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Alternatives & Analyses: The State Oil Company of Bulgaria –the ultimate phase of state capture

The latest proposal of the Ministry of Finance for the establishment of a “State Oil Company,” featuring a network of gas stations and excise warehouses throughout the country, has been long brewing. Crisis management needs have brought it to the fore.

The BG Oil Co. is tasked to cover both the storage of strategic oil and fuel reserves and other essential energy products.

The MoF statement of today has an exuberant populistic message – ‘to ensure the lowest possible prices for citizens and businesses.”

What other oil majors will see as a daunting challenge in terms of time and investment, the BoG seems confident to be able to achieve in a single year.

In his address, Minister Goranov stated that amendments to the law should oblige current excise warehouses to offer their capacity to all traders. Furthermore, the SOC itself will build and offer storage capacity to traders.

Regardless of the blatant populism, there is substance behind the idea.

The MoF acknowledges the total failure of the Government of Bulgaria to enforce EU competition standards and liberalize the fuel market in Bulgaria. Timing is also essential – once Lukoil has decided to relieve the close friend of PM Borisov of his duties at the top of Lukoil Bulgaria, denying him access to the cash flows – the Bulgarian government cries fowl pretending it has lost control of the refinery and the trader.

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The Commission for Protection of Competition never had the will nor the dedication to safeguard competition and protect consumers. For once, due to legal constraints, that limited its powers in investigating abuses of dominant market position and illegal practices of the ‘cartel’ of fuel traders. The CPC has been continuously susceptible to outside interference, compromising its independence and unbiased judgment. Thirdly, in the rare instances when penalties were imposed, appeals in court have overturned them.

The announcement made by Minister Goranov is not meant to bear an immediate or direct impact fixing fiscal imbalances. It is not primarily driven by concern for the revenues in the public budget, but for fears the cash flows to private pockets might dry up.

The need for a quantum improvement in the management of the strategic reserves of oil and energy products is axiomatic. Now that the crude oil and fuel prices are at record lows, and the state reserves are losing money, through asset depreciation, the lack of proactive sell/buy auctions, inflicts heavy financial losses to the state, measured in the hundreds of millions of euro. The strategic reserves of state are dependent on Lukoil and other private companies.

It makes sense to transpose the EU Third package legislation and unbundle ownership and operation of Lukoil’s refined product duct from Bourgas to Sofia, to allow unlimited third party access to critical infrastructure. It remains highly questionable, however, whether the state will do any better as an owner or operator.

There is merit in registering the different fuel depots of Lukoil Bulgaria as separate excise warehouses, yet this will not have an immediate fiscal effect.

The interplay between the traders and the refinery has led to unparalleled in the EU levels of state capture and horrendous losses for consumers and taxpayers. Remedying the situation has been long overdue, yet Borisov’s government had interest to tame the reaction of all state’s institutions.The public anger, coupled with the loss in welfare and uncertain economic future, was brewing up. The prices at the pump, between different fuel retailers, range between 1.35 and 1.93 leva per liter of diesel or gasoline, of which almost 1 lev is the fixed part for excise duty and tax.

The proponents of a state-owned oil company as a market maker, breaking the mold of price parallelism – nourish much-cherished hope after years of abuse of monopoly status. But most Bulgarians believe the public’s interests are a smokescreen, behind which consumers will continue to pay more and the premiums will end up with Cabal’s oligarchs both on the entry and the exit of the SOC.

The criticism and skepticism are not only legitimate but overwhelming.

The state could opt for much cheaper solution, instructing state companies and state administration to buy fuel with price caps. The ‘cartel’ will undoubtedly take note.

The one-year term, Minister Goranov, referred to, needed to build the network of stations, is simply inconceivable.

A twelvemonths’ timespan decries political motives –reflecting forthcoming elections’ gravity, and aurgent need to close a gap that could be exploited by opponents.

At the same time, the ‘no rules’ fight between the rival gangster mobs for control of the cash flows in the fuels market continues to rageunabated. State institutions are used to promote private and group interests of the clan-in-power, in their take-overs of large-scale private businesses.

There are many precedents –starting with the KTB, then later the unsuccessful attempt to take control of the arms manufacturer ‘Dunarit’, and, more recently, the nationalization of the private lottery of the believed-to-be-the-richest Bulgarian Vasil Bozhkov. As theonslaught on private business by the clan-in-power could be seenas discrediting, the disguise of the state interests steps in. Not long ago Mr. Peevsky’sLafka and Mr. Bozhkov’s National Lottery were operating in tandem. Then the Mastermind of the whole ‘Spider Web’ decided to take over the whole business in yet another encore of the KTB assault pattern, masked as a concern for the interests of the state lottery.

As with the ‘nationalization’ of the private lottery, where former partners of Mr. Bozhkov – the Naidenovs were used as turncoats, in the case of the State Oil Company vs. Lukoil narrative, one could easily distinguish the figure of an oil tycoon with a refinery, businessmen and interested politicians, waiting for their share of the prey.

There are many additional questions – why, for example, the Ministry of Economy, better known as the Ministry of Peevsky, is designated to be in the lead and not the state energy company BEH.

Why does the National Revenue Agency turn a blind eye on the practices for financial optimization along the value chain from the import of crude oil to the derivatives leaving the refinery, which has always translated in sustainable losses on the balance sheet?

State capitalism is the last refuge of Bulgaria’s oligarchic capitalism, unable to endure market competition.

The State Oil Company is the ultimate epitome of the fake ideology of this nominal “right-wing” government.

Ilian Vassilev

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