ENI: WHAT SHOULD WE DO ABOUT GAZPROM'S ITALIAN PARTNER?

C O N F I D E N T I A L SECTION 01 OF 04 ROME 000451



SIPDIS



SIPDIS



DEPARTMENT FOR EUR DAS BRYZA

DEPARTMENT FOR E EURASIAN ENERGY COORDINATOR STEVEN MANN

USEU BRUSSELS FOR SPECIAL ENVOY FOR EURASIAN ENERGY GRAY

NSC FOR DEPUTY NSA JAMES JEFFREY



E.O. 12958: DECL: 04/07/2018

TAGS: ETRD, ENRG, EINV, EIND, RU, IT

SUBJECT: ENI: WHAT SHOULD WE DO ABOUT GAZPROM'S ITALIAN

PARTNER?



REF: A. ROME 390

B. ROME 249

C. 07 STATE 69



ROME 00000451 001.2 OF 004





Classified By: Ecmin Tom Delare for reasons 1.4 (b) and (d)



1. (SBU) Summary. Senior officials of Italian energy giant

Eni reject claims that their collaboration with Russia's

Gazprom endangers Europe's energy security. Instead, they

maintain that construction of South Stream and other natural

gas pipelines from Russia actually increases European energy

security. However, when pressed by Emboffs, a Eni Senior

Vice President admitted that Europe is now "over reliant" on

Russian gas, and "should be worried" about this dependence.

Eni officials seem to be in denial about possible strategic

political motives behind Gazprom's actions. Eni argues

(unconvincingly) that South Stream does not threaten Nabucco,

and estimates there is only a sixty percent chance South

Stream will be built. Evidence points to the fact that Eni

is now a major part of Gazprom's plans for expansion. Yet

Eni is still 30 percent owned by the Italian government,

providing us with some government to government leverage.

The USG might find it useful to push the next Italian

government to excercise its influence to redefine Eni's

interests so as to come to a different view of Italian and

European energy security, one that is less reflective on

Gazprom and Russia's strategic goals. End summary.



2. (SBU) Marco Alvera, Eni Senior Vice President for Supply

and Portfolio Development at the Italian energy giant Eni,

hosted Econ Counselor March 18 for a briefing on Eni's

activities in Russia and on the status of the South Stream

natural gas pipeline project. Eni asked to give us this

briefing after a March 4 speech by Ambassador Spogli in which

he discussed Gazprom and the need for Europe to diversify its

energy sources. Alvera is responsible for all Eni activities

in Russia and is Eni's senior manager for the South Stream

project. A copy of the PowerPoint presentation used by

Alvera in his briefing is available through Intellipedia's

Italy Portal, and can be found at

http://www.intelink.sgov.gov/

w/images/8/89/Eni Southstream Presentation.pdf.



--------------

Eni's Russian Partnership

--------------



3. (SBU) In an effort to obtain preferential access to new

supplies of natural gas, Eni (with the blessing of the

Italian government) established a "strategic relationship"

with Gazprom in 2006. Alvera said Eni has been Gazprom's

largest natural gas customer since the 1970's, buying between

six and seven billion dollars of gas a year. In Eni's eyes,

the shift from a commercial relationship with Gazprom to an

"integrated strategic" relationship is mutually beneficial.

Eni has gained access to Russian oil and gas fields, extended

its supply contracts with Gazprom until 2035, and has been

able to participate in projects such as the Blue Stream

pipeline linking Russia and Turkey. In Alvera's words,

Gazprom has used the relationship to "plant flags outside of

Russia," has gained access to Eni projects in Libya and

Algeria, and will be allowed to sell gas directly to Italian

consumers starting in 2010. Eni and Gazprom are also

collaborating on LNG projects in the Baltic and on the South

Stream pipeline.



4. (SBU) Alvera characterized the relationship as a boon for

Eni. Eni estimates Russia has 47,800 bcm of natural gas

reserves and predicts Gazprom will be able to export between

166 bcm/yr and 207 bcm/yr to Europe by 2030. By comparison,

Gazprom exported 133 bcm of natural gas to Europe in 2005.

Alvera admitted that Gazprom had not invested sufficiently in

maintaining its upstream infrastructure, but predicted easy

gains in Russian natural gas production through equipment

modernization and gains in efficiency. In addition to these



ROME 00000451 002.2 OF 004





gains, Alvera is enthusiastic about the possibility of

developing new gas fields in Russia, "it's easy - like the

Gulf of Mexico in the 1980's."



5. (SBU) Econ Counselor pointed to Forbes magazine's July

2007 article on the Eni-Gazprom relationship, "The Devil's

Advocate," (The Devil being Putin, the Advocate being Eni CEO

Scaroni) and asked Alvera to respond to press articles that

characterize Eni as a stalking horse for Gazprom interests in

Europe. Alvera said that he believes all of the decisions in

the Eni-Gazprom relationship are made on a commercial basis

and that he has never seen Gazprom's decisions driven by

political factors. He responded to allegations in the press

that Gazprom seeks to control European energy supplies by

noting that plans for new pipelines like South Stream are

driven by growing EU demand for natural gas, not by Russian

plans for market domination.



--------------

The Role of South Stream

--------------



6. (SBU) Turning to the question of South Stream, the

pipeline being built by Eni and Gazprom, Alvera said the

pipeline "is much more about bringing 'old' gas to Europe

using a safer route (i.e., not through Ukraine) than it is

about 'new' gas." The pipeline will start alongside the Blue

Stream pipeline in Beregovaya, Russia, run under the Black

Sea for 900 kilometers, make landfall in Bulgaria, and then

split into northern and southern routes. The underwater

portion of the pipeline will be owned by a 50-50 Eni-Gazprom

joint venture, South Stream AG, which is incorporated in

Switzerland. South Stream's northern route will run from

Bulgaria to Austria, while the southern route will reach

Italy via Greece. Eni and Gazprom are still finalizing South

Stream's northern route, and Alvera admitted that

difficulties in negotiations with the governments of Serbia

and Romania mean that "there is only a 60 percent chance the

project will actually be built." Alvera said that South

Stream's 30 bcm capacity will be filled with 20 bcm of

"substitution gas" taken from the Ukrainian pipeline system

and 10 bcm of "incremental gas" which would be "new gas" for

the EU market.



7. (C) As described by Alvera, the South Stream project is

driven by two factors: (i) increasing EU demand for natural

gas and (ii) the unreliability of the Ukrainian pipeline

system. According to Alvera, Ukraine has not been meeting

its maintenance obligations for pipelines transiting Ukraine

enroute to the EU. In one case, he said the Ukrainian

pipeline operator took 18 days to make repairs that should

have been fixed in three, and failed to notify Gazprom of the

problem. South Stream avoids this type of problem by

bypassing the Ukraine altogether and increases energy

security by increasing "diversity of routes." Alvera made

the case several times that South Stream would bring about an

increase in European energy security, a statement that is

clearly at odds with the USG view of the situation.



--------------

South Stream: Not Intended to Dominate Market

--------------



8. (C) Alvera was dismissive of allegations that Gazprom

intends to use South Stream to further cement its hold on

European energy supplies. Alvera noted that the 10 bcm of

new gas that is introduced to the market through South Stream

is dwarfed by the expected increase in European demand and

the anticipated supply shortage. When further pressed on

this issue, Alvera noted that even if Eni and Gazprom were

able to fill South Stream's 30 bcm capacity entirely with

"new" gas, it would only meet a small portion of the expected

increase in demand for gas. Under Eni's most conservative

projection, European demand for gas will reach 750 bcm/yr by

2030, with EU gas production, contracted imports, and



ROME 00000451 003.2 OF 004





contract extensions totaling 480 bcm/yr. Alvera pointed out

this leaves the EU with a gap in its natural gas supply of

270 bcm/yr, and that South Stream's 30 bcm/yr capacity is

insignificant by comparison.



9. (SBU) Asked to comment on the competition between South

Stream and the EU's Nabucco pipeline, Alvera said the biggest

difference between the two projects is that South Stream only

needs 10 bcm of new gas in order for the pipeline to be

filled and is guaranteed to get that gas from Russian gas

fields. In contrast, backers of the Nabucco projects must

identify 30 bcm of gas to fill their pipeline. He was

skeptical of Azerbaijan's ability to produce sufficient gas

to fill Nabucco and of the size of Azeri natural gas

reserves. Alvera noted that other Gazprom pipeline projects,

including Nord Stream, also face the problem of identifying

"new" gas. When we pressed Alvera on how Eni will profit

from South Stream, he pointed to the company's 50 percent

ownership of South Stream AG and construction fees that will

be paid to Eni's Saipem pipeline construction subsidiary.

Eni will also own the right to half of the 10 bcm of "new"

gas carried by South Stream.



--------------

Is Eni Part of a Kremlin Plot?

--------------



10. (C) Econ Counselor again pressed the Eni officers on

their company's close collaboration with Gazprom, pointing to

statements by President Putin in which he poured scorn on the

Nabucco project (reported in the Eurasia Daily Monitor, March

5, 2008). Econ Counselor asked Alvera if he is concerned

about the possibility that Russia may one day do to the EU

what it has repeatedly done to Ukraine. Would Eni then

regret its role in constructing the infrastructure that

helped Russia to do that? Alvera conceded that the EU --

especially Germany -- is now "overdependent on Russian gas."

Econ Counselor asked if the EU should be worried about this

overdependence. "Yes, they should be worried!" conceded

Alvera. But Alvera argued that Europe's dependence on

Russian gas is the result of the lack of an EU energy policy,

including a "schizophrenic" approach to natural gas that pits

the British and the Dutch against the Germans and the French

(he didn't elaborate on what he meant by this). The result

of this policy vacuum is that EU energy policy has been

shaped by "thousands of entrepreneurial decisions" taken by

individual power companies. On the issue of South Stream,

Alvera again downplayed the amount of gas the pipeline will

bring to Europe, noting that it is small compared to

estimated increases in demand.



11. (C) Alvera also repeatedly denied that South Stream

represents a threat to Nabucco. He acted as if he had never

heard of this charge, as if it were patently absurd. But in

his denial, he only focused on the supply end of the

pipeline, claiming that South Stream will be filled with old

Russian gas, not Caspian Basin gas that will fill Nabucco.

Alvera seemed to deliberately ignore the fact that just as

Russian pipeline construction connecting Turkmen gas fields

to the Russian pipeline system led to the abandonment of

plans to build a Trans-Caspian pipeline, South Stream, by

locking European consumers into long-term supply contracts,

reduces incentives for EU countries to push for Nabucco.



--------------

Comment

--------------



12. (C) The Eni briefing was reminiscent of Soviet era

double speak. According to Eni, Europe's energy security is

enhanced -- not weakened -- by new pipelines to Russia. And

according to Eni, in the Russia-Ukraine energy

confrontations, the Ukrainians -- not the Russians -- are

the bad guys. In talking to Eni, it sometimes seemed as if

we were talking to Gazprom. We found Eni's arguments



ROME 00000451 004.2 OF 004





far-fetched and self-serving. Eni denials notwithstanding,

through its close collaboration with Gazprom, including its

support for South Stream and Gazprom's expansion into North

Africa, we think this company is working against

U.S.-supported EU efforts to diversify Europe's energy

sources.



13. (C) The Italian government's 30 percent ownership of Eni

presents us with immediate opportunities to influence key Eni

decisions. For example, Alvera told us that he thinks there

is only a 60 percent chance that South Stream will actually

be built. His fear is that difficulties in reaching

agreement with Eastern European governments might scuttle the

project. We think Washington should consider adding USG

objections -- presented through Eni's GOI owners -- to the

list of reasons that Eni should not build Gazprom's new

pipeline.



14. (C) In a broader sense, the new government that takes

power in Italy following the April 13-14 elections will

present us with an excellent opportunity to push the GOI for

fundamental changes in Eni's approach to European energy

security. At the very least, we should push the GOI to

ensure that their parastatal operates in a manner consistent

with Italy and the EU's stated objective of increasing the

diversity of Europe's energy supply. Eni should be made to

work in pursuit of the EU's definition of energy security,

not the Kremlin's.

BORG