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RR RUEHAG RUEHAST RUEHDF RUEHHM RUEHIK RUEHLN RUEHLZ RUEHMA RUEHPB
RUEHPOD RUEHROV RUEHSR RUEHTM
DE RUEHBS #1776/01 3291318
ZNR UUUUU ZZH
R 241318Z NOV 08
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAK/AMEMBASSY ANKARA
RUEHAH/AMEMBASSY ASHGABAT
RUEHKB/AMEMBASSY BAKU
RUEHIT/AMCONSUL ISTANBUL

UNCLAS SECTION 01 OF 03 BRUSSELS 001776 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET EUN
SUBJECT: THE EU'S "CASPIAN DEVELOPMENT CORPORATION" PROPOSAL 
 
REF: A. BRUSSELS 1761 
     ¶B. BRUSSELS 1697 
     ¶C. BRUSSELS 1532 
     ¶D. BRUSSELS 952 
 
¶1.  (SBU) Summary.  On 14 November, and in a series of 
earlier meetings, DG-TREN Officials explained the concept of 
the "Caspin Development Corporation" (CDC) to Econ Offices. 
 As proposed by the EU Commission, the CDC would have the 
mandate to aggregate gas demand from European buyers and 
present a single large offer to Turkmenistan.  The CDC is 
intended as a vehicle that would help accelerate gas 
development in the Caspian region, present a credible single 
European client to Turkmenistan and other countries to whom 
they could conveniently and securely sell significant volumes 
of gas, and who as a counterparty would have the greatest 
credit worthiness and ability to promote gas development and 
related transport infrastructure.  In justifying the CDC 
approach, the Commission argues that the European energy 
market model, where individual companies buy and sell gas 
using a tightly-regulated network for transport, has not 
delivered expected results when attempted to be extended to 
the Caspian region.  If desired, DG-TREN officials offered to 
travel to the U.S. to do a "road show" explaining the CDC 
concept.  End Summary. 
 
The CDC Concept 
--------------- 
¶2.  (SBU) On November 14 (and in a series of earlier 
meetings) DG-TREN Officials explained the concept of the 
"Caspian Development Corporation" (CDC) to Econ Officers.  As 
proposed by the EU Commission, the CDC would have the mandate 
to aggregate gas demand from European buyers and serve as a 
single, substantial client for Turkmen gas.  The actual 
structure of the CDC could be a consortium of companies or 
something along the lines of a merchant bank that would be 
contracted by companies to provide the aggregation and 
negotiation services and a clearing and settlement mechanism. 
  The CDC is intended as a vehicle that would help accelerate 
gas development in the Caspian region, present a credible 
single European client to Turkmenistan and other countries to 
whom they could conveniently and securely sell significant 
volumes of gas, and who as a counterparty would have the 
greatest credit worthiness and ability to promote gas 
development and related transport infrastructure. 
 
¶3.  (SBU) DG-TREN officials stressed that the CDC is intended 
solely for Turkmenistan and is not intended to be used in 
countries, such as Azerbaijan, where open market mechanisms 
are already in place.  (Note:  Other Commission 
pronouncements have indicated that while the focus of the CDC 
would be on Caspian gas, it could also purchase gas from the 
Middle East and Russia.  End note.)  The Commission intends 
for the CDC to be simple and transitional to overcome 
perceived market risk and a fear of retaliation.  Centered on 
Baku as a collection point for gas from beyond the Caspian, 
from Central Asia and the Middle East, the CDC would aim to 
bring in new gas supplies of between 60 and 120 billion cubic 
meters of gas per annum for the EU.  The Commission believes 
that that type of financially guaranteed commitment will give 
comfort to Central Asian gas suppliers to open up new 
investments and issue new licenses.  Likewise, it believes 
the prospect of such volumes would help alleviate Turkey's 
energy security concerns, allowing the Azeris to commit more 
gas Nabucco and/or TGI. 
 
¶4.  (SBU) DG-TREN officials indicated that as currently 
conceived CDC would not have exclusivity over gas purchasing 
from the region and CDC would be independent from the 
Southern Corridor pipeline projects -- though it could build 
new infrastructure where needed.  Along these lines, DG-TREN 
officials believe the CDC could finance or at the least 
enable the building of a trans-Caspian gas pipeline from 
Turkmenistan to Azerbaijan.  DG-TREN officials see the CDC as 
a purely private sector endeavor.  As such the only action 
required by the EU would be relaxing completion rules to 
allow volume aggregation.  He went on to say that the CDC 
would not have exclusive market rights and would have to have 
a third-party access system. 
 
¶5.  (SBU) The CDC is mentioned as part of the Commission 
Communication on the 2nd Strategic Energy Review (REF A). 
The Communication does not spell out details, but simply 
states: "The feasibility of a block purchasing mechanism for 
Caspian gas ("Caspian Development Corporation") will be 
 
BRUSSELS 00001776  002 OF 003 
 
 
explored, in full respect of competition and other EU rules." 
 The Communication also calls on the Council and Parliament 
to welcome "the Commission's determination to ensure the 
development of a Southern gas corridor and encourage the 
Commission and the Community financial institutions to 
collaborate closely in exploring the feasibility of block 
purchasing mechanism ("Caspian Development Corporation")." 
 
The Commission's Justification for the CDC 
------------------------------------------ 
¶6.  (SBU) In justifying the CDC approach, the Commission 
argues that the European energy market model, where 
individual companies buy and sell gas using a 
tightly-regulated network for transport, has not delivered 
expected results in attempts to access Caspian markets. 
Caspian gas producers focus on the strategic and commercial 
value of gas trade rather than the implementation of Europe's 
energy market model.  European gas purchasers, including some 
of the biggest gas companies in the world, have not signed 
import contracts and are not expected to take the lead in 
sponsoring Caspian gas development.  This reportedly stems 
largely from concerns about their gas contracts with Gazprom 
and/or investments in Russia. 
 
¶7.  (SBU) These factors have led to the Commission to 
conclude that it must lead a coordinated approach 
underwritten by the EU and the European Investment Bank 
(EIB), along with other multilateral institutions,  in order 
to successfully engage the Caspian producers and European gas 
companies.  One possible role for the EIB is the facilitation 
of gas purchases directly and/or through participation in 
joint purchasing through the CDC.  Another is the provision 
of financing and/or guarantees for gas development in the 
Caspian and related transport infrastructure in the Caspian, 
South East Europe and the EU.  The Commission views 
Turkmenistan as a special case and one that requires a novel 
approach if it is to lock it in as a supplier for Nabucco. 
 
World Bank Study 
---------------- 
¶8.  (SBU) The Commission has suggested to Turkey that it 
request a World Bank feasibility study on this concept.  The 
study itself would be funded by the EU probably through the 
EIB, not the World Bank, with Turkey as the beneficiary. 
DG-TREN officials said the initial reaction from the World 
Bank indicates that they would probably recommend a merchant 
bank/service contract model rather than a consortium of 
companies as originally envisaged by the Commission.  Under 
this model a bank or other financial company would act as an 
aggregator for gas purchase requests from European and 
Turkish buyers and then would present a single large offer to 
buy gas to Turkmenistan. 
 
¶9.  (SBU) The objectives of the World Bank Study would be to: 
 
-- Examine options to better coordinate Europe's efforts to 
promote gas production and infrastructure development and 
coordinate gas purchases including the creation of the 
Caspian Development Corporation (CDC); and 
 
-- Assuming the CDC approach proceeds, design the concept, 
structure, method of composition and financing of the CDC, 
along with the regulatory, legislative and contractual 
arrangements guiding its relationships both on the buy as 
well as sell sides. 
 
¶10.  (SBU) DG-TREN officials said the Commission would work 
with the European Investment Bank  to finance the World Bank 
study.  The terms of reference for the World Bank study have 
been shared with Turkey, but not yet with the EU Member 
States.  At this point, the ball appears to be in Turkey's 
court, and Turkey has not yet made the decision on whether to 
proceed.  One concern is that going the study route would 
require a year or more before any solution is implemented. 
DG-TREN officials indicated that U.S. support for the CDC 
concept would be very helpful, especially with the World Bank 
and Turkey.  If desired, DG-TREN officials offered to travel 
to the U.S. to do a "road show" explaining the CDC concept. 
 
Comment 
------- 
¶11.  (SBU) One of the issues that has always swirled around 
the Caspian/Central Asia gas pipeline concept is the need for 
sufficient concentrated demand from Europe - this is one 
reason why the USG has encouraged EU market liberalization. 
 
BRUSSELS 00001776  003 OF 003 
 
 
The CDC is the Commission's attempt to address the obstacles 
to moving Turkmen gas west.  At this point the CDC project is 
still just a concept, not a fait accompli.  The Commission is 
looking for a way to deal with what it perceives as the 
obstacles to moving Turkmen gas west.  In going out for a 
World Bank sponsored study it is opening up the door for 
other suggestions and a judgment on whether or not this idea 
should move beyond the proposal stage. 
 
¶12.  (SBU) From the competition perspective, the CDC will 
either have to fully comply with EU competition regulations, 
or be granted a derogation.  Having the Commission champion 
the CDC would seem a prelude to a derogation.  Such a 
derogation would likely be decided on by DG-TREN (who would 
champion CDC), but would also require buy-in from DG-COMP. 
The derogation would most likely be for a fixed period of 
time.  This fits withthe Commission idea that the CDC would 
be he first step towards gas imports from Turkmenistan, but 
the goal would be to eventually move to a more open 
competitive model over time. 
 
¶13.  (SBU) We see a number of potential benefits to the CDC 
approach: 
 
-- The CDC could provide the comfort factor Turkmenistan 
needs to commit to shipping gas west to Europe, provide the 
Turkmen with another outlet for their gas and lessen their 
dependence on Russia, and would meet the Turkmen's 
requirement to sell gas at its border. 
 
-- The CDC could succeed Qgetting Turkey to back away from 
its demand for a 15 percent off-take of any gas transiting 
Turkey. 
 
-- The CDC could set a useful precedent for the EU pooling 
its negotiating leverage, and provide a potential partner for 
the European Investment Bank (EIB) in developing a 
risk-mitigation mechanism for latter stages of Nabucco. 
 
-- By encouraging upstream development in Turkmenistan, the 
CDC could benefit U.S. companies seeking to invest in 
Turkmenistan's gas sector. 
 
¶14.  (SBU) We nonetheless also see a number of potential 
disadvantages to the CDC approach: 
 
-- The CDC idea appears to be counter to the free market 
messages we have been passing to Turkmenistan and other 
Caspian states. 
 
-- This approach could encourage the belief among the 
Turkmen, Azerbaijanis, Turks and the Europeans that only 
government entities can manage the energy business. 
 
-- This approach could undermine our efforts to advocate on 
behalf of Chevron, ConocoPhillips, ExxonMobil, and others to 
allow the private sector to develop Turkmenistan's gas 
resources and deliver them to market. 
 
-- While initially conceived for Turkmenistan, the concept 
could be extended to other countries and sources better 
addressed with a market based approach. 
 
¶15.  (SBU) From our optic, the pros of opening up the 
Southern Corridor, strengthening ties between Europe and 
Turkey, and decreasing Turkmenistan's dependence on Russia by 
giving it a western outlet for its gas appear to outweigh the 
cons.  Nevertheless, strong support or for that matter strong 
opposition for the CDC concept is probably not warranted at 
this point.  If the World Bank Study goes forward, the 
recommendations it produces may differ greatly from what is 
currently proposed by the Commission.  It will also be 
important to observe the reactions from Turkmenistan, 
Azerbaijan, Turkey, and the EU to see if the CDC could 
actually accomplish the goal of bringing Turkmen gas west to 
Europe. 
 
Silverberg 
.