(C) CZECH OIL SUPPLIES UPDATE: RUSSIA OFFERS TO

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002262 SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: DECL: 08/04/2018 TAGS: EPET ENRG ECON PREL RS SUBJECT: (C) CZECH OIL SUPPLIES UPDATE: RUSSIA OFFERS TO ELIMINATE MIDDLEMEN IN OIL TRADE REF: MOSCOW 2053 Classified By: Econ MC Eric T. Schultz for Reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) Czech DCM Hynek Pejcha told us on August 4 that the GOR has offered to negotiate a complete removal of intermediaries from the oil trade between the two countries in order to prevent future supply problems. Pejcha said oil is still flowing at reduced levels and normal flows have not been restored, as reported by some media outlets. He added that the GOCR has received "informal signals" that future supplies will not be restored to previous levels until the two sides come to an agreement on the issue of intermediaries. He reiterated that the GOCR does not see any immediate energy security threat from the situation, given the country's multiple sources for crude (reftel). End summary. -------------- GETTING RID OF MIDDLEMEN -------------- ¶2. (C) According to Pejcha, the GOR, in its official response to Czech requests for information regarding the recent reduction of oil supplies (reftel),has offered to eliminate oil trading intermediaries from the oil supply chain from Russia to the Czech Republic. Pejcha said Czech Ambassador-at-large for energy security Vaclav Bartuska has prepared a letter (to be delivered August 4) responding that he is ready to come to Moscow to negotiate the details of this proposal, which the Czech government supports. Pejcha was not sure what the Russians intend to propose, but stressed that his government will insist on concrete mechanisms to ensure transparency in the oil trade. ¶3. (C) Pejcha was encouraged by the Russian offer, even while he remained skeptical. He said he could "only speculate" as to the motivations behind the Russian offer. He suggested the offer could be sincere given the high-level and public attention on transparency and anti-corruption efforts; or it could merely be the new team kicking out the old team in order to take its turn at the trough. -------------- PIPELINE CONTROL -------------- ¶4. (C) In an aside, Pejcha told us Transneft President Nikolai Tokarev had made it clear to him in a private meeting that Russia cannot allow oil from the Odessa-Brody pipeline (which connects to the Druzhba pipeline from Russia) in Ukraine to mix with or disrupt oil flows from Russia. According to Pejcha, Transneft is worried that its control over flows along the pipeline to Eastern Europe could be threatened by Caspian oil going north from the Black Sea. Tokarev told Pejcha that Transneft is prepared to take the issue to arbitration if it continues. (NB: We plan to explore this further septel.) -------------- GOING WITH THE LOW FLOW -------------- ¶5. (C) Pejcha said oil supplies had not been reduced beyond the 50% previously reported for July, suggesting a July 31 press report of "further reductions" was erroneous. Some press headlines on August 1 also erroneously reported that oil flows were "back to normal." Pejcha explained that while supplies were up relative to July, they are still some 15% - 40% below previous levels. He added that the GOCR expected a continuation of reduced flows in August and has "received informal signals" that these reductions would continue until the GOR and GOCR reach some agreement related to oil trading intermediaries. ¶6. (C) Since Czech refineries can get their oil from a variety of sources, Pejcha reiterated that the GOCR does not MOSCOW 00002262 002 OF 002 see this episode of reduced oil supplies from Russia as a threat to its energy security. He said the GOCR does not see the situation as an emergency, or as an "attack" by Russia. -------------- COMMENT -------------- ¶7. (C) Like the Czechs, we remain skeptical as to the reasons behind the GOR's interest in eliminating middlemen from the oil trade. Because of the oil trading companies' murky overseas ownership structures and opaque operations, it is difficult to determine whether they are acting in response to market or political pressures. Meanwhile, the emergence in the public eye of Gennady Timchenko's Gunvor in recent months raises the possibility that the GOR's proposal may be an attempt to redirect wealth to Kremlin favorites. ¶8. (C) Whatever the real motives on the Russian side, the Czechs are right in insisting on concrete mechanisms to ensure transparency. The entire episode, which we will continue to monitor closely, offers us good examples of three of the pillars of energy security -- transparency, open access to pipelines, and multiple sources of supply. End comment. RUBIN