SOUTHERN CORRIDOR ENERGY CONFERENCE EXAMINES

C O N F I D E N T I A L SECTION 01 OF 05 ATHENS 002078

SIPDIS

NOFORN
SIPDIS

DEPT ALSO FOR EUR (BRYZA) AND EB (GARVERICK)

E.O. 12958: DECL: 08/07/2016
TAGS: ENRG GR
SUBJECT: SOUTHERN CORRIDOR ENERGY CONFERENCE EXAMINES
EUROPEAN ENERGY SECURITY


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Classified By: AMBASSADOR CHARLES P. RIES FOR REASONS 1.4 (B,D)


1. (C) Summary: Gazprom's growing stranglehold on European
energy supplies, particularly in the area of natural gas, has
the potential to reduce these countries' diplomatic freedom
of movement in support of U.S. diplomatic goals. Improving
these countries' energy security and diversity of supply
options can therefore improve U.S. national security. One
key element of this overall strategy is maximizing the
opportunity provided by the new Turkey-Greece-Italy natural
gas interconnector, currently under construction, to bring
Caspian gas to Europe. Achieving this objective will require
a number of steps, including reinforcing cooperation between
the four "core" capitals of Ankara, Athens, Baku and Rome,
enlisting the more active support of the EU/EC, as well as
providing bridge support for vulnerable transit countries
such as Georgia and Ukraine in the critical years of
2006-2007 before Azerbaijani' natural gas exports come
online. These were among the key issues discussed during the
"Southern Corridor" Energy Officers' Conference convoked by
Embassy Athens July 14. For a list of conference
participants, please see paragraph 12. End Summary.

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The U.S. Strategy
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2. (C) A "Southern Ring" Energy Officers, Conference took
place in Athens on July 14. Conference objectives were to
discuss energy challenges within the region and to develop a
comprehensive, coordinated approach to counter Gazprom,s
campaign evidently aimed at vertically integrating the gas
sector and preventing the emergence of non-Gazprom controlled
pipeline gas routes to western Europe. All agreed that it
is imperative to promote energy diversification strategies
that encompass the development of additional energy sources
and suppliers to provide vulnerable SE and SCE countries with
alternatives to Gazprom. Our expectation is that, if exposed
to real competition, Gazprom would eventually be compelled to
adopt a more Western-style business model and operate
according to international market principles. A direct
result would be lower-cost and more secure energy in Europe,
as well as improved investment in a wider range of energy
suppliers, including Russia, and the Caspian states.

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Caspian Gas Equals Effective Competition
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3. (C) As the recent opening of the BTC pipeline had been
for Caspian oil, DAS Bryza explained that a window of
opportunity is opening for the West to develop a strategy for
bringing central Asian gas to markets in a pro-competitive
manner. Although proposals will undoubtedly be deeply
political, the key will be to coordinate strategic political
objectives with commercially viable projects. The USG's
objective will be to bridge the political and commercial
elements in a coordinated manner, with BTC,s recent success
setting a precedent for the development of additional
pipelines and resources (such as TGI and Shah Deniz
expansion). Ultimately, the goal will be to develop
alternative energy sources and supply routes to expose
Gazprom to the pressures of competition and force it to
fundamentally transform its modus operandi. To confront
Gazprom domination, there must be a concerted effort to
diversify and develop multiple gas pipelines from the Caspian
to Europe. At this point, the center of attention in the
Caspian regions is Azerbaijan. Bryza noted that, while
Kazakhstan shares a common strategic vision with the West and
possesses significant gas reserves, it is not yet prepared to
confront Gazprom, particularly in terms of infrastructure.
Turkmen gas remains a wild card, with quantities unknown and
political leadership unreliable. Iraq could play a
significant role in the future, but its current security
situation is far too precarious to be reliable. Azeri gas is
therefore the prime initial source to undercut Gazprom,s
long-term strategy. Bryza stressed that, although Azerbaijan
originally questioned why it should place such intense
emphasis on developing gas supplies for onward sale to
Europe, USG approaches have led the Azeri government to
realize that if additional pipelines are not developed,
Gazprom could position itself so that Azerbaijan would lose

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the southern corridor market and ultimately be shut out as a
supplier.

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TGI Is the Key
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4. (C) The near-term way to get Azeri gas to Europe is
through the Turkey-Greece-Italy Gas Interconnector, which is
scheduled to be completed in 2012. Because it interprets the
southern corridor as a challenge to its hegemony (despite its
limited initial volume of 11.5 bcm),Gazprom has embarked
upon an intimidation and disinformation campaign throughout
the southern corridor region to ensure that it remains the
sole pipeline gas supplier to Europe. Gazprom's strategy in
Greece is illustrative. The GoG has told USG officials that
it has come under tremendous pressure from Gazprom's
hard-hitting, anti-competitive tactics. So far, Gazprom has
taken three tacks in Greece. The first was to deny that
there was any Caspian gas on offer: USG experts have been
able convincingly to show this was pure disinformation.
Second, Gazprom argued that, even if Caspian gas was
available, it would come on-line much too late to make sense
for TGI. Azeri efforts to ramp up Shah Deniz production have
largely answered this concern. Lastly, Gazprom has linked
approval for extension of the existing gas supply agreement
with Greece, scheduled to run out in 2016, to an equity stake
in the TGI pipeline. While GoG fears a vindictive Gazprom
response if GoG pursues alternate energy supplies (GoG has a
below market rate contract with Gazprom through 2016 that
could be in jeopardy at the time of extension),Greece is
nonetheless looking toward Azerbaijan as a key future
supplier. In fact, the GoG has hosted several high-level
GoAZ visits recently, citing positive discussions.

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Turkey's Role -- as Transit Country
or as Reseller -- Must Be Clarified
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5. (C) Bryza told the group that Turkey is also on board
with our "Southern Corridor" strategy, although turning the
verbal commitment of Turkish officials into actual transit of
large volumes of Caspian gas through Turkey will require much
work. Turkey is not yet convinced the Azeri reserves are as
vast as reported, and it continues to entertain the idea of
supporting the expansion of the Bluestream pipeline system
through which Russian gas is delivered. During the
conference it became clear that the key problem vis-a-vis
Turkey is its aspirations to become an energy reseller,
extracting (it hopes) greater profits from gas trade than it
would as a simple gas transit country. Insofar as such a
stance has the potential to put Turkey at odds with
Azerbaijan and others involved in TGI development, resolving
Turkey's role within TGI must be one of the USG's highest
priorities over the coming months.

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Italian Edison On-Board ... Until 2007
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6. (C) The key Italian partner in TGI, Italian Edison,
supports the project strongly. Unfortunately, Italian
Edison's exclusive contract with the Greek gas pipeline firm
DEPA to develop a Greece-Italy underwater link expires at the
end of 2006. If a project isn't presented for financing to EU
authorities by then, the opportunity would be opened to
participation from other Italian bidders. This would likely
include Italian gas powerhouse ENI. ENI, being close to
Gazprom, could then try and bring Gazprom gas into the TGI,
undercutting efforts to get Caspian energy to Western Europe.
To counter this possibility, it is important that the four
major players, Azerbaijan, Turkey, Greece, and Italy, all
have a political statement of interest, and at least an MOU
on a transit and purchase agreement, in order to secure EU
funding on the Greek portion of the pipeline construction.

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The Russian Strategy: Gazprom
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7. (C) The conference also examined Gazprom's likely approach

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to alternative sources of natural gas flowing to Europe.
Firstly, what kind of a company is Gazprom? According to
conference participants, Gazprom,s risk-averse business
model seeks to consolidate all aspects of gas production,
transportation, and delivery into a vertically integrated
operation. Moreover, Gazprom's predatory behavior towards
potential competitors seeks to expand its reach horizontally.
The result is the creation of a "super" monopoly. One
Gazprom ploy is to grant concessional prices in early
negotiations with consumers or potential transit countries in
order to drive off competitors. Once the deal is struck,
however, Gazprom has been utilizing its market power to
extract concessions from the customer, whether in new pricing
agreements, increased preferential access to transit
capacity, or frequently, in majority or strong minority
control of local gas companies. Gazprom prefers long-term
contracts over volatile spot-market trading, and uses its
market dominance to obtain those lengthy contracts.


8. (C) As one participant noted, it is very difficult to
assess the true market price for natural gas in Europe
because of Gazprom's dominant position -- the price of gas is
largely what Gazprom considers it to be. Gazprom also goes
to great lengths to minimize its dependence on any one
transit route. With problems in pricing and moving gas
across Ukraine, Gazprom is now contemplating its own southern
corridor route to bypass it (given that 80% of Gazprom,s
exports currently transit Ukraine). Gazprom is reportedly
considering a $5-6 billion USD investment to expand Blue
Stream instead of a $300-$400 million USD infrastructure
upgrade on its Ukraine transit facilities.


9. (C) Conference participants discussed how we might
counter Gazprom,s efforts, concluding that the single most
important tactic would be to get key TGI partner countries to
form a coordinated front, if possible. Other ideas discussed
included embarking on a PR campaign to expose Gazprom,s
unorthodox tactics and unreliability; and educating regional
policy makers on the long-term merits of developing
alternatives to Gazprom, including market diversity and
national energy security. It was recognized that for many
countries, especially emerging democracies, it is extremely
difficult to contemplate resisting Gazprom -- the risk of
political and economic disruption if Gazprom retaliates is
very high, and Gazprom has shown itself willing to retaliate.
However, that very willingness to retaliate provides the
U.S. with the opportunity to stress in those vulnerable
countries that there is no safety in dealing with Gazprom
singly in its current market-dominant position; retaliation
can occur anytime, anywhere, and the only way to alleviate
this problem is for countries to reject Gazprom's short-term
solutions, and focus on allowing competition into the market.


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Next Steps
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10. (C) DAS Bryza closed the conference by outlining the
steps necessary to realize the USG's policy goals on the
Southern Corridor. All recognized this strategy would
require overall Washington clearance:


A. EU/EC Support. EUR ERA would draft an action plan aimed
at enlisting the active support of the European Commission
and EU member states for the strategy of bringing Caspian gas
through the Southern Corridor. Within the EC, particular
emphasis would be given to enlisting the support -- both
financial and political -- of RelEx and Energy Commissioners.
EU/EC support is essential in helping provide TGI member
states additional political backing in their efforts to
combat the Gazprom monopoly.


B. Political/Commercial Agreements. Embassies Ankara,
Athens, Rome, Tbilisi and Baku would coordinate an effort
with their host governments to formulate and sign a political
agreement pledging support for the Southern Corridor
strategy. This political document would be supplemented by a
commercial agreement specifying the business aspects of the
strategy. These documents would be supplemented by any other
agreements, such as a transit agreement between Azerbaijan
and Ankara, necessary to achieving the overall strategy.

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Again, the key is presenting a united front, which Gazprom
should find harder to undermine.


C. Support for Georgia. DAS Bryza would take the lead in
finalizing an agreement he had brokered in Istanbul July 13
between the Georgian, Turkish and Azerbaijani governments,
according to which the GoT promised to transfer the rights to
a portion of its 2006-2007 gas supply from Azerbaijan to
Georgia. This gas would provide Georgia a much-needed supply
buffer during these two critical years. Bryza would also
work with the EU/EC to issue public support for Georgian
energy supply during these years.


D. TDA Trans-Caspian Pipeline Study: DAS Bryza said he would
contact TDA's Dan Stein to urge forward movement on the
funding of a feasibility study for a trans-Caspian pipeline
to bring Kazakh gas to Azerbaijan for onward supply to
European markets.


E. Bring the "Shoulder" Countries on Board: DAS Bryza
recognized that, while the TGI states formed the core of our
short- and mid-term strategy, we had to think about a broader
region over the long-term. He and Bud Coote therefore agreed
to embark on a series of visits to countries linked to the
Southern Corridor strategy, including Bulgaria, Romania and
Albania. The aim of the visits would be to explain our
policy and how over the longer-term it would contribute to
these countries' energy security. It would also aim at
urging these countries not to cut deals in the near-term with
Gazprom that would undercut our overall strategy.


F. Using Other International Institutions: EUR/EB would
investigate the possible role institutions such as the IEA
could contribute to the Southern Corridor strategy. IEA in
particular, in view of its membership (Russia is not a
member),could play a positive future role. Bryza emphasized
the value of recent statements by the G-8 and the "Energy
Principles" enunciated at the U.S.- EU summit.

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Conference Participants
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11. (U)

EUR Deputy Assistant Secretary Matthew Bryza

EB Robert Garverick

Ankara Economic Counselor Thomas Goldberger

Athens Ambassador Charles Ries
Economic Counselor Clark Price
Deputy Economic Counselor Robert Winchester
Deputy Political Counselor Kirsten Bauman
Deputy Commercial Counselor Sally Hastings
Consular Officer Addie Schroeder
Economic Intern Alyson Ricker

Baku Ambassador Anne Derse
Incoming Economic Officer Alan Eyre

Bucharest Economic Officer Benjamin Rockwell

Rome Economic Officer David Whiting

Sofia Economic Officer Mark Johnson

Tbilisi Economic Officer Robert Kiene

Tirana Political Officer Paula Thiede

CIA Senior Energy Analyst Bud Coote

DoE Tiller Tyler

Zagreb Economic Officer Nicholas Berliner



12. (U) DAS Bryza has not cleared this cable.



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RIES