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 date: 10/2/2008 10:02 refid: 08SOFIA641 origin: Embassy Sofia classification: CONFIDENTIAL destination:  header: VZCZCXRO6805 OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR DE RUEHSF #0641/01 2761002 ZNY CCCCC ZZH O 021002Z OCT 08 FM AMEMBASSY SOFIA TO RUEHC/SECSTATE WASHDC IMMEDIATE 5430 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY RUEAIIA/CIA WASHINGTON DC PRIORITY RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY   C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000641    SIPDIS    FOR SPECIAL ENVOY BOYDEN GRAY    E.O. 12958: DECL: 09/30/2018  TAGS: ECON, ENRG, PGOV, BU  SUBJECT: BULGARIA AND THE ENERGY KNOT: SCENESETTER FOR OCT  7 VISIT OF SPE GRAY    Classified By: Ambassador Nancy McEldowney for reasons 1.4. (b) and (d)  .    1.  (C)  Summary:  The quandary over energy facing all our  European partners is particularly acute here in Bulgaria.  With few hydrocarbons of its own, Bulgaria relies on Russia  for seventy percent of its total energy needs and over ninety  percent of its gas.  Though previously a net exporter of  electricity, the EU's decision to force closure of blocks 3  and 4 of the communist-era nuclear plant Kozluduy cost the  Bulgarian economy over USD 1.4 billion and put a squeeze on  Serbia, Macedonia and Greece, who had purchased the bulk of  the exports.  The hard reality of today's energy picture is  that Russia is not only the dominant supplier, it is also the  dominant player -- your visit here is the first by a senior  U.S. energy official in a year, whereas Putin has personally  engaged both the President and Prime Minister on energy  issues in multiple sessions over the past ten months.  But  the cartoon strip portraying a passionately eager Bulgaria in  bed with the muscle bound duo of Gazprom and Lukoil is only  partially true -- it is a tryst driven less by passion and  more by a perceived lack of options.  Prime Minister  Stanishev recently described Russian tactics on South Stream  as blackmail and Energy Minister Dimitrov complains openly of  psychological warfare.  At the same time, the Bulgarians are  deeply worried about the prospects for Nabucco and are  convinced that Azeri gas supplies will be held up by Turkey.  Their bid to hold an energy summit in the spring, the  ostensible focus of your visit, is designed to catalyze  greater coordination -- and negotiating leverage -- amongst  transit countries while also getting the United States more  actively engaged.  Background on specific issues likely to  arise in your discussions with President Parvanov, Prime  Minister Stanishev, Foreign Minister Kalfin and Energy  Minister Dimitrov follows below.  End Summary.    TIMING  ------    2.  (C)  Your visit to Sofia comes when Bulgaria is striving  to sell itself as a European energy center.  With six active  or potential pipelines transiting the country, the creation  of a new energy mega-holding company, and the construction of  a new nuclear plant, Bulgaria is setting itself up to be an  important regional energy player, despite being overly  dependent on Russian energy sources.  The proposal to host a  major gas summit in April 2009 -- which Putin has already  promised to attend -- is the latest attempt to put Bulgaria  on the energy map.  Your visit will guide the Bulgarians as  they formulate an agenda and goals for this summit.  It will  also focus Bulgarian policy makers on U.S. views on Russian  energy strategy and South Stream, answer growing skepticism  about Nabucco's prospects, and give solid counter-arguments  to those who say there is no real alternative to dependence  on Russian energy.    THE SUMMIT  ----------    3.  (C)  At the January 19 signing of the South Stream  Intergovernmental Agreement, President Parvanov, with Putin  at his side, announced Bulgaria would host an energy summit  intended as a follow-on to the June 2007 Zagreb energy  conference.  Upon Putin's departure, Sofia fell under heavy  criticism both at home and abroad for hastily joining South  Stream, and the energy summit idea lost steam.  Ambassador  for Energy Security Peter Poptchev told us the Bulgarians  resented perceived Russian pressure to hold such a summit.  In July the Bulgarians independently resurrected the summit  idea as a way to show Bulgarian support for Nabucco and  diversification, as well to balance European, U.S. and  Russian interests in the Caspian and Black Sea regions.  With  the potential for six pipelines passing through its  territory, the Bulgarians also have high hopes to become a  regional energy hub.  The summit, they believe, will help put  Sofia on the map not only as an energy center, but as a place  that brokers discussions between the West, Russia and  Eurasia.    4.  (C)  The Bulgarians requested your visit to advise on the  summit.  They envision a spring conference (tentatively April  24-25) that would bring together heads of state from Eurasian  and European producer, transit and consumer countries.  PM  Stanishev told Ambassador September 19 that Putin has agreed  to attend.  The summit will be gas-focused and will attempt  to put "real solutions" on sources, routes and quantities on    SOFIA 00000641  002 OF 003      the table.  Well-aware of the potential for East European  energy conference fatigue in the first half of 2009, the  Bulgarians are proposing that all key participants, including  the EU, the United States and Russia, view the proposed  Hungarian, Bulgarian and Czech conferences as a linked  continuum.  The April Sofia conference would take care of any  unfinished business left from the January Hungary Conference  and the proposed Czech conference would take up where the  Sofia conference leaves off.  To distinguish the Bulgarian  summit, Sofia is considering including an as-yet undeveloped  "industry component."    5.  (C)  The Bulgarians will seek U.S. views and your advice  on the proposed agenda of the summit and whether it will  advance U.S. goals in the region.  They want recommendations  on how to coordinate the Hungarian, Bulgarian and Czech  conferences and may seek advice on the proposed industry  component of the Sofia summit.  They are interested in, but  may not ask directly about, U.S. views on whether Sofia has a  future as an intermediary between Europe, the United States  and Russia on energy and other issues affecting the Black Sea  region.  They are interested in your analysis of recent Azeri  and Turkish energy moves.  They will also request high level  U.S. attendance at the summit.      BULGARIAN ENERGY PROJECTS  --------------------------      6.  (C)  SOUTH STREAM:  The Bulgarians signed the South  Stream intergovernmental agreement in January and Parliament  ratified the agreement in July.  Negotiations between  Bulgargaz and Gazprom resumed in September to work out a  pre-shareholders agreement.  At our recommendation, and at  the direction of the Government, state-owned Bulgargaz  reluctantly hired outside legal counsel (the U.S. law firm  Paul Hastings) to represent it in South Stream negotiations.  With the creation of a new, state-owned energy mega-holding  in September, Bulgargaz has lost much of its  previously-considerable independence.  The acting head of the  Bulgarian Energy Holding is Deputy Energy Minister Galina  Tosheva, previously lead South Stream negotiator for the  Bulgarian Government.  Tosheva has a healthy suspicion of  Russia's intentions in Bulgaria and has directed Bulgargaz to  rely on its legal counsel for expert advice.  Tosheva told us  that Gazprom negotiators are taking a hard line now that  negotiations have resumed.  They are proposing to re-route  gas currently transiting Bulgaria (for which Bulgartransgas  makes a healthy profit) to South Stream, meaning South Stream  would not represent 31 bcm of new gas for Europe, but  something significantly lower.  The Bulgarians state that  this is contrary to the spirit of the IGA and are preparing  to fight the Russian proposal.    7.  (C)  NABUCCO:  Despite the strong public support they  have shown Nabucco this year, the Bulgarians are turning into  Nabucco-skeptics.  In March, Sofia signed what it thought was  an agreement for Azerbaijan to supply 1 bcm of gas that  Bulgaria would eventually take as its Nabucco quota.  In  advance of Nabucco, Bulgaria planned to access the gas via a  potential hook-up to the Turkey-Greece-Italy interconnector.  Realizing now that the agreement was not, in fact, a  commitment on Azerbaijan's part, the Bulgarians feel burned.  The government is now in dire need of a pep talk on the  Nabucco.  They state firmly that both South Stream and  Nabucco are critical and that one cannot be allowed to  preclude the other.  At the same time, they are nervous about  both Azerbaijani willingness to supply Nabucco and Turkish  willingness to support the project.  They will be interested  in your view of Nabucco's prospects.    8.  (C)  TGI HOOK-UP:  The Bulgarians are in negotiations  with Greece about this possible interconnector.  Energy  Holding CEO Tosheva said this is Bulgaria's most immediate  source of diversification and energy security.  The Greeks  apparently are cool to the idea, saying there is insufficient  gas.  In response, the Bulgarians have proposed the purchase  of LNG to be delivered to Greece in exchange for either TGI  access or gas currently going through the export pipeline  from Russia and transiting Bulgarian territory.  Your  Bulgarian interlocutors may ask for U.S. support for these  schemes in our discussions with the Greeks and Turks.    9.  (C)  BURGAS-ALEXANDROUPOLIS (BAP) and AMBO:  The  Bulgarians, Russians and Greeks signed a shareholders    SOFIA 00000641  003 OF 003      agreement for the BAP oil pipeline in January during the  Putin visit.  Since then, the project company has been  registered, but little more progress has been made.  The  Bulgarians are still confident the pipeline will be built,  and seem surprisingly uninterested in the dynamics  surrounding CPC expansion.  With BAP's relative progress, the  AMBO (Albania-Macedonia-Bulgaria) oil pipeline project has  lost momentum.  Still, Bulgaria remains committed to AMBO and  is ready to move forward if and when AMBO attracts supply and  financing.    10.  (C)  BELENE:  In 2006 the GOB selected Russian  AtomstroyExport as the contractor for the new Belene nuclear  plant.  Bulgaria is keeping majority ownership of the plant,  but is in the process of selecting a strategic investor for  the other 49 percent.  RWE and the Belgian Electrabel are in  the running.  We have stated repeatedly that the choice of a  Russian contractor for Belene decreased Bulgaria's bid for  greater independence from Russian energy sources.  The lack  of transparency surrounding the tender has led to the  inescapable conclusion that the decision to choose Russia as  the Belene contractor was linked to the re-negotiation of  Bulgaria's long-term gas transit contract with Gazprom in  December 2006.      YOUR MEETINGS  -------------    11.  (C)  President Parvanov began his second five-year term  in 2007.  Parvanov's desire to exercise behind-the-scenes  influence over the government has led to tensions with his  former protege, Prime Minister Sergei Stanishev.  Parvanov  has close ties to Russian politicians and held no less than  eight meetings with Vladimir Putin in the last seven years.  The energy summit will be under his aegis.    --Prime Minister Sergei Stanishev is a 42-year-old  progressive Socialist.  He is pro-west and eager to have  Bulgaria viewed as a good friend and partner of the United  States.  He returned September 30 from a week-long visit to  the United States where he met with U/S Burns, spoke at the  Harvard Business School and held an investment forum.  He  understands that Bulgaria is overly dependent on Russian  energy sources, but sees Bulgaria as having few options for  greater energy independence.    --Foreign Minister Kalfin is close to both Stanishev and  Parvanov and as Deputy Prime Minister oversees the Economy  and Energy Ministry.  He is a strong supporter of close  Bulgarian-U.S. relations and is highly conversant on energy  issues.    --Economy and Energy Minister Petar Dimitrov is a relative  new-comer to energy issues.  He is largely seen as taking  direction on energy matters from former Energy Minister Rumen  Ovcharov, who is linked with Russian energy interests and  left office in June 2007 after a corruption scandal.    12.  (C)  Your visit will also highlight, though meetings and  press outreach, the need for Bulgaria to focus on a long-term  energy strategy not solely based on the transit of  hydrocarbons or the production of Russian-based nuclear  energy, but on the development of renewables, clean coal and  greater energy efficiency.  Bulgaria will always be dependent  on Russian energy to one extent or another. But as the most  energy inefficient economy in Europe, it can make meaningful  strides toward greater diversity away from Russian energy  sources.  With the price of energy at near record highs,  Russia's hydrocarbon-generated wealth is increasingly  circulating through the Bulgarian economy, making Bulgaria  all the more susceptible to Russian leverage.  An energy  strategy that focuses on renewables and efficiency is one  tool Bulgaria can use to put a noticeable dent in negative  Russian influence.  The other tool is transparency.  Hub  status in any industry is bestowed only on places which offer  transparent, efficient service.  To achieve its goal of  becoming a true energy center, we should recommend that  Bulgaria present itself not as the place with closest ties to  Russia, but as the most transparent place to do energy deals.        McEldowney 

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