MACEDONIAN GOVERNMENT AND GREEK OIL COMPANY SIGN

UNCLAS SECTION 01 OF 02 SKOPJE 000082

SIPDIS

SIPDIS

DEPT FOR EUR/SCA

E.O. 12958: N/A
TAGS: ECON ENRG PGOV PREL ETRD MK
SUBJECT: MACEDONIAN GOVERNMENT AND GREEK OIL COMPANY SIGN
SETTLEMENT AGREEMENT

Summary
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1. (SBU) The GOM signed a settlement with Hellenic Petroleum
on December 31, 2007 to pay 40 million dollars in penalties
for Macedonia's past violations of the 1999 privatization
agreement of the OKTA oil refinery, which is owned and
operated by Hellenic Petroleum. The agreement also extended
the deadline for OKTA to meet more stringent environmental
standards. The settlement reached between the GOM and a
large Greek investor, which is partially owned by the Greek
government, demonstrated that commercial matters can move
forward despite political disagreement between Greece and
Macedonia over the name issue. End summary.

A Bad Deal Violated
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2. (SBU) In 1999, under then Prime Minister Ljupco
Georgievski's VMRO government, Macedonia sold the state-owned
OKTA refinery to Hellenic Petroleum for $32 million dollars.
The privatization process was non-transparent and widely
viewed in Macedonia at the time as a corrupt transaction.
The terms of the twenty-year agreement were also criticized
as unfavorable to the GOM, including obligations that the GOM
purchase from OKTA 500,000 tons of heavy fuel oil annually or
pay a $27 per ton penalty, and that the GOM ensure a minimum
of one million tons of oil flow through the
Skopje-Thessaloniki pipeline annually. The GOM also gave
OKTA the exclusive right to import oil, with a duty of only
one percent. Current Prime Minister Nikola Gruevski was
Minister of Trade at the time the arrangement was concluded,
but claims that he was not involved in the negotiation or
approval of the deal.


3. (U) The GOM, under previous and current governments,
subsequently violated the terms of the privatization
agreement. It consistently failed to purchase the minimum
500,000 tons of heavy fuel oil or guarantee the one million
ton throughput for the pipeline. The GOM also allowed other
companies to import petroleum products, violating the
agreement's exclusivity clause. In 2004, OKTA filed suit in
the International Chamber of Commerce's International Court
of Arbitration. In August 2007, the arbitration court ruled
in OKTA's favor, awarding it $53 million in damages.

Environmental Regulations As Bargaining Tool?
--------------

4. (SBU) The GOM appears to have used fuel environmental
standards in an attempt to gain leverage in the negotiations.
In July 2007 the parliament approved new fuel standards for
unleaded and diesel fuels. Then, in September 2007,
following the August arbitration court ruling, the parliament
revised the law to significantly shorten the deadline for
implementing the new fuel standards. OKTA officials told
Econoff in early December that it would be impossible to
upgrade the refinery in time to meet the new deadlines for
implementing the tougher standards.

A Settlement Both Sides Could Live With
--------------

5. (SBU) On December 31, 2007, the GOM and Hellenic Petroleum
signed a settlement agreement that included the following
provisions: the GOM would pay $40 million in damages for past
violations through 2007, OKTA would transfer 20 percent of
the ownership of the Skopje-Thessaloniki pipeline to the GOM
(as agreed to in the 1999 agreement),and the GOM would
extend the deadline for OKTA to meet the higher fuel quality
standards. The settlement agreement addresses only past, but
not any future, violations of the 1999 purchase agreement.
The agreement includes a specific provision that "immediately
after closing" of the settlement agreement the sides will
appoint representatives to negotiate "the modalities for
avoiding" future violations of the purchase agreement.
Opposition members criticized the GOM for not resolving these
future obligations before paying the damages, thereby
weakening its bargaining position on the remaining issues.
In the future the GOM is unlikely to meet the targets of
purchasing 500,000 tons of heavy fuel oil or the one million
ton throughput for the pipeline, while it would be
politically and economically costly to forbid other companies
from importing oil.


6. (SBU) Aristides Vlachos, the president of the Macedonian
International Council of Investors, (primarily an association
of Greek companies in Macedonia),told Econoff that the
settlement agreement was carefully constructed so that both
sides could claim victory. The GOM's spokesperson claimed

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that Macedonia would have had to pay $94 million if it had
paid the full damages with interest for all past violations
of the agreement, so he claimed the GOM had saved tax payers
$54 million by agreeing to the $40 million figure. Hellenic
Petroleum was able to tell its shareholders, including the
Greek government which owns approximately a third of the
company's shares, that it had recouped 80 percent of the
damages awarded by the arbitration court and also changed the
unrealistically short deadline for new fuel standards.

Comment: GOM-Greeks Continue To Do Business
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7. (SBU) The settlement agreement demonstrated two important
points: first, that the GOM was committed to paying damages
for its past contractual violations, no matter how flawed the
original agreement, and second, that the GOM and an important
Greek investor were able to reach a mutually satisfactory
agreement regardless of the political strains surrounding the
Greek government's threat to veto Macedonia's NATO invitation
if Skopje does not agree to resolve the name issue before
then. The GOM has the cash to pay OKTA the $40 million
settlement, thanks to better-than-projected tax collection in

2007. Now, however, the GOM will face difficult negotiations
to resolve its obligations under the remaining 11 years of
the original contract.
MILOVANOVIC