Domestic sector overviewState of the market
Describe the domestic natural gas sector, including the natural gas production, liquefied natural gas (LNG) storage, pipeline transportation, distribution, commodity sales and trading segments and retail sales and usage.
Croatia’s gas sales market has been fully open since 1 August 2008; as a result, all customers have acquired eligible customer status. This means that all customers have the legal right to choose their gas supplier and freely contract the quantity and price of the supplied gas. Currently there are 53 registered suppliers on the market. According to Eurostat, industry gas prices in the first half of 2019 amounted to €0.0299 kWh, while household prices amounted to €0.0375/kWh.
The changes in gas regulation with the aim to bring Croatia’s gas market in compliance with EU regulations started in 2013, when the previous Gas Market Act (Official Gazette Nos. 28/13, 14/14 and 16/17) entered into force, gradually implementing the EU Third Energy Package in Croatia, while the full implementation occurred on 1 April 2014.
On 3 March 2018 the new Gas Market Act (Official Gazette No. 18/18) (GMA) entered into force (with the exception of two subsections of article 111 regarding data reporting in gas supply contracts, which became effective on 2 May 2019), allowing further liberalisation of the Croatian gas market and implementation of relevant European regulations. The passing of this Act was crucial for the functioning of the Croatian gas market, as well as the broader energy market. It also laid the groundwork for the ongoing project of constructing an LNG terminal on the island of Krk, moving it closer to realisation. The new Act also extends the protection of households regarding gas prices and security of gas supply by means of regulating the household price until 1 October 2021. The regulated household price in the realm of public service is methodologically determined in a way that a maximum price is set for wholesale gas suppliers selling gas to public service suppliers. A transitional period of three gas years is granted, after which the wholesale suppliers’ role is to be removed and the Croatian Energy Regulatory Agency (HERA) is to take over the selection of public service suppliers through public tender procedures. One of the principal criteria for selection will be the margin imposed on households, which can be lower or equal to the margin determined by HERA using prescribed methodology.
The GMA (Official Gazette No 18/18) defines energy activities in the gas sector as: natural gas production, gas transport, gas storage, LNG terminal management, gas distribution, gas market organisation, gas trade, gas supply and LNG or CNG supply facilities operation. The Act differs between government-regulated energy activities and market activities. The latter include natural gas production, LNG/CNG supply point management, supply of gas to eligible customers and trading on the gas market so that the price and quantity of delivered gas is freely negotiated. On the other hand, transport, distribution, storage, supply of tariff customers, LNG terminal operation and gas market organisation are regulated activities and are performed as public service obligations. The non-discriminatory third-party access regime has applied since 2008.
According to the decision of 8 February 2019 rendered by HERA, the selected wholesale market supplier for the period from 1 April 2019 to 31 March 2020 is HEP dd, meaning it is entitled to buy gas at regulated prices from the national producer and sell it at regulated prices to public service suppliers. The regulated price is 0,0437 kn/kWh. Due to lack of interest from other suppliers, HERA rendered an additional decision on 28 October 2019 extending HEP’s role as the selected wholesale market supplier for the period from 1 April 2020 until 31 March 2021 with the regulated price at 0.0414 kn/kWh.
Just under 40 per cent of Croatia’s natural gas needs are met from domestic production. The only Croatian natural gas producer is the Croatian Oil and Gas Company, INA dd (INA), a partially state-owned and privatised company. INA exploits gas fields in northern Croatia and, in a joint venture with Italian company ENI, in the Adriatic Sea. The remaining natural gas has been exclusively imported from Russia for the past 30 years, and more recently, imports have begun from ENI. However, after the three-year contract expired with ENI in 2013, INA decided not to enter into any long-term contracts and turned to domestic gas sources and short-term contracts. Recently, INA bought the company Eni Croatia BV from ENI. The Italian energy company used Eni Croatia BV to participate in the joint project of gas production in the Croatian offshore exploitation areas Northern Adriatic and Marica. By acquiring Eni Croatia BV, INA became the full owner and independent operator of Croatian offshore exploitation areas North Adriatic and Marica.
Croatia has only one natural gas storage facility, owned and operated by Podzemno skladiste plina d.o.o., a company in the ownership of Plinacro d.o.o. (Plinacro), a state-owned company. In June 2016, Podzemno skladiste plina d.o.o. announced that work on modernisation of the storage facility had begun.
The transportation network is owned and operated by the state-owned transportation system operator (TSO), Plinacro. There are 35 different companies registered for the distribution of gas, mostly operating at the local level.
Lacking an LNG terminal, Croatia still has no LNG market. However, the construction of a floating LNG terminal on the island of Krk is in full swing and the terminal is expected to become fully operational on 1 January 2021. The necessary regulative preparation for this project came in the form of the Liquefied Natural Gas Act, which entered into force on 5 July 2018. The Act regulates the infrastructure of an LNG terminal, awarding concessions on maritime domain, expropriation of property, rules and actions regarding the LNG terminal realisation. The company in charge of the LNG terminal investments is LNG Croatia, which plans to carry out the project in two phases, the building of a floating LNG terminal followed by the building of an onshore LNG terminal. LNG Croatia was given a grant by the EU in the amount of €1,307,725 (85 per cent of the projected cost).Consumption
What percentage of the country’s energy needs is met directly or indirectly with natural gas and LNG? What percentage of the country’s natural gas needs is met through domestic production and imported production?
Natural gas currently meets around 28 per cent of Croatia’s energy needs. Croatia’s gas consumption has decreased by 25 per cent during the past decade due to general decline in domestic industrial production, however gas production is also increasingly falling because of deterioration of existing drills and failure to issue new licences for gas exploration and extraction. As a result, domestic gas production covers around 40 per cent of total natural gas consumption, while the remainder is imported.Government policy
What is the government’s policy for the domestic natural gas sector and which bodies set it?
The power industry is of special (national) importance in Croatia. The general guidelines of Croatia’s government policy regarding the natural gas sector are set out in the current Strategy of Energy Development (Official Gazette No. 130/09) (Strategy). However, a new Strategy of Energy Development of the Republic of Croatia, to 2030 with an outlook to 2050, is expected to be accepted this year. At the time the current Strategy was adopted, Croatia’s main aim was to adjust and prepare the energy sector in general, which included the natural gas sector, for accession into the EU and participation in the single EU market, but at the same time to preserve Croatia’s national interest. The idea behind the new Strategy is to ensure a transition to a new period of energy policy, providing accessible, safe and high-quality energy supply without burdening the state budget by subsidies and incentives, which proved troublesome in the past. The Strategy is to offer a wide spectrum of energy policy initiatives to enhance security of supply, gradually reduce energy losses and increase energy effectiveness, reduce fossil fuels dependency, boost domestic production and use renewable energy sources.
Croatia became a member of the European Union on 1 July 2013 and joined the EU energy market and one of its obligations during the accession process was the incorporation of the EU Third Energy Package. Thus, in 2012, new legislation was adopted governing the natural gas sector: the Energy Act (Official Gazette Nos. 120/12, 14/14, 95/15, 102/15 and 68/2018), the Energy Activities Regulations Act (Official Gazette Nos. 120/12 and 68/2018) and the Gas Market Act (Official Gazette No. 18/18). These acts incorporate the EU Directive 2009/73/EC and a number of EU regulations and were all last amended in 2018 to further align Croatian laws with EU legislation.
Since 2006, Croatia has been a party to the Energy Community Treaty (Official Gazette International Treaty No. 6/06). According to the Croatian Constitution, international agreements take priority over domestic laws and form an integral part of Croatian legislation.
In the new Strategy, Croatia acknowledges the important role of natural gas for transition to a low-carbon economy because it has the lowest emission of carbon dioxide of all the fossil fuels and the gas network can be used for decarbonised gas transport. Croatia’s aim is to achieve a higher level of security of natural gas supply by diversifying supply sources, especially bearing in mind that domestic production has been steadily decreasing in recent years owing to depleted reservoirs. The trend is expected to continue in this year, but provided that new exploration activities result in production, a gradual increase is likely to follow. Considering geological projections and potential new discoveries, natural gas production is to reach its maximum around 2035 after which another decline is to follow.
In 2015, Plinacro proposed and HERA approved the 10 Year Development Plan of the Croatian Gas Transmission System for the period 2018 to 2027. The main projects are the construction of the LNG terminal on the island of Krk in the North Adriatic and the Ionian-Adriatic Pipeline. Therefore, the construction of LNG storage capacities on the island of Krk, the finalisation of construction of the Croatian transportation network, connection to international pipelines and the construction of natural gas storages are recognised as strategic national projects.
On 30 July 2014, the Hydrocarbons Exploration and Exploitation Act (Official Gazette Nos. 94/13 and 14/14) entered into force. It introduced the possibility of production-sharing or royalty contracts after a unified unique licence tendering procedure for exploration with an automatic concession regime for the exploitation of oil and gas in Croatia (subject to commercial discovery). In 2014, the government announced the first offshore licensing round for licences for the exploration and production of hydrocarbons in the Adriatic, resulting in awarding of 10 licences. Two additional licencing rounds have been completed since, with bidders competing for seven exploration blocks in continental Croatia and four blocks in the Dinarides region respectively.
Croatia is also intensifying its efforts to implement the Ionian-Adriatic Pipeline (IAP) as a connection to the Trans-Adriatic Pipeline (TAP), which is receiving more support from the EU as an alternative gas supply route from Azerbaijan. It is expected that the construction of TAP will be completed this year and that the first Azerbaijani gas will enter Europe.
On 14 June 2018 a new Hydrocarbons Exploration and Exploitation Act (Official Gazette Nos. 52/2018 and 52/19) (HEEA) entered into force. According to the new Act, to engage in hydrocarbons exploration, one needs to be awarded a licence and enter into an agreement for the exploration and exploitation of hydrocarbons. Hydrocarbons exploitation can only be performed if one is awarded a licence for the exploration and exploitation of hydrocarbons and a licence for extraction of hydrocarbons or one already owns rights for hydrocarbons exploitation. Under the previous Act, the investor or holder of exploitation licence was also automatically granted concession rights; however, the new Act does not provide that option.
The LNG terminal on the island of Krk was declared a project of strategic importance for Croatia at a government session on 16 July 2015. Twelve EU member states in the Adriatic, Baltic and Black Sea area - including Croatia - signed the Three Seas Initiative, which indirectly supports the LNG terminal as one of the key projects in connecting the region, at a summit in Dubrovnik in August 2016.
The HEEA makes no distinction between conventional and unconventional oil and gas exploration or exploitation.Regulatory authorities
Which authorities make regulatory policies and decisions in respect of the production, transmission, distribution and supply of natural gas?
Regulatory policies governing the production, transmission, distribution and supply of natural gas are governed by the Ministry of Energy and, to a certain extent, by HERA. The Ministry prepares the strategy and legislation with respect to the natural gas sector, and implements laws enacted by the Parliament. The Ministry also enacts different gas market by-laws and regulations.
HERA is an autonomous, independent legal entity with public authority to regulate activities in the energy sector. It was founded by the Republic of Croatia and reports its activities to the Croatian Parliament. HERA’s business activities, authority and responsibilities are established by the Energy Activities Regulations Act (Official Gazette Nos. 120/12 and 68/2018), the Energy Act (Official Gazette Nos. 120/12, 14/14, 95/15, 102/15 and 68/2018), its Statute and acts regulating individual energy markets. It is partially a regulatory and partially a supervisory body. As a regulatory body, HERA, inter alia, grants different licences for the performance of energy activities, participates in natural gas policy design, organises and carries out tender procedures and settles disputes related to the carrying out of regulated energy activities.
Foreign companies must have a corporate presence with a registration for mining activities before the Ministry of Energy in the case of companies with an EU seat, and registration with the respective domicile authority.
The Ministry, as a government body, is independent of the natural gas business and industry. However, in the process of the preparation of natural gas legislation, it follows and accepts proposals from natural gas specialists. HERA is a non-profit institution and independent from the natural gas industry, since members of the HERA management board (and members of their family) cannot be owners of any company in the energy business or perform any other activity in that sector that may lead to a conflict of interest. They are also independent of government officials, since they cannot be members of Parliament, of local representative bodies or of the political parties’ main bodies.
HERA’s decisions are either final or appealable to the Ministry, depending on the matter in question. If HERA’s decision is final, it can only be challenged before the Croatian Administrative Court. The Ministry’s appellate decision can also be challenged before the Croatian Administrative Court.
The Ministry’s decisions are usually final. If a decision is final, it can only be challenged before the Croatian Administrative Court. Exceptionally, if it is provided by law, the Ministry’s decisions may be appealed back to the same Ministry, but also to the Appeal Senate as the second-instance authority.
HERA has the authority to conduct a supervision procedure within its jurisdiction. The supervision procedure is initiated by HERA of its own discretion, over energy entities, final customers and other legal and natural persons. The party under supervision has to cooperate with the Agency and supply all the necessary information so that the Agency can establish the facts. An appeal against a decree is not allowed, but an administrative procedure may be brought before an administrative court. Furthermore, HERA is authorised to impose a fine on a natural person or legal entity that, among others, violates the Act on the Regulation of Energy Activities, disrupts competition, discriminates against system users or denies connection to the electro-energetic gas network.
If a breach of the Act, or a rule issued pursuant to this Act, is established by supervision, the Agency may:
- file a motion to the competent authority in compliance with infringement laws;
- issue a misdemeanour order;
- file criminal charges for the offence to the competent authority; and
- take other measures or perform other actions within its jurisdiction based on the Act and regulations regarding energy and energy activities.
Based on the facts established during a supervision procedure, HERA makes decisions about temporarily or permanently revoking the licences to perform energy activities and may order certain actions to be taken or require a rectification of procedural deficiencies.
The Ministry of Energy is in charge of administrative control over the implementation of the Act. Inspectors and other state officials perform inspections over its implementation when special regulations apply.
Regulation of natural gas productionOwnership and organisation
What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?
According to article 4/3 of the HEEA, all hydrocarbons, including natural gas, are in the state’s ownership. The HEEA prescribes a unique tendering procedure ensuring that the successful bidder will be awarded an exploration licence.
Then, in compliance with the conditions listed in the licence, the investor is to enter into an agreement with the government for exploration and production sharing within six months of the day the exploration and exploitation licence was issued.
The agreement must be in compliance with the contents of the licence, and it prescribes all rights and obligations of the contracting parties as well as the rights and obligations arising from the exploration and exploitation licence. By holding the licence for exploration and exploitation the investor has the right to explore hydrocarbons and to be awarded a licence for production of hydrocarbons directly, provided that all contractual obligations are duly fulfilled. An investor is required to pay a fee for exploration and exploitation of hydrocarbons, geothermal waters, storage of natural gas and permanent carbon dioxide disposal, which may be comprised of a financial remuneration and a share of extracted hydrocarbons. The fee and the distribution ratio are determined by government regulation, based on a proposition by the Ministry. The tender must include a proposal for the cost of the exploration and exploitation agreement.
Furthermore, the Republic of Croatia has a pre-emption right over the hydrocarbons that are produced and belong to the investor. If the amount of hydrocarbons at the state’s disposal is insufficient for domestic market supply, the investor is obliged to sell any amount of hydrocarbons not bound by other sales contracts to whichever legal person the government decides.Regulatory framework
Describe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.
Natural gas exploration and exploitation is regulated by the HEEA. The implementing regulations are the Regulation on fees for the exploration and exploitation of hydrocarbons (Official Gazette Nos. 37/14, 72/14 and 52/18) and the Ordinance on the essential technical requirements, safety and protection of exploration and exploitation of hydrocarbons offshore (Official Gazette No. 52/18). The Mining Act (Official Gazette Nos. 56/13, 14/14,52/18 and 15/18) prescribes all rights and obligations pertaining to the mining aspect of the exploration and exploitation of oil and gas. On 7 July 2015, the Act on the safety of the offshore exploration and exploitation of oil and gas (Official Gazette No. 78/15) was passed. The law prescribes responsibilities regarding the prevention of major accidents in the exploration and exploitation of hydrocarbons and is fully compliant with EU Directive 2013/30/EC. According to article 5 of the Act, the licensee is financially liable for preventing and repairing environmental damage caused by gas activities offshore.
The new framework extracts hydrocarbons from other mineral rights. Neither mineral rights nor exploration and exploitation of hydrocarbons can be leased.
Pursuant to article 4/3 of the HEEA, all hydrocarbons, including natural gas, are under the state’s ownership. An exploration licence is issued for a maximum period of five years. At the investor’s request, the exploration period may be extended by two additional six-month periods if good reasons exist.
The maximum exploitation and exploration period is 30 years (five years for exploration and 25 years for exploitation; if the exploration period is extended, the exploitation period is shortened). Natural gas may be exploited only within the extraction field specified in the licence.
All activities in connection with the exploration and exploitation of oil and gas are monitored by the Inspectorate of the Ministry of Energy. The hydrocarbons agency (CHA) is a legal person with public authority that monitors the fulfilment of contractual obligations of chosen investors in compliance with the technological and ecological standards and conducts a strict supervision of hydrocarbons exploration and exploitation activities in Croatia.
Regulatory policies governing the production, transmission, distribution and supply of natural gas are governed by the Ministry of Energy and HERA (see question 4).Unconventional gas production
Are there different rules for, or any restrictions on, unconventional natural gas production (including fracking)?
No significant instances of unconventional commercial exploitation of hydrocarbons have been recorded in the European Union so far, so the only set of rules currently available is the European Commission’s Recommendation on minimum principles for the exploration and production of hydrocarbons (such as shale gas) using high-volume hydraulic fracturing (2014/70/EU).
The Framework plan and programme for onshore exploration and production of hydrocarbons issued by the Croatian Hydrocarbon Agency states that since the regulatory framework in the Republic of Croatia is not adjusted to the needs and special features of the hydrocarbon exploration and production using high-volume hydraulic fracturing, in accordance with the Commission’s Recommendation those types of mining operations cannot be authorised by the verified mining project and technical documentation until legal prerequisites are achieved. That refers to fracturing applied in shales injecting 1,000 cubic metres or more of water per fracturing stage or 10,000 cubic metres or more of water during the entire fracturing process into a horizontal well. Therefore, since there are no legal prerequisites, the current interest of the Republic of Croatia lies in the exploration of new hydrocarbon reservoirs and the development of conventional discovered hydrocarbon reservoirs, as well as the possibility of producing unconventional hydrocarbon reservoirs without disrupting the integrity of the wellbore and fracturing overlying rocks.
Prior to the commencement of works it is necessary to obtain assessments, permits, decisions, approvals (ie, all the necessary documents in accordance with the valid regulations pertaining to the areas of hydrocarbon exploration and production, mining, environmental protection, nature protection, construction and spatial planning, as well as maritime affairs, transport and infrastructure).Required security and guarantees
Are participants required to provide security or any guarantees to be issued with a licence to explore for or to store gas?
HEEA (article 16/6) prescribes that participants must provide a bid bond (in the form of a bank guarantee) to successfully participate in a tendering procedure (see question 5).
According to the latest bidding instructions titled Bidding round for granting licences for the exploration and production of hydrocarbons in the area of Dinarides of 30 January 2019 (amended on 10 April 2019), issued by the government (through the Ministry of Energy) and CHA, participants are obliged to provide a bid bond together with their bids to the amount of €500,000. The bid bond needs to be irrevocable and unconditional, delivered after the first invitation to tender and be valid for 360 days from the submission deadline, so that the first following day is taken as the beginning of that period.
The bid bond is collected if the bidder withdraws from the bid during the term of validity of the bid, gives false data, refuses to accept the licence or sign the agreement, or both, fails to deliver a guarantee for performing minimum work obligations and a guarantee for decommissioning of exploration block within the set time frame. The bid bond is returned to the investor upon delivery of all of the required guarantees that must be delivered within the deadlines stated in the agreement and to all other participants upon expiry of the validity of the guarantee (page 13, 3.3 of the Bidding round for granting licences for the exploration and production of hydrocarbons in the area of Dinarides and the Bidding round for granting licences for the onshore exploration and production of hydrocarbons).
Pursuant to article 95/1 of the Act on Exploration and Exploitation of Hydrocarbons, a financial guarantee must be delivered to the Ministry before a licence is issued for exploration or permanent disposal of carbon dioxide.
To be issued a licence for storing gas, the participants must, inter alia, provide a solvency certificate and a bank statement or equivalent proof regarding their financial ability to obtain the required funds (Appendix 1/9, page 24 of the Rules for Licensing in Energy Activities and Keeping Register of Issued and Revoked Licences in Energy Activities (Official Gazette Nos. 88/15, 114/15, 66/18).
Regulation of natural gas pipeline transportation and storageOwnership and infrastructure
Describe in general the ownership of natural gas pipeline transportation, and storage infrastructure.
The natural gas pipeline, which is approximately 2,693km long, is owned and operated by Plinacro, which is the TSO licensed with HERA for the 15-year period from 10 November 2009.
Croatia’s only natural gas storage facility, Okoli, with a capacity of 553 million cubic metres, is owned and operated by the storage system operator (SSO) Podzemno skladiste plina d.o.o., a company owned by Plinacro (licensed with HERA for gas storage until 21 January 2026).
Therefore, both transportation and storage infrastructure are directly or indirectly owned and operated by the state.Regulatory framework
Describe the statutory and regulatory framework and any relevant authorisations applicable to the construction, ownership, operation and interconnection of natural gas transportation pipelines, and storage.
The construction of transportation pipelines and storage facilities requires building, environmental, safety, administrative and other licences in accordance with general planning and building regulations.
The operation of and interconnection to transportation pipelines and storage are regulated by the GMA, the Gas Market Regulation (Official Gazette No 50/18), the General Conditions for Supply of Natural Gas (Official Gazette No. 50/18) (General Conditions), and other regulations and ordinances.
The national transmission networks are owned and operated by Plinacro (see question 9). Since natural gas transportation is a regulated, non-market activity, Plinacro has the sole power to construct and operate transportation networks. In accordance with the old GMA, Plinacro passed a five-year transportation system development plan, approved by the Ministry of Economy. Plinacro was granted a licence for natural gas transportation activities, issued by HERA.
Croatia’s single natural gas storage facility Okoli is owned and operated by Podzemno skladiste plina d.o.o. (see question 9). The storage of natural gas is also a regulated, non-market activity, therefore Podzemno skladiste plina d.o.o. has the sole power to construct and operate storage facilities. The SSO’s rights and duties correspond with that of the TSO’s (see above).
Regulatory policies governing the transportation, distribution and supply of natural gas are governed by the Ministry of Energy and, to a certain extent, by HERA (see question 6).Land rights
How does a company obtain the land rights to construct a natural gas transportation or storage facility? Is the method for obtaining land rights to construct natural gas distribution network infrastructure broadly similar?
Only Plinacro, as TSO, can obtain land rights to construct a natural gas transportation facility (see question 10). For construction of a pipeline over privately owned land, the land should be expropriated in an administrative proceeding and expropriation compensation paid to the owner, all in accordance with the Croatian Expropriation Act (Official Gazette Nos. 74/14 and 69/17). The expropriation can be made through transfer of ownership, or through servitude rights or temporary lease on the land in favour of Plinacro.
The same procedure is applied for construction of a storage facility or distribution network infrastructure.Access
How is access to the natural gas transportation system and storage facilities arranged? How are tolls and tariffs established?
Croatia has a regulated third-party access regime for its transportation and storage system based on non-discriminatory, objective conditions and published tariff methodology. The GMA provides that the TSO and SSO should reserve system capacities based on received requests for connection to the transportation system, and provide access to the free capacities to the natural gas producer, the system operator and consumers (to the extent of their own consumption).
The TSO and respective third party enter into a contract on connection to the transportation system, while the SSO concludes a contract on the storage of natural gas.
Access may be refused only in cases explicitly provided by the GMA (eg, in cases of lack of capacity). The refusal should be explained in writing, and the third party has the right of appeal against the transportation or SSO’s decision to HERA.
Transportation service rates are based on the methodology for determining tariff items for gas transmission (Official Gazette Nos. 85/13, 158/13, 118/15, 48/18 and 58/18). The transportation tariff methodology was devised by HERA, and outlines the principles and methods for calculating rates for natural gas transportation. It adopts an entry-exit tariff system.
Storage services rates are also based on HERA’s methodology for determining tariffs for the storage of gas (Official Gazette Nos 22/14, 18/18 and 48/18), which outlines the principles and methods for calculating the rates for the storage of gas. Pursuant to the government decision (Official Gazette No. 14/2014) on giving priority to storage capacity, HEP held 70 per cent of the storage capacity system until 31 March 2017. The current Act does not prescribe any regulations regarding the gas storage system operator’s obligation to distribute a certain percentage of the total number of standard storage capacity packages available to the wholesale market supplier.
According to the GMA, the Ministry of Energy shall determine the strategic storage capacity (ie, priority while making reservations or distribution of storage capacity for the chosen wholesale gas supplier).
In both cases, the tariff rates are set by HERA.Interconnection and expansion
Can customers, other natural gas suppliers or an authority require a pipeline or storage facilities owner or operator to expand its facilities to accommodate new customers? If so, who bears the costs of interconnection or expansion?
Customers can demand the pipeline or storage facility operator to expand its facilities only if they have previously been rejected from accessing the system owing to lack of capacity. The pipeline or storage operator must, within a reasonable time frame, make necessary alterations to its facilities to accommodate new customers, but only if such alterations are economically feasible or if the customer bears the total cost of interconnection or expansion (article 81/9 of the GMA).
The Ministry of Energy and the local administration are responsible for planning the expansion of transportation and storage facilities. The TSO and SSO are expected to pass a 10-year development plan, which should be approved by the Ministry (see question 3). By approving or disapproving an operator’s development plans, the government obliges the TSO or SSO to expand its facilities if it finds this to be necessary.Processing
Describe any statutory and regulatory requirements applicable to the processing of natural gas to extract liquids and to prepare it for pipeline transportation.
No such specific statutory or regulatory requirements exist. The processing of natural gas purely to extract liquids is not considered a separate energy activity and does not require an energy licence or consent. A distribution system operator is required to establish a system for monitoring gas quality parameters.
The General Conditions specify the standard quality of gas that should be supplied to consumers. Therefore, the processing of gas should result in standard quality gas, which should then be transported through pipelines to consumers.Contracts
Describe the contractual regime for transportation and storage.
In accordance with article 12 of the GMA, any gas market participants are required to regulate their mutual relations by contracts made in compliance with the GMA, gas market organisation rules, transport system network rules, gas distribution system network rules, rules for using the gas storage system, rules for using the LNG terminal, general gas supply conditions and the methodology for establishing the charge for connection to the gas distribution or transportation system and for the connection capacity increase.
The types of contracts that may be concluded on the gas market and their terms and conditions are outlined in the General Conditions and the Grid Code for the gas transportation system (Plinacro NN 50/18). As for the provisions of the Grid Code, there are two types of contracts: contracts on connection to the transportation system and contracts on transport of gas.
The contract for connection to the transportation system is entered into by the transport system operator (TSO) or distribution system operator (DSO), the operator of a refuelling point for LNG or CNG, closed distribution system organiser or gas storage system operator or natural gas producer or gas storage system operator or natural gas producer or LNG operator or the final customer in the transportation system connection procedure or in the connection capacity increase procedure.
The TSO is obliged to connect the respective user to the system and the user is obliged to pay the connection fee. This contract must contain, inter alia, information on the technical specifications for connection, the connection fee, the payment terms, the deadline for connection to the system and the connection place and time.
Under the contract on transport of gas, the TSO is obliged to provide transport services to the system user within its reserved capacities, while the system user is obliged to pay a regulated fee. Under the contract on gas transportation, the transportation system user is obliged to pay a regulated fee for use of the transportation system, while under the contract on gas transportation to interconnection, the transportation system user is obliged to pay a fee on the basis of allocation of interconnection capacity through an auction process via the platform. Integral parts of the contract are the General Conditions on transportation system use and the notification on transportation system disposition capacitance. The contract on storage of natural gas is concluded between the SSO and the gas supplier, trader or transport system operator for the storage of gas. The contract should contain clauses regarding, inter alia, the storage conditions, the tariff, the payment terms, the time of delivery of gas into the transportation system, the working volume and the reserved capacity. The periods for which the contract may be concluded are the same as for the contract on transport of gas.
All the above-mentioned contracts are standard contracts published on the respective operators’ websites.
Regulation of natural gas distributionOwnership
Describe in general the ownership of natural gas distribution networks.
Natural gas distribution networks are operated by DSOs, which hold respective distribution energy licences from HERA and concessions for natural gas distribution granted by local municipalities. There are 35 registered DSOs in Croatia, most of which are completely or partially owned by local municipalities. DSOs operate more than 19,500 km of Croatia’s distribution network. The distribution network is mainly owned by the municipalities and operated by DSOs on the basis of concessions. A part of the distribution network is privately owned by DSOs.Regulatory framework
Describe the statutory and regulatory structure and authorisations required to operate a distribution network. To what extent are gas distribution utilities subject to public service obligations?
Natural gas distribution is regulated by the GMA, the Gas Market Regulation, the methodology for determining tariff items for the gas transportation (Official Gazette Nos. 48/18 and 58/18) and other regulations and ordinances.
According to the GMA, the distribution of natural gas is a regulated, non-market activity performed as a public service obligation. DSOs must provide equal, non-discriminatory access to the distribution network to all potential customers.
A DSO must hold a distribution energy licence from HERA and a concession for natural gas distribution granted by the local municipality. The concession is granted for at least 20 years and up to a maximum of 50 years in a public tender process.
Regarding regulatory policies, the regulator and its legal tools, see question 6.Access and pricing
How is access to the natural gas distribution grid organised? Describe any regulation of the prices for distribution services. In which circumstances can a rate or term of service be changed?
Access to the natural gas distribution grid is organised in the same manner as access to the transportation and storage network (see question 12).
The distribution services rates are set in the Tariff System for Natural Gas Distribution (Official Gazette Nos. 122/16, 14/17, 127/17 and 48/2018) rendered by HERA. The rates are set by HERA and for each energy subject (DSO). The tariff system in the distribution is based on the postage stamp principle.
General terms of service are provided by relevant legislation - the GMA, the Gas Market Regulation, the General Conditions and the Grid Distribution Code - and may be changed only by amendments to the above-mentioned legislation. Distribution contracts should be standard contracts, and therefore not subject to negotiations between the DSO and the consumer.System/service expansion and limitation
May the regulator require a distributor to expand its system to accommodate new customers? May the regulator require the distributor to limit service to existing customers so that new customers can be served?
See question 13 in respect of distributors expanding their systems to accommodate new customers.
There is no provision that would allow the regulator to require the DSO to limit service to existing customers so that new customers can be served.Contracts
Describe the contractual regime in relation to natural gas distribution.
For connection to the distribution system, an agreement for connection to the distribution system (article 53 of the Grid Code for the gas distribution system (Official Gazette No. 74/18) is entered into by the DSO and the investor in the connection (investor or owner of the building to be connected to the distribution system, including the organisers of the closed distribution system). Under this contract, the DSO undertakes the obligation to connect the respective user to the system, and the user must pay the connection fee. This contract contains data on contracting parties, the technical requirements on connecting equipment and other technical data for connection, the connection fee, the payment terms, the terms of construction of the connection, the time and place of the connection, and other provisions.
The contracting parties of the gas distribution agreement are the DSO and the final customer. This contract regulates distribution services and financial obligations, all in accordance with the Grid Code. The contract on gas distribution contains data on contracting parties, the conditions of gas distribution, the provisions on the quality of gas supply, the restrictions of gas supplies, the provisions concerning the calculation and payment of fees for use of the distribution system, and other provisions. General conditions for distribution system use can be found in Appendix 3 of the Grid Code and are a constituent part of Grid Code and gas distribution agreement.
The above-mentioned contracts should be standard and are published on the DSOs’ websites.
Regulation of natural gas sales and tradingOwnership and organisation
What is the ownership and organisational structure for the supply and trading of natural gas?
Supply of gas to eligible customers and natural gas trading are market activities, while supply of gas to tariff customers is a regulated, non-market activity. On 1 August 2008, all consumers became eligible customers, meaning that each customer may freely choose its natural gas supplier and change it free of charge (see question 1).
Croatia has 53 registered natural gas suppliers, most of which are universal service providers. The GMA should have allowed free choice by the suppliers; however, the GMA left the possibility for the government to regulate this activity, making the elected entity the only wholesale market supplier until 1 October 2021, while, HERA will choose, after consultations with the Ministry, suppliers through a tender procedure (see question 1).
The majority of suppliers perform their activity in a certain region, while there are only a few larger utilities that supply customers in several regions (eg, HEP-Plin d.o.o., Prvo plinarsko drustvo d.o.o.). The suppliers are usually completely or partially owned by local municipalities.
Only 10 foreign-owned companies are registered as natural gas traders in Croatia (eg, RWE Supply & Trading GmbH, gaSolutions GmbH, AXPO BULGARIA EAD).Government oversight
To what extent are natural gas supply and trading activities subject to government oversight? What authorisations are required to engage in wholesale trading of gas?
Supply and natural gas trading are also energy activities subject to licensing by HERA. HERA, inter alia:
- ensures that all licensing requirements are fulfilled;
- ensures the quality of suppliers’ service;
- ensures the application of regulated tariffs;
- initiates misdemeanour proceedings in cases of non-compliance with the legal provisions; and
- issues opinions to the Ministry of Energy on general terms and conditions for the supply of customers.
To engage in energy activities, a legal or natural person needs to acquire a licence for performing energy activities from HERA. The Agency may award legal or natural persons the licence for performing energy activities if they are registered to perform energy activities in the Republic of Croatia and they fulfil the technical qualification conditions, professional competence conditions and financial qualifications prescribed by the Rules for Licensing in Energy Activities and Keeping Register of Issued and Revoked Licences in Energy Activities (Official Gazette Nos. 88/2015, 114/2015 and 66/2018).
HERA has the power to revoke suppliers’ or traders’ licences in cases prescribed by the law.
Local municipalities and the Ministry of Economy are responsible for monitoring the security of supply. Therefore, the supplier and trader are obliged to provide the Ministry with a yearly report on the security of supply and provide other relevant statistical data.
General terms and conditions on supply of natural gas set by the respective supplier must be in accordance with the General Conditions.
According to the GMA, during the three-year transitional period the designated supplier on the wholesale market will supply the suppliers in the public service domain at the regulated price. When the transitional period expires, the role of the designated wholesale supplier will be removed.Trading processes
How are physical and financial trades of natural gas typically completed?
Physical trades of natural gas are typically completed by individual delivery agreements concluded between the natural gas supplier, gas trader or gas producer, and the other gas supplier or gas trader. According to the GMA and general conditions, such contract must contain, inter alia, conditions regarding supply, the price of delivered gas, the amount and quality of delivered gas, the payment terms, the deadline for delivery, and the delivery place and time.
Prvo plinarsko drustvo d.o.o., as Croatia’s largest natural gas supplier (see question 21), publishes its standard contractual terms for the supply of natural gas on its website.
Financial trades of natural gas are not yet common in Croatia.Available services and products
Must wholesale and retail buyers of natural gas purchase a bundled product from a single provider? If not, describe the range of services and products that customers can procure from competing providers.
No, there is no single provider of natural gas commodity and transmission or distribution services. Wholesale and retail buyers can freely purchase gas from different suppliers. Transportation services are provided by the TSO, Plinacro, which has a legal obligation to provide non-discriminatory access to potential consumers. Distribution capacities can be booked from different DSOs.
Trading with natural gas on the Croatian market is still in its infancy; so, the range of services and number of providers is limited.
Regulation of LNGOwnership and organisation
What is the ownership and organisational structure for LNG, including liquefaction and export facilities, and receiving and regasification facilities?
At present, LNG is not used in Croatia, and Croatia does not have liquefaction and export facilities or receiving and regasification facilities. Construction of an LNG terminal, now as a floating terminal, is recognised by the government as a strategic energy project. The national electricity company, HEP, and Plinacro founded LNG Croatia with the purpose of building an LNG terminal on the island of Krk. The capacity of the terminal should have been around 6.5 billion cubic metres per year, but it would appear that a floating terminal with a 2.6 billion cubic metre per year capacity is more likely to happen.Regulatory framework
Describe the regulatory framework and any relevant authorisations required to build and operate LNG facilities.
The building of LNG facilities requires construction, environmental, safety, administrative and other licences in accordance with the general planning and building regulations.
According to the GMA and Energy Licence Regulation, an operator must hold an energy licence issued by HERA for the operation of an LNG terminal.
For legal tools, see question 6.Pricing
Describe any regulation of the prices and terms of service in the LNG sector.
Since the operation of an LNG terminal is a regulated activity performed as a public service obligation, HERA sets out the prices. The prices of service are regulated by the tariff methodology on unloading and send out of liquefied natural gas (Official Gazette No. 48/18) rendered by HERA on 25 May 2018. Following the said tariff, HERA rendered the decision on indicative tariff items on unloading and sending out of liquefied natural gas to LNG Croatia on 20 June 2018.
Regarding the terms of service, the GMA and General Conditions apply, meaning that the principles of the non-discriminatory third-party access regime are also relevant to the LNG sector. However, new infrastructure facilities like interconnectors, the gas storage system and the LNG facility may be exempt for a defined period of time from the application of the right to third-party access upon a request of a natural or legal person, from applying the adequate methodology for determining tariffs and from the obligations of unbundling transmission system operators under certain conditions. The decision on exemption for a new infrastructure facility shall be reached by HERA, but made final with the confirmation from the European Commission, which may request modifications or revocation of HERA’s decision to grant an exemption for the new infrastructure facility.
Mergers and competitionCompetition authorities
Which government body may prevent or punish anticompetitive or manipulative practices in the natural gas sector?
The Croatian Competition Agency (CCA) and the Croatian Financial Services Supervisory Agency (HANFA) are responsible for acquisition and merger control in general, including in the natural gas sector. HERA controls the eligibility of parties participating in acquisitions and applies a system of measures for protection of energy market competition.
HERA, in establishing and implementing the system of regulation of activities that are performed as public services, is obliged to apply measures for the protection of basic rights of consumers in accordance with special laws. HERA is also obliged to apply the rules and a system of measures for the protection of market competition with regard to natural gas matters. It is authorised to supervise, inter alia, the degree of transparency and market competition and, where necessary, demand the implementation of specific measures.Competition standards
What substantive standards does that government body apply to determine whether conduct is anticompetitive or manipulative?
There are no specific criteria that apply to the energy sector that define anticompetitive or manipulative conduct. Regulated energy activities are regulated on the principles of transparency, objectivity and non-discrimination, while market energy activities are regulated according to the principles of market competition. Therefore, the Competition Act (Official Gazette Nos. 79/09 and 80/13) applies to energy market activities. The Competition Act prohibits entry into agreements that, inter alia: directly or indirectly fix purchase or selling prices, or any other trading conditions; limit or control the market; or share markets or sources of supply. Further, abuse of a dominant market position is also prohibited, as well as concentration of undertakings.Enforcement
What authority does the government body have to preclude or remedy anticompetitive or manipulative practices?
HERA has the power to withdraw licences for the performance of energy activities (for instance, if the supplier does not apply the prices set by the methodology). HERA also issues other legally binding orders in accordance with the law.
The GMA prescribes fines for any misconduct, including anticompetitive or manipulative practices (for instance, if the TSO or DSO unlawfully deny access to the grid). The fines are imposed by the State’s Inspectorate. In the case of recidivism, energy undertakings may be suspended from carrying out licensed activities for up to a year.
According to competition law, the CCA issues legally binding orders through which it prohibits anticompetitive conduct. Finally, the CCA is authorised to instigate misdemeanour court proceedings in cases of violation of the Competition Act.
HANFA is also authorised to instigate misdemeanour court proceedings in cases of takeover irregularities.Merger control
Does any government body have authority to approve or disapprove mergers or other changes in control over businesses in the sector or acquisition of production, transportation or distribution assets?
The CCA and HANFA are the respective authorities in the acquisition and merger control sector (see question 28).
Procedures, criteria and time limits for review of transfers of control are set out in the Competition Act (Official Gazette Nos. 79/09 and 80/2013) and the Act on the Takeover of Joint Stock Companies (Official Gazette Nos. 109/07, 36/09, 108/12, 90/13, 99/13 and 148/13).
Pursuant to the Competition Act, the review procedure is performed by the CCA. The procedure is initiated ex officio or upon the request of any party having a legal or economic interest.
Upon carrying out the procedure provided for by the Competition Act, the CCA issues a decision through which it either approves or refuses a transaction. The CCA will block a transaction in the case of a prohibited concentration, referring to those undertakings that can significantly influence the prevention, restriction or distortion of competition. The CCA should issue a decree within three to eight months of the proceeding being initiated, depending on the type and complexity of the case in hand.
HANFA supervises the takeover of joint stock companies and the application of the Act on the Takeover of Joint Stock Companies. If takeover irregularities are identified, HANFA may impose measures provided for by law, such as declaring the takeover bid invalid, or instructing revision, supplementation or withdrawal of the takeover bid.Price restrictions
In the purchase of a regulated gas utility, are there any restrictions on the inclusion of the purchase cost in the price of services?
Prices for regulated gas activities are set by the methodology rendered by HERA (see questions 12 and 18). The purchase cost of a regulated gas utility is not included in the formula for calculation of a regulated service price as per the tariff methodology currently in force.Corporate governance regulations
Are there any restrictions on the acquisition of shares in gas utilities? Do any corporate governance regulations or rules regarding the transfer of assets apply to gas utilities?
There are no special legislative restrictions on the acquisition of shares in gas utilities, but general merger control principles apply (see questions 28 and 30). However, the TSO, Plinacro and the SSO, Podzemno skladiste plina d.o.o., are directly or indirectly state-owned companies, and the acquisition of shares would only be possible in a privatisation process approved by the government under the relevant privatisation legislation. No such legislation has been adopted so far.
No specific corporate governance regulations or rules regarding the transfer of assets of gas utilities apply. However, in the case of a transfer of assets essential for performing the licensed activity, the gas utility may lose its energy licence from HERA. The new owner of assets may obtain the same licence from HERA if it fulfils other requirements (personnel, financial, technical, etc) set by the Energy Licence Regulation.
Are there any special requirements or limitations on foreign companies acquiring interests in any part of the natural gas sector?
There are no special requirements or limitations in the natural gas sector regarding acquisitions by foreign companies, but general merger and acquisition laws apply (see questions 28 to 33).International agreements
To what extent is regulatory policy affected by treaties or other multinational agreements?
According to the Croatian Constitution, international agreements take priority over domestic laws and form an integral part of Croatian legislation. Since 2006, Croatia has been a party to the Energy Community Treaty (Official Gazette International Treaties No. 6/06), and Croatia ratified the Kyoto Protocol in 2007. Because of its accession into the EU, Croatia has adopted acquis communautaire in the energy sector, including the natural gas sector, and implemented the relevant EU directives into its legislation.Cross-border sales and deliveries
What rules apply to cross-border sales or deliveries of natural gas?
There are no specific rules that apply to cross-border sales and deliveries of natural gas. Undertakings having a natural gas supply and trade energy licence are also eligible for cross-border supply.
Transactions between affiliatesRestrictions
What restrictions exist on transactions between a natural gas utility and its affiliates?
The GMA has adopted a legal unbundling concept, meaning that transportation, distribution and the SSO must be independent from one another and from other gas market activities. Cross-subsidisation of companies engaged in regulated activities and those engaged in market activities, and cross-subsidisation of activities within the same company, is prohibited by the GMA. However, this does not affect the parent company’s ability to approve the annual financial plans of its affiliates and to set the limits of their possible indebtedness, but it cannot give instructions relating to their everyday operation. General non-discrimination principles and a prohibition of abuse of dominant position set out by relevant competition law provisions also refer to transactions between parent companies and their affiliates in the natural gas sector.Enforcement
Who enforces the affiliate restrictions and what are the sanctions for non-compliance?
HERA supervises whether the principles of legal unbundling have been followed and may demand their implementation.
The CCA oversees enforcement of competition law provisions (see questions 28 to 30).
Update and trendsOther regulatory developments of particular relevance to the gas sector
Describe any other recent regulatory trends and developments of particular interest to those operating in the domestic natural gas sector.Gas sector-specific regulation39 Describe recent trends and developments in the regulation of the domestic natural gas sector.
As in previous years, the natural gas sector in Croatia was marked by further market liberalisation and further advances in amending existing by-laws. Many important events for Croatia’s gas market occurred in 2018, while 2019 saw the completion of processes already in motion. The previous year noted the implementation of the legislative package ‘Clean energy for all Europeans’ (Clean Energy Package, CEP) throughout the European Union, which for Croatia meant a full revision of implementing regulations in the gas sector following the enactment of the new Gas Market Act, with special focus on acts and decisions pertaining to the preparations for building an LNG terminal on the island of Krk.
Implementation of the Commission Regulation (EU) 2017/460 establishing a network code on harmonised transmission tariff structures for gas, prescribed obligations for Croatia, based on which HERA, as the national regulative body, reached the Decision on elements of Methodology for establishing a referential price for gas transport services and the Decision on discounts, multipliers and seasonal factors in May 2019. Amendments to the Methodology for establishing the amounts of tariff structures for gas transport will be made in accordance with these Decisions.
The past year in Croatia was also marked by the process of adopting the new Strategy of Energy Development until 2030, with an outlook to 2050. At this point the plan has still not been adopted, but the draft version is available as well as the Green Paper and the White Paper, two analyses issued by the Hrvoje Požar Energy Institute, which served as the platform for the preparation of the strategy. The strategy encompasses different energy initiatives with the aim of gradually reducing energy losses, increasing efficiency, decreasing fossil fuel dependency, enhancing domestic energy production and use of renewable energy sources. There is a strong focus on renewables in the strategy. However natural gas is still expected to play an important role for transition to low-carbon economy because it has the lowest emission of carbon dioxide of all the fossil fuels and the gas network can be used for decarbonised gas transport.
The strategy’s goals, among others, include reducing dependence on energy imports and strengthening the supply of energy products by developing strategic infrastructure, one of such projects being the aforementioned LNG terminal on the island of Krk. The project has been ongoing for several years with recent developments finally announcing its completion on 1 January 2021. The proposed project, which is in large part financed through an EU grant (€1.4 million, 85 per cent of the original projected cost), includes the building and operation of infrastructure necessary for receiving, storing, reloading and regasification of liquefied natural gas. Its purpose is to secure energy needs and increase security of gas supply through provision of a new gas supply route for central and southeastern European countries.
Meanwhile, Croatia’s first liquefied natural gas (LNG) filling station for trucks and utility vehicles was opened in Kukuljanovo, inland from the northern coastal city of Rijeka, an important step in establishing infrastructure for alternative low-carbon fuels. The project is part of a €2.5 million Croatian-Slovenian investment, including three filling stations in Croatia and Slovenia.
Croatia’s efforts to ensure optimum production of its mineral resources and promote investments in new hydrocarbon exploration and production started to intensify back in the early 2010s. There were three onshore bidding rounds for granting licences for exploration and production of hydrocarbons planned, one of which was completed in 2016 and resulted in five production sharing agreements. The remaining two tender procedures were conducted in 2018 and 2019, offering seven exploration blocks in the Pannonian Basin and four blocks in the Dinarides region respectively.
The activities have recently started to yield results. There were three commercial gas discoveries reported in the summer of 2019 as a result of the first bidding round, while the other rounds are attracting investors. The Pannonian Basin tender resulted in the awarding of four licences, two to Croatian companies and two to foreign ones (INA - Industrija nafte d.d., Crodux derivati dva dd, Canada-based Vermilion Zagreb Exploration d.o.o. and Aspect Croatia, a subsidiary of the American company Aspect Energy Holdings). The last bidding round was completed in September 2019 with one offer received - its evaluation currently in process.
It can be concluded that Croatia’s gas market will see more changes in the coming years directed towards further market development, competitive prices, protection of end customers and enhancing the security of gas supply.Other regulatory developments of particular relevance to the gas sector40 Describe any other recent regulatory trends and developments of particular interest to those operating in the domestic natural gas sector.
During the past couple of years, the focus in the Croatian gas sector has been mostly on adapting the existing legislature and regulations to align them with EU legislation. Several new acts and by-laws have been passed. However, other areas have yet to reflect the latest developments. Consequentially, no particular recent trends in relation to those involved in the gas sector have been recorded in other areas at the time of writing this chapter.
There are existing laws with partial relevance for the sector, such as the 2010 Flammable Gases and Liquids Act (Official Gazette Nos. 108/1995, 56/2010), which prescribes how to pack, mark and store such matters, requirements for gas installations in buildings, requirements for persons working with flammable gases, etc, and the Environmental Protection Act (Official Gazette Nos. 80/2013, 153/2013, 78/2015, 12/2018, 118/2018), which regulates all types of interventions impacting the environment. The Occupational Health and Safety Act (Official Gazette Nos. 71/2014, 118/2014, 154/2014, 94/2018, 96/2018) prescribes the manners of dealing with dangerous substances, precautions, obligations of employers, etc.