NABUCCO MOVING FORWARD, BUT STILL LOOKING FOR

C O N F I D E N T I A L SECTION 01 OF 02 VIENNA 002423 SIPDIS SIPDIS E.O. 12958: DECL: 09/14/2017 TAGS: ENRG EPET EINV AU SUBJECT: NABUCCO MOVING FORWARD, BUT STILL LOOKING FOR AZERI GAS Classified By: A/DCM Dean Yap for reasons 1.4 (b) and (d). Summary -------------- ¶1. (C) OMV Gas CEO Werner Auli told Acting DCM and EconUnit Chief on September 11 that the Nabucco gas pipeline project was moving forward, with the imminent announcement of a 6th shareholder and the appointment of an EU Nabucco Coordinator to "manage Brussels." Auli argued that Nabucco had the potential to reach 30 bcm capacity by 2012, whereas the Turkey-Greece Interconnector (TGI) was capped at 8 bcm. According to Auli, Southstream was an "interesting project," which was not mutually exclusive from Nabucco. Auli viewed Southstream as more of a wake-up call for Turkey, than as a threat to Nabucco. Auli said he shared many USG concerns about doing business in Iran. However, Auli opined that commercial engagement could moderate the Iranian regime, and that gas-hungry Asia would fill the void, should western energy companies retreat from Iran. OMV's plans to develop an LNG terminal in Krk, Croatia by 2012 remain on track. End Summary. Nabucco Moving Forward: New Shareholder, New EU Coordinator -------------- -------------- ¶2. (C) During a September 11 meeting with Acting DCM and EconUnit Chief, OMV Gas CEO Werner Auli said that the Nabucco Pipeline Project would soon announce the addition of a 6th shareholder in the consortium, which currently includes OMV (Austria),MOL (Hungary),Transgaz (Romania),Bulgargaz (Bulgaria),and Botas (Turkey). Auli would not officially identify the investor, but he added that it was "a big European company" frequently identified in the press as the 6th partner. (Note: Austrian and international press have consistently speculated that Germany's RWE would soon join the Nabucco consortium. End Note). ¶3. (C) According to Auli, Nabucco's development was moving forward on a number of fronts. Nabucco Gas Pipeline International GmbH had established subsidiaries in all of the transit countries to assist with local issues, including right-of-way, interface with national regulators, and environmental impact studies. Nabucco was entering the engineering phase of development. ¶4. (C) Auli welcomed the appointment of former Dutch Foreign Minister Jozias van Aartsen as the EU's Nabucco Coordinator, who would help "manage Brussels." Nabucco has already applied to the EC for exemptions from Article 22 of the EU's Internal Gas Market Directive. Specifically, Nabucco is requesting a 50% set-aside of initial capacity for its shareholders, with the other 50% auctioned off during an open season. A second important exemption would be to set long-term tariff rates along the route to protect the project against capricious tariff increases by national regulators. Auli stressed that these exemptions were important to attract private investment, which would account for 30-40% of the project. Auli expressed confidence that the EC would grant the exemptions, as it had granted significant exemptions to recent applications for large energy projects in the EU. Azeri Gas Key for Nabucco's Success -------------- ¶5. (C) Auli reiterated that Azeri gas was key to Nabucco's timely start-up scheduled for 2012. Auli maintained that OMV remained uncertain about Azeri potential and that the TGI's 8 bcm from Azerbaijan could "hurt Nabucco." Auli pointed out that only Edison would have access to the TGI, whereas Nabucco would allow for third-party access. Moreover, Nabucco had the potential to become a "gas highway" to Europe, reaching an expected 30 bcm by 2017, with the possibility of additional volumes depending on market conditions and geopolitical factors. Transcaspian gas, particularly from Turkmenistan, remained an important factor for the long-term success of Nabucco. Southstream: No Threat to Nabucco, But Maybe to Turkey -------------- -------------- ¶6. (C) Auli repeated recent public comments by Austrian Economics Minister Marten Bartenstein that Southstream was an "interesting project." Southstream, which faced many technical and political hurdles, and Nabucco were not mutually exclusive. Auli said that Southstream could eventually feed into Nabucco. In Auli's opinion, Southstream was less of a threat to Nabucco, but more of a challenge to VIENNA 00002423 002 OF 002 Turkey. Ankara, in Auli's view, was "gambling too much" in its efforts to secure a special status beyond that of a transit nation. OMV Does Not Fear Challenges to Its Gas Hub -------------- ¶7. (C) Responding to Emboffs' question about reports that Hungary wanted to build up a Central European gas hub to rival Austria's Baumgarten, Auli downplayed any competitive threat. According to Auli, Baumgarten "was the real world," a major European gas hub that has functioned well for decades. Many countries -- Hungary, Turkey, potentially Bulgaria -- have dreams of creating major hubs. Auli suggested that these countries should first prove themselves as reliable transit nations, a path Austria had taken. Hungary, according to Auli, remained a strong supporter of Nabucco despite OMV's recent hostile takeover efforts towards MOL. Iran Remains Likely Option for Nabucco -------------- ¶8. (C) Emboffs reiterated that the USG supported Southern Corridor pipelines, but was troubled by plans to ship Iranian gas through Nabucco. Auli admitted he shared many of the USG's concerns about dealing with Iran. However, he argued that commercial engagement with the Tehran regime was a means to build up trust and that gas-hungry Asian countries would fill any void left by the West. Emboffs responded that engagement with Iran in the energy sector was a particularly sensitive issue, because it provided the regime with financing for its proliferation efforts and its regional support for terrorism. OMV's Plans for Croatian LNG Terminal -------------- ¶9. (C) Auli said that OMV's plans to build an LNG terminal in Krk, Croatia were on track. The re-gasification facility is scheduled to begin operations in 2012, with the location set and an additional partner (EoN) on board. The Krk facility will be able to handle 10-15 bcm annually. Auli expressed concern that Russia was also interested in increasing its presence in the Croatian market. Comment -------------- ¶10. (C) With Nabucco's financing solidifying, it will become crucial to line up sufficient supply for the 2012 start-up. It appears OMV is genuinely uncertain of the volume of Azeri gas available for the project's start-up. To keep the project's timeline and to satisfy its shareholders, Nabucco will most likely seek additional quantities from other sources, most likely from Iran. We believe OMV remains schizophrenic about its relations with Gazprom: it would welcome some Russian gas as part of Nabucco, if only to increase its capacity; however, it understands Russia would like to torpedo Nabucco, especially as Nabucco's long-term plans envisage a trans-Caspian gas link. McCaw