Sicilian naphthia

The Italian authorities, in order to prevent the shutdown of one of the largest oil refineries in Europe, owned by LUKOIL, ISAB, due to sanctions, decided to transfer it to the state. The market believes that for the Russian company this loss will be more tangible in terms of trading than finance. In turn, the Italian government is now faced with the task of supplying refineries with raw materials, searching for sources of investment and potential buyers for the asset.

The Italian government has approved a special decree on the protection of national interests in strategic industrial sectors, involving urgent measures to save the third in Europe and the country’s largest oil refinery ISAB (owned by LUKOIL) in Sicilian Priolo. A threat to his work was the sixth package of anti-Russian sanctions, under which, after December 5, to Europe by sea forbidden import oil from the Russian Federation, namely, it is processed by a refinery in Sicily. Alternative purchases are impossible against the background of banks’ refusal to provide financing and guarantees for oil purchases. After the transfer of the plant to trust management, contracts for the purchase of non-Russian oil can be signed.

As explained in the Ministry of Industry of Italy, according to the approved document, the Cabinet of Ministers received the right to transfer the enterprise under the temporary control of the state regulator for up to a year with the possibility of extension for another 12 months “in case of serious and imminent risks” for energy security.

According to unofficial data, the management of the ISAB plant may be transferred to the state energy company ENI. At the same time, LUKOIL remains the beneficiary of the plant.

The Russian company does not comment on the situation. In the controlling refinery trader Litasco stated that the company is ready to ensure “uninterrupted operation of the refinery, taking into account the stocks of raw materials for the coming months and future supplies of oil not from the Russian Federation.” In addition, they note that Litasco is ready to cooperate with the Italian authorities to ensure the normal operation of the plant. The market believes that the plant will be able to buy oil in Kazakhstan (from the Caspian Pipeline Consortium), as well as in Africa and the Middle East.

Sources of Kommersant close to LUKOIL note that traditionally refining in Europe was low-margin, but from the point of view of trading and logistics, the favorable geographical location of the plant in the middle of the Mediterranean made it a strategic point for the Russian company (LUKOIL could sell refined products not necessarily to Italy ). In addition, an interesting feature of the refinery is the presence in its composition of a large power unit IGCC (combined-cycle plant with gasification) for 500 MW, which uses oil residues from processing as a feedstock.

In 2022, due to the low price of Russian oil in the EU, the profitability of refineries in Sicily increased, but given the imminent imposition of an embargo on raw materials from the Russian Federation, Kommersant’s interlocutors believe that LUKOIL will “lose a little” from the introduction of state management at the plant. They recall that back in 2021, LUKOIL wrote off losses on assets, including on ISAB, so from the point of view of financial statements, the oil company will not fail in 2022 due to the loss of control over the plant.

In the future, ISAB can be sold, and both the temporary manager (Italian side) and the remaining owner of the LUKOIL plant can search for a buyer.

The question remains why LUKOIL has been delaying the sale of the Sicilian refinery for so long.

As reported in the middle of the week Financial Times, the Russian company resumed negotiations with the American investment platform Crossbridge Energy Partners on a deal worth up to $1.6 billion. Prior to this, LUKOIL had repeatedly put up for sale the plant bought in 2013, but each time then abandoned this idea. The last time the search was suspended in 2019, although investors from the United States and the Persian Gulf showed interest in the asset. Then LUKOIL was not satisfied with the offered prices. In the current situation, Kommersant’s interlocutors note, it is even less worth counting on high prices, especially given the high, hundreds of millions of euros per year, costs and environmental restrictions introduced as part of decarbonization. This complicates the payback of such a large asset, they say in the market.

Olga Mordyushenko