Scenario and Strategy
The reference market and the competitive environment
Transition towards a low-carbon energy mix
Companies operating in the energy sector face with two challenges: satisfy growing energy needs, working to build a future in which everyone can access to the energy sources in an efficient and sustainable way and limit their emissions in the atmosphere, contributing to the gradual path to decarbonization, in accordance with the decision taken in COP, starting from Paris 2015.
In 2040 the world population is expected to grow from 7 million to 9 million and the energy demand will increase by approximately 30%. There will be also a geographical shift in consumption and 70% of energy demand will come from non-OECD countries, representing approximately 85% of worldwide population.
In this context, natural gas represents an opportunity for a strategic repositioning of the oil companies thanks to lower carbon intensity and the possible integration with renewable sources in the electricity production. There is a growing awareness on the needs to promote policies aimed at replace coal in electricity generation.
2017, the year of rebalancing
In 2017, after three years of oversupply, OPEC and non-OPEC cuts in production and the strong demand led to rebalancing. At the end of 2017, OECD total stocks were near to the last 5 year average volumes, in line with the OPEC target. Geopolitical crises came back to play upward. In contrast, the growth of tight oil in the USA fuelled high volatility phases: notwithstanding a growth rate lower than the ones recorded during the boom years, the short-cycle nature of tight oil and the international export of crudes from the USA are the main volatility drivers for the market. 2017 average Brent price was 54.3 $/bbl (up 10 $/bbl vs. 2016), exceeding the 65 $/bbl threshold at the end of the year.
OPEC strategy addressing 2018 scenario
Expected cuts in 2018 and subsequent market control strategy by OPEC will support in 2018, driven also by widespread geopolitical crisis, primarily in Venezuela where production levels reached thirty years ago level. Capital expenditure discipline of Capital expenditure discipline of the last two years will allow to maintain high prices, determining a gap from expected demand.
A better context in the mid-downstream industry
In Europe the rationalization process started in 2008 until the end of 2014, with margins and commodity demand recovery. In 2017, in a trading scenario characterised by high margins, there were no reductions of capacity, despite the increase in Brent price. In the next years, European refining industry is expected to continue benefitting from demand growth and the IMO impact at 2020, which would foster the profitability of complex refineries in place of simple ones subject at risk of shut-down. However, European refiners will be less penalized because of already achieved capacity reduction. In the refinery business, Europe is expected to remain a marginal refiner in a global market of high competition from operators located in the Middle East, the USA, Russia and Asia, which leverage on competitive advantages in terms of supply cost and efficiency.
The 2018-2021 industrial plan includes a gradual increase in Brent price scenario up to the balance long-term value of 72 $/bbl, in line with the market fundamentals trend.
Our deep transformation process of Eni’s business model was implemented in the 2014-2017 period. As a result of this, we have set a company strongly integrated in the oil&gas value chain, strengthened and constantly growing in the upstream business, completed the turnaround in the mid-downstream business and more focused on the robustness of the financial structure. This process has been supported by organizational initiatives aimed at a more effective integration in the different company’s function.
Operating, economic and financial goals of the 2018-2021 plan target the development and the value growth in all businesses by leveraging the high level of maturity and soundness due to the advanced actions planned, such as: production ramp-ups of the fields lately started up, progress of planned project sanction to support production start-up, renegotiation of long-term supply contracts, LNG contracted volumes, reduced break-even level of refining activities, integration and specialties growth in the chemical business as well as our path to decabornization and development of the green businesses based on a distinctive model.
Another key driver of our plan is the dissemination of digital technology to catch development, efficiency and work-safety opportunities.
The low break-even of capex in execution phase, economic, financial and technical discipline as well as the decrease in activity of environmental impacts together with the improving Eni’s portfolio integration, will allow to catch addition value and allowed the Company Eni to be more financial resilient and robust.
In the 2018-2021 period, our cash neutrality (capex and dividend) targets are improving than the previous plan; in particular, in 2018, we plan a cash neutrality at a Brent price of approximately 55 $/bbl and decline to 50 $/bbl at the end of the plan period due to a growth in all businesses and the ongoing capex discipline.
In light of the progress in all businesses and the expected growth in the next four-year plan, Eni intends to increase the cash dividend to €0.83 per share. Eni is committed to a progressive remuneration policy linked to our underlying earnings and free cash flow growth. Share buy-back remains a flexible way to return to shareholders the cash in excess of the leverage target (0.20-0.25).
Focus on decarbonization
Eni defined a path to decarbonization and implemented a clear and defined climate strategy, integrated with its own business model. lt is based on the following pillars:
- reduction of direct GHG emissions: by 2025 we target to reduce upstream direct GHG emissions by 43% compared to 2014 realizing projects to eliminate process flaring, reduce fugitive emissions of methane (by 80% vs. 2014) and energy efficiency projects; capex planned in order to reach these targets amounts to €0.6 billion in 2018-2021 at 100% and with relate only to upstream operated activities;
- “low carbon” oil&gas portfolio characterized by conventional projects developed through a phased approach and with low C02 intensity. The total break-even of the new projects in execution is below 30 $/bbl and are therefore resilient even in low cabon scenarios. Generally, Eni’s portfolio has a higher share of gas, a bridge towards a reduced emissions future;
- green business development through: (i) a growing commitment to renewable energy (approximately 1,000 MW installed power in 2021); (ii) development of the second phase of the Venice biorefinery and the completion, by the end of 2018, of the Gela biorefinery; (iii) strengthening of green chemistry, with production of bio-intermediates from vegetable oil at Porto Torres, studies and partnerships with other operators. Eni’s capex for the 2018-2021 four-year period amount to more than €1.8 billion, including R&D costs to support path to decarbonization.
- commitment to research and development (R&D), which will play a key role in achieving maximum efficiency in the decarbonization process.
We've restructured all of our businesses and we're ready to see them grow, creating value for our shareholders. Today Eni is a fully integrated oil and gas company that is aiming for greater efficiency and improved liquidity generation across all the sectors in which it works.