BMI View: E.ON affirmed its strong commitment to the development of the Livorno LNG terminal offshore Tuscany. The economics of the project, along with other planned LNG terminal s , has been questioned as Italy already h as a large gas import infrastructure and mostly flat demand. Nonetheless, we believe that developing such capacity will be critical for Italy going forward in order to alleviate the threat to energy security triggered by falling export capacit ies of its traditional suppliers in North Africa.
Italy 's gas strategy provides a strong insight into the future of the European gas market. The country remain s la rgely dependent on gas imports , having seen nearly 68b n c ubic m etres (bcm) of net gas inflows in 2012 . F lat consumption and declining domestic production could see its gas imports breach through 70 bcm per annum over the decade.
|Italian Gas Consumption, Production & Net Imports, bcm|
Italy appears keen to develop extensive gas import infrastructure that will help service energy needs in the future. It currently has two operating liquefied natural gas ( LNG ) regasification plants : the Adriatic LNG , located close to Rovigo, with a nameplate capacity of 8bcm, and the Panigaglia terminal, which has a 3.5bcm capacity of and is near La Spezia in the n orth-western part of the country. The re st of its gas import requirement is sourced from Mediterranean pipelines that transport gas from Algeria and Libya , and the European gas network, which mostly brings in Russian gas.
|Algerian Gas Pipeline To Europe|
Nonetheless, numerous companies are currently planning on boosting Italy's LNG import capacity further. Two LNG terminals reached the construction phase and four terminals have been announced in recent years:
Brindisi LNG: This was set to have a 8.28 bcm but was put on hold by operator BG Group following numerous delays in obtaining various permits for further development. To date, the company has invested about US$250mn in the project;
Livorno LNG: Also known as the Tuscany Offshore Regasification Terminal (OTL), it isunder construction with projected capacity of 3.75bcm upon completion. The project envisages a floating regasification unit from modifying an LNG carrier. It will be positioned 22 kilometres (km) off the Tuscan coast and is connected to dry land by a 30km- long pipeline that will transfer gas to the national distribution system. The project will be operated by E. ON and Italian regional utility Iren and is expected to cost US$790mn in all.
Giola Tauro LNG (Medgas): It will have a capacity of 12 bcm. It is is waiting for environmental approval;
Porto Empodolce LNG: Planned for a 2015 startand is set to process 8.28 bcm of natural gas;
Rosignano LNG: To be operated by Edison, the terminal will be based in Tuscany with an annual regasifictaion capacity of 8 bcm.
Priolo LNG: Cancelled by Shell in 2012 after Erg withdrew from the project.
Much controversy surrounds these projects as Italy's pipelines links appear sufficient to meet the country's gas requirements for the foreseeable future. Nonetheless, E.ON's CEO Johannes Teyssen announced at a conference early June that the company is 'definitely committed' to the project, adding that ' there's always overcapacity sometimes but infrastructure is not happening for next year, it's happening for a generation' in an attempt to alleviate doubts about the commercial viability of the project.
While we continue to be concerned about a potential overcapacity that could affect Italian LNG importers in the coming decade, we do believe that developing these projects could remove serious energy security issues that could be detrimental for the country in the future. The main reason for this is Italy's large reliance on imports from the Middle East, in particular Algeria and Libya. In 2012, the country imported 33% o f its gas from Algeria , 9% from Libya and 1 % from Egypt.
|Italian Gas Imports by Country of Origin, percent, (2012)|
Recent uprisings in Libya and Egypt and its consequences on these countries' political stability have reduced their gas export capacit ies , and consequently have hit available supplies to European importers. Similarly, terrorists attacks early 2013 in Algeria , in particular at BP 's In Amenas gas plant, and mounting presence of Al Qaeda in the Islamic Maghreb (AQIM) in the north Mali creates further supply uncertainty. KGS Nightwatch notes that 'Al Qaeda in the Saharan region is far more sophisticated and coordinated than in Afghanistan or the tribal Arabs in Yemen. Southern Algeria appears to be their base of operations.' We also expect the country's gas consumption to grow significantly in the years to come, further limiting its export capacity.
|Energy Security Risk|
|Algeria (LHC) & Libya (RHC) Gas Production, Consumption & Net Exports, bcm|
Public authorities in Italy have noted the upcoming risk of shortage from North African gas inflows. Leonardo Senni, head of the energy department at Italy's Ministry of Economic Development stated that the country is 'in need of new supply sources' early June. With Algerian exports already on the downtrend, it appears critical for Italy to diversify its energy sources. The National Energy Plan (NEP), which was adopted early 2013, targets the development of new gas sources, especially through new pipelines and LNG import capacity. Fulvio Conti, chief executive of Italian utility Enel said that ' Italy is trying to diversify away with the likes of LNG and the Trans-Adriatic Pipeline (TAP)' even if the country ' can't do without Algerian gas.'
We believe that if TAP were to be finalised, it could bring to the country nearly 10 to 15bcm of additional gas from Azerbaijan into Europe. Part of this gas will end up at TAP's destination point in Italy, to the benefit of the country. Nonetheless, the potential downturn in Algerian exports in the coming years remains a serious threat for Italy's energy security and the country would need all the gas it can get from other sources. We believe developing significant LNG import capacity will be critical for the country to secure sufficient gas in the decades to come.