PUTIN PUSHES RUSSIA-TO-BULGARIA UNDERSEA GAS

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000611 SIPDIS SIPDIS E.O. 12958: DECL: 05/16/2017 TAGS: ENRG PREL EUN RU BU SUBJECT: PUTIN PUSHES RUSSIA-TO-BULGARIA UNDERSEA GAS PIPELINE REF: SOFIA 582 Classified By: ALEX KARAGIANNIS, CDA, FOR REASONS 1.4 B & D 1 (C) SUMMARY: President Putin told Bulgarian Prime Minister Stanishev May 8 that Russia is interested in building a gas pipeline from Izobilny (Stavropol, in the Caucuses),Russia, to Varna, Bulgaria. Russian interest in the project is driven at least in part by a wish to bypass Ukraine's "aging" gas-transit infrastructure. The Russian President downplayed the potential for Caspian gas to reach Europe and held out the prospect of Bulgaria becoming "a major transit center" for Russian energy. The proposed pipeline would carry 30 bcm/year to Greece. Although most major details (financing, throughput contracts) have not been addressed, both sides are working quickly to nail down the broad outlines of the project. They have already agreed that Russia would own 51% and Bulgaria 49% of the international project company, which will run from Russia to Varna and into Greece, without utilizing any of Bulgargaz's existing infrastructure. Some Bulgarian government officials, including Ambassador to the U.S. Elena Poptodorova (Protect),are alarmed by the prospect of yet another bilateral energy deal with Russia. The majority of Bulgarian officials, however, while accepting our arguments that they and the rest of Europe are too dependent on Russia energy, appear to be caught up in the "every man for himself" mindset that substitutes for an EU energy policy. END SUMMARY ¶2. (C) PM Stanishev visited Moscow May 6-8. In a restricted bilateral, Putin dwelt at length on energy, other issues reported septel. The PM's foreign policy advisory, Vladimir Radomirski gave us an extensive readout May 17. Putin told Stanishev that Ukraine's gas-transit infrastructure was falling into disrepair and needed "huge investment," according to Radomirski. The Russian leader implied that Ukraine was reluctant to allow Gazprom to make the needed investment, and Russia was therefore looking for "alternatives." Dismissing the alternatives to Russian gas, Putin reportedly told Stanishev that "you cannot stake too much on Caspian gas." He asserted that Azeri reserves were unproven and that there were "political, psychological, economic, and technical limits" standing in the way of Caspian gas supplies to Europe. Among the technical impediments he cited to Stanishev was the "mountainous seabed" of the Caspian. Russia had already demonstrated that it could build a pipeline under the Black Sea. Moreover, such a pipeline would help turn Bulgaria into "a major transit center," Putin asserted. ¶3. (C) The Russian President expressed skepticism to Stanishev about the prospect of filling a gas pipeline between Turkey and Greece, asserting that Iran regularly cuts supplies to Turkey without notice, forcing Gazprom to step in and fill the shortfall. Turkmenistan (seeing Uzebekistan's experience) "prefers to work through Russia," and is more likely to support a pipeline to Pakistan and India than to Europe. When we refuted Putin's claims, Radomirski acknowledged that "Russia is playing a geo-strategic game on energy," and exploiting its advantages. Radomirski added that Bulgaria wants alternate sources, but has no real alternative to Russian energy in the short term: "If Nabucco can provide gas, we will buy it," Radomirski said. He also lamented the lack of unity in the EU, which left Bulgaria and other small countries "feeling like they are alone." Bulgaria is also concerned that it will again be by-passed by Blue Stream II; thus the interests in other routes. ENERGY MINISTRY WORKING OUT DETAILS ¶4. (C) Deputy Minister of Energy Galina Tosheva provided additional details about Minister of Energy and Economy Ovcharov's Moscow meetings. She told us on May 16 that while most of the press details about a project to expand Russian gas transiting through Bulgaria were incorrect, it was true that the two countries were seriously discussing the proposal. Talks began as early as April 5, during Gazprom's Alexy Miller's Sofia meeting with PM Stanishev, and picked up during Stanishev's visit to Moscow when Russia presented a draft agreement. There is no deadline to sign the agreement, but GOB energy authorities planned to meet on May 17 with Minister Ovcharov - who is on a 10-day forced leave during a scandal investigation (Reftel) until May 21 - to discuss the SOFIA 00000611 002 OF 002 Bulgarian response. ¶5. (C) Tosheva said Russia is in a hurry, but major unanswered questions remain, such as where the company will be legally headquartered, what Bulgaria will offer for its 49% share (besides technical support and operation - via Bulgargaz - of the Bulgarian portion of the pipeline),and whether Greece has actually agreed to purchase the gas. She was confident that sufficient financial support exists from Western banks and investment funds to finance the project. Although Gazprom Bank could finance a large part of this, Tosheva claimed Gazprom would only enter projects that were economically sound, and for which they could get backing on market terms. ¶6. (C) According to Tosheva, this project is solely for transit, as Bulgaria currently has enough supply from its recently amended contract with Gazprom. In the future, Bulgaria could purchase gas, or it could be transited to other countries (Macedonia, Turkey, Serbia and onward),but Tosheva said that is not being discussed at this point. There is no estimate of the costs, but Tosheva thought it would easily be north of Euro 4 billion, based on Blue Stream costs. Press reports of two billion (currency unclear) in transit fees are wildly off the mark, in fact it would be closer to the $35 million annual fees expected for the Burgas-Alexandropoulis oil pipeline. ¶7. (C) When asked how "real" the project is, Tosheva shrugged and smiled, saying there are a lot of ideas out there for pipelines. But she quickly added that it would be better for Bulgaria to have a pipeline go through Varna than come through Blue Stream I or II in Turkey. She also said Bulgaria strongly supports Nabucco and the Turkey-Greece-Italy interconnector with a spur to Bulgaria, and does not want this project to interfere with the possibility that Nabucco would be built. In this context, she expressed concern about Turkey's true intentions in becoming a gas hub or exchange. (We explained that Turkish energy leaders recently agreed to transit, rather than re-sale of gas, but she seemed unaware of this position.) ¶8. (C) Tosheva acknowledged that Bulgaria will run up against EU opposition, but pointed to long-term deals (and in some cases pipelines) between Gazprom and Germany, France and Hungary. She said there is no prohibition in the draft agreement on working on other pipeline projects or importing/transiting other gas. In fact, Tosheva said Bulgaria's aim is to "have as many pipelines as possible in order to take advantage of their geographic, strategic position," and that "Nabucco remains the main priority." American and Western companies would be welcome to participate in financing and/or construction. ¶9. (C) COMMENT. Econ/Energy Minister Ovcharov is very much involved in the latest discussions, and the Ministry is clearly planning and awaiting his return to work; Tosheva, however, couldn't answer with certainty whether the deal would continue if Ovcharov were to lose his job. Some knowledgeable Bulgarians have speculated that the latest pipeline deal was a last-ditch effort by Ovcharov to make himself appear indispensable, but Radomirski's readout of the Putin-Stanishev talks lend credence to the notion that there is more to this than Ovcharov's usual showmanship, and that something had been in the works (or up the Russian sleeve) for some time. Regardless of whether Russia's goal is to stop Nabucco and TGI, or put pressure on Ukraine or Turkey in negotiations regarding Blue Stream expansion, the Bulgarians appear very interested in pursuing negotiations on this "Black Sea Stream" proposal. Bulgarian officials accept our arguments that they and the rest of Europe are too dependent on Russia energy, but appear to be caught up in the "every man for himself" mindset that substitutes for a European energy policy. The Bulgarians know they are playing a weak hand, but seem too eager to be at the table as Russia holds stronger cards. Greater EU unity, and greater coordination between Bulgaria, Greece and Turkey, could block Russian progress, but we don't see Bulgaria leading that charge, at least not now. Karagiannis