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Cablegate: Bulgaria: Energy Update

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DE RUEHSF #0673/01 3291430
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FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6499
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000673

SIPDIS

FOR SPE MORNINGSTAR

E.O. 12958: DECL: 11/17/2019
TAGS: ENRG PREL PGOV BU
SUBJECT: BULGARIA: ENERGY UPDATE

REF: SOFIA 538

Classified By: CDA Susan Sutton for reasons 1.4 (b) and (d).

1. (C) Summary: Since taking power in July, PM Borissov has
shaken up the energy sector by calling into question the
Russian-backed energy projects pursued by the previous
government and emphasizing the need for greater transparency
and diversification. While Bulgaria may continue going
through the motions on South Stream, it is making Nabucco,
interconnectors, and closer cooperation with southern
corridor gas producers the focus of its gas strategy. It has
frozen the Russian-backed Belene Nuclear Power plant, at
least for now, and is investigating U.S. nuclear fuel and
spent fuel storage diversification options. The obstacles
are many. Eager not to lose their privileged place in the
Bulgarian energy sector (and economy), Russian and Bulgarian
energy lobbies are resisting. In certain key areas, they
still have the upper hand. We are urging the government to
act boldly on individual diversification and transparency
projects, which, added together, will represent real change.
End Summary.


THE FUTURE OF RUSSIAN-BACKED ENERGY PROJECTS
--------------------------------------------


2. (C) In August Prime Minister Boyko Borissov's government
announced a full-scale review of all Russian-sponsored energy
projects (the Belene Nuclear Power Plant, the South Stream
gas pipeline and the Burgas-Alexandroupols oil pipeline) to
which the previous government had committed. Borissov had
promised Russian PM Putin an answer on these projects by
November. Our contacts tell us an announcement on the fate
of these projects is likely in early December. This is what
is likely:

3. (C) Belene: The previous government had awarded Russia's
AtomstroyExport the contract to construct two AES-92 VVER
1000 reactors at Belene at an original cost of four billion
euros in 2006. In 2008 Bulgaria brought in the German
company RWE as a 49 percent strategic investor. Since then,
the project, at times referred to here as "the money
machine," has been dogged by cost over-runs, financing woes,
construction delays and rumors of serious safety and quality
assurance concerns. Cost estimates skyrocketed to over 10
billion euros around the same time the Borissov government
took office. Borissov and his energy team immediately began
questioning the terms, conditions and rationale of the
project, and stated Bulgaria would, at a minimum, reduce its
share of the project to 20 percent (down from 51 percent.)
Strategic investor RWE then got cold feet and withdrew from
the project altogether. The Belene project, still consisting
of little more than an empty field, is now frozen, with the
only offer of investment coming from Russia, an option the
Borissov government calls unacceptable.

4. (C) South Steam: The Borissov government originally had
harsh words for South Stream, but after a September
Borissov-Putin telephone conversation and meeting, additional
outreach by Russian Energy Minister Schmatko and Italian PM
Berlusconi, and a steady stream of Russian warnings that
South Stream would bypass Bulgaria if Sofia continued its
feet-dragging, the Bulgarians backed down. Our contacts tell
us that with so many European countries signed on, South
Stream is no longer a Russian project, but a European one.
They have doubts it will be built, but if it goes forward,
Bulgaria doesn't want to be left out. As the EU country most
affected by the Russia-Ukraine gas dispute in January,
Bulgaria is also eager to diversify not only its sources of
gas, but its supply routes as well. The Bulgarian Energy
Holding tells us that Gazprom continues to exert pressure on
Bulgaria to rush decision-making on South Stream in order to
bring Bulgaria to an ultimate investment decision, but
Bulgaria's U.S.-based legal advisers Paul Hastings are fully
engaged in trying to protect Bulgaria's interests in the
project.

5. (C) Burgas-Alexandroupolis: The Borissov Government is
still undecided on the BAP oil pipeline, a joint Russian,
Greek and Bulgarian initiative. The new government most
often cites environmental concerns as the reason it is
dragging its feet on this Bosphorus bypass, but we've heard
that even if these concerns can be satisfactorily overcome,
there is little appetite within the current administration
for this project. If Russian pressure on BAP becomes intense

SOFIA 00000673 002 OF 003


(which it has not been so far), the Bulgarians still could
decide to move forward, but would likely seek a reduction in
the government's 24.5 percent share.


A FOCUS ON DIVERSIFICATION
--------------------------

6. (C) After January's gas crisis exposed Bulgaria's extreme
dependence on Russian energy supplies, even the previous,
Russia-friendly government, began to focus on
diversification. With its desire to rid Bulgaria of the cozy
relationship the last government had with Russia, the
Borissov administration has increased these diversification
efforts. Nabucco is central to Bulgaria's diversification
strategy. During a recent visit of the Nabucco CEO to Sofia,
the Bulgarian Government pledged a 300 million euro
investment into the project. There is still a significant
amount of skepticism about Nabucco's prospects within the
halls of the Bulgarian Energy Holding, but publicly the
Government is fully on-board.

7. (C) Interconnectors: In July the Bulgarian Energy
Holding signed an agreement with the Greek and Italian
companies DEPA and Edison for the construction of a
Greek-Bulgarian interconnection that would allow Bulgaria to
import one bcm of gas through ITGI (the Turkey-Greece-Italy
Interconnector.) The 160 km, 120 million euro pipeline,
called Interconnector Greece-Bulgaria (IGB), would extend
from Komotini in northern Greece to Stara Zagora, Bulgaria.
Bulgaria has applied for 45 million euros in EU funds to
support this project, but we heard of some hesitation in
Brussels to approve these funds. A feasibility study for
this project is in the final stages. Less progress has been
made on potential interconnectors to Romania, Serbia and
Turkey, but these key for Bulgaria's (and Europe's) energy
security and are under consideration.

8. (C) Azeri Outreach/CNG: During a November visit of Azeri
President Aliev to Sofia, Azerbaijan and Bulgaria signed an
agreement on the export of one bcm of Azeri gas to Bulgaria
(which Bulgaria would take through its ITGI interconnector,
and, later, through Nabucco.) The Azeris and Bulgarians also
agreed to study the possibility of sending additional amounts
of compressed natural gas to Bulgaria (and beyond) via
Georgia and the Black Sea. If the initial 60 day study of
this option is promising, the two sides agreed to set up a
joint venture company to perform a full-scale feasibility
study.

NUCLEAR: REAL ALTERNATIVES
---------------------------

9. (C) While the January gas crisis focused attention on the
need for gas source diversification, Bulgaria is just as
vulnerable on the nuclear side. One hundred percent of the
fuel used at the Kozluduy Nuclear Power Plant (which
generates 40 percent of Bulgaria's electricity) comes from
Russia. Bulgaria is also dependent on Russia to take spent
nuclear fuel from these reactors, which Moscow does at
considerable annual cost. These are areas where U.S.
technology offers real diversification alternatives to
Bulgaria. Bulgaria has a unique opportunity to benefit from
a successfully demonstrated USG nuclear fuel supply
diversification program (using Westinghouse technology)
originally designed for a Ukrainian reactor identical to
Kozluduy blocks 5 and 6. This program, combined with
deployment of a U.S. (New Jersey-based Holtec International)
on-site transportable spent nuclear fuel storage system,
could not only save Bulgaria hundreds of millions of dollars
and launch a state-of-the-art technology transfer program,
but also play an important role in increasing Bulgaria's
energy security.

COMMENT: TRANSPARENCY IS ELUSIVE
----------------------------------

10. (C) Even with the Borissov Government's tremendous
political will, bringing transparency to Bulgaria's
notoriously-shady energy sector is a challenge. As the new
government restructures the Bulgarian Energy Holding and
decides which projects to pursue, powerful domestic energy
lobbies are fighting behind the scenes to keep their
representatives in positions of influence. As several
officials have lamented to us, Bulgaria's energy bench is
shallow, making it nearly impossible to find new energy
sector professionals who are not beholden to one or another

SOFIA 00000673 003 OF 003


lobby. Complicating the situation, Bulgaria's long-term gas
supply contracts with Gazprom run out in 2010 and 2012. The
government would like to improve transparency by eliminating
the shady, Gazprom-linked intermediaries that dominate the
gas sector in its next supply contract, but Gazprom and
domestic lobbies are opposed. In addition, we understand
Russian leaders, at the highest levels, have linked a
favorable gas deal with Bulgaria's continued participation in
the big, Russian-backed energy projects. We are urging bold,
individual moves -- nuclear diversification, interconnector
projects, a gas sector transparency initiative -- which,
added together, will represent greater diversification,
transparency and energy security for Bulgaria.


SUTTON

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