War's drain on resources has compelled governments to recognize the risks of over-reliance on a single supply source or a single geographical area. It bears resemblance to the energy crisis of the 1970s, which prompted a reevaluation of the West's reliance on oil from the Middle East which, in turn, increased international interest in exploring and sourcing from new regions. en
Italy has weathered economic storms before, and its resilience is remarkable. With a stockpile of extra resources and confidence that gas rationing won't be required, the country boasts that it has the finest energy security in all of Europe. Italy has relied heavily on Russian gas imports for quite some time; nevertheless, the country has a more diversified supply and stronger ties to Africa than many of its neighbors, making it better able to survive a disruption in Russian supply. If Russia were to suddenly cease all deliveries this winter, Italy has secured enough gas supplies from North Africa to make up for any deficits. The gas Italy now imports from Russia will be offset by the increase in supplies slated to arrive from Algeria and Egypt.
Before Russia's invasion of Ukraine in February, over 40% of Italian gas imports came from Russia. Now, that number has dropped to around 10%. Last year, Italy used 29 billion cubic meters (bcm) of Russian gas, but beginning this winter, Italian energy firm Eni claims that it will begin progressively replacing roughly 10.5 bcm of that amount with greater shipments from other nations. Algeria, which has agreed to boost its annual gas exports to Italy by roughly 20% to 25.2 bcm, is the main source of the supplementary supply, and will provide about 35% of Italy's imports and overtake all other suppliers. According to Eni, starting in the spring of 2023, Italy will be able to replace another 4 bcm of Russian gas with LNG imported from countries like Egypt, Angola, Congo, Nigeria, and Qatar.
Italy is among the world's top countries when it comes to developing reliable backup supply chains, however, this may be hampered by factors such as an exceptionally cold winter, pipeline damage, or a delay in the arrival of newly obtained supplies. To continue the progress made this winter and reach Italy's initial aim of being independent of Russian gas by spring 2025, regasification capacity must be boosted. After Russia put pressure on the European Union after numerous rounds of sanctions in reaction to the invasion, outgoing Prime Minister Mario Draghi began seeking alternate gas sources to shield Italy from any supply shortages.
He is critical of Berlin's choice to put a ceiling on gas prices for residents while taking on €200 billion in new debt, while acknowledging the 66 billion Euros spent by Italy through December to protect its citizens from rising power bills and the approximately 5 billion Euros spent on tax incentives for energy-intensive industries is not maintainable over time. Small and medium-sized businesses are concerned about their future as the country confronts the possibility of paying twice as much for energy imports as they did a year ago. Georgia Meloni, the victorious candidate for Prime Minister in Italy's recent election, advocates for a cap on petrol prices across the European Union. Once in office, she has plans to reform Italy's energy sector independently of her European counterparts. She estimates it will cost between 3 and 4 billion euros until March to decouple the price of renewable energy from gas, a sum she promises will not add to Italy's already substantial debt.
Italy has three operational LNG facilities and has just bought two more; to improve its chances, they must complete construction of a new floating regasification facility in Piombino by spring 2023. The plant has the capacity to process 5 billion cubic meters of gas per year, but may be delayed if it encounters resistance from local authorities. LNG imports from Egypt will grow by the end of the year to match the quantity now shipped from Russia, while Algerian shipments to Italy are set to double to 18 billion cubic meters per year. Italian energy company Eni has been conducting business in Algeria since 1981, and in 2019, they extended their deal to import gas through 2027. Russian supplies have proved crucial in filling gas storage to 90% before the onset of winter. At a conference on September 24 in Rome, Eni SpA CEO Claudio Descalzi predicted that the upcoming season would worsen if Italy did not enhance its regasification capacity by the approaching spring.
As Putin's War alters Europe's energy environment, it is a quick transition that many European nations have not been able to undertake. Germany, the largest importer of Russian gas, is having trouble securing more supplies. Chancellor Olaf Scholz returned from a trip to the Middle East with an agreement for only one shipment of liquefied natural gas. Gas producer Uniper SE is being bailed out by the government to the tune of around 18 billion euros ($17.3 billion) this year to cover the expense of replacing Russian supplies with more expensive gas from the market. On Tuesday, Gazprom PJSC of Russia issued a warning that the dispute between Russia and Ukraine might threaten the flow of gas to Europe through Ukraine. Because of concerns that Europe would be without Russian gas this winter, speculators drove prices up by over 20%.
As the country is ready to enter a recession, the economy is preparing for gas and energy rationing, and the government has lately nationalized a critical utility, Germany has been caught off guard despite its longstanding reputation as an economic powerhouse and model of thorough preparedness. The German economy ministry has stated that the country intends to wean itself from Russian gas imports as soon as possible and diversify its supply, noting the lease of five floating terminals for LNG as an example of an initial step in this direction. Germany, which relied heavily on Russian gas imports last year, has been adversely affected by the recent shutdown of the Nord Stream 1 pipeline and subsequent reduction in supplies in June and August. Due to alleged sabotage, the pipeline is currently out of commission.
Germany has had to buy replacement gas on the spot market at costs that are eight times higher than those witnessed a year ago because it has been unable to arrange long-term replacement supplies from other countries and does not have a national oil and gas major with output elsewhere. Energy independence may be affected by external circumstances; for instance, Italy's proximity to North Africa and Britain and Norway's access to North Sea resources give them a leg up over Germany in terms of energy independence. As an added downside, there are no major oil or gas reserves.
In retrospect, Germany's energy policy was inadequate. It is not simply because pipeline gas is cheaper that major industrial powers like Germany and Italy import so much of their gas from Russia. Due to widespread disapproval based on environmental concerns, fracking was considered politically unfeasible in Germany. Several attempts to locate viable gas alternatives ultimately came up short. The growing share of Russian gas that Germany has consumed in recent years was not an intentional policy, but rather, a consequence of an unsuccessful attempt at diversification. Undoubtedly, reducing reliance on external sources would have benefited from a faster expansion of renewables. In any case, Germany's simultaneous phase-out of nuclear and coal-generated energy would have necessitated the import of natural gas as a transitional fuel.
Germany's leadership has made mistakes in recent years, but Angela Merkel, during her tenure as chancellor, traveled extensively to oil- and gas-producing countries including the Gulf states, Azerbaijan, Algeria, Egypt, and Angola. The North African region was singled out as a potential source of supplies independent of Russia. For instance, before its civil conflict, Libya was a trusted gas exporter. The same was expected of Iran after the nuclear accord, with the expectation that it would begin pumping gas to Europe via a pipeline through Turkey. However, such political expectations, especially with respect to Iran and Algeria, have since disintegrated.
Eni, Italy's leading gas importer, signed the largest gas agreement by a European corporation with Gazprom, the energy behemoth owned by the Kremlin, in 2006. This accelerated Italy's rush toward Russian gas. However, Italy began to diversify its energy sources over the past eight years, while Germany has doubled down on Russian gas and become further dependent on the supply.
In 2014, a new Italian government took office following the removal of Silvio Berlusconi, a longtime ally of Vladimir Putin. Under this government, Eni's CEO Claudio Descalzi, an expert in exploration and production who had previously overseen operations in Libya, Nigeria, and the Congo, began looking to Africa as a potential source of supply. The discovery of Zohr, the biggest gas field in the Mediterranean Sea, by Eni near Egypt was a huge success. Eni was able to start production at Zohr in less than 2 and a half years, which is far faster than the norm for the industry.
The 2014 annexation of Crimea by Russia and the resulting Western sanctions marked a turning point in relations between the two countries. As a result of the sanctions, Rome cut ties with Gazprom's $40 billion South Stream project, which was designed to circumvent the Ukraine on its way from Russia to Hungary, Austria, and Italy. Later that year, Eni decided to pull the plug on South Stream, and Moscow eventually put the project on indefinite hold. Italy shifted its focus to the smaller Trans Adriatic Pipeline, which traverses Azerbaijan to Greece and Albania. However, Germany did not reduce its reliance on Russia.
Germany still hasn't fully grasped the needs and demands of producing countries. African allies like Senegal are keen to see more investment in the area, but Germany is cautious to fund exploration of new gas sources because of environmental concerns. This ultimately reduces the number of nations available for supply runs. The Russian invasion is the only thing that has altered the perspectives of the political participants and opened new channels of discussion. Suddenly, investing in gas fields or buying LNG from the U.S. and Qatar is being viewed as a viable alternative to importing gas from Russia.
~Anne Charman, Vice President Market Research - Brightside Industries Group, LLC
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