The ‘energy’ security
2009 is an important year in the energy history of Italy. In the first nine months of the year, the demand for gas – the principal components of which are the industrial and thermo-electric demand – dropped by 12%. It concerns a dramatic collapse, without precedent, of the oil crisis of the 70’s: through this data, it is possible to understand the impact of the economic crisis on the manufacturing production of our Country. Contemporaneously, the Rovigno terminal of regasification was inaugurated on the 19th October, 2009, realized through a joint venture between Edison, Exxon Mobil and Qatar Petroleum. Thanks to the regasification, which is the first infra-structure of a gas fuelled system not owned by the former monopolist, the capacity of Italian importation will grow by circa 8 billion cubic meters of gas per year, 80% of which will come from Qatar. The remaining capacity, according to regulatory obligations of “third party access” (1) ,was put to tender. The first transfer, for a capacity of l45 thousand cubic meters of gas, was abandoned (2) , even though the capacity was assigned in the second phase of the tender (3) .
The two things are naturally correlated: due to the crisis, the Italian market is structurally long. Therefore, the real demand for gas, among other things weakened by the mild winter temperatures, does not justify the purchase of further quantities. What are the implications for the energy security? To reply it is necessary, first and foremost, to clarify the concept.
The Energy security
To define the energy security is a relatively simple task. In the modern sense, the energy security exceeds the classical aspects of physical security – of the infrastructures, of the routes and wells – to encompass a series of larger questions, which are collocated on a vague horizon between politics, economy and environment (Ercolani 2008). According to the European Commission “the long-term strategy of the European Union for the guarantee of the energy security must be constructed to guarantee – for the well-being of its citizens and the adequate functioning of its economy – the uninterrupted physical availability of energy products on the market, at an accessible price for all consumers (private and industrial), while respecting environmental concerns and looking at the sustainable development” (EC 2001, pg. 2; WC 2006). What is more complex is to find an operative definition of energy security, since the concept has implications on a number of areas and sectors, at times, coherent one with the other, but often in tension. The International Agency of Energy describes the energy security in terms of a supply that is “adequate, economical and reliable” (IEA 2002). In subsequent years, the environmental dimension of security has acquired an always more central importance, in particular, with reference to the climatic question (IEA 2007). Furthermore, the escalation of oil prices between the first years of 2000 and 2008 meant that the emphasis was placed on the security of the energy offer: however, an analogous and specular problem concerns the security of the demand (Alhajiji 2007).
It is clear that there is a high risk in adopting conflicting policies in response to the different aspects of the security (Stagnaro 2007). For example, if the installed renewable capacity is instantly multiplied, on the one side, the gas emissions of climate altering gas would be reduced, but on the other side, probably the energy prices would grow exponentially, and the reliability of the system would be reduced, due to the inadequacy of the electric network: the impact on the security would be dubious or negative. Vice versa, if a great coal-fired generating capacity were introduced, probably the prices would decrease, but the emissions would increase. The relation between foreign dependency and security is doubtful: Muller-Kraenner (2007) sustains that the environmental policies increase the security, thanks to a progressive reduction of outside dependency, while Howell & Nakhle (2007) warn against the risks of an excessive self-sufficiency, moving from the example of the coal for Great Britain in the 80’s (see also Bryce 2008, on this subject).This helps to understand that the challenge of the security is not so much that of the maximization of a parameter, as that of the optimization of a series of parameters. For a series of reasons, in a context like that of Italy, to speak of security means, above all, to speak of natural gas.
Gas, energy epicenter of Italy
In a security perspective, gas represents the weakest link in the Italian
energy chain. This is, essentially, for two reasons: the first general, and the
second local. The general characteristic consists in the fact that the oil is traded on a global and liquid market, where the variable-price can undergo changes, also very significant ones, but would not endanger the availability or the accessibility of the crude oil.
Anyone who needs a further barrel of oil can normally find it on the market, as long as he is prepared to pay enough. However, this is not true for gas, at least on the European market. On the one side, the principal mode of transport of gas – the pipeline – is naturally rigid and cannot be re-oriented. On the other, the prices are usually guided by long-term contracts, which anchor them to those oil suppliers, cutting them out, de facto, from the relationship between supply and demand. Although there are signs of a progressive decoupling of gas and oil prices (Villa 2009), which were intensified during the crisis, thanks to the instantaneous over-abundance of methane on the market (IEA 2009, pg. 511), the process is still in course and it is difficult to say if, when and how it will arrive at a definitive decoupling. The local reason derives from the fact that, for choice or for vocation, for necessity or for virtue, Italy has made gas the epicenter of its energy system. This is the result of dual dynamics: in our Country, as in all the industrial world, a growing quota of energy consumers is fed by electric energy. But in Italy, unlike elsewhere, electricity means always more gas and always less all the rest (Table 1 on the following page).
In the past, this heavy dependence on gas has created problems, due to the external shock impact (like the drop in suppliers due to the clashes between Russia and the Ukraine) and the inadequacy of the adduction infrastructures. Thanks to the combined conjunction between the effect of the crisis (which depresses consumption) and the input in terms of Rovigo (which increases the importation capacity) this risk is less serious, but not completely resolved.
In fact, although on the annual basis, today the capacity of importation is adequate, it is not said that this will be true in the event of peaks of consumption of brief duration. As the President of the Energy Authorities, Alessandro Otis, has recently written, “in case of cold seasonal tails, the present system would be hard pushed to face the need” (4) . From these factors, the outlines of the question ‘gas security for Italy’ begin to take shape.
The gas security for Italy
To secure the Italian gas supplies, therefore, requires, essentially, an infrastructural effort, which is, in fact, in course. The expectation of an inexorable growth in gas demand although interrupted by the crisis has, in past years stimulated a large number of projects of new infrastructures: from the sbottigliamento of the existing gas-ducts to the realization of new pipelines, until the presentation of a dozen new projects for the construction of regasification terminals. The construction itself of new infrastructures poses new questions. First of all, is it possible to predict what will actually be implemented and when? The authorization process is long and rather unclear, in Italy, and this is one of the reasons why so many projects have been presented. It is a sort of race, in which those who come first – that is, those who are authorized – have the winning ticket, because in this way, they can enjoy the advantage of being the ‘first mover’ in responding to the demand for gas (Stagnaro 2009).
In the presence of a more certain and predictable framework of regulations, as much as in the results as in the time factor, probably the race would have been less crowded. It is extremely improbable, on the contrary, that all the works presently being examined will be realized, also because in this case, there would be an overabundance of gas which, even if it is agreeable to the consumers, would put at risk the financial solidity of the importers (Clò 2006). The only possibility to combine the financial viability of the operation with the achievement of all, or the greater part – the terminals and the other works – (also strongly encouraged by the Energy Authorities), would be that of clustering the interconnections towards the North, in such a way that Italy becomes the hub for Southern Europe. The vocation of our Country as transit Country represents a fascinating challenge, in terms of strategic collocation and financial position, as well as having obvious positive implications in terms of security. Nevertheless, at the moment it does not seem realistic that Italy will take this path in the foreseeable future.
In fact, in the medium term, the existing infrastructures, or those in the course of construction, will most probably be able to satisfy the national demand, but it is unlikely that they will constitute a critical mass able to trigger a rethink of the role of our Country in the European gas industry panorama. Mazzei (2009) constructed a matrix of the liquefied natural gas LNG flows on the basis of the existing projects of plants of liquefaction and regasification: by 2020, Italy will receive 2.87 million tons of gas per year, from Nigeria, and 4.70 million tons per year, from Qatar. This implies that only the plant proposed by Enel at Porto Empedocle will be added to the Edison/ExxonMobil/Qatar Petroleum regasifier of Rovigo, already covered by a contract with the African Country. In reality, in a recent speech, the Minister of Economic Development, Claudio Scajola, did not cite Porto Empedocle, but Priolo (Erg/Shell) and Trieste (Natural Gas) as the plants “absolutely secure and useful in an intelligent energy policy” which will be made (5) .
A second and parallel problem concerns the actual ability of individuals proposing the new supply terminals to fuel them with their own gas, once they are in function. In the immediate future this would not be a problem, if also these infrastructures were operative, since an excess supply on the European market is registered – Iea (2009) even speak of a “mini bubble”. In the medium term, ie. in the horizons in which it is possible these facilities become active, this will no longer be true. Therefore, an important competitive factor concerns the ability of the companies to assure the supply of gas, through the subscription of long-term contracts. Although for a long time opposed by the European Commission, the long-term contract is, however, necessary to guarantee a reasonable margin of certainty. This condition is not always respected in the case of projects presented in Italy. The paradox, in the words of Nicolazzi (2009, pg. 117) is, therefore, that “there is almost a physiological hysteresis between the time when the demand occurs (and therefore, the market is individuated) and the moment when the offer materializes (and therefore, the production and the transport become reality)”
The infrastructure pays off only if it is used, presumably, fully laden, or almost: therefore, it requires on the one side an excess of demand, on the other, the certainty of the availability of the methane. This is the reason why the gas market, unlike the oil market, is structurally exposed to insecurity in Europe. And this is also the reason why the regasification terminals, as we shall see further on, can contribute to change, at least in the medium term, the terms of the equation.
The challenge of LNG
The difference between LNG and pipeline lies, essentially, in the different flexibility of the medium. A cubic meter of gas transported via pipeline must, necessarily, move from point A to point B. Vice versa, an LNG vessel directed from A to B, can, at a certain point of its journey, change route to reach a point C, where the demand and, therefore, the price that the consumers are prepared to pay is higher, in relation to the available offer. Although in both cases, the financing of the works imposes the coverage of long-term contracts, the proliferation of the regasification and liquefaction plants (the condition of which is, perhaps, even more critical, and risks becoming a real bottle neck beyond the scope of the consumer Countries) could create a real network, made of departure points of producer Countries and entry points, potentially available in the consumer Countries.
If the volume of gas transported by ship reaches a critical mass – it is even possible although not simple – that markets which are today, isolated, such as the European and American ones, are put in communication, creating a first embryo of a global market and setting the conditions to transfer the spot transactions outside of the national context. Neumann (2009) had, in fact, already found the existence of a similar process, which triggered forms of convergence, before unpublished, between the prices on the European and United States markets.
It should be said that the LNG, compared to the pipeline, allows a greater flexibility, not only of maneuver, but also of destination and, therefore, financial. A pipeline is made only with the certainty of being able to fill it – that is, having a long-term contract upstream, and an excess demand downstream. A regasifier could also enter into a different logic, which explains, in part, the wave of programmed investments (before the crisis) by some major oil companies: a regasification terminal is not only an infrastructure, but also a point of entry which can be managed in a discretionary way, thanks to the lighter application of the Tpa.
It is possible we could observe a “specialization” in the next few decades, in which the gas transported by pipeline covers the consumption base (that for which there is a security of the demand) while the regasifiers are intended to fuel spot markets. Therefore, they could expect the “variable” part (from the viewpoint of volumes and negotiating availability) of the demand, and this in itself introduces stabilization and linking factors between different markets, in the sense already indicated.
This can have very important implications for Italy, in at least, two senses. On the one hand, it can contribute to a major diversification of the supplies which, at the present, are very concentrated (both in absolute terms and when compared to the “cousin” oil, as Table 2 shows).
The Herfindahl-Hirschman Index (HHI), a common index of concentration (6) , ( The Herfindahl-Hirschman Index is constructed adding up the market shares, expressed in percentage, of the companies that compete on a given market. Therefore, in a monopolistic context, where a single companies controls l00% of the market, the HHI assumes a value equal to 10.000. In a perfectly competitive market, it is close to zero. In practice, a market is considered competitive if the HHI has a value inferior 100; not concentrated if it does not exceed 1.000; moderately concentrated between 1.000 and 1.800; and much more concentrated the more distant it is from such threshold. The HHI was developed independently by Hirschman (1945) and Herfindahl, who in 1950 used it in the ambit of his doctorate thesis (unpublished) on “Concentration in the U.S. Steel Industry”. Further details are available in Hirschman (1964) and Calkins (1983). The HHI is very much used in the ambit of anti-trust law, which presumes it legitimate any operation that determines an increase of the index inferior to the 100 points, while it holds further scrutiny necessary when a major increase of the concentration is verified. In this regard, see Alese (2008).) clearly shows the difference. Considering the gas and oil exporting Countries as companies, the Italian oil market has an index equal to 1973, indicative of a reasonably concentrated market, while for gas the index arrives at 2408, sign of a very concentrated market. Not surprisingly, if from the Countries one looks at the companies, the result would be analogous: against a higher concentration in the import, a very much stronger monopolistic presence is found in the segment of the commercialization of the gas market (also due to infrastructural data), compared to what happens for the oil.
However, with regard to the comparison between oil and gas, one need not give too much importance, since the structural difference between the two markets and even between the two fuels (i.e. the uses to which they are and can be assigned and the different degree of substitutability of the supply sources). If, in fact, the oil security is essentially a question of volume, besides prices, the security of gas is principally a matter of infrastructure. As Hayes and Victor lucidly state (2006, pg. 350), “the ‘new world’ characterized by a plurality of suppliers and users and by the fungibility of gas, can bring a major security both for the producers and for the consumers. However, reaching such security will require infrastructures ‘in excess’ compared to the point-to-point contracts which were typical of the ‘old’ world”
The challenge of gas, then, consists in “forcing” the market towards the creation of a structural excess, not so much for the present offer, as for the potential offer, that is, of capacity of production or importation. And, consequently, concerns the way in which the premium on the security can be paid and the recourse to adequate regulatory instruments. In this, the Regulation Authorities play an equally crucial role in the business, and probably more important, of the policy itself – in the “ancient” sense that the policy could have, first and foremost international, towards the decisions and the energy investments. The cited exemptions to the Tpa principle fall into this logic.
Security in the classical sense
In recent years, the discussion on Energy security has undergone an acceleration which has led to the junction between environments – market and geopolitics. To speak of energy security today, means to speak, above all, of economy of the supplies, environmental sustainability and underlying alliances or strategies. This does not mean that the “old” security is a solved problem. On the contrary, it is the major flexibility and inter-dependency – which is the mirror of the development of relations, de facto, multi – rather than bi-lateral – that draws attention to the need of guaranteeing adequate protection to the logistic junctions. This requires as much vigilance against attacks by “common” pirates, as against the terrorist activities that resort to piracy techniques (Safe 2009).
The convergence between these two categories determines the necessity of a new approach of Intelligence and policing on the oceans. Piracy has become a particularly strong threat to the LNG carriers, which are destined to become even more numerous and to carry an always more critical load for energy supplies of the consumer Countries. The current comeback of even more ferocious attacks by the pirates on the Somali coast has undergone a new growth in recent years, after a progressive reduction.
In reality, it has principally regional importance: as clearly emerges from the map compiled by the International Chamber of Commerce (7) , mainly involving the African and Southeast Asian regions. Elsewhere, it is sporadic (Latin America) or almost non-existent (Table 3). This does not mean that the numbers are not striking: in the first nine months of 2009, more attacks were registered (306) than in the whole of the previous year (293)(8) . More than the increase factor, it would be more appropriate to speak of intensification: in the sense that the risk of aggressions is growing in certain areas of the planet, and therefore, it is and will be felt as much in the gas prices as in political choices. Furthermore, “the convergence between piracy and terrorism renders the energy markets particularly vulnerable, since the major part of the oil and gas routes cross the areas more heavily infested with pirates” (Forest 2007, pg. 247).
Particularly important, for our purposes, is the observation that – on the total of the boardings – the number has grown of those having as their objective carriers with energy products, including the LNG. This, for Nincic (2009), indicates also the acquisition, by the pirates, of more sophisticated instruments and technological knowledge. In short, there is a risk of triggering off a perfect tempest due to the convergence of three factors, in themselves independent, each one more or less manageable if taken singularly: the renewed vital force of the traditional piracy, the terrorist attacks on the energy carriers, and the growing importance of the transport, not only of oil, but also of gas by ship. The efficacious guarantee of the security of the routes constitutes de facto a precondition that must be satisfied: to be able to cope with, on all fronts, the question of the energy security in the modern sense.
The energy security debate has, by now, acquired a centrality and a dignity which goes beyond its components. The energy security is a complex concept, which embraces – in addition to the classical themes of security against attacks of a criminal or terrorist nature – economic, geopolitical and environmental questions. The intersection of these themes is not easy to find, especially because, necessarily, it requires a close examination of the trade-off which is necessary to accept in order to arrive at an optimal mix. In fact, to maximize the energy security requires giving up the objective of maximizing its components individually. Given the strong inter-dependency between them, not always lineal and not always positive, in certain cases, pressing the accelerator on one front can mean putting on the brakes on another.
What is more, the energy security falls into a context of liberalized market, where the space for political decisions is reduced. In the “old world”, as Hayes and Victor (2006) call it, the State had more degrees of liberty, because – whether for the different framework of regulations or for the relative isolation of the various markets – it could unload the effects of its choices on their diseconomies. This, in a globalized world is not possible.
Therefore, from the perspective of security, it is necessary to identify the mechanisms compatible with a competitive market which encourage the development in the desired direction. For Italy, this means, essentially, concentrate on gas, central fuel for our energy supply. And since the “new world” requires characteristics of flexibility and competitiveness, which once were not necessary, the role of the State should result as an effective regulation, and aim to encourage the creation of an excess of capacity of importation. In addition, it is reasonable to imagine a growing role for the LNG, despite the new challenges that it represents: not only for the economic systems which it fits into, but also, and above all – in a public perspective – for the renewed attention to the security of the routes that it requires. For example, the return of piracy collides with the purposes of the energy security and, therefore, requires special attention.
Finally, our Country has yet to complete some strategic choices. One concerns the effective competitiveness of the market, which in the case of gas still remains closed and vague (Beccarello and Villa 2009). The other is relative to the decision whether the importations of gas – and therefore, the relative infrastructural planning, be it entrusted to public choices or private investments – must serve our national market, or also satisfy part of the requirement of the entire Southern Europe. In this case, it would be even more urgent to render the authorization processes more certain and transparent. The administrative opacity represents a barrier to entrance with potentially anti-competitiveness effects, and above all, could provoke the perception of Italy as a ‘risk country’.
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(1) The essential infrastructures are subject to the obligation of “third party access” (Tpa) i.e. that they must allow access on non-discrimination conditions to all competitors. The new works are generally exempted according to the Rule of the 80-20, that is, 80% of the capacity can be utilized at the discretion of the operator for a period of 20 years. See Beccarello and Piron 2008.
(2) “LNG Rovigo, that 10% available on sale” Quotidiano Energia, 24th November, 2009.
(3) “LNG Rovigo, allocated the capacity of December” Quotidiano Energia, 25th November, 2009.
(4) Alessandro Ortis “Strengthening the pipelines remains a priority” Il Sole 24 Ore, 24th October, 2009
(5)“LNG. Scajola pushes for Priolo and Trieste. Staffetta Quotidiana. 20th Oct, 2009. On the regasifiers of Trieste, an international contentious argument exists with Slovenia, which opposes the plant. Regarding this, Scajola has affirmed: “We have tried to explain our reasons to Slovenia many times, and it seems to us that we have not seen any reason that could support the thesis of not constructing the plant. We have put up with short-sighted vetoes from inside, and we cannot permit undergoing the same from outside, unless they are justified”.
(6) The Herfindahl-Hirschman Index is constructed adding up the market shares, expressed in percentage, of the companies that compete on a given market. Therefore, in a monopolistic context, where a single companies controls l00% of the market, the HHI assumes a value equal to 10.000. In a perfectly competitive market, it is close to zero. In practice, a market is considered competitive if the HHI has a value inferior 100; not concentrated if it does not exceed 1.000; moderately concentrated between 1.000 and 1.800; and much more concentrated the more distant it is from such threshold. The HHI was developed independently by Hirschman (1945) and Herfindahl, who in 1950 used it in the ambit of his doctorate thesis (unpublished) on “Concentration in the U.S. Steel Industry”. Further details are available in Hirschman (1964) and Calkins (1983). The HHI is very much used in the ambit of anti-trust law, which presumes it legitimate any operation that determines an increase of the index inferior to the 100 points, while it holds further scrutiny necessary when a major increase of the concentration is verified. In this regard, see Alese (2008).
(8) “Unprecedented increase in Somali Pirate Activities”. International Maritime Bureau, 21st October, 2009.