POLAND: DAS BRYZA'S MEETING WITH DEPUTY ECONOMICS

C O N F I D E N T I A L SECTION 01 OF 04 WARSAW 000086

SIPDIS

SIPDIS

STATE FOR S/P, EUR/NCE, EUR/ERA, EB/ESC, EUR/CARC, EUR/RUS
EUR FOR DAS BRYZA
EUR/NCE FOR DKOSTELANCIK AND BPUTNEY
EUR/ERA FOR DLIPPEAT AND LCATIPON
EB/ESC FOR SGALLOGLY, RGARVERICK, AND JLEWANDOWSKI
S/P FOR SHELLMAN AND GMANUEL
COMMERCE FOR 4232/ITA/MAC/EUR/OECA/MROGERS, JKIMBALL,
JBURGESS
DEPT OF ENERGY FOR LEKIMOFF

E.O. 12958: DECL: 01/12/2017
TAGS: ENRG ECON PREL RS GG AJ KZ LH LG EN LO PL
SUBJECT: POLAND: DAS BRYZA'S MEETING WITH DEPUTY ECONOMICS
MIN NAIMSKI


Classified By: Charge D'Affaires Ken Hillas for reasons 1.4 b and d


1. (C) Summary: EUR DAS Bryza and Polish Deputy Minister
of Economy Naimski discussed a deal for gas for Azerbaijan
and Georgia that would relieve both countries of their
dependence on Russian gas, and exchanged views on the
political situation in Georgia. Naimski restated his
opposition to the Mazeikiu refinery purchase, noting that it
would have been better for PKN Orlen to invest in upstream
development, but conceded the strategic benefits of the deal.
He asked for USG assistance in arranging a meeting for the
GOP with ConocoPhillips to discuss its sale of European
assets to LukOil. The GOP will work to join its energy grid
to the Baltics and to participate in the construction of a
replacement for the Ignalina nuclear power plant. The GOP
continues to pursue the Odessa-Brody-Gdansk oil pipeline and
is focusing on oil from Kazakhstan to make it viable. The
GOP will make one last try to purchase the Transpetrol
refinery stake but considers it a lost cause. The GOP
continues to pursue a gas deal for a dedicated gas pipeline
from Norway. DAS Bryza's meeting with Wojciech Zajaczkowski,
Director of Eastern Policy at the Ministry of Foreign
Affairs, will be reported septel. End Summary.

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Georgia and Azerbaijan
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2. (C) Bryza began the meeting with Deputy Minister Naimski
by laying out a scenario in which within 20 days Azerbaijan
and Georgia could go from being 100% dependent on Russian gas
to requiring zero Russian gas to get through this winter.
Bryza informed Naimski that BP has agreed not to re-inject
gas into Azeri-Chirag-Guneshli (ACG),but instead sell it to
Azerbaijan, and subsequently to Georgia. Additionally,
Turkey agreed not to take the Shah Deniz (SD) gas but to
would allow Georgia to buy it. Additionally, Azerbaijan will
burn mazut to fill remaining energy needs in order to avoid
relying on any Russian gas this winter. Bryza noted that
Azerbaijan and Georgia are resolute in working together to
rid themselves of dependence on Russian gas.


3. (C) Naimski was pleased with this news, but quickly
turned the conversation to discuss what would happen to
Georgia if President Saakashvili was assassinated.
Acknowledging that the U.S. is doing all it can via personal
protection to make sure that doesn't happen, Naimski thought
that a better strategy might be to provide other deterrents.
He suggested that Saakashvili expand his core group and
publicly acknowledge that he is preparing a successor, so as
to make him replaceable, therefore making it less effective
to kill him. Naimski also suggested that we begin to take
Georgia into Western structures now, to show the world that
we care about Georgia and we're watching what's happening
closely. Both sides acknowledged that Russia may begin to
feel pressure and may instigate disturbances and
destabilizations in the region that will hurt the West, and
especially Georgia, with no impact on Russia.

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Mazeikiu Refinery
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4. (C) Naimski told DAS Bryza that personally he was not
happy with the Mazeikiu refinery purchase by PKN Orlen
because it was a large investment in production, and he would
prefer such investments were made upstream. He believes that
the investment is so large it will preclude years worth of
potential investments by PKN Orlen (PKNO) in upstream
development. But, although he personally didn't agree with
the purchase, once PKNO decided to go through with it, he
fully supported the Poles in ensuring the transaction was
completed. He also believed that it took the Russian cutoff

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of oil to Mazeikiu to wake Hungary up to the fact that Russia
is being predatory.

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ConocoPhillips
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5. (C) Naimski requested DAS Bryza's assistance in
encouraging ConocoPhillips representatives to visit Poland to
discuss future investments in Poland and the region with the
GOP. Naimski discussed the sale of Conoco assets in the
Czech Republic to LukOil, noting that although the deal is
relatively minor for Conoco, it is very important politically
for Poland. Emphasizing that he was not concerned about the
sale of gas stations which he was happy to let LukOil
purchase and control, Naimski instead worried about the
Kralupy refinery shares as PKNO is also an owner of the
refinery and should have rights of first refusal. However,
the specifics of the deal are unclear to the GOP and give
them pause since the reported transaction appears to involve
trading shares rather than selling assets. The GOP is afraid
that via an internal trade, others, including PKNO, might be
priced out of the market. Naimski proudly emphasized that
Poland is the only country in the region without Russian
investments in gas.

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Electricity and the Balts
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6. (C) As recently announced in Vilnius, Poland will join
its electric power grid with Lithuania and the other Baltic
countries. Naimski said that the discussion now is centered
on where to place clutches required to block the power from
the Russia system (which Lithuania is currently connected to)
to the European system. The options being considered are on
Lithuania's border with Poland or with Belarus. Naimski
would like the clutches placed on the border with Belarus,
and then further up the border between the Baltic States and
Russia, bringing the Baltics into the European system. This
location would also block Russian electricity exports to the
region. However, the deal is currently to place them on
Lithuania's border with Poland. Naimski said that the Baltic
States are not fully supportive of placing the clutches on
their borders with Russia for fear of angering the government
of Russia. DAS Bryza asked if the USG should approach the EC
on this issue and Naimski responded that Commissioner
Piebalgs is supportive but an approach would assist the Poles
and Balts. He was uncertain of whether EU funds were
available for the project which he estimated would cost USD $
1 billion. Naimski noted that the GOP has been talking to
the governments of the Baltics for 17 years about integration
projects and nothing has happened. The governments were
concerned that they couldn't complete strategic integration
projects and decided energy was a good place to start.

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Ignalina Nuclear Power Plant
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7. (C) Naimski confirmed that Poland is interested in
cooperating in the construction of the replacement for the
Ignalina nuclear power plant. Poland is not opposed to the
development of nuclear energy although it does not have a
nuclear plant. Joining the nuclear project will give the
Polish industry good experience. The framework agreement
signed by the Prime Ministers commits each country to a 25%
ownership share. The Ministry of Economy is taking its
orders from the highest political level on this project.

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Kazakhstan
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8. (C) Naimski explained that the GOP understands that the
government of Kazakhstan, as well as Brussels, are split on
the issue of export from Kazakhstan. Kazakhstan's Kulibayev
and Tokayev do not favor a trans-Caspian oil or gas pipeline
because of the tricky political situation with Russia. He
believes that President Nazarbayev is interested in a
project, but that Deputy Prime Minister Massimov is pushing
for LNG to be shipped across the Caspian, something Naimski
sees as completely economically unfeasible. However, the
GOKZ may push the deal even if it's not commercially feasible
to open another export route and avoid the Caspian
demarcation dispute. Brussels exhibits the same dichotomy on
export from Kazakhstan, with Deputy DG of Relex Rotrades
supporting LNG while Piebalgs advisor Ruchel advises that the
countries should focus on a pipeline. DAS Bryza explained
that U.S. policy is to show that Azerbaijani gas can be
exported to the EU, then bring Kazakhstan along. Naimski
noted that Kazakhstan sells to Russia, China, and the U.S.
and wondered if the EU should/could become a 4th partner.
Bryza assured Naimski that the U.S. would welcome more EU
involvement in the region. President Nazarbayev wants an EU
and Western strategy as the Russians have constrained his
exports of oil and gas. The U.S. strongly supported maimal
EU involvement in the Caspian region. For example, we are
coordinating on feasibility studies. It's been hard to
convince the Commission but there is now good coordination
between the U.S. and EU.

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Odessa-Brody Pipeline
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9. (C) Naimski acknowledged that there is no reasonable way
to proceed with the Odessa-Brody pipeline without Kazakhstani
oil which unfortunately is already allotted elsewhere. The
only viable option is to persuade ChevronTexaco to use
Odessa-Brody as an alternative route, but the company doesn't
seem interested in doing so. Naimski mused that maybe the
GOP needs to work to make it a more attractive option for
Chevron. Poland recognizes that although it has good
knowledge of Ukraine, it does not have enough influence on
its own to balance Russian interests in Ukraine or to
convince the EU to engage with the Ukraine. Bryza shared
with Naimski that U.S. companies are not extremely interested
in getting involved in Ukraine because they are uncertain
which way things will go there politically. ChevronTexaco
appears to be favoring the Burgos-Alexandropolis and
Samsun-Ceyhan bypass routes. Naimski added that there is an
agreement with Ukraine on the Odessa-Brody project but that
the Ukraine wants Russian participation in the project.
Khristenko reportedly told the Ukrainians that he will not
oppose the project if it does not undermine Russian interests
in the Druzba system.


10. (C) President Kaczynski will likely go to Kazakhstan in
early 2007 to discuss the Odessa-Brody project with President
Nazarbayev. Naimski believes that there is a chance that
President Nazarbayev might like to have an alternative for
his own oil (possibly 8 million tons/year). And if so, that
would make Odessa-Brody-Gdansk viable. When DAS Bryza
questioned the economics of Odessa-Brody, stating that
President Nazarbayev would have the same questions, Naimski
replied that it's possible to make the economics acceptable,
for example by batching oil or alternately reversing the
line. Bryza explained that Chevron seemed to view
Burgas-Alexandropolis as its preferred Bosporus bypass
pipeline, with Samsun-Ceyhan as a backup. He recommended
that Naimski sharpen his calculations of Odessa-Brodiy,s
commercial viability, then share them with Chevron.

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Transpetrol, Norwegian Gas, LNG

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11. (C) While Naimski noted that he's recently been asking
the question "who lost Slovakia" he is resigned to the fact
that the game is over. The GOP could persuade PKNO to buy a
claim and spend forever in court but that's not a good
option. The GOP will pursue the course of action discussed
with S/P Advisor Helman but believes it's now a waste of
time. On Norwegian gas, Naimski stated that Minister of
Economy Wozniak is going to Oslo the week of December 18.
German Chancellor Merkel raised the issue of gas sales to
Poland with Norwegian PM Stoltenberg as promised and he
seemed to be supportive. The GOP is in talks with Statoil
and ExxonMobil about the purchase of 3BCM. The GOP believes
that the mood in Norway is changing and that Norway needs
Poland's purchase to make the project profitable. Naimski
confirmed that building the planned North Baltic gas pipeline
from Russia to Germany and the hoped-for pipeline from Norway
to Poland is difficult but technically feasible as the
pipelines can legally and technically cross in the Baltic.
Naimski confirmed that PGNiG would announce the location for
its new LNG port shortly and that the GOP is committed to
building an LNG terminal to increase its energy security.
(Note: PGNiG subsequently announced it will construct a
terminal in Swinoujscie, on the Polish-German border. End
Note.)

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COMMENT
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12. (C) Deputy Minister of Economy Naimski's meeting with
DAS Bryza revealed that the GOP continues to struggle to
reinforce its energy security but is beginning to recognize
that some pet projects -- i.e. Transpetrol and Odessa-Brody
-- may not be feasible or realistic absent leadership by
private investors. It is clear that the GOP is continuing to
pursue every possible project to secure its energy
independence. The Ministry of Economy has made progress in
the past year, and if it can construct some of the projects
it has started, the residents of Poland will be less
dependent on Russian energy in 5 years. Particularly
interesting are the energy grid project with the Baltic
countries and Polish participation in the Ignalina nuclear
power plant replacement. Naimski's analysis that Poland and
the Baltics have not completed any strategic infrastructure
linkages is spot-on. Progress on the energy projects could
lead to discussions and cooperation on other infrastructure
which would further link the region and further integrate the
countries.


13. (U) DAS Bryza cleared this cable after departing Warsaw.

HILLAS