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UPDATE 3-Eni starts tests on Libya Greenstream pipeline

* Greenstream restart boosts Italy energy supply security

* First tests at Greenstream pipeline run at 3 mcm a day

* Eni, NOC aim to restart offshore platform of Sabratah in Nov (Adds analyst reaction)

MILAN/LONDON, Oct 13 (Reuters) - Italian oil major Eni and Libya’s National Oil Corporation (NOC) launched tests of the Greenstream pipeline on Thursday as they aim to fully restart the flow of Libyan gas to Italy, boosting Italy’s gas supplies ahead of winter.

Libya was Italy’s third-biggest supplier of gas after Algeria and Russia and covered about 12.5 percent of its gas needs before flows via Greenstream were suspended in February because of civil war.

The volumes of gas shipped during the testing period mark the preliminary restart of pipeline operations after nearly eight months, Eni said in a statement. The first tests will entail a flow of 3 million cubic metres of gas per day.

“The restart of Greenstream pipeline will allow us to face the coming winter with a greater level of supply security and also offset other possible risks with foreign (energy) supplies,” Italian Industry Ministry Undersecretary Stefano Saglia said in a statement.

Eni Chief Executive Paolo Scaroni has said he hopes to begin gas exports through Greenstream in October.

“We will be able to increase production towards the end of November,” Eni Exploration & Production Director General Claudio De Scalzi told Sky TV.

The 520 km Greenstream pipeline runs from Mellitah to Gela on the Italian island of Sicily and has a capacity of 8 billion cubic metres.

RESTART TO REVERSE SENTIMENT

The mere fact that test flows have resumed should reverse the prevailing sentiment that European gas markets are undersupplied, Societe Generale analyst Thierry Bros said in a research note.

He said the prospect of material Libyan supplies reaching Italy this year could create a supply glut domestically, forcing Eni to cancel some deliveries from Gazprom under take-or-pay obligations.

This would require Eni to pay for gas it did not use, a situation it has largely avoided during the Greenstream outage.

“If material volumes of Libyan gas were to arrive in Italy during winter 2011/12, other suppliers (Russia, Norway and/or Qatar) would need to curb supply to avoid flooding the European market,” Bros said.

Moreover, a quick return of Libyan supplies could drive European gas prices lower across the board, reversing prevailing views of a looming shortage caused by cutoffs in Middle Eastern supply and greater demand in Asia.

Rapid stockpiling during summer months and diminished demand across Europe makes the region more susceptible to a downside shock, he added.

Test flows of Libyan gas to Italy may also ease supply shortages caused by the closure of the Switzerland-Italy Transitgas pipeline on Tuesday, after heavy rainfall and snow melt exposed sections of the link’s southern leg.

Italy has boosted imports of gas from Russia and northern Europe and has drawn more on its gas stocks to offset shortfalls in imports from Libya, Saglia said.

Since spring, Italy has managed to replenish its gas reserves to about 87 percent of capacity, despite the lack of Libyan gas and aims to completely rebuild the stocks by the end of October, Saglia said.

The first tests have run with 3 million cubic meters of gas per day, produced by the Wafa field, located about 500 km southwest of Tripoli in the Libyan desert, Eni said.

The Wafa field, which largely supplies the Libyan domestic market for power generation, has been producing gas throughout the conflict to provide power to the local population, it said.

NOC and Eni, which are equal partners in Greenstream BV, the company that operates the pipeline, as well as in the Mellitah Oil & Gas Company, operator of production fields in Libya, have been working together to restore production at all their joint fields in Libya, Eni said.

Eni also said it was working with NOC and Mellitah Oil & Gas to restart gas output in November at the offshore platform of Sabratah, about 110 km off Libya’s coast in the Bahr Essalam gas field.

They also aim to restart the associated treatment and processing facilities at the Mellitah terminal on the western part of the Libyan coast, from where Greenstream transports gas to Italy.

Bahr Essalam field is an important source of gas supply for Greenstream, and resuming production there will trigger a gradual increase of the volumes available, Eni said. (Additional reporting by Oleg Vukmanovic; editing by Jane Baird)

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