Azernews.Az

By Stephen Jewkes & Jonathan Gleave
Reuters, August 23

MILAN/MADRID – Italy is better placed than Spain to become a Mediterranean gas hub for Europe because of its stronger pipeline links and ample storage capacity to complement its transmission grid.

Spain's superior LNG supplies give it greater flexibility but some worry LNG flexibility could pose problems for Europe's security of supply since cargoes could follow highest prices, while Spain's only export route is through France which has dragged its heels on interconnection.

Italy, with contracted gas imports of up to 90 billion cubic metres, wins on interconnection. By reversing flows on existing lines at the northern border and beefing up its transmission network in the north, it has the potential to stop and reroute some 15 bcm of imports, replacing them with gas from the south.

"Spain has lots of LNG but only two pipelines. Italy has pipe links to Russia, Algeria, Libya, Norway and soon Greece and Turkey with Azeri gas, as well as several LNG projects," a member of Italian energy traders association AIGET said.

But if the government wants a hub, a fly in Italy's ointment could be dominant state-controlled gas supplier Eni (ENI.MI).

It's true a hub would create sales opportunities for Gas Natural (GAS.MC) and Eni. But "Eni is the Gate Keeper of Italian gas - the Saint Peter that decides entry into the paradise of the Italian gas market. That gives it great sway and it'll be hard to change that mindset," the AIGET member said.

Italy has traditionally been an importer of gas seeking to use its limited capacity to satisfy domestic demand with a power sector that is some 50 percent gas fired. But a slew of gas infrastructure projects, if realised, could change that.

Italy has recently added 7 bcm to the TAG pipeline (Russian gas), another 7 bcm to the TTPC line (Algerian gas) and 8 bcm from the new LNG terminal at Rovigo – about 27 percent of current Italian consumption.

In coming years a potential 29 bcm of extra piped capacity could emerge (excluding the 63 bcm South Stream project) with some 48 bcm of extra LNG capacity and over 3 bcm extra storage.

Ramping up reverse flows at Italy's northern interconnectors at Passo Gries and Tarvisio is not difficult -- one year's work and just 50 million euros, grid operator Snam Rete Gas (SRG.MI) says. The real work is beefing up the network in the north which will take 500-600 million euros and 3 years.

"Italy's interconnections were designed for Italy to be an importer, not an exporter," a leading London-based investment banker said. "The national grid is designed for imports, not to operate with excess capacity as is the case in Spain. To be a hub, gas must flow liberally."

Snam, controlled by Eni, says overcapacity is an opportunity and is working on reverse flows at the borders. The group's capex is focussed on strengthening the grid in north Italy so it can start exporting into central Europe.

"Lots of shippers are asking us to increase export capacity into central Europe," Snam Chief Executive Carlo Malacarne said in a conference call in June.

Cut off from the rest of Europe by the Pyrenees, Spain's gas hub ambitions remain largely at the whim of the French, whose hefty pipeline connections with the UK and Germany, along with environmental issues in the mountains, could lead to further delays in green lights for more pipelines.

Spain has had the upgrade of its only major gas pipeline approved and will have 5.5 bcm export capacity to France by 2013 and 7.5 bcm by 2015, but more pipelines will be costly, especially on the French side of the Pyrenees.

A second pipeline expansion across the Pyrenees through the Basque country was finally approved in July after planned capacity was cut to 2 bcm from 2.

Storage critical
To be a hub, gas storage is critical to help modulate flows. Italian storage capacity is, with Germany, the largest in Europe with some 14 bcm and plans to add 3-6 bcm more by end 2015.

"Storage is crucial since consumption is seasonal and you need to be able to park it. Italy is at an advantage here since shippers can clinch transportation and storage contracts with the same operator and get good terms," says one gas trader.

Although Spain's gas consumption is about half of Italy's, its storage capacity – including LNG tanks – stands at a fifth of usable gas, enough for just 12 days supply.

Spain's shortfall is not as critical as it looks however as regas plants with their supply flexibility reduce storage need.

Despite its solid pipeline perspective Italy is short on LNG with concentrated supply sources. Its two LNG plants is a long way from Spain's six fully working terminals (one third of Europe's regasification capacity), bringing in gas from as far afield as Trinidad and Tobago or even Nigeria.

Spain not only dominates Europe with its over 60 bcm of regas capacity, but Gas Natural is the largest LNG transporter in the Mediterranean and Atlantic basins and fourth largest in the world with a fleet of 13 ships.

"To be a hub, like the U.S.'s Henry Hub, you need multiple pipelines, multiple LNG entry points, and a good mix. Neither Spain nor Italy appears to have the ideal conditions at the moment, says Frank Harris, head of LNG consulting for Wood Mackenzie.

Yet Italy is drawing increasing attention from pipeline planners. "Why do they not go to, say, Austria, another hub candidate? Because Italy is not just well located but at a low cost we can store your gas and get you connections to London," a source at Snam said.