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Module 09: Critical Thinking Assignment
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CT Rubric (58.071 KB)
Eni Case 16 (850.238 KB)
Eni is Italy’s largest and most profitable company. The case traces Eni’s 50-year history from its founding as a state-owned oil and gas company, through its privatization and restructuring during the 1990s, to its growth and success under its present CEO, Vittorio Mincato. The case surveys the state of Eni during the early part of 2003 and considers some of the challenges facing Mr. Mincato as he seeks to sustain and continue Eni’s outstanding financial and operating performance under a strategy of “disciplined growth” and “core business focus.” The case deals with the analysis of corporate strategy for a large corporation. (By 2003, Eni was among the top-50 global corporations whether measured by sales or market capitalization.) Eni is vertically integrated, international, and diversified across several industrial sectors. The case requires students to identify and analyze the rationale behind Eni’s current corporate strategy and make recommendations for how Eni should allocate its resources across its different vertical levels, business sectors, and geographical areas of operation in the future. A key challenge of the case is that Eni is currently performing exceptionally well. Hence, there is a tendency among many students to recommend “Keep up the good work, Mr. Mincato” without looking deeply at the company and its business. In fact, Eni faces a number of key challenges, which must be addressed if Eni’s recent success is to be sustained.
This case is used to develop students’ skills in the following:
Identifying, articulating, and analyzing a company’s corporate strategy.
Analyzing the fit between a company’s corporate strategy and (a) its external environment and (b) its resources and capabilities
Combining quantitative, qualitative, and historical information to build a profile of a company’s resources and capabilities.
Examining the structure, systems, and culture that an organization needs to support its corporate strategy.
What is Eni’s corporate strategy?
Evaluate Eni’s corporate strategy. How well aligned is Eni’s strategy with (a) the characteristics and requirements of its industry environment and (b) Eni’s resources and capabilities?
Looking ahead over Eni’s next four-year planning period (2004–7), what are the main issues that face the company? How should Eni allocate its resources across its different businesses and between different geographical areas? In particular: a) Should Eni divest its chemicals business? What about its engineering, construction, and oilfield services subsidiaries? b) Should Eni seek to establish itself as a major supplier of electrical power? Should it invest in renewable energy sources (e.g. wind power)? c) What should Eni’s international strategy be – especially in relation to its downstream businesses (Refining and Marketing; Gas and Power)?
What organizational changes should Mincato pioneer, especially with regard to organizational structure, management systems, and corporate culture?
Note: Answer the Critical Thinking Assignment mainly based on the Module 9 Case . Chapter 5 ” Analyzing Resources and Capabilities” of the textbook is also relevant to this case. Optionally, feel free to support your reasoning with additional valid academic sources using SEU e-library.
Your well-written paper should meet the following requirements:
Be 4 to 5 pages in length, which does not include the required title and reference pages, which are never a part of the content minimum requirements.
Use Saudi Electronic University academic writing standards and APA style guidelines.
Support your submission with course material concepts, principles, and theories from the textbook and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.
It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before submitting it to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step instructions.
Review the grading rubric to see how you will be graded for this assignment.
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ENI case
Performance Measurement E Corporate Strategy – Modulo Ii (Corporate Strategy) /
Performance Measurement And Corporate Strategy – Module Ii (Corporate Strategy)
(Università Commerciale Luigi Bocconi)
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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 executive 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 predecessors, 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 tensions 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.
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CASE 16 ENI SPA: THE CORPORATE STRATEGY OF AN INTERNATIONAL ENERGY MAJOR
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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 resurrection 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 international 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 replicated 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 companies to meet the political needs of government ministers and politicians. By 1962,
Eni was “engaged in motels, highways, chemicals, soap, fertilizers, synthetic rubber, 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 government economic, industrial, and employment policies: the boards and chief executives
of Eni’s subsidiaries were appointed by government.4 Nevertheless, Eni continued to
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FIGURE 1
The Development of Eni, 1985–2014
Sales ($billion)
180
160
140
120
100
80
60
40
20
0
Net income ($million)
20000
10000
0
–10000
1985
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1985
1989 1993 1997 2001 2005 2009 2013
Oil and gas produced (thousands boe/day)
1989
1993
1997
2001
2005
2009
2013
1985
1989
1993
1997
2001
2005
2009
2013
2009
2013
Employees (thousands)
160
140
120
100
80
60
40
20
0
1985
1989
1993
1997
2001
2005
Note: BOE = barrels of oil-equivalent.
Source: Eni annual reports for various years.
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 autonomy 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 conglomerate 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, technology, 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,
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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 glassmaker 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, $1.4 billion), and Burren Energy (2008, €2.36 billion).
Between 1998 and 2014, Eni’s capital expenditure more than tripled (in US$
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 troublesome 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, Eni’s approach was widely viewed as a model for oil company
relations with host governments. In addition to onshore and offshore E&P
projects, Eni built power plants using associated gas from the M’Boundi oilfield to provide the majority of Congo’s electricity needs. Eni also initiated a
biofuels plant, while the Eni Foundation established health clinics and a vaccination program for children.
● In Libya, Eni built on its status as Libya’s oldest and biggest petroleum partner by extending its concessions to 2047 and maintaining production despite
the chaos that followed the overthrow of the Gaddafi regime.
●
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In deep waters off Mozambique, Eni discovered in 2011–2013 the world’s
fourth-largest gas field with about 2,650 billion cubic meters (or 93.6 trillion
cubic feet) of gas. Eni and its partner Anadarko were planning an LNG plant
which would begin operations in 2018.
● Eni extended its E&P activities into Asia—including Australia, East Timor,
Indonesia, and Pakistan.
●
A further feature of Eni’s upstream strategy was its preference to take the role
of operator in oil and gas fields in which it held a major stake. This allowed Eni
greater control over development and costs and helped it to build its production
capabilities.
As Eni extended the geographical extent of its gas fields beyond its core
Mediterranean region, it looked increasingly to LNG as a means of monetizing these
reserves. LNG allowed Eni to develop gas production far from its core European
market and to expand its sales of gas to Asia. By 2014, Eni held equity interests
in LNG trains in Egypt, Libya, Nigeria, Angola, Oman, Trinidad, Indonesia, and
Australia.
Table 1 shows the geographical distribution of Eni’s production and reserves. This
distribution contrasted sharply with that of most other petroleum majors. Their major
sources of hydrocarbons were North America and the Middle East. Eni’s focus on
Africa and the former Soviet Union reflected, first, its comparative youth and, second, its capacity to build cordial relations in countries that were viewed as difficult
places to do business. Energy commentator Steve LeVine observed: “Italy’s Eni continues to pioneer a successful path to survival in Big Oil’s treacherous new world—
get in bed, don’t compete with the world’s state-owned oil companies . . . Where its
brethren bicker with Hugo Chavez and Vladimir Putin, Eni has found a comfortable embrace.”9 Others viewed Eni’s willingness to engage with the autocratic and
TABLE 1 Eni’s petroleum production and reserves by region, 2014a
Italy
Rest of Europe
North Africa
Sub-Saharan Africa
Kazakhstan
Rest of Asia
Americas
Australia and Oceania
TOTAL
Hydrocarbon
productionb
Liquids
productionc
Gas
productiond
Reservese
179
149
528
307
96
135
114
299
1,537
73
93
253
230
52
37
84
6
828
541
498
1,536
418
181
297
205
106
3,782
503
544
1,756
1,320
1,069
290
960
160
6,602
Notes:
a
Production/reserves data include both consolidated subsidiaries and equity-accounted entities.
b
Thousands of barrels of oil equivalent per day.
c
Thousands of barrels per day.
d
Millions of cubic feet per day.
e
Millions of barrels of oil equivalent (includes both developed and undeveloped reserves).
Source: Eni 20-F report for 2014.
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CASE 16 ENI SPA: THE CORPORATE STRATEGY OF AN INTERNATIONAL ENERGY MAJOR
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unrepresentative governments of Algeria, Nigeria, Angola, Kazakhstan, and Russia as
opportunistic and unprincipled. Scaroni’s response was matter-of-fact: “We deal with
countries that have gas. If Switzerland had gas, we would deal with Switzerland.”
At the root of Eni’s flexible approach to host government relationships was its recognition that the balance of power had shifted in favor of the producer countries:
“The fact is, the oil is theirs . . . If you are looked at as a partner, you are allowed to
exploit their oil; if not, you are pushed aside.”10 A key component of Eni’s engagement with host countries was investing in electricity supplies. In Nigeria, the Okpai
power plant and electricity from other industrial plants supplied 10.5 million
customers.
Downstream: Building the European Gas Business In possessing a large
downstream gas business, Eni was unique among the majors—though vertically
integrated in oil, gas distribution had historically been in the hands of regulated
monopolies: state-owned companies such as British Gas and Gaz de France in
Europe or regulated local utilities in the US.
Eni’s downstream gas and power business (it had forward integrated into producing electricity from its gas supplies) was a consequence of Eni’s historical roots in
natural gas and its belief that its integrated gas chain was a key competitive advantage. As Paolo Scaroni observed:
Eni has a very distinctive way of dealing with the gas in Europe. We are both
upstream with our E&P division, and downstream in distribution, transport and
sales. Just to give you an idea of how integrated these two divisions are, 35% of our
equity gas is sold through our Gas and Power division, so we are already where
most of our competitors in the midstream and downstream business of gas would
like to be: integrated upstream, and generating our sales from our own equity gas
… Then of course we have a wide portfolio of sourcing of gas, which goes from
Algeria to Libya, Poland, Norway, and of course, Russia … There is no other player
that has such a privileged position in the European market.11
Marco Alvera, in charge of gas supplies, added further explanation of these
advantages:
Our gas, be it equity or contracted, comes from ten different countries. This gives
us considerable diversity and security of supply. Second, we can leverage on a
growing integrated LNG business. Third, we have attractive contractual structures
and terms. Fourth, we have access to a very large set of transportation and storage
assets across Europe from north to south and east to west. Finally, we have significant commercial flexibility that allows us to vary, on a daily basis, the amounts of
gas produced or drawn from each of our contracts. Summing up, I would say that
no other operator in the European gas market can claim to have the same scale
and asset backed flexibility as Eni’s Gas and Power division.12
International pipelines played a key role in linking Eni’s gas supplies with its
Italian distribution network. The Trans Austria Pipeline (TAP) brought Russian gas
from Slovakia; the Trans Europa Naturgas Pipeline (TENP) carried North Sea gas
from the Netherlands; the Trans-Mediterranean pipeline brought Algerian gas; the
Greenstream pipeline linked Libya to Italy; the Bluestream pipeline, owned jointly
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with Gazprom, linked Russia and Turkey across the Black Sea. The South Stream
pipeline, begun by Eni and Gazprom in 2012, was intended to take Russian gas
to Germany and Italy. Saipem, an oilfield services, engineering, and construction
company, 43% owned by Eni, played a key role in building Eni’s subsea pipelines.
The key threat to Eni’s integrated gas strategy was the European Commission’s
goal of a competitive European gas market. Eni was required to reduce its share
of the Italian downstream gas market to 50% and divest its gas transmission, storage, and distribution. These were transferred to Snam, which was separated from
Eni in 2012. Eni’s ownership and operation of international gas pipelines were also
targeted by the European Commission: Eni was forced to sell its stakes in the TAP
and TENP pipelines.
While divesting its gas storage and distribution system in Italy, Eni acquired
equity stakes in downstream gas companies in Spain (Union Fenosa Gas), Germany
(GVS), Portugal (Galp Energia), Belgium (Distrigas and Nuon), Hungary, Greece,
and Croatia.
Refining, Marketing, and Chemicals Downstream oil was a different story.
Unlike most other oil and gas majors, the refining and marketing of oil products was
a comparatively minor part of Eni’s overall business, accounting for a mere 5% of
Eni’s fixed assets. Refining and marketing were heavily focused on Italy, where Eni
held 31% of the market for fuels. Under Mincato and Scaroni, Eni shrank its refining
capacity, closed retail outlets, and exited from downstream markets outside of Italy.
Despite cost cutting and asset sales, Eni’s refining and marketing sector lost money
during 2009–2013.
Chemicals, where Eni lacked scale and distinctive technological advantages, were
an even greater challenge. Chemicals had been a loss maker for Eni for decades.
Despite creating a business into a separate chemical company, Polimeri Europa, Eni
had been unable to find a buyer. In 2012, Eni embarked upon a new strategy for
its chemicals business focusing on specialty chemicals and seeking licensing, alliances, and joint ventures. Bio-chemicals—including plant-based plastics, lubricants,
and additives—were one target area. To emphasize the strategy shift, Polimeri was
renamed Versalis.
Eni’s vertical chains for oil and gas are shown in Figure 2.
Organizational Changes Both Mincato and Scaroni sought to make Eni a more
integrated corporation. The first stage of this was transforming it from a holding
company into a multidivisional corporation with three key divisions: exploration
and production, gas and power, and refining and marketing. The new structure permitted stronger corporate-level functions, especially finance and human resources.
Achieving greater integration involved stronger financial control, more rigorous
internal auditing, and risk management procedures, establishing a code of ethics,
and company-wide procedures for sustainability reporting.
To forge a clearer stronger identity and image for Eni, the slogan “Eni’s Way” was
adopted as the company’s tagline in advertising and corporate communication. The
key themes that “Eni’s Way” conveyed were technological strength, a spirit of adventure, and social and environmental responsibility.
The organizational changes continued under Descalzi with a further integration
across the divisions and centralization of functional areas. The divisional structure
was broken up and reorganized around capabilities (Figure 3).
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CASE 16 ENI SPA: THE CORPORATE STRATEGY OF AN INTERNATIONAL ENERGY MAJOR
FIGURE 2
615
Eni’s vertical chains in oil and gas
OIL (millions of tonnes)
Eni’s crude oil
production 27.6
Crude oil
purchases 35.6
Refining in
Italy 27.0
Crude oil
trading 32.1
Refining
overseas 5.0
Exports 1.4
Other sales
(including petrochemicals) 9.0
Retailers
outside Italy 3.0
Retailers
in Italy 8.4
Wholesalers
outside Italy 4.3
Wholesalers
in Italy 9.4
NATURAL GAS (billion cubic meters)
Gas produced by Eni
15.9
Gas purchases
79.2
Sales in Italy
28.5
Sales elsewhere in
Europe 53.0
Sales outside
Europe 6.2
Eni’s power
generation 5.1
Wholesalers 5.2
Industry 8.1
Spot markets 5.2
Power generators 4.3
Residential 5.7
Source: Eni Fact Book.
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FIGURE 3
Eni’s organizational structure, March 2015
Board of Directors
CEO
Chief
Exploration
Officer
Office of the CEO
Corporate Affairs
& Governance
Procurement
Government
Affairs
Chief of Legal
& Regulatory
Affairs
Chief Financial
& Risk
Management
Officer
Chief Services &
Stakeholder
Relations Officer
Chief
Upstream
Officer
Chief
Midstream
Gas & Power
Officer
Chief
Development,
Operations &
Technology
Officer
External
Communication
Chief
Refining &
Marketing and
Chemicals
Officer
Chief
Retail Market
Gas & Power
Officer
Source: www.eni.com/en_IT/company/organisation-chart/organisation-chart.shtml.
The Petroleum Industry in 2015
The Industry Sectors
The petroleum sector comprises two major segments: upstream and downstream.
Upstream undertakes the exploration and production of oil and gas; in the downstream, gas and oil have separate value chains. In oil the primary activities are refining and marketing (where marketing includes both wholesale and retail distribution
of fuels). In gas the primary downstream activities are distribution and marketing.
Linking upstream and downstream are mid-stream activities: transportation of oil
and gas and trading.
Exploration and Production The rise in the price of crude from around $22 in
2002 to over $100 during 2010–14, reinforced the conventional wisdom that industry’s primary source of profit was oil and gas production. During 2006–2013, the
majors earned a return on capital employed in E&P at least double what they earned
in refining and marketing. Although upstream activities accounted for only one-fifth
of their revenues, they contributed about three-quarters of overall profits during this
period. In response, all the majors greatly increased the proportion of their capital
investment toward E&P.
High oil prices were the result of rising world demand—especially from India
and China—and limits on oil production—not because of declining reserves—but
because of political instability in Libya, Egypt, Iraq, and Nigeria and underinvestment
in Venezuela, Russia, and Mexico. Production quotas imposed by the Organization
of Petroleum Exporting Countries (OPEC) also helped to support prices. However,
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FIGURE 4
617
The price of Brent crude, 1987–2015 ($ per barrel)
140
120
100
80
60
40
20
1990
1995
2000
2005
2010
2015
the costs of finding and developing oil and gas fields were also rising, causing
upstream profitability to decline during 2011–2013.
Between June 2014 and January 2015, the price of Brent crude declined from
$115 to $47 per barrel (Figure 4). The principal cause was a remarkable expansion in US oil production: as a result of horizontal drilling and hydraulic fracturing,
increased output of US “tight” oil would result in the US displacing Saudi Arabia
as the world’s biggest oil producer during 2015 (Table 2). In response to falling oil
prices, the Saudis abandoned their traditional role as “swing producer” and refrained
from cutting production to support prices.
The result was a transformation in the finances of the oil majors. During the first
quarter of 2015, the pretax profits of the majors declined by between 32 and 63%.
To contain rising upstream costs, the oil and gas companies had outsourced more
and more of their E&P activities. Drilling, seismic surveys, rig design, platform construction, and oilfield maintenance were increasingly undertaken by oilfield service
companies. As these companies developed their expertise and their proprietary
technologies, and grew through mergers and acquisitions, so sector leaders such as
Schlumberger, Baker Hughes, Halliburton, and Diamond Offshore Drilling emerged
as powerful players within the petroleum industry.
Refining and Marketing The main refined products in order of importance
were: gasoline, diesel fuel, aviation fuel, heating oil, liquefied petroleum gas (LPG),
and petrochemical feedstock (e.g., naphtha). Historically, downstream was less profitable than upstream: in their refining and marketing businesses, the majors typically
earned rates of return that barely covered their costs of capital. As a result, all the
majors had divested refining and marketing assets to concentrate increasingly on
their upstream businesses (Table 3).
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618 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
TABLE 2 Oil and gas production and reserves by country
Oil production
(mn barrels/day)
Saudi Arabia
Russia
US
China
Canada
Iran
UAE
Kuwait
Iraq
Mexico
Venezuela
Norway
Nigeria
Brazil
Qatar
Kazakhstan
Angola
Algeria
Gas production
(bn cubic meters)
2013
2007
1991
2013
2007
1991
Oil reserves
(bn barrels)
2013
11.5
10.8
10.0
4.2
3.9
3.6
3.6
3.1
3.1
2.9
2.6
2.1
1.8
2.1
2.0
1.8
1.8
1.6
10.4
10.0
6.9
3.7
3.3
4.4
2.9
2.6
2.1
3.5
2.6
2.6
2.4
1.8
1.3
1.5
1.7
2.0
8.8
9.3
9.1
2.8
2.0
3.5
2.6
0.2
0.3
3.1
2.5
1.9
1.9
0.8
0.5
0.5
0.2
1.4
103
605
688
117
155
167
56
16
1
57
28
109
36
21
159
19
—
79
76
607
546
69
184
112
49
13
1
46
29
90
28
14
63
15
—
83
35
600
510
15
105
26
24
1
n.a.
28
22
27
4
6
12
4
—
53
266
93
44
18
174
157
98
102
150
11
298
9
37
16
25
30
13
12
Gas reserves
(tn cubic meters)
2013
8.2
31.3
9.3
3.3
2.0
33.8
6.1
1.8
3.6
0.3
5.6
2.0
5.1
0.5
24.7
1.5
—
4.5
Notes:
mn = million; bn = billion; tn = trillion.
n.a. = not available.
Source: BP Statistical Review of World Energy, 2008 and 2014.
The main problem in refining was excess capacity. Demand for refined products
was declining in Europe and North America and new refining capacity was coming on stream in the Middle East and Asia as a result of downstream investments
by national oil companies (NOCs). Excess capacity and thin margins were also the
norm in gasoline retailing.
Downstream Gas and Power Unlike Eni, whose origins lay in gas rather than
oil, the other petroleum majors were relative newcomers to natural gas. The rising
demand for natural gas caused all the majors to reorient their upstream activities
toward gas, while the privatization and liberalization of downstream gas and power
markets offered opportunities to market gas to end users and to become generators
of electricity. However, the downstream gas and power did not offer the petroleum
majors rates of return comparable to those earned upstream.
Chemicals Petrochemicals displayed many of the same structural features as oil
refining: capital-intensive processes producing commodity products, many competitors, and a tendency toward excess capacity (mainly resulting from new investment by
Asian and Middle Eastern producers). Competitive advantage in chemicals depended
upon scale economies, technological advantages (such as patented products and
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CASE 16 ENI SPA: THE CORPORATE STRATEGY OF AN INTERNATIONAL ENERGY MAJOR
TABLE 3
619
Capital expenditures among the majors, 2003–2011
Average annual capex
($billion)
Capex on E&P as % of total
2003–2007
2008–2011
2012–2014
2003–2007
2008–2011
2012–2014
17.0
16.4
17.9
12.2
10.8
11.4
9.6
30.5
26.6
24.9
23.9
21.9
11.3
16.1
38.4
40.6
23.5
26.0
35.0
16.3
15.7
78.2
68.0
69.3
72.3
77.0
57.9
65.7
82.6
78.2
79.1
65.2
90.2
86.7
69.8
80.5
83.6
81.3
69.2
92.1
98.0a
90.3
ExxonMobil
Royal Dutch/Shell
BP
Total
Chevron
Conoco Phillips
Eni
Note:
a
Estimated
Source: Company annual reports.
processes), and low costs of feedstock. Lower feedstock costs gave Middle Eastern
and North American producers a big advantage over European producers. Among the
oil and gas majors there were two distinct views about chemicals. Some, like Eni and
BP, saw chemicals as a fundamentally unattractive industry and believed that chemical plants were better run by chemical companies. Others (including ExxonMobil,
Shell, and Total) viewed chemicals as part of their core business and believed that
integration between refining and petrochemicals offered them a cost advantage.
The Companies
The petroleum sector featured three main types of company:
The oil and gas majors were characterized by their age, size, international scope, and vertical integration. Between 1998 and 2002, a wave of
mergers and acquisitions resulted in the emergence of an elite group of
“super majors” comprising ExxonMobil, BP, Royal Dutch Shell, Chevron,
ConocoPhillips, and Total (Table 4). The extent of economic benefits from
these mergers and acquisitions remains unclear. The costs of developing
oil and gas fields and building LNG facilities were huge, but typically these
were undertaken as joint ventures, not by single firms. The main benefits of
a large portfolio of upstream projects were spreading risks and infrastructure costs and accelerating learning. However, there was little evidence that
scale economies continued up to the size of companies such as ExxonMobil
