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Eni: Looking to bounce back

If it is to achieve its ambitions, Eni must restore its reputation as a company capable of managing big projects

Italy's Eni has always felt a bit like the younger brother. Its founder, Enrico Mattei, famously described the large dominant oil companies of the post-World War Two era as "the seven sisters" and Eni has tried ever since to break into the clique. With a market capitalisation of €88bn ($138bn), it is at the bottom edge of the group, rivalling ConocoPhillips for size, but remains very much the junior sibling to the other big sisters in the family.

Humiliatingly for Eni, that status was confirmed again earlier this year in Kazakhstan. The company became operator of the Kashagan oilfield development in the Caspian Sea in 2001, leading a group of supermajors, including BP, ExxonMobil, Royal Dutch Shell and Total. One of the largest oilfields discovered in the last three decades, Kashagan was proclaimed as a jewel in the crown – both for Kazakhstan and for Eni, which emerged as the compromise candidate to become its operator.

Failure at Kashagan

"Kashagan is our test," the company's previous chief executive, Vittorio Mincato, said in 2005. But by 2007, Eni had failed its exam. Cost overruns and delays in the timetable exacerbated the government's dissatisfaction with a production-sharing contract that it considered too generous to its private-sector partners in an era of high oil prices and producer power. A deal agreed in January means Eni will eventually lose its role as operator of the project; the partners will pay a heavy fine to the government and concede some of their shares to give state-owned KazMunaiGaz a bigger stake. Production will come on stream six years later than planned, in 2011 at the earliest, although it should eventually reach 1.5m barrels a day (b/d).

If the Kashagan debacle left the impression that Eni was not up to managing the largest projects, the company could be forgiven a feeling of misfortune. It need only ask its partner, Shell, how rising costs across the industry and unforeseen complications on the ground can derail a big project's timetable. At Kashagan, a high-pressure reservoir and a high content of hydrogen sulphide gas needed unexpected and heavy investment to make it safe to develop. And, says one analyst, because of its desire to change the contract in the state's favour, the government was always likely to pounce on any problem. But the market did not make allowances: since summer 2007, when the Kashagan dispute erupted, Eni's share price has bumped steadily downhill.

Hoping to reverse that trend, the firm has persisted with a strategy of doing business in countries that have not been especially welcoming to the majors lately. In March, it signed a large contract with Venezuela's PdV. The deal gives Eni a 40% stake in Junin-5, a 2.5bn barrels-of-oil equivalent (boe) block in the Orinoco basin. Production, scheduled to begin at 30,000 b/d in 2010, will rise to 300,000 b/d by 2014.

Its agreement with PdV was a surprise: Eni took the Venezuelan government to court over a compensation claim after PdV seized control in 2006 of the Dación oilfield, which the Italians had been operating since 2001. The two parties settled on compensation of $0.7bn earlier this year.

It has not been shy of another country whose reputation of late has been worrying for foreign investors. Eni has teamed up with Russia's Gazprom, helping it to extend its influence through Europe's downstream gas market in exchange for a complicated position for Eni, along with Enel, in Russia's upstream. The deal-making in Russia gave the two Italian firms 100% of three companies that were once owned by now-bankrupt Yukos – Arctic Gas, Urengoil and Neftegaztechnologia – amounting to 2.5bn boe in reserves net to Eni. Gazprom has an option to buy control of each of the companies and has already exercised an option to buy a 20% stake in Gazprom Neft that Eni also bought at the auction.

But the biggest joint project with Gazprom is the South Stream gas pipeline, which will export up to 31bn cubic metres a year (cm/y) of gas into the heart of the EU. For Paolo Scaroni, Eni's chief executive, the agreement fits neatly with his view of Europe's looming gas crunch, a subject he has loudly proclaimed at industry events. "Gazprom isn't just a pillar of energy security in Europe," Scaroni told Petroleum Economist last year, "it is the pillar of energy security." In addition to the South Stream project, rumours were circulating last month that the two companies were planning a new gas pipeline to Europe from Libya, a country Gazprom has added to its array of interests.

Gaps in the portfolio

Eni already has stakes in gas-supply pipelines from North Africa to Europe. Greenstream, a 50:50 venture with Libya's National Oil Company (NOC), transits 8bn cm/y and came on stream in 2004. With Algeria's Sonatrach, it shares a 27bn cm/y pipeline linking Algeria, Tunisia, Sicily and the Italian mainland. An extension will increase its capacity to 33.5bn cm/y by 2012 and allow it to reach Slovenia. Meanwhile, Eni also extended its licences for oil and gas properties in Libya to 2042 and 2047, respectively, as part of a wider deal with NOC that is aimed at monetising "substantial gas reserves", Eni says. Elsewhere in Africa, a deal to buy UK independent Burren Energy last year for $3.6bn consolidated Eni's position in Congo (Brazzaville).

But some gaps remain in the portfolio. The Canadian oil sands have not tempted Eni across the Atlantic, although the company picked up a number of fields in a US Gulf of Mexico licensing round last year. And its presence in liquefied natural gas (LNG) has been weak by comparison with its peers. With the exception of ConocoPhillips and Chevron (whose business will soon increase considerably), all the other majors have larger positions in LNG.

Eni says it wants to increase its LNG export capacity to 11.3bn cm/y in 2011 and 18.8bn cm/y by 2014. But last year it was just 5.7bn cm/y, according to Petroleum Economist's LNG Data Centre. The bulk of that comes from small stakes in each of Nigeria LNG's six trains at Bonny Island; stakes in Angola LNG, in an expansion of Darwin LNG in Australia, and 17% of the planned Brass LNG in Nigeria should account for the increases.

Upstream, Eni's target of 2.05m boe/d of output by 2011 is ambitious, involving 4.5% compound yearly growth in output. Last year, production fell by 1.9% to 1.736m boe/d. To reverse that trend, it will need to bring a host of new projects on stream, on time and on budget. It has set aside €29.8bn to spend until 2011. Eni operates 17 new developments scheduled to add equity production by then, including phase 1 of Kashagan. Steady delivery of those projects will restore the company's operational reputation.

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