SE GRAY DISCUSSES SOUTHERN CORRIDOR, TEC IN

C O N F I D E N T I A L SECTION 01 OF 04 PRAGUE 000729 SIPDIS E.O. 12958: DECL: 11/23/2018 TAGS: ENRG EPET ECON PREL PGOV EU EZ SUBJECT: SE GRAY DISCUSSES SOUTHERN CORRIDOR, TEC IN ADVANCE OF CZECH EU PRESIDENCY REF: A. PRAGUE 696 ¶B. PRAGUE 667 ¶C. PRAGUE 623 ¶D. PRAGUE 547 ¶E. PRAGUE 447 ¶F. PRAGUE 367 Classified By: Ambassador Richard Graber; Reasons 1.4 b, and d. ¶1. (C) Summary: U.S. Special Envoy for Eurasian Energy C. Boyden Gray stressed the importance of getting Caspian gas to Europe and the value of continuing the Transatlantic Economic Council (TEC) during a November 7-11 visit to Prague to discuss energy and the upcoming Czech EU Presidency. The Czechs reported that the European Council had endorsed their proposal to hold an EU-Caspian summit in March, although several member states had lobbied (unsuccessfully) for Russian participation. While supportive of the January Nabucco conference in Budapest, the Czechs are wary of cooperating with Sofia on its planned gas conference. ¶2. (SBU) Although the Czechs will hold a conference on interconnectivity of the electricity market in January, they oppose full ownership unbundling, believing the proposed "Gazprom clause" to be inadequate to prevent Russian companies from acquiring additional EU energy assets. With the important exception of the Greens, who control the Environment Ministry, the Czechs are skeptical of EU climate goals and see further expansion of nuclear power as critical to their energy security. Consequently, the Ministry of Industry and Trade (MIT) will host a European Nuclear Energy Forum in May and is considering proposing a U.S.-EU nuclear conference for April. The Czechs also remain committed to holding a Transatlantic Economic Council during their presidency (although a plan to hold a second TEC focusing exclusively on energy security has been dropped). End summary. ¶3. (SBU) U.S. Special Envoy for Eurasian Energy C. Boyden Gray met with Czech MFA Energy Envoy Vaclav Bartuska, Deputy Vice Minister for European Affairs Marek Mora, Deputy Minister of Industry and Trade for Energy Tomas Huner, MFA Eastern Europe Director Daniel Kostoval, MFA Security Department Director Veronika Kuchynova-Smigolova, members of the independent Paces Energy Commission and leading energy industry representatives during a November 7-11 visit to Prague. Ambassador Gray also led a small energy security roundtable with NGOs and gave interviews to the Czech News Agency and the leading Czech news weekly Tyden. Turkey Acting out of Hurt Feelings Toward Europe -------------- --- ¶4. (C) Throughout his visit, Ambassador Gray stressed the importance of Caspian gas not only to meeting EU climate goals but as a way to increase EU energy security by furthering diversifying sources and routes. MFA Energy Envoy Bartuska noted Turkey,s desire to be a gas hub rather than a transit country was threatening to kill Nabucco. He suggested that part of Turkey,s obstinance came from its hurt feelings toward Europe. He cautioned that while the Czech Republic supports Turkey,s EU accession and opening the energy chapter, the general mood in the EU toward enlargement remains bleak. Czech Presidency to Hold EU-Caspian Summit -------------- ¶5. (C) Bartuska confirmed that the Czechs are proposing an EU-Caspian summit during their presidency which ideally will include Azerbaijan, Turkmenistan and Kazakhstan as energy producing countries, and Turkey, Georgia and Ukraine as transit countries. Several EU members had urged the Czechs to include Russia as well, something the Czechs strongly oppose as counterproductive. Nevertheless, the EU member states formally endorsed the Czech proposal in the October European Council conclusions. ¶6. (C) Deputy Vice PM for European Affairs Marek Mora clarified that the Czechs are now planning to hold the summit in Brussels in March 2009. It will either be held at the head of government/head of state level on March 18-19, on the PRAGUE 00000729 002 OF 004 margins of the European Council, or at the foreign and energy ministers level March 15-16, during the preceding GAERC. MFA Eastern Europe Director Kostoval noted that the Azeris and Georgians are firmly on board. The Kazakhs said they do not feel comfortable attending a &Caspian summit,8 to which Russia, another Caspian country, was not invited, but suggested they would come if the name of the summit were changed. The Czechs are reaching out to the others and will travel to Turkmenistan on December 1-2. ¶7. (C) Kostoval noted that Czech efforts are complicated by the lack of Czech Embassies in the region. The Czechs have a "flying Ambassador" to Azerbaijan resident in Prague, but will not have an Embassy there until 2010. The Belgian Embassy will represent the Czech EU Presidency in Azerbaijan. This is a problem, however, as the Czechs and Belgians have diametrically opposed views of the region. Belgium's Caspian policy is derived from its policy toward Russia. As a result, it is reluctant to do anything in the region that might negatively affect its relations with Russia. The Czechs, however, want to help each country increase its de facto independence from Moscow. Consequently, the Czechs have an informal cooperation agreement with the Latvian Embassy in Baku. Czechs Suspicious of Sofia Summit -------------- ¶8. (C) Ambassador Gray noted that Budapest and Sofia are also planning Caspian-related conferences and that if the three countries worked together, the three events could be a powerful tool toward making progress on moving Caspian gas to Europe. Bartuska and Kostoval responded, however, that while they are enthusiastic about the Hungarian Nabucco summit, they are suspicious of the Bulgarian initiative, largely because of Russian participation. Bartuska noted that the Czech understanding is that the Bulgarians have built their conference around the goal of getting Putin to come to Sofia. Czechs Pressing for EU Use of Competition Policy in Energy -------------- -------------- ¶9. (C) Bartuska agreed with Ambassador Gray that applying EU competition rules toward Gazprom would be a powerful tool to force greater competition in the market. Bartuska noted that he had already raised this with Brussels on several occasions. The answer he received was that DG Competition would not initiate any case as long as there were no complaints from other companies in the market. Since no companies were complaining, there was no case. Except for Greens, Czechs Skeptical of Climate Change -------------- -------------- ¶10. (C) Ambassador Gray's interlocutors noted that with the important exception of the Greens, who control the Environment Ministry, the Czech government is very skeptical of the EU's ability to meet its climate goals. Deputy Vice PM Mora stressed that the Czechs are one of the few EU countries who want to reconsider the targets. The current financial crisis makes retooling the goals even more imperative. Ambassador Bartuska said that while the EU wants a flashy agreement, he thought it is less serious about actually fulfilling those goals. He noted that during a recent visit to Prague a major EU leader had privately admitted that the EU would never be willing to pay the economic costs necessary to meet the targets. Huner complained that the goals are not based on realistic assumptions. Kostoval noted that the only reason the 20 percent target had been chosen was to match the 2020 deadline. Czechs Fear "Gazprom Clause" Inadequate; Oppose Full Unbundling -------------- -------------- ¶11. (C) MIT Deputy Minister Huner noted Czech support for the third energy package and the need for interconnectivity of the EU's gas and electricity grids. The Czechs will hold an EU conference in Ostrava January 29-30 to discuss practical steps toward interconnectivity of the EU electricity market. According to Kostoval, however, the Czechs do not trust the efficacy of the proposed "Gazprom clause," and thus do not PRAGUE 00000729 003 OF 004 support full ownership unbundling, fearing that it would open the door for Russian companies to buy more key EU energy assets. While the Czechs may be able to use the clause to block Russian investment in the Czech energy sector, it was unclear that other countries in the region would. Kostoval feared that increased Russian ownership of energy assets in neighboring states could further increase Czech energy dependency on Russia. Czechs still Concerned Slovaks Will Sell Transpetrol -------------- -------------- ¶12. (C) Bartuska reported that Rosneft Chairman Igor Sechin had unexpectedly flown to Bratislava in October, apparently to talk to the Slovak Government about buying the controlling interest in Transpetrol, which the Slovaks are currently buying back from Yukos Finance. Transpetrol owns and operates the Slovak portion of the Druzhba pipeline. The Czechs had been expecting the Slovaks to sell Transpetrol to Gazpromneft. The Czechs remain very concerned about the pipeline falling back into Russian hands, and Czech PM Topolanek and his Slovak counterpart had had a long and open discussion on the issue. Bartuska admitted, however, it would be odd for the Slovaks to sell the pipeline when they were actively nationalizing other energy assets. Second Pipeline Crucial to Surviving Russian Oil Disruptions -------------- -------------- ¶13. (C) Bartuska hinted that it was no coincidence that the deliveries of Russian crude oil through the Druzhba pipeline had slowed immediately following the July 8 signing of the U.S.-Czech missile defense agreement. Because the Czechs in 1994 had built the Ingolstadt-Kralupy-Litvinov (IKL) Pipeline (which connects to the Transalpine (TAL) Pipeline in Bavaria),they were able to find alternative sources for the lost oil within 24 hours. If they had not had a second pipeline, like Slovakia or Hungary, he noted, the oil disruptions would have had them &on their knees.8 Bartuska reported that Russian Energy Minister Shmatko had recently promised that the deliveries would return to normal in November. Bartuska cautioned, however that the Czechs are skeptical, having heard this promise before. (Note: Russian crude oil deliveries were down 40 percent in July, 26 percent in August, 20 percent in September and nearly 50 percent in October. End note.) Unipetrol CEO Francois Vleugels told us that, ironically, some of the oil they are purchasing for delivery through TAL-IKL, originates in Russia. ¶14. (C) Bartuska thought there is some truth to the Russian claims of problems with intermediaries. Some contracts between the international oil companies (IOCs) active in the Czech Republic and their Russian suppliers have as many as 36 intermediaries. The Virgin Islands and Cayman Islands are among the largest oil exporters to the Czech Republic. Bartuska doubted, however, that Putin or Medvedev ordered the disruptions to punish Prague, since they had to know the Czechs had an alternative source of oil. Rather he thought the disruptions might be linked to efforts to redistribute the profits to new, different intermediaries. Lack of Russian Investment Bigger Concern -------------- ¶15. (C) Both Bartuska and MIT Deputy Minister Huner appeared more concerned about the lack of Russian investment in its domestic energy sector and what this will mean for Russia's ability to be a reliable long-term energy supplier. While able to produce all of its electricity from domestic sources (coal and nuclear),the Czech Republic is dependent on Russia for two thirds of its oil and over 70 percent of its gas. Bartuska noted that while Alaska and Norway have information on the actual costs of Artic fields going back to the 1970s, Russia's northern fields had all been developed by slave labor during the Soviet era. Consequently, no one has any reliable basis on which to calculate today's costs of developing new fields in northern Russia. Bartuska added that it is also extremely hard (and expensive) to find people willing to work in such extreme conditions. Consequently, the railway to Yamal is progressing at the pace of one km per year. The drop in oil prices will further hurt Russian investment. PRAGUE 00000729 004 OF 004 MFA, MIT Planning EU Events to Promote Nuclear Energy -------------- -------------- ¶16. (SBU) All of Ambassador Gray's interlocutors stressed that expansion of nuclear energy is imperative to future Czech energy security. Thanks to abundant coal and its two nuclear plants, the Czechs are a net exporter of electricity. Half the coal plants are over 30 years old, however, and the state energy firm, CEZ, reported it is reluctant to invest in new coal power plants given current EU environment policy. Thus, CEZ, the MFA, and MIT all support the construction of new blocs at the Czech Republic's two nuclear power stations. The Greens, however, are using their position within the governing coalition to block any expansion of Czech nuclear power. Nevertheless, the MFA and MIT plan to promote nuclear energy during the Czech Presidency. The MIT is planning a European Nuclear Energy Forum in Prague May 21-22 and is considering proposing an April U.S.-EU nuclear conference. Czechs Support Continuation of TEC -------------- ¶17. (SBU) Ambassador Gray noted that Deputy National Security Advisor Price and Commissioner Verheugen agreed last month to make energy a more integral part of the Transatlantic Economic Council (TEC) and stressed the U.S. desire to continue the TEC as an important tool for removing barriers to transatlantic trade and investment. The Czechs expressed their commitment to holding a TEC during their presidency. Deputy Vice PM Mora noted that the Czechs have been invited to the December 12 TEC in Washington and will plan to attend. He noted, however, that the European Council will also be held December 12, which may limit the ability of some French and Commission representatives to participate. (Note: the Czechs have dropped an earlier proposal to hold a second TEC during their presidency devoted exclusively to energy security issues due to failure to gain much traction with other member states and the Ministry of Industry and Trade's concerns about being stretched too thin. End note.) Comment -------------- ¶18. (C) The Czechs have made energy security one of their main EU Presidency priorities -- along with EU competitiveness and international relations (the latter focusing on transatlantic relations, the Balkans, and Eastern Europe/Caucasus/Central Asia). Central to Czech energy priorities is the political goal of reducing domestic and regional dependence on Russia. We should be careful, however, not to expect too much from the Czech EU Presidency. The Czech Republic is a small country, with little experience and sophistication in successfully navigating the shoals of EU decision-making. Nevertheless, the Czech Presidency can be an important ally. The USG should look for ways it can leverage Czech EU Presidency support for EU Caspian outreach, the southern corridor and connecting the EU's gas and electricity markets to make progress on these important U.S. energy goals. ¶19. (U) Ambassador Gray cleared this cable. Graber