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C O N F I D E N T I A L SECTION 01 OF 04 MOSCOW 005585 SIPDIS SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HARBERT, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: DECL: 11/26/2017 TAGS: EPET ENRG ECON PREL PINR RS

SUBJECT: "SECURE GAS SUPPLY FOR EUROPE" -- NORD STREAM MOVING FORWARD REF: A. THE HAGUE 1999 B. MOSCOW 5399 C. TALLINN 737 D. HELSINKI 785 E. WARSAW 1975 F. RIGA 430 Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d) 

------- SUMMARY ------- 1. (C) In a November 15th meeting with emboffs, Nord Stream executives said they expect construction of the gas pipeline across the Baltic to the EU to start mid-2009, with completion of the first of two pipelines in 2010 and deliveries to begin in 2011. Various other contacts with whom we discussed the project also believed the project would likely move forward, though not on this timetable. 2. (C) Hurdles remain, however, including potentially laborious permit processes in environmentally conscious Finland and Sweden, and political opposition from Poland, Estonia, and Latvia. Finnish and Swedish Embassy representatives told us the permit processes in their countries would follow the law but that neither government was opposed to the pipeline in principle. The EC Delegation's energy officer told us the pipeline is welcome in that it would provide route diversification, if not supply diversification, provided that it "follows the rules," something Nord Stream insists it is doing to the fullest. ------------------------------ "SECURE GAS SUPPLY FOR EUROPE" ------------------------------ 3. (U) Nord Stream was established in 2005 as a joint venture between Gazprom (51%) and two German companies, BASF subsidiary Wintershall (24.5%) and E.On-Ruhrgas (24.5%). This November, Dutch energy company Gasunie joined the project (ref A), taking a 4.5% stake from each of the German partners. Nord Stream is headquartered in Zug, Switzerland but the majority of the work is done from the Moscow office. The company will build and operate two gas pipelines, each with a capacity of 27.5 billion cubic meters (bcm), from the Russian port of Vyborg, 1200 km across the Baltic Sea to Greifswald, Germany. The project timeframe sees the first line completed by 2010 and the second by 2012. 4. (SBU) On November 15th and November 22nd respectively, Nord Stream and Wintershall representatives gave us different versions of the same Nord Stream presentation, outlining the project and its status. Quite aware of Western European anxiety over Russia's renewed might and its position as the dominant foreign supplier of energy to the region, Nord Stream's presentation is titled: "Secure Gas Supply for Europe." According to the Nord Stream and Wintershall officials, by 2015, 75% of EU gas consumption will be supplied by imports (up from about 60% today), amounting to an additional annual 230 billion cubic meters (bcm) of imported gas needed by 2015. Much of the company's presentation is devoted to such facts, with the punch line that the EU needs Russian gas and that Russia is a capable and reliable gas supply partner for the EU. ----------------------- MONEY AND GAS AVAILABLE ----------------------- 5. (SBU) By Nord Stream's own estimates the project will cost "at least" 5 billion euros. Yet Finance Director Paul Corcoran was confident that financing would not be an issue. He told us the current credit crunch has actually made the project more appealing to banks. "It fulfills new credit criteria," he said, explaining that it gives banks a long-term energy infrastructure project backed by guarantees from credible and established shareholders with reliable customers for the shipped gas. He said shareholders have already contributed $150 million in capital and that the company will significantly ramp up spending in the coming MOSCOW 00005585 002 OF 004 months so that the partners' combined equity contribution will amount to about $1.5 billion. The remainder will be borrowed. He said company staff, currently numbering about 70, will rise to 100 or more by the end of the year. 6. (SBU) The Nord Stream and Wintershall executives stressed that gas for the pipeline will not come from a dedicated source, but that the pipeline would simply be connected to Russia's existing gas supply system, with Gazprom guaranteeing supply. They added, however, that possible sources of the additional gas to feed the system will come from the Yuzhnoe-Russkoe field, expected to produce 25 bcm annually, and, later, the Shtokman field, expected to produce over 70 bcm per year. Corcoran observed that the operators of the Yuzhnoe-Russkoe had surprised everyone by meeting its deadlines and that it will be on-stream by the end of 2007. By contrast, he admitted that 2015 is "optimistic" for Shtokman gas, but that Nord Stream was not dependent on Shtokman coming on-line by a specific date. ---------------------------- ENVIRONMENTAL CONSIDERATIONS ---------------------------- 7. (SBU) Currently, Nord Stream is in the permit phase of the project, which it had hoped to conclude by the end of 2008. The process is complex, given the need to consult with 9 different national governments and receive specific permits from at least 5. Both Vitaly Yusufov, head of Nord Stream's Moscow office, and Tatiana Krylova, the Deputy Director of Wintershall's Russia office, told us that although Nord Stream has already ordered pipe and begun construction of the Russian land-based facilities, no off-shore construction would begin until all needed permits were in hand. Nord Stream's Corcoran said the company expects to have all permit applications complete by April 2008 and to receive all approvals by "mid-2009" (about six months later than projected in the timeline in the company's presentation). 8. (C) Swedish and Finnish environmental permits are expected to be the most time consuming to obtain. Finnish Embassy Economic Officer Antti Helantera told us November 14th that the Finnish government has no political opposition to Nord Stream (ref D), but that the permit process would have to run its proper legal course. He described the process as one of Nord Stream's potential major roadblocks, calling it "unpredictable." According to Helantera, permits were needed from two different authorities, each with its own appeals process, neither with a time limit for decision-making, and both open to input from the public. He said the Russians would automatically think delays are "political," but only because "they don't understand the process." 9. (C) Swedish Embassy Economic Counselor Stefan Gullgren described Sweden's role and position as similar to Finland's. He said the Swedish government was not opposed to the project, as long as it passed strict Swedish environmental review. "The environment is important to Swedes; there will no special deals  and no political intervention," Gullgren said. He specifically highlighted concern over possible disturbance of chemical munitions thought to lie on the seabed, and the pipeline's effect on sensitive breeding grounds for fish. According to Corcoran, there is no deadline under Swedish law for review of Nord Stream's application, but Nord Stream expects the process to take 12-15 months. Gullgren also noted that a proposed "service platform" (to examine and repair the pipeline as needed) to be built in Swedish waters would become, in effect, "Swedish territory" and subject to Swedish laws and regulations. 10. (SBU) In its presentation, Nord Stream went to great lengths to demonstrate its interest in minimizing potential environmental impacts as well as incorporating stakeholders' input. Corcoran and Yusufov described the company's studies of the Baltic Sea as "the most extensive undertaken by anybody, ever." Relevant to the stranded munitions question, they claimed that through various technologically sophisticated scanning techniques they identified just 22 "objects of concern." Through further analysis, they determined that 12 of those are harmless debris (e.g. anchors), and they were currently using submersible research MOSCOW 00005585 003 OF 004 vessels to investigate the remaining ten. In the end, Nord Stream predicts that only "2 or 3" objects will turn out to be munitions or other troubling discoveries. According to the Nord Stream presentation, the company has also used over 170 different monitoring stations to study various physical and biological parameters that may be affected by the pipeline. 11. (SBU) Wintershall's Krylova said Nord Stream has actively consulted with NGOs and the public in all Baltic Sea countries and would continue to do so. She said company representatives have participated in numerous public hearings in Baltic Sea countries and that they do monthly visits to each affected country to meet with potential stakeholders. As part of its intensive public relations effort, Nord Stream maintains a website in five languages, prints project-related documents in ten languages, and publishes a newsletter in four languages. -------- POLITICS -------- 12. (SBU) Nord Stream's PR efforts are partly aimed at defusing political opposition, as the already complex permit process is further complicated by Russian political relations with the various Baltic Sea littoral states. Poland has been among the most vocal opponents of the project (ref E), which is designed to bypass Poland as a transit state, depriving it of some of its leverage over Russia. Poles reportedly refer to it as the "modern Molotov-Ribbentrop Pact," recalling the division of Eastern Europe between Hitler and Stalin. Dismissing Poland's opposition, Russian MFA European Cooperation Director Dmitry Polyanskiy recently told us (ref B) "Nord Stream is an EU priority and one EU member, even a large one like Poland, cannot hold it up." 13. (SBU) Estonia has been another vocal detractor of Nord Stream. Finland had at first asked Nord Stream to explore a more southern route through Estonian waters. However Estonia, with which Russia's relations are particularly tense, refused to give permission (ref C) for even the studies needed to evaluate the possible alternative route. This refusal caused Nord Stream to revert to its original plan to go through Finnish waters. 14. (C) Latvian Embassy DCM Janis Zamlets told us November 27th that his government's position on Nord Stream is "gray." He explained that Latvians are generally opposed to Nord Stream "in solidarity with Estonia against Russia." Given its "100% dependence" on Russia for gas (ref F), Latvia also fears Nord Stream would allow Russia to cutoff gas to Latvia. Right now, Russia uses gas from storage facilities in Latvia to supply Kaliningrad and St. Petersburg. Nord Stream could provide gas directly to those regions. However, Zamlets said, Latvia could support the pipeline if the company would agree to use Latvia's massive natural underground storage capabilities, a proposal that has gained little traction. Zamlets said Latvia may "make some noise" against Nord Stream, but he conceded it is unlikely to be able to stop progress on the pipeline. ----------------------------- FIRST GAS DELIVERIES BY 2011? ----------------------------- 15. (SBU) Despite public claims by Polish Prime Minister Donald Tusk that the project may be abandoned, everyone with whom we discussed the prospects of Nord Stream, including German Embassy and EC Delegation representatives, felt the pipeline would be built, even if not on the company's timetable. Nord Stream officials Corcoran, Yusufov, and Krylova were all confident that although the project is behind schedule, gas would begin flowing more or less according to plan -- if not by the end of 2010, then in the first half of 2011. Company CEO Matthias Warnig and other project and government leaders have recently publicly claimed the same -- the first gas out of Nord Stream would flow by the end of 2010. 16. (SBU) Yusufov and the other Nord Stream officials added MOSCOW 00005585 004 OF 004 that while hurdles remain, the project "cannot be arbitrarily stopped." They predicted that Nord Stream's environmental assessments would reveal no major effects that cannot be mitigated and explained that under the Espoo Convention, which governs the process of building a cross-border project such as Nord Stream, countries must adequately justify denials of needed permits. Moreover, Corcoran explained that under the EU's "10-E" status, conducted by member states in 2000 and reaffirmed in 2006, securing energy supplies from the northeast (as well as several other directions) was deemed to be in the EU's energy security interest, and thus it would be more difficult for any disgruntled state to block such a project. 17. (C) Torsten Wollert of the EC Delegation in Moscow confirmed as much to us on November 28. Wollert told us that Nord Stream is perfectly acceptable to the EU provided it "follows the rules." He pointed out that regardless of the rhetoric, Nord Stream will essentially replace the long-planned "Yamal-to-Europe 2" pipeline that would have paralleled Yamal-to-Europe 1 through Belarus and Poland. Europe needs the gas, Wollert explained, and Europe's principal concern about Nord Stream is whether there will be sufficient production to fill it. 18. (SBU) Once it lands at Germany's shore, Nord Stream gas is destined to be distributed via Germany's OPAL and NEL internal pipelines. Nord Stream believes that under German law, and given an EU designation that the project is in Europe's energy security interest, Germany can waive third-party access requirements to these pipelines, thus guaranteeing Nord Stream a path to the customers, easing the path for financing. Corcoran pointed out that the consortium's partners have already firmed-up commitments to sell 20-22 bcm/y all the way out to 2035, with WinGas (the Wintershall-Gazprom distribution company in Germany) alone taking 9 bcm/y of this amount. ------- COMMENT ------- 19. (C) Given the clever inclusion of partners and beneficiaries from a host of EU countries, including a UK subsidiary of Italian company ENI to build the pipeline, the project indeed appears politically well-covered. If built, Nord Stream will trade the murky world of Belarusian transit for the more transparent realm of Scandinavian and northern European regulations, and as such help integrate Russia into the global marketplace. The bypassed countries are justifiably concerned about weakened checks against Russian misbehavior, but the principal route for Russian gas will remain overland for the time being so they will not be without influence. Even with the construction of Nord Stream, Russia will still need its overland routes for the foreseeable future. --------- BIO NOTES --------- 21. (C) Nord Stream brings together a collection of old energy, intelligence, political, and financial hands in the panorama of Russian-German relations. Nord Stream's Chairman of the Board is, of course, former German Chancellor Gerhard Schroeder. Matthias Warnig, Nord Stream's CEO, is a long-standing personal friend of President Putin who came to know Putin when the latter served in East Germany. Vitaly Yusufov, who heads the Moscow office of Nord Stream, also has ties to Putin through his father, former Energy Minister Igor Yusufov, who is still Special Advisor to Putin for International Energy Cooperation. Prior to joining Nord Stream, Yusufov was a senior advisor to Aleksander Medvedev, the Deputy CEO of Gazprom and the head of Gazprom's subsidiary Gazpromexport. BURNS