OPPORTUNITIES FOR U.S.-BULGARIAN ENERGY PARTNERSHIP

C O N F I D E N T I A L SECTION 01 OF 04 SOFIA 000949

SIPDIS

EUR FOR DAS BRYZA

E.O. 12958: DECL: 08/07/2017
TAGS: ECON ENRG PGOV RU BU
SUBJECT: OPPORTUNITIES FOR U.S.-BULGARIAN ENERGY PARTNERSHIP

REF: A. SOFIA 863

B. ANKARA 1809

C. ANKARA 1761

Classified By: CDA Alex Karagiannis for reasons 1.4 (b) and (d).


1. (C) Summary. New Economy and Energy Minister Petar
Dimitrov recently told the Ambassador that he welcomes a
partnership with the U.S. government on energy and will also
work to eliminate obstacles to U.S. investments in Bulgaria.
A newcomer facing a steep learning curve on energy, Dimitrov
is saddled with questionable deals his predecessor made with
Russia. This message reviews the status of key energy
projects Dimitrov will oversee, including regional oil and
gas pipelines and domestic nuclear power plants. Post also
presents suggestions to engage Bulgaria more robustly in a
partnership on energy security. Our recommendations include
establishing a bilateral energy dialogue, encouraging
Azerbaijan to do more to promote Nabucco and its gas exports,
exploring the possibility of establishing a regional energy
advisor and enhancing commercial cooperation in energy
efficiency and renewable energy. The Ambassador looks
forward to discussing these and other ideas for regional
coordination at the September Chiefs of Mission energy
conference. End Summary.

Minister Dimitrov: Honest, but Inexperienced
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2. (C) Prime Minister Stanishev told the Ambassador that in
selecting Petar Dimitrov as Minister of Economy and Energy,
he had opted for a reliable professional who was also a
"decent" person -- a reference to the corruption allegations
that brought down his predecessor Ovcharov (ref A).
Dimitrov has a strong background in economics, but little
experience in energy. Stanishev stressed that he would
personally assist Dimitrov as he learns his new portfolio.


3. (C) Ambassador met Dimitrov on July 23. Dimitrov wants to
focus on attracting foreign investment, increasing
professionalism and transparency, and removing obstacles to
private sector development. More specifically, in the near
future he will be called upon to decide Bulgaria's role in
several regional pipeline projects, decommission the Kozloduy
nuclear power plant and build a new plant at Belene, and
answer the public's questions about the opaque deals his
predecessor, former Minister Rumen Ovcharov, made with
Russia. Dimitrov did not provide any new details on pipeline
projects, but said he hopes to bring the Nabucco and
Burgas-Alexandroupolis pipelines to successful conclusions,
if practical issues could be resolved.


4. (C) Dimitrov admitted that he had a lot to learn about
energy, but promised to be up to speed by September. He also
pledged to be a good partner to the U.S. Embassy and help
U.S. companies facing bureaucratic hurdles. Our active
engagement with Dimitrov is especially important in light of
comments made to Emboffs by trusted sources in the energy
sector that former Minister Ovcharov will continue to hold
considerable sway over energy issues until Dimitrov fully
takes on the portfolio. Plus, with Ovcharov as chair of
Parliament's economy/energy committee, he will have a hand in
any legislative approvals for energy projects.

Pipeline Update
--------------


5. (C) Over recent weeks, Econoffs met numerous officials
and businesspeople for updates on Bulgaria's on-going energy
projects. We take some of their comments with a grain of
salt given the elastic nature of the
information/disinformation flow. Some players do not seem
square on the facts and are seeking to influence, rather than
inform. With these caveats, following is an update on the
major energy projects in which Bulgaria is participating:


6. (C) Burgas-Alexandroupolis oil pipeline (B-A): Bulgarian,
Greek and Russian officials met on July 12 in Sofia to
discuss issues related to the formation of an international
operating company to implement the B-A oil pipeline. Deputy
Minister of Energy Galina Tosheva and the GOB's new legal
advisor for the B-A project, Mark Lewis of the Paul Hastings,
LLC law firm in Washington, DC, told us that no real progress
was achieved during the meeting. Lewis said the discussions
should have been more advanced at this stage of negotiations.
The primary issue for resolution is the division of control
within the international pipeline company. According to the
current inter-governmental agreement, Russia's Gazprom will
own 51 percent, while Greece and Bulgaria will each own 24.5
percent of the pipeline. Russia wants all decision-making to
be on the basis of majority rule; Bulgaria and Greece would
like to have more influence, perhaps through a
super-majority. Lewis said that the parties would next meet
on August 23 in Athens. Bulgargaz Head of Research and
Analysis Jacklen Cohen noted that there still was
disagreement over where to incorporate the B-A controlling
company, with Bulgaria insisting that it must be in a EU
country.


7. (C) B-A continued: Two Bulgarian state-owned companies,
Bulgargaz and Transexportstroy, recently registered a joint
venture, Burgas-Alexandroupolis BG (B-A BG),that will manage
Bulgaria's share of B-A. Each of these state-owned companies
owns 50 percent of B-A BG. Local Chevron representative Ivan
Drenovichki explained that the B-A agreement, in addition to
laying out pipeline ownership terms, also obligates Russia to
provide 51 percent of the oil, and Bulgaria and Greece each
24.5 percent. As one option, Bulgaria is looking to Chevron
for this oil, from increased volumes after CPC expansion.
Chevron is interested in transiting oil through the pipeline,
but has not yet decided whether to invest in the new
Bulgarian company or simply to contract for transit.
Drenovichki explained that elements within the GOB want to
exclude Chevron from investing in B-A BG, to further their
own ability to corruptly profit from B-A. This opposition,
combined with confusion within the GOB regarding B-A BG's
role in the pipeline, has caused the GOB to move very slowly
and to hold up progress in planning the project.


8. (C) Albania-Macedonia-Bulgaria oil pipeline (AMBO): Cohen
said there is no problem with the route itself, but according
to official reports, the proposed exit point at Vlore does
not have the capacity to handle the oil, a point separately
made by Chevron,s Drenovichki. Drenovichki said Chevron is
not interested in AMBO because it would be too expensive, due
to its length and the number of pumping stations needed to
get the oil through the mountains. Cohen stressed that there
is no possible oil source for AMBO aside from Russia. (Note:
AMBO continues to refute technical issues such as routing and
pumping, though the question of sourcing remains.)


9. (C) South Stream gas pipeline: On July 12, the Council of
Ministers formed an inter-ministerial group to negotiate the
inter-governmental agreement with Russia and Italy for the
South Stream gas pipeline. Tosheva told us she is likely to
represent the Ministry of Economy and Energy in this group.
She said that Italy and Russia are applying pressure to
complete the agreement quickly, but Bulgaria does not feel
the same sense of urgency and no deadline has been set.
Tosheva confirmed that Russia pressed to hold a July 13
meeting on South Stream following B-A discussions, but
Bulgarian officials declined as they were not prepared for
further talks at that time. Tosheva stressed that
negotiations will be difficult (because "any negotiation with
the Russians is difficult"). Although Minister Dimitrov made
no specific mention of South Stream, he told the Ambassador
that he and the Prime Minister were loath to reexamine deals
unless serious problems exist. Thus, it is doubtful that the
lack of transparency surrounding the deal made by Dimitrov's
predecessor will lead to a formal investigation, although
parliamentary and press questions continue.


10. (C) Nabucco gas pipeline and Turkey-Iran MOU: Asked
about how South Stream impacted the Nabucco project, Tosheva
said they were not competitors; South Stream would serve the
Italian market while Nabucco would serve other parts of
Western Europe. She said Nabucco is lagging behind because
it is an entirely private project. The Bulgarian Council of
Ministers currently is reviewing a draft agreement on
Nabucco. Subsequent to our meeting with Tosheva, the
Turkey-Iran "preliminary" gas MOU became public (ref B).
When asked if the agreement would have a negative effect on
Nabucco, Bulgargaz official Cohen said that the only serious
source of gas for Nabucco is Iran, and if not for Nabucco,
Turkey would not have pursued the MOU. He said that he did
not believe Azeri gas was sufficient to make Nabucco work in
the next 5-6 years. Nonetheless, Bulgargaz, which owns 20
percent of Nabucco Gas Pipeline International, is resolved to
keep on schedule with the project and has registered a new
entity, "Nabucco Bulgaria," which will be the operator of the
pipeline on Bulgarian soil.


11. (C) Nabucco continued: In general Cohen voiced strong
suspicions of Turkey's motivations. He was extremely
critical of Turkey's demand for a 10-15 percent share (at
inland prices) of the gas transiting Nabucco. He said Turkey
raised this demand at a July 10 meeting, at which time the
other shareholders replied this was totally unacceptable. He
remarked that Kazakhstan and Turkmenistan signed gas
agreements with Russia earlier this year because they were
concerned about Turkish plans; "it is better to deal with the
devil you know," Cohen said. Asked about the long-term gas
contract with Gazprom negotiated by former Minister of Energy
Ovcharov, Cohen said that although it does not preclude
sourcing gas from other suppliers, at the moment, there is no
supplier other than Gazprom.

Nuclear Plants
--------------


12. (C) Kozloduy: As a result of her participation in the
July 2 London donors meeting, Tosheva was hopeful that the EU
could be convinced to double its contribution to the Kozloduy
International Decommissioning Fund (KIDF) to one billion
euros. This would make the decommissioning of reactors more
acceptable, as the cost of closing them has been estimated at
two billion euros. (Note: The EU required Bulgaria close
four of the six reactors at Kozloduy for safety reasons.)


13. (C) Belene: Dimitrov said that he hoped U.S. companies
would be able to participate in some aspect of the four
billion euro Belene Nuclear Plant project, despite the fact
that they will not have a share in the investment. Tosheva
said she hoped the winner of the bid for strategic invrstors
would be selected among the ten finalist companies by the end
of this year. Among the ten companies are nine European
entities and one firm from Hong Kong. According to Tosheva,
the GOB will focus on financing the project once the
strategic investors are chosen. (Note: U.S. companies have
steered away from the project, presumably concerned that
Russian predominance and EU insider tracks have tilted the
playing field.)

Comment and Recommendations
--------------


14. (C) Bulgaria is tied closely to Russia on energy. This
is partially a function of the previous, pro-Russian and
non-transparent Energy Minister, but also a result of
geography. Bulgarian officials often comment to us that they
would like to wean Bulgaria off dependence on Russia, but
Gazprom and Russia are the only potential energy sources in
the near-term. We need to offer Bulgaria realistic mid-term
alternatives. We have an opportunity to shape GOB thinking.
New Energy Minister Dimitrov is a long-time Embassy contact.
Despite his lack of experience, he seems willing to work with
us openly and transparently on energy issues, unlike his
predecessor. As a parliamentary committee chair, he assisted
us in attaining approval of the Double Taxation Treaty, and
his encouraging statements to the Ambassador indicate his
interest in running a "clean" operation. In advance of the
September Chiefs of Mission Energy Conference, we offer the
following proposals for working with Bulgaria:

-- Invite Minister of Economy and Energy Dimitrov to
Washington for meetings at State, DOE and elsewhere before
the end of the year in order to frame his thinking on energy
and strengthen his position within the Ministry on energy
issues.

-- Despite our reassurances, GOB officials still believe
there is insufficient Azeri gas for TGI and Nabucco phase 1.
The GOB is too ready to accept Gazprom's biased analysis.
Azerbaijan can do itself (and us) a world of good by engaging
assertively, sending a team to the Nabucco transit countries
to discuss Azeri production and promote the concept of a
southern gas corridor.

-- Formalize and expand our "Bilateral Energy Dialogue."
Ensure more regular visits by USG energy experts (State, DOE,
Commerce, CIA) to meet with senior GOB officials and discuss
regional energy security issues, renewable energy, energy
efficiency, clean coal technology, and other projects and
programs that could promote U.S. know-how and equipment.
These visitors should distribute written analyses and charts
to their GOB interlocutors.

-- Organize an energy trade mission to Bulgaria that would
focus on energy efficiency and renewables. As Bulgaria has
one of the most energy-inefficient economies in Europe,
significant energy savings are achievable through
technologies in which U.S. companies dominate. Leveraging EU
funds, the economics of projects focusing on energy
efficiency and renewable energy can be quite attractive. Our
Commercial and Agriculture Service colleagues are already
working with U.S. industry leaders in energy efficiency and
renewable energy technologies. A trade mission would bolster
U.S. interests.

-- Explore with USAID and ACE the possibility of providing a
regional energy advisor. A regional advisor, perhaps based
in Sofia or out of the Budapest EST hub, could take local
ownership of advocating for southern corridor energy
projects. The advisor could also work bilaterally with local
and national governments to increase energy efficiency and
diversify both supply and type of energy consumed. The
Jefferson or American Association for the Advancement of
Science (AAAS) Fellows programs are two possible sources for
such an advisor.

-- Increase coordination with the European Commission and
their Nabucco coordinator, with the UK, and with other
European partners to present a common message and approach to
our Central European allies.

-- Invite Bulgaria to participate in DOE,s FutureGen
pollution free coal power plant project, and other applicable
USG initiatives.


Karagiannis