OIL & GAS: Croatia vs Hungarian MOL over Control of National Oil Group INA

Negotiations between representatives of the Croatian government and Hungarian petrochemical company MOL, regarding possible amendments to the Croatian oil and gas company INA shareholder agreement, began on 18 September in Zagreb. The Croatian negotiating team is led by Economy Minister Ivan Vrdoljak (HNS) and Head of the State Office for State Property Management (DUUDI) Mladen Pejnovic (SDP). MOL’s negotiating team is comprised of Vice-President Sandor Csanyi (also Chairman of the Hungarian OTP Bank) and INA CEO Zoltan Aldott.

In 2003, the SDP-led government, under late Prime Minister Ivica Racan (SDP), sold 25%+1 share to MOL. At the same time MOL undertook the responsibility for the modernisation of INA’s Sisak and Rijeka refineries, as well as for its overall further development as an integrated oil and gas company. During two subsequent phases, MOL acquired a further 17% (2007) and 7% (2009) of INA shares; presently, MOL holds a 49.08% stake in the Croatian company.

The dispute arose due to the amendment to the privatisation contract signed by the previous HDZ government, led by former Prime Minister Ivo Sanader (HDZ), who in 2012 was convicted of accepting a bribe of €5 million from MOL in return for securing management control over INA. While Croatian investigators are continuing a probe into role of MOL CEO Zsolt Hernadi in the 2009 acquisition of INA, last week Hungary dropped a request by the Croatian State Attorney’s Office to interview Hernadi in its investigations.

The contract provided complete managerial rights over INA to the Hungarian company, despite not having over 50% ownership of the company, while the government, which has a 44.8% strategic minority stake, agreed to take over INA’s loss-making gas business valued at €263 million.

MOL argues that, to date, the government has not initiated the gas business takeover, which resulted in the alleged accumulated losses to the business unit, due to the government’s requirement to provide subsidised pricing to Croatian citizens. The company recently raised prospects of legal actions against Croatia for failing to comply with the 2009 shareholder agreement, and demand the €263.million in damages, if the negotiations with the government do not result in a positive compromise agreement.

The government disputes MOL’s absolute managerial rights and is not satisfied with the company’s overall business performance, namely, declines in production and sales and investment (in 2012 INA’s net profit dropped 62%, to 90 million euros). Government officials underlined that the agreed modernisation of the Sisak refinery has not even begun, while only the first phase of the Rijeka refinery upgrade has been initiated.

Cooperation is the key for resolving this dispute. MOL is using the gas unit losses as leverage in the negotiations, while the government appears to be using the liberalisation of the exploration of Croatia’s oil and gas reserves (e.g. Hydrocarbons Exploitation Act) in the same way.

The government has also operated as an INA shareholder, in accordance with the disputed 2009 agreement, which means that the unilateral pursuit to reclaim the managerial rights in INA based on the legality of the signed contract could result in substantial financial losses. Despite prima facie a negative stand toward operating the mentioned gas business, the government neglects the fact that INA’s gas business is an integral part of Croatia’s energy strategy, especially regarding the future LNG Terminal and Ionian Adriatic (gas) Pipeline (IAP), meaning that direct control of INA’s gas unit is absolutely in Croatia’s strategic interest.

The final outcome of the bribery judicial proceedings could conceivably negate the initial 2009 agreement, but this would surely complicate the present business operations, meaning that a final compromise agreement is in the interest of both sides…

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