BULGARIA SPARRING AGAINST RUSSIAN ENERGY DEPENDENCE

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 001162

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/08/2016
TAGS: ENRG ECON EPET PREL BU
SUBJECT: BULGARIA SPARRING AGAINST RUSSIAN ENERGY DEPENDENCE

REF: A. SOFIA 632


B. SOFIA 310

C. SOFIA 202

D. SOFIA 190

Classified By: CDA Alex Karagiannis for reasons 1.4 (b) & (d)


1. (C) SUMMARY/ACTION REQUEST: Bulgarian leaders are
battling against the grip that Russia increasingly holds over
the energy sector here, but are struggling to strengthen
their position. President Purvanov and Prime Minister
Stanishev appear especially concerned; Minister of Economy
and Energy Ovcharov less so, perhaps due to his long history
of working with the Russian energy sector. None sees any
advantage in confronting Russia directly; all have strong
interests in maintaining good relations with Moscow. The
Russian energy web extends to gas, oil-pipeline construction
and the bidding to build a nuclear power plant at Belene.
Bulgarian officials are increasingly willing to stand up to
Russian pressure and they are open to alternative mechanisms
for meeting their energy needs, particularly if they involve
the EU and/or U.S. ACTION REQUEST: We strongly recommend a
September visit by DAS Matt Bryza to buck up the Bulgarians
and shape their strategic vision on energy diversity. We
encourage visits by other speakers or experts to buttress USG
energy policies. END SUMMARY

GAS: FORCED BY RUSSIA TO STRIKE A DEAL


2. (C) Some sobering statistics: Bulgaria gets 88 percent of
its gas and 73 percent of its oil from Russia. The
government wants to loosen Russia's grip especially on
Russian gas. It fears its only option may be to agree to
current Gazprom demands to increase the price on gas
contracts. Without such an agreement, the Bulgarians fear
they will lose an opportunity to lock in prices - and future
transit fees - at currently advantageous levels, and are
afraid the Russians will follow through on threats to divert
transit gas to Blue Stream. The current high energy prices
fuel concerns here that now is the time to make a deal.


3. (C) Ovcharov and Gazprom's Medvedev plan to meet in Vienna
on August 21 under the guise of "vacations" to try to
finalize a deal. Ovcharov told Ambassador Beyrle on August 9
that he was not sure if they could come to a final agreement.
He also said the Russians have agreed to a phased-in period
of price increases over five to six years, and an increase in
transit fees. Aside from the price, outstanding questions
include the quantity of gas to flow through Bulgaria to third
countries after 2010, and when to announce the increases:
either this summer when heating prices are not as sensitive
an issue, but which would come a few months before the
October 22 presidential election; or in late fall after the
election, but when the weather is cold and consumers are
already burdened with heating costs. Ovcharov also stressed
that Gazprom is pushing for a long-term agreement - possibly
20 years. In addition, Gazprom has indicated it would grant
more favorable financial terms in return for a stake in
Bulgargaz' pipeline, something Ovcharov has said Bulgaria
will not agree to.


4. (C) On the Turkey-Greece-Italy Interconnector (TGI),
Ovcharov offered that Bulgaria is interested in the project
and would try to hook up the relatively short 70-75 KM
distance from the Greek portion. He said Bulgaria has not
discussed this with Greece, but has talked with Turkey. As
for the origin of the gas, Ovcharov said the Kazakh PM told
him that Russia and Iran are working together to block a
Trans-Caspian pipeline, citing an old agreement that nothing
can be built on the Caspian without the agreement of all
parties. Ovcharov has spoken publicly about the threat of
Russian gas interests to Europe, and the need for European
countries to be part of a common energy policy. But he has
also said recently that Bulgaria must take care of its own
problems, which requires it to negotiate with Kazakhstan,
Turkey, Egypt and Algeria for long-term solutions, as well as
Gazprom immediately.

B-A PIPELINE: CAT AND MOUSE WITH THE RUSSIANS


5. (C) Ovcharov told us not to expect activity soon on the

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Burgas-Alexandropoulous (B-A) oil pipeline. The Russians are
analyzing the financial aspects of the project, preparing
feasibility studies, and are again pushing Bulgaria and
Greece for 90 percent Russian ownership, leaving 5 percent
each for the host countries. Bulgaria wants to step up and
build the pipeline, Ovcharov told us, but not at all costs,
and not for only a 5 percent share. Bulgaria sees its
interests as strategic, and calculates that its participation
in the pipeline could give a bit more leverage in gas and
nuclear plant talks.


6. (C) Ovcharov also said that Bulgaria and Greece will float
the idea of constructing the pipeline without Russian
participation. Ovcharov recognizes that it will be nearly
impossible to get financial backing without the promise of a
Russian supply, but the GOB feels it is worth exploring -
particularly in order to push Russia back off its recent grab
for 90% control of B-A. Bulgaria also holds out some hope
that Chevron might be interested in the project. On Caspian
Pipeline Company (CPC),Ovcharov told us he met recently with
the Russian Minister of Energy who said Russian interest in
CPC is to expand output, not to change the ownership model.

BELENE NUCLEAR PLANT: RUSSIAN OFFER IS LEADING


7. (C) The GOB closed the Belene bid review process on July

22. Even before seeing the final recommendations from the
National Electric Company, which, along with U.S. company
Parsons Engineering is coordinating the bid process, Ovcharov
requested the two bidders provide better prices and faster
timetables. Ovcharov is particularly interested in new
prices from the Russian bidder, Atomstroyexport, and their
sub-contractor for the Instrumentation and Control (I and C),
Framatom, whose numbers are more than twice Westinghouse's
offer for the I and C portion of the Skoda bid. Ovcharov is
confident he will get acceptable prices, but has threatened
to reconsider the viability of the project if not. When
Ambassador Beyrle described the strengths of the Westinghouse
proposal, along with its successful experience on the
Kozloduy nuclear plants here, Ovcharov agreed, but mentioned
"Framaton/Arveal and the EU" with a resigned shrug. Ovcharov
also stressed that Bulgaria was not negotiating with Gazprom
on the Belene deal.


8. (C) Ovcharov has pointed to the technical superiority of
the Atomstroyexport proposal, calling it "cutting edge," such
as the one Russia is building in China. He described the
Czech offer as fine, but asked why Bulgaria should settle for
20-year old technology. It is unclear, however, whether the
GOB would allow a "mix-and-match" by switching Westinghouse
in as the I and C portion of the plant. The real risk in
this situation is if Gazprom bank or another Russian energy
player were to become a major financial stakeholder in Belene
- something that the GOB currently says will not happen. The
GOB hopes to begin final negotiations with the winning bidder
in early September.

THE HIDDEN INTERESTS


9. (C) Gas supplies, the B-A pipeline and construction of
Belene are intertwined. Russian interests, most pointing
back to Gazprom, are involved in the three major energy
projects, and Gazprom has also expressed a desire to obtain
the Bulgargaz distribution grid if that were to be
privatized. Ovcharov has denied that there is any linkage
between the projects, but most observers find that hard to
believe. In addition, rumors are rampant that organized
crime figures, Bulgarian and Russian, are involved with
high-level GOB officials in bid-rigging, shakedowns and other
illegal behavior in the energy sector (septel to follow.)
Ovcharov, who studied in Moscow and has spent much of his
professional career working with Russian energy interests,
took pains to describe to us measures he is taking to limit
the activities of such players. His protestations are at
least in part self-serving given the murky world behind the
closed doors of a non-transparent negotiation process.

COMMENT


10. (C) While Bulgaria is a small player in Europe's energy
market, its role as a possible hub or transit country for

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Eastern gas and oil is potentially large. The increasing
hunger of Gazprom and other Russian interests to play a
larger role in almost all aspects of the Bulgarian market
makes it very difficult for Bulgaria to isolate the Russian
pieces in this Rubik's Cube.


11. (C) We regularly stress to the President, Prime Minster
and Minister of Energy the need for Bulgaria to diversify
energy sources away from Russia. They agree, but are at
pains to figure out how. Without a coordinated and serious
European effort to address what appears to be a comprehensive
strategy of Russia and/or Gazprom to reassert its interest in
the region, small countries such as Bulgaria may never be
able to escape the Russian energy orbit. We strongly
recommend a September visit by DAS Bryza to offer our
strategic vision and energy outlook to help stiffen
Bulgaria's resolve in the face of unrelenting Russian
pressure.
KARAGIANNIS