Is Neftochim’s nationalization more attractive for Bulgaria than billions coming from Brussels? Thursday, 02 February 2023
Instead of passing the necessary package of laws to receive EU funds under the Recovery and Sustainable Development Plan, the People’s Assembly of Bulgaria (the country’s parliament) urgently passed three laws that create conditions for the decapitalization of a successful private enterprise and its transfer to state control. Bulgarians are well aware of this scheme: the state will turn out to be an even less effective manager and will put up the heavily impaired, but nevertheless very valuable, assets for sale to “the right people.” The question remains: who is the next owner of the largest oil refinery in the Balkans to be?
The 48th Parliament of Bulgaria started its work in October 2022 and finished three months later, in January 2023. The President of the Republic, Rumen Radev, urged the deputies to elect the next government, adopt a new state budget and vote for the package of changes introduced by the interim government, which includes 22 laws necessary for Bulgaria to receive 6.3 billion euros from EU. The amount was approved by the European Commission as part of Bulgaria’s Recovery and Sustainable Development Plan, but the transfer to the country would demand vast reforms in Bulgaria.
The Parliament has not voted a single law out 22 package along EU guidelines. The MP’s efforts were dedicated to the three newly invented laws supported by an odd majority of parties — GERB, DPS and Democratic Bulgaria. They have always failed to reach an understanding on other questions. All three laws were adopted with the pretext of overseeing compliance with EU sanctions and concern only one company — the major oil refinery in the Balkans, LUKOIL Neftochim Burgas.
Anyone interested in the oil business in Bulgaria are well aware of the technological level of the refinery worth of billions of dollars. In its current position as the largest and most modern refinery in the country, Neftochim Burgas would be too expensive to be purchased by “suitable” executives. However, if the plant becomes unprofitable, the owner will be forced to sell it with a big discount. The three laws, already signed by President Radev radically lower the asset profile.
The first law legalizes the withdrawal of 70% of the difference between the price of Urals and Brent oil, multiplied by the total volume of fuel supplied to the market. The second law presupposes the revocation of the Neftochim Burgas’s concession for the Rosenets port, through which the bulk of oil is imported to Bulgaria. Finally, the third law implies the introduction of state operational management at the refinery, justified by strategical importance of the enterprise. The authors justify their focus on the refinery and cooperation between competing parties with consumer concerns.
Bulgaria enjoys derogation from European sanctions on the import of Russian oil and petroleum products. The fuel in Bulgaria is already the cheapest in the entire EU, and Neftohim refinery is already paying a 33% tax on excess profits according to European regulations, the state will take another 70% from the difference between the price of Brent and Urals oil, and will return them to consumers through government aid. Unless the European Commission notices that this is essentially a fee and takes 75% of these funds following the European rules.
Politicians explain that in the future refineries will be charged for access to port infrastructure, and thus the state will receive even more profit. An advance excise tax and VAT will also be introduced. However, if the plant is not able to work in such conditions, the state will then take over its operational management, again “in the interests of the consumer.”Advertisement
Though, some Bulgarian journalists suspect that the legislative initiatives directed against the plant are in the interests of another Bulgarian refinery owners, Insa Oil. Recently, it has introduced a newly created American investment fund as a founding member and plans to expand its activities in European countries. A number of publications in the Bulgarian media link Insa Oil owner, Georgy Samuilov, with shady business practices and political patronage. If his structures turn out to be potential buyers of Neftohim Burgas, this will not surprise most Bulgarians.
In a country like Bulgaria, which has been criticized for corruption for decades, such a scheme is well known and has been repeatedly used over the past 15 years: the state machine focuses on a specific successful business, renders it lifeless, and changes its owner. Therefore, the assumption that the unprofitability of the plant is the ultimate goal of express lawmaking is not devoid of logic.
Hence Neftohim refinery is owned by the Russian company, the pressure is justified by the sanctions policy pursued by the EU. However, Deputy Prime Minister and Minister of Transport Khristo Aleksiev sees no logic in the initiatives of the deputies. “Despite the analyzes provided to the Parlament, it has adopted laws and decisions that create risks for price increases and the suspension of Neftochim Burgas operation. The MPs should not have passed laws more restrictive than the requirements of the European Commission. These EC compromises were made precisely to provide Bulgaria, as the poorest country in the EU, with an opportunity to take advantage of this delay, so I don’t see the logic of the MPs, why we should have approached this case in such a strict manner,” Aleksiev told reporters. He is convinced that “taking over the entire process of supplying crude oil, processing and distributing it is a very difficult process and it is obvious that the state does not have such a resource and knowledge.
Now the Bulgarian government looks extremely awkward in front of the European Commission. Instead of reporting on the fulfillment of the conditions for providing the country with much-needed EU funds, it sends different laws for notification to Brussels. The European Commission will have check their compliance with EU legislation and international trade rules, whether the voted-for state aid is justified and whether the imposition of hidden tariffs is an attempt to put pressure on business.
If Brussels approves three laws, Neftochim Burgas will be subject to the usual 10% income tax as well as to a 33% solidarity contribution, adopted in accordance with European regulations. And, in addition, to a fee of 70% of the difference between the prices of benchmark crudes.
Combined with inaccessibility to the port other taxes, fees, excises and modified terms of existing taxation might make Neftochim’s business unprofitable and lower the asset profile. This might affect the jobs of about ten thousands of people, as well as a hundred other Bulgarian companies, connected to its operation activity.
However, if LUKOIL decides to withdraw from the Bulgarian market, the new owner, whoever he may be, will have to immediately secure long-term oil supplies. Then Bulgaria will have to compete for expensive non-Russian oil with other countries such as Turkey. In this case, the country can forget not only about the withdrawal of excess profits, but also about the significant amount of taxes, excises and social security payments coming into the Bulgarian budget. This could have dire consequences for the population of the poorest EU member state.
On the other hand, Neftochim Burgas is a major producer of fuel consumed not only in Bulgaria, but also in other Balkan countries. The shutdown of the refinery in the context of the European diesel crisis could leave the entire region without fuel. Thus, in practice, the three laws inherited from the short life span of the 48th Bulgarian Parliament are a ticking time-bomb for any future Bulgarian government, and for the entire region.
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