SCENESETTER FOR AMBASSADOR MORNINGSTAR'S VISIT TO

C O N F I D E N T I A L SECTION 01 OF 03 MADRID 001165

SIPDIS

STATE FOR SPECIAL ENVOY MORNINGSTAR AND JULIA NESHEIWAT

E.O. 12958: DECL: 12/07/2019
TAGS: ENRG PREL EINV SP
SUBJECT: SCENESETTER FOR AMBASSADOR MORNINGSTAR'S VISIT TO
SPAIN

MADRID 00001165 001.2 OF 003


Classified By: A/DCM William Duncan for Reasons 1.4(b) and (d)

Summary
--------------
1.(U) Embassy Madrid welcomes your visit, which will be an
opportunity to raise with the GOS our European energy
security concerns as Spain prepares to assume the European
Council presidency in January. U.S.-Spain RELATIONS are
strong and based on shared global interests, including our
association in NATO, the fight against terrorism, and growing
economic ties. Spaniards are enthusiastic about President
Obama, and the GOS is optimistic about the prospect for
closer bilateral RELATIONS and enhanced engagement. The
high-profile October 13 meeting between our two presidents,
President Zapatero's first White House meeting in his five
years in office, has contributed to the momentum for closer
bilateral ties.

Bilateral RELATIONS
--------------
2.(U) We value Spanish cooperation on security issues and in
the fights against terrorism and narcotics. Spain is a
strong bilateral defense partner, despite differences in the
past over its sudden withdrawal from Iraq in 2004 and its
withdrawal this year from the NATO force in Kosovo. Spain
operates a Provincial Reconstruction Team in Afghanistan with
about 1,000 troops participating in ISAF. President Zapatero
has announced his intention to support President Obama's call
for more NATO ally participation by sending more Spanish
troops, though exact numbers will be determined after
consultations with the Defense and Interior Ministries.
Spain also allows us the use of two military bases that are
crucial transit points between the U.S. and Afghanistan and
Iraq. Counter-terrorism and law-enforcement cooperation is
strong, as are commercial relations.

Political Context
--------------
3.(SBU) President Zapatero won reelection to a second term in

2008. His center-left Spanish Socialist Workers Party (PSOE)
is seven seats shy of a Congressional majority and fared
poorly this year in regional and European Parliament
elections. Zapatero's popularity has suffered because of the
long recession and what are viewed as the government's
ineffective efforts to address it. The conservative
opposition Popular Party (PP) has not capitalized on
Zapatero's unpopularity, as it has suffered internal
divisions and has been dogged by corruption accusations.
Zapatero has sought to show that he is taking a leading
international role in the response to the economic crisis,
and the EU presidency gives the GOS an opportunity to play up
its international role.

Economic Context
--------------
4.(U) Spain grew much faster than the EU average over the 15
years through 2007 and now has the world's 9th largest
economy. The rapid growth was driven by a housing boom that
ended in 2007, after which the world economic crisis
aggravated the economy,s woes. Spain has been in recession
for 20 months. The economy is expected to continue
contracting until sometime in 2010, which would make it the
last large economy to begin recovering. Unemployment, now
over 19%, is expected to pass 20% next year. The GOS has
responded with a major fiscal stimulus. This has boosted the
budget deficit to around 10% of GDP, and the GOS will have to
curb spending in the next few years.

5.(U) Zapatero intends to reorient Spain,s economy towards
more sustainable sectors. Renewable energy is a key part of
Zapatero,s vision, in fighting climate change as well as in
promoting energy security and developing new industries.
Generous (and costly) feed-in tariffs have helped make Spain
a world leader in wind and solar power, and Iberdrola and
Acciona are the world's two largest wind power generators.

6.(U) Renewable energy is also an important part of the
bilateral economic relationship. Spanish companies own wind
farms and wind turbine manufacturing plants in around 20
states. Iberdrola wind projects have received over $500
million in U.S. stimulus funds, and Acciona has applied for
$200 million. Spanish firms have several solar and biofuels
projects in the U.S. as well. Spanish companies and
government bodies collaborate with DOE on research, and some
have received USG grants for wind, solar, and biofuels
activities.


MADRID 00001165 002.2 OF 003


7.(U) In recent years, Spain has become a major investor in
the United States in other sectors as well, including
banking, road construction, and food. The GOS and Spanish
companies see the USG as providing Spanish companies
opportunities in these areas and others through the stimulus
package, climate change legislation, and efforts to sell
troubled banks, and the GOS portrays close bilateral
relations as helping Spain,s economic interests.

EU Presidency
--------------
8.(SBU) The GOS has named a wide range of issues as
priorities of its presidency. Its most frequently mentioned
priorities are coordinating economic recovery and reform
measures, coordinating implementation of the Lisbon Treaty
(including adjusting to the roles of new President Van Rompuy
and High Representative Ashton),and promoting gender
equality. President Zapatero and other GOS officials often
cite strengthening transatlantic RELATIONS as another top
priority. The GOS wants a more substantive TEC meeting and
is enthusiastic about the US-EU Energy Council, particularly
in the areas of renewable energy and energy technology. The
business community appears relatively uninterested in EU
presidency issues, and in EU issues in general, compared to
its counterparts in other EU countries.

Energy Security
--------------
9.(U) Spain does not produce significant quantities of oil or
gas, and for most Spaniards, energy security means promoting
renewable energy (and for some, nuclear) to reduce the
country's dependence on imported oil and gas. Spain is not
dependent on Russian gas; about 70% of its gas is LNG from a
variety of suppliers. About 30% of its gas comes from
Algeria, mostly by pipeline. The public and most of the
business community see issues such as Russia/Ukraine gas,
Nordstream, and Nabucco as related to overall European energy
security but not as having immediate domestic implications.

10.(SBU) The Foreign Ministry and the Energy Secretariat of
State will be the key players on these issues during the
Spanish presidency. Secretary of State for Energy (in the
Ministry of Industry, Tourism, and Commerce) Pedro Marin has
the lead within the GOS on EU presidency energy issues.
Officials from the Foreign Ministry's bilateral secretariat
and European Union secretQiat also have roles, and National
Security Advisor-equivalent Milagros Hernando is involved in
many big-picture international policy issues. Recent
occasions in which senior officials focused on European
energy security issues included Foreign Minister Moratinos'
visit to Ukraine, EU Secretary of State Diego Lopez Garrido's
visit to Russia, and Secretary of State Marin's attendance
last month at the US-EU Energy Council launch in Washington,
where he spoke with you.

11.(SBU) GOS staff-level officials welcome the possibility of
increasing gas interconnections, both for supply security
reasons and to bring prices down. During its presidency, the
GOS will seek to promote Nabucco. North Africa is a key GOS
interest, and the GOS will encourage the EC to present
proposals to strengthen European gas and electricity
connections with North Africa through the Mediterranean Ring
project. It will organize in Algeria a meeting of
governments interested in the large Desertec solar
electricity project.

12.(C) The GOS generally has positive RELATIONS with Russia,
and Zapatero and other officials have identified as a
presidency priority moving forward on a new EU-Russia
strategic accord. Foreign Ministry sources say they see the
possibility of a January Russian gas cutoff of Ukraine as
remote but one that cannot be entirely discounted. Zapatero
and the royal household are comfortable enough with Russia
that they were willing to risk criticism from economic
nationalists inside and outside the government last year by
trying to encourage the sale to Lukoil of the 20% stake in
Repsol owned by a troubled construction company sympathetic
to the ruling party. (The effort was abandoned after oil
prices fell and Lukoil lowered the amount it was willing to
pay.)

Repsol
--------------
13.(C) You will be hosted for a lunch December 17 by Repsol
chairman Antonio Brufau. Repsol was the world's 15th largest
petroleum refiner by revenue in 2008. USG interactions with
it have focused on our interest in discouraging it from

MADRID 00001165 003.2 OF 003


investing in Iran's Persian LNG South Pars project, in which
it is a partner with Shell. The two companies have taken no
investment decision and are negotiating with a Chinese
company to enter the project in order to reduce their stake.
Company officials understand the USG position that now is not
the time to do anything that the GOI could portray as
business as usual. However, they are maintaining frequent
contact with the GOI and retain a long-term interest in thQ
country's resources. They understand that Iran is not the
focus of your visit. GOS concern over Repsol's interest in
Iran may be a factor, along with a reflexive preference for
dialogue and skepticism over the effectiveness of sanctions,
shaping GOS views on new sanctions against Iran.
(Nonetheless, the GOS actively enforces existing sanctions
and understands the importance of addressing Iran's nuclear
ambitions.)

14.(U) Repsol operates in over 30 countries, exploring
primarily in north and west Africa and Latin America. The
company has in the last several months announced its
largest-ever gas find in Venezuela (offshore),large oil and
gas finds in Brazil (offshore),and a large gas investment in
Bolivia. Brufau squired Venezuelan president Chavez around
town during Chavez' September visit. Repsol also has
operations in the Gulf of Mexico and an office in Houston.
The company is reported to be seeking to increase its
presence in developed countries. Press articles suggest that
Brufau has come under fire in recent months for cutting back
the company's dividend rather than cutting exploration and
that his position is not solid; the critics include corporate
stockholders with cash flow problems.
CHACON