FOREIGN MINISTER KALFIN ON SOUTH STREAM

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000067 SIPDIS SIPDIS FOR EUR DAS BRYZA AND EEB ENERGY COORDINATOR MANN E.O. 12958: DECL: 01/27/2018 TAGS: ENRG ECON PGOV BU SUBJECT: FOREIGN MINISTER KALFIN ON SOUTH STREAM REF: A. SOFIA 0065 ¶B. SOFIA 0048 AND PREVIOUS Classified By: Ambassador John Beyrle for reasons 1.4(b) and (d). ¶1. (C) Summary: Bulgarian Foreign Minister Kalfin told Ambassador January 25 the signing of the South Stream intergovernmental agreement (IGA) had been in doubt until the last hours of Putin's January 18-19 visit. Kalfin defended the late night negotiations and last minute signing saying Bulgaria "got everything it wanted" although it made concessions on ownership, transit taxes, and the target profitability date. He said the 50/50 ownership split was a victory for Bulgaria, since Russia would have "never agreed to anything less." Despite "personal doubts" about the economic feasibility of South Stream, Kalfin believes the IGA's language allows Bulgaria to go forward with the project without much downside risk. If the required feasibility study shows the project won't meet market realities, he said, the project won't be realized. In apparent response to the Ambassador's urging that Bulgaria make immediate public statements in support of Nabucco, President Georgi Parvanov stressed the importance of this project January 27 in a press conference. To show these words have meaning, the Bulgarians must be convinced to conclude supply contracts with Azerbaijan. End Summary. ¶2. (C) Ambassador met Foreign Minister Ivailo Kalfin on January 25 for a read-out of the January 17-18 Putin visit. (Note: Ref A and septel cover Kalfin's comments on issues other than South Stream). Kalfin said the signing of the South Stream IGA was in question until the final hours of the Putin visit. Bulgarian negotiators managed to secure sufficiently favorable terms in the final days and hours of negotiation to allow Bulgaria to go forward with the agreement. Kalfin said the 50/50 ownership structure was a victory, as Russia "never would have agreed to anything less." Russia also refused to allow the pipeline to pay transit taxes to the Bulgarian government. Instead, Bulgarian negotiators agreed to allow the South Stream project company (which will be registered in Bulgaria) to charge a transit tariff, from which it will eventually pay the state a profit tax. To protect itself, Kalfin said Bulgaria inserted language into the agreement which states the tariff will ensure that the project provides a reasonable rate of return and a target payback period of 15 years. Kalfin stated that the agreement further protects Bulgaria by binding Russia to a ship-or-pay agreement which will allow the project to attract financing. According to Kalfin, the agreement, which only a handful of people have seen, will eventually be released to the public and submitted to Parliament for ratification. (Note: Post obtained a copy January 25 XXXXXXXXXXXX) ¶3. (C) Kalfin agreed there were still many questions to be answered about 31 bcm pipeline. It is unclear where the pipeline will exit Bulgarian territory and how much it will cost (Kalfin had seen estimates of 7 billion euros, while other estimates top 12 billion euros). The next steps include the conclusion of shareholders and host government agreements and a feasibility study. Kalfin said personally he had questions about the viability of the project, but he felt the agreement protected Bulgarian interests sufficiently to allow the GOB to go forward with little downside risk. If the feasibility study shows the project is uneconomical, it will not be realized. ¶4. (C) The Ambassador said the USG remains skeptical of the economics of South Stream, given the cost of the project and projected shortfalls in Russian gas production beginning in ¶2011. South Stream, he stated, is a Russian attempt to monopolize non-Russian gas supply and preempt Nabucco. Bulgaria must now come out strongly in support of Nabucco through public statements and engagement of Azerbaijan's state energy company SOCAR in discussions about Azerbaijan's commitment to supply Nabucco. Kalfin repeated his government's support for Nabucco, even though Putin said Nabucco is a project "without supply." He said Sofia believes South Stream and Nabucco are complementary and European demand will absorb gas from both pipelines. In his view, progress on Nabucco is hampered by three factors: the perception that Nabucco has no supply; a lack of cooperation on the part of Turkey; and the cumbersome decision-making process in the EU which slows progress on Nabucco. On this last point, he said, the United States can play a positive role by focusing the attention of all prties on the need for forward movement on Nabucc. ¶5. (C) Kalfin said the Azerbaijani Foreign inister would visit Sofia in April. He said he wuld talk with Bulgargaz head Lubomir Denchev, aswell as the Bulgarian embassy in Baku, to make apropriate contacts with SOCAR in order to push pogress on Nabucco during the FM's visit. Klfin also said Bulgaria has invited EU Nabucco coordinator Jozias van Aartsen for a second visit in order to move forward on Nabucco. He said the GOB would soon come out with public statements in support of Nabucco. (Note: In a press conference January 27, President Parvanov stressed the importance of the Nabucco project.) ¶6. (C) Comment: From our initial analysis of the South Stream IGA (our detailed analysis will be sent via septel), it appears there will be very little monetary benefit coming to the Bulgarian state coffers from this project. Although they are no longer admitting it, the Bulgarians crossed significant redlines (majority ownership, guaranteed tax revenues) to sign this deal. When Parliamentarians, opinion makers and journalists finally get their hands on the agreement, the government is likely to face serious questions about what the project actually offers Bulgaria. We must continue to raise questions about the economic viability of South Stream while stressing the logic of Nabucco. If President Parvanov's January 27 speech is any indicator, Sofia is taking seriously our press for positive statements on Nabucco, but the true test will come when Bulgaria engages SOCAR on supply contracts. We will press them to take the advice of their newly-hired legal counsel (advice they made only partial use of during the negotiations leading up to Putin's visit) and get the best deal possible from the even-more-important shareholders and host government agreements. We will also urge them to make any future South Stream commitments contingent upon the results of an unbiased feasibility study. End Comment. Beyrle