KAZAKHSTAN: EUROPEAN DIPLOMATS DISCUSS NABUCCO GAS PIPELINE

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000053 SIPDIS STATE FOR SCA/CEN E.O. 12958: DECL: 03/06/2059 TAGS: PGOV PREL ECON EPET TX RS KZ SUBJECT: KAZAKHSTAN: EUROPEAN DIPLOMATS DISCUSS NABUCCO GAS PIPELINE REF: 09 ASTANA 2100 Classified By: Ambassador Richard E. Hoagland, 1.4 (b),(d) ¶1. (C) SUMMARY: Discussion with European diplomats at January 14-15 energy events centered on the Nabucco gas pipeline, and what role -- if any -- Kazakhstan would likely play in supplying natural gas to Europe via a "southern corridor." There was also agreement that Turkmenistan's ability to diversify gas export routes has created anxiety in Moscow, although Russia is likely to remain Turkmenistan's primary market for the foreseeable future. END SUMMARY. A "REAL SHIFT" IN KAZAKHSTAN'S POSITION ON NABUCCO ¶2. (C) At a small, private January 14 luncheon hosted by Hungarian Ambassador Janos Balla, Hungary's Ambassador-at-Large for Energy Security, Mihaly Bayer said he decided to visit Astana now in order to follow up on President Nazarbayev's positive comments about Nabucco from his October 22-24 visit to Turkey (reftel). During his state visit, Nazarbayev publically and unequivocally declared for the first time that Kazakhstani oil and gas will flow through Turkey. Bayer said he feels "a real shift" in Kazakhstan's position. In several years, he underlined, Kazakhstan will need new markets when its gas production increases. At a press conference in Astana on January 14, Bayer stated the need for higher-level talks with Kazakhstan on the Nabucco project. "I think it is time," he said, "to talk directly with the Kazakhstani leadership why we need Nabucco, what are the opportunities for cooperation, and how Kazakhstan can benefit from such cooperation." According to Bayer, "gas production in Kazakhstan is on the rise, and starting in 2011, it will be growing at an even faster pace. Why," he asked, "is it so impossible to assume that Europe might have some portion of it?" (NOTE: On January 20, Timur Imashev, Director of the Gas Industry Department of the Ministry of Energy and Mineral Resources, told Energy Officer that Kazakhstan does not currently produce enough natural gas to supply Nabucco, but would likely be able to do so once the enormous Kashagan oil field is developed. However, he said that Kazakhstan would follow Turkmenistan's example and sell natural gas only at the border, rather than investing in pipeline projects. END NOTE). ¶3. (C) Bayer believes that Kazakhstan has paid close attention to the April 2009 pipeline explosion in Turkmenistan, and Russia's subsequent treatment of Turkmenistan. He further speculated that Kazakhstan currently worries that something similar could happen to them, too. Thus, he sees "a window to capitalize" on Kazakhstan's current perception. Bayer said he is telling Kazakhstan that Europe wants to diversify routes and supplies, while Kazakhstan wants to diversify its markets; this makes sense for both. Bayer said, "Change is slow in this part of the world, but it can happen here. However, they will take only those risks that can be covered." WHO WILL SUPPLY THE GAS? ¶4. (C) During the January 14 energy conference in Batumi, Bayer reported, Azerbaijan objected to any mention of Nabucco in the text of the final document. Bayer said he expects no real movement from Azerbaijan on Nabucco until significant movement occurs on Ngorno-Karabakh. He commented to the Ambassador, "Your 'interim' situation without an accredited Ambassador in Baku is decidedly regrettable. They see it as a 'signal.' And your situation in Ashgabat is simply absurd." Bayer said Nabucco does not need, nor is pursuing, gas from Iran. Significant gas from Iraq is becoming more and more a real possibility. HOPE FOR A DULL -- AND PRODUCTIVE -- NEW YEAR ¶5. (C) Bayer expressed his expectation and hope for a "relatively dull year" for Nabucco. He called completion of the first part, the inter-governmental agreement (IGA),"a real breakthrough. Now, we have to work behind the scenes on the more technical parts, including host government agreements, design, building permits, and financing. International financial institutions (IFI) like the EBRD, European Investment Bank, and International Finance Corporation are already firmly committed," he averred. However, Bayer mentioned a private ASTANA 00000053 002 OF 002 concern that the IFIs will not accept sovereign guarantees from Nabucco shareholder-partners Romania and Bulgaria. SOUTH STREAM SKEPTICISM ¶6. (C) About Hungary and South Stream, Bayer underlined that two years have passed since Budapest signed on to South Stream -- and nothing has happened. Two years ago, Nabucco was "dormant," but now the situation (between Nabucco and South Stream) has totally flipped. The new Hungarian government is no longer straddling the fence between Nabucco and South Stream. The new Hungarian Prime Minister has declared publically for the first time, "Hungary favors Nabucco." According to Bayer, the Hungarian government's natural-gas priorities are 1) Nabucco, 2) LNG, and then 3) South Stream (if it ever happens). TURKMENISTAN'S DESIRE TO DIVERSIFY ¶7. (C) During a monthly energy security roundtable, European diplomats agreed on Turkmenistan's success in diversifying gas-export routes in a short period of time. In addition to a new gas pipeline to China, in just 18 months, Turkmenistan has expanded existing capacity to export gas to Iran, and reopened the gas pipeline to Russia. The British Energy Officer reported that the pipeline to China will ship just six bcm initially, but Turkmenistan will export up to 30 bcm to China by 2013 at a price of $195/thousand cubic feet, including possibly via a second, parallel gas pipeline. He also asserted that Turkmenistan plans to increase exports to Iran to 20 bcm by 2011. According to Austria's Ambassador to Kazakhstan, who attended the previous luncheon at the Hungarian Embassy, Bayer said that Turkmenistan has clearly demonstrated its desire to diversify and willingness to "court" the European Union as a partner. FROM RUSSIA, WITH ANXIETY ¶8. (C) The European diplomats agreed that increased diversification and energy independence in Turkmenistan have raised anxiety levels in Russia. "It is no accident that the pipeline to Russia was back in business after Medvedev's visit to Ashgabat," said the British Energy Officer. He argued that if Europe is serious about importing Turkmen gas, it must send high-level delegations to Ashgabat to make the case directly to President Berdimuhamedov. The UK, he added, will send Minister of Energy Lord Hunt to Baku, Astana, and Ashgabat at the end of February/beginning of March. Noting that Russia had been paying for Turkmen gas six months after delivery, he said that Turkmenistan only "felt the pain" of the pipeline explosion in November, which is when the government began more actively to push for alternative export routes. CASPIAN LITTORAL PIPELINE ¶9. (C) On the first morning of his visit to Astana, Bayer met with Vice Minister for Energy and Mineral Resources Aset Magauov. When Bayer asked about the Caspian Littoral (Prikaspiskii) pipeline, he said Magauov answered, "The Central Asia Center (gas pipeline) is at only half capacity. In 2010, Turkmenistan will sell only about 12 billion cubic meters (bcm) to Russia. At this time, no one needs Prikaspiskii and no one is paying any attention to it." ¶10. (C) COMMENT: Primarily an oil exporter, Kazakhstan cannot realistically be expected to serve as the Nabucco gas pipeline's main supplier. Furthermore, Kazakhstan's leadership takes a serious political risk vis-a-vis its relationship with Russia every time it issues statements even vaguely supportive of the Nabucco project. Nevertheless, as Kashagan oil production comes online in 2013 and beyond, significant quantities of Kazakhstani gas will be available for export. The amount that will go to China via the new gas pipeline (design capacity, 40 bcm) remains unclear, but we fully expect Kazakhstan to increase overall natural gas exports over the next five years. To answer Mr. Bayer's question, Europe well might receive some portion of it. END COMMENT. HOAGLAND