BULGARIANS SEEKING PARTNERS FOR B-A PIPELINE;

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 001100

SIPDIS

SIPDIS

EUR FOR DAS BRYZA

E.O. 12958: DECL: 09/09/2017
TAGS: ECON ENRG PGOV BU
SUBJECT: BULGARIANS SEEKING PARTNERS FOR B-A PIPELINE;
CHEVRON WEIGHING PROPOSAL

REF: SOFIA 1073

Classified By: Ambassador John Beyrle for reasons 1.4 (b) and (d).


1. (C) Summary: Minister of Regional Development Asen
Gagauzov told Ambassador September 12 that Bulgaria is
seeking proposals from oil suppliers, specifically
Kazmunaigaz and Chevron, to allow Bulgaria to fill its 24.5
percent of the Burgas-Alexandropolous pipeline (B-A).
Bulgaria is doing this, he said, despite the conviction that
Russia's August ultimatum -- that Bulgaria and Greece either
give up their decision-making rights in the proposed
international pipeline company in return for Russian
commitments to fill the pipeline or take on the
responsibility of filling 49 percent of the pipe themselves
-- contradicts the terms of the Intergovernmental Agreement
on B-A (Reftel). Meanwhile, Chevron's lead consultant for
B-A informed us September 10 that Chevron is working on a
proposal to take over the Bulgarian and Greek shares of the
pipeline. Chevron believes Russia has a logical view of how
this pipeline should be structured commercially, but is
acting in typical "bulldog fashion" and is not winning any
friends in Greece or Bulgaria. According to Chevron, because
of the way the Governments of Bulgaria and Greece have sold
this project to their populations, they will look like they
are giving in to the Russians if they concede any
decision-making rights or shares in the pipeline. Therefore,
Chevron believes only outside, private sector entities can
break the political B-A deadlock, by becoming owners of the
pipe, not just suppliers to it. End Summary.

Bulgarians Weighing Options


2. (C) Minister of Regional Development Gagauzov requested
the September 12 meeting with the Ambassador to update him on
B-A negotiations. Gagauzov confirmed the August 27-28 B-A
meetings in Athens had been particularly difficult. In
Bulgaria's view, Russia's ultimatum - that Bulgaria and
Greece give up their decision-making rights in the pipeline
in return for Russian commitment to fill the pipeline or fill
49 percent of the pipe themselves - violates the terms of the
Intergovernmental Agreement on B-A the three countries signed
March 15 in Athens. Gagauzov said under no circumstances
would Bulgaria concede all of its decision-making rights in
the international pipeline company to Russia, although
Bulgaria might be willing to negotiate giving up
decision-making power on some operational matters. He said
Bulgaria is ready to stand firm with Greece in the face of
Russian pressure on this point.


3. (C) Before the next B-A meeting, to be held in Moscow
September 26 (a meeting of the B-A legal advisers will meet
in Moscow September 19),Gagauzov said Bulgaria hopes to have
proposals from Chevron and Kazmunaigaz on shipment
commitments. While Gagauzov did not rule out the eventual
sale of Bulgaria's shares to one of these companies, at this
point Bulgaria would rather procure its 24.5 percent of the
pipeline's capacity than sell its shares. He said Foreign
Minister Kalfin held preliminary talks on B-A while in
Kazakstan September 3, but Bulgaria has received no concrete
proposals from Kazmunaigaz to date.

Chevron's Possible Proposal


4. (C) On September 10, Chevron's lead B-A consultant
Mark Woloshyn told us that Chevron is developing a proposal
to take over the Bulgarian and Greek shares of the pipeline.
Woloshyn admitted his company's view of how the pipeline
should be structured is in line with Russia's. Russia, he
said, has a logical vision for this project but is acting in
typical "bulldog fashion" and alienating its negotiating
partners in the process. Woloshyn said the Governments of
Bulgaria and Greece face political difficulties because of
the way they have sold this pipeline to their publics. As a
result, they will look like they are giving in to the
Russians if they hand over decision-making power in return
for oil guarantees. According to Woloshyn, it is time for
the private sector to step in to unblock the political
logjam. He noted Chevron's proposal would include a number
of points designed to help Bulgaria and Greece sell such a
plan to their publics. These include:

-- Calculating for the Governments of Bulgaria and Greece
the tax revenues and gains from local employment they would
receive from the pipeline.

-- Estimating, on a preliminary basis, how much the

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companies involved could earn through subcontracting.
(Woloshyn warned this figure would depend on EU regulations
on procurement.)

-- Developing a proposal for a cash payment to Bulgaria and
Greece for their shares of the pipeline. Woloshyn warned
that this number would not be "massive" because Chevron does
not believe Bulgaria and Greece have much of value to sell at
this point. But he added that Chevron could offer a certain
sum up front and then more later as an incentive for making
this deal happen. Woloshyn warned, however, that EU
regulators may view the immediate sale of B-A shares by
state-owned companies as State Aid. Therefore, it might make
more sense for these companies to sell their shares when the
project is further developed and they can legitimately
receive compensation for work they have put into the pipeline
(in Bulgaria's case, for example, after the project has
received all needed environmental permits.)

-- As a face-saving measure, allowing Bulgaria and Greece to
keep a certain percentage, perhaps five percent, in the
pipeline, with limited voting rights.


5. (C) Woloshyn noted that while Bulgaria and Greece
would rather receive ship or pay guarantees from Chevron (and
Kazmunaigaz) to procure their 49 percent of the pipeline
capacity, Chevron is unwilling to issue such guarantees. It
would make more commercial sense for Chevron to buy into the
pipeline than to allow the Bulgarians and Greeks to finance
the project on the basis of Chevron's commitment to ship oil.
He added that if Chevron is successful in moving B-A
forward, the company would use this effort to prod the
Russians to accept CPC expansion. Woloshyn cautioned that
these ideas are preliminary and have not received company
approval. He requested USG "input and advice" on the
political feasibility of such a proposal, commenting that
such a plan would need the support of the United States and
the EU in order for the GOB and Greece to accept it.


6. (C) Comment: The GoB appears to be betting it will be
able to come to terms with Chevron and/or Kazmunaigaz on ship
or pay guarantees, something Chevron has told us is not on
the table. Bulgaria's fall-back position is unclear, as is
Chevron's. Chevron has made clear to us that its involvement
in B-A is dependent on CPC expansion, while it appears Russia
has made progress on B-A a precondition for CPC expansion.
The news that Transneft head Semyon Vainshtok is stepping
down was greeted by Bulgaria's B-A negotiators has a positive
sign that B-A negotiations could take a more positive turn.
Our Chevron contact also told us Vainshtok's departure is at
least partially linked to Putin's desire to speed up
negotiations on B-A. End Comment.
Beyrle