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07ZAGREB407 2007-04-25 12:08:00 CONFIDENTIAL Embassy Zagreb
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1. (C) Summary: Following up on reports of Austrian OMV's
LNG deal with Iran, Econ Off spoke to Stevo Kolundzic, Senior
Advisor to the Chairman of Croatia's national oil and gas
company INA about the reports. Kolundzic said that there are
many other potential sources of LNG for the Croatian project
and that OMV's announcement of the Iran deal was most likely
an offshoot of its flirtation with Iran over Nabucco. He
cited Qatar as a source, saying that it would have additional
capacity coming on line by 2012 (roughly the time the
Croatian facility is projected to be up and running, if it is
built), as well as potential sources in Egypt, Libya, Nigeria
and Norway. He noted that INA currently has ongoing projects
in Egypt, together with RWE, which is also part of the
Croatian LNG project. Total, also a party in the deal, is
active in Qatar as well. Kolundzic said that he believes the
source of gas for the Croatian LNG project is less of a
problem than the source of gas for Nabucco, which he fears
could be dealt a death blow by Bluestream II, with Hungarian
and Turkish complicity. End Summary.

2. (C) Econ Off spoke to Stevo Kolundzic, Senior Advisor to
the Chairman of Croatia's INA on April 25 to follow up on
reports of an OMV deal with Iran to source LNG for the
planned terminal on the Croatian Adriatic island of Krk.
Kolundzic, who has been with INA for thirty-five years, has
extensive knowledge of the oil and gas business and an
understanding of the geopolitical context. He said that
there are many other sources of LNG that could be used for
the Croatian LNG terminal and suspected that OMV's
announcement of its Iran deal arose from its contacts with
Iran over Nabucco. He noted that, as far as INA was
concerned, Iran had not been considered as a source of gas
for the project.

3. (C) When asked about claims that gas from Qatar would not
be available for Croatia, Kolundzic said that, while it was
true that Qatar did not have current surplus capacity, there
is new capacity scheduled to come on line by 2012, which
would dovetail with the projected start of regasification at
the Croatian plant. He noted that project partner Total was
active in Qatar, so it would be a logical supplier. He said
Mediterranean supply would also be a logical source for the
Krk facility, citing both Egypt and Libya. Both INA and
project partner RWE are present in Egypt, where INA is
currently exploiting oil concessions, but believes there is
potential for gas as well. Other mentioned sources were
Norway and even Nigeria, though in the longer term.

4. (C) Kolundzic said that he believes supply for Nabucco is
the more difficult question, and the one where avoiding
eventual Iranian supply might be more difficult in the long
term, though he said that it was clear that a political
change would have to occur in Iran for it to become a
feasible source. He said that Putin was trying to drive a
stake in the heart of Nabucco with Bluestream II and said it
would be difficult to secure an eventual 35 billion cubic
meters (bcm) for Nabucco from Caspian sources alone,
particularly if the project is not finalized soon. Kolundzic
cited Turkey and Hungary as impediments to Nabucco, saying
that they were playing into Russian hands. He said that in
discussions with Turkish colleagues, he had come away with
the impression that Turkey is less concerned about sources of
gas than it is with making itself into an energy bridge,
which is helping the Russians kill Nabucco. Hungary, he
said, is a little more complicated, but two factors are
tilting it towards the Russians: 1) EoN's asset swap with
Gazprom and 2) its desire to develop a gas hub to compete
with Austria.

5. (C) Kolundzic also wondered about the rumored prospects of
an OMV-MOL merger (MOL holds a 25% stake in INA). He said
that, given Russian interest in dominating Central and
Eastern European energy markets, such mergers would probably
be the only way to keep these companies from falling under
Russian control, given that the Western majors are more
interested in concessions and production elsewhere than in
acquiring relatively minor companies.

6. (C) The Croatian LNG terminal is still not a done deal
and a final investment decision by the partners (OMV, Total,
RWE, INA and Geoplin) is not expected until late 2008.
Croatian indecision and political maneuvering is also
partially responsible for preventing this project from taking
shape, as the GOC has sought to split INA's share with the
national electric monopoly HEP and MOL has sought a share
from INA. According to Kolundzic, most of these problems
have been overcome and INA has agreed that MOL will get 1 bcm
per year when the facility comes on line. In the meantime,

ZAGREB 00000407 002 OF 002

however, there is still uncertainty over the location and
environmental opposition also lurks in the background. With
elections in Croatia in 2007, it is unlikely that the GOC is
going to be too forward-leaning on a project that could give
opposition parties a lead in for attacks against it.
Nevertheless, the GOC is still on record as supporting the
project and has not indicated that this will change.