Serbia's NIS, Croatia's INA to Discuss Options for Co-Operation

Croatia’s oil and gas company INA and its Serbian peer NIS are considering the option of possible co-operation, it was reported by Reuters, citing an INA statement on Friday (12 February). Both companies are controlled by foreign shareholders. Hungary’s MOL owns 47% of INA, along with management control of the company and the Croatian government controls a 44% stake. NIS on the other side is 51%-owned by the oil arm of Russian gas giant Gazprom, Gazprom Neft. INA’s statement confirmed that initial contact has been established, although neither company has revealed details over the focus of possible co-operation.

Separate news coming from both companies has also played a part in delineating the prospects for collaboration between the two Balkan players as both are in the process of new strategy planning. In a statement to Reuters, NIS confirmed that it is in the process of drafting a new strategy that is likely to focus on using the company’s resources "in exploration and production (E&P) of oil and gas abroad". Additionally, last week MOL, which consolidated INA’s business into its own portfolio in July 2009, confirmed that the Croatian company is expected to play a prominent role in MOL’s 2010 strategy. According to MOL executive chairman Zsolt Hernadi, speaking before Reuters last week, nearly a third of MOL’s planned upstream capital expenditure (capex) for the year, or about US$679.7 million, is earmarked for the development of INA's Hayan Block in Syria.

Potential for Co-Operation

Both INA and NIS are vertically integrated companies with presence in the exploration, production, refining, and marketing segments. Given that the two companies operate in the geographic space of what was once Yugoslavia, and that the structure of their business operations is similar, there is potential for co-operation in multiple areas. The most likely field, as hinted by NIS’ goals outlined in its new strategy, is the E&P segment. Aside from its domestic assets, INA also boasts a notable presence internationally. The company has carried out joint exploration activities with Italy’s Eni in the northern Adriatic and is currently producing oil in Egypt and Angola through a concession with the same company. However, INA’s most notable overseas assets are in Syria, where it holds a concession over the Hayan Block, which is estimated to hold gas reserves of up to 15 bcm. The company is already producing approximately 3.5 mmcm/d of gas from the Jihar and Mahr fields. Peak capacity at the Hayan field is expected at up to 5 mmcm/d after the construction of a new gas treatment plant (GTP), which is scheduled for completion in 2011.

As noted above, MOL is planning a significant investment in the development of the Hayan field, however, its flexibility in planning 2010 capex is likely to remain limited due to the high exposure of both INA and MOL to the refining sector. Low refining margins and the sharp drop in demand for refined products in Europe have continued to exercise downward pressure on the financial results of the two companies. As a result of the weak performance in the refining sector, yesterday MOL reported operating profit of 25.8 billion forints (US$130 million), or a 37% decrease in operating profits in the fourth quarter relative to the third. The general expectation is that the economic environment will remain adverse throughout the remainder of 2010, which in turn will pose certain limitations on MOL’s, and respectively, INA’s upstream capex programme. In order to cope with the issue MOL revealed two weeks ago that it is considering several options for increasing INA’s capital including a direct capital increase, the issue of a convertible bond, or the sale of fixed assets. However, the news of talks with NIS opens up another opportunity, namely, the prospect for direct co-operation between the two companies in INA’s Syrian assets.

Potential synergies for co-operation between the two Balkan companies are possible in other geographic locations, namely in Serbia’s western neighbour, Montenegro. Reports by Reuters have indicated that the country may hold an offshore oil and gas exploration tender in April, which will certainly attract the attention of NIS. The company already has a solid presence in Montenegro’s retail fuel market, dating from before the country’s declaration of independence from Yugoslavia in 2006. INA, in turn, has gained significant expertise in the E&P of hydrocarbons in the Adriatic Sea, which opens the door for a fairly competitive INA-NIS tie-up in the prospective tender for assets off Montenegro’s coast.

Outlook and Implications

The combination of INA’s need for fresh financial resources and NIS’s interest in expanding its international profile in the E&P segment certainly opens the door for co-operation. Further prospects in other segments down the value chain should not be discarded either; the two companies are among the most active in the retail sector of the Western Balkans. INA has a strong marketing presence in Serbia, Slovenia, and Bosnia and Herzegovina while NIS dominates the Serbian market, where it has legal monopoly on the import of oil until 2011. NIS is also active in Montenegro and Bosnia and Herzegovina. An overview of the core markets of the two companies indicates that they are complementary, which in turn could lead to collaboration in the refining and marketing segments as well. In this context it is worth noting that both companies have planned considerable investments in their refining complexes. In September 2009 NIS announced plans to pour 396 million euro (US$ 540 million) up to 2012 into the modernisation of its Pancevo refinery. On its behalf, INA is also in the process of upgrading its refineries at Sisak and Rijeka. While outright co-operation in the refining and marketing sector may not turn out to be a feasible option, the downstream plans for expansion that both companies have put in place could certainly derive benefits from some sort of partnership in the upstream sector.