BULGARIA MOVES FORWARD ON SOUTH STREAM AND

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 001325

SIPDIS

SIPDIS

EUR FOR DAS BRYZA

E.O. 12958: DECL: 11/19/2017
TAGS: ECON ENRG EU PGOV RU BG
SUBJECT: BULGARIA MOVES FORWARD ON SOUTH STREAM AND
BURGAS-ALEXANDROPOLOUS

REF: A. A) SOFIA 1288

B. B) SOFIA 1100

C. C) STATE 150552

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


1. (C) Summary: The Government of Bulgaria signed a
declaration with Russia on the proposed South Stream gas
pipeline in Moscow November 8. As expected, the document is
a general one-page political statement that leaves details
about ownership of the pipeline to a later intergovernmental
agreement (IGA). When announcing the signing of the
declaration, the two sides stated they intend to sign an IGA
during Putin's planned visit to Sofia in mid-January. In a
separate but related development, on November 15 in Athens,
the Bulgarian, Greek and Russian participants in the proposed
Burgas-Alexandropolous pipeline (BAP) signed a joint protocol
that agrees to establish an international project company,
registered in The Netherlands. The document also lays out a
tiered decision-making structure on key issues, which is to
be agreed upon by January 15 in exchange for Russian
guarantees to fill the pipeline at levels needed to attract
project finance. The BAP protocol represents a breakthrough
for the project after Russian insistence that the Bulgarians
and Greeks guarantee input for the pipeline brought
negotiations to halt two months ago. The Athens meeting also
exposed a new divide among the participants, with Bulgaria
and Russia now on one side and Greece on the other. End
Summary.


2. (C) As expected (ref A),the Bulgarians signed a
declaration on South Stream during the visit of Minister of
Economy and Energy Petar Dimitrov to Moscow November 8. The
declaration (text will be sent to EUR/NCE Bulgaria desk) is
general and pledges the two sides to support the realization
of the South Stream project. The document does not contain
wording that South Stream would involve an "additional"
pipeline on Bulgarian territory rather than make use of
existing infrastructure, although our contacts at the
state-owned Bulgargaz and at the Ministry of Economy and
Energy tell us Bulgaria will not participate if the project
does not involve a new, separate pipeline. Minister of
Regional Development Asen Gagauzov told Ambassador November
19 that he believes even if South Stream involves a new,
additional pipeline, the Russians intend to use the project
to divert gas from Ukraine and Belarus, not to increase
volumes of gas to Europe. After the signing, the two sides
pledged to complete an intergovernmental agreement (IGA) on
the pipeline by the time of the visit of President Putin to
Sofia in mid-January (our contacts tell us January 18). Our
working level contacts tell us this deadline is too soon, but
that they are under pressure to produce a deliverable for
Putin's visit. The Bulgarians have not yet taken our advice
and hired outside legal counsel to advise them on the
development of an IGA for South Stream, but tell us it is
high on their action list.

SURPRISE BAP AGREEMENT


3. (C) After a two-month negotiating hiatus, the Bulgarian
BAP negotiators (without the knowledge of their U.S.- based
legal counsel) unexpectedly joined the South Stream
negotiators in Moscow on November 8, where they, too, signed
a protocol with the Russians, this time with Transneft. The
protocol caught BAP observers -- and, apparently, the Greek
participants in BAP -- by surprise. The protocol (text
emailed to EUR/NCE Bulgaria desk) states that Bulgaria and
Russia agree to tiered decision-making on key issues within
the international project company (IPC) (most issues require
approval of 80 percent of voting shares to be approved) in
return for Russian guarantees to fill the pipeline in
quantities sufficient to attract financing for the project
(our contacts tell us this is 18 million tons of the
pipeline's 35 million ton capacity.) This was a major U-turn
for the Russians, who stated the Bulgarians and Greeks would
have to guarantee oil input in proportion to their shares in
the IPC (ref B). Regional Development Minister Gagauzov and
other Bulgarian contacts suspect that Putin himself was
responsible for the Russian about-face. The Bulgarians
returned from Moscow highly pleased with this agreement and
announced that an IPC would be incorporated by the end of the

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year.


4. (C) The Bulgarians and Russians then went to Athens on
November 15 to try to get the Greeks to sign on to the
agreement. Our contacts report that the Greek side was "less
than pleased" that the Bulgarians and Russians had come to an
agreement without them. Although the three sides signed a
protocol on November 15, the only real agreement in the
document is that the IPC will be registered in The
Netherlands. The Greeks are insisting that 90 percent
(rather than 80 percent) of votes are needed to take major
decisions. The sides agreed on an aggressive negotiations
schedule (November 23-24 in Moscow and December 10-11 in
Sofia) to complete work on the IGA, which will likely be
presented as a deliverable either during the Putin visit to
Sofia in January or, according to Gagauzov, during a
Karamanlis visit to Moscow in late December.


5. (C) Russian guarantees on input mean Bulgaria, to its
relief, will not be in the oil shipment business. Gagauzov
told Ambassador that the structure of the agreement will
allow shippers of Central Asian oil, such as Chevron and
Kazmunaigaz, to ship up to 17 million tons of oil through
BAP. These companies would do this through agreements with
Transneft. Gagauzov also stated the current arrangement
would make Bulgarian BAP shares more attractive to future
participants, such as Chevron, in case Bulgaria decides to
sell. Gagauzov said he is still waiting to hear from Chevron
about its interest in BAP, but noted Chevron and Kazmunaigaz
may not be willing to make offers until an economic
feasibility study for the project is complete.

AMBO ALSO MOVING FORWARD, BUT LAGGING BEHIND BAP


6. (C) Deputy Ministers from the Bulgarian and Macedonian
ministries responsible for the proposed AMBO oil pipeline
will meet November 22 in Sofia to sign a border crossing
agreement for the project. While this agreement is a small
detail, it shows Bulgarian willingness to continue to move
forward with AMBO even as BAP gains momentum. Our AMBO
contacts tell us they are still trying to secure financing
for this project and deny that recent BAP progress threatens
AMBO's prospects.


7. (C) Comment: The upcoming Putin visit is the driver of
forward movement on Bulgaria's energy policy, at least in the
short-term. The problem is that short-term policy is the
only energy policy that Bulgaria has. In the case of BAP,
Bulgarian negotiators apparently prevailed and Russia has
resigned itself to providing oil guarantees in order to
secure the project and make CPC expansion possible. On South
Stream, the pressure from the looming Putin visit is forcing
the Bulgarians to move too quickly and without legal counsel.
We continue to deliver South Stream points (Ref C) and argue
for the necessity of outside legal counsel before they sign
any additional documents. (PM Stanishev told the Ambassador
November 20 he agreed that outside counsel was needed.) What
is clear from our meetings is that the Bulgarians are
committed to the idea of South Stream, which they see as a
huge potential revenue generator. The Bulgarians insist that
South Stream is not an alternative to Nabucco, and they say
they remain committed to the project. Still, we note an
increasing Nabucco skepticism on the part of almost all of
our energy contacts. We will use events surrounding the
Sofia Energy Officers training session December 6-7, as well
as DAS Bryza's concurrent visit, to address these Nabucco
doubts.





Beyrle