Hungary’s Support for EU’s Russia Oil Ban Depends on Billions in Funding, Reports Reuters

By Krisztina Than and Marek Strzelecki

BUDAPEST – Hungary is escalating its demands in the ongoing discussions regarding European Union oil sanctions, stating that an agreement is unattainable until Brussels provides a “solution” amounting to hundreds of millions of dollars to offset the impact of replacing Russian oil in Hungary’s economy.

Foreign Minister Peter Szijjarto announced on social media that no satisfactory proposal has yet been presented. He further emphasized that Russian oil transported via pipelines should be exempted from any impending oil embargo, which should solely apply to maritime deliveries.

This position would favor the Hungarian group MOL, which is benefiting significantly from low-cost Russian Urals crude oil. The price gap between Urals and Brent has expanded to around $34-$35 per barrel, allowing MOL to offset losses incurred from the Hungarian government’s fuel price cap instituted last year, which was pivotal in helping Prime Minister Viktor Orban secure his electoral victory in April.

Szijjarto reiterated Hungary’s stance to Brussels, insisting that the country would only support oil sanctions if the European Commission proposes solutions to mitigate the economic challenges posed by such restrictions.

“We expect a proposal addressing not only the costly transformation required for our refineries but also the necessary capacity enhancements at the Croatian pipeline, which would also involve significant financial outlay, as well as considerations regarding the future of the Hungarian economy,” Szijjarto stated.

While most EU nations are in favor of banning Russian oil as part of a new sanctions package aimed at penalizing Moscow for its actions in Ukraine, unanimous agreement is required for such a decision. Hungary has emerged as a prominent dissenting voice, alongside some other Eastern European nations.

According to Szijjarto, a mutual agreement could only be reached if the EU’s ban were limited to maritime oil shipments.

European Commission President Ursula von der Leyen has indicated that further discussions are needed to achieve a consensus and plans to convene a meeting focused on regional cooperation regarding oil infrastructure.

The matter is complex, as granting MOL extended exemptions and financial assistance for refinery upgrades could disrupt the competitive balance within the market.

“MOL and the government are collaborating strategically to prolong the use of Russian oil, which is considerably more profitable given the price difference,” remarked Wojciech Kononczuk, Deputy Director of the OSW Centre for Eastern Studies, a think-tank in Warsaw.

Poland’s ambassador to the EU noted that the discussions are challenging due to the multi-year exemptions raising concerns about competition and equality among companies within the common market.

A LIFELINE FOR MOL?

MOL’s business model heavily relies on Russian crude transported via the Druzhba pipeline, which supplies roughly 65% of Hungary’s oil needs. The group stated that transitioning its refineries in Slovakia and Hungary to process alternative crude would require a substantial investment of between $500 million and $700 million and take at least 2-4 years.

“MOL’s refineries have been designed for processing Russian Export Blend (REB) crude. While MOL can adapt its refineries for alternative crude, further investments, capacity expansion, and testing time are necessary,” the company responded to inquiries.

“Currently, we benefit from favorable Urals prices, but this advantage may not last indefinitely.”

MOL’s refining margins have been bolstered by its access to inexpensive Russian oil as well as an increase in diesel and gasoline profit margins. According to MOL’s figures, its refinery margin surged to $33.7 per barrel in March from just $3.4 in February. The company did not release data for April, stating that “current margins do not reflect MOL’s actual profitability.”

Tamas Pletser, an oil industry analyst at Erste Investment, acknowledged that the embargo might negatively impact MOL’s business model; however, he also pointed out that the company’s dependence on the Druzhba pipeline poses its own risks.

“If they obtain EU funding for these investments, it would be a beneficial situation for them, especially if Russian shipments can continue,” he concluded.