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Serbian Oil and Gas Privatization: Investigation Promised

An aerial picture of a petroleum refinery in the industrial are of a small town of Pancevo, near Belgrade, January 22, 2008

Serbian authorities have promised to launch an investigation into the controversial privatization and sale of Naftna Industrija Srbije AD (NIS), the national oil and gas company that allowed Russian OAO Gazprom Neft to gain control of the company.

The sale took place during the gas war between Russia and Ukraine six years ago, and no requests for other bidders were issued and no other investors were sought at the time. The terms of sale have been questioned since then by opposition groups and now Prime Minister Aleksandar Vucic is under renewed pressure.

Nebojsa Stefanovic
Nebojsa Stefanovic

The investigation was promised recently in a statement from Interior Minister Nebojsa Stefanovic’s office, which said the probe would be led by a special investigation team formed by Stefanovic to “examine all facts and circumstances surrounding the privatization of Naftna Industrija Srbije.”

Gazprom acquired a 51 per cent stake in NIS for 400 million euros in 2008, as well as a 51 percent share in a local company that is in charge of both construction and management of the South Stream pipeline through Serbia. The Russian firm also upgraded NIS’s Pancevo refinery as part of the deal.

Critics claim that the controlling interest sold to Gazprom Neft was sold too cheaply, at 400 million euros when NIS had capital assets valued at 993.8 million euros. Also, at the time, a Deloitte accounting assessment estimated the “fair market value” of NIS as 2.2 billion euros, meaning the value of the 51 per cent controlling interest would be computed at 1.12 billion euros.

In addition, a low royalty rate of three per cent was part of the deal until 2035, a rate that translates into Gazprom Neft’s paying Serbia just three per cent of the sales income of oil and gas it mines from Serbian soil. The royalty rate in Russia is 22 per cent and is higher in neighboring countries, and no lower than 10 percent elsewhere in the region.

The Russian-controlled NIS paying only that three per cent rate has resulted in a significantly accelerated exploitation of Serbia’s oil and gas. An NIS report issued for FY 2012 showed the company had grown to 2 billion euros in revenues, with net profit of 400 million euros. That net profit equaled just what Gazprom Neft paid in 2008 for its controlling interest in NIS and a controlling interest in the company in charge of construction and management of South Stream Pipeline. Other countries that have sold assets in the region have retained 51 percent ownership compared to Serbia’s 49 percent, according to critics of the deal.

Borislav Stefanovic
Borislav Stefanovic

Democratic Party vice-chairman Borislav Stefanovic (unrelated to Interior Minister Stefanovic) headed the Serbian negotiating team in 2008, has said that the NIS sale was part of a framework energy agreement between the two countries. He said that broader agreementwas ratified by Parliament and it extended to the construction of the South Stream pipeline through Serbia, as well as to an underground natural gas storage facility in Banatski Dvor.

During negotiations over the NIS sale, he says, “the Russian side repeatedly invoked the framework agreement, and refused to even discuss specific issues such as royalty rates.”

The sale agreement was signed in Moscow along with a statement on the strategic importance of energy and cooperation between the two countries.

Today, Serbia seeks to benefit more than it has so far from privatization of NIS. On the heels of forming a new government earlier this year, Vucic expressed a strong concern that, as a stakeholder in the company, Serbia expects a share of its profits equivalent to its investment.

But that stake has dwindled since the sale to Gazprom Neft and the Russian share has increased. Gazprom Neft now owns 56 percent of the entire venture and, because other ownership shares have been sold to small investors, Serbia’s investment now stands at 29.8 percent—more than 19 percent less than it was at the time of the sale.

Nevertheless, Vucic raised the issue of increasing Serbia’s share from Gazprom Neft when he was in Moscow last month, in talks with President Putin and Prime Minister of Russia Dimitry Medvedev.

Aleksandar Antic
Aleksandar Antic

I believe we have an open door there and that we have the support we need to improve terms where there is room for that,” Serbian energy minister Aleksandar Antic said after the talks.

But the general agreement would seem to indicate otherwise. New legislation did take effect in 2012 to raise the royalty rate, as well as the income taxes that NIS is to pay, but there is a catch. It will be implemented, according to the comprehensive energy agreement, only after Gazprom Neft has paid off its investments in Serbia. So, although the new legislation scheduled a raise in royalties to seven per cent, NIS continues to pay only three percent. An increase to 15 percent in income tax on profits does not take effect and remains at 10 percent for NIS, because those who control the company have not determined that their ongoing investment has been repaid.

Since 2008, when the NIS sale agreement was signed, public debate over its potential harm to Serbian interests has been ongoing. While many in Serbia acknowledge misgivings about the NIS privatization, commentators also suggest that the timing of the government’s investigation may be politically motivated.

Foreign investment consultant Mahmut Busatlija believes that, even if the move is politically motivated, it may be a good idea to establish how NIS assets were disposed of prior to the sale, while under Serbia’s ownership.

Gazprom Neft Deputy Director Vadim Yakovlyev expressed surprise at the Serbian government’s announcement of an investigation, saying it must not be connected to the operational management of the company.

“Given that we have been doing business in Serbia since 2008, our relations with the Serbian government have been cordial and we have resolved everything through dialogue. An agreement between our governments, concluded between the Russian Federation and Serbia, defines relations in the energy sphere and the mutual obligations of all parties,” Yakovlyev said.

“NIS has become the most successful company and greatest tax payer. We are on the Belgrade stock market, we regularly pay dividends,” Yakovlyev emphasized. He added that Gazprom Neft, as a party to the agreement between the two countries, has fulfilled all of its obligations, investing in technology upgrades and development of NIS, expanding the retail network of gas stations, and growing assets.

Premier Vucic said he did not believe that looking into the privatization deal will harm relations with Russia. “What actually happened will be shown by the investigation, he said.. “But the appropriate authorities will do their job and investigate.”