Italy Oil and Gas Report Q1 2013

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Aside from the country’s well-publicized economic woes, Italy is at a crossroads in terms of energy market development. The public has rejected state efforts to revive its nuclear strategy, leaving the way clear for gas volumes to rise steadily higher – forcing the import bill up at the same pace. Domestic oil and gas volumes are significant, with some upside potential, while Italy’s refining system will continue to absorb cash but offer little in the way of returns – as evidenced by national oil group Eni’s decision earlier in 2012 to reduce throughput at its Gela complex.

The main trends and developments we highlight in Italy’s oil & gas sector are:

The governments of Greece and Italy have agreed to support the Trans-Adriatic Pipeline (TAP).

The agreement was reached between Greek deputy energy minister Makis Papageorgiou and his Italian counterpart Giulio Terzi on August 7 2012. The pipeline will transport natural gas from the Caspian Sea and the Middle East via Greece, Albania and Italy to the rest of Europe. The
pipeline aims to help Europe to lessen its dependence on Russia.

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Gas use in power generation is the key to demand growth and consumption looks set to reach 82.0bn cubic metres (bcm) by 2016. Imports are likely to have reached almost 74.7bcm by that time. By 2021, the country is set to be a net importer of more than 82bcm per annum, potentially costing some US$38bn.

Eni has approved the sale of 30% less one share of its holding in Snam Rete Gas, the Italian gas distribution network, for EUR3.5bn to a government-controlled agency under terms mandated by Premier Mario Monti’s government. Monti sanctioned the spin-off of Snam from Eni to boost competition. Eni has sold a further 5% share to institutional investors and the company’s CEO Paulo Scaroni said it was in discussions with potential investors for its remaining stake.

Italian oil consumption has fallen steadily since 1999. There is scope for very modest annual gains over the next several years, although the lack of economic growth could mean this scenario is overly optimistic. By 2016, oil consumption could hit 1.41mn b/d, climbing to a possible
1.45mn b/d by 2021.

Italy is seeking to reduce its spending on energy by cutting down on imports. On October 16 2012, it unveiled a new energy strategy that seeks to reduce imports to 67% of Italian needs by 2020. It involves doubling domestic output of both oil and gas by 2020 and increasing renewable
energy
production. This would see the contribution of local resources rise from an existing 7% to 14% of its energy mix by 2020, which would also shave EUR14bn per year off its energy import
bill to EUR62bn.

During 2012 Italy will have produced around 171,000b/d in the form of crude oil, gas liquids and refinery gains. The 500mn barrels (bbl) Val d’Agri oil complex can potentially supply 120,000b/d of light oil, plus heavy oil volumes will also be drawn from the Tempa Rossa field.
Total has made its final investment decision (FID) on Tempa Rossa in the Basilicata region, according to a statement. The field is expected to produce 50,000b/d of heavy crude. A mediumterm rise in domestic oil production is therefore expected. We are now assuming total liquids
production of 235,500b/d in 2016. Oil imports are set to average 1.18mn b/d by 2016, rising to 1.25mn b/d by 2021.

In September 2012, the heads of Italian refinery group Saras and Russian national oil company (NOC) Rosneft, agreed to look into ‘joint commercial opportunities’. In a written statement, Saras said this ‘would include, but not limited to, the possibility of Rosneft supplying crude oil to Sarras’ refinery in Sarroch’. A possible long-term crude supply deal between Saras and Rosneft would be a strategic move for both. Saras would be able to avoid market price volatility to access a steady supply of crude oil from Rosneft for its Sarroch refinery, while the Russian outfit
secures a buyer to help absorb an expected increase in its long-term output. The materialisation of such a deal would be conditional on an agreement that sufficiently compensates the risk that Saras would have to bear in locking itself in a long-term contract.

If oil imports reach 1.18mn b/d by 2016, the cost to Italy would be US$40.1bn. Gas imports are likely to be 74.8bcm at this stage, costing some US$34.7bn. The value of total oil and gas imports is set to reach US$74.8bn by 2016, climbing further to US$79.4bn by 2021. At the time of writing we assume an OPEC basket oil price for 2012 of US$107.10/bbl, falling to US$99.10/bbl in 2013. The assumptions for 2016 and 2021 are US$93.25 and US$91.50/bbl respectively.

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