Croatia hopes there will be oil

By bne IntelliNews October 24, 2013

Harriet Salem in Belgrade -

Balmy Mediterranean weather provides favourable climes for sun seekers and vineyards alike. Crystal clear waters surround more than 1,200 islands, sprinkled off stunning rocky shores that are littered with historical gems from Umag down to Dubrovnik. Croatia's Adriatic coastline is the jewel in the crown of the EU's newest member. Yet while it provides a lifeline for Croatia's faltering economy, which relies on tourism for nearly 10% of GDP, Zagreb is hopeful the coastal stretch is about to yield a new treasure trove: oil and gas.

In June, Norwegian company Spectrum signed a deal with Croatia's economy ministry to conduct a 2D seismic survey over more than 21,000 square kilometres of the Adriatic seabed. Deploying technology that's analogous to ultrasound equipment used for imaging the human body, scientists will spend seven months creating a detailed picture of geological structures hidden below the earth's surface. If successful, the survey - scheduled for completion in April 2014 - will reveal the location of hidden oil and gas reserves, potentially worth hundreds of billions of dollars.

Yet while returns could be high, the gamble is big. More than $25m has already been invested by Spectrum, which is conducting the research at its own financial risk. Jan Schoolmeesters, chief operations officer at the Norwegian company, is confident the venture will pay off, noting the area shows "high promise" given known gasfields in the North Adriatic, as well as the Italian Adriatic's offshore oil reserves. As such, Schoolmeesters tells bne that Spectrum "expects sufficient interest from exploration companies, such that the sales of data licenses will turn this survey into a profitable project."

Investors appear convinced. Six months prior to completion, the survey's findings are already rumoured to be attracting substantial interest. According to a Zagreb insider, Vitol and Glencore have already expressed interest on the oil services side; Russian and US majors, Rosneft and ExxonMobil, are keen on the exploration side.

But knowledge of the potentially lucrative reserves is not new. Research into Croatia's offshore oil dates back to the Yugoslav era, and data gathered in 2009-10 indicated the presence of more than 2.8bn barrels - enough to meet the country's energy needs for more than a century. Why then, has it taken so long to explore this potential goldmine?

Regaining control

Whilst technological advancements over the last decade have pushed forward the frontiers of oil and gas exploration worldwide, in Croatia's case a new hydrocarbon exploitation law, passed in July, has proved the real game changer.

"Previous legal provisions, or lack thereof, provided little protection to potential investors in the Croatian upstream oil industry and acted as a deterrent to international firms," says Luka Oreskovic, a Harvard University researcher specialising in Southeast Europe. "The current government have brought an end to this situation. From the state's perspective, competition is beneficial and this has now been formally recognised in law."

The new legislation is, in part, a response to the EU's demands on its newest member to open its markets and bring an to end monopolies. It also, however, gives the Croatian government significant leverage in its ongoing dispute to regain control over the former state oil and gas firm INA from Hungary's MOL Group.

MOL holds a 49% stake in INA, but the Croatian firm has been subordinate to the Hungarian firm since 2009, when a deal was struck by then-prime minister Ivo Sanader to hand over management rights allegedly in exchange for a €5m backhander. Following Sanader's conviction last November on multiple counts of corruption - which included a charge related to the INA deal - Zagreb is on a mission to nullify the original agreement. MOL have so far held firm, denying any wrongdoing and refusing to accede to Interpol and EU arrest warrants issued by Zagreb for its chief executive, Zsolt Hernádi, who is also implicated in the scandal.

However, Oreskovic argues that if INA is to participate "without handicap" in the lucrative public tenders for exploration rights in the Adriatic that will follow Spectrum's survey release - most likely in July next year - then the dispute with MOL needs to be resolved speedily, because the new legislation means much stronger competition than before. "Whilst INA has local and proven expertise in operating on the Adriatic Coast, a degree of politics will surely play a role," Oreskovic explains.

As with all voyages into unchartered territory, there look to be several twists and turns in the plot ahead. While Spectrum's data will provide a decent map for explorers, locating the exact "X" that marks the spot will take significantly more time, research and investment. "Since 2D seismic cross-sections are 5 to 10 km apart, the survey will provide a good indication, but cannot be used to accurately provide predictions of the oil and gas reserves in the subsurface," says Schoolmeesters. "For that, further 3D seismic investigations and ultimately drilling will be required."

And all that glitters is not gold. Much more precise information is needed before the exact value of any reserves can be established and, indeed, whether they will be accessible at all. "For oil and gas companies it is not so much about whether there is oil and gas, but where and in what quantity," explains Schoolmeesters.

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