Cablegate: Eu Strategy for the Southern Gas Corridor

DE RUEHBS #0534/01 1000524
R 090524Z APR 08




E.O. 12958: N/A

1. (SBU) Summary. In an April 7 meeting, EU Commission
officials discussed the EU's strategy for the Southern Gas
Corridor to bring gas from the Caspian region to Europe.
Jozias Van Aartsen, the EU's Coordinator for the Southern Gas
Corridor, believes the EU and Turkey need to agree to
prioritize the Nabucco pipeline project over the other
contenders. Nabucco would supply Caspian gas into the
Russian dominated market where it would be competition for
Russian gas. The Commission reasons that there is enough gas
in the Caspian region only for one pipeline to Europe to be
built within the next 6-7 years. Van Aartsen plans to
lobby EU Commission President Barosso to make Nabucco the EU
priority and encourage him to push Turkey to do the same when
Barosso visits Turkey on April 11. End Summary.

2. (SBU) On April 7 2008 EST Officers met with EU Commission
officials to discuss the EU's strategy for the Southern Gas
Corridor to bring gas from the Caspian and Middle East to
Europe. Brendan Devlin, assistant to Jozias Van Aartsen who
is the EU's Coordinator for the Southern Gas Corridor, began
by explaining the nature of Mr. Van Aartsen's role in
determining EU policy and negotiating on behalf of the EU.
Van Aartsen's role is as a facilitator who seeks to guide the
negotiations and focus the EU's policy goals. Devlin was
keen to point out that Van Aartsen's statements do not
necessarily reflect the views of the Commission. Van Aartsen
has a wide mandate to push development of the Southern
Corridor, while at the same time giving the Commission a
certain degree of deniability. Van Aartsen can be
contradicted by EU officials and to a certain degree is
considered expendable. However, a Commission official who
attended the meeting indicated that the Commission is largely
in line with Van Aartsen's views.

Van Aartsen's Message to Barosso
2. (SBU) Van Aartsen planned to brief EU Commission
President Barosso on 8 April on how he thinks the EU should
approach the Southern Corridor in advance of Barosso's
planned meeting on 11 April with Turkish Prime Minister
Erdogan. According to Devlin, Van Aartsen will stress five
points with Barosso:

-- The intergovernmental agreement (IGA) for the Nabucco
pipeline should be signed in an inter-governmental commission
in The Hague in June.

-- Turkey should commit to sending a Vice President for the
IGA ceremony.

-- Azerbaijan and Georgia must take part in the IGA.

-- The EU should offer to cooperate with Turkey on the
Turkish domestic gas market.

-- The EU and Turkey should agree that Nabucco is the
priority pipeline for both Europe and Turkey. This means
prioritizing Nabucco over other competing pipelines such as
the Turkey-Greece-Italy (TGI) pipeline and the Trans-Adriatic
pipeline (TAP).

Two Separate Agreements Needed for Nabucco
3. (SBU) Devlin indicated that to accomplish Nabucco, two
separate agreements would be needed. The first step is the
IGA for the entire route with all the countries involved
(Azerbaijan, Georgia, Turkey, Bulgaria, Romania, Hungary,
Austria.) The IGA would cover taxes, right of ways,
jurisdiction, etc., but not transmission. Secondly, Nabucco
will need a transmission agreement between the EU and Turkey.
The IGA falls under the competence of the EU Member States
involved, but transmission is an EU competence. Such an
EU-Turkey transmission agreement would cover all pipelines
(Nabucco, TAP, TGI, etc.). Devlin indicated that TGI broke
EU rules when it included netback terms in the TGI pipeline
IGA. This should have been handled via an EU-Turkey
agreement because transmission is an EU competence.

4. (SBU) Van Aartsen has been encouraging Turkey to sign on
to the Energy Community Treaty so that Turkey can use the
treaty for the transmission agreement. Turkey is an observer
of the Treaty, but not a signatory. Devlin indicated the

BRUSSELS 00000534 002 OF 003

Energy Community Treaty basically applies EU rules and would
require that transmission fees be directly related to costs.
The alternative to using the treaty would be to negotiate an
EU-Turkey bilateral transmission agreement from scratch. Van
Aartsen is arguing against the bilateral approach because
negotiating such an agreement would inevitably bring up
Turkish accession to the EU, Cyprus, and other political
issues. One Member State could potentially block it. Devlin
pointed out that negotiating the Energy Community Treaty took
six years and negotiating a bilateral EU-Turkey transmission
treaty from scratch could equally delay Nabucco by six years
or more (especially with Italy likely to delay so that they
can get TGI first). Van Aartsen has offered Turkey the
option of deleting the parts of the Energy Community Treaty
they don't like (coal fired power plant restrictions, targets
on sulfur, etc.) as long as they keep the relevant sections
on transit.

5. (SBU) Turkey has consistently said no to the Energy
Community idea, but the reasons for their opposition may be
misunderstanding of the treaty. Devlin opined that at a
working level the Turks do not see the opportunities the
treaty would provide; only the perceived restrictions it
would impose. He believes the EU needs to educate working
level Turkish authorities on the possibilities presented by
the treaty and the art of "imaginative implementation" as
practiced by the EU member states.

Why Nabucco?
6. (SBU) In response to EST officer's questions on why
Nabucco should be the priority and not TGI or TAP or any of
the other projects, Devlin responded that the Nabucco
pipeline has the highest strategic importance for the EU.
Nabucco is the biggest project (31 bcm/y) whereas the TGI is
only 8 bcm/y. Nabucco would supply Caspian gas into the
Russian dominated market where it would be competition for
Russian gas and provide an alternative supplier to countries
which only have one choice - Russia. A pipeline into Italy,
where it would compete with Algerian gas, would not have the
same strategic importance, he said. TGI gas won't get out of
the Italian market. The White Stream project would also be a
viable project and has several advantages, but the project is
not very far along and Nabucco is much further advanced. Van
Aartsen believes there is not enough gas for all the pipeline
projects at once. If TGI goes first it would suck up the gas
for Nabucco and delay Nabucco by as much as five years.
Nabucco would provide the strategic benefit of countering
Russian market dominance. And with Nabucco, gas could still
flow to Italy via the hub in Baumgarten.

Timing Matters
7. (SBU) Devlin stressed that timing is critical for the
Nabucco project. This summer a number of long-term gas
contracts in member states will come up for renewal, notably
in Hungary. Negotiations for these supply contracts will be
ongoing through the fall. Devlin opined that if companies
have a 99 percent guarantee of Nabucco gas and 100 percent
guarantee of Russian gas they will opt for Russian gas. He
stressed that the supply gap is now. He believes the member
states need a viable alternative to Russian gas by the end of
the year. If Nabucco doesn't get this batch of contracts
they'll have to rebuild the supply contracts over time, which
could delay Nabucco's startup until 2017. To make Nabucco a
viable alternative to Russian gas, Van Aartsen believes the
EU needs to remove the risk from the equation. As such, Van
Aartsen is looking at possible European Investment Bank
mechanisms to remove the risk for suppliers and consumers
such as "Off take or Pay" guarantees for suppliers
(Azerbaijan, Turkmenistan, etc.) and "Ship or Pay" guarantees
for consumers.

8. (SBU) Van Aartsen is hoping to wrap up the EU-Turkey
transmission agreement by September or November. The EU
wants to have a final investment decision on Nabucco during
the French Presidency. The EU also wants to get a Turkish
agreement on Gaz de France (GDF) participation in Nabucco.
Turkey originally said they excluded GDF on technical
grounds, but later leaked that they did it for political
reasons. Van Aartsen believes French support for the project
is crucial. Van Aartsen is not planning to go to Azerbaijan

BRUSSELS 00000534 003 OF 003

or Turkmenistan until he has a "cash deal" he can lay on the
table. His philosophy is he should hold back until he has a
concrete deal to offer. In Van Aartsen's opinion, according
to Devlin, too many people have been going to Azerbaijan and
Turkmenistan, saying "this is really important", and then
going away again. When Van Aartsen goes, he wants to be able
offer a fixed route and an investment guarantee. The next
technical meeting with Turkey will be in Istanbul on April
21, 2008.

The USG Role
9. (SBU) As for what the USG can do to support the EU's
efforts Gas for Nabucco Devlin requested two things: 1.)
Encourage Georgia and Azerbaijan to participate in the
discussions on transmission and 2.) Get Turkey to propose to
prioritize Nabucco over the other options. Devlin also
suggested the US could play a role in educating Turkish
officials on the concept of a commercial gas hub. The EU is
not opposed to Turkey having a commercial gas hub, like an EU
or a US commercial gas hub -- Not acting as an intermediary,
just a market place, with an operator running things.
Turkey, on the other hand, has been pushing the idea of the
hub acting as an intermediary. Devlin jokingly suggested
flying the staff from Henry Hub to Turkey to teach them how a
commercial hub works. The EU is trying to get Turkey to give
up the idea of being the "Ukraine of the South."

10. (SBU) Comment. Van Aartsen's priorities are not
necessarily the Commission's priorities, but they are
probably close. And Barroso could in the near term wind up
adopting Van Aartsen's objectives. The Commission has trouble
promoting one pipeline over another, because each of the
proposed pipelines would benefit various member states. End


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