Analysis: Italy won't find it easy to kick Russian gas habit

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  • Italy seeks to wean itself off Russian gas reliance
  • Seeking additional supplies from Algeria, Azerbaijan
  • Change would take time and incur costs

MILAN, March 3 (Reuters) - Italy's plan to bump up gas imports via southern routes to reduce its energy dependence on Russia will take time and money to achieve and is likely to come at a cost to Italian households and businesses.

Russia's invasion of Ukraine has triggered sweeping Western sanctions that threaten to disrupt commodity flows, raising the spectre of gas shortages, blackouts and further price increases.

Italy is particularly exposed. It uses gas to generate 40% of its electricity and imports account for more than 90% of its gas needs. Russia has been its largest supplier and Prime Minister Mario Draghi wants to reduce that reliance. read more

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It is now scrambling to boost flows from Algeria, Libya and Azerbaijan to meet demand and fill storage before next winter.

With one of Europe's biggest gas transport networks, Italy is seen as a future bridgehead into Europe for gas - and green hydrogen - produced in North Africa and beyond. read more

The Transmed pipeline has been pumping Algerian gas to Italy since 1983. It has a daily capacity of more than 110 million cubic metres (mcm) but currently transports under 60 mcm.

"There’s plenty of room in the pipeline but the problem is there's no new gas to fill it because of chronic underinvestment in the industry in recent years,” says Davide Tabarelli, head of energy think tank Nomisma Energia.

Algeria, which also has pipelines to Spain and a large liquefied natural gas (LNG) terminal at Skikda, boosted oil and gas output last year by 5% to around 185 million tons of oil equivalent. LNG output rose 14%.

But rising domestic consumption and political instability, including the closure of a pipeline to Spain over a dispute with Morocco, have capped Algerian exports.

"Algeria has a lot of gas and it's easy to get out of the ground but it will take years to get it on line," says Tabarelli.

TAP ALTERNATIVE SUPPLIERS

Algeria's gas exports to Italy climbed last year, jumping 76% to 21 billion cubic metres - 28% of overall consumption and second behind the 29 bcm from top supplier Russia.

Italy's foreign minister said a visit this week to Algeria with the head of energy group Eni to seek an increase in gas supplies had yielded good results. read more

Eni, which holds long-term gas contracts with state-owned energy giant Sonatrach, last year signed a series of accords aimed at increasing production in the country.

Eni also has gas assets in Libya and co-owns the Green Stream pipeline which currently pumps around 7% of imports. But conflict in the country has made ramping up production hard.

Italy is also counting on getting more gas from Azerbajan through the Trans-Adriatic pipeline (TAP) that only started pumping last year after years of bitter local opposition.

Prime Minister Draghi said Italy needed to think about possibly doubling TAP capacity.

TAP, the final leg of a $40 billion project named the Southern Gas Corridor, last year brought more than 8 bcm of Azeri gas into Europe with around 6 bcm ending up in Italy. This year capacity is expected at 10 bcm.

The project consortium, which includes gas transport group Snam (SRG.MI), is in talks that could pave the way to double capacity though TAP management says it would take more than 50 months to upgrade infrastructure.

But Azerbaijan's ability to produce and export more fuel is limited.

"They can build compressor stations for the pipeline but Azerbaijan can't just double production overnight - that requires time and money," said Paolo Ghislandi, secretary general of Italy's energy trader and supplier association AIGET.

RISING COSTS

On Thursday climate change think tank ECCO said Italy could manage a Russian gas outage over the next year through energy efficiency measures, faster renewables rollout and leveraging existing gas infrastructure.

It said "non-Russian" pipelines from Algeria, Libya and Northern Europe were largely underused with an aggregate annual transport capacity of more than 100 bcm.

Calls from Draghi for Italy to build more LNG terminals will also require investments - but above all time.

Italy’s byzantine permitting process, a brake on renewables rollout, has virtually stopped development of LNG facilities beyond the three plants currently operative and which now account for 23% of daily imports.

"It's a cataclysm with consumers already looking at price rises almost 50% from just a week or so ago," says Tabarelli. "There's just not enough gas to replace Russia."

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Reporting by Stephen Jewkes Editing by Keith Weir

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