Hungary Stops Diesel Supplies to Ukraine

Earlier this week, the Hungarian oil and gas company Mol requested the Ministry of Energy to open the country's strategic oil reserves for the lack of shipments of crude oil from Russia via a pipeline through Ukraine since the end of last month. Ukraine says the supply was interrupted for technical reasons: one of the pipeline's pumps has no power because the Russians shot down the electrical infrastructure, and the problem has not yet been resolved. However, the Hungarian government replied by ordering the termination of diesel fuel supplies to Ukraine – a move that could deprive Hungary of important economic benefits in the future, experts say.

The conflict began at the end of January when a Russian air strike shut down the Druzhba oil pipeline, which transports crude oil from Russia to Hungary via Belarus and Ukraine. Although the European Union banned Russian oil imports from December 2022, pipeline deliveries were granted a temporary exemption with no deadline. The governments of only two countries have taken advantage of this exemption since last year: Hungary and Slovakia.

Mol, which operates a refinery in Százhalombatta near Budapest and another one in the Slovak capital Bratislava, through its Slovak subsidiary, said that an initial release of 250,000 tons of reserves may be necessary. Hungary's total reserves amount to 655,000 tons of crude oil and 513,000 tons of diesel, 256,000 tons of gasoline, and 13,000 tons of kerosene in finished products, covering more than three months of national consumption.

According to Mol, there are no supply security risks, the market is being served without disruption, and the company is operating within the framework of normal business. It says oil supplies could stabilize in mid-March as alternative purchases have been initiated: the first sea shipments of oil could arrive at the port of Omisalj in Croatia in early March, from where they could reach the refineries in Százhalombatta and Bratislava in 5-12 days via the Adria pipeline and the branch of the Druzhba pipeline connecting Hungary and Slovakia.

Hungarian political leaders often say that gas and oil supplies should not be connected to political issues and sanctions because this is a matter of geography and security of supply. Nevertheless, on Wednesday this week, Péter Szijjártó, Minister of Foreign Affairs and Trade, made a political statement: Hungary will not supply diesel to Ukraine until the Ukrainians resume crude oil deliveries via the Druzhba pipeline. Shortly afterwards, the Slovak government made a similar announcement.

The long-term consequences of these measures are uncertain. According to Reuters, Ukraine is not really at the mercy of Hungary. Russian attacks on Ukrainian oil refineries and fuel storage facilities with drones and missiles has forced traders to compensate with imports, purchasing diesel fuel even from India, which imports a significant portion of its crude oil from Russia. Hungary's advantage in this regard is that it has an old product pipeline from Mol's refinery in Százhalombatta to Ukraine section, a route that has recently been used for cheap transportation of diesel fuel. Analysts point out that the current Hungarian political decision could deprive Hungary of important economic benefits in the future as this business could cease if other countries, such as Poland, enter the Ukrainian diesel market instead of Hungary, or if the current major sellers, India and Greece, increase their market share. In fact, the CEO of Polish oil company Orlen, Ireneusz Fąfara has already announced to Reuters that his company is willing to increase fuel exports to Ukraine...