Eni CFO on climate change conundrum

When Francesco Gattei was made CFO of Italian energy giant Eni in August it could not have come at a more challenging moment. The falling oil price had forced billions of dollars of write-downs as the industry faced a fossil fuel backlash in response to climate change concerns.

But at the same time, Gattei and the rest of the Eni leadership team needed to find a way of operating despite coronavirus ripping through many of the 60-plus countries the ‘Supermajor’ operates in.

The immediate reaction of the Rome-headquartered group to the pandemic was to bring two thirds of its 30,000 global workforce, those on the corporate side, to remote working within 24 days, in response to Italy being the most hard-hit European country by early March.

Eni’s operating teams were able to continue working- employing a testing and quarantine protocol the company had developed. “We didn’t suffer any disruption related to Covid, we were not forced to stop operations,” says Gattei.

But the critical move to address the ongoing impact of coronavirus, in which global lockdowns have cut demand for oil and gas, was the launch of two hybrid bonds, the largest ever by an Italian company, raising €3bn in October.

The move eased pressure on Eni’s share price, which by mid-March had halved from around €14 at the start of the year, but has since recovered some ground to reach €8 by December- giving the group a market value of around €30bn by year end.

It was Gattei’s biggest contribution so far toward ensuring the group’s financial strength, after the 25-year Eni veteran (including eight years at Agip that was acquired by Eni in 2003), had been running the group’s businesses in North and South America.

Eni had already cut €2.3bn from 2020 capex in an emergency response to the pandemic, 30 percent lower than the initial targets, with further reductions of 30-35 percent lower than original plans for 2021.

But the fundraising gave Eni room to manoeuvre in an uncertain world. “I don’t want to be forced to take a decision due to rigidity in my financial capital. I want to be able to take an opportunity if any arises or to absorb a second or third wave [of the pandemic],” says Gattei.

“I don’t now see myself being uncomfortable from a financial point of view, as we have enough to pass through the crisis, in a way that is not forcing me to exit in a difficult position. The pandemic is not yet ended. But we can see the light, we can see the next thing, we can see a different trajectory,” he says.

Climate challenge

Gattei must now turn to the existential challenge that has been sidelined as the response to coronavirus took centre stage. But as the pandemic’s danger levels gradually lift as a worldwide vaccine rollout takes shape, energy demand that has been supressed by a collapse in travel, will resume- reigniting a global debate about energy consumption.

This will be fuelled by a renewed global political will to tackle climate change led by a new US president, after the Trump administration’s retreat from the COP21 treaty, which set the goal of limiting global warming to two degrees Celsius above pre-industrial levels.

Given that Eni has already taken write downs of over €5bn Eni across three business quarters, in response to the low crude oil price, Gattei must now navigate a route through the post-pandemic environment that will continue to be challenging.

“The world we left last February, due to limitations in our economical and personal life, will return. This third phase of the crisis, the returning to normality will see a demand for energy increase, and we have to be ready for this period,” he says.

Gattei acknowledges that a new administration in the US will raise the stakes re the climate change challenge. “there will be a different view about the international relationship and climate,” he says.

At the same time, Gattei says that a global economic recovery, driven by government spending, “in the US but probably not in Europe”, will also determine the medium-term landscape. “I expect more economical spending, more support and therefore more demand,” says Gattei.

The CFO of what was for many years Italy’s biggest company, before the fall of the oil price, says the chance is there for “taking a new opportunity and diversifying my business or changing my business towards the renewables sector,” he says.

But  Gattei then references the almost impossible challenge of resetting the business to a new paradigm in which a limited amount of carbon is released to ensure the COP 21 targets are met.

“As a traditional oil and gas company, we have to take advantage of this opportunity to improve the kind of products we are selling. But I don’t think that we need to remove the use of fossil fuel.

“We have to remove the use of carbon, not the fossil fuel, of the effects of the oil burning. We need it in the heavy industrial activity of burning molecules, [but] we should avoid the release of carbon into the atmosphere,” he says- without describing the technologies required to make that possible.

The disconnect between the COP 21 targets and the continued reliance of energy giants on fossil fuels- could lead to ‘stranded assets’ (reserves that may never be extracted  in order to meet those targets), many observers believe.

Eni is at least moving in the right direction. In December the group acquired 20 percent of the UK’s Dogger Bank offshore wind farm for £405m, the group’s latest foray into the renewables sector, as part of a plan to cut greenhouse gas emissions by 80 percent by 2050. “That is faster than the Paris agreement,” claims Gottei.

“That is our goal and we know that it is going to be achieved through a mix of technology such as carbon capture, of gas more than oil, and a mix of renewables,” says Gattei. But he stresses “it is not an evolution that is happening just by selecting the binary opportunity- the world is much more sophisticated and complicated than that,” he says.

Proximity to North Africa and its vast solar potential may be part of the renewables future, but at the moment that prospect is limited by “the investment required to keep the system at the right level of performance”, Gattei cautions.

 Contribution of finance

Where Gattei and the finance team can help pivot Eni to a position less heavily skewed to fossil fuels is by using tools that capture data on the changing value drivers across the group,  combining financial and non-financial data, to offer a template for long term, sustainable value creation. “We are collecting a lot of data, to get an enlarged 360 degrees perspective that is supporting as much as possible the evolution and the decision of the various businesses,” says Gottei.

He says this approach, using tools such as AI, can develop a long-term plan where climate change is a key element, “where you can play deeper or wider” in respect to portfolio activity scenario planning.

“We have been working with AI on a long journey on our industrial sites for exploration and prediction activity and also for avoiding accidents. But now in accounting we see more activity in digital automatisation. It is an area where we have to do more to enlarge the use of this tool because clearly, it will be necessary to match the speediness of the world,” he says.

Using these tools contrasts sharply with Gattei’s early career in Eni, in which he spent his first 15 years in the upstream areas of exploration and production, in planning and control, business development and M&A, including four years in Libya.

“I was exposed to factors you can’t see from the corporate centre, of the lack of resources, or other kinds of constraint, as well as cultural difference, on foreign assignments. The priorities and rules of the game are completely different working in Russia, Kazakhstan or in Africa,” he says.

A valuable experience was negotiating a joint venture deal to operate the Karachaganak field in Khazakstan, which involved understanding “the fundamentals behind the deal, the different levers of value, and taking a dynamic view of the contract.

“I realised then that in the oil and gas business, all the fundamentals can change. It’s about recognising how a specific asset is moving in a different price environment. And that was, for me, a very valuable experience.

“It’s like playing a chess game. If you’re not able to understand that culture, and you just play your way, you will never reach the endgame.

Then Gattei transferred to the corporate centre, taking on roles that encompassed strategy and investor relations. “I got exposure to the wider environment, understanding how the investment community is perceiving the company,” he says.

But in the group CFO role he is now able to exploit the full range of tools for capturing information about pricing, volume production, geopolitical factors, which he says compared to 15 or 20 20 years ago, is “uncomparable.”

Gattei says: “You are submersed in this data all the time. Now the CFO is to be able to process that data and understand what’s going on around you in a deeper and rapid way, generating decisions that advise the CEO and the other part of the business.

“The oil and gas business tended to be a conservative group of self-financing players that met continuously, who worked with a limited number of players and partners. Now that situation is becoming much more complicated, with more new players you are subjected to new pressures in terms of cash needs, in terms of capex.

“There is also pressure to cover the needs of transition to new energy sources for decarbonisation, to return cash to shareholders, and to disclose much more than before in reporting.

“All this means that you are being more integrated with the business and more creative and have more capability to add value to the company.

“You are in a racing car, where you can turn the accelerator on or off, to go faster and overcome your adversaries,” he says.

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