Croatian LNG in jeopardy?

(LNG Hrvatska, Public domain)

The Croatian Ministry of Environmental Protection and Energy announced the proposal of a special Liquefied Natural Gas Terminal Act, which would directly assign LNG Croatia's maritime concession to the floating LNG terminal.

The Croatian parliament adopted the Act on June, 2018. According to the new legislation an investor will also be able to obtain the expropriation on the land necessary for the construction of the accompanying infrastructure, as well as for the construction of the LNG bunker gas station at Petrol Harbor in Rijeka. The LNG terminal is defined as “undoubtly strategic interest of the Republic of Croatia” and the adoption of a special law is explained by the fact that the “strategic energy infrastructure in the industrial port area of special purpose necessitates specific resolution of concession on the maritime utility for the oil and gas terminals on the island of Krk and issuing a concession for a subproject for the construction of a supply site in Rijeka and more detailed prescribing of the accompanying infrastructure for liquefied natural gas”, and the need to” regulate “the issues mentioned within Croatian legislation.

As the strategic interests of the Republic of Croatia include the security of gas supply through LNG terminals, in accordance with the EU Natural Gas Storage Strategy and the Safe Energy Supply Strategy of the EU. Regarding the supply point in Rijeka, the law states that “for the purpose of introducing liquefied natural gas (LNG) as environmentally acceptable propulsion fuel in maritime, river and heavy truck traffic, the interest of the Republic of Croatia will ensure the realization of the construction site for LNG supply in Port of Rijeka, as a subproject of the LNG terminal on the island of Krk.” Additionally, the infrastructural importance of the port of Rijeka is closely connected to the largest interregional proactive political and economic initiative of the Croatian government and president, the Three Seas Initiative, in cooperation with Poland, Romania, and Hungary. The Port of Rijeka is in that plan strategically one of the most important points. This joined Croatian-Polish initiative is a part of the Croatian goal to be closer or to join the Višegrad Group and develop its Central European regional policy.

For the project holder, the legislation designated a company LNG Croatia, which will design the LNG terminal construction project in two stages, floating in the first stage, and land construction in the second stage, as well as the bunker station in the Rijeka port, provided that the floating terminal cannot be taken over from this company in the ten year period from day of commissioning.

Before the Act was adopted the Croatian government experienced a tough blow. On April 2018, the final deadline for the first round of tenders for the submission of binding bids for the lease of the future terminal capacity has expired, and the results of the competition are negative. According to unofficial information, LNG Croatia received only one binding offer that included a modest capacity, reportedly only 100 million cubic meters (mcm) of natural gas annually. According to the same unofficial confirmation within the Croatian economy circles, this was an offer of the Croatian national oil company INA. Since the planned terminal capacity is about 2.4 billion cubic meters (bcm) of gas per year, it appears that potential customers can buy just over 4 per cent of the total capacity – the amount significantly below the level that would allow the financial viability of the investment. It shows that the biggest obstacles to the realization of this strategically important energy project are neither ecological, geopolitical nor land-legal, but merely of market-commercial nature.

The key unknown fact in the current development of the LNG terminal project development was whether there are companies who are ready to commit themselves financially for twenty years to the use of the terminal. The outcome of the first round of lease tenders offers a depressing response and significantly exacerbates the perspective for the realization of the project.

The project is designed in such a way that roughly a third of costs are covered by the European Union’s funds, a third by private or public-private partnership, and a third from a loan to be paid out of the future terminal income. As the total predicted value of the project is approximately EUR383m, it is estimated that another EUR282m will have to be provided. In principle, this means that investors and banks have to provide EUR140m (the ratio may be different). For the LNG Terminal Project the European Union has approved EUR102m of non-refundable assistance, and even the US President Donald Trump spoke about the importance of the Krk terminal. The situation in which the project collapses due to a lack of interest in its use is, therefore, also politically unpleasant for the Croatian PM Andrej Plenković and his government.

Without the entrepreneurs who will buy gas at the terminal and continue to sell it, there is no doubt there will be no terminal, because their interest depends on the interests of the investor. A potential investor is Marguerite fund, which is made up of six major European financial institutions, but it is illusory to expect investors to enter a terminal that does not have leased capacities, as profits are paid out of the rental tariffs. Earlier calls for delivery of non-binding bids, ten companies were interested to lease, allegedly, more capacity than the terminal could offer – 2.6 bcm of LNG per year.

The market does not care for complications, and especially delays. In 2016, potential investors and the financing funds were presented with a plan stating that a land terminal would be built in September 2019. Suddenly, the project is turned into a floating terminal and set the start of operation to 2020. Investors, as well as leasing companies, do not mind what kind of terminal Croatia will have, as long as it is “diluted” with LNG, but it is disturbed by the change in plans and the delay. Leaseholders are companies that need new sources as soon as possible. They were obsessed with the Krk terminal, but now that they see it moving all the way to 2020, the local community in equally impatient, and the other complications will give up.

The prefect (župan) of Primorje-Gorski kotar County, where the island of Krk is located, Zlatko Komadina, announced that the county authorities will ask for an approval of the County Assembly to initiate an administrative dispute that would disprove the groundwork of the environmental impact study for the project of the floating LNG terminal in Omišalj on Krk. He argued that the commercial approach to the construction of the LNG terminal was unjustified, pointing out that national interest should be addressed by national means or by EU funds, if the priority is the supplies security of Croatia and other countries. “Exit to the benefit of the state-owned company, which is envisioned by the new law, is only on paper in favor of the state, because tomorrow it may be a private company,” Komadina stressed. He claims that the recent Environmental Impact Study, which has been released to the public, proved that the land terminal is safer, more cost-effective and more environmentally friendly, and would bring the development of this area and environmental safety.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.

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