End to fuel price caps in Hungary looms following another error at MOL refinery

The trouble in Szazhalombatta proved bigger than initially thought. The Danube Oil Refinery there cannot restart operation on Friday as planned. Should operations not resume on Monday, the price freeze on petrol will likely come to an end in Hungary before Christmas.

ECONOMY DECEMBER 1. 2022 17:16

A new, now second error has been discovered at the MOL Group’s Danube Oil Refinery (DuFi) located in Szahahalombatta, Hungary, the economic portal Vilaggazdasag learnt from reliable sources.

DuFi reportedly carried out a pressure test and found another cracked pipe in the process. This is a serious setback, especially in the current situation, as the refinery cannot restart operation until the problem is eradicated.

MOL has, therefore, decided to postpone the originally planned restart of the refinery in Szazhahalombatta by three days.

DuFi was scheduled to resume operation in the evening of 2 December this week, however, this will definitely not take place until next Monday, 5 December.

In other words, the refinery will continue to suspend operations or

will run partially, at 50-55 per cent of its capacity. If the situation remains unresolved, it may become necessary to revisit the official state imposed price cap of 480 forints (1.17 euros) on fuel as early as December, Vilaggazdasag points out.

Third attempt to restart DuFi

Essential maintenance work at the refinery in Szazhalombatta has been in progress since mid-summer. This is no small-scale project, as it is the most comprehensive sevicing operation in MOL’s history. Maintenance work was to be performed in two phases. In the first phase, from 31 July 31 to 18 September, periodic, scheduled maintenance was carried out at several DuFi plants at the same time in order to ensure safe operation and increase the lifetime of refinery equipment. The second phase started at the beginning of October, during which additional plants were also overhauled. Information at the time said that the process would be finished as early as the end of October, after which the Szazhalombatta plant will resume operations at 100 per cent capacity.

In the end, the deadline could not be met and DuFi was rescheduled to start only on 12 November.

However, a technical obstacle was encountered in the process and the first cracked pipe was discovered. The crack had to be welded, which likely took longer than expected, because the new date was set at 2 December, almost three weeks later than the initially planned completion. In the meantime, another cracked pipe was discovered, and our source were rather skeptical about the probability of repairing it in three days. In light of what happened, the occurrence of another error cannot be ruled out, our sources suggested.

It’s impossible to do without DuFi

DuFi has been refining crude oil since 1965, employs 1,200 people, and has a capacity of 165 thousand barrels a day. This means the refinery processes 8.1 million tons of crude oil annually, which makes the plants in Szazhahalombatta one of the largest refineries in the Central and Eastern European region.

Perhaps little further explanation is necessary to see that the plant’s closure has a serious impact on Hungary’s fuel supply.

This would be true even under normal circumstances, and is all the more so in the current war climate.

The 480 forint (1.17 euros) fuel price introduced a year ago has proved to be an effective government tool in the fight against general price hikes. However, as a second-round effect, it has essentially eliminated fuel imports into Hungary, as it is not profitable for any trader to sell to Hungary at 150-250 forints (0.35-0.6 euros) cheaper than the European market price level. In effect, this meant that MOL was left with the burden of meeting internal demand, while volumes increased by a brutal 30-40 per cent. This has created an inherently stretched system, which in turn, with more attention

has so far been sustainable due to cheap Russian oil and DuFi’s capacity.

But financially, there is no need to worry about MOL at all. The Russian Ural Blend, the Russian export grade crude it processes, is currently 23 dollars per barrel cheaper than Brent, the benchmark in Western Europe. But the difference reached 37 dollars previously. Tamas Pletser, an oil and gas industry analyst at Erste Investments, previously calculated for the economic portal VG that MOL gains 2.5 billion forints (about 6 million euros) per day (on the EBITDA line) on Ural, which is 30 dollars cheaper.

Price freeze is at stake

It was already evident during the scheduled summer shutdown that the loss of Szazhalombatta, compounded by technical disruptions at other refineries in the region, would require massive intervention in the system. The government then released strategic reserves, with two decisions ordering the release of 18 million litres of 95 octane petrol and 213 million litres of diesel.

Recently, the government has made it clear that

in addition to the uninterrupted supply of oil from Russia, the continued operation of the Szazhalombatta refinery is necessary to maintain the fuel price freeze after January.

Even the former is uncertain, as EU oil sanctions will be in effect from next week, while the latter has not been true for many months. Gergely Gulyas was even more direct at Thursday’s government briefing. He recalled that the government had last extended the fuel price freeze until 31 December, but that there was now some worrying news about supplies. “It is up to MOL to decide whether or not it can supply the country with the fuel it needs. The question is how long we can secure the country’s petrol and diesel supplies. If there is a shortage of petrol and diesel, then we have to act,” he underlined.

Based on all this, the decision to revoke the 480 forint official price on fuel has never been so close in the past one year.

If DuFi doesn’t restart on Monday, it’s almost certain that the petrol price freeze will have to be wiped before Christmas.

ECONOMY

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fuel, Hungary, oil, prices