(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)

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SUMMARY
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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.

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GETTING RID OF MIDDLEMEN
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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.

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PIPELINE CONTROL
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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.)

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GOING WITH THE LOW FLOW
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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

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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.

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COMMENT
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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