SCENESETTER FOR LUGAR CODEL MEETINGS WITH EU

UNCLAS SECTION 01 OF 05 BRUSSELS 001273

SENSITIVE
SIPDIS

H FOR CODEL LUGAR

E.O. 12958: N/A
TAGS: EAGR ECON ENRG EPET EU
SUBJECT: SCENESETTER FOR LUGAR CODEL MEETINGS WITH EU
OFFICIALS ON 3-4 SEPTEMBER, 2008


1. (SBU) Welcome to Brussels. Your visit comes as the EU
struggles to develop a common energy policy, internally and
externally. One goal of the French EU Presidency is to reach
political agreement by the end of the year on the EU
Commission proposals on internal energy market liberalization
and climate change. This will not be easy as the proposals
face opposition from member states intent on protecting their
large energy firms and their prerogatives over the energy
mix. The debate turns on "unbundling" at natural gas and
electricity energy conglomerates. That is, separating as
enterprises the supply (power generation or gas supply) from
the transmission, as we have been doing in the U.S. for some
years now. Mixed into this question is whether Russia's
Gazprom should be able to buy up European companies in the
gas and electricity sectors. Gazprom as the ultimate
supplier of 25 percent of the natural gas used in Europe
(with almost total dominance of the market in Central Europe)
could put itself in complete control of the vertical energy
chain in Europe. Starting with the gas wellheads in Siberia
and ending at the meters attached outside apartments in
Poland, Germany, and France. The Europeans should quake at
this prospect and are. A deep uneasiness about Europe's
dependence on Russia as an energy supplier adds to this
ferment. The Commission and the Council are working together
to develop a more coherent external energy strategy for the
EU. Finally, Climate change issues are embedded in the EU
psyche and play a part in any European discussion of energy
issues.


2. (SBU) The Europeans view energy security in broad terms
-- to include alternative sources and supply of gas,
development of additional renewable resources, research into
clean coal, and the construction of nuclear power plants in
EU member states that favor nuclear power. And overlaying
the energy security debate here is the imperative that
European leaders see to combat climate change. It is thus
almost impossible to have energy-related discussions here in
Brussels without addressing each of these parts of energy
security: internal EU market liberalization, measures to
address climate change, and external energy policy. You can,
and we hope will, use this connection to our advantage, by
underlining our common need to collaborate in the development
of new energy technologies to address our climate and energy
security concerns.


3. (SBU) Your schedule here covers:

-- Energy Commissioner Piebalgs. He has the lead role in the
Commission on both the internal energy market liberalization
and the energy/climate package; his is also the key
Commission voice on external energy policy.

-- Common Foreign and Security Policy High Representative
Solana. He works with the Commission on the EU's external
energy policy, and can speak to the dynamics among the member
states on this issue.

-- Competition Commissioner Kroes. She also plays a critical
role on energy policy, as competition policy along with trade
policy are two areas in which the Commission has autonomous
power. Kroes has successfully used this power to go after
major energy firms, notably in Germany and France, and U.S.
companies such as Microsoft and Intel. But she has been
reluctant to consider using the same powers to tackle
anti-competitive practices by Russia's Gazprom.

-- EU Political and Security Committee. We have also
arranged for you to meet informally with the Council's EU
Political and Security Committee. This body has recently
been concentrating on issues like combating piracy and the
crisis in Georgia that have implications for the security of
energy supplies. The PSC Ambassadors will also be doing
preparatory work ahead of the September 5-6 informal meeting
of EU Foreign Ministers in Avignon (the "Gymnich") in which
Ministers are expected to discuss the situation in Georgia
and informally brainstorm on transatlantic relations.

-- Tri-Mission Dinner. Ambassadors Silverberg, Fox, and
Volker will be co-hosting a dinner for you with individuals
involved in EU, Belgian, and NATO security policy.

-- Caspian Region Ambassadors. If time permits, you will
also be meeting with the Ambassadors from Azerbaijan,
Kazakhstan, and Turkmenistan. Each of these countries plays
a role in the EU's plans to increase Europe's energy security

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by opening up a southern corridor to bring gas supplies from
the Caspian region to European markets.

-- Director General for DG Agriculture, Jean-Luc Demarty.
Also if time permits, we plan to arrange a meeting for you
with the Director General for DG Agriculture, Jean-Luc
Demarty, to discuss the inter-related issues of biofuels and
genetic engineering. Mr. Demarty has been involved in the
WTO Doha discussions on agriculture.

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Proposals
--------------

4. (U) The energy sector has been something of an anomaly in
the European Community, as the member states jealously guard
their prerogatives over national monopoly utility providers
and the energy mix. Russia's January 2006 cutoff of Russian
gas exports to Ukraine was a wake up call for Europe on its
vulnerability to a dominant Russian supplier. Russia's
current conflict with Georgia will no doubt further these
concerns.


5. (U) European Commission President Barroso and EU Council
High Representative Solana saw their opportunity to bring
energy more fully into the Community's ambit. As a result of
their efforts, the EU is now moving ahead with major
initiatives on energy market liberalization, external energy
security, renewable energy, and climate change.


6. (U) In September 2007, the European Commission presented
the "Third Energy Package" intended to increase competition
and investment in the internal market for gas and
electricity. In January 2008, as part of its Climate and
Energy Package, the Commission submitted proposals to
increase the share of renewables in the energy mix, promote
energy efficiency, and create cleaner-burning fossil fuels.
The Commission has also been promoting a number of gas
pipeline projects to help meet expected increases in European
gas demand.

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Internal Energy Markets
--------------

7. (U) New energy sector liberalization proposals under
consideration in the EU could have an important role in
facilitating distribution of gas from the east, whether from
Russia or the Caspian region. The Commission's legislative
package of two draft directives and three draft regulations
proposed in September 2007 are designed to ensure greater
competition and third party access by effectively separating
supply/production of electricity and gas from transmission
networks.


8. (U) Under the proposals, vertically integrated suppliers
would have to either sell off their transmission networks or
arrange for their transmission operations to be done by an
"independent" subsidiary. Just how independent this
subsidiary would actually be is currently being debated. To
ensure that this effective "unbundling" does not result in
transmission firms being bought up by foreign interests, the
so-called "Gazprom Clause" would prohibit foreign (non-EU)
companies from controlling gas pipelines and high voltage
lines in the EU, although this prohibition could be waived if
the home country of the firm has a bilateral or multilateral
agreement with the EU. While we agree with the geostrategic
considerations behind the Commission proposal, we are
concerned that the provision as drafted could unintentionally
affect potential U.S. investment in these transmission
networks.


9. (SBU) Two key aims of the internal market reforms are to
increase competition, and to encourage the building of
iterconnections among member stat's electricity and gas
grids. The potential gas grid interconnections could play an
imprtant role in enhancing European energy flexibiity and
security. For many of the countries f Central Europe the
gas pipelines run one way (east to west) and many of these
countries are heavily dependent on Russian gas supplies for
their energy needs. Currently, if these Russian gas supplies
are disrupted, there are no alternative supplies available.
Building interconnections among these member states, however,
would allow for gas to be rerouted from one member state to
another in such an emergency.


10. (U) The Commission's proposals initially called for

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"full ownership unbundling" in the energy sector. However, a
blocking minority of six countries in the Council (led by
France and Germany) opposed forcing large energy producers to
give up ownership of their distribution networks and proposed
the so-called Third Option, which allows the continued
existence of vertically integrated energy companies, but at
the same time lays down strict conditions to ensure that
transmission system operators do not discriminate against new
market entrants.


11. (U) On June 6, Energy Ministers reached a political
agreement on the Third Option, which is now also being backed
by the Commission. In its first reading the European
Parliament backed away from full ownership unbundling for
gas, but supported full ownership unbundling for electricity.
The French Presidency of the EU is determined to reach a
political decision on the Third Energy Package by the end of
this year. If political agreement is reached by the end of
the year, it could enter into force early next year. The
provisions would then go to the Member States where they
would have to be transposed into national law before they
actually take effect. However, if political agreement is not
reached by the end of the year, the process likely will be
postponed until after the Parliamentary elections next summer
and perhaps much longer.

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External Energy Policy
--------------

12. (U) About one-quarter of total European energy
consumption is based on natural gas. Recent International
Energy Agency (IEA) predictions suggest that gas demand in
the EU will more than double by 2030, while Europe's own
production -- now primarily from the North Sea and Norway --
is declining. Meeting the new demand will require
significant increases in gas-imports and import capacity.
The IEA estimates that annual European demand could increase
by about 200 billion cubic meters (bcm),or 7 trillion cubic
feet, over the next two decades from 500 bcm now, while
production declines from roughly 300 bcm to about 200 bcm.
Today Russia itself accounts for about a quarter of the EU
27's import needs, while imports from Norway, Algeria, and
the Caspian and Central Asian states through Russia comprise
the remainder. The dependence on Russian gas is much higher
for many Central European countries who rely on Russia for
more than 75 percent of their gas imports. The EU will have
to develop a number of new transport pipelines if it is to
reduce this over-dependency on gas coming from and through
Russia.


13. (U) The Commission and Council have proposed a more
robust role for the European Union in developing an external
energy policy. Javier Solana, whom you will see, has
publicly argued for more effective EU coordination on
external energy issues, with the strong backing of the
Central European states, who are most concerned about
Gazprom's hegemony and continued German courting of Moscow.
EU Energy Commissioner Piebalgs supports this as well. The
Treaty of Lisbon, rejected in the recent Irish Referendum,
contains language intended to give the EU additional say over
crafting and implementing a common external energy policy.
That said, many member states remain divided on what the
policy should be, and the EU does not speak with one voice on
external energy issues. Russia has excelled at exploiting
the divisions among member states with Gazprom continuing to
make inroads into European gas distribution and supply.


14. (SBU) To date, the Commission has publicly taken an open
approach to new gas infrastructure projects. While
supporting the Nabucco and Turkey-Greece-Italy Interconnector
(TGI) pipeline projects they have also supported the Russian
Nord Stream and South Stream projects, even though South
Stream, which could transport about 30 bcm of gas a year from
Russia and Central Asia via a Black Sea route that bypasses
Turkey, is a direct competitor to the Nabucco project.
Privately, Commission officials have indicated they prefer
the non-Russian solutions, but view South Stream as a
convenient bargaining tool in transit negotiations with
Turkey.


15. (SBU) In the fall of 2007 the Commission appointed
Jozias Van Aartsen, former Dutch Foreign Minister and current
Mayor of the Hague, as a special Coordinator for the Nabucco
project. Van Aartsen's original mandate was to facilitate
the negotiation of the transit agreement and necessary

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inter-governmental agreements to enable the Nabucco project.
Van Aartsen's mandate has since been redefined to include all
the Southern Corridor projects intended to bring Caspian
region gas to Europe. Van Aartsen's focus so far has been on
working with Turkey to arrive at terms for a transit
agreement that would be attractive to European buyers and
Caspian producers, while still meeting Turkey's concerns over
its own security of gas supply concerns. The major sticking
point from the EU side has been Turkey's insistence on a 15
percent take off clause allowing Turkey to take 15 percent of
any gas flows at a reduced rate.


16. (SBU) The U.S. has been supportive of the EU's efforts
to open up the Southern Corridor. Special Envoy C. Boyden
Gray and Deputy Assistant Secretary Matt Bryza in particular
have held numerous discussions with the Europeans, Turkey,
and representatives from producer and consumer states with
the aim of encouraging them to find a middle ground that will
allow the gas to flow. From the U.S. standpoint, opening
the Southern Corridor is a win, win, win scenario, in
providing greater independence for the Caspian States,
increasing Turkey's ties with the West, and increasing
Europe's energy security.

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Energy and Climate Change
--------------

17. (U) While its external powers are still relatively
limited, the Commission has power under environmental and
internal market rules to promote broad measures on climate,
energy security, and competitiveness. Commissioner Piebalgs
and others will likely raise these issues with you because
the Commission sees energy security as an integral part of a
broad package of measures including renewables, clean coal,
nuclear power, and emissions trading, in addition to new
sources of gas supply.


18. (U) On January 23, the European Commission announced a
new energy and climate change legislative package to
implement the March 2007 mandate from EU leaders to achieve
reductions of 20 percent in EU carbon emissions by 2020.
Although this legislation is not quite as far along as the
energy liberalization package, again the French intend to
push this to at least political agreement by the end of their
presidency.


19. (U) One of the most hotly contested parts of this
package is the allocation of the greenhouse gas (GHG)
reduction among the member states. Poland recently broke
ranks over emissions caps proposed in the new legislation,
arguing that reducing dependence on coal -- currently 96% of
Poland's electricity generation -- in favor of renewables
would present a large obstacle to economic growth. Poland's
other option, replacing coal with natural gas, would require
a new dependence on Russia, which Poland claims will
sacrifice energy security. Poland claims to have up to eight
member states supporting it, although these have not yet been
identified. In addition, many of Europe's traditional
energy-intensive industries - including steel, autos,
chemicals and cement -- are deeply concerned that the EU's
ambitious GHG reduction targets could seriously disadvantage
them globally; they could at the very least try to ensure the
EU retains the ability to "level the playing field" by
imposing a carbon tax on imports.


20. (U) A third issue is the development and use of
renewable energies. The Commission included proposals to
increase renewable energy to 20 percent of the EU total and
reach 10 percent alternative fuels use for transport, also by

2020. (The transport directive is often called the biofuels
mandate, named for the fact that biofuels are expected to
comprise the majority of the 10 percent, as opposed to
hydrogen fuel cells or electric cars.) The biofuels mandate
has come under the most scrutiny because of the fuel or food
argument and also because of concerns raised over
sustainability.


21. (SBU) The EU, like the United States, understands that
measures that enhance energy technology to address climate
change concerns are also directly related to energy security
needs. That said, they often emphasize the climate
connection in their rhetoric, and distinguish their own
"environmental" aspirations from our "energy security"
concerns. We have been trying to erase this false dichotomy
by emphasizing that the U.S. and EU have shared concerns on

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both global warming and energy security, and that stepped-up
transatlantic collaboration on energy technologies helps
address both. It will be helpful if you can reinforce this
theme in your public comments by pointing to the robust
domestic energy program the President and Congress have
instituted, as well as our robust and growing U.S.-EU
cooperation on energy efficiency, biofuels, hydrogen fuel
cells, solar power, and carbon capture and sequestration.


22. (SBU) It will also be extremely useful if you highlight
the President's efforts to advance the UN Framework
Convention on Climate Change (UNFCCC) negotiations through
the Major Economies Process. Any international agreement
that does not include binding commitments on China and other
key emerging countries will likely draw a skeptical response
in Washington. This is also a shared U.S.-EU interest; we
need the EU to work more actively with us to attain a global
solution.


23. (SBU) To sum up, you are coming to Brussels as key
energy and climate related proposals are being debated
widely. The European Commission and Solana are frustrated by
the lack of a common EU energy policy, but with member states
still jealously guarding their prerogatives it has been
difficult for Brussels to play a greater role. Though its
energy policy is nascent, Brussels nonetheless does have
powers and is pressing for more.


Silverberg
.