What to expect if Bulgaria expels Lukoil

COMMENT: What to expect if Bulgaria expels Lukoil

Russia’s unprovoked invasion of Ukraine in February 2022 had unpredictable repercussions in the global energy market. Although EU countries significantly decreased reliance on Russian oil and, to some extent, Russian gas, the Kremlin still maintains limited influence in some EU countries, including Bulgaria. Since the EU imposed an energy sanctions package on Russia, Bulgaria was granted a two-year exemption from Europe’s embargo on Russian oil until December 2024.

According to the available data, Bulgaria imports 3mn barrels of Russian oil a month, making it the world’s fourth-largest importer, followed by India, China and Turkey. Lukoil’s refinery in Bulgaria accounts for a tenth of the country’s GDP. Since the sanctions were introduced, Lukoil has been benefitting from access to cheap Russian Ural crude, which is transported to Bulgaria by tankers through the Black Sea. Nevertheless, the Bulgarian government initially planned to replace the Russian oil and push out Lukoil from the country as soon as possible.

Alternative sources 

At this stage, it is arguable to what extent Bulgaria will be able to promptly replace the oil for the Lukoil refinery in case of termination of the contract. If so, the only viable option for Bulgaria is the construction of the long-proposed Burgas-Alexandroupolis pipeline that could secure alternative sources of crude oil for the refinery. If successful, the pipeline would transport crude between the Aegean and Black Seas by bypassing the Turkish Straits.

However, considering the risks of early termination of Lukoil’s contract, the Bulgarian government conducted an investigation into possible repercussions of the decision and whether the suspension of Russian oil imports threatens the country’s national security. Indeed, the heated debates regarding the Lukoil refinery in Bulgaria occurred in light of pressure from the EU amid the raging war in Ukraine and the broader strategy to cut the import of Russian fossil fuels.

Unlike the countries to its east and west, parts of the Balkan region have historically been submissive to the Kremlin’s influence. In the case of Bulgaria, all efforts of former prime minister Kiril Petkov, a pro-Western reformist, to tackle the Russian influence faced opposition among the old and pro-Russian Bulgarian elite. As a result, six months after his appointment, the parliament issued a vote of no confidence in Petkov’s government. Among the reasons was Petkov’s government’s refusal to extend energy contracts with Russia and to pay Moscow in rubles for gas. Although Petkov’s resignation raised optimism in the Kremlin regarding its footprint, the frequent criticism from EU partners apparently led Sofia to review its stance towards Lukoil. Moreover, such criticisms appear fiercer in light of Ukraine’s harsh criticism of pro-Russian Bulgarian President Rumen Radev’s remarks blaming Kyiv for the current war.

The current rhetoric of the Bulgarian government, which includes Petkov’s Change Continues, and continuous pressure from its Western partners suggest that Lukoil’s contract will be terminated earlier than scheduled as some MPs believe that “the legal changes will make Bulgaria a strong and adequate country”. However, such a decision will come at a cost, namely a significant increase in fuel prices by at least 20-25 cents.

From its side, the Bulgarian government will exert more pressure on Lukoil to push it out of the local market. In August 2023, Sofia seized control over the only oil port on its territory, near Burgas, from the company. The loss of a critical Bulgarian oil port will likely trigger Lukoil to sell its assets as its business activities may start plunging soon. Also, due to the sanctions on oil exports, Bulgaria receives oil shipments via tankers through the Black Sea, which prevented Lukoil from selling cheap Russian oil.

Political leverage 

The ongoing heated debates in the Bulgarian parliament and divergent visions regarding Lukoil’s presence in the country clearly indicate to what extent the Russian company effectively used its business activities to develop enormous political leverage by financing certain political parties and media. Hence, although the contract termination with Lukoil may hinder Russian influence in Bulgaria, it will be insufficient to marginalise Moscow fully.

For example, simultaneously with the public debates regarding Lukoil, Bulgaria is in talks with Turkey to establish a new gas pact, raising fears that it could allow more Russian gas into the EU. Although the specific aspects of the agreement are not public, it will enable Bulgaria to receive 1.85bn cubic metres (bcm) of gas per year through the Strandzha-Malkoclar interconnection border point with Turkey. Considering that Turkey is the major non-EU importer of Russian gas, the EU is worried that this agreement may open a back door for Russian gas flow to Europe despite sanctions. However, it is worth mentioning that Turkey re-exports not only Russian gas but also Iranian and Azerbaijani gas to Europe. Therefore, the natural gas flowing to Bulgaria may not necessarily be Russian, and this is impossible to clarify at this stage.

Even though the Bulgarian government has not made a final decision regarding the existing contract with Lukoil, its termination seems very realistic amid the growing pressure from the EU and public discontent with Russia’s invasion campaign of Ukraine. However, Bulgaria apprehends that the early termination of the contract will come at certain costs, particularly at a time of political and economic uncertainty.

This piece was originally published by BNE Intellinews

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