Identifier
Created
Classification
Origin
06ROME1005
2006-04-04 04:36:00
UNCLASSIFIED
Embassy Rome
Cable title:  

EUR DAS BRYZA DISCUSSES CASPIAN BASIN NATURAL GAS

Tags:  ECON ENRG EPET RU IR QA IT 
pdf how-to read a cable
VZCZCXRO2582
PP RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHRO #1005/01 0940436
ZNR UUUUU ZZH
P 040436Z APR 06
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC PRIORITY 4291
INFO RUCNMEU/EU INTEREST COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHSI/AMEMBASSY TBILISI PRIORITY 0197
RUEHKB/AMEMBASSY BAKU PRIORITY 0076
RUEHFL/AMCONSUL FLORENCE PRIORITY 1276
RUEHMIL/AMCONSUL MILAN PRIORITY 6875
RUEHNP/AMCONSUL NAPLES PRIORITY 1341
UNCLAS SECTION 01 OF 04 ROME 001005 

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG EPET RU IR QA IT
SUBJECT: EUR DAS BRYZA DISCUSSES CASPIAN BASIN NATURAL GAS
POTENTIAL WITH ITALY

REF: A. ROME 933


B. ROME 834

ROME 00001005 001.4 OF 004


UNCLAS SECTION 01 OF 04 ROME 001005

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG EPET RU IR QA IT
SUBJECT: EUR DAS BRYZA DISCUSSES CASPIAN BASIN NATURAL GAS
POTENTIAL WITH ITALY

REF: A. ROME 933


B. ROME 834

ROME 00001005 001.4 OF 004



1. (U) Summary: In March 17 meetings, GOI officials in the
Ministries of Foreign Affairs, Productive Activities, and the
Prime Minister's office concurred with EUR DAS Matthew
Bryza's assessment of the risk to Italian and European energy
security of Gazprom's dominance of natural gas shipments to
Europe and Italy. GOI officials proposed a conference to
examine the feasibility of a Turkey-Greece-Italy
inter-connector pipeline, agreed that NATO should undertake a
discussion of the "geo-economic" elements of the
Europe-Russia energy relationship, and outlined the GOI
vision of Italy as a Southern European natural gas hub.
Officials at ENI, Italy's largest oil and gas company,
lamented the lack of coordination between government and the
private sector on increasing Italy's sources of energy, and
pointed out that new EU Member States' privatization policies
may aid Gazprom's entry into the European market. ENI
officials, also commenting on the state of Iran's natural gas
industry, concluded that Iran has lost ground to Qatar and
that in the immediate future, most Iranian gas production
will be consumed domestically. End Summary.

Introduction
--------------


2. (U) EUR DAS Matthew Bryza met with GOI and ENI officials
March 17 to discuss energy security and access to Caspian
Basin natural gas. In separate meetings, Bryza discussed
energy security and regional stability issues with MFA
Director General (DG) for Multilateral Economic Affairs,
Giandomenico Magliano; Ministry of Productive Activities
(MPA) DG for Energy Sergio Garribba; the Energy Authority;
and ENI Senior Vice President for Corporate Strategies
Leonardo Maugeri. DAS Bryza's meetings with Deputy
Diplomatic Advisor to the Prime Minister Francesco Talo and
MFA DG for Multilateral Political Affairs Giulio Terzi, which
did not cover energy issues, were reported in Ref A.

Agreement on Risks of Gazporm's Dominance
--------------


3. (U) The Prime Minister's office, MFA, and ENI all agreed
with Byrza's assessment that Gazprom's dominance of the

European natural gas markets is a problem and that Gazprom
needs to be channeled towards market behavior. Although
Garribba, the GOI's leading expert on energy, previously
viewed energy security as a matter of increasing the routes
through which Italy receives Russian gas (reported Ref B),he
and other GOI officials with whom DAS Bryza met were
receptive to introducing new sources of gas, such as the
Caspian Basin, into the Italian and European markets.


4. (U) ENI's Maugeri expressed frustration at ENI's
difficulties with Gazprom. He noted that Gazprom was the
only buyer for natural gas ENI produced in gas fields in
Kazakhstan. This dynamic put ENI in a weak negotiating
position. Maugeri believes Gazprom and the GOR are trying to
restore Russian prestige following a strategy first outlined
by Russian President Putin in an academic essay published in
the 1990,s.


5. (U) Garribba, Magliano, Maugeri, and Talo all agreed that
Gazprom is conducting business in a non-transparent way.
Further, that Gazprom is using its dominance of natural gas
supplies and transmission infrastructure to realize huge
profits, and that its management is focused on stifling
competition, not on maximizing productivity. Magliano and
Garribba agreed with DAS Bryza that introducing Central Asian
gas into the European market using non Gazprom-owned
pipelines would force market-based pricing onto the natural
gas markets, and lead Gazprom to react by streamlining its
operations and introducing more transparency to preserve its
market dominance.


6. (U) Magliano proposed that NATO be used as a forum for
discussion of the political aspects of energy security. He
stressed that Russia "is a partner" for Europe and that the
GOR should be included in these discussions. (Note: In
doing so, he contradicted his subordinate, Gianni Manfredi,
who had told Bryza in NATO meetings the previous day that the
energy security issue should be kept out of NATO. End note.)
Magliano also proposed that the International Energy Agency
(IEA) be "staffed up" to examine the economic aspects of

ROME 00001005 002.2 OF 004


energy security, with an eye on implementing the G8's
Gleneagles agreement on energy and global climate change.
"Energy savings equal energy security," he said.


7. (SBU) Bryza told Talo and Terzi that Russia and Gazprom
had used price and supply fluctuations to manipulate Russia's
neighbors, particularly Georgia and Ukraine. The United
States is encouraging the EU to help support Ukraine's
efforts to take a second look at non-transparent energy deals
to exclude shady middlemen. Noting that renegotiating the
Ukraine-Gazprom agreements could create another short-term
energy crisis for Europe, DAS Bryza said the USG hopes the EU
will accept a short-term shock in exchange for long-term
stability and transparency in Russian energy supplies.

Privatization Aids Gazprom.
--------------


8. (U) Garribba, Terzi, and Maugeri all noted that
privatization of state-owned energy companies in new EU
member states has the unintended consequence of aiding
Gazprom's entry into European energy markets. All noted that
Gazprom, because of its dominance of the European natural gas
and oil markets, has the cash reserves to finance the
acquisition of energy infrastructure throughout Eastern
Europe. Maugeri said privatization has simply moved control
of some Eastern European countries' energy infrastructures
from the government to Gazprom and has not introduced
competition to the market. "Market liberalization needs
supply liberalization," according to Maugeri. Anything else
is simply blind faith in "the animal spirits of capitalism."
In a later meeting, Magliano echoed this statement by saying
that more competition and less vertical integration are
needed throughout the energy industry.


9. (U) Maugeri argued that the EU must slow privatization
until other companies can compete with Gazprom to purchase
state-owned energy assets. He urged the USG and GOI to
support slowing the process down, noting that if large oil
companies like ENI make the case, their arguments are
dismissed as an attempt to stifle competition. Maugeri
argued that major oil company dominance is exaggerated.
Citing an article he wrote for the March/April issue of
Foreign Affairs, "Two Cheers for Expensive Oil," Maugeri
stated that publicly-traded oil companies control less than
eight percent of proven oil reserves, and less than twenty
percent of proven gas reserves. The rest is controlled by
privately-held or state-owned companies.

The Southern Corridor - The Best Route to Competition?
-------------- --------------


10. (U) All of DAS Bryza's GOI interlocutors agreed a
"southern ring" of gas pipelines, including the
Turkey-Greece-Italy inter-connector pipeline (TGI),could
carry Caspian Basin natural gas to Europe via the Caucuses
and Turkey. Further, that the introduction of non-Gazprom
gas into the European market would force Gazprom to respond
to market forces. Garribba views a southern ring of natural
gas pipelines as complementing GOI plans to develop Italy's
role as a "natural gas hub" for Europe.


11. (U) In contrast, Maugeri was dismissive of the TGI and
the GOI natural gas hub strategy. According to Maugeri,
Turkey signed large gas contracts in the 1990s in
anticipation of increased natural gas demand. However,
Turkish demand has not increased; and now the Turks need a
way to re-export surplus gas imported from Central Asia.
Maugeri argued that Italian energy companies should focus on
increasing natural gas flows from Libya or building new LNG
terminals. Maugeri dismissed the GOI vision of Italy as a
natural gas hub as "not economically viable." (Comment:
Maugeri's rhetoric may be motivated by a desire to minimize
ENI's competition within Italy. ENI cannot invest in
additional gas pipelines to Italy because Italian law places
a 67 percent ceiling on ENI's contribution to the Italian
natural gas system through 2010. ENI is already importing as
much gas as it can under current laws. End comment.)


12. (U) In his meeting with Magliano, DAS Bryza noted that
if the TGI and other pipelines are used to move Central Asian
gas, investment sequencing is very important. Specifically,
downstream investors must be assured that a pipeline will be
in place to move the natural gas extracted from Central Asian
gas fields; and investors in the pipeline will have to know

ROME 00001005 003.2 OF 004


that there will be gas to fill the pipelines. Magliano
proposed a feasibility conference to bring upstream and
downstream investors together with banks and financiers to
discuss the feasibility of using TGI and other pipelines to
connect Central Asia to Europe. Magliano proposed the
conference be modeled on that held prior to the construction
of the Baku-Tblisi-Ceyhan pipeline.

The GOI Vision: Italy as Europe's Natural Gas Hub
-------------- --------------


13. (U) Garribba noted that construction of a southern ring
of gas pipelines will complement GOI plans to turn Italy into
a southern European natural gas hub. As envisioned by the
GOI, increasing the capacity of existing pipelines to North
Africa, completing the TGI pipeline, and increasing the
number of LNG re-gasification terminals in Italy will enable
Italy to become a transit country for gas flowing to
landlocked countries in Eastern Europe. Garribba noted that
initially, the TGI would carry "Bluestream gas" owned by
Gazprom, but that in the future the pipeline could carry
Caspian Basin gas, including Iranian gas. Both Garribba and
officials at the Energy Authority cited agreements signed
between the GOI and other governments (Serbia, Romania, and
Slovenia, for example) as signs GOI plans are moving forward.


14. (U) Both Garribba and Magliano emphasized the use of LNG
terminals to increase Italy's sources of natural gas. Both
see LNG terminals as more flexible than pipelines, which have
fixed routes. ENI's Maugeri agreed, and said LNG terminals
are more viable than additional pipelines.


15. (U) Officials at the Energy Authority, Italy's
independent energy industry regulator, told DAS Bryza they
will enact regulatory incentives to speed the construction of
natural gas infrastructure. The Energy Authority's goal is
to speed the completion of the TGI pipeline and the
construction of LNG terminals. The Energy Authority is
reaching out to other energy regulators in the Mediterranean
Basin, including the Balkans, and will host regulatory
workshops to harmonize regulations.


16. (U) Maugeri characterized the GOI "southern hub" plan as
"not economically viable," and views it as an example of bad
government decision making. He called plans to build a
pipeline from Algeria to Sardinia "Mickey Mouse," and added
construction "will never happen." According to Maugeri, the
GOI is entering into agreements with other governments for
pipelines that the private sector doesn't think are viable.
He cited the agreement signed between the GOI and Serbia,
Romania, and Slovenia as an example. (Comment: Maugeri's
pessimism regarding these projects is likely caused by legal
restrictions on the amount of gas that ENI can bring into the
Italian market. Other Italian oil and gas companies, such as
Edison, may not share Maugeri's view. End comment.)

ENI's Thoughts on Iran
--------------


17. (U) During his meeting with ENI officials, DAS Bryza
asked about ENI's experience doing business in Iran. Using
the construction of LNG terminals as an example, Maugeri
stated "it's easier to do business in Iran than in Italy."
Maugeri continued that he does not understand the USG policy
of "isolating" Iran. Pointing out that in the 1930's Italy
became the first country subjected to multilateral sanctions
(by the League of Nations following Ethiopia's invasion),
Maugeri said that sanctions don't work, and that in the case
of Iran, they only unify the otherwise pro-western population
behind President Ahmadinejad,s anti-western regime.


18. (U) Continuing, he said Iran's natural gas industry has
fallen behind Qatar's, and that Iran is unlikely to play a
major role in international gas markets because of Iran's
high domestic demand for natural gas: Iran uses eight billion
cubic meters of natural gas a year domestically, including
gas used for re-injection into oil fields. The South Pars
gas field, in which ENI has a substantial investment, will
not export for some time, according to Maugeri.

Comment
--------------


19. (U) Two themes emerged from DAS Bryza's conversations
with GOI and ENI officials. First, the GOI shares the USG

ROME 00001005 004.2 OF 004


concern over Gazprom dominance of European gas supplies and
wants to find ways to strengthen market forces and channel
Gazprom towards more constructive, market-based behavior.
Second, the disconnect between the GOI and ENI on how to
diversify Italy's natural gas sources is a reminder that the
private sector should be included in discussions on Europe's
energy security. This is especially important since the GOI
and EU expect the private sector to take the lead in
developing the infrastructure necessary to lessen Europe's
dependence on Russian oil. End comment.


20. (U) DAS Bryza did not clear this cable prior to his
departure.
SPOGLI