MILAN: Italy will struggle to stay warm this winter if Russia’s conflict with Ukraine disrupts gas supplies and Libya veers towards collapse, putting at risk an already shaky economic recovery following years of recession and sluggish growth.
Caught between dwindling gas imports from North Africa and a rising dependency on Russia, Italy’s contingency plans for a complete breakdown in Ukrainian transit flows consist of raiding stockpiles, arranging costly emergency shipments, as well as forcing heavy industry to cut its output.
Import-reliant Italy uses gas to fuel almost half its power plants, triggering fears the conflict between Russia and Ukraine as well as tit-for-tat sanctions between the West and Moscow could disrupt deliveries by Gazprom to Europe.
“It’s a problem. In the short term, Italy has no alternative to Russian gas,” said Leonardo Maugeri, ex-strategy head at Italian major Eni and now at Harvard Kennedy School.
Italy’s winter gas prices are trading ¤2.6 ($3.43) per megawatt hour above rival benchmarks in northwest Europe, underscoring the view that its energy supplies are most vulnerable to Russian gas cuts and cold snaps.
In 2006 and 2009, price disputes between Russia and Ukraine, which pumps half of Moscow’s gas supply for Europe, triggered widespread disruptions and prompted Italy to rush through emergency measures that included tapping strategic gas reserves.
Although things are different this year due to a mild spring and summer and low demand in crisis-hit Europe, just a month of freezing weather with key gas supplies down could see supply shortfalls in Italy, and former Eni CEO Paolo Scaroni has warned a halt to Russian gas flows would raise prices and could cause supply problems.
North Africa also poses threats. Although oil and gas output in Libya has risen recently, Italian importers worry that its exports might collapse as violence escalates.
Risks this year are particularly high after price cuts led Italy to boost Russian imports to 49 percent of supply in the first half, up from 41 percent in 2013 and 32 percent in 2012. At the same time, the glut of Russian gas has led Italian buyers to snub alternative supply deals, reducing its options.
Edison has suspended its contract with Algeria’s state-run gas monopoly Sonatrach, Enel has sold some of its liquefied natural gas (LNG) tanker cargoes from Nigeria to Britain’s BG Group, while Eni has halved imports from Algeria and could incur extra charges if it requested more gas.
Should gas be rationed, energy-intensive steel and chemicals industry would be first to feel the pain as household supplies are prioritised. With Russian and Libyan imports at risk, Algeria has become key in safeguarding supplies.
“If the agreement between Sonatrach and Eni enables Algerian gas to come back to Italy then even a prolonged disruption from Russia shouldn’t have much effect, but without Algerian supply it could make things tight,” Wood Mackenzie energy analyst Massimo Di-Odoardo said.
Reuters
