Kazakhstan’s Challenge international trade case study Umberto de Feo, Priscilla Martella, Beatrice Ruospo
Agenda PART 1: Company’s presentation• Brief history of ENI S.p.A.• Mission and Values• Financial and operational highlights• Key Factors Tag Cloud and Future targets• Geographic Presence PART 2: Kazakhstan’s overview• Highlights• Economic outlook• Eni’s activities and initiatives in Kazakhstan• GDP Composition and Figures• Eni in Kazakhstan• FDI Inflows and Determinants• Revealed Comparative Advantage PART 3: Host country effects• Effects on industry• Effects on local community and workers• ENI’s distinctiveness: Energy for development
Brief history of ENI S.p.A.’20 •1926 Establishment of AGIP (Azienda Generale Italiana Petroli) – Italian General Oil Company •1945 Enrico Mattei is appointed Provisional Administrator of Agip’40 • Exploration begun in Italy and foreign ventures initiated (Romania, Albania, Iraq)’50 • 1953 Eni (Ente Nazionale Idrocarburi) is established; Enrico Mattei is the first Chairman • 1957 Agreement signed with Iran and the revolutionary "Mattei formula" is launched which involves the producer country‘60 in the management of its oil resources. This formula breaks the monopoly of the major oil companies, enabling the local State Authority to share in the profits of oil and gas development.‘70 •1971 Using a new "gravity" platform Agip discovers and then brings into production the "Loango" field in offshore Congo •1973 The oil crisis favours the implementation of a policy based on natural gas as an alternative source to meet Italian‘80 energy needs •Agreement reached with Algeria and Netherlands for the supply of natural gas • Agreement reached with Libya for the exploitation of the Mediterraneans largest oil field •1992 Eni becomes a joint stock company‘90 •1993 Contracts and agreements signed for oil exploration in Kazakhstan, China and Russia •1997 Two major agreements signed with Kazakhstan: Karachaganak Project and Caspian Project •1998 Eni incorporates Agip, thus becoming directly an oil and gas producer. Enis daily oil and gas production reaches 1 million barrels of oil •1999 Eni-Gazprom agreement for the Blue Stream Project •2000 British Borneo acquisition. Agreements for the development of oil and gas fields in Iran‘00 •2001 Eni is named sole operator of the North Caspian Sea project in the Kazakh Offshore •2003 AgipPetroli is merged into Eni •2004 Development of the Kashagan’s plan: the giant field in the Kazakh offshore of Caspian Sea, was approved •2006 Eni and Gazprom signed in Moscow an agreement that sets up an international, in the mid and downstream gas
Mission and ValuesEni is an open, dynamic and integrated energy company, committed to developing its activitiesin research, production, transport, transformation and marketing of oil and natural gas. Businesses Exploration & Transformation Oilfield ServicesOil and Gas Transportation Petrochemicals Engineering Production & Mktg Construction Eni in numbers: “We are a major integrated energy company, Revenues: €84.3 billion committed to growth in the activities of Net Profit: €5.3 billion finding, producing, transporting, transforming Ebitda Margin: 26.28% andmarketing oil and gas. Eni men and women have a passion for challenges, continuous improvement, Main businesses: excellence and particularly value people, the environment • Exploration & Production and integrity” Net profit: €3.8 billion • Gas & Power Eni’s mission Net profit: €2.9 billion
Key Factors Tag Cloud attract young talent innovationsustainability corporate responsibility culture innovation change efficiency qualified human resources internal cohesion partnership o Growth in core businessFuture o Grow market share in Italy o Upgrade in marketing networkTargets o Continue the integration of core activities o Focus on operating efficiency o Developing proprietary tech. to support Enis growth process o Maximize return for shareholders
Geographical Presence ENI is active in 77 countries, with a staff of 78,400 employees.Exploration and Production Engineering and ConstructionGas and Power PetrochemicalsRefining and Marketing
Kazakhstan’s HighlightsPopulation 15.4 million (2009 est.)Country Risk rating BEase of doing business Rank 70 out of 181 (2008 est.)Global competitiveness 4.08 - 67 out of 133 (2009report est.) Source: GlobalEdge
Kazakhstan’s Economic outlookGDP annual growth rate in percentage avg 92-03 2004 2005 2006 2007 2008 2009ITALY 1,44 1,53 0,66 2,04 1,48 -1,32 -5,04KAZAKHSTAN 1,40 9,60 9,70 10,70 8,90 3,30 1,20Source: World Bank Italy spreadsheet, Kazakhstan spreadsheetGDP per capita as a percentage of U.S. GDP per capita (current USD) 2004 2005 2006 2007 2008 2009ITALY 73,68% 71,31% 70,78% 76,72% 81,31% 75,55%KAZAKHSTAN 7,13% 8,87% 11,85% 14,58% 18,03% 14,79%Source: World Bank Kazakhstan spreadsheet GDP growth rate GDP per capita % of U.S. GDP per capita12,00 90,00% 81,31%10,00 80,00% 73,68% 76,72% 75,55% 71,31% 70,78% Italy 8,00 70,00% Kazakhstan 6,00 60,00% 4,00 50,00% 2,00 40,00% 0,00 30,00%-2,00 2004 2005 2006 2007 2008 2009 18,03% 20,00% 14,58% 14,79% 11,85% 7,13% 8,87%-4,00 10,00%-6,00 0,00% 2004 2005 2006 2007 2008 2009
GDP CompositionKazakhstan Economic Outlook 2004 2005 2006 2007 2008 2009 BN USD Percentage changes, volume (2004 prices)Private consumption 16,12 11,1 13,8 10,6 9,0 5,2Government consumption 2,93 10,8 7,3 14,7 10,5 10,5Gross fixed capital formation 5,78 28,1 26,5 23,9 8,7 6,9Total domestic demand 24,83 15,0 16,4 14,8 9,1 6,3Exports of goods (BoP, current USD) 20,60 37,4 37,0 24,7 48,9 -38,9Exports of services (BoP, current USD) 2,01 10,9 26,5 26,5 24,2 -3,7Exports of goods and services (BoP, current USD) 22,61 35,0 36,2 24,9 47,2 -36,9Imports of goods (BoP, current USD) 13,82 30,1 34,2 37,9 15,6 -25,2Imports of services (BoP, current USD) 5,11 46,7 16,9 33,9 -5,2 -9,5Imports of good and services (BoP, current USD) 18,93 34,6 29,1 36,8 10,2 -21,6 NET EXPORTS 3,69 37,1 72,1 -20,4 287,4 -65,0GDP at chain-linked prices 9,60 9,70 10,70 8,90 3,30 1,20Inflation rate* 6,7 7,5 8,4 18,8 9,5 6,2Unemployment rate 8,4 8,0 8,1 7,4 7,3 6,6Current account balance (BoP, current USD) -223,0 -414,8 89,3 316,4 -175,5 -154,2Source: World Bank Kazakhstan spreadsheet* Agency of Statistics of Kazakhstan
Balance of Payment composition 90 EXPORTS goods 80 EXPORTS services 70 60 EXPORTS total 50 IMPORTS goods 40 30 IMPORTS services 20 IMPORTS Total 10 0 2005 2006 2007 2008 2009 Domestic Demand100 Private Consumption Government consumption 50 Gross fixed capital formation Total domestic demand 0 2005 2006 2007 2008 2009
Eni in Kazakhstan Eni has been operating in Kazakhstan since 1992 in the exploration and production of hydrocarbons and in the oilfield services, construction and engineering sector. MODE OF ENTRY Joint Venture Greenfield Kashagan Field Consortium (16.8% stake) ENI’s subsidiary Agip KCO Caspian Pipeline Consortium (2% stake) and Saipem’s subsidiaries, NCOC (one of 7 consortium partners) off-shore platforms, plants KPO Consortium (32.5% stake) Karachaganak field co-operation (21%)In 2009, Eni produced 115,000 barrels of oil equivalent perday, including 70,000 barrels per day of oil and condensateand around 7,3 million cubic metres per day of natural gas.
FDI dynamics in KazakhstanFDI(ln billions USD) 2004 2005 2006 2007 2008 2009FDI net Inflows (BoP, current USD) 4,15720849 1,97121763 6,27816796 11,1190366 15,7797717 12,6007605FDI NET (BoP, current USD) 5,43615368 2,11707781 6,66285548 7,96590328 14,7831491 9,52570362
Vertical FDI DeterminantsENI fragmented its value chain and set up in Kazakhstan these upstream activities: Exploration & Production North Caspian Sea Production Sharing Agreement - Kashagan It defines the terms and conditions for exploring, developing and utilizing the Kashagan field (the largest and most important of the country), which was discovered in the offshore area of the Caspian Sea. Eni was the sole operator, up to January 2009 Karachaganak Situated onshore in the western part of the country, Karachaganak is a giant onshore hydrocarbon deposit that produces oil, condensate and natural gas Eni-KazMunayGas cooperation agreement In November 2009, it was signed for the development of industrial infrastructure and exploration and production in Kazakhstan Caspian Pipeline Consortium (CPC) Oil Pipeline Construction of the oil pipeline that transports oil Kazakhstan to Russia Engineering & Construction Saipem S.p.A. is an Italian oil and gas industry contractor. ENI owns approximately 43% of Saipems shares. The subsidiary has contracted for designing and constructing several pipelines. Together with other partners, Saipem has completed various contracts as part of the Karachaganak project, including the construction of production units, gas treatment plant, equipment for recovering liquids and condensate and the Karachaganak-Atyrau oil pipeline and relative pumping station.
FDI Determinants Factor endowments: oil & gas reserves: the country has Firm specific assets such as specific large reserves of natural gas and production of both oil expertise in oil & gas technology, and gas is steadily increasing. Moreover, the Caspian management know-how (Model 231” Sea sector holds other major unexploited oil and natural gas deposits. organizational, management and control Strong evidence: with 1.54 million barrels per day Model), intangible assets, intellectual (bbl/d) in 2009 Kazakhstan is the most promising property assets. country among non-OPEC oil producers (such as West Intellectual Property assets are key value Africa, Russia, Ecuador already considered as Eni’s for Eni: priority) and it can countervail the Middle East - Eni has developed a model for theCountry determinants Industry determinants predominance over oil price management and exploitation of its Financial risk: even if Kazakhstan is an unstable country due to corruption, ENI doesn’t take this risk though. In technological Intellectual Property fact who actually finances ENI’s camps are the World (patents, trade secrets and software Bank and the International Finance Corporation that copyright). granted funds from private banks. Moreover, Agip -Enis total patent portfolio includes over might be protected by Italian public capital through the 8,000 patents, protecting about 1,000 export credits agency SACE. inventions. Strategic position: it is a bridge between Asia and -In 2009 Eni filed 106 new patent Europe Knowledge spillovers in exploration and drilling applications: an absolute record for Eni. activities coming from consortium partners Factor intensity: Agreements signed with the government for oil & gas availability of oil and exploration, development ,exploitation and production gas reserves sharing
Revealed Comparative Advantage Source: “Kazakhstan and the World Trade Organization”, “Kazakhstan’s Revealed Comparative Advantage vis-à-vis tue EU-27”, ECIPE – European Centre for International Political Economy, March 2008EU is Kazakhstan’s first trade partner and the economic trade relations between Kazakhstan and the EU arebecoming increasingly important.The analysis is based on the Balassa index of Revealed CA and calculated for the period 1999 to 2006.Results:Kazakhstan retains a comparative advantage mainly in the energy and mineral sectors. Moreover, mineral fuelsaccount for over 80% of exports, where RCA>1. In fact oil and minerals have been driving force of the country’seconomic development over the past decade and a half. EXPORT Minerals and Fuels RCAi1 = >1 RCAi2= >1 Year % share on total EU-27 export Kazakhstan’s exports advantage with Kazakhstan’s CA with respect to intra EU- 1999 51,33 respect to world exports into the EU-27 trade between 27 member states 2000 71,83 2001 70,06 2002 78,75 2003 80,24 2004 84,81 2005 87,71 2006 83,49 Changing trends of revealed CA over time for index RCA1
Host Country Effects• Oil and gas production bears on annual GDP for the 15% and ENI is one of the largest employer in Kazakhstan.• Unemployment/employment: in 2008 country recorded a decrease in unemployment rate (7, 3%) from 2006 (8,1%) to 2009 (6,6%) whereas the employment rate has increased mainly in unskilled and labour intensive sectors and predominantly in oil and gas field.• Mining industry: in 2008 mining industry, represented only by seven big companies, grew at 5,3% ($52bil) mainly due to the oil extraction.• Wages: monthly nominal salary of mining industry is $730. One of the highest after those of the financial sector whereas the average gross monthly nominal salary in Kazakhstan is $420 (on 2010 USD).• ENI’s activities in Kazakhstan have contributed to make the energy sector as the leading economic one throughout the years. In fact significant amount of crude oil and natural gas condensate production comes from the Kazakhstan’s oil and gas basins.
Host Country Effects - On local communities and workers- Investments for local communities €32.604.142- Spillovers: contribution on country’s industrial modernization and on employees training activities through technological transfer. Development of “local content program” in which Eni helps local companies to get quality certifications.- The most significant initiatives are several infrastructure works, such as: • the rehabilitation and upgrading of health and school facilities, • the implementation of public works and social infrastructure programs • projects to supply natural gas and water to urban and rural areas not reached by the distribution networks- Education subsidies such as 42 scholarships and internships for 450 students KPO Program for all ENI’s employees in Kazakhstan, the latest initiative was “The comprehensive program for developing intercultural competence”- “Craft Training Program” to reintegrate unemployed people through specific training activities, such as maintenance specialists for the Atyrau Centre- Partnerships with the main Italian universities to encourage the international exchange- Adoption of the Safety Watch Scheme and the 12 Golden Rules to prevent from working accidents.
ENI’s distinctiveness:Energy for Development “By working we have built a culture of diversity. Living with other people helps to develop a distinctive culture based on the key concepts of a respect for the rules - a guarantee for everyones safety - and respect for diversity and for people - given that any command system must be based on the knowledge that everyone has an important role to play, regardless of their position. Enis corporate culture is now at the service of its commitment to Sustainability. The companys objective of creating value is closely linked to the social and economic development of the countries and the communities we operate in. We take responsibility for the environment we share with the inhabitants of the countries where we operate, and the safety and wellbeing of everyone who works with us is key to our success. All this means for us Energy for Development”