Croatia has become the newest member of
the European Union, with a national referendum on
January 22 capping the accession process. The
government-controlled JANAF (Jadranski Naftovod -
Adriatic Oil Transportation) enterprise, however,
has marked the country's EU accession in its own
way. It has opened the way for Zarubezhneft and,
potentially, other Russian state-controlled
companies to expand into
Croatia and beyond, in preference to EU partners,
and blindsiding Croatia's newly installed
government.
JANAF is an enterprise with
strategic significance to landlocked Central
Europe. JANAF's Adria oil pipeline, running from
the deep-water tanker port Omisalj (Krk Island)
toward Hungary, enables Central European countries
to pursue supply diversification, mitigating their
dependence on Russian oil from the Druzhba
pipeline. Druzhba's southern branch delivers
Russian oil via Ukraine to Slovakia, the Czech
Republic, and Hungary. The Adria option,
meanwhile, helps constrain the Russian suppliers'
price leverage.
The Adria option is
gaining in importance as Russia gradually reduces
oil deliveries through the Druzhba pipeline,
redirecting volumes toward Russia's own Baltic
export terminals. Consequently, landlocked Central
Europe will have to increase its reliance on the
oil supply route from Croatia's Adriatic coast.
This presupposes a JANAF independent of Russian
oil interests. It also presages a growing role for
Croatia as an energy transit country in a European
energy security framework.
Zarubezhneft's
move in Croatia seems mainly designed to block
Central Europe's Adria option and tempt JANAF into
long-term dependence on Russian business.
Zarubezhneft CEO Nikolai Brunich first aired this
offer on January 17 in Zagreb through a news
conference at the Russian Embassy (implying
Russian government support for this initiative),
followed by JANAF board chairman Ante Markov with
extensive supportive comments in the ensuing days.
The offer consists of three inter-related
investment projects with a combined value of more
than 1 billion euros (US$1.5 billion) by this
preliminary estimate. The investment projects
include:
1. Reviving the
Druzhba-Adria oil transportation scheme.
This familiar proposal involves using JANAF's
pipeline on Croatian territory in the reverse
direction, north-south, for Russian oil exports
through Croatia's Omisalj port to international
markets. In that case, port and pipeline
capacities would no longer be available for
non-Russian oil supplies in the originally
intended direction, from Omisalj toward Central
Europe. Reverse-use in Croatia would mirror the
reverse-use of Ukraine's Odessa-Brody pipeline
(2004-2010), north-south for Russian oil exports,
instead of south-north for Caspian oil to Central
Europe as originally intended. Reverse-use is an
access-denial tactic against competitors,
accompanied by below-capacity use of the pipeline,
once control is achieved. Zarubezhneft suggests
using the Adria pipeline and Omisalj storage tank
farm for Russian oil companies' exports to spot
markets.
According to Brunich, Russia's
oil pipeline monopoly Transneft might buy an
ownership stake in JANAF in the event of the
latter's privatization. JANAF's transit system on
Croatian territory comprises three main spurs with
a combined working capacity of 20 million tons
annually (design capacity: 34 million tons per
year). The system is currently operating far below
those parameters (at 30% of capacity, according to
some estimates).
The existing spare
capacities could accommodate a growing flow of
non-Russian oil to Central Europe, so as to
replace the Russian oil volumes re-directed by
Moscow from the Druzhba pipeline. However, Russian
reverse-use of the Adria pipeline (even below its
capacity) could block the flow to Central Europe,
and compromise Croatia's prospects as an energy
transit country within the EU.
2.
Building a new pipeline for transportation of oil
products - mainly gasoline and diesel
fuel, from Zarubezhneft's Bosanski Brod refinery
(Republika Srpska in Bosnia), to run via Croatia
to Omisalj port.
Storage capacities would
be built near Zagreb and a new terminal for oil
products would be constructed in Omisalj. This
product pipeline could also be connected with
Gazpromneft's Pancevo and Novisad refineries in
Serbia, in which case Gazpromneft could
participate in this pipeline project. According to
Brunich, either Zarubezhneft or Transneft would
acquire an ownership stake and operational control
of this oil-product pipeline in Croatia. The
Russian companies would in that case use Omisalj's
terminal and storage for exporting their oil
derivatives, which they plan to upgrade to EU
environmental standards by 2015.
Additionally, Zarubezhneft proposes to buy
Austrian OMV's network of fuel stations, which OMV
intends to sell off in Croatia and
Bosnia-Herzegovina. With this, Russian state
companies would be moving into the core market of
Croatian INA (leading shareholder: Hungarian MOL).
These combined moves, if accomplished, would usher
in a second phase of Russian oil companies'
expansion into south-eastern Europe.
3. Launching exploratory drilling at
nine Croatian oil and gas fields -
including onshore sites in the Slavonia region and
offshore sites on the Adriatic shelf.
If
successful, exploration would be followed by
production contracts. Croatia's oil and gas
company INA (with Hungarian MOL as leading
shareholder) plans to participate in the tender
for those sites; but Zarubezhneft seems intent on
circumventing that process with JANAF's help.
Zarubezhneft wants 51% ownership in this project
through a local subsidiary of its own; it has
brought an obscure, untested minority partner in
its tow; and it offers a 10% stake to JANAF.
Initial investment is estimated at 100 million
euros; but JANAF would only have to pay a symbolic
sum of 37,000 Croatian crowns (kuna) (US$64,000)
for its 10% stake, with a title to 10% of the
profits, if the project is successful. JANAF also
anticipates earning fees for transporting the
hoped-for oil through its pipelines.
This
proposal seems crafted as an outright gift to
JANAF, with earnings to come at zero risk and for
zero investment. JANAF's management board has
embraced this rent opportunity. It looks like a
reward for assisting Zarubezhneft's attempt to
prevail over INA.
JANAF seems keenly
interested in Zarubezhneft's proposals. JANAF
claims that the second and the third compartments
(of the three above) had already been approved by
Croatia's government in mid-to-late 2011; or at
least that the government was notified and made no
objections. The parliamentary elections of
December 2011 resulted in a change of government,
however. The former government's key figures
(prime minister, economy minister, investment
minister) and the Croatian side of INA's
management all deny having approved or even having
been informed about those intentions.
The
new Croatian government seems taken aback by these
developments. Prime Minister Zoran Milanovic,
First Deputy Prime Minister Radimir Cacic
(responsible for energy policy) and other
officials are reacting with cautious skepticism.
To get at the facts they have commissioned a
review of agreements concluded or approved by the
previous government, and have extended the tender
deadline for the nine oil and gas exploration
sites while reviewing the tender's conditions. The
government takes the position that JANAF must
remain in Croatian ownership, in view of this
transit system's strategic significance.
State-owned Zarubezhneft claims that it
has enough spare cash for new investments. The
company is buying a minority stake in Alrosa's
Siberian gas projects (non-core business of
Russia's diamond monopoly).
Meanwhile, the
Russian government is discussing the possibility
of merging Zarubezhneft with the much larger
pipeline monopoly, Transneft. This would enable
Transneft to co-own or operate pipelines built by
Zarubezhneft beyond Russia's borders. Such could
be the case with the proposed oil product pipeline
and terminals in Croatia, if this becomes a
Zarubezhneft project there. Russia's Economic
Development Ministry favors a
Transneft-Zarubezhneft merger, but others are
skeptical. Transneft vice-president Mikhail Barkov
says that the company would seek the operating
rights, if Zarubezhneft builds a product pipeline
in Croatia.
On the whole, the proposals
seem designed to draw JANAF into a relationship of
dependence on the Russian state-controlled oil
business. The offer implies rent-type earnings for
JANAF, in return for aiding the expansion of
Russian oil interests in the region. By the same
token, it would undermine JANAF's strategic
independence and constrain its decision-making in
the future.
All this would compromise
Croatia's prospects as an oil transit country in
the framework of the EU. The Croatian transit
system, however, stands to gain in importance for
diversification of oil supplies from the Adriatic
coast to Central Europe. The Russian offers just
made in Zagreb are another attempt to deprive
Croatia of that prospect.
Vladimir
Socor is a Senior Fellow of the
Washington-based Jamestown Foundation and its
flagship publication, Eurasia Daily Monitor (1995
to date). Mr Socor is a frequent speaker at US and
European policy conferences and think-tank
institutions; as well as a regular guest lecturer
at the NATO Defense College and at Harvard
University’s National Security Program’s Black Sea
Program. Mr Socor was previously an analyst with
the Radio Free Europe/Radio Liberty Research
Institute (1983-1994). He is a Romanian-born
citizen of the United States based in Munich,
Germany.
(This article first appeared
in The
Jamestown Foundation. Used with permission.)
(Copyright 2012 The Jamestown
Foundation.)
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