VZCZCXRO2582
PP RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHRO #1005/01 0940436
ZNR UUUUU ZZH
P 040436Z APR 06
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC PRIORITY 4291
INFO RUCNMEU/EU INTEREST COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHSI/AMEMBASSY TBILISI PRIORITY 0197
RUEHKB/AMEMBASSY BAKU PRIORITY 0076
RUEHFL/AMCONSUL FLORENCE PRIORITY 1276
RUEHMIL/AMCONSUL MILAN PRIORITY 6875
RUEHNP/AMCONSUL NAPLES PRIORITY 1341

UNCLAS SECTION 01 OF 04 ROME 001005 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET RU IR QA IT
SUBJECT: EUR DAS BRYZA DISCUSSES CASPIAN BASIN NATURAL GAS 
POTENTIAL WITH ITALY 
 
REF: A. ROME 933 
 
     ¶B. ROME 834 
 
ROME 00001005  001.4 OF 004 
 
 
¶1.  (U) Summary:  In March 17 meetings, GOI officials in the 
Ministries of Foreign Affairs, Productive Activities, and the 
Prime Minister's office concurred with EUR DAS Matthew 
Bryza's assessment of the risk to Italian and European energy 
security of Gazprom's dominance of natural gas shipments to 
Europe and Italy.  GOI officials proposed a conference to 
examine the feasibility of a Turkey-Greece-Italy 
inter-connector pipeline, agreed that NATO should undertake a 
discussion of the "geo-economic" elements of the 
Europe-Russia energy relationship, and outlined the GOI 
vision of Italy as a Southern European natural gas hub. 
Officials at ENI, Italy's largest oil and gas company, 
lamented the lack of coordination between government and the 
private sector on increasing Italy's sources of energy, and 
pointed out that new EU Member States' privatization policies 
may aid Gazprom's entry into the European market.  ENI 
officials, also commenting on the state of Iran's natural gas 
industry, concluded that Iran has lost ground to Qatar and 
that in the immediate future, most Iranian gas production 
will be consumed domestically.  End Summary. 
 
Introduction 
------------ 
 
¶2.  (U) EUR DAS Matthew Bryza met with GOI and ENI officials 
March 17 to discuss energy security and access to Caspian 
Basin natural gas.  In separate meetings, Bryza discussed 
energy security and regional stability issues with MFA 
Director General (DG) for Multilateral Economic Affairs, 
Giandomenico Magliano; Ministry of Productive Activities 
(MPA) DG for Energy Sergio Garribba; the Energy Authority; 
and ENI Senior Vice President for Corporate Strategies 
Leonardo Maugeri.  DAS Bryza's meetings with Deputy 
Diplomatic Advisor to the Prime Minister Francesco Talo and 
MFA DG for Multilateral Political Affairs Giulio Terzi, which 
did not cover energy issues, were reported in Ref A. 
 
Agreement on Risks of Gazporm's Dominance 
----------------------------------------- 
 
¶3.  (U) The Prime Minister's office, MFA, and ENI all agreed 
with Byrza's assessment that Gazprom's dominance of the 
European natural gas markets is a problem and that Gazprom 
needs to be channeled towards market behavior.  Although 
Garribba, the GOI's leading expert on energy, previously 
viewed energy security as a matter of increasing the routes 
through which Italy receives Russian gas (reported Ref B), he 
and other GOI officials with whom DAS Bryza met were 
receptive to introducing new sources of gas, such as the 
Caspian Basin, into the Italian and European markets. 
 
¶4.  (U) ENI's Maugeri expressed frustration at ENI's 
difficulties with Gazprom.  He noted that Gazprom was the 
only buyer for natural gas ENI produced in gas fields in 
Kazakhstan.  This dynamic put ENI in a weak negotiating 
position.  Maugeri believes Gazprom and the GOR are trying to 
restore Russian prestige following a strategy first outlined 
by Russian President Putin in an academic essay published in 
the 1990,s. 
 
¶5.  (U) Garribba, Magliano, Maugeri, and Talo all agreed that 
Gazprom is conducting business in a non-transparent way. 
Further, that Gazprom is using its dominance of natural gas 
supplies and transmission infrastructure to realize huge 
profits, and that its management is focused on stifling 
competition, not on maximizing productivity.  Magliano and 
Garribba agreed with DAS Bryza that introducing Central Asian 
gas into the European market using non Gazprom-owned 
pipelines would force market-based pricing onto the natural 
gas markets, and lead Gazprom to react by streamlining its 
operations and introducing more transparency to preserve its 
market dominance. 
 
¶6.  (U) Magliano proposed that NATO be used as a forum for 
discussion of the political aspects of energy security.  He 
stressed that Russia "is a partner" for Europe and that the 
GOR should be included in these discussions.  (Note:  In 
doing so, he contradicted his subordinate, Gianni Manfredi, 
who had told Bryza in NATO meetings the previous day that the 
energy security issue should be kept out of NATO.  End note.) 
 Magliano also proposed that the International Energy Agency 
(IEA) be "staffed up" to examine the economic aspects of 
 
ROME 00001005  002.2 OF 004 
 
 
energy security, with an eye on implementing the G8's 
Gleneagles agreement on energy and global climate change. 
"Energy savings equal energy security," he said. 
 
¶7.  (SBU) Bryza told Talo and Terzi that Russia and Gazprom 
had used price and supply fluctuations to manipulate Russia's 
neighbors, particularly Georgia and Ukraine.  The United 
States is encouraging the EU to help support Ukraine's 
efforts to take a second look at non-transparent energy deals 
to exclude shady middlemen.  Noting that renegotiating the 
Ukraine-Gazprom agreements could create another short-term 
energy crisis for Europe, DAS Bryza said the USG hopes the EU 
will accept a short-term shock in exchange for long-term 
stability and transparency in Russian energy supplies. 
 
Privatization Aids Gazprom. 
--------------------------- 
 
¶8.  (U) Garribba, Terzi, and Maugeri all noted that 
privatization of state-owned energy companies in new EU 
member states has the unintended consequence of aiding 
Gazprom's entry into European energy markets.  All noted that 
Gazprom, because of its dominance of the European natural gas 
and oil markets, has the cash reserves to finance the 
acquisition of energy infrastructure throughout Eastern 
Europe.  Maugeri said privatization has simply moved control 
of some Eastern European countries' energy infrastructures 
from the government to Gazprom and has not introduced 
competition to the market. "Market liberalization needs 
supply liberalization," according to Maugeri.  Anything else 
is simply blind faith in "the animal spirits of capitalism." 
In a later meeting, Magliano echoed this statement by saying 
that more competition and less vertical integration are 
needed throughout the energy industry. 
 
¶9.  (U) Maugeri argued that the EU must slow privatization 
until other companies can compete with Gazprom to purchase 
state-owned energy assets.  He urged the USG and GOI to 
support slowing the process down, noting that if large oil 
companies like ENI make the case, their arguments are 
dismissed as an attempt to stifle competition.  Maugeri 
argued that major oil company dominance is exaggerated. 
Citing an article he wrote for the March/April issue of 
Foreign Affairs, "Two Cheers for Expensive Oil," Maugeri 
stated that publicly-traded oil companies control less than 
eight percent of proven oil reserves, and less than twenty 
percent of proven gas reserves.  The rest is controlled by 
privately-held or state-owned companies. 
 
The Southern Corridor - The Best Route to Competition? 
--------------------------------------------- --------- 
 
¶10.  (U) All of DAS Bryza's GOI interlocutors agreed a 
"southern ring" of gas pipelines, including the 
Turkey-Greece-Italy inter-connector pipeline (TGI), could 
carry Caspian Basin natural gas to Europe via the Caucuses 
and Turkey.  Further, that the introduction of non-Gazprom 
gas into the European market would force Gazprom to respond 
to market forces.  Garribba views a southern ring of natural 
gas pipelines as complementing GOI plans to develop Italy's 
role as a "natural gas hub" for Europe. 
 
¶11.  (U) In contrast, Maugeri was dismissive of the TGI and 
the GOI natural gas hub strategy.  According to Maugeri, 
Turkey signed large gas contracts in the 1990s in 
anticipation of increased natural gas demand.  However, 
Turkish demand has not increased; and now the Turks need a 
way to re-export surplus gas imported from Central Asia. 
Maugeri argued that Italian energy companies should focus on 
increasing natural gas flows from Libya or building new LNG 
terminals.  Maugeri dismissed the GOI vision of Italy as a 
natural gas hub as "not economically viable."  (Comment: 
Maugeri's rhetoric may be motivated by a desire to minimize 
ENI's competition within Italy.  ENI cannot invest in 
additional gas pipelines to Italy because Italian law places 
a 67 percent ceiling on ENI's contribution to the Italian 
natural gas system through 2010.  ENI is already importing as 
much gas as it can under current laws.  End comment.) 
 
¶12.  (U) In his meeting with Magliano, DAS Bryza noted that 
if the TGI and other pipelines are used to move Central Asian 
gas, investment sequencing is very important.  Specifically, 
downstream investors must be assured that a pipeline will be 
in place to move the natural gas extracted from Central Asian 
gas fields; and investors in the pipeline will have to know 
 
ROME 00001005  003.2 OF 004 
 
 
that there will be gas to fill the pipelines.  Magliano 
proposed a feasibility conference to bring upstream and 
downstream investors together with banks and financiers to 
discuss the feasibility of using TGI and other pipelines to 
connect Central Asia to Europe.  Magliano proposed the 
conference be modeled on that held prior to the construction 
of the Baku-Tblisi-Ceyhan pipeline. 
 
The GOI Vision: Italy as Europe's Natural Gas Hub 
--------------------------------------------- ---- 
 
¶13.  (U) Garribba noted that construction of a southern ring 
of gas pipelines will complement GOI plans to turn Italy into 
a southern European natural gas hub.  As envisioned by the 
GOI, increasing the capacity of existing pipelines to North 
Africa, completing the TGI pipeline, and increasing the 
number of LNG re-gasification terminals in Italy will enable 
Italy to become a transit country for gas flowing to 
landlocked countries in Eastern Europe.  Garribba noted that 
initially, the TGI would carry "Bluestream gas" owned by 
Gazprom, but that in the future the pipeline could carry 
Caspian Basin gas, including Iranian gas.  Both Garribba and 
officials at the Energy Authority cited agreements signed 
between the GOI and other governments (Serbia, Romania, and 
Slovenia, for example) as signs GOI plans are moving forward. 
 
¶14.  (U) Both Garribba and Magliano emphasized the use of LNG 
terminals to increase Italy's sources of natural gas.  Both 
see LNG terminals as more flexible than pipelines, which have 
fixed routes.  ENI's Maugeri agreed, and said LNG terminals 
are more viable than additional pipelines. 
 
¶15.  (U) Officials at the Energy Authority, Italy's 
independent energy industry regulator, told DAS Bryza they 
will enact regulatory incentives to speed the construction of 
natural gas infrastructure.  The Energy Authority's goal is 
to speed the completion of the TGI pipeline and the 
construction of LNG terminals.  The Energy Authority is 
reaching out to other energy regulators in the Mediterranean 
Basin, including the Balkans, and will host regulatory 
workshops to harmonize regulations. 
 
¶16.  (U) Maugeri characterized the GOI "southern hub" plan as 
"not economically viable," and views it as an example of bad 
government decision making.  He called plans to build a 
pipeline from Algeria to Sardinia "Mickey Mouse,"  and added 
construction "will never happen."  According to Maugeri, the 
GOI is entering into agreements with other governments for 
pipelines that the private sector doesn't think are viable. 
He cited the agreement signed between the GOI and Serbia, 
Romania, and Slovenia as an example.  (Comment: Maugeri's 
pessimism regarding these projects is likely caused by legal 
restrictions on the amount of gas that ENI can bring into the 
Italian market.  Other Italian oil and gas companies, such as 
Edison, may not share Maugeri's view.  End comment.) 
 
ENI's Thoughts on Iran 
---------------------- 
 
¶17.  (U) During his meeting with ENI officials, DAS Bryza 
asked about ENI's experience doing business in Iran.  Using 
the construction of LNG terminals as an example, Maugeri 
stated "it's easier to do business in Iran than in Italy." 
Maugeri continued that he does not understand the USG policy 
of "isolating" Iran.  Pointing out that in the 1930's Italy 
became the first country subjected to multilateral sanctions 
(by the League of Nations following Ethiopia's invasion), 
Maugeri said that sanctions don't work, and that in the case 
of Iran, they only unify the otherwise pro-western population 
behind President Ahmadinejad,s anti-western regime. 
 
¶18.  (U) Continuing, he said Iran's natural gas industry has 
fallen behind Qatar's, and that Iran is unlikely to play a 
major role in international gas markets because of Iran's 
high domestic demand for natural gas: Iran uses eight billion 
cubic meters of natural gas a year domestically, including 
gas used for re-injection into oil fields.  The South Pars 
gas field, in which ENI has a substantial investment, will 
not export for some time, according to Maugeri. 
 
Comment 
------- 
 
¶19.  (U) Two themes emerged from DAS Bryza's conversations 
with GOI and ENI officials.  First, the GOI shares the USG 
 
ROME 00001005  004.2 OF 004 
 
 
concern over Gazprom dominance of European gas supplies and 
wants to find ways to strengthen market forces and channel 
Gazprom towards more constructive, market-based behavior. 
Second, the disconnect between the GOI and ENI on how to 
diversify Italy's natural gas sources is a reminder that the 
private sector should be included in discussions on Europe's 
energy security.  This is especially important since the GOI 
and EU expect the private sector to take the lead in 
developing the infrastructure necessary to lessen Europe's 
dependence on Russian oil.  End comment. 
 
¶20.  (U) DAS Bryza did not clear this cable prior to his 
departure. 
SPOGLI