ISTANBUL

Ukraine's sanctions on Russian energy corporation Lukoil pose a significant risk for Hungarian and Slovakian refineries, Fitch Ratings said Wednesday.

Refineries in Slovakia and Hungary face significant credit risk after crude oil from Lukoil to be shipped across Ukraine through the Druzhba pipeline has been put on hold since last month, it said in a statement.

"These volumes primarily serve the Hungarian and Slovakian markets and, while immaterial to the overall European supply balance, could significantly impact energy supply in Hungary and Slovakia over the medium-term," it added.

Fitch said MOL Hungarian Oil and Gas plc operates all refining assets in Hungary and Slovakia, while it was utilizing around 65% - 70% of Russian crude in its refining system as of May.

MOL aims to reduce its reliance on Russian crude to 50% - 55% by the end of this year through various ongoing upgrade projects, but full replacement will likely become possible by 2026, it added.

"MOL also maintains a very strong financial profile to help cushion the impact of a temporary interruption in access to Russian crude, but long-term solutions will be needed if the situation doesn’t ease in the near term," said the statement.

The rating agency said both Hungary and Slovakia maintain strategic oil and oil-products reserves of at least 90 days' worth of average net imports, which can be used to provide additional room in case of an extended interruption of supply.

"So far both Slovakia and Hungary have managed to bridge this supply interruption with additional volumes from other sources, however, a broader and longer-term interruption of Russian supply could pose a significant risk to refining operations and energy supply," said Fitch.

Lukoil is the second largest company in Russia after natural gas major Gazprom.