VZCZCXRO5398
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBW #1433/01 2950721
ZNR UUUUU ZZH
R 220721Z OCT 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1641
INFO RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0014
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 001433 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON ENRG SR
SUBJECT:  GAZPROM IN SERBIA - BUYING UP THE WORKS? 
 
REFTEL: Belgrade 1376 
 
SUMMARY 
------- 
 
¶1.  (U) Russia's Gazprom is making a push to control Serbia's key 
energy companies and infrastructure.  During an October 9 visit, 
Gazprom CEO, Alexei Miller linked three major energy projects in 
Serbia -- a new gas pipeline, a gas storage facility and perhaps a 
deal involving 51% ownership of the Serbian Oil Industry (NIS).  The 
Serbian government has both publicly downplayed the significance of 
Miller's comments, and been unforthcoming about the nature of 
discussions with Miller in discussions with Embassy officials. 
Russian support for Serbia over the Kosovo issue is probably a key 
factor in increased Serbian support for Gazprom's plans in the 
region.  End Summary. 
 
Gazprom Visits Serbia 
--------------------- 
 
¶2.  (U) During his October 9 visit, Gazprom CEO Alexei Miller 
outlined the company's desire to purchase or otherwise control 
Serbian energy assets including Serbian state oil company NIS, the 
Banatski Dvor gas storage facility and a possible gas pipeline to 
Western Europe via Serbia.  In a televised interview on state-owned 
RTS Miller said that he viewed NIS, Banatski Dvor, and the transit 
pipeline as linked projects that Gazprom would want to pursue 
jointly.  Miller's public candor about Gazprom's intentions 
contrasted with the Serbian government's comments on the 
discussions.  The Prime Minister's office stuck to generic language 
about energy playing a significant role in economic development and 
the importance of the MOU signed in December 2006 supporting the 
idea of a gas transit pipeline through Serbia in its statement 
following the meeting with Miller. 
 
¶3. (SBU) Linking these three significant energy projects would give 
Gazprom unprecedented control over the energy infrastructure in 
Serbia and the Western Balkans.  Serbia currently relies on one gas 
pipeline connection from Hungary, controlled by the Hungarian 
company MOL, but supplied with Gazprom gas.  The Banatski Dvor gas 
storage facility is an attempt to build internal gas reserves so 
that Serbia can meet its own seasonal demands for gas, which are 
greater than the pipeline capacity in very cold weather.  The 
storage facility would also provide a cushion against supply 
shortages or disruptions.  Serbijagas Director Milos Milankovic told 
embassy officials on October 12, the Serbian gas company had tried 
to solicit bids for additional gas to cover winter shortages and 
begin to fill the still under construction storage facility. 
Milankovic believed Miller's visit was an effort to discourage 
Serbia from soliciting bids without Gazprom's participation. 
 
Energy Minister Popovic Denies a Deal 
------------------------------------- 
 
¶4. (SBU) During an October 16 meeting with the DCM and visiting SCE 
Director Chris Hoh, Energy Minister Aleksandar Popovic referred to 
Serbia's discussions with Gazprom as "inconclusive."  In response to 
DCM's comment that Miller never came to town unless he was ready to 
sign a deal, Popovic shrugged saying "that's what I thought too, but 
as it turns out he had nothing concrete to offer."  Popovic again 
said that he supported the strategy of moving ahead with 
privatization of a portion of NIS quickly, but that the details 
regarding what percentage to sell and how was now a political 
decision.  Popovic told the DCM there were two alternatives on the 
table and he could argue in favor of either of them.  One 
alternative would be to sell up to 37.5% of the company to 
non-Serbian entities and the other was to sell 51% or more.  Popovic 
admitted that the 37.5% solution would be the more politically 
popular alternative but said the 51% option obviously made NIS more 
attractive to a "foreign investor." 
 
¶5.  (SBU) Popovic also obfuscated on the goal of the Bantski Dvor 
gas storage facility during the same meeting, saying it would be "in 
support of" a Nabucco gas pipeline through Bulgaria and Romania. 
"We are in negotiations with the Romanians to build a spur from any 
eventual Nabucco pipeline and we could augment the plan through our 
storage facility."  Popovic said this alternative also could accrue 
transit fee income for Serbia.  Romanian DCM Alexandru Muresan 
earlier told DCM at a reception on September 12 that until the early 
1990's building a gas pipeline had been a constant feature of the 
bilateral agenda, but that the Serbs stopped mentioning it "in 
1994," and had not raised it since.  Press following the Miller 
visit clearly linked the Banaski Dvor project to the alternative 
Gazprom pipeline project through Serbia. 
 
NIS - A Political Challenge 
--------------------------- 
 
 
BELGRADE 00001433  002 OF 002 
 
 
¶6. (SBU). The NIS privatization has been stalled since before the 
January 2007 elections, as politics and the continued revenues and 
jobs for politically connected persons have slowed progress on 
privatization across the board.  The current plan, to sell off 37.5% 
(a minority share of 25% plus an additional 12.5% investment by the 
purchaser) to a strategic partner, with an offer of management 
control, is not likely to attract a large number of bidders.  NIS 
requires significant investments to make it competitive with 
refineries in the region.  Currently, NIS survives only because of 
the Serbian ban on imported gasoline.  In the current environment, 
and with only a third of the company likely to be offered to the 
buyer, Gazprom is looking to buy the company cheaply and without 
significant competition.  A Serbian businessman recently commented 
to Econoff that NIS is unlikely to be privatized before Kosovo is 
settled as the Serbian government is worried that any misstep in the 
NIS privatization from Gazprom's perspective could weaken Russia 
resolve to support Serbia on Kosovo. 
 
Comment 
------- 
 
¶7. (SBU) Russia and Gazprom are using the political capital of 
Russia's support for Serbia in Kosovo to bolster Russian influence 
in the energy sector.  Miller's visit to Belgrade was one more step 
in Gazprom's effort to link Serbia exclusively with Russian gas. 
While the Serbian government continues to maintain publicly that it 
is committed to a fair and transparent tender process for NIS at 
some point, Popovic's obfuscations to embassy officials on the 
subject show the government's inclination to keep the process murky. 
 End Comment. 
 
BRUSH