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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 JE...

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 
"