Challenging Croatian business environment and haemorrhaging European refinery industry

September 11, 2014 | 00:00

Challenging Croatian business environment and haemorrhaging European refinery industry

Interview with Marcus Lippold, Vice President for Business Strategy and Regulatory & Public Affairs, MOL Group

MOL, the Hungarian oil & gas company, has been facing a tough time in Croatia since taking effective control over the national energy champion – INA, in 2009. According to Marcus Lippold if there isn't an amicable solution reached with the Croatian government, MOL would be willing to sell its stake in INA. In light of the current Russian-Ukrainian gas crisis he expressed concerns about missing reverse gas flows between some Central European countries. Furthermore, with regard to the EU 2030 climate goals he calls for “a clever way of financing but without giving excessive subsidies”.

Marcus Lippold (left) and Jozef Badida
In 2002, upon the recommendation of IMF, Croatia adopted a law allowing the privatization of INA, the Croatian oil & gas champion. As a result, the Croatian government has lost its control over INA in favour of the MOL Group that manages refineries in Slovakia, Hungary and Croatia and upstream assets in the North Sea, Central Europe, Russia, Kurdistan and Pakistan. The amendment to the Shareholders Agreement signed in 2009 by the Croatian government led by then Prime Minister Ivo Sanader and MOL, formalised this fact. However, it seems that Croatia would like to return INA back into 'Croatian hands' and it might use its trump card – the Sanader verdict. In 2012, the Croatian court sentenced Mr. Sanader to jail, among other things, for allegedly receiving a bribe of 10 million Eur from MOL´s Chairman-CEO, Zsolt Hernádi, in exchange of managerial control in INA. This verdict was confirmed by the Croatian Supreme Court this June.

How does Marcus Lippold perceive this dispute? What might be the next steps of MOL? Is the energy security of Hungary in any way threatened?

As Mr. Lippold is also a former Senior Economist and Coordinator for EU international Energy policies at DG Energy of the European Commission, we also provide you with his views on (i) the challenging European refinery business, (ii) the transition to a low-carbon economy and (iii) the intensively discussed EU 2030 energy and climate goals.

JB: Mr. Lippold, you are responsible, among other things, for Public Affairs in MOL. So let´s start with the quite complicated situation in Croatia. MOL´s Chairman-CEO, Mr. Hernádi, has been accused by the Croatian judiciary of bribing former Prime Minister Ivo Sanader in exchange for a dominant position in INA. And Mr. Sanader´s sentence for corruption was confirmed by the Croatian Supreme Court this June. How do you read this verdict?

ML: MOL Group has never had any dealings with this court case. We have not been asked to comment, nor for any evidence. We conducted our internal investigation without finding proof of any wrongdoing, which was later also corroborated by a comprehensive investigation of the Hungarian State Attorney’s Office. They dismissed this case back in January 2012 due to lack of evidence of any criminal act and had refused to further investigate.

JB: I see, but indirectly, is this case not also about your company, if MOL´s Chairman-CEO has been accused for bribing Mr. Sanader?

ML: I can say that from the side of the Hungarian judiciary there have been very detailed enquiries made and all of this material has been offered to the Croatian courts as well but was not taken up at all. For us, it is very difficult to say where all this stands. As a group we only see that the Hungarian jurisdiction didn’t find any incriminating findings with regard to the Chairman-CEO and it is strange that the Croatian side has not only completely dismissed it but didn’t even want to look at any of the gathered materials. One would at least assume that the countries’ judiciaries would cooperate where they are working on similar cases but that was not what the Croatian side seemed interested in.

JB: If you look at it from the Croatian side, does the sentencing of Mr. Sanader not prove the bribery of MOL´s CEO?

ML: Apart from the fact that to the best of our knowledge there has been no bribery at all, I could also argue that the whole procedure and the media hype serves

the whole procedure and the media hype serves as a convenient excuse for violent seizure of our management rights in INA by the Croatian government
as a convenient excuse for violent seizure of our management rights in INA by the Croatian government. It is important to note that it was the government of the Republic of Croatia that had approved the amendment to the Shareholders Agreement on management rights in INA. People keep going on about Mr. Sanader which, I guess, is a big case because you don’t often have a former Prime Minister being sentenced to jail. But there have been many individuals, all part of the government at that time, looking at the entire document amending the Shareholders Agreement and approving it. It wasn’t just one person...

JB: The Croatian government doesn’t hide its interest to annul the amendment to the Shareholders Agreement enabling MOL to execute control over INA. How do you perceive such statements of the Croatian authorities?

ML: A part of the Croatian government has been very vocal about getting INA back – “it is the Croatian company, it should be fully given back to Croatia”, whatever that means. However, our acquisition of shares was never questioned, not even by the government. Our aim to gain control over INA was totally in line with the provisions of the INA Privatisation Act. Once MOL became INA’s largest shareholder, it was in a position to gain management control of INA. This was formalized in the First Amendment to the Shareholders Agreement in January 2009. MOL today is the biggest shareholder of INA owning more than 49% of the company.

JB: So, do you think that they will, not just verbally, try to change the legal position of MOL in INA?

ML: Currently what we are seeing in terms of legislation that is being put forward and implemented and what some members of the government are saying, it is going in that direction.

JB: What will be your next steps?

ML: MOL is in negotiations with the Croatian government, which is the second biggest shareholder in INA next to MOL, and we are looking at ways how to best cooperate. All of that is done with the purpose of further developing INA into a competitive, healthy company which is certainly in MOL´s interest but is also in the Croatian interest.

JB: However, if an amicable solution is not reached what future can we expect in this story?

ML: Again, we will continue negotiating in good faith in order to reach a win-win with regards to INA. But of course, we cannot go on like this indefinitely when the company is losing value, when we are not able to adjust the company to a market environment

If you look at what is happening in Europe, in general, regarding the downstream and refining business, it is extremely challenging
that has deteriorated significantly over the last several years. If you look at what is happening in Europe, in general, regarding the downstream and refining business, it is extremely challenging. We have started making INA more competitive but if all efforts to continue that way and especially having INA run on a private company model are being thwarted by the government then ultimately we also need to look at other alternatives. Selling is an option, if we absolutely cannot make it work and if there is really no positive sign from the government at all in terms of working towards making INA a stronger and healthier company.

JB: Imagine there is an offer from the Croatian state to buy a control stake in INA, would you accept the offer?

ML: In general, if you are willing to sell, it always depends on the offered price. MOL has invested significant amounts of money into INA. MOL has always had a long-term strategic plan for INA as a strong part within MOL Group. To just settle to get out at any price doesn’t make sense. If it is the Croatian government buying it at a fair price, we wouldn’t say no. Why not?

JB: The complexity of the Hungarian-Croatian energy relations is emphasised by incapacity of the Croatian side to enable reverse gas flow on existing pipelines. Gazprom has suspended gas deliveries to Ukraine and the 2009 gas crisis might repeat itself at any time. How is Hungary and its gas transmission operator FGSZ, belonging to the MOL Group, prepared for this situation when reverse gas flows from Croatia and Romania have not been available yet?

ML: In my view Hungary has one of the most developed systems in Europe for gas emergency situations with its interconnectors and obligatory gas stockpiling regulation.

What is frustrating for MOL to see is that investments have been made but you don’t yet get other countries reciprocating in terms of reverse flow
What is frustrating for MOL to see is that investments have been made but you don’t yet get other countries reciprocating in terms of reverse flow. And one of them is Croatia trying to keep all its indigenous hydrocarbons within the country. If you look at what is at stake it is more than just keeping the lights and heating on. It is also about keeping production going, which powers GDP and jobs. So it is not a trivial thing. At least we should be using the existing energy infrastructure and not try to block that.

JB: The same problem, a lack of reverse gas flow, is present at the pipeline interconnector between Hungary and Romania, isn’t it?

ML: Romania is also thinking hard what to do with the hydrocarbons that are being produced in the country. There have been significant finds recently but again there is no agreement about letting that flow westwards. It is different from the Croatian case but there is a similar question being mulled over: “should we keep it all for ourselves? Or should we connect to the region and then really trade out and trade in?” Certainly, it goes against the EU directive – not enabling reverse gas flow.

JB: MOL has acquired some upstream assets in very promising Iraqi Kurdistan oil fields. However, everybody knows that the whole region has been experiencing violence and political instability. Could you compare your business experience in Iraq and Europe?

ML: For an economic operator, a civil conflict or strike is not the only element in the risk matrix, the legal environment is a very big factor too

For an economic operator, a civil conflict or strike is not the only element in the risk matrix, the legal environment is a very big factor too
when considering whether to invest or not. Europe in general has become much more uncertain in this respect, especially with regard to the energy legislation and RES policies. Also in Croatia, where the law this year changed frequently without prior warning. If you are considering investing in a country for the long-term that is exactly what puts you off. Kurdistan has been quite stable in this respect. But of course the conflict in Iraq and the Kurdish region is a big security concern, for the civil society there and operators in the region.

JB: You have already mentioned the difficult situation of European oil refineries as they are facing fierce global competition and declining domestic demand. As a result, MOL closed its Italian refinery in Mantova last year. Which one will be next?

ML: In Europe there are several assets which could be next. The challenge is that European consumption per head is declining and the European population itself is also steeply declining. On top of that you have new export refineries in the Middle East, but now also the US Gulf Coast refineries that are pushing product into Europe. So, if you are anywhere near the sea you can be easily reached by product imports. On a per unit basis, many of these export refineries are more efficient than those producing in Europe on average. That has already hit the UK, significantly, as well as France, and Italy. There have been about 15-18% capacity closures in Europe over the last 5-6 years. And if you look at where consumption is going, there will be more. There is the general question of how much do you import and how much do you still produce yourself. Producing yourself is not always the right answer if it is significantly more expensive than what you get from the global market. With respect to refineries, there are some which will experience increasing pressure from the exports arriving in Europe and will therefore struggle more and more to compete.

JB: How is the MOL Group able to compete on this global market?

ML: There are measures you take to control costs – decrease of energy intake, reduction of emissions in order not to pay penalties, increasing automatization, constant adjustment and process improvement. But still there are some assets that are more competitive than others.

JB: Could the refinery industry in Europe survive taking into account the EU and member states initiatives to reduce the usage of fossil fuels? Are you ready for the transition to a low-carbon economy? What will the industry look like in 30-40 years?

ML: Several answers... Some of the latest studies have, for example, shown that the best thing for the environment is to drive your car, whatever kind of car that is, until it literally brakes down. If you look at the energy input needed and the emissions generated in the whole process of manufacturing a car - digging up the ore, sorting it, smelting it, shipping it to a car manufacturer etc.- , then the savings on fuel consumption of newer more energy efficient cars don’t yet make up for that.

The second is whatever Europe does in terms of the environment doesn’t matter much in the global context unless others also implement some of those policies.

Just focusing on Europe, policies promoting renewables are here to stay and anybody would be foolish not to acknowledge that.

Energy system change has typically taken 40 years
That being said, it is difficult to transition away from one energy source to the next. Energy system change -whether it was going from burning wood to burning coal, to transitioning to oil, to developing wind turbines- has typically taken 40 years. In Europe, the transition is under way and we are looking at that. In the next 30-40 years in terms of transportation, oil will probably remain the biggest and most important fuel, though its absolute share is getting less.

Ultimately, MOL defines itself as an energy company, so if traditional fuels will not be allowed any more, rather than not being available any more, then we would still have an energy portfolio of whichever fuel makes sense.

A transition is under way. I think it might lose momentum a bit, but it won´t stop. At the same time it will take longer than some people think, in part because it needs to be financeable. The economics around renewables support are only now being looked at. In Spain some support measures have already become non-financeable.

So for us, it is definitely a challenge, but the energy sector has always been challenging. We are looking at the different developments, for example, bunkering is going to trend towards LNG as a marine fuel. Fuels are shifting but there is still sufficient time to adapt to these changes.

The only thing I would say is that people should not underestimate what proven energy and reliable energy mean to the economy. If you have disruptions it majorly affects your production process and affects your industry.

JB: What do you think about the EU 2030 climate and energy proposals? Are they feasible?

ML: Well, scenarios reflect a political will, that doesn’t mean they are always feasible. They are meant as stretch targets and whether they are achievable in a mandated time period at reasonable cost is really a big question mark. For instance, in several other parts of the world it would be beneficial to the environment, if you wouldn’t burn wood, but instead, for example, operate a very efficient heating oil burner. So a lot of things are relative.

JB: In the end, do you support the 2030 goals on GHG emissions and renewables proposed by the Commission or not?

ML: Again, they are a bit of wish list. But I need to distinguish a bit. If you look at our industry, oil and gas, in the refining sector 60% of our costs are energy related. So, it is in our interest to cut down on energy waste as much as we can. It is the same in the aluminium sector. So you have a lot of industries already that continuously improve on their energy consumption. Simply because it makes business sense and if you are located in Europe, it is one of the few remaining drivers you have of getting your costs down vis-a-vis global competition. This happens in many industries even without directives or any other special law.

But there are other sectors, for example the building sector, where you need to come up with a pragmatic concept that works. Just saying that energy efficiency measures are a low-hanging fruit, that they will finance themselves because it makes sense, that they are no-regret options, is too simplistic.

The goals have been set. It is now all about really finding pragmatic ways of making it happen
Take buildings for instance, in the case of an average country in Europe with a declining population, there won't be much new building stock being build. So, you are predominantly talking about better insulating existing building stock. Doing that retroactively is very inefficient and very expensive. If you take anyone that is younger than 30 they might not have the funds and they are not taking a loan out for this investment. Anyone older than 60 might not see the payback period any more. So you are looking at a fairly narrow slice of the population that can actually afford those measures and where they make economic sense as an investment.

You need to find a clever way of financing, but without giving excessive subsidies. And that is what politicians should concentrate on much more. The goals have been set. It is now all about really finding pragmatic ways of making it happen. And in those cases where the goal of the mission statement is unrealistic it needs to be fine-tuned.

JB: Supposedly, bearing in mind high energy prices, politicians don’t want to see more subsidies...

ML: Regarding renewables, I am not sure. I think for politicians supporting renewables almost comes naturally. It allows them to give out subsidies, not really a new business model for them. That is partially why, in Europe, you see such a mix of different measures regarding renewables. It is far from being harmonised.

JB: Was it not the Commission who motivated the member states towards the subsidies by the 20/20/20 strategy?

ML: The Commission is very much focused on trying to harmonise it, but it is difficult getting member states to agree on harmonising their laws...

Marcus Lippold became MOL Group´s Vice President for Business Strategy and Regulatory & Public Affairs in August 2013. Before joining the MOL Group, Marcus held various managerial positions at EXXON Mobil in the USA and Europe in the Mid- and Downstream. For 5 years he has worked for the European Commission’s Energy Directorate as Senior Energy Economist and Coordinator for EU international Energy policies. He holds a Master's degree in Economics from the University of Hamburg and an MBA from Solvay Business School in Brussels.

 

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