DEPSEC KUPFER DISCUSSES EUROPEAN ENERGY SECURITY

UNCLAS SECTION 01 OF 06 BRUSSELS 001685 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EPET EUN SUBJECT: DEPSEC KUPFER DISCUSSES EUROPEAN ENERGY SECURITY ¶1. (SBU) Summary. On October 6-7, 2008 Acting Deputy Secretary of Energy Jeffrey Kupfer met with EU and industry officials to discuss developments in European energy security and also discussed a wide range of topics including climate change and energy research. Research Commissioner Potocnik provided an overview of the current state of U.S.-EU Cooperation on energy research. UK Perm Rep Darroch, provided the UK view on energy security, the EU internal market, and climate change. Over lunch select Deputy Perm Reps expressed diverse views on energy security, climate change, and nuclear energy. German Perm Rep Duckwitz gave the German view of energy security, with an emphasis on the importance of good relations with Russia. Over dinner representatives from Nabucco partners RWE and OMV provide the industry view on how to move forward on transit negotiations with Turkey and lining up gas supplies for the project. The Georgian and Azeri Ambassadors discussed the impact of the Russian invasion and Azerbaijan's desire to build a strategic connection with Europe. Energy Commissioner Piebalgs discussed relations with Russia and the status of the Third Energy Package. End Summary. ¶2. (SBU) On October 6-7, 2008 Acting Deputy Secretary of Energy Jeffrey Kupfer met with EU and industry officials to discuss developments in European energy security. Commissioner Potocnik -------------- ¶3. (SBU) On October 6, DepSec Kupfer's first meeting was with Science and Research Commissioner Janez Potocnik (Slovenia). Potocnik, whose desk is flanked by portraits of John Lennon and Bob Marley, said U.S.-EU S&T cooperation is going well, but added we have "no choice at the moment." He said we must continue to deepen cooperation and increase funding. Given the limited resources currently available, he stressed the need to coordinate global funding. He noted that on carbon capture and storage (CCS) research, the EU is preparing to move forward. The Deputy Secretary said that coordination is very important and agreed on the need to streamline efforts. He said unlike the Commission, which receives funding under seven-year plans, the U.S. does not have such long-term initiatives. Nevertheless, he expects funding will increase for R&D. UK Perm Rep -------------- ¶4. (SBU) On October 6, DepSec Kupfer and Ambassador Silverberg met (for almost two hours) with Ambassador Kim Darroch, the UK Permanent Representative to the European Union. Darroch spoke at length on his views on the internal market, opening the Southern Corridor, and the EU's climate change agenda. Speaking on the French Presidency Darroch pointed out that most EU Presidencies have one or at most two major crises to deal with. The French have had three: the Irish "No" vote on the Lisbon Treaty, Russia's invasion of Georgia, and the financial crisis. These crises have derailed many of France's goals for its Presidency. ¶5. (SBU) On internal market reforms, Darroch said that the UK was not keen on giving the Commission a vote on the Gazprom clause as this is a matter of national sovereignty. Darroch believed that this would set a bad precedent. The UK favors the Commission being able to advise, but not to block. Darroch said that the Commission can't just decide to extend its powers into new areas; this would require the collective decision of the 27 member states. It is a matter of principle. Darroch characterized the Council version of the 3rd Energy Package as the 60 percent solution. Darroch believes that in ten year's time the European market will be unbundled one way or another. ¶6. (SBU) Darroch said that the Commission will present its Strategic Energy Review (SER) during the fist week of November. He thinks that this will include some calls for EU money going into interconnections, especially building north-south links. This will target the "energy islands" especially in the Baltic States. The SER will also focus on energy diversification and supply diversification. In this vein it will address both the Caspian region and pipelines from North Africa. Darroch believes there will be contention amongst the big member states over the next Energy Commissioner. ¶7. (SBU) Turning to the Southern Corridor, DepSec Kupfer and Ambassador Silverberg stressed to Darroch that the EU needs BRUSSELS 00001685 002 OF 006 to show a strong commitment toward Azerbaijan. Darroch was open to the suggestion and noted that the first trip by the UK's new Climate and Energy Minister Ed Milliband should be to Azerbaijan. Darroch agreed that there needs to be high-level engagement by the member states and that they should not leave this up to the Commission. Darroch opined that one problem the EU has is with the EU's Nabucco Coordinator, Jozias Van Aartsen, whom Darroch said "hasn't left Holland." Darroch hopes that one product of the SER will be to raise the profile for the Southern Corridor effort. Darroch believes that the events in Georgia have transformed the debate on energy security. ¶8. (SBU) Darroch said that the Turks want all the gas and the problem is to convince them of the benefits of being a transit state. Darroch believes the EU needs to engage Turkey along with the U.S.. The EU has some leverage with Turkey over accession. The UK Minister will support Turkish accession, but there is no consensus among the member states. DepSec Kupfer queried about the possibility of aiding Turkey with its domestic gas needs by providing other alternatives such as nuclear and renewables. Darroch responded that the EU was providing Turkey 2.5 billion euros in pre-accession aid and opined that some of this could be used for energy. On opening the Energy Chapter with Turkey, Darroch said that the EU hopes to open at least two new chapters with the Turks under the French Presidency. The UK is in favor of one of these chapters being the Energy Chapter, there is no reason not to do so despite opposition from the Cypriots. ¶9. (SBU) Darroch believes the financial crisis has created the worst possible back drop for doing the 2020 deal. At the political level, EU governments are still saying they are going to stick to the targets. If not for the financial crisis, Darroch believes the big issue for the EU would be energy security. Darroch believes a major tool for meeting the 20 percent GHG reduction by 2020 goal will be auctioning of carbon credits. Under this system industries will have to buy permits to emit carbon and the power sector will be covered 100 percent. Steel will not be covered and the remaining sectors will be somewhere in the middle. Darroch believes the power sector will be the main driver. ¶10. (SBU) On Carbon Leakage, Darroch said the EU will have to find a way to deal with the industries most open to international competition that would be rendered uncompetitive under the EU's carbon trading system. Darroch believes the answer is to give these industries either very low priced or free carbon credits. Establishing the criteria is the key and will determine where you draw the line. Darroch believes that once the Germans set the principal for a sector they will try to load everything into that sector. He believes there will be exceptions for industries such as steel, aluminum, and cement, but is uncertain how much further the exemptions should go. Lunch with Deputy Perm Reps -------------- ¶11. (SBU) On October 6, Ambassador Silverberg hosted a lunch for DepSec Kupfer with selected Deputy Perm Reps from Austria (Mr. Walter Grahammer),Bulgaria (Mr. Mario Milouchev), Greece (Ambassador Leonidas Rokanas),Romania (Mr. Marius Hirte),and The Netherlands (Mr. Peter Kok). DepSec Kupfer emphasized the importance of diversifying energy supplies, both in terms of suppliers and supply routes and encouraged the EU to work to open the Southern Corridor. The events in Georgia have brought this to the forefront. The Deputy Perm Reps provided their views on energy security and Nabucco and launched into a broad ranging discussion which also covered climate change, renewables, and nuclear energy. ¶12. (SBU) Austrian Deputy Perm Rep Grahammer said the starting point for European energy policy was the 2006 Ukraine-Russia crisis; since then energy has been a huge issue for the EU. Romanian Deputy Perm Rep Hirte pointed out that the Council planned a political debate to guide the Commission in its Strategic Energy Review. The question in Hirte's mind is how to determine which competencies the Community has and which are reserved to member states. Bulgarian Dep Perm Rep Milouchev said the Council is discussing some financing options for energy security, but it is still very vague. The focus from the Council standpoint is on energy efficiency, emergency stocks, infrastructure, and external relations with Russia and third countries. BRUSSELS 00001685 003 OF 006 Greek Dep Perm Rep Amb Rokanas opined that the EU relationship with Russia is complicated. The EU Deputy Perm Reps have been engaged on the so called "Gazprom Clause" in the CoRepPer. Russia is a strategic partner, but Russia wants absolute control of its own gas and Russia has used energy as a political weapon. Nonetheless, Russia needs EU technology and investment. The question for the EU is how to balance this dependence. ¶13. (SBU) On the question of how to move forward on Nabucco, Austrian Deputy Perm Rep Grahammer pointed out that there is a lot of division among member states about how to proceed. Grahammer believes Turkey is not the biggest problem. The biggest challenge is the need to engage with Azerbaijan, as well as also Iran as potential sources. Greek Dep Perm Rep Ambassador Rokanas said the biggest doubt over Nabucco is on how to fill it. He said the picture is very complicated with Iran, Iraq, and Azerbaijan as potential suppliers. Bulgarian Dep Perm Rep Milouchev said that Nabucco can't be filled with just Caspian gas and argued that they should source Iranian gas as well. Bulgaria is very keen on Nabucco because it diversifies both routes and sources. On opening the Energy Chapter with Turkey as a step forward in negotiations on Nabucco, Bulgarian Dep Perm Rep Milouchev said that it is more important to bring Turkey into the Energy Community. Ambassador Rokanas said that Greece wants Turkey in Community. Austrian Deputy Perm Rep Grahammer opined that the problem some member states have with opening the Energy Chapter is that opening a chapter is the first step in closing it. ¶14. (SBU) Speaking about the EU's climate change goals, Dutch Deputy Perm Rep Kok said meeting these goals will require huge investment. He believes pressure is mounting for passage of the Climate and Energy Package, but the package is very complicated. On the question of whether or not the EU will change its renewable targets, Austrian Deputy Perm Rep Grahammer responded that if you change the targets you have to change everything. The general view is the citizens want tough targets, the question is how to meet them and how much will be met through the use of clean development mechanisms (CDMs). ¶15. (SBU) Greek Dep Perm Rep Amb Rokanas pointed out that energy security can also come from renewables, because this translates into less dependence on imported gas. Rokanas said there is a huge potential in Greece for wind power, solar, and geothermal. Rokanas said that Greece is keeping an open mind on carbon capture and storage (CCS),but the technology is untested. In Rokanas's mind, CCS has huge associated costs just to "sweep the problem under the rug" and questioned whether it wouldn't be better to invest in "real" renewables. He said Greece is ready to explore the CCS option after they've seen the demonstration projects. Greece is not against CCS, they just need to see more proof that it will work. Rokanas emphasized that there can be no global solution to climate change without the United States. ¶16. (SBU) The most lively discussion at the lunch centered around nuclear power. Romanian Deputy Perm Rep Hirte said nuclear is the best solution for energy diversity, as Hirte sees it Romania has a choice between nuclear and greater dependence on Russian gas. He also believes the EU's climate goals will result in a strong push for nuclear power. Greek Deputy Perm Rep Amb Rokanas opined that the problem with nuclear addressing public opinion. Hirte countered that people are mainly concerned over the cost of energy, not whether or not it comes from nuclear. Hirte said that Romania has been working with a Canadian firm and wants to build two new nuclear units, but that the Canadians don't seem too excited about the prospect. ¶17. (SBU) Bulgarian Dep Perm Rep Milouchev, also sees no alternative to investing in nuclear power. Milouchev pointed out that had to close one of its nuclear power plants under the terms of EU accession and decided to build a replacement plant. He lamented the fact the only bidders for this plant were Russian and Czech (with Russian involvement). Milouchev said Bulgaria is 100 percent dependent on Russian oil and 95 percent dependent on Russian gas. Bulgaria has a lot of lignite coal, but this causes emissions problems. As such he sees the only way out as nuclear, or perhaps Nabucco. ¶18. (SBU) Greek Dep Perm Rep Amb Rokanas emphasized that for nuclear power is not an option for Greece. Rokanas BRUSSELS 00001685 004 OF 006 recognizes this is not a rational reaction but is due to perceived danger, emphasizing that nuclear power is a very sensitive issue in Greece. Nonetheless, Rokanas acknowledged that there is discussion even in Greece about nuclear. German Perm Rep -------------- ¶19. (SBU) In a October 6 meeting, German Permanent Representative Edmund Duckwitz told DepSec Kupfer that Germany sees renewables as a very important aspect of energy security. Duckwitz said Germany needs to diversify its energy supply as much as possible. They are trying to find as many sources and routes for gas and oil as possible. Duckwitz said Germany is quite active even though his country does not get that much sun. They are working on solar projects in Algeria and other countries as well. Germany is also pushing wind energy. Nuclear, Duckwitz said, is very delicate in Germany and opined that perhaps the next German government will have to reconsider this question. ¶20. (SBU) Turning to gas supply, Duckwitz said Germany is very much in favor of promoting the different gas pipeline projects: South Stream, Nabucco, and Nord Stream. In the end, Duckwitz believes Germany will need them all. Duckwitz said Nord Stream can offer better supply of gas to Germany, the UK, and The Netherlands. Duckwitz understands the concerns of Germany's eastern neighbors (Poland) and said Germany had offered to give them a direct connection to the pipeline. He said Nord Stream still has a long way to go given the ongoing environmental discussions. Asked if Nord Stream is a competitor to Nabucco, Duckwitz said he does not see any competition between them, reiterating that "we will need them all." He also said he believes that the resource base (from Russia and the Caspian region) is large enough to fill all the pipelines. Duckwitz emphasized that Germany is a strong supporter of Nabucco and that Germany is hearing from private investors that all three projects are sustainable. He also emphasized that there are major German companies involved in both Nord Stream (E.On) and Nabucco (RWE). ¶21. (SBU) On relations with Russia, Duckwitz said the financial crisis is having an influence on Russian behavior. He pointed to the fact that Russia is allowing EU observers in Georgia as a positive development. He said he now sees more flexibility on the Russian side, because the financial crisis has underlined to the Russians how dependent they are on Europe. Duckwitz emphasized that Russia needs investment and they are very interested in German technology. He sees the relationship with Russia as one of interdependence. Duckwitz acknowledged there was a certain reluctance about investment in Russia after the events in Georgia, but believes that problem has been overcome. He said that the interest of German companies in investing in Russia has not lessened. Germany is the most important partner of Russia, and Duckwitz believes it will stay so. Nabucco Dinner -------------- ¶22. (SBU) DepSec Kupfer hosted a dinner October 6 for representatives from German RWE and Austrian OMV to seek their views on the Nabucco gas pipeline project. Attending from RWE was Jeremy Ellis, Head of Business Development RWE Gas Midstream GmbH who drove in for the meeting from Germany. Representing OMV at the dinner were Mr. Johann Gallistl, Procurist of Nabucco Gas Pipeline Int'l GmbH and Managing Director of the National Nabucco Company Austria who flew in for the meeting and Mr. Stefan Pinter, OMV Director for EU Relations based in Brussels. ¶23. (SBU) OMV's Gallistl started off by giving an overview of current negotiations with Turkey. Gallistl said that Turkey is now engaging and negotiating with the Nabucco partners. Turkey continues to insist on a 15 percent lift-off right, but the producers don't want this. Basically Turkey wants gas at a discount. This will have to be settled in a separate arrangement. They are negotiating on an inter-governmental agreement (IGA),which will set the terms and conditions for the entire pipeline. They are also working on a Project Support Agreement (PA). The IGA and PA will lock in all the transit countries. Nabucco is working to come up with political and commercial solutions for Turkey's security of supply concerns. RWE's Ellis said that Turkey is coming to realize that without Nabucco they loose. Nabucco would open up the door for further investment, create BRUSSELS 00001685 005 OF 006 transparent pricing, and give greater liquidity to the gas market. The question is how to divide up the Azeri volumes. Turkey wants 8 bcm from Azerbaijan. Nabucco is arguing that they can give Turkey a security of supply call on Nabucco volumes allowing them to divert European bound gas to Turkey in the event of an emergency. Ellis said that Turkey realizes the threat from South Stream is real. This realization along with the events in Georgia brought Turkey to the negotiating table. ¶24. (SBU) Ellis emphasized that Nabucco needs a second gas supply source beyond Azerbaijan. Gallistl pointed out Nabucco needs 15 bcm for sanctioning. Azerbaijan can provide at most 8 bcm. Ellis said that the 8 bcm from Azerbaijan would be enough to start Nabucco in 2013 but they would need additional volumes coming on-stream by 2017-2018. RWE is very interested in Iraq as this potential second source, and Ellis asked the U.S. to consider accelerating gas development in Iraq by helping to provide some sort of umbrella for delivery risk. On Turkmenistan, Ellis believes a trans-Caspian gas solution is necessary for Turkmenistan because it will keep all the buyers honest. There needs to be heavy-weight consortium formed to push this idea forward, probably something involving companies from Germany, the U.S., OMV and Turkey. Ellis believes that if they get Nabucco off the ground, the Russians will want to sell their gas through Nabucco because it will be cheaper than building South Stream. ¶25. (SBU) RWE is not concerned about funding for Nabucco. Ellis said that when the supply is settled and the transport contracts are in place, the funding will follow. Ellis likened Nabucco to the movie "Field of Dreams" saying "If youQild it they will come." Ellis said Nabucco does not need EU or U.S funding. He urged both to put their money to work on the supply issue. He downplayed suggestions to help Turkey build nuclear power plants as a substitute for gas, pointing to what he called Turkey's "nuclear bidding fiasco." Ellis said what Turkey needs is gas, not alternatives. Ellis downplayed the usefulness of conferences and summits saying they take a lot of work, produce some nice conferences, and some pretty words, but words are not enough. ¶26. (SBU) Ellis said support from the EU Commission up until now has been worse than nothing, but opined that it is better now that Nabucco Coordinator Jozias Van Aartsen is otherwise occupied (as Mayor of The Hague). Asked what kind of help the Nabucco partners would seek from Energy Commissioner Piebalgs, Ellis said that Piebalgs should focus on the supply picture. The EU has neglected the Caspian and the Caspian producers are feeling isolated. Ellis said that Piebalgs needs to go to Azerbaijan as soon as possible because President Aliyev is very nervous. He also encouraged Piebalgs to work on supply solutions with Iraq. On Turkey, Ellis said they are urging the EU to keep the pressure up on Turkey to deliver. Ellis said the EU needs to back off from holding bilateral discussions on transit with Turkey (but without the Nabucco partners). Ellis views this as a commercial issue and believes the Commission needs to back off. His advice to the EU would be to keep the pressure on Turkey and wait for the call from the Nabucco partners once they have worked out the commercial details. Georgian and Azeri Ambassadors -------------- ¶27. (SBU) On October 7 Ambassador Silverberg hosted a breakfast attended by Georgian Ambassador to the EU Salome Samadashvili and Azeri Ambassador to the EU Arif Mamedov. The American-educated Samadashvili said that Georgia has been trying to play the role of intermediary between Europe and Central Asia. She said the Russian invasion was a wake-up call for Central Asian states, and she is not sure where they stand at this point. Georgia wants to remain a transit country, but she questioned whether Central Asia could produce enough supplies to meet European demand. Ironically, she said Russian gas flowed unhampered to Georgia throughout the invasion. She believes Russian forces deliberately targeted the Baku-Supsa pipeline, noting there were 50 craters around the pipeline and no other strategic assets in the area. The Georgian government will now look to increase the use of renewables, particularly hydropower, to lessen dependency on Russia. She said 45% of Georgia's electricity (and 100% of Abkhazia's) comes from hydropower. DepSec Kupfer said the U.S. could help Georgia with renewables and energy efficiency and thanked Georgia for its role in BRUSSELS 00001685 006 OF 006 interdicting nuclear smugglers. ¶28. (SBU) Amb Mamedov said Azerbaijan is ready to play a role in transmitting gas to Europe, but there are a lot of borders to be crossed and prices need to be set between producer and consumer countries. When asked about TGI, he said he was all for "diversification," but indicated a preference for Nabucco. Despite saying Nabucco was "too early or too late," he believes it is a good project, but it needs political support. He said Shah Deniz II would have 11-13 BCM available for sale, but Nabucco needs at least 20-25 BCM to be commercially viable. He said the only practical gas source for Nabucco is the Caspian Basin, but noted that the Europeans have not demonstrated a political commitment: "Europe talks about necessities and strategic importance, but it is not pushing for a deal." He said senior EU officials need to resolve the issues with Turkey and "go to Turkmenistan as Putin has." The distance between Azeri and Turkmen platforms in the Caspian Sea is only 60km. "You do not need a pipeline" he said, "you can call this an interconnector." Mamedov said Azerbaijan is in a delicate situation; Russian President Medvedev has offered to buy all available reserves. It wants to sell gas to Europe, but it will not sacrifice its strategic relationship over transit issues or prices. He added: "our neighbors are not Austria and Switzerland." Commissioner Piebalgs -------------- ¶29. (SBU) On October 7, Energy Commissioner Andris Piebalgs (Latvia) told the Ambassador and Deputy Secretary that he would be meeting with Russian officials in Paris on October 8 under the rubric of the Permanent Partnership Council. He said he did not expect any concrete outcomes - Russia sees the Commission as a nuisance and prefers to deal with member states - but that it was important to maintain dialogues following the invasion of Georgia. Amb Silverberg noted that BP had recently made a big concession over TNK-BP and while Piebalgs said the outcome was "good," he noted it was "clear that the Russian government" was involved. On Third Country clause, Piebalgs said he would have preferred to have decision-making authority, but said the mandatory consult with the Commission would be sufficient: "It would be difficult for a member state to ignore the Commission's opinion." He said EU efforts on renewables are progressing but said the issue of sustainability criteria for biofuels is still "messy." DepSec Kupfer noted that the EU's proposed criteria have "gone too far" and encouraged a science-based approach. ¶30. DepSec Kupfer was not able to clear on this cable. Silverberg .