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DE RUEHSF #0641/01 2761002
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O 021002Z OCT 08
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5430
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000641 
 
SIPDIS 
 
FOR SPECIAL ENVOY BOYDEN GRAY 
 
E.O. 12958: DECL: 09/30/2018 
TAGS: ECON ENRG PGOV BU
SUBJECT: BULGARIA AND THE ENERGY KNOT: SCENESETTER FOR OCT 
7 VISIT OF SPE GRAY 
 
Classified By: Ambassador Nancy McEldowney for reasons 1.4. (b) and (d) 
. 
 
¶1.  (C)  Summary:  The quandary over energy facing all our 
European partners is particularly acute here in Bulgaria. 
With few hydrocarbons of its own, Bulgaria relies on Russia 
for seventy percent of its total energy needs and over ninety 
percent of its gas.  Though previously a net exporter of 
electricity, the EU's decision to force closure of blocks 3 
and 4 of the communist-era nuclear plant Kozluduy cost the 
Bulgarian economy over USD 1.4 billion and put a squeeze on 
Serbia, Macedonia and Greece, who had purchased the bulk of 
the exports.  The hard reality of today's energy picture is 
that Russia is not only the dominant supplier, it is also the 
dominant player -- your visit here is the first by a senior 
U.S. energy official in a year, whereas Putin has personally 
engaged both the President and Prime Minister on energy 
issues in multiple sessions over the past ten months.  But 
the cartoon strip portraying a passionately eager Bulgaria in 
bed with the muscle bound duo of Gazprom and Lukoil is only 
partially true -- it is a tryst driven less by passion and 
more by a perceived lack of options.  Prime Minister 
Stanishev recently described Russian tactics on South Stream 
as blackmail and Energy Minister Dimitrov complains openly of 
psychological warfare.  At the same time, the Bulgarians are 
deeply worried about the prospects for Nabucco and are 
convinced that Azeri gas supplies will be held up by Turkey. 
Their bid to hold an energy summit in the spring, the 
ostensible focus of your visit, is designed to catalyze 
greater coordination -- and negotiating leverage -- amongst 
transit countries while also getting the United States more 
actively engaged.  Background on specific issues likely to 
arise in your discussions with President Parvanov, Prime 
Minister Stanishev, Foreign Minister Kalfin and Energy 
Minister Dimitrov follows below.  End Summary. 
 
TIMING 
------ 
 
¶2.  (C)  Your visit to Sofia comes when Bulgaria is striving 
to sell itself as a European energy center.  With six active 
or potential pipelines transiting the country, the creation 
of a new energy mega-holding company, and the construction of 
a new nuclear plant, Bulgaria is setting itself up to be an 
important regional energy player, despite being overly 
dependent on Russian energy sources.  The proposal to host a 
major gas summit in April 2009 -- which Putin has already 
promised to attend -- is the latest attempt to put Bulgaria 
on the energy map.  Your visit will guide the Bulgarians as 
they formulate an agenda and goals for this summit.  It will 
also focus Bulgarian policy makers on U.S. views on Russian 
energy strategy and South Stream, answer growing skepticism 
about Nabucco's prospects, and give solid counter-arguments 
to those who say there is no real alternative to dependence 
on Russian energy. 
 
THE SUMMIT 
---------- 
 
¶3.  (C)  At the January 19 signing of the South Stream 
Intergovernmental Agreement, President Parvanov, with Putin 
at his side, announced Bulgaria would host an energy summit 
intended as a follow-on to the June 2007 Zagreb energy 
conference.  Upon Putin's departure, Sofia fell under heavy 
criticism both at home and abroad for hastily joining South 
Stream, and the energy summit idea lost steam.  Ambassador 
for Energy Security Peter Poptchev told us the Bulgarians 
resented perceived Russian pressure to hold such a summit. 
In July the Bulgarians independently resurrected the summit 
idea as a way to show Bulgarian support for Nabucco and 
diversification, as well to balance European, U.S. and 
Russian interests in the Caspian and Black Sea regions.  With 
the potential for six pipelines passing through its 
territory, the Bulgarians also have high hopes to become a 
regional energy hub.  The summit, they believe, will help put 
Sofia on the map not only as an energy center, but as a place 
that brokers discussions between the West, Russia and 
Eurasia. 
 
¶4.  (C)  The Bulgarians requested your visit to advise on the 
summit.  They envision a spring conference (tentatively April 
24-25) that would bring together heads of state from Eurasian 
and European producer, transit and consumer countries.  PM 
Stanishev told Ambassador September 19 that Putin has agreed 
to attend.  The summit will be gas-focused and will attempt 
to put "real solutions" on sources, routes and quantities on 
the table.  Well-aware of the potential for East European 
energy conference fatigue in the first half of 2009, the 
Bulgarians are proposing that all key participants, including 
the EU, the United States and Russia, view the proposed 
Hungarian, Bulgarian and Czech conferences as a linked 
continuum.  The April Sofia conference would take care of any 
unfinished business left from the January Hungary Conference 
and the proposed Czech conference would take up where the 
Sofia conference leaves off.  To distinguish the Bulgarian 
summit, Sofia is considering including an as-yet undeveloped 
"industry component." 
 
¶5.  (C)  The Bulgarians will seek U.S. views and your advice 
on the proposed agenda of the summit and whether it will 
advance U.S. goals in the region.  They want recommendations 
on how to coordinate the Hungarian, Bulgarian and Czech 
conferences and may seek advice on the proposed industry 
component of the Sofia summit.  They are interested in, but 
may not ask directly about, U.S. views on whether Sofia has a 
future as an intermediary between Europe, the United States 
and Russia on energy and other issues affecting the Black Sea 
region.  They are interested in your analysis of recent Azeri 
and Turkish energy moves.  They will also request high level 
U.S. attendance at the summit. 
 
BULGARIAN ENERGY PROJECTS 
-------------------------- 
 
¶6.  (C)  SOUTH STREAM:  The Bulgarians signed the South 
Stream intergovernmental agreement in January and Parliament 
ratified the agreement in July.  Negotiations between 
Bulgargaz and Gazprom resumed in September to work out a 
pre-shareholders agreement.  At our recommendation, and at 
the direction of the Government, state-owned Bulgargaz 
reluctantly hired outside legal counsel (the U.S. law firm 
Paul Hastings) to represent it in South Stream negotiations. 
With the creation of a new, state-owned energy mega-holding 
in September, Bulgargaz has lost much of its 
previously-considerable independence.  The acting head of the 
Bulgarian Energy Holding is Deputy Energy Minister Galina 
Tosheva, previously lead South Stream negotiator for the 
Bulgarian Government.  Tosheva has a healthy suspicion of 
Russia's intentions in Bulgaria and has directed Bulgargaz to 
rely on its legal counsel for expert advice.  Tosheva told us 
that Gazprom negotiators are taking a hard line now that 
negotiations have resumed.  They are proposing to re-route 
gas currently transiting Bulgaria (for which Bulgartransgas 
makes a healthy profit) to South Stream, meaning South Stream 
would not represent 31 bcm of new gas for Europe, but 
something significantly lower.  The Bulgarians state that 
this is contrary to the spirit of the IGA and are preparing 
to fight the Russian proposal. 
 
¶7.  (C)  NABUCCO:  Despite the strong public support they 
have shown Nabucco this year, the Bulgarians are turning into 
Nabucco-skeptics.  In March, Sofia signed what it thought was 
an agreement for Azerbaijan to supply 1 bcm of gas that 
Bulgaria would eventually take as its Nabucco quota.  In 
advance of Nabucco, Bulgaria planned to access the gas via a 
potential hook-up to the Turkey-Greece-Italy interconnector. 
Realizing now that the agreement was not, in fact, a 
commitment on Azerbaijan's part, the Bulgarians feel burned. 
The government is now in dire need of a pep talk on the 
Nabucco.  They state firmly that both South Stream and 
Nabucco are critical and that one cannot be allowed to 
preclude the other.  At the same time, they are nervous about 
both Azerbaijani willingness to supply Nabucco and Turkish 
willingness to support the project.  They will be interested 
in your view of Nabucco's prospects. 
 
¶8.  (C)  TGI HOOK-UP:  The Bulgarians are in negotiations 
with Greece about this possible interconnector.  Energy 
Holding CEO Tosheva said this is Bulgaria's most immediate 
source of diversification and energy security.  The Greeks 
apparently are cool to the idea, saying there is insufficient 
gas.  In response, the Bulgarians have proposed the purchase 
of LNG to be delivered to Greece in exchange for either TGI 
access or gas currently going through the export pipeline 
from Russia and transiting Bulgarian territory.  Your 
Bulgarian interlocutors may ask for U.S. support for these 
schemes in our discussions with the Greeks and Turks. 
 
¶9.  (C)  BURGAS-ALEXANDROUPOLIS (BAP) and AMBO:  The 
Bulgarians, Russians and Greeks signed a shareholders 
agreement for the BAP oil pipeline in January during the 
Putin visit.  Since then, the project company has been 
registered, but little more progress has been made.  The 
Bulgarians are still confident the pipeline will be built, 
and seem surprisingly uninterested in the dynamics 
surrounding CPC expansion.  With BAP's relative progress, the 
AMBO (Albania-Macedonia-Bulgaria) oil pipeline project has 
lost momentum.  Still, Bulgaria remains committed to AMBO and 
is ready to move forward if and when AMBO attracts supply and 
financing. 
 
¶10.  (C)  BELENE:  In 2006 the GOB selected Russian 
AtomstroyExport as the contractor for the new Belene nuclear 
plant.  Bulgaria is keeping majority ownership of the plant, 
but is in the process of selecting a strategic investor for 
the other 49 percent.  RWE and the Belgian Electrabel are in 
the running.  We have stated repeatedly that the choice of a 
Russian contractor for Belene decreased Bulgaria's bid for 
greater independence from Russian energy sources.  The lack 
of transparency surrounding the tender has led to the 
inescapable conclusion that the decision to choose Russia as 
the Belene contractor was linked to the re-negotiation of 
Bulgaria's long-term gas transit contract with Gazprom in 
December 2006. 
 
YOUR MEETINGS 
------------- 
 
¶11.  (C)  President Parvanov began his second five-year term 
in 2007.  Parvanov's desire to exercise behind-the-scenes 
influence over the government has led to tensions with his 
former protege, Prime Minister Sergei Stanishev.  Parvanov 
has close ties to Russian politicians and held no less than 
eight meetings with Vladimir Putin in the last seven years. 
The energy summit will be under his aegis. 
 
--Prime Minister Sergei Stanishev is a 42-year-old 
progressive Socialist.  He is pro-west and eager to have 
Bulgaria viewed as a good friend and partner of the United 
States.  He returned September 30 from a week-long visit to 
the United States where he met with U/S Burns, spoke at the 
Harvard Business School and held an investment forum.  He 
understands that Bulgaria is overly dependent on Russian 
energy sources, but sees Bulgaria as having few options for 
greater energy independence. 
 
--Foreign Minister Kalfin is close to both Stanishev and 
Parvanov and as Deputy Prime Minister oversees the Economy 
and Energy Ministry.  He is a strong supporter of close 
Bulgarian-U.S. relations and is highly conversant on energy 
issues. 
 
--Economy and Energy Minister Petar Dimitrov is a relative 
new-comer to energy issues.  He is largely seen as taking 
direction on energy matters from former Energy Minister Rumen 
Ovcharov, who is linked with Russian energy interests and 
left office in June 2007 after a corruption scandal. 
 
¶12.  (C)  Your visit will also highlight, though meetings and 
press outreach, the need for Bulgaria to focus on a long-term 
energy strategy not solely based on the transit of 
hydrocarbons or the production of Russian-based nuclear 
energy, but on the development of renewables, clean coal and 
greater energy efficiency.  Bulgaria will always be dependent 
on Russian energy to one extent or another. But as the most 
energy inefficient economy in Europe, it can make meaningful 
strides toward greater diversity away from Russian energy 
sources.  With the price of energy at near record highs, 
Russia's hydrocarbon-generated wealth is increasingly 
circulating through the Bulgarian economy, making Bulgaria 
all the more susceptible to Russian leverage.  An energy 
strategy that focuses on renewables and efficiency is one 
tool Bulgaria can use to put a noticeable dent in negative 
Russian influence.  The other tool is transparency.  Hub 
status in any industry is bestowed only on places which offer 
transparent, efficient service.  To achieve its goal of 
becoming a true energy center, we should recommend that 
Bulgaria present itself not as the place with closest ties to 
Russia, but as the most transparent place to do energy deals. 
 
McEldowney