BULGARIA: USG ENGAGEMENT NEEDED AS GOVERNMENT

S E C R E T SECTION 01 OF 03 SOFIA 000507 SIPDIS STATE FOR SPE MORNINGSTAR E.O. 12958: DECL: 08/07/2034 TAGS: ENRG IAEA PREL PGOV BU SUBJECT: BULGARIA: USG ENGAGEMENT NEEDED AS GOVERNMENT TARGETS RUSSIAN ENERGY PROJECTS REF: A. SOFIA 499 ¶B. SOFIA 0363 AND PREVIOUS Classified By: CDA John Ordway for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: Driven by mounting budget deficits and a desire to step back from the previous government's cozy energy relationship with Russia, PM Boyko Borissov's new government is re-evaulating Bulgaria's participation in all Russia-led energy projects. On the possible chopping block are the problem-riddled Belene Nuclear Power Plant and the Burgas-Alexandroupolis oil pipeline. Analysts are also reconsidering South Stream, although that project's star has risen in recent days, most likely because the government has considerable time before a real investment decision must be made. The new government remains fully behind Nabucco and the proposed Bulgarian spur to the Turkey-Greece-Italy interconnector. Key officials in the new administration are also holding out hope that re-examination of Bulgaria's energy projects might make an opening for Westinghouse technology through an expansion of the Kozluduy nuclear power plant. We have a window of opportunity to help the Bulgarians diversify and rid itself of the worst deals made by the previous government. In addition, we have a strategic interest in the debate on South Stream and serious safety concerns about Belene. If we are to make the most of this opportunity, we'll need Washington engagement targeted at the Prime Minister. END SUMMARY. TAKING AIM AT RUSSIAN PROJECTS -------------- ¶2. (C) Even before coming to power, Borissov's GERB party had harsh words for Bulgaria's participation in Russian-led energy infrastructure projects. In pre-election campaigning, GERB officials, along with the center-right Blue Coalition, attacked the Bulgarian Socialist Party for being Russia's lap dog on energy. Once in power, GERB had a new reason to target the big energy projects: the 13 percent budget deficit it inherited from the socialist-led former ruling coalition. After publicly threatening South Stream, Belene and Burgas-Alexandroupolis, Bulgarian officials have moderated their tone somewhat, especially after an August 27 telcon and a subsequent September 1 meeting between Prime Minister Borissov and Vladimir Putin. But according to Deputy Prime Minister Simeon Dyankov, the future of Belene and Burgas-Alexandorupolis are still very much in question. THE BLACK HOLE OF BELENE AND AN OPENING FOR DIVERSIFICATION -------------- -------------- ¶3. (S) The Belene NPP continues to be dogged by cost overruns, financing woes, construction delays, and ongoing serious safety and quality assurance concerns (ref B). DPM and Finance Minister Dyankov is waging a personal crusade against this project, which by his estimates, already represents over one billion euros in sunk costs for the Bulgarian state. Dyankov told us August 27 that the only way Belene will go forward is if strategic partner RWE, Russia or another investor comes up with more cash to allow the Bulgarian government to drastically reduce its stake in the beleaguered project. Our contacts tell us RWE is also looking to reduce its commitment in Belene. No other strategic investor appears on the horizon. That leaves Russia. Dyankov doubts Russia will come up with an offer that will be both politically and economically acceptable to Bulgaria, but other analysts are not so sure. Russia seems intent on proving it can build a 1000 MW AES92 reactor in the European Union and Bulgaria is its test case. After their September 1 pull-aside in Gdansk, PM Borissov and Putin agreed that Bulgaria will announce its intentions on Belene by November. In the meantime, Bulgarian officials and technical staff are scrambling to understand what is taking place at Belene while energy oligarchs profiting from the project are using all possible tools to regain the upper hand. The Belene upheaval has also breathed new life into a proposed alternative project using Westinghouse technology at the Kozluduy NPP. Proponents of this plan include Deputy Prime Minister Dyankov, who prefers a Kozluduy expansion over Belene for economic, safety and diversification grounds. BURGAS-ALEXANDROUPOLIS IN QUESTION SOFIA 00000507 002 OF 003 -------------- ¶4. (C) Bulgarian participation in the Burgas-Alexandroupolis oil pipeline is increasingly in doubt. All government representatives we've talked with have said they see no benefit for the Bulgarian government to continue supporting this proposed Bosphorus bypass pipeline. Russian reaction to Bulgarian backtracking has been muted. The legal adviser to the Burgas-Alexandroupolis Project Company BG (a subsidiary of the state-owned Technoexportstroy which owns 24.5 percent of the shares of BAP's international project company) told us September 4 that Russian BAP partners Transneft, Rosneft and Gazprom Neft are walking back their previous commitment to supply the pipeline with the minimum volumes needed to attract project financing. NABUCCO AND TGI-B FULLY SUPPORTED -------------- ¶5. (C) Before officially taking office, PM-elect Borissov ordered the Bulgarian Energy Holding (BEH) to cease all on-going project negotiations and stop signing agreements, with two exceptions. He supported out-going Prime Minister Sergey Stanishev's participation in the Nabucco IGA signing on July 13 in Ankara and he allowed the head of BEH to sign a memorandum of understanding with Italy's Edison and Greece's DESPA on the construction of a EUR 125 million spur to the Turkey-Greece-Italy interconnector. The new government remains fully behind these projects, which they view as essential for the diversification and security of Bulgaria's gas supply. SOUTH STREAM -------------- ¶6. (C) While originally strongly against South Stream, since the August 27 Borissov-Putin telcon, the government has become more conciliatory toward the project. The Russians, meanwhile, are ratcheting up pressure on Bulgarian Energy Holding officials to make concessions on the project, which has gone nowhere since the two sides signed a cooperation agreement in May 2009. According to a Gazprom proposal given to us by current CEO of the Bulgarian Energy Holding, Gazprom is proposing to renegotiate the current cooperation agreement to prevent BEH from engaging in any competitive pipeline project, speed up the deadline for a feasibility study, and reopen negotiations for the use of current Bulgarian pipeline infrastructure by South Steam. Bulgaria's U.S.-based legal counsel is preparing a harshly-worded counterproposal, but given the current upheaval within BEH (the Prime Minister has announced he will disband the Holding in order to partially privatize some of its daughter companies),the Russian moves are a wisely-timed attack. The date for a final investment decision (which will compel Bulgaria to put real money into the project) is still a year away, so the new government has some time to evaluate its options. COMMENT -------------- ¶7. (S) The new government's re-evaluation of its Russian-backed energy deals is an opportunity we should seize. While we are no more than interested bystanders in discussions on Burgas-Alexandroupolis, the Belene and South Stream debates are of strategic importance. Ref B details Belene's serious safety concerns. Belene's demise would not only eliminate these concerns, it could also offer real opportunity for diversification through the use of Westinghouse technology in a Kozluduy expansion. More immediate openings for nuclear diversification could also exist at Kozluduy through a USG-nuclear fuel supply diversification program (using Westinghouse technology) originally designed for a similar Soviet-built reactor in Ukraine and possible deployment of U.S. technology for on-site storage. And if we'd like to cast doubt on South Stream's viability, now is the time. Seeing its energy stranglehold in Bulgaria threatened, Russia is engaging in dialog at the highest level. PM Borissov has promised a response to Putin on all the projects by November. To make a difference, we need Washington engagement with the Prime SOFIA 00000507 003 OF 003 Minister, starting with an SPE Morningstar visit soon. ORDWAY