POLAND ENERGY: PIPELINES, MERGERS, STORAGE, GAS

C O N F I D E N T I A L SECTION 01 OF 02 WARSAW 001981 SIPDIS SIPDIS STATE FOR EUR, EUR/NCE, EUR/ERA, EEB EUR FOR JGARBER AND MBRYZA EUR/NCE FOR LLOCHMAN, BPUTNEY, TYEAGER EUR/ERA FOR ELUFTMAN, EMCCONAHA EEB/ESC FOR SGALLOGLY, JKOPP, DMONOSSON COMMERCE FOR 4232/ITA/MAC/EUR/OECA/MROGERS ENERGY FOR EROSSI, LEKIMOFF TREASURY FOR TTORGERSON E.O. 12958: DECL: 09/19/2017 TAGS: ENRG ECON EPET ETRD PL PREL SUBJECT: POLAND ENERGY: PIPELINES, MERGERS, STORAGE, GAS REF: A. WARSAW 1975 ¶B. WARSAW 1901 ¶C. AND PREVIOUS Classified By: Econ Counselor Richard Rorvig, reasons 1.4 b, d ¶1. (C) Summary: Poland continues to pursue the construction of the Odessa-Brody Plock oil pipeline and GOP officials will meet with counterparts from Georgia, Ukraine, and Azerbaijan in Tbilisi on September 26. The Ministry of Economy opposes the merger of PKN Orlen and Lotos Refinery because Poland's oil sector policy envisions two separate oil companies and GOP control would be reduced by a merger. Oil executives inform us that the GOP plans to fine oil importers for not having sufficient oil storage capacity despite the GOP's opposition to new construction by entities that are not state-controlled. Plans for an LNG port are on-track but the GOP does needs a gas contract. End Summary. -------------- -------------- Meeting in Georgia will Discuss Odessa-Brody-Plock Pipeline -------------- -------------- ¶2. (C) Jakub Kozera and Janusz Kowalski of the Ministry of Economy's Department for Diversification of Oil and Gas Supply told Econoff that Deputy Minister Naimski will meet with counterparts from Georgia, Ukraine, and Azerbaijan in Tbilisi on September 26. The GOP hopes to move the Odessa-Brody project forward during the meeting. The GOP is still waiting for a concrete answer from Georgia and Azerbaijan on whether they will participate in the pipeline. The governments will negotiate an Intergovernmental Agreement (IGA) and leave the commercial framework and financing arrangements to commercial partners. ¶3. (C) Kowalksi stated that both Georgia and Azerbaijan agreed to join the project but are not expected to invest any money in the pipeline. Asked about recent press reports from Ukraine that the government of Ukraine invited Shell to join the project, Kowalski replied that it's a pre-election period in Ukraine also, and that funny things should be expected to continue to come out of the press there. Subsequently, Krzystof Rogala of Gaz Systems told Econoff that it appears that Azerbaijan State Oil Company Socar's position on joining the project has changed. During initial discussions Socar expressed interest in acquiring a 25% stake in the project. Socar recently told GOP officials that it would like a 1% stake. Rogala characterized negotiations with the new potential partners as "tricky." A long-time skeptic of the viability of the project, Rogala now believes the current problems experienced by the Greek and Bulgarian governments in putting together the Burgos-Alexandropoulous pipeline present an opportunity for Odessa-Brody-Plock. -------------- PKN Orlen-Grupa Lotos Merger -------------- ¶4. (C) Asked about the recent speculation on a PKN-Orlen merger with Grupa Lotos refinery, Kowalski stated that Minister Wozniak is opposed to a merger and that Poland's Oil Sector Policy does not permit a merger. The current GOP is not considering a merger and legally a merger can not take place without new legislation permitting it. Kowalski confided that the Ministry of Economy prepared an analysis of the proposed merger that showed that merging the companies does not make sense if the goal is to defend both companies from a hostile takeover. Currently, he said, slightly more than 50% of Grupa Lotos is state-owned, with PKN Orlen less than 30% state owned. A merged company would leave the GOP with less than 50% ownership of the shares. (Note: Recent Warsaw Stock Exchange figures show GOP ownership of Grupa Lotos is 68.8% and Orlen is 17.32%. Kowalski's analysis that a merger would leave the GOP with less than 50% of the merged company is accurate, despite the discrepency in the numbers, given the relative sizes and capitalization of Orlen and Lotos. End Note.) ¶5. (C) A merger also does not make sense for the companies, said Kowalski, given the large investment program Lotos plans. A merger could lead to difficulty in financing WARSAW 00001981 002 OF 002 expansion and investment. PKN Orlen's plans for the merger are therefore dangerous for Lotos and Orlen, the Polish economy, and Polish energy security. The merger would also create a monopoly in the oil sector, which the GOP opposes. Kowalski opined that Orlen supports the merger as a way to eliminate competition in its home market using the cover of avoiding a potential hostile takeover. He concluded by noting that the energy sector is strategic for Poland and all decisions are political. -------------- Oil Storage Continues to Be an Issue -------------- ¶6. (C) Krzystof Rogala confirmed that the GOP plans to establish its own Strategic Oil Reserve. A group of GOP and company officials is in the U.S. this week visiting the Idaho National Labs, the Strategic Oil Reserve and DC to discuss the U.S. experience. Rogala stated that the GOP will not necessarily be the only owner of oil and gas storage but wants to ensure the country has sufficient strategic reserves. David Ensor, Mercuria Energy Group Executive Vice President told Econoff that obtaining sufficient oil storage continues to be a problem for Mercuria (ref b). Ensor explained that the GOP recently informed the company that it will be fined under a new Polish law requiring companies to contract for oil and product storage. Mercuria has been unable to get permission to build appropriate storage or to lease it from GOP-owned companies. The process of fining Mercuria was recently initiated, and the GOP intends to also fine PKN Orlen, Shell and BP. PKN Orlen reportedly received a grace period to comply until March, 2008. Ensor hopes that Mercuria and the other companies will be treated in the same manner. Given the current GOP's disdain for the company's founders, Ensor is concerned that Mercuria will not be treated fairly. -------------- LNG Port On Track But Needs Gas -------------- ¶7. (C) The proposed LNG port to be constructed in Swinojuscie is on schedule, according to Rogala. Polish Oil and Gas Company (PGNiG) is hiring experts with international LNG experience to work on the project. The GOP's draft budget for 2008 includes long-term funding for the port, which will be GOP owned, while the terminal will be owned and financed by PGNiG. Rogala told Econoff that Minister Wozniak would speak to Minister of Energy Bodman on the margins of the GNEP meeting to request USG assistance in obtaining a long-term gas contract for the project. The GOP has a number of LNG contract possibilities pending and feels the USG could use its powers of persuasion to ensure that at least one could be finalized. (Note: Despite numerous explanations that the USG does not get involved in commercial contracts the Ministry of Economy continues to believe that the USG can and will assist Poland on commercial deals when requested. End note.) ¶8. (C) Comment: The GOP continues to pursue its energy diversification strategy on a number of fronts. Despite a lack of commercial interest in the Odessa-Brody-Plock pipeline, the GOP is pursuing the project as a means of strengthening ties with Ukraine, Georgia, and Azerbaijan. The current GOP is unlikely to approve a PKN Orlen - Lotos merger as it would reduce government control of the companies. The GOP's efforts to improve oil storage capacity are still in their infancy. Post hopes the visit to INL, Houston, and DC will reinforce our message that improving storage capacity is critical but that private ownership is not evil and commercial enterprises can provide essential technical and managerial capabilities. HILLAS