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P 241218Z OCT 06
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC PRIORITY 2726
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHINGTON DC PRIORITY

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