Wikileaks - MCXXX

166853 8/21/2008 13:17 08BERLIN1166 Embassy Berlin UNCLASSIFIED//FOR OFFICIAL USE ONLY 08STATE73058 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