Offshore Energy Today had a chat with Croatia’s Minister of Economy, Ivan Vrdoljak, where we discussed Croatia’s recent offshore lease sale for exploration and exploitation of hydrocarbons in the Adriatic and the subsequent award of ten offshore licences.
OET: Croatia awarded ten offshore licenses in January 2015. How many bids did you receive? What were the conditions that the companies which applied had to fulfil in order to get the licenses and what were the main criteria for getting it?
Vrdoljak: The first licensing round was closed on November 3, 2014. We received six offers for 15 exploration areas. After evaluation of submitted offers, Croatian Government selected five companies for exploration of 10 research areas.
The main criteria in evaluating the best bid were investments in exploration activities, which include geological surveys and exploration wells that receive the highest rating; also, one of the most important criteria in the selection procedure was environmental protection.
OET: What actions did the Croatian government take during last year to facilitate exploration and exploitation of hydrocarbons offshore Croatia?
Vrdoljak: Over the past two years, we worked hard to streamline bureaucracy and remove obstacles to investment. We passed a new mining law and Croatia’s first hydrocarbon law. Also, we obtained new seismic data and obtained the legacy seismic and well data. We then established Croatian Hydrocarbon Agency and a Data Room.
The Government of Croatia is pro-investment and knows that when you invest in Croatia you need to realize a competitive return. As such, we designed a fiscal regime that will ensure that Croatia is one of the most competitive oil and gas fiscal regimes in the Mediterranean.
OET: We received a confirmation from your office that the deadline for signing the Production Sharing Agreement with the companies was postponed from April to June. Could you explain the reasons behind this decision? How will this delay affect the whole process?
Vrdoljak: Croatia’s neighbouring countries (Slovenia Montenegro and Italy) have requested to be included in the Planned environmental impact assessment for the exploitation of hydrocarbons in the Adriatic Sea. Upon receiving a request, Croatian Ministry of Environmental Protection included Italy, Slovenia and Montenegro into the procedure.
This is a standard procedure prescribed by Convention on Environmental Impact Assessment in a Transboundary Context (Espoo). All neighbouring countries have a right to be included and this is nothing new when it comes to any activity that has the potential of trans boundary impacts.
Consequently, this will postpone the signing of the contracts with the companies that have received the licenses for the offshore exploration for about two months. We are expecting a feedback from our neighbours by May 5. Contract signing is expected in June.
OET: After signing the Production Sharing Agreement, Croatia’s government will get 100 million HRK, but that is only the beginning. What is the estimated value of this project for Croatia?
Vrdoljak: In accordance with the new financial model, the direct financial benefit to the Republic of Croatia is estimated at an amount of 55-65% of the total net income. According to an old financial model, fees that belonged to the Republic of Croatia amounted to 5% of the value of the total amount of hydrocarbons (5% of revenue). New financial model raised fees to the amount of 10%. In addition, new financial model is defining higher fees for the surface of the approved exploration area as well as fees for the surface of determined exploitation field.
We cannot forget indirect effect on the state budget, which is also not insignificant.
According to international experience, estimates show that 60% of goods and services can be provided from local market. This is a great opportunity for Croatia’s local industry and economy.
Greens against drilling
OET: Environmental organizations have called for the government to urgently pass the laws to protect the Adriatic Sea and its ecosystems from the consequences of hydrocarbon exploration and exploitation. Can you tell us is there in fact already that kind of law, or if the Croatian government is in the process of passing it?
Vrdoljak: In the procedure of announcing the tendering, the Agency has in the documentation already set the maximum limitations that are in the compliance with all applicable Croatian laws as well as the most stringent EU directives such as Safety Offshore Directive which have yet to enter into our legal framework (in July this year), which means that we insisted on the strictest criteria for the preservation of the environment even before the law obliged us to do so.
Also, EU Directives such as the Offshore Safety Directive are very strict, in order to manage the prevention of any potential accidents when it comes to offshore drilling and this is also implemented in our legislation. At each stage of exploration and exploitation activities, we are responsible for approving activities plans and technologies and for assuring that, everything is done according to the highest environmental standards.
OET: How do you respond to comments that offshore drilling could have negative effects on fishing and tourism in Croatia?
Vrdoljak: For more than 40 years, tourism, fishing, exploration and exploitation of hydrocarbons have coexisted in Croatia and now we are implementing even stricter standards than we had before. Tourists that are spending their summer vacations in Croatia are not aware of existing platforms in the Adriatic. Tourism is the most important industry in our country, which cannot and will not be endangered with this project.
Concerns are understandable but we would like to draw your attention on the fact that up until last year Croatia did not have any of the restriction criteria, which means that the drillings could have been done in the shallow water, and also on the islands.
Communication as the key
OET: How would you reassure the people who are concerned about the environmental impacts of drilling offshore Croatia?
Vrdoljak: Communication, communication, communication!
In the Adriatic area, not just on Croatian side, we have a long tradition of both oil and gas production. None of the existing drilling spots or platforms have affected tourism. We have platforms built during the time when technology and environmental standards were not developed as they are today, without strict EU regulation and yet, at no time environment preservation was threatened. We have been protecting the Adriatic all this time! Now, we are insisting on even higher healthy and safety standards as well as the technology in order to ensure environmental preservation.
The limitations that we are inducing as the way of protecting other industries such as tourism and fishery did not exist a year ago. It is our shared responsibility to treat the Adriatic not just as the available, but extremely vulnerable and invaluable resource.
To achieve that, we all must share not just the same goal but the same respect and standards towards our resources.
OET: Croatian Prime Minister Zoran Milanovic raised a question of referendum on exploration. Will there actually be one and how would that affect current plans and negotiations with the companies that received the licenses?
Vrdoljak: Government has not made a decision to call a referendum, nor is it now in the plan. The Ministry of the Economy would like to send a clear message first of all to investors in Croatia, and this refers to the fact that the Croatian Government will complete the project of exploration and exploitation of gas and oil in accordance with the highest business, environmental and world standards. The Ministry has continued the project of hydrocarbon exploration under pre-designed plans. In respect of all energy projects, thus including exploration of oil and gas, we have to underline that Croatia applies the highest environmental standards which are even more rigid in comparison with those applied several decades ago when the exploitation of the Adriatic began.
OET: In case the referendum takes place and citizens vote no to oil and gas exploration and exploitation, will the government be obligated to compensate the investors?
Vrdoljak: As I already said, we have a plan to complete the project of exploration and exploitation of gas and oil, and Government and no one else has not made a decision to call a referendum.
OET: When will we know if Croatia is indeed rich in oil and gas? You have been quoted as saying that Croatia might become a “little Norway”?
Vrdoljak: In front of us, after signing the contracts, we have a period of exploration.
Exploration activities and timeframe depend on sea depth because it can represent a significant difference in activities plans.
According to the Hydrocarbon Law, exploration activities can be planned in two stages (three + two years) and total exploration period cannot exceed 6 years. Therefore, in 6-year period we will find out what is the hydrocarbon potential of Croatian part of Adriatic.
OET: How many local jobs do you predict will be created by these new exploration and, potentially production, works?
Vrdoljak: Total number of workplaces and jobs depends on operational phase, whether it is exploration or development and production. We have a good example in neighbouring Italy – they are planning to double their production of hydrocarbons by 2020. And estimates are that this will create 25 000 new jobs. If we take in consideration that Italy is already way in front of us regarding oil industry with existing infrastructure and petroleum operations bases, for Croatia, which is in the beginning of that process, numbers could be higher.