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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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