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. - - - - - - - - - - - Georgia and Azerbaijan - - - - - - - - - - - ¶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. - - - - - - - - - Mazeikiu Refinery - - - - - - - - - ¶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 WARSAW 00000086 002 OF 004 of oil to Mazeikiu to wake Hungary up to the fact that Russia is being predatory. - - - - - - - - ConocoPhillips - - - - - - - - ¶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. - - - - - - - - - - - - - Electricity and the Balts - - - - - - - - - - - - - ¶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. - - - - - - - - - - - - - - - Ignalina Nuclear Power Plant - - - - - - - - - - - - - - - ¶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. - - - - - - Kazakhstan - - - - - - WARSAW 00000086 003 OF 004 ¶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. - - - - - - - - - - - Odessa-Brody Pipeline - - - - - - - - - - - ¶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. - - - - - - - - - - - - - - - - Transpetrol, Norwegian Gas, LNG WARSAW 00000086 004 OF 004 - - - - - - - - - - - - - - - - ¶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.) - - - - COMMENT - - - - ¶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