Statement of the Emergency Oil Stocks Agency to the report of the SAO

Following the report on the result of the inspection "Strategic energy security policy in the area of emergency stocks of crude oil and petroleum products", which the Supreme Audit Office of the Slovak Republic (hereinafter referred to as "SAO") submits for consideration by the Committee of the National Assembly of the Slovak Republic for Economic Affairs, the Emergency Oil Stocks Agency (hereinafter referred to as the "Agency") allows to indicate the following statement:

When comparing the content of the above report on the result of the inspection with the report on the result of the inspection focused on the policy of strategic energy security in the field of emergency stocks of crude oil and petroleum products, which was submitted to the Agency by NKU (hereinafter referred to as the "report"), an inconsistency is apparent.

The SAO's report concluded that the Agency was functioning effectively in accordance with the relevant legislation and that no major deficiencies were found in the Agency's activities. However, in the above-mentioned audit report, the SAO, on the contrary, interprets certain facts concerning the systemic set-up of the model for the management of emergency stocks of crude oil and petroleum products (hereinafter referred to as 'emergency stocks') in the Slovak Republic in contradiction to the Protocol, in a biased manner and without their comprehensive follow-up of all relevant facts. Thus, some of the conclusions presented by the SAO do not correspond to the factual situation and represent rather vague, often hypothetical risks. The actual functioning of the emergency stock management system demonstrates in practice the efficient and economic management of emergency stocks in the interest of effective energy security of the Slovak Republic, in particular in the following areas:

  • The agency model of managing emergency stocks in accordance with European legislation is the standard solution in most European Union countries. The Slovak agency model for emergency stocks was inspired by several European countries during its development, while the issue of sectoral classification of the Agency and other central stock management entities in Europe was addressed by Eurostat after the Agency was established, i.e. not in advance, as incorrectly stated by the SAO.
  • The impetus for the change of the emergency stocks management model was primarily the expiration of the transposition deadline of the Emergency Stocks Directive (ending 31.12.2012), while in the long term the original system of emergency stocks management would represent a burden for the state budget (the need to increase the volume of emergency stocks) if the original system is maintained.
  • The purely state-run model of maintaining emergency stocks financed from the state budget, as operated in the Slovak Republic prior to the creation of the agency model, currently exists in only two EU countries - the Czech Republic and Latvia. The Czech Republic, due to the same problems that led to the above-mentioned change of system in Slovakia, has for almost four years been unable to meet the minimum emergency stockholding limit required by European legislation and has been maintaining emergency stocks below 90 days of average daily net imports.
  • The Emergency Stocks Directive (Article 7) requires that the payments made by entities for the establishment of an emergency stockholding system should not exceed the cost of establishing that system (the so-called "cost-based" principle of remuneration). In this respect, the original State model was contrary to this principle, since only part of the funds generated for the purpose of creating emergency stocks (the statutory fee) were generally returned to the emergency stockholding system and the remainder were otherwise used within the State budget. The SAO states that 'the State budget's revenue under the State emergency stockpile management model was higher than its expenditure' (p. 9 of the SAO Report). This is presented by the SAO as a positive feature of the State model, and in the light of the above, it is clear that such an interpretation is totally misleading and, ultimately, legally unsustainable.
  • The Agency's budget, all expenditures, and financial transactions are communicated and reconciled on an ongoing basis by the Ministry of Finance of Slovak Republic, which has a complete overview of the Agency's management, including purchases of emergency stocks and the amount of debt repayments - repayable financial assistance, which is the equivalent of a commercial loan provided to the Agency by the Ministry of Finance of Slovak Republic for the purchase of emergency stocks into the Agency's ownership (hereinafter referred to as the "NFV"). The specific repayments of already the initial commercial loan granted to the Agency by the syndicate of banks, which was subsequently replaced by the NFV, have always been agreed with the Ministry of Finance or the Agency for Debt and Liquidity Management (ARDAL).
  • The original NFV amount of EUR 520 million has been repaid in a cumulative amount of EUR 190 million at the end of 2020, a further EUR 210 million is expected to be repaid over the next 5 years and the remaining debt will be repaid by the end of 2031 at the latest, as stipulated in the NFV contract in question. This repayment plan for the NFV debt is a good starting point for the amount of price paid by the selected entrepreneurs to the scheme to decrease and not increase, as the SAO report suggests, pointing also to the fact that the Agency is a non-profit-making interest association of legal entities and the most important input in the calculation of the amount of remuneration is the NFV.
  • The crucial role of the state in the emergency stockpile management system has been ensured throughout the Agency's existence for the purpose of maintaining the emergency stocks in the public interest - in all cases in the Agency's history, consensus has been achieved between State and industry representatives in decision-making, i.e., no decision at the Agency has ever been reached without the consent of the State's appointees under any circumstance.
  • The SAO's assumptions that in some critical cases of votes in the Agency (such as the sale of emergency stocks or their placement outside the territory of the Slovak Republic) a situation could arise in which the state could be overruled can be considered extremely hypothetical and unrealistic in practice. There would have to be an extremely coordinated and complicated chain of events, such as the deliberate failure of a member of the body to fulfil the obligations of the State's representatives to participate in the deliberations of the bodies and to vote in the interests of the State, the agreed cooperation of the Agency's employees carrying out the actual operations, and the agreement of the oil companies and their representatives in the Agency, who represent over 90% of the entire industry and are also competitors in the market, to take action against the State. Further, without the knowledge of the State, to carry out a real withdrawal of stocks, most of which are stored in the State company's facilities, to quickly sell the emergency stocks on the market or export them abroad without being noticed, and to 'fail to notice' that the funds from such a hypothetical sale of emergency stocks would ultimately end up in the Agency's account held in the Treasury, which is managed by ARDAL. Thus, there is no real situation and no motivation whatsoever in this regard that could result in non-consensual voting behaviour by the State and industry representatives.
  • The Agency's system of maintaining and financing of emergency stocks has proven to be extremely effective in practice, capable of securing industry cooperation to ensure sufficient funding for emergency stocks. The Agency's overdue receivables in the form of outstanding payments from selected entrepreneurs have been less than 0,1 % of total payments during the Agency's existence.
  • The agency's emergency stockpile management system has transparently and equitably ensured the financing of needs in this area primarily from those consumers who use petroleum products the most, while minimally burdening those citizens of the country who are also taxpayers to the public purse, but who do not use, or use only minimally, petroleum products for their needs.
  • The Agency's model also maintained equal non-discriminatory access to oil companies, as each oil company pays the same unit price in payments to the system, regardless of its size and influence, and thus there is no distortion of competition.
  • The agency model has also made it possible to increase emergency stocks following the increased consumption of petroleum products in previous years without a negative impact on the state budget and has also made it possible to repay the state's investment in emergency stocks purchased in the past in a transparent and gradual manner.
  • The Agency maintains emergency stocks at all times ready to deal immediately with disruptions in the supply of crude oil or petroleum products to the Slovak Republic. A real proof of this is, for example, the participation in the resolution of an extremely serious situation in May 2019, when crude oil supplies to Slovakia via the Druzhba pipeline were completely halted. The Agency, in cooperation with the private sector, was able to resolve this very serious situation by securing alternative crude oil supplies, thus avoiding the need to take restrictive measures that could have negatively affected the country's population.
  • The Agency is categorised in the public finance system as other public administration entity and the approval of the Government of the Slovak Republic is necessary to dispose of its assets (emergency stocks). Even after the adoption of the new system, the emergency stocks of the Slovak Republic have always been and will continue to be maintained and used only in the public interest.
  • The discrepancy in the calculation of the price in 2017, due to an unclear interpretation of the rules in the Statute, has occurred only once in the entire history of the Agency. According to a strict interpretation of the rules, the amount of remuneration for 2017 would have been calculated at EUR 31,23/m³/tonne, whereas the Agency calculated this amount at EUR 29,65/m³/tonne, considering the impact of VAT on costs or expenses. The final remuneration level for 2017 was therefore set at an even more favourable level for the business environment and the final consumer. However, in order to avoid similar inconsistencies, the Agency has clarified the definitions for the calculation of the price amount in Article 14 of the Statutes in the framework of the draft amendments to the Statutes. The amended version of the Agency's Statutes was submitted by the Administration of State Material Reserves of the Slovak Republic for approval by the Government of the Slovak Republic already in 2020 and we are currently waiting for the inclusion of this material in the Government's proceedings for its approval.
  • The agency temporarily used the institute called "ticketing" of emergency stocks, which is also commonly used in other countries of the European Union, at a time when the level of emergency stocks in the Slovak Republic was oscillating close to the minimum level and could thus fully ensure the country's oil security with minimal financial expenditure and at the same time save financial resources for a higher NFV principal repayment. The Agency considers the SAO's interpretation of the riskiness of the system for controlling the amount of emergency stocks stored in the form of "tickets" to be highly extensive. The inspection report creates the impression that companies that contractually provided a part of their own commercial stocks to the Agency in good faith after agreement, among other, with the Ministry of Finance of the Slovak Republic, could manipulate this contractually agreed level of "borrowed" stocks. The agency notes that this form of "borrowing" of their own commercial stocks was carried out by warehousers, which are the state transporter of crude oil and the only crude oil processor in the Slovak Republic, which is at the same time the largest seller of oil products on the market. Both companies have an unquestionable reputation in the market, their usual level of commercial stock usually exceeds the loaned volume of "ticketed" stock many times over. In addition to the above, one of these companies, as the owner of the only crude oil refinery in Slovakia, regularly reports monthly for many years to the Administration of State Material Reserves of the Slovak Republic detailed movements on the side of production, sales, stock levels of raw materials, semi-finished products, and final products. The provision of their commercial stocks to the Agency brought limitations to the aforementioned stock keepers in the realization of possible business cases, as they could not dispose of the borrowed stocks. The Agency believes that there was no motivation for the companies in question to not fulfil their obligations to the Agency, they never acted against the interests of the state in the field of oil security, on the contrary. For the stated reasons, there is and was no real reason to question their credibility and good name on the part of the SAO when documenting emergency stocks in the area of "tickets". With reference to the above, as well as to the fact of a reasonable expectation of low interest from potential providers of this service in the Slovak Republic, but especially to the Agency's interest in maintaining primary emergency stocks in its possession, the Agency decided that this institute, the so-called "ticketing" of emergency stocks will not be used in the following period.