Identifier
Created
Classification
Origin
06VIENNA1939
2006-06-30 10:59:00
CONFIDENTIAL
Embassy Vienna
Cable title:  

GOVERNMENTS COMMIT TO NABUCCO PIPELINE -- INDUSTRY

Tags:  ENRG EPET PGOV EUN AU 
pdf how-to read a cable
VZCZCXRO5956
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVI #1939/01 1811059
ZNY CCCCC ZZH
P 301059Z JUN 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 4066
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 02 VIENNA 001939 

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/30/2016
TAGS: ENRG EPET PGOV EUN AU
SUBJECT: GOVERNMENTS COMMIT TO NABUCCO PIPELINE -- INDUSTRY
FACTORING IN IRAN

REF: A) VIENNA 1556 B) 05 VIENNA 3490

Classified By: Economic-Political Counselor Gregory E. Phillips for
reasons 1.5 (b) and (d).

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 02 VIENNA 001939

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/30/2016
TAGS: ENRG EPET PGOV EUN AU
SUBJECT: GOVERNMENTS COMMIT TO NABUCCO PIPELINE -- INDUSTRY
FACTORING IN IRAN

REF: A) VIENNA 1556 B) 05 VIENNA 3490

Classified By: Economic-Political Counselor Gregory E. Phillips for
reasons 1.5 (b) and (d).

Summary
--------------


1. (C) At a June 26 conference, senior government officials
from Austria, Hungary, Romania, Bulgaria, and Turkey, as well
as EU Energy Commissioner Andris Piebalgs, signed a joint
declaration to initiate the Nabucco pipeline project.
Construction of the Euro 4.6 billion ($5.8 billion) pipeline
should begin in 2008, with operation scheduled for 2011 or

2012. Initial capacity should be 8-13 billion cubic meters
(bcms),rising to 25.5-31 bcms by 2020. The Nabucco
consortium, consisting of Austria's OMV, Hungary's MOL,
Romania's Transgaz, Bulgaria's Bulgargaz, and Turkey's BOTAS,
is seeking 1-2 additional strategic partners in an effort to
attract robust international financing. The project must
still obtain several exemptions from the European Commission,
but OMV, the lead Austrian company, is confident it will
obtain Brussels' consent. According to OMV, the bulk of the
initial capacity will come from Azeri or Iranian fields.
Egypt, Syria, and Iraq are other probable suppliers, and
Kazakhstan and Turkmenistan might enter the mix at some
point. OMV told us that Russia could also participate in
Nabucco, perhaps through Blue Stream, but OMV was adamant
that Russia would not obtain any controlling function in the
project. End Summary.


Diversifying Europe's Gas Supplies
--------------


2. (U) During a June 26 conference in Vienna, senior
government officials from Austria, Hungary, Romania,
Bulgaria, and Turkey, as well as EU Energy Commissioner
Andris Piebalgs, signed a joint declaration to "successfully
complete" the Nabucco gas pipeline project. CEOs from the
five companies participating in the Nabucco consortium also
attended the conference, as did representatives from the
European Investment Bank, International Energy Agency, and
the Stability Pact for Southeastern Europe. Austrian
Economics and Energy Minister Martin Bartenstein

characterized Nabucco as "Europe's most important energy
project," one which will diversify Europe's gas suppliers and
transport routes. According to Bartenstein, the January
cut-off of Russian gas was a "wake-up call for the EU."
However, Bartenstein stressed that the project does not aim
to exclude Russian gas from Europe, adding that relations
with Russia and Gazprom are excellent. Bartenstein
underscored that Gazprom's plans for a Southeastern European
Gas Pipeline would not affect the project, as Nabucco will
cover only one-tenth of Europe's medium-term demand. In
15-20 years, Europe will need an additional 250 bcms, with
total import demand increasing to 300 bcms. Nabucco's
maximum capacity will be only 31 bcms.


3. (U) Construction of the 3,300 kilometers long pipeline
should start in 2007 or 2008. The estimated cost is Euro 4.6
billion ($5.8 billion). Potential suppliers include
Azerbaijan, Iran, Iraq, Egypt, and Russia. Initial capacity
in 2011 should be 8-13 billion cubic meters (bcms),
increasing to 25.5-31 bcms by 2020. Approximately half of
the gas will reach West European markets via Austria's
Baumgarten gas hub, with the transit countries off-loading
the remaining half. The Nabucco project consortium has
formed a joint subsidiary, the Nabucco Gas Pipeline
International GmbH. Austria's OMV, Hungary's MOL, Romania's
Transgaz, Bulgargaz, and Turkey's BOTAS each hold a 20% share
in the subsidiary.


Nabucco Seeks EC Exemptions, Strategic Investor
-------------- --


4. (SBU) During a June 28 meeting with EconUnit Chief, Otto
Musilek, Director of OMV Gas, said the conference had been a
success. In Musilek's opinion, without the Russian cut-off
in January, such a conference would never have taken place.
Musilek said that the biggest concern entering the conference
had been Turkey's tepid support for the project. Turkey,
according to Musilek, wants cheap gas from Iran as part of
the Nabucco deal. Musilek added that the Turkish Government
and BOTAS appear to be much more receptive to Nabucco
following the conference. Musilek noted that OMV officials
had detected a new level of enthusiasm at follow-up working
level meetings with BOTAS on June 27.


5. (C) Musilek emphasized that Nabucco still needs
exemptions from the European Commission to ensure the

VIENNA 00001939 002 OF 002


project's viability. The consortium is seeking an exemption
from Article 22 of the Internal Gas Market Directive
2003/55/EC, which establishes "regulated third party access"
to transmission and distribution networks. The Nabucco
investors want to reserve a certain capacity for themselves
to ensure sufficient capacity. Secondly, the consortium
wants a 20-year holiday from a regulated transmission fee.
Musilek maintained that potential Nabucco shareholders will
expect a minimum rate of return of 13%, far above the
anticipated regulated return of 6.5%. There have apparently
been six applications for exemption under Article 22 and the
EC or national regulators have approved all of them.
According to Musilek, Piebalgs told him privately that the EC
would approve these exemptions, as long as the consortium
followed the EC's procedures.


6. (C) The consortium will finance one-third of the project,
and look to the financial markets for the remaining
two-thirds. Musilek admitted that the consortium needs to
bring in 1-2 additional strategic investors, with a higher
credit rating, to attract robust financing. He said that OMV
is conducting confidential talks with four possible investors
-- EoN Ruhrgas, RWE, Gaz de France, and Total. Musilek noted
that the great majority of the Nabucco gas would transit to
France or Germany, with some to the Czech Republic, so OMV
would welcome participation by a German or French gas company.


Nabucco Timeline -- Operational by 2011 or 2012
-------------- --


7. (SBU) In 2007, in addition to finding a new strategic
investor, Musilek said the consortium hopes to secure
transport and supply contracts, negotiate right-of-way
agreements in transit countries, and begin social and
environmental impact assessments. Construction should start
in 2008, with the pipeline operational in 2011 or 2012.
Musilek emphasized OMV did not want any slippage past 2012,
because many of the participating countries have contracts
with Gazprom that expire in 2011-2012. At that time, Nabucco
must be a viable alternative or supplement to Gazprom for
these countries. Musilek maintained that none of the
participating countries were willing or able to move away
completely from Russian gas supplies.


Azeri, Iranian Supplies Vital for Nabucco
--------------


8. (SBU) Musilek conceded that Nabucco needs the
overwhelming bulk of the initial 8 bcms in capacity to come
from Azerbaijan and/or Iran. Musilek acknowledged that
commercial negotiations with Iran are consistently difficult
and that the political situation in Iran is not promising.
Musilek pointed to Syria, Egypt, and Iraq as possible
suppliers to Nabucco. On Egypt, he opined that transport of
Egyptian gas to OMV's planned new LNG terminal in Croatia was
a better option than routing the gas through Nabucco.
Kazakhstan and Turkmenistan offer potential in the future,
but Musilek noted that lack of a trans-Caspian pipeline would
exclude their participation at the moment. Nevertheless,
Musilek added that OMV, through its 2004 takeover of
Romania's Petrom, had acquired concessions to Kazakh gas
deposits.


Russia and Nabucco
--------------


9. (C) Russia, according to Musilek, has become very adept
at being "an irritant everywhere" in the energy sector. For
instance, Musilek said OMV had information that Gazprom was
recently attempting to entice MOL to develop an alternative
route through Hungary. Russia is also advocating for Nabucco
to circumvent Romania and transit through Serbia instead.
Musilek said Nabucco would most likely develop a spur into
Serbia, but it would not exclude Romania from the project.
Blue Stream, which is only operating at 30%, could also feed
into Nabucco. From the Russian perspective, this would give
Moscow more flexibility by diversifying transport routes.
Musilek said that OMV is not opposed to Russian gas flowing
through the Nabucco pipeline. However, he adamantly stressed
that, while Russian gas might be a part of the Nabucco
project, it would not be a controlling part.
Kilner