SCENESETTER FOR SECRETARY OF ENERGY BODMAN VISIT

C O N F I D E N T I A L SECTION 01 OF 02 CAIRO 004377

SIPDIS

E.O. 12958: DECL: 07/13/2016
TAGS: ENRG EPET ECON PGOV EG
SUBJECT: SCENESETTER FOR SECRETARY OF ENERGY BODMAN VISIT
TO EGYPT, JULY 18-19, 2006


Classified By: DCM Stuart Jones for Reasons 1.4 (b) and (d)

Secretary Bodman

SIPDIS


1. (C) The U.S. Mission in Egypt warmly welcomes your visit
to Cairo. It provides us the opportunity to enhance the
investment climate and opportunities for U.S. corporations
operating in Egypt's vital petroleum sector. Your meetings
with Minister of Finance Yousef Boutros Ghali and Minister of
Petroleum Sameh Fahmy will allow you to raise the two primary
issues facing U.S. investors here: 1) arrears to producers
from the national oil company, and 2) fuel subsidies that
impinge the profitability of downstream retailers. The
meeting with Minister Fahmy will also provide an update on
developments regarding natural gas fields offshore of Gaza.

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Getting Paid
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2. (C) Apache Oil, the largest U.S. investor in Egypt,
currently has over USD 3.1 billion invested in exploration
and production in Egypt, and has plans to double its
production over the next five years, with an additional USD
3.6 billion in investment. Apache continues to experience
delayed payments from Egypt's state-owned Egyptian General
Petroleum Company (EGPC),at times reaching upwards of USD
100 million. Apache is not alone. EGPC "plays the float"
with all the multinationals. You may wish to reaffirm with
Minister Fahmy that a good way to encourage new investment in
a vital sector is to treat current investors well -- payments
in arrears do the opposite.

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Subsidies
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3. (U) Gasoline prices in Egypt are five to seven times lower
than comparable markets in the region, placing gasoline here
among the cheapest in the world. A liter of 90 octane
gasoline costs LE 1 (USD 17 cents). Official GOE estimates
place the cost of the subsidy at LE 40 billion per year (USD
7 billion),although these estimates were made at a time of
USD 50 per barrel oil. Fuels costs are set nationally, and
the price of 90 octane gasoline has remained static for
fourteen years. The GOE did, however, increase the price of
diesel fuel in 2004 by nearly 50 percent with negligible
flow-through effects on the costs of services. In the
absence of market pricing, and with all possible efficiencies
exploited, downstream retailers require a margin increase to
squeeze any profitability from their retail operations. Such
a margin increase would require a reduction of the fuel
subsidy, however.


4. (C) Plans are reportedly afoot in the Cabinet to raise the
price of 90 octane fuel to LE 1.30 (USD 23 cents),a 30
percent rise, thereby making it just slightly less expensive
than the higher grade 92 octane. While this move would only
negligibly affect the overall subsidy, it would be a major
boost to downstream retailers. Exxon-Mobil, for one, has
plans to invest an additional USD 100 million in Egypt over
the next 6-7 years to upgrade service stations and other
aspects of its retail business. This plan, however, is based
on an assumption that the GOE will reduce the subsidy and
move to more reasonable pricing. The GOE will be wary of any
moves that could spur domestic unrest, however.

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Gaza
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5. (C) Your meeting with the Minister of Petroleum will also
provide an opportunity to seek his views on the development
of natural gas fields offshore of Gaza and plans to bring
this gas ashore in Egypt. According to industry contacts,
British Gas' (BG) recently-announced intention to bring
natural gas production from the Gaza Marine field into Egypt
is on hold due to Israeli non-cooperation on permit requests.
The Palestinian Authority granted BG a 25-year concession in
2000 to develop the field, which lies twenty kilometers off
the Gaza coast, and BG has successfully fought off Israeli
court challenges questioning the validity of the concession.
The field is estimated to contain 1 trillion cubic feet of
gas and, according to BG estimates, could be worth USD 100
million annually in taxes and royalties for the PA
government. Initial negotiations with the GOI to bring the
Gaza to Israel broke down due to disagreements over price and
Israeli worries about revenues being used to finance
Palestinian terrorism. Recent events in Gaza and Lebanon do
not bode well for a speedy resolution. Separately, Egypt
inked a deal with Israel in 2005 to sell 1.7 billion cubic
meters of gas annually over 15 years through a pipeline under
construction by the Egyptian-Israeli consortium Eastern
Mediterranean Gas (EMG).


6. (C) Further development of the site requires ship-based
surveys. Given the location of the site, the Israeli
Ministry of Defense must permit the survey ship to pass
through a small military-controlled zone near the Egypt-Gaza
border. Despite past approvals, BG says that the Israeli MOD
has failed to respond to the current request. Even though
Egyptian proven gas reserves have doubled over the last seven
years, multinational firms here believe that increasing
domestic consumption and slowing production increases could
force a tightening of supply as early as 2009, thereby
reducing LNG exports, and much-needed revenues, from the two
LNG "train" facilities located at Idku.


7. (C) On the political and security front, Egypt remains
fully engaged on Gaza security issues since Israel's
withdrawal of troops and settlers from the Gaza Strip last
September. Egypt's decision to create a new Border Security
Force of 1,000 trained and well-armed personnel troops for
the Gaza border provided Israel with the confidence necessary
for it to depart Gaza at that time. Egypt has improved its
capacity to prevent cross-border smuggling into Gaza, and has
worked to faithfully implement the November 15, 2005
Agreement on Movement and Access - brokered by Secretary Rice
- that provided Gazans an international border outside Israel
for the first time since 1967. Egypt also plays a unique and
activist role in dealing with Palestinian political and armed
factions, including efforts to broker a cease-fire with
Israel and to resolve the crisis sparked June 25 when an
Israeli soldier was kidnapped by Palestinian militants.
Nonetheless, you will find your counterparts dismayed by
Israeli military action in Lebanon.

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Energy Sector Developments
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8. (SBU) Gas exploration, development, and production are
among the brightest spots in the economy, and gas exports
increased significantly in 2005 as new liquefied natural gas
(LNG) plants came on line in the Nile Delta, the Western
Desert and offshore in the Mediterranean. Oil production and
exports, while declining, still play an important role in the
economy. In FY 04/05 the oil and gas sector officially
accounted for approximately 12 percent of GDP and more than
one third of annual merchandise exports. In the first half
of FY 05/06, earnings from oil and gas exports amounted to
about USD 4.8 billion, a 75 percent increase over the same
period in the previous fiscal year. The oil and gas sector
continues to account for the bulk of foreign investment in
Egypt, with participation from industry giants such as
British Petroleum (BP),British Gas (BG),Italy's ENI, and
Shell, as well as leading independent producers such as
U.S.-based Apache. A number of other U.S.-based exploration,
drilling, and oilfield services companies also work in Egypt,
and this sector continues to present some of the country's
best trade and investment opportunities.


9. (SBU) Crude oil production has been in decline for some
years, from a high of more than 920,000 barrels per day (BPD)
in 1995 to an average of slightly higher than 655,000 BPD in
the first ten months of 2005. In 2006 Egypt became a net oil
importer. Gas and gas condensate production and reserves
continue to rise. Over the last five years, production of
natural gas has increased by approximately 75 percent,
reaching more than 5.1 billion cubic feet per day by the end

2005. Proven reserves have almost tripled over the past ten
years to more than 65 trillion cubic feet (TCF). The
government estimates probable reserves at another 40-60 TCF,
but other industry sources are less confident of this figure.

RICCIARDONE