1. 1
Eni S.p.A. Energy Company:
An Industry and Company Analysis
William Duncan
Todd Bailey
2. 2
Table of Contents:
Brief History & Introduction…………………………………………………………………………….......3
External Analysis:
Industry Overview…………………………………………………………………….………………4
General Environment……………………………………………………………………………..4-5
The Industry Environment: Porter’s Five Forces………………..….………………...5-6
Strategic Groups………...…………………………………………………………………….…….6-7
Internal Analysis:
Financial Analysis……………………………………………………………………...…………...7-8
Tangible & Intangible Resources…………………………………………………….….....8-10
Core Competencies……………………………………………………………………………….…10
SWOT Analysis………………………………………………………………………...…………10-12
Eni S.p.A.’s Current Strategies……...…………………………….……………………..…12-13
Major Problems…………………………………………………………………..…………………..13
Future Strategies………………..…………………………………………..…………………..13-14
Appendix 1……………………………………………………………………………………………...........15-17
Appendix 2……………………………………………………………………………………………….......18-19
Bibliography……………………………………………………………………………………………..............20
3. 3
Brief History & Introduction:
Eni S.p.A
The Italian energy and chemical company, Eni S.p.A. has a long, storied
history dating back to 1926. For this case, we will review the history from 1998 to
2012.
Vittorio Mincato, a former veteran line worker, took the reins of Eni in 1998
and set in a four-year plan in 1999 featured, “on one side, an aggressive growth
option in upstream activities and, on the other, a customer-oriented approach in the
energy market” (Grant, 582). By the time of his retirement, Mincato was highly
regarded for his work with Eni, winning “plaudits from investors and industry
leaders both for the clarity of Eni’s strategy and the effectiveness of its execution”
(Grant, 582). Mincato let Eni to the extension of its exploration activities in
countries like Kazakhstan, West Africa, Iran, and the Gulf of Mexico as well as major
projects including, “the Blue Stream pipeline to move gas from Russia to Turkey
under the Black Sea and the Greenstream pipeline from Libya to Italy” (Grant, 583).
Mincato continued to focus on expanding Eni’s upstream and downstream as well as
horizontally as a major point of his strategy.
The departure of Mincato in 2005 led to skepticism and doubt about the
success of new CEO, Paolo Scaroni. However, “early skepticism was allayed by
Scaroni’s effectiveness as a communicator, especially with the investment
community, and as an international dealmaker. From the outset, Scaroni make it
clear that he would not deviate substantially from Mincato’s ‘disciplined growth’
strategy” (Grant, 583). Under Scaroni, capital investments more than doubled,
including initiatives that were both failures and successes. These initiatives included
Eni’s Kashagan oilfield, where “technical, geological, and logistical complexities”
caused a joint operating company to replace Eni in 2009. Also, Scaroni build on the
company’s relationship with Russia, negotiated a pivotal agreement Congo, built on
its status in Libya, and extended exploration into new areas. Scaroni and Eni were
known for its “capacity to build cordial relations in countries that were
conventionally viewed as difficult places to do business” (Grant, 584).
4. 4
External Analysis
Industry Overview
Due to Eni’s vast horizontal integration in the fields of Petroleum and LNG
(Natural Gas), and chemicals, we will classify the company to be in both industries.
Since the strategies for companies in said industries differ by such a degree (refer to
Strategic Groups, p. 8), it is not appropriate to classify Eni in such a broad industrial
category such as “Energy.” Therefore, we will include a brief overview of each
industry.
The last four years for the oil and gas industry have shown promising
growth, but buyer beware: one must be aware of constant threats to the industry
including alternative energy, government regulations, and environmentalist groups.
As of 2012, revenue for the world oil and gas industry reached $1,247,490, up 1.5%
from 2011. (Appendix 1.1)(World Gas and Oil Industry Revenue 2013 | Statistic.)
Demand for crude oil worldwide has shown to settle between 85.3 million of barrels
per day in 2006 and 89.8 million in 2012. (Appendix 1.2)(Daily Global Crude Oil
Demand 2006-2015 | Statistic.).
The global chemical industry has continued to show growth, omitting the
obvious dip as was predicted with the recession of 2008. Total revenues for the
industry have increased by an average of 11.2% per year. (Appendix 1.3)(Global
Chemical Industry Revenue 2002-2014 | Statistic.)
The General Environment
Economic:
Omitting February, 2009, when the price of crude oil dropped almost $100
per barrel from the peak in June, 2008, crude oil prices have shown general growth.
At years end in 2012, crude oil prices per barrel reached $93.80. (Crude Oil Price
History Chart | MacroTrends.)
5. 5
Political/Legal:
“Eni’s ownership of domestic gas transportation had long been under attack
from the European Commission. In 2012, the new Italian government under Mario
Monti make it clear that Eni would have to relinquish its 52% ownership of Snam
Rete Gas, the gas network owner. The European Commission had also pressured Eni
to sell its ownership stakes in several international pipelines on the basis that it had
limited competition in the Italian gas market by restricting third-party access”
(Grant, 579).
Socio-cultural:
With environmental awareness becoming much more important among the
social issues, Eni came under attack by environmental groups for “the company’s
lack of investment in renewable energy sources and concerned over the
environmental consequences of individual projects – most notably Eni’s tar sand
project in Congo” (Grant, 580).
The Industry Environment:
Porter’s Five Forces
Bargaining Power of Buyers:
The bargaining power of buyers for firms in the petroleum, LNG, oil, and
chemical industries is very low. There is a high demand for energy and chemical
products to accommodate transportation, power, and agricultural needs, to name a
few. These buyers are completely dependent on energy and chemical suppliers
unless they can supply the means to produce energy on their own.
Bargaining Power of Suppliers:
For firms like Eni who are very vertically integrated, the bargaining power of
suppliers is low since vertically integrated firms can supply the means for
production and distribution on their own.
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For firms that rely on outside companies to supply drills, distribution, or
other necessities, the bargaining power is high, which increases the rationale to
invest in upstream and downstream integration.
Threat of New Entrants:
Due to the extremely high capital expenditure needed to enter the industry,
the treat of new entrants is extremely low. Also, there are multiple international
firms with high brand awareness and well-established manufacturing, distribution,
and logistic channels that come with years of experience.
“Expanding upstream production was becoming increasingly challenging:
exploration was moving to technically challenging frontier regions such as the Artic
and ocean floors, resource nationalism and political instability was a constant threat
in producer countries, and competition in the upstream continued to grow” (Grant,
579).
Threat from Substitutes:
The threat from substitutes in the industry is relatively high. Firms in these
industries must constantly be aware of trends and advancing technology that could
take advantage of current and alternative energy resources as social-cultural trends
continue to shift towards environmental consciousness. Electricity and solar power
sources are being developed and utilized in more and more places.
Rivalry from Existing Players:
Rivalry from existing players is extremely high. While there are expensive
and high barriers to entry, the existing players in the industry are very powerful and
established. There are at least 25 companies who market capitalization is at least $1
billion. The top firms have extensive and elaborate research and E&P divisions to
stay technologically ahead with sufficient assets.
Strategic Groups
Due to the extremely high capital expenditure needed for entry into the oil
and gas as well as chemical industry, many firms like Eni choose to reduce costs by
increasing upstream and downstream integration. By owning or partnering in as
many parts of the E&P, manufacturing, transportation, and distribution cycle as
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possible, these companies reduce the bargaining power of suppliers as well as costs.
These companies, for example, China National Petroleum Corporation (CNPC), all
focus first on the importance of vertical integration in this industry. The difference
comes in the effectiveness of the company’s vertical integration and the scope of
their horizontal integration. Eni and CNPC both have oil and gas, chemical, and in
CNPC’s case, plastics, subsidiaries.
Some companies only focus on the refinery of petroleum. Hindustan
Petroleum Corporation (HPC), partners with other Indian state owned corporations
to “dominate the petroleum sector in India” (Borini, Felipe Mendes, 8)
As shown in Appendix 1.4, there tend to be three clusters in the oil and gas
sector. The “top companies are the elite or traditional first movers (Exxon Mobil,
Royal Dutch Shell and British Petroleum), and form the first cluster” (Borini, Felipe
Mendes, 10).
Another difference in between companies like BP and those in the BRIC
(Brazil, Russia, India, China) include where the company acts. BP, Eni, and Exxon
Mobil all choose to act internationally, compared to companies in the BRIC, who
choose to act regionally, as depicted in Appendix 1.5 (Borini, Felipe Mendes, 12)
Finally, shown in Appendix 1.6 is a list of major competitors for some of the major
players in the oil and gas industry. (Borini, Felipe Mendes, 12)
Internal Analysis
Financial Analysis
The financial analysis of Eni allows us to determine where it stands by
comparing profitability ratios against rival companies. In Eni’s 2011 annual report,
it reported its financial performance with an “adjusted net profit of €6.97 billion; an
increase of 1.5% from 2010, driven by a robust performance delivered by the
Exploration & Production Division (up 15.8%) and, to a lesser extent, by the
Engineering & Construction Division (up 8.8%)” (www.eni.com). Its performance in
the Exploration and Production Division reported an operating profit of €16.1
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billion that was driven by high crude oil prices. Its performance in the Gas and
Power Division registered a sharp decline in operating profit, down by 37.6%. In the
Refining and Marketing Division, Eni reported an adjusted operating loss at €535
million because it suffered from unprofitable refining margins and lower demand. In
addition to the operating loss in the Refining and Marketing Division, the
Petrochemical Division reported an operating loss of €276 million because of falling
cracker margins and a large decrease in sales of commodities. Lastly, Eni reported
that Saipem recorded an operating profit at €1.44 billion (www.eni.com). In
addition to the financial performance in Eni’s 2011 annual report, we used stock-
analysis.net to compare profitability ratios against Eni’s top competitors. The return
on sales and return on investment ratios can be seen in Appendix 2 below.
Tangible & Intangible Resources
When analyzing the Eni SpA case, the internal analysis part required that we
distinguish between the company’s tangible and intangible resources. Our first step
was to determine its major tangible resources: property, plant, and equipment.
Since 2000, Eni had grown its petroleum outputs and reserves by more than most of
the other major companies (Grant, 630). Under CEO Paolo Scaroni’s strategy from
2005-2012, he more than doubled Eni’s capital expenditure. Eni operates in 85
countries around the world with around 79,000 employees (www.eni.com). Under
Scaroni, Eni’s biggest upstream project consisted of its giant Kashagan oilfield in
Kazakhstan with consisted of upward of 15 billion barrels of oil, the world’s biggest
oil finds in 30 years. Its operation in Russia was built on its relationship as one of
the biggest customers of Soviet gas, and Eni was involved in acquiring equity stakes
in four Russian oil companies and projects in the Samburgskoye and Urengoskoye
fields in order to broaden its relationship with Gazprom. In Congo, Eni was involved
in investing $3 billion in projects such as onshore and offshore oil and gas
exploration and production (E&P) projects. Additionally, Eni would build two power
plants, including distribution infrastructure and providing 80% of Congo’s
electricity needs. Lastly in Congo, Eni would develop a palm oil plantation to
9. 9
produce biofuels. Its operation in Libya solidified Eni as Libya’s longest partner in
oil production and biggest buyer of Libyan oil. Eni extended E&P activities in new
areas through acquisitions: Maurel and Prom’s assets in Congo, a Gulf of Mexico
oilfield from Dominican Resources, Burren Energy PLC with its gas fields in
Turkmenistan, and First Calgary Petroleum Ltd with upstream assets in Algeria.
Eni’s discovery of two major gas fields off Mozambique was a huge find because the
size of the fields was estimated between 47 and 52 trillion cubic feet of gas
(equivalent to 8.1 to 9.0 billion barrels of oil), and Eni was planning a LNG plant to
exploit the gas fields discovered off Mozambique (Grant, 635-36). By the end of
2011, Eni’s operating performance is as followed: proved hydrocarbon reserves was
7,086 million of barrels of oil equivalent, hydrocarbon production was 1,581
thousand of barrels of oil equivalent, worldwide gas sales was 96.76 billion cubic
meters, electricity sold was 40.28 terawatt-hour, refinery capacity was 767
thousand barrels/day, and its number of service stations was 6,287.Lastly, inn
Appendix 3 on page 653, we were able to compare the top 40- Oil and Gas
Companies among the Forbes Global 2000, and we were able to compare the top
companies sales, assets, and market value. For Eni, it ranked 29th with $143.2 billion
in sales, $178.7 billion in assets, and it had a market value of $97.6 billion (Grant,
653). Its tangible resources help create value and generate opportunities to
continue its growth.
The next step in our internal analysis of Eni SpA was to determine the
intangible resources: technology, culture, and reputation. Eni’s technology and
knowledge management is fundamental for the petroleum business because the
critical driver of competitive advantage was the ability to learn from experience and
transfer it throughout the company. Many new knowledge management systems
relied mainly on web-based technology, distributed computing, and digital wireless
communication in order to enhance the speed and quality of decision making
(Grant, 644). Its technological strength would make it a preferred partner for
producer companies and allow Eni to increasingly focus its attention on large oil and
gas fields (Grant, 649). Its culture is rooted in the key theme of “Eni’s Way” where
they embraced its originality, spirit of adventure, and social and environmental
10. 10
responsibility (Grant, 635). In addition to the intangible resources, Eni’s reputation
is deeply rooted in its brand. Eni’s ability to make deals with autocratic and
unrepresentative governments helps promote their brand image because “Eni’s
flexible, innovative approach to relationships with producer countries was
acceptance of the fact that the balance of power has shifted in favor of the producer
countries” (Grant, 638). It ranked 29th for the top-40 Oil and Gas Companies among
the Forbes Global 2000, and it is one of the leaders in European gas markets with its
upstream E&P division, downstream in distribution, and wide portfolio of sourcing
of gas (Grant, 638).
Core Competencies
Eni SpA’s core competencies are fundamental towards their success and how
they promote their business and gain competitive advantages over their rivals.
Their first core competence is there brand image. It ranked 29th for the top-40 Oil
and Gas Companies among the Forbes Global 2000, and it is one of the leaders in
European gas markets (Grant, 638). They were one of the leaders in the European
market for gas, with the ability to leverage themselves. Its strong position in the
market allows Eni’s vertical integration to be a key competitive advantage (Grant,
638). Its upstream growth is another core competence as its capital expenditure
more than doubled under Scaroni. For example, its giant Kashagan oilfield was the
world’s biggest oilfield find in 30 years (Grant, 635). Its close relationship with
Saipem provided it with in-house technical capabilities that other oil majors could
not match. Its technical strengths and operating capabilities allowed Eni to increase
its focus on large oil and gas fields. Lastly, its implementation of its strategies in
explaining how it was positioning itself within its markets to build competitive
advantages based upon its assets and capabilities help gain competitive advantages
over rivals (Grant, 649).
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SWOT Analysis
Strengths:
Eni SpA’s strengths are fundamental in its success as a company. One main
strength Eni has is its strong market position within the European market for
natural gas. It has strong R&D capabilities such as its in-house technical capabilities
from oilfield service companies like Saipem (Grant, 648-49). It operates in wide
range of businesses worldwide, and it operates in about 85 countries worldwide.
Additionally, it has strong retail operations in Europe that helps gain a competitive
advantage over rival competitors.
Weaknesses:
Weaknesses of Eni are places where it should focus on improving because
they allow other companies to outperform them. For instance, a major weakness is
its petrochemical sector because it is “intensely competitive, with low-margin
business but also Eni lacked scale and distinctive technological advantages” (Grant,
649). Another weakness Eni faces is that its board of directors and its 13-person top
management team were both comprised of Italians, and this is a weakness when it
operates internationally and wants to promote international growth (Grant, 651).
Opportunities:
Opportunities for Eni help give them a chance to exploit the and gain a
competitive advantage over rivals. One opportunity they have is the increasing
demand for LNG. Another opportunity for the company would be to increase its
portfolio, and it has the opportunities to continue production and exploration
expansion. They have an opportunity to move to more environmental friendly
sources of energy such as solar energy, if the wish to move into that type of market.
Threats:
Threats that can affect Eni and the industry need to be carefully analyzed
because they can cause a huge financial downturn. Such threats are environmental
regulations which can cause a huge problem within the industry. “Expanding
upstream production was becoming increasingly challenging: exploration was
moving to technically challenging frontier region such as the Artic and ocean floors,
12. 12
resource nationalism and political instability was a constant threat in producer
countries, and competition in the upstream sector continues to grow” (Grant, 631).
The increase of competition and political instability both provide threats for a
company like Eni. Another threat Eni faces is that they have been under attack from
the European Commission about their ownership of domestic gas transportations,
and the new Italian government made it clear that Eni would have to relinquish its
52% ownership of Snam Rete Gas, the gas net-work owner, in 2012. Lastly, its
strategy of vertical integration in gas pose a threat by shareholder activism because
its share price had been at a discount to its peers, and some shareholders believed
that the best way for Eni to release value would be to spin off its downstream gas
business (Grant, 631).
Eni S.p.A.’s Current Strategies
The strategy Paolo Scaroni adopted when he became the CEO of Eni was
much the same as his predecessor, Vittorio Mincato. Scaroni adopted two major
thrusts from Mincato’s strategy: “a commitment to organic growth strategy with a
particular emphasis on oil and gas exploration and production (E&P); [and] a
vertically integrated approach to Eni’s natural gas business through linking Eni’s gas
fields in north and west Africa and gas supplied from its alliance partner, Gazprom,
to its downstream gas business in Europe by pipelines (and, more recently, liquefied
natural gas)” (Grant, 630). Scaroni took an approach most companies did not take
which was “doing business with the autocratic and unrepresentative governments
of Libya, Algeria, Nigeria, Kazakhstan, and Russia” (Grant, 638). Eni stressed that
they do business with countries that have gas so the unprincipled and opportunistic
approach the company took seemed to be a successful one. Scaroni’s approach to
the downstream gas business was that he wanted to maintain a strong position in
the European market because he believed its vertical integration offered a key
competitive advantage. They key competitive advantage is that Eni is both upstream
with its E&P division, and downstream in distribution, transport and sales. 35% of
Eni’s equity gas is sold through the Gas & Power Division, so they believe that are
13. 13
already where most of their competitors in the midstream and downstream
business would be. Lastly, they have a competitive advantage because of their wide
portfolio of countries’ sourcing of gas: Algeria, Libya, Poland, Norway, and Russia
(Grant, 638). Its downstream oil business differed from its downstream gas
business. The refining and marketing of oil products was a minor part of Eni’s
downstream business. Eni continued to shrink its refining capacity, reduce its
number of retail outlets, and narrow its geographical scope since Eni’s refining and
marketing sector loss money in 2009-2011. Their strategy is to continue
international expansion in both upstream and downstream gas. Eni’s cornerstone
for its upstream strategy is its “commitment to close, collaborative relationships
with the governments and NOCs of producer countries and its own technical
excellence” (Grant, 648). In Eni’s petrochemical sector, where it has been a loss
maker for Eni for many years, Scaroni announced a turnaround strategy based upon
“Regaining competitiveness within the chemicals business through refocusing the
chemicals portfolio on added-value products, expansion outside of Europe through
licensing, alliances, and joint-ventures, and efficiency improvements to reduce
costs” (Grant, 649). Its successful implementation of this strategy depends on
several factors that can cause problems for Eni in the future.
Major Problem
The major problem Eni faces in the near future is the growing trend towards
environmental friendly energy sources and non-toxic chemicals. With the presence
of global warming emerging, people are moving towards more environmental
friendly sources of energy. Another major problem we identified is the fact that they
have to relinquish its 52% ownership of Snam Rete Gas, the gas network owner, and
several other international pipelines, which pipelines played a critical role in linking
gas production to consumers (Grant, 640). Lastly, they face a problem with
international expansion because its board of directors and its 13-person top
management team are both comprised of Italians which can hurt with strategic
moves and alliances with other international companies.
14. 14
Future Strategies
After analyzing the case, we have some recommendations for Eni as they
continue to strive as a major integrated energy company. We recommend they
continue with strategy presentation that they presented on March 15, 2012 which
states: “During 2012-2015, capital investment would rise to €15 billion annually, of
which 75% would go to E&P. The target was for petroleum production to grow by
more than 3% each year during 2012-2015. Eni would continue to grow its natural
gas business. The majority of Eni’s increased petroleum output would be natural
gas; downstream, Eni would grow its sales of gas to European business and retail
customers by 18% and 28% respectively; Eni would continue to invest in pipelines,
including the proposed South Stream pipeline (a joint venture with Gazprom, EDF,
and Wintershall) from Russia to Austria and Italy” (Grant, 630). We believe this is
the right direction for Eni because they need to continue investment in pipelines
since they are going to have to relinquish their ownership with Snam Rete Gas and
because pipelines play a critical role in linking gas production to consumers. We are
wary about their chemical division as it has been a loss maker for many years, but
Eni’s turnaround strategy provides a clear strategic move such as its agreement
with Novamont SpA to convert Eni’s Porto Torres chemical plant into a bio-based
chemical complex to produce products from vegetable raw materials (Grant, 649).
Other recommendations we have would be for the company to move into more
environmental friendly sources of energy such as solar energy and non-toxic
chemicals. Additionally, we recommend Eni hire non-Italian board members from
established subsidiaries or other major companies to provide a more diverse group,
which can help with strategic moves and alliances in other countries.
20. 20
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