DEPARTMENT ENERGY ADVISER HELLMAN'S ENERGY

C O N F I D E N T I A L SECTION 01 OF 05 WARSAW 001592 SIPDIS STATE FOR EUR, E. EUR/NCE. EUR/ERA,EB/ESC EUR/NCE FOR A/S DFRIED, DAS MPEKALA, DAS MBRYZA EUR/NCE FOR DKOSTELANCIK AND MSESSOMS EB/ESC FOR SGALLOGLY, RGAVERICK, JLEVANDOWSKI DOE FOR LEKIMOFF USDOC FOR 4232/ITA/MAX/EUR JBURGESSS, JKIMBALL, MROGERS PARIS PASS USMISSION OECD AND IAE E.O. 12958: DECL: 12/31/2020 TAGS: ENRG EPET LH PL PREL SUBJECT: DEPARTMENT ENERGY ADVISER HELLMAN'S ENERGY SECURITY DISCUSSIONS IN WARSAW: POLES WATCHING LITHUANIAN SITUATION CLOSELY REF: WARSAW 1336 Classified By: Econ Couns. Richard Rorvig for reasons 1.4(b) and (d). -------------- Summary -------------- ¶1. (C) Economics Ministry State Secretary Piotr Naimski told visiting State Department Energy Advisor Steve Hellman August 1 that Poland is very concerned by the cut-off of Russian oil shipments to Lithuania's Mazeikiu Nafta refinery due to alleged 'accidents and technical difficulties.' The Poles believe that there is sufficient off-loading capacity at the Lithuanian port of Butinge to supply Mazeikiu by sea. The problem is that there is only 100,000 tons of storage capacity in Lithuania, enough for about five days of normal refinery operations. The State Secretary said that 100,000 tons of oil had reached Butinge August 1 via tanker, a fact confirmed by Polish refiner PKN Orlen. PKN Orlen Vice President Cezary Filipowicz said Orlen is buying Mazeikiu for strategic reasons, fearing that otherwise the Russians will take over the Lithuanian refiner. The Russians would then have a refinery inside the EU tariff wall, and could lower prices to a few cents below Orlen's refining costs, eventually driving it out of business. Orlen thinks it is better to fight the battle with the Russians today in Lithuania than tomorrow in Poland. ¶2. (C) Orlen is in a delicate position, since its acquisition of Mazeikiu has yet to be approved by the EU competition authority. Orlen estimates the approval process could take until December. Until that time, it must keep legal distance from the Lithuanian refiner. Hellman urged the Poles to get on top of the oil trading situation, and bring in a technical specialist who could advise it on blending issues, if it is forced to replace Russian oil. He said that even though Orlen could not intervene to supply the refinery, it could consider discussions for sourcing crude to one safe port in north-west Europe without specifying Butinge, thus not violating the prohibition of commercial contact with the 
refinery. Continued operation of Mazeikiu would show the Russians that their strategy is not working. On Slovakia's Transpetrol, Naimski said that the Poles fear that Prime Minister Fico is politically isolated in the EU and will succumb to Russian pressure. They plan to invite him to Warsaw to show him he has other options. The Poles were receptive to Hellman's suggestion that he organize a brainstorming session in the U.S. with them on energy issues. -------------- Economic Ministry Views -------------- Mazeikiu ¶3. (C) Polish Economics Ministry State Secretary Piotr Naimski told visiting State Department Energy Advisor Steve Hellman August 1 that Poland is very concerned by the cut-off of Russian oil shipments to Lithuania's Mazeikiu Nafta refinery, due to alleged 'accidents and technical difficulties.' Naimski said he fears that this is the big crisis that many have been expecting. According to Polish information, there is sufficient off-loading capacity at the Lithuanian port of Butinge to supply Mazeikiu by sea. The problem is that there is only 100,000 tons of storage capacity in Lithuania, enough for about five days of normal refinery operations or a bit more than a week at reduced 10-12,000 ton per day operating levels. Naimski said that 100,000 tons of oil had reached Butinge August 1 via tanker. This is now being unloaded. However, it would take two weeks to secure alternative spot supplies from Rotterdam. Naimski said that Orlen had accommodated itself to the idea of buying Mazeikiu Nafta and that it must be prepared to supply the refinery eventually by sea. ¶4. (C) Hellman told Naimski that the Russians do not believe that Mazeikiu can be supplied by Butinge. Rosneft and Lukoil are left as suppliers. Rosneft wants to get the $3 billion it thinks it is owed by Yukos. It either wants to take over the Mazeikiu refinery cheaply, which it might then even resell, or it wants to extort money from the buyers. The Russians are prepared to exert pressure on Poland directly to get it. Elements in Transneft do not support this strategy, but the order comes straight from the Rosneft Chairman and Igor Sechin within the presidential administration. ¶5. (C) Hellman advised the Poles to do their best not to aggravate the situation -- for example by closing down Russian shipments through Poland to Germany, lest Poland appear to be the aggressor. This would also undercut Poland's natural allies within Russia. Naimski said that Poland was not considering cutting off the pipeline across Poland as a strategy. However, if the situation in Lithuania gets desperate enough, Poland could either stand by and do nothing (which is unacceptable) or consider breaking other contracts or shipping agreements. Naimksi suggested, for example, that perhaps a Russian export shipment from Gdansk could be diverted to Butinge. Charge urged that Poland pursue a strategy that does not put them at odds with Germany, whose support will be key. Hellman urged the Poles to react calmly to the situation. There is lots of oil available. Two hundred thousand barrels per day, Mazeikiu's needs, are not a great amount. Perhaps the Polish Government could recommend that Orlen consider contracting a tanker load from Rotterdam for delivery to a Northern European port of its nomination. It is important to keep Mazeikiu operating and show the Russians that their strategy is not working. The Poles could even offer to help repair the pipeline, then let the Russians make the first move. Poland should show strength and wait. Once they have shown that the Russian strategy is not working, they will have an opportunity to re-engage with Transneft to restart supplies. Hellman suggested the GOP persuade Orlen to get on top of the oil trading situation, and bring in a technical specialist who could advise it on blending issues, if it is forced to replace Russian oil. Slovakian Sale of Transpetrol ¶6. (C) Naimski said that Poland wants to buy Transpetrol, and that it understands that the Slovak Government is under a pressure from the Russians to sell it to Gazprom. Hellman replied that we must convince the Slovaks that it is not a good idea to give in to the Russians. Hellman suggested the Poles use their influence with the Czech Republic, where PKN Orlen owns Unipetrol, to get the Czechs to lobby the Slovaks on the issue in the name of both Slovak and Czech energy independence. All of us have an interest in seeing Gazprom not get it. Naimski said that, due to political problems in forming a government in Prague, it is difficult to talk to the Czechs now. In any case, he is skeptical that the Czechs have much influence in Bratislava. However, it was worth a try. With regard to a quick decision on the Transpetrol sale, the Poles believe that there is a provision in the existing Transpetrol arrangement which would allow the Slovaks to block any sales agreement until April 2007. (Note: Several hours after the meeting, Naimski's office informed Hellman that Poland believed that the financial company Slavia, backing the Czech bid, is a front for Russian interests.) ¶7. (C) Naimski said he thinks new Slovak prime minister Fico is somewhat isolated in Europe, and is seen as a kind of new Meciar by many Western European states. So far only the Russians have invited him for an official visit. For this reason, the Poles plan to invite him soon to Warsaw. Foreign Minister Kubis visited last month. It would be helpful if we could all persuade other EU states to invite him also. Fico needs to know that he has other options than the Russians. Odessa-Brody-Plock Pipeline ¶8. (C) Hellman said that the US would very much like to see a complete copy of the Odessa-Brody-Plock feasibility study so that it can assure itself that the project is commercially viable. Naimski said that the study has still not been officially approved by the Consortium. Poland so far is not entirely satisfied with it, and is discussing it with the Ukrainians. A good feasibility report is a prerequisite to approaching the Kazakhs and Azeris on the project. Naimski expects to have the final version by September. He said that he had held good discussions with the firm Baker Donelson in Washington, but has not yet responded to it, due in part to the change in Poland's Prime Minister. Poland is still considering the best way to attract the interest of major Western firms. The potential actors, which range from PERN to Kazmunigaz, are from countries where the political forces are quite different. Poland understands that some of the big western companies are afraid to do anything in the back yard of Russia's big energy monopoly. Companies like Baker Donelson, and others, want to play a connecting role. Naimski said he is unsure what they would be connecting. -------------- Discussions with Polish Refiner PKN Orlen -------------- ¶9. (C) PKN Orlen Vice President Cezary Filipowicz opened the discussion by stating that he had just received confirmation from Mazeikiu that the Russian oil cut off would take a month or longer to resolve. He said the Russians had told the Lithuanians that they would have to pig about 700 kilometers of pipe to evaluate the state of the pipeline. Filipowicz said that Orlen is in a delicate position, since its acquisition of Mazeikiu has yet to be approved by the EU competition authority. Filipowicz estimated that the review process would take three to four months and that Orlen would not receive a green light until December at the earliest. ("The clerks in Brussels do not like to be rushed.") Until that time, it could not complete the takeover of Mazeikiu or assume management control of the company. EU legal requirements were very strict. In this context, Filipowicz noted that PKN Orlen's previous takeover of Unipetrol in the Czech Republic, which was more complicated since it also involved chemical plants, took eight months to obtain EU approval. Nonetheless, the Poles were getting daily reports of developments from the refinery. ¶10. (C) Filipowicz said that Orlen is buying Mazeikiu for strategic reasons. It figures that if it fails to do so, then the Lithuanian refiner will be taken over by the Russians. The Russians would then have a refinery inside the EU tariff wall. They would lower prices to a few cents below Orlen's retail prices (using favorable terms for crude supplies to compete unfairly). Within four or five years, first Poland's Gdansk-based Lotos Group and then Orlen would be bankrupt. Orlen thought it is better to fight this battle with the Russians today in Lithuania than tomorrow in Poland. The situation today is also better than a decade ago when Williams faced problems with Mazeikiu. At that time there was no Butinge off-loading option and no Primorsk. Filipowicz said that it is also in Russia's interest to work with Orlen. Between Mazeikiu Unipetrol, and Orlen's operations in Poland, Orlen will be Russia's largest single crude oil customer, buying or transiting roughly one-third of its total oil exports. Russia's cannot afford not to sell one-third of its oil and would have no place to put such a quantity on the domestic market without driving down prices. Nobody would logically walk away from such an export business. ¶11. (C) PKN Orlen is confident that Mazeikiu refining head Nelson English will respond properly to the situation. Filipowicz confirmed that 100,000 tons from Primorsk was being off-loaded in Butinge on August 1-2. He said, it is an open question how far the Russians will go with the situation. Will they still allow supplies to Mazeikiu from Primorsk? Filipowicz said that he had just received a call from Lukoil saying it wanted a meeting with him in Geneva. Lukoil said the subject was too sensitive to be discussed over the phone. Filipowicz wondered whether it might be to discuss a cut-off in deliveries to Orlen. However, Orlen could buy oil from other places -- Africa, Venezuela, the North Sea. It could still make a profit as long as it had an EU customs barrier to keep the Russians from flooding the market for refined products. ¶12. (C) PKN Orlen is interested potentially in joining with the Kazakhs, who lost out in the competition for Mazeikiu, to buy a refinery in Germany. PKN Orlen President Igor Chalupiec told the Kazakhs that Orlen could bring a network of 2500 gas stations to the deal, while the Kazakhs had upstream assets. Chalupiec told the Kazakhs that Orlen realizes that they are upset. However, if Kazmunigaz had acquired Mazeikiu it would have had 27 gas stations in Lithuania. It would have had to learn the downstream business in Europe, an area where they had no experience. However, a combined effort on a new project in Europe would be good for both sides. Kazakhstan would get a foot in the EU and Poland would find an upstream partner. ¶13. (C) In response, Hellman reiterated the points made earlier to Naimski regarding Rosneft's intentions to extort $3 billion it feels is owed to it by Yukos. He suggested that Orlen needed to brace itself for a possible crude shutdown. Furthermore, Orlen, once it takes over Mazeikiu, should make sure via internal transfer pricing that Mazeikiu appears to show a profit. That way the Russians will see that their policy is not having the intended effect. Orlen also should think about contracting in Rotterdam for a term crude contract to a Northern European port of its choosing. It should also consider bringing in a blending specialist to advise it in the event it needs to find substitutes for Russian oil. In response to Filipowicz' suggestions of strategic infrastructure development, Hellman proposed that Filipowicz and a Polish delegation come to the United States in the near future for a strategic brainstorming session, which could include US industry people. Filipowicz said he would be very interested in this proposal and would personally be delighted to accept. -------------- -------------- Discussions with Polish National Pipeline Company PERN -------------- -------------- ¶14. (C) Hellman opened the meeting with PERN Vice President Marcin Jastrzebski by reviewing the state of play in Lithuania and Russian intentions. Jastrzebski said that PERN is concerned by Russian pressure on the Slovaks over the Transpetrol sale. PERN would be making a pitch to buy Transpetrol to the Slovaks on August 4. Sixty percent of the presentation would be about energy independence. We have to convince the Slovaks that it is important that the Russians not buy it. PERN has already had a bad experience with Yukos-influenced Transpetrol. For three years, PERN has been trying to conduct a test shipment of 25,000 tons of oil through the pipeline to the Kralupe refinery, as a proof of concept test for the Odessa-Brody-Plock pipeline. A Transpetrol source told him that there would be no such tests unless Transneft also agrees. It is important to buy the Yukos-owned part of Transpetrol to eliminate such Russian influence. Jastrzebski said that many companies are now interested in buying Transpetrol, including apparently Kazakhstan's Kazmunigaz, Hungary's Mol, a US group and a Czech firm. Hellman said that we all could agree that the Slovaks should not sell Transpetrol to the Russians. ¶15. (C) Jastrzebski said that one of the problems that PERN faces is that its existing shipment contracts with Germany require the company to guarantee shipment of Rebco to Gdansk in an emergency. The company does not have the capacity to ship non-Russian crude from Plock to Gdansk as potentially envisioned in the Odessa-Brody-Plock project and guarantee the Germans a supply of Rebco. PERN would therefore like to modify its contracts with the Germans so that it can provide other crude rather than Rebco. With regard to a potential cut-off of Russian oil to the Czech Republic, the main Czech refineries are supplied from the Adriatic. It would also be possible to supply Slovakia through this route. Hellman again advised that PERN try and get the Czechs to weigh in with the Slovaks to encourage a Transpetrol sale to non-Russian buyers. -------------- Comment -------------- ¶16. (C) All of our Polish interlocutors were extremely forthcoming with information and greatly appreciated the exchange with Mr. Hellman. The visit, coming as it did at the same moment as the Lithuanian oil disruption, could not have been better timed. Orlen seemed to take a much more relaxed attitude to the Lithuanian situation than Poland's Economics Ministry. The Polish refiner is confident that Mazeikiu has the ability to overcome its problems and the company said it knows that the Mazeikiu situation will remain problematic for some time. The company said it is prepared to go ahead with the transaction for strategic reasons. It does not see any grounds to alter those plans based on current Russian actions, which it expected to some extent. We repeatedly stressed that the U.S. needs to see a complete copy of the Odessa-Brody-Plock feasibility study to advise Poland on how to engage the private sector. Naimski promised to try to be helpful in this regard. Mr. Hellman's offer to arrange a brainstorming session in the U.S. met with considerable interest. HILLAS