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PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0562/01 2111416
ZNR UUUUU ZZH
P 291416Z JUL 08 ZDK
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8521
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 ZAGREB 000562 
 
DEPT FOR EUR/SCE (BALIAN) AND EUR/PPD 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON ENRG PREL PGOV HR
SUBJECT: CROATIAN ENERGY ISSUES 
 
ZAGREB 00000562  001.2 OF 002 
 
 
Sensitive But Unclassified.  Please Handle Accordingly. 
 
¶1. (SBU) SUMMARY: The GoC has initiated a process to produce a 
comprehensive energy strategy, allegedly as early as this fall.  But 
it appears that at this point there is no consensus on what the 
country's priorities should be in this sector.  In the meantime, 
considerable attention has centered on proposals to engineer a share 
swap between Croatia's INA and Hungary's MOL, which would leave the 
Hungarian firm with considerably greater control over INA.  END 
SUMMARY. 
 
A FLURRY OF ACTIVITY REGARDING INA OIL COMPANY 
--------------------------------------------- - 
 
¶2. (U) The most immediate issue, and the one receiving the most 
public attention, is what to do about the future of Croatia's 
leading oil and gasoline company, INA.  Currently, the GoC holds 44 
percent of INA's shares, and another seven percent is held by the 
Croatian Veterans' Fund, while Hungary's MOL oil company holds 22 
percent, and the balance is in the hands of institutional investors. 
 According to the terms of the shareholder agreement by which MOL 
acquired its shares several years ago, MOL could not sell its INA 
holdings on the market before October 2008.  Under Croatian law, the 
GoC is prohibited from reducing its share to below 25 percent until 
the day that Croatia joins the EU.  On July 5, Croatian PM Sanader 
and Hungarian PM Gyurcsany announced that they were exploring a 
possible share swap whereby MOL would acquire 19 percent of INA's 
shares from the GoC, in return for an equivalently-priced chunk of 
MOL's stock.  The precise ratio at which the shares would be 
swapped, has been the subject of much speculation, given the 
influence it would have on INA's overall share prices. 
 
¶3. (SBU) INA CEO Tomislav Dragicevic told the Ambassador that INA 
management had not been involved in discussions of the potential 
swap.  He said he had received a call from HANFA (Croatia's SEC 
equivalent) while he was at a conference in Madrid the day the deal 
was announced, asking him for details of the proposal, and he had 
none.  Dragicevic and his key advisor Stevo Kulundzic professed to 
be uncertain what the GoC's strategy was in proposing the swap, but 
speculated that it was likely related to the impending expiration of 
restrictions on MOL's current shares in INA.  They believed the GoC 
was nervous about who might buy pieces of INA, and a new swap could 
mean a new shareholder agreement that would extend the prohibition 
on MOL selling its current INA stake freely.  If that was not the 
motive, Dragicevic and Kulundzic said, then it was unclear to them 
what the advantages of the swap would be for Croatia. 
 
¶4. (U) In the weeks since the Sanader-Gyurcsany announcement, 
confusion over INA has only increased.  Officials at the Veterans' 
Fund have said they would feel under no obligation either to hold on 
to their shares or to sell them to MOL, but would seek the greatest 
financial gain for their own shareholders.  Sanader quickly 
"clarified" his statements by saying that an INA-MOL swap was only 
"one of the options" that was being investigated.  Austria's OMV, 
meanwhile, has expressed interest in possibly buying INA shares. 
When queried by HANFA, OMV said it had no plans at this time for a 
takeover attempt on INA, but that it was monitoring developments, 
and hoped that any process would be transparent and give OMV an 
equal opportunity with MOL. 
 
AS OTHER ENERGY POLICIES REMAIN DORMANT 
----------------------------------- 
 
¶5. (SBU) While INA's status seems to evolve daily, other energy 
policies appear to be only crawling forward.  The GoC continues to 
say it is committed to pursuing a liquefied natural gas (LNG) 
terminal in the northern Adriatic.  But selection of the proposed 
site has been repeatedly put off, even as almost all analysts assume 
that the site adjacent to the current Omisalj oil terminal on the 
island of Krk is the only practicable location. 
 
¶6. (SBU) The government also remains in the process of developing a 
comprehensive national energy strategy.  However, officials of 
leading energy firms that we have spoken to, such as INA and HEP, 
the country's primary electrical utility, are skeptical that the 
strategy will provide any clear vision or guidance.  INA's 
Dragicevic said the small consultancy EKONERG put in charge of the 
project has suspect qualifications for such a mammoth task. 
Kulundzic, who is a member of one of the project's advisory bodies, 
said it appeared to him the strategy would place a heavy emphasis on 
nuclear power generation, but said he doubted such projects could be 
economical, given the relatively small size of the Croatian market, 
with an estimated 3600 megawatts of forecast demand. 
 
¶7. (SBU) At a dinner hosted by the Ambassador on July 22, Zdravko 
Muzek of EKONERG said that the strategy was also looking carefully 
at other power sources such as wind.  A HEP executive who was also 
at the dinner disagreed strongly that wind would provide much of a 
solution to Croatia's energy requirements. 
 
 
ZAGREB 00000562  002 OF 002 
 
 
¶8. (SBU) COMMENT:  Looming in the background of all of these 
discussions is Russia.  While Croatia meets 30 percent of its oil 
and 60 percent of its gas requirements domestically, it is keenly 
concerned about improving its security of supply, and suspicious of 
Russian actors, who have to date been only bit players in the 
Croatian energy scene.  The lack of consensus about what Croatia's 
energy development priorities should be, however, has severely 
hampered efficient or effective planning.  The October expiration of 
MOL's agreement on INA shares may spur a decision on the future of 
that company.  We would like to see some decisiveness on the broader 
policy issues as well.  But in the absence of action-forcing events 
in relation to other sectors -- whether it be LNG, nuclear or 
renewables -- we fear that Croatia is likely to see continued 
dithering on energy.  END COMMENT. 
 
BRADTKE