US embassy cable - 03ROME2598

C O N F I D E N T I A L  ROME 002598 
 
SIPDIS 
 
 
E.O. 12958: DECL: 06/03/2013 
TAGS: ENRG, EPET, ETRD, ETTC, IT 
SUBJECT: ENI UPDATE: ITALY'S ENERGY GIANT LOOKING BOTH 
INWARD AND OUTWARD 
 
REF: ALMATY 2071 
 
Classified By: Economic Minister-Counselor Scott Kilner 
for reasons 1.5 (b and d) 
 
1. (SBU) Summary: ENI, Italy's dominant energy conglomerate, 
is expanding into foreign markets, while consolidating its 
position at home.  Its significant presence in the Middle 
East and Central Asia increasingly is complemented by 
expansion within Europe, including recent acquisitions in 
Spain and Scandinavia.  Domestically, ENI,s acquisition of 
shares of Italgas 
(Italy,s largest natural gas distributor) allows it to 
consolidate its position in anticipation of continued 
liberalization under both Italian and EU directives.  End 
Summary. 
 
2.  (SBU) Over the last year, ENI, Italy,s dominant energy 
conglomerate, has continued its expansion into markets 
outside Italy, while simultaneously consolidating its 
position in the Italian market.  ENI executives, from 
President Roberto Poli on down, tell us of the company,s 
satisfaction with the steady, measured pace of its expansion 
within Europe.  They are pleased with ENI,s operations in 
the Caspian Basin, especially the completion of the Blue 
Stream gas pipeline from Russia to Turkey and the company,s 
significant presence in both the gas and oil sectors of 
Kazakhstan. 
 
Caspian Basin - Kazakhstan Up, Azerbaijan Down 
--------------------------------------------- - 
 
3. (C) In a meeting with Ecmin earlier this year, Poli 
pointed to Kazakhstan as the keystone of the company,s 
Caspian operations.  ENI,s role (through Agip KCO) as single 
operator of the potentially enormous Kashagan oilfield is 
clearly a point of pride for the company -- so much so that 
ENI was quick to complain to us last summer when it felt its 
operator status was being threatened by consortium partner 
ExxonMobil. (Though that dispute's reported origins stem from 
criticism of ENI,s performance as operator by its partners, 
our contacts have never admitted to any intra-consortium 
friction.) ENI has an even bigger stake in the Karachaganak 
project in northwest Kazakhstan, where it is co-operator 
along with British Gas. 
 
4. (C) Although our ENI contacts tend to downplay ongoing 
problems with both the Kashagan and Karachaganak projects, 
they have told us that ENI,s relationship with the 
Kazakhstani government has hit occasional rough spots. These 
include a contract dispute that our contacts tell us was 
resolved only when President Nazarbayev intervened to confirm 
the sanctity of existing contracts (including the production 
sharing agreements ENI has with the GOK). ENI has 
characterized the mid-May decision by ENI and most of its 
consortium partners to buy out BG,s stake in the Kashagan 
project (rather than allow the entrance of two Chinese 
companies into the consortium) as a normal business decision. 
Our contacts are tight lipped about more recent problems with 
the GOK (such as obtaining GOK approval of the Kashagan 
development plan, as well as the revocation of the 
consortium's zero-rate VAT status).  ENI has publicly 
acknowledged the delay in getting the development plan 
approved.  However, our contacts tell us that, for now, the 
company is not unduly concerned. 
 
5. (SBU) In contrast to its high hopes for its operations in 
Kazakhstan, ENI is unenthusiastic about Azerbaijan, 
exemplified by the late 2002 decision to have LukAgip (its 
joint venture with Russia,s Lukoil) pull its ten percent 
stake out of the Shakh Deniz onshore gas project.  ENI told 
us that decision rested on a number of factors: 
disappointing exploration results, an excess of gas in the 
region, lack of interest strategically (especially given its 
heavy investment in Kazakhstan), and, tellingly, "problems in 
the consortium."  ENI was surprised by reports in late 2002 
that LukAgip might be reconsidering the decision to pull out, 
noting their earlier decision had not changed. The company 
apparently remains committed to its five-percent stake in the 
Baku-Tbilisi-Ceyhan (BTC) oil pipeline. 
 
Turkey, Greece and Gas to Europe - ENI Cautious 
--------------------------------------------- -- 
 
6. (SBU) The completion and inauguration of the Blue Stream 
 
 
gas pipeline across the Black Sea from Russia to Turkey is, 
like the Kashagan project, a point of pride among ENI 
executives.  ENI,s enthusiasm for Blue Stream (despite the 
softened Turkish gas market) is not matched by that for the 
potential project to transit gas through Greece en route to 
the rest of Western Europe.  ENI tells us its continued 
reluctance is owed to many factors. Italy,s energy 
liberalization law would inhibit it from buying or 
controlling such gas, forcing it to seek a long-term contract 
to export gas onward from Italy. Moreover, the gas is not 
needed in the less industrialized area of southern Italy 
where it would enter the country. Most tellingly, ENI is 
already committed to importing gas from Algeria (via Tunisia 
to Sicily) and, eventually, from Libya.  ENI does not believe 
gas shipped from the Caspian would be competitive with North 
African imports.  (Comment:  Italian gas regulatory 
authorities are much more enthusiastic about bringing Caspian 
gas to Italy than is ENI; they are not concerned about the 
"oversupply" problem noted in para 7.  Authorities see ENI's 
stance simply as part of the company's effort to maintain its 
continued dominance in the domestic Italian market.  End 
comment.) 
 
7. (SBU) During an Italy-Algeria energy ministerial meeting 
in April to promote a potential Algerian-Sardinian gas 
pipeline project, ENI CEO Vittorio Mincato dampened an 
otherwise enthusiastic conference by criticizing the proposed 
pipeline for its potential contribution towards what he views 
as a serious oversupply of gas into Italy.  (Italian gas 
consumption fell in 2002 from 2001, the first such decline in 
decades.) Mincato admitted that the competing Libya-Sicily 
pipeline that ENI is constructing, planned during a more 
economically propitious time, was bound to aggravate the 
problem as well (Mincato acidly noted that the Libya pipeline 
will benefit ENI,s competitors by providing them with access 
to new gas supplies). Not surprisingly, ENI is not one of the 
Italian participants in the Algeria-Sardinia pipeline 
feasibility study (which does include ENI competitors Edison 
and ENEL). Ever the astute businessman, however, Mincato said 
that Saipem, ENI,s offshore construction company, could be 
interested in participating in the pipeline's construction. 
 
Iran and Libya - Continued Strong Presence Foreseen 
--------------------------------------------- ------ 
 
8. (SBU) ENI,s interest in both Iran and Libya continues to 
be strong.  While we are unaware of any new ENI investments 
in either country that might raise ILSA concerns, the company 
appears to be banking on future positive results from its 
ongoing activity. Pointing to its long history in both 
countries, predating Ghaddafi as well as the Iranian 
revolution, ENI emphasizes that addressing each nation over 
the long term is essential. 
 
9. (SBU) ENI executives are more sanguine about Libya these 
days than Iran. The long planned Libya-Sicily gas pipeline is 
now entering an engineering and pre-construction phase, with 
a late 2004 completion date still foreseen. The Wafa natural 
gas field, being jointly developed by ENI with the Libyan 
National Oil Company, is expected to begin production at the 
same time to feed into the new pipeline. ENI,s acquisition 
of Lasmo led to its current position as operator of the 
Elephant oil field, where it holds a 33 percent stake - 
production is expected to begin later this year. Our ENI 
contacts say the company works well with Libyan energy 
entities. Generally positive trade exchanges between Italy 
and Libya (example - GOI Trade Vice Minister Adolfo Urso led 
a delegation to Libya April 7-8) provide an encouraging 
atmosphere for ENI,s activity there. 
 
10. (SBU) ENI is more concerned about near-term developments 
in Iran, where the uncertain political situation of recent 
years heightens risk to the company,s operations. 
Nevertheless, ENI,s history of riding out the Iranian 
Revolution leaves it optimistic it can weather the current 
situation.  In any case our contacts are hopeful that Iran 
will evolve into a more moderate regime, rather than undergo 
another revolution.  ENI,s multibillion-dollar stakes in 
four major projects in Iran (including the Darkhovin oil 
field, the first onshore project to be developed by a foreign 
company since the Iranian revolution) are indicative of 
ENI,s commitment there, despite the risks. 
 
11. (C) In discussing ENI,s operations in Iran and Libya, 
Embassy consistently reminds company executives of the 
 
 
provisions of the Iran and Libya Sanctions Act.  In a recent 
meeting, Ecmin reminded CEO Poli that the U.S. remains 
opposed to investment in both Libya and Iran.  While the U.S. 
welcomes positive changes in Libya,s behavior, but it must 
still comply with all aspects of the UNSC resolutions related 
to the Lockerbie bombing (including admission of 
responsibility and compensation).  Ecmin also underscored the 
lack of positive developments in Iran, which continues to 
develop WMD, violate the human rights of its citizens, and 
support terrorism. 
12. (SBU) ENI is closely watching developments in Iraq, and 
appears to be counting on the GOI,s support of the U.S.-led 
war to give the company a role in the reconstruction and 
modernization of the country's energy sector.  ENI contacts 
have emphasized to us the company,s long history in Iraq 
(from the mid 1950s to the 1980s) and their broad experience 
in all aspects of petroleum exploration, production and 
engineering.  ENI has told us the company is particularly 
interested in having Italian representation on the petroleum 
advisory committee being led by Philip Carroll. 
 
European Expansion - Preparing for a Liberalized EU 
--------------------------------------------- ------ 
Market 
------ 
 
13. (U) ENI is in the midst of an expansion drive, investing 
in energy companies outside of Italy, particularly elsewhere 
in Western Europe.  Examples in the last two years include 
its acquisition of the UK oil firm Lasmo ($4.2 billion), its 
50 percent stake in the Spanish gas company Fenosa (Euro 440 
million), and its acquisition of the Norwegian assets of the 
Finnish oil and gas firm Fortum ($1.1 billion).  In early 
2003 ENI announced that it intended to become a major player 
in the European natural gas market by 2006, targeting 
especially Turkey, Germany and the Iberian Peninsula (with a 
goal of 44 BCM in European sales by 2006 compared to 20 BCM 
in 2002). 
 
14. (SBU) Downstream, ENI foresees some increase in market 
share in selected European markets where it already enjoys 
supply advantages and brand awareness. Along with its 
selected overseas expansion efforts, our contacts tell us the 
company is carefully considering its operations worldwide, 
including possibly pulling out of some of the less promising 
countries in which it currently operates. 
 
The Home Base - Declining Market, and Market Share 
--------------------------------------------- ----- 
 
15. (SBU) In the last decade ENI has been progressing from a 
parastatal holding company to a more integrated oil and gas 
company.  Many corporate entities that had previously existed 
as separate companies (such as Agip Petroli, which oversees 
refining and marketing, and Agip Spa, which oversees 
exploration and production) have now been recast as divisions 
within ENI. There are a few significant exceptions that 
remain separate companies (Snamprogetti, Saipam), but our 
contacts envision these remaining entities being either 
reconstituted as ENI divisions or being sold off over the 
next few years. 
 
16. (SBU) The GOI still controls 30 percent of ENI, though 
Prime Minister Berlusconi has hinted the GOI might sell a 
further share in the company.  Although the GOI plays an 
important role in selecting ENI,s leadership, our contacts 
claim the company receives scant government pressure in terms 
of its decisions. 
 
17. (SBU) ENI,s restructuring owes much to ongoing efforts 
both within Italy (the Letta Decree) and the EU to liberalize 
the energy market.  Under the Letta Decree ENI must reduce 
its control of the natural gas market in Italy to 61 percent 
by 2010. Although the Italian Antitrust Authority ruled in 
late 2002 that ENI had violated the decree by exerting 
indirect control outside of Italy on gas imports to Italy, it 
imposed a token fine in recognition of ENI,s genuine efforts 
to stay within the limits of the liberalization regulations. 
 
 
18. (SBU) ENI has told us that its recent decision to acquire 
all the shares of natural gas distributor Italgas (ENI 
formerly held 44% percent of Italgas shares) establishes a 
strong, integrated commercial arm that would help it form 
 
 
alliances outside of Italy. Its eventual goal is to market 
gas exported from Italy, starting in approximately three 
years. Such exports will allow it to stay within the limits 
of the Letta Decree while optimizing markets for the 
(potential) oversupply of gas slated to arrive in Italy once 
the Libya-Sicily Green Stream pipeline begins operation. 
SKODON 
NNNN 
 2003ROME02598 - Classification: CONFIDENTIAL