Natural gas transportation

The service of transporting natural gas

Natural gas transportation is an integrated service that consists of moving gas from the national network entry points⁹ to the regional network redelivery points, where the gas is delivered to users of the service.

Snam Rete Gas allocates transportation capacity to companies upon their request. As shippers, these companies have the right to inject and withdraw, at any time during the thermal year, at the entry and exit points of the national network, the redelivery points of the regional network and the virtual trading point¹⁰, respectively, a quantity of gas not greater than the daily capacity allocated. The gas injected into the national network comes from imports and, to a lesser extent, national production.

Natural gas from abroad is injected into the national network at seven entry points where the network joins up with the import pipelines (Tarvisio, Gorizia, Gries Pass, Mazara del Vallo and Gela) and the LNG regasification terminals (Panigaglia and Cavarzere). Domestically produced gas is injected into the 67 entry points¹¹ located at the production fields or their collection and treatment centres. The storage facilities are also connected to the transportation network (two virtual entry/exit points for the storage hubs). Gas leaving the national network is transported on the regional network to the redelivery points, from where it is withdrawn by the shippers.

Snam Rete Gas is Italy’s leading domestic transporter and dispatcher of natural gas, with more than 31,500 km of high- and medium-pressure pipelines (around 94% of the entire transportation infrastructure).

Snam Rete Gas - Network infrastructure

Key performance indicators	(€ millions)	2007	2008	2009	Change	% change
Core business revenue(*)		1,769	1,882	1,865	(17)	(0.9)
Operating costs(*)		347	388	399	11	2.8
EBIT		1,015	1,017	974	(43)	(4.2)
Net profit		589	528	530	2	0.4
Investments		725	1,038	926	(112)	(10.8)
- of which with incentives		614	916	793	(123)	(13.4)
- of which without incentives		111	122	133	11	9.0
Net invested capital at 31 December		9,312	9,736	10,060	324	3.3
Volumes of natural gas injected into the gas transportation network (billions of cubic metres)		83.28	85.64	76.90	(8.74)	(10.2)
Transportation network (km in use)		31,081	31,474	31,531	57	0.2
- of which national network		8,548	8,779	8,871	92	1.0
- of which regional network		22,533	22,695	22,660	(35)	(0.2)
Employees in service at 31 December (number)		2,270	2,252	2,254	2	0.1

(*) Before consolidation adjustments

Results

EBIT for 2009 was €974 million, down only slightly (-4.2%) on 2008 despite a substantial fall in gas demand (-8%) and the subsequent reduction in transported gas volumes (-10.2%). The weaker performance of the segment was due essentially to lower transportation revenue, higher operating costs, relating for the most part to greater provisions for risks and charges, and an increase in amortisation and depreciation after the introduction of new transportation infrastructure.

Operating review

Investments in 2009 amounted to €926 million, a decrease of €112 million, or 10.8%, compared with 2008.

Investments	(€ millions)	2007	2008	2009	Change	% change
Development		526	813	692	(121)	(14.9)
Investments with incentive of 3%		302	578	451	(127)	(22.0)
Investments with incentive of 2%		224	235	241	6	2.6
Maintenance and others		199	225	234	9	4.0
Investments with incentive of 1%		88	103	101	(2)	(1.9)
Investments without incentive		111	122	133	11	9.0
		725	1,038	926	(112)	(10.8)

Investments are classified in accordance with resolution ARG/gas no. 184/09 of the Electricity and Gas Authority, which identified various project categories each with a different incentive level¹².

It is foreseen that 86% of investments benefit from incentive- based remuneration. The breakdown of investments in 2009 by category will be submitted to the Authority when the tariffs are approved for 2011.

The main investments with a 3% incentive were:

• as part of the project for the new transportation infrastructure along the Adriatic side (€158 million), the purchase of materials to construct the Massafra-Biccari pipeline in Puglia and Basilicata;
• as part of the project to upgrade the import infrastructure in Sicily and Calabria (€128 million):
  (i) construction of the Montalbano-Messina and Enna- Montalbano pipelines in Sicily, and the
  Rende-Tarsia pipeline in Calabria; (ii) completion works on the Mazara-Menfi and Tarsia-Morano pipelines in Sicily and Calabria respectively; (iii) first instalments relating to supply of the turbo compressor at the Montesano station;
• as part of the project to improve the import infrastructure from the North East (€49 million):
  (i) installation of the new 24-MW turbo compressor to upgrade the Malborghetto station in Friuli Venezia Giulia; (ii) construction of the Tarvisio-Malborghetto pipeline and assembly of the gas cooler at the Istrana station;
• as part of the project to upgrade the transportation infrastructure in the Po Valley with an aim to increase import capacity (€31 million): (i) detailed design and materials for constructing the Poggio Renatico-Cremona pipeline in Emilia Romagna and Lombardy; (ii) spare parts and finishing works on the Poggio Renatico station;

Breakdown of investments by incentive (% of total investments)

The main investments with a 2% incentive were:

• as part of the project to upgrade the transportation infrastructure in the Po Valley with an aim to increase national transportation capacity (€49 million): (i) materials for constructing the
  Cremona-Sergnano pipeline in Lombardy; (ii) design of the Zimella-Cervignano pipeline in Veneto and Lombardy;
• upgrading the pipeline network in South Piedmont (€22 million), including construction of the Cherasco- Cuneo and Oviglio-Ponti pipelines and completion works on the Mortara-Alessandria and Alessandria- Oviglio pipelines.

The main investments with a 1% incentive involved several projects aimed at maintaining adequate safety and quality levels at the stations. With a €14 million expense in 2009, the project to replace the TC 1-2-3 units at the Messina station was particularly significant, with design activities and the first instalments relating to the supply of turbo compressors.

The investments without incentive include projects to replace assets and plants, as well as projects relating to the implementation of new IT systems, the development of existing ones and the purchase of other key operating assets.

Status of national gas transportation network

Natural gas availability

The availability of natural gas in Italy in 2009 was 77.68 billion cubic metres, down by 6.84 billion cubic metres, or 8.1%, compared with 2008.

Natural gas availability	(billions of m3)	2007	2008	2009	Change	% change
From imports		73.50	76.52	68.67	(7.85)	(10.3)
From national production		9.78	9.12	8.23	(0.89)	(9.8)
Total gas injected into the network		83.28	85.64	76.90	(8.74)	(10.2)
Net storage withdrawals (injections) (*)		1.25	(1.12)	0.78	1.90
Total natural gas availability		84.53	84.52	77.68	(6.84)	(8.1)

(*) The balance between withdrawals from (-) and injections into (+) storage.

Natural gas withdrawals	(billions of m3)	2007	2008	2009	Change	% change
Redelivery to the domestic market		83.30	83.34	76.66	(6.68)	(8.0)
Exports		0.48	0.60	0.48	(0.12)	(20.0)
Snam Rete Gas consumption and emissions		0.39	0.42	0.34	(0.08)	(19.0)
Unaccounted-for gas and other changes (*)		0.36	0.16	0.20	0.04	25.0
Total natural gas withdrawals		84.53	84.52	77.68	(6.84)	(8.1)

(*) Includes the line pack variation. A definition of “Unaccounted-for gas” can be found in the forthcoming paragraph “Natural gas withdrawals”.

The volumes of gas injected into the transportation network fell by 10.2% to 76.90 billion cubic metres. The reduction in volumes injected into the gas transportation network was due to lower imports (-7.85 billion cubic metres or -10.3%), and lower national production (-0.89 billion cubic metres or -9.8%).

The negative balance of around 0.8 billion cubic metres between gas withdrawals from (-) and injections into (+) the storage system also contributed to the lower volumes injected into the network. The situation was reversed in 2008, when injections into the storage system were 1.12 billion cubic metres greater than withdrawals.

The following is an analysis of imports by entry point:

Imports by entry point	(billions of m3)	2007	2008	2009	Change	% change
Entry point
Tarvisio		24.04	24.58	22.92	(1.66)	(6.8)
Mazara del Vallo		22.52	24.77	21.66	(3.11)	(12.6)
Passo Gries		15.12	15.69	12.02	(3.67)	(23.4)
Gela		9.24	9.87	9.17	(0.70)	(7.1)
Cavarzere (GNL)				1.53	1.53
Panigaglia (GNL)		2.38	1.52	1.32	(0.20)	(13.2)
Gorizia		0.20	0.09	0.05	(0.04)	(44.4)
		73.50	76.52	68.67	(7.85)	(10.3)

Natural gas injected into the network by entry point

(% of total injected)

Compared with 2008, imports were down 10.3%. Notably, there were smaller imports at the Gries Pass (-23.4%),Mazara del Vallo (-12.6%) and Tarvisio (-6.8%), the latter affected by the relationship crisis between Russia and Ukraine which meant imports were blocked in January 2009.

The reduction in natural gas volumes injected into the network in 2009 (-10.2%) was due mainly to Eni (-23.5%) e Enel Trade (-11.9%).

Natural gas withdrawals

The natural gas withdrawn from the transportation network in 2009 (77.68 billion cubic metres) was destined mainly for: (i) redelivery to shippers at the network exit points (76.66 billion cubic metres);
(ii) exports (0.48 billion cubic metres), primarily to Slovenia; (iii) use by the compressor stations and emissions from Snam Rete Gas’s network and plants (0.34 billion cubic metres).

The difference between the volume of gas measured at its injection into the network and the volume measured at the exit points (mainly caused by the technical tolerance of the measuring instruments) is generally defined as “unaccounted-for gas” in the energy report drawn up by Snam Rete Gas.

Volumes of natural gas injected into the network by shipper	(billions of m3)	2007	2008	2009	Change	% change
Eni		52.39	51.80	39.63	(12.17)	(23.5)
Enel Trade		9.36	9.82	8.65	(1.17)	(11.9)
Others		21.53	24.02	28.62	4.60	19.2
		83.28	85.64	76.90	(8.74)	(10.2)

Until 2009, the Authority attributed unaccounted-for gas to the shippers¹³.

The demand for natural gas in Italy in 2009 was 78.13 billion cubic metres, down by 6.75 billion cubic metres, or 8%, compared with 2008 owing to the effects of the economic crisis. The reduction was concentrated mainly in the thermoelectric (-15.5%) and industrial (-14.6%) sectors, although this was partly offset by higher demand from the residential and tertiary sector (+4.9%) owing primarily to weather conditions.

The measures taken to develop and upgrade the transportation infrastructures have led to an increase in the network’s transportation capacity to 365.4 million cubic metres per day (+13.8%) at the beginning of the 2009-2010 thermal year.

Gas demand by sector (% of total gas demand)

Reconciliation between volumes withdrawn from the network and domestic demand	(billions of m3)	2007	2008 (*)	2009	Change	% change
Volumes withdrawn		84.53	84.52	77.68	(6.84)	(8.1)
Exports (-)		(0.48)	(0.60)	(0.48)	0.12	(20.0)
Gas injected into the regional network of other operators		0.12	0.09	0.08	(0.01)	(11.1)
Other uses (**)		0.73	0.87	0.85	(0.02)	(2.3)
Total demand in Italy		84.90	84.88	78.13	(6.75)	(8.0)

(*) Gas demand was aligned with the data published by the Ministry of Economic Development.
(**) Includes consumption by the industrial, agricultural and fishery, chemical synthesis and automotive sectors.

Domestic gas demand	(billions of m3)	2007	2008 (*)	2009	Change	% change
Residential and tertiary		28.18	30.18	31.65	1.47	4.9
Thermoelectric		34.29	33.90	28.66	(5.24)	(15.5)
Industrial (**)		20.89	19.31	16.49	(2.82)	(14.6)
Other		1.54	1.49	133	(0.16)	(10.7)
		84.90	84.88	78.13	(6.75)	(8.0)

(*) Gas demand was aligned with the data published by the Ministry of Economic Development.
(**) Includes consumption by the industrial, agricultural and fishery, chemical synthesis and automotive sectors.

Transportation capacity	Thermal year 2007-2008			Thermal year 2008-2009			Thermal year 2009-2010
(milions of m3/day)
Entry point	Available capacity	Allocated capacity	Satura-tion (%)	Available capacity	Allocated capacity	Satura-tion (%)	Available capacity	Allocated capacity	Satura-tion (%)
Tarvisio	112.6	92.2	81.9	106.0	97.8	92.2	119.7	102.8	85.9
Mazara del Vallo	90.7	80.4	88.7	101.8	93.2	91.6	103.6	98.7	95.3
Passo Gries	63.5	59.6	93.8	64.9	60.8	93.7	64.9	59.0	90.9
Gela	30.3	29.5	97.3	30.5	30.5	100.0	33.0	32.9	99.7
Cavarzere (GNL)							26.4	21.0	79.5
Panigaglia (GNL)	13.0	11.4	87.7	13.0	11.4	87.7	13.0	7.2	55.4
Gorizia	4.8	0.5	9.4	4.8			4.8
	314.9	273.5	86.9	321.0	293.7	91.5	365.4	321.6	88.0

The rise is due mainly to new transportation capacity available at the entry point connection with the Cavarzere LNG terminal, and to the increase in transportation capacity at Tarvisio, Gela and Mazara del Vallo following the implementation of upgrades to import infrastructures from Russia and North Africa.

The network’s available capacity meant that it was able to meet all the shippers’ capacity requests for the thermal year 2009-2010, with a rise in allocated capacity of 9.5%. Furthermore, transportation capacity of 35.2 million cubic metres per day is available at the entry points connected with domestic production, in addition to that mentioned above at the entry points connecting with imports and the LNG terminals.

Snam Rete Gas has prepared a long-term schedule of its available transportation capacity, which was communicated to the Economic Development Ministry on 16 June 2009 and published on the Snam Rete Gas website. This document shows capacity data for all the entry points connected with imports and LNG terminals for the thermal year 2009-2010 and subsequent years through to 30 September 2019.

Gas transportation capacity and saturation

Regulation

Resolution nos. 166/05 and 102/08 “Criteria for determining the tariffs for transporting and dispatching natural gas” and “Approval of tariff proposals for natural gas transportation and dispatch fees”.

With resolution no. 166/05 “Criteria for determining the tariffs for transporting and dispatching natural gas”, published on 30 July 2005, the Electricity and Gas Authority set the criteria for defining natural gas transportation tariffs on the national and regional networks for the second regulatory period
(1 October 2005 – 30 September 2009). The mechanisms in place during the first regulatory period were confirmed for determining tariff levels. Moreover, an invested capital remuneration rate was fixed at 6.7% in real terms before tax. Investments were again incentivised for the second regulatory period by payment of a remuneration rate increased by 1-3 percentage points compared with that paid on existing capital at the end of 2004 (6.7%) and for a duration of between five and 15 years. The increase in the remuneration rate and the duration differ depending on the type of investment. Revenue tied to new investments is recognised from the thermal year after that in which the costs were incurred and are ensured regardless of the volumes transported.

The method applied to update the tariffs (price capping) is applied only to revenue components related to operating costs and amortisation and depreciation which are adjusted for inflation and decreased by a productivity coefficient, set at 2% for the component related to capacity and at 3.5% for that related to volumes transported. The revenue component related to remuneration is determined after the annual adjustment of net invested capital at 31 December 2004 (RAB).

Based on the entry/exit model, the tariff structure has been confirmed for the second regulatory period, except for the fixed fee, which is replaced by a special measuring fee. The Electricity and Gas Authority approved the natural gas transportation tariffs for the thermal year 2008-2009 with its resolution ARG/gas 102/08 “Approval of tariff proposals for natural gas transportation and dispatch fees, enacting the Authority’s resolution no. 166/05 of 29 July 2005”, published on 31 July 2008. The tariffs were determined on the basis of updated core revenues, additional revenue of €39 million relating to development investments made in the first regulatory period and additional revenue of €233 million relating to investments made in 2005, 2006 and 2007.

Net invested capital (RAB) at 31 December 2007 was €12.2 billion. The Authority also approved the introduction of an additional fee for the thermal year 2008-2009 to cover the extra costs for fuel gas for compression and network losses.

Resolution ARG/gas 184/09 - “Approval of part II – Regulation of tariffs for transporting and dispatching natural gas for the regulatory period 2010-2013 (RTTG), approval of part III – Regulation of tariffs for natural gas transportation metering for the regulatory period 2010-2013 (RMTG), measures on temporary fees for gas transportation metering for 2010 and modifications to Appendix A of resolution no. 11/07”.

With its resolution ARG/gas 184/09, published on 2 December 2009, the Electricity and Gas Authority defined the criteria for setting natural gas transportation and metering tariffs on the national and regional networks for the third regulatory period (1 January 2010 to 31 December 2013)¹⁴.

The Authority also decided that €33.6 million should be paid to Snam Rete Gas for additional costs incurred during the thermal year 2007-2008 for purchasing fuel gas used to supply compressor stations.

The evaluation of net invested capital (RAB) is carried out using the revalued historical cost method. The remuneration rate (WACC) of the net invested capital was fixed at 6.4% in real terms before tax.

Incentives for new investments were confirmed, with a greater remuneration compared with the floating base rate (WACC), depending on the type of investment, from 1-3 percentage points and for a period of five to 15 years.

The amortisation and depreciation of the transportation infrastructure (pipelines) is calculated on the basis of a useful life of 50 years and is removed from the price-cap mechanism. Operating costs recognised are determined on the basis of the actual operating costs incurred in 2008 increased by 50% of the higher productivity revenue generated in the second regulatory period.

Fuel gas is recognised as pass-through and excluded from the price-cap mechanism.

The share of revenue related to the volumes of gas actually transported is determined on the basis of recognised operating costs and is equal to around 15% of core revenue.

Resolution ARG/gas 192/09 - “Changes to resolution no. 137/02 of 17 July 2002 for defining the criteria for dealing with non-metered natural gas (self-consumed gas, network losses, line pack and unaccounted-for gas) as part of the balancing service”.

With its resolution ARG/gas 192/09, published on 15 December 2009, the Electricity and Gas Authority, enacting the new tariff criteria laid down by resolution ARG/gas 184/09, defined methods for payment in kind, by shippers to transporters, of gas volumes to cover fuel gas, network losses and unaccounted-for gas, owed as a percentage of the volumes respectively injected into and withdrawn from the transportation network.

Resolution ARG/gas 198/09 - “Approval of tariff proposals for natural gas transportation and dispatch fees and temporary gas transportation metering fees for 2010”.

On the basis of the criteria described, the Authority approved transportation, dispatch and metering tariffs for 2010 with its resolution ARG/gas 198/09.

The tariffs were determined on the basis of recognised core revenue of €1,703 million (net of all pass-through costs, including fuel gas and network losses), additional revenue of around €28 million relating to incentives for development investments made during the first regulatory period and revenue of around €23 million associated with system balancing costs.

Revenues for 2010 will take into account the growth in transported volumes compared with the benchmark value, taken as 75.7 billion cubic metres.

The share of revenues associated with transportation capacity is guaranteed and is equal to around 85% of core revenue.

RAB at 31 December 2008 for the transportation, dispatch and metering business was €12.8 billion.

Resolution VIS 8/09 – “Closure of the preliminary investigation begun with the Electricity and Gas Authority's resolution VIS 41/08 of 15 April 2008 into the correct application of forecasts about unaccounted-for gas in the natural gas transportation network in the period 2004-2006”.

With its resolution VIS 8/09, published on 5 February 2009, the Electricity and Gas Authority concluded its preliminary investigation to acquire information on unaccounted-for gas in the transportation system between 2004 and 2006, and began a fact-finding investigation on the levels of service and maintenance at several of the transportation network’s metering stations. The inquiry was scheduled to close on 30 September 2009, but resolution VIS 96/09 extended it until 31 March 2010.

(9) The criteria for defining the national network are set out in the Decree of the Industry, Trade and Craftwork Ministry of 22 December 2000, as required by Legislative Decree no. 164 of 23 May 2000 (the “Letta” Decree).
(10) Virtual point where shippers can trade gas injected into the national network on a daily basis.
(11) Number of entry points at 31 December 2009.
(12) The investment incentives are the same as for the second regulatory period.
(13) In accordance with the new tariff criteria for the third regulatory period established by resolution ARG/gas 184/09, from 1 January 2010 the Electricity and Gas Authority's resolution ARG/gas 192/09 laid down new methods for recognising costs relating to unaccounted-for gas and gas needed for the functioning of compressor stations. This information can be found in the forthcoming “Regulation” section.
(14) Resolution ARG/gas 135/09 of the Authority, published on 28 September 2009, extended the validity of tariffs approved for the 2008-2009 thermal year to the period 1 October 2009 - 31 December 2009.