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Viewing cable 08SARAJEVO1661, RS OIL STATE OF PLAY

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Reference ID Created Released Classification Origin
08SARAJEVO1661 2008-10-27 15:00 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Sarajevo
VZCZCXRO5707
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVJ #1661/01 3011500
ZNR UUUUU ZZH
R 271500Z OCT 08
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC 9161
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 02 SARAJEVO 001661 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/SCE HYLAND, FOOKS, STINCHCOMB 
 
E.O. 12958: N/A 
TAGS: ECON ENRG PREL RS BK
SUBJECT: RS OIL STATE OF PLAY 
 
REF: 07 SARAJEVO 678 
 
 1. (SBU) Summary: According to the Republika Srpska 
Government, the Russian Zarubjezneft rehabilitation of the 
Brod refinery is progressing, despite many internal delays, 
and the refinery should be producing gasoline by the end of 
October 2008. (Reftel) As part of the Brod privatization 
deal, Zarubjezneft also purchased the largest chain of retail 
gas stations in the RS, PETROL RS.  Despite commitments to 
invest in improvements to the old gas stations, Zarubjezneft 
has not yet invested a Euro in their rehabilitation.  In 
other industry news, the RS Government is deliberating on a 
law to control the price of gasoline in the consumer market 
by limiting the profit margins for wholesalers and retailers. 
 The first biodiesel plant, funded with U.S. investment by 
American citizen locals, opened in Srbac in the northern RS 
on September 28.  RS President and PM Milorad Dodik attended 
the ribbon-cutting ceremony and used the factory opening to 
declare that the RS is a safe place for foreign investment. 
With regard to legislative reform, the RS continues to work 
on updating its own energy legislation, instead of pursuing a 
joint energy strategy with the Federation which would go much 
farther in enticing foreign companies to take a chance on 
investment in BiH. End Summary. 
 
BROD REFINERY 
------------- 
 
2. (SBU) The Russian firm Zarubjezneft began discussions with 
the RS Government in 2006 to purchase its oil and gas assets 
(Reftel).  Bosniak members of the Council of Ministers, 
however, stalled the agreement when they raised concerns 
about sub-EU-quality oil coming from Russia into the BiH 
market.  The lower quality gasoline that will be produced, 
once the old processing line at the Brod refinery is 
rehabilitated, will not meet EU-environmental quality 
obligations due to the high sulfur content in the Russian oil 
that is difficult to refine.  The Council of Ministers 
finally approved the agreement in March 2007 once the 
refinery agreed to bring its petrol products up to EU 
standards by July 31, 2010.  Republika Srpska Assistant 
Minister for Energy Dragana Kalabic claims, however, that 
Brod will only require six months to improve the old 
processing line to remove the sulfur content and bring the 
gasoline up to EU standards.  (Note: At present, the largest 
percentage of gasoline in BiH comes from Croatia where it is 
refined to EU standards. End note) 
 
3. (SBU) Kalabic explained that once the Brod refinery is up 
and running at the end of October, it will be able to supply 
gasoline to the RS, the Federation as well as Brcko district 
(although with lower quality gasoline compared to what they 
receive now from Croatia)) essentially the whole country ) 
and still have excess product for export.  She claimed Brod 
would sell its products based on free market principles 
without preferential pricing for RS wholesalers (Note: This 
was an earlier concern raised by Bosniak politicians in 
Parliament.  End note.) 
 
PETROL RS ) ANOTHER RUSSIAN ASSET 
--------------------------------- 
 
4.  (SBU) General Manager of PETROL RS, Drago Djukic, said 
that PETROL RS is still the biggest petrol retailer in the RS 
with 78 gas stations out of over 350 existing stations.  He 
explained that the new Russian owners have committed to 
invest in refurbishing the old gas stations, but have not yet 
done so.  He also predicted that retailers will receive 
better prices for gas once the Brod refinery is generating 
fuel again, as compared to prices they currently pay for 
imported gasoline.  When asked about the problem with non-EU 
quality gas coming from Brod, Djukic confirmed RS Assistant 
Minister Kalabic,s statement that further improvements to 
the refinery,s old processing line should in six months 
bring the sulfur content of the fuel down to EU standards. 
Djukic explained that although there are already penalties 
for poor quality gasoline, the fines are extremely low and do 
not prohibit wholesalers and retailers from selling poor 
quality gas. 
 
CONTROLLING PRICES? 
------------------- 
 
5.  (SBU) Kalabic also discussed RS plans to pass a law that 
would control the price of petrol in the retail market, in 
response to the high price of oil in the world market and 
increasing concerns from consumers.  She explained that the 
RS is mainly concerned with uncontrolled profit margins 
between wholesalers, retailers and the customers.  She said 
that a price margin ceiling, either as an exact amount that 
 
SARAJEVO 00001661  002 OF 002 
 
 
would change based on crude oil price fluctuations or as a 
percentage, would be an ideal regulation.  Kalabic expects 
this regulation to be included in the next changes to the RS 
Law on Gas, which could happen sometime later this fall. 
(Note: The RS Government had already pressured retailers to 
adhere to maximum profit margins on certain consumer products 
in order to control inflation before the October 5 municipal 
elections. End note.) 
 
SYSTEM ECOLOGIJA ) FIRST BIODIESEL FIRM IN BIH 
--------------------------------------------- -- 
 
6. (SBU) System Ecologica, a biodiesel firm in the northern 
RS, held a ribbon-cutting ceremony on September 28 which RS 
President Kuzmanovic and RS Prime Minister Dodik attended. 
It was opened by Best Inc., which is a U.S. firm founded by 
American-Bosnian dual citizen locals Nenad Kokanovic and 
Borivoje Vukadinovic.  Company director Biljana Kokanovic 
announced to the media that the company will produce daily 
100 tons of biodiesel from vegetable oils and fats and will 
employ 20 workers.  Although the company is currently 
importing raw materials, the owners intend to purchase raw 
materials from local farmers once their storage facilities 
are ready in 2009.  Dodik took the opportunity of the factory 
opening to state that this is an excellent example proving 
that the RS is safe for foreign investors ) though the 
amount of true foreign investment is really questionable.  In 
terms of customers, BiH is a brand new market for biofuels, 
and it may be a challenge to find wholesalers or retailers to 
purchase the fuel.  Drago Djukic, General Manager of PETROL 
RS, the largest gas station retailer in the RS had not heard 
of the biodiesel company and did not know of any other 
companies selling biofuels in the area.  RS Minister of 
Energy Kalabic noted that the RS Government will soon be 
purchasing a new fleet of eco-commuter buses that will run on 
biofuel.  With enough volume, these eco-buses will provide 
System Ecologica sufficient income to increase production and 
search for new buyers. 
 
EU OIL AND GAS LAW CONSISTENCY 
------------------------------ 
 
7. (SBU) Most of the oil and gas industry is regulated at the 
entity level.  The RS is currently trying to bring its laws 
into compliance with EU standards, including the Law on Gas, 
Law on Energy, Law on Fuel and Law on Electricity.  Although 
her priority is not harmonizing the new laws with the 
Federation Government, Kalabic noted that she has good 
contacts with her Federation counterparts and talks with them 
daily.  According to Kalabic, it is the job of the BiH 
Minister of Foreign Trade and Economic Relations to make sure 
the RS and the Federation laws are harmonized.  She mentioned 
that the Law on Gas is currently under scrutiny by the EC 
experts and still needs to be brought into compliance with EU 
regulations.  Although there were earlier discussions on 
establishing a state-wide Law on Natural Gas, Kalabic 
explained that the RS is leaning towards establishing an 
agreement between the Federation and the RS, making a new law 
unnecessary.  (Note: Dr. Johann Hess, Head of the Economic 
Assistance Section at the European Commission, later 
explained that in contrast to Kalabic,s assertions, that the 
EC has one main point of contact at the State level ) it is 
not in the business of examining entity-level legislation. 
End note) 
 
COMMENT 
-------- 
 
8. (SBU) Despite many previous unfulfilled commitments on 
Brod, we have recently heard our fair share of positive signs 
that the Brod refinery will definitely be producing gasoline 
by the end of this month, or at the latest, the beginning of 
next month.  Once production is online, we will follow 
closely the revenue generated from the finished products, the 
status of the promised investment into PETROL RS, as well as 
Kalabic,s statement that Brod will start producing EU 
quality petrol products within six months.  It is 
disappointing that the RS Government (as in many other 
matters) continues to work in its own world, ignoring the 
possibility of developing a state-wide energy sector strategy 
with the Federation. 
ENGLISH