Croatia seen short of funds to end fight with Hungary

By bne IntelliNews October 4, 2013

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Backed by Budapest, Hungary's MOL Group said on October 3 that it could sell its stake in Croatian refiner INA. However, according to Croatian media, government officials say there's little chance Zagreb could raise the estimated €3bn it would cost to buy the almost-50% stake.

With Budapest indicating the day before that a divestment by MOL may be the best route out of the deepening crisis between the two countries, the Hungarian energy group said in a statement that course is under consideration. Stating that MOL constantly reviews the value of its assets, the statement said the company "is going to reconsider the nature of any future involvement with INA in the near future".

MOL also claimed: "If there might be any decision about the possible selling of INA shares, the Croatian side does not possess the pre-emption right that the government has gained by contracts signed in 2009, due to prior violation of these contracts."

Meanwhile, citing high-ranking government sources, Croatian daily Jutarnji List reported on October 3 that there is no way Croatia could afford to buy the 49.1% stake in INA, especially given the current poor market conditions.

The paper concludes that only a Russian company has that kind of cash, yet Russian ownership would further weaken Croatia's position in INA. Any company buying the stake would also obtain the management rights currently ascribed to them, and a Russian company would pursue only its own interests. Those, the paper points out, are in direct conflict with Croatia's strategic interests.

On October 2, the Hungarian government - the largest single shareholder in MOL with 24.6% - said it would ask MOL to consider selling the INA stake to Zagreb or a third party. That followed a decision the previous day by the Croatian Office for the Suppression of Corruption and Organised Crime (USKOK), to issue Interpol and European arrest warrants for MOL CEO Zsolt Hernadi.

The move followed Hernadi's failure to appear for a hearing in a case concerning bribes paid to the now-jailed former Croat prime minister Ivo Sanader. Sanader was given a 10-year prison sentence in November after being found guilty of accepting a €10m bribe from MOL in return for awarding the Hungarian company controlling rights in INA in 2011. Sanader is appealing the verdict, while MOL denies any wrongdoing.

Both the Hungarian government and MOL claim the Croatian authorities' move is a tactic to force MOL to give up the management rights of INA in talks that are currently taking place between the two sides over a new shareholder agreement.

"Already in November 2012, MOL Group emphasized that no substantive evidence has been provided to the court in support of the specific charges ... MOL will defend itself by all legal means against the outrageous actions that have been taken against Mr. Hernadi and the company, which appear to be influenced by interests seeking to intimidate both the company and its chairman," the company said in a statement on October 2.

Certainly the timing of the warrant's issue is convenient for Croatia, which is seeking to regain control of a company it feels was let go for too low a price, with its prospects as an oil and gas explorer looking increasingly bright. Zagreb sold a 25% stake in INA to MOL in 2003 for $505m. It allowed the Hungarian group to raise its stake to 49.1% in 2009, leaving the Croatian state holding 44.8%. However, opposition in Croatia since has prevented MOL gaining full majority control - hence the importance of the management rights handed over by Sanader's government.

The relationship has been rocky ever since. MOL complains the Croatian side has not lived up to its promises, which include taking back under public control INA's loss-making midstream gas business Prirodni Plin. For its part, Zagreb claims that MOL has only ever treated INA as a subsidiary and not invested in the company's promising upstream business.

According to KPMG, there is an estimated 18bn to 30bn cubic metres (cm) of unconventional gas in Croatia's Drava Depression, and INA believes there is much more lying in deep shale formations. "However further exploration still has to take place in order to gain more knowledge and understanding of potential source areas," the consulting company said in a report last year.

With the stakes so high then, few expect a quick resolution to the standoff. "The bribery case is setting the tone of the negotiations between MOL and Croatia over the INA shareholders' agreement ... We doubt that any rapid solution can be found here and expect long drawn-out negotiations," says Tamas Pletser of Erste Bank.

Inevitably Russia looms large over the whole issue, especially since the country's companies are continually trying to buy into energy assets in the region. On September 6, Bloomberg quoted unnamed sources saying that the Croatian government had approached Russian state-owned oil giant Rosneft about acquiring the INA stake from MOL. It took the office of Prime Minister Zoran Milanovic three days to deny the claim.

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