SLOVAK GOV'T AIMS TO REPURCHASE TRANSPETROL

C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000501

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/21/2016
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: SLOVAK GOV'T AIMS TO REPURCHASE TRANSPETROL
PIPELINE

REF: A. BRATISLAVA 494


B. VALLEE/PEKALA EMAILS

C. WARSAW 1167

D. VILNIUS 512

Classified By: Ambassador Rodolphe M. Vallee for Reasons 1.4 (B) and (D
)


1. (C) Summary - The Slovak government is negotiating with
Yukos to re-purchase the 49 percent stake in the oil pipeline
that was originally sold to Yukos in 2002. Economic Minister
Jirko Malcharek, who has the lead in the negotiations, is
attempting to finalize an agreement before the current
government's mandate ends in the coming days or weeks.
Although the Russian oil company Russneft had an agreement
with Yukos Finance to buy the 49 percent stake in February
for USD 103 million, Slovakia maintains veto authority over
any deal for the Yukos stake, and has used this power to stop
the pending sale to Russneft. In addition to the Russians,
who remain interested in the Transpetrol stake despite the
recent rejection, Polish oil company PKN Orlen and a possible
consortium or U.S. equity investors are also pursuing a deal.
A non-Russian investor would be more inclined to utilize the
pipeline's full capacity through a connection to the
Odessa-Brody pipeline and Caspian light crude. End Summary.

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TRANSPETROL IS STILL UP FOR GRABS
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2. (C) Yukos Board Chairman Viktor Gerashchenko announced two
weeks ago that the company had failed to sell its 49 percent
stake, which includes management control, of the Slovak oil
pipeline firm Transpetrol to Russian oil firm Russneft.
Yukos Finance, a Yukos subsidiary that is based in the
Netherlands, had originally purchased the 49 percent stake
for USD 74 million in 2002. Russneft reached an agreement in
February with Yukos Finance to buy the stake for USD 103
million. The Slovak Anti-Monopoly Office approved the sale
to Russneft on May 19. The Slovak government, led by the
Ministry of Economy, maintains veto authority over any sale
of the Yukos stake until April 2007 and has not yet approved
the Russneft deal.


3. (C) The Transpetrol pipeline system is a part of the
Druzba pipeline and runs 515 km from the Ukrainian border in
the east to the Czech Republic in the west. The pipeline has
branches to the Slovnaft refinery in Bratislava and
refineries in the Czech Republic, as well as a connection to
the Adria pipeline system running south through Hungary into
Croatia. The pipeline currently has a throughput capacity of
20 million metric tons per year (Mta),but has historically
been operating at less than half of this amount,
approximately 10.7 million Mta of heavy crude from western
Siberia. In 2005, 5.57 million Mta went to the Bratislava
Slovnaft refinery owned by the Hungarian energy company MOL,
and 5.04 million Mta went to Czech refineries (4.26 million
Mta went to Ceska Rafinerska). This output would increase by
another 2 million Mta if a planned Bratislava-Schwechat
extension to an OMV refinery in Austria were to become
operational. (Note: Environmental issues and Yukos problems
have put this project on hold for the time being.)


4. (C) According to an article in the daily SME on June 16,
Russian Ambassador to Slovakia Alexander Udalcov said that
Russia remains interested in Yukos' stake and Russian
companies were not out of the running for the deal. It is
widely believed that under Russian control all of the oil
traveling the pipeline would continue to be heavy crude from
western Siberia. A non-Russian investor, on the other hand,
would be more inclined to diversify to other sources. The
main proposal involves connecting the Odessa-Brody-Druzhba
route to transit Caspian light-crude oil through Ukraine's
Odessa-Brody oil pipeline and along the southwestern branch
of the Druzhba pipeline for delivery to refineries in the
Czech Republic, and eventually Austria and southern Germany.
While this would require a significant investment to upgrade
Transpetrol's transit capacity from 20 to 28 Mta, it could
result in additional transit volumes of more than 17 Mta
through the Transpetrol pipeline system.

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LAME DUCK MINISTER CONTINUES TO PURSUE A DEAL FOR SLOVAKIA
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5. (C) Minister of Economy Jirko Malcharek has taken the GOS
lead in negotiations with Yukos. According to his top
advisor and MOE spokesman, Robert Beno, Malcharek's top
priority in his remaining days in office is to cancel the
deal with Russneft so that the Slovak government can
repurchase the Yukos stake in Transpetrol. (Note:
Malcharek's political party, Nadej or "Hope", did not meet
the five percent threshold in last Saturday's parliamentary
elections and will therefore not be a part of the next
government.) 100 percent GOS ownership of Transpetrol would
not only allow Slovakia to diversify supply, but it would
also help towards meeting the EU goal of having at least 90
days of reserves. One expert told us that the oil in the
pipeline alone could be counted as 10 to 15 days of reserve
supply. Transpetrol also owns several back up tanks that
could be used for this purpose, and would save the government
from having to build additional storage facilities. In
Slovak Crowns the price of the 49 percent stake is actually
less today (approx. SKK 3 billion) than the GOS sold it for
in 2002 (approx. SKK 3.5 billion) due to exchange rate
differences.


6. (C) According to an article in the June 21 SME newspaper,
Malcharek met last Thursday (6/15) with Yukos Finance CEO
Steven Theede to discuss the potential re-purchase of the 49
percent Transpetrol stake by the Slovak Government.
Malcharek said that Slovakia needed to act quickly because
the Russian courts will decide on the Yukos bankruptcy in
mid-July. (Note: Yukos chief Stephen Theede has argued that
since the Transpetrol stake is held by Netherlands-based
Yukos Finance it is not subject to the bankruptcy proceedings
in Moscow. This is the same entity that recently sold
Lithuania's Mazeikiu Nafta oil refinery to PKN Orlen, as
outlined in Reftel D.) The SME article also quotes Malcharek
as saying that he is not sure that Yukos has actually
canceled its deal with Russneft despite the recent statements
by Yukos' Board Chairman.


7. (C) Malcharek cannot finalize arrangements with Yukos on
his own and would eventually need the support of the
governmentto approve any deal. We heard before the June 17
election from sources in the Prime Minister's office that the
current government could take a final decision on the
Transpetrol sale during the interim period between the
election and formation of a new government, especially if it
appeared that the Prime Minister's SDKU party would not be a
part of the next government (See Reftel A for the latest
political developments). SDKU feels it should at least
consider finalizing deals of "strategic importance" to
Slovakia before turning over the reigns to a possible
Smer-led government. Robert Kalinak, the vice-chair for the
leading opposition party and top vote-getter Smer, told us
last week that he did not expect Malcharek to take a decision
in his final days on the job. Kalinak noted that Smer would
prefer that the GOS buy back the shares from Yukos, which is
ultimately the same goal that Malcharek says he is pursuing.
Malcharek acknowledges in the SME article that although he
would like to reach an agreement with Yukos in the coming
weeks, ultimately the next government would finalize the deal
over the coming months.

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MORE THAN JUST THE SLOVAKS AND RUSSIANS ARE INTERESTED
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8. (C) In addition to Russian and GOS interest in the
Transpetrol stake, Polish oil company PKN Orlen is reportedly
pursuing a deal for Transpetrol (Reftel B). In 2005 PKN
Orlen acquired a 63 percent stake in Unipetrol, the biggest
refinery and chemical company in the Czech Republic which
receives two-thirds of the Transpetrol throughput. The
chairman of the board at the Bratislava-based refinery
Slovnaft, Marian Jusko, told us that a Polish bid could be
politically problematic. Anything that makes PKN Orlen more
competitive in the neighboring Czech Republic would likely
face significant opposition in both Slovakia and Hungary.
Slovnaft is owned by the Hungarian oil company MOL and
supplies 70 percent of the Slovak market directly or
indirectly. Over the last year Russneft has become a major
supplier to Slovnaft, and Russians are rumored to have close
ties with the MOL leadership. MOL's influence over the deal
would be strengthened if SMK, the Hungarian party, were a
part of the next government.


9. (C) A U.S. company, GlobalNet Financial Solutions, has
recently contacted us regarding their interest in putting
together a consortium of U.S. private equity investors to
make a bid for the Transpetrol stake. GlobalNet's Managing
Director in Ukraine, Geoff Berlin, has been working on
projects related to the Odessa-Brody pipeline for several
years. Berlin had not yet presented its proposal to either
the GOS or to Yukos when we spoke with them last week. A
lack of ties to specific suppliers and refineries, if that is
indeed the case, could be one advantage that GlobalNet brings
to the table.


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COMMENT
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10. (C) Ambassador is scheduled to meet with Malcharek on
Friday (6/23) and will have a chance to hear his plans
firsthand. With the exception of the Prime Minister, MOE has
kept other GOS ministries in the dark on their intentions.
This seems a bit strange since a GOS repurchase of the
Transpetrol stake has widespread political support (except
for SMK) and increases the options for diversification of oil
resources for Slovakia and the region. Such an acquisition by
the GOS - which is not directly connected to competing
refineries or suppliers - would be consistent with U.S.
energy security goals in the region. End Comment.
VALLEE