Identifier
Created
Classification
Origin
08VIENNA142
2008-01-29 15:42:00
CONFIDENTIAL
Embassy Vienna
Cable title:  

NABUCCO: OMV STILL CONFIDENT DESPITE SOUTH STREAM

Tags:  ENRG EPET EINV PREL IR AU 
pdf how-to read a cable
VZCZCXRO4101
OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVI #0142/01 0291542
ZNY CCCCC ZZH
O 291542Z JAN 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9414
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE IMMEDIATE
C O N F I D E N T I A L SECTION 01 OF 03 VIENNA 000142 

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/29/2017
TAGS: ENRG EPET EINV PREL IR AU
SUBJECT: NABUCCO: OMV STILL CONFIDENT DESPITE SOUTH STREAM
CHALLENGE

REF: 07 VIENNA 2890

Classified By: Economic-Political Counselor Dean Yap for reasons 1.4
(b) and (d).

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 VIENNA 000142

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/29/2017
TAGS: ENRG EPET EINV PREL IR AU
SUBJECT: NABUCCO: OMV STILL CONFIDENT DESPITE SOUTH STREAM
CHALLENGE

REF: 07 VIENNA 2890

Classified By: Economic-Political Counselor Dean Yap for reasons 1.4
(b) and (d).

Summary
--------------


1. (C) Reinhard Mitschek, Managing Director of Nabucco, told
Emboffs on January 25 that the project remains on track
despite the Russian campaign to present South Stream as an
alternative. One of the reasons Russia is flouting South
Stream, according to Mitschek, is to improve Gazprom's
negotiating position as an eventual Nabucco supplier.
Mitschek warned that, on the heels of Russia's diplomatic
offensive in Belgrade and Sofia, Gazprom is now pressing for
an increased presence in Croatia. Mitschek said Nabucco and
South Stream are not mutually exclusive, but, the initial
load factor in both pipelines "would be lousy."


2. (C) The consortium will soon announce the addition of a
crucial sixth partner (most likely Germany's RWE). OMV told
us that a seventh (ideally French) partner could also join
the consortium at a later stage, giving Nabucco additional,
crucial political support from two key EU Member States.
Azerbaijan (6-7 bcm/y) and Blue Stream will supply the
initial start-up volume of 8-12 bcm/y. OMV remains bullish
about the possibility of significant quantities of Iraqi gas
in Nabucco by 2015. Nabucco's partners will finance 30% of
the estimated Euro 5 billion project, with a combination of
international financial institutions (EBRD, EIB, IFC),export
credit agencies, and commercial banks providing the
remainder. End Summary.


South Stream as Bargaining Chip?
--------------


3. (C) Commenting on Russia's recent deals promoting South
Stream in Bulgaria and Serbia, Reinhard Mitschek, Managing
Director of the Nabucco Gas Pipeline International GmbH and
OMV Gas Vice-President for Logistics, told Emboffs and USEU
Energy Officer on January 25 that "Nabucco was not dead."
Part of the reason behind South Stream, according to
Mitschek, was a Russian tactic to increase Gazprom's
bargaining position as an eventual supplier for Nabucco.

Mitschek noted that South Stream would face significant
technical hurdles, not least the construction and operation
of a pipeline 2000 meters under the Black Sea.


4. (C) Mitschek expressed frustration with DG Competition's
firm opposition to Russian gas a part of Nabucco. Nabucco
had two choices, in Mitschek's view: invite Russia to become
a supplier or keep Russia outside, with an "inevitable
unhappy ending for Nabucco." OMV, according to Mitschek, had
information that Russia was pressing to become more active in
Croatia following the agreements in Sofia and Belgrade.
Mitschek said OMV was counseling its Croatian interlocutors
to be wary of Russian advances; Croatia should ask Gazprom to
produce basic planning documents for South Stream, none of
which exist, according to Mitschek. When pressed, Mitschek
maintained that Nabucco and South Stream were not mutually
exclusive. However, he predicted that the initial load
factors for both "would be lousy," at least until 2025 when
European gas demand will increase significantly.


OMV: Nabucco Remains on Track
--------------


5. (C) Mitschek maintained that Nabucco remained on track,
with construction scheduled to start in 2009 and operation in

2012. The consortium planned to announce the addition of a
sixth partner "in the next days." (Note: Austrian and
international press have long speculated that Germany's RWE
would be the sixth partner. End Note) According to
Mitschek, Nabucco had signed Letters of Intent, as well as
Confidentiality Agreements, with shippers representing 7

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different European countries. Mitschek noted that the
shippers wanted to remain anonymous for the moment to avoid
antagonizing Russian interests. Nabucco has also engaged the
British firm Penspen (www.penspen.com) to serve as an
engineering coordinator for the project.


6. (C) Azerbaijan (6-7 bcm/y) would provide the bulk of the
initial volume of 8-12 bcm/y, with Blue Stream contributing
the remainder. Mitschek again stressed that Russian gas was
welcome in Nabucco, but only "as an add-on." Nabucco planned
to increase capacity to 31 bcm/y by the end of the second
construction phase in 2017.



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Financing Nabucco
--------------


7. (C) Mitschek regretted that he could not release a
detailed ABN Amro financial feasibility study for Nabucco to
the USG without the express consent of all the Nabucco
partners. Euro 4 billion will be required for "Construction
Step 1" to ensure initial deliveries by 2012/2013. An
additional Euro 1 billion will be required during
"Construction Step 2" to raise capacity to 31 bcm by
2017/2018 by adding additional compressor stations along the
route. Financing will be divided between equity from the
Nabucco partners (30%) and loans (70%). Multilateral
financial institutions (EBRD, EIB, IFC) will provide between
one-third and 40% of the total loan amount; export credit
agencies will cover 25-30%; and commercial banks will provide
the remainder. Mitschek predicted that "when it came time to
put money on the table," OMV, Hungary's MOL, and the
soon-to-be-announced sixth partner would increase their
shares in the project. Mitschek hinted that a seventh
partner "from France or Germany" could eventually join the
consortium, bolstering political support for the project.


8. (C) Given the highly competitive situation at Baumgarten,
Austria's major gas hub and Nabucco's end point, Mitschek
underscored that the project would be competitive. Mitschek
cautioned that there were considerable costs to Gazprom to
refurbish depreciating pipelines in Eastern and Southeastern
Europe for South Stream. By contrast, Nabucco was
essentially a greenfield investment implementing the latest
technology. Furthermore, Nabucco expected the European
Commission to soon approve important exemptions to the EU's
Gas Directive, which would prevent national regulators along
Nabucco's route from capriciously raising tariffs. In all
these aspects, Mitschek claimed, OMV was a more viable
investment than South Stream over the long-term.


Iran Remains Nabucco's Ace-in-the-Hole
--------------


9. (C) Mitschek maintained that Nabucco would only consider
Iran as a supplier, "when the international political
framework would allow it." If it became politically
feasible, Mitschek outlined how "Iranian gas" would be
included in Nabucco. A part of OMV's South Pars field could
supply Tehran and northern Iran with gas via pipeline.
Nabucco could then swap 10-20 bcm/y of its South Pars gas for
Turkmen gas, which could be transported to Europe via Iran
and Turkey. Egypt could supply 2-4 bcm/y to Nabucco at a
later stage, and OMV remained bullish about northern Iraq's
potential. (Note: OMV has begun oil exploration in the
Kurdistan region. OMV Exploration executives previously told
us (reftel) that Iraqi gas could provide as much as 5-10
bcm/y to Nabucco by 2015. End Note)


Turkey Still Key to Nabucco's Success
--------------


10. (C) Turkey remained a key piece for Nabucco, according
to Mitschek. Turkey's uncooperative stance was encouraging
the construction of bypasses. Although Turkey aimed to
develop itself as a gas trading hub, Mitschek noted that the
country needed "a stronger backbone" -- storage capacity,
improved LNG capabilities -- before it could assume such a
role. OMV, according to Mitschek, had offered Turkey
assistance to develop its storage capacity.


EU Needs a Synchronized Approach to Central Asia
-------------- ---


11. (C) Mitschek pleaded for a more "synchronized" European
approach to Central Asia. The EU needed to bring "a complete
package" to the region, i.e., engagement in social,
educational, and political areas to complement cooperation in
the energy sector. Mitschek also argued that fully
integrated energy companies were a necessity to compete with
Gazprom in the region. In Mitschek's view, if the EU
successfully carries through its unbundling proposals, as
outlined in the Commission's 3rd Energy Package, Europe will
ultimately end up with less security of supply with no
appreciable benefits to consumers, i.e., lower prices.


12. (C) Mitschek said that OMV was not surprised by the
December agreement to build a Caspian pipeline across Russia.
However, Turkmenistan, according to Mitschek, remained
interested in developing an alternative route, which would
bypass Russia, to transport gas to Europe. Moreover, OMV
believes relations between Azeri President Aliev and Turkmen
President Berkymukhamedow were excellent, laying the

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groundwork for more intensive cooperation in the energy
sector. Turkmenistan would gladly supply Nabucco at a later
date, Mitschek claimed, but it will not actively cooperate to
develop a Trans-Caspian Pipeline at the moment.


Comment
--------------


13. (C) Overall, Mitschek portrayed a credible optimism
regarding Nabucco's chances in the face of Russian
maneuvering. OMV has had a long and mutually beneficial
relationship with Gazprom, so the company believes it
understands and can deal with the Russian company, probably
better from within than from outside. Perhaps the biggest
reason for OMV's confidence in the face of South Stream is
the belief (and hope) that, if and when international
dynamics with Iran change, OMV will be able to access Iran's
enormous untapped gas reserves for Nabucco. Moreover, with
the Turkmen-Iranian gas swap outlined above, Nabucco could
access Turkmen gas without the enormous challenges of
building a Trans-Caspian Pipeline.
Kilner