FRENCH CIVILIAN NUCLEAR: CURRENT AMBITIONS AND FUTURE

C O N F I D E N T I A L SECTION 01 OF 04 PARIS 001980

SIPDIS

E.O. 19528: DECL: 10/28/18
TAGS: ENRG ETRD PREL FR GM
SUBJECT: FRENCH CIVILIAN NUCLEAR: CURRENT AMBITIONS AND FUTURE
BOTTLENECKS

CLASSIFIED BY ECON COUNSELOR STUART DWYER FOR REASONS 1.4 (B) AND (D)


1. (SBU) Summary. In 10/16-17 meetings French officials and private
sector representatives told Special Representative Frank Mermoud that
France wants its national energy industrial groups to be leaders in
the "nuclear renaissance". Expansion is being driven by energy
security and climate change concerns, as well as the rising energy
demands of emergent and populous countries. The French anticipate
bottlenecks and rising costs in labor, forging capacity,
decommissioning, and waste management. The GOF is focused on the
long-term, and says it is working to creating an environment in which
new players will adhere to global energy practices that are safe,
secure, verifiable and environmentally sound. France's industrial
groups are forming strategic alliances with established nuclear
partners. In the United States, EDF says the lack of acceptance of
French engineering for both new and existing nuclear plants is
hurting its relations with MidAmerica and Constellation Energy. End
summary.


2. (SBU) On October 16-17, State Department Special Representative
for Commercial and Business Affairs J. Frank Mermoud, met with the
following officials in the French civilian nuclear sector who gave an
overview of current policies, activities, and future challenges:

-- Alain Bontemps, Secretary General of the French Nuclear Industry
Association (GIIN).
-- Thomas Branche, Head of Public Policy and Oversight at the
Directorate General for Energy and Climate, Sub-Directorate for
Nuclear Industry, Ministry of Ecology, Sustainable Development and
Country Planning (MEEDDAT) and Olivier Aubourg, Head of External
Affairs for the same sub-directorate.
-- Matthieu Louvot, Advisor to the President on Industry, Energy, and
Transport.
-- Francois Scheer, Advisor to the CEO of Areva.
-- Jean-Pierre Benque, Senior Executive VP for Development for North
America, EDF

INDUSTRY STRENGTHS AND CHALLENGES
- - - - - - - - - - - - - - - - -


3. (SBU) GIIN, MEEDDAT, AREVA and EDF outlined for Mermoud what they
see as the French civil nuclear industry's competitive advantages:

-- Long-term capability. France has been consistently active in
nuclear power reactor commissioning from 1977 to 2001.

-- Experience in different technologies. French nuclear industry
works with different reactor design: Pressurized Water Reactor,
Boiling Water Reactor, Pressurized Heavy Water Reactor, Light Water
Pressurized Reactor (VVER).

-- Strong global experience. French firms operate on several
continents: China, Japan, India, South Africa, Finland, Canada,
Russia, South Korea, and the U.S.

-- Adaptive to different regulatory and qualification standards.
French nuclear industry works in countries which reprocess nuclear
fuel and those that don't.

-- Adaptive to different forms of local cooperation. Whether it is
through commercial representation or JVs with technology transfer and
local procurement, French industry's international strategy is to
offer a range of partnership forms.


3. (SBU) French representatives noted the following challenges in the
sector:

-- Decommissioning costs. A large number of early generation nuclear
plants will soon reach the end of their active lives. Decommissioning
is an expensive and time-consuming process which must occur in
phases. The long time frame makes cost estimates difficult and cost
overruns common. EDF is undertaking life extension through partial
investments to upgrade plants, renew licenses and update
certifications. They expect to delay the full decommissioning
process by 10 years.

-- Labor bottleneck. Demographics and labor trends will cause an
acute shortage in the industry, notably in the United States, when
35-45 year old engineers retire. The current young workforce also
needs retraining. In response to the human resources challenge,
aggressive recruitment policies are required now to lure future
college graduates back to the industry. In 2008, Areva's recruitment
schedule is 1,000 employees per month worldwide.

-- Rising energy demands of emergent and populous nations. In the
next 10 years GIIN estimates China will increase its energy demand by
10 percent and India by 9 percent. Pressure to increase nuclear
generation will stress the "unavoidable construction gap" resulting
from concurrent reactor decommissioning, and next generation reactor
construction. There needs to be a global plan to cope with the

PARIS 00001980 002 OF 004


transition in replacing the nuclear fleet.

-- Localization. The civil nuclear revival is attracting countries
with different capacities and economic, commercial, and labor
policies. Countries favoring local labor and procurement must adhere
to international nuclear energy practices regarding building parts,
inspection procedures and the protection of materials from criminals
or terrorists.

-- Waste management. France has to store approximately 10 percent of
its nuclear waste, given its whole-cycle approach. National law
prevents it from managing another country's waste. The risk of waste
mismanagement concerns the public and an accident anywhere could
impact the global industry environment. The process of integrating
new countries into the civilian nuclear community must include
effective safeguards and verification for waste management.

-- Forging capacity. Steel forge production is concentrated in
Japan. Companies that won't need the central reactor-vessel part for
years are placing orders now and making large down payments, but
there won't be enough production to meet building plans for new
reactors. (Note: Areva announced in July a new investment program in
its plant Le Creusot to expand its capacity in ingot production. By
2010, Areva expects to locally produce 100 percent of the components
required to build an EPR. End note.)

-- Uranium stocks. Balancing uranium demand and supply is a growing
European concern that falls under the authority of the European
Atomic Energy Community (Euratom) Supply Agency. The Agency must
ensure equal access to all forms of uranium as a strategic resource
and it has an exclusive right to conclude supply contracts. MEEDDAT
officials said besides management of limited stockpiles, the chief
fear is that uranium falls into the hands of criminals or terrorists.
EDF stocks are reportedly secure until 2020, but the group is
planning for the longer term.

SARKOZY'S STRATEGIC VISION
- - - - - - - - - - - - - -


4. (SBU) Presidential Advisor for Energy Louvot told Mermoud that
President Sarkozy's civilian nuclear plans are part of France's
broader long-term development and cooperation policies. Sarkozy will
be aggressive in establishing a secure international environment for
civilian nuclear development that includes training for personnel,
adequate legal and regulatory controls, transparency, and compliance
with international safety standards.


5. (C) Created in April 2008, the President's Council on Nuclear
Power includes the Prime Minister, the MEEDDAT, Foreign Affairs,
Economy, Research, Defense, and Budget Ministers, the Chief of the
Armed Forces, the Secretary General of the Armed Forces and the
Administrator of the Commission on Atomic Energy. It decides which
countries are acceptable partners for the French nuclear industry.
In simple terms, Louvot said the Council's role is to ensure French
civilian nuclear activity is not associated with another Chernobyl.


6. (C) Although the Council's selection criteria are classified, the
MEEDAT's Branche noted that commercial interests are key, while
safety and infrastructure standards and personnel training
opportunities are equally crucial factors. Elysee Advisor Louvot
said France currently encourages strategic partnerships with
countries with an established nuclear industry, citing China, the UK,
and the United States. In principle, it will not refuse to work with
Middle Eastern/North African countries, but they must follow global
nuclear energy practices. Countries which cross nuclear military and
civilian lines are not eligible. Louvot and MEEDDAT noted ongoing
bilateral discussions with Morocco, Jordan, and the UAE. Louvot said
the dialogue with Algeria and Egypt is "more complex," without
providing additional detail.

FRENCH INTERNATIONAL NUCLEAR AGENCY
-- - - - - - - - - - - - - - - - -


7. (SBU) Once the Elysee country list and industry parameters are
met, the choice on a strategic partnership becomes a commercial one
and falls to EDF or Areva. If one of the companies decides to
engage, the new French International Nuclear Agency (AFNI) steps in
as a fee-based consultancy service to advise strategic partners on
legislative, safety, security, and workforce matters. AFNI's
clientele will include emergent nations wishing to enter into the
civilian nuclear energy field, those who have stopped and want to
start up again, or rich countries with a political desire for energy
diversification (UAE). Throughout the process, AFNI will promote
partnerships with French service providers. AFNI is led by an
inter-ministerial group under the leadership of MEEDDAT's General
Director of Energy and Climate Change.

AREVA GLOBAL STRATEGY
- - - - - - - - - - -


PARIS 00001980 003 OF 004



8. (U) Areva's international advisor Francois Scheer told Mermoud
that France's long standing experience and whole-cycle
non-proliferation approach makes it a unique leader. Areva's overall
strategy is to obtain 30 percent of new nuclear generating capacity
worldwide in the next 30 years. Eighty percent of its activities
focus on countries with an existing nuclear industry. In a country
without a nuclear industry, Areva's approach, which supports
long-term non-proliferation objectives, requires feasibility studies
that can take up to 10 years, establishment of appropriate legal and
regulatory institutions (minimum 2-3 years),seismic studies,
compliance with IAEA standards, and political stability. Broadly
speaking, the earliest a new generation reactor could be built in a
new partner country lacking civilian nuclear experience is 2020
(versus seven years for construction in countries with a nuclear
industry).


9. (C) When questioned on media speculation about the possible
recapitalization of Areva, Scheer explained it would be necessary to
cover current investments in human capital, maintain a growth rate of
10 percent per annum and to set aside money for future
decommissioning costs and industrial capacity expansion. CEO Anne
Lauvergeon wants to maintain Areva's integrated nuclear focus.
Lauvergeon approaches the recapitalization option from an "industrial
logic" that makes potential stakeholders such as Bouygues or Alstom
unattractive. Areva does not want to impose Alstom turbines on its
clients. While the Minister of Finance previously was against
recapitalization, GOF views are evolving and it is now more open to
the option. Scheer concluded that ultimately it will be President
Sarkozy who decides how and when recapitalization occurs.


10. (C) The notion that Areva, EDF, Total, Suez-Gaz are seen as
French national champions may not always sit well with potential
partners, Scheer said, and these groups need to become European
champions based on commercial criteria. Areva is especially active
in creating international strategic alliances via joint ventures. A
case in point is its partnership with Siemens, which is also one of
its most formidable competitors.

AREVA AND THE UNITED STATES
- - - - - - - - - - - - - -


11. (SBU) Scheer confirmed the importance of the U.S. market for
Areva, which started 30 years ago when it cloned Westinghouse
reactors. Now the North American market represents 15-17 percent of
total sales (Asia 19 percent, Europe/CIS 56 percent, Africa/Middle
East 8 percent). Areva uses third generation recycling (COEX) in the
U.S. which eliminates the flow of pure plutonium, a response to
American nuclear non-proliferation concerns. Besides the
Areva-Bechtel consortium, the JV between Areva and Urenco, Enrichment
Technology Company (ETC),provides uranium enrichment centrifuge
technology. Anticipating a rise in American demand for enriched
uranium, ETC will build a second uranium enrichment plant in the
U.S., which will allow for closure of the USEC plant in Paducah, KY.
Areva announced October 23 that it joined forces with Northrop
Grumman to build a plant in Newport News, VA to manufacture heavy
components, including steel forges, for the U.S. EPR generation III
reactor.


12. (SBU) Scheer underscored the positive impact renewed U.S.
interest in the civilian nuclear industry will have on the global
market. France is very happy CH2M Hill is taking the lead in the
UAE, where Areva joined with Total and Suez in a nuclear power plant
project and is offering a range of lifecycle services. The bottom
line, Scheer said, is that the market is global and there is enough
room for all players: Areva, GE, Westinghouse and the Russians.

OTHER AREVA COMPETITORS AND STRATEGIC PARTNERS
- - - - - - - - - - - - - - - - - - - - - - - -


13. (SBU) China and India are Areva's major recent strategic
partners. Areva will build two EPRs in China and provide the
materials and fuel to operate them. China negotiated for strong
technology transfer, whereas India prefers little technology
transfer. In September France and India signed a cooperation
agreement on electrical transmission and distribution production. A
strategic partnership was established between Areva's non-nuclear
Indian subsidiary Areva T and D India and GE consumer and Industrial
India. Areva has been talking with Indian authorities (along with
Russian and American competitors) to sell EPRS to India. Scheer
believes the recent agreement facilitating nuclear cooperation
between the United States and India is helping pave the way for
nuclear expansion.


14. (C) Asked about opportunities in the German market, Scheer, a
former French Ambassador to Germany, explained that France can't push
too hard for change in public opinion, as it would further complicate
the delicate ongoing dialogue with Berlin. The difficult
Franco-German dialogue on civilian nuclear energy is one aspect of
the intricate move to forge a common European energy policy.


PARIS 00001980 004 OF 004



15. (C) Scheer said France wants to convince its European partners
that Russia is part of the European market and the Europeans,
including France, need to collaborate with it. The Russians should
be seen as serious competitors with a strong industrial capacity
offering relatively low costs, Scheer noted.

EDF AND THE U.S.
- - - - - - - -


16. (SBU) Incoming Senior Executive Vice President Development for
North America, Jean-Pierre Benque, told Mermoud he sees a bright
future for EDF in the U.S. and in cutting CO2 emissions.
Standardization of technologies is crucial for the future of the
civilian nuclear industry, Benque said. The purpose of EDF's JV with
Constellation Energy, UniStar, is to provide support for the
expansion of the clean, safe, and sustainable nuclear energy in the
U.S. The creation of UniStar was important for EDF as a means of
covering the transition period between existing nuclear reactors and
new reactors. EDF is exploring life expansion options for operations
and building new nuclear energy plants. "We need to harmonize the
learning curves", emphasized Benque.

CONSTELLATION IS OFF THE TABLE
- - - - - - - - - - - - - - - -


17. (C) Benque said he believes EDF's offer for Constellation Energy
was rebuffed because the United States does not want EDF involved in
existing nuclear plants. EDF is pleased with Constellation as a
partner, but its takeover offer has become political. MidAmerican
can bring money, skill and operations, but its engineering is
outdated. EDF has Areva technology and planned to deploy Areva EPR
reactors in North America using new AP1000 technology. Benque said
EDF would appreciate advice in working with Constellation.


18. (C) With respect to the U.S. market more generally, limiting work
to new nuclear is not enough. There needs to be a balance between
servicing existing operations and building new nuclear plants.
Benque said his impression is that French nuclear engineering is not
welcome in the United States. EDF is favorable to a Franco-American
partnership with MidAmerica Energy, but the package should be on both
new and existing nuclear plants. EDF is not looking to be the leader
in the nuclear field in the U.S., as it understands the sector is
sensitive and touches on national security. Benque suggested that
EDF is open to discussions on working with Westinghouse and using its
technology, particularly if that moves EDF closer to formalizing an
agreement with MidAmerica. (Note: EDF is Constellation's largest
shareholder with a 9.5 percent stake. Constellation and EDF's JV
Unistar will build four next generation nuclear reactors in the
United States.) Mermoud suggested to EDF, Areva and MEEDDAT contacts
that reciprocity for some projects would be a good policy to pursue.
French companies could work more with U.S. companies in France, but
also in third country markets.


19. (U) This cable has been cleared by J. Frank Mermoud.

STAPLETON