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08CAIRO84 2008-01-17 15:06:00 CONFIDENTIAL Embassy Cairo
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DE RUEHEG #0084/01 0171506
R 171506Z JAN 08
					C O N F I D E N T I A L CAIRO 000084 




E.O. 12958: DECL: 01/13/2028


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


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.




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.




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.