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.

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Relations with Suppliers and Customers
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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?

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Bilateral Ties: "It Takes Two to Tango"
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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

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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."

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Gazprom and the Financial Crisis
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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.

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"Gas OPEC" and Liquefied Natural Gas
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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.

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Gazprom's Social Conscience
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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

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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."
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Comment
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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