This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 VIENNA 003490 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
 
TAGS: ECON ETTC ENRG EPET AU
SUBJECT: AUSTRIAN GAS AND OIL INTERESTS IN IRAN 
 
REF: 04 VIENNA 1556 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE ACCORDINGLY. 
 
Summary 
 
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¶1.  (SBU) The Austrian oil and gas giant OMV, in cooperation with four partner companies, is moving forward with plans to construct the $6 billion Nabucco gas pipeline from Turkey to an Austrian hub.  Remaining challenges include price negotiations with Iran, Turkey's lukewarm support for the project, alternative pipeline routes, inter-governmental negotiations, and a desire to obtain the European Commission's blessing for non- regulated transportation fees.  OMV is keenly aware of USG sensitivities surrounding Nabucco, but argues that Iran will eventually sell gas to other markets (China and India), should political concerns derail the project.  Separately, OMV told us that it will continue oil exploration in the Zagros region, with plans to move forward to the development stage on the company's first oil discovery.  End Summary. 
 
Construction Planned for 2007, Operation in 2011 
 
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¶2.  (SBU) In June 2005, the Austrian oil and gas company OMV signed a joint venture agreement to establish the Nabucco pipeline project to transport gas from Iran and Kazakhstan to Central Europe and beyond through the Austrian hub Baumgarten.  Partner companies are Botas (Turkey), Bulgargaz (Bulgaria), Transgaz (Romania), and MOL (Hungary), all from countries through which the pipeline would flow.  The agreement is the follow-up to a feasibility study, which the companies concluded at the end of 2004.  Following conclusions of a financing plan in 2007, the construction phase could begin. Operation and marketing of the pipeline would commence in 2011 at the earliest. 
 
Nabucco: Decreasing Europe's Reliance on Russian Gas 
 
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¶3.  (SBU) Emboffs recently discussed OMV's Nabucco plans with Otto Musilek, head of OMV's gas division and Chairman of the Nabucco Steering Committee.  Musilek told us that growing energy demands and decreasing gas production in Europe were the impetus behind the Nabucco project.  According to Musilek, the EU produced 49% of its gas supply internally in 2003, but by 2030, the EU will need to import 80% of its gas needs. Nabucco, Musilek claimed, could provide 50% of the EU's future gas supply, adding that 50% of the gas flowing through 
 
Nabucco would be off-take in transit countries.  Musilek said he recognized that the political situation in Iran was unstable and "irritating."   However, Musilek opined that Iran would simply sell gas to other countries (China and India), if European companies avoided Iran. 
 
¶4.  (SBU) Musilek maintained that it was neither possible nor desirable to purchase additional natural gas from Russia.  Musilek said that now was an opportune moment to conclude a contract with the Iranians on gas transportation, because many European-Russian contracts will run out in 2007-2009.  Musilek maintained that a Nabucco contract would give Europe leverage vis?vis Russia.  Absent a contract, Russia would strengthen its "gas monopoly" on Europe. 
 
Nabucco Alternatives 
 
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¶5.  (SBU) Musilek admitted Nabucco faced challenges. Turkey remains lukewarm about the project, as its medium- term gas supply outlook is more than adequate.  According to Musilek, the Turks prefer another route through Greece, the Mediterranean and Italy.  However, Musilek emphasized that the government-held oil company Botas has already signed the Nabucco agreement.  Iran is also negotiating with Ukraine about transporting gas through a northern pipeline.  Musilek claimed that neither alternative is economically feasible.  Additionally, 
 
Musilek said difficult inter-governmental negotiations still lie ahead. 
 
OMV Wants Unregulated Transportation Fees 
 
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¶6.  (SBU) Musilek underlined that OMV and its partners want an exemption from Article 22 of the European Directive 2003/55/EC on Common Rules for the Internal Natural Gas Market in order to set a non-regulated transmission fee.  The directive establishes "regulated third party access" as the standard model for transmission and distribution networks.  While it does not allow for "negotiated access" in general, it does permit exemption from regulated access for "major new gas infrastructures" subject to a detailed case-by-case scrutiny by national regulatory authorities.  In practice, according to the economic consulting firm Nera, this exemption has been the rule.  Thus, Musilek is optimistic that Nabucco will receive an exemption.  He claims that the price will be "self-regulating" in practice through offsetting pressures from buyers and financial lenders. 
 
Exploration and Production: OMV Extends Oil Contracts 
 
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¶7.  (SBU) Separately, Emboffs met with Peter Seitinger, OMV's Regional Manager for the Middle East to discuss media reports on OMV's oil exploration efforts and reports of the company's first oil discovery in the southwestern Iranian region of Zagros.  He confirmed that OMV is seeking approval from the National Iranian Oil 
 
Company (NIOC) to exploit the discoveries OMV made in January 2005 in the Mehr Block.  In addition, OMV, as leader of a consortium with the Spanish and Chilean companies, Repsol and Sipetrol, intends to extend the exploration contract in this region, which was due to expire by the end of 2005. 
 
¶8.  (SBU) Seitinger stated OMV investments in Iraqi exploration and development efforts were "between $10-300 million" during a 3-4 year exploration period.  Seitinger emphasized that there was no guarantee that OMV would recover its investments in Iran and that contractual arrangements with NIOC would allow the Iranians to extract oil reserves that OMV found with other partners.  According to Seitinger, Iran is the only one of the "big five oil-producing nations" in which OMV has a presence. 
 
Comment 
 
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¶9.  (SBU) For the foreseeable future, Iran's huge, untapped gas reserves will remain of interest to OMV. OMV and its partners will have to overcome many challenges before Nabucco becomes operational.  Nevertheless, it appears OMV is intent on developing and operating the pipeline.  Regarding its oil interests in Iran, OMV's former Regional Manager told us that OMV would not renew the current 2001-2005 contract (reftel).  The January 2005 discoveries have obviously changed OMV's outlook.  Iran remains an interesting market for OMV for oil exploration, but in the medium-term, it is less important for OMV than interests elsewhere in the Middle and Eastern Europe. 
 
VAN VOORST#