CONFUSION AND FINGER POINTING OVER DELAY IN LNG

UNCLAS ZAGREB 000605 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ENRG ECON EINV HR SUBJECT: CONFUSION AND FINGER POINTING OVER DELAY IN LNG TERMINAL ¶1. SUMMARY. Insiders within the government and energy industry are at a loss to explain the slow pace of progress in the liquid natural gas (LNG) terminal planned for construction on the Croatian island of Krk. Both are quick to point fingers at the other for the delay. Contacts in the natural gas industry told us last week that the government was inexplicably dragging its feet and that the terminal could now not come on line until 2014 at the earliest. An official in the energy division of the Ministry of Economy retorted that it was internal wrangling at the INA/MOL, Croatia's largest energy company, that was to blame. This apparent chaos has prompted public frustration from the project's largest foreign investors, particularly EON of Germany and OMV of Austria, accompanied by unsubstantiated rumors that they are considering pulling out of the project. End summary. ¶2. Press reported last week that EON and OMV, 31% and 26% shareholders in Adria LNG, respectively, are frustrated at the slow pace of progress on the LNG project and were considering pulling out of the deal. The president of the Croatian Natural Gas Association, as well as a senior advisor at INA, told econoff that the large investors' frustration was completely understandable. They both described the project as being in a state of confusion. According to them, the structure of the Croatian portion of the consortium is in place, and they are simply waiting for the government to begin the necessary comment period for the environmental impact study. After this, the government can move forward with the final site permits that will enable the project to actually begin. The INA official told us that he feels the government is exhibiting a familiar attitude toward investment, in which the government presumes that Croatia will be cheated by the big players unless they exercise absolute caution at every step. ¶3. An assistant director in the Ministry of Economy's energy office, the government office primarily charged with LNG preparations, told econoff in a separate conversation that it was negotiations inside INA/MOL that were holding up the process, not the government. After the sale of a controlling interest in INA to MOL of Hungary, the Croatian government negotiated the spin-off of INA's gas business out of the deal - a move designed to ensure Croatia's energy security by maintaining government control over natural gas supplies. It was strange, our Ministry contact told us, that MOL now wanted a direct stake in Adria LNG. According to her, the Ministry's remaining tasks were quite straightforward and they were simply awaiting the results of INA/MOL's corporate wrangling to know exactly what the 25% Croatian portion of the project would look like. ¶4. COMMENT. It is impossible to know who is to blame for the slow pace of the LNG project, although INA's arguments are bolstered by the fact that the government has dawdled over the LNG project for several years before MOL's purchase of INA. INA's comment about government reluctance to embrace foreign investors is also a familiar refrain from other investment projects. There does seem to be a lack of political will in the energy sector. The National Energy Strategy, drafted almost a year ago and which should determine the priorities for 10 billion euros of investment over the next ten years, continues to await formal debate in the Sabor. The parliamentarian leading the discussion told us he is also frustrated that the government has not made energy projects a higher priority. On the list of topics for consideration in the current session of parliament, the national energy strategy comes in at 38th place. END COMMENT. FOLEY