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

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DEVELOPING NEW GAS INFRASTRUCTURE, INCL.
LNGREQUIREMENTS AND PRACTICAL EXPERIENCE
Marco Margheri Head of EU liaison officeCEER
workshopBrussels 9th November, 2006
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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 entrants
view on the financing issues connected with new
infrastructure development,within the peculiar
context of the Italian energy market,geographical
ly bound to become a harbour forcompetitive and
diversified supply routes.
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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 ENTRANTS
PERSPECTIVE An outlook of project development
phases and of key requisites for completion4)
PRACTICAL EXPERIENCE DEVELOPING EDISON LNG AND
PIPELINE PROJECTSEdisons latest developments,
with drill-down on two projects listed among EU
priorities North Adriatic LNG terminal and IGI
Greece-Italy interconnection pipeline
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BRIEFLY... WHO WE ARE
Born in 1881, Edison is one of Europes 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 Italys second
largest electricity generator. Edisons
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 Italys
second largest gas operator and first investor in
new capacity.
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THE CONTEXT A LIBERALIZED MARKET
Electric generation
Edison estimates
Historic data
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
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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!
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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
Italya 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
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WHY M-S? ITS A LONG WAY TO THE LAKE!
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 (productionsupply) on additional
volumes are the strategic goal. Mid-stream
investments are a key enabler to negotiate
volumes and make them available to the market.
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TOWARDS A COMPETITIVE MARKET
A consistent flow of investments is currently
taking place in Italy, through mid-size
industrial projects, 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.
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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.
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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.

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WHEN A SHIPPER DEVELOPS A PROJECT...
Local consent investigation Design Basis
definition Agreements with relevant TSOs Concept
identification
Host country agreements Basic Design (
10) VOLUMESDefinitive commercial
contracts Corporate structure Financial structure
Pre-Basic Design (20) Preliminary commercial
contracts Authorisations Intergovernmental
agreements CAPACITY SECURINGTPA exemption
request
Final investment decision
Pipeline
Site selection Local consent investigation Agreeme
nts with site owners Design Basis definition
(30)
Authorisations Preliminary commercial
contracts CAPACITY SECURINGTPA exemption
request Pre-Basic Design (20)
Financial structure Corporate structure VOLUMESD
efinitive commercial contracts Basic Design (
10) Regulated access code
Preliminary investment decision
LNG Terminal
Critical path
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...SUPPLY IS KING!

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

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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
Capacity 8-10 Bcm
Commercial ops 2010/11
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CASE 1 NORTH ADRIATIC LNG

• Main project characteristics
• Worlds 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

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CASE 1 NORTH ADRIATIC LNG
AN INTEGRATED VALUE CHAIN TO BE COVERED
Pipeline
LNG
Gas
LNG
Extraction
Liquefaction plant
Shipping
Regasification terminal
LT SUPPLY APPROACH KEY FOR MAXIMIZING VOLUMES
NUMBER OF OPERATORS KEY FOR OPTIMIZING
CAPACITYCOSTS

• 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

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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)
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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

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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)
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WHAT DO WE NEED PROJECT SCENARIO
GOAL
ACTORS
ACTIONS
OUTCOME
A jointEU,national,and local
UnleashedNegotiationPower
TPA exemptionfor new infrastructuresfostering
competitionon the final market

• Bring new entrantson the market
• Reduce dominantoperators mkt share
• Diversify sources

Predictablecash flow

• Ensure non-discriminatoryconditions
• Develop a Southernhub for Europe

Stable frameworkfor network access, Including
entry / exitand cross-bordermanagement

• Ensure Permittingin 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
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