European Commission in no rush to step in and settle Lukoil transit ban dispute

The European Commission is in no hurry to settle the dispute over the halt in oil transit by Lukoil. At a recent meeting of EU trade representatives, only 11 countries supported the Commission's position to delay action on the matter, and no member state sided with Hungary and Slovakia.

At a daily press briefing in Brussels on July 25, a spokesperson for the European Commission said a decision by Ukraine restricting transit deliveries of Russian crude bound for Hungary and Slovakia did not cause an "immediate problem."

"My understanding is that there is no immediate impact on the security of oil supply into the EU. There is no immediate problem for the two member states concerned because they have a 90-day backup of supply in line with EU legislation," Olof Gill said.

The European Commission stated that it requires more time to gather evidence and assess the legal situation before making a decision, he added.

Ukraine’s recent sanctions have barred Lukoil from using the country for transit, affecting both Hungary and Slovakia, which together receive 2mn tonnes per year (tpy) of crude oil from Lukoil. The Russian oil giant accounts for half of the supply on the Druzhba pipeline, a crucial artery for eastern Europe’s oil supply.

Hungary and Slovakia sent a letter to the European Commission at the beginning of the week requesting the start of talks with Ukraine as a precursor to legal action. The two member states claimed Kyiv’s sanctions had violated a 2014 association agreement between Ukraine and the bloc.

Hungary’s chief diplomat warned that Ukraine’s action could lead to an energy crisis.

Ukraine’s sanctions on oil transiting its territory only apply to the privately owned Lukoil. Kyiv's pipeline operator UkrTransNafta to reject applications for Lukoil-contracted oil to pass through Druzhba. The transit of oil from the other Russian companies of state-owned Rosneft and privately owned Tatneft have not been affected.

Hungary and Slovakia still have options for Russian oil, as they could tap supplies via other sections of the Druzhba pipeline system. Such supplies are permitted, unlike seaborne Russian oil imports, which the EU placed an embargo on at the end of 2022.

Hungary, Slovakia and Czechia are exempted from the EU's sanctions on Russian oil due to their high dependency on it.

So far, Kyiv has typically avoided placing sanctions on Russia that significantly hurt EU member states, and the move may be punishment for Hungary and Slovakia opposing further military to Ukraine and sanctions on Russia.

Russia supplies about 70% of Hungary’s oil imports, with half of that amount coming from Lukoil. Moscow also covers 88% of Slovakia’s imports. Bratislava has warned that the move by Kyiv could cut oil supply to its only refinery, the 124,000 barrel per day (bpd) Slovnaft plant owned by Hungary’s MOL, by 40%.

After the Kyiv’s decision to cut off supplies, Budapest threatened to block the disbursement of €6.5bn of the European Peace Facility, but it has been doing so for more than a year, citing discrimination against Hungarian companies, or the language rights of ethnic Hungarians in Ukraine.