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. -------------- -------------- Italian dependence on Russian gas -- not the real problem -------------- -------------- ¶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. -------------- -------------- Italy lacks long term energy strategy -- And so does the EU -------------- -------------- ¶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," ROME 00000390 002.2 OF 003 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. -------------- -------------- Italy must diversify import sources, but Eni is the problem -------------- -------------- ¶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. -------------- GOI has an evident conflict of interest -------------- ¶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 ROME 00000390 003.2 OF 003 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. -------------- -------------- Italy must privatize and become Mediterranean gas hub -------------- -------------- ¶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. -------------- Comment -------------- ¶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