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P 211600Z JUN 06
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 9980
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000501 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 06/21/2016 
TAGS: ENRG ECON EPET PREL PGOV LO RS
SUBJECT: SLOVAK GOV'T AIMS TO REPURCHASE TRANSPETROL 
PIPELINE 
 
REF: A. BRATISLAVA 494 
 
     ¶B. VALLEE/PEKALA EMAILS 
     ¶C. WARSAW 1167 
     ¶D. VILNIUS 512 
 
Classified By: Ambassador Rodolphe M. Vallee for Reasons 1.4 (B) and (D 
) 
 
¶1. (C) Summary - The Slovak government is negotiating with 
Yukos to re-purchase the 49 percent stake in the oil pipeline 
that was originally sold to Yukos in 2002.  Economic Minister 
Jirko Malcharek, who has the lead in the negotiations, is 
attempting to finalize an agreement before the current 
government's mandate ends in the coming days or weeks. 
Although the Russian oil company Russneft had an agreement 
with Yukos Finance to buy the 49 percent stake in February 
for USD 103 million, Slovakia maintains veto authority over 
any deal for the Yukos stake, and has used this power to stop 
the pending sale to Russneft.  In addition to the Russians, 
who remain interested in the Transpetrol stake despite the 
recent rejection, Polish oil company PKN Orlen and a possible 
consortium or U.S. equity investors are also pursuing a deal. 
A non-Russian investor would be more inclined to utilize the 
pipeline's full capacity through a connection to the 
Odessa-Brody pipeline and Caspian light crude. End Summary. 
 
--------------------------------- 
TRANSPETROL IS STILL UP FOR GRABS 
--------------------------------- 
 
¶2. (C) Yukos Board Chairman Viktor Gerashchenko announced two 
weeks ago that the company had failed to sell its 49 percent 
stake, which includes management control, of the Slovak oil 
pipeline firm Transpetrol to Russian oil firm Russneft. 
Yukos Finance, a Yukos subsidiary that is based in the 
Netherlands, had originally purchased the 49 percent stake 
for USD 74 million in 2002.  Russneft reached an agreement in 
February with Yukos Finance to buy the stake for USD 103 
million.  The Slovak Anti-Monopoly Office approved the sale 
to Russneft on May 19. The Slovak government, led by the 
Ministry of Economy, maintains veto authority over any sale 
of the Yukos stake until April 2007 and has not yet approved 
the Russneft deal. 
 
¶3. (C)  The Transpetrol pipeline system is a part of the 
Druzba pipeline and runs 515 km from the Ukrainian border in 
the east to the Czech Republic in the west.  The pipeline has 
branches to the Slovnaft refinery in Bratislava and 
refineries in the Czech Republic, as well as a connection to 
the Adria pipeline system running south through Hungary into 
Croatia.  The pipeline currently has a throughput capacity of 
20 million metric tons per year (Mta), but has historically 
been operating at less than half of this amount, 
approximately 10.7 million Mta of heavy crude from western 
Siberia.  In 2005, 5.57 million Mta went to the Bratislava 
Slovnaft refinery owned by the Hungarian energy company MOL, 
and 5.04 million Mta went to Czech refineries (4.26 million 
Mta went to Ceska Rafinerska).  This output would increase by 
another 2 million Mta if a planned Bratislava-Schwechat 
extension to an OMV refinery in Austria were to become 
operational.  (Note: Environmental issues and Yukos problems 
have put this project on hold for the time being.) 
 
¶4. (C) According to an article in the daily SME on June 16, 
Russian Ambassador to Slovakia Alexander Udalcov said that 
Russia remains interested in Yukos' stake and Russian 
companies were not out of the running for the deal. It is 
widely believed that under Russian control all of the oil 
traveling the pipeline would continue to be heavy crude from 
western Siberia. A non-Russian investor, on the other hand, 
would be more inclined to diversify to other sources.  The 
main proposal involves connecting the Odessa-Brody-Druzhba 
route to transit Caspian light-crude oil through Ukraine's 
Odessa-Brody oil pipeline and along the southwestern branch 
of the Druzhba pipeline for delivery to refineries in the 
Czech Republic, and eventually Austria and southern Germany. 
While this would require a significant investment to upgrade 
Transpetrol's transit capacity from 20 to 28 Mta, it could 
result in additional transit volumes of more than 17 Mta 
through the Transpetrol pipeline system. 
 
--------------------------------------------- ------------- 
LAME DUCK MINISTER CONTINUES TO PURSUE A DEAL FOR SLOVAKIA 
--------------------------------------------- ------------- 
 
¶5. (C) Minister of Economy Jirko Malcharek has taken the GOS 
lead in negotiations with Yukos.  According to his top 
advisor and MOE spokesman, Robert Beno, Malcharek's top 
priority in his remaining days in office is to cancel the 
deal with Russneft so that the Slovak government can 
repurchase the Yukos stake in Transpetrol.  (Note: 
Malcharek's political party, Nadej or "Hope", did not meet 
the five percent threshold in last Saturday's parliamentary 
elections and will therefore not be a part of the next 
government.)  100 percent GOS ownership of Transpetrol would 
not only allow Slovakia to diversify supply, but it would 
also help towards meeting the EU goal of having at least 90 
days of reserves.  One expert told us that the oil in the 
pipeline alone could be counted as 10 to 15 days of reserve 
supply.  Transpetrol also owns several back up tanks that 
could be used for this purpose, and would save the government 
from having to build additional storage facilities.  In 
Slovak Crowns the price of the 49 percent stake is actually 
less today (approx. SKK 3 billion) than the GOS sold it for 
in 2002 (approx. SKK 3.5 billion) due to exchange rate 
differences. 
 
¶6. (C) According to an article in the June 21 SME newspaper, 
Malcharek met last Thursday (6/15) with Yukos Finance CEO 
Steven Theede to discuss the potential re-purchase of the 49 
percent Transpetrol stake by the Slovak Government. 
Malcharek said that Slovakia needed to act quickly because 
the Russian courts will decide on the Yukos bankruptcy in 
mid-July.  (Note: Yukos chief Stephen Theede has argued that 
since the Transpetrol stake is held by Netherlands-based 
Yukos Finance it is not subject to the bankruptcy proceedings 
in Moscow.  This is the same entity that recently sold 
Lithuania's Mazeikiu Nafta oil refinery to PKN Orlen, as 
outlined in Reftel D.)  The SME article also quotes Malcharek 
as saying that he is not sure that Yukos has actually 
canceled its deal with Russneft despite the recent statements 
by Yukos' Board Chairman. 
 
¶7. (C) Malcharek cannot finalize arrangements with Yukos on 
his own and would eventually need the support of the 
governmentto approve any deal.  We heard before the June 17 
election from sources in the Prime Minister's office that the 
current government could take a final decision on the 
Transpetrol sale during the interim period between the 
election and formation of a new government, especially if it 
appeared that the Prime Minister's SDKU party would not be a 
part of the next government (See Reftel A for the latest 
political developments).  SDKU feels it should at least 
consider finalizing deals of "strategic importance" to 
Slovakia before turning over the reigns to a possible 
Smer-led government.  Robert Kalinak, the vice-chair for the 
leading opposition party and top vote-getter Smer, told us 
last week that he did not expect Malcharek to take a decision 
in his final days on the job.  Kalinak noted that Smer would 
prefer that the GOS buy back the shares from Yukos, which is 
ultimately the same goal that Malcharek says he is pursuing. 
Malcharek acknowledges in the SME article that although he 
would like to reach an agreement with Yukos in the coming 
weeks, ultimately the next government would finalize the deal 
over the coming months. 
 
--------------------------------------------- --------- 
MORE THAN JUST THE SLOVAKS AND RUSSIANS ARE INTERESTED 
--------------------------------------------- --------- 
 
¶8. (C) In addition to Russian and GOS interest in the 
Transpetrol stake, Polish oil company PKN Orlen is reportedly 
pursuing a deal for Transpetrol (Reftel B).  In 2005 PKN 
Orlen acquired a 63 percent stake in Unipetrol, the biggest 
refinery and chemical company in the Czech Republic which 
receives two-thirds of the Transpetrol throughput.  The 
chairman of the board at the Bratislava-based refinery 
Slovnaft, Marian Jusko, told us that a Polish bid could be 
politically problematic.  Anything that makes PKN Orlen more 
competitive in the neighboring Czech Republic would likely 
face significant opposition in both Slovakia and Hungary. 
Slovnaft is owned by the Hungarian oil company MOL and 
supplies 70 percent of the Slovak market directly or 
indirectly.  Over the last year Russneft has become a major 
supplier to Slovnaft, and Russians are rumored to have close 
ties with the MOL leadership.  MOL's influence over the deal 
would be strengthened if SMK, the Hungarian party, were a 
part of the next government. 
 
¶9. (C) A U.S. company, GlobalNet Financial Solutions, has 
recently contacted us regarding their interest in putting 
together a consortium of U.S. private equity investors to 
make a bid for the Transpetrol stake.  GlobalNet's Managing 
Director in Ukraine, Geoff Berlin, has been working on 
projects related to the Odessa-Brody pipeline for several 
years.  Berlin had not yet presented its proposal to either 
the GOS or to Yukos when we spoke with them last week.  A 
lack of ties to specific suppliers and refineries, if that is 
indeed the case, could be one advantage that GlobalNet brings 
to the table. 

 
------- 
COMMENT 
------- 
 
¶10. (C) Ambassador is scheduled to meet with Malcharek on 
Friday (6/23) and will have a chance to hear his plans 
firsthand.  With the exception of the Prime Minister, MOE has 
kept other GOS ministries in the dark on their intentions. 
This seems a bit strange since a GOS repurchase of the 
Transpetrol stake has widespread political support (except 
for SMK) and increases the options for diversification of oil 
resources for Slovakia and the region. Such an acquisition by 
the GOS - which is not directly connected to competing 
refineries or suppliers - would be consistent with U.S. 
energy security goals in the region. End Comment. 
VALLEE