Italy unlocks drilling in new Italian “Aiuti Quater” Decree22 December 2022
"Aiuti quater Decree aims to gradually increase the amount of natural gas extracted from available domestic reservoirs."
The Council of Ministers of the Italian government, in its session No. 4 of 10 November 2022, approved a Law Decree named “Aiuti quater” (the “Aiuti quater Decree”) which introduces urgent regarding electricity, natural gas and fuels, including amendments to Article 16 of Law Decree No. 17 of 1 March 2022. Following in the footsteps of Mario Draghi’s government and the work of former Ecological Transition Minister Roberto Cingolani (now Giorgia Meloni’s consultant for energy policies), the Aiuti quater Decree aims to continue decreasing Italy’s dependence on gas from Russia. Ultimately, the government’s goal is to gradually increase the amount of natural gas extracted from available domestic reservoirs.
On 18 November 2022, the Aiuti quater Decree was published in the Official Journal (Gazzetta Ufficiale) and entered into force on 19 November 2022. Like all law decrees, the Aiuti quater Decree will have to be converted into law by the Italian Parliament within 60 days of its publication in the Official Journal. During this parliamentary phase, corrective measures or new measures or amendments may be introduced.
The Aiuti quater Decree allocates approximately €9.1bn from tax surplus to finance measures against high energy prices.
Article 16 of Law Decree No. 17 of 1 March 2022
According to Paragraphs 1 and 2 of Article 16 of Law Decree No. 17 of 1 March 2022 (converted, with amendments, by Law No. 34 of 27 April 2022 and setting out “measures to deal with the emergency resulting from high prices of energy products by strengthening the security of supply of natural gas at fair prices”), the National Operator of Energy Services (“GSE”) and/or companies controlled by it (hereafter the “GSE Group”) shall initiate – pursuant to the directives of the Ministry for Ecological Transition (now the Ministry of the Environment and Energy Security (Ministero dell’Ambiente e della Sicurezza Energetica or “MASE”) – procedures for the long-term supply of domestically produced natural gas from the holders of concessions for gas production. Specifically, the GSE Group formally invites holders of natural gas cultivation concessions to express interest in joining the long-term supply of domestically produced natural gas by sharing their proposals for producing natural gas from existing concessions for the years 2022 to 2031, as well as a list of possible developments, increases or restoration of natural gas production for the same period in the concessions they hold. The concession holders must communicate their programmes to the GSE Group, the MASE and the Italian Regulatory Authority for Energy, Networks and Environment (“ARERA”), within 30 days of the GSE Group’s formal invitation to the expression of interest.
Regulatory interventions on drilling – amendments to Article 16 of Law Decree No. 17 of 1 March 2022
Article 4 of the Aiuti quater Decree introduces amendments to Article 16 of Law Decree No. 17 of 1 March 2022 in relation to the extraction of hydrocarbons in Italy, including the following:
1. Article 4 of the Aiuti quater Decree has amended Article 16, Paragraph 2, of Law Decree No. 17 of 1 March 2022 (which limited the access to the long-term supply of domestically produced natural gas only to holders of gas production concessions whose facilities were located in specific areas considered compatible with the “Plan for the Sustainable Energy Transition of the Eligible Areas” (“PiTESAI”)) by extending the possibility of accessing the long-term supply of domestically produced natural gas also to the holders of “concessions for the production of hydrocarbons located in the stretch of sea between the 45th parallel and the parallel passing through the mouth of the Goro branch of the Po river, at a distance from the coastline of more than 9 miles and having a gas mining potential for a certain reserve quantity exceeding 500 million cubic meters”¹. This area is located approximately 16 km from the coast off the Po Delta between the Municipalities of Rovigo and Goro. Additionally, in derogation from the provisions of Article 4 of Law No. 9 of 9 January 1991, which prohibits prospecting, exploration and cultivation in in the stretch of sea between the parallel passing through the mouth of the Tagliamento river and the parallel passing through the mouth of the Goro branch of the Po river, the Aiuti quater Decree allows for the exploitation of hydrocarbon production concessions located in that part of the Adriatic Sea for the duration of the whole useful life of the reservoir:
(i) on condition that the holders of such concessions adhere to the procedures for the long-term supply of domestically produced natural gas initiated through formal invitation from the GSE Group and followed by an expression of interest from the concession holders, as explained above, and
(ii) upon presentation of technical-scientific analyses and detailed programmes for monitoring and verifying the absence of significant subsidence of the coastline to be carried out under the supervision of the MASE.
2. Article 4 of the Aiuti quater Decree introduces a new Paragraph 2-bis under Article 16 of Law Decree No. 17 of 1 March 2022, which, by derogating from the prohibition contained in Article 6, Paragraph 17 of Legislative Decree No. 152 of 2006, allows new hydrocarbon production concessions to be granted along all the Italian coastline in marine areas between 9 and 12 nautical miles from the coast and the outer perimeter of marine and coastal protected areas, though limited to sites with mineable gas reserves exceeding 500m cubic metres. Entities that acquire ownership of these concessions are also required to adhere to the long-term supply of domestically produced natural gas initiated by the GSE Group upon formal invitation by the GSE Group followed by an expression of interest of the interested concession holders.
3. Article 4, Paragraph 2 (d) and (e), of the Aiuti quater Decree also includes amendments to Paragraphs 4 and 5 of Article 16 of Law Decree No. 17 of 1 March 2022 concerning the long-term supply of domestically produced natural gas. According to these amendments:
"New hydrocarbon production concessions are now allowed along all the Italian coastline in marine areas between 9 and 12 nautical miles from the coast and the outer perimeter of marine and coastal protected areas."
a. Paragraph 4 requires the GSE Group to enter into contracts for the purchase of long-term gas rights in the form of financial contracts (for difference from the virtual trading point (PSV)) having a maximum duration of 10 years and a mechanism for review of the terms at the end of the 5th year, with the concessionaires referred to in the new Paragraphs 2 and 2-bis of Article 16 of Law Decree No. 17 of 1 March 2022 (as amended/introduced by the Aiuti quater Decree), at a price which guarantees coverage of the actual total costs of the individual productions including tax and transport charges, as well as a fair remuneration. Such price, which is established by Decree of the MASE jointly with the Ministry of the Economy and Finance and the Ministry of Enterprise and Made in Italy (formerly, the Minister of the Economic Development or “MISE”) (the “MEMI”), is defined by applying an even, progressive percentage reduction to the daily prices recorded at the virtual trading point, and is in any case variable within the limit of minimum and maximum levels quantified, respectively, at €50 and €100 per MWh; and
b. Paragraph 5 states that the GSE Group offers through various means at the price referred to in Paragraph 4 above, the gas rights it has collectively acquired (pursuant to the contracts referred to in the same paragraph) to industrial end-users with high gas consumption, who, also acting collectively, are entitled to the facilities referred to in the Decree of the MASE 541 of 21 December 2021² and consumed in 2021 a quantity of natural gas for energy uses not less than the volume of natural gas indicated in Article 3, Paragraph 1, of the same Decree³, without new or increased charges for the GSE Group. The modalities and allocation criteria are defined by Decree of the MASE jointly with the Ministry of the Economy and Finance and the MEMI. The rights offered by the GSE Group are awarded via allocation procedures based on pro-rata criteria. Once this process has been finalised, the GSE Group enters into another financial contract with each final assignee for the rights awarded. If a contract is entered into between the GSE Group and industrial end-users acting collectively, the contract itself ensures that its effects are passed on to interested end-users. The contract will also provide that:
(i) the quantity of rights awarded via the allocation procedures and regulated in the contract will be redetermined on 31 January of each year on the basis of the actual production during the previous year; and
(ii) the assignment of rights in the contract between end-users is prohibited.The outline of a standard offer contract referred to in this amended paragraph was prepared by the GSE Group and approved by the Ministry of Economy and Finance and the MASE.
Italian data – an overview
MEMI estimates show that, in the period between January and September 2022, 2.48bn cubic metres of natural gas were extracted domestically against total consumption of 51.35bn cubic metres (see table below). This is why natural gas is largely imported from abroad.
|BILANCIO MENSILE DEL GAS NATURALE|
|(Milioni di Standard metri cubi a 38,1 MJ/mc)|
|Settembre||Gennaio - Settembre|
|2022||2021||Variaz. %||2022||2021||Variaz. %|
|a)||PRODUZIONE NAZIONALE (2)||280||272||2,6%||2.487||2.490||-0,1%|
|Per punto di ingresso||MAZARA DEL VALLO||2.148||1.147||87,3%||17.330||15.296||13,3%|
|d)||Variazione delle scorte (2)||1.438||560||156,8%||4.188||2.198||90,5%|
|e) = a)+b)-c)-d)||Consumo Interno Lordo||4.037||4.879||-17,3%||51.357||53.078||-3,2%|
|Fonte: Ministro della transizione ecologica - Dipartimento Energia - DGIS|
|(1) Preconsuntivi al netto dei transiti|
|(2) Comprende consumi e perdite|
These 2.48bn cubic metres of natural gas are extracted from 1,298 extractive wells: 514 of these are habitually used for extraction, while 752 are only formally active but not currently in use. This is due to many reasons, including: (i) reservoirs being almost empty; (ii) exploitation becoming too expensive for the yield; (iii) requiring investment to refresh the system; and (iv) regulations prohibiting it i.e. Article 6, Paragraph 17 of Legislative Decree No. 152 of 2006 which padlocked gas and oil fields in territorial waters within 12 miles from the coast. The remainder are control and maintenance wells.
Hydrocarbon reserves in Italy are distributed across the entire length of the peninsula, both onshore and offshore. The northern Adriatic is the province with the largest proven reserves of methane gas. As shown in the MEMI table following (data updated to August 2022), the region where most methane gas is extracted is Basilicata, with 617,910,058 standard cubic metres. It is followed by Sicily, Emilia Romagna and Apulia. Good levels of extraction are also seen for a number of the offshore areas, especially Zone A (off the coast of Emilia Romagna) and Zone B (off the coast of Marche and Abruzzo).
Ministe(UNMIG)ro della trasmissione ecologica- Direzione generale infrastrutture e sicurezza (IS) - Ufficio nazionale minerario per idrocarburi e le georisorse
PRODUZIONE NAZIONALE DI IDROCARBURI - ANNO 2022
RIPARTIZIONE DELLA PRODUZIONE PER REGIONI E ZONE MARINE
PRODUZIONE DI GAS NATURALE
Forecasts, estimates and extraction sites in Italy
According to estimates released by Palazzo Chigi, the seat of the Italian government, the plan is to extract 2 billion cubic meters of gas to be allocated to the more than 150 companies with high methane consumption. The regulated price will fall within a range of between €50 and €100 per megawatt hour, a much lower value than the approximately €153 current benchmark for the Italian market.
Analysis published last April by Assorisorse⁴ shows 108 gas concessions have been granted in the following areas:
- the Po Valley, particularly especially between Lombardy and Veneto;
- the Marche and Abruzzo coasts;
- the Tuscan and Lazio hinterlands;
- the area between Basilicata and the Campanian provinces of Salerno and Avellino; and
- marine macro-areas in the Ionian Sea, the Gulf of Taranto and the Strait of Sicily.
However, only 52 remain active to date, with up to 31 subject to legal constraints. Indeed, due to uncertainty over the policies of successive governments, producers in recent years have preferred not to invest in Italian oil and gas extraction. This situation is likely to worsen, considering idle reservoirs lose about 15% of their capacity year on year.
"The plan is to extract 2 billion cubic meters of gas to be allocated to the more than 150 companies with high methane consumption."
How much gas could Italy extract?
There are many untapped natural gas fields throughout Italy that could be prepared for extraction. According to data from the MASE, Italy has methane reserves of circa 112bn cubic metres both onshore and offshore: 45.775bn certain, 45.901 probable and 19.912 possible.
According to Assorisorse, Italian gas production could increase from 3.3bn cubic metres in 2021 to circa 6bn cubic metres/year by 2025 and more than 7bn in following years.
The newly introduced Aiuti quater Decree is the first concrete act by the new Italian government to mitigate and alleviating the economic difficulties the country is facing due to high energy bills and inflation. To alleviate these problems, the Aiuti quater Decree introduces a series of new measures including, inter alia, procedures for the long-term supply of domestically produced natural gas deriving from concessions for exploiting Italian gas reserves, with a significant extension of the territorial limits for the release of such concessions in order to increase domestic production. The Aiuti quater Decree now allows concessions to be granted in areas in which, by virtue of Italian law, exploitation is normally prohibited. Nonetheless, the issuing of new concessions and the increased exploitation of those already existing are conditional on participation in the procedures for the long-term supply of domestically produced natural gas initiated by the GSE Group through a particular financial mechanism, prefigured by the government, coordinated by GSE and realised through the conclusion of derivative financial contracts with concession holders for the purchase of long-term rights, centered on administered (capped) prices established by decree. GSE will therefore be the hub of a system of contracts with a maximum duration of 10 years for the purchase of rights.
The objective is therefore that concession holders make available to the GSE Group, from January 2023 and until 2024, a quantity of rights (acquired by the GSE Group through financial contracts) corresponding to at least 75% of the production volume expected from their investments. GSE Group, in turn, will allocate the rights at its disposal to energy-intensive end-users (also through the conclusion of specific financial contracts). According to the Minister of the MASE Gilberto Pichetto Fratin, “potentially 15bn cubic metres are estimated to be exploitable over 10 years by the concessionaires”.
 Aiuti-quater Law Decree, Article 4, Paragraph 1, number 2.
 The Decree of the MASE No. 541 of 21 December 2021 establishes parameters for the definition of a gas-consuming company, instituting an ordinary subsidy for companies with a high consumption of natural gas. According to this Decree, as of 1 April 2021, these companies have access to a subsidy system that provides significant reductions in their bills. The relief consists of tax credits equal to 15% of the expenses incurred for the purchase of gas. The credit can only be used by offsetting and can be cumulated with other concessions for the same costs, provided that such cumulation does not lead to the cost incurred being exceeded. To be eligible for the subsidy, companies must have the following characteristics: (i) operate in one of the sectors listed in Annex 1 to the MASE Decree of 21 December 2021; and (ii) have had a natural gas consumption, in the first quarter of 2022, equal to or greater than 23,646 Sm3.
 1 GWh/year (or 94,582 Sm3/year, considering a higher calorific value for natural gas of 10.57275 kWh/Sm3).
 The Confindustria association of mining companies.