EDISON ITALIA OUTLINES THE WAY FORWARD FOR

UNCLAS ROME 001667

SIPDIS

SIPDIS

BAKU: PLEASE PASS TO EUR DAS MATTHEW BRYZA

E.O. 12958: N/A
TAGS: ENRG EPET AZ TU GR AL IT
SUBJECT: EDISON ITALIA OUTLINES THE WAY FORWARD FOR
TURKEY-GREECE-ITALY NATURAL GAS PIPELINE

REF: A. ROME 1005


B. ROME 834

Sensitive but unclassified. Not for Internet distribution.


1. (SBU) Summary. A/EcMin met May 25 with Roberto Poti,
Edison Italia's Vice President for Corporate Development, to
discuss Edison's investment in the Turkey-Greece-Italy
Interconnector pipeline designed to ship Azeri natural gas to
Europe. Edison has partnered with DEPA, Greece's state-owned
gas transport company, in the Greece-Italy portion of the
pipeline. Edison has committed 175 million euros to the
trans-Adriatic natural gas pipeline with an annual capacity
of eight to ten billion cubic meters of gas. Poti also
briefed A/EcMin on Edison's presence in Iran, where Poti said
the company has no "impressive" investments or ongoing
operations. End summary.

======================================
The Turkey-Greece-Italy Interconnector
======================================

One pipeline, three sections
--------------


2. (SBU) Poti said the Turkey-Greece-Italy (TGI)
Interconnector, for which it has partnered with the Greek and
Turkish national oil companies, is a "strategic" project for
Edison. Construction and financing of the TGI Interconnector
can be divided into three parts. According to Poti,
construction of the first portion of the pipeline, from the
Shah Deniz natural gas field in Azerbaijan to Erzurum,
Turkey, will be funded by the Shah Deniz consortium and will
be finished by the end of 2006. Poti listed British
Petroleum, Statoil, and SOCAR (the Azeri national oil
company) as members of the constortium. The second leg of
the pipeline, running from Erzurum, Turkey, to the
Turkey-Greece border will involve upgrading existing Turkish
natural gas pipelines and building a pipeline connecting
Turkey and Greece. Poti anticipates completion of the
Turkey-Greece portion of the pipeline by the end 2007. The
final leg is the Italy-Greece Interconnector Pipeline (IGI
Pipeline) under the Adriatic Sea from Thessaloniki to Italy.
The GOI and GOG signed a bilateral agreement for the
construction of the IGI Pipeline, which Poti said gives
Edison needed political cover. Poti expects the IGI pipeline
to be finished by the end of 2008 or 2009. When it is
completed, the IGI Pipeline will deliver eight to ten billion
cubic meters a year (bcm/year) of natural gas to Italy, ten
percent of the country's natural gas demand.

Financing
--------------


3. (SBU) Poti's explanation of how construction of the
pipeline is being financed was limited to the pipeline west
of Erzurum, Turkey, and excluded the pipeline being built by
the Shah Deniz consortium. According to Poti, the pipeline
across Turkey will be an upgrade to existing pipelines. The
upgrade is necessary to increase pipeline capacity from 2-3
bcm/year to at least 10-11 bcm/yr. Although Poti did not
provide figures, he indicated the upgrade would not be
expensive, as it only requires the addition of compression
stations along the existing pipeline.


4. (SBU) Poti stated that DEPA will likely put out bids for
the construction of the pipeline across Greece. He noted the
Greek government (which owns a majority interest in DEPA)
supports the project, which will double DEPA's assets.
Construction of the underwater pipeline linking Greece and
Italy will be financed jointly by Edison and DEPA through
Poseidon, a 50/50 joint venture formed for the purpose of
building the pipeline. Poti said construction of the
underwater (Poseidon) pipeline will cost 350 million dollars,
or 175 million each for Edison and DEPA. He added that
construction of the pipeline across Greece (from the
Turkey-Greece border west) will cost between 600 and 700
million dollars, and said the Greek government will seek EU
financing for the project.

Feasibility and Availability of Azeri Natural Gas:
"If You Build It, Gas Will Come."
-------------- --------------


5. (SBU) The TGI Interconnector is being built in
anticipation of natural gas exports from Azerbaijan's Shah
Deniz natural gas field, which Poti said will be ready to
export natural gas in 2010 or 2011, as much as three years
after the TGI Interconnector is completed. Poti said surplus
Turkish gas (purchased in anticipation of demand which did
not materialize),perhaps including "Bluestream" gas imported
from Russia, could be used to fill the TGI Interconnector in
the period before Azeri gas is available for export. He
commented that although the Russian government has opposed
construction of the Nabucco pipeline (to Austria),its
attitude towards the TGI Interconnector has changed over time
from opposition to interest in using it as another means to
ship Russian gas to Europe.


6. (SBU) Although final figures for phase two of the Shah
Deniz natural gas field will not be ready until September,
Poti said Edison has already completed its feasibility
studies. According to Poti, the project is feasible assuming
that Azeri natural gas will be available, that natural gas
prices stay above a certain level, and that transit fees are
not excessive. Poti views the Shah Deniz consortium's
decision to go ahead with construction of a pipeline from
Azerbaijan to Turkey as a sign the gas will be available. As
for price, Poti pointed out that European demand for natural
gas has been increasing for some time, and shows no sign of
decreasing. (Note: Italy is a case in point. It currently
produces 40 percent of it electricity using natural gas.
This number is expected to increase to 70 percent by 2015.
End note.) High oil prices will keep demand and prices up
for natural gas, too.

Possible Pitfalls
--------------


7. (SBU) Poti views Albania as being a potential source of
problems. Albania will receive approximately 500 million
cubic meters of gas a year via a pipeline spur running from
Greece north into Albania. At one point, consideration was
given to running the pipeline between Greece and Italy
through Albania in order to minimize the length of the
underwater pipeline in the Adriatic. This idea was shelved
in favor of running the pipeline south of Albania in order to
prevent possible problems with the Albanians taking more than
their contracted share of natural gas from the pipeline. As
the pipeline is currently envisioned, the Greeks will be able
to shut off gas flows to Albania after the Albanians have
taken their share of the natural gas. According to Poti,
Albania is trying to exert political pressure on the EU to
re-route the pipeline through Albania, and a Swiss company
has proposed an alternative to the Edison/DEPA project.
While it is unclear what the effect of this pressure will be,
it concerns Poti, who noted the GOI is very sensitive to
issues concerning Albanian political stability. (Comment: We
note that neither Switzerland nor Albania are members of the
EU, and think that Poti may be overestimating the exent to
which EU and Italian concern regarding Albanian stability
will affect their support of this economically important
project. Poti noted that the added cost of routing the main
pipeline south of Albania is negligible. End comment.)


8. (SBU) Poti seemed frustrated by Turkey's slow movement on
the TGI Interconnector, and seemed to think that Turkish
recalcitrance is in part caused by concerns over how the TGI
project will affect Turkey's relations with Russia. Poti
noted that a proposal to convert the bilateral Italy-Greece
agreement regarding construction of the Greece-Italy portion
of the pipeline into a trilateral agreement covering the
entire TGI Interconnector has gone nowhere -- the GOI and GOG
are still waiting for a response from the Turkish government.

============================================= =
Edison's Position in the Italian Energy Market
============================================= =


9. (SBU) Edison is Italy's second largest importer of
natural gas and second-largest generator of electricity using
natural gas. Edison is half owned by Electricite de France
(EDF) and half owned by Italian municipalities. Poti said
that by 2015 EDF will consume 40 billion cubic meters of
natural gas a year (bcm/year),half of which will be provided
by Edison. Edison currently buys natural gas from Eni,
Italy's parastatal oil and gas company. Eni imports gas from
Libya and Algeria (30 percent),Norway (30 percent),and

Russia (30 percent). Edison plans to invest two to three
billion euros in the near future on projects that will expand
its ability to import natural gas independent of Eni.


10. (SBU) Edison has partnered with ExxonMobil and Quatar
Gas in the construction of a regasification plant near
Rovigo, on the Adriatic Sea. Long stalled by NIMBYism, Poti
said the plant will open in 2008 with a capacity of eight
bcm/year, which will be provided by Quatar Gas. Poti noted
that Rovigo will be the first non-Eni facility to bring
natural gas to the Italian market. In this way, he noted, it
is similar to the Turkey-Greece-Italy Interconnector, which
will introduce Azeri natural gas to the European market
outside of channels owned by Eni or Gazprom.

=========================
Edison's Presence in Iran
=========================


11. (SBU) Poti said Edison has no "impressive" investments
in Iran (relative to the estimated 2.5 billion dollars Eni
has spent there). He estimates Edison has invested between 50
and 100 million dollars in Iran in oil and gas exploration.
While Edison has a representative office in Iran, it has
never had any production in Iran, and has no active wells in
Iran. Poti noted that Edison had been awarded the concession
for the construction and operation of a power plant, but that
the project never went through because of concerns about
expropriation. The way the contract was written, the power
plant project "was not bankable," according to Poti. Poti
did not rule out future investments in Iran, because Edison
needs oil and gas to fuel its power plants in Europe and "it
is always possible we might invest" in Iran.

=======
Comment
=======


12. (SBU) Completion of the TGI Interconnector will be a
large step towards making the GOI's vision of Italy as a
"southern gas hub" for Europe a reality and will help bring
stability to European energy markets through the introduction
of market-priced natural gas. Poti was clearly concerned
that Russia's influence on Turkey may cause the GOT to delay
completion of the Turkish leg of the TGI, and cited Turkey's
silence on the proposed trilateral (GOI-GOG-GOT) agreement on
the TGI as evidence of this. While he admitted that a
trilateral agreement is not necessary for the completion of
the TGI, Poti said it would provide needed "political cover"
for the project and said a trilateral agreement might help
Turkey finance upgrades to its existing natural gas pipelines
as a part of the TGI Interconnector. A trilateral agreement
might also help Edison and DEPA counter Albanian efforts by
to have the pipeline routed through Albania. End comment.
SPOGLI