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DE RUEHBS #0151/01 0341324
ZNR UUUUU ZZH
R 031324Z FEB 09
FM USEU BRUSSELS
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INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
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RUCNMEM/EU MEMBER STATES COLLECTIVE
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UNCLAS SECTION 01 OF 02 BRUSSELS 000151 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET EUN
SUBJECT: DAS BRYZA ENCOURAGES EU ENERGY INVESTMENTS AND 
COMPETITION 
 
Sensitive but Unclassified - not for Internet distribution. 
 
¶1. (SBU) Summary and Introduction: EUR Deputy Assistant 
Secretary Matthew Bryza met separately with Steven Everts, 
Advisor to High Representative Javier Solana; Heinz 
Hilbrecht, EU Commission Director for Security of Supply and 
Energy Markets; and Jean-Paul Decaestecker, EU Council Head 
of Unit for Energy Policy in Brussels on January 30. 
Discussions focused on: 
 
- promoting market competition, 
- accessing Caspian gas through the Southern Corridor, 
- improving relations with Ukraine, and 
- enhancing cooperation on renewables. 
 
Everts mentioned that in March, EU leaders will consider in a 
3.5 billion euro investment package on a series of energy 
infrastructure projects, including gas and electricity 
interconnectors and carbon capture and storage pilots. 
Hilbrecht said that the European Investment Bank would be 
prepared to finance the Nabucco project if it secures 8 bcm/a 
for phase I.  End summary. 
 
INTERCONNECTIONS AND MARKET COMPETITION 
 
¶2. (SBU) In his meeting with Everts, DAS Bryza stressed the 
need for more competition in the gas market as well concern 
over Gazprom's 50 percent stake in the Baumgarten gas trading 
hub.  Bryza emphasized the need for investment in 
infrastructure, particularly LNG terminals on the Black and 
North seas and gas and electricity interconnectors in/to 
central and eastern member states, whose vulnerability to 
Russia was exposed during the recent crisis.  Everts 
acknowledged that significant steps need to be taken to 
develop a real internal gas market.  He said the difficulties 
lie with the larger member states, such as Germany, the UK, 
the Netherlands and France, who place their own energy 
interests above the community's.  He did note that Chancellor 
Merkel wrote to Commission President Barroso and Czech Prime 
Minister Topolanek on January 29 "urging" more 
interconnections, development of a market structure and 
diversification - citing Nabucco, Nord Stream and South 
Stream.  Everts added that the Commission had just submitted 
a series of energy investment proposals under the EU's 
Recovery Package, to be taken up by the Council in March.  He 
said significant sums were made available for electricity and 
gas interconnections in the Baltic and Mediterranean states, 
but less for central and eastern Europe.  Decaestecker said 
the while the EU supports gas inter-connections, it might not 
support the NETS project to integrate operators in central 
Europe and the Balkans, as it is primarily supported by one 
company, Hungary's MOL.  Bryza noted that even incremental 
investments in central Europe would enhance competition. 
 
 
TURKEY AND NABUCCO 
 
¶3. (SBU) Fresh from his participation at the January 26-27 
Budapest Nabucco Summit, DAS Bryza said the key to progress 
on the Southern Corridor is a transit agreement between 
Turkey and Azerbaijan.  Azerbaijan seeks a &fair market 
price8 from Turkey for gas from the Shah Deniz (SD) II 
field, the primary source for phase I of Nabucco.  Turkey 
seeks to maintain the well-below market structure it pays for 
Azeri gas from the SD I field, whereas Azerbaijan seeks an 
increased tariff for these supplies as well.  Bryza opined 
that Turkey would maintain its position at least until the 
upcoming municipal elections scheduled for March 25. 
Hilbrecht said the problem is Turkey, which needs cheap gas 
to maintain its high growth rates.  Turkey insists on 8 
billion cubic meters per annum (bcm/a) from SD II but that 
would not leave enough gas for Nabucco.  Bryza agreed this is 
too much; he said that Azerbaijan wants to retain sufficient 
volumes for direct access to the EU market, either through 
Nabucco or TGI.  Hilbrecht said RWE and OMV have proposed a 
cost-based transmission regime with market guarantees in 
event of a crisis, but Hilbrecht is not convinced Turkey will 
accept the offer.  Bryza said Turkey needs to think 
strategically, and that it may take a "political decision" 
between Prime Minister Erdogan and President Aliyev to wrap 
up an agreement. 
 
¶4. (SBU) Another problem has been Turkey's insistence on 
 
BRUSSELS 00000151  002 OF 002 
 
 
linking the opening of negotiations on the Energy Chapter on 
EU accession with an intergovernmental agreement on Nabucco. 
Everts said that EU High Commissioner Solana, Commission 
President Barroso, and Enlargement Commissioner Rehn were 
"sympathetic" to this issue, but warned Turkey about painting 
them into a corner on the Energy Chapter.  He said Cyprus 
remains obstinate on Turkey's accession, as well as EU-NATO 
relations, which he described as "its sole foreign policy 
objective."  Everts added that France and the Netherlands 
also oppose the opening of the Energy Chapter, but they may 
be more flexible, particularly France, if Gaz de France joins 
the Nabucco consortium, which he said, Erdogan opposes. 
 
¶5. (SBU) Both Everts and Hilbrecht said that financing would 
not be a problem if a transit agreement were reached.  Everts 
reported that 250 million euros of "seed capital" has been 
set aside for Nabucco in the Recovery Package.  (Note: 100 
million euros were allocated for TGI.  End note.)  Hilbrecht 
said the EIB was prepared to finance Nabucco if deemed 
"viable," which would mean a supply agreement of at least 
eight bcm/a for phase one. 
 
¶6. (SBU) Hilbrecht was also optimistic about securing Turkmen 
gas for Nabucco.  Yashygeldy Kakaev, the head of Turkmengas 
Company told Hilbrecht that if there is an agreement to form 
the Caspian Development Corporation (CDC), Turkmenistan will 
make sufficient supplies available.  Kakaev asked if Gazprom 
would be permitted to join the CDC; Hilbrecht said yes, as 
long as Gazprom was willing to behave like a market 
competitor.  He also invited Kakaev to join the CDC steering 
committee. 
 
UKRAINE 
 
¶7. (SBU) Hilbrecht said that after gas flows had resumed in 
mid-January, Gazprom's Deputy Chairman Alexander Medvedev 
told EU officials that Ukraine's full transmission capacity 
needs to be maintained.  Hilbrecht said that in reality, 
Gazprom seeks to circumvent Ukraine, and it cut off gas 
supplies in January as a justification for doing so.  He said 
there is now a proposal to increase South Stream's capacity 
from 30 bcm to 46 bcm.  This combined with Nord Stream's 55 
bcm would divert much of 120 or so bcm currently transiting 
Ukraine to Europe.  Thus, South Stream would no longer be in 
competition with Nabucco for Caspian gas but instead would be 
built to transmit Russian supplies and "squeeze Ukraine." 
 
¶8. (SBU) DAS Bryza stressed the need to remain engaged with 
Ukraine and suggested a U.S.-EU-Ukraine working group to 
promote transparency and rehabilitate Ukraine's 
infrastructure, as referenced in the 2008 U.S.-EU Summit 
declaration.  Decaestecker welcomed the proposal and said the 
Council Secretariat had made a similar proposal to Russia to 
promote transparency in Ukraine.  Hilbrecht was less 
committal.  He said a proposal to form a consortium of EU gas 
companies, Gazprom and Naftogaz to manage the flows had been 
put forth and received the approval of Energy Commissioner 
Piebalgs.  However, European gas companies are apprehensive 
about investing the approximately 2.5 billion dollars needed 
to rehabilitate Ukraine's infrastructure. 
 
RENEWABLES 
 
¶9. (SBU) DAS Bryza proposed the U.S. and EU intensify 
cooperation on renewables and alternative sources of energy, 
as set forth in recent Summit declarations.  He said while we 
must address the immediate need to promote interconnectivity 
and competition, we cannot lose sight of the strategic need 
to develop and deploy renewables.  Decaestecker was keen on 
this idea and suggested we explore options in advance of this 
year's summit. 
 
Murray 
.