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The energy crisis represents the new European "order": A strong Italy and a sick Germany

2022-09-30 18:41:01Biznes SHKRUAR NGA REDAKSIA VOX
The energy crisis represents the new European "order": A strong Italy
Television tower near Berlin's Protestant cathedral glows at dusk with dimmed lights to save energy

Francesca Landini, Christoph Steitz – Reuters

In the weeks following Russia's February 24 invasion of Ukraine, Claudio Descalzi, chief executive of Italian energy giant Eni, made frequent visits to gas suppliers in Africa. The visits included meetings with officials in Algeria in February, as well as talks in Angola, Egypt and the Republic of Congo in March, where Descalzi was often accompanied by senior Italian government officials, according to company and government releases.

Eni, a state-controlled company, was able to take advantage of their existing supply relationships with those countries to secure additional gas to replace a large portion of the volumes they received from their largest supplier, Russia. It's a clever twist that many European countries have failed to pull off as Vladimir Putin's war has pushed the continent into an alternate reality.

The main example is Germany. As an economic powerhouse and a towering example of wise planning, it has been caught completely off guard. It is on the brink of recession, its industry is preparing to ration gas and electricity, and it has just nationalized a major facility.

Italy, a country known for economic crises, appears relatively resilient. It secured additional supplies and is confident it will not need to ration gas, with its government considering the country to be "the best in Europe" in terms of energy security.

Both countries find themselves in contrasting circumstances as the burden of a severe energy crisis shifts across the continent. Much of the region faces a winter supply crisis, with Germany, Hungary and Austria hit hard by a crisis. The least affected countries are France, Sweden and Britain, which traditionally do not depend on Russia, as does Italy.

An oil and gas specialist at research firm Wood Mackenzie said that although Italy has long seen Russia as its biggest gas supplier, its greater diversity of suppliers and long-standing ties to Africa mean it is in a better position. well to cope with the current situation, compared to other countries.

The company Eni has very strong relations with all the countries it works with in North Africa and is present in all of them: Algeria, Tunisia, Libya, Egypt and in most of these countries it is the largest investor in the upstream of gas.

In turn, Germany's Economy Ministry said it wants to move away from Russian gas imports as soon as possible and diversify its supplies, citing early steps toward that, such as leasing five floating terminals of liquid gas. Germany currently has no LNG terminals, while Italy has three in operation and recently acquired two more.

A tale of two buyers

Italy consumed 29 billion cubic meters of Russian gas last year, accounting for about 40% of its imports. Eni said it is gradually replacing about 10.5 billion cubic meters by increasing imports from other countries since this winter. Most of the additional gas will come from Algeria, which said on Sept. 21 it would increase shipments to Italy by about 20% to 25.2 billion cubic meters this year. This means it will become Italy's largest supplier, providing almost 35% of imports. Meanwhile, Descalzi said that Russia's share has fallen to very low levels.

According to the company Eni, from the spring of 2023, an increase in the flow of liquid gas from Egypt, Qatar, Congo, Nigeria and Angola will begin, allowing Italy to replace another 4 billion cubic meters of Russian gas.

Germany, which last year imported 58 billion cubic meters of Russian gas, accounting for 58% of consumption, has faced a supply freeze on the Nord Stream 1 pipeline since August. Unable to secure long-term alternative supplies from other countries, and having no major national oil and gas companies with offshore production, Germany was forced to go to the spot, or cash, market as needed to pay about eight times more expensive prices to replace Russian gas.

Factors beyond human control can shape energy security: Germany does not enjoy Italy's proximity to North Africa, or Britain's and Norway's North Sea riches. There are no significant oil or gas reserves. However, German company officials and administrators have miscalculated in recent years, particularly after Russia's annexation of Crimea, suggesting the current crisis could end differently.

In 2006, Italy was the fastest to receive Russian gas, with Eni at the time agreeing the largest gas deal ever by a European company with Moscow-controlled energy giant Gazprom.

But in the past eight years, the countries have changed: Germany doubled its supply of Russian gas and became increasingly dependent, while Italy sought to protect its investments. Italy began charting a different course in 2014 when a new government replaced that of Silvio Berlusconi, an old friend of Putin, and Descalzi took over at Eni. A source said Descalzi, an exploration and production specialist who has overseen projects in countries such as Libya, Nigeria and Congo, has focused on what he knows best: exploring Africa.

The energy crisis represents the new European "order": A strong Italy
Claudio Descalzi, general administrator of the Italian energy giant Eni

A major success was achieved in Egypt in 2015, when Eni discovered the largest gas field in the Mediterranean. While Descalzi has put Eni on the fast track to projects, the company started production in Egypt in less than two and a half years, a relatively fast development in this industry.

In Algeria, where Eni has been present since 1981, the company concluded an agreement in 2019 to renew gas imports until 2027.

Crossroads in Crimea

Russia's annexation of Crimea in 2014 and the Western sanctions that followed were a watershed moment.

In response to the sanctions, Rome withdrew its support for Gazprom's $40 billion southern project, which was intended to transport gas from Russia to Hungary, Austria and Italy bypassing Ukraine. South Stream was abandoned by Eni later that year, before being cut off by Moscow.

Instead, Italy turned its eyes to building a smaller pipeline across the Adriatic, from Azerbaijan through Greece and Albania. At the same time, Germany did not reduce its exposure to Russia.

Following Russia's annexation of Crimea in 2014, analysts say Europe and Russia have forged an energy partnership over four decades and there has not been a single day in that period when gas has been used as a strategic weapon against the West. In addition, an agreement was concluded in 2015 between Gazprom and the German companies E.ON and Wintershall to form a consortium for the construction of the Nord Stream 2 gas pipeline.

And Germany was shocked again!

A day before Moscow invaded Ukraine, Klaus-Dieter Maubach, CEO of Uniper, Germany's largest importer of Russian gas, considered Gazprom a reliable supplier. He has since changed his mind.

Seven months later, Uniper is preparing to sue Gazprom for damages from cut supplies, and it has been bailed out with 29 billion euros by the German government, which agreed in September to nationalize the company.

Germany aims to completely replace Russian gas by mid-2024, although some companies believe it could take longer than that, given the lack of alternative sources and the difficulty of procurement.

Everyone agrees that it will be an incredibly expensive move. "We have long and heavily relied on energy supplies from Russia," German Chancellor Olaf Scholz said in June. "The old formula that Russia is a reliable economic partner even in crises is no longer valid," he added.


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