South East Europe - Next Hotspot for Energy Investing?

This interest has been supported by an institutional process of establishing a single energy market in the region to attract investments and to allow for cross-border energy trade and integration with the European Union energy market.

Treaty Establishing the Energy Community in South East Europe (Energy Community Treaty) came into force in mid-2006 with the objective to extend the EU internal energy market to South East Europe and beyond. The Parties that entered into this Treaty included the European Community, on the one hand, and seven South East European nations, namely, Albania, Bosnia and Herzegovina, Croatia, former Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo. Georgia, Moldova, Norway, Turkey and Ukraine also entered into this Treaty as observers. As a result, the Treaty established the largest energy market in the world, with an aim to ensure a stable investment environment for attracting investments in the region and to contribute to security of energy supply in wider Europe.

This energy market integration process has sparked interest among many global energy companies searching for new markets to expand their operations but also to establish a strategic position in the world’s largest energy market. The seven aforementioned countries in South East Europe have large hydro- and thermal-power generation potential. Moreover, some countries are in the process of privatizing their energy companies, which are relatively undervalued and offer a good investment potential. This potential is particularly present in the electricity sector and is attractive because 60% of the global trade in electricity takes part within the market regulated under the Energy Community Treaty. Some countries in the region are already net electricity exporters, including Bosnia and Herzegovina and Serbia. This electricity surplus and a potential for a substantial expansion of generation capacity has attracted the attention of many global companies, including EFT Group (U.K), EnBW AG (Germany), CEZ Group (Czech Republic), and even some Eurasian companies, such as BMG/Kaztransgas and the U.S. corporate giant, General Electric.

Moreover, the region’s accession to the European Union has also been a key reason for the Russian oil and gas giants, such as Gasprom and Lukoil, to seek investments in this part of the world in order to establish a broader access to the European Union market and to strengthen the EU dependency on Russian oil and gas supplies. As a result, Russian Gasprom has entered into a partnership with Serbia’s oil industry (NIS), Zarubezhneft has acquired monopoly over oil refining businesses in Bosnia and Herzegovina, and Lukoil has acquired oil distribution networks in the region. The EU-based companies have also acquired assets in the oil production in the region, with the Hungarian MOL taking a minority stake in Croatian INA. On the other hand, it is important to note that the region may represent a special interest for oil and gas companies given its strategic location in the context of the oil and gas pipelines, especially those that bring alternative energy supplies that aim to reduce EU’s dependency on oil and gas from Russia.

Integration of South East Europe into a broad energy market within the Energy Community Treaty has created many opportunities for investment in the region. The region’s economic transition and robust growth, driven to a large extent by domestic demand, has already attracted capital from several EU nations, with the lion’s share of investments coming from Austria, Slovenia, and Germany. The region’s energy sector has been a focus of the recent privatization and investment deals, with a fierce competition among investors trying to get hold of undervalued assets offering large potential in the integrated energy market. The battle for the energy market in the region will likely intensify as the global economies recover and demand for energy re-exerts pressure on energy prices.