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Anne W McNeill  10/06/2006 11:33:13 AM  From  DB/Inbox:  Search Results

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C O N F I D E N T I A L        WARSAW 01592

SIPDIS
CXWARSAW:
    ACTION: ECON
    INFO:   POL ADM MGT ORA FCS DCM AMB PAS

DISSEMINATION: ECOX
CHARGE: PROG

APPROVED: DCM:KHILLAS
DRAFTED: ECON:RRORVIG
CLEARED: NONE

VZCZCWRI059
PP RUEHC RUEHZL RUEHKW RUCPDOC RHEBAAA RUEATRS
DE RUEHWR #1592/01 2160859
ZNY CCCCC ZZH
P 040859Z AUG 06
FM AMEMBASSY WARSAW
TO RUEHC/SECSTATE WASHDC PRIORITY 1550
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHKW/AMCONSUL KRAKOW 1226
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L SECTION 01 OF 05 WARSAW 001592 
 
SIPDIS 
 
STATE FOR EUR, E. EUR/NCE. EUR/ERA,EB/ESC 
EUR/NCE FOR A/S DFRIED, DAS MPEKALA, DAS MBRYZA 
EUR/NCE FOR DKOSTELANCIK AND MSESSOMS 
EB/ESC FOR SGALLOGLY, RGAVERICK, JLEVANDOWSKI 
DOE FOR LEKIMOFF 
USDOC FOR 4232/ITA/MAX/EUR JBURGESSS, JKIMBALL, MROGERS 
PARIS PASS USMISSION OECD AND IAE 
 
E.O. 12958: DECL: 12/31/2020 
TAGS: ENRG EPET LH PL PREL
SUBJECT: DEPARTMENT ENERGY ADVISER HELLMAN'S ENERGY 
SECURITY DISCUSSIONS IN WARSAW: POLES WATCHING LITHUANIAN 
SITUATION CLOSELY 
 
REF: WARSAW 1336 
 
Classified By: Econ Couns. Richard Rorvig for reasons 1.4(b) and (d). 
 
------- 
Summary 
------- 
 
¶1. (C) Economics Ministry State Secretary Piotr Naimski told 
visiting State Department Energy Advisor Steve Hellman August 
1 that Poland is very concerned by the cut-off of Russian oil 
shipments to Lithuania's Mazeikiu Nafta refinery due to 
alleged 'accidents and technical difficulties.'  The Poles 
believe that there is sufficient off-loading capacity at the 
Lithuanian port of Butinge to supply Mazeikiu by sea.  The 
problem is that there is only 100,000 tons of storage 
capacity in Lithuania, enough for about five days of normal 
refinery operations.  The State Secretary said that 100,000 
tons of oil had reached Butinge August 1 via tanker, a fact 
confirmed by Polish refiner PKN Orlen.  PKN Orlen Vice 
President Cezary Filipowicz said Orlen is buying Mazeikiu for 
strategic reasons, fearing that otherwise the Russians will 
take over the Lithuanian refiner.  The Russians would then 
have a refinery inside the EU tariff wall, and could lower 
prices to a few cents below Orlen's refining costs, 
eventually driving it out of business.  Orlen thinks it is 
better to fight the battle with the Russians today in 
Lithuania than tomorrow in Poland. 
 
¶2. (C) Orlen is in a delicate position, since its acquisition 
of Mazeikiu has yet to be approved by the EU competition 
authority.  Orlen estimates the approval process could take 
until December.  Until that time, it must keep legal distance 
from the Lithuanian refiner.  Hellman urged the Poles to get 
on top of the oil trading situation, and bring in a technical 
specialist who could advise it on blending issues, if it is 
forced to replace Russian oil.   He said that even though 
Orlen could not intervene to supply the refinery, it could 
consider discussions for sourcing crude to one safe port in 
north-west Europe without specifying Butinge, thus not 
violating the prohibition of commercial contact with the 
refinery.  Continued operation of Mazeikiu would show the 
Russians that their strategy is not working.  On Slovakia's 
Transpetrol, Naimski said that the Poles fear that Prime 
Minister Fico is politically isolated in the EU and will 
succumb to Russian pressure.  They plan to invite him to 
Warsaw to show him he has other options.  The Poles were 
receptive to Hellman's suggestion that he organize a 
brainstorming session in the U.S. with them on energy issues. 
 
 
----------------------- 
Economic Ministry Views 
----------------------- 
 
Mazeikiu 
 
¶3. (C) Polish Economics Ministry State Secretary Piotr 
Naimski told visiting State Department Energy Advisor Steve 
Hellman August 1 that Poland is very concerned by the cut-off 
of Russian oil shipments to Lithuania's Mazeikiu Nafta 
refinery, due to alleged 'accidents and technical 
difficulties.'  Naimski said he fears that this is the big 
crisis that many have been expecting.  According to Polish 
information, there is sufficient off-loading capacity at the 
Lithuanian port of Butinge to supply Mazeikiu by sea.  The 
problem is that there is only 100,000 tons of storage 
capacity in Lithuania, enough for about five days of normal 
refinery operations or a bit more than a week at reduced 
10-12,000 ton per day operating levels.  Naimski said that 
100,000 tons of oil had reached Butinge August 1 via tanker. 
This is now being unloaded.  However, it would take two weeks 
to secure alternative spot supplies from Rotterdam.  Naimski 
said that Orlen had accommodated itself to the idea of buying 
Mazeikiu Nafta and that it must be prepared to supply the 
refinery eventually by sea. 
 
¶4. (C) Hellman told Naimski that the Russians do not believe 
that Mazeikiu can be supplied by Butinge.  Rosneft and Lukoil 
are left as suppliers.  Rosneft wants to get the $3 billion 
it thinks it is owed by  Yukos.  It either wants to take over 
the Mazeikiu refinery cheaply, which it might then even 
resell, or it wants to extort money from the buyers.  The 
Russians are prepared to exert pressure on Poland directly to 
get it.  Elements in Transneft do not support this strategy, 
but the order comes straight from the Rosneft Chairman and 
Igor Sechin within the presidential administration. 
 
¶5. (C) Hellman advised the Poles to do their best not to 
aggravate the situation -- for example by closing down 
Russian shipments through Poland to Germany, lest Poland 
appear to be the aggressor.  This would also undercut 
Poland's natural allies within Russia.  Naimski said that 
Poland was not considering cutting off the pipeline across 
Poland as a strategy.  However, if the situation in Lithuania 
gets desperate enough, Poland could either stand by and do 
nothing (which is unacceptable) or consider breaking other 
contracts or shipping agreements.  Naimksi suggested, for 
example, that perhaps a Russian export shipment from Gdansk 
could be diverted to Butinge.  Charge urged that Poland 
pursue a strategy that does not put them at odds with 
Germany, whose support will be key.  Hellman urged the Poles 
to react calmly to the situation.  There is lots of oil 
available.  Two hundred thousand barrels per day, Mazeikiu's 
needs, are not a great amount.  Perhaps the Polish Government 
could recommend that Orlen consider contracting a tanker load 
from Rotterdam for delivery to a Northern European port of 
its nomination.  It is important to keep Mazeikiu operating 
and show the Russians that their strategy is not working. 
The Poles could even offer to help repair the pipeline, then 
let the Russians make the first move.  Poland should show 
strength and wait.  Once they have shown that the Russian 
strategy is not working, they will have an opportunity to 
re-engage with Transneft to restart supplies.  Hellman 
suggested the GOP persuade Orlen to get on top of the oil 
trading situation, and bring in a technical specialist who 
could advise it on blending issues, if it is forced to 
replace Russian oil. 
 
 
Slovakian Sale of Transpetrol 
 
¶6. (C) Naimski said that Poland wants to buy Transpetrol, and 
that it understands that the Slovak Government is under a 
pressure from the Russians to sell it to Gazprom.  Hellman 
replied that we must convince the Slovaks that it is not a 
good idea to give in to the Russians.  Hellman suggested the 
Poles use their influence with the Czech Republic, where PKN 
Orlen owns Unipetrol, to get the Czechs to lobby the Slovaks 
on the issue in the name of both Slovak and Czech energy 
independence.  All of us have an interest in seeing Gazprom 
not get it.  Naimski said that, due to political problems in 
forming a government in Prague, it is difficult to talk to 
the Czechs now.  In any case, he is skeptical that the Czechs 
have much influence in Bratislava.  However, it was worth a 
try.  With regard to a quick decision on the Transpetrol 
sale, the Poles believe that there is a provision in the 
existing Transpetrol arrangement which would allow the 
Slovaks to block any sales agreement until April 2007. 
(Note: Several hours after the meeting, Naimski's office 
informed Hellman that Poland believed that the financial 
company Slavia, backing the Czech bid, is a front for Russian 
interests.) 
 
¶7. (C) Naimski said he thinks new Slovak prime minister Fico 
is somewhat isolated in Europe, and is seen as a kind of new 
Meciar by many Western European states.  So far only the 
Russians have invited him for an official visit.  For this 
reason, the Poles plan to invite him soon to Warsaw.  Foreign 
Minister Kubis visited last month. It would be helpful if we 
could all persuade other EU states to invite him also.  Fico 
needs to know that he has other options than the Russians. 
 
 
Odessa-Brody-Plock Pipeline 
 
¶8. (C) Hellman said that the US would very much like to see a 
complete copy of the Odessa-Brody-Plock feasibility study so 
that it can assure itself that the project is commercially 
viable.  Naimski said that the study has still not been 
officially approved by the Consortium.  Poland so far is not 
entirely satisfied with it, and is discussing it with the 
Ukrainians.  A good feasibility report is a prerequisite to 
approaching the Kazakhs and Azeris on the project.  Naimski 
expects to have the final version by September.  He said that 
he had held good discussions with the firm Baker Donelson in 
Washington, but has not yet responded to it, due in part to 
the change in Poland's Prime Minister.  Poland is still 
considering the best way to attract the interest of major 
Western firms.  The potential actors, which range from PERN 
to Kazmunigaz, are from countries where the political forces 
are quite different.  Poland understands that some of the big 
western companies are afraid to do anything in the back yard 
of Russia's big energy monopoly.  Companies like Baker 
Donelson, and others, want to play a connecting role. 
Naimski said he is unsure what they would be connecting. 
 
 
----------------------------------------- 
Discussions with Polish Refiner PKN Orlen 
----------------------------------------- 
 
¶9.  (C) PKN Orlen Vice President Cezary Filipowicz opened the 
discussion by stating that he had just received confirmation 
from Mazeikiu that the Russian oil cut off would take a month 
or longer to resolve.  He said the Russians had told the 
Lithuanians that they would have to pig about 700 kilometers 
of pipe to evaluate the state of the pipeline.  Filipowicz 
said that Orlen is in a delicate position, since its 
acquisition of Mazeikiu has yet to be approved by the EU 
competition authority.  Filipowicz estimated that the review 
process would take three to four months and that Orlen would 
not receive a green light until December at the earliest. 
("The clerks in Brussels do not like to be rushed.")  Until 
that time, it could not complete the takeover of Mazeikiu or 
assume management control of the company.  EU legal 
requirements were very strict.  In this context, Filipowicz 
noted that PKN Orlen's previous takeover of Unipetrol in the 
Czech Republic, which was more complicated since it also 
involved chemical plants, took eight months to obtain EU 
approval.  Nonetheless, the Poles were getting daily reports 
of developments from the refinery. 
 
¶10. (C) Filipowicz said that Orlen is buying Mazeikiu for 
strategic reasons.  It figures that if it fails to do so, 
then the Lithuanian refiner will be taken over by the 
Russians. The Russians would then have a refinery inside the 
EU tariff wall.  They would lower prices to a few cents below 
Orlen's retail prices (using favorable terms for crude 
supplies to compete unfairly).  Within four or five years, 
first Poland's Gdansk-based Lotos Group and then Orlen would 
be bankrupt.  Orlen thought it is better to fight this battle 
with the Russians today in Lithuania than tomorrow in Poland. 
 The situation today is also better than a decade ago when 
Williams faced problems with Mazeikiu.  At that time there 
was no Butinge off-loading option and no Primorsk. 
Filipowicz said that it is also in Russia's interest to work 
with Orlen.  Between Mazeikiu Unipetrol, and Orlen's 
operations in Poland, Orlen will be Russia's largest single 
crude oil customer, buying or transiting roughly one-third of 
its total oil exports.  Russia's cannot afford not to sell 
one-third of its oil and would have no place to put such a 
quantity on the domestic market without driving down prices. 
Nobody would logically walk away from such an export business. 
 
¶11. (C) PKN Orlen is confident that Mazeikiu refining head 
Nelson English will respond properly to the situation. 
Filipowicz confirmed that 100,000 tons from Primorsk was 
being off-loaded in Butinge on August 1-2.  He said, it is an 
open question how far the Russians will go with the 
situation.  Will they still allow supplies to Mazeikiu from 
Primorsk?  Filipowicz said that he had just received a call 
from Lukoil saying it wanted a meeting with him in Geneva. 
Lukoil said the subject was too sensitive to be discussed 
over the phone.  Filipowicz wondered whether it might be to 
discuss a cut-off in deliveries to Orlen.  However, Orlen 
could buy oil from other places -- Africa, Venezuela, the 
North Sea.  It could still make a profit as long as it had an 
EU customs barrier to keep the Russians from flooding the 
market for refined products. 
 
¶12. (C) PKN Orlen is interested potentially in joining with 
the Kazakhs, who lost out in the competition for Mazeikiu, to 
buy a refinery in Germany.  PKN Orlen President Igor 
Chalupiec told the Kazakhs that Orlen could bring a network 
of 2500 gas stations to the deal, while the Kazakhs had 
upstream assets.  Chalupiec told the Kazakhs that Orlen 
realizes that they are upset.  However, if Kazmunigaz had 
acquired Mazeikiu it would have had 27 gas stations in 
Lithuania.  It would have had to learn the downstream 
business in Europe, an area where they had no experience. 
However, a combined effort on a new project in Europe would 
be good for both sides.  Kazakhstan would get a foot in the 
EU and Poland would find an upstream partner. 
 
¶13. (C) In response, Hellman reiterated the points made 
earlier to Naimski regarding Rosneft's intentions to extort 
$3 billion it feels is owed to it by Yukos.  He suggested 
that Orlen needed to brace itself for a possible crude 
shutdown.  Furthermore, Orlen, once it takes over Mazeikiu, 
should make sure via internal transfer pricing that Mazeikiu 
appears to show a profit.  That way the Russians will see 
that their policy is not having the intended effect.  Orlen 
also should think about contracting in Rotterdam for a term 
crude contract to a Northern European port of its choosing. 
It should also consider bringing in a blending specialist to 
advise it in the event it needs to find substitutes for 
Russian oil.  In response to Filipowicz' suggestions of 
strategic infrastructure development, Hellman proposed that 
Filipowicz and a Polish delegation come to the United States 
in the near future for a strategic brainstorming session, 
which could include US industry people.  Filipowicz said he 
would be very interested in this proposal and would 
personally be delighted to accept. 
 
 
--------------------------------------------- --------- 
Discussions with Polish National Pipeline Company PERN 
--------------------------------------------- --------- 
 
¶14. (C) Hellman opened the meeting with PERN Vice President 
Marcin Jastrzebski by reviewing the state of play in 
Lithuania and Russian intentions.  Jastrzebski said that PERN 
is concerned by Russian pressure on the Slovaks over the 
Transpetrol sale.  PERN would be making a pitch to buy 
Transpetrol to the Slovaks on August 4.  Sixty percent of the 
presentation would be about energy independence.  We have to 
convince the Slovaks that it is important that the Russians 
not buy it.  PERN has already had a bad experience with 
Yukos-influenced Transpetrol.  For three years, PERN has been 
trying to conduct a test shipment of 25,000 tons of oil 
through the pipeline to the Kralupe refinery, as a proof of 
concept test for the Odessa-Brody-Plock pipeline.  A 
Transpetrol source told him that there would be no such tests 
unless Transneft also agrees.  It is important to buy the 
Yukos-owned part of Transpetrol to eliminate such Russian 
influence.  Jastrzebski said that many companies are now 
interested in buying Transpetrol, including apparently 
Kazakhstan's Kazmunigaz, Hungary's Mol, a US group and a 
Czech firm.  Hellman said that we all could agree that the 
Slovaks should not sell Transpetrol to the Russians. 
 
¶15.  (C) Jastrzebski said that one of the problems that PERN 
faces is that its existing shipment contracts with Germany 
require the company to guarantee shipment of Rebco to Gdansk 
in an emergency.  The company does not have the capacity to 
ship non-Russian crude from Plock to Gdansk as potentially 
envisioned in the Odessa-Brody-Plock project and guarantee 
the Germans a supply of Rebco.   PERN would therefore like to 
modify its contracts with the Germans so that it can provide 
other crude rather than Rebco.  With regard to a potential 
cut-off of Russian oil to the Czech Republic, the main Czech 
refineries are supplied from the Adriatic.  It would also be 
possible to supply Slovakia through this route.  Hellman 
again advised that PERN try and get the Czechs to weigh in 
with the Slovaks to encourage a Transpetrol sale to 
non-Russian buyers. 
 
------- 
Comment 
------- 
 
¶16. (C)  All of our Polish interlocutors were extremely 
forthcoming with information and greatly appreciated the 
exchange with Mr. Hellman.  The visit, coming as it did at 
the same moment as the Lithuanian oil disruption, could not 
have been better timed.   Orlen seemed to take a much more 
relaxed attitude to the Lithuanian situation than Poland's 
Economics Ministry.  The Polish refiner is confident that 
Mazeikiu has the ability to overcome its problems and the 
company said it knows that the Mazeikiu situation will remain 
problematic for some time.  The company said it is prepared 
to go ahead with the transaction for strategic reasons.  It 
does not see any grounds to alter those plans based on 
current Russian actions, which it expected to some extent. 
We repeatedly stressed that the U.S. needs to see a complete 
copy of the Odessa-Brody-Plock feasibility study to advise 
Poland on how to engage the private sector.  Naimski promised 
to try to be helpful in this regard.  Mr. Hellman's offer to 
arrange a brainstorming session in the U.S. met with 
considerable interest. 
 
 
HILLAS