RWE PROPOSES TWO NEW APPROACHES TO GET NABUCCO

UNCLAS SECTION 01 OF 02 BRUSSELS 001907

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET EUN
SUBJECT: RWE PROPOSES TWO NEW APPROACHES TO GET NABUCCO
MOVING

REF: BRUSSELS 1776


1. (SBU) In a December 9 meeting with Econ Officers, an
official from German RWE raised two new approaches RWE is
pursuing to advance the Nabucco gas pipeline project. The
first approach he outlined would be for RWE and Austrian OMV
to form a "Caspian Energy Corporation" to negotiate directly
with Turkmenistan to buy gas for Nabucco. The second
approach would be to co-opt the competition by inviting
Italian Edison to join the Nabucco consortium.

The Caspian Energy Corporation
--------------

2. (SBU) RWE is not necessarily opposed to the Commission's
proposal to form a "Caspian Development Corporation" (CDC,
reftel) as a way to bring Turkmen gas into Nabucco, but it is
concerned that the World Bank study process proposed by the
Commission will take too long. RWE is also wary of any
business solution designed by the Commission. As a result,
RWE and OMV are seeking to form a "Caspian Energy
Corporation" (CEC) whose purpose would be the same as that of
CDC, but would only involve the two partners (at least
initially). Our RWE contact said there was too much "noise"
surrounding the CDC proposal and that he believes a private
company would be able to act more quickly to approach
Turkmenistan with a credible offer to buy gas. RWE has
pitched the same idea to EU Energy Commissioner Andris
Piebalgs, but so far Piebalgs is "not too keen" on the idea.


3. (SBU) RWE believes it is essential to move now to lock in
a secondary source for Nabucco (beyond Azerbaijan). CEC
would look at the "tie-in option", that is tying in offshore
Turkmenistan gas production facilities to nearby offshore
Azerbaijan production facilities and requiring only about 60
km of new pipeline. This would be a "baby step" but could
provide up to 8 bcm of gas for Nabucco. RWE indicated this
approach could potentially get around the whole Caspian
delimitation issue that would undoubtedly have to be
addressed for a trans-Caspian pipeline solution as envisaged
by CDC. Another option RWE would like to consider is for CEC
to buy gas from Turkmenistan via Iran, this could be either
via actual transit or through a swap arrangement with Iran
and Turkey. Econ Officers reminded our RWE contact that the
U.S. would not support any solution involving Iran. Ideally,
according to RWE, CEC would also involve an upstream partner
in Turkmenistan, such as Petronas or a U.S. or other Western
company. CEC would only need to negotiate an
intergovernmental agreement (IGA) between Azerbaijan and
Turkmenistan, as once the gas entered Azerbaijan it would go
into the Nabucco system. CEC would basically be an
instrument to aggregate demand and build any necessary
infrastructure to deliver the gas to Azerbaijan.


4. (SBU) Commission officials at DG-TREN told Econ Officers
on December 12 that the Commission would not be opposed to
the CEC idea as long as it is pro-competitive and results in
getting the gas necessary for Nabucco to go forward. The
Commission is of the opinion, however, that Turkmenistan
will need more than a simple offer to buy 8 bcm of gas to
make the commitment to ship gas west to Europe. In the
Commission's mind, Turkmenistan needs a financial guarantee
for a substantial about of income for a long period of time.


5. (SBU) According to the Commission, the CDC concept would
be for an initial volume of 12-13 bcm with up to a 50-year
take-or pay guarantee which would be backed up by the
European Investment Bank (EIB). The Commission also sees CDC
as providing cover for private companies vis-a-vis Russia.
The Commission believes any company that made a deal directly
with Turkmenistan would suffer in its relations with Gazprom,
where as with CDC the companies would only be participating
in a smaller way and likely would not engender the same
response from the Russians. The Commission is optimistic
that the proposed World Bank study on CDC can be concluded by
June 2009, which would allow for a 2010 startup and could
bring gas volumes on stream by 2015.


6. (SBU) The Commission intends that CDC would also be used
as a development mechanism (investing in schools,
infrastructure, and training) to achieve the EU's wider
development goals in the region. Our contacts reaffirmed
that the Commission does not envisage CDC having any role in
upstream development. The World Bank put an upstream role in

BRUSSELS 00001907 002 OF 002


the original Terms of Reference, but this not something the
Commission proposed and not something the Commission will
accept. The demand for gas presented by CDC could require
Turkmenistan to hold a new licensing round for development of
additional offshore or onshore blocks, but this would not
affect existing contracts and is not something CDC would
participate in.


7. (SBU) Econ Officers also spoke with a contact from
Italian Edison -- the Italian part of the Turkey-Greece-Italy
pipeline (TGI) -- about the CDC concept on December 15.
Edison is not opposed to the idea of a CDC as long as it is
not a "Commission Club of Friends." Even then, Edison would
probably participate as a way to get more gas. Edison is
skeptical, however, of any Commission solution to getting
gas from Turkmenistan and fears that it would be influenced
by EU politics.

If You Can't Beat Them, Join Them
--------------

8. (SBU) According to our contact, RWE would be interested
in having Edison join the Nabucco consortium as a way of
eliminating the competition for Azeri gas volumes posed by
TGI. RWE believes that if any Azeri gas goes to TGI instead
of Nabucco, the Nabucco project will be dead for at least
eight years. According to RWE, Edison is not in this to
build pipelines, it just wants the gas for its electricity
generation. As such, why not have Edison join Nabucco as an
equity partner? RWE is now approaching Electricite de France
(EDF) -- who is a large shareholder in Edison -- to garner
support for bringing Edison into Nabucco. In RWE's mind
there will be plenty of capacity in Nabucco to accommodate
Edison's needs. As our RWE contact put it, there is a "fully
open door" for Edison to join Nabucco as the seventh equity
partner.


9. (SBU) Econ Officers raised the notion of Edison joining
Nabucco with our Edison contact. Our contact laughed, but
said that this was not the first time he had heard of this
idea. He said, however, he was not aware of any ongoing
negotiations and that he, based in Brussels, would likely not
be involved in any such discussions. He said that joining
Nabucco would have a certain appeal for Edison. The driver
behind Edison's desire to build TGI is to obtain an alternate
gas source. Currently Edison is totally dependent on Italian
Eni for all its gas supply. Building TGI would diversify
Edison's gas sources away from a single supplier. Edison is
not a pipeline company and would likely look favorably on any
solution that allowed it to buy gas directly from the source,
rather than Eni.


10. (SBU) Comment. Our industry contacts at both Nabucco
and TGI express a greater sense of urgency than that felt by
the Commission and like many in industry they are skeptical
of any solution proposed by government. Both of RWE's
proposals appear promising. The CEC idea could accomplish
the goal of bringing Turkmen gas west without the Commission
baggage attached to the CDC idea -- provided CEC were not
granted an exclusive export license from Turkmenistan.
Having Edison join Nabucco would likewise eliminate the
competition between Nabucco and TGI for Azeri volumes. RWE,
Edison, and the Commission would all prefer to see their
individual plans come to fruition, but at the end of the day
all of them would likely support any solution that results in
Caspian basin gas flowing to them through the Southern
Corridor. End Comment.

Silverberg
.