SCENESETTER FOR VISIT OF EUR DAS BRYZA TO BULGARIA

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 001339

SIPDIS

SIPDIS

EUR FOR DAS BRYZA, SCA FOR PDAS MANN

E.O. 12958: DECL: 11/26/2017
TAGS: ECON ENRG PGOV BG
SUBJECT: SCENESETTER FOR VISIT OF EUR DAS BRYZA TO BULGARIA

REF: A. A) SOFIA 1325

B. B) SOFIA 1312 AND PREVIOUS

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


1. (C) Summary: Your visit to Sofia comes at a time when
Bulgaria is rapidly signing deals to position itself as a
future energy transit hub. Eager to produce deliverables for
a January 2008 Putin visit and develop new revenue sources,
Bulgaria is rushing into South Stream, in particular, without
the necessary due diligence on long-term economic and
security implications. The drive to sign deals with Russia
also comes from the belief that if Bulgaria does not agree to
participate, its neighbors will. Your visit will focus
Bulgarian policy makers on U.S. views on Russian energy
strategy, answer profound skepticism about Nabucco's
prospects, and give solid counter-arguments to those who say
there is no real alternative to dependence on Russian energy.
End Summary.

THE PROJECTS: HAPPINESS IS MULTIPLE PIPELINES -- ON
BULGARIAN TERRITORY


2. (C) South Stream - On November 8 in Moscow Minister of
Economy and Energy Petar Dimitrov (who will be abroad during
your visit) signed a declaration with Russia on the proposed
South Stream pipeline (ref A). The one-page political
statement leaves ownership and other important decisions to a
future Intergovernmental Agreement (IGA),which Dimitrov
pledged to sign in January during the Putin visit to Sofia
(expected to take place January 18.) Our working level
energy contacts tell us this does not leave sufficient time
to negotiate a good deal for Bulgaria. The Bulgarians have
not yet acted on our advice to hire outside legal counsel to
advise them on the IGA development, although PM Stanishev
told the Ambassador November 20 that he agreed outside
counsel was needed. There appears to be little consideration
about the economics of South Stream. Policymakers are giving
no thought to whether Russian can actually provide sufficient
gas for the pipeline at competitive prices. The politicians
(and state-owned Bulgargaz) view the upcoming IGA on South
Stream as a political document that can be signed even before
serious thought is given to economic and technical
feasibility studies, despite the fact that the IGA will
likely spell out ownership structure of the part of the
pipeline on Bulgarian territory. Bulgaria insists it will
not go forward with the project unless South Stream involves
a new, additional pipeline on Bulgarian territory (a
clarification that Russia ultimately refused to include in
the November 8 declaration) and that Bulgaria own majority
shares of the pipeline on Bulgarian territory. It is
critical that Bulgaria hold this line even in the rush to
produce a deliverable on South Stream by January.


3. (C) NABUCCO - The Bulgarians remain committed to Nabucco
and state they do not see South Stream as a Nabucco
competitor. At the same time, our contacts are expressing
increasing skepticism about Nabucco's prospects and they use
this skepticism as another justification about the need for
South Stream. In October, Nabucco Coordinator Van Aartsen
was in town, but his visit apparently did little to bolster
confidence in Nabucco's future. (It did, however, result in
Bulgaria's approval of the inclusion of Gaz de France and RWE
into the project.) Your visit is key to re-building
confidence in Nabucco (understanding of Azeri volumes is many
months behind the reality of latest industry estimates) and
to making the case that Russia is using South Stream to
undermine Nabucco's prospects.


4. (C) Burgas-Alexandropolous (BAP) - On November 15 in
Athens, Bulgarian, Greek and Russian participants in the
proposed BAP oil pipeline signed a joint protocol that agrees
to establish an international project company (IPC)
registered in The Netherlands. The protocol 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. This agreement represents a breakthrough
for the project after Russian insistence that the Bulgarians
and Greeks (who each own 24.5 percent of the project, with
Russia owning 51 percent) guarantee input for the pipeline
brought negotiations to a halt two months ago. Our Bulgarian
contacts suspect that Putin himself was responsible for the
Russian about-face. The Bulgarians are extremely pleased
with this deal and acknowledge the role their U.S.-based

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legal counsel had in securing it -- something we emphasize
when we stress for the need for legal counsel on South Stream.


5. (C) AMBO - With BAP's progress, the AMBO pipeline
project has lost some momentum. Still, Bulgaria remains
committed to AMBO. On November 22 Deputy Ministers from the
Bulgarian and Macedonian ministries responsible for AMBO
signed a border crossing agreement for the project. Our AMBO
contacts tell us they are sill trying to secure financing
(and commitments for input),and deny that recent BAP
progress threatens AMBO's prospects.

OTHER ENERGY ISSUES


6. (C) BELENE - In 2006 the GOB selected Russian
AtomstroyExport as the contractor for the new Belene nuclear
plant. Bulgaria is keeping majority ownership of the plant,
but is in the process of selecting a strategic investor for
the other 49 percent. There are Belgian, German, Italian and
Czech companies in the running. We have stated repeatedly
that the choice of a Russian contractor for Belene decreased
Bulgaria's bid for greater independence from Russian energy
sources. The tender was managed by former Minister of
Economy and Energy Rumen Ovcharov, who left office in June
after a corruption scandal (but who is still widely believed
to have strong influence on GOB energy policy.) Ovcharov's
lack of transparency and Russian ties have led to the
inescapable conclusion that the decision to choose Russia as
the Belene contractor was linked to the renegotiation of
Bulgaria's long-term gas contract with Gazprom in December
2006 (which was also Ovcharov's doing.) We have heard that
Ovcharov, currently an MP in charge of the Parliament's
Budget Committee, is also advising new Energy Minister
Dimitrov, a newcomer to energy issues, on South Stream.

YOUR MEETINGS


7. (C) Prime Minister Sergei Stanishev, whom you met in
November 2006, is a 41 year-old progressive Socialist. He is
pro-west and understands that Bulgaria is overly dependent on
Russian energy supplies, but sees Bulgaria has having few
options for greater energy independence. We want him to come
away from his meeting with you determined to hire outside
legal counsel for South Stream before Bulgarian signs any
additional documents, more knowledgeable about Nabucco's
prospects and realistic about Russia's attempts to use South
Stream to undermine Nabucco.


8. (C) Minister for Regional Development Asen Gagauzov,
whom you also met in 2006, is in charge of BAP and AMBO, but
also sits on the South Stream Working Group. In the past
Gagauzov has expressed concerns about Russian motives on
South Stream, telling the Ambassador November 19 that he
thinks Russia intends to use the pipeline to divert gas from
Ukraine and Belarus, not to increase supplies to Europe. He
will see the meeting with you as a chance to understand the
U.S. view of Russia's energy strategy. He'll also likely ask
about CPC developments and Chevron's possible future
involvement in BAP, although we understand Chevron has not
been in touch with the Bulgarians recently.


9. (C) Bulgargaz Chief Executive Director Lyubomir Denchev
has held his current position with the wholly-state-owned
company since March 2007. He is believed to have close ties
to former Energy Minster Ovcharov. Bulgargaz will be the
Bulgarian implementer of South Stream, is one of two
Bulgarian companies involved in BAP and is the Bulgarian
partner in Nabucco. Our contacts tell us that Bulgargaz has
its eyes set on expansion (to Macedonia and Albania) and
eventual privatization (which would undoubtedly attract
Russian bidders.) In addition to South Stream and BAP,
Bulgargaz is considering the construction of an LNG terminal
either on the Aegean coast or on the Black Sea. In recent
meetings our Bulgargaz contacts have inquired about Iran and
the U.S. view of OMV's Iran deal. Bulgargaz has close ties
to Russia and Gazprom, and has expressed more skepticism
about Nabucco (to us, at least) than should be expected from
a Nabucco partner.


10. (C) Your visit will also highlight, through meetings,
press events and your presentation at the energy security
conference sponsored by the Center for the Study of
Democracy, the need for Bulgaria to focus on a long-term
energy strategy not solely based on the transit of
hydrocarbons, but on the development of renewables, biofuels

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and greater energy efficiency. Bulgaria will never be
completely energy independent, but, as one of the most
energy-inefficient economies in Europe, it can make
meaningful strides toward greater diversity away from Russian
energy sources. With the price of oil pushing USD
100/barrel, Russia's hydrocarbon-generated wealth is
increasingly circulating through the Bulgarian economy,
making Bulgaria all the more susceptible to Russian leverage.
We estimate that the bottom line of Russian energy deals, if
fully consummated, would be close to USD 10 billion; even a
one percent dirty money leakage would inject USD 100 million
into a weak rule of law environment. An energy strategy that
focuses on renewables and efficiency is one tool Bulgaria can
use to put a noticeable dent in negative Russian influence
here. More strategically, it would help Bulgaria keep its
sights on transatlanticism and its society and economy on a
trajectory that values and practices rule of law norms.

Beyrle