GAZPROM IN SERBIA - BUYING UP THE WORKS?

UNCLAS SECTION 01 OF 02 BELGRADE 001433

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ECON ENRG SR
SUBJECT: GAZPROM IN SERBIA - BUYING UP THE WORKS?

REFTEL: Belgrade 1376

SUMMARY
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1. (U) Russia's Gazprom is making a push to control Serbia's key
energy companies and infrastructure. During an October 9 visit,
Gazprom CEO, Alexei Miller linked three major energy projects in
Serbia -- a new gas pipeline, a gas storage facility and perhaps a
deal involving 51% ownership of the Serbian Oil Industry (NIS). The
Serbian government has both publicly downplayed the significance of
Miller's comments, and been unforthcoming about the nature of
discussions with Miller in discussions with Embassy officials.
Russian support for Serbia over the Kosovo issue is probably a key
factor in increased Serbian support for Gazprom's plans in the
region. End Summary.

Gazprom Visits Serbia
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2. (U) During his October 9 visit, Gazprom CEO Alexei Miller
outlined the company's desire to purchase or otherwise control
Serbian energy assets including Serbian state oil company NIS, the
Banatski Dvor gas storage facility and a possible gas pipeline to
Western Europe via Serbia. In a televised interview on state-owned
RTS Miller said that he viewed NIS, Banatski Dvor, and the transit
pipeline as linked projects that Gazprom would want to pursue
jointly. Miller's public candor about Gazprom's intentions
contrasted with the Serbian government's comments on the
discussions. The Prime Minister's office stuck to generic language
about energy playing a significant role in economic development and
the importance of the MOU signed in December 2006 supporting the
idea of a gas transit pipeline through Serbia in its statement
following the meeting with Miller.


3. (SBU) Linking these three significant energy projects would give
Gazprom unprecedented control over the energy infrastructure in
Serbia and the Western Balkans. Serbia currently relies on one gas
pipeline connection from Hungary, controlled by the Hungarian
company MOL, but supplied with Gazprom gas. The Banatski Dvor gas
storage facility is an attempt to build internal gas reserves so
that Serbia can meet its own seasonal demands for gas, which are
greater than the pipeline capacity in very cold weather. The
storage facility would also provide a cushion against supply
shortages or disruptions. Serbijagas Director Milos Milankovic told
embassy officials on October 12, the Serbian gas company had tried
to solicit bids for additional gas to cover winter shortages and
begin to fill the still under construction storage facility.
Milankovic believed Miller's visit was an effort to discourage
Serbia from soliciting bids without Gazprom's participation.

Energy Minister Popovic Denies a Deal
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4. (SBU) During an October 16 meeting with the DCM and visiting SCE
Director Chris Hoh, Energy Minister Aleksandar Popovic referred to
Serbia's discussions with Gazprom as "inconclusive." In response to
DCM's comment that Miller never came to town unless he was ready to
sign a deal, Popovic shrugged saying "that's what I thought too, but
as it turns out he had nothing concrete to offer." Popovic again
said that he supported the strategy of moving ahead with
privatization of a portion of NIS quickly, but that the details
regarding what percentage to sell and how was now a political
decision. Popovic told the DCM there were two alternatives on the
table and he could argue in favor of either of them. One
alternative would be to sell up to 37.5% of the company to
non-Serbian entities and the other was to sell 51% or more. Popovic
admitted that the 37.5% solution would be the more politically
popular alternative but said the 51% option obviously made NIS more
attractive to a "foreign investor."


5. (SBU) Popovic also obfuscated on the goal of the Bantski Dvor
gas storage facility during the same meeting, saying it would be "in
support of" a Nabucco gas pipeline through Bulgaria and Romania.
"We are in negotiations with the Romanians to build a spur from any
eventual Nabucco pipeline and we could augment the plan through our
storage facility." Popovic said this alternative also could accrue
transit fee income for Serbia. Romanian DCM Alexandru Muresan
earlier told DCM at a reception on September 12 that until the early
1990's building a gas pipeline had been a constant feature of the
bilateral agenda, but that the Serbs stopped mentioning it "in
1994," and had not raised it since. Press following the Miller
visit clearly linked the Banaski Dvor project to the alternative
Gazprom pipeline project through Serbia.

NIS - A Political Challenge
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6. (SBU). The NIS privatization has been stalled since before the
January 2007 elections, as politics and the continued revenues and
jobs for politically connected persons have slowed progress on
privatization across the board. The current plan, to sell off 37.5%
(a minority share of 25% plus an additional 12.5% investment by the
purchaser) to a strategic partner, with an offer of management
control, is not likely to attract a large number of bidders. NIS
requires significant investments to make it competitive with
refineries in the region. Currently, NIS survives only because of
the Serbian ban on imported gasoline. In the current environment,
and with only a third of the company likely to be offered to the
buyer, Gazprom is looking to buy the company cheaply and without
significant competition. A Serbian businessman recently commented
to Econoff that NIS is unlikely to be privatized before Kosovo is
settled as the Serbian government is worried that any misstep in the
NIS privatization from Gazprom's perspective could weaken Russia
resolve to support Serbia on Kosovo.

Comment
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7. (SBU) Russia and Gazprom are using the political capital of
Russia's support for Serbia in Kosovo to bolster Russian influence
in the energy sector. Miller's visit to Belgrade was one more step
in Gazprom's effort to link Serbia exclusively with Russian gas.
While the Serbian government continues to maintain publicly that it
is committed to a fair and transparent tender process for NIS at
some point, Popovic's obfuscations to embassy officials on the
subject show the government's inclination to keep the process murky.
End Comment.

BRUSH