ITALY PROMOTING BIGGER ROLE FOR NATURAL GAS IN ITS ENERGY MIX

Italy is pressing a major campaign to boost the natural gas share in its energy mix.

Environmental concerns in Italy are gaining a higher profile as a result of toughening European strictures on air quality. That's especially true in the Italian electrical power sector, historically heavily dependent on fuel oil, which aims to double the gas share of its fuel supply.

Italian government officials and state owned energy companies are trying a portfolio approach in boosting the role of natural gas in the country's energy mix. A number of fiscal incentives and technological advances have been implemented to promote natural gas use, and the nation's natural gas transmission and distribution infrastructure is growing rapidly. Domestic exploration and production is rebounding after a virtual hiatus of several years. Italian companies are lining up more gas imports from current suppliers and considering new sources of gas imports.

While all this emphasis on natural gas may pose concerns that Italy is putting all its eggs in one energy basket, the dominant view in the country is that natural gas is, indeed, the fuel of the future and that Italy's central location in Mediterranean Europe makes that fuel a natural choice (see related story, p. 29).

NATURAL GAS ROLE

The role of gas in Italy's energy mix is growing steadily, says Snam SpA, Italy's main gas supplier and a unit of state owned energy group Ente Nazionale Idrocarburi (ENI).

In 1993, Snam shipped 1.736 tcf of natural gas, 52.5 bcf more than the previous year. While the rate of growth may not seem too dramatic at 3%, it must be viewed in the overall context of Italian energy consumption. Last year, Italy's use of solid fuels plunged 15.1% from the prior year, while oil consumption slipped 2%.

The performance of natural gas is even more impressive when considering that the consumption of natural gas as a feedstock for petrochemicals fell 37% in 1993 from the year before and natural gas demand in residential heating slipped marginally because of a milder winter.

In fact, the market penetration of gas has risen in Italy, accounting for 25.4%, or 844,000 b/d of oil equivalent (boed), of Italy's total primary energy demand in 1993. Of that, 158,000 boed was gas converted to electrical power. Natural gas accounted for 822,000 boed of Italian primary energy demand in 1992.

The natural gas share of Italy's energy mix is second in Europe only to major gas producer Netherlands, where natural gas commands 42% of the market. Italian consumption currently runs at about 1.785 tcf/year. Agip SpA, another ENI unit, predicts Italian gas demand will soar to about 2.625 tcf/year by 2000. That increase of more than 50% in less than a decade will result in natural gas meeting about one third of total primary energy demand.

Oil currently accounts for about 56% of Italy's total primary energy demand.

GAS DEMAND BREAKOUT

A concerted effort by Italy's gas industry to promote gas use in residential heating and cooking has sharply hiked demand in that sector.

In January 1994, residential consumption jumped 8% from the year ago figure. In 1993, gas accounted for 51% of the energy used in Italian homes, compared with 48% in 1992.

By the turn of the century, 15 million families or two thirds of the national total, are projected to be tied into the national gas grid.

In the industrial sector, gas demand is likely to rise steadily at the same pace as in the past. Most gas consumed in this sector is by small and medium sized factories concentrated in urban areas, where air quality concerns are greatest. In this sector, gas is expected to reach a market share of 43% by 2000 compared with its current level of 40%.

It is in the electrical power sector where gas consumption is expected to log its biggest growth, increasing to 40% of national gas consumption from the current 20%. The main consumer here is ENEL, the national electric utility that used 231 bcf in 1993, up 24.5 bcf from 1992's level. ENEL predicts its gas consumption will double by 2000.

Much of what is driving increased power consumption of gas in Italy are advances in technology, notably high efficiency, combined cycle gas turbines and cogeneration designs implemented in a new generation of power plants. Lower investment costs and simpler operation, along with increased efficiency gained from recovery of waste heat, have helped spark demand for natural gas in this sector.

INDUSTRIAL POWER USE

Another factor in burgeoning electric demand for natural gas is a deregulation drive under way in Italy's power sector, notably the rise of independent power producers (IPPs).

As much as 4 million kw of power produced from private cogeneration and IPP suppliers will be sold to ENEL within the next 10 years. This represents one third to one half of Italy's projected incremental electricity demand by 2002.

Private industry is encouraged to build its own power plants with the incentive of a 20-26% discount on the price of gas, provided it is used in high efficiency, combined cycle cogeneration plants.

Operators are allowed to pass along gas price increases to their contract suppliers of electricity under a tripartite agreement among Snam, ENEL, and the National Union of Industrialists (Confindustria). Long term contracts help justify the investment in private power, where outlays are averaging about $645 million/year.

Overall, gas represents 40% of the energy consumed by Italy's industrial sector, and the growth trend is not easing. Electrical power used by private industry accounted for most of that sector's increased gas consumption in 1993-up 9.7% from 144,000 boed in 1992. At the same time, that sector's consumption of solid fuels to generate power fell 19% in 1993 from the prior year.

Gas now represents 21% of industrial thermoelectric inputs, compared with 19% in 1992, with the driving force in increased gas consumption there being tougher regulation of industrial emissions.

In addition, gas is increasingly favored in construction, especially brickmaking, and in chemical and metallurgical industries. While marginal at the moment, sharply growing demand also is expected from gas powered air conditioning and natural gas vehicles.

GAS GRID

Italy's natural gas transmission and distribution pipeline network has reached a total 26,000 km, up 200% the past 12 years and spurred mainly by the rise in gas use to heat homes.

Major upgrading of the natural gas pipeline system is still going strong, especially in southern Italy and the Italian islands, where bottled liquefied petroleum gas was the rule only 10 years ago.

Thanks to the European Regional Development Fund, 600 municipalities in southern Italy have been connected to the network. Completion of the southern expansion is due in the next 3 years, with another 500 towns linked to the grid.

The system upgrade will include doubling capacity of the south-north trunk line extending from Sicily to Milan and completion of the Padana Valley trunk line, which runs from the Austrian border to Turin.

Snam forecasts that Italy's total demand for natural gas will reach 2.45 tcf/year by the end of the decade. Most of this will come from abroad.

Of the 1.75 tcf of gas Snam delivered to Italian markets in 1993, 35% was produced in Italy by Agip and other companies, while 28% was imported from Algeria, 26% from Russia, and 11% from Netherlands.

ITALIAN GAS PRODUCTION

Italy's production of gas increased in 1993 from 1992, climbing 7.4% to 672 bcf from 630 bcf. Of this increase, 28 bcf was produced by ENI companies, 14 bcf by other companies.

Current domestic production is equal to 37.6% of total Italian consumption, and the percentage won't substantially change in coming years, say Snam and Ministry of Industry.

Taking a different stance from some other European countries, Italy is not reducing its dependence on foreign energy sources. So diversifying supply sources is a strategic priority.

Snam is well ahead of schedule in doubling throughput capacity of the trans-Mediterranean gas pipeline system. It recently laid a subsea line from Cap Bon, Tunisia, to Mazara del Vallo, Sicily. Snam also is increasing throughput capacity of the Trans-Austria Gasleitung (TAG) pipeline by adding three compressor stations, which will allow it to increase imports of Russian gas by 192.5 bcf/year.

With the increasing role of gas consumption in Italy's energy mix there is a need for a substantial increase of underground gas storage capacity. Total working gas capacity is to be expanded in Italy from the present level of 455 bcf to 630-700 bcf by about 2000. At the moment there are eight storage reservoirs in the country. Three partly depleted onshore fields are being surveyed in North and Central Italy and are likely to be developed later as storage sites.

Agip, responsible for developing Italy's gas storage system, says it currently can cope with a 6 month disruption of gas imports.

Agip also is recommissioning 15 marginal gas fields in the upper Adriatic Sea. Plans call for installing as many as 19 unmanned platforms linked together and tied into a new gas export trunk line to be laid to an existing onshore treating plant in northern Italy. Combined upper Adriatic gas field reserves are estimated at 1.1 tcf. Agip has developed a new, integrated approach to developing marginal upper Adriatic fields. It makes maximum use of operating synergies and new project management techniques that allow the company to reach "an interesting cost/benefit ratio in the marginal gas field."

Development is based on "low energy/high reliability platforms" with minimal topsides installed on unmanned wellhead platforms that are in turn connected to two manned platforms with production modules. Upper Adriatic gas production will fuel new gas fired cogeneration plants to be built near the Adriatic coast.

SUPPLY SHORTFALLS?

There is a possibility of gas supply shortfalls centering on imports.

Qatar last January refused the price Snam set under the so-called Eurogas megadeal calling for an initial 6 million metric tons/year of liquefied natural gas-half of Qatar's LNG output-to be shipped to Italy. Snam offered $2.40/MMBTU vs the $3.50/MMBTU Qatar reportedly was seeking.

Italy has renegotiated a 25 year agreement with Algeria covering supply of 385 bcf/year of Algerian gas. Effective Aug. 1, Italy was to begin paying $2.60/MMBTU at the Italian border, compared with $2.85/MMBTU Jan. 1 1993, and $2.41/MMBTU Oct. 1, 1991, French gas company Cedigaz reported. But Snam maintains the price it currently pays for Algerian gas works out to less than $2.50/MMBTU.

ENI is buying 175 bcf/year of Russian gas at a relatively low cost. ENI was the first company to strike a deal with the former Soviet Union-then under Nikita Khruschev--and has taken the lead in revamping Russia's gas pipeline network. Cedigaz reports the Italian price for Russian gas as of last Aug. I was $2.35/MMBTU, well below the $2.68/MMBTU the rest of western Europe pays for Russian gas.

Supply problems could develop elsewhere. Prospective shipments of LNG from Nigeria's long delayed Bonny LNG project are mired in more problems than had been anticipated.

In addition, last winter pressure fell almost 50% in the TAG pipeline coming from the C.I.S. during a dispute between Ukraine and Russia. The Kremlin accused Kiev of siphoning gas supplies meant for Europe when the latter had not paid its energy debt to Russia.

The concern remains that Italy may be relying on too many unstable countries for imported gas.

TOWARD DEREGULATION

In Italy, Snam is the only gas importer and transporter. It accounts for 90% of the country's gas sales.

There are two other, smaller companies that produce town gas and sell it to 859 local distribution companies and industrial manufacturers.

The main name in local distribution is Italgas, owned 45% by ENI. Italgas is the main Italian distributor of gas, with 4,600,000 customers and 34% of the market. Italgas has an optimistic outlook, citing a first half increase of 6.1% in gas consumption by its customers from the prior year. Italgas also is involved in gas distribution in large areas of Portugal, Greece, and Argentina and is looking closely at Czech and Hungarian energy industry privatization plans.

In Italy, the price of hydrocarbons is still government regulated, although more loosely than in the past.

A law passed Dec. 28, 1993, introduced a price cap, indexing the price of gas to the cost of living. The law fixes the average price for home consumption at 60cts/cu m, compared with 53cts/cu m before Jan. 1, 1994. But that represents only 35% of the real cost of gas, with taxes accounting for 46% and distribution costs 19%.

"The heavy dependence of Italy on gas is also due to a lack of competition between fuels, such as oil or coal," said Ministry of Industry's Luiqi De Simone. "Gas is the only one that doesn't require heavy investments to use. And it became increasingly important when the first antipollution laws on emissions (sulfur dioxide, particulates, et al.) were passed in 1990.11

This booming market, with an increasingly stronger demand, recently saw entry of a big new player. British Gas plc last spring opened offices in Milan and began studying some of the governments of major cities in northern Italy that manage their own distribution companies: AMGA in Genoa, Acega in Trieste, and AMAG in Padua. British Gas plans to buy shares in those companies as soon as they are privatized and perhaps eventually import LNG into northern Italy.

Italy's upstream may also attract more foreign investment. Sicily, a region prospective for hydrocarbons, was the first region to rebel against royalties ENI paid for its oil and gas production. Sicily ostensibly expects to be a good business opportunity for foreign E&P companies. However, operators must tread carefully because the territory is burdened with many discriminatory regulations, official and unofficial-notably reputed payments to organized crime syndicates,

MONOPOLY CONCERNS

The most attractive region in Italy to British Gas and other international operators remains the hydrocarbon rich Padana Valley of northern Italy.

So far, it has been a traditional preserve of ENI, where it has a legal monopoly on oil and gas production. The European Economic Commission asked Italy to put an end to it. The monopoly is expected to be ended in 1995, but in Italy, "It is difficult to foresee when the EEC rules are complied with," says a foreign operator.

"According to the EEC regulations on third party access, national monopolies such as Snam are obliged to carry the gas of competitors such as British Gas," said Ministry of Industry official Mattia Sica. "However, Italian carriers pretend that it would overstretch their technical capacities and then deny access to the network. The case is being analyzed by the Italian antitrust commission, but it will take quite a while before a decision is reached."

Thus, municipalities have been prevented from buying gas from other suppliers, and market penetration by big international firms has been checked.

The average tariff Snam charges distribution companies is about 15cts/cu m, depending on gas quality. Distribution companies in turn are reimbursed a guaranteed 16cts/cu m.

"Unfortunately, this fixed price does not stimulate distribution companies to modernize" Sica said, "because their margins are guaranteed."

However, the Ministry of Industry is skeptical that privatization could mean lower prices in Italy.

"Newcomers wouldn't mean lower prices of gas for the final consumer, only more profits for distribution companies," Sica said. "Yet the real interest of privatization is that the safety of Italian supplies could increase."

ENEL'S SUPPLY WOES

The problem of finding adequate fuel supplies is epitomized by ENEL, the third largest electric utility in the world, which plans to boost it; capacity to 8-12 million kw by 2002.

ENEL got stuck between stricter European Union regulations on air emissions and commissioning problems at Montalto di Castro, Central Italy, where it has two combined cycle, gas fired power plants, one rated at 940,000 kw, the other at 2.48 million kw. Only the smaller plant is on stream because authorization has not come for a proposed LNG regasification terminal to feed the bigger plant, In addition, construction of ENEL's new Brindisi, southern Italy, power plant has been halted by local authorities. The result is that ENEL is scrambling to buy very low sulfur fuel oil (LSFO) to fuel its other power plants.

ENEL admits that it could have big problems with electricity supply within 3 years. But ENEL's LSFO needs could outstrip Italian refiners' capacities even sooner. Disruption in electricity supply is being felt this fall in southern Italy, where the suspension of work on the 660,000 kw Brindisi power plant resulted in overloading transmission lines carrying electricity from northern Italy.

Impending privatization, which would break up the electrical power monopoly, risks further disruption of required capital investment and normal operations of the company.

Coalition parties of the Berlusconi government are quarreling furiously on the shape to give the old monopoly. Part of the debate focuses not only on present and future dangers but also on errors of the past.

"ENEL decided not to put desulfurizers on its fuel oil power plants, and it was (tantamount to) suicide," a Ministry of Industry official said. "Thus ENEL will become the world's biggest importer of LSFO and increase its consumption to 160,000 b/d from 40,000 b/d by the turn of the century."

The official said Italian refiners could provide as much as 80,000 b/d of that future need, but there likely will be a shortfall of 100,000 b/d by 2002, in turn tightening the world fuel oil supply/demand balance.

Issue date: 11/07/94