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DEVELOPING NEW GAS INFRASTRUCTURE, INCL. LNG REQUIREMENTS AND PRACTICAL EXPERIENCE

DEVELOPING NEW GAS INFRASTRUCTURE, INCL. LNG REQUIREMENTS AND PRACTICAL EXPERIENCE. Marco Margheri – Head of EU liaison office CEER workshop Brussels – 9th November, 2006. OBJECTIVE.

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DEVELOPING NEW GAS INFRASTRUCTURE, INCL. LNG REQUIREMENTS AND PRACTICAL EXPERIENCE

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  1. DEVELOPING NEW GAS INFRASTRUCTURE, INCL. LNGREQUIREMENTS AND PRACTICAL EXPERIENCE Marco Margheri – Head of EU liaison officeCEER workshopBrussels – 9th November, 2006

  2. OBJECTIVE As a leading energy operator in the Italian market, Edison is actively pursuing the increase and diversification of its sources of gas supply, as well as trying to secure sufficient import capacity to make these supplies available to the Italian and European market. The aim of this presentation is to share our “new entrant’s view” on the financing issues connected with new infrastructure development,within the peculiar context of the Italian energy market,geographically bound to become a harbour forcompetitive and diversified supply routes.

  3. AGENDA 1) WHO WE AREThe leading new entrant on the Italian energy market2) MARKET OUTLOOK Italian and European market outlook: why are shippers’ mid-stream investments key for meeting gas demand and developing competition on the final market. A brief summary of European examples3)NEW INVESTMENTS: A NEW ENTRANT’S PERSPECTIVEAn outlook of project development phases and of key requisites for completion4) PRACTICAL EXPERIENCE: DEVELOPING EDISON LNG AND PIPELINE PROJECTSEdison’s latest developments, with drill-down on two projects listed among EU priorities: North Adriatic LNG terminal and IGI Greece-Italy interconnection pipeline

  4. BRIEFLY... WHO WE ARE Born in 1881, Edison is one of Europe’s oldest energy companies. In 2005, it reported revenues of 6650 mln € (+ 32% in first 6 months of 2006, including a growth of more than 41% on the liberalized electricity market), and is currently carrying out one of the largest investment plans in Europe. it had to diversify its business, when the national monopoly on electricity was established in Italy on 1963; thanks to the first wave of EU Directives in 1996, it could re-focus its business on energy once again. With more than 10.000 installed MWs and investments to grow up to 14.000 MWs, it is now Italy’s second largest electricity generator. Edison’s generation portfolio encompasses state-of-the-art CCGT thermo plants, as well as hydro and wind power plants, with high environmental sustainability. 13,3 bcm total sales of natural gas in 2005, and investments in both pipeline and LNG supply projects, will make Edison Italy’s second largest gas operator and first investor in new capacity.

  5. THE CONTEXT: A LIBERALIZED MARKET Electric generation Historic data Edison estimates INCUMBENT: 39% The liberalization process in Italy has led to roughly 20 billion € investment in new generationcapacity, adding nearly 15000 MW to the portfolio (more than 80% with CCGT technology) These investments were carried out by a number of new entrants, leading to one of the most competitive marketplaces throughout Europe

  6. THE CONTEXT: GAS IS A KEY ARENA EU30 (EU 25 + N, CH, TK, RO, BG): Gas Demand growth and sources ITALY: Gas Demand growth and sources CAGR: 1,8% CAGR: 2,1% 530 114 Source: IEA World Energy Outlook and Edison internal review data Gas consumption will increase throughout Europe, with gas as the only growing fossil source; the Italian demand is foreseen to increase steadily, driven by power generation. Availability of additional volumes is a key enabler; diversifying sources & improving sourcing conditions will be a key success factor in the competitive arena. And... capacity is missing!

  7. INVESTMENTS: THE EUROPEAN CONTEXT Existing pipelines Existing LNG Pipelines under construction LNG under construction UE-301: Import capacity* (Bcm) Pipelines under development LNG under development Example 1 - The UK:- focus on volumes- various TPA exemptions (up to 100% capacity) - LNG: LT market strategy Italy:a naturalplatformfor anopen mkt * EU.25 + Norway, Switzerland, Turkey, Romania and Bulgaria • Example 2: • Focus on capacity • LNG: ST market strategy * Norway gas hub, Ormen Lange, BBL, Interconnector are considered as UE30 internal sources and are not included in UE 30 import capacity All the projects under development are necessary to meet 2020 demand. Different business model, but significant volumes are key for Italy 7

  8. WHY M-S? IT’S A LONG WAY TO THE LAKE! Major gas suppliers in Italy in 2005 (bcm) purchases from domestic sources 56.1 16.5 13.3 12.1 10.2 7.6 ENI ENEL Edison Others Edison share of total Italian portfolio availability: 15% INCUMBENT: 65% The existing market structure is still strongly dominated by the incumbent operator. New entrants need to integrate all along the supply chain in order to increase competition on the downstream market (both heavy use and retail). Upstream investments (production&supply) on additional volumes are the strategic goal. Mid-stream investments are a key enabler to negotiate volumes and make them available to the market.

  9. TOWARDS A COMPETITIVE MARKET A consistent flow of investments is currently taking place in Italy, through mid-size industrialprojects, preparing a diversified and open import market. Shippers are leading the way. The Italian Government has adopted relevant EU legislation (with subsequent AEEG regulation) and recently launched a strategic initiative to prioritize initiatives and support timely development.

  10. WIN / WIN: FROM THE LAKE TO THE HUB Sources: MSE, SRG, Edison Italian Demand New regas/pipe 2 new regas/pipe New regas/pipe Existing + under construction + committed import capacity (North Adriatic LNG, TAG, TTPC) Domestic production A solid domestic demand and a diversified competitive arena allow for maximization of the system capacity. This will result in the development of a liquid hub, with diversified sources of supply to be traded across Europe. The Italian trading hub can thus represent a valuable contribution to the diversification of sources of supply for central Europe as well as a key efficiency factor in optimizing the risk of industrial investments under development.

  11. NEW INVESTMENTS: AN EU FRAMEWORK • A stable regulatory framework is required in order to facilitate investments in new infrastructures by implementing Directive 2003/55/CE and its national applications. • CEER and ERGEG should support the harmonisation of national and regional regulations of neighbouring countries with the acquis communautaire, avoiding potential overlaps and distortion of competition among Member States. • Implementation of compatible regulation in supplying & transit countries would stabilize the gas business framework. • Gas interconnections between North Italy and Central Europe (e.g. through Switzerland and Austria) should allow for bi-directional gas flow. In such way the gas arriving in Italy from the “Southern route” could be made available to Central European countries, diversifying the gas suppliers for such region. • The unbundling of existing interconnections should be implemented to facilitate the access of new operators.

  12. FEASIBILTY 2 years PRE-FEED 1 year FEED 1-2 years CONSTR. 2-3 years OPS. >20 years 2 years 1 year 1 year 3 years >20 years WHEN A SHIPPER DEVELOPS A PROJECT... Local consent investigation Design Basis definition Agreements with relevant TSOs Concept identification Host country agreements Basic Design (~ 10%) VOLUMES:Definitive commercial contracts Corporate structure Financial structure Pre-Basic Design (~20%) Preliminary commercial contracts Authorisations Intergovernmental agreements CAPACITY SECURING:TPA exemption request Final investment decision Pipeline Site selection Local consent investigation Agreements with site owners Design Basis definition (~30%) Authorisations Preliminary commercial contracts CAPACITY SECURING:TPA exemption request Pre-Basic Design (~20%) Financial structure Corporate structure VOLUMES:Definitive commercial contracts Basic Design (~ 10%) Regulated access code Preliminary investment decision LNG Terminal Critical path

  13. ...SUPPLY IS KING! • Cash flow comes from contracted volumes, not from available capacity: • Secure and/or credible (sensitivity analysis as the mainstream financial market methodology) market potential, through financial commitment by customers • Availability of volumes within a long-term perspective, through direct negotiation with supplying countries • Balanced and predictable transport costs • Reliable and economic access to storage & distribution • Minimize operational risk for construction and management: • Strong political support by EU, national and local authorities • Optimal project outline, matching available volumes and minimizing route or operational risks in the long term

  14. OUR PRACTICAL EXPERIENCE North Adriatic LNG Rosignano LNG Capacity: 8 Bcm Capacity: 8 Bcm Commercial ops: 2010/11 Commercial ops : 2008 GALSI IGI Capacity: 8-10 Bcm Commercial ops : 2010/11 Commercial ops : 2010/11 Capacity: 8-10 Bcm

  15. CASE 1: NORTH ADRIATIC LNG Main project characteristics: • World’s first offshore LNG regas terminal. • Shareholders: Exxon Mobil (45%), Qatar Petroleum (45%), Edison (10%). • Capacity and volume allocation: 8 Bcm/year Send-Out capacity. 250.000 cm LNG Storage Capacity. 80% for 25 years TPA exemption granted by the Italian government and the EU. Edison/RasGas II 25 years 6,4 bcm/y supply contract • Start up in 2008

  16. CASE 1: NORTH ADRIATIC LNG AN INTEGRATED VALUE CHAIN TO BE COVERED Pipeline LNG LNG Gas Extraction Liquefaction plant Shipping Regasification terminal LT SUPPLY APPROACH KEY FOR MAXIMIZING VOLUMES NUMBER OF OPERATORS KEY FOR OPTIMIZING CAPACITY&COSTS For the North Adriatic LNG Project : • Production Facilities have been developed in the field (North Field Reservoir – Qatar) • Liquefaction plant constructed and operational • A 25 years agreement for LNG supply has been signed (through 80% TPA exemption) • LNG carriers have been constructed (roughly 150k mc LNG = 90 mln smc NG) • The regasification plant is under construction

  17. CASE 1: NORTH ADRIATIC LNG • First offshore storage and regasification terminal in the world: 15 km offshore; on the seabed in 30m water depth; not visible from the coast. Operation will start in 2008. • Under construction: Work progress over 40%. Already awarded contracts 1 billion Euro. • Strong environmental commitment: More than 100 prescriptions The project is subject to a wide and complex Environmental Monitoring Plan under execution by ICRAM (MOE). • Ongoing activities: 26 dedicated employees, additional recruiting ongoing Training – Investment for over 1 mln € Terminale A EUROPEAN PRIORITY PROJECT The North Adriatic LNG is listed among TEN-E European priority projects (Dec. 1364/2006/EC: Annex I, NG.4; Annex III, 8.12)

  18. CASE 2: IGI PIPELINE Main project characteristics: • Onshore Section will be realized exclusively by DEPA • Offshore section will be realized through a SPV (Poseidon Co) owned by Edison and DEPA on an equal basis • 8 to 10 bcm/year throughput capacity • Currently undergoing Pre-FEED phase: • Authorization Procedure in Italy and Greece • Marine Survey and feasibility results updates • Commercial Agreements (i.e. supply, transit) negotiations • TPA exemption procedure

  19. CASE 2: IGI PIPELINE The IGI Project (developed by Edison and Depa in cooperation with Botas) represents the missing link that, once realised, will allow the flow of Caspian and Middle East reserves into Italy and western Europe via Turkey and Greece. The ITG project, linking Turkey and Greece is currently under construction, by Depa and Botas, and operations are soon expected to start.. Italian and Greek Governments have recently signed, in the presence of the Turkish Government, an Intergovernmental agreement, recognising the strategic relevance of the IGI Project and committing to support its fast development A PROJECT OF EUROPEAN INTEREST The IGI pipeline is listed among TEN-E European priority projects, and included amongprojects of European interest (Dec. 1364/2006/EC: Annex I, NG.3; Annex III, 7.12)

  20. EU: D 2003/55 and subs. regulation&decisions; TEN-E priorities MS: national legislation and regulation (Italy: L239/04 and subs.) Local authorities: EIA, construction permits and monitoring WHAT DO WE NEED: PROJECT SCENARIO GOAL ACTORS ACTIONS OUTCOME A jointEU,national,and local UnleashedNegotiationPower • Bring new entrantson the market • Reduce dominantoperator’s mkt share • Diversify sources TPA exemptionfor new infrastructuresfostering competitionon the final market Predictablecash flow • Ensure non-discriminatoryconditions • Develop a Southernhub for Europe Stable frameworkfor network access, Including entry / exitand cross-bordermanagement • Ensure “Permitting”in due time • Ensure flawless construction andmanagement Seamlessimplementation& mgmt. Strong political supportat all levels for priorityprojects, ensuringcoordination of effortsand a more effectivecommunication to stakeholders EFFORT- Legislation - Regulation - Decisions

  21. MERCITHANK YOUGRAZIE

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