Identifier
Created
Classification
Origin
06ROME3379
2006-12-27 16:38:00
UNCLASSIFIED
Embassy Rome
Cable title:  

ITALIAN ENERGY SUPPLIES PROJECTED TO BE ADEQUATE

Tags:  ENRG EPET ECON RU IT 
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VZCZCXRO4773
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRO #3379/01 3611638
ZNR UUUUU ZZH
P 271638Z DEC 06
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC PRIORITY 6808
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAS/AMEMBASSY ALGIERS PRIORITY 0524
RUEHKB/AMEMBASSY BAKU PRIORITY 0088
RUEHMO/AMEMBASSY MOSCOW PRIORITY 4311
RUEHFL/AMCONSUL FLORENCE PRIORITY 2015
RUEHMIL/AMCONSUL MILAN PRIORITY 8145
RUEHNP/AMCONSUL NAPLES PRIORITY 2152
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
UNCLAS SECTION 01 OF 03 ROME 003379 

SIPDIS

SIPDIS

EUR FOR MATT BRYZA
EB FOR PAUL SIMON

E.O. 12958: N/A
TAGS: ENRG EPET ECON RU IT
SUBJECT: ITALIAN ENERGY SUPPLIES PROJECTED TO BE ADEQUATE
FOR WINTER 2006-2007


ROME 00003379 001.2 OF 003


-------
SUMMARY
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UNCLAS SECTION 01 OF 03 ROME 003379

SIPDIS

SIPDIS

EUR FOR MATT BRYZA
EB FOR PAUL SIMON

E.O. 12958: N/A
TAGS: ENRG EPET ECON RU IT
SUBJECT: ITALIAN ENERGY SUPPLIES PROJECTED TO BE ADEQUATE
FOR WINTER 2006-2007


ROME 00003379 001.2 OF 003


--------------
SUMMARY
--------------


1. (U) Summary. Italian officials are optimistic Italy will
not experience a repeat of last winter's energy shortages.
Energy analysts point to a mild winter, gas reserves higher
than last year, and Italy's increased ability to switch
natural gas-fired power plants to oil. Looking past Italy's
immediate energy needs, GOI officials and private sector
analysts say Italy's long-term energy security should be
increased by new agreements between Eni, Italy's oil and gas
parastatal, and Gazprom, construction of at least two
regasification plants in northern Italy and one in southern
Italy, and the construction of additional natural gas
pipelines connecting North Africa and the Caspian Basin to
Italy. GOI officials support a coordinated EU energy policy
to ensure long-term energy security for Italy and Europe.
End summary.

--------------
Italian Energy Supplies for Winter 2006-2007
--------------


2. (U) Italy, which generates over half of its electricity
using natural gas, is better positioned to withstand
increased winter demand for energy than last year, according
to Giovanni Manfredi, the MFA office director-equivalent
responsible for energy issues. Manfredi said that Italian
energy companies have been increasing natural gas stocks
since April to boost Italian natural gas reserves before
winter. As a result, Manfredi noted that Italian strategic
and working reserves are higher than at the beginning of last
winter.


3. (U) Manfedi's optimism is consistent with that of Claudio
Fava, Managing Director of Aquirente Unico, an Italian
electricity reseller. Fava told Econoff that Italy will not
experience power shortages similar to those of the winter of
2005-2006 because electricity companies are prepared to run
natural-gas fired power plants using other energy sources.
Fava also said Eni has notified its "preferred" customers
they may have their gas supplies cut off in the event of a
nation-wide natural gas shortage. (Note: Preferred customers
buy natural gas from Eni under long-term contracts with
preferential pricing. In exchange for lower prices,

preferred customers agree to have their natural gas supply
cut under some circumstances. End note.)


4. (U) Diego Gavagnin, a former official at the Italian
Energy Authority, now a private energy analyst, echoes Fava's
optimism regarding energy supplies in the coming winter. In
Gavagnin's view, Italian energy security has been enhanced by
increased European dependence on Russian natural gas.
Gavagnin's logic is that Gazprom will not run the risk of
alienating European governments by cutting off natural gas
flows, and will keep the gas flowing to ensure a steady
income and increase Gazprom's share of the EU natural gas
market. Gavagnin also predicted a mild winter in 2006-2007
will lower demand for natural gas and electricity used in
heating.

--------------
Italy's Long-Term Energy Security
--------------


5. (U) Manfredi acknowledged that Italy has been lucky with
this year's mild winter and reduced demand for natural gas,
but noted that in the long term, Italy needs a strategy to
improve its energy security. All our interlocutors on energy
issues say the GOI and Italy's energy industry are taking two
approaches to improving energy security: increasing Italy's
access to existing natural gas sources by constructing new
natural gas pipelines and encouraging the formulation of a
common EU energy policy.


6. (U) Italy currently imports roughly 30 percent of its
natural gas supply from each of three sources: Russia, the
North Sea, and Algeria. Natural gas pipelines connect Italy
to natural gas fields in Russia, the North Sea, Algeria, and

ROME 00003379 002.2 OF 003


Libya. Italy plans to increase the capacity of existing
pipelines and participate in the construction of new
pipelines. Including pipelines currently under construction
or in the planning phase, Italy will eventually be connected
to natural gas fields by five pipelines: the Transgas
pipeline, currently used to import Russian gas; pipelines
connecting Italy to Norway; the Transmed and Green Stream
pipelines connecting Italy to Algeria and Libya; the
Turkey-Greece-Italy pipeline, which will bring Caspian
natural gas to Italy; and the GALSI pipeline, which will
connect Algeria to Sardinia and the Italian mainland.
According to Manfredi, the GOI does not favor any one of
these projects over another, but "supports any pipeline
project that will bring natural gas to Italy." Manfredi said
the GOI's long-term plan is to make Italy a natural gas hub
for the Mediterranean, at the center of a "Mediterranean
Ring" of natural gas pipelines.

Ties to Russia Improve Energy Security
--------------


7. (U) Eni, Italy's oil and gas parastatal, has continued to
expand its presence in Russia through a closer relationship
with Gazprom. In November 2006, Eni and Gazprom signed a
cooperation agreement to develop each company's operations in
the other's traditional market sector. The agreement will
allow Gazprom to sell Russian gas directly to the Italian
consumer. Gazprom's direct sales in Italy could reportedly
reach three billion cubic meters annually by 2010. (Note:
Italy consumes 80 billion cubic meters of natural gas
annually. End note.) In exchange for giving Gazprom direct
access to the Italian market, the agreement allows Eni to
invest in gas exploration and extraction operations in Russia
for sale to third parties, and leaves the door open to
extending existing Gazprom contracts to supply gas to Italy
through 2035.

Public Opposition Stymies LNG Development
--------------


8. (U) In addition to natural gas pipelines, ExxonMobil is
building an LNG regasification terminal on Italy's Adriatic
coast. BP has begun building a similar facility in Brindisi,
but has had difficulty overcoming opposition from the local
government, according to Manfredi. Eni has also recently
announced it will construct an LNG plant in Southern Italy
which could be operational within two-three years.

Power Plants in North Africa?
--------------


9. (U) The GOI is considering supporting power plant
construction in Algeria and Tunisia to generate electricity
for export to Italy. It is unclear how this will increase
Italian energy security, since the electricity would be
generated using North African natural gas currently exported
to Italy. Proponents of this plan, including Diego Gavagnin,
a private sector energy consultant, and Claudio Fava,
Managing Director of Aquirente Unico, note that this idea has
the benefit of encouraging economic growth and development in
the countries where the plants will be located, and of moving
the greenhouse gas emissions out of Italy. Gavagnin pointed
out that while these projects have not been economically
feasible in the past, high oil and gas prices make them
realistic. In contrast, the MFA's Manfredi is skeptical of
the proposal to import electricity from Algeria and Tunisia,
and noted that the electricity lines would have to connect
with the Italian electricity grid in Sicily, which already
has sufficient electricity-generating capacity.
Additionally, if electricity generated in North Africa were
to be shipped to the Italian mainland, it would have to be on
electricity lines crossing the Strait of Messina, a
geographic bottleneck, which Manfredi says is already
over-crowded with power and other infrastructure.

Need to Press for EU Energy Policy
--------------


10. (U) Manfredi said that in the long term, the GOI will
seek to increase its energy security through the

ROME 00003379 003.2 OF 003


establishment of a common EU energy policy. He noted that
progress towards a comprehensive, uniform, EU energy policy
has been limited, due to the complex political and economic
questions involved.

First Step: Integrate European Energy Grids/Pipelines
-------------- --------------


11. (U) Absent an EU energy policy, Gavagnin made the case
that further integration of the European energy grids will
improve European, and Italian, energy security. He noted the
European electricity grid is already partially integrated,
and that electricity generated in Italy is sold to other EU
countries. The next step, according to Gavagnin, is to
establish of a Europe-wide spot-market for natural gas to
allow cross-border natural gas sales on an as-needed basis.
Gavagnin pointed out that a requirement for a Europe-wide
spot-market for natural gas is an interconnected network of
natural gas pipelines, which are currently being built on an
ad hoc basis.


12. (U) Gavagnin also noted that European energy security
can be enhanced by balancing European electricity generation
among natural gas (concentrated in Italy),nuclear (France),
coal (Germany),and renewable energy. Gavagnin estimated
that natural gas, nuclear, and coal each account for 30
percent of Europe's electricity generation, with renewable
energy making up the remaining ten percent.

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


13. (U) One year after natural gas shortages caused the GOI
to tap Italy's natural gas reserves and cut gas supplies to
some customers, we are struck by differences in the two
prongs of Italian energy security policy. On the one hand,
the Italian energy industry is pursuing closer relations with
Gazprom, with Eni entering into an agreement that will allow
Gazprom to sell natural gas directly to Italian consumers in
exchange for rights to invest in exploration and extraction
opportunities in Russia. On the other hand, Italy seeks to
distance itself from dependence on Russian natural gas
through the construction or expansion of pipelines linking
Italy to other natural gas sources. In this context, the
pursuit of an EU energy policy can been seen as an attempt by
the GOI to present a unified front to possible future efforts
by Russia and other potential members (e.g., Algeria) of a
"natural gas OPEC" to sell natural gas at a premium to
European consumers.


14. (U) In fact, this dichotomy indicates to us the GOI
continues to react to last year's energy crisis by pursuing
all of the options at its disposal (increased access to
Russian gas, building new pipelnes to the Caucuses and North
Africa, and advocating for an EU energy policy) to ensure
Italy's energy security. We expect the GOI to focus
increasingly on the development of an EU energy policy,
including Italy as a major producer of electricity using
natural gas. End comment.
SPOGLI