ENI’s spree of deals in the Middle East sets it up for growth

The Italian energy company has clinched deals in UAE, Oman and Bahrain

ENI is still well behind its rivals in production from the Middle East, but Mr Descalzi wants the region to contribute 35 per cent of its revenues within five to seven years. Reuters

Claudio Descalzi, chief executive of Italian oil giant ENI, has muscled in like Mario Balotelli to score in the Middle East. Deals in Abu Dhabi, Sharjah, Oman and Bahrain have taken his firm from non-competitors to championship contenders. And the Middle East has become a showcase for sharp differences in the strategies of the leading Western oil firms.

ENI has always been strong in North Africa – Algeria, Libya, Tunisia, and Egypt where it made the giant offshore Zohr gas find in 2015. It has at times had Middle Eastern aspirations – under buccaneering founder Enrico Mattei in the 1950s, then again when it developed the Darquain field in Iran in the early 2000s, and entered Iraq’s big Zubair field in 2009.

But recent moves have transformed its position. The company has been the most successful explorer recently among the leading international oil firms, with Zohr set alongside new fields in Cyprus, Mexico and Mozambique.

ExxonMobil’s big oil finds in Guyana, some hits by Equinor in its home base of Norway and in East Africa, gas discoveries by BP and partner Kosmos between Mauritania and Senegal, and a large gas-condensate success last week by Total in deepwater off South Africa, are parts of an upturn in exploration performance. But total volumes found are at historically low levels, and discovering oil, rather than gas, has been particularly elusive.

ENI aims to bring its exploration skills to the world’s premier hydrocarbon region by picking up two offshore blocks in Abu Dhabi, all three offered by Sharjah in the emirate’s debut bid round, a preliminary agreement for an offshore block north of Bahrain island, and acreage in Oman. It plans to drill offshore Oman this year, on a licence it has held since 2017, and has an agreement with BP to look for more unconventional gas in the sultanate. And it is currently drilling another important well in Egypt, Nour-1, which could further boost the country’s gas renaissance.

But it is not just about exploration. Last year marked ENI’s first appearance in the UAE, when it secured shares in new contracts for Abu Dhabi’s giant offshore Umm Shaif and Lower Zakum fields, then the Ghasha sour gas field. Its most recent deal was uncharacteristic, outside the upstream sector, taking 20 per cent of Adnoc’s refining unit for $3.3 billion (Dh12.1bn).

ENI is still well behind its rivals in production from the Middle East, but Mr Descalzi wants the region to contribute 35 per cent of its revenues within five to seven years. Like Total, it is hardly present in US shale, an absolute priority for the American super-majors now, and prominent for BP and Shell too. The big companies seek a balanced portfolio, which is profitable, has potential for growth, is not too exposed to political risk in a single region, and can survive periods of low commodity prices.

North American shale offers enormous resources, attractive tax terms and fast development, that can be scaled up or down in response to short-term oil price moves. Deepwater and liquefied natural gas (LNG) developments, staples of the super-majors’ legacy business models, provide long-term cashflow but require enormous up-front investments that are vulnerable to price downturns or an ultimate ebbing in demand for fossil fuels. Russia’s huge fields are mostly off-limits to international companies, who are further hampered by western sanctions.

By comparison, the Middle East harbours giant, low-cost resources, defensive in low price periods, and likely to underpin future world supply even if demand diminishes. But governments retain most of the profits via tax and production shares, and often long negotiation periods try the patience of companies and their shareholders. While Oman, Sharjah and Bahrain would be happy to discover more oil, the priority in Abu Dhabi and Iraq is to develop what the state already has, and to produce more gas for domestic needs.

This spree of deals by ENI, Total and to a lesser extent BP in the Middle East may be nearing its close. Abu Dhabi has only a few exploration blocks still to allocate, Iran is firmly off-limits because of American sanctions, while Saudi Arabia and Kuwait rely entirely on their national oil firms. Iraq’s tough contractual terms have deterred the super-majors rather than enticing them to expand their existing positions, and Bahrain’s announced offshore shale oil resources have attracted only tepid interest so far. Qatar’s new LNG plants will be competed for fiercely.

Investors have not been impressed by ENI’s run of successes. Since the nadir of oil prices at the start of 2016, only ExxonMobil amongst the international supermajors has performed worse; the Americans’ shares are down slightly, while the Italians are up 14 per cent. The sector leader, though, Equinor, has gained 65 per cent, and Shell 37 per cent. Total, which has also boosted its Middle East presence aggressively over the past couple of years, has gained 23 per cent.

But shareholders have for some years been locked in a mindset favouring returns and cost-cutting over growth, punishing Shell for its 2015 purchase of gas firm BG, then ExxonMobil for big shale acquisitions made at the peak of the market.

The market has now come to appreciate the strategic advantages Shell gained from BG. Total, ExxonMobil and ENI appear best-set for growth in the next few years, and may yet be rewarded. Mr Descalzi has given his firm a chance in the Middle East – now they need to show that they can score.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis