SOUTH STREAM NEGOTIATIONS TO RESUME

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000625

SIPDIS

FOR ENERGY ENVOY GRAY, ENERGY COORDINATOR MANN, EUR DAS
BRYZA

E.O. 12958: DECL: 09/18/2018
TAGS: ENRG PGOV PREL ECON BU
SUBJECT: SOUTH STREAM NEGOTIATIONS TO RESUME

Classified By: Ambassador Nancy McEldowney for reasons 1.5 (b) and (d)


1. (C) Summary: Gazprom negotiators arrive in Bulgaria
September 29 to launch a new round of negotiations with
Bulgargaz on a pre-shareholders agreement. In a sharp
about-face, Bulgargaz appears to be depending heavily on its
outside legal counsel, the U.S. firm Paul Hastings, to
extract the best deal. In pre-negotiation correspondence,
the Russians are taking a hard line on key issues and appear
to be reopening points agreed in the hastily-signed January
Intergovernmental Agreement. Bulgargaz and their attorney
intend to hold their ground, hardened by their previous
negotiating sessions with Gazprom. Meanwhile the Government
is sending signs it intends to exert more oversight of these
negotiations to ensure Bulgaria gets a good deal. End
Summary.


2. (C) In preparation for the September 29 re-launch of
South Stream negotiations with Gazprom, Bulgargaz and its
outside legal counsel Paul Hastings met September 17-18 to
discuss strategy. The September 29 session will be devoted
to discussing a pre-shareholders agreement, which will spell
out who pays for what until a shareholders agreement is
approved. It will also determine course of action on a
feasibility study for the project in Bulgaria. Paul Hastings
attorneys Mark Lewis and Lubomir Roglev tell us Gazprom, to
no one's surprise, is taking hard line. In documents
submitted prior to the September 29 meeting, the Russians are
insisting that the Bulgarians agree to a "call option" which
would allow Gazprom to buy Bulgargaz's share of South Stream
if Bulgargaz decides to withdraw from the project after
seeing results of a feasibility study. According to Roglev,
this demand is a non-starter, as it would create a 100
percent Russian-owned pipeline on Bulgarian territory.
Bulgargaz is also expecting Russia to resurrect demands to
use Bulgaria's existing pipeline system for South Stream,
although the Inter-Governmental Agreement (IGA) signed by
Russia and Bulgaria in January made reference to South
Stream's existence as an additional pipeline. This, too, is
a Bulgarian redline, as it would amount to giving up
ownership of a percentage of the Bulgarian pipeline system to
Gazprom. Gazprom is also proposing that the two sides
register the South Stream company in Bulgaria before a
shareholders' agreement is negotiated. Paul Hastings is
recommending against this as it would give the project "more
legitimacy than it deserved" before a feasibility study is
done and the parties have agreed to shareholders terms.


TARIFFS AND FEASIBILITY STUDIES


3. (C) The Bulgarians expect to do battle over tariffs as
well. Bulgargaz hopes to get better terms on tariffs than
were contained in the January IGA, which left much open to
question. Bulgargaz and its attorneys are scratching their
heads over another Russian proposal to discuss the
"optimization of volumes" of gas currently transiting
Bulgaria while negotiations on a shareholders agreement are
on-going. Paul Hastings attorney Lewis fears that with this
proposal, Russia is attempting to hold Bulgaria's current
transit volumes hostage to a South Stream deal. Roglev
assured us Bulgaraz has no intention of accepting a
Russian-produced feasibility study, although the Russians
have offered. Bulgargaz is determined to contract for an
independent study, ideally not just on the part of the
project located on Bulgarian territory, but for the project
as a whole. As Bulgargaz is a wholly-owned state firm, the
Bulgarians believe the future study will be subject to public
procurement laws, something Gazprom is fighting.

RUSSIAN TACTICS


4. (C) Having represented the Bulgarians in the
Burgas-Alexandroupolis oil pipeline negotiations, our Paul
Hastings contacts say they are getting used to Russian
negotiating tactics, which include:

--The random inclusion of seeming non sequiturs in proposals
which at first seem harmless but in the end prove to have
significant meaning;
--The almost constant changing of members of official
negotiating delegations so that the new negotiators can feign
ignorance of agreements reached with previous negotiators;

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--The referencing of completely separate agreements in
seemingly innocuous ways to make the terms of those
agreements open for renegotiation;
--The insistence on bilateral-only negotiations
(Bulgaria-Russia, Serbia-Russia etc.) to avoid allowing any
sides to team up against Gazprom. Paul Hastings is advising
Bulgargaz that any bilateral work achieved on South Stream is
useless without corresponding multilateral agreements (IGAs,
feasibility studies, etc.) signed by all South Stream
countries. Roglev and Lewis are stressing to their client
that South Stream will never attract financing without such
multilateral agreements.


COMMENT


5. (C) After months of ignoring the outside legal counsel
it felt had been foisted upon it by the Government under
pressure from the United States, Bulgargaz now appears to be
depending on Paul Hastings advice. Whether this is due to
the knowledge that Gazprom itself is hiring outside counsel
for South Stream (Paul Hastings reps tell us Baker Botts and
the UK firm Fresh Fields are in the running) or pressure from
the Government, the result is positive. Galina Tosheva,
Deputy Minister of Economy and Energy and Executive Director
of Bulgaria's new Energy Holding Company (which was launched
September 19 and includes Bulgargaz),told us she plans to
demand even greater Government oversight of Bulgargaz (which
has frosty relations with the Ministry and a dim view of the
Energy Holding) and its negotiations with Gazprom.
McEldowney