VZCZCXYZ0013
RR RUEHWEB

DE RUEHEG #0084/01 0171506
ZNY CCCCC ZZH
R 171506Z JAN 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7917
INFO RUEHDO/AMEMBASSY DOHA 0223
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

C O N F I D E N T I A L CAIRO 000084 
 
SIPDIS 
 
SIPDIS 
 
DOHA PLEASE PASS TO SECRETARY'S PARTY 
 
E.O. 12958: DECL: 01/13/2028 
TAGS: ENRG ECPO KNNP PREL EG
SUBJECT: SCENESETTER FOR SECRETARY OF ENERGY BODMAN VISIT 
TO EGYPT 
 
REF: A. CAIRO 3464 (NOTAL) 
     ¶B. CAIRO 3406 
 
Classified By: Ambassador Francis J. Ricciardone 
Reasons 1.4 (b) and (d). 
 
¶1. (C) Egypt is addressing the mushrooming energy demands of 
its growing economy and population, but tackling the problem 
will require aggressive action on energy subsidies, increased 
conservation, and maximization of finite hydrocarbon 
reserves.  In addition to its plans for civilian nuclear 
power development, the GOE in recent months has increased 
efforts to both articulate and implement its 
subsidy-reduction and renewable resource development 
strategies.  Your visit provides an opportunity to enhance 
cooperation on civilian nuclear power, encourage Egypt's 
positive steps toward a more market-oriented electricity 
sector, and promote energy-related trade between our two 
countries.  President Bush briefly noted to President Mubarak 
on January 17 his support for civilian nuclear power 
production. 
 
--------------------------- 
Meeting Future Energy Needs 
--------------------------- 
 
¶2. (SBU) With electricity consumption growing at over 7 
percent per year and limited conservation measures in place, 
Egypt faces a tough challenge in meeting demand.  Some local 
experts are forecasting energy demand to grow to 120,000 
megawatts by 2050, up from around 22,000 megawatts at 
present.  Egypt is in the midst of national debate over how 
best to manage the sector to promote economic growth in a 
fiscally-sustainable manner.  Mindful of the potential 
political backlash, Egypt is nonetheless chipping away at its 
financially-crippling energy subsidy entitlements both at the 
industrial and household level.  Energy subsidies account for 
roughly 70 percent of Egypt's estimated EGP 64 billion (USD 
11.6 billion) subsidy bill for 2007/8.  In November, Minister 
of Electricity Hassan Younes raised electricity prices for 
both companies and households by an average of 7 and 11 
percent respectively, and Minister of Trade and Industry 
Rachid Mohamed Rachid announced in early January 2008 that 
Egypt would fully liberalize energy prices by 2009 through a 
gradual lifting of subsidies. 
 
¶3. (SBU) In its subsidy cuts, the GOE is particularly 
targeting heavy industry, which benefits from 70 percent of 
energy subsidies but only employs 10 percent of the nation's 
workforce.  The GOE raised natural gas and electricity prices 
to Egypt's largest industrial consumers (mainly steel and 
cement producers) in September 2007 with a goal of market 
pricing by 2010.  Exempting bakeries and electricity 
generation, Prime Minister Ahmed Nazif raised the price of 
heavy fuel oil by 100 percent in January 2008.  The move will 
markedly increase costs to the building materials industry, 
which has long benefited from well-below-market input costs. 
As a follow-up to gasoline and diesel price increases in 
September 2006, many here expect another round of increases 
this spring. 
 
¶4. (U) In August 2007, the GOE announced plans for a new 
unified electricity law that would provide for private sector 
production and distribution.  As of December 2007, the GOE 
has granted licenses to Egyptian companies to produce 
off-grid power via generators for, among others, as oil 
services company, an industrial complex, and the new campus 
of the American University in Cairo. Egypt has agreed to 
expand its power linkages with Gaza and is embarking on a USD 
33.5 million project funded by the Islamic Development Bank 
to increase transmission and infrastructure to the territory. 
Egypt had been providing only emergency power, but Younes 
announced in December 2007 that capacity at stations feeding 
electricity to Gaza has increased to 87,000 kilowatts. 
 
---------------------- 
Civilian Nuclear Power 
---------------------- 
 
¶5. (C) In your meeting with Minister Younes, you will be able 
to reinforce our joint desire to foster economic development 
through safe, and proliferation-resistant, nuclear energy 
(reftels).  Younes and the GOE are positively disposed toward 
U.S. expertise and equipment, but will question whether we 
will make stepped-up nuclear cooperation with Egypt dependent 
upon Egypt's signing of the Additional Protocol (AP).  The 
Egyptians have made their signing of the AP contingent on 
Israel joining the NPT.  The meeting is a good chance to 
 
examine the growing international support for GNEP and its 
principles.  To us, the senior energy and nuclear 
apparatchiks betray no interest in acquiring the fuel cycle. 
Nonetheless, at least some of the nuclear technical experts 
likely quietly harbor such ambitions as a matter of 
professional and national pride. 
 
¶6. (C) Egypt is moving forward with plans to develop a 
nuclear power program and is working closely with the IAEA in 
developing legislation to formally organize and govern the 
sector (ref b).  The GOE has shared its draft nuclear energy 
bill with the IAEA and expects to put the bill before the 
Egyptian parliament in March 2008.  Younes intends to begin 
the process of selecting an advisor for the construction of 
the first nuclear plant this January, and hopes to have a 
contract signed by the end of 2008.  He told the press this 
week that El Dabaa, on the Mediterranean coast, will be the 
site for the first reactor, but this remains open to 
question.  Seismology tests and other site improvements are 
underway to ensure the suitability of the location.  Chairman 
of the Egyptian Atomic Energy Authority Dr. Aly Islam and 
Chairman of the Egyptian Nuclear Power Plants Authority Dr. 
Yassin Ibrahim, both of whom will likely join in the Younes 
meeting, participated in the DOE-sponsored January 14 - 16 
nuclear power development seminar at Lawrence Livermore. 
 
------------- 
Petroleum/Gas 
------------- 
 
¶7. (SBU) The debate within Egypt continues about whether to 
utilize finite hydrocarbon resources for export or domestic 
consumption.  FDI in the petroleum sector increased to USD 
3.1 billion last year, up from USD 1.8 billion.  Chinese 
investment is small but growing.  In December 2007, the 
Egyptians formed a joint venture with the Chinese to 
manufacture well pipes, and Sinopec has been actively seeking 
other investment opportunities in the Egyptian sector. 
Annual oil production has decreased year-on-year since 1996, 
with current production at 678,000 bpd. Proven reserves as of 
2006 are 3.7 billion barrels. Successful use of new 
exploration and recovery technologies in the Western Desert 
has brightened oil's short-term prospects somewhat, and the 
GOE now expects the Western Desert to add 40,000 bpd to the 
national output.  The Ministry of Petroleum has been keen to 
publicize the September 2007 discovery of commercial volumes 
of oil in Upper Egypt, the first of its kind in the area, 
although industry contacts downplay the discovery.  Egypt is 
also looking to cash in on a growing energy transit market, 
focused on increasing its share in the transport of Gulf 
petroleum to the U.S. and Europe.  Expansion work on the 
SUMED pipeline located alongside the Suez Canal is underway 
with the aim of increasing storage capacity. 
 
¶8. (SBU) Egypt is pinning its near to medium term energy 
hopes on expanding natural gas production, both for export 
earnings (through LNG and the Arab pipeline) and for domestic 
energy provision.  Gas production more than doubled from 
2002-2006, reaching 6.6 bcf.  The contract structure in the 
sector is changing as well.  Minister Fahmy decreed in 
November 2007 that Egypt would now prefer shorter-term export 
agreements (4 - 5 years). Egypt announced in September 2007 
that it would increase its gas exports to Jordan through the 
Arab pipeline by 550 million cubic meters per year.  On 
January 28, the World Bank is expected to approve a USD 75 
million Natural Gas Connection Project for Egypt.  The 
project supports the switch from LPG canisters to natural gas 
connections in the greater Cairo area, thereby connecting 
300,000 households to the grid.  Minister Fahmy has promised 
that natural gas will reach all Egyptian governorates by 2009. 
 
¶9. (U) Egypt also appears set to begin exports of natural gas 
to Israel via pipeline in early 2008, a development that has 
elicited some protest in parliament from opposition MPs.  In 
July 2005, Egypt and Israel signed a long-awaited deal for 
Egypt, through the Eastern Mediterranean Gas Co. (EMG), to 
export 25 billion bcf of natural gas to Israel over a 15-year 
period.  A pipeline is under construction from El Arish, 
Egypt to Ashkelon, Israel to carry the gas.  EMG has the 
exclusive rights to export Egyptian gas to Israel.  Desiring 
to diversify its gas supply beyond Egypt, Israel has been 
lobbying hard to receive the production of British Gas' Gaza 
Marine concession, a Palestinian asset, via pipeline to 
Ashkelon.  BG earlier had entertained plans to bring the gas 
ashore at El Arish due to Israeli intransigence on pricing, 
however under apparent political pressure from Israel and 
HMG, BG is moving toward finalizing a sales agreement with 
Israel.  According to BG, the agreement acknowledges the 
 
field as a Palestinian asset and signals Israel's willingness 
to pay the Palestinians for it through some "transparent 
mechanism," as yet to be determined, to ensure revenues are 
used for "legitimate government purposes."  The sale of the 
gas, which could be brought ashore as early as 2009-10, could 
be worth between USD 60 and 100 million per year for the 
Palestinians for 15 years or more. 
 
---------- 
Renewables 
---------- 
 
¶10. (SBU) Ramping-up of renewable energy production is a key 
component of Egypt's long-term energy strategy, and wind 
energy is at the forefront.  By 2020, Egypt wants at least 20 
percent of its electricity powered from renewable resources. 
Currently hydropower and wind energy provide 13 percent and 
1.3 percent respectively.  In December 2007 Egypt inked a 
deal with the World Bank for a Euro 49.8 million grant to 
help finance the development of the solar-thermal power 
station at Kuraymat, located 65 miles south of Cairo, which 
the GOE tells us should be finished by 2010.  But with 
limited hydropower development options and the high cost of 
solar power, the GOE is pursuing wind energy with vigor.  The 
Egyptian Renewable Energy Authority (EREA) estimates that 
wind farms in the Gulf of Suez, which some international 
experts consider as having optimum wind-generating 
characteristics, could potentially produce 20,000 MW at full 
power.  The EREA tells us that wind power is currently 
producing 520 MW, but is expected to increase to 7,000 MW by 
¶2012.  The Germans and Danes are among the leading the 
international players exploring the Egyptian wind energy 
market.  USAID had performed some work with the GOE in the 
1980's related to wind energy as part of a broader energy 
conservation and environment project, although no recent wind 
energy projects have received U.S. support. 
 
----------------- 
Past U.S. Support 
----------------- 
 
¶11. (SBU) The U.S. has played a major role in the development 
of Egypt's conventional energy infrastructure.  Between 1975 
and 2006, USAID supported nearly every facet of Egypt's power 
sector development, investing USD 1.8 billion in generation, 
transmission and distribution systems, energy policy, 
industry structure and governance, and financial and 
operational stability of productive assets.  USAID 
contributions were by far the largest of any single donor, 
accounting for 22 percent of total foreign assistance in 
power sector development.  Minister Younes in particular is 
likely to emphasize his appreciation for the critical role 
this assistance has played in Egypt's development.  He is 
also likely to express his hope for future USAID 
participation in the sector, which USAID believes is more 
appropriately funded through the private sector under current 
economic conditions. 
Ricciardone