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 SIPDIS STATE FOR EUR/FO JGARBER AND MBRYZA, EUR/CE, EUR/RUS, EUR/ERA, EEB/FO, PLEASE PASS TO NSC ASTERLING 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. BUDAPEST 00000101 002 OF 007 ¶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. BUDAPEST 00000101 003 OF 007 ¶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. BUDAPEST 00000101 004 OF 007 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 BUDAPEST 00000101 005 OF 007 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 BUDAPEST 00000101 006 OF 007 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. BUDAPEST 00000101 007 OF 007 Budapest, January 27, 2009 End text. Foley