ANALYSIS-Czechs grow wary over Russian energy muscle

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A new centre-right government has begun shaping policies to protect the Czech Republic's energy sector from the might of Russia, its main oil and gas supplier.

Senior government officials have also warned that Russian state-controlled firms may set their sights on Czech energy supply routes and companies.

The new cabinet led by Civic Democrat Mirek Topolanek has set up an expert panel to assess how to cover future energy needs and appointed a special envoy, Vaclav Bartuska, to take charge of international energy issues.

"Russia's growing willingness to profile itself as an energy superpower is manifesting itself more and more, and we must seek an answer to that," Bartuska told Reuters.

The Czechs, as well as their other ex-communist neighbours, are even more dependent on Russian energy supplies than western Europe. The conservative government in neighbouring Poland has already put energy diversification on top of its agenda.

Energy security is also on agenda of Germany's EU presidency in the first half of this year.

Russians do not own any significant Czech energy firms but worries they may step in are behind the Czechs' rejection last week of a European Commission proposal to break up European energy giants in order to improve functioning of the market.

"We cannot risk that our energy sector, the distribution of electricity and gas, ends up in the hands of, for example, (Russian gas monopoly) Gazprom," Deputy Prime Minister Alexandr Vondra said in the daily Hospodarske Noviny.

The Czechs sold their gas import monopoly Transgas to Germany's RWE , along with most regional distribution companies. Transgas has recently extended its supply deal with Gazprom until 2035.

Bartuska has met with RWE officials to sound out the German firm on its intentions after a privatisation-related moratorium on selling the Czech unit expires in 2010.

"This infrastructure has strategic importance, so we obviously are interested," Bartuska said, adding RWE had confirmed it had a "long-term commitment" to the Czech Republic.

The Czechs also import a small portion of their gas from Norway as a part of their diversification efforts.

ELECTRICITY AND OIL

In the electricity sector, the state fully owns the main grid company, CEPS. Talk of its possible sale has gone quiet under the new government.

The region's biggest power producer CEZ , with a market capitalisation of $25.4 billion, is 68 percent state-owned.

The government has agreed to sell a small stake, 6-7 percent, to plug a hole in the state budget this year. Its aim is to stop that stake falling into the wrong hands, and the most likely scenario a sale on the open market with a simultaneous buy-back by the company.

But talk of privatising a further slice of CEZ any time soon has fizzled out.

CEZ mostly burns coal but also operates two nuclear power plants. Russia's state-owned TVEL processes fuel for one nuclear power plant and has won a contract to supply the second one from 2010.

An interruption of oil flow through the Druzhba pipeline in January due to a transit fee row between Russia and Belarus was another reminder to the Czechs of their vulnerability.

Prague immediately started talks to boost supplies in case of emergency through the TAL pipeline from Trieste to Germany and further to the Czech Republic via the IKL link.

Bartuska said the talks continued, with the main problem being that TAL's capacity was fully comitted. The way forward could be a refinery in Germany's Karlsruhe supplied through an alternative link from Marseille, which would free up TAL.

Bartuska said he was also following the pending sale of Conoco's 16.3 percent stake in refiner Ceska Rafinerska, which Russia's LUKOIL is interested in. Czech Unipetrol has the right of first refusal and has shown strong interest in the stake.

[PRAGUE/Reuters/Finance.cz]