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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Is There Still A Future For Eni In Libya?

It has been a rough year for Italy’s Eni much like it has been a rough year for many other oil majors. Yet part of Eni’s troubles stem from a unique set of challenges – Libyan security concerns. Eni has faced almost constant security issues for its Libyan operations since the 2011 revolution that ousted Muammar Gaddafi. A recent example of that is the car bomb in front of Eni’s Libyan joint venture headquarters last fall which ISIS would later take credit for.

These security concerns in Libya have been damaging enough that they have driven many other oil majors away from the country, yet Eni has persisted. This is due in large part to the fact that Libya holds the largest total proved oil reserves and fourth largest proved natural gas reserves in Africa. As of this summer, Eni reported that it was producing 300,000 BOE of per day in Libya which is actually more than the company produced before the Libyan revolution in 2011. The company is also continuing to make new discoveries in Libya including two gas and condensate discoveries found there in 2015. Related: $10 Trillion Investment Needed To Avoid Massive Oil Price Spike Says OPEC

Despite Eni’s security concerns in Libya, the company really cannot leave the country. Eni’s Libyan production of 300,000 is almost 20 percent of its current production levels which averaged 1.7 million BOE per day in 3Q2015. Eni appears committed to Libya as a tool to hit its production target growth metrics going forward.

Speaking of the Libya market, Eni CEO Claudio Descalzi said on the last conference call, “Libya, so what we are experiencing there is that oil, gas and condensates, especially for regard the situation, so far is good. And we think that the gas that now is going about 60 percent for the domestic market is particular at the maximum rate. And our forecast is that it's going to continue at this rate. So and that results a positive signal because when they increased, Libya increased, the gas utilization disposal. So that is positive because it means better working and the situation is not too bad in all different cities. So for gas we are optimistic. For oil, the projection is not so optimistic because we need different facilities we need more maintenance, we need fair purchase then we need also the extra facility working operationally at the best. So the projection that remain in our calculation is in a steady state right now that Eni has not charged the maximum adjusted new percentages full potential.” Related: OPEC: $95 Oil, But Not Until 2040

None of that sounds like the company is ready to throw in the towel yet.

In fact, Eni may actually be becoming more comfortable with risk in its operational footprint as a result of the Libyan situation. The firm has been very aggressive in a number of other challenging geographies of late which may reflect increased confidence by management that the firm can deal with a unique set of risk factors. Eni is aggressively looking at opportunities in Iran, and is taking a risky position by investing in oil production in the Arctic. The firm is poised to start production from a field in the Barents Sea roughly 300 miles north of the Arctic circle which will eventually put out 100,000 BOE per day. Eni continued with that $6 billion project even as other oil companies have abandoned the area. Related: Competition Within OPEC Set To Intensify Amid Low Oil Prices

The tenacity that Eni is showing in Libya and elsewhere should serve the firm well in the medium term. As other companies abandon challenging markets and geographies, Eni should be able to earn attractive returns and offer shareholders a unique investment that differs from the standard oil major model. Perhaps that will help the company’s stock price as the oil industry finds itself wandering the proverbial desert of low oil prices. Either way, Eni is too deep in Libya to leave now.

By Michael McDonald of Oilprice.com

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