B-A PIPELINE CLOSE TO FIRST DOWN; INDECISION ON

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000150

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/31/2017
TAGS: ENRG ECON GR RU BU
SUBJECT: B-A PIPELINE CLOSE TO FIRST DOWN; INDECISION ON
MAJOR COMMERCIAL ISSUES KEEPS IT OUT OF END-ZONE

REF: SOFIA 1560

SOFIA 00000150 001.3 OF 002


Classified By: AMB. JOHN BEYRLE FOR REASONS 1.4 B & D


1. (C) SUMMARY Bulgaria, Russia and Greece plan to sign a
broad intergovernmental agreement (IGA) giving the go ahead
to the Burgas-Alexandropoulis (B-A) oil pipeline on February
7 or 8 in Burgas. Several key issues -- equity stakes,
operation of the pipeline, and a final decision on control of
the Universal Terminal Burgas (UTB) -- will likely be punted
to future talks. The sides have shown some flexibility on
UTB and previous Russian demands on land ownership.
President Putin's recent public threat to find an alternate
route has put pressure on Bulgaria and Greece to bend, but
also show how badly Russia wants this route. The highly
political IGA document is perceived as merely the opening
kick-off of a tense contest involving Russian geo-political
interests, oil companies' need for an outlet, and Bulgaria
and Greece's scramble for more than the table scraps from
this USD 900 million dollar deal. END SUMMARY

Universal Terminal Burgas


2. (C) Ownership and control of Universal Terminal Burgas
(UTB) pumping station has been a serious fault line in talks
between Bulgaria and Russia. Bulgaria, led by Minister of
Energy Ovcharov, demanded separate Bulgarian ownership and
control. Russia and the oil companies were equally firm that
UTB had to be part of the overall consortium. As recently as
January 19, Ovcharov told Ambassador Beyrle that there was a
great deal of daylight between the two sides. Chevron
representative Mark Woloshyn (protect),who talked to
Transneft on January 30 and met previously with Bulgarian
Minister for Regional Development Gagauzov, told us Gagauzov
was showing flexibility on this issue. Ovcharov then
complained to us on January 30 that Bulgaria might be giving
away too much on UTB and Deputy Minister of Energy Tosheva
confided that this issue may not be fully addressed in the
February 7 agreement.


3. (C) The apparent difference of opinion between Ministers
Ovcharov, who has overall say over most energy issues, and
Gagauzov, who has legal control over pipelines, means there
is still room for intra-governmental wrangling. There will
also likely be additional horse-trading between the GOB and
Russia, but the indications of some movement on one of the
project's long-standing redline issues signals forward
progress.

Land

4.(C) Russia has reportedly backed down from its demand that
Bulgaria carry out eminent domain proceedings for land that
the consortium can not purchase on the market. Bulgaria's
constitution permits expropriation only for state purposes;
the pipeline is not considered a state entity.

Equity Shares


5. (C) The 51 percent Russian, 24.5 percent Bulgarian and
Greek division still stands. Even so, the sides have
revealed no decision on what those shares buy or what each
party would pony up for construction costs. Bulgaria has not
yet decided how it will divvy up its share with private
companies. Chevron is concerned about the high "entry fee"
Bulgaria seeks for the company's participation - USD 200
million is the latest figure. Chevron is also unclear what
that sum would purchase, but clearly wants an equity stake
equal to its share of oil in the project. Putin wants the
project to happen and has asked Transneft to make it work,
according to Chevron. They, in turn, have been asked by
Transneft to participate.

Transneft as Operator


6. (C) Russia suggested Transneft as operator, and Bulgaria
originally balked. But Tosheva indicated that some sort of
shared operation would likely work for all sides. Woloshyn
was also optimistic the issue could be worked out. It is
unclear if this will be resolved in the February 7 document.

Taxes


7. (C) Greece and Bulgaria have not agreed to waive VAT on
imported construction material. Russia is keen to get this

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tax break for its builders, but it is unclear if doing so
would violate Bulgaria and Greece's commitments to the EU.

CPC connection


8. (C) Chevron is primarily in this game as a way to obtain
expansion of the Caspian Pipeline Company (CPC). Once it
expands output, the company will need a Bosphorous bypass
more than ever, they told us. Chevron believes B-A is the
best route, and does not want to use a Turkish route because
of the higher cost of construction and the control that would
give Turkey over virtually all Russian and Caspian oil
transit. But Woloshyn mentioned that Russia had re-started
negotiations with Turkey on Samsun-Ceyan as a way to put
pressure on Bulgaria and Greece. Putin's February 1 comments
that Russia would look to other pipeline routes hit Sofia as
a clear attempt to ratchet up pressure on Greece and Bulgaria
to cave in to Russian demands. How far that plays is
uncertain. Chevron, for example, does not believe AMBO is a
viable route.

AMBO


9. (C) Bulgaria, Macedonia and Albania signed an three-way
convention for the AMBO pipeline on January 31. This
agreement gives an overall legal framework to the project for
investors and host governments. The big question of oil
throughput, which has eluded AMBO so far, still exists,
AMBO's CEO told us on February 1. AMBO hopes to use this
recent signing as a springboard to attract more investors,
and then, oil commitments. AMBO intends to start
environmental, engineering and other studies in the next few
months. It is more confident about Vlore than Burgas as
terminal ports -- considering the infrastructure at Burgas
and Russian-Bulgaria jockeying as problem areas. The CEO
suspected political gamesmanship in having the signings of
the B-A and AMBO agreements so close together.


10. (C) COMMENT The intergovernmental agreement on B-A is
not yet a done deal. Even if it is signed on February 7, the
parties will still have to wrestle over the issues that will
determine the market-worthiness of the project. We'll know
B-A is headed for the goal line when we hear the sides have
resolved - in writing - ownership of the terminal; equity
stakes, including a fair oil-to-equity agreement; and who
will operate the pipeline. If CPC expansion is approved,
we'll know the game is well in hand. For now, this latest
B-A agreement will keep the teams on the field.
BEYRLE