Andrew MacDowall in Budva, Montenegro -

Senior government ministers, representatives of supermajors and officials from mid-ranking contractors rubbed shoulders by the chilly early-spring Adriatic in the Montenegrin resort of Budva in March, as they discussed the region’s budding offshore hydrocarbons prospects. But the event was held against a backdrop of growing environmental opposition to offshore exploration, a disappointing first-round tender by Croatia and the plummeting global oil price.

Most attendees at the inaugural Adriatic Oil & Gas Summit, of course, talked up the potential beneath the Adriatic. Croatia, Montenegro and Albania are in the process of exploration tenders that they hope will bring billions of dollars of investment and boost regional energy security at a time when the issue has been brought sharply into focus by the war in Ukraine. Croatia is expected to award production-sharing agreements in April on ten licences awarded in January; Montenegro is in the process of negotiating with bidders for offshore blocks; while international companies are already conducting exploration in Albania, which expects to auction another block in the near future.

Croatia’s offshore tenders have attracted the most attention, as they are the most substantial. In 2013, Norwegian company Spectrum reported that a seismic survey had suggested Croatia could have offshore oil reserves totalling 3bn barrels. However, even Croatian officials have treated this claim with scepticism – seismic studies often talk up volumes.

The country’s first-ever offshore oil and gas exploration tender was launched in April 2014 to much fanfare, involving 29 blocks stretching all the way from the Gulf of Venice to the mouth of the Bay of Kotor, off the Montenegrin coast. The government hoped to attract $2.5bn in investment over five years through the tender.

But the results, announced in November, were disappointing. The government stated that there had been six bidders, “big, serious companies” in the words of Economy Minister Ivan Vrdoljak, who said that he was “satisfied”. But in fact there were only three bidders, as two were consortia. Only 15 of the 29 blocks attracted bids, and the supermajors which had reportedly been interested in the tender were largely absent – ExxonMobil, Shell, Total, Chevron. Sources close to the process told bne IntelliNews that the tender had been bungled; it was cut too short for some major bidders and had been hampered by political interference.

By January, Croatia was awarding just ten blocks to five companies, four in consortia. Marathon Oil and OMV were granted a licence for seven blocks; Eni and Medoilgas one block; and Croatia’s own INA (caught in a tug-of-war between the Croatian government and Hungary’s MOL), two. “Now, we are in the negotiation process and we expect to have our first production sharing agreements signed by the summer when we expect to finalise [the] strategic environmental impact assessment,” Barbara Doric, head of the Croatian Hydrocarbons Agency (HZU), which oversaw the process, told bne IntelliNews.

One source close to the tender process told bne IntelliNews that he felt that some bidders might try to back out, with falling oil prices giving cover for exiting.

He said that he expected the remaining 19 blocks to be offered at a new tender, which has been the position that the Croatian authorities have taken. But Doric’s statement on the matter is not cast-iron: “Given the successful offshore and onshore license rounds, and given the positive feedback from oil and gas companies, we expect to keep this process rolling over the years and we might go out with the second offshore and onshore license round sometime in September this year,” she said.

Vox populi

Days before the Budva conference, a potential spanner was thrown into the works when Croatian Prime Minister Zoran Milanovic suggested that offshore oil and gas development should be put to a referendum, following mounting opposition to the sector from environmentalists and local communities.

In Budva, Vrdoljak fought a rear-guard action against the referendum proposal, saying that the PM had not specified when the vote might be held, or what the question might be. He was overheard telling sector representatives: “don’t worry about the referendum”.

Milanovic, who faces a tough re-election campaign by year-end, has since said that a referendum was possible, but only if exploration proves that there are substantial resources. This formula will not necessarily appease either investors or those worrying about the impact on the environment and tourism. “We have local communities, diaspora, environmentalists, artists and international organisations” opposed to oil and gas development, Vjeran Pirsic, a local councillor on the island of Krk, and head of the EkoKvarner ecological organisation, told bne IntelliNews. “It’s a question of economy and human lives: there are problems of a significant impact on the fishing and tourism industries, and even without any oil spill, the image of the virgin islands will be destroyed. This is also a democratic disaster, with the sea being given to oil and gas companies without any public debate.”

Pirsic and allies like the Clean Adriatic Sea Alliance (CASA) refute the government’s assertion that Italy has hundreds of offshore rigs that operate without polluting the sea, saying that a spill in the Eastern Adriatic would be particularly catastrophic, as currents would push any oil towards a bottleneck in the Gulf of Venice, and despoil Croatia’s pebbly beaches (harder to clean than sandy equivalents).

The perception that public consultation has been lacking is widespread, even among some who are in favour of development. But the authorities say that there has been consultation at every step. Doric emphasises that exploration must meet EU environmental standards, and that Croatia has operated offshore rigs for decades without mishap. “The EU imposes very strict standards, which Croatia has even elevated,” said the source close to the process. “My feeling is that [those opposing the process] focused on loudness rather than soundness. Which is understandable for citizens who are not experts, but I haven’t seen experts’ critiques.”

The source said that the referendum could scupper offshore oil and gas, which would be indicative of how development projects and moves to liberalise the economy have too often run into the sand in Croatia. He added that gas resources have more potential than oil, except in deeper parts of the South Adriatic, further offshore.

A referendum is now unlikely to take place before the election, which in any case could see Milanovic’s government replaced. A greater threat could come from the drop in oil prices, as James Webb, an analyst at Wood Mackenzie, told the Budva conference. He noted that a whopping $153bn had been cut from development spending globally in 2015-16. But he forecasted a “moderate price recovery” in the second half of 2015 and 2016, and noted that the long lead-times for offshore development in the Adriatic would give prices time to recover to levels needed for break-even in the Adriatic. He said that there would need to be 150mn barrels of oil and 8.5bn cubic metres of gas under the sea to make exploration viable.

Infighting

Officials reiterated their determination to push ahead with exploration. Stavri Dhima, from Albania’s Ministry of Industry and Energy, noted that the Balkan country started offshore development in 1991, and that licences have been issued for five blocks – three to Emanuelle Adriatic Energy, one to San Leon Energy (which has been active in the troubled shale sector in Emerging Europe), and one to Orion Energy. However, development has been slow.

Dhmia noted that Albania had 13 “free” hydrocarbon blocks (one offshore), which would be opened to “competitive procedures...very soon”. All the blocks are currently controlled by Albpetrol, the state-owned oil company, the botched privatisation of which the government recently vowed to resuscitate. However, Albanian officials at the Budva conference were not wholly reassuring to major investors, emphasising the desire to attract local and regional bidders, and criticising unnamed companies which control blocks without developing them.

Albania’s oil sector is already feeling the effect of falling oil prices: in January, Banker’s Petroleum, the Canadian-owned largest oil producer in the country, announced that it would be partially halting its drilling programme.

Sandwiched between Croatia and Albania – which both have significant existing oil industries – is Montenegro. Most recently, in March, Montenegro issued a complaint to the UN about Croatia’s exploration activities in disputed waters – potentially adding another layer of complexity to Croatia’s oil and gas outlook.

Montenegro is pursuing its own Adriatic development, and in February the economy ministry announced that it had launched preliminary discussions with bidders for offshore oil and gas blocks. The bidders are three consortia: Marathon and OMV, Eni and Novatek, and Energean Oil &Gas and Mediterranean Oil&Gas. According to Wood & Co, Montenegro’s offshore fields are significantly shallower on average than Croatia’s and Albania’s, reducing the cost of extraction per barrel.

Montenegro’s designs on becoming an “energy hub” for the region may see a stronger emphasis put on domestic resource development, while Croatia addresses challenges to its offshore projects and Albania rejigs its extractive industry regulation. Montenegro’s greater political clarity – it has effectively been ruled by the same party since 1992 – may also play well. However, low levels of gasification mean that domestic gas demand is low, and infrastructure skeletal at present. (Croatia, by contrast, has established midstream and downstream infrastructure, and is developing further pipeline networks, though its refineries are aging.)

There is certainly broad agreement that there are substantial unproven oil and gas reserves beneath the Eastern Adriatic, miles from the rugged coast and beautiful Venetian towns that have made it famous. But political, technical and economic hurdles to development remain substantial.