DAS DOUG HENGEL'S MEETINGS WITH EU OFFICIALS

UNCLAS SECTION 01 OF 03 BRUSSELS 001504

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET EU
SUBJECT: DAS DOUG HENGEL'S MEETINGS WITH EU OFFICIALS


1. (SBU) Summary. In September 11 meetings with EU
officials visiting DAS Doug Hengel learned that energy
security is getting more focused attention at high levels
with many initiatives underway. While the process going
forward will be complex, the EU is focused on internal
reforms (with competition rules that would limit Gazprom's
ability to gobble up assets, although not cut them out
completely),new energy security proposals in November, the
Southern Corridor (with Van Aarsten going to Turkey soon for
a heart-to-heart with Erdogan plus a gas security proposal)
and perhaps a way to move gas to Bulgaria and north not based
on Nabucco (a pipeline that brings gas from Russia).


2. (SBU) In the meetings, DAS Hengel pushed the need for
high level European attention to Azerbaijan and Turkmenistan
so they feel a strategic connection, cautioning that without
this attention there may be no Southern Corridor. EU
officials acknowledge this need, but the only indication
given of more attention was possible visit by Barroso to the
region in early November. The Europeans face many challenges
going forward, including possible complications from
disagreements on climate change proposals, and difficulties
with Italy (they seem to be seen as more of a problem than
Germany),and Turkey unless they become more reasonable. End
Summary.

Energy Security and Competition Policy
--------------

3. (SBU) On September 11 DAS Hengel met with Ruud Boogert,
Member of Competition Commissioner Kroe's Cabinet. Boogert
described the EU's efforts to form a single internal market
for gas and electricity through the proposed "Third Energy
Package". He said the Commission's goal is to increase
competition, achieve fair prices for consumers, and achieve
solidarity in case of gas supply disruptions. Boogert
emphasized that October will be a very important month for
the Third Energy Package with the Energy Council scheduled to
meet mid-month. If the October Council has a positive
result, Boogert is hopeful an agreement can be reached with
Parliament before the end of this year. Boogert reiterated
that the cutoff for action on this package is March 2009,
after which the Parliament will be going into the election
cycle.


4. (SBU) The Council reached general agreement on the
Package in June, but there are still some things member
States do not agree on. Grouped together, these objections
from member states could form a blocking minority. Boogert
said one of the issues being debated in the Council is the
"Third Country Clause", commonly referred to as the "Gazprom
Clause." Boogert believes the text of this measure is
evolving in an attempt by member states to level the playing
field, both within the EU and externally. The original
clause was targeted externally, but the latest Council
version attempts to make sure that an unbundled energy
company in one member state cannot be acquired by an
integrated energy company from another member state.


5. (SBU) Boogert said that the Commission believes more
investment and interconnection of the gas system is very
important for the EU's security of supply. He believes that
private investment will be available for this sector once the
EU establishes a more unified cross-border regulatory
environment. Boogert feels increased investment will also
depend on further consolidation in the markets. He expects
progress on the electricity portions of the Third Energy
Package, as electricity is less controversial than gas.


6. (SBU) Asked about using Competition authorities to go
after Russia's Gazprom, Boogert stressed that there is a very
high burden of proof if the Competition Commissioner wants to
go after a company because of its dominant position in the
market. He also stressed that member states still hedge EU
and national interests, working together with the EU while at
the same time making private deals with the Russians to
insure their own energy supply. According to Boogert, the
only thing the Commission can do is act when Gazprom tries to
take over a European interest and then it must be considered
on a case by case basis.


7. (SBU) Boogert described Piebalgs interest in Nabucco as
important. One of the challenges Nabucco faces is finding a
sufficient upstream gas supply. The Commission has been
talking with the European Investment Bank (EIB) about how to
insure against the political risk for the pipeline, given
developments in Georgia. Boogert believes that the EIB may

BRUSSELS 00001504 002 OF 003


be willing to fulfill this role. This would, however, need
approval by the EU Council. Boogert also pointed out that
the EU views the lack of a transit deal with Turkey as the
major stumbling block in the way of Nabucco.

The Southern Corridor
--------------

8. (SBU) In a meeting with Brendan Devlin, assistant to the
EU's Nabucco Coordinator Jozias Van Aartsen, Devlin outlined
current EU thinking on the Southern Corridor strategy. Van
Aartsen's focus remains on a transit agreement with Turkey.
Devlin was not confident, however, that the EU is close to a
breakthrough. Over the summer the Commission had reached
what it considered to be a working level agreement with the
Turkish side, involving the &Caspian Development
Corporation8 concept as a way to aggregate demand and insure
sufficient quantities of gas for Turkey and Europe.
According to Devlin, talks fell apart when the Turkish side
re-demanded a 15 percent take-off provision and the Energy
Ministry started talking about needing all Azeri gas for the
domestic Turkish market.


9. (SBU) Devlin said the EU's will also consider the rival
White Stream project that would bring Caspian gas to Europe
via Ukraine. Van Aartsen plans to make some public
statements in late October about the importance and value of
the White Stream project.


10. (SBU) Devlin also raised the possibility of using
existing pipelines in Romania and Bulgaria to achieve the
effect of Nabucco, without actually building Nabucco. There
are existing gas pipelines around the Black Sea in Romania
and Bulgaria that currently transport Russian gas from north
to south. Devlin said he is investigating whether or not
these pipelines could be reversed, but much depends on who
owns these pipelines - a subject which Devlin described as
"murky at best." These pipelines could conceivably transport
as much as 30 bcm of gas and could be used under a
"back-haul" scheme. Under this scenario, a European company
could contract for Azeri gas through a swap arrangement with
Turkey. The Azeri gas would actually flow to Turkey, while
the European customer would receive Russian gas originally
destined for Turkey.


11. (SBU) Addressing the rumor that Energy Commissioner
Piebalgs would be taking over Van Aartsen's role as Nabucco
Coordinator, Devlin said that Van Aartsen would continue as
Coordinator but that Piebalgs would oversee the process.
Devlin described the relationship between the two as a "good
cop, bad cop. According to Devlin, Van Aartsen has agreed to
make the harsh public statements in an attempt to get things
moving, while Piebalgs would reassure the Turks about the
importance of the Southern Corridor.


12. (SBU) Director General for Transportation and Energy
(DG-TREN) Mathias Ruete confirmed that Piebalgs is looking to
visit Ankara in November. He was not optimistic that a deal
could be reached this year, and said it may fall upon the
Czech Presidency to engage the Turks during the new year.
Ruete said that the French Presidency is seeking to devise a
final agreement on the Third Energy Package during the
October European Council meeting, which the Council would
then present to the Parliament as a final offer. He said the
Dutch and the British understand the importance of the third
country (Gazprom) clause but fear takeovers of their
respective energy industries by other (European) energy
companies that would remain vertically integrated. He urged
DAS Hengel to stress the importance of unbundling to Dutch
and British officials. On the Climate and Energy Package, he
noted that the Poles (among others) have indicated that they
cannot accept the green house gas (GHG) emissions reductions
targets in the current draft, and the Commission was working
on a solution. He was pleased with the cooperation on
biofuels, but DAS Hengel stressed the need for U.S. and EU
experts to compare notes on sustainability criteria.


13. (SBU) In meetings with Matthew Baldwin and Steven
Everts, advisors to Barroso and Solana respectively, DAS
Hengel stressed the need for high-level EU engagement with
Azeri and Turkmen leaders. He said that Presidents Aliyev
and Berdimuhamedow were vocal about the lack of high-level
European engagement, without which, the Southern Corridor
would be in jeopardy. Baldwin stated that plans were being
considered for Barroso to visit Baku and Ashgabat later this
fall, although no commitment had been made. He believes that
Turkey will be more cooperative following the invasion of

BRUSSELS 00001504 003 OF 003


Georgia. Everts said that Solana does not plan to travel to
the region but rather planned to discuss energy security with
the Kazakh and Turkmen Foreign Ministers in Paris at the
September 17-18 EU-Central Asian Ministerial (see Paris 1777)
and with the Azeri Foreign Minister in New York during UNGA.
Everts said that Solana would likely attend the Nabucco
Summit in Budapest, scheduled for January 26-27, 2009.
.