C O N F I D E N T I A L TIRANA 000281

SIPDIS

SIPDIS

STATE FOR EUR/SCE (MBENEDICT/DSAINZ/WILLIS)
NSC FOR BRAUN
TREASURY FOR ATUKORALA
USDOC FOR 4233/ITA/MAC/OEERIA/CEED (MROGERS)
USDOC FOR 30004/ITA/CS/ADVOCACY CENTER (PASS TO WILL CENTER)
ROME PASS TO FCS (KWARE)

E.O. 12958: DECL: 03/18/2016
TAGS: EINV ENRG EPET AL
SUBJECT: MAJOR LNG AND POWER PROJECT NEARER REALIZATION;
WORLD BANK OPPOSITION POSSIBLE

REF: A. TIRANA 176


B. 04 TIRANA 194

Classified By: DCM Steven E. Zate for
reasons 1.4 (b) and (d).


1. (C) SUMMARY: ASG Power, a U.S.-Swiss consortium,
received GoA permission on March 13 to undertake final
feasibility and environmental studies to build a 1.9 billion
LNG re-gasification facility and 1200 megawatt power plant
near Fier. Gas and electricity will mostly be exported to
Italy, but a large part of Albania's energy needs could
likely also be met. A senior GoA official expressed concern,
however, that the World Bank was overreaching on its request
that the GoA cancel all concession negotiations based on
unsolicited proposals, regardless of project merit or
investor reliability and that such a request could be
interpreted to apply to even green-field projects like ASG's.
This would lower investor confidence below current abysmal
levels and cause unacceptable delays in the development of
the energy sector. End summary.


Project History, Details, Justification


2. (SBU) In late 2003, a Swiss-U.S consortium (now called
ASG Power) approached the GoA with a proposal to build a 1200
megawatt gas-fired power plant in southern Albania (ref B).
ASG believed that most of the electricity generated could be
supplied by undersea cable to Italy. Over the next two
years, ASG did more preliminary studies and it became
apparent that gas supply issues would endanger the project's
feasibility. To remedy the situation, the scope of the
project was expanded to include a port for LNG tankers to
off-load, a re-gasification facility to handle 10 billion
cubic meters of gas per year, and an undersea gas pipeline to
Italian markets and the European gas network. At the same
time, ASG apparently secured commitments from Italian
operators and the Italian government to make pipeline and
energy cable connections in Italy and to purchase po

wer and
gas. Gas suppliers in Qatar and Algeria have expressed
interest in shipping LNG to the facility. Swiss operator
Azienda Elettrica Ticinese also agreed to extend credit to
ASG for USD 15 million to conduct final feasibility and
environmental studies.


3. (C) As it currently is envisioned, the project would cost
roughly USD 1.9 billion and would represent one of the
largest private investments in the Balkans. Originally
proposed to be located at Vlore, ASG agreed to move it north
several kilometers to the district of Fier in order to
respond to GoA political concerns about the opposition of
Vlore's residents to large energy projects. The proposed
location is completely undeveloped and not suitable for other
development -- roads, a port terminal, electrical grid
connections, etc. would all have to be constructed.
Companies which have expressed interest in the construction
of the project include U.S. based firms Black & Vietch,
General Electric, and Chicago Iron. Ex-Im Bank has also
provided letters of interest in support of financing the
project or providing political risk insurance.


4. (C) ASG believes the project is feasible because Italy's
gas and electrical demands are so great that this project,
and others on the table, cannot by themselves satisfy demand.
ASG seems certain of this principle -- they obligingly gave
up a request for exclusivity within Albania for the project
concept -- another proposal for the same concept is under
consideration by the GoA and its proponents do not believe
that exclusivity is needed. The location of the project in
Albania appears largely due to NIMBY-type concerns and slow
licensing procedures in Italy.

Tough Negotiation


5. (C) On March 13, after several weeks of notably serious
negotiations, ASG obtained a "Memorandum of Understanding"
from the GoA which will allow ASG to move forward to conduct
final studies and obligated the GoA to expeditiously process
ASG's licensing and land-lease applications. Ministry of
Energy Deputy Minister Bojaxhi led the team of GoA officials
who negotiated the deal. Although Bojaxhi has expressed
reservations to us about ASG's abilities to pull off a
project of such magnitude, he told us that the GoA would not
be the one who stood in the way of such an investment.
ASG will have nine months to complete the studies and propose
a final agreement with the GoA. Such an agreement would
address what amounts of power and gas could be diverted to
the Albanian market and at what price. Potentially, the
project could go far in addressing Albania's severe energy
shortages.

World Bank Interference Possible


6. (C) On March 14, Bojaxhi told us that he was concerned
that the World Bank was taking a particularly hard line on
the issue of concessions, demanding that all future
concessions, including those in advanced stages of
negotiation, should be issued by the GoA only through
competitive bidding processes. Bojaxhi said the Bank's
position might even apply to this project -- even though it
is not a concession (no valuable or strategic resource is
being used) -- because the Bank was claiming that all energy
projects were concessions. If the GoA adopted the Bank's
view on this, according to Bojaxhi, this project,
approximately 25 small hydropower concessions, and the larger
Bratile hydropower project (in which General Electric has
invested; see ref A) would be in danger of cancellation, and
future badly-needed investments delayed for years.

Comment: Good News


7. (C) The GoA's shaky start with foreign investors (see
ref A) may be smoothing out. The seriousness, degree and
depth of the GoA's involvement in the negotiations with ASG
the last few weeks was unprecedented in Embassy's experience.


Comment: Bad News


8. (C) Bojaxhi's concerns about the World Bank seem
legitimate. The Bank's overly mechanistic, blinkered view
provides no greater guarantee of transparency in dealings --
competitive tenders here have a particularly poor track
record and reputable investors who have put in substantial
time and energy in fully transparent dealings to improve
infrastructure here will be driven away. And, it is certain
that development, especially in the critical energy sector,
will be unnecessarily delayed. Similar criticisms from the
Bank in the GE railway procurement contract case may have
carried more weight -- the Bank could then arguably contend
that the GoA was indirectly using other Bank financing in a
way the Bank did not like.


9. (C) With concessions, however, the GoA is not spending
anyone's money, rather earning money from private investment
to develop strategic resources. It is difficult enough to
get reputable companies to come to Albania to make proposals.
Potentially kicking out major companies who have already
undertaken the risk to come here on their own is not likely
to result in more investment through Bank-recommended tender
procedures. Moreover, no GoA money exists to conduct
feasibility studies for development of strategic resources,
making competitive tenders even more unlikely to occur for
several years. More worrisome, if the Bank takes the
position that all energy projects, including green-field
projects like ASG's, are considered concessions, then private
investment in the energy sector will very likely come to a
crashing halt when energy-starved Albania can least afford it.
RIES