SCENESETTER FOR U/S JEFFERY'S VISIT TO VIENNA

UNCLAS SECTION 01 OF 02 VIENNA 000411

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR E, EEB/ESC, EUR/ERA, AND EUR/AGS

E.O. 12958: N/A
TAGS: ENRG PREL EPET ECON AU
SUBJECT: SCENESETTER FOR U/S JEFFERY'S VISIT TO VIENNA
MARCH 27

Summary
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1. (SBU) Your visit to Vienna comes as Russia presses ahead
with a regional campaign to promote the South Stream pipeline
as a rival to the OMV-led Nabucco project. While some
analysts claim that Nabucco is now "dead," OMV remains
committed to starting operations by 2012. Your meetings with
OMV and Austrian Government officials provide an opportunity
to reaffirm USG support for Nabucco and to encourage OMV to
work with Azerbaijan and commercial operators to ensure that
there is sufficient Azeri gas for the initial phase. We have
received indications that OMV is, for now, not moving forward
to implement its April 2007 deal with Iran to develop a South
Pars gas field. However, we recommend that you reiterate USG
opposition to this deal, which undercuts international
efforts to resolve Iran's nuclear issue. Gazprom has
acquired a 50% share in OMV's gas trading platform at
Baumgarten. We should confirm that this joint venture with
Gazprom does not permit the Russian company to control any of
the infrastructure or existing gas storage facilities at this
critical gas hub. End Summary


Nabucco Gas Pipeline Project
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2. (SBU) OMV is leading the Nabucco consortium's efforts to
bring Caspian gas to Europe to meet growing demand and to
diversify Europe's gas supplies away from Russia. Nabucco
faces obstacles: some slippage in the project's timeline;
uncertainty about sufficient quantities (8 bcm) for the
start-up; protracted discussions between Azerbaijan and
Turkey regarding an equitable transit fee; and Russian
opposition. Despite these challenges, Nabucco offers the
best chance to bring large volumes of Caspian gas to Europe
via a non-Russian pipeline.


3. (SBU) OMV remains concerned that there will not be enough
Azeri gas for the initial phases of the TGI and Nabucco
projects by 2012. The company is therefore considering other
options, including limited quantities of Russian gas. We
need to convince OMV that, given new, upward estimates of
Azeri gas potential, Azerbaijan by itself could provide
sufficient volumes for Nabucco's start-up. Medium- and
long-term supply for Nabucco to expand to a planned capacity
of 31 bcm by 2018 could also come from Turkmenistan, Egypt,
and Iraq. Iran, with enormous untapped gas reserves, is also
enticing, but OMV has told us that the international
situation would have to improve before it would consider this
option. OMV strongly believes that Nabucco is a much more
commercially viable project than Russia's South Stream. In
OMV's view, both projects could co-exist, but the initial
load factors would be "lousy." OMV CEO Ruttenstorfer and
Economics Minister Bartenstein have publicly said that South
Stream could be complementary to Nabucco.


OMV's Iran Deal
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4. (SBU) In April 2007, OMV signed a Heads of Agreement with
the National Iranian Oil Company to participate in the
development of the South Pars 12 Gas Field. The USG has
consistently and vigorously emphasized to OMV and the GoA
that the deal, although only a preliminary agreement, sent
the wrong message at a time when international sanctions were
increasing pressure on the regime. The deal did not
contravene Austrian, EU, or UN law, but worked against
diplomatic efforts, including the EU-3 initiative, to force
Iran to come clean on its nuclear program. If implemented,
the deal could trigger U.S. sanctions against OMV under the
Iran Sanctions Act. The Austrian political class continues
to support OMV's Iran deal publicly, but recent information
indicates the GoA, which owns 31.5% of OMV, has asked OMV to
put the deal on ice for now.


Baumgarten Gas Hub
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5. (SBU) OMV's "Baumgarten" facility encompasses two
distinct operations: a natural gas shipping hub and a gas
trading platform. The physical gas hub, which has been in
operation since 1968, handles over 50 bcm of gas annually,
predominantly from Russia. One-third of all Russian gas
exports to Europe transits through Baumgarten. The trading
platform, located in Vienna, is a virtual gas exchange, which
offers commercial, logistical, and auctioneering services to

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traders.


6. (SBU) On January 25, OMV and Gazprom signed an agreement
allowing the Russian company to take a 50% stake in the gas
trading platform. The agreement also foresees joint storage
projects in the region. Some commentators have alleged that
the joint venture will allow Gazprom to take over the
Baumgarten hub. However, OMV has consistently told us that
the Gazprom agreement pertains only to the trading platform
and that OMV would not allow Gazprom operational control over
Baumgarten's infrastructure, existing gas storage facilities,
or control over the sale and distribution of gas coming
through Baumgarten.


Iraq Exploration
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7. (SBU) In November 2007, OMV signed two production sharing
agreements with the Kurdish Regional Government (KRG) to
develop two oil blocks in northern Iraq. The Iraqi Oil
Ministry subsequently decided to halt all oil exports to
Austria because of its displeasure with the OMV-KRG deal
absent a national Hydrocarbon Law. OMV believes its deal
conforms to the Iraqi Constitution. OMV also views Iraq as a
possible supplier for Nabucco in the medium-term.
Kilner