Governments across Europe and the Middle East are mobilizing to ensure that the extensive operations of the Russian energy company Lukoil PJSC continue to function, following the imposition of US sanctions and the cancellation of a significant bid for its international assets last week. Lukoil, Russia's second-largest oil company, manages a vast international network that includes oil fields, refineries, and filling stations. Last month, sanctions were imposed by both the US and the UK, with a window until November 21 to terminate current transactions with the company. Until last week, it seemed a solution was in sight, as the energy company Gunvor Group had agreed to acquire Lukoil's international assets. However, the process was abruptly halted when the US Treasury Department labeled Gunvor a "Kremlin puppet." The company withdrew its bid, creating pressure to keep the Russian company's assets operational.
Slaughtering each other
"There is a lot of movement on how to manage Lukoil's international assets, especially after the rejection of the Gunvor bid," said Richard Bronze, head of geopolitics at Energy Aspects Ltd. "While global crude markets have a fairly good buffer to absorb supply disruptions, the situation in the refining sector is much more vulnerable."
The first signs of the sanctions' impact have already begun to appear. Lukoil declared "force majeure" on an Iraqi oil field that accounts for one-tenth of the country's total production, while two state-owned companies took over operations to ensure production. Similarly, Bulgaria took a step toward full control of the country's largest refinery to maintain operation and jobs. In Finland, some filling stations are facing a fuel shortage as a Lukoil company stopped deliveries, according to local media.
Pressure on the US
Many countries are pressuring the US to issue a license that would allow Lukoil's operations to continue after November 21, something the Trump administration has already implemented for other sanctioned Russian assets. If extensions are not granted, this could cause a wave of repercussions in the crude and fuel markets.
In Bulgaria, officials are in negotiations with the US for the operation of the Burgas refinery, with a capacity of 195,000 barrels per day, while in Romania, the possibility of extending the deadline is being considered. In Moldova, the government plans to purchase a fuel depot from Lukoil to secure the operation of the capital's airport, Chisinau.
The reason for the concern about fuels is obvious: while crude oil prices in Europe are approaching $60 a barrel, the price of diesel reaches $95. Prices rose following the sanctions against Lukoil and Rosneft PJSC, amidst a period of annual refinery maintenance that limits supply.
Lukoil's presence
Despite the sanctions, Lukoil maintains a significant presence. The trading subsidiary Litasco in Switzerland is already facing the effects of sanctions, while the company holds stakes in a refinery in the Netherlands and filling stations in Italy. In the US, Lukoil maintains approximately 200 filling stations in New York, New Jersey, and Pennsylvania, with five new locations in the bidding process.
As Bob McNally, president of Rapidan Energy Advisors LLC, comments, "the point is to inflict maximum pain on Putin but not on American drivers. I doubt Washington will make it easy for Lukoil to adapt to sanctions, unless there is a significant supply restriction that raises global prices."
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