Without an OFAC license, NIS reserves last 2-3 months

The license issued by the US Office of Foreign Assets Control (OFAC) for Petroleum Industry of Serbia (NIS) to operate expires on October 30, which leaves four days as of October 26. NIS has filed a new request for a special license, no decision has arrived from Washington yet, and for the first time a concrete scenario for the case of no extension is being laid out in public.

Srpske Novine reported on October 24 that NIS was seeking a new OFAC license and that the current one runs out at the end of the month. The scenario for an unfavorable decision has now been described by Zeljko Markovic, an energy expert, on the morning program of RTS.

What is NIS asking OFAC for?

According to a NIS statement, the request to the US Treasury covers a special license that would let the company continue operations without interruption after October 30. NIS says the request stresses the company’s importance for the continuity of domestic supply, and that regular operation of the Pancevo oil refinery is of central importance for Serbia’s energy stability. The company thanked both domestic and foreign institutions that support efforts to let it keep operating.

Will OFAC extend the license?

Markovic expects it will, as he said on the show:

“I expect that NIS will get this extension now as well.”

He sees grounds for optimism in the talks between US President Donald Trump and Russian President Vladimir Putin, as well as in the latest agreement on deliveries of Russian diesel to the American market. Continued dialogue between Washington and Moscow, he says, could also work in NIS’s favor.

It also remains open how long an extension would last, a month or a longer period. On that, Markovic says:

“OFAC still has to settle this.”

In his assessment, an extension would allow talks on NIS’s ownership structure to continue. He recalled that in recent weeks there was news of talks between Hungary’s MOL and the Russian shareholders, Gazpromneft and Gazprom. At a conference in Budapest on September 22, one official said the negotiations were practically finished, but that a deal needs approval from the relevant institutions, including antitrust authorities and OFAC.

What happens if the license is not extended?

Two things need to be kept apart here, because they are easily mixed up in retellings. According to Markovic, the Pancevo refinery would first process its existing stocks of crude oil. Once those were used up, processing would stop. He did not say by when that would happen.

Supply to the market is a separate matter. It would continue from stocks of finished fuels and from imports, and for that period Markovic says:

“And all those reserves can ensure some uninterrupted supply for two to three months, for sure.”

If the problem is not solved even after that period, he warns, shortages are possible, because domestic oil processing would have stopped. The state would have to take additional measures by then, but Markovic does not expect Serbia to end up facing a long-term supply interruption.

In short, as he describes it:

• crude oil in Pancevo is used first, with no deadline given
• after that, processing stops
• the market is supplied from fuel stocks and imports for two to three months
• shortages are possible only if the problem is not solved even after that

How much more expensive is oil than before?

Brent reached almost 117 dollars per barrel before the weekend and was trading around 115 dollars on Monday morning. Markovic points out that it was around 60 dollars earlier, and that after a sharp rise prices have settled at a new, much higher level:

“Even your fellow journalists joke: ‘We have entered a period of new abnormality.’”

Diesel quotations on the Mediterranean market, Markovic says, are around 1,440 to 1,500 dollars. The price of diesel depends not only on the price of crude but also on available refining capacity: the fewer refineries there are, the more limited the supply of finished fuels. Russian diesel for the US and the release of additional volumes from reserves should mainly prevent new price increases rather than bring prices down. A price drop in the US does not necessarily reach Europe, which has different supply sources and restrictions on imports of Russian energy.

What does this mean for electricity?

Markovic does not expect electricity shortages in winter, but warns about the price. A dry second half of the year cut hydropower output in Serbia and the region, and, as he noted, Elektroprivreda Srbije (EPS) said recently that overhauls are complete and the system is ready for winter.

Imports are still large:

“In October, over 25 percent of the electricity intended for consumption came from imports.”

According to Markovic, this is above all a financial problem, because electricity prices on European exchanges are high. Added pressure comes from expensive natural gas, which is used in the power plants that cover peak demand.