Few European countries have closer ties to Moammar Gadhafi’s Libya than Italy

Italy’s ties to Libya in spotlight amid unrest Libya turmoil could hurt Italian companies, Eni in focus

LONDON, Feb23, 2011, 12:01 p.m.EST
By Polya Lesova, MarketWatch

It’s little surprise then that the Italian stock market fell sharply this week, as a popular uprising against the 42-year regime of Gadhafi escalated, leading to violent turmoil and uncertainty about the path ahead for the oil-rich North African nation.

Libya, which was once an Italian colony, is a key supplier of oil and natural gas to Italy. Prime Minister Silvio Berlusconi’s government has spent years wooing Gadhafi, leading to considerable cross-border investment.

“Berlusconi has made enormous efforts to strengthen institutional ties between Italy and Libya, but also to strengthen personal ties between himself and Gadhafi,” said James Walston, a professor at the American University in Rome.

“If Gadhafi goes, that could cause trouble for Italian interests,” he said.

Italian companies have invested heavily in Libya, which is home to Africa’s biggest proven oil reserves. Energy giant Eni SpA /quotes/comstock/23g!eni (IT:ENI 17.40, +0.32, +1.87%) /quotes/comstock/13*!e/quotes/nls/e (E 47.77, +0.84, +1.79%) was Libya’s biggest international hydrocarbon operator in 2009, according to its website. Eni has operated in Libya since 1959.

In the construction and engineering sector, Impregilo SpA /quotes/comstock/23g!ipg (IT:IPG 2.25, -0.01, -0.62%) has several key projects under development in Libya, including a conference hall in Tripoli and university campuses in three other cities.

In turn, Libya owns stakes in some of Italy’s highest-profile companies, including banking giant UniCredit SpA /quotes/comstock/23g!ucg (IT:UCG 1.84, -0.01, -0.60%) , aerospace and defense group Finmeccanica SpA /quotes/comstock/23g!fnc (IT:FNC 9.00, +0.05, +0.50%) , and soccer powerhouse Juventus Football Club SpA /quotes/comstock/23g!juve (IT:JUVE 0.86, -0.01, -0.98%) .

As investors worried about what the Libyan unrest would mean for Italian companies, Milan’s benchmark FTSE MIB stock index slumped 3.6% Monday and a further 1.1% Tuesday. The index closed down 0.3% on Wednesday. Read more about European stock markets.

So far this week, Eni and UniCredit shares have both declined 7%. Impregilo’s shares are down more than 8%.

Berlusconi in a tough spot

International pressure on the Libyan leader has grown following his brutal crackdown on protesters. At least 300 people have died in the unrest, according to reports. Italy’s foreign minister on Wednesday was quoted as saying the death toll was likely over 1,000.

In a defiant televised address Tuesday, Gadhafi vowed to fight and to remain in Libya “until the end.”

Italy’s close ties to Libya have put Berlusconi in a difficult situation, as international condemnation of Gadhafi has grown.

The Italian prime minister said Monday he was alarmed by the escalation of clashes and Libya’s “unacceptable” use of violence against the civilian population. The statement came only after Berlusconi was sharply criticized in Italy for failing to denounce earlier the violence used by Libya against protesters. Over the weekend, Berlusconi reportedly said he hadn’t gotten in touch with the Libyan leader because he didn’t want to “bother” Gadhafi during the crisis.

“Berlusconi has been much more subservient [to Gadhafi],” Walston said. “There is one photograph from last year when Berlusconi bends down and kisses Gadhafi’s hand.”

Trade data also illustrate Italy’s ties to Libya. In 2010, the 27 member states of the European Union imported goods from Libya valued at 27.3 billion euros ($37.5 billion). Of that total, by far the largest amount — €11.8 billion — went to Italy, according to data from Eurostat.

France followed with €4.7 billion of Libyan imports, while Spain and Germany were next with more than €3 billion each.

Energy ties

“If the unrest becomes a war, then that will affect Italy’s oil and gas supplies,” Walston said. “If supplies are cut off for any extended period, then it would be a very serious problem for Italy.”

Eni said Tuesday that supplies of natural gas from Libya through the Greenstream pipeline have been suspended. The move came after Eni temporarily suspended some of its oil and gas activities in Libya as a precaution.

“However, Eni is still able to meet its customers’ demand for gas,” Eni said in a statement.

Currently, Italy relies on Libya for around 10% of its gas and 25% of its oil.

“A peaceful solution in Libya looks unlikely for now as Gadhafi indicates that he won’t go quietly,” which will likely mean “more pain for Eni,” said strategists at Evolution Securities in a note to clients.

Mohammed El-Katiri, an analyst at Eurasia Group, said in a note that tribal support will be a key element in determining Gadhafi’s fate.

“Some form of civil conflict is likely, which will ensure that foreign technical workers in the oil sector will not make a quick return to Libya,” El-Katiri wrote. “Thus, we foresee a significant impact on oil production and exports flowing out of these tumultuous political events.”

Polya Lesova is chief of MarketWatch’s London bureau.