company to post a statement calling for an end to the conflict in Ukraine. Its board called in early March for there to be peace in Ukraine as soon as possible, while stopping short of condemning Moscow’s actions.

“Calling for the soonest termination of the armed conflict, we express our sincere empathy for all victims who are affected by this tragedy,” the board said. “We strongly support a lasting ceasefire and a settlement of problems through serious negotiations and diplomacy.”

However, while Lukoil has less close ties with the Kremlin than its state-owned rivals Rosneft and Gazprom, the company can hardly be considered in opposition to Moscow policy. In May, a month after stepping down as Lukoil’s CEO, its founder Vagit Alekperov received an Order of Merit to the Fatherland from Russian President Vladimir Putin.

Still, the company has not attracted the same sanctions pressure from the West as other Russian majors. Neither Alekperov nor Lukoil are subject to EU sanctions, although the company has been under US sanctions since 2014 – the year when Moscow annexed Crimea and began supporting rebel action in the eastern Donbas area.

Furthermore, Lukoil’s operations in Europe have been far less affected than those of its state-owned counterparts. The company continues to operate hundreds of fuel filling stations, three refineries in Italy, Bulgaria and Romania, and a 45% stake in another one in the Netherlands. It also controls a trading arm based in Geneva, called Litasco.

Litasco has suffered as a result of the crisis, with banks withdrawing their credit lines and Lukoil being forced to spend “$1bn or more” to clear the subsidiary’s liabilities, according to Politico. The company now only sells Russian oil and gas products, and is considering relocating to Dubai, the news agency reported, citing sources.

Because of difficulties caused by sanctions, Lukoil also struck a deal to sell its Italian refinery to an Israeli-backed private equity fund G.O.I. Energy, backed by Geneva-based trading giant Trafigura in January. But its Russian counterparts have suffered far more. Germany confiscated Rosneft’s Schwedt refinery last year and Gazprom unit Gazprom Germania, preventing them from simply divesting.

As of yet, though, Lukoil has not reached similar agreements for the sale of assets in other European countries. Its position is seen as most entrenched in Bulgaria, where it has long held a monopoly position. When EU countries in December banned seaborne Russian oil imports, Bulgaria successfully secured a two-year derogation, ensuring that Lukoil could continue sending its own oil to the facility. Burgas supplies half of Bulgaria’s fuel needs.

Refined products produced at the refinery are designated for the domestic fuel market and can only be exported to Ukraine. According to Politico, Lukoil is selling 32,000 barrels per day (bpd) of gas oil from the plant to Ukraine, although there is a “very high risk" of smuggling to other EU markets.

From January to November of last year, Bulgaria exported €700mn of fuels to Ukraine, data published by the Bulgarian National Statistical Institute showed, according to Euractiv. All that supply came from Burgas, the country’s sole refinery, and mostly comprised gas oil.

Still, Lukoil’s operations in Bulgaria may also face headwinds in the future. Bulgaria’s parliament passed a law this month enabling the government to take control of the Burgas refinery in the event of a threat to national security.

Romanian media have reported that Lukoil could sell its business there as well as its other operations in neighbouring Moldova. Lukoil owns 315 filling stations in Romania along with a refinery in Ploiesti, and is the third largest player in the country’s fuel sales market. In Moldova, it occupies about 20% of the retail fuel market, and also handles 40% of diesel imports and 33.5% of gasoline imports into the country.

 

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