Croatia Oil & Gas Report Q1 2008

The latest Croatia Oil & Gas Report from BMI forecasts that the country will account for 1.78% of Central and Eastern European (CEE) regional oil demand by 2011, while contributing virtually nothing to supply. CEE regional oil demand rose to 5.30mn barrels per day (b/d) in 2006 and should average 5.45mn b/d in 2007, before reaching 6.06mn b/d by 2011. Production of 12.41mn b/d in 2006 is forecast to reach 14.91mn b/d by 2011. CEE gas consumption in 2006 was 594bn cubic metres (bcm), with demand of 716bcm targeted for 2011. Production in 2006 of 685bcm should reach 754bcm by the end of the period.

Croatia's share of consumption in 2006 was 0.67%, while its share of production was 0.51%. By 2011, its share of demand is forecast to be 0.84%, with the country accounting for 0.44% of supply.

Global oil demand growth is now expected to be 1.9% in 2007, down from our June forecast, but with Asia Pacific and the CEE regions dominating. While oil demand growth assumptions remain robust, there are early signs that future revisions will be on the downside as factors such as the credit crunch kick in.

The overall demand outlook for the period to 2011 remains healthy, but subject to review if the macroeconomic outlook deteriorates. Our projections for 2007 as a whole are revised upwards from the last quarterly report. We are now assuming an OPEC basket price average of US$64 per barrel, compared with the US$59 estimate provided by our last quarterly report. Based on recent price differentials, this implies Brent at US$67.81, WTI averaging US$66.18/bbl, and Urals at US$64.43/bbl.

Croatian real GDP growth is now forecast by BMI at 5.5% for 2007, up from 4.8% in 2006. We are assuming 4.6% growth in 2008, followed by 4.3% in 2009, 4.5% in 2010 and 5.7% in 2011. Consumption of oil is set to rise at less than half the rate of the underlying economy, increasing by around 2% per annum over the forecast period and reaching an estimated 108,000b/d by 2011. Imports are therefore set to rise from an estimated 80,000b/d in 2006 to at least 94,000b/d by the end of the forecast period. Partly privatised state oil group INA is attempting to raise local production in partnership with major shareholder MOL, but we expect to see a steady decline in crude production, from the estimated 2006 level of 18,000b/d to no more than 14,000b/d by 2011. We expect gas output to reach 4bcm in 2007/08, before starting to decline. Consumption is forecast to rise from 4.4bcm in 2006 to 6.0bcm by 2011, requiring imports of 2.7bcm.

In the BMI Business Environment Ranking matrix, Croatia receives a higher composite score of 27, and it has risen to 11th out of the 12 states included in the CEE region. The country's overall business environment can be considered very unattractive in a regional context, thanks largely to low levels of oil and gas output growth potential, modest hydrocarbon resources and average levels of perceived economic and political risk. Licensing terms and the production sharing regime in the upstream segment are better than average, while the competitive landscape can be considered benign.