SPECIAL ENVOY GRAY'S MEETINGS ON THE NABUCCO

UNCLAS SECTION 01 OF 02 BRUSSELS 001526 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EPET EU SUBJECT: SPECIAL ENVOY GRAY'S MEETINGS ON THE NABUCCO PROJECT ¶1. (SBU) Summary. Special Envoy for Eurasian Energy C. Boyden Gray met separately on September 25 with Hungary's Nabucco Ambassador Mihaly Bayer and Jeremy Ellis, the head of the Nabucco Project for Germany's RWE. Bayer laid out Hungary's plans to host a high-level Nabucco summit on January 26-27, 2009. Bayer believes the summit is a necessary step to demonstrate broad political support for the Nabucco project. RWE's Ellis was much more focused on getting the commercial side of the equation solved before worrying about the politics. Ellis believes the Nabucco partners are working towards a viable solution with Turkey and that the politicians in Brussels should stay out of the mix until the commercial details are worked out. End Summary. Nabucco Summit -------------- ¶3. (SBU) Hungary's Nabucco Ambassador Mihaly Bayer began the meeting by describing the Government of Hungary's (GOH) plans to host a high-level Nabucco Summit on January 26-27, 2009. Bayer said that the GOH wants this to be a heads-of-state level summit with participation from source countries (Azerbaijan, Turkmenistan, Iraq, and Egypt),Turkey, the Nabucco Countries (Hungary, Austria, Bulgaria, Germany, and Romania),the European Union, the U.S., and the Nabucco Project itself. Bayer presented SE Gray with a formal invitation to the summit and asked for U.S. support in encouraging high-level participation from all parties. Bayer said that the GOH had already delivered letters to the Presidents of Azerbaijan and Turkmenistan as well as the Prime Ministers of Iraq and Egypt. Preliminary reactions from the source countries have been good, though the GOH has not yet received any firm commitments for attendance. ¶4. (SBU) Bayer believes the Summit is necessary to reach a broad agreement on political support for the Nabucco project. He said that the GOH envisages the participants signing a "Budapest Declaration" about major principals on cooperation and to demonstrate political will. The actual form and text such a declaration would contain has not yet been decided. Bayer is meeting with EU officials in Brussels about the summit. He plans to advise Energy Commissioner Piebalgs's Cabinet that it is important for Piebalgs to travel to Central Asia. Bayer said a visit to the region by EU President Barroso would also be very powerful, but that Barroso would need to do more to support Nabucco than he did when he visited Turkey. Bayer criticized EU support for the Azerbaijan-Turkmenistan Summit which Bayer considers historic, but to which the EU sent a Head of Unit to read a canned message. Bayer planned to travel to the U.S. this week to meet with Washington-based officials from State, NSC, and OVP. He also planned to meet with US ExIm Bank officials to discuss possible funding mechanisms for Nabucco associated projects. ¶5. (SBU) According to Bayer, the Turkish side is more open to negotiations post Russia/Georgia and seems to have a higher awareness of the necessity for Nabucco. Bayer understands Turkey's concerns about gas security of supply, given the Russian threat to cut off gas supplies in 2011, but thinks that Turkey shouldn't expect Azerbaijan to solve its problems. Bayer said the Nabucco companies need to commit 40 million euros to move forward, but without an Intergovernmental Agreement (IGA) Turkish Botas will not be able to spend any money. Turkey has dropped demands for a 15 percent lift off in the IGA, but has retained this demand in negotiations over a Host Government Agreement (HGA). Bayer said that his advisors tell him that two agreements (IGA & HGA) are not necessary; everything can be covered by an IGA. Turkey can sign an HGA with the Nabucco partners if they want, but an HGA is not necessary from the standpoint of the EU Nabucco countries. Leave the Deal to Us -------------- ¶6. (SBU) In stark contrast with Bayer's belief in the need for a political solution Jeremy Ellis, German RWE's Nabucco Project Head, told SE Gray that the Nabucco partners are hard at work on a commercial deal for Turkey and what they need least is interference from Brussels. In Ellis's opinion, the EU should concentrate on Cyprus and Turkey's accession aspirations and not worry about the details of the IGA and HGA. Ellis believes the Nabucco partners are close to getting a working-level agreement with Turkey on the IGA. The IGA is not a corporate document, but it has to be commercially acceptable. The HGA is expected to be the most BRUSSELS 00001526 002 OF 002 difficult to negotiate, but the Nabucco partners are now working on a draft. The goal is to get an agreement on the IGA and HGA documents by the end of the year. ¶7. (SBU) Like Bayer, Ellis views Turkey as more willing to negotiate in the wake of the Georgia crisis. Turkey seems to be waking up to the possibility that Russia will capture all the gas from Turkmenistan, unless Nabucco is there as an alternative. Turkey and the Nabucco partners are carrying on an active dialog about Turkey's security of supply concerns. Ellis believes the Nabucco pipeline is as much for Turkey as it is for Europe. One of the options they are currently considering is to make the pipeline bidirectional so that, if needed, gas could flow from the European system back into Turkey. Turkey would of course then be paying the netback for gas routed through Europe, but this would help them in their concerns about the suppl of Russian gas. The principal advantage forTurkey would be that it would give them some negotiating room with the Russians. ¶8. (SBU) RWE is also talking to Turkish officials about meeting their security of supply concerns by building new coal-fired and possibly nuclear plants and hopes to announce a major hydro project with Turkey in the next 10 days. Ellis believes they need to arrive at an optimal solution for Turkey within the next two to three months and expects that the proposed solution will need a political push before the end of the year. To this end, RWE is now trying to mobilize support from the German government. Ellis reiterated, however, that until the companies can deliver the commercial side the political push is not needed. ¶9. (SBU) Ellis said he believes it is important to open up the possibility of gas flows from Turkmenistan as part of the confidence building for the Nabucco project. He does not believe Russian gas is a requirement for Nabucco, but believes the Russians will want to come into the project as shippers once they see that it is actually going to be built. Ellis made a plea for the U.S. to consider allowing for the possibility of Turkmenistan gas transiting Iran as a first step in getting Turkmenistan gas flowing west through Azerbaijan. Ellis also mentioned possible gas flows from Iraq, but did not consider this a viable short term option for Nabucco. ¶10. (SBU) Comment. Bayer and Ellis both make valid points on the steps necessary to make Nabucco a reality. In the end, Nabucco's fate will depend on how successful Ellis and his colleagues are at hammering out a commercial deal that can also garner political support from all the key players. End Comment. Silverberg .