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IdentifierCreatedClassificationOrigin
07SOFIA1073 2007-09-05 15:01:00 CONFIDENTIAL Embassy Sofia
Cable title:  

BULGARIANS CHAFE AT RUSSIAN HARD LINE IN B-A

Tags:   ECON ENRG PGOV BU 
pdf how-to read a cable
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TO RUEHC/SECSTATE WASHDC PRIORITY 4231
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
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					  C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 001073 

SIPDIS

SIPDIS

EUR FOR DAS BRYZA

E.O. 12958: DECL: 09/04/2017
TAGS: ECON ENRG PGOV BU
SUBJECT: BULGARIANS CHAFE AT RUSSIAN HARD LINE IN B-A
PIPELINE TALKS

REF: SOFIA 1023

Classified By: DCM Alex Karagiannis for reasons 1.4 (b) and (d).



1. (C) Summary: Bulgarian government officials are
expressing public and private disdain for two Russian
proposals tabled during August 27-28 negotiations for the
Burgas-Alexandropolous Pipeline (B-A) in Athens. The
proposals would require Bulgaria and Greece, as minority
shareholders in B-A, to either give up their decision-making
rights in the pipeline corporation in return for guarantees
from Russia to fill the pipeline, or take on the
responsibility of filling 49 percent of the pipeline capacity
themselves. Bulgarian officials claim that both proposals
violate the terms of the Intergovernmental Agreement on B-A,
signed March 15 in Athens - a charge the Bulgarians' U.S.
legal advisors and Chevron on-lookers privately dispute.
Unwilling to give up decision-making capability, the
Bulgarians tell us they now plan to approach Kazmunaigas and
Chevron in attempts to obtain commitments for their share of
the pipeline capacity. At the same time, all our
interlocutors are now questioning the future prospects of
this pipeline. End Summary.

A HEATED RETURN FROM ATHENS



2. (C) Even before he returned from Athens, the lead
Bulgarian negotiator, Stefan Gunchev, CEO of
Burgas-Alexandropolous Bulgaria and an official of the
Ministry of Regional Development, gave interviews to the
Bulgarian media accusing the Russian side of bad faith
negotiations and questioning the future of B-A itself. In a
meeting with polecoffs upon his return on August 31, Gunchev
described Russian behavior during the negotiations as
"aggressive" and "out of line." He admitted the Bulgarian
side was caught off guard by Russia's two proposals - that
the Bulgarians and Greeks either give up their
decision-making rights in the pipeline in return for Russia
"undertaking" to fill 100 percent of the pipeline's capacity,
or guarantee to fill 49 percent of the pipeline capacity
themselves. He said both proposals violate article five of
the Intergovernmental Agreement on B-A, under which, in the
Bulgarians' interpretation, the Russian side will be
responsible for filling the pipe. (Note: Our reading of the
agreement casts doubt on this interpretation.)



3. (C) Unwilling to give up its decision-making rights in
the pipeline, Gunchev told us that Bulgaria will now approach
Chevron and Kazmunaigaz to obtain commitments to fill
Bulgaria's 24.5 percent of the pipe by allowing these firms
to purchase capacity "at preferential terms." (Note:
Bulgaria's Foreign Minister was in Kazakhstan on September 3
and energy issues were high on his agenda. Initial reports
indicate Kazakhstan may be open to oil sales, but the
practical questions of pricing and transit are huge.) Gunchev
said Bulgaria and Greece had agreed to stand firm in the face
of Russian proposals. On September 3, the two countries sent
a joint protocol (which Gunchev gave us) to the Russians,
stating clearly they do not believe minority rights should be
linked with capacity allocation issues. In response, the
Russian side sent a "points of contention" document to the
Bulgarian and Greek delegations. Tellingly, the Russians'
first point states: The aim of the pipeline construction is
not profit maximization but transportation through the
territory of Greece and Bulgaria, which will strengthen the
geopolitical role of these countries in the region, create
jobs and bring income taxes to their budgets."

ARE THE RUSSIANS OUT-OF-LINE?



4. (C) The U.S. attorneys advising the Bulgarians on B-A,
tell us the Russian proposals should not have caught Bulgaria
by surprise. Mark Lewis a pipeline lawyer from the U.S. firm
Paul Hastings, who attended the negotiations in Athens, told
us August 31 that in a side-bar meeting, the Russians told
him they were seeking decision making rights only on
"operational" issues, not on all issues, in return for
Russian guarantees on input. Lewis said the sides agreed to
continue meetings at the "legal adviser level" and in this
forum Lewis plans to pursue Russia's flexibility on this
count. On the second Russian proposal, Lewis worried that
even if Bulgaria contracted with Chevron and Kazmunaigaz for
oil input, there are no guarantees that Russia would actually
allow such oil to make it out of the port of Novorosisk and
to the pipeline. The Bulgarian side will need guarantees
from Russia stating that contractual volumes will actually
get on the ships headed to Burgas. Lewis stressed that

SOFIA 00001073 002 OF 002


despite the harsh rhetoric coming from the Bulgarian side
after the meetings, the Bulgarians have not said no to
anything. Ultimately, he believes the Bulgarians will be
willing to give up some level of operational control to be
relieved of the responsibility of filling the pipeline.



5. (C) According to Chevron, Russia's negotiating stance
makes economic sense. According to Mark Woloshyn of
Chevron's B-A team, the Bulgarians and Greeks have
exaggerated expectations. Without oil, he told us, these
countries cannot expect to have ownership and decision-making
rights in the pipeline while also collecting transit tariffs.
Woloshyn expressed doubts that Bulgaria would be able to
contract with Chevron and Kazmunaigaz at rates that would be
economically competitive with other available transit
options. He noted that the Bulgarians have not contacted
Chevron since the Athens meetings.


WHO REALLY WANTS/NEEDS THIS PIPELINE MOST?



6. (C). Gunchev told us that Bulgaria would like to see this
pipeline completed, but not at any cost. He expressed doubts
that this pipeline is a priority for the Russians, and said
he would not be surprised if the Russians walked away from
the project. In Lewis' view, this pipeline, as its first
such project in the EU, is more important for the Russians
than anyone else. But the Russians will not go ahead unless
the other Bosphorus shippers (Kazmunaigas and Chevron) are
involved. He added that the Bulgarian and Greek interest in
the project is all financial, since they have no oil and the
pipeline itself will offer few jobs. According to Chevron,
the only person who really wants this pipeline is President
Putin himself. According to Woloshyn, the project makes
little economic sense, and consequently, neither of the two
factors needed for the pipeline's success - financing and oil
supplies - are certain. Chevron only wants in to secure
Russian approval of CPC expansion. Woloshyn predicts the
Russians will make intense efforts to make progress on the
pipeline before Putin's term expires. If these efforts do
not succeed, B-A may be scrapped altogether, he suggested.




7. (C) Comment: By all accounts, the next few months will
be critical (again) for the future of the
Burgas-Alexandropolous pipeline. The Bulgarians (and Greeks)
have taken a tough negotiating stance, which the economics of
the project may not ultimately support. Public Bulgarian
complaints about what they call unreasonable Russian demands
may end up hurting those officials now making those claims,
if, ultimately, the government decides to give up any amount
of decision-making control in exchange for Russian assurances
to fill the pipeline. If the Russians are truly under
pressure to make progress on the pipeline before the end of
Putin's term, the tough Bulgarian and Greek stance may buy
these parties some leverage for which the economics of the
project would not ordinarily allow.



8. (C) Comment Continued: Beyond the economics of oil and
pipelines, there are politics and psychology. The Bulgarians
are again chafing at what they perceive as Russia's
heavy-handed approach. The prime minister's chief of staff
did not dispute a characterization of "unremitting Russian
pressure" in describing the latest round of talks. Indeed,
the Bulgarians are familiar with the tactic of intense
pressure followed by a more accommodating line designed to
wear down resistance to Russian demands. With an energy
novice at the helm of the Economics and Energy Ministry, and
knowing the Russians hold a strong bargaining hand, our
Bulgarian contacts are uncertain of next steps or genuine
options. For now at least, they are holding their ground.
We are confident they would welcome more briefings and
discussions with U.S. experts as their define their position.

Beyrle