SCA DAS KROL'S MEETING WITH GAZPROM

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 003552 SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HEGBURG, EKIMOFF E.O. 12958: DECL: 11/24/2018 TAGS: EPET ENRG ECON PREL RS SUBJECT: SCA DAS KROL'S MEETING WITH GAZPROM ¶1. (C) Summary: In a 13 November lunch with visiting SCA DAS George Krol, Gazprom head of foreign relations Ivan Zolotov said that Gazprom seeks "market-based" relationships with its suppliers and customers, including in Central Asia; that he expected more continuity than change in the U.S.-Russian relationship; that Gazprom's gas reserves and expectation of enduring demand for energy would help it weather the global financial crisis; and that the prospects for a "gas OPEC" were unrealistic and overblown. On Central Asia, he tried to maintain a tone of genial disinterest about U.S. engagement; however, an outburst about U.S. "hyperactivity" in the region and repeated suggestions that the U.S. could keep no secrets from Russia in Central Asia underscored the extent to which Gazprom continues to view Central Asia as a zero-sum game. End Summary. -------------- Relations with Suppliers and Customers -------------- ¶2. (C) Gazprom head of foreign relations Ivan Zolotov assured DAS Krol that Russia had plenty of its own gas, but said the locations of its major fields meant that gas was difficult to extract and expensive to ship. With transit accounting for some 75% of Gazprom's costs, it made perfect sense, he argued, for Gazprom to prefer cheap, accessible Central Asian gas to costly, distant Russian gas. Zolotov added that projects like the trans-Caspian pipeline faced little hope of realization, depending as they did on unlikely coordination among countries like Azerbaijan and Turkmenistan and the other states bordering the Caspian. Zolotov dismissed the Gaffney-Cline audit of Turkmen gas reserves as exaggerated, claiming that Gazprom,s own data indicated significantly less reserves. Furthermore, he doubted Turkmen -- and Chinese -- ability to extract much of the gas, as they lacked the technology and investment to exploit these geologically-challenging deposits. He thought the Turkmen would need the participation of experienced gas firms, although he did not specify any by name, including his own. ¶3. (C) Zolotov was circumspect about the details of natural gas price negotiations with Central Asian producers, saying merely that Gazprom would pay its suppliers "market prices" just as it expected market prices from its customers. "If the Baltic states, for example, have to pay market prices, why should Ukraine or Belarus get gas any cheaper?" he asked, noting that there was no reason for Russia to subsidize these countries' economies. While the majority of his scorn was reserved for Ukraine and Belarus, Zolotov also expressed frustration with Greece, which he accused of reselling Russian gas to European customers for higher prices. Every commercial contract has a no-resale clause, he huffed -- why should Gazprom meet Greece's increasing demands for gas if Greece was only going to resell it? -------------- Bilateral Ties: "It Takes Two to Tango" -------------- ¶4. (C) Zolotov emphasized the lingering nostalgia for the Soviet period in Central Asia, a nostalgia that made Russia's ties to Central Asian states stronger than its more contentious relationships with the former republics to the west. He said Central Asian governments' statements that they did not want to be forced to choose between the U.S. and Russia but hoped to enjoy good relationships with both were disingenuous and an example of "classic Asiatic behavior." While they were telling the U.S. this, they were telling Russia that they resented being tugged in all directions by the U.S. He emphasized that there were people in the governments of each country who told Russia all the details of their meetings with the U.S., although "of course" they only told Russia what they deemed it in their interest for Russia to hear. ¶5. (C) DAS Krol responded that he saw no reason for the U.S. and Russia to compete in Central Asia, although he understood that a U.S. presence was sensitive for Russia. "It's not sensitive," responded Zolotov. "It's just politics. But should it interfere with our commercial activities -- then it would become sensitive." At the end of the meeting, however, Zolotov returned to the subject of the U.S. presence in Central Asia with a markedly less disinterested tone. "Mr. Krol, what is it you want in Central Asia?" Zolotov asked. Counternarcotics he could understand, and energy MOSCOW 00003552 002 OF 003 diversification to a point, but these goals did not account for U.S. "hyperactivity" in Central Asia. DAS Krol explained that the U.S. saw its actions as conducting normal diplomatic relations, not "hyperactivity." ¶6. (C) Zolotov added that he did not share the "rosy" view of many Russians that relations between the two countries would improve markedly under a new U.S. administration. In his view, the bilateral relationship was characterized more by continuity than by change and was captured perfectly by President Reagan's "trust but verify" comment, which he quoted in Russian but then appended in English that "it takes two to tango." -------------- Gazprom and the Financial Crisis -------------- ¶7. (C) Zolotov told us that Gazprom had been in excellent financial condition prior to the global financial crisis, but that in light of the current situation they were forced to evaluate their projects, moving ahead with the "strategic" ones and putting the others on the back burner. He did not elaborate on which projects fell into each category, although he made a few passing comments about the high costs of ambitious pipeline projects, taking pains to include Western-backed projects like Nabucco in the same questionable category as Russian-backed pipeline projects. ¶8. (C) Zolotov said, however, that Gazprom could rest secure in the face of the crisis because it still had its reserves -- not the GOR's financial reserves, he was quick to clarify, but its reserves of natural gas still in the ground, which would retain their value regardless of the vagaries of the markets. Energy price volatility did not concern him, nor did global efforts for energy conservation or fuel switching. To illustrate his point, he related an old joke from the Soviet campaign against alcoholism in which the simple provincial target of the government's reforming zeal insists that he will continue to buy vodka even in the face of escalating price increases intended to curb his consumption: "As long as it comes in the same bottle, I'll buy it." Zolotov suggested that the desire for energy was like the desire for vodka: prices and demand may fluctuate, but there will always be a market for energy. -------------- "Gas OPEC" and Liquefied Natural Gas -------------- ¶9. (C) Zolotov emphasized that the notion of a "gas OPEC" was absurd. Gazprom,s Iranian colleagues, inspired by "rigid political motives," were enthusiastic about the idea of a cartel, but Gazprom had explained to them that such a cartel simply wouldn't work, because gas wasn't fungible, had no spot market of any scale, and was sold through long-term contracts. The "Gas Exporting Countries Forum" was purely a means for producers to exchange opinions, and their plan to set up a secretariat at their next meeting in late December was simply meant to tackle the logistical nightmare of coordinating meetings. DAS Krol began to mention Premier Putin's recent comments in favor of a "gas OPEC," but Zolotov cut him off, snapping "we are the ones who study this every day, and I am telling you how it is." ¶10. (C) Zolotov touched briefly on fellow gas producers like Iran, which he characterized as "far behind" in gas production technology, and "Kuwait" (presumably Qatar),whose Liquefied Natural Gas (LNG) technology and market positioning he noted favorably. He declined to speak at any length about Gazprom's own LNG program, except to note that Gazprom sees LNG as the future but the technology was "expensive." Gazprom hopes to participate more in the U.S. market, both in LNG and in projects in Alaska, though he was less optimistic since Senator McCain and Governor Palin had lost the election. Zolotov had traveled with Gazprom CEO Miller to Alaska, where he claimed they were received warmly. -------------- Gazprom's Social Conscience -------------- ¶11. (C) As part of his effort to help DAS Krol "put a face to the name" of Gazprom, Zolotov waxed on about the deeply-felt sense of social obligation that led Gazprom to provide stabilizing functions throughout Russia ranging from MOSCOW 00003552 003 OF 003 providing a dry-cleaner at headquarters, a French chef at an Arctic production facility, and gas to far-flung Siberian villages. DAS Krol wondered whether this same sense of civic duty operated in Central Asia, inspiring Gazprom to seek a similarly stabilizing role there. "No," said Zolotov abruptly. "There, it is strictly commercial." -------------- Comment -------------- ¶12. (C) More interesting than Zolotov's broad-brush comments and efforts to portray a kinder, gentler Gazprom were the instances when his composure departed him, especially with respect to U.S. objectives in Central Asia. This underscores Gazprom,s (and Russia's) suspicion of U.S. motives in Central Asia and the extent to which many Russians continue to view Central Asia -- and energy -- as a zero-sum game. ¶13. (SBU) DAS Krol has cleared this cable. BEYRLE