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This project is funded by the European Union

Financial Viability Analysis and Cost Benefit Analysis for the Interconnection Pipeline BiH – HR (Zagvozd – Posusje – Novi Travnik with a branch to Mostar)

Final Report May 2018 Technical Assistance to connectivity in the Western Balkans EuropeAid/13785/IH/SER/MULTI

Issue and revision record

Revision Date Originator Checker Approver Description

A 25/03/2018 Yannis Stergiopoulos Agni Levis

Ole Johansen Chris Germanacos

First issue for Beneficiaries and Stakeholders

B 23/04/2018 Yannis Stergiopoulos Agni Levis


Second issue for Beneficiaries and Stakeholders

C 17/05/2018 Yannis Stergiopoulos Agni Levis


Final issue for Beneficiaries and Stakeholders (incorporating Beneficiary comments)

Information Class: EU Standard

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Disclaimer

This CBA report (the “Report”) has been conducted by the Mott MacDonald Connecta Consortium

(the “Consultant”) in an effort to assess the Financial Viability and provide a Cost Benefit Analysis for

the South Gas Interconnection Pipeline Bosnia and Herzegovina (BiH) – Croatia (HR) from Zagvozd –

Posusje – Novi Travnik with a branch to Mostar and the addition of the section from Split to Zagvozd.

The Report is based upon information and estimations provided by the Beneficiaries or on publicly

available information. In addition, the Consultant conducted meetings with the Beneficiaries were

information provided, assumptions and findings were discussed. The Consultant assumed that all

information provided is complete and accurate. The Consultant has not independently verified any of

the information provided for the purpose of preparing this Report and no responsibility is or will be

accepted by the Consultant as to or in relation to the accuracy, reliability or completeness of any such

information.

The Report is based upon the financial and market conditions prevailing on the time or as of today,

whatever appropriate, and the Consultant expresses no opinion if these conditions will continue to

prevail or how changes in these conditions might affect the outcome of this report or of the opinions

included. Events following the date of the Report may materially affect the assumptions and

conclusions herein, however the Consultant does not undertake any responsibility for updating or

reviewing this report. Estimates contained herein may be materially affected due to future changes in

legal framework, fierce competition in the sector, political circumstances in BiH, HR or the areas

related to the Project etc. No representation or warranty is made that any estimate contained herein

will be achieved.

Contents

1 Synopsis...................................................................................................................................... 9

List of Abbreviations ........................................................................................................................ 10

2 Executive Summary ................................................................................................................... 11

3 Introduction ............................................................................................................................... 14

3.1 Project Objective .............................................................................................................. 14

3.2 Project Beneficiaries ......................................................................................................... 15

3.3 Resources and Activities .................................................................................................. 15

3.4 Project Background .......................................................................................................... 16

4 Gas Sector in BiH Today ........................................................................................................... 18

4.1 Gas Transmission Network ............................................................................................... 18

4.2 Gas Consumption ............................................................................................................. 19

4.3 Gas Supply....................................................................................................................... 21

4.4 Gas Prices ....................................................................................................................... 22

5 The South Gas Interconnection of BiH and HR .......................................................................... 25

5.1 Pipeline Routing and Capital Investment ........................................................................... 25

5.2 Gas Market Outlook and Expected Consumption .............................................................. 26

5.2.1 Consumers on the existing gas pipeline network ........................................................... 27

5.2.2 Consumers in the future gasified areas ......................................................................... 27

5.2.3 Gas consumption forecasts........................................................................................... 30

5.2.4 Potential use of gas for electricity generation in FBiH .................................................... 30

5.3 Gas Supply Routes and Transmission Costs .................................................................... 32

5.3.1 The Croatian gas transmission system .......................................................................... 32

5.3.2 Gas Transmission Costs ............................................................................................... 33

5.4 Other Gas Supply Sources ............................................................................................... 34

6 Scenarios under Examination .................................................................................................... 35

6.1 The Incremental Approach................................................................................................ 35

6.2 The Project Base Line Scenarios ...................................................................................... 36

7 Financial Analysis and Assessment ........................................................................................... 38

7.1 Methodology & Basic Assumptions ................................................................................... 38

7.2 Capital Investments, Operating Data and Residual Value ................................................. 40

7.2.1 Investment costs and financing sources ........................................................................ 40

7.2.2 Operating income ......................................................................................................... 41

7.2.3 Operating costs ............................................................................................................ 42

7.2.4 Working capital ............................................................................................................. 43

7.2.5 Residual value ............................................................................................................ 43

7.3 Financial Performance Indicators ...................................................................................... 44

7.3.1 Financial Internal Rate of Return (FIRR) ....................................................................... 44

7.3.2 Financial Net Present Value (FNPV) ............................................................................. 44

7.3.3 The Financial Benefit/Cost ratio (FB/C) ......................................................................... 45

7.3.4 EBITDA ........................................................................................................................ 45

7.3.5 Financial Sustainability ................................................................................................. 46

7.4 Financial Sensitivity Analysis ............................................................................................ 49

8 Economic Analysis and Assessment .......................................................................................... 52

8.1 Methodology & Basic Assumptions ................................................................................... 52

8.1.1 Basic Assumptions for switching effect monetization ..................................................... 52

8.2 Economic Benefits ............................................................................................................ 55

8.2.1 Security of Supply ......................................................................................................... 56

8.2.2 Savings of avoided gas disruptions ............................................................................... 56

8.2.3 Benefits from market enhancement ............................................................................... 58

8.3 Economic Cash Flows and Performance Indicators........................................................... 58

8.3.1 Economic cash flows .................................................................................................... 58

8.3.2 Economic performance indicators ................................................................................. 59

8.4 Economic Sensitivity Analysis ........................................................................................... 60

9 The IAP Effect ........................................................................................................................... 62

9.1 The Ionian-Adriatic Pipeline project ................................................................................... 62

9.2 The Impact to the Project .................................................................................................. 63

10 Other Economic Benefits ........................................................................................................... 65

10.1 Quantified Indicators ......................................................................................................... 65

10.1.1 N-1 Criterion ............................................................................................................. 65

10.1.2 Import Route Diversification (IRD) ............................................................................. 68

10.2 Non - Quantified Benefits .................................................................................................. 69

10.2.1 Addition of new gas supply sources .......................................................................... 69

10.2.2 Increased economic activity and employment growth ................................................ 69

10.2.3 Saving related to lower costs of gas purchase ........................................................... 69

10.2.4 Increased bargaining power vs. the current gas supplier ........................................... 70

10.2.5 Air pollution in BiH: Increasing market sustainability .................................................. 70

10.2.6 Increased role of Croatia as transit country ............................................................... 71

10.2.7 Other interconnection project .................................................................................... 71

10.2.8 Formation of a regional energy market ...................................................................... 72

11 Risk Analysis ............................................................................................................................. 73

11.1 Risk identification ............................................................................................................. 73

11.2 Risk Analysis, Risk Rating & Mitigation Strategies ............................................................ 75

ANNEX ............................................................................................................................................ 84

List of Tables Table 1: Gas transmission system in BiH ......................................................................................... 19

Table 2: Gas consumption breakdown by sector .............................................................................. 20

Table 3: Gas prices of natural gas in FBiH ....................................................................................... 23

Table 4: Capex by pipeline section ................................................................................................... 26

Table 5: Potential gas consumption in new municipalities ................................................................. 28

Table 6: Gas consumption in Lasva and Fojnica areas, Bugojno and Zenica .................................... 29

Table 7: Expected gas flows transmitted through the Project Interconnector ..................................... 30

Table 8: Capex dynamics................................................................................................................. 41

Table 9: Incremental gas flows per pipeline section .......................................................................... 42

Table 10: Operating expenses ......................................................................................................... 43

Table 11: EBITDA per pipeline section ............................................................................................. 45

Table 12: Net cash flow position for the pipeline branch in HR.......................................................... 47

Table 13: Net cash flow position for the pipeline branch in BiH ......................................................... 48

Table 14: Financial sensitivity for the section in HR .......................................................................... 49

Table 15: Financial sensitivity for the section in BiH ......................................................................... 50

Table 16: Avoidance of costs related to the use of alternative fuels per 1,000 cm ............................. 53

Table 17: Impact from greenhouse gas emissions per 1,000 tons..................................................... 54

Table 18: Impact from emissions of other polluting compounds per 1,000 cm ................................... 55

Table 19: Fuel switching average price ............................................................................................ 55

Table 20: Savings of SoS................................................................................................................. 56

Table 21: Savings of avoided gas disruptions ................................................................................... 57

Table 22: Benefits from market enhancement .................................................................................. 58

Table 23: Economic benefits and costs ............................................................................................ 59

Table 24: Economic sensitivity ........................................................................................................ 60

Table 25: Economic sensitivity analysis on SoS ............................................................................... 61

Table 26: IAP map & data summary ................................................................................................. 62

Table 27: Risk identification table ..................................................................................................... 74

List of Figures Figure 1: Map of the Gas transmission system in BiH ....................................................................... 18

Figure 2: Total natural gas consumption in BiH ................................................................................ 19

Figure 3: Gas consumption 2006-2016 in BiH .................................................................................. 20

Figure 4: Route of gas supply to BiH ................................................................................................ 21

Figure 5: Quoted gas prices ............................................................................................................. 23

Figure 6: Gas transmission system in Croatia in 2013 ...................................................................... 32

Figure 7: Comparison of EU wholesale gas prices in the third quarter of 2017 .................................. 34

Figure 8: Gas disruption interconnection points ................................................................................ 57

Figure 9: Daily peak demand 2016 – 2040 in BiH ............................................................................. 67

Figure 10: N-1 Criterion for BiH ........................................................................................................ 67

Figure 11: Energy Community Gas Ring Concept ............................................................................ 72

1 Synopsis

Project Title: TA to Connectivity in the Western Balkans (CONNECTA)

Project Number: Europe Aid/137850/IH/SER/MULTI

Sub-project Title Financial Viability Analysis and Cost Benefit Analysis for the interconnection Pipeline BiH – HR (Zagvozd – Posusje – Novi Travnik with a branch to Mostar)

Sub-project Number: CONNECTA-ENE-INFR-BiH-CBA-01

Contract number: 2016/382-382

Contracting Authority: European Commission, DG NEAR

Beneficiaries: Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo*

Region: South Eastern Europe (SEE)

Contractor: Mott MacDonald Romania Srl in Consortium with WYG SAVJETOVANJE d.o.o., COWI A/S, CeS COWI d.o.o. (renamed CESTRA d.o.o.), TRENECON Consulting & Planning Ltd and SYSTEMA Consulting SMLTD

Contract signed: 19 December 2016

Full Mobilisation of 3 KE: 20 January 2017 (date of Kick-off Meeting in Brussels)

Project Duration: 48 months

Anticipated completion: 19 December 2020

Contractor’s Project Director:

Wim Verheugt In the contract, Andrei Penescu is mentioned as Project Director but during the contract signature DG NEAR was informed of the change to Wim Verheugt

Project office: Kneginje Zorke 2, 1st floor, 11000 Belgrade, Serbia

Telephone: +381 (0) 11 308 22 97

Bcm billion cubic meters

B/C Benefit/Cost ratio BiH Bosnia and Herzegovina

CAGR Compound Annual Growth Rate CBA Cost Benefit Analysis

CCGT Combined-Cycle Gas Turbine Cm cubic meter Connecta Technical Assistance to Connectivity in the Western Balkans

DG NEAR Directorate-General for Neighbourhood and Enlargement Negotiations DCF Discounted Cash Flow

EBRD European Bank for Reconstruction and Development EBITDA Earnings Before Interest, Tax, Depreciation and Amortization

EC European Commission ECS/EnCS Energy Community Secretariat

EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return

EnCS Energy Community Secretariat ENPV Economic Net Present Value

ENTSOG European Network of Transmission System Operators for Gas EU European Union

FBiH Federation of Bosnia and Herzegovina FID Final Investment Decision

FIRR Financial Internal Rate of Return FNPV Financial Net Present Value

FS Feasibility study

GHG Green-House Gas HR Croatia

IAP Ionian – Adriatic Pipeline IFI International Financing Institution

IPF Infrastructure Project Facility KM Convertible Mark

LFO Light Fuel Oil mcm Million Cubic Meter

MoFTER BiH Ministry for Foreign Trade and Economic Relations MoM Minutes of Meeting Mott MacDonald-CONNECTA Consortium

The Consortium carrying out the present project

NA Not applicable NPV Net Present Value

RS Republika Srpska SoS Security of Supply

TA Technical Assistance TSO Transmission System Operator

TYNDP Ten-Years Network Development Plan VoLL Value of Lost Load

WACC Weighted Average Cost of Capital WBIF Western Balkans Investment Framework

List of Abbreviations

2 Executive Summary

This CBA report has been conducted by the Mott MacDonald Connecta Consortium (hereinafter the “Consultant”) in an effort to assess the Financial Viability and provide a Cost Benefit Analysis for the

South Gas Interconnection Pipeline Bosnia and Herzegovina – Croatia ( Zagvozd – Posusje – Novi

Travnik with a branch to Mostar), with the addition of the section from Split to Zagvozd, in order to

connect to the existing Croatian gas transmission network (hereinafter the “Project Interconnector” or

the “Project”).

Bosnia and Herzegovina started using natural gas in 1979 and the main reason it was introduced was

to solve the problem of air pollution in the city of Sarajevo and to supply Alumina Plant Birac in

Zvornik with gas. In 1984, part of the Semizovac – Zenica gas pipeline was built.

Today, the existing single interconnector from Serbia to BiH is at the end of its technical lifetime (40

years old). Because of that and the dependence to a single route and source of gas supply to BiH and

particularly to FBiH, the realization of the Project Interconnector as an alternative source of supply

from Croatia is of vital importance for the BiH. Moreover, the capacity of the existing transmission

route does not allow the future gas market development in BiH.

Due to the above, the South Interconnection pipeline is included to the Strategic Plan and Program of

the Energy Sector of Federation of Bosnia and Herzegovina 2009, the Comprehensive Energy

Strategy until 2035 of the Federation of BiH and the Comprehensive Energy Strategy until 2035 of BiH (which is in the final stage of adoption). This project is also in the TYNDP 2018-2027 of Croatia.

The Project links the gas transmission systems of BiH and HR and represents a new gas supply route

for BiH while HR acts as a transit country (connection corridor) for BiH. It is planned to be 236 km

long, of which 162 km will be located in FBiH and 74 km in HR (52 km being the additional section

from Split to Zagvozd). The total investment costs have been estimated at 164 mil. eur, out of which

100 mil. eur in BiH and 64 mil. eur in HR (48 mil. eur for the additional section from Split to Zagvozd).

BH-Gas and Plinacro are the two project promoters (the “Project Promoters”) in FBiH and HR respectively and have agreed that the transmission assets ownership, maintenance and investment

duties, as well as the operating activities are to be divided between the two, according to the physical

location of the assets.

Given the limitations of the existing gas transmission system in FBiH, the present CBA gives

emphasis on security / diversity of supply and is based on the incremental approach. It considers the

difference between the “Without the Project” scenario to that “With the Project”. In order to address

the security of supply, the “Without the Project” scenario assumes almost stable gas consumption and

interruption of the existing pipeline after 10 years. In the “With the Project scenario”, gas consumption

in the FBiH is expected to grow since the implementation of the Project Interconnector is anticipated to enhance consumption (from 203 in 2020 mcm to 543 mcm in 2039), to new and existing consumer

areas.

The economic analysis focused on the Project as a whole. It included the monetization of the impact

due to the cut of the existing pipeline at the end of its technical lifetime (SoS), the savings of avoided

gas disruptions and finally, the impact on costs and the environment through market enhancement.

The Economic Analysis revealed that the Project is economically sound, as implied by the relevant performance indicators.

ENPV EIRR EB/C Ratio

Gas Pipeline from Split - Zagvozd – Posusje – Novi Travnik with a branch to Mostar

3.0 mil. eur 33.1% 4.67

Furthermore, other economic benefits, quantified and non-quantified were identified. The N-1 criterion

and the Import Route Diversification analysis were quantified. With the implementation of the Project

Interconnector, although the N-1 criterion is not reached to 100%, it is improved since the criterion is zero under the existing situation. Moreover, it should be pointed out that the gas supply balance (i.e.

peak demand minus total import capacity), is positive through all analysed years. As for the Import Route Diversification, which is measured by the IRD index, it is expected to improve substantially when the Project is implemented (from 10.000 today to 5.942).

Other economic, non-quantified benefits that were considered, include addition of new supply

sources, increased economic activity and employment growth, increased bargaining power vs. the

current gas supplier, reduced air pollution in FBiH, increased role of Croatia as a gas transit country

and contribution towards the formation of a regional energy market (Energy Community Gas Ring).

Another development regional interconnection project between BiH and HR is the North

interconnection project Brod – Zenica. With regards to South interconnection project, North

interconnection project is running through two BiH entities. In the current circumstances of non-

existence of the legal framework for both, the regulatory authority at the state level and lack of

consensus between the BiH entities for North interconnection project realization, South

interconnection project has a greater advantage.

The financial analysis examined separately the pipeline branch located in BiH/FBiH and that located

in HR. A WACC of 5.29% in HR and 5.05% in FBiH was used as the financial discount rate in the valuation and as the threshold (lower accepted level) for the evaluation of FIRR. The derived financial

performance indicators have as follows:

Economic Benefits'in mil. eur

Totalfor the period

Averageper year NPV

Security of Supply 5,872.4 266.9 3,042.2Gas Disruptions 254.7 12.7 150.1Market Enhancement 1,150.2 57.5 632.0Total 7,277.4 337.2 3,824.3

FNPV FIRR FB/C Ratio

Gas Pipeline from Split – Zagvozd – HR/BiH border point -9.8 mil. eur 3.7% 0.81

Gas Pipeline from HR/BiH border point – Posusje – Novi Travnik with a branch to Mostar

37.5 mil. eur 7.5% 1.08

Overall, the financial indicators for the HR section fall below the acceptable levels. On the other hand,

all financial indicators for the FBiH section are positive and above the thresholds, indicating the financial viability of this section. The last is based on the assumption that the per-unit gross profit in FBiH (i.e. selling price minus purchase value and transportation costs outside FBiH) is 0.06

eur per cm.

Furthermore, the impact to the Project was examined under the assumption that IAP exists. With this

scenario, Zagvozd was considered as the starting point of the Project Interconnector. Due to the lower

CAPEX in the HR, the financial indicators for the section were impacted positively.

FNPV FIRR FB/C Ratio

Gas Pipeline from Zagvozd – HR/BiH border point 31.3 mil. eur 20.7% 2.48

ENPV EIRR EB/C Ratio

Gas Pipeline from Zagvozd – Posusje – Novi Travnik with a branch to Mostar

3.1 mil. eur 38.9% 4.99

3 Introduction

3.1 Project Objective

Mott MacDonald Connecta Consortium has been commissioned by EC DG NEAR to undertake the

project reference CONNECTA-ENE-INFR-BiH-CBA-01, Financial Viability and Cost Benefit Analysis for the South Gas Interconnection Pipeline BiH – HR from Zagvozd – Posusje – Novi Travnik with a

branch to Mostar. In addition, the construction of the Split – Zagvozd section in order to connect the

new pipeline with the existing Croatian gas transmission network system, is included as part of the

CBA.

BH-Gas and Plinacro are the two project promoters (the “Project Promoters”) in BiH/FBiH and HR

respectively and have agreed that the transmission assets ownership, maintenance and investment

duties, as well as the operating activities are to be divided between the two, according to the physical

location of the assets.

The CBA has been based on the incremental approach which compares the do nothing or the without the Project scenario to the with the Project scenario. It includes all necessary sections in order to

assess the Project’s viability: i) Financial Analysis and Assessment; ii) Economic Analysis and

Assessment; iii) Other Economic Benefits; iv) Risk assessment. In addition, emphasis has been given to Security of Supply since it is an issue of vital importance, particularly for the BiH/FBiH, due to the fact that the existing supply route is at the end of is technical lifetime (40 years old).

The aim of the financial analysis has been to evaluate the Project’s profitability and to verify the

financial sustainability. The financial analysis has been carried out through subsequent, interlinked, accounts i.e. total investment costs, total operating costs and revenues, sources of financing and

working capital needs.

The economic analysis investigates the impact of the Project on the society. Focus has been given in addressing the following issues: security / diversity of supply and market enhancement. The economic analysis has been performed taking into account, among others, the following parameters:

impact of the lost primary energy due to the cut of the existing pipeline at the end of its technical

lifetime, savings of avoided gas disruptions, impact on costs related to the use of alternative fuels and impact in emissions of greenhouse gases and other polluting compounds. In addition, N-1 criterion,

gas supply source diversification, increased economic activity & employment growth and other

potential non-monetized economic benefits have been considered.

It should be pointed out that, due to EU Regulations, financial and economic results of the CBA for the

section in HR should be accompanied by a binding Open Season procedure. Therefore, the final

financial results for HR and economic results for the Project may change. These may also change if

new projects in the near future take an FID status1.

Since the Project Interconnector will mainly impact the gas market in FBiH, an extended analysis of

the current and expected gas sector of FBiH has been included in the present report (network, consumption, supply sources) while for HR emphasis was on the gas supply sources and routes that

relate to the Project. The financial and economic analysis has looked equally at both parts (FBiH and

HR).

Finally, a list of risks and uncertainties related to aspects not directly reflected in the financial and

economic analysis has been prepared in order to identify possible risk prevention and mitigation

measures.

3.2 Project Beneficiaries

The key beneficiaries of the CBA are as follows:

From Bosnia and Herzegovina

• BH-Gas d.o.o., Sarajevo, represented by Mr. Jasmin Salkić, Director;

• Ministry of Foreign Trade and Economic Relations of Bosnia and Herzegovina represented by Mr. Mirko Šarović, Minister;

• Ministry of Communications and Transport of Bosnia and Herzegovina represented by Mr. Ismir Jusko, Minister;

• Federal Ministry of Energy, Mining and Industry represented by Mr. Nermin Dzindic, Minister

From Croatia

• Plinacro D.o.o., Zagreb, represented by Mr. Ivica Arar, President of the Board

From the leading IFI of the Project

• EBRD, represented by Mr. Ian Brown, Head of the Bank’s office in Bosnia and Herzegovina

3.3 Resources and Activities

The Team of Experts, mobilized in July 2017, has relied on the following principal documents/ sources in conducting the CBA:

• Inception Report - Financial Viability Analysis and Cost Benefit Analysis for the Interconnection Pipeline BiH – HR (Zagvozd – Posusje – Novi Travnik with a branch to Mostar), October 2017

• WB6-REG-ENE-08: Pre-Feasibility Study - South Gas Interconnection of BiH and Croatia, i.e. o Line Route Report, June 2013

1 Final Investment Decision (FID) status means the decision taken at the level of an undertaking to definitively earmark funds towards the investment phase of a project (Regulation EU No 256/2014)

o Connection Options Comparison Report, August 2013 o Pre-FS Report, September 2013

• Guide to Cost-Benefit Analysis of Investment Projects, DG Regional Policy, European Commission, 2014, Brussels.

• Energy System Wide Cost-Benefit Analysis Methodology, ENTSOG, February 2015 • BH-Gas D.o.o., Annual Financial Statements and Independent Auditor Opinion for 2016

In addition, a series of meetings took place with the beneficiaries, in order to present and discuss the

development of the CBA and intermediate results:

• July 22nd 2017, Kick off meeting, at BH-Gas, Sarajevo

• September 12th 2017, at Plinacro, Zagreb

• September 26th 2017, at BH-Gas, Sarajevo

• November 13th 2017, at BH-Gas, Sarajevo

• December 14th 2017, at Plinacro, Zagreb

• March 8th 2018, at BH-Gas, Sarajevo

• April 12th 2018, at BH-Gas, Sarajevo

3.4 Project Background

The South Gas Interconnection of BiH and HR is a constituent of the Strategic Plan and Program of

the Energy Sector of Federation of Bosnia and Herzegovina 2009, the Comprehensive Energy

Strategy until 2035 of the Federation of BiH and the Comprehensive Energy Strategy until 2035 of

BiH. The Project is also listed as a priority project of the Public Investment Program of Federation of

BiH 2017-2019. In addition, it is also included as a Project of Mutual Interest (PMI) on the

corresponding 2016 list of the Energy Community and in the ENTSOG TYNDP 2017. Further on, the

Government of the Federation of BiH in June 2017 adopted a Conclusion on the strategic importance

of this project, after which activities on its realization has been intensified.

The realization of South Interconnection BiH-Croatia Project is of vital importance for the BiH/FBiH

gas sector. Today, the existing single interconnector from Serbia to BiH is at the end of its technical

lifetime (40 years old). Due to that and the dependence to a single route and source of gas supply to

BiH and particularly to FBiH, the existing gas pipeline system does not provide the security of supply

to existing consumers in BiH and does not allow the future gas market development in BiH.

This project is also of great significance for Plinacro and the Republic of Croatia due to the regional

market integration and connecting to the gas system of the neighbouring country. For years this project has been in the Ten-Years Network Development Plan (TYNDP) of the gas transmission

system of Republic of Croatia, including the latest Plan for 2018-2027. Plinacro applied the project for

ENTSOG TYNDP and selection of projects for PECI/PMI. This project has also been applied for a PCI

status. As regards the project maturity, Environmental Impact Study is completed and a positive

opinion of the competence Ministry is obtained (ESIA), Basic Design is drawn up and the Location

Permit is obtained as well.

In September 2013, WBIF completed a pre-feasibility study for the South Gas Interconnection of BiH

and HR (hereinafter the “Pre-FS Report2”). Two potential routes were examined: the first was

Zagvozd (HR) via Posusje (FBiH) to Novi Travnik with a branch to Mostar and the second was Ploce

(HR) – Mostar - Sarajevo (FBiH). The aim of the Pre-FS Report was to examine and evaluate the two options and the first option was selected as more acceptable and recommended for further

development.

After completion of the Pre-FS Report, BiH applied in a regular WBIF TA round for continuation of the

study's sequence. In 2014 the amount of 1.5 Mil EUR was granted for development of Feasibility

Study, Environmental and Social Impact Assessment, CBA and Preliminary Design, but the funds are

subsequently diverted to the projects repairing damages caused by floods that hit BiH in 2014. It

should be noted that BIH is currently not eligible to apply in regular WBIF TA round for continuation of

the studies' sequence because of:

• the infringement process that EnCS has against BiH in the gas subsector (lack of reforms,

third energy package, etc); and

• BiH’s lack of any energy strategy at state level3.

Due to major problems with the existing and sole gas supply to BiH, both DG NEAR and ECS support

making an exception to the suspension of TA in the gas sector. This exception is not for the full studies package but for a smaller financial analysis in the form of a CBA.

In giving support to the CBA, DG NEAR and ECS clarified that any further EU engagement would be

conditional on the unbundling and positive outcome of the infringement process.

In addition, EBRD is giving support to the Project as a matter of urgency since its aim is to establish a

new supply route for BiH providing a diversified and reliable natural gas supply to address three major

problems as follows:

1. the existing single interconnector from Serbia to BiH is near the end of its technical lifetime. This pipeline has a maximum of 10 years of remaining technical lifetime;

2. the Project aims to address security / diversity of supply. Having a single point of entry of gas

supplies to BiH poses a significant risk of disruption of gas supply interruption on gas

transmission systems in Serbia and Hungary (for any reason) or impossibility (interruption) of

gas supply via Ukraine, hence the need for an alternative source of supply from Croatia and

decreasing dependence of Russian gas by using alternative source of supply; and

3. the capacity of the existing transmission route is insufficient to meet the existing demand and

especially for planned natural gas market enhancement of both entities.

2 WB6-REG-ENE-08: Pre-Feasibility Study - South Gas Interconnection of BiH and Croatia, Pre-FS report, September 2015, WBIF, COWI-IPF Consortium 3 MoFTER informed that the Comprehensive Energy Strategy at state level is in the final stage of adoption.

4 Gas Sector in BiH Today

4.1 Gas Transmission Network

Bosnia and Herzegovina started using natural gas in 1979 and the main reason it was introduced was

to solve the problem of air pollution in the city of Sarajevo and to supply Alumina Plant Birac in Zvornik with gas. The Zvornik – Sarajevo gas pipeline was built at that time, which was 117 km long.

In 1984, part of the Sarajevo (Semizovac) – Zenica gas pipeline was built to be used by Zenica Steel

Works with a length of 54 km.

Currently, BiH’s network has a total length of 243 km. The sole cross-border entry point for gas is

Sepak, near Zvornik, where the handover measurement station is located. The design transmission

capacity of the natural gas pipeline Zvornik - Sarajevo (16 inch, 50 bar) is 1.25 bcm/year. In addition,

hand-over pressure is limited to max 30 bar due to current condition of the gas pipeline after 40 years

of operation, with regard to both Serbia and BiH sections.

Although the current contracted hand-over pressure is 30 bar, the transmission capacity of 750 million

m3/year is theoretical taking into account the age of the gas pipeline of 40 years as well as changes

of the value of transmission factor occurred during the exploitation. Taking into account the

aforementioned, current max transport capacity of BiH is approx. 650 million m3/year, which during

the winter period is not sufficient to meet hourly consumption of consumers in the city of Sarajevo.

According to BH-Gas, industrial consumers connected to gas pipeline downstream Sarajevo come

into the situation that they cannot be supplied; this capacity (annual, semi-annual and daily transmission capacities) is divided in the ratio 60/40, as established by agreement (which is not valid)

of the capacity allocation between Federation of BiH and Republic of Srpska, respectively. In

accordance with this capacity allocation, max transport capacity for Federation of BiH is approx.

45.000 cm/h. In the winter period, daily consumption for city of Sarajevo according to BH-Gas reaches

more than 70.000 cm/h.

Figure 1: Map of the Gas transmission system in BiH

Transmission of natural gas in FBiH and supply to large customers are exclusively performed by BH-

Gas, the vertically integrated owner and operator of the largest part of the transmission pipeline in the

country. In more details, the ownership and the management of the gas transmission system in BiH is

split as follows:

Table 1: Gas transmission system in BiH

Section Length (km) Ownership TSO

Border – Zvornik 19 Srbijagas Srbijagas, Serbia Zvornik - Kladanj 40 Sarajevo-gas Lukavica Sarajevo-gas Lukavica Kladanj – Sarajevo 72 BH-Gas BH-Gas Semizovac – Zenica 54 BH-Gas BH-Gas Zenica – Travnik 40 BH-Gas BH-Gas Visoko – Brnjaci 18 BH-Gas BH-Gas

According to BH-Gas, the existing single interconnector from Serbia to BiH is at the end of its

technical lifetime (40 years old) and has a maximum of 10 years of remaining technical lifetime.

4.2 Gas Consumption

Basic domestic energy sources in BiH include coal and hydropower, while gas and oil are imported.

Coal represents over 50% of total consumption of energy, followed by crude oil, oil products, hydro,

natural gas and other energy sources.

Figure 2: Total natural gas consumption in BiH Source: BH-Gas

The consumption of natural gas in BiH declined significantly in the 1990s and early 2000s, from 0.6

bcm to 0.15 bcm, due to the war and the economic recession following the break-up of Yugoslavia.

There was then a recovery until 2005, at 0.38 bcm, after which it declined again. During the last ten

years, consumption has been fluctuating between 178 mcm (2014) and 314 mcm (2007).

0

50

100

150

200

250

300

350

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mcm

Gas Consumption

2 per. Mov. Avg. (Gas Consumption)

Overall, current gas consumption in BiH is considered low, mostly due to the following: a) not enough

developed gas distribution network, b) gas prices high compared to other fuels, mainly coal and wood,

c) lack of major industrial consumers and d) decreasing gas pressure due to the aging and technical

limitations of the main pipeline that result to lower gas supplies.

Today, four gas distributors are responsible for the distribution and retail sale of gas in BiH namely

Sarajevogas Sarajevo, Zvornik Stan, Sarajevo-gas Lukavica and Visoko Ekoenergija. The main part

of the distribution system is owned by Sarajevogas, Sarajevo.

In the FBiH, BH-Gas supplies all distribution companies and the large industrial consumers that are

located along the main gas pipeline and use gas as part of their production process.

Figure 3: Gas consumption 2006-2016 in BiH Source: BH-Gas; Srbijagas Daily Reports

Gas distribution is concentrated in FBiH and mainly in Sarajevo. Outside Sarajevo only a few large consumers are connected to the gas transmission system.

Table 2: Gas consumption breakdown by sector

(mcm) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (Ε)

FBiH Residential & Commercial Sector 163 160 161 142 153 158 145 126 107 126 134 144

Industrial Sector 46 45 62 59 57 54 54 56 53 51 35 38

RS Residential & Commercial Sector 3 3 3 2 3 3 3 2 2 3 3 Ν/Α

Industrial Sector 152 106 84 29 32 63 55 5 18 36 59 Ν/Α

Total Residential & Commercial Sector

166 163 164 144 156 161 148 128 109 129 137 Ν/Α

Industrial Sector 198 151 146 88 89 117 109 61 71 87 94 Ν/Α

(Source: BH-Gas; Srbijagas Daily Reports)

In FBiH, the residential & commercial sector constitutes the main consumer group, with slightly

increasing consumption during the last periods. In RS, the Zvornik aluminium processing plant has a

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016FBiH 209 205 223 201 210 212 199 182 159 177 169RS 155 109 87 31 35 66 58 7 20 39 62

0

50

100

150

200

250mcm

high share in total consumption and therefore oscillations in consumption in the area is due to

volatilities in the industrial production of the plant.

As the weather in BiH is characterized by cold winters and warm summers, high peaks of gas demand

occur during the winter period as a high proportion of gas usage is heat-related in households and commercial businesses that constitute the main consumer sector. This fluctuation in the residential

and commercial demand creates a consumption pattern with a winter peak. Given that contracted

volumes of natural gas are taken on a continuous basis over the year, this consumption pattern

means that significant volumes are not taken in the summer period, which impacts final gas price.

4.3 Gas Supply

BiH currently has only one supply route. Supplies are exclusively based on imports from a single

source, the Russian Federation, passing through Ukraine, Hungary and Serbia. In more detail, gas

supplies are delivered to BiH through the transmission system of Russia to the Ukrainian / Hungarian

border station at Beregovo, then through the Hungarian gas transmission system to Kiskundorozma

(Horgos) at the Hungarian / Serbian border and through the gas transmission of Serbia they enter BiH at Zvornik, where the gas metering and regulation station for the country is installed. Russian natural

gas has been supplied to the country since 1979, when the use of natural gas started in BiH.

Figure 4: Route of gas supply to BiH

The procurement of gas in BiH is performed through the importer Energoinvest d.d. Sarajevo, from

the supplier Gazprom export LLC, a subsidiary of Gazprom. BH-Gas along with Energoinvest is a

cosignatory of the agreement with the Russian supplier. In accordance with the signed agreement

between Energoinvest and BH-Gas, all financial liabilities based on the gas importation are settled by BH-Gas (payments, guarantees, etc.). Same holds for arrangement of transport and supporting

activities and for arrangement and delivery of gas to customers in the BiH.

The agreement on natural gas supply with Gazprom export LLC is extended by annexes on an annual

basis, usually at the end of each year. Gazprom sells gas outside the Russian Federation mainly

under long-term contracts at prices indexed mainly to world oil product prices. Generally speaking, the

long-term contracts of Gazprom are service contracts that allow buyers to exercise flexibility with

regard to daily volumes and annual supplies, while the seller has an obligation to deliver the pre-paid

take-or-pay volumes. Under the long-term contracts between Gazprom and counterparties, each party

is entitled to request a revision of the contract price if any material changes occur.

Further on, BH-Gas holds long-term gas transportation contracts with transporters through Hungary

and Serbia for the transmission of gas through the countries. According to BH-Gas, transportation

tariffs charged by the TSO’s in Hungary and Serbia are defined by long term contracts.

Finally, it should be mentioned that there is an agreement for daily capacity share between the

entities of FBiH and RS, 60:40 respectively. This agreement has never been made obligatory and by

agreement envisaged consent of entity governments.

According to BH-Gas, taking into account that natural gas was introduced in BiH exclusively for the

purpose of supplying consumers in the city of Sarajevo, the contracts with large industrial consumers from the very beginning were made with switch-off clause. That clause secured that large industrial

consumer in whole BiH switched to using alternative fuels, in case that supply of households in the

Sarajevo city was endangered.

Until recently, there has never been a need to apply this rule. However, according to BH-Gas, given

that consumption in the RS is increasing, applying the 60:40 share with the technical constraints of

the existing system will limit the gas that is transmitted to FBiH which will lead to shortages during the

peak months, even for the protected consumers and this situation is getting worse because of

technical life time of the existing gas pipeline, i.e. the reduction of technical capacity in the near future.

4.4 Gas Prices

In Bosnia and Herzegovina, the gas sector is not regulated yet in accordance with EU legislation, and

competencies are divided among different administrative units i.e. authorities.

In FBiH, there is no established natural gas transmission tariff system in the natural gas sector, and

there are no legal regulations defining the gas transmission system methodology. The gas sector,

including issues pertaining to gas tariffs, is currently regulated by the Decree on the Organization and

its Regulation of the Gas Sector adopted in November 2007 (“Official Gazette Federation of BiH“, No.

83/07). Gas tariffs are based on calculations including the supply price of gas and the distribution

price of gas. According to Article 31 of the Decree, the Government of FBiH determines the price of gas supply for the supplier of gas to tariff customers, who provide public services in FBiH, on the

basis of a proposal provided by the Federal Ministry of Trade and obtained prior opinion of the

Federal Ministry of Energy, Mining and Industry. BH-Gas determines the price of gas supply for tariff

customers, who do not belong to the aforementioned category, and is obligated to notify the Ministry

in written form regarding any changes in price.

For the years 2012-2017, average prices of BH-Gas to its customers and Gazprom’s average gas

selling prices in Europe (net of VAT, excise tax and customs duties) were as follows:

Figure 5: Quoted gas prices (1) Source: http://www.gazprom.com/about/marketing/europe/,

2017: http://www.gazprom.com/f/posts/57/287721/ifrs-presentation-3q2017.pdf

(2) Source: BH-Gas

As presented on the graph above, BH-Gas prices tend to follow Gazprom’s trends on European

prices. According to Gazprom, in its contracts it follows competitive gas pricing, reflecting primarily

changes in the oil prices with a six to nine-month time lag.

Furthermore, the current transmission tariffs (entry/exit tariffs) from Ukraine to BiH through Hungary and Serbia, according to the latest rates (April 2018) published by the TSO’s, have as follows:

• Hungary entry tariff: 1,483.63 HUF 4.75 eur per kWh/h

• Hungary exit tariff: 1,663.59 HUF 5.32 eur per kWh/h

47.31 HUF 0.15 eur per MWh • Serbia entry tariff: 242.68 RSD 2.04 eur cm/day

• Serbia exit tariff: 481.43 RSD 4.04 eur cm/day

0.84 RSD 0.01 eur cm

Finally, the average prices of natural gas for households and industry connected to the distribution

system of Sarajevogas Sarajevo from August 2017 and still valid are presented on the following table.

Table 3: Gas prices of natural gas in FBiH

Gas User Category in KM/cm

BH-Gas Price

Distribution Fee

Price without VAT

Price with VAT

Large Industrial Users 0.495 0.250 0.745 0.872

KJKP Toplane Sarajevo doo 0.495 0.080 0.575 0.673

Small Industrial Users 0.495 0.260 0.755 0.883

Residential Users 0.495 0.080 0.575 0.673

Eligible Consumers 0.495 0.040 0.535 0.626

2012 2013 2014 2015 2016 2017Gazprom Price - Europe (1) 299.8 286.3 264.5 221.5 159.0 163.8BH-Gas Selling Price (2) 419.3 407.6 385.5 370.9 251.0 250.5

0

50

100

150

200

250

300

350

400

450(eur/1,000 cm)

Gas User Category in Eur/cm

BH-Gas Price

Distribution Fee

Price without VAT

Price with VAT

Large Industrial Users 0.252 0.128 0.380 0.445

KJKP Toplane Sarajevo doo 0.252 0.041 0.293 0.343

Small Industrial Users 0.252 0.133 0.385 0.451

Residential Users 0.252 0.041 0.293 0.343

Eligible Consumers 0.252 0.020 0.273 0.319

Source: Sarajevogas doo

Note: The gas price is determined by the decision of the Government of Canton of Sarajevo. BH-Gas

price for distribution is determined by the decision of the Government of the Federation BiH.

The gas price for large industrial consumers directly connected to the BH-Gas’s transmission system

is defined by Contracts between BH-Gas and large industrial consumers.

5 The South Gas Interconnection of BiH and HR

5.1 Pipeline Routing and Capital Investment

The South Gas Interconnection Pipeline BiH – HR starts from Zagvozd in Croatia, runs towards

Imotski, continuing toward the border to BiH in the vicinity of Posusje and then it turns north towards Novi Travnik. A pipeline branch heading south connects Posusje with Mostar. The detailed pipeline

route has as follows:

The total length of the above route is 183.76 km with the pipe diameter being DN500. The pipeline is

bidirectional with the entry capacity to BiH at the HR/BiH interconnection at 38 GWh/day and the exit

capacity at 73 GWh/day from Croatia.

In addition, the construction of the Split – Zagvozd section is considered as part of the Project in order

to connect the South Gas Interconnection Pipeline BiH – HR with the existing Croatian gas

Zagvozd (HR) – Border HR/BiH

21.8The route starts from Zagvozd in Croatia, runs in north-east direction reaching Imotski, continuing toward the border.

Border HR/BiH – Posusje (BIH)

0.7 From the borders, the route runs to Posusje in BiH.

Posusje – Tomislavgrad

35.7In the first section the pipeline route passes through Posusje Field, Vinjani plateau, Duvno field to Tomislavgrad (Sarajlije).

Tomislavgrad - Suica

10.7

From Sarajlije the route passes through south eastern slopes of Paklina Mountain, to the tie-in point at Suica where the branch towards Linvo is located. (Potential future extension pipeline - Suica – Livno (17,7 km).

Suica - Kupres 20.7The route from tie-in point at Suica runs towards Kupres through Kupres field up to Antonica Kuce.

Kupres - Bugojno

17.7

From Kupres the route ascends to Vran top and then descends to Bugojno pit to Kandija where the branch towards Gornji Vakuf is located. (Potential future extension pipeline - Bugojno - Gornji Vakuf (Uskoplje) 12,8 km).

Bugojno - Novi Travnik

28.5

From Bugojno, main route turns lowlands to Vilesi, where is eventually a branch towards Travnik. The route then ascends towards Jagoda hill top and descends to Rankovici, near Novi Travnik. From Rankovici the route stretches through Kuka slope to measuring and regulating station Novi Travnik.

Posu

sje

- M

osta

r Br

anch Posusje - Siroki

Brijeg – Mostar48.0

The route stretches from tie-in point at Posusje lowlands to Kocerin and Mostar mud, near to aluminium factory Mostar. At Kocerin the route separates to Grude. (Potential future extension pipeline - Kocerin - Grude 4,1 km).

Zagv

ozd

- Pos

usje

- No

vi T

ravn

ik

Bran

ch

transmission network that currently expands up to Split. According to Plinacro, this additional section

will have a length of 52 km and a diameter of 32 inches, following the IAP standards rather than the

requirements of the BiH gas market, since it will be part of the Croatian section of IAP.

The preliminary EIA, which was conducted during the Pre-FS Report, considered potential impacts on the climate, geomorphology and soil quality, water resources, land use, biological and ecological

resources, protected natural values, landscape and visual sensitivity, air quality and noise levels. Most

of the potential physical, biological and economic residual effects that could arise during construction

and operation of the pipeline were considered to be reversible in the short- to medium-term. However,

some residual effects were considered to be reversible in the long-term such as alteration of native

vegetation along the pipeline route. Nevertheless, it was assessed that there were no situations

where there was a high probability of occurrence of a permanent or long- term residual effect of high

magnitude that could not be technically or economically compensated. Consequently, residual effects associated with the pipeline were not considered significant.

As estimated on the Pre-FS Report, Capital Expenditures for the South Gas Interconnection Pipeline

BiH – HR include investments in land and equipment for natural gas transportation. Compressor

stations were not included in the analysis and therefore no related costs have been included in the

CAPEX. The investment costs were based on the agreed technological and engineering

characteristics and have as follows:

Table 4: Capex by pipeline section

Pipeline Section (in‘000 eur) km

Capex allocated in

HR

Capex allocated in

BiH

Total Capex

Zagvozd - Border line 21.80 16,000 16,000 Border line - Posusje 0.66 409 409 Posusje – Tomislavgrad 35.70 21,420 21,420 Tomislavgrad – Suica 10.70 6,848 6,848 Suica – Kupres 20.70 12,420 12,420 Kupres – Bugojno 17.70 12,213 12,213 Bugojno - Novi Travnik 28.50 18,240 18,240 Posusje-Mostar 48.00 28,800 28,800 Total 183.76 16,000 100,350 116,350

Source: For the Zagvozd - Border line figures, Plinacro. For the rest, Pre-Feasibility Study - South Interconnection of BiH and HR, Connection Options Comparison Report, August 2013.

Moreover, according to Plinacro, the estimated CAPEX for the Split – Zagvozd pipeline section is

expected to reach the amount of 48 mil. eur. Therefore, the total CAPEX for the Project

Interconnector is estimated to reach 164 mil. eur.

5.2 Gas Market Outlook and Expected Consumption

The South Interconnector is expected to enhance consumption since it will provide increased and

uninterrupted gas supply to existing gas users but also to new users along the existing and the newly

gasified areas.

In order to assess future demand in the FBiH, two major consumer groups were considered and

different approaches were used:

• Consumers on the existing gas pipeline network

• Consumers in the future gasified areas

5.2.1 Consumers on the existing gas pipeline network

This group includes existing and potential consumers in the areas of the existing gas pipeline network. The Project Interconnector is expected to increase gas consumption at these areas since it

will provide availability and reliability of supply and therefore will overcome some of the issues that

lead to a decrease in the use of gas during the last years, while at the same time attract new users.

Moreover:

• Industries will be able to rely on ample and continuous gas supply,

• The residential / commercial sector can make use of reliable and modern means of heating houses.

Expected gas consumption for this group was based on the latest historic gas consumption level for

FBiH; it was expected to grow by 5% annually for the first 5 years and then to decrease gradually to

1.5% by the end of the twenty-year period. The applied rate has taken into account the following:

- The estimated average growth rate for gas consumption in BiH as per the IAP FS and ESIA report 4;

- The World Energy Outlook of IEA5;

- The Natural Gas Sector Development Study of Ramboll 6;

- The gas penetration rates of other similar countries which is higher when compared to BiH;

- The potential to expand district heating systems;

- Supportive environmental policies that limit the use of coal or other fossil fuels in favour of

gas; and

- The expansion of use of gas in other fields (transportation, CNG application).

5.2.2 Consumers in the future gasified areas

This group includes potential consumers in the following areas:

• The main areas of the Cantons Hercegovackoneretvanski, Zapadno-hercegovacki and Livanjski

4 Starting with the baseline consumption of 0.28 bcm in 2010, total gas consumption for BiH until the year 2040 was forecasted at 2.2 bcm. Therefore, a CAGR of 6.88% was estimated for the period 2010-2040. Source: COWI-IPF Consortium, FS and ESIA for the Ionian – Adriatic Pipeline, December 2012. 5 In E.Europe/Eurasia area, gas demand is expected to increase steadily among 2012-2040 with an estimated compound average annual growth rate of 0.5%. Source: International Energy Agency, World Energy Outlook 2014, Paris, France, 2014 6 BiH Natural Gas Sector Development Study, RAMBØLL, Teknikerbyen 31, Dk-2830 Virum, November 2000

• The areas:

- of Bugojno

- from Busovaca to Travnik (Lasva and Fojnica areas), where there is an existing pipeline

branchthat is not in operation yet

- of Zenica, where a new distribution company is established.

Forecasted gas consumption in the Cantons Hercegovackoneretvanski, Zapadno-hercegovacki and Livanjski

The Southern Interconnector will pass through cantons in BiH that did not have previous access to

gas. Forecasted demand for gas consumption in these areas was drawn upon the Study for gas

pipeline construction in the Cantons Hercegovackoneretvanski, Zapadno-hercegovacki and Livanjski7.

The analysis of expected gas consumption for the three Cantons focused on the access to potential

consumers rather than the actual forecasts given in the detailed study.

Based on the relevant study, the forecasted consumption for the main cities that are close to the route

of the new pipeline has as follows:

Table 5: Potential gas consumption in new municipalities

Note: In order to reflect current conditions and given the time of the study (2009), all estimates have been shifted according to assumed Commercial Operating Date (COD)

Forecasted gas consumption in the Lasva and Fojnica areas, Bugojno and Zenica

Future consumption in the cities of Buzovaca, Vitez, Novi Travnik, Travnik, Bugojno, Kiseijak,

Kresevo, Fojnica and Zenica was treated separately since these are considered main cities on the

existing or under examination gas network, which currently do not receive gas or receive insufficient

quantities of gas (Zenica).

Estimated consumption for the Lasva and Fojnica areas as well as for Bugojno was derived from the

Gasification Study conducted by the Research and Development Center of Gas Technology,

7 Pre-Investment Study for gas pipeline construction in the Cantons Hercegovackoneretvanski, Zapadno-hercegovacki and Livanjski, Energy Institut Hrvoje Požar and Plin Inženjering, d.o.o., Zagreb, Croatia, December 2009.

COD 2020 2025 2030 2035 2039

Posusje - Novi Travnik BranchPosusje 2025 0.00 0.38 2.32 3.05 3.60Tomislavgrad 2025 0.00 0.51 3.26 4.22 4.92Kupres 2025 0.00 0.07 0.47 0.61 0.70

Mostar BranchGrude 2020 0.36 2.26 2.95 3.63 4.17Siroki Brijek 2020 0.53 3.60 4.58 5.76 6.61Mostar 2020 1.97 12.76 17.38 23.84 28.71

Posusje - Novi Travnik BranchPosusje 2025 0.00 0.12 0.56 1.44 2.12Tomislavgrad 2025 0.00 0.46 2.24 3.64 4.45Kupres 2025 0.00 0.01 0.15 0.26 0.31

Mostar BranchGrude 2020 0.24 1.15 2.06 2.80 3.28Siroki Brijek 2020 0.00 0.50 2.41 6.20 9.08Mostar 2020 3.15 10.84 18.51 27.67 34.94

(in mcm)

Res

iden

tial &

C

omm

erci

alS

ecto

r

Indu

stria

l S

ecto

r

Sarajevo8. The main goal of this study was to establish natural gas needs in Central Bosnia Canton

and in terms of satisfying these needs, to define a natural gas network development proposal for the

region.

Estimated consumption for the Zenica area was derived from the Feasibility Study for gasification of Zenica, conducted by the Research and Development Center of Gas Technology, Sarajevo9.

Currently, gas is delivered only to the steel factory in Zenica (ArcelorMittal Zenica). However, a new

distribution company is established that, given increased gas supply availability, it is expected to

significantly boost consumption in this populated and polluted area of the FBiH.

In addition, the estimated consumption figures from the pre-mentioned studies were adjusted by

different penetration rates, based on the market of the broader region, as follows:

• Residential and Commercial Sector: the penetration rate was assumed to be 5% in the first operational year then gradually increase to a maximum of 70%, which would be achieved

after 15 years for the residential sector and 10 years for the commercial sector. It was also

assumed that 30% of the potential end users would never switch to or use the natural gas.

• Industrial Sector: the penetration rate was assumed to be 10% in the first operational year and then gradually increase to a maximum of 70%, which would be achieved after 5 years of

operation. It was also assumed that 30% of the potential end users would never switch to or use the natural gas.

The forecasted consumption for the above cities has as follows:

Table 6: Gas consumption in Lasva and Fojnica areas, Bugojno and Zenica

8 Technical and Economic Study of Gasification of Central Bosnia Canton, Research and Development Center of Gas Technology, Sarajevo – Bosnia-Herzegovina, June 2006 9 Feasibility Study for gasification of Zenica, Research and Development Center of Gas Technology, Sarajevo – Bosnia-Herzegovina, January 2009

2020 2025 2030 2035 2039

Busovaca 0.19 0.53 1.48 3.86 3.86Vitez 0.25 0.71 2.09 4.92 4.92Novi Travnik 0.24 0.69 1.99 4.89 4.89Travnik 0.55 1.57 4.62 10.94 10.94Bugojno 0.45 1.28 3.71 9.05 9.05Kiseljak, Kresevo, Fojnica 0.46 1.33 3.95 9.30 9.30Zenica 0.87 2.60 8.08 17.47 17.47Busovaca 0.20 1.97 1.97 1.97 1.97Vitez 0.23 2.26 2.26 2.26 2.26Novi Travnik 0.21 2.07 2.07 2.07 2.07Travnik 1.00 10.00 10.00 10.00 10.00Bugojno 0.67 6.68 6.68 6.68 6.68Kiseljak, Kresevo, Fojnica 0.18 1.81 1.81 1.81 1.81Zenica 0.21 2.12 2.12 2.12 2.12

Res

iden

tial &

C

omm

erci

al

Sec

tor

Indu

stria

lS

ecto

r

(in mcm)

5.2.3 Gas consumption forecasts

Based on the above, the gas flows transported by the Project Interconnector are presented below:

Table 7: Expected gas flows transmitted through the Project Interconnector

5.2.4 Potential use of gas for electricity generation in FBiH

From the late 1990s, several studies evaluated the potential for gas consumption for electricity

generation in BiH. The first comprehensive study was carried by RAMBOLL10 in 2000, where in the

high demand growth scenario there was a potential for a gas fired CCGT (Combined Cycle Gas

Turbine) a CHP and as start-up fuel in existing coal power plants. In the lower and base case growth

scenarios, lower level of gas use in electricity were envisaged.

The Energy Sector Study in BiH from 2008, considered the option for building new power plants in

Bosnia and Herzegovina. The possibility of a modern, high efficient CCGT unit with installed power of

300 MW was considered as well. It was assumed that such a power plant could not be commissioned

before 2015. Gas fired power plants, given the cost of the investment of 600 eur/kW (overnight cost)

10 BiH Natural Gas Sector Development Study, RAMBØLL, Teknikerbyen 31, Dk-2830 Virum, November 2000

Residential & Commercial

Sector

Industrial Sector

Sub-TotalResidential & Commercial

Sector

Industrial Sector

Sub-Total

2020 153.73 37.37 191.10 5.89 6.08 11.97 203.072021 161.42 39.23 200.66 7.87 8.63 16.50 217.152022 169.49 41.20 210.69 10.60 12.37 22.97 233.662023 177.97 43.26 221.22 14.40 17.94 32.34 253.562024 185.09 44.99 230.07 19.74 26.32 46.06 276.132025 192.49 46.79 239.27 28.28 39.97 68.25 307.532026 200.19 48.66 248.84 31.87 41.74 73.61 322.462027 208.20 50.60 258.80 36.24 43.82 80.07 338.872028 215.48 52.37 267.86 41.65 46.29 87.94 355.792029 223.02 54.21 277.23 48.39 49.24 97.63 374.862030 230.83 56.10 286.93 56.88 52.82 109.70 396.642031 238.91 58.07 296.98 63.11 55.37 118.48 415.452032 246.08 59.81 305.89 70.44 58.21 128.64 434.532033 253.46 61.60 315.06 79.09 61.38 140.47 455.532034 261.06 63.45 324.52 89.34 64.93 154.27 478.792035 266.28 64.72 331.01 101.52 68.92 170.44 501.452036 271.61 66.02 337.63 103.29 71.66 174.95 512.582037 275.68 67.01 342.69 105.15 74.59 179.73 522.422038 279.82 68.01 347.83 107.09 77.72 184.81 532.642039 284.02 69.03 353.05 109.13 81.08 190.21 543.26

YearTotal

Existing Consumption Area New Consumption Area

(in mcm)

and anticipated price for natural gas according to the IEA and WEC scenarios, were not considered

an option. Their competitiveness was challenged by relatively low-priced lignite and brown coal from

domestic sources. In addition to thermal power plants using lignite and natural gas, consideration was

also given to wind power plants, small hydro power plants and a few more perspective projects using hydro power.

The Strategic Plan and Program of the Energy Sector Development of FBiH from 2009, summarized

results of the previous two studies, but did not give any new recommendations related to the

development of gas consumption in electricity generation. In the electricity generation part of the

study, a gas fired power plant was not even considered as an option.

In 2009, activities on the development of 385 MW CCGT facility in Zenica started. According to the

Indicative Production Development Plan for 2018-2027 of NOS (Independent System Operator in

BiH), this was the only gas fired plant envisaged in BiH until 2027 and the plant should start production of 3.250 GWh of electricity from 2024. Other sources pointed that production should be

around 2.700 GWh. This can translate to consumption of gas between 560 and 680 mcm per year.

This power plant was the only plant analysed as potential gas fired power plant in Framework Energy

Strategy of the FBiH by 2025. The Strategy did not give any concrete recommendations related to the

priorities to the electricity generation development but mentioned: “Realization of potential new

projects needs to be planned and implemented in accordance with the adopted and future Action

Plans, EU/EC commitments and long-term sustainability for the FBiH”.

Anyhow, development of the gas fired production facility in Zenica is currently put on hold. In any case, potential gas consumption of this power plant should be closer to 500 - 560 mcm per year. The

expected 680 mcm consumption applies to very high number of working hours which is highly non-

typical for gas fired power plants in countries with significant coal and hydro production capacities.

In 2010, BH-Gas and JP Elektroprivreda BiH evaluated the possibility of the development of a gas

fired power plant at Kakanj. It envisaged a 120 MW CCGT power plant and a system of start-up of

current coal plants with gas. For the supply of gas for this power plant, the existing supply route did

not have sufficient capacity and the development of a compressor station was envisaged. It was concluded that the development of the CCGT Kakanj could not be feasible with the prevailing gas and

electricity price at that time and that due to the long distance to potential heat customers, sales for

heating could not support the economics of the plant.

Considering all the above mentioned and current electricity and gas prices, the development of gas

powered plants in the FBiH is very much uncertain and therefore has not been taken into account in

the gas consumption forecasts.

5.3 Gas Supply Routes and Transmission Costs

With the development of the Project Interconnector, the following gas supply routes become

immediately available for the transmission of gas to BiH:

I. If the gas is purchased in Ukraine: Hungary (Drávaszerdahely) - Croatia (Imotski)

II. If the gas is purchased in Slovakia: Austria (Murfeld) - Slovenia (Rogatec) – Croatia (Imotski)

As soon as the LNG terminal on the Island of Krk in Croatia is in operation, BiH will have the option of

supply solely through Croatia and later on, when the IAP is constructed, it will have the option of

getting Azerbaijan gas through the TAP.

As can be seen from the pre-mentioned supply route alternatives, the Project Interconnector will be

linked to the Croatian gas transmission system. A brief description as well as a display of current

transmission tariffs according to the TSO’s sites via the two alternative gas supply routes are

presented on the following sections.

5.3.1 The Croatian gas transmission system

Figure 6: Gas transmission system in Croatia in 2013 Source: Directions of development of the Croatian gas system, Đurovic. HSUP Opatija 2010

The transmission system of the Republic of Croatia, controlled by the transmission system operator,

Plinacro Ltd, consists of the following pipeline segments:

• 952 km of a max. operating pressure of 75 bar and the diameter from DN 200 to DN 800 mm

• 1,741 km of a max. operating pressure of 50 bar and the diameter from DN 80 to DN 500 mm,

The Transmission system receives gas through nine entry measuring stations, two of which represent entry stations with international character for the imported gas through Slovenia (Rogatec) and

Hungary (Drávaszerdahely), while the remaining have domestic character and take gas from domestic

gas fields, as well as the underground gas storage facility Okoli. Gas is being delivered from the

transport system through 191 connections at 157 exit measuring-reduction stations, whereof 151

connections are used for delivery to distribution system and 40 as delivery points for industrial

customers on the transportation system.

In addition to the existing gas pipeline, a new one is anticipated on the route Lučko - Zabok - Rogatec

(ESIA is done, Basic Design is done, Location permit is obtained and Main Design is underway), that will significantly increase capacity of the interconnection of the Croatian and Slovenian transmission

systems. The capacity of this gas pipeline will amount up to 5 bcm/y in both directions as opposed to

the existing gas pipeline, the capacity of which amounts up to 1.8 bcm/y in the direction from Slovenia

to Croatia. The completion of this project is important for the security of supply of the Croatian market

and the markets of the Southeast Europe.

Current Croatian gas supply possibilities from production, import and storage amount to 210 GWh/day

and are expected to increase to 250 GWh/day in 2020 after new compressor station is built in 2019

(positive FID taken). This capacity will enable covering of both Croatian and FBiH peak gas demand up to 2024 when supply balance becomes negative. Croatia prepares the development of a new

Slovenian interconnection of around 200 GWH/day total capacity and an LNG terminal development

with first phase estimated capacity of 72 GWh/day. With the development of new Slovenian

interconnection both Croatian and FBiH peak demand will be covered through project time.

Plinacro LTD is a national gas transmission system operator in Republic of Croatia. The Company

manages the system of main and regional gas pipelines in Croatia which transport natural gas from

domestic production and import it to the distribution systems (industrial and power plants), as well as

to customers that are directly connected to the transmission system.

5.3.2 Gas Transmission Costs

Based on current transmission tariffs, the cost through the two alternative gas supply routes (entry/exit

tariffs), according to the latest rates (April 2018) published by the TSO’s, has as follows:

If the gas is purchased in Ukraine: Hungary (Drávaszerdahely) - Croatia (Imotski)

• Hungary entry tariff: 1,483.63 HUF 4.75 eur per kWh/h

• Hungary exit tariff: 631.25 HUF 2.02 eur per kWh/h 47.31 HUF 0.15 eur per MWh

• Croatia entry tariff: 2.69 KN 0.36 eur per kWh/h

• Croatia exit tariff: 6.86 KN 0.92 eur per kWh/h

0.0018 KN 0.00024 eur per MWh

If the gas is purchased in Slovakia: Austria (Murfeld) - Slovenia (Rogatec) – Croatia (Imotski)

• Austria entry tariff: 0.70 eur per kWh/h)/y • Austria exit tariff: 4.16 eur per kWh/h)/y • Slovenia entry tariff: 0.11 eur per kWh/h)/day

• Slovenia exit tariff: 0.06 eur per kWh/h)/day

0.03 eur per kWh • Croatia entry tariff: 2.69 KN 0.36 eur per kWh/h

• Croatia exit tariff: 6.86 KN 0.92 eur per kWh/h 0.0018 KN 0.00024 eur per MWh

5.4 Other Gas Supply Sources

With the development of the Project and as soon as the investments are completed, the following additional supply sources will become available to BiH: a) LNG KrK and b) Shah Deniz II development in Azerbaijan.

Moreover, natural gas that will enter the Project Interconnector may also be purchased in the open market on the liquid HUB-s or virtual trading points in Austria and Hungary. For reference reasons, in the following table a Comparison of EU wholesale gas prices in the second quarter of 2017 EUR/MWh is presented.

Figure 7: Comparison of EU wholesale gas prices in the third quarter of 2017 Source: Market Observatory for Energy, DG Energy, Volume 10, issue 3, third quarter of 2017

6 Scenarios under Examination

The Project Interconnector will connect the gas transmission system of Bosnia & Herzegovina and Croatia and will enable the diversification of routes and sources of supply for BiH. For this purpose,

the countries that are directly involved in the transmission of gas up to BiH through the specific

pipeline, are grouped in two categories as follows:

• the countries on whose territory the Project Interconnector is constructed (i.e. Croatia and

Bosnia & Herzegovina),

• The neighbouring countries directly connected by gas infrastructure (i.e. Serbia, Slovenia and Hungary).

In order to assess the feasibility (both financial and economic) of the Project Interconnector, the

incremental approach was used and two main scenarios were examined, without and with the

implementation of the pipeline. The results of the CBA derive from the comparison of those two

scenarios, by assessing the incremental costs and benefits.

6.1 The Incremental Approach

The incremental approach requires that a counterfactual scenario is defined as what would happen in

the absence of the project. For this scenario, projections are made of all cash flows related to the

operations in the area for each year during the project lifetime:

• In cases where a project consists of a completely new asset, the “Without the Project” scenario is one with no operations.

• In cases of investments aimed at improving an already existing facility, it includes the costs

and the revenues/benefits in order to operate and maintain the service at a level that it is still

operable (Business as Usual) or even small adaptation investments that were programmed to

take place anyway (do-minimum).

In the CBA, in order to assess the incremental gas flows, the following were taken into consideration:

The financial and economic performance indicators are calculated on the incremental cash flows only.

6.2 The Project Baseline Scenarios

The CBA considers the difference between the counterfactual, do-nothing or the “Without the Project”

scenario and the “With the Project” scenario.

In the “Without the Project” scenario, due to the pre-mentioned technical limitations in the existing

facilities, the current pipeline is expected to reach the end of its technical lifetime in ten years. For this

period, consumption in the FBiH is anticipated to remain at approximately the same levels, with a 5%

annual reduction, as a provision for inability to meet demand due to aging of the existing facilities.

Moreover, for the years of operation, the necessary maintenance investments were assumed, in order

to ensure basic functionality of the assets and service provision under similar quality levels (Business as Usual).

On the other hand, in the “With the Project” scenario, consumption in FBiH is expected to be

enhanced since the developed network will provide increased and und

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