GERMAN ENERGY GIANT RWE JOINS NABUCCO

UNCLAS SECTION 01 OF 02 BERLIN 000153 SIPDIS SENSITIVE SIPDIS FOR EEB U/S JEFFERY AND EUR/FO DAS BRYZA E.O. 12958: N/A TAGS: ENRG EINV PREL PGOV GM SUBJECT: GERMAN ENERGY GIANT RWE JOINS NABUCCO ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION. ¶1. (SBU) SUMMARY: After negotiations lasting nearly a year, German energy giant RWE became the sixth member of the Nabucco Gas Pipeline consortium. RWE joins energy companies from Austria, Bulgaria, Hungary, Romania and Turkey in the EU-supported project to pipe gas from the Caspian region to Europe by 2013. Nabucco is expected to make final decisions on planning and construction during the first half of 2008 amid concerns that the recently announced Gazprom supported Southstream project to link the Caspian region via Russia to Europe may jeopardize its viability. Although a prime goal of the project was to reduce dependence on Russia and break Gazprom's monopoly on pipelines feeding into the European energy grid, Nabucco CEO Mitschek announced that the pipeline could also transport Russian gas. END SUMMARY. ¶2. (SBU) After protracted negotiations with the Nabucco consortium, the CEO of RWE's newly formed RWE Gas Midstream, Stefan Judisch, signed the contract to join the project on February 5 in Vienna. Existing members are Austrian OMV, Hungarian MOL, Romanian Transgaz, Bulgarian Bulargaz Holding EAD and Turkish Botas. Talks are reportedly underway with Gaz de France as a potential seventh member. Azerbaijan is also seen as a potential partner and has reportedly expressed interest. ¶3. (SBU) RWE upstream activities are currently focused on Germany, the UK, Norway, Denmark, Northern Africa and the Caspian region. Its relationship with Gazprom is currently limited to buying gas and does not have an interest in any pipelines or other forms of joint ventures with the Russian energy giant. It thus sees participation in Nabucco as an opportunity to diversify supplies and reduce dependence on Russian gas. A senior RWE official told Embassy Berlin that RWE participation in Nabucco is based on the expectation that Iranian gas would not be needed to make the project economically viable. ¶4. (SBU) Originally planned to reduce European dependence on Russian gas and pipelines, the $7.4 billion EU-sponsored Nabucco project to construct a 3,300 km pipeline to carry 31 bcm natural gas per annum from the Caspian region to Europe has been dogged by ill fortune since its foundation in 2002. Russia has been eager to lock up gas via long term contracts from other major suppliers in the region such as Turkmenistan, Khazarkstan and Azerbaijan. This has led many experts to question the pipeline's viability, especially if Iranian gas remains politically unfeasible. It what many view as a further blow to Nabucco, Gazprom was recently successful in reaching agreement with Italian ENI, as well as Bulgaria and Serbia, on the competing South Stream pipeline. ¶5. (SBU) The Nabucco Consortium reacted to the Russian Southstream announcement by issuing a nine million euro-contract to a British engineering company to coordinate technical planning with the goal of the pipeline being operational by 2013. However, the latest announcement by CEO Mitschek that the pipeline could also carry Russian gas is a complete reversal of previous policy and could be seen as a last ditch stand to save the pipeline. However, our contacts with the major German gas competitors said that although they view Southstream as a competing project, the demand for gas in Europe will be so large that both pipelines could be viable, provided other supplies from the region (e.g., Iraq or Iran) become available. They also saw a potential for linking the two projects. ¶6. (SBU) With a turnover of approximately 10 billion euro per annum in gas and 10 million customers, RWE is currently Europe's sixth largest BERLIN 00000153 002 OF 002 gas company. Its market share ranges from seven percent in the Netherlands, eight percent in Germany and the UK to 41 percent in Hungary and 82 percent in the Czech Republic. RWE Gas Midstream was formed to consolidate gas procurement, supply, trading and sales as well as commercial responsibility for LNG and non regulated gas transport, transit and storage. RWE DEA is now responsible for consolidated upstream oil and gas activities. ¶7. (SBU) COMMENT: Russian moves to undermine EU attempts to reduce dependence on Russian gas and pipelines can be seen as a pincer movement with the Baltic Sea Nordstream Pipeline in the north and the Southstream pipeline to Italy and the Balkans in the south. Given that the Russians have also successfully contracted Caspian gas, there are serious doubts about the ability of the Nabucco consortium to obtain enough gas to feed the pipeline. A side-effect of Russian support for Iran could be to polarize the EU in its efforts to obtain non-Russian gas. In this light, the sudden announcement that Russian gas may also be acceptable for the Nabucco pipeline could be seen as a strategic move by Nabucco to defuse Russian resistance. Whether this succeeds or merely emboldens Gazprom further remains to be seen. Gazprom's agreement with Italian ENI on the Southstream project also highlights the apparent inability of the European Union to achieve a common position in developing a common energy policy. END COMMENT. TIMKEN, JR