ITALIAN PIPELINE COMPANY CONCERNED ABOUT AZERI

C O N F I D E N T I A L SECTION 01 OF 02 ROME 000281 SIPDIS STATE FOR EEB FOR DAS HENGEL STATE FOR EUR FOR DAS BRYZA E.O. 12958: DECL: 03/11/2019 TAGS: ECON ENRG GR IR IT RS TU AJ SUBJECT: ITALIAN PIPELINE COMPANY CONCERNED ABOUT AZERI (AND AMERICAN) SUPPORT FOR CASPIAN GAS PROJECT REF: A. A) 08 ROME 1308 B) 08 ROME 1101 ¶B. C) 08 ROME 842 ROME 00000281 001.2 OF 002 Classified By: CDA Elizabeth Dibble for reasons 1.4 b and d ¶1. (C) Summary: Franco - Italian energy company Edison, one of the leading partners in the Turkey-Greece-Italy (TGI) gas pipeline project, is concerned about Azerbaijan's decision to delay production from its Shah Deniz II gas field. Such a delay would adversely impact current plans for first TGI gas exports to Europe around 2013. Edison believes the Azeri delay may be designed to give the competing Nabucco pipeline project more time to get off the ground, and inquired about the level of USG support for the Azeri plans. Edison is trying to decide whether or not to proceed with its Caspian endeavor. The company claims that mixed signals from Washington are increasing its uncertainty. See paragraph 6 for guidance request. End Summary. ¶2. (C) Elio Ruggeri, Project Leader for the TGI gas pipeline led by the Franco/Italian energy company Edison, called on Post recently to express concerns that Azerbaijan may decide to delay gas production from its Shah Deniz II (SDII) gas field. Ruggeri said that such delay would adversely impact current TGI plans for first gas exports to Europe around ¶2013. He explained that while the Azeri decision to delay may be a tactical move in its ongoing negotiations with Turkey for Azeri gas passage to European markets, his company is concerned that the delay decision may also be designed to give the competing Nabucco gas pipeline project more time to get all the pieces in place to become a viable project. Given the perception in Brussels and the international media of USG preference for Nabucco, he said his company would like to know if there is USG support for the Azeri delay. He said knowing the USG position is important for his company in order to better assess its options. ¶3. (C) One option that has recently surfaced, advanced by members of the Nabucco consortium last December, is a TGI merger with Nabucco, but Ruggeri said that Edison is not interested. He said Edison is reluctant because TGI is planned to come on line sooner than Nabucco and it is by itself a more viable project. Ruggeri repeated previously �A;stated advantages of TGI over Nabucco in getting first gas to Europe: that TGI is a smaller project that needs less gas and less financing, that as a smaller project it would not draw Russian opposition and that it will use existing gas transport infrastructure for a major part of its trajectory. On the issue of financing, Ruggeri highlighted that Edison alone would be able to finance TGI if its other consortium partners chose to withdraw from the project. He said that Nabucco, on the other hand, depends on financing from all its consortium members. He concluded that TGI advantages point to it being built sooner as a stand alone project than if it were to merge with Nabucco. Ruggeri stressed that, if there is USG (or European) support behind Azeri plans to delay SDII gas, his company would like to know in order to better assess its options, including the merger proposal with Nabucco. ¶4. (C) If USG policy still remains of supporting any pipeline that opens up the Southern Corridor, Ruggeri said USG encouragement on Azerbaijan to market SDII gas to the Georgia-Turkey border could help move forward Azeri-Turkish gas negotiations. In his view, the marketing of SDII gas by Azerbaijan would attract bids from Edison and other gas companies. The bidding process would then put a reference price on the gas and would also allow bidding companies to put pressure on Turkey to conclude a SDII gas passage/pricing deal with Azerbaijan. Without these types of moves, Ruggeri said the status quo on stalled Azeri-Turkey gas negotiations will remain, jeopardizing projects like TGI and Nabucco to open up the Southern Corridor. ¶5. (C) As for the status of the Italy-Greece-Turkey-Azerbaijan Inter-governmental Agreement, Ruggeri said it is on hold pending Turkey,s decision to sign it. Ruggeri said that PM Berlusconi sent one letter to PM Erdogan encouraging Turkish signature. Ruggeri speculated that Erdogan has not responded to the letter and that Berlusconi may be preparing to send another one. He added that not being an Italian parastatal company, Edison has ROME 00000281 002.2 OF 002 limited political capital with the GOI and that it must be careful not to push the government too hard on this. ¶6. (C) Comment/Guidance Request: There is a real possibility that Edison may pull out of the TGI project, thereby putting an end to a gas pipeline that could open Southern Corridor gas to Europe. Edison often reminds us that they have not yet formally decided to get involved in building the TGI project and that they face a fast approaching end-2009 deadline to reach a decision (ref B). They have also continued to express concerns on what they believe are perceptions at the EU in Brussels and in the Caucasus of USG preference for Nabucco over TGI. Edison says that such perceptions continue to hurt the efforts by the company and its partners to open up the Southern Corridor. Post has repeatedly told Edison that USG policy continues to be supporting Southern Corridor projects, without favoring specific pipelines, that diversify European gas imports. Edison would like to see greater USG emphasis of this position and for stressing both Nabucco and TGI as key Southern Corridor projects in its policy dialogue with the EU and Caucasus region stakeholders. Post requests guidance on responding to Edison,s inquiry regarding the USG position on the Azeri decision to delay SDII gas production. Post also request guidance on responding to Edison,s concerns of perceived USG Nabucco preference. End comment. DIBBLE