C O N F I D E N T I A L SECTION 01 OF 04 BRUSSELS 000110

SIPDIS

E.O. 12958: DECL: 01/26/2019
TAGS: ECON EPET EUN RS UP TU ZB ZJ
SUBJECT: THE EU'S ENERGY SECURITY: MAINTAINING THE MOMENTUM
FOR DIVERSIFICATION

REF: (A)ANKARA 56 (B) BAKU 31 (C) BRUSSELS 31

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Classified By: EEST Chief Louis L. Bono for reasons 1.4(b) and (d).


1. (C) Summary and Introduction: The recent dispute between
Russia and Ukraine over gas supply and transit underscores
yet again the precariousness of Europe's energy supply.
Despite attempts by the parties to portray this as a
commercial dispute, it was evident that gas was being used as
a weapon in a broader geo-political struggle between Russia
and Ukraine ) with Europe suffering the humanitarian
consequences. In order to insulate our European partners
from the whims and undue influence of petro states, to
further our relations with Black Sea and Caspian states, and
to preserve the integrity of energy markets, we need to
intensify our bilateral efforts to improve Europe's energy
security. One of the key components to this, as noted at the
2008 U.S.-EU Summit, is to increase competition through
interconnectivity and diversification of resources and
routes. The major challenge will be to convince the
individual EU member states of the commonality of purpose.

2. (U) The European Commission has outlined a plan of action
for the EU in its Second Strategic Energy Review (SER). The
EU's Energy Security and Solidarity Action Plan, to be taken
up by the European Council in March 2009, calls for:
- The development of infrastructure to enhance cross
border transmission of electricity and gas supplies between
member states, and to establish links with new suppliers
(diversification);
- Improving external relations with supplier and transit
states;
- The maintenance of gas and oil stocks by member states;
- Energy efficiency; and
- Exploitation of indigenous resources including
renewables, coal, and nuclear.
As president of the EU Council, the Czech Republic has
identified energy security as a priority for the
Transatlantic agenda. The EU's action plan provides a good

framework for cooperation. End summary.
TURKEY AND THE SOUTHERN CORRIDOR
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3. (C) A major component of the EU's energy security efforts
is to develop new gas sources and alternative routes to
market. To this end the EU, with U.S. support, has been
focusing on the development of the Southern Corridor, to
bring Caspian and Middle Eastern, including Iraqi, gas to
Europe. This endeavor has taken on renewed urgency following
the recent cutoff of Russian gas, and we should maintain this
momentum.

4. (C) The key to getting Caspian, and eventually Central
Asian and Iraqi resources to Europe lies with Turkey. Having
also suffered cuts in Russian gas due to the dispute with
Ukraine, and with their Russian supply contract due to expire
in 2011, Turkey is intent on cornering Azeri gas supplies.
Turkey seeks as much as 8 billion cubic meters per annum
(bcm/a) from Azerbaijan's Shah Deniz (SD) II field field, and
may be willing to pay western prices for it. (Ref. A) If
Turkey succeeds, it would leave roughly 5 bcm/a available for
Europe from SD II. Five bcm/a may be sufficient for the
Turkey-Greece-Italy (TGI) interconnector, but it would not be
enough to sanction the first phase of the Nabucco.
Regardless, the Southern Corridor projects will remain
stalled until Turkey concludes a bilateral sales agreement
with Azerbaijan. Thus, we should continue to encourage the
two to conclude a bilateral sales an agreement that would
leave sufficient supplies for the European market.

5. (C) Our efforts to provide Turkey with assurances and
guarantees to satisfy its energy needs have been praised, but
we must impress upon our EU partners to do more of the same.
Less than seven percent of the European Investment Bank's

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(EIB) funding for Turkey over the past five years (about 556
million euros) has gone to the energy sector, whereas the
European Bank for Reconstruction and Development has only
just commenced operations in Turkey. If the EU is to
convince Turkey of its sincerity as an energy partner, it
must do more to help Turkey meet its energy demand.

6. (C) Equally important is the political relationship.
During a recent visit to Brussels, Prime Minister Erdogan
declared that he would not use gas as a "weapon", but earlier
stated that Turkey would reconsider its commitment to the
Southern Corridor if the Energy Chapter of its accession
process were not opened. Finally, while Azeri gas is crucial
to the near term expansion of the Southern Corridor, its
long-term sustainability depends on supplementary sources.
The Nabucco consortium is keen to pursue gas from both
Turkmenistan and Iraq. Estimates indicate that Turkmenistan
has significant reserves, but the lack of high-level EU
engagement, combined with stiff competition from Russia and
China, has not helped European suitors. Iraq provides
another viable source, but prospects are dim while its
hydrocarbons legislation remains in limbo. We must also
address the consortium's interest in Iran as a secondary
source. The USG initially opposed Nabucco as it was
conceived to transmit Iranian gas to Europe. The project has
evolved, as European policy makers have moved away from Iran
as a source, but the reality remains that if supplies from
Turkmenistan or Iraq cannot be secured, the consortium could
easily turn back to Iran.
UKRAINE
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7. (C) Ukraine's reliability as a transit partner is as
dubious as Russia's reliability as a supplier. Nevertheless,
over 80 percent of Russian gas supplies to the EU pass
through Ukraine. If/when the Nabucco and Nord Stream
projects come on line, their aggregate transmission capacity
of 86 bcm/a represents less than half of Ukraine's capacity
of 179 bcm/a. Accordingly, the EU will remain dependant on
Ukraine as a transit partner and improvements in Ukraine's
infrastructure and transparency are needed to strengthen
Europe's security of supply. For instance, one of the major
issues during the recent Russia-Ukraine dispute was the gas
needed to power Ukraine's compressors to pump supplies to
Europe. Under normal circumstances, only two to three
percent of the transit gas is needed for this purpose.
However, the antiquated and inefficient Ukrainian system
requires six to eight percent for its compressors. (Note:
There is speculation that Ukraine may have padded the figures
to secure additional supplies for its own use. Even so, this
underscores the need to improve transparency. End note.)

8. (C) One suggestion has been to meter EU supplies as they
enter and exit Ukraine. In addition, we should help Ukraine
manage its domestic demand by improving efficiency, adopting
a market price structure and diversifying its energy sources,
including renewables and increased domestic hydrocarbons
production. The U.S. and EU agreed at the 2008 Summit to
cooperate with Ukraine towards these ends, but there has been
little action.

9. (C) Although the recent crisis has soured EU-Ukraine
relations, we should seize upon the fears of vulnerability to
turn the tide and strengthen this relationship. A priority
would be to establish a joint U.S.-EU-Ukraine energy working
group as we committed ourselves to do at the 2008 Summit,
though Commission officials have been reluctant to follow
through.
RUSSIA
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10. (C) The EU has had difficulties managing its relations
with Russia, due in part to the aversion of some member
states to upset their principal supplier of oil and gas.
Russia supplies about 25 percent of the EU's total gas

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supply, 47 percent of its imports, and in the case of some
member states, 80 to 100 percent of their gas needs.
Russia's decision earlier this month to cut off supplies
contravenes its 2006 St. Petersburg commitment to
transparent, predictable and stable energy markets. EU
Energy Commissioner Piebalgs remarked that for the first
time, Gazprom did not care about the impact of its actions
toward Ukraine on its customers. (Ref. C)

11. (C) There has been much rhetoric throughout Europe the
past few weeks about the need to reduce dependency on Russian
gas supplies. European Commission President Barroso
reportedly told Prime Minister Putin during the cut-off that
"if supplies do not resume, (he) will recommend European
energy companies stop purchasing Russian gas." This is a bit
of a hollow threat, given the dearth of alternative sources
and the sheer size of Russian gas reserves, but it marks a
change in Barroso's tone. Time will tell whether Putin has
overplayed his hand, or whether the Europeans will forget the
incident after a few months of steady supplies. A key
indicator may be the manner in which Russia/Gazprom responds
to the contractual suits that European customers are
preparing to file for failure to deliver. Most expect
Gazprom will invoke the force majeure clause (or "force
Putin" as some call it). If Gazprom is not willing to assume
significant responsibility for the cut in deliveries, the EU
and member states should be inclined to expedite attempts to
diversify. Nevertheless, with limited source and
transmission options, the EU will remain dependent on Russian
gas for the near future. Thus, it will be important for the
EU to refocus Russia, and for that matter Gazprom, on
repairing external relations, honoring legal commitments, and
investing in infrastructure and exploration. What leverage
the Europeans can bring to bear to accomplish these
objectives remains the chronic question mark.
THE BALTICS
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12. (C) Estonia, Latvia, and Lithuania are essentially energy
islands, isolated from Europe's electricity grid. Lithuania
must decommission its Ignalina nuclear power plant by the end
of this year. The plant provides about 70 percent of
Lithuania's power and a substantial portion of Latvia's.
Estonia's oil shale reserves lend it some additional
independence, that is, until the EU's carbon emissions cap
kicks in over the next few years. The simple answer for the
Baltic states is to source electricity from Russia, but
Russia's unreliability as an energy supplier, coupled with
its historically fractious relationship with the region,
could spell disaster. We and the EU must not lose sight of
this precarious arrangement in our efforts to address Ukraine
and the Southern Corridor. Proposals to interconnect the
Baltics with the rest of Europe and to diversify sources have
been put forth but have been beset by infighting, lack of
vision and insufficient funding. We must encourage EU
attention to this issue and urge the Baltic states to set
aside nationalistic proclivities and cooperate on common
solutions.
COMMENT: DIVERSIFICATION OF POWER SOURCES
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13. (C) In support of his policy to promote a green
technologies revolution, the President remarked that the
manner in which we use energy strengthens our adversaries.
Energy Commissioner Piebalgs conveyed a similar sentiment - a
fear of a European market increasingly dependent on Russia
and Iran. (Ref. C) Over the last few years, our leaders
have pledged and re-pledged to promote strategic cooperation
on energy technologies, as well energy security. As we seek
to strengthen Europe's security of supply, we should assess
the progress that has been made on energy cooperation and
examine ways to intensify it through the development and
deployment of alternative sources such as renewables and

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nuclear, cleaner technologies such as carbon capture and
storage, and energy efficiency mechanisms.
.