US embassy cable - 05PARIS7704

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