Cablegate: Southern Italy's Growing Energy Sector

DE RUEHNP #0079/01 3051559
R 311559Z OCT 08



E.O. 12958: N/A


1. Summary: While Italy continues to import up to 90 percent
of its energy needs, increasing production in southern Italy has
the potential to slightly reduce the country's dependence on oil
and gas from Russia and North Africa. Ironically, the growing
production in the South has not prevented significantly higher
electricity costs there as compared to the Center-North.
Europe's largest inland crude oil reserves are in Basilicata,
and in July and September 2008 the discoveries of major natural
gas deposits off the coast of Sicily were announced. Energy
supplied by renewable sources, in particular solar and wind
power, is on the rise in the South, though it still represents
only a small fraction of production. An apparently significant
potential for geothermal energy remains untapped.
Waste-to-energy projects (one of which is led by an American
company) have the potential to solve the South's perennial trash
crisis and to lower electricity costs. Bureaucracy, organized
crime and local government indifference have hindered
implementation of some energy plans. These factors, combined
with a lack of well-maintained energy infrastructure, have led
to the above-mentioned disparities in the cost of electricity
and the quality of service between northern and southern Italy.
End summary.


2. Italy imports 90 percent of its energy needs, mostly in the
form of oil and natural gas from Russia, North Africa and the
North Sea (gas). Much of Italy's relatively small domestic
energy production comes from the South, in particular the
regions of Basilicata and Sicily. Production through
alternative means (mainly wind and solar power) is also
increasing rapidly in the South, but these sources still account
for a miniscule percentage of Italy's total energy production.
According to European Commission statistics, Italy's total
domestic energy production increased by 15 percent over the
period 1990-2004; energy produced by renewable sources grew by
86 percent over the same period. At the same time, imports of
gas increased by 118 percent. There are several re-gasification
plants in various planning stages in Southern Italy, with one in
Brindisi (Apulia) already approved and nearing completion
(others have been proposed for Taranto, Gioia Tauro, Porto
Empedocle and Priolo, the last of which appears to be a GOI
priority, according to recent remarks by the Environment

Basilicata -- Europe's Largest Inland Crude Oil Reservoir
--------------------------------------------- -------------

3. The discovery of large oil and natural gas deposits has made
Basilicata, one of Italy's poorest regions, an area of strategic
importance, not only for Italy but for Europe. Although oil was
discovered in the region 70 years ago, it became accessible only
in recent years, thanks to new horizontal drilling technologies
that allow curved wells that bypass difficult patches of hard
rock. The Val D'Agri zone may have reserves of at least 420
million barrels and possibly much more, according to different
sources, although it is not clear how much will actually be
recoverable. Nonetheless, the zone is Europe's largest inland
crude oil reservoir, and is being exploited by Italian
parastatals AGIP and ENI, as well as ExxonMobil, Shell, Total
and Enterprise. Over 100,000 barrels per day are trucked to
ENI's refinery in the port city of Taranto. Total's Tempa Rossa
field is expected to come on stream by 2010, with peak
production of 50,000 barrels per day.

4. Natural gas deposits have also been discovered near the city
of Matera, and deposits of methane in the Metaponto area along
the Ionian Sea, although so far it is not being exploited and no
one knows how much gas is there. There are great expectations
that the oil and gas can lead to economic development and
greater employment in the impoverished region, with minimal
impact to the environment. Basilicata also produces
hydroelectricity (200 million kWh in 2007), wind power (260
million kWh in 2007) and thermoelectricity (1 billion kWh in

Sicily - It's a Gas

5. The discovery of natural gas deposits off the coast of
Sicily was announced in July 2008 to great fanfare. The rights
to the new gas fields are held by ENI (60 percent) and Italy's
second-largest energy company, Edison. Gas reserves associated
with the discovery -- mainly in an area 22 kilometers off the
coast of Agrigento at a depth of 560 meters -- are estimated at
approximately 16 billion cubic meters. Preliminary tests show

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production of around 190,000 cubic meters of gas per day.
Edison CEO Umberto Quadrino has indicated that the discovery
will boost the group's gas production by between 20 percent and
30 percent by 2011. In late September 2008, ENI announced
another new gas discovery in the Sicilian Strait, about 20
kilometers off the coast of Agrigento, through the Argo 2 well,
whose rights are also shared with Edison. Preliminary tests on
the new discovery have shown a production of around 170,000
cubic meters of gas per day. The potential of all the
ENI/Edison Sicilian offshore gas fields is estimated at
approximately 18 billion cubic meters of recoverable reserves.
ENI/Edison have not indicated when pumping will begin. The
future addition of this new gas will of course contribute to
Italy's domestic energy production, but given the country's
growing demand and estimated current gas imports of about 80
billion cubic meters per year, it will not significantly
decrease its dependence of foreign gas supplies.

6. ENI is also extracting gas inland in southeastern Sicily,
and U.S.-French company Panther Oil and Gas is exploring in the
same area. Panther has had ongoing legal problems with local
governments and environmentalists in Val di Noto that have
hindered most of its operations; the Consul General has done
advocacy for the company, but the case is now tied up in the
very slow Italian courts.

7. Sicily also has four oil fields with an estimated one
billion barrels of recoverable oil in Ragusa, Gela, Vega and
Perla. Exxon-Mobil has an oil refinery in Augusta (near
Siracusa) that is the second largest producer of lubricants
worldwide; it also produces aviation and maritime fuels and
gasoline. An attempt to merge with a former ENI refinery to
create a large fuel, lubricant and chemical operation failed in
2001 due to limiting anti-trust conditions. In June 2008,
Russia's Lukoil purchased a 49 percent share in the ISAB
refinery complex in Priolo, which it operates jointly with
majority owner ERG (Italy's largest independent refiner). The
facility has a capacity of about 320,000 barrels a day. ERG has
stated it would use the Lukoil cash for expansion, including in
the area of alternative and renewable energy sources.

Apulia - Potential Source of Oil and Gas

8. Recent exploratory drilling in the region of Apulia
identified some 40 sites of oil deposits in Lecce Province and
natural gas in the Foggia province. Regional authorities
issued permits for ENI and Intergas Piu' to continue the
drilling, but concrete results will not be available until
2011-2012 according to local officials.

Alternative Sources on the Rise

9. Renewable energy sources (not counting hydroelectricity)
supply about two percent of Italy's energy needs. It is
estimated that Italy has one of the largest potentials for solar
energy in Europe. Southern Italy receives lots of sunlight,
making it ideal for attempts to harness solar power. One of
the most advanced undertakings, known as the "Archimedes
Project," is being carried out by ENEL (Italy's largest power
company) at Priolo Gargallo, Siracusa Province, Sicily. It
will use high-performance technology developed by Nobel Laureate
Carlo Rubbia and ENEA (the Italian National Agency for New
Technologies, Energy and the Environment) in order to produce
and store energy at night, or with cloudy skies, thanks to a mix
of sodium and potassium. Thin mirrors will involve lower
construction and installation costs than other similar schemes.
Apulia and Basilicata are developing a project for the
construction of a plant for solar energy research and production
that is scheduled to begin in late 2008. Our contacts tell us
that Italian government subsidies for the development of solar
power have helped, but that bureaucratic hold-ups have hindered
the use of electricity from these sources.

10. According to ENEL, Italy is the fifth-largest producer of
wind energy in the world, though the country does not have the
same natural advantage for wind power as other European
countries. Most of Italy's existing wind farms are concentrated
in southern regions and the islands of Sicily and Sardinia; one,
on the border of Campania and Apulia, is reportedly the largest
in Europe. Between them they produce annual revenue of some 450
million euros and employ 3,500 people. A British company, Blue
H, is constructing the world's first floating wind turbines some
12 miles off the coast of Sicily, with plans to build a
full-scale floating 90 megawatt wind farm in the region. There
are also fairly large wind farms in Basilicata and Calabria; in
the latter region, unfortunately, there have been reports of

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Mafia ('Ndrangheta) involvement in some of the projects.

11. Another promising source of renewable electricity
generation for Italy could be geothermal energy. According to
the International Geothermal Association (IGA), Italy has the
fourth-largest installed geothermal capacity in the world (795
megawatts), and has over 90 percent of the total installed
geothermal electricity production capacity in the EU. Analysts
estimate that Italy could have the largest per capita geothermal
potential in the world. Currently almost all of the production
is in the North. According to our contacts, plans to exploit
the huge potential in places like the volcanic province of
Naples have been developed by local scientists but not
implemented by the GOI or Italian power companies.

12. Waste-to-energy schemes, such as the construction of
incinerators in Campania, may eventually help reduce the costs
of electricity production. Unfortunately, the completion of a
long-promised incinerator near Naples has been delayed by
inefficiency and corruption, with a number of officials under
indictment for fraud and related charges. A local entrepreneur
in both the energy and environmental sectors told us that there
are studies underway to assess the feasibility of plants
exploiting landfill methane. (Such plants already exist in
Tuscany and Emilia Romagna, providing considerable income to the
communities that host them.) But perhaps the most promising
development is that an American company, San Diego-based
Adaptive Arc, is in the process of negotiating contracts in
Campania and Calabria (including Vibo Valentia and a consortium
of seventeen towns in Cosenza province) to implement a
plasma-based technology that converts waste -- even toxic waste
-- into an artificial natural gas that can be used to produce
electricity (reftel). The technology has the potential to both
reduce the cost of electricity production and to provide a
long-term solution to Campania's perennial waste disposal
crisis. The potential value of contracts for Adaptive in
southern Italy is approximately one billion USD.

Disparities Noted at Energy Conference

13. The island of Capri hosted the southern interregional
Confindustria (Industrialists' Confederation) Young
Entrepreneurs' annual conference October 3-4, with the theme
"Innovating Energies: Companies and the Environment." National
Confindustria Young Entrepreneurs President Federica Guidi
supported the Berlusconi Government's decision to restart
Italy's nuclear power program, calling for the need to diversify
energy sources. Campania Young Industrialists President Mauro
Maccauro pointed out that businesses in the South are five times
likelier to experience blackouts than those in the Center-North,
while the price per megawatt hour of electricity in Sicily (156
euros) is double that in the Center-North (82 euros). He noted
that energy prices have also risen much more in the South than
in the North. Puglia Governor Nichi Vendola asked for
government support of his alternative energy projects, including
hydrogen. ENI CEO Paolo Scaroni warned that Italy was wedded to
Russian natural gas for the foreseeable future and needed to
maintain good relations with Russia (Scaroni has been in talks
with his Gazprom counterpart, Alexei Miller, to form a
"strategic partnership"). ENEL CEO Fulvio Conti lamented a
system "full of contradictions," and warned that implementing
the Kyoto protocol will lead to higher energy costs. Former UK
Chancellor of the Exchequer Nigel Lawson opined that the
environmental agenda had been "hijacked by climate change" on
the part of "subprime science."

14. Comment: Although energy production is on the rise in
Italy's South, these sources will not be enough to significantly
reduce Italy's dependence on oil and gas imports any time soon.
And despite the fact that southern Italy accounts for such a
large proportion of the country's energy production, and
notwithstanding the rise in energy production from
alternative/renewable sources, the South suffers from more
frequent blackouts than the rest of the country -- up to five
times that of the North. This is largely due to a lack of
investment in maintaining and improving energy infrastructure,
according to ConGen contacts in the Naples Industrialists'
Confederation. For example, the electrical transmission grid in
Sicily does not have the capacity to transmit all of the energy
produced by wind-powered turbines in the center of the island.
Our contacts in the energy and environmental sectors complain
that there has been greater emphasis on increasing energy
production than on improving energy efficiency. Moreover,
bureaucratic delays remain a strong impediment to further
development of alternative energy sources, although procedures
have improved in recent months. A few local entrepreneurs
welcome recent GOI incentives -- up to 55 percent of costs --

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for solar energy installations and hope that they will be fully
used by local communities, as they referred to awareness as a
key factor for carrying out these programs. They tell us that
local politicians are not yet seriously involved or committed to
a systematic approach to energy issues. ConGen Naples will
continue to raise these issues in both public fora and with
local officials, and to assist American businesses in helping
address southern Italy's energy needs.

© Scoop Media

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