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Croatia issues extradition request for head of MOL Group

The Hungarian government has criticised Croatia over tactics used

Since joining the EU on 1 July, Croatia has become embroiled in a fight over extradition: it's issued an extradition request for the head of MOL Group, Hungary’s state-controlled energy company.

On October 2, the Hungarian government and MOL issued furious denunciations of Croatia over its tactics regarding a long-simmering battle over Croatian energy firm INA, which is almost 50% owned by the Hungarian company. The previous day, Croatia confirmed it had issued Interpol and European arrest warrants for MOL's chief executive, Zsolt Hernadi, in connection with a bribery case.

The request followed Hernadi’s non-appearance for a hearing in a case brought by Croatia's anti-corruption bureau, the Croatian Office for the Suppression of Corruption and Organised Crime, over bribes paid to the now-jailed former prime minister Ivo Sanader. Sanader was jailed for 10 years in November last year after being found guilty of accepting a €10 million ($13.5m) bribe from MOL in return for awarding the company controlling rights in INA in 2011. Sanader is appealing, while MOL denies any wrongdoing.

The Hungarian government smells a rat: the accusations and arrest warrants come as the two sides began negotiations over a new INA shareholder deal. “It is unacceptable for the Hungarian government that first the strategic partner is selected ... which saves Croatia's most important company INA during the crisis, and then there are attempts to intimidate this strategic partner later ... in order to regain control of INA without a buyout," the Hungarian government said in a statement on 2 October.

The company also responded: "Already in November 2012 MOL Group emphasised that no substantive evidence has been provided to the court in support of the specific charges as they relate to MOL… MOL will defend itself by all legal means against the outrageous actions... which appear to be influenced by interests seeking to intimidate both the company and its chairman."

Opportunity knocks

Certainly the timing is convenient for Croatia, which is looking to regain control of a company it feels was let go for too low a price, and one whose prospects look increasingly bright.

Croatia sold 25% of INA to MOL in 2003 for $505 million. In 2009 it  allowed it to raise its stake to 49.1%, with Croatia holding 44.8%. But growing opposition in Croatia to Hungarian ownership meant MOL never gained full majority control of INA – hence the importance of management control it was handed by Sanader's government.

Analysts too suspect Croatia's motives. "Management talks at this level would typically involve the chief executive, but Hernadi could not attend any talks in Croatia and subsequently expect to leave the country without the detention order coming into effect," notes IHS Global Insight.

Both accuse each other of not living up to agreements. MOL claims the Croatian government was supposed to take back into public control INA’s loss-making midstream gas business Prirodni Plin. Croatian daily Jutarnji List reported on 12 September that MOL was ready to sue Croatia for €262m in damages over Zagreb's failure to take over INA's loss-making gas business, as agreed in 2009.

The Croatian government, however, argues MOL is not investing properly in INA's upstream potential. INA's exploration and production activities are focused on Angola and Egypt (Syrian operations have been suspended due to the civil war), though in the past it has been involved in E&P in 20 countries. And there is growing interest in Croatia itself. According to KPMG, there is an estimated 18 billion to 30 billion cubic metres of unconventional gas in the Drava Depression and INA believes there is more lying in deep shale formations. "However further exploration has to take place in order to gain more knowledge and understanding of potential source areas," KPMG said in a report last year.

On 29 September, The Sunday Times reported that the Croatian government is pinning huge hopes on a 13,500 square-mile subsea survey being conducted by Spectrum, a Norwegian seismic-imaging company, which has estimated that Croatia could have offshore reserves of 3bn barrels of oil, while the volume of gas has still to be analysed. 

Thus the stakes are high, meaning few expect a quick resolution to the standoff. "The bribery case is setting the tone of the negotiations between MOL and Croatia over the INA shareholders' agreement… I doubt that any rapid solution can be found here and expect long drawn-out negotiations," says Tamas Pletser of Erste Bank.

One solution would be for MOL to sell up. Indeed, Prime Minister Viktor Orban's government, the largest single shareholder in MOL with 24.6%, said on 2 October it would ask MOL's management to consider selling its stake in INA to the Croatian government or a third party. MOL has been playing hardball, threatening legal action against the Croatian government if talks fail to resolve the dispute over management rights.

Waiting in the wings are the Russians, which is ironic given that it was only two years ago that the Hungarian government managed to prise a 21.2% stake in MOL out of the hands of Surgutneftegaz, which bought the shares from OMV after the Austrian company’s hostile takeover bid for the Hungarian firm failed. INA's refineries could be attractive to Russian companies, while its upstream business could benefit from Russian access to resources, capital and technology.

On 6 September, Bloomberg  reported that the Croatian government had approached Rosneft about acquiring MOL's stake in INA. Three days later this was denied by the office of Prime Minister Zoran Milanovic.

Few doubt, however, that Zagreb is already drawing up contingency plans should it engineer the failure of the talks with MOL over INA's future.

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