Enel Readies To Sell E&P Interests, Increasing Focus on Regulated Assets
Natural Gas Europe had the pleasure to speak with Marco Arcelli, Head of Upstream Gas at Enel Group. Italy's largest utility made headlines in September and October, stealing the scene for its firm intention to push ahead with domestic natural gas exploration to decrease Italy's reliance on imports and decrease gas prices. For several weeks, Enel set the tone for the following discussions in Italy, and Europe.
In this interview, Enel committed to decrease its exposure in the E&P business in Italy and/or in Algeria. Apparently, the company wants to develop fields and reap the benefits, securing an alternative to its existing gas contracts that should start expiring around 2018. Nonetheless, this approach to developments would not imply the final ownership of the assets - the important element is that the gas is available.
"Through our activity, we have been supporting new production going online in Italy and Algeria, whose volumes are key to maintaining a safe demand/supply balance" says Arcelli.
In this sense, Enel is not considering new initiatives, but its activities in Algeria and Italy could be a good proxy for E&P activities, electricity production, and stability in the two Mediterranean countries.
Could you please elaborate on Enel’s strategy in the Upstream segment?
Over the years we have built a great portfolio – focused, material, low risk and with further upside potential – and we are now working towards our projects in Italy and Algeria being brought online within the next few years. Nevertheless, Enel will increase its focus on contracted and regulated assets with flexible spending and a short time to EBITDA. Accordingly, we do not expect to increase our presence in the E&P business, and after receiving several expressions of interest, we are evaluating a possible sale. After all, the sale of our Russian upstream assets in 2013 achieved capital gains of almost 1.6 billion US dollars, demonstrating the value that we had built through our investments. During this period we will continue to move our projects forward and manage them in such a way as to deliver their full value and meet all our commitments.
Enel wrote that the production from gas fields will guarantee part of the gas needed to fuel Enel power plants, allowing partial independence from its existing supply contracts, which expire around 2017-2018. What does that mean?
Enel has a large portfolio of gas contracts that will begin to expire around 2018, and we are developing fields that will start production around the same time. Whether we continue to be the owner or not, this will add to our ability to access secure and competitive supplies in the coming years. Through our activity, we have been supporting new production going online in Italy and Algeria, whose volumes are key to maintaining a safe demand/supply balance and offering reliable supply alternatives.
Our commitment to security of energy supplies will not stop if we end up exiting the upstream business, but rather will continue in another form, through investments in renewables and grids. If you look at our involvement in Africa for example, we will focus on reducing local need for hydrocarbons, while continuing to ensure they have sufficient energy to sustain their economic growth.
Secondly, European gas markets are becoming increasingly liquid, and this enhanced liquidity is giving us more room to operate in short-term markets in addition to contracting gas supplies through long-term agreements.
Speaking about Upstream prospects in North Africa, what is your main focus?
In Algeria we have built a portfolio of assets that is unique to the industry: we are participating in four projects that overall account for about 25-30% of all the resources that will be brought into production by international companies over the next decade. From 2018 our projects will bring one new field into production every two-three years, each with a production plateau of billions of cubic metres.
We have one of the four projects currently in development (Isarene, in which we are working together with Sonatrach and Petroceltic), and we have three out of eight exploration and appraisal licences. The first is South East Illizi, where we have just announced a third discovery and we are beginning to work with our partners Sonatrach, Repsol and GDFSuez on pre-conceptual development schemes while we continue to drill four more appraisal wells. The other two are Msari Akabli, where we have the role of operator, and Tinrhert Nord, where we are working with Dragon Oil as operator. The latter two are in the initial exploration period, but considerable resources have already been found.
Overall, it is a very interesting and material set of assets.
In October, Enel signed contracts for two exploration blocks in Algeria. What is the timing for these and other developments in the country?
In January we started the initial exploration phase at Msari Akabli and Tinhrert, which will last three years. During this time, new seismic data should be acquired and seven wells on the two blocks are due to be drilled.
Shortly we will be entering the third exploration phase at South East Illizi, which will last two years. We expect to complete assessment of our discoveries so that we can decide to what extent they can be developed.
At Isarene we are working on the Front End Engineering Design (FEED), we have started the selection of EPC contractors and we have recently awarded the main drilling contracts.
What is the situation in Libya? Do you have any gas assets there? How do you plan to proceed?
We do not have operations in Libya.
Over the last months, Egypt signed a flurry of exploration deals. Cairo also signed deals to increase the purchase price of gas extracted from new fields by around 40%. Do you see any room for investment there?
Clearly, as we are currently evaluating a possible sale, we are not looking at new initiatives, but we continue to monitor developments in all the Mediterranean as they will have an impact on the European and North African gas markets in which we operate.
Do you think that cooperation with other companies in North Africa could help Enel optimise its Upstream portfolio? How?
We have already cooperated at a project level with Dragon Oil during the last bid round in Algeria, but we also believe in more structured cooperation. After all, success of upstream operations depends on scale, as well as good operations and risk management.
Changing topic, what is the role of conventional (Upstream gas) resources in Italy? How do you intend to proceed in this field?
Italy has a treasure under its feet. A series of experts estimate that it could cover about 20% of demand for at least 20 years at a cost that is 20-30% lower than imports, generating 2 billion euros of additional fiscal revenues for the administration and reducing the energy bill and the trade balance by 6 billion euros, while creating 100,000 jobs over four years. There is probably no other industry that has this potential for wealth creation for the local population with this degree of certainty and in such a short period.
Enel has built an important exploration portfolio, which is comprised of one project in development in the Po Valley plus four “near field” prospects found thanks to the excellent work of our geological experts and a constructive approach with all the involved agencies and communities. Additionally we have several high-impact plays that could be tested in the coming years. Developing these resources would create the basis for another industrial and economic boom like the one Italy experienced at the time its oil&gas industry was first developed in the 1950s and 1960s, but with even greater care for the environment thanks to the developments in technology since then.
You said that gas output in Italy could meet 20% of the national demand by 2020. You explained that the price of domestic gas could be 30% lower than imported gas. What is the timing (licences, exploration activities, production) and what would be the price range for this “domestic gas”? Would production in Italy make sense also under the current market conditions?
We do have a treasure, and now we have to use the key to unlock it. That key is the permitting process. There have been positive signals that several projects will be given the green light in 2015, so fieldwork could begin in 2016. And yes, the current market conditions support new investments.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. Follow him on Twitter: @SergioMatalucci
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