CZECH REPUBLIC REQUESTS USG INTERVENTION WITH

C O N F I D E N T I A L PRAGUE 000033 SIPDIS NOFORN SIPDIS STATE FOR EUR/FO, EUR/NCE, EUR/ERA, EB/ESC, E STAFF NSC FOR TRACEY MCKIBBEN E.O. 12958: DECL: 01/15/2017 TAGS: ECON EFIN ETRD PGOV EZ ENRG SUBJECT: CZECH REPUBLIC REQUESTS USG INTERVENTION WITH CONOCOPHILLIPS REF: A. 2005 PRAGUE 1402 ¶B. WARSAW 86 Classified By: DCM Cameron Munter for reasons 1.4 B&D ¶1. (U) This is an Action Request. See para 5. ¶2. (C/NF) During a meeting January 11 with visiting EUR A/S Fried, Czech PM Mirek Topolanek raised GOCR concerns about the country's energy security, and particularly two commercial transactions that he believes threaten energy security by increasing the role of Russian interests. The most pressing item, as reinforced at a meeting January 15 between DCM and Deputy FM Tomas Pojar together with Czech Ambassador-at-Large for Energy Issues Vaclav Bartuska and MFA Political Director Martin Poveijsil, concerns the planned sale by ConocoPhillips of its shares in the Czech refinery Ceska Rafinerska (CRC) to Russia's Lukoil. The second issue involved the contract to supply fuel to the nuclear power plant at Temelin (this second issue will be reported septel after further discussions with the GOCR). ¶3. (C/NF) As reported in ref A, ConocoPhillips currently owns 16.3% of CRC. The other shareholders are Poland's PKN Orlen with 51%, and Dutch Shell and Italy's Agip each with 16.3%. Conoco has been talking for some time about selling its share in CRC, and other assets in the Czech Republic (including a small chain of gas stations). This move is apparently a part of its larger strategic decision to sell off Central European investments and reinvest in the Russian oil sector. The Czech government believes this will be detrimental to Czech energy security by increasing its dependence on Russia. ¶4. (C/NF) While existing CRC shareholders have the preemptive right to match or beat whatever "fair price" offer is made by an outside bidder, it is not clear who or how this "fair price" determination is made. Czech officials fear that given Conoco's existing investments in Lukoil, a deal will be cooked overvaluing Conoco's shares in CRC, making it virtually impossible for existing CRC shareholders to match or beat the deal. PKN Orlen, which is particularly eager for Conoco's shares, believes Lukoil is likely to offer double the value of Conoco's share in CRC. Ambassador Bartuska informed that a deal between ConocoPhillips and Lukoil is expected to be announced by the end of January, giving existing share holders 30 days to reply. (Note: Bartuska spent most of the past week in Warsaw and apparently consulted with his Polish counterparts on the sale; it has been raised by the GOP with USG officials as well, ref B.) Bartuska and Dep FM Pojar, in their January 15 meeting with the DCM, requested that the USG to weigh in with ConocoPhillips on its decision to sell its shares in CRC, specifically with the goal of ensuring that the sale is not structured in a manner that will favor Lukoil over one of the existing CRC shareholders. ¶5. (C/NF) ACTION REQUEST: Post requests Department guidance on how to respond to the GOCR's request for USG intervention. This is the first time the GOCR has requested USG assistance with energy security issues and how we respond will set the tone for future interactions. While the potential deal between ConocoPhillips and Lukoil has been known for several months, the recent oil supply cutoff resulting from the dispute between Russia and Belarus, combined with both the recent creation of the Ambassador-at-Large position to overcome interagency battles and PM Topolanek's personal attention on the issue, has prompted such rare pro-active approach by the Czech government. GRABER