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Cablegate: Confusion and Finger Pointing Over Delay in Lng

VZCZCXYZ0856
OO RUEHWEB

DE RUEHVB #0605 2790806
ZNR UUUUU ZZH
O 060806Z OCT 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9570
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS ZAGREB 000605

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ENRG ECON EINV HR
SUBJECT: CONFUSION AND FINGER POINTING OVER DELAY IN LNG
TERMINAL

1. SUMMARY. Insiders within the government and energy
industry are at a loss to explain the slow pace of progress
in the liquid natural gas (LNG) terminal planned for
construction on the Croatian island of Krk. Both are quick
to point fingers at the other for the delay. Contacts in the
natural gas industry told us last week that the government
was inexplicably dragging its feet and that the terminal
could now not come on line until 2014 at the earliest. An
official in the energy division of the Ministry of Economy
retorted that it was internal wrangling at the INA/MOL,
Croatia's largest energy company, that was to blame. This
apparent chaos has prompted public frustration from the
project's largest foreign investors, particularly EON of
Germany and OMV of Austria, accompanied by unsubstantiated
rumors that they are considering pulling out of the project.
End summary.

2. Press reported last week that EON and OMV, 31% and 26%
shareholders in Adria LNG, respectively, are frustrated at
the slow pace of progress on the LNG project and were
considering pulling out of the deal. The president of the
Croatian Natural Gas Association, as well as a senior advisor
at INA, told econoff that the large investors' frustration
was completely understandable. They both described the
project as being in a state of confusion. According to them,
the structure of the Croatian portion of the consortium is in
place, and they are simply waiting for the government to
begin the necessary comment period for the environmental
impact study. After this, the government can move forward
with the final site permits that will enable the project to
actually begin. The INA official told us that he feels the
government is exhibiting a familiar attitude toward
investment, in which the government presumes that Croatia
will be cheated by the big players unless they exercise
absolute caution at every step.

3. An assistant director in the Ministry of Economy's energy
office, the government office primarily charged with LNG
preparations, told econoff in a separate conversation that it
was negotiations inside INA/MOL that were holding up the
process, not the government. After the sale of a controlling
interest in INA to MOL of Hungary, the Croatian government
negotiated the spin-off of INA's gas business out of the deal
- a move designed to ensure Croatia's energy security by
maintaining government control over natural gas supplies. It
was strange, our Ministry contact told us, that MOL now
wanted a direct stake in Adria LNG. According to her, the
Ministry's remaining tasks were quite straightforward and
they were simply awaiting the results of INA/MOL's corporate
wrangling to know exactly what the 25% Croatian portion of
the project would look like.

4. COMMENT. It is impossible to know who is to blame for
the slow pace of the LNG project, although INA's arguments
are bolstered by the fact that the government has dawdled
over the LNG project for several years before MOL's purchase
of INA. INA's comment about government reluctance to embrace
foreign investors is also a familiar refrain from other
investment projects. There does seem to be a lack of
political will in the energy sector. The National Energy
Strategy, drafted almost a year ago and which should
determine the priorities for 10 billion euros of investment
over the next ten years, continues to await formal debate in
the Sabor. The parliamentarian leading the discussion told
us he is also frustrated that the government has not made
energy projects a higher priority. On the list of topics for
consideration in the current session of parliament, the
national energy strategy comes in at 38th place. END COMMENT.
FOLEY

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