A MEETING OF LEADERS Croatian President Stjepan Mesic and Bulgarian President Georgij Parvanov at the 'Natural Gas For Europe – Security & Partnership' energy summit at which decisions were made on whether to support the Nabucco natural gas pipeline that would reduce European dependency on Russian natural gasVladimir Putin made a point of not showing up in Sofia at the Natural Gas For Europe energy summit that was to have traced the route of partnership and security in the supply of natural gas. Putin thereby sent a message to the representatives of 28 European countries and the EU that the European energy future will have to hew to Russian plans. And in Zagreb the Qatari Emir Sheikh Hamad Bin Khalifa Al-Thani made it abundantly clear to Croatian Government that Qatar had no more interest in investing even a penny, far less 2 billion euro, into the construction of a Croatian LNG terminal, either in Ploce or in Omisalj. Croatia missed the boat, President Mesic's lobbying efforts have not been taken advantage of, and at the Zagreb meeting Croatia did not offer Sheikh Al-Thani a single concrete and thought-out economic project, least of all the construction of an LNG terminal, the most important natural gas supply project since Croatia gained independence. Unlike in 2002, when Emir Al-Thani told President Mesic that Qatar was willing to construct an LNG terminal in Croatia, Qatar will not now take even the smallest stake in the ownership structure of the Adria LNG consortium on the island of Krk, which Croatian Government still does not know how to and is unable to organise. Qatar is willing to sell small quantities of natural gas to Croatia post-2012 – and that is it. But there is a big chance that Croatia's situation will become even more difficult at the Sofia summit. In spite of the undeniable need to supply new quantities of natural gas from Russia and Croatia's need to participate in the Southern Stream project, Russian blackmail and the unconditional acceptance of Russian conditions for the construction of the Southern Stream through Croatia – which favours Russia's Gazprom to the detriment of Croatia's domestic natural gas operator Plinacro – will lead to there being absolutely no financial effect from the collection of transit tariffs for the transmission of Russian natural gas to the West. It will also strengthen Croatian dependency on the supply of Russian natural gas, and with the entry of Russian companies into the Croatian oil and natural gas business the Omisalj LNG terminal project – as a pledge in earnest of Croatian energy independence – could very easily be brought into question. An LNG terminal on the island of Krk does not suit Russia's interests. Croatia could pay dearly for its dearth of a national energy strategy.

By not coming to Sofia and by protesting the European favouring of the Nabucco natural gas pipeline project – that would supply non-Russian natural gas from Azerbaijan and the Middle East – and by increasing pressure on almost all European countries in favour of the new Russian natural gas pipeline, the Southern Stream, Putin has scored with maximum effect. Croatia is aware of its requirements for additional quantities of Russian natural gas, in a situation in which the contract with Gazprom on the supply of the current 1.1 billion cubic metres of natural gas expires in 2010, but is not aware of the cunning Russian plan to bring Europe under its sway through energy – a plan in which Croatia is a very important link. Lacking an integral national energy strategy, Croatian representatives in Sofia agreed to all of Russia's conditions, both in the implementation of the DruzbAdria oil pipeline, and in the Southern Stream natural gas pipeline project, in line with the conclusions of a session of the intergovernmental Croato-Russian commission for economic cooperation held this February in Moscow. That is why it is more than a pity that Croatia missed the opportunity to join Qatar in investing into the entire LNG chain and production, transport and sales business. And since Croatia still does not know what it wants, Government did not prepare any proposal to invest into the construction of production capacities (up stream) and natural gas liquefaction facilities in Omisalj for Sheikh Al-Thani, for which Qatar had previously shown an interest. It has been known for months that the conditions are lacking for the construction of a terminal in Ploce, and even that Qatar is now only interested in selling natural gas to Croatia, but not before 2012, as Qatari capacity is fully booked. Croatia has to date not submitted a request to Qatar for the supply of natural gas. It is not known why, when Gazprom is behaving as rigidly and arrogantly as it is, giving Croatia very little prospects of getting even a single cubic metre more natural gas in 2012 than it does now, much less the 1.6 billion metres it is seeking.

But by the good will of Sheikh Al-Thani and the Qatari government Croatia could, after his visit to Zagreb, if it submits its request as soon as possible, get the needed additional quantities of Qatari natural gas, which is one reason more for Croatian Government not to rush into the arms of Gazprom with its unconditional acceptance of all Russian conditions in the construction of the Southern Stream natural gas pipeline through Croatia, but rather to wisely take advantage of the benefits of agreeing to be a part of the Southern Stream project. Croatia is in a much better position than the other countries in the region, because it covers 60 percent of its needs via domestic production and has reserves of natural gas in the northern Adriatic, the option of building an LNG terminal and linking to sources in the Near and Middle East. Since the Russians are aware that Croatia is in a significantly better position than the rest of the UKRAINE is no longer a trustworthy partner in the transmission of natural gasregion, the Russians, who have already entered Bulgaria, Serbia and Hungary and have stepped into Croatia, should be given our conditions for the Southern Stream investment into Croatia. The same way the Slovenes, admittedly at the persuasion and under pressure from the EU, answered the Russians when they offered them conditions very much like those they are offering to Croatia. And this for an investment into a natural gas pipeline that still does not have a single element of basic design, or a route, or an approximate capacity, but which the Russians feel would cost 9 billion euro. Well aware of the different position Croatia has, the Russians surrounded Croatia and left it for the end of the negotiations on participation in the Southern Stream project. Qatar now produces 65 billion cubic metres of natural gas, and will produce in excess of 75 billion in four years time, while Croatia by 2012 needs only 500 thousand to 1 billion cubic metres of natural gas, which is in Qatari frames of reference a trifle. There is, then, the possibility of securing the needed additional and emergency reserve quantities of natural gas through imports, because Qatar is open and willing, and solutions can be provided by the Croatian side to receive Qatari natural gas, even without building an LNG terminal on the island of Krk.

So what did the Russians offer Croatia and why are their conditions unacceptable for Croatia? If we want additional quantities of natural gas, the Russian side said in Moscow in February, we have to allow the Southern Stream to run through Croatia. Croatia would thereby have to accept that Gazprom builds the natural gas pipeline through Croatia and that it would be its majority owner. In that case quite a bit of money collected as transit tariffs for the passage of natural gas through Croatian territory would be collected by Gazprom rather than going to the Croatian national budget. When the Slovenes grasped this fact, they politely put the Russian proposal on hold. But Boris Medvjedev, the minister-counsellor for economic affairs at the Russian embassy in Zagreb, has succeeded in convincing Croatian Government and President Mesic that 23 million dollars would pour into the Croatian budget every year for every 100 kilometres of the route from the border with Serbia to the border with Slovenia if the Southern Stream were to pass through Croatia. That would be about 350 kilometres. Medvjedev presented the Croatian leadership with a calculation of enormous earnings from transit tariffs, just like those earned by Ukraine, which gets 2.3 dollars for every 100 kilometres a thousand cubic metres of natural gas are transmitted. Which is true, but on the basis of the ownership of their natural gas pipeline. It is precisely against this Ukrainian model that the Russians are ardently fighting and wish to do away with, and on the other hand, they want to "sell" it to Croatia. In this model the crumbs go to Croatia and the lion's share to Gazprom.

As they have already secured their interests in Bulgaria, and have given our northern neighbours a serious headache with their entry into the Hungarian oil company MOL, the Russians have purchased the Serbian oil company Naftna industrija Srbije (NIS) and promised the Serbians that the Southern Stream route would run through Serbia. Gazprom has joined forces with natural gas supplier and distributor Srbijagas, wholly owned by the Serbian government, to create a company that will build the Southern Stream natural gas pipeline through Serbia. Serbia is paying for its part of the construction of the natural gas pipeline through the value of Srbijagas, while the Russians are financing 51 percent of the construction with their money. And so, by way of the Southern Stream project the Russians have purchased Srbijagas and will get the natural gas pipeline built. But both the Russians and the Serbians want Srbijagas to, by way of Gazprom, become the regional leader in the natural gas business and the chief operator for all of South Eastern Europe. And that is the second great danger for Croatia and its transmission system operator, Plinacro, which has done much to develop its operations, with significant investments into the Croatian natural gas distribution network. Gazprom wants to gain ownership over Srbijagas, invest into the construction of new Srbijagas storage facilities at Banatski Dvori near Novi Sad, with a capacity of 2.5 billion cubic metres of natural gas, which they will fill, of course, with Russian natural Stipe Mesic and Qatari Sheikh Al-Thani want to reduce the Russian monopoly in Croatiagas, and by doing so, through the construction of the Southern Stream natural gas pipeline, expand their commercial influence in the natural gas business from Serbia to Croatia and to all of South Eastern Europe, including Slovenia. And while with the purchase of NIS for a pittance the Russians have already despoiled Serbia, the Serbian government and Srbijagas are not annoyed. The Serbians see themselves as Russia's cronies in the entire region, as the leader of the natural gas business, and are even preparing to offer Croatia a part of the action in the division of the natural gas market of Bosnia & Herzegovina.

And while nobody knows what the capacity of the Southern Stream will be, as the Russians alternately cite figures of 30 and 47 billion cubic metres of natural gas a year, and even though many think that the Russians will not in fact build a new pipeline at all, but just link up existing ones, the Southern Stream can pass through Croatia from Serbia if 80 km of new pipeline is built and if Croatia makes available its own transmission system, through which it can move 5-8 billion cubic metres a year, which would cover Croatia's needs for the coming 10 to 15 years. There is a false dilemma concerning who would invest into the Southern Stream. Even though they are aware that, unlike Serbia or Bulgaria, Croatia is in a significantly different position, because it has several alternatives and does not have to be dependent on Russian natural gas, the Russians are making the delivery of additional quantities of natural gas to Croatia conditional on a decision that the investor has to be Gazprom. Croatia has yet to learn what the characteristics of the Southern Stream are. But the Croatian leadership is not sufficiently aware of the different position Croatia has and the alternatives being offered to Croatia, and there is a possibility that someone might jump the gun and blindly agree to the Russian terms after the Sofia summit. The Croatian leadership has to be aware that the construction of the LNG terminal on the island of Krk offers Croatia an alternative to Russian natural gas, that it is LNG that secures independence and that the option is a necessary one, regardless of whether Croatia will, on equal terms and as a partner, participate in the construction of the Southern Stream. The Croatian leadership does not understand that it has arguments to resist the Russian conditions and lacks the decisiveness to say: if the Southern Stream is to bypass us because we do not accept Gazprom as the owner of a natural gas pipeline through Croatia, bypass us and go via Hungary to Austria. The Slovenians had the courage to do so, and they are in a much worse position than Croatia is. Croatia has to put it clearly to Russia that it wants the Southern Stream, but under significantly different conditions, in which the transmission tariff and a decent profit for the passage of natural gas stays in Croatia, rather than going to Gazprom. Croatia has its own operator, Plinacro, which builds and manages the transmission system, and which is capable of taking on this role, both in the construction and management of the Croatian part of the Southern Stream. Croatia must be open in pointing out that there are other modes of cooperation, in which Gazprom can lease natural gas pipeline capacities running through Croatia on the long term, for whatever period of time it wishes. The model by which Gazprom intends to build the pipeline and provide natural gas would be a model of the economic subjugation of Croatia. That is why it is key that Croatian Government finally resolves the doubts, blockades, and perhaps even obstructions that are delaying the establishment of the Adriatic LNG consortium. If Government does not quickly move to initiate the prompt resolution of these problems among the potential members of the consortium, any signature given in Sofia concerning our participation on the construction of the Southern Stream could prove calamitous.

Croatia is important to the Russians precisely because of the LNG terminal. If the construction of the Southern Stream through Croatia is in fact realised, it is to be expected that the Russians will seek their stake in the LNG facility on the island of Krk, or will force Croatian Government to abandon the project. Insofar it could soon happen that, having entered MOL and INA, the Russian side presents new conditions, and Gazprom takes part in the construction of the LNG terminal on the island of Krk.

That it is possible to come to a different kind of deal with the Russians, if there is wise negotiation and the development of one's own natural gas system, is demonstrated by the example of the DruzbAdria deal which was discussed in Sofia. This deal between Russia's Transnaf and Croatian JANAF will make it possible for Russian oil to arrive by land route, via the Croatian oil pipeline from Omisalj to the Hungarian border, with an annual capacity of 5 million tonnes. JANAF is ready to complete the reversible route by the end of the year, of which the Russians will not be owners, but rather users. This was contributed to largely by the timely preparation of JANAF as an independent infrastructural oil storage provider, because JANAF has launched the construction of new storage tanks, with a 1.2 million tonne capacity at the terminals in Omisalj and Sisak. JANAF has also succeeded in getting the Russians to come on board as partners on the Adriatic spot market, at the crude oil exchange that will operate in Omisalj and Sisak.