Arbitration a Rocky Road for Croatia, MOL Dispute over INA

The Croatian government and Hungary's MOL Group are on a rocky road towards arbitration negotiations on management and investment of Croatian oil and gas company, INA.

Speaking in Parliament, PM Zoran Milanovic said that the Croatia will resist MOL's mode of management with 'political pressure'.

The dispute has its roots in the INA Privatization Act passed by the Croatian Parliament in 2002 permitting MOL to acquire 25%+1 share of INA. The Act was aimed at opening the economy and reducing the Croatian state’s share in INA as part of the policy package recommended by the IMF to facilitate Croatia’s accession to the European Union. 

Tensions began shortly after MOL gained control of INA through its acquisition of 47.16% of INA’s shares on the Zagreb Stock Exchange in October 2008, leaving the Croatian Government with 44.84%. MOL’s right of control was formalized in the First Amendment to the Shareholders Agreement negotiated by MOL and Croatian Government representatives at the end of 2008 and approved in January 2009. It was also approved by the Croatian Competition Agency and the European Commission and came into effect in June 2009. In 2010, MOL further increased its ownership to 49.1% by purchasing shares from minority shareholders.

MOL’s gain of effective control of INA was not well received by the Croatian Government and the relationship between the shareholders has been in steady deterioration.

Currently, there are two international arbitrations in play, one relating to the the control of management rights, and the other to the future INA's two refineries in Rijeka and Sisak, the latter posing a major challenge to the Milanovic's Government in this election year.

Croatia says that MOL has failed to make appropriate investment into INA and in particular, to modernise the Sisak and Rijeka refineries. MOL retorts that it has invested in INA’s refineries as much as it would cost to create new ones.  

Last week in Parliament, Milanovic announced an escalation of the dispute.

"The interest of MOL is to close everything in Croatia, to close refinery in Rijeka and to pump it's fuel in INA pumps. The Government may try to oppose it, not with weapons, not by force, but simply with political pressure and no one will say me it is an attack on freedom of investment and legal security in Croatia", Milanovic said.

In letters to Management and Supervisory Board of INA, Croatian Minister of Economy Ivan Vrdoljak claims that MOL is protecting it own interests at the expense of INA and that Croatian company is treated as "a branch office".

Vrdoljak has demanded an explanation of why INA has not signed contracts that ensure the continuation of Rijeka Refinery modernization, and warns that there is currently no alternative to the existing elaborate processing of domestic oil in the Sisak refinery.

"This is another way in which Croatia, as a responsible second largest shareholder in INA, protects its interests and because of that I ask responsible people for explanation why only the interests of MOL are protected and why Croatia's strategic companies is treated as a subsidiary of MOL," said Minister Vrdoljak.

"I will repeat what I always say. INA must never become a subsidiary of MOL, domestic oil must be processed in Croatia and INA must be a developed regional company and it is not negotiable," the Minister continued.

In it's defence, MOL points out that it that saved INA from bankruptcy, stabilized it financially and turned it into a profitable company with a significant investment potential.  In a press release in November 2014,  MOL in turn, has accused Croatia of blocking investments and requested the Management Board of INA to convene an extraordinary general meeting of the shareholders to approve a extraordinary total dividend payout in an amount of EUR 260 million.

"After the Ministry of Economy’s last decision to revoke the licences for exploration in Sava and North-Western Croatia the shareholders understood that the Ministry is currently not supporting an investment friendly environment in Croatia and therefore the time has come now for all shareholders to realize return of their previous investments," said MOL in the press release.

At an impasse, the parties have proceeded on the path of  international mediation in two proceedings, one led by the US State Department, and the other under the UNCITRAL Arbitration Rules.  So far, attempts to solve matters via this route have only led to further clashes between the two parties.

Last week, the Croatia refused to accept four mediators proposed by the US Department of State. At the top of the shortlist of mediators was Michael Polkinghorne, a partner in the Paris-New York law firm White & Case, and an expert in mediation in the field of energy, telecommunications and infrastructure. The Croatian side complained that the proposed arbitrators were in a conflict of interest because of the connections with MOL. The United States is now attempting to find alternate, acceptable experts.

The United States has taken an interest in the this case and in facilitating an suitable agreement in order to offset concerns about the possibility of Gazprom securing MOL's INA state and hence, impacting energy supply diversity in the regional area which already sees a strong Russian presence.

The arbitration case at UNCITRAL was intitiated by Croatia in January 2014 after MOL initiated a separate arbitration against Government at the World Bank’s International Centre for Settlement of Investment Disputes on 26 November 2013.

In arbitration, Croatia is calling for the return of its management rights in INA as it had prior the signing of the the First Amendment to the Shareholders Agreement in 2009.  It points to the Sanader case, where former Croatian Prime Minister Ivo Sanader was found guilty by a Croatian Court of accepting an alleged €10 million bribe from MOL’s Chairman-CEO in exchange of ceding to MOL management rights in INA.  Croatia has also demanded damages compensation, claiming that contracts have financially damaged INA while benefiting MOL.

It is important to note that MOL’s gain of control was not made possible by PM Sanader but by the 2002 INA Privatization Act and the 2003 Shareholder Agreement. Once MOL acquired 47.16% of INA’s shares in October 2008, it benefited from all the conditions to eventually control the company.