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Oil & Gas Laws and Regulations in Serbia

Oil & Gas Laws and Regulations in Serbia

Oil & Gas Comparative Guide: 2022
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Contributed by JPM Jankovic Popovic Mitic.

1. SUMMARY 

The Republic of Serbia became a member of the Energy Community by signing the Treaty Establishing Energy Community in 2006. As a member, the Republic of Serbia undertook the obligation and is devoted to legally complying its energy sector with the Energy Community acquis. Therefore, while drafting the Energy Law (Official gazette of the RS no. 145/2014, 95/2018 – other law and 40/2021), Directive 2009/73/EC of July 13, 2009, concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC as well as Regulation 715/2009/EC of July 13, 2009, on conditions for access to the natural gas transmission networks and repealing Regulation 1775/2005/EC were adopted. Furthermore, in the field of oil, Directive 2009/119/EC of September 14, 2009, imposes an obligation on member states to maintain minimum stocks of crude oil and/or petroleum products is implemented.

Additionally, the Ministry of Mining and Energy is currently in the process of implementation of several natural gas rules, namely: i) Regulation 703/2015/EU of April 30, 2015, establishing a network code on interoperability and data exchange rules, ii) Regulation 2017/459/EU of March 16, 2017, establishing a network code on capacity allocation mechanisms in gas transmission systems and repealing Regulation 984/20131/EU, iii) Regulation 2017/460/EU of March 16, 2017, establishing a network code on harmonized transmission tariff structures for gas, iv) Regulation 312/2014/EU of March 26, 2014, establishing a network code on gas balancing of transmission networks and v) Annex 1 to the Regulation 715/2009/EC governing transparency and congestion management mechanisms. Adoption is expected to occur in 2022. With these regulations, it is expected that the Serbian natural gas market becomes more connected and harmonized with the EU natural gas market, having in mind that the Republic of Serbia has implemented almost all Energy Community acquis in its legislation.

Additionally, the Serbian energy sector, including the oil & gas sector as well as renewable energy sources, is in expansion and open to investments. One of the major recent investments in this regard was the completion of the Turkish Stream and the commencement of its operation. The Turkish Stream stretches from the Serbian border with Bulgaria to the Serbian border with Hungary, and the pipeline is approximately 400 kilometers long, with an annual capacity of approximately 13 million cubic meters. Taking into account the dimensions of the pipeline, as well as the strategic interest of Serbia in this project, the Turkish Stream represents the biggest investment in the Republic of Serbia in the last 50 years. Furthermore, with this investment, it is strived to achieve a more secure supply of natural gas, as well as to create diversification of supply routes. Additionally, one more gas interconnector between the Republic of Serbia and Bulgaria is currently under construction, aiming to connect the domestic natural gas market with gas from the Shah Deniz (Azerbaijan) gas field with the same aim of diversification of supply routes.

2. OVERVIEW OF THE COUNTRY’S OIL & GAS SECTOR 

2.1. Legal framework – a brief outline of your jurisdiction’s oil & gas sector

The Law on Mining and Geological Exploration

The Law on Mining and Geological Exploration (“Official gazette of the RS” no. 101/2015, 95/2018 – other law and 40/2021) recognizes oil and natural gas as mineral resources of strategic importance to the Republic of Serbia and their exploration and exploitation are considered to be in the public interest. The said law sets out conditions for oil and natural gas exploration, in which exploration may be undertaken by a domestic company, other legal entity, or an entrepreneur. 

Additionally, foreign investors may have participation in the exploration as well as in its exploitation, but not directly. Namely, in order for foreign investors to perform exploration/exploitation of oil and natural gas, they must incorporate a branch office and register it before the Business Register Agency of the Republic of Serbia. When conditions for exploration are met (see Section 3.1.), the competent body of the Republic of Serbia shall issue an exploration permit to the eligible entity.

When the exploration phase is conducted, the entity may submit a request for obtaining an exploitation permit. The exploitation of mineral resources is considered the performance of works in the exploitation of oil and natural gas and works in the separation of oil and natural gas, the preparation of oil and natural gas for transport and storage, as well as the extraction of LNG in appropriate facilities. 

Energy Law

1) Production and import

From the point of view of the Energy Law, the production of natural gas is not considered as an energy activity for which an energy license is required. However, for the production of oil derivates, it is necessary that the entity, before the commencement of production, obtains a license. Otherwise, such an entity commits a commercial offense.

As for the import of oil and natural gas, the Energy Law stipulates that an entity must have a license for conducting of energy activity oil trade i.e., energy activity natural gas supply. The energy license is issued upon the request of the interested party by the Energy Agency of the Republic of Serbia (Energy Agency). However, in case oil i.e., natural gas is imported for the own needs, such a license is not legally required. On the other hand, it is required to have the said license for oil trade in case of oil exports. Contrary, when exporting natural gas, an energy license is not legally required. Other approvals are not needed for export/import.

2) Transmission/distribution

Regarding the energy activities natural gas transmission i.e., distribution, the Energy Law sets out as a mandatory condition to have a license for the respective energy activity. 

Furthermore, in line with the EU Third Energy Package, it is mandatory that energy activity natural gas transmission is unbundled from the activities of natural gas production and natural gas supply, meaning that the energy entity transporting natural gas is not allowed to be involved in the natural gas production or to conduct energy activity natural gas supply. 

As for oil transport, this activity is also recognized as energy activity and thus a license is required. 

Currently, in the Republic of Serbia, three natural gas transmission system operators conduct energy activity being Gastrans doo Novi Sad, Transportgas doo Novi Sad and Yugorosgaz-transport doo Nis. Each of the operators has its own transmission system network. As per distribution, thirty distribution system operators are licensed. On the other hand, only one operator for oil transport is licensed being Transnafta ad Pancevo and it transports oil via pipeline from Pancevo to the border with Croatia (for more detail please see Section  2.1.2).

Furthermore, the transmission of natural gas/oil and distribution of natural gas are recognized as activities of public interest.

3) Storage

Natural gas storage and oil storage are also energy activities for which conduction is required to have a license pursuant to the Energy Law. Same as for operator of a natural gas transmission system, operator of natural gas storage must be unbundled from the energy activities of natural gas transmission, production, and supply.

However, a license is not legally required when oil is stored for its own purposes in a storage facility with a capacity of over 5 tons. In such a case, approval of the Ministry of Mining and Energy must be obtained.

4) Energy permit

For the construction of natural gas transmission system, natural gas distribution system, natural gas storage, oil transportation system, and oil storage, it is mandatory to obtain an energy permit. The Ministry of Mining and Energy is authorized to issue energy permits upon request of the interested party.

In the oil sector, only one producer of crude oil is operating – Naftna Industrija Srbije. Simultaneously, Naftna Industrija Srbije is also the dominant player in oil trade, trade on gas stations as well as importer of oil, which is mainly imported from the Russian Federation. 

Same as in the oil sector, in the natural gas sector the only producer is Naftna Industrija Srbije. On the other hand, the main supplier of natural gas is JP Srbijagas which is 100% state-owned.

Regarding other market participants in the Republic of Serbia, please note that currently license for energy activity of natural gas transmission currently hold two companies, for natural gas distribution thirty companies, energy activity natural gas storage performs only one company and for supplies thirty-two companies are licensed.

In the field of oil, only one company is licensed for oil transportation, 24 companies perform oil storage, 56 are licensed for wholesale oil trade, and 462 for oil trade on gas stations.

As already stated, that Energy Law was drafted in line with the EU Third Energy Package, and unbundling of certain energy activities is required as a consequence. JP Srbijagas, being one of the major players in the Republic of Serbia’s natural gas market, commenced a long and complicated process of unbundling. As JP Srbijagas is the biggest supplier of natural gas, and thus cannot conduct energy activity of natural gas transmission, the company Transportgas doo Novi Sad was incorporated for conduction of natural gas transmission. Transportgas doo Novi Sad is in 100% state ownership.

Major recent investment in the gas sector was the construction of the Turkish Stream, an interconnector approximately 400 kilometers long, entering the Republic of Serbia at the border with Bulgaria, and exiting at the border with Hungary. Before the construction of this interconnector, the Republic of Serbia imported natural gas only from one point, at the border with Hungary. Now, when an alternative supply route is constructed, the security of supply is on a much higher level. 

With the same purpose Republic of Serbia commenced construction of a new interconnector which shall connect the Serbian gas network with the Bulgarian gas network, and thus will ensure new sources of natural gas.

Furthermore, as the north of the country is mainly gasified, the south still lacks a developed gas network. JP Srbijagas announced further investments in gasification estimating five to seven years to achieve complete gasification of the Republic of Serbia.

2.2. Domestic oil & gas production and imports/exports 

Natural gas

A major characteristic of reserves of natural gas is that the Republic of Serbia from its own reserves can cover only a small part of domestic needs for natural gas. The production of natural gas is conducted only in the area of ​​Vojvodina (north part of the Republic of Serbia) with Naftna Industrija Srbije as the only producer of natural gas. 

Having in mind that during 2020 the Republic of Serbia were consumed approximately 2.500 million cubic meters and at the same time were produced 265 million cubic meters of natural gas, it may be concluded that its own production of natural gas can satisfy about 10% of domestic needs for natural gas. For that reason, the Republic of Serbia is mainly oriented to import of natural gas and in 2020 were imported 2.144 million cubic meters of natural gas, out of which 1.384 million cubic meters were imported from Russian Federation, and 760 million cubic meters from other sources. Import of natural gas is conducted via gas pipeline. 

On the other hand, natural gas is not exported from the Republic of Serbia. However, the Republic of Serbia is a transit country through which natural gas is transported to Bosnia and Herzegovina as well as to Hungary.

Oil

Same as for natural gas, in the Republic of Serbia production of crude oil, conducts only one company being Naftna Industrija Srbije. The total consumption of crude oil and semi-finished products from domestic production, imports, and stocks in 2020 was about 3.299 million tons. In 2020, Serbia produced about 0.861 million tons of crude oil (26.10% of total consumption), and 2.438 million tons (73.90%) was provided from imports, out of which 2/3 of crude oil originates from Iraq, and the rest from Russian Federation and Kazakhstan.

As per export, in 2020 approximately 0.92 million tons of oil derivates were exported.

2.3. Foreign investment and participation 

The Republic of Serbia does not impose restrictions on foreign companies in relation to acquisitions of interest in the Serbian energy sector.

2.4. Protection of investment 

The most important international treaties in the energy sector are i) the Stabilization and Association Agreement, entered into force on September 1, 2013, granting the Republic of Serbia the status of an associated country to the European Union, by which agreement the Republic of Serbia, inter alia, undertook the obligation to be as much as possible harmonized with EU energy sector. At the end of the 2021 Republic of Serbia has fulfilled initial requirements in the energy sector (restructuring of the gas sector and creating an action plan on mandatory oil reserves) and therefore has opened an energy chapter in negotiation with the EU, and ii) the Treaty establishing Energy Community, which the Republic of Serbia become party to during 2006. Pursuant to this Treaty and decisions of the Energy Community bodies, the Republic of Serbia has concrete obligations to undertake certain legislative steps in order to be in compliance with EU energy regulations, including in the field of oil and natural gas. Thus, when adopting laws and regulations, the Republic of Serbia takes into account EU regulations (see Section 1) to the most extent possible.

A major bilateral treaty in this sector is the Agreement between the Government of the Republic of Serbia and the Government of the Russian Federation on Cooperation in Fields of Oil and Natural Gas, which was executed during 2008. This Agreement envisages several energy projects: i) the construction of the South Stream, which was stopped, ii) the construction of the natural gas Underground Storage Banatski Dvor, which was constructed and put into operation as of 2012, and iii) the acquisition of Naftna Industrija Srbije by Gazprom. Stability clause and protection from expropriation and similar acts are stipulated. 

With regard to bilateral agreements, the Republic of Serbia executed numerous agreements on mutual incentives and investment protection, with over twenty such agreements with EU countries (inter alia United Kingdom, Germany, France, the Netherlands, etc.). The majority of the agreements are executed for a period of ten years with the automatic extension for the same period or indefinite period.

Apart from the said, Law on Investments of the Republic of Serbia (“Official gazette of the RS” no. 89/2015 i 95/2018) lists benefits to foreign investors, such as the right to transfer profit, protection from expropriation, or similar acts, stability clause, national treatment, etc.

3. EXPLORATION OF OIL & GAS 

3.1. Granting of oil & gas exploration rights 

The main law governing the exploration of oil and natural gas is the Law on Mining and Geological Explorations. As already said, exploration of oil and natural gas is not an energy activity for which license is needed, and such activity is in the public interest of the Republic of Serbia. In order for any entity to commence works on exploration, it is mandatory to obtain an exploration permit. 

The process of issuing exploration permits is initiated by the Ministry of Mining and Energy by publishing public tender for exploration of oil i.e., natural gas. Announcement of the public tender is published in the Official gazette of the RS as well as in the Official gazette of the EU. In the announcement is stated, inter alia, mineral resources are subject to exploration and exploration field.

Within the exploration phase, it is allowed to take oil i.e., natural gas when testing exploration well, for a duration of up to one year to test the production and technical characteristics of discovered oil i.e., natural gas deposits, and define the parameters of their possible exploitation. For such obtained oil i.e., natural gas, it is necessary to pay royalties as determined by the law governing royalties for usage of public goods.

Additionally, the holder of the exploration permit may submit a request to retain the right to the exploration area in order to prepare documentation for the exploitation permit, i.e., the exploitation field and exploitation area permit, no later than 30 days before the expiration of the exploration period. The exploration area for oil and natural gas cannot exceed 5,000 square meters.

Holder of an exploration permit is obliged to prepare a yearly report on results of geological exploration, which report shall cover all findings in the last 12 months. When the exploration phase is over, the holder of an exploration permit must prepare a final report on the results of geological exploration as well as elaborate on resources and reserves of oil/natural gas. Both yearly and final reports must be delivered to the Ministry of Mining and Energy. 

The main characteristics of reserves of oil and natural gas in the Republic of Serbia are the small volume of conventional resources and balance reserves, a relatively high level of performed exploration, and a limited exploration area. Most oil and natural gas deposits have a relatively high utilization rate, which has caused a natural decline in production. Consequently, when drafting action plans and energy strategies, not much space is dedicated to the exploration and exploitation of oil and natural gas. However, the main strategic documents in this regard are i) the Energy Development Strategy of the Republic of Serbia until 2025 with Projections until 2030; ii) the Regulation on Determining the Program for the Implementation of the Energy Development Strategy of the Republic of Serbia until 2025 with Projections until 2030 for the period from 2017 to 2023 and iii) the Strategy on Management of Mineral Resources of the Republic of Serbia until 2030.

Additionally, the Ministry of Mining and Energy is currently drafting two new energy significant documents: i) the National Energy and Climate Plan for a period until 2030, with Projections until 2050, and ii) the Energy Development Strategy for a period until 2040, with Projections until 2050.

3.2. Foreign exploration 

In the Republic of Serbia, foreign companies are entitled to conduct exploration of oil and natural gas. However, they cannot directly be the holder of an exploration permit, but first, they must incorporate and be duly registered in the Republic of Serbia branch office, through which all necessary legal and factual actions may be done. 

Foreign investors may obtain exploration permits in two ways: i) by filing a request for an exploration permit to the Ministry of Mining and Energy (see Section  3.1), and ii) by transfer. Namely, a domestic public or private company may transfer an exploration permit to another entity, including a foreign branch office. Such transfer is initiated by the holder of exploration permit filing request for transfer to the Ministry of Mining and Energy, and if all conditions set out by the Law on Mining and Geological Exploration are met, the transfer shall occur. The foreign investor shall have the same scope of rights and obligations, regardless of the manner of obtaining an exploration permit.

Additionally, from the law perspective, there are no differences in legal treatment between domestic companies and foreign investors, as well as no difference in the manner of obtaining exploration.

Investment protection by law

Last but not least, by the latest amendments of the Law on Mining and Energy is introduced the possibility of the Republic of Serbia and investor who is the holder of exploration permit may execute investment agreement. This agreement shall govern the construction of missing infrastructure, environmental protection, financial benefits as well as other important issues for the realization of the project. However, up to now, no such agreement has been executed between the Republic of Serbia and any investor.

3.3. Stages of the exploration process 

Please see Section  3.1.

3.4. Obligatory state participation 

All findings of the exploration phase must be documented in the relevant reports and elaborate on resources and reserves of oil/natural gas (see Section  3.1.), and these reports and elaborate must be submitted to the Ministry of Mining and Energy. Additionally, the ministry is authorized to forward certain data from the reports and elaborate to the Serbian Geological Institute and Republic Geodetic Institute, who must treat such data as a business secret.

Furthermore, if the holder of the elaborate reserves and resources does not submit a request for an exploitation permit within six years, the Republic of Serbia shall become the holder of such elaborate reserves and resources of oil/natural gas and thus acquires all rights they derive from.

Last but not least, the holder of the exploration permit must pay royalties to the Republic of Serbia for exploration as well as for taking the oil and natural gas during the exploration phase, as set out by the law governing fees for usage of public goods.

3.5. Risks to be considered

As already mentioned, resources of the oil and natural gas in the Republic of Serbia are, to the great extent, already explored and exploited. Thus, potential investment in this regard is accompanied by the risk of possible scarce findings.

4. PRODUCTION OF OIL & GAS 

4.1. Granting of oil & gas production rights 

The main laws regulating the production of oil and natural gas are Law on Mining and Geological Exploitation and Energy Law. As per first law, it is envisaged that the holder of a certificate on reserves and resources is entitled to submit a request for obtaining an exploitation permit, which permits the Ministry of Mining and Energy is authorized to issue in the administrative proceedings. Please note that process of obtaining a complete exploration permit is divided into three parts. 

First, it is necessary to obtain a permit for the exploitation field. In this permit is determined, inter alia, the type of resources subject to exploitation and deadline for commencement of preparatory works and deadline for obtaining a permit for construction of mining objects and conduction of mining works. Therefore, when the permit for exploitation field is obtained, the holder may commence on preparatory works (clearing the terrain and removing facilities in order to provide space for the construction of future mining objects and performing mining works) and should commence on drafting necessary documents (see below paragraph) for obtaining next permit.

Second, holders of a permit for exploitation field may submit a request for obtaining a permit for construction of mining objects and conduction of mining works. For obtaining this permit, it is necessary to prepare investment-technical documentation consisting of among others: i) feasibility study for exploitation of mineral resources, ii) long-term exploitation program, iii) yearly operation plan, and iv) the mining project. The mining project represents a set of the following projects: main mining project, supplementary mining project, technical mining project, and simplified mining project. The mining project is subject to technical control. When the Ministry of Mining and Energy issues this permit, the entity is entitled to commence construction of mining objects in line with the mining project.

Third, in case mining objects are constructed in compliance with the mining project, a usage permit for mining objects may be obtained, and exploitation commences.

From the Energy Law’s perspective, the production of natural gas does not represent licensed activity. Production of crude oil is also license-free activity. However, for the production of oil derivates, i.e., unleaded motor gasoline, aviation gasoline, jet fuel, gas oil, heating oil, marine fuels, liquefied petroleum gas, and similar, a license is mandatory. Energy Agency is authorized to issue licenses for energy activities, upon the request of the interested entity. License is issued for a period of 10 years, with the possibility of extension. 

Additionally, as a precondition to commencing the construction of objects for oil production, Energy Law envisages obtaining energy permits as well. The Ministry of Mining and Energy is authorized to issue an energy permit.

Incentives

Currently, the Republic of Serbia is more devoted to granting incentives for renewable energy sources. However, the newly adopted Regulation on Conditions and Criteria of Harmonized State Aid for Environmental Protection and in Energy Sector (“Official gazette of the RS” no. 99/2021) envisages the possibility of state aid for investment in energy infrastructure. State aid may be granted for energy infrastructure located in the area of level two of the nomenclature of statistical territorial units whose GDP per capita is less than or equal to 75% of the EU-27 average. Under energy, infrastructure is considered any physical equipment or facility located in the Republic of Serbia or connecting the Republic of Serbia with at least one country and is classified as infrastructure natural gas or oil infrastructure. The amount of state aid may not exceed the difference between the eligible costs and the operating profit of the investment, whereby the operating profit is deducted from eligible costs in advance or through a refund mechanism, up to a maximum of EUR 50 million per market participant per investment project.

Pursuant to the Law on State Aid (“Official gazette of the RS” no. 73/2019), state aid can be granted through the following instruments: 1) subsidy (grant) or subsidized interest rate on loans, 2) fiscal relief (reduction or exemption from taxes, contributions, customs duties, and other fiscal duties), 3) a guarantee from the state, any legal entity that disposes of and/or manages public funds or another state aid provider, given under conditions more favorable than market ones, 4) waiver of profits and/or dividends of the state, local self-government or legal entity that manages or disposes of public funds, 5) write-off of debt to the state, local self-government or a legal entity that manages or disposes of public funds, 6) sale or use of the publicly owned property at a lower market price, 7) purchase or use of the property at a price higher than the market price by the state, local self-government or a legal entity that manages or disposes of public funds.

4.2. Foreign production 

Pursuant to the Law on Mining and Geological Exploration, when the holder of certification on resources and reserves is the Government of the Republic of Serbia, it may transfer such certificate to another entity in two ways: i) through a public auction, on which most appropriate entity shall be chosen, and with such certification, it may commence the procedure for obtaining exploitation permit (see Section  4.1.) or ii) by executing PPP or concession agreement.

Furthermore, if the holder of exploitation permit (i.e., permit for exploitation field, permit for construction of mining objects and conduction of mining works and permit for the usage of mining objects) is a public company, it may, under the same conditions as a private entity, submit a request to the Ministry of Mining and Energy to transfer relevant permit to another eligible entity. If all conditions for the transfer of permit, as set out by the law, are met, the Ministry of Mining and Energy shall render resolution on the transfer of the relevant permit.

Additionally, if the holder of the exploitation permit is in the process of privatization, the buyer of the holder’s property which is used for exploitation may obtain the holder’s exploitation permit as well, by an agreement executed between the holder, buyer of property, Ministry of Mining and Energy and Privatization Agency. The government of the Republic of Serbia must give its consent to such an agreement.

4.3. Stages of the production process 

Oil

For the sake of a better understanding of the regulatory part, please take into consideration two different stages of oil production: production of crude oil and production of oil derivates.

With respect to the production of crude oil, it is necessary to obtain an exploitation permit. This permit may be obtained by domestic companies as well as foreign entities. However, a foreign entity cannot directly perform this activity, but only through its branch office duly registered with the Business Register Agency of the Republic of Serbia. For this activity, no energy license is needed.

Regarding the production of oil derivates, Energy Law stipulates mandatory licenses for this energy activity, which license is issued for a validity period of 10 years. However, please note that energy activity production of oil derivates may perform only in a domestic company.

Natural gas

In respect of natural gas production, Energy law considers this activity as license-free activity. However, from the point of Law on Mining and Geological Exploration, an exploitation permit must be obtained (see Section 4.1.).

Export

Regarding oil and natural gas export please see Section 2.1.

4.4. Obligatory state participation 

The Republic of Serbia has an interest in and benefits from the exploitation of oil and natural gas to the same extent from the domestic as from the foreign companies. As already said, Law on Investment envisages national treatments of investors meaning that foreign investors shall have the same position as domestic companies. 

Law on Fees for Usage of Public Goods envisages a list of royalties connected with the production of oil and natural gas. The most important and significant one is the fee for usage of oil and natural gas in the amount of 7% of acquired income from selling of goods. Furthermore, producers of oil and natural gas must pay a fee for the environment, as such production is classified as a high-risk activity for the environment. 

With respect to oil production, energy entities conducting the production of oil derivates are obliged to pay a fee for establishing and maintaining mandatory reserves as well as fees for energy efficiency. 

In relation to the export of natural gas and oil, the Republic of Serbia envisages no specific restrictions. For detailed information on export, please see Section 2.1.

4.5. Risks to be considered

As already said, the Republic of Serbia does not have a sufficient amount of oil and natural gas reserves, which may attract major investments in this sector (see Section 3.5.).

5. TERMINATION OF PRODUCTION OF OIL & GAS 

5.1. Abandonment and decommissioning 

Pursuant to the Law on Mining and Geological Exploration, it is possible to i) temporary suspense production and ii) abandon production.

Temporary suspension occurs due to unforeseen circumstances (gas or water burglary, problems with mountain strikes, pit fires, disturbances on main ventilation routes, passage, drainage and transport, landslides, eruptions, etc.) or due to force majeure. In such an event, the holder of exploitation shall notify the mining inspector of the reasons for the suspension. 

Prior to the planned suspension of works, which will last longer than 30 days, the holder of the exploitation permit is obliged to perform the necessary measurement, draft supplement mining projects and plans, and make a record of the reasons for the suspension of works, indicating hazards for reopening of the oil, i.e., natural gas field. During the temporary suspension of works, facilities in the oil i.e., natural gas fields must be maintained in such a condition that they do not represent danger.

On the other hand, if the holder of an exploration permit wants to abandon the production of oil, i.e., natural gas, it must notify the Ministry of Mining and Energy. 

In case of abandonment, the holder of exploitation is obliged to undertake all measures to protect the mining facility and land on which the works were performed and measures to protect and rehabilitate the environment to ensure life and health of people and property, all in line with the mining project. The works on rehabilitation must be undertaken within one year as of the abandonment, and the Ministry of Mining and Energy must be informed on the results of rehabilitation of the environment and conservation of the abandoned mining facilities.

Additionally, when applying for an exploration permit, it is necessary to submit security for the rehabilitation of the environment. Such security may be in form of either a bank guarantee, promissory notes, or corporate guarantee. If the holder of an exploration permit does not undertake necessary measures of environmental rehabilitation, the costs of rehabilitation shall be collected from the provided security.

5.2. Environmental and HSE consideration 

Please see Section 5.1.

6. SAFETY OF OIL & GAS EXPLORATION AND PRODUCTION 

6.1. International treaties to which the jurisdiction is a party 

The Republic of Serbia is a party to no international treaty governing safe exploration and production of oil and natural gas. 

6.2. Offshore Safety Directive

Having in mind that the Republic of Serbia has no exit to the sea, Offshore Safety Directive is not implemented, nor any similar rule.

7. IMPORT, EXPORT, AND SALES OF OIL & GAS 

7.1. Import and Export of oil & gas

Oil

Subject wanting to import oil in order to sell it in the Republic of Serbia must have an energy license (see Section  2.1.). But in case of import for own needs, please have in mind that license is not needed.

When exporting license is also needed, regardless of the purpose of export. Having in mind that an energy license may obtain only domestic company (save for wholesale supply of natural gas), this means that import and export of oil may perform only licensed domestic company.

Additionally, producers and importers of oil are obliged to pay excise tax as well.

The Republic of Serbia does not envisage additional authorizations/permits to conduct these activities.

Natural gas

In the field of natural gas, the situation is less complex. Namely, for the import of natural gas with the purpose to sell it in the Republic of Serbia, an energy license is mandatory. Foreign companies may directly (not through the branch office) obtain a license for wholesale supply of natural gas.

On the other hand, in the case of export and just transit through the Republic of Serbia (without selling within), a license is not needed.

Contrary to oil, natural gas is not subject to excise tax.

7.2. Transportation 

Transmission of natural gas and oil is regulated by the Energy Law. Taking into account that transmission of both, natural gas and oil, is a licensed activity, only a domestic company may conduct it.

Natural gas

In the Republic of Serbia exists only three transporters of natural gas, Gastrans doo Novi Sad, Transportgas doo Novi Sad, and Yugorosgaz-Transport doo Nis. As the Energy Law is drafted in compliance with the EU Third Energy Package and EU Directive 2009/73 concerning common rules for the internal market in natural gas, transmission of natural gas must be completely unbundled from the energy activities of natural gas distribution, natural gas storage, supply of natural gas and natural gas production, meaning that the same person cannot have directly or indirectly control over the transmission of natural gas and any of the said three activities.

In order to prove to unbundle from related energy activities, TSO, prior to licensing, must be certified. The administrative procedure of certification is conducted before Energy Agency. Additionally, in the case when the TSO is controlled by a third person from a foreign country, such TSO must also be unbundled from related energy activities. Upon obtaining certification, TSO may submit a request for issuing a license for energy activity transmission of natural gas.

In addition to the regulatory part, pursuant to the Energy Law before obtaining a construction permit for commencement of construction of transmission pipeline, it is necessary to obtain an energy permit for such facility.

In relation to the access to the transmission system, TSO is obliged to enable users of the system access to the transmission system on the principle of transparency and non-discrimination. Gastrans doo Novi Sad, for example, uses the Regional Booking Platform for the allocation of transmission capacities to the users.

Regarding the terms of transmission, such terms must be agreed upon in the gas transmission agreement. Pursuant to the Energy Law, gas transmission agreement must include, inter alia, data on delivery point, capacity on delivery point, calculation period.

Price for access to the system is regulated, meaning that Energy Agency renders methodology for establishing prices and each TSO is obliged to form its prices to access to the system in line with methodology. Such formed prices are subject to the approval of the Energy Agency before they may be applied. Each of the TSO publishes its prices on its website.

The only exception in regard to the unbundling obligation and access to the transmission system is an exemption from such obligations. Pursuant to the Energy Law (same stipulated in the EU Directive 2009/73), new gas pipeline infrastructure may be exempted from said obligations if such exemption, inter alia, does not prevent competition, improves the security of supply, users of new infrastructure object shall bear costs for it using, etc. The exemption is granted by the Energy Agency. In the Republic of Serbia, only one TSO, being Gastrans doo Novi Sad, is exempted and operates under an exemption regime.

Oil

Same as for the transmission of natural gas, oil transportation is a licensed energy activity and thus only domestic companies may conduct it. Access to the transportation system is free and based upon principles of transparency and non-discrimination. Prices for access to the system are, same as for natural gas, regulated.

7.3. Land rights 

Acquisition of land may be obtained through an agreement with the landowner. In case it is not feasible, Law on Mining and Geological Exploration envisages the possibility for expropriation of land for the benefit of the entity who is the holder of either exploration or exploitation permit.

The process of expropriation is conducted before the administrative body on which’s territory the land is situated. Within this process, agreement on the fee for expropriation for land may be achieved between the beneficiary of expropriation and the landowner. If this agreement omits, in the administrative procedure only expropriation of land will be conducted, and land will be transferred to the beneficiary. However, in such a case, a separate procedure for determining of expropriation fee has to be conducted before the competent court.

7.4. Access and integration 

For access to the transmission system by users, please see Section 7.2.

On the other hand, in the case of the interconnection of transportation pipelines, an interconnection agreement has to be executed between respective TSO, or TSO and distribution system operator/storage operator, by which agreement parties shall regulate their relations.

7.5. Gas transmission and distribution 

For transmission of natural gas please see Section 7.2.

The sector of natural gas distribution is quite similarly regulated as the transmission of natural gas. Namely, Energy Law envisages mandatory energy license for conduction of activity distribution of natural gas. Therefore, only domestic companies may conduct this energy activity. 

The distribution system operator must be unbundled from the related energy activities (transmission, supply, and production of natural gas) as well-meaning that it must be independent in the legal form, organization, and decision making from the vertically integrated undertaking. However, the distribution system operator does not need to undergo a certification process before licensing.

Regarding access to the distribution system, access must be on the principles of transparency and non-discrimination. Same as for natural gas, prices for access are regulated, meaning that Energy Agency renders methodology on the basis of which distribution system operators form their prices. Such prices are subject to approval by Energy Agency.

8. TRADING 

8.1. Trading license 

In respect to the supply of natural gas, the Energy Law envisages three kinds of supply: i) supply, ii) public supply and iii) wholesale supply.

The supply of natural gas means to supply to the consumers on the free market under market-based prices. Currently, 64 energy entities have licenses for natural gas supply, out of which only eleven were active in 2020.

Public supply may perform only public suppliers and, in this case, natural gas is selling under regulated prices to the households and small customers. Regulated prices mean that public suppliers form them in line with the methodology rendered by Energy Agency. Regulated prices are subject to approval by Energy Agency. Additionally, JP Srbijagas is designated as a supplier of public suppliers, by the decision of the Government of the Republic of Serbia. When a regulated natural gas market is established, public suppliers will buy natural gas on a regulated market (see Section  8.2.). Currently, thirty-two energy entities have a license for the public supply of natural gas.

Wholesale supply means selling natural gas to the customers, but not final customers (being costumers buying only for their own needs). Currently, no energy entity has a license for wholesale supply of natural gas.

Pursuant to the Energy Law, all three kinds of supplies are energy activities for which a license is needed, but a foreign entity may obtain a license only for wholesale supply.

8.2. Products

The Republic of Serbia, for the time being, is not an established regulated market of natural gas. By the latest amendments of the Energy Law it is envisaged that TSO with the most exits points on its transmission system shall be responsible for the management and administering of the regulated market of natural gas. The government of the Republic of Serbia shall designate such TSO.

So far, trade with natural gas is conducted on a bilateral market, meaning that trade is conducted directly between market participants on the basis of executed supply agreements. Prices are based on market principles. The only exception is regulated prices for public supply, which are determined by the public supplier. For the year 2021 average regulated price per cubic meter is 0.4 EUR.

9. COMPETITION

9.1. Authorities

In the Republic Serbia energy sector, monitor over competition field conduct Energy Agency and Anti-Competition Agency. In this respect, pursuant to the Energy Law suppliers of natural gas and wholesale suppliers of natural gas are obliged to deliver to the Energy Agency and Anti-Competition Agency, as well as to the competent body of the Energy Community, data in connection with the transactions from supply agreements. Such data encompass, inter alia, duration, rules on delivery of natural gas and settlement of obligations, data on quantities, prices, manner on the identification of users. Suppliers and public suppliers are obliged to keep a record of this data for at least five years.

9.2. Anti-competitive actions 

Please note that Energy Agency is authorized to monitor competition in the oil and natural gas market in the Republic of Serbia. In case irregularities are detected, necessary anti-competitive actions are undertaken by the Competition Agency.

Pursuant to the Competition Law (“Official gazette of the RS” no. 51/2009 i 95/2013), acts and actions of market participants with a consequence of significant restriction, distortion, or prevention of competition are deemed anti-competition actions. 

Furthermore, in case of acquisition, it is necessary to notify Competition Agency on concentration in order to obtain approval on concentration, in line with the law.

If during the monitoring of the energy market, Energy Agency detects any action that may be considered to prevent or restrict competition, it is obliged to notify thereon Competition Agency which shall conduct the administrative procedure in order to determine whether a breach of competition occurs or not. In case of a positive answer, Competition Agency shall render resolution in which it may determine measures aimed at eliminating the established violation of competition, i.e., preventing the possibility of the same or similar violation, by issuing an order to undertake certain behavior or prohibiting certain behavior.

10. STABILITY CLAUSE AND DISPUTE RESOLUTION 

10.1. Stability clause 

Law on PPP and Concession (“Official gazette of the RS” no. 88/2011, 15/2016 i 104/2016) envisages stability clause in a way that after execution of PPP or concession agreement change of law occurs, which leads to deterioration of the position of the public or private partner, the agreement may be amended in order to put public or private partner in the same position as was before the change of law. This law applies to all public or private partners of the state which have PPP or concession agreements.

Additionally, the Agreement between the Government of the Republic of Serbia and the Government of Russian Federation on Cooperation in Fields of Oil and Natural Gas contains a stability clause, and therefore NIS as a producer of oil is obliged to pay a fee for exploitation in the amount of 3% of income, instead of 7% as it is now prescribed by the law.

10.2. Compulsory dispute resolution procedure

Dispute resolution between energy entity and their users initially shall be resolved between involved parties. Namely, energy entities are obliged to adopt network codes, within which is regulated right of users to submit objections/appeals to the respective energy entity in case of any breach to the detriment of users. Energy entities are obliged to undertake necessary actions in order to resolve such objections/appeals. If through this internal mechanism it is not possible to resolve the dispute, the interested party may initiate a procedure before the competent court. Furthermore, it is allowed to include in the agreement between energy entity and user arbitration for dispute resolution.

Additionally, suppliers of natural gas are obliged to make a report on resolving objections/appeals of its users and to submit it to the Energy Agency.

As per dispute resolutions between energy entities and state authorities, in case the energy entity is not satisfied with the rendered resolution (on energy licenses, energy permitting, and exploration and exploitation permits) it is possible to initiate a procedure before the Administrative Court. A judgment of the Administrative Court is final and binding for all parties.

10.3. International treaty protection 

The Republic of Serbia is a contracting party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards as of 1981 as well as a contracting party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States as of 2006.

In addition, when an investor wants to initiate court procedure against state or any state authority, there are no special conditions that have to be fulfilled. Law on Civil Procedure (“Official gazette of the RS” no. 72/2011, 49/2013 – CC decision, 74/2013 – CC decision, 55/2014, 87/2018 and 18/2020) provides the possibility for, before filing a claim against the state, to submit a proposal for a peaceful settlement of the dispute to the Republic Public Attorney’s Office. If the Republic Public Attorney’s Office does not respond within 60 days, it is considered that proposal was not accepted, and the claim may be submitted to the competent court.

 

Guide Contributors For Serbia

Jelena Gazivoda

Senior Partner

jelena.gazivoda@jpm.rs

+381 207 68 50

 

Nikola Djordjevic

Partner

nikola.djordjevic@jpm.rs

+381 207 68 50

 

Marko Mrdja

Senior Associate

marko.mrdja@jpm.rs

+381 207 68 50

 

 

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