Italy's new offshore drilling rules risk sidelining independents

* Decree passed this month imposes 12-mile ban around coasts

* New measure halves area open to exploration

* Small players say they lack resources for deep water areas

By Stephen Jewkes and Oleg Vukmanovic

MILAN/LONDON, Sept 24 (Reuters) - Italian environmental regulations will halve the area available for offshore oil and gas exploration and push it out into deep waters where independent producers lack the cash to operate, leaving bigger players to call the shots.

Italy has sought to lure small foreign oil and gas producers to drill offshore, to help stimulate stagnating output that has contributed to higher energy bills and dependence on imports.

But the changes introduced by decree early this month - to impose a 12-mile ban around coasts, shut down the Tyrrhenian sea east of Sardinia and focus on areas with high potential and low environmental impact - left smaller players cold.

"It's no attraction for us," said Giuseppe Rigo, chairman of Calgary-based CYGAM Energy (CDNX: CYG.V - news) , referring to a new area the government is offering to the west of Sardinia.

"It's deepwater, and research there is expensive, and we don't have the means. It's a new area for the big guys."

This month's decree means a cut in offshore acreage to 139,000 square km from 255,000. New areas have been opened up, notably near the Balearic Islands west of Sardinia.

"The Balearic area is around 2,500 metres deep. Too deep for small developers who will have to go there in joint ventures with bigger peers," said Pietro Cavanna, managing director of Italian oil industry association Assomineraria.

Oil major Eni (NYSE: E - news) and Edison (Milan: EDNR.MI - news) , controlled by French utility EDF (Paris: FR0010242511 - news) , are offshore leaders. Anglo-Dutch major Royal Dutch Shell (Xetra: A0ET6Q - news) and France's Total (NYSE: TOT - news) are also active in the region.

Italy's Industry Ministry has said the new areas have drawn a lot of interest - especially the acreage off Sardinia straddling waters already developed by France and Spain.

"A series of U.S. companies have been in contact with the ministry expressing great interest and asking when the decree was coming out," a senior source at the ministry said.

Opinions differ on just how much oil and gas Italy is sitting on but excitement over a gas bonanza in the Eastern Mediterranean and the billions of dollars in revenues Cyprus and Israel (Other OTC: IRLCF - news) could generate has kindled interest in Italian waters.

Italy has total oil and gas reserves of around 700 MTEP (million-ton equivalent of petroleum), compared to current annual production of just 12 MTEP, and is looking to double domestic oil and gas output by 2020.

Former Industry Minister Corrado Passera estimated that doubling production could generate investments of 15 billion euros ($20 billion) and cut the energy bill by about 6 billion euros.

Imports account for around 90 percent of Italian energy demand and with nuclear power banned, shale gas off the agenda and renewable energy incentives limited, the country is uncomfortably dependent on gas supplies from Algeria, Russia and Libya - all of which have suffered disruptions in recent years.

RED TAPE

While the new decree has cleared up a confusing tangle of previous regulations, some investors said it has failed to tackle Italy's chronic red tape that has caused them years of frustration.

"I think offshore Italy is a very difficult place to do business. The laws keep changing and there's a lot of local opposition. I think it would be a pretty confident move now to be buying into offshore with all the risks on permitting and rules," said James Parsons, CEO of UK-based Sound Oil.

Italy's complicated and, at times, arbitrary regulatory environment means several different permits may be required from both central and regional governments before clearance is given.

A separate decree issued last week, aimed at attracting foreign investors, acknowledged the impasse and said the government would seek to streamline the permitting process.

But operators remain skeptical. "They've been talking about this for years but nothing happens," said a manager at one British oil and gas independent with concessions in Italy.

"It's not the 12-mile ban, it's the lack of clarity. Italy has some of the biggest oil and gas reserves in Europe, but on a reserves-to-production basis it's bottom of the class."