THE IMPORTANCE

OF TAP FOR ITALY

SOME SCENARIOS
Antonio Sileo

AntonIo SIleo

Senior Research Fellow, Institute for Competitiveness

(I-com)

80

It was suggested that Italy, with its geographical

position at the junction of North-African, NorthEuropean and Russian streams, could be turned
into the Southern Europe gas hub.

1. Introduction

Among the possible interventions

considered over the last decade, it
was suggested that Italy, with its geographical 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 Italys
most recent National Energy Strategy (NES). In this context, Snam, the
1.
2.

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Italy, like most European countries,

is heavily dependent on gas imports
from outside the EU. Yet, as Italys
gas consumption grows, mainly due
to the completion of the methane
pipeline system in the country and
the increased use of gas for power
generation, there is a corresponding
decline in domestic production.1 Inevitably, the historical condition of
dependence will worsen. These circumstances affect the market structure, as almost 93% of Italian imports
flow through pipelines.

Italian transmission system operator (TSO) provided for by the lawdecree (D.L.) of January 24th 2012,
n.1, modified in Law (L.) 24th March
2012, n.27, and by the decree of the
Prime Minister (DPCM) 25 th May
2012, should play a major role in
contributing to supply security and,
in general, national energy security
(Sileo; 2012).2 However, energy security is not exclusively guaranteed
by a long-term strategy; a comprehensive approach also demands the
ability to manage possible shortterm supply shocks. The Italian gas
system has recently faced critical
situations, in particular in 2005 and
2006. Based on its practical experience, Italy has learned how to cope
with emergencies, and always managed to ensure the supplies for its
final domestic consumers. Moreover, since 2008, gas consumption
has dropped, thanks to the financial
crisis. Having stopped growing, by

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

the end of 2011, gas consumption

reached its 2003 level.

AntonIo SIleo

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.

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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. TAPs rationale
is mainly one of diversification: carrying 10 bcm of Azerbaijani natural
gas from the Shah Deniz II field each
year, TAP would provide a new and
significant energy source. Moreover,
a second phase is already planned,
in order to increase the nominal capacity of the pipeline up to 20 bcm/
year, through a new compression
station. This additional capacity may
play a pivotal role in the Italian supply strategy, which depends heavily
on imports (particularly from Russia, Algeria and Libya), both in terms
of security and industry. In the recent past, Italy has experienced gas
shortages, due to the particularly
rigid climatic conditions and lack of
flexibility 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 unconventional industrial uses in steel
production and a substantial shift
in fuel transportation, are likely to
emerge.
3.

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

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 this
sense, 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 fulfilling the demand of other European 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 production share was limited to 11% of
total consumption (7.7 bcm),3 while
net 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 regasification terminals (Panigaglia and
Portoviro).
Domestic Demand

Italian natural gas demand has continued 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 consumption has dropped by more than 35%

over 10 years (from 21 to 13 bcm).

This reduction is due to: 1) a reduction in gas use as a result of the economic crisis, particularly harsh for
the industries involved, and 2) more
efficient use of gas, considered a key
factor in competitiveness.

Power generation of electricity significantly affects Italian natural gas

consumption: in fact, it has historically amounted to one-third of the
total. Despite the installation of fur-

All in all, consumption patterns in

Italy show both a temporary low
and a structural contraction: the
actual bottom is surely related to
the economic crisis. While that will
eventually end, the decline is also
the consequence of a permanent
shift in the consumption paradigm.
In particular, we attend to the rise
of the relative (and possibly absolute) importance of residential use.
This has two major implications.
First, whether or not total gas vol-

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Meanwhile, the household gas consumption, which amounts to roughly

half of the total, has experienced a
slight increase, also due to the cold
temperatures this winter. Unfortunately, the use of gas for heating
is unpredictable, and the patterns
observable in the past years can be
considered exceptional; therefore
few can be used to predict future
trends. In addition, natural gas is facing new competition, such as heating
pumps, induction stoves and heaters,
which will probably limit growth in
consumption.

ther capacity in terms of combined

cycle plants over the last decade,
consumption of thermoelectric generation has dropped significantly
since 2009. A structural fall is evident following the peaks in 2007
and 2009 (33 34 bcm), when thermoelectric plants helped to fill the
power deficit of the electric system.
The contraction of consumption in
recent years can be explained based
on two main factors: 1) the overall
decline in electricity consumption
and 2) the upsurge in renewable energy sources.

A fire at the Ilva

steel plant in
Taranto after it was
hit by a tornado.

AntonIo SIleo
84

umes bounce back to 2005 levels,

the overall volatility of the market
will change. In fact, domestic use is
strictly related to climatic and seasonal conditions (i.e. winter con-

Power generation of electricity

significantly affects Italian natural gas
consumption.

sumption is much higher than summer consumption) and from year to

year (for example, in the event of a
particular cold winter).

The second consequence raises security issues: given the EU regulation

on security of supply4 and its implementation within national law, domestic consumers are protected in
case of supply shortages.5 This protection guarantees supplies to con4.
5.

sumers in case of: 1) extreme temperatures during a 7-day peak period

occurring with a statistical probability of once in 20 years; 2) any period
of 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 consumption 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 security raise serious concerns in case of
a winter disruption, when electricity
demand is high, photovoltaic produc-

Regulation n. 994/2010.
With other civil consumers, whose total consumption is less than 50,000 cubic meters per year.

tion is negligible and priority is given

to domestic consumers.

3. Security issues: lessons

from the recent past

The Italian gas system has significant

experience of critical and unexpected
situations. Two exceptional events
have taken place in recent years: the
interruption of the Greenstream flow
due to the outbreak of the conflict in
Libya at the end of February 2011,
and the 6-month shutdown of the
Transitgas pipeline (which connects
Italy to Northern Europe), from July
to December 2010, because of a landslide in Switzerland.

6.

On February 1st 2012, Gazprom did

not appear to be able to meet the
increased supply demand its European clients. In the Italian context,
this imbalance was reflected in a
discrepancy between requirements
and transits of 12.3% at the entry
point of Tarvisio. The gap increased
up to 24.2% the following day, and
up to 30% by February 3rd. Despite
the geopolitical tensions arising
from polarised views of Ukraines
alleged violation of the gas agreements - having withdrawn more gas
than its contract allowed for - the
main factor in the 2012 crisis was
simply the cold snap which struck
Europe, Turkey and indeed Russia
itself.

The withdrawing of stored volumes

has thus covered, once again, 6 the
Russian shortage. Friday 3rd February, 32 mcm were withdrawn from
storage, in order to meet an unusual
high demand: 414.7 mcm daily. The
following week, due to the extreme
cold and intense industrial activity,
the demand did not shrink, reaching record highs on February 6th and
February 7th. Consumption on February 7th was 465.9 mcm, setting an
absolute record of network intakes.
A comparison with the comparable
Tuesday in 2011 illustrates the exceptional nature of this peak (Figure
2).

As a result, gas withdrawals in the

industrial sector in 2010 were heav-

Similar extraordinary condition where met in 2005 and 2009.

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In the attempt of realizing a crisis infrastructural equipment, which can

face the interruption of a pipeline or
the consequences of an exceptional
cold snap, storage infrastructures
stand as key-asset for the system.
In the current system, those facilities play a crucial role in satisfying
consumption modulation, because
they ensure the flexibility required
for the execution of administration
contracts to the selling companies.
Good storage capacity has also been
proven to be a basic precondition
for the creation of a liquid market,
both in the gas and electricity sector,
increasing arbitrage opportunities
among markets in different countries. Such liquidity is currently not
a feature of the Italian system, that
cannot rely on satisfying networks
neither at the internal nor at the
European. To further illustrate this
point, it is useful to consider a spe-

cific case: the emergency situation

that arose in February 2012.

AntonIo SIleo

ily limited because of the emergency

procedures that were activated.7 It
is therefore easy to see that the supply shortage was the result of the low
temperatures, even if it is more difficult to recognise the size of the increase in consumption. The obvious
practical implication of resorting to
stored natural gas at the beginning
of the season is the performance decline acceleration. Italy had already
experienced this phenomenon during the winter of 2005.

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Some arguments have been made

in favour of increasing the storage
capacity. In fact, the greater the storage capacity, the greater the likelihood of guaranteed supply and, consequently, Italian energy security.
This capacity, however, comes at an
economic cost (the remuneration of
its capital and operating expenses).
Moreover, while this is a feasible
solution in case of harsh climatic
conditions, Italy is unable to handle
a structural shortage, such as a permanent reduction in Russian or Algerian imports.
Italys past experiences demonstrate 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 provide more than 40 additional bcms
per day. Such volumes cannot meet

7.

peak demand; that role is carried out

by storage facilities. It can, however,
ensure the replenishment of the reservoirs during the year, especially
if new storage infrastructures are
build. 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 largest steelworks in Europe. Last year, it
was investigated for its environmental impact. After the government
commissioner was appointed to
manage the plants transition, there
has been much discussion of ways
to achieve more sustainable production in the medium and long term.
The production activities of Ilva have
been deemed so harmful to the environment in terms of pollution that
multiple measures to limit the production itself have been taken. The
repeated shutdowns of some parts
of the plant in recent years. This culminated with an AIA (Autorizzazione 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 modernising the plant to make it more
competitive and sustainable, one
entails a radical change in the pro-

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.

Kyoto Protocol
meeting on
December
10, 2009 in
Copenhagen.

In the past, a number of measures

have been taken to reduce the environmental impact of the plant, but
the majority have been related to
post-treatment technologies. The
success of these measures in limiting the diffusion of fugitive dust

emissions has been disputed. Since

September, experts have been working on preliminary experiments,
checking whether the plants are
compatible with the new technology and the new production process,
i.e. producing steel with natural gas.
This solution would replace the classical configuration, in place since the
late nineteenth century: the coke
oven-blast furnace-converter. So far,
tests results seem positive, and further developments will likely be announced in the coming months.
In the current plant configuration, a
huge amount of coal is held in stockyards and used in order to produce
coke, the chemical agent used in the
blast furnace to make hot metal. In
the blast furnace, iron oxides in the
shape of ores, sinter and pellets are
transformed into hot metal by re-

CASPIAN REPORT, SPRING 2014

duction process of steel that involves

the use of natural gas, instead of coal.
This change falls within the measures laid down by the AIA designed
to increase productivity and improve
environmental and human protections through the use of innovative
technologies. The use of these technologies is in fact one of the points
contained in the Proposta di piano
delle misure e delle attivit di tutela
ambientale e sanitaria which was
recently prepared for the Company
by an expert committee appointed
by the Minister of Environment.

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AntonIo SIleo
88

ductant chemical reactions generated by coke and carbon oxides (developed through the combustion of
coke).

In the new gas-based configuration,

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 calorific value and the proportion 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 CO 2
sources. In addition to the drastic reduction of emissions from the plant,
the production could benefit from

greater flexibility and increased productivity. Flexibility is guaranteed

based on the fact that the plant can
operate at a wide spectrum of hydrogen 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 conventional steel making process, because
the virgin iron contains lower levels
of unwanted elements such as zinc
and copper. Additional benefits can
also be identified in terms of operating costs, which, defined 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 transformation of the production process,
but a detailed analysis regarding
the investment costs still has to be

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 the
implementation of the AIA, the natural gas needs for the Taranto plants
could rise up to 1.5 bcm/y (representing 10% of the Italian industrial
gas demand recorded in 2012).

the biggest deterrent to the development of natural gas in the transportation sector, considering also
the limited autonomy of the CNGpowered vehicles. In recent years
progress have been made in the
The use of natural gas for transportation
is one of the objectives of the European
Commission.

Fuel Shift in Transportation

However, despite the strong growth

in recent years, the feeling is that the
Italian market could do more. The
scarcity of distributors is certainly

implementation of the distribution

network. The number of CNG stations has grown by 37% in the last
four years (Figure 15), but the sector 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, containing measures for economic recovery, entered into law. Specifically,
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 transformation of liquid fuels distribution
systems into exclusive methane distribution facilities.

AIEE, based on a study of Federmetano, which indicates 2,370,000

as the hypothetical natural gas road
fleet in 2020, has estimated the demand for natural gas for low duty
vehicles at around 1.64 bcm in 2020,
and up to 4 bcm in 2030, considering
both the new CNG vehicles and those
with retrofitted engines. Moreover,
liquefied natural gas (LNG) is set to

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CASPIAN REPORT, SPRING 2014

The use of natural gas for transportation is one of the objectives of the
European Commission: Member
States are to adopt national policies
in order to develop markets for alternative fuels and their infrastructures. In fact, the EU aims to promote the sustainable development
of the transport sector, accelerating the use of fuel-efficient vehicles
for transport, thereby reducing CO2
emissions. 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 experience 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 natural gas vehicles out of four are Italian.

AntonIo SIleo
90

emerge as a significant new transportation 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, assuming 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 capacity to Italy of up to 20 bcm/year

once phase II is at full speed. This capacity will face shrinking consumption (especially on the industrial and
power generation side) and a more
volatile and unpredictable demand.
However, the 2010 European Commission regulation security of supply emphasises the importance of
protecting consumers again disruption. Given the increasing political
tensions 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 Energy Strategy (SEN). Looking at Italys past experiences, it is difficult to
argue that TAP alone will be able to
provide additional gas in the event of
a major interruption coinciding with
a demand peak. It can, however, improve supply conditions to the soonto-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 economic 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 economically feasible. It is estimated
that such an intervention will significantly reduce the plants harmful emissions, which currently cause
production to be heavily limited (i.e.
it would be allowed to return to full
production capacity). Second, from

the long term perspective, the additional gas can be used in transportation, with a lower environmental
impact.

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CASPIAN REPORT, SPRING 2014

A final remark must be made in relation to the Southern-European gas

hub opportunity. In principle, Italy
has the geographic and infrastructural potential to become an important hub in an integrated European
gas system. Importing gas from
Azerbaijan (through Turkey), Algeria, 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 community regulations and focused on flexibility and competition, as the European Union is currently developing.
National and European market competition 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, investments 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 flow pipes.