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 
 
 
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SUMMARY 
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¶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. 
 
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Comment 
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¶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