[06SOFIA1162] BULGARIA SPARRING AGAINST RUSSIAN ENERGY DEPENDENCE

 C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 001162    SIPDIS    SIPDIS    E.O. 12958: DECL: 08/08/2016  TAGS: ENRG, ECON, EPET, PREL, BU  SUBJECT: BULGARIA SPARRING AGAINST RUSSIAN ENERGY DEPENDENCE    REF: A. SOFIA 632         B. SOFIA 310       C. SOFIA 202       D. SOFIA 190    Classified By: CDA Alex Karagiannis for reasons 1.4 (b) & (d)    1. (C) SUMMARY/ACTION REQUEST:  Bulgarian leaders are  battling against the grip that Russia increasingly holds over  the energy sector here, but are struggling to strengthen  their position.  President Purvanov and Prime Minister  Stanishev appear especially concerned; Minister of Economy  and Energy Ovcharov less so, perhaps due to his long history  of working with the Russian energy sector.  None sees any  advantage in confronting Russia directly; all have strong  interests in maintaining good relations with Moscow.  The  Russian energy web extends to gas, oil-pipeline construction  and the bidding to build a nuclear power plant at Belene.  Bulgarian officials are increasingly willing to stand up to  Russian pressure and they are open to alternative mechanisms  for meeting their energy needs, particularly if they involve  the EU and/or U.S.  ACTION REQUEST: We strongly recommend a  September visit by DAS Matt Bryza to buck up the Bulgarians  and shape their strategic vision on energy diversity.  We  encourage visits by other speakers or experts to buttress USG  energy policies.  END SUMMARY    GAS: FORCED BY RUSSIA TO STRIKE A DEAL    2. (C) Some sobering statistics: Bulgaria gets 88 percent of  its gas and 73 percent of its oil from Russia.  The  government wants to loosen Russia's grip especially on  Russian gas.  It fears its only option may be to agree to  current Gazprom demands to increase the price on gas  contracts.  Without such an agreement, the Bulgarians fear  they will lose an opportunity to lock in prices - and future  transit fees - at currently advantageous levels, and are  afraid the Russians will follow through on threats to divert  transit gas to Blue Stream.  The current high energy prices  fuel concerns here that now is the time to make a deal.    3. (C) Ovcharov and Gazprom's Medvedev plan to meet in Vienna  on August 21 under the guise of "vacations" to try to  finalize a deal.  Ovcharov told Ambassador Beyrle on August 9  that he was not sure if they could come to a final agreement.   He also said the Russians have agreed to a phased-in period  of price increases over five to six years, and an increase in  transit fees.  Aside from the price, outstanding questions  include the quantity of gas to flow through Bulgaria to third  countries after 2010, and when to announce the increases:  either this summer when heating prices are not as sensitive  an issue, but which would come a few months before the  October 22 presidential election; or in late fall after the  election, but when the weather is cold and consumers are  already burdened with heating costs.  Ovcharov also stressed  that Gazprom is pushing for a long-term agreement - possibly  20 years.  In addition, Gazprom has indicated it would grant  more favorable financial terms in return for a stake in  Bulgargaz' pipeline, something Ovcharov has said Bulgaria  will not agree to.    4. (C) On the Turkey-Greece-Italy Interconnector (TGI),  Ovcharov offered that Bulgaria is interested in the project  and would try to hook up the relatively short 70-75 KM  distance from the Greek portion.  He said Bulgaria has not  discussed this with Greece, but has talked with Turkey.  As  for the origin of the gas, Ovcharov said the Kazakh PM told  him that Russia and Iran are working together to block a  Trans-Caspian pipeline, citing an old agreement that nothing  can be built on the Caspian without the agreement of all  parties.   Ovcharov has spoken publicly about the threat of  Russian gas interests to Europe, and the need for European  countries to be part of a common energy policy.  But he has  also said recently that Bulgaria must take care of its own  problems, which requires it to negotiate with Kazakhstan,  Turkey, Egypt and Algeria for long-term solutions, as well as  Gazprom immediately.    B-A PIPELINE: CAT AND MOUSE WITH THE RUSSIANS    5. (C) Ovcharov told us not to expect activity soon on the    SOFIA 00001162  002 OF 003      Burgas-Alexandropoulous (B-A) oil pipeline.  The Russians are  analyzing the financial aspects of the project, preparing  feasibility studies, and are again pushing Bulgaria and  Greece for 90 percent Russian ownership, leaving 5 percent  each for the host countries.  Bulgaria wants to step up and  build the pipeline, Ovcharov told us, but not at all costs,  and not for only a 5 percent share.  Bulgaria sees its  interests as strategic, and calculates that its participation  in the pipeline could give a bit more leverage in gas and  nuclear plant talks.    6. (C) Ovcharov also said that Bulgaria and Greece will float  the idea of constructing the pipeline without Russian  participation.  Ovcharov recognizes that it will be nearly  impossible to get financial backing without the promise of a  Russian supply, but the GOB feels it is worth exploring -  particularly in order to push Russia back off its recent grab  for 90% control of B-A.  Bulgaria also holds out some hope  that Chevron might be interested in the project.  On Caspian  Pipeline Company (CPC), Ovcharov told us he met recently with  the Russian Minister of Energy who said Russian interest in  CPC is to expand output, not to change the ownership model.    BELENE NUCLEAR PLANT: RUSSIAN OFFER IS LEADING    7. (C) The GOB closed the Belene bid review process on July  22.  Even before seeing the final recommendations from the  National Electric Company, which, along with U.S. company  Parsons Engineering is coordinating the bid process, Ovcharov  requested the two bidders provide better prices and faster  timetables.  Ovcharov is particularly interested in new  prices from the Russian bidder, Atomstroyexport, and their  sub-contractor for the Instrumentation and Control (I and C),  Framatom, whose numbers are more than twice Westinghouse's  offer for the I and C portion of the Skoda bid.  Ovcharov is  confident he will get acceptable prices, but has threatened  to reconsider the viability of the project if not.  When  Ambassador Beyrle described the strengths of the Westinghouse  proposal, along with its successful experience on the  Kozloduy nuclear plants here, Ovcharov agreed, but mentioned  "Framaton/Arveal and the EU" with a resigned shrug.  Ovcharov  also stressed that Bulgaria was not negotiating with Gazprom  on the Belene deal.    8. (C) Ovcharov has pointed to the technical superiority of  the Atomstroyexport proposal, calling it "cutting edge," such  as the one Russia is building in China.  He described the  Czech offer as fine, but asked why Bulgaria should settle for  20-year old technology.  It is unclear, however, whether the  GOB would allow a "mix-and-match" by switching Westinghouse  in as the I and C portion of the plant.  The real risk in  this situation is if Gazprom bank or another Russian energy  player were to become a major financial stakeholder in Belene  - something that the GOB currently says will not happen.  The  GOB hopes to begin final negotiations with the winning bidder  in early September.    THE HIDDEN INTERESTS    9. (C) Gas supplies, the B-A pipeline and construction of  Belene are intertwined.  Russian interests, most pointing  back to Gazprom, are involved in the three major energy  projects, and Gazprom has also expressed a desire to obtain  the Bulgargaz distribution grid if that were to be  privatized.  Ovcharov has denied that there is any linkage  between the projects, but most observers find that hard to  believe.  In addition, rumors are rampant that organized  crime figures, Bulgarian and Russian, are involved with  high-level GOB officials in bid-rigging, shakedowns and other  illegal behavior in the energy sector (septel to follow.)  Ovcharov, who studied in Moscow and has spent much of his  professional career working with Russian energy interests,  took pains to describe to us measures he is taking to limit  the activities of such players.  His protestations are at  least in part self-serving given the murky world behind the  closed doors of a non-transparent negotiation process.    COMMENT    10. (C) While Bulgaria is a small player in Europe's energy  market, its role as a possible hub or transit country for    SOFIA 00001162  003 OF 003      Eastern gas and oil is potentially large.  The increasing  hunger of Gazprom and other Russian interests to play a  larger role in almost all aspects of the Bulgarian market  makes it very difficult for Bulgaria to isolate the Russian  pieces in this Rubik's Cube.    11. (C) We regularly stress to the President, Prime Minster  and Minister of Energy the need for Bulgaria to diversify  energy sources away from Russia.  They agree, but are at  pains to figure out how.  Without a coordinated and serious  European effort to address what appears to be a comprehensive  strategy of Russia and/or Gazprom to reassert its interest in  the region, small countries such as Bulgaria may never be  able to escape the Russian energy orbit.  We strongly  recommend a September visit by DAS Bryza to offer our  strategic vision and energy outlook to help stiffen  Bulgaria's resolve in the face of unrelenting Russian  pressure.  KARAGIANNIS