Clarion Partners - Owner's Engineer

Deloitte: Energy and Resources – regulated prices shoot down profit

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In the operations of companies from the energy sector and mineral resources in the Adria region, there is generally an improvement in business compared to last year. Companies from this sector showed a significant increase in revenue (20 – 30%) in 2010th  compared to revenues in  2009th year as a result of significant price increases, primarily oil and gas, in this period. Electricity prices were more stable, and therefore the position of companies in the electricity sector is similar to those from last year’s list. If we look at companies in the Adria region, Central Europe is dominated by large, stable companies with three major regional markets: Serbia, Slovenia and Croatia. On the other hand, realized  profitability of energy companies in the region in 2010.year had no clear trend.

Serbian oil company NIS  recorded significant growth in revenues to 1.57 billion euros in 2010, which makes an increase of 24.2%.At the same time, EPS  recorded almost the same revenues in 2010. and in 2009.year. Of Serbian companies significant revenue growth in 2010th  have made  EFT, Srbijagas and Yugorosgaz.

In  2010th  year, INA is the largest company of this sector in the region, with revenue of3.55 billion euros. It is almost 17% more than last year’s income when the INA also dominated the list. The increase in revenues has been due to rising prices of oil and gas. Petrol group, with headquarters in Slovenia, which operates around the Adria region, is the second largest energy company in the region with revenue of 2.8 billion euros. HEP (Croatian Electric Power) has earned 1.67 billion euros, which puts it in third place among regional companies in this sector.In  the ownership structure of the largest companies in the energy sector in the past ,there were no significant changes. INA and NIS are still controlled by large foreign partners MOL and Gazpromneft, while a minority of companies are still in state ownership. Petrol, although in a minority state ownership, is still strongly influenced by the government of Slovenia. EPS HEP, companies from the electricity sector, the state-owned with few competitors, except in the field of renewable energy where there were a few small foreign investments.

Regional consolidation process, due to less regulated markets, to some extent takes place only in the sector of oil and gas. In the electricity sector, there are no such trends. MOL, Petrol and Lukoil were still active in the field of consolidation of smaller companies trade in the region.

The electricity market is still subject of strict regulation, it is often an instrument of social policy, and due to the fallout of the global economic crisis, there is additional pressure to maintain lower prices. Thus, the EPS and Srbijagas company remains unprofitable due to, among other important social functions.

Currently the largest investment that is realized is the project of building power plants of EFT company, in  Stanari near Doboj in the Republic of Serbian. In addition, EPS has started cooperation with Italy’s Edison to build a power plant Kolubara B.

Although the current supply of  Serbian energy market is well, there is a clear danger that the current capacity will not be able to meet the increasing demand that can be expected with an increase in economic activity. In 2010th  year, although there were some progress and agree on future investments (Kolubara,Smederevo, on the Drina HE, etc.), realization of development energy projects, hasn’t come a long way.

Since there is a solid strategy to avoid the privatization of power sector, most projects are planned as a joint venture with strategic partners from abroad. However, in the market conditions that prevailed in 2010th , and under the influence of the global economic crisis, foreign partners were unwilling to undertake the significant investment and their participation is mostly ended up in the expression of interest for potential projects in the future.

On the other hand, the oil sector with an increase in oil prices and a lower burden of social role, was able to quickly implement development projects. Co-ownership of the Russian giant Gazpromnjeft in NIS led to significant revenue growth and shift the focus of the company, and the ambition to grow the business from Serbia to the region. Thus, upon completion of investments in modernization, NIS can expect overseas business expansion through acquisitions of existing companies and investments in greenfield projects.

Business in the gas sector is limited to regulated prices that don’t provide significant gains of enterprises in this sector neither investments in the future. Although currently there is a desire and interest of the Serbian government to privatize Srbijagas or one of its segments, including investors, there is a clear interest in the company, especially bearing in mind the possibility of building the pipeline Juzni tok.



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