Italian Presidency to Focus on Interconnections, Neutral to Targets
The Italian government has the opportunity to show leadership at a difficult moment for Europe, neighbouring regions and the gas industry. Apart from its internal economic problems, instability around the Old Continent translates into additional complexity for Brussels (and Rome). Against this backdrop, Natural Gas Europe had the pleasure to interview Matteo Verda, research fellow at the Italian Institute for International Political Studies (ISPI).
We spoke about the current events and their consequences on investments and geopolitics. Through the presidency of the Council of the European Union, which is said to have a rather symbolic value, Italy will still have to prove that a reaction is possible. According to Verda, interconnections are the key solution to overcome this complicated situation, exacerbated by tensions all around Europe. In the South, North Africa remains unstable, with potential problems in Algeria. In the East Mediterranean, the current crisis between Israel and Gaza is mothballing investments in the region. On the East, Ukrainian instability remains a high hurdle. Nonetheless, Renzi's government has some cards to play. It can capitalise on its complex and grounded relations with Russia to increase European energy security. The riddle is there, solutions too.
Many newspapers are describing Italy as a country too soft on Russia, suggesting that the main opposition to Federica Mogherini (current Italian Foreign Minister) as the new European foreign policy chief had to do with her recent visit to Moscow, which was the first during Italy’s current rotating presidency. Do you actually think Italy is too soft on Russia? If so, what are the differences with Austria, which actually signed contracts with Gazprom to have South Stream’s endpoint in Baumgarten?
Italy is a strategic partner in Europe for Russia and Russia is a strategic partner for Italy. They have a long term relationship. No surprise that the current Italian government has met Russian politicians. You have to put things into context. Russian supplies are a key element for Italian energy security. The difference between Italy and Austria is that Italy has a much more complex relation on many different aspects. Austria is a low profile member state of Europe. It is playing a role of hub for Russian gas, but it is a much more flexible country. Italy is a much more outspoken pro-Russian country in Europe, because ties are not just a matter of gas. You can see strong cooperation in the industrial sector or in transportation, for example. That is why Italy cannot play the Austrian strategy, which is a below the radar one, less outspoken and not that evident. But at the end, both countries are quite favourable to Russia and their strategies can be compatible. The South Stream might end up in Baumgarten, but the Russian gas will arrive to Tarvisio anyway. In this context, the big loser is Slovenia, rather than Italy. For the Italian government, the decision to have the gas arriving in Austria and then taking it from there makes sense, as it could strengthen an ally in Europe to work with to push for the South Stream project.
Do you think that there could be an increased focus on Mediterranean gas assets during the Italian presidency? Between the Italian presidency and Cyprus presidency in 2023, there will be only Malta in 2017 as a Mediterranean country guiding the EU. Do you think that Rome could be able to push Europe to reassess its neighbourhood policy, finding ways to step up cooperation with North African countries and supporting projects in the East Mediterranean?
We have a big political problem in the region. The political instability is the main break to any kind of energy cooperation. We have problems in Libya, we have potential problems in Algeria. Generally speaking it is a really unstable region. We would need more stable secure environments to have any major real progress in terms of energy cooperation in the region.
Do you think that Europe can help these countries to achieve more stability?
Only marginally. Currently, Europe is showing extreme weakness. There is no financial, political will to project influence in the region. Speaking about Libya, we saw some form of intervention, but I don’t see a real appetite for a diplomatic intervention. European leaders are currently dealing with the instability in Ukraine. They are currently overstretched. That is why, I don’t see much of a focus on this region. It could happen in the next decade, but Europe has its hands tied at the moment. Of course, Italy, France and Spain will push for a stronger role of the EU in the region, but at the moment any effort would hardly translate into any significant result. On the other hand, there is a form of interest for stronger economic cooperation in the Eastern Mediterranean Sea, mainly on FLNG. But international investors are also scared of the evolution of the conflict in the region. The next step of the crisis between Israel and Gaza will be a key moment for new projects. Cautious investors are waiting to see developments there before taking any decision. Apart from that, I still see many potential problems in the area. I see a weak Syria. That is why, probably the only solution for investors is represented by liquefaction, whether Cyprus-based or FLNG facilities.
Would your viewpoint change in the event of consistent and significant shale gas production in Algeria? Keeping in mind the water issue and that this factor could impact the scope of fracking in Algeria. Shale gas production may still happen, albeit with a time-lag. Taking this complex framework into consideration, would your analysis change in the event of shale gas production in Algeria? In other words, would techniques to develop shale gas in Algeria change the evaluation of Northern African gas production? In that case, would a Platform between Europe and North Africa make more sense?
Algeria is for sure a long term partner and, maybe, we will see some unconventional natural gas coming from there in some years. But I don’t see an immediate future for shale production there, because of the technical problems. As you mentioned, we have a problem of water supplies, and we have also security issues. Algerian natural gas industry is a complex industry, but it is not on the frontline of innovation. They need to import technology and attract foreign investors. And, as said, the regional context is not a safe bet for investors. Maybe, after the transition of powers in the country, we will see a change in the approach. More investments might follow. But it still requires time. This will not happen this decade. We will have to wait till the next decade to see how things change, and I am referring both to the security issues in the region and unconventional natural gas coming from Algeria.
Do you think that Italy’s current presidency of the Council of EU could help the country push forward the South Stream project?
The EU presidency is largely a symbolic position. The Italian government has a some leeway at the European level stemming from its size, the size of its economy and its market. At the same time, it can also leverage on the fact that Eni is involved in the construction of the offshore section of the South Stream. Italy has quite a few cards to play, but the presidency is not the decisive one.
Do you think the Italian presidency would increase Italy’s potential to become a central gas hub?
The building of the South Stream is not relevant in this context. It is quite marginal. The construction of the pipeline is an instrument to increase Italian energy security and not to sell the gas to other countries. The gas hub strategy proposed by the government hinges on the Trans Adriatic Pipeline (TAP), because the South Stream is largely an alternative to the Russian gas via Ukraine. On the other hand, TAP brings new gas to Europe.
Do you see the two projects going ahead together? Do you think they are compatible? Do you think that it could be possible for Italy to support and endorse both projects - TAP and South Stream?
Yes, absolutely. They are definitely compatible. The sheer size of the two pipelines is quite clear: South Stream is a 63 bcm pipeline, while TAP is between 10 and 20 bcm per year. The decision to support South Stream is part of an security strategy, rather than a competitive strategy. The only case of potential incompatibility would derive from a massive upgrade of the Southern Corridor, but this is not the case yet.
Do you think that there are other pipelines compatible with the two under construction? Do you see other pipelines arriving to Europe any time soon?
Given the low European gas demand, I don’t see the need of new pipelines to Europe. In other words, I don’t see any financially sustainable pipelines. Even though internal production is decreasing, the pace of this decrease is such that new imports are not that urgent. Not for this decade, I would say.
With regards to countries in North Africa, you said something really interesting. You basically said that investments in many countries will be a matter of a decade. But we also know that energy cooperation requires strong platforms to discuss and foster any common position. And these platforms require years to be built and to become efficient.
Earlier this month, Energy Minister from the EU, North Africa and the East Mediterranean agreed in principle to establish a Euro-Mediterranean Platform on Gas that will bring together policy makers, industrial representatives, regulators and energy stakeholders. According to a recent note released by the European Commission, further elaboration of the modus operandi of the platform should take place in Rome in November. Do you think that Italian presidency can promote it and push it forward? Do you think that the timing is right and that the platform will be ready for the investments to be made in the next decade? It sounds like, isn’t it? Half a decade to create such a Platform seems reasonable, and this could trigger the investments you were speaking about, no?
No doubt that the Italian government will push on a diplomatic level. Italy will clearly try to establish a framework for more efficient cooperation. But, still, I don’t see much scope for increased cooperation in the region now. Gas production in Northern Africa is indeed decreasing. Libya is a really unstable supplier. Egypt will not supply anymore natural gas because it needs that gas for its own market. Algerian natural gas is dramatically decreasing due to a clear lack of proper investments. Therefore, I don’t see a strong potential for a big platform. There is a lack of real interest. Maybe at the end of this decade, things might change, but at the moment the platform would be not that useful.
In short, what are the priorities of the Italian government during the next six months? What’s its role in Europe and what’s its interest in the energy sector? What about interconnections?
Interconnections are indeed the main priority of the Italian government, because interconnections can have a positive impact on energy security. There is some interest to create interconnections to export natural gas from Italy. The first option would be a reverse flow of the facility in Passo Gries. In this sense, there is scope for an Italian hub, especially given the dimension of the Italian gas market. And this is something that Europe needs as well. More interconnections immediately translate into more energy security. That is why the Italian government will obviously push in this direction. Interconnections are important for Italy and equally topical for Europe. As a consequence, TAP is financially viable and useful for Europe and the Italian system.
Speaking about other priorities, targets for 2030 are quite a difficult topic to address, as Italy has traditionally been a passive actor. Italy has been substantially neutral to environmental policies at a European level. I expect the country to be neutral to carbon emissions targets, as well. I am not sure about the renewables target, as there is not a clear interest to support or to adverse these targets. In this sense, I don’t see the Italian government to use its presidency to push for a policy or another. That is why I don’t see a clear distinctive Italian position, other than the point we raised before: more integration and more interconnections.
But Renzi’s government decided to cut renewable energy incentives. Is this decision coherent with what you just said? Could it be followed by a similar move at the European level, despite the recent declarations of the newly appointed President of the European Commission Junker, who said that renewable energy has to account for at least 30% of European energy needs by 2030?
The rethinking of the subsidies is forced by the current economic situation in Italy, and elsewhere in Europe. At the same time, the current system of subsidies is not working efficiently. It is providing a good level of renewables in the energy mix, but it is too costly. In this sense, there is a need to rethink the incentives to renewables. But I don’t see a strong link between Renzi’s decision of partially changing the system of subsidies and the future position of Italy on targets and renewables. Of course, Italy will focus on the economic viability of projects, on a sustainable EU framework. But it will not immediately imply a strong position on renewables or targets.
On a different note, do you think that Europe can find its way not to increase its reliance on Russian gas? In other words, do you think that it could find other ways to buy gas or produce it locally? Do you think that enough has been done to promote energy efficiency?
I don’t think that Europe is too reliant on Russia. The point is that European national grids are not well interconnected. Europe needs more interconnections. That is the priority. In case of shortages or cut-offs, the problem would be how to provide gas to Eastern European countries. But that would be a crisis situation. Generally speaking, Russian supplies are really reliable. It is not my opinion, it is history. That is because Russia is extremely dependent on its European customers. We can trust their weaknesses.
Will your viewpoint change when Russia will finish its pipelines to China?
No, for two reasons. Firstly, China might become the second market for Russian gas, but Europe will remain Russian main importer. China is important, but it is not a substitute. Secondly, the Chinese market is supplied with natural gas from new fields. The costs of developing those fields and building the infrastructures will imply further obligations for Gazprom. Therefore, Gazprom will be not less reliant on European countries. Given the new financial exposure of Gazprom, Russia will still depend on its core market, on Europe.
In conclusion, speaking about Italy, do you think that it is true that ‘breakthrough only comes after breakdown’? In other words, do you expect the country to move forward with its projects and its recovery?
Yes, I am very optimistic about the prospects of Italy. I think that recovery might take place even faster than expected. Of course, it is a incredible crisis. I think that by the end of this decade we will see some really good Italian performance. I am really positive. This will depend on the possibility of delivering good reforms. I am especially referring to the labour market and further liberalisation of the service sector. But, yes, I see a good outlook for the Italian economy in 5-year time.