PM'S FOREIGN POLICY ADVISOR DISCUSSES CROATIA'S

C O N F I D E N T I A L ZAGREB 000071 NOFORN SIPDIS DEPARTMENT FOR EUR/SCE E.O. 12958: DECL: 01/01/2019 TAGS: PREL PGOV ENRG HR RU SUBJECT: PM'S FOREIGN POLICY ADVISOR DISCUSSES CROATIA'S INTEREST IN RUSSIAN ENERGY DEALS Classified By: Richard A. Holtzapple, Political Section Chief, for reas ons 1.4 (b) & (d). ¶1. (C/NF) SUMMARY: PM Kosor will visit Moscow on February ¶22. Croatia's main aim will be to secure a new gas supply contract with Russia, as the current one expires in late ¶2010. GoC is also interested in talking about Croatia's possible inclusion in South Stream, but only on a 50/50 basis. Russia will raise its desire to use the Adria oil pipeline for Russian oil exports. Croatia will only accept that if Russia agrees to help upgrade the line to reversible flow, so it can still be used to supply Central European customers. Russia has not raised any concerns about Croatia's plans for an LNG terminal. END SUMMARY. ¶2. (C/NF) Davor Stier, PM Kosor's foreign policy advisor, told PolCouns on January 29 that Kosor's visit to Moscow is now confirmed for February 22. While the visit would include some "general economic cooperation topics and agreements," Stier said Croatia's main interest in the visit is to negotiate a new gas supply contract, to replace the existing contract due to expire by the end of 2010. Stier said such contracts should normally be negotiated up to two years before expiry, and so the Croatians were "a bit nervous" that Russia had not yet agreed to a new contract. ¶3. (C/NF) Stier said Croatia was also interested in inclusion in the South Stream gas pipeline network. Unlike Serbia, Croatia would not, however, agree to a 51/49 split with the Russians. Stier said the Serbians had gotten "a bad deal," and Croatia would only agree to a 50/50 split such as Hungary and Slovenia had received. In Stier's estimation, the Russians were unlikely to show much interest in the Croatian offer. Russia already had the Hungarian deal, and therefore did not need Croatia, unless Croatia was willing to agree to better terms for the Russians. But if Russia was willing, Croatia would sign on. ¶4. (C/NF) Russia, however, is interested in negotiating on the Druzba-Adria oil pipeline project on February 22. Russia wants to hook up the existing Adria pipeline, which currently carries oil from tankers in Adriatic ports to the rest of Croatia and inland Central European destinations, to a planned Druzba connector, and then to use that pipeline to export Russian oil to the Adriatic ports. Stier said this proposal was unacceptable to Croatia, as it would give Russia "greater strategic dominance" of the oil market not just in Croatia, but in the Central European markets served by Adria. "It would harm our allies, and we won't do it," he said. ¶5. (C/NF) The Croatian offer, therefore, would be to expand the capacity of Adria and its operator, JANAF, above the current 5 bcm level, and convert it to a reversible pipeline that Russia could then partially use for its exports. But JANAF, Stier stressed, would need to retain control of managing the pipeline. Stier said re-fitting Adria for reversible flow would be costly, and Russia would need to finance such a conversion. Even so, according to Croatian calculations, such a pipeline would still be "a couple cents" cheaper route for Russian oil exports than its current routes. It might not be enough of a savings to interest the Russians, Stier said, but that was all that Croatia could offer. ¶6. (C/NF) Stier acknowledged that the Russians were in a strong position in these talks, given that Russia was presently the only viable external supplier to meet Croatia's gas needs. The meetings on February 22, he said, would show how hard Moscow wanted to squeeze Croatia on either Druzba-Adria or on a 51/49 split for South Stream, in exchange for a new gas contract. PolCouns noted that media reports had suggested that Russia was also pressuring Croatia to abandon plans for an LNG terminal on the Adriatic island of Krk in exchange for a new gas contract. Stier said the Russians have never mentioned the LNG terminal. ¶7. (C/NF) COMMENT: The Croatians are well aware of the risks they face in gas supply negotiations with Russia. They may well have to agree to a higher price, or lower quantities, than if they were willing to make concessions to Russia in other areas. But the Croatians also have strategic interests in their relationships with their Central European customers. They are EU members and Croatia needs their support to achieve its number one national priority of joining the EU in the next couple of years. END COMMENT. FOLEY