Technology from Europe:
Italy

Italian firms thrive despite domestic limitations

Salvatore D’Andrea

Salvatore D’Andrea is board member in charge of Upstream Activities for Total Italia in Milan, Italy, and he is also chairman of the Hydrocarbons and Geothermal Section of Assomineraria, The Italian Petroleum and Mining Industry Association. Founded in 1917, it is part of Confindustria, the Italian manufacturers’ syndicate. The association represents companies operating on Italy’s national territory in the exploration and production of oil, natural gas, minerals and geothermal fluids. It also represents companies that supply equipment and services to the industry.

Question: How does Assomineraria try to guide the Italian upstream oil & gas industry’s activities?

Answer: Assomineraria makes every effort to create favorable conditions to operate in our country. Italy is a mature country, with 330,000 boe/day of oil and gas production, combined. Reserves total 1.9 billion boe, which should last for 20 years (oil) and 14 years (gas) at present output rates (44 million bbl/year and 1.16 Bcfgd).

The association groups 17 oil companies – Italian and international, major as well as juniors – together with 60 service companies, ranging from larger global contractors to small-sized enterprises operating in specific upstream-related technologies.

Its main mission, as well as its commitment, is to promote an innovative, efficient, environmentally sound and socially responsible development of the industry, favoring its competitiveness both here and abroad. Major efforts are also made these days to help our operators in the difficult process of obtaining permits and authorizations, so that they can secure acceptable timeframes in which to get to market. Production of gas has, in fact, dropped considerably in later years – by 1 Bcm/year (35 Bcf/year) over the last eight years. This is due to a progressive reduction of the companies’ activities, a trend that could be reversed by simpler, more certain authorization processes.

Q: How does Assomineraria characterize last year’s E&P market for Italian operators and service companies? Was the amount of upstream activity during 2005 sufficient?

A: Considering the current oil price scenario, the level of E&P activities is definitely below expectations. Investments were up 54% on the previous year, to over $1 billion. But signs are not as encouraging if we look at exploration activity, which has shown an upward trend that is still too limited. (Governmental) authorizations for projects are still lagging behind, and the operators have not seen the expected results in the reduction of time required to get to market.

Q: Assuming that high oil and gas prices continue, what are your expectations for business levels in 2006?

A: Activities in 2006 are expected to continue to rise, but only $840 million of investments were budgeted, and only 25 wells are planned for drilling. However, the situation could change in the mid-term, if the authorization processes were to be finished on a number of projects, particularly for those in Basilicata (one of the country’s administrative regions, like a US state, in southern Italy).

Q: Are Italian companies obtaining extra business in any region because of high oil and gas prices?

A: The Italian “global” companies, both E&P operators and contractors, are definitely enriching their project portfolios, worldwide, due to the high oil and gas prices, and to their good reputations for technical operations in difficult environments. As for those firms with more of a local perspective, we see several examples of internationalization of the business activity, mostly within the Mediterranean basin, both east and south.

Q: There were only 30 wells drilled throughout Italy last year. Should the Italian government be doing more to encourage an increase in E&P activity?

A: The new law passed in 2004 (Marzano Law) established more favorable conditions by rationalizing the authorization processes. However, a number of obstacles have been emerging locally on environmentally related matters, especially for onshore projects, which are under the full responsibility of regional administrations.

The government could encourage an increase in E&P by taking back the helm of the energy policy. Both government and parliament have passed a change in the constitution to bring back to central authorities the full power to authorize energy projects, including E&P activities. But this change will have to go through a referendum in a few months.

Q: In relation to the previous question, would Assomineraria welcome additional investment and participation by non-Italian firms, either European, American or Canadian?

A: Of course it would. There are signs evident from foreign companies of an increasing interest in investing in Italy. Five new companies joined Assomineraria in the last two years, three from the USA, one from Canada and one from the UK.

Their presence is very much appreciated, as it shows the potential for a new type of E&P business, fitting the context of a country with mature oil & gas reserves, with a growing market, especially for gas, and with an incredibly extended grid of gas pipelines. The existence of more than 30,000 km (18,642 mi) of gas pipelines around the country makes it easy for any size operator/ investor to flow its production to market.

The presence of more operators could convince the government to act more decisively and could help in keeping alive the local upstream industry contractors.

Q: Where are some major field projects in which Italian firms are involved?

A: Italian oil companies and service firms are involved in projects worldwide, with only a few countries excluded. As for Italy, the major projects are onshore, in the southern region of Basilicata, though considerable potential resides in the undepleted gas fields of the Po Valley, an area which was recently liberalized. Only small companies applied for permits in this area, while there is evidence of potential business in transforming depleting fields into gas storage facilities. Storage capacity in depleted fields, close to high energy demand areas, is increasingly important for a country, where almost 60% of electricity is produced with natural gas. Only large operating companies can manage these complex facilities.

Q: Which projects serve as good examples of Italian companies upstream technical work?

A: E&P projects in Italy, with their particular environmental difficulties, have been an excellent training ground for Italian oil companies, which have consequently obtained important operatorships abroad. These projects have also helped Italian contractors, which are now leading in technically challenging projects worldwide.

High pressures, high temperatures and major field depths have contributed to forming the greater capabilities of the Italian industry, and people in the industry appreciate this around the world.

Q: Are Italian companies concerned about the aggressive competition from Chinese oil companies and service/ supply firms outside Asia?

A: Competing with the emerging Chinese industry is certainly a challenge for all companies and firms operating in this industry. However, given the level of activity in Italy, and the particular technical conditions, this risk does not seem to be impending here.

Q: Toward which international areas do you think that oil & gas company interest and investment are moving?

A: High oil and gas prices are attracting investments in many new areas that are now considered economically viable. From our perspective, it is interesting to monitor the investments flowing to mature areas, and to areas closer to energy demand, where the skills required, particularly on environmental issues, are not to be undervalued. This is what the Italian onshore and offshore fields can offer, and we need to attract operators willing to commit themselves to those areas.