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Bosnian Federation: Oil Legislation Sets First Concessions in Motion

Earlier this year we let you in on a little known secret about an up-and-coming oil venue in an unlikely corner of the world—Bosnia and Herzegovina. The paralytic “multi-ethnic” government and three-headed, rotating presidency of Bosnia is not known for its ability to pass key legislation. Indeed, since the war ended various governments have not passed any key legislation--except to abolish the death penalty, which for obvious reason transcended “ethnicity”—without direct intervention by the “international community”.  However, as we predicted, oil legislation, which is in everyone’s interest here, would be passed before the end of the year.

That time has come.

The oil legislation was adopted by the Federation parliament on 17 September, and the Energy Ministry of Bosnia’s Federation entity has now been given permission to start granting concessions for exploration and production of oil and gas through direct negotiations. For this initial stage, it’s all about Royal Dutch Shell, which already has a memorandum of understanding going back to 2011 and will likely be the sole recipient of a concession at this point. That MOU duly noted that “based on practical estimates conducted by Shell... their representative will... negotiate on one or more concessions, licenses or agreements…[and]  Shell could have exclusive rights to exploration, estimation and possibly commercial development and production”.

It was Shell in September that pushed the entity government to start negotiations on a concession.  On 25 November, the Federation government hinted that Shell would be granted a concession. Negotiations are scheduled to begin in late February and expected to last about nine months.

“Bearing in mind the extent of the possible deal, we would be able to sign a contract awarding the concession to Shell at the end of 2014,' Federation Energy Ministry Erdal Trhulj said. “This is an enormous endeavor that has never before been conducted in Bosnia.”

Depending on the number of drilling sites, we’re looking at an initial investment by Shell of between $300 million and $500 million.

Under the deal, Bosnia's largest engineering group Energoinvest, which was the local partner with Amoco during pre-war exploration, will hand over all documentation to Shell.

In the first phase, Shell will conduct digital screening of the territory in question, followed by geophysical and seismic research. After an estimated two-year period, there should be a clear indication about the potential oil and gas reserves.

The federation parliament would then decide whether to call an international exploration tender or to award exclusive exploration rights to a future partner.

Bosnia and HerzegoviniaExploration is likely to start in the Dinaridi area, stretching from the city of Bihac in the west, to the Adriatic town of Neum in the south. This is the area Shell is most interested in, and some local experts believe that these southern deposits could contain up to 500 million tons of oil reserves, located at depths of between 4,000 to 8,000 meters.

Outside of this area, in the north, experts estimate deposits at around 70 million tons. Energoinvest says the 500 million tons in the south is an exaggeration. In the northeast of the country, Energoinvest says that 15 exploration wells have so far shown potential reserves of 50 million tons of oil at a depth of 3,000-5,000 meters. This territory covers Bosanski Brod, Brcko, Bijelina, Zvornik and Tuzla (12,000 square meters)—enough to meet domestic oil needs for 30 years.

A successful conclusion of negotiations would open the possibility for Shell to start a company in Bosnian capital Sarajevo somewhere around the third quarter of next year. Exploration in the Dinaridi area could take two to three years.  

Once we get past this and into the tender process, the inside word is that Shell will have the right to pick two blocks in the area, outside of the regular bidding process.

Shell has been waiting two years for the Federation government to pass the necessary oil legislation, and now the MOU with Shell will likely be extended for one year to allow for concession negotiations.

Bosnian Oil & Politics Primer

Earlier exploration conducted before the war broke out showed the presence of oil in the Federation entity—the larger of the two entities in Bosnia and Herzegovina.

Before war broke out in Bosnia-Herzegovina in 1992, Amoco had conducted extensive research on Bosnia’s oil reserves, which indicate that the country has greater potential than its neighbors, including Albania, which is currently the leading Balkan oil producer.

Amoco’s research was sidelined with the outbreak of war. It has remained sidelined due to the misperception that Bosnia is a risky investment environment. This perception is based on a lack of experience in post-war Bosnia and a general and widespread lack of knowledge of the country’s cultural, ethnic and political structure.

The rights for research and exploration of hydrocarbons in Bosnia and Herzegovina were owned by state-owned EnergoInvest until 2018. However, the Federation government striped EnergoInvest of these rights and granted them to Shell.

Most of the land in question is owned by the government, but privately owned land is subject to expropriation.

The new oil legislation resolves the issue of authority over granting oil and gas concessions. Without the legislation, the Federation’s 10 Cantons had the authority to grant concessions. The new oil bill gives this authority to the Federation, easing a major bureaucratic hurdle.  

The bill will also resolve the issue of frontiers between the Federation entity and the Republika Srpska entity. The new law will regulate oil exploration and exploitation on the entity frontiers and prevent eventual jurisdiction and ownership disputes, but not at the state level, and this is where it gets a bit tricky.

Bosnia is divided into two separate political entities and one “administrative district”.

•    Republika Srpska: Republika Srpska, in the country’s north, is dominated by Bosnian Serbs
•    Federation: The Federation entity is dominated by Bosniaks and Bosnian Croats
•    Brcko District: This separate administrative district is multi-ethnic and straddles
territory in both the Federation and Republika Srpska. It has less autonomy than the entity governments

Republika Srpska is much further along in the exploration and development of its oil and gas potential. In 2011, it awarded an exploration concession to Jadran Naftagas, a joint venture between Russia’s Neftegasinkor, a unit of state-owned Zarubezhneft, and Serbian oil firm NIS, which is itself majority owned by Russia’s Gazprom Neft. The JV started drilling in June 2013 with a $41 million investment in the first exploration phase. We’re still waiting for the findings here.  

There could end up being some jurisdictional squabbles here where oilfields cross over from the Federation to Republika Srpska.

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