GIF Inside Story: West Balkan gas market on the verge of opening up

Author: David Simon


LONDON (ICIS)--The west Balkan region currently relying on Russian gas may transform itself into an interconnected trading area after 2021.

The development would follow the completion of the Croatian LNG terminal and several cross-border pipeline projects.

Cross-border trade with Hungary, Slovenia and Italy could potentially support liquidity on the Croatian market but cumbersome regulations and the dominant position of a few companies still stay in the way of market development.

Croatia’s flagship project, the downsized 2.6bcm/year LNG terminal, is expected to come online by the beginning of 2021. The new terminal would change supply dynamics in the west Balkan and central European regions. The project has been supported by the US, which sees it as a potential destination for its LNG cargoes.

The new terminal would also become a trans-regional infrastructure project under the EU’s Project of Common Interest, dubbed North-South Gas Corridor. This is meant to create a vertical supply route by linking existing and some new infrastructure, like the Polish-Slovak interconnector.

The Polish Swinoujscie LNG terminal would become the northern end of the corridor, while the planned terminal at the island of Krk would be the southern end.

LNG terminal

Initially, Croatia had been planning to construct a 6bcm/year onshore terminal at Krk but insufficient market interest and high costs prompted project promoter LNG Croatia, a joint venture of Croatian transmission system operator Plinacro and incumbent HEP, to downsize the proposed technical capacity. As a result, a more feasible floating storage and regasification unit (FSRU) was greenlight in 2019.

The future role of the LNG terminal is still unclear as it has been subject to intense back-door negotiations between Croatia and Hungary.

Hungary offered to buy a 26% stake in the FSRU but the Croatian government conditioned the acquisition by Hungarian companies buying regasification capacity at the proposed terminal.

Hungary rejected that proposal as it found the price, including the regasification tariff and transport fees, uncompetitive with Russian supplies. ICIS understands that the Russian contract is indexed to the Dutch TTF front-month contract.

Hungarian companies refrained from booking capacity due to lack of clarity around the project framework and high total costs of getting the gas to Hungary.

In January 2019, the Croatian government decided that state-owned companies must provide around 58% of the required funds as low market interest in the binding open season for regasification capacity did not justify realisation of the project.

HEP and national oil and gas producer INA booked a total of 520 million cubic metres (mcm)/year binding capacity, while two other companies booked 300mcm/year of conditional, non-binding capacity.

The planned terminal required 1.5bcm/year to be economically feasible.


In June 2019, Hungary and Croatia agreed to set up a working group to analyse the impacts of integrating their natural gas markets.

The parties also agreed to conduct joint negotiations with potential LNG suppliers in the future, while talks behind closed doors over the potential acquisition of a minority stake and a potential market merger between the two countries are on the agenda.

Utilisation of the future terminal will mainly depend on offtakes from Hungary as the Croatian market has been already saturated but other countries in the west Balkan region may benefit from additional supply.

Croatian gas demand rose by around 3% year on year to 2.46 billion cubic metres (bcm) in 2019, according to HEP.

Around 59% of the total consumption accounted for rising industrial and power generation demand, while the remainder came from falling demand at local distribution zones.

Rising gas-fired power generation may support gas consumption in the coming years as HEP will construct an additional 150MW gas-fired heat and power (CHP) unit at the EL-TO Zagreb plant by 2022.

The country currently has around 762MW installed gas-fired capacity in total, according to the ICIS long-term power analytics tool.

Historically, Croatian offshore and onshore natural gas production had covered most of the country’s annual demand but production output has been declining gradually in recent years.

Data by HEP showed that local production dropped by around 15% year on year to 760 million cubic metres (mcm) in 2019, accounting for around 30% of annual demand.

In addition to domestic production, privately owned Croatian energy trader PPD has a 1bcm/year supply contract with Russia’s Gazprom, which creates tough competition for potential LNG deliveries.


Croatia’s isolation from neighbouring markets ended this year as Plinacro finished the construction of a compressor station on the Croatian-Hungarian border, which has enabled firm export flows along the now bidirectional Dravaszerdahely border point from 16 January.

Prior to that Croatia was only had import capacity available on its borders, which was one of the factors limiting trading activity in the market.

Due to the lack of export capacity and the proportionally large domestic production, Croatia has remained a balancing market, where shippers were only active on the HROTE-operated balancing and trading platforms to balance their physical portfolios.

Only Plinacro and balancing group managers are allowed to trade on the HROTE platform.

Market participants have been pushing to lift the restriction in recent years but energy regulator HERA has been reluctant to change the market rules. The HROTE platform has 18 members, which include utilities, suppliers and energy trading houses.

The launch of export capacity on the Croatian-Hungarian border has been part of set of infrastructure development projects in accordance with EU regulations, which requires interconnectors to be bidirectional across the bloc.

Cross-border trading with Hungary may spur liquidity not only in Croatia but also in Slovenia as Slovene shippers are active in Croatia.

However, the start of Croatian export flows to Slovenia is likely to be possible only in 2021, according to sources close to the matter.

Slovene grid operator Plinovodi previously told ICIS that the Slovene system had been ready to receive imports from Croatia along the Rogatec border point but slow progress on the Croatian side has been holding back the project implementation.


Croatia has been looking to link its grid with other countries as well.

Italy and Croatia are discussing a potential 1bcm/year bidirectional gas interconnector through the Adriatic Sea by utilising existing offshore gas production infrastructure, which would support gas market integration and enhance security of supply in both countries.

In June 2018, Italian oil and gas incumbent Eni and Croatian counterpart INA signed a bilateral cooperation agreement to evaluate the proposed interconnector project.

Prior to this, INA purchased Eni Croatia BV, a wholly owned member of the Italian incumbent active in joint gas production in Croatia’s Northern Adriatic and Marica offshore areas.

Following the transaction, INA became the sole operator of the Northern Atlantic concession area, while gas produced in the Marica area has continued to be transported to Italy under a gas sales contract.

A proposed pipeline connecting Bosnia and Croatia is expected to become operational in 2023, according to a tender for an environmental impact study and feasibility studiey by Bosnian grid operator BH-Gas in June 2019.

The new 162km-long pipeline will run from inland Novi Travnik to Posusje at the border with a leg to Mostar. Croatia’s Plinacro will also need to construct a connection to the Bosnian border from Split via Zagvozd and Imotski.

The new pipeline, called Southern Interconnection, will enable greater security of supply and supply diversification for Bosnia-Herzegovina by linking its grid to the future Croatian LNG terminal, natural gas storages in neighbouring countries.

Currently, Bosnia-Herzegovina only receives Russian gas via Hungary and Serbia under two acting supply contracts with Bosnian suppliers Energoinvest and GAS-RES.

Croatia is expected to introduce its harmonised transport tariffs under the EU network code from the beginning of January 2021. Meanwhile, HERA has only published indicative tariffs, which will require a final consultation before coming into force.

Market sources expect the tariff regime will make gas transports more expensive, however shippers will likely charge end users for the additional costs to preserve profit margins.


Market development and liquidity growth in Slovenia will continue to depend on residential gas consumption and the industry as the country has no storage capacity and has only 492MW installed gas-fired generation capacity.

At the same time, Slovenia will benefit from developments in its southern neighbour as the country has been a supply transit country to Croatia, competing with Hungary.

However, Slovenia’s share was challenged by Hungary in 2017, after the expiry of long-term supply contracts between a number of suppliers in Slovenia and the latter significantly lowering export tariffs, leading to a drop in Slovene transit flows to Croatia.

Exports rose sharply again in 2019 as Slovenia exported around 588mcm in 2019, up by 66% compared to 2018, according to data by Slovene system operator Plinovodi.

This also had a positive impact on liquidity on the Slovene virtual point operated by Plinovodi, where 767GWh changed hands on the over-the-counter (OTC) market in 2019, up by 55% year on year, according to Plinovodi.

At the same time, 263GWh was traded on the Slovene balancing market, which was a 23% year-on-year increase.

Slovenia will likely benefit from future LNG deliveries to Croatia as Plinovodi, Hungarian counterpart FGSZ and Italy’s Snam Rete Gas recently reshaped the long-awaited Slovene-Hungarian interconnector project and broadened its concept into a Hungary-Slovenia-Italy (HUSIIT) supply corridor.

Plinovodi and FGSZ will offer capacity on the proposed internconnector at the annual yearly capacity auctions 6 July.

The project would provide access for Slovene shippers to the vast Hungarian storage capacity and also allow Hungarian shippers to reach the Italian PSV market. The pipeline would not only open storage arbitrage opportunities but also improve Slovenia’s security of supply.

According to the latest development plan by FGSZ, Hungary and Slovenia are planning to construct the new 41km-long interconnector, which may enable up to 0.4bcm/year bidirectional flow from October 2023.

Available capacity maybe further be increased in the future up to 3.2bcm/year, but the implementation of the upgrades will depend on additional works on the Hungarian grid and the consultation between the grid operators.

Plinovodi and FGSZ are planning to auction capacity on annual yearly capacity booking held on 6 July.


Future prospect of market development in the west Balkan region will largely depend on the completion of infrastructure projects.

Some of the more ambitious project like the Ionian Adriatic Pipeline (IAP) will likely not be implemented but the region should have sufficient supply in the coming year. The bidirectional IAP pipe would connect the existing Croatian infrastructure and the proposed Krk LNG terminal, via Montenegro and Albania, with the Trans Adriatic Pipeline, which will deliver Azerbaijani gas to Italy through Turkey, Greece and Albania.

The 511km-long IAP pipe would supply Albania with 1bcm, Montenegro with 0.5bcm, Bosnian and Herzegovina with 1bcm and coratia with 2.5bcm.

Croatia will likely remain the engine of regional market development due to its larger market size and the new LNG terminal, however the slow pace of liberalisation and political hurdles may hold back market development.

Market participants polled by ICIS said that the Croatian market may get more concentrated due to larger activity by incumbents, which could also negatively impact regional shippers and deter potential entrants from starting business activity.