A storm on the horizon in the Black Sea

The entire situation around Lukoil’s foreign assets and its operations, particularly in Europe, have left one major refinery in the Black Sea region in uncharted waters. Namely, the 160 kbd Lukoil Neftokhim Burgas refinery has been coming under increased scrutiny lately, as one of the last few Lukoil-controlled refineries in Europe. Indeed, the fallout of the Gunvor-Lukoil deal of late has pushed the Bulgarian government (Burgas is by far the most important fuel supplier to the domestic market) to even openly discuss nationalisation of the refinery. Within the next two weeks, the question about its ownership will need to be clarified, or the refinery faces a shutdown, as payments would be effectively blocked under the US sanctions.

The hard facts are that the refinery is in and of itself, relatively well built for its operations, achieving a 9.6 Nelson complexity index (according to our calculations based on IIR data) and being capable of handling heavy crude for its operations via high level of conversion. Indeed, originally designed to handle medium-sour Urals, the refinery has enjoyed some solid margins until the derogation was voted out by the government in late 2024. Following the halt of Urals buying, the crude feed has become much more diverse, with Johan Sverdrup, Kazakh CPC and Basrah Medium and Heavy emerging as clear winners of the switch. On the downstream side of things, the refinery configuration is tilted towards middle distillates, with gasoil and jet output sitting at around 70 kbd and 10 kbd, respectively, contributing to the lion’s share of yields, with gasoline and naphtha output at 45 kbd and 20 kbd, respectively (JODI, NSI data).

While the Bulgarian government adopted a special legislation recently to allow for a temporary nationalisation of the refinery, in the event of an operational impasse, a special caretaker would be appointed by the government to operate the refinery on national security grounds; it is still unclear whether this will happen within the limited time window. So far, the US OFAC has refused to give an exemption to the Burgas refinery under the current sanctions, so there is a non-zero chance that a temporary halt of operations may occur towards the end of this month, as no clear decision has been made on next steps. This non-zero chance is becoming even larger when one considers that the most recent legislative amendments filed in the Bulgarian parliament today are being largely dismissed as being unconstitutional and even if voted in will probably get nullified in the next days by the country’s high court.

Which brings us to the main point. While chances of an operational halt are not yet above 50%, there exists the not-so-distant possibility that the refinery is forced to cease operations for a couple of weeks at the end of November. If this were to happen, the eastern Med gasoil markets will receive a sizeable additional boost, as domestic retailers will be forced to look for substitute barrels, which could not be easily delivered by any of Bulgaria’s neighbours. Meaning, in the face of Volgograd’s recent drone strike and the sustained weakness in Russian gasoil exports in recent months, the reasons for Med gasoil bullishness may grow by one more soon.

Burgas Neftokhim refinery schema (kbd)

Source: Kpler estimates based on IIR data

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