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War in Ukraine: Russian oil still flowing into the EU

Saturday, 03 August 2024 | 00:00

In the two and a half years since Russia’s full-scale invasion of Ukraine, questions around Russian oil and gas coming into the EU have never been far from the headlines.

The latest development concerns Ukraine’s decision to put Russian oil company Lukoil on a sanctions list, forcing it to stop delivering pipeline crude oil — via Ukrainian territory — to the few EU countries still receiving it.

What’s going on with Lukoil and who is affected?

In late June, Ukraine hardened existing sanctions against Lukoil, effectively preventing the company from using Ukraine as a transit country through which to deliver pipeline crude oil to other countries.

Hungary, Slovakia and the Czech Republic still receive Russian crude oil through the southern branch of the Druzhba pipeline — which passes through Ukraine — from Lukoil and other suppliers.

The Center for Research on Energy and Clean Air

(CREA) told DW that combined, the three countries imported €2.6 billion ($2.8 billion) worth of crude oil from Russia in the first six months of 2024.

Hungary and Slovakia are the most dependent and their respective governments also have pro-Moscow leanings. They reacted angrily to Kyiv’s move and last week asked the European Commission to formally mediate with Ukraine over the issue.

A spokesperson for the European Commission told DW: “The Commission is currently gathering detailed information on whether and how Ukraine’s measure might impact the supply of crude oil to Hungary and Slovakia. The Commission has addressed detailed questions to Slovakia and Hungary to establish a complete analysis and reached out to Ukrainian authorities.”

“These questions relate to volumes of the current oil transit, legal entities shipping the oil through Ukraine and contracts in place, possibilities for alternative routes of supply as well as the cost of it,” the spokesperson added.

Hungary relies on Russia for around 70% of its oil imports, with Lukoil accounting for half that figure.

Hungarian Foreign Minister Peter Szijjarto said Ukraine’s measures threaten Hungary’s energy security while energy experts have said that if a solution is not found, the country could be dealing with soaring electricity prices and power cuts within weeks.

Have flows stopped?

Hungary’s oil imports have dropped since Ukraine’s move. Vaibhav Raghunandan, an analyst with CREA, told DW that according to data available up to July 20, “Hungary’s import volumes have dropped by a third compared to June.”

Other Russian companies which also supply oil via the pipeline, such as Rosneft and Tatneft, have not been newly sanctioned so they are still sending oil through Druzhba.

Why are some EU countries still receiving pipeline Russian oil?

The EU has prohibited the seaborne transport of Russian crude oil since December 2022. However, the EU has allowed what it calls “a temporary exception” for imports of crude oil by pipeline into “those EU member states that, due to their geographical situation, suffer from a specific dependence on Russian supplies and have no viable alternative options.”

That primarily referred to Hungary, Slovakia and the Czech Republic.

Despite the EU specifically calling on those countries to find alternative supplies, there has actually been a 2% increase in the amount of pipeline Russian crude they receive since the first half of 2021.

Raghunandan says this is down to Hungary, which has increased imports of Russian crude by 56% since 2021. “Rather than slowly wean themselves off their dependence on Russian crude, as the derogation hoped for, it is clear that Hungary has actually increased it,” he told DW.

However, despite this, the EU’s overall imports of Russian crude oil have dropped by 90% since the invasion as a result of EU sanctions and member states shutting off imports.

What about gas?

Given that Russian gas was never officially sanctioned by the EU, it has long represented a different challenge. EU member states imported €11 billion worth of Russian oil and gas in the first half of 2024, with €3.6 billion of that being Liquefied Natural Gas (LNG) and €4.8 billion coming from pipeline natural gas. That means gas now accounts for 76% of the Russian hydrocarbons still coming into the EU.

The EU has significantly reduced the amount of Russian gas it imports, from around 40% of its supply in 2021 to 15% in 2024. However, several EU member states such as Austria, Hungary and Slovakia are still heavily dependent on Russian gas via the Ukrainian transit route, according to CREA.

Other EU nations, such as the Netherlands, Spain and France, also import significant quantities of Russian LNG. Yet much of this LNG is not even needed by the European market and is being handled at European ports before being re-exported to third countries worldwide, with some EU states and companies profiting as a result.

According to CREA, 21% of the EU’s imported Russian LNG is re-exported globally, a process known as trans-shipping.

The EU continues to strongly encourage member states to reduce their purchases of Russian gas, whether it is by pipeline or LNG. However, an embargo has still not been part of any EU sanctions package.

How is the current dispute likely to play out?

The next move may come from Brussels. Hungary and Slovakia want the EU to open consultations with Kyiv on the terms of Ukraine’s trade deal with the EU.

However, the EU’s stated position of needing more time to investigate and consider the request and the legal situation around it, has reportedly been strongly supported by member states, with little support for Budapest or Bratislava so far.

Ukraine may move to further restrict more oil flowing via the Druzhba pipeline, namely that of the other Russian companies sending the hydrocarbon. Hungary appears to have the most to lose, given how much it has increased its dependency on Russian oil since the invasion.

Ukraine’s firm stance on Lukoil may only be the start of its direct moves to tackle Russian oil and gas revenues.

CREA’s Raghunandan pointed out that Ukraine’s transit contract for Russian pipeline gas expires in December 2024, with no extension planned. “As a result, Russian pipeline gas is set to cease flowing into Europe via Ukraine starting January 2025,” he said.

That means the situation is likely to escalate in the months ahead.

Austria, Hungary and Slovakia are still heavily dependent on this route for gas. However, Hungary also continues to import Russian gas via the southern TurkStream pipeline. Flows are expected to continue on that route, which does not cross Ukrainian territory.
Source: Deutsche Welle

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