- Published: October 31, 2021
- Updated: October 31, 2021
- University / College: Fordham University
- Language: English
- Downloads: 26
UpstreamFor the upstream production, it becomes more and more challenging for Eni to expand. With the increasing demand and the quest for reserves, the competition in exploration between the petroleum majors is growing and moving to regions with more adverse conditions such as the Arctic and ocean floors. This trend has force Eni to invest extra funds in R & D and outsource some of the technology-intensive activities to other specialist companies in order to keep Eni in the frontier.DownstreamDue to the character of the industry and the competitive markets, both of Eni´s downstream refining and marketing and chemicals businesses are struggling to obtain margin. Only if Eni can find a solution to increase its profit, the downstream industries will become a barrier for Eni’s future plan.Vertically integrated strategyThe change in the industry environment force Eni to adjust its vertically integrated strategy. In the oil sector, several factors affect Eni’s decision on the direction of its future. The development of the global infrastructure of transportation and storage in recent years has increased the capability of the logistics majors so that they could provide better services in transportation for the petroleum companies. Also, more and more specialist companies has established and become competitive at every stage of the value chain. All these logistics and specialist companies and other petroleum majors have created a market full of competition nowadays. Eni must change its formal vertically integrated strategy in order to survive in the oil market.In the gas sector, Eni´s vertically integrated gas strategy faces more immediate threats. Due to the monopoly position in the Italian gas market, Eni have to deal with the pressure from the Italian government and the European Commission. In 2012, the new Italian government makes it clear that Eni would have to sell its 52% ownership of Snam Rete Gas, the gas network owner. The European Commission had also pressured Eni to sell its ownership stakes in several international pipelines on the basis that it had limited competition in the Italian gas market by restricting third-party access.Environmental protectionUnder the supervision of the environmental groups and NGO, Eni and other petroleum majors are being forced to concern more about the environmental protection and sustainable development. In the next four years, Eni must input more investment in renewable energy sources and concern over the environmental consequences of every its individual project.Resource nationalism and political turmoilAnother threat comes from the resource nationalism and political instability in producer countries. After the mid-1960s, more and more national oil companies (NOCs) were created by the producer governments. Nowadays, they have become the leading petroleum companies in production and reserves. All the NOCs that are supported or controlled by their governments have become direct competitors of the petroleum majors. Also, the political uncertainties in the oil producer countries increase the venture of operations for Eni. How to cooperate with the NOCs and to reduce the impact of the political turmoil are critical issues waiting for Eni to solve.Persuade the investment community to support their strategyComparing with other majors, Eni’s market value is still low on the basis of conventional valuation rations. In order to collect more money to support its future plan, avoid its investors’ divestment and give them guarantee is one of Eni’s priority tasks at present.Internal challengesThere are also some internal issues wait for Eni to solve. One challenge Eni facing now is it need to develop its coordination and responsiveness. To achieve this target, in the future, Eni must enhance its close flexible coordination across organizational boundaries, its time-to-market capabilities and its asset flexibility. Also, internationalization is another challenge for Eni. Eni is still a very Italian company. It has a board of directors and a top management team with only Italians. Without any change, the lack of internationalization internally will block Eni from being as successful in foreign countries.Should Eni divest its chemicals business? What about its engineering, construction and oilfield services subsidiaries?As a long-term plan, Eni should divest its chemicals business. The situation in chemicals was more difficult than Eni’s upstream oil exploration and production. Competitive advantages in chemicals depend upon scale economies, technological advantages and low costs of feedstock. The lack of scale and distinctive technology advantages made chemicals a loss sectors for Eni in the last decade. Also, with the emerging of the specialist companies and the competition in the petrochemical sector, the vertical integration strategy is no longer the best strategy that suits for the oil industry. The time of the majors was excellent in all stream levels had gone forever. Although after the unsuccessful sale of its chemical sector in 2012 Eni started its turnaround strategy and refocusing on chemical businesses, we still believe Eni should withdraw itself from the chemical sectors like some other majors did and build a long-term cooperate relationship with the chemical companies. Instead of developing all products by itself, Eni could establish a foundation or allocate portions of its R&D fund to support the chemical companies with the research and development on added-value chemical products and bio-based chemical complex such as bio-plastics, bio-lubricants, and bio-additives from vegetable raw materials. By divesting the chemical sector and building a steady relationship with the chemical companies, Eni could increase its profitability and enhance its value chain simultaneously.For its engineering, construction and oilfield services subsidiaries, Eni should gradually change their main businesses into other fields and outsource these services to the oilfield service specialist companies. After expanding through mergers and acquisitions, few oilfield service companies become powerful players within the petroleum industry nowadays. These companies have developed their expertise and their proprietary technologies as well as their better control on the costs. Due to the reason above, Eni should outsource its upstream engineering, construction and other oilfield services to control the rising upstream costs. For its oil service subsidiaries, Eni could either sell them to the specialist companies or, if Eni really wants to keep them within the company, invest more capital for them to develop their technologies to reacquire their competitiveness.ShouldEni seek to establish itself as a major supplier of electrical power? Should it invest in renewable energy sources (e.g. wind power)?Eni should seek to establish itself as a major supplier of electrical power by developing its gas sector. Due to the mature of the oil market, there was a fierce oil-based competition between petroleum majors, specialist companies and power companies in becoming the leading electricity supplier. The red ocean market forced many petroleum majors to change their vertical integration strategy, focus more on their upstream superior sectors and leave the oil-based electrical power service to the specialist or the power companies. We believe that this is the best strategy that Eni should follow, withdraw from the red ocean and find a new blue ocean.The gas-based electrical power market is the new blue ocean for Eni. Many petroleum industry experts predict that the first half of the twenty-first century is going to be the “era of gas”. In 2011, gas consumption was 85% that of oil. Although the gas has the great potential, its lack of an integrated global market decides that vertical integration strategy is the optimal way at present for all the majors to follow. The character of the gas chain has also encouraged most of the majors to invest in electricity generation. There are still a lot of areas in the gas market waiting for Eni to develop.For the renewable energy sources such as wind power, Eni should invest more on them in the future. These renewable energy sources are most eco-friendly with rare pollution and more sustainable as well. Change their strategy and start to invest on renewable energy sources from now could help Eni to take the leading position in the future. Also, in the long term, the eco-friendly energy sources may obtain more profits as well as a better reputation for Eni.What should Eni’s international strategy be-especially in relation to its downstream businesses (Refining and Marketing; Gas and Power)?In Europe and North America, the demand for refined products was declining during the last few years. Eni should not expand in these mature markets until the demand increase again. To earn more profit and keep its competitiveness, Eni should also encourage and support innovation in refining technology in their future strategy. In the Middle East and Asia the scenario is different. With the increasing downstream investments by NOCs in these regions, new refining factory was coming on stream and created exceed capacity. Due to the fact that Eni have more experience and advance technology, the best strategy for Eni to expand in these countries is to cooperate with the NOCs and earn profit through technology transfer and capacity building.Due to excess capacity and new entry by supermarket chains into gasoline distribution, Eni’s profitability in retailing will decline more in the future if it doesn’t change its strategy. Eni should use its superiority on the vertical integration value chain to compete with the global supermarket chains.For gas and power, Eni should develop them together and regard them as one of the top priorities. The rising demands for natural gas give Eni the opportunity to increase its presence in gas marketing and distribution. Also, Eni could enter power generation directly or supply natural gas to independent power producers. Although the downstream market for gas and power doesn’t offer a better petroleum rate of return comparing with the upstream businesses currently, there is a serious probability that gas and power will become the most profitable sector in the future. A tiny investment in Eni’s gas and power today may create considerable profits for the company in the future.