Croatia considering its geo-strategic

UNCLAS SECTION 01 OF 02 ZAGREB 000266 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ENRG ECON PREL EINV HR SUBJECT: Croatia considering its geo-strategic position in energy sector ¶1. Summary: Before Gazprom threw the switch on gas supplies to Ukraine on New Year's Day 2006, Croatia was already considering diversification of supply and its position in the regional energy sector. Croatia is a net importer of both oil and gas, with domestic production steadily declining. The government is now seeking ways to take advantage of its geographic position to make Croatia a bigger player in European oil and gas distribution. Proposals for major investments in a liquefied natural gas (LNG) terminal and an oil pipeline are now being given serious consideration. End summary. -------------- Seeking Security of Supply of Natural Gas -------------- ¶2. Croatia imports about 1.2 billion cubic meters (bcm) of natural gas, 55% of overall consumption, all of which comes from Russia. Recently, Russian gas supplies have been cut 10-15%. However, the impact of the reduction has been minimal on residential users, as large industrial users, who account for 47% of total demand, reduced their gas consumption and turned to other energy sources such as coal to shift gas supplies to the residential market. ¶3. Although Croatia is not currently facing a natural gas crisis, the GOC recognizes that Croatia's domestic natural gas supplies are declining (by 2030, it is projected that Croatia will import 87% of its natural gas) and that it needs to diversify supply. To that end, both PM Ivo Sanader and Minister of Economy Branko Vukelic have publicly supported the construction of an LNG terminal in Croatia. This fits well into the EU plan to increase LNG imports from 80 bcm to 160 bcm over the next few years and supports Sanader's goal of "gasification" of Dalmatia (an infrastructure project he likens as being just as important as bringing highways to the region.) ¶4. Two locations under consideration are Omisalj and the port of Ploce in Dalmatia. Stevo Kolundzic, advisor to the chairman of INA, Croatia's state-run petroleum and energy company, told econoff that only Omisalj, a deepwater port located on the island of Krk, is truly of interest since it is a more favorable site (Ploce has fault lines) and INA has already invested 8 million euro into the site. Kolundzic said that the current Adria LNG consortium will draft a new shareholding agreement early in �0A;2006 to accommodate the German company E.ON. Current shareholders include Croatia's INA and Slovene, Czech, French and Austrian companies Geoplin, RWE-Transgas, Total, and OMV. The expected capacity of the terminal would be between 10-13 bcm, 50% of which would go to E.ON and the rest would be divided among other shareholders. If built, the terminal is not expected to be operational before ¶2011. ¶5. Although there is support from the GOC and interest from industry, the head of Primorsko- Goranski County, Zlatko Komadina, opposes building an LNG terminal at Omisalj because he sees it as an ecological risk that could affect tourism on the island of Krk. Several environmental groups share Komadina's position and have started speaking to the press about their concerns. Sanader responded by saying that the site of an LNG terminal will be based on the decisions of experts and not on local whims and that Croatia's energy security is a primary concern. -------------- Potential oil pipeline projects -------------- ¶6. INA currently produces about 40% of domestic oil and purchases the rest on the spot market. Tankers deliver oil to Omisalj (about 7.5 million tons per year) and about 55% of this oil is then transported by pipeline to two refineries in Croatia (Rijeka and Sisak). The rest is transported to refineries in Serbia and Montenegro (SaM) and Bosnia and Herzegovina (BiH). ¶7. While technically straightforward, the proposed linkage of the Druzba and Adria pipelines (which would transport oil from Russia via Belarus, Ukraine, Slovakia, the Czech Republic, Hungary and ZAGREB 00000266 002 OF 002 then through Croatia to tankers at Omisalj) has met with stiff resistance from environmentalists in Croatia and lacks the support of Prime Minister Sanader and his government. An alternative to DA is the Pan European Oil Pipeline (PEOP) which Kresimir Cerovac, Head of the Energy Department, Ministry of Economy, described as "more interesting" for Croatia since it would obviate the need to offload oil onto tankers in the Adriatic. Thus far, however, PEOP has not received much attention from the government, which seems to be more focused on constructing the LNG terminal at Omisalj. According to Davor Matic from the Hrvoje Pozar Energy Institute, an oil pipeline which transits Croatia is not as interesting since the "real power and money" is associated with a terminal, not just a pipe. ¶8. Kolundzic said INA is interested in both DA and PEOP, but concedes that, barring an unlikely shift in public or government opinion, DA is not likely to be built. Kolundzic thinks the Sanader government has not supported DA because they associate it with the previous government. He expressed concern that the GOC's handling of DA will tarnish Croatia's prospects to join other pipeline development projects, including PEOP. Marija Sculac Domac, Head of the Energy Sector at the Croatian Chamber of Economy, said that the GOC stacked the environmental impact assessment committee to ensure a rejection of DA, allowing the current government an easy way out of a potentially bruising battle with public opinion. FRANK