US EUROPEAN/CASPIAN/EURASIAN ENERGY STRATEGY

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 002491 SIPDIS SIPDIS USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK EEB FOR A/S SULLIVAN EUR FOR DAS BRYZA SCA FOR MANN DOE FOR HEGBURG USTDA FOR DAN STEIN E.O. 12958: DECL: 10/04/2017 TAGS: ENRG EPET XF XG ZK TU SUBJECT: US EUROPEAN/CASPIAN/EURASIAN ENERGY STRATEGY REF: A. ANKARA 1785 ¶B. ANKARA 2273 Classified By: AMBASSADOR ROSS WILSON FOR REASONS 1.4 (B) AND (D) ¶1. (SBU) On September 20-22, Istanbul hosted a Eurasia regional energy Chiefs of Mission conference. Participants included representatives from the supplier country posts of Ashgabat, Astana, Baghdad and Baku; posts in countries that are on key transit routes and/or are major buyers, including the Nabucco capitals, Berlin, Paris, Rome, Tbilisi, and others; Moscow; and USEU. Washington policymakers who attended included E U/S Jeffrey, EEB A/S Sullivan, and senior officials from EUR, SCA, DOE, and other agencies and offices. The goals of the conference were to gain a common understanding of the economics and politics of energy, and to develop new ideas and make recommendations for US strategy in this area. The conference addressed five main topics: gas supply, demand and transit, oil, and key regional and external actors. This message summarizes key conclusions, recommendations and outstanding questions. Why We Care -------------- ¶2. (C) The conference opened with a discussion on US achievements, goals and objectives regarding Eurasian energy. Participants identified four key US interests: -- Supporting the independence of the states of the former Soviet Union and the new EU members in East-Central Europe that remain heavily dependent for their economic well-being on Russian-controlled energy resources and means of supply. Russia's resurgence after the 1990s, its promotion in many cases of opaque business practices, and its aggressive attempts to dominate Eurasian markets and Central Asian supply give this special urgency. -- Support for Iraq's energy development and export connections to Europe can similarly improve its economic prospects and stimulate more European interest in its success. -- Supporting European energy security via additional and multiple sources of production and transit routes to bring that energy to the European marketplace and ensuring open, competitive markets for energy in Europe. Engaging the EU and individual states in the sustainability and independence of the energy-affected states of the FSU and New Europe speaks to similar goals. -- Countering Iran's influence in the region, reducing the attractiveness of its gas and supporting US diplomacy to block investment there by promoting alternative energy sources in the Caspian Basin, Central Asia, Iraq and elsewhere. Key Conclusions -------------- ¶3. (C) Participants agreed that the US and Europe today face challenges quite different from those 5-15 years ago when we worked to develop Kazakh and Azerbaijani energy and the CPC and BTC main oil export pipelines. Now the focus is increasingly on gas. New factors include the greater complexity of gas development and transit infrastructure finance that require long lead times to realize; the much larger number of players involved in the development and transit of Eurasian gas to market (as the range of COM conference participants demonstrated); Russia's resurgence; increased Chinese activity; and Iran's continuing efforts to develop and export its own gas. ¶4. (C) There was recognition of Russia's importance to regional energy issues and complications that flow from that fact, but views among conference participants varied. ANKARA 00002491 002 OF 004 -- Russia is ruthlessly competitive and it is little harnessed by checks and balances in the FSU and many New Europe states. It continues to pressure Caspian Basin supplier countries not to send gas to Europe via non-Russian pipelines and has bullied Europeans, as well. It is determined to maintain control of Turkmen gas exports, for example. -- Russian plans to build the Nordstream and South Stream gas pipelines directly into Europe and to invest downstream there demonstrate an unfettered sense of commercial opportunity that could transform into a worrisome political presence abroad. Russia is using energy as a tool to continue to exert influence on former Warsaw Pact EU member states, whose dependence on Russian energy is double that of more diversified "Old Europe." -- While Russian behavior challenges our interest in supporting the former Warsaw Pact and USSR states and with regard to European energy security, Russia is and must remain a major supplier of energy to Europe for a long time to come. Countering or excluding it as a major regional source of energy supply is neither practical nor realistic. Nevertheless, the US should continue pushing for alternative European sources of supply (including alternative fuels) and for competitive energy markets in Europe, avoid the appearance that we are trying to drive Russia out, encourage Russia/Russian firms to play by international rules, and maintain a frank, senior, and quiet dialogue with Russia on these matters. Our public remarks should avoid the suggestion that US policy is this area is anti-Russian as this would feed Russia's sense of unwarranted encirclement and result in mainly negative reactions. ¶5. (C) Gas Supply: Regional gas reserves are plentiful, but extraction and delivery to market present complex problems. In the short term, there may be supply constraints because Russian commitments to deliver gas to Europe have not been matched by investment in upstream development. Azerbaijan is committed to developing and exporting its gas to Europe (10-16 bcm by 2013-16) and to serving as a transit country; the commitments of Kazakhstan and especially Turkmenistan are less clear. The time is right for more intense engagement with Turkmenistan, especially regarding upstream development. Some 4 bcm of Western Iraq gas may be available for export via Syria to Turkey and Europe within two years, and Northern Iraq may have potential to export 8-10 bcm within several years. ¶6. (C) Gas Demand: By some estimates, gas demand in Europe will double by 2030. European awareness of the security and economic importance of diversifying gas sources and routes is increasing. However, EU and member state energy policies remain fractured. EC energy strategy doesn,t address day-to-day calculations by member states, individual state's energy policies may actually hinder EU gas market competition, and countries and companies are making their own deals with Gazprom that defy Commission rulings. ¶7. (C) Gas Transit: We have made progress on non-Russian routes to Europe. -- The Azerbaijani government is committed to the Southern Corridor project. Gas has begun to flow to Georgia and Turkey, and a symbolic amount will go to Greece this year. -- The Turkey-Greece interconnector will open this year, and a transit pipeline on to Italy should follow soon after. -- Achieving the full potential of these projects, as well as Nabucco and the Trans-Caspian Pipeline (TCP),is complicated by the number of countries involved, financing needs, lack of clear and commercially viable transit arrangements (especially through Turkey),Caspian delimitation, and other ANKARA 00002491 003 OF 004 problems. Increased US support is necessary to get completed soon the commercial and political arrangements required to realize these projects. We need to encourage a simpler way to put Nabucco together and gain a better understanding of the complex, long-term financing that is required to make this deal work. TCP depends on identifying reliable, long-term supplies of gas to fill a future pipeline, as well as on progress in Caspian delimitation, for which there is some hope. -- There are uncertainties about the sources of supply for Nabucco and the Turkey-Greece-Italy (TGI) pipelines and when those supplies will come on stream. ¶8. (C) Oil: Maximizing oil output and minimizing oil prices are in our national interest. High volumes, especially of Kazakh oil, are set to come online soon, though Kashagan may face delay. Continued Russian blockage of CPC expansion is raising the importance of the trans-Caspian shipment of Kazakh oil to Baku and onward across the Caucasus to the Black Sea or via BTC to the Mediterranean. Bosporus bypass pipelines may become increasingly urgent as more oil comes into the Black Sea. Participants agreed that the market, not the USG, should drive decisions on bypass routes. Recommendations -------------- ¶9. (C) Chiefs of Mission identified a number of recommendations to bolster the effectiveness of US energy policy and efforts in the region, starting with the need for greater prioritization among our energy goals in the region. Other recommendations include the following. -- With all the countries involved, the US needs more dedicated engagement at a senior level to leverage step-by-step progress and the resolution of problems. Regional leaders need an unequivocal sign of high-level US commitment to next-phase Caspian development. -- Focus on upstream development in Turkmenistan by working with the government, American and other private developers and helping the Turkmen address key investment climate issues. Work intensively with Turkmenistan, Azerbaijan and the private sector to signal that there is a way forward on a trans-Caspian gas pipeline. -- Get completed gas transit arrangements between Azerbaijan and Turkey, which are essential for Turkey-Greece-Italy gas flows and Nabucco. Participate at a senior level in the Turkey-Greece interconnector opening ceremony later this year to highlight progress. -- Continue US-Turkey-Iraq trilateral efforts to promote cooperation on gas and gas trade. Explore using the November 2007 Iraq ministerial in Istanbul and visit later that month to Turkey by Energy Secretary Bodman to advance this dialogue. Promote Iraq with the Europeans as a source for energy diversity that would also give the Europeans a more direct stake in Iraq,s future. -- Increase US engagement with the EU and EC on energy. Get them more engaged with Caspian Basin supply countries, transit countries and "New Europe" on energy issues and cooperation. For example, the proposed trilateral US-Ukraine-EU dialogue would focus Europeans on energy security and gas transit issues. -- Support the Kazakhstan Caspian Transit System to bring large new Kazakh oil volumes to market via Baku to the Black or Mediterranean Seas. Support the expansion of CPC and BTC. Resource Requirements -------------- ANKARA 00002491 004 OF 004 ¶10. (C) To expand on the first recommendation above, conference participants believed that more dedicated diplomacy is required for US efforts to succeed. Energy issues are central to our foreign policy; our staffing and support of this function need to reflect that more. Participants proposed the following: -- Creation of a dedicated, senior-level Eurasian energy envoy whose job it would be to engage with the leaders and countries of the region and with American and other private firms to advance the US energy agenda on a more intensive and sustained basis than present staffing permits. -- Creation of an energy office at State to support the envoy and posts overseas. It would assist in coordinating our Eurasian energy diplomacy and provide expertise on such issues as production-sharing agreements, pipeline financing, delimitation of the Caspian, etc., so that our posts can engage on these issues more effectively. -- Revision of FSI's Oil and Gas Course to focus less on extraction technologies and more on the politics and economics of upstream, midstream and downstream oil and gas development, the major energy players and current US energy policy. -- Revival of the annual Eurasian energy officers conference, which Embassy Sofia offered to host in December to ensure effective coordination in developing and implementing US energy strategy regionally. Policy Questions -------------- ¶11. (C) Participants identified several key issues on which views were mixed, where trade-offs and choices may be needed, and/or where US policy decisions may be necessary. -- Nabucco: What are our priority countries for gas supply? Knowing that Azerbaijan can supply the first tranche may not be enough to make the deal work. If Iran joins Nabucco, how will the US distance itself from the project? What is our view on Russian participation in Nabucco? Is there more to be gained by bringing the Russians in, including as a way to foster their greater conformity to Western business practices? -- TGI vs. Nabucco: Is there enough gas for both Nabucco and TGI? If there is not, should we choose one project? Or do we leave picking winners and losers to the market, recognizing that the economics of gas could very substantially delay the loser or force it toward Iran? -- Iraqi Gas and Syria: What is our position on Iraqi gas transit thru Syria to Turkey and Europe? -- Turkmen Gas to China: Should we encourage Turkmen exports to China? China may spur upstream development and diversify Turkmenistan's markets, but large-scale exports to the east may come at the expense of gas for Europe. How far east should the East-West corridor go? ¶12. (C) COM conference participants agreed that timing is key. Critical political and commercial arrangements to support diversified sources of energy, especially gas, need to be put in place soon. This post and others that participated look forward to hearing Washington's views soon on next steps to intensify our Eurasian energy efforts as soon as possible. Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/ WILSON