No. 1, 2010
Igor Veshny
LINES OF MUTUALLY BENEFICIAL COOPERATION
The energy dialogue between Russia and Italy receives a new impetus
In 2008, commodity turnover between Russia and Italy reached $52.9 billion, having increased by 46.7% over 2007. At the same time, the results for 2008 show that the biggest commodity items in Russian exports to Italy are: crude oil ($19.8 billion), natural gas ($9.7 billion) and petroleum products ($6.5 billion). Moreover, in recent years, there has been a tendency to expand mutual investments by the two countries in the energy sector. One of the main participants in this process is the leading Russian oil and gas company LUKOIL.
The history of European oil and gas detente
Italy is a traditional strategic partner of Russia in the energy sector. Trade relations in the oil sphere between Russia and Italy began back in the 19th century. In the Apennines, Russian kerosene successfully competed with American right until the beginning of World War I. In the mid-1920s, Russian petroleum products returned to the Italian market. The joint-stock company Petrolea, in which the Oil Syndicate of the USSR held a substantial block of shares, was specially set up in Rome to sell these products across the country. By the mid-1930s, the share of Soviet petroleum products was over 37% on the Italian market. The outbreak of World War II, however, broke off the many years of oil cooperation between the two countries.
In the modern era, the energy dialogue between Russia and Italy began in 1958, when the head of the Italian national corporation ENI (Ente Nazionale Idrocarburi), Enrico Mattei, and Nikolay Patolichev, Minister for Foreign Trade of the Soviet Union, signed an agreement for supply of one million tons of Soviet oil to Italy.
This happened at a time when oil supplies from the USSR were vetoed by seven leading Western oil companies, the so-called Seven Sisters - Exxon, British Petroleum, Chevron, Gulf Oil, Mobil, Royal Dutch Shell and Texaco. The symbolical agreement thus brought forward the collapse of the sort of blockade of Soviet oil in Europe and, soon afterwards, other European countries followed Italy's example. On the other hand, cooperation with the USSR helped Italy undermine the sway of the Seven Sisters in the country, having consolidated Italy's intention to pursue its own independent energy policy.
The cooperation between Russia and Italy in the energy sector rapidly gained momentum and, in 1960, ENI concluded a new contract with the Soviet Union for supply of 12 million tons of oil from 1961 to 1965. Payment for Soviet oil was made both in cash and in deliveries to the USSR of about 240,000 tons of large-diameter steel pipes, certain types of equipment, synthetic rubber and other goods. Largely thanks to fulfillment of this contract, the commodity turnover between the USSR and Italy increased from 174 billion rubles in 1960 to 225 billion rubles in 1965.
In 1963, another barter agreement was concluded between the two countries for delivery of Soviet oil in exchange for Italian equipment, petrochemical products and certain other goods. In accordance with the agreement, from 1964 to 1970, over 25 million tons of Soviet oil were imported into Italy.
ENI's example was followed by national companies of Japan, the FRG and many other countries. Soviet oil began to be imported by major corporations on the basis of long-term contracts, payment being made both in national currencies and industrial goods.
Nor was it long before the first gas contract was signed between the USSR and Italy and, already in 1969, the parties concluded an agreement for delivery of 6 billion m3 of gas a year. From 1974, after the pipeline connecting the USSR and Austria was started up, Italy began receiving regular deliveries of gas for SNAM, a subsidiary company of ENI.
Subsequently, in 1979, Italy, France, Germany, Belgium, the Netherlands and Austria initiated negotiations with the Soviet Union on joint construction of a new Siberia-Western Europe gas pipeline. The trunkline was laid between 1982 and 1984.
Since then, Italy has become the second biggest importer, after Algeria, of Russian natural gas. In addition, Italy is today Russia's 4th biggest foreign trade partner in the world in terms of commodity turnover, with natural gas, oil and petroleum products accounting for about 70% of Italian imports from Russia.
Key partnership factors
In 1992, the Russian gas major Gazprom and ENI signed a contract for supply of equipment for upgrading the Russian pipeline system and, within the scope of this contract, Italy began receiving additional volumes of natural gas. In September 1996, the parties signed a new agreement, this time for liquefied gas. In 1998, ENI was already importing 16.7 billion m3 of gas.
In 1999, a Memorandum of Understanding was signed between Gazprom and ENI, which has both extensive experience in building offshore gas pipelines and the world's biggest pipe-laying fleet. This Memorandum provides for joint implementation of the Blue Stream project. The partners then registered, in the Netherlands, the Russian-Italian special purpose vehicle Blue Stream Pipeline Company B.V. on a parity basis. This company is now the owner of the offshore segment of the gas pipeline, including the Beregovaya compressor station. The owner and operator of the onshore segment of the gas pipeline is Gazprom. The Blue Stream pipeline, with a design capacity of 16 billion m3 of gas, was built within the scope of the Russian-Turkish agreement of 1997, under which Russia was to supply Turkey with 364.5 billion m3 of gas from 2000 to 2025. In February 2003, Blue Stream came on line.
In November 2006, Gazprom and ENI signed an agreement on strategic partnership, in accordance with which Gazprom received an opportunity, from 2007 onwards, to make direct deliveries of Russian gas to the Italian market. Under this agreement, existing contracts for supplies of Russian gas to Italy were prolonged until 2035.
In April 2007, within the scope of the strategic partnership agreement, Gazprom concluded an agreement with ENI and Enel, Italy's leading electric power company, on acquisition of assets included in the lot for sale of YUKOS property. As a result of the bidding, the company SeverEnergia - a consortium of ENI (60%) and Enel (40%), acquired the following gas assets: ArcticGas (100%), Urengoil (100%), Neftegaztechnologia (100%), and Gazprom Neft (20%). Subsequently, the assets of GazpromNeft (20%) were transferred to a 100% subsidiary company of ENI, which might allow the Italian energy company to increase the discovered reserves of hydrocarbons by more than 600 million barrels of oil equivalent (by 9%). By 2010, the amount of hydrocarbons produced on the territory of the Russian Federation in the interests of ENI may reach 150,000 barrels, which is equivalent to approximately 8% of the company's total output.
Besides, ENI has been represented in the Russian downstream sector since 1991, from which time its subsidiary structure Nefto Agip has been operating on the Moscow retail fuel market, as well as on the market for lubricants throughout Russia, offering high quality products and services.
In 2007, Gazprom and ENI signed a Memorandum of Understanding on implementation of the South Stream project. The Memorandum determines the lines of cooperation between the two companies in the sphere of design, financing, construction and management of South Stream. In 2008, a special purpose vehicle South Stream AG was registered in Switzerland. The founders of the company, on a parity basis, were Gazprom and ENI.
In 2009, Gazprom and ENI reached agreement on increasing the throughput capacity of the offshore segment of the South Stream gas pipeline from 31 to 63 billion m3 a year, and on regulating aspects of gas marketing within the scope of the project.
The new South Stream gas pipeline laid along the bottom of the Black Sea can reduce Russia's dependence on transit countries. South Stream is a Russian-Italian gas pipeline project that passes along the bottom of the Black Sea from Novorossiysk to the Bulgarian port of Varna, its two branches then crossing the Balkan Peninsula to Italy and Austria. According to plans, the project is to be commissioned in 2013.
On December 3, 2009, in Rome, in the presence of the President of the Russian Federation, Dmitry Medvedev, and Italian Prime Minister Silvio Berlusconi, the Chairman of the Management Board of JSC Gazprom, Alexey Miller, and ENI CEO Paolo Scaroni signed a Memorandum of Understanding with respect to South Stream. In the Memorandum, Gazprom and ENI expressed support for the French company EDF, Europe's leading electric power producer, to join the South Stream project. The parties also agreed to develop, in the near future, specific conditions for EDF's participation in the project.
Apart from the gas business, the Russian electricity market is also of interest to Italian investors. In 2004, Enel and the Russian investment company ESN won a tender to manage the North-Western Thermal Power Station located in the vicinity of St. Petersburg. Having acquired the necessary experience on the Russian market, in 2007, the company purchased over 25% of the shares in OGK 5, one of Russia's leading power-generating companies, and later increased its stake to 29.9%.
In turn, at the beginning of 2007, the Russian firm Renova registered Avelar Energy in Switzerland, a company to produce and sell renewable energy, and concluded a transaction to purchase the Italian energy trader company Energetic Source. Within a period of 5 years, Renova intends to invest $1 billion in production of wind, solar and bio-energy. In January 2009, the first two windmills of an energy park in the Italian province of Tuscany were connected to the power grid.
In cooperation with LUKOIL
An example of joint entry by Russia and Italy on to the oil markets of third countries is provided by the cooperation between LUKOIL and ENI in Kazakhstan at the Karachaganak field, one of the biggest oil and gas condensate reservoirs in the world. Development of this field, covering an area of 280 km2 and with reserves of over 1.2 billion tons of oil and condensate and more than 1.35 trillion m3 of gas, is under the management of four international companies: the BG Group and ENI (32.5% each), Chevron (20%) and LUKOIL (15%).
The cooperation between LUKOIL and ENI has a long history. Back in 1994, for instance, Agip and LUKOIL founded, on a parity basis, the LUKAgip joint venture to implement oil production projects in Northern Africa and on the Caspian. Another joint project with share participation was development of the offshore gas condensate field Shah-Deniz in Azerbaijan. In 2004, LUKOIL bought up ENI's stake in JV LUKAgip, thus increasing its participation in the Shah-Deniz project to 10% and in the Meleiha projects (Egypt) to 24%.
Yet, the clearest example of cooperation between LUKOIL and Italian companies was the creation, in December 2008, of a joint venture between LUKOIL and ERG for managing the Italian refining complex ISAB. The amount of the transaction was 1,347 billion euros. LUKOIL owns 49% of the JV and ERG - 51%. LUKOIL may also, within the next 5 years, acquire another 25% to 51% of the joint venture from the Italian partner.
The ISAB complex in Sicily includes two refineries connected by a system of pipelines and integrated into a unified complex with a refining capacity of 16 million tons of crude per year. The complex is capable of refining Urals brand oil, thereby providing LUKOIL with an excellent opportunity to integrate it into its own chain of export supplies. Besides, according to the 2008 results, the aggregate amount of oil refined at LUKOIL refineries, including the ISAB complex, reached a record 56.3 million tons, which was an almost 8% increase over the previous year's figure.
In addition, it is very likely that LUKOIL will become a participant on Italy's retail market for petroleum products. In a media interview, LUKOIL Italia General Director Nazim Suleymanov announced that the oil company was counting on becoming a major player in Italy's gasoline filling station business. The Company has so far set its sights on a 5% share of the retail fuel market.
The interest shown by the companies of the two countries in the fuel and energy complex has grown considerably in recent years. Positive trends can be observed in the sphere of trade in energy resources, too. The many years of mutually beneficial business cooperation, as well as positive experience of cooperation between the partner countries' political circles, ensure further success in development of the Russia-Italy energy dialogue.
