OMV ON NABUCCO AND GAZPROM

C O N F I D E N T I A L SECTION 01 OF 02 VIENNA 003105 SIPDIS SIPDIS E.O. 12958: DECL: 10/19/2016 TAGS: ENRG EPET ECON PGOV PREL AU SUBJECT: OMV ON NABUCCO AND GAZPROM REF: A) VIENNA 2475 B) VIENNA 1939 Classified By: Economic-Political Counselor Gregory E. Phillips for reasons 1.5 (b) and (d). Summary -------------- ¶1. (C) OMV Gas executives Werner Auli and Reinhard Mitschek told emboffs on October 12 that Nabucco Pipeline International had formally requested exemptions from the EU's Gas Directive -- restricting initial third-party access to the pipeline to 50% and insulating the project from tariff reductions. OMV believes the European Commission will grant the exemptions, as Brussels supports Nabucco as a means to increase Europe's energy security and to integrate the countries of Southeastern Europe more closely into a European energy network. Nabucco also hopes to identify an additional strategic investor -- most likely a major French or German gas firm -- by the end of 2006 or in early 2007. In OMV's opinion, Russia realizes the potential benefits from linking the underutilized Blue Stream with Nabucco. However, in the long-term, Russia views the probability of the Trans-Caspian Pipeline (TCP) feeding into Nabucco as threatening. Azeri gas remains critical for the initial capacity of 8-13 billions cubic meters in 2011. OMV is very bullish on Iraq's potential as a near-term supplier, and has therefore started exploration activities in northern Iraq. With a connection to the TCP and, possibly to Iran's large, untapped gas reserves at a later stage, Nabucco's capacity could reach 40-45 bcms. France and Germany would be the primary recipients of Nabucco gas. Ukraine has reportedly contacted Nabucco to express an interest to connect into the pipeline to reduce its dependency on Russian deliveries. OMV downplayed the recent announcement that Gazprom's Austrian subsidiary would begin directly providing 1.8 bcms (roughly 20% of Austria's domestic consumption) to Austrian customers. End Summary. EC Exemption Critical for Nabucco Project -------------- ¶2. (C) On October 12, emboffs met with Werner Auli, OMV Gas CEO, and Reinhard Mitschek, Managing Director of Nabucco Gas Pipeline International GmbH, to discuss latest developments with the project. Auli said that the consortium had just filed a formal request with the EU Commission for an exemption from Article 22 of the Internal Gas Market Directive 2003/55/EC. According to Auli, the exemption request contained two parts: reserving 50% of initial capacity for Nabucco participants and affiliates, thus limiting third-party access; and a long-term regulatory holiday for tariffs. Mitschek added that Nabucco's investors demand a certain, minimum rate of return from the project. The investors do not want to face the possibility that national regulators, particularly in Bulgaria and/or Romania, might capriciously reduce tariffs. ¶3. (SBU) Both Auli and Mitschek underscored that EC approval of the exemptions is crucial before the project can move forward. Nabucco expects an initial response from the Commission by the end of 2006. In Mitschek's opinion, Brussels strongly supports the Nabucco as a means to increase energy security in Europe, but also as a means to integrate the countries in Southeastern Europe (SEE) more closely into a European energy network. Mitschek noted that the establishment of an Energy Community, consisting of the EU and 11 SEE nations, was an important step in this integration process. Mitschek also pointed to the sizable economic and commercial benefits the project would provide to various European industries as an additional selling point with the Commission. Russia Views Nabucco as Threat and Opportunity -------------- - ¶4. (C) Auli acknowledged that Russia is lukewarm about Nabucco, but added that Moscow views the creation of a "Southstream," linking the Blue Stream pipeline to Nabucco, as potentially attractive. The Russians, however, were working behind the scenes to promote alternative routes through Serbia (ref B) and propagating the idea that Nabucco will fail without Russian participation. Russia has adopted a "wait-and-see" attitude towards Nabucco. OMV has repeatedly argued that it is not a question of "Russian gas or Nabucco." According to OMV, Europe's gas import needs will increase from 250 billion cubic meters (bcms) today to 600 bcms by 2020. Nabucco, when it reaches full capacity in 2020 at 30 billion bcms, will represent only 5% of total import needs. VIENNA 00003105 002 OF 002 ¶5. (C) Auli opined that what Russia really fears is the medium-term probability that the Trans-Caspian Pipeline (TCP) will divert Kazakh and Turkmen gas to Nabucco. Russia will lose its ability to buy cheap gas from the region for domestic consumption. Mitschek expressed confidence that the TCP will eventually come into operation and that it would link up with Nabucco. As soon as governments see that Nabucco is a reality, there will be an economic and political incentive to complete the TCP. Nabucco's Suppliers and Customers -- OMV Bullish on Iraq -------------- -------------- ¶6. (C) Azeri gas is essential for the initial start-up, with initial capacity of 8-13 bcms in 2011. Auli pointed to Egypt and Iraq as other potential early suppliers for Nabucco. Auli said that OMV views Iraq as promising in the near- and mid-term. OMV started gas exploration operations this summer in northern Iraq. In addition to TCP gas, Iran's large untapped gas reserves could also supply Nabucco at some point. Auli admitted that doing business in Iran is presently very difficult for political and commercial reasons. Nevertheless, Auli cautioned that if the West "blockades" Iranian gas, Tehran will sell its gas to Asian markets or even to Europe via Russia, thus increasing Russia's dominant market position. With this long-term supply, Mitschek said that Nabucco's capacity might reach 40-45 bcms. Mitschek added that Nabucco is willing and able to build a second, parallel pipeline to handle increased volumes. ¶7. (C) Mitschek reaffirmed that France and Germany would receive the bulk of Nabucco's gas (ref B),but the Czech Republic and Poland would also benefit from the project. Of the 30 bcm maximum capacity, transit countries would receive only 5 bcms, and the "adjacent neighborhood" 10-11 bcms. Mitschek said that Ukraine had expressed an interest to connect to Nabucco to decrease its dependency on Russian gas. At an October 13 Energy Community Mini-Gas Forum in Vienna, Mitschek announced that Nabucco would consider constructing spurs along the pipeline, including one into Serbia. Financing Nabucco -------------- ¶8. (C) According to Mitschek, Nabucco is presently negotiating with a major European gas firm to join the project as a major financier. (Note: Ref B reported that Nabucco's short list of potential strategic investors includes EoN Ruhrgas, RWE, Gaz de France, and Total. End Note). Mitschek claimed the investor is keen to join the consortium, perhaps by the end of 2006 or early 2007. The European Investment Bank has agreed to extend a Euro 700 million financing guarantee for the project. Gazprom Enters Austrian Market as Distributor -------------- ¶9. (SBU) Beginning in November 2006, Gazprom, through its Austrian subsidiary Gas und Warenhandels GmbH (GWH),will sell gas on the Austrian market. GWH will only sell 1.8 bcms to three southern Austrian states (out of a total domestic demand of 8 bcms),but Auli speculated that Gazprom might use Vienna as a platform to launch further downstream activities in Europe. Auli downplayed Austrian news reports that portrayed GWH's entry into the Austrian market as a Gazprom "invasion" of the market. In Auli's view, the move increases Gazprom's "market security," as GWH can bypass trading companies and sell directly to the customer. Auli stressed that, except for the January gas dispute with Ukraine, Gazprom has been a reliable supplier to Austria since 1968. McCaw