HUNGARIAN ENERGY CONSULTATIONS WITH DAS BRYZA,

C O N F I D E N T I A L SECTION 01 OF 05 BUDAPEST 000409

SIPDIS

EUR FOR DAS BRYZA, EUR/NCE FOR MARC NORDBERG

E.O. 12958: DECL: 04/09/2018
TAGS: ENRG ECON HU
SUBJECT: HUNGARIAN ENERGY CONSULTATIONS WITH DAS BRYZA,
APRIL 2008

Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D).



1. (C) SUMMARY AND ACTION REQUEST: EUR DAS Matthew Bryza
visited Budapest on April 7-8 for energy discussions with the
GOH, opposition leaders and Hungarian energy company MOL.
While the GOH recently signed an agreement with Russia on
Gazprom's South Stream pipeline project, the government also
has appointed a Nabucco Ambassador. Discussion with MOL
revealed a seeming focus on Gazprom-linked projects, despite
earlier pro-diversification rhetoric. The FM called for
regular consultations with the USG, beginning with discussion
of Russia policy, to foster an open dialogue free of
"stereotypes." Embassy supports the FM's proposal and
requests Department's authorization to move forward as soon
as possible. END SUMMARY AND ACTION REQUEST.

FM CALLS FOR REGULAR CONSULTATIONS


2. (C) Opening with a brief recap of the Bucharest Summit, FM
Goncz noted her appreciation for the USG's active efforts to
resolve the Macedonia name dispute and emphasized her view
that continued delay could destabilize the region. She also
underscored the importance of NATO's "clear promise" to
Georgia and Ukraine, expressing her happiness that the
Alliance had avoided a split which would have "sent the wrong
message to Moscow." She concluded that Ukraine would now
have to focus on building public support for NATO membership,
an effort with which Hungary would be "happy to help."


3. (C) Turning to energy issues, FM Goncz appealed for a
"consultation structure" to ensure that our bilateral
communication did not devolve to "stereotypes." She
introduced Nabucco Ambassador-nominee Mihaly Bayer (due for
his parliamentary hearing the following day),commenting that
his appointment and his contacts throughout the region could
add value to international efforts to promote the Nabucco
project.


4. (C) DAS Bryza reviewed his recent contacts with Azeri
officials, highlighting President Aliyev's positive
impressions of his recent visit to Hungary. Turkmenistan is
working to make clear that it has the capacity and the
political will to move forward, most particularly in
resolving their long-standing impasse with Turkey over
transit fees. We have worked to encourage engagement at the
highest levels, and Aliyev had advised us that he expects
resolution "soon -- perhaps within weeks." Based on recent
trilateral talks with Turkey and Iraq, we believe Iraq could
begin exporting gas from existing fields to Syria, and then
northward, within two years and that significant exports
could begin by 2015. However, we prefer the Turkish proposal
to export that gas directly to Turkey, via the right-of-way
of the existing Kirkuk-Yurmutalik oil pipeline.


5. (C) There is also encouraging news from Turkmenistan, with
BP officials projecting that fields there could rival Shah
Deniz. Although Turkmenistan has had "hot and cold"
relations with Azerbaijan and "a bumpy road" with the U.S.,
we believe we are now making progress. FM Goncz and
Ambassador-designate Bayer remarked that Hungary would
support these efforts in contacts throughout the region,
hoping that they could find a niche despite - or perhaps
because of - Hungary's "smaller footprint."


6. (C) DAS Bryza noted the importance of instilling
confidence among Caspian suppliers, highlighting President
Aliyev's "confusion" over Hungary's commitment to South
Stream. "Sequencing matters," he concluded, "as does the
political will" to stay the course on Nabucco in order to
avoid efforts to "divide and distract us." FM Goncz
responded that Nabucco and South Stream are not mutually
exclusive options in Hungary's view, underscoring that
projected European demand would require multiple pipelines.
South Stream would transit through Hungary, she noted, but
that alone would not increase Hungary's dependency on Russia.


7. (C) DAS Bryza agreed that there could be "space and time
for both projects" but cautioned that "our intentions and
Russia's may differ in this regard." Russia's goal may be to
manipulate prices and stifle competition, not to diversify
options. FM Goncz replied that Moscow might follow its own
interest in preventing progress on Nabucco but noted "that
does not mean we have to follow it." She expressed
frustration with the EU struggle to form a common energy
policy and argued that Hungary should not become "a
scapegoat" for doing what other European countries had done.
She underscored that perceived U.S. criticism on this front
could be "misused politically" in the current climate in
Hungary, noting that even granting interviews to certain
publications would "in itself be seen as the message."


8. (C) DAS Bryza acknowledged the importance of sending the
right signals, warning again that South Stream should not be
allowed to "delay and distract us." FM Goncz reiterated her
commitment to Nabucco, describing Hungary's South Stream
agreement as "only a framework" and noting that "we will work
only on Nabucco -- because Gazprom is working on South Stream
and needs no encouragement." "Russia is a different kind of
regime," she concluded, "but the EU and partner nations need
pressure on Nabucco."
MOL SETS SIGHTS ON HUNGARIAN GAS HUB


9. (C) In a meeting with CEO Zsolt Hernadi, International
Affairs Advisor Reka Szemerkenyi and the company's gas
trading expert, MOL executives denied any involvement in
South Stream or Blue Stream II, discussed Gazprom's
Baumgarten (Austria) presence at length and presented a
north-south pipeline network intended to position Hungary as
a regional gas hub, second only to Baumgarten.


10. (C) Hernadi stated up front that he had met Gazprom's
Alexei Miller in Moscow on April 1 but gave no details of the
meeting, insisting that "MOL has no role in South Stream or
Blue Stream II." When asked about MOL-Gazprom joint venture
SEP Co., which will do the feasibility study for South
Stream, Hernadi looked uncomfortable, saying only that he
"told Miller MOL would help with the study, but no study
exists." (Comment: This conflicts with what Finance Minister
Veres tells us regarding SEP Co.'s efforts, and Hernadi
appeared to be intentionally misleading. MOL and the GOH
have been equally non-transparent regarding the players in
Hungary's South Stream deal. Recent press articles have
revealed MOL-Gazprom cooperation on gas storage, allegedly
linked to the South Stream pipeline. End Comment.)


11. (C) Despite MOL's alleged exclusion from the South Stream
deal, Hernadi defended the GOH position, calling the
inter-governmental agreement (IGA) "not as bad as everyone
says." Hernadi confessed that he "cannot say South Stream
was a negative decision" in light of Azerbaijani President
Ilham Aliyev's caution "about the amounts he could supply ...
ever," as well as the likelihood that Gazprom would continue
to placate Turkmenistan with rising purchase prices and free
rein to sell gas to the east. He also defended the
pipeline's economics, arguing that in addition to giving
Gazprom a strategic advantage vis-a-vis Nabucco, the project
will prevent losses upwards of USD 2 billion per year
resulting from alleged Ukrainian siphoning. "For that
amount, Gazprom can finance South Stream."


12. (C) Looking to the region, Hernadi surmised that Russia
is continuing South Stream negotiations in Croatia, using the
talks as leverage with Zagreb, and also as insurance against
"risky" Hungary. In the broader view, Hernadi remarked that
now "Italy is the strategic partner to Russia" and "Germany
is not as much of a strategic partner as under Schroeder."
(Note: Schroeder visited Hungary April 10-11, broadly
criticizing U.S. policy and commending the GOH's decision on
South Stream. End Note.)


13. (C) Turning to Gazprom's participation in OMV's
Baumgarten trading facility, MOL executives explained that
Baumgarten is important to Russia because it allows Gazprom
to see the entire European market and to use that information
to profit from, and close the gap on, existing arbitrage
opportunities. Centrex, a Cypriot offshore controlled by
Gazprom, currently accounts for 60 percent of Baumgarten
trading. In addition, Gazprom will be able to use its newly
gained influence over capacity booking decisions to prevent
market-based pricing from reaching further into Central and
Eastern Europe. Gazprom also will sell gas directly to
Baumgarten to complement its long-term contracts with
individual countries. Musing on what would happen if Nabucco
gas got to Baumgarten, MOL's gas trading director remarked,
"then maybe there would be a real market."

14. (C) In closing, Hernadi outlined a plan for pipeline
interconnectors between Hungary and Croatia and Hungary and
Romania, which he described as separate from MOL's NETS (New
European Transmission System) proposal. In Hernadi's vision,
"MOL becomes a local hub, which is good for MOL and Russia
because Russia doesn't want to rely only on Baumgarten."
Both Romania and Croatia, he explained, have been cut out of
South Stream and, if Nabucco fails, will be completely cut
off from major gas pipelines, so "interconnections are
vital." With MOL's proposal, each country would contract
with Gazprom for gas, and MOL would collect transit fees.
Once Croatia has LNG, remarked Hernadi, flows could be
reversed to Slovakia, Baumgarten and Romania. (Comment: Post
notes that at least in this scenario, MOL stands to gain most
if the Nabucco project fails. Despite Hernadi's insistence
that this project is separate from NETS, we fail to see major
distinctions. In addition, MOL has requested USG support for
this project but has yet to provide information on NETS
promised in January of this year. Post would urge a cautious
approach, since MOL's current plan will only deepen the
region's dependence on Gazprom. End Comment.)

FIDESZ SAYS IT REMAINS COMMITTED TO NABUCCO


15. (C) At a breakfast with senior officials of the
opposition FIDESZ party, DAS Bryza emphasized the importance
of "winning the domestic political battles in Hungary" and
"making the economic case for Nabucco throughout Europe." He
reviewed progress with Azerbaijan, Turkmenistan, and Iraq,
emphasizing the importance of "synchronizing investments" to
"make Nabucco a reality and not a self-denying prophecy."


16. (C) FIDESZ representatives expressed strong agreement
with his premise and strong support for his points.
Parliamentary Faction Leader Tibor Navracsics expressed
concern regarding Russia's success in using both "a soft
approach and scare tactics" against Europe. He cautioned
that Hungary's current political straits could "inflict many
casualties," among them plans to form a Nabucco Committee in
Parliament to support the project. He and Parliamentary
Foreign Affairs Committee Chair Zsolt Nemeth underscored
their willingness to work with the SzDSz party to adopt a
resolution in Parliament "tomorrow," but reiterated their
previous reservations re working with SzDSz Party President
Janos Koka, commenting that "his party has financial
interests in business as usual as well."


17. (C) Nemeth also highlighted concerns regarding Russia's
"genius for division," noting their success in "dividing
Central Asia from Europe -- and Nabucco participants from
each other." Although he took DAS Bryza's point regarding
the signal success of securing NATO's commitment to Alliance
membership for both Georgia and Ukraine at the Bucharest
Summit, Nemeth cited a legitimate fear of "abandonment by
Europe" throughout Central Asia. Navracsics noted that the
GOH's ambiguous position at Bucharest had been the latest
blow to Hungary's internationalcredibility.


18. (C) FIDESZ is committed to pressing on, however. Legal
expert Eniko Csontos reviewed the potential "landmines" in
the GOH's recent South Stream agreement, noting that it:

-- Potentially violated EU legislation in providing a VAT
exemption for the project;

-- Raised competition concerns in its use of the Hungarian
Investment Bank in a joint venture; and,

-- Gives exclusive rights to Russia in determining use and
Third Party access.


19. (C) Nemeth and foreign policy commentator Anita Orban
continued, highlighting the "ridiculous procedure" by which
the government had withheld the agreement from Parliament.
We do not know "the extent of the state's role" or "the
limits on Russia's power," Nemeth concluded, signaling the
opposition's intention to continue challenging the South
Stream agreement. Turning his attention to Brussels, he
called on the EU to "stop apologizing and stand up in the
name of simple reciprocity." Orban framed the strategic
stakes in stark but plausible terms, suggesting that the GOH
will move to cede effective control of its gas transport and
power generation infrastructure to Russia. After that, she
concluded, "we can talk all we want about Nabucco."

IN THE SHADOW OF A "BIG BEAR"


20. (C) While Hungarian Democratic Forum (MDF) Party
President Ibolya David was careful to point out that Russia's
large reserves mean it cannot be excluded from Europe's
energy mix, she asserted MDF's desire for "tools to
strengthen competitive capital." Although MDF sees Nabucco
as its priority project, David worried that it is a "distant
solution" and said she would be pleased to see U.S.
assistance in creating "a concrete counter to the Russian
monopoly." Bemoaning the EU's failure to "create unity in an
area where it has the biggest interests," David said she
favors the creation of a common European energy policy and
called that strategic vacuum "the reason Gazprom found us
unprepared as to how to say 'no'" to South Stream.


21. (C) Commenting further on Hungary's decision to sign a
South Stream IGA, David said MDF didn't oppose the decision
-- because it is to Hungary's advantage to be a transit
country -- but admitted that her party had not been happy
about "having to say 'ok.'" In the aftermath, she said, MDF
pushed the GOH to "appoint a Nabucco Ambassador and work
closely with U.S. allies." Underlining her party's
commitment to Nabucco -- in response to DAS Bryza's
presentation of the pipeline's cost benefits in comparison
with South Stream -- David remarked, "we would choose
Nabucco, even for the same price (as South Stream). Hungary
would absolutely support Nabucco, if it can be built."


22. (C) DAS Bryza and David discussed briefly Bucharest's
NATO Summit, with both welcoming the Communique language on
future membership for Ukraine and Georgia. David said MDF
"wants to do all possible to support Ukraine's NATO
membership" but noted how important it will be for Ukraine's
public also to support it. Recalling Hungary's own
accession, she said public opinion turned in favor of
membership after U.S. soldiers mingled with Hungarians in
schools, shops and other public venues and invited locals
into their barracks for tours. From David's perspective, a
similar approach could bring dividends in Ukraine.

TIME FOR HUNGARY TO PUT A LITTLE "GIVE" IN "GIVE AND TAKE"


23. (C) COMMENT: The attitudes expressed last week reflect a
continuing trend of pragmatism in Hungary's energy strategy.
For the opposition, it is a matter of conviction but also a
weapon of convenience in the deepening domestic political
rift. In a subsequent meeting, FIDESZ President Viktor Orban
admitted that his party's legal arguments against Nabucco had
been intended primarily to undermine the government's
position and that he took a cynical view as to the merits of
those arguments. He described Hungary's South Stream IGA as
a "contract with a lion."


24. (C) For th govenment nd MOL it isa chane to pofit
fom theinevitble
i theirminds,returnof the "big
bear. Overthe pat two ears, we have fcused on psitive
outrach tothe GH and OL, ofering ssistace wheever
possible and rarely refusing eetingrequests. However, with
the GOH concerned moe with Moscow's reaction than with
Brussels' or our, ad ithMO prmoingGapro-cntric
projects over Nabucco -- despite careful manipulation of the
facts for U.S. audiences -- the time has come for Hungary to
hold up its end of the bargain, to showthat its commitment
to diversification goes beyond empty rhetoric. In our view,
Hungary should show its good faith by:

-- Following Sofia's example and signing a gas contract with
Azerbaijan, even for a token amount;

-- Hosting the Second Annual Nabucco Conference, as a
follow-on to the successful September 2007 event (an idea to
which the MFA is receptive); and

-- Declaring Nabucco the priority pipeline project in
Hungary, establishing a Parliamentary Committee to aid in
moving the project forward.

25. (C) The regularly scheduled consultations called for by
the FM offer an opportunity to engage Hungary on a broad
range of issues, reasserting our influence on ground the GOR
has maneuvered to monopolize. However, at least on energy
security, MOL and the GOH have used their unfettered access
to rationalize their decisions rather than to coordinate
their policy. We believe their requests for assistance
should be viewed cautiously until they put a little more
"give" in the "give and take." End Comment.


26. (U) EUR DAS Matthew Bryza cleared this cable.
FOLEY