European Commission to probe new Croatian natural gas market regulation

The European Commission is considering the effect of a swathe of new government regulation that has recently altered the organisation of the Croatian wholesale gas market, ICIS has learnt.

A commission spokeswoman said the EU executive body was looking into the potential effect of some measures on the cross-border exchange of gas and was concerned that full liberalisation of the Croatian gas market appears to have been postponed until 2017, contradicting Croatia’s commitments under the [EU] accession negotiations.

The Croatia’s ministry of economy say the changes are interim measures aimed at securing household gas supply as the country seeks to fully liberalise its gas market, but some sources in Croatia have suggested the new rules may be part of a government effort to pressure Hungarian oil and gas incumbent MOL. The government is involved in an ownership dispute with MOL over Croatian incumbent INA.

New regulations

The regulated price at which Prirodni Plin, the gas division of INA, has been obliged to supply the Croatian wholesale gas market was due to lapse on 1 April 2014. But the Croatian government adopted a number of new regulations in the first quarter, extending the period of regulated prices for a further three years and instated a new supplier to the wholesale market at the expense of Prirodni Plin.

The government made state-owned gas and electricity company HEP the new supplier of gas to the country’s household distribution companies, taking over a similar role fulfilled in a loss-making capacity by Prirodni Plin. It also awarded HEP a 70% priority on Croatian gas storage capacity.

The new regulations oblige INA, as Croatia’s only gas producer, to sell a set volume of gas to HEP at a regulated price.

As of 1 April, INA has to supply 5.8GWh/year (15.89MWh/month) until 31 March 2017 at a price of Croatian kuna (HKR) 0.1842/kWh (€24.10/MWh), fixed until 31 March 2015.

HEP must sell to smaller household gas suppliers at HKR 0.2595/kWh (€34.60/MWh) for the period 1 April 2014-31 March 2015.

This will transfer HKR 250-350 million/year of INA’s profits will effectively be transferred to HEP, the producer estimates.

The figure is based on a HKR 0.0753/kWh margin, derived from the new regulated prices, and a clause granting HEP the flexibility to demand 10% less or more of the contracted volume of gas from INA.

ICIS understands that before 1 April, Prirodni Plin had been obliged to sell gas to domestic suppliers at €34.50/MWh. It is unclear at what cost Prirodni Plin procured the gas it supplied to the wholesale market, but the company recorded losses of HUF 30.3bn (€994,544) in 2013 while serving as the supplier to the wholesale market, according to MOL’s annual results.

And the decision to award the majority of Croatia’s storage capacity to HEP is set to further hit INA’s operation and finances. In an interview with Croatian-based energy website Energetika-Net, and confirmed to ICIS by INA, Prirodni Plin’s director Davorka Tancer said that more than 200 million cubic metres of gas remained in store from the company’s own time as the regulated wholesale supplier. The risk is the storage operator deems this gas to be unwithdrawn which means it would be sold to new storage capacity holders.

With access to less than 30% of storage capacity under the new regulations, Priordni Plin no longer has enough capacity to cover its own gas stocks.

Tancer also questioned the decision to award HEP both the majority of storage capacity and the flexibility to demand +/- 10% of the contracted volume of gas from INA,. The situation is technically and financially unworkable for INA which may have to resort to burning gas on a flare stack or even shutting down gas wells in order to remain balanced.

Responses

The Croatian ministry of economy did not respond to a request for comment from ICIS, but has described the regulatory changes on its official website as a means of ensuring security of household supply in the country while preventing any one player from controlling more than 50% of the market.

It also says that its strategy of only regulating the household sector of the market, leaving the industrial sector unregulated, is part of a transitional period aimed at fully liberalising the wholesale market within three years.

But one source active in the Croatian energy market suggested to ICIS that the move may be part of a concerted government effort to hit INA’s profitability and squeeze its 49.08% stakeholder, Hungarian oil major MOL, with which Zagreb – a 44.84% shareholder of INA – is embroiled in a long-standing disagreement.

A MOL spokesman said the recent changes in Croatia have caused “direct damage to INA and intentionally decrease[d] the value of the company’s shares [by] forcing INA to sell gas well below the market price.”

He also alluded to the recent government hike in the royalty rate due on hydrocarbon production in Croatia, the introduction of retroactive refinery taxes ( see ESGM 21 March 2014 ) and the government’s delayed investment in a new coker unit. All this has had a negative impact on INA and prevented the company from expanding its natural gas production, he said.

The disagreement stems from an unfulfilled obligation by the Croatian government to purchase the loss-making Prirodni Plin from INA.

In any case, the new legislation in Croatia has caught the attention of the European Commission which has expressed its concern at the country’s seemingly backward step on the path towards full market liberalisation.

A spokeswoman said the commission was aware of recent amendments to Croatia’s gas market act and of a series of government decisions modifying the structure of the wholesale market from 1 April 2014, but had so far not received formal notification from the Croatian authorities.

She added that the Commission is currently assessing the compliance of the national rules with EU provisions and that it intends to clarify a number of issues with the Croatian authorities in the coming weeks. Jake Horslen