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C O N F I D E N T I A L SECTION 01 OF 02 ZAGREB 000057 
 
SENSITIVE 
SIPDIS 
 
S/CEE AMB MORNINGSTAR AND REBECCA NEFF, EEB/ESC, EUR/CE, 
EUR/RUS 
 
E.O. 12958: DECL: 01/01/2020 
TAGS: ENRG ECON EPET PGOV PREL HU HR
SUBJECT: HUNGARIAN AMBASSADOR DISCUSSES VISIT OF PRIME 
MINISTER BAJNAI TO CROATIA, REINFORCES CONCERNS ON ENERGY 
 
Classified By: Rick Holtzapple, POL/ECON, Reasons 1.4 B/D 
 
¶1.  (C) Summary.  Hungary's ambassador to Croatia, Peter 
Gyorkos, sat down with Pol/Econ Counselor and Econ Officer on 
January 22 to discuss the recent visit of the Hungarian Prime 
Minister to Croatia, and to explain Hungary's increasing 
nervousness regarding Croatia's energy relations with Russia. 
 Hungary was pleased that the gas interconnector between 
Hungary and Croatia would be completed this year, giving both 
Hungary and Croatia a more diverse set of options for gas 
supplies.  He also noted significant progress in resolving 
issues related to MOL's takeover of the Croatian energy 
company INA.  However, he said Hungary perceived a strong 
push by Russia to court Croatian participation in energy 
projects that could benefit Russia at Hungary's expense.  In 
particular, he mentioned the Druzba Adria oil pipeline 
project and the fears that Russia had the ability to 
completely book the line's capacity, cutting off Hungary from 
supplies.  He expressed cautious optimism that the liquefied 
natural gas facility (LNG) on the Island of Krk would begin 
to move forward this year.  END SUMMARY. 
 
¶2. (C) Energy was the primary subject discussed during 
Hungarian Prime Minister Bajnai's visit to Croatia on January 
¶18.  According to Hungarian Ambassador Gyorkos, Bajnai asked 
Prime Minister Kosor to be cautious of Russia's intentions 
during her planned visit to Moscow later this winter.  Prime 
Minister Kosor will travel to Moscow, reportedly to discuss 
the renewal of Croatia's long term gas contract with Gazprom 
that expires this year, among other issues.  (NOTE: Croatian 
media this week said that Kosor's visit to Moscow would 
likely occur on February 22.  END NOTE.)  Croatia is 
reportedly seeking a major increase in the quantity of 
Russian gas supplied.  But Hungary fears Russia may see this 
as an opportunity to push other issues, such as undercutting 
the case for an LNG terminal on the Adriatic coast, or 
getting Croatia to sign on to an alternative route for South 
Stream that could cross Croatia rather than Hungary.  Gyorkos 
noted that any land pipeline seeking to get around Ukraine on 
the south has to pass either through Hungary or Croatia. 
Prime Minister Bajnai reportedly reminded Prime Minister 
Kosor that Hungary had domestic gas production and 
large-scale storage that could help supply Croatia in a 
crisis.  Both Prime Ministers applauded the beginning of 
construction of the Hungary-Croatia gas interconnector. 
Gyorkos said the interconnector, which is scheduled to be 
completed by the end of 2010, gives Hungary some real options 
for diversifying its gas supplies, as Hungary could access 
gas from any major pipeline crossing Croatia, as well as the 
planned LNG terminal. 
 
¶3. (C) Gyorkos also described as positive recent developments 
in MOL's investment in INA of Croatia, after a series of 
difficulties throughout 2009.  In January 2009, MOL had 
signed two agreements with the GoC.  One was a Shareholder 
Agreement that gave MOL -- which had earlier acquired the 
largest set of shares, although not an absolute majority -- 
responsibility for day-to-day operational decisions, while 
"strategic decisions" would have to be made by MOL and the 
GoC jointly, as the two biggest shareholders.  That Agreement 
also extended until 2014 the GoC's right of first refusal for 
any move by MOL to sell its INA shares, something the 
Croatians have been eager to ensure, so as to avoid possible 
hostile takeover moves from elsewhere, particularly Russia. 
 
¶4. (C) The more controversial agreement signed in January 
2009, however, had been a Gas Master Agreement that committed 
the GoC to purchasing INA's money losing gas subsidiary. 
This purchase was supposed to be completed by July 2009, but 
the GoC balked at completing the deal, Gyorkos said, because 
it could not raise the needed cash, and because of internal 
fights between the Croatian Finance and Economy ministries. 
The surprise resignation of then-PM Ivo Sanader in July 2009, 
followed by the resignation of Economy Minister Damir 
Polancec over a separate controversy in the fall, further 
complicated INA-MOL negotiations.  According to Gyorkos, the 
parties only resolved the issue in December 2009, aided by 
what he described as the "very correct" attitude of PM Kosor. 
 The final deal left the gas subsidiary within INA-MOL at 
least for now, but was accompanied by a rise in the 
government-controlled price of gas to a level that Gyorkos 
said would make it financially feasible for MOL to retain the 
unit.  Even here, however, Hungary had concerns about Russian 
involvement.  Gyorkos argued that Russian interests were 
likely behind a spate of negative media coverage of MOL 
within Croatia.  He also noted rumors, which he could not/not 
confirm, that Russia's Surgutneftigas, which owns 21 percent 
 
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of MOL, had offered to swap its MOL shares for INA shares. 
He also complained that Surgutneftigas was not complying with 
Hungarian laws that required disclosure of its corporate 
ownership structure. 
 
¶5. (C) Gyorkos reported that oil supplies were also of 
serious concern to Hungary.  Currently, oil off-loaded in 
Croatia's ports travels the Adria pipeline to refineries in 
Croatia, as well as onward to Hungary, Bosnia, and Serbia. 
The ambassador said that if Croatia agreed to participate in 
the Druzba Adria project, reversing the flow of the Adria 
pipeline to enable Russian oil exports, then Russia could 
completely book the capacity of the line, export to Serbia, 
and elsewhere from Croatia's coast, leaving Hungary out. 
Econoff asked the ambassador about rumors that Russia would 
demand that a new gas agreement with Croatia be made 
contingent on Croatian participation on Druzba Adria. 
Gyorkos said he wasn't sure what was happening behind the 
scenes, but that even with different companies and different 
commodities, "it is always the same eye peering in from the 
other end of the pipeline." 
 
¶6. (C) On the LNG terminal, Gyorkos said his prime minister 
had made a strong case to PM Kosor to help the project 
finally move forward.  It was Gyorkos' opinion that the GoC's 
long delay in formalizing the Croatian partnership within the 
Adria LNG consortium was due in large part to the 
uncertainties over the fate of INA's gas subsidiary.  As INA 
was to be the largest part of the Croatian partnership within 
the consortium, it had been difficult to finalize the 
composition of that partnership until the fate of INA's gas 
business was clear.  Now that those issues appear to have 
been resolved and the agreement on the gas trading business 
signed, Gyorkos expressed cautious optimism that there would 
be quicker movement on the project soon.  The LNG terminal's 
projected 10 bcm of import capacity, combined with the gas 
connector with Croatia, would give Hungary a welcome option 
for diversification of its gas supplies. 
 
¶7. (C) Comment:  The Hungarians clearly recognize that, while 
Croatia's market size is small, its geographic position is 
key to a number of projects relating to Hungary's energy 
security.  The Hungarian prime minister's visit brought 
additional political weight to the same message on 
diversification of energy supplies that we have given the 
Croatians.  The difference is that, while the U.S. has few 
economic energy equities in Croatia, Hungary is a key energy 
partner for Croatia.  For that reason, we expect Prime 
Minister Kosor will take Prime Minister Bajnai's advice and 
concerns seriously as she contemplates her upcoming 
negotiations with Russia. 
FOLEY