Serbia exclusive report: Privileged market position of Gazprom, energy security endangered?

29. October 2013. / News Serbia Energy

All former governments from 2005.  handed over Serbia oil and gas energy market to the Russian state company Gazprom with their  decisions. Although the state has share in all works agreed with the Russian company, constantly was coming out to meet the Russian side. Several interstate documents guarantee the privileged position which Gazprom has now, from which the most important energy agreement was signed in 2008. By agreement and its associated protocol was set out the price of 400 MEUR for the Petroleum Industry of Serbia, with the obligation of Gazprom Neft to comply with the modernization program worth 500 MEUR.

Gazprom Neft fulfilled the obligation by borrowing the money for modernization to the Petroleum Industry of Serbia, and NIS is obliged to return the money with interest.

In the financial statements of NIS, the borrowing is shown as debt in amount of 500 MEUR. The loan is repayable to the Gazprom Neft every three months until 15 May 2023.

From this loan, NIS modernized the Pancevo Oil Refinery under Gazprom Neft.

Besides, Insider research showed that Serbia to Gazprom Neft, together with NIS, handed over to the management domestic oil and gas reserves worth even seven billion euros.

Serbia has proven reserves of 10.5 million tons of oil and 4.35 billion cubic of gas.

According to the current prices of oil and gas, the total value of proven domestic reserves is about 9.4 billion dollars, or about 7 billion EUR.

Precisely increased use of domestic oil and gas shows how the NIS was sold below cost. The total value of the reserves utilized only during the 2012.  is about 800 MEUR. This means that only during that year value of used reserves was two times larger than the price that Gazprom Neft paid for 51 percent of NIS.

Milan Kovacevic, a consultant for foreign investment: Here they are encouraged to push it out of the country as soon as possible by paying a fee of 3 percent, before rising to a more normal level. I do not know that any other country has such a low fee for exploitation.

Gazprom Neft is privileged when it comes to paying taxes for the use of these reserves.

Mineral rent in the world ranges from 10 to over 30 percent in some countries, while in Serbia, according to the Law on Mining, amounts seven percent. But NIS is under old law by which the mining rent is paid for only three per cent of revenues.

According to the papers that the Insider got on the basis of the Law on Free Information Access, NIS paid 23.7 MEUR in 2012. in the name of mining rent.

Although during that year in Serbia was effective as a new Law on mining with mineral rent increased by seven percent, NIS paid fee under the old law by which the mineral rent was three percent.

If on NIS would be applied the current Law, the company would pay to the state about 56 MEUR – or 32 MEUR more.

In the current government there is no unified opinion on the mining rent issue. While Zorana Mihajlovic, Minister of Energy, said that the fee should be increased, Milan Bacevic, Minister of Mining, who is charge for this area, considers that mineral rent for NIS should not be changed until the e agreement expiration by 2038. Both Zorana Mihajlovic and Milan Bacevic are officials of the Serbian Progressive Party.

Despite initial promise, Bacevic did not accede to an interview for Insider.

Zorana Mihajlovic, the Minister of Energy: Serbia has almost the lowest percentage of mining rent in the world. So you have all the countries, starting from Albania, which has 12, Slovenia 10, Croatia also something 10 or 12, Hungary, where it is progressively … With us it is 3 percent.

The first idea of ​​ NIS privatization was not even that this company should be sold in direct negotiations. According to the plan from 2005. the company should have been offered on tender in which all interested buyers could propose their price.

In order to choose the best way for the state privatization that would bring ​​the most money and provide the NIS development, during the same year the Serbian government announced a competition for the privatization advisor. Business got the consortium Merrill Lynch – Raiffeisen Investments.

The compiled report submitted to the government in June 2006, and on this document was marked as “confidential”. Insider team came to this document under the Law on Free Information Access.

-The document has the code “Liman Project”, and in it, on 115 pages, was exposed in detail the privatization proposal that could bring the most money to the state and ensure the long-term development of the NIS.

The total value of NIS, according to preliminary estimates of the privatization advisor, was between 1.2 and 1.6 billion euros. This means that in 2006. over 51 percent of NIS was worth between 612 and 816 MEUR. In this assessment did not enter the value of domestic oil reserves.

Although the strategy of privatization was completed, the former government started direct negotiations with Gazprom to sell NIS.

The Gazprom delegation led by Alexey Miller, head of the Board of the Directors, came to Belgrade in October 2007. to meet separately with Vojislav Kostunica, the then Prime Minister and Boris Tadic, the former president. At that time was proposed the NIS sale within the framework of a comprehensive energy deal between Russia and Serbia.

Press Release of the Gazprom company after a meeting in Belgrade: ” As a single complex project Gazprom considers the participation issues in the privatization of the Petroleum Industry of Serbia, the development of gas-transport system in the South Stream project and the possibility of an underground gas storage to ensure delivery to the Republic and the transit to a third countries”.

Only three months later this was the final solution, which was specified in the Energy Agreement. For years Vojislav Kostunica has refused to give an interview for the Insider, and the interview on this issue also refused the former Serbian President Boris Tadic.

Five years after the agreement signing the Serbian representatives have not yet discovered who suggested price of NIS and therefore the exploitation rights were not included in the value of this company as a valuable part of the company.

B92: How do you look on the sale of 51 percent of the NIS shares for 400 million and 500 million of investment? How did this seem to you?

Svetislav Krstic, former director of the NIS development: Well it is, I will tell you right now sincerely. It is very cheap. Therefore, NIS was sold cheap because NIS is worth more. I will give you the evidence. You have over 200 pumps owned by NIS. Take one, and in some locations that are attractive, well not all pumps, some pumps have internal character, but the majority of these pumps are located in a very attractive location, and price to make this pump surely is five to ten MEUR. Maybe one MEUR, maybe … so no one can make a pump for less money. You have over 200 stations.

Sava Blagojevic, Union OF NIS Naftagas since 2001.by 2013: So the real price would be if the NIS was sold on the tender. The real value of NIS would be shown on the tender. How much the real price was, it may be seen very well from the amount that NIS previously earned from oil and gas exploitation, and also considering the turnover of derivatives on the Serbian territory.

Milan Kovacevic, consultant for the foreign investment: The system that provided Nis selling through the direct sale was guilty. The system required tenders to be done and in that case the big oil company probably would be paid more.

The only one negotiation participant that acceded on the interview for Insider on this issue is Borislav Stefanovic, who before the contract signing on NIS sale was put for the leader of the negotiation team.

B92: Do you agree that Nis was sold on the law price?

Borislav Stefanovic, DS: Well no, I agree if you watch severely, through the economic parameter and benefit that could be gotten from the South Stream and other things that we achieved.

Although it already had done and paid privatization strategy with the value assessment of Nis and although signed the document in which was defined the price for the company sale, on the excuse that the price could change the Serbian government ordered the new value assessment of the domestic company.

The Serbian citizens paid additional half MEUR to the company Deloitte to assess the company value whose price already was agreed.

According to the engaged consultant assessment, considering the financial reports, reports on the assets, but also by comparing the values of the similar regional companies, NIS was worth 2.2 billion EUR on the market on 30. June 2008, on the day when the assessment was made. That was, according to Deloitte report, “fair market value “of the company. That means that a 51 percent of the stake in NIS was worth 1.12 billion EUR – two and a half times more than the price that was agreed upon.

Oil Industry of Serbia was sold in order that the section of South Stream pipeline pass over Serbia, by which Russian gas will be transported from the Black Sea through Bulgaria, Serbia, Hungary and Slovenia to Italy. Thus Serbia has become the only country in this project which gave to the Russian side such important resources such as the national oil industry, with all the oil and gas reserves.

Besides, Serbia is the only country on the South Stream route, which handed over control of the only domestic gas storage to the Russians, which agreed to be a minority partner in the whole project with 49 percent of ownership of the pipeline section passing through its territory and it is the only country that has agreed that the company that will build this section will be set up in the offshore zone. Any of participants in the South Stream project did not make these concessions to the Russian side.

B92: Is there any chance for this agreement correction?

Milan Kovacevic, consultant for the foreign investment: I think there is. It says it can be changed by the agreement of the parties.

Zorana Mihajlovic, Minister of Energy: I think that we cannot change anything in the Energy agreement. So we cannot change the purchase agreement for NIS, therefore between NIS and Gazprom Neft. It is one agreement which includes two contracted parties and there cannot be any change.

As you see in the four last episodes of the series “Energy (no) agreement” engagement with Russia was announced as “the century work” which would provide hundreds million of EUR to the Serbian citizens from the transit taxes, great money from the NIS shares, more than 2000 new job positions, job for the construction companies and blooming economy.

Five years later, the citizens of Serbia stayed without control over the most profitable local company, because the most of the profit is transferred out of the country without control over the only domestic gas storage. To the citizens of Serbia have remained expensive jobs that are declared as official secret, rich private companies in shady gasification works, old and new intermediaries in trade with Russia and the Public Enterprise Srbijagas in debt of one billion euros, which, by all odds, will pay off the same citizens.

Source; Serbia Energy/B92 Insider tv show

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