[06SOFIA202] UNDER THE YOKE: BULGARIA’S DEPENDENCE ON RUSSIAN OIL AND GAS

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Published by Wikileaks & Bivol.bg
 id: 52186 date: 2/8/2006 11:57 refid: 06SOFIA202 origin: Embassy Sofia classification: CONFIDENTIAL destination: 05SOFIA2063|06SOFIA190 header: VZCZCXRO9830 RR RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR DE RUEHSF #0202/01 0391157 ZNY CCCCC ZZH R 081157Z FEB 06 FM AMEMBASSY SOFIA TO RUEHC/SECSTATE WASHDC 1401 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE RHEBAAA/DEPT OF ENERGY WASHINGTON DC RHEHNSC/NSC WASHINGTON DC RUCPDOC/DEPT OF COMMERCE WASHINGTON DC RUEAIIA/CIA WASHINGTON DC   C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000202    SIPDIS    SIPDIS    E.O. 12958: DECL: 02/06/2016  TAGS: ENRG, ECON, ETRD, TRGY, EINV, EPET, PREL, SENV, B  SUBJECT: UNDER THE YOKE: BULGARIA'S DEPENDENCE ON RUSSIAN OIL AND GAS    REF: A) SOFIA 190 B) 05 SOFIA 2063    Classified By: Amb. John Beyrle for reason 1.4 (b) & (d)    1.  (C)  SUMMARY:  Sixteen years after the dissolution of the  Warsaw Pact, Bulgaria still finds itself under the Russian  energy yoke.  Bulgaria receives 88 percent of its natural gas  from Gazprom or one of its sister companies, and 73 percent  of its oil from Russia.  As it awaits entry into the EU,  Bulgaria still faces the fact that one country-supplier can  control whether the lights stay on.  Minister of Economy and  Energy Rumen Ovcharov went to Moscow January 31 - February 1  to discuss the Belene Nuclear Plant, Burgas-Alexandropolous  (B-A) oil pipeline, and gas prices with Russian Energy  Minister Khristyenko.  Upon return, he has publicly spoken  about the prospect of an even larger Russian energy presence  in Bulgaria if Russian firms are selected to build the  proposed Belene Nuclear Power Plant.  In a possible quid pro  quo, he has also said Russia and Bulgaria have agreed that  the current subsidized gas delivery contract with Gazprom --  which the Russian side had insisted on revising -- will  continue unchanged for the time being.  In addition, Ovcharov  announced that Russia, Bulgaria and Greece will meet in  Athens in March to discuss final details for the  Burgas-Alexandropolous pipeline.  The GOB, with its neighbors  and soon-to-be EU partners, must come up with an energy  policy that diversifies its supply of primary fuels, without  burning any bridges to Russia, on which it will be dependent  for years to come.  END SUMMARY    GAS: GAZPROM CALLING THE SHOTS  ------------------------------    2.  (C)  Gazprom's recent attempt to reopen the contract it  negotiated in 1998 with Bulgaria has again highlighted  Bulgaria's need for strategic energy planning (Ref B).  Although Bulgaria drafted an energy policy in 2004 with the  aim of diversifying its sources, scant attention had been  paid to the issue until Gazprom's, New Years "surprises" here  and in Ukraine.    3.  (C)  In 2005, Bulgaria consumed 3.47 billion cubic  meters, of which 3 billion was imported from Russia.  The  remaining amount was produced domestically, from dwindling  reserves.  Bulgaria currently pays less than market prices  for the portion -- 40-50 percent -- of the gas it receives  from Gazprom in the form of transit fees for gas flowing to  Turkey, Greece and Macedonia.  The transit price was fixed in  1998 at USD 83/1000 cubic meter.  Bulgaria claims that for  the first few years of the contract, they lost USD 30 Million  at that price.  Once energy prices began to rise, though,  Bulgaria began to enjoy the fruits of a contract that now  seems very shrewd.  The agreement is complex; but the current  average price for all gas delivered to Bulgaria is approx.  USD 160-170 vs. a market price of USD 258.  In December,  Gazprom began calling for renegotiation of the contract due  to the escalation in natural gas prices.  Gazprom said it  would pay the transit fees in cash, and charge Bulgaria  market rates for all gas deliveries.    4.  (C) GOB officials and private analysts told us the  sanctity of the 1998 contract could and should be respected.  If the EU backed up Bulgaria, it would send a strong message  to Russia not to meddle with previously agreed contracts.  Nevertheless, Bulgarian leaders privately worry that they  could "win the battle, but lose the war," as former Economy  and Energy Minister Milko Kovachev told us.  When the current  contract runs out in 2010, Bulgaria will not only have to  contend with a potentially stronger Gazprom, but could be  faced with loss of revenue from its pipeline if Russia makes  good on its threat to build an additional Blue Stream route  in Turkey.  GOB officials, including current Minister of  Economy and Energy Rumen Ovcharov, have told us they take  seriously the threat that Russia will go ahead with another  Blue Stream route, which could leave Bulgaria holding an  empty pipeline come 2010.  This, more than any other piece of  Russian gas leverage, has forced the GOB to assess its  long-term strategic goals, rather than just seek short-term  pricing advantages.    5.  (U) Upon his return from the Moscow meetings, Ovcharov  said Gazprom was pleased with Bulgaria for not slowing the  supply of natural gas to neighboring countries, and that the  current gas contracts will stay in place for the time being  ) a victory of sorts for Bulgaria.  But he also said that  the two sides discussed increasing the transit of natural  gas, as well as the involvement of Gazprom and other Russian  companies in various energy projects in Bulgaria.  In a clear    SOFIA 00000202  002 OF 003      recognition of the unbalanced nature of the Bulgarian-Russian  energy relationship, Ovcharov said that Bulgaria, as a small  country, "cannot stand up to a giant like Gazprom" and  discuss natural gas in isolation from other energy projects.    6.  (C) Ovcharov told the press that in Russia the two sides  discussed the option of jointly constructing an extension of  the current gas pipeline grid and possible Gazprom  participation in a future privatization of Bulgargaz, but  this would not happen until after EU-mandated changes in the  structure of Bulgargaz in 2007.  These changes might help  Bulgaria resolve its current gas and transit fee dilemma, but  would lead to a much deeper reliance on Gazprom.    NABUCCO: BACK ON THE RADAR SCREEN  ---------------------------------    7.  (C) The prospect of continued dependence on Gazprom has  renewed Bulgaria's focus on a long-delayed alternative, the  Nabucco pipeline.  In 2005 Austria's OMV, Hungary's MOL,  Romania's Transgas, Turkey's Botas, and Bulgaria's Bulgargaz  signed a joint-venture agreement to establish Nabucco.  Each  of the partners would own a 20 percent stake.  This pipeline  would bring jobs, transit fees and, most importantly to  Bulgaria, a non-Russian source of gas.  However, it is still  in the discussion stage.  There are outstanding questions  about where the gas would come from -- Iran, Azerbaijan,  Turkmenistan, or other Caspian sources -- and whether Turkey  would first purchase the gas and re-sell it to the pipeline,  or allow it to transit through and just collect their own  fees.  The Bulgarians complain that Turkey wants to play a  controlling role in both gas and oil supply, rather than  remaining "just" a transit country.  In fact, Turkey and  Bulgaria can be seen as competitors in the gas/oil hub arena,  although Turkey, closer to the sources and much larger, has  an obvious advantage over Bulgaria.    8.  (C)  Ovcharov told us the earliest Nabucco will be  on-line is 2011-12, and even then the most likely potential  supplier ) Iran ) is not necessarily a more preferable  partner than Russia.  Ovcharov said this in the context of  explaining why Bulgaria will need to improve its overall  relationship with Gazprom for both current contracts and for  other energy-sector projects.  Nabucco, particularly with EU  support, could help Bulgaria diversify away from Russian  sources -- unless, of course, Gazprom purchases Bulgargaz.    OIL PIPELINES: B-A BACK IN PLAY  -------------------------------    9. (U)  There are currently two oil pipelines under  consideration to run through Bulgaria: AMBO ) an  American-led consortium to carry oil of unspecified origin  from Burgas, Bulgaria, through Macedonia and on to Vlore,  Albania; and B-A, taking Russian oil from Burgas to  Alexandropolous, Greece.  The current Bulgarian government  has not clearly indicated whether it will support one route  over another, or allow the market to take over the process.  Ovcharov, in remarks to Parliament on January 27, stated that  B-A is at a more advanced stage of development than AMBO.  Ovcharov said Russia and Bulgaria agree now is the time to  move B-A into the implementation stage.  Specifics will be  discussed in a trilateral meeting in Athens in March.  Interestingly, Gazprom will also take part in the  construction of B-A, Ovcharov reported after his trip to  Moscow.    10.  (C)  However, we learned from Bulgaria's Minister of  Regional Development, Asen Gagauzov, that Russia recently  reneged on last year's three-nation agreement on equal  ownership in a consortium to build B-A, and is now pushing  for a 90 percent share, leaving Bulgaria and Greece with only  5 percent each.  Gagauzov claimed Greece has already accepted  the deal, and the GOB is ready to concede as long as it can  be guaranteed ownership and control of the Universal Terminal  Burgas (UTB) ) the entry point for the oil.  The GOB says it  does not want to build two terminals, in case both AMBO and  B-A are eventually built.    11.  (C)  American companies involved in B-A have told us  privately that they are strongly opposed to the current  structure of the UTB (the companies want the terminal to be  part of the pipeline, not separate) and route, and would not  participate under the current plan.  However, if the GOB  brought in an international investor, that could change the  equation, XXXXXXXXXXXX told us.  There are  also questions about the players involved in UTB and their  links to current and former high-ranking government    SOFIA 00000202  003 OF 003      officials.  In the end, Amb. Beyrle has told Gagauzov and PM  Stanishev that the GOB needed to work with the private sector  regarding plans for UTB in order to get their buy-in.  One  risk here for Bulgaria is that if the government puts too  many conditions on the structure of the project, it could  chase investors to other routes through Romania or Turkey.    12.  (C)  Successful completion of B-A would give Bulgaria a  more reliable supply of oil, and increase the government's  revenues from transit fees.  However, with such a large  presence of Russian financing, construction and supply  interests, it would not help Bulgaria diversify its energy  sources.    AMBO MOVING SLOWLY  ------------------    13.  (C)  There are conflicting views of whether AMBO is a  viable project.  Ovcharov told Parliament that it is possible  if AMBO receives backing from a major power (i.e., the U.S.),  along the lines of Baku-Ceyan.  Others feel the length and  cost of the project, not to mention the potential instability  of Macedonia and Albania, make AMBO less attractive as a true  Bosphorous bypass.    14.  (C)  Private sources have told us AMBO has not yet  signed up the international suppliers necessary to finalize  the project's financing.  GOB energy officials told us AMBO  has not been active for months ) perhaps waiting to see how  B-A gets moving.  Curiously, this is an area where the EU  might be more interested, former Energy Minister Kovachev  told us, due to the potential to bring oil right to Italy's  shores.  AMBO, with US and/or EU participation, could  diversify Bulgaria's energy supplies -) particularly if the  oil comes from non-Russian (Kazahk) sources -- but there  needs to be some external interest from the oil suppliers as  well as a major governmental player for this to happen  anytime soon.    COMMENT  -------    15.  (C)  Bulgaria's leadership recognizes that their  dependence on one energy supplier ) even a historical friend  like Russia ) threatens its independence and prosperity.  It  is likely Gazprom's threat to cut off supplies was a ploy to  get favorable concessions on other projects.  Any move by the  GOB to allow Gazprom to reach further into Bulgaria's energy  market could ensure Bulgaria's gas supplies in the short  term, but weaken the country's ability to resist further  pressures from Gazprom and/or Russia.  Bulgaria's  geographical position makes it a natural energy hub for  Southeastern Europe, bringing oil and gas from the East to  Europe and beyond, while continuing to export electricity to  the immediate region.  The strategic challenge for the  Bulgarians is securing their hub position without mortgaging  too much of their future to Gazprom and Russia.  Beyrle   
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