Identifier
Created
Classification
Origin
03ROME2598
2003-06-10 17:17:00
CONFIDENTIAL
Embassy Rome
Cable title:  

ENI UPDATE: ITALY'S ENERGY GIANT LOOKING BOTH

Tags:  ENRG EPET ETRD ETTC IT 
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C O N F I D E N T I A L ROME 002598 

SIPDIS


E.O. 12958: DECL: 06/03/2013
TAGS: ENRG EPET ETRD ETTC IT
SUBJECT: ENI UPDATE: ITALY'S ENERGY GIANT LOOKING BOTH
INWARD AND OUTWARD

REF: ALMATY 2071

Classified By: Economic Minister-Counselor Scott Kilner
for reasons 1.5 (b and d)

C O N F I D E N T I A L ROME 002598

SIPDIS


E.O. 12958: DECL: 06/03/2013
TAGS: ENRG EPET ETRD ETTC IT
SUBJECT: ENI UPDATE: ITALY'S ENERGY GIANT LOOKING BOTH
INWARD AND OUTWARD

REF: ALMATY 2071

Classified By: Economic Minister-Counselor Scott Kilner
for reasons 1.5 (b and d)


1. (SBU) Summary: ENI, Italy's dominant energy conglomerate,
is expanding into foreign markets, while consolidating its
position at home. Its significant presence in the Middle
East and Central Asia increasingly is complemented by
expansion within Europe, including recent acquisitions in
Spain and Scandinavia. Domestically, ENI,s acquisition of
shares of Italgas
(Italy,s largest natural gas distributor) allows it to
consolidate its position in anticipation of continued
liberalization under both Italian and EU directives. End
Summary.


2. (SBU) Over the last year, ENI, Italy,s dominant energy
conglomerate, has continued its expansion into markets
outside Italy, while simultaneously consolidating its
position in the Italian market. ENI executives, from
President Roberto Poli on down, tell us of the company,s
satisfaction with the steady, measured pace of its expansion
within Europe. They are pleased with ENI,s operations in
the Caspian Basin, especially the completion of the Blue
Stream gas pipeline from Russia to Turkey and the company,s
significant presence in both the gas and oil sectors of
Kazakhstan.

Caspian Basin - Kazakhstan Up, Azerbaijan Down
-------------- -


3. (C) In a meeting with Ecmin earlier this year, Poli
pointed to Kazakhstan as the keystone of the company,s
Caspian operations. ENI,s role (through Agip KCO) as single
operator of the potentially enormous Kashagan oilfield is
clearly a point of pride for the company -- so much so that
ENI was quick to complain to us last summer when it felt its
operator status was being threatened by consortium partner
ExxonMobil. (Though that dispute's reported origins stem from
criticism of ENI,s performance as operator by its partners,
our contacts have never admitted to any intra-consortium
friction.) ENI has an even bigger stake in the Karachaganak
project in northwest Kazakhstan, where it is co-operator
along with British Gas.


4. (C) Although our ENI contacts tend to downplay ongoing
problems with both the Kashagan and Karachaganak projects,

they have told us that ENI,s relationship with the
Kazakhstani government has hit occasional rough spots. These
include a contract dispute that our contacts tell us was
resolved only when President Nazarbayev intervened to confirm
the sanctity of existing contracts (including the production
sharing agreements ENI has with the GOK). ENI has
characterized the mid-May decision by ENI and most of its
consortium partners to buy out BG,s stake in the Kashagan
project (rather than allow the entrance of two Chinese
companies into the consortium) as a normal business decision.
Our contacts are tight lipped about more recent problems with
the GOK (such as obtaining GOK approval of the Kashagan
development plan, as well as the revocation of the
consortium's zero-rate VAT status). ENI has publicly
acknowledged the delay in getting the development plan
approved. However, our contacts tell us that, for now, the
company is not unduly concerned.


5. (SBU) In contrast to its high hopes for its operations in
Kazakhstan, ENI is unenthusiastic about Azerbaijan,
exemplified by the late 2002 decision to have LukAgip (its
joint venture with Russia,s Lukoil) pull its ten percent
stake out of the Shakh Deniz onshore gas project. ENI told
us that decision rested on a number of factors:
disappointing exploration results, an excess of gas in the
region, lack of interest strategically (especially given its
heavy investment in Kazakhstan),and, tellingly, "problems in
the consortium." ENI was surprised by reports in late 2002
that LukAgip might be reconsidering the decision to pull out,
noting their earlier decision had not changed. The company
apparently remains committed to its five-percent stake in the
Baku-Tbilisi-Ceyhan (BTC) oil pipeline.

Turkey, Greece and Gas to Europe - ENI Cautious
-------------- --


6. (SBU) The completion and inauguration of the Blue Stream


gas pipeline across the Black Sea from Russia to Turkey is,
like the Kashagan project, a point of pride among ENI
executives. ENI,s enthusiasm for Blue Stream (despite the
softened Turkish gas market) is not matched by that for the
potential project to transit gas through Greece en route to
the rest of Western Europe. ENI tells us its continued
reluctance is owed to many factors. Italy,s energy
liberalization law would inhibit it from buying or
controlling such gas, forcing it to seek a long-term contract
to export gas onward from Italy. Moreover, the gas is not
needed in the less industrialized area of southern Italy
where it would enter the country. Most tellingly, ENI is
already committed to importing gas from Algeria (via Tunisia
to Sicily) and, eventually, from Libya. ENI does not believe
gas shipped from the Caspian would be competitive with North
African imports. (Comment: Italian gas regulatory
authorities are much more enthusiastic about bringing Caspian
gas to Italy than is ENI; they are not concerned about the
"oversupply" problem noted in para 7. Authorities see ENI's
stance simply as part of the company's effort to maintain its
continued dominance in the domestic Italian market. End
comment.)


7. (SBU) During an Italy-Algeria energy ministerial meeting
in April to promote a potential Algerian-Sardinian gas
pipeline project, ENI CEO Vittorio Mincato dampened an
otherwise enthusiastic conference by criticizing the proposed
pipeline for its potential contribution towards what he views
as a serious oversupply of gas into Italy. (Italian gas
consumption fell in 2002 from 2001, the first such decline in
decades.) Mincato admitted that the competing Libya-Sicily
pipeline that ENI is constructing, planned during a more
economically propitious time, was bound to aggravate the
problem as well (Mincato acidly noted that the Libya pipeline
will benefit ENI,s competitors by providing them with access
to new gas supplies). Not surprisingly, ENI is not one of the
Italian participants in the Algeria-Sardinia pipeline
feasibility study (which does include ENI competitors Edison
and ENEL). Ever the astute businessman, however, Mincato said
that Saipem, ENI,s offshore construction company, could be
interested in participating in the pipeline's construction.

Iran and Libya - Continued Strong Presence Foreseen
-------------- --------------


8. (SBU) ENI,s interest in both Iran and Libya continues to
be strong. While we are unaware of any new ENI investments
in either country that might raise ILSA concerns, the company
appears to be banking on future positive results from its
ongoing activity. Pointing to its long history in both
countries, predating Ghaddafi as well as the Iranian
revolution, ENI emphasizes that addressing each nation over
the long term is essential.


9. (SBU) ENI executives are more sanguine about Libya these
days than Iran. The long planned Libya-Sicily gas pipeline is
now entering an engineering and pre-construction phase, with
a late 2004 completion date still foreseen. The Wafa natural
gas field, being jointly developed by ENI with the Libyan
National Oil Company, is expected to begin production at the
same time to feed into the new pipeline. ENI,s acquisition
of Lasmo led to its current position as operator of the
Elephant oil field, where it holds a 33 percent stake -
production is expected to begin later this year. Our ENI
contacts say the company works well with Libyan energy
entities. Generally positive trade exchanges between Italy
and Libya (example - GOI Trade Vice Minister Adolfo Urso led
a delegation to Libya April 7-8) provide an encouraging
atmosphere for ENI,s activity there.


10. (SBU) ENI is more concerned about near-term developments
in Iran, where the uncertain political situation of recent
years heightens risk to the company,s operations.
Nevertheless, ENI,s history of riding out the Iranian
Revolution leaves it optimistic it can weather the current
situation. In any case our contacts are hopeful that Iran
will evolve into a more moderate regime, rather than undergo
another revolution. ENI,s multibillion-dollar stakes in
four major projects in Iran (including the Darkhovin oil
field, the first onshore project to be developed by a foreign
company since the Iranian revolution) are indicative of
ENI,s commitment there, despite the risks.


11. (C) In discussing ENI,s operations in Iran and Libya,
Embassy consistently reminds company executives of the


provisions of the Iran and Libya Sanctions Act. In a recent
meeting, Ecmin reminded CEO Poli that the U.S. remains
opposed to investment in both Libya and Iran. While the U.S.
welcomes positive changes in Libya,s behavior, but it must
still comply with all aspects of the UNSC resolutions related
to the Lockerbie bombing (including admission of
responsibility and compensation). Ecmin also underscored the
lack of positive developments in Iran, which continues to
develop WMD, violate the human rights of its citizens, and
support terrorism.

12. (SBU) ENI is closely watching developments in Iraq, and
appears to be counting on the GOI,s support of the U.S.-led
war to give the company a role in the reconstruction and
modernization of the country's energy sector. ENI contacts
have emphasized to us the company,s long history in Iraq
(from the mid 1950s to the 1980s) and their broad experience
in all aspects of petroleum exploration, production and
engineering. ENI has told us the company is particularly
interested in having Italian representation on the petroleum
advisory committee being led by Philip Carroll.

European Expansion - Preparing for a Liberalized EU
-------------- --------------
Market
--------------


13. (U) ENI is in the midst of an expansion drive, investing
in energy companies outside of Italy, particularly elsewhere
in Western Europe. Examples in the last two years include
its acquisition of the UK oil firm Lasmo ($4.2 billion),its
50 percent stake in the Spanish gas company Fenosa (Euro 440
million),and its acquisition of the Norwegian assets of the
Finnish oil and gas firm Fortum ($1.1 billion). In early
2003 ENI announced that it intended to become a major player
in the European natural gas market by 2006, targeting
especially Turkey, Germany and the Iberian Peninsula (with a
goal of 44 BCM in European sales by 2006 compared to 20 BCM
in 2002).


14. (SBU) Downstream, ENI foresees some increase in market
share in selected European markets where it already enjoys
supply advantages and brand awareness. Along with its
selected overseas expansion efforts, our contacts tell us the
company is carefully considering its operations worldwide,
including possibly pulling out of some of the less promising
countries in which it currently operates.

The Home Base - Declining Market, and Market Share
-------------- --------------


15. (SBU) In the last decade ENI has been progressing from a
parastatal holding company to a more integrated oil and gas
company. Many corporate entities that had previously existed
as separate companies (such as Agip Petroli, which oversees
refining and marketing, and Agip Spa, which oversees
exploration and production) have now been recast as divisions
within ENI. There are a few significant exceptions that
remain separate companies (Snamprogetti, Saipam),but our
contacts envision these remaining entities being either
reconstituted as ENI divisions or being sold off over the
next few years.


16. (SBU) The GOI still controls 30 percent of ENI, though
Prime Minister Berlusconi has hinted the GOI might sell a
further share in the company. Although the GOI plays an
important role in selecting ENI,s leadership, our contacts
claim the company receives scant government pressure in terms
of its decisions.


17. (SBU) ENI,s restructuring owes much to ongoing efforts
both within Italy (the Letta Decree) and the EU to liberalize
the energy market. Under the Letta Decree ENI must reduce
its control of the natural gas market in Italy to 61 percent
by 2010. Although the Italian Antitrust Authority ruled in
late 2002 that ENI had violated the decree by exerting
indirect control outside of Italy on gas imports to Italy, it
imposed a token fine in recognition of ENI,s genuine efforts
to stay within the limits of the liberalization regulations.



18. (SBU) ENI has told us that its recent decision to acquire
all the shares of natural gas distributor Italgas (ENI
formerly held 44% percent of Italgas shares) establishes a
strong, integrated commercial arm that would help it form


alliances outside of Italy. Its eventual goal is to market
gas exported from Italy, starting in approximately three
years. Such exports will allow it to stay within the limits
of the Letta Decree while optimizing markets for the
(potential) oversupply of gas slated to arrive in Italy once
the Libya-Sicily Green Stream pipeline begins operation.
SKODON
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2003ROME02598 - Classification: CONFIDENTIAL