VZCZCXRO0424
RR RUEHFL RUEHNP
DE RUEHNP #0079/01 3051559
ZNR UUUUU ZZH
R 311559Z OCT 08
FM AMCONSUL NAPLES
TO RUEHC/SECSTATE WASHDC 6284
INFO RUEHRO/AMEMBASSY ROME 0492
RUEHFL/AMCONSUL FLORENCE 0107
RUEHMIL/AMCONSUL MILAN 0126
RUEHMO/AMEMBASSY MOSCOW 0007
RUEHBS/USEU BRUSSELS 0004
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHNP/AMCONSUL NAPLES 1022

UNCLAS SECTION 01 OF 04 NAPLES 000079 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON TRGY BEXP KGHG SENV IT RS
SUBJECT: SOUTHERN ITALY'S GROWING ENERGY SECTOR 
 
REF: NAPLES 28 (NOTAL) 
 
¶1.  Summary:  While Italy continues to import up to 90 percent 
of its energy needs, increasing production in southern Italy has 
the potential to slightly reduce the country's dependence on oil 
and gas from Russia and North Africa.  Ironically, the growing 
production in the South has not prevented significantly higher 
electricity costs there as compared to the Center-North. 
Europe's largest inland crude oil reserves are in Basilicata, 
and in July and September 2008 the discoveries of major natural 
gas deposits off the coast of Sicily were announced.  Energy 
supplied by renewable sources, in particular solar and wind 
power, is on the rise in the South, though it still represents 
only a small fraction of production.  An apparently significant 
potential for geothermal energy remains untapped. 
Waste-to-energy projects (one of which is led by an American 
company) have the potential to solve the South's perennial trash 
crisis and to lower electricity costs.  Bureaucracy, organized 
crime and local government indifference have hindered 
implementation of some energy plans.  These factors, combined 
with a lack of well-maintained energy infrastructure, have led 
to the above-mentioned disparities in the cost of electricity 
and the quality of service between northern and southern Italy. 
End summary. 
 
Overview 
------------ 
 
¶2.   Italy imports 90 percent of its energy needs, mostly in the 
form of oil and natural gas from Russia, North Africa and the 
North Sea (gas).  Much of Italy's relatively small domestic 
energy production comes from the South, in particular the 
regions of Basilicata and Sicily.  Production through 
alternative means (mainly wind and solar power) is also 
increasing rapidly in the South, but these sources still account 
for a miniscule percentage of Italy's total energy production. 
According to European Commission statistics, Italy's total 
domestic energy production increased by 15 percent over the 
period 1990-2004; energy produced by renewable sources grew by 
86 percent over the same period.  At the same time, imports of 
gas increased by 118 percent.  There are several re-gasification 
plants in various planning stages in Southern Italy, with one in 
Brindisi (Apulia) already approved and nearing completion 
(others have been proposed for Taranto, Gioia Tauro, Porto 
Empedocle and Priolo, the last of which appears to be a GOI 
priority, according to recent remarks by the Environment 
Minister). 
 
Basilicata -- Europe's Largest Inland Crude Oil Reservoir 
--------------------------------------------- ------------- 
 
¶3.  The discovery of large oil and natural gas deposits has made 
Basilicata, one of Italy's poorest regions, an area of strategic 
importance, not only for Italy but for Europe.  Although oil was 
discovered in the region 70 years ago, it became accessible only 
in recent years, thanks to new horizontal drilling technologies 
that allow curved wells that bypass difficult patches of hard 
rock.  The Val D'Agri zone may have reserves of at least 420 
million barrels and possibly much more, according to different 
sources, although it is not clear how much will actually be 
recoverable.  Nonetheless, the zone is Europe's largest inland 
crude oil reservoir, and is being exploited by Italian 
parastatals AGIP and ENI, as well as ExxonMobil, Shell, Total 
and Enterprise.  Over 100,000 barrels per day are trucked to 
ENI's refinery in the port city of Taranto.  Total's Tempa Rossa 
field is expected to come on stream by 2010, with peak 
production of 50,000 barrels per day. 
 
¶4.  Natural gas deposits have also been discovered near the city 
of Matera, and deposits of methane in the Metaponto area along 
the Ionian Sea, although so far it is not being exploited and no 
one knows how much gas is there.  There are great expectations 
that the oil and gas can lead to economic development and 
greater employment in the impoverished region, with minimal 
impact to the environment.  Basilicata also produces 
hydroelectricity (200 million kWh in 2007), wind power (260 
million kWh in 2007) and thermoelectricity (1 billion kWh in 
2007). 
 
Sicily - It's a Gas 
------------------ 
 
¶5.  The discovery of natural gas deposits off the coast of 
Sicily was announced in July 2008 to great fanfare.  The rights 
to the new gas fields are held by ENI (60 percent) and Italy's 
second-largest energy company, Edison.  Gas reserves associated 
with the discovery -- mainly in an area 22 kilometers off the 
coast of Agrigento at a depth of 560 meters -- are estimated at 
approximately 16 billion cubic meters.  Preliminary tests show 
 
NAPLES 00000079  002 OF 004 
 
 
production of around 190,000 cubic meters of gas per day. 
Edison CEO Umberto Quadrino has indicated that the discovery 
will boost the group's gas production by between 20 percent and 
30 percent by 2011.  In late September 2008, ENI announced 
another new gas discovery in the Sicilian Strait, about 20 
kilometers off the coast of Agrigento, through the Argo 2 well, 
whose rights are also shared with Edison.  Preliminary tests on 
the new discovery have shown a production of around 170,000 
cubic meters of gas per day.  The potential of all the 
ENI/Edison Sicilian offshore gas fields is estimated at 
approximately 18 billion cubic meters of recoverable reserves. 
ENI/Edison have not indicated when pumping will begin.  The 
future addition of this new gas will of course contribute to 
Italy's domestic energy production, but given the country's 
growing demand and estimated current gas imports of about 80 
billion cubic meters per year, it will not significantly 
decrease its dependence of foreign gas supplies. 
 
¶6.  ENI is also extracting gas inland in southeastern Sicily, 
and U.S.-French company Panther Oil and Gas is exploring in the 
same area.  Panther has had ongoing legal problems with local 
governments and environmentalists in Val di Noto that have 
hindered most of its operations; the Consul General has done 
advocacy for the company, but the case is now tied up in the 
very slow Italian courts. 
 
¶7.  Sicily also has four oil fields with an estimated one 
billion barrels of recoverable oil in Ragusa, Gela, Vega and 
Perla.  Exxon-Mobil has an oil refinery in Augusta (near 
Siracusa) that is the second largest producer of lubricants 
worldwide; it also produces aviation and maritime fuels and 
gasoline.  An attempt to merge with a former ENI refinery to 
create a large fuel, lubricant and chemical operation failed in 
2001 due to limiting anti-trust conditions.  In June 2008, 
Russia's Lukoil purchased a 49 percent share in the ISAB 
refinery complex in Priolo, which it operates jointly with 
majority owner ERG (Italy's largest independent refiner).  The 
facility has a capacity of about 320,000 barrels a day.  ERG has 
stated it would use the Lukoil cash for expansion, including in 
the area of alternative and renewable energy sources. 
 
Apulia - Potential Source of Oil and Gas 
----------------------------------------- 
 
¶8.  Recent exploratory drilling in the region of Apulia 
identified some 40 sites of oil deposits in Lecce Province and 
natural gas in the Foggia province.   Regional authorities 
issued permits for ENI and Intergas Piu' to continue the 
drilling, but concrete results will not be available until 
2011-2012 according to local officials. 
 
Alternative Sources on the Rise 
-------------------------------- 
 
¶9.  Renewable energy sources (not counting hydroelectricity) 
supply about two percent of Italy's energy needs.  It is 
estimated that Italy has one of the largest potentials for solar 
energy in Europe.  Southern Italy receives lots of sunlight, 
making it ideal for attempts to harness solar power.   One of 
the most advanced undertakings, known as the "Archimedes 
Project," is being carried out by ENEL (Italy's largest power 
company) at Priolo Gargallo, Siracusa Province, Sicily.   It 
will use high-performance technology developed by Nobel Laureate 
Carlo Rubbia and ENEA (the Italian National Agency for New 
Technologies, Energy and the Environment) in order to produce 
and store energy at night, or with cloudy skies, thanks to a mix 
of sodium and potassium.  Thin mirrors will involve lower 
construction and installation costs than other similar schemes. 
Apulia and Basilicata are developing a project for the 
construction of a plant for solar energy research and production 
that is scheduled to begin in late 2008.  Our contacts tell us 
that Italian government subsidies for the development of solar 
power have helped, but that bureaucratic hold-ups have hindered 
the use of electricity from these sources. 
 
¶10.  According to ENEL, Italy is the fifth-largest producer of 
wind energy in the world, though the country does not have the 
same natural advantage for wind power as other European 
countries.  Most of Italy's existing wind farms are concentrated 
in southern regions and the islands of Sicily and Sardinia; one, 
on the border of Campania and Apulia, is reportedly the largest 
in Europe.  Between them they produce annual revenue of some 450 
million euros and employ 3,500 people.  A British company, Blue 
H, is constructing the world's first floating wind turbines some 
12 miles off the coast of Sicily, with plans to build a 
full-scale floating 90 megawatt wind farm in the region.  There 
are also fairly large wind farms in Basilicata and Calabria; in 
the latter region, unfortunately, there have been reports of 
 
NAPLES 00000079  003 OF 004 
 
 
Mafia ('Ndrangheta) involvement in some of the projects. 
 
¶11.  Another  promising source of renewable electricity 
generation for Italy could be geothermal energy.  According to 
the International Geothermal Association (IGA), Italy has the 
fourth-largest installed geothermal capacity in the world (795 
megawatts), and has over 90 percent of the total installed 
geothermal electricity production capacity in the EU.  Analysts 
estimate that Italy could have the largest per capita geothermal 
potential in the world.  Currently almost all of the production 
is in the North.  According to our contacts, plans to exploit 
the huge potential in places like the volcanic province of 
Naples have been developed by local scientists but not 
implemented by the GOI or Italian power companies. 
 
¶12.  Waste-to-energy schemes, such as the construction of 
incinerators in Campania, may eventually help reduce the costs 
of electricity production.  Unfortunately, the completion of a 
long-promised incinerator near Naples has been delayed by 
inefficiency and corruption, with a number of officials under 
indictment for fraud and related charges.  A local entrepreneur 
in both the energy and environmental sectors told us that there 
are studies underway to assess the feasibility of plants 
exploiting landfill methane.  (Such plants already exist in 
Tuscany and Emilia Romagna, providing considerable income to the 
communities that host them.)  But perhaps the most promising 
development is that an American company, San Diego-based 
Adaptive Arc, is in the process of negotiating contracts in 
Campania and Calabria (including Vibo Valentia and a consortium 
of seventeen towns in Cosenza province) to implement a 
plasma-based technology that converts waste -- even toxic waste 
-- into an artificial natural gas that can be used to produce 
electricity (reftel).  The technology has the potential to both 
reduce the cost of electricity production and to provide a 
long-term solution to Campania's perennial waste disposal 
crisis.  The potential value of contracts for Adaptive in 
southern Italy is approximately one billion USD. 
 
Disparities Noted at Energy Conference 
---------------------------------------- 
 
¶13.  The island of Capri hosted the southern interregional 
Confindustria (Industrialists' Confederation) Young 
Entrepreneurs' annual conference October 3-4, with the theme 
"Innovating Energies: Companies and the Environment."  National 
Confindustria Young Entrepreneurs President Federica Guidi 
supported the Berlusconi Government's decision to restart 
Italy's nuclear power program, calling for the need to diversify 
energy sources.  Campania Young Industrialists President Mauro 
Maccauro pointed out that businesses in the South are five times 
likelier to experience blackouts than those in the Center-North, 
while the price per megawatt hour of electricity in Sicily (156 
euros) is double that in the Center-North (82 euros).  He noted 
that energy prices have also risen much more in the South than 
in the North.  Puglia Governor Nichi Vendola asked for 
government support of his alternative energy projects, including 
hydrogen.  ENI CEO Paolo Scaroni warned that Italy was wedded to 
Russian natural gas for the foreseeable future and needed to 
maintain good relations with Russia (Scaroni has been in talks 
with his Gazprom counterpart, Alexei Miller, to form a 
"strategic partnership").  ENEL CEO Fulvio Conti lamented a 
system "full of contradictions," and warned that implementing 
the Kyoto protocol will lead to higher energy costs.  Former UK 
Chancellor of the Exchequer Nigel Lawson opined that the 
environmental agenda had been "hijacked by climate change" on 
the part of "subprime science." 
 
¶14.  Comment:  Although energy production is on the rise in 
Italy's South, these sources will not be enough to significantly 
reduce Italy's dependence on oil and gas imports any time soon. 
And despite the fact that southern Italy accounts for such a 
large proportion of the country's energy production, and 
notwithstanding the rise in energy production from 
alternative/renewable sources, the South suffers from more 
frequent blackouts than the rest of the country -- up to five 
times that of the North.  This is largely due to a lack of 
investment in maintaining and improving energy infrastructure, 
according to ConGen contacts in the Naples Industrialists' 
Confederation.  For example, the electrical transmission grid in 
Sicily does not have the capacity to transmit all of the energy 
produced by wind-powered turbines in the center of the island. 
Our contacts in the energy and environmental sectors complain 
that there has been greater emphasis on increasing energy 
production than on improving energy efficiency.  Moreover, 
bureaucratic delays remain a strong impediment to further 
development of alternative energy sources, although procedures 
have improved in recent months.  A few local entrepreneurs 
welcome recent GOI incentives -- up to 55 percent of costs -- 
 
NAPLES 00000079  004 OF 004 
 
 
for solar energy installations and hope that they will be fully 
used by local communities, as they referred to awareness as a 
key factor for carrying out these programs.  They tell us that 
local politicians are not yet seriously involved or committed to 
a systematic approach to energy issues.  ConGen Naples will 
continue to raise these issues in both public fora and with 
local officials, and to assist American businesses in helping 
address southern Italy's energy needs. 
TRUHN