Security & Geopolitics

Explosion at Baumgarten: What are Italy’s (and Europe’s) priorities?

The explosion at Baumgarten revived the debate on Italian energy security, but new iport routes might not be what is most needed.

Baumgarten explosion

On the 12th of December 2017 an explosion occurred at the gas hub of Baumgarten, the largest Austria’s import and entry point, as well as a major European gas hub.
In fact, approximately one third of the Russian gas supplies transported by the TAG pipeline to Western Europe passes through Baumgarten, with Germany, Italy, Slovenia and Hungary as destination markets, besides serving the Austrian one[1].
Due to the severity of the accident, happened at 8.45 am, the operator of the facility – Gas Connect Austria – had to close it with no clear indication of when operation could resume, since in the immediate aftermath of the explosion the entity of the damage was not clear.
The facility restarted operation in the late evening.

Spiking Prices

“The European gas market seems to be going through a perfect storm”.
Massimo Di-Odoardo, Wood Mackenzie Ltd.

Although operations were rapidly restored, the few hours of interruption and uncertainty were enough to alarm regional gas markets.
Prices immediately reflected the uncertainty of supply continuity.
The day before the accident, Italian PSV was trading at EUR 23.70/Mwh, and the Austrian VTP spot prices were up to EUR 21/Mwh.  On Tuesday, the day of the accident, the former was trading at EUR 45/Mwh, and the latter at a price of EUR 35/Mwh[2].
The effect of the disruption was not only limited to the gas market. Coal rose as much as 2 percent to $90.75 a ton and crude oil futures rose above $65 a barrel for the first time since June 2015[3].

Fear of shortages in Italy

“The biggest implications are for the Italian market”
Trevor Sikorski, Natural Gas Research at Energy Aspects in London.

The TAG pipeline has been responsible between 2010-2017 for 30% -50% of the Italian gas imports and accounts for 25% – 45% of demand, considering also domestic production.
Given the extreme relevance of this route, and not knowing when flows would have resumed, the Italian ministry of economic development declared a state of emergency for gas.
This measure was aimed at securing supply through a possible increase in imports from Northern Europe, Algeria and Libya.
However, it must be said that the possibility of shortage and of Italians being left in the freezing cold – as much-feared by the most alarming national press – was rather remote.
Italy has a solid natural gas system, thanks to import infrastructure capacity equal to 130 bcm a year, while demand is equal to 70-80 bcm a year, and thanks to its large storage capacity. In fact, when the accident occurred, storages were full at 83%[4].

Even in these encouraging circumstances, and while on the one hand reassuring the population on the availability of gas, the Italian Minister of Economic Development Calenda stressed, on the other hand, that the accident at Baumgarten showed Italy’s problem of security of supply and that opening new routes is mandatory.
The CEO of ENI, Claudio Descalzi, echoed Calenda underlying how diversification is key to overcome the fragility of the Italian gas system.
The solutions presented were both infrastructures – as TAP and EastMed pipeline – and more LNG.

As said, the Italian gas system cannot really be defined as fragile, but it comes with no surprise that the accident at Baumgarten revived the debate on energy security.
The discussion around energy security in Italy, and more widely in Europe, is nowadays almost exclusively crystallized on the topic of dependency on Russia, and the need to diversify routes of supply.
Notwithstanding that diversification is a crucial issue, energy security goes well beyond it and cannot be only focused on the need of founding new suppliers to decrease the level of dependency on Russia.

Connected European Energy Markets

Beyond Italy, the explosion at Baumgarten disrupted supply to the UK from Belgium and the Netherlands. Simultaneously, an outage in Norway caused flow reductions from Europe’s largest gas production site Troll, which compounded the supply problems.
Prices spiked everywhere in Europe.
This consistency throughout Europe is a good indicator of the fact that the market is integrated, and integration appears to be the way to strengthen energy markets.
To increase resiliency against disruptions like the one occurred in Baumgarten, Europe needs to have redundant infrastructures, including storage, domestic transport and import systems. These are quite solid in Italy, but other systems in Europe are more fragile and these weaknesses need to be overcome.

One good recent development was the update of the Security of Gas Supply Regulation, to minimise the impact of supply disruption. The Regulation calls for a Union-wide assessment of the infrastructure to be carried out by the ENTSOG (European Network of Transmission System Operators for Gas).
Strengthening the internal gas market and increasing its resilience to shocks is key to enhance the level of energy security in Europe. Resource diversification is certainly part of energy security, but it is not the end of it.

Too much politics?

There is no doubt that energy security and security of supply are strongly influenced by domestic and international politics. Especially in the case of “diversifying away” from Russia, political motives are essential.
However, the accident occurred in Baumgarten showed that we are facing the risk of making energy security an “essentially political issue” and therefore have a partial vision that could only lead to partial solutions.
Europe, and Italy as a member state, if willing to increase energy security both at domestic and Union level, needs to look at the wider picture.
Europe as a whole is not facing gas shortages any time soon. International infrastructures take time to build, are very costly and create environmental concerns along with social conflicts (TAP endpoint in southern Italy is the clearest example).

Now, the question is: what do we really need?
To have a more resilient gas market we might need a better integrated one, with stronger interconnections, storage, transportation and transmission systems, much more than 10 bcm coming from Baku.