PRE-EMPTIVE RIGHTS ON THE PROFITABLE FIELDS Zsolt Hernadi – pictured with Hungarian prime minister Gordon Bajnai – the CEO of the MOL company which has pre-emptive rights over INA's oil and gas business in Syria, into which 700 million euro was recently invested and from which large profits are expected shortly"The contract which Finance Minister Ivan Suker signed with MOL is a step in the right direction with regard to resolving the problems within INA, but on some issues should have been more precise, especially considering the possibility of the sale of the company's oil fields in Syria. In question are INA's most valuable oil fields, which should bring INA as much as 900 million dollars profit over the next three years.

It is therefore unclear why in the contract Suker did not define a concrete price and model of sale. By not doing so, that process has effectively been left to INA, and given that operational control of the company is entirely controlled by MOL, it seems as if the Hungarian company will organize the sale of INA's assets to themselves.

In that context Government will need to, as soon as possible, in additional negotiations with MOL ensure the transparent sale of the oil fields in Syria, on the basis of which the Hungarian company would pay a realistic market price for them," a respected Croatian oil expert told Nacional, asserting that the contract signed between Government and MOL is insufficient with regards to defining the rights and obligations of the two large co-owners of INA.

Something that in the end could result in losses for the state and taxpayers. On the basis of that agreement MOL will financially assist INA, and enable it to settle its outstanding debts to the state, which have now apparently surpassed 1.6 billion kuna. None the less, the price for that assistance will be extremely high. As insurance for the payout, MOL is expected to receive convertible bonds, securities that in the event the issuer cannot pay out in the assigned time frame are transformed into shares, meaning a part of the company's ownership.

In this way the possibility for MOL to become INA's majority owner within one year, has been opened, and Government's problem is that it has no formal recourse to stop that kind of scenario, because it has no controlling rights in INA, and therefore no ability to influence her financial business. The same situation applies to the Hayan oil field in Syria. Even though the contract outlines that following the sale of assets in Syria INA retains pre-emptive rights.

Whether or not INA in the end does so depends on the company's future financial plan. That plan is adopted with a majority vote by the company's management, and is confirmed by another majority vote by the supervisory board, which means that MOL can adopt the decision by itself, without seeking the approval of Croatian Government.

In that context it seems as though the purchase of half of the ownership package of INA's most valuable oil fields could be final. For the same reasons it is unclear how the state plans to ensure a realistic market price for the Syrian oil fields. The fact that neither the price of the transaction, nor the methodology for the calculation of a realistic market price has been clearly defined in the contract Suker signed with MOL, poses the question of how it will be established.

The state still has the ability to influence moves within INA, because for the sale of the company's assets a two thirds majority vote is still required from the supervisory board, something that cannot be achieved without the support of Governments' representative. Because of this it reasonable to assume that Government and MOL will negotiate the price in the future, but what is not good for the national leadership, is the fact that each process regarding estimating the value of the Syria oil fields will be subject to MOL's influence, because on an operational level her people control the company. Information that MOL offered 200 million euro for 50 percent of INA's business in Syria, and that the total estimated value of the oil fields is around 400 million, is very telling.

This was published in the Croatian media some months ago, to repeated denials from within INA, claiming that MOL had never made any kind of concrete offer. However, after the contents of the agreement between Government and MOL were revealed, it is only a matter of time before the offer does come. How much MOL plans on offering for now remains a secret, but on the basis of analysis of INA's production in Syria, it is clear that it must be many times more than 200 million euro. INA's Hayan oil field is comprised of six fields altogether, the Palmyra and Mustadyra gas fields, the Jazal and Mazkur oil fields, and the mixed Jihar and Mazkur fields that produce both oil and natural gas condensate.

On the basis of the contract that INA has with the Syrian state oil company, SPC, 51 percent of the exploited oil and 56 percent of the gas belongs to INA. That currently accounts for 365 thousand tonnes of oil and 430 million cubic metres of natural gas per year. These are significant amounts that ensure the Croatian company 160 million dollars in annual revenues, but they should become significantly larger in a short period of time. As early as 2011, on the basis of continued development of the oil field's production at the Hayan location, that amount should be increased to 650 thousand tonnes of oil and 1.4 billion cubic metres of gas and 130 thousand cubic metres of liquid petroleum gas.

For comparison, Croatia annually imports 1.2 billion cubic meters of gas from Russia. It is therefore clear that the field in question is indeed a large one. On the basis of output growth, INA's revenues will increase to approximately 360 million dollars annually. It also bears mentioning that in Syria INA has completed a massive investment cycle, valued at 700 million euro, for the development of the Hayan oil field, ensuring that future operational costs will be minimal, around 6 million dollars per year. For this reason it appears that the bulk of INA's revenues from Syria are clean profits. It is therefore no wonder that INA's managers often refer to the Syrian fields as INA's "golden goose".

Of course the aforementioned projections of INA's profits depend on the price of oil and gas, and the exchange rate; but despite this it can be concluded that the company should earn billions of dollars in Syria over the next decade.IVAN SUKER, Finance Minister in Croatian Government – who attended the signing of the contract between Plinacro, INA, government and MOL in January of 2009 (far left of the picture) – signed a new contract between Government and MOL that, as a result of its vagueness, could cost Croatia

A significant portion of that money would through profit taxation, and the state's share of ownership in the company, end up in the national budget, and it therefore remains unclear why the state would rid itself of this future income by selling MOL half of the oil field. Even though the debt INA owes the state is a serious burden on the state budget, according to some calculations it would be more financially sound for government to go into debt and buy the fields from INA, rather than sell them to MOL, especially of the price is around 200 million euro.

Even if the state were unable to make this kind of direct transaction, there are a number of state owned companies such as JANAF or Plinacro, that are financially strong enough to embark on that kind of deal. Judging from the incredible profitability of the Syrian oil fields, it is highly likely that these companies could find the necessary support from banks. However, it appears that Government for now lacks the will for that kind of move, so it is to be expected that INA will in the end sell half of the Syrian oil fields to MOL. Government's key assignment in this is to ensure that the Hayan fields are sold at a realistic market price.

Nacional's source feels that the goal can only be achieve by the sale of the fields through a public international tender: "INA would have to issue a big international tender for the sale of half of the interest in the Syrian fields. When all of the bids from the interested parties are collected, MOL should be offered pre-emptive rights if it agrees to pay a price equal to the highest bid. If the Hungarians do not agree to this, then it should be sold to the highest bidder. That is the only way to transparently and positively establish the true current market value of INA's oil fields. Government would be making a serious mistake if the price is reached through a direct deal with MOL as the only bidder, on the basis of an estimated value. Because of MOL's control over INA's business, and the ability to influence the parameters of INA's production, the Hungarian side has the ability to influence that estimated value, even if it is established by an independent institution.

Furthermore, direct deals almost always produce a price lower than that which would have been achieved through a public tender. Therefore that method of sale would be against INA's interests as well as Croatia's national interests."

Whether or not INA will decide on that kind of model remains unknown. In response to Nacional's inquiry as to their plans, the company simply replied that there are no plans to sell INA's oil fields in Syria. "At this time there is no concrete financial offer from MOL, nor any concrete decision regarding cooperation with regard to INA's production in the Syrian oil fields."