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Italy imposes offshore exploration moratorium

The industry’s future hangs in the balance as the government considers a new energy transition strategy

Hopes of a revival for Italy's upstream sector have been dealt a severe blow by parliamentary approval in February of an 18-month moratorium on offshore oil and gas exploration permits, as well as a sharp increase in fees payable on upstream concessions. The government says it wants to prioritise renewable energy developments instead.

The measures were introduced as an amendment to the government's so-called "simplification decree" and are intended to assist Italy's energy system in its "process of transition towards decarbonisation", says economic development ministry undersecretary Davide Crippa. Crippa is a member of the populist Five-Star Movement, which is part of a ruling coalition with the right-wing League.

The moratorium, which could be extended to 24 months, gives the government time to agree a new "plan for the sustainable energy transition of suitable areas", designed to define the geographical areas where exploration and production activities are to be allowed in future.

The moratorium affects 73 existing exploration permits (47 onshore and 26 offshore), as well as 79 pending applications for exploration permits (54 onshore and 25 offshore) and five pending applications for non-exclusive offshore exploration permits.

In addition, the legislation states that-with the exception of natural gas storage-oil and gas upstream will no longer qualify as 'activities of public relevance'​, slowing down the permissions process, notably in terms of land acquisition by onshore drillers.

The government is also set to increase 25-fold offshore concession fees, for both exploration and production, from 1 June 2019. Crippa says the fees, unchanged since 1998, currently bring in just €1mn/yr ($1.1mn/yr) for the state.

The industry has been flagging up the potential for lost investment revenues resulting from the moratorium. Andrea Ketoff, general manager of Italian petroleum and mining industry association, Assomineraria, says it risks undermining an estimated €400mn of investments and a possible €110mn/yr loss in taxes and royalties for the state. He also tells Petroleum Economist that if the "suitable areas" review had a negative impact on existing permits, it could potentially lead to billions of euros of further lost investment revenues.

The measures have also generated strong opposition from unions representing upstream workers in Emilia-Romagna, Basilicata and Sicily, where most oil and gas projects are located. Around 1,000 companies operate in Italy's upstream sector, employing some 100,000 workers, according to Assomineraria data.

Opponents of the moratorium have suggested that companies could seek compensation for lost investment, although it has yet to be established how this process would work. The government has sought to assuage public purse concerns by saying it may use some of the extra revenues from higher concessions fees to meet any such future payments.

Production declines

The moratorium is another blow for an industry already struggling in a tough operating environment, according to Davide Tabarelli, of Bologna-based consultancy Nomisma Energia. He notes oil firms were already banned from offshore drilling within 12 miles of the coast by legislation introduced in 2010.

Oil and gas production has been declining steadily in recent years, with just 5.65bn m³ of gas and 4.14mn t (around 80,000bl/d) of oil produced in 2017. That compares to 19.5bn m³ and 5.94mn t respectively in 1997. Proved natural gas reserves were estimated at around 45bn m³ in 2017, while oil reserves stood at 78mn t, according to government data.

In the past five years, just 14 permits have been approved, of which three were for production and 11 for exploration, with just one of the latter being offshore, according to Assomineraria. Between 2013 and 2017, seven exploration wells-all onshore-and 20 production wells have been drilled in Italy. That compares with an average 70 wells per year between 1970 and 2017.

Aside from the impact on new permits, the moratorium also risks weakening small- and medium-sized companies that provide services to the upstream sector, Assomineraria's Ketoff says.

Italian firms, including contractor Saipem, make up 5pc of the global upstream sector, generating combined revenues of €20bn/yr across domestic and international projects. While much of this revenue is generated abroad, maintaining a buoyant base in their domestic market is crucial to the strategies of these companies, Ketoff says.

A further decline in domestic natural gas production would also lead to a greater reliance on imports, he adds. The country's energy and climate plan, recently submitted to the EU Commission, envisages gas as the main complement to renewables in the energy transition. Italy consumes some 75bn m³/yr of natural gas, of which around 90pc is imported, mainly from Russia and Algeria.

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