Page 158 - RusRPTJan23

● Lukoil
Sale of ISAB refinery in Italy for $1.5bn may be close to completion, reports Reuters on December 9, with the potential buyer being the same Crossbridge Energy Partners of the USA with which Lukoil had been in negotiations for such a sale earlier in the year. This would be unambiguous good news. The ISAB plant proved itself to be extremely useful to Lukoil in 2022. As the company was able to export 150-200kbd of Urals crude to the plant and then realize the resulting products at full European prices, Lukoil was able to avoid having to take the $20-$40/bbl discount to Brent that Urals has traded at since March. For example, an avoided $20/bbl discount on 150kbd is the equivalent of $45mn/month of higher revenues vs. selling the crude directly. However, with the EU embargo on Russian oil coming into force on 5 Dec, that logistical solution became null and void. Lukoil can no longer send Urals crude to Sicily, and other sanctions effectively prohibit it from importing crude from other countries to the plant. Therefore, Italy was faced with the possibility of having 20% of its refining capacity shut down, and is looking at the possibility of ‘temporarily’ nationalizing the plant to keep it running under outside management. Therefore, for Lukoil a sale to Crossbridge at this moment would be ideal, with the proceeds boosting the company’s ability to execute its planned redemption of foreign debt while affecting dividend payouts less.
Italy approved temporary nationalisation of Lukoil’s ISAB refinery on the island of Sicily as part of the country’s Council of Ministers decree to protect strategic enterprises. The proximate reason for this move (which has been in discussion for months) is approaching EU embargo on Russian oil, set to go into effect in the second week of December. That event will bar Lukoil from supplying its own, Russian oil to the plant. Other sanctions-related measures effectively bar Lukoil from supplying non-Russian oil to the plant, and thus threaten to shut down one fifth of Italy’s fuel supplies. 20% of Italy’s refining capacity threatened by EU embargo. We consider this news as negative for Lukoil, of course, but only moderately so. First, although the plant has been very useful this year for Lukoil as an outlet for a significant amount of Urals crude, the market knew this arrangement would end on December 5th, with or without the action by the Council of Ministers. Second, even had Lukoil been able to keep the plant and run it off of alternate, non-Russian crude flows, typical European refining margins would imply annual EBITDA contributions of perhaps $0.3bn, vs. typical annual EBITDA of around $15bn, or only 2% of the total. Third, the move is supposedly ‘temporary’, implying that someday, in an improved geopolitical background, Lukoil might regain the refinery. Finally, Lukoil may still be allowed to sell the plant to a third party, and negotiations for a sale to American Crossbridge have reportedly been resumed.
158 RUSSIA Country Report January 2023 www.intellinews.com