Slovakia aims to maintain refining levels as Central Europe faces rifts over EU sanctions

The operator of Slovakia's 122,000 b/d Bratislava refinery aims to maintain throughput at historical levels as Central European refiners grapple with impending EU curbs on trade in oil products derived from Russian crude, officials said.

EU sanctions banning imports of Russian crude from Dec. 5 included an exemption for crude sent from Russia via the Druzhba pipeline into Central Europe -- including to Hungary, Slovakia, the Czech Republic and Poland.

However, a ban on Russian oil products also takes effect on Feb. 5 and includes curbs on countries exporting oil products they have manufactured from Russian crude, even within the EU internal market, with one exemption: for fuel supplied into the Czech Republic until Dec. 5, 2023.

Officials around the region have flagged complications that could arise from EU sanctions imposed in response to the Russian invasion of Ukraine, including a risk to supplies of fuel to Ukraine itself.

Central Europe suffers a lack of diesel production capacity and Russian diesel will be hard to replace, Slovak economy minister Karel Hirman has pointed out.

Hungary has already been suffering fuel shortages recently, likely exacerbated by price controls that the government canceled on Dec. 6.

Bulgaria's government says it will permit the Russian-owned Lukoil Neftohim refinery at Burgas to continue exporting oil products to regional markets as part of a tax deal, in a move that risks infringing sanctions.

Slovakia's Bratislava facility, owned by Hungary's Mol, faces difficulty as it relies on being able to export to a wide variety of countries, including Austria, Czech Republic, Germany, Hungary, Poland and Ukraine. Some 52% of its motor fuels production is for export, according to Slovnaft spokesperson Anton Molnar.

Molnar said the company aimed to broadly maintain refining at current levels in 2023 and to retain its export markets, sourcing 60% of its crude from Russia, with the remainder via the Adria pipeline from the Croatian port of Krk.

"Our supply department is working on those [non-Russian] supplies and the Adria pipeline should have sufficient volume," Molnar told S&P Global Commodity Insights on Dec. 12.

Diesel cargo values for both the Mediterranean and Northwest Europe have jumped in the second half of 2022 since the exclusion of Russian-origin cargoes from assessments by Platts, part of S&P Global.

Ukraine shortfall

Meeting Ukraine's needs without fuel derived from Russian crude oil could prove a particular problem.

Ukraine is heavily dependent on imports of liquid fuel from countries such as Slovakia as its own refining infrastructure has been destroyed in Russian rocket attacks -- reliance on fuel for generators has likely increased with recent attacks on gas and power infrastructure.

A European Commission spokesperson confirmed the ban on exporting Russian-derived oil products applied to Ukraine as a "third country", while noting the sanctions regime is under development, with a "ninth sanctions package" under discussion.

The Slovak economy minister, Hirman, told a Dec. 9 news conference that talks with the European Commission on an exemption for fuel exports to Ukraine were underway, with a solution "very close".

At a Nov. 21 conference, Hirman had described the situation with Ukraine as "a strategic issue", saying the problem was particularly acute for diesel -- where Slovakia is an important exporter to Ukraine -- and highlighted Central Europe's overall deficit of diesel production capacity in countries such as the Czech Republic, Hungary, and Austria.

On the Ukraine issue, Slovnaft's Molnar said: "It is up to the Slovak Ministry of Economy and other EU countries to try and find a solution for these Ukraine exports." Oil products from non-Russian oil supplies could still be shipped to Ukraine from Poland or other EU countries, he noted.

Molnar cautioned, however, that exports from EU countries could themselves become more problematic if the EU faced a widely expected shortage of diesel when the EU ban on Russian oil comes into force.

Slovnaft planned for product output from Bratislava in 2023 to broadly follow historical trends, Molnar said. In 2021, Slovnaft refined 5.5 million mt of crude, with 1.56 million mt of motor fuels produced, of which 1.19 million mt was diesel and 376,000 mt was gasoline.

The domestic Slovak market accounted for 48% of the motor fuels marketed, with 58% of earnings derived from exports.

Windfall tax

At home in Slovakia Slovnaft is also under pressure from a proposed 70% "solidarity" tax on excess profits in 2023. The excess tax on top of existing taxes would mean the state will take 91% of all the company's net profit next year, Slovnaft's general manager, Oszkar Vilagi, pointed out in an Dec. 8 opinion piece in the business daily Hospodarske Noviny.

"It is not that we are against the tax in itself, but we believe that the level has been set too high and is unfair," Molnar commented.

"Because of the Russian sanctions we are facing investments of around $200 million over the next years to adapt to refining different types of oil. These are not investments that we planned but they have been thrust upon us and are now unavoidable," Molnar said, added the investments will still proceed.

Slovnaft will, however, consider launching an international arbitration case against the Slovak government if the proposed solidarity tax is eventually confirmed by a vote in parliament.

The Slovak economy minister, Hirman, at a Dec 6 news conference described the solidarity tax on Slovnaft as legitimate given the "substantial savings the company is getting by being able to receive Russian oil supplies."