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Cablegate: Scenesetter for Senator Lugar's Visit to Berlin,

VZCZCXYZ0006
PP RUEHWEB

DE RUEHRL #1166/01 2341317
ZNR UUUUU ZZH
P 211317Z AUG 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2002
INFO RUEHFR/AMEMBASSY PARIS PRIORITY 9767
RUEHBS/AMEMBASSY BRUSSELS PRIORITY 0646
RUEHSI/AMEMBASSY TBILISI PRIORITY 0205
RUEHAK/AMEMBASSY ANKARA PRIORITY 0645
RUEHBM/AMEMBASSY BUCHAREST PRIORITY 0196
RUEHUP/AMEMBASSY BUDAPEST PRIORITY 0370
RUEHKV/AMEMBASSY KYIV PRIORITY 0024
RUENAAA/OLA WASHINGTON DC PRIORITY
RUEHBS/USEU BRUSSELS PRIORITY

UNCLAS BERLIN 001166

SENSITIVE
SIPDIS

PLEASE PASS TO H FOR CODEL LUGAR AND RM/F/DFS/FO/AA/CAA

E.O. 12958: N/A
TAGS: AFIN AMGT ASEC OREP PGOV PREL GM
SUBJECT: SCENESETTER FOR SENATOR LUGAR'S VISIT TO BERLIN,
SEPTEMBER 1-2

REF: STATE 73058

1. (U) Mr. Senator: Mission Germany warmly welcomes you to
Berlin. Your visit comes on the heels of the historic
opening of our new Embassy on Pariser Platz on July 4,
preceded by the separate June visits of President Bush and
Secretary Rice. I am pleased that we will be able to host
two of your meetings in our magnificent new facility. The
central theme of your visit -- energy security -- has moved
to the top of the German foreign policy agenda --
particularly in light of the recent events in Georgia.
German officials, Bundestag members, and leading energy
companies are eager to learn about the results of your
visits to Tbilisi, Kyiv, Baku and other key capitals in the
region. In Berlin, you will meet with senior
officials/state secretaries at the Federal Chancellery,
Ministry of Foreign Affairs, Economics Ministry,
Environment Ministry, and Agricultural Ministry; with
members of the Bundestag responsible for energy and foreign
affairs; and with senior representatives from three major
energy firms: RWE, E.ON Ruhrgas, and Wintershall AG.

Political Overview

2. (SBU): Germany increasingly is looking toward the next
federal election, which most likely will take place in
September 2009. Chancellor Merkel remains highly popular,
but polls show that her Christian Democrats (CDU) and their
Bavarian sister party (the Christian Social Union -- CSU)
do not currently enjoy enough support to enable them to
form a center-right coalition with the Free Democrats
(FDP). Consequently, a "Grand Coalition" (CDU/CSU and the
Social Democratic Party, or SPD) may well govern Germany
even after 2009, since other majority coalitions will be
difficult to achieve in the current fragmented political
spectrum. The SPD -- the junior partner in the Grand
Coalition -- is polling at a post-war nadir, with numbers
in the low to mid-20% range, and must contend with the
rising popularity of the new Left Party. The Left Party is
focused primarily on rolling back reforms of the German
welfare state, but also advocates an isolationist foreign
policy that would undermine the transatlantic relationship.

The Crisis in Georgia

3. (SBU) The crisis in Georgia has strongly engaged
Germany's foreign policy leadership and will be a central
topic of discussion in your meetings at the Chancellery,
MFA, the Economics Ministry, and with Bundestag members and
energy companies. After meeting with Russian President
Medvedev on August 15 in Sochi, Chancellor Merkel visited
Georgian President Saakashvili in Tbilisi two days later.
Chancellery spokesman Thomas Steg subsequently warned that
"this war in South Caucasus means a change, a profound
break. One doesn't wish to isolate Russia; however the
relations to Russia must be rethought." In her recent
visit to Tbilisi, Merkel stated clearly her belief that
Georgia "will become a member of NATO, if it wants to."
Merkel, however, has not changed Germany's position
opposing offering NATO's Membership Action Plan to Georgia
at this time. Germany also believes Ukraine is not yet
ready for MAP because of the lack of a national consensus
in the Ukrainian population on NATO membership.

Germany's Energy Landscape

4. (SBU) Germany's energy landscape is shaped by its heavy
dependence on imported sources; rising consumer prices; a
strong, diverse, and constantly growing renewable energy
sector; and a heated ministerial debate on whether to
lengthen the running times of nuclear plants. Net imports
of energy have risen steadily since 1990 although Germany
is the EU's second largest producer of coal and nuclear
energy. Russia is the leading gas exporter to Germany with
a 37% share; Norway, the Netherlands, Denmark and the UK
supply 48%; domestic production provides 15%. Domestically
produced renewable energy has substantially increased in
the last few years. In 2007, consumption in Germany broke
down as follows: 34% oil, 26% coal (14% hard coal, 12%
lignite), 22% natural gas, 11% nuclear, and 6.7%

renewables. Together, coal (46%) and nuclear (22%)
produced two thirds of Germany's electricity (renewables
just 14%, of which one half was wind).

German Energy Policy

5. (SBU) You will be meeting with Economics Ministry State
Secretary Peter Hintze and Environment Ministry State
Secretary Mattias Machnig, who are from the two key
ministries on energy issues. The Economics Ministry has
primary responsibility for fossil fuels and the Environment
Ministry for renewables and nuclear energy.

6. (SBU) A series of energy policy summits hosted by
Chancellor Merkel in 2006 failed to produce agreement on a
national energy policy. In 2000, Germany initiated the
phase-out of German nuclear reactors; the last German
reactor is due to go off line in 2020. Rising energy prices
have generated controversy over the nuclear phase-out and
possible power shortages in the next decade. A policy
change on nuclear energy before the 2009 election, however,
is unlikely.

7. (SBU) Germany initiated a domestic Integrated Energy and
Climate Package (IECP) in 2007 that seeks to reduce CO2
emissions by 36.6% by 2020. Measures to increase the share
of renewables from the current 13% to 25/30% in 2020 have
already passed. More legislation to tighten requirements
in transportation and for building insulation will go to
Parliament in the fall. The German package is supplementary
to the EU Emissions Trading System (ETS), which plans to
substantially increase the share of certificates auctioned
when the third trading period begins in 2013. The SPD-led
Environment Ministry regards the nuclear phase-out as
irreversible and thus supports new coal-fired generators to
replace some nuclear power until renewables can take-over.
However, a campaign by environmentalists to stop coal-fired
generators across the board has already stopped several
projects.

8. (SBU) Germany continues to push its aggressive mid-term
emissions target although most European countries cannot
hope to achieve such a goal. At the Major Economies
Meeting (MEM) in Japan July 7-9, Germany also agreed with
developing nations that not only should the developed world
bear a larger burden to reduce emissions, but that they
also must commit to doing so first -- a position with which
we disagree.

Germany and EU Energy Policy

9. (U) The Germans oppose three key EU energy proposals: 1)
unbundling ownership of energy utilities; 2) restricting
foreign corporations from entering EU energy markets unless
reciprocity is available (the EU's so-called Gazprom
clause); and 3) creating a European super-regulator.

10. (SBU) Germany argues that unbundling favors state-owned
entities (such as those in France) because the split
operation would still be controlled by the same entity --
the state. Germany led a blocking minority in the EU
pushing for a compromise favoring stricter controls rather
than forced sale of transport assets. E.ON, however, broke
ranks last February and negotiated a deal with the EU to
sell its long distance power lines and swap generating
capacity in return for an EU guarantee not to pursue anti-
trust investigations. RWE followed suit with a deal of its
own involving the sale of its long distance pipelines. In
the last two years, the EU has initiated several anti-trust
cases against large German energy corporations.

11. (SBU) On the Gazprom clause, the German Government says
it opposes the regulation on the grounds that it is too
sector-based. Germany likewise opposes a new European
super-regulator because it argues current coordination
among national regulators already serves that purpose.

Germany and Russia

12. (SBU) Germany takes a pragmatic view of its energy

relationship with Russia, which it maintains is "reliable
and independent from political change" and "built on
economic raison d'etre." Officials note that Russia is
equally dependent on the EU countries in order to acquire
necessary new technology and maintain the revenue flow from
Europe. Germany emphasizes the importance of a diversity
of sources in the European energy mix, including from
Central Asia and the Caspian region. On the other hand,
rumors of Gazprom interest in a German energy company
generated considerable public concern and were the main
impetus behind investment security legislation that will go
to the Bundestag this fall.

13. (SBU) Berlin-based Gazprom Germania is a growing force.
Founded in the early 1990's to handle Gazprom's Western
European business, earnings more than doubled in the past
year. Yet the firm delayed its plan to buy shares in
German municipal utilities or regional distributors because
of uncertainties about future European energy policy.
Gazprom Germania is investing in gas storage facilities and
gas power stations in connection with Nordstream and plans
a 400 million Euro ($600 million) gas power plant near the
Polish border.

Gas Pipelines: Nabucco and Nordstream

14. (SBU) You will meet with three key energy companies:
RWE, E.ON, and Wintershall. The Nabucco and Nordstream
pipelines will be at the center of these discussions.

-- RWE and Nabucco:

15. (SBU) RWE, which with 10 billion Euros is Germany's
second largest energy company, joined the Nabucco Gas
Pipeline Consortium in February 2008. In addition to the
Georgian crisis, RWE remains concerned about 1)
insufficient contractual gas supplies to justify investment
(only Azerbaijan has committed supply to date, with Iraq on
the drawing board); 2) Turkish attempts to secure gas for
its domestic market (Turkey is concerned about Russian
supply cuts and wants to secure all gas supplies from
Azerbaijan); 3) Gazprom's rival South Stream Pipeline
project, which is progressing faster than Nabucco; and 4)
construction costs that have spiralled to 7.9 billion
Euros. RWE has up to 18 months to make a final investment
decision. Before the outbreak of hostilities in the
Caucasus, RWE was eager to sign transit agreements by
September or October this year.

-- E.ON and Nordstream:

16. (SBU) After agreement between then Chancellor Schroeder
and Russian President Putin, Gazprom, E.ON and BASF signed
an agreement to build the 1,200 km Nordstream pipeline from
Vyborg, Russia to Greifswald on the German Baltic Coast.
Gazprom holds 51% of the shares. Gazprom and E.ON plan to
build a gas-fired power plant in Greifswald where the
pipeline lands. Gazprom reportedly gave E.ON and BASF
options to take 25% shares each in drilling and
exploitation at the Siberian gas field Yushno Russkoye,
which will feed the pipeline. Whereas BASF quickly reached
agreement with Gazprom, E.ON is still negotiating. The
project is supported by the EU and the Merkel government,
but Poland and the Nordic and Baltic countries have
expressed strong reservations.

-- Wintershall and Nordstream

17. (SBU) Meanwhile, E.ON, which is Europe's largest
commercial energy corporation, is beginning construction of
Germany's first offshore deep water wind farm. Its gas arm,
E.ON Ruhrgas, still enjoys a 50% share since liberalization
of the gas market. Ruhrgas has imported gas from Russia
since the first pipeline to Western Europe went into
operation in 1973 and has long term gas contracts until
2026. It owns a 6.5% share in Gazprom and is the only
foreign entity to hold a seat on its supervisory board.
Despite this, E.ON Ruhrgas has been unable to reach
agreement on a share of the Russian Yushno Russkoye gas
fields. Recently, the company indicated it wants to reduce

its dependence on Russian gas and diversify its suppliers.

18. (SBU) Wintershall is the oil and gas subsidiary of the
chemicals company BASF and Germany's largest oil and gas
producer. Wintershall founded Wingas, a joint venture with
Gazprom that is now a major gas trader and operator of gas
storage facilities. Wintershall has supply contracts with
Gazprom until 2030. In 2006, BASF agreed to take a 35%
share in the Yushno Russkoye field which will supply
Nordstream. In return Gazprom increased its share in
Wingas to 50% minus one share and took a 49% share in two
Wintershall oil operations in Libya. Wintershall argues
that Nordstream will increase mutual dependence and make it
harder for Gazprom to operate unilaterally. Wintershall
also formed a joint venture with Gazprom, ZAO Achimgaz, in
2003 to exploit the west Siberian Urengoi gas field.

Agricultural Biotechnology

19. (SBU) Your program will also include a meeting with the
State Secretary of Agriculture, Gert Lindemann, where the
major topics of discussion will be biotechnology and bio-
energy. Germany, which generally follows the EU position on
biotechnology, has either abstained or voted against the
approval of new biotech events. The formation of a Grand
Coalition government in 2005 raised hopes for greater
acceptance of biotechnology in German crop production
practices. However, Agriculture Minister Seehofer's
enthusiasm waned as the Green Party and NGOs intensified
their campaign against biotech. Still, acceptance of
biotechnology by German farmers is growing, particularly in
the eastern part of the country where farms are larger. In
the first several months of 2008, German farmers registered
an estimated 4,382 hectares of farmland for the cultivation
of Bt corn varieties vs. 2,685 hectares for the entire 2007
crop year. While Merkel is more open to biotechnology,
Seehofer leans toward the environmental groups,
particularly Greenpeace, encouraging importers to look to
Russia and the Ukraine for non-biotech products.

20. (SBU) Government and industry are well aware that the
EU's inability to approve the numerous outstanding biotech
products could result in trade disruptions and effectively
shut the EU from the world market for animal feed protein.
(As the second highest ranking official at the Agriculture
Ministry and expert on these issues, Lindemann fully
understands the stakes in question.) Higher animal feed
prices are beginning to intensify calls by German farmers
and industry representatives to make changes in the EU
approval policies. (Note: The EU's biotech policies have
exacerbated price hikes in animal feed by virtually closing
the market to U.S. corn gluten feed.) With a limited
amount of land and strict crop rotation requirements,
Germany is unlikely to have enough plant material to reach
its bioenergy goals. These developments pose a growing
dilemma for Germany's politicians.


TIMKEN JR

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