ENI: Plan for the Worst and Hope for the Best!

By Gerard Kreeft

Claudio Descalzi, was recently re-appointed Chief Executive Officer (CEO) for a fourth term by ENI’s Board of Directors. He has been CEO since 2014, making him one of the longest serving CEOs in the industry. Under his command the company has become a dominant voice in the industry, especially in the frontier areas of Africa and Asia, seldom covered by the media.

It is time to reflect on his reign and what to anticipate in the coming period. Perhaps a very bumpy road to 2050.

For starters the company produces 1.7Million barrels of oil equivalent per day (1.7MMBOEPD), has a balance sheet which has an economic leverage of 20%, and has, according to its website,  an Internal Rate of Return(IRR) of 34%, the highest of all its peers  for the 2012-2021. Also, its RRR(Reserve Replacement Ratio) of 110% for the period 2012-2021 is the highest compared to its industry peers.

ENI states that 90% of exploration capex is spent on near fields and proven basins. Some $11Billion in the last 10 years has been spent on its dual exploration model—near fields and proven basins. The company states that it only requires three years—from first discovery of oil  to market—twice as fast as the industry average.

Yet ENI’s stock market price, like the other oil majors, has performed badly in the period between January 2018 and April 2023. While the DOW Jones Industrial Index rose 35% (25,295 to 34,098) in this period, the ENI share and most of the European majors, with the exception of Equinor, have underperformed dramatically. In this five-year period , the ENI share price has, for example, decreased  14%. Other European stocks also decreased: Repsol down 18%, BP down 7%, Shell down 10%, and TOTALEnergies remained the same. Only Equinor was up 26%. In the same period US oil giants Chevron and ExxonMobil have seen their share prices flourish: Chevron up 32% and ExxonMobil 36%.

Table 1: Stock market prices of  majors Jan 2018- April 2023(NYSE – New York Stock Exchange)

Why is it that the share prices of  Chevron and ExxonMobil have performed so well and their European counterparts, including ENI, have done so poorly?

The message from the investor community is the clarity of the message. Chevron and ExxonMobil have as their mainstay–the production of hydrocarbons and this is the message that is preached. New energy policies including CCS (Carbon Capture and Storage) and other new energy initiatives make up only  between 15-20% of their capital budgets. In the case of Chevron some $3Billion per year based on a capital budget of $15-$17Billion; ExxonMobil’s new energy comes in at $3Billion per year based on a capex of $23- $25Billion. The message is clear and simple: we are oil companies pure and simple. Done in the good tradition of John D. Rockefeller the spiritual father of both companies.

European oil giants, have seen their dualism—wanting to maintain their green image and also profiting from the oil bonanza—fall out of favor by company shareholders. Their clarity of messaging has been found wanting.   The sole exception is Equinor who have stated that the majority of their capex budget will be from renewables by 2030.

ENI’s Strategy

A key ENI strategy is developing a series of joint-ventures to ensure that ENI can achieve maximum leverage for its current oil and gas assets and at the same pursuing new strategies as part of its energy transition plan. Three examples:

Vår Energi, Norway was formed in 2018 following the merger of ENI Norge AS and Point Resources AS owned  by Hitec Vision, a private Norwegian investment fund.  The company’s primary focus  is oil and gas developments on the Norwegian Continental Shelf. ENI controls 69.6% of the shares, and HitecVision 30.4%. Vår Energi has production in 36 fields and produces 247,000 boepd.

Vår Energi has entered into a collaboration with Odfjell Oceanwind and Source Galileo to pursue a pilot project for floating offshore wind at Goliat. The Goliat platform is currently electrified and is supplied with power from shore through a power cable with a capacity of 75 MW. The purpose of the project, which is called GoliatVind, is to use the cable as infrastructure for electricity to the mainland and increased renewable power generation in Finnmark, Norway.

Azule Energy, Angola, a 50-50 joint venture between ENI and BP formed in 2022 to include both companies’upstream assets, LNG and solar business. Azule Energy is now Angola’s largest independent equity producer of oil and gas, holding 2Billion barrels equivalent of net resources and growing to about 250,000 barrels equivalent per day (boed) of equity oil and gas production over the next 5 years. It holds stakes in 16 licences (of which 6 are exploration blocks) and a participation in Angola LNG JV. The company also participates in the New Gas Consortium(NGC), the first non-associated gas project in the country.

An interesting footnote: “The JV incorporation took place after the pending conditions were met, among them having secured a third-party financing of $2.5Billion in the form of Pre-Export Financing, and after receiving regulatory approvals.” In other words, any financing of Azule Energy will not be reflected in the ENI and BP balance sheets.

Plenitude, ENI’s new company, launched in June 2022 is an integrated business combining the generation of electricity from renewables, the sale of electricity, gas and energy services to households and businesses, and a European network of charging points for electric vehicles.

Plenitude had an installed renewables generation capacity of 2.3 GW and a pipeline of renewables projects of over 10 GW, a retail portfolio of 10 million clients and an electric vehicle charging network of 7,300 proprietary installed charging points (excluding inter-operational charging points).

“The cash flows from the retail business area will underpin the growth of the business, with the Company having sufficient leverage capacity to independently achieve its targets through a strong balance sheet and an investment-grade profile. Sustainability is at the core of Plenitude as it plans to achieve Net Zero by 2040.

ENI considers the IPO an important step in the development of PlENItude. The IPO will enable the Company to diversify its ownership structure, create a long-term shareholder base, access competitive funding, consolidate its positioning and develop more quickly while creating sustainable value for all stakeholders.”

Will PlENItude be given a more important strategic role in the coming years to ensure that ENI can achieve its energy transition role?

ENI’s Dexterity

On 23 November 2022, the President of Mozambique, Filipe Jacinto Nyusi, visited and inaugurated the ENI’s Coral-Sul FLNG installation. The event took place after the shipment of the first LNG cargo on 13 November from Coral Sul FLNG. ENI’s Coral Sul FLNG project’s inauguration deserves special attention. Especially at a time when the two of the country’s most highly touted LNG projects—Rovuma and Mozambique LNG– continue to be on security hold.

While LNG markets in 2023 are scrambling to meet European and global gas demands, there has been radio silence on two of Africa’s most touted LNG projects located in Mozambique: Rovuma owned by a consortium consisting of ExxonMobil, ENI, China National Petroleum Company, Galp, Kogas and ENH; and Mozambique LNG owned by TOTALEnergies, Mitsui Group, ENH, ONGC, Bharat Petroleum, PTTEP, and Oil India.

ENI’s pole position that the company has achieved with its Coral South project cannot be underestimated. With a long-term predicted weakened global demand for LNG, both ExxonMobil and TotalEnergies may have to go cap-in-hand to ENI to discuss possible project options.

ENI’s North African Gas Hub

ENI’s North African Gas Hub–Algeria, Libya and Egypt–will certainly be a key provider of natural gas to Europe. The three countries together produce 650,00BOEPD, approximately a third of ENI’s total global production.

Algeria

In July 2022 Sonatrach and ENI announced that an additional 4Billion cubic meters per year (Bcm/y) will be exported to Italy via the TransMed Pipeline which is a 2,475 km-long natural gas pipeline built to transport natural gas from Algeria to Italy via Tunisia and Sicily. Built in 1983, it is the longest international gas pipeline system and has the capacity to deliver 30.2Bcm/y of natural gas.

ENI recently  announced that it has agreed to acquire BP’s business in Algeria, including the two gas-producing concessions “In Amenas” and “In Salah” (45.89% and 33.15% working interest respectively).

In 2023 ENI’s production from Algeria is 130,000BOEPD.

Libya

The Libyan gas produced by the Wafa and Bahr Essalam fields operated by Mellitah Oil & Gas, an operating company jointly owned by ENI and NOC(Libyan National Oil Company). The gas  is brought to Italy through the Greenstream pipeline. The 520-kilometre natural gas pipeline crosses the Mediterranean Sea connecting the Libyan coast with Gela in Sicily. The natural gas pipeline has a capacity of  8 bcm/y. ENI has a production of 168,000 boepd.

Egypt

ENI is operator of the large Zohr field which In August 2019, had a  production of more than 2.7Billion cubic feet of gas per day (Bcf/d). An important agreement was the restart the of Damietta liquefaction plant which will provide up to 3 bcm in 2022 for European customers. ENI produces 360,000BOEPD.

The Kazakhstan Connection

ENI has been present in Kazakhstan since 1992  and is a co-operator of the Karachaganak producing field in which it has a share of 29.25% share; and is a partner of the North Caspian Sea PSA (NCSPSA) consortium which operates  the Kashagan Project.  The success of both projects is dependent on the goodwill of both Russia and Kazakhstan. ENI production in Kazakhstan is 145,000 boepd.

The Karachaganak Project produces approximately 45% of Kazakhstan’s natural gas. Peak production reached 155Billion cubic feet per year and oil production of 100,000 bopd(barrels oil per day). An important part component of this project is the Karachaganak Orenburg Transportation System (KOTS) connecting

the Karachaganak field to the Orenburg Gas Plant (OGP) in the Russian Federation. Two pipelines of 28 inches in diameter transport sour gas to OGP for further treatment. In addition, there are three 14-inch lines of which one is a liquid export line and two are dual service and transport either unstabilised liquid or sour gas.

The Kashagan Field discovered in 2000 has approximately 13Billion barrels of recoverable reserves. The project has from the start been hampered by harsh weather conditions including sea ice in the winter, temperatures varying from -35C to -40C, extremely shallow water and high levels of hydrogen sulphide, together with project delays, mismanagement and disputes. In 2012 it was designated as the main source of supply for the Kazakhstan-China oil pipeline. CNN Money had estimated that field development had cost $116Billion, making it the most expensive energy project in the world. No wonder cynics named the project ’Cash-is-Gone’.

Caspian Pipeline Consortium (CPC)

An equally troubling problem is the Caspian Pipeline Consortium(CPC) which transports Caspian oil from Kazakhstan to Novorossiysk-2 Marine Terminal, an export terminal at the Russian Black Sea port of Novorossiysk. The CPC pipeline handles almost all of Kazakhstan’s oil exports. In 2021 the pipeline exported up to 1.3MillionBPD(barrels per day). On July 6, 2022 a Russian court ordered a 30-day suspension of the pipeline because of an oil spill. The CPC appealed the ruling and the suspension was lifted on 11 July of the following week, and the CPC was instead fined 200,000 rubles ($3,300).
The incident demonstrates the vulnerability of future production. No doubt this is not the last such incident which involves Russian and Kazakhstan goodwill to ensure that Kazakhstan’s oil and production does not falter. Being dependent on Russian-Kazakhstan goodwill is the most brazen example of a lack of diversity of oil  supply.

Some Final Considerations

ENI is a company that can be admired because of the joint-ventures it has established to date, its contrarian decentralized management style, and its symbolic race to become green. Yet there is a  need to establish a more central message. Much too much of a central green message has remained at the decentralized level of its joint ventures. In effect reducing any message that top management wants to send to shareholders. Consider the following aspects:

Going Green

If ENI is to be a serious contender in the Green Race it must ask whether it continues down the road of its current European duality: wanting to be green through its PlENItude subsidiary and also maintain its core mandate that of producing hydrocarbons. To date only Equinor has found a doable solution: announcing that by 2030 the majority of its capex will be based on renewable fuels.  Will Plenitude become ENI’s green vehicle in the energy transition?

Meanwhile the European competition has not been sitting idle:

Enel: committed to achieving CO2 neutrality by 2040 instead of 2050, achieving 75% of electricity from renewables and 80% digitalization of its customers on the grid  by 2025. and having an installed generating capacity of 75GW by 2050.

Engie: pledged to reduce to CO2 neutrality by 2045, 45% of investments is focused on renewables and by 2030 will have 80GW of installed generating capacity.

Iberdrola: in the period 2023-2025 the company will invest $50Billion and achieve net zero for Scope 1, 2 and 3 before 2040. By 2030 the company will have installed capacity of 100GW, valued at $70Billion.

Note: Essentially, scope 1 and 2 are those emissions that are owned or controlled by a company, whereas scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by it.

Ørsted: the Danish wind energy pioneer, continues to set new records. Ørsted share price in December 2022 was $93; five years earlier in 10 June 2016 it was $37. By 2030 the company’s goal is to have an installed capacity of 50GW. Ørsted is also involved with the building of two energy islands– Bornholm and North Sea– which will deliver 10GW of power.

What has set these companies apart is that they have created a huge competitive advantage which will be hard to challenge for newcomers. Moreover, they have moved well beyond simply dabbling in green energy. These companies have become specialists and now moving on to the next level: creating a digital platform on which value does not reside in owning resources but rather in managing data-driven ecosystems. Essentially borrowing a chapter from Uber, which does not own taxis or Booking, which does not own hotels. Creating a digital platform on which value does not reside in owning resources but rather in managing data-driven ecosystems.

How will shareholders react to  these companies in 2023?  To date there is good news and bad news for green energy companies.

Table 2: Stock market prices of new energy companies  Jan 2018- April 2023

Enel, the Italian power company has seen its share price increase by 40%. Engie, the large French energy giant has seen its share price remain flat . Iberdrola, the Spanish power company has had an increase of 86% and Ørsted, the Danish power company, has seen its stock soar by 82%.

ENI’s Joint Ventures

The Vår Energi  and Azule Energy joint ventures demonstrate that ENI is willing and able to put together decentralized entities in diverse settings and still  maintain management control. Do not be surprised that additional JVs will be commissioned.

In the future ENI’s North African Gas Hub–Algeria, Libya and Egypt—will probably become more integrated as it continues to provide natural gas to Europe.

What could provide the company additional problems is its multi-party relationship in Kazakhstan dependent  on the good will of the Governments of both Kazakhstan and Russia and the Karachaganak and  Kashagan Partners.

ENI operates in a very fluid market place and has shown the ability to be diverse and able to provide contrarian strategies. The company has a divergent portfolio yet it lacks an overarching strategy which provides a roadmap to its 2050 low carbon deadline.  Such a roadmap should provide clarity of message which no doubt would help bolster its share price.

Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise.  He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe.  Gerard has Dutch and Canadian citizenship and resides in the Netherlands.  He writes on a regular basis for Africa Oil + Gas Report, and contributes to IEEFA(Institute for Energy Economics and Financial Analysis). His book The 10 commandments of the Energy Transition is now on sale at  Bookstorehttps://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition