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OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSF #0641/01 2761002
ZNY CCCCC ZZH
O 021002Z OCT 08
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5430
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000641
SIPDIS
FOR SPECIAL ENVOY BOYDEN GRAY
E.O. 12958: DECL: 09/30/2018
TAGS: ECON ENRG PGOV BU
SUBJECT: BULGARIA AND THE ENERGY KNOT: SCENESETTER FOR OCT
7 VISIT OF SPE GRAY
Classified By: Ambassador Nancy McEldowney for reasons 1.4. (b) and (d)
.
1. (C) Summary: The quandary over energy facing all our
European partners is particularly acute here in Bulgaria.
With few hydrocarbons of its own, Bulgaria relies on Russia
for seventy percent of its total energy needs and over ninety
percent of its gas. Though previously a net exporter of
electricity, the EU's decision to force closure of blocks 3
and 4 of the communist-era nuclear plant Kozluduy cost the
Bulgarian economy over USD 1.4 billion and put a squeeze on
Serbia, Macedonia and Greece, who had purchased the bulk of
the exports. The hard reality of today's energy picture is
that Russia is not only the dominant supplier, it is also the
dominant player -- your visit here is the first by a senior
U.S. energy official in a year, whereas Putin has personally
engaged both the President and Prime Minister on energy
issues in multiple sessions over the past ten months. But
the cartoon strip portraying a passionately eager Bulgaria in
bed with the muscle bound duo of Gazprom and Lukoil is only
partially true -- it is a tryst driven less by passion and
more by a perceived lack of options. Prime Minister
Stanishev recently described Russian tactics on South Stream
as blackmail and Energy Minister Dimitrov complains openly of
psychological warfare. At the same time, the Bulgarians are
deeply worried about the prospects for Nabucco and are
convinced that Azeri gas supplies will be held up by Turkey.
Their bid to hold an energy summit in the spring, the
ostensible focus of your visit, is designed to catalyze
greater coordination -- and negotiating leverage -- amongst
transit countries while also getting the United States more
actively engaged. Background on specific issues likely to
arise in your discussions with President Parvanov, Prime
Minister Stanishev, Foreign Minister Kalfin and Energy
Minister Dimitrov follows below. End Summary.
TIMING
------
2. (C) Your visit to Sofia comes when Bulgaria is striving
to sell itself as a European energy center. With six active
or potential pipelines transiting the country, the creation
of a new energy mega-holding company, and the construction of
a new nuclear plant, Bulgaria is setting itself up to be an
important regional energy player, despite being overly
dependent on Russian energy sources. The proposal to host a
major gas summit in April 2009 -- which Putin has already
promised to attend -- is the latest attempt to put Bulgaria
on the energy map. Your visit will guide the Bulgarians as
they formulate an agenda and goals for this summit. It will
also focus Bulgarian policy makers on U.S. views on Russian
energy strategy and South Stream, answer growing skepticism
about Nabucco's prospects, and give solid counter-arguments
to those who say there is no real alternative to dependence
on Russian energy.
THE SUMMIT
----------
3. (C) At the January 19 signing of the South Stream
Intergovernmental Agreement, President Parvanov, with Putin
at his side, announced Bulgaria would host an energy summit
intended as a follow-on to the June 2007 Zagreb energy
conference. Upon Putin's departure, Sofia fell under heavy
criticism both at home and abroad for hastily joining South
Stream, and the energy summit idea lost steam. Ambassador
for Energy Security Peter Poptchev told us the Bulgarians
resented perceived Russian pressure to hold such a summit.
In July the Bulgarians independently resurrected the summit
idea as a way to show Bulgarian support for Nabucco and
diversification, as well to balance European, U.S. and
Russian interests in the Caspian and Black Sea regions. With
the potential for six pipelines passing through its
territory, the Bulgarians also have high hopes to become a
regional energy hub. The summit, they believe, will help put
Sofia on the map not only as an energy center, but as a place
that brokers discussions between the West, Russia and
Eurasia.
4. (C) The Bulgarians requested your visit to advise on the
summit. They envision a spring conference (tentatively April
24-25) that would bring together heads of state from Eurasian
and European producer, transit and consumer countries. PM
Stanishev told Ambassador September 19 that Putin has agreed
to attend. The summit will be gas-focused and will attempt
to put "real solutions" on sources, routes and quantities on
the table. Well-aware of the potential for East European
energy conference fatigue in the first half of 2009, the
Bulgarians are proposing that all key participants, including
the EU, the United States and Russia, view the proposed
Hungarian, Bulgarian and Czech conferences as a linked
continuum. The April Sofia conference would take care of any
unfinished business left from the January Hungary Conference
and the proposed Czech conference would take up where the
Sofia conference leaves off. To distinguish the Bulgarian
summit, Sofia is considering including an as-yet undeveloped
"industry component."
5. (C) The Bulgarians will seek U.S. views and your advice
on the proposed agenda of the summit and whether it will
advance U.S. goals in the region. They want recommendations
on how to coordinate the Hungarian, Bulgarian and Czech
conferences and may seek advice on the proposed industry
component of the Sofia summit. They are interested in, but
may not ask directly about, U.S. views on whether Sofia has a
future as an intermediary between Europe, the United States
and Russia on energy and other issues affecting the Black Sea
region. They are interested in your analysis of recent Azeri
and Turkish energy moves. They will also request high level
U.S. attendance at the summit.
BULGARIAN ENERGY PROJECTS
--------------------------
6. (C) SOUTH STREAM: The Bulgarians signed the South
Stream intergovernmental agreement in January and Parliament
ratified the agreement in July. Negotiations between
Bulgargaz and Gazprom resumed in September to work out a
pre-shareholders agreement. At our recommendation, and at
the direction of the Government, state-owned Bulgargaz
reluctantly hired outside legal counsel (the U.S. law firm
Paul Hastings) to represent it in South Stream negotiations.
With the creation of a new, state-owned energy mega-holding
in September, Bulgargaz has lost much of its
previously-considerable independence. The acting head of the
Bulgarian Energy Holding is Deputy Energy Minister Galina
Tosheva, previously lead South Stream negotiator for the
Bulgarian Government. Tosheva has a healthy suspicion of
Russia's intentions in Bulgaria and has directed Bulgargaz to
rely on its legal counsel for expert advice. Tosheva told us
that Gazprom negotiators are taking a hard line now that
negotiations have resumed. They are proposing to re-route
gas currently transiting Bulgaria (for which Bulgartransgas
makes a healthy profit) to South Stream, meaning South Stream
would not represent 31 bcm of new gas for Europe, but
something significantly lower. The Bulgarians state that
this is contrary to the spirit of the IGA and are preparing
to fight the Russian proposal.
7. (C) NABUCCO: Despite the strong public support they
have shown Nabucco this year, the Bulgarians are turning into
Nabucco-skeptics. In March, Sofia signed what it thought was
an agreement for Azerbaijan to supply 1 bcm of gas that
Bulgaria would eventually take as its Nabucco quota. In
advance of Nabucco, Bulgaria planned to access the gas via a
potential hook-up to the Turkey-Greece-Italy interconnector.
Realizing now that the agreement was not, in fact, a
commitment on Azerbaijan's part, the Bulgarians feel burned.
The government is now in dire need of a pep talk on the
Nabucco. They state firmly that both South Stream and
Nabucco are critical and that one cannot be allowed to
preclude the other. At the same time, they are nervous about
both Azerbaijani willingness to supply Nabucco and Turkish
willingness to support the project. They will be interested
in your view of Nabucco's prospects.
8. (C) TGI HOOK-UP: The Bulgarians are in negotiations
with Greece about this possible interconnector. Energy
Holding CEO Tosheva said this is Bulgaria's most immediate
source of diversification and energy security. The Greeks
apparently are cool to the idea, saying there is insufficient
gas. In response, the Bulgarians have proposed the purchase
of LNG to be delivered to Greece in exchange for either TGI
access or gas currently going through the export pipeline
from Russia and transiting Bulgarian territory. Your
Bulgarian interlocutors may ask for U.S. support for these
schemes in our discussions with the Greeks and Turks.
9. (C) BURGAS-ALEXANDROUPOLIS (BAP) and AMBO: The
Bulgarians, Russians and Greeks signed a shareholders
agreement for the BAP oil pipeline in January during the
Putin visit. Since then, the project company has been
registered, but little more progress has been made. The
Bulgarians are still confident the pipeline will be built,
and seem surprisingly uninterested in the dynamics
surrounding CPC expansion. With BAP's relative progress, the
AMBO (Albania-Macedonia-Bulgaria) oil pipeline project has
lost momentum. Still, Bulgaria remains committed to AMBO and
is ready to move forward if and when AMBO attracts supply and
financing.
10. (C) BELENE: In 2006 the GOB selected Russian
AtomstroyExport as the contractor for the new Belene nuclear
plant. Bulgaria is keeping majority ownership of the plant,
but is in the process of selecting a strategic investor for
the other 49 percent. RWE and the Belgian Electrabel are in
the running. We have stated repeatedly that the choice of a
Russian contractor for Belene decreased Bulgaria's bid for
greater independence from Russian energy sources. The lack
of transparency surrounding the tender has led to the
inescapable conclusion that the decision to choose Russia as
the Belene contractor was linked to the re-negotiation of
Bulgaria's long-term gas transit contract with Gazprom in
December 2006.
YOUR MEETINGS
-------------
11. (C) President Parvanov began his second five-year term
in 2007. Parvanov's desire to exercise behind-the-scenes
influence over the government has led to tensions with his
former protege, Prime Minister Sergei Stanishev. Parvanov
has close ties to Russian politicians and held no less than
eight meetings with Vladimir Putin in the last seven years.
The energy summit will be under his aegis.
--Prime Minister Sergei Stanishev is a 42-year-old
progressive Socialist. He is pro-west and eager to have
Bulgaria viewed as a good friend and partner of the United
States. He returned September 30 from a week-long visit to
the United States where he met with U/S Burns, spoke at the
Harvard Business School and held an investment forum. He
understands that Bulgaria is overly dependent on Russian
energy sources, but sees Bulgaria as having few options for
greater energy independence.
--Foreign Minister Kalfin is close to both Stanishev and
Parvanov and as Deputy Prime Minister oversees the Economy
and Energy Ministry. He is a strong supporter of close
Bulgarian-U.S. relations and is highly conversant on energy
issues.
--Economy and Energy Minister Petar Dimitrov is a relative
new-comer to energy issues. He is largely seen as taking
direction on energy matters from former Energy Minister Rumen
Ovcharov, who is linked with Russian energy interests and
left office in June 2007 after a corruption scandal.
12. (C) Your visit will also highlight, though meetings and
press outreach, the need for Bulgaria to focus on a long-term
energy strategy not solely based on the transit of
hydrocarbons or the production of Russian-based nuclear
energy, but on the development of renewables, clean coal and
greater energy efficiency. Bulgaria will always be dependent
on Russian energy to one extent or another. But as the most
energy inefficient economy in Europe, it can make meaningful
strides toward greater diversity away from Russian energy
sources. With the price of energy at near record highs,
Russia's hydrocarbon-generated wealth is increasingly
circulating through the Bulgarian economy, making Bulgaria
all the more susceptible to Russian leverage. An energy
strategy that focuses on renewables and efficiency is one
tool Bulgaria can use to put a noticeable dent in negative
Russian influence. The other tool is transparency. Hub
status in any industry is bestowed only on places which offer
transparent, efficient service. To achieve its goal of
becoming a true energy center, we should recommend that
Bulgaria present itself not as the place with closest ties to
Russia, but as the most transparent place to do energy deals.
McEldowney