IJF: From 2010 to 2015, companies in the gas supply sector have an average annual revenue of around 11 billion kuna

The liberalization of the gas market in Croatia has primarily affected gas supply, resulting in an increased market share of private companies, while companies in which the state has a minority stake are gradually being ‘squeezed’ out of the market, with the dominant market participant becoming the company Prvo plinarsko društvo, which controls more than one-third of the total gas supply market, some of the conclusions of the analysis by the Institute of Public Finance indicate.

In the latest issue of the IJF publication “Fiscus”, titled “The Gas Market in the Republic of Croatia – Liberalization and Financial Operations”, Anto Bajo, Marko Primorac, and Dijana Jurinec analyze the operations of 100 companies in the gas sector and point to significant changes in market structure.

The publication provides a detailed analysis of the application of EU guidelines on the liberalization of the gas market in Croatia, the main participants in the Croatian gas market, and particularly the size and structure of the gas supply and distribution sector.

With Croatia’s accession to the EU, it has been intensively implementing market liberalization since 2013, which is expected to conclude in 2017 with the abolition of the gas supply monopoly. By 2015, the supply and distribution of gas had largely been liberalized, the analysis states.

It is noted that government decisions have regulated relations in the wholesale market. “The government decision limited the entry of other participants into the market and confirmed HEP’s monopoly in the wholesale gas market until March 31, 2017,” the authors note.

The Croatian Energy Regulatory Agency (HERA) issued 100 licenses for energy activities in the gas market by 2016. The most licenses were granted in the supply (55) and distribution (35) sectors. Of the total of 99 companies in the Croatian gas market, the majority, 49, are state-owned, 14 are mixed, and 37 are privately owned, according to some data from the publication.

The authors also point out that among suppliers, Prvo plinarsko društvo d.o.o. (PPD) stands out. “A significant positive leap in the operations of this company can be attributed to the signing of a binding agreement with E.ON. Ruhgras Group (referred to as E.ON), which will supply it with natural gas. This has called into question the long-standing monopoly of INA. Later, contracts were signed with Gazprom, MVM, and other European partners. The possibility of changing gas suppliers for business users in Croatia has been available for several years and has been utilized by more than 500 large companies,” the publication states.

It is also noted that significant savings are increasingly recognized by small and medium-sized enterprises and that due to the current legal regulations in the market, only business users can be supplied, as the gas supply market for households is regulated until 2017, making market-based supply impossible.

The authors included all companies that received a HERA license in their analysis of the size and structure of the gas sector in Croatia, except for INA, HEP, Vetropack Straža, Radnik, Petrokemija, and Elektrometal, companies that predominantly engage in other activities besides gas. Instead of INA, the analysis included Prirodni plin d.o.o. until 2014, as it was then merged with INA and their financial reports were consolidated. Within the HEP group, HEP trgovina, HEP Plin, and HEP Opskrba plinom were analyzed.

According to data for 2015, nearly four thousand employees were employed in the gas market, mostly in state-owned (2344) and mixed (875) companies, but the number is decreasing in these while increasing in private companies (517), with the largest number of employees in the supply (1842) and distribution (1471) segments.

Companies operating in the gas market achieved more than 13.6 billion kuna last year, total expenses amounted to 12.8 billion kuna, and aggregate net profit was 650 million kuna. HEP, as a “supplier of suppliers”, generated average revenues of half a billion kuna from gas sales, so including it in the analysis would significantly increase total revenues, the authors note.

It is also noted that total revenues and sales revenues have been growing from 2010 to 2013, while in 2014 there was a significant decline due to the merger of Prirodni plin with INA.

Analyzing the size and structure of the gas supply and distribution sector, the authors state that from 2010 to 2015, companies in the gas supply sector achieve an average annual revenue of around 11 billion kuna.

“An insight into the structure of the gas supply market easily reveals that liberalization increases the share of private companies, while companies in which the state has a minority stake are gradually being ‘squeezed’ out of the market. While in 2010 private companies had a market share of less than 10 percent, by 2015 they already hold around 70 percent of the market. This shift in market structure is attributed to Prvo plinarsko društvo, whose sales revenues grew from 51 million kuna in 2011 to nearly 4 billion kuna in 2015, making it a dominant market player, controlling more than one-third of the total gas supply market in Croatia,” the analysis states.

As other significant market participants in this segment, the authors highlight Prirodni plin, which achieved 2.6 billion kuna in sales revenue in 2014, as well as Gradska plinara Zagreb – Opskrba with 1.2 billion kuna, Crodux plin with 821 million kuna, and GEN-I Zagreb with 764 million kuna in sales revenue in 2014.

“The liberalization of the gas market is also evident in retail. In 2014 alone, 1852 changes of gas suppliers were recorded (an increase of 250 percent in supplier changes compared to 2013). Such changes in suppliers lead to pressure to reduce prices. Liberalization increases the number of companies engaged in gas supply,” the analysis states.

It is noted that in the gas distribution sector, the market structure during the period from 2010 to 2015 is significantly more stable. Total sales revenue is around 2 billion kuna, with the private sector holding a 10 percent market share, the public sector 60 percent, and about 30 percent private companies in which the state has a certain stake. The largest market share in 2015 belongs to HEP-Plin with 392 million kuna in sales revenue, followed by Termoplin, Gradska plinara Zagreb, and Međimurje plin, which have between 200 and 250 million kuna in sales revenue.

In the conclusions of the analysis, the authors emphasize that the results clearly indicate that the liberalization of gas operations has significantly influenced changes in the gas supply sector. “Specifically, the most significant change relates to the replacement of the market position of two large companies – Prirodni plin and Prvo plinarsko društvo, with the former being in mixed (formerly state-owned) and the latter in private ownership,” the authors conclude.

They also believe that market processes in the gas supply and distribution sector should be viewed within the broader geopolitical relations and the global struggle for market positioning by large companies.

They remind us that Prirodni plin sourced gas from the Russian Gazprom until 2011, and at the beginning of 2011, a new supplier was selected – the Italian ENI. “In this way, Gazprom was practically excluded from the Croatian market for several years, but it was precisely Prvo plinarsko društvo that served as a platform for its return to the market. Namely, the partnership between this company and Gazprom since 2013 coincides with the growth of that company and the gradual phasing out of Prirodni plin,” the analysis states and concludes that changes in the Croatian gas market – besides EU accession and gradual market liberalization – are also determined by external factors and circumstances that should be considered in further market liberalization and shaping the future energy development strategy of Croatia.