According to Massimo Nicolazzi, Chief Executive Officer of Centrex Europe Energy & Gas, a more liquid market gas is what Europe needs to overcome the problems caused by – among other factors – the conflict between Ukraine and Russia. In the following interview with Aspen Italia’s website team, Nicolazzi explains the current state of the industry, highlighting that the way forward is not to increase import (and regasification) capacity, but to improve interconnections between countries. Indeed, only a European network that functions as a massive gas hub can guarantee the level of energy security which at present no other energy source – not even renewables – can offer.
What risks does the conflict between Ukraine and Russia carry for gas supplies to Italy? The risks are much less than one might ordinarily think. Suppliers of hydrocarbons – Russia first and foremost – have a very strong interest in maintaining supply flows of such raw materials, given that they often form a key component of the tax revenues of producer countries. At the same time, demand in hydrocarbon-consuming European countries, such as Italy, has fallen significantly, not as a result of energy efficiency gains, but because of the crisis.
Even countries such as Ukraine have no interest in upsetting the applecart, seeing as the country has a highly energy-intensive industrial base, with consumption over half that of Italy. Any thought of refueling from the West is, in the short term, a technical impossibility. What’s more, historically speaking, irrespective of the government of the day, Ukraine has always struggled to pay. Indeed, the current tensions stem in part from the country’s poor credit record, with the Russians in recent years forced to continue to finance Ukrainian debt in order to avoid having to write down the value of their own loans to the country.
There is talk of seeking alternatives to Russian supplies, but is this a viable option? Last year, the volume of Europe’s unused regasification capacity was roughly equal to the volume of gas actually imported to Europe from Russia, the latter having reached a historic high. Empty regasification units and full pipelines mean that liquefied gas ends up plumping for the Asian route, where it can fetch almost double the price that it would in Europe. If we want to buy more liquefied gas to replace gas from Russia, we will now have to compete with Asia, and by and large pay more for it. Sure, the situation could be turned on its head tomorrow, but this is how things stand at the moment. Part of the problem is that Europe quite frequently talks of increasing supplies and importers, but it is still lagging in internal market infrastructure. Gas is not oil, and the wild card in this case is precisely infrastructure. I believe that to guarantee supply security, the way to go is to ensure greater liquidity for the market, rather than focusing on its geopolitical aspects. And paradoxically, the way to achieve a more liquid gas market is through an overabundance of infrastructure. Such infrastructure, however, is not (as a rule) fundable through the market, and can only be delivered if the public contributes, through taxation or via a user-pays system. Any political debate on gas and energy security should end up being a debate over how much excess infrastructure it is reasonable to ask taxpayers/users to pay for.
Spain has put its regasification capacity forward as a possible supply alternative for Western Europe. Is this a role that Italy could also seek to fulfill? Before a country with a significant regasification overcapacity such as Spain can become a credible supply alternative for the European market, it must overcome the infrastructure bottleneck that prevents it from being effectively connected with the rest of Europe. Spain is currently able to import the equivalent of about 65 billion cubic meters of natural gas a year, but with its existing infrastructure, it can only re-export a maximum of 5 billion cubic meters to Europe. Italy at present has an importation infrastructure capacity that is double its actual imports. What’s more, overcapacity is a Europe-wide phenomenon: the continent has 200 billion cubic meters of regasification capacity, of which only 20% was used last year. Any additional capacity added to the system will be in excess of current demand. In such a scenario, the most important issue becomes not so much increasing importation capacity, but doing the utmost to develop interconnections between the different countries. In short, making the market more liquid means building a European network that ideally functions as an enormous gas hub.
Given that renewables are growing and are produced locally, how might they contribute to energy security? Solar and wind power will only be self-sufficient if we invent an efficient way of storing the energy produced. No such system exists yet and we are not even close to coming up with one. What we are on the brink of is the collapse of the power companies, which is quite evident from the fact that several foreign operators are writing down their assets and leaving Italy. The difficulties faced by these companies stem from a collapse in consumption, when their planning had assumed an upward trend in demand. This has been compounded by the boom in renewable energy sources, and the dispatching priority to the national grid accorded to power produced from renewables. So, today, maintaining installed capacity of fossil fuel power carries a cost. An increase in consumption would help a lot, but precisely the opposite is happening. This is why we need to think about rescaling the system and resign ourselves to making some painful choices. I believe that renewables also need to bear the some of the brunt of this sacrifice, especially as without the back-up of gas-fueled power plants, there is a risk that solar and wind energy will not be able to guarantee us a hot shower every day.
Massimo Nicolazzi is Chief Executive Officer of Centrex Europe Energy & Gas, based in Vienna. Prior to this role, upon completing his Masters at the University of Michigan Law School, he held several positions within the ENI Group, including as Director of Legal Affairs and then Director General for Negotiations and Legal Affairs at Agip, and later as Senior Vice President Exploration and Production at ENI for operations in the Russian Federation, Central Asia and Eastern Europe.
