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C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 001481    SIPDIS    SIPDIS    DEPARTMENT FOR EUR / BRYZA AND PEKALA    E.O. 12958: DECL: 10/23/2016  TAGS: ENRG, ECON, EPET, PREL, RU, GR, BU  SUBJECT: BULGARIA FAVORS RUSSIAN BID TO BUILD BELENE NPP    REF: SOFIA 1363    Classified By: Ambassador John Beyrle for reasons 1.4 (b) and (d)    1. (C) SUMMARY:  In a meeting with the Ambassador Oct. 19,  Energy/Economy Minister Rumen Ovcharov confirmed press  reports that Bulgaria has decided in favor of the  Russian/European consortium for construction of a new nuclear  plant at Belene.  Ovcharov acknowledged a link between the  Belene decision and the Bulgarians' ongoing discussions with  Gazprom to renegotiate the Russian gas supply contract with  Bulgaria.  Beyrle urged Ovcharov to consider a modified deal  in which the instrumentation and control (I&C) system for the  Belene reactors would be built by Westinghouse, but Ovcharov  claimed that French and German pressure for their I&C system  was insurmountable.  Discussions on the  Burgas-Alexandroupolis (B-A) pipeline continue to move  forward, but major decisions on equity shares and timelines  are pending and Bulgaria is in no hurry to conclude a deal.  The Belene decision further compounds Bulgaria's problem of  overdependence on Russian energy sources; our comment (para.  10) offers some initial thoughts on ways to push the  Bulgarians toward greater diversity.  END SUMMARY    BELENE NPP:  RUSSIANS ARE CLEAR FAVORITES  -----------------------------------------     2. (C) Ovcharov said the long-awaited announcement for the  Belene deal (AtomstroyExport/Framatom-Areva winning out over  rival bidder Skoda/Westinghouse) would be made after  Bulgaria's presidential election, the first round of which  took place on October 22.  The Skoda/Westinghouse bid lost  out, he said, because the reactor is essentially a  fifteen-year old design -- with a proven track record, he  conceded, but inferior to the latest-generation  AtomstroyExport model.  Beyrle urged Ovcharov to consider a  "mix and match" scenario for Belene in which the I&C system  for the Russian reactors would be built by Westinghouse  instead of the German/French Framatom/Areva system that came  "bundled" with the Atomstroy package. Ovcharov claimed he had  favored this scenario and is a "big fan" of Westinghouse I&C,  based on their successful track record at the Kozloduy plant.   But the political pressure from Paris and Berlin, he said,  was too strong to overcome -- linked with ratification of  Bulgaria's EU membership.   He said that Chancellor Merkel  had raised the issue in her September 27 meeting with PM  Stanishev.  Ovcharov said he was certain that Westinghouse  would win a number of jobs at Belene, but only as a  subcontractor to the Russian/European consortium.    3.  (C) Ovcharov acknowledged a link between the Belene  decision and the ongoing discussions with Gazprom to  renegotiate the Russian gas supply contract with Bulgaria.  Under that contract, Bulgaria has been paying Gazprom up to  30 percent below market price for gas through a complicated  set of fees and pricing arrangements on Russian gas  transiting Bulgaria territory for the Balkan and European  markets.  Once the decision in principle on Belene has been  conveyed to Moscow, Bulgaria will finalize a new gas supply  agreement with Gazprom in which price increases are phased in  gradually over the next several years and Bulgaria receives  guarantees on increased transit volume (and revenues).  Only  after the gas agreement is finalized to the Bulgarians'  satisfaction, Ovcharov claimed, will the Belene deal be  formally announced.    4. (C) The AtomstroyExport design has an ambitious  construction timetable, but will take more than five years to  build, ideally starting in early 2007, plus a year of  commissioning.  Galina Tosheva, Ovcharov's Deputy Minister  responsible for energy, told us separately that even under  the best circumstances, Belene would not come on line before  2012 or 2013.  Bulgaria plans to keep 51 percent ownership,  but is seeking financing for its share of the 4 billion-euro  project.  They are also looking for strategic investors for  the 49 percent minority share.  The Italian company Enel is  the most serious, and is likely to pick up a large chunk of  Belene, according to several industry insiders and  journalists we spoke with.  Gazprom Bank is not looking at  ownership, we have been told, but perhaps to finance.    BURGAS-ALEXANDROUPOLIS: DELAYS OVER EQUITY SHARES  --------------------------------------------- ----    5. (C) Ovcharov downplayed any direct linkage between the  Belene/Gazprom deal and ongoing discussions with Russia and  Greece over the Bosphorus bypass pipeline from Burgas to    SOFIA 00001481  002 OF 003      Alexandroupolis.  Despite Russian desire to move the B-A  talks forward, he claimed, Bulgaria was in no hurry to  conclude a deal.  The Russian 51 percent stake is now  generally accepted by all three parties, but Ovcharov said he  believed it would be split between Transneft, Gazpromnelt,  and Rosneft -- i.e., TNK-BP would not be part of the Russian  group, leaving what he called "total state ownership" by  Moscow.  Ovcharov said Bulgaria has not yet agreed with  Greece and private companies how to divide up the remaining  49 percent.  Under the current scenario, Bulgaria and Greece  would take 24.5 percent shares, each financing that portion  of the entire project, and taking the same in profits,  according Deputy Minister Tosheva.   Bulgaria will look to  private financing from its consortium partners - Bulgargaz  (25 percent) and Universal Terminal Burgas (UTB) (75  percent).    6. (C) Ovcharov said Bulgaria was hoping for discussions with  Chevron as a potential partner in its 24.5 percent stake, and  claimed that Greece might seek a similar partnership with  TNK-BP.  He said that during the three-party discussions in  Athens September 4, Parvanov had made a point of stressing  the importance of "broad participation" in the B-A project,  and that Putin had expressed specific agreement with  Parvanov's point. Overall, however, Ovcharov said the final  equity split was of lesser importance.  Bulgaria's priority  goals were to retain control of the Universal Terminal  Burgas, and to ensure Russia did not emerge from the deal as  operator of the pipeline.  Ovcharov agreed with Beyrle that  increased Russian pressure to finalize the B-A project augurs  well for an eventual decision to expand volumes through CPC,  but said the Bulgarians were not yet in any specific talks  with Chevron.    AMBO OIL PIPELINE: NEEDS INVESTORS TO STAY ALIVE  --------------------------------------------- ---    7. (C) Despite a recent spike in interest and activity  surrounding the AMBO bypass pipeline -- including the Sept.  29 development/construction agreement between Bulgaria,  Macedonia and Albania -- AMBO still appears well behind B-A  in terms of financing or throughput commitments.  XXXXXXXXXXXX, which would like to work with AMBO through its role in the Universal Terminal Burgas, tell us AMBO has neither money nor commitments of  throughput, although they are optimistic that it could happen  as soon as five years after B-A comes on line (i.e. 2015).  According to XXXXXXXXXXXX, AMBO has a three-stage plan: to raise  $7 million for "preliminary engineering," subject to  completion of a Tripartite Convention, over the next six  months.  The second stage will last 12 months with a goal of  raising $20-30 million through equity investors or an IPO in  the U.S. for detailed engineering and material ordering.  They will also sign oil contracts at this stage.  The third  stage will raise the rest of the equity funds, approximately  $350 million, from Mitsubishi, Oiltanking, Techint and other  investors.  AMBO would then begin construction, estimated to  last 30 months.  Presently AMBO has "expressions of interest"  from ExxonMobil and Vitol, a Canadian oil trader and  refinery, but no solid commitments.    BEEFING UP THE ENERGY SECTOR TO CREATE A NATIONAL CHAMPION  --------------------------------------------- ------------    8. (U) Minister Ovcharov recently floated a proposal to  consolidate all state owned monopolies - the National  Electric Company (NEK), Bulgargaz, the Kozloduy Nuclear  Plant, Maritza East coal mines, and the Maritza East II  Thermal Power Plant - into one giant energy company.  The  idea is to create a "national champion," as well as prepare  the monopolies to compete in a liberalized market, which  would strengthen them for potential privatization, according  to Ovcharov.   The government is also considering listing on  international stock exchanges as a way to attract foreign  capital to help pay for Belene construction.    9. (C) Not surprisingly, this idea is viewed with suspicion  by some industry experts.  XXXXXXXXXXXX, called the plan  politically motivated, noting that it would put a large share  of the economy under control of the senior Coalition partner,  Ovcharov's Bulgarian Socialist Party.  Others believe the  government is attempting to save NEK's monopoly in the  electricity export market by creating a larger group of  companies to feed into that pool.  Asked by the Ambassador  whether the establishment of this new energy giant would be  welcomed by EC competition authorities, Ovcharov said he    SOFIA 00001481  003 OF 003      would not be raising the idea if it were not EU-compliant.  He acknowledged that the restructuring would encounter  political opposition, but claimed the government would push  through with it.    COMMENT  --------    10. (C) Given Russia's leverage as supplier of 70-80 percent  of Bulgaria's oil and gas, the decision to go with the  Russian bid on Belene (which also includes supply and  take-back of nuclear fuel) is not surprising and was probably  inevitable.  According to our sources XXXXXXXXXXXX, although the Russian reactor design is technically superior to Skoda's, Atomstroy's project management track record is weaker, which will tend to drive  up the cost.  Thus, the economic bottom line for Bulgaria may  depend in large part on how much better a deal they get in a  new supply/transit agreement with Gazprom as a result of the  Belene decision.  In strategic terms, however, the Belene  choice compounds Bulgaria's problem of over-reliance on  Moscow as an energy source, prolonging its complete  dependence on Russian nuclear fuel in addition to Russia's  near monopoly over oil and gas.  Our pitch to the Bulgarians  in discussions in Sofia and Washington over the coming months  should encompass some of the following themes to strengthen  Bulgaria's ability to stand up against Russian commercial and  political pressure:    --  Belene: inclusion of US partners (in this case,  Westinghouse) to the maximum extent as the project goes  forward;    --  Gas supply/transit deal: avoiding ceding control of  infrastructure (pipelines, terminals) to Gazprom;    --  B-A: retaining full control over the terminal and  pipeline operation; additionally, Bulgarian (and/or Greek)  partnership with a respected U.S. major should be encouraged  to give some oomph to their minority share;    --  drawing the line on other Russian energy investment or  "partnerships."  We know, e.g., that Moscow is very  interested in the upcoming privatization of several Bulgarian  district-heating facilities, including Sofia's.  Here, where  U.S. and other Western firms would also like to compete,  there is no compelling reason to "buy Russian" and Bulgaria  should be encouraged to demonstrate its oft-declared interest  in diversity.    We welcome any ideas that amplify or add to these initial  thoughts.  BEYRLE  

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