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250963 2/26/2010 9:54 10BUCHAREST105 Embassy Bucharest CONFIDENTIAL VZCZCXRO4106 PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR DE RUEHBM #0105/01 0570954 ZNY CCCCC ZZH P 260954Z FEB 10 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 0351 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RHEHNSC/NSC WASHDC PRIORITY RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY C O N F I D E N T I A L SECTION 01 OF 02 BUCHAREST 000105

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STATE FOR EUR/CE ASCHEIBE AND S/EEE SE MORNINGSTAR STATE PLEASE PASS TO USTDA JMERRIMAN

E.O. 12958: DECL: 02/24/2020 TAGS: ENRG, ECON, PREL, PGOV, RO SUBJECT: ROMANIA: LNG NEVER LOOKED SO GOOD

Classified By: DCM JERI GUTHRIE-CORN FOR REASONS 1.4 (B) AND (D).

1. (C) Summary. Excited about the possibility of developing a shortcut to new gas supplies, Minister of Economy and Trade Adriean Videanu relayed his hope to the Ambassador that the Azerbaijan-Georgia-Romania Interconnector (AGRI) proposal, which would twin liquefied natural gas (LNG) terminals in Georgia and Romania, would be developed quickly (reftel). The Minister believes that this project would be a faster, cheaper route than the plodding Nabucco project for bringing Caspian Sea gas to Europe. Still, despite having had a series of very "positive" meetings with Gazprom, the Romanians remain unconvinced that South Stream has a viable future, remaining firmly in the Nabucco camp. On reform in the energy sector, the Minister said plans are well-advanced on energy "bundling" (septel). Videanu eagerly accepted the Ambassador's invitation to visit the U.S. to look at commercial opportunities in the energy sector and took on board the Ambassador's suggestions on improving government transparency and thinking strategically about the allocation of state-aid. End Summary.

2. (C) Videanu opened by saying that he had an "interesting" and "very positive" meeting with Gazprom, where South Stream was discussed. Apparently fearing a negative reaction, he said that Romania had "a duty" to provide Gazprom with information needed to complete a feasibility study of South Stream. Videanu added that Alexander Medvedev (Gazprom's Director for Exports) had asserted to him that South Stream was "not a competitor with Nabucco" but rather a logical next step given the lack of investment in upgrading and maintaining the natural gas pipelines in Ukraine. Relaying Medvedev,s comment that Russia has gas contracts to deliver 3.1 trillion cubic meters of gas to Western Europe between now and 2030, Videanu said that Gazprom,s contention is that South Stream would not draw on the same gas sources as Nabucco (i.e., Caspian Sea gas), a point on which Videanu seemed unconvinced. Still, he was pleased to hear from the Ambassador that the U.S. Government policy should not be seen as directly opposing South Stream. According to Videanu, Romania continues to have a positive relationship with Gazprom on projects to develop underground gas storage facilities, which may ultimately be developed in tandem with natural gas power generation facilities. Still, Romania's latest best hope is the AGRI proposal, which Videanu felt could be largely developed by using existing Azeri gas. The project would make use of Romania's good relationship with Azerbaijan, while logically building on the USTDA-financed feasibility study of an LNG terminal in the port of Constanta. If this facility is built, Videanu said that he would be interested in having U.S. companies, such as ExxonMobil, bid on managing the project.

3. (C) The process of bundling the existing state-owned energy producers into two companies is needed, according to the Minister, because the current situation results in "rigid production" and a "distorted" electricity market. The motivation behind the integrated companies is to create "mixed production" so that the companies simply sell energy, without reference to the generation type. (Note: Post will report in more detail on these plans septel. End Note). Despite currently controlling 90 percent of the market, the Ministry expects that by 2017 the two companies will only account for half of the electricity market due to the many new projects that are scheduled to come on-line in the next seven years. Taking note of Post's concerns about the equities of the Property Fund, a property restitution vehicle with many American shareholders that has significant stakes in the state-owned energy sector, Videanu replied that the plan was to privatize management of the two integrated companies and eventually float them on the Bucharest Stock Exchange, a plan which he believes would protect the value of the assets.

4. (SBU) Turning to commercial issues, the Ambassador noted that Videanu is traveling to France to look at nuclear power and he extended an invitation for Videanu to make a similar visit to the U.S., a proposal which was readily accepted. The Ambassador also raised the case of a large prospective American investor in the energy sector which is interested in applying for state aid. Videanu said that he understood the importance of taking a strategic view toward allocating limited state aid funds and that he would look forward to hearing more about this project.

5. (SBU) With regard to Moldova, the Ambassador noted that the Moldovan President and Prime Minister both remain

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interested in energy interconnections. Videanu agreed that this is also a priority for the Romanian Government, noting that a 110 KW electrical interconnection has been completed, while a separate 400 KW project, partially financed by the European Bank for Reconstruction and Development, is underway. A gas interconnection remains strategically important, but Videanu said that this project remains at the feasibility study phase.

6. (SBU) The Ambassador concluded by mentioning that he and the British, German, Austrian, and Spanish Ambassadors are working together to highlight areas were transparency and the business environment could be improved. The Ambassador informed Videanu that areas such as multi-annual budgeting, constitutional reform, and strengthening the justice system are areas of common agreement. Videanu acknowledged that Romania needs to continue to favorably impress foreign investors, many of whom are looking for progress in these areas. He added that this is a Government-wide project, noting that the ministers meet biweekly, at the Prime Minister's direction, to discuss transparency and biweekly to identify strategies for increasing EU fund absorption.

7. (C) Comment. Gazprom's recent press release, stating that Romania has a "confirmed interest" in participating in the South Stream project appears to have been the genesis for Videanu's request to see the Ambassador soon. He seemed concerned that the U.S. had drawn mistaken conclusions from the press coverage of his meeting with Gazprom, which hinted that Romania was on the verge of joining South Stream. This is not the first time that Gazprom has publicly overstated the degree of Romanian interest in South Stream, and the Minister was anxious to show us that Romania had nothing to hide in its dealings with the company. Rather, Romania sees little upside in not cooperating, especially on low-cost options like providing data for feasibility studies. Ultimately, South Stream remains a fourth choice at best for the Romanians, behind Black Sea LNG, Nabucco, and White Stream. It also assumes that exploration currently underway in the Black Sea reveals no commercially viable offshore natural gas. The only real surprise in the meeting was the degree to which the AGRI concept has seized the attention of Romanian policymakers, who seem willing to push it forward without waiting to see if the Nabucco project will really grow legs and stand on its own. End Comment. GITENSTEIN