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OO RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
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DE RUEHVB #0085/01 0481610
ZNR UUUUU ZZH
O 171610Z FEB 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9008
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000085 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/ERA, EUR/SCE AND EEB/ESC, COMMERCE FOR 
TDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EINV HR
SUBJECT: CROATIAN NATURAL GAS PROJECTS: LOOKING FOR NEW 
MOMENTUM IN THE AFTERMATH OF THE CRISIS 
 
¶1.  Summary: The recent gas crisis has fueled discussion and 
interest in the subject of Croatian energy security and 
energy diversification.  The most significant project 
addressing these issues is the long-delayed construction of 
an LNG terminal on the Adriatic.  Senior government leaders 
have expressed confidence that the structure of the 
consortium will soon be finalized and that Croatia can move 
to the next step.  However, senior executives from the three 
companies involved in the Croatian portion of the project, 
HEP, Plinacro, and INA, seem uninformed and give conflicting 
opinions about the true state of play and the reasons for the 
continuing delays in getting the project off the ground. 
Croatia plans a number of other projects which are also 
important, but whose impact on the broader theme of energy 
security will be more modest.  Even if all planned projects 
are realized, Croatia will continue to rely on significant 
quantities of Russian gas for the foreseeable future. End 
Summary. 
 
¶2.  The Russia-Ukraine gas crisis has sparked increased 
interest in new energy diversification strategies, all of 
which are necessary, and none of which will free Croatia from 
the need for significant future quantities of Russian gas. 
Croatia avoided some of the more serious hardships 
experienced by its neighbors during the gas crisis since it 
has domestic production fulfilling roughly 60 percent of its 
demand.  Nevertheless, Croatia could ill afford the slowdown 
in industrial output caused by the crisis and there is 
broader public interest now in exploring options for 
diversification of energy supply.  These strategies include: 
1) Moving forward with plans for an LNG terminal on the 
Adriatic; 2) Construction of a pipeline interconnector to 
Hungary; 3) Construction of a second underground storage 
facility; 4) Negotiation of new supplies from Algeria via 
Italy; and 5) Construction of a pipeline through Lika and 
Dalmatia to connect with the Ionian-Adriatic pipeline (IAP) 
from Albania. 
 
LNG Terminal Update 
------------------- 
 
¶3.  In a meeting on February 6, Deputy Prime Minister 
Polancec told the ambassador and econoff that Croatia is 
committed now more than ever to pushing through with plans 
for an LNG terminal at Omisalj on the island of Krk. 
Although the LNG terminal has been under discussion for 
years, he told us Croatia was very close to finalizing the 
structure of Croatia's 25 percent share in Adria LNG, the 
international consortium spearheading the project.  He said 
discussions had partially been held up by uncertainties in 
the privatization of the national oil company INA, and what 
role, if any, its new owners in Hungarian MOL would want to 
play in the project.  The DPM said MOL was currently 
negotiating a participation in Adria LNG independent of the 
Croatian consortium.  Having just successfully negotiated the 
split of the gas trading business out of the INA/MOL deal, 
the way should be clear to finally determine the role of the 
other two partners in Croatia LNG: HEP (electric power 
monopoly), and Plinacro (gas transmission company).  He 
anticipates the deal will be finalized and ready to move 
forward by the end of March. 
 
¶4.  (SBU) Others are more skeptical that the LNG terminal is 
finally ready to move forward.  A senior manager and board 
member at Plinacro told us that the delay determining the 
structure of the new management at INA/MOL could not in 
itself account for the inability to launch the Croatian LNG 
consortium.  It was also unclear to him what interest MOL 
could have in the LNG terminal, especially after MOL 
acquiesced to the government splitting out the gas trading 
business from INA.  He sees unidentified strong interests 
behind the scenes trying to slow the project down, even 
suggesting undue influence of Gasprom over MOL management was 
to blame.  Comment: These theories could prove to be 
unfounded if Minister Polancec's prediction is true and the 
Croatian consortium is finalized soon.  We also spoke to a 
key board member at HEP who was completely unaware of the 
state of play with the Croatian consortium - strange 
considering HEP is one of the key players. 
 
Pipeline Interconnector to Hungary 
---------------------------------- 
 
¶5.  Plinacro's plan for a pipeline interconnector from 
Slavonski Brod to Varosfold in Hungary offers Croatia a 
distinct advantage in future supply options, as both the 
Nabucco and South Stream projects envision transit of 
 
ZAGREB 00000085  002 OF 002 
 
 
Varosfold.  It also would significantly shorten the route of 
Russian gas to Croatia, which currently is imported through 
Slovenia.  Plinacro hopes to begin construction of this 
interconnector this year. 
 
¶6.  Several high level EU officials recently promised 
financial assistance to this project, part of a larger number 
of projects under consideration in the wake of the gas 
crisis.  However, in a surprise announcement at the end of 
January, EU energy spokesperson Ferrand Tarradellas said the 
EU had decided not to fund the project because of Croatia's 
"insufficient preparation."  Plinacro told us they were 
incensed at this judgment of a worthwhile project, and felt 
they had been discriminated against in favor of full EU 
member projects such as the TARP project linking Greece and 
Italy.  Nevertheless, Plinacro claims the EU funds are not 
needed for the project to go forward as planned. 
 
Underground Storage 
------------------- 
 
¶7.  Plinacro plans to construct a second underground storage 
facility at Okoli, south of Zagreb. Croatia currently has 
only one underground natural gas storage facility.  Despite 
the renewal of gas imports from Russia, the reserve is still 
50 percent depleted, according to an INA executive.  He said 
another crisis would instantly put Croatia back in a 
dangerous situation.  This storage facility has already been 
transferred to Plinacro in connection with the sale of INA to 
MOL and the separation from the deal of gas assets considered 
by the government to be strategic. 
 
New Supplies from Algeria 
------------------------- 
 
¶8.  Croatia began negotiations with Algeria during the gas 
crisis for additional supplies for delivery to Italy.  Italy, 
in turn, would free up additional gas for Croatia from its 
Adriatic fields.  A senior INA official has told us that 
negotiations are ongoing, but was unwilling or unable to give 
us details on when they might be completed. 
 
Linking up Dalmatia 
------------------- 
 
¶9.  There is currently no gas distribution network in the 
southern half of Croatia along the coast to Dalmatia.  Power 
generation in the region is largely hydropower, but Plinacro 
has ambitious plans for a 75-bar gas network to stretch the 
length of Croatia's coast, with interconnectors to the major 
urban areas.  They hope to then link up with the projected 
Ionian Adriatic Pipeline from Albania, which would give 
access to future supplies crossing Turkey and Greece. 
 
Comment 
------- 
 
¶10.  The gas crisis may well have the long term benefit of 
finally moving some of these projects out of the planning 
phase and into reality, particularly LNG.  But even now, it 
is strange that conversations with senior managers at HEP, 
Plinacro and INA still reveal a great deal of confusion over 
what the Croatian consortium will look like, when it will be 
finalized, and the reasons for the continuing delays.  The 
Deputy Prime Minister seemed genuine in his desire to get the 
project off the ground and his confidence that it would 
happen soon.  Whenever it is ready to move to the next stage, 
the LNG project faces the problem of finding sufficient gas 
supplies for the facility.  Supplies from the Middle East, 
especially Qatar, are reportedly fully contracted for the 
foreseeable future.  When we raised this concern with the 
Plinacro executive, he pointed to four unspecified LNG 
terminals in the U.S. that had sat idle for years owing to 
lack of supply, but now were operating at full tilt and with 
solid profits.  This did not seem to be a very convincing way 
to dismiss investor concerns over gas supplies for the new 
terminal. 
BRADTKE