ŽELJKO TOMŠIĆ, Assistant Economy Minister responsible for energy and mining is Croatia’s main negotiator in the PEOP oil pipeline projectThough little known to the public, Croatia has for some time been a participant in a project to channel Russian oil to the Adriatic. This was also the idea of the Druzba Adria project, a project which has all but fallen through. While Druzba Adria was most criticized for a somewhat exaggerated danger of potential tanker spills, this project would avoid that possibility as the oil is planned to travel exclusively via pipelines.

The Pan European Oil Pipeline (PEOP) is a project that would channel Russian and Caspian oil from the Red Sea to the Adriatic through 1319 kilometres of pipeline. However, not only Russian oil would be transported. Considering that American and Western European oil companies such as ExonMobil, Chevron, British Gas, ENI and Shell control the majority of Caspian wells, the project has received the support of both the European Commission and the Americans.

The oil pipeline would begin at Costanza in Romania and would follow the existing corridor to the town of Pitesia. From there to Pancevo in Serbia, a new corridor would be established, and from Pancevo the pipeline would lead to Sisak where it will hook up with the Adriatic pipeline towards Trieste via Slovenia or Istria. Tomsic, Assistant Economy Minister responsible for energy and mining, represents Croatia in the ongoing PEOP negotiations.

“The PEOP originally began as a project for the pipeline Constanza - Pancevo - Omisalj - Trieste, but the primary idea was to export 5 to 15 million tons of oil from Omisalj. An international commission of the participating countries – Romania, then Serbia and Montenegro and Croatia, had already drafted the project. However, this project occurred simultaneously with the Druzba Adria project that had the same goal, the export of Russian oil, but on a different route. With respect to the PEOP, in Croatia, the existing JANAF oil pipeline is planned to be used. This pipeline has an annual capacity of 20 million tons of oil, while currently, only 4.5 million tons are used. The system needs only to be adapted so that oil can flow in the opposite direction, as this was planned for transport from Croatia to Serbia. At that time, Romania received an EU PHARE project that resulted in a study which concluded that this project could be different,” said Zeljko Tomsic.

In fact, the PEOP began due to problems with the Bosporous Strait, where tankers are forced to wait in long lines and the export of Caspian and Russian oil is limited. “The study concluded that the need for the export of Caspian oil would be significantly larger and it was proposed that the quantity of oil in the PEOP be increased to 40-90 million tons annually, with 60 million tons as the most likely variation. Also, in order to avoid ecological problems on the Adriatic Sea, it is proposed that the pipeline not go all the way to Omisalj, and instead be turned towards Trieste at Melnice, 15 kilometres before Rijeka. In Trieste, this oil would not be exported, but instead the oil pipeline would be joined to the existing TAL oil pipeline that travels through Austria and the Czech Republic all the way to Munich. Also, at Trieste PEOP would be hooked up to the oil pipeline for northern Italy. In this way, oil transport would not be via ships, but from pipeline to pipeline. Then, in 2005, the Italians and Slovenians entered into the project. At first, the Slovenians had reservations, but were not against the project, while the Italians should great interest in the PEOP,” says Tomsic.

As the project evolved, the time can to sign letters of intent, but on the day of signing, the Slovenians backed away. “The pipeline was supposed to pass through 20 km of Slovenia. This is not a large investment, but also the revenues were relatively small. They said that the entire pipeline would pass through sensitive karst areas and that they would have serious political projects with ecologists if Slovenia consented. Even today, they have not made it clear whether or not they consent to the project, as they have not definitively rejected it. At the last meeting of the international commission, which the Slovenians did not consent to, the remaining four countries signed a memorandum inviting Slovenia to participate, although it was clearly said that the project would be realized with or without Slovenia. In that case, the pipeline would go via Istria into the sea to Trieste, thereby bypassing Slovenia,” says Tomsic.

The project though does not clearly define what will become of JANAF if the PEOP pipeline becomes a reality. Namely, the PEOP project has not been completed. “Romania has done its share of the work, financial and marketing studies have been drafted, while the route has not been defined in detail in the remaining countries. Also, a final decision has not been made on JANAF, whether its pipeline will remain, as this is to a large extent a decision of Serbia. If they believe that PEOP will supply sufficient oil, then there is no need for JANAF and its infrastructure can instead be used for PEOP. Clearly, Croatia would retain the route from Omisalj to Sisak,” stressed Tomsic, who also acts as chairman of the Supervisory Board of JANAF.

Branko Radosevic, CEO of the company Plinacro, stresses that the supply of Russian natural gas via Hungary is a key energy project for Croatia. The total investment in the project would range between $1.7 to 3.7 billion, depending on the capacity. Croatia would then invest between $590 million and $1 billion, with expected revenues over 20 years totalling from $1.8 to 2.5 billion. Recently, speculations arose that this route would also be the site of a gas pipeline by which Croatia would be supplied with Russian natural gas.

“The Italians were the first to propose that we should examine the feasibility of placing a gas pipeline along the same route, considering that natural gas is transported to Romania; a proposal was also made that a terminal for Caspian natural gas be built at Constanza. Of course, these are all still in the idea phase. Romania and Serbia were not overly enthusiastic, fearing that this might water the entire project down and make its realization questionable,” says Tomsic.

A delegation from INA and HEP (Croatian Electric) recently visited Moscow to discuss the issue of Russian natural gas with the Russian energy giant Gazprom. Russian natural gas is planned to be transported in a pipeline via Hungary, which is currently Plinacro’s top priority project. Plinacro CEO Branko Radosevic says that the project is now only waiting on a contract to be signed by our suppliers – INA for its customers and possibly HEP for its own purposes.

“The contract on the purchase of natural gas had already been drafted, and then three days prior to the signing date, a decision was made to back away from the idea. After President Mesic and Premier Sanader intervened with President Putin, GazpromExport consented to continue the negotiations and they were all very positive about the possibility of the gas supply. They requested, in line with the rules of the profession, data on the amount of natural gas amounts, supply dynamics and other terms such a contract must contain. This was actually the only precondition for the start of construction of the pipeline, primarily on the part of Hungary. We only have to build eight kilometres of pipeline, which is not a problem, this can be done in 6-12 months. However, Hungary is required to build 270 kilometres of pipeline; MOL Gastransmision is interested in the project, but will not begin construction without a signed contract,” explained Radosevic.

“The problems with the supply of Russian natural gas arose because the Russians said that they were not able to supply a certain amount of natural gas before 2012. Meanwhile, we were in negotiations with them on the resolution of debt clearance, that was supposed to be paid in parts for a natural gas thermal electric plant. We said that without their natural gas, we would not be able to use such a plant. Premier Sanader sent a letter to Russian Premier Fratkov, who responded that certain problems did exist, but that Gazprom and INA needed to get in contact to resolve them. The INA and HEP representatives visited Moscow on 19 December. There they were told that the natural gas could be supplied to Croatia, but that INA and HEP would have to inform them about the quantities and supply dynamics. It was originally arranged that the INA and HEP CEOs, Tomislav Dragicevic and Ivan Mravak, attend the meeting. However, first Dragicevic cancelled, followed by INA board member Mirko Zelic. Then Mravak also cancelled. I personally expected a stronger delegation on our part,” said Tomsic.

Meanwhile, representatives of Plinacro were also in Moscow – Branko Radosevic and Goran Francic, director of Plinacro’s Development and Investments Division. There they met with representatives of the company Rosneftegaztroy (RNGS). By an Agreement between the Russian Federation and Croatia, that company has been assigned as Plinacro’s partner in the resolution of the $15.7 million clearing debt to be dealt with in equipment for the pipeline to be hooked up to Hungary’s pipeline.

“Construction of the complete system will certain allow for the supply of natural gas to Croatia and to neighbouring countries for the next 25 years. The new model of ensuring energy independence is based first and foremost on connecting transport systems and diversification of supply. This is not only our principle, but is also applied throughout Europe, meaning that connections with neighbouring transport systems will allow for flexibility of the system and energy trade based on market principles, as well as faster market reactions to changes in energy needs. According to our plans, by 2011, Croatia will be able to take all natural gas quantities that we need, as well as for transport. We are ready to connect our system to all large projects in the environment, be that PEOP, Nabucco or some other project.

Radosevic has refuted some media claims by which Plinacro will take the lead role in the LNG terminal project to be built in Krk or in Istria. “Plinacro wants to participate in the LNG project, and we think it’s a good project. On the other hand, we don’t want to have, nor has anyone given us, the lead role. Dirty tricks are obviously not good for Croatia, because they benefit our opponents in negotiations in order to obtain a better bargaining position. For example, if they write that the foreign partners will back away from the LNG terminal project, this applies pressure on the Croatian negotiators. Now, all of a sudden, there is the fear that we will lose the LNG project, even though until recently, the majority of the public was very concerned as to whether it would pollute the environment. We are one of the energy companies under 100% ownership by the Croatian state. We are interested in this project and through our participation in the project, we intend to protect Croatia’s national interests and the interests of the company itself, as we are responsible for the transport of natural gas and the construction and development of the natural gas transport system in Croatia. No one can threaten this legal obligation we have, particularly not subjects intending to introduce clauses to various contracts that would disable the fulfilment of our legal obligations and it is obvious that they are trying to direct public attention to the alleged possibility that we could lost the project,” says Radosevic.

He stresses that this project is not key or crucial for Croatia, though it is beneficial. “Even if we lose this project, Croatia will be able to more efficiently ensure energy independence than with construction of the LNG terminal. This is first and foremost in the interest of Europe, and not just Croatia,” emphasizes Radosevic.

Assistant Minister Tomsic stated that HEP and Plinacro entered into the project after the Government decision to increase the Croatian share of the consortium building the terminal. “Considering the strategic importance of the LNG terminal, the Croatian Government stated that the Croatian share should be increased to 25%. That is when HEP and Plinacro entered. HEP was to have a 10% share in the consortium, while Plinacro will have 5%. I say ‘was to have’ because the new consortium has not yet been formed and formalized, even though the remaining partners have consented to a reduction in their share. Also, the idea is to form a single company through which all the Croatian companies would act within the consortium. At the meeting of the representatives of those companies, it was agreed that Plinacro would handle the formal matters, but not as the leader of the consortium, but as someone who needs to handle the formal and legal matters regarding the future company. Though this new company has not yet been formally entered into the court register, the consortium has been sent a memorandum in which our companies are appearing jointly through the company that has not been named yet; the working name is Terminal Croatia,” said Tomsic.