Questions
Word limit: no more than 2,000 in total.
1. What has Eni’s corporate strategy been over the past two decades?
2. Evaluate Eni’s corporate strategy in terms of its alignment with (a) the characteristics and requirements of its industry environment; and (b) Eni’s resources and capabilities?
3. What current developments threaten Eni’s performance?
4. Looking ahead over Eni’s next 4-year planning period (2016-9), what changes in Eni’s corporate strategy would you recommend? How should Eni allocate its resources across its different businesses and between different geographical areas? In particular:
a. Should Eni continue to focus most of its capital investment on its upstream business?
b. Should Eni divest (i) its chemicals business, and (ii) its engineering, construction and oilfield services subsidiary (Saipem)?
c. Should Eni continue with its vertically-integrated strategy in natural gas?
d. Should Eni invest more heavily in renewable energy sources (e.g. wind power, solar power, and geothermal power)?
5. Evaluate the recent changes to organizational structure that Mr. Descalzi has introduced—what further organizational and management changes would you recommend?
Case 16 Eni SpA: The Corporate Strategy of an International Energy Major On May 13, 2015, Claudio Descalzi opened the annual meeting of shareholders’ of Eni SpA. It had been little more than a year since the 59-year-old petroleum execu- tive had been appointed as CEO of Italy’s largest company. Yet, during that time a series of events had shaken Eni and raised troubling questions over its strategic direction. Over two and a half decades, Eni had been transformed from a widely diversified, loss-making, state-owned company into an international oil and gas major with the highest market capitalization of any Italian company. Under Descalzi’s three prede- cessors, Eni had developed a distinctive, well-integrated strategy that comprised a: ● near exclusive focus on oil and gas, with a primary focus on exploration and production, especially in Africa which accounted for more than half of Eni’s oil and gas production; ● vertically integrated natural gas strategy where Eni’s major gas fields were linked to its downstream markets in Europe by pipelines and LNG (liquefied natural gas) facilities. During 2014, the security and profitability of Eni’s upstream operations were threatened by a series of political and economic developments. The Arab Spring had unleashed chaos across much of North Africa and the Middle East. That year, instability and violence were especially acute in Libya and Egypt—Eni’s two most important sources of hydrocarbons. Further problems for Eni ensued from the ten- sions between Europe and Russia that followed Russia’s annexation of Crimea and intervention in Ukraine. Eni’s relations with Russia extended back to the Soviet era: Eni was a key customer of Gazprom, a partner of Gazprom in several major pipeline projects, and was pursuing several upstream projects in Russia. In December 2014, Vladimir Putin announced the cancellation of the South Stream gas pipeline from Russia to Western Europe, which was to have been built by Eni’s subsidiary Saipem. In terms of its impact on Eni’s bottom line, the most catastrophic event was the collapse of crude oil prices during the latter half of 2014. The effect of low oil prices became clear on April 28, 2015 when Descalzi presented Eni’s financial results for This case was prepared by Robert M. Grant. ©2015 Robert M. Grant. CASE 16 EnI SpA: ThE CorporATE STrATEgy of An InTErnATIonAl EnErgy MAjor 609 the first quarter of the year. Net profit was 46% lower than in the year-ago quarter with upstream operating profit down by more than 70%. The History of Eni Mattei and Eni as a State-owned Enterprise, 1926–1992 In 1926, Italian Prime Minister Benito Mussolini established Agip (Azienda Generali Italiana Petroli) as a state-owned oil company. At the end of the Second World War, Enrico Mattei, a former partisan, was appointed head of Agip and instructed to dismantle this relic of fascist economic intervention. Contrary to instructions, Mattei renewed Agip’s exploration efforts and, in 1948, discovered a substantial gas field in northern Italy’s Po Valley. Mattei also took over the management of Snam SpA, the Italian gas distribution company and in 1953, the government merged Agip, Snam, and other state-owned energy activities to form Ente Nazionale Idrocarburi (Eni) with the task of “promoting and undertaking initiatives of national interest in the fields of hydrocarbons and natural gases.” Mattei became its first chairman and chief executive. Eni’s 36 subsidiaries extended well beyond oil and gas to include engineering services, chemicals, soap, and real estate. Mattei’s vision was for Eni to become an integrated, international oil and gas company that would ensure the independence of Italy’s energy supplies and make a substantial contribution to Italy’s postwar regeneration. In doing so he became a national hero: “He embodied great visions for postwar Italy—antifascism, the resur- rection and rebuilding of the nation, and the emergence of the ‘new man’ who had made it himself, without the old boy network.”1 Eni’s international growth reflected Mattei’s daring and resourcefulness. The inter- national oil majors, which Mattei referred to as the “Seven Sisters,” had tied up most of the world’s known sources of oil in the Middle East and Latin America. The production-sharing agreement that Mattei signed with the Shah of Iran in 1957 marked the beginning of a fundamental shift of power from the oil majors to producer governments and established Eni as the enfant terrible of the oil business. The Iranian agreement was revolutionary. It created a jointly owned exploration and production company headed by an Iranian chairman and with the proceeds shared between Eni and the Iranian National Oil Company. This “Mattei formula” was rep- licated in Libya, Egypt, Tunisia, and Algeria. Mattei also concluded a barter deal to acquire crude oil from the Soviet Union. At home, Mattei built political support within Italy. He rescued struggling com- panies to meet the political needs of government ministers and politicians. By 1962, Eni was “engaged in motels, highways, chemicals, soap, fertilizers, synthetic rub- ber, machinery, instruments, textiles, electrical generation and distribution, contract research, engineering and construction, publishing, nuclear power, steel pipes, cement, investment banking, and even education, to mention only a few.”2 Mattei died in a plane crash on October 27, 1962 at the age of 56. He left a sprawling corporate empire whose strategy had been Mattei’s own vision and whose integrating force had been Mattei’s charisma and personal authority.3 Without his leadership, power shifted to the politicians and Eni became an instrument of govern- ment economic, industrial, and employment policies: the boards and chief executives of Eni’s subsidiaries were appointed by government.4 Nevertheless, Eni continued to 610 CASES To ACCoMpAny ConTEMporAry STrATEgy AnAlySIS expand its oil and gas interests, though financial performance remained weak: Eni earned significant profits only during 1988–1990 (Figure 1). The Bernabè Era: Privatization and Transformation, 1992–1998 Pressured from the European Commission to cut the public-sector deficit and reduce state intervention, reformist Prime Minister Giuliano Amato granted Eni greater auton- omy in 1992 and appointed Franco Bernabè, a 44-year-old economist, as CEO. Though lacking line management experience, Bernabè possessed a clear vision for Eni’s future as a privatized, integrated energy company, shorn of its various diversified businesses.5 The corruption scandal that swept Italy in 1993 resulted in Eni’s chairman together with several board members and executives being arrested on corruption charges. Bernabè now seized the opportunity to launch a radical transformation of Eni. Bernabè’s corporate strategy was “to reduce Eni from being a loose conglomer- ate to concentrate on its core activity of energy.”6 During 1993, 73 Eni businesses were closed or sold and employment was cut by 15,000. Cost savings and asset sales resulted in a profit of almost $2 billion in 1994.7 Eni’s initial public offering on the Milan, London, and New York stock exchanges in November 1995 marked the beginning of a new era. After four decades of looking to politicians in Rome for direction, Eni’s top management had a new set of masters: the global investment community. The new creed of shareholder value creation encouraged further refocusing: “Eni’s strategy is to focus on businesses and geographical areas where, through size, tech- nology, or cost structure, it has a leading market position. To this end, Eni intends to implement dynamic management of its portfolio through acquisitions, joint ventures, FIGURE 1 The Development of Eni, 1985–2014 Note: BOE = barrels of oil-equivalent. Source: Eni annual reports for various years. 0 20 40 60 80 100 120 140 160 180 1985 1989 1993 1997 2001 2005 2009 2013 0 20 40 60 80 100 120 140 160 1985 1989 1993 1997 2001 2005 2009 2013 0 400 200 600 800 1000 1200 1400 1600 1800 2000 1985 1989 1993 1997 2001 2005 2009 2013 –10000 0 10000 20000 1985 1989 1993 1997 2001 2005 2009 2013 Sales ($billion) Employees (thousands) Net income ($million) Oil and gas produced (thousands boe/day) CASE 16 EnI SpA: ThE CorporATE STrATEgy of An InTErnATIonAl EnErgy MAjor 611 and divestments. Eni also intends to outsource non-strategic activities.”8 Investment was concentrated upon upstream activities with divestment of refining, marketing, and petrochemical assets. The results were striking (see Figure 1). Between 1992 and 1998, Eni halved its debt, turned a loss into a substantial profit, and reduced employment by 46,000. In 1998, Bernabè was appointed to lead another newly privatized giant: Telecom Italia. Eni’s Strategy under Mincato and Scaroni, 1998–2014 Eni’s next two CEOs had very different backgrounds. Vittorio Mincato was a veteran line manager with 42 years’ service at Eni. Paolo Scaroni, who succeeded Mincato in 2005, had pursued a diverse international career and had been CEO of British glass- maker Pilkington, and of Enel, Italy’s dominant electricity supplier. Nevertheless, the two followed similar strategies for Eni. Upstream Strategy: “Disciplined Growth” Eni’s primary strategic goal was to grow its production of oil and gas. Expanding oil and gas reserves and production was achieved primarily by organic growth—finding new oil and gas fields and more effectively exploiting existing reserves. Both CEOs were skeptical of growth through mergers and acquisitions and chose to limit themselves to small acquisitions that could be integrated within Eni’s existing upstream activities. These included British Borneo (2000, €1.3 billion), LASMO (2000, €4.1 billion), Fortum’s Norwegian oil and gas assets (2002, $1.1 billion), and Dominion Exploration and Production’s Gulf of Mexico oilfields (2007, $4.8 billion), Maurel & Prom’s Congo oilfields (2007, $1.4 bil- lion), and Burren Energy (2008, €2.36 billion). Between 1998 and 2014, Eni’s capital expenditure more than tripled (in US$ terms) with 82% of it going into exploration and production (E&P). Major upstream projects included: ● Kazakhstan: Eni’s giant Kashagan oilfield with upward of 15 billion barrels of oil was the world’s biggest oil find of the past three decades and the most expensive to develop. Eni held a 16.8% stake and was the field’s operator. As well as being Eni’s biggest upstream project, it was also the most trouble- some with huge cost overruns, an eight-year delay in start-up, and fierce disputes with the Kazakh government. ● In Russia, Eni built upon its status as a major, long-term customer for Soviet gas, to broaden its relationship with Gazprom (including joint ventures to build the Greenstream and South Stream gas pipelines) and initiated several exploration ventures with Rosneft. ● In Congo,