VZCZCXYZ0000
RR RUEHWEB

DE RUEHBW #0599/01 1270638
ZNR UUUUU ZZH
R 070638Z MAY 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0762
INFO RUEHSF/AMEMBASSY SOFIA 0838
RUEHVB/AMEMBASSY ZAGREB 1426
RUEHMO/AMEMBASSY MOSCOW 0197
RUEHBM/AMEMBASSY BUCHAREST 0251
RUEHAK/AMEMBASSY ANKARA 0051
RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS BELGRADE 000599 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EFIN PGOV EIND SR
SUBJECT: UPDATE ON ENERGY ISSUES FROM SERBIA 
 
REF: A) Belgrade 133 and B) 06 Belgrade 2062 
 
SUMMARY 
------- 
¶1.  (U) Summary. State-owned gas monopoly Srbijagas has managed to 
improve its financial outlook via an intergovernmental agreement 
that uses old Yugoslavia clearing debt to pay gas arrears to Gazprom 
of USD 188.2 million, debt accumulated from 1994 to 2000.  However, 
the company still has a debt toward Gazprom of USD 36.3 million for 
arrears accumulated after 2000, and management cites Srbijagas's 
financial weakness as the main reason why it has not moved forward 
on the Banatski Dvor gas storage facility, the key to providing 
Serbia with near-term energy security.  Any decisions on the gas 
storage, and, longer-term, on construction of the Nis-Dimitrovrad 
gas pipeline, await a new Government, which faces the dilemma of 
ensuring continued deliveries of gas from Russia while preserving 
control over critical infrastructure. End Summary 
 
SERBIA SETTLED DEBT FOR UNPAID GAS 
---------------------------------- 
¶2.  (U) Milan Parivodic, Serbia's Acting Finance Minister, and 
Sergei Storchak, Assistant Minister of Russia's Finance Ministry, on 
April 26 signed an agreement settling the USD 288.6 million clearing 
debt of the former Soviet Union towards the former Socialist Federal 
Republic of Yugoslavia (SFRJ).  Most of the debt, some USD 188 
million, will be used to pay arrears to Gazprom accumulated in the 
period 1994-2000, while the remaining USD 105.5 million will finance 
overhaul of the Djerdap hydroelectric plant on the Danube River. 
Interest arrears will be used to finance construction of a particle 
accelerator at the Vinca Nuclear Institute. 
 
¶3.  (U) Milos Milankovic, general director of state-owned gas 
company Srbijagas, said at a press conference on April 25 that the 
agreement resolved a huge burden in relations with Gazprom, although 
he acknowledged that Srbijagas still has debt toward Gazprom.  When 
econ chief met with Milankovic on April 30 to discuss the agreement, 
he disclosed that debt to Gazprom accumulated after 2000 amounts to 
USD 36.2 million.  Srbijagas services such debt regularly via a 
payment of USD 3 per 1000 cubic meters of gas delivered, with 
payments to Yugorosgaz, Gazprom's subsidiary in Serbia. 
 
¶4.  (SBU) When econ chief asked about progress on making the 
Banatski Dvor gas storage facility operational, Milankovic outlined 
three options for filling the storage before the upcoming winter 
season.  The first is for Srbijagas to obtain a bank loan with GOS 
approval, or even a guarantee.  Although banks are ready to do 
business with Srbijagas, Milankovic said, this option is difficult 
because of the company's weak financial position.  He disclosed that 
Beogradske Elektrane, Belgrade's district heating company, alone 
owes Srbijagas some RSD 2.7 billion, or close to USD 40 million; and 
Srbijagas owes NIS Gas (the former gas division within state-owned 
oil and gas company Naftna Industrija Srbije-NIS) some RSD 3.3 
billion, or close to USD 50 million. 
 
¶5.  (SBU) The second option would be a straight cash transfer from 
the new government, just as Srbijagas obtained EUR 11.5 million from 
the government to complete equipping of Banatski Dvor.  The third 
option - and according to Milankovic, the most favorable - would be 
a strategic partner for Banatski Dvor.  Milankovic said that 
Srbijagas had already raised this possibility with Gazprom, 
Yugorosgaz, Hungarian MOL, Austria's OMV and Gas de France.  (MOL's 
director of strategy on April 27 expressed willingness to invest in 
Serbia's storage or lease Hungarian storate to Srbijagas.) 
 
¶6.  (SBU) Milankovic told econoff that he is urging the GOS to 
resolve this question by the end of May; otherwise, the chance to 
store gas at Banatski Dvor for the coming winter will be lost.   He 
said that some USD 40-50 million is needed for cushion gas and for 
some 50 million cubic meters of gas that would be available for 
winter use. The cost had been estimated previously at some USD 70 
million, but Milankovic said that Srbijagas can cut the cost by 
using domestic natural gas, which is lower quality but 20 percent 
cheaper, rather than Russian gas, for cushion gas. (Note:  Srbijagas 
pays close to USD 250 per 1,000 cubic meters for Russian gas, in 
addition to MOL pipeline fees.) 
 
¶7.  (SBU) Milankovic said that he sent an official letter to the 
Ministry of Energy at the beginning of the year proposing these 
three options for Banatski Dvor and seeking Ministry assistance - 
urgently - in finding a solution.  Yet he said he has never received 
a reply; moreover, Assistant Minister Slobodan Sokolovic, a 
technocrat who oversees gas and oil issues, never saw Milankovic's 
letter, the Srbijagas director said.  Milankovic, a member of former 
finance minister Dinkic's G17 Plus party, indicated that political 
issues play a part in the lack of cooperation with the Ministry. 
(Minister Naumov is a member of Kostunica's Democratic Party of 
Serbia.) 
 
¶8.  (SBU) The political issues go deeper than distrust within the 
coalition.  Milankovic sits on the four-member board of 
Gazprom-linked company Yugorosgaz as Srbijagas representative; he 
mentioned that, for the last two months, he has been under constant 
pressure from Yugorosgaz to agree to certain business proposals. 
While he would not disclose specifics, it was clear that he regarded 
these as corrupt. 
 
¶9. (SBU) Milankovic said he resisted such pressure from Yugorosgaz 
and complained directly to Gazprom; the Gazprom directors then 
supported him.  Milankovic said that Bosphorus Gas, a Turkish 
company partly controlled by Gazprom, really is calling the shots in 
Yugorosgaz.  Bosphorus Gas controls Centrex, an Austria-based 
company that owns 25 percent of Jugorosgaz.  (At the same time, 
Gazprom had insisted in December that Srbijagas to sign the 2007 gas 
supply agreement with Yugorosgaz as a condition for signature of a 
Memorandum of Understanding on extending the Blue Stream pipeline 
though Serbia.) 
 
¶10.  (SBU) Regarding a pipeline connecting the Serbian and Bulgarian 
natural gas systems, Milankovic said that even the Russians are 
waiting for a new government before deciding how to approach the 
Nis-Dimitrovgrad pipeline.  He added that, in his opinion, the 
Bulgarian gas company has not shown much interest in the 
Nis-Dimitrovgrad project.   Milankovic mentioned that Srbijagas had 
also started talks with Croatia about possible construction of 60 
kilometers of gas pipeline parallel to the existing oil pipeline 
that links Croatia and Serbia, to enable gas transit between the two 
countries. 
 
¶11.  Comment.  (SBU) Serbia's energy policy is constrained as much 
by internal disarray as it is by Russia's interest in acquiring 
energy sector assets here.  Banatski Dvor is an example of a project 
that could move forward quickly with government approval; given 
ample privatization receipts, money is not a problem. As the key 
players in the new government emerge, we will lobby behind the 
scenes for a sensible policy that focuses on energy security and 
market-based solutions. End comment. 
 
POLT