Challenges and changes in the Druzhba pipeline system
The transit of oil from the east is in its final years.
The system of transit oil pipelines from Russia to Europe is called Druzhba (Friendship). The name now sounds ironic, as friendly directions are becoming fewer and fewer. In the 2000s, friendship with the Baltic countries disappeared when the Kremlin disconnected the section leading there for “scheduled repairs,” which turned out to be a permanent situation.
This year, it seems that the transit through the northern branch of Druzhba to Poland and Germany has come to an end. In 2022, they still pumped 24 million tons there, but both Berlin and Warsaw refused to buy oil from the aggressor this year.
Ironically, only one “Ukrainian” segment remains operational for the transit of oil to Hungary, Slovakia, and the Czech Republic, although its prospects are uncertain. The fact that this transit segment is still functioning is due to a complex balance of interests and contradictions.
The European Union has imposed an embargo on Russian oil and petroleum products, but it does not apply to supplies through the southern branch of Druzhba.
However, with the start of the full-scale war, Ukrtransnafta, the operator of Ukrainian segment, significantly increased the tariffs. If transit cost 8.6 euros per ton at the beginning of last year, the price was raised multiple times both last year and this year. Since June, it has been twice as high as the pre-war period, at 17 euros per ton, and it will increase to 21 euros in August. It initially wanted to set it at 27.2 euros per ton, but it has not reached an agreement yet. Meanwhile, tariffs on other routes are even higher.
The actual deliveries in 2022 even slightly increased. The Hungarians received 4.9 million tons (a 45% increase compared to the pre-war year), the Czechs received 4.2 million tons (a 25% increase), while the Slovaks purchased the same amount as before, 5.2 million tons.
These purchases took place against the backdrop of infrastructure shelling (although the pipeline itself was not targeted) and concerns about the disruption of transit. However, serious disruptions were avoided.
Moscow attempted to switch the settlements to ruble accounts, which temporarily halted the transit for a few days. Ukraine rejected these demands. In practice, the oil is pumped for the Hungarian MOL (which owns refineries in Hungary and Slovakia) and the Polish PKN Orlen, which owns a refinery in the Czech Republic. Amid the failures of the “lightning war of the second world army,” they did not risk quarreling with Orban in the Kremlin, and the issue of currency payment was managed by the oil buyers.
At the beginning of the year, according to leaked US intelligence documents, Ukrainian President Volodymyr Zelenskyy suggested studying the potential consequences of stopping the Druzhba oil pipeline. Budapest even started to worry about this. However, it was a game of nerves. Although Kyiv is not thrilled with Orban’s position, it will not interrupt the transit.
As a result, Ukraine receives diesel fuel — 114,000 tons in 2022. This is valuable for both the agricultural sector and the Armed Forces of Ukraine. Additionally, the money from transit enables the maintenance of the oil pipelines that transport Ukrainian oil.
The neighboring Central European countries, three landlocked nations, receive resources for processing and time for diversifying their supply sources.
And they began diversifying. Before the war, Slovakia relied on Russian oil for 95% of its supply, Hungary for 60-65%, and the Czech Republic for half of its supply.
Last year, these countries increased their alternative route deliveries through the Adria oil pipeline, which was originally constructed during the Yugoslav communist era, running from the Croatian port of Omisalj on the Adriatic Sea. Ironically, it was through this pipeline that Ukrtransnafta once planned to develop transit shipments of oil from Tyumen.
Transitioning to non-Russian oil and EU incentives
Furthermore, the Czechs, together with Austrians and Germans, will engage in the modernization of another pipeline, the Transalpine Pipeline (TAL), from the Italian port of Trieste. The Polish company PKN Orlen, which stopped buying oil through the northern branch of Druzhba in the spring, promises to exclude Russian oil from its refineries in the Czech Republic. The agreement to increase the TAL’s capacity to 4 million tons per year will allow the Czech Republic to become independent of Russia by 2025.
The situation for the Hungarians is slightly more complex. They plan to expand the volume of Croatian transit, but they are not yet willing to completely abandon Druzhba pipeline. The company MOL is working on diversifying the supply routes of oil and expects to have the option to choose between Urals or non-Russian oil for its refineries by 2026.
Their relationship with Croatia has been eventful. In 2009, MOL acquired a 49% stake in the local oil and gas conglomerate INA (while the Croatian government holds 45%). The result of this deal was a criminal case against the Prime Minister of Croatia, Ivo Sanader. He was accused of accepting bribes from the Hungarians. In November 2012, the former Prime Minister received a ten-year prison sentence. Naturally, MOL denies any involvement in bribery, but these nuances (along with Zagreb’s appeals to international courts to terminate the contract) did not strengthen their “fruitful cooperation.”
Currently, tensions have eased to some extent, but when the long-term oil transit contract with Zagreb expired this year, they were unable to reach a new agreement despite a year of negotiations. The Hungarians accuse their neighbors of overpricing the pumping fees, which are four times higher than they would prefer. They have now entered into a temporary one-year agreement. Overall, they are “sworn friends.”
Technically, to increase the capacity of the Adria pipeline, it will be necessary to strengthen the pumping station and modernize approximately a hundred-kilometer section of the pipeline, requiring investments ranging from 100 to 200 million euros. By the way, in its forty-plus years of history, the Adria pipeline has never operated at even half its capacity.
At the same time, Budapest is attempting to enter the Serbian market by proposing the extension of a pipeline from Druzhba to Serbia (although it suggests seeking funding from the EU).
Despite the nuances, the replacement of the Russian export blend, Urals, is progressing actively.
By the end of 2023, Slovakia aims to transition approximately one-third of its refining to non-Russian oil, primarily Azerbaijani oil. This represents a reduction of nearly 2 million tons of transit through Ukraine.
Hungary, where Russian oil accounted for about 60% of its supply before the war, aims to decrease its dependence to 40%.
Furthermore, the European Union has incentivized this process by prohibiting the export of petroleum products derived from Russian raw materials. Slovak refineries used to export up to half of their production to the Czech Republic. Until the end of 2024, diesel fuel produced from Russian oil can still be sold from Slovakia to the Czech Republic (but only to the Czech Republic).
In Hungary, this deferment is in effect until December 2023. Even if it is extended for another year (as attempts are being made to do so), both the Hungarian and Slovak routes will experience significant declines.
Both the Czech-Polish and Hungarian transit routes are expected to be operational in the second half of 2025, with a corresponding reduction in transit through Ukraine. Instead of the current 10 million tons pumped to Hungary and Slovakia through Ukrtransnafta, in two to three years, it will decrease to 3.5-4 million tons. The Czech Republic, with its current volume of 5 million tons, will essentially go to zero.
Internal transit of its own oil (1.5-2 million tons) will not compensate for such losses.
After the unblocking of ports, transit from the sea will become available. However, for now, it remains limited.
In June, the construction of the “eternal” Brody-Adamova Zastawa oil pipeline was mentioned again. During negotiations with the Polish company PERN, it was mentioned that the pipeline would connect the Ukrainian and Polish oil transportation systems, and the readiness level for implementation was highly praised. However, these were ceremonial words with no concrete details. The project has been hanging in limbo for about twenty years. Although it was emphasized that when it comes to fruition, the pipeline will transport oil in both directions, allowing Ukraine to receive oil from the Baltic Sea. It is a promising project for Poland as well as other EU countries, but it can only move forward after the Ukrainian Black Sea ports are unblocked.
Uncertainties and the future of Ukraine’s oil industry
The traditional question of “Who will pay for the construction?” remains unanswered, and the question of resource availability is also uncertain. Although the project is included in the EU’s list of priorities, there is currently no clarity. Moreover, the project truly contributes to diversifying energy supply routes to the EU market, which instantly adds political dimensions to the equation.
One thing is clear — there will be no Druzhba pipeline. What will come after Druzhba? Currently, there are transformations in progress, and it is difficult to say when and how they will conclude. However, it is likely that the market will change beyond recognition. Ukraine should start looking for its place in this changing market now, while there are still available opportunities. Soon, there won’t be. At the very least, it is crucial to develop, or rather revive, oil processing industry. It won’t be easy or quick, and losses are inevitable. However, burying heads in the sand and expecting that everything will resolve itself is not a viable option.
Originally posted by Ihor Mascalevych on Zn.ua. Translated and edited by the UaPosition – Ukrainian news and analytics website