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Cablegate: Eni: What Should We Do About Gazprom's Italian

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PP RUEHAG RUEHROV
DE RUEHRO #0451/01 1011317
ZNY CCCCC ZZH
P 101317Z APR 08
FM AMEMBASSY ROME
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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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