Italy Oil Mozambique: Eni Is Pursuing Its East African Bet


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Eni’s chief executive, Paolo Scaroni, said the discoveries had come after Eni spent five years studying East Africa, where very little oil and natural gas had been found. When Mozambique made exploration blocks available in 2006, Eni bid and got the one it wanted. “Although Mozambique was a new country, we thought the chances were reasonable, about 20 percent,” of finding something, Mr. Scaroni said during an interview in Milan. “Of course it was high-risk, high-reward.”

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Italy Oil Mozambique: Eni Is Pursuing Its East African Bet

  1. 1. Italys Oil Leader, Eni, makes a push toward the top. Huge natural gas field discovered in MozambiqueEni’s chief executive, Paolo Scaroni, said the discoveries had come after Enispent five years studying East Africa, where very little oil and natural gas hadbeen found. When Mozambique made exploration blocks available in 2006, Enibid and got the one it wanted. “Although Mozambique was a new country, wethought the chances were reasonable, about 20 percent,” of findingsomething, Mr. Scaroni said during an interview in Milan. “Of course it washigh-risk, high-reward.”Richard Carson/ReutersPaolo Scaroni is the chief executive of Eni of Italy, which has found huge natural gas fields in Mozambique in East AfricaMILAN — Tucked away in a building on the outskirts of Milan is the “nirvanaroom,” so called perhaps because of the good tidings it contains. There,geologists working for the Italian oil company Eni don 3-D glasses tocontemplate fluorescent images of underground geological formations and tryto divine which might be worth tens of millions of dollars in exploratory drilling.The mood around Eni has been nirvana-like lately as the company’s explorershave made some lucrative enlightened guesses. Beginning in 2010, Eni and arival, the Houston-based Anadarko Petroleum, made a series of findsoff Mozambique, a country in East Africa, that add up to the largest naturalgas discovery of recent years — the equivalent of about 16 billion barrels of oil.Eni controls the largest share of the Mozambique findings, with 70 percent ofan offshore block in the Indian Ocean called Area 4, in what is known as theRovuma Basin.Eni’s chief executive, Paolo Scaroni, said the discoveries had come after Enispent five years studying East Africa, where very little oil and natural gas hadbeen found. When Mozambique made exploration blocks available in 2006, Enibid and got the one it wanted.The challenge now will be to fully capitalize on that opportunity, which willrequire the company to help manage Mozambique’s transition into a majorenergy exporter. And building multibillion-dollar plants in remote areas to turn
  2. 2. natural gas into liquids for transport on specialized ships will also test Eni’sskills.These days, oil and natural gas exploration is an industry as fraught withgeopolitical risks as it is with geological ones, as the recent hostage-takingattack in Algeria has made clear. And Eni is as aware as any European energycompany of the dangers of politically volatile North Africa, given its ownextensive operations in Algeria and Libya.But for now, at least, Mozambique is not one of Africa’s trouble spots. And inany case, energy companies tend to follow opportunities wherever they canfind them.“Although Mozambique was a new country, we thought the chances werereasonable, about 20 percent,” of finding something, Mr. Scaroni said during aninterview in Milan. “Of course it was high-risk, high-reward.”It was after Anadarko, a U.S. independent, announced a discovery in anadjacent tract that Eni, which had been preparing to drill in another part of itsblock, decided to put its first well near Anadarko’s tract.Mr. Scaroni, a graduate of Columbia Business School in New York with amaster’s degree in business administration, took the top job at Eni in 2005after spending much of his career outside Italy and the oil business. He hasbeen gradually reshaping the company into more of a machine for finding andproducing oil and natural gas and less of the lumbering state conglomeratethat had toiled in the second tier of global oil giants.Mr. Scaroni, 66, also has the crucial task of maintaining Eni’s relationships witha group of fossil-fuel-rich but prickly host countries that include Iraq, Libya,Russia, Venezuela and, elsewhere in Africa, Angola and the Republic of Congo.He regularly turns up in places like Baghdad or Brazzaville that might giveother chief executives pause.During the interview, the Zubair field in Iraq was on his mind. “We have acompany with 150 expatriates in Iraq, with a huge effort for security, and theeconomic result for us is very little, since we are paid $2 per barrel,” he said.“From time to time, we ask ourselves: Is it worth it?”Eni is the largest foreign producer of oil and gas in both Algeria and Libya. Eniexecutives say they were surprised and shocked by what happened to BP andStatoil, which are partners in the Algerian plant that was seized, and aretightening up their own security measures. They note that Eni already haslarge numbers of Algerian troops inside the perimeters of its Algerian sites,while troops apparently were not posted inside the seized complex at InAmenas.
  3. 3. So far, Mr. Scaroni has smoothly sailed Eni through Libya’s chaotic transitionfrom the regime of Col. Muammar el-Qaddafi to a new government that is stilltrying to find its balance. Unlike most other oil companies, Eni thrived underthe Qaddafi regime, developing new fields and building a $9 billion facility atMellitah, west of Tripoli, to pipe natural gas under the Mediterranean.Mr. Scaroni was quick to go to Benghazi in April 2011 to meet the rebelleadership, even before Colonel Qaddafi’s fall. Since then, Eni has restoredmost of its Libyan production, which represents 14 percent of Eni’s oil andnatural gas output.But Mr. Scaroni knows he cannot be complacent. The Wafa field, an importantEni site in Libya, is 35 kilometers, or 22 miles, east of In Amenas. The Libyansdo have a special incentive for protecting the field: It keeps the lights on inthat country, producing 50 percent of the gas that fuels Libyan power plants.In gaining early access to Mozambique, Eni trumped other major oilcompanies, which have been shut out of the country, even though it was thescene of four of the five largest finds worldwide last year.“We missed East Africa,” Mike Daly, BP’s head of exploration, lamented at arecent conference. “Eni are the people who have been the most successfulthere.”With the finds in Mozambique, along with others in the Barents Sea and offIndonesia, Mr. Scaroni has leeway to do what one of Eni’s big shareholders,Knight Vinke Asset Management, an activist fund manager based in Monaco,has been urging: focus on exploration and production and get rid of extraneousassets.He is gradually selling Eni’s holdings in other businesses, including SNAM, aregulated natural gas distribution business in Italy, and a 33 percent holding inGALP, a Portuguese oil company. Those deals have raised about €7.4 billion, or$9.9 billion, and have helped cut net debt. “We are preparing the balancesheet to be ready to develop all the discoveries we have made,” Mr. Scaronisaid, noting that Eni faced a “season of big capital expenditure” before reapingthe rewards of added production.Given the new focus, Mr. Scaroni has resisted selling Eni’s controlling stake inSaipem, a drilling and engineering subsidiary. That is despite Saipem’s havingembarrassed Eni in December when Milan prosecutors said they wereinvestigating company executives over suspicions of corruption in Algeria.As part of that episode, Saipem’s chief executive resigned; so did Eni’s chieffinancial officer, who had previously been finance chief at Saipem.
  4. 4. The combination of discoveries and disposals plus the prospect of a buyback ofas much as €6 billion of the company’s stock helped lift Eni’s share price 15percent last year. That was the second-best stock performance among majoroil companies, after Rosneft of Russia, according to Bernstein Research, aninvestment analysis firm. Eni’s stock is up an additional 5.6 percent so far inJanuary.For investors, that is a welcome change for a company that had previouslylagged behind its peers. “We have to give them credit for executing,” saidOswald Clint, an analyst at Bernstein in London.To keep up the strong performance, though, Eni faces some difficult tasks anddecisions. A big question is whether Eni — or Anadarko, for that matter — haswhat it takes to manage Mozambique’s likely transition from a small onshoreproducer to potentially one of the world’s leading natural gas exporters, on ascale with Australia and Qatar. To export to the Asian customers that are themost likely buyers, Mozambique will need huge liquefied natural gas plants forpreparing the gas for shipping, as well as other facilities that do not yet exist.Neither Eni nor Anadarko has strong credentials in processing and shippingliquefied natural gas, or L.N.G., which requires skills beyond those required forconveying natural gas via pipelines. Another complexity will be the remotelocation of the facilities.“Northern Mozambique is pretty much a frontier area lacking anyinfrastructure; this will add to the challenges of developing MozambiqueL.N.G.,” said Mansur Mohammed, an analyst in Edinburgh for Wood Mackenzie,an energy and mining research firm. Mr. Mohammed estimated the cost of theinitial phase of the projects at about $50 billion.Mr. Scaroni said that Mozambique would become larger than any investmentEni had previously made. He acknowledged that he was talking to othercompanies about selling potential stakes, though he said Eni preferred to domore exploration and initial development before bringing in partners.On Dec. 21, Eni and Anadarko signed an agreement to build L.N.G. facilitiestogether, which could help cut costs.A logical partner would be Royal Dutch Shell, one of the world’s leading L.N.G.players. Shell agreed last year to buy Cove Energy, a small British companythat holds an 8.5 percent stake in Anadarko’s Mozambique block. But Shell wasoutbid by PTT Exploration & Production of Thailand, which paid about £1.2billion, or $1.9 billion.Based on the Cove sale, Eni figures that its share of Mozambique natural gas isvalued in the $15 billion range.
  5. 5. Mr. Scaroni said that under its president, Armando Guebuza, Mozambique haddevised a “very reasonable” program for developing its oil and natural gasresources with the aid of advisers from Norway, a country whose petroleumsystem has become a model for new producers. The government ofMozambique seems to have little problem with its foreign partners makingprofits, but it wants to make sure that natural gas is used for the country’sdevelopment.“The government seems to signal that it wants the commercial companies tomake a good profit but not to give them the lion’s share,” said Bjorn-ErikLeerberg, a partner at Simonsen, a Norwegian law firm that has been advisingMozambique.Mozambique is not expected to start producing the offshore natural gas untillate in this decade at the earliest. Bernstein has said it expects Mozambique toyield very high returns on investment, close to 30 percent, for its gasdevelopers. Of course, achieving that sort of profit would require a stablegovernment; continued high prices for natural gas in Asia, which have yet tobe affected by the shale gas boom in the United States; and smooth andefficient operations.Eni’s track record on major projects has not always been stellar. Delays andcost overruns have reduced returns to an estimated 7 percent on the giantKashagan project in Kazakhstan, where Eni was the operator until 2008,according to Bernstein. That is below Eni’s 8 percent cost of capital. Theestimated $48 billion first phase of the project is about eight years behindschedule.Eni is considered a major producer, with output equivalent to about 1.7 millionbarrels a day. Its output is double that of a large independent like Anadarko.While it is only half the size of Shell, by any other standard, Eni is huge:79,000 employees and net profit of €6.3 billion for the first nine months of lastyear. The Italian government holds a 30 percent stake.The corporate credo is that it is a “two-flag” company — one that tries to workas a cooperative partner with its host countries. In the case of the Republic ofCongo, Eni yielded to the president’s request that Eni expand one power plantand build another for the country, which was short of generating capacity.Mr. Scaroni has also been supportive of Russian energy projects includingSouthstream, a proposal for bringing Russian natural gas to Western Europe bymeans of a pipeline under the Black Sea, bypassing countries like Ukraine.That cooperation has helped Eni obtain a foothold in the Russian Arctic througha venture with the state oil company Rosneft in the Barents Sea, where Eni hasalready had success on the Norwegian side.
  6. 6. As for Mozambique, Mr. Scaroni said he had visited the country seven or eighttimes, once during the Christmas holiday in late 2011. A picture in his officeshows his son with a fish he caught during that visit.“I meet the president every time I go there,” he said of Mr. Guebuza. “I amkeeping him informed about potential partners; every change in theconsortium has to have their approval.”FONTE: