European Gas Markets, November 15, 2006

Gazprom and Eni have signed a long-awaited "strategic agreement", giving the Russian gas monopoly access to the Italian downstream market, while Italy's oil and gas incumbent gains upstream assets in Russia and elsewhere.

"The agreement sets up an international alliance enabling the two companies to launch joint projects in the mid and downstream gas, in the upstream and in technological cooperation," according to Eni. Gazprom will extend the duration of its gas supply contracts with Eni until 2035. Beginning in 2007 Gazprom will sell directly into the Italian market, with gas volumes building to 3 billion cubic metres (Gm3) from 2010, "for the entire duration of the long term supply contract," Eni said in a statement.

In the upstream sector, Eni and Gazprom have earmarked major projects involving "companies and assets" in and outside Russia. Eni said that these assets would be jointly owned. "Eni and Gazprom have agreed to work with each other on an exclusive basis on these projects, which are expected to be finalised by the end of 2007," Eni added.

Mikhail Korchemkin, director of East European Gas Analysis, told EGM that it remained unclear how the deal would benefit Eni. "Eni will get upstream assets, but on what terms?" he asked.

The level of cooperation extends further, into the field of gas transportation. Eni and Snam Rete Gas, Italy's gas network operator, will provide Gazprom with "know-how and expertise" for the expansion of Russia's gas transportation system. Gazprom and Eni will plan to develop LNG projects together.

Eni c.e.o. Paolo Scaroni said in a statement: "The new strategic alliance between Eni and Gazprom has been made possible by our unique relationship which dates back over 50 years and will encompass the next 30 years involving all the business areas of both companies. The agreement... is a major step towards the security of energy supply to our country." Gazprom could not be reached for comment.

Korchemkin said: "The deal indicates that Gazprom is unlikely to introduce common, transparent rules for all players in the Russian gas scene. Cooperation with foreign partners will be based on individual preferences and the choice of Gazprom and Mr Putin." He conceded that Gazprom needed first-hand knowledge of LNG and high pressure pipeline technologies, which Eni could provide.

Gazprom has a number of mid-sized gas reservoirs that could be shared with Eni. Korchemkin added that Gazprom might offer to share with Eni a deep reservoir at the Yamburg or Urengoy deposits in Siberia.

The two firms backed out of a similar deal in October last year, claiming the terms were "outdated". In May 2005, Eni agreed to give 2 Gm3 of its long-term contract volumes back to Gazprom for the Russians to market gas in Italy from 2006. In return Gazprom extended Eni's supply contracts by ten year to 2027. The agreement provoked a storm of controversy at the time, and stoked the interest of Italy's anti-trust authority, AGCM. It later transpired that the gas would have been marketed by an associate of then Italian prime minister Silvio Berlusconi. It remains to be seen whether Italy's anti-trust authority will raise objections to the latest agreement.