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.

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Seeking Security of Supply of Natural Gas
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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
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.

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Potential oil pipeline projects
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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