Russia's Rosneft said looking to buy INA and Petrol in the Balkans

By bne IntelliNews February 26, 2014

Joseph Orovic in Zagreb -

Russia's Rosneft hopes to take over Croatian oil and gas firm INA Industrija Nafte along with its Slovenian counterpart Petrol, according to an internal document obtained by the Croatian daily Vecernji List. Rosneft intends to increase both Balkan companies' operations through a newly formed subsidiary, extending the Russian state energy giant's reach into the European market.

Until now, Russian interest in INA - which is locked in a dispute with its largest shareholder, Hungary's MOL - has been reported in local newspapers through unnamed sources. The document obtained by Vecernji List, however, shows Moscow's intentions for the firms are part of a broader plan that includes regional expansion.

Croatian Economic Minister Ivan Vrdoljak told reporters on February 24 that the government has not had any direct contact with Russian representatives regarding a potential acquisition of INA. "The country the investor comes from is irrelevant. What is important is an agreement on strategic objectives and those are for INA to be a vertically integrated Croatian company and the strongest energy company in the region, and this is how it is going to be," Vrdoljak said when asked specifically about Rosneft's reported interest.

The Russian oil giant's strategy derives from an internal study that explored options for its expansion in the region, Vecernji List reported. It concluded that a unified INA and Petrol would maximize both companies' operations. The proposed plan includes: a unified regional company that would exploit INA's underutilized operations in the Croatian cities of Rijeka and Sisak; the creation of thousands of gas stations; over 10,000 employees; and an increased presence in ten markets - first in the former Yugoslavia, then eventually into the heart of Europe, including Austria, Hungary and northern Italy.

The move would require heavy investment upfront by the Russian company to modernize some aspects of both companies' operations. Rosneft is on solid financial ground; the oil firm posted $11bn in net income in 2012 on revenues of $102bn.

Rosneft's executive chairman and former Russian deputy prime minister, Igor Sechin, told Vecernji List last June that Croatia could provide the basis for any expansion into the region. "Croatia has all the prospects to become a transportation and energy center for all nations in the region. With that, we not only have an interest in expanding into Croatia but have already begun discussions about possible projects we could participate in," he said, without elaborating.

In January, Russia's current deputy prime minister, Arkady Dvorkovich, said the government hopes one of its energy companies makes a push for MOL's stake in INA.

Shareholder dispute

The option to buy INA derives from Croatia's legal and public relations fight with MOL, which holds a minority stake but management rights in INA. Accusations of mismanagement have come from both sides, with Croatia most recently claiming that MOL lowered the value of INA's Syrian assets to avoid making a dividend payout. That move led to INA reporting a $268m loss for 2013, falling out of profit for the first time since 2009.

Relations between the two reached a nadir when the Croatian police issued an arrest warrant for MOL's chairman and CEO, Zsolt Hernadi, over accusations he bribed former Croatian PM Ivo Sanader to gain management rights of INA. A survey of analysts showed the odds of MOL selling its stake in the Croatian firm have increased to better than 50% as the fighting between the two companies continues.

Reports have stated representatives from MOL have met with potential Russian buyers, who have expressed an interest in buying the Hungarian company's 49.1% stake in INA. Should MOL part with its INA shares, the Croatian government reportedly is willing to part with some of its almost 45% stake as well, surrendering control of the company if the potential buyer promises to invest heavily in INA, which is looking to exploit potentially huge new discoveries of offshore oil and gas.

On February 25, Economy Minister Vrdoljak announced a public tender for concessions to explore Croatia's Adriatic coast for oil and gas. In April, the ministry will offer investors 29 sections to explore in the Adriatic.

The inclusion of Petrol in Rosneft's plans is a new addition to already rife speculation about Russia's intentions in the region. The Slovenian company has faced financial problems of its own with rumours of a possible sale, including to MOL at one time. The company's ownership structure, with local banks and the Slovenian state all holding shares in Petrol, could prove problematic to a full Rosneft takeover though, Vecernji Listreports.

The expansion of another Russian oil and gas giant into the region could also possibly run up against opposition from the EU, of which Croatia has just become a member.

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