STEVE HELLMAN'S DISCUSSIONS WITH OMV ON NABUCCO,

C O N F I D E N T I A L SECTION 01 OF 03 VIENNA 003208 SIPDIS SIPDIS E.O. 12958: DECL: 11/02/2016 TAGS: ENRG EPET ECON EINV PREL AU SUBJECT: STEVE HELLMAN'S DISCUSSIONS WITH OMV ON NABUCCO, RUSSIA, AND IRAN REF: VIENNA 3105 Classified By: Economic-Political Counselor Gregory E. Phillips for reasons 1.5 (b) and (d). Summary -------------- ¶1. (C) During an October 23 meeting with Werner Auli, CEO of OMV Gas, and Reinhard Mitschek, Managing Director of Nabucco Gas Pipeline International, S/P Steve Hellman updated OMV on Russia's continuing pressure, via its gas exports, on Azerbaijan, Georgia, and Turkey. Hellman noted that Russia's tactics have highlighted the importance and urgency of developing a viable Southern Corridor for Caspian gas. Hellman informed OMV about a potential intergovernmental agreement between Azerbaijan and Turkey to define transit principles and ensure that Ankara will not demand a special status as a gas trader. Calling attention to OMV's on-going explorations in northern Iraq, Auli reiterated OMV's optimism that Iraqi gas could feed into Nabucco at an early stage. Auli underscored that Nabucco would not allow Russian gas to dominate the project, but he left the door open for Blue Stream to connect with Nabucco. Russian intrigues in Hungary, particularly with MOL, are troubling, but OMV believes it can overcome any obstacles. Hellman clearly laid out the USG's opposition to any/any Iranian participation in Nabucco, arguing that, in addition to geo-political concerns, Iran was not a reliable commercial partner. OMV countered that excluding Iranian gas would only benefit Russia. Auli promised to continue the dialogue on Iran and to inform the OMV Board of the USG position. End Summary. Russian Pressure on Azerbaijan, Georgia, and Turkey -------------- -------------- ¶2. (C) On October 23, S/P Steve Hellman met with Werner Auli, CEO of OMV Gas, and Reinhard Mitschek, Managing Director of Nabucco Gas Pipeline International, to discuss the latest developments in the Russian-Azeri-Georgian gas dispute and the status of the Nabucco pipeline project. Hellman said that the Russians are clearly trying to put a squeeze on Georgia by threatening to withhold 3 billion cubic meters (bcms) of Gazprom's 4.5 bcms worth of exports to Azerbaijan, should the Azeris export 3 bcms to Georgia and Turkey. At the same time, Moscow hopes to portray Baku as an unreliable partner for Southern Corridor gas projects. Hellman noted that Russia, through its overt bullying, had demonstrated that Azeri gas is indeed a threat to them, thus underscoring to all the importance of carrying through with a Southern Corridor alternative. Hellman praised the cooperation amongst Turkey, Georgia, and Azerbaijan on this issue. Turkish-Azeri Inter-governmental Agreement Best Solution -------------- -------------- ¶3. (C) Hellman informed the OMV executives that Turkey and Azerbaijan intend to work on a bilateral agreement (perhaps ultimately in the form of an IGA) to explicitly lay out Turkey's transit regime. Hellman pointed out that senior GoT and BOTAS officials accept Turkey's role as a transit nation, and will not demand some special status as an aggregator. A bilateral agreement would allow for transparent pricing -- low enough to ensure Caspian gas is competitive, but high enough to encourage additional investments. Regarding future infrastructure investment, Hellman said that the USG is urging the GoT to allow non-discriminatory access to investment. With this in place, a company such as OMV could step in, if BOTAS is unwilling/unable to provide the necessary investment. ¶4. (C) Auli agreed that a bilateral agreement is the best mechanism to bring the Turks on board. Auli nevertheless expressed some skepticism that Ankara had entirely given up on its desire to buy and resell gas from the Caspian. Responding to Hellman's offer to help "sell" the Nabucco transit principles with Ankara and Baku, Mitschek said that OMV would gladly share them with the Azeris, should the GoA formally ask OMV. VIENNA 00003208 002 OF 003 OMV Exploration in Iraq Underway -------------- ¶5. (C) Mitschek confirmed that OMV has commenced exploration activities in Iraq this summer, near Chamchamal. Auli repeated OMV's bullish views on Iraqi gas quantities and the possibility of integrating Iraqi gas into Nabucco at an early stage of the project (reftel). In addition to exploration, OMV is carrying out feasibility studies and verifying the quality of infrastructure. Hellman welcomed OMV's engagement in Iraq, but advised OMV to keep the central government in Baghdad informed concerning the company's activities in the north. Russia--Better to Have Them In Than Out -------------- ¶6. (C) Responding to Hellman's query about Russian views on Nabucco, Mitschek said that, under European Energy Law, Nabucco would have to offer the same transportation access to all commercial actors, including Gazprom. Russian gas, through an extension of Blue Stream, could form a part of the Nabucco network. Auli opined that there are two options vis-a-vis Gazprom: integrate Russian gas into Nabucco and therefore minimize the likelihood that Russia will concoct a competitor to Nabucco; or exclude Gazprom, and hope Russia does not/cannot sabotage the project. Auli emphasized that Nabucco would never allow Gazprom to assume a dominating position, nor to become a strategic investor in the project. Hellman replied that the USG did not want to exclude Russian gas from any of the Southern Corridor projects. These projects were not anti-Russian, rather anti-monopoly, designed to provide enhanced energy security for Europe and economic and political independence for the Caspian region. Hungary--The Government's On-side, but MOL's a Problem -------------- -------------- ¶7. (C) Turning to Hungary, Mitschek expressed concern that Hungary is under pressure from Gazprom "to kill Nabucco." The MoU between Gazprom and MOL to develop a gas storage project is an attempt to convince the Hungarians that they could develop an alternative to Austria's Baumgarten gas hub. Furthermore, it has complicated progress on Nabucco. (Note: OMV is a 10% shareholder in MOL. End Note) ¶8. (C) Hellman said that the GoH continues to support a Southern Corridor strategy, but MOL's intentions are uncertain. Hellman raised the more ominous possibility of a hostile takeover, perhaps when MOL's shares had plummeted following a pipeline "accident." What would be OMV's reaction in such a scenario? Russia's modus operandi appears to be to create trouble at the source (Azerbaijan) and at the end (Hungary) of Nabucco. ¶9. (C) Auli acknowledged that, if Gazprom pulled out all the stops to acquire MOL, it would be difficult to prevent, though OMV would try. Auli pointed out that, with Hungarian Government support, Nabucco could bypass MOL in such a case scenario by creating its own Hungarian subsidiary, a "Nabucco Hungary." Auli opined that the GoH does not want increased Russian dependency for its energy supplies. Furthermore, Hungary is an EU nation, and the EU would not stand by idly in such a situation. Auli added that, "if Nabucco cannot handle Hungary, it certainly cannot handle Turkey, Azerbaijan, or Iran." Iran--Hellman Warns OMV Against the Iranian Option -------------- -------------- ¶10. (C) Hellman forcefully laid out the USG position regarding Iran: the USG would not facilitate Nabucco, if there is any/any Iranian gas in the pipeline. The USG views the Southern Corridor as vehicle to improve Europe's energy security and to promote political and economic independence in the Caspian region. The other side of the Nabucco coin is not accepting Iranian gas. There is sufficient gas for Nabucco and TGI without Iranian gas, especially with the potential of the TCP and Turkmen gas in the East Caspian. In addition, Iranian gas does not make sense commercially, as it is overwhelmingly in the south and the Tehran regime has demonstrated it is unable to fulfill its current supply VIENNA 00003208 003 OF 003 obligations. Hellman emphasized that the USG is delivering the same message to all the Southern Corridor actors. Hellman offered to follow-up with the OMV and Nabucco Boards to emphasize the USG's position on Iranian participation. ¶11. (C) Auli acknowledged that Iran is a potential Nabucco supplier in the long-term. In Auli's view, excluding Iran plays into Moscow's hands: eventually Iran will ship its gas to Russia, thus increasing Russia's grip on Europe. Or Iran might also accelerate development of its LNG capabilities, with Iranian gas destined for other markets. Mitschek questioned who would provide the 60 bcms needed for Nabucco and the other Southern Corridor pipelines. Auli welcomed further dialogue on Iran and promised to relay USG concerns to the OMV Board. IEA Meeting Postponed -------------- ¶12. (C) Hellman told OMV that the IEA had postponed its Southern Corridor meeting to ensure better preparations. Moreover, the participants did not want to discuss this issue in the context of the Russian-Azeri dispute. Mitschek welcomed the postponement, reiterating concerns that OMV would be caught in between the European Commission and Turkey (reftel). Auli opined that it might be better to hold the meeting in spring 2007 to allow countries to avoid the spotlight vis-a-vis Gazprom during the winter. Furthermore, Auli confided that Nabucco would prefer to have the IEA meeting following the addition of a strategic investor, probably in late 2006 or early 2007. Hellman welcomed additional input from OMV regarding the agenda and participants. ¶13. (U) S/P Hellman has cleared this message. McCaw