U/S JEFFERY DISCUSSES ENERGY SECURITY WITH OMV AND

C O N F I D E N T I A L SECTION 01 OF 03 VIENNA 000518

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E.O. 12958: DECL: 04/15/2018
TAGS: ENRG PREL EPET SENV PGOV AU
SUBJECT: U/S JEFFERY DISCUSSES ENERGY SECURITY WITH OMV AND
AUSTRIAN GOVERNMENT

REF: A) VIENNA 209 B) 07 VIENNA 2890

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

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


1. (C) During a March 27 meeting with U/S Jeffery, OMV CEO
Wolfgang Ruttenstorfer pointed to Turkey as the critical
piece for the Nabucco pipeline's success. Ruttenstorfer
hopes that Turkey will sign an Intergovernmental Agreement
(IGA),which EU Nabucco Coordinator is negotiating, by
September or October. Without GoT approval of the IGA,
Nabucco cannot move forward with an open season to offer
non-binding capacity and the project could significantly
stall, Ruttenstorfer warned. However, Ruttenstorfer opined
that the threat of South Stream would motivate the GoT to be
more cooperative on Nabucco. According to Ruttenstorfer, OMV
was going very slow on its April 2007 Heads of Agreement with
Iran to participate in the development of the South Pars gas
field. Ruttenstorfer added that, in the long-run, Europe
would need Iran's gas. Economics Minister Martin
Bartenstein, in a separate meeting, clearly stated that
Iranian gas was off-limits for Nabucco in the current
political situation. Ruttenstorfer said that OMV would go
ahead with oil exploration in northern Iraq, despite
opposition from the Iraqi central government. Ruttenstorfer
indicated that the Akkas gas field did not seem to be an
option for Nabucco for now. Ruttenstorfer emphasized that
the OMV-Gazprom joint venture for a gas trading platform did
not allow the Russian company to gain control of any
infrastructure at the critical Baumgarten gas hub.
Ruttenstorfer and Bartenstein criticized the Commission's
unbundling proposal, suggesting the Commission would have to
find a compromise that fell short of full ownership
unbundling.


2. (SBU) On climate change, MFA State Secretary Hans Winkler
admitted Austria was well below its Kyoto emissions reduction
target, claiming that transit traffic was the main culprit.
Referring to the Commission's recent Energy and Climate
Change Package, Minister Bartenstein said the GoA would
oppose the auctioning of emissions certificates for energy
intensive industries, unless the U.S. and China were "on
board" with a post-Kyoto agreement. Bartenstein suggested
global sectoral agreements might offer a good approach. As a
last resort to prevent carbon leakage, the EU might consider
a carbon duty, which "would be WTO consistent," on goods from
countries that are not sufficiently contributing to emissions
reductions targets. End Summary.


3. (U) During separate meetings on March 27, U/S Jeffery met
with OMV CEO Wolfgang Ruttenstorfer, Austrian Minister of
Economics Martin Bartenstein, and Austrian MFA State
Secretary Hans Winkler. Discussions centered on energy

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security and climate change. Special Envoy to the EU C.
Boyden Gray, EEB/ESC DAS Doug Hengel, Acting DCM, and
EconUnit Chief accompanied U/S Jeffery.


Nabucco: Iran, Turkey, and South Stream
--------------


4. (C) Ruttenstorfer underscored that OMV was promoting
alternatives to Russian gas through Nabucco and its planned
LNG re-gasification facility in Krk, Croatia. Nabucco would
look for gas "wherever we can get it," Ruttenstorfer said,
including Azerbaijan, Central Asia, Iraq, and when the
political situation improves, Iran. Ruttenstorfer stressed
that, in the long-run, Europe would need Iranian gas and he
noted that Nabucco was designed originally with Iranian gas
in mind. Regarding OMV's April 2007 Heads of Agreement to
participate in the development of Iran's South Pars gas
field, Ruttenstorfer said that there was no final deal on the
horizon. Minister Bartenstein said that Iranian gas remained
"a no-go" for Nabucco because of the political situation.


5. (C) Turkey remained the most pressing challenge for
Nabucco, according to Ruttenstorfer. The Turkish Government
was reviewing a first draft of an Intergovernmental Agreement
(IGA) among the five Nabucco partners. (Note: OMV previously
told post that an IGA with Turkey is important because it
would cover many issues included under EU law: third party
access exemption; tariff methodology and parameters;
protection of ownership; establishment of tax and levy
regimes; and transit guarantees. End Note). EU Nabucco
Coordinator van Aartsen has been charged with negotiating the
IGA. It was critical to move forward with the IGA, as one of
its addenda would establish a transit regime for Nabucco.
Ruttenstorfer added that Nabucco needed to conclude the IGA

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before it could initiate an open season to offer non-binding
capacity on the pipeline. Ruttenstorfer said that he hoped
Turkey would sign the IGA by September or October.
Construction could then begin in late 2009 or early 2010.


6. (C) The threat of South Stream, according to
Ruttenstorfer, had motivated Turkey to be more cooperative on
Nabucco. OMV executives and Turkish Energy Minister Guler
now meet every 3-4 weeks to discuss Nabucco issues.
Ruttenstorfer quipped that "Turkey wanted to be Europe's gas
supplier, although it did not have any gas." Regarding South
Stream, Ruttenstorfer said it might make sense to combine it
with Nabucco, but Nabucco was committed to including Romania,
while South Stream was now committed to Serbia.
Ruttenstorfer added that the big question was whether South
Stream was real or simply a Russian ploy to try to torpedo
Nabucco.


OMV Moving Forward with Oil Exploration in Iraq
-------------- --


7. (C) Iraq, according to Ruttenstorfer, remained a
potential supplier to Nabucco in the medium-term, as its gas
reserves have never been developed. Ruttenstorfer noted that
OMV had signed two oil production sharing agreements (ref B)
with the Kurdish Regional Government. The Iraqi Central
Government reacted by imposing an oil embargo on OMV (ref A),
but Ruttenstorfer maintained that the agreements were in line
with the Iraqi constitution. Ruttenstorfer added that
uncertainties surrounding the Akkas gas field meant it was
not an option for Nabucco at this time.


USG Opposes Investment in Iran's Energy Sector
-------------- -


8. (C) U/S Jeffery offered USG assistance, where requested,
to try to unblock impediments to Nabucco, e.g., encouraging
Turkey to agree to a reasonable transit regime. On Iran, U/S
Jeffery stressed that the USG strongly opposed any investment
in Iran's energy sector, such as the recent deal concluded
between Iran and Switzerland's EGL. U/S Jeffery underscored
that it was important for Iraq to have a solid legal
framework in place on the federal level to allow investments
in the energy sector to move forward with certainty.


Baumgarten Gas Trading Platform
--------------


9. (C) Ruttenstorfer stressed that the Central European Gas
Hub (CEGH) joint venture between OMV and Gazprom was a
computer-based gas trading platform, facilitating
over-the-counter trading among approximately 15 traders. The
Euro 2 million CEGH did not allow Gazprom to control any of
the physical infrastructure at the Baumgarten gas hub.


10. (C) OMV hopes to build the CEGH up to be one of the
biggest gas trading platforms in Europe. To do this,
Ruttenstorfer stressed, the CEGH needed to increase liquidity
at the Baumgarten hub. As the principal supplier to the hub,
Gazprom was the only partner that could provide sufficient
liquidity. "Virtual gas does not exist," Ruttenstorfer said,
adding that OMV was increasing its current level of storage
from 5 bcm to 8-9 bcm, equal to Austria's annual consumption.


European Oil Market Consolidating
--------------


11. (C) The European oil market, according to Ruttenstorfer,
functioned well based on free market principles and a clear
regulatory framework. Companies from Russia and other CIS
countries were expanding westwards, but Ruttenstorfer
maintained that this was "natural." However, Ruttenstorfer
said that, as more European refineries are sold to sovereign
wealth equity funds, there is a possibility that the funds
could then sell the refineries to Russian interests.
Ruttenstorfer predicted that consolidation would eventually
yield 1-2 oil companies "plus the Russians" in the Central
European market. With this in mind, Ruttenstorfer noted that
OMV would continue to pursue a takeover of Hungary's MOL to
strengthen its position in the market.


Gas Sector: Austria Opposes Unbundling
--------------


12. (C) Europe's gas sector, according to Ruttenstorfer, was
more problematic. The Commission's 3rd Energy Package was an

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attempt to address some shortcomings, but the approach was
faulted, Ruttenstorfer maintained. OMV opposed the
Commission's proposals, particularly the legal unbundling of
gas generation and transmission. Unbundling would, in
Ruttenstorfer's view, not improve Europe's energy security,
because it would discourage large infrastructure projects.
The Commission should instead insist on full implementation
of existing regulations.


13. (C) Minister Bartenstein reiterated that the GoA
remained opposed to full ownership unbundling. Bartenstein
opined that there would eventually be a compromise between
the Commission's proposals and "the third way" espoused by a
blocking minority of Member States. Bartenstein maintained
that the decision by Germany's E.ON to sell its electricity
transmission grid was a quid pro quo for DG Comp's agreement
to terminate an anti-trust investigation against E.ON in the
electricity sector.


Climate Change and Carbon Leakage
--------------


14. (SBU) MFA State Secretary Winkler admitted that Austria
was struggling to meet its Kyoto targets to reduce CO2
emissions (Note: According to the Austrian Environmental
Agency, in 2005 Austria was 35.6% above its target to reduce
its CO2 emissions by 13% based on 1990 figures. End Note.)
Winkler singled out emissions from transportation,
particularly transit traffic between Italy and Germany, as
the major culprit. Although renewables already represented a
relatively high portion of Austria's energy mix (23%),the
Commission was now asking Austria to raise this further to
34% by 2020 (Note: The GoA has criticized the Commission's
target as too ambitious, but the GoA's 2007 government
program set a target of 45%. End Note).


15. (SBU) Minister Bartenstein acknowledged that there would
be difficult negotiations within the EU to establish new
burden sharing arrangements to reduce emissions. In
Bartenstein's opinion, the Commission should not force energy
intensive industries, such as steel, cement, and maybe
automobile, to buy emission certificates via an auction, if
the U.S. and China are not "on board" with a post-Kyoto
agreement. An alternative, in Bartenstein's view, might be
global sectoral agreements in the energy intensive
industries. The least preferable solution, according to
Bartenstein, would be an EU import duty, "which would be
consistent with WTO rules," on goods from non-contributing
countries.


16. (SBU) Special Envoy Gray noted that Europe continued to
underestimate U.S. action to combat climate change. The U.S.
was spending billions of dollars on environmental technology,
such as biofuels and clean coal technology. The USG and
Europe should stand united in dealing with emerging
economies, which need to contribute their fair share to
reduce global emissions. The Major Economies Meetings (MEM)
format, Special Envoy Gray stressed, was a mechanism to bring
China and other emerging economies into the negotiating
process. Special Envoy Gray said the MEM's goal was to craft
a strong roadmap at the G-8 Summit in Japan this summer to
support the UNFCCC process. He underlined that it was
important to achieve progress now, particularly given that
there will be political transitions in Brussels and
Washington in 2009, which may temporarily slow down momentum.


17. (U) U/S Jeffery and Special Envoy Gray have cleared this
message.
Kilner