VZCZCXRO7865
RR RUEHAG RUEHAST RUEHDF RUEHHM RUEHIK RUEHLN RUEHLZ RUEHMA RUEHPB
RUEHPOD RUEHROV RUEHTM
DE RUEHBS #1238/01 2241245
ZNR UUUUU ZZH
R 111245Z AUG 08
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAK/AMEMBASSY ANKARA
RUEHAH/AMEMBASSY ASHGABAT
RUEHKB/AMEMBASSY BAKU

UNCLAS SECTION 01 OF 02 BRUSSELS 001238 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET EU
SUBJECT: RWE'S VIEWS ON THE NABUCCO PROJECT 
 
¶1. (SBU) Summary.  In a July 15 meeting with Special Envoy 
Gray, RWE's Chief Commercial Officer Stephan Judisch shared 
his views on the current progress on the Nabucco Pipeline 
project and the challenges he sees going forward.  From 
Judisch's standpoint, the biggest challenge on Nabucco is 
lining up enough gas supplies to justify the investment and 
the biggest factor limiting available supply is Turkey's 
current desire to buy up all of the gas production from 
Azerbaijan's Shah Deniz Phase II.  RWE is trying to convince 
Turkey that being tied in to Europe's 550 bcm market will 
guarantee security of supply for Turkey.  One novel approach 
RWE is considering to help Turkey with its security of supply 
concerns is to suggest using new modern coal-fired power 
plants built on the Black Sea coast with a generating 
capacity equivalent to 6 bcm of gas-fired plants.  Even if 
Turkey's demands can be scaled back, however, Judisch 
believes Nabucco will need to look beyond Azerbaijan to 
Turkmenistan to line up enough supply to justify Nabucco. 
End Summary. 
 
¶2. (SBU) In a July 15 meeting with Special Envoy Gray, German 
RWE's Chief Commercial Officer Stephan Judisch shared his 
views on the current progress on the Nabucco Pipeline project 
and the challenges he sees going forward.  The Inter 
Governmental Agreement and Host Government Agreements (both 
legislate for the transit rights through the transit 
countries, but are especially important for Turkey) are in 
draft form and currently being negotiated by the Project's 
shareholders with Turkey. RWE believes it is critical that 
these now get resolved and signed by September/October 2008. 
From Judisch's standpoint, the biggest challenge on Nabucco 
is lining up enough gas supplies to justify the investment 
and the biggest factor limiting available supply is Turkey's 
current desire to buy up all of gas production from 
Azerbaijan's Shah Deniz Phase II (SD-2). 
 
Mitigating Turkey's Security of Supply Concerns 
--------------------------------------------- - 
¶3. (SBU) Turkey is worried about security of supply, despite 
being oversupplied during the past five years.  They fear the 
Russians could cut off supply, and as a result Turkey is now 
trying to capture all the Azeri gas.  If they succeed, 
Judisch believes there will be no Nabucco.  RWE is trying to 
convince Turkey that being tied in to Europe's 550 bcm market 
will guarantee security of supply for Turkey.  One method RWE 
is considering to mitigate Turkey's concerns is to offer them 
guaranteed access to Nabucco gas.  Nabucco is a 30 bcm 
project, each of six partners has an equal 5 bcm share of the 
capacity, and RWE and OMV between them have 10 bcm.  To help 
Turkey with its security of supply concerns, RWE and OMV 
would be willing to guarantee half of their combined share (5 
bcm) to Turkey in case of a supply crunch.  However, the 
companies would require that the "crunch" be verified by an 
independent body to determine if Turkey really needs it. 
Judisch also believes that most if not all of the other 
Nabucco partners would be willing to enter in to a similar 
agreement.  In addition, RWE/OMV have conceptually offered to 
set up joint venture companies with Turkish companies for the 
purpose of investing in the upstream and midstream gas sector 
in Turkey and its neighboring countries - this would also 
include purchasing gas, which could be used for Turkish and 
European markets. Turkey has to date not engaged with RWE/OMV 
on the proposals. 
 
¶4. (SBU) Judisch views Turkey as "the big issue" and said 
"every day Nabucco is delayed is a day for the competitors." 
The Nabucco partners are continuing to work on the IGA with 
Turkey, and the draft is now in Turkish hands for review. 
The Turkish demand for a 15 percent lift-off is in the host 
government agreement (HGA), but Turkish officials tell RWE 
that Turkey would be willing to give this up.  Nonetheless, 
in a conference call on July 14, Judisch learned the 15 
percent demand was back in the agreement.  Judisch does not 
believe Turkey will succeed in getting the deal they want. 
Turkey wants a net back price on the lift-off quantities, 
believing if the gas stops in Turkey they should get a 
cheaper price than if the gas goes all the way to Baumgarten. 
 This is at odds with the view from Azerbaijan, as Azerbaijan 
sees no reason it should have to supply Turkey at a 
discounted rate when it can get a better price in Baumgarten. 
 
Security of Supply through Diversity of Fuels 
--------------------------------------------- 
¶5. (SBU) One novel proposal RWE is considering to assuage 
Turkey's security of supply concerns is suggesting the 
construction of modern coal-fired power plants on the Black 
Sea coast with generating capacity equivalent to 6 bcm of 
gas-fired plants.  These plants could be fueled from coal 
 
BRUSSELS 00001238  002 OF 002 
 
 
mined in the Donnets region of Ukraine, which could be 
shipped across the Black Sea without transiting the Bosporus. 
 Judisch acknowledged that the plants could also be built to 
use Turkish lignite (an option Judisch indicated is preferred 
by Turkey), but believes the lignite is of such poor quality 
that it would make more sense to import coal from Ukraine. 
According to Judisch, Ukraine has vast deposits of anthracite 
coal.  Nonetheless, Judisch acknowledged that doing business 
in Ukraine is very, very difficult.  (Comment: Under the EU's 
emissions trading scheme if Turkey did indeed build new 
coal-fired power plants, they might actually qualify for 
Clean Development Mechanism (CDM) credits as the modern 
plants would have less emissions than the older plants they 
would replace.  End Comment.) 
 
Azerbaijan Alone is not Sufficient 
---------------------------------- 
¶6. (SBU) Besides transit, Judisch's other big concern is 
supply.  Judisch indicated RWE has between 15-18 months to 
make the final investment decision for Nabucco.  To go 
forward, the project will require 8 bcm capacity commitments 
by 2013 and a further 5.5 bcm by 2015.  So far the numbers 
don't look favorable.  The only "sure" source of gas Judisch 
sees is from Azerbaijan's SD-2, which RWE estimates should 
produce 12-15 bcm of gas.  Judisch indicated that between 3 
and 4 bcm of the gas from SD-2 will probably be consumed 
domestically in Azerbaijan or exported to Georgia.  That 
leaves 8-12 bcm for export west.  If Turkey takes 8 bcm, as 
it is now demanding, that leaves only 0-4 bcm for Nabucco. 
Even if Turkey's demands can be scaled back, Judisch doesn't 
believe Azerbaijan alone has enough supply to justify Nabucco. 
 
Looking Beyond Azerbaijan 
------------------------- 
¶7. (SBU) RWE is very interested in gas from Iraq but views 
this as a possible addition for phase two of the project. 
The only real possibility for Nabucco phase one is 
Turkmenistan.  Turkmenistan is committed to sending up to 10 
bcm west, but the question is "how do you get it to Turkey?" 
RWE sees three possible routes: 
 
-- A Trans-Caspian pipeline, this would be the preferable 
option, but Judisch thinks a decision has to be made to build 
the pipeline within the next 15 months for it to be in time 
for Nabucco. 
 
-- RWE views transit through Iran as another option. Judisch 
said that RWE is convinced that transit is not excluded by 
the current Iran Sanctions.  To support his case, Judisch 
pointed out that the U.S. has not rebuked Turkey for buying 
gas from Turkmenistan, which transits Iran. 
 
-- The third option would be to use compressed natural gas 
(CNG) tankers to transit the Caspian.  This would be 
challenging, but Judisch believes it would be do-able.  RWE 
is in discussions with both Turkmenistan and Kazakhstan about 
this option.  Judisch plans to travel to Ashgabat to pursue 
the CNG option in case a Trans-Caspian pipeline isn't 
possible. 
 
¶8. (SBU) Comment.  RWE as the newest partner in Nabucco 
appears committed to making the project work and is pursuing 
some novel approaches to that end.  End Comment. 
 
Silverberg 
.