WHAT: MOL is in talks to obtain Lukoil’s oil at the Russia-Ukraine border.

WHY: Kyiv imposed sanctions on Lukoil in June, which Hungary and Slovakia have said caused disruptions in their Russian oil imports.

WHAT NEXT: By taking responsibility for oil at the Russia-Ukraine border, Ukrainian sanctions would no longer be an issue, but Hungary has said it will mean a $1.5-per-barrel increase in its costs.

 

Hungary’s national oil company MOL is in talks to obtain oil from Russia’s Lukoil at the Russia-Ukraine border, to overcome disruptions caused by Kyiv’s sanctions, Bloomberg reported on August 23.

Ukraine’s government imposed sanctions against Lukoil in June, and the following month, Hungary and Slovakia said their oil supplies from the Russian company through Ukrainian territory had been disrupted as a result of Kyiv’s actions. Hungary and Slovakia are the only EU countries alongside the Czech Republic to have secured exemptions to the EU embargo on pipeline imports of Russian oil that was introduced at the end of 2022.

Russia ships some 300,000 barrels per day (bpd) of oil to Eastern Europe via the southern leg of the Druzhba pipeline through Ukraine. Prior to Kyiv’s sanctions, Lukoil was responsible for roughly half of these shipments. 

As bne IntelliNews has reported, there is some confusion around the story, as Ukraine claims that Russian oil flows through its territory remain more or less unchanged, as while supplies by Lukoil have been cut, fellow Russian oil producers Rosneft and Tatneft appear to have ramped up deliveries. It is also unclear why Kyiv chose to impose sanctions on Lukoil, a private oil producer, and not on Rosneft and Tatneft, even though they are both majority-owned by the Russian state and therefore pay dividends to Moscow.

Possible deals this autumn

MOL has secured short-term supplies since Ukraine imposed its sanctions and the company has been negotiating a longer-term arrangement, Hungarian cabinet minister Gergely Gulyas told a government briefing on August 23, according to Bloomberg. He did not say what party MOL was in discussions with, however.

“MOL has a good chance to sign the necessary deals,” he said, noting those agreements could be reached in early autumn. “In technical terms, that will mean that transport will be costlier and MOL will have to carry the risk from the Russian-Ukrainian border.” He did not divulge any further details.

Under the existing agreement with Lukoil, the Russian company is responsible for the transport of the oil to Fenyselitka, a Hungarian settlement on the border with Ukraine.

Ukraine appears prepared to accept this solution, the minister added.

The Ukrainian side has not publicly supported the plan yet. The country’s energy minister, German Galushchenko, on August 22 declined to comment on whether Kyiv backed the proposal, but said the government would “see whether we would get some requests for negotiation from the Hungarians”.

Earlier Hungary and Slovakia threatened to sue Ukraine over its sanctions. Ukraine also depends on the pair for energy supplies – namely fuel and power produced from Russian resources. Hungary’s foreign ministry estimates that the country was responsible for 42% of Ukraine’s power imports in June.

While this arrangement is aimed at ensuring supply security, Gulyas said that transport costs via Ukraine could increase by about $1.50 per barrel, because of greater security risks and related insurance.

Hungary has been readying itself for a worse-case scenario whereby Russian oil flow through Ukraine stops completely since Moscow began its war with Kyiv in February 2022, Gulyas said. “That’s why we have one of the largest relative crude reserves in Europe,” he said.

Kyiv’s decision to impose sanctions also came out of left field for the Slovak and Hungarian governments, which have also been frustrated by the European Commission’s reluctance to intervene in the situation.

Similar arrangements for gas

There are expectations that a similar arrangement will be made for Russian gas supplies to Central and Eastern Europe once the long-term transit contract between Moscow and Kyiv expires at the end of this year. In other words, Hungary, Slovakia and other countries still dependent on Russian gas would purchase and take responsibility for the supplies at the Russia-Ukraine border, paying a transit fee to Kyiv. This would avoid Ukraine and Russia having any direct dealing, beyond having to sign a border interconnection point for shipments after this year.

However, Ukraine’s incursion into Russia’s Kursk region and subsequent capture of the key Sudzha gas metering facility near the border is likely to complicate efforts to find a solution that ensures continued Russian gas transit beyond this year. With just over four months before the transit contract expires, the market uncertainty is driving up European gas prices.

Limited alternatives for oil imports

Landlocked Hungary and Slovakia have limited access to alternative shipments of oil besides Russian supplies through Ukraine, which explains why they were able to secure exemptions to the EU embargo. Hungary is able to import oil from the port of Omisalj in Croatia, and in April and July received some 120,000 bpd via this route. However, Hungarian Foreign Minister Peter Szijjarto on August 2 ruled out securing oil supplies from Croatia, citing high transit fees.

Slovakia, meanwhile, can only receive oil via a pipeline from Hungary, and not enough to make up for lost Russian oil shipments. The Czech Republic is able to import oil via the Transalpine (TAL) pipeline linking Italy’s port of Trieste with the IKL pipeline at Germany’s Ingolstadt. But the country does not expect to be able to switch from Russian oil until next year.

This article is from bne IntelliNews’ sister publication NewsBase that covers global energy issues. Sign up for a two week trial here.