Arenas:
Eni is an oil and gas company with combination of upstream and downstream internationally with the highest market capitalization of any Italian company. Eni’s business spreads into diverse and many numbers of countries including Libya, Egypt, Kazakhstan, Russia, Congo, Mozambique, Asia and so on. Exploration and production of oil and gas. Refining and marketing chemicals, engineering, construction, operate globally
Vehicles:
Eni focuses on vertically integrated in oil and natural gas strategy and become diversified business. Mattei’s vision shows Eni’s vertical strategy in order to guarantee Italy’s energy supplies is independent. The “Seven Sisters” connect well known sources of oil in the Middle East and Latin America. Mattei singed production-sharing agreement with the Shah of Iran in 1957, and then spreads into Libya, Egypt, Tunisia, and Algeria. Eni has both upstream with exploration and production division, and downstream in distribution, transport and sales. For example, they sold equity gas through their own Gas and Power division to generate their sales.
More, Eni’s capital structure expanded through acquisitions, joint ventures and divestments. It also intends to outsource non-strategic activities. Investment activities focused on upstream activities with divestment of refining, marketing, and petrochemical assets. Under Mincato and Scaroni management, both of them expand Eni’s capital structure through mergers and acquisitions by choosing small acquisitions, so it can be integrated within Eni’s original upstream activities. It includes British Borneo, LASMO, Fortum;s Norwegian oil and gas assets and Dominion Exploration and Production’s Gulf of Mexio oilfields, Maurel & Prom’s Congon oilfields and Burren Energy. Although those acquisitions are small, it helps Eni’s capital expenditure more than tripled with 82% of exploration and production. They also divested gas storage and distribution system in Italy. They acquired equity stakes in downstream gas companies Union Fenosa Gas in Spain, GVS in Germany, Galp Energia in Portugal and so on.
Staging: Eni has upstream with their own exploration and production, and down stream in distribution, transport and sales. By this strategy, Eni have access to large set of transportation and storage assets across areas. Their international pipelines have important roles to connect their gas supplies with its distribution network. For example, the Trans Austria Pipeline brought Russain gas from Slovakia; the Trans Europa Naturgas Pipelin brought North Sea gas from the Netherlands and so on.
Economic Logic: Eni reduces capital expenditure and accelerating cost reduction and asset sales.
Differentiations: Eni has spread gas chain around the world; Eni’s upstream exploration and production, and downstream into distribution, transport and sales; Eni’s own pipelines provides gas across areas.
Eni basically use corporate strategy which includes diversification, vertically integrated, mergers and acquisitions not only in it domestic countries, instead, it spreads into around the world.
b) Where is Eni going and what type of company is it seeking to become?
Eni aims to be a high market capitalized international gas and oil company. Basically, their integrated and acquisition strategy has already helped it to achieve and keeping developed this goal. They focus both on upstream exploration and production, and downstream into distribution, transport and sales. They basically expand its arenas more and more. Their integrated and acquisition companies show their different arenas with supplies from diverse areas, transportations and sales through pipelines, and different markets on different areas. It also shows Eni’s position aims to select niche arena to satisfy oil and gas needs within market such as Asia. They also have diversification of chemicals business.
Their slogan “Eni’s way” aims to make Eni a more integrated corporation with concerns of technological strength, a spirit of adventure, and social and environment responsibility.
c) What is its competitive advantage?
The integrated gas chain is a key competitive advantage. Eni’s feature upstream strategy helps to operate oil and gas fields better. This is beneficial to Eni because it helps to control over development and costs better and then to build its production capabilities. Eni’s integration and acquisitions around the world helps set up their own product line (gas chain), which increase its efficiency of value chain. Their upstream with exploration and production division, and downstream in distribution, transport and sales shows its efficient value chain by integration and acquisitions around the world. The upstream projects for example in Russia and Congo contributed to expand their capital structure as well. Its petroleum geographical distribution of Eni’s production and reserves, such as 528 Hydrocarbon production in North Africa, demonstrates huge sources and capacity to build cordial relations in countries in order to do more business. Their oil and gas resources are expanded a lot through its vertical integrated exploration and production. Those world-wide oil and gas resources and reserves creates much value for Eni. For resources, they have great human resources management. Within their organization structure, it is clearly they have very specific and different departments and different divisions of employees. Corporate strategy responses corporate top management.
Their international upstream exploration and production, and downstream distribution and transportation provides better resources and capabilities for creating its value-chain. Their world wide pipelines can be one of their competitive advantages. For example, TAP brought Russian gas from Slovakia. Their major pipelines contribute a lot to be competitive within world-wide market. This competitive advantages helps put pressure on price margin.
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?
Adaptation:
Eni’s corporate strategy of vertically integrated and acquisitions fits features of the petroleum sector. It comprises two major segments: upstream with their own exploration and production division, and downstream in distribution, transport and sales. More, Eni does refining, marketing as their oil primary activities. The refining and marketing of oil products accounts 5% of Eni’s fixed assets, and it is a comparatively minor part of their overall business. Their refining and marketing focused on especially on Italy by holding 31% of the market for fuels.
The did changes on its organizational changes. Acquisitions change established order and pattern activities. Both Mincato and Scaroni goals to make Eni a more integrated corporation, the company’s structure was changed into multidivisional corporation with three key divisions: exploration and production, gas and power, and reefing and marketing. The organizational changes continued under Descalzi with future integration across the divisions and centralization of functional areas. The divisional structure was broken up and reorganized around capabilities. According to Firgure 3, it demonstrates different levels for different departments.
Their acquisitions illustrate Eni has made changes in order to expand their distribution and marketing for gas primary downstream activities. They were keeping explored their business in different countries.
When external environment changes, their plan for next few years of reducing capital expenditure and accelerating cost reduction and asset sales shows they are changing all the time.
Implementation: Their huge branches of integration and acquisitions last two decades demonstrate they were implementing changes to adapt into current environment. Their developed pipelines help deliver gas across countries, and this shows Eni implements their international business goals.
Positioning: They focused its positioning more on broad and multiple markets. Their upstream and downstream activities are around the world. Their pipelines satisfy different regions’ needs regarding different areas.
Their resources and capabilities expanded through vertically integrations in oil and gas. For example, Eni’s upstream projects in Kazakhstan owns a 16.8% stake, and it was the field’s operator. This shows its preference to take the role of operator in oil and gas fields in which it held a major stake. This helped Eni have control over development and costs and helped it to build its production capabilities. Their gas and oil resources and capabilities are expanded a lot from upstream exploration and production division to downstream in distribution, transports and sales. They have many resources and huge capabilities.
Their broad sources and huge capabilities shows ability of producing value. It creates its own value-chain and then make decision, ultimately influence price margin.
Eni’s corporate strategy through integration and acquisitions illustrates Eni has done changes to adapt into the petroleum sector industry environment. Their both upstream and downstream activities show common requirement of industry environment. Their resources and capabilities are expanded by their integrated strategy and acquisitions. Their international upstream exploration and production, and downstream distribution and transportation provides better resources and capabilities for creating its value-chain. It shows their allegiances between productions and consumptions.
3. What current developments threaten Eni’s performance? (IGNORE THIS QUESTION)
During 2014, a branches of political and economic developments put threats to the security and profitability of Eni’s upstream operations. The instability and violence in Libya and Egypt hurts Eni’s economy because the two areas are Eni’s two most important sources of hydrocarbons. Catastrophic events cause oil prices going to bottom level. This hurt Eni’s financial performances as net profits was 46% lower than in the year-ago quarter with upstream operating profit reduction by more than 70%. In addition, another key threat to Eni’s integrated gas strategy was the European Commission’s objectives of a competitive European gas market. Eni was enforced to reduce its share of the Italian downstream gas market to 50% and divest their gas transmission, storage and distribution. Thus, political factors can threaten Eni’s performances.
More, Eni has weakness on its refining capacity under management of Mincato and Scaroni. Because of this, retail outlets closed and exited from downstream markets outside of Italy, and Eni’s refning and marketing sector lost money during the year between 2009 to 2013.
In addition, Eni has weakness on chemical products. Eni lacked scale and distinctive technological advantages, and this is a greater challenge for them. They even had been unable to find a buyer. However, in 2012, Eni came up with new strategy which aims to seek licensing, alliances and join ventures. They will target bio-chemicals including plant-based plastics, lubricants and additives.
Another threat of current development is economic logic may change. High profit in oil and gas production may attract more companies to enter the market. The price of crude increases from about $22 in 2002 to $100 during 2012 and 2014. There would be more competitors into the market. The costs of finding and developing oil and gas field kept rising, which lead upstream profitability to decline during the year 2011 to 2013.
The last important and potential threat of current development is that economic benefits from mergers and acquisitions are unclear. The costs of developing oil and gas fields and building LNG facilities are huge. Acquisitions are visible, expensive and often harmful.
Similarly, Eni’s vertically integration strategy has been challenged. In terms of oil, because of the development of global infrastructure of transportation and storage, competitive markets for both crude and refined products, and the presence of specialist companies at every platform of the value chain had reduced the benefits of vertical integration. All companies withdraw from some stages of the value chain. For example, some companies outsourcing oilfield services and marine transportation. Integrated business model is no longer a strategic advantage in gaining resource and market access, accordion to CEO of Phillips.
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?
a. Should Eni continue to focus most of its capital investment on its upstream business?
Eni should not continue to focus most of its capital investment on its upstream business. The market of upstream business is not good. As I discussed above, the costs of finding and developing oil and gas fields were rising, it already causing a decline to upstream profitability during 2011 and 2013. Brent gave a warn on crude prices which declined from $115 to $47 per barrel. And the reason is because of increased output of US “tight” oil in 2015. This occurs last year, and it will have impacts continually in the future. Thus, Eni should not focus more on its upstream business.
b. Should Eni divest (i) its chemicals business, and (ii) its engineering, construction and oilfield services subsidiary (Saipem)?
Competitive advantages in chemicals relies on scale economics, technological advantages and low costs of feedstock. Although Eni has weakness on chemical business and it regards chemicals as a fundamentally unattractive industry, Eni’s new strategy of seeking licensing, alliances and joint ventures will help Eni performance better. Therefore, Eni shouldn’t divest its chemicals business.
c. Should Eni continue with its vertically-integrated strategy in natural gas?
Eni shoud continue with its vertically-integrated strategy in natural gas. The situation of gas is different than oil. Transporting and storing gas has physical difficulties, and it means gas reserves asked dedicated investments in transportation, liquefaction, and storage to connect production to consumption. There are huge price differences between areas as lack of integrated global market in gas. The desire to exploit upstream integrated strategy on gas will help establish substantial investment in LNG. In addition, integration for downstream also needed because if can directly supplying large industrial customers or establishing relationships with gas marketing companies.
d. Should Eni invest more heavily in renewable energy sources (e.g. wind power, solar power, and geothermal power)?
Since oil and gas are not sustainable sources, Eni such huge corporations have to made changes to adapt into new external environment such as renewable energy sources and technology. Now, it seems Eni’s arena only stays at narrowed scope because it focuses only on oil and gas exploration and production. To better implement their corporate strategy, Eni should be more diversified, which means exploiting other energy sources such as wind power, solar power and geothermal power. Those renewable energy sources are sustainable in the future, which is contrast to the original energy sources of oil and gas. If Eni don’t want to be given up, they should seek new productions and be more diversified regarding to their corporate strategy. They should shift to more broad energy sources stages.
The success is sum of entire process. If Eni wants to more successful in the future, the aspects of technical, logistical, political, and financial complexities of the business they should all be concerned. Those elements are important because it can be related Eni’s competitive advantages to learn from experience and transfer that learning throughout the company.
Group discussion
1. What has Eni’s corporate strategy been over the past two decades?
· Competitive advantage: vertical integration and relationships with unstable governments
· Arenas: exploration and production, gas and power, refining and marketing, chemicals, engineering, construction, operate globally especially South Africa, Europe, and the Middle East and Asia, distribution network center is in Italy.
· Haven’t outsourced E&P
· Cost leader in gas and electric, differentiator due to complete vertical integration
0. 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?
· Characteristics: profits from upstream, not complete vertical integration, large capital expenditures, high barriers to entry, changes in external environment
. Eni is aligned with upstream and focus on profits, but completely integrated which is out of the norm
· Resources and capabilities: diversify supply of oil and gas, subsidiaries like Saipem, partial or full control over production, control over development and costs
. Eni is aligned well as they utilize the resources that bring them the greatest profit without over-extending
Upstream ¾ of overall pfofals increase capitail investment in E&P high oil prices limits on oil production
Alignment with vertical integration vs not vertical more
Resources and capabilities align and reduce as they grow (competitive advantage)
0. What current developments threaten Eni’s performance?
· Specialization firms at every stage of the value chain
European commission
· Goal was to have competitive gas market
· Forced eni to reduce market share to 50% and reduce several pipelines
Arab Spring
· Negatively effects on N Africa and Ease
Indeppendentts disrupted Eni’s vertical integration
Russia and Europe lensions
· Rutin cancelled South Stream gas pipeline
Collapse of crude oil prices
0. 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?
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)?
Michelle_Michy
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