Tomislav Dragičević is president of the board of INA, the state energy company. The recent increases in oil prices on the world market and the possibility of increasing prices at Croatian petrol pumps have put his meetings with Economy Minister Branko Vukelić in the spotlight, as these meetings have been held to decide just how much revenue INA and the government will forsake to prevent the rising oil prices from affecting consumers. In this exclusive interview for Nacional, Dragičević speaks of the policy of forming petrol prices on the Croatian market, and on the forecasts for oil prices on the world market. He also announced INA’s plans in other key economic issues: the exploitation of recently discovered natural gas in Syria, the DružbAdria project, the privatization of an additional 15% of INA, brining natural gas to Dalmatia, taking over Energopetrol in Bosnia and the modernization of INA’s refineries.

NACIONAL: Following the terrorist attacks in London, oil prices on the world market dropped sharply, but by noon were already at the opening levels. What does this mean? How will oil prices stand on the world market?
  - I have already said that the average price for 2005 will be about $50. In 2005, consumption was equal to production, about 84.3 million barrels a day. However, analysis shows that in 2005, demand was much higher than production.

NACIONAL: Who is responsible for this?
  - There are assumptions that some have bought reserves that they did not need. In that way, they raised the price. The second reason why the price is rising is that the US has a somewhat different oil policy than the EU. European countries heavily burden oil products with taxes and tariffs, thereby resolving budget problems. In Europe, 65-70% of the retail price of oil products are taxes. This is not the case in the US. They stimulate the consumption of energy that they do not have enough of, and the cost is not high for their citizens. On the other hand, in the first five months of this year, China used only half the amount of oil as in the same period last year. The assumption is that it will not increase consumption in the remainder of the year to reach last year’s levels. Those are arguments suggesting that oil prices could remain at about this level. In the future, the cost of crude oil on the world market will continuously oscillate, but the growth trend will be constant until adequate sources of alternate energy are found.

NACIONAL : Has the period of oil ended?
  - The period of oil is passing, and in the next 30 years we will see an increase in consumption of natural gas. Following this, nuclear energy and coal. All these other energy sources will slowly fade out. The reason for this disturbance in fact is the sudden development of India and China. The status of the North Sea is also very important. Sources of light oil and easily obtainable oil, which are in increasing demand, are already spent. Not a single new oil field has been discovered. And now we are returning to those old oil fields where there is old oil which is difficult to exploit. South Africa is currently developing a new technology of producing a type of gas from natural gas.

  NACIONAL: Do you agree with the short-term forecasts that in 15 years time, crude oil will cost $150 per barrel?
  - That will only depend on the exchange rate of the dollar. While the dollar was weak, there was not a large disturbance on our market, and oil grew in price from $25 to $50. It depends on the exchange between the dollar and the euro, but the price will certainly go up.
 

NACIONAL: You mentioned light oils, which is a higher quality oil which gives higher quality derivatives and fewer side products.
  - Yes, it is less expensive to process, but very expensive as a raw material. It does not require special processing plants.
 

 NACIONAL: The Americans prefer it?
  - Yes, because they lack additional processing plants. That is why we are entering into this new investment cycle, in order to be ready to process these heavy poorer oils. I regret that with all the forecasts and predictions from 2001 that we did not succeed in realizing this by 2005. Had we succeeded in this, today we would have massive revenues.

NACIONAL: Where was the problem?
  - In the assessment of whether this should be done within the INA Board of directors. The conflict was whether or not we should build a plant and what kind of plant it should be. Today it is obvious that we choose well, but it was a difficult decision. The battle took us two years, the planning two years and today we are at the starting point. All those in Europe who have already carried this out are today making massive profits. 

NACIONAL: Do companies dealing with processing and sale of oil derivatives make more money when crude oil is more expensive on the world market?
  - For a vertically integrated company, expensive crude oil is good. For someone who only has a refinery, this is no longer of any importance. It is important to see what palette of products you can make and what. If you make a lot of expensive products, then your spread, the difference between the cost of crude oil and the derivative, is very good. We have old technology, old refineries and we make a lot of inexpensive products.

  NACIONAL: What about eurodiesel? Several years ago it was half the price of eurosuper, and today their prices are virtually equalized?
  - Though their production costs are already equalized, the tariffs on gasoline are higher. Consumption and demand for diesel has greatly increased. Now, even small cars drive on diesel fuel. Once, 100,000 kilometres was the point where it paid off to take a more expensive car with a diesel engine, now that boundary has been moved to 600,000 km. Soon diesel will cost more than gasoline, because we just don’t have enough of it. We will see a surplus in gasoline, and gas prices will begin to drop.
 

NACIONAL: Meaning that thrifty Croats have gotten themselves into trouble by buying expensive cars with diesel engines?
  - You could say that. We already had projections 3 years ago that the demand for diesel would increase due to all the new cars.

  NACIONAL: How strong is the government influence in forming retail fuel prices?
  - I have seen diagrams by which the price of fuel from 1999 to 2000 doubled. It did not. The production price has grown from 2 to 3 kuna, and the rest is all the influence of tax and tariffs. That is the case throughout Europe. Small countries like Croatia, Slovenia and BiH have to have similar prices. For if there is a large difference in price, all the consumers will go to fill up in the cheapest country. Large countries like Russia or Germany can afford to have a large difference in price, for there may be people tanking up outside the country in the border regions, but not in the interior. In the zone near Poland, Germany dropped its oil prices to avoid people from heading there to buy petrol. Yesterday I spoke with Minister Vukelić and told him that INA can work without trade markups. We would earn enough in exploitation and in the refineries. We could completely do away with the trade mark ups, the question is only whether our profits will be a little higher or lower. But all the other traders on the market could not survive that.

NACIONAL: How does INA stand considering the competition from foreign companies and domestic companies like Tifon?
  - INA has three core activities. First, acquiring oil and gas, in fact production. Second, refineries which process raw materials. Here we have no competition. For the citizens, retail is most important and this is where the competition exists. These are small companies that have developed and today hold more than 35% of the market. Our strategic plan foresees that other market players will reach 50% and we will remain at the same tonnage of sold fuel. All the market growth will be picked up by these small companies and the ratios will change.

NACIONAL: When will the second round of INA privatizations start, and by which model?
  - I have spoken at various professional and scientific meetings on the possibilities which exist. The owners will have to come to an agreement. The government will likely select a consultant to suggest the best option. We as INA will suggest what we believe to be best for the company from the technological perspective, while the government will be most interested in how much money it can pull into the budget. According to the existing law, we will issue an initial share offer tender. It is expected that someone will buy 15% of shares and that MOL will try to obtain majority ownership. The government will have to decide how it will and to what extent remain in the ownership structure. It can choose the option of 25% + 1 share in order to retain management influence over its energy company.

NACIONAL: What happened to the suggestion that the central European energy companies like OMV, INA and MOL exchange shares?
  - I suggested that four or five years ago, when we were worth 2 billion and they were worth 4 billion. Today, they are worth 12 -14 billion, and we are world only 3-4 billion. Were we to enter into such a swap of shares, we wouldn’t have even 25% of the total share. Plus, there is also the issue of trust. What would the critics say if our government were to begin swapping shares? 

NACIONAL: INA has found a large quantity of natural gas in Syria. Allegedly, the Americans are trying to force you out of this lucrative business, and the French have offered to make a joint investment in the exploitation of this gas field?
  - The gas reserves in Syria are much larger than here in the Adriatic. We have a solid contract with the Syrian government and we will soon sign a contract on a joint company to begin production in those gas fields. A disturbance in the political relations between Croatia and Syria would not be positive. The Syrian government has encouraged us. The French have expressed their interest to work with us in this field, and currently we are in talks with PetroCanada and El Fakiten, who would take on 50% of the investment. There is the idea to swap fields or for the French to invest cash. It would be better for them to invest $100 -150 million, thereby liberating those funds so that we could modernize our refineries as soon as possible. 

 NACIONAL: What about the takeover of Energopetrol in Bosnia Herzegovina?
  - I didn’t want to discuss this earlier. INA and MOL as a consortium gave the best price in the bidding and received 90 points in the assessment. Tuzlanki Inzenjering received 60 points, and OMV 30 points. To date, the BiH government has still not announced that our bid is the best one, and a series of talks have taken place since. Every time we meet, new terms are added to the tender terms, the majority of which we have accepted. We have accepted seven or eight new terms, and the government has to reconsider one or two, and then we will be informed as to whether our bid is the best or not. 

NACIONAL: You have been an INA man since the beginning of your career?
  - I finished secondary school in Vinkovci, graduating early on a scholarship from Petrokemija. I began working there as a plant engineer and in several years time became head of the plant. At that time, Petrokemija was under INA. I was transferred to the development sector in Zagreb in 1982, and become project manager. In 1992, I was head of chemical support, our laboratory made initial explosives for the military and private companies. It is not known that the submarine mines placed on the ships blocking Croatian ports by our amphibian men were made in INA. I was made General Director in 2003 after several management positions. At first, this was an interim decision, until the function was renamed as President of the Board, but I am still here. INA is truly a company close to my heart.

  NACIONAL: They say that you are safe in your position for as long as Mesić is President. You are the only President of the Board who was appointed by the Račan government and who is still in his position today?
  - That is not true, yesterday Darko Karačić received a new mandate, and he was appointed by Slavko Linić. Furthermore, the government has 100% ownership over Plinacro, and the company earns large profits.

NACIONAL: But the majority of directors had to go.
  - The answer is simple. In 2000, INA had 1.6 billion kuna in losses, with accumulated losses of 3.5 billion kuna and 500 million dollars in loans. It had excess staff, old technology and no perspectives. When I began here, I knew that INA could bring in $200-250 million dollars in profit with its technology. With all the improvements we made last year, we had a large increase in profits, and we did not have a large increase in revenues. Meaning, we rationalized the company structure, the processing method and issues a thousand small internal memos on how things should be done. I am still not satisfied with the way the company works. We have a strategic partner which helps in accelerating things. They have called me Hungary’s man, as the Hungarian President of the Board supported me. The have called me Mesić’s man. I am in good relations with the President and I think that he does his job well, particularly in warning where errors have been made, even in my case. But people like to simplify things, because they think they can do everything on their own. 

NACIONAL: Your mother-in-law Savka Dabčević-Kučar is currently leading in Nacional’s survey on the most influential Croatian woman of all time.
  - I have no doubt about that. Not because she is my mother-in-law, but because she is Dr. Savka Dabčević. That is like asking who is the greatest scientist: Einstein, for there is no one even close. In 1912, he saw something which even today they cannot comprehend. It is questionable just what my developmental path would have looked like without her, because personal contacts and the fact that people know you personally, and not just through the media, is what helps in your career.

Energy highway
  NACIONAL: How is the Adriatic natural gas project coming along?
  - We have calculated that we will bring the natural gas to the mainland in September. This cheapest and cleanest energy source will be available to citizens if we develop the network. It is important to get the households ready, and to buy the equipment. The local governments need to get prepared to issue a concession to start building the network. We should see natural gas in Dalmatia in 2008 or 2009, and this natural gas network will be our energy highway. Then tourism will also make sense in September and October, when the weather is nice, but heating is required.

 DružbAdria
  NACIONAL: What is INA’s perspective on the DružbAdria project?
  - We are 17% owners in JANAF, which is supposed to run this project. We are interested in seeing that part of DružbAdria which is the reversible pipeline from Sisak to Omišalj in operation as soon as possible. In that way, we will be able to receive cheaper Russian oil from the north. Ecologically speaking, the 3 million tons we import by ship will no longer have to travel by sea, but will come via land. We would also unburden the Omišalj port and the sea. In the future, we need to think about joining this pipeline with Trieste, in order to allow for the western network in Europe to receive Russian oil supplies. That would mean 15 million tons less oil traveling on the Adriatic every year. This would also free up the Omišalj capacities and we would then talk about an export port, but that is in ten years time. We are in support of obtaining reversibility as soon as possible, at world ecological standards, for our children and their children also need to live in this country.