Hungary in bind over Russian oil as EU pushes embargo

Hungary’s resistance to EU plans to hit Russia with an oil embargo might seem yet another aspect of the hostile relationship between Brussels and Viktor Orbán’s government, but officials and oil industry executives have stressed practical concerns behind Budapest’s stance.

Landlocked and with an oil pipeline infrastructure that points towards Moscow, Hungary says it would find an embargo on the import of Russian oil and fuel nearly impossible to handle.

Hungary’s government has said it cannot support the EU’s plan to ban Russian crude and fuel imports unless it exempts countries that rely exclusively on Russian pipelines to import their crude needs, putting the plan on hold as it requires unanimous backing from all 27 member states.

Under Orbán, disputes with the EU over corruption or democratic values have led to a stand-off that now threatens Budapest with financial penalties running to billions of euros, while Orbán has also been one of the EU leaders closest to Russian president Vladimir Putin. But Péter Szijjártó, Hungary’s foreign minister, said his government’s reluctance to sanction Russian oil with an embargo was “not a matter of a lack of political will or timing”.

“It is the simple geographical, physical, infrastructural reality . . . Hungary’s energy supplies are secure at the moment, but this sanctions package would completely ruin that security,” said Szijjártó.

EU diplomats believe Hungary will eventually be brought round, possibly by a promise of funding for new infrastructure. “They always negotiate hard but they backed the other five [sanctions] packages,” said one.

In a letter to European Commission president Ursula von der Leyen on Thursday, prime minister Orbán said Hungary was unable to support the EU’s latest sanctions plan “in its current form”.

“The sanctions would require diverting necessary national resources to redundant fossil investments while relevant funding from the EU is available to us only on paper,” Orbán wrote.

Zsolt Hernádi, chief executive of the Budapest-based multinational energy group MOL, said Hungary had neither physical access to sufficient other sources nor the technology to refine oil from elsewhere.

Hernádi said central Europe was fighting a “big fish / little fish problem . . . Western Europe has for decades built cheaper, smaller refineries, with a lot of capacity outsourced to the Middle East, for the seaborne, light Brent crude . . . So they are a lot less affected by a potential Russian oil embargo.”

Hungary and some other eastern European states cover most of their crude imports via the Soviet-era Druzhba pipeline, which traverses Ukraine. One alternative route exists: the Adria pipeline from the Croatian coast, which could theoretically cover 80 per cent of the region’s needs via seaborne crude, Hernádi said.

MOL’s refineries around the region include the only ones in Hungary and Slovakia.

Hernádi said the company had spent billions of dollars over decades to develop the technology to process the oil supplied via Druzhba — standardised blend of 70 various oilfields, called REBCO, or Russian Export Blend Crude Oil.

If either Russia or the EU decides to sever the crude ties completely, MOL’s refineries would have to be retooled again, a process that may take years and cost around half a billion dollars, Hernádi said.

MOL would have to find a replacement that matches REBCO in dozens of necessary parameters to produce the same range of products.

“In an embargo, it would be impossible to ensure market supply at even 60, 70 per cent of the current level,” he said. “We would have to prepare for at least three or four years of a shortage economy in Hungary, but also in Czechia, Slovakia and Bulgaria.”

Slovakia and Hungary were offered an extra year until the end of 2023 but Karol Galek, state secretary at the Slovak economy ministry, said it needed three years to convert its refinery — which also supplies Austria, the Czech Republic and Ukraine. It would cost up to €250mn, he added.

Jozef Sikela, Czech industry minister, wants a similar deal for Prague and said: “The pain should be shared equally.” Two EU diplomats said Bulgaria and Greece had asked for an objective criteria for who deserves extra time, suggesting any concession would have to be extended to other countries.

Budapest is also beholden to Russia for natural gas imports — with a long-term gas supply agreement signed just last year — and nuclear energy, with a project to expand a nuclear power plant that it has stood by despite years of delays even before the invasion of Ukraine.

The Hungarian government is contemplating ways to manage energy imports but the constraints are especially hard in the oil sector with no solutions readily available, according to sources with knowledge of the situation.

Any transition away form Russian oil would take time and cost money, which makes Hungary’s reservations warranted, said Tamás Pletser, an oil and gas market analyst at Erste Bank in Hungary.

“This is a politically supercharged question but there is an objective reality behind it,” Pletser said. “There are intense talks about it and the agreement will probably cover a transition period of a certain length. In the end, these countries may indeed end up using Russian oil longer term.”

Pletser said the EU could sweeten the deal with substantial financial support for alternative, parallel infrastructure, which would otherwise be uneconomical.

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