BACKGROUND AND TALKING

UNCLAS SECTION 01 OF 02 STATE 106338

SIPDIS, SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EPET GM SW RS
SUBJECT: BACKGROUND AND TALKING
POINTS ON U.S. POSITION REGARDING
NORDSTREAM PIPELINE

REF: STOCKHOLM 611


1. (SBU) The United States supports reducing Russia's
dominance in European gas markets through development of
a Southern Corridor bringing gas from the Caspian region
through Turkey to European markets. Nordstream
bolsters Gazprom's position in European gas markets and
could negatively impact the energy security of Ukraine,
the Baltic littoral states and Poland. However,
Nordstream's energy security implications for Europe
require a nuanced approach. The United States should not
advocate a view opposing the development of Nordstream.
If asked for United States' views, Posts may draw from
points provided below.

Background


2. (SBU) As planned, the European Commission (EC)
supports Nordstream because it is a project to bring
additional Russian gas to Europe to meet its growing
demand, rather than diverting gas that currently transits
Poland and Ukraine. Nordstream is planned to consist of
two parallel pipelines each designed to deliver 27.5
billion cubic meters per year (bcm/a); the first pipeline
is scheduled to be completed in 2011 and the second in
2012, for a total capacity of 55 bcm/a mainlined from
Russia to Germany. The primary source of gas for the
first pipeline, the Russian Yuzhno-Russkoye field (25
percent
owned by German firm BASF),is projected to reach its
planned output of 25 bcm/a in 2009, two-years ahead of
schedule. However, other Russian sources of supply for
Nordstream's second pipeline, the Bovanenko field on the
Yamal Peninsula and the Shtokman field in the Barents
Sea,
are several years behind schedule and may not be ready in
time for the second phase.


3. (SBU) In the event of production delays, it is
unclear
where gas to fill the second phase of Nordstream would
come from. If the second phase of Nordstream diverts
current volumes of gas transiting other nations through
existing or inexpensively-upgraded infrastructure, then
it
could possibly harm the energy security of some eastern
EU
members and Ukraine. We should highlight this
possibility
to European nations that favor Nordstream. We indeed
seek
to explore with Kyiv and our EU partners the possibility
of expanding gas transit across Ukraine by 20 bcm/a, a
project Ukrainian authorities estimate would cost around
USD 800 million.


4. (SBU) USG policy is to encourage Russia to increase
its oil and gas production to boost supply on global
markets. USG attempts to oppose or undermine projects
that bring additional gas to market could contradict our
2006 G-8 St. Petersburg Energy Security Principles
commitments.


5. (SBU) We also strongly support the efforts of the
European Commission to create a common EU internal market
for gas and electricity along the lines envisioned in the
Third Energy Package. A unified energy market, with
increased electricity and gas interconnections between EU
members, would significantly enhance European energy
security. Currently Russia faces 27 separate European
markets. If it faced one unified market the dynamics of
the relationship could change positively. Greater
interconnectivity also would help mitigate the risk from
asymmetric shocks to one EU member.


6. (SBU) Both Germany and the Netherlands have supported
Nordstream, ostensibly to compensate for declining North
Sea production. At the same time, Chancellor Merkel
inherited Nordstream from former Chancellor Schroeder,
who
concluded the deal shortly before assuming a position at
the head of the Nordstream development company,
Nordstream
AG, a joint venture between Gazprom and German energy
companies. Following Russia's attack on Georgia, Germany

STATE 00106338 002 OF 002

SUBJECT: BACKGROUND AND TALKING
POINTS ON U.S. POSITION REGARDING
NORDSTREAM PIPELI
may be more sensitive to the possible downsides of
Nordstream and the corresponding value of diversification
options. Nordstream causes concern among other EU
members, such as the Baltic States.


7. (SBU) Department requests Posts draw from the
following talking points regarding the U.S. position on
Nordstream if raised:

BEGIN POINTS

-- The EU and United States oppose business as usual with
Moscow, as long as Russia is in violation of its
commitments
Under ceasefire documents signed by President Medvedev.

-- It is important for Europe and the United States to
work
together to increase diversification of energy supplies.
The key to this objective in Europe is the realization of
a "Fourth" or "Southern Corridor" to export Caspian gas
directly to Europe.

-- U.S. policy is to support EU efforts to diversify
sources of energy supply, as well as to develop
transparent, market oriented pipelines, which meet the
best international practices for governance, transparency
and environmental safety. This is consistent with the
2006 St. Petersburg Global Energy Security Principles
that
all G-8 members pledged to uphold.

-- Our central - and long held - position is that
diversification of energy supplies will benefit both
consumers and suppliers and improve European energy
security.

-- Another core goal is full integration of European
energy markets into a single market space. A common EU
internal market for gas and electricity, as envisioned in
the Third Energy Package proposed by the European
Commission, would increase electricity and gas
interconnections between Member States, boosting
efficiency and enhancing EU energy security.

-- These internal reforms and diversification of energy
sources are increasingly important given growing doubts
as
to whether Russia can produce enough gas to meet growing
European demand. We encourage Western investment in new
Caspian gas reserves so that these additional volumes can
flow to the European market via new, non-Gazprom
infrastructure.

The IEA has said that Russia could encounter problems
Fulfilling its existing European gas contracts as early
as 2011 absent significant upstream investment; Russian
gas
production declined in 2007 for the first time since
2000,
according to the 2008 BP Statistical Review of World
Energy.

-- While Gazprom has said it will boost upstream gas
investment, and Russia has announced domestic gas price
increases to reduce demand, it is unclear whether such
measures will have a concrete impact on increasing gas
available for export.

-- If competition deepens more generally in the European
gas and electricity markets, including by building
interconnections among European natural gas and
electricity grids (especially those that connect Germany
to Poland and the Baltic states),Nordstream's potential
negative effects could be mitigated and it could have a
beneficial impact on EU energy security by bringing new
gas to market.
RICE