Hungarians Have a Billion Reasons to Discredit Janaf

If the energy sector were solely focused on decarbonization and energy transition, it would have enough concerns, but with the conflict between Ukraine and Russia, sanctions, and general geopolitical instability, there are too many. Janaf has lost a major buyer in the Serbian, i.e., Russian NIS due to sanctions, and has not gained a new one in Mol, which will enjoy an exemption from sanctions on Russian energy sources for at least another year. We discussed this issue, the development of the energy network, and renewable energy projects with Vedran Špehar, the State Secretary in the Ministry of Economy responsible for energy.

How will the situation with Janaf develop further and what kind of year lies ahead for the company?

– The flow possibilities of certain sections of the pipeline are regularly tested according to existing protocols. The testing of the Croatian and Hungarian parts of these pipelines on the route from Omišalj to Százhalombatta is jointly conducted by two logistics departments from Janaf and Mol. Tests have already been conducted last year and earlier this year. There is clearly a reason why Mol has been granted an exemption for another year, but every exemption is temporary and must expire. Given the situation, the ban and sanctions on the purchase of Russian oil will remain in effect until further notice, and this exemption is a problem for those who received it, but also for those who granted it. It should be noted that Janaf was built as part of a broader system of pipelines that would supply five refineries in the former Yugoslavia, namely two INA refineries in Croatia and refineries in Slovenia, Bosnia and Herzegovina, and Serbia, and by connecting the Adria and Druzhba pipelines to Janaf’s system, two Mol refineries in Hungary and Slovakia were also connected. Therefore, Janaf undoubtedly has sufficient capacity to supply ‘non-Russian’ oil through its terminal in Omišalj to the NIS refinery in Serbia and the Mol refineries in Hungary and Slovakia. However, this concerns the price difference for oil that can be purchased on the Mediterranean market compared to the price at which Mol buys it from Russia. This difference, depending on the quantities and market price movements, can be up to one billion euros per year. To shorten it: Hungarians have a billion reasons to discredit Janaf, or to question the sufficiency and reliability of its transport capacities. Thus, the outcome of events related to Russian ownership in NIS and the newly approved exemption for Mol to continue purchasing Russian oil is a status quo. However, Janaf is undoubtedly still ready to make all its transport capacities available to meet the total needs of Hungary and Serbia for crude oil.

What is the situation in Serbia? Is the offer for Janaf to take part ownership in NIS still current?

– From the very beginning, we have advocated for the continued supply of oil to NIS through Janaf’s pipeline system, as we have for the past fifty years. For Janaf, NIS’s continuous operation and production is a strategic interest, which is why we have offered appropriate solutions while respecting the sanctions imposed on it. Ultimately, what is most important to us is that oil continues to be transported through the pipeline system to NIS, and the owners of NIS and Serbia will decide what is best for them. We are here to be part of the solution, not the problem, and all of this reflects Janaf’s stance and actions. NIS and Serbia have already significantly depleted the secured reserves of crude oil, which is why problems in its processing could soon arise. Therefore, options are being considered for the state to intervene and procure additional quantities of oil derivatives. When NIS stops offering its derivatives on the market, the supply of the Serbian market will primarily be taken over by the nearest neighbors, primarily Hungarian Mol, which is already present in Serbia, as well as Bulgarian, Romanian, and Greek oil companies with their refineries, and I believe traders; in some indirect form, perhaps even INA, because from the New Year, the modernized refinery in Rijeka should process more oil. In short, all neighboring countries with their surpluses will jump into the Serbian market.

INA rarely misses the opportunity to highlight the modernization of the Rijeka refinery as the largest investment in Croatian history. Is the refinery operating enough to say that it is the largest investment?

– The modernization of the Rijeka oil refinery is an obligation from INA’s shareholder agreement. It is Mol’s obligation and responsibility. Additionally, we should not forget the part of the story regarding the refinery in Sisak. The fact is that it was designed for processing domestic oil. Its reserves and production have drastically declined, raising the question of whether there is realistically room for two refineries in Croatia. Therefore, we insist on completing the modernization of INA’s refinery in Rijeka, which should have already been completed and which, according to announcements from INA, will be finished by the end of the year. I expect that the refinery will then operate in accordance with the capacities that modernization will bring. INA has a good market position, and I believe there is undeniable potential for the placement of Rijeka derivatives in the markets where it and its Hungarian partner, i.e., co-owner, are represented.

What can the state do if these announcements are not fulfilled?

– Mol bought the refinery in Mantova, took it over and closed it, but with it, it acquired the sales-storage infrastructure, logistics, and market. I do not know if that was agreed upon and how the Italians reacted to it. Business and public interest often differ. The Croatian state certainly has instruments it can act with. However, we want to maintain a good relationship with Mol and not burden good neighborly relations with Hungary, which is why I believe the Rijeka story will be good for everyone. In the end, nearly 700 million euros have been invested in its modernization so far.

How much does Hungary realistically count on increased LNG capacities from Croatia?

– Today, the LNG terminal on Krk is operating at full capacity, half for us and half for our neighbors. We were dependent on one supply route, but we timely secured an alternative route, which is why we did not feel the consequences for gas supply when the conflict in Ukraine occurred. There was price volatility due to the consequences of the corona crisis and the war, but now prices have stabilized, and supply has been and remains secure. Moreover, it is our obligation to be supportive and help our neighbors. We have already further increased the capacity of that terminal, and we are also increasing the transport capacities of our pipelines – for the same reason.

Producers of energy from renewable sources have now addressed the European Commission with a complaint about the circumstances of domestic connection prices. Is this a consequence of electricity subsidies?

– This is not about the connection price. Someone is trying to impose the thesis that the situation in Croatian energy is not the best, but that is simply not true. Energy encompasses multiple segments. Regarding oil derivatives, the situation is excellent. The price of crude oil is favorable and stable, and the value of the dollar is also. There is supply, competition, free prices, and the security of supply has never been called into question. Unfortunately, domestic oil production is experiencing a natural decline, but we have Janaf’s import terminal on Krk, as well as a system of mandatory oil and oil derivatives reserves. Natural gas production is also declining, so the gas supply problem has been resolved by the LNG terminal, pipelines, and storage. The green transition is a process. To implement it successfully, time and money are needed because, for example, you need to replace the existing boiler with an electric boiler powered by solar panels and batteries, and then replace installations, radiators, and install heat pumps and electric convectors. In industry, this is even more complex. And it costs quite a bit. Electrification is currently the best solution because it has the smallest carbon footprint and impact on the environment we live in. Of course, provided that electricity is produced without emitting carbon dioxide into the atmosphere. Thanks to the intensive encouragement of electricity production from renewable energy sources, we have managed to attract numerous investors to invest money in such projects and achieve the desired effects. And this has cost us quite a bit, and it will continue to cost us for the next ten years. Now there is talk about connecting a large number of gigawatts of new projects of such power plants to the grid, but you know what? The grid cannot handle that. Mega power plants are an excellent solution at the places of energy consumption, but where there is no consumption, such a project can become a problem. Anyone who invests in a project near Zagreb, Split, Rijeka, Osijek, or similar locations will certainly be welcome. However, there is a worrying trend that such facilities want to be built somewhere in the hinterland, where the infrastructure cannot accept such a large amount of energy. And they want to build at least twice as much as we need. Therefore, we will continue to encourage micro-solar, i.e., solar power plants on the roofs of houses and business facilities; batteries and other solutions for storage and delayed delivery of electricity as well because this ensures energy when we really need it and where we need it. One of the excellent solutions in this context is electrolysis, i.e., hydrogen production.

There is summer consumption there.

– Exactly, there is. But not enough, so the price of electricity in summer is often zero or even negative, and the number of hours in the year when you need to pay someone to take your produced electricity is increasing. If you look at, for example, wind farms along the coast, you will see that they are often turned off when it is a beautiful, sunny day, so they do not produce a loss. Namely, it is not profitable for the producer to sell electricity at that moment at negative prices.

Are you concerned about the ‘renewables’ addressing the European Commission?

– Some investors want the grid to be renewed for them, a power line to be built, cheap land to be allocated to them, and then energy to be purchased regardless of what is happening in the market. At the expense of others. For some, this has become a financial investment, speculation, and targeting good locations. Those who need it know and see this well.

Hera has provided a methodology for calculating the connection price to the energy grid for renewable energy sources in public consultation. It seems that a full circle has been made and that the price will be similar to the one against which investors originally protested.

– This methodology is brought by the Croatian Energy Regulatory Agency. It is an independent institution, so I cannot predict what it will bring. Everything that is justified, rational, in the interest of the state, citizens, and entrepreneurship, i.e., the economy, must be included in the ten-year plans for the development of the transmission and distribution network and approved in a timely and prescribed manner. The connection price to the electricity grid must arise from the answer to the question of who the grid is being built and developed for.

It seems to me that it would be in the interest of the state to support the development of the grid because Croatia has the industrial capacities for it.

– I agree. The grid is already being revitalized and digitized, and its efficiency is being increased. We are doing this as part of many programs that you can easily find on the internet. But I do not see a difference between private and non-private companies. The Ministry of Economy equally cares for all Croatian business entities.

While we were previously talking about wind, sun, and oil, it seemed that you were also targeting that nuclear energy is a good backbone of the energy mix.

– There should certainly be room for nuclear energy in the energy mix just as there is for wind, sun, hydrogen, etc. The alternative in nuclear energy is acceptable for several reasons. First, we already have long-standing experience in Krško, and the technology has significantly advanced in the meantime, so when the moment comes to decide on extending the operational life of that nuclear power plant, we will strive to extend its operation for another twenty years. Slovenia is independently developing the project for a new power plant in Krško and choosing partners; they may include us, or they may not. The new nuclear power plant in Krško can only be interesting to us if the model is acceptable for Croatia. In this context, we must also explore options to do something ourselves. Such a facility on Croatian territory would primarily guarantee us a secure supply of electricity, but it would also bring many other benefits for citizens, science, and industry, i.e., for the economy.

Can we and will we?

– We have knowledge and experience, we have ideas, and the technology is becoming increasingly acceptable and closer to us. The only question can be whether it is wiser to build one conventional nuclear power plant or to make several smaller ones.

That technology is not yet in commercial use.

– About ten years ago, when LNG was a hot topic, a similar story was with floating terminals. And look at how many there are now in Europe and the world. To this day, there are debates about electric cars, but you will agree that there is no longer any doubt, i.e., no turning back. Technology is developing rapidly and systematically advancing, and if we want to start on time and secure sufficient quantities of reliable and cost-effective clean energy, we must get involved now. These are our obligations and responsibilities. The main reason for the idea of a nuclear power plant in Croatia is the diversification of the energy mix. District heating plants in Croatia, for example, as a central heating system using hot water, were still operating on fuel oil until recently. One day, thermal power plants and gas heating plants will stop operating. If they do not continue to operate, for example, on hydrogen, a new source of energy will have to be found for those needs. Geothermal energy is one of the possible solutions, but only where it exists. Therefore, waste heat from a nuclear power plant can also be used for central heating systems. Boilers for heating water in heating plants can also operate on electricity when the economics are such that it is cheaper to buy it than to spend natural gas. Not to mention the multiplicative effect of such projects on the local community and economy.

Are you afraid that aligning energy prices with market prices will become a new fuel for inflation?

– That is not true. Energy prices for economic entities are already at market levels, and that is the largest segment of the market. Only the prices of electricity and thermal energy and natural gas for citizens are slightly below the level at which they realistically should be, but we are gradually approaching the end there as well. The reason for this is well known. It is about protecting citizens from the price shock that hit Europe, and we survived it relatively painlessly. For citizens, cheap energy contributes to inflation because it stimulates consumption. In other words, when energy prices rise for citizens, they will consume more rationally. Therefore, they will have less money for consumption, which will then reduce the pressure on inflation.