VZCZCXYZ0003
OO RUEHWEB

DE RUEHBW #1018/01 2000658
ZNR UUUUU ZZH
O 190658Z JUL 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1199
INFO RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/USDOC WASHDC

UNCLAS BELGRADE 001018 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON ENRG SR
SUBJECT: AMBASSADOR MEETS ENERGY MINISTER 
 
 
SUMMARY 
------- 
¶1. (SBU) Ambassador Polt met with new Minister of Energy Aleksandar 
Popovic on July 11 to review his plans for addressing Serbia's 
energy security.  The minister, a vice president in Prime Minister 
Kostunica's Democratic Party of Serbia (DSS), said Serbia has no 
alternative to sourcing gas from the east but at the same time 
declared that his goal is to decrease dependence on the current 
single-source MOL pipeline.  He pledged to have gas storage ready 
for winter 2008-2009 but declined to discuss how Srbijagas would 
find the money to fill the Banatski Dvor gas storage facility, 
mentioning only that the issue is linked to ongoing discussions of 
gas transit pipelines.  Privatization of state oil monopoly NIS will 
proceed gradually, as planned by the previous government, but 
Popovic acknowledged that the goal is an eventual majority for the 
strategic partner. The meeting ended with a very frank discussion of 
Kosovo status. End summary. 
 
¶2.  (SBU) The Ambassador met with Minister of Energy Aleksandar 
Popovic for the first time in the latter's new capacity on June 20. 
Popovic, an assistant professor of chemistry at the University of 
Belgrade and a DSS vice president, was pleasant but guarded in 
discussing a series of energy issues, including Banatski Dvor gas 
storage, a gas pipeline to connect Serbia to Bulgaria's network, and 
privatization of state oil company Naftna Industrije Srbije (NIS). 
The Ambassador, who was accompanied by the Embassy's econ chief, 
opened the discussion by expressing understanding for the difficult 
task Popovic faces in pursuing energy security for Serbia; it is an 
important issue for the rest of Europe and the U.S., he added. 
Secure supply also was also an issue for investors, the Ambassador 
noted, reminding Popovic that U.S. Steel was forced to cut 
production in January 2006 because of a natural gas shortage. 
 
¶3. (SBU) Serbia is a small country that produces only 8 percent of 
its own gas, Popovic replied.  Gas from the east is the only source, 
but Serbia must try to diversify to the maximum extent possible. 
Ambassador Polt noted that a Nis-Dmitrovgrad pipeline would provide 
Serbia with an alternative for gas supply.  Popovic replied that 
this option is beyond Serbia's control; moving forward requires the 
agreement of Bulgaria and Jugorosgas.  (Note:  Jugorosgas, which is 
controlled by Gazprom, generally is believed to have an exclusive 
right to construct gas pipelines in Southern Serbia by way of 
Milosevic-era bilateral agreements.) 
 
¶4. (SBU) At the same time, without such a pipeline, Serbia cannot 
get enough gas during winter, Popovic added, explaining that 
pressure in the MOL pipeline is not sufficient for central Serbia. 
Nor is the 12 million cubic meter daily capacity of the MOL pipeline 
enough as gasification expands in central Serbia. 
 
¶5. (SBU) Ambassador Polt noted that gas storage would strengthen 
Serbia's energy security; however, Banatski Dvor would not be ready 
this winter, despite previous assurances.  It's a simple story, 
Popovic replied:  Serbia needs only the money and 150 days during 
which to pump gas. The reservoir requires 100 million cubic meters 
of cushion gas.  But Srbijagas lacks the money now, the Minister 
said, and the summer season, during which there is excess gas for 
filling the storage, soon will be over. Nevertheless, it will be 
ready next year, Popovic said:  "I'll finish it or I'll resign." 
 
¶6. (SBU) Privatization of state oil company NIS is another sensitive 
issue on the Ministry's plate, Ambassador Polt said, noting that the 
U.S. generally favors selling off the biggest possible stake, as 
quickly as possible. The Minister said that the Kostunica government 
would employ a more gradual approach similar to the strategy adopted 
- but not executed - by the previous government. The first stage 
would be sale of 25-37.5 percent to a strategic investor, who also 
would gain management control. The government's goal is to build NIS 
into a strong regional player, and this would require time, money 
and good management.  On the one hand, Serbia would go slow in order 
to preserve a "national resource," Popovic said, but it would profit 
later by selling shares after the value of the company has been 
enhanced.  The eventual goal is to sell off 50 percent plus one 
share, but privatization of a majority stake definitely would not 
happen under this government, Popovic said. 
 
¶7. (SBU) Popovic added that he was strongly against privatizing 
power company EPS, which has a relatively stronger position. EPS 
would seek a strategic partner for co-investment in two, 700-MW 
coal-fired plants, but the government wants to build up EPS as a 
strong regional player.  He explained that power is in deficit all 
over the region, creating opportunities for EPS. Although Serbia's 
power generating capacity has recovered from NATO bombing, Kosovo's 
power sector faces continuing production problems, he added.  Serbia 
itself faces annual winter electricity deficits, and gas storage at 
Banatski Dvor could help by permitting an increase in winter power 
production based on natural gas. 
 
¶8. (SBU) Ambassador Polt asked whether the current developments on 
Kosovo would influence the tenders that Serbia is planning.  Popovic 
replied that the sell-off of a minority stake in NIS would be 
transparent.  However, he added that Serbia is constrained by its 
geographic position, and by the fact that 95 percent of its gas 
comes from Russia. 
 
¶9. (SBU) Turning to Kosovo, the Ambassador Polt sought Popovic's 
views on how possible additional time for Kosovo status engagement 
could be used to achieve progress.  The Energy Minister, known for 
his strident and emotional views on Kosovo, replied that face to 
face negotiations led by a new mediator could be productive. 
Ahtisaari had not invested enough effort into the outcome.  Talks 
should start with issues on which there is potential for agreement 
before moving into the tougher issues.  "We are ready to offer a 
lot, but not independence," Popovic said. 
 
¶10. (SBU) The Ambassador noted that an additional 120 days of talks 
would be a final opportunity for Belgrade to engage constructively 
with Pristina and the international community and ultimately to 
prepare for Kosovo's supervised independence.  In that context, the 
Ambassador Polt asked Popovic how Serbia would propose to proceed. 
 
¶11. (SBU) Some in Belgrade view a link between Kosovo and 
Euro-Atlantic integration as blackmail, Popovic replied.  A 
premature solution now, without the possibility of something better, 
will hurt the region and Europe, although the U.S. will escape the 
consequences by virtue of its geographic position.  More time is 
necessary; developments that were unthinkable in Bosnia now years 
ago now are politically possible with the passage of time, Popovic 
argued. 
 
¶12. (SBU) Ambassador Polt argued that a hard-line reaction on the 
part of the Serbian government would damage almost exclusively 
Serbia's interests.  Euro-Atlantic integration is a benefit for the 
Serbian people, as the road to prosperity.  The Ambassador 
questioned whether Serbia believes it has other options for future 
success of its people? 
 
¶13. (SBU) "We will do what we have to do," Popovic replied. "I have 
to say, as an American friend, that I am disappointed that America 
picked the wrong allies in the region."  The U.S. choice of a 
strategic partner for the region would set the course for decades to 
come, he added dramatically.  Rejecting this emotional assertion, 
the Ambassador pointing out that NATO and other international 
support was the key guarantor of security and stability in Kosovo. 
 
 
¶14. (SBU) The Ambassador said that after Kosovo status settlement, 
the U.S. will be ready to move on in its relationship with Serbia. 
He said he hoped that Serbia would be similarly able to move on. 
 
POLT