From strategic partners to international disputes

The relationship between INA (the national oil and gas company) and MOL (Hungarian Oil and Gas Plc) goes back to 2003, when INA was privatised through a public procurement process in which MOL acquired 25% of INA, plus one of its shares (for further details please see "MOL offer to purchase INO shares raises concerns for energy sector"). By 2011 MOL had acquired additional shares and become INA's largest shareholder, with a total of 49.08% of its shares.

According to INA's privatisation plan, MOL was supposed to be a strategic partner, enabling further growth and easier access to resources and markets. However, 13 years later, the Croatian government and MOL are in two international disputes over INA – the first of which ended badly for the government.

Arbitration proceedings

The disputes centre on:

  • the 2009 first amendment to the shareholders agreement, which gave MOL management control of INA, despite MOL's shares being below 50%; and
  • the 2009 gas master agreement under which the government was meant to take over INA's loss-making gas storage and supply business.

The most controversial issue is the circumstances under which these agreements were made. According to the government, MOL Chair Zsolt Herna´di's bribed former Prime Minister Ivo Sanader into giving MOL management control over INA.

In 2013 MOL initiated arbitration proceedings against the government before the International Centre for Settlement of Investment Disputes (ICSID) in Washington, DC claiming that the government had breached its obligations with regard to MOL's investment in INA – that is, the government allegedly failed to:

  • comply with gas master agreement with regard to taking over INA loss-making gas trading business; and
  • purchase all of INA's domestic gas production at market prices within 15 years.

Following these claims, the government initiated arbitration proceedings against MOL before the United Nations Commission on International Trade Law (UNCITRAL) in Geneva in 2014, requesting that the 2009 agreements (ie, the shareholders agreement and gas master agreement) be declared null and void since they were concluded by way of corrupt practices and that MOL pay subsequent damages.

While the ICSID has yet to reach a decision on MOL's claim (expected in mid-2017), in December 2016 UNCITRAL stated as follows: "Croatia's claims based on bribery, corporate governance and MOL's alleged breaches of the 2003 Shareholders Agreement are all dismissed."

The reason for this decision appears to be a lack of proof regarding the corrupt practices in relation to procuring the 2009 agreements. In particular, the Croatian Constitutional Court annulled a decision in which Sanader was accused of taking a bribe from MOL in exchange for signing the 2009 agreements, leaving Sanader without a formal corruption conviction. Further, INTERPOL cancelled the international arrest warrant against Herna´di.

The government has strongly opposed the decision, initiating proceedings to have it annulled and filing a request to postpone execution of the award until the Swiss Federal Court rules on the appeal. The postponement mainly referred to the procedural costs of the arbitration proceedings, which were significant. The request for postponement was rejected, while the decision on the appeal is expected in the upcoming period.

Government to regain ownership and full control of INA

Following the arbitration decision, the prime minister announced that the government will initiate the process to buy-out MOL's shares in INA, which he cited as Croatia's strategic national company, and to restore full control over INA.

MOL representatives have already been notified of the government's plan; however, they have not yet commented.

The problem that the government faces is how to buy the shares without increasing the already high external debt. To do so, the government is considering selling 25% of state-owned electricity undertaking HEP in an initial public offering.

The government appointed a special committee to seek the best solution for the buy-out.

Although the privatisation of HEP has been on the cards for decades, it appears that this decision is merely an attempt to save INA.

Some government coalition partners do not support the buy-out through the sale of HEP in a time when economies are abandoning the use of fossil fuels. Further, experts are warning not only that selling HEP would fail to raise enough money, but also that the buy-out is almost impossible without increasing the external debt. Concerns have also been raised over the real value of INA, MOL's willingness to sell back the shares and whether Croatia will even benefit from INA's nationalisation.

Finally, following the announcement of this decision, INA's shares have jumped by almost 10% on the Zagreb stock exchange.

For further information on this topic please contact Miran Macešic or Ivana Manovelo at Macešic & Partners by telephone (+385 51 215 010) or email (mmacesic@macesic.hr or manovelo@macesic.hr). The Macešic & Partners website can be accessed at www.macesic.hr.

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