VZCZCXRO3294
RR RUEHAG RUEHDF RUEHHM RUEHIK RUEHLN RUEHLZ RUEHMA RUEHPB RUEHPOD
RUEHROV
DE RUEHBS #0284/01 0520630
ZNR UUUUU ZZH
R 210630Z FEB 08
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHMO/AMEMBASSY MOSCOW

UNCLAS SECTION 01 OF 04 BRUSSELS 000284 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EPT FOR OES 
DEPT FOR EUR/ERA 
DEPT FOR EEB/ESC 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET ETRD EU
SUBJECT: US/EU ENERGY SECURITY DISCUSSIONS 
 
¶1.  (U) Summary.  Under Secretary for Economic, Energy, and 
Agricultural Affairs Reuben Jeffery and Special Envoy Gray 
learned during February 12 meetings with EU Competition 
Commissioner Neelie Kroes, Energy Commissioner Andris 
Piebalgs, CFSP High Representative Javier Solana, and 
industry reps that: 
 
-- EU Competition authorities are not sufficient to guarantee 
full competition in the gas and electricity transmission 
without the unbundling measures proposed in the Third Energy 
Package; 
 
-- The purpose of the energy package is to enhance energy 
security -- including from major suppliers like Russia -- by 
increasing investment in grid interconnections and to add 
liquidity to the markets for gas and electricity; 
 
-- The Commission would like to work more systematically with 
the US to pursue common interest on energy issues. 
 
End Summary. 
 
--------------- 
Energy Security 
--------------- 
 
¶2.  (U) On 12 February Under Secretary for Economic, Energy, 
and Agricultural Affairs Reuben Jeffery, Special Envoy Gray, 
and Econ Officers met with EU Commission officials to discuss 
energy security issues.  In separate meetings with 
Competition Commissioner Neelie Kroes, Energy Commissioner 
Andris Piebalgs, and High Representative Javier Solana the 
officials highlighted the importance they place on energy 
security in the overall EU policy agenda. 
 
¶3.  (U) The EU views energy security from both internal and 
external perspectives.  Externally, Commissioner Piebalgs 
said the EU is looking to increase gas supplies from Norway, 
Algeria, Azerbaijan, the Arab Pipeline, and Iraq 
(specifically the Akkas field in Anbar Province).  Piebalgs 
views LNG as another medium term solution for energy security 
but cautioned that Europe faces stiff competition, especially 
from China.  LNG also has increased costs and technical 
difficulties compared to pipeline gas and the market for LNG 
is not as liquid as it could be.  High Representative Solana 
indicated he also believes increasing LNG supplies from all 
sources will play an important role in enhancing EU energy 
security. 
 
¶4.  (U) Piebalgs believes the Treaty of Lisbon should enable 
the EU to transform its energy and external energy policy. 
Currently the only tools the EU can use to enforce energy 
policy are those related to the internal market or the 
environment.  Piebalgs believes the role of the Energy 
Commissioner will be strengthened by the treaty. 
 
¶5.  (U) Internally the EU wants to increase competition and 
investment in its energy infrastructure.  The goal is to 
establish a single liquid, competitive market for oil and gas 
to replace the current fragmented markets now found in the 
individual member states.  The Commission's preferred tool to 
accomplish this is the Third Energy Package, proposed in 
September 2007.  Commissioner Kroes stressed that the 
competition tools at her disposal are not sufficient to 
create the type of liberalized energy market Europe needs. 
She said she needs the backing of the Council and Parliament 
to impose real energy market liberalization, hence the Third 
Energy Package. 
 
------------------------ 
The Third Energy Package 
------------------------ 
 
¶6.  (U) Kroes believes that if the unbundling is successful 
the EU can get more investment and upgrade its 
infrastructure.  Right now there are too few connections 
between member state grids.  Kroes stated "There is no 
incentive for investment without unbundling." She believes 
the EU needs a fair and level playing field.  Kroes views 
security of supply as a major issue within a common market. 
Kroes said she was dedicated to fighting for market 
liberalization in gas and electricity. 
 
¶7.  (U) On the question of unbundling, Piebalgs indicated 
that currently energy is a member state competence which 
 
BRUSSELS 00000284  002 OF 004 
 
 
results in 27 separate markets.  The task is to deliver one 
market for electricity and gas.  To do this the EU needs 
interconnection between the grids and a liquid market. 
Piebalgs feels the Third Energy Package is crucial. 
Unbundling is important, but Piebalgs does not view it as the 
most important part of the package.  The most important part 
for Piebalgs is making sure that regulators in all 27 member 
states all have the same power and resources.  Second, in 
Piebalgs view the EU needs to have cross-border regulatory 
balance.  The EU Agency for Regulators has to make sure that 
there are no regulatory barriers to cross-border flows. 
Piebalgs ranks unbundling third in importance. He believes 
the EU needs structural unbundling with the networks 
separated from the suppliers. 
 
¶8.  (SBU) Piebalgs believes the EU can work with the recent 
counter-proposal to the Third Energy Package from France & 
Germany, which argues that application of existing 
competition policy tools should be sufficient and that 
unbundling, legal or de facto, is not needed.  Kroes, 
however, is not satisfied with the counter proposal and 
believes the EU needs real unbundling.  Piebalgs indicated 
the Commission will see how the other member states react and 
said the Commission could put additional requirements into 
the package.  Piebalgs said the Commission needs the package, 
but not at any price.  He expects a breakthrough by June; 
otherwise he feels the task will be left to his successor. 
Right now, however, he feels it is definitely too early to 
say. 
 
¶9.  (U) Addressing the question of third country investment 
in the EU energy sector, Commissioner Kroes said she believed 
investment from inside the EU and from the outside should be 
treated the same way.  Kroes said she's delighted with US 
money, Norwegian funds, and Middle East investment, but that 
it has to be transparent when governments are the investors 
-- one of the reasons there is concern in the EU about the 
role of sovereign wealth funds.  High Representative Solana 
also believes sovereign wealth funds will become very 
important and believes this will not be an easy or 
uncomplicated issue.  He sees the IMF and international 
cooperation playing an important role on this issue. 
 
------------------------- 
EU-Russia Interdependence 
------------------------- 
 
¶10.  (U) Solana, Piebalgs, and Kroes all emphasized the 
important role that Russia plays in the EU's energy security. 
 As Commissioner Kroes put it, "The EU is dependent on 
Russia, but Russia is also dependent on the EU.  The EU needs 
Gazprom, but Gazprom needs the EU."  High Representative 
Solana pointed out that Russia is the EU's most important 
supplier and Russia never failed as a supplier during the 
Cold War.  Piebalgs also highlighted Russia's role as a 
dependable supplier.  Nonetheless, Kroes indicated that the 
EU doesn't want to have all its eggs in one Russian basket. 
That's why the EU is interested in increasing supplies from 
Algeria and is pushing projects like Nabucco. 
 
¶11.  (SBU) The question for the EU is how reliable will 
Russian supplies be in the future.  Solana expressed concern 
that the Russians have been "investing more on leverage than 
on pipelines, especially pipelines in Russia."  According to 
Piebalgs, the current difficulty is over how the Russian gas 
sector is being managed. Piebalgs called the current 
situation an "unimaginable political mess" from a management 
point of view.  At a meeting to discuss the Nabucco pipeline 
(see below), Howard Chase from BP indicated that BP believes 
Russia has systematically underinvested in its gas industry 
and cautioned that the cost for new Russian gas supplies will 
be at least twice as high as existing supplies. 
 
¶12.  (U) One hope for Russian gas production is if Russia can 
better manage its domestic market.  Increasing prices and 
improving inefficiencies could allow Russia to free up more 
gas for exports. Solana finds Russia's attempts to tackle its 
domestic demand encouraging.  Piebalgs was less optimistic 
but believes things are not as discouraging on the internal 
market as they are for investment. 
 
¶13.  (U) On the export front, Piebalgs pointed out that 
Russia is pushing a number of big projects such as Nord 
Stream and South Stream.  Piebalgs sees South Stream as 
providing no new gas supplies for the EU, but at the same 
 
BRUSSELS 00000284  003 OF 004 
 
 
time doing no harm to EU interests. Piebalgs is pleased with 
the level of transparency for the Nord Stream project and 
categorized the Russians as working together with their 
European partners. 
 
------- 
Nabucco 
------- 
 
¶14.  (U) Piebalgs and Kroes both highlighted the important 
role they see for the Nabucco pipeline project in enhancing 
European energy security and emphasized the key role Turkey 
will play in deciding whether the project is successful.  On 
the positive side, Nabucco recently added German RWE as its 
sixth partner and the Commission granted the necessary 
third-party-access exemption for the Austrian part of the 
pipeline. 
 
¶15.  (U) For Piebalgs the difficulty with Nabucco lies in 
sourcing. Nabucco is depending on Shah Deniz gas and Egyptian 
and Iraqi gas down the line.  Piebalgs pointed out that the 
original idea behind Nabucco was Iranian gas but when this 
became politically unacceptable they started looking to Shah 
Deniz gas from Azerbaijan.  Piebalgs does not exclude the 
possibility of getting gas from Turkmenistan, but categorized 
Turkmenistan as a "very particular country."  He believes 
Trans-Caspian gas is not out of the question.  The situation 
in Kazakhstan is more unclear. 
 
¶16.  (SBU) In a separate lunch meeting with officials from 
British Petroleum (BP) and Austrian OMV, Howard Chase, BP 
Director European Government Affairs, indicated production 
from the BP-operated Shah Deniz phase I is increasing and 
already at 9 bcm/year.  This gas is already contracted to 
markets in Azerbaijan, Georgia, and Turkey. BP expects an 
additional 12-13 bcm/year from Shah Deniz Phase II. 
Azerbaijan and Georgia will want some of this gas, but it 
should leave 8 bcm/year to feed into Nabucco starting in 2013 
onward, which will be enough to allow the project to go 
forward. 
 
¶17.  (SBU) Gottfried Steiner, Head of International Affairs 
for OMV, highlighted that Nabucco is a project that will have 
a portfolio of different supply sources.  He acknowledged, 
however, that Nabucco needs the gas from Shah Deniz to make 
the first stage of the pipeline project viable.  He expects a 
run on booking capacity once Nabucco is committed.  He 
stressed that Nabucco is not anti-Russian and indicated that 
South Stream could be combined with Nabucco. Steiner said the 
motivation for South Stream is to avoid transit problems in 
Ukraine.  Russia originally considered extending Blue Stream 
but found an unclear regulatory environment and legal regime 
in Turkey. 
 
¶18.  (U) Commissioners Kroes and Piebalgs both see Turkey as 
the critical part of the equation to make Nabucco work. 
Piebalgs believes it is essential that Turkey sort out the 
transit terms with Azerbaijan.  According to Piebalgs, EU 
Nabucco coordinator Jozias Van Aartsen is very close to the 
Azerbaijanis and is working to close the negotiating gap. 
The good news is that Azerbaijan has absolutely no intention 
to ship gas via Russia.  Commissioner Kroes also said the EU 
is watching Turkey closely.  Until now Turkey has been 
cooperative, but that is not enough, Turkey needs to make its 
position clear.  Whether the gas comes from Russia or Iran, 
it will have to come through Turkey. 
 
¶19.  (SBU) The BP and OMV representatives also emphasized 
that Turkey is key for Nabucco.  Gottfried Steiner from OMV 
indicated that Azerbaijan's state company (SOCAR) has 
concerns over the transport regime in Turkey.  Right now, 
there is no clear transport regime and no clear tariff. 
According to Steiner, Turkey has still not decided whether it 
wants to be a second Gazprom, buying gas on one end and then 
selling it on for a profit, or a gas transit state earning 
fees. Steiner pointed out that Turkey knows it is in a 
strategic position and they want to maximize their benefits 
out of it.  However, they have not yet decided on exactly 
what these benefits should be. Howard Chase from BP agreed 
that Turkey suffers from a lack of "strategic clarity." 
Chase believes Turkey is the critical part of the whole 
equation.  He is confident something can be worked out with 
Turkey.  The Baku-Tblisi-Ceyhan (BTC) project worked proving, 
according to Chase, that Turkey can make pipelines work if it 
wants to. 
 
BRUSSELS 00000284  004 OF 004 
 
 
 
-------------------------- 
The Role for Nuclear Power 
-------------------------- 
 
¶20.  (U) Both Solana and Piebalgs raised nuclear power as an 
important contributor to the EU energy mix going forward. 
Solana believes nuclear is not playing a large enough role in 
the EU picture, with the exception of France.  He believes 
nuclear use has to increase EU wide.  He also believes it may 
be time to take a fresh look at the non-proliferation treaty 
with the aim of enabling greater peaceful use of nuclear 
power worldwide.  Piebalgs likewise believes now is the time 
to invest in nuclear energy.  Solana also indicated that he 
does not believe Germany will go through with decommissioning 
its nuclear power plants because substitution will be too 
difficult in the context of the EU energy and climate change 
targets. 
 
¶21.  (SBU) Solana highlighted that the EU is not alone in 
looking for new nuclear power plants.  China and India are 
now competitive markets for nuclear power and over the past 
two years there has also been a large move toward nuclear 
power from the countries in the Mediterranean all the way 
across to Saudi Arabia.  Piebalgs also raised the issue of 
Russian dominance in the nuclear power field. He indicated 
that the majority of new power plant tenders in the east seem 
to be going to Russia.  Piebalgs finds this trend worrying, 
but has not determined if Russian dominance poses a real 
threat to EU energy security. 
 
---------------------- 
US/EU Energy Relations 
---------------------- 
 
¶22.  (U) Commissioners Kroes and Piebalgs and High 
Representative Solana all indicated that they find US 
engagment on energy security issues to be very positve. 
Piebalgs in particular encouraged the US to continue its 
current policies to build a free market in energy.  Piebalgs 
believes the EU and US should have closer coordination on 
security of supply and that they should strengthen the role 
the IEA has to play.  Piebalgs also agreed that the US and EU 
should work to have more coherent policy discussions and on a 
more systematic basis. 
 
¶23.  (SBU) Comment.  U/S Jeffery's visit here helped set the 
stage for what should be a very productive March 3 US-EU 
Strategic Energy Policy Review.  The Europeans in general 
share our aims of diversifying sources of supply and 
supporting the building of networks to bring gas from Central 
Asia and the Caspian region to Europe.  They also appear 
amenable to collaborating with us as we work on some of the 
detailed steps needed to reach this goal:  helping Turkey 
achieve clarity, enhancing investment climates, and working 
on legal issues with the governments concerned.  We will want 
to develop a clear list of things on which we seek European 
input by March 3, so we can follow up with them subsequently. 
 End Comment. 
 
¶24.  (U) U/S Ruben Jeffery cleared this cable with the 
exception of the USEU comment in para 23. 
 
 
Murray 
.