AMBASSADOR'S MEETING WITH CROATIAN NATIONAL OIL

C O N F I D E N T I A L SECTION 01 OF 02 ZAGREB 000091

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/05/2018
TAGS: ENRG ECON PREL HR
SUBJECT: AMBASSADOR'S MEETING WITH CROATIAN NATIONAL OIL
AND GAS COMPANY CHAIRMAN


Classified By: Econ Officer Nicholas Berliner for reasons 1.4 b/d.


1. (C) Summary: In a February 5 meeting with Ambassador,
Tomislav Dragicevic, chairman of Croatian national oil
company INA, said that Croatia had decided not to seek
additional gas imports from Russia, but would instead try to
secure gas from North Africa via Italy. Dragicevic expressed
disappointment that the GOC had not made more progress on the
Adriatic LNG terminal during its previous term in office, but
was optimistic that favorable political and market conditions
would now enable the project to move forward. Ambassador
stressed the need for diversity of supply, reminding
Dragicevic that LNG from Croatia would also help its
neighbors to lessen their own dependency on Russia.
Commenting on the recent Russian acquisitions in Serbia,
Dragicevic said that the Russians had clearly leveraged the
current situation to their advantage with a view to Serbia's
possible future in the EU and the precedent being established
of Gazprom owning and operating energy infrastructure in
Europe. He added, however, that if a pipeline were built
into Serbia, he would advocate extending it across Croatian
territory as well, as a means of collecting transit revenues.
Dragicevic also discussed the OMV-MOL relationship,
characterizing OMV as a formidable player that he believes
will ultimately prevail in its fight for control of MOL. End
Summary.

Croatia Seeking Non-Russian Gas Imports
--------------

2. (C) INA Chairman Tomislav Dragicevic told Ambassador
Bradtke February 5 that his company was in negotiations with
Italy's ENI to secure an additional 1 billion cubic meters
(bcm) of gas from North Africa (Algeria). Dragicevic said INA
was looking at North African gas as a means of diversifying
its imports and not becoming overly-reliant on Russia. Note:
Croatia currently imports approximately one-third of its
natural gas (about 1.1 bcm) from Russia, producing the
balance domestically. Imports via Italy would be based on
swaps and make use of the Adriatic pipeline that connects
INA's offshore production sites with the mainland pipeline
infrastructure. Croatia desperately needs additional gas and
previous talks with Gazprom never bore fruit, partly because
the GOC refused to give in to Russian demands for greater
access to energy projects in Croatia.

Disappointment at Lack of Progress on LNG
--------------

3. (C) Ambassador queried Dragicevic on the status of the
LNG project planned for the Northern Adriatic, emphasizing
the importance this project would have for the diversity of
supply not only for Croatia, but also for Hungary, Slovenia
and other countries. Dragicevic said he was disappointed
that the GOC had not secured this project during the first
mandate of PM Sanader, noting ironically that INA had been
talking about LNG for the last twenty years. He said time
was wasted arguing over the ownership structure of the
consortium for reasons related more to politics than
business. However, he added that he saw no real obstacles to
the project going forward now and that the high price of gas
has made LNG competitive. On its current timetable, the hope
is that the final investment decision and all necessary
permitting could be in place by early next year (something
originally expected in 2008, but delayed partially due to the
Croatian elections).

South Stream and Russian Acquisitions in Serbia
-------------- --

4. (C) On South Stream, Dragicevic said that the project was
clearly intended to thwart Nabucco. He said that, despite
the enormous engineering challenges of building a gas
pipeline at a depth of nearly 2,000 meters, he was convinced
the Russians would build South Stream. He views South Stream
and the Gazprom acquisitions in Serbia as part of a long-term
Russian strategy to penetrate the European market that he is
convinced Serbia will eventually join. Serbia, in
Dragicevic's view, could be the precedent Gazprom has sought
in Europe to own infrastructure and ultimately deliver gas to
the consumer. He noted, however, that were such a pipeline
actually to be built, he would advocate extending its onward
route through Croatia as a means of securing transit revenues
and a seat at the table in a major energy project.

OMV-MOL Relationship
--------------

5. (C) On the subject of OMV's takeover bid for MOL (Note:
MOL owns 25 percent plus one share of INA),Dragicevic said
"nobody can stop OMV." He said that its ownership structure
in which the Austrian government's interest is in a holding

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enables OMV to act independently and free of government
interference (something Dragicevic can only dream of in
Croatia where the government still sets energy prices). He
expects that OMV will eventually prevail in its bid for MOL.
However, he does not believe that this would affect INA
significantly, as its shareholder agreement with MOL limits
the influence of the minority partner.

Comment
--------------

6. (C) INA's decision not to seek additional Russian gas is a
positive step for Croatia's energy policy. The GOC is
generally skeptical of Russian business interests and many in
Zagreb view recent Russian investments in the region as a
cause for some concern. At the end of the day, however, as
Dragicevic's comments reveal, Croatia is also unlikely to
stand idly by if the opportunity to profit from a Russian
pipeline project should present itself.
BRADTKE