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RR RUEHAG RUEHAST RUEHDF RUEHHM RUEHIK RUEHLN RUEHLZ RUEHMA RUEHPB
RUEHPOD RUEHROV RUEHSR RUEHTM RUEHTRO
DE RUEHBS #0577/01 1071529
ZNR UUUUU ZZH
R 171529Z APR 09
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
RUEHTA/AMEMBASSY ASTANA
RUEHKB/AMEMBASSY BAKU
RUEHSI/AMEMBASSY TBILISI

UNCLAS SECTION 01 OF 04 BRUSSELS 000577 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET EUN
SUBJECT: SCENESETTER FOR SPECIAL ENVOY MORNINGSTAR'S VISIT 
TO BRUSSELS, APRIL 22-23, 2009 
 
Sensitive but Unclassified - not for Internet distribution. 
 
¶1.  (SBU) Welcome to Brussels.  Your visit comes as the EU 
struggles to develop a common energy policy, internally and 
externally.  The Europeans view energy security in broad 
terms -- to include alternative sources and supply of gas, 
development of additional renewable resources, research into 
clean coal, and the construction of nuclear power plants 
(where politically acceptable).  And overlaying the energy 
security debate here is the imperative that European leaders 
see to combat climate change.  It is thus almost impossible 
to have energy-related discussions in Brussels without 
addressing each of these components of energy security: 
internal EU market liberalization, measures to address 
climate change, and external energy policy. 
 
EXTERNAL ENERGY POLICY 
¶2.  (U) About one-quarter of the EU's energy consumption is 
fueled by natural gas.  Recent International Energy Agency 
(IEA) predictions suggest that gas demand will more than 
double by 2030, while Europe's own production - now primarily 
from the North Sea and Norway - is declining.  Meeting demand 
will require significant increases in gas-imports, as well as 
import capacity.  The IEA estimates that annual European 
demand could increase by about 200 billion cubic meters 
(bcm), or 7 trillion cubic feet, over the next two decades 
from 500 bcm now, while production declines from roughly 300 
bcm to about 200 bcm.  Today Russian gas accounts for about 
one-quarter of the EU's aggregate supply, while imports from 
Norway, Algeria, and the Caspian and Central Asian states 
(through Russia) comprise the remainder.  The dependence on 
Russian gas and infrastructure, however, is much greater for 
many Central European countries that rely on Russia for more 
than 75 percent of their gas imports.  This was highlighted 
during the latest Ukraine/Russia gas conflict.  The EU will 
have to develop a number of new transport pipelines if it is 
to reduce its dependency on gas coming from and through 
Russia. 
 
¶3.  (U) The Commission and Council have proposed a more 
robust role for the European Union in developing an external 
energy policy.  Javier Solana has publicly argued for more 
effective EU coordination on external energy issues, with 
strong support from the Central European states, who are most 
concerned about Gazprom's hegemony and Germany's close ties 
to Moscow.  EU Energy Commissioner Piebalgs (a native of 
Latvia) supports this as well.  The Treaty of Lisbon, 
rejected last year by the Irish but still under 
consideration, contains language intended to give the EU 
additional say over crafting and implementing a common 
external energy policy.  That said, many member states remain 
divided on what the policy should be, and the EU does not 
speak with one voice on external energy issues.  Russia has 
excelled at exploiting these divisions, with Gazprom 
continuing to make inroads into European gas distribution and 
supply networks. 
 
¶4.  (SBU) To date, the Commission has publicly taken an open 
approach to new gas infrastructure projects.  While 
supporting the Nabucco and Turkey-Greece-Italy Interconnector 
(TGI) pipeline projects they have also supported the Russian 
Nord Stream and South Stream projects, even though South 
Stream, which would bypass Turkey under the Black Sea, would 
compete with Nabucco and TGI for supply.  Privately, 
Commission officials have indicated they prefer the 
non-Russian solutions but view South Stream as a convenient 
bargaining tool in transit negotiations with Turkey. 
 
¶5.  (SBU)  A large part of the Commission's efforts to 
advance the Southern Corridor have been focused on Turkey, 
attempting to reach a transit agreement that would be 
feasible for European buyers and Caspian producers and allay 
Turkey's security of supply concerns.  The efforts have 
intensified in the wake of the Russian gas cutoff with the 
emphasis increasingly on Nabucco.  The major obstacle has 
been Turkey's concerns over its own natural gas needs -- 
Turkey is looking for as much as 8 bcm of gas from Azerbaijan 
for its own use, which would effectively sop up the potential 
supplies from Azerbaijan's Shah Deniz II project leaving 
insufficient gas to source TGI and/or Nabucco.  In addition, 
Turkey has declared the opening of the Energy Chapter on 
accession a key component to the talks.  On this issue, there 
is near unanimity with Cyprus being the lone opponent. 
 
BRUSSELS 00000577  002 OF 004 
 
 
 
¶6.  (SBU) The U.S. has been supportive of the EU's efforts to 
open up the Southern Corridor.  U.S. officials have held 
numerous discussions with the Europeans, Turkey, and 
representatives from producer and consumer states with the 
aim of encouraging them to find a middle ground that will 
allow the gas to flow.    From the U.S. standpoint, opening 
the Southern Corridor is a win, win, win scenario: it would 
provide greater independence for the Caspian States, enhance 
Turkey's ties with the West, and strengthen Europe's energy 
security.  However, with respect to Nabucco, gas companies 
such as the German RWE and Austrian OMV have stated that 
Azeri gas will not alone make the project commercially 
viable.  They are therefore exploring other options, 
including gas from Iraq, Russia, and Iran, as well as 
transiting Turkmen gas through Iran.  We have urged senior EU 
officials to increase engagement with Turkmen officials to 
demonstrate firm interest in Turkmen supplies. 
 
RECOVERY PACKAGE 
¶7.  (U) The EU Parliament and the Czech EU Presidency reached 
a tentative agreement on April 16 on a package to boost 
Europe's economy. The 3.98-billion-euro (5.3-billion-U.S. 
dollar), EU-funded package is intended to benefit 
cross-border projects in gas and electricity infrastructure, 
offshore wind energy generation and carbon capture and 
storage.  The plan is part of EU attempts to bolster itself 
against energy shocks and follows this winter's gas crisis, 
caused by a price row between Moscow and transit country 
Ukraine.  The "informal compromise" between the Parliament's 
Industry Committee and the Czech EU Presidency still needs 
the blessing of the full Parliament and European Council.  EU 
Member States have been wrangling for months over what 
projects should benefit from the funds, which are the main 
EU-financed component of the bloc's 200 billion euro economic 
recovery plan. 
 
¶8.  (U) Projects eligible for funds under the package include 
the Nabucco (200 million euros) and TGI (100 million euros) 
gas pipelines.  Another 275 million euros is to go towards 
linking the electricity grids of Finland and Sweden to those 
in Latvia, Lithuania and Estonia, which remain largely cut 
off from EU power markets and dependent on Russian energy. 
Rounding out the list are a number of projects to connect the 
gas and electricity grids, principally in Eastern Europe as 
well as funding for Carbon Capture and Storage and Offshore 
Wind projects.  Some Parliamentarians criticized the plan 
after later drafts left out funding for energy efficiency 
projects but an April 16 compromise seems to have addressed 
Parliament's concerns.  Under the deal, those funds which 
have not been committed by the end of 2010 will be used for 
funding energy efficiency and renewable energy measures. 
 
INTERNAL MARKET - THIRD ENERGY PACKAGE 
¶9.  (U) New energy sector liberalization proposals under 
consideration in the EU could have an important role in 
facilitating distribution of gas from the East, whether from 
Russia or the Caspian region.  The Commission's legislative 
package of two draft directives and three draft regulations 
proposed in September 2007 are designed to ensure greater 
competition and third party access by effectively separating 
supply/production of electricity and gas from transmission 
networks. 
 
¶10.  (SBU) Two key aims of the internal market reforms are to 
increase competition and to interconnect the member states' 
electricity and gas grids.  The potential gas grid 
interconnections could play an important role in enhancing 
European energy flexibility and security.  For many of the 
countries of Central Europe the gas pipelines run one way - 
East to West - leaving these countries heavily dependent on 
Russia for their energy needs.  Currently, if these Russian 
gas supplies are disrupted, there exists no infrastructure to 
bring in alternative supplies, as is the case in Bulgaria. 
Building interconnections among these member states, however, 
would allow for gas to be rerouted from one member state to 
another in such an emergency. 
 
¶11.  (U) The Commission's proposals initially called for 
"full ownership unbundling" in the energy sector.  However, a 
blocking minority of six countries in the Council (led by 
France and Germany) opposed forcing large energy producers to 
give up ownership of their distribution networks and proposed 
 
BRUSSELS 00000577  003 OF 004 
 
 
the so-called Third Option, which allows the continued 
existence of vertically integrated energy companies, but at 
the same time lays down strict conditions to ensure that 
transmission system operators do not discriminate against new 
market entrants. 
 
¶12.  (SBU) The final version of the third energy package 
agreed to between Parliament and Council contains three 
equivalent options for the ownership separation of production 
and transmission activities of gas and electricity companies. 
 The first option implies strict ownership separation of 
energy production and the transmission system. The second 
option presumes the setting up of an independent system 
operator (ISO), to operate as an ownership unbundled operator 
securing energy transmission on another party's assets.  The 
third option provides for legal separation of the 
transmission sytem and energy production by setting up an 
inependent transmission operator (ITO). 
 
¶13.  (SBU) Comment.  The text agreed to by the Parliament and 
Council preserves the carefully structured compromise among 
Member States over ownership unbundling.  In exchange, the 
Parliament won increase consumer protections.  Given the wide 
flexibility on unbundling allowed under the plan, it is 
uncertain whether the package, when implemented, will 
actually accomplish the goal of encouraging more competition 
and building interconnections between member states. End 
Comment. 
 
SECOND STRATEGIC ENERGY REVIEW 
¶14.  (SBU) Last November EU Energy Commissioner Andris 
Piebalgs presented the Commission's 2nd Strategic Energy 
Review (SER) to the Parliament.  The SER focuses on security 
of supply and is intended by the Commission to complete the 
picture in developing a new "Energy Policy for Europe". The 
first SER concentrated on climate change, introducing the 
20-20-20 targets, leading to the proposed new Renewables 
Directive and the revision of the Emissions Trading Scheme 
Directive, as well as the 3rd Energy Package.  The 2nd SER 
contains a wide-ranging energy package which is intended to 
give a new boost to energy security in Europe by: 
 
-- Putting forward a new strategy to build up energy 
solidarity among Member States and a new policy on energy 
networks to stimulate investment in more efficient, 
low-carbon energy networks. 
 
-- Proposing an Energy Security and Solidarity Action Plan to 
secure sustainable energy supplies in the EU and looking at 
the challenges that Europe will face between 2020 and 2050. 
 
-- Adopting a package of energy efficiency proposals aiming 
to make energy savings in key areas, such as reinforcing 
energy efficiency legislation on buildings and energy-using 
products. 
 
¶15.  (SBU) The SER contains a new five-point "EU Energy 
Security and Solidarity Action Plan," focused on:  1) 
Infrastructure needs and diversification of energy supplies 
(including interconnections and new supply corridors); 2) 
External energy relations; 3) Oil and gas stocks and crisis 
response mechanisms; 4) Energy efficiency; and 5) Making the 
best use of the EU's indigenous energy resources (including 
renewables, coal, and nuclear energy).  The plan charts the 
policy priorities for the next Commission, due to take office 
in November 2009. 
 
¶16.  (SBU) In February, EU Energy Ministers broadly endorsed 
the SER, reaffirming their support for infrastructure 
projects to improve gas and electricity interconnections and 
promote large-scale offshore wind.  Ministers also reiterated 
the need to create an external energy policy, with emphasis 
on developing cooperation with Russia, countries along the 
Southern Corridor and the Mediterranean region.  Renewable 
energies, carbon capture and storage (CCS) and nuclear power 
were also highlighted as key to providing a more secure 
energy future. 
 
CONCLUSION 
¶17.  (SBU) To sum up, you are coming to Brussels at a time 
when the EU has a heightened awareness of its energy security 
needs and the importance of its external energy relations. 
The Commission officials and Solana are frustrated by the 
 
BRUSSELS 00000577  004 OF 004 
 
 
continued lack of a common EU energy policy, but as member 
states jealously continue to guard their "energy sovereignty" 
it will be difficult for Brussels to play a greater role. 
 
Murray 
.