U.S.-EU STRATEGIC ENERGY REVIEW

UNCLAS SECTION 01 OF 04 STATE 030237

SIPDIS

SENSITIVE
SIPDIS
SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ENRG EUN KGHG SENV
SUBJECT: U.S.-EU STRATEGIC ENERGY REVIEW


1. SUMMARY: On March 3, EU Energy Commissioner Andris
Piebalgs and Under Secretary Reuben Jeffery co-chaired
the second annual U.S.-EU Strategic Energy Review,
established at the June 2006 U.S.-EU Summit to review
progress in U.S.-EU energy cooperation. Discussions
covered cooperation on energy technologies aimed at
lessening dependence on imported hydrocarbons and the
geopolitical aspects of energy security, including
diversification of hydrocarbon sources and suppliers.
The two sides: (1) briefed each other on recent energy
policy developments; (2) agreed to continue to increase
cooperation on energy technologies, and in particular
on sustainability standards for biofuels; (3) exchanged
views on enhanced International Energy Agency
engagement with China and India; and (4) reviewed key
Eurasian gas diversification proposals and projects.
END SUMMARY.


2. U.S. participants in the meeting included NSC Senior
Director for European Affairs Damon Wilson; EEB A/S
Sullivan; Special Envoy for European Union Affairs
Boyden Gray; Department of Energy DAS Carmen Difiligio;
NSC Director for European Union Relations and European
Economic Affairs Lauren Catipon; USEU Economic Counselor
Peter Chase; EUR/ERA Director William Lucas; and
EEB/ESC/IEC Director Steve Gallogly. EU participants
included Roland Kobia, Member of Piebalgs' Cabinet;
Ferran Tarradellas Espuny, Spokesperson for Energy;
Laurent Muschel, Head of Unit, International Relations,
Directorate General for Energy and Transport; Ulrich
Eckle, Policy Officer, DG RELEX; and Mr. Igor Salamun,
Director General, Directorate for Energy, Ministry of
the Economy.

Piebalgs: EU Starting to Pull Together on Energy Policy
-------------- --------------


3. Commissioner Piebalgs spoke with enthusiasm about the
growing role of the European Commission in formulating
European energy policy and the increasing coordination
among member states. While energy policy has been a
member-state competency, with the Commission relying on
its prerogatives in competition policy, environment, and
consumer protection to influence it, Piebalgs said
that the Lisbon Treaty would give the Commission greater
control in energy policy. He saw progress in three areas:
(1) development of an integrated internal energy market;
(2) promotion of cleaner energy, renewable energy, and
energy efficiency to reduce greenhouse gas emissions;
and (3) greater unity on external energy relations and
the need to diversify energy sources. On internal
market integration, Piebalgs noted the Commission's
September 2007 package, which, if adopted, would
institute improvements in EU-wide regulatory
cooperation and the implementation of corporate asset
unbundling and competition rules for all gas and power
companies operating in the EU. Piebalgs indicated that
he aims for a member-state political agreement on the
package by June, and adoption by co-decision with the
European Parliament before the end of 2008.


4. Turning to the Commission's January 2008 climate
change and energy package, Piebalgs asserted that its
"20-20 by 2020" binding targets on individual member
state emissions and renewables use - including in the
transportation sector - as well as its efficiency
requirements for all appliances, would be critical
to providing a guaranteed framework and stability to
encourage investment in alternative energies. Piebalgs
also noted progress on diversification of energy
sources and coordination of external energy policy,
including establishment of an agency or institute to
examine energy issues and forecast global energy supply
and demand. Piebalgs argued that European demand
projections may provide a rationale for moving
forward simultaneously with multiple new pipeline
projects, for example, development simultaneously
of Nabucco with Russia's new South Stream proposal
that would reach the same geographic sub-market.


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Difiglio: EISA Promotes Commercialization of Cleaner, More
Efficient Energy
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5. Department of Energy DAS Carmen Difiglio briefed the
EC delegation on: (1) the Energy Independence and Security
Act of 2007 (EISA) - signed into law in December 2007 -
explaining the difference between Congressional
appropriations and authorizations; and (2) the
restructuring of the Department of Energy's FutureGen
program. Difiglio indicated that the most significant
provision in EISA is the mandate to increase the national
fuel economy standard to 35 miles per gallon by 2020 -
which will increase fuel economy by 40% and save billions
of gallons of fuel; this requirement represents the first
statutory increase in automobile fuel economy standards
since 1975. EISA also requires fuel producers to use at
least 36 billion gallons of renewable fuels by 2022 (a
nearly five-fold increase over previous requirements),
which combined with restrictions on the types of land
used for biofuel production, will encourage a shift from
first-generation biofuels to second-generation
cellulosic-based biofuels. EISA also calls for a 30%
increased energy efficiency of light bulbs, which will
effectively lead to a phase-out of most incandescent
light bulbs by 2012.


6. DAS Difiglio also explained that EISA - and President
Bush's FY09 budget requests - significantly increase the
potential resources available for carbon capture and
storage (CCS) development and authorize seven large-scale
CCS projects. Difiglio noted that the recent
restructuring of FutureGen was a change in the right
direction, as it will push CCS technology out of the
publicly-funded research institutes and non-governmental
organizations and into the realm of commercial
development. The restructured FutureGen should nicely
complement the EC proposal to fund as many as a dozen
CCS systems in EU Member States. Commissioner Piebalgs
indicated that the EC is working on enabling legislation
for CCS projects to address issues such as liability and
will consider 100% state aid, on a project-by-project
basis.

Biofuels: Cooperation and Public Relations Challenges
-------------- --------------


7. Reviewing the four principal areas of energy
technology cooperation, Commissioner Piebalgs considered
U.S.-EU work on biofuels to have been the most
successful, with only limited results having been
achieved in our collaboration on CCS, energy efficiency,
and energy research and development. He noted a strong
public concern - fanned by arguments from the oil
industry - on sustainability of biofuels, particularly
their impact on food prices, water, and land use.
Biofuel sustainability standards proposed by the EC,
developed in close consultation with industry, mandate
that biofuels contribute to a minimum of 35% reduction
in CO2 and prohibit the use of wetlands and other
areas of biodiversity for cultivation of biofuel
crops. Arguing that the U.S. and the EU need to develop
a united approach on biofuel sustainability criteria,
Piebalgs pressed for regulatory and technical cooperation
to develop the next generation of biofuels. He
highlighted the need to address in future discussions
the problem of distortions caused by biofuel subsidies,
and asserted that the U.S. system of subsidizing
production causes more market distortion than the EU
system of subsidizing consumption. The result, he said,
is that U.S. exports of biofuels to the EU market
enjoy a double subsidy, while European producers are
disadvantaged.


8. U/S Jeffery acknowledged the importance of cooperation
on biofuels - including trilateral efforts with Brazil
- to develop standards on sustainability. Special
Envoy C. Boyden Gray observed that the challenges are
both technical and public in nature, noting Brazil is
nervous that biofuels are developing a negative image in
the U.S., EU, and elsewhere. Gray elaborated that the
main source of the publicity challenge in Europe is
public concern over genetically modified organisms,
sustainable use of resources, and biodiversity impacts,

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whereas the main source of contention in the U.S. is the
energy industry's aversion to competition and OPEC
opposition. He commented with irony that some wealthy
OPEC countries, by virtue of their membership in the G-77
group of developing nations, are demanding compensation
for the corresponding decrease in oil use due to fuel
substitution linked to climate change concerns.


9. SE Gray suggested using the Transatlantic Economic
Council to promote U.S.-EU cooperation on sustainability
standards, while using the G8 process to address the
biofuels public relations challenge. A/S Sullivan, the
G8 Sous Sherpa for the U.S., agreed that the G8 could be
an appropriate venue for a statement underscoring the
importance of biofuels to nations' energy security
strategies. Piebalgs suggested issuing a joint statement
on sustainability through U.S.-EU dialogue.


10. Finally, SE Gray noted that U.S. legislation will
require a cap of CO2 emissions in preparation of land
for biofuels cultivation, i.e. - a limit on the amount
of CO2 released per acre in order to make the land
"biofuels ready." Gray cautioned that the EU should
work with the U.S. on this issue or risk being "trumped"
by U.S. regulation taking the lead.

IEA Outreach: Eventual Membership for China, India
and Russia
-------------- --------------


11. (SBU) Moving to questions of International Energy
Agency outreach and enlargement, Commissioner Piebalgs
noted that the EC does not have a set position on
eventually extending IEA membership to China, India
and Russia, but cautioned against any moves that would
dilute the IEA's effectiveness by bringing in members
that didn't share the organization's values. U/S
Jeffery noted that the U.S. is supportive of enhanced
IEA engagement - and possibly expansion - while
agreeing that it is not in U.S. or EU interests to
dilute the IEA's efficacy. However, U/S Jeffery told
Piebalgs that U.S. policy on this issue is evolving
and we should continue our dialogue on IEA expansion.


12. (SBU) A/S Sullivan argued that since the IEA is
dedicated to energy-consuming countries, IEA member
states' interests converge in many areas with those of
China and India. He stressed the importance of
bringing China into a transparent market system and up
to IEA standards, which would strengthen, not dilute,
the IEA. Sullivan also noted that China and India
participated in the IEA's Committee Week in December
2007, and that IEA engagement and expansion would be
discussed at the upcoming March 12-13 Governing Board
meeting. He advocated beginning discussions with the
two countries now, considering that the process will
take a number of years, even in a best-case scenario.
Russia, in contrast, has not indicated the same level
of interest in IEA engagement, Sullivan noted, perhaps
because it sees its interests more in line with those
of other energy-producing countries. Ulrich Eckle of
the EU's Directorate General for External Relations
asked if this is an issue the G8 could address, to
which A/S Sullivan responded that the G8 is waiting
for the outcome of the IEA Governing Board meeting
before taking action.

Diversity of Supply and External Strategies
--------------


13. (SBU) U/S Jeffery invited Commissioner Piebalgs to
provide views on competing natural gas pipelines, the
economic and political benefits of each, and how best
to engage as governments to increase available supplies.
U/S Jeffery added that the EU could not ignore engagement
with Russia on energy issues. Piebalgs responded with a
comprehensive discussion of upstream potential, Ukraine,
and an overview of competing gas infrastructure projects.


14. (SBU) On Central Asia, Piebalgs spoke of the need to
go slow with Turkmenistan and not let negative incidents
feed Turkmen fears that foreigners want to rob them of
their natural resources, referring to a recent commercial
development involving a European company. He foresaw no

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gas from Kazakhstan available for the EU in the near term
but possibly some from Uzbekistan. Piebalgs alluded to
tensions between the EC and Algerian natural gas company
Sonatrec related to the Commission's unbundling
proposals, and expressed strong interest in importing gas
from the Akkas field in Iraq's Anbar province into
Europe. Piebalgs expressed little sympathy for Ukraine,
arguing that its system of middlemen makes no sense.
In the ongoing negotiations between Ukraine and Gazprom,
Piebalgs found the Russians more transparent with him
than the Ukrainians. He considered the underlying problem
to be the continuing political rivalry between Tymoshenko
and Yushchenko, which feeds corruption in Ukraine.


15. (SBU) Piebalgs said the Commission's prime interest
is diversification of energy supplies, and that Nabucco
is the Commission's priority project for bringing Caspian
and Middle Eastern gas to Europe. He added that after
Nabucco, other proposed pipelines would be welcome if they
bring new sources of gas to the EU. Piebalgs outlined the
Commission's current thinking on a variety of gas
infrastructure projects:

-- Nord Stream: The Commission would not actively
discourage Member States from advocating an alternative
land-based routing of the pipeline that is more palatable
to the Baltic States and Poland, nevertheless Piebalgs
predicted that Nord Stream will be built as currently
projected, adding that the EC's role is to encourage
transparency on the part of the partners.

-- South Stream: Piebalgs said flat out that he initially
thought South Stream was a political ploy and never
expected it to be built due to the costs and questionable
project rationale. He questioned spending billions of
dollars to put a pipeline under the Black Sea, but
answered himself by noting that South Stream's purpose is
to bypass Ukraine. However, in light of recent
developments in the Balkans and Black Sea region, he is
not ruling the pipeline out; and the Commission's
position on South Stream is neutral, neither
encouraging nor discouraging South Stream's construction.

-- Nabucco: The proposed Nabucco pipeline is the EC's top
priority for diversification of natural gas supplies. The
challenge is securing the natural gas supplies from
Azerbaijan, Iraq, Egypt, and other sources. Piebalgs
indicated that Turkey is a problem due to the disagreement
over transit arrangements with upstream producer
Azerbaijan. While Piebalgs said that in reality it does
not matter who contracts with the EU to supply the gas -
Azerbaijan or Turkey - the disagreement between the two
is an impediment, so Turkey needs to come to a fair
agreement with Azerbaijan.

-- White Stream: Despite the fact that the European
Commission is considering funding a feasibility study on
the White Stream pipeline, Commissioner Piebalgs does not
support the project, as it is designed to bypass Turkey;
he indicated that the EC is not in the "bypassing
business" and prefers to deal with Turkey, encouraging
it to become a responsible transit country.

-- Turkey-Greece-Italy (TGI): Despite the fact that the
Greece-Italy portion of the pipeline has not been built
and there are no substantial gas sales and purchase
agreements for the pipeline, Piebalgs indicated that he
sees this project as complete, requiring no Commission
action.

-- Trans-Adriatic Pipeline (TAP): Piebalgs sees this
proposed pipeline as a competitor for TGI, and so is not
supportive at this time.

-- Trans-Caspian Pipeline (TCP): The EC supports an
eventual trans-Caspian pipeline to transport Turkmen gas
westward but, similarly to the current U.S. view, favors
connecting Turkmen offshore fields as a first step/proof
of concept.
RICE