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### Viewing cable 08ROME451, ENI: WHAT SHOULD WE DO ABOUT GAZPROM'S ITALIAN

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08ROME451 | 2008-04-10 13:01 | 2011-04-18 11:11 | CONFIDENTIAL | Embassy Rome

`

    VZCZCXRO8719
    PP RUEHAG RUEHROV
    DE RUEHRO #0451/01 1011317
    ZNY CCCCC ZZH
    P 101317Z APR 08
    FM AMEMBASSY ROME
    TO RUEHC/SECSTATE WASHDC PRIORITY 0118
    INFO RUCNCIS/CIS COLLECTIVE PRIORITY
    RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
    RUEHAS/AMEMBASSY ALGIERS PRIORITY 0539
    RUEHEG/AMEMBASSY CAIRO PRIORITY 0401
    RUEHRB/AMEMBASSY RABAT PRIORITY 0409
    RUEHTRO/AMEMBASSY TRIPOLI PRIORITY
    RUEHTU/AMEMBASSY TUNIS PRIORITY 0497
    RUEHFL/AMCONSUL FLORENCE PRIORITY 3001
    RUEHMIL/AMCONSUL MILAN PRIORITY 9343
    RUEHNP/AMCONSUL NAPLES PRIORITY 3150
    RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
    RUEHBS/USEU BRUSSELS PRIORITY 4619

` `

    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
    "

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