MOL reaches agreements securing Druzhba crude deliveries

Hungarian oil and gas company MOL has concluded agreements to secure the continuous transport of crude through the Druzhba (Friendship) pipeline through Belarus and Ukraine to Hungary and Slovakia. Under the agreements with crude suppliers and pipeline operators, MOL Group will take over ownership of the affected volumes of crude at the Belarus-Ukraine border, effective September 9.

The updated transportation agreements and the new takeover arrangements fully comply with all relevant sanctions and provisions, including those of the European Union and Ukraine, MOL said.

The new arrangement provided a "sustainable solution" for crude transport through the Druzhba pipeline and would contribute to the security of supply in Hungary and Slovakia, said Gabriel Szabo, MOL Group's downstream VP.

Following Russia's 2022 invasion of Ukraine, the European Union banned oil imports from Russia but granted exemptions to Czechia, Hungary and Slovakia to give them time to find alternative supplies.

Hungary and Slovakia stopped receiving oil from Lukoil through the southern branch of the Druzhba pipeline on July 18, after Ukraine included the Russian company on its sanctions list.

Bratislava and Budapest, both of which have opposed Western military aid to Ukraine amidst Russia’s invasion, had raised concerns about the move.

The Hungarian foreign ministry called the decision a violation of an agreement between Ukraine and the EU on facilitating free trade and accused Ukraine of jeopardising the two countries' energy security.

Hungary and Slovakia urged the European Commission to intervene, only to face calls by Brussels to reduce dependency on Russia.

In July MOL’s Danube refinery near Budapest received 10% less Russian oil compared to planned shipments and the Bratislava refinery saw a 22% drop.

At the end of August comments that Ukraine would shut down the Druzhba oil pipeline from 2025 raised worries, but later Kyiv confirmed that existing transit agreements would be honoured until their expiration in 2029, but no new contracts would be allowed as part of Ukraine’s efforts to reduce Russian oil and gas shipments to the EU.

In related news with MOL, Erste Bank slashed the company’s target price last week from HUF3,450 (€8.7) to HUF2,600 with a sell rating, citing the deteriorating external environment and increasing tax burdens. MOL has underperformed its peers on the Budapest bourse with its share price down by 6-7%, while the three other blue chips rallied. Magyar Telekom, Richter and OTP Bank shares have risen 51%, 22% and 16% respectively this year.

Issues over the transit ban have raised concerns of MOL being slow in diversifying its oil supplies and reducing its dependence on Russian supplies. Russian oil imports to Hungary have increased from 58% to 77% of supply between 2021 and 2023, according to a European Commission report cited by Radio Free Europe.

MOL’s decision to continue to rely on Russian oil appears to serve political rather than business interests, which aligns with the government's strategy of increasing business ties with Russia, defying calls by Brussels, according to comments by a popular economic blog Kard. By purchasing Russian oil, Hungary both demonstrates its loyalty to Moscow and benefited from the price difference between Russian Brent and other types, but last week, the price of the Russian flagship crude traded at over $80 per barrel, some $7 above the price of Brent. 

For years, Hungary’s reliance on cheaper Russian oil allowed MOL to secure better margins compared to its regional competitors, which is eroding with recent developments, according to financial website Portfolio.hu.

Details of the agreement announced by MOL, including that on volume, timeframe and pricing are not known, the financial portal writes, which recalls earlier comments by head of the Prime Minister Office Gergely Gulyas, who said that the agreement would raise MOL’s acquisition costs by $1.50 per barrel.