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Vol. 10, No. 35 Week of August 28, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Eni enters Alaska

Houston affiliate of Italian mega-major buys Armstrong’s North Slope assets

Kay Cashman

Petroleum News Executive Editor

Eni Petroleum Exploration Co. has purchased the assets of Armstrong Alaska, which include 104 oil and gas leases on the North Slope where Eni said “reserves are expected to exceed 170 million barrels.” The leases encompass 341,500 gross (273,000 net) acres onshore and offshore in state and federal waters (see map). As part of the deal Eni will inherit Armstrong’s minority working interests with Pioneer Natural Resources and Kerr-McGee in northern Alaska, including the proposed Oooguruk and Nikaitchuq developments (see related article below).

An affiliate of Italy’s Eni SpA, Houston-based Eni Petroleum told Petroleum News Aug. 26 that it considers the “North Slope and Beaufort Sea as areas with exploration potential for new finds” and said Eni has “decided to establish a position in the area with an emphasis of consistent growth.”

When asked if it is looking for other oil and gas properties in Alaska — and anything outside of northern Alaska — the company said it is “always looking for opportunities to further enhance its competitive presence in the areas where it operates. Alaska is no exception and Eni will consider all opportunities available, and continue to invest in regional studies to assess the potential of new areas, with special attention to the Beaufort and Chukchi sea areas.”

In response to written questions from Petroleum News, Eni wrote that it is “evaluating” whether or not to set up an office in Alaska. The company has not yet selected a person to oversee its Alaska assets, but said if an Alaska coordinator is named that person would report to Eni Petroleum’s Houston office which “manages E&P operations in (the) Gulf of Mexico and will also manage the operations in Alaska.”

Although Armstrong was the first company to cut a deal with Eni in Alaska, Eni made its decision to enter Alaska “based on its internal studies and evaluation, while keeping a close eye on all the available opportunities. In addition, Eni intends to leverage the experience gained from its operatorship in other challenging areas such as Kazakhstan, where there are similar requirements for high levels of technology, as well as analogous operating conditions.”

Eni’s comparison of Alaska to Kazakhstan could bode well for Alaska. Eni operates Kazakhstan’s huge Kashagan field in the Caspian Sea. Since it entered Kazakhstan in 1992 (10 months after the country’s independence from the former Soviet Union), Eni has made itself part of the new nation’s future. Among other things, Eni undertook the expense of training some of Kazakhstan’s new oil ministry employees at its headquarters in Italy and it funded the construction of the Kazakh national library.

When asked if Eni plans to be an operator in Alaska, the company said it operates in other Arctic areas, and “generally takes a leadership role in its joint ventures worldwide.”

Initially, Eni said it “intends to fully cooperate with its partners who operate some projects in the pre-development stage. It is Eni’s intention to bring its experience onboard while taking the time to understand the peculiarity and challenges of the area.” The company has not yet decided whether it will drill any of its 100 percent-owned acreage this coming winter: “It is too early to comment. This will be evaluated during our 2006 budget and planning process.”

Although Eni said it will evaluate the possibility of partnering with Shell on Shell’s planned Beaufort Sea seismic shoot for next summer, no decision will be made until Eni has completed its 2006 budget and planning process.

In Alaska, “as in all of its activities, Eni is fully committed to sustainable development and environmental protection of the areas in which it operates. In the Gulf of Mexico, Eni has received several nominations for Safety Awards from the Minerals Management Service,” the company said in its correspondence with Petroleum News.

Eni did not disclose the terms of its deal with Armstrong.

And when asked if it was looking at buying EnCana’s acreage in Alaska, Eni said no.

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Italy’s Eni SpA reaches around the globe

It may not be a household name in North America, but Italy’s Eni SpA is a major presence in the world oil industry, easily ranking in the top ten by any measure of company size. Fortune ranked the company 17th in its list of the 50 most profitable companies in the world, behind industry rivals ExxonMobil, Shell, BP, Chevron, Total and Malaysia’s Petronas.

In terms of production, Eni is about the size of ConocoPhillips, though its revenue is barely more than half the amount generated by the Houston company. By either measure, it’s significantly smaller than its European rivals.

But unlike some of the other super majors, Eni is making major gains in the amount of oil and gas it brings out of the ground.

In the second quarter, Eni’s production jumped 6.4 percent to 1.725 million barrels of oil equivalent daily, from 1.621 million BOE per day in the same period a year earlier. And that increase came despite the impact of production-sharing arrangements, where host countries take a slice of production that increases with higher oil prices. Profits rose 44 percent for the quarter.

Production rising

For the year as a whole, Eni is expecting a 5 percent gain in production, after showing 4 percent growth in 2004.

There are plenty of reasons to expect the company to meet that target. Last month, two big developments started producing major amounts of oil.

In Iran’s Darkhovin oil field near the border with Iraq, Eni started bringing in 55,000 barrels daily. That’s the first stage of a $1 billion project that will be pumping 160,000 bpd as early as the fourth quarter of next year.

Meanwhile, the Kissanje and Dikanza fields in deepwater offshore Angola started production, with 250,000 bpd expected by the end of the year. Eni’s share of that will be 45,000 bpd. Eni has a 20 percent share in that development, half as much as operator ExxonMobil. BP and Statoil are the other partners.

Overall, Eni’s reserves are more than 7.2 billion barrels of oil equivalent, most of it in Italy and Africa. It has 71,000 employees around the globe.

Active in U.S. Gulf

In the United States, Eni’s activities up to now have all been in the Gulf of Mexico, where the company’s deepwater drilling expertise has been a big asset. Total U.S production, all from the Gulf, runs about 45,000 bpd.

The company is operator and sole owner of Allegheny and Morpeth, and operates King Kong with a 50 percent interest. It is also involved in the Medusa, Timon and K2 fields in the Green Canyon.

Caspian role

Among the company’s big international projects is the giant Kashagan field in the Caspian Sea, where Eni is operator and holds an 18.5 percent interest. The field, with recoverable reserves estimated at up to 13 billion barrels, is expected to start production in 2008 and reach 1.2 million bpd at peak production. Eni also is co-operator of the Karachaganak field in Kazakhstan, with a 32.5 percent interest there and current production to the company of more than 70,000 bpd.

Just more than half of Eni’s oil reserves and production are in Africa, where the company has been operating for decades. It has been aided by U.S. laws and policies that have kept — or booted — some of its competitors out of countries such as Libya and Iran.

Eni is the leading international operator in Libya, where fields operated by the company produce nearly a fifth of Libya’s oil. The company also has a major presence in Italian neighbors Egypt and Algeria. It also operates fields accounting for about a tenth of Nigeria’s oil.

The company gets 25 percent of its oil production from North Africa, 28 percent from West Africa, 19 percent from its North Sea assets and 8 percent from Italy. The rest of the world provides 20 percent.

Mideast presence

The company is active in Iran at the big offshore South Pars gas concentration. Eni is also working in Saudi Arabia with a license for gas extraction in the Rub al Khali basin near Qatar and the United Arab Emirates.

In Asia, it’s a partner with ConocoPhillips in the Bayu-Undan field in the Timor Sea near Australia, which just started LNG production. Eni has a 12 percent interest there.

Earlier this year, Eni made a move toward Unocal, but bowed out after the bidding went well beyond the $58 a share Eni was reportedly willing to pay. Chevron won that one with an offer worth more than $66 for each Unocal share.

In oilfield services and contracting, Eni subsidiaries Saipem and Snamprogetti both have offices in Houston. Saipem leases a fleet of floating production and storage vessels as well as providing offshore drilling services, mainly in Africa, the Middle East, and the North Sea. It’s also been involved in the maintenance, modification and operations segment, taking over various oilfield operations for owner companies.

LNG expertise

The group has also been involved in major new LNG facilities, with Saipam promoting its expertise in design and construction of regasification facilities, tanks and vessels, as well as the offshore floating systems that may be used more extensively if terrorism concerns affect siting of onshore terminals.

Snamprogetti has been involved extensively in engineering and contracting for LNG facilities, as well as traditional natural gas processing units. It has been part of the construction and design group for seven liquefaction trains with total capacity of more than 26 million tonnes annually. The company is active in huge projects in Nigeria and Qatar, for example.

Eni has shown recent interest in LNG in the United States, announcing a contract with Sempra in early August to take capacity of 600 million cubic feet daily for 20 years at the proposed Cameron terminal in Louisiana.

Broad range of operations

Along with its E&P activities, Eni has an extensive refining and marketing operation in Italy under the Agip brand name. It has a power generation arm, and also natural gas transmission and pipeline operations in Italy. The pipeline business is likely to be sold, generating cash that could be used for other investments.

The company already has a major war chest of cash and stock — a recent Smith Barney report said it could afford to return up to $10 billion to stockholders. Indeed, the company had been buying back stock under former CEO Vittorio Mincato.

Future direction unclear

But Mincato was replaced in June by Paolo Scaroni, who was picked for the job by the Italian government. Scaroni, who has scarce background in the oil industry, came from Enel SpA, a huge utility that, like Eni, is government-controlled.

Scaroni hasn’t detailed his vision for the company’s future, and his own future as well as the company’s direction could change if the Italian government takes advantage of high oil prices and cashes out its 30 percent stake in Eni to pay off some of the country’s debt.

—Allen Baker