Bosnia/Republika Srpska: Zarubezhneft Refinery Brod unclear market entry and mysterious exit strategy

16. March 2015. / SEE Energy News

Eight years have passed since the sale of the oil sector in Republika Srpska in BiH, for which was obtained by 121 MEUR. Russian buyer has not paid the obligation until today and the accumulated Refinery loss exceeds 250 MEUR.

Pompously announced the project of oil sector reconstruction in Republika Srpska in Bosnia and Herzegovina, bought by Russian company Njeftegazinkor in 2007th, did not give the expected results. At least if judging by the business data. The Russians have concluded an agreement in February 2007th for the purchase of Oil Refinery in Brod, Oil Refinery in Modrica and the company Petrol, with RS Government, and the contract was marked as “strictly confidential”, and immediately it caused doubt in the public given that it was the public sector.

It is true that a lot of money was invested in the Refinery in Brod, but the question is why debts are not discharged even eight years after the purchase. The whole process of oil sector privatization, says economic analyst Sinisa Vukelic, took place under mysterious circumstances.

It was shaky from the beginning

“That was the first time in the history that sessions of RS National Assembly was closed to the public. You sell the oil industry, something that belongs to the public sector, on closed session, to the customer who is unknown. We know that the Russian state company Zarubezhneft owns 40 percent of Njeftegazinkor but it is not known who the other three individuals who hold 60 percent are”.

Vukelic pointed out that by the subsequent annexes to the agreement RS Government gave monopoly to the Russian partners over oil resources in the territory of the whole RS, and also share in JANAF, the Adriatic pipeline, which part, or terminal in the ship refinery remained in their ownership after the war. That question should be resolved at the state level, but it has never been solved.

In any case, the losses of ship refinery, which operates within the Optima Group, are very important for the whole story. But from the Optima Group were not in the mood for a broader discussion on this topic, but they submitted answers about losses and business in written form. In the answers are not mentioned losses of the company.

“The primary reason for the negative operating result of Oil Refinery Brod is the volume of raw materials, which is insufficient for profits. Volume processing directly depends on the market availability and cover margins. In addition, a large part of the operating costs goes on fixed costs (payroll, maintaining operational readiness, taxes and duties), and there is also a high level of financial liabilities and interest on loans”, it was announced from the refinery.

 

Indebtedness exceeds the fixed capital value for several times

According to the results of the auditing company Deloitte from 2013th accumulated loss of the Refinery in Brod exceeds 232 MEUR, and its debt ten times exceeds the value of the share capital. The opposition in RS pointed from the start to irregularities in the privatization of the oil sector, although little is done to investigate possible irregularities. Branislav Borenovic form PDP says that with these losses raises the question of justification the refinery operations.

Oil refinery in Modrica

“Short-term liabilities are six times larger than the capital, and everything that can be drawn from the Refinery was taken out, it is burdened by numerous mortgages. The only obligation the buyer had not fulfilled yet is to pay 120 MEUR of liabilities under the contract. We are afraid that they will try to avoid this obligation. When we asked, whether any of this was paid, they told us that it is, but from the information we receive it cannot be seen”.

Tax Administration: “A part of the debt will be paid”

From the Tax Administration of Republika Srpska has been recently said that the Refinery Brod paid 15 MEUR in the name of arrears, which are inherited during privatization. The repayment plan was launched until July 2014th, some seven years after buying the oil sector, and the remaining debt only on this basis amounted to another 44 MEUR.

“The worst thing is that the financial indicators are bad. It is obvious that a Refinery served to someone to pull everything worth in Refinery over the related company. The question is, was really someone’s intention to make the same scenario as in Birc”, says Borenovic.

Refinery has received grace period for years, says Sinisa Vukelic, as well as a special status in the Council of Ministers for the petroleum products production with higher sulfur content. The contract was defined by the construction of the railroad and pipeline between Modrica and refinery in Brod which has never been done, Vukelic said: “Lately a lot of information show that the Russians withdrew from the Refinery due to the lack of profitability. How much is this true, it is hard to say, but it is certain that the losses are enormous and the reasons are that the Refinery does not have a significant retail network. Also Gazprom entering, which bought the chain of OMV petrol stations, played a significant role on the market”.

Gazprom refused Refinery?

Refinery business is not profitable unless there is a so-called closed operation network, as Refinery in Brod does not have it because it has no own oil resources so that this company is only a link in the middle of the chain. Vukelic said that according to some information, Refinery owners tried to sell Gazprom oil sector during entry in the market of Bosnia and Herzegovina and the purchase of OMV’s stations network, but the company apparently was not interested in the job.

From the Optima Group have announced that such information were “inaccurate and speculative”.

To illustrate, according to stock exchange data from July 2007th, the largest turnover was achieved by the shares of Oil Refinery Bosanski Brod of 550.000 EUR. The price of these shares amounted to 0,55EUR.

In January 2014th, also according to stock exchange data, stocks in Refinery in Brod were traded at 0.015 EUR in the value of 350 EUR.

Economic analyst Zoran Pavlovic says that the accumulated losses significantly overpassed the value of the Refinery, but it is difficult to predict how this story ends: “The refinery price is used as a parameter for the fuel price. On the other hand, citizens used the fact that the refinery price in Brod is high compared to the environment so that our distributors fail to offer citizens a lower price than it gives Refinery”.

The results could be good

“What is the advantage of Refinery in Brod is that it is Refinery for BiH and if rationality and processing price adjustment would be achieved, the results would be good. However, Optima Group, the mother company, would not earn much in this case”, said Pavlovic.

In the previous term in RS government the energy ministry was Zeljko Kovacevic, who did not want to talk on this topic, business, settlement of Refinery obligations and possible concessions by the government, although we have repeatedly contacted him. On the other hand Slobodan Puhalac was energy minister at the time of the contract signing with the Russians. Today he is at the head of Gas Res, a company that was founded with the aim of implementing the construction of the South Stream Gas Pipeline through RS, which is now more certain, it will not happen. From this perspective, eight years later, Puhalac considers that the deal with the sale of the oil sector was one of the best for RS.

“The Refinery implications on the economy of RS and BiH are significant and it cannot be put into alignment with the failure to meet obligations. I’m pleased. They are clean from the point of payment obligations, not those provided by contract, on how it can possibly be talking, but with the payment of salaries to employees, etc. I cannot analyze the losses. At this point I do not have a contract in front of him, and the memory does not serve me exactly which obligations are concerned, but I think I will be there to make a concrete approach. Do not talk about how to enter oil under preferential agreements through the Port. This is still a subject of which you can always control, “says Puhalac.

Regular salaries, part of workers go home

As for the 1,236 workers at the Refinery Brod, as claims union president Djoko Cvjetkovic, regular salaries and all other liabilities were paid off to all. The average salary is around 450EUR, and Refinery tries to reduce the number of employees for years.

“Workers Excess was in 2013th and 2014th and it is carried out by the decision of Zarubezhneft. However, there are no decisions in 2015th nor do we know at this point how many workers could be redundant. But when it comes to that, also the union will be involved in all activities”, says Cvjetkovic.

On the question whether the employees release is planned and what will be the number of fired workers, from the Optima Group responded to us that ” they are optimizing the number of employees” but this would be done through staff retire at job positions at which new people would not be hired.

In any case, even after so many years, the privatization of the oil sector in RS causes enormous public attention.

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