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 WARSAW 00002355 001.2 OF 003 Classified By: EconCouns R. Rorvig for reasons 1.4 (b) and (d). -------------- Summary -------------- ¶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 -------------- -- Poland's New Energy Czar Likes Market Solutions -------------- -- ¶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. -------------- --- The Ignalina Nuclear Plant and the Energy Bridge -------------- --- ¶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. -------------- Privatization of Power Companies -------------- ¶4. (C) Poland's traditional policy of keeping electricity generation in public hands has kept the public firms too weak WARSAW 00002355 002.2 OF 003 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. -------------- -------------- Norwegian Gas and Scandinavian Pipeline vs. German Connection -------------- -------------- ¶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. -------------- Odessa-Brody-Plock Pipeline -------------- ¶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. -------------- The Russian-German Baltic Pipeline -------------- ¶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. -------------- Lotos and Orlen -------------- ¶8. (C) Szejnfeld said he does not support a government push WARSAW 00002355 003.2 OF 003 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. -------------- Clean Coal -------------- ¶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. -------------- Comment -------------- 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