CZECH GOVERNMENT CALM ABOUT SHARP DROP IN RUSSIAN

C O N F I D E N T I A L SECTION 01 OF 02 PRAGUE 000447 SIPDIS EUR/FO, EUR/NCE, EB/FO, EB/ESC, T/FO E.O. 12958: DECL: 07/15/2018 TAGS: ECON ENRG PREL RU EZ SUBJECT: CZECH GOVERNMENT CALM ABOUT SHARP DROP IN RUSSIAN OIL DELIVERIES REF: PRAGUE 367 Classified By: A/Polec Counselor Martina Strong for reasons 1.4b & d ¶1. (C) Summary and Comment: Czech officials confirmed press reports that Russian crude oil deliveries to the Czech Republic via Druzhba pipeline have dropped sharply since early July for allegedly technical reasons. Czech press speculated that Russia was using oil to retaliate against the Czechs following the signing of the Ballistic Missile Defense Agreement (BMDA) on July 8, 2008. Czech officials in their public statements have so far been very careful not to draw this link. The Czechs asked Russia for explanation, but so far received no response. Czech officials and private sector representatives moved quickly to fill the gap with oil supplied through the TAL Ingolstadt pipeline. The country also has over 90 days, worth of oil reserves. For these reasons, the Czechs are relatively calm about the oil supply cut. They have notified the EU Energy Commissioner Andris Piebalgs, but at this time, they have not asked the USG to take any steps on their behalf. As reported in reftel, Czechs are increasingly concerned about Russia's influence over the Czech and European energy markets. MFA officials told us that they will certainly place energy security at the top of their agenda for the first meeting of the U.S.-Czech Strategic Dialogue in September. The cut in Russian oil supplies, whether due to technical problems or retaliation, has certainly not shaken the Czech government's commitment to the MD project. If anything, it has strengthened it, given the Czechs, usual negative reaction to any Russian saber-rattling and now pipeline-rattling. End Summary and Comment. RUSSIA CUTS OIL BY 60 PERCENT IN JULY -------------- ¶2. (C) On July 10, 2008, Russia informed the Czech government that its July deliveries of oil via the Druzhba ("Friendship") pipeline would be cut from 460,000 tons to about 193,000 tons, a decrease of 60 percent. There have already been a reduction in June of about 60,000 tons (or about 15 percent). In light of previous drops in oil supply via Druzhba, the June drop was viewed as a relatively normal fluctuation that would be compensated in months to come. However, the reduction continued in July -- in the first 10 days of July the deliveries were down another 45,000 tons. The reduction have affected all three oil-processing firms on the Czech market (i.e., Unipetrol, Shell and Agip). The Czech Republic has formally asked Transneft, the Russian pipeline monopoly, the Russian Ministry of Energy, and the Russian Ministry of Foreign Affairs for an explanation, but has yet to receive a response. Czech Energy Envoy Vaclav Bartuska told us that Russia is claiming that it has problems with extraction from its oil fields. However, given that Druzhba oil supplies to Poland, Hungary and Slovakia were not cut, Bartuska found this explanation less than plausible. GOVERNMENT FOCUSED ON RECTIFYING THE SITUATION -------------- - ¶3. (C) Since the Czech Republic (CR) is not solely dependent on the Druzhba pipeline for its oil supplies, the private sector was able to secure relatively easily additional oil supplies through the Trans Alpine System (TAL pipeline) and the IKL pipeline. There is thus no threat of an energy crisis in the Czech Republic. The Trade Ministry and MERO, the Czech state-owned company operating the Druzhba and Ingolstadt oil pipelines, assured EconOff that the situation was under control. MERO also told the Embassy that Czech oil reserves would last at least 90 days, and MERO is working to increase its reserve capacity. According to MERO,s spokesperson, MERO just finished two additional storage tanks and would fill them up during the summer to increase the total oil reserves to at least 120 days. MERO also confirmed that oil deliveries through the Ingolstadt pipeline could compensate even for a total Russian shutoff. (NOTE: In contrast to oil, Russian gas supplies are going smoothly at contractual level. Senior Foreign Ministry and Trade Ministry officials said that if Russia wanted to punish the Czechs, it would use natural gas. The CR receives 70 percent of its natural gas from Russia and 30 percent from Norway. They also remarked that the Russian natural gas industry is more closely linked to the state than the oil industry. END NOTE.) PRAGUE 00000447 002 OF 002 ¶4. (C) Beyond seeking formal explanation from the Russians, the Czechs have taken few steps on the political level. They notified the EU Commissioner for Energy, Andris Piebalgs. Ambassador Graber spoke on July 12 with DFM Tomas Pojar, who was calm about the situation. So far, the Czechs have not asked us to take any action to assist them, preferring to receive the formal explanation from Russia first. However, the oil supply cut will only strengthen the Czech's concerns about Russia and its rising influence over the European energy markets. As a result, the Czechs have also reiterated their interest in the TAL stake being sold by Exxon and the fate of the Transpetrol pipeline in Slovakia. CZECH REFINERIES REMAIN CALM -------------- ¶5. (C) Private industry also remains calm. Czech refineries work with MERO to cover their shortfalls from the national strategic reserves and increasing their supplies through the Ingolstadt pipeline. Unipetrol Refinery so far has been using its own Russian oil supplies purchased from tankers, as they did in the past. The industry expects that this is a short-term situation that would not necessitate raising prices or reducing production levels. Graber