Oil bonanza beckons in Italian olive groves

WHEN unemployed factory worker Nicola Paoliello loiters on the ramshackle main square of the southern Italian town of Viggiano, he sees in the sun-drenched valley below an incongruously modern compound that could make the rest of Italy envy this forgotten area's luck.

Below the grazing and olive groves of the Val d'Agri in the southern Basilicata region lies Europe's largest inland crude oil reservoir, according to forecasts by companies such as the UK's Enterprise Oil.

Mr Paoliello has great hopes for the regenerative potential of the oilfields in an area where unemployment is a crippling 35 per cent.

After almost 10 years of wrangling, Basilicata's government and ENI, Italy's largest oil company, have finally agreed on how to distribute and develop the oil riches.

Basilicata, where ENI, Enterprise and other oil companies plan to invest billions of dollars, could also dent the influence of Middle Eastern suppliers, which account for about one third of the European Union's oil consumption.

"When it is in production, it will be cheaper than what we've got in the North Sea and Norway," said Pierre Jungels, Enterprise's chief executive.

Thanks to the region's reserves, in seven years Italy could quintuple its existing oil production of 109,000 barrels per day - even though it would still have to import more than half of the oil it consumes.

Local geologists first discovered the presence of oil in Basilicata (squeezed between the heel and the toe of Italy's boot) more than 60 years ago when dictator Benito Mussolini still used the isolated area to exile dissidents, such as the writer Carlo Levi.

The oil became accessible only in recent years, thanks to new horizontal drilling technologies that allow curved wells to bypass difficult patches of hard rock. Now, following their accord with the Basilicata government, ENI in partnership with Enterprise will be the first to begin industrial development of the reserves, building a new processing centre and a pipeline to the port of Taranto.

"The oil companies could begin building the pipeline this year," said Filippo Bubbico, head of Basilicata's negotiating team and the region's environment commissioner.

The Val d'Agri agreement concerns only ENI-operated concessions. It will be used as a blueprint for development accords to lift heavy oil in fields alongside Val d'Agri for Enterprise, ENI, Mobil, and Belgium's Fina. Another British oil company, Lasmo, is selling its stake in the project to concentrate on business elsewhere.

Enterprise estimates Basilicata's entire oil reserves to be as much as 20 billion barrels, with approximately 10 per cent that could be extracted. ENI would not discuss how much oil the whole region may hold. It prefers the most conservative figure of 480 million barrels in proven and likely reserves at its concession in Val d'Agri alone, and says a roughly similar amount lies in the nearby Tempa Rossa concession.

In any case, "we are talking about a giant size," said Gianfranco Amici, head of ENI's Val d'Agri project.

ENI is the world's seventh-largest oil company by reserves, with more than 5 billion barrels of proven reserves. It has already invested L1,200bn (pounds 700m) in the region and plans to spend L2,000bn more.

The ENI and Enterprise concessions in Val d'Agri produce high-quality light oil comparable to Brent crude, worth more than $12 a barrel. Oil at the Tempa Rossa concessions of Fina, Mobil and other companies is of a heavier kind, trading some $6 cheaper per barrel, he said.

The Val d'Agri development remains profitable, even though crude oil prices fell by a quarter this year, according to Mr Marshall who rates both ENI and Enterprise shares as "buy".

"The wells may be more expensive to drill there than in the North Sea, but overall the costs are lower because the oil is onshore and getting it to consumers is cheaper."

Basilicata expects to receive about L70bn a year in royalties as production in Viggiano begins, said Mr Bubbico. It will spend most of its share of the money on creating jobs and infrastructure in Val d'Agri, the region's most isolated and underdeveloped area.

The new oil centre in Vald'Agri will employ only 50 new staff, but it will create 3,000 temporary construction jobs.

A 150-megawatt power station will run on the oil and gas produced locally, and the cheaper power is expected to lure businesses into Val d'Agri's nascent industrial park.