Consequences Shutdown NIS Oil Refinery Serbia?

Control and Operational services in accordance to safety and environmental procedures by taking the process units out.

Operations at the Pančevo Oil Refinery have come to a halt after the United States did not grant approval for NIS to continue its business activities. This outcome was announced today by the President of Serbia, Aleksandar Vučić, who said that the approval had not arrived and that there were no indications it would. The Ministry of Energy informed NIS that it does not possess the necessary licence, thereby allowing the shutdown process of the refinery – which carries a series of consequences – to formally begin.

Today in the afternoon, the company announced: “Work at the Pančevo Oil Refinery is being suspended today due to the lack of crude oil for processing, which has arisen as a consequence of the sanctions imposed on NIS by the US Treasury Department.”

As explained by NIS, this process is being carried out in the same way as planned overhauls, and is conducted in accordance with the laws of the Republic of Serbia, the company’s internal regulations, as well as the strictest environmental, safety, and occupational health standards.

In the meantime, NIS states that activities at the refinery are organised so that the facilities will be ready to start up again as soon as the necessary conditions are met, meaning once information on the availability of crude oil is obtained.

When that will happen, no one currently knows, but what is known is that Serbia has given the Russian owners a deadline of 50 days to find a buyer. If that does not happen, as Aleksandar Vučić stated, “we have no choice.” In practical terms, this would mean that “there will be no immediate nationalisation, but our administration will be introduced.”

“Then we will offer the highest possible price and pay the highest possible price to our Russian friends,” Vučić said earlier.

How the refinery shutdown came about

Due to the situation with NIS, the President of Serbia, Aleksandar Vučić, held a meeting today with representatives of the energy team, after which he stated that “we have not received a positive decision from the US regarding NIS.”

“We expected to receive a licence from the US government allowing the refinery to continue operating, but we did not receive a positive decision from the US. I am disappointed,” Vučić said.

He added that he was surprised, as he “does not see what they have gained by this,” but that it is “clear that the Russians do not wish to sell NIS” and that the issue is political rather than financial.

“That is their right, they are the owners. It is a different matter that this causes us a great deal of trouble. Just as the Americans are interested only in their own interests. For now, only Serbia is suffering; how things will develop, we shall see,” he said.

It had previously been announced that the refinery would officially stop operating today, following several days of so-called hot circulation, unless the US issued a licence in the meantime for NIS to continue operating.

Serbia waited until today for a response from the US State Department and the Office of Foreign Assets Control (OFAC) regarding the extension of NIS’s licence, which ultimately did not arrive. Since sanctions against NIS came into force on 9 October, the Pančevo refinery has been using reserve oil supplies. To make matters more complicated, 13 December is approaching, when the Russian company Lukoil’s licence to operate also expires.

Lukoil and NIS together own 439 out of Serbia’s total of 1,529 petrol stations, which are predominantly supplied with fuel from the Pančevo refinery.

What Serbian citizens should expect

What does all this mean for the citizens of Serbia?

Officials claim that there will be no shortages, that there is no need to implement an odd–even rationing system, and that reserves will cover needs until the end of January. Vučić also said that once NIS uses up its operational reserves at petrol stations, the state cannot continue providing them with mandatory and commodity reserves.

“What does that mean? That from 13 December neither NIS nor Lukoil can receive fuel from state reserves for retail sale. At that point, the entire Republic of Serbia would formally fall under US sanctions, because mandatory and commodity reserves belong to the state. Therefore, we can deliver petroleum products to all other companies that are not under sanctions – but not to NIS.”

What will we be facing then? The fact that there is enough fuel: diesel, petrol, and even kerosene. There will be no problems with that; I won’t explain how we secured it -but we did. Air traffic will function completely normally. We will have enough fuel for everything until the end of January. And as we said -on 15 January the deadline falls, in the worst-case scenario, if by then they do not finalise agreements with the Arabs, Hungarians, English, Americans, or whomever they choose. That is their affair.

So, there will be enough fuel. The only difference is that citizens will have to go to other petrol stations instead of those belonging to NIS,” Vučić said.

He explained that although NIS has only 327 petrol stations, they account for 48 per cent of total turnover simply because they are located in the best locations.

“We have more than 204,000 tonnes of diesel in stock, and 82 per cent of total fuel consumption is diesel. We have slightly less petrol, but enough,” Vučić said.

There are 54,500 tonnes of mazut in reserve -the heavy fuel used in heating plants and also in power plants to increase the calorific value of coal -while annual consumption is around 44,000 tonnes.

Operations at the Pančevo Oil Refinery have come to a halt after the United States did not grant approval for NIS to continue its business activities. This outcome was announced today by the President of Serbia, Aleksandar Vučić, who said that the approval had not arrived and that there were no indications it would. The Ministry of Energy informed NIS that it does not possess the necessary licence, thereby allowing the shutdown process of the refinery -which carries a series of consequences -to formally begin.

“Work at the Pančevo Oil Refinery is being suspended today due to the lack of crude oil for processing, which has arisen as a consequence of the sanctions imposed on NIS by the US Treasury Department,” the company announced this afternoon.

As explained by NIS, the process is being carried out in the same way as during planned maintenance shutdowns, in accordance with the laws of the Republic of Serbia, the company’s internal rules, and the strictest environmental, safety, and occupational health standards.

In the meantime, NIS reports that activities at the refinery are organised in such a way that the facilities will be ready to restart as soon as the necessary conditions are met, meaning once information regarding crude oil availability has been obtained.

When that will happen, no one currently knows, but what is known is that Serbia has given the Russian owners a deadline of 50 days to find a buyer. If that does not happen, as Aleksandar Vučić said, “we have no choice.” In practical terms, this would mean that “there will be no immediate nationalisation, but our administration will be introduced.”

“Then we will offer the highest possible price and pay the highest possible price to our Russian friends,” Vučić said earlier.

How the refinery shutdown came about

Due to the situation with NIS, the President of Serbia, Aleksandar Vučić, held a meeting today with members of the energy team, after which he stated that “we have not received a positive decision from the US regarding NIS.”

“We expected to receive a licence from the US government for the refinery to continue operating, but we did not receive a positive decision from the US. I am disappointed,” Vučić said.

“That is their right, they are the owners. It is another matter that this causes us considerable trouble. Just as the Americans are interested only in their own interests… For now, only Serbia is suffering; how things will develop, we shall see,” he said.

Serbia waited until today for a response from the US State Department and the Office of Foreign Assets Control (OFAC) regarding the extension of NIS’s licence, which ultimately did not arrive. Since sanctions against NIS came into force on 9 October, the Pančevo refinery has been using reserve oil supplies. Making matters more complicated, 13 December is approaching, when the Russian company Lukoil’s operating licence also expires.

Lukoil and NIS together own 439 out of Serbia’s 1,529 petrol stations, which are predominantly supplied by the Pančevo refinery.

What Serbian citizens should expect

What does all this mean for the citizens of Serbia?

Officials claim that there will be no shortages, that there is no need to introduce an odd–even rationing system, and that reserves will cover needs until the end of January. Vučić also said that once NIS uses up its operational reserves at petrol stations, the state cannot continue supplying them with mandatory and commodity reserves.

“What does that mean? From 13 December, neither NIS nor Lukoil will be able to receive fuel for retail sale from state reserves. At that moment, the entire Republic of Serbia would formally fall under US sanctions, because mandatory and commodity reserves belong to the Serbian state. Therefore, we can deliver petroleum products to all other companies that are not under sanctions -but not to NIS.

What will we be facing then? The fact that there is enough fuel: diesel, petrol, and even kerosene. There will be no problems with that; I won’t explain how we secured it -but we did. Air traffic will function completely normally. We will have enough fuel for everything until the end of January. And as we said – the deadline falls on 15 January, in the worst-case scenario, if by then they do not finalise agreements with the Arabs, Hungarians, English, Americans, or whomever they choose. That is their affair.

So, there will be enough fuel. The only difference is that citizens will have to go to other petrol stations instead of those belonging to NIS,” Vučić said. He explained that although NIS has only 327 petrol stations, they account for 48 per cent of total turnover simply because they are located in the best locations.

“We have more than 204,000 tonnes of diesel in stock, and 82 per cent of total fuel consumption is diesel. We have slightly less petrol, but enough,” Vučić noted.

Mazut, which is used as fuel in heating plants and also in power plants to increase the calorific value of coal, amounts to 54,500 tonnes in reserve, while annual consumption is around 44,000 tonnes.

“We do not have a problem with fuel; we have opened new import channels. What we do have a problem with is logistics. Tankers will have to collect fuel at some distant locations, which increases logistical costs, and there is also the question of the number of tankers. There are countless problems,” Vučić warned.

The second problem is secondary sanctions.

“The moment when payment transactions with NIS cease, and today we agreed -at our own risk, at the risk of the Republic of Serbia, at the risk that the National Bank of Serbia and our commercial banks may come under sanctions -to ensure payment transactions until the end of this week. So: yesterday, today, tomorrow, the day after, Friday, Saturday and Sunday -NIS will have payment transactions enabled. This means that NIS has enough time to pay employees’ salaries, to pay all suppliers, and to prepare its workers for what lies ahead. After that, we will monitor the situation day by day, because we want to avoid a scenario in which the entire financial system of the Republic of Serbia would be destroyed,” Vučić said.

Vučić added that the state is now taking a risk, because the Central Bank and other banks could be sanctioned at any moment.

“Whenever payment transactions are suspended, that creates enormous problems for companies; it is not just one company at stake, but the whole of Serbia,” he said.

In the meantime, there has been no reaction from Russia.

What Russia wants or does not want

Like Vučić, the general director of Srbijagas, Dušan Bajatović, also suggested today that it is highly questionable whether Russia even wants to sell NIS. He used the phrase “what has been taken can be returned.”

“There are several problems. Serbia is ready to pay 1.4 billion euros, but how will you transfer the money to Russia? On the other hand, what has been taken can be returned, as Patriarch Pavle used to say. We do not know what Russia’s strategy on this issue will be; I am not sure the Russians want something taken away from them. And I do not think that Russia or Putin wants to lose the support they have in Serbia. They want to pit us against the Russians, to make us impose sanctions, these are political issues. If they turn us against the Russians, what have we achieved?” Bajatović said.

He also said that a solution must be found for the Petroleum Industry of Serbia to continue operating, adding that the state will have to take certain steps, and that if Serbia were to take over the management of the company, it would not mean seizing Russian property – but the question remains whether Russia wishes to sell NIS.

“We have given a deadline of 50 days; after that, if there is no OFAC approval, the state will have to take certain steps. Perhaps that means management; we shall see, but that does not mean direct seizure of property,” Bajatović told TV Pink.

On the other hand, he expressed doubt that, if Serbia were to take over the management of NIS, this would be sufficient for the United States, which imposed sanctions on the company. He stated that there is interest in transferring the oil and gas sector into the hands of other companies, and that an increasing number of Western analysts have said that many foreign companies are interested in NIS.

What the refinery shutdown brings

When asked what will happen if the refinery stops, Professor Velimir Lukić of the Faculty of Economics in Belgrade said yesterday that what is at play is an escalation of a nerve-racking standoff.

“I would say that what we need to observe are our reserves of petroleum products. The fact is that they will start to be used up and depleted. Consumption is expected to remain more or less stable, and as for imports, because there will be unmet demand, I expect that they will rise at a certain rate in the coming period,” Lukić explained.

He said that the main consequence is that the profit previously generated by NIS and the refinery will now go somewhere else, most likely to refineries in the region.

Speaking about whether the Russian partner is ready to exit NIS ownership, he said that the Russian partner is disheartened by everything that has been happening since October.

“This is not a new situation because in its immediate surroundings there are numerous Russian companies facing similar problems. They are under blockade, under sanctions, and they know well that the Russian state has responded reciprocally by blocking the assets of foreign companies,” Lukić said.

However, on the other hand, he said, this is entirely new territory for our state.

“The state will certainly remain an owner; the question is whether it will be a minority or majority owner, but whatever kind of owner it becomes, our state needs a partner,” Lukić told RTS.

Economist Saša Đogović said yesterday that shutting down the Pančevo Refinery and HIP Petrohemija would have severe negative consequences for the entire Serbian economy. First and foremost, he said, the blow would be felt by employees not only in those companies but also in Pančevo’s heating plant, and then by consumers and the economy at large through higher fuel prices.

“That would certainly have a negative impact on overall economic dynamics and economic growth,” Đogović told Danas.

He added that Serbia, in such a case, would have to spend more foreign currency on importing petroleum products, which would further increase the foreign trade deficit.

If such a situation were to persist, he warned, macroeconomic stability would also be threatened.

Đogović explained that a short-term shutdown of about a month could be compensated for later, but anything lasting longer would mean cutting certain investments to prevent the fiscal deficit from exceeding the planned three per cent of GDP.

Economist Milan Kovačević also warns that the current situation with NIS will have major consequences for Serbia’s economy. As he said, the country will first face problems with the supply and import of petroleum products, which will then increase costs and lead to reduced business activity in certain sectors. All of this, he added, will also affect other prices in the country: “It will cause further price increases and further complicate the state’s efforts to bring them down.” He reminded that NIS has been of great importance for the state budget, which means that a drop in revenue will be inevitable.

Since the United States imposed sanctions on the Russian energy sector earlier this year, American officials have warned the authorities in Belgrade that they do not want Russian ownership in NIS and that it “must be zero.” Washington has already postponed the revocation of the crude oil import licence several times, and the sanctions came into force on 9 October.