BULGARIA FAVORS RUSSIAN BID TO BUILD BELENE NPP

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 001481

SIPDIS

SIPDIS

DEPARTMENT FOR EUR / BRYZA AND PEKALA

E.O. 12958: DECL: 10/23/2016
TAGS: ENRG ECON EPET PREL RU GR BU
SUBJECT: BULGARIA FAVORS RUSSIAN BID TO BUILD BELENE NPP

REF: SOFIA 1363

Classified By: Ambassador John Beyrle for reasons 1.4 (b) and (d)


1. (C) SUMMARY: In a meeting with the Ambassador Oct. 19,
Energy/Economy Minister Rumen Ovcharov confirmed press
reports that Bulgaria has decided in favor of the
Russian/European consortium for construction of a new nuclear
plant at Belene. Ovcharov acknowledged a link between the
Belene decision and the Bulgarians' ongoing discussions with
Gazprom to renegotiate the Russian gas supply contract with
Bulgaria. Beyrle urged Ovcharov to consider a modified deal
in which the instrumentation and control (I&C) system for the
Belene reactors would be built by Westinghouse, but Ovcharov
claimed that French and German pressure for their I&C system
was insurmountable. Discussions on the
Burgas-Alexandroupolis (B-A) pipeline continue to move
forward, but major decisions on equity shares and timelines
are pending and Bulgaria is in no hurry to conclude a deal.
The Belene decision further compounds Bulgaria's problem of
overdependence on Russian energy sources; our comment (para.
10) offers some initial thoughts on ways to push the
Bulgarians toward greater diversity. END SUMMARY

BELENE NPP: RUSSIANS ARE CLEAR FAVORITES
--------------


2. (C) Ovcharov said the long-awaited announcement for the
Belene deal (AtomstroyExport/Framatom-Areva winning out over
rival bidder Skoda/Westinghouse) would be made after
Bulgaria's presidential election, the first round of which
took place on October 22. The Skoda/Westinghouse bid lost
out, he said, because the reactor is essentially a
fifteen-year old design -- with a proven track record, he
conceded, but inferior to the latest-generation
AtomstroyExport model. Beyrle urged Ovcharov to consider a
"mix and match" scenario for Belene in which the I&C system
for the Russian reactors would be built by Westinghouse
instead of the German/French Framatom/Areva system that came
"bundled" with the Atomstroy package. Ovcharov claimed he had
favored this scenario and is a "big fan" of Westinghouse I&C,
based on their successful track record at the Kozloduy plant.
But the political pressure from Paris and Berlin, he said,
was too strong to overcome -- linked with ratification of
Bulgaria's EU membership. He said that Chancellor Merkel
had raised the issue in her September 27 meeting with PM
Stanishev. Ovcharov said he was certain that Westinghouse
would win a number of jobs at Belene, but only as a
subcontractor to the Russian/European consortium.


3. (C) Ovcharov acknowledged a link between the Belene
decision and the ongoing discussions with Gazprom to
renegotiate the Russian gas supply contract with Bulgaria.
Under that contract, Bulgaria has been paying Gazprom up to
30 percent below market price for gas through a complicated
set of fees and pricing arrangements on Russian gas
transiting Bulgaria territory for the Balkan and European
markets. Once the decision in principle on Belene has been
conveyed to Moscow, Bulgaria will finalize a new gas supply
agreement with Gazprom in which price increases are phased in
gradually over the next several years and Bulgaria receives
guarantees on increased transit volume (and revenues). Only
after the gas agreement is finalized to the Bulgarians'
satisfaction, Ovcharov claimed, will the Belene deal be
formally announced.


4. (C) The AtomstroyExport design has an ambitious
construction timetable, but will take more than five years to
build, ideally starting in early 2007, plus a year of
commissioning. Galina Tosheva, Ovcharov's Deputy Minister
responsible for energy, told us separately that even under
the best circumstances, Belene would not come on line before
2012 or 2013. Bulgaria plans to keep 51 percent ownership,
but is seeking financing for its share of the 4 billion-euro
project. They are also looking for strategic investors for
the 49 percent minority share. The Italian company Enel is
the most serious, and is likely to pick up a large chunk of
Belene, according to several industry insiders and
journalists we spoke with. Gazprom Bank is not looking at
ownership, we have been told, but perhaps to finance.

BURGAS-ALEXANDROUPOLIS: DELAYS OVER EQUITY SHARES
-------------- --------------


5. (C) Ovcharov downplayed any direct linkage between the
Belene/Gazprom deal and ongoing discussions with Russia and
Greece over the Bosphorus bypass pipeline from Burgas to

SOFIA 00001481 002 OF 003


Alexandroupolis. Despite Russian desire to move the B-A
talks forward, he claimed, Bulgaria was in no hurry to
conclude a deal. The Russian 51 percent stake is now
generally accepted by all three parties, but Ovcharov said he
believed it would be split between Transneft, Gazpromnelt,
and Rosneft -- i.e., TNK-BP would not be part of the Russian
group, leaving what he called "total state ownership" by
Moscow. Ovcharov said Bulgaria has not yet agreed with
Greece and private companies how to divide up the remaining
49 percent. Under the current scenario, Bulgaria and Greece
would take 24.5 percent shares, each financing that portion
of the entire project, and taking the same in profits,
according Deputy Minister Tosheva. Bulgaria will look to
private financing from its consortium partners - Bulgargaz
(25 percent) and Universal Terminal Burgas (UTB) (75
percent).


6. (C) Ovcharov said Bulgaria was hoping for discussions with
Chevron as a potential partner in its 24.5 percent stake, and
claimed that Greece might seek a similar partnership with
TNK-BP. He said that during the three-party discussions in
Athens September 4, Parvanov had made a point of stressing
the importance of "broad participation" in the B-A project,
and that Putin had expressed specific agreement with
Parvanov's point. Overall, however, Ovcharov said the final
equity split was of lesser importance. Bulgaria's priority
goals were to retain control of the Universal Terminal
Burgas, and to ensure Russia did not emerge from the deal as
operator of the pipeline. Ovcharov agreed with Beyrle that
increased Russian pressure to finalize the B-A project augurs
well for an eventual decision to expand volumes through CPC,
but said the Bulgarians were not yet in any specific talks
with Chevron.

AMBO OIL PIPELINE: NEEDS INVESTORS TO STAY ALIVE
-------------- ---


7. (C) Despite a recent spike in interest and activity
surrounding the AMBO bypass pipeline -- including the Sept.
29 development/construction agreement between Bulgaria,
Macedonia and Albania -- AMBO still appears well behind B-A
in terms of financing or throughput commitments. XXXXXXXXXXXX, which would like to work with AMBO through its role in the Universal Terminal Burgas, tell us AMBO has neither money nor commitments of
throughput, although they are optimistic that it could happen
as soon as five years after B-A comes on line (i.e. 2015).
According to XXXXXXXXXXXX, AMBO has a three-stage plan: to raise
$7 million for "preliminary engineering," subject to
completion of a Tripartite Convention, over the next six
months. The second stage will last 12 months with a goal of
raising $20-30 million through equity investors or an IPO in
the U.S. for detailed engineering and material ordering.
They will also sign oil contracts at this stage. The third
stage will raise the rest of the equity funds, approximately
$350 million, from Mitsubishi, Oiltanking, Techint and other
investors. AMBO would then begin construction, estimated to
last 30 months. Presently AMBO has "expressions of interest"
from ExxonMobil and Vitol, a Canadian oil trader and
refinery, but no solid commitments.

BEEFING UP THE ENERGY SECTOR TO CREATE A NATIONAL CHAMPION
-------------- --------------


8. (U) Minister Ovcharov recently floated a proposal to
consolidate all state owned monopolies - the National
Electric Company (NEK),Bulgargaz, the Kozloduy Nuclear
Plant, Maritza East coal mines, and the Maritza East II
Thermal Power Plant - into one giant energy company. The
idea is to create a "national champion," as well as prepare
the monopolies to compete in a liberalized market, which
would strengthen them for potential privatization, according
to Ovcharov. The government is also considering listing on
international stock exchanges as a way to attract foreign
capital to help pay for Belene construction.


9. (C) Not surprisingly, this idea is viewed with suspicion
by some industry experts. XXXXXXXXXXXX, called the plan
politically motivated, noting that it would put a large share
of the economy under control of the senior Coalition partner,
Ovcharov's Bulgarian Socialist Party. Others believe the
government is attempting to save NEK's monopoly in the
electricity export market by creating a larger group of
companies to feed into that pool. Asked by the Ambassador
whether the establishment of this new energy giant would be
welcomed by EC competition authorities, Ovcharov said he

SOFIA 00001481 003 OF 003


would not be raising the idea if it were not EU-compliant.
He acknowledged that the restructuring would encounter
political opposition, but claimed the government would push
through with it.

COMMENT
--------------


10. (C) Given Russia's leverage as supplier of 70-80 percent
of Bulgaria's oil and gas, the decision to go with the
Russian bid on Belene (which also includes supply and
take-back of nuclear fuel) is not surprising and was probably
inevitable. According to our sources XXXXXXXXXXXX, although the Russian reactor design is technically superior to Skoda's, Atomstroy's project management track record is weaker, which will tend to drive
up the cost. Thus, the economic bottom line for Bulgaria may
depend in large part on how much better a deal they get in a
new supply/transit agreement with Gazprom as a result of the
Belene decision. In strategic terms, however, the Belene
choice compounds Bulgaria's problem of over-reliance on
Moscow as an energy source, prolonging its complete
dependence on Russian nuclear fuel in addition to Russia's
near monopoly over oil and gas. Our pitch to the Bulgarians
in discussions in Sofia and Washington over the coming months
should encompass some of the following themes to strengthen
Bulgaria's ability to stand up against Russian commercial and
political pressure:

-- Belene: inclusion of US partners (in this case,
Westinghouse) to the maximum extent as the project goes
forward;

-- Gas supply/transit deal: avoiding ceding control of
infrastructure (pipelines, terminals) to Gazprom;

-- B-A: retaining full control over the terminal and
pipeline operation; additionally, Bulgarian (and/or Greek)
partnership with a respected U.S. major should be encouraged
to give some oomph to their minority share;

-- drawing the line on other Russian energy investment or
"partnerships." We know, e.g., that Moscow is very
interested in the upcoming privatization of several Bulgarian
district-heating facilities, including Sofia's. Here, where
U.S. and other Western firms would also like to compete,
there is no compelling reason to "buy Russian" and Bulgaria
should be encouraged to demonstrate its oft-declared interest
in diversity.

We welcome any ideas that amplify or add to these initial
thoughts.
BEYRLE