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“Oil is the hostage of speculation, Africa is paying for the price crisis,” ENI CEO Descalzi says

by Roberto Bongiorni

Ahead of the meetings in St. Petersburg, where the OPEC countries, Russia and other producers will try to find a solution for the low oil price, the chief executive of ENI, Claudio Descalzi, invited to a forum with Il Sole 24 Ore-ItalyEurope24, is not optimistic on the possibility of an agreement. For the CEO of the Italian oil major, it is a difficult moment. The geopolitical situation is explosive, and involves several OPEC countries, there is the shadow of U.S. shale gas which still today is facing over-production, and markets increasingly at the mercy of speculation are preventing low oil prices from emerging from a three-year crisis. The result, for Descalzi, is dramatic, above all in Africa, where the price of oil for many exporters is 30-50% below their breakeven. It is a market without rules which Descalzi describes, which has led to the loss of 470,000 jobs in the energy sector, throwing millions into poverty.

BONGIORNI: It is difficult to imagine then that new production cuts will be decided to resolve the prices?

DESCALZI: I am not optimistic. The oil commodity has entered a difficult crisis. There is less confidence also among institutional investors, who normally have long positions and today they have become shorters. In this way space has been given to hedge funds and speculators. Probably they do not believe that OPEC is capable of taking radical initiatives. And today several sub-Saharan African countries are in serious difficulties.

BONGIORNI. Therefore poverty and the migration flows are also the result of this distorted mechanism?

DESCALZI: The moment is difficult, and speculation is strong. There are speculators that are making maybe billions of dollars. It is a market without rules, which is destroying the primary industry and in the energy sector it has burned 470,000 jobs in three years. Millions of people are affected. Africa is exploding: the lack of diversification of the economies and the absence of wealth distribution is contributing to poverty and to migration flows.

BONGIORNI: Natural gas risks seeing an excess of supply, which could pressure the already low prices. The U.S. intend to become the second global exporter of liquefied natural gas (LNG) focusing on Europe and Asian markets.

DESCALZI. The U.S. are experiencing a phase of excess, the market has grown a lot thanks to shale gas. U.S. President Donald Trump offered to sell LNG in Poland but imposing a political accord is difficult. At the end it is the prices that count. The U.S. will encounter great difficulty in Europe for the gap, to their disadvantage, of prices. It would not be difficult for Gazprom, which supplies Europe with about 170-180 billion cubic meters, to cut them out, all they would need to do is lower the price by a few cents.

BONGIORNI: Doesn’t the doubling of the Nord Stream gas pipeline, which connects Russia and Germany through the Baltic Sea, risk jeopardizing ENI’s expansion plans?

DESCALZI: The Nord Stream is not a problem, neither for ENI nor for Italy. Europe will have to import more gas and it is important to create differentiated access. We cannot do without Russia: it produces the least expensive gas and it can go up to 250 billion cubic metres per year. For Northern European countries the doubling of the Nord Stream has its logic. ENI should not purchase all the gas it needs from the North: Italy needs to get its supply from pipelines from the South because this reduces the prices for consumers. ENI has big potential, 120-125 billion capacity in reception and transportation and we use 62-70 billion. We could convey 50-60 billion to the North. The gas we receive must come from the South, from Libya, Algeria, the Eastern Mediterranean area.

BONGIORNI. Total has just signed an agreement for the exploitation of a big gas field in Iran. What is preventing ENI from doing the same?

DESCALZI: We are happy that Total is in Iran. We are not competing to be the number one. We have been the only company operating in Iran for 15 years and we are still there. ENI as well has signed an agreement, a month and a half ago, with Iranian oil company NIOC, to develop oil (Darkhovin) and gas (Kish) fields. ENI is in a different position with respect to its competitors. In the last seven years, we found fields for 14 billion barrels, under one dollar per barrel, which means that the cost of developing these fields are very low. We are also present in many, many countries, among which there are Libya, Egypt and Venezuela. ENI is active in Nigeria, Angola, Congo, Ghana, Kenya and Mozambique, without forgetting the important findings in Mexico.

BONGIORNI: Libya is an El Dorado of oil and natural gas: it has the largest crude oil reserves in Africa (49 billion barrels) and rather low production costs. Before the revolution, it produced 1.6 million barrels of oil per day. From 2014, that has fallen to an average of just 350,000-400,000 barrels per day. Now production has returned over 1 million barrels. But political instability is still very high. What is the strategy of ENI, which has always been the top foreign operator in Libya? Are you also trying to contribute to stabilize the country?

DESCALZI: Libya is our top country in terms of production. From 2010 until today we have managed to maintain our production unchanged, at about 300,000 barrels of oil equivalent per day. We have achieved a miracle, thanks to the use of local staff. We have invested a lot in training. But above all we continue to invest risk capital in Libya. Both in offshore but also on the coast to give the population the energy it needs. In 2008, ENI supplied 700 million cubic meters of gas to the electricity system. Today we have reached 7 billion. The Libyans recognize this. ENI has never left Libya on its own. We could have exported 10 billion cubic meters to Italy. Instead we decided to export 4 and allocate 6 to the Libyan market.

BONGIORNI: But in this way is there not a risk of reducing profits in a county which is among the riskiest states?

DESCALZI: It is a decision that reduces profit, but it has increased the value and the sustainability of our strategy, concentrating on the social front and the environment. The energy system, which has investment times that even last 12 years, cannot be judged in three months. It is better to invest over the longer period, accepting a reduction in profits and taking on some risks. It is necessary to invest in the company to be more credible. And you are credible only if you assume some risks. The other foreign competitors have not produced in Libya for six years. We remain the top operators. All our oilfields are working. And we could double gas flows from Libya to Italy.