BUDAPEST NABUCCO SUMMIT: SOME NEW MOMENTUM BUT NO

C O N F I D E N T I A L SECTION 01 OF 07 BUDAPEST 000101

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E.O. 12958: DECL: 02/02/2019
TAGS: ENRG ECON EPET PGOV EU HU
SUBJECT: BUDAPEST NABUCCO SUMMIT: SOME NEW MOMENTUM BUT NO
BREAKTHROUGHS

Classified By: P/E Counselor Eric Gaudiosi, reasons 1.4(b),(d)


1. (SBU) Summary: The GoH-hosted Nabucco Summit in Budapest
brought together twelve national delegations representing
potential Nabucco suppliers (including Iraq, Egypt,
Turkmenistan, and Kazakhstan),transit states, and consumers,
including three EU prime ministers, the EU Energy
Commissioner, and the President of Azerbaijan. The Summit
yielded some new momentum within the EU, following the
Russia-Ukraine gas cutoff, to accelerate progress on Nabucco,
including a commitment to complete an IGA in the first half
of 2009, a proposal for a financing structure that could
enhance the pipeline's near-term viability, and a Summit
declaration of political support for the project. End
Summary.


2. (U) On January 26-27, the GoH hosted a Nabucco Summit to
solidify political support and elaborate new mechanisms to
accelerate progress on the project. Hungarian PM Gyurcsany
outlined two key goals for the Summit: to obtain a commitment
for EU financial support for the project to mitigate upfront
commercial risk, and to establish an international body to
coordinate among the various stakeholders and thus generate
momentum behind Nabucco.


3. (U) Azeri President Aliyev and Bulgarian Prime Minister
Stanishev participated, as did Georgian Deputy Prime
Minister/Finance Minister Gilauri, Turkish Energy Minister
Guler, Egyptian Oil Minister Fahmy, Austrian Economic
Minister Mitterlehner, and Romanian Economic Minister
Videanu. Germany sent Economic Ministry State Secretary
Pfaffenbach, Iraq sent Oil Ministry Undersecretary Hassan,
and Turkmenistan sent Director of the State Agency for
Hydrocarbon Resources Kakayev. Kazakhstan belatedly decided
to send Deputy Energy Minister Batalov, who attended the
conference but did not speak in the open forum. The EU
Presidency was represented by Czech Prime Minister Topolanek.
Also in attendance were EU Energy Commissioner Piebalgs,
European Bank for Reconstruction and Development (EBRD)
President Mirow and European Investment Bank (EIB) President
Maystadt. DAS Bryza headed the U.S. delegation.

EAST-WEST DIVIDE PERSISTS AMONG NABUCCO'S EUROPEAN PARTNERS


4. (SBU) Most participants agreed that the recent Russian
gas cutoff cast the Nabucco project in a new light, with MOL
chief strategist Laszlo Varro referring to the cutoff as "our
9/11." Czech Prime Minister Topolanek warned that the
Russia-Ukraine gas cutoff marked the realization of Europe's
"worst-case scenario" and could have dragged on for many more
days, or even weeks. Europe therefore faces an urgent need
to make a strategic decision to diversify natural gas
supplies by investing in Nabucco, taking into consideration
the project's strategic benefits in addition to the "usual
financial balance sheet considerations." Topolanek stressed
the need for more urgent diplomacy to secure gas supplies
from Azerbaijan, Turkmenistan, and Iraq, noting that Iran was
not emerging as a viable supplier, notwithstanding original
plans by Nabucco's developers. Topolanek's views were echoed
by Prime Ministers Gyurcsany and Stanishev, all of whom made
strong appeals for EU funding to mitigate Nabucco's upfront
risks based on the project's strategic nature, arguing that
energy security is an essential element of economic
prosperity and national sovereignty and that Nabucco is more
than merely a commercial project. They called for EU
solidarity to overcome what Gyurcsany described as a "new
Iron Curtain," referring to the new member states' isolation
from the West European gas grid and resulting overdependence
on Russian sources. They also emphasized that progress needs
to be made during the "window of opportunity" following the
gas crisis.


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5. (SBU) Topolanek went still further, calling Nabucco a
"test of European integration" and referring to the Nord
Stream and South Stream pipelines as threats not only to
Nabucco, but to Europe's entire gas diversification effort
and its very sovereignty. All three agreed that Nabucco's
potential to mitigate the impact of future gas cutoffs should
qualify it for EU financial support. In a written statement
to the Summit, EU Commissioner Barroso, who was unable to
attend, added his support for Nabucco after the
Russia-Ukraine gas crisis revealed Europe's "excessive
vulnerability" to gas supply disruptions. Polish PM Tusk
also sent a statement to be read at the Summit in which he
offered support and indicated his country's desire to join
the project.


6. (SBU) The Austrian and German delegates de-emphasized
Nabucco's strategic significance, voicing their support for
Nabucco as a commercial venture and placing it in the context
of Europe's overall effort to diversify its gas supply
sources and routes by projects including Nord Stream and
South Stream. Both spoke of the need to ensure a stable gas
supply for Europe and the inherent benefits of competition
and diversification, but neither recognized the
disproportionate risks borne by their neighbors to the east.
Mitterlehner also added a plug for eventual inclusion of Iran
as a supplier to Nabucco and for the Caspian Energy Company,
an OMV-RWE joint venture, as a means to link Turkmenistan
with the gas pipeline system in Azerbaijan. Energy
Commissioner Piebalgs' comments focused on Nabucco's
importance in light of Europe's rising demand for gas and
need to address risks to supply transit and pricing.

SUPPLIERS INDICATE READINESS TO SELL GAS


7. (SBU) Prospective suppliers to Nabucco expressed their
support for the pipeline and varying degrees of willingness
and ability to supply it. President Aliyev reiterated
Azerbaijan's longstanding support for Nabucco and declared
that Azerbaijan is ready to play a more active role in
Europe's energy diversification with its 2 tcm in gas
reserves. He also welcomed Gyurcsany's call for a
partnership with the EU that would go beyond a role as simply
a raw material supplier, contrasting Azerbaijan's desired
strategic partnership with the EU with the exploitation
Azerbaijan suffered as a Soviet republic. (Note: Topolanek
and Stanishev echoed Gyurcsany's call for a partnership
extending beyond commercial ties, but the German delegate
recommended that the relationship begin with energy and grow
from there. End note.) Aliyev added that Azerbaijan viewed
energy as a way to generate international connections rather
than divisions.


8. (SBU) Egypt's delegation expressed interest in possibly
supplying gas to Europe through the Arabian pipeline, while
Turkmenistan's leaned forward on possible involvement in
Nabucco, but maintaining its policy to sell energy at its own
border. The Turkmen delegate referred to recent studies that
indicate they have adequate gas to support a variety of
diversification projects. They currently ship gas to Russia
and Iran and a pipeline to China is under construction. The
EU will be their next recipient.


9. (C) In comments to the open forum, Iraqi Oil Ministry
Undersecretary Hassan expressed Iraq's desire to begin
exporting gas within the next ten years, after focusing first
on production and domestic consumption. In conversations on
the margins, however, Hassan suggested to DAS Bryza that Iraq
is eager to begin exporting gas and that fields in Akkas and
Chamchamal could provide as much as 5 bcm/a. Even in the
absence of a hydrocarbon law, he indicated that the GoI might
be able to purchase from the KRG additional gas for resale
from the Kurdish region in the north.

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10. (C) In a conversation on the margins of the Summit,
Kazakh Deputy Energy Minister Batalov told Bryza that his
government would like to work quietly with the U.S. and the
Europeans on possible future gas exports into the Southern
Corridor as production expands at the Kashagan field. He
affirmed that PM Massimov wants to find a way to move some
Kazakh gas to Azerbaijan and westward.

TURKEY TO REMAIN TOUGH ON TRANSIT


11. (C) Turkey played a generally constructive role at the
Summit but in the closed session made clear its plan to
maintain a hardline approach to the transit of Azeri gas.
Hungarian Nabucco Ambassador Bayer on January 26 lauded
Turkey's contribution to the Summit's non-binding "Budapest
Declaration," in which the parties declared their intention
to "create the necessary political, legal, economic and
financial conditions for the successful and prompt
realization of the Nabucco pipeline project." Bayer was
especially pleased that Turkey agreed to a "clear,
transparent and cost-based transmission regime" and that the
delegation proposed holding an intergovernmental conference
in Turkey to sign the intergovernmental agreement (IGA)
during the first half of 2009. In his comments to the
Summit, Energy Minister Guler highlighted Turkey's prior
experience with international pipelines such as BTC, said
Turkey was committed to Nabucco's realization in the
"shortest possible timeframe," and offered Turkey's existing
gas network as an initial means to transport Nabucco gas.
DAS Bryza opined, however, that BOTAS Managing Director
Duzyol's dismissal in the closed session of a proposal to
kick-start Nabucco financing with 8 bcm of gas from
Azerbaijan's Shah Deniz II field, insisting instead that the
pipeline needed its full 31-bcm capacity upfront to become
viable, suggested that Turkey might still be trying to corner
the market on Shah Deniz volumes for its own consumption.

GYURCSANY'S FINANCING PROPOSAL GAINS EIB SUPPORT


12. (SBU) PM Gyurcsany's proposals for EU funding to
jump-start financing for Nabucco's first phase (on the basis
of a commitment of 8 bcm from Azerbaijan) received support
from EIB President Maystadt, who explained that he had not
previously been aware of the strategic imperative and
political support enjoyed by Nabucco. Commissioner Piebalgs
offered support for Gyurcsany's request for an initial
200-300 million euros in EU pre-financing--the EU proposed
250 million for Nabucco the next day on January 28--though he
rejected Gyurcsany's proposal that the EU finance up to 2
billion euros of the project's cost, telling the press after
the Summit that the EU could help the Nabucco Consortium
obtain loans but that he would not consider further support
that would turn the project into a "public-private
partnership."


13. (C) Gyurcsany's idea to establish an international body
for Nabucco received a lukewarm reception from EU and West
European delegates who tended to view it as duplicative of
existing efforts. (Note: PM Gyurcsany's national security
advisor Karoly Banai earlier confided to DAS Bryza that it
was precisely due to the feebleness of EU efforts,
specifically pointing at EU Nabucco Coordinator Van Aartsen's
lack of engagement, that Hungary wanted to stand-up this new
committee. End note.) The Austrian Economic Minister in the
closed session dismissed the idea as counterproductive and
Piebalgs allowed that an international council could add
value if it included supplier countries, although the
existing structures are currently working well. President
Aliyev stressed the importance of closer coordination among
the stakeholders and PM Stanishev said such a body would be
most effective if granted decision-making authority.

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PUBLIC FINANCING COULD BREAK IMPASSE


14. (SBU) Several Summit participants explored a creative
financing approach to help the project get off the ground.
In conversations on the margins of the Summit, DAS Bryza
reported growing support for a Nabucco financing model akin
to the EU's existing financing scheme for Airbus. MOL CEO
Hernadi suggested to Bryza that individual EU member states
and/or financial institutions could take equity stakes at the
outset of the project to mitigate upfront risk and reduce
their own exposure by gaining a share in the project's upside
through royalty payments over the life of the project.
Hernadi noted that Airbus had initially been financed in this
way. By offering equity capital instead of grants, state
shareholders could realize some upside in the project in
exchange for assuming the risk that future gas volumes might
not materialize. Partial state-ownership could enhance
Nabucco's ability to attract cheap debt financing from the
private sector and international financial institutions.


15. (SBU) DAS Bryza further asked about breaking the project
down into smaller, more easily-financed phases beginning with
an initial volume of 8 bcm from Azerbaijan and fewer
compression stations and investing in the pipeline as
additional funding and gas supplies become available. EIB
President Maystadt expressed strong support for this idea and
indicated that the EIB remains interested in the project and
could potentially finance up to 25 percent of its cost,
depending on the terms of the IGA and the project's overall
bankability. The EBRD also indicated interest, but offered
no specifics on potential participation. Nabucco Managing
Director Reinhard Mitschek of OMV also expressed interest,
but upped his estimate of necessary initial volumes to 12 bcm
to make the project bankable.

FIRST HALF OF 2009 TO BE DECISIVE OR DIVISIVE


16. (U) The Nabucco parties have committed themselves to a
full schedule of events designed to press the project forward
during the next six months, beginning with the resumption in
Vienna in early February of an intergovernmental conference
that convened on January 22-23 in Brussels to work on the
IGA, and hopefully concluding with the signing of an IGA this
summer, which Turkish Energy Minister Guler said he hoped
would happen in Turkey. There are also plans for a summit on
European gas security in Sofia in April, a Southern Corridor
Summit in Prague under the auspices of the Czech EU
Presidency in May, and a high-level conference in April 2009
in Turkmenistan based on a Turkmen-initiated UN resolution on
the role of energy transit in sustainable development and
international cooperation.


17. (C) Comment: The January gas cut-off threw open the
window of opportunity for Nabucco that the Georgia crisis
unlocked last August. Events in the next few months will
surely help keep the spotlight on European gas supply
diversification and Nabucco's important role as one key
element in realizing that goal. All agree that the
successful conclusion of a Nabucco IGA will open the door to
next steps such as an environmental impact assessment and
earnest discussions about project financing. More difficult
issues remain to be addressed, however, such as solving the
chicken-and-egg problem of securing a critical mass of
ship-or-pay and take-or-pay contracts to make Nabucco viable,
as Turkey appears to pursue a maximalist approach in
negotiations on gas purchases and transit with Azerbaijan.
We can be sure that, despite PM Putin's recent welcoming
comments toward Nabucco, Russia will continue working to
undercut any progress, as it sought to do with Deputy PM
Zubkov's and Gazprom Deputy CEO Medvedev's visit to Budapest
just before the Summit. In his closing statement to the

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Summit, PM Gyurcsany tried to capture the positive spirit and
productive steps toward Nabucco by declaring that "decisive
momentum" had been achieved. But a verbal slip that came out
"divisive momentum" could prove closer to the truth if
Europe's failure to unite behind this project impedes
progress in overcoming its obstacles. Still, these European
leaders' strong call for a strategic response to the
Russia-Ukraine gas cutoff and their new and creative thinking
on financing may reflect new momentum in support of this one
important element in Europe's efforts to diversify its
supplies of natural gas.

DECLARATION OF THE BUDAPEST NABUCCO SUMMIT


18. (U) Following is the text of the joint statement to
which the participating Nabucco Summit delegations agreed.
Begin text.

We, the participants of the Nabucco Summit held in Budapest
on the 27th of January 2009,

Attaching great importance to the diversification of
hydrocarbon sources, markets, and routes of delivery based on
the principles of market economy, transparency, reliability,
predictability, free competition and mutual benefits, as well
as to the uninterrupted and secure supply of natural gas for
the domestic markets of all countries at competitive prices
and conditions,

Considering that the harmonization of the interests of energy
consumers, suppliers, transit countries and energy companies
is a prerequisite of the overall energy security, which will
also contribute to the economic development and prosperity of
the countries concerned,

Underlining that the growing interdependence between energy
producing, consuming and transit countries requires a
strengthened partnership among all stakeholders with a view
to enhancing energy security,

Emphasizing, against the background of growing energy supply
concerns in the transit and consumer countries, the viability
of additional energy supply projects, complementing
deliveries from existing routes and suppliers,

Bearing in mind in this context the EU-Central Asia Strategy
and the European Neighborhood Policy, as important frameworks
for enhancing relations of the European Union and countries
of the Caspian Sea region and the Middle East in the field of
energy security,

Aware of the necessity to create a new energy corridor (the
Southern Energy Corridor) linking the European Union, Turkey
and Georgia to the Caspian Sea region and the Middle East,

Considering Nabucco an innovative, viable and robust priority
project to directly connect the natural gas suppliers of the
Caspian Sea region and the Middle East to the European Union,
Turkey and Georgia, and encouraging the upcoming European
Council to be held on 19-20 March 2009 to place Nabucco among
the Union's priority energy projects,

Reiterating the importance of the Ministerial Statement on
the Nabucco Gas Pipeline project signed in Vienna on 26 June
2006,

Acknowledging the progress achieved in the preparation of
this project due inter alia to the efforts made by the
countries party to the project, the European Commission, the
Nabucco International Ltd. and other stakeholders to further
accelerate the early implementation phase, to secure the
necessary volumes of natural gas for the pipeline, to

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complete the legal framework (intergovernmental agreement and
project support agreements),and to exempt the project from
the EU Gas Directive according to the provisions of Article
22,

Welcoming all endeavors aimed at increasing the natural gas
production in the countries of the Caspian Sea region and the
Middle East, in particular the efforts the Republic of
Azerbaijan makes to develop Shah Deniz and other gas fields,
as well as the efforts of other interested partners to
transport gas through the Caspian Sea to the consumer
countries, which fit well with the goals of the Nabucco
pipeline project,

Highly appreciating the results of the Baku Energy Summit of
the 14th of November 2008, particularly concerning the
Nabucco project,

Reiterating our strong commitment to the Nabucco pipeline
project,

Deciding to further expand the mutually beneficial
cooperation among the producer, transit and consumer
countries, international institutions and energy companies to
create the necessary political, legal, economic and financial
conditions for the successful and prompt realization of the
Nabucco pipeline project,

We express our willingness to

- support the development of a clear, transparent and
cost-based transmission regime along the entire length of the
Nabucco pipeline;

- strongly encourage foreign direct investment in the source
and transit countries, as well as the transfer of know-how
and technology, which require active participation of energy
companies;

- foster cooperation among the European Union, its Member
States, Turkey, Georgia, the countries of the Caspian Sea
region and the Middle East, aiming at the creation of an
effective energy partnership including reliable ways of
meeting the domestic needs of producing countries, transit
countries and European markets;

- actively support all initiatives and proposals that would
secure the above objectives, inter alia

-- the proposal of the European Commission and Turkey to
establish the Caspian Development Corporation, a concerted
sector initiative to combine political, legal and commercial
resources to build a strong link across the Caspian Sea;

-- Turkmenistan's intention to hold a high-level
conference in 2009 based on the Resolution of the 63rd
Session of the United Nations General Assembly on the
Reliable and Stable Transit of Energy and its Role in
Ensuring the Sustainable Development and International
Cooperation initiated by Turkmenistan;

-- the Sofia Energy Summit, "Natural Gas for Europe:
Security and Partnership," to take place on 24-25 April 2009;

-- the "Southern Corridor Summit" to be organized by the
Czech Presidency of the Council of the European Union on 7
May 2009;

-- the closing event of the Nabucco Intergovernmental
Conference and signing of the agreement in the first half of
2009 in Turkey.


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Budapest, January 27, 2009

End text.
Foley