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Cablegate: France: Energy Sector Update

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PARIS 007704

SIPDIS

SENSITIVE

STATE FOR EUR/WE; OES; NP; EB/ESC, AND EB/CBA
USDOC FOR 4212/MAC/EUR/OEURA
DOE FOR ROBERT PRICE PI-32 AND KP LAU NE-80

E.O. 12958: N/A
TAGS: ENRG EPET EIND EINV PREL PGOV FR
SUBJECT: FRANCE: ENERGY SECTOR UPDATE

Ref: (A) Paris 7561

(B) Paris 7373
(C) Paris 7334
(D) Paris 6927
(E) Paris 6660
(F) Paris 5010
(G) Paris 3654

1. (U) This is the fourth in a series of occasional
updates on the French energy sector. Feedback is welcome
to help us make this product as useful as possible for
our inter-agency USG audience.

Contents:
-- Total executive notes decision-making void in Iran
(para 2)
-- Individuals flocking to buy EDF shares despite high
price (para 3)
-- Total posts record quarterly profit (para 4)
-- Total launches gas-to-liquids research program (para
5)
-- Ford to sell two biofuel vehicles in France (para 6)
-- French media (and farmers) increase attention to
biomass and biofuels (para 7)
-- Public debate begins on new nuclear reactor (para 8)

2. (SBU) Total executive notes decision-making void in
Iran: On November 8, EconOff met with Total's new Senior
Vice President for International Relations, Hubert
Loiseleur des Longchamps (HLL), who had just transferred
from heading Total's presence in Angola. (His
predecessor is now in Beijing, charged with consolidating
the company's diverse investments in China.) When asked
about Azadegan, HLL said that the decision making process
in Iran has grinded to a halt by the fact that there is
no Minister. The people the new president has put
forward lacked credentials for the job and the vacancy
has added to diverse struggles among the centers of power
in Iran. With the top seat vacant, no decisions are
being taken at the Ministry as no one dares and no one
feels they have the authority to do so. The result for
Total and others in the oil and gas sector casts a shadow
on an already dark picture of potential deals. After
EconOff cited persistent rumors that Total may be taking
a stake in Azadegan development, HLL opined that the
context is not favorable for any finalizing or signature
of deals. His comment implied a large sense of the term
"context" given proliferation concerns and recent
controversial anti-Israel statements by President
Ahmadinejad.

3. (U) Individuals flocking to buy EDF shares despite
high price: Individual investors appear to be focusing
more on EDF's reputation and quality, as well as the one-
euro price cut that they will receive compared to
institutional investors, and are unflinchingly coming
forward to buy shares despite a higher than initially
expected share price. (Refs B and C detail the long-
awaited partial privatization and initial reactions.) To
date, some 2.5 million individuals in France have been
"won over" by EDF and have signed up to buy shares since
the capital opening began two weeks ago. A number of
bank branches have already placed half of the shares
allocated to them. EDF estimates that the company will
have as many as four million private shareholders. The
deadline for placing the seven billion Euros' worth of
EDF shares is November 15 for individual investors and
two days later for institutions. EDF reportedly spent 18
million Euros on advertising to promote the flotation.
Meanwhile, institutional investors appear wary of the
high flotation price -- between 29.5 and 34.1 euros per
share, depending on supply and demand -- which puts the
value of the company in the neighborhood of 54 to 60
billion euros. This valuation is 20 times EDF's profits.
Other listed groups in Europe tend to be valued at a
factor of no more than 15. So, some analysts fear that
EDF's share price growth could be limited. A rise in
electricity rates, to bring EDF in line with Europe,
could significantly boost its value, but (as a condition
to allow the partial privatization to move forward)
electricity price increases in France are limited to the
rate of inflation until 2007. Institutional investors,
for whom around 50% of the floated stake has been
reserved, may see themselves forced to invest in the
company in any case if it joins the CAC 40 selective
index, as fellow state-controlled group Gaz de France
recently did. The GOF indefinitely postponed the only
other major looming energy sector privatization, nuclear
services company Areva (ref A).

4. (U) Total posts record quarterly profit: On November
4, Paris-based oil and gas company Total posted a 32%
increase in third-quarter profit as soaring oil prices
and strong refining margins more than offset the impact
of refinery strikes (ref D) and hurricanes in the Gulf of
Mexico. Adjusted net profit rose to 3.13 billion Euros
for July through September from 2.76 billion Euros in the
same period of 2004, with a 19% increase in revenue to
38.41 billion Euros. The company said the surge to its
highest ever quarterly profit came despite a 2% decline
in production to 2.43 million barrels of oil equivalent
per day -- mainly due to contract terms that limit
Total's oil field entitlements when prices rise. "At a
time when global demand for petroleum products was
already strong, major disruptions in the Gulf of Mexico
drove oil prices and refining margins to very high
levels," Total CEO Thierry Desmarest said. Downstream,
however, "retail marketing and petrochemicals suffered as
a result of rapidly rising raw material costs." Rising
prices squeezed retail and marketing margins for refined
products, Total said. Strikes that shut down several
French refineries and an outage at Total's Port Arthur
unit in Texas, caused by Hurricane Rita, also weighed on
the downstream business, but only partially offset the
sharply higher refining margins. Chief Financial Officer
Robert Castaigne said Total has launched studies aimed at
increasing the capacity of the Port Arthur unit to
process heavy crude oil some time after 2010. The
project would cost around US$800 million, he said,
according to news reports. The company's results
statement gave no forecast for the full year or 2006, but
said both oil prices and refining margins have remained
high following the U.S. hurricanes.

5. (U) Total launches gas-to-liquids research program:
On November 3, Total announced its launch of a research
and development program aimed at converting natural gas
to liquid forms, which are desirable for their relative
ease to transport. In announcing the launch, company
officials did not disclose specific investment plans, but
did say that the company will set up a pilot unit as part
of the research program, whose main goal is to develop a
new technology to improve efficiency of the Fischer-
Tropsch process, the core element of gas-to-liquids
technology. Total also said it has formed cooperation
agreements with several partners, including Velocys, a
unit of U.S. technology group Battelle.

6. (U) Ford to sell two biofuel vehicles in France: U.S.
auto company Ford announced on November 4 that it would
sell hybrid ethanol/petrol versions of its Focus cars in
France to fleet buyers by the end of 2005, and is
preparing to make the whole range hybrid by the end of
2006, according to the head company representative in
France. At a news conference, Ford France chairman Eric
Saint-Frison said "We plan to apply this technology,
which costs 350 Euros extra per car, to 300 Focus saloon
cars and Focus C-Max minivans intended for local
authority or corporate fleets." Referring to the goal of
broadening the offering to the entire range of their
vehicles available for sale in France, he added that "It
is a genuine business strategy." BP will make the fuel
available to fleet buyers and Ford expects that the
initial output will be enough to justify making tens of
thousands of liters of biofuel. Pure biofuel cannot be
used in France, but must be blended with gasoline.

7. (SBU) French media (and farmers) increase attention to
biomass and biofuels: Reflecting the increased political
attention (ref D) devoted to biofuels and biomass energy,
the mainstream French media is more frequently dedicating
attention to the subject. On November 9, daily newspaper
La Tribune devoted two pages to the possibilities of
"biomasses" as an "energy treasure." The gist of the
piece was that green energy, based on vegetable
resources, will diminish oil costs and CO2 emissions and
create jobs in the countryside. Currently biomasses make
up 4.2% of France's energy needs. Meanwhile, Industry
Minister Francois Loos recently met with representatives
of farmers, biofuel producers, petrol producers, car
manufacturers and car importers as part of a plan to
increase the production of biofuels in France sevenfold
between now and 2010. The aim is to increase the area
under cultivation for biofuels production from 300,000
hectares in 2004 to some two million hectares. Among
other things, the recent meeting discussed the
controversy created by a recently released GOF report
which found that the estimate of the number of jobs that
would be created (26,000) by the increased use of
biofuels is a gross overestimate, and that rather than
create jobs, it would merely protect existing jobs in
rural areas. The report also estimated the cost of each
job at 60,000 Euros, plus 93,000 Euros as a result of a
tax on polluting activities. One of our Industry
Ministry contacts expressed dismay that the GOF's
decision to accelerate its plans to promote biofuels was
based on more advantages that were political than on
economic or scientific data.

8. (U) Public debate begins on new nuclear reactor:
November 3 was the first day of the long-planned public
debate on the EPR (European/evolutionary pressurized
reactor) nuclear reactor proposed to be built in
Normandy, following the cancellation of the first four
meetings due to a boycott by anti-nuclear associations.
Some associations have boycotted the debate on the
nuclear reactor, because questions relating to the
security of the reactor are considered by the French
authorities as "national security" issues and therefore
excluded from the debate. The first French EPR reactor
is to be constructed in Flamanville and is expected to go
into service in 2012. Meetings of this kind are to be
held throughout France over the next three and a half
months, with the purpose of providing information to the
general public before French electricity group
Electricite de France (EDF) makes a formal decision to
construct the reactor. The company is already planning
to submit the plans to its board of directors for
approval in spring 2006.

Stapleton

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