Thursday, 4 June 2009

Libya: The Italian Connection

Libya: The Italian Connection
Copyright © 2009 Energy Intelligence Group, Inc. (click for details)
Friday, March 27, 2009
Immigration is a hot political issue in Italy, and one that Libyan leader Muammar Qaddafi has proved a master of exploiting. The two countries have engaged in on-off spats for years over the flow of African migrants, refugees and asylum seekers from Libya's shores, which seems to vary according to what benefits Libya can extract. For Tripoli, one clear result was the European Union's decision in 2004 to lift sanctions on Libya, including an arms embargo, with Italian support. Another was the $5 billion Italy-Libya friendship treaty agreed last year, under which Italian companies -- funded by a tax on energy giant Eni -- should invest $250 million annually over 20 years in Libyan infrastructure projects (EC Sep.5,p10).

The $5 billion treaty was billed by Qaddafi as reparation for colonial wrongs -- more than 100,000 Libyans are said to have died during Italy's violent occupation of 1911-43. Italian Prime Minister Silvio Berlusconi provided a different spin, reportedly quipping during the signing ceremony in August that the treaty was about "less migrants" and "more oil." Italy is a major consumer of Libyan oil and gas, while 30% state-owned Eni dominates Libya's hydrocarbon sector and was the first foreign producer to agree to major extensions of its contracts under Epsa-4 terms (EC Jun.13,p11).


Although fewer than 15% of migrants to Italy come from Libya, those that do -- pitching up in leaking boats on the shores of the small vacation island of Lampedusa -- generate the most media attention. But Berlusconi's offhand remark belies a more complicated relationship. While maintaining preferential access to Libya's reserves is a key aim, Italy also tends to use Libya to project itself as an international actor, says Oxford University's Claudia Gazzini. Rome believes it facilitated Libya's return to the international fold by being the first to initiate strong diplomatic relations and, under former Prime Minister Romani Prodi's presidency of the European Commission, ending the EU embargo. Last August, Berlusconi rushed to Libya to sign the friendship treaty, preempting a Tripoli visit by then-US Secretary of State Condoleezza Rice -- even though diplomats were still working on the accord's wording. Berlusconi addressed Libya's General People's Congress early this month. This week, Italian Foreign Minister Franco Frattini said Italy was ready to mediate in a simmering spat between Libya and Switzerland (EC Aug.1,p4).

Tripoli likewise uses its access to Rome to boost its international standing, most recently securing an invitation from Berlusconi to attend an African session of the G8 conference, to be held in Italy in July. The alliance with Italy also provides a counterweight to Libya's oft-troubled relationship with the US.

Commercially, Eni produces some 250,000 barrels of oil equivalent per day in Libya, or 15% of its output, making Libya its top producing country. Eni also helped build Libya's main export route, the Greenstream gas pipeline to Italy. Under new Epsa-4 deals agreed last year, the company agreed to invest a further $14 billion. Libya has long dabbled in Italy, owning shares in automaker Fiat and soccer club Juventus, but has recently stepped up the momentum, deploying its $70 billion sovereign wealth fund, the Libyan Investment Authority, in search of bargains. These include Eni, in which Libyan state entities already own a 2% stake and are targeting as much as 10%, potentially making Tripoli the biggest stakeholder after the Italian government. Tripoli has also acquired a 4.6% holding in Italian bank UniCredit, where it is now the second-largest shareholder. Earlier this month, Libya expressed an interest in taking a stake in cash-poor, debt-ridden Enel.

Surprisingly, there has been little public debate in Italy about this activity. Officials at Eni, Enel and UniCredit seem untroubled: The companies need the money, and are not too worried about where it comes from. Eni Chief Executive Paolo Scaroni described Libya's purchase of Eni stock as a "positive thing" and suggested that Eni would have no problems with a jump to 10%, while the government publicly supported the idea. UniCredit head Alessandro Profumo expressed similar sentiments. The thinking seems to be that any risks are worth it, even though Qaddafi is a master of the unexpected (EC Jan.30,p4).

Tax Burden

Scaroni was less enthusiastic about funding the $5 billion friendship treaty. In February, he said that while Eni welcomes the new agreement, "we welcome the 'bill' much less, a tax which in some way imposes the cost on our shoulders" (EC Feb.20,p13). Eni Chief Financial Officer Alessandro Bernini said it should not have any "significant" impact on the group's overall tax level.

But, according to Gazzini, "It's always been understood in Rome -- and in Eni -- that the treaty would be paid for by Eni," rather than by the state treasury or foreign aid budget. Libya has long pursued some form of colonial compensation, and a reparations treaty has been in the works for some four years. For Italy, the deal serves to put a lid on future Libyan demands, while facilitating business for Italian firms in Libya.

Jill Junnola, London

Compass Points

• SIGNIFICANCE: The special relationship between Libya and Italy, as embodied by the friendship treaty, brings mutual benefits: Italy maintains access to Libya's reserves and generates business for Italian companies, while Libya's leadership boosts its credentials by extracting a landmark reparations deal and keeping an EU player on its side.

• CONTEXT: The adventures of Libya's sovereign wealth fund highlight the connection: Its quest for investments in Italy has been welcomed by companies and government alike, whereas plans to pursue a stake in Spanish Repsol YPF seem bound to encounter political opposition (EC Dec.5,p6).

• NEXT: Watch for further Libyan equity investments in Eni, and how the two sides approach the thorny issue of board representation. Tight ties aside, market conditions could undermine some of Eni's ambitious plans for Libya, such as a new LNG plant.


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