AMBASSADOR MEETS ENERGY MINISTER

UNCLAS BELGRADE 001018

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON ENRG SR
SUBJECT: AMBASSADOR MEETS ENERGY MINISTER


SUMMARY
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1. (SBU) Ambassador Polt met with new Minister of Energy Aleksandar
Popovic on July 11 to review his plans for addressing Serbia's
energy security. The minister, a vice president in Prime Minister
Kostunica's Democratic Party of Serbia (DSS),said Serbia has no
alternative to sourcing gas from the east but at the same time
declared that his goal is to decrease dependence on the current
single-source MOL pipeline. He pledged to have gas storage ready
for winter 2008-2009 but declined to discuss how Srbijagas would
find the money to fill the Banatski Dvor gas storage facility,
mentioning only that the issue is linked to ongoing discussions of
gas transit pipelines. Privatization of state oil monopoly NIS will
proceed gradually, as planned by the previous government, but
Popovic acknowledged that the goal is an eventual majority for the
strategic partner. The meeting ended with a very frank discussion of
Kosovo status. End summary.


2. (SBU) The Ambassador met with Minister of Energy Aleksandar
Popovic for the first time in the latter's new capacity on June 20.
Popovic, an assistant professor of chemistry at the University of
Belgrade and a DSS vice president, was pleasant but guarded in
discussing a series of energy issues, including Banatski Dvor gas
storage, a gas pipeline to connect Serbia to Bulgaria's network, and
privatization of state oil company Naftna Industrije Srbije (NIS).
The Ambassador, who was accompanied by the Embassy's econ chief,
opened the discussion by expressing understanding for the difficult
task Popovic faces in pursuing energy security for Serbia; it is an
important issue for the rest of Europe and the U.S., he added.
Secure supply also was also an issue for investors, the Ambassador
noted, reminding Popovic that U.S. Steel was forced to cut
production in January 2006 because of a natural gas shortage.


3. (SBU) Serbia is a small country that produces only 8 percent of
its own gas, Popovic replied. Gas from the east is the only source,
but Serbia must try to diversify to the maximum extent possible.
Ambassador Polt noted that a Nis-Dmitrovgrad pipeline would provide
Serbia with an alternative for gas supply. Popovic replied that
this option is beyond Serbia's control; moving forward requires the
agreement of Bulgaria and Jugorosgas. (Note: Jugorosgas, which is
controlled by Gazprom, generally is believed to have an exclusive
right to construct gas pipelines in Southern Serbia by way of
Milosevic-era bilateral agreements.)


4. (SBU) At the same time, without such a pipeline, Serbia cannot
get enough gas during winter, Popovic added, explaining that
pressure in the MOL pipeline is not sufficient for central Serbia.
Nor is the 12 million cubic meter daily capacity of the MOL pipeline
enough as gasification expands in central Serbia.


5. (SBU) Ambassador Polt noted that gas storage would strengthen
Serbia's energy security; however, Banatski Dvor would not be ready
this winter, despite previous assurances. It's a simple story,
Popovic replied: Serbia needs only the money and 150 days during
which to pump gas. The reservoir requires 100 million cubic meters
of cushion gas. But Srbijagas lacks the money now, the Minister
said, and the summer season, during which there is excess gas for
filling the storage, soon will be over. Nevertheless, it will be
ready next year, Popovic said: "I'll finish it or I'll resign."


6. (SBU) Privatization of state oil company NIS is another sensitive
issue on the Ministry's plate, Ambassador Polt said, noting that the
U.S. generally favors selling off the biggest possible stake, as
quickly as possible. The Minister said that the Kostunica government
would employ a more gradual approach similar to the strategy adopted
- but not executed - by the previous government. The first stage
would be sale of 25-37.5 percent to a strategic investor, who also
would gain management control. The government's goal is to build NIS
into a strong regional player, and this would require time, money
and good management. On the one hand, Serbia would go slow in order
to preserve a "national resource," Popovic said, but it would profit
later by selling shares after the value of the company has been
enhanced. The eventual goal is to sell off 50 percent plus one
share, but privatization of a majority stake definitely would not
happen under this government, Popovic said.


7. (SBU) Popovic added that he was strongly against privatizing
power company EPS, which has a relatively stronger position. EPS
would seek a strategic partner for co-investment in two, 700-MW
coal-fired plants, but the government wants to build up EPS as a
strong regional player. He explained that power is in deficit all
over the region, creating opportunities for EPS. Although Serbia's
power generating capacity has recovered from NATO bombing, Kosovo's
power sector faces continuing production problems, he added. Serbia
itself faces annual winter electricity deficits, and gas storage at
Banatski Dvor could help by permitting an increase in winter power
production based on natural gas.


8. (SBU) Ambassador Polt asked whether the current developments on
Kosovo would influence the tenders that Serbia is planning. Popovic
replied that the sell-off of a minority stake in NIS would be
transparent. However, he added that Serbia is constrained by its
geographic position, and by the fact that 95 percent of its gas
comes from Russia.


9. (SBU) Turning to Kosovo, the Ambassador Polt sought Popovic's
views on how possible additional time for Kosovo status engagement
could be used to achieve progress. The Energy Minister, known for
his strident and emotional views on Kosovo, replied that face to
face negotiations led by a new mediator could be productive.
Ahtisaari had not invested enough effort into the outcome. Talks
should start with issues on which there is potential for agreement
before moving into the tougher issues. "We are ready to offer a
lot, but not independence," Popovic said.


10. (SBU) The Ambassador noted that an additional 120 days of talks
would be a final opportunity for Belgrade to engage constructively
with Pristina and the international community and ultimately to
prepare for Kosovo's supervised independence. In that context, the
Ambassador Polt asked Popovic how Serbia would propose to proceed.


11. (SBU) Some in Belgrade view a link between Kosovo and
Euro-Atlantic integration as blackmail, Popovic replied. A
premature solution now, without the possibility of something better,
will hurt the region and Europe, although the U.S. will escape the
consequences by virtue of its geographic position. More time is
necessary; developments that were unthinkable in Bosnia now years
ago now are politically possible with the passage of time, Popovic
argued.


12. (SBU) Ambassador Polt argued that a hard-line reaction on the
part of the Serbian government would damage almost exclusively
Serbia's interests. Euro-Atlantic integration is a benefit for the
Serbian people, as the road to prosperity. The Ambassador
questioned whether Serbia believes it has other options for future
success of its people?


13. (SBU) "We will do what we have to do," Popovic replied. "I have
to say, as an American friend, that I am disappointed that America
picked the wrong allies in the region." The U.S. choice of a
strategic partner for the region would set the course for decades to
come, he added dramatically. Rejecting this emotional assertion,
the Ambassador pointing out that NATO and other international
support was the key guarantor of security and stability in Kosovo.



14. (SBU) The Ambassador said that after Kosovo status settlement,
the U.S. will be ready to move on in its relationship with Serbia.
He said he hoped that Serbia would be similarly able to move on.

POLT