COMPETING PIPELINES

UNCLAS SECTION 01 OF 03 BRUSSELS 001579

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET EU
SUBJECT: COMPETING PIPELINES


1. (SBU) On September 25 Eurogas, an industrial association
of 44 gas companies and federations, held its annual policy
conference in Brussels. One of the sessions, "Key Challenges
and Opportunities in the Development of Major
Infrastructures," was comprised of presentations on the major
East-West infrastructure projects: Nabucco, Nord Stream, the
Trans-Adriatic Pipeline (TAP),South Stream, and the
Turkey-Greece-Italy Interconnector (TGI). Most of the
presentations contained only general information about the
respective projects. However, TGI declared that there is not
enough gas in the Caspian region to support all of the
proposals, whereas Nabucco mentioned its interests in Russian
and Iranian gas.

Nabucco
--------------

2. (SBU) Martin Schwarzbichler, Head of Business Analysis
for Austrian OMV's Gas unit stressed there is large potential
for development in the Caspian and Middle East regions -
Nabucco's targeted source. He estimated 84.49 trillion cubic
meters (tcm) exist in these two regions and an additional
47.65 tcm in Russia alone. Nabucco Gas Pipeline,
International is a conglomerate of OMV (Austria),MOL
(Hungary),Transgaz (Romania),Bulgargaz (Bulgaria),Botas
(Turkey) and RWE (Germany) and is divided into national
subsidiaries in Austria, Hungary, Romania, Bulgaria and
Turkey.


3. (SBU) According to Schwarzblicher, transmission would
commence in 2013; the first open season for transmission
would allot 15 billion cubic meters per year (bcm/a) to the
shareholders and the second round would open the remaining 16
bcm/a to third-party bidders. While Azerbaijan's Shah Deniz
II field is expected to be the primary source for Nabucco,
Schwarzbichler stated that Nabucco would require additional
sources to meet its planned 31 bcm/a capacity and cited Iran,
Iraq, Egypt and Russia as prospective suppliers. He pointed
out that there is already existing infrastructure linking
Turkey with Iran and with Russia, but declined to provide any
further information about potential Russian supplies.


4. (SBU) In subsequent discussions with RWE and OMV, company
representatives reiterated the need to look beyond Azerbaijan
for gas supplies and acknowledged that Russia and Iran are
receiving serious consideration. Jeremy Ellis from RWE added
that gas from Turkmenistan is more problematic than accessing
gas from Iraq over the short to medium term. Ellis asked for
U.S. and EU help in finding ways to encourage gas exports
from Iraq and to find mechanisms to help offset the political
and security risks of developing and exporting Iraqi gas
deposits.

TAP
---

5. (SBU) The Trans Adriatic Pipeline is a joint venture
between Norway's StatoilHydro and Switzerland's EGL to bring
Caspian gas to Italy via Turkey and Greece, much like TGI.
According to Markus Brokof of EGL, EGL has contracted with
the National Iranian Gas Export Company for 5.5 bcm/a and is
also seeking to access gas from Azerbaijan's Shah Deniz II
field. (Note: Brokof ironically cited Senator Lugar's call
for the opening of the Southern Corridor. End note.)
StatoilHydro has a 25.5 percent share of Azerbaijan's Shah
Deniz field and an 8.65 percent share of the ACG field, also
in Azerbaijan. Like the other Southern Corridor proposals,
TAP has been unable to secure a transit agreement through
Turkey.

Nord Stream
--------------

6. (SBU) Nord Stream is a joint venture between Russia's
Gazprom, German E.On and Wintershall Holding (a BASF
subsidiary),and Dutch Gasunie. In contrast to the
"competing" Southern Corridor proposals, Dr. Maartje van
Putten described Nord Stream as one of many components of the
EU's long-term energy policy. She said that renewables alone
will not meet increasing demand and estimated that the EU
will need to import 81 percent of its gas supplies by 2025,
compared to 58 percent in 2005. With a capacity of 51 bcm/a,
Nordstream will transmit Russian gas directly to Germany
under the Baltic Sea, but van Putten emphasized it as a
"European project" with links to ten member states through
shareholders and/or contractors.

South Stream

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7. (SBU) South Stream is a joint venture between Eni of
Italy and Russia's Gazprom, that would transit gas westward
under the Black Sea bypassing both Ukraine and Turkey.
Conceived subsequent to Nabucco, Carlo Merrigi of Eni denied
it was in competition with the other Southern Corridor
proposals, despite projecting routes similar to both Nabucco
- Bulgaria to Romania and Hungary and TGI - Bulgaria to
Greec to Italy. He also insisted there are sufficient
supplies to support the 30 bcm project. He did acknowledge
several challenges such as access to materials and
technology, and most recently access to credit, although he
said Eni and South Stream have enough capital for now.

TGI
---

8. (SBU) The Greece-Italy Interconnector (IGI) is the final
phase of the Turkey-Greece-Italy Interconnector (TGI)
project. IGI is a joint venture between Italian Edison and
Greek Depa to build a subsea connection called Poseidon
across the Adriatic. In describing TGI, Elio Ruggeri of
Edison was much more concrete than other presenters. Edison
expects European dependence on foreign gas to nearly double
in the next 12 years, underscoring the need to open a route
for Caspian supplies. Ruggeri said Azerbaijan, Uzbekistan,
Iran, Iraq, Turkmenistan and Kazakhstan hold about 22% of the
world's reserves. Both Iran and Iraq lack infrastructure and
pose political challenges, where as Turkmen, Uzbek, and
Kazakh supplies appear destined for Russia and China. Thus,
he argued, Azerbaijan's Shah Deniz II field, with a potential
of 14-16 bcm/a (11-13 likely available for transit) is the
most viable mid-term option for Europe. In contrast to
Nabucco, TGI, which has only 10 bcm/a capacity, would not
need to be supplemented beyond Azerbaijan. Further, Ruggeri
pointed out that TGI will utilize existing infrastructure,
most which is in place; only 800 km of new pipe is needed to
transit gas under the Adriatic.


9. (SBU) In a subsequent conversation, Ruggeri said the main
obstacle for TGI remains a purchase arrangement between
Turkey and Azerbaijan. Turkey originally agreed to a 15
percent take from TGI's flow (a maximum of about 1.5 bcm/a),
but has since retracted and is now seeking to contract
directly with Azerbaijan for 8 bcm/a. Ruggeri said Prime
Minister Berlusconi was seeking to convene his Azeri,
Turkish, and Greek counterparts next month in an attempt to
finalize the deal.

White Stream
--------------

10. (SBU) Not represented at the conference was the White
Stream gas pipeline project. The UK-based White Stream
company is the brainchild of Pipeline Systems Engineering
(PSE) and Radon-Ishizumi consulting and engineering
companies. The project envisions building a gas pipeline
from Georgia across the Black Sea to either Ukraine and/or
Romania and then onward to markets in Central and Western
Europe. The project, however, so far lacks a major player
from the gas production, distribution, or consumption sectors
to champion the pipeline.

Comment
--------------

11. (SBU) The Nabucco, TGI, and the TAP projects share a
common challenge negotiating transit agreements with Turkey.
The sticking point is how much gas Turkey will need for its
own market and how much it will be comfortable allowing to
flow onwards to Europe. Contacts at several of the firms
involved tell us that Turkey fears its Russian gas contracts,
which expire in 2011, may not be renewed. Thus Turkey is
more concerned with securing Azeri gas for its domestic
consumption rather than serving as a conduit for Europe.
Until Turkey's supply fears can be assuaged, it seems
unlikely that any of these projects will move forward.
Industry and EU officials that we've talked with are well
aware of this problem and are all looking for ways to help
Turkey with its security-of-supply concerns.


12. (SBU) However, even if a transit agreement is reached
with Turkey, Nabucco would still require a second source of
supply beyond Azerbaijan to make it economically feasible.
Nabucco representatives are not optimistic about the
prospects of Turkmen gas. Rather, they are more intent on
exploring the prospects of supplementing Nabucco with
supplies from Russia, Iran or Iraq. They are very much aware

BRUSSELS 00001579 003 OF 003


that the former two pose implications for U.S. policy, and
perhaps may use this to leverage U.S. guarantees for efforts
to develop infrastructure within Iraq.


13. (SBU) While Russia's invasion of Georgia has caused the
Europeans to refocus their efforts on diversification of
supply, the reality is there does not appear to be enough gas
in the region to support all of these proposals in the
2010-2015 timeframe. Indeed, one RWE executive echoed
Special Envoy Gray's comments that Nord Stream will likely be
in competition with any Southern Corridor project for Caspian
Gas. In reality, TGI and Nabucco are both competing for the
same Azeri gas. Whereas TGI represents the most expeditious
way to open the Southern Corridor, Nabucco would bring more
gas to a larger market, currently dominated by Russian gas.
This begs the question, is the bird in the hand, better than
two in the bush? End Comment.
.