FRANCE: ENERGY SECTOR UPDATE

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SUBJECT: FRANCE: ENERGY SECTOR UPDATE


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1. (U) This is another 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:

-- French PM calls for EU Energy Summit and EU Energy Chief (para
2)
-- EU energy supplies dominate France-Germany-Russia talks
para 3)
-- France to introduce biofuel "green pumps" (para 4)
-- The GOF energy bill: contents and timetable (para 5)
-- Privatization of GDF (para 6)
-- French-style implementation of EU energy deregulation (para 8)
-- French union opposition to further privatization of GDF weak so
far (para 9)


2. (U) French Prime Minister Dominique de Villepin on September 22
called for an energy summit bringing together European Union
countries and the main neighboring oil and gas-producing countries.
De Villepin announced that the summit should take place early next
year and include major energy producers Russia, Algeria, Norway and
countries such as Kazakhstan and Azerbaijan. "At a time when energy
occupies an increasingly important role in our exchanges with these
countries, it is time for us to conclude agreements which
specifically deal with this issue," he explained. He further
proposed that a new post of "special representative for energy" be
set up at the European level. He suggested that such a
representative would work closely with the EU's foreign policy chief
Javier Solana. "We would carry more weight in negotiations with the
producers by being able to speak with one voice," de Villepin noted.



3. (SBU) EU energy supplies were at the forefront of the September
23 summit near Paris between the leaders of France, Germany and
Russia. The French press said that the talks stressed the EU's
eagerness to avoid a repeat of January's gas crisis, when Gazprom
switched off its gas taps to Ukraine and impacted gas supplies in
western Europe. French papers further noted Russia's apparent drive
to assert control over the country's vast energy reserves and muscle
out foreign energy majors in favor of state-backed Russian ones.
Earlier, they had given prominent coverage to Russia's alleged
threat to revoke a license for French group Total to develop the
Kharyaga oil field, accusing it of excessive delays. Contacts told
us Putin reportedly said that Russia was a law abiding country that
would honor its commitments so long as firms investing in Russia
followed Russian law and their Production Sharing Agreements. The
Franco-Russian cooperation deals clinched during the summit that
were worth more than 10 billion dollars were not in the energy
sector, but rather in transportation and aviation.


4. (U) French Finance, Economy and Industry Minister Thierry
Breton revealed on September 24 his intention to launch biofuel
"green pumps" serving bioethanol, which will offer motorists "a
green fuel that costs much less." The announcement follows an
earlier series of proposals by the European Commission to encourage
a switch to green fuels.


5. (U) The GOF energy draft bill presented to the National Assembly
on September 7 would fully liberalize the French electricity and gas
markets on July 1 2007, as required by two 2003 EU directives. At
the same time, the bill would expedite the further privatization of
gas utility Gaz de France (GDF) prior to its 70.8 billion euro
merger with Suez, the second largest electricity generator in
France. Parliamentary debate is taking place under a fast-track
procedure, which requires only one reading by both houses, followed
by re-conciliation procedures to agree on a final text to be voted
on by both houses. The National Assembly is expected to vote on the
bill on October 3.


6. (SBU) On September 27, the National Assembly approved the
controversial Article 10 of the GOF energy draft bill, providing for
the further privatization of Gaz de France (GDF). This article
enables the GOF to reduce its minimal shareholding in GDF from 70
percent to a third, thus paving the way for GDF's merger with Suez.
The EU Commission has allowed the French Government to retain a
"golden share" protecting GDF's gas distribution network, liquefied
natural gas terminals and storage depots from takeovers. Unveiled
last February by Prime Minister Dominique de Villepin from his
office, with the chairmen of both companies at his side, the deal
was brokered to ward off hostile advances form Italian energy group
Enel. (Note: AFEP, the French private enterprise business
association, told us they found the sight of a French PM announcing
the deal in his office "very shocking." End Note).


7. (U) Even though the French administration has championed the
merger, several other processes could derail the deal. The Senate
must also pass the bill after the National Assembly does so on
October 3. The European Commission must clear the merger. The
Commission prolonged its review of the merger proposals from the
original October 25 deadline to November 17 after concessions the
two companies provided in September failed to assuage concerns.
Finally, Suez share holders must vote for the privatization.
Tensions between France and Italy were eased somewhat when de
Villepin and his Italian counterpart Romano Prodi met in Rome
earlier this month to boost their two countries' cooperation in the
energy sector. The two countries' industry ministers met in Paris
on September 28 in a bid to further defuse the situation.


8. (SBU) The original GOF energy draft bill's opening articles gave
domestic consumers the right to choose their electricity and gas
providers, in line with EU energy directives that come into force on
July 1, 2007. The text recently adopted by the National Assembly
members (yet to be approved by the Senate),however, agreed to
maintain government-regulated gas and electricity tariffs for an
indefinite period beyond 2007. The National Assembly also
transformed the role and make-up of the French energy regulatory
authority (CREG),which Members criticized as too independent and
too market-oriented. Cambridge Energy Research Associations
Electricity and Gas Director Jean-Marie Chevalier told us that with
elections in the offing Parliamentarians wanted to showing the
French people "they are protected" from EU liberalization and market
realities.


9. (SBU) Privatization is a sensitive issue for France's national
trade union federations, traditionally quite strong in France's
energy sector. However, so far, the unions have not succeeded in
challenging the GOF's energy draft bill. They oppose both market
deregulation and the further privatization of GDF. Organized
labor's first attempt to organize strikes and demonstrations on
September 12 failed miserably. However, the major trade union
federations have announced that they plan to organize further
demonstrations on October 3 and 14. According to protest organizers
the privatization of GDF may lead to 20,000 lost jobs.

Stapleton