Industry Analysis: Bribery Scandal Blemishes Big Week For Eni
It’s been a busy week for Eni. The Italian oil giant started production at the largest natural gas field in the Eastern Mediterranean. But Eni’s CEO also just found out that he will face trial in Milan over a bribery scheme.
First the good news. Eni started up production at the Zohr gas field off the coast of Egypt, a rapid turnaround from the initial discovery in 2015. Production is estimated at 350 million cubic feet per day, but will rise substantially in the next two years as the company drills up to 20 wells. Egypt’s oil minister said that output will hit one billion cubic feet in June 2018 before rising dramatically to 2.7 bcf/d by the end of 2019.
Zohr is important to both Egypt and Eni. The Egyptian government believes the massive gas field will help the country achieve “self-sufficiency of natural gas, ease the burden on the state budget and cut the imports bill,” oil minister Tarek El-Molla said, according to Bloomberg.
Indeed, Egypt has suffered through electricity shortages in recent years, as domestic output has declined while demand continues to rise. By 2014, Egypt had to forgo gas exports in an attempt to meet the needs of its people. But the shortfall continued to grow, and Egypt had to make up the difference by importing LNG at a high price. In fiscal year 2015/2016, Egypt purchased 89 LNG cargoes at a total cost of $2.2 billion, according to Bloomberg.
Zohr could plug the deficit when production scales up. In 2016, Egypt consumed an average of 4.9 bcf/d, while it only produced 4 bcf/d. With Zohr slated to eventually produce 2.7 bcf/d, Egypt could once again become a gas supplier for the region. “Zohr is a game changer for Egypt’s energy outlook,” Hany Farahat, a senior economist at CI Capital Holding, told Bloomberg.
Egypt hopes to keep the momentum going. A recent policy change loosened the control of the state in the energy sector, allowing private companies to ship gas through the nation’s pipeline network. Changes to gas pricing were also made to incentivize more investment.
For Eni, Zohr is also pivotal to the company’s long-term bet on natural gas. Eni rolled the dice on Zohr—Royal Dutch Shell explored the region a decade ago without anything to show for it. Eni’s own engineers believed the odds of discovery were pretty low, but moved forward anyway. With Zohr in production, along with some sizable gas assets in East Africa, Eni is turning into a notable gas producer.
More broadly, the Zohr discovery sparked even greater interest in the Eastern Mediterranean, now considered a very serious natural gas basin. Prior discoveries in the waters of Cyprus and Israel fueled an earlier round of exploration, but Zohr could help transform the region into a significant source of natural gas supply.
The geopolitics are complex. Optimists see the natural gas discoveries as a vehicle to spread peace, if only because countries like Egypt, Israel and perhaps Lebanon would be increasingly intertwined in a burgeoning trade relationship, which could discourage conflict. Whether or not such a dream is realistic remains to be seen.
Meanwhile, Eni’s CEO didn’t have the time to celebrate the startup of the Zohr field. Claudio Descalzi, along with other top executives at Eni and Shell, will stand trial in Milan in March over charges related to bribing the Nigerian government to win a deepwater license in 2011. The two companies paid the Nigerian government $1.1 billion, money that allegedly paid off key officials. Eni obviously denies any wrongdoing.
As Bloomberg notes, the trial of a sitting CEO is very uncommon. “This is really quite a big precedent-setting case,” Barnaby Pace, a campaigner at watchdog Global Witness, which was involved in bringing the incident to light, told Bloomberg in an interview. “It’s unusual to see oil majors at the sharp end of the stick in this way.” The trial could take years and might result in hefty legal costs for both oil companies. (By Nick Cunningham of Oilprice.com)
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