NEW GAS PIPELINE ASSURES WINTER SUPPLY

UNCLAS SECTION 01 OF 02 ZAGREB 001092

SIPDIS

SENSITIVE

SIPDIS

STATE FOR EUR/SCE BALIAN
STATE FOR EB/ESC/IEC GARVERICK

E.O. 12958: N/A
TAGS: ENRG ECON HR
SUBJECT: NEW GAS PIPELINE ASSURES WINTER SUPPLY


ZAGREB 00001092 001.2 OF 002


SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET


1. (SBU) Summary: The completion of a major new gas
pipeline linking Croatia's Adriatic gas fields to
the mainland gas distribution system is a major step
forward in bolstering the country's near-term energy
security. When the pipeline comes on line at the
end of the year, domestic gas production will
satisfy 70 percent of Croatia's 3.2 billion cubic
meter (bcm) annual demand, substantially reducing
its reliance on Russian imports and ending chronic
winter supply shortages. When the pipeline network
is extended to cover the remainder of the country,
both its builder, state-owned PlinaCro and the
Croatian government believe that Croatia will be
able to guarantee the long-term security of its gas
supply. End Summary.

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Higher Domestic Production
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2. (SBU) The Croatian government recently announced
the completion of a new gas pipeline connecting the
east and west of the country. The pipeline runs
from the Istrian city of Pula, to Rijeka, Karlovac,
through Zagreb and on to Slavonski Brod in Eastern
Slavonia. Most importantly, however, is an
underwater line built by the state oil and gas
company INA connecting its offshore production
facilities in the Adriatic to the pipeline.


3. (SBU) INA's offshore production, developed
jointly with Italian ENI and Edison, will now
provide Croatia with an additional 1.1 bcm of gas
annually. Supply from these fields has been limited
until now by the lack of a direct connection to the
Croatian distribution network, so the entire output
of the fields went through Italy. INA and its
Italian partners share the output of the fields on a
50-50 basis. Proven reserves of currently exploited
fields are about 25 bcm. INA expects these fields
to reach peak production in 2010. Croatia also has
substantial domestic gas production in its
continental region. The Pannonian fields, located
in the area between Zagreb and the eastern region of
Slavonia in what was the bed of the prehistoric
Pannonian Sea, produce about 1.2 bcm annually.

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Expanded Network Secures Supply
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4. (SBU) PlinCro, which builds and operates
Croatia's entire pipeline network, has plans to
extend its pipelines into coastal Dalmatia as far as
Dubrovnik and construct a new connection to the
Hungarian border near the Slavonian town of Donji
Miholjac in the eastern part of the country.
According to PlinaCro, extending Croatia's gas
network offers the dual benefit of bringing gas to
previously un-serviced areas, such as Dalmatia, but
also diversifying potential sources of supply. The
new connection to Hungary, for example, will enable
Croatia to import larger quantities than have been
possible through its existing connection from
Slovenia. One of the reasons Croatia could not
fully use its Adriatic gas was that the Slovenian
pipeline, through which all gas entered the system,
was already at its saturation point.


5. (SBU) In the longer term, the Croatian
government has given its support for construction of
an LNG terminal in the northern Adriatic with a
planned capacity of 10-13 bcm, enough to satisfy
Croatia's modest but growing domestic demand and to
enable it to play a role in European supply.
Currently there are no connections between the
Croatian pipeline system and those of Serbia, Bosnia
and Montenegro. The system built in the former
Yugoslavia supplied Croatia and Slovenia from the
northern trunk line from Russia while Serbia and
Bosnia received gas from the southern line - a
decision Croats came to view as fortuitous during
the 1990s war as, unlike in the case of Bosnia,
Serbia was never able to deprive Croatia of gas. In
the changed environment of present-day southeastern
Europe, Croatia views itself as the possible
supplier to its southern and eastern neighbors.

ZAGREB 00001092 002.2 OF 002



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Wary of Gazprom's Downstream Predation
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6. (SBU) Contacts at both INA and PlinaCro believe
that Europe has no realistic alternatives to Russian
gas, but want to ensure that Croatia is positioned
to benefit from Caspian gas should that source
become available. PlinaCro considers that once it
completes its bi-directional pipeline throughout
Croatia, connections either to NABUCCO or even to
eventual Albania pipelines would be relatively easy.


7. (SBU) The Croatian gas industry is more
concerned about Gazprom's downstream moves for local
gas distribution than a disruption of supply.
Although PlinaCro is state-owned, the status of
municipal gas companies varies with some owned by
municipalities themselves, others by the national
electric utility HEP and others in private hands.
Although thus far there has been little Russian
interest in Croatian gas distribution companies, as
one contact put it, "sooner or later Gazprom is
going to eat us all for lunch, even the small fish
like Croatia."

BRADTKE