ITALIAN ENERGY: EXPERTS UNCONCERNED ABOUT

C O N F I D E N T I A L SECTION 01 OF 03 ROME 000390

SIPDIS

NOFORN
SIPDIS

DEPARTMENT FOR EUR DAS BRYZA

E.O. 12958: DECL: 03/31/2023
TAGS: ETRD ENRG EINV EIND ETRN RU IT
SUBJECT: ITALIAN ENERGY: EXPERTS UNCONCERNED ABOUT
DEPENDENCE ON RUSSIAN ENERGY

REF: A. ROME 249


B. 06 ROME 834

ROME 00000390 001.2 OF 003


Classified By: Economic Couselor William R. Meara for reasons 1.4 (b) a
nd (d)


1. (C) Summary. On February 28, Ecmin hosted a roundtable
discussion with Italian energy experts. The discussion
focused on Italian energy security (especially security of
Italian natural gas imports),and Italy's energy relationship
with Russia. With one exception, the Italian experts did not
view Italian dependence on Russian as a problem, and argued
that Russia is equally dependent on Italian payments for
natural gas shipments. They noted the lack of an EU energy
policy and alleged the GOI has outsourced Italian energy
security policy to Eni, the Italian oil and gas parastatal.
The four experts also argued that Eni blocks diversification
projects, including the construction of LNG re-gasification
facilities. On the issue of natural gas pipelines linking
Russia and Europe, they agreed the South Stream pipeline will
make the proposed Nabucco pipeline "obsolete." They said the
GOI sees Eni more as a revenue source than as an instrument
of national energy policy. End summary.

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Italian dependence on Russian gas -- not the real problem
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2. (C) On February 28, Ecmin hosted a roundtable discussion
on energy security issues with four leading Italian energy
experts (none of whom currently work for the GOI or Italian
energy companies). Participants were:

-- Dr. Vittorio Dermo, from the Italian Association of Energy
Economists (also a former Eni official);

-- Prof. Sergio Garribba, former Director General for Energy
at the Economic Development Ministry, and former Italian
Energy Authority Commissioner;

-- Dr. Diego Gavagnin, Editor of on-line energy daily
"Quotidiano Energia" and former Italian Energy Authority
Official;

-- Dr. Carlo Stagnaro, Energy Expert from Italian
conservative think-tank Istituto Bruno Leoni


3. (C) Dermo, Gavagnin, and Stagnaro all expressed
confidence regarding Italian energy security. They view
Italian dependence on Russian natural gas as a two-way
street: "While we are dependent on them for energy, they are
dependent on us for the money that we pay them for that
energy." One participant stated that he "could not imagine"
Russia cutting off natural gas exports to Italy, and that
Italy "could turn to the IEA for help" in the event of a gas
cut-off. (Comment. We have also heard this from the MFA's
energy expert. It is unclear what the IEA could do to force
Russia to supply gas to Italy if it decided not to do so.
End comment.)


4. (C) All of the experts agreed that even if Italy makes
reasonable progress on some of the infrastructure projects
currently on the drawing boards (re-gasification plants in
particular),Italy's level of dependence on Russian natural
gas will remain roughly the same over the next 10-15 years.
Italy currently imports approximately 25 percent of its
natural gas supply from Russia and uses that gas to generate
over half its electricity.

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Italy lacks long term energy strategy -- And so does the EU
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5. (U) Among the four experts present, only Garribba, who
many consider to be Italy's top energy expert, expressed
serious concern regarding Italy's mid-term energy security.
Garribba noted that Italy does not have a long-term energy
strategy. Nor is there energy coordination among EU member
states; caused by differing energy situations and priorities
within the EU. Garribba made a distinction between
"environmental policy" such as the EU policies to increase
the use of renewable energy sources and "energy policy,"

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which should address energy diversification and energy
security.


6. (U) All of the participants echoed Garribba's assertion
that an EU energy policy is absolutely necessary to guarantee
energy security in Europe. EU energy policy is currently
largely focused on climate change considerations and EU
anti-trust policy. They agreed that although approval of the
Lisbon Treaty could lead to the development of a common
energy policy, there is the risk that EU energy policy will
continue to emphasize climate change concerns and Kyoto
parameters instead of energy security and the need to
rebalance the EU energy relationship with Russia.

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Italy must diversify import sources, but Eni is the problem
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7. (U) Regarding diversification of sources, Garribba
believes that Eni and Gazprom's South Stream project will
render the EU's Nabucco pipeline obsolete and greatly reduce
the importance of the Turkey-Greece-Italy (TGI) natural gas
pipeline. All of the experts noted that South Stream will
increase Russia's control of European gas supplies by
providing an additional Gazprom-controlled route for Central
Asian natural gas to reach Western European markets. They
agreed that Italy must complete or increase the capacity of
natural gas pipelines to North Africa (Algeria, Libya, and
Tunisia) and build a substantial number of LNG
re-gasification terminals.


8. (SBU) The experts also agreed the GOI has essentially
turned over development of Italian energy strategies to Eni.
Although the GOI maintains a 30 percent controlling interest
in Eni, the company's main objectives are making profits and
paying dividends. Eni is not focused at all on increasing
Italian energy security. Eni's role in developing Italian
energy policy was identified as the key problem Italy faces
in addressing its energy security. It is also "no secret"
that Eni is being used by Gazprom as its spearhead in the
European market. (Comment. During a subsequent conversation
with Econoff, Garribba said that in 2006, when he was
Director General for energy under the center-left Prodi
government, "there was no point in discussing energy security
with Bersani (the Minister for Economic Development) because
he used to be a Communist" and thought the Russians would
look out for Italian interests. End comment.)


9. (U) Dr. Dermo, a former Eni official, argued that Eni's
strategies are largely dictated by the location of oil and
gas deposits -- if Italy had more energy resources there
would be less reason to go Russia -- hence the decision to
build on Eni's 40 year relationship with Russia. Dermo also
maintained that Eni should be viewed as an integral part of
the European energy system. In this view, Eni's close ties
to Gazprom are balanced by other companies ties to
non-Russian energy sources.

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GOI has an evident conflict of interest
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10. (U) Participants agreed there is a conflict between the
GOI's interest in receiving large dividends from Eni
(especially at a time of large budget deficits) and the need
to pursue energy diversification projects. The GOI's
practice of allowing Eni to pursue the most profitable
strategies at the expense of energy diversity is one that
"makes the Treasury Minister very happy, but keeps the
Economic Development Minister awake at night." Ref B details
Italy's energy sources and the conflict between the
Ministries of Finance and Economic Development. In this
perspective, the GOI's hands-off approach to energy security
facilitates Eni's role in assisting Gazprom's efforts to
dominate European energy markets. While agreeing on the
above, Garribba maintained that Eni is being held hostage by
Gazprom. According to Garribba, Gazprom allowed Eni to
participate in the exploration and development of Kazakh oil
and gas fields in exchange for access to the Italian retail
market for natural gas. (Note: Without access to the
pipelines controlled by Gazprom, Eni's oil and gas assets in
Kazakhstan would be marooned and impossible to sell. End

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note.) Our contacts did not believe that the outcome of the
upcoming April parliamentary elections will change
substantially current Italo-Russian relations in the energy
sector.


11. (U) On a more conspiratorial note, the experts argued
that Eni is the cause of the difficulties experienced by
companies constructing LNG re-gasification plants in Italy.
The consensus was that Eni opposed LNG re-gasification plants
because it is not in Eni's interest to facilitate the
introduction of new gas sources to the Italian market. One
expert argued that Eni's control of Italy's natural gas
pipeline system through its SNAM Rete Gas pipeline subsidiary
means that it can prevent LNG companies from moving their
product once it has arrived in Italy. To date, Eni has been
able to stall privatization/separation of SNAM Rete Gas.

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Italy must privatize and become Mediterranean gas hub
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12. (U) Participants all agreed that it is in Italy's
long-term interest to fully privatize Eni (as well as
electricity conglomerate ENEL). Privatization will allow
Italy to support and develop energy strategies in the
national and European interest rather than focusing on Eni's
bottom line.


13. (U) If Italy acts quickly, it can still play an
important role and become a key European gas hub. Italy has
announced plans to increase imports from Algeria, develop
re-gasification facilities, and build pipelines (through
Sardinia) to supply France and possibly Spain.
Geographically, Italy's Adriatic basin could serve as a
southern European gas storage hub, providing competition to
the natural gas hub Gazprom plans to build in Serbia.

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Comment
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14. (C) We were surprised by the extent to which these
energy experts are comfortable with the (im)balance of power
in the Italy-Russia energy relationship. The roundtable
confirmed our assessment that Italy is not concerned about
dependence on Russian natural gas imports. The idea that the
IEA will be able to compel the Kremlin/Gazprom to resume
natural gas exports in the event of a cut-off similar to the
one that took place is 2006 strikes us as extremely naive.
Similarly, the Italian notion of "energy interdependence"
between Russia and Italy ("They need our money as much as we
need their gas.") seems foolish. The roundtable did make
clear to us that this idea of "interdependence" is
well-entrenched in the GOI bureaucracy and among energy
experts. This roundtable and conversations with GOI
officials (reported ref A) make clear that we are more
concerned about Italian energy security than Italians are,
and that, left to its own devices, the GOI will simply stay
the course and allow Eni to continue to facilitate Gazprom's
efforts to dominate the Western European energy market.
SPOGLI