PORTUGAL - ENERGY SECTOR OVERVIEW

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
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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
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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

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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
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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

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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
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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