7-80-91 caspian report

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ANTONIO SILEO

SENIOR RESEARCH FELLOW, INSTITUTE FOR COMPETITIVENESS

(I-COM)

THE IMPORTANCE

OF TAP FOR ITALYSOME SCENARIOS

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It was suggested that Italy, with its geographicalposition at the junction of North-African, North-European and Russian streams, could be turned

into the “Southern Europe gas hub.”

1. INTRODUCTION

Italy, like most European countries,

is heavily dependent on gas imports

from outside the EU. Yet, as Italy’s

gas consumption grows, mainly due

to the completion of the methane

pipeline system in the country andthe increased use of gas for power

generation, there is a corresponding

decline in domestic production.1 In-

evitably, the historical condition of

dependence will worsen. These cir-

cumstances affect the market struc-

ture, as almost 93% of Italian imports

low through pipelines.

Among the possible interventions

considered over the last decade, it

was suggested that Italy, with its geo-

graphical position at the junction of

North-African, North-European and

Russian streams, could be turned

into the “Southern Europe gas hub.”

This was clearly articulated in Italy’s

most recent National Energy Strat-

egy (NES). In this context, Snam, the

Italian transmission system opera-

tor (TSO) provided for by the law-

decree (D.L.) of January 24th 2012,

n.1, modiied in Law (L.) 24th March

2012, n.27, and by the decree of the

Prime Minister (DPCM) 25th May

2012, should play a major role in

contributing to supply security and,in general, national energy security

(Sileo; 2012).2 However, energy se-

curity is not exclusively guaranteed

by a long-term strategy; a compre-

hensive approach also demands the

ability to manage possible short-

term supply shocks. The Italian gas

system has recently faced critical

situations, in particular in 2005 and

2006. Based on its practical experi-

ence, Italy has learned how to cope

with emergencies, and always man-

aged to ensure the supplies for its

inal domestic consumers. Moreo-

ver, since 2008, gas consumption

has dropped, thanks to the inancial

crisis. Having stopped growing, by

1. It is important to say that Italian natural gas domestic production has inverted the trend since July 2011, returning to increase.

2. According to the Italian legislation a decree-law is a decree passed by the Italian Government as an urgent measure, which has to

be approved by the Parliament within 60 days in order to become law.

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the end of 2011, gas consumption

reached its 2003 level.

On this basis, the Trans Adriatic

Pipeline (TAP), at present the most

ambitious project concerning the

Italian gas infrastructure system,

can be considered consistent with a

security-led strategy. TAP’s rationale

is mainly one of diversiication: car-

rying 10 bcm of Azerbaijani natural

gas from the Shah Deniz II ield each

year, TAP would provide a new and

signiicant energy source. Moreover,

a second phase is already planned,

in order to increase the nominal ca-

pacity of the pipeline up to 20 bcm/

year, through a new compressionstation. This additional capacity may

play a pivotal role in the Italian sup-

ply strategy, which depends heavily

on imports (particularly from Rus-

sia, Algeria and Libya), both in terms

of security and industry. In the re-

cent past, Italy has experienced gas

shortages, due to the particularly

rigid climatic conditions and lack of

lexibility in the volumes imported

from abroad. On those occasions,

the storage infrastructures played a

much larger role than usual, raising

questions about their economic and

strategic sustainability. Moreover,

alternative uses of gas, such as un-

conventional industrial uses in steel

production and a substantial shift

in fuel transportation, are likely toemerge.

A new southern route may also

have strategic implications for Italy,

strengthening its role as an entry

point for non-Russian, non-LNG gas

to travel to Northern Europe. In thissense, the efforts of the European

Commission through the Southern

Gas Corridor initiative - despite the

obstacles posed by divergent national

interests – has a strong basis. In this

sense, TAP may play an important role

in fulilling the demand of other Euro-

pean countries, whose consumption

patterns also seem to be shrinking.

2. TRENDS IN THE ITALIAN GAS

MARKET: AN OVERVIEW

Supply and Sources

Italy is heavily dependent on gas

imports. In 2013, the national pro-

duction share was limited to 11% of

total consumption (7.7 bcm),3 whilenet imports (imports minus exports)

amounted to almost 88% of the total

(61.7 bcm). Most of this imported gas

comes from Algeria and Russia. In

2011, Italy imported 22.9 bcm from

Algeria and 19.7 bcm from Russia.

Among others, Qatar (6.2 bcm) is the

main LNG importer, through two re-

gasiication terminals (Panigaglia and

Portoviro).

Domestic Demand

Italian natural gas demand has con-

tinued to shrink over the last decade,

aside from a minor and temporary

recovery in 2010. This decline was

anticipated, and indeed industry-led

since 2004: total industrial consump-tion has dropped by more than 35%

THE TRANS ADRIATIC PIPELINE (TAP), AT PRESENT THE

MOST AMBITIOUS PROJECT CONCERNING THE ITALIAN

GAS INFRASTRUCTURE SYSTEM, CAN BE CONSIDERED

CONSISTENT WITH A SECURITY-LED STRATEGY.

3. A similar gure for 2012: 11.5% (equal to 8.7 bcm).

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umes bounce back to 2005 levels,

the overall volatility of the market

will change. In fact, domestic use is

strictly related to climatic and sea-sonal conditions (i.e. winter con-

sumption is much higher than sum-

mer consumption) and from year to

year (for example, in the event of a

particular cold winter).

The second consequence raises secu-

rity issues: given the EU regulation

on security of supply4 and its imple-

mentation within national law, do-

mestic consumers are protected in

case of supply shortages.5 This pro-

tection guarantees supplies to con-

sumers in case of: 1) extreme tem-

peratures during a 7-day peak period

occurring with a statistical probabil-

ity of once in 20 years; 2) any periodof at least 30 days of exceptionally

high gas demand, occurring with a

statistical probability of once in 20

years; and 3) for a period of at least

30 days in case of the disruption of

the single largest gas infrastructure

under average winter conditions. An

increasing impact of domestic con-

sumption also increases the share of

protected consumers, and therefore

of the supply that must be secured to

the expenses of other uses, such as

power generation. Given the impact

of thermoelectric power generation

on total power generation in Italy, the

European provisions on supply secu-

rity raise serious concerns in case of

a winter disruption, when electricity

demand is high, photovoltaic produc-

POWER GENERATION OF ELECTRICITY

SIGNIFICANTLY AFFECTS ITALIAN NATURAL GAS

CONSUMPTION.

4. Regulation n. 994/2010.

5. With other civil consumers, whose total consumption is less than 50,000 cubic meters per year.

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ily limited because of the emergency

procedures that were activated.7 It

is therefore easy to see that the sup-

ply shortage was the result of the low

temperatures, even if it is more dif-icult to recognise the size of the in-

crease in consumption. The obvious

practical implication of resorting to

stored natural gas at the beginning

of the season is the performance de-

cline acceleration. Italy had already

experienced this phenomenon dur-

ing the winter of 2005.

Some arguments have been made

in favour of increasing the storage

capacity. In fact, the greater the stor-

age capacity, the greater the likeli-

hood of guaranteed supply and, con-

sequently, Italian energy security.

This capacity, however, comes at an

economic cost (the remuneration of

its capital and operating expenses).

Moreover, while this is a feasiblesolution in case of harsh climatic

conditions, Italy is unable to handle

a structural shortage, such as a per-

manent reduction in Russian or Al-

gerian imports.

Italy’s past experiences demon-

strate its heavily storage-dependent

security strategy, shedding light on

the possible implications of a new

source: the TAP. In fact, an Adriatic

pipeline could be a viable alternative

both in terms of capacity (especially

with the extra 20 bcm/year) from

phase II, and in economic terms.

Provided that TAP will work at 80%

of its capacity, it will be able to pro-

vide more than 40 additional bcms

per day. Such volumes cannot meet

peak demand; that role is carried out

by storage facilities. It can, however,

ensure the replenishment of the res-

ervoirs during the year, especially

if new storage infrastructures arebuild. TAP supplies will also cover a

substantial proportion of demand in

case of the main import routes (e.g.

from Russia or Algeria) experiences

long term disruption.

4. ENVIRONMENTAL

IMPLICATIONS

The Ilva Case

The Ilva plant in Taranto is the larg-

est steelworks in Europe. Last year, it

was investigated for its environmen-

tal impact. After the government

commissioner was appointed to

manage the plants transition, there

has been much discussion of ways

to achieve more sustainable produc-tion in the medium and long term.

The production activities of Ilva have

been deemed so harmful to the en-

vironment in terms of pollution that

multiple measures to limit the pro-

duction itself have been taken. The

repeated shutdowns of some parts

of the plant in recent years. This cul-

minated with an AIA (Autorizzazi-

one Integrata Ambientale) decision

to limit production to 8 mt of steel

per year. This has had repercussions

for the entire Italian steel industry,

which was already in trouble.

Among the potential plans for mod-

ernising the plant to make it more

competitive and sustainable, one

entails a radical change in the pro-

7. Just planned to face the lack of gas requirements coverage in case of adverse climate events in the

decree of the former Ministry of Industry on 26th September 2001.

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emissions has been disputed. SinceSeptember, experts have been work-

ing on preliminary experiments,

checking whether the plants are

compatible with the new technol-

ogy and the new production process,

i.e. producing steel with natural gas.

This solution would replace the clas-

sical coniguration, in place since the

late nineteenth century: the coke

oven-blast furnace-converter. So far,

tests results seem positive, and fur-

ther developments will likely be an-

nounced in the coming months.

In the current plant coniguration, a

huge amount of coal is held in stock-

yards and used in order to produce

coke, the chemical agent used in the

blast furnace to make hot metal. Inthe blast furnace, iron oxides in the

shape of ores, sinter and pellets are

transformed into hot metal by re-

duction process of steel that involvesthe use of natural gas, instead of coal.

This change falls within the meas-

ures laid down by the AIA designed

to increase productivity and improve

environmental and human protec-

tions through the use of innovative

technologies. The use of these tech-

nologies is in fact one of the points

contained in the “Proposta di piano

delle misure e delle attività di tutela

ambientale e sanitaria” which was

recently prepared for the Company

by an expert committee appointed

by the Minister of Environment.

In the past, a number of measures

have been taken to reduce the envi-

ronmental impact of the plant, but

the majority have been related topost-treatment technologies. The

success of these measures in lim-

iting the diffusion of fugitive dust

Kyoto Protocolmeeting onDecember10, 2009 in

Copenhagen.

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ductant chemical reactions gener-

ated by coke and carbon oxides (de-veloped through the combustion of

coke).

In the new gas-based coniguration,

the reductant is natural gas. Since

this hydrocarbon, in its virgin form,

has a low reducing power, it has to be

converted into a mixture of H2 and

CO. This conversion takes place in

reactors and is called the reforming

process. During this process, both

the caloriic value and the propor-

tion of reducing gas in relation to the

oxidizing gases (like CO2) increase.

When natural gas rather than coal is

used to make iron, CO2 production

could be 50-65% lower, depending

on how one accounts for the CO2

sources. In addition to the drastic re-

duction of emissions from the plant,

the production could beneit from

greater lexibility and increased pro-

ductivity. Flexibility is guaranteedbased on the fact that the plant can

operate at a wide spectrum of hy-

drogen to carbon monoxide ratios

(0.5 to 3.5). The quality of the steel

produced with the gas technology is

also higher in respect to the conven-

tional steel making process, because

the virgin iron contains lower levels

of unwanted elements such as zinc

and copper. Additional beneits can

also be identiied in terms of operat -

ing costs, which, deined as materials

management, are much lower.

Despite these advantages, many

doubts remain about the practical

feasibility of the new project. So far,

experts are mainly assessing the

technical feasibility of the transfor-mation of the production process,

but a detailed analysis regarding

the investment costs still has to be

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the biggest deterrent to the devel-

opment of natural gas in the trans-

portation sector, considering also

the limited autonomy of the CNG-

powered vehicles. In recent yearsprogress have been made in the

implementation of the distribution

network. The number of CNG sta-

tions has grown by 37% in the last

four years (Figure 15), but the sec-

tor needs even greater momentum

to overcome the obstacles to greater

market penetration.

At the Italian level, on August 9 th

2013, decree n. 69/2013, contain-

ing measures for economic recov-ery, entered into law. Speciically,

Article 4, paragraph 7 promotes the

implementation of the liquid fuels

distribution network and the use of

methane as a fuel. The fund for the

implementation of the distribution

network also aims to provide grants

for the closing and contextual trans-

formation of liquid fuels distribution

systems into exclusive methane dis-

tribution facilities.

AIEE, based on a study of Feder-

metano, which indicates 2,370,000

as the hypothetical natural gas road

leet in 2020, has estimated the de-

mand for natural gas for low duty

vehicles at around 1.64 bcm in 2020,

and up to 4 bcm in 2030, consideringboth the new CNG vehicles and those

with retroitted engines. Moreover,

liqueied natural gas (LNG) is set to

conducted. New natural gas-based

plants around the world have shown

investment costs greater than 500

million Euros. According to Carlo

Mapelli, the Ilva consultant for theimplementation of the AIA, the natu-

ral gas needs for the Taranto plants

could rise up to 1.5 bcm/y (repre-

senting 10% of the Italian industrial

gas demand recorded in 2012).

Fuel Shift in Transportation

The use of natural gas for transpor-

tation is one of the objectives of the

European Commission: Member

States are to adopt national policies

in order to develop markets for al-

ternative fuels and their infrastruc-

tures. In fact, the EU aims to pro-

mote the sustainable development

of the transport sector, accelerat-

ing the use of fuel-eficient vehicles

for transport, thereby reducing CO2emissions. Italy is responding to this

with the increasing use of natural

gas-powered vehicles, in particular

CNG (compressed natural gas) cars

and commercial vehicles. Indeed,

CNG vehicles currently represent a

concrete answer to two key factors:

the reduction of CO2 emissions along

with costs for motorists. Although

the consumption of natural gas for

vehicles constitutes only 1.23% of

total demand, the sector has experi-

ence rapid growth recently, and Italy

is now the leading EU country in

terms of CNG vehicle adoption, with

847,000 units. In the EU, three natu-

ral gas vehicles out of four are Italian.

However, despite the strong growthin recent years, the feeling is that the

Italian market could do more. The

scarcity of distributors is certainly

THE USE OF NATURAL GAS FOR TRANSPORTATION

IS ONE OF THE OBJECTIVES OF THE EUROPEAN

COMMISSION.

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emerge as a signiicant new trans-

portation fuel over the next years,

both for the maritime sector and for

heavy duty road vehicles. According

to AIEE, the use of natural gas as a

fuel for ferries, for example, assum-ing the use of 276 ferries powered

by LNG by 2030, would lead to an

increase of approximately 1 bcm of

natural gas in demand.

5. FINAL REMARKS

TAP will bring additional import ca-

pacity to Italy of up to 20 bcm/year

once phase II is at full speed. This ca-

pacity will face shrinking consump-

tion (especially on the industrial and

power generation side) and a more

volatile and unpredictable demand.

However, the 2010 European Com-

mission regulation security of sup-

ply emphasises the importance of

protecting consumers again disrup-

tion. Given the increasing politicaltensions in Russia and Ukraine, it is

important to consider whether TAP

can truly play a role in assuring sup-

ply, as it stated in the National En-

ergy Strategy (SEN). Looking at Ita-

ly’s past experiences, it is dificult to

argue that TAP alone will be able to

provide additional gas in the event of

a major interruption coinciding witha demand peak. It can, however, im-

prove supply conditions to the soon-

to-be-build storage infrastructures,

especially in the event of a structural

reduction in imports from one of the

exporting countries.

Aside from the security and the eco-

nomic perspectives, environmental

impacts are anticipated in two cases.

First, it is at a debate (though at its

initial phase) whether a possible

conversion of the Ilva steel plant

in Taranto from a coal-based plant

to a natural gas-based one, is eco-

nomically feasible. It is estimated

that such an intervention will sig-

niicantly reduce the plant’s harm-

ful emissions, which currently causeproduction to be heavily limited (i.e.

it would be allowed to return to full

production capacity). Second, from

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the long term perspective, the addi-

tional gas can be used in transpor-

tation, with a lower environmental

impact.

A inal remark must be made in rela-

tion to the “Southern-European gas

hub” opportunity. In principle, Italy

has the geographic and infrastruc-

tural potential to become an impor-

tant hub in an integrated European

gas system. Importing gas from

Azerbaijan (through Turkey), Alge-

ria, Libya and from the Arabic LNG

sources such as Qatar, Italy could

to export gas to other European

countries. But if Italy is to become

the Southern-European gas hub (or

Euro-Mediterranean), it must seek a

new model, encouraged by commu-

nity regulations and focused on lex-

ibility and competition, as the Euro-

pean Union is currently developing.

National and European market com-petition should be associated with

the creation of a commercial and

infrastructural hub, serving not only

national but also European demand,

especially from the Central Eastern

market. In order to do this, invest-

ments must be made not only in the

import capacity, but also in internal

transportation infrastructures and

at the borders with Swiss, Slovenia

and Austria, expanding the network

of reverse low pipes.

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