EU seeks to close ranks around plan for partial Russian oil ban

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EU leaders are close to agreeing a watered-down ban on Russian oil imports after weeks of wrangling, exempting a key supply route and leaving other details unresolved as they try to levy more sanctions against Moscow for invading Ukraine.

A leader’s summit starting on Monday evening will vow to include crude oil and petroleum products in a sanctions package but will crucially allow a “temporary” exemption for crude delivered by pipeline, according to draft conclusions seen by the Financial Times.

The conclusions may still change before EU leaders meet and diplomats have not agreed how long any carve-out of oil supplied via pipeline would last.

Keeping pipelines out of any embargo has been a key demand of Hungary, which has argued that a ban would put its economy at risk given its reliance on crude delivered by the Druzhba (Friendship) pipeline from Russia.

If exports on Druzhba are at the pipeline’s maximum capacity of 750,000 barrels a day, it would help Russia earn in the region of $2bn a month from EU buyers.

A move to ban only Russian seaborne crude also risks distorting competition in the EU oil market, with refineries connected to pipelines from Russia enjoying a large advantage. The price of Russian oil has fallen to a huge discount versus supplies from elsewhere as European traders have shunned the country’s seaborne crude since the invasion of Ukraine.

An embargo solely on seaborne oil purchases would cover about two-thirds of Europe’s imports from Russia.

Russian Urals crude is trading at about $93 a barrel compared with $120 for Brent, the international oil benchmark. While Russian oil delivered via Druzhba may not carry such a big discount, depending on how contracts are structured, Hungarian oil group MOL has said it has enjoyed “skyrocketing” margins for its refineries since March owing to the “widening Brent-Ural spread”.

The draft summit conclusions say ministers need to ensure a “level playing field” for oil purchases, without saying how this would work.

“We should make sure we will not have more damage done to the internal market than benefits,” said an EU diplomat.

Brussels proposed an embargo on buying Russian oil in early May, underlining the EU’s difficulties in finding a way to extend punishments on Moscow for its war on Ukraine while not damaging parts of the European economy that depend on deliveries of Russian energy. The EU has already sanctioned Russian coal but exempted gas from sanctions.

Hungary wants a promise that the EU will foot the bill for alternative supplies and for its move away from fossil fuels. Last week Viktor Orbán, the Hungarian prime minister, declared he was not willing to discuss the oil sanctions at Monday’s summit given the lack of consensus on the matter.

Even with the latest compromise excluding pipeline oil, Hungary would still want guarantees for alternative supplies in case Druzhba, which crosses through Ukraine, is disrupted, allowing it to source Russian oil transported by sea, according to diplomats.

Germany also has two refineries served by the Druzhba pipeline and takes about 50 per cent of what it supplies. Poland takes 16 per cent, Slovakia 13.5 per cent, Hungary and Slovenia 11 per cent and the Czech Republic 9.5 per cent, according to IHS Markit, a unit of S&P Global.

Volumes shipped via Druzhba have actually increased since Russia invaded Ukraine, with buyers in the EU looking to take advantage of the large discounts or to stock up ahead of any embargo.

Argus, the energy price reporting agency, said that while seaborne shipments from Russia to Europe had fallen by 500,000 b/d, Druzhba shipments had risen by 100,000 b/d in April compared with January and were expected to increase again in May. Hungary has increased shipments by 65,000 b/d while Poland has imported an additional 130,000 b/d, helping to more than offset declines elsewhere.

One EU diplomat said it was vital to maintain bloc unity and progress on sanctions. “Is there an agreement on an embargo on oil? Yes. Is there an agreement it will be in two phases? Yes. Is there an agreement on a date? It is more complicated. We will keep working on the package.”

Additional reporting by Eleni Varvitsioti in Athens



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