NEW ENERGY CZAR WANTS MORE ECONOMIC LIBERALISM IN

C O N F I D E N T I A L SECTION 01 OF 03 WARSAW 002355

SIPDIS

SIPDIS

STATE FOR EUR/NCE, EUR/ERA, EUR/PGI,
PASS TO USTR FOR WMOORE
COMMERCE FOR 4232/ITA/MAC/EUR/JBURGESS, JKIMBALL, MWILSON
DOE FOR LEKIMOFF, MGINSBERG, GKERESTES

E.O. 12958: DECL: 12/31/2020
TAGS: ECON ENRG EPET EINV PL
SUBJECT: NEW ENERGY CZAR WANTS MORE ECONOMIC LIBERALISM IN
POLAND'S ENERGY SECTOR

REF: WARSAW 2309

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Classified By: EconCouns R. Rorvig for reasons 1.4 (b) and (d).

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Summary
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1. (C) Adam Szejnfeld, the newly appointed Secretary of State
in the Economics Ministry responsible for energy affairs,
told the DCM that he wants to bring more economic liberalism
into Poland's energy policy. Szejnfeld said he will review
over the next three months the various energy projects pushed
by the former PiS Government. Each proposal will be examined
based on its strategic and commercial merits, recognizing
that Poland has significant political capital invested in
some projects, such as the proposed gas pipeline from
Scandinavia. In contrast to his predecessor Piotr Naimski,
Szejnfeld said he will not place priority on government
control, but rather support projects which have major private
sector involvement and make commercial sense. He plans to
push privatization of state-owned energy companies,
particularly in the electric power sector, both to increase
enterprise efficiency and to raise capital for new
investment. Szejnfeld said a theoretical Polish-Ukrainian
agreement to build an Odessa-Brody-Plock oil pipeline would
mean little if private energy companies determine it makes no
economic sense. End Summary

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Poland's New Energy Czar Likes Market Solutions
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2. (C) During a December 10 luncheon with the DCM, Adam
Szejnfeld, the newly appointed Economics Ministry State
Secretary responsible for energy affairs and business

SIPDIS
legislation, reviewed his general approach to economic policy
as well as his preliminary thinking about a number of
specific projects. Szejnfeld stressed that the new Tusk
Government supports efficient market solutions to Poland's
energy diversification needs, rather than central government
control. The previous PiS government consulted very little
with the private sector when taking strategic energy policy
decisions and filled the ranks of Poland's state-owned energy
companies with PiS loyalists rather than industry experts.
Szejnfeld said he hopes to change this policy and make sure
that energy company executives also represent the interest of
the enterprises. Energy projects must make commercial as
well as strategic sense. Szejnfeld then proceeded to review
a number of projects.

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The Ignalina Nuclear Plant and the Energy Bridge
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3. (C) Poland's insistence that it receive 1200 megawatts out
of the 3200 megawatt planned capacity of Lithuania's proposed
Ignalina nuclear plant is based on the minimum volume it
calculates its power companies need to commercially justify
the investment to upgrade the Polish power grid that will
form the backbone of the European energy bridge to the
Baltics. It is not based on an estimation of Poland's future
energy needs which are much larger. Szejnfeld said that
Poland's demand for additional electricity generating
capacity is expected to grow by 1000 megawatts a year during
the next decade. Poland would therefore have no trouble
absorbing all of Ignalina's capacity. Poland is aware that
the Lithuanian parliament has passed a law stipulating that
one-third of Ignalina's output (or about 1100 megawatts) is
reserved for Lithuania. Subtracting out the Lithuanian and
Polish portions would leave 900 megawatts to be split between
Latvia and Estonia.

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Privatization of Power Companies
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4. (C) Poland's traditional policy of keeping electricity
generation in public hands has kept the public firms too weak

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to get bank financing and deprived them of the ability to
raise capital through equity sales to investors. As a
result, the public electric utilities have failed to build
enough new power plants to keep pace with growing demand.
Szejnfeld said the Tusk Government hopes to make considerable
progress in privatizing electric utilities during its term in
office, both to raise capital for the new investments and
improve management efficiency. Therefore, it will reexamine
the PiS government's proposals to combine utilities into two
larger regional groupings in light of how this might affect
their prospects for equity sales to private investors.
Szejnfeld said the electricity sector's capital needs for new
plant construction and modernization are huge, and the
private sector needs to play a leading role.

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Norwegian Gas and Scandinavian Pipeline vs. German Connection
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5. (C) Szejnfeld said that the Tusk government would also
review the strategic planning for a proposed pipeline from
Scandinavia. He estimated that the infrastructure investment
needed to bring in gas from Norway would be at least 10 times
that of building a connector to the German gas grid.
Nevertheless, Poland had invested a huge amount of political
capital in this project and modifying it could do significant
damage to Poland's image and credibility. Szejnfeld said
that it would make, however, no sense to build a north-south
pipeline as well as a spur to Germany since cheaper gas from
Germany would completely undermine the financial viability of
the Scandinavian project. Szejnfeld said he is inclined to
proceed with the building of an LNG terminal on Poland's
coast since this project is at an advanced stage of planning.
However, the commercial basis of this project appears to be
weak.

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Odessa-Brody-Plock Pipeline
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6. (C) Szejnfeld said that despite years of government
discussion, the prospects for construction of an
Odessa-Brody-Plock pipeline to bring Caspian oil to Poland
were still distant. There was currently no committed
supplier of oil and no likely buyer of product from Poland or
beyond. None of the major oil companies have stepped forward
either as buyers or suppliers. Even if a
government-to-government agreement could be reached with
Ukraine, that did not mean that commercial companies were
under any obligation to finance the project. It is thus
critical that any proposed pipeline make commercial sense to
the private sector. Private investors and not governments
build pipelines.

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The Russian-German Baltic Pipeline
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7. (C) The Tusk Government, like the PiS Government, is also
opposed to the Baltic pipeline between Germany and Russia,
which it sees as a politically rather than economically
motivated decision. However, the GOP will now be much less
abrasive in making known its views. Szejnfeld said that the
Russian-German underwater connection would be much more
expensive to build than the proposed Yamal II/Amber pipeline
project running across Poland. Szejnfeld said that he
thought the best way of making the Amber project more
palatable to Russia and Germany would be to bring in
additional international partners. The presence of more
partners would soften the Russian-Polish dimension of the
project and raise the comfort level of all investing parties
that the project will be run according to economic and not
political principles.

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Lotos and Orlen
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8. (C) Szejnfeld said he does not support a government push

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to merge Poland's two largest oil refiners, Lotos and Orlen.
If the two firms come to the conclusion that they want to
merge for strictly commercial reasons, then he would not be
opposed. The important point is that any deal would have to
be driven by commercial reasoning. Szejnfeld said that a
number of the top officials of Poland's energy companies had
been selected for political rather than technical reasons.
This style of management would have to change and some
officials who were in their jobs for non-meritocratic reasons
would be asked to leave.

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Clean Coal
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9. (SBU) Szejnfeld said that clean coal was one of the most
important areas for future investment and that the Tusk
government had already declared its public support for this
technology. Szejnfeld said that a number of interesting
technologies had been developed in recent years, many by U.S.
firms. Poland was anxious to achieve progress in this area
for both reasons of energy security and to control greenhouse
gas emissions.

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Comment
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10 (C) The contrast between Szejnfeld's pro-market views and
the suspicious, secretive nature of his predecessor Piotr
Naimski could not be greater. Whereas Naimski did not trust
the private sector and the free market, and rarely consulted
anyone outside of his small group of self-selected advisors,
Szejnfeld says he plans to give priority to privatization,
private sector involvement and commercial viability. It is
still unclear what changes, if any, will be introduced in
Poland's energy policy following the three month review
period. Szejnfeld implied that one of his first priorities
will be to replace Naimski's team at the Economic Ministry
with individuals more favorable to markets and the private
sector. He also made it clear that he expects Poland's
energy companies to act first and foremost in the interests
of their shareholders, and not according to the directives of
the bureaucracy. Szejnfeld does not currently plan any trips
to Washington, but expressed eagerness to meet with U.S.
energy policy-makers and energy security strategists in the
coming months.
ASHE