SOUTH STREAM - BACKGROUND FOR POSTS' USE

C O N F I D E N T I A L SECTION 01 OF 02 STATE 111310

SIPDIS

E.O. 12958: DECL: 10/08/2018
TAGS: ENRG ECON PGOV EU BG GR HU RS SL SB IT AS
SUBJECT: SOUTH STREAM - BACKGROUND FOR POSTS' USE

REF: A. ATHENS 1256

B. 07 STATE 150552

Classified By: DAS Judy Garber for reasons 1.5(B) and (D)


1. (U) Department is aware that posts do or may contend
with questions about South Stream. In the interest of
keeping posts apprised of Washington thinking on this
issue, we offer the below background on South Stream for
your use in discussing the issue with host governments.
This background supersedes Reftel B talking points. Posts
should not "deliver a demarche" based on this, but rather draw
on points when asked about South Stream, when discussing the
use of European Energy Security, and when advocating U.S.-
supported approaches (Southern corridor, Nabucco, TGI, etc.).
Posts should also avoid public/media discussion of these
views, specifically on South Stream beyond general points
advocating energy independence and diversity as well as our
concerns about energy monopolies. Thus, Posts
should not/not leave text of below background with host
governments as a non-paper. The Department welcomes
reporting on this topic. Please direct questions to
EUR/ERA Erin McConaha or Ben Rockwell or EEB/ESC/IEC/EPC

J. Larry Wright.

BACKGROUND
--------------

2. (C) The following points are background for Posts' use:

-- Washington has concerns about the proposed South
Stream pipeline that bear reflection by European
governments, especially monopoly control over energy.
This policy is anti-monopoly in nature, not anti-Russian.

-- U.S. concerns over South Stream are threefold: (1) it
is unlikely to significantly enhance diversification or
sources of supply; (2) it largely serves to bypass
Ukraine; and (3) it is designed to undercut new and
significantly more cost effective gas deliveries from the
Caspian to Europe via the Southern Corridor.

-- Over the course of the last year, Russia has concluded
agreements on South Stream with Serbia, Bulgaria, Hungary,
and Greece. More recently, Greece has ratified the South
Stream agreement and Moscow is courting Austria, the last
link in the chain.

-- The Russia-Georgia conflict, meanwhile, has further focused
some European capitals on the potential political
vulnerabilities of dependence on Russian gas or gas controlled
by Russia. Now is not the time for governments to conduct
business as usual with
Russia.

-- We encourage European governments
to prioritize projects that will realize diversification
of energy supply.

-- While the Nordstream pipeline is planned to transport
new Russian gas production to Germany, over two-thirds of
South Stream will be filled with existing gas rerouted
around Ukraine. The source of any new gas remains
unsecured, though Central Asia appears to be the prime
focus.

-- The Southern Corridor can deliver new gas supplies from
Central Asia to Europe for 40 to 50 percent cheaper than
South Stream. South Stream faces enormous technical and
financial challenges, with Gazprom's own construction
estimates running to 20 billion dollars.

-- Rerouting extant gas does not enhance European security
of supply. The real potential for Russian production
shortfalls compound this concern. By contrast, projects that

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access new sources
of supply from the Caucasus and Central Asia (outside the
control of Gazprom and the Kremlin) strengthen European
energy security, as well as the security and independence
of the supplier countries.

-- By bypassing Turkey, Ukraine, Moldova, and Romania,
South Stream aims to undercut these countries' quest for
deeper integration with their European neighbors/allies.

-- Russia already is the largest provider of imported
natural gas to Europe. While European demand may make all
pipelines viable in the long-run, we encourage our
partners to strengthen their own negotiating leverage with
Russia by developing Southern Corridor alternatives first.

-- Realizing a Southern Corridor of energy infrastructure
to transport Caspian Basin oil and gas, including projects
such as the Turkey-Greece-Italy Interconnector (TGI) and
Nabucco, would enhance consumer countries' leverage in
negotiations with Gazprom and improve the competitive
health of European markets.

-- The European Commission's proposal to create a single,
liquid, interconnected energy market and unbundle energy
companies would also significantly improve European energy
security.

-- It is important for Europe and the U.S. to work
together to increase diversification of energy supplies.

-- Key to this 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 development of
transparent, market oriented pipelines that 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 that would boost
efficiency and reduce vulnerability to market
disruptions.

-- The USG will continue to support development of new
sources of gas for Europe by encouraging Western
investment in Caspian gas reserves and pressing Azerbaijan
and Turkey to conclude a gas transit agreement to enable
supply contracts for Caspian Basin gas.

END BACKGROUND
RICE