VZCZCXRO4024
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLI #0791/01 0821602
ZNR UUUUU ZZH
R 231602Z MAR 07
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 5705
INFO RUCNMEM/EU MEMBER STATES
RUEHUJA/AMEMBASSY ABUJA 0086
RUEHAS/AMEMBASSY ALGIERS 0061
RUEHLU/AMEMBASSY LUANDA 0537
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEANAT/NASA WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 03 LISBON 000791 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/WE KEVIN OPSTRUP 
 
E.O. 12958: N/A 
TAGS: ENRG TRGY EPET ETRD EIND ECON PO
SUBJECT: PORTUGAL - ENERGY SECTOR OVERVIEW 
 
REF: LISBON 001524 
 
ENERGY SECTOR OVERVIEW 
---------------------- 
¶1. Portugal, a country with just over 10 million inhabitants, 
is heavily dependent on energy imports, with foreign sources 
providing over 80% of its primary energy resources. Crude oil 
and natural gas imports comprise 63% and 13% of the total, 
with coal accounting for 3-5%.  Domestic Renewable Energy 
Sources (RES) fluctuate between 10-20% depending on climactic 
conditions. 
 
¶2. Efforts to alleviate this heavy dependence can be seen 
throughout Portugal's National Energy Policy which focuses on 
supply diversification and liberalization of the gas and 
electricity markets. Beyond seeking new energy suppliers and 
exploration opportunities for natural gas and crude oil, the 
plan calls for the increased role of RES in electricity 
production and facilitates access for third-party suppliers 
to select transport, distribution and supply systems. 
 
¶3. Furthermore, Prime Minister Socrates announced in early 
January that the GOP would contribute to the fight against 
climate change by increasing Portugal's production of 
electricity from RES from 39% to 45% by 2010, and by 
substituting between 5% and 10% of coal usage with biomass or 
other alternatives. 
 
THE CRUDE OIL SECTOR 
-------------------- 
¶4. In 2005, crude oil accounted for approximately 63% of 
Portugal's total primary energy supply, down 5% since the 
1997 introduction of natural gas to the energy market. The 
transportation sector consumes around 43% of crude oil while 
the industrial sector consumes 28%. 
 
¶5. Portugal imports all of its crude oil, with OECD countries 
providing 75% and Galp Energia ) the national gas company - 
supplying the remaining 25%. Nigeria and Saudi Arabia are the 
top two individual suppliers at 23% and 16%, respectively. 
Galp Energia, which dominates the domestic storage, 
transportation, distribution and retail sectors, generates 
43% of its crude oil imports from exploration projects in 
Angola and Brazil. 
 
¶6. The crude oil sector has not been liberalized. European 
Commission Directive 2003/55 on the Internal Gas Market 
allows Portugal to delay market liberalization until 2008. As 
such, the current national energy policy does not call for 
the full liberalization of the crude oil or natural gas 
markets; however, it does allow select third-party suppliers 
access to storage facilities, terminals, and transmission and 
distribution grids. 
 
THE NATURAL GAS SECTOR 
---------------------- 
¶7. In 2005, natural gas accounted for approximately 13% of 
the primary energy supply and saw a sales increase of 5% in 
the commercial and residential markets and 6% in the 
industrial market from 2004. These increases are due to low 
electricity production from hydropower, which like other RES, 
fluctuates based on rainfall and climate. Natural gas usage 
is expected to continue to grow between 4-6% annually until a 
new energy source is introduced on the market or until 
renewable energy systems become more efficient and dependable. 
 
¶8. Portugal has an almost 100% natural gas dependency on two 
international suppliers, Sonatrach of Algeria and Liquefied 
Natural Gas of Nigeria, which respectively supply 61% and 37% 
of all natural gas. As with crude oil, Galp Energia dominates 
the natural gas distribution, storage, and retail markets. 
 
¶9. Natural gas from Algeria is imported via the 
Maghreb-Europe Gas Pipeline (also known as the Pedro Duran 
Farrel pipeline) which starts at Algeria's Hassi R'mel field 
and passes through Morocco and Spain. Liquefied natural gas 
(LNG) from Nigeria is imported via the Sines Port Terminal 
located 150km south of Lisbon on the Atlantic coast. 
 
¶10. In an effort to diversify suppliers of natural gas, 
Portugal entered into discussions with Russia's Gazprom in 
early 2006, including the possibility of joint exploration 
between Gazprom and Galp Energia in Angola. In 2007, the GOP 
also began talks with Algeria's Sonatrach about joint 
 
LISBON 00000791  002 OF 003 
 
 
exploration opportunities with Galp Energia in other parts of 
Western Africa.  To date, no formal agreements have been 
signed with either country. 
 
THE COAL SECTOR 
--------------- 
¶11. All coal, which represents 3-5% of Portugal's primary 
energy supply, is imported - mainly from South Africa (40%), 
Colombia (25%), Australia (15%) and Indonesia (11%).  Its 
usage, mostly for electricity generation in the industrial 
sector, has declined steadily over the last decade due to the 
1997 introduction of natural gas to the domestic energy 
market. 
 
¶12. As part of the National Energy Policy, the Prime Minister 
in January 2007 called for 5-10% of the coal used in energy 
production to be replaced by biomass and other alternatives. 
While decreasing dependence on coal, the plan does not intend 
to completely eliminate coal from its energy mix, according 
to the Ministry of Economy. 
 
THE ELECTRICITY SECTOR 
---------------------- 
¶13. Portugal generates approximately 86% of its own 
electricity and imports 13-15% from Spain via an 
interconnected grid. Energias de Portugal (EDP) dominates the 
domestic electricity sector and owns significant generating 
and distribution assets throughout the Iberian region. 
 
¶14. Unlike the oil and gas sectors, Portugal's national 
energy policy calls for the liberalization of the electricity 
sector.  Legislation adopted in 2005 permits third-party 
suppliers to buy and sell electricity to consumers. However, 
while the new legislation has helped to open the market, 
consumers often experience problems when switching providers 
as viable transfer rules and regulations have yet to be 
drafted. Electricity rates per inhabitant are also among the 
highest in Europe. 
 
¶15. In 2001, Portugal and Spain signed a protocol to create a 
joint Iberian electricity market - the Mercado Iberico de 
Electricidade (MIBEL) ) which will completely integrate both 
electricity markets and regulate the costs of energy while 
increasing the workability of regional electricity grids. Due 
to regulatory delays on both sides, the MIBEL project has not 
yet been implemented. 
 
THE RENEWABLE ENERGY SOURCES (RES) SECTOR 
----------------------------------------- 
¶16. In 2005, RES accounted for 10% of electricity production, 
down from around 20% in 2004. Approximately two-thirds of 
energy produced by RES comes from hydropower. However, 
droughts in 2005 resulted in a reduction of energy produced 
by hydropower. 
 
¶17. Portugal's terrain offers many opportunities for RES; 
wave energy along the Atlantic coast, solar energy in the 
south, and hydro and wind energies in the central and 
northern parts of the country. In general, the country has a 
mild Mediterranean climate with the southern half warm and 
dry, and the northern and interior regions cooler with 
considerable rainfall. The three main rivers, Douro, Tagus 
and Guadiana, provide excellent opportunities for small/large 
hydropower production. 
 
¶18. The National Energy Policy on RES is based on the Kyoto 
Protocol and the European Commission's 2001/77 directive on 
energy consumption and environmental protection. In January, 
the Prime Minister announced that the GOP planned to increase 
its production of electricity from RES from 39% to 45% by 
¶2010. The goal of 39%, set in 2001, was considered quite 
ambitious in comparison to the EU target of 12%. Some GOP 
members, while supportive of the policy's intent, question 
whether the bar has been set too high. 
 
¶19. The new legislation also increases Portugal's biofuel 
targets to 10% by 2010, 4.25% above the EU target, and 
imposes high taxes on the sales of fluorescent light bulbs 
that are not energy efficient. Portugal has less than 10 
biofuel plants, the largest of which has a capacity of 
100,000 tons per year and is owned by Galp Energia. In order 
to meet its 10% target, Portugal would need to at least 
double biofuel production.  This would likely result in a 
strain on domestic farmers to produce the needed raw 
 
LISBON 00000791  003 OF 003 
 
 
materials. 
 
¶20. Below are the GOP's current installed RES capabilities 
and its 2010 goals*: 
 
   INSTALLED RES                 2006 (MW)   2010 (MW) 
   --------------------------------------------- ------ 
   Wind                            1,637       3,750 
   Small/Large Hydro               4,801       5,400 
   Biomass w/ Cogeneration            12         150 
   Solid Waste                        88         130 
   Biogas                              8          50 
   Wave                                3          50 
   Photovoltaic                        3         150 
   Geothermal                         18          30 
   --------------------------------------------- ------- 
   SOURCE: DGGE (Direccao-Geral de Geologia e Energia) 
   *Goals for RES at 39% (goals for RES at 45% are yet to be 
published) 
 
¶21. To achieve these 2010 goals, the GOP has granted RES 
companies special tax incentives, subsidies, and investment 
grants. American companies, such as General Electric and the 
PowerLight Corporation, have already taken advantage of these 
subsidies by investing $75 million in an 11MW solar energy 
plant in the south of Portugal (see reftel). When completed 
in early 2007, it will be the largest photovoltaic plant in 
the world, provide electricity to 8,000 homes, and save over 
30,000 tons of greenhouse gas emissions per year. 
 
COMMENT 
------- 
¶22. Portugal will remain heavily dependent on non-EU imports 
for the foreseeable future despite concerted efforts to 
diversify its energy supply.  Towards this end, it has been 
actively cultivating ties with Russia and the Maghreb, with 
the Foreign and Economic Ministers having traveled to 
Algeria, Libya and Morocco in recent months.  Closer to home, 
the GOP has proposed a highly ambitious RES program.  While 
it may fall short of its targets, the GOP should be applauded 
for its campaign to attract RES investment. With regard to 
nuclear energy, the current Administration has stated that 
they are not pursuing a program, though acknowledge that 
future governments may be inclined to do so. 
Hoffman