SPECIAL ENVOY GRAY TALKS PIPELINES, CLIMATE POLICY

C O N F I D E N T I A L SECTION 01 OF 04 BUDAPEST 001058

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DEPARTMENT FOR EUR/FO JGARBER AND MBRYZA, EUR/CE, EUR/RUS,
EUR/ERA, EEB/FO, PLEASE PASS TO NSC ASTERLING

E.O. 12958: DECL: 11/06/2018
TAGS: ENRG ECON EPET PGOV SENV KGHG HU
SUBJECT: SPECIAL ENVOY GRAY TALKS PIPELINES, CLIMATE POLICY
IN BUDAPEST

REF: A. BUDAPEST 1021

B. BRUSSELS 1686

BUDAPEST 00001058 001.2 OF 004


Classified By: P/E Counselor Eric Gaudiosi, reasons 1.4 (b, d)


1. (C) SUMMARY: During his two-day trip to Budapest to take
part in an energy conference, Special Envoy Gray held a
series of meetings with regional energy officials and
experts. These conversations revealed that despite recent
Russian diplomatic and financial setbacks, Gazprom and its
partners are moving forward on the South Stream pipeline
feasibility study while Moscow is apparently working to
influence the outcome of the Southern Corridor pipeline
project in Turkey and the Balkans. Hungary, Bulgaria, and
the Czech Republic are hoping to keep a spotlight on Central
European energy security and the Southern Corridor as they
host a series of energy summits in 2009. Ukraine is making a
bid to retain its role in European energy transit following
the construction of planned pipelines that circumvent it. On
climate policy, Hungary indicated it would not agree to the
French proposal to change the base year for emission
reduction requirements from 1990 to 2005 without
coordination, but that it might be open to a compromise base
year sometime between 1990 and 2005. Hungary, like Poland,
wants to take the lead in coordinating a policy with fellow
new EU members. END SUMMARY.


2. (SBU) US Special Envoy for Eurasian Energy Boyden Gray
visited Budapest October 28-29 to take part in the 3rd Energy
Forum, a conference jointly organized by Hungary,s
Constellation Energy Institute and Poland,s Eastern
Institute and held under the patronage of President Solyom.
On the margins of the conference, Special Envoy Gray met with
Peter Poptchev, Bulgaria,s Ambassador for Energy Security
and Climate Change and Coordinator for Nabucco, Bohdan
Sokolovskyj, the Ukrainian Presidential Representative for
International Energy Policy, and Zeyno Baran, a Eurasian
energy expert from the Hudson Institute. Special Envoy Gray
also met with Hungary,s Ambassador-at-Large for Nabucco,
Mihaly Bayer, at his office, and held a breakfast meeting
with Senior State Secretary Dr. Lajos Olah of the Ministry of
Environment and Water, and Tibor Farago, the Ministry,s Head
of Strategic Planning, who represents Hungary at EU climate
change meetings.

SOUTH STREAM: PROGRESSES, AT LEAST ON PAPER


3. (SBU) Much of the conversation with Poptchev and Bayer
centered on Russia and the state of play with South Stream.
Both see Russia in a weakened position following the Georgia
conflict and as a result of the financial crisis. Poptchev
posited that Russia is "unsure of itself" and "sorry for its
actions in Georgia." Bayer believes Russia still would like
to integrate into Western institutions, albeit on its own
terms, but the loss of confidence by the West in Russia,
post-Georgia, and the impact of the financial crisis and
lower energy prices on its hard currency reserves suggest it
lacks the means to bend the West to its will.


4. (C) Poptchev and Bayer both made it a point to emphasize
that Bulgaria and Hungary are merely transit states for South
Stream, which they described as a diversification project for
Italy. Special Envoy Gray responded that based on recent
conversations with ENI management, from the Italian
company,s perspective, South Stream has not moved beyond an
agreement with Gazprom for a two-year feasibility study.
Planning for the project, however, appears to be proceeding
in both countries under a veil of secrecy. Poptchev reported
that "they are working day and night" on the Bulgarian
feasibility study, but that information is being
compartmentalized with Bulgargaz, Moscow representative
taking the lead while the Sofia office is kept in the dark.
Bayer,s statements to Gray and to Ambassador Foley in a

BUDAPEST 00001058 002.2 OF 004


separate meeting on October 27, that Hungary,s progress on
South Stream is facing delays, suggest that he is similarly
out of the loop in light of Hungarian National Security
advisor Banai,s assertion that an announcement could come
any day (see reftel A).

RUSSIAN ROLE IN BALKANS, NABUCCO?


5. (C) It eventually became clear that Poptchev had
requested the meeting with Gray to put forward a proposal
that Russia be included as an economic development partner in
the West Balkan region. (Note: It was not clear if this
proposal was Poptchev,s own idea, from the Bulgarian
government, or from the Russian side. In his conference
presentation, Poptchev remarked that Bulgaria considers South
Stream part of its West Balkan neighborhood policy. End
note.) He contrasted the EU,s lack of significant
development assistance to the region and Nabucco's planned
bypassing of these countries with the assertion that South
Stream would provide gas to them and might offer a way for
Russia to play a positive role. He suggested that the US
elections and the financial crisis might offer everyone a
chance to take a step back from energy geopolitics to
consider such a role for Russia, but he also said he favors
forward progress on Nabucco whether Russia likes it or not.


6. (C) After remarking that even Gazprom officials in Sofia
expect Nabucco to be eventually completed, Poptchev suggested
that linking Nabucco with the Blue Stream pipeline in Turkey
and using it to transport Russian as well as Caspian gas
might help make the project more viable. (Note. Once again,
it was not clear if this was Poptchev,s own proposal, the
Bulgarian government,s or Russia,s. End Note.) When
asked, Poptchev was not sure if this would also mean Gazprom
membership in the Nabucco Consortium and part ownership of
the pipeline.

NABUCCO NEEDS GOOD NEWS


7. (SBU) Special Envoy Gray discussed with Bayer and
Poptchev the ambitious schedule of upcoming Central European
energy conferences, beginning with the Nabucco Summit
Budapest plans to host in January, followed by a more
broadly-focused Energy Summit, to include Russian
representation, in Sofia in April and an EU-Trans Caspian
Summit the Czechs are planning for the latter half of their
EU presidency, which will run from January-June 2009.
Special Envoy Gray stressed the importance of coordinating
these three events to ensure the maximum impact, particularly
given the Czech EU presidency, and to avoid redundancy.
Poptchev said Sofia has reached out to Prague and Budapest,
but that the Czechs were reluctant to include the Budapest
and Sofia events on the official docket for their presidency.
Bayer told Ambassador Foley in their meeting on October 27
that he will soon travel to Sofia to iron out objectives for
the first two conferences, but that neither Budapest nor
Sofia had any details on the Czech summit. Similarly,
Hungarian officials have pressed us for more details
regarding an upcoming energy conference in Baku, expressing
their desire to coordinate with Azeri officials and
indicating that PM Gyurcsany may attend. Bayer and Poptchev
both requested US engagement in encouraging high-level
attendance by conference participants and in helping to
facilitate coordination among the capitals to help ensure
that the upcoming conference are complementary.


8. (SBU) Bayer said he hopes preparations for the Nabucco
Summit might stimulate progress toward completion of an
Intergovernmental Agreement (IGA) among the Nabucco
countries. Additionally, the Summit might provide a
framework for harmonizing an eventual IGA in accordance with
Turkey,s insistence on a series of Host Government
Agreements (HGAs) with the companies forming the Nabucco

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Consortium. He does not expect the IGA to be ready to be
signed by the Summit, but believes that having politicians,
energy companies and investors at the same table in Budapest
could give lift to the process. He described a recent
meeting in Budapest of representatives from the five EU
Nabucco transit states to discuss the relationship between
the IGA and HGAs. The EU countries were not opposed to the
idea of an HGA, but all considered an IGA more attainable in
the near-term and agreed that, given the need for some good
news on Nabucco after the Georgia invasion, efforts should
remain primarily focused on successfully adopting an IGA.


9. (SBU) Poptchev and Bayer both mentioned unresolved issues
surrounding Turkish transit of Nabucco gas as key impediments
to concluding a deal. At a recent EU meeting on Nabucco,
Poptchev proposed opening the EU energy chapter for Turkey as
an inducement to Ankara, but Cyprus blocked it. Bayer
believes it to be a good sign, however, that Turkish Prime
Minister Erdogan is planning to attend the Budapest summit.


10. (SBU) Despite the boost Nabucco receives from German
energy giant RWE,s addition to the Nabucco Consortium, Bayer
does not expect the project to benefit from German political
support as Berlin wants to avoid any indication that it is
favoring one infrastructure project over another. He added
that Chancellor Merkel is further constrained by her current
bid for re-election. As such, he does not expect her to
accept the invitation to attend the Budapest summit in
January.

UKRAINE HOPES FOR FUTURE TRANSIT ROLE


11. (SBU) Ukrainian Presidential Representative for
International Energy Policy Bohdan Sokolovskyj requested a
meeting with Special Envoy Gray to pass on a proposal for a
Caspian/Black Sea/Baltic Energy Transit Space. Kiev plans to
present the proposal at the November 13-14 Energy Summit in
Baku and would like the US to engage on its behalf with the
EU. Several EU members are apparently awaiting signals from
Brussels, while Baku is interested but wants to see favorable
reactions from Polish and Baltic partners before it proceeds.
Sokolovskyj reported initial indications of interest from
the Lithuanian government and from Polish President
Kaczynski, although the Polish government remains
noncommittal. Special Envoy Gray offered to take the issue
up with Warsaw when he visits in December.


12. (SBU) Sokolovskyj also wanted to sound out the Special
Envoy,s views on White Stream, a proposed pipeline that
would carry Caspian gas to EU customers via the Black Sea and
Ukraine. Special Envoy Gray said it was worth considering,
particularly because it would create competition for Turkey,
which continues to play hardball on Nabucco.

FROM RUSSIA WITH HATRED


13. (C) Zeyno Baran, in a pull-aside meeting at the
conference, told Special Envoy Gray the Russians are making a
full-court press to drive a wedge between Turkey and the EU,
particularly with regard to Nabucco. She surmised that the
Russians are taking advantage of US focus on our elections
and political transition to secure maximum gains. Her
Turkish contacts tell her that Russia is again pushing for a
second Blue Stream pipeline and demanding that Russian gas be
included in any Southern Corridor pipeline configuration. A
proposal by Moscow for a Russia-Turkey-Iran trilateral
agreement whereby Iranian gas would be developed for use in
Iran and Turkey is apparently gaining a following among those
in Turkey who are opposed to a deal with Azerbaijan. She
suggested that improved prospects for Iraqi gas transiting
Turkey might undercut Russian moves and help keep Turkey
focused on Nabucco.


BUDAPEST 00001058 004.3 OF 004



14. (C) Baran also related a personal account that is
perhaps indicative of this more aggressive Russian posture.
At the dinner reception following the first day of the
conference, a Russian participant named Vladimir Sizov,
Director of the Center for Military-Strategic Studies,
Institute for US and Canada Studies, interrupted a
conversation she was having to berate her for her
presentation on energy security, which, he claimed, was
tantamount to a "new US military doctrine." According to
Sizov (and numerous other Russian participants at the
conference),the US is trying to start a new Cold War and is
using the issue of energy security to make Europe more
confrontational toward Russia. (Note: Econoff noted a large,
vocal Russian presence at the conference from a variety of
private sector, governmental, and non-governmental
institutions, generally sharing the same, if sometimes less
forcefully stated, message. End note.) He then
personalized his critique of Baran,s presentation, saying
"We know who you are. We hate you. We are following you."

HUNGARY SEEKING FURTHER COORDINATION ON BASE YEAR EMISSIONS


15. (SBU) At his meeting with Messrs. Olah and Farago from
the Ministry of Environment, Special Envoy Gray discussed
linkages between energy and climate policies and asked the
Hungarians their views on the Polish opposition to the French
initiative to change the EU,s base year for calculating
emissions reductions to 2005 (ref B). Olah was doubtful that
a deal would be reached at the next UN Conference on Climate
Change scheduled for December 2008 in Poznan. He indicated
that Budapest could not accept the French proposal without
coordination, and that Hungary, like Poland, wants to be a
coordinator of the newly-acceded EU states. According to
Olah, Hungary has many arguments for keeping 1990 as the base
year but is open o considering setting the base year
somewhere between 1990 and 2005. Farago underlined the
importance of agreeing in Poznan on specific next steps,
noting that there would be no deal without the US and that
there is a place for China and India as well.


16. (C) COMMENT: If Ms. Baran is correct in her view that
Moscow is aggressively countering US policy on European and
Eurasian energy in hopes of catching the US off-balance
during our election cycle, then Nabucco and/or other Southern
Corridor projects that would bring Caspian gas to Europe
through non-Russian controlled pipelines could definitely use
some offsetting good news. A successful series of summits,
beginning with the one in Budapest in January, could give
Nabucco a needed boost, provided they are properly
coordinated among the hosts and identify meaningful but
achievable objectives. Post will remain engaged with GOH and
Ambassador Bayer to that end. We remain concerned, however,
that any such good news might be trumped by the next
announcement of progress on the Hungarian segment of South
Stream, which we believe to be inevitable... and potentially
timed to undermine the Nabucco Summit itself. END COMMENT.


17. (U) Special Envoy Gray cleared this cable.
Foley