Hungary's energy dilemma: Russian oil halt sparks urgency for alternatives

Oil deliveries to Hungary by the Russian giant Lukoil have been halted. Ukraine has turned off the tap due to sanctions. Has Orban been cut off from oil? Not entirely. What then does the turning off of the Druzhba pipeline tap mean for Hungarians? The key is what reserves they have.

Russian oil has stopped flowing to Hungary through Ukrainian territory. Kyiv is cutting off Viktor Orban from cheap "Putin oil," thereby tightening sanctions on Russian Lukoil.

As Ukrainska Pravda reminds us, Lukoil has been subject to sanctions in Ukraine since 2018, although they are limited in nature. So far, the restrictions only involved withdrawing capital, trade limitations, and bans on privatizing or leasing state property.

However, in June 2024, the National Security and Defense Council of Ukraine (NSDC) significantly expanded these sanctions, also adding a ban on transit through its territory. As a result, the Russian oil delivered through the southern branch of the Druzhba (Friendship) pipeline cannot be delivered to Hungary. Notably, these supplies were excluded from Western sanctions and covered two-thirds of all deliveries to that country.

Hungarian Foreign Minister Peter Szijjarto, quoted by Bloomberg, called the interruption in Russian oil deliveries "certain legal complications" that are currently being worked on.

The halt of transit through Ukraine and, as a result, the tightening of Ukraine's implementation of sanctions against Russia means the cessation of Russian oil deliveries by Lukoil to Hungary. This is a decisive step by Ukraine towards reducing the financing of Russian aggression by some EU countries that were still buying Russian energy resources, commented Kamil Lipiński from the Polish Economic Institute (PIE) in an interview with money.pl.

The stop of transit through Ukraine should not be a surprise for Hungarians. Kyiv had already signaled this step earlier, and Peter Szijjarto discussed this issue during the UN General Assembly with Russian Foreign Minister Sergey Lavrov. At that time, he emphasized that from Hungary's point of view, Russian oil is crucial for the country's energy security.

Moscow and Budapest have numerous interests in common. In 2023, Russia supplied Hungary with 3.6 million tons of oil and 4.5 billion cubic feet of natural gas. The previous year, the volume of Russian oil delivered by Transneft amounted to 5.4 million tons of the resource.

Lukoil is the largest supplier of oil for the Hungarian MOL company, and according to Bloomberg data, in January 2024 alone, Budapest paid the Russian supplier $343 million for oil.

Hungary benefited for a long time from the exemption from sanctions on importing Russian oil via pipelines (which does not apply to Poland and Germany). Despite not pursuing diversification policies, the price of 95-octane E10 gasoline in Hungary is currently 10% lower than the EU average according to European Commission data (though it is still 3% more expensive than in Poland) - calculates Lipiński.

What does the turning off the Druzhba pipeline tap, which supplied 160,000 barrels of oil per day, mean for Hungarians?

As the PIE expert reminds us, in such situations, oil reserves are crucial for the state's security. EU member states are required to maintain oil reserves at the level of 90 days of average daily net imports or 61 days of average daily domestic consumption, whichever value is higher.

For Hungary, which imported about 136,000 barrels of oil per day last year, this means maintaining oil reserves at 11.2 million barrels. According to JODI data, co-created by organizations such as OPEC and IEA, Hungarian reserves at the end of the year exceeded 12 million barrels. This is nearly 80 days of operation for Hungarian refineries - explains Kamil Lipiński.

If the Hungarian society does not panic, there should be no threat to the continuity of supply at gas stations in Hungary - assesses the expert.

He adds that it is possible that restricting Russian deliveries will raise fuel prices in Hungary to the EU average and limit consumption, which may additionally facilitate ensuring Hungary's supply security.

From the beginning, Budapest has emphasized that Russian resources are the basis for the country's energy security and that there are no real possibilities to limit it. At the same time, unlike Prague and Bratislava, which similarly defined their position, it does not particularly strive to build alternatives, using the argument that as a country it has no access to maritime routes. Yet, the Czech Republic and Slovakia do not have access either.

Brussels has repeatedly reminded Budapest that EU member states should reduce dependence on Russian energy. But Viktor Orban's government continues to navigate between favorable agreements with Moscow and European commitments.

Instead of reducing dependence on Moscow, Orban deepened it by investing in a pipeline to transport Russian oil from Serbia through MOL, among others.

Do Hungarians really have no alternatives? That's not true, they do. As Kamil Lipiński points out, even before the supply stoppage, about 40% of supplies to the Hungarian MOL group constituted non-Russian oil.

Hungary's reliance on Russian oil was partly a result of business calculations and fits into the broader activities of this state concerning Ukraine and the EU sanctions on the Russian aggressor - emphasizes the PIE analyst.

In the coming months, diversification of supplies will be crucial. Hungary, in addition to the possibility of importing oil through Ukrainian territory (160,000 barrels per day), has pipelines connecting it with Slovakia (136,000 b/d) and Croatia (228,000 b/d). Apart from these pipelines, there is the possibility of importing by rail and road - points out other routes Lipiński.

It is worth noting that Hungary also has access to resources from Azerbaijan. Already at the end of last year, in a statement sent to money.pl, the Hungarian government's press service emphasized that precisely for the purpose of energy independence the previous summer Hungary established energy cooperation with Turkey, Azerbaijan, and Qatar.

"Here in Budapest, we held talks with the presidents and emirs of all three countries, signed agreements, and opened new opportunities. Turkey and Central Asia – the Turkish world – play a strategic role in energy supplies to Europe," Prime Minister Orban's office conveyed. Additionally, deliveries from Azerbaijan also began.

Back then, it was about gas, but in March 2024, the Hungarian government also boasted of oil supplies from the Azerbaijani fields acquired by MOL. The arrival of this Azeri Light oil delivery is an extraordinary event for us, as it further demonstrates our flexibility in acquiring oil - emphasized Gabriel Szab, Executive Vice President for Downstream at MOL Group.

Oil extracted from the Azeri-Chirag-Gunashli (ACG) oil field, of which MOL Group owns 9.57% shares, reaches Hungary and Slovakia through the port of Ceyhan in Turkey to Omisalj in Croatia, and then transports 99,000 tons of oil to the only refinery in Hungary in Duna near Budapest and to Bratislava through the Adria pipeline.

In 2020, MOL bought from American Chevron just under 10% shares in the ACG oil field and 8.9% in the BTC pipeline (Baku-Tbilisi-Ceyhan) for $1.57 billion. It is the third-largest investor in this extraction project after BP and SOCAR. This field accounts for 15% of MOL Group's total production and 25% of Hungary's total reserves.

The problem is that transporting Azerbaijani resources is more difficult, and hence more expensive than Russian oil through Druzhba. Additionally, Hungarians complain about the pipeline through Croatia, highlighting its low capacity and high transit fees.