| ||
UNITED STATES |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
OR | ||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 200 | ||
OR | ||
![]() | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ | |
OR | ||
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report |
Commission file number: 1-14090
Eni SpA
(Exact Namename of Registrant as Specifiedspecified in Its Charter)its charter)
Republic of Italy
(Jurisdiction of Incorporationincorporation or Organization)organization)
Piazzale1, piazzale Enrico Mattei 1,
00144 Rome, Roma
Italy
(Address of Principal Executive Offices)principal executive offices)
Alessandro Bernini
Eni SpA
1, piazza Ezio Vanoni
San Donato Milanese
20097 Milano
Italy
Tel +39 02 52041730
Fax +39 02 52041765
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
————————————————————
Securities registered or to be registered pursuant to Section 12(b) of the Act:Act.
Title of each class | Name of each exchange on which registered | |
Shares | New York Stock Exchange* | |
(Which represent the right to receive two Shares) | * Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NoneNone.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None.None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary shares of euro 1.00 each4,005,358,876
Indicate by check mark whetherif the Registrantregistrant is a well knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act:Act.
Yes | No |
If this report is an annual or transition report, indicate by check mark whetherif the Registrantregistrant is nornot required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:1934.
Yes | No |
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:days.
Yes | No |
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of "Accelerated"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act:Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP | International Financial Reporting Standards as issued by the International Accounting Standards Board | Other |
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement Itemitem the Registrantregistrant has elected to follow:follow.
Item 17 | Item 18 |
If this is an annual report, indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):.
Yes | No |
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Presentation of Financial and Other Information
Statements Regarding Competitive Position
i | i | Page | ||
Certain Defined Terms | i | ii | ||
Presentation of Financial and Other Information | i | ii | ||
Statements Regarding Competitive Position | i | ii | ||
Glossary | i | iii | ||
Abbreviations and Conversion Table | i | vi |
ii | i | i | i | i |
PART I | i | i | i |
Item 11. | i | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK | i | 161 |
Item 12. | i | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES | ||
i | 161 | |||
i | i | i | i | |
PART II | i | i | i | i |
Item 13. | i | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES | i | 162 |
Item 14. | i | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | i | 162 |
Item 15. | i | CONTROLS AND PROCEDURES | i | 162 |
Item 16. | i | i | ||
i | Board of Statutory Auditors Financial Expert | i | 163 | |
i | Code of Ethics | i | 163 | |
i | Principal Accountant Fees and Services | i | 163 | |
i | Exemptions from the Listing Standards for Audit Committees | i | 164 | |
i | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | |||
i | 164 | |||
i | Corporate Governance Practices | i | 165 | |
i | ii | i | i | i |
PART III | i | i | i | i |
Item 17. | i | FINANCIAL STATEMENTS | i | 168 |
Item 18. | i | FINANCIAL STATEMENTS | i | 168 |
Item 19. | i | EXHIBITS |
i
Certain disclosures contained herein including, without limitation, information appearing in "Item 4 – Information on the Company", and in particular "Item 4 – Exploration & Production", "Item“Item 5 – Operating and Financial Review and Prospects"Prospects” and "Item 11 – Qualitative and Quantitative Disclosures about Market Risk" contain forward-looking statements regarding future events and the future results of Eni that are based on current expectations, estimates, forecasts, and projections about the industries in which Eni operates and the beliefs and assumptions of the management of Eni. Eni may also make forward-looking statements in other written materials, including other documents filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). In addition, Eni’s senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. In particular, among other statements, certain statements with regard to management objectives, trends in results of operations, margins, costs, return on capital, risk management and competition are forward looking in nature. Words such as ‘expects’, ‘anticipates’, ‘targets’, ‘goals’, ‘projects’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict because they relate to events and depend on circumstances that will occur in the future. Therefore, Eni’s actual results may differ materially and adversely from those expressed or implied in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 20-F under the section entitled "Risk Factors" and elsewhere. Any forward-looking statements made by or on behalf of Eni speak only as of the date they are made. Eni does not undertake to update forward-looking statements to reflect any changes in Eni’s expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any further disclosures Eni may make in documents it files with the SEC.
CERTAIN DEFINED TERMS
In this Form 20-F, the termterms "Eni", the "Group", or the "Company" refersrefer to the parent company Eni SpA and its consolidated subsidiaries and, unless the context otherwise requires, their respective predecessor companies. All references to "Italy" or the "State" are references to the Republic of Italy, all references to the "Government" are references to the government of the Republic of Italy. For definitions of certain oil and gas terms used herein and certain conversions, see "Certain Oil and Gas Terms""Glossary" and "Conversion Table".
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
The Consolidated Financial Statements of Eni, included in this annual report, have been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB) and adopted by the European Commission following the procedure contained in Article 6 of the EC Regulation No. 1606/2002 of the European Parliament and Council of July 19, 2002. Until December 31, 2004, Eni prepared its Consolidated Financial Statements and other interim financial information (including quarterly and semi-annual data) in accordance with Italian GAAP. IFRS require adopting companies to restate only one year of past financial statements. Pursuant to SEC Release 33-8567, "First-time Application of International Financial Reporting Standards", Eni is not required to include in this annual report financial statements for any earlier periods. Accordingly this annual report includes financial information prepared in accordance with IFRS as of and for the two years ended December 31, 2004 and 2005.
IFRS, under which Eni’s Consolidated Financial Statements have been prepared, differ in certain significant respects from U.S. GAAP. For information on the differences between IFRS and U.S. GAAP as they relate to Eni, see Notes 33, 34 and 35 to Eni’s Consolidated Financial Statements included herein..
Unless otherwise indicated, any reference herein to "Consolidated Financial Statements" is to the Consolidated Financial Statements of Eni (including the Notes thereto) included herein.
Unless otherwise specified or the context otherwise requires, references herein to "dollars", "$", "U.S. dollars" and "U.S. $" are to the currency of the United States, and references to "euro" and "€" are to the currency of the European Monetary Union.
STATEMENTS REGARDING COMPETITIVE POSITION
Statements made in "Item 4 – Information on the Company", referring to Eni’s competitive position are based on the company’sCompany’s belief, and in some cases rely on a range of sources, including investment analysts’ reports, independent market studies and Eni’s internal assessment of market share based on publicly available information about the financial results and performance of market participants. Market share estimates contained in this document are based on management estimates unless otherwise indicated.
ii
GLOSSARY
A glossary of oil and gas terms is available on Eni’s web page at the address www.eni.it. Below is a selection of the most frequently used terms.
Financial | ||
Leverage | ||
Net borrowings | Eni evaluates its financial condition by reference to "net borrowings", which is a non-GAAP measure. Eni calculates net borrowings as total finance debt less: cash, cash equivalents and certain very liquid investments not related to operations, including among others non-operating financing receivables and securities not related to operations. Non-operating financing receivables consist of amounts due to Eni’s financing subsidiaries from banks and other financing institutions and amounts due to other subsidiaries from banks for investing purposes and deposits in escrow. Securities not related to operations consist primarily of government and corporate securities. For a discussion of management’s view of the usefulness of this measure and its reconciliation with the most directly comparable GAAP measure which in the case of the Company refers to IFRS, see "Item 5 – Financial Condition". | |
TSR (Total Shareholder Return) | Management uses this measure to asses the total return of the Eni share. It is calculated on a yearly basis, keeping account of changes in prices (beginning and end of year) and dividends distributed and reinvested at the ex-dividend date. | |
Business terms | ||
Associated gas | Natural gas, occurring in the form of a gas cap, overlying an oil zone, contained in the reservoir’s crude oil gas. | |
Average reserve life index | Ratio between the amount of reserves at the end of the year and total production for the year. | |
Barrel/BBL | Volume unit corresponding to 159 liters. A barrel of oil corresponds to about 0.137 metric tons. | |
BOE | Barrel of Oil Equivalent. It is used as a standard unit measure for oil and natural gas. The latter is converted from standard cubic meters into barrels of oil equivalent using a certain coefficient (see "Conversion Table"). | |
Concession contracts | Contracts currently applied mainly in Western countries regulating relationships between states and oil companies with regards to hydrocarbon exploration and production. The company holding the mining concession has an exclusive on exploration, development and production activities and for this reason it acquires a right to hydrocarbons extracted against the payment of royalties on production and taxes on oil revenues to the state. | |
Condensates | These are light hydrocarbons produced along with gas that condense to a liquid state at surface temperature and pressure. | |
Conversion capacity | Maximum amount of | |
Conversion index | Ratio of capacity of conversion facilities to primary distillation capacity. The higher the ratio, the higher is the capacity of a refinery to obtain high value products from the heavy residue of primary distillation. | |
Deep waters | Waters deeper than 200 meters. | |
Development | Drilling and other post-exploration activities aimed at the production of oil and gas. | |
iii
Enhanced recovery | Techniques used to increase or stretch over time the production of wells. | |
EPC | Engineering, Procurement and Construction. | |
EPIC | Engineering, Procurement, Installation and Construction. | |
Exploration | Oil and natural gas exploration that includes land surveys, geological and geophysical studies, seismic data gathering and analysis and well drilling. | |
FPSO | Floating Production Storage and Offloading System. | |
FSO | Floating Storage and Offloading System. | |
Infilling wells | Infilling wells are wells drilled in a producing area in order to improve the recovery of hydrocarbons from the field and to maintain and/or increase production levels. | |
LNG | Liquefied Natural Gas obtained through the cooling of natural gas to minus 160 °C at normal pressure. The gas is liquefied to allow transportation from the place of extraction to the sites at which it is transformed back into its natural gaseous state and consumed. One tonne of LNG corresponds to 1,400 cubic meters of gas. | |
LPG | Liquefied Petroleum Gas, a mix of light petroleum fractions, gaseous at normal pressure and easily liquefied at room temperature through limited compression. | |
Margin | The difference between the average selling price and direct acquisition cost of a finished product or raw material excluding other production costs (e.g. refining margin, margin on distribution of natural gas and petroleum products or margin of | |
Mineral Storage | According to Legislative Decree No. 164/2000, these are volumes required for allowing optimal operation of natural gas fields in Italy for technical and economic reasons. The purpose is to ensure production flexibility as required by long-term purchase contracts as well as to cover technical risks associated with production. | |
Modulation Storage | According to Legislative Decree No. 164/2000, these are volumes required for meeting hourly, daily and seasonal swings in demand. | |
Natural gas liquids (NGL) | Liquid or liquefied hydrocarbons recovered from natural gas through separation equipment or natural gas treatment plants. Propane, normal-butane and isobutane, isopentane and pentane plus, that were previously defined as natural gasoline, are natural gas liquids. | |
Network Code | A code containing norms and regulations for access to, management and operation of natural gas pipelines. | |
Over/Under lifting | Agreements stipulated between partners which regulate the right of each to its share in the production for a set period of time. Amounts lifted by a partner different from the agreed amounts determine temporary Over/Under lifting situations. | |
Primary balanced refining capacity | Maximum amount of feedstock that can be processed in a refinery to obtain finished products measured in BBL/d. | |
Production Sharing Agreement ("PSA") | Contract in use in African, Middle Eastern, Far Eastern and Latin American countries, among others, regulating relationships between states and oil companies with regard to the exploration and production of hydrocarbons. The | |
iv
Proved reserves | Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of the impact of changes | |
Reserve life index | Ratio between the amount of proved reserves at the end of the year and total production for the year. | |
Reserve replacement ratio | Measure of the reserves produced replaced by proved reserves. Indicates the company’s ability to add new reserves through exploration and purchase of property. A rate higher than 100% indicates that more reserves were added than produced in the period. The ratio should be averaged on a | |
Ship-or-pay | Clause included in natural gas transportation contracts according to which the customer is requested to pay for the transportation of gas whether or not the gas is actually transported. | |
Strategic Storage | According to Legislative Decree No. 164/2000, these are volumes required for covering lack or reduction of supplies from extra-European sources or crises in the natural gas system. | |
Take-or-pay | Clause included in natural gas supply contracts according to which the purchaser is bound to pay the contractual price or a fraction of such price for a minimum quantity of gas set in the contract whether or not the gas is collected by the purchaser. The purchaser has the option of collecting the gas paid for and not delivered at a price equal to the residual fraction of the price set in the contract in subsequent contract years. | |
Upstream/Downstream | The term upstream refers to all hydrocarbon exploration and production activities. The term downstream includes all activities inherent to the oil and gas sector that are downstream of exploration and production activities. |
v
ABBREVIATIONS
mmCF | = | million cubic feet | ktonnes | = | thousand tonnes | |
BCF | = | billion cubic feet | mmtonnes | = | million tonnes | |
mmCM | = | million cubic meters | MW | = | megawatt | |
BCM | = | billion cubic meters | GWh | = | gigawatthour | |
BOE | = | barrel of oil equivalent | TWh | = | terawatthour | |
KBOE | = | thousand barrel of oil equivalent | /d | = | per day | |
mmBOE | = | million barrel of oil equivalent | /y | = | per year | |
BBOE | = | billion barrel of oil equivalent | E&P | = | the Exploration & Production segment | |
BBL | = | barrels | G&P | = | the Gas & Power segment | |
KBBL | = | thousand barrels | R&M | = | the Refining & Marketing segment | |
mmBBL | = | million barrels | E&C | = | the Engineering & Construction segment | |
BBBL | = | billion barrels | ||||
CONVERSION TABLE
1 acre | = | 0.405 hectares | ||
1 barrel | = | 42 U.S. gallons | ||
1 BOE | = | 1 barrel of crude oil | = | 5,742 cubic feet of natural gas |
1 barrel of crude oil per day | = | approximately 50 tonnes of crude oil per year | ||
1 cubic meter of natural gas | = | 35.3147 cubic feet of natural gas | ||
1 cubic meter of natural gas | = | approximately 0.00615 barrels of oil equivalent | ||
1 kilometer | = | approximately 0.62 miles | ||
1 short ton | = | 0.907 tonnes | = | 2,000 pounds |
1 long ton | = | 1.016 tonnes | = | 2,240 pounds |
1 tonne | = | 1 metric ton | = | 1,000 kilograms |
= | approximately 2,205 pounds | |||
1 tonne of crude oil | = | 1 metric ton of crude oil | = | approximately 7.3 barrels of crude oil (assuming an API gravity of 34 degrees) |
vi
PART I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
NOT APPLICABLE
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
NOT APPLICABLE
Item 3. KEY INFORMATION
Selected Financial InformationInformation
The Consolidated Financial Statements of Eni have been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB) and adopted by the European Commission following the procedure contained in Article 6 of the EC Regulation No. 1606/2002 of the European Parliament and Council of July 19, 2002. Until December 31, 2004, Eni prepared its Consolidated Financial Statements and other interim financial information (including quarterly and semi-annual data) in accordance with Italian GAAP. IFRS require adopting companies to restate only one year of past financial statements. Pursuant to SEC Release 33-8567, "First-time Application of International Financial Reporting Standards", Eni is not required to include in this annual report financial statements for any earlier periods. Accordingly the. The tables below show Eni selected historical financial data prepared in accordance with IFRS as of and for the years ended December 31, 2004, 2005, 2006, 2007 and 2005 and in accordance with U.S. GAAP for the five year period ended December 31, 2005.2008. The selected historical financial data for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 are derived from Eni’s Consolidated Financial Statements included herein. IFRS, under which Eni’sin Item 18. All such data should be read in connection with the Consolidated Financial Statements have been prepared, differand the related notes thereto included in certain significant respects from U.S. GAAP. For information on the differences between IFRS and U.S. GAAP as they relate to the Eni, see Notes 33, 34 and 35 to the Eni’s Consolidated Financial Statements.
Item 18.
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |||||
(euro million |
CONSOLIDATED PROFIT STATEMENT DATA | |||||||||||||||
Amounts in accordance with IFRS (euro): | |||||||||||||||
Net sales from operations | 57,545 | 73,728 | |||||||||||||
Operating profit | |||||||||||||||
Exploration & Production | 8,185 | 12,574 | |||||||||||||
Gas & Power | 3,428 | 3,321 | |||||||||||||
Refining & Marketing | 1,080 | 1,857 | |||||||||||||
Petrochemicals | 320 | 202 | |||||||||||||
Oilfield Services Construction and Engineering | 203 | 307 | |||||||||||||
Other activities | - | (395 | ) | (902 | ) | ||||||||||
Corporate and financial companies | (363 | ) | (391 | ) | |||||||||||
Unrealized profit in inventory (1) | (59 | ) | (141 | ) | |||||||||||
Operating profit | 12,399 | 16,827 | |||||||||||||
Net profit pertaining to Eni | 7,059 | 8,788 | |||||||||||||
Data per ordinary share (euro) (2): | |||||||||||||||
Operating profit | 3.29 | 4.48 | |||||||||||||
Net profit: basic and diluted | 1.87 | 2.34 | |||||||||||||
Data per ADS ($) (2) (3): | |||||||||||||||
Operating profit | 8.91 | 10.61 | |||||||||||||
Net profit: basic and diluted | 5.06 | 5.54 | |||||||||||||
Amounts in accordance with U.S. GAAP (euro): | |||||||||||||||
Net sales from operations | 45,848 | 43,632 | 48,018 | 54,698 | 70,331 | ||||||||||
Operating profit (4) | 8,853 | 7,861 | 9,215 | 11,739 | 15,528 | ||||||||||
Profit before cumulative effect of change in accounting principle and income taxes | 10,330 | 8,350 | 9,274 | 12,324 | 16,281 | ||||||||||
Net profit before cumulative effect of change in accounting principle | 6,098 | ||||||||||||||
Effect of adoption of SFAS No. 143 | 198 | ||||||||||||||
Net profit | 6,317 | 5,292 | 6,296 | 6,401 | 7,583 | ||||||||||
Data per ordinary share (euro) (2): | |||||||||||||||
Operating profit | 2.26 | 2.05 | 2.44 | 3.11 | 4.13 | ||||||||||
Net profit: basic and diluted | 1.62 | 1.38 | 1.67 | 1.70 | 2.02 | ||||||||||
Data per ADS ($) (2) (3): | |||||||||||||||
Operating profit | 4.02 | 4.30 | 6.15 | 8.42 | 9.78 | ||||||||||
Net profit: basic and diluted | 2.88 | 2.89 | 4.21 | 4.60 | 4.78 |
CONSOLIDATED PROFIT STATEMENT DATA | |||||||||||||||
Net sales from operations | 57,545 | 73,728 | 86,105 | 87,256 | 108,148 | ||||||||||
Operating profit by segment | |||||||||||||||
Exploration & Production | 8,185 | 12,592 | 15,580 | 13,788 | 16,415 | ||||||||||
Gas & Power | 3,428 | 3,321 | 3,802 | 4,127 | 3,933 | ||||||||||
Refining & Marketing | 1,080 | 1,857 | 319 | 729 | (1,023 | ) | |||||||||
Petrochemicals | 320 | 202 | 172 | 74 | (822 | ) | |||||||||
Engineering & Construction | 203 | 307 | 505 | 837 | 1,045 | ||||||||||
Other activities | (395 | ) | (934 | ) | (622 | ) | (444 | ) | (346 | ) | |||||
Corporate and financial companies | (363 | ) | (377 | ) | (296 | ) | (217 | ) | (686 | ) | |||||
Impact of unrealized intragroup profit elimination (1) | (59 | ) | (141 | ) | (133 | ) | (26 | ) | 125 | ||||||
Operating profit | 12,399 | 16,827 | 19,327 | 18,868 | 18,641 | ||||||||||
Net profit attributable to Eni | 7,059 | 8,788 | 9,217 | 10,011 | 8,825 | ||||||||||
Data per ordinary share (euro) (2) | |||||||||||||||
Operating profit: | |||||||||||||||
- basic | 3.29 | 4.48 | 5.23 | 5.14 | 5.12 | ||||||||||
- diluted | 3.28 | 4.47 | 5.22 | 5.14 | 5.12 | ||||||||||
Net profit attributable to Eni basic and diluted | 1.87 | 2.34 | 2.49 | 2.73 | 2.43 | ||||||||||
Data per ADR ($) (2) (3) | |||||||||||||||
Operating profit: | |||||||||||||||
- basic | 8.18 | 11.14 | 13.13 | 14.10 | 15.07 | ||||||||||
- diluted | 8.17 | 11.12 | 13.12 | 14.10 | 15.07 | ||||||||||
Net profit attributable to Eni basic and diluted | 4.66 | 5.82 | 6.26 | 7.48 | 7.14 |
1
As of December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |||||
(euro million |
CONSOLIDATED BALANCE SHEET DATA | ||||||||||
Amounts in accordance with IFRS: | ||||||||||
Total assets | 72,853 | 83,850 | ||||||||
Short-term and long-term debt | 12,684 | 12,998 | ||||||||
Capital stock issued | 4,004 | 4,005 | ||||||||
Amounts in accordance with U.S. GAAP: | ||||||||||
Total assets | 64,976 | 66,122 | 71,995 | 72,354 | 82,977 | |||||
Short-term and long-term debt | 12,379 | 15,320 | 16,144 | 12,697 | 12,954 | |||||
Capital stock issued | 4,001 | 4,002 | 4,003 | 4,004 | 4,005 | |||||
Other Financial Information in accordance with IFRS: | ||||||||||
Capital expenditure | 7,499 | 7,414 | ||||||||
Weighted average number of ordinary shares outstanding (shares million) | 3,912 | 3,827 | 3,778 | 3,772 | 3,759 | |||||
Dividend per share (euro) | 0.750 | 0.750 | 0.750 | 0.900 | 1.100 | |||||
Dividend per ADS ($) (5) | 1.48 | 1.71 | 1.83 | 2.17 | 2.63 |
CONSOLIDATED BALANCE SHEET DATA | ||||||||||
Total assets | 72,853 | 83,850 | 88,312 | 101,460 | 116,590 | |||||
Short-term and long-term debt | 12,684 | 12,998 | 11,699 | 19,830 | 20,837 | |||||
Capital stock issued | 4,004 | 4,005 | 4,005 | 4,005 | 4,005 | |||||
Minority interest | 3,166 | 2,349 | 2,170 | 2,439 | 4,074 | |||||
Shareholders’ equity - Eni share | 32,374 | 36,868 | 39,029 | 40,428 | 44,436 | |||||
Capital expenditures | 7,499 | 7,414 | 7,833 | 10,593 | 14,562 | |||||
Weighted average number of ordinary shares outstanding (fully diluted - shares million) | 3,775 | 3,763 | 3,701 | 3,669 | 3,639 | |||||
Dividend per share (euro) | 0.90 | 1.10 | 1.25 | 1.30 | 1.30 | |||||
Dividend per ADR ($) (2) | 2.17 | 2.73 | 3.24 | 3.74 | 3.72 |
(1) | i |
(2) | i | Euro per |
(3) | i | |
2
Selected Operating Information
The tabletables below setsset forth selected operating information with respect to Eni’s proved reserves, developed and undeveloped, of crude oil (including condensates and natural gas liquids) and natural gas, as well as other data as of and for the years ended December 31, 2001, 2002, 2003, 2004, 2005.2005, 2006, 2007 and 2008. Data on proved reserves, production of oil and natural gas and hydrocarbon production sold includes Eni’s share of reserves and production of affiliates and joint ventures accounted for under the equity or cost method of accounting.
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
Proved reserves of oil at period end (mmBBL) | 3,948 | 3,783 | 4,138 | 4,008 | 3,773 | |||||
Proved reserves of natural gas at period end (BCF) | 17,072 | 18,629 | 18,008 | 18,435 | 17,591 | |||||
Proved reserves of hydrocarbons in mmBOE at period end (1) | 6,929 | 7,030 | 7,272 | 7,218 | 6,837 | |||||
Reserve replacement ratio (2) (three year average) | 226 | 202 | 179 | 117 | 89 | |||||
Reserve life index (3) | 13.7 | 13.2 | 12.7 | 12.1 | 10.8 | |||||
Average daily production of oil (KBBL/d) | 857 | 921 | 981 | 1,034 | 1,111 | |||||
Average daily production of natural gas available for sale (mmCF/d) (4) | 2,827 | 3,015 | 3,174 | 3,171 | 3,344 | |||||
Average daily production of hydrocarbons available for sale (KBOE/d) (4) | 1,353 | 1,449 | 1,536 | 1,586 | 1,693 | |||||
Hydrocarbon production sold (mmBOE) | 499.7 | 523.3 | 556.2 | 576.5 | 614.9 | |||||
Oil and gas production costs per BOE (5) | 3.85 | 3.83 | 4.16 | 4.92 | 5.59 | |||||
Profit per barrel of oil equivalent (6) | 5.48 | 5.08 | 5.95 | 8.87 | 12.20 | |||||
Sales of natural gas to third parties (7) | 63.72 | 64.12 | 69.49 | 72.79 | 77.08 | |||||
Natural gas consumed by Eni (7) | 2.00 | 2.02 | 1.90 | 3.70 | 5.54 | |||||
Sales of natural gas of affiliates and relevant companies (Eni’s share) (7) | 1.38 | 2.40 | 6.94 | 7.32 | 8.53 | |||||
Total sales and own consumption of natural gas (7) | 67.10 | 68.54 | 78.33 | 83.81 | 91.15 | |||||
Transport of natural gas for third parties in Italy (7) | 11.41 | 19.11 | 24.63 | 28.26 | 30.22 | |||||
Length of natural gas transport network in Italy at period end (8) | 29.6 | 29.8 | 30.1 | 30.2 | 30.7 | |||||
Electricity production sold (9) | 4.99 | 5.00 | 5.55 | 13.85 | 22.77 | |||||
Refined products production (10) | 37.78 | 35.55 | 33.52 | 35.75 | 36.68 | |||||
Balanced capacity of wholly-owned refineries (11) | 664 | 504 | 504 | 504 | 524 | |||||
Capacity utilization of wholly-owned refineries (12) | 97 | 99 | 100 | 100 | 100 | |||||
Number of service stations at period end (in Italy and outside Italy) | 11,707 | 10,762 | 10,647 | 9,140 | 6,282 | |||||
Average throughput per service station (in Italy and outside Italy) (13) | 1,685 | 1,858 | 2,109 | 2,488 | 2,479 | |||||
Petrochemicals production (10) | 7.83 | 7.12 | 6.91 | 7.12 | 7.28 | |||||
Oilfield Services Construction and Engineering order backlog at period end (14) | 6,937 | 10,065 | 9,405 | 8,521 | 9,964 | |||||
Employees at period end (units) | 72,405 | 80,655 | 75,421 | 70,348 | 72,258 |
2004 | 2005 | 2006 | 2007 | 2008 | |||||
Proved reserves of liquids of consolidated subsidiaries at period end (mmBBL) | 3,972 | 3,748 | 3,457 | 3,127 | 3,243 | |||||
of which developed | 2,471 | 2,331 | 2,126 | 1,953 | 2,009 | |||||
Proved reserves of liquids of equity-accounted entities at period end (mmBBL) | 36 | 25 | 24 | 142 | 142 | |||||
of which developed | 19 | 18 | 26 | 33 | ||||||
Proved reserves of natural gas of consolidated subsidiaries at period end (BCF) | 18,278 | 17,501 | 16,897 | 16,549 | 17,214 | |||||
of which developed | 10,501 | 11,159 | 10,949 | 10,967 | 11,138 | |||||
Proved reserves of natural gas of equity-accounted entities at period end (BCF) | 157 | 90 | 68 | 3,022 | 3,015 | |||||
of which developed | 70 | 48 | 428 | 420 | ||||||
Proved reserves of hydrocarbons of consolidated subsidiaries in mmBOE at period end (1) | 7,154 | 6,796 | 6,400 | 6,010 | 6,242 | |||||
of which developed | 4,300 | 4,275 | 4,032 | 3,862 | 3,948 | |||||
Proved reserves of hydrocarbons of equity-accounted entities in mmBOE at period end (a) | 64 | 41 | 36 | 668 | 666 | |||||
of which developed | 31 | 27 | 101 | 107 | ||||||
Reserve replacement ratio (2) | 91 | 43 | 38 | 38 | 136 | |||||
Average daily production of liquids (KBBL/d) | 1,034 | 1,111 | 1,079 | 1,020 | 1,026 | |||||
Average daily production of natural gas available for sale (mmCF/d) (3) | 3,171 | 3,344 | 3,679 | 3,819 | 4,143 | |||||
Average daily production of hydrocarbons available for sale (KBOE/d) (3) | 1,586 | 1,693 | 1,720 | 1,684 | 1,748 | |||||
Hydrocarbon production sold (mmBOE) | 576.5 | 614.9 | 625.1 | 611.4 | 632.0 | |||||
Oil and gas production costs per BOE (4) | 5.59 | 5.79 | 6.90 | 7.77 | ||||||
Profit per barrel of oil equivalent (5) | 12.20 | 14.97 | 14.03 | 15.80 |
(a) | Mainly refers to Eni’s share of proved reserves relating to three Russian companies purchased in 2007 by Eni as part of a bid procedure for assets of bankrupt Yukos (Eni’s share was 60%). Gazprom was granted an option to acquire a 51% interest in these three entities. Considering that Gazprom has exercised its call option, Eni’s interest will be diluted to approximately 30% and proved reserves that were booked in connection with the acquisition will be reduced by approximately 50%. | |
(1) | Includes approximately | |
(2) | Consists of: (i) the increase in proved reserves of consolidated subsidiaries attributable to: (a) purchases of minerals in place; (b) revisions of previous estimates; (c) improved recovery; and (d) extensions and discoveries, less sales of minerals in place; divided by (ii) production during the year as set forth in the reserve tables, in each case prepared in accordance with SFAS 69. See the unaudited supplemental oil and gas information in | |
(3) | ||
Natural gas production volumes exclude gas consumed in operations | ||
Expressed in U.S. dollars. Consists of production costs (costs incurred to operate and maintain wells and field equipment including also royalties) prepared | ||
Expressed in U.S. dollars. Results of operations from oil and gas producing activities, divided by actual sold production, in each case prepared in accordance with |
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Selected Operating Information continued
Year ended December 31, | |
2004 | 2005 | 2006 | 2007 | 2008 | |||||
Sales of natural gas to third parties (6) | 72.79 | 77.08 | 79.63 | 78.75 | 83.69 | |||||
Natural gas consumed by Eni (6) | 3.70 | 5.54 | 6.13 | 6.08 | 5.63 | |||||
Sales of natural gas of affiliates (Eni’s share) (6) | 5.84 | 7.08 | 7.65 | 8.74 | 8.91 | |||||
Total sales and own consumption of natural gas of the Gas & Power segment (6) | 82.33 | 89.70 | 93.41 | 93.57 | 98.23 | |||||
E&P natural gas sales in Europe and in the Gulf of Mexico (6) (7) | 4.70 | 4.51 | 4.69 | 5.39 | 6.00 | |||||
Worldwide natural gas sales (6) | 87.03 | 94.21 | 98.10 | 98.96 | 104.23 | |||||
Transport of natural gas for third parties in Italy (6) | 28.26 | 30.22 | 30.90 | 30.89 | 33.84 | |||||
Length of natural gas transport network in Italy at period end (8) | 30.2 | 30.7 | 30.9 | 31.1 | 31.5 | |||||
Electricity sold (9) | 16.95 | 27.56 | 31.03 | 33.19 | 29.93 | |||||
Refinery throughputs (10) | 35.75 | 36.68 | 36.27 | 35.21 | 33.98 | |||||
Balanced capacity of wholly-owned refineries (11) | 504 | 524 | 534 | 544 | 544 | |||||
Retail sales (in Italy and rest of Europe) (10) | 14.40 | 13.72 | 12.48 | 12.65 | 12.67 | |||||
Number of service stations at period end (in Italy and rest of Europe) | 9,140 | 6,282 | 6,294 | 6,440 | 5,956 | |||||
Average throughput per service station (in Italy and rest of Europe) (12) | 2,488 | 2,479 | 2,470 | 2,486 | 2,502 | |||||
Petrochemical production (10) | 7.12 | 7.28 | 7.07 | 8.80 | 7.37 | |||||
Engineering & Construction order backlog at period end (13) | 8,521 | 10,122 | 13,191 | 15,390 | 19,105 | |||||
Employees at period end (units) | 70,348 | 72,258 | 73,572 | 75,862 | 78,880 |
(6) | Expressed in | |
(7) | ||
(8) | Expressed in thousand kilometers. | |
(9) | Expressed in | |
(10) | Expressed in | |
(11) | Expressed in KBBL/d. | |
(12) | Expressed in | |
The sum of the order backlog of Saipem SpA and Snamprogetti SpA, expressed in |
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Exchange Rates
The following table setstables set forth, for the periods indicated, certain information regarding the Noon Buying Rate in U.S. dollars per euro, rounded to the second decimal (Source: The Federal Reserve Board).
High | Low | Average(1) | At | ||||
(U.S. dollars per |
Year ended December 31, | ||||||||||||||||
2001 | 0.95 | 0.84 | 0.90 | 0.89 | ||||||||||||
2002 | 1.05 | 0.86 | 0.95 | 1.05 | ||||||||||||
2003 | 1.26 | 1.04 | 1.13 | 1.26 | ||||||||||||
2004 | 1.36 | 1.18 | 1.24 | 1.35 | 1.36 | 1.18 | 1.24 | 1.35 | ||||||||
2005 | 1.35 | 1.17 | 1.24 | 1.18 | 1.35 | 1.17 | 1.24 | 1.18 | ||||||||
2006 | 1.33 | 1.19 | 1.26 | 1.32 | ||||||||||||
2007 | 1.49 | 1.29 | 1.37 | 1.46 | ||||||||||||
2008 | 1.60 | 1.24 | 1.47 | 1.39 |
(1) | Average of the Noon Buying Rates for the last business day of each month in the period. |
High | Low | At | |||
(U.S. dollars per |
December 2005 | 1.20 | 1.17 | 1.18 | |||
January 2006 | 1.23 | 1.20 | 1.22 | |||
February 2006 | 1.21 | 1.19 | 1.19 | |||
March 2006 | 1.22 | 1.19 | 1.21 | |||
April 2006 | 1.26 | 1.21 | 1.26 | |||
May 2006 | 1.29 | 1.26 | 1.28 | |||
June 2006 (through June 12, 2006) | 1.30 | 1.26 | 1.26 |
November 2008 | 1.30 | 1.25 | 1.27 | |||
December 2008 | 1.44 | 1.26 | 1.39 | |||
January 2009 | 1.39 | 1.28 | 1.28 | |||
February 2009 | 1.31 | 1.25 | 1.27 | |||
March 2009 | 1.37 | 1.25 | 1.31 | |||
April 2009 | 1.35 | 1.30 | 1.32 | |||
May 2009 (through May 4, 2009) | 1.34 | 1.33 | 1.34 |
Fluctuations in the exchange rate between the euro and the dollar affect the dollar equivalent of the euro price of the Shares on the Telematico and the dollar price of the ADSsADRs on the NYSE. Exchange rate fluctuations also affect the dollar amounts received by owners of ADSsADRs upon conversion by the Depository of cash dividends paid in euro on the underlying Shares. The Noon Buying Rate on June 12, 2006May 4, 2009 was $1.26$1.34 per euro 1.00.
Risk Factors
Competition
There is strong competition worldwide, both within the oil industry and with other industries, in supplyingto supply energy to the industrial, commercial and residential energy markets.
In the Exploration & Production business, Eni encounters competition from other international oil and natural gas companies for obtaining exploration and development rights, particularly outside Italy. The current trendin all areas of the industry towards a reduction of the number of operators via takeovers or mergers might lead to possibly stronger competition from operators with greater financial resources and a wider portfolio of development projects.its operations.
• | In the Exploration & Production business, Eni faces competition from both international oil companies and state run oil companies in a number of geographic markets for obtaining exploration and development rights, and developing and applying new technology to maximize hydrocarbon recovery. Furthermore, Eni may face a competitive disadvantage in many of these markets because of its relatively smaller size compared to other international oil companies, particularly when bidding for large scale or capital intensive projects, and may be exposed to industry-wide cost increases to a greater extent compared to its larger competitors given its potentially smaller market power with respect to suppliers. If as a result Eni fails to obtain new exploration and development acreage or to apply and develop new technology, its growth prospects and future results of operations and cash flows may be adversely affected. | |
• | Eni is increasingly in competition with state run oil companies who are partners of Eni in a number of oil and gas projects and titles in the host countries where Eni conducts its upstream operations. These state run oil companies can change contractual terms and other conditions of oil and gas projects in order to obtain a larger profit share from a given project, by this way reducing Eni’s profit share. For example, Sonatrach, the Algeria national oil company, is seeking to modify the contractual terms of certain PSAs in which Eni is party to achieve a redistribution of the tax burden of such PSAs. Sonatrach alleges that it is currently bearing part of the tax burden attributable to Eni following the enactment of certain modifications to the |
5
country’s tax regime. If this negotiation results in a negative outcome for Eni, the future profitability of certain of Eni’s PSAs in Algeria will be reduced. For more information on this matter see "Item 4 – Exploration & Production – Algeria". | ||
• | In its domestic natural gas business, Eni faces increasingly strong competition from both national and international natural gas suppliers, particularly following the liberalization of the Italian natural gas market introduced by Legislative Decree No. 164/2000 which provides for, among other things, the opening of the Italian market to competition, limitations to the size of gas companies relatively to the market and third party access to infrastructures. Increasingly high levels of competition in the Italian natural gas market could possibly entail reduced natural gas selling margins (see below). In addition, Legislative Decree No. 164/2000 grants the Italian Authority for Electricity and Gas certain regulatory powers in matters of natural gas pricing and access to infrastructures. Outside of Italy, particularly in Europe, Eni faces competition from large well-established European utilities and other international oil and gas companies in growing its market share and acquiring or retaining clients. Furthermore, a number of large clients, particularly electricity producers, in both the domestic market and other European markets are planning to enter the supply market of natural gas. At the same time, a number of national gas producers from countries with large gas reserves are planning to sell natural gas directly to final clients, which would threaten the market position of companies like Eni which resell gas purchased from producing countries to final customers. These developments may increase the level of competition in both the national and other European markets for natural gas and reduce Eni’s operating profit. Risks of increasing competition in the natural gas sector are exacerbated by the current economic downturn. Due to the commoditized nature of natural gas, lowering gas demand could result in a situation where suppliers compete more aggressively on pricing thus leading to lower gas margins for the whole sector. |
Eni faces The Company expects in the near future increasing competition from several international oil companies in its refinery and refined product marketing businesses. In retail marketing both in andsuppliers outside Italy due to the current economic downturn.
• | In retail marketing of refined products both in and outside Italy, Eni competes with third parties (including international oil companies and local operators such as supermarket chains) to obtain concessions to establish and operate service stations. Once established, Eni’s service stations compete primarily on the basis of pricing, services and availability of non-petroleum products. In Italy, political and institutional forces are urging greater levels of competition in the retail marketing of fuels. Eni expects developments on this issue to further increase pressure on selling margins in the retail marketing of fuels. | |
• | Competition in the oilfield services, construction and engineering industries is primarily based on technical expertise, quality and number of services and availability of technologically advanced facilities (for example, vessels for offshore construction). Lower oil prices could result in lower margins and low demand for volumes of oil services. |
The Company’s failure or inability to respond effectively to competition could adversely impact the Company’s growth prospects, future results of operations and local operators such as supermarket chains) to obtain concessions to establish and operate service stations. Once established, Eni’s service stations compete primarily on the basis of pricing, services and availability of non-petroleum products. In Italy plans for the upgrading and efficiency improvement of the national service station network can advance only in accordance with the evolution of the regulatory framework, which lags behind that of other major European countries.cash flows.
Eni also faces significant competition from certain international operators in the oilfield services, construction and engineering industries. Such competition is primarily on the basis of technical expertise, quality and number of services and availability of technologically advanced facilities (for example vessels for offshore construction).
Risks associated with the exploration and production of oil and natural gas
The exploration and production of oil and natural gas requires high levels of capital expenditureexpenditures and entails particular economic risks and opportunities.risks. It is subject to natural hazards and other uncertainties including those relating to the physical characteristics of oil orand natural gas fields. The production of oil and natural gas is highly regulated and is subject to interventionconditions imposed by governments throughout the world in matters such as the award of exploration and production interests, the imposition of specific drilling and other work obligations, environmental protection measures, control over the development and abandonment of fields and installations, and restrictions on production. The oil and gas industry is subject to the payment of royalties and excise duties,income taxes which tend to be higher than those payable in respect of many other commercial activities.
Exploratory drilling efforts may not be successful
Drilling for oil and gas involves numerous risks including the risk of dry holes or failure to find commercial quantities of hydrocarbons. The costs of drilling, completing and operating wells are often uncertain, and drilling operations may be unsuccessful as a result of a variety of factors, including among others, unexpected drilling conditions, pressure or irregularities in formations, equipment failures or fires, blow-outs and various forms of accidents, marine risks such as collisions and other adverse weather conditions and shortages or delays in the delivery of equipment. Exploring or drilling in offshore areas, in particularparticularly in deep water,waters, is generally more complex and riskier than in onshore areas; sothe same is true for exploratory activity in remote areas or in challenging environmental conditions such as those we are experiencing in the case of the Caspian Regionregion or Alaska.
Failure in the activity of explorationto discover commercial quantities of oil and natural gas could have an adverse impact on Eni’s future growth prospects, results of operations and financial condition.liquidity. Because of the percentage of Eni’sEni plans to invest significant capital plans devoted to higherexpenditures in executing high risk exploratoryexploration projects, it is likely that Eni will continue to experienceincur significant exploration and dry hole expenses.expenses in future years. High risk exploration projects include projects executed in deep and ultra-deep offshore and in new areas where the Company lacks installed production facilities. In particular Eni plans to explore for oil and gas offshore, oftenfrequently in deep water or at deep drilling depths, where
6
operations are more difficult and costly than on land or at shallower depths and in shallower waters. Deep water operations generally require a significant amount of time between a discovery and the time that Eni can produce and market the oil or gas, increasing both the operational and financial risks associated with these activities. In addition, lackthe case of necessary equipments such as athe Company, risky exploration projects are conducted in the deep offshore of the Gulf of Mexico, Australia, Brazil, the Barents Sea, India, and offshore Ireland. In 2009, management plans to spend significant amounts of exploration expenditures in these areas that may result in significant dry hole expenses.
Furthermore, shortage of deep water rigs could further delay operations, thus increasing both operational and financial risks.
In addition, failure in findingto find additional commercial reserves could dampenreduce future production of oil and natural gas which is highly dependent on the rate of success of exploratory activity.
Development projects bear significant operational risks which may adversely affect actual returns on such projects
Eni is involved in numerousa number of development projects for the production of hydrocarbon reserves, principally offshore. Eni’s future results of operations rely upon its ability to develop and operate major projects as planned. Key factors that may affect the economics of thosethese projects include:
• | the outcome of negotiations with co-venturers, governments, suppliers, customers or others | |
• | timely issuance of permits and licenses by | |
• | the Company’s relative size compared to its main competitors which may prevent it from affording opportunities to participate in large-scale projects or affect its ability to reap benefits associated with economies of scale, for example by obtaining more favorable contractual terms by supplier of goods and services; | |
• | the ability to design development projects so as to prevent the occurrence of technical | |
• | delays in manufacturing and delivery of critical equipment, or shortages in the availability of such equipment, causing cost overruns and delays; | |
• | risks associated with the use of new | |
• | changes in operating conditions and costs, including the sharp rise in procurement costs | |
• | the actual performance of the reservoir and natural field decline; | |
• | the ability and time necessary to |
Furthermore, deep waterwaters and other hostile environments, where the majority of Eni’s planned and existing development projects are located, can exacerbate these problems. Delays and differences between estimatedscheduled and actual timing of critical events, as well as cost overruns may adversely affect completion, the completiontotal amount of expenditures to be incurred and start-upstart up of production from such projects and, consequently, actual returns. Finally, developing and marketing hydrocarbons reserves typically requires several years after a discovery is made. This is because a development project involves an array of complex and lengthy activities, including appraising a discovery in order to evaluate its commercial potential, sanctioning a development project and building and commissioning related facilities. As a consequence, rates of return for such long-lead-time projects are exposed to the actual returnsvolatility of oil and gas prices which may be substantially lower with respect to prices assumed when the investment decision was actually made, leading to lower rates of return. For example, we have experienced increased budgeted expenditures and a substantial delay in the scheduling of production start up at the Kashagan field, where development is ongoing. Moreover, in July 2007 these matters triggered a dispute with the relevant Kazakh authorities. On October 31, 2008, all the international partners of the project and the Kazakh authorities agreed upon a new contractual and governance framework of the Kashagan project, settling the dispute. See "Item 4 – Exploration & Production – Caspian Sea" for a full description of the material terms of the agreement. In conjunction with the finalization of the agreements, parties also sanctioned the revised expenditure budget of phase-one, amounting to U.S. $32.2 billion (excluding general and administrative expenses) of which U.S. $25.4 billion related to the original scope of work of phase 1 (including tranches 1 and 2), with the remaining part planned to be spent to execute tranche 3 and build certain exporting facilities. First oil is expected late in 2012. Eni will fund those investments in proportion to its participating interest of 16.81%. The original development plan that was filed with Kazakh Authorities in 2004 forecast expenditures of U.S. $10.3 billion (Eni’s interest being at the time 18.52%) to execute tranches 1&2 (to be adjusted to take into account cost inflation up to 2007) and first oil in 2008. The change in production start-up and the relevant cost increase over the original budget were driven by: depreciation of the U.S. dollar versus the euro and other currencies; cost price escalation of goods and services required to execute the project; an original underestimation of the costs and complexity to operate in the North Caspian Sea due to lack of benchmarks; design changes to enhance the operability and safety standards of the offshore facilities.
7
See "Item 4 – Business Overview – Exploration & Production". If the Company is unable to develop and operate major projects as planned, it may have a material adverse effect on such projects.our results of operations and liquidity.
Inability
in replacingto replace oil and natural gas reserves could adversely impact results of operations andearningsfinancial condition
Eni’s results of operations and earningsfinancial condition are substantially dependent on ourits ability to develop and sell oil and natural gas. Unless we arethe Company is able to replace produced oil and natural gas, ourits reserves will decline. The Company’s reserve replacement is affected by the entitlement mechanism in its Production Sharing Agreements and similar contractual schemes. In accordance with such contracts, Eni is entitled to a portion of a field’s reserves, the sale of which should cover expenditures incurred by the Company to develop and operate the field. The higher the reference prices for Brent crude oil used to determine year-end amounts of Eni’s proved reserves, the lower the number of barrels necessary to recover the same amount of expenditures. The Company’s reserve replacement was negatively affected by reduced entitlements in its PSAs in the years 2006 and 2007 when Eni’s reserve replacement ratio was 38% in both years, meaning that the Company replaced less reserves than those produced. Eni’s proved reserves of subsidiaries declined by 6.1% in 2007 and by 5.8% in 2006. See "Item 4 – Business Overview – Exploration & Production". Future oil and gas production areis dependent on the company’sCompany’s ability to access new reserves through new discoveries, application of improved techniques, success in development activity, negotiation with countries and other owners of known reserves and acquisitions. An inability to replace reserves could adversely impact future production levels and growth prospects, thus negatively affecting Eni’s future results of operations.operations and financial condition.
LiftingWe forecast a significant reduction in costs to develop anddevelopment costs are increasingoperate oil and gas fields. If we fail to benefit from thiscould reduce profitexpected trend, our oil and gas margins will deteriorate due to falling hydrocarbons pricesDue to the current oil downturn, we expect that prices for oilfield services and materials will trend lower in the future. We intend to benefit from this reduction by implementing the needed cost initiatives to preserve our profitability in an environment of low oil prices. Cost initiatives include rescheduling of certain field developments to obtain cost saving and renegotiating contracts for oilfield services with our supplies on more favorable terms. If we fail to achieve the targeted levels of cost reductions, our profits per BOE
for the oil industry
Profit margins in the oil industry are being affected by a steady rising trend in lifting and development costs as a result of the following: (i) the increasingly high percentage of complex development projects (such as those in deep and ultra deep waters and in harsh environments) which bear higher development costs as compared to development projects in traditional environments; (ii) inflationary pressure affecting purchase prices of raw materials and services in connection to the worldwide economic recovery; and (iii) lack of specialized resources (such as engineers and other valuable technicians) especially in remote areas. Eni’s management expects this rising trend of lifting and development costs to continue in the medium term and this could lead to a reduction in profit per BOE.Exploration & Production segment will be adversely affected.
Changes in crude oil and natural gas prices may adversely affect Eni’s results of operations
The exploration and production of oil and gas is a commodity business with a history of price volatility. The single largest variable that affects the Company’s results of operations and financial condition is crude oil prices. Eni generally does not hedge its exposure to variability in future cash flows due to crude oil price movements. As a consequence, Eni’s profitability depends heavily on crude oil and natural gas prices.
Crude oil and natural gas prices are subject to international supply and demand and other factors that are beyond Eni’s control. OPEC member countries control, production ofincluding among other things:
(i) | the control on production exerted by OPEC member countries which control a significant portion of the worldwide supply of oil and can exercise substantial influence on price levels; | |
(ii) | global geopolitical and economic developments, including sanctions imposed on certain oil-producing countries on the basis of resolutions of the United Nations or bilateral sanctions; | |
(iii) | global and regional dynamics of demand and supply of oil and gas; in the current economic downturn we have experienced a significant reduction in worldwide demand for crude oil and in the European gas demand which have negatively impacted crude oil and natural gas prices; | |
(iv) | prices and availability of alternative sources of energy; | |
(v) | governmental and intergovernmental regulations, including the implementation of national or international laws or regulations intended to limit greenhouse gas emissions, which could impact the prices of hydrocarbons; and | |
(vi) | success in developing and applying new technology. |
All these factors can affect the worldwideglobal balance between demand and supply offor oil and can exercise substantial influence on its price levels. International geopolitical tensions and political developments, including sanctions imposed on certain oil-producing countries on the basis of resolutions of the United Nations, can also affect world supply and prices of oil. Such factors can also affect the prices of natural gas because natural gas prices for the major part of our supplies are typically tiedindexed to the prices of crude oil and certain crudes and refined petroleum products. Lower crude oil prices could have an adverse impact on Eni’s results of operations and cash flows from operations.
Furthermore, lower oil and gas prices over prolonged periods may also adversely affect Eni’s results of operations and cash flows by: (i) reducing rates of return of development projects either planned or being implemented, leading the Company to reschedule, postpone or cancel development projects; (ii) reducing the Group’s liquidity, entailing lower resources to fund expansion projects, further dampening the Company’s ability to grow future production and revenues; and (iii) triggering a review of future recoverability of the Company’s carrying amounts of oil and gas properties, which could lead to the recognition of significant impairments charges.
8
Uncertainties in Estimates of Oil and Natural Gas Reserves
Numerous uncertainties are inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. The accuracy of proved reserve estimates depends on a number of factors, assumptions and variables, among which the most important are the following:
• | the quality of available geological, technical and economic data and their interpretation and | |
• | projections regarding future rates of production and timing of development expenditures; | |
• | whether the prevailing tax rules, other government regulations and contractual conditions will remain the same as on the date estimates are made; |
• | results of drilling, testing and the actual production performance of Eni’s reservoirs after the date of the estimates which may require substantial upward or downward revisions; and | |
• | changes in oil and natural gas prices which could | |
Many of these factors, assumptions and variables involved in estimating proved reserves are beyond Eni’s control and may prove to be incorrectchange over time.time and impact the estimates of oil and natural gas reserves. Accordingly, the estimated reserves could be materiallysignificantly different from the quantities of oil and natural gas that ultimately will be recovered. Additionally, any downward revision in Eni’s estimated quantities of proved reserves would indicate lower future production volumes, which could adversely impact Eni’s results of operations and financial condition.
Oil and gas activity may be subject to increasingly high levels of income taxes
In recent years, Eni has experienced adverse changes in tax regimes applicable to oil and gas operations in Italy and in a number of countries where the Company conducts its upstream operations. Management believes that adverse changes are always possible in the tax regimes of any country in which Eni conducts its oil and gas operations, regardless of the level of stability of the political and legislative framework in each country. In recent years, developments in the regulatory framework, mainly regarding tax issues, have been implemented or announced also in EU countries and in North America. In 2008, Italy enacted new tax rules that increased the statutory tax rate applicable to energy companies with annual turnover in excess of euro 25 million by 5.5 percentage points, thus reversing a reduction in the statutory tax rate of the same amount that was enacted the previous year. Early in 2009, the Italian Parliament enacted a supplemental tax rate of 4% that has to be applied to profit before income taxes reported by the parent company Eni SpA associated with the Treaty between Italy and Libya. This supplemental tax rate will entail increased tax payables amounting to approximately euro 300 million for the full year 2009.
Adverse changes in the tax rate applicable to the Group profit before income taxes would translate into negative impacts on Eni’s future results leadingof operations and cash flows. Furthermore, the marginal tax rate in the oil and gas industry tends to increase in correlation with higher oil prices which could make it difficult for Eni to translate higher oil prices into increased depreciation, depletion and amortization charges and/or impairment charges, which would reduce earnings and shareholders’ equity.
net profit. However, the Company does not expect that the marginal tax rate will trend lower in response to falling oil prices.
Political Considerations
A substantial portion of our oil and gas reserves and gas supplies are located in politically, socially and economically unstable countries where we are exposed to material disruptions to our operations
Substantial portions of Eni’s hydrocarbon reserves are located in countries outside the EU and North America, some of which may be politically or economically less stable than EU or North American countries. At December 31, 2005,2008, approximately 73%80% of Eni’s proved hydrocarbon reserves were located in such countries. Similarly, a substantial portion of Eni’s natural gas supplysupplies comes from countries outside the EU and North America. In 2005,2007, approximately 60%70% of Eni’s supplies of natural gas came from such countries. See "Item 4 – Gas & Power – Natural Gas Supplies". Adverse political, social and economic developments in any such producing countryof those countries may affect Eni’s ability to continue operating in that country,an economic way, either temporarily or permanently, and affect Eni’s ability to access oil and gas reserves. In operating in politically unstable countriesParticularly Eni faces risks in connection with the following:following issues: (i) lack of well-established and reliable legal systems;systems and uncertainties surrounding enforcement of contractual rights; (ii) other politicalunfavorable developments in laws, regulations and laws and regulations (such as expropriationcontractual arrangements leading for example to expropriations or forced divestituredivestitures of assets and unilateral cancellation or modification of contract terms), forcontractual terms. For example, in April 2006, Eni’s titles and mineral assets relating to an important oil field were transferred toconjunction with the Venezuelan state oil company following its unilateral cancellationrescheduling of the contract regulating oil activitiesKashagan project in 2007, the field;Kazakh authorities opened a dispute against the international partners of the consortium operating the Kashagan development claiming failure on part of the consortium to fulfill certain contractual obligations. Subsequently, the Kazakh authorities and the international partners of the consortium have agreed on a new contractual framework of the project. See "Item 4 – Exploration & Production – Caspian Sea" for a full description of the material terms of the agreement; (iii) restrictions on exploration, production, imports and exports; (iv) tax or royalty increases (including retroactive claims); and (v) civil and social unrest forleading to sabotages, acts of violence and incidents. For example, in the first quarter of 2006 certain episodes of civilwe have been
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experiencing continuing social unrest in Nigeria causedleading to a number of disruptions at certain Eni oil producing facilities. facilities in the country. As a consequence, our oil and gas production in the country has yet to return to normal production levels. In the first quarter of 2009, security problems have continued to impact our operations.
In 2008 we incurred significant asset impairments in our Exploration & Production business amounting to euro 989 million mainly driven by changes in contractual arrangements and regulatory provisions and environmental obligations leading the Company to reassess the recoverable amounts of a number of its oil and gas properties.
See "Item 4 – Exploration & Production – Oil and Natural Gas Reserves"; and "Item 5 – Recent Developments". While the occurrence of these events is unpredictable, it is likely that the occurrence of such events could cause Eni to incur material losses or facility disruptions, by this way adversely impacting Eni’s results of operations and cash flows.
In August 1996,Our activities in Iran could lead to sanctions under relevant U.S. legislation
Eni is currently conducting oil and gas operations in Iran. The legislation and other regulations of the United States adoptedof America impose sanctions on this country and may lead to the imposition of sanctions on any persons doing business in this country or with Iranian counterparties.
Under the Iran and Libya Sanctions Act (the "Sanctions Act"of 1996 (as amended, "ISA"), which implements sanctions against Iran with the objective of denying Iran and Libyait the ability to support acts of international terrorism and fund the development or acquisition of weapons of mass destruction. On April 23, 2004destruction, upon receipt by the U.S. authorities of information indicating potential violation of this act, the President of the United States terminated the application of the Sanctions Actis authorized to Libya, with the remaining economic sanctions against Libya lifted on September 23, 2004. The Sanctions Act still applies to Iran and authorizes the President of the United States to imposestart an investigation aiming at possibly imposing sanctions from a six-sanction menu under certain circumstances against any person includingfound in particular to have knowingly made investments of U.S. $20 million or more in any foreign company, making investments in Iran, thustwelve-month period, contributing directly and significantly to the enhancement of Iran’s ability to develop its hydrocarbons resources. The Sanctions ActFurthermore, the ISA envisages that the President of the United States is scheduledbound to expireimpose sanctions against any persons that knowingly contribute to certain military programs of Iran, effective on August 5,June 6, 2006. Eni does not believe that enforcementcannot predict interpretations of, or the implementation policy of the Sanctions Act againstU.S. Government under ISA with respect to Eni’s current or future activities in Iran or other areas. Eni has incurred capital expenditures in excess of U.S. $20 million in Iran in each of the last 9 years. Management expects to continue investing in Iran yearly amounts in excess of that threshold in the foreseeable future. Eni’s current activities in Iran are primarily limited to carrying out residual development activities relating to certain buy-back contracts it wouldentered into in 2000 and 2001 and no sanctions have a material adverse effectever been imposed on its financial condition or results of operations. However,Eni’s activities in the country.
Adding to Eni’s risks arising from this matter, a bill to amend and extend the extra-territorial reach of the economic sanctions imposed by the United States with respect to Iran has been passed by the U.S. House of Representatives and may lead to the passage of new laws in this area. Iran continues to be designated by the U.S. State Department as a State sponsoring terrorism. For a description of Eni’s operations in Iran and Libya see "Item 4 – Information on the Company – Exploration and& Production – North Africa and Rest of World".
It is possible that in future years Eni’s activities in Iran may be sanctioned under relevant U.S. legislation.
We are aware of initiatives by certain U.S. states and U.S. institutional investors, such as pension funds, to adopt or consider adopting laws, regulations or policies requiring divestment from, or reporting of interests in, companies that do business with countries designated as states sponsoring terrorism. These policies could adversely impact investment by certain investors in our securities.
Cyclicality of the Petrochemical Industry
The petrochemical industry is subject to cyclical fluctuations in demand, with consequentconsequential effects on prices and profitability exacerbated by the highly competitive environment of thethis industry. Eni’s petrochemicalspetrochemical operations which are located mainly in Italy, have been in the past and may be adversely affected in the future be adversely affected by worldwide economic slowdowns and excess installed production capacity, as well as by economic slowdowns in many industrialized countries. The dislocation ofcapacity. Furthermore, Eni’s petrochemical activities to geographic areas like the Far Eastoperations face increasing competition from Asiatic companies and national oil producing countriescompanies’ petrochemical divisions which providecan leverage on certain long-term competitive advantages has weakenedin terms of lower operating costs and feedstock purchase costs. In particular, Eni’s petrochemical operations are located mainly in Italy and Western Europe where regulatory framework and public environmental sensitivity are generally more stringent than in other countries, especially Far East countries, resulting in higher operating costs of our petrochemical operation compared to the competitiveness ofCompany’s Asiatic competitors due to the need to comply with applicable laws and regulations in environmental and other related matters. In 2008 our petrochemicals operations in industrialized countries, including Eni’s petrochemical operations. Petrochemical operations in industrialized countries are also less competitive than those locatedposted operating losses of euro 822 million due to sharply higher feed-stock costs in the above-mentioned areasfirst half of the year and lower product volumes and margins in the second half due to stricter regulatory frameworksthe current economic downturn and growing environmental concerns which prevailrelated asset impairments. Impairment losses were recorded amounting to euro 278 million as the recoverable amounts of certain petrochemicals plants were lower than their carrying amounts due to deteriorating profitability prospects on the back of lowered expectations for industry fundamentals and unfavorable trends in industrialized countries.
the trading environment. As
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the downturn is expected to continue for the full year 2009, we do not project any significant improvement in our petrochemicals business profitability.
Liberalization of the Italian Natural Gas Market
Legislative Decree No. 164/2000 opened completelyup the Italian natural gas market starting onto competition as from January 1, 2003. This means thatAs a result, all customers in Italy are free to choose their supplier of natural gas. The decree, among other things, introduced rules which have a significant impact on Eni’s activity, as the companyCompany is present in all the phases of the natural gas chain, in particular:chain:
• | until December 31, 2010, antitrust thresholds are in place for gas operators | |
• | ||
The newFurthermore, on June 30, 2008 provisions came into effect on the unbundling of regulated entities in the Italian gas sector on the basis of a Code that was adopted by the Authority for Electricity and Gas in 2007. According to unbundling rules, controlling entities as in the case of the parent company Eni SpA are forbidden from interfering in the decision-making process of its subsidiaries running gas transport, storage and distribution infrastructures.
Eni expects that a combination of regulatory regime has the effect of limiting the sizeeffects and increasing competition will limit growth prospects and profitability of Eni’sour natural gas business in Italy.Italy as discussed below.
Eni’sEni has been experiencing significant pressure on its natural gasmarginmargins1 since the inception of the liberalization process inItaly may decrease permanently comparedItaly. In the current economic downturn, margin pressures could worsen also considering an expected increase in supplies of natural gas tohistorical levelsthe Italian market in light of new import capacity that has been completed or is expected to come on stream in the next one to three years
In order to meetSince the expected growthinception of the liberalization process in the Italian natural gas market, over the medium and long-term, Eni entered into long-term purchase contracts with producing countries that currently have a residual average term of approximately 15 years. Existing contracts, whichhas been experiencing rising competition in general contain take-or-pay clauses, will ensure total delivery of approximately 67.3 BCM/y ofits natural gas (Russia 28.5, Algeria 21.5,business leading to lower selling margins due to the Netherlands 9.8, Norway 6 and Nigeria 1.5)entry of new competitors into the market. Certain competitors of Eni are supplied by 2008. The above quantities are basedthe Company itself, generally on the annual contract quantitybasis of the relevant contract. The average annual minimum quantity that Eni is committed to purchase under its take-or-pay obligations is approximately 85% of said quantities.long-term contracts. In fact, in order to comply with the above mentioned regulatory thresholds relating to volumes input intosupplied through the national transport network and sales volumes in Italy, Eni signed multi-yearsold part of its gas availability under its take-or-pay supply contracts withto third party importers inparties importing said volumes to Italy and started implementing a strategy of increasing naturalmarketing them to Italian customers. For more information on Eni’s take-or-pay contracts, see "Item 4 – Gas & Power – Natural gas sales in the rest of Europe in order to sell outside Italy natural gas volumes available under its take-or pay contracts, exceeding mandatory thresholds. In prior years Eni sold the majority of its natural gas availability on the Italian market. This change in the sale mix is structural and is adversely affecting Eni’s results of operations. Further, managementpurchases".
Management expects Eni’s gas selling margins on natural gas in Italy to comeremain under pressure in the foreseeable future years due toconsidering deteriorating demand fundamentals in the entry into the market of new competitors, including the impact of thecurrent economic downturn, Eni’s gas availability under its take-or-pay supply contracts, build-up of Eni’s supplies to the above mentioned competitors and new competitors entering the Italian importers.market also in light of ongoing or already implemented capital projects designed to expand the transport capacity of import pipelines to Italy and to build new import infrastructures, particularly LNG terminals. In fact, Eni is currently implementing its plans to upgrade its natural gas import pipelines mainly from Algeria and Russia to Italy to achieve an increase of 13 BCM/y in import capacity reaching full operation in 2010. Specifically, the upgrading of the TTPC pipeline from Algeria was completed in 2008 and is expected to be fully operational in 2009. The upgrade of the Russian pipeline is ongoing. Further 3 BCM/y of new import capacity will be added by upgrading the GreenStream gasline from Libya with expected start up in 2012. A large portion of the new capacity deriving from Eni’s upgrading projects has been or is planned to be sold to third parties. In addition, a third party project has been implemented to build a new LNG terminal with an 8 BCM/y capacity in the Adriatic Sea and is expected to commence operations by late 2009. These new or upgraded gas infrastructures will considerably increase supplies to the Italian natural gas market at a time when demand is falling due to the economic downturn.
(1) | i | For a definition of margin see "Glossary". |
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Despite the fact that an increasing portion of natural gas volumes purchased by Eni under its take-or-pay contracts is planned to be marketed outside Italy, management believes that unfavorable trends in the Italian demand and supply for natural gas on both the short and the longer-term, also due to the reaching of full operation at new supply infrastructures, and the evolution of Italian regulations of the natural gas sector, represent risk factors to the fulfillment of Eni’s obligations in connection with its take-or-pay supply contracts and may result in a downward pressure on the Company’s gas selling margins. Based on the foregoing, Eni’s future results of operations and cash flows might be adversely affected.
Eni
growth prospects in Italy are limited by regulation
Dueis committed to the antitrust threshold on direct sales in Italy, management expects Eni’sincreasing natural gas sales in Italy to increase at a rate that cannot exceed the growth rate of natural gas demand in Italy. Management believes this development might have a material adverse impact on Eni’s results of operations.
Europe. If Eni fails to
grow natural gas sales in Europe as planned,achieve this target, future growth prospects may be adversely affected. Furthermore, Eni may be unable to fulfill its minimum take obligations under its take-or-pay purchase contracts and this could adversely impact results of operations and liquidity
Over the medium term,medium-term, Eni plans to increase its natural gas sales in Europe also to absorbleveraging on its natural gas availability under take-or-pay contracts.purchase contracts it has entered into with major natural gas producing countries (namely Russia, Algeria, Libya, Norway and the Netherlands) and synergies from the acquisition of the Belgian gas operator Distrigas that was completed in 2008. Should Eni fail to increase natural gas sales in Europe as planned due to poor strategy execution or competition, Eni’s future growth prospects, results of operations and cash flows might be adversely affected also taking account that Eni maymight be unable to sell all the volumesfulfill its contractual obligations to purchase certain minimum amounts of natural gas purchased underbased on its take-or-pay purchase contracts and this could adversely impact results of operations.currently in force.
Due to the regulated access to natural gas transport
infrastructureinfrastructures in Italy, Eni may not be able to sell in Italy all the natural gas volumes it planned to import and, as a consequence,itthe Company may be unable to sell all the natural gas volumes whichEniit is committed to purchase under take-or-pay contract obligations
Over the next few years,medium-term, Eni plans tohas scheduled its import certain volumes of natural gas usingto Italy based on the highestassumption to use the purchase flexibility ascontractually provided for by its take-or-pay purchase contracts.contracts during periods in which demand is expected to peak. These import programs are also based on the assumption that Eni also assumes that it will be entitled toobtain the necessary transport capacity entitlements on the Italian transport infrastructure.network. However, EniEni’s planning assumptions are inconsistentmay be considered to be not fully in line with current rules regulating the access to the Italian transport infrastructureinfrastructures as provided for by the Network Code currently in force which has been drafted underin accordance with Decision No. 137 of July 17, 2002 of the Authority for Electricity and Gas. Such rules establishedestablish certain priority criteria for the entitlement to transport capacity of natural gasentitlements at points where the Italian transport infrastructure connects with international transport networksimport pipelines (the so-called entry points to the Italian transport system). In particular current rules establish thatSpecifically, Eni’s gas volumes purchased under take-or-pay contracts entered into before 1998, as in the case of Eni, have the rightare entitled to a priority in the entitlement toallocation of available transport capacity equal tofor amounts not exceeding average daily contractual volumes. There is therefore no guaranteed access priority forAccordingly, Eni’s contractedpurchase volumes exceeding average daily contractual volumes. In fact, take-or-pay contracts entered intovolumes are not entitled to any priority in gaining access to the Italian transport infrastructures. The contractual flexibility represented by Eni before 1998 envisage Eni’s right to offtakeuplift daily volumes larger than the average daily contractual volume; this contractual flexibility provided by the difference between the maximum daily volume Eni is allowed tovolumes under its take-or-pay purchase and the average daily contractual volumecontracts is used when demand peaks, usually during the winter.wintertime. In the event of congestion occurs at entry points natural gas volumes not receiving priority are entitled to the Italian transport network, under current regulation available transport capacity would be entitled firstly to operators having a priority right, i.e. holders of take-or-pay contracts within the limits of average daily contractual volumes. Then any residual available transport capacity would be allocated in proportion with requests from operators.to all pending capacity requests. Eni considers Decision No. 137/2002 to be inconsistent with the overall rationale of the European natural gas legislativeregulatory framework, especially with reference to Directive 98/30/CE (superseded and replaced by Directive 03/55/CE) and Legislative Decree No. 164/2000, and is challenginghas opened an administrative procedure to repeal Decision No. 137/2002 before the competentan administrative courts.court. See "Item 4 – Regulation of the Italian Hydrocarbons Industry – Gas & Power". However, Eni cannot rule out a negative outcome infor this matter. Accordingly,However, management believes that Eni’s results of operations and cash flows could be adversely affected should market conditions and/orin light of current regulatory constraints prevent Eni from selling its whole availability of natural gas purchased to fulfill take-or payits minimum take contract obligations (i.e.,(e.g. in case a congestion occurs at the entry points of the Italian transport infrastructure, whichEni would force Enibe forced to offtakeuplift a smaller volume of gas than the minimum contractual off take). See "Item 5 – Management Expectations of Operations".
The Italian Government, Parliament and the regulatory authorities in Italy and in Europe may take further steps to
improveincrease competition in the Italian natural gas market and such regulatory developments may adversely affect Eni’s results of operations and cash flows
Eni cannot predict future developmentsItalian institutional and political forces are urging a higher degree of competition in the regulation of the Italian natural gas market. Also an institutional debate is ongoing in Italy regarding the liberalization of the natural gas market and this may produce significant developments onin this matter.area. A brief description follows of certain recently enacted laws and certain proceedings before the Authority for Electricity and Gas and the Italian Antitrust Authority in order to allow investors to gain some insight ofinto the complexity of this matter. For a full discussion of laws and procedures described herein see "Item 4 – Regulation of the Italian Hydrocarbons Industry – Gas & Power ".Power".
In 2003, Law No. 290 was enacted which prohibits Eni from holding an interest higher than 20% in undertakings owning natural gas transport infrastructure in Italy (Eni currently holds a 50.07%50.04% interest in Snam Rete Gas, which owns and manages approximately 97% of the Italian natural gas transport infrastructure). A decree is expected to be enacted by the Italian Prime Minister to establish the relevant provisions to implement this mandatory disposal. The deadline for the disposal, which was initially scheduled for December 31, 2008, is to be re-
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scheduled in a 24-month term starting from the date in which this decree from the Italian Prime Minister becomes effective. Currently, Eni is unable to foresee a deadline for this disposal.
On the basis of the findings of a joint inquiry conducted from 2003 through June 2004 on the Italian natural gas market, the Authority for Electricity and Gas and the Italian Antitrust Authority (the "Antitrust Authority") acknowledgedconcluded that the overall level of competition of the Italian natural gas market is unsatisfactory due to the dominant position held by Eni in many phases of the natural gas chain. According to both the Authority for Electricity and Gas and the Antitrust Authority, the vertical integration of Eni in the supply, transport and storage of gas has restricted the development of competition in Italy notwithstanding the antitrust ceilings introduced by Legislative Decree No. 164/2000. It was further stated that the price of natural gas in Italy (in particular for the industrial sector) is higher than in other European countries.
In October 2005,order to implement a Law Decree defined by the Italian Government to face the economic downturn, in March 2009 the Authority for Electricity and Gas startedproposed certain rules on the Italian gas market designed to increase competition. These rules provide that Eni supplies to the market preset amounts of natural gas at fixed prices. Implementation of these rules could materially and adversely affect the Company’s results of operations and cash flow.
In November 2006, the Authority for Electricity and Gas concluded an inquiry concerning the competitive behavior of operators selling natural gas to residential and commercial customers withcustomers. This inquiry found that the aimretailing market for natural gas in Italy lacked a sufficient degree of defining measurescompetition due to improve competition.current commercial practices and the existence of both entry and exit barriers.
In February 2006,November 2007, the Italian Authority for Electricity and Gas and the Italian Antitrust Authority closedopened an inquiry concerning Eni’s competitive behavior concluding that Eni abused its dominant positionto gain insight into the functioning of the natural gas storage activity in Italy, particularly with regard to its decisionlack of investments by operators directed to suspend a plan for the upgrading of the import pipeline from Algeria and to unilaterally cancel certain contracts to sell the relevant transportexpand capacity to third parties. Contracts were signed earlystore natural gas in 2003 andItaly. Eni through its wholly-owned subsidiary Stogit Italia owns almost the relevant upgrade is expected to become effectiveentire storage capacity currently existing in 2007. The Antitrust Authority fined Eni by an amount of euro 290 million.
On May 5, 2006, the European Commission started an inquiry in order to verify an alleged abuse of dominant position on the part of Eni in violation of Article 82 of the EEC Treaty and Article 54 of the CES Agreement in the activities of international gas transport and wholesale and retail supply of gas.Italy.
Management believes the institutional debate on the degree of competition in the Italian natural gas market and the regulatory activity to be areas of attention for management and cannot exclude negative impacts on Eni’s financial condition or results of operations in future years deriving from developments on these matters.
Eni believes an oversupplymatters on Eni’s future results ofnatural gas is likely to occur in the long-term (beyond 2009)
Eni plans to upgrade its natural gas import infrastructure from Algeriaoperations and Russia to Italy, with expected start-up in 2008 and late 2008/2009, respectively. Taking into account the build-up of supplies of natural gas from Libya through the Greeenstream gasline and of Eni’s fourth long term take-or-pay purchase contract from Russia, an additional import capacity of 883 BCF/y is expected to be available for the Italian natural gas market starting in 2009. A large portion of this expected import capacity has been or is planned to be awarded to third parties. In addition, certain operators in the Italian natural gas market have publicly announced plans to develop LNG terminals in Italy. Eni expects at least one new LNG terminal with a 283 BCF/y capacity to start operations by 2009 thus adding new import capacity to the Italian market. Management believes the pace of demand growth in the Italian natural gas market may not meet the expected increase in supplies of natural gas market starting in 2009 and beyond. If this projections materialize, a decrease in natural gas margins is likely to occur.cash flows.
Decisions of the Authority for Electricity and Gas
inon the matter of natural gas tariffs may diminish Eni’s ability to determine the price at which it sells natural gas to customers
On the basis of certain legislative provisions, the Authority for Electricity and Gas ("the Authority") holds a general monitoring power on pricing in the natural gas market in Italy and the power to establish selling tariffs in thefor supplying natural gas to residential and commercial segmentsusers consuming less than 200,000 CM/y (qualified as non eligible customers at December 31, 2002 as defined by Legislative Decree No. 164/2000) taking into account, among other things, the public interest goal of containing the inflationary pressure due to a rise inrising energy costs. The decisions of the Authority for Electricity and Gas on these matters may limit the ability of Eni to pass an increase in the purchase cost of fuelsnatural gas on to the final consumers of natural gas. In particular,consumers. Following a complex and lengthy administrative procedure started in 2004 and finalized in March 2007 with DecisionResolution No. 248/200479/2007, the Authority established a new indexation mechanism for Electricityupdating the raw material cost component in supplies to residential and Gas established,commercial users consuming less than 200,000 CM/y, establishing, among other things: (i) that an increase in the international price of Brent crude oil is only partially transferred on to residential and commercial users of natural gas in case international prices of Brent crude oil exceed the 35 dollars per barrel threshold; and (ii) that Italian natural gas importers – including Eni – must renegotiate wholesale supply contracts to wholesalers in order to take account of this new indexation mechanism. Management cannot exclude the reductionpossibility that in the future the Authority could implement similar measures that may negatively affect Eni results of operations and liquidity.
Certain provisions of law may also limit the priceCompany’s ability to set commercial margins. Specifically, Law Decree No. 112 enacted in June 2008 forbids energy companies such as Eni to transfer on to customers, through higher prices, the higher income taxes incurred in connection with a supplemental tax rate of natural gas sold to residential and commercial users. A proceeding has commenced between5.5 percentage points introduced by the same decree on energy companies with a yearly turnover in excess of euro 25 million. The Authority for Electricity and Gas is in charge of monitoring compliance with the rule. The Authority has subsequently that energy companies have to adopt effective operational and Eni, which appealed Decisionmonitoring systems in order to prevent the transfer to customers by means of unlawful variations of final prices of gas.
For more information on these issues (particularly the Authority’s Decisions No. 248/2004, to an administrative court.
Eni’s management expects a negative outcome of this matter. Eni has accrued a material provision in its 2005 Consolidated Financial Statements in order to reflect the risks associated with this matter. In 134/2006 management expects Eni’s results of operations to be adversely impacted by a material amount in light of the high Brent crude oil prices, in the event Decision 248/2004 is implemented in its original form. Seeand 79/2007) see "Item 4 – Regulation of the Italian Hydrocarbons Industry – Gas & Power".
Antitrust and
"Item 5 –competition law
The Group’s activities are subject to antitrust and competition laws and regulations in many countries of operations, especially in Europe. In the years prior to 2008, Eni recorded significant loss provisions due to unfavorable developments in certain antitrust proceedings before the Italian Antitrust Authority, and the European
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Commission. It is possible that the Group may incur significant loss provisions in future years relative to ongoing antitrust proceedings or possible new proceedings. The Group is particularly exposed to this risk in its natural gas and refining and marketing activities due to its large presence in these markets in Italy and in Europe. See Note 29 to the Consolidated Financial ReviewStatements for a full description of Eni’s main pending antitrust proceedings. Particularly, as a result of an inquiry on the level of competition in the European natural gas market, on March 9, 2009 the European Commission sent Eni a Statement of Objections related to a proceeding under Article No. 82 of the EU Treaty and Prospects"Article No. 54 of the SEE agreement with reference to an alleged unjustifiable refusal of access to the TAG and TENP/Transitgas gas pipelines, that are interconnected with the Italian gas transport system through actions intended to "capacity hoarding, capacity degradation and strategic limitation of investment" with the effect of "hindering the development of a real competition in the downstream market and […] harming the consumers".
The European Commission envisages the possible imposition of a fine and of structural remedies. Based on available information and its knowledge of the proceeding, the Company is currently unable to determine the outcome of the matter.
Furthermore, based on the findings of antitrust proceedings, plaintiffs could seek payment to compensate for any alleged damages as a result of antitrust business practices on part of Eni. Both these risks could adversely affect the Group’s future results of operations and cash flows.
Environmental, Health and Safety Regulation
Eni may incur material operating
costsexpenses andliabilitiesexpenditures in relation to compliance with applicable environmental,regulationshealth andfuture environmental developmentssafety regulations
Eni is subject to numerous EU, international, national, regional and local environmental, health and safety laws and regulations concerning its oil and gas operations, products and other activities, including legislation that implements international conventions or protocols.activities. In particular, these laws and regulations require the acquisition of a permit before drilling for hydrocarbons may commence, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with exploration, drilling and production activities, as well as refining, petrochemicals and other Group operations, limit or prohibit drilling activities onin certain protected areas, provide for measures to be taken to protect the safety of the workplace and health of communities involved by the company’s activities, and impose criminal or civil liabilities for pollutionpolluting the environment or harming employees or communities health and safety resulting from oil, natural gas, refining, petrochemical and petrochemicalother Group’s operations.
These laws and regulations may also restrict emissions and discharges to surface and subsurface water resulting from the operation of natural gas processing plants, petrochemicalspetrochemical plants, refineries, pipeline systems and other facilities that Eni owns.owned by Eni. In addition, Eni’s operations are subject to laws and regulations relating to the production, handling, transportation, storage, disposal and treatment of waste materials. Breach of environmental, health and safety laws exposes the Company’s employees to criminal and civil liability and the Company to the incurrence of liabilities associated with compensation for environment health or safety damage. Additionally, in the case of violation of certain rules regarding safety in the workplace, the Company can be liable as provided for by a general EU rule on businesses liability due to negligent or willful conduct on part of their employees as adopted in Italy with Law Decree No. 231/2001.
Environmental, health and safety laws and regulations have a substantial impact on Eni’s operations. Some riskManagement expects that the Group will continue to incur significant amounts of operating expenses and expenditures to comply with environmental, costshealth and liabilities is inherent in certain operations and products of Eni, and there can be no assurance that material costs and liabilities will not be incurred.
Although management, considering the actions already taken with the insurance policies to cover environmental risks and the provision for risks accrued, does not currently expect any material adverse effect on Eni’s Consolidated Financial Statements as a result of its compliance with suchsafety laws and regulations, therealso taking into account possible future developments in environmental regulations in Italy and in other countries where Eni operates, particularly the implementation of increasingly strict measures decided at both international and country level to reduce greenhouse gas emissions.
Eni’s results of operations and financial condition are exposed to risks deriving from environmental, health and safety accidents and liabilities
Risks of environmental, health and safety incidences and liabilities are inherent in many of Eni’s operations and products. Notwithstanding management believes that Eni adopts high operational standards to ensure safety of its operations and to protect the environment and health of people and employees, it is always possible that incidents like blow-outs, spillovers, contaminations and similar events could occur that would result in damage to the environment, employees and communities. In particular, Eni is performing a number of remedial actions to restore and clean-up certain industrial sites that were contaminated by the Group’s industrial activities in previous years, mainly in Italy. Management expects further remedial actions to be implemented in future years. The Group has accrued risk provisions to cope with all existing environmental liabilities whereby both a legal or constructive obligation to perform a clean-up or other remedial actions is in place and the associated costs can be reasonably estimated. The accrued amount represents the management’s best estimates of future environmental expenses to be incurred. Notwithstanding this, management believes that it is possible that in the future Eni may incur significant costsenvironmental expenses and liabilities in future yearsaddition to the amounts already accrued due to: (i) the chance of as yet
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unknown contamination; (ii) future developments in environmental regulation; (iii) the results of on-going surveys or surveys to be carried out on the environmental status of certain Eni’s industrial sites as required by the applicable regulations on contaminated site; (iii) unfavorable developments in ongoing litigation on the environmental status of certain Company’s site where a number of public administrations and other possible effects deriving from the implementation of Decree No. 471/1999 of theItalian Ministry of Environment;for environment act as plaintiffs; (iv) the possible effects deriving from the implementation of certain enacted regulations such as the ones deriving from Decree No. 367 of the Ministry of Environment published in January 8, 2004, regarding the fixing ofpossibility that new quality standards for aquatic environment in relation to dangerous substances, and those deriving from the application of European directive 2004/35/EC concerning environmental responsibility for prevention and reclamation of environmental damage;litigation might arise; and (v) the possibility of litigationprobability that new and the difficulty of determining Eni’s liability, if any, as against other potentially responsible parties with respect to such litigation and the possible insurance recoveries.
stricter environmental laws might be implemented.
Legal Proceedings
Eni is a party to a number of civil actions and administrative proceedings arising in the ordinary course of the business. Although Eni’s management does not currently expect a material adverse effect on Eni’s financial position and results of operations on the basis of information availableIn addition to date and taking account of existing provisions Eni’s management cannot rule outaccrued as of the balance sheet date to account for ongoing proceedings, it is possible that in future years Eni may incur materialsignificant losses in addition to amounts already accrued in connection with pending legal proceedings due to: (i) uncertainty regarding the final outcome of each proceeding; (ii) the occurrence of new developments that management could not take into consideration when evaluating the likely outcome of each proceeding in order to accrue the risk provisions as of the date of the latest financial statements; (iii) the emergence of new evidence and information; and (iv) errors in the estimateunderestimation of probable future losses.
Risks
deriving from changesrelated to Changes inoil pricesthe Price of Oil, Natural Gas, Refined Products andin natural gas, refined and petrochemical products prices and marginsChemicals
Operating results in certain of Eni’s businesses, particularly the Exploration & Production, Refining & Marketing, Gas & Power and Petrochemical segments are affected by changes in the price of crude oil and by their impactmovements in crude oil prices on prices and margins of natural gas and refined and petrochemical products.
Eni’s results of operations are affected by changes in international oil prices
Overall, lower oil prices have a net adverse impact on Eni’s results of operations. The effect of lower oil prices on Eni’s average realizations offor produced oil prices is generally immediate. HoweverFurthermore, Eni’s average realizationrealizations for produced oil differsdiffer from the price of Brent crude marker crude Brentprimarily due primarily to the circumstance that Eni’s production slate, which also includes heavy crudes,crude qualities, has a lower API gravity compared with Brent crude (when processed the latter allows for higher yields of valuable products compared to heavy crudes,crude qualities, hence higher market price).
The favorable impact of higher oil prices on Eni’s results of operations may be offset by
thedifferent trendsofin marginsinfor Eni’s downstream businesses
AThe impact of changes in crude oil prices on Eni’s downstream businesses, including the Gas & Power, the Refining & Marketing and the Petrochemical businesses, depends upon the speed at which the prices of gas and products adjust to reflect these changes. Wholesale margins in the Gas & Power business are substantially independent from fluctuations in crude oil prices as purchase and selling prices of natural gas are contractually indexed to prices of crude oil and certain refined products according to similar pricing schemes. However, quarterly performance and year-to-year comparability of results of Eni’s natural gas business may be somewhat affected by the indexation mechanism of the raw material component in gas supplies to residential customers and certain resellers to residentials in Italy in accordance with applicable regulations from the Italian Authority for Electricity and Gas as outlined above in the risk factor describing the "Liberalization of the Italian Natural Gas Market". Specifically, this indexation mechanism provides a certain time lag between movements in the price of crude oil and the related adjustment to the selling price of natural gas. For a detailed discussion of this indexation mechanism in Italy see "Item 4 – Regulation – Gas & Power – Natural gas prices".
In the Refining & Marketing and Petrochemical businesses a time lag exists between movements in oil prices and movements in the prices and margins of natural gas and refined and petrochemical products. In particular, trends of natural gas margins in Eni’s natural gas business tend to mitigate the impact of changes in oil prices on Eni’s operating results due to different movements in prices of certain energy parameters to which natural gas purchase and sale prices are contractually indexed in different proportions and as measured over different reference periods.finished products.
Eni’s results of operations are affected by changes in European refining margins
The results of operations of Eni’s Refining & Marketing segment are substantially affected by changes in European refining margins which reflect changes in relative prices of crude oil and refined products. Generally, a time lag exists between changes in oilproducts as outlined above. The prices and movements inof refined products prices.in turn depend on global and regional supply/demand balances, inventory levels, refinery operations, import/export balances and weather. Furthermore, Eni’s realized margins are also affected by relative price movements of heavy crude qualities vs. light crude qualities, taking into account the ability of Eni’s refineries to process complex crudes that represent a cost advantage when market prices of heavy crudes are relatively cheaper than the marker Brent price. In 2009, Eni expects that weak demand for products and narrowing price differentials between heavy and light crudes ones will negatively affect the performance of Eni’s refining operations.
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Eni’s results of operations are affected by changes in petrochemical margins
Eni’s margins on petrochemical products margins are affected by trends in demand for petrochemical products and changes in oil prices which influence changes in costpurchase costs of petroleum-based feedstock. Generally, an increase in oil price determines a decrease inGiven the commoditized nature of Eni petrochemical products, it is difficult for the Company to transfer higher purchase costs for oil-based feedstock to selling prices to customers. In 2008, the profitability of Eni’s petrochemical segment was significantly affected by lower selling margins for commodity petrochemical products due to higher purchase costs for oil-based feedstock that were not fully transferred to selling prices of products in the short-term. Prolonged weaknessfirst half of the European economy as well as Eni’s own structural weaknesses have prevented Eni’s Petrochemical segment from returning to profitability in recent years due to the inability to transfer increases of oil-based feedstocks into selling prices. Due to industry conditionsyear and, subsequently by weak economic growth in Europe,demand for petrochemical products. These negative factors also triggered asset impairments. Management’s outlook for 2009 is also challenging, and management does not expect any significant and durable improvement in Petrochemicals segment profitability over the foreseeable future.
trading environment from 2008 and possibly a further contraction in margins on petrochemical products.
Risks from Acquisitions
Eni constantly monitors the oil and gas market in search of opportunities to acquire individual assets or corporations in order to achieve its growth targets or complement its asset portfolio. Acquisitions entail an execution risk – the risk that the acquirer will not be able to effectively integrate the purchased assets so as to achieve expected synergies. In addition, acquisitions entail a financial risk – the risk of not being able to recover the purchase costs of acquired assets, in case a prolonged decline in the market prices of oil and natural gas occurs. We also incur unanticipated costs or assume unexpected liabilities and losses in connection with companies or assets we acquire. If the integration and financial risks connected to acquisitions materialize our financial performance may be adversely affected.
Credit risk
Credit risk is the potential exposure of the Group to losses in case counterparties fail to perform or pay amounts due. Credit risks arise from both commercial partners and financial ones. Although the Group has never experienced material non-performance from its counterparties, due to the severity of the current economic and financial crisis it is possible that we may experience a higher than normal level of counterparty failure. In our consolidated financial statements for the year 2008, we accrued an allowance against doubtful accounts amounting to euro 251 million more than doubling the allowance made a year earlier.
Exchange Rates
Movements in the exchange rate of the euro against the U.S. dollar can have a material impact on Eni’s results of operations. Prices of oil, natural gas and refined products generally are denominated in, or linked to, U.S. dollars, while a significant portion of Eni’s expenses are denominated in euro.euros. Similarly, prices of Eni’s petrochemical products are generally denominated in, or linked to, the euro, whereas expenses in the PetrochemicalsPetrochemical segment are denominated both in euroeuros and U.S. dollars. Accordingly, a depreciation of the U.S. dollar versusagainst the euro generally has an adverse impact on Eni results of operations.
operations and liquidity because it reduces booked revenues by an amount greater than the decrease in dollar-denominated expenses. The Exploration & Production segment is particularly affected by movements in the U.S. dollar vs. the euro exchange rates. In 2008, Eni’s operating profit in this business segment has been impacted by an estimated amount of euro 1.2 billion due to a 7.3% depreciation of the U.S. dollar versus the euro.
Risks deriving from Eni’s Exposure to Weather
in Italy and SeasonalityConditions
Significant changes in weather conditions in Italy and in the rest of Europe from year to year may cause variations inaffect demand for natural gas and some refined products; in colder years, demand is higher. Accordingly, the results of operations of the Gas & Power segment and, to a lesser extent, the Refining & Marketing segment, as well as the comparability of results over different periods may be affected by such variationschanges in weather conditions. In addition, Eni’s results
Furthermore, our operations, particularly offshore production of operations reflect the seasonality in demand foroil and natural gas, are exposed to extreme weather phenomena that can result in material disruption to our operations and certain refined products used in residential space heating, the demand for which is typically highest in the first quarterconsequent loss or damage of the year, which includes the coldest months,properties and lowest in the third quarter, which includes the warmest months.
facilities.
Interest Rates
Interest on Eni’s financialfinance debt is primarily indexed at a spread to benchmark rates such as the Europe Interbank Offered Rate, "EURIBOR""Euribor", and the London Interbank Offered Rate, "LIBOR""Libor". As a consequence, movements in interest rates can have a material impact on Eni’s financialfinance expense in respect to its financialfinance debt.
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Critical Accounting Estimates
The preparation of financial statements entailsrequires management to make certain accounting estimates that are characterized by a high degree of uncertainty, complexity and judgment. These estimates affect the reported amount of the Company’s assets and liabilities, as well as the reported amount of the Company’s income and expenses for a given period. Although management believes these critical accounting estimates are thoroughly applied and underlying amounts are fairly determined, management cannot rule out thatto represent the best outcome of the estimation process, actual outcomes mayresults could differ from such estimates, due to, among other things, the following factors: uncertainty, lack or limited availability of information; the availability of new informative elements, variations in economic conditions such as prices, significant factors (e.g., removal technologies and costs) and the final outcome of legal, environmental or regulatory proceedings. See "Item 5 – Critical Accounting Estimates".
Item 4. INFORMATION ON THE COMPANY
History and Development of the Company
Eni SpA with its consolidated subsidiaries is engaged in the oil and gas, electricity generation, petrochemicals, oilfield services and engineering industries. Eni has operations in about 70 countries and 72,25878,880 employees as of December 31, 2005.2008.
Eni, the former Ente Nazionale Idrocarburi, a public law agency, established by Law No. 136 of February 10, 1953, was transformed into a joint stock company by Law Decree No. 333 published in the Official Gazette of the Republic of Italy No. 162 of July 11, 1992 (converted into law on August 8, 1992, by Law No. 359, published in the Official Gazette of the Republic of Italy No. 190 of August 13, 1992). The Shareholders’ Meeting of August 7, 1992 resolved that the company be called Eni SpA. Eni is registered at the Companies Register of Rome, register tax identification number 00484960588, R.E.A. Rome No. 756453. Eni is expected to remain in existence until December 31, 2100; its duration can however be extended by resolution of the shareholders.
Eni’s registered head office is located at Piazzale Enrico Mattei 1, Rome, Italy (telephone number: +39-0659821). Eni branches are located in:
• San Donato Milanese (Milan), Via Emilia, 1; and
• San Donato Milanese (Milan), Piazza Ezio Vanoni, 1.
Internet address: www.eni.it.
The name of the agent of Eni in the United States is Viscusi Enzo, 666 FifthDe Luca Vincenzo, 485 Madison Ave., New York, NY 1010310002.
Eni’s principal segments of operations and subsidiaries are described below.
Eni conducts its exploration and production activities through its Exploration & Production Division and certain operating subsidiaries. Eni’s exploration, development and production activities commenced in 1926, when Agip SpA was established by the Italian Government with a mandate to explore for and develop oil and natural gas. Agip SpA was merged into Eni SpA effective as of January 1, 1997 to become Eni’s Exploration & Production Division.
Eni is engaged in exploration and production of hydrocarbons in Italy, North Africa, West Africa, the North Sea, the Gulf of Mexico, Australia, South America and areas with great development potential such as the Caspian Sea, the Middle and Far East, India and Alaska. In 2005, Eni’s hydrocarbon production available for sale averaged 1,693 KBOE/d and, at December 31, 2005, Eni’s estimated proved reserves totalled 6,837 mmBOE with a life index of 10.8 years. In 2005, Eni’s Exploration & Production segment hadengages in oil and natural gas exploration and field development and production, as well as LNG operations in 39 countries, including Italy, Libya, Egypt, Norway, the UK, Angola, Congo, the U.S., Kazakhstan, Russia, Algeria, Pakistan and Australia. In 2008, Eni’s production of oil and natural gas amounted to 1,748 KBOE/d on an available-for-sale basis. As of December 31, 2008, Eni’s proved reserves of subsidiaries stood at 6,242 mmBOE; Eni’s share of reserves of equity-accounted entities amounted to 666 mmBOE. In 2008, Eni’s Exploration & Production segment reported net sales from operations (including intersegmentinter-segment sales) of euro 22,47733,318 million and operating profit of euro 12,57416,415 million.
Eni conducts its natural gas and electricity generation activities through its Gas & Power Division and certain operating subsidiaries. Eni’s natural gas supply, transmission and distribution activities commenced in the 1940s with the commercial sale of natural gas to industrial users in Northern Italy. Snam SpA was merged into Eni SpA effective as of February 1, 2002 to become Eni’s Gas & Power Division.segment engages in supply, transport, distribution and marketing of natural gas, as well as of LNG. This segment also includes the activity of power generation that enables Eni to extract further value from gas, diversifying its commercial outlets. In 2005,2008, Eni’s worldwide sales of natural gas amounted to third parties totalled 52.47104.23 BCM, including 6.00 BCM of gas sales made directly by the Eni’s Exploration & Production segment in Europe and the U.S. Sales in Italy and 23.44amounted to 52.87 BCM, in the rest of Europe; Eni’s share of natural gas volumes sold by its affiliates totalled 8.53 BCM (of which 7.85 billion was sold in the rest of Europe). Natural gas volumes consumed in operations by Eni and Eni’s subsidiaries – mainly in electricity generation, refining and petrochemicals operations – totalled 5.54 BCM. Natural gaswhile sales in Italy include: (i) salesEuropean markets were 43.03 BCM that included 11.25 BCM of gas sold to wholesalers, mainly local companies selling natural gascertain importers to residential and commercial customers, andItaly. Sales to large industrial and thermoelectric customers which are supplied by amarkets outside Europe amounted to 2.33 BCM. Through its 50.03 per cent-owned subsidiary Snam Rete Gas, Eni operates an Italian network of high and medium pressure pipeline network; and (ii) sales to residential and commercial customers which are supplied by a low pressure pipeline network. Eni’s high and medium pressure gas pipeline networkpipelines for natural gas transport that is about 30,700-kilometerapproximately 31,474-kilometer long, in Italy, while outside Italy Eni holds transmission rightscapacity entitlements on a network of European pipelines extending for approximately 5,0004,400 kilometers made up of high pressure pipelines. Eni’s naturalpipelines to import gas transport network in Italy is ownedfrom Russia, Algeria, Libya and managed by Snam Rete Gas SpA. Snam Rete Gas is listed on the Italian Stock Exchange, Eni’s share being 50.07%. Snam Rete Gas transports natural gas on behalf of Eni and third parties ("shippers"); in 2005 its transported volumes were 85.10 BCM, of which 30.22 billion were on behalf of third parties.North Europe production basins to European markets. Eni, through its 100%100 percent-owned subsidiary Italgas and other subsidiaries, is engaged in natural gas distribution activity in Italy serving 1,2821,320 municipalities through a low pressure network consisting of approximately 48,00049,400 kilometers of pipelines as of December 31, 2005.
2008. Eni conductsproduces electricity and steam at its electricity generation activities through its wholly-owned subsidiary EniPower SpA, which owns and manages Eni’s power stationsoperated sites of Livorno, Taranto, Mantova, Ravenna, Brindisi, and Ferrera Erbognone and Ferrara with a total installed capacity of approximately 4.5 gigawatt4.9 GW as of December 31, 2005.2008. In 2005, sold production2008, sales of electricity totalled 22.77 terawatthours.totaled 29.93 TWh. Eni owns other minor power stations locatedoperates a re-gasification terminal in Eni’s petrochemical plantsItaly and refineries whose production is mainly for internal consumption. The accountsholds indirect interest or capacity entitlements in a number of these power stations are reported within Eni’s Refining & MarketingLNG facilities in
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Europe, Egypt and Petrochemicals segments.
in certain projects under construction in the U.S. In 2005,2008, Eni’s Gas & Power segment hadreported net sales from operations (including intersegmentinter-segment sales) of euro 22,96936,936 million and operating profit of euro 3,3213,933 million.
Eni conducts its refining and marketing activities through the Refining & Marketing Division and certain operating subsidiaries. Activities commenced in the 1930s, when Eni initiated the development of the industrial and retail markets for refined products in Italy. AgipPetroli SpA was merged into Eni SpA effective December 31, 2002 to become Eni’s Refining & Marketing Division. Eni’ssegment engages in refining and marketing activities are located primarilyof petroleum products mainly in Italy and in the rest of Europe. In 2005,2008, processed volumes of crude oil and other feedstock amounted to 35.84 mmtonnes and sales of refined products were 50.68 mmtonnes, of which 28.92 mmtonnes in Italy. Retail sales of refined product at operated service stations amounted to 12.67 mmtonnes including Italy and the rest of Europe. In 2008, Eni’s retailingretail market share for refined products in Italy through its Agip-branded network of service stations was 29.7%30.6%. In 2005, Eni divested its wholly-owned subsidiary Italiana Petroli which is engaged in the retail marketing of refined products through a network consisting primarily of leased service stations, under the IP brand. In 2005, sales of refined products totalled 51.63 million tonnes, of which 30.29 million were in Italy. The balanced refining capacity of Eni’s wholly-owned refineries totalled 524 KBBL/d as of December 31, 2005. In 2005,2008, Eni’s Refining & Marketing segment hadreported net sales from operations (including intersegmentinter-segment sales) of euro 33,73245,083 million and operating profitnet loss of euro 1,8571,023 million.
Eni’s petrochemical activities commenced in the 1950s, when it beganinclude production of basic petrochemicals at its Ravenna industrial complex. Through Polimeri Europa SpA and its subsidiaries, Eni operates in olefins and aromatics, basic intermediate products, chlorine derivatives, polyethylene, polystyrenes, and elastomers. Eni’s petrochemical operations are concentrated in Italy and in Western Europe. In 2005,2008, Eni sold 5.4 million tonnes4.7 mmtonnes of petrochemical products. In 2005,2008, Eni’s PetrochemicalsPetrochemical segment hadreported net sales from operations (including intersegmentinter-segment sales) of euro 6,2556,303 million and an operating profitnet loss of euro 202822 million.
Eni’s oilfield services, construction and engineering activities commenced in the late 1950s. Throughare conducted through its 42.91 per cent-owned subsidiary Saipem SpA (a 43% owned subsidiary) and its subsidiaries, Eni operates inSaipem’s controlled entities. Activities involve offshore construction, in particularparticularly fixed platform installation, subseasub-sea pipe laying and floating production systems. Through Snamprogetti SpA (a wholly owned subsidiary)systems and its subsidiaries Eni is a provider ofonshore construction. Offshore and onshore drilling services and engineering and project management services are also provided to the oil and gas, refining and petrochemical industries. In 2005,2008, Eni’s Oilfield Services,Engineering & Construction and Engineering segment hadreported net sales from operations (including intersegmentintra-group sales) of euro 5,7339,176 million and operating profit of euro 3071,045 million.
A list of subsidiaries of Eni is included as an exhibit to this Annual Report on Form 20-F.
Strategy
Eni’s strategy is to grow the Company’s main businesses, over both the medium and the long-term, with improving profitability. This strategy has remained unchanged in spite of the current economic downturn and an uncertain outlook for the global energy demand. In executing this strategy, management intends to preserve a solid capital structure targeting an optimal mix between net borrowings and shareholders’ equity. By this means, management expects to maintain the Company’s current credit rating. Over the next four-years, Eni plans to deployexecute a capital expenditure program amounting to euro 48.8 billion to support organic growth. Eni plans to fund this capital expenditure program mostly by means of cash flows provided by operating activities. Capital projects will be assessed and implemented in accordance with tight financial criteria. The Company intends to remunerate its shareholders through significant dividend distributions so as to ensure to its shareholders competitive dividend yields (measured as the ratio of dividend to the share price recorded on average in the month of December on the Italian stock exchange). Management intends to support the Company’s profitability by focusing on cost reduction initiatives, including a number of actions that will be implemented in order to benefit from the expected reduction in purchase costs for oilfield materials, equipment and services in the Exploration and Production segment. For a description of risks and uncertainties associated with the Company’s outlook and the capital expenditure program See "Item 5 – Management’s Expectations of Operations".
Eni’s strategy of organic growth intended to sustain the group’s business over the long-term.
In thein its Exploration & Production activities, Eni plansoperations is to grow production leveraging on the development of oil and natural gas through organic growth, targetingthe Company’s asset portfolio. Eni targets to achieve a production level of more than 2 mmBOE/d in 2009, which corresponds to a compound average growth rate of approximately 4% under certain trading environment assumptions (See3.5% on average over the 2009-2012 period, assuming Eni’s Brent price scenario of 55 U.S. dollar per barrel in 2012. For a discussion of Eni’s production volume sensitivity to oil prices see "Item 5 – ManagementManagement’s Expectations of Operations"). Eni plans to reach said production target by leveraging in particular on the contribution of recently completed large development projects and projects in the development phase in Angola, Libya, Nigeria, Egypt, Iran, Algeria and Kazakhstan. Management will continue to evaluateassess opportunities to increase production through the purchase of corporations or individual assets.acquisitions. Eni intends to pay special attention to reserve replacement in order to ensuresecure the medium to long-term sustainability of its business.
In its Gas & Power activities, Eni intends to grow natural gas sales in the international market, preserve the profitability of the Italian marketing business, effectively manage regulated businesses, and develop a global LNG business. Due to the current economic downturn, the Company has revised down its long-term growth expectations for the European gas demand from 3% to 2% per annum until 2020. For a description of trends in the natural gas markets see "Gas & Power" below. The impact of a worsening demand outlook and increasing competitive pressure on Eni’s results of operations on the domestic market is expected to be offset by the contribution of regulated businesses and continuing growth in European markets, mainly driven by the integration of the recently acquired Belgian company Distrigas. Eni targets worldwide gas sales of 124 BCM in 2012, including E&P sales in Europe and the U.S. In particular, Eni targets to achieve an annual average growth rate of 7% in international sales in the four-year period 2009 to 2012. The Company’s strategy contemplates a further strengthening of Eni’s presence in the European market, leveraging on the synergies expected from the acquisition of Distrigas (for further details see below – "Significant business and portfolio developments"). The integration with upstream activities will provide the Gas & Power business with opportunities to monetize the equity gas reserves and develop LNG sales.
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In its Refining & Marketing activities, the Company’s strategy focuses on improving the business profitability and reducing the cash requirements of the business by means of strict capital discipline also in light of a weak outlook for refined products demand. The Company intends to selectively upgrade its refinery system and improve quality standards in marketing activities as well as increase operating efficiency. In refining Eni plans to increase the conversion index and flexibility of plants in order to achieve a higher yield of middle distillates and increase the ability of its refineries to process less valuable crudes. In marketing, Eni intends to strengthen its leadership position in the Italian retail market trough plant upgrading, loyalty programs and enhanced non-oil service formats. In Europe, Eni’s growth strategy will continue to be selective, focusing on those markets where it can leverage on scale, supply and logistic synergies and brand awareness.
In its Engineering & Construction activities, Eni aims at developing and expanding its geographical reach and technical characteristics of its world class fleet in order to maintain its strong competitive position and reduce its exposure to the cyclicality of the oil industry.
In technological research and innovation activities, Eni plans to implement significant capital expenditures amounting to euro 1.1 billion in the next four years to develop such technologies that management believes may ensure competitive advantages in the long-term. Eni plans to continue developing ongoing programs focused on reducing costs to find and recover hydrocarbons, developing clean fuels, upgrading heavy crude (in particular the EST project), monetizing natural gas through projects such as high pressure high distance gas transmission (TAP) and Gas to Liquids (GTL), and protecting the environment by investing in the fields of renewable sources of energy and reduction of GHG emissions.
Significant business and Portfolio Developments
The significant business and portfolio developments that occurred in 2008 and to date in 2009 were the following:
• | In January 2008, Eni completed the acquisition of the entire issued share capital of the UK-based oil company Burren Energy Plc, for a total cash consideration amounting to approximately euro 2.4 billion (including Burren’s shares purchased in 2007, for a total amount of euro 0.6 billion). In 2008 production of Burren assets averaged 25 KBBL/d in Congo and Turkmenistan. | |
• | In October 2008, all the international parties to the North Caspian Sea Production Sharing Agreement (NCSPSA) consortium and the Kazakh authorities signed the final agreement implementing the new contractual and governance framework of the Kashagan project, based on the Memorandum of Understanding signed on January 14, 2008. Eni’s management expects to achieve first oil at the Kashagan field by the end of 2012. | |
• | In October 2008, following authorization from the European Commission, Eni closed the acquisition of a 57.243% majority stake in the Belgian company Distrigas NV from the French company Suez-Tractebel. The deal entailed cash consideration of euro 2.75 billion. On December 30, 2008, Eni was granted authorization from the Belgian market authorities to execute a mandatory tender offer on the minority shareholders of Distrigas. On March 19, 2009, the mandatory tender offer on the minority shareholders of Distrigas was finalized. Shareholders representing 41.61% of the share capital of Distrigas tendered 292,390 shares on Eni’s offer. Publigaz Scrl tendered its entire interest (31.25%). On April 8, 2009 Eni paid to those shareholders cash consideration amounting to euro 1,991 million. Following the tender offer, Eni owned 98.86% of the share capital of Distrigas. The squeeze-out on the residual 1.14% was completed in early May. Consequently Eni now holds all the shares of Distrigas except for one share belonging to the Belgian State with special powers. Distrigas shares have been delisted from Euronext Brussels. | |
• | In October 2008, Eni signed an agreement with Suez related to the sale of a number of Eni’s assets as well as long-term gas and electricity supply contracts. As of end of December 2008 the following agreements have been finalized: (i) the Virtual Power Plant agreement that grants Suez the right to off-take volumes of electricity corresponding to capacity of up to 1,100 MW for a period of 20 years, with proceeds of euro 1.21 billion; (ii) gas supply contracts up to 4 BCM/y to be delivered in Italy for a period of 20 years and an option to purchase up to 2.5 BCM/y to be delivered in Germany for a period of 11 years, with proceeds amounting to euro 255 million; (iii) supply contracts for 0.9 BCM/y of LNG for a period of 20 years at a price of euro 87 million; (iv) on October 30, 2008 the Eni fully-owned subsidiary Italgas and the partner Suez signed a purchase and sale contract regarding an asset identified as the gas distribution network of the city of Rome and certain nearby municipalities owned by Italgas. The contract is a final one which validity is conditional upon approval by the Municipal body of the city of Rome to be granted not later than August 31, 2009 regarding the change in the entity who will act as operator of the service concession arrangement in place as a consequence of the closing of the contract; and (v) a number of contracts were also signed for the divestment of a number of upstream exploration and production concessions in the UK, the Gulf of Mexico, Egypt and Indonesia entailing cash consideration up to euro 273 million. Closing of the contracts regarding properties in Egypt and Indonesia is conditional upon approval from relevant local Authorities, while contracts have been closed regarding the sale of properties in the UK and the Gulf of Mexico. | |
• | In November 2008, Eni finalized an agreement to acquire all the common shares of First Calgary Petroleums Ltd, a Canadian oil and gas company with exploration and development activities in Algeria. |
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The acquisition values the fully diluted share capital of First Calgary at approximately euro 605 million. Production start-up is expected in 2011 with a projected plateau of approximately 30 KBOE/d net to Eni by 2012. |
In addition, in 2008 Eni completed the following transactions:
• | In February 2008, as part of the announced plan to dispose of non core assets, Eni sold its 30% interest in Gaztransport & Technigaz SA (GTT), a company owning a patent for the construction of tanks for LNG transport, to Hellman & Friedman for a total value of euro 310 million. | |
• | In June 2008, Eni finalized a strategic oil transaction with the Libyan national oil company based on the framework agreement of October 2007. This transaction effective from January 1, 2008, extends the duration of Eni’s oil and gas properties in Libya until 2042 and 2047 respectively and lays the foundations for a number of projects targeting development of the significant gas potential in the country. |
• | In April 2008, Eni signed a Memorandum of Understanding with the state-owned company Qatar Petroleum International to target joint investment opportunities in the exploration and production of oil and gas. | |
• | In May 2008, Eni defined a cooperation agreement with the Republic of Congo for the extraction of unconventional oil from the Tchikatanga and Tchikatanga-Makola oil sands deposits with over extension of 1,790 square kilometers. Eni plans to monetize the heavy oil by applying its EST (Eni Slurry Technology) proprietary technology intended to convert entirely the heavy barrel into high-quality light products. The agreement also comprises the construction of a new 450 MW electricity generation plant (Eni’s share 20%) to be fired by 2009 with the associated natural gas from the operated M’Boundi field and a partnership for the production of bio-diesel. | |
• | In July 2008, Eni renewed the Memorandum of Understanding with Brazilian oil company Petrobras for the evaluation of joint initiatives in the upstream and downstream sectors, to produce and market renewable fuels and the possible options for the valorization of the natural gas reserves discovered by Eni offshore Brazil. | |
• | In September 2008, Eni finalized the purchase of a 17% stake in the share capital of Gaz de Bordeaux SAS active in the marketing of natural gas in the Bordeaux area. Eni’s associate Altergaz (Eni’s interest being 38.91%) also entered the transaction with an equal stake. The two partners signed also a long-term agreement for the supply of 250 mmCM/y of gas for ten years to Gas de Bordeaux. | |
• | In September 2008, Eni signed a strategic agreement with Petroleos de Venezuela, SA (PDVSA) for the exploration and development of two offshore Venezuelan areas and the subsequent development of gas resources via an LNG project. | |
• | In October 2008, Eni completed the divestment of the entire share capital of the subsidiary Eni Agip España to Galp Energia SGPS SA following the exercise of a call option in October 2007, pursuant to agreements among Galp’s shareholders. The divested asset includes 371 service stations as well as wholesale marketing activities of oil products located in the Iberian Peninsula. | |
• | In October 2008, Eni signed a partnership agreement with Papua New Guinea for the exploration of oil and gas and identification of opportunities to develop the Country’s resources. Eni is also interested to joint opportunities related to power generation projects and the development of alternative and existing renewable energies. | |
• | In November 2008, Eni finalized an agreement with the British company Tullow Oil Ltd to purchase a 52% stake and the operatorship of fields in the Hewett Unit and relevant facilities in the North Sea in close proximity to the Interconnector pipeline. Eni plans to upgrade certain depleted fields in the area so as to achieve a gas storage facility with a 177 BCF capacity to support seasonal upswings in gas demand in the UK. | |
• | In November 2008, Eni finalized a Memorandum of Understanding with Colombia’s state oil company Ecopetrol to evaluate joint exploration opportunities. |
Recent developments are described below.
• | On April 7, 2009 Gazprom exercised its call option to purchase the 20% interest in OAO Gazprom Neft held by Eni following agreements between the two partners. The 20% interest in Gazprom Neft was acquired by Eni on April 4, 2007 as part of a bid procedure for the assets of bankrupt Russian company Yukos. The exercise price of the call option is equal to the bid price (U.S. $3.7 billion) as adjusted by subtracting dividends distributed and adding the contractual yearly remuneration of 9.4% on the capital employed and financing collateral expenses. At the same time, Eni and Gazprom signed new cooperation agreements targeting certain development projects to be conducted jointly in Russia and other countries of interest. Terms of the call option granted to Gazprom to purchase a 51% interest in the share capital of OOO SeverEnergia (Eni’s interest being 60%), which owns 100% of three Russian companies engaging in the development of gas reserves, are currently under review by Eni, Enel and Gazprom. | |
• | On February 12, 2009, Eni’s Board of Directors approved the divestment of 100% of Italgas SpA and Stoccaggi Gas Italia SpA (Stogit) to Snam Rete Gas (50.03% owned by Eni) for total cash consideration of euro 4,720 million (euro 3,070 million and euro 1,650 million, respectively). The transaction will be |
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financed by Snam Rete Gas through: (i) a rights issue up to a maximum of euro 3.5 billion (Eni has already committed to subscribe its relative share of the rights issue); and (ii) new medium to long-term financing for euro 1.3 billion. The main impacts expected on Eni’s consolidated financial statements when the transaction closes will be: (i) a decrease of euro 1.5 billion in net borrowings and a corresponding increase in total equity as a consequence of the pro-quota subscription of the Snam Rete Gas capital increase by the minoritiy shareholders; and (ii) a decrease in Eni’s net profit equal to 45% of the aggregate net profit of Italgas and Stogit, with a corresponding increase in net profit attributable to minoritiy shareholders. From an industrial perspective the transaction, expected to close in July 2009, will create significant synergies in the regulated businesses segment and maximize the value of Italgas and Stogit due to the higher visibility of regulated businesses as a part of Snam Rete Gas. |
In 2008 capital expenditures amounted to euro 14,562 million, of which 84% related to the Exploration & Production, Gas & Power and Refining & Marketing segments and mainly related to: (i) the development of oil and gas reserves (euro 6,429 million) deployed mainly in Kazakhstan, Egypt, Angola, Congo and Italy and exploration projects (euro 1,918 million), primarily in the United States, Egypt, Nigeria, Angola and Libya; (ii) the purchase of proved and unproved property for euro 836 million related mainly to the extension of mineral rights in Libya following an agreement signed in October 2007 with the state company NOC and the purchase of a 34.81% interest in the ABO project in Nigeria; (iii) the development and upgrading of Eni’s natural gas transport and distribution networks in Italy (euro 1,130 million and euro 233 million, respectively) and upgrading of natural gas import pipelines to Italy (euro 233 million); (iv) the ongoing construction of combined cycle power plants (euro 107 million); (v) projects designed to upgrade the conversion capacity and flexibility of Eni’s refineries, including construction of a new hydrocracking unit at the Sannazzaro refinery, and to build of new service stations and upgrade of existing ones in Italy and outside Italy (totaling euro 965 million); and (vi) the upgrading of the fleet used in the Engineering & Construction division (euro 2,027 million).
In 2008, Eni’s acquisitions amounted to euro 5.85 billion (euro 4.3 billion net of acquired cash of euro 1.54 billion) and mainly related to: (i) the acquisition of the 57.243% majority stake in Distrigas NV; (ii) the completion of the acquisition of Burren Energy Plc; (iii) the purchases of certain upstream properties and gas storage assets, related to the entire share capital of the Canadian company First Calgary operating in Algeria, a 52% stake in the Hewett Unit in the North Sea, a 20% stake in the Indian company Hindustan Oil Exploration Co; and (iv) other investments in non-consolidated entities mainly related to funding requirements for an LNG project in Angola.
In 2007, capital expenditures amounted to euro 10,593 million, of which 84.7% related to the Exploration & Production, Gas & Power and Refining & Marketing businesses, and primarily related to: (i) the development of oil and gas reserves (euro 4,788 million) deployed predominantly in Kazakhstan, Egypt, Angola, Italy and Congo, and exploration projects (euro 1,659 million) particularly in the Gulf of Mexico, Egypt, Norway, Nigeria and Brazil; (ii) development and upgrading of Eni’s natural gas transport and distribution networks in Italy (euro 886 million) as well as upgrading of natural gas import pipelines to Italy (euro 253 million); (iii) the ongoing construction of combined cycle power plants (euro 175 million); (iv) projects designed to upgrade the conversion capacity and flexibility of Eni’s refineries, including construction of a new hydrocracking unit at the Sannazzaro refinery, and to build and upgrade service stations (totaling euro 979 million); and (v) the upgrading of the fleet used in the Engineering & Construction segment (euro 1,410 million).
In 2007, Eni’s acquisitions amounted to euro 9.7 billion and mainly related to: (i) a 60% interest in three Russian gas companies as part of the liquidation procedure of bankrupt Russian company Yukos. Through the same transaction Eni also purchased a 20% stake in the oil and gas company OAO Gazprom Neft. Gazprom was granted a call option to purchase a 51% interest in those three gas companies and the 20% stake in OAO Gazprom Neft; (ii) the purchase of upstream assets in the Gulf of Mexico; (iii) the purchase of upstream assets onshore Congo; (iv) the purchase of a 24.9% interest in Burren Energy; (v) the acquisition of a further 16.11% stake in the Ceska Rafinerska in the Czech Republic increasing Eni’s ownership interest to 32.4%; (vi) the purchase of 102 retail fuel stations and related marketing assets located in the Czech Republic, Slovakia and Hungary; and (vii) the purchase of a 13.6% stake in the Angola LNG consortium.
BUSINESS OVERVIEW
Exploration & Production
Eni’s Exploration & Production segment engages in oil and natural gas exploration and field development and production, as well as LNG operations, in 39 countries, including Italy, Libya, Egypt, Norway, the UK, Angola, Congo, the U.S., Kazakhstan, Russia, Algeria, Pakistan and Australia. In 2008, Eni produced 1,748 KBOE/d on an available for-sale basis. As of December 31, 2008, Eni’s proved reserves of subsidiaries stood at 6,242 mmBOE; Eni’ share of reserves of equity-accounted entities amounted to 666 mmBOE.
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Eni’s strategy in its Exploration & Production operations is to increase production leveraging on the development of its asset portfolio. Eni plans to achieve a production growth rate of 3.5% on average over the 2009-2012 period, under certain trading environment assumptions (See "Item 5 – Management’s Expectations of Operations"). A description of Eni’s production volume sensitivity to oil prices is disclosed under "Item 5 – Management’s Expectations of Operations".
Future growth will be driven by the development of new projects located in a number of strategic oil and gas basins in the world, namely the Caspian Region, North and West Africa and the Gulf of Mexico. A high-quality portfolio geographically focused and resilient, with one of the lowest breakeven prices in the industry, high exposure to the most competitive giant projects and long-standing relationships with key host countries will enable any to deliver industry-leading growth even in current market conditions. Management will continue to evaluate opportunities to increase production through focused acquisitions. Eni intends to pay special attention to reserve replacement in order to guarantee the medium-to long-term sustainability of its business. Eni intends to optimize its portfolio of development properties by focusing on areas where its presence is established, seeking for new opportunities and divesting marginal assets. Eni also intends to develop its LNG business also through the purchase of interests in liquefaction plants in order to better exploitmonetize its naturallarge base of gas reserves in North and West Africa. In exploration activities Eni intends to renew its portfolio of properties focusing on such areas where management believes a high mineral potential exists, on assets in areas where its presence is established (in particular Egypt, Nigeria, the United States, Italy and Norway) and to start exploration in newly acquired areas (in particular Alaska, Libya and India).
In the Gas & Power activities, Eni plans to grow natural gas sales in the rest of Europe and to develop its presence in the LNG business in order to compensate for lower growth opportunities on the domestic market due to the limits imposed on operators by the sector regulation and increasingly intense competition. In Italy, Eni plans to comply with regulatory limits on direct sales and input volumes to the national transport network by optimizing allocation of supplies between direct sales in Italy and in the rest of Europe and by using natural gas at its own electricity generation plants and, at the same time, leveraging on the expected consumption growth. In the medium term, management expects its natural gas sales in Italy to decline from the 58 BCM level recorded in 2005 as a consequence of increasing competition from third parties. Eni plans to implement a more attractive commercial offer than Eni’s competitors’ on the basis of the quality of services, pricing formulas including different indexation schemes to suit various customers’ purchasing profile and the integration of supply of gas and electricity. Management plans to grow natural gas sales on European markets by leveraging on the availability of Eni’s equity gas and on a diversified portfolio of supply contracts, an extensive gas pipeline network, which allows for the supply of natural gas from several sources, and long standing relationships with producing countries. Eni intends to strengthen its presence in markets where its presence is already established – such as the Iberian Peninsula, Germany and Turkey – and to develop sales in markets with significant growth and profitability prospects (in particular France and the United Kingdom).
In the Refining & Marketing activities, Eni intends to maximize returns from its existing assets. In the refining activity Eni plans to invest in new primary distillation capacity and in new conversion capacity to make its refining system flexible enough to obtain a higher yield of middle distillates and to achieve a greater vertical integration with its upstream activities. In marketing Eni aims to improve its competitive position in Italy and to increase sales in selected neighboring countries in the Rest of Europe.
Eni’s oilfield services construction and engineering activities play an essential role in contributing to technological innovations and in the implementation of world-scale projects thus supporting Eni’s growth process in the oil & gas business.
In technological research and innovation activities Eni plans to implement a relevant capital expenditure programme to develop such technologies that management believes may ensure competitive advantages in the long-term and promote sustainable growth. Eni plans to continue developing existing programmes on clean fuels, sulphur and greenhouse gas management as well as projects such as the upgrading of heavy crudes (EST), high pressure gas transmission (TAP) and Gas to Liquids (GTL).
In pursuing this strategy Eni plans a capital expenditure programme amounting to euro 35.2 billion over the next four years. Eni plans to finance this capital expenditure programme by using the cash provided by operating activities. Over the next four year period, the Company expects to distribute to its shareholders a flow of dividends in line with the level of 2005 under certain assumptions (See "Item 8 – Dividends"). Eni aims to allocate cash flow in excess of capital expenditure and dividend requirements to continue its programme of share buy-back while at the same time maintaining a strong balance sheet. See "Item 5 – Management Expectations of Operations".
Key Developments
The most significant events that occurred during 2005 and to date in 2006 were the following:
In 2005, capital expenditure amounted to euro 7.4 billion, of which 91% related to the Exploration & Production, Gas & Power and Refining & Marketing segments, and was primarily related to: (i) the development of oil and gas reserves (euro 3,952 million) in particular in Kazakhstan, Libya, Angola, Italy and Egypt, exploration projects (euro 656 million) and the purchase of proved and unproved property (euro 301 million); (ii) upgrading of Eni’s natural gas transport and distribution networks in Italy (euro 825 million); (iii) the continuation of construction of combined cycle power plants (euro 239 million); (iv) actions for improving flexibility and yields of refineries, including the completion of construction of the tar gasification plant at the Sannazzaro refinery, and the upgrade of the refined product distribution network in Italy and in the rest of Europe (overall euro 656 million); and (v) upgrading of vessels and other equipment and facilities in Kazakhstan and West Africa in the Oilfield services and construction business (euro 346 million).
In 2005 capital expenditure decreased by euro 85 billion over 2004, or 1.1%, due to a euro 299 billion reduction, or 20.6%, in the Gas & Power business due principally to the completion of the Greenstream underwater pipeline project and the nearing to completion of the power generation development plan.
In 2004, capital expenditure amounted to euro 7.5 billion (of which 94% related to the Exploration & Production, Gas & Power and Refining & Marketing segments) and concerned: (i) development of hydrocarbon fields (euro 4,369 million) in particular in Libya, Iran, Angola, Italy, Kazakhstan, Egypt, Nigeria and Norway, and exploration (euro 499 million); (ii) upgrading of Eni’s natural gas transmission and distribution network in Italy (euro 721 million); (iii) the construction of the tar gasification plant at the Sannazzaro refinery, actions on refineries for the adjustment of automotive fuel characteristics to new European specifications and the upgrade of the refined product distribution network in Italy and in the rest of Europe (for a total of euro 669 million); and (iv) the continuation of construction of electricity generation plants (euro 451 million) and the completion of the Greenstream underwater pipeline project (euro 159 million).
BUSINESS OVERVIEW
Exploration & Production
Eni operates in the exploration and production of hydrocarbons in Italy, North Africa, West Africa, the North Sea, the Gulf of Mexico, Australia and South America. It also operates in areas such as the Caspian Sea, the Middle and Far East, India and Alaska where management believes a great mineral potential exists. In 2005, Eni produced 1,693 KBOE/d; as of December 31, 2005, Eni’s proved reserves totalled 6,837 mmBOE. Eni plans to grow production of oil and natural through organic growth, targeting a production level of more than 2 mmBOE/d in 2009 which corresponds to a compound average growth rate of approximately 4% under certain trading environment assumptions (See "Item 5 – Management Expectations of Operations"). Eni plans to reach said production target by leveraging in particular on the contribution of recently completed great development projects and projects in the development phase in Angola, Libya, Nigeria, Egypt, Iran, Algeria and Kazakhstan. Management will continue to evaluate opportunities to increase production through the purchase of corporations or individual assets. Eni intends to pay special attention to reserve replacement in order to guarantee the medium to long-term sustainability of its business. Eni intends to optimize its portfolio of development properties by focusing on areas where its presence is established, seeking for new opportunities and divesting marginal assets. Eni intends to develop its LNG business also through the purchase of interests in liquefaction plants in order to better exploit its natural gas reserves in North and West Africa.
In exploration activities, Eni intends to renew its portfolioconcentrate resources in well established areas of properties focusing onpresence where availability of production facilities, existing competencies and long-term relationships with host countries will enable Eni to readily put in production discovered reserves, reducing the time-to-market and capturing synergies. Approximately 80% of planned capital expenditures will be directed to such core areas where management believes a high mineral potential exists, assets(located mainly in areas where its presence is already established (in particular Egypt, Nigeria, the United States, Egypt, Libya, Nigeria, Angola, Italy, Norway and Norway)Congo). Eni also plans to selectively pursue high risk/high reward opportunities arising from expansion in areas with high mineral potential. Eni expects to purchase new exploration permits and to startdivest or exit marginal or non strategic ones.
In order to execute these strategies, Eni intends to invest approximately euro 32.6 billion on reserve development and field optimization as well as exploration in newly acquired areas (in particular Alaska, Libyaprojects over the next four-year period; euro 1.8 billion of which will be spent to build transportation infrastructures and India).execute LNG projects through equity-accounted entities.
In 2009, oil and gas prices are expected to be significantly lower than 2008. In response Eni plans to improve profitability of its performanceoperations by searchingimplementing a number of initiatives designed to reduce costs to develop and operate oil and gas fields by leveraging on the expected reduction in purchase costs of oilfield services, materials and equipment due to the economic downturn. Management has yet to commit a large amount of future development expenditures and plans to be able to benefit from ongoing downward trends in rates of oilfield services and purchase costs of goods and equipment. Additional cost control measures will address ongoing operations. The amount of planned capital expenditures for operating solutionsthe years 2009-2012 already factors in the benefits associated with lower operating costs and synergies.
cost control. See "Item 3 – Risk Factors".
Oil and Natural Gas Reserves
Eni continues to exercisehas always exercised rigorous control over the booking of proved reserves. The Reserve Department of the Exploration & Production segment reporting directly to the General Manager, is entrusted with the task of keeping reserve classification criteria ("criteria") constantly updated and of monitoring theircontinuously updating the Company’s guidelines regarding reserves evaluation. The department monitors the periodic process of estimate. The criteriaestimation process. Company guidelines follow Regulation S-X ruleRule 4-10 of the U.S. Securities and Exchange Commission (SEC) as well as on specific issues not regulated by the SEC rules, the consolidatedestablished practice recognizedendorsed by qualified reference institutions. The current criteria applied by Eniinstitutions on the marketplace. Company guidelines have been examinedreviewed by DeGolyer and MacNaughton (D&M), an independent oil engineerspetroleum engineering company, which confirmed that they are complianthas certified their compliance with theapplicable SEC rules. D&M has also stated that the criteriaCompany guidelines regulate situations for which the SEC rules are less precise, providing a reasonable interpretation in line with the generally accepted practices in international markets. When participating in exploration and production activities operated by other entities, Eni also estimates its proved reserves on the basis of the mentioned criteria also when it participates in explorationabove guidelines.
The process for evaluating reserves involves: (i) business unit managers (geographic units) and Local Reserve Evaluators (LRE) who perform the evaluation and classification of reserves including estimates of production activities operatedprofiles, capital expenditures, operating costs and costs related to asset retirement obligations; (ii) geographic area managers at head offices checking evaluations carried out by other entities.business unit managers; and (iii) the Reserve Department, which provides independent reviews of the fairness and correctness of classifications carried out by business units, aggregates worldwide reserve data and performs an economic assessment of reserves to calculate equity volumes. Moreover, the Reserve Department has the responsibility to ensure the periodic certification process of reserves and to update continuously the Company guidelines on reserves evaluation and classification.
Beginning inSince 1991, Eni has requested qualified independent petroleumoil engineering companies to carry out an independent evaluation2 of its proved reserves on a rotationrotational basis. Eni believes those independent evaluators to be experienced
(2) | i | From 1991 to 2002 DeGolyer and MacNaughton, from 2003 also Ryder Scott. |
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and qualified in the marketplace. In particularthe preparation of their reports, those independent evaluators relied, without independent verification, upon information furnished by Eni with respect to property interest, production, current cost of operation and development, agreements relating to future operations and sale, prices and other factual information and data that were accepted as represented by the independent evaluators. This information was used by Eni in 2005determining its proved reserves and included log, directional surveys, core and PVT (Pressure Volume Temperature) analysis, maps, oil/gas/water production/injection data of wells, reservoir, and field, reservoir studies; technical analysis relevant to field performance, reservoir performance, long-term development plans, future capital and operating costs. In order to calculate the economic value of reserves net present value (NPV), actual prices received from hydrocarbon sales, instructions on future prices, and other pertinent information are provided. Accordingly, Eni believes that the work performed by the independent evaluators is to be considered an evaluation of Eni’s proved reserves carried out in parallel with the internal evaluation. The circumstance that the independent evaluations achieved the same results as those of the Company for the vast majority of fields support management’s confidence that the company’s booked reserves meet the regulatory definition of proved reserves which are reasonably certain to be produced in the future. When the assessment of independent engineers is lower than internal evaluations, Eni revises its estimates based on information provided by independent evaluators. In any case, those differences were not significant.
In 2008, a total of 1.641.5 BBOE of proved reserves or about 24%of subsidiaries have been evaluated, representing approximately 25% of Eni’s total proved reserves of subsidiaries at December 31, 2005, have been evaluated. The results of this independent evaluation confirmed Eni’s evaluations, as they did in past years.2008. In the 2003-2005 three year2006-2008 three-year period, independent evaluations concerned 84%76% of Eni’s total proved reserves; in particular evaluations concerned allreserves of subsidiaries were subject to independent evaluations. As at December 31, 2008 the new development projects, including Kashagan,most important of Eni’s properties which were not subject to an independent evaluation were: Bouri and most large-sized mature fields.Bu Attifel (Libya), Barbara (Italy), M’Boundi (Congo) and Elgin-Franklin (United Kingdom).
Eni’s proved reserves of oil and natural gassubsidiaries at December 31, 2005 totalled 6,8372008 totaled 6,242 mmBOE (oil and condensates 3,7733,243 mmBBL; natural gas 17,59117,214 BCF) representing a decreasean increase of 381232 mmBOE, or 5.3%3.9%, from December 31, 2004. The reserve replacement ratio was 40% in 2005; the average reserve replacement ratio for the last three years was 89%. The average reserve life index is 10.8 years (12.1 at December 31, 2004). The reserve replacement ratio was calculated dividing additions to proved reserves for year 2005 by total production, each as derived from the tables of changes in proved reserves prepared in accordance with SFAS No. 69 presented in Note 35 to the Consolidated Financial Statements. Management considers the reserve replacement ratio to be a key measure of the ability of the company to sustain its growth prospects. However, the ratio measures past performance and cannot be used to forecast the ability of management to replace produced reserve in future years.
Addition2007. Additions to proved reserves booked by Eni’s subsidiaries in 20052008 were 253850 mmBOE derived from :deriving from: (i) extensions and discoveries (156 mmBOE), in particular in Nigeria, Norway, Kazakhstan and Algeria; (ii) revisions of previous estimates (down 98of 746 mmBOE, partly related to higher entitlements reported in certain PSAs (up 340 mmBOE) resulting from lower year end oil prices from a year ago (Brent price was $36.55 per barrel at December 31, 2008 compared to $96.02 per barrel at December 31, 2007), net of downward revisions associated with marginal productions in certain mature fields such as Angola, Kazakhstan and Libya; (ii) extensions and discoveries (71 mmBOE) with major increases booked in Angola, Egypt, Nigeria, Norway and United States; and (iii) improved recovery (33 mmBOE) mainly reported in Algeria, Angola, Congo and Libya. Acquisitions amounted to 91 mmBOE reflecting the contribution of the acquired Burren assets in Congo, Turkmenistan and India. Sales of reserves (59 mmBOE) related to lower entitlementthe divestment of a 1.71% stake in certain Production Sharing Agreements (PSAs)3the Kashagan project following the finalization of the agreements implementing the new contractual and buy-back contracts due to higher oil prices recorded mainly in Kazakhstan, Angola and Libya; (iii) improved recovery (89 mmBOE), in particular in Algeria, Angola and Kazakhstan; and (iv) purchasegovernance framework of proved property (106 mmBOE) in Kazakhstan, Australia, Italy and Angola. The increase offset in part the decline related to production forproject effective January 1, 2008 (information on the year (634 mmBOE)Kashagan agreements is provided below under the section "Caspian Area" on page 39). Due to risks inherent in the exploration and production business, a degree of uncertainty still exists as to whether these additions will actually be produced. See "Item 3 – Risks associated with exploration and production of oil and natural gasgas" and – Uncertainties"Uncertainties in estimates of oil and natural gas reserves.reserves".
As of December 31, 2008 Eni’s share of proved reserves of equity-accounted entities amounted to 666 mmBOE. The 2008 year end amounts comprise 60% of proved reserves of the three Russian gas companies purchased in 2007 as part of a bid procedure for assets of bankrupt Russian company Yukos. Terms of the call option granted to Gazprom to purchase a 51% interest in the share capital of OOO SeverEnergia (Eni’s interest being 60%), which owns 100% of these three Russian companies engaging in the development of gas reserves, are currently under review by Eni, Enel and Gazprom.
The reserve replacement ratio for Eni’s subsidiaries was 136% in 2008 (38% in 2007 and 38% in 2006). The average reserve life index for Eni’s subsidiaries was 9.6 years at December 31, 2008. The reserve replacement ratio was calculated by dividing additions to proved reserves by total production, each as derived from the tables of changes in proved reserves prepared in accordance with SFAS No. 69 (see the supplemental oil and gas information in the Consolidated Financial Statements). The reserve replacement ratio is a measure used by management to assess the extent to which produced reserves in the year are replaced by reserve additions booked according with SEC criteria under Rule 4-10 of Regulation S-X. Management considers the reserve replacement ratio to be an important gauge of the ability of the Company to sustain its growth prospects. However, this ratio measures past performances and is not an indicator of future production because the ultimate development and production of reserves is subject to a number of risks and uncertainties. These include the risks associated with the successful completion of large-scale projects, including addressing ongoing regulatory issues and completion of infrastructure, as well as changes in oil and gas prices, political risks and geological and other environmental risks. Specifically, in recent years Eni’s replacement produced reserves has been affected by the impact of higher year-end oil prices on reserves entitlements in the Company’s Production Sharing Agreements (PSAs) and similar contractual schemes. In accordance with such contracts, Eni is entitled to a portion of field reserves, the sale of which should cover expenditures incurred by the Company to develop and operate the field. The higher the reference prices for Brent crude oil used to determine year-end amounts of Eni’s proved reserves, the lower the number of barrels necessary to cover the same amount of expenditures. In 2008 this negative trend reversed resulting in a higher amount of booked reserves associated with the Company’s PSAs as the oil price recorded at 2008 year-end was lower than the previous year.
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The table below show Eni’s calculations of its reserve replacement ratios for the years ended December 31, 2006, 2007 and 2008.
Subsidiaries | Equity-accounted entities | ||
2006 | 2007 | 2008 | 2006 | 2007 | 2008 | ||||||
(mmBOE) |
Additions to proved reserves | 244 | 237 | 882 | 1 | 639 | 6 | ||||||||||||
of which purchases and sales of reserves-in-place | (172 | ) | 156 | 32 | 617 | |||||||||||||
Production for the year | (640 | ) | (627 | ) | (650 | ) | (6 | ) | (7 | ) | (8 | ) |
Subsidiaries | |
2006 | 2007 | 2008 | |||
(%) |
Proved reserves replacement ratio of subsidiaries | 38 | 38 | 136 |
Proved developed reserves of subsidiaries at December 31, 20052008 amounted to 4,3063,948 mmBOE (2,350(2,009 mmBBL of oilliquids and condensates and 11,22911,138 BCF of natural gas), representing 63% of total estimated proved reserves (60%(64% and 58%63% at December 31, 20042007 and 2003,2006, respectively).
Proved reservesVolumes of oil and natural gas applicable to long-term supply agreements with foreign governments in mineral assets where Eni is operator represented approximately 11% of all proved reserves at December 31, 2005 (10% at December 31, 2004; 8% at December 31, 2003).
With effective date April 1, 2006, the Venezuelan State oil company Petróleos de Venezuela SA (PDVSA) unilaterally terminated the service contract governing activities at the Dación oil field where Eni acted as a contractor, holding a 100% working interest. As a consequence, starting on the same day, operations at the Dación oil field are conducted by PDVSA which replaced Eni Dación BV, Eni’s wholly-owned subsidiary that had been operating the field until that date.
Eni believes that it is entitled to a market value compensation for the expropriation of the Dación field. On these basis, Eni is available to reach an agreement with the Venezuelan authorities. In case an amicable settlement is not possible, Eni will take any other action in order to protect its interest in Venezuela. Based on internal and external independent evaluation, Eni is confident that a fair market compensation will not be lower than the book value of the Dación related assets. Accordingly, management decided not to impair the book value of Eni’s Dación assets. In 2005 and in the first quarter 2006, the Dación field production rate was about 60 KBBL/d. Management expects Eni’s proved reserves of hydrocarbons to be reduced by an amount of approximately 175 mmBBL corresponding to Eni’s net proved reserves of the Dación fieldtotaled 679 mmBOE as of December 31, 20052008 (676 and 583 mmBOE as a consequence of December 31, 2007 and 2006, respectively). Said volumes are not included in reserves volumes shown in the loss of Eni’s title to the field.table herein.
The tabletables below setsset forth a geographical breakdown of Eni’s proved reserves and proved developed reserves of hydrocarbons, on a barrel of oil equivalent basis, for the periods indicated.
Proved reserves
Eni’s proved reserves of hydrocarbons by geographic area
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(mmBOE) |
Italy | 1,315 | 1,199 | 996 | 890 | 868 | |||||
North Africa | 2,122 | 2,033 | 2,024 | 2,117 | 2,026 | |||||
West Africa | 1,136 | 1,287 | 1,324 | 1,357 | 1,279 | |||||
North Sea | 879 | 825 | 912 | 807 | 758 | |||||
Rest of the World | 1,477 | 1,686 | 2,016 | 2,047 | 1,865 | |||||
Total consolidated subsidiaries | 6,929 | 7,030 | 7,272 | 7,218 | 6,796 | |||||
Unconsolidated entities | 41 | |||||||||
6,929 | 7,030 | 7,272 | 7,218 | 6,837 |
Italy | 805 | 747 | 681 | |||
North Africa | 2,018 | 1,879 | 1,922 | |||
West Africa | 1,122 | 1,095 | 1,146 | |||
North Sea | 682 | 617 | 510 | |||
Caspian Area | 1,219 | 1,061 | 1363 | |||
Rest of the World | 554 | 611 | 620 | |||
Total consolidated subsidiaries | 6,400 | 6,010 | 6,242 | |||
Equity-accounted entities | 36 | 668 | 666 |
Eni’s proved reserves of oilliquids by geographic area
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(mmBBL) |
Italy | 309 | 255 | 252 | 225 | 228 | |||||
North Africa | 1,171 | 1,072 | 1,080 | 993 | 961 | |||||
West Africa | 976 | 1,022 | 1,038 | 1,056 | 936 | |||||
North Sea | 552 | 498 | 529 | 450 | 433 | |||||
Rest of the World | 940 | 936 | 1,239 | 1,284 | 1,190 | |||||
Total consolidated subsidiaries | 3,948 | 3,783 | 4,138 | 4,008 | 3,748 | |||||
Unconsolidated entities | 25 | |||||||||
3,948 | 3,783 | 4,138 | 4,008 | 3,773 |
Italy | 215 | 215 | 186 | |||
North Africa | 982 | 878 | 823 | |||
West Africa | 786 | 725 | 783 | |||
North Sea | 386 | 345 | 276 | |||
Caspian Area | 893 | 753 | 939 | |||
Rest of the World | 195 | 211 | 236 | |||
Total consolidated subsidiaries | 3,457 | 3,127 | 3,243 | |||
Equity-accounted entities | 24 | 142 | 142 |
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Eni’s proved reserves of natural gas by geographic area
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(BCF) |
Italy | 5,640 | 5,295 | 4,166 | 3,818 | 3,676 | |||||
North Africa | 5,509 | 5,563 | 5,467 | 6,453 | 6,117 | |||||
West Africa | 925 | 1,533 | 1,656 | 1,729 | 1,965 | |||||
North Sea | 1,892 | 1,899 | 2,223 | 2,051 | 1,864 | |||||
Rest of the World | 3,106 | 4,339 | 4,496 | 4,384 | 3,879 | |||||
Total consolidated subsidiaries | 17,072 | 18,629 | 18,008 | 18,435 | 17,501 | |||||
Unconsolidated entities | 90 | |||||||||
17,072 | 18,629 | 18,008 | 18,435 | 17,591 |
Italy | 3,391 | 3,057 | 2,844 | |||
North Africa | 5,946 | 5,751 | 6,311 | |||
West Africa | 1,927 | 2,122 | 2,084 | |||
North Sea | 1,697 | 1,558 | 1,336 | |||
Caspian Area | 1,874 | 1,770 | 2,437 | |||
Rest of the World | 2,062 | 2,291 | 2,202 | |||
Total consolidated subsidiaries | 16,897 | 16,549 | 17,214 | |||
Equity-accounted entities | 68 | 3,022 | 3,015 |
Eni’s proved developed reserves of hydrocarbons by geographic area
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(mmBOE) |
Italy | 825 | 774 | 702 | 671 | 620 | |||||
North Africa | 875 | 797 | 806 | 961 | 1,230 | |||||
West Africa | 640 | 703 | 710 | 749 | 793 | |||||
North Sea | 773 | 724 | 822 | 707 | 611 | |||||
Rest of the World | 654 | 705 | 1,190 | 1,212 | 1,021 | |||||
Total consolidated subsidiaries | 3,767 | 3,703 | 4,230 | 4,300 | 4,275 | |||||
Unconsolidated entities | 31 | |||||||||
3,767 | 3,703 | 4,230 | 4,300 | 4,306 |
Italy | 562 | 534 | 465 | |||
North Africa | 1,242 | 1,183 | 1,229 | |||
West Africa | 798 | 766 | 827 | |||
North Sea | 571 | 524 | 407 | |||
Caspian Area | 525 | 494 | 670 | |||
Rest of the World | 334 | 361 | 350 | |||
Total consolidated subsidiaries | 4,032 | 3,862 | 3,948 | |||
Equity-accounted entities | 27 | 101 | 107 |
Eni’s proved developed reserves of oilliquids by geographic area
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(mmBBL) |
Italy | 171 | 168 | 173 | 174 | 149 | |||||
North Africa | 685 | 610 | 640 | 655 | 697 | |||||
West Africa | 539 | 554 | 560 | 588 | 568 | |||||
North Sea | 476 | 426 | 464 | 386 | 353 | |||||
Rest of the World | 443 | 483 | 610 | 668 | 564 | |||||
Total consolidated subsidiaries | 2,314 | 2,241 | 2,447 | 2,471 | 2,331 | |||||
Unconsolidated entities | 19 | |||||||||
2,314 | 2,241 | 2,447 | 2,471 | 2,350 |
Italy | 136 | 133 | 111 | |||
North Africa | 713 | 649 | 613 | |||
West Africa | 546 | 511 | 576 | |||
North Sea | 329 | 299 | 222 | |||
Caspian Area | 262 | 219 | 321 | |||
Rest of the World | 140 | 142 | 166 | |||
Total consolidated subsidiaries | 2,126 | 1,953 | 2,009 | |||
Equity-accounted entities | 18 | 26 | 33 |
Eni’s proved developed reserves of natural gas by geographic area
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(BCF) |
Italy | 3,665 | 3,397 | 2,966 | 2,850 | 2,704 | |||||
North Africa | 1,103 | 1,084 | 962 | 1,760 | 3,060 | |||||
West Africa | 584 | 863 | 866 | 924 | 1,289 | |||||
North Sea | 1,721 | 1,727 | 2,075 | 1,845 | 1,484 | |||||
Rest of the World | 1,221 | 1,283 | 3,355 | 3,122 | 2,622 | |||||
Total consolidated subsidiaries | 8,294 | 8,354 | 10,224 | 10,501 | 11,159 | |||||
Unconsolidated entities | 70 | |||||||||
8,294 | 8,354 | 10,224 | 10,501 | 11,229 |
Italy | 2,449 | 2,304 | 2,031 | |||
North Africa | 3,042 | 3,065 | 3,537 | |||
West Africa | 1,447 | 1,469 | 1,443 | |||
North Sea | 1,395 | 1,293 | 1,065 | |||
Caspian Area | 1,511 | 1,580 | 2,006 | |||
Rest of the World | 1,105 | 1,256 | 1,056 | |||
Total consolidated subsidiaries | 10,949 | 10,967 | 11,138 | |||
Equity-accounted entities | 48 | 428 | 420 |
25
Mineral Right Portfolio and Exploration
ActivityActivity for the year
As of December 31, 2005,2008, Eni’s portfolio of mineral rightsright portfolio consisted of 1,04141,244 exclusive or shared rights for exploration and development in 3439 countries on five continents, for a total net acreage of 266,0025415,494 square kilometers (234,180(394,490 at December 31, 2004)2007). Of these 55,09839,244 square kilometers concerned production and development (41,997(37,642 at December 31, 2004)2007). Outside Italy net acreage (395,085 square kilometers) increased by 41,40321,258 square kilometers mainly due to the acquisition of assets after international bid proceduresBurren Energy Plc for a total net exploration and development acreage of 9,569 square kilometers (mainly in Libya, Egypt, India, Pakistan, Angola, Algeria, the United StatesTurkmenistan, Yemen, Congo and IrelandEgypt) and purchasesan increase of mineral assetsnet exploration acreage in Nigeria, Alaska and Australia.Mali. These increases were partly offset by the contractual revision in part by releasesLibya. In addition, new exploration leases were awarded in Italy, Brazil, Congo, MoroccoAngola, Algeria, Alaska, the Gulf of Mexico, Gabon, Indonesia, Norway and Tunisia and divestmentsthe United Kingdom for a total acreage of assets in the British section of the North Sea. 57,361 square kilometers (net to Eni, 99% operated).
In Italy, net acreage (20,409 square kilometers) declined by 9,582255 square kilometers due to releases.
A total of 52111 new exploratory wells were drilled (21.85in 2008 (58.4 of which represented Eni’s share on the basis of its working interest in relevant properties)share), as compared to 6681 exploratory wells completed in 2004 (29.52007 (43.5 of which represented Eni’s share). OverallIn addition, 21 exploratory wells were in progress at year end. The overall commercial success rate was 39.3% in 2005,36.5% (43.4% net to Eni) as compared to 52.1%40% (38% net to Eni) in 2004; the2007. In 2006, 68 exploratory wells were completed (35.9 of which represented Eni’s share), with an overall success rate of 43% (the success rate of Eni’s share of exploratory wells was 47.4% in 2005, as compared to 57.3% in 2004.
49%).
Production
The matters regarding future production, additions to reserves and related production costs and estimated reserves discussed below and elsewhere herein are forward-looking statements that involve risks and uncertainties that could cause the actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties relating to future production and additions to reserves include political developments affecting the award of exploration or production interests or world supply and prices for oil and natural gas, or changes in the underlying economics of certain of Eni’s important hydrocarbons projects. Such risks and uncertainties relating to future production costs include delays or unexpected costs incurred in Eni’s production operations.
In 20052008, oil and natural gas production available for sale averaged 1,6931,748 KBOE/d (oil and condensates 1,111(liquids 1,026 KBBL/d; natural gas 3,3444,143 mmCF/d) increasing by 107, an increase of 64 KBOE/d, or 3.8%, compared to 2004, up 6.7%, due to: (i) production increases registered2007. This improvement mainly in Libya, Angola, Iran, Algeria, Egypt and Kazakhstan; and (ii)came from the start-up of fields in Angola and Libya. These increases were partly offset by: (i) an estimated 32 KBOE adverse entitlement impact in PSAs and buy-back contracts related to higher international oil prices; (ii) declines in mature fields mainly in Italy and the United Kingdom; and (iii) the effect of the divestment of proved property carried out in 2004 (16 KBOE) and of hurricanesassets acquired in the Gulf of Mexico, (10 KBOE)Congo and Turkmenistan (up 62 KBOE/d), as well as continuing production ramp-up in Angola, Congo, Egypt, Pakistan and Venezuela. This increase was partially offset by mature field declines as well as planned and unplanned facility downtime in the North Sea and hurricane-related impacts in the Gulf of Mexico (down 11 KBOE/d). Higher oil prices on a yearly average resulted in lower volume entitlements in Eni’s PSAs and similar contractual schemes, down approximately 37 KBOE/d. When excluding the impact of lower entitlements in PSAs, production was up 5.6%. The share of productionoil and natural gas produced outside Italy was 85% (82.6%89% (88% in 2004)the full year 2007).
Production of oilliquids amounted to 1,026 KBBL/d and condensates (1,111 KBBL/d) increased by 77 KBBL/d compared to 2004,was up 7.4%, due to0.6% from a year ago. The most significant increases were registered in: (i) Angola,the Gulf of Mexico, Congo and Turkmenistan due to full productionthe contribution of the Hungo and Chocalho fields within phase A of the development of the Kizomba area in Block 15 and the start-up of the Kissanje and Dikanza fields within phase B of the same project in Block 15 (Eni’s interest 20%) and the start-up of the Sanha-Bomboco fields in area B of Block 0 (Eni’s interest 9.8%);acquired assets; (ii) Libya, due to full production at the Wafa field and the start-up of the Bahr Essalam field (Eni’s interest 50%); (iii) Iran, due to full production at the South Pars field Phases 4-5 (Eni operator with a 60% interest) and production increases at the Dorood (Eni’s interest 45%) and Darquain fields (Eni operator with a 60% interest); (iv) Algeria, due to full production at the Rod and satellite fields (Eni operator with a 63.96% interest); (v) Kazakhstan, in the Karachaganak field (Eni co-operator with a 32.5% interest) due to increased exports from Novorossiysk terminal on the Russian coast of the Black Sea; and (vi) Italy, due to increased production in Val d’Agri resulting from full production of the fourth treatment train of the oil center. These increases were partly offset by declines of mature fields, in particular in the United Kingdom, and by the effect of the divestment of assets carried out in 2004.
Production of natural gas available for sale (3,344 mmCF/d) increased by 173 mmCF/d compared to 2004, up 5.5%, due to increases registered in: (i) Libya, due to full production at the Wafa field and the start-up of the Bahr Essalam field (Eni’s interest 50%); (ii) Egypt,Angola due to the start-up of the Barboni fieldMondo and the Temsah 4 platformSaxi/Batuque fields in the offshoredevelopment area of former Block 15 (Eni’s interest 20%); and (iii) Venezuela due to the start-up of the Nile Delta;Corocoro field (Eni’s interest 26%). Production decreases were reported in the North Sea and (iii) KazakhstanItaly due to planned and Pakistan. These increasesunplanned facility downtime and mature field declines. In addition, lower volume entitlements associated with higher average yearly oil prices were partly offsetreported in the Company’s PSAs.
Production of natural gas for the full year was 4,143 mmCF/d and increased by declines of mature fields, in particular in Italy, the effect of the divestment of assets effected in 2004 and of the hurricanes324 mmCF/d, or 8.5%, from a year ago. The improvement was driven by growth in the Gulf of Mexico.Mexico, due to the contribution of acquired assets, and Pakistan due to production ramp-up of the Zamzama field (Eni’s interest 17.25%) and start-up of the Badhra field (Eni operator with a 40% interest). Production decreased in Italy and the United Kingdom due to mature field declines.
HydrocarbonOil and gas production sold totalled 614.9in 2008 amounted to 632 mmBOE. About 68%Approximately 53% of oil and condensateliquids production sold (402.6(370.2 mmBBL) was delivereddestined to Eni’s Refining & Marketing segment (70% in 2004). About 44%division; about 32% of natural gas production sold (1,219(1,503 BCF) was delivereddestined to Eni’s Gas & Power segment (40% in 2004).division.
26
The tables below set forth Eni’s production of oil and condensatesliquids and natural gas on an available-for-sale basis for the periods indicated.
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(KBBL/d) |
Production of oil and condensates (1) (2) | ||||||||||
Italy | 69 | 86 | 84 | 80 | 86 | |||||
North Africa | 228 | 252 | 250 | 261 | 308 | |||||
West Africa | 219 | 222 | 236 | 285 | 310 | |||||
North Sea | 204 | 213 | 235 | 203 | 179 | |||||
Rest of the World | 137 | 148 | 176 | 205 | 228 | |||||
Total | 857 | 921 | 981 | 1,034 | 1,111 |
Liquids production (1) (2) | ||||||
Italy | 79 | 75 | 68 | |||
North Africa | 329 | 337 | 338 | |||
West Africa | 322 | 280 | 289 | |||
North Sea | 178 | 157 | 140 | |||
Caspian Area | 64 | 70 | 81 | |||
Rest of the World | 107 | 101 | 110 | |||
Total | 1,079 | 1,020 | 1,026 |
(1) | i | Data includes Eni’s share of production of affiliates and joint venture accounted for under the equity method of accounting amounting to 5, 7 and 8 KBBL/d in 2008, 2007 and 2006, respectively. |
Year ended December 31, | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
(mmCF/d) |
Natural gas production available for sale (1) (2) (3) | ||||||||||
Italy | 1,313 | 1,260 | 1,181 | 1,067 | 972 | |||||
North Africa | 497 | 560 | 559 | 619 | 900 | |||||
West Africa | 82 | 87 | 128 | 143 | 151 | |||||
North Sea | 450 | 516 | 596 | 560 | 563 | |||||
Rest of the World | 485 | 592 | 710 | 782 | 758 | |||||
Total | 2,827 | 3,015 | 3,174 | 3,171 | 3,344 |
Natural gas production available for sale (1) (2) | ||||||
Italy | 883 | 763 | 725 | |||
North Africa | 1,187 | 1,357 | 1,661 | |||
West Africa | 232 | 220 | 204 | |||
North Sea | 557 | 557 | 521 | |||
Caspian Area | 214 | 222 | 227 | |||
Rest of the World | 606 | 700 | 805 | |||
Total | 3,679 | 3,819 | 4,143 |
(1) | i | Data includes Eni’s share of production of affiliates and joint venture accounted for under the equity method of accounting amounting to 13, 28 and 31 mmCF/d in 2008, 2007 and 2006, respectively. |
i | ||
Volumes of oil and natural gas purchased under long termlong-term supply contracts with foreign governments or similar authoritiesentities in properties where Eni acts as producer totalled 20.5totaled 93 KBOE/d, 75 KBOE/d and 2.957 KBOE/d in 20052008, 2007 and 2004, respectively (2003 amounts were immaterial).2006, respectively.
27
The table below sets forth certain information and operating data regarding Eni’s principal oil and natural gas interests for the year endedas of December 31, 2005.2008.
Principal oil and natural gas interests at December 31, 20052008
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Commencement | Number of interests | Gross exploration and development acreage (1) | Net exploration and development acreage (1) | Type of fields | Number of producing fields | Number of other fields | ||||||||||||||||||||||||
Italy | 1926 | 180 | 31,048 | 24,053 | 12,700 | Onshore/Offshore | 83 | 79 | 1926 | 159 | 25,522 | 20,409 | Onshore/Offshore | 87 | 99 | |||||||||||||||
Outside Italy | 1,085 | 732,976 | 395,085 | Onshore/Offshore | 419 | 219 | ||||||||||||||||||||||||
North Africa | ||||||||||||||||||||||||||||||
Algeria | 1981 | 37 | 14,352 | 3,792 | 860 | Onshore/Offshore | 23 | 15 | 1981 | 34 | 2,921 | 909 | Onshore | 28 | 12 | |||||||||||||||
Egypt | 1954 | 56 | 34,918 | 22,644 | 4,180 | Onshore/Offshore | 35 | 28 | 1954 | 59 | 26,335 | 9,741 | Onshore/Offshore | 34 | 34 | |||||||||||||||
Libya | 1959 | 15 | 44,955 | 37,703 | 15,466 | Onshore/Offshore | 11 | 7 | 1959 | 13 | 36,375 | 18,164 | Onshore/Offshore | 12 | 17 | |||||||||||||||
Mali | 2006 | 5 | 193,200 | 128,801 | Onshore | |||||||||||||||||||||||||
Tunisia | 1961 | 11 | 6,464 | 2,317 | 1,601 | Onshore/Offshore | 9 | 6 | 1961 | 11 | 6,464 | 2,274 | Onshore/Offshore | 21 | 4 | |||||||||||||||
119 | 100,689 | 66,456 | 22,107 | 78 | 56 | 122 | 265,295 | 159,889 | 95 | 67 | ||||||||||||||||||||
West Africa | ||||||||||||||||||||||||||||||
Angola | 1980 | 53 | 15,234 | 2,310 | 715 | Offshore | 36 | 32 | 1980 | 55 | 20,492 | 3,323 | Onshore/Offshore | 45 | 27 | |||||||||||||||
Congo | 1968 | 20 | 9,855 | 4,224 | 880 | Offshore | 16 | 8 | 1968 | 26 | 15,655 | 8,244 | Onshore/Offshore | 20 | 8 | |||||||||||||||
Gabon | 2008 | 6 | 7,615 | 7,615 | Onshore/Offshore | |||||||||||||||||||||||||
Nigeria | 1962 | 49 | 46,075 | 8,922 | 6,539 | Onshore/Offshore | 119 | 69 | 1962 | 50 | 44,049 | 8,574 | Onshore/Offshore | 95 | 38 | |||||||||||||||
122 | 71,164 | 15,456 | 8,134 | 171 | 109 | 137 | 87,811 | 27,756 | 160 | 73 | ||||||||||||||||||||
North Sea | ||||||||||||||||||||||||||||||
Norway | 1965 | 51 | 26,601 | 8,814 | 128 | Offshore | 14 | 13 | 1965 | 50 | 11,771 | 3,861 | Offshore | 13 | 8 | |||||||||||||||
The United Kingdom | 1964 | 84 | 6,504 | 1,506 | 652 | Offshore | 29 | 15 | ||||||||||||||||||||||
United Kingdom | 1964 | 91 | 5,207 | 1,450 | Offshore | 35 | 14 | |||||||||||||||||||||||
135 | 33,105 | 10,320 | 780 | 43 | 28 | 141 | 16,978 | 5,311 | 48 | 22 | ||||||||||||||||||||
Rest of World | ||||||||||||||||||||||||||||||
Caspian Area | ||||||||||||||||||||||||||||||
Kazakhstan | 1995 | 6 | 4,933 | 880 | Onshore/Offshore | 1 | 5 | |||||||||||||||||||||||
Turkmenistan | 2008 | 1 | 200 | 200 | Onshore | 2 | ||||||||||||||||||||||||
7 | 5,133 | 1,080 | 3 | 5 | ||||||||||||||||||||||||||
Rest of world | ||||||||||||||||||||||||||||||
Australia | 2001 | 15 | 31,948 | 22,349 | 3,299 | Offshore | 2 | 1 | 2001 | 18 | 60,486 | 29,520 | Offshore | 2 | 2 | |||||||||||||||
Brazil | 1999 | 2 | 2,203 | 2,057 | Offshore | 1999 | 2 | 1,389 | 1,389 | Offshore | ||||||||||||||||||||
China | 1983 | 4 | 866 | 181 | 103 | Offshore | 8 | 4 | 1983 | 3 | 899 | 192 | Offshore | 10 | 3 | |||||||||||||||
Croatia | 1996 | 3 | 6,056 | 3,029 | 988 | Offshore | 2 | 6 | 1996 | 2 | 1,975 | 988 | Offshore | 6 | 5 | |||||||||||||||
East Timor | 2006 | 5 | 12,224 | 9,779 | Offshore | |||||||||||||||||||||||||
Ecuador | 1988 | 1 | 2,000 | 2,000 | 2,000 | Onshore | 1 | 1 | 1988 | 1 | 2,000 | 2,000 | Onshore | 1 | 1 | |||||||||||||||
India | 2005 | 2 | 14,445 | 5,698 | Onshore/Offshore | 2005 | 3 | 24,425 | 9,091 | Onshore/Offshore | 4 | 2 | ||||||||||||||||||
Indonesia | 2001 | 12 | 31,419 | 15,859 | 984 | Onshore/Offshore | 7 | 8 | 2001 | 11 | 28,605 | 17,316 | Onshore/Offshore | 7 | 12 | |||||||||||||||
Iran | 1957 | 4 | 1,456 | 820 | 820 | Onshore/Offshore | 4 | 1957 | 4 | 1,456 | 820 | Onshore/Offshore | 3 | |||||||||||||||||
Kazakhstan | 1995 | 6 | 4,934 | 959 | 488 | Onshore/Offshore | 1 | 5 | ||||||||||||||||||||||
Pakistan | 2000 | 14 | 21,876 | 11,692 | 615 | Onshore/Offshore | 6 | 1 | 2000 | 21 | 35,938 | 18,855 | Onshore/Offshore | 7 | 3 | |||||||||||||||
Russia | 2007 | 5 | 6,636 | 3,891 | Onshore | 9 | ||||||||||||||||||||||||
Saudi Arabia | 2004 | 1 | 51,687 | 25,844 | Onshore | 2004 | 1 | 51,687 | 25,844 | Onshore | ||||||||||||||||||||
Trinidad & Tobago | 1970 | 1 | 382 | 66 | 66 | Offshore | 3 | 2 | 1970 | 1 | 382 | 66 | Offshore | 3 | 4 | |||||||||||||||
The United States | 1968 | 389 | 7,890 | 3,569 | 389 | Onshore/Offshore | 17 | 8 | ||||||||||||||||||||||
United States | 1968 | 575 | 11,478 | 6,648 | Onshore/Offshore | 69 | 11 | |||||||||||||||||||||||
Venezuela | 1998 | 4 | 1,701 | 867 | 511 | Onshore/Offshore | 5 | 2 | 1998 | 3 | 1,556 | 614 | Offshore | 1 | ||||||||||||||||
Yemen | 2008 | 1 | 3,911 | 3,598 | Onshore | |||||||||||||||||||||||||
458 | 178,863 | 94,990 | 10,263 | 56 | 38 | 656 | 245,047 | 130,611 | 113 | 52 | ||||||||||||||||||||
Other | 9 | 6,276 | 1,279 | 1,114 | Offshore | 1 | ||||||||||||||||||||||||
Other countries | 9 | 6,311 | 1,363 | Offshore | ||||||||||||||||||||||||||
Other countries with only exploration activity | 18 | 89,056 | 53,448 | Onshore/Offshore | 13 | 106,401 | 69,075 | Onshore/Offshore | ||||||||||||||||||||||
Outside Italy | 861 | 479,153 | 241,949 | 42,398 | 348 | 232 | ||||||||||||||||||||||||
Total | 1,041 | 510,201 | 266,002 | 55,098 | 431 | 311 | 1,244 | 758,498 | 415,494 | 506 | 318 | |||||||||||||||||||
(1) | i | Square kilometers. |
Eni’s principal regions of operations are described below. In the discussion that follows references to hydrocarbon production are to be intended to be hydrocarbon production available for sale.
Italy28
In 2005, Eni’s hydrocarbon production in Italy totalled 256
Eni has been operating in Italy since 1926. In 2007, Eni’s oil and gas production amounted to 195 KBOE/d. Eni’s activities in Italy are deployed in the Adriatic Sea, the Central Southern Apennines, mainland and offshore Sicily and the Po Valley. Eni’s exploration and development activities in Italy are regulated by concession contracts. The Adriatic Sea represents Eni’s main production area in Italy, accounting for 48% of Eni’s domestic production in 2008. Main operated fields are Barbara (124 mmCF/d net to Eni), Angela-Angelina (57 mmCF/d), Porto Garibaldi (49 mmCF/d), Cervia (39 mmCF/d) and Tea-Arnica-Lavanda (42 mmCF/d). Eni is operator of the Val d’Agri concession (Eni’s interest 60.77%) in Basilicata Region, Southern Italy, resulting from the unitization of the Volturino and Grumento Nova concessions made in late 2005. Production from the Monte Alpi, Monte Enoc and Cerro Falcone fields is fed by 21 production wells of the 47 foreseen by the sanctioned development plan and is supported by the Viggiano oil center with a treatment capacity of 104 KBBL/d. Oil produced is carried to Eni’s refinery in Taranto via a 136-kilometer long pipeline. Gas produced is treated at the Viggiano oil center. In 2008, the Val d’Agri concession produced 95 KBOE/d (58 net to Eni) corresponding to 29% of Eni’s production in Italy. Eni is operator of 15 production concessions onshore and offshore Sicily. Its main fields are Gela, Ragusa, Giaurone, Fiumetto and Prezioso, which in 2008 accounted for 9% of Eni’s production in Italy. Development activities concerned in particular: (i) optimization of producing fields by means of |
29
sidetracking and represented 15% of Eni’s total production. Eni’s explorationinfilling (Antares, Cervia, Emma, Fratello North, Giovanna, Hera-Lacinia, Gela, Luna and development interests in Italy are concentrated in the Adriatic Sea, the Central Southern Apennines, Sicily and the Sicilian offshore and the Po Valley. Natural gas production available for sale averaged 972 mmCF/d and represented approximately 67% of Eni’s hydrocarbon production in Italy. Eni’s principal natural gas fields are located in the Adriatic Sea (Barbara, Angela/Angelina, Porto Garibaldi/Agostino, Cervia/Arianna, Porto Corsini, Regina and Bonaccia, which collectively accounted for 50% of Eni’s natural gas production in Italy in 2005) and in the Ionian Sea (Luna, which accounted for 9.2%).
Production of oil in Italy averaged 86 KBBL/d. Eni’s three major oil fields, Val d’Agri in Southern Italy, Villafortuna in the Po Valley and Gela in Sicily, represented 82% of Eni’s total oil production in Italy in 2005. Other oil fields are Aquila in the Adriatic offshore of Southern Italy, Rospo in the Adriatic Sea, Prezioso and Vega offshore Southern Sicily, and Giaurone and Ragusa in Sicily.
Exploration activities onshore yielded positive results with the Mezzocolle 1 well (Eni’s interest 100%) containing natural gas in the Imola permit in the central Apennines, with the Longanesi 1 well containing natural gas in the Po Plain (Eni’s interest 100%) and with Argo-1 well (Eni’s interest 60%) testing an offshore gas accumulation in the Sicily Channel.
In the Val d’Agri the expected production peak of 73 KBOE/d net to Eni was reached as planned. Oil production derives from the first 19 wells drilled of the 38 foreseen by the development plan.
Production maintenance actions were performed on the offshore Annabella, Armida, Barbara, Garibaldi gas fields and the Rospo oilfield through the drilling of infilling wells and sidetrack activities, increasing production by about 75 mmCF/d.
During 2005 development activities concerned: (i) continuation of the development plan of the onshore Candela and Miglianico fields and the completion of the development of the Naide field;Fiumetto); (ii) continuation of drilling and connectionupgrading of development wellsproducing facilities in the Val d’Agri; and (iii) completion of development activities at Cascina Cardana field and phase 1 of the optimizationVal d’Agri project.
Other development activities were the development of producing fields by means of sidetrackingthe Annamaria and infilling (the Annabella, Armida, Barbara, Garibaldithe Guendalina gas fields in the Adriatic Sea. The Annamaria project provides for the installation of a production platform and the Rospo oilfield); (iv) construction of an additional sealine for the optimal management of the fields connectedlinkage by sealines to the Fano terminal; and (v) the beginning of the development phase of the Annamaria field.
As part of the development of onshore gas fields in Sicily the following projects are in an advanced phase: (i) in the Pizzo Tamburino field, the first well is scheduled for the second half of 2006 with expected production of approximately 6 mmCF/d; in 2007 according to the actual production of the first well a second one is expected to be drilled; (ii) in the Fiumetto field, an infilling well is expected to start production in the first half of 2007 with an expected peak flow of approximately 7 mmCF/d; and (iii) in the Samperi field, start-upplant. Start-up is expected in 2009. Actions on Guendalina include the second halfinstallation of 2006 peaking at approximately 7 mmCF/d.a platform and the linkage by existing facilities to the Ravenna plant. Start-up is expected in 2010.
In December 20052008 Eni acquired for euro 90 million (including net financial debt transferredwas awarded two onshore exploration blocks in Puglia region.
Major discoveries were made in offshore Sicily with the operated gas discovery Cassiopea that has yielded excellent results in addition to the positive appraisal of euro 17 million)the Argo gas field. Eni holds a 90%60% interest in Sarcis SpA holdingthe two discoveries. In particular for Cassiopea an accelerated development plan is foreseen in order to provide optimal synergies with the nearby Panda and Argo discoveries. The project provides for the drilling of undersea producing wells and the installation of a production platform linked to the existing onshore permits/concessionstreatment facilities. Production start up is expected in Sicily.2011.
In the medium-term, management expects production in Italy to remain stable at current level due to the production ramp-up of the Val d’Agri fields and ongoing new field project and continuing development activities designed to counteract mature field decline.
North Africa
Eni’s operations in North Africa are conducted in Algeria, Egypt, Libya and Tunisia. In 2005,2008, North Africa accounted for 27%36% of Eni’s total worldwide production of hydrocarbons.oil and natural gas.
AlgeriaAlgeria. Eni has been present in Algeria since 1981. In 2005,2008, Eni’s oil and gas production averaged 86 KBBL/80 KBOE/d. The principal oil producing fields operated by EniOperating activities are located in the Bir Rebaa area in the South-Eastern desert and include the following exploration and production blocks: (a) Blocks 401a, 403 a/d (Eni’s interest 100%); (b) Blocks 401a/402a (Eni’s interest 55%); (c) Blocks 403 403a(Eni’s interest 50%) and 403d404a (Eni’s share between 50%-100%interest 12.25%), which; and (d) under development Blocks 212 (Eni’s interest 22.38%) and 208 (Eni’s interest 12.25%).
In November 2008, Eni completed the acquisition of First Calgary Petroleums Ltd, a Canadian oil and gas company with exploration and development activities in Algeria. The acquisition values the fully diluted share capital of First Calgary at approximately CAN $923 million (equal to euro 605 million). Assets acquired include the operatorship of Block 405b with a 75% interest. Production start-up is expected in 2011 with a projected production plateau of approximately 30 KBOE/d net to Eni by 2012. In December 2008, following an international bid procedure, Eni was awarded the operatorship of the Kerzaz exploration block (Block 319a-321a) covering a gross acreage of 16,000 square kilometers. Exploration activity start-up is expected in 2009. Exploration and production activities in Algeria are regulated by Production Sharing Agreements (PSAs) and concession contracts. Production in Block 403a/d is supplied mainly by the HBN and Rom and satellite fields and accounted for approximately 12% of Eni’s production in Algeria in 2008. The main project underway is the Rom Integrated project, designed to develop the reserves of the Rom Main, ZEA and Rom North fields. The development project provides construction of a new oil treatment plant with a capacity of 32 KBBL/d with production start-up expected in 2012. In 2008 Eni and Sonatrach signed a framework agreement to set out the common contractual ground of the project and to extend the duration of the |
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Rhourde Messaoud and Zemlet Adreg development licenses for further 10 years and the Bir Rebaa North license for further 5 years.
Production in Blocks 401a/402a is supplied mainly by the Rod and satellite fields and accounted for approximately 52%23% of Eni’s production in 2005Algeria in Algeria. Other interests held by Eni2008. Infilling activities are HBN, HBNS, HBNSEbeing performed in order to maintain the current production plateau.
The main fields in Block 403 are BRN, BRW and satellites (Eni’s interest 12.25%)BRSW and Ourhoud (Eni’s interest 4.59%), which in 2005 accounted for approximately 48%14% of Eni’s production in Algeria.
Algeria in 2008. Exploration activities yielded positive results in permits P 404 in area C (Eni’s interest 25%), nearfor appraising the HBNE field, with the SFSW-3 appraisal well on the Sif Fatima discovery and P 403 c/e (Eni’s interest 33.33%) with the ZNNW-1 appraisal well. In both permits the presence of hydrocarbons was confirmed at a depth of about 3,000 meters.
In Block P 403a/d (Eni’s interest 50%) the NFW ROM-6 discovery well and the ROM North-1 appraisal well were drilled at a depth of about 3,400 meters and confirmed the extensionmineral potential of the new oil levelsarea are planned.
Block 208 is located south of Bir Rebaa. The El Merk Synergy, designed to jointly develop of this block and adjoining blocks operated by other companies, is the main project underway in Algeria. In 2008 following an international bid procedure, the ROM field. The ROM integrated development project entails production from these new levels also through the reinjection of gas produced in the nearby BRN field, reducing gas flaring by nearly 90%. Management expects productionseven EPC contracts of the ROM field to peak at 16project have been awarded. The project provides for the construction of a new treatment plant with a capacity of 11 KBOE/d net to Eni and production facilities in 2009.Block 404/208. Start-up is expected in the first quarter of 2012.
Main discoveries for the year were achieved in: (a) the Block 401a/402a with the ROD-21 appraisal well that started production through existing facilities; (b) the Block 404a with the BKNE-24 and HBNSE-12 appraisal wells, with the latter starting production through existing facilities.
The EKT, EMK, EMNnew Algerian hydrocarbon law No. 05 of 2007 introduced a higher tax burden for the national oil company Sonatrach that requested to renegotiate the economic terms of certain PSAs in order to restore the initial economic equilibrium. Eni signed an agreement for Block 403 while negotiations are ongoing for Block 401a/402a (Eni’s interest 55%) and EME fields are in the development phase in blockBlock 208 (Eni’s interest 12.25%). TheAt present, management is not able to foresee the final outcome of such renegotiations.
In the medium-term, management expects to increase Eni’s production in Algeria to approximately 110 KBOE/d, reflecting the development plan provides forand integration of the drilling of 142 wells and the construction of a central facility for the production of stabilized oil, condensates and LNG. Management expects production of this field to commence in 2008, peaking at 13 KBOE/d net to Eni in 2010.First Calgary acquired assets.
EgyptEgypt. Eni has been present in Egypt since 1954. In 2005,2008, Eni’s share of production in this country amounting to 207232 KBOE/d and accounted for 12%13% of Eni’s total annual hydrocarbon production.
In 2005, oil Eni’s main producing liquid fields are located in the Belayim concession (Eni’s interest 100%) and condensate production averaged 90 KBBL/d net to Eni and came mainly from the Eni operated Belayim and Ashrafi fields inoffshore the Gulf of Suez and Melehia inSuez. Gas production mainly comes from the Western Desert, which covered 74%operated or participated concession of Eni’s crude oil production in Egypt.
In 2005, natural gas production available for sale averaged 671 mmCF/d net to Eni. The main natural gas producing interests operated by Eni are concentrated in the Nile Delta: onshore the Abu Madi and el Qar’a interests and in the Mediterranean offshore, the North Port Said (former Port Fouad)Fouad, Eni’s interest 100%), Baltim (50% interest), Ras el Barr (50% interest, non-operated) and el Temsah interests. Production(50% interest) offshore the Nile Delta. In 2008 production from these concessions covered nearly allalso including a portion of liquids accounted for 90% of Eni’s natural gas production in Egypt.
Exploration and production activities in Egypt are regulated by concession contracts and PSAs. In May 2009, Eni signed an agreement with the Egypt’s Ministry of Petroleum to broaden and enhance an integrated model of cooperation aimed at developing hydrocarbon reserves in the Country and to implement a joint education project for the training of Egyptian professionals. The agreement include the extension of the licence for the Belayim field until 2030 and the initiatives to develop and market natural gas reserves at high depths. In 2008 a number of fields started to produce: (i) the West Ashrafi (Eni’s interest 100%) field was completed underwater and linked to existing facilities; and (ii) in the Ras el Barr concession (Eni’s interest 50%), the Taurt field was linked to the onshore West Harbour treatment plant. Production peaked at approximately 38 KBOE/d (13 net to Eni) in 2008. In the el Temsah concession (Eni operator with a 50% interest), development activities progressed at the Denise field started-up in late 2007. The production build-up was reached in 2008 through the completion of phase A of the development plan. Current production amounts to 37 KBOE/d (11 net to Eni). The Taurt and Denise fields are expected to ensure natural gas supplies of 23 KBOE/d to the first train of the Damietta LNG plant. In the Gulf of Suez optimization activities progressed at the Belayim field (Eni’s interest 100%) by finalizing |
Exploration yielded positive results in the following concessions: (i) Ashrafi (Eni’s interest 50%) in the Gulf of Suez with the drilling of the NFW Ashrafi 1X well that found hydrocarbons at a depth of about 1,700 meters; (ii) Belayim Land (Eni’s interest 50%) with the drilling of NFW BLSW-1 well that found gas at a depth of over 3,000 meters; (iii) Belayim Marine (Eni’s interest 50%) in the Gulf of Suez with the drilling of the BMNW-4 outpost well which allowed to report mineralized levels at a depth of about 3,000 meters. This well was linked to the existing production facilities; and (iv) North Port Said (Eni operator with a 50% interest) with the drilling of the PFM-D-1 well which found gas and condensates at a depth of about 5,000 meters.31
![]() | basic engineering for the upgrading of the water injection system intended to recover residual reserves. Development activities are underway offshore the Nile Delta: (i) in the Thekah concession (Eni operator with a 50% interest); and (ii) the North Bardawil concession (Eni operator with a 60% interest). Upgrading of the el Gamil compression plant progressed by adding new capacity. Through its affiliate Unión Fenosa Gas, Eni has an indirect interest in the Damietta natural gas liquefaction plant with a producing capacity of 5.1 mmtonnes/y of LNG corresponding to approximately 268 BCF/y of feed gas. Eni is currently supplying 53 BCF/y to the first unit for a twenty-year period. Eni and the partners of the Damietta LNG plant have planned to double the capacity of this facility through the construction of a second train with a treatment capacity of approximately 268 BCF/y of gas. Eni will provide 88 BCF/y to the second train for a period of twenty years. The project is awaiting to be sanctioned by the Egyptian authorities. The reserves which are needed to feed the second train, have been already identified including the additional amounts that must be developed to meet the country’s domestic requirements under existing laws. Main discoveries for the year were achieved in: (a) the offshore area of the Nile Delta with the Satis-1 gas discovery (Eni’s interest 50%) and the appraisal activity of the Ha’py field; and (b) the onshore area with the Eky oil discovery (Eni operator with a 100% interest) and Jasmine Est (Eni’s interest 56%). |
Development activities are underway in concessions in the offshore of the Nile Delta: (i) North Port Said (Eni’s interest 50%) where the Barboni gas platform started production in May 2005 at an initial level of about 35 mmCF/d while work continued for the expansion of the el Gamil terminal where in 2005 natural gas production net to Eni increased from 388 to 459 mmCF/d; and (ii) el Temsah (Eni operator with a 25% interest) where in August 2005 gas and liquid production started at the Temsah 4 platform. In the second quarter of 2006medium-term, management expects production of gas and condensates is expected to start from platform Temsah NW. Peak production at 41 KBOE/d net to Eni is expected in 2008.
In January 2005 the LNG production plant at Damietta was started-up. The plant (Eni’s interest 40%) has a treatment capacity of 247 BCF/y. Eni plans to supply 106 BCF/y of its natural gas production volumes in Egypt to this plant in the next 20 years. A second liquefaction train is planned to be installed at the plant with the same capacityone of the first train. Eni plans to supply its productionEni’s largest oil and gas to this line as agreed in an intent protocol signed with the Egyptian Government in March 2005.
In January 2005 the NGL plant in Port Said was started-up. The plant (Eni’s interest 33%) has a treatment capacity of 1,095 mmCF/d of natural gas and annual production of 330,000 tonnes of propane, 280,000 tonnes of LPG and 1.2 mmBBL of condensates.
In the medium term management plans to increase Eni’s hydrocarbon production in Egypt leveraging on the development of natural gas reserves in existing areas. This increase is expected to be offset in part by production decline of certain mature oil fields.producing countries.
LibyaLibya. Eni started operations in Libya in 1959. In 2005, Eni’ s share of production in this country amounting to 158 KBOE/d accounted for approximately 9% of2008, Eni’s total annual hydrocarbon production.
In 2005 Eni’s hydrocarbonoil and gas production averaged 158300 KBOE/d, the portion of which 76% was oil. The main oil, condensates and gas fields operated by Eni are Wafa onshore in permit NC-169 A and Bahr Essalam located in the NC-41 permitliquids being 48%. Production activity is carried out in the Mediterranean offshore northfacing Tripoli and in the Libyan Desert area.
In June 2008, Eni and the Libyan national oil company NOC finalized six Exploration and Production Sharing contracts (EPSA) converting the original agreements that regulated Eni’s exploration and development activities in the country. The terms of Tripoli started upEni’s assets in September 2004Libya have been extended till 2042 and August 2005, respectively,2047 for oil and gas properties respectively. The two partners have also agreed to develop a number of industrial initiatives designed to monetize the large reserve base, particularly through the implementation of important gas projects. The economic effects and Eni’s production entitlements based on the new contracts have been determined effective from January 1, 2008.
Under above agreement the Eni’s assets have been grouped into six contract areas as part offollows: (i) area A including the former concession 82 (Eni’s interest 50%); (ii) Area B, former concessions 100 (Bu Attifel field) and the NC 125 Block (Eni’s interest 50%); (iii) Area E with El Feel (Elephant) field (Eni’s interest 33.3%); and (iv) Area F with Block 118 (Eni’s interest 50%). Offshore areas are: (i) Area C with the Bouri oil field (Eni’s interest 50%); and (ii) Area D with Blocks NC 41 and NC 169 (onshore) that feed the Western Libyan Gas Project (Eni’s interest 50%). Production from the two fields is treated at the Mellitah plant under completion on the Libyan coast. Natural gas is carried to Italy through the underwater Greenstream pipeline. In 2005 the two fields produced 74 KBOE/d. Total peak production at 128 KBOE/d net to Eni is expected in 2006. When fully operational in 2006 the gasline is expected to transport and export to Italy a total volume of 283 BCF/y (141 BCF/y net to Eni). This volume will be entirely sold to third parties on the Italian natural gas market under long term contracts. In addition 71 BCF/y are expected to be sold on the Libyan market. In 2005, volumes transported to Italy through this gasline amounted to approximately to 163 BCF for the year.
Other significant fields are: (i) Bu-Attifel (Eni’s interest 50%) onshore in the central-eastern desert and Bouri (Eni’s interest 30%) in the Mediterranean offshore facing Tripoli which accounted for 43% of Eni’s production in Libya in 2005; and (ii) Elephant in the NC-174 onshore permit in the south-western desert (Eni’s interest 23.33%) which in 2005 produced 9 KBBL/d net to Eni.
In October 2005 following an international bid procedurethe exploration phase, Eni obtained an exploration license asis operator of four onshore blocks with a total acreage of 18,220 square kilometers, located in the MurzukMuzurk basin (161/1, 161/2&4, 176/3) and in the Kufra area (186/1, 2, 3 & 4).
The tax burden on Eni’s taxable profit has been determined based on the renewed tax framework, enacted in 2007, applicable to foreign oil companies operating under PSA schemes. In line with past practice, NOC has retained the role of tax agent on behalf of foreign oil companies. This tax regime does not alter the agreed economic value of the EPSAs currently in place between Eni and NOC. Based on the arrangements agreed upon with NOC, the tax base of the Company’s Libyan oil properties has been reassessed resulting in the partial utilization of previously accrued deferred tax liabilities amounting to euro 173 million.
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Within the Western Libyan Gas project upgrading of plants and facilities is underway aimed at increasing gas exports by 106 BCF/y fully operating from the 2014 and maintaining production profiles at the Wafa oil field. In 2008 exported volumes amounted to 332 BCF, equal to 90% of the total gas production of the two fields. In addition 35 BCF were sold on the Libyan market for power generation. Other ongoing development activities concern the A-NC118 field (Eni’s interest 50%) linking it to the pipelines connecting Wafa with Mellitah plant and the valorization of associated gas of the Bouri field. The partially treated gas and associated condensates will be shipped by sealine to the nearby Sabratha platform and exported through the GreenStream pipeline. Main discoveries for the year were achieved in: (a) the offshore Block NC41, where the U1-NC41 discovery well showed the presence of oil and natural gas and the D4-NC41 appraisal well showed the presence of natural gas and condensates; and (b) in former Concession 82, the YY-1 discovery well showed the presence of oil. In the medium-term, management expects to increase Eni’s production in Libya owing to the expected ramp-up of new mineral structures near the Western Libyan Gas Project fields with the support of the upgrade of the GreenStream pipeline, despite mature field declines. Eni targets a production level in excess of 280 KBOE/d. If this target is achieved, in the medium-term Libya will become the largest producing country by volume in Eni’s portfolio. |
Tunisia. Eni has been present in Tunisia since 1961. In 2008, Eni’s production amounted to 15 KBOE/d. Eni’s activities are located mainly in the Mediterranean offshore facing Hammamet and in the Southern desert areas.
Exploration yielded positive resultsand production in offshore block NC-41this country are regulated by concessions.
Production mainly comes from the Adam (Eni operator with a 25% interest), Oued Zar (Eni operator with a 50% interest), MLD (Eni’s interest 50%) and El Borma (Eni’s interest 50%) onshore blocks.
The ongoing development activities mainly regarded the optimization of production at the Adam, Oued Zar, MLD and El Borma concessions.
Development activities started also at the production platform of the Maamoura (Eni’s interest 49%) and Baraka (Eni’s interest 49%) fields. Production start-up is expected in 2009.
Main discoveries for the year were achieved in the following permits: (a) Adam, where the Mejda-1 and El Azzel North-1 wells showed the presence of oil; (b) Bek (Eni operator with a 25% interest), where the drilling ofAbir-1 well NFW T1-NC41 which found oil and gas at a depth of 2,770 meters and yielded 4.6 KBBL/d of crudenatural gas; (c) MLD, where the LASSE-1 well found oil and 13 mmCF/d of gas in test production.natural gas; and (d) El Borma, where the EB-406 exploratory well showed additional oil resources.
In the NC-174 permit (Eni’s interest 23.33%) about 800 kilometers south of Tripolimedium-term, Eni expects production in Tunisia to increase due to the development of the Elephant oil field continued. In October 2005 the new 725-kilometer long pipeline linking it to the Mellitah plant started operations. The upgrading of the Mellitah plant will be completed in the first half of 2006. Management expects production of this field to peak at 150 KBBL/d (35 KBBL/d net to Eni) in the second half of 2006.
In the medium term, management expects to increase significantly Eni’s production in Libya from the 158 KBOE/d level of 2005 benefiting from the expected achievement of full production at the Western Libya Gas Project and at Elephant fields.recent discoveries.
West Africa
Eni’s operations in West Africa are conducted in Angola, Congo and Nigeria. In 2005,2008, West Africa accounted for 20%19% of Eni’s total worldwide production of hydrocarbons.oil and natural gas.
AngolaAngola. Eni has been present in Angola since 1980. In 20052008, Eni’s oil production averaged 122121 KBOE/d. Eni’s activities are concentrated in the conventional and deep offshore.
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![]() | The main blocks with Eni’s participation are: (i) Block 0 in Cabinda (Eni’s interest 9.8%) west of the Angolan coast; (ii) Development Areas in the former Block 14 (Eni’s interest 20%) in the deep offshore west of Block 0; and (iii) Development Areas in the former Block 15 (Eni’s interest 20%) in the deep offshore of the Congo basin. Eni also holds interests in other minor concessions, in particular in some areas of Block 3 (with interests varying from 12 to 15%) and in the Lianzi Development Area (former 14K/A IMI Unit Area-Eni’s interest 10%). In the exploration phase, Eni is operator of Block 15/06 (with a 35% interest) and holds interests in Block 3/05-A with a 12% interest. Exploration and production activities in Angola are regulated by concessions and PSAs. In May 2008, Eni acquired a 10% interest in the Cabinda North Block from the state oil company Sonangol. In February, 2009 Eni signed the first three agreements pertaining to the Memorandum of Understanding signed in August 2008 with Angola’s state oil company Sonangol. These agreements provide for: (i) a feasibility study that addresses the utilization of associated gas feeding a new onshore power plant; (ii) a joint study that evaluates areas of the highly prospective Angolan onshore basins and their production potential for further upstream sector initiatives; and (iii) the definition of educational projects and the training of Angolan professionals with the aim of implementing energy initiatives. |
Development at the Landana and Tombua oil fields in offshore Block 14 (Eni’s interest 20%) progressed. Early production is ongoing in the north area of Landana that was linked to the Benguela/Belize-Lobito/Tomboco facilities. Production is expected to peak at 100 KBBL/d and accounted for 11%in 2010 at the end of Eni’s total annualthe drilling program.
Activities at the Banzala oil production.
Eni’s main oil producing fields are locatedfield in Block 0 in Cabinda (Eni’s interest 9.8%), Block 14 (Eni’s interest 20%) and Block 15 (Eni’s interest 20%).
progressed as planned. The main oil fields in Block 0 are Takula, Nemba and Malongo. In the first halfcommissioning of 2005a third production started at the North Sanha/Bomboco oil, condensate and LPG offshore fields. LPG is produced through an FPSO (Floating Production Storage Offloading) unit, the largest in its class in the world. At Sanha a complex for the reinjection of gas into the fields has been built aiming at reducing gas flaring by 50%. In 2005 production from this block (38 KBBL/d) accounted for approximately 31% of Eni’s production in Angola.platform was achieved early 2008. Peak production of oil, condensate and LPG is expected at 10027 KBBL/d (10 KBBL/d net to Eni) in 2007. The main field in the deep waters of Block 14 is Kuito which in 2005 produced approximately 58 KBBL/d (10 KBBL/d net to Eni).
In Block 15 the Hungo and Chocalho fields started-up in August 2004, and the Kissanje and Dikanza fields, started-up in July 2005 within phase A and B of the development of the Kizomba area, are now in production. Both fields are developed by means of an FPSO unit. Peak production of phase B at 250 KBBL/d (47 KBBL/d net to Eni) was reached in late 2005. Peak production of phase A at 250 KBBL/d (43 KBBL/d(3 net to Eni) is expected in 20062009. Mafumeira project in Block 0 also progressed according to schedule toward first production expected in 2009.
With respect to the activities for gas flaring reduction, projects progressed at the Takula and Nemba fields in Block 0. The start-up of Takula project is expected in 2009. Gas currently flared will be keptre-injected in the field; condensates will be shipped via a new pipeline to the Malongo treatment plant to be converted into LPG. Development activities at the same level by means of additional production from marginal fields. Another relevantNemba field in Block 15 is Xikomba. In 2005 production from Block 15 (70 KBBL/d) accounted for approximately 56% of Eni’s production in Angola. Development is underway at: (i) Mondo field with expected start up in 2007 and expected capital expenditure net to Eni amounting to approximately $360 million; and (ii) at Saxi-Batuque fields with expected start up in 2008 and expected capital expenditure net to Eni amounting to approximately $380 million.
The project is underway for the development of the Benguela, Belize, Lobito and Tomboco oilfields at a depth between 300 and 500 meters in Block 14 (Eni’s interest 20%). The project provides forare planned including the drilling of 50gas injection wells and the installation of a compliant tower withnew production facilities for Benguela/Belize. The first oil was produced in January 2006. Lobito and Tomboco are planned to be developed by means of underwater completion and to be connected to the compliant tower of Benguela/Belize with start-up scheduled in the second half of 2006. Management expects production from these four fields to peak at 188 KBBL/d (32 KBBL/d net to Eni) in 2008. Total capital expenditure net to Eniplatform. Start-up is expected to amount to approximately $460 million.in 2011.
Offshore exploration activities were successfulThe Mondo and Saxi/Batuque fields in the following areas: (i) Block 0, former Cabinda (Eni’s interest 9.8%) with the NFW 70-5X well that found hydrocarbons at a depth of 2,335 meters and yielded 2 KBBL/d of crude oil and natural gas in test production; (ii) Block 14K/A-IMI (Eni’s share 10%) with the drilling of the Lianzi-2ST and Lianzi-2OH appraisal wells on the Lianzi discovery which showed the presence of natural gas and crude oil layers at a depth of more than 3,000 meters; and (iii) Block 15 (Eni’s interest 20%) were started-up by means of a floating, production, storage and offloading (FPSO) vessel. Peak production at 100 KBBL/d (18 KBBL/d net to Eni) was achieved at both fields in 2008. The outlined projects and other ongoing development activities aim at maintaining current oil production plateau in the area.
In 2008 the final investment decision was achieved regarding the development of the Kizomba Satellites project-phase 1. The project plans to produce reservoir of the Clochas and Mavacola oil discoveries. Start-up is expected in 2012.
Eni holds a 13.6% interest in the Angola LNG Limited (A-LNG) consortium responsible for the construction of an LNG plant in Soyo, 300 kilometers north of Luanda. It will be designed with a processing capacity of 1 BCF/y of natural gas and produce 5.2 mmtonnes/y of LNG and related products. The project has been sanctioned by relevant Angolan authorities. It envisages the development of 10,594 BCF of associated gas reserves in 30 years. Gas volumes currently being produced from offshore production blocks are flared. In 2008 the final investment decision was reached to build a pipeline linking the fields located in Blocks 0 and 14 to LNG plant in order to monetize gas currently flared. Start-up is expected in 2012.
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Main oil discoveries for the year were made in: (a) Block 15/06, with the Batuque-3Ngoma-1 and Sangos-1 discoveries. Both discoveries were declared of commercial interest; (b) Block 0, with the Kambala appraisal well onwell; (c) the Batuque discovery which confirmeddevelopment area of former Block 14, with the presenceLucapa-5 appraisal well; and (d) the development area of hydrocarbons at a depth of about 2,000 meters.
In May 2006, Eni acquiredformer Block 15 with the operatorship (Eni’s interest 35%) of a new exploration area in Block 15.Mavacola-3 appraisal well.
In the medium term,medium-term, management expects to increase Eni’s production to approximately 200150 KBBL/d benefitingreflecting contributions from ongoing development projects, despite mature field declines.
Congo. Eni has been present in Congo since 1968. In 2008 production averaged 85 KBOE/d net to Eni. Eni’s activities are concentrated in the conventional and deep offshore facing Pointe Noire and onshore. Exploration and production activities in the Congo are regulated by Production Sharing Agreements. Eni’s main operated oil producing interests in Congo are the Zatchi (Eni’s interest 65%) and Loango (Eni’s interest 50%) fields, Blocks Marine VI (Eni’s interest 65%), Marine VII (Eni’s interest 35.75%), M’Boundi (Eni’s interest 80.1% pursuant to the acquisition of Burren Energy) and Kouakouala A (Eni’s interest 100% pursuant to the acquisition of Burren Energy). Other relevant producing areas are a 35% interest in the Pointe Noire Grand Fonde and Pex permits. Eni also holds interests in three deep offshore blocks currently in the exploration phase: Mer Très Profonde Nord (Eni operator with a 40% interest), Mer Très Profonde Sud (Eni’s interest 30%), Marine X (Eni operator with a 90% interest), and Le Kouilou onshore permit (Eni operator with a 85% interest pursuant to the acquisition of Burren Energy). In May 2008, Eni signed a cooperation agreement with the Republic of Congo with the aim to develop the country’s mineral and oil potential. The agreement provides for: (i) development and extraction of unconventional oil from the Tchikatanga and Tchikatanga-Makola oil sands deposits. The two deposits that cover an acreage of approximately 1,790 square kilometers are deemed to contain significant amounts of resources based on a recent survey. |
Eni plans to monetize the heavy oil by applying its EST (Eni Slurry Technology) proprietary technology intended to fully convert the heavy oil into high quality light products. The project will also benefit from synergies resulting from the expected achievementclose proximity of fullthe operated M’Boundi oilfield; (ii) collaboration in the use of vegetable oils, aimed at covering domestic demand for food uses and using excess amounts for the production of bio-diesel with Eni’s proprietary technology Ultra-Bio-Diesel; and (iii) construction of a 450 MW electricity generation plant near the Djeno oil terminal, with start-up expected in late 2009. The power station (Eni’s share 20%) will be fired with the associated natural gas from the M’Boundi field and offshore discoveries in permit Marine XII (Eni operator with a 90% interest) contributing to the reduction of gas flaring. The final investment decision was reached in 2008. This project aims at qualifying as Clean Development Mechanism in implementing the Kyoto protocol and as a contribution to the sustainable development of the Country.
The Awa Paloukou (Eni’s interest 90%) and Ikalou-Ikalou Sud (Eni’s interest 100%) operated fields started-up in 2005the Marine X and the contribution of new development projects.
Congo Eni has been presentMadingo permits were started up in Congo since 1968 and its2008 with production in 2005 was 67peaking at 13 KBOE/d.
Eni is the second largest international oil producer, with oil fields operated by Eni accounting for 28% of Congo’s total oil production in 2005 (65 KBBL/d net to Eni). Eni’s principal oil producing interests operatedEni in Congo are located in2009.
Development activities of the offshore facing Pointe Noire:M’Boundi field moved forward with the Zatchi, Foukanda, Mwafirevision of the production schemes and Djambala fields (Eni’s interest 65%),layout to plan application of advanced recovery techniques and a design to monetize associated gas.
In the Loango field (Eni’s interest 50%) and the Kitina field (Eni’s interest 35.75%) operated by Eni accounted for approximately 59% ofmedium-term, management expects to increase Eni’s production in Congo due to the integration and development of recently acquired assets as well as projects underway, targeting a level in 2005. Eni holds a 35% interestexcess of 140 KBBL/d in the Pointe Noire Grand Fond and Pex permits.2012.
NigeriaNigeria. Eni has been present in Nigeria since 1962. In 2005,2008, Eni’s hydrocarbonoil and gas production averaged 149119 KBOE/d located mainly in the onshore and accounted for 9%offshore of Eni’s hydrocarbon production.the Niger Delta.
Eni’s principal producing fields in Nigeria are located in: (i) four35
In the development/production phase Eni is operator of onshore blocks (OMLOil Mining Leases (OML) 60, 61, 62 and 63) in the Niger Delta63 (Eni’s interest 20%), which in 2005 accounted for 35% of Eni’s production in Nigeria; (ii) the and offshore OML 125 block (Eni’s interest 50.19%85%), where the Abo field is located which produced over 14 KBBL/d net to EniOMLs 120-121 (Eni’s interest 40%) and holds a 12.5% interest in 2005. The development of other levels of the Abo field are expected to reach a production peak of 38 KBBL/d (15 KBBL/d net to Eni)OML 118 as well as in 2007; and (iii) the offshore OML 119 block, operated through aand 116 service contract, where the Okono and Okpohocontracts. Through SPDC JV oil fields are located, which produced 55 KBBL/d (19 KBBL/d net to Eni) in 2005.
joint venture, Eni also holds a 5% interest in the 31 onshore blocks and a 12.86% interest in 5 conventional offshore blocks. In the 5 offshore blocksexploration phase Eni is operator of NASE, the largest oil joint ventureOil prospecting Leases (OPL) 244 (Eni’s interest 60%), OML 134 (former OPL 211 - Eni’s interest 85%) and onshore OPL 282 (Eni’s interest 90%) and OPL 135 (Eni’s interest 48%). Eni also holds a 12.5% interest in the country. In 2005 production of this joint venture net to Eni accounted for about 34% of Eni’s production in Nigeria.OML 135 (former OPL 219).
In November 2005December 2008 Eni exercised its pre-emption rights on the Bonga oil field (Eni’sremaining 49.81% interest 12.5%), situated in Blocks OML 125 and 134. On the OML 118 permit offshoresame occasion Eni transferred a 15% stake to the Nigerian company OANDO. This transaction has been approved by relevant authorities.
Exploration and production activities in Nigeria in watersare regulated mainly by Production Sharing Agreements and concession contracts as well as service contracts, where Eni acts as contractor for state owned companies.
In Blocks OMLs 60, 61, 62 and 63 development activities of gas reserves are underway: (i) the basic engineering work for increasing capacity at the Obiafu/Obrikom plant was completed. The project also provides for the installation of a depth between 950new treatment plant and 1,150 meters, was started up. Development is achieved by meanstransport facilities; and (ii) the development plan of an FPSO vessel connected to 17 producing wells (9 already drilled).the Tuomo gas field has been progressing. Production is expected to peak at 200start by means of linkage to the Ogbainbiri treatment plant. These activities target to supply 311 mmCF/d of feed gas to the Bonny liquefaction plant (Eni’s interest 10.4%) for a period of 20 years.
In the OML 118, Bonga field produced about 19 KBOE/d net to Eni via a FPSO unit with a 225 KBBL/d (23treatment capacity. The associated gas is gathered into a platform in EA field and then delivered to the Bonny liquefaction plant.
In the OML 119, Okono/Okpoho production reached about 12 KBBL/d net to Eni via a FPSO unit with a 40 KBBL/d treatment capacity.
In the OMLs 120/121 blocks (Eni operator with a 40% interest), the development plan of the Oyo oil discovery was approved. The project provides for the installation of an FPSO unit with treatment capacity of 40 kBBL/d and storage capacity of 1 mmBBL. Production start-up is expected in 2009.
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Through the SPDC JV, the Forcados/Yokri oil and gas field is under development as part of the integrated associated gas gathering project aimed at supplying gas to the Bonny liquefaction plant. Offshore production facilities have been installed. Onshore activities regard the upgrading of the Yokri and North/South Bank flow stations and the construction of a gas compression plant with a 233 mmCF/d capacity. Completion is expected in 2009.
In the OML 125, oil production deriving from Abo field. Ongoing development activities aim at reaching a peak production of 27 KBBL/d (18 KBBL/d net to Eni) in 2006.
In September 2005 Eni acquired as operator the OML 120 and OML 121 development licenses from Nigerian companies. The concessions, where the Oyo field was discovered, are located approximately 70 kilometers offshore the western coast of the Niger Delta in Nigeria. Two exploration wells are going to be drilled in 2006.
Exploration yielded positive results in the offshore OML 125 block (Eni operator2009. Production is supported by an FPSO unit with a 50.2% interest) with the drilling of the Abo 8 appraisal well that found oil layers at a depth of 2,142 meters45 KBBL/d capacity and in the offshore OPL 219 block (Eni’s interest 12.5%) with the drilling of the Bolia 3X appraisal well that found oil levels at a depth of over 3,000 meters.an 800 KBBL storage capacity.
Eni holds a 10.4% interest in Nigeria LNG Ltd whichthat manages the Bonny liquefaction plant located on Bonny Islandin the Eastern Niger Delta, with a treatment capacity of approximately 8121,236 BCF/y of naturalfeed gas corresponding to a production of 17 million tonnes/22 mmtonnes/y of LNG alongon 6 trains. The seventh unit is being engineered with over 2.2 million tonnes/start-up expected in 2012. When fully operational, total capacity will amount to approximately 30 mmtonnes/y of LPG and 1.1 million tonnes/y of condensates on five trains. The fourth train was started up in late 2005 and the fifth in January 2006. The fourth train and the fifth train are expected to reach full production in 2007. Nigeria LNG’s partners have planned a further capacity expansion to 1,448 BCF/y,LNG, corresponding to a productionfeedstock of 30 million tonnes of LNG by means of the installation of two more trains (one already under construction) with start-up expected between 2007 and 2011. Eni expects its share of capital expenditure for the planned capacity expansion to amount to $1.2 billion; this expenditure is expected to be completely financed by cash generated from the plant operations.
approximately 1,624 BCF/y. Natural gas supplies to the plant (first six trains) will beare provided under a gas supply agreementagreements with a 20 year20-year term from production of the NASESPDC joint venture (Eni’s interest 5%) and of Blocks OMLthe NAOC JV, the latter operating the OMLs 60, 61, 62 and 61 (Eni operator with a 20% interest). When fully operational in63. In 2008 they will supply approximately 3.5 BCF/total supplies were 3,461 mmCF/d (0.27 BCF/(268 mmCF/d net to Eni, corresponding to approximately 47,000 BBL/46 KBOE/d). Capital expenditure netLNG production is sold under long-term contracts and exported to European and American markets by the Bonny Gas Transport fleet, wholly-owned by Nigeria LNG Co.
Eni is operator with a 17% interest of the Brass LNG Ltd Company for the development activityconstruction of a natural gas liquefaction plant to be built near the existing Brass terminal. This plant is expected to amount to approximately $560 million.
In April 2005, the Okpai power station (independent power plant, Eni’s interest 20%) started operations,start operating in 2014 with a generationproduction capacity of 480 megawatt10 mmtonnes/y of LNG corresponding to 618 BCF/y (approximately 64 net to Eni) of feed gas on two gas and one steam turbines. The power station is fed with2 trains for twenty years. Supplies to this plant will derive from the collection of associated gas from nearby producing fields and from the nearby Kwale fieldsdevelopment of gas reserves in permit OMLthe OMLs 60 (Eni operator with a 20% interest), which will supply 71 mmCF/dand 61 onshore blocks. The venture signed preliminary long-term contracts to sell the whole LNG production capacity. Eni acquired 1.67 mmtonnes/y of natural gas when the power stationLNG capacity. The front end engineering is fully operational. The project is part of Eni’sunderway and the Nigerian government’s plan to reduce CO2 emissionsfinal investment decision is expected in the atmosphere.2009.
In the medium term,medium-term, management expects to increase significantly Eni’s production in Nigeria to approximately 200 KBBL/KBOE/d, leveraging onreflecting in particular the development of natural gas reserves, in particular in order to ensure supplies to the Bonny plant, and the contribution of fields started-up recently, as in the case of Bonga, and of new development projects.reserves.
North Sea
Eni’s operations in the North Sea area are conducted in Norway and the United Kingdom. In 2005,2008, the North Sea accounted for 16%13% of Eni’s total worldwide production of hydrocarbons.oil and natural gas.
Norway. Eni has been operating in Norway since 1964. Eni’s activities are performed in the Norwegian Sea, in the Norwegian section of the North Sea and in the Barents Sea. Eni’s production in Norway amounted to 126 KBOE/d in 2008. Exploration and production activities in Norway are regulated by Production Licenses (PL). According to a Production License, the holder is entitled to perform seismic surveys and drilling and production activities for a few years with possible extensions. In February 2008, following an international bid procedure, Eni was awarded the operatorship of 2 exploration licenses with a 40% and 65% stake, respectively, in the Barents Sea and further 3 licenses in the Norwegian Sea with stakes from 19.6% to 29.4%. In May 2009, following an international bid procedure, Eni was awarded the operatorship of the PL 533 and PL 529 exploration permits with a 40% stake as well as a 30% interest of the PL 532 permit. Eni holds interests in 6 production areas in the Norwegian Sea. The main producing fields are Aasgaard (Eni’s interest 14.82%), Kristin (Eni’s interest 8.25%), Heidrun (Eni’s interest 5.12%), Mikkel (Eni’s interest 14.9%) and Norne (Eni’s interest 6.9%) which in 2008 accounted for 67% of Eni’s production in Norway. |
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Activities in 2008 were aimed at maintaining production levels by means of sidetracking and infilling activities at the main producing fields. The main structures under development are located near Kristin, particularly Tyrihans (Eni’s interest 6.23%). Economic development of this field is expected to be achieved through synergies with the Kristin production facilities. Production is expected to start in 2009, in coincidence with the expected production decline of Kristin which will make spare capacity available to process production from Tyrihans. Pre-development activities are underway on recent oil and gas discoveries near Aasgaard field. In particular: (i) in May 2008, the relevant authorities sanctioned the development plan of the Morvin discovery. The basic design provides linkage to existing production facilities that will be upgraded. Production start-up is expected in 2010; and (ii) the drilling program at the Yttergryta field was completed. Production commenced at 81 mmCF/d in early 2009. Eni holds interests in four production licenses in the Norwegian section of the North Sea. The main producing field is Ekofisk (Eni’s interest 12.39%) in PL018 which in 2008 produced 42 KBOE/d net to Eni and accounted for 33% of Eni’s production in Norway. Ongoing projects aim at maintaining and optimizing production at Ekofisk by means of infilling wells, the development of the South Area, upgrading of existing facilities and optimization of water injection. |
Currently Eni is only performing exploration activities in Barents Sea. Operations in this area are focused on the appraisal of the mineral potential of the large Goliath discovery made in 2000 at a water depth of 370 meters in PL 229 (Eni operator with a 65% interest) aimed at its commercial development. The project is progressing according to schedule. Commencement is expected in 2013 with a production plateau at 100 kBBL/d. In 2008 contracts were awarded for the study of two possible development plans by means of a cylindrical FPSO unit. The final investment decision is expected in 2009.
Norway Eni has been operatingMain discoveries for the year were achieved in Norway since 1964. In 2004 Eni’s hydrocarbon production averaged 136 KBOE/d. Eni’s principal producing interests are the Ekofisk fieldthe: (a) Prospecting License 312 (Eni’s interest 12.39%17%) inwith the North Sea, andGamma gas discovery at a depth of about 2,500 meters. Production will be treated at the Aasgard, Mikkel (bothnearby Aasgaard facilities; (b) the Prospecting License 122 (Eni operator with a 14.9%20% interest) and Norne (Eni’s interest 6.9%) fields in, where appraisal activities confirmed the Norwegian Sea which together accounted for 90%mineral potential of Eni’s production in Norway in 2005.
In November 2005 production started at the Kristin oil and gas field (Eni’s interest 8.25%) located inMarulk discovery; (c) the PL134 permit in the Haltenbanken area about 200 kilometers off the coast in the Norwegian Sea. Oil production is treated on a semi-submersible platformProspecting License 293 (Eni operator with a capacity of 125 KBBL/d. Production is expected to peak at 218 KBOE/d (18 KBOE/d net to Eni) in 2007. In the same permit the Tofte formation discovered45% interest), with the first producing well on Kristin will be developed. The synergies withgas and condensate Aphrodite discovery. Ongoing pre-development activities aim to assessing the Kristin production facilities will allow a viable developmenteconomic viability of the nearby Tyrihans field (Eni’s interest 7.9%), expected to start-up in 2009, in coincidence with the expected production decline of Kristin.
In November 2005 the Svaleproject; and Stær oil fields in the PL128 permit(d) Prospecting License 128 (Eni’s interest 11.5%) were started up, exploiting synergies with the nearby Norne production facilities. Production is expected to peakDompap gas discovery at 56 KBBL/d (6 KBBL/d net to Eni) in 2006.
The explorationa depth of about 2,750 meters. Appraisal activities yielded positive results in the Barents Sea with the second appraisal Goliath South well on the Goliath oil and gas discovery. Management expects the Goliath South well may results in the discovery of additional hydrocarbon reserves either from the expected reservoir or from deeper layers. Goliath is located in Block PL 229 (Eni’s interest 65%).are underway.
The United KingdomKingdom. Eni has been present in the United Kingdom since 1964. Eni’s activities are carried out in the British section of the North Sea, in the Irish Sea and in some areas East and West of the Shetland Islands. In 20052008 Eni’s net production of hydrocarbonsoil and gas averaged 141104 KBOE/d.
Eni’s principal producing interestsExploration and production activities in the United Kingdom are regulated by concession contracts.
In November 2008, Eni finalized an agreement with the British company Tullow Oil to purchase a 52% stake and the operatorship of fields in the Hewett Unit in the British section of the North Sea and relevant facilities including the associated Bacton terminal. Eni acquired operatorship of the assets with an 89% interest. Eni aims to upgrade certain depleted fields in the area so as to achieve a gas storage facility with a 177 BCF working gas capacity to support seasonal upswings in gas demand in the UK leveraging on the strategic purchased facilities. The Bacton terminal, in fact, is very close to the incoming point of the Interconnector pipeline connecting the United Kingdom with Europe. For this purpose, Eni intend to request a storage license.
In December 2008 following an international bid procedure, Eni was awarded four exploration blocks with a 22% interest located in the Shetland Islands. One of the awarded blocks is located near the Tormore (Eni’s interest 20%) and Laggan (Eni’s interest 20%) recent gas discoveries in the North Sea.
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Eni holds interests in 12 production areas in the British section of the North Sea. The main fields are Elgin/Franklin (Eni’s interest 21.87%), MacCulloch (Eni’s interest 40%), fields located in the Liverpool Bay (Eni’s interest 53.9%) and J-Block (Eni’s interest 33%). In 2005 these fields, Andrew (Eni’s interest 16.21%), Farragon (Eni’s interest 30%), the Flotta Catchment Area (Eni’s interest 20%) and Mac-Culloch (Eni’s interest 40%) which in 2008 accounted for 77%63% of Eni’s production in the United Kingdom.
Exploration yielded positive results Development activities progressed at the West Franklin field (Eni’s interest 21.87%) by completing a second development well planned. The production is supported by facilities of the nearby Elgin/Franklin field which peaked at 20 KBOE/d (4 net to Eni). Other activities related to: (i) optimization of production in the P/233 permitJ-Block through the upgrading of existing facilities; and (ii) infilling actions at the Flotta Catchment Area and Mac-Culloch fields targeting to maintain production levels. Development activities started at the Burghely field (Eni’s interest 21.92%). Pre-development activity continued on the Suilven discovery (Eni’s interest 8.75%).
Eni holds a 53.9% interest in blocks 15/6 production fields in the Liverpool Bay area in the Eastern section of the Irish Sea. Main fields are Douglas, Hamilton and Lennox and their extension which in 2008 accounted for 24% of Eni’s production in UK. Facilities upgrading is underway.
Eni holds interest in 6 production permits located East of the Shetland Islands. Main fields are Ninian (Eni’s interest 12.94%) and Magnus (Eni’s interest 5%) which in 2008 accounted for 4% of Eni’s production in the United Kingdom. In 2008 maintenance and optimization actions were performed with the drilling of infilling wells.
Main discoveries for the year were achieved in the: (i) Block 16/23 (Eni’s interest 16.67%) with the Kinnoul oil and gas discovery which is planned to be developed in synergy with the production facilities of the Andrew field (Eni’s interest 16.21%); (ii) Block 30/6 (Eni’s interest 33%) where gas and condensates were found near the recent Jasmine discovery. Joint development of these two structures is being assessed in combination with existing facilities; and (iii) Block 22/25a (Eni’s interest 12%16.95%) in the central section of the North Sea with the NWF 15/25°-DD well drilled at a depth of over 2,000 meters and flowed about 4 KBBL/d of high quality oil and natural gas in test production.
Development activities concerned: (i) the start-up of the Farragon field (Eni’s interest 30%); and (ii) linkage of the gas and condensate Glenelg (Eni’s interest 8%) and West Culzean discovery near the Elgin/Franklin producing field (Eni’s interest 21.87%) fields to the Elgin Franklin production platform.
In July 2005 Eni divested some exploration assets located in the central section. Study of the North Sea as part of its strategy of asset portfolio rationalization.
In November 2005 the British government announced a draft law to increase corporate income taxes by levying a supplementary charge increase of 10 percentage points (from 10 to 20%). In the event this draft lawdevelopment activities is enacted, management estimates an adverse 1.2 percentage points impact on Eni Group’s tax rate in 2006 as compared to 2005. Approximately half of the expected increase will relate to a provision for deferred taxation. Given the expected production decline of the area for the decline of mature fields, the adverse impact of higher rates of taxes in the United Kingdom will diminish with time.underway.
Rest of the WorldCaspian Area
In 2005,2008, Eni’s operations in the rest of the worldCaspian Area accounted for 21%7% of its total worldwide production of hydrocarbons.
In Brazil in January 2006 following an international bid procedure held in October 2005 Eni acquired the operatorship of a six year exploration license in Block BM Cal-14, covering an area of about 745 square kilometers in the deep waters of the Camamu-Almada basin, about 1,300 kilometers north of Rio de Janeiro. In March 2005 the exploration license of Block BM-C-3 (Eni’s interest 40%) was converted into an evaluation area. The test phase of the Peroba discovery well containing oil is scheduled within 2006. Exploration yielded positive results in Block BM-S-4 (Eni’s interest 100%) with the drilling of the NFW Belmonte-1A well which found natural gas at a depth of over 5,000 meters. The relevant authorities allowed a third exploration period for this block which will last two years and provides for the drilling of one well.
In China offshore exploration activity yielded positive results in Block 16/19 (Eni’s interest 33%) in the South China Sea about 180 kilometers south east of Hong Kong with the drilling of the HZ25-4-1 well (Eni’s interest 100%), which found hydrocarbons at a depth between 2,200 and 3,800 meters and flowed about 5 KBBL/d of oil in test production. The HZ25-4 field will be started up by means of the production facilities existing in the area. In Block 16/19 the HZ25-3-2 appraisal well confirmed the extension of the reserves of the HZ25-3 oil field.
In India in July 2005, Eni was awarded the right to conduct exploration activities as operator in Blocks 8 and D-6, following an international bid tender. Block 8 (Eni’s interest 34%) is located onshore in Rajasthan in the northwest of India, and extends for 1,335 square kilometers. Block D-6 (Eni’s interest 40%) is located deep water in the Indian Ocean, some 130 kilometers east of the Andaman Islands, and covers an area of 13,110 square kilometers. This contract marks the beginning of Eni’s upstream activities in India. In September 2005 Eni and the Indian Oil & Natural Gas Corporation signed a memorandum of understanding establishing mutual cooperation between the companies aimed at finding new exploration and production opportunities. In particular, the companies will exchange information on a range of deep offshore exploration projects in India and in other countries, with an option to exchange equity interests in selected upstream and midstream projects.
In Mozambique in March 2006, following an international bid tender, Eni obtained the exploration license for Area 4, located in the deep offshore of the Rovuma Basin 2,000 kilometers north of Maputo. The block covers an area of 17,646 square kilometers in an unexplored geological basin with great mineral potential according to surveys performed.
In Turkey in September 2005 an agreement has been reached with the Turkish Group Calik concerning feasibility study for the realization of a new oil pipeline from the Black Sea Turkish coast east of Samsun (Unye) to Ceyhan, on the Turkish Mediterranean coast. The new oil transportation infrastructure will include: (i) a new loading terminal in Samsun; (ii) a 550-kilometer long pipeline with design capacity of 1.5 million barrels of oil per day; and (iii) oil storage facilities to be built in the existing terminal in Ceyhan. The construction of a pipeline represents a faster, environmentally safer and more economic alternative to the transportation of oil by ship through the Turkish Straits of the Bosphorus and Dardanelles.
Australia Eni has been present in Australia since 2000. In 2005 Eni’s hydrocarbon production averaged 21 KBOE/d mainly of oil.
Eni is operator with a 65% interest of the offshore Woollybutt oil field, which in 2005 accounted for 51% of Eni’s production in Australia.
Eni holds a 12.04% interest in the liquids and gas Bayu Undan field where liquid production was started-up in 2004. Production of natural gas currently under development will be treated at the Darwin liquefaction plant which has a capacity of 3.5 million tonnes/y. In January 2006 the first shipment of LNG was made to the Japanese market. A production peak of 160 KBOE/d from this field (18 KBOE/d net to Eni) is expected in 2008.
Offshore exploration was successful in: (i) Block AC/P-21 (Eni’s interest 40%) with the NFW Vesta-1 well that located oil and gas at a depth of over 3,300 meters; (ii) Block WA-25-L (Eni’s interest 65%) with the Woollybutt-4 appraisal well which confirmed the presence of oil in the western extension of Wollybutt-3 at a depth of over 2,000 meters; and (iii) Block WA-208 P (Eni’s interest 18.66%) with the NFW Hurricane-1 well that identified natural gas at a depth of over 3,000 meters.
In December 2005 Eni purchased further interests and reached 100% in permits WA 279-P and WA 313-P in the Bonaparte offshore basin off the northern coast of Australia where the Blacktip and Penguin fields are located. Total capital expenditure net to Eni is expected to amount to approximately $325 million. In the same basin Eni purchased a 39% interest in the WA 34-R permit where the Rubicon and Prometeus fields are located.
In December 2005 Eni signed Heads of Agreement with the Darwin Power and Water Utility Company for the supply of a total amount of 20 BCM of natural gas from the Blacktip field for a 25 year period starting in January 2009.
Croatia Eni, through a 50/50 joint venture with INA, the national Croatian company, operates the Ivana natural gas field, located 40 kilometers West of Pola in the Adriatic offshore in approximately 40 meter deep waters. The field is operated through a main production platform, called Ivana A, and three satellite platforms, Ivana B, D and E.
As part of the development plan of the natural gas discoveries in the area between the end of 2005 and the beginning of 2006 the Ika, Ida, Ivana C and K fields were started up. Production from these fields is sent to the Ivana K platform and from this platform through a 57-kilometer long pipeline to the Garibaldi K platform. A 43-kilometer long pipeline is under construction to reach the Croatian coast near Pula. Two fields, Katarina and Annamaria, are under development and are expected to start-up in late 2006 and early 2009, respectively.
In the medium term, management expects to increase Eni’s production to approximately 7 KBOE/d benefiting from the full production of the new fields.
Indonesia Eni has been present in Indonesia since 2000. In 2005 hydrocarbon production net to Eni averaged 22 KBOE/d. Eni’s producing interests are located in the onshore area in East Kalimantan (Borneo) regulated by the Sanga Sanga PSA (Eni’s interest 37.81%) operated by Virginia Indonesia Co, in which Eni holds a 50% interest. This area produces mainly natural gas (about 80%). This gas is treated at the Bontang liquefaction plant, the largest in the world, and is exported to the Japanese, South Korean and Taiwanese markets.
Offshore exploration activity yielded positive results in the Bukat block (Eni operator with a 41.25% interest) in the Tarakan basin offshore Borneo with the drilling of appraisal wells on the Aster oil discovery made in 2004. The Aster 2 and 3 wells confirmed the presence of additional reserves of high quality hydrocarbons and the exploration potential of the basin. In 2006 and 2007 further appraisal activities are scheduled in order to reach a definition of the field’s development plan.
Iran Eni has been present in Iran since 1957. In 2005 liquid production net to Eni averaged 35 KBBL/d. The main producing oil fields operated by Eni under buy-back contracts are: (i) South Pars phases 4 and 5 (Eni operator with a 60% interest, the remaining 40% interest being held by Iranian partners) in the offshore of the Persian Gulf. These phases were started up in 2004. At the beginning of 2005 the gas treatment plant as part of the development project of the field was completed. In 2005, production of gas reached a rate equivalent to the 706 BCF/y production plateau; the field produced also one million tonnes/y of propane and butane and 108 KBBL/d of condensates (33 KBBL/d of condensates net to Eni) through separation from natural gas. Eni’s share of condensates is destined to cover development costs incurred by Eni and to remunerate capital employed by Eni; and (ii) the Darquain oil field (Eni operator with a 60% interest, the remaining 40% interest being held by Iranian partners) located onshore approximately 50 kilometers north-east of Abadan. On this field the second development phase is underway and aims at increasing production from the present 50 KBBL/d to over 160 KBBL/d (14 KBBL/d net to Eni) through the increase of the existing treatment capacity, the drilling of new producing wells and the injection of gas. These two fields account for 85% of Eni’s production in Iran.
Eni also holds interests in the Dorood (45%) and Balal (45%) oil fields in the offshore of the Persian Gulf located respectively near the Kharg island and about 100 kilometers south-west of the Lavan island. The development of Dorood is expected to be completed at the end of 2006 with a peak production of 50 KBBL/d.
Kazakhstan. Eni has been present in Kazakhstan since 1992. Eni is co-operator with British Gas with a 32.5% interest of the Karachaganak oil, gasfield and, condensate field. In 2005 production from this field (netup to Eni) averaged 64 KBBL/d of liquids and 207 mmCF/d of natural gas. Most ofJanuary 2009, acted as the liquids produced are exported to Western markets through the Caspian Pipeline Consortium pipeline (Eni’s interest 2%). This pipeline is connected to the Novorossiysk terminal on the Russian coast of the Black Sea. In 2005 exports amounted to 42.5 KBBL/d net to Eni, corresponding to 41.7% of oil and gas produced by the field net to Eni. The rest of liquid production is exported and sold, as unstabilized condensates, on the Russian and Kazakh markets. The development plan of the field provides for the production of additional liquid and gas reserves by means of a gas treatment plant and the drilling of production wells.
As partsingle operator of the North Caspian Sea PSA, whereProduction Sharing Agreement (NCSPSA) activities.
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Kashagan. Eni holds a 16.81% participating interest in the NCSPSA. The change in the participating interest from a previous 18.52% was effective as of January 1, 2008 according to an agreement signed in October 2008 with the Kazakh authorities. The Eni partners of this international consortium are the Kazakh national oil company KazMunayGas and the international oil companies Total, Shell and ExxonMobil, each with a participating interest currently of 16.81%, ConocoPhillips with 8.40%, and Inpex with 7.56% based on the renewed contractual arrangements. The NCSPSA defines terms and conditions for the exploration and development activities to be performed in the area covered by the contract. The Kashagan field was discovered in the northern section of the contractual area in the year 2000. Management believes this field to contain a large amount of hydrocarbon resources. The phased development plan of the Kashagan field provides for the drilling of about 240 wells and the construction of production plants located on artificial islands which will collect production from other satellite artificial islands. Oil production will be marketed. Natural gas will be mostly used (80%) for re-injection into the reservoir for maintaining pressure levels. The natural gas not re-injected will be treated for the removal of hydrogen sulphide and will be used as fuel in power generation for the production plants. The remaining amounts will be marketed. | ![]() |
As outlined above, on October 31, 2008, all the international partners of the NCSPSA consortium and the Kazakh authorities signed the final agreement implementing the new contractual and governance framework of the Kashagan field is located,project, based on March 31, 2005 Eni (operator) and the otherMemorandum of Understanding signed on January 14, 2008.
The material terms of the agreement are: (i) the proportional dilution of the participating interest of all the international members of the Kashagan consortium, except for one, purchased British Gas’s interest (16.67%) in proportional shares, according tofollowing which the option exercised in May 2003, and sold half of this newly acquired interest tostake held by the national Kazakh company Kazmunaygaz (KMG)Company KazMunayGas and the stake held by the other four major stakeholders are each equal to 16.81%, effective from January 1, 2008. The Kazakh partner will pay the other co-ventures an aggregate amount of $1.78 billion; (ii) a value transfer package to be implemented through changes to the terms of the NCSPA, the amount of which will vary in proportion to future levels of oil prices. Eni is expected to contribute to the value transfer package in proportion to its new participating interest in the project (16.81%); and (iii) a new operating model which entails an increased role of the Kazakh partner and defines the international parties’ responsibilities in the PSAexecution of the subsequent development phases of the project. The new North Caspian Operating Company (NCOC) BV has been established and capitalized by the seven partners of the consortium. In January 2009 the new entity has taken over the operatorship of the project. Subsequently development, drilling and production activities have been delegated by NCOC BV to the main partners of the Consortium. Eni is confirmed to be the operator of phase-one of the project (the so-called "Experimental Program") and in addition will retain operatorship of the onshore operations of phase 2 of the development plan.
In conjunction with the signing of the final agreements, the partners also reached a final approval of the revised expenditure budget of phase-one of the development plan, amounting to $32.2 billion (excluding general and administrative expenses) of which $25.4 billion related to the original scope of work of phase 1 (including tranches 1 and 2), with the remaining part planned to be spent to execute tranche 3 and build certain exporting facilities. Eni will fund those expenditures in proportion to its participating interest of 16.81%. Management expects to achieve first oil late in 2012 on the basis of progress to completion (55% of phase 1 of the project) and accumulated expertise and project know-how. In the following 12-15 months treatment facilities and compression units for gas re-injection will be entirely commissioned enabling the Consortium to deploy an 8.335% interest. Following these two transactions (the saleinstalled production capacity of 370 KBBL/d in 2014. Subsequently, production capacity of phase-one (Experimental Program) is expected to KMG was closed in May 2005), Eni increased its interest from 16.67%step-up to 18.52%450 KBBL/d, leveraging on additional compression capacity for gas re-injection associated with the start-up of phase-two offshore facilities. In addition, within phase-one a rail terminal with carrying capacity at 300 KBBL/d of oil and continues acting as operator. The outlay for this transaction amounted to $200 million. 4,500 tonnes/d of sulphur will be built.
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The development plan of the Kashagan field presented atwas originally sanctioned by the Kazakh authorities in February 2004, contemplating a three-phase development scheme including partial gas re-injection in the reservoir to enhance the recovery factor of the crude oil. The sanctioned plan budgeted expenditures amounting to U.S. $10.3 billion (in 2007 real terms) to develop phase-one, with a target production level of 300 KBBL/d. First oil was originally scheduled to be produced by the end of 2002 and approved2008. Eni was expected to fund these expenditures according to its participating interest in February 2004, mainly foresees: (i)this project. On June 29, 2007, Eni, as operator, filed with the relevant Kazakh authorities amendments to the sanctioned development plan. These amendments rescheduled the production start-up to 2010 and estimated development expenditures for phase-one at U.S. $19 billion. As outlined above the amended development plan that was sanctioned in October 2008 atforecast production start-up late in 2012 and an initial levelexpenditure budget for phase one amounting to $25.4 billion. The production delay and cost overruns were driven by a number of 75 KBBL/d. Management plans production level to increase to 450 KBBL/d at the end of the first phase of development and to reach a plateau of 1.2 mmBBL/d at the end of the field development; (ii) total capital expenditure estimated at $29 billion ($5.4 billion being Eni’s share). Such capital expenditure plan is currently under revision in order to take into accountfactors: depreciation of the U.S. dollar versus the euro and other currencies; cost price escalation of goods and services required to execute the rising trendsproject; an original underestimation of the costs and complexity to operate in the costsNorth Caspian Sea due to lack of certainbenchmarks; design changes to enhance the operability and safety standards of the offshore facilities.
The magnitude of the reserves base, the results of the well tests conducted and the findings of subsurface studies completed so far support expectations for a full field production factors (suchplateau of 1.5 mmBBL/d, which represents a 25% increase above the original plateau as materials and oilfield services).presented in the 2004 development plan. An independent reserve evaluation performed by a petroleum engineer (Ryder Scott Petroleum Consultants) fully supports the target production plateau. The above mentionedachievement of the full field production plateau will require a material amount of expenditures in addition to the development expenditures needed to complete the execution of phase-one. However, taking into account that future development expenditures will be incurred over a long time horizon, management does not includeexpect any material impact on the company’s liquidity or its ability to fund these capital expenditureexpenditures.
In addition to the expenditures for developing the construction offield, further capital expenditures will be required to build the infrastructureinfrastructures needed for exporting the production to international markets, for which various options are currently under scrutinyreview by the consortium. These include: (i) the use of existing infrastructure, such as the Caspian Pipeline Consortium pipeline (Eni’s interest 2%) and the Atyrau-Samara pipeline; andpipeline, both of which are expected to undergo a capacity expansion; (ii) the layingconstruction of a pipelinenew transportation system. In this respect, it is worth mentioning the project aimed at building a line connecting the onshore Bolashak production centercentre with the Baku-Tbilisi-Cehyan pipeline (BTC, Eni’s(where Eni holds an interest of 5%). This new system includes corresponding to the laying of a 750-kilometer longright to transport 50 KBBL/d) through the KCTS pipeline with a 42 inch diameter from Bolashak to Kuryk and a reception terminal on the other side offurther shipping across the Caspian Sea nearto Baku; and (iii) the starting pointconstruction of a new transport system linking Samsum on the Turkish coast of the BTC pipeline.Black Sea to Cehyan on the Mediterranean coast in order to bypass the Turkish Straits of Bosporus and Dardanelles.
AtAs of December 31, 2008, Eni’s proved reserves booked for the Kashagan field amounted to 594 mmBOE determined according to Eni’s participating interest of 16.81%, recording an increase of 74 mmBOE with respect to 2007 despite the divestment of a 1.71% stake in the Kashagan project following the finalization of the agreements implementing the new contractual and governance framework of the project. The amount booked for the year reflected higher volume entitlements resulting from lower year end oil prices from a year ago and upward revisions of previous estimates which were supported by an independent evaluation of the field made by an oil engineering company (Ryder Scott Petroleum Consultants).
As of December 31, 2007, Eni’s proved reserves booked for the Kashagan field amounted to 520 mmBOE, recording a decrease of 76 mmBOE with respect to 2006 mainly due to the impact of increased year-end oil prices on reserve entitlements in accordance with the PSA scheme. Proved reserves for the field as of December 31, 2007 were determined according to Eni’s then current participating interest of 18.52%.
As of December 31, 2006, Eni’s proved reserves booked for the Kashagan field amounted to 596 mmBOE, recording an increase of 107 mmBOE with respect to 2005 due to an extension of the totalproved area and project cost revision, offset in part by the impact of price revisions.
As of December 31, 2008, the aggregate costs incurred by Eni for the Kashagan project capitalized in the financial statements amounted to $3.3 billion (euro 2.4 billion at the EUR/USD exchange rate of December 31, 2008) net of the divestment of a 1.71% stake in the Kashagan project following the finalization of the agreements implementing the new contractual and governance framework of the project ($0.4 billion). This capitalized amount of contracts awardedincluded: (i) $2.3 billion relating to expenditures incurred by Eni for the development of the field was over $8.8oilfield; and (ii) $1 billion relating primarily to accrued finance charges and expenditures for the completionacquisition of interests in the North Caspian Sea PSA consortium from exiting partners upon exercise of pre-emption rights in previous years.
As of December 31, 2007, the aggregate costs incurred by Eni for the Kashagan project capitalized in the financial statements amounted to $2.6 billion. This capitalized amount included: (i) $1.8 billion relating to expenditures incurred by Eni for the development of the first phaseoilfield; and (ii) $0.8 billion relating primarily to accrued finance charges and expenditures for the acquisition of interests in the North Caspian Sea PSA consortium from exiting partners upon exercise of pre emption rights in previous years. The $2.6 billion amount was equivalent to euro 1.8 billion based on the 2007 year-end euro /U.S. dollar exchange rate.
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As of December 31, 2006 the aggregate costs incurred by Eni for the Kashagan project that were capitalized by Eni in its financial statements amounted to $1.9 billion, corresponding to euro 1.5 billion based on 2006 year-end exchange rates.
Costs borne by Eni to explore and develop this field are recovered in accordance with the mechanisms typically contemplated by a PSA scheme, which is widely used in the industry. In this type of contract the national oil company or State-owned entity assigns to the international oil company (the contractor) the task of performing exploration and production with the contractor’s equipment and financial resources. Exploration risks are borne by the contractor and production is generally divided into two portions: "cost oil" is used to recover costs borne by the contractor and "profit oil" is divided between the contractor and the national company according to variable schemes and represents the profit deriving from exploration and production. Accordingly, recoverability of the field’sexpenditures is subject to approval from the relevant State-owned or controlled entity who is party to the agreement. Similarly, cost overruns are recovered to the extent they are sanctioned by the State-owned or controlled entity who is party to the agreement.
Karachaganak. Located in West onshore Kazakhstan, Karachaganak is a liquid and gas field. Operations are conducted by the Karachaganak Petroleum Operating consortium (KPO) and are regulated by a Production Sharing Agreement lasting 40 years, until 2037. Eni and British Gas are co-operators of the venture both with a 32.5% interest.
In 2008 production from this field averaged 234 KBBL/d of liquids (69 KBBL/d net to Eni) and 774 mmCF/d of natural gas (227 mmCF/d net to Eni). This field is developed by producing liquids from the deeper layers of the reservoir and re-injecting the associated gas in the higher layers. Approximately two thirds of liquid production are stabilized at the Karachaganak Processing Complex (KPC) with a capacity in excess of 150 KBBL/d and exported to Western markets through the Caspian Pipeline Consortium (Eni’s interest 2%) and the Atyrau-Samara pipeline. The remaining third of non-stabilized liquid production and volumes of associated gas not re-injected in the reservoir are marketed at the Russian terminal in Orenburg.
The execution of fourth oil treatment unit has been progressed to completion and will enable to increase the exported oil volumes to Western markets.
The Phase 3 project engineering activities have identified a staged approach to best develop the Karachaganak field. The first stage envisages the development plan (Tranches 1of approximately 55 mmtonnes of liquids the doubling of the existing gas injection capacity (from 233 to 466 BCF/y) and 2)the maintenance of a production plateau at 12 mmtonnes/y of stabilized liquids (until 2018) and 318 BCF/y of acid gas at Orenburg. An alternative option is under review which includesentails marketing of a portion of the drilling of development wells,additional gas re-injected. Start-up is expected late in 2013 subject to approval by the construction of infrastructure and facilities for offshore production (drilling, treatment and reinjection of sour gas for maximizing the oil yield) and onshore treatment plants. relevant authorities.
The most advanced techniques are going to be applied in the construction of the plannedUralsk Gas Pipeline is ongoing. This new infrastructure, and facilitieswith a length of 150 kilometers, will link the Karachaganak field to the Kazakhstan gas network. Start-up is expected in order2009.
In April 2008, the Kazakh authorities approved a tax decree enacting an Export Duty on crude oil; such tax was applied on Karachaganak from July 2008 up to cope with high pressuresJanuary 2009 when it was "zero rated". In the same month the authorities enacted a new tax code that does not affect the profitability of this project taking into account that certain clauses in the PSA regulating the activities at the field provide the stability of the tax burden for the ventures.
As of December 31, 2008, Eni’s proved reserves booked for the Karachaganak field amounted to 740 mmBOE, recording an increase of 200 mmBOE with respect to 2007 and derived from upward revisions of previous estimates mainly related to higher entitlements reported in PSA resulting from lower year end oil prices from a year ago.
As of December 31, 2007, Eni’s proved reserves booked for the Karachaganak field amount to 541 mmBOE, recording a decrease of 82 mmBOE with respect to 2006 as a result of downward and upward revisions of previous estimates. Downward revisions mainly related to an adverse price impact in determining volume entitlements in accordance with the PSA scheme. These negative revisions were partly offset by upward revisions mainly related to the finalization of the gas sale contract as outlined above.
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Turkmenistan. Eni started its activities in Turkmenistan in connection with the purchase of British company Burren Energy plc in 2008. Activities are mainly focused in the western part of the country. In 2008 Eni’s production averaged 12 KBOE/d. Exploration and production activities in Turkmenistan are regulated by Production Sharing Agreements. Eni is operator of the Nebit Dag producing block (with a 100% interest). Production derives mainly from the Burun oil field. During 2008, the development activities were focused at the production optimization by means of drilling development wells and carry-over of the program for water injection and facility upgrading. The drilling activity at Uzboy and Balkan fields, nearby Burun field, progressed. The fields achieved early production in 2006. | ![]() |
Rest of the World
In 2008, Eni’s operations in the rest of world accounted for 14% of its total worldwide production of oil and natural gas.
Australia. Eni has been present in Australia since 2000. In 2008 Eni’s production of oil and natural gas averaged 16 KBOE/d. Activities are focused on conventional and deep offshore fields.
The main production blocks in which Eni holds interests are WA-25-L (Eni operator with a 65% interest) and JPDA 03-13 (Eni’s interest 10.99%). In the exploration phase Eni holds interests in 13 licenses (in 7 as operator and in 5 of which with a 100% interest), of particular interest are the blocks WA-33-L and WA-313-P, where the Blacktip and Penguin discoveries are located.
Exploration and production activities in Australia are regulated by concessions, while in the cooperation zone between East Timor and Australia (Joint Petroleum Development Area - JPDA) they are regulated by PSAs.
The main producing fields are Woollybutt and Bayu Undan in WA-25-L and JPDA03-13, respectively.
In 2008 development activities have been completed in the southern area of the Woollybutt oil field with a new horizontal production well that was linked to an FPSO unit with relevant production ramp-up in July 2008.
Development activities are underway at the Blacktip gas field (Eni operator with a 100% interest). The development strategy envisages installation of an unmanned platform that will be linked to an onshore treatment plant. Start-up is expected in 2009, peaking at 26 BCF/y in 2010. Natural gas production is destined to supply a power plant.
In 2008, an important discovery was made in the Block JPDA 06-105 (Eni operator with a 40% interest), located in the international offshore cooperation zone between East Timor and Australia, where the Kitan discovery showed the presence of hydrogen sulphide.oil at a depth of 3,658 meters and yielded 6.1 KBBL/d in test production. In June 2008, the oilfield development area was approved by the Timor Sea Designated Authority pursuant to the declaration of commercial discovery that was made by Eni. Activities are ongoing for the preparation of a development plan to be filed with relevant authorities. The final investment decision is expected in 2009.
In the medium term,medium-term, management expects to increase Eni’s production in KazakhstanAustralia through ongoing development activities.
Brazil. Eni has been present in Brazil since 1999 and is performing exploration activities in: (i) operated blocks BM-S-4 and BM-S-857, subjected official awarding, (both with a 100% interest) located in the deep offshore in the Santos basin; (ii) block BM-CAL-14 (Eni operator with a 100% interest) in the deep offshore in the Camamu-Almada basin.
The current exploration program aims at appraising the Belmonte gas discovery in block BM-S-4.
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In 2008 Eni and Petrobras renewed a Memorandum of Understanding signed on 2007 aimed at identifying joint production and refining opportunities. Eni will make available its EST (Eni Slurry Technology) proprietary technology for the complete conversion of heavy oils (typical of the Brazilian upstream) into high-quality light products. China. Eni has been present in China since 1984. Activities are located in the South China Sea. In 2008 Eni’s production amounted to 8 KBOE/d. Exploration and production activities in China are regulated by Production Sharing Agreements. Production derives mainly from offshore blocks 16/08 and 16/09 operated by the CACT-Operating Group (Eni’s interest 16.33%). Oil production, destined to the domestic market, mainly derives from the HZ25-4 field (Eni’s interest 49%) through fixed platforms underwater linked to an FPSO. Natural gas production from the HZ21-1 field is delivered to the Zhuhai treatment plant. | ![]() |
Ongoing development activities are mainly focused on the HZ25-4 and the HZ25-3/1 fields, on the latter the construction of a production platform is ongoing and start-up is expected in 2009. The development plan of the HZ25-4 field, on stream since 2007, provides for the drilling of addition producing wells as planned.
Colombia. In 2008 Eni signed a Memorandum of Understanding with the national oil company Ecopetrol aimed at identifying joint opportunities for exploration and production in Colombia and in other Southern American countries.
![]() | Croatia. Eni has been present in Croatia since 1996. In 2008 Eni’s production of natural gas averaged 66 mmCF/d. Activities are deployed in the Adriatic Sea facing the city of Pula. Exploration and production activities in Croatia are regulated by PSAs. The main producing gas fields are Ivana, Ika & Ida, Marica and Katerina operated by Eni through a 50/50 joint venture with the Croatian oil company INA. In 2008 the Ana field (Eni’s interest 50%) was started-up through linkage to the facilities existing in the area. Development activities are nearing completion in the Irina, Vesna and Annamaria fields. Start-ups are expected in 2009. Exploration activities yielded positive results in the Bozica (Eni’s interest 50%) and the Ika gas fields with appraisal activity. |
East Timor. Eni entered East Timor in 2006 and is operator with an 80% interest of 5 offshore blocks. The first exploration phase of the exploration plan with a three-year term provides for the acquisition seismic data which was completed during the year, and the drilling of 2 wells.
Ecuador. Eni has been present in Ecuador since 1988. In 2008 Eni’s production averaged 16 KBBL/d. Since 2000, Eni became operator of Block 10 (Eni’s interest 100%) located in the Amazon forest and on which Villano field has been discovered.
Exploration and production activities in Ecuador are regulated by a service contract.
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Production derives from the current levelVillano field, started-up in 1999. Production is carried out by means of 100a Central Production Facility linked by pipeline to the storage facility. During the year work-over and infilling activities were aimed to contrast the natural depletion.
India. Eni has been present in India since 2005.
In August 2008, Eni acquired control of the Indian Company Hindustan Oil Exploration Ltd (HOEC) following execution of a mandatory tender offer on a 20% stake of the HOEC share capital. The mandatory offer was associated with Eni’s acquisition of a 27.18% of HOEC as part of the Burren Energy deal. Assets acquired, located onshore in the Cambay Basin and offshore Chennai, include: (i) development and producing assets which are expected to reach a production plateau of 10 KBOE/d leveragingin 2010; and (ii) fields where exploration and appraisal activities are underway. Main development activities are focused on the PY1 gas field. Start-up is expected in 2009.
Other activities are related to exploration of the onshore Block RJ-ONN-2003/1 (Eni operator with a 34% interest) and offshore Blocks AN-DWN-2003/2 (Eni operator with a 40% interest) and MN-DWN-2002/1 (Eni’s interest 34%).
The exploration program for Block RJ-ONN-2003/1 located in the desert of Rajasthan provides for the drilling of 4 wells in the first four years of the license. Any hydrocarbons discovered will be sold locally.
The exploration program for Block AN-DWN-2003/2 near the Andaman Islands provides for the drilling of 3 wells in the first four years of the license and expected start-up in 2010.
The exploration program for Block AN-DWN-2002/1 located in the deep offshore of the eastern coast provides for the drilling of 3 wells in the first year of the license.
Indonesia. Eni has been present in Indonesia since 2000. Eni’s production amounted to 16 KBOE/d, mainly gas, in 2008. Activities are concentrated in the eastern offshore and onshore of Borneo and the offshore Sumatra, where Eni holds interest in 11 blocks.
In May 2008, following an international bid procedure, Eni was awarded the operatorship of the West Timor exploration block extending over an offshore and onshore area of about 4,000 square kilometers.
Exploration and production activities in Indonesia are regulated by PSAs.
Production consists mainly of gas and derives from the Sanga Sanga permit (Eni’s interest 37.81%) with seven production fields. This gas is treated at the Bontang liquefaction plant, one of the largest in the world, and is exported to the Japanese, South Korean and Taiwanese markets.
Eni as operator is evaluating major development opportunities in the Bukat permit (Eni’s interest 66.25%) where oil and gas discoveries were recently made. Eni, as partner, is also involved in the ongoing joint development of naturalthe five discoveries in the Kutei Deep Water Basin area (Eni’s interest 20%), gas reserves at Karachaganak andproduction of which will be sent to the Bontang LNG plant.
During 2008, the exploration activity was focused: (i) in the Krueng Mane permit (Eni operator with a 85% interest), with the start-up of Kashagan.the drilling activities; and (ii) in the Bukat permit, with the finalization of a seismic data acquisition campaign.
PakistanIran. Eni has been present in Iran since 1957. In 2008 Eni’s production averaged 28 KBBL/d. Activities are concentrated in the offshore and onshore facing of the Persian Gulf.
Exploration and production activities in Iran are regulated by buy-back contracts.
The main producing fields are South Pars phases 4&5 in the offshore of the Persian Gulf and Darquain field located onshore which accounted for 91% of Eni’s production in Iran in 2008. Eni also holds interests in the Dorood field (Eni’s interest 45%).
The main project regards the Darquain field operated by Eni with a 60% interest. Upgrading activities are underway by means of drilling additional wells, increasing capacity of the existing treatment plant and gas injection. These actions aim at increasing production from the present 100 KBBL/d to over 160 KBBL/d (14 net to Eni) by 2009.
The legislation and other regulations of the United States of America impose sanctions on this country and may lead to the imposition of sanctions on any persons doing business in this country or with Iranian counterparties. Particularly, under the Iran Sanctions Act of 1996 (as amended, "ISA"), which implements sanctions against Iran with the objective of denying it the ability to support acts of international terrorism and fund the development or acquisition
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of weapons of mass destruction, upon receipt by the U.S. authorities of information indicating potential violation of this act, the President of the United States is authorized to start an investigation aiming at possibly imposing sanctions from a six-sanction menu against any person found in particular to have knowingly made investments of U.S. $20 million or more in any twelve-month period, contributing directly and significantly to the enhancement of Iran’s ability to develop its hydrocarbons resources. Furthermore, the ISA envisages that the President of the United States is bound to impose sanctions against any persons that knowingly contribute to certain military programs of Iran, effective on June 6, 2006. Eni cannot predict interpretations of, or the implementation policy of the U.S. Government under, ISA with respect to Eni’s current or future activities in Iran or other areas. Eni has incurred capital expenditures in excess of U.S. $20 million in Iran in each of the last 9 years. Management expects to continue investing in Iran yearly amounts in excess of that threshold in the foreseeable future. Eni’s current activities in Iran are primarily limited to carrying out residual development activities relating to certain buyback contracts it entered into in 2000 and 2001 and no sanctions have ever been imposed on Eni’s activities in the country. It is possible that in future years Eni’s activities in Iran may be sanctioned under relevant U.S. legislation.
Pakistan. Eni has been present in Pakistan since 2000. In 20052008 Eni’s production net to Eni averaged 4854 KBOE/d, mainly gas.
Exploration and production activities in Pakistan are regulated by concessions (onshore) and PSAs (offshore).
In March, 2009 Eni signed a Protocol for Cooperation with the government of natural gas. ThePakistan to develop a number of important upstream, midstream and downstream projects in the Country. This deal follows Eni’s growth strategy through the discovery of new reserves. Eni will provide its expertise as well as new technologies developed in the oil and gas sector, mainly in the exploration and production of hydrocarbon fields.
Eni’s main natural gas producing fields operated by Enipermits are Bhit (Eni operator with a 40% interest), Sawan (Eni’s interest 40%23.68%) and KadanwariZamzama (Eni’s interest 18.42%17.25%), which in 20052008 accounted for 43%90% of Eni’s production in Pakistan.
As part of the reserve development of the Bhit permit the operations of a third treatment unit started increasing the plant capacity by 46 mmCF/d and allowing the start-up of the satellite Badhra field. Other activities were targeted at optimizing production from the Kadanwari, Miano, Sawan and Zamzama fields by means of the drilling additional wells and upgrading the existing facilities.
Main discoveries for the year were made in: (a) the Mubarak Block (Eni’s interest 38%) with the Saquib gas discovery which was tested at a production rate of 2,472 KCF/d; and (b) the Latif exploration license, where the Latif-2 appraisal well has confirmed the hydrocarbon potential of the area.
Papua New Guinea. In 2008 Eni signed a Partnership Agreement with Papua New Guinea for the start of an exploration program aimed at identifying development opportunities and oil and gas projects. The agreement provides also holds interestsfor projects in electrical power generation and unconventional and renewable energy sources, which will foster sustainable development in this country.
Qatar. In 2008 Eni signed a Memorandum of Understanding with the state-owned company Qatar Petroleum International to target joint investment opportunities in the Sawan (23.68%), Zamzama (17.75%)exploration and Miano (15.16%) fields. Inproduction of oil and gas. The agreement also envisages the first quarterdevelopment of 2005joint projects in the Rehmatpetrochemical industry and power generation.
Russia. Eni has been present in Russia since 2007 following the acquisition of Lot 2 in the Yukos liquidation procedure. In particular, acquired assets included three Russian companies operating in the exploration and development of natural gas reserves: OAO Arctic Gas Co, ZAO Urengoil Inc and OAO Neftegaztechnologia. The three companies are managed by the OOO SeverEnergia subholding, owned by Eni (60%) and Enel (40%). Eni and Enel granted to Gazprom a call option on a 51% interest in OOO SeverEnergia. Terms of the call option are currently under review by Eni, Enel and Gazprom. Acquired companies are located in the Yamal Nenets region: (i) OAO Arctic Gas Co owns two exploration licenses, Sambugurskii and Yevo-Yahinskii including seven gas and condensates fields currently in the appraisal/development phase. Main fields are | ![]() |
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Sambugorskoye currently under development and Urengoiskoye. The final investment decision for both fields is expected in 2009 with production start-up in 2010; (ii) ZAO Urengoil Inc owns exploration and development licenses for the Yaro-Yakhinskoye gas and condensates field. Ongoing are representend by workovers of some existing wells and by new seismic acquisition; and (iii) OAO Neftegaztechnologia owns the exploration and development license of the Severo-Chasselskoye field where an acquisition of seismographic data is underway.
Other activities concern exploration in the Karalatskiy block (Eni’s interest 30%54%) was started-up.
Eni is operator in the Gorakh permitAstrakhan region. This exploration license is part of the assets acquired from Burren Energy Plc.
Saudi Arabia. Eni entered Saudi Arabia in 2004 and is performing exploration activities in the so called C Area in order to discover and develop gas reserves. This license is located in the Rub Al Khali basin at the border with Qatar and the United Arab Emirates. The exploration plan provides for the drilling of 4 wells in five years. In case of a commercial discovery, the contract will last 25 years with a possible extension to a maximum of 40 years. Any gas discovered will be sold locally for power generation and as feedstock for petrochemical plants. Condensates will be sold on international markets.
Trinidad and Tobago. Eni has been present in Trinidad & Tobago since 1970. In 2008 Eni’s production averaged 55 mmCF/d. Activity is concentrated offshore north of Trinidad.
Exploration and production activities in Trinidad & Tobago are regulated by PSAs.
Production is provided by the Chaconia, Ixora and Hibiscus gas fields in the North Coast Marine Area 1 Block (Eni’s interest 92.5%17.4%) in Kirthar Foldbet area. Production is supported by fixed platforms linked to the Hibiscus treatment facility. Natural gas is used to feed trains 2, 3 and holds an interest in other permits4 of the Atlantic LNG liquefaction plant under long-term contracts. LNG production is sold in the Middle Indus Basin.United States, Spain and the Dominican Republic.
Eni purchasedThe main development project concerns the Indus MPoinsettia, Bougainvillea and Indus N exploration permitsHeliconia fields. The project provides for the installation of a production platform on Poinsettia and linked to the Hibiscus treatment facility, due to be upgraded. During the year drilling activity was started. Production start-up is expected in the offshore of the Indus Delta with a total area of 5,000 square kilometers. In February 2006 Eni purchased the permits Rajar, Mithi, Thar and Umarkot in the East Sindh area.2009.
United StatesStates. Eni has been present in the United States since 19661966. Activities are performed in the conventional and holds various mineral interestsdeep offshore in the Gulf of Mexico and more recently onshore and offshore Alaska.
In 20052008 Eni’s hydrocarbonoil and gas production deriving mainly from the Gulf of Mexico averaged 3386 KBOE/dd.
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Exploration and production activities in the United States are regulated by concessions.
Eni holds interests in 412 exploration and production blocks in the Gulf of Mexico, 60% operated.
The main fields operated by Eni with a 100% interest are Allegheny, East Breaks and Morphet as well as Devils Towers, Triton and Goldfinger (Eni operator with a 75% interest). Eni also holds interests in the Medusa (Eni’s interest 25%), Europa (Eni’s interest 32%), and King Kong (Eni operator with a 56% interest) fields.
In March 2008, following an international bid procedure Eni was obtainedawarded 32 exploration blocks. The subsequent development phase will leverage synergies relating to the proximity of acquired acreage to existing operated facilities.
In August 2008, Eni was awarded 5 exploration licenses in the Keathley Canyon area, one of the main exploration areas in the Gulf of Mexico. The main producing fieldsblocks will be 100% operated by Eni are Allegheny (Eni’s interest 100%) and King Kong (Eni’s interest 50%). AnotherEni. The transaction is subject to authorization from relevant field is Medusa (Eni’s interest 25%). These fields accounted for 71% of Eni’s production in 2005.authorities.
In May 2005November 2008 Eni signed a cooperation agreement with the K2 oil field (Eni operator of the development phase with an 18.17% interest) was started-up. The field’s development includes two additional subsea wells linked to the nearby Marco Polo platform, operated by a partner. A peak production of 38 KBOE/d (7 KBOE/d net to Eni) is expected in 2007.
Eni purchased 22Colombian state company Ecopetrol for exploration blocksassets in the Gulf of Mexico following its participationMexico. Under the terms of this agreement, Ecopetrol will invest approximately $220 million to acquire a 20-25% interest in five exploration wells due to be drilled before 2012.
The development program of the 194 (March 2005) and 196 (August 2005) Lease Sale.Longhorn discovery (Eni’s interest 75%) was sanctioned. The project provides for the installation of a fixed platform linked to three underwater wells. Start-up is expected in 2009 with peak production at 29 KBOE/d (about 20 net to Eni).
Main discoveries for the year were made in the following blocks: (a) Block Mississippi Canyon 771 (Eni’s interest 25%) with the oil and gas Kodiak discovery close to the operated Devil’s Tower platform (Eni’s interest 75%); (b) Block Walker Ridge 508 (Eni’s interest 15%) the Stones-3 discovery well found oil. This discovery is part of the exploration assets acquired from Dominion Resources; (c) Block Mississippi Canyon 459 (Eni’s interest 100%) with the Appaloosa oil discovery. The final investment decision was reached at the end of 2008. Start-up is expected in 2010 with peak production at 7.5 KBBL/d; (d) Block Keathley Canyon 1008 (Eni’s interest 100%) with appraisal activities of the Hadrian oil discovery; and (e) Block offshore Green Canyon 859 (Eni’s interest 12.5%) with the oil and gas Heidelberg-1 discovery at a depth of 9,163 meters. Eni’s activities in Alaska are currently in the exploration and development phase in 158 blocks with interests ranging from 10 to 100%, over half as operator. In February 2008, following an international bid procedure Eni was awarded 18 offshore exploration blocks, 4 of which as operator, in the Chukchi Sea. The acquired acreage will strengthen Eni’s position in the area. The phased development plan of the Nikaitchuq field (Eni operator with a 100% interest) was sanctioned. Production is expected to start in 2010 with production plateau at 26 KBOE/d. |
In Alaska in August 2005, Eni purchased fromJune 2008, production started at the U.S. independent company Armstrong Oil & Gas 104 exploration blocks onshore in the North Slope and offshoreOooguruk oil field (Eni’s interest 30%), in the Beaufort Sea. The blocks, with a total acreageSea, by linking to onshore facilities located on an artificial island. Peak production at 17 KBOE/d is expected in 2011.
In the medium-term, management expects to increase Eni’s production due to the development and integration of 1,409 (1,111 net to Eni) square kilometers, include twoassets acquired and the start-up of fields in the pre-development phase holding estimated 170 mmBBL of oil of reserves.
Production for 2005 was adversely impacted by shutdowns of certain facilities as a consequence of the hurricane season. Management expects residual hurricane-related impactAlaska, targeting at approximately 110 KBOE/d in 2006. See the paragraph "Production" above and "Item 5 – Recent Developments".2012.
VenezuelaVenezuela. Eni has been present in Venezuela since 1998. In 2005 daily2008 Eni’s production averaged 615 KBBL/d netd. Activity is concentrated in the Gulf of Venezuela and in the Gulfo de Paira.
48
Exploration and production are regulated by the terms of the so called Empresa Mixta. Under the new legal framework, only a company incorporated under the law of Venezuela is entitled to conduct petroleum operations. A stake of at least 60% in the capital of such company is held by an affiliate of Venezuela State oil company PDVSA, preferably Corporación Venezuelana de Petróleo (CVP).
In February 2008, Eni and came fromthe Venezuelan Authorities reached a final settlement over the dispute regarding the expropriation of the Dación oil field. Seefield which took place on April 1, 2006. Under the paragraph "Oilterms of the settlement, Eni will receive cash compensation in line with the carrying amount of the expropriated asset. Part of this cash compensation has been collected in the period. Eni believes this settlement represents an important step towards improving and natural gas reserves" above.strengthening cooperation with the PDVSA.
TheAs part of improving cooperation with PDVSA, the two partners signed two agreements in September 2008: (i) a joint study agreement for the development of the Junin Block 5 located in the Orinoco oil belt, covering a gross acreage of 670 square kilometers. Once relevant studies have been performed and a development plan defined, a joint venture between PDVSA and Eni will be established to execute the project. Eni intends to contribute its experience and leading technology to the project in order to maximize the value of the heavy oil; and (ii) an agreement for the exploration of two offshore areas, Blanquilla and Tortuga in the Caribbean Sea, both with a 20% interest over an area of 5,000 square kilometers. The prospective development of these areas will take place through an integrated LNG project.
In 2008, production started at the Corocoro oil field (Eni’s interest 26%) in the Gulfo de Paira West Paria GulfBlock. A second development phase is in progress. The plan provides for a phased development dependingexpected to be designed based on the results from wellsachieved in the first one regarding well production rate and reaction of the field toperformance under water and gas reinjection. Production is expected to start in 2008 with ainjection. A production peak of about 7066 KBBL/d (17 KBBL/d net to Eni) is expected in 2009.2012.
In January 2006, followingEni holds an international bid, Eni was awardedinterest of 50% in the Cardon IV Blockoffshore exploration license in joint ventureblock, covering an area of 938 square kilometers.
Eni is participating with another international oil company19.5% interest in the GulfGulfo de Paira Centrale offshore exploration block, covering an area of Venezuela.
259 square kilometers, where the Punta Sur oil discovery is located.
Capital
ExpenditureExpenditures
See "Item 5 – Liquidity and Capital Resources – Capital ExpenditureExpenditures by Segment".
Storage
Natural gas storage activities are performed by Stoccaggi Gas Italia SpA (Stogit) to which such activity was conferred on October 31, 2001 by Eni SpA and Snam SpA, in compliance with Article 21 of Legislative Decree No. 164 of May 23, 2000, which providedprovides for the separation of storage from other activities in the field of natural gas.
Storage services are provided by Stogit through eight storage fields located in Italy, based on ten storage concessions63 vested by the Ministry of Productive Activities.
In 2005 Stogit increased2008, the share of storage capacity used by third parties up to 56% (53% in 2004)was 61%. From the beginning of its operations, Stogit markedly increased the number of customers served and the share of revenues from third parties:parties; the latter, from a nearly negligible amount, the latter accounted for 44% of total revenues in 2005.non-significant value, passed to 50%.
Storage | 2002 | 2003 | 2004 | 2005 | |||||
Available capacity: | ||||||||||
- modulation and mineral | (BCM) | 7.1 | 7.1 | 7.5 | 7.5 | |||||
. share utilized by Eni | (%) | 66 | 53 | 47 | 44 | |||||
- strategic | (BCM) | 5.1 | 5.1 | 5.1 | 5.1 | |||||
Total customers | (No.) | 20 | 30 | 39 | 44 | |||||
. modulation and upstream storage customers | (No.) | 14 | 24 | 29 | 35 |
Storage | 2006 | 2007 | 2008 | |||
Available capacity: | ||||||||
- modulation and mineral | (BCM) | 8.4 | 8.5 | 8.6 | ||||
. share utilized by Eni | (%) | 54 | 44 | 39 | ||||
- strategic | (BCM) | 5.1 | 5.1 | 5.1 | ||||
Total customers | (No.) | 38 | 44 | 48 |
Until 2008, results of the storage activities in Italy have been reported within the Exploration & Production segment. Following the 100% divestment of Stogit to Snam Rete Gas that was approved by Eni’s Board of Directors and is expected to close by mid 2009 (for details on this deal see "Significant Business and Portfolio Developments" above), from 2009 the results of the storage business conducted in Italy will be reported within the Gas & Power segment, under the "Regulated Business".
Eni is engagedIn 2008 operating profit reported by the natural gas storage business was euro 183 million down euro 83 million or 31.2% from 2007.
(3) | Two of these are not yet operational. |
49
Gas & Power
Eni’s Gas & Power segment engages in the businesssupply, transport, distribution, storage and marketing of natural gas, supply,as well as of LNG. This segment also includes the activity of power generation that enables Eni to extract further value from gas, diversifying its commercial outlets.
Eni’s strategy in its Gas & Power segment is to grow international sales also leveraging on the Distrigas acquisition, preserve the profitability of Italian gas marketing operations, increase operational efficiency and effectiveness mainly in regulated businesses (i.e., Italian transport and sale mainlydistribution activities), and develop a global LNG business.
Eni has revised down its long-term expectations for gas demand growth due to the current economic downturn that is reducing gas consumption in all industrial segments and in power generation. In Europe, Eni expects gas demand to remain substantially stable during 2009 and to resume growing at an average annual rate of 2% in the following years till 2020, reaching an amount of 722 BCM. The main long-term driver of growth in European demand will be the wider use of gas in power generation. A growing portion of European gas requirements is expected to be satisfied by imports via pipeline. According to Eni’s estimates, European gas imports will cover at least 80% of consumption from the current level of 60%, due to domestic production decrease, stressing European dependence on producing countries. The most important pipeline supply sources will remain Russia and Algeria and, to a lesser degree, Norway and Libya. Eni expects that LNG supplies will contribute to diversify sources of supply.
In 2008, natural gas demand in Italy amounted to 84.88 BCM representing a small decline from 2007 due to the economic slowdown; approximately 90% of gas requirements were met through imports and 10% was covered by domestic production. The outlook for the Italian demand is more challenging as demand is expected to shrink in 2009 and to post a moderate recovery in subsequent years. Over the long-term, the Company expects Italian gas demand to increase at an average growth rate of approximately 2% through 2020, reaching an amount of 106.7 BCM in 2020 (gas volumes are projected at 94.2 BCM in 2012), driven by rising consumption in the restpower generation sector. Growing gas needs will be met by a projected increase in import capacity, which will be supported by significant capital expenditure projects designed to upgrade existing infrastructures and to build new ones, including new LNG terminals. The Company expects additional import capacity to supply up to 10 BCM in 2009 as Eni’s upgrades of Europe.its main TTPC and TAG pipelines from Algeria and Russia respectively reach full operations. In addition, Eni is also engagedcompleting another leg of expansion at the TAG pipeline and is planning to upgrade its pipeline from Libya. A competitor has commenced commissioning operations at a new LNG terminal in the businessAdriatic Sea. Overall the Company expects that import capacity will increase by 25 BCM by 2012 of electricity generation, which is conducted in Italy.90% available by 2010.
EniAgainst this backdrop, management plans to growincrease international natural gas sales in the rest of Europe and to develop its presence in the LNG business in order to compensate for lower growth opportunities on the domestic market due to the limits imposed on operators by the sector regulation and increasingly intense competition. In Italy, Eni plans to comply with regulatory limits on direct sales and input volumes to the national transport network through an optimal allocation of supplies between direct sales in Italy and in the rest of Europe and by using natural gas at its own electricity generation plants and, at the same time, leveraging on the integration of and expected consumption growth. In the medium term, management expects natural gas sales in Italy to declinesynergies from the 58 BCM level recorded in 2005Distrigas acquisition as a consequence of increasing competition from third parties. Eni plans to implement a more attractive commercial offer thanwell as Eni’s competitors’ on the basis of the quality of services, pricing formulas, including different indexation schemes to suit various customer’s purchasing profile,competitive advantages ensured by gas availability under long-term supply contracts and the integration of supply of gas and electricity. Management plans to grow natural gas sales on the European market leveraging on Eni’s availability of equity gas, access to infrastructures, long-term relationships with key producing countries (mainly Russia, Algeria and Libya), market knowledge and a diversifiedwide portfolio of supply contracts, an extensive gas pipeline network, which allows for the supply of natural gas from several sources, and long standing relationships with producing countries.clients. Eni intends to strengthen its presencepositioning in European markets where its presence is already established – such as the Iberian Peninsula, Germany, France, the United Kingdom, Benelux and Turkey – and to develop its marketing activities internationally, particularly in the U.S. leveraging on the planned expansion of the Company’s LNG business.
In Italy, in an increasingly competitive market, Eni sales volumes are projected to decline from the 53 BCM level achieved in markets with significant growth and profitability prospects (in particular France and the United Kingdom).
Eni also2008 to approximately 50 BCM in 2012. The Company intends to acceleratepreserve the developmentprofitability of its LNG businessmarketing operations by leveraging on cost controls and a global scale throughnumber of marketing initiatives designed: (i) to focus the acquisitionmost profitable customer segments; (ii) to upgrade the commercial offer by tailoring pricing and services to customers’ specific needs; and (iii) to develop the combined offer of interestsgas and power ("dual offer"). A strong focus will be devoted to reducing general and selling expenses.
In the medium-term, Eni plans to increase worldwide gas sales targeting a volume of 124 BCM by 2012, leveraging on expected growth in assets coveringinternational sales that are projected to achieve an average annual rate of increase of 7% and upon synergies deriving from the whole LNG chain (in particular regasification terminals) and also to monetize its natural gas reserves in West and North Africa, in the Far East.Distrigas acquisition.
The matters regarding future natural gas demand and sales target discussed in this section and elsewhere here in are forward-looking statements that involve risks and uncertainties that could cause the actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties relating to future natural gas demand include changes in underlying economic factors, changes in regulation, population growth or shrinkage, changes in the relative mix of demand for natural gas and its principal competing fuels, and unexpected developments in the markets for natural gas and its principal competing fuels.
50
Demand for Natural Gas in ItalySupply of natural gas
In 2005, natural gas demand in Italy totalled 862008 Eni’s consolidated subsidiaries, including Distrigas’ share amounting to 5.15 BCM, (increasing by over 7% over 2004). In 2005, about 18% of natural gas requirements were met through domestic production (including natural gas volumes offtaken from storage), while imports covered 82%. Eni expects natural gas consumption in Italy to reach about 95 BCM in 2010, corresponding to an compound annual growth rate of about 2%.
Most of this increase is expected in electricity generation, because of the significant advantages of the use of natural gas in combined cycle plants, due to its lower investment cost, higher yields and reduced polluting emissions as compared to other fuels. Demand is expected also to increase from residential and commercial users, due to the increased use of natural gas in residential space heating, in households and services, in large tertiary firms and as vehicle fuel.
Natural Gas Purchases
In 2005, Eni’s Gas & Power segment purchased 82.56supplied 89.65 BCM of natural gas with a 6.475.85 BCM increase over 2004,from 2007, up 8.5%, in line with7%. Excluding the increase in sales and related to higher volumes purchased outside Italy (7.04 BCM), offset in part by lower production volumes supplied in Italy (0.57 BCM). Naturalcontribution of Distrigas, gas volumes supplied outside Italy (71.83 BCM)(76.50 BCM from consolidated companies), imported in Italy or sold outside Italy, represented 87%91% of total supplies (85% in 2004).
Outside Italy increases concerned purchaseswith an increase of 1.35 BCM from Libya (3.29 BCM) and from Algeria (0.72 BCM). Imports of LNG destined to Italy increased by 0.18 BCM2007, or 1.8%, mainly due to the partial resumptiongrowth registered on European markets in particular in the first months of the year, with higher volumes purchased: (i) from Algeria via pipeline (up 1.07 BCM); (ii) from Libya (up 0.63 BCM) in line with the growth of gas equity production; and (iii) from the Netherlands (up 0.36 BCM); (iv) from Russia to Turkey (up 0.31 BCM) in line with the increased gas demand on the Turkish market. Supplies in Italy (8 BCM) declined by 0.65 BCM from 2007, or 7.5%, due to lower domestic production. Supplies of Russian gas for the Italian market declined by 0.97 BCM mainly due to the implementation of agreements with Gazprom providing for Gazprom’s entrance in the market of supplies to Italian importers and the corresponding reduction in Eni offtakes.
In 2008, main gas volumes from Sonatrach afterequity production derived from: (i) Italian gas fields (7.5 BCM); (ii) the accident occurredWafa and Bahr Essalam fields in early 2004 atLibya linked to Italy through the SkikdaGreenStream pipeline. In 2008 these two fields supplied 3.2 BCM net to Eni; (iii) certain Eni’s fields located in the British and Norwegian sections of the North Sea (2.3 BCM); and (iv) other European areas (in particular Croatia with 0.6 BCM). Considering also the direct sales of the Exploration & Production division in Europe and in the Gulf of Mexico and LNG supplied from the Bonny liquefaction plant in Nigeria.Nigeria, supplied gas volumes from equity production were approximately 21 BCM representing 21% of total volumes available for sale.
In 2005, a total of 0.84 BCM2008, net input of natural gas were withdrawn from thevolumes to storage sites ofdeposits owned by Eni’s subsidiary Stoccaggi Gas Italia SpA (Eni’s interest 100%) aswere 0.08 BCM compared to 0.93volumes uplifted from storage of 1.49 BCM in 2004.2007.
The table below sets forth Eni’s purchases of natural gas by source for the periods indicated.
Natural gas supplies | 2001 | 2002 | 2003 | 2004 | 2005 | |||||
Natural gas supply | 2006 | 2007 | 2008 | |||
(BCM) |
Italy | 14.62 | 12.67 | 12.16 | 11.30 | 10.73 | ||||||||||
Russia for Italy | 19.51 | 18.62 | 18.92 | 20.62 | 21.03 | ||||||||||
Russia for Turkey | 0.63 | 1.60 | 2.47 | ||||||||||||
Algeria | 18.39 | 16.35 | 16.53 | 18.86 | 19.58 | ||||||||||
the Netherlands | 7.00 | 7.55 | 7.41 | 8.45 | 8.29 | ||||||||||
Norway | 1.10 | 4.83 | 5.44 | 5.74 | 5.78 | ||||||||||
Croatia | 0.31 | 0.65 | 0.35 | 0.43 | |||||||||||
the United Kingdom | 1.48 | 1.98 | 1.76 | 2.28 | |||||||||||
Hungary | 3.11 | 3.05 | 3.56 | 3.57 | 3.63 | ||||||||||
Libya | 0.55 | 3.84 | |||||||||||||
Algeria (LNG) | 1.79 | 1.92 | 1.98 | 1.27 | 1.45 | ||||||||||
Others (LNG) | 0.30 | 0.72 | 0.70 | 0.69 | |||||||||||
Other supplies | 0.03 | 0.03 | 0.04 | 0.12 | 1.18 | ||||||||||
Others outside Europe | 0.96 | 0.96 | 1.14 | 1.20 | 1.18 | ||||||||||
Outside Italy | 51.89 | 55.40 | 59.00 | 64.79 | 71.83 | ||||||||||
Total supplies | 66.51 | 68.07 | 71.16 | 76.09 | 82.56 | ||||||||||
Withdrawals from (inputs to) storage | 0.13 | (1.43 | ) | 0.84 | 0.93 | 0.84 | |||||||||
Network losses and measurement differences | (0.92 | ) | (0.50 | ) | (0.61 | ) | (0.53 | ) | (0.78 | ) | |||||
Available for sale | 65.72 | 66.14 | 71.39 | 76.49 | 82.62 |
Italy | 10.21 | 8.65 | 8.00 | ||||||
Outside Italy | 79.06 | 75.15 | 81.65 | ||||||
Russia | 24.98 | 23.44 | 22.91 | ||||||
Algeria (including LNG) | 20.42 | 18.41 | 19.22 | ||||||
Libya | 7.70 | 9.24 | 9.87 | ||||||
the Netherlands | 10.28 | 7.74 | 9.83 | ||||||
Norway | 5.92 | 5.78 | 6.97 | ||||||
the United Kingdom | 2.50 | 3.15 | 3.12 | ||||||
Hungary | 3.28 | 2.87 | 2.84 | ||||||
Qatar (LNG) | - | - | 0.71 | ||||||
Other supplies of natural gas | 2.41 | 2.2 | 4.07 | ||||||
Other supplies of LNG | 1.57 | 2.32 | 2.11 | ||||||
Total supplies of subsidiaries | 89.27 | 83.80 | 89.65 | ||||||
Withdrawals from (input to) storage | (3.01 | ) | 1.49 | (0.08 | ) | ||||
Network losses and measurement differences | (0.50 | ) | (0.46 | ) | (0.25 | ) | |||
Volumes available for sale of Eni's subsidiaries | 85.76 | 84.83 | 89.32 | ||||||
Volumes available for sale of Eni's affiliates | 7.65 | 8.74 | 8.91 | ||||||
E&P volumes | 4.69 | 5.39 | 6.00 | ||||||
Total volumes available for sale | 98.10 | 98.96 | 104.23 |
In order to meet the medium and long-term demand for natural gas, in particular ofin the Italian market, Eni entered into long-term purchase contracts with producing countries that currently have acountries. The residual average termlife of the Company’s supply portfolio currently amounts to approximately 1521 years. ExistingSuch contracts, which in generalgenerally contain take-or-pay clauses, will ensure a total of about 67.3approximately 62.4 BCM/y of natural gas (Russia 28.5, Algeria 21.5,by 2010.
The finalization of the purchase of the Belgian company Distrigas (for details on this deal see "Significant Business and Portfolio Developments" above) has entailed significant expansion of Eni’s supply portfolio with an addition of long-term supplies of approximately 14.7 BCM (Norway, the Netherlands 9.8, Norway 6 and Nigeria LNG 1.5) by 2008. TheQatar) having a residual average annual minimum quantity (take-or-pay) is approximately 85%life of said quantities. about 14 years. Eni’s supply portfolio will be more diversified and less risky, as Eni will depend from one single supplier for about 20-22% of total projected supplies in 2012.
Despite the fact that management plans to sell outside Italy thean increasing volumesportion of natural gas available under Eni’s take-or-pay contracts,volumes is planned to be sold outside Italy, management believes that in the expected development oflong-term unfavorable trends in the Italian natural gas demand and supply, also due to the increase in import capacity (pipeline upgrading and new LNG plants) that took place in 2008 and the
51
finalization of natural gasprojects in the mediumprogress or publicly announced by Eni and long-term andthird parties, as well as the evolution of Italian regulations in this segmentthe natural gas sector, represent a risk elementfactors to the fulfillment of Eni’s obligations in the management ofconnection with its take-or-pay supply contracts. See "Item 3 – Risk Factors" and "Item 5 – Contractual Obligations".
In 20052008, Eni withdrew about 3.8 BCM morepurchases under its take-or-pay contracts were higher than its minimum offtakeuplift obligation. See "Item 5 – Recent Developments and Management ExpectationsThis amount relates mainly to a contractual year, rather than a calendar year (from October to end of Operations"September for a sizeable part of Eni Gas & Power long-term supply contracts).
In 2003 Eni and Gazexport (Gazprom) signed an agreement under which Eni has the right to sell the gas it purchases from Gazexport (Gazprom) in countries other than Italy. This agreement entails the cancellation of the so called territory destination clause. Gazexport (Gazprom), in turn, can sell its gas to other Italian operators. The European Commission approved this transaction and requested Eni to assume additional obligations favoring competition, in particular: (i) Eni should make volumes of natural gas purchased from Gazexport (Gazprom) available outside Italy; and (ii) Eni shall promote the upgrading of the TAG gasline (from Austria into Italy) with deadlines consistent with the decision of third parties to build LNG terminals in Italy.
Marketing
Natural Gas Sales
in Italy and Europefor the Year 2008
In 20052008, worldwide natural gas sales (91.15of 104.23 BCM, including own consumption, sales by affiliates and Eni’s shareE&P sales in Europe and in the Gulf of sales of affiliates)Mexico, increased by 7.34 BCM over 2004, up 8.8%,5.3% from 2007 mainly due mainly to higher salesthe organic growth recorded in the restEuropean markets (up 9%) and the contribution of Europe (up 3.15 BCM),the acquisition of Distrigas as well as higher seasonal sales recorded in the first quarter. These positives were partly offset by the lower performance of the Italian market (up 2.39 BCM, or 4.8%) and natural gas supplies for power generation at EniPower’s power stations (up 1.84 BCM, or 49.7%(down 5.8%).
In an increasingly competitive market, natural gas sales to third parties in Italy (52.47 BCM) increased by 2.39 BCM over 2004, down 4.8%, reflecting an increase in sales to end users, also due to a cold winter, primarily relating to power generation (up 1.68 BCM or 10.6%), industries (up 0.68 BCM or 5.5%) and the residential and commercial segment (up 0.44 BCM or 6%). These increases were offset in part by lower sales to wholesalers (down 1.82 BCM or 13.1%) related to the so called gas release carried out in accordance with certain decisions of the Antitrust Authority. See "Regulation of the Italian Hydrocarbon Industry – Gas & Power – Inquiries by Italian and European Antitrust Authorities – Sales contracts outside Italy" below.
Natural gas sales in Italy were 52.87 BCM (including own consumption) and declined by 3.26 BCM from 2007, or 5.8%.
The Italian market includes large businesses, power generation users, wholesalers, middle-sized enterprises and service and residential customers; they are further grouped as follows: (i) large industrial clients and power generation utilities directly linked to the restnational and the regional natural gas transport networks; (ii) wholesalers, mainly local selling companies which resell natural gas to residential customers through low pressure distribution networks and distributors of Europe (23.44natural gas for automotive use; and (iii) residential customers include households (also referred to as the retail market), the tertiary sector (mainly commercial outlets, hospitals, schools and local administrations) and middle-sized enterprises (also referred to as the middle market) located in large metropolitan areas and urban centers. As of December 31, 2008, Eni clients amounted to 6.63 million units.
In 2008, the decline in sales on the Italian gas market was primarily due to wholesalers (down 2.49 BCM) and industrial customers (down 2.13 BCM) mainly reflecting the impact of lower gas demand and competitive pressures. The decrease was partly offset by higher supplies to the power generation sector (up 0.48 BCM) and higher seasonal sales to residential customers (up 0.43 BCM) due to colder weather in the first quarter. The decline in sales to wholesalers and industrial customers also reflects the increase in sales under the gas release programs (3.28 BCM, up 0.91 BCM from 2007). These sales related to certain proceedings settled between Eni and the Italian Antitrust Authority. In June 2004, Eni agreed with the Antitrust Authority to sell a total volume of 9.2 BCM of natural gas (2.3 BCM/y) in the four thermal years from October 1, 2004 to September 30, 2008 at the Tarvisio entry point into the Italian network. In March 2007 a new gas release program was signed for volumes amounting to 4 BCM of natural gas to sell in the two thermal years from October 1, 2007 to September 30, 2009 at a virtual exchange point in the Italian market.
Sales to importers in Italy (11.25 BCM) increased by 1.90.58 BCM, (up 8.8%)up 5.4%, as a larger portion of these sales in 2007 was replaced with direct sales in Italy.
Gas sales in European markets (31.78 BCM including affiliates and the contribution of Distrigas acquisition) increased by 7.43 BCM, or 30.5%, also reflecting market share gains. Excluding the impact of Distrigas, sales of natural gas on European markets amounted to 26.55 BCM, increasing by 2.20 BCM, or 9%, mainly due to increasesthe growth registered in: (i) France (up 0.64 BCM) due to marketing initiatives targeting wholesalers and industrial customers; (ii) the Iberian Peninsula (up 0.53 BCM) due to higher supplies to wholesalers and the Turkish market viapower generation segment; (iii) Turkey (up 0.31 BCM), due to the progressive reaching of full operations of the Blue Stream gaslinepipeline; and (iv) Germany-Austria (up 0.860.20 BCM); (ii) sales under long-term supply contracts to importers to Italy (up 0.57 BCM), also due to reaching full supplies from Eni’s Libyan fields; (iii) France, relatedhigher sales to wholesalers. Sales to markets outside Europe (2.33 BCM) are substantially in line with 2007.
E&P sales in Europe and in the increase in supplies to industrial customers and to wholesalers (up 0.5 BCM); and (iv) Germany and Austria related toUnited States increased supplies (up 0.3 BCM) to Eni’s affiliate GVS (Eni’s interest 50%) and other operators.
Own consumption7 was 5.54by 0.61 BCM, up 1.84 BCM from 2004, or 49.7%11.3%, reflecting primarily higher supplies to EniPower due toas a result in particular of the coming on streamproduction ramp-up in the Gulf of new generation capacity, primarily reflecting supplies to EniPower (4.41 BCM), to Polimeri Europa (0.35 BCM) and to Eni’s Refining & Marketing segment (0.27 BCM).Mexico.
Sales of natural gas by Eni’s affiliates (net to Eni and net of Eni’s supplies) amounted to 8.53 BCM, increasing by 1.21 BCM over 2004, up 16.5%, and concerned: (i) GVS (Eni’s interest 50%) with 3.39 BCM; (ii) Galp Energia (Eni’s interest 33.34%) with 1.56 BCM; (iii) Unión Fenosa Gas (Eni’s interest 50%) with 1.52 BCM; and (iv) volumes of natural gas (1.45 BCM) treated at the Nigeria LNG Ltd liquefaction plant (Eni’s interest 10.4%) in Nigeria, sold by Nigeria LNG Ltd to U.S. and European markets.52
The tabletables below setsset forth Eni’s sales of natural gas by principal market for the periods indicated.
Natural gas sales | 2001 | 2002 | 2003 | 2004 | 2005 | |||||
Natural gas sales by entities | 2006 | 2007 | 2008 | |||
(BCM) |
Italy | 56.74 | 50.43 | 50.86 | 50.08 | 52.47 | |||||
Wholesalers | 21.09 | 17.02 | 15.36 | 13.87 | 12.05 | |||||
Gas release | 0.54 | 1.95 | ||||||||
End customers | 35.65 | 33.41 | 35.50 | 35.67 | 38.47 | |||||
Industrial users | 18.53 | 14.43 | 13.17 | 12.39 | 13.07 | |||||
Thermoelectric users | 12.21 | 12.48 | 15.03 | 15.92 | 17.60 | |||||
Residential | 4.91 | 6.50 | 7.30 | 7.36 | 7.80 | |||||
Rest of Europe | 6.05 | 12.77 | 17.54 | 21.54 | 23.44 | |||||
Outside Europe | 0.93 | 0.92 | 1.09 | 1.17 | 1.17 | |||||
Total sales to third parties | 63.72 | 64.12 | 69.49 | 72.79 | 77.08 | |||||
Own consumption | 2.00 | 2.02 | 1.90 | 3.70 | 5.54 | |||||
Total sales to third parties and own consumption | 65.72 | 66.14 | 71.39 | 76.49 | 82.62 | |||||
Sales of natural gas of Eni’s affiliates (net to Eni) | 1.38 | 2.40 | 6.94 | 7.32 | 8.53 | |||||
Europe | 0.93 | 1.93 | 6.23 | 6.60 | 7.85 | |||||
Outside Europe | 0.45 | 0.47 | 0.71 | 0.72 | 0.68 | |||||
Total sales of natural gas | 67.10 | 68.54 | 78.33 | 83.81 | 91.15 |
Total sales of subsidiaries | 85.76 | 84.83 | 89.32 | |||
Italy | 57.07 | 56.08 | 52.82 | |||
Rest of Europe | 27.93 | 27.86 | 35.61 | |||
Outside Europe | 0.76 | 0.89 | 0.89 | |||
Total sales of Eni's affiliates (Eni's share) | 7.65 | 8.74 | 8.91 | |||
Italy | 0.02 | 0.05 | 0.05 | |||
Rest of Europe | 6.88 | 7.16 | 7.42 | |||
Outside Europe | 0.75 | 1.53 | 1.44 | |||
Total sales of G&P | 93.41 | 93.57 | 98.23 | |||
E&P in Europe and in the Gulf of Mexico (a) | 4.69 | 5.39 | 6.00 | |||
Worldwide gas sales | 98.10 | 98.96 | 104.23 |
(a) | i | E&P sales include volumes marketed by the Exploration & Production division in Europe (4.07, 3.59, 3.36 BCM in 2006, 2007 and 2008, respectively) and in the Gulf of Mexico (0.62, 1.8 and 2.64 BCM in 2006, 2007 and 2008, respectively). |
Natural gas sales by market | 2006 | 2007 | 2008 | |||
(BCM) |
ITALY | 57.09 | 56.13 | 52.87 | |||
Wholesalers | 11.54 | 10.01 | 7.52 | |||
Gas release | 2.00 | 2.37 | 3.28 | |||
Italian gas exchange and spot markets | - | 1.90 | 1.89 | |||
Industries | 14.33 | 12.77 | 10.64 | |||
Industries | 13.33 | 11.77 | 9.59 | |||
Medium-sized enterprises and services | 1.00 | 1.00 | 1.05 | |||
Power generation | 16.67 | �� | 17.21 | 17.69 | ||
Residential | 6.42 | 5.79 | 6.22 | |||
Own consumption | 6.13 | 6.08 | 5.63 | |||
INTERNATIONAL SALES | 41.01 | 42.83 | 51.36 | |||
Importers in Italy | 14.10 | 10.67 | 11.25 | |||
European markets | 20.71 | 24.35 | 31.78 | |||
Iberian Peninsula | 5.24 | 6.91 | 7.44 | |||
Germany-Austria | 4.72 | 5.03 | 5.29 | |||
Turkey | 3.68 | 4.62 | 4.93 | |||
Belgium | - | - | 4.57 | |||
Northern Europe | 2.62 | 3.15 | 3.21 | |||
Hungary | 3.10 | 2.74 | 2.82 | |||
France | 1.07 | 1.62 | 2.66 | |||
Other | 0.28 | 0.28 | 0.86 | |||
Extra European markets | 1.51 | 2.42 | 2.33 | |||
E&P in Europe and in the Gulf of Mexico | 4.69 | 5.39 | 6.00 | |||
WORLDWIDE GAS SALES | 98.10 | 98.96 | 104.23 |
The Italian Natural Gas MarketPlanned Actions and Sales Target
The Italian natural gas market is made up of three main segments: residential and commercial, industrial and thermoelectric. Customers can be divided into three groups: (i) high consumption final users directly linkedIn the medium-term, Eni plans to the national and regional natural gas high pressure networks (industries and power stations); (ii) customers of the residential and commercial sector such as residential and commercial users, hospitals, schools, public utilities, small enterprises located in urban centers supplied by wholesalers through low pressure networks; and (iii) wholesalers (mainly local selling companies and distributorsincrease its sales volumes of natural gas in international markets, mainly in Europe and the U.S., in order to compensate for automotive use) purchasing naturallower growth opportunities on its domestic market due to sector-specific regulation imposing limits to the size of Italian gas operators. In order to sell itachieve its growth targets, Eni will leverage on its strengths represented by gas availability both as equity gas and under long-term purchase contracts, operational flexibility ensured by access to residentiala large transport network, regasification terminals and commercial customers.logistic assets, a large portfolio of clients and market knowledge. Eni expects to increase international sales also leveraging on synergies deriving from the Distrigas acquisition that will help drive sales growth and markets share gains in Eni’s target markets in spite of an unfavorable short-term outlook for European gas demand.
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(i) Italy
In 2005, Eni’s natural gas sales to wholesalers amounted to 12.05 BCM (down 13.1% over 2004).
In 2005, natural gas consumption inthe medium-term, the Italian industrial segment amounted to approximately 21.8 BCM (approximately 25% of total final consumption), with a 2.3% decrease from 2004. In 2005, Eni’s sales of natural gas to industrial users amounted to 13.07 BCM (up 5.5% over 2004).
In 2005, natural gas consumption in the Italian thermoelectric segment amounted to approximately 33 BCM (approximately 38% of total demand), with an approximately 14% increase over 2004. In 2005, Eni’s sales of natural gas to thermoelectric users amounted to 17.60 BCM (up 10.6% over 2004).
Natural gas consumption in the residential and commercial segment amounted to over 30 BCM (35% of total demand), with a 6.9% increase from 2004 duemarket will be characterized by greater competition related to the effect of weather conditions. Eni manages directly over 5 million residential customersshort-term decline in demand resulting from the economic slowdown and in 2005 Eni’s sales to this segment amounted to 7.8 BCM (up 6% from 2004).
Transmission, Dispatching and Regasification Activities
Transmission, dispatching and regasification activities in Italy are carried out by Snam Rete Gas, a company listedthe entry on the Italian Stock Exchange (in which Eni holds a 50.07% interest). Eni’s primary transmission network was conferred to Snam Rete Gas in July 2001 in implementationmarket of Legislative Decree No. 164/2000 concerning the Italian natural gas market, which provides for the separation of transmission, dispatching and regasification activities from all other activities in the natural gas segment. This Decree also establishes that transport activity qualifies as a public concern activity and consequently is regulated.
The Italian natural gas transmission system is made up of a national pipeline network and a regional pipeline network for a total length of 33,000 kilometers, of which 30,712 kilometers are owned by Eni.
The Italian national transmission network is made up of high pressure trunklines, mainly with a large diameter, which carry natural gas from the entry points to the system – import lines, storage sites and main Italian natural gas fields – to the linking points with the regional transmission network. The national network includes also some interregional lines reaching important markets.
The regional transmission network is made up of the remaining lines and allows the transmission of natural gas to industries, power stations and local distribution companies of the various local areas served.
At December 31, 2005 the national pipeline network owned by Eni extended for 8,392 kilometers.
Underground pipelines have a maximum diameter of 48 inches and carry natural gas at pressures of 24 to 75 bars. The underwater pipeline crossing the Messina Strait has a diameter of 20 to 26 inches and carries natural gas at a pressure equal to or higher than 115 bars.
The major pipelines interconnected with import trunklines that are part of Eni’s national network are:
In 2005 Eni’s national network increased by 196 kilometers duenew supplies related to the upgrade of import infrastructure. In particular import capacity is expected to increase by approximately 25 BCM in the trunklines for gas importednext four years. About 90% of new capacity is expected to come on stream in 2010. This capacity derives in particular from the upgrades achieved by Eni on pipelines from Russia (TAG), Algeria (TTPC) and Algeria.Libya (GreenStream) and the full operation of the re-gasification plant of Rovigo owned by third parties.
In order to support sales and profitability of its marketing operations in Italy, Eni intends to implement an effective marketing policy, intended to deliver value to customers leveraging on the quality of the service and the offer of customized price formulas. Eni’s regional transmission network is made upmarketing initiatives will focus on all segments in particular the middle and retail markets, also leveraging on the expected development of pipes with smaller diameter than the national linescombined offer of gas and power to residential customers ("dual offer"). Large industrial clients will be retained based on selective marketing policies targeting the most valuable and profitable. Volumes to thermoelectric utilities will be supported in order to maintain current levels.
At the same time, Eni expects to preserve its selling margins by means of reducing the cost to serve leveraging on technological innovation, streamlining front-end and back-end processes and achieving economies of scale and synergies, particularly those driving from the dual offer in terms of process integration for acquiring, retaining and managing customers.
As part of its marketing activities in Italy, Eni engages in the marketing of power. Particularly, the Company offers to its retail clients a total lengthcommercial offer that provides the combined supply of 22,320 kilometers. These pipes carry natural gas at pressures between 5 and 12 bars, between 12power ("the dual offer"). Eni plans to achieve by 2012 a penetration rate of over 20% of Eni’s retail customer base.
In 2008, sales of power amounted to 29.93 TWh and 24 bars and between 24 and 75 bars. In 2005, Eni’s regional network decreased by 29 kilometers despite3.26 TWh from 2007, down 9.8%, reflecting lower traded volumes as the entry into service of new lines.
Eni’s system is completed by: (i) 11 compressor stations with a total power of 683 megawatt; and (ii) 5 marine terminals linking underwater pipelines witheconomic activity declined in the on-land network at Mazara del Vallo, Messina and Gela in Sicily and Favazzina and Palmi in Calabria for the Greenstream pipeline.
The control roomlast part of the dispatching system is located in San Donato Milaneseyear. The decrease mainly regarded sales to the power exchange. Sales on the free market to wholesalers increased due to higher spot sales, and overseesso did sales to industrial users due to new customers acquired. Sales of power amounting to 29.93 TWh were directed to the free market (76%), the power exchange (13%), industrial sites (9%) and monitorsElectricity Service Operator (2%). In 2008, the whole transmission network in cooperation with peripheral units. In 2005 this system obtainedprogram for expanding the ISO 9001-2000 certification. Peripheral units are represented by eight districts that monitor the transmission network through 60 centers that guarantee operation, maintenancecombined integrated offer of gas and control of the whole system. Each unit is responsible for operationspower (dual offer) progressed in accordance with technical specifications and applicable laws and regulations.
In addition to the international pipeline transmission system, natural gas also enters Eni’s system through the Panigaglia (Liguria) LNG terminal, which receives LNG carried by tanker ships. This terminal is currently the only one in Italy and at its maximum capacity can input 3.5 BCM/y into the transmission network. In 2005, volumes of LNG regasified amounted to the equivalent of approximately 2.49 BCM of natural gas.Company’s expansion plans.
In 2005 a total of 85.1 BCM of natural gas were input into the national network, of 64% of which was owned by Eni.
In the next four years Eni plans to carry out capital expenditure of approximately euro 3.5 billion aimed at the upgrade of its transport network in view of the expected increase in import capacity (in particular from Russia and Algeria).
Natural gas transported in Italy (1) | 2001 | 2002 | 2003 | 2004 | 2005 | |||||
2006 | 2007 | 2008 | ||||
|
Eni | 58.17 | 54.56 | 51.74 | 52.15 | 54.88 | |||||
Third parties | 11.41 | 19.11 | 24.63 | 28.26 | 30.22 | |||||
Enel | 6.28 | 8.28 | 9.18 | 9.25 | 9.90 | |||||
Edison Gas | 2.98 | 4.61 | 7.49 | 8.00 | 7.78 | |||||
Other | 2.15 | 6.22 | 7.96 | 11.01 | 12.54 | |||||
Total | 69.58 | 74.40 | 76.37 | 80.41 | 85.10 |
Power generation | 24.82 | 25.49 | 23.33 | |||
Trading of electricity | 6.21 | 7.70 | 6.60 | |||
31.03 | 33.19 | 29.93 | ||||
Power sales by market | ||||||
Free market | 16.22 | 20.73 | 22.89 | |||
Italian Exchange for electricity | 9.67 | 8.66 | 3.82 | |||
Industrial plants | 2.70 | 2.81 | 2.71 | |||
Electricity Service operator (ESO) | 2.44 | 0.99 | 0.51 | |||
31.03 | 33.19 | 29.93 |
Power availability to Eni is ensured by internal production (see the generation business below) and purchases on the free market. In 2008, production availability covered 78% of sales volumes.
(ii) European Markets
In the future, Eni intends to strengthen its leadership in the European gas markets, targeting to increase both volumes and market shares. A review of Eni’s presence in key European markets and volume targets for 2012 is presented below.
Benelux. The acquisition of Distrigas finalized in October 2008 granted Eni a solid base from which to develop its presence in Benelux countries (Belgium, the Netherlands and Luxembourg). Distrigas is a key operator in Benelux, in particular in Belgium, the strategic hub of the continental European gas market thanks to its central position and high level of interconnectivity with the transit gas networks of central and northern Europe. The company sells natural gas mainly to industries, wholesalers and power generation. Distrigas also has diversified sources of supply, both in geographical terms with its long-term supply contracts portfolio in the Netherlands, Norway and Qatar, and technically as it purchases natural gas, transports it via pipeline and as LNG. It also owns an
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11% interest in Interconnector UK Ltd, the company that owns the interconnection of the transit gas networks between Belgium and the UK and the Methania gas tanker ship. Its transport assets connect natural gas sources with European markets and the Zeebrugge hub on the Belgian coast.
In 2008 Distrigas natural gas sales in Benelux amounted to approximately 13.5 BCM and by 2012 Eni targets sales of 14.8 BCM, an annual average growth rate of 2% and a 22% market share.
France. Eni sells natural gas to industrial clients and resellers and to the segments of small businesses and retail though its partnership with Altergaz in which it holds a 38.91% stake. Altergaz supplies approximately 23,000 clients (of these 17,000 are residential customers), with revenues of approximately euro 260 million. Eni will support Altergaz’s development in the target segments through a 10-year supply contract of 1.3 BCM/y and will pursue synergies with its own commercial structure. On September 23, 2008, Eni and Altergaz acquired a 17% stake each in the share capital of Gaz de Bordeaux SAS, a gas distributor in the municipality of Bordeaux and defined the terms of a long-term supply contract for 250 mmCM/y to Gaz de Bordeaux.
In addition, the recent acquisition of Distrigas provides Eni with a customer base and sound commercial structures.
The retail segment in France presents attractive development opportunities with its 10.8 million of sites and delivery points and consumption equaling 27% of total national consumption.
Eni expects to ramp sales on the French market to achieve 6.8 BCM of sales by 2012. This target represents an annual average growth rate of 14%. Eni’s market share is expected to reach 13%.
Germany/Austria. Eni is present on the German natural gas market through its affiliate GVS (Gasversorgung Süddeutschland GmbH - Eni 50%) which sold approximately 4.22 BCM in 2008 (2.11 BCM being Eni’s share) and through a direct marketing structure (Eni G&P GmbH). In the medium-term, Eni, supported by the synergies achieved with GVS, plans to significantly increase its sales to the local distribution companies and industrial segment, leveraging on the pursuit of opportunities arising from the ongoing liberalization process. The objective is to sell 7.6 BCM in 2012, equal to a 7% market share with an annual growth rate of 9%.
Iberian Peninsula
Portugal. Eni operates on the Portuguese market through its affiliate Galp Energia (Eni’s interest 33.34%) which sold approximately 5.78 BCM in 2008 (1.93 BCM being Eni’s share).
Spain. Eni operates in the Spanish gas market through a direct marketing structure that markets in particular LNG from Nigeria and through Unión Fenosa Gas (UFG) (Eni’s interest 50%) which supplies natural gas mainly to final customers and power generation utilities. In 2008 gas sales of UFG in Europe amounted to 4.32 BCM (2.16 BCM Eni’s share). UFG holds an 80% interest in the Damietta liquefaction plant, on the Egyptian coast (see below), and a 7.36% interest in a liquefaction plant in Oman. In addition, it holds interests in the Sagunto (Valencia) and El Ferrol (Galicia) regasification plants, with a 42.5% and 18.9% interest, respectively.
Eni targets to increase its sales in the Iberian Peninsula from the current 7.44 BCM level to approximately 8.6 BCM by 2012, with an annual average growth rate of 4%, in line with the growth of the Spanish market.
UK/Northern Europe. Eni through its subsidiary North Sea Gas & Power (Eni UK Ltd) markets equity gas produced at Eni’s fields in the North Sea and operates in the main continental natural gas hubs (NBP, Zeebrugge, TTF). Eni plans to grow volumes sold on the markets of the UK/ Northern Europe from the current 3.2 BCM level to approximately 6.8 BCM by 2012, with a 21% average annual growth rate.
Turkey. Eni sells gas supplied from Russia and transported via the Blue Stream pipeline. In 2008 sales amounted to 4.93 BCM. Leveraging on the expected demand growth, Eni plans to increase sales up to 6.4 BCM by 2012, equal to a 7% growth rate.
(iii) The United States
Eni’s plans to expand its natural gas sales in the U.S. are described under the "LNG business" below.
The LNG Business
Eni is present in the all phases of LNG: liquefaction, shipping, regasification and sale, and intends to speed up the development of its LNG business on a global scale, aiming at building or acquiring assets in the LNG value chain in order to seize the opportunities arising from the increasing role of LNG in satisfying energy requirements.
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Expansion of LNG business in particular on extra European markets, mainly in the USA, will enable Eni to fully monetize its large equity reserves.
Eni’s main assets in the LNG business are described below.
Italy. Eni, through Snam Rete Gas, operates the only regasification terminal operating in Italy at Panigaglia (Liguria). At full capacity, this terminal can regasify 17,500 CM of LNG per day and input 3.5 BCM/y into the Italian transport network. Eni plans to increase the capacity of the Panigaglia plant from the current 3.5 BCM to 8 BCM. From 2014 the upgrade of this structure will allow to increase imports to Italy by 4.5 BCM/y. In accordance with Management’s revised plans, works are expected to commence by 2011, if all authorizations are granted.
Qatar. The closing of the acquisition of Distrigas allowed Eni to increase its development opportunities in the LNG business with the access to new supply sources mainly from Qatar, under a 20-year long agreement with RasGas (owned by Qatar Petroleum with a 70% interest and ExxonMobil with a 30% interest) and to the Zeebrugge LNG terminal on the Western coast of Belgium. In 2008 the terminal was authorized to load gas carriers, allowing Distrigas to start its LNG export activity to very profitable markets.
Egypt. Eni, through its interest in Unión Fenosa Gas, owns a 40% interest in the Damietta liquefaction plant producing approximately 5 mmtonnes/y of LNG equal to a feedstock of 7 BCM/y of natural gas. In 2008, the Gas & Power segment withdrew 0.7 mmtonnes of LNG (approximately 1 BCM of natural gas) to be marketed in Europe.
Spain. Eni through Unión Fenosa Gas holds a 21.25% interest in the Sagunto regasification plant, near Valencia, with a capacity of 6.7 BCM/y. At present, Eni’s capacity entitlement amounts to 1.6 BCM/y of gas. A capacity upgrading plan has been sanctioned targeting a 0.8 BCM/y capacity increase by 2009. Eni through Unión Fenosa Gas also holds a 9.5% interest in the El Ferrol regasification plant, located in Galicia, which started operations in November 2007, with a treatment capacity of approximately 3.6 BCM/y, 0.4 BCM/y being Eni’s capacity entitlements.
USA
Cameron. Eni acquired from the U.S. company Sempra a capacity entitlement in the Cameron regasification plant, under construction on the banks of the Calcasieu River, approximately 15 miles south of Lake Charles in Louisiana. Eni’s capacity entitlement amounts to 6.5 BCM/y, equal to a 40% share of the total plant capacity for a duration of 20 years. The validity of the contract is conditional upon the actual start-up of the regasification service, expected by end of 2009. This transaction will allow Eni to market the natural gas reserves that it is developing in North Africa and Nigeria on the North American market.
Pascagoula. Within the upstream project related to the construction of an LNG plant in Angola designed to produce 5.2 mmtonnes/y of LNG (approximately 7.3 BCM/y) for the North American market, Eni has an option to purchase a capacity entitlement amounting to 5.8 BCM/y for 20 years at the regasification plant that will be built near Pascagoula in Mississippi, with start up expected by end of 2011.
With the contribution of the Distrigas acquisition and of sales of the E&P segment, by 2012 Eni targets sales of LNG of about 17 BCM (12 BCM in 2008).
LNG sales | 2006 | 2007 | 2008 | |||
(BCM) |
G&P sales | 6.4 | 8.0 | 8.4 | |||
Italy | 1.5 | 1.2 | 0.3 | |||
European markets | 4.4 | 5.6 | 7.0 | |||
Extra european markets | 0.5 | 1.2 | 1.1 | |||
E&P sales | 3.5 | 3.7 | 3.6 | |||
Liquefaction plants: | ||||||
Bontang (Indonesia) | 0.9 | 0.7 | 0.7 | |||
Point Fortin (Trinidad & Tobago) | 0.4 | 0.6 | 0.5 | |||
Bonny (Nigeria) | 1.8 | 2.0 | 2.0 | |||
Darwin (Australia) | 0.4 | 0.4 | 0.4 | |||
9.9 | 11.7 | 12.0 |
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Power Generation
Eni conducts its power generation activities at its sites of Ferrera Erbognone, Ravenna, Livorno, Taranto, Mantova, Brindisi and Ferrara. In 2008 production of power amounted to 23.33 TWh, down 2.16 TWh from 2007, or 8.5% due mainly to a decline in sales volumes. Total installed capacity was 4.9 GW at December 31, 2008. Sales of steam (10,584 ktonnes) in 2008 decreased by 265 ktonnes from 2007, down 2.4% and were directed to end customers.
In the medium-term Eni intends to complete its plan for expanding power generation capacity, targeting an installed capacity of 5.5 GW. At full capacity in 2012, production is expected to amount to approximately 29 TWh, corresponding to approximately 8% of power expected to be generated in Italy at that date. This expansion will allow Eni to consolidate its market share and its position as third power producer in Italy. Supplies of natural gas are expected to amount to approximately 5.6 BCM/y from Eni’s diversified supply portfolio. Residual expected capital expenditure amount to euro 0.7 billion in addition to the euro 2.4 billion already invested until 2008. The development plan is underway at Ferrara (Eni’s interest 51%), where in partnership with EGL Holding Luxembourg (a company belonging to Swiss group EGL) construction of two new 390 MW combined cycle units is currently undergoing testing and the relevant authorizations are pending with start up expected in early 2009.
New installed generation capacity uses the combined cycle gas fired technology (CCGT), ensuring a high level of efficiency and low environmental impact. In particular, management estimates that for a given amount of energy (electricity and heat) produced, the use of the CCGT technology on a production of 26.5 TWh reduces emissions of carbon dioxide by approximately 5 mmtonnes, as compared to emissions using conventional power generation technology. The CCGT technology has been acknowledged by the Authority for Electricity and Gas as a production technology that entails priority on the national dispatching network and the exemption from the purchase of "green certificates". Article 11 of Legislative Decree No. 79/1999 concerning the opening up of the Italian electricity market obliges importers and producers of power from non renewable sources to input into the national power system a share of power produced from renewable sources set at 2% of power imported or produced from non renewable sources exceeding 100 GW. Calculations are made on total amounts net of co-generation and own consumption. This obligation can be met also by purchasing volumes or rights from other producers employing renewable sources (the so-called green certificates) to cover all or part of such 2% share. Legislative Decree No. 387/2003 established that from 2004 to 2006 the minimum amount of power from renewable sources to be input in the grid in the following year be increased by 0.35% per year. The Minister of Productive Activities, with decrees issued in consent with the Minister of the Environment, will define further increases for the 2007-2009 and 2010-2012 periods.
Eni’s operated power plants are described below.
Ferrera Erbognone. This power plant has an installed capacity of approximately 1,030 MW divided on three combined cycle units, two of them with an approximately 390 MW capacity are fired with natural gas, the third one with approximately 250 MW capacity is fired whit a mixed fuel, natural gas and refinery gas obtained from the gasification of a heavy residue form crude processing at the nearby Eni-operated Sannazzaro refinery.
Ravenna. Two new combined cycle 390 MW units started operations in 2004. Added to the existing capacity, the power plant’s installed capacity has reached approximately 1,100 MW.
Brindisi. This power plant has been upgraded by installing three new combined cycle units, each with capacity of 390 MW, increasing overall capacity at approximately 1,500 MW.
Mantova. This power plant has been upgraded by installing two new combined cycle units, each with capacity of 390 MW, increasing overall capacity at approximately 900 MW. This power plant also provides steam for heating purposes delivered to the Mantova’s urban network through a heat exchanger.
Livorno. This power plant has an installed capacity of approximately 200 MW, divided on gas and steam turbines with steam generators.
Taranto. The existing power units have a capacity of approximately 75 MW, divided on gas and steam turbines with steam generators.
Ferrara. Two new combined cycle 390 MW units started operations in 2008. Added to already existing gas and steam turbines, the power plant’s installed capacity has reached approximately 840 MW.
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Power Generation | 2006 | 2007 | 2008 | |||
Purchases | ||||||||
Natural gas | (mmCM) | 4,775 | 4,860 | 4,530 | ||||
Other fuels | (ktoe) | 616 | 720 | 560 | ||||
- of which steam cracking | 136 | 137 | 131 | |||||
Production | ||||||||
Electricity | (TWh) | 24.82 | 25.49 | 23.33 | ||||
Steam | (ktonnes) | 10,287 | 10,849 | 10,584 | ||||
Installed generation capacity | (GW) | 4.9 | 4.9 | 4.9 |
Infrastructures
Eni operates a large European network of integrated infrastructure for transporting natural gas, which links key consumption basins with the main producing areas (North Africa, Russia and the North Sea).
In Italy Eni operates almost all the national transport network and can count on an extended system of local distribution networks serving retail markets. The availability of regasification capacity in Italy and the Iberian Peninsula coupled with a significant storage capacity ensures a high level of operating flexibility. These assets represent a significant competitive advantage. Eni is implementing plans for upgrading its import pipelines from Russia, Algeria and Libya and its storage capacity, and for expanding and modernizing its national transport and distribution networks. The Company plans to invest approximately euro 7 billion in the next four years in these businesses to cope with long-term growth expected in the European gas demand.
Transport infrastructure | ||||||||||||
Route | Lines | Length of main line | Diameter | Transport capacity (1) | Pressure min-max | Compression stations | ||||||
ITALY | (units) | (km) | (inch) | (mmCM/d) | (bar) | (No.) | ||||||
Mazara del Vallo-Minerbio (under upgrading) | 2/3 | 1,480 | 48/42 - 48 | 101.8 | 75 | 7 | ||||||
Tarvisio-Sergnano-Minerbio | 3 | 433 | 42/36, 34 e 48/56 | 106.0 | 58/75 | 3 | ||||||
Passo Gries-Mortara | 2 | 177 | 48/34 | 64.9 | 55/75 | 1 | ||||||
Lines | Total length | Diameter | Transport capacity (2) | Transit capacity (3) | Compression stations | |||||||
OUTSIDE ITALY | (units) | (km) | (inch) | (BCM/y) | (BCM/y) | (No.) | ||||||
TENP (Bocholtz-Wallbach) | 2 lines of km 500 | 1,000 | 36/38/40 | 22.9 | 15.5 | 4 | ||||||
Transitgas (Rodersdorf-Lostorf) | 3 lines of km 165, 71 and 55 | 291 | 36/48 | 24.9 | 19.9 | 1 | ||||||
TAG (Baumgarten-Tarvisio) | 3 lines of km 380 | 1,140 | 36/38/40/42 | 45.2 | 37.4 | 5 | ||||||
TTPC (Oued Saf Saf-Cap Bon) | 2 lines of km 370 | 740 | 48 | 34.0 | 33.2 | 5 | ||||||
TMPC (Cap Bon-Mazara del Vallo) | 5 lines of km 155 | 775 | 20/26 | 33.2 | 33.2 | |||||||
GreenStream (Mellitah-Gela) | 1 line of km 520 | 520 | 32 | 8.0 | 8.0 | 1 | ||||||
Blue Stream (Beregovaya-Samsun) | 2 lines of km 387 | 774 | 24 | 16.0 | 16.0 | 1 |
(1) | i | |
(2) | i | Includes both transit capacity and volumes of natural gas destined to local markets and withdrawn at various points along the pipeline. |
(3) | i | The maximum volume of natural gas which is input at various entry points along the pipeline and transported to |
The ItalianInternational Transport Activities
In order to import natural gas system is supplied for about 82% with imported gas, transmitted to Italy, throughEni owns capacity entitlements in a network of international high pressure pipelines extending for a total of over 4,300 kilometers;4,400 kilometers enabling the Company to import natural gas produced in which Eni owns transportation rights,Russia, Algeria, the North Sea and Libya to Italy. A description of the main pipelines is provided below.
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expected to start operating in the fourth quarter of 2009. In 2008 the whole new capacity has been awarded to third parties following a transparent and non discriminatory procedure (lottery) agreed with Austrian and European Authorities. | ||
• | ||
• | The TMPC pipeline for the import of Algerian gas, 775-kilometer long, made up of five lines each 155-kilometer long with a transport capacity of 33.5 BCM/y. It crosses underwater the Sicily Channel from Cap Bon to Mazara del Vallo in Sicily, the point of entry | |
• | The TENP pipeline, 1,000-kilometer long (two 500-kilometer long lines) with transport capacity of 15.5 BCM/y and four compression stations. It transports natural gas from the Netherlands through Germany, from the German-Dutch border of Bocholtz to Wallbach at the German-Swiss border. | |
• | The Transitgas pipeline, | |
• | ||
Eni holds a 50% interest in the Blue Stream underwater pipeline (water depth greater than 2,150 meters) linking the Russian andcoast to the Turkish coast of the Black Sea. When fully operational, thisThis pipeline is 774-kilometer long pipeline with a transmissionon two lines and has transport capacity of 49 mmCM/d,16 BCM/y.
The South Stream project
Eni and Gazprom are assessing a project to build a new route for importing gas from Russia to Europe through the Black Sea. The South Stream pipeline is expected to be composed by two sections: (i) an offshore 900-kilometer long section crossing the Black Sea from the Russian coast at Beregovaya (the same starting point of the Blue Stream pipeline) to the Bulgarian coast at Varna. It will be laid reaching water depths of more than 2,000 meters; and (ii) an onshore section for which two options are currently being evaluated: one envisages crossing Serbia and Hungary to connect to existing trunklines from Russia; another section pointing South West crossing Greece and Albania then linking to the Italian network. Eni and Gazprom will carry out the project using the most advanced technologies in full respect of the strictest environmental criteria.
Regulated businesses in Italy
Italian Transport Activity
Eni, through Snam Rete Gas, a company listed on the Italian Stock Exchange, in which Eni holds a 50.03% interest, operates most of the Italian natural gas transport 16 BCM/ynetwork as well as the only regasification terminal currently operating in 2010 (Eni’s share 8 billion)Italy.
Under Legislative Decree No. 164/2000 concerning the opening up of Russianthe natural gas market in Italy, transport and regasification activities are regulated by the Authority for Electricity and Gas which determines the methods for calculating tariffs and fixing the return on capital employed. This makes transport a low risk business capable of delivering stable returns.
Eni’s network extends for 31,474 kilometers and comprises: (i) a national transport network extending over 8,779 kilometers, made up of high pressure trunk-lines mainly with a large diameter, which carry natural gas from the entry points to the system – import lines, storage sites and main Italian natural gas fields – to the linking points with regional transport networks. The national network includes also some interregional lines reaching important markets; and (ii) a regional transport network extending over 22,695 kilometers, made up of smaller lines and allowing the transport of natural gas to be sold onlarge industrial complexes, power stations and local distribution companies in the Turkish market (see "Development Projects" below)various local areas served. The major pipelines interconnected with import trunk-lines that are part of Eni’s national network are:
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- | two lines with a 48/42-inch diameter, each approximately 1,500-kilometer long, including the smaller pipes that cross underwater the Messina Strait, connect Mazara del Vallo on the Southern coast of Sicily where they link with the TMPC pipeline carrying Algerian gas, to Minerbio (near Bologna). This pipeline is undergoing an upgrade with the laying of a third line with a 48-inch diameter 528-kilometer long (of these 309 are already operating). At the Mazara del Vallo entry point the available transport capacity, which is measured at the beginning of each thermal year starting on October 1, is approximately 102 mmCM/d; |
- | a 36-inch line, 67-kilometer long linking Gela, the entry point of the GreenStream underwater pipeline, to the national network near Enna along the trunkline transporting gas coming from Algeria. Transport capacity at the Gela entry point is approximately 31 mmCM/d; |
- | two lines with 42/36/34-inch diameters extending for a total length of approximately 900 kilometers connect the Austrian network at Tarvisio. This facility crosses the Po Valley reaching Sergnano (near Cremona) and Minerbio. This pipeline has been upgraded by the laying of a third 264-kilometer long line with diameter from 48 to 56 inches. The pipeline transport capacity at the Tarvisio entry point amounts to approximately 106 mmCM/d plus the transport capacity available at the Gorizia entry point of approximately 5 mmCM/d; |
- | one line, with a 48-inch diameter, 177-kilometer long extends from the Italian border at Passo Gries (Verbania), to the node of Mortara, in the Po Valley. The pipeline transport capacity at the Passo Gries entry point amounts to 65 mmCM/d; |
- | one line, with a 30-inch diameter, 170-kilometer long links the Panigaglia terminal to the national transport network near Parma. The pipeline transport capacity at the Panigaglia entry point amounts to 13 mmCM/d; |
- | a 36-inch connection at the Minerbio junction with the Cavarzere-Minerbio pipeline belonging to Edison Stoccaggio SpA, which will receive gas from the LNG terminal located offshore of Porto Viro, once in operation. |
In 2008, Eni’s national transport network increased by 393 kilometers due to certain upgrades to both national trunklines (231 kilometers) and the regional network (162 kilometers). AtEni’s system is completed by: (i) 11 compressor stations with a total power of 830 MW used to increase gas pressure in pipelines to the endlevel required for its flow; and (ii) 5 marine terminals linking underwater pipelines with the on-land network at Mazara del Vallo, Messina and Gela in Sicily and Favazzina and Palmi in Calabria. The interconnections managed by Snam Rete Gas in the Italian transport network are guaranteed by 23 linkage and dispatching nodes and by 569 plant units including pressure reduction and regulation plants. These plants allow to regulate the flow of 2005natural gas in the firstnetwork and guarantee the connection of pipes working at different pressures.
Snam Rete Gas is currently assessing a project to build the Italian section of the Dzhubga compression station onnew Galsi pipeline connecting Algeria to Italy through Sardinia with an 8 BCM/y capacity. The Italian section of this new infrastructure will be consist of an onshore section crossing Sardinia and an offshore section reaching Tuscany where it will link with the Russian coastnational network for a total length of 600 kilometers. Galsi will be responsible for project engineering and obtaining needed licenses and authorizations, while Snam Rete Gas will build the pipeline and manage it when operational.
For the next four years Snam Rete Gas approved a capital expenditure plan of approximately euro 4.3 billion aimed mainly at increasing transport capacity by 25% and upgrading the network in view of increasing import flows.
In 2008, volumes of natural gas input in the national grid (85.64 BCM) increased by 2.36 BCM from 2007, up 2.8%, mainly due to higher volumes of natural gas input to storage for the rebuilding of stocks in summer months as a result of higher offtakes related to higher seasonal sales registered in the first months of the Black Sea started operations. It is madeyear. Eni transported 33.84 BCM of natural gas on behalf of third parties, up 2.95 BCM from 2007, or 9.6%.
Gas volumes transported (a) | 2006 | 2007 | 2008 | |||
(BCM) |
Eni | 57.09 | 52.39 | 51.80 | |||
On behalf of third parties | 30.90 | 30.89 | 33.84 | |||
87.99 | 83.28 | 85.64 |
(a) | i | Includes amounts destined to domestic storage. |
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Transport capacity in Italy | 2007-2008 Thermal year | 2008-2009 Thermal year | ||
Entry points | Available capacity | Awarded capacity | Saturation | Available capacity | Awarded capacity | Saturation | ||||||
(mmCM/d) | (mmCM/d) | (%) | (mmCM/d) | (mmCM/d) | (%) | |||||||
Tarvisio | 112.6 | 92.2 | 81.9 | 106.0 | 97.8 | 92.2 | ||||||
Mazara del Vallo | 90.7 | 80.4 | 88.7 | 101.8 | 93.2 | 91.6 | ||||||
Passo Gries | 63.5 | 59.6 | 93.8 | 64.9 | 60.8 | 93.7 | ||||||
Gela | 30.3 | 29.5 | 97.3 | 30.5 | 30.5 | 100.0 | ||||||
GNL Panigaglia | 13.0 | 11.4 | 87.7 | 13.0 | 11.4 | 87.7 | ||||||
Gorizia | 4.8 | 0.5 | 9.4 | 4.8 | ||||||||
314.9 | 273.6 | 86.9 | 321.0 | 293.7 | 91.5 | |||||||
In 2008, the LNG terminal in Panigaglia (La Spezia) regasified 1.52 BCM of three turbocompressors and three turbogenerators that will allow to increase the volumes ofnatural gas transported.
(2.38 BCM in 2007).
Distribution Activity
Distribution involves the delivery of natural gas to residential and commercial userscustomers in urban centers through low pressure networks. Eni, through its 100% subsidiary Italgas and other subsidiaries, is engagedoperates in the distribution activity in Italy serving 1,2821,320 municipalities through a low pressure network consisting of over 48,000approximately 49,400 kilometers of pipelines supplying 5.85.6 million customers at December 31, 2005.and distributing 7.3 BCM in 2008. Under Legislative Decree No. 164/2000 concerningon the opening up of the natural gas market in Italy, defines distribution asactivities are considered a public service which is subject to regulation and its management is entrusted to natural gas companies by local governments exclusively under bid procedures. Concessions existing at the coming into force of the Decree and awarded with a bid procedure expire on December 31, 2012; all other concessions expire on December 31, 2007 (with an optional three year extension in case of public interest). See "Regulation of the Italian Hydrocarbon Industry Gas & Power" below.
Development Projects
Eni is engaged in various development projects concerning the sale of natural gas in European markets and in the LNG business in order to strengthen its market share in area where its presence is already established (Iberian Peninsula, Germany, Turkey) and to develop sales in markets with interesting growth and profitability prospects (in particular France and the United Kingdom). Eni plans to increase the flexibility of its operations by upgrading its logistical assets.
In these European markets Eni can leverage on the availability of equity gas and a diversified portfolio of supply contracts, an extensive gas pipeline network, which allows for the supply of natural gas from several sources, and long standing relationships with producing countries. Eni intends to develop its presence in the LNG business which provides interesting growth prospects, leveraging on the value of its assets, on its participation in liquefaction projects aimed at exploiting its natural gas reserves (mainly in North and West Africa, the Far East and Australia) and on the purchase of interests in regasification terminals located in strategic consumption markets (such as the United States, the United Kingdom and the Far East).
Germany Eni has been present on the German natural gas market since late 2002 through GVS Gasversorgung Süddeutschland GmbH) in which it holds a 50% interest. Through a 1,863-kilometer long gas pipeline network (of these 1,750therefore are owned and 113 are managed) it transports and markets about 7 BCM/y of gas to local distribution companies serving about 750 municipalities in the South-Western areas of the country.
In January 2005 Eni agreed a 14 year contract, starting in 2006, for the supply of 1.2 BCM/y of natural gas to the German company Wingas. The gas will be delivered at Eynatten at the German-Belgian border. In the medium term, Eni plans to increase its natural gas sales from the 4.2 BCM level recorded in 2005.
Iberian Peninsula
Portugal Eni operates on the Portuguese market through Galp Energia (Eni’s interest 33.34%). On December 29, 2005, Eni, Amorim Energia (a privately held Portuguese company in which Sonangol, the national oil company of Angola, holds a minority stake) and Rede Electrica Nacional (REN) entered an eight year long shareholders agreement for the joint management of Galp Energia (Galp). The agreement came in force on March 29, 2006 after the occurrence of all the suspensive conditions, among which: (i) the authorization of the European Commission issued on March 24, 2006; (ii) the purchase on March 28, 2006 of a 1% stake in Galp by Caixa (a primary Portuguese financial institution) which also entered the shareholder agreement of December 2005; and (iii) the change in the powers of the Portuguese State in Galp (golden share) resulting from the approval by Galp’s Shareholders’ Meeting held on March 29, 2006 of new by-laws consistent with the agreement between Eni, Amorim Energia, REN and Caixa. At the present date shareholders of Galp are: Eni (33.34%), the Portuguese State (17.711%), Parpublica (12.293%), REN (18.30%), Amorim Energia (13.312%), Iberdrola (4%), Caixa Geral de Depositos (1%), Setgas (0.044%).
Key guidelines of the agreement are as follows: (i) the establishment of a new set of corporate governance rules setting, among others, percentages of share capital voting rights necessary to make relevant decisions; (ii) an industrial plan targeting the achievement of a leading market position in natural gas, refining and petroleum products marketing in the Iberian Peninsula, an increase in the weight of upstream activities in Galp’s asset portfolio and access to the Portuguese electricity sector; (iii) placement of part of the stake held by the Portuguese State in Galp through an initial public offering by year end of 2006; (iv) spin-off of certain regulated asset of Galp (natural gas transport network, storage sites and the Sines LNG regasification plant) ideally by the end of 2006; those assets are agreed to be sold to REN; (v) transfer of REN’s stake in Galp to Amorim Energia within an 18 month period from the effective date of the agreement; and (vi) a five year lock in period.
This agreement replaces the pre-existing agreement between Eni and the Portuguese State.
In 2005 Galp sold about 1.56 BCM of gas to approximately 820,000 customers and managed a high, medium and low pressure network covering about 11,700 kilometers. The assets of Galp include among other things two import infrastructures: the Transmaghreb pipeline and the Sines LNG regasification plant. Following the entry into force of the new agreement, these transport and regasification infrastructures are expected to be spun off.
Spain Eni operates on the Spanish market through the Unión Fenosa Gas group (Eni’s interest 50%, the remaining 50% being held by Unión Fenosa SA), which is active in natural gas supply and sales to final users and to power generation companies. In 2005 natural gas sales of Unión Fenosa Gas amounted to 1.52 BCM. Unión Fenosa Gas is active in LNG through an 80% interest in a liquefaction plant with a capacity of over 7 BCM/y, located at Damietta on the Egyptian coast, that started operations in January 2005, and through a 7.36% interest in a liquefaction plant under construction in Oman, completed in 2005. In addition, it holds an 18.9% and a 42.5% interest in the El Ferrol and Sagunto regasification plants under construction, managed by the Reganosa and Saggas companies. The Sagunto plant is expected to start operations between 2006 and 2007.
In the medium term, Eni plans to increase its natural gas sales from the 5.3 BCM level recorded in 2005.
Turkey Blue Stream Eni and Gazprom hold equal shares in Blue Stream Pipeline Company BV, which operates the Blue Stream transport system, that links the Russian (Dzhubga) to the Turkish (Samsun) coast of the Black Sea. In November 2005 the first section of the compressor station at Dzhubga on the Russian coast of the Black Sea started operating. This station is made up of three turbocompressors and three turbogenerators and will allow to increase volumes transported. The gasline transports natural gas produced in Russia which is sold jointly by Eni and Gazprom in Turkey to the Turkish company Botas under a long-term contract. In 2005 volumes transported and sold in Turkey amounted to 5.14 BCM of natural gas (50% of which were Eni’s share) corresponding to an 18% market share. Volumes transported and marketed will increase progressively in future years and are targeted to about 16 BCM/y (8 billion net to Eni) in 2010.
France In July 2005 Eni signed a long term agreement with French company EDF for the supply of 860 mmCM/y of natural gas starting in October 2006.
Upgrading of the international transport network Eni has defined a program for the upgrade of transport gaslines from Algeria and Russia. Eni plans to increase the transport capacity of the TTPC gasline from Algeria by 6.5 BCM/y, with a 3.2 BCM starting on April 1, 2008 and an additional 3.3 BCM increase starting on October 1, 2008 with an expected expenditure of euro 345 million. A corresponding capacity on the TMPC downstream gasline is already available. The first section of the upgrade was assigned to third parties in November 2005.
Eni plans to upgrade the transport capacity of the TAG gasline from Russia by 6.5 BCM/y with a 3.2 BCM increase starting on October 1, 2008 and an additional 3.3 BCM increase starting on April 1, 2009 with an expected expenditure of euro 275 million. The first section of the upgrade was assigned to third parties in February 2006. In addition, the upgrade related to the build-up of the fourth import contract from Russia is nearly completed (up 4 BCM from 2007).
Considering also the full capacity from 2006 of the Greenstream gasline from Libya (8 BCM/y) and the upgrade underway of the TAG gasline in the light of the build-up of the fourth import contract from Russia (up 4 BCM/y from 2007), from 2009 a total of about 25 BCM/y of new import capacity are expected be available for the Italian market. Except for the 4 BCM/y of the Russian contract, 14.4 BCM of this new capacity have already been sold to third parties and a further 6.6 BCM/y are expected to be sold under open bidding procedures.
Libya Eni’s Gas & Power segment purchase 80% of the natural gas production of the Libyan natural gas producing field of Wafa and Bahr Essalam operated by Eni (with a 50% interest). The share of production belonging to the Libyan partner National Oil Company is purchased under a long term supply contract with a 24 year term. When the two fields achieve full production in 2006, production plateau volume are expected to be 10 BCM/y of which 8 BCM/y will be purchased by Eni’s Gas & Power segment and imported to Italy via the Greeenstream gasline. These volumes are sold to Italian third party importers under long term supply contracts with a 24 year term and delivery point at Gela in Sicily. The remaining 2 BCM/y natural gas availability from production is expected to be sold on the Libyan market by the two partners.
LNG
Eni is a party in various initiatives in the area of LNG. What follows is a description of the major initiatives.
United States On August 1, 2005, Eni signed an agreement with the U.S. company Cameron LNG LLC (belonging to the Sempra Energy group) to purchase a share of the regasification capacity of the Cameron liquefied natural gas terminal under construction in Louisiana expected to be completed in 2008-2009. The share of regasification capacity purchased amounts to 6 BCM/y for a period of 20 years, which corresponds to about 40% of the overall initial capacity of the terminal (15.5 BCM/y). This transaction will enable Eni to sell part of its natural gas reserves from North African and Nigerian fields in the United States.
Egypt In January 2005, the first LNG shipment was made from the Damietta liquefaction plant (Eni’s interest 40% through its 50% interest in Unión Fenosa Gas) that is targeted to produce about 7 BCM/y. The partners in the project (Unión Fenosa Gas, the Egyptian company EGAS and oil producers Eni and BP) have planned an expansion of the plant consisting in the construction of a second train with the same capacity of the first one with expected capital expenditure amounting to approximately $1.5 billion and start-up in 2009. Eni will supply about 3 BCM/y of natural gas to the first train for twenty years. Further volumes will be supplied to the second train under an intent protocol signed in March 2005 with the Egyptian Government.
Spain Eni holds a 9.5% and a 21.25% interest in the El Ferrol and Sagunto regasification plants under construction and expected to start operations between 2006 and 2007. Eni’s share of regasification capacity amounts to 1.8 BCM/y.
Other Developments
Agreement between Eni and Gazprom/Gazexport
In October 2005 Eni and Gazprom agreed to promote a new set of agreements aimed at widening their cooperation agreeing also to cease a previous agreement signed in May 2005. Negotiations are underway.
Sale of the water business
In March 2005, after receiving the authorization of the Italian Antitrust Authority, Italgas divested its majority interest (67.05%) in Società Azionaria per la Condotta di Acque Potabili to Amga SpA and Smat SpA for a cash consideration of euro 85 million (euro 15.57 per share). In May 2005, after receiving the authorization of the Italian Antitrust Authority, Italgas divested its 100% interest in Acquedotto Vesuviano SpA to Gori SpA for a cash consideration of euro 20 million. The above transactions are part of Eni’s strategy of concentrating its resources in its core natural gas business.
Purchase of Siciliana Gas
In May 2006 Eni purchased a 50% interest of Siciliana Gas SpA for a cash outlay of euro 98 million. The Italian Antitrust Authority approved the transaction on February 1, 2006. With this purchase Eni becomes the sole owner of Siciliana Gas SpA and through this company also of 100% of Siciliana Gas Vendite SpA. Siciliana Gas SpA has been operating in Sicily since 1979 and holds the rights for the distribution of gas to 76 Sicilian municipalities, including Agrigento, Enna, Trapani and Gela (of these 70 concessions are operating) through a 2,600-kilometer long network and with 186 employees. It owns Siciliana Gas Vendite SpA operating in the sale of natural gas to end users with approximately 215,000 customers and sales volumes of about 190 mmCM/y and 50 employees.
Toscana Energia SpA
On January 24, 2006, Eni, Italgas and the local authorities partners of Fiorentina Gas SpA and Toscana Gas SpA signed a framework agreement for developing an alliance in the area of natural gas distribution and sale. As part of the agreement, the partners incorporated Toscana Energia SpA (Eni’s interest 48.7% the remaining 51.3% interest being held by municipalities and local banks) to which they contributed in kind their interests in Fiorentina Gas and Toscana Gas. These two companies operate in natural gas distribution to 97 municipalities through a 7,900-kilometer long network serving 1.6 million customers. They will be merged in Toscana Energia within two years under the framework agreement. The local authority partners will play a role of strategic guidance and control, while Italgas is the industrial partner and has operating and management responsibilities. The agreement provides also for the establishment of a regional sales company (600,000 customers, 1.1 BCM sold in 147 Tuscan municipalities) under Eni’s control, through the merger of Toscana Gas Clienti SpA (Eni’s interest 46.1% through Italgas) and Fiorentina Gas Clienti SpA (Eni’s interest 100%).
Electricity Generation
Eni, through EniPower, is one of the major operators in electricity generation on the Italian market. Operating since 2000, EniPower owns power stations located at Eni’s sites in Brindisi, Ferrera Erbognone, Livorno, Mantova, Ravenna, Ferrara and Taranto with installed capacity in operation of approximately 4.5 gigawatt at December 31, 2005 (3.3 gigawatt in 2004).
In 2005, Eni sold 27.56 terawatthours of electricity, of which about 22.77 were produced by EniPower, corresponding to over 5% of the Italian market, and 10.66 million tonnes of steam. Approximately 57% of sales were directed to end users, 28% to the Electricity Exchange, 8% to GRTN/Terna (under CIP 6/92 contracts and imbalances in input) and 7% to wholesalers. All the steam produced was sold to end users.
Eni is completing a plan for expanding its electricity generation capacity targeting in 2009 an installed capacity of 5.5 gigawatt with production amounting to 30 terawatthours from 2008, corresponding to over 10% of electricity generated in Italy at that date. Planned expenditure amounts to euro 2.4 billion, of which euro 1.8 billion is already expensed.
High efficiency, low environmental impact, reduced expenditure and construction times are the main features of these plants, which show interesting profitability prospects due to the expected increase in demand for electricity and the ability to operate in co-generation (combined electricity and steam generation). The co-generation mode has been acknowledged by the Authority for Electricity and Gas aswhich determines the methods for calculating tariffs and fixing the return on capital employed. This business, therefore, presents a production mode that entails priority onlow risk and a steady cash generation profile.
Distribution activities are conducted under concession agreements whereby local public administrations award the national dispatching network andservice of gas distribution to companies. According to Legislative Decree No. 164/2000, the exemptionaward of the service has to take place by competitive bid from the purchaseend of "green certificates"8.
Eni estimates that with the same amount of energy (electricity and heat) produced, EniPower power stationsa transition period no later than December 31, 2012. Future concessions will reduce emissions of carbon dioxide by approximately 11 million tonnes, as compared to emissions caused by conventional power stations.
EniPowerlast no more than twelve years. Eni intends to become a cost leader in the Italian electricity industry thanks to the high technology contentdevelop its market and optimal sizeimprove efficiency and quality of the plants it is building. When fully operational in 2008, consumption of natural gas of Eni’s plants is expected to reach over 6 BCM/y, supplied by Eni.services rendered.
Power Generation | |||||||
2003 | 2004 | 2005 | |||||
Purchases | ||||||||
Natural gas | (mmCM) | 940 | 2,617 | 4,384 | ||||
Other fuels | (thousand tonnes of oil equivalent) | 847 | 695 | 563 | ||||
Sales | ||||||||
Electricity production sold | (terawatthour) | 5.55 | 13.85 | 22.77 | ||||
Electricity trading | (terawatthour) | 3.10 | 3.10 | 4.79 | ||||
Steam | (thousand tonnes) | 9,303 | 10,040 | 10,660 |
Distribution activity in Italy | 2006 | 2007 | 2008 | |||
Volumes distributed | (BCM) | 7.54 | 7.44 | 7.63 | ||||
- on behalf of Eni | 6.90 | 6.39 | 6.33 | |||||
- on behalf of third parties | 0.64 | 1.05 | 1.30 | |||||
Installed network | (km) | 48,724 | 48,746 | 49,410 | ||||
Active meters | (No. of users) | 5,550,700 | 5,598,677 | 5,676,056 | ||||
Municipalities served | (No.) | 1,317 | 1,318 | 1,320 |
The developmentFor the next four years Eni defined a capital expenditures plan has been completed at all sites except for Ferrara (Eni’s interest 51%), where in partnership with Swiss company EGL AG construction is underway of two new 390 megawatt combined cycle units which will bring installed capacity to 840 megawatt with startup expected in 2007.
Ferrera Erbognone On May 14, 2004 the combined cycle power station was inaugurated, the first one in Italy after the opening up of the electric market. This power station has an installed capacity of approximately 1,030 megawatt articulated in three combined cycle units, twoeuro 1 billion for the development/upgrade of them with approximately 390 megawatt capacity are fired with natural gas,its distribution networks and their technological upgrade.
Storage
Following the third one with approximately 250 megawatt capacity is fired in part with natural gas100% divestment of Stogit to Snam Rete Gas that was approved by Eni’s Board of Directors and complemented with refinery gas obtained from the gasification of tar from visbreaking from Eni’s nearby Sannazzaro de’ Burgondi refinery.
Ravenna Two new combined cycle 390 megawatt units started operations in 2004. Added to the existing 190 megawatt, the power station’s installed capacity reached approximately 970 megawatt.
Brindisi Three new combined cycle 390 megawatt units, two of which started operations in 2005, the last is expected to start operationclose by mid 2009 (for details on this deal see "Significant Business and Portfolio Developments" above), from 2009 the results of the storage business conducted in Italy described in the second half of 2006. When fully operationalExploration & Production section will be reported within the power station will haveGas & Power segment, under the "Regulated Business". The storage gas business in Italy is a totalfully-regulated activity which returns are preset by the Italian Authority for Electricity and Gas. Italian regulated storage services are provided through eight storage fields, with a modulation capacity of approximately 1,320 megawatt, including already existing amounts. The completion8.6 BCM.
In addition to storage activities conducted in Italy, Eni, through its Gas & Power segment, engages in certain gas storage activities in Europe. Particularly, the Company is developing a storage facility in the UK section of the power station is expected betweenNorth Sea following the end of 2005 and the second quarter of 2006.
Mantova Two new combined cycle 390 megawatt units started operations in 2005 with full operation in early 2006. The power station will have a total installed capacity to approximately 840 megawatt. This power station will provide steam for heating purposes delivered to Mantova’s urban network through a remote heating system.
Ferrara EniPower owns 51%acquisition of the shareHewett Unit where certain depleted fields will be converted to gas storage deposits (for further detailed information see "Item 4 – Exploration & Production" above). The expected capital expenditure program for this project amounts to euro 0.7 billion with expected start-up in 2011. The storage capacity
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will be located to complement Eni’s production, sales and trading activities in Europe and will further enhance the flexibility of Società EniPower Ferrara (SEF)Eni’s portfolio in partnership with EGL Swiss. SEF startedserving the constructionmain markets. Eni considers the development of two new combined cycle units withgas storage facilities as a core element of the gas business. Gas storage capacity provides flexibility to match gas demand in peak periods, thereby contributing to the optimization of 390 megawatt each whichthe gas supply portfolio. The activity of gas storage in the UK is de-regulated and results from this project will bring total installed capacity at Ferrara to 840 megawatt. Operations are expected to start in 2007. In 2004, some 80 megawatt of capacity were purchased.
be reported within the "Marketing business".
Capital
ExpenditureExpenditures
See "Item 5 – Liquidity and Capital Resources – Capital ExpenditureExpenditures by Segment".
Refining & Marketing
Eni is engagedEni’s Refining & Marketing segment engages in refining and the sale of refined products, mainly in Italycrude oil and the rest of Europe.
In the refining business, Eni plans to strengthen the competitive positioning of its refining system by increasing the primary refining capacity and conversion capacity and implementing actions to improve flexibility of refineries. Eni’s objectives are optimization of processed feedstocks, adjustment of the slate of refined products to the evolution of demand and strengthening of the degree of integration with Eni’s upstream activities. Eni’s strategy in its refining business is based on the following assumptions regarding trends in demand and the trading environment: (i) an expected worldwide decline in gasoline consumption in favor of diesel fuel, in connection with the expected evolution of the car fleet towards an increasingly high spread of diesel engine cars; (ii) the progressive substitution of fuel oil with natural gas in Italy; (iii) a further increase in worldwide differential between light and heavy crudes that favors high conversion capacity refineries; and (iv) the implementation of European fuel specifications as concerns quality standards of fuels.
In the marketing of refined products Eni plans to strengthen its competitive positioning in Italy and in a number of European markets. Based on public data, Eni is the main operator in the markets for refining and marketing of refined products in Italy. Eni’s refining and marketing operations are efficiently integrated and supported by restructuring and upgrading its distribution network and implementing ana full set of logistic assets. Refining know-how, strong market acceptance of the brand, the ability to develop innovative marketing strategy, the key elements of which are expected to be an offer of high quality fuels, and differentiated promotional initiatives intendedthe integration with upstream operations represent Eni’s principal competitive advantages. Eni’s key medium-term target is to support customer loyalty. enhance the profitability of its downstream oil business and to reduce the cash requirements of the business by applying tight financial discipline on capital expenditures.
The strategic guidelines to attain this target are:
• | to improve profitability and qualitative standards of the Italian retail network; and | |
• | to pursue higher levels of operational efficiency. |
In the restnext four years the implementation of Europe, Eni intendsthese strategies will be supported by a capital expenditure program of approximately euro 2.8 billion that will be directed to develop or strengthen itsupgrade Eni’s most efficient and profitable refineries and improve the quality standards of Eni’s retail operations, in particular in Italy, expanding activities for the supply of non oil products and developing the market share in certain geographic areas where it can obtain logisticalselected European markets. Efficiency improvement actions will be directed to all activities targeting control of operating costs and operating synergies and exploit its Agip brand. Eni plans to grow sales volumes buying, leasing and building well equipped and high throughput services stations and by launching marketing campaigns aimed at consolidating the perceptionimprovement of the Agip brand in target markets.energy efficiency.
The matters regarding future plans discussed in this section and elsewhere herein are forward-looking statements that involve risks and uncertainties that could cause the actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties include difficulties in obtaining approvals from relevant Antitrust Authorities and developments in the relevant market.
Supply and Trading
In 2005,2008, a total of 66.48 million tonnes57.91 mmtonnes of oilcrude were purchased (67.05by the Company’s Refining & Marketing segment (59.56 mmtonnes in 2004)2007), of which 37.30 million tonnes were29.71 mmtonnes from Eni’s Exploration & Production segment9, 14.85 million tonnessegment. Volumes amounting to 16.11 mmtonnes were purchased under long-term supply contracts with producing countries, and 14.33 million tonneswhile 12.09 mmtonnes were purchased on the spot market. Some 24%Approximately 29% of oilcrude purchased in 2008 came from West Africa, 19% from European and Asian Russia, 29% from North Africa, 17% from countries of the former Soviet Union, 16%14% from the Middle East, 14% from the North Sea 7%and 6% from Italy and 3% from other areas. Some 31.07 million tonnesItaly.
Approximately 26 mmtonnes of crude purchased in 2008 were resold, representing an increase of 1.32 million tonnes over 2004, up 4.1%.0.7% from 2007. In addition, 3.58 million tonnes3.39 mmtonnes of intermediate products were purchased (3.10(3.59 mmtonnes in 2004)2007) to be used as feedstocksfeedstock in conversion plants and 16.21 million tonnes17.42 mmtonnes of refined products (18.8(16.14 mmtonnes in 2004) sold as a2007) were purchased to complement to own production on the Italian market (4.97 million tonnes) and on markets outside Italy (11.24 million tonnes).
availability.
Refining
Eni is engaged in theEni’s refining business in Italy and owns interests in refineries in Germany and the Czech Republic with asystem has total refiningrefinery capacity (balanced with conversion capacity) of approximately 35 million tonnes36.8 mmtonnes (equal to 701737 KBBL/d) and a conversion index of which 30.2 million tonnes57.6%. The conversion index is a measure of a refinery complexity. The higher the index, the wider is the spectrum of crude qualities and feedstock that a refinery is able to process thus enabling it to benefit from the cost economies associated with the fact that certain qualities of crude (particularly the heavy ones) trade at discount with reference to the light crude benchmark Brent. Eni’s five 100-percent owned refineries have balanced capacity is located in Italy.
Eni’s refining systemof 27.2 mmtonnes (equal to 544 KBBL/d), with a 60.3% conversion rate. In 2008, refinery throughputs in Italy is made up of five wholly owned refineries and a 50% interest inoutside Italy were 35.84 mmtonnes.
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In the Milazzo refinery in Sicily.next four years, Eni plans to selectively upgrade its refining system by increasing complexity and flexibility of plants, using Eni’s proprietary EST technology and achieving a conversion index of 65% in Europe (71% in Italy). The completion of construction of three new hydrocrackers at Sannazzaro, Taranto and Bayernoil is scheduled in 2009. Middle distillate yields are expected to come in at 45% from 40% in 2008 (more than double of gasoline yields) and equity crude volumes processed to increase from 19.0% to 19.6%. Improvement in operations as result of investment upgrading and efficiency actions targeting operating costs are expected to enable refining operations to lower the break-even level with respect to 2008. This means that in the medium-term our refineries will achieve positive results in a capital expenditure forlower refining margin scenario compared to 2008. Management’s projections about the next four years amountingbreak-even level also take into account the operating expenses required to comply with environmental rules on the emissions of carbon dioxide (CO2) which amounted to approximately euro 2.4 billion (including logistics activities)17 million in 2008 as the business emissions are higher than the entitled allowance based on the criteria of Law Decree No. 216/2006 which implemented in Italy the EU Directive on Emission Trading (see below under the section Environmental Regulation). Main actions planned are:Management expects that the Refining & Marketing business will incur a level of operating expenses similar to 2008 in the next four-years to comply with the outlined environmental regulation.
In the next four-years period, Eni’s investment plans are designed to take advantage of certain expected market trends in the refining industry:
(i) | a significant reduction in European demand for gasoline, despite the diffusion of new gasoline fuelled engines with efficiency levels in consumption comparable to those of diesel fuel, is expected in the medium-term, while consumption of diesel fuel is expected to grow driven by the continuing renewal of the car fleet; | |
(ii) | a slowdown in the demand for gasoline on the U.S. market is expected, reflecting the negative economic scenario, the diffusion of more energy efficient car models and the increasingly widespread use of bio-fuels; | |
(iii) | implementation of increasingly tight environmental regulations in Europe will require significant capital expenditures for refinery upgrading; |
(iv) | demand for fuel oil is expected to decrease due to increasingly strong competition from natural gas in firing power plants; and |
(v) | opportunities will arise to monetize heavy crudes and non conventional resources by applying advanced refinery technologies. |
Eni’s refinery capital projects will be designed to: (i) an increase of primary processing andplant conversion capacity also in lightview of boosting middle distillate yields and extracting value from equity crude; (ii) improve refinery flexibility in order to optimize processed feedstock and capture market opportunities arising from an expected increased availability of equity oilheavy/sour crudes that are typically discounted in the Mediterranean area; (ii) an improvement of refinery flexibility with the aim of optimizing feedstock processing; andmarketplace; (iii) the production ofproduce fuels in line with demand and in compliance withproduct specifications provided for increasingly tight European environmental standards. Eni also aims at achieving a higher degreestandards; and (iv) enhance operational efficiency of vertical integration with Eni’s upstream and downstream activities, increasing intake processing of equity crudes and feedstock volumes transferred to petrochemicals activities.refineries, including energy efficiency gains.
The table below sets forth certain statistics regarding Eni’s refineries at December 31, 2005.2008.
Location | Ownership Interest | Conversion | Balanced Primary Distillation Capacity (2) | |||||
Wholly-owned refineries: | ||||||||
Sannazzaro | Lombardy | 100.0% | 42.5 | 160,000 | ||||
Gela | Sicily | 100.0% | 140.1 | 100,000 | ||||
Taranto | Apulia | 100.0% | 71.6 | 90,000 | ||||
Livorno | Tuscany | 100.0% | 11.4 | 84,000 | ||||
Porto Marghera | Veneto | 100.0% | 22.8 | 70,000 | ||||
59.2 | 504,000 | |||||||
Partly-owned refineries: | ||||||||
Milazzo | Sicily | 50.0% | 69.6 | 80,000 | ||||
Ingolstadt/Vohburg/Neustadt | Germany | 20.0% | 32.6 | 52,000 | ||||
Schwedt | Germany | 8.0% | 41.8 | 19,000 | ||||
Kralupy/Litvinov | Czech Rep. | 16.3% | 28.8 | 26,000 | ||||
49.7 | 177,000 | |||||||
Total Eni | 56.7 | 681,000 | ||||||
Refining system in 2008
Ownership share | Distillation capacity | Distillation capacity | Primary balanced refining capacity | Conversion index (1) | Fluid catalytic cracking - FCC (2) | Residue conversion | Go-Finer | Mild Hydro- cracking/ Hydro- cracking | Visbreaking/ Thermal Cracking | Coking | Distillation capacity utilization rate | Balanced refining capacity utilization rate | ||||||||||||||
Wholly owned refineries | 685 | 685 | 544 | 60.3 | 69 | 22 | 37 | 29 | 89 | 47 | 82 | 94 | ||||||||||||||
Italy | ||||||||||||||||||||||||||
Sannazzaro | 100 | 223 | 223 | 170 | 50.9 | 34 | 29 | 29 | 73 | 99 | ||||||||||||||||
Gela | 100 | 129 | 129 | 100 | 144.8 | 35 | 37 | 47 | 82 | 101 | ||||||||||||||||
Taranto | 100 | 120 | 120 | 110 | 64.6 | 22 | 38 | 97 | 79 | |||||||||||||||||
Livorno | 100 | 106 | 106 | 84 | 11.4 | 88 | 102 | |||||||||||||||||||
Porto Marghera | 100 | 107 | 107 | 80 | 20.2 | 22 | 79 | 86 | ||||||||||||||||||
Partially owned refineries (3) | 874 | 245 | 193 | 49.7 | 163 | 25 | 99 | 27 | 77 | 98 | ||||||||||||||||
Italy | ||||||||||||||||||||||||||
Milazzo | 50 | 248 | 124 | 80 | 73.0 | 41 | 25 | 32 | 68 | 99 | ||||||||||||||||
Germany | ||||||||||||||||||||||||||
Ingolstadt/Vohburg/ Neustadt (Bayernoil) | 20 | 215 | 43 | 41 | 34.0 | 49 | 43 | 93 | 95 | |||||||||||||||||
Schwedt | 8.33 | 231 | 19 | 19 | 41.8 | 49 | 27 | 98 | 102 | |||||||||||||||||
Czech Republic | ||||||||||||||||||||||||||
Kralupy e Litvinov (Ceska Rafinerska) | 32.4 | 180 | 59 | 53 | 29.6 | 24 | 24 | 86 | 80 | |||||||||||||||||
Total refineries | 1,559 | 930 | 737 | 57.6 | 232 | 47 | 37 | 128 | 116 | 47 | 81 | 95 | ||||||||||||||
(1) | i | Stated in fluid catalytic cracking equivalent/topping (% by weight), based on 100% of balanced primary distillation capacity. |
(2) | i | |
(3) | i | Capacity of |
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Italy
Eni’s refining system in Italy is composed of five 100-percent owned refineries and a 50% interest in the Milazzo refinery in Sicily. Each of Eni’s Italian refineries in Italy has an operationaloperating and strategic setup adequatefeatures that aim at maximizing the value associated to maximizing return on assets and monetizing itsthe asset structure, the geographic locationpositioning with respect to end markets and the integration with Eni’s other Eni business segments.activities.
The Sannazzaro, with a refinery has balanced primary refining capacity of 160170 KBBL/d and an equivalenta conversion index of 42.5%50.9%. It is one of the most efficient refineries in Europe. Located in the South-West of the Po Valley, at the confluence of the rivers Po and Ticino, it supplies mainly markets in north-westernNorth-Western Italy and Switzerland. The high degree of flexibility of this refinery allows it to process a wide range of oil from Russia, Africa and Asia, CPC Blend crude oil from the Caspian Sea carried through the CPC pipeline and oil from Eni’s nearby Villafortuna field.feedstock. From a logistical standpoint this refinery is located along the route of the Central Europe Pipeline, which links the Genova terminal with French speaking Switzerland. This refinery contains two primary distillation plants and a vacuum unit.
The conversion plants are:relevant facilities, including three desulphurization units. Conversion is obtained through a fluid catalytic cracker (FCC), an HDCKa mild hydrocracker (HdCK) middle distillate conversion unit and a visbreaking thermal conversion unit two catalytic reforming plants, an isomerization plant, an alchilation plant, an MTBE plant and three desulphurization plants for middle distillates and one for naphtha from cracking. In 2005 works continued forwith a gasification facility using the completion of the tar (heavyheavy residue from visbreaking) gasification plant that willvisbreaking (tar) to produce syngas that will be used to firefeed the nearby EniPower power stationplant at Ferrera Erbognone. In the medium term Eni plans to upgrade theA significant conversion capacity of this refinery; planned actions include: (i) construction ofand flexibility upgrading program is ongoing in order to transform it in a world class plant. In particular, a new hydrocracking unit with a processing capacity of 28,000 BBL/28 KBBL/d which will allowis under construction with expected start-up in 2009. In addition Eni plans to develop a conversion plant employing the Eni Slurry Technology with a 23 KBBL/d capacity for the productionprocessing of one million tonnes/y ofextra heavy crude with high sulphur content producing high quality diesel fuel with low sulphur content;middle distillates, in particular gasoil, and (ii) construction of a new deasphalting unit with a capacity of 18,000 BBL/d for the separation of vacuum residues of asphaltenes with the aim of obtaining additional feedstocks for the cracking plant. Works are expected to be completed by 2008. Capital expenditure for this project is expected to amount to euro 400 million.
Gela, with a balanced primary refining capacity of 100 KBBL/d and an equivalent conversion index of 140.1% represents an upstream integrated pole with the production of heavy crudes obtained from nearby Eni fields offshore and onshore Sicily, while downstream it is integrated with Eni’s nearby petrochemical plants. Located on the Southern coast of Sicily, it manufactures fuels for automotive use and residential heating purposes, as well as petrochemical feedstocks. Its high conversion level allows it to minimizereducing the yield of fuel oil and semi-finished products. Besides its primary distillation plants, this refinery contains the following plants: an FCC unit with advanced technology for the conversion of low grade feedstocks and two coking plants for the vacuum conversion of heavy residues. All these plants are integrated in order to process heavy residues and feedstocks and manufacture valuable products. This refinery also contains two reforming units, an alchilation unit, an MTBE unit and plants for desulphurization of gasoil and naphtha from cracking. The power plantzero. Start-up of this refinery also contains modern residue and exhaust fume treatment plants which allow the complex to comply with the most exacting environmental standards.facility is scheduled in 2012.
The Taranto, with a refinery has balanced primary refining capacity of 110 KBBL/d and an equivalenta conversion index of 60.5%,64.6%. This refinery can process a wide range of crudescrude and semi-finished products with great operational flexibility.other feedstock. It mainly produces fuels for automotive use and residential heating purposes for the South-EasternSouthern Italian markets. Besides its primary distillation plants this refinery contains a flash vacuum unit,and relevant facilities, including two plantsunits for the desulphurization of middle distillates, a reforming unit, an isomerization unit and conversions plants such as:this refinery contains a two-stage thermal conversion plant (visbreaking/thermal cracking) and an RHU conversion plant that allows to convertfor the conversion of high sulphur content residues into valuable products and catalytic cracking feedstocks. It processes most of the oil produced in Eni’s Val d’Agri fields carried to Taranto through the Monte Alpi pipeline; in 2005pipeline (in 2008 a total of 3.1 million tonnes2.3 mmtonnes of this oil were processed. In the medium-term Eni plans a relevant upgrade of this refinery by means of two projects for increasing primary refining and conversion capacity with an expected expenditure of euro 800 million. The first project entails construction of aprocessed). A new 17,000 BBL/d capacity hydrocracking plant with a new associated hydrogen unit for the manufacture of approximately 0.6 million tonnes/y of high quality diesel fuel. Works are expected to be completed by 2008. The second project entails the construction of: (i) a new topping plant with a capacity of 4 million tonnes/y with an associated vacuum unit with a capacity of 2.5 million tonnes/y; (ii)17 KBBL/d is expected to start production in 2009. Eni’s plan to upgrade the conversion capacity of this refinery will enable to extract value from fuel oil and other semifinished products currently exported.
Gela, with a new plantbalanced refining capacity of 100 KBBL/d and a conversion index of 144.8%, this refinery located on the Southern coast of Sicily is highly integrated with upstream operations as it processes heavy crude produced from nearby Eni fields offshore and onshore Sicily. In addition, it is integrated downstream as it supplies large volumes of petrochemical feedstock to Eni’s in site petrochemical plants. The refinery also manufactures fuels for automotive use and petrochemical feedstock. Its high conversion level is ensured by an FCC unit with go-finer for the desulphurizationupgrading of middle distillatesfeedstocks and two coking plants for the vacuum conversion of heavy residues. The power plant of this refinery also contains modern residue and exhaust fume treatment plants which allow full compliance with a capacitythe tightest environmental standards. An upgrade of 2.3 million tonnes/y;the Gela refinery is underway by means of an upgrade of its power plant, through the revamping of its boilers, aimed at increasing profitability by exploiting the synergies deriving from the integration of refining and (iii) ancillary units and utilities with other logistical assets. Works are expected to be completed by 2009.power generation.
Livorno, with a balanced primary refining capacity of 84 KBBL/d and an equivalenta conversion index of 11.4%, manufactures mainly gasolines,gasoline, fuel oil for bunkering specialty products and lubricant bases. Besides its primary distillation plants, this refinery contains a vacuum unit, a reformer unit, an isomerization plant, two desulphurization units for middle distillates and two lubricant manufacturing lines. Its pipeline links with the local harbor and with the Florence storage sites allow the Livorno facility to operate with great efficiency as concerns reception,by means of two pipelines optimizes intake, handling and distribution of products.
Porto Marghera, with a balanced primary refining capacity of 7080 KBBL/d and an equivalenta conversion index of 22.8%20.2%, producesthis refinery supplies mainly gasolines and other light products for the supply of markets in North-Eastern Italy Austria, Slovenia and Croatia.Austria. Besides its primary distillation plants, this refinery contains a reformer plant, an isomerization plant, two gasoil desulphurization units and a two-stage thermal conversion plant (visbreaking/thermal cracking) for increasingdesigned to increase yields of valuable products.
Rest of Europe
In Germany Eni holds an 8.3% interest in the Schwedt refinery and a 20% interest in Bayernoil,, an integrated industrial pole includingthat included the Ingolstadt, Vohburg and Neustadt refineries. Eni’s refining capacity in Germany amounts to approximately 70 KBBL/d. Eni’s share of the production of the three integrated refineries and of the Schwedt refinery isd mainly used to supply Eni’s distribution network in Bavaria and Eastern Germany. In 2008 the restructuring of the whole complex was completed with the closing down and divestment of the Ingolstadt site, the construction of a new hydrocracker with a capacity of approximately 2 mmtonnes/y (40 KBBL/d), the revamping other assets (in particular a reformer and a hydrofiner) and the shutting-down of a topping unit in Neustadt. The project completed in 2008 with start-up in the second half of December and production expected in 2009, aimed at increasing middle distillate yields and reducing the production of gasoline.
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Eni holds a 16.33% interest32.4% stake in Ceska Rafinerska, which owns and managesincludes two refineries, Kralupy and Litvinov, in the Czech Republic. Eni’s overall balanced conversionshare of refining capacity from this refinery amounts to 27about 53 KBBL/d.
In addition, with its 33.34% interest in Galp, with the Portuguese group Amorim Eni is evaluatingjointly controls two refineries in Portugal: a restructuring of the Bayernoil refinery pole and the purchase of interestssmall one in strategically located refineries aimed at supporting growth in its distribution activitiesPorto specialized in the restmanufacture of Europe.
On March 2, 2005 Eni sold to Erg SpA its 28% interestlubricant bases and a larger and more complex one in Erg Raffinerie Mediterranee SpA and Erg Nuove Centrali SpA, anticipating the maturity (November 2006) of Eni’s put option, provided for by the agreement for the restructuring of the Priolo site signed on October 1, 2002. In order to guarantee the continuity of existing supply contracts of oil-based feedstocks to Polimeri Europa, Eni’s processing contract for about 2 million tonnes/y of crude oil retains validity until December 31, 2006 at the conditions (yields and payments) reflecting the current setup of the refinery.Sines integrated with petrochemicals.
The table below sets forth Eni’s petroleum products availability figures for the periods indicated.
Petroleum products availability | 2001 | 2002 | 2003 | 2004 | 2005 | |||||
Availability of refined products | 2006 | 2007 | 2008 | |||
|
Italy | |||||||||||||||
Products processed in wholly-owned refineries | 32.24 | 30.09 | 25.09 | 26.75 | 27.34 | ||||||||||
Products processed for third parties | (1.45 | ) | (1.88 | ) | (1.72 | ) | (1.50 | ) | (1.70 | ) | |||||
Products processed in non owned refineries | 5.92 | 6.27 | 8.43 | 8.10 | 8.58 | ||||||||||
Products consumed and lost | (1.95 | ) | (1.91 | ) | (1.64 | ) | (1.64 | ) | (1.87 | ) | |||||
Products available | 34.76 | 32.57 | 30.16 | 31.71 | 32.35 | ||||||||||
Purchases of finished products and change in inventories | 5.19 | 6.27 | 5.86 | 5.07 | 4.85 | ||||||||||
Finished products transferred to foreign cycle | (4.96 | ) | (5.56 | ) | (5.19 | ) | (5.03 | ) | (5.82 | ) | |||||
Consumption for power production | (1.74 | ) | (1.07 | ) | (1.06 | ) | (1.09 | ) | |||||||
Sales | 34.99 | 31.54 | 29.76 | 30.69 | 30.29 | ||||||||||
Outside Italy | |||||||||||||||
Products available | 3.02 | 2.98 | 3.36 | 4.04 | 4.33 | ||||||||||
Purchases and change in inventories | 10.27 | 12.16 | 12.12 | 13.78 | 11.19 | ||||||||||
Finished products transferred from Italian cycle | 4.96 | 5.56 | 5.19 | 5.03 | 5.82 | ||||||||||
Sales | 18.25 | 20.70 | 20.67 | 22.85 | 21.34 | ||||||||||
Sales in Italy and outside Italy | 53.24 | 52.24 | 50.43 | 53.54 | 51.63 |
Italy | |||||||||
Refinery throughputs | |||||||||
At wholly-owned refineries | 27.17 | 27.79 | 25.59 | ||||||
Less input on account of third parties | (1.53 | ) | (1.76 | ) | (1.37 | ) | |||
At affiliates refineries | 7.71 | 6.42 | 6.17 | ||||||
Refinery throughputs on own account | 33.35 | 32.45 | 30.39 | ||||||
Consumption and losses | (1.45 | ) | (1.63 | ) | (1.61 | ) | |||
Products available for sale | 31.90 | 30.82 | 28.78 | ||||||
Purchases of refined products and change in inventories | 4.45 | 2.16 | 2.56 | ||||||
Products transferred to operations outside Italy | (4.82 | ) | (3.80 | ) | (1.42 | ) | |||
Consumption for power generation | (1.10 | ) | (1.13 | ) | (1.00 | ) | |||
Sales of products | 30.43 | 28.05 | 28.92 | ||||||
Outside Italy | |||||||||
Refinery throughputs on own account | 4.69 | 4.70 | 5.45 | ||||||
Consumption and losses | (0.32 | ) | (0.31 | ) | (0.25 | ) | |||
Products available for sale | 4.37 | 4.39 | 5.20 | ||||||
Purchases of finished products and change in inventories | 11.51 | 13.91 | 15.14 | ||||||
Products transferred from Italian operations | 4.82 | 3.80 | 1.42 | ||||||
Sales of products | 20.70 | 22.10 | 21.76 | ||||||
Refinery throughputs on own account | 38.04 | 37.15 | 35.84 | ||||||
of which: total equity crude input | 12.50 | 9.29 | 6.98 | ||||||
Total sales of refined products in Italy and outside Italy | 51.13 | 50.15 | 50.68 | ||||||
Crude oil sales | 30.66 | 25.82 | 26.00 | ||||||
TOTAL SALES | 81.79 | 75.97 | 76.68 |
In 20052008, refining throughputs on own account in Italy and outside Italy were 38.79 million tonnes, up 1.10 million tonnes35.84 mmtonnes, down 1.31 mmtonnes from 2004,2007, or 2.9%3.5%. Volumes processed in Italy decreased by 2.06 mmtonnes, or 6.3%, due to planned and unplanned refinery downtime at the Taranto, Porto Marghera and Gela plants, as well as lower volumes at the Livorno refinery due to a challenging refining environment in the first half of the year. The increase recorded outside Italy (up 750 ktonnes) was mainly due to higher processingcapacity entitlements at Eni’sCeska Rafinerska following the purchase of an additional ownership interest made in 2007, partly offset by the lower volumes in Germany.
Total throughputs in wholly-owned refineries (25.59 mmtonnes) decreased 2.20 mmtonnes, down 7.9%, from 2007. Approximately 21.5% of Taranto, Livorno and Sannazzaro also as a result of fewer maintenance standstills. These increases were offset in partvolumes processed crude was supplied by the impact of the maintenance standstill of the Porto Marghera refinery and lower processing at the Gela refinery following the damage caused by a sea storm to the docking infrastructure in December 2004. Processing on third party refineries increased, especially at the Milazzo refinery (Eni’s interest 50%). Total throughputs on wholly owned refineries (27.34 million tonnes) increased 0.59 million tonnes from 2004, or 2.2%, with full balanced capacity utilization. About 32.3% of all oil processed came from Eni’s Exploration & Production segment (33%(30.2% in 2004).
2007) representing a 8.7% decrease from 2007, equivalent to a lower volume of 2.3 mmtonnes due to lower equity crude availability from Russia, Libya and Italy.
Logistics
Eni is engageda primary operator in storage and transport of petroleum products in Italy. ItsItaly with its logistical integrated infrastructure consistsconsisting of 1221 directly managed storage sites and a network of petroleum product pipelines.pipelines for the sale and storage of refined products, LPG and crude.
Eni holds interests in five companiesjoint entities established by partnering the major Italian operators in the oil businessoperators. These are located in Vado Ligure-Genova (Petrolig), Arquata Scrivia (Sigemi), Venice (Petroven), Ravenna (Petra) and Trieste (DCT) aimedand aim at reducing logistic costs, and increasing efficiency and providing integrated services to customers.efficiency.
ForEni operates in the transport of oil and refined productsproducts: (i) on land Eni also ownsthrough a pipeline network integrated byof leased and owned pipelines extending over 3,2103,019 kilometers of these 1,513(1,447 kilometers are wholly owned. Transportowned by sea of crudesEni); and refined products takes place(ii) by sea through spot and long-term lease contracts of tanker ships. For the secondarySecondary distribution of refined products to retail and wholesale markets is effected through third parties who also own their means of transportation, in some instances with minority participation of Eni.
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In 2008 Eni ownsimplemented a fleetnew hub model made up of tanker trucksfive main areas in Italy and manages third-party owned vehicles.
including all Eni also holdslogistic assets among which refining ones. This new model aims to enhance the efficiency of logistic operations by: (i) centralizing the handling of products flows on a 65% interestsingle platform enabling real time monitoring; and (ii) introducing more efficient operating modes in Costiero Gas Livorno, a company that operates an underground storage facility in Livornothe collection and delivery of orders with the capacity to store 45,000 CMaim of propane.reducing unit delivery costs.
In the medium-term Eni intends to upgrade the integration of its logistics system with its refining system. Eni plans to upgrade logistical assets in order to support the development of the Taranto refinery. In particular Eni is evaluating the construction of a new storage site for gasoils and gasolines in Campania and of three pipelines, of which two linking the refinery to the new storage site and one for the transport of virgin naphtha to the Eni’s Brindisi petrochemical complex. Eni intends also to optimize its logistics system by rationalizing its structures in Lazio, the Po Valley and the Naples area.
Distribution andMarketing
Eni markets a wide range of refined petroleum products, primarily in Italy, through an extensive direct salesoperated network of service stations, franchises and other distribution systems.
The table below sets forth Eni’s sales of refined products by distribution channel for the periods indicated.
Oil products sales in Italy and outside Italy | 2001 | 2002 | 2003 | 2004 | 2005 | |||||
Oil products sales in Italy and outside Italy | 2006 | 2007 | 2008 | |||
|
Italy | ||||||||||
Retail sales | 11.64 | 11.14 | 10.99 | 10.93 | 10.05 | |||||
Wholesale sales | 11.24 | 10.64 | 10.35 | 10.70 | 10.48 | |||||
22.88 | 21.78 | 21.34 | 21.63 | 20.53 | ||||||
Petrochemicals | 4.23 | 3.82 | 2.79 | 3.05 | 3.07 | |||||
Other sales (1) | 7.88 | 5.94 | 5.63 | 6.01 | 6.69 | |||||
Sales in Italy | 34.99 | 31.54 | 29.76 | 30.69 | 30.29 | |||||
Outside Italy | ||||||||||
Retail sales rest of Europe | 2.47 | 2.57 | 3.02 | 3.47 | 3.67 | |||||
Retail sales Africa and Brazil | 1.71 | 1.44 | 1.18 | 0.57 | ||||||
4.18 | 4.01 | 4.20 | 4.04 | 3.67 | ||||||
Wholesale sales | 5.55 | 5.65 | 6.01 | 5.30 | 4.50 | |||||
9.73 | 9.66 | 10.21 | 9.34 | 8.17 | ||||||
Other sales (1) | 8.52 | 11.04 | 10.46 | 13.51 | 13.17 | |||||
Sales outside Italy | 18.25 | 20.70 | 20.67 | 22.85 | 21.34 | |||||
53.24 | 52.24 | 50.43 | 53.54 | 51.63 |
Italy | ||||||
Retail marketing | 8.66 | 8.62 | 8.81 | |||
Wholesale marketing | 11.74 | 11.09 | 11.15 | |||
20.40 | 19.71 | 19.96 | ||||
Petrochemicals | 2.61 | 1.93 | 1.70 | |||
Other sales | 7.42 | 6.41 | 7.26 | |||
Total | 30.43 | 28.05 | 28.92 | |||
Outside Italy | ||||||
Retail marketing | 3.82 | 4.03 | 3.86 | |||
Wholesale marketing | 4.60 | 4.96 | 5.38 | |||
8.42 | 8.99 | 9.24 | ||||
Other sales | 12.28 | 13.11 | 12.52 | |||
Total | 20.70 | 22.10 | 21.76 | |||
51.13 | 50.15 | 50.68 |
In 20052008, sales volumes of refined products (51.63 million tonnes)(50.68 mmtonnes) were down 1.91 million tonnes over 2004,up 0.53 mmtonnes from 2007, or 6.2%1.1%, mainly due to the divestment of activities in Brazil carried out in August 2004 (down 1.51 million tonnes), lower saleslarger volumes to oil companies and traders outside Italy (down 305,000 tonnes), declining wholesale sales volumes in Italy (220,000 tonnes) and lower salessold on the Agip branded network (130,000 tonnes) related to lower domestic consumption. These declines were offset in part by higher retail and wholesale salesmarkets in Italy and wholesale market in the rest of Europe (357,000 tonnes) due to the implementationEurope.
Retail Sales in Italy
Eni markets refined products in Italy trough its Agip-branded network of Eni’s development strategy.
Following the approval of the Italian Antitrust Authority granted on August 25, 2005, on September 6, 2005 Eni divested 100% of the share capital of Italiana Petroli ("IP") to api - anonima petroli italiana SpA for euro 190 million. IP is engaged in the retail marketingoperated service stations. In 2008, volumes of refined products through a lease concession network of approximately 2,900 units, under the IP brand. As part of the sale transaction, the parties signed: (i) a five year fuel supply agreement under which IP will purchase from Eni agreed amounts of fuel each year; and (ii) an 18 month long agreement for the supply of lubricants and fuel transport services from storage sites to service stations. Consequently the impact on sales of the divestment of IP was marginal since the lower volumes soldmarketed on the retail marketItalian network (8.81 mmtonnes) were substantially offset by the volumes supplied to the divested company under the contracts in force.
Retail Marketing
Retail sales in Italy
Sales of refined products on retail markets in Italy in 2005 (10.05 million tonnes) were down 0.88 million tonnesup 190 ktonnes from 2004,2007, or 8.1%2.2%, reflecting primarily the divestment of IP. Sales volumes on the Agip branded network (8.76 million tonnes) were down 130,000 tonnes, or 1.5%, due mainly todespite a declinedecrease recorded in domestic consumption, (down 1.9%)mainly due to marketing activities ("Iperself" promotional campaign – see below – and fidelity programs) that sustained market share growth from 29.2% to 30.6%; market share is computed as ratio of Eni’s sales volumes to national consumption as published in particular ofnational statistics. Higher sales mainly related to gasoil sales while gasoline sales registered a decrease.
The average throughput per service station measured on gasoline and LPG, whose effects were offset in part bygasoil sales was 2,470 kliters, an improved performance. Market shareincrease of the Agip network was26 kliters from 2007, or up 0.2 percentage points from 29.5 to 29.7%. Average throughput of gasoline and diesel fuel of the Agip network was substantially unchanged at 2,509,000 liters (down 0.7% from 2004)1.1%.
At December 31, 2005,2008, Eni’s retail distribution network in Italy consisted of 4,3494,409 service stations, 2,895 less19 more than at December 31, 2004 (7,244 service station), due to the divestment of IP (2,915 service stations). Excluding the effect of IP’s sale, the Agip branded network increased by 20 units2007, resulting from December 31, 2004 as a result of the positive balance of acquisitions/releases of lease concessions (27(32 units), the opening of 12 new service stations and an increase in highway(7 units), partly offset by the closing of service stations (twowith low throughput (19 units) and the release of one service stations) offsetstation under highway concession.
In 2008, fuel sales of the Blu line – high performance and low environmental impact fuel – declined due to sensitivity of demand to prices of these products in partan environment of economic downturn and high fuel prices on average. Sales of BluDiesel and its reformulated version BluDieselTech amounted to 583 ktonnes (677 mmliters), declining by 152 ktonnes from 2007 and represented 10.6% of gasoil sales on Eni’s retail network. At year end, service stations marketing BluDiesel totaled 4,095 units (4,065 in 2007) covering to approximately 93% of Eni’s network. Retail sales of BluSuper amounted to 78 ktonnes (91 mmliters) and decreased by 20 ktonnes from 2007 and covered 2.5% of gasoline sales on Eni’s retail network. At year end, service stations marketing BluSuper totaled 2,631 units (2,565 at December 31, 2007), covering approximately 60% of Eni’s network.
66
In 2007, Eni launched its "You&Agip" promotional campaign, lasting 3 years, designed to boost customer loyalty to the closureAgip brand. This three-year long initiative offers prizes to customers in proportion to purchases of 21 less efficientfuels and convenience items at Agip’s stores as well as at the ones of certain partners to the program. At every purchase of fuels or convenience items, clients are granted a proportional amount of points that are credited to a fidelity card. Clients are able to decide how to accumulate points and when to spend them. At December 31, 2008, the number of customers that actively used the card in the period amounted to over about 4 million. The average number of cards active each month was over 3 million. Volumes of fuel marketed under this initiative represented 46% of total volumes marketed on Eni’s service stations.stations joining the program, and 44% of overall volumes marketed on Eni’s network.
In 2008, Eni revamped its "Iperself" promotional campaign, which provides a euro 0.06 discount per liter to customers purchasing fuel in self service stations during closing hours. Supported by other marketing activities this initiative allowed to achieve higher sales and a higher market share in retail marketing even in an environment characterized by a steep decline in domestic demand.
Eni plans to strengthen its competitive positioning in Italy by restructuring and upgrading its distribution networkoutlets. Management targets to expand its share in the domestic retail market for fuels by 2012 from the 2008 level of 30.6%. Planned actions are designed to attain European standards of quality and implementing anservices, leveraging on innovative marketing initiatives aimed at strengthening clients loyalty, develop the key elements of which are expected to be an offer of premium products and develop innovative non oil formats. A strong focus will be devoted to pursue high quality fuels and differentiated promotional initiatives intended to support customer loyalty.
In 2005 sales volumeslevels of BluDiesel – a high performance diesel fuel virtually sulphur free that improves engine performance – on the Agip branded network amounted to nearly 1 billion liters, a decline of about 13% from 2004 due mainly to the increasingly high sensitivity of consumers to the price of fuels in light of the increase in prices in the year. At 2005 year end service stations selling BluDiesel were over 4,000 (about 3,900 at 2004 year end) corresponding to approximately 92% of Eni’s Agip branded network.
In 2004, Eni started to sell the new BluSuper gasoline, which guarantees better engine performance and efficiency and reduces polluting emissions, due to its high antidetonating power resulting from a higher octane number (98 as compared to 95 of ordinary gasolines) and its lack of sulfur. BluSuper complements BluDiesel, sold since 2002, and is part of Eni’s strategy to improve the quality of its fuels, anticipating their compliance with EU regulations (mandatory from 2009) and targeting its offer to customers’ requirements, leveraging on Eni’s integrated refining-logistics-distribution system. In 2005 sales volumes of BluSuper amounted to 150 million liters. At 2005 year end Agip branded service stations selling BluSuper were 1,719 (about 1,000 at 2004 year end) corresponding to approximately 39% of Eni’s network.
In January 2006 Eni started to sell "Ad-Blue®", a water solution containing urea for technologically advanced heavy duty vehicles. This additive, compatible with the new characteristics of most trucks built in Europe reacts with exhaust gases thus reducing emissions and consumption and improving engine performance.
In 2005, Eni continued its Do-It-Yourself campaign which allowed customers accessing self-service outlets provided with an electronic card to obtain price discounts or gifts in proportion to the total amount of purchased fuel, plus a bonus for the most loyal customers and long-distance drivers. At year end the number of cards distributed exceeded 3.8 million; turnover on cards increased by 9% from 2004. The amount of fuel purchased with these cards was about 37% of all fuel sold on Agip branded service stations.
Eni also continued its AgipMaxi promotional initiative addressed to truck drivers who purchase diesel fuel at the approximately 800 Agip branded service stations participating in the program. Active fidelity cards were over 38,000.
The improvement in the quality of service to customers led to a further expansion of the automation process of the domestic network. At December 31, 2005 nearly all Agip branded service stations were provided with a corporate credit card system.
In 2005, Eni continued the development of the European Multicard Routex paying card addressed to professional transport (transporters and car fleets) with sales of 1.414 billion liters (up 3.4% over 2004), while the number of customers provided with this card increased by about 5,000 to 50,000 users at year end. Multicard is used internationally and is part of the international Routex consortium, made up of four oil companies.
Eni continued the development of its non-oil retail activities aimed at promoting the development of its network in line with European standards, such as the diffusion of self-service facilities, high-tech car care systems, and services to customers in particular 1,000 café and fast food outlets as well as innovative commercial outlets. To this end Eni owns master franchisor rights with exclusive rights for the oil sector for some international brands of the restaurant and catering sector.
In 2005, a total of 80 new affiliates were added to the AgipCafè® branded outlets launched in 2003, and by year end 287 franchises were active, while 10 new convenience stores under the "SpazioAgip" brand name were opened, thus reaching a total of 19 locations. Also 45 new car-wash facilities were opened at Agip branded service stations, thus reaching a total of 685 units.operating efficiency. In the next four years, Eni intends to continueplans capital expenditures for the developmentconstruction, upgrading and restructuring of its non oil activitiesplants, increasing the number of "Iperself" and fully automated service stations as well as complying with applicable environmental standards and regulations.
By 2012, Eni expects to provide 70%achieve volumes of its Agip brandedapproximately 11.4 billion liters sold (approximately 11 billion liters in 2008) with a retail network with these structures by 2009 (50% in 2005).composed of 4,451 service stations, of which 75% owned.
Retail
sales outside ItalySales in the Rest of Europe
At December 31, 2005,In recent years, Eni’s retail distribution networkstrategy focused on selectively growing its market share, particularly by means of acquiring valuable assets in European areas with interesting profitability perspectives. In implementing its growth strategy, Eni has been able to leverage on synergies ensured by the proximity of these markets to Eni’s production and logistic facilities, brand awareness and economies of scale.
Growth outside Italy was represented by service stations locatedwill continue to be selective and aimed at strengthening Eni’s competitive position in key markets.
In 2008 retail sales of refined products marketed in the rest of Europe (3.86 mmtonnes) was down 170 ktonnes from 2007, or 4.2%, mainly in South-Central Germany, Spain, South-Western France, Austria, Switzerland,the Iberian Peninsula, due to the disposal of downstream activities to Galp, and in Germany. These decreases were partly offset by higher sales in the Czech Republic, and Hungary and Slovakia due to the purchase of assets made in the fourth quarter of 2007.
At December 31, 2008, Eni’s retail network in the rest of Europe consisted of 1,9331,547 units, a decrease of 503 units from December 31, 2007 (2,050 service stations). The network evolution was as follows: (i) divestment of 371 service stations 37 more than at December 31, 2004, due in particularthe Iberian Peninsula to the acquisitionGalp; (ii) a negative balance of lease concessions in Spain, France and Germany. Throughput peracquisition/releases of leased service station averaged 2,427,000 liters, up 1.4% from 2004. Saleswas recorded (down 135 units), with positive changes in Hungary and Switzerland and negative ones in Germany; (iii) 17 low throughput service stations were closed; (iv) purchased 15 service stations; and (v) opened 5 new outlets. Average throughput (2,577 kliters) was substantially in line with 2007.
The key markets of refined products totalled 3.67 million tonnes, representing an increaseEni’s presence are: Austria with a 7% market share, Hungary with 11.6%, Czech Republic with 11.4%, Slovakia with 10.2%, Switzerland with 6.4% and Germany with a 3.8% on national base. These market shares were calculated by Eni based on public data on national consumption and Eni’s sales volumes.
In 2008, management divested its retail and wholesale marketing activities in the Iberian Peninsula following the exercise of 0.20 million tonnes over 2004, up 5.8%a call option on part of Eni’s partner Galp Energia (Eni’s share being 33.34%), reflecting higher sales mainly in Germany, Spainaccordance with the agreement signed in December 2005 by the majority shareholders of Galp Energia (in addition to Eni, Amorim Energia and Caixa Geral de Depósitos). The transaction includes 371 Agip-branded service stations.
Growth outside Italy will continue to be selective and aimed at strengthening Eni’s competitive position in key markets, based on the Czech Republic.
competitive advantage provided by synergies in supply, logistics and brand awareness. Eni intends to develop or strengthenfocus on the German, Swiss and Austrian markets where it targets to increase its market share in certain geographic areas where it can obtain logistical and operating synergies and exploit its Agip brand. Eni plans to grow sales volumes buying, leasing and building well equipped and high throughput services stations and by launching marketing campaigns aimed at consolidating the perception of the Agip brand in target markets.share.
Non oil activities outside Italyin the rest of Europe are performedcarried out under the "CiaoAgip"CiaoAgip brand name in 1,1201,032 service stations, of these 330325 are in Germany and 163168 in France representing 58%with a 67% coverage of the whole Agip branded network outside Italy (97% when calculating the percentage on alland a virtually complete coverage of owned service stations).
stations.
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Wholesale Marketing andOtherSalesbusinessesWholesale
Eni sells gasolinesmarkets gasoline and other fuels on the wholesale market in Italy, including diesel fuel for automotive use and for heating purposes, fuels for agricultural vehicles and for vessels gasolines and fuel oil. Major customers are wholesalers, theresellers, agricultural andusers, manufacturing industries, public utilities and transports. Agricultural customers and fishing fleets are supplied directly at 60 agricultural centers and 90 owned or leased marine fuel outlets.transports, as well as final users (transporters, condominiums, farmers, fishers, etc.).
Eni provides its customers with its experienceexpertise in the area of fuels with a wide range of products that cover all market requirements. Along with traditional products provided with the high quality Eni standard, there is also an innovative low environmental impact line, which includes AdvanceDiesel and Biodiesel (with very low content of hydrogen sulfide, particulates and carbon dioxide) especially targeted for heavy duty public and private transports.
Customer care and product distribution is providedsupported by a very widespread commercial and logistical organization presentpresence all over Italy and articulated in local salesmarketing offices aided byand a network of agents sales persons and concessionaires.
Eni also sells jet fuel directly at 38 airports, of which 27 areIn 2008 volumes marketed on the wholesale market in Italy, and marine fuel (bunkering) directly at 38 ports, of which 23 in Italy.
Sales on wholesale markets in Italy (10.48 million tonnes) were down 0.22 million tonnesapproximately 11.15 mmtonnes up 0.06 mmtonnes from 2004,2007, or 2.1%0.5%, mainly due to a declinereflecting an increase in domesticmarket bunker consumption on the and lower sales of fuel oil to the power generation segment, due to the progressive substitution of fuel oil with natural gas as feedstock for power plants.
sales. Sales volumes on wholesale markets outside Italy (4.50 million tonnes) declined by 0.80 million tonnes,were 4.82 mmtonnes, up approximately 430 ktonnes from 2007, or 15.1%9.8%, mainly due mainly to lower LPG sales resulting from the divestment of activities in Brazil, offset in part by higher salesgrowth in the restCzech and Swiss markets, offset by declines in Spain, Austria, France and Germany.
Eni also markets jet fuel directly at 46 airports, of Europe,which 27 in particularItaly. In 2008, these sales amounted to 2.4 mmtonnes (of which 1.9 mmtonnes in Central-Eastern Europe, while they declinedItaly).
Eni is active also in Germany and Spain.
the international market of bunkering, marketing marine fuel mainly in 40 ports, of which 23 are in Italy. In 2008 marine fuel sales were 2.4 mmtonnes (2.3 mmtonnes in Italy). Other sales (22.93 million tonnes) increased by 0.36 million tonnes, or 1.6%, due mainlywere 21.36 mmtonnes of which 19.66 mmtonnes referred to higher sales in Italy related to supplies to IP (up 650,000 tonnes) offset in part by lower sales to oil companies and traders, outside Italy (down 305,000 tonnes).
and 1.70 mmtonnes, supplies to the petrochemical sector.
Other Businesses
LPG
In Italy Eni is engagedleader in theLPG production, distributionmarketing and sale of LPG. In 2005 Eniwith 566 ktonnes sold 649,000 tonnes of LPG for heating and automotive use (under the Agip brand and wholesale), with equal to a 19%17.8% market share. An additional 400,000 tonnesAdditional 234 ktonnes of LPG were soldmarketed through other channels mainly to oil companies and traders.
LPG activities in Italy derive theirare supported by direct production, availability from 5 bottling plants and 4 owned storage sites, in addition to products from five Italian refineries and from imports receivedimported at the three coastal storage sites located in Livorno, Naples and Ravenna. Product availability and customer requirements are met also with 10 other owned plants/storage sites in Italy and 45 contracts for bottling and storage with third party facilities. Eni’s LPG sales network is organized over six sale areas with 3 direct sales offices, 21 agencies and 24 concessionaires. Products are sold also to over 150,000 customers owning small tanks, while the sale network of LPG bottles includes over 11,000 outlets. In the past few years LPG pipelines were developed and over 13,000 customers are served through direct links with 95 storage facilities.
Outside Italy Eni is also present in Ecuador with a 36.4% market share in 2005.
Lubricants
Eni operates eight7 (owned and co-owned) blending plants, in Italy, Europe, North and South America Africa and the Far East.
In Italy Eni is With a market leader in lubricants with the manufacturing of base oils and with awide range of products includingcomposed of over 650 different blends.blends, Eni masters international state-of-the-artstate of the-art know-how for the formulation of products for vehicles (engine oil, special fluids and transmission oils) and industries (lubricants for hydraulic systems, industrial machinery and metal processing).
In Italy Eni is leader in the manufacture and sale of lubricant bases. Base oils are manufactured primarily at Eni’sEni refinery in Livorno. Eni also owns two facilitiesone facility for the production of additives and solvents. solvents in Robassomero.
In 2005,2008, retail and wholesale sales in Italy amounted to 133,000 tonnes125 ktonnes with a 23.9%24.8% market share. Eni also sold approximately 5,000 tonnes5 ktonnes of special products (white oils, transformer oil and anti-freeze fluids).
Outside Italy sales amounted to approximately 139,000 tonnes,111 ktonnes, of these about 50% were registered in Europe (mainly Spain, Germany, the Netherlands and Spain)France).
Oxygenates
Eni, through its subsidiary Ecofuel (Eni’s interest 100%), sells aboutapproximately 2 million tonnes/mmtonnes/y of oxygenates mainly MTBE (9%ethers (approximately 10% of world demand) and methanol.methanol (approximately 1.5% of world demand). About 67%72% of products are manufactured in Italy in Eni’s plants in Ravenna, in Venezuela (in joint venture with Pequiven) and Saudi Arabia (in joint venture with Sabic), while the remaining 33%28% is bought from third parties. and resold.
In Venezuela2008 Eni plans to convert itsstarted distributing bio-ETBE on the Italian market in compliance with the new legislation indicating the minimum content of bio-fuels. Bio-ETBE is a kind of MTBE plants tothat gained a relevant position in the manufactureformulation of isoethane,gasoline in the European Union, due to the environmental problems posed by MTBE.
fact that it is produced from ethanol from agricultural crops and qualified as bio-component in the European directive on bio-fuels. World market for ETBE is currently limited to the European Union and Japan and in 2008 was estimated to amount to 2.2 mmtonnes.
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Capital
ExpenditureExpenditures
See "Item 5 – Liquidity and Capital Resources – Capital ExpenditureExpenditures by Segment".
Petrochemicals
Engineering & Construction
Eni operates in the businesses of olefinsengineering, construction and aromatics, basicdrilling both offshore and intermediate products, chlorine derivatives, polystyrene, elastomers and polyethylene. Its major production sites are located in Italy and Western Europe.
In 2005 sales of petrochemical products (5,376,000 tonnes) were up 189,000 tonnes, or 3.6% from 2004, reflecting primarily higher sales of intermediates (up 13%), olefins (up 8.8%) and aromatics (up 6%) related to positive demand, higher product availability and the fact that intermediate sales, in particular acetone and phenol, declined in the first quarter of 2004 following a standstill due to an accident at the Porto Torres dock. These increases were offset in part by a decline in: (i) elastomers (down 4.5%) related mainly to the standstill of the polychloroprene rubber plant in Champagnier, France; (ii) styrene (down 2.6%) related to standstills and shutdowns; and (iii) polyethylenes (down 2.3%) due to weak demand for LDPE and LLDPE.
At December 31, 2005, Eni’s sales network covered 17 countries, with Italy accounting for 51% of sales, the rest of Europe for 44% and the rest of the world for 5% (54%, 40% and 6%, respectively in 2004).
Production (7,282,000 tonnes) was up 164,000 tonnes from 2004, or 2.3%, in particular in basic petrochemicals. Nominal production capacity declined 1.8% from 2004 due mainly to revisions of the nominal capacity of the Gela cracker and the shutdown of the DMC and ABS plants in Ravenna. The average plant utilization rate calculated on nominal capacity was up 3 percentage points from 75.2 to 78.4 due mainly to fewer maintenance standstills.
About 35.8% of total production was directed to Eni’s own production cycle (36.7% in 2004). Oil-based feedstocks supplied by Eni’s Refining & Marketing segment covered 23% of requirements (22% in 2004).
The table below sets forth Eni’s main petrochemical products availabilityonshore for the periods indicated.
| |
2001 | 2002 (1) | 2003 (1) | 2004 | 2005 | |||||
|
Basic petrochemicals | 6,119 | 4,304 | 4,013 | 4,236 | 4,450 | ||||||||||
Styrene and elastomers | 1,537 | 1,538 | 1,635 | 1,606 | 1,523 | ||||||||||
Polyethylene | 84 | 1,274 | 1,259 | 1,276 | 1,309 | ||||||||||
Polyurethane | 91 | ||||||||||||||
7,831 | 7,116 | 6,907 | 7,118 | 7,282 | |||||||||||
Internal consumption | (3,185 | ) | (2,607 | ) | (2,651 | ) | (2,616 | ) | (2,606 | ) | |||||
Purchases and change in inventories | 588 | 984 | 1,010 | 685 | 700 | ||||||||||
Total products | 5,233 | 5,493 | 5,266 | 5,187 | 5,376 | ||||||||||
The table below sets forth Eni’s sales of main petrochemical products by volume for the periods indicated.
| |
2001 | 2002 (1) | 2003 (1) | 2004 | 2005 | |||||
|
Basic petrochemicals | 3,928 | 2,894 | 2,704 | 2,766 | 3,022 | |||||
Styrene and elastomers | 1,138 | 1,151 | 1,171 | 1,038 | 1,003 | |||||
Polyethylene | 84 | 1,448 | 1,391 | 1,383 | 1,351 | |||||
Polyurethane | 83 | |||||||||
Total sales | 5,233 | 5,493 | 5,266 | 5,187 | 5,376 | |||||
Basic petrochemicals
Sales of basic petrochemicals (3,022,000 tonnes) increased by 256,000 tonnes from 2004, up 9.3%, due to increases registered in all basic chemicals businesses.
In olefins (up 8.8%) sales of ethylene (up 10.7%), propylene (up 5.8%) and butadiene (up 33.6%) increased due to high demand from the Far East. In aromatics (up 6%) sales of the most remunerative products (paraxylene up 13.5% and metaxylene up 35.1%) increased supported by a particularly lively market. In intermediates (up 13%) phenol sales increased 16.7% and acetone sales increased 11.1% related to a positive trend in demand and the fact that in the first quarter of 2004 sales declined due to a standstill for an accident at the Porto Torres dock.
Basic petrochemical production (4,450,000 tonnes) increased by 214,000 tonnes from 2004 (up 5.1%) due to increases registered in all businesses (olefins up 3.8%, aromatics up 8.4%, intermediates up 7%).
Increased olefin production derived mainly from the Brindisi (up 19.9%), Dunkirk (up 12%) and Priolo (up 8.1%) crackers. Declines concerned Gela (down 26.7%) where only one line was active and Porto Marghera (down 13.2%) due to a planned maintenance standstill.
Styrene and elastomers
Styrene sales (581,000 tonnes) decreased by 16,000 tonnes from 2004, down 2.6%, due mainly to lower ABS/SAN availability (down 23.6%) related to the shutdown of the Ravenna plant in April 2005 and lower availability of products due to technical accidents caused by power cutoffs at the Mantova plant in the last quarter of 2005. This decline was offset in part by the 2.8% increase in expandable polystyrene sales pushed by the strong increase in demand especially in Eastern Europe, in particular for increased consumption in the segment of thermal insulation and industrial packaging.
Elastomer sales (422,000 tonnes) decreased by 19,000 tonnes from 2004, down 4.5%, due mainly to the standstill of the Champagnier plant (polychloroprene rubbers) and the decline in SBR (down 12.7%) and TPR (down 2.5%) rubber due to a decline in demand related to the crisis in the shoe manufacturing industry. These declines were offset in part by an increase in sales of EPR rubber (up 19.6%) and latex (up 7.5%), due to lively demand.
Production of styrene (1,048,000 tonnes) declined by 70,000 tonnes from 2004, due mainly to plant shutdowns and standstills.
Elastomers production (475,000 tonnes) decreased by 13,000 tonnes or 2.5%, due to plant standstills and a declining demand for SBR rubber (down 4.8%) and BR (down 4.2%), while demand for EPR rubber (up 13.7%) and latex (up 11%) increased in line with the increase in demand.
Polyethylene
Sales of polyethylene (1,351,000 tonnes) decreased by 32,000 tonnes from 2004, down 2.3%, due to a decline in demand for all products, in particular LDPE (down 3.4%) and LLDPE (down 1.9%), also due increasing competition from imported products.
Production (1,309,000 tonnes) increased by 33,000 tonnes or 2.6%, due mainly to increases in LLDPE (up 8%), due to the flexibility at the Brindisi plant that produced mainly LLDPE in its high pressure line, while HDPE production declined (down 6%).
Capital Expenditure
See "Item 5 – Liquidity and Capital Resources – Capital Expenditure by Segment".
Oilfield Services Construction and Engineering
Eni operates in oilfield services and constructionoil & gas industry through Saipem, a companysubsidiary listed on the Italian Stock Exchange (Eni’s interest is 43%), operating. Saipem boasts a strong position in the relevant market leveraging on technological and operational skills mainly in frontier areas, harsh environments and complex projects, as well as on engineering and project management capabilities and ownership or availability of necessary technologies and also on its integration with Snamprogetti. In spite of a weaker scenario in the oil industry worldwide and the uncertainty of the changed economic context, Saipem plans to continue consolidating its position in onshore and offshore markets, completing the expansion of its construction and drilling fleet.
Saipem plans to achieve these objectives implementing the following strategic guidelines: (i) to maximize the efficiency in all business areas with the aim in particular to maintain top execution and security standards, optimize the utilization rate of the fleet, preserve competitive supply costs and increase structure flexibility in order to mitigate the effects of negative business cycles; (ii) to consolidate the Company’s competitive position in large offshore and onshore drillingprojects for the development of hydrocarbon fields strengthening at the same time its market share in the strategic segments of deepwater, FPSO, heavy crude upgrading and gas monetization; (iii) to promote local content in terms of employment of local contractors and assets in strategic countries where large projects are carried out supporting the development of delocalized logistic hubs and construction yards when requested by clients in order to achieve a long-term consolidation of its market position in those countries; (iv) to leverage on the capacity to execute internally more phases of large projects on an EPC and LNG.
Eni, throughEPIC basis, pursuing better control of costs and terms of execution adapting with flexibility to clients’ needs, thus expanding the Company’s value proposition; and (v) to complete the expansion and revamping program of its subsidiary Snamprogetti (100% Eni), is engagedconstruction and drilling fleet in engineering and contractingorder to confirm the Company’s leading position in the areasegment of plants for hydrocarbon production, treatmentcomplex projects with high profitability.
Saipem expects to invest approximately euro 3.9 billion over the next four years to further expand the geographical reach and transport, foroperational features of its fleet as well as to support the liquefactionactivities related to the execution of projects in portfolio and treatmentthe acquisition of natural gas, for the conversion of heavy residues from conventional and non conventional crudes, for the chemical industry, for power generation, infrastructure and environmental protection.new orders.
Orders acquired in 20052008 amounted to euro 8,188 million. Approximately 89%13,860 million, of new orders acquired were represented by workthese projects to be performedcarried out outside Italy and 11% by work originated byrepresented 94%, while orders from Eni companies.companies amounted to 4% of the total. Order backlog was euro 9,96419,105 million at December 31, 20052008 (euro 8,52115,390 million at December 31, 2004)2007). Projects to be carried out outside Italy represented 88%98% of the total order backlog, while orders from Eni companies amounted to 7%13% of the total.
On February 24, 2006, Saipem agreed to purchase the entire share capital of Snamprogetti owned by Eni SpA. The transaction was closed on March 27, 2006. The integration of the companies will boost their role in the development of Eni’s oil & gas core business.
Orders acquired and order backlog | |||||||
2003 | 2004 | 2005 | |||||
Orders acquired | (million euro) | 5,876 | 5,784 | 8,188 | ||||
Oilfield Services Construction | 4,298 | 4,387 | 4,735 | |||||
Engineering | 1,578 | 1,397 | 3,453 | |||||
Originated by Eni companies | (%) | 11 | 14 | 11 | ||||
To be carried out outside Italy | (%) | 91 | 90 | 89 | ||||
Order backlog | (million euro) | 9,405 | 8,521 | 9,964 | ||||
Oilfield Services Construction | 5,225 | 5,306 | 5,513 | |||||
Engineering | 4,180 | 3,215 | 4,451 | |||||
Originated by Eni companies | (%) | 10 | 8 | 7 | ||||
To be carried out outside Italy | (%) | 81 | 84 | 88 |
2006 | 2007 | 2008 | ||||
Orders acquired and breakdown by business | (euro million) | 11,172 | 11,845 | 13,860 | ||||
Offshore construction | 3,681 | 3,496 | 4,381 | |||||
Onshore construction | 4,923 | 6,070 | 7,522 | |||||
Offshore drilling | 2,230 | 1,644 | 760 | |||||
Onshore drilling | 338 | 635 | 1,197 | |||||
Originated by Eni companies | (%) | 24 | 16 | 4 | ||||
To be carried out outside Italy | (%) | 91 | 95 | 94 | ||||
Order backlog and breakdown by business | (euro million) | 13,191 | 15,390 | 19,105 | ||||
Offshore construction | 4,283 | 4,215 | 4,682 | |||||
Onshore construction | 6,285 | 7,003 | 9,201 | |||||
Offshore drilling | 2,247 | 3,471 | 3,759 | |||||
Onshore drilling | 376 | 701 | 1,463 | |||||
Originated by Eni companies | (%) | 20 | 22 | 13 | ||||
To be carried out outside Italy | (%) | 90 | 95 | 98 |
Oilfield Services and ConstructionBusiness areasOffshore construction
Saipem intends to consolidate its competitive positioningis well positioned in the segmentmarket of large, offshore projects for the development of hydrocarbon fields and the construction of large export infrastructure by leveraging on its technological and operational skills, engineering and project management capabilities and ability to operate in complex environments. Leveraging on these assets, Saipem plans to address key success factors of the market represented by the ability to evaluate risks in the bidding phase, technological innovation, ability to manage efficiently the execution of projects by delocalizing support activities to low cost areas and enhancing local contents by employing local resources and creating decentralized logistical bases.
Saipem intends to develop its presence and enter the strategic segments of monetization of natural gas (GTL, LNG) and upgrading of heavy crudes by developing the required skills and resources mainly in the engineering and project management phases. It also plans to expand in the leased FPSO business and in floating LNG treatment systems for liquefaction and regasification of LNG.
Saipem intends to intensify efficiency improvement actions in all its activities, in particular by reducing supply and execution costs while maintaining a high utilization rate of equipment and improving its flexible structure in order to reduce the impact of possible negative cycles.
The most significant orders won in 2005 in oilfield services and construction were:
In the Offshore construction area: in West Africa: two turnkey contracts were awarded: (i) the first one for Total Upstream Nigeria for the installation and operation of underwater, umbilical and riser pipelines; and the construction of an unloading terminal, a mooring system for the FPSO vessel and the laying of a pipeline. Works will be carried out by the Saibos FDS and Saipem 3000 vessels; and (ii) the second one for Esso Exploration Angola Ltd for the engineering, procurement, construction and installation of subsea lines for the Marimba field development in Block 15; in Indonesia: two turnkey contracts for BP Berau Ltd for the construction of two platforms and the related underwater pipelines linking the Tangguh field with the gas liquefaction plant onshore; and in Thailand: a turn key contract for Thai Oil Public Company Ltd for the construction of unloading facilities to supply oil to a refinery in Sri Racha in the Gulf of Siam. Works will be performed in 2007, and the installation will be carried out by Castoro 8 vessel.
In the Leased FPSO area a contract for Petrobas for the conversion of an oil tanker into the new Vitoria FPSO vessel with a production capacity of 100,000 BBL/d and a storage capacity of 1,600,000 BBL for the development of the Golfinho 2 field offshore Brazil at a depth of 1,400 meters.
In the Offshore drilling area two contracts were acquired. The first one for Total Exploration and Production Angola, involving the deep water drillship Saipem 10000 for activities to be performed on the Rosa field for two years plus the option of a further two years. The second one for Burrullus Gas Company involves the renewal of contract for the semi-submersible Scarabeo 6 for three months in Egypt.
In the Liquefied Natural Gas area two contracts were awarded: (i) the first one, in association with Technip and Zachry, for the engineering and procurement of tanks for an LNG regassification terminal on the Quintana island in Texas; and (ii) the second one, in consortium with the Mexican company Gutsa, for the construction of infrastructure for the mooring and dry-docking of tankers at the Costa Azul in Mexico.
In the Onshore construction area two turnkey contracts were acquired: (i) the first one for Saudi Aramco to convert the existing East-West pipeline from oil to gas transport. It includes also fabrication, construction, installation and commissioning of new sections of East-West line and related facilities. Works will be performed in early 2008; and (ii) the second one for Sonatrach-Sonelgaz for the engineering, procurement and construction of a gas-fired power station.
In the Onshore drilling a contract for the North Caspian Sea consortium for drilling activities in Block D of the Kashagan field utilizing two drillings rigs owned by the client. Activities will be performed for five years.
Business areas
OFFSHORE CONSTRUCTIONSaipem is able to execute large projects for the development of offshore hydrocarbon fields by integratingleveraging on its technical and operational skills, supported by a technologically advancedtechnologically-advanced fleet, and the ability to operate in complex environments, withand engineering and project management capabilities acquired on the marketplace over recent years. Saipem intends to consolidate its market (among which Bouygues Offshore, Moss Maritime, Petromarine, Idpe)share strengthening its EPIC oriented
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business model and leveraging on its satisfactory long-term relationships with the major oil companies and National Oil Companies ("NOCs"). The services thatHigher levels of efficiency and flexibility are expected to be achieved by outsourcing the management of EPC projects and non core engineering activities in cost efficient areas reaching economies of scale in its engineering hubs and employing local resources in contexts where this represents a competitive advantage, directly managing offshore construction processes through the creation of a large construction yard and revamping/upgrading its construction fleet. Over the next years, Saipem can currently provide to its customers can cover the main market segments such as: (i) floating production units (FPU); (ii) underwater developments; (iii) fixed platforms; and (iv) pipelines. Management expects the demand for these services to increase in particularwill invest in the FPU and underwater development areas, due to the increased shareupgrading of deep water development projects. Key areas are West Africa, Asia Pacific, and Latin America.
Saipem operates in the area of deep offshore hydrocarbonits fleet, by building a pipelayer, a field development by means of the construction and installation of FPUs. Among FPUs, FPSO vessels offer the main interesting market prospects due to their storage capacity, which allows to develop fields remote from transport infrastructure, and to their versatility, which allows at the end of the useful life of a field to relocate vessels on other fields thus expanding their useful life.
Saipem is engaged in the segment of underwater development in the deep offshore, which includes laying of small diameter pipes, umbilical lines, risersship for deepwater and other sub sea structures thanks to the design ability of its engineering structures and the installation capacity of its vessels. Saipem is also engaged in the segment of design, procurement and installation of fixed platforms, in particular in the segment of ultra heavy lifting, thanks to the technical features of its vessels. Saipem is able to execute the laying of large diameter long distance subsea pipelines and transport infrastructure both in conventional and deep offshore.supporting assets for offshore activity.
ItsSaipem’s offshore construction fleet is made up of 2528 vessels and 45 robotized vehicles able to perform advanced subseasub-sea operations. Among itsIts major vessels are: (i) the Saipem 7000 semi-submersible dynamic positioned vessel, with dynamic positioning system, with 14,000 tonnes14 ktonnes of lift capacity, (the highest of this kind in the world), capable to lay pipelines using the J-lay technique to the maximum depth of 3,000 meters. This vessel has been used to lay the Blue Stream pipeline in the waters of the Black Sea at the record depth of 2,150 meters; (ii) the Saibos FDS for the development of underwater fields in dynamic positioning, provided with cranes lifting up to 600 tonnes and a system for j-layJ-lay pipe laying to a depth of 2,000 meters; (iii) the Castoro 6 semi-submersible vessel, capable of laying pipes in waters up to 1,000 meters deep; (iv) the Saipem 3000 multifunction vessel for the development of hydrocarbon fields, derived from the transformation of the Maxita that canable to lay rigid and flexible pipes and is provided with cranes capable of lifting over 2,000 tonnes;2 ktonnes; and (v) the Semac semisubmersiblesemi-submersible vessel used for large diameter underwater pipe laying. The fleet also includes also remotely operated vehicles (ROV), highly sophisticated and advanced underwater robots capable of performing complex interventions in deep waters.
OFFSHORE DRILLING
The most significant orders awarded in 2008 in Offshore construction were: (i) a contract on behalf of Nord Stream AG for laying the Nord Stream gas pipeline constituted by a twin natural gas pipeline that will link Russia and Germany across the Baltic Sea. Overall capacity of about 55 BCM/y will be reached when both lines are operational; (ii) an EPIC contract on behalf of Elf Petroleum Nigeria Ltd (Total) for the construction and installation of underwater pipelines and related facilities connecting the Usain offshore oil field to an FPSO unit (Floating Production Storage Offloading); and (iii) a contract on behalf of OLT Offshore LNG Toscana for the FSRU (Floating, Storage and Regasification Unit) of the LNG terminal of Livorno through the conversion of a gas carrier ship moored offshore Tuscany into a floating, storage and regasification unit. The FSRU will have a storage capacity of 137 KCM of LNG and a production capacity of 3.75 BCM/y of natural gas.
Onshore construction
Saipem operates in the construction of plants for hydrocarbon production (extraction, separation, stabilization, collection of hydrocarbons, water injection) and treatment (removal and recovery of sulphur dioxide and carbon dioxide, fractioning of gaseous liquids, recovery of condensates) and in the installation of large onshore transport systems (pipelines, compression stations, terminals). Saipem intends to capture opportunities arising from the market, both in the plants and pipeline segment, by leveraging on its solid competitive position in the strategic areas of Middle East/Caspian Area, North and West Africa and Russia. In 2008, leveraging on its distinctive know-how in the gas monetization segment, Saipem has been awarded for the first time the role of main contractor for the construction of a large gas liquefaction plant in Algeria, asserting its reputation as an integrated player, capable of managing large and complex turnkey projects in the high tech market of LNG.
The most significant orders awarded in 2008 in Onshore construction were: (i) an EPC contract on behalf of Sonatrach for the construction of a single-train gas liquefaction plant, with a capacity of 4.7 mmtonnes/y of LNG near the Algerian city of Arzew; (ii) an EPC contract on behalf of Saudi Aramco for the construction of three gas/oil separation trains (GOSP, Gas Oil Separation Process) as part of the Manifa Field Development Program to increase the production capacity of Saudi Arabia by 900 BBL/d; (iii) an EPC contract on behalf of Sonatrach for the construction of three LPG production trains with a total capacity of 8 mmCM/d as part of the development of the Hassi Messaoud field in Algeria; and (iv) an EPC contract on behalf of Total Exploration and Production Nigeria Ltd for the upgrade of OML 58 Block through the revamping of the existing Flow Station and the construction of a new gas treatment train in order to increase gas production to 17.5 mmCM/d.
Offshore drilling
Saipem is the only engineering and construction contractor that provides also offshore and onshore drilling services to oil companiescompanies. In the offshore drilling segment Saipem mainly operates in key areas such as West Africa, the North Sea, and the Mediterranean Sea it operatesand Middle East and boasts significant market positions in the most complex segments of deep and ultra deep offshore. Management expects demand forultra-deep offshore, drilling services to increase steeply in the short to medium-term according to the exploration plans announced by the major oil companies. Management expects unit tariffs to be supported by a shortage of supply. West Africa is confirmed as one of the most attractive areas. Saipem can seize these market opportunities by leveraging on the outstanding technical features of its equipment. Itsdrilling platforms and vessels, capable of drilling exploration and development wells at a maximum depth of 9,200 meters. In order to better meet industry demands, Saipem is finalizing an upgrading program of its drilling fleet providing it with state-of-art rigs to enhance its role as high quality player capable of operating also in complex and harsh environments. In particular, over the next four years Saipem intends to build: (i) the Scarabeo 8 and 9, new generation semi-submersible platforms, to be employed in drilling operations in the deep-water of the Barents Sea and in the Gulf of Mexico, respectively, initially on behalf of Eni’s upstream activity; (ii) the Perro Negro 6 jack-up to conduct operations in shallow waters; and (iii) the new S12000 drilling ship to perform operations in West Africa on behalf of Total. In parallel, significant investments are planned to keep up the production capacity of other fleet equipment (upgrade equipment to the characteristics of projects or to clients needs and purchase of support equipment).
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Saipem’s offshore drilling fleet consists of 1011 vessels properlyfully equipped for its primary operations and some drilling plants installed on board of fixed offshore platforms. One of its most important offshore drilling vessels is the Saipem 10000, designed to explore and develop hydrocarbon reservoirs operating in excess of 3,000 meters water depth in full dynamic positioning. The ship has a storage capacity of 140,000 BBL and canis able to maintain a steady operating position without anchor moorings by means of 6 computerized azimuth thrusters, which offset and correct the effect of wind, waves and current in real time. Capital expenditure for building this ship amounted to about $300 million. The vessel is operating in ultra deep waters (over 1,000 meters) in West Africa.
Other relevant vessels are Scarabeo 5 and 7, third and fourth generation semi-submersible rigs able to operate at depths of 1,900 and 1,200 meters of water, respectively. Average utilization of drilling vessels in 2008 stood at 84.7% (94.7% in 2007).
LEASED/SALE FPSOSaipem provides to oil companies servicesThe most significant contracts awarded in Offshore drilling in 2008 included: (i) a 5-year extension of the contract for the developmentuse of offshore hydrocarbon fields by leasing its FPSO vessels. Following acquisitions carried outthe Scarabeo 7 semi-submersible platform in recent years (in particular Moss Maritime and Bouygues Offshore), Saipem significantly strengthened its design skills. The leasing of an FPSO represents an alternative to direct expenditure for oil companies. West Africa and Latin America are the markets with the highest expected growth rates due to the numberon behalf of development projects announced or started-up by oil companies. Saipem’s main vessels are: (i) FPSO Firenze,Eni; (ii) a tanker ship which, after its conversion into a floating production and storage vessel, has been installed in Eni’s Aquila field, in the Adriatic Sea, where it operates at a depth of 850 meters; and (ii) FPSO Mystras that has been installed since January 2004 in the Okono and Okpoho oil fields operated by Eni with a 100% interest in the deep offshore of Nigeria. Saipem intends to expand its market share in this business and plans to upgrade its offer by adopting the new generic FPSO vessels, designed and equipped in direct cooperation with the client in order to identify standard features that make the vessel easily employable in more than one development project according to the client’s portfolio of fields. In this light, Saipem is building its new Vitoria unit that will be operating on the Golfinho 2 field in the offshore of Brazil.
ONSHORE CONSTRUCTIONSaipem operates in the construction of plants for hydrocarbon production (separation, stabilization, collection of hydrocarbons, pumping stations, water injection) and treatment (removal and recovery of sulphur dioxide and carbon dioxide, fractioning of gaseous liquids, recovery of condensates) and in the installation of large onshore transport systems (pipelines, compression stations, terminals). The demand for this kind of services from the oil industry is expected to increase in the medium-term, in particular long distance pipelines represent one2-year extension of the favorite systemscontract for linking production areas with their end markets, despite the increasing competition from other transport modes (LNG, GTL). The main operation areas are Africause of semi-submersible platform Scarabeo 3 in Nigeria on behalf of Addax Petroleum; and (iii) a 12-month contract extension for the Middle East. Saipem also boasts a consolidated presenceuse of the Scarabeo 6 semi-submersible platform in remote areas such as the Caspian Sea and Far East Russia, leveragingEgypt on its ability in operating in hostile environments, managing complex projects and enhancing local content, in addition to providing on land services complementing offshore activities (key factor in projects in areas such as the Caspian Sea). Saipem intends to consolidate its competitive positioning in the strategic segmentbehalf of monetization of natural gas (GTL, LNG) and upgrading of heavy crudes by upgrading and acquiring the skills and resources necessary in the engineering and project management phases, which are key factors in this segment characterized by large EPC contracts. The acquisition of Snamprogetti is a key step in this direction.Burullus Gas Co.
ONSHORE DRILLING
Onshore drilling
Saipem operates in this area as main contractor for the major international oil companies performingand NOCs executing its activity mainly in South America, Saudi Arabia, North Africa and, Peru, where itat a lower extent, in Europe. In this areas Saipem can leverage on its knowledge of marketsthe market, long-term relations with customers and synergies and integration with other business areas. Saipem also boasts a long standing presencesolid track record in remote areas (such as(in particular in the Caspian Sea) based, leveraging on its operatingown operational skills and its ability to operate in hostilecomplex environments.
Average utilization of rigs in 2008 stood at 99% (99.6% in 2007). The 73 rigs owned by Saipem at year end were located as follows: 30 in Venezuela, 16 in Peru, 9 in Saudi Arabia, 7 in Algeria, 3 in Kazakhstan, 3 in Brazil, 2 in Italy, 1 in Ecuador, 1 in Colombia and 1 in Egypt.
The most significant orders awarded in 2008 in Onshore drilling is conducted through 23 drilling platformswere: (i) contracts on behalf of various oil companies for the lease of 17 rigs with an average contract duration of five years; and 15 workover plants that can drill to 10,000-meter depths(ii) contracts on behalf of various oil companies for the lease of 32 rigs, of which 13 new ones, in high pressureSouth America (mainly in Venezuela and high temperature environments.Peru) and Ukraine. The average contract duration was one year for the existent rigs and five years for the new ones.
LNGSaipem
Capital Expenditures
See "Item 5 – Liquidity and Capital Resources – Capital Expenditures by Segment".
Petrochemicals
Eni operates in the LNG segment followingbusinesses of olefins and aromatics, basic and intermediate products, polystyrene, elastomers and polyethylene. Its major production sites are located in Italy and Western Europe.
Eni’s strategy in its purchasepetrochemical business is to effectively and efficiently manage operations in order to lower the break-even considering the volatility of Bouygues Offshorecosts of oil-based feedstock and Moss Maritime which contributed their experiencethe commoditized feature of Eni’s main products. In fact, Eni’s profitability in the LNG chain, complementarypetrochemical businesses is particularly sensitive to the onshore and offshore transport of natural gas. The markets offering the highest potentialmovements in product margins that are Asia, Europemainly affected by changes in oil-based feedstock costs and the Americas. Services providedspeed at which product prices adjust to higher oil prices, also considering the cyclical nature of demand. See "Item 3 – Risk factors". The Company does not expect to incur significant amount of expenditures to develop this business. In future years, management forecast a yearly level of expenditures in line with 2008 mainly targeted to upgrade plant efficiency, execute de-bottlenecking interventions and to comply with all applicable regulations on environment, health and safety issues.
In 2008 sales of petrochemical products (4,684 ktonnes) decreased by Saipem include: (i) the onshore segment which, according to management, shows interesting growth prospects, where Saipem is engaged829 ktonnes from 2007, down 15%, in the design and constructionall business areas as a result of regasification terminals, storage tanks and in the design of gas tanker ships. Saipem also intends to acquire skills and critical mass in liquefaction; and (ii) the offshore segment, that includes FSRU (Floating Storage Regasification Units) and FNLG (Floating Liquefaction plantslower petrochemical demand for Natural Gas) integrated systems which, according to management, show interesting growth prospects in the medium-termpetrochemical products, due to their lower environmental impacta negative market scenario.
Petrochemical production (7,372 ktonnes) decreased by 1,423 ktonnes from 2007, or 16.2%. In a context of economic downturn, the steep decline in unit margins and greater flexibility as compared to other systems. Saipem intends to develop its presence in this segment.
MAINTENANCE, MODIFICATION & OPERATIONSaipem is also present in the MMO business which complements the company’s activities and provide interesting growth prospects for the increasing tendencysales determined unexpected outages of oil companies to outsource these services (both routine work and upgrading/revamping) and for the development of remote areas for hydrocarbon production. Saipem is capable of seizing the opportunities provided by this segment by leveraging on its specialized know-how also as project manager, on its resources and network of logistical bases.
Engineering
Snamprogetti intends to consolidate its competitive positioning in the market of high complexity onshore projects, mainly in the strategic segments of oil and gas, natural gas monetization (GTL, LNG) and ethylene. In order to attain this objective, Snamprogetti intends to focus on the role of the main contractor, leveraging on its skills in terms of project management capabilities, a wide and integrated array of services provided and availability and continuing development of proprietary technologies.
Snamprogetti intends to expand the supply of qualified services in the phases of front end loading of projects (feasibility studies, conceptual, basic and front end engineering and project management) mainly to major clients and as a support to Eni’s investment plans.
It plans also to intensify actions for improving operational efficiency and flexibility also through the rationalization of its operating structure, full utilization rates of low cost engineering and fabrication centers, the optimization of procurement, the adoption of the most stringent international best practices in terms of working tools and methods and the hiring of highly qualified resources.
Snamprogetti intends to continue enhancing its proprietary portfolio of technologies by means of support activities to the development on an industrial scale of technologies in strategic areas, such as the conversion of heavy crudes and high pressure transmission of natural gas, and the development of know-how in the field of the manufacture of high quality fuels and in the area of natural gas monetization (GTL, syngas, methanol, ammonia, urea).
In 2005, the engineering order backlog increased by euro 1,236 million due in particular to the recovery ongoing in reference markets, in particular the following contracts were awarded: (i) an EPIC contract for Abu Dhabi Gas Industries (GASCO) for the construction of a single line plant with a treatment capacity of 24,400 tonnes/y of LNG at the Ruwais complex in the United Arab Emirates. Works include also the construction of storage facilities, new port infrastructure and the provision of ancillary services; (ii) the Escravos GTL project in Nigeria, in joint venture with U.S. company KBR for Chevron for the construction of a 34,000 BBL/d plant for the production of diesel fuel, naphtha and LPG; and (iii) the Hawiyah GTC project in Saudi Arabia for Saudi Aramco for the construction of a natural gas treatment and compression plant with a capacity of 31,000 BBL/d.
Business areas
PLANTSOil & Gas Snamprogetti is engaged in the execution of complex and technologically advanced projects in the area ofsome plants, for hydrocarbon production, natural gas treatment and monetization (LNG; recovery and fractioning of natural gas liquids). Based on the capital expenditure plans announced by oil companies, Snamprogetti expects a growth in the demand for services in these areas. In particular the segment of transport and treatment of natural gas seems the most dynamic due to the progressive globalization of demand and supply of natural gas. Snamprogetti intends to consolidate its know-how in natural gas treatment by means of acquiring and developing needed competence in particular in the businesslast part of liquefaction. Significant capital expenditures for expanding liquefaction and regasificationthe year.
Nominal production capacity decreased by approximately 2 percentage points from 2007, due to the shutdown of about 130 million tonnes/ythe Gela cracker. The average plant utilization rate calculated on nominal capacity decreased by 12 percentage
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points from 80.6% to 68.6%, due to the current economic downturn that entailed reductions in production in all main plants.
Approximately 49.5% of LNG (equivalenttotal production was directed to 180 BCM/y) are expectedEni’s own productions cycle (48.9% in 2007). Oil based feedstock supplied by Eni’s Refining & Marketing segment covered 24% of requirements (21% in 2007).
Prices of Eni’s main petrochemical products increased on average by 7%, increasing in the next four years.
Refining Snamprogetti is engagedbusiness of: (i) olefins (up 13%) with increases in the segment of conventional plants (grass root refineries and refining units) and in the segment of plants for the hydroconversion and hydrotreatment of heavy residues and distillates. Snamprogetti intends to seize the growth opportunities of the business of plants for heavy residue conversion and production of clean fuels. Growth in this business is supported by the wider availability of heavy crudes and by the increasingly stringent environmental requirements on emissions established worldwide. At Eni’s Taranto refinery the first demonstration plant with 1,200 BBL/d capacity based on the Eni Slurry Technology is nearing completion. This technology has a high strategic value and aims at meeting the increasing demand for upgrading of heavy crudes and non conventional crudes (tar sands) and for conversion of refining residues (see: "Innovative Technologies" below).
Chemical complexes Snamprogetti is engaged in the area of plants for the conversion of natural gas (syngas, GTL, hydrogen, ammonia, methanol and urea) and gas-to-chemicals (ethylene and ethane derivatives). Snamprogetti plans to grow in the strategic segment of conversion of natural gas to liquids (GTL) for the manufacture of high value added products (LPG, diesel fuel and virgin naphtha); in this segment, where syngas is a critical element, Snamprogetti owns a proprietary technology through its subsidiary Haldor Topsøe. Snamprogetti holds a sound position in the design and construction of plants for the production of nitrogen-based fertilizers and high-octane additives for gasoline (MTBE, ETBE, TAME and iso-octene/iso-octane)all products; (ii) elastomers (up 10%), based on proprietary technologies. Snamprogetti intends to strengthen its competitive position in the segment of world scale plants for ammonia and urea production, demand for which is supported by increasing consumption in Asia, with capital expenditure in new capacity concentrated in areas where gas has a competitive price (Middle East, Africa, Latin America). Snamprogetti intends to seize the opportunities for the construction of plants for the manufacture of world scale ethylene in particular polybutadienic and nytrilic rubbers; and (iii) polyethylene (up 5%), in areas where feedstocks have a low price (especially the Middle East). Snamprogetti intends to seize this opportunity leveraging on its skills.
Energy Snamprogetti is activeparticular EVA. However, these prices increases did not made for higher purchase costs of oil-based feedstock (virgin naphtha was up 17.3% in the design and construction of combined cycle power stations also fired with refinery residues (IGCC - Integrated Gasification Combined Cycle). Snamprogetti intends to make use of the relevant know-how it acquireddollar terms, 9.3% in the construction of EniPower power stations searching for new projects in Italy and outside Italy.
FIELD UPSTREAM FACILITIES AND PIPELINESSnamprogetti is engaged in the design and construction of pipelines for the transport of hydrocarbons, collection networks and upstream plants (construction of primary separation plants, gas and water injection systems, compression and pumping stations)euro), the demand for which is expected to grow. Snamprogetti is developing new advanced technologies for high pressure transport of natural gas aimed at the monetization of reserves located in remote areas (see: "Innovative Technologies" below).
INFRASTRUCTURESnamprogetti is active in the field of design and construction of great infrastructure in Italy. In particular it is working at the completion of the high speed/high capacity train tracks from Milan to Bologna.
AQUATER - ENVIRONMENTAL ACTIVITIESSnamprogetti, through its Aquater - Environmental Activities division, is active in the field of projects for environmental remediation and reclamation, protection of the soil and integrated water systems in the framework of the optimization of compatibility of industrial development and environmental protection. The division provides a wide range of engineering services for the soil, the environment and natural resources and is active both as a consultantparticularly until September, and as a result product margins significantly decreased from a year ago.
The table below sets forth Eni’s main contractorpetrochemical products availability for the periods indicated.
Year ended December 31, |
2006 | 2007 | 2008 | ||||
(ktonnes) |
Olefins | 2,950 | 3,490 | 2,819 | ||||||
Aromatics | 772 | 938 | 767 | ||||||
Intermediates | 553 | 1,260 | 977 | ||||||
Styrene | 1,088 | 1,117 | 1,018 | ||||||
Elastomers | 457 | 515 | 494 | ||||||
Polyethylene | 1,252 | 1,475 | 1,297 | ||||||
Total production | 7,072 | 8,795 | 7,372 | ||||||
Consumption of monomers | (2,488 | ) | (4,304 | ) | (3,652 | ) | |||
Purchases and change in inventories | 692 | 1,022 | 964 | ||||||
5,276 | 5,513 | 4,684 |
The table below sets forth Eni’s sales of main petrochemical products by volume for the periods indicated.
Year ended December 31, |
2006 | 2007 | 2008 | ||||
(ktonnes) |
Olefins | 1,699 | 1,797 | 1,423 | ||||||
Aromatics | 530 | 514 | 420 | ||||||
Intermediates | 654 | 712 | 576 | ||||||
Styrene | 587 | 594 | 543 | ||||||
Elastomers | 412 | 447 | 433 | ||||||
Polyethylene | 1,394 | 1,449 | 1,289 | ||||||
Total sales | 5,276 | 5,513 | 4,684 |
Olefins
Olefins sales (1,423 ktonnes) decreased by 374 ktonnes from 2007 (down 20.8%), penalized by a poorer market scenario that negatively affected product demand and lower product availability. Main reductions were registered in sales of ethylene (down 30%), butadiene (down 30.3%) and propylene (down 15%).
Olefins production (2,819 ktonnes) declined by 671 ktonnes from 2007, or 19.2%, due to the maintenance shutdown of the Priolo cracker, technical problems at the Brindisi and Dunkerque plants, steep demand reduction and the shutdown of the Gela cracker.
Aromatics and intermediates
Aromatics sales (420 ktonnes) decreased by 94 ktonnes from 2007 (down 18.3%) due to lower demand for isomers (down 33%), mainly in the area of environmental remediation, reclaiming of plants, waste management, water purification and civil works.
CEPAV UNO AND CEPAV DUESnamprogetti holds interests in the CEPAV Uno (50.36%) and CEPAV Due (52%) consortia that in 1991 signed two contracts with TAV SpA for the construction of the tracks for high speed/high capacity trains from Milan to Bologna (under construction) and from Milan to Verona (in the design phase).
Assecond part of the project for the constructionyear. Intermediates sales (576 ktonnes) decreased by 136 ktonnes from 2007 (down 19.1%) mainly due to temporary shutdown of the tracksPorto Torres cracker as a result of the poorer market scenario that negatively affected demand. Main decreases were registered in phenol (down 30.6%) and cyclohexanone (down 6.4%).
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Aromatics production (767 ktonnes) decreased by 171 ktonnes from Milan to Bologna, an addendum2007 (down 18.2%) mainly due to the contract between CEPAV Uno and TAV SpA was signed on June 27, 2003, redefining certain terms and conditionsmaintenance shutdown of the contract. In 2005,Priolo cracker and the consortium CEPAV Uno requested a time extension for the completion of works and an additional payment amounting to approximately euro 800 million. CEPAV Uno and TAV failed to solve this dispute amicably, and on April 27, 2006, CEPAV Uno notified TAV of a request for arbitration, as provided under the termstemporary shutdown of the contract.Porto Torres plant.
AtIntermediates production (977 ktonnes) decreased by 283 ktonnes from 2007 (down 22.5%) mainly due to the endshutdown of 2005, CEPAV Uno Consortium had completed works correspondingPorto Torres plant.
Styrene and elastomers
Styrene sales (543 ktonnes) declined by 51 ktonnes from 2007 (down 8.6%). Sales reductions affected essentially compact polystyrene (down 13%) and ABS/SAN (down 13.2%) due to 71%lower demand. Increases in styrene (up 9.8%) and expanded polystyrene (up 5.6%) were due to higher product availability.
Elastomers sales (433 ktonnes) decreased by 14 ktonnes, or 3.1%, due to a steep decline in demand in the last part of the total contractual priceyear, mainly in line with the contractual obligations.automotive sector. Sales decreases were registered mainly in lattices (down 11%), NBR (down 9.5%) and polybutadienic rubbers (down 4%). Increases recorded in thermoplastic rubbers (up 6.3%) and SBR (up 3.4%) were due to higher product availability.
As concerns the Milan-Verona portion, in December 2004 CEPAV Due presented the final project, prepared in accordance with Law No. 443/2001 on the basisStyrene production (1,018 ktonnes) decreased by 99 ktonnes, or 8.9%.
Elastomer production (494 ktonnes) decreased by 21 ktonnes (down 4.1%) due to maintenance shutdown of the preliminary project approvedRavenna plant and unexpected outages of the Porto Torres and Ferrara plants.
Polyethylene
Polyethylene sales (1,289 ktonnes) were down 160 ktonnes or 11%, from 2007, reflecting mainly negative market conditions for LPDE (down 19.4%) and HDPE (down 11.4%).
Production (1,297 ktonnes) decreased by an Italian governmental authority (CIPE).
The final project was178 ktonnes, or 12.1%, due to be examinedthe maintenance shutdown of the Gela, Ragusa and Priolo plants and the temporary shutdown of Porto Torres and Dunkerque plants reflecting lower demand. EVA production increased by TAV for final approval. CEPAV Due started an arbitration procedure against TAV for8% due to the recognitionfact that 2007 was impacted by the outage of damage related to TAV’s belated completion of its tasks. A final decision is expected late in 2006.Oberhausen plant.
Capital Expenditures
See "Item 5 – Liquidity and Capital Resources – Capital Expenditures by Segment".
Corporate and Other Activitiesactivities
Eni’s otherThese activities are organized as follows:include the following businesses:
• | the "Other | |
• | the "Corporate and financial companies" |
Management does not consider Eni’s activities in these areas to be material to its overall operations.
Seasonality
Eni’s results of operations reflect the seasonality in demand for natural gas and certain refined products used in residential space heating, the demand for which is typically highest in the first quarter of the year, which includes the coldest months and lowest in the third quarter, which includes the warmest months. Moreover, year-to-year comparability of results of operations is affected by weather conditions affecting demand for gas and other refined products in residential space heating. In colder years that are characterized by lower temperatures than historical
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average temperatures, demand for gas and products is typically higher than normal consumption patterns, and vice versa.
Research and Development
In technologicalTechnological research and innovation activities Eni plans to implement a capital expenditure programmerepresent key factors in the 2006-2009 four year planimplementing Eni’s business strategies. Eni’s efforts in ordertechnological innovation are primarily intended to develop such technologies that management believes may ensure competitive advantagesso as to meet the environmental issues and climate change, to overcome limits in accessing to hydrocarbon resources, to strengthen partnerships with producing countries and to develop renewable sources of energy.
Eni is committed to developing advanced upstream technologies in frontiers areas with environmental and geological complex features, reducing the long-termcosts of finding and promote sustainable growth. Eni plans to continue developing existing programmes on clean fuels, sulphurrecovering hydrocarbons, upgrading heavy oils, monetizing stranded gas and greenhouse gas management as well as projects such asprotecting the upgrading of heavy crudes (EST), high pressure gas transmission (TAP) and Gas to Liquids (GTL).
In 2005, Eni’s costs incurred for research and development amounted to euro 204 million, of these 32% were incurred by Eni’s research department, 25% by the Exploration & Production segment, 24% by the Petrochemical segment and 13% by the Refining & Marketing segment. At December 31, 2005, a total of 1,420 persons were employed in research and development activities. In 2004, Eni’s costs incurred for research and development amounted to euro 257 million, of which 39% were incurred by Eni’s research department, 21% by the Exploration & Production segment, 21% by the Petrochemical segment and 12% by the Refining & Marketing segment. At December 31, 2004, approximately 1,470 persons were employed in research and development activities (1,400 at December 31, 2003).
Inenvironment. Over the next four years, Eni plans to invest approximately euro 11.1 billion balancing resources betweento fund ongoing projects aimed at reaching short-term objectives for business units with group-wide projects aimed at strengthening medium to long-term business sustainability. In particular the main focus ofin Eni’s R&D lines are: (i) reserve replacement and reduction of mineral risk; (ii) production from non conventional hydrocarbon reserves and optimal management of reserves with high hydrogen sulfide and sulfur content; (iii) expansion in the natural gas market and utilization of associated gas and gas located in remote areas; (iv) improvement of quality and performance of fuels in light of the evolution of engines to increasingly perfected and efficient systems with lower impact on air quality; (v) efficient use of fossil fuels through an improvement in refining yields and an optimal use of each fuel with reduced environmental impact; and (vi) mitigation of the greenhouse effect, through the capture and geological sequestration of carbon dioxide.
Follows a description of Eni’s keybusinesses as well as research and development projects.
INNOVATIVE TECHNOLOGIES FOR SUBSOIL SURVEYIn order to prepare a geological model of fields as near as possible to reality aimed at the simulation and monitoring of fields, Eni developed significant industrial applications of highly innovative technologies. The main objective of these technologies is the reduction of mineral risk and the optimization of processes for extracting and recovering hydrocarbons.
In the area of seismic imaging, the further developments of the proprietary "3D Common Reflection Surface (CRS) Stack" technology found various industrial applications with much higher efficiency than conventional techniques. New depth imaging techniques based on proprietary algorithms can generate depth images with such high resolution that they allow a very precise physical characterization of reservoirs. A new 3D resistivity modeling interpretive technique has been developed for the petrophysical measurement of wells (electrical logs), especially suited for the identification of complex mineralization situations, such as thin strata of sand and clay. Initial field applications proved that this new approach contributes to the production of more accurate estimates of reserves in place.
DRILLING OF "ADVANCED WELLS"Eni developed and applied at industrial level a series of innovative technologies that allow to drill highly complex wells with greater operating efficiency. In particular, lean profile drilling, developed and patented by Eni, is applied in deep vertical and deviated wells especially in high pressure and high temperature environments allowing a reduction in time and costs and in environmental impact as it reduces the use of products for mud and cement and the resulting waste by about 30-40%.
Wells obtained with this technique are high quality and low risk. The technique basically consists in reducing to a minimum the tolerance between the diameter of wells and their lining columns while keeping the production casing unchanged. The application underway in Val d’Agri is a record lean drilling in highly deviated wells (a 13"3/8 casing in a 14"3/4 hole with inclination up to 60°).
INNOVATIVE TECHNOLOGIES FOR THE TREATMENT OF LIQUIDSIn the field of transmission and treatment of hydrocarbons Eni developed and applied innovative technologies with particular attention to multi-phase fluids (water, oil and/or gas) in order to optimize production and reduce its environmental impact. In particular, Eni successfully tested at its Cavone oil center a pilot plant for the removal of oils from layer waters which allows to reduce the residual concentration of hydrocarbons in water to less than 10 ppm, starting from an initial content of over 1,000 ppm. The system is based on the use of adsorbing polymers capable first to capture oil particles and then to release them favoring their coalescence and making them easier to separate. The system is currently being engineered in order to make it useable on platforms. Another ongoing project aims at optimizing new design centrifugal systems for the separation of water from oil and for the confirmation of innovative technologies for removing soluble organic compounds.
Also in the field of multiphase pumping Eni is applying innovative technologies as an alternative to traditional production systemsrenewable energy which could result in marginal fields, fields located in frontier areas or difficult contexts such as deep waters. The multiphase technology becomes extremely useful, in terms of economic benefits, in offshore applications where the possibility to transport production from the wells over long distances allows to transfer processing activities on existing facilities and infrastructure, thus significantly reducing technical costs for the development of fields. Infield applications of multiphase pumping have been recently installed offshore and onshorepotential break-through technologies. Particularly in the United Kingdom and Tunisianext four years Eni plans to fund euro 102 million to "Along with other partners in order to obtain a higher recovery of hydrocarbons.
MANAGEMENT OF HYDROGEN SULFIDE AND SULFURThe Research & Development project for the optimal management of reserves with high content of hydrogen sulfide and sulfur started in 2003 is continuing. The project aimed at developing innovative technologies and/or advanced processes able to manage the disposal and possible exploitation of high amounts of sour gas and sulfur that are co-produced with hydrocarbons, while respecting safety and the environment. In particular innovative processes for the separation of hydrogen sulfide and its conversion into plain sulfur and the storage and/or use of this sulfur are in the development phase. In parallel innovative processes are being studied for the reinjection of hydrogen sulfide into the field and its monitoring.
In 2006 the integrated researchPetroleum" program called H2S and sulphur management in Exploration & Production operations will be completed. The program was aimed at identifying innovative solutions for the treatment of very sour gas. In particular significant progress was achieved in an innovative technology for H2S bulk removal and in a new system for the massive storage of sulphur.
ENI SLURRY TECHNOLOGYEST is a process of catalytic hydroconversion in the slurry phase that allows to convert asphaltenes (the hard fraction of heavy crudes) totally, thus reducing to zero the production of solid and fluid residues usually deriving from the refining of non conventional oil.
It is a flexible technology that satisfies the needs of upstream and downstream oil and can be adapted to various kinds of feedstocks to be converted, to different capacities and plants. Among its products are naphtha, kerosene, diesel fuel.
The development of this technology was started at the beginning of the 80s and the decision to test it industrially made possible in 2001 the building of a commercial demonstration plant with a 1,200 BBL/d capacity at Eni’s Taranto refinery completed in 2005. It is currently being run for reaching the validation of the technology.
This will provide Eni with an important competitive lever for a more economic use of the full barrel of crude with lower environmental impact.
NATURAL GAS TRANSPORT – THE TAP PROJECTAmong the reliable technologies for making the transmission via pipeline of relevant amounts of natural gas from production areas to consuming markets economically viable (gas to market), the TAP (high pressure transport) project will contribute to developing research projects on the most advanced long distance, high capacity, high pressureaspects of large scale use of renewable energy sources and high grade solutions with relevant targets related to:
The TAP technology is expected to allow a decrease in the consumption of natural gas used in compressor stations from 7.5% to 3% of transported volumes.
The project was started in 2002 with a wide range of design, engineering and construction activities and in 2005 two infrastructures for the validation of its assumptions were completed.
The first one is a 10-kilometer long pilot segment in X 80 steel with 48" diameter from Enna to Montalbano integrated in the Snam Rete Gas network that allowed to test and validate the industrial application of the concepts.
The second infrastructure consists of two pilot pipes, with a 48-inch diameter in high resistance X100 steel installed in Perdasdefogu in Sardinia. It was started up in September 2005 under pressures of 140 bar. Testing is expected to last 20 months and will simulate the actual behavior of an industrial infrastructure for a period equivalent to 20 years.energy efficiency.
In 2006 management believes that the first technology manual2008, Eni’s expenditures on R&D amounted to euro 217 million which were almost entirely expensed as incurred (euro 208 million and FEED developed foreuro 220 million in 2007 and 2006).
At December 31, 2008, a hypothetical trunklinetotal of 1,098 people were employed in X100 steel with a 48" diameter linking Central Asia to Europe (for a length of 3,500 kilometers) will be available. A furtherresearch and development of this project will be the construction and operation of a commercial line in X100 steel a few-kilometer long.
CONVERSION OF GAS TO LIQUIDS – GTL PROJECTThis is a key technology for the use of natural gas on a large scale for the production of high quality motor fuels, in particular diesel fuel and therefore it receives special attention by all majors due to its primary strategic value.
Eni’s R&D activities in 2005 led to the preparation of the first basic design package for an industrial unit.activities.
In 2006 Eni will continue its development activity at the Sannazzaro pilot plant consolidating the Fischer-Tropsch synthesis and optimizing its integration in the first two phases in order to define the optimal size2008, a total of the GTL module along with its basic design package.
INNOVATIVE FUELS: CLEAN DIESEL FUEL PROGRAMIn its effort to improve the quality of its fuels, in 2002 Eni started to sell new virtually sulphur free (less than 10 ppm) products (first BluDiesel and since 2004 BluSuper) anticipating their compliance with EU regulations mandatory beginning in 2009.
With a longer term objective Eni started a clean diesel fuel program that aims at identifying the optimal formula96 applications for a diesel fuel with high performance and low particulate emissions using as benchmark GTL Fischer-Tropsch gasoil.patents were filed.
ENVIRONMENTAL PROTECTIONIn the area of environmental protection, with the cooperation of partners from industries and academia, Eni is developing technologies for reducing the environmental impact of offshore and onshore E&P and refining operations.
In this area the following projects are worth mentioning:
Insurance
Eni constantly assesses its exposure for the Italian and foreign activities that are mainly covered through the Oil Insurance LimitedLtd ("OIL"), a mutual insurance and reinsurance company that provides to its members a broad coverage tailored to the specific requirements of oil and energy companies. Eni makes use of a captive insurance company that covers the risks and implements Eni’s Worldwide Insurance Program re-insured with high quality securities in order to integrate the terms and conditions of the OIL coverage.
An insurance risk manager works in close contact with managers directly involved in core business activities in order to evaluate potential risks and their financial impact on the Group. This process allows Eni to define a constant level of risk retention and, conversely, the amount of risk to be transferred to the market.
The level of insurance maintained by Eni is generally appropriate for the risks of its businesses.
Environmental Matters
Environmental Regulation
Eni’s operations, products and services areEni is subject to numerous EU, international, national, regional and local environmental, health and safety laws and regulations concerning its oil and gas operations, products and other activities, including legislation that implements international conventions or protocols. In particular, these laws and regulations require that an environmental impact assessment is performedthe acquisition of a permit before drilling for new operations,hydrocarbons may commence, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with exploration, drilling and production activities, limit or prohibit drilling activities on certain protected areas, provide for measures to be taken to protect the safety of the workplace and health of communities affected by the company’s activities, and impose criminal or civil liabilities for pollution resulting from oil, natural gas, refining and petrochemical operations. These laws and regulations may also restrict emissions and discharges to surface and subsurface water resulting from the operation of natural gas processing plants, petrochemical plants, refineries, pipeline systems and other facilities that Eni owns. In addition, Eni’s operations are subject to laws and setregulations relating to the rules for the generation,production, handling, transportation, storage, disposal and treatment of waste materials.
Environmental laws and regulations have a substantial impact on Eni’s operations. Some risksrisk of environmental costs and liabilities areis inherent in particularcertain operations and products of Eni, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs and liabilities will not be incurred.
Although management, considering the actions already taken with the insurance policies to cover environmental risks and the provision for risks accrued, does not currently expect any material adverse effect upon Eni’s Consolidated Financial Statements as a result of its compliance with such laws and regulations, there can be no assurance that there will not be a material adverse impact on Eni’s Consolidated Financial Statements due to: (i) the possibility of as yet unknown contamination of industrial sites; (ii) the results of the ongoing surveys and the other possible effects of statements required by Decree No. 471/1999 of the Ministry of Environment concerning the remediation of contaminated sites; (iii) the possible effect of new environmental legislation and rules, such as: (a) the decree of the Ministry of Environment No. 367 published on January 8, 2004, that regards the fixing of new quality standards for aquatic environment and dangerous substances and Legislative Decree No. 59/2005 concerning the integrated environmental authorization (IPPC), (b) the application of European directive 2004/35/EC concerning environmental responsibility for prevention and reclamation of environmental damage, referred to in paragraph 439 of the single Article of Law No. 266/2005 (budget law for 2006), and (c) a legislative decree to be issued in implementation of Law No. 308 of December 15, 2004 that delegated to the Government the restructuring of regulations concerning waste disposal and reclamation of polluted areas, protection of waters from pollution and management of water resources, payment of environmental damage, procedures for the evaluation of environmental impact and for the strategic environmental impact as well as protection from emission into the atmosphere within 18 months. The Decree n. 152/2006 was approved by the Council of Ministers on February 10, 2006 has been in force since April 29, and it is now under examination by the new Government. The decree also implements European directive 2000/60/EC that established a European action framework for the protection of waters; (iv) the effect of possible technological changes relating to future remediation; and (v) the possibility of litigation and the difficulty of determining Eni’s liability, if any, as against other potentially responsible parties with respect to such litigation and the possible insurance recoveries.
A brief description of major environmental laws impacting on Eni’s activity follows.activities located in Italy and Europe is outlined below.
Decree No. 471/1999 Management of waste, toxic waste, packaging and packaging waste is regulated by74
Italy
On April 29, 2006, Legislative Decree No. 22152/2006 "Environment Regulation" came into force. This was designed to rationalize and coordinate the whole regulation of February 5, 1997 which refersenvironmental matters by setting:
• | procedures to preserve soil, prevent desertification, effectively manage water resources and protect water from pollution; | |
• | procedures to effectively manage waste and remediate contaminated sites; | |
• | air protection and reduction of atmospheric pollution; and | |
• | environmental liability. |
The most important changes introduced by the Decree regarded reclamation and remediation activities as this Decree provided a site-specific risk-based approach to three European Directives (91/156/CEE, 91/689/CEEdetermine objectives of reclamation and 94/62/CE)remediation projects, cost-effective analysis required to evaluate remediation solutions, criteria for waste classification.
The Decree 152/2006 was amended by two subsequent decrees: Legislative Decrees 284/2006 and provides incentives to clean technologies4/2008; the latter introduced important changes regarding SEA and recyclingEIA procedures, landfill, waste and reuse of waste. This decree prohibits the uncontrolled disposalremediation. A principle of waste undergroundhierarchy was introduced along with definition of by-product and in the water and obliges polluting entitiessecondary raw materials.
The most important aspects of these regulations to remediate polluted areas. Whenever it is not possible to identify one person or entity responsibleEni are those regulating permits for existing pollution, the owner of the polluted area is expected to pay for its remediation. This decree became operational with Decree No. 471/1999 of the Ministry of the Environment, which also defined: (i) limits for the contamination of soils and underground waters; (ii) general guidelines for remediation and environmental recovery of polluted areas; and (iii) criteria for the identification of polluted areas of national interest. For the storage of toxicindustrial activities, waste the decree favors techniques avoiding transport of waste and their on-site treatment. Whoever causes, willfully or accidentally, pollution of an area or actual danger of pollution is expected to react within 48 hours according to the procedure set by the decree. At present Eni is not yet able to evaluate the possible future consequences deriving from the completion of on-going surveys and other possible effects of the application of Decree No. 471/1999 of the Ministry of Environment; however there can be no assurance there will not be a material adverse impact on Eni’s results of operations and financial position from the application of that decree. Law 388/2000 changed the regulations concerning themanagement, remediation of polluted sites, easing the discipline of crimes related to events prior towater protection and environmental liability.
On April 9, 2008, Legislative Decree No. 22/199781/2008 "Implementation of Article 1 of Law 123/2007, in matter of protection of the health and imposing the remediationsecurity on the working places" came into force. This was designed to rationalize and coordinate working environments, the equipments and the Individual Protection Devices, the physical agents (noise, mechanical vibrations, electromagnetic fields, optical radiations, etc.), the dangerous substance (chemical agents, carcinogenic substances, etc.), the biological agents and explosive atmosphere, the system of sites where industrial activity is ongoing. However,signs, the remediation isvideo terminals.
In 2008 Eni worked on the implementation of the general framework regulations on health and safety contained in this Legislative Decree No. 81/2008, developing all laws and regulations concerning prevention and protection of workers at national and European level to be carried out provided that it does not involve a significant disruption in operations; remediation costs can be amortized in ten years.applied for all kinds of workers and employees.
At European level Eni continued its work for applying the REACH Regulation (Registration, Evaluation, Authorization and Restriction of Chemicals, EC Regulation No. 197/2006).
The complexity and range of situations where Eni is operating imposed the definition and application of principles for consolidating its performance in health and prevention. To this end Eni upholds:
• | clear policies; | |
• | an ethical code; | |
• | endorsement of international conventions and principles; | |
• | guidelines and procedures; and | |
• | sharing of knowledge. |
European Union
On January 23, 2008 the European Commission put forward a far-reaching package of proposals that will deliver on the European Union’s ambitious commitments to fight climate change, promote renewable energy and increase energy security (new Energy Policy for Europe - EPE, so called "20-20 by 2020"). In December 2008 the European Parliament and Council reached an agreement on the package.
The EU is committed to reducing its overall emissions to at least 20% below 1990 levels by 2020, and is ready to scale up this reduction to as much as 30% under a new Decree No. 152/2006, concerningglobal climate change agreement when other developed countries make comparable efforts. It has also set itself the overall revisiontarget of previous environmental laws, supercedes Decree 471/1999increasing the share of renewables in energy use to 20% by 2020.
Central to the strategy is a strengthening and expansion of the Emissions Trading System (EU ETS), the EU’s key tool for cutting emissions cost-effectively. Emissions from the sectors covered by the system (energy and manufacturing industries) will be cut by 21% by 2020 compared with levels in particular, it envisages that risk assessment2005. A single EU-wide cap on ETS emissions will be performedset, and free allocation of emission allowances will be progressively replaced by auctioning of allowances by 2020.
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Emissions from sectors not included in the EU ETS – such as transport, housing, agriculture and waste – will be cut by 10% from 2005 levels by 2020. Each Member State will contribute to this effort according to its relative wealth, with national emission targets ranging from -20% for richer Member States to +20% for poorer ones.
The Directive sets legally binding targets for each Member State, in order to definereach the extentEU target of a 20% share of renewable energy in 2020. It creates cooperation mechanisms so that the EU can achieve the targets in a cost effective way. It also includes a flat 10% target for renewables in transport (biofuels, "green" electricity, etc.); this legislation also sets out sustainability criteria that biofuels will have to meet to ensure they deliver real environmental benefits.
The package also seeks to promote the development and safe use of Carbon Capture & Storage (CCS), a suite of technologies that allows the carbon dioxide emitted by industrial processes to be captured and stored underground where it cannot contribute to global warming. The reinforced carbon market will provide a long-term incentive for investment, while up to 300 million allowances in the new entrants reserve under the EU ETS will be made available to stimulate the construction and operation of up to 12 commercial demonstration CCS projects, and for innovative renewable energy demonstration technologies in the EU.
The fuel quality Directive will place an obligation on suppliers to reduce greenhouse gases from the entire life cycle of the required remediation. At this early stage itfuel 6% by 2020, mostly by an increased use of biofuels. A review in 2012 will consider increasing the target to 10%, through the inclusion of international projects, carbon capture and storage as well as electricity for cars.
Also a new regulation was approved to set emissions standards for new passenger cars, which is not possiblean important tool to assessassist Member States in meeting their emissions targets in the impactnon-ETS sectors. It will set binding emissions targets to ensure that emissions from the new car fleet will be reduced to an average of 120g CO2/km by 2015, including the effect of the new law on Eni’s activities, but it is expected that, in general, the introductionFuel Quality Directive, then decreasing to a stringent long-term target of risk assessment could reduce the extent of the remediation projects.95g CO2/km by 2020.
In accordance with European guidelines, the protection from water pollution was strengthened with Legislative Decree No. 152/1999 as completed by Decree No. 258/2000 and by Decree No. 367 of the Ministry of Environment. Decree No. 258/2000 provides for an integrated protection of water resources by extending control from each discharge place to all the effects of accumulation and interactions of various discharges into one single water course and set quality objectives to be reached by 2008. All discharges require preventive authorization, to be renewed every four years, and must lie below the thresholds set by Regions. The Decree No. 152/2006 has also renovated the previous water legislation, by aligning it to the less restrictive EU water directive. To date Eni cannot evaluate the possible impact of the application ofOn January 29, 2008, the new law. However, there can be no assurance that there will not be a material adverse impact on Eni’s operations due to measures adopted by local authorities whenever the quality of a certain water source does not comply with set standards due to the industrial activity of all plants located above that water source.
Law 372/1999 will gradually enter into force. This law, which is related to the European Directive 96/61/CE (IPPC - IntegratedIPPC (Integrated Pollution Prevention and Control), envisages that industrial installations will apply for an integrated authorization concerning emissions, wastes and water discharges. The calendar for Directive 2008/1/EC was published in the requestOfficial Journal of the integrated authorization has recently been defined. ManyEuropean Union No. 24. Therefore, from February 18, 2008, the new IPPC directive repeals the Directive 96/61/EC with its successive amendments. This directive rationalizes all existing regulations on this issue, confirming the achievement of Eni’s plants – refineries, chemical plants, power stations – will havehigh levels of environmental protection to apply for the authorization by the year end. All the Eni installations are getting readybe of primary importance to request the IPPC authorization, which will have a five year duration, in general, and eight years for installations registered according to EMAS regulation. In order to secure the extended authorization, some Eni installations have obtained or are in the process of obtaining the EMAS registration.member states.
As of the year 2003, accordingAccording to the IPPC Directive, the Member States of the EU hadhave to communicate their national values of emissions into the atmosphere, wastes produced and managed and finally, discharges of compounds into waterwaste. The European Commission published in Official Journal of European Union, May 16, 2007 (2007/C 110/01) the definitive replacement of the European Pollutant Emission Register (EPER) by the European Pollutant Release and Transfer Register (E-PRTR), published in 2006 (Regulation No. 166/2006). In 2008 Italian legislation already required from the IPPC site owners to account and report environmental data related to 2007 according to PRTR Register as requested by the Regulation.
Eni is implementing an Integrated Environmental Information System, able to gather, manage and report the data on all the pollutants released and off-site transferred as requested by PRTR Regulations.
On December 21, 2007, the European Commission published its proposal of directive on Industrial Emissions. In view of the general call for "better regulation", the draft incorporates the reviews of six sector-specific directives (IPPC, Large Combustion Plants, VOC - Volatile Organic Compounds - emissions, incineration of waste and titanium industry). The proposed directive intends to enforce BAT definition, together with a tightening of current minimum emission values in some compounds specifiedsectors. The directive extends the scope of the IPPC directive to cover certain activities (e.g. combustion plants between 20 and 50 MW). The new proposal introduces also more robust monitoring and inspections on installations, the review of permit conditions and the reporting of compliance.
On November 22, 2008, the new Directive on waste (Directive 2008/98/EC) was published in the annexesOfficial Journal of the directive relative to EPER (European Pollutant Emission Register)European Union. The new Directive simplifies the existing legislative framework by clarifying definitions, streamlining provisions and integrating the directives on hazardous waste (91/689/EEC) and on waste oils (75/439/EEC). The Directive appliesintroduces a life-cycle approach, focuses on waste policy by improving the way of resources consumption. The scope is to improve the recycling market by setting environmental standards, specifying under which conditions certain recycled waste are no longer considered such. The Directive requires that Member States take appropriate measures to encourage the prevention or reduction of waste production and its harmfulness. This can be done by a combination of several Eni plants,strategies. Especially mentioned are the development of clean technologies, the technical development and marketing of products designed so to contribute as little as possible to increasing the Eni divisions and/or companies which own these plants have reported their data to the authority in chargeamount of preparing the Italian national communication.waste. The Directive also sets new recycling targets.
On January 2006, EU Regulation No. 166 was issued concerning the Pollutant Releases and Transfers Register (PRTR), which are an extensionsCore of the previous EPER registers and deals with allDirective is the emissions and transfersintroduction of 91 pollutants to air, water and soil. PRTR registers will be operationala waste management hierarchy. This hierarchy is as follows: 1. Waste prevention, 2. Re-use, 3. Recycling, 4. Recovery (including energy recovery), 5. Disposal.
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Moreover the Directive bolsters the importance of the extended producer responsibility in the year 2009, with respectfuture waste management measures.
The Member States will have to 2007 emissions. To comply with the obligations Eni is considering the use of a group-wide Environmental Information System.transpose this Directive into national legislation until December 12, 2010.
For a description of the impact of Law No. 316 of December 30, 2004 (Emission trading) on Eni’s business, see below in "Implementation of the Kyoto Protocol".
HSE Activity for the
yearYear 2008
In an operating context requiring companies,Eni is committed to continuously improve its model for managing health, safety and environment across all its own operational activities in particular those in the energy sector,order to meet strict environmental sustainability requirementsminimize risks associated with its industrial activities, ensure reliability of its industrial operations and to reduce risks, Eni’s Health Safety Environment (HSE) activities are increasingly oriented to the application and certification of rigorous HSE management systems, in an effort to constantly improve their performance through specific projects aimed at meeting the main challenges of sustainability of Eni’s operating sectors.
At the end of 2003, Eni issued a management system model (MSG) based on a yearly cycle including planning, implementation, control, review of results and definition of new objectives. In 2005 business units continued implementing this management system alongcomply with an audit program aiming at checking its functioning in Eni’s business segments and at identifying any measures for its improvement.all applicable regulations.
In 2005,2008, Eni’s business units continued to obtain certificationcertifications of their management systems, industrial installations and operating units according to the most stringent international standards. As of December 31, 2005,
In 2008, the total number of certifications obtained was 155 (133329 (248 in 2004)2007), of which 82123 certifications metaccording to the ISO 14001 standard.standard, 11 certifications according to the EMAS regulation (EMAS is the Environmental Management and Audit Scheme recognized by the European Union) and 51 according to the OHSAS 18001 standard (Occupational Health and Safety management Systems - - requirements).
Environment. In 2005,2008, Eni incurred a total expenditure ofexpenditures amounting to euro 1,0661,081 million for the protection of environment, up 33%1.7% from 2004.2007. Current environmental expenditure amountedexpenses decreased by approximately 9% from 2007, and mainly related to euro 690 millioncosts incurred with respect to remediation and relatedreclamation activities, carried out mainly to the intense program of site remediation started in the past few years.Italy. Capitalized environmental expenditure amountedincreased by 22% and mainly related to euro 375 millionsoil and related mainly tosubsoil protection, water management and soil and subsoil protection.air emissions.
Safety Eni. The safety of Eni’s employees, of its contractors and the one of the people living in the area where its activities and assets are located, is strongly committedof fundamental importance to adopting a preventive approachthe Company.
As to safety regulations, in order2008 the Legislative Degree No. 81/2008 on health and safety in workplaces came into force. This decree meaningfully increases the responsibility of companies for violating applicable laws regulating safety at work, then requiring more severe controls by supervisors and managers.
Eni’s safety strategy is based on:
• | the improvement and dissemination of a safety culture through all levels of its organization; | |
• | a comprehensive policy, specific guidelines and proper management systems in line with International standards and best practices; and | |
• | a risk management system with severe procedures for hazards identification and risk analysis, prevention and mitigation, related to process, products and operations. |
In 2008, the injury frequency rate was 1.45 and the injury severity rate was 0.05.
Cost incurred in 2008 to reduce the occurrence of accidents and their consequences. Operations are managed with a special focus onsupport the safety levels of workers, contractorsoperations and local communities. In lineto comply with international best practice, safety, preventionapplicable rules and regulations were euro 441 million, down 5.8% from 2007.
Health. Eni’s activities for protecting health aim at the continuous improvement of work hygiene include:conditions. Results have been achieved through:
efficiency and reliability of plants; | ||
• | promotion and dissemination of knowledge, adoption of best practices and operating management systems based on advanced criteria of protection of health and internal and external environment; | |
• | certification programs of management systems for production sites and operating units; | |
• | identified indicators in order to monitor exposure to chemical and physical agents; | |
• | strong engagement in health protection for workers operating outside Italy, identifying international health centers capable of guaranteeing a prompt and adequate response to any emergency; | |
• | identification of | |
In 2005, expenditure forTo protect the health and safety on the workplace amounted to euro 391 million, 57% of which were for current expenditure with the remaining part being capitalized. In 2005, the injury frequency rate measured as the number of injuries per million hours worked by Eni’sits employees, was approximately 3.17, declining from the 2004 level of 4.47.
Health Activities for the protection of health aim at improving general work conditions and are developed according to three main principles: (i) protection of employees’ health; (ii) prevention of accidents and professional diseases; and (iii) promotion of healthier behaviors and life styles in workplaces.
In 2005 approximately euro 40 million was invested in the protection of health.
In Italy, health surveillance is performed in each operating unit throughEni relies on a network of health centers and by means of medical examinations, controls and monitoring campaigns for the major physical, chemical and biological risk agents. The health of employees outside Italy is protected likewise, in many cases integrating the typical activities of medicine on the workplace and first aid with the activities dedicated to primary health care extended also to family members and in many cases also to local communities.
Eni has a network of 339 own332 health care centers located in itsis main operating areas, of these 241 centers are outside Italy and are managed by local staff (322 doctors and 384 nurses).areas. A set of international agreements with the best local and international health centers ensures efficient serviceservices and timely reactionsresponses to emergencies.
In 20052008 Eni boosted its E-medicine program aimed at increasingincurred a total expense of euro 68.6 million, up 27.5% from 2007 to protect the quality of health care provided to employees and to health operators in Italy and outside Italy, that integrates computerized technologies and advanced telecommunication systems. The program includes three projects:
In Italy, Eni started a program of prevention, both through information campaigns and by means of screening procedures and direct actions accessed on a voluntary basis. The areas concerned are:
Outside Italy, Eni promoted specific information campaigns for the protection of its employees, their families and local communities, such as those for the prevention of malaria (in Nigeria and Azerbaijan) and the prevention of HIV transmission (in Nigeria and Congo).
employees.
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Implementation of the Kyoto Protocol
On February 16, 2005, the Kyoto Protocol entered into force and, with it, the commitments of the Annex I Parties which have ratified the protocol,Protocol, including the EU and Italy. According to Law No. 120/2002, Italy committed itself to reduce GHGgreenhouse gas (GHG) emissions by 6.5% in the period 2008-2012, as compared to 1990 values.GHG levels emitted in 1990. Reductions can be achieved through both through internal measures and through a series of instruments supplementary to internal measures. These arecomplementary initiatives. The latter include the so-called flexible mechanisms, which allow an enterpriseenables a Party to carry out projects in developing countries (CDM - Clean Development Mechanism) and in industrial countries with transition economies (JI - Joint Implementation) in order to obtain emissionsemission credits and to purchase Assigned Amount Units from other Annex I countries, that have a surplus of thesefulfill the Kyoto units (IET - International Emission Trading).compliance.
Italy, as an EU Member State, is participating inpart of the EU Emission Trading Scheme which("ETS") that was established onby Directive 2003/87/EC. Effective from January 1, 2005, ETS is the largest carbonvirtual market in the world.world for exchanging emission allowances targeting industrial installations with high carbon dioxide emissions.
TheAs foreseen by the Directive, Italy has issued two National Action Plan forAllocation Plans (NAP) covering the reduction of greenhouse gas emissions 2003-2010, setsperiods 2005-2007 and 2008-2012 which set out the allowances assignedawarded to each sector and installation. Eni has cooperated withis part to the authorities responsible for the preparation of the National Allocation Plan and itETS. Moreover, Eni is also active in the utilization of the Kyoto Flexible Mechanisms. In fact, due to its presence in about 70 countries, Eni is an elective partner for carrying out CDM and JI projects thus contributing to the Italian program of greenhouse gas emissions reduction. In December 2003 during the Conference of Parties to the Kyoto Protocol – COP9 – Eni and the Ministry of the Environment signed a Voluntary Agreement for using flexible mechanisms, promoting CDM and JI and contributing to the sustainable development of host countries.
Law No. 316 of December 30, 2004 which converts Law Decree No. 237/2004 has implemented EuropeanThe ETS EU directive 2003/87/EC which establishes a system for emission trading targeted to industrial installations with high carbon dioxide emissions. From January 1, 2005, this European emission trading scheme has beenprovides that each Member State shall ensure that any operator who produces GHG emissions in force and on this matter on February 24, 2006 the Ministryexcess of the Environment publishedamounts awarded based on national allocation plan, will provide allowances to cover excess emissions a decree assigning the EU allowancesyear later in addition to pay a penalty. The excess emissions penalty shall be euro 100 (euro 40 for the 2005-2007 period to each industrial installation included in the scheme. In the first period of commitment, emissions not covered by corresponding allowances are subject to a fine amounting to euro 40/2005-2007) for each tonne of carbon dioxide.dioxide equivalent emitted. All companies are expected to identify and carry out projects for emission reduction.reductions. Eni participate toparticipates in the ETS scheme with 6156 plants in Italy and two4 outside Italy, which collectively represent about a third of all greenhouse gas emissions generated by Eni’s plants worldwide. In the whole period (2005-2007) Eni was assigned, for the existing installations,entitled to allowances equal to 65.2 million tonnes77.2 mmtonnes of carbon dioxide for existing and new installations (of which 22.4 for 2005, 21.4 for 2006 and 21.4 for 2007). New EU allowances are expected for new entrants, especially in power generation. In 2005, emissions25.7 mmtonnes of carbon dioxide fromfor 2007).
Based on the implementation of projects designed to reduce emissions, particularly the start-up of high efficiency combined cycles for the cogeneration of electricity and steam, the amount of carbon dioxide emitted by Eni’s plants were lower than permits entitled.
In order to play an active rolecomplied with mandatory limits in the ETS Eni:
Eni is also upgrading its ongoing program for the reduction of energy consumption and related CO2 emissions.whole period.
AManagement believes that a significant emission reduction potential can be derived fromachieved in connection with oil and gas production activities outside Italy, that in somea number of cases, given the lack of local market outlets, require the flaring of natural gas associated to oil production. The elimination of flaring and the use of associated gas for the development of local economies allow sustainable development while reducing greenhouse gas emissions. The validation of such projects as Clean Development MechanismCDM and JI will provide emission credits and facilitate the achievement of the Italian reduction target, as set by the Kyoto Protocol. Eni already carried out Zero Gas Flaring projects in Nigeria and Congo while others are underway.
In 2004 Eni preparedNovember 2006 the documentation required forNigerian Kwale-Okpai project has been registered as a CDM project. It regarded the Kwale-Okpaiconstruction of a combined cycle power station, in Nigeria to qualify as a Clean Development Mechanism project, the power stationwhich utilizes the associated gas to oil production formerly flared. More projects are being assessed or implemented in Congo, Nigeria and Angola. Moreover, Eni endorsed the Global Gas Flaring Reduction Initiative of the World Bank, in order to fight for the elimination of obstacles to the completion of gas flaring reduction projects.
The best solutions for compliance with the Kyoto Protocol are the use of low emission energy sources and the adoption of highly efficient technologies. To address the greenhouse gas challenge, Eni completed in 2004performed a detailed analysis for defining its strategy to respond to climate change and to participate in the European emissions trading system, identifying a number of projects for energy saving and emission reductionreductions from its plants.
To ensure comprehensive, transparent and accurate accounting for GHG emissions, which is consistent over time, Eni introduced a protocolin 2005 its own Protocol for the accounting and reporting of greenhouse gas emissions (GHG Accounting and Reporting Protocol), which is an essential requirement for emission certification. Indeed, accurate reporting will support the strategic management of risks and opportunities related to greenhouse gases, the definition of objectives and the evaluation of progress.
For safer and more accurate management of GHG emissions and with a view to supporting accounting, Eni provided all its divisions and business units with a dedicated database, in order to gather and report GHG emissions according to the Protocol and to ensure completeness, accuracy, transparency and consistency of GHG accounting as required by certification of these emissions, Eni decided to implement a commercial database to facilitate evaluation of emissions in compliance with the methodologies laid down in its own GHG Accounting and Reporting Protocol.needs.
Eni introduced a complete, accurate and transparent protocol for accounting and reporting of greenhouse gas emissions, which is an essential requirement for emission certification. Indeed, accurate reporting will support the strategic management of risks and opportunities related to greenhouse gases, the definition of objectives and the evaluation of progress.78
As a support to its general strategy for a sustainable management of greenhouse gases, Eni continued its programs for the development of natural gas in Italy and outside Italy, by means of technologically advanced projects such as the Blue Stream gas pipeline from Russia to Turkey and the GreenstreamGreenStream pipeline from Libya to Sicily. Increased gas availability in Italy will lead to a further expansion of the gas-power integration, through high efficiency combined cycles with much lower carbon dioxide emissions than coal and liquid fuels.
In a medium term perspectivethe medium-term, work is underway on the separation of carbon dioxide and its permanent storage in geologic reservoirs, a part of the CO2 Capture Project, an international R&D program carried out in conjunction with other oil companies. In the long-term, Eni is actively engaged in the political process regarding future emission reduction regulations. In particular Eni is involved in bioenergy and biofuels.
Regulation of Eni'sEni’s Businesses
Overview
The matters regarding the effects of recent or proposed changes in Italian legislation and regulations or EU directives discussed below and elsewhere herein are forward-looking statements and involve risks and uncertainties that could cause the actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties include the precise manner of the interpretation or implementation of such legal and regulatory changes or proposals, which may be affected by political and other developments.
Regulation of Exploration and Production Activities
Eni’s exploration and production activities are conducted in many different countries and are therefore subject to a broad range of legislation and regulations. These cover virtually all aspects of exploration and production activities, including matters such as license acquisition, production rates, royalties, pricing, environmental protection, export, taxes and foreign exchange. The terms and conditions of the leases, licenses and contracts under which these oil and gas interests are held vary from country to country. These leases, licenses and contracts are generally granted by or entered into with a government entity or state company and are sometimes entered into with private property owners. These arrangements usually take the form of licenses or production sharing agreements. See "Regulation of the Italian Hydrocarbons Industry" and "Environmental Matters" for a description of the specific aspects of the Italian regulation and of environmental regulation concerning Eni’s exploration and production activities.
Licenses (or concessions) give the holder the right to explore for and exploit a commercial discovery. Under a license, the holder bears the risk of exploration, development and production activities and provides the financing for these operations.
In principle, the license holder is entitled to all production minus any royalties that are payable in kind. A license holder is generally required to pay production taxes or royalties, which may be in cash or in kind. Both exploration and production licenses are generally for a specified period of time (except for production licenses in the United States which remain in effect until production ceases). The term of Eni’s licenses and the extent to which these licenses may be renewed vary by area.
Production sharingIn Product Sharing Agreement (PSAs), entitlements to production volumes are defined on the basis of contractual agreements (PSAs) entered intodrawn up with state oil companies which hold the concessions. Such contractual agreements regulate the recover of costs incurred for the exploration, development and operating activities (cost oil) and give entitlement to a government entity or state company generally obligate Eni to provide all the financing and bear the risk of exploration and production activities in exchange for a shareportion of the production remaining after royalties, if any.volumes exceeding volumes destined to cover costs incurred (profit oil).
A similar scheme to PSAs applies to Service and "Buy-Back" contracts.
In general, Eni is required to pay income tax on income generated from production activities (whether under a license or production sharing agreement). The taxes imposed upon oil and gas production profits and activities may be substantially higher than those imposed on other businesses.
Regulation of the Italian Hydrocarbons Industry
OverviewThe matters regarding the effects of recent or proposed changes in Italian legislation and regulations or EU directives discussed below and elsewhere herein are forward-looking statements and involve risks and uncertainties that could cause the actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties include the precise manner of the interpretation or implementation of such legal and regulatory changes or proposals, which may be affected by political and other developments.
79
Exploration & Production
The Italian hydrocarbons industry is regulated by a combination of constitutional provisions, statutes, governmental decrees and other regulations that have been enacted and modified from time to time, including legislation enacted to implement EU requirements (collectively, the "Hydrocarbons Laws").
In the early 1990s, the Government commenced the gradual liberalization of the Italian hydrocarbons industry by implementing legislation that provided for, among other things: (i) the elimination of price controls on petroleum products, (ii) the abolition of Eni’s right of first refusal with respect to the purchase of natural gas produced offshore Italy; (iii) the implementation of a partial third-party access system for the transportation of natural gas; (iv) the establishment of a system for the updating of natural gas retail prices; and (v) the establishment of a royalty reduction program. Law No. 481 of November 14, 1995 (the "Authority Law"), provided for the establishment of a new regulatory body, known as the Autorità per l’Energia Elettrica e il Gas (the "Authority for Electricity and Gas"), a public body charged with, among other things, regulatory supervision of electricity activities and natural gas distribution in order to guarantee the promotion of competition and efficiency while providing for an adequate level of service quality. As the latter is concerned, the Authority for Electricity and Gas is mainly responsible for the public service of natural gas distribution through urban networks.
Legislative Decree No. 164/2000 ("Decree No. 164"), which enacted the European Directive on Natural Gas 98/30/CE into Italian legislation, regulates the Italian natural gas market. Prior to the implementation of Decree No. 164, the Italian natural gas market lacked a legislative framework. "See – Natural Gas" below.
Legislative Decree No. 32 of February 11, 1998 ("Decree No. 32") as amended by Legislative Decree No. 346 of September 8, 1999 and Law Decree No. 383 of October 29, 1999, significantly changed Italian regulation of service stations. In particular, the Decree replaced the process of concessions granted by the Ministry of Industry, regional and local authorities with a license granted by city authorities. "See – Refining and Marketing of Petroleum Products" below.
Legislative Decree No. 443 of October 29, 1999 ("Decree No. 443") modified Legislative Decree No. 112 of March 31, 1998 ("Decree No. 112"), which attributed to Regions many responsibilities in the field of energy and specifically in the sector of hydrocarbons. Decree No. 443 attributes to the State administrative decisions concerning explorationExploration permits and productionof hydrocarbons in the Italian offshore, as well as natural gas storage in fields, while administrative decisions concerning exploration and production of hydrocarbons on the Italian mainland are made by the State in agreement with Regions.
Exploration and Production
Exploration Permits and Production Concessionsconcessions. Pursuant to the Hydrocarbons Laws, all hydrocarbons existing in their natural condition in strata in Italy or beneath its territorial waters (including its continental shelf) are the property of the State. Exploration activities require an exploration permit, while production activities require a production concession, in each case granted by the Ministry of Productive Activities(formerly Ministry of Industry).through competitive auctions. The initial duration of an exploration permit is six years, with the possibility of obtaining twothree yearthree-year extensions and an additionalone yearone-year extension to complete activities underway. Upon each of the three year extensions, 25% of the area under exploration must be relinquished to the State. The initial duration of a production concession is 20 years, with the possibility of obtainingone ten yeara ten-year extension and an additionalfive year extensionsfive-year extension until the field depletes.Royalties. The Hydrocarbons Laws require the payment of royalties for hydrocarbon production. Royalties are equal to 7% and 4%, respectively, for onshore and offshore production of oil and 7% for both onshore and offshore production of natural gas.
Preferential RightsUntil December 31, 1996, Eni was entitledA bill of law is currently under review by the Italian Parliament which provides for an increase of royalties on hydrocarbon production from the current rate of 7 toa number of preferential rights, including, among other things,10%. For theexclusive rightyear 2009 management expects that this provision would translate into higher royalties amounting toexplore for and exploit, without permit or concession, hydrocarbon deposits in the Exclusive Area.
In 1994, the EU enacted a licensing directive (the "Licensing Directive"), which required member states to enact legislation eliminating, by December 31, 1996, all laws that provided exclusive rights to a single entity in a specific geographic area. Legislative Decree No. 625/1996 (Decree No. 625), which was adopted to implement the Licensing Directive, eliminated the exclusivity of Eni’s rights in the Exclusive Area. Decree No. 625 allows Eni to obtain upon application exploration permits and production concessions having effect from January 1, 1997 that would preserve such rights as have vested under the regime of exclusivity (based on the activities that have been carried out or are currently underway).approximately euro 20 million.Storage of natural gas
The right to store natural gas in depleted fieldsStorage activities in Italyis exercised pursuant to concessions grantedare regulated bythe Ministry of Productive Activities (formerly Ministry of Industry). BeforeLegislative Decree No.164 came into force, only entities already holding a concession to exploit a hydrocarbon deposit were entitled to receive a concession to store natural gas, which is granted by the Ministry of Productive Activities. The initial duration of a concession is 20 years, with the possibility of obtaining at most two ten year extensions if they complied with the storage programs and other obligations deriving from said concession as per Law No. 239/2004. After the expiration of a concession, new storage or production concessions on the same field may be granted through competitive auctions. Pursuant to164/2000 ("Decree No.625, unused storage capacity can be made available to third parties, subject to164"), which enacted theapproval of the Ministry,European Directive ona negotiated basis. Until December 31, 1996, Eni had the exclusive right to store natural gas in depleted fields in the Exclusive Area. Decree No. 625 eliminated this exclusive right, while granting Eni the right to obtain upon application storage concessions effective from January 1, 1997 that would preserve the rights vested with Eni during the regime of exclusivity (based on current storage activities or certain statutory conditions). Eni obtained the ten storage concessions which it had applied for.Natural Gas 98/30/CE into Italian legislation. The most important aspects of Decree No. 164 concerning
production andstorage activitiesperformed by Eniare the following: (i)it favors the development of domestic natural gas reserves; (ii)in vertically integrated enterprises, storage is to be carried out by a separate company not operating in other gas activities (such as Eni’s subsidiary Stoccaggi Gas Italia SpA) or by companieswhichengaged onlyengageintransmissiontransport and dispatching activities, provided the accounts of these two activities are clearly separated from the accounts ofstorage.storage; (ii) storage activity is exercised pursuant to concessions granted by the Ministry of Productive Activities. The duration of a concession is 20 years, with the possibility of obtaining at most two ten-year extensions if operators complied with the storage programs and other obligations deriving from applicable laws. Existing storage concessions are subject to the Decree. Their original term was confirmed and includes relevant production concessions; (iii) the need for strategic storage in Italy is defined explicitly; the burden of strategic storage is imposed upon companies importing from non-EU countries, which have to provide a strategic storage capacity in Italy corresponding to 10% of the amount of natural gas imported each year; (iv) holders of storage concessions are required to provide storage capacity for domestic production, for strategic use and for modulation to eligible users without discriminations, where technically and economically viable; (v) modulation storage costs are charged to shippers which have to provide modulation services adequate to the requirements of their final customers; (vi) storage tariffs criteria are determined by the Authority for Electricity and Gas in order to ensure aproperpreset return on capital employed, taking into account the typical risk inherent inupstream activities,this activity, as well as volumes stored for ensuring peak supplies andprovides incentivesthe need to incentive capital expenditure for upgrading theupgrading of thestorage system;(vii) in the transitional period until the publication of the Authority’s decision, storage companies determineandpublish their own tariffs; and (viii)(vii) the Authority for Electricity and Gashas to establishestablishes the criteria and priority of accessmoststorage operators have to include in their own storage codes.In compliance with the provisions of Article 21 of Decree No. 164/2000, on October 21, 2001 all storage activities carried out within the Eni Group were conferred to Stoccaggi Gas Italia SpA ("Stogit"), which holds ten storage concessions.
In implementation of Decree 164, the Decree of the Minister of Productive Activities of September 26, 2001 defined the criteria for the determination and use of strategic storage. The utilization of natural gas volumes held under strategic storage becomes mandatory in case of interruption or reduction of imports from non-EU countries due to technical and unpredictable causes, in case of emergency on the national gas network, in case of winters colder than those expected by the Authority for Electricity and Gas in its periodic statements concerning the determination of modulation obligations for seasonal consumption peaks.
With Decision No. 26 dated February 27, 2002, the Authority for Electricity and Gas determined tariff criteria for natural gas storage for the first regulated period (from April 1, 2002 to March 31, 2006) on the basis of the costs of the service, plus a weighted average pre-tax rate of return of 8.33%. Tariffs are adjusted through a price cap mechanism that takes into account inflation and a productivity recovery of 2.75% per year. The tariff structure for modulation consists of two fixed elements, one based on the annual capacity used (space occupied in the reservoir) and one based on maximum output capacity demand for one day in the year, as well as a variable element calculated on the basis of the quantities entering and leaving the field. On the basis of these criteria on March 18, 2002, Stoccaggi Gas Italia SpA presented its suggested tariffs for cyclical modulation, upstream and strategic storage services for the first regulatory period. The Authority for Electricity and Gas rejected Stoccaggi Gas Italia proposal and set storage tariffs for the first regulatory period with Decision No. 49 of March 26, 2002. In 2002, Stoccaggi Gas Italia appealed against both decisions to the Regional Administrative Court of Lombardia in order to obtain their cancellation. The Regional Administrative Court of Lombardia repealed Stoccaggi Gas Italia’s appeal with decision of September 29, 2003. Stoccaggi Gas Italia appealed to the Council of State against this decision on February 3, 2004. Pending the proceeding, Stoccaggi Gas Italia is currently applying the tariffs set by the Authority for Electricity and Gas.On March 3, 2006, the Authority for Electricity and Gas with
DecisionResolution No. 50/2006 published the criteria for determining storage tariffs forthe second regulated period. This decision changes the regulation in force in the firsta regulated periodintroducing maximum allowed revenues affecting the capacity component (space and flow) and confirming the price cap mechanism for the commodity component. It also establishes a single national tariff. The decision confirms the mechanisms for the evaluation of net capital employed already defined for the first regulated period; the return on capital employed is reduced from 8.33% to 7.1% (pre-tax). Based on the new tariff regime and keeping into account that all the capacity available in 2006 is considered in the calculation of tariffs, revenues expected in the thermal yearstarting from April 1, 2006toand ending on March 31,2007 amount2010.According to
about euro 280 million, decreasing 20% fromthis Resolution, theprevious thermal year. The decision contains alsostorage company calculates revenues for the determination of unit tariffs for storage services by adding the following cost elements:
(i) a return on the capital employed by the storage company equal to 7.1% (8.33% in the first regulated period); (ii) depreciation and amortization charges; and (iii) operating costs. In the years following the first year of the newly regulated period, reference revenues are updated to take account of variations of capital employed and the impact of the indexation of depreciation charges and operating costs to consumer price inflation lowered by a preset rate of productivity recovery.
Applicable regulation provides for incentives to capital
expenditure for the development ofexpenditures intended to develop and upgrade storage capacity by recognizing an additional rate of return of 4% on the basic ratefor 8 years forto capital expenditureincreasing capacity and for 16 years for the development ofprojects aiming at80
developing new storage
sites. Decision No. 56 of March 16, 2006 approved Stogit’s tariff proposalsdeposits and increasing existing capacity. Such incentives are applicable for2006-2007 thermal year.a sixteen-year period and an eight-year period, respectively.
With Decision No. 119/2005,In November 2007, the Italian Authority for Electricity and Gasregulates waysand the Italian Antitrust Authority opened an inquiry to gain insight into the functioning of the natural gas storage activity in Italy, particularly with regards to the lack of investments by operators aimed at expanding natural gas storage capacity to store natural gas in Italy. Eni, through its wholly-owned subsidiary Stogit Italia, owns nearly the entire storage capacity currently existing in Italy.With Resolution No. 220/2006, the Italian Authority for Electricity and Gas approved the
supplystorage code proposed by Stoccaggi Gas Italia on the basis ofmodulation, mineralthe framework andstrategiccriteria established by Resolution No. 119/2005 ("Adoption of guarantees for free access to natural gas storage services,on partduties of subjects operating storagecompanies, as well as the service for the operating balancing of transport companiesactivities andprovides a basic schemerules for the preparation ofcompanies’a storage code").This code regulates access to and provision of storage services during normal operational conditions, regulates procedures for conferring storage capacities, fees to be charged to customers in case they uplift from or input to storage sites volumes in excess or uses higher input/uplift capacity with respect to scheduled and operating programs. On the basis of these provisions, Eni may incur significant charges for storage services should the Company fail to use storage services in accordance with scheduled operating programs.
The code has been in force since November 1, 2006.
The storage company offers services according to an access priority established by the Italian Authority for Electricity and Gas as follows:
(i) mandatory services, including modulation storage, mineral storage, and strategic storage services; and (ii) services for operating needs of transport companies, including hourly modulation. The modulation storage service is geared towards satisfying modulation needs of natural gas users in terms of peak consumption and daily or seasonal trends in consumption. Final clients consuming less than 200,000 CM on an annual basis are entitled to a priority when satisfying their modulation requirements. To that end, the storage company makes available its capacity for space, injection and off-take on an annual basis in accordance with its storage code.
By February 1 of each year, theThe mineral storagecompany isservice aims topublish on its internet site: (i) its plantallow natural gas producers to perform their activity under optimal operatingand maintenance program for the following thermal year (the thermal year for storage starts on April 1 and ends on March 31 of the following year); (ii) its upgrading and divestment plan as authorizedconditions, according to criteria determined by the Ministry ofProductive Activities; and (iii)Economic Development.The strategic storage service aims to satisfy certain obligations of natural gas importers from countries not belonging to the EU in accordance with Article 3 of Legislative Decree No. 164/2000. The relevant storage capacity
available for each of the services provided.
As concerns the modulation and mineral storage services, in its storage code the company defines a program for the injection phase and the offtake phase, indicating the optimization criteria and flexibility margins provideddedicated tousers. The offtake phase takes place between November 1 and March 31, the injection phase between April 1 and October 31. The volumes of gas offtaken by the user cannot be higher than the volumes injected or the volumes the customer is entitled to.
The capacity destined to mineral and strategic storagethis service is determined by the Ministryfor Productive Activities. As concerns strategic storage, the company makes available the volumesofnatural gas in storage it owned resulting from its closing balance at December 31, 2001. For any additional volumes that can contribute to the reaching of the thresholds set by the Ministry, the price is suggested by the storage company and set with a bid procedure. The user can request only storage capacity and inject own natural gas volumes.Economic Development.Storage capacity is
assignedawarded by the storage company for periods no longer than a thermal year byMarchApril 1, of each year. The first requests to be met are those for strategic storage and for the operating balancing of the system. The residual capacity available and the maximum dailyofftakeuplift capacity isassignedawarded according to the following order of priority to: (i) holders of production concessions requesting mineral storage services; (ii)entities deployingnatural gassale activitiesselling operators who areobligedheld to provide a modulation service of their supply to their customers according to Article 18, paragraphs 2 and 3 of Legislative Decree No. 164/2000, for maximum volumes corresponding to a seasonal demand peak with average temperatures, on the terms and conditions established by a procedure to be issued by the Authority for Electricity and Gas; (iii) to the entities mentioned in (ii) above only for those additional maximum volumes related to a seasonal demand peak in case of certain low temperatures measured on a20 year20-year period, under the terms and conditions of the procedure mentioned in (ii) above; and (iv) the entities requesting access for services different from the ones mentioned above.A procedure to be issued by the Authority for Electricity and Gas will establish the criteria for assigning capacity when the requests mentioned in (iv) above exceed availability.
During the storage thermal year, the company makes new assignations when new capacity becomes available. Users are allowed to sell to each other volumes of gas injected or capacity assigned. Users are requested to transmit to the storage company one week in advance of the next, programs for injection or offtake, within the limit of assigned capacity, confirming each day the bookings for the following day.
The Decision No. 50/2006 also regulates the charges for balancing and replenishing storage for the first regulated period, while for calculating the tariffs related to balancing and replenishing in the second regulated period the Authority is expected to publish a new decision.
If the user offtakes a peak daily amount higher than the assigned amount, without replenishing by purchasing, the storage company applies, for each month to the maximum difference between peak daily capacity actually used and peak daily capacity entitled, a variable charge depending on the volumes of gas in storage on the day of the offtake and the number of days of exceeding use.
If the volumes input to storage are higher than the capacity assigned and the user does not purchase additional capacity or sell excess natural gas volumes within 15 days from receiving information on its position, the storage company will: (i) apply to the maximum exceeding volume in a month a variable balancing charge depending on the month of injection; and (ii) sell, on behalf of the user that has not yet done it, the volume of gas injected exceeding the assigned capacity in the day or days of the thermal year of storage in which working gas reached its maximum amount, if the transport company reduced the volumes planned by users of transport at one or more interconnection points at the border and the same transport users also hold storage capacity.
If the volumes of gas offtaken by a user are higher than those held in storage and the user fails to replenish by means of a purchase, charges are applied that relate to replenishment of offtake from strategic storage, which include: (i) in case of offtakes allowed by the Ministry of Productive Activities, the replenishment of the first volumes input to storage right after the offtake and the payment by the user of a charge applied to the maximum accumulated volume of offtaken gas, net of an income proportional to volumes replenished, as determined by the Authority, as well as the payment of balancing charges without penalty; and (ii) in case of non authorized offtake, the income recognized to the user for replenishment is reduced by a fixed amount. Proceeds from the replenishment of strategic reserves are subdivided proportionally among users in charge of strategic storage services, except for the proceeds from the replenishment of gas offtaken without authorization that are proportionally distributed to all users. Proceeds to the storage company from the application of balancing charges are proportionally distributed to users.
With Decision No. 21 of January 31, 2006, the Authority for Electricity and Gas increased these charges by different amounts with respect to authorized and unauthorized offtakes. On the basis of these provisions, Eni may incur material charges for storage services in case of unauthorized offtakes from the strategic reserve. Eni appealed against this decision.
With Decision No. 266/2005 the Authority for electricity and gas started an inquiry leading to a possible administrative sanction (fine under Law No. 481/1995) alleging that Stogit’s behavior does not conform with the discipline contained in Decision No. 119/2005 concerning access to and provision of storage services.
On the use of storage capacity conferred in 2004/2005 and 2005/2006With Decision No. 37 of February 23, 2006, the Authority for Electricity and Gas started an inquiry on a few natural gas selling companies, among which Eni, with reference to the use of storage capacity in years 2004-2005 and 2005-2006. For the 2004-2005 thermal year and for the period from October 1, 2005 to December 31, 2005 the Authority for Electricity and Gas deemed improper the use of modulation storage capacity. In fact the Authority for Electricity and Gas judged offtakes to be higher than the volumes considered necessary to satisfy the requirements for which the storage company was awarded priority given the weather of the period.Eni
alsoheld natural gas for strategic reserve purposes in its storage business, as established by Decree No. 164. The strategic reserves of gas are defined as "stock destined to meet situations of deficit/decrease of supply or crisis of the gas system". The Ministry ofProductive Activitiesthe Economic Development determines quantities and usage criteria of such reserves. As of December 31,20052008 Eni held approximately180179 BCF of strategic reserves of natural gas(180(179 BCF at year end2004)2007).Gas & Power
Natural gas market in Italy
The European Directive on Natural Gas was implemented into Italian legislation through Legislative Decree No. 164 of May 23, 2000 ("Decree No. 164"), effective from June 21, 2000. As concerns natural gas activities carried out by Eni, the most relevant aspects of the decree are as follows:
(i)81
(i) starting in 2003 all customers are eligible customers (with access to the natural gas system and free to choose their supplier of natural gas); (ii) Antitrust thresholds are in place for gas operators in Italy as follows: (a) effective January 1, 2002, operators are prohibited to transmit into the national transport network imported or domestically produced gas volumes higher than a preset share of Italian final consumption. This share is 75% of total final consumption in the first year of regulation and then is to decrease by 2 percentage points per year to reach a 61% threshold in terms of final consumption by 2009; and (b) effective January 1, 2003, operators are prohibited to market gas volumes to final customers in excess of 50% of overall volumes marketed to final customers. Compliance with these ceilings is verified yearly by comparing actual average shares obtained by any operator in a given three-year period for both volumes input and volumes marketed to customers with average shares permitted by the law for the same period. Actual shares are computed net of losses (in the case of sales) and volumes of natural gas consumed in own operations. Based on a bill passed by the Italian upper house, Eni expects that these antitrust thresholds will be renewed when they expire in 2010; (iii) natural gas transport and dispatching activities have to be carried out by a separate company that is not allowed to carry out any other activity in the natural gas field, with the only exception of storage, for which, however, accounting and operating separation is envisaged. Also distribution, which includes the transport of natural gas by means of local gas pipeline networks for delivery to customers, has to be carried out by a separate company which cannot perform other gas related activities. Sales activity to final customers is compatible only with import, export and production activities and is subject to authorization from the Ministry of Productive Activities. Concessions for the distribution of natural gas will be awarded by bid procedure; and
(iv) tariff criteria and return on capital employed for transport, dispatching, storage, use of LNG terminals and distribution are determined by the Authority for Electricity and Gas. Third parties are allowed to access transport infrastructure, storage sites, LNG terminals and distribution networks on a regulated basis. As provided for by the decree, a Network Code containing norms and regulations for the operation of and access to infrastructure was prepared by operators on the basis of criteria set by the Authority for Electricity and Gas. Year 2008 closed the
natural gas system and free to choose their supplier of natural gas); (ii) from January 1, 2003 to December 31, 2010 no single operator is allowed to hold a market share higher than 50% of domestic sales to final customers. In addition, no single operator is allowed to supply more than 75% of all natural gas volumes introduced in the domestic transmission network by 2002, decreasing by 2 percentage points per year until it reaches 61%. Compliance with these ceilings is verified annually by comparing the allowed average percentage on a three year basis for volumes input or sold to the average percentage obtained by each operator in the same three year period. Allowed percentages are calculated net of losses (in the case of sales) and volumes of natural gas consumed in own operations. In accordance with Article 19, paragraph 4 of Legislative Decree No. 164/2000 the volumes of natural gas consumed in own operations by a company or its subsidiaries are excluded from the calculation of ceilings for sales to end customers and for volumes input into the Italian network to be sold in Italy; (iii) imports from the European Union are free, while natural gas imported from outside the European Union is subject to an authorization of the Ministry of Productive Activities. Subjects importing from countries outside the EU must secure a certain availability of strategic storage. Such constraints apply also to the import contracts entered into before the coming into effect of Decree No. 164, these contracts are automatically considered authorized since this date; (iv) natural gas transport and dispatching activities have to be carried out by a separate company that is not allowed to carry out any other activity in the natural gas field, with the only exception of storage, for which, however, accounting and operating separation is envisaged. Also distribution, which includes the transport of natural gas by means of local gas pipeline networks for delivery to customers, has to be carried out by a separate company which may not perform other gas related activities. Sale activity to final customers is compatible only with import, export and production activities and is subject to an authorization from the Ministry of Productive Activities. Concessions for the distribution of natural gas will be assigned only through an auction procedure; and (v) tariff criteria and return on capital employed for transport, dispatching, storage, use of LNG terminals and distribution are determined by the Authority for Electricity and Gas. Third parties are allowed to access transport infrastructure, storage sites, LNG terminals and distribution networks on a regulated basis. As provided for by the decree, a Network Code containing norms and regulations for the operation of and access to infrastructure was prepared by operators on the basis of criteria set by the Authority for Electricity and Gas.
In particular 2005 closes the second three yearfifth three-year regulated period for natural gas volumes input in the domestictransmissiontransport network,(forfor which the allowed average percentageis 71%was 63% of domestic consumption of naturalgas)gas, and thefirst three yearfourth three-year regulated period for sales volumes(for whichto theallowed average percentage is 50% of gas sales).Italian market. Eni’s presence on the Italian market complied with saidlimit.limits.Law No. 239 of August 23, 2004 on the restructuring of the energy sector in Italy
This law provides for:
• a derogation to third party access granted to companies that make direct or indirect investments for the construction of new infrastructure or the upgrading of existing ones such as: (i) interconnections between EU Member States and national networks; (ii) interconnections between non-EU States and national networks for importing natural gas to Italy; (iii) LNG terminals in Italy; and (iv) underground storage facilities in Italy. Investing companies can obtain priority on the conferral of new capacity for a portion of not less than 80% of the new capacity installed and for a period of at least 20 years.years; and• Paragraph 34 of the single article prohibits undertakings active in the field of natural gas and electricity with a concession for local public services or for the management of networks (excluding all sale activities) from operating in a competitive market for post-counter services, in the areas where they hold the concession for the duration of the concession, including through subsidiaries or affiliates.•Paragraph 51 cancelsparagraph5 of Article 16 of Legislative Decree No. 164/2000, which obliged distribution companies to ascertain the safety of plants which do not only supply gas to productive units and safety of post-counter services.•Paragraph69 provides the authentic interpretation of the rule introduced by Legislative Decree No. 164/2000 concerning the transitional regime of concessions for natural gas distribution activities in urban centers existing at June 21, 2000, which allows for an anticipated repayment of the distribution service, despite being provided through a bid procedure rather than direct entitlements. This law changes the provisions defined by Legislative Decree No. 164/2000 by: (i) extending to December 31, 2007, the transitional period for the continuation of existing concessions, with a possible extension of one further year when public interest is considered important by local authorities; and (ii) canceling the adding up of possible extensions, as provided for by Legislative Decree No. 164/2000, in case of certain conditions (business restructuring, size parameters, shareholding composition). The end of concessions awarded on the basis of a bid procedure remains set at December 31, 2012.Law Decree No. 239/2003
Law Decree No. 239/2003, converted with amendments into Law No. 290/2003, prohibits companies operating in the natural gas and
electricitypower industries to hold stakes higher than 20% in the share capital of companies owning and managing national networks for the transmission of natural gas andelectricity from July 1, 2007. Law No. 266/2005 (budget law for 2006) extendedpower.The term by which companies must comply with this
deadline from July 1, 2007 toprovision, which was initially fixed at December 31,2008. At December 31, 20052008, will be re-determined in 24 months after the effective date of said decree from the Italian Prime Minister. Currently, Eniheld a 50.05% interest in Snam Rete Gas. Following this provision, Eni will haveis unable tosell part of its stake in Snam Rete Gas – until it reaches the 20% maximum interest allowed within the end of 2008.predict that date.
OnIn addition, on March 23, 2006 aLawPresidential Decreeof the President of the Council of Ministersdefined criteria andmodesmethods for the divestment of the interest held by Eni in Snam Rete Gas SpA, introducing the special powers of the Ministry of Economy and Finance82
provided for by the regulations on the divestment of interests held by the Italian Government ("golden share") in the
by-lawsBy-laws of this company.
Natural gas emergency procedureOn December 12, 2005,Increasing competition in theMinisterwholesale segment ofProductive Activities updated the emergency procedure to cope with anatural gasshortage in the event of unfavorable climatic events. In particular the new established procedure set the following sequence of activities:and power
•an increase of gas availability (maximization of natural gas importation);•activation of the interruption of customers with interruptible contracts;•interruption of supplies to "dual-fuel" plants;•further actions to reduce natural gas consumption of "dual-fuel" plants; and•further initiatives to reduce natural gas consumption.In order to
manageimplement the Law Decree defined by the Italian Government to face the economic downturn, on March 2009, the Authority for Electricity and Gas proposed certain rules on gas and power sales and production to increase competition on the Italian market.The new rule is aimed at increasing competition on the wholesale segment in Italy, both in the natural gas
emergency duringmarket and the2005-2006 winter opened on December 19, 2005,electricity one. The Authority for Electricity and Gas will define a certain amount of quantities of gas to be sold at a fixed price. The main operator in thefollowing provisions were adopted:
•Resolution No. 10/2006: the Authority introduced an auction mechanism to activate an interruption temporary system of the gas natural supply;•Ministerial Decree of January 24, 2006: the Ministry of Productive Activities reduced emissions limits to the power generation plant up till March 31, in favor of the use of oil; and•Ministerial Decree of January 25, 2006: the Ministry of Productive Activities reduced from 1 to 28 of February the allowed limits of temperature in the residential buildings.
The MinistryItalian gas market will be obliged to offer this set amount ofProductive Activities declarednatural gas. In particular, from October 1 to March 31 of each year, starting from 2009, theendmain operator is obliged to offer about 100 mmCM per day and 20 mmCM per day from April 1 to September 30. This rule should limit the discretionarily of theemergency proceduremain operator in defining higher prices of natural gas and onMarch 22, 2006.the other side to increase liquidity of the natural gas market in Italy.Natural
Gasgas pricesPrices of natural gas sold to industrial and thermoelectric customers as well as to wholesalers are freely established among buyers and sellers following the liberalization of the natural gas sector introduced by Decree No. 164.
Eni applies a multi-choice price structure to its individual customers or groups of customers who are able to choose among various forms of price indexation. This price structure aims at reducingNotwithstanding this, theimpact of the volatility of raw material prices due to fluctuations in the prices of energy parameters and in exchange rates by introducing mechanisms that minimize commodity risks. TheAuthority for Electricity and Gas holds a power of surveillance on this matter (see below) under Law No. 481/1995 (establishing the Authority for Electricity and Gas) and Legislative Decree No. 164/2000.See below for a discussionFurthermore, the Authority is entrusted with the power of regulating natural gas prices
of sales of natural gasto residential and commercial customers which were not eligible customers until December 31, 2002.
TheIn fact, the Presidential Decreeof the President of the Council of Ministers ofdated October 31, 2002conferred toentrusted the Authority for Electricity and Gas with thepowers to: (i)power to define, calculate and updateandgas selling pricesalso after the opening up of markets set at January 1, 2003for customers who were not-eligible customers until December 31,2002; (ii) define methods for updating selling prices with reference to variable costs that minimize2002, also after theimpactopening up ofinflation; and (iii) define criteria for allocatingthecostsgas markets from January 1, 2003, additionally targeting the public goal of containing inflationary pressure deriving fromsocial support measures, in order to reduce the aggregate net cost of interventions as much as possible and to ensure neutrality in the application of selling prices to the various groups of users.increasing energy costs. Consistently with this decree, the Authority for Electricity and Gas: (i) with Decision No. 195 of November 29, 2002 changed the methods for periodically updating selling prices for natural gas in connection with changes in international prices of crude oil and refined products. Such changesconcernregarded theschedulesscheduled update process (from every two months to every three), and the duration of the reference period for the calculation of changes in average international prices as compared to the first application quarter(from(changes are calculated with reference to a nine-month period preceding thepreceding six months to the preceding nine months)update). The invariance threshold, beyond which tariffs are updated, remained at 5%; and (ii) withDecisionResolution No. 207 of December 12, 2002, it decided that companies selling natural gas through local networks have to maintain the conditions applied to non-eligible customers until December 31, 2002 until the customer accepts a new contract offer. In addition, the Authority for Electricity and Gas decided that these companies can propose their own new contract offers and the tariffs determined according to the criteria established by the Authority for Electricity and Gas, adequately advertising them before March 31, 2003 (such offers must be published on the companies web page, on at least one newspaper of general circulation and on theOfficial GazetteGazzetta Ufficiale of their region or autonomous province).
With Decision No. 248Changes introduced to the indexation mechanism ofDecember 29, 2004,the raw material component in supplies to residential customers by the Authority for Electricity and Gas: Resolutions No. 248/2004; 134/2006 and 79/2007With Resolution No. 79/2007 the Italian Authority for Electricity and Gas
changed the indexingestablished a new indexation mechanismconcerningfor the raw material cost component in natural gas supplies to customers consuming less than 200,000 CM/y who were not-eligible customers until December 31, 2002 (mainly residential and commercial customers located in urban centers). The new indexation mechanism of the raw material cost component in tariffs paid by end customersthat were non-eligibleconsuming less than 200,000 CM/y as set in Resolution No. 79/2007 basically works this way: (i) it has limited the ability of gas operators to transfer to customersuntil December 31, 2002 according to Decision No. 195/2002. The decision introducedchanges in thefollowing changes: (i) establishment ofraw material cost by setting a capset atof 75% forthechanges in the raw material component linked to a fall in Brent crude prices below 20 $/BL or a rise within the 35-60 $/BL range, raising the cap at 95% if Brent crude pricesfall outside the 20-35 dollar/barrel range;are higher than 60 $/BL; (ii)change ofit has changed the relative weight of the three products making up the reference index of energy prices whose variations – when higher or lower than5%2.5% as compared to the same index in the preceding period – determine the adjustment of raw material costs; (iii)substitution ofit has replaced one of the three products included in the index (a pool of crudes) with Brent crude; and (iv)reduction init has reduced the value of the variable wholesale component of the selling price byeuro0.26cents per cubic metereuro/CM. Additionally, Italian natural gas importers – including Eni – were obliged to renegotiate existing wholesale supply contracts in order tofostertake account of this new indexation mechanism. For thenegotiation of prices consistent with average European prices in gas import contracts starting from October 2005. Decision No. 248/2004 obliges Italian suppliers to wholesalers to renegotiate supply contracts in lightyear 2005, the Resolution introduced a transitory regime whereby the impact of theprice revision introducednew indexation mechanism was equally shared bysame decisionimporters and wholesalers insupplycase importers had renegotiated existing wholesale contractsbetween wholesalersandend users. This decision also states thatinformed of this theAuthority may reviewAuthority. On theseclausesbasis, Eni reversed part of the reserves accrued in Eni’s accounts for 2005 and 2006 with respect to the83
preliminary estimated impact of the new indexation mechanism on its gas selling margins resulting in a gain recognized in the
light of import contracts. Eni provided the Authority with the terms of its import contracts that may lead the Authority to reconsider its decision, as Eni is one of the largest importers to Italy.
In May-October 2005 the Regional Administrative Court of Lombardy, based on claims of Eniprofit andother operators, annulled Decision No. 248/2004. In March 2006, the Council of State annulled the decision of the Regional Administrative Court of Lombardy in the case of a single operator and, at the same time, postponed to the plenary meeting of the Council of State the case of an association of natural gas wholesalers and local selling companies, taking into account a possible procedural flaw. Furthermore, the Council of State postponed its decision on the appeal proposed by the Authority against the decision of the Regional Administrative Court of Lombardy in favor of Eni after the decision of the plenary meeting of the Council of State on said procedural issues (expected to occur late in 2006).
In December 2005 the Authority for Electricity and Gas implemented Decision No. 248loss for thefirst quarter 2006 through Decision No. 298/2005. The Regional Administrative Court of Lombardia initially suspended Decision No. 298/2005 based on claims of Eni and other operators. Then the same Court cancelled the suspension it had initially granted. Therefore Decision No. 298/2005 is now fully effective. On March 28, 2006, the Authority for Electricity and Gas issued Decision No. 63/2006 which updates tariffs for the April-June 2006 quarter, in application of Decision No. 248/2004. Eni appealed also this decision for the reasons stated above.
Eni’s management expects a negative outcome of this matter. In fact Eni accrued a material provision in its 2005 Consolidated Financial Statements in order to reflect the risks associated with this matter. In 2006 management expects Eni’s results of operation to be adversely impacted by a material amount in light of the high Brent crude oil prices, in the event Decision 248/2004 is implemented in its original form. Actually Eni’s results of operations for the first quarter 2006 were negatively affected by this matter.year 2007. See"Item 3 – Risk Factors" and"Item 5 – Results of Operationsand Recent Developments"– Gas & Power".
With Decision No. 65/2006, the Authority startedThis indexation mechanism applies for aconsultation with operators to redefine mechanisms for the updating of the raw material component in natural gas prices to households and established provisions concerning partial adjustments for final customers related to differences between Decision No. 248/2004 and the previous Decision No. 195/2002. Consistently with the appeal against Decision No. 248/2004, Eni appealed also against Decision No. 65/two-year period effective July 1, 2006, with theRegional Administrative Court of Lombardia. The Authority, in the consultation document published on May 17, 2006, proposed the followings: (i) while confirming a quarterly basis mechanism for the updating of the raw material component in natural gas price formulas, with a five percentage points of invariance threshold as provided for by Decision No. 195/2002, a monthly updating mechanism is proposed for the recognition of purchase costs borne by operators with an half percentage point invariance threshold; (ii) the establishmentoption of acompensatory fund which will redistribute among operators the differences between natural gas prices recognized to end customers and the raw material costs incurred by operators; and (iii) the fixation of a range of $35-60 per barrel of Brent crude oil to which selling companies apply the 75% cap, limiting the ability to pass increases in the purchase cost onto final customers. Beyond $60, increases in the purchase cost are proposed to be transferred to end customers with a 90-95% cap for a maximum twoone yeartransition period. In addition the Authority confirmed the obligation of suppliers to wholesalers to renegotiate supply contracts taking account of the new price mechanism introduced by Decision No. 248/2004. Management expects the proposed changes to partially mitigate the impact of Decision No. 248/2004, as they do not enable Eni to fully recover the purchase cost of natural gas in selling prices.
Inquiry of the Authority for Electricity and Gas on import purchase pricesWith Decision No. 107/2005 the Authority for Electricity and Gas started a formal inquiry under Law No. 481/1995 against Eni and other gas importers alleging their failure to comply with the Authority information requirements contained in its Decision No. 188/2004 of October 27, 2004, by which it required natural gas importers, among which Eni, to give information concerning: (i) dates and supplier for each supply contract for the import of natural gas; (ii) FOB purchase prices; (iii) price updating formulas; and (iv) volumes supplied and FOB purchase average prices on a monthly basis for each supplying contract relating to the period October 2002-September 2004. Under Law 481/1995, the Authority for Electricity and Gas can impose a fine on Eni. Eni appealed this decision with the Regional Administrative Court of Lombardia that on March 22, 2005 cancelled the obligation for Eni to communicate dates and supplier for each contract and FOB purchase prices. Accordingly, Eni initially gave the Authority for Electricity and Gas only part of the information required. On April 6, 2006 a final hearing was held in front of the Authority Eni confirmed its position that it has provided adequate information, but with the intention of full collaboration it provided the data concerning average monthly fob prices for the October 2002-September 2004 period.
Inquiry of the Authority for Electricity and Gas on behaviors of operators selling natural gas to end customersWith Decision No. 225 of October 28, 2005, the Authority for Electricity and Gas started an inquiry on the behaviors of companies selling natural gas to end customers aimed at acquiring new customers or re-acquiring customers transferred to other sellers, with particular reference to hurdles posed by companies to customers wishing to leave one distributor or to the entry of competitors on the market. The inquiry aims at identifying any measure the Authority should take in this area and is expected to close before July 31, 2006.
Inquiries by the Italian and European Antitrust Authorities
Sale contracts outside ItalyWithextension following a decision ofNovember 21, 2002,theAntitrust Authority judged thatAuthority. Enihad violated competition rules by entering in 2001 into contracts outside Italy with other operators importing into Italy the supplied volumes and thus limiting third party access to natural gas transport infrastructure. The Antitrust Authority considered that these contracts infringe the rationalecannot foresee any development ofArticle 19 of Legislative Decree No. 164/2000 which defines the limits for volumes to be input by single operators into the national network. With the same decision and taken into account the lack of clarity of Italian regulations and Eni’s availability to increase the transmission capacity of gaslines outside Italy, the Antitrust Authority imposed on Eni a symbolic fine amounting to euro 1,000 and requested Eni to submit "implement measures to eliminate infringing behaviors with specific attention to the upgrading of the transmission network or equivalent actions".
On June 18, 2004, Eni submitted to the Antitrust Authority a proposal entailing the sale to third parties of a total of 9.2 BCM of natural gas in the four-thermal year period starting in October 1, 2004 through September 30, 2008, corresponding to 2.3 BCM for each thermal year, before such natural gas enters the national transmission network at Tarvisio. With a decision of June 24, 2004, the Antitrust Authority judgedthisproposal adequate to end the effects of the violation of competition rules highlighted in the November 21, 2002 decision. With the decision of October 7, 2004 that closed the above mentioned procedure, the Antitrust Authority acknowledged that Eni had taken proper measures for executing the decision of November 21, 2002 by signing gas release contracts. However, it fined Eni euro 4.5 million alleging that Eni had complied belatedly with the Antitrust Authority’s indications. On December 6, 2004, Eni filed a claim with the Regional Administrative Court of Lazio against this decision requesting the annulment of the fine that was however recorded in Eni’s accounts. In May 2005 the Regional Administrative Court repealed this claim. Eni paid the fine imposed on it by the Antitrust Authority. In June 2006, the appeal proposed by Eni before the Council of State against the decision of the Regional Administrative Court was rejected. A claim filed by Eni with the Regional Administrative Court of Lazio against the decision of November 21, 2002 is still pending.
Inquiry of the Authority on the upgrade of the TTPC Pipeline - Appeal to the Regional Administrative Court for LazioOn February 15, 2006, the Antitrust Authority informed Eni of the closing of an inquiry started in February 2005 to ascertain an alleged abuse of dominant position. The events leading to the opening of the procedure relate to behaviors of Trans Tunisian Pipeline Co Ltd (TTPC), wholly owned by Eni, concerning its decision to consider expired certain ship-or-pay contracts signed on March 31, 2003 by TTPC with four shippers, who had been assigned new transport capacity on TTPC’s pipeline, due to the non occurrence of certain suspensive clauses. Therefore TTPC decided to not proceed to the planned upgrade of the pipeline by 2007.
In January 2006 Eni submitted to the Antitrust Authority a proposal containing the actions it intends to perform in order to favor competition on the Italian natural gas market and mitigate the effects if its alleged abuse of dominant position, concerning in particular the upgrade of the TTPC pipeline in Tunisia for the import of natural gas to Italy from Algeria: 3.2 BCM/y from April 1, 2008 and further 3.3 BCM/y from October 1, 2008.
With a decision notified on February 15, 2006 the Antitrust Authority stated that Eni’s behavior through its subsidiary TTPC represented an abuse of dominant position under Article 82 of the European Treaty. It therefore fined Eni. The original fine amounted to euro 390 million and was reduced to euro 290 million in consideration of Eni’s commitment to perform actions favoring competition as mentioned above. Eni appealed against this decision with the Regional Administrative Court of Lazio. The hearing is scheduled on July 12, 2006. See above "Gas & Power – Development Projects".
Eni SpA - GNL Italia SpAOn November 18, 2005 the Antitrust Authority notified Eni and its subsidiary GNL Italia the opening of an inquiry, in accordance with Article 14 of Law No. 287/1990, concerning an alleged abuse of dominant position in the assignment and use of the total continuous regasification capacity of the Panigaglia terminal (owned by GNL Italia) in thermal years 2002-2003 and 2003-2004, as evidenced by an inquiry of the Authority for Electricity and Gas which referred Eni to the Antitrust Authority. In a later communication the company was informed that the inquiry has been extended also to thermal year 2004-2005 and to Snam Rete Gas which is the parent company of GNL Italia SpA. The inquiry is due to be closed on October 31, 2006.
Inquiry of the European CommissionOn May 5, 2006 the European Commission started an inquiry in order to verify an alleged abuse of dominant position on the part of Eni in violation of Article 82 of the EEC Treaty and Article 54 of the CES Agreement in the activities of international gas transport and wholesale and retail supply of gas.
According to the European Commission Eni might have adopted commercial practices that constitute barriers to access to the Italian market for the wholesale supply of natural gas, in particular taking account Eni long-term purchase contracts. In addition Eni also entered long-term transport contracts which award Eni a majority share of transport capacity of the certain international gaslines and, as a consequence, Eni might have prevented others to access infrastructure.
In addition according to the European Commission, Eni might have delayed or annulled certain plans for the upgrading international transport infrastructure, despite the significant demand for access by third parties. This behavior would have favored natural gas commercial supplies downstream of transport activities thus allowing Eni to keep its dominant position in the market of wholesale sales.
Lastly, based on information held by the Commission, Eni might have subdivided the market with other companies operating in the supply and/or transport of natural gas, in particular by limiting the use of rights of access to entry and exit points of gas pipelines, in particular TENP and TAG.
Officials from the European Commission conducted inspections at headquarters of Eni and of certain Eni’s subsidiaries and collected documents.
If the existence of the alleged anti-competitive practices is confirmed, the European Commission could fine Eni.matter.Transport
Transport
tariffstariffs. WithDecisionResolution No. 120 of May 30, 2001, the Authority for Electricity and Gas published the criteriawhichtransport companies have to apply in determining natural gas transport and dispatching tariffs on national and regional transportation networks, for the first regulatory period made up of four thermalyearyears (each thermal year begins on October 1 of each calendar year and ends on September 30), as provided for by Decree No. 164/2000. Tariffs are subject to approval by the same Authority, which ensures their compliance with preset criteria. This tariff system substitutedprecedingprevious agreements between Eni and customers ofany category.all categories. Within the first quarter of each calendar year, transport companies submit the tariff proposal to the Authority for Electricity and Gaswhich in turn approves or rejects the proposal of transport companies.who grants approval.Criteria established by the Authority for Electricity and Gas
provide forset a cap on revenues from transport and dispatching activity ("allowed revenues") which is adjusted annually;thosethe criteria alsoprovide fordefine a separate treatment of revenues on existing assets and on new capital expenditure on expansions and extension of infrastructure.In the first thermal year allowed revenues are calculated as the sum of: (i) operating costs including storage and modulation costs; (ii) amortization and depreciation of transport assets; and (iii) return on net capital employed. Net capital employed is calculated by
revaluatingre-evaluating historic costs of transport infrastructure (pipelines, compressor stations and other support equipment) on the basis of certain inflationary indexes; resulting amounts are adjusted to take into account the residual useful life of assets (pipelines are estimated to have a useful life of 40 years) and also subtracting State grants. The application of this methodology implies an estimated value of Eni’s transport assets of approximately euro 9.6 billion. This, however, is a valuation for regulatory purposes and should not be read as an indication of the market value of Snam Rete Gas. The rate of return on capital employed set by the Authority for Electricity and Gas was 7.94% (pre-tax), for the first regulatory period. Once established, allowed revenues for the first year are divided into two components: (i) capacity revenues equal to 70% of allowed revenues which are the maximum amount of revenues collectable from the sale of transport capacity to customers; and (ii) commodity revenues equal to 30% of allowed revenues which are the maximum amount of revenues collectable from transported volumes.Starting from the second year these two components are adjusted on a yearly basis to take into account inflation and certain reduction factors (set at 2% and 4.5% for capacity revenues and commodity revenues, respectively); commodity revenues are also adjusted to transported volumes of the current regulatory period. The 2% reduction factor on capacity revenues provides scope for improving results of operations of the transport company if cost reductions exceed the set amount, whereas the 4.5% reduction factor on commodity revenues provides scope for improving results of operations of the transport company if transported volumes grow more than the reduction factor. New capital
expenditureexpenditures in extension and expansion enable transport companies to increase the capacity revenue by a stated percentage in the regulatory period following the period in which new capitalexpenditure isexpenditures are incurred.In addition, those capital expenditures give rise to a six year fixed increase in allowed commodity revenues. At the end of the first regulatory period, all transport cost components were recalculated and 50% of higher cost reductions with respect to established efficiency improvements were recognized to transport companies and 50% were transferred to customers. Once the allowed revenues are established, transport companies define individual tariffs to clients which are based on a charge for the capacity used at the entry location (border, fields, storage sites) and the capacity used at interconnection nodes with regional networks (divided into 17 zones) and on a charge for the capacity used at regional level, providing for discounts to those outgoing the network at less than 15 kilometers from the interconnection point between regional and national networks. A further charge (commodity charge) is related to the amounts of gas transported plus an annual fixed charge varying according to the delivery points. This tariff system regulated the four-thermal year period starting October 1, 2001 and ending on September 30, 2005.
With
the DecisionResolution No. 166/2005, the Authority for Electricity and Gas revised the outlined tariff regime for the second regulatory period (October 1, 2005-September 30, 2008). The new tariff structure confirms the breakdown of the tariff into two components: capacity and commodity in a ratio of 70 to 30 and the entry-exit model for the determination of the capacity component on the national pipeline network, already present in the previous tariff regime established byDecisionResolution No. 120/2001. The major new elements of the new regime are the following: (i) a reduction of the rate of return of capital employed in transport activities from 7.94% to 6.7% (pre-tax); (ii) a new set of incentives for new capital expenditure. In the previous regime, the return on upgrade and capacity expansion expenditure was 7.47% for one year only included in the calculation of the capacity component of the transport tariff and 4.98% for 6 years in the calculation of the commodity component. The new tariff structure provides an additional rate of return depending on the type of expenditure on the return rate recognized for capital employed:84
from a minimum of 1% for safety measures that do not increase transport capacity, applied for 5 years, to a maximum of 3% for expenditure that increases capacity at entry points into the national network, applied for 15 years. The additional return is part of the determination of the maximum allowed revenues in the calculation of the capacity component of the tariff and therefore is not influenced by changes in volumes transported; (iii) the updating by means of a price cap mechanism of the allowed revenues the transport undertaking is entitled to and the annual recalculation of the portion of allowed revenues relating to costs incurred for capital expenditure. This price cap mechanism applies to operating costs and amortization charges (previously it applied to all the allowed revenues). The annual rate of recovery of productivity was confirmed at 2%; this is used to reduce the effect of changes in the consumer price index on the updating of the preceding
year’syears allowed revenues; instead the preset annual rate of change of productivity recovery for the updating of the commodity component of the tariff was reduced from 4.5% to 3.5% of; and (iv) confirmation of the tariff reduction forstart-upsstart ups (construction/upgrade of combined cycle plants forelectricitypower generation) and for off take in low season periods (from May 1 to October 31) already contained in Decisions No. 5/2005 and 6/2005 which updated the previous tariff regime. The companies active in the field of gas transport submit their tariff proposals to the Authority who grants approval, within the first quarter of each calendar year.Network code. With
DecisionResolution No. 75 of July 1, 2003, the Authority for Electricity and Gas approved Snam Rete Gas Network Code, which defines rules and regulations for the operation and management of the transmission network. The Network Code, in accordance with Legislative Decree No. 164/2000, is based on the criteria set by the Authority for Electricity and Gas withDecisionResolution No. 137/2002, aimed at guaranteeing equal access to all customers, maximum impartiality and neutrality in transport and dispatching activities. The Network Code regulates entitlement of transport capacity, obligations of transporter and customer and the procedures through which customers can sell capacity to other users. Transport capacity at entry points in the national gasline network (point of interconnection with importgaslines)gas lines) is assigned on an annual basis and can last up to five thermal years.Entities eligible to be assigned transport capacity on a multi-year basis are those having multi-year import contracts within the limit of their daily average contract volumes. Priority criteria envisage that available capacity is assigned first to parties in multi-year import contracts containing take-or-pay clauses signed before August 10, 1998 (date of coming in force of European Directive 98/30/CE).
ItIf requests for capacity in a given thermal year are higher than available capacity, a pro-rata mechanism is applied in compliance with the aforementioned priority.Parties in annual or shorter import contracts and parties in multi-year import contracts are entitled to annual capacity conferrals corresponding to maximum daily contract volumes and the difference between maximum daily contract volumes and average daily contract volumes, respectively. Available transport capacity is assigned first to parties in annual import contracts and parties in multi-year import contracts. If requests for capacity in a given thermal are higher than available capacity, a pro-rata mechanism is applied in compliance with the aforementioned priority.
Eni filed a claim against this decision with the Regional Administrative Court of
Lombardia, thatLombardy, which was partially accepted with a decision of December 2004. The Authority filed a claim against this decision with the Council of State and informed Eni on February 19, 2005. This proceeding is still pending.
New tax criteria for the determination of amortizations for companies operating in transport and distribution of natural gasThe criteria for the determination of the annual share of amortizations of natural gas transport and distribution assets deductible in the determination of income taxes have been changed starting in 2005 onwards by Law Decree No. 203 of September 30, 2005, converted into Law No. 248 of December 2, 2005 and Law No. 266 of December 23, 2005 (budget law for 2006). Due to these changes, the share of amortizations that was previously calculated based on rates set by a decree of the Minister of Finance of December 31, 1988, is now determined by dividing the relevant asset gross book value in accordance with the useful lives determined by the Authority for Electricity and Gas and reducing the amount obtained after tax by 20%. The alignment of the fiscal lives of natural gas transport and distribution assets to their useful lives entails the anticipation of the payment of income taxes given the postponement of the deductibility of amortization without impacting on net profit of companies involved (mainly Snam Rete Gas and Italgas), except for the financial charges related to this cash anticipation.
Regulation (EC) No. 1775/2005On November 3, 2005 Regulation (EC) No. 1775/2005 concerning conditions for accessing international natural gas transport networks was published. The Regulation establishes non discriminatory access rules and will be effective starting on July 1, 2006. The Regulation will be directly applicable in each Member State and national regulatory authorities will be responsible for its enactment.
Preliminary investigation on the management and operation of the Panigaglia LNG regasification terminalThe Authority for Electricity and Gas with Decision No. 204 of November 18, 2004, started a preliminary investigation on the management and operation of Eni’s Panigaglia LNG regasification terminal and on LNG supplies to the Italian market in the thermal years from 2001 to 2004 in order to ascertain any behavior infringing the rules of equal access and equal conditions and neutrality in providing the regasification services.Adoption of guarantees for free access to LNG regasification services and rules for the regasification
codecode. WithDecisionResolution No. 167 of August 1, 2005, the Authority for Electricity and Gas published the criteria for access to LNG regasification services. The Decision also defines criteria for the allocation of regasification capacity. In particular it establishes that take-or-pay contracts entered into before 1998, as in the case of Eni, areassigned aawarded priority access limited to the minimum amount of volumes that have been regasified in the period starting from thermal year 2001-2002. Eni filed a claim against this decision with the Regional Administrative Court ofLombardia.Lombardy that rejected the claim. Subsequently, Eni filed a claim with a higher degree administrative court.
Regasification tariffsTariffs criteria forboththecontinuous and spot regasification services are based on treated volumesuse of LNGnumber of discharges carried out and energy associated to volumes inputterminals in thenational transport network. Tariffsthird regulatory period. The Authority for Electricity and Gas has set the criteria regulating the tariffs for thespot service are 30% lower than thoseuse of LNG terminals in the 3rd regulatory period (October 2008-September 2012) with its ARG/gas 92/08 resolution.The Regulatory Asset Base (RAB) is calculated with the re-valuated historical cost methodology. The yearly adjustment of revenues and tariffs will follow the same methodologies applied in the previous regulatory period, except for
continuous service.depreciation that will be adjusted on a yearly basis and excluded from the price cap mechanism. The allowed rate of return (WACC) on Regulatory Asset Base has been set equal to 7.6% in real terms pre tax. Furthermore, it established an additional remuneration, up to 3% above WACC, for new capital expenditures for a maximum of 16 years. Operating costs will be adjusted every year taking into account inflation and efficiency gains (X- factor) set by the Authority at 0.5% in real terms.The ARG/gas 92/08 resolution also established that the allocation of reference revenues between regasification capacity and the commodity component is fixed at 90:10 (compared to 80:20 ratio in the second regulated period).
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Gas not recorded in accounts on the natural gas transport networks in the 2004-2006 period. The Italian Authority for Electricity and Gas with the Resolution VIS 8/09, has completed the preliminary investigation on the gas not recorded in accounts started with Resolution VIS 41/08 "Preliminary investigation on the correct application of the provisions concerning gas not recorded in accounts on the natural gas transport networks in the 2004-2006 period". Based on the results of this preliminary investigation, future actions to be implemented by Snam Rete Gas were defined in order to improve the process of calculation of natural gas. The total amount to be recognized to the company, with regard to higher costs incurred for the purchase of fuel gas in the thermal years 2005-2006 and 2006-2007, was also set at euro 45 million. The Authority also established to determine in subsequent resolutions the additional costs incurred by the company for the thermal years 2007-2008 and 2008-2009.
Distribution
Distribution is the activity of delivering natural gas to residential and commercial customers of urban centers through low pressure networks. Distribution is considered a public service operated in concession and is regulated on the basis of Law Decree No. 164/2000.
Distribution
tariffstariffs. WithDecisionResolution No.237 dated December 28, 2000 as amended, the Authority for Electricity and Gas determined tariff criteria for natural gas distribution activity for the first regulated period ending on September 30, 2004. Tariffs are determined so that annual revenues from natural gas distribution activity cover operating costs and the remuneration of capital employed and are adjusted yearly according to the price cap method based on parameters and formulas determined by the Authority for Electricity and Gas. Capital employed is determined by applying a parameter-based method or, alternatively, a method of revalued historical cost for those companies that published audited financial statements starting with the fiscal year ended before January 1, 1991 (which include Italgas). With Decision No. 170 of September 29, 2004 the Authority for Electricity and Gas defined gas distribution tariffs for the second regulated period from October 1, 2004 to September 20,159/2008,setting at 7.5% the rate of return on capital employed of distribution companies, as compared to the 8.8% rate set for the preceding regulated period. The rate of productivity recovery – one of the components of the annual adjustment mechanism of tariffs – was set at 5% of operating expenses and amortization charges (as compared to the 3% rate applied to total expenses and charges in the preceding regulated period). With Decision No. 122 of June 21, 2005, the Authority integrated and changed Decision No. 170/2004 defining a new determination mechanism for distribution tariffs that takes account of capital expenditure incurred by distributing companies.
Distribution network codeWith Decision No. 138/2004the Authority for Electricity and Gas defined a new methodology for determining revenues for natural gas distribution activity. Starting from January 1, 2009 and for the duration of four-year regulated period, i.e. until 2012, the resolution provides for the recognition of total revenues for each regulated year amounting to a value that the Authority will set at the time ofrulesapproving the operators’ requests for distribution tariffs and defined as Total Revenue Constraint (TRC), representing the maximum remuneration recognized by the Authority toensure free accesseach operator for covering costs borne.In previous years, revenues were determined by applying tariffs set by the Authority to volumes actually distributed to selling companies in the relevant year. The resolution also provides for any positive or negative difference between TRC and revenues resulting from invoices for actually distributed volumes to be regulated through an equalization device making use of credit/debit cards lodged with the Electricity Equalization Exchange.
As a result of the new mechanism, revenues are no longer related to the
distribution networks and neutralityseasonality of volumes distributed but are constantly apportioned during thedistribution service, as well as criteria for the definitionyear. The introduction ofdistribution network codes.this new mechanism does not cause a decline in total revenues on a yearly basis.
With Decision No. 108/2006 the Authority for Electricity and Gas approved the Gas Distribution Master Code which will be used as a standard contract between distribution companies and shippers (natural gas selling companies). Within three months from its publication, distribution companies are due to issue their own gas distribution code adopting either the Gas Distribution Master Code or the scheme provided for by the Decision No. 138/2004.Refining and Marketing of Petroleum Products
RefiningRefining. Under Decree No. 112, companies that seek to establish refining operations in Italy or to expand the capacity of existing refining operations must obtain an operating concession from the relevant Region, while companies that seek to build or operate new plants that do not increase refining capacity must obtain an authorization from the relevant Region. Management expects no material delays in obtaining relevant concessions for the upgrading of the Sannazzaro and Taranto refineries as planned in themedium term.medium-term.Service
Stationsstations. Decree No. 32 of February 11, 1998, as amended by Legislative Decree No. 348 of September 8, 1999 and Law Decree No. 383 of October 29, 1999, significantly changed Italian regulation of service stations. TheDecreedecree replaces the system of concessions granted by the Ministry of Industry, regional and local authorities with an authorization granted by city authorities. Legislative Decree No. 112/1998 confers the power to grant concessions for the construction and operation of service stations on highways to Regions. Decree No. 32 also requires that contracts between license holders and service station operators have a duration of not less than six years and be drafted in accordance with arrangements agreed by the relevant trade group of license holders and the union representatives for the service station operators. Decree No. 32 also provides for: (i) the testing of compatibility of existing service stations with local planning and environmental regulations and with those concerning traffic safety to be performed by city authorities; (ii) upon the closure of at least 7,000 service stations, the option to extend by 50% the opening hours (currently 52 hours per week) and a generally increased flexibility in scheduling opening hours; (iii) simplification of regulations concerning the sale of non-oil products and the permission to perform simple maintenance and repair operations at service stations;(iv) establishment of a fund for the restructuring of the sales network, in part financed through a contribution, in the 1998-2000 period. In 2002 the fund received new financings: the decree of the Minister of Productive Activities of August 7, 2003, implementing Law No. 237 of December 12, 2002, defined the amount of euro 0.0003andeuro 0.0001 for each liter of automotive fuel (gasoline, diesel fuel and LPG) sold in 2002 in the ordinary distribution network to be paid by authorization holders and service station managers, respectively. The latest payment date was set at December 31, 2003; (v)(iv) the opening up of the logistics segment by permitting third party access to unused storage capacity for petroleumproducts; and (vi) measures designed to increase competition on the market for LPG for residential, industrial and agricultural users.products. With the goal of renewing the Italian distribution network, Law No. 57/2001 provides that the Ministry of Productive Activities is to prepare guidelines for the modernization of the network, and the Regions shall follow those guidelines in the preparation of regional plans. TheDecreedecree was issued on October 31, 2001 and established the criteria for the closing down of incompatible stations, the approval of the plan, the renewal of the network, the opening up of new stations and the regulations of the operations of service stations on matters such as automation, working hours and non oil activities.Petroleum
Product Pricesproduct prices. Petroleum product prices were completely deregulated in May 1994 and are now freely established by operators. Oil and gas companies periodically report their recommended prices to the Ministry of ProductiveActivities and service station operators, andActivities; such recommendations are considered by service station operators in establishing retail prices for petroleum products.86
With
Ministerial Decree dated February 16, 2000, an entity was established that supportsa recommendation approved at its meeting of January 18, 2007 and submitted to theMinistryGovernment and the Regions, the Italian Antitrust Authority requested the elimination ofProductive Activities in monitoring trends in domesticlocal constraints to the opening up of the fuel distribution outlets aimed at increasing competition andinternational prices of oil and oil products. Furthermore,reducing retail prices. Specifically, the Authority urged the following measures in order toavoid initiatives inhibitingenhance the level of competitionLaw No. 57/2001 providesin thecompliance with EU Regulation No. 2790/1999 concerning "vertical agreements"sector of retail marketing of fuels: (i) the development of the marketing of fuels by large retailers (supermarkets, large chain-stores, etc.); (ii) the elimination of administrative constraints to the opening of new service stations; (iii) a liberalization of opening hours; and (iv) transparency for consumers, identifying any useful tools for proper information oneconomic relations betweenactual prices imposed by operators in each outlet. Currently, Eni is unable to forecast a time frame for thisarea. To date, this regulation has had no significant impact on Eni’s operations.matter. Implementation of any of these suggested measures could enhance the level of competition in the retail marketing of fuels, leading to a reduction in retail margins for all operators.Compulsory
Stocksstocks. According to Legislative Decree of January 31, 2001, No. 22 ("Decree 22/2001") enacting European Directive No. 98/1993 (which regulates the obligation of member states to keep a minimum amount of stocks of crude oil and/or petroleum products) compulsory stocks, must be at least equal to the quantities required by 90 days of consumption of the Italian market (net of oil products obtained by domestically produced oil). In order to satisfy the agreement with the International Energy Agency (Law No. 883/1977), Decree 22/2001 increased the level of compulsory stocks to reach at least 90 days of net import, including a 10% deduction for minimum operational requirements. Decree 22/2001 states that compulsory stocks are determined each year by a decree of the Minister of Productive Activities based on domestic consumption data of the previous year, defining also the amounts to be held by each oil company on a site-by-site basis.
Decree No. 32 of February 11, 1998 established an entity responsible for the maintenance and management of this compulsory stock whose main tasks are to: (i) distribute stocks on the national territory according to available storage sites and consumption levels; (ii) meet the demand for refined products in case of crisis; (iii) guarantee storage volumes to operators; and (iv) record demand for refined products in the various areas of Italy. The Agency has been created on June 14, 2001; its by-laws had been approved with a Ministerial Decree of January 29, 2001 and its operating regulation has been approved on May 20, 2003 by the general meeting of the Agency’s members.At December 31,
20052008 Eni owned7.2 million tonnes6.3 mmtonnes of oil products inventories, of which4.8 million tonnes4.4 mmtonnes as "compulsory stocks",1.0 million tonnes1.5 mmtonnes related to operating inventories in refineries and depots (including 0.2million tonnesmmtonnes of oil products contained in facilities and pipelines), 1.1 million tonnes related to oil products contained in shipsand0.3 million tonnes0.4 mmtonnes related to specialty products.Eni’s compulsory stocks (at December 31,
2005)2008) were held in term of crude oil(27%(30%), light and medium distillates(44%(47%), fuel oil(22%(19%) and other products(7%(4%) and they were located throughout the Italian territory both in refineries(75%(72%) and in storage sites(25%(28%).
Recent tax development
The "Treaty of Friendship" between the Republic of Italy and Libya was enacted by Italy’s upper house on February 3, 2009 and is about to be published shortly. This law under Article No. 3 has introduced a supplemental tax rate applicable to taxable income of such individual companies that engage in the exploration and production of hydrocarbons, where fixed assets, including both tangible and intangible assets and investments dedicated to oil and gas operations exceed 33% of their respective items in the balance sheet, also having a market capitalization in excess of euro 20 billion. This supplemental tax is due whenever taxes currently payable represent less than 19% of taxable income and is to be determined as the lower of the amount of income taxes up to 19% of taxable income and the amount resulting from applying a certain set of decreasing rates to companies’ net equity as determined from individual financial statements. This supplemental tax rate is due for 2009 and following years up to 2028. Eni believes that the parent company Eni Spa will likely fall within the scope of this supplemental tax rate based on the criteria set by the law to identify the persons subject to the new tax rate and the conditions regulating its enactment. According to management’s estimates the new supplemental tax rate will cause the Company to incur additional tax payable amounting to approximately euro 300 million for the full years 2009, 2010 and 2011. In subsequent years this expense will amount to approximately euro 180 million per year. The Company is planning to file recourse against this law.
Competition
Like all Italian companies, Eni is subject to Italian and EU competition rules. EU competition rules are set forth in Articles 81 and 82 of the Treaty of Rome as amended by the Treaty of Amsterdam dated October 2, 1997 and entered into force on May 1, 1999 ("Article 81" and "Article 82", respectively being the result of the new denomination of former Articles 85 and 86) and EU Merger Control Regulation No. 4064 of 1989 ("EU Regulation 4064"). Article 81 prohibits collusion among competitors that may affect trade among member states and that has the object or effect of restricting competition within the EU. Article 82 prohibits any abuse of a dominant position within a substantial part of the EU that may affect trade among member states. EU Regulation 4064 sets certain limits for cross-border transactions, above which enforcement authority rests with the European Commission and below which enforcement is carried out by national competition authorities, such as the Antitrust Authority in the case of Italy. On May 1, 2004, a new regulation of the European Council came into force (No. 1/2003) which substitutes Regulation No. 17/1962 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty. In order to simplify the procedures required of undertakings in case of concentration, the new regulation substitutes the obligation to inform the Commission with a declaration that such concentration does not infringe the Treaty. In addition, the burden of proving an infringement of Article 81(1) or of Article 82 of the Treaty shall rest on the party or the authority alleging the infringement. The undertaking or association of undertakings
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claiming the benefit of Article 81(3) of the Treaty shall bear the burden of proving that the conditions of that paragraph are fulfilled. The regulation defines the functions of Authorities guaranteeing competition in Member States and the powers of the Commission and of national courts. The competition authorities of the Member States shall have the power to apply Articles 81 and 82 of the Treaty in individual cases. For this purpose, acting on their own initiative or on a complaint, they may take the following decisions:
• requiring that an infringement be brought to an end; • ordering interim measures; • accepting commitments; and • imposing fines, periodic penalty payments or any other penalty provided for in their national law. National courts shall have the power to apply Articles 81 and 82 of the Treaty. Where the Commission, acting on a complaint or on its own initiative, finds that there is an infringement of Article 81 or of Article 82 of the Treaty, it may: (i) require the undertakings and associations of undertakings concerned to bring such infringement to an end; (ii) order interim measures; (iii) make commitments offered by undertakings to meet the concerns expressed to them by the Commission binding on the undertakings; and (iv) find that Articles 81 and 82 of the Treaty are not applicable to an agreement for reasons of Community public interest.
Eni is also subject to the competition rules established by the Agreement on the European Economic Area (the "EEA Agreement"), which are analogous to the competition rules of the Treaty of Rome and apply to competition in the European Economic Area (which consists of the EU and Norway, Iceland and Liechtenstein). These competition rules are enforced by the European Commission and the European Free Trade Area Surveillance Authority.
In addition, Eni’s activities are subject to Law No. 287 of October 10, 1990 (the "Antitrust Law"). In accordance with the EU competition rules, the Antitrust Law prohibits collusion among competitors that restricts competition within Italy and prohibits any abuse of a dominant position within the Italian market or a significant part thereof. However, the Antitrust Authority may exempt for a limited period agreements among companies that otherwise would be prohibited by the Antitrust Law if such agreements have the effect of improving market conditions and ultimately result in a benefit for consumers.
Property, Plant and Equipment
Eni has freehold and leasehold interests in real estate in numerous countries throughout the world, but no one individual property is material to Eni as a whole. See "Exploration & Production" above for a description of Eni’s reserves and sources of crude oil and natural gas.
Organizational Structure
Eni SpA is the parent company of the Eni
group companies.Group. As of December 31,2005,2008, there were257283 fully consolidated subsidiaries94 subsidiariesand 80 associates that were accounted for undereitherthe equitymethodorthe cost method and 176 affiliates accounted for under either the equity method or thecost method.The significantFor a list of subsidiariesassociated undertakings and joint venturesof theEni Group controlled directly or indirectly by Eni at December 31, 2005 and included in the scopeCompany, see "Exibit 8 – List ofconsolidation, as well asEni’spercentage of equity capital or joint venture interest (rounded to the nearest whole number) are set forth in the table below. The principal country of operation is generally indicated by the company’s country of incorporation or by its name.fully consolidated subsidiaries for year 2008".
Company/UndertakingCountry of Incorporation%Exploration & ProductionStoccaggi Gas Italia SpAItaly100Eni Oil Algeria Ltdthe Netherlands100Eni Angola Exploration BVthe Netherlands100Agip Caspian Sea BVthe Netherlands100Eni Congo SAthe Netherlands100Eni Dación BVthe Netherlands100Lasmo Sanga Sanga LtdBermuda100Eni Iran BVthe Netherlands100Agip Karachaganak BVthe Netherlands100Eni Lasmo Plcthe United Kingdom100Eni LNS Ltdthe United Kingdom100Eni North Africa BVthe Netherlands100Agip Oil Ecuador BVthe Netherlands100Eni Petroleum Co IncUSA100Eni UK Ltdthe United Kingdom100Ieoc Production BVthe Netherlands100NAOC Nigerian Agip Oil Co LtdNigeria100Eni Norge A/SNorway100Gas & PowerSnam Rete Gas SpAItaly50Società Italiana per il Gas pAItaly100Distribuidora de Gas Cuyana SAArgentina46Gas Brasiliano Distribuidora SABrazil100Greenstream BVthe Netherlands75Inversora de Gas Cuyana SAArgentina76Tigáz Rt Tiszántúli Gázszolgáltátó RészvénytársaságHungary50EniPower SpAItaly100Refining & MarketingAgipFuel SpAItaly100Ecofuel SpAItaly100Eni Portugal Investment SpAItaly100Agip Deutschland GmbHGermany100Agip España SASpain100Agip Française SAFrance100American Agip Co IncUSA100PetrochemicalsPolimeri Europa SpAItaly100Dunastyr Polystyrene Manufacturing Co LtdHungary100Polimeri Europa Benelux SABelgium100Polimeri Europa Elastomères France SAFrance100Polimeri Europa UK Ltdthe United Kingdom100Oilfield Services Construction and EngineeringSaipem SpAItaly43Snamprogetti SpAItaly100CEPAV (Consorzio Eni per l’Alta Velocità) UnoItaly50Saipem SAFrance43Other ActivitiesSyndial SpA - Attività DiversificateItaly100EniTecnologie SpAItaly100Sieco SpAItaly100Tecnomare - Società per lo Sviluppo delle Tecnologie Marine SpAItaly57Corporate and financial companiesEni International BVthe Netherlands100Eni Coordination Center SABelgium100Società Finanziaria Eni SpA - EnifinItaly100Società Finanziamenti Idrocarburi - Sofid-SpAItaly100
Item 4A. UNRESOLVED STAFF COMMENTS
None.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The information in this itemThis section is the Company’s analysis of its financial performance and of significant trends that may affect its future performance. It should be readtogetherin conjunction with the Key Information presented in Item 3 and the Consolidated Financial Statements and related Notes thereto included in Item 18. The Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB.This section contains forward-looking statements which are subject to risks and uncertainties. For a list of important factors that could cause actual results to differ materially from those expressed in the forward-looking statements, see the cautionary statement concerning forward-looking statements on page ii.
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Executive Summary
Eni
recorded areported net profit of euro8.8 billion8,825 million in2005, an increase2008, representing a decrease of24.5% over 2004.11.8% compared to 2007.Operating profit in
20052008 amounted to euro16.8 billion,18,641 million, down 1.2% from 2007 mainly reflecting the lower operating profit reported by Eni’s downstream businesses as the Refining & Marketing, Petrochemicals and Gas & Power segments reported lower operating profit by euro 1,752 million, euro 896 million and euro 194 million, respectively. These reductions were partly offset by improved operating profit recorded by:
(i) the Exploration & Production segment which reported an increase in operating profit of euro 2,627 million. This improvement was mainly driven by higher hydrocarbon realizations in dollar terms; and (ii) the Engineering & Construction segment which reported an increase in operating profit of euro 208 million. This improvement mainly reflected favorable market trends. Eni’s Group results for the year were reduced by higher finance charges, up
35.7%euro 681 million, and higher income taxes, up euro 473 million. These negative factors were partly offset by higher profit (up euro 130 million) from2004 reflecting volume growthnon consolidated entities that are accounted for under the equity or the cost method.Net cash provided by operating activities amounted to euro 21,801 million, including proceeds on advances received from the partner Suez (euro 1,552 million) following the signing of a number of long-term gas and
performance improvementselectricity supply contracts, and cash from divestments (euro 1,160 million) were used to fund the majority of cash outflows relating to: (i) capital and exploratory expenditures totaling euro 14,562 million; (ii) the acquisition of assets and investments (euro 4,305 million which include cash and finance debt acquired as part of the purchased companies); and (iii) dividend distribution to Eni’s shareholders and Eni share repurchases for a total cash return to Eni shareholders of euro 5,688 million, as well as minority dividend payments and share repurchases relating mainly to the listed subsidiaries Snam Rete Gas SpA and Saipem SpA (totaling euro 288 million).As of December 31, 2008 net borrowings amounted to euro 18,376 million, representing a euro 2,049 million increase from 2007. This increase mainly reflected the large amount of capital expenditures and acquisitions executed in
Eni’s main businesses combinedthe year which was only partially funded witha favorable trading environment characterized by strong gains both in crude oil prices and in refining margins.cash flows from operations.On the basis of the results achieved, Eni’s management proposed
atto the AnnualGeneral ShareholderShareholders’ Meeting the distribution of a dividend of euro1.11.30 per share, of which euro0.45 was already0.65 had been paid asaninterim dividend inOctober 2005.September 2008. This dividend is22% higher thanin2004line with 2007 (euro0.901.30 per share) and was approved by the AnnualGeneral ShareholderShareholders’ Meeting onMay 25, 2006.April 30, 2009.
InEni’s oil and gas production for the year (on an available for sale basis) increased by 3.8% to 1,748 KBOE/d. This performance was mainly due to:
(i) the contribution of assets acquired in the Gulf of Mexico, Congo and Turkmenistan (up 62 KBOE/d compared to 2007); and (ii) continuing production ramp-up in Angola, Congo, Egypt, Pakistan and Venezuela. These positive factors were offset in part by:
(i) mature field declines; (ii) planned and unplanned facility downtime in the North Sea; (iii) hurricane-related impacts in the Gulf of Mexico (down 11 KBOE/d); and (iv) lower entitlements in certain Production Sharing Agreements (PSAs) and similar contractual schemes (down 37 KBOE/d compared to 2007) due to higher oil prices. Under such contracts, Eni is entitled to fixed monetary amounts to recover the expenses incurred for the development of the relevant properties and as a consequence of higher oil prices, the volumes that are necessary to cover the same amount of expenses are lower. On October 31, 2008, the international partners of the North Caspian Sea Production Sharing Agreement (NCSPSA) consortium and the Kazakh authorities signed the final agreement implementing the new contractual and governance framework of the Kashagan project, based on the Memorandum of Understanding signed on January 14, 2008. For a more detailed discussion of this project see "Item 4 – Exploration & Production
Eni continued– Kazakhstan".Worldwide gas sales in 2008 amounted to
build on its established position104.23 BCM, up 5.3% from 2007 due to growth achieved insome of the world’s fastest-growing producing nations of oil and natural gas. Eni’s daily production of oil and natural gas available for sale increased by 6.7% over 2004 to 1,693 KBOE. Net proved reserves of oil and natural gas were 6,837 mmBOE at year end 2005 (55% crude and condensates)international markets (up 8.53 BCM),down 381 mmBOE from 2004 due principally to an adverse entitlement impact in certain production sharing agreements and buy-back contracts as a result of higher oil prices which reduced Eni’s entitlement to volumes of oil and natural gas to recover costs incurred by Eni for the development of certain oil fields. The reserve replacement ratio was 40%. The reserves life index at year end 2005 was 10.8 years (12.1 years at December 31, 2004).
Eni increased its interestparticularly in theKashagan project (Kazakhstan) from 16.67% to 18.52%. Management believes Kashagan to be a very important project formain European markets, and thefuture growthcontribution ofEni’s production of oil and natural gas. The development of the project, of which Eni is the sole operator, is on track, with 40% of work completed, and management plans to achieve first oil production by end-2008. Management is currently reviewing the planned $29 billion capital expenditure for the development of this large field in order to take account of changing market conditions.
Eni added to its exploration portfolio withthe acquisition ofassetsDistrigas that was completed inareas such as Libya, Nigeria and Angola where Eni’s presence is already established, andOctober 2008 (up 5.23 BCM). These increases were offset innew basins such as Alaska and India.
In Gas & Power, Eni continuedpart by lower sales toleverage on its assets consisting of access to infrastructure, availability of gas – both from owned facilities and from long term purchase contracts – and large customer base, to increase natural gas sales in European gas markets.
Overall gas sales in 2005 totalled 91.15 BCM, up 8.8% from 2004. This growth has been driven by European gas sales and by larger volumes sold in Italy:
•gas sales across Europe (31.29the domestic market (down 3.26 BCM)rose 11.2% as compared to 2004, driven also by the build up of the Greenstream project; and•Italian gas sales (58.01 BCM, including own consumption) increased by 8% from 2004, mainly driven by gas consumption in our power business, and gas sales in South America were stable at 2 BCM.
Electricity sales (22.8 TWh) increased by 64% in volume terms from 2004as a result of thestart-upeconomic downturn and stronger competitive pressure.Capital expenditures in 2008 amounted to euro 14,562 million (euro 10,593 million in 2007), of
two power units atwhich 84% related to theMantova power plantExploration & Production, Gas & Power andthe first unit of the Brindisi plant, as well as full commercial operation at the Ravenna and Ferrera Erbognone plants.
InRefining & MarketingEni is seeking to increase return from assets by upgrading its refining system, increasing integration with Exploration & Production activitiessegments, andstrengthening its competitive position in marketing.
In 2005, Eni completed the construction of the Sannazzaro gasification plant and the disposal of its wholly-owned subsidiary Italiana Petroli which operates in the retail market in Italy. Overall retail sales in Europe under the Agip brand in 2005 amounted to 16 billion liters, of which 11.3 billion liters were in Italy. Retail sales increased 0.6% from 2004 reflecting higher sales in certain markets of Central Europe and in Spain.
In Engineering & Construction, Saipem was awarded important contracts in complex environments such as Kashagan in Kazakhstan and Sakhalin in Russia. Snamprogetti significantly increased its backlog, closing 2005 with strong financial results.
Capital expenditure totalled 7.4 billion in 2005, in line with 2004; 91% of capital expenditure was carried out in oil and gas activities. The principal projects for the year were:mainly regarded:
•(i)development of oil and natural gas reservesactivities (euro3.95 billion),6,429 million) mainly in Kazakhstan,Libya,Egypt, Angola, Congo and Italy;89
(ii) exploration projects (euro 1,918 million) of which 93% was spent outside Italy, primarily in the United States, Egypt, Nigeria, Angola and Italy, as well as exploration (euro 656 million) andLibya;(iii) the acquisitionpurchase of proved and unproved propertyreserves(euro301 million,836 million) related mainly to the extension ofwhich euro 161 million was formineral rights in Libya following an agreement signed in October 2007 with theacquisitionstate oil company NOC and the purchase ofan additional 1.85% sharea 34.81% interest in theconsortium developing Kashagan);Abo project in Nigeria;•(iv)expansiondevelopment andimprovementsupgrading oftheEni’s natural gastransportationtransport and distributionnetworknetworks in Italy (euro8251,130 million and euro 233 million, respectively) and upgrading of natural gas import pipelines to Italy (euro 233 million);•(v)ongoing construction of combined cycle power generationplants (euro 107 million);(vi) the Refining & Marketing division (euro 965 million) for projects aimed at upgrading the conversion capacity and flexibility of refineries, including construction programme (euro 239 million);of a new hydrocracking unit at the Sannazzaro refinery, building of new service stations and upgrading of existing ones; and•(vii)upgrading of our Italian refining and logistics system to enhance flexibility and increasetheyields of light products and middle distillates, including completion of the heavy residue gasification plant at the Sannazzaro refinery and improvement of the retail distribution network both in Italy andfleet used in therest of EuropeEngineering & Construction division (euro6562,027 million).In 2008 Eni successfully executed a number of strategic acquisitions and deals that are intended to strengthen its competitive position in its main markets. Total finance requirements for these acquisitions amounted to euro 4,305 million and mainly related to the acquisition of a 57.243% stake in Distrigas NV, the completion of the acquisition of Burren Energy Plc, the purchases of certain upstream properties and gas storage assets, mainly in Algeria, in the North Sea and in India, as well as other investments in non-consolidated entities.
In the 2009-2012 four-year period, Eni expects to invest approximately euro 48.8 billion in capital expenditures and exploration projects to implement its growth strategy. For further details see "Item 5 – Management’s Expectations of Operations".
Margin10
Margin: The difference between the average selling price and direct acquisition cost of a finished product or raw material excluding other production costs (e.g., refining margin, margin on distribution of natural gas and petroleum products or margin of petrochemicals products). Margin trends reflect the trading environment and are, to a certain extent, a gauge of industry profitability.Trading Environment
2003
2004
2005
Average price of Brent dated crude oil (1) 28.84 38.22 54.38 Average price in euro of Brent dated crude oil (2) 25.50 30.72 43.71 Average EUR/USD exchange rate (3) 1.131 1.244 1.244 Average European refining margin (4) 2.65 4.35 5.78 EURIBOR – three month euro rate % (3) 2.3 2.1 2.2 Whenever used in Item 5, "Margin" means the difference between the average selling price and direct acquisition cost of a finished product or raw material excluding other production costs (e.g. refining margin, margin on distribution of natural gas and petroleum products or margin of petrochemicals products). Margin trends reflect the trading environment and are, to a certain extent, a gauge of industry profitability.
2006
2007
2008
Average price of Brent dated crude oil in U.S. dollars (1) 65.14 72.52 96.99 Average price of Brent dated crude oil in euro (2) 51.86 52.90 65.93 Average EUR/USD exchange rate (3) 1.256 1.371 1.471 Average European refining margin in U.S. dollars (4) 3.79 4.52 6.49 Euribor - three month euro rate % (3) 3.1 4.3 4.6
(1) i In U.S. dollarsPrice per barrel. Source: Platt’s Oilgram.(2) i Price per barrel. Source: Eni’s calculations.calculations based on Platt’s Oilgram data for Brent prices and the EUR/USD exchange rate reported by the European Central Bank (ECB).(3) i Source: European Central Bank.ECB.(4) i In U.S. dollarsPrice per barrel. FOB Mediterranean Brent dated crude oil. Source: Eni calculations based on Platt’s Oilgram data.Eni’s results of operations and the year to year comparability of its financial results are affected by a number of external factors which exist in the industry environment, including changes in oil, natural gas and refined products prices, industry-wide movements in refining and petrochemical margins and fluctuations in exchange rates and interest rates. Changes in weather conditions from year to year can influence demand for natural gas and some petroleum products, thus affecting results of operations of the natural gas business and, to a lesser extent, of the refining and marketing business. See "Item 3 – Risk Factors".
TheIn 2008, Eni’s results were achieved in a trading environment characterized by a significant increase in Eni’s oil and gas realizations (up 28.1% on average) on the backdrop of a favorable oil scenario until the month of September. Subsequently Brent prices experienced a steep decline from mid-year levels as a consequence of the financial crisis and the global economic downturn that has reduced energy demand. On average yearly Brent prices were up 33.7% from 2007. Management expects that oil prices will remain weak throughout the year 2009 as the economic downturn is expected to continue impacting global demand for oil, products and natural gas. Based on current market trends, management believes that there is still uncertainty about the timing of a recovery in global energy demand and in Brent prices. See "Item 3 – Risk Factors" for a description of sensitivity of Eni’s results of operations to changes in crude oil prices. In 2009 weak energy demand is expected to impact the Company’s gas sales in its downstream marketing business, particularly on the Italian market where the economic slowdown is expected to weigh heavily on gas demand. See "Item 5 – Management’s Expectations of Operations" below.
90
In 2008, margins on gas sales were affected by an unfavorable trading environment also reflecting exchange rate movements.
In 2008, refining activities were positively influenced by a strong margin environment (Brent refining margins were up 43.6%, to 6.49 $/BL). This positive trend was
generallypartly offset by a negative impact associated with narrowing differentials between light and heavy crudes that reduced the profitability of Eni’s complex refineries. This negative trend has been continuing in the first quarter of 2009 as market availability of heavy crudes has been impacted by OPEC cuts.In 2008, a steep decline was registered in selling margins of commodity chemicals due to higher supply costs of oil-based feedstock that were not fully recovered in sales prices and weak demand. In the first quarter of 2009, results of the petrochemicals operations were negatively impacted by the economic downturn that affected demand for commodity chemicals.
In 2008, the market environment was particularly favorable in
2005the Engineering & Construction business as a result of the strong order pattern experienced throughout the year on the backdrop of the strong oil cycle. Management believes that falling oil prices, weak energy demand and tight financial markets will reduce the investment plans of oil companies thus affecting results of operations of oilfield contractors, even though withpricesa time lag with respect to the oil companies’ investing decisions taking into account existing orders. In the first quarter 2009, Eni’s Engineering & Construction business reported positive results due to completion ofBrent crude oil increasing by approximately 42% compared to 2004. Natural gas demandorders inItaly increased by approximately seven percentage points over 2004 driven by strong growthbacklog and revenues associated with multi-years orders. Management expects that assuming that the Company will not incur any material order delay or cancellation, full-year results of the Engineering & Construction business will be positive in theelectricity generation. Natural gas marginsfull year 2009. In the medium-term, assuming a reduction inItaly decreased in 2005 as compared to 2004 due to competitive pressure inorders coming from oil companies, thedomestic natural gas market, offset in part by favorable trends in prices of certain refined products to which natural gas sale and purchase prices are contractually indexed resulting in a higher increase of selling prices as compared to supply costs when comparing 2005 to 2004. In 2005, refining margins increased sharply due to strong demand for refined products, especially in Asia, a shortage of fuels meeting required European specifications due to lags in the upgrading certain refineries and imbalances in the availability of products in different areasresults of theworld. Petrochemical product margins declinedEngineering & Construction business will be supported by its ability to manage complex projects and large presence in2005 as compared to 2004, essentially duestrategic countries that make the business less vulnerable to thehigher costoil cycle.In 2008, Eni’s results were negatively affected by the 7.3% appreciation of
oil-based feedstocks not being completely reflected in to selling prices.
the euro against the dollar (based on the yearly average exchange rates).Key
consolidated financial dataConsolidated Financial Data
(million euro)
2004
2005
Net sales from operations 57,545 73,728 Operating profit 12,399 16,827 Net profit 7,059 8,788 Net cash provided by operating activities 12,500 14,936 Capital expenditure 7,499 7,414 Investments 316 146 Shareholders’ equity including minority interest 35,540 39,217 Net borrowings (1) 10,443 10,475 Net profit per share (euro per share) 1.87 2.34 Dividend per share (euro per share) 0.90 1.10 Net borrowings to total shareholders’ equity ratio including minority interests (leverage) (1) 0.36 0.33
2006
2007
2008
(euro million)
Net sales from operations 86,105 87,256 108,148 Operating profit 19,327 18,868 18,641 Net profit attributable to Eni 9,217 10,011 8,825 Net cash provided by operating activities 17,001 15,517 21,801 Capital expenditures 7,833 10,593 14,562 Acquisitions of investments and businesses 95 9,665 4,019 Shareholders’ equity including minority interest at year end 41,199 42,867 48,510 Net borrowings at year end (1) 6,767 16,327 18,376 Net profit per share attributable to Eni (basic and diluted) (euro per share) 2.49 2.73 2.43 Dividend per share (euro per share) 1.25 1.30 1.30 Net borrowings to total shareholders’ equity ratio including minority interest (leverage) (1) 0.16 0.38 0.38
(1) For a discussion of the usefulness of and a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures see "Liquidity and Capital Resources – Financial Conditions" below. Critical Accounting Estimates
The
adoption of IFRS
TheCompany’s Consolidated Financial Statementsof Eni have been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB) and adopted by the European Commission following the procedure contained in Article 6 of the EC Regulation No. 1606/2002 of the European Parliament and Council of July 19, 2002. The IFRS adopted by Eni differ in certain limited respects from the IFRS sanctioned by the IASB. Until December 31, 2004, Eni prepared its Consolidated Financial Statements and other interim financial information (including quarterly and semi-annual data) in accordance with Italian GAAP. IFRS require adopting companies to restate only one year of past financial statements. Pursuant to SEC Release 33-8567, "First-time Application of International Financial Reporting Standards", Eni is not required to include in this annual report financial statements for any earlier periods. Accordingly this annual report includes financial informationare prepared in accordance with IFRS as issued by the IASB. These require the use of estimates andforassumptions that affect thetwo years ended December 31, 2004assets, liabilities, revenues and2005. For hydrocarbon explorationexpenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion andproduction,disclosure of contingent liabilities. Estimates made are based on complex or subjective judgments and past experience of other assumptions deemed reasonable in consideration of the information available at the time. The accounting policiesgenerally applied byand areas that require theoil industry have been adopted, with particular referencemost significant judgments and estimates toamortization according to the Unit-Of-Production (UOP) method, buy-back contracts and Production Sharing Agreements. The Consolidated Financial Statements have been prepared by applying the cost method except for items that under IFRS mustberecognized at fair value as describedused in theNotes topreparation of the Consolidated Financial Statementsunderare in relation to theheading "Evaluation Criteria".
The general principle that should be applied on first-time adoption of IFRS is that standardsaccounting for oil and natural gas activities, specifically inforce at the transition date (January 1, 2004) should be applied retrospectively. However, IFRS 1 "First-time Adoption of International Financial Reporting Standards" (IFRS 1) contains a number of exemptions that companies are permitted to apply. Eni has taken the following main exemptions:
•no retroactive restatement of business combinations that occurred before January 1, 2004. As a result of this exemption, goodwill was not restated to take into account amortization charges recorded in previous periods before the adoption of IFRS; and•the election of January 1, 2005 as the transition date for the first application of IAS 32 and IAS 39, related to the evaluation of financial instruments, including derivatives. As permitted under IFRS 1, Eni has not restated comparative information. In the Consolidated Financial Statements for the year ended December 31, 2005 the impact of recording certain derivative financial instruments at fair value, as is required by IAS 39, was a euro 386 million charge in the profit and loss account. For further information see "Consolidated Financial Statements – Effects of the adoption of IFRS and Evaluation Criteria".
The IFRS under which Eni’s Consolidated Financial Statements have been prepared differ in certain limited respects from the IFRS adopted by the IASB, the effect of such differences on the Consolidated Financial Statements is not material.
Critical Accounting Estimates
The preparation of these consolidated financial statements requires Management to apply accounting methods and policies that are based on difficult or subjective judgments, estimates based on past experience and assumptions determined to be reasonable and realistic based on the related circumstances. The application of these estimates and assumptions affects the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of income and expenses during the reporting period. Key areas where estimates are applied includethe determination ofoil and gasproved reserves,and proved developed reserves, accounting for exploratory drilling costs under U.S. GAAP,impairment of fixed assets, intangible assets and goodwill, asset retirement obligations, business combinations, pensions and other post-retirement benefits, recognition of91
environmental liabilities and recognition of revenues in the oilfield services construction and engineering businesses.
ActualAlthough the Company uses its best estimates and judgments, actual resultsmaycould differ significantly fromthese estimates given the uncertainty surrounding the assumptions and conditions upon whichthe estimatesare based. Summarized below are the accountingand assumptions used. A summary of significant estimatesthat require the more subjective judgment of our management. Such assumptions or estimates regard the effects of matters that are inherently uncertain and for which changes in conditions may significantly affect future results.
follows.Oil and
Gas Activitiesgas activitiesEngineering estimates of the Company’s oil and gas reserves are inherently uncertain. Proved reserves are the estimated volumes of crude oil, natural gas and gas condensates, liquids and associated substances which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Although there are authoritative guidelines regarding the engineering criteria that
have tomust be met before estimated oil and gas reserves can be designated as "proved", the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment.
Reserves in a fieldField reserves will only be categorized as proved when all the criteria for attribution of proved status have beenmet, including an internally imposed requirement for project sanction that occurs when a final investment decision is made.met. Atthe point of sanction,this stage, all booked reserves will becategorizedclassified as proved undeveloped. Volumes will subsequently berecategorizedreclassified from proved undeveloped to proved developed as a consequence of development activity. The first proved developed bookings will occur at the point of first oil or gas production. Major development projects typically take one to four years from the time of initial booking to the start of production.Adjustments may be made to booked reserves due to production, reservoir performance, commercial factors, acquisition and divestment activity and additional reservoir development activity.Eni reassesses its estimate of proved reserves
on an annual basis.periodically. The estimated proved reserves of oil and natural gas may be subject to future revision and upward and downward revision may be made to the initial booking of reserves due to production, reservoir performance, commercial factors, acquisition and divestment activity and additional reservoir development activity. In particular, changes in oil and natural gas prices could impact the amount of Eni’s proved reserves as regards the initial estimate and, in the case ofProduction Sharing AgreementsProduction-sharing agreements and buy-back contracts, the share of production and reserves to which Eni isentitled to.entitled. Accordingly, the estimated reserves could be materially different from the quantities of oil and natural gas that ultimately will be recovered.Oil and natural gas reserves have a direct impact on certain amounts reported in the
financial statements.Consolidated Financial Statements. Estimated proved reserves are used in determining depreciation and depletion expenses and impairment expense. Depreciation rates on oil and gas assets using the UOP basis are determined from the ratio between the amount of hydrocarbons extracted in theyearquarter and proved developed reserves existing at theyearend of the quarter increased by the amounts extracted during theyear.quarter.Assuming all other variables are held constant, an increase in estimated proved developed reserves for each field decreases depreciation, depletion and amortization expense.
On the contrary,Conversely, a decrease in estimated proved developed reserves increases depreciation, depletion and amortization expense.Also,In addition, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whetheraor not property impairment is to be carriedout or not.out. The larger thevolumesvolume of estimated reserves, theless likelylower theproperty is impaired. See "Item 3 – Risk Factors – Uncertainties in Estimateslikelihood ofOil and Natural Gas Reserves".
asset impairments.
Accounting for Suspended Well Costs under U.S. GAAP
Under U.S. GAAP costs for exploratory wells are initially capitalized pending the determination of whether the well has found proved reserves. If proved reserves are found, the capitalized costs of drilling the well are reclassified to tangible assets and amortized on a UOP basis. If proved reserves are not found, the capitalized costs of drilling the well are charged to expense. However, successful exploratory efforts are, in many cases, not declared to be proved until after an extensive and lengthy evaluation period has been completed. These issues were addressed by the FASB staff in its FSP FAS 19-1, published in April 2005, amending FAS 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". Under the provisions of FSP FAS 19-1, companies in the oil and gas industry are allowed to continue capitalization of an exploratory well after the completion of drilling when: (a) the well has found a sufficient quantity of reserves to justify completion as a producing well; and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met or if an enterprise obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well would be assumed to be impaired, and its costs, net of any salvage value, would be charged to expense. Determination of whether an exploratory well should remain capitalized after completion of drilling requires a high degree of judgment on the part of management in assessing whether the Company is making sufficient progress assessing the reserves and the economic and operating viability of a given project. The company evaluates the progress made on the basis of regular project reviews which take account of the following factors: (i) costs are being incurred to assess the reserves and their potential development; (ii) existence (or active negotiations) of sales contracts with customers for oil and natural gas; and (iii) existence of firm plans, established timetables or contractual commitments, which may include seismic testing and drilling of additional exploratory wells. As of December 31, 2005, an amount of euro 403 million remain capitalized relating to approximately 30 exploratory wells for which drilling activities have been completed for more than one year, of this capitalized amount euro 59 million (or 8 wells) relates to projects progressing towards completion of development activities, and the remaining euro 344 million (or 22 wells) relates to projects for which additional exploratory activity is underway or firmly planned. See Note 35 to the Consolidated Financial Statements.Impairment of
AssetsassetsEni assesses its
fixedtangible assets and intangible assets, including goodwill, for possible impairment if there are events or changes in circumstances that indicate the carrying values of the assets are not recoverable. Such indicators include changes in the Group’s business plans, changes in commodity prices leading to unprofitable performance, a reduced utilization of the plants and, for oil and gas properties, significant downward revisions of estimated proved reservequantities.quantities or significant increase of the estimated development costs. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses, production profiles and the outlook for global or regional marketsupply-and-demandsupply and demand conditions for crude oil, natural gas, commodity chemicals and refined products.
Technically, theThe amount of an impairmentchargeloss is determined by comparing the book value of an asset with its recoverable amount. The recoverable amount is the greater of fair value net of disposal costs and value in use. The estimated value in use isusuallybased on the present values of expected future cash flowsusing assumptions commensurate with the risks involved in the asset group.net of disposal costs. The expected future cash flows used for impairment reviews are based on judgmental assessments of future production volumes, prices and costs, considering available information at the date of review and are discounted by using a rate related to the activity involved.For oil and natural gas properties, the expected future cash flows are estimated principally based on developed and non-developed proved reserves including, among other elements, production taxes and the costs to be incurred for the reserves yet to be developed. The estimated future level of production is based on assumptions
aboutrelating to future commodity prices, lifting and development costs, field decline rates, market demand and supply, economic regulatory climates and other factors.
Under both IFRS92Oil, natural gas and
U.S. GAAP, goodwillpetroleum products prices used to quantify expected future cash flows are estimated based on forward prices prevailing in the marketplace for the first four years and management’s long-term planning assumptions thereafter.The estimate of the future amount of production is based on assumptions related to the commodity future prices, lifting and development costs, market demand and to other factors. The discount rate reflects the current market valuation of the time value of money and of the specific risks of the asset not
amortized but, like indefinitive livedreflected in the estimate of the future cash flows.Goodwill and other intangible assets
is testedwith an indefinite useful life are not subject to amortization. The Company tests such assets at the cash generating unit level for impairmentat least annually. Under IFRSon an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce theassessment offair value below its carrying amount. In particular, goodwill impairment is based on the determination of the fair value of each cash generatingunitsunit to which goodwill can be attributed on a reasonable and consistent basis.A cash generating unit is
a group of assets that generates cash inflows that are largely independent ofthecash inflows from other groups of assets.smallest aggregate unit on which the Company, directly or indirectly, evaluates the return on the capital expenditure. If thefair valuerecoverable amount of a cash generating unit is lower than the carrying amount, goodwill attributed to that cash generating unit is impaired up to thatdifference,difference; if the carrying amount of goodwill is less than the amount of impairment, assets of the cash generating unit are impaired on a pro-rata basis for the residual difference.Asset Retirement Obligations
Obligations
relatedtothe removal ofremove tangible equipment andto the restoration ofrestore land orseabedsseabed require significant estimates in calculating the amount of the obligation and determining the amount required to be recorded presently in theConsolidated Financial Statements.consolidated financial statements. Estimatingthefuture assetremoval costsretirement obligations isdifficult andcomplex. It requires management to make estimates and judgmentsbecause most of thewith respect to removal obligationsarethat will come to term many years into the future and contracts and regulations are often unclear as to what constitutes removal.AssetIn addition, the ultimate financial impact of environmental laws and regulations is not always clearly known as asset removal technologies and costs
areconstantlychanging,evolve in the countries where Eni operates, aswell asdo political, environmental, safety and publicrelations considerations.expectations. The subjectivity of these estimates is also increased by the accounting method used that requires entities to record the fair value of a liability for an asset retirementobligationsobligation in the period when it is incurred (typically, at the time the asset is installed at theproductionsproduction location).When liabilities are initially recorded, the related fixed assets are increased by an equal corresponding amount. The liabilities are increased with the passage of time
(interest(i.e. interest accretion) and any changeofin the estimates following the modification ofthefuture cash flows andthediscount rate adopted. The recognized asset retirement obligations are baseduponon future retirement cost estimates and incorporate many assumptions suchasas: expected recoverable quantities of crude oil and natural gas, abandonment time,to abandonment,future inflation rates and the risk-free rate of interest adjusted for the Company’s credit costs.Business Combinations
Accounting for
the acquisition of abusiness combinations requires the allocation of the purchase price to the various assets and liabilities of the acquired business at their respective fairvalue.values. Any positive residual difference is recognized as "Goodwill". Negative residual differences arecharged againstcredited to the profit and loss account. Management uses all available information to make these fair value determinations and, for major business acquisitions, typically engages anoutsideindependent appraisal firm to assist in the fair value determination of the acquiredlong-lived assets.
assets and liabilities.Environmental
LiabilitiesliabilitiesTogether with other companies in the industries in which it operates, Eni is subject to numerous EU, national, regional and local environmental laws and regulations concerning its oil and gas operations,
productionsproduction and otheractivities, including legislationactivities. They include legislations thatimplementsimplement international conventions or protocols. Environmental costs are recognized when it becomes probable that a liability has been incurred and the amount can be reasonably estimated.
Although management,Management, considering the actions already taken,theinsurance policies to cover environmental risks and provision for risks accrued, does not expect any material adverse effect on Eni’s consolidated results of operations and financial position as a result of such laws andregulations,regulations. However, there can be no assurance that there will not be a material adverse impact on Eni’s consolidated results of operations and financial position due to:(i) the possibility of as yet unknown contamination; (ii) the results of the on-going surveys and the other possible effects of statements required by Decree No. 471/1999 of the Ministry of Environment concerning the remediation of contaminated sites; (iii) the possible effect of future environmental legislation and rules, like the Decree No. 367 of the Ministry of Environment, published on January 8, 2004, that introduces new quality standards for aquatic environment and dangerous substances and those that may derive from the legislative decree that the Italian Government will have to enact in order to implement Directive 2000/60/EC creating a framework for joint European action in the area of water; (iv) the effect of possible technological changes relating to future remediation; and (v) the possibility of litigation and the difficulty of determining Eni’s liability, if any, as against other potentially responsible parties with respect to such litigation and the possible insurance recoveries.
(i) the possibility of an unknown contamination; (ii) the results of the ongoing surveys and other possible effects of statements required by Decree No. 471/1999 of the Ministry of Environment concerning the remediation of contaminated sites; 93
(iii) the possible effects of future environmental legislations and rules; (iv) the effects of possible technological changes relating to future remediation; and (v) the possibility of litigation and the difficulty of determining Eni’s liability, if any, as against other potentially responsible parties with respect to such litigations and the possible insurance recoveries.
Employees post-retirementEmployee benefits
EmployeesDefined benefit plans and other long-term benefits(such as pension payments, life insurance payments, medical assistance after retirement, etc.)are evaluated with reference to uncertain events and based upon actuarial assumptions including among others discount rates, expected rates of return onanyplan assets, expected rates of salary increases, medical costtrend rates,trends, estimated retirement dates and mortality rates.These assumptions are reviewed annually and may change from year to year impacting future results of operations.The significant assumptions used to account for pensions and other post-retirement benefits are determined as follows:
•(i)discount and inflation rates reflect the rates at which thebenefits could be effectively settled, taking into account the durationo fof the obligation.IndicationsIndicators used in selecting the discount rate include rates of annuity contracts and rates of return onhigh-qualityhigh quality fixed-incomeinvestments (such as government bonds).investments. The inflation rates reflect market conditions observed country by country;•(ii)salary increase assumptions (when relevant) are determined by each entity. They reflect an estimate oftheactualfuture salary levels of the individual employeesinvolved,are determined including an estimate of future changes attributed to general price levels (consistent with inflation rate assumptions), productivity, senioritypromotionandother factors;promotion;•(iii)healthcare cost trend assumptions (when relevant)reflect an estimate of the actual future changes in the cost of the healthcare related benefits provided to the plan participants and are based on past and current healthcare cost trends including healthcare inflation, changes in healthcare utilization and changes in health status of the participants;•(iv)demographic assumptions such as mortality, disability and turnover reflect the best estimate of these future events for theindividual employees involved, based principally on available actuarial data; and•(v)determination of the expected rates of return on assets is made through compound averaging. For each plan, there are taken into accountthe distribution of investments among bonds, equities and cash and their specific average expected rate of return is taken into account. Differences between expected and actual costs and between the expectedrates ofreturn and the actual return onbonds, equitiesplan assets routinely occur andcash. A weighted-average rate is then calculated.are called actuarial gains and losses.
Differences between projected and actual costs and between the projected return and the actual return on plan assets routinely occur and are called actuarial gains and losses.
The unrecognized actuarial losses of pension benefits as at December 31, 2005 were euro 144 million compared to euro 41 million in 2004. The euro 103 million increase from 2004 reflected primarily changes in assumptions used to account for pensions and other post-retirement benefits mainly related to the decrease in discount rates (4.0% in 2005 compared with 4.5% in 2004). Pension accounting principles require that such actuarial losses be deferred and amortized over future periods.Eni applies the corridor method to amortize its actuarial losses and gains. This method amortizes on a pro-rata basis the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period that exceed 10% of the greaterofof: (i) the present value of the defined benefitobligationobligation; and (ii) the fair value of plan assets, over the average expected remaining working lives of the employees participating in the plan.
In 2005, Eni recognizedAdditionally, obligations for other long-term benefits are determined by adopting actuarial assumptions. The effect of changes in actuarial assumptions or acharge of euro 126 million (euro 118 million in 2004)change in theprofit and loss account in connection with its obligations for employee post-retirement benefits.
See Note 20characteristics of theConsolidated Financial Statements for further information about employees post-retirement benefits.
benefit are taken to profit or loss in their entirety.Contingencies
In addition to accruing the estimated costs for environmental liabilities, asset retirement
obligationobligations andenvironmental liabilities,employee benefits, Eni accrues for all contingencies that are both probable and estimable. These other contingencies are primarily related toemployee benefits,litigation and tax issues. Determining appropriate amounts for accrual is a complex estimation process that includes subjective judgments.Revenue recognition in the
Oilfield Services,Engineering & Constructionand EngineeringsegmentRevenue recognition in the
Oilfield Services,Engineering & Constructionand Engineering businesssegment is based on the stage of completion of a contract as measured on the cost-to-cost basis applied to contractual revenues. Use of the stage of completion method requires estimates of future gross profit on a contract by contract basis. The future gross profit represents the profit remaining afterdeducingdeducting costs attributable to the contract from revenues provided for in the contract. The estimate of future gross profit is based on a complex estimation process that includes identification of risks related to the geographical region, marketconditionconditions in that region and any assessment thatitis necessary to estimate with sufficient precision the total future costs as well as the expected timetable.VariationRequests for additional income, deriving from a change in the scope ofthework, are included in the total amount of revenues when it is probable that the customer will approve the variation andclaimsthe related amount. Claims derivingforfrom additional costs incurred for reasons attributable to the client are included in the total amount of revenues when it is probable thattheythe counterparty willresult in additional revenue.accept them.94
2006-2008 Group Results of Operations
Overview of the Profit and
lossLoss Account forTwoThree YearsendedEnded December 31,20052006, 2007 and 2008The table below sets forth a summary of Eni’s profit and loss account for the periods indicated. All line items included in the table below are derived from the Consolidated Financial Statements prepared in accordance with IFRS.
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Net sales from operations 57,545 73,728 Other income and revenues (1) 1,377 798 Total revenues 58,922 74,526 Operating expenses (41,592 ) (51,918 ) Depreciation, amortization and writedowns (4,931 ) (5,781 ) Operating profit 12,399 16,827 Net financial expense (156 ) (366 ) Net income from investments 820 914 Profit before income taxes 13,063 17,375 Income taxes (5,522 ) (8,128 ) Net profit 7,541 9,247 Pertaining to: - Eni 7,059 8,788 - minority interest 482 459
Net sales from operations 86,105 87,256 108,148 Other income and revenues (1) 783 827 720 Total revenues 86,888 88,083 108,868 Operating expenses (61,140 ) (61,979 ) (80,412 ) Depreciation, depletion, amortization and impairments (6,421 ) (7,236 ) (9,815 ) OPERATING PROFIT 19,327 18,868 18,641 Finance income (expense) 161 (83 ) (764 ) Income from investments 903 1,243 1,373 PROFIT BEFORE INCOME TAXES 20,391 20,028 19,250 Income taxes (10,568 ) (9,219 ) (9,692 ) NET PROFIT 9,823 10,809 9,558 Attributable to: - Eni 9,217 10,011 8,825 - minority interest 606 798 733
(1) i Includes, among other things, contract penalties, income from contract cancellations, gains on disposal of mineral rights and other fixed assets, compensation for damages and indemnities and other income. The table below sets forth certain income statement items as a percentage of net sales from operations for the periods indicated.
Year ended December 31,
2006
2007
2008
(%)
2004
2005
Operating expenses 72.3% 70.4% Depreciation, amortization and writedowns 8.6% 7.8% Operating profit 21.5% 22.8%
Operating expenses 71.0 71.0 74.4 Depreciation, depletion, amortization and impairments 7.5 8.3 9.1 OPERATING PROFIT 22.4 21.6 17.2
20052008 compared to20042007. Net profit pertaining to Eni in20052008 was euro8,7888,825 million, representing a decrease of euro 1,186 million from 2007, down 11.8%. This decrease was affected by the following negative factors.
(i) Higher finance expenses (up euro 681 million) were recorded mainly reflecting losses of euro 577 million incurred on fair value valuation of certain derivative financial instruments that do not meet the formal criteria to be qualified as hedges under IFRS. Additionally, higher finance charges on finance debt were incurred as a result of increased average net borrowings and higher interest rates on euro denominated finance debt (Euribor up 0.3 percentage points) partially offset by lower interest rates on dollar loans (Libor down 2.4 percentage points). (ii) An increase in income taxes of euro 473 million mainly due to increased income taxes currently payable recorded by subsidiaries in the Exploration & Production division operating outside Italy, partly offset by a positive adjustment to deferred taxation associated with new tax rules effective from January 1, 2008 applicable to Italian companies and Libyan activities (for more details on these items see "Taxation" below). (iii) A decrease in operating profit of euro 227 million, mainly due to the weaker operating performance reported by Eni’s downstream businesses, partly offset by an improved performance in the Exploration & Production segment driven by the strong pricing environment experienced until September 2008. These negative factors were partly offset by higher profit from non consolidated entities that are accounted for under the equity or the cost method, up euro 130 million.
2007 compared to 2006. Net profit pertaining to Eni in 2007 was euro 10,011 million with a euro
1,729794 million increaseover 2004 (up 24.5%from 2006 (8.6%)reflecting, primarily due to:95
(i) lower income taxes (down euro 1,349 million) mainly reflecting:
- an adjustment to deferred tax assets and liabilities for Italian subsidiaries amounting to euro 394 million relating to certain amendments to the Italian tax regime, including a lower statutory tax rate, enacted by the 2008 Budget Law, and
- the circumstance that in 2006 deferred tax liabilities were recorded due to changes in the fiscal regimes of Algeria and the United Kingdom and charges regarding disputes on certain tax matters (totaling euro 347 million);
(ii) an increase in net income from investments of euro 340 million, mainly due to net gains on the divestment of interests in certain associates of the Engineering & Construction segment and higher earnings from entities that are accounted for under the equity or the cost method; and (iii) a gain of euro 83 million deriving from a reduction in the provision accrued for post-retirement benefits for Italian employees following changes in applicable regulation (the so called curtailment of the provision for post retirement benefits). Effective January 1, 2007, Italian laws modified Italian post-retirement benefits scheme from a defined benefit plan to a defined contribution one. Following this, the provision for Italian employees was reassessed to take account of the exclusion of future salaries and relevant increases from actuarial calculations. These positive factors were partly offset by a lower operating profit
(up(down euro4,428459 million)recorded particularlymainly in the Exploration & Production segmentin respect to higher oil and natural gas prices in dollars (Brent up 42.3%)(euro 1,792 million) and highersales volumes of oil and natural gas (up 38.3 mmBOE, or 6.7%). These positives were offset in part by higher environmental provisionsnet finance charges (euro532 million), a provision to the risk reserve concerning the fine imposed on February 15, 2006 by the Antitrust Authority and the estimated impact of the application of Decision No. 248/2004 of the Authority for Electricity and Gas affecting natural gas prices to residential customers and wholesalers (euro 225 million) in force from January 1, 2005 and the recording in 2004 of net gains on the sale of assets by the Exploration & Production segment (euro 320244 million).
The effect of the increase in operating profit on net profit was offset in part by higher income taxes (up euro 2,606 million).Discontinued
operationsOperationsDiscontinued operations
under both IFRSin 2008, 2007 andU.S. GAAP in 2005 and 20042006 were immaterial.Analysis of the
line itemsLine Items of theprofitProfit andloss account:Loss Account
Revenue recognition
Revenues from sales of products and services rendered are recognized upon transfer of risks and advantages associated with the property or upon settlement of the transaction. In particular, revenues are recognized:
•for crude oil, generally upon shipment;•for natural gas, when the natural gas is delivered to the customer;•for petroleum products sold to retail distribution networks, generally upon delivery to the service stations, whereas all other sales are generally recognized upon shipment; and•for petrochemical products and other products, generally upon shipment.
Revenues are recognized upon shipment when, at that date, the risks of loss are transferred to the acquirer.
Revenues from the sale of crude oil and natural gas produced in properties in which Eni has an interest together with other producers are recognized on the basis of Eni’s working interest in those properties (entitlement method). Differences between Eni’s net working interest volume and actual production volumes are recognized at current prices at period-end.
Income related to partially rendered services is recognized with respect to the accrued revenues, if it is possible to reasonably determine the state of completion and there are no relevant uncertainties concerning the amounts and the existence of the revenue and related costs; otherwise it is recognized within the limits of the recoverable costs incurred.
The revenues accrued in the period related to construction contracts are recognized on the basis of contractual revenues by reference to the stage of completion of a contract measured on the cost-to-cost basis. Additional revenues, deriving from a change in the scope of the work, are included in the total amount of revenues when it is probable that the customer will approve the variation and the relevant amount; claims deriving for instance from additional costs incurred for reasons attributable to the client are included in the total amount of revenues when it is probable that the counterpart will accept them.
Revenues are stated net of returns, discounts, rebates and bonuses, as well as directly related taxation. Exchanges of goods and services with similar nature and value do not give rise to revenues and costs as they do not represent sale transactions.a) Total Revenues
Net sales from operationsEni’s total revenues were euro
74,526108,868 million, euro 88,083 million and euro58,92286,888 million in20052008, 2007 and2004,2006, respectively. Total revenues consist of net sales from operations and other income and revenues. Eni’s net sales from operations amounted to euro73,728108,148 million, euro 87,256 million and euro57,54586,105 million in20052008, 2007 and2004,2006, respectively, and its other income and revenuestotalledtotaled euro798720 million, euro 827 million and euro1,377,783 million, respectively, in these periods.Net sales from operations
The table below sets forth, for the periods indicated,
thenet sales from operations generated by each of Eni’s business segments includingintersegmentintra-group sales, together with consolidated net sales from operations.
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Exploration & Production 15,346 22,477 Gas & Power 17,302 22,969 Refining & Marketing 26,089 33,732 Petrochemicals 5,331 6,255 Oilfield Services Construction and Engineering 5,696 5,733 Other activities 1,279 1,358 Corporate and financial companies 851 977 Consolidation adjustment (1) (14,349 ) (19,773 ) 57,545 73,728
Exploration & Production 27,173 27,278 33,318 Gas & Power 28,368 27,633 36,936 Refining & Marketing 38,210 36,401 45,083 Petrochemicals 6,823 6,934 6,303 Engineering & Construction 6,979 8,678 9,176 Other activities 823 205 185 Corporate and financial companies 1,174 1,313 1,331 Impact of unrealized intragroup profit elimination 75 Consolidation adjustment (1) (23,445 ) (21,186 ) (24,259 ) NET SALES FROM OPERATIONS 86,105 87,256 108,148
(1) IntersegmentIntra-group sales are included in net sales from operations in order to give a more meaningful indicationas toabout the volume of the activities to which sales from operations by segment may be related. The most substantialintersegmentintra-group sales are recorded by the Exploration & Production segment. See Note3136 to the Consolidated Financial Statements for a breakdown ofintersegmentintra-group sales by segment for thetworeported years.
20052008 compared to20042007. Eni’s net sales from operations for2005 totalled2008 (euro 108,148 million) were up euro73,72820,892 millionwith an increasefrom 2007, or 23.9%, primarily reflecting higher realizations on oil, products and natural gas in dollar terms and higher natural gas sales volumes due to the acquisition of Distrigas. These positives were partially offset by the impact of 7.3% appreciation of the euro16,183versus the dollar on average during the period.96
Revenues generated by the Exploration & Production division (euro 33,318 million) increased by euro 6,040 million,
over 2004, up 28.1%or 22.1%, mainly dueprincipallyto higher realizations of oil and gas in dollar terms (oil up 24.2%, natural gas up 47.8%). Eni’s liquid realizations (84.05 $/BL) were affected by the settlement of certain commodity derivatives relating to the sale of 46 mmBBL in the year, with a negative impact of 4.13 $/BL (for a more detailed explanation, see the discussion on results of the Exploration & Production division below). Revenue increases in 2008 were also driven by higher production volumes sold (up 20.1 mmBOE, or 3.3%). These improvements were partially offset by the appreciation of the euro against the dollar.Revenues generated by the Gas & Power division (euro 36,936 million) increased by euro 9,303 million, up 33.7%, mainly due to higher average natural gas prices
(denominatedreflecting trends indollars), higher refined productenergy parameters to which gas prices are contractually indexed, as well as increased international sales due to the contribution of the acquisition of Distrigas andpetrochemical prices and higherorganic growth recorded in European target markets, partly offset by lower volumes sold in Italy due to the impact of the economic downturn and competitive pressure.Revenues generated by the Refining & Marketing division (euro 45,083 million) increased by euro 8,682 million, up 23.9%, mainly due to higher international prices for oil and products and higher product volumes sold (up 1.1%) partly offset by the impact of the appreciation of the euro over the dollar.
Revenues generated by the Petrochemical division (euro 6,303 million) decreased by euro 631 million, down 9.1%, mainly reflecting a decline in volumes sold (down 15%) due to weaker demand.
Revenues generated by the Engineering & Construction division (euro 9,176 million) increased by euro 498 million, up 5.7%, due to increased activity levels.
2007 compared to 2006.Eni’s
main operating segments.net sales from operations (revenues) for 2007 (euro 87,256 million) were up euro 1,151 million, a 1.3% increase from 2006, primarily reflecting higher activity levels in the Engineering & Construction division and higher realizations on oil and natural gas in dollar terms, partially offset by the impact of the appreciation of the euro versus the dollar (up 9.2%), a decline in hydrocarbon production sold and lower products volumes sold, as well as the negative trends of energy parameters to which gas prices are contractually indexed in the Gas & Power division.Revenues generated by the Exploration & Production
segmentdivision (euro22,47727,278 million) increased by euro7,131105 million,in 2005,up46.5%0.4%, mainly dueprincipallyto higher oilprices realized (oil up 41.3%realizations in dollars (up 12.7%),natural gas up 15.6%) combined with increasedpartially offset by to the impact of the appreciation of the euro versus the dollar and lower hydrocarbon productionvolumessold(38.3(down 14.7 mmBOE, or6.7%2.2%).Revenues generated by the Gas & Power
segmentdivision (euro22,96927,633 million)increaseddeclined by euro5,667735 million,in 2005, up 32.8%down 2.6%, mainly dueprincipallytohigherlower average natural gas prices reflecting negative trends in energy parameters to which gas prices are contractually indexed and a negative shift in theincreasemix of volumessold of natural gas (4.29 BCM, or 5.9%), and electricity (up 8.92 terawatthours, or 64.4%).sold.Revenues generated by the Refining & Marketing
segmentdivision (euro33,73236,401 million)increaseddeclined by euro7,6431,809 million,in 2005, up 29.3%down 4.7%,principallymainly due to the effect of the appreciation of the euro over the dollar and lower product volumes marketed (down 0.98 mmtonnes), partly offset by higher international prices for oil andrefined products, the effects of which were offset in part by lower volumes sold on Italian retail and wholesale markets (down 1.1 million tonnes), the effect of the sale of LPG and refined product distribution activities in Brazil in August 2004 and lower trading activities (down 1.3 million tonnes).products.Revenues generated by the Petrochemical
segmentdivision (euro6,2556,934 million) increased by euro924111 million from 2006, up 1.6%, reflecting mainly the fact that performance in2005,2006 was adversely impacted by the unplanned downtime of the Priolo craker and downstream plants as a consequence of an accident that occurred at the nearby refinery in April 2006, resulting in a recovery in production volumes sold (up 4.5%). Commodity chemicals prices were also up17.3%, due mainly to a 12% increase in the average selling prices of products and a 3.6% increase in sales volumes.by 4% on average.Revenues
fromgenerated by theOilfield Services,Engineering & Constructionand Engineering segmentdivision (euro5,7738,678 million) increased by euro371,699 million, up 24.3%, due to increased activity levels in2005, up 0.6%, reflecting mainly higher utilization rates of vesselsthe Offshore anddrilling rigs and a higher volume of orders fulfilled.Onshore construction businesses.Revenues
of Corporate and financial companies (euro 977 million) increasedgenerated by the Other activities division decreased by euro126618 millionin 2005, up 14.8%, which essentially consists of invoices for services provided to other group segments. In 2005, Corporate started supplying certain central services amountingto euro76205 million,to a merged subsidiary, Italgas Più belongingdue to theGas & Power segment. Other increasesintragroup divestment of the Porto Torres plant for the production of basic petrochemical products to Polimeri Europa, which occurred inrevenues were essentially related to IT services (euro 27 million) and general services such as activities related to real estate rentals and maintenance, fleet of cars, company’s aircrafts, and other activities (euro 21 million).2007.
Other income and revenues97
2005 compared to 2004Other income and revenues (euro 798 million) declined by euro 579 million in 2005, down 42%, due mainly to lower gains on asset divestment in relation to the fact that in 2004 gains on the sale of mineral assets were recorded by the Exploration & Production segment for euro 373 million, and the fact that starting in 2005 derivative contracts on commodities were accounted for under IFRS No. 32 and 39, under which gains or losses on derivative financial contracts used to manage exposure to fluctuations in commodity prices are accounted for as financial income.b) Operating Expenses
The table below sets forth the components of Eni’s operating expenses for the periods indicated.
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Purchases, services and other 38,347 48,567 57,490 58,179 76,408 Payroll and related costs 3,245 3,351 3,650 3,800 4,004 Operating expenses 41,592 51,918 61,140 61,979 80,412
20052008 compared to20042007. Operating expenses for 2008 (euro51,91880,412 million)increased bywere up euro10,32618,433 millionin 2005 compared to 2004, up 24.8%from 2007, or 29.7%,due mainly to: (i)reflecting primarily higher purchase prices of natural gas as well as higher prices foroil-basedrefinery and petrochemicalfeedstocksfeedstock due to market trends in oil commodities andfor natural gas; (ii) higher environmental provisions (euro 532 million), recorded in particularrising dollar-denominated operating expenses in theOther activitiesExploration & Production division due to full consolidation of acquired assets and theRefining & Marketing segment in connection with reclamation and remediation activities of certain industrial plants related to businesses exited by Eni in past years and environmental liabilities relating to refineries and the distribution network in Italy; (iii) an increase in provisions relating to the fine imposed on February 15, 2006 by the Antitrust Authority and the estimatedimpact of sector-specific inflation, mainly in theapplication of Decision No. 248/2004first nine months of theAuthority for Electricity and Gas from January 1, 2005 (euro 515 million); (iv) a euro 87 million increase in insurance charges deriving from the extra premium due for 2005 and for the next five years (assuming normal accident rates) related to the participation of Eni in Oil Insurance Ltd. These higher insurance charges reflect the exceptionally high rate of accidents in the two year period 2004-2005; and (v) increases in provisions relating to certain legal proceedings and contractual obligations (euro 58 million). Theseyear. Those increases werepartiallypartly offset by thesaleappreciation ofactivities in Brazil in August 2004.the euro over the dollar.Payroll and related costs (euro
3,3514,004 million) were up euro106204 million,in 2005,or3.3%5.4%,reflecting primarily an increase inmainly due to higher unit labor cost in Italyoffset in part by a declineand an increase in the average number of employees outside Italy that was recorded mainly inItalythe Exploration & Production division, following the consolidation of acquired assets, as well as increased personnel in the Engineering & Construction business due to higher volumes. In addition in 2007 a non-recurring gain of euro 83 million was recorded in connection with the curtailment of the provision for post-retirement benefits relating to obligations towards Italian employees. These increases were partly offset by exchange rate translation differences.2007 compared to 2006. Operating expenses for 2007 (euro 61,979 million) increased by euro 839 million from 2006, up 1.4%, mainly due to higher purchase prices for refinery and petrochemical feedstock, as well as rising dollar-denominated operating expenses in the Exploration & Production segment, partly offset by the appreciation of the euro against the dollar. Purchases, services and other include: (i) an expense of euro 91 million relating to a provision against ongoing antitrust proceedings before the European authorities net of a gain deriving from the reversal of a previously accrued provisions upon favorable developments in certain antitrust proceedings; and (ii) environmental charges (euro 327 million), recognized particularly by Syndial and the
effectRefining & Marketing segment.Payroll and related costs (euro 3,800 million) increased by euro 150 million, up 4.1%, mainly due to higher unit labor costs and an increase in the average number of employees outside Italy in the Engineering & Construction segment related to higher activity levels and in the Exploration & Production segment due to the acquisition of assets. These increases were offset in part by exchange rate translation differences and a gain (euro 83 million) deriving from the curtailment of the
sale of refined product distribution activities in Brazil.
provision for post-retirement benefits existing at year-end 2006 related to obligations towards Italian employees.98
c) Depreciation, Depletion, Amortization and
WritedownsImpairmentsThe table below sets forth a breakdown of depreciation, depletion, amortization and
writedownsimpairments by business segment for the periods indicated.
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Exploration & Production (1) 3,047 3,944 Gas & Power 637 684 Refining & Marketing 465 462 Petrochemicals 114 118 Oilfield Services Construction and Engineering 184 176 Other activities 45 31 Corporate and financial companies 106 98 Unrealized profit in inventory (2) (4 ) Total of depreciation and amortization 4,598 5,509 Writedowns 333 272 Depreciation, amortization and writedowns 4,931 5,781
Exploration & Production (1) 4,646 5,483 6,733 Gas & Power 687 687 742 Refining & Marketing 434 433 430 Petrochemicals 124 116 117 Engineering & Construction 195 248 335 Other activities 6 4 3 Corporate and financial companies 70 68 76 Impact of unrealized intragroup profit elimination (2) (9 ) (10 ) (14 ) Total depreciation, depletion and amortization 6,153 7,029 8,422 Impairments 268 207 1,393 6,421 7,236 9,815
(1) i ExplorationExploratory expenditures of euro6182,057 million, euro 1,778 million and564euro 1,075 million are included in these amounts relative to the years20052008, 2007 and2004,2006, respectively.(2) i Unrealized profit in inventoryThis item concernedintersegmentmainly intra-group sales of commodities, services and capital goodsand services.recorded in the assets of the purchasing business segment as of end of the period.
20052008 compared to20042007Depreciation, amortization. In 2008 depreciation, depletion andwritedownamortization charges (euro5,7818,422 million) increased by euro8501,393 million,in 2005 compared to 2004,up17.2%. Depreciation and amortization charges (euro 5,509 million) were up euro 911 million, or19.8%,from 2004 to 2005mainly in the Exploration & Production segment (up euro8971,250 million). The higher charges incurred in the Exploration & Production segment were associated with: (i) increased development amortization charges reflectingprimarily: (i) higher development costs forconsolidation of assets acquired and increased expenditures to develop new fields andincreased costs incurredtomaintainsustain productionlevels in certainperformance at mature fields; and (ii) higher exploration expenditures that are expensed in full when incurred (euro 420 million). These increases were partly offset by the appreciation of the euro against the dollar.In 2008, impairments (euro 1,393 million) mainly regarded proved and unproved mineral properties in the Exploration & Production division due to changes in the regulatory and contractual framework for certain properties, cost increases, as well as a changed pricing environment. The value of number of plants and equipment in the Refining & Marketing and Petrochemical divisions were impaired due to a downward revision of the future profitability associated with worsening expectations for the future pricing/margin environment. For more information about the main assumptions used by the Company in testing the recoverability of the carrying amounts of its property, plant and equipment see "Note 8 to the Consolidated Financial Statements".
2007 compared to 2006. In 2007 depreciation, depletion and amortization charges (euro 7,029 million) increased by euro 876 million, or 14.2%, from 2006 mainly in the Exploration & Production segment (up euro 837 million) related to higher exploratory expenditures (euro 703 million), the consolidation of activities acquired in the Gulf of Mexico and Congo and the impact on amortization charges of
the revision of previous estimatesan estimated update of asset retirement obligations for certain Italian andremoval costs relating to certainU.S. fieldslocatedcarried out in theUK, Norway, Kazakhstan; (iii)preparation of 2006 consolidated financial statements, offset in part by exchange rate differences.In 2007 impairment charges amounted to euro 207 million mainly regarding mineral assets in the
impact of oil prices on amortization in PSAs and buy-back contracts; (iv) higher production; and (v) higher exploration costs (up euro 50 million). In the Gas & Power segment amortization charges increased by euro 47 million due to the coming on stream of the Greenstream gasline and new power generation capacity.
Writedowns (euro 272 million) concerned mainlyExploration & Production(euro 156 million), Other activities (euro 75 million)segment andPetrochemical (euro 29 million) segments.
plants and equipment in the Refining & Marketing segment.99
d) Operating Profit by Segment
The table below sets forth Eni’s operating profit by business segment for the periods indicated.
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Exploration & Production 8,185 12,574 15,580 13,788 16,415 Gas & Power 3,428 3,321 3,802 4,127 3,933 Refining & Marketing 1,081 1,857 319 729 (1,023 ) Petrochemicals 320 202 172 74 (822 ) Oilfield Services Construction and Engineering 203 307 Engineering & Construction 505 837 1,045 Other activities (395 ) (902 ) (622 ) (444 ) (346 ) Corporate and financial companies (363 ) (391 ) (296 ) (217 ) (686 ) Unrealized profit in inventory (59 ) (141 ) Impact of intragroup profits elimination (133 ) (26 ) 125 Operating profit 12,399 16,827 19,327 18,868 18,641 The table below sets forth operating profit for each of Eni’s principal business segments as a percentage of each segment’s net sales from operations (including intragroup sales) for the periods presented.
Year ended December 31,
2006
2007
2008
(%)
Exploration & Production 57.3 50.5 49.3 Gas & Power 13.4 14.9 10.6 Refining & Marketing 0.8 2.0 (2.3 ) Petrochemicals 2.5 1.1 (13.0 ) Engineering & Construction 7.2 9.6 11.4 Group 22.4 21.6 17.2 Exploration & Production. Operating profit in 2008 amounted to euro 16,415 million, up euro 2,627 million from 2007, or 19.1%, reflecting higher realizations of oil and gas in dollar terms (oil up 24.2%; natural gas up 47.8%) and increased production sales volumes (up 20.1 mmBOE) due to the contribution of assets acquired in the Gulf of Mexico, Congo and Turkmenistan. These increases were partly offset by: (i) the recognition of significantly higher asset impairments (euro 810 million) due to changes in the regulatory and contractual framework for certain properties, cost increases, as well as a changed pricing environment; (ii) a negative impact on the translation to euro of the operating profit reported by subsidiaries whose functional currency is the U.S. dollar as the euro appreciated on average by 7.3%, with an estimated negative impact of euro 1,200 million; (iii) rising operating costs reflecting the impact of sector-specific inflation and higher amortization and depreciation charges, due to the consolidation of acquired assets and higher costs incurred to develop new fields and to sustain production performance at mature fields; and (iv) increased exploration expenses (euro 420 million on a constant exchange rate basis) in connection with higher geological and geophysical expenses and increased exploratory drilling expenditures that are expensed in full as incurred.
Liquids and gas realizations for the year increased on average by 28.1% in dollar terms driven by the strong market environment of the first nine months of the year. Average gas realizations were supported by a favorable trading environment and also a better sales mix reflecting higher volumes marketed on the basis of spot prices on the U.S. market. Eni’s liquids realizations for the full year amounted to 84.05 $/BL (up 24.2%) which benefited from narrowing differentials between heavy and light crude recorded in the year and were reduced by approximately 4.13 $/BL due to the settlement of certain commodity derivatives relating to the sale of 46 mmBBL in the year, as follows:
• in the first three quarters of the year liquid realizations were reduced on average by 6.02 $/BL from the sale of 34.5 mmBBL; and • in the fourth quarter liquid realizations were increased by 1.36 $/BL from the sale of 11.5 mmBBL. The positive contribution of these derivatives was confirmed in the first quarter 2009. 100
These derivatives were entered into in 2007 to hedge future cash flows in the 2008-2011 period from the commodity risks on the sale of approximately 2% of Eni’s proved reserves as of 2006 year-end (125.7 mmBBL of which 79.7 million remained as of December 31, 2008) associated with certain asset purchases in the Gulf of Mexico and Congo that were executed in 2007.
Liquid realizations and the impact of commodity derivatives were as follows:
Full Year
2007
2008
Sales volumes (mmBBL) 366.7 364.3 Sales volumes hedged by derivatives (cash flow hedge) 46.0 Total price per barrel, excluding derivatives ($/BL) 67.7 88.17 Realized gains (losses) on derivatives (4.1 ) Total average price per barrel 67.7 84.05
The table below sets forth, for each of Eni’s principal business segments, operating profit as a percentage of such segment’s net sales from operations (including intersegment sales) for the periods indicated.
Year ended December 31,
2004
2005
Exploration & Production 53.3% 55.9% Gas & Power 19.8% 14.5% Refining & Marketing 4.1% 5.5% Petrochemicals 6.0% 3.2% Oilfield Services Construction and Engineering 3.6% 5.4%
Exploration & ProductionOperating profit in20052007 amounted to euro12,57413,788 million, down euro 1,792 million from 2006, or 11.5%, reflecting: (i) a negative impact due to the appreciation of the euro over the dollar (approximately euro 1,400 million), resulting in a decrease in revenues partly offset by lower operating expenses when translated into euro; (ii) lower production volumes sold (down 14.7 mmBOE) due to disruptions in Nigeria and Venezuela’s expropriation of the Dación oilfield assets; (iii) increased exploration expenses (euro 840 million on a constant basis) in connection with higher geological and geophysical expenses and increased exploratory drilling expenditures that are expensed in full as incurred; and (iv) rising operating costs reflecting the impact of sector-specific inflation and higher amortization and depreciation charges. These negatives were partly offset by higher realizations in dollars (oil up 12.7%, natural gas up 2.2%).Gas & Power. Operating profit in 2008 amounted to euro 3,933 million, representing a euro 194 million decline compared to 2007, down 4.7%. This decrease reflected the following trends: (i) lower results from marketing operations in Italy as sales volumes of gas declined by 3.26 BCM due to the impact of lower gas demand and competitive pressures; (ii) gas selling margins were lower as they were affected by a rapid recovery in the U.S. dollar vs. the euro exchange rate in the last part of the year. The Company’s cost of gas supplies are linked to the current U.S. dollar vs. the euro exchange rate on a monthly basis, while gas selling prices are indexed to the U.S. dollar over a longer time period. As a result of this, in the last part of the year, gas purchase prices were affected by the recovery in the dollar leading to relatively higher purchase costs, while selling prices reflected the stronger euro recorded in the previous months; and (iii) the fact that certain provisions accrued in previous reporting periods were partially reversed through the 2007 profit and loss statement due to favorable developments in Italy’s regulatory framework. Those provisions were originally accrued due to the implementation of Resolution No. 248/2004 and following ones by the Italian Authority for Electricity and Gas regarding the indexation mechanism of the raw material cost in supply contracts to resellers and residential customers. These decreases were partly offset by an increase in operating results from regulated businesses in Italy.
Operating profit in 2007 amounted to euro 4,127 million, a euro
4,389325 million increase compared to2004,2006, up53.65%8.5%, due to: (i)higher oil anda positive development with Italy’s regulatory framework on gasprices (oil prices up 41.3% in dollars, natural gas prices up 15.6% in dollars); (ii) higher production volumes sold (up 38.3 mmBOE, or 6.7%); and (iii) lower asset impairment charges (euro 40 million). These positive factors were offset in part by: (i) higher operating costs and amortization charges; (ii) net gains on divestments recorded in 2004 (euro 320 million); and (iii) higher insurance charges.
Gas & PowerOperating profit in 2005 amountedpricing toeuro 3,321 million,residential clients, reflecting aeuro 107 million decrease compared to 2004, down 3.1%, due mainly to: (i) a provision increase relating to the fine imposed on February 15, 2006 by the Antitrust Authority (euro 290 million) and the estimated impactmore favorable indexation mechanism of theapplication of Decision No. 248/2004 ofraw material cost component as established by the Authority for Electricity and Gasfrom January 1, 2005 affecting natural gas priceswith Resolution No. 79/2007, changing the regime in force in the first half of 2006 as established by Resolution No. 248/2004. Additionally, Eni fulfilled obligations provided by this resolution toresidential customer and wholesalers (euro 225 million); (ii) weaker realized marginsrenegotiate wholesale contracts based onnatural gas sales related to competitive pressure offset in part by favorable trends in prices of certain refined products to which natural gas sale and purchase prices are contractually indexedthe same indexation mechanism resulting inathe partial reversal of provisions accrued in 2005 and in the first half of 2006 with respect to expected charges for these renegotiations; (ii) higherincrease of selling prices as compared tosupply costswhen comparing 2005 to 2004;incurred in 2006 caused by a climatic emergency during the 2005-2006 winter; and (iii)other provision increases (euro 46 million). These negative factors were offset in part by: (i) increased natural gas sales volumes (up 6.13 BCM including own consumption, or 8%) and higher natural gas volumes distributed; (ii) a higher operating profit in natural gas transport activities outside Italy; and (iii) a higher operating profit of power generation activities which almost doubled to euro 138 million in 2005, up euro 77 million, reflecting primarilyan increase insold production of electricity (8.92 terawatthours, up 64.4%), offsetoperating result from transportation activities inpart by a decline in realized margins related to unfavorable trends in prices of certain refined products to which electricity selling prices and purchase prices of fuels (in particular natural gas) are contractually indexed resulting in a higher increase of supply costs as compared to selling prices when comparing 2005 to 2004.Italy.Refining & Marketing. The Refining & Marketing
Operating profit in 2005 amounted tosegment reported operating loss of euro1,8571,023 million, a euro7771,752 millionincreasedecrease compared to2004, up 71.9%,2007, mainly dueessentially to: (i)to an inventory holding loss amounting to euro 1,199 million recognized in the 2008 profit and loss reflecting the impact of falling prices of crude oil and products on the year-end valuation of inventories according to the average-cost method of inventory accounting. In addition, impairment losses were recorded amounting to euro 299 million (down euro 241 million from 2007) as the recoverable amounts of certain refining plants and service stations were lower than their carrying amounts due to deteriorating profitability prospects on the backdrop of lowered expectations for the future trading environment. In 2007 an inventory holding gain of euro671658 millionresulting from the evaluation of inventories under the weighted-average cost method of inventory accountingwas recorded in connection withrising internationalthe impact of increasing prices of oil and refined products. Inventory holding gains or losses represent the difference between the cost of sales of the volumes sold during the period calculated using theaveragecost of supplies incurred during the same period and the cost of sales calculated using theweighted-averageweighted average cost method.During 2005In 2008, reported operating benefited from a positive underlying performance of the
costrefining business reflecting a favorable trading environment, partly offset by lower throughputs due to planned and unplanned refinery101
downtime and higher refinery expenses associated with utilities and compliance with certain environmental regulations about carbon dioxide emissions. Marketing activities in Italy reported higher operating results due to a recovery in retail margins that were supported by a number of marketing initiatives and increased sales volumes as
determined under the weighted-average methoda result of an increased market share. The increase in wholesale business was due to higher margins.Operating profit in 2007 amounted to euro
1,064729 million,lower thanacost of sales assuming a cost based on the current cost of supplieseuro 410 million increase compared to 2006, mainly due to: (i) an inventory holding gain amounting to euro 658 million recognized in2005 (euro 393 million lower in 2004); (ii) higher realized margins in refining (the margin on Brent was up 1.43 dollars/barrel, or 32.9%) combined with higher volumes processed2007 profit andan improvement in the mix of refined products obtained, the effect of which was offset in part byloss reflecting the impact of rising prices of crude oil and products on thestandstillvaluation of year-end inventories using theGela refinery in the first partaverage-cost method of2005 owing to the damage caused by a seastorm in December 2004; (iii) higher operating profit in distribution activities in Italy; and (iv)inventory accounting. In 2006 anincrease in operating resultsinventory holding loss ofrefining and marketing activities in the rest of Europe related to a favorable trend of the trading environment for refining and to increased retailing sales in particular in Germany, Spain and the Czech Republic, due to the purchase/construction of service stations. These positive factors were offset in part by aeuro185215 millionincrease in operating expenses related in particular to higher environmental provisions and higher insurance costs and the effect of the sale of Agip do Brasil (euro 28 million) in August 2004.
PetrochemicalsOperating profit in 2005 amounted to euro 202 million, a euro 118 million decrease compared to 2004, down 36.9%, due mainly to: (i) higher operating expenses (euro 92 million)was recorded in connection with therestructuringimpact of declining prices of oil and refined products. Inventory holding gains or losses represent the difference between the cost of sales of theChampagnier plantvolumes sold during the period calculated using the cost of supplies incurred during the same period and the cost of sales calculated using the weighted average cost method; and (ii) a provision accrued inview2006 against a fine imposed by the Italian Antitrust Authority for anti-competitive activities in the field ofits shutdown, provisionssupplies of jet fuel (euro 109 million).On the negative side, the refining business delivered a weaker operating performance on the backdrop of an unfavorable trading environment for
litigationEni’s complex refineries, reflecting reduced discounts on sour crudes, lowering margins from any of the company’s secondary products (such as base lubricants and bitumen) as the prices for these products did not increase in proportion to the costs of the feedstock used to produce them and the appreciation of the euro over the dollar. Marketing activities in Italy also reported a lower operating profit mainly due to: (i) lower retail margins; and (ii) a decline in wholesale business result due to lower margins and volumes marketed (down 1.8%), the latter also reflecting unusually mild winter weather in the first quarter of 2007 causing lower sales of home-heating fuels.Petrochemicals. In 2008 the Petrochemical segment reported an operating loss amounting to euro 822 million, a euro 896 million decrease compared to 2007, due to: (i) a steep decline in selling margins of commodity chemicals, reflecting higher
insurance costs;supply costs of oil-based feedstock which were not fully transferred to final selling prices; (ii) lower demand on end-markets particularly in the fourth quarter of the year as the economic downturn worsened and (iii) an inventory holding loss (euro 166 million). In addition, impairment losses of euro 278 million were recorded as the recoverable amounts of certain petrochemicals plants were lower than their carrying amounts due to deteriorating profitability prospects on the backdrop of lowered expectations for the future unfavorable trading environment.Operating profit in 2007 amounted to euro 74 million, a euro 98 million decrease compared to 2006, down 57%, due to lower selling margins of commodity chemicals, particularly the margin on cracker and on aromatic products (paraxilene), reflecting a sharp increase in the cost of oil-based feedstock which was not fully transferred to final selling prices. This negative was partly offset by: (i) higher production and sales volumes compared to 2006; when an accident occurred at the Priolo refinery which heavily impacted performance; and (ii) lower
product margins in basic petrochemicals reflecting higher oil-based feedstock purchase costs not fully recovered in selling prices, partly offset by higher margins in elastomersasset impairments (euro 50 million) andpolyethylene. These negative factors were offset in part by higher sales volumes (up 3.6%) andrisk provisions (euro 31 million). In addition a loweroperating costs related to efficiency actions.inventory holding gain was recorded (down euro 54 million).
Oilfield Services Construction andEngineering & Construction. Operating profit in20052008 amounted to euro3071,045 million, a euro104208 million increase (24.9%) compared to2004, up 51.2%. The oilfield services2007. This increase related to an improved operating performance recorded in all business areas. In particular, Onshore andconstructionOffshore businesses benefited from improved margins, Offshore and Onshore activities reflected higher tariffs and higher activity levels.Operating profit in 2007 amounted to euro 837 million, a euro 332 million increase (65.7%) compared to 2006. This increase related to an improved operating performance recorded in all business
reported an operating profit of euro 306 million, up euro 37 million, or 13.8%, achievedareas, particularly in thefollowing areas: (i) offshoreOffshore and Onshore constructionarea, reflecting higher profitability of certain projects completed in North Africa; (ii) onshore drilling area, reflectingbusinesses due to higher activitylevels;levels and(iii) offshore drilling area, reflecting tariff increases for the submersible platform Scarabeo 6, higher utilization of the submersible platform Scarabeo 4 and of the jack-up Perro Negro 5. Such gains were partially offset by higher costs on projects in progress in the LNG area and the fact that for 2004 the Leased FPSO area recorded income relating essentially to a contract for the recovery of oil spilled from the Prestige tanker not recorded in 2005.improved margins.
The engineering business reported an operating profit of euro 1 million, an increase of euro 67 million over 2004, arising from the higher profitability of certain contracts in addition to the share of earnings from certain projects acquired in early 2005.Other
activitiesactivities.These activities includeThis reporting segment includes the results of operations of Eni’s subsidiary Syndial whichmanages certain decommissioningruns minor petrochemical activities and reclamation and decommissioning activitiesrelatingpertaining to certainshut down industrial sites ofbusinesses which Eniand other Eni subsidiaries (such as, among others, Sieco, Tecnomare, EniTecnologie, Eni Corporate University and AGI) engagedexited indiversified activities (mainly services to Eni business segments). Thepast years.Other activities reported an operating loss of euro
902346 million for2005, higher by2008, representing an improvement of euro50798 million, or128%22.1%, compared tothe loss in 2004, due essentially to a euro 504 million increase in Syndial’san operating lossrelating to: (i) higher provisions forrecorded in 2007 (euro 444 million) mainly due to impairment losses, as well as lower environmentalliabilities of euro 328 million reflecting primarily to the clean up of the Porto Marghera site and the settlement agreed with certain Italian authorities for the environmental damages and remediation of the same site, the reclamation of areas belonging to the Mantova plant and the dismantling of inactive plants and tanks in the Porto Torres site; (ii) provisions for contractual riskscharges (euro71109 million)essentially related to the inability to fulfill certain contractual obligations in connection with product supply and litigations (euro 40 million); and (iii) higher asset impairments (up euro 56 million from euro 19 million to euro 75 million); impairments in 2005 related in particular to the Scarlino and Porto Torres plants, up euro 44 million and euro 19 million, respectively..
Corporate and financial companiesThese activities include results of operation of the headquarter of the parent company Eni SpA and of Eni’s subsidiaries engaged in treasury services. TheseOther activities reported an operating loss of euro391444 million for2005, down2007, representing an improvement of euro28178 million, or7.7% from 2004,28.6%, compared to the loss recorded in 2006 (euro 622 million) mainly dueessentiallytoan increase in IT costs, uplower provisions for risks and lower asset impairments (for a cumulative positive effect of euro48 million, arising from higher activity levels,78 million) andinstitutional communication costs, up euro 7 million. These negative factors wereto a gain recognized upon settlement of certain contractual issues with Dow Chemical. This was partly offset bylowerhigher environmental charges (euro 84 million).Corporate and financial companies. These activities include expenses incurred in connection with corporate activities including the central treasury department and financial subsidiaries that makes available a range of
102
financial services to the Group, including supporting the financing of Eni’s projects around the world, as well as results from operations of certain Eni’s minor subsidiaries that provide a range of services including training, business support, real estate and general purposes services to group’s companies.
The aggregate Corporate and financial companies reported an operating loss of euro 686 million for 2008, representing a decline of euro 469 million, compared to the loss recorded in 2007 (euro 217 million), mainly reflecting a contribution of euro 200 million to the solidarity fund pursuant to Italian Law Decree No. 112/2008 to be used to subsidize the gas bills for residential uses of less affluent citizens and higher environmental provisions.The aggregate Corporate and financial companies reported an operating loss of euro 217 million for 2007, representing an improvement of euro 79 million, or 26.7%, compared to the loss recorded in 2006 (euro 296 million), mainly reflecting lower operating costs and lower provisions for redundancy incentives.
e) Net
FinancialFinance ExpenseThe table below sets forth a breakdown of Eni’s net financial expense for the periods indicated:
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Exchange gain (loss), net 169 Interest and other financial income 2 74 Income from securities 31 36 Interest and other financial expense (254 ) (309 ) Accretion of asset retirement obligation (109 ) (109 ) Income (expense) on derivative financial instruments 34 (386 ) (Increase)/decrease in risk reserve provision (62 ) less: Interest capitalized 202 159 (156 ) (366 )
Gain (loss) on derivative financial instruments 383 26 (551 ) Exchange differences, net (152 ) (51 ) 206 Interest income 194 236 87 Finance expense on short and long-term debt (462 ) (703 ) (993 ) Finance expense due to passage of time (116 ) (186 ) (249 ) Income from equity instruments 188 241 Other finance income (expense), net 198 227 259 45 (263 ) (1,000 ) Finance expense capitalized 116 180 236 161 (83 ) (764 ) 2008 compared to 2007. In 2008 net finance expenses were recorded amounting to euro 764 million increasing by euro 681 million from 2007. This was mainly due to a net loss of euro 551 million (as compared to a net gain of euro 26 million in 2007) recognized in connection with fair value valuation through profit and loss of certain derivatives instruments on commodities, interest and exchange rates that do not qualify for hedge accounting under IFRS. These transactions do not qualify for hedge accounting under IFRS due to the fact that Eni hedges its exposure to commodity prices and interest and foreign exchange rates based on the overall exposure of the group to commodity prices and foreign exchange and interest rates (rather than on a transaction-by-transaction basis which would be required for hedge accounting). In addition, increased finance charges were incurred as average net borrowings increased, and interest rates on euro-denominated finance debt were up (Euribor up 0.3 percentage points) partially offset by lower interest rates on dollar loans (Libor down 2.4 percentage points). A gain from an equity instrument amounting to euro 241 million was recorded (euro 188 million in 2007) relating to the contractual remuneration of 9.4% on the 20% interest in OAO Gazprom Neft according to the contractual arrangements between Eni and Gazprom.
2007 compared to 2006. In 2007, net finance expense (euro 83 million) increased by euro 244 million from 2006 when a net finance income of euro 161 million was recorded. This change was mainly due to:
(i)
the recognition of lower gains on the fair value evaluation of certain financial derivatives instruments which do not meet the formal criteria to be assessed as hedges under IFRS, including the ineffective portion of the change in fair value of certain commodity derivatives designed as cash flow hedges resulting in a loss of euro 52 million in connection with trends in oil prices as of the date of the evaluation.
Eni entered into these instruments to hedge the exposure to variability in future cash flows deriving from marketing an amount of Eni’s proved reserves equal to 2% of proved reserves as of December 31, 2006 (corresponding to approximately 125.7 mmBOE). These hedging transactions were undertaken in connection with the acquisitions executed in 2007 of proved and unproved properties in Congo and in the Gulf of Mexico. Eni put in place certain forward sale contracts at a fixed price and call and put options with the same date of exercise. These options can be exercised in presence of crude oil market prices higher or lower compared with preset contractual prices. The effective portion of the change in fair value of these hedges was directly recognized in equity and amounted to a loss of approximately euro 1.3 billion net of the related tax benefit with a corresponding decrease in other current and non-current liabilities; and
(ii)
the increase in net finance expenses due to the increase registered in average net borrowings, as well as the impact of higher interest rates on euro (Euribor up 1.2 percentage points) and dollar loans (Libor up 0.1 percentage points).
2005 compared to 2004Net financial expense (euro 366 million) was up103
These negatives were partly offset by a net gain of euro
210188 millionfrom 2004, or 135%, due to charges pertaining to changesrecognized in connection with the fair value valuation recorded in the profit and loss account ofderivative financial contracts and to higherboth a 20% interestrate chargesin OAO Gazprom Neft that Eni acquired ondollar loans (relating to an increase in LIBORApril 4, 2007 following finalization of2 percentage points),a bid within theeffects of which were offset in part by a decrease in average net borrowings11Yukos liquidation procedure, and thefact that in 2004related call option granted by Eni to Gazprom related to this interest. This call option is exercisable within 24 months starting from the acquisition date, at aeuro 62 million increaseprice of $3.7 billion equaling the bid price, as modified by subtracting dividends received and adding possible share capital increases, a contractual remuneration of 9.4% on the capital employed and additional financing costs. The net gain recognized through the profit and loss equaled the remuneration of the capital employed by Eni in therisk reserve provision was recorded in connection with assignment of a financing receivabletransaction according to theacquirercontractual arrangements between the two partners. This accounting treatment is in accordance with the fair value option provided by IAS 39. Eni elected this accounting treatment to eliminate a recognition inconsistency that would otherwise arise from measuring the 20% interest in OAO Gazprom Neft and the related call option on different bases. In fact, the call option granted to Gazprom is measured at fair value through profit or loss being a derivative instrument. Fair value evaluation ofa divested affiliate of Eni whichthe 20% interest in OAO Gazprom Neft was based on quoted market prices as this entity isexpected to be unable to repay such receivablecurrently listed on thebasis of management estimates.
London Stock Exchange.f)
NetIncome (Expenses) from Investments
20052008 compared to20042007In 2005 net. Net income frominvestmentinvestments in 2008 was euro9141,373 million andconcerned primarily:was mainly related to: (i) Eni’s share ofincomeprofit ofaffiliatesentities accounted forunderwith the equity method (euro737640 million), in particularaffiliatesin the Gas & Power and Exploration & Production divisions; (ii) net gains on the divestment of interest in Gaztransport et Technigaz SAS (euro358185 million) in the Engineering & Construction division and of the interest in Agip España by the Refining & Marketing division (euro22115 million); and (iii) dividends received by entities accounted for at cost (euro 510 million), mainly related to Nigeria LNG Ltd.2007 compared to 2006. Net income from investments in 2007 was euro 1,243 million and was mainly related to: (i) Eni’s share of earning of equity-accounted affiliates (euro 773 million), particularly in the Gas & Power, Refining & Marketing and Engineering & Construction segments; (ii) net gains on
disposal (euro 179the divestment of interests in Haldor Topsøe AS and Camom Group (totaling euro 290 million)relatinginparticular tothesale of 100% of IP (euro 132 million) and a 2.33% stake in Nuovo Pignone Holding SpA (euro 24 million);Engineering & Construction segment; and (iii) dividends received by affiliates accounted forunder theat costmethod(euro33170 million).The euro
94340 million increase in net income from investments from 2006 was due essentially toimproved resultshigher gains on disposals ofoperations of affiliatesinterests in theGasEngineering &PowerConstruction segment and higher dividends distributed in particularGalp Energia SGPS SA (Eni’s interest 33.34%), Unión Fenosa Gas SA (Eni’s interest 50%) and Blue Stream Pipeline Co BV (Eni’s interest 50%) as well as the fact that in 2004 a euro 41 million impairment was recorded in connection with the divestment of Eni’s 35% interest in Albacom. These increasesby Nigeria LNG, whose effects were offset in part by lowergains on disposal (euro 257 million) related to the fact that in 2004 the gain on the saleresults of9.054%operations ofthe share capital of Snam Rete Gas, 100% of Agip do Brasil SA and other minor assets were recorded for a total of euro 437 million, as compared to the euro 179 million gain recorded in 2005.
affiliates.g)
TaxesIncome Tax Expense
20052008 compared to20042007.IncomeIn 2008, income taxeswereamounted to euro8,1289,692 million, up euro2,606473 million,from 2004,or47.2%5.1%,and reflected primarily higher income before taxes (euro 4,312 million). The Group’s effective tax ratemainly reflecting increased4.5 percentage points to 46.8% (42.3% in 2004). There were three factors behind this increase. First, the higher share of profit beforeincome taxesearnedcurrently payable recorded by subsidiaries in the Exploration & Production segment operating outside Italy due to higher taxable profit.The higher taxes currently payable were partly offset by an adjustment to deferred tax relating to:
• a net gain amounting to euro 176 million which was recorded in connection with new tax rules in Italy that changed the tax treatment of inventories. Law Decree No. 112 of June 25, 2008 (Converted in to Law No. 133/2008) requires that from 2008 Italian energy companies state inventories of hydrocarbons at the weighted-average cost for tax purposes as opposed to the previous LIFO valuation and to recognize a one-off tax calculated by applying a special rate of 16% on the difference between the two amounts. This provision triggered utilization of deferred tax liabilities recognized till 2008 that were accrued by applying the statutory tax rate to the higher carrying amounts of year-end inventories of oil, gas and refined products stated at the weighted-average cost with respect to their tax base (euro 528 million) partly offset by the recognition of a one-off tax amounting to euro 229 million. This one-off tax will be paid in three annual installments of same amount, due from 2009 onwards. Deferred taxation was accrued on hydrocarbons inventories based on the applicable statutory tax rate of 33% as enacted in June 2008 compared with 27.5% of the previous tax regime representing an expense of euro 123 million; • application of the statutory tax rate of 33% pursuant to Law Decree No. 112/2008 replacing the previously applicable tax rate of 27.5% on certain deferred tax assets of Italian subsidiaries resulting in a gain of euro 94 million; • application of the Italian Budget Law for 2008 that provided an increase in limits whereby carrying amounts of assets and liabilities of consolidated subsidiaries can be recognized for tax purposes by paying a one-off tax calculated by applying a special rate of 6% resulting in a net positive impact on profit and loss of euro 290 million; and enactment of a renewed tax framework incountries whereLibya regarding oil companies operating in accordance with production sharing schemes. Based on the new provisions, the tax base of the Company’s Libyan oil properties has been reassessed resulting in the partial utilization of previously accrued deferred tax liabilities (euro 173 million).104
These positives were partly offset by the fact that in 2007 Eni made use of an option provided in the annual Budget Law whereby the Company aligned the carrying amounts of certain fixed assets to their tax base by paying a one-off tax and recording through the profit and loss account excess deferred taxation resulting in a net positive impact of euro 773 million.
In 2009 management expects the Group effective tax-rate to be approximately 52-53%, representing an increase from 2008 as a result of the recently enacted supplemental tax rate for the parent company which provides for a four percentage point additional rate to be applied to profit before income taxes effective from January 1, 2009 (see "Item 3 – Risk Factors"). In addition, the Group does not expect any gains in deferred taxation for amounts comparable to those recorded in 2008. This guidance on tax rate is based on the Group full year assumption of a Brent price of U.S. dollar 43 per barrel in calculating the tax burden associated with the Company’s PSAs (see "Management expectations of operations" below).
2007 compared to 2006. Income taxes were euro 9,219 million, down euro 1,349 million, or 12.8%, mainly reflecting an adjustment to deferred tax assets and liabilities for Italian subsidiaries relating to certain amendments to the Italian tax regime, including a lower statutory tax rate, enacted by the 2008 Budget Law (euro 394 million), as well as deferred tax liabilities recorded in 2006 due to changes in the fiscal regimes of Algeria and the United Kingdom and charges regarding disputes on certain tax matters (totaling euro 347 million).
The adjustment to deferred tax assets and liabilities for Italian subsidiaries were recognized in connection with certain amendments to the Italian tax regime enacted by the 2008 Budget Law. These included a lower statutory tax rate (IRES from 33% to 27.5%, IRAP from 4.25% to 3.9%) effective January 1, 2008, and an option regarding the increase of the tax bases of certain tangible and other assets to their carrying amounts by paying a special tax with a rate lower than the statutory tax
rate is higher than therate. The Group taxrate. Second, profit for the year was adversely impactedrate (46%) declined byhigher non-deductible charges pertaining to increases in risk reserve provision, relating mainly to a fine imposed by the Italian Antitrust Authority. The third factor was5.8 percentage points from 2006 (51.8%) reflecting: (i) a lower share ofnon-taxable income pertaining in particularprofit before taxes generated by the Exploration & Production division; (ii) the abovementioned adjustment to deferred tax assets and liabilities for Italian subsidiaries; and (iii) the recognition of certain gains on divestment of certain interests which are subject to lowergains on disposals of shareholdingstaxation. These positives were partly offset by a higher tax rate recorded inconsolidated subsidiaries and of investments recorded undertheitem "Net Income from Investments" (see above).
upstream division.h) Minority Interest
20052008 compared to20042007. Minorityinterestsinterest was euro459733 million, down euro 65 million from 2007, or 8.1%, and concerned primarilyEni’s interest inSaipem SpA (euro 407 million) and Snam Rete Gas SpA (euro321254 million).2007 compared to 2006. Minority interest was euro 798 million, up euro 192 million from 2006, or 31.7%, and concerned primarily Saipem SpA (euro
115514 million) and Snam Rete Gas SpA (euro 268 million). This increase in minority interest mainly reflected the improvement in Saipem’s results of operations and the mentioned gain on disposal of equity interest in certain affiliates.
Liquidity and Capital Resources
Eni’s cash requirements for working capital, share buybacks, dividends to shareholders, capital expenditures and acquisitions over 2006, 2007 and 2008 were financed primarily by a combination of funds generated from operations, borrowings and divestments of non-strategic assets. The Group continually monitors the balance between cash flow from operating activities and net expenditures targeting a sound and well-balanced financing structure.
105
The following table
below sets forthsummarizes the Group cash flows and the principal components of Eni’s change in cash and cash equivalent for the periods indicated.
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Net profit 7,541 9,247 Adjustments to reconcile to cash generated from operating profit before changes in working capital: • Amortization and depreciation and other non-monetary items 5,092 6,518 • Net gains on disposals of assets (793 ) (220 ) • Dividends, interest, and income taxes and other changes 5,740 8,471 Net cash generated from operating profit before changes in working capital 17,580 24,016 Changes in working capital related to operations (909 ) (2,422 ) Dividends received, taxes paid, interest (paid) received during the year (4,171 ) (6,658 ) Net cash provided by operating activities 12,500 14,936 Capital expenditure (7,499 ) (7,414 ) Investments (1) (316 ) (127 ) Disposals 1,547 542 Other cash flow related to capital expenditure, investments and divestments 308 184 Changes in short and long-term financial debt (3,743 ) (540 ) Dividends paid and changes in minority interests and reserves (3,175 ) (7,284 ) Effect of change in consolidation scope and exchange differences (55 ) 33 Change in cash and cash equivalent for the year (433 ) 330 Cash and cash equivalent at the beginning of the year 1,436 1,003 Cash and cash equivalent at year end 1,003 1,333
(1)This item refers mainly to the acquisition of equity of other companies.
Net profit 9,823 10,809 9,558 Adjustments to reconcile to cash generated from operating profit before changes in working capital: - depreciation, depletion and amortization and other non monetary items 5,753 6,346 11,388 - net gains on disposal of assets (59 ) (309 ) (219 ) - dividends, interest, income taxes and other changes 10,435 8,850 9,080 Cash generated from operating profit before changes in working capital 25,952 25,696 29,807 Changes in working capital related to operations (1,024 ) (1,667 ) 2,212 Dividends received, taxes paid, interest (paid) received during the year (7,927 ) (8,512 ) (10,218 ) Net cash provided by operating activities 17,001 15,517 21,801 Capital expenditures (7,833 ) (10,593 ) (14,562 ) Acquisitions of investments and businesses (95 ) (9,665 ) (4,019 ) Disposals 328 659 979 Other cash flow related to investing activities 577 (514 ) (267 ) Changes in short and long-term finance debt (682 ) 8,761 980 Dividends paid and changes in minority interest and reserves (6,443 ) (5,836 ) (6,005 ) Effect of changes in consolidation and exchange differences (201 ) (200 ) 918 Change in cash and cash equivalents for the year 2,652 (1,871 ) (175 ) Cash and cash equivalents at the beginning of the year 1,333 3,985 2,114 Cash and cash equivalents at year end 3,985 2,114 1,939 The table below sets forth the principal components of Eni’s change in net borrowings
(2)(1) for the periods indicated.
Year ended December 31,
2004
2005
2006
2007
2008
(
million euro)euro million)
Net cash provided by operating activities 12,500 14,936 Capital expenditure (7,499 ) (7,414 ) Investments (316 ) (127 ) Disposals 1,547 542 Other cash flow related to capital expenditure, investments and divestments 97 293 Net borrowings (2) of acquired companies (19 ) Net borrowings (2) of divested companies 190 21 Exchange differences on net borrowings and other changes (64 ) (980 ) Dividends paid and changes in minority interests and reserves (3,175 ) (7,284 ) Change in net borrowings (2) 3,280 (32 ) Net borrowings (2) at the beginning of the year 7,163 10,443 Net borrowings (2) at year end 10,443 10,475
Net cash provided by operating activities 17,001 15,517 21,801 Capital expenditures (7,833 ) (10,593 ) (14,562 ) Acquisitions of investments and businesses (95 ) (9,665 ) (4,019 ) Disposals 328 659 979 Other cash flow related to capital expenditures, investments and divestments 361 (35 ) (267 ) Net borrowings (1) of acquired companies (244 ) (286 ) Net borrowings (1) of divested companies 1 181 Exchange differences on net borrowings and other changes 388 637 129 Dividends paid and changes in minority interest and reserves (6,443 ) (5,836 ) (6,005 ) Change in net borrowings (1) 3,708 (9,560 ) (2,049 ) Net borrowings (1) at the beginning of the year 10,475 6,767 16,327 Net borrowings (1) at year end 6,767 16,327 18,376
(1) (2)i Net borrowings is a non-GAAP financial measure. For a discussion of the usefulness of net borrowings and its reconciliation with the most directly comparable GAAP financial measures see "Financial Condition" below. Analysis of Certain Components of Eni’s Change in Net Borrowings:
a) Cash
generatedGenerated from Operating Profit before Changes in Working Capital
CashNet cash generated from operating profit before changes in working capitaltotalledtotaled euro24,01629,807 million in2005 and euro 17,5802008 (euro 25,696 million in2004. The2007), up euro6,4364,111 millionincreasefrom2004 reflected primarily increased results of operations.2007.
In 2005, net106Net profit
has beenfor 2008 was adjusted to take into accountamortizationdepreciation, depletion anddepreciationamortization and other non-monetary items (euro6,51811,388 million), whichconcernedprimarily regarded depreciation, depletion and amortization of tangible and intangible assets (euro5,5098,422 million), non-monetary charges relating to environmental and risk provisions, impairments offixed assetsproperty, plant and equipment and investments (euro2722,966 million)primarily resulting from the impairment of proved and unproved property in the Exploration & Production segment (euro 156 million) and a euro 63 million impairment charge in the Other Activities segment related. Adjustments tocertain shutdown plants and to the Porto Torres petrochemical complex, andnet profit also included income taxes (euro 9,692 million) and interest expense (euro8,471809 million).
In 2004 netNet profithas beenfor 2007 was adjusted to take into accountamortizationdepreciation, depletion anddepreciationamortization and other non-monetary items (euro5,0926,346 million), whichconcernedprimarily regarded depreciation, depletion and amortization of tangible and intangible assets (euro4,5987,029 million), non-monetary charges relating to environmental and risk provisions, impairments offixed assetsproperty, plant and equipment and investments (euro333207 million). Adjustments to net profit also included income taxes and interest expense (euro 8,850 million).b) Changes in Working Capital related to Operations
In 2008, changes in
particularworking capital added positive flows amounting to euro 2,212 million as a result of increased current liabilities and trade payables, as well as additions to theimpairmentrisk provision. These positives were partly offset by cash outflows associated with increased trade receivables.In 2007, changes in working capital were negative amounting to euro 1,667 million mainly due to: (i) an increase in the carrying amount of
provedinventories in connection with the evaluation of inventories of refined products under the weighted-average cost method of accounting; andunproved property(ii) increased trade receivables. These cash outflows were partly offset by increased trade payables.c) Investing Activities
Year ended December 31,
2006
2007
2008
(euro million)
Exploration & Production 5,203 6,625 9,545 Gas & Power 1,174 1,366 1,794 Refining & Marketing 645 979 965 Petrochemicals 99 145 212 Engineering & Construction 591 1,410 2,027 Other activities 72 59 52 Corporate and financial companies 88 108 95 Impact of unrealized profit in inventory (39 ) (99 ) (128 ) Capital expenditures 7,833 10,593 14,562 Acquisitions of investments and businesses 95 9,665 4,019 7,928 20,258 18,581 Disposals (328 ) (659 ) (979 ) NET INVESTMENT 7,600 19,599 17,602 Capital expenditures totaled euro 14,562 million and euro 10,593 million respectively in 2008 and in 2007.
In 2008, 84% of capital expenditures related to the Exploration & Production (euro 9,545 million), Gas & Power (euro 1,794 million) and Refining & Marketing (euro 965 million) segments.
For a discussion of capital expenditures by business segment and a description of year-on-year changes see "Capital Expenditures by Segment" below.
Acquisitions of investments and businesses totaled euro 4,019 million in 2008 and euro 9,665 million in 2007. Main acquisitions executed in the year are outlined in "Item 4 – Significant business and portfolio developments for the year".
Disposals amounted to euro 979 million in 2008 and euro 659 million in 2007.
In 2008, disposals primarily related to the Engineering & Construction segment, in connection with the divestment of the 30% stake in GTT (Gaztransport et Technigaz SAS) (euro 300 million) and the sale of Agip España by the Refining & Marketing segment (euro 153 million).
107
In 2007, disposals primarily related to: (i) the Engineering & Construction segment, in connection with the divestment of interests in Haldor Topsøe AS and Camom Group (totaling euro 378 million); (ii) disposal of mineral assets and other minor assets in the Exploration & Production segment (euro
287 million), and income taxes and interest expense (euro 5,740 million).
b) Changes in Working Capital Related to Operations
Net working capital related to operations was euro 2,422 million in 2005 and euro 909 million in 2004.
In 2005, the increase in net working capital (euro 2,422 million) was mainly due to a euro 3,576 million increase in trade accounts receivable due essentially to the impact of increased international oil and refined product prices, growth in sales volumes of oil and natural gas and currency translation effects. This increase related in particular to the Gas & Power (up euro 1,671 million), Refining & Marketing (up euro 1,010 million) and the Exploration & Production (up euro 806 million) segments. This increase was partly offset by an increase in the euro value of trade accounts payable (euro 2,333 million) resulting from the same reasons as the increase in trade accounts receivable.
c) Dividends received, taxes paid, interest (paid) received during the year
Dividends, interest and taxes paid (which is net of amounts received) totalled euro 6,658 million in 2005 and euro 4,171 million in 2004 and concerned primarily the payment of income taxes (euro 6,619 million in 2005 and euro 4,199 million in 2004).
d) Capital Expenditure and Investing Activities
Capital expenditure totalled euro 7,414 million in 2005 and euro 7,499 million in 2004. In 2005, 91% of capital expenditure related to the Exploration & Production (euro 4,964 million), Gas & Power (euro 1,152 million) and Refining & Marketing (euro 656 million) segments. In 2004, 93% of capital expenditure related to the Exploration & Production (euro 4,853 million), Gas & Power (euro 1,451 million) and Refining & Marketing (euro 693 million) segments. For a discussion of capital expenditure by business segment and a description of changes from one year to another see below "Capital Expenditure by Segment".
Investments (including net borrowings acquired) totalled euro 146 million in 2005 and 316 million in 2004.
e) Disposals
Disposals (including net debt discharged) totalled euro 563 million in 2005 and euro 1,730 million in 2004.
In 2005, disposals (euro 563 million, including net borrowing) concerned primarily: (i) the Gas & Power segment, related to the divestment of Eni’s majority interest (67.05%) in Società Azionaria per la Condotta di Acque Potabili (euro 85 million) and 100% of the share capital of in Acquedotto Vesuviano SpA (euro 20182 million); and(ii) the Refining & Marketing segment related to the divestment of 100% of the share capital of IP (euro 190 million) and 28% of the share capital of Erg Raffinerie Mediterranee Srl (euro 97 million).
In 2004, disposals (euro 1,828 million, including net borrowing discharged of euro 279 million) concerned primarily: (i) the Gas & Power segment (euro 676 million), related to the sale of shares representing 9.054% of the share capital of Snam Rete Gas SpA to Mediobanca SpA (euro 650 million) and the disposal of other assets (euro 26 million); (ii) the Exploration & Production segment (euro 492 million) related in particular to the program of rationalization of mineral assets (euro 459 million) and disposal of other(iii) minor assets(euro 33 million); (iii)in the Refining & Marketing segment (euro41253 million)related to the divestment of the 100% interest in Agip do Brasil SA, a company active in distribution and marketing of refined products and LPG (euro 365 million), the sale of service stations (euro 16 million) and disposal of other minor assets (euro 31 million); (iv) the Other Activities and Corporate and financial companies segments (euro 101 million) related to the sale of the waste disposal business in Ravenna (euro 49 million), the sale of a 2.33% stake in Nuovo Pignone Holding SpA (euro 28 million) and disposal of other minor assets (euro 24 million); and (v) the Petrochemical segment (euro 41 million) related in particular to the sale of the elastomer Baytown plant (euro 31 million) and disposal of other minor assets (euro 10 million).
f)d) DividendsPaidpaid and Changes in Minority Interests and ReservesIn
2005,2008, dividends paid and changes in minority interests and reserves (euro7,2786,005 million) related mainly to the dividend distribution to Eni shareholders for euro 4,910 million (of which euro 2,551 million related to the balance for the fiscal year 2007 and euro 2,359 million as an interim dividend for fiscal year2004 of euro 3,384 million122008) and thepaymentdistribution ofan interimdividendof euro 1,686 million13carried out by Eni SpA, the payment of dividendsto minority interest by Snam Rete Gas SpA and Saipem SpA (euro1,171 million of which euro 976 million was paid as an extraordinary dividend)288 million) and other consolidated subsidiaries (euro 9 million) and the buy-back program(euro 1,034 million)(for euro 778 million by Eni SpA and for euro 58 million by Saipem SpA).In
2004,2007, dividends paid and changes in minorityinterestinterests and reserves (euro3,1755,836 million) related mainly to thepayment of dividendsdividend distribution to Eni shareholders for euro 4,583 million (of which euro 2,384 million related to the balance for the fiscal year 2006 and euro 2,199 million as an interim dividend for fiscal year20032007) and the distribution of dividend to minority interest byEniSnam Rete Gas SpAfor a total amount of euro 2,828 million14and Saipem SpA (euro 282 million) and other consolidated subsidiaries (euro2487 million) and the buy-back program (for euro 680 million by Eni SpA and for euro 358 million by Snam Rete Gas SpA and Saipem SpA).Financial Condition
In assessing its capital structure, Eni
evaluates itsuses net borrowings and leverage (as described below), both of which are "non-GAAP" financialconditionmeasures. Non-GAAP financial measures are measures that either exclude or include amounts that are not excluded or included in the comparable measures calculated and presented in accordance with generally accepted accounting principles, in Eni’s case IFRS issued byreference to "net borrowings", which is a non-GAAP financial measure.the IASB and IFRS issued by the IASB as adopted by the European Union. Eni calculates net borrowings as total finance debt (short-term and long-term debt) derived from its Consolidated Financial Statements prepared in accordance with IFRS less: cash, cash equivalents and certain very liquid investments not related to operations including, among others, non-operating financing receivables and securities not related to operations. Non-operating financing receivablesconsistsconsist mainly ofamounts due to Eni’s financing subsidiaries fromdeposits with banks and other financing institutionsand amounts due to other subsidiaries from banks for investing purposesand deposits in escrow. Securities not related to operations consist primarily of government bonds andcorporate securities.securities from financing institutions. These assets are generally intended to absorb temporary surpluses of cash as part of the Company’s ordinary management of financing activities.Management believes that net borrowings is a useful measure of Eni’s financial condition as it provides
an indication ofinsight about the soundness of Eni’s capital structure andof howthe means whereby Eni’s operating assets are financed. In addition, management utilizes the ratio of net borrowings to total shareholders’ equity including minority interest (leverage) toevaluateassess Eni’sfinancialcapital structure, to analyze whether the ratio between finance debt and shareholders’ equity is well balanced according to industry standards and to track management’s short-term and medium-term targets. Management constantly monitors trends in net borrowings and trends in leverage in order to optimize the use of internally-generated funds vs. funds from third parties. The measure calculated in accordance with IFRS that is most directly comparable to net borrowings is total debt (short-term and long-term debt). The most directly comparable leverage measure, derived from IFRS reported amounts,to leverageis the ratio of total debt to shareholders’ equity (including minority interest). Eni’s presentation and calculation of net borrowings and leverage may not be comparable to that of other companies.108
The tables below set forth the calculations of net borrowings and leverage for the periods indicated and their reconciliation to the most directly comparable GAAP measure.
Year endedAs of December 31,
2004
2005
2006
2007
2008
Short-term
Long-term
Total
Short-term
Long-term
Total
Short-term
Long-term
Total
(
million euro)euro million)
Total debt (short-term and long-term debt) 5,077 7,607 12,684 5,345 7,653 12,998 Cash and cash equivalent (1,003 ) (1,003 ) (1,333 ) (1,333 ) Securities not related to operations (792 ) (1 ) (793 ) (903 ) (28 ) (931 ) Non operating financing receivables (11 ) (240 ) (251 ) (12 ) (247 ) (259 ) Other, net (194 ) (194 ) Net Borrowings 3,077 7,366 10,443 3,097 7,378 10,475
Total debt (short-term and long-term debt) 4,290 7,409 11,699 8,500 11,330 19,830 6,908 13,929 20,837 Cash and cash equivalents (3,985 ) (3,985 ) (2,114 ) (2,114 ) (1,939 ) (1,939 ) Securities not related to operations (552 ) (552 ) (174 ) (174 ) (185 ) (185 ) Non-operating financing receivables (143 ) (252 ) (395 ) (990 ) (225 ) (1,215 ) (337 ) (337 ) Net borrowings (390 ) 7,157 6,767 5,222 11,105 16,327 4,447 13,929 18,376
As of December 31,
2004
2005
Shareholders’ equity including minority interests as per Eni’s Consolidated Financial Statements prepared in accordance with IFRS (million euro) 35,540 39,217 Ratio of total debt to total shareholders’ equity including minority interests 0.36 0.33 Less: ratio of cash, cash equivalent and certain liquid investments not related to operations to total shareholders’ equity including minority interests (0.07 ) (0.06 ) Ratio of net borrowing to total shareholders’ equity including minority interests (leverage) 0.29 0.27
2006
2007
2008
Shareholders’ equity including minority interest as per Eni’s Consolidated Financial Statements prepared in accordance with IFRS (euro million) 41,199 42,867 48,510 Ratio of total debt to total shareholders’ equity including minority interest 0.28 0.46 0.43 Less: ratio of cash, cash equivalents and certain liquid investments not related to operations to total shareholders’ equity including minority interest (0.12 ) (0.08 ) (0.05 ) Ratio of net borrowing to total shareholders’ equity including minority interest (leverage) 0.16 0.38 0.38
Net borrowingsIn
2005,2008, net borrowings amounted to euro10,47518,376 million, representing a euro322,049 million increaseover 2004.from 2007. This increase was mainly due to the large amount of capital expenditures and acquisitions executed in the year which was only partially funded with cash flows from operations. Total debt of euro12,99820,837 million consisted of euro5,3456,908 million short-term debt (including the portion of long-term debt due within twelve months equal to euro733549 million) and euro7,65313,929 million of long-term debt.Total debt included bonds for euro
5,3396,843 million (including accrued interest anddiscount)discount on issuance). Bonds maturing in the next 18 months amounted to euro436412 million (including accrued interest and discount). Bonds issued in20052008 amounted to euro4411,812 million (including accrued interest and discount). Total debt was denominated in the following currencies: euro(72%(77%), U.S. dollar(16%(11%), pound sterling(8%(10%) and4%2% in other currencies.In
2004,2007, net borrowings amounted to euro10,443 million.16,327 million, a euro 9,560 million increase over 2006, up 141%, reflecting the large amount of capital expenditures and acquisitions executed in the year which was only partially funded with cash flows from operations. Total debtamounted toof euro12,68419,830 million consisted ofwhicheuro5,0778,500 millionofshort-term debt (including the portion of long-term debt due within twelve monthsforequal to euro927737 million) and euro7,60711,330 million of long-term debt.Total debt included bonds for euro 5,386 million (including accrued interest and discount on issuance). Bonds maturing in the next 18 months amounted to euro
5,331 million.584 million (including accrued interest and discount). Bonds issued in 2007 amounted to euro 1,118 million (including accrued interest and discount). Total debt was denominated in the following currencies: euro(63%(78%), U.S. dollar(24%(13%), pound sterling(10%(8%) and3%2% in other currencies.Short-term Debt
As of December 31,
2005,2008, short-term debt of euro4,6126,908 million(excluding(including the portion of long-term debt due within twelve months) decreased by euro 1,592 million over 2007. The weighted average interest rate of Eni’s short-term debt was 4.2% and 4.9% for the years ended December 31, 2008 and 2007, respectively.109
As of December 31, 2008, Eni had maintained committed and uncommitted unused borrowing facilities of euro 3,313 million and euro 7,696 million, respectively (euro 5,006 million and euro 6,298 million at December 31, 2007). These facilities were under interest rates that reflected market conditions. Changes in unutilized facilities were not significant.
As of December 31, 2007, short-term debt of euro 8,500 million (including the portion of long-term debt due within twelve months) increased by euro
4624,210 million over2004.2006. The weighted average interest rate of Eni’s short-term debt was2.5%3.9% and2.8%4.9% for the years ended December 31,20042006 and2005,2007, respectively.As of December 31,
2005,2007, Eni had maintained committed and uncommitted unusedlinesborrowing facilities ofcredit foreuro5,8555,006 million and euro4,7836,298 million, respectively (euro5,3045,896 million and euro7,7716,523 millionrespectively,at December 31,2004)2006). Theseagreements provide forfacilities were under interestcharges based on prevailingrates that reflected market conditions.Commission fees on unused lines of credit areChanges in unutilized facilities were not significant.Long-term Debt
As of December 31,
2005,2008, long-term debt of euro8,38613,929 milliondecreasedincreased by euro1482,599 million over2004.2007.
Eni entered into financing arrangements withAt December 31, 2007 and 2008, theEuropean Investment Bank, relating to bank debt that requires maintenance of certain financial ratios generally based on Eni’s Consolidated Financial Statements or of a rating not inferior to A- (S&P) and A3 (Moodys). Theamount ofthis financing arrangementshort and long-term debt subject tosaidrestrictive covenants was euro1,1041,429 million and euro1,2581,323 million,as of December 31, 2004 and 2005,respectively.In 2005, those covenants primarily concern Eni’s financing arrangements (euro 1,235 million, as of December 31, 2005, of which euro 110 million as comprised a portion of long-term debt due within twelve months). Eni was in compliance with said covenants. AlsoFurthermore, Saipem SpA entered intofinancing arrangements with bankscertain borrowing facilities for euro27575 million(euro 300 million aswith a number ofDecember 31, 2004), that requirefinancial institutions subordinated to the maintenance of certainfinancial ratios generallyperformance indicators based onSaipem’sthe consolidated financialconditionstatements of Saipem. Eni andresults of operations.Saipemwasare in compliance withsaid covenants.
As of December 31, 2005, bondsthe covenants contained in their respective financing arrangements. Bonds of euro5,3396,843 millionincludedconsisted of bonds issuedunderwithin the Euro Medium Term Notes Program for a total of euro4,3656,391 million and other bonds for a total of euro974452 million.
As of December 31, 2004 bonds of euro 5,331 million included bonds issued under the Medium Term Notes Program for a total of euro 4,296 million and other bonds for a total of euro 1,039 million.
The weighted average interest rate on Eni’s long-term debt (including current maturities) at December 31, 2005 was approximately 4.5% (4.2% at December 31, 2004).Capital
ExpenditureExpenditures by Segment
The table below sets forth a breakdown, by segment, ofExploration & Production. In 2008, capitalexpenditure.
Year ended December 31,
2004
2005
(million euro)
Exploration & Production 4,853 4,964 Gas & Power 1,451 1,152 Refining & Marketing 693 656 Petrochemicals 148 112 Oilfield Services Construction and Engineering 186 349 Other activities 49 69 Corporate and financial companies 119 112 Total 7,499 7,414
In 2005, capital expenditureexpenditures of the Exploration & Production segment amounted to euro4,9649,545 million, representing an increase of euro1112,920 million, or2.3%44.1%, from20042007 mainly dueprimarilytohigher unitthe developmentcosts in connection with a higher rateofdevelopment activity for new fields in complex environmentsoil andin mature areas, and higher costs of certain productive factors (e.g. tariffs of drilling rigs). Capital expenditure for 2005 concerned mainly development expenditure (euro 3,952 million, compared to euro 4,310 million in 2004)gas reserves. Significant expenditures were directed mainly outside Italy,(euro 3,541 million),in particularinKazakhstan,Libya,Egypt, Angola, Congo andEgypt.the United States. Developmentexpenditureexpenditures in Italy(euro 411 million)concernedin particular the completion of work for planta well drilling program andinfrastructurefacility upgrading in Val d’Agriandas well as sidetrack and infillingactionsactivities in matureareas. Exploration expenditure amounted to euro 656 million (euro 499 million in 2004),fields. About 93% ofwhich about 96% wasexploration expenditures were directed outsideItaly. OutsideItaly,exploration concernedin particularthe following countries: Norway, Egypt,to the United States,BrazilEgypt, Nigeria, Angola andIndonesia.Libya. In Italy, explorationconcerned essentially Northern Italy.
Expenditure foractivities were directed mainly to thepurchaseoffshore of Sicily. Acquisition of proved and unproved propertyamounted to euro 301 millionconcerned mainly the extension of Eni’s mineral rights in Libya, following the agreement signed in October 2007 with NOC, the National Oil Corporation (effective from January 1, 2008), andconcernedthe acquisitionof: (i)of afurther 1.85%34.81% stake inthe KashaganABO projectfor dollar 200 million; (ii) 104 exploration blocks and two fieldsinpre-development phase in Northern Alaska; (iii) a 40% stake in the OML 120 and OML 121 concessions under development in the Nigerian offshore; and (iv) a 50% interest in WA-313-P and a 53.8% interest in WA-280-P permits in Australia. Capital expenditure for capital goods amounted to euro 55 million.Nigeria.In
2004,2007, capitalexpenditure inexpenditures of the Exploration & Production segment amounted to euro4,8536,625 million, representing an increase of euro 1,422 million, or 27.3%, from 2006 due to development of oil andlargely concerned development expendituregas reserves. This amount of expenditures was also affected by industry-wide cost trends regarding oilfield services and equipment. Main projects were executed mainlydirectedoutside Italy,(euro 3,991 million):in particularin Libya (the WafaKazakhstan, Angola, Egypt andBahr Essalam project), Iran (the South Pars project, phases 4 and 5), Angola (fields in Block 15), Kazakhstan, Egypt, Nigeria and Norway.Congo. Developmentexpenditureexpenditures in Italy(euro 378 million)concerned in particularthe continuation of thea well drilling program andwork for plant and infrastructurefacility upgrading in Val d’Agri and sidetrack and infillingactivitiesinterventions in matureareas.fields. Significant expenditures were directed toward exploratory projects. About90%94% ofexploration expenditure (euro 499 million) wasthese expenditures were also directed outsideItaly. OutsideItaly,exploration concernedin particular thefollowing countries:Gulf of Mexico, Egypt,the United States, Nigeria,Brazil, NorwayIndonesiaandKazakhstan.Nigeria. In Italy, explorationwas focused onshoreactivities were directed mainly to the offshore of Sicily. Acquisition of proved and unproved property concerned mainly a 70% interest inSicily and Central Italy. A further euro 17 million (Eni’s share) was expensed by affiliates for exploration projectsthe Nikaitchuq oilfield inSaudi Arabia, Russia and Spain.Alaska, in which Eni reached a 100% ownership.Gas & Power.In
2005,2008, capitalexpenditureexpenditures in the Gas & Power segmenttotalledtotaled euro1,1521,794 million and relatedin particularessentially to: (i)developmentdeveloping andimprovement ofupgrading Eni’stransmissiontransport network in Italy (euro6431,130 million); (ii) thecontinuationupgrading plan ofthe construction of combined cycle power plantsinternational pipelines (euro239233 million); (iii)developmentdeveloping andimprovement of Eni’s distribution network in Italy (euro 182 million); and (iv) development of Eni’s transport network outside Italy (euro 48 million). As compared to 2004, capital expenditure declined by euro 299 million, down 20.6%, due essentially to the completion of the Greenstream gasline in 2004 and of the power generation development plan.
In 2004, capital expenditure in the Gas & Power segment totalled euro 1,451 million and related mainly to: (i) development and improvement of Eni’s natural gas transportation network in Italy (euro 553 million); (ii) the continuation of the construction of combined cycle power plants (euro 451 million) in particular at Brindisi, Ferrara, Ferrera Erbognone, Mantova and Ravenna; (iii) development and improvement ofupgrading Eni’s natural gas distribution network in Italy (euro168233 million); and (iv) ongoing construction of combined cycle power plants (euro 107 million), in particular at thecompletion of the Greenstream gasline (euro 159 million) that started operations in October 2004.Ferrara site.In
2005,2007, capitalexpenditureexpenditures in the Gas & Power segment totaled euro 1,366 million and related essentially to: (i) developing and upgrading Eni’s primary transport network in Italy (euro 691 million); (ii) the upgrading plan of international pipelines (euro 253 million); (iii) developing and upgrading Eni’s natural gas distribution network in Italy (euro 195 million); and (iv) ongoing construction of combined cycle power plants (euro 175 million), in particular at the Ferrara site.Refining & Marketing. In 2008, capital expenditures in the Refining & Marketing segment amounted to euro
656965 million andconcerned:related mainly to: (i) refining, supply and logistics (euro349630 million),in Italy, with projects designed to improve the conversion rate and flexibility of refineries, in particularplant efficiency and flexibility improvement actions including the completionongoing construction ofthe tar gasification planta new110
hydrocracker at the Sannazzaro
refinery;refinery, and expenditures on health, safety and environmental upgrades; (ii) upgrade and restructuring of the retail network in Italy (euro 183 million); and (iii) upgrade of thedistributionretail network andthe construction of new service stations in Italy (euro 154 million); and (iii) the upgrade of the distribution network and to a lesser extent thepurchase of service stations in the rest of Europe (euro71115 million).As comparedExpenditures on health, safety and the environment amounted to2004, capital expenditure declined byeuro37 million, or 5.3%, due essentially to the completion of the plant in Sannazzaro.166 million.In
2004,2007, capitalexpenditureexpenditures in the Refining & Marketing segment amounted to euro693979 million andconcerned essentially:regarded mainly: (i) refining, supply and logistics (euro420675 million),in Italy, with projects designed to improve the conversion rate and flexibility of refineries, in particular the start-up of construction ofthe tar gasification planta new hydrocracking unit at the Sannazzaro refinery,efficiency improvement actionsandadjustment of automotive fuel characteristics to new European specifications;expenditures on health, safety and environment upgrades; (ii)theupgrade and restructuring of therefined product distributionretail network in Italy (euro164176 million); and (iii)theupgrade of therefined product distributionretail networkand the purchase of service stationsin the rest of Europe (euro69106 million). Expenditures on health, safety and the environment amounted to euro 141 million.Petrochemicals.In
2005,2008, capitalexpenditureexpenditures in thePetrochemicalsPetrochemical segment amounted to euro112212 million (euro 145 million in 2007) andconcerned in particular actions forrelated mainly to extraordinary maintenance (euro3784 million)and periodical, plant upgrades (euro2751 million)improvement, actions for, environmental protection,and for complying withsafety and environmentalregulationsregulation compliance (euro2541 million), upkeeping andimproving the efficiency of plantsrationalization (euro2324 million).In
2004,2007, capitalexpenditureexpenditures in thePetrochemicalsPetrochemical segment amounted to euro148145 millionand concerned in particular actions for improving the efficiency of plantsregarded mainly plant upgrades (euro5847 million)and actions for, environmental protection,and for complying withsafety and environmentalregulationsregulation compliance (euro4139 million), extraordinary maintenance (euro 29 million) and upkeeping (euro 28 million).Engineering & Construction.In
2005,2008, capitalexpenditureexpenditures in theOilfield Services,Engineering & Constructionand Engineering segment amounteddivision (euro 2,027 million) mainly related toeuro 349 million,the start up87.6% from 2004 and concerned mainly oilfield services and construction (euro 346 million), in particular: (i) improvement and upgrade of equipment; (ii) vessels and logistical support means for specific contracts, in particular Kashagan; (iii) upgrade of operating structures in Kazakhstan and West Africa; and (iv) the purchaseof theMargaux tankerconstruction of the deepwater field development ship FDS 2 as well as the ongoing construction of the pipelayer, the semisubmersible platforms Scarabeo 8 and 9 and thebeginningdeepwater drilling ship Saipem 12000. In 2008, the construction ofitsthe FPSO vessel Gimboa and of the jack-up Perro Negro 7 has been completed.In 2007, capital expenditures in the Engineering & Construction segment (euro 1,410 million) mainly related to: (i) ongoing construction of the new semisubmersible platform Scarabeo 8, a new pipelayer and a new deepwater drilling ship Saipem 12000; and (ii) the conversion of two tanker ships into
anFPSOunitvessels that will operate in Brazil on the Golfinhofield.
In 2004, capital expenditure2 field and inthe Oilfield Services, Construction and Engineering segment amounted to euro 186 million and concerned mainly: (i) the construction and upgrade of logistical support means in Kazakhstan, Angola and Nigeria; (ii) the completion of interventions on the semi-submersible platforms Scarabeo 3 and Scarabeo 4, on the Perro Negro 3 jack-up and on the Castoro 8 pipelaying vessel; and (iii) the purchase of plant and equipment required for the Sakhalin project in Russia.Angola.
Recent Developments
The table below sets forth certain indicators of the trading environment for the periods indicated:
Three months
ended March 31,
Two monthsOne monthApril-May,ended April 30,
2005
2006
2005
2006
Average price of Brent dated crude oil (1) 47.50 61.75 50.19 70.09 Average price in euro of Brent dated crude oil 36.23 51.37 39.15 55.98 Average EUR/USD Exchange rate (2) 1.311 1.202 1.282 1.252 Average European refining margin (3) 4.26 2.95 6.92 5.11 EURIBOR – three month euro rate % 2.1 2.6 2.1 2.8
2008
2009
2008
2009
Average price of Brent dated crude oil in U.S. dollars (1) 96.90 44.40 108.97 50.34 Average price of Brent dated crude oil in euro (2) 64.60 34.10 69.19 38.17 Average EUR/USD exchange rate (3) 1.500 1.302 1.575 1.319 Average European refining margin in U.S. dollars (4) 3.81 5.34 8.34 4.06 EURIBOR - three month euro rate % (3) 4.5 2.0 4.78 1.42
(1) i In U.S. dollarsPrice per barrel. Source: Platt’s Oilgram.(2) i Price per barrel. Source: Eni’s calculations based on Platt’s Oilgram data for Brent prices and the EUR/USD exchange rate reported by the European Central Bank.Bank (ECB).(3) i In U.S. dollarsSource: ECB.(4) i Price per barrel. FOB Mediterranean Brent dated crude oil. Source: Eni calculations based on Platt’s Oilgram data.
Eni’sresultsResults ofoperationsOperations for thefirst quarter 2006First Quarter 2009Net profit for the first quarter of
2006 increased by 21.6% over2009 was down 42.7% compared to the first quarter of2005, reflecting higher2008. Reported operating profit(up 25.7%), partially offset bywas down 35.8% as ahigher Group effective tax rate, up 4.1% (from 42.6 to 46.7%). The increase in the effective tax rate was due principally to a higher shareresult of lower profitbefore income taxes earned by subsidiariesin the Exploration & Productiondivision operatingand Gas & Power segments due to lower oil prices and falling gas demand amidst the current economic downturn. The Company also reported lower profit from equity-accounted entities. This decrease incountries where the statutorynet profit was also due to a higher tax rateis higher than the average tax rate for the Group.(up 2.7 percentage points from 45.6% to 48.3%).Eni’s results
benefitedwere positively influenced by the depreciation (down 13.2%) of the euro vs. the dollar. The trading environment was characterized by lower oil realizations in the quarter declining by 50.9% in dollar terms, driven by falling Brent prices (down 54.2% from the first quarter of 2008). Natural gas realizations increased by111
3.8% due to the time lag between movements in oil prices and their effect on gas prices. Gas marketing margins increased from a the first quarter of 2008 due to favorable trends in energy parameters used in determining purchase and selling prices of natural gas.
Realized refining margins were slightly impacted by the favorable trading environment
with a higher Brent crude oil price (up 30%) and a depreciationas measured by movements in the relative prices of products compared to the cost of theeuro versusoil feedstock (the margin on Brent was 5.34 $/BL, up 40.2% from thedollar (down 8.3%first quarter of 2008), mainly due to narrowing differentials between light and heavy oil that penalized Eni’s results on complex cycles. Retail marketing margins were lower. Selling margins of commodity chemicals were sharply due to higher costs of oil-based feedstock that were not fully recovered in sales prices.At March 31, 2009 net borrowings declined by 10.1% from December 31, 2008, due to cash inflows provided by operating activities, offset in part by financing requirements for capital expenditures.
In the first quarter of 2009, hydrocarbon production decreased by 0.9% compared with the first quarter of 2008 mainly due to OPEC production cuts, unplanned facility downtime in Nigeria and mature field declines (for further detailed information see "Item 4 – Exploration & Production"). These
positive factorsnegatives were partially offset bydeclining refining margins (down 30.8%), lower petrochemical products marginscontinuing production ramp-up in Angola, Congo, Egypt anddeclining selling margins on naturalVenezuela. Lower oil prices resulted in higher volume entitlements in Eni’s Production Sharing Agreements (PSAs) and similar contractual schemes.Natural gas
as a consequence of the new regulatory regime established by the Italian Authority for Electricity and Gas. In the subsequent months of April and May, the trend in the euro versus U.S. dollar exchange rate reversed with the euro appreciating considerably versus the dollar. Should this trend of appreciation continue for the rest of the year, Eni’s results of operation will be adversely impactedsales were up 4.7% as compared to the first quarter of2006.
The2008 reflecting contribution from the Distrigas acquisition. This increasein Eni’s operating profit for the first quarter 2006waslargely attributable to Exploration & Production division (up 67.6%) due to higher oil prices (oil up 33.4% in dollars, natural gas up 24.4% in dollars) combined with increased production volumes sold (up 7.8%), and to the favorable impact of the depreciation of the euro versus the U.S. dollar, offset in part by higher operating costs and amortization charges.
These increases werepartly offset by significantly loweroperatinggas sales on the Italian market due to the economic downturn.Significant Transactions
On April 7, 2009 Gazprom exercised its call option to purchase the 20% interest in OAO Gazprom Neft held by Eni following agreements between the two partners. The 20% interest in Gazprom Neft was acquired by Eni on April 4, 2007 as part of a bid procedure for the assets of bankrupt Russian company Yukos. The exercise price of the call option is equal to the bid price (U.S. $3.7 billion) as adjusted by subtracting dividends distributed and adding the contractual yearly remuneration of 9.4% on the capital employed and additional financing expenses. On April 24, 2009 Eni collected from Gazprom the cash consideration for the exercise of the call option amounting to U.S. $4.2 billion. Terms of the call option granted to Gazprom to purchase a 51% interest in the share capital of OOO SeverEnergia, which owns 100% of the three abovementioned Russian companies engaging in gas development, are currently under review by Eni, Enel and Gazprom.
On March 19, 2009, a mandatory tender offer to the minority shareholders of Distrigas was completed. Shareholders representing a 41.61% of the share capital of Distrigas tendered 292,390 shares on Eni’s offer. Publigaz Scrl tendered its entire interest (31.25%). The transaction has been accounted for in Eni financial statements as at March 31, 2009. On April 8, 2009 Eni paid to those shareholders cash consideration amounting to euro 1,991 million. Following the tender offer, Eni owned 98.86% of the share capital of Distrigas. The squeeze-out on the residual 1.14% was completed in early May. Consequently Eni holds all the shares of Distrigas except for one share belonging to the Belgian State with special powers. Distrigas shares have been delisted from Euronext Brussels. For further details on this transaction see "Item 4 – Significant business and Portfolio Developments".
On February 12, 2009, Eni’s Board of Directors approved the divestment of 100% of Italgas SpA and Stoccaggi Gas Italia SpA (Stogit) to Snam Rete Gas (50.03% owned by Eni) for total cash consideration of euro 4,720 million (euro 3,070 million and euro 1,650 million, respectively). The transaction will be financed by Snam Rete Gas through: (i) a rights issue for up to euro 3.5 billion (Eni has already committed to subscribe its share of the rights issue); and (ii) new medium to long-term financing for euro 1.3 billion. The main effects expected on Eni’s consolidated financial statements when the transaction closes will be: (i) a decrease of euro 1.5 billion in net borrowings and a corresponding increase in total equity as a consequence of the pro-quota subscription of the Snam Rete Gas capital increase by the minority shareholders; and (ii) a decrease in Eni’s net profit
in:equal to 45% of the aggregate net profit of Italgas and Stogit, with a corresponding increase in net profit attributable to minority shareholders. From an industrial perspective the transaction, expected to close in July 2009, will create significant synergies in the regulated businesses segment and maximize the value of Italgas and Stogit due to the higher visibility of regulated businesses as a part of Snam Rete Gas. For further details on this transaction see "Item 4 – Significant business and Portfolio Developments".By the end of May 2009, based on the approval of the full year dividend proposal made by the Company’s Annual General Shareholders Meeting on April 30, 2009, Eni expects to pay the balance of the dividend for fiscal year 2008 amounting to euro 0.65 per share. Total cash out is estimated at euro 2.36 billion.
112
Management’s Expectations of Operations
Management expects that the macroeconomic environment will remain challenging throughout the whole of 2009. Key management assumptions for the main external variables are an average Brent price of 43 $/BL for the full year 2009 and a decline in European demand for natural gas and fuels. The Brent assumption has been used by management for planning purposes and does not intend to furnish a forecast for what will be the likely Brent market price for the year. In this environment, management plans to achieve the following volumes targets.
• Hydrocarbon production: the Gas & Power division (down 23%) due primarilyCompany projects that its oil and gas production will grow with respect toa decrease2008 (actual production on available-for-sale basis was 1,748 KBOE/d innatural gas margins as a consequence2008) when excluding the impact of OPEC cuts to production levels in certain of thenew regulatory regime established byCompany’s countries of operations. The Company anticipates a partial downward revision of its growth rate compared to its initial plans for a 3% growth rate for 2009 due to lower than anticipated gas demand, rescheduling of certain projects in order to capture theItalian Authority for Electricityexpected downturn in costs andGas with Decision No. 248/2004 affecting natural gas prices to residential customers and wholesalers combined with higher purchasing costs. See "Item 4 – Regulation – Gas & Power – Natural gas prices". Onthepositive side, salesimpact ofnatural gas were up 1.87 BCM, or 7.2%, and electricity production sold was up 1.44 terawatthours, or 28.9%. Transported natural gas volumes outside Italy were also higher reflecting the coming-on-line of volumes transported through the Greenstream pipeline from Libya;unplanned facility downtime, particularly in West Africa.• Worldwide natural gas sales: the Petrochemical division (down 75.3%) affected byCompany projects that its natural gas sales will increase from 2008 (actual sales volumes in 2008 were 104.23 BCM) reflecting thesignificantly higher costfull contribution ofoil-based feedstocks not completely transferredthe Distrigas acquisition. In addition, the Company intends toselling prices;leverage on a number of marketing initiatives to gain market share in the main European countries of operations aiming at counteracting the effects of lowering gas demand. Sales in Italy are expected to decline sharply from the previous year due to the economic downturn and competitive pressures.• Refining throughputs on Eni’s account: the Refining & Marketing division (down 67%) due primarily to declining refining margins (margins on BrentCompany projects that refinery throughputs will increase slightly from 2008 (actual throughputs in 2008 weredown 1.31 dollars/barrel, or 30.8%), the effect of longer maintenance outages of refineries and higher environmental provisions (euro 21 million). These factors were offset in part by the impact of the appreciation of the dollar over the euro.
Eni’s net sales from operations (revenues) for the first quarter of 2006 increase by 35.2% from the first quarter of 2005, primarily reflecting higher realized prices and higher sales volumes in virtually all of Eni’s operating segments. Also contributing was the favorable impact of the depreciation of the euro versus the dollar.
The appreciation of the euro over other currencies, in particular the U.S. dollar (at March 31, 2006 the EUR/USD exchange rate was up 2.5% over December 31, 2005) resulted in decrease in the book value of net capital employed, in net equity and in net borrowings at 2005 year end.
Net borrowings at March 31, 2006 declined by 39.9% from December 31, 2005, due to cash inflow provided by operating activities, and was also influenced by seasonality factors, cash from asset divestments and currency translation effects. These inflows were offset in part by financial requirements for capital expenditure and investments and the repurchase of own shares.
In the first quarter of 2006 hydrocarbon production increased by approximately 7% as compared to the first quarter of 2005. This increase was driven by organic growth in Libya, Angola and Egypt. Production for the quarter was adversely impacted by: (i) an estimated 29 KBOE/d reduction due to lower entitlements in certain PSAs and buy-back contracts; (ii) field declines in mature areas, mainly in natural gas production in Italy; and (iii) residual hurricane impacts on production in the Gulf of Mexico and outages and disruptions in Nigeria due to social unrest.
Natural gas sales (included gas consumed by Eni and Eni’s share of sales of its affiliates) increased by 5.8% as compared to the first quarter of 2005. Electricity production sold increased by 28.98% as compared to the first quarter of 2005.
Cancellation of the Dación oil field contract on part of the Venezuelan State Oil Company
With effective date April 1, 2006, the Venezuelan State oil company Petróleos de Venezuela SA (PDVSA) unilaterally terminated the service contract governing activities at the Dación oil field where Eni acted as a contractor, holding a 100% working interest. As a consequence, starting on the same day, operations at the Dación oil field are conducted by PDVSA which replaced Eni Dación BV, Eni’s wholly-owned subsidiary that had been operating the field until that date.
Eni believes that it is entitled to a market value compensation for the expropriation of the Dación field. On these basis, Eni is available to reach an agreement with the Venezuelan authorities. In case an amicable settlement is not possible, Eni will take any other action in order to protect its interest in Venezuela. Based on internal and external independent evaluation, Eni is confident that a fair market compensation will not be lower than the book value of the Dación related assets. Accordingly, management decided not to impair the book value of Eni’s Dación assets. In 2005 and in the first quarter 2006, the Dación field production rate was about 60 KBBL/d. Management expects Eni’s proved reserves of hydrocarbons to be reduced by an amount of approximately 175 mmBBL corresponding to Eni’s net proved reserves of the Dación field as of December 31, 2005 as a consequence of the loss of Eni’s title to the field.
Management Expectations of Operations
The following are the forecasts for Eni’s key production and sales metrics in 2006:
•production of liquids and natural gas is expected to increase from the 1,693 KBOE/d level of 2005. Management plans to increase production mainly in Libya, Angola and Egypt due to full production from fields that commenced production in the second half of 2005. These increases will be partly offset by natural field declines, residual hurricane impacts on production in the Gulf of Mexico and outages and disruptions in Nigeria due to social unrest and the impact of the unilateral cancellation by the Venezuelan national oil company PDVSA of the service contract for the Dación oil field effective from April 1, 2006. Despite the adverse impact of the unforeseen events in Venezuela and Nigeria, production growth rate for the year is expected to be 3% assuming an average Brent crude oil price of 54.5 dollars per barrel in 2006. Management believes this growth rate to be consistent with Eni’s planned average growth rate of 4% for its oil and natural gas production in the four year period 2006-2009;35.84 mmtonnes) reflecting improved performance at certain plants.• sales volumes of natural gas are expected to increase by approximately 2% from the 91.15 BCM level of 2005. Management plans to increase natural gas sales volumes mainly in Turkey, Germany and Spain;•sold production of electricity is expected to increase by approximately 15% from the 22.77 terawatthours level of 2005. Management plans to increase sold production of electricity thanks to the ramp-up of new production capacity at the Brindisi and Mantova sites; lower production is expected at the Ravenna and Ferrera Erbognone plants due to planned maintenance;•refining throughputs on Eni’s account are expected to decline slightly from 2005, due mainly to planned maintenance at the Sannazzaro, Livorno and Taranto refineries. Otherwise Eni’s refineries are expected to run at full capacity; and•retailRetail sales of refined productson the Agip branded networkin Italyare expected to remain stableand the rest of Europe: the Company projects that sales of refined products at8.8 million tonnes; according to management’s plansits outlets in Italy and Europe will decline from 2008 (12.03 mmtonnes in 2008, excluding the impact of theexpected declinedivestment of marketing activities indomestic consumption is projected to be offset by a higher network performance. Intherest of Europe management plans to increase sales from the 3.7 million tonnes level of 2005 despite the expected stagnationIberian Peninsula that was executed late inconsumption; in particular higher sales are expected in Spain, France and Central Eastern Europe also2008) due to weak demand in theconstruction/acquisitionmain European markets on the backdrop ofservice stations.the economic slowdown.
In 2006, capital expenditure is expected to amount to euro 9.7 billion, representing a 31% increase from 2005. Approximately 91% of capital expenditure is planned in Eni’s Exploration & Production, Gas & Power and Refining & Marketing business segments; the main increases are expected in exploration projects, the development of oil and natural gas reserves, upgrading of natural gas transport and import infrastructure and upgrading of refineries.
Overall, inOver the next fouryear period managementyears, the Company plans to investapproximatelyeuro35.248.8 billion innewits businesses to support continued organic growth; approximately 67%, 17%, 8% and 6% of planned capitalexpenditure; approximately 69%, 12% and 10% of this new capital expenditure is plannedexpenditures will be directed tobe made inthe Exploration & Production, Gas & Power, Engineering & Construction and Refining & Marketing segments, respectively.KeyThe main planned projects are as follows: (i) development of reserves of hydrocarbons mainly in Kazakhstan,Angola, Nigeria,Norway, Libya, Italy, Angola, Congo, Egypt, Nigeria and the U.S. and; (ii) exploration projects to be executed mainly in the U.S., Libya, Italy, Angola, Indonesia, Nigeria, Norway, and Egypt;(ii) exploration in selected areas;(iii)increaseupgrading ofEni’s import capacity ofnational pipelines for transporting natural gas,from Algeria and Russia andas well as upgrading of Italian distribution networks; (iv) development of infrastructures to store natural gas in order to support seasonal upswings in natural gas demand; (v) upgrading of theItalian natural gas transportfleet of construction vessels anddistribution networks; (iv) interventions aimed atoffshore drilling rigs, as well as logistic centers and other support facilities in the Engineering & Construction segment; (vi) refinery upgrading,primary distillation capacity andmainly targeting an increase in conversion capacity andthe degree offlexibility of Eni’srefining system;main refineries; and(v)(vii) upgradingand developmentof Eni’sItalian and Europeannetworks of service stations for marketing petroleum products.Eni’s capital expenditure program has remained broadly unchanged with respect to the
marketingprevious industrial plan for the following reasons: (i) management believes that it has adopted prudent price assumptions in making investment decisions and these assumptions remain intact also in the current economic downturn; and (ii) management estimates that a high number ofpetroleum products.development projects in the Company’s Exploration & Production business deliver positive returns at current oil prices. Additionally, the Company capital plans present a high exposure to the regulated activities in the Italian gas sector (14% of the total investment program) which bear preset rates of return and are marginally influenced by market conditions. Management also expects that the current economic downturn will cause a reduction in expenditures required to develop reserves, including oilfield service rates and purchase costs of materials and support equipment, when compared to costs incurred during the upward phase of the oil cycle. In the event of a further deterioration in the macroeconomic environment, the Company believes that its capital plans retain an adequate level of flexibility to enable rescheduling of a number of projects as approximately 50% of the planned capital expenditures are yet to be committed. A capital project becomes committed when it receives the appropriate level of internal sanction and relevant contracts with third parties are awarded.In
ordermaking its capital expenditure projections for the next four years, management has assumed that the Company will be able toevaluatedeliver approximately euro 5 billion of savings on planned expenditures benefiting from theprofitability ofexpected reduction in oilfield service and materials costs and other cost control initiatives on ongoing projects. See "Item 3 – Risk Factors".Management intends to pursue strict capital discipline when assessing individual capital
expenditure projects, managementprojects. Management uses a long-term reference oil price of30 dollars per barrel.57 $/BL from 2013 onwards, in real terms that is adjusted to take account of expected inflation. The internal rate of return of each project is compared to the relevant hurdle rate, differentiated by business segment and country of operation. These hurdle rates are calculated by taking into account: (i)Eni’sthe weighted average cost of capitalwhich is differentiated for each business segment;to the Group; (ii) a country risk premium which reflects theriskinessspecific level of risk113
associated with each country of operation in terms of macroeconomic, business and
socialsocio-political current conditions and outlook; and (iii) a premium for the business risk.In the foreseeable future, management is strongly focused on preserving a solid balance sheet and an adequate level of liquidity taking into account macroeconomic uncertainties and tight financial markets. By this means, management expects to maintain its current credit rating. For planning purposes, management assessed the Company’s cash flows against a scenario of Brent prices at 43 $/BL for the year 2009 increasing slightly in the next
fourthree years up to 55 $/BL in 2012 and concluded that cash flows from operations would be sufficient to fund planned capital expenditures and dividend payments, while at same time achieving a ratio of net borrowings to total equity "leverage" that management regards as consistent with the priority of preserving the Company’s credit rating. Particularly, for the year 2009, management expects a decrease in capital expenditures as compared to 2008 (euro 14.56 billion in 2008). On the basis of the Company’s projections of cash flow at a price of $43 per Brent barrel for the full year, management expects that the Group’s leverage at year-end 2009 will record a slight increase from 2008 year-end (0.38). Nevertheless, management believes that, based upon its understanding of the criteria used for credit ratings,the Group projected leverage at year-end 2009 will be adequate to support the Company’s current credit rating. For planning purposes, management assumed an average exchange rate of approximately 1.30 U.S. dollars per euro in the 2009-2012 period. Given the sensitivity of Eni’s results of operations to movements in the euro versus the U.S. dollar exchange rate, trends in the currency market represent a factor of risk and uncertainty. See "Item 3 – Risk Factors".In the next four-year period management
plansintends topay dividends in line with the euro 1.1pursue a dividend policy designed to ensure competitive dividend yields to Eni’s shareholders. For fiscal year 2008, Eni is paying a dividend per sharepaid to shareholders for fiscal year 2005,of euro 1.30, of which euro0.450.65 per share was paid inOctober 2005September 2008 as an interim dividend with the balance of euro 0.65 per share to be paid late inJune 2006. Total cash outlay is expected at euro 4.1 billion (includingMay 2009. In future years, management expects to continue paying interim dividends for each fiscal year, with theeuro 1.7 billion alreadybalance for the full year dividend paid inOctober 2005).the following year. The euro 1.3 dividend for 2008 represents a yield of 7.6% as measured against the Eni share price recorded in the month of December 2008 on the Italian stock exchange. See "Item 8 – Dividend Policy" for more details on Eni’s dividend policy and the uncertainties and constraints to which it is subject.
Management plans to cover financial requirementsBased on management’s assumptions forcapital expenditure and dividends by means of net cash provided by operating activities. Management expects crudeoil pricesto remain high and volatilein the nexttwo years assuming a level of 54.5 and 45 dollars per barrel for 2006 and 2007, respectively; then in followingfour years, managementexpects crude oil pricesplans tostabilize until settling on the long term level of 30 dollars per barrel. Management's planned target ofachieve anoil and natural gasaverage productionlevel of 2 mmBOE/d in 2009, implying an averagegrowth rate of4%3.5% in the2006-2009 four year period, assumed a Brent crude oil2009-2012 period. Oil priceof $32 per barrel in 2009,assumptions are particularly significant when assessing the Company’s future production performance considering the entitlement mechanism underwhich management has used to estimate entitlements to production in certainEni’s PSAs andbuy-back contracts.similar contractual schemes. For the current year, the Company estimates that production entitlements in its PSAs would decrease on average by approximately 1,000 BBL/d for each $1 increase in oil prices compared to Eni’s assumptions for oil prices. This sensitivity analysis relates to the existing Eni portfolio and might vary in the future.In the
2006-2009next fouryear period managementyears, Eni expectsan exchange rate of approximately 1.30 U.S. dollars per euro.
Management expects to maintain a stable financial structure. See the paragraph "Financial condition" above, for a discussion of how Eni’s management assess Eni’s financial structure.
Discussion of certain business trends expected for 2006 and beyond
Decision No. 248/2004 the Authority for Electricity and Gas established, among other things: (i) that an increase in the international price of Brent crude oil may only be partially transferred on to residential and commercial users of natural gas in case international prices of Brent crude oil exceed the 35 dollars per barrel threshold; and (ii) that Italian natural gas importers – including Eni – must renegotiate supply contracts to wholesalers in order to take account of the reduction of the price of natural gas sold to residential and commercial users. A proceeding has commenced between the Authority for Electricity and Gas and Eni, which appealed this decision to an administrative court. Management believes a negative outcome of this matter to be likely. Accordingly, in 2006, management expects Eni’s natural gas selling margins to be adversely impacted by a material amount in light of the high Brent crude oil prices.
In addition, Eni is experiencing some pricing pressure inits core natural gas business in Italy to face increasing competitive pressure as aconsequenceresult of: (i) the current economic downturn that has significantly impacted management’s growth expectations ofincreasing competitionthe Italian gas market for the year 2009 and possibly beyond as there is limited visibility on time and strength of the recovery; also future growth rates for European gas demand have been subject to downward revisions (see "Item 4 – Gas & Power"); (ii) an expected increase in supplies of natural gas to the Italian market as new import capacity comes on line in connection with already started-up projects and completion of ongoing projects designed to upgrade import infrastructures to Italy. Specifically, the Company expects additional import capacity to supply up to 10 BCM in 2009 as Eni’s upgrades of its main TTPC and TAG pipelines from Algeria and Russia respectively reach full operations. In addition, Eni is completing another leg of expansion at the TAG pipeline and is planning to upgrade its pipeline from Libya. A competitor has commenced commissioning operations at a new LNG terminal in the Adriatic Sea. Overall the Company expects that import capacity will increase by 25 BCM by 2012 of which 90% will be available by 2010; and (iii) the need on the part of Eni to comply with the mandatory ceilings provided for bytheItalianregulatory systemregulation by selling natural gas volumes available under take-or-pay purchase contracts to certain Italian natural gas importers who resell those volumes on the Italian natural gas market (see "Item 4 – Regulation of the Italian Natural Gas Market" and "Item 3 – Risk Factors").
However,As a result of these market trends and developments, management expectsdeclining natural gas selling margins to be offset almost completely by the planned growth in natural gas sales in European markets and in supplies for the production of electricity, cost savings deriving from planned efficiency improvement actions and higher volumes of natural gas transport outside Italy.
In the medium term, taking into account the mandatory ceilings provided for by the Italian regulatory system for natural gas operators and the possibility of further regulatory constraints, developmentsthat competition will increase in thesupply and demand of natural gasfuture putting further pressure on selling margins. Eni’s sales volumes in Italycould pose some risks to Eni’s ability to fulfill its contractual obligations under take-or-pay contracts for the purchase of natural gas. In addition, management expects natural gas sales in Italyare projected to decline from the5853 BCM level achieved in 2008 to approximately 50 BCM in 2012. Worldwide gas sales are projected to reach 124 BCM by 2012 leveraging on the Company’s expansion in European markets on the backdrop of2005 duethe expected synergies arising from the integration of Distrigas (see "Item 4 – Gas & Power"). This planned growth will make for reduced growth expectations in the Italian natural gas market.Management intends to
increased competition. Managementimplement a number of marketing actions designed to support the Company’s selling margins in the Italian market in spite of rising competitive pressure. Specifically, management plans tomanage Eni’s growing portionpreserve profitability ofnaturalthe Company’s gaspurchased under take-or-pay contracts which cannot be sold in Italy and to compensate for the expected decline in natural gas salesoperations in Italy bymeans of: (i) a better commercial offer basedfocusing on theintegrationmost profitable customer segments. Tailored marketing policies will be deployed to retain and develop the main customers throughout all market segments. These policies include the offer ofEni marketing policypricing formulas and services that are designed to best satisfy the customers’ needs. Also the Company intends to strengthen its market position innaturalthe residential sector by leveraging on the development of the combined offer of gas and electricitygeneration businesses, aiming at customer satisfaction; (ii) increasing sales in European natural gas markets where Eni’s presence is established, as a result of supply contracts already signed, expected demand growth(the dual offer). Streamlining business support activities and reducing marketingefforts directed to expand Eni’s market shares in relevant areas; (iii) developing Eni’s presence in recently entered markets; (iv) exploiting the growing importance of natural gas spot markets (the so called continental hubs for natural gas);and(v) developing the business of LNG.general and administrative costs will also drive margin improvements.114
For a discussion of certain risks relating to the impact of the evolution of Italian regulation of the natural gas sector on Eni’s take-or-pay contracts see "Item 3 – Risk Factors – Liberalization of the Italian Natural Gas Market"
.
In 2006, management expects the Group effective tax rate to increase from the 46.8% level recorded in 2005. The expected increase in the Group effective tax rate will be driven principally by the increasing share of profit before income taxes which is expected to be earned by subsidiaries in the Exploration & Production division operating in countries where the statutory tax rate is higher than the average tax rate for the Group. In addition, a further rise in Eni’s Group effective tax rate is likely in light of a proposed fiscal reform impacting profits of corporations in the United Kingdom. See "Item 4 – Exploration & Production – North Sea".The expectations described above are subject to risks, uncertainties and assumptions associated with the oil and gas industry, and economic, monetary and political developments in Italy and globally that are difficult to predict. There are a number of factors that could cause actual results and developments to differ materially, including, but not limited to, crude oil and natural gas prices; demand for oil and gas in Italy and other markets; developments in electricity generation; price fluctuations; drilling and production results; refining margins and marketing margins; currency exchange rates; general economic conditions; political and economic policies and climates in countries and regions where Eni operates; regulatory developments; the risk of doing business in developing countries; governmental approvals; global political events and actions, including war, terrorism and sanctions; project delays; material differences from reserves estimates; inability to find and develop reserves; technological development; technical difficulties; market competition; the actions of field partners, including the inability of joint venture partners to fund their share of operating or developments activities; industrial actions by workers; environmental risks, including adverse weather and natural disasters; and other changes to business conditions.
Off-Balance Sheet Arrangements
Eni has entered into certain off-balance sheet arrangements, including guarantees, commitments and risks, as described in Note
2429 to the Consolidated Financial Statements. Eni’s principal financial obligations, including commitments under take-or-pay or ship-or-pay clauses, are described under "Contractual Obligations" below. See the Glossary for a definition of take-or-pay or ship-or-pay clauses.Off-balance sheet arrangements comprise those arrangements that may potentially impact Eni’s liquidity, capital resources and results of operations, even though such arrangements are not recorded as liabilities under generally accepted accounting principles. Although off-balance sheet arrangements serve a variety of Eni’s business purposes, Eni is not dependent on these arrangements to maintain its liquidity and capital resources; nor is management aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on the company’s financial condition, results of operations, liquidity or capital resources.
Eni has provided various forms of guarantees on behalf of
unconsolidatednon-consolidated subsidiaries and affiliated companies, mainly relating to guarantees for loans, lines of credit and performance under contracts. In addition, Eni has provided guarantees on the behalf of consolidated companies, primarily relating to performance under contracts. The aggregate amount of these guarantees is euro 20.6 billion, euro 7.1 billion of which relate to non-consolidated entities. In addition, Eni has commitments and contingencies relating to purchases of assets an other risks for a total of euro 1.9 billion. See "Item 4 – Acquisition of Distrigas". These arrangements are described in Note2429 to the Consolidated Financial Statements.115
Contractual Obligations
The following table summarizes the principal financial obligations which are described in
Item"Item 18 – Financial Statements –Note 14, 18Notes 16, 21, 22, 29 and24.31".
Total
2006
2007
2008
2009
2010
Thereafter
Amounts in the table refer to expected payments by period under contractual obligations commitments shown an undiscounted basis as of the balance sheet date.
Maturity year
Total
2009
2010
2011
2012
2013
2014 and thereafter
(
million euro)euro million)
Long-term Debt 8,386 733 1,339 661 524 1,370 3,759 Short-term Debt 4,612 4,612 Sub total 12,998 5,345 1,339 661 524 1,370 3,759 Operating leases relating to real estate rental in Italy 663 89 91 88 83 70 242 Other Commitments (off balance sheet): Take-or-pay 119,444 11,527 10,970 9,559 8,620 7,697 71,071 Ship-or-pay 6,094 338 361 372 373 374 4,276 Others 296 116 13 13 13 13 128 of which: - Purchase of investments 103 103 - Memorandum of intent relating Val d’Agri 193 13 13 13 13 13 128
Total debt 20,837 6,908 3,630 797 2,687 1,981 4,834 Long-term debt 14,478 549 3,630 797 2,687 1,981 4,834 Short-term debt 6,359 6,359 Interest payments on debt 2,893 502 469 412 383 336 791 Noncancelable operating lease obligations (1) 4,287 618 1,025 697 468 395 1,084 Asset retirement obligations (2) 9,469 269 35 61 18 256 8,830 Environmental liabilities 1,988 396 421 284 223 221 443 Purchase obligations (3) 259,973 17,938 13,777 14,326 14,405 14,112 185,415 Natural gas to be purchased in connection with take-or-pay contracts (4) 248,329 15,694 13,041 13,574 13,610 13,343 179,067 Natural gas to be transported in connection with ship-or-pay contracts (4) 5,849 539 537 545 549 528 3,151 Other take-or-pay and ship-or-pay obligations 1,455 139 135 126 111 106 838 Other purchase obligations (5) 4,340 1,566 64 81 135 135 2,359 Other commitments 180 8 5 5 5 5 152 of which: - Memorandum of intent relating to Val d’Agri 180 8 5 5 5 5 152 TOTAL 299,627 26,639 19,362 16,582 18,189 17,306 201,549
"Other commitments" relating to natural gas take-or-pay and ship-or-pay
(1) i Operating leases primarily regarded assets for drilling activities, time charter and long-term rentals of vessels, lands, service stations and office buildings. Such leases did not include renewal options. There are no significant restrictions provided by these operating leases which limit the ability of the Company to pay dividends, use assets or to take on new borrowings. (2) i Represents the estimated future costs for the decommisioning of oil and natural gas production facilities at the end of the producing lives of fields, well-plugging, abandonment and site restoration. (3) i Represents any agreement to purchase goods or services that is enforceable and legally binding and that specifies all significant terms. (4) i Such arrangements include non-cancelable, long-term contractual obligations to secure access to supply and transport of natural gas, which include take-or-pay clauses whereby the Company obligations consist of off-taking minimum quantities of product or service or paying the corresponding cash amount that entitles the Company to off-take the product in future years. Future obligations in connection with these contracts were calculated by applying the forecasted prices of energy or services included in the four-year business plan approved by the Company’s Board of Directors and on the basis of the long-term market scenarios used by Eni for planning purposes to minimum take and minimum ship quantities. See "Item 4 – Gas & Power – Natural Gas Purchases" and "Item 3 – Risk Factors – Liberalization of the Italian Natural Gas Market" for a discussion of nature and importance of Eni’s take-or-pay contracts and the related risks from the evolving regulatory environment that could negatively impact Eni’s results. (5) i Mainly refers to arrangements to purchase capacity entitlements at certain re-gasification facilities in the U.S. The table below summarizes Eni’s capital expenditure commitments for property, plant and equipment and capital projects at 31 December 2008. Capital expenditures are considered to be committed when the project has received the appropriate level of internal management approval. Such costs are included in the
long and medium term market scenarios used by Eni for planning purposes to minimum take and minimum ship quantities. Management expectsamountsdue under Eni take-or-pay and ship-or-pay contractual obligations in years subsequent to year 2010 will be roughly in line with the average amounts expected to be paid in the 2006-2010 period. See "Item 4 – Gas & Power – Natural Gas Purchases" and "Item 3 – Risk Factors – Liberalization of the Italian Natural Gas Market" for a discussion of the nature and importance of Eni’s take-or-pay contracts and the related risks from the evolving regulatory environment that could negatively impact Eni’s results.
shown.
Total
2009
2010
2011
2012
2013 and subsequent years
(euro million)
Capital expenditure commitments Committed on major projects 23,159 4,938 3,831 2,697 1,837 9,856 Other committed projects 24,910 5,147 4,342 3,186 2,389 9,846 TOTAL 48,069 10,085 8,173 5,883 4,226 19,702 Liquidity Risk
Eni’s financial operations are managed according to a centralized model where financial subsidiaries have specific roles and assignments. Eni’s Treasury Department coordinates and controls all activities, defines objectives and constraints in terms of financial structure, programs and risk management.Liquidity risk is the risk that suitable sources of funding for the
Group’s business activitiesGroup may not beavailable.available, or the Group is unable to sell its assets on the market place as to be unable to meet short-term finance requirements and to settle obligations. Such a situation would negatively impact the Group results as it would result in the Company incurring higher borrowing expenses to meet its obligations or under the worst of conditions the inability of the Company to continue as a going concern. As part of its financial planning process, Eni manages the liquidity risk by targeting116
such a capital structure as to allow the Company to maintain a level of liquidity adequate to the Group’s needs optimizing the opportunity cost of maintaining liquidity reserves also achieving an efficient balance in terms of maturity and composition of finance debt. The Group capital structure is set according to the Company’s industrial targets and within the limits established by the Company’s Board of Directors who are responsible for prescribing the maximum ratio of debt to total equity and minimum ratio of medium and long-term debt to total debt as well as fixed rate medium and long-term debt to total medium and long-term debt. In spite of the difficult and ongoing credit market conditions resulting in higher spreads to borrowers, the Company has succeeded in maintaining access to a wide range of funding at competitive rates through the capital markets and banks. The actions implemented as part of Eni’s financial planning have enabled the Group to maintain access to the credit market particularly via the issue of commercial paper also targeting to increase the flexibility of funding facilities. The above mentioned actions aimed at ensuring availability of suitable sources of funding to fulfill short-term commitments and due obligations also preserving the necessary financial flexibility to support the Group’s development plans. In doing so, the Group has pursued an efficient balance of finance debt in terms of maturity and composition leveraging on the structure of its lines of credit particularly the committed ones.
At present, the Group believes it has access to sufficient funding and has also both committed and uncommitted borrowing facilities to meet currently foreseeable borrowing requirements.
As of December 31, 2008, Eni maintained short-term committed and uncommitted unused borrowing facilities of euro 11,009 million, of which euro 3,313 million were committed, and long-term committed unused borrowing facilities of euro 1,850 million. These facilities were under interest rates that reflected market conditions. Fees charged for unused facilities were not significant.
Eni has in place a program for the issuance of Euro Medium Term Notes up to euro 10 billion, of which euro 6,391 million were drawn as of the balance sheet date.
The Group has debt ratings of AA- and A-1+ respectively for the long and short-term debt assigned by Standard & Poor’s and Aa2 and P-1 assigned by Moody’s; the outlook is stable for both. A security is not a recommendation to buy, sell or hold securities. A security rating may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Working Capital
Management believes that, taking into account unutilized
marketcredit facilities, Eni’s credit rating and access to capital markets, Eni has sufficient working capital for its foreseeable requirements.Credit Risk
Credit risk is the potential exposure of the Group to
losslosses inthe event of non-performance by a counterparty.case counterparties fail to perform or pay amounts due. The Group manages credit risk differently depending on whether it arises from exposure to financial counterparties or to customers relating to outstanding receivables. Individual business units are responsible for managing credit risk arising in the normal course of the business. The Group has established formal credit systems and processes to ensure that before trading with a new counterpart can start, its creditworthiness is assessed. Also credit litigation and receivable collection activities are assessed. The monitoring activity of credit risk exposure is performed at the Group level according to certain guidelines and measurement techniques that establish counterparty limits and systems to monitor exposure against limits and report regularly on those exposures. Specifically, credit risk exposure to multi-business clients and exposures higher than the limit set at euro 4 million are closely monitored. Monitoring activities do not include retail clients and public administrations. The assessment methodology assigns a score to individual clients based on publicly available financial data and capital, profitability and liquidity ratios. Based on these scores, counterparties are assigned an internal credit rating and classified based on their risk category. The Group risk categories are comparable to those prepared by external credit rating agencies. The Group’s internal ratings are also benchmarked against ratings prepared by such agencies. With regard to risk arising from financial counterparties, Eni has established guidelines prior to entering into cash management and derivative contracts to assess theGroup’s normal commercial operations is controlled by individual operating units within Group-approved guidelines. Eni’scounterparty’s financialcompanies follow guidelines approved by Eni’s treasury department onsoundness and rating in view of optimizing thechoice of highly credit-rated counterparties in their userisk profile of financial activities while pursuing operational targets. Maximum limits of risk exposure are set in terms of maximum amounts of credit exposures for categories of counterparties as defined by the Company’s Board of Directors taking into account the credit ratings provided by credit rating agencies. Credit risk arising from financial counterparties is managed by the Group central finance departments, including Eni’s subsidiary Eni Trading & Shipping which specifically engages in commodity derivatives transactions.Those are the sole Group entities entitled to be party to a financial transactions due to the Group centralized finance model. Eligible financial counterparties are closely monitored to check exposures against limits assigned to each counterparty on a daily basis. Exceptional market conditions have forced the Group to adopt contingency plans and
commodityunder certain circumstances to suspend eligibility to be a Group financial counterparty.117
Actions implemented also have been intended to limit incentrations of credit risk by maximizing counterparty diversification and turnover. Counterparties have been also selected on a more stringent criteria particularly in transactions on derivatives instruments
including derivatives.and with maturity longer than a three-month period. Eni has not experienced materialnonperformancenon-performance by any counterparty. As of December 31,2005,2007 and 2008, Enihashad no significant concentrations of credit risk.
HedgingMarket Risk
The most important currencies forIn the normal course of its operations, Eniare the euro and the U.S. dollar. See "Item 3 – Risk Factors – Exchange Rates". Eni’s hedging policyis exposed tominimize foreign exchange rate exposure through a policy of matching assets and liabilities where appropriate. Eni also enters into certain derivative financial contracts to hedge existing receivables and payables, including deposits and borrowings denominated in currencies other than the currency used in the relevant financial statements.
Eni enters into various types of derivative financial contracts (primarily interest rate swaps, forward rate agreements and interest rate collars) to manage its interest rate risk, to lower its funding costs and diversify its sources of funding and to minimize interest rate exposures arisingmarket risks deriving frommismatches between assets and liabilities.
Eni enters into certain derivative financial contracts and commodity hedging contracts for the purpose of reducing its exposure to changesfluctuations in commodity prices and changes inconnection with specific transactions, including, to a limited extent, to mitigatetheeffects of petroleum price fluctuations.euro vs. other currencies exchange rates, particularly the U.S. dollar, and in interest rates. For an in-depth analysis of market risks exposure and policies used by Eni to manage its exposure to market risk see "Item 11–- Qualitative and Quantitativeand QualitativeDisclosures About Market Risk".Research and Development
For a description of Eni’s research and development operations in
2005,2008, see "Item 4 – Research and Development".
Summary of Significant Differences Between Italian GAAP and U.S. GAAP
Eni’s Consolidated Financial Statements have been prepared in accordance with IFRS issued by the IASB as adopted by the EU, which differs in certain respects from U.S. GAAP. The significant differences between IFRS and U.S. GAAP, as applied to Eni’s Consolidated Financial Statements, are: A) consolidation policy; B) exploration & production activities; C) asset impairment and subsequent asset write-up; D) deferred tax assets and liabilities; E) intangible assets; and F) accounting for inventory evaluation. See Note 33 to the Consolidated Financial Statements for a more detailed discussion of the significant differences between IFRS and U.S. GAAP that affect Eni’s Consolidated Financial Statements, and Note 34 to the Consolidated Financial Statements for a reconciliation of net profit and shareholders’ equity between IFRS and U.S. GAAP.
Consolidated operating profit under U.S. GAAP was euro 15,528 million and euro 11,739 million in 2005 and 2004, respectively, compared with consolidated operating profit under IFRS of euro 16,827 million and euro 12,399 million for the same years. The significant reconciling items are as follows: (i) Saipem SpA, including its subsidiaries, accounted for under the equity method for U.S. GAAP purposes, but fully consolidated under IFRS; 50-50 owned joint ventures and other entities in which Eni’s ownership equals that of other partners are accounted for under the equity method accounting for both IFRS and U.S. GAAP; (ii) the capitalization of certain oil and natural gas exploration and development costs that were fully or differently amortized in the same period under IFRS; and (iii) the impact of the different accounting method for determining the cost of inventory on hand (last-in-first-out method of accounting under U.S. GAAP versus average cost method of accounting under IFRS). See Note 34 to the Consolidated Financial Statements for a breakdown of operating profit by segment under U.S. GAAP for the years 2005 and 2004.
Consolidated net profit under U.S. GAAP was euro 7,583 million and euro 6,401 million in 2005 and 2004, respectively, compared with consolidated net profit under IFRS of euro 8,788 million and euro 7,059 million for the same years. In addition to the effects discussed above, the reconciliation of consolidated net profit to U.S. GAAP was affected in all years presented by the tax effect of reconciling items and the differences in deferred income tax treatment of distributable reserves.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
In accordance with Article 17.3 of Eni’s By-laws, the Board of Directors is made up of 3 to 9 members. The Board of Directors
of Eni SpAcurrently in officeconsistswas elected by the ordinary shareholders’ meeting held on June 10, 2008, that established the number of Directors at ninemembers.for a three financial year term. The Board will therefore expire at the date of the Shareholders’ Meeting approving Eni’s financial statements for year ended December 31, 2010.
The table below sets forth the names of thenine members of theBoard of Directors members appointed, their positions, the year when each was initially appointed as a Director and theirages. This Board of Directors was appointed byages
Name Position Year first appointed to Board of Directors
Age
Roberto Poli Chairman 2002
71
Paolo Scaroni CEO 2005
63
Alberto Clô Director 1999
62
Paolo Andrea Colombo Director 2008
49
Paolo Marchioni Director 2008
40
Marco Reboa Director 2005
54
Mario Resca Director 2002
64
Pierluigi Scibetta Director 2005
50
Francesco Taranto Director 2008
69
Roberto Poli, Paolo Scaroni, Paolo Andrea Colombo, Paolo Marchioni, Mario Resca and Pierluigi Scibetta were candidates included in the
Ordinary Shareholders’ Meeting held on May 27, 2005 for a three year period; it will therefore expire at the datelist of theGeneral Shareholders’ Meeting approving Eni’s financial statementsMinistry for Economy and Finance. Alberto Clô, Marco Reboa and Francesco Taranto were candidates included in thefinancial year 2007.
NamePosition
Year First Appointed to Board of Directors
Age
Roberto Poli Chairman 2002
68
Paolo Scaroni CEO 2005
60
Alberto Clô Director 1999
59
Renzo Costi Director 1996
69
Dario Fruscio Director 2002
69
Marco Pinto Director 2005
44
Marco Reboa Director 2005
51
Mario Resca Director 2002
61
Pierluigi Scibetta Director 2005
45
list presented by institutional investors.
While it remains a significant shareholder, the Ministry of Economy and Finance intends to continue to participate in the nomination and election of Eni’s Board of Directors in order to protect its investment as a shareholder.
During whatever periodOn the basis of Italian laws regulating the special powers of the State (see "Item 10 – Limitations on Voting and Shareholdings"), the Minister of Economy and Finance in agreement with the Minister of Economic Development may appoint another member of the Board of Directors, without voting rights, in addition to those appointed by the Shareholders’ Meeting. On the occasion of the last Board appointment, the Minister for Economy and Finance opted not to exercise that power.
Moreover, according to Italian law and jurisprudence, until the Ministry of Economy and Finance remains a
majorityrelevant shareholder,accordingEni’s accounts will be subject toItalian law, as confirmed by Decision No. 466/1993the review of theCorte Costituzionale (Constitutional Court), theItalian Court of Accountants ("Corte deiconti (Court of Accounts) has the right and duty to exercise a role as financial controller of Eni’s operationsConti") in order to protect the financial interest of theState as a shareholder. In order forState. A Magistrate appointed by the Court of Accountsto exercise such control, a representative of the Court of Accountsconsequently attendsthe meetings of theEni’s Board of Directors,and theBoard of Statutory Auditorsof Eni without the right to voteand Internal Control Committee meetings (without any voting right) and Eni has the obligation to send to the Court ofAccountsAccountants its financial118
statements together with the reports of the Board of Directors, the Board of Statutory Auditors and its external auditors. The
representative of the Court of Accounts who attends the meetings of the Board of Directors and Board of Statutory Auditors of Eni is Luigi Schiavello (alternate Angelo Antonio Parente).
On the basis of Eni’s By-Laws as amended on April 13, 2005, the Minister of Economy and Finance in agreement with the Minister of Productive Activities may appoint another member of the Board of Directors, with no voting rights.
On June 1, 2005, the new Board of DirectorsMagistrate delegated tothe Chairman, Roberto Poli, powers for researching and promoting integrated projects and strategic international agreements, and appointed Paolo Scaroni Managing Director of the parent company Eni SpA and CEO of Eni Group, confirming the powers already delegated to the previous CEO.
On December 14, 2005, the Board of Directors of Eni appointed Domenico Dispenza as General Manager of the Gas & Power Division with those powers as defined by the Board from January 1, 2006. Mr. Dispenza may be removed by the Board of Directors of Eni without cause. Mr. Dispenza replaced Mr. Sgubini, who reached the mandatory retirement age.control is currently Lucio Todaro Marescotti (alternate Amedeo Federici).The table below sets forth
Eni SpA’s,the composition of Eni’s senior management, including the CEO who is also General Manager of theexecutive officers andEni SpA, theGeneral ManagersChief Operating Officers of Eni’s three divisions, and those senior managers who attended on a permanent basis the meetings of Eni’s Management Committee and other senior managers who report to the CEO. This table indicates their positions within Eni, the year they were appointed to such positions, their total years of service at Eni and their ages.The executive officers of EniChief Operating Officers are appointed by the Board of Directors, upon proposal of the CEO in agreement with the Chairman. Other members ofEniEni’s senior management are appointed by Eni’s CEO and may be removed without cause.
Name Management Position Year First Appointed to Current Position
Total Number of Year of Service at Eni
Age
Management position Year first appointed
to current
positionTotal number
of year of service at EniAge
Paolo Scaroni General Manager of Eni 2005
1
60
Chief Operating Officer of Eni 2005
4
63
Stefano Cao General Manager for the Exploration & Production Division 2000
30
55
Claudio Descalzi (*) Chief Operating Officer for the Exploration & Production Division 2008
28
54
Domenico Dispenza General Manager for the Gas & Power Division 2005
32
60
Chief Operating Officer for the Gas & Power Division 2005
35
63
Angelo Taraborrelli General Manager for the Refining & Marketing Division 2004
33
58
Angelo Caridi Chief Operating Officer for the Refining & Marketing Division 2007
39
62
Marco Mangiagalli Chief Financial Officer 2006
27
56
Alessandro Bernini (**) Chief Financial Officer 2008
13
49
Salvatore Sardo Chief Corporate Operations Officer 2005
4
57
Massimo Mantovani The Group Senior Vice President for Legal Affairs 2006
13
43
The Group Senior Executive Vice President
for Legal Affairs2006
16
46
Stefano Lucchini The Group Senior Vice President
for Public Affairs and Communication2005
1
44
Rita Marino The Group Senior Executive Vice President
for Internal Audit2008
4
45
Leonardo Maugeri The Group Senior Vice President
for Strategies and International Relations2000
11
41
The Group Senior Executive Vice President
for Strategies and Development2000
14
44
Amedeo Santucci The Group Senior Vice President
for Supply Operations2005
26
61
Salvatore Sardo The Group Senior Vice President
for Human Resources2005
1
54
Stefano Lucchini The Group Senior Executive Vice President
for Public Affairs and Communication2005
4
47
Roberto Ulissi The Group Senior Vice President
for Corporate Affairs and Governance2006
0
44
The Group Senior Executive Vice President
for Corporate Affairs and Governance2006
3
47
Raffaella Leone Executive Assistant to the Chief Executive Officer 2005
4
47
(*) i Appointed by the Board of Directors on July 30, 2008. (**) i Appointed on August 1, 2008. The biographies of Eni’s directors and
executive officerssenior managers are set out below.Roberto Poli was appointed Chairman of Eni SpA
onin May30,2002. He isChairman of the Board of Directorscurrently President of Poli e Associati SpA, amajorconsulting firm specialized inthe area ofcorporate finance,businessmergers,andacquisitions andbusiness restructuring.reorganizations. From 1966 to 1998 he was Professor of Business Finance at the Università Cattolica of Milan. He is aMemberpartner ofthe Board of Directors ofa leading firm for corporate finance and legal affairs. He is director in important companies such as Fininvest SpA, Mondadori SpA, Merloni Termosanitari SpA,and G.D.Coesia SpA, Maire Technimont SpA andgeneral partnerPerennius Capital Partners SGR SpA. He has been an advisor for extraordinary finance operations for some ofBrafin S.A.P.A.the most important companies in Italy. He has also been Chairman of Rizzoli-Corriere della Sera SpA and Publitalia SpA.Paolo Scaroni
graduatedwas appointed CEO of Eni SpA in June 2005. He obtained an economics degree fromthe UniversitàMilan’s Bocconi University inMilan1969 andobtained a masters degree in business administrationan MBA from ColumbiaUniversityBusiness School inNew York. After working1973. For a year following business school, he was an associate at McKinsey & Co. From 1973 until 1985, he held a series of positions with Saint Gobain, culminating with his appointment asconsultant with McKinsey, in 1973 he joinedPresident of the Saint GobainGroup, where he held various managing positions in Italy and outside Italy, until in 1976 he was appointed general manager of the "Vetro piano" division in Paris with the responsibility of managing all of Saint Gobain’s international activities.flat glass division. From 1985 to 1996worked with Techint wherehe wasappointed vice-presidentDeputy Chairman andmanaging director, following the privatizationCEO of Techint. During his time at Techint, he was also Vice President of Falck and executive Vice President of SIV,Italimpiantia joint venture between Techint andDalmine.Pilkington plc. He joined Pilkington in 1996 and was group CEO until2002 was managing director of the group’s head company in Great Britain.May 2002. From May 2002 to May 2005 he wasmanaging director and general managerCEO ofEnel. At present, Mr.Enel, Italy’s leading electricity utility. Paolo Scaroni isa director of "Il Sole 24 Ore" and Marzotto, a member of the managing committee of Confindustria and chairman of Unindustria Venezia in Italy, while outside Italy is chairman of the Board of Directors of Alliance UniChem, a member of the Supervisory Board of ABN AMRO, anda member of the Board of Assicurazioni Generali SpA, of LSEG plc (London Stock Exchange Group), of Veolia Environment (Paris), of the Board of Overseers of ColumbiaUniversity’sBusinessSchool.School (New York) and of the Board of Fondazione Teatro alla Scala. He was Chairman of Alliance Unichem plc (UK) from 2005 to July 2006. In November 2007 he was made a member of the Légion d’honneur of France.119
Alberto Clô graduated in Political Science. He is
a professorAssociate Professor of IndustrialEconomyEconomics at the University of Bologna and from 1995 to 1996 he was Minister of Industry and interim Minister of Foreign Trade ad interim in 1995 and 1996. During the Italian presidency of the European Union he waschairmanChairman of the Council of Ministers of Industry and Energy of the European Union. In 1996 he was awarded the title of Cavaliere di Gran Croce al Merito of the Republic of Italy.He is a Member of the Board of DirectorsUntil December 31, 2007 he was director of ASM BresciaSpA, De LonghiSpA. Currently he is non-executive director of Atlantia SpA, Italcementi SpA andSocietà AutostradeDe Longhi SpA. Heis also President of the Scientific Committeehas been an independent Director of EniCorporate University.SpA since May 1999.
Renzo Costi is an attorneyPaolo Andrea Colombo graduated in Business Economics from the Bocconi University andconsultant. He servedqualified as amagistrate from 1964 to 1968professional accountant and auditor in 1985. He iscurrentlyprofessor ofcommercial lawAccounting and Financial Reporting at the Bocconi University, Milan. He is partner ofBologna. He was founder,Borghesi Colombo & Associati, a consultancy firm specialized in corporate finance, mergers andcurrently is co-director, of the magazines "Giurisprudenza Commerciale", "Banca Impresa e Società"acquisitions, strategy and"Banca, Borsa e titoli di credito".corporate governance. He is a member of the Board of Directors ofEditrice Il Mulino SpA.
Dario Fruscio is a chartered accountant, public auditorMediaset, Interbanca, Ceresio Sim andconsultant; he is currently Professor of EconomyVersace, andManagement at the University of Pavia and taught at the Accademia Nazionale della Guardia di Finanza of Bergamo. He is Chairman of Italia Turismo SpA and amember of the Board ofSviluppo Italia SpA.Statutory Auditors of Interbanca, Aviva Vita, Sirti, A. Moratti Sapa, Humanitas Mirasole, Credit Agricole Assicurazioni Italia. In Eni, he was member of the Board of Statutory Auditors/Audit Committee (2002-2005) and Chairman of the same Board for a three year period until June 2008. He has been Chairman of Eni’s audit committee since May 2005. He has been an independent Director of Eni since June 2008.
Marco PintoPaolo Marchioni is amagistratequalified lawyer specialising in penal andnotaryadministrative law. He acts as a consultant to government agencies andhas previously heldbusiness organizations on business, corporate, administrative and local government law. He was Mayor of Baveno (Verbania) from April 1995 to June 2004 and Chairman of the Assembly of Mayors of Con.Ser.Vco from September 1995 to June 1999. He served in various positionsat Regional Administrative Courtswithin government agencies. From October 2001 to April 2004 he was a director of Cim SpA of Novara (merchandise interport center), from December 2002 to December 2005 a director andthe Councilexecutive committee member ofState.Finpiemonte SpA and from June 2005 to June 2008 director of Consip SpA. Heis a professor and dean of the department for economic sciences at the Scuola Superiore dell’economia e delle finanze. Since 1994 hehas beena legal counsel and headan independent Director ofthe legislative office of the Ministry of Economy and Finance. From December 2004 to April 2005 he was head of the technical secretariat of the vice-president of the Council of Ministers.Eni since June 2008.Marco Reboa graduated in Business Administration from the Bocconi University, Milan. He is a chartered accountant and public auditor. He is
a professorProfessor of law at the Libero Istituto Universitario Carlo Cattaneo in Castellanza and author of essays on corporate governance, economicevaluationandfinancial statements.legal issues. He is the editor of "Rivista dei Dottori Commercialisti" and is a professional advisor in Milan. He is a member of the Board of Directors of Seat PG SpA, Interpump Group SpA, IMMSI SpA and Intesa PrivateBanking.Banking SpA. He isa statutoryChairman of the Board of Statutory Auditors of Luxottica Group SpA and Mediobanca SpA. He is an auditor ofAutogrillGruppo Lactalis Italia SpA and Egidio Galbani SpA. He has been an independent Director of Eni SpA since May 2005.Mario Resca graduated in Economics from the Bocconi University, Milan. He is
Chairman and Managing Director of McDonald’s Italia SpA andChairman of Italia Zuccheri SpA (formerly Eridania SpA),of the American Chamber of Commerce in ItalyCasinò di Campione SpA andof Confimprese, National Board member of U.P.A. (Union of Associated Advertising Operators), andConfimprese. He is Director of Mondadori SpA, ARFIN SpA (insurances) anda Member of the Board of liquidators of Cirio Del Monte Group under special management.Finance Leasing SpA. He isalso chairmanVice Chairman and venture partner ofthe RMCH foundationMcDonald’s Development Italia, Inc and advisor of British Telecom Italia. As a graduate he worked forchildren. In 2002 was awardedthetitle of Cavaliere del Lavoro. After working forChase Manhattanbank,Bank. In 1974 he was appointed director of Biondi Finanziaria (Fiat Group),and from 1976 to 1991 he wasapartneratof EgonZehnder,Zehnder. In this period he was appointed director ofLancomeLancôme Italia anda directorofcertaincompaniesofbelonging to theRCS-CorriereRizzoli-Corriere della Sera Group and Versace Group. Heis chairmanwas Chairman ofFinanziariathe American Chamber of Commerce. He also served as Chairman of Sambonet SpA, Kenwood Italia SpA and was a foundingmemberpartner of Eric Salmonand& Partners. In 2008, he was appointed General Director of Italian Museums by the Government. He has been an independent Director of Eni SpA since 2002.Pierluigi Scibetta graduated in Economics from the University La Sapienza, Rome. He is a chartered accountant and auditor and has been appointed director and auditor of
variousa number of public bodies and companies. In 2003 he was appointed director of the Istituto Superiore per laprevidenzaPrevidenza e lasicurezzaSicurezza sullavoroLavoro - ISPESL (the State Agency for Employee Safety) and oftheGestore del Mercato Elettrico SpA.In 2004, he was appointed director of Nucleco SpA.Heis a professor of Energy Engineeringlectures in Environmental Economics at the University of Perugia. He has been an independent Director of Eni SpA since May 2005.
Stefano CaoFrancesco Taranto graduated in Economics from the Catholic University of Milan. He began working in 1959, in a stock brokerage in Milan; from 1965 to 1982 he worked at Banco di Napoli, as deputy director of the stock market and securities office. He was director of securities funds at Eurogest from 1982 to 1984, general director and chief executive officer of Interbancaria Gestioni from 1984 to 1987. After moving to the Prime group (1987 to 2000), he was chief executive officer of the parent company. He has also been a member of the steering council of Assogestioni and of the corporate governance committee for listed companies formed by Borsa Italiana. He was a director of Enel SpA from October 2000 to June 2008, and is currently a member of the Board of directors of Banca Carige, Cassa di Risparmio di Firenze, Unicredit Xelion Banca, Pioneer Global Asset Management (Unicredito group) and Kedrios. He has been an independent Director of Eni since June 2008.Claudio Descalzi graduated in Physics from the University of Milan and attended specialist courses in Petroleum Engineering in France and USA. He joined the Eni Group in 1981 as
a technical engineer active mainlyoil & gas field petroleum engineering and project manager. He served inoffshore construction. He then became general manager,various managingdirectorpositions in the Exploration & Production Division. In 2006 he was appointed Deputy Chief Operating Officer of the Exploration & Production Division andchairman120
Chairman of
Saipem SpA, and is at present General ManagerAssomineraria. In 2008 he was appointed Chief Operating Officer of Eni’s Exploration & Production Division.Domenico Dispenza
is an engineergraduated in Aeronautical Engineering from the Politecnico of Milan and obtained a Master’s Degree in Advanced Technologies. He joined Snam’s study department in 1974. He served in various managing positions in EnigroupGroup companies engaged in natural gas activities. In 2004 he was elected Chairman and CEO of Snam Rete Gas SpA and in 2006 he was appointedGeneral ManagerChief Operating Officer of Eni’s Gas & Power Division.Angelo
Taraborrelli,Caridi graduated inlaw,Civil Engineering from the Politecnico of Turin. He joinedthe Eni groupSnamprogetti in1973 as an expert1970. He served inanalysis evaluation and control of investments in the oil market. After the merger of AgipPetroli with Enivarious managing positions within Eni’s Group companies. In 2002 he was appointedDeputyManaging Director and CEO of Snamprogetti in 2005. In August 2007 he was appointed Chief Operating Officer of Eni’s Refining & MarketingDivision for Marketing OperationsDivision. He is non-executive director of Saipem SpA.Alessandro Bernini started his career in 1979 at the auditing firm Neutra Revisioni Sas. In 1981, he joined Ernst & Young and
on April 14, 2004in 1995 hebecame General Manager of Eni’s Refining & Marketing Division replacing Gilberto Callera who retired.
Marco Mangiagalli worked for the Barclays Group and other Italian merchant banks before joiningwas appointed Partner. On September 1, 1996 he joined the Eni Group in1979.the quality of Chief Financial Officer of Saipem SpA, and was appointed Group Chief Financial Officer for Saipem Group. He has been appointed Chief Financial Officer of the Eni Group in August 2008.Massimo Mantovani is an attorney at law and worked as a legal counsel for international activities before joining Snam’s legal office in 1993. He was responsible for legal affairs at Eni���s Gas & Power Division until he was appointed Eni’s Senior Vice President for legal affairs in 2005.
Rita Marino has a degree cum laude in Economics from the LUISS and worked in Stet and then in Telecom Italia where she spent most her professional career, carrying out several managerial assignments in the Planning and Control Department. She has also achieved a well-established experience in the Merger & Acquisition Department, managing several and important corporate transactions. In March 2003 she started working for Enel where she was Head of the Strategy, Control and Procurement Processes Area and Corporate Procurement. She was also Chief Operating Officer in a company of the Enel Group and member of the
Boardboard ofDirectorsseveral companies ofvariousTelecom Italia Group and Enel Group. She has been Chief of the Internal Auditing Department since July 1, 2005 when she joined Enicompanies. He is responsible for Eni’s administration, financial reporting and accounting, planning and control, and treasury operations..Stefano Lucchini graduated in
economicsEconomics from the LUISS in Rome and joined the study department of Montedison. After a period in the United States, where he was assistant to the Chairman of the Energy and Commerce Commission of the U.S. Congress, he was head of communications at Montedison USA. In 1993 he returned to Italy and was head of the investor relations department for the Ferruzzi and Montedison Group. He was then Director for external relations at Enel and later at Confindustria and Banca Intesa. He joined Eni asDirectorSenior Executive Vice President forcommunicationsPublic Affairs and Communication in 2005. He is also a professor at theHighSchool for Journalism of the Università Cattolica in Milan.
Massimo Mantovani is an attorney at lawLeonardo Maugeri has two degrees andworked asalegal counsel for international activities before joining Snam’s legal office in 1993. He was responsible for legal affairs at Eni’s Gas & Power Division until he was appointed Eni’s Senior vice president for legal affairs in 2005, replacing Carlo Grande who retired.
Leonardo Maugeri,research doctorate, after extensive academic experience acquired in Italy and abroad, joined the Eni Group in 1994, holding various positions mainly as counsel for strategicdecisions.decisions before being appointed as Senior Executive Vice President for Strategies and Development Department. Maugeri is also a director of Polimeri Europa SpA, Italgas and the Fondazione Mattei. He isamember of theexecutive council of CensisEnergy Advisory Board and the World Economic Laboratory of theCommission on international relations at Confindustria.
Amedeo Santucci, graduated in engineering, joinedMassachusetts Institute of Technology (MIT), as well as theGroup in 1979International Councillor Board of the Center for Strategic andserved various positions inInternational Studies (CSIS - Washington, D.C.), theareasEnergy Advisory Board ofmaintenanceAccenture, the Foreign Policy Association (New York) andprocurement. He was Chairman of Eurosolare.the Rand Business Forum (Los Angeles).Salvatore Sardo graduated in
economicsEconomics from the University of Turin and started his career as an auditor for Coopers & Lybrand. He later joined Telecom Italia where, after the privatization of the company, he was responsible for administration and control. He was Chairman of Pagine Gialle from 1998 to 2001 and returned to Telecom Italia as manager of thegroup’sGroup’s real estate and general services. From 2003 he was procurement and security manager at Enel until 2005 when he joined Eni to become Senior Vice President for Human Resources & Business Services. In 2008 he has been appointed Chief Corporate Operations Officer of Eni.He replaced Renato Roffi who retired.Roberto Ulissi is an attorney at law. After some years at the Banca d’Italia as an in-house legal counsel he
was transferred tobecame Director General of the Ministry of Economy and Finance,as an expert in legal and banking matters for the privatization of state-owned industrial companies. He then became Director General of the Ministry,head of thebanking"Banking andfinancial markets department.Finance System and Legal Affairs Department". He was Director of state-owned companies, such as Telecom Italia, Ferrovie dello Stato, Alitalia, Fincantieri, and Government representative in the Bank of Italy’s governing council. He was member of several national and European committees as a representative of the Italian Ministry of Economy including, at a national level, the Commission for the Reform of Corporate Law and, at an EU level, the Financial Services Policy Group, the Banking Advisory Committee, the European Banking Committee, the European Securities Committee, and the Financial Services Committee. He has also been special professor of banking law at the University of Cassino. He is a Grande Ufficiale della Repubblica Italiana. Since 2006 he has been appointed Senior Executive Vice President forcorporate affairsCorporate Affairs andgovernanceGovernance Department at Eni and a member of the board of Enion May 12, 2006.
Auditors
Statutory Auditors
The Italian legislation requires Italian listed corporations to have a boardInternational BV. He also holds the position ofstatutory auditors composed of independent experts in accounting matters and in matters specified in such corporations’ by-laws. Eni SpA’s Board of Statutory Auditors is elected by the shareholders meeting, who also appoints the Chairman of the Board. Eni SpA’s by-laws currently provide thatCompany Secretary on the Board ofStatutory Auditors consistsDirectors offive effective statutory auditorsEni.121
Raffaella Leone worked for Techint SpA, Pilkington Plc and
two alternate auditors (eachEnel SpA before joining Eni in 2005 as Executive Assistant to the CEO. She is Vice President ofthem automatically substitutes an effective auditor who resigns or is otherwise unable to serve as an auditor elected in the same list).
The following table sets forth the names, positionsEni Foundation andyear of appointment of the membersmember of the Board ofStatutory Auditors ofFondazione Eniwho were appointed by the Ordinary Shareholders’ Meeting held on May 27, 2005 for a three year period; therefore this Board of Statutory Auditors will expire at the date of the General Shareholders’ Meeting approving Eni’s financial statements for the financial year 2007. For a description of the dutiesEnrico Mattei, as well as member of the Board ofStatutory Auditors see below.
NamePosition
Year First Appointed to Board of Statutory AuditorsPaolo Andrea ColomboChairman
2002Filippo DuodoAuditor
1998Edoardo GrisoliaAuditor
2005Riccardo PerottaAuditor
1999Giorgio SilvaAuditor
1999Francesco BilottiAlternate Auditor
2005Massimo GentileAlternate Auditor
2006
External Auditors
As provided for by Italian law, external auditors must be a chartered company and are appointed by the Shareholders’ Meeting. Eni’s external auditors, PricewaterhouseCoopers SpA, were appointed by the Shareholders’ Meeting of June 1, 2001 for a three year term ending with the Shareholders’ Meeting approving financial statements for 2003. Eni’s Shareholders’ Meeting of May 28, 2004 confirmed the appointment of PricewaterhouseCoopers SpA for a further three year period ending with the Shareholders’ Meeting approving financial statements for 2006.other Eni companies.
Board Practices
Appropriate Conduct
Due to the diverse circumstances in which Eni operates, the Board of Directors has deemed it appropriate to provide a clear definition of the value system that Eni recognizes, accepts and upholds and the responsibilities that Eni assumes within its Group and externally in order to ensure that all Group activities are conducted in compliance with laws, in a context of fair competition, with honesty, integrity, correctness and in good faith, respecting the legitimate interests of shareholders, employees, suppliers, customers, commercial and financial partners and the communities where Eni operates. All those working for Eni, without exception or distinction, are committed to observing these principles within their function and responsibility and to make others observe them. The belief of working for the advantage of Eni cannot be a justification for behaviors contrary to such principles. These values are stated in a "Code of Conduct" whose observance by employees is evaluated by the Board of Directors, based on the annual report of the Guarantor for the Code of Conduct. The Code of Conduct is published on Eni’s internet site (www.eni.it).
In its meeting of January 20, 2000, Eni’s Board of Directors resolved to adopt the Self-discipline Code of Listed Companies (the "Code") and, pursuant to a thorough review of the matter, underscored how Eni’s organizational model is essentially in line with the principles expounded in the Code, as well as with related recommendations issued by Consob.
In accordance with the requirements of Borsa Italiana SpA, in particular the "Guidelines for the preparation of the yearly report on corporate governance" of February 12, 2003, Eni’s corporate governance system is described below. In preparing this report account has been taken also of the "Guide to the preparation of the report on corporate governance" published by Assonime and Emittenti Titoli SpA in March 2004.
The Board of Directors: Competencies, Delegate Powers and CompositionEni’s
organizationalgovernance structure follows the traditional model defined by the Italian Civil Code and the Eni’s Corporate Governance Code (adopted in line the provisions ofItalian companies in which management is exclusivelythe Borsa Italiana Corporate Governance Code) with managerial functions entrusted to the Board of Directors,which isas the centralelementbody ofEni’sthe corporate governancesystem.system, for the purpose of achieving the Company’s purpose.Monitoring functions are entrusted to the Board of Statutory Auditors while accounting control and the audit of the financial statements is entrusted to
theexternal auditors appointed by the Shareholders’ Meeting.According to Eni’s By-laws, the Board of Directors delegates specific powers to the CEO who is responsible for the management of the Company, with the exception of those powers that cannot be delegated according with current legislation and of those retained exclusively by the Board of Directors on the matter regarding major strategic, operational and organizational decisions. Furthermore, the Board of Director has delegated the Chairman powers for researching and promoting integrated projects and strategic international agreements.
Eni’s governance model, therefore, states a clear separation between the role of the Chairman, and that of the CEO. According to Article 25 of Eni’s By-laws, the Chairman and the CEO represent the Company. In accordance with Article 27 of Eni’s By-laws, the Chairman also chairs the Shareholders’ Meeting, calls and chairs meetings of the Board of Directors and controls the application of decisions made by the Board. The Board of Directors
delegated specific powers to the Chairman and Managing Director, who are the representatives of the company in accordance with Article 25 of Eni’s by-laws.
In accordance with internationally accepted principles of corporate governance, the Board of Directorshas also established committees with consulting andproposingadvisory functions.The Board of Directors also appointed three Chief Operating Officers responsible for the three operational divisions of Eni SpA and – in accordance with internationally-accepted principles of corporate governance – set up internal committees of the Board with advisory and consultative powers.
CompetenciesDuties and Responsibilities
In its meetingsA review ofJune 1the Board’s power is represented below. The following duties andOctober 11, 2005,responsibilities are in addition toexclusive competencies entrusted to it by Article 2381 of the Civil Code, the Board of Directors has reserved the following tasks:those that cannot be delegated under applicable laws.
1. to define corporate governance rules forEstablishes the Company and Groupcompanies, includingCorporate Governance system and rules. In particular, after consulting theappointment, definitionInternal Control Committee, the Board approves the rules that ensure the substantial and procedural transparency and correctness offunctionsthe transactions carried out with related parties andregulationsthose in which a Director holds an interest, on his behalf or on behalf of third parties. The BoardCommittees;adopts a procedure for the management and disclosure to third parties of documents and information concerning the Company, having special regard to price sensitive information.2. to define guidelines for the internal control system, based on indications provided by the relevant Board Committee,Establishes among its members one or more committees with advisory andto monitor the effectivenessconsulting tasks, appoints their members, establishes their responsibilities, determines their compensation andmodes of managing main corporate risks;approves their regulations.3. to examineConfers andapproverevokes themain features of corporate and Group organization, checking the effectivenesspowers of theorganizationCEO andadministration setup prepared bytheCEO;Chairman; establishes terms, limits and operating methods of the exercise of such powers and determines the compensation related to the powers, on the basis of proposals from the Compensation Committee and after consulting the Board of Statutory Auditors. The Board may issue instructions to the CEO and the Chairman and reserve to itself any operations that pertain to its powers.4. to determine – on proposalEstablishes the guidelines of the organizational, administrative and accounting structure of the parent Company, including the internal control system, the main subsidiaries and the Group; evaluates the adequacy of the organizational, administrative and accounting structure designed by the CEO– strategic guidelines and objectives atin particular with regard to theCompany and Group level;management of conflicts of interest.
5. Establishes, in particular, based on the recommendations of the Internal Control Committee, the guidelines of the internal control system, in order to examineensure the identification, measurement, management andapprove multi-annual strategic, industrial and financial plans atmonitoring of the main risks faced by the Company andGroup level;its subsidiaries. It evaluates adequacy, effectiveness and effective functioning of the internal control system managed by the Chief Executive Officer on an annual basis.
6. Establishes, based on the recommendation of the Chief Executive Officer, Company and Group strategic guidelines and targets, including Sustainability policies. It reviews and approves the Company’s and Group’s strategic, operational and financial plans and the strategic agreements to examinebe entered into by the Company. It examines andapprove yearlyapproves the Company’s non-profit activities plan and approves unplanned expenditures that amount to more than euro 500,000.7. Examines and approves annual budgets for Eni’s Divisions and the Company, as well as the Group’s consolidated budget. 122
8. Examines and approves the Company’s and Group’s interim financial report and quarterly consolidates accounts, as per current regulations. Examines and approves the sustainability report, submitted also to the Shareholders’ Meeting. 9. Receives from Board members with delegated powers, at every Board meeting or at least every two months, reports informing the Board of Divisions,activities carried out in exercising the delegated powers as well as updates on activities carried out by the Group and on atypical or unusual transactions or transactions with related parties that were not previously submitted to the evaluation and approval of the Board. In particular,
it receives a half-year report on the changes of approved capital projects indicated under 12 (b) and 12 (c) below on the basis of criteria defined by the Board itself.
10. Receives half-year updates on the Board Committees’ activities. 11. Evaluates the general performance of the Company and the consolidatedGroup,budget;7.to evaluate and approve quarterly accounts and related disclosures and any other period accounts and related disclosures provided for byon thelaw and to compare quarterly resultsbasis of information received from Board members withplanned results;8.to evaluate the general trends in operationsdelegated powers, withspecificparticular attention topossiblesituations of conflicts ofinterest;interest and compares results achieved as contained in the annual report and interim and quarterly reports, with the budget.9.to examine and approve strategically relevant agreements;10.to receive from Directors entrusted with specific powers timely reports describing the activities performed under such powers and the most relevant transactions, according to a specific previously agreed definition, and any atypical or unusual relations and transactions with related parties;11.to receive from Board Committees periodic reports on activities performed, according to previously agreed definitions and timetables;
12. Evaluates and approves any transaction executed by the Company and its subsidiaries that have a significant impact on the company’s results of operations and liquidity. Particular attention is paid to attribute, modifysituations in which Board members hold an interest on their own behalf or on behalf of third parties, andrevoketo related parties transactions. The Board ensures the principle of not interfering in the decision making process of the Group listed subsidiaries and subsidiaries subject to unbundling regulation. It also ensures the confidentiality of trade relations between said subsidiaries and Eni or third parties for the protection of the subsidiaries’ interests. Transactions with a significant impact on the Company’s results of operations and liquidity include the following:
(a) acquisition and disposal of investments, businesses and individual properties, contributions in kind, business combinations, mergers and de-mergers, winding-up of businesses, in each case exceeding euro 100 million, notwithstanding Article 23.2 of the By-laws;
(b) capital expenditures exceeding euro 300 million, or less if of particular strategic importance or particularly risky; (c) any exploration initiatives and portfolio operations in the E&P sector in new areas; (d) sale and purchase contracts relating to goods and services other than capital goods, for an amount exceeding euro 1 billion or a duration exceeding twenty years or gas supply contracts for at least 3 billion cubic meter per year for a ten-year term; (e) financing to entities other than subsidiaries: (i) for amounts exceeding euro 200 million, if the amount is proportionate to the interest held or, (ii) in any case, if in favor of non-related companies or the amount is not proportionate to the interest held; and (f) issuing by the Company of personal and real guarantees to entities other than subsidiaries: (i) for amounts exceeding euro 200 million, if in the interest of the Company or of Eni subsidiaries, or associates, as long as the guarantee is proportionate to the interest held or, (ii) in any case, if the guarantees are issued in the interest of associates and the amount is not proportionate to the interest held. In order to issue the guarantees indicated in section (i) of letter f), if the amount ranges between euro 100 million and euro 200 million, the Board confers powers to Directors, defining their limitsthe CEO andmodesthe Chairman, to be exercised jointly in case ofexecution, determining the compensation related to such powers, after consultation with the Board of Statutory Auditors. To deliver guidelines to empowered Directors and to recall to itself transactions included in the delegated power;urgency.
13. to approve, basedAppoints and revokes, onthe indications of the relevant Board Committee, the adoption and implementation of share incentive plans and to define the compensation criteria of top managers;14.to appoint, revoke and delegate powers to general managers, on proposalrecommendation of the CEO and in agreement with theChairman;Chairman, the General Managers of Divisions and attributes powers to them. In case of the Chief Executive Officer’s appointment as General Manager, the Chairman makes the proposal.14. Appoints and revokes, on recommendation of the CEO and in agreement with the Chairman, and with the approval of the Board of Statutory Auditors, the Manager charged with preparing the Company’s financial reports as per Legislative Decree No. 58/1998. Moreover the Board of Directors verifies the adequacy of his powers and resources in order to fulfill this task and the observance of relevant administrative and accounting procedures prepared by him. 15. to decide major saleAppoints andpurchase transactionsrevokes, on recommendation of theCompany and to provide a pre-emptive evaluation of those concerning Group companies, in particular:
a)sale and purchase transactions, as well as conferral of real estate, investments, companies of amounts exceeding euro 50 million;b)capital expenditure projects amounting to over euro 100 million, such capital expenditure projects deemed to entail strategic impact and risks for the Group, and any portfolio and exploration initiatives of the Exploration & Production segment in new areas;c)the provision of loans from Eni or its subsidiaries to third parties;d)the provision from Eni of personal and real guarantees to third parties in the interest of Eni or its subsidiaries of amounts exceeding euro 50 million;e)the provision of loans from Eni or its subsidiaries to affiliates, as well as of real and personal guarantees on their bonds of amounts exceeding euro 50 millionCEO and inany case, ifagreement with theamount is not proportional toChairman, after consulting thestake heldInternal Control Committee, the person in charge of internal control and theaffiliate;Internal Audit Manager, determining his/her compensation in line with the Company’s remuneration policies, andf)purchase and sale agreementsapproves the guidelines set forgoods and services not intended as capital expenditure of amounts exceeding euro 1 billion and of a duration longer than 20 years;those activities.
16. to examine and decide any proposalEnsures a person is identified as responsible for handling the relationships with the Shareholders.17. Establishes, on the basis of the proposals received from the Compensation Committee, the criteria for top management compensation and implements the stock incentive plans approved by the Shareholders’ Meeting. 18. Examines and decides on proposals submitted by the CEO concerningwith respect to voting powers and to the appointment of members of theBoardmanagement and control bodies ofDirectors andthe main subsidiaries. With specific regard to the shareholders’ meetings of listed companies of the Eni’s Group, the Board ensures the observance ofStatutory Auditors of major subsidiaries; andthe Corporate Governance Rules regarding the Shareholders’ Meetings.17.19.to formulate allPrepares the proposalsof decisionsto bepresentedsubmitted to the Shareholders’ Meeting.20. Examines and resolves on other matters that the CEO deems appropriate to submit to the Board because of their importance and sensitivity.
In accordance123Pursuant to Article 23.2 of the By-laws, the Board resolves on: mergers by incorporation and proportional demergers of at least 90% of directly owned subsidiaries; establishment and winding up of branches; amendments to the By-laws in order to comply with applicable legislation.
During the fiscal year the Board can approve the distribution of interim dividends to shareholders, as per Article
2729.3 of Eni’sby-laws, the Chairman chairs Shareholders’ Meetings, convenes and chairs BoardBy-laws.In its meeting of
Directors’ meetings and oversees the implementation of decisions made byJune 11, 2008, the Board ofDirectors.Directors approved internal rules for the calling and functioning of its meetings.In
accordance with Article 23, paragraph 3 of Eni’s by-laws, the Chairman and the CEO report timely to2008, the Board ofStatutory Auditors, at leastDirectors met 19 times (of which 15 ordinary meetings and 4 extraordinary meetings) for an average duration of 2 hours and 40 minutes. The average attendance rate to Board meetings was 98.66%, the attendance rate of independent non-executive Board members was 98.54%. The attendance rate for the Board currently in office was 98% both for the delegated Director and the independent delegated Director. The Eni Corporate Governance Code (the Eni Code) provides that independent Directors may hold meetings attended exclusively by non-executive independent members. This power was exercised in the meeting of February 22, 2009.The market is informed, with advance notice normally before the closing of the year, of the dates of meetings convened for the approval or review of annual, semi-annual, full-year preliminary accounts and quarterly accounts, as well as resolution and
at each Board meeting,proposal of interim dividends and final dividends, and related ex-dividend and payment dates. The financial calendar is available onactivities performed by and major transactions of Eni and its subsidiaries.Eni’s website.In
accordanceline withArticle 2391 ofinternational best practices and as provided for by theItalian CivilEni CodeDirectors inform other Directorsand the Borsa Italiana Code, the Board ofStatutory AuditorsDirectors performs its self assessment ("Board review") ofany interest they may have, directly or on behalfsize, composition and functioning and ofthird parties, in any transactionthe activities ofEni.the Board and Board committees, with the support of a specialized consulting firm.Appointment
In accordance with Article 17 of Eni’s by-laws, as amended by the BoardSee "Item 10 – Limitations onApril 13, 2005, the Board of Directors is made up of 3 to 9 members. The Shareholders’ Meeting determines the number of Directors within said limits. As per Article 6, paragraph 2, letter d) of Eni’s by-laws the Minister for EconomyVoting andFinance, in agreement with the Minister of Productive Activities, may appoint one member of the Board without voting right in addition to those appointed by the Shareholders’ Meeting. The Minister for EconomyShareholdings – Minority protection provisions".Directors’ independence and
Finance chose not to appoint a member at this time.integrity requirements
The appointment of the Board of Directors calls for a list vote. Only shareholders who, alone or with others represent at least 1% of voting shares at an ordinary meeting have the right to present lists for the appointment of directors, as well as the Board of Directors. Each shareholder can present or participate in presenting only one list. Companies controlling a shareholder and joint controlled companies cannot present, nor participate in presenting other lists, meaning by controlled companies the companies described in Article 2359, paragraph 1 of the Civil Code. The lists must be deposited at Eni’s headquarters at least ten days before the date set for the Shareholders’ Meeting on first call (20 days in case of the Board of Directors presenting a list) and published on national newspapers and must include a resume of each candidate.
On June 1, 2005, Eni’s Board of Directors, in accordance with the provisions of the Code, evaluated the statements presented by Board members and established that the Chairman and non executive Board members Alberto Clô, Renzo Costi, Dario Fruscio, Marco Pinto, Marco Reboa, Mario Resca, and Pierluigi Scibetta are independent as they do not have any economic relationship with Eni and Eni Group companies, with the CEO and with the Ministry of Economy and Finance, Eni’s major shareholder, such as to bias their autonomous judgment nor are they close relatives of the CEO. Director Marco Pinto is an employee of the Ministry for Economy and Finance. The CEO of Eni is an employee of Eni and holds the position of General Manager of the parent company Eni SpA.
On March 30, 2006, the Board verified that its members were independent on the basis of their own statements and that they possess the honorability required by articles 147 ter and 147 quinquies ofLegislative Decree No. 58 of February 24, 1998and included in Law(TUF), as amended by Legislative Decree No.262303 of December28, 2005 ("law for29, 2006 states that at least one member, or two members if theprotection of savings") and acknowledged that its members continued being independent as verified on June 1, 2005 and possessing the honorability requiredBoard is composed byLaw.
Eni’s by-laws were amended by Eni’s Extraordinary Shareholders’ Meeting held on May 25, 2006 in order to reflect the provisions of Law No. 262/2005. Amendments made on that occasion established that Eni’s Boardmore than seven members musthave honorability andpossess the independence requirementsas required by the norms in forceprovided fortheStatutory Auditors(see below). Atof listed companies, as per Article 148, paragraph 3, of same rule.Article 17.3 of Eni’s By-laws states that at least one
Boardmember, if the Board is made up by up to five members,are noor three Board members, in case the Board is made up by more than fiveor at least threemembers, shall have those independence requirements. This rule actually increases the number of independent Directors in Eni’s Board,members if they are more than five, shall meetas compared to what is required by theindependence requirement. The Boardlaw. In addition Eni’s By-laws provide for a mechanism that supports Eni’s voting system by ensuring in any case the presence ofDirectors evaluates periodically the independence and the honorability of its members. If these requirements are not met by a Director and, ifthe minimum number of independent directors in the Board. Eni’s Code contemplates further independence requirements, in line with those provided by the Corporate Governance Code promoted by Borsa Italiana.The TUF, as implemented in Article 17.3 of Eni’s By-laws, provides that the persons acting as Directors and Chief Operating Officers of listed companies shall possess the integrity requirements prescribed to members of control entities of listed companies. Directors must comply with additional specific requirements.
In accordance with Article 17.3 of Eni’s By-laws, the Board periodically evaluates independence and integrity of Directors and the absence of reasons for ineligibility and incompatibility. The Eni Code also provides for the Board of Statutory Auditors to verify the proper application of criteria and procedures adopted by the Board to evaluate the independence of its members.
In accordance with Article 17.3 of Eni’s By-laws, should the independence and integrity requirements be impaired or cease or should other reasons of ineligibility arise, the Board declares the termination of office of the member lacking said requirements and provides for his substitution or, alternatively, allows any impaired director to eliminate any reasons for incompatibility within a fixed deadline. Board members
setare expected to inform the Company if they lose their independence and integrity requirements or of any reasons for ineligibility or incompatibility that might arise.On February 26, 2009 as part of the periodic assessment of each Board member’s requirements provided by
these by-laws is not met,the law and Eni’s By-laws, the Board of Directorsremoves ahas verified that all its members possess the integrity requirement, on the basis of individual statements received. In addition, the Boardmember who does not meet the independence requirement and resolves to appoint a substitute Director. At the date of the Meeting, Eni’s Board was already compliant with the honorability and independence requirementshas declared seven out of its nine members asprescribed byindependent, in accordance with applicablelaws.laws, Eni’s By-laws and the Eni Code, with specific reference to non
In addition Eni’s by-laws, as amended on May 25, 2006, established that124executive directors: Alberto Clô, Paolo Andrea Colombo, Paolo Marchioni, Marco Reboa, Mario Resca, Pierliugi Scibetta and Francesco Taranto.
The Board of Statutory Auditors verified in its meeting of March 3, 2009, the
General Managers appointedproper application of criteria and procedures adopted by the Boardmust possessto evaluate thesame honorability requirements as the membersindependence ofthe Board,its members.Admissible positions in
order to make the appointment effective. The General Managers notother companiesIn its meeting
such requirement shall be removed.
Eni’s by-laws do not indicate a specific frequencyofmeetings. In 2005June 11, 2008, the Board of Directorsmet 21 times (18expressed its opinion on the matter of the admissible number of positions held by Directors in2004) forother companies, as required by the Eni Code, confirming the opinion of the preceding Board, as follows:anaverage length of four hours per meeting. The public is informed of:executive director should not hold: (i) thedatesposition ofmeetings convenedexecutive director in any other Italian or foreign listed company, or in any finance, banking or insurance company or any company with a net equity exceeding euro 10 billion; and (ii) the position of non-executive director or statutory auditor (or member of any other advisory committee) in more than three of said companies; anda non-executive director, should not hold further positions than the one held in Eni, as: (i) executive director in more than one of the companies mentioned above and non-executive director or statutory auditor (or member of any other control body) in more than three of the mentioned companies, or as (ii) non-executive director or statutory auditor in more than six of the mentioned companies.All the positions held in Eni’s subsidiaries are excluded for the
approvalpurposes described above.In case a director exceeds said limits in terms of
interim results; (ii)positions held, he should timely inform thedatesBoard, who shall judge the situation taking into account the interest ofgeneral Shareholders’ Meetings;the Company and(iii)call upon thedates wheninterested director to make a decision on theamountmatter. In any case, before accepting the office ofinterim dividends and final dividends are announced anddirector or statutory auditor (or member of any other control entity) of a company not relatedpayment dates.
Functioning
Theto Eni, the executive director informs the Board of Directorsdefinedthat evaluates its compatibility with his office at Eni and therulesinterests of Eni. This rule applies also to the Chief Operating Officers of Eni’s divisions.The Board’s resolution on this matter is published on Eni’s website in the Corporate Governance section.
On the basis of available information, at the Board’s meeting of February 26, 2009, the Board of Directors verified that the number of positions held in other companies by each Board member complies with the above mentioned limits.
Transaction in which a director has an interest and related parties transactions
As requested by the Eni Code, in accordance with the Borsa Italiana Code, the Board of Directors, with the opinion of Internal Control Committee, has adopted on February 12, 2009, the internal guidelines on transactions in which a Director (or a Statutory Audit) has an interest and on transactions with related parties4, with the aim to ensure the observance of transparency and fairness principles requested by the applicable laws and regulations for the
calling ofabove mentioned transactions.In particular in its
meetings;guidelines the Board:
• identified, based on predetermined criteria, main transactions with related parties ("relevant transactions"), as such reserved to its sole responsibility; • reserved a special role to independent directors, by engaging the Internal Control Committee in the assessment and decision making process of these transactions. The Committee plays also a relevant role in transactions that are not reserved to the Board; and • strengthened an in-depth process of review and assessment of all transactions with related parties, irrespective of allocation of decision-making powers, in order to guarantee transparency and substantial and procedural fairness. The same kind of transparency must be observed also in the subsequent decision making process. Therefore, these guidelines define Eni’s Group policy on these matters (for detailed information on 2008 operations, see "Item 7.B – Related party transactions").
As provided for by the Eni Code, these guidelines also regulate the transactions in which a Director and Statutory Auditor has an interest, providing, in particular that:
Eni’s directors and statutory auditors shall disclose periodically any personal interest with respect to theChairman convenes Board meetings, and,parent company inconcert with the CEO, defines agenda items. Notice is sent by mail, fax or e-mail within five days of the meeting’s date, at least 24 hours in advance in case of urgency. Eni’s by-laws allow meetings to be held by video or teleconference, provided that all participants can be identified and are allowed to participate in real time. The meeting is deemed held in the location where the Chairman and Secretary are present.
Board members receive in advance adequate and thorough information on all issues subject to Board evaluation and resolutions, except for urgent cases and those for which confidentiality is deemed necessary. During meetings directors can meet managers ofEni and its subsidiariesin order to obtain information onand shall timely inform thefeaturesBoard of Directors and theorganizationBoard oftheir businesses.Statutory Auditors on transactions in which they have an interest that may be irrelevant to the Company’s purposes;
(4) i Until the approval of said guidelines, relevant transactions with related parties (excluding standard ones) – as identified according to IAS 24 and according to the specific internal financial reporting regulation of July 4, 2006 and of December 20, 2007 – have been submitted to the Board of Directors, even if their amount was lower than the threshold defined for its competence. 125
• directors who disclosed above mentioned interests should usually not take part in discussions and decisions on such transactions, also leaving the meeting when the decision is made; and • in any case, all transactions in which a director or a statutory auditor has an interest are considered material to the Company and are subject to the strengthened review process with express opinion of the Internal Control Committee.
In 2005 on average 88% of Board members participated in Board meetings. On average 85% of independent non executive Board members.Board Committees
In order to carry out itsThe Board has instituted, as provided for by the Eni Code, three internal committees with advisory and consulting tasks: (a) the Internal Control Committee, (b) the Compensation Committee and (c) the Oil-Gas Energy Committee. Their composition, tasksmore effectively,and functioning are defined by the Board of Directors,has instituted three advisory Committees:with specific regulations, in respect of the criteria established by the Eni Code.The committees provided by the Eni Code (the Internal Control Committee and the Compensation
Committee,Committee) are made up of at least three members and in no case by a number higher than the majority of Board members. All committees must be composed exclusively ofindependent, non-executive Board members, except for Marco Pinto, a membernon executive directors, the majority ofboth committees, and the International Oil Committee in which the CEO also participates.whom are independent.In
theits meeting of June1, 2005 membership11, 2008, the Board appointed the following non executive directors, all of them independent, as members of theCommittees was as follows:Committees:
Internal Control Committee:Marco Reboa (Chairman), Alberto , Renzo Costi, Marco Pinto and Pierluigi Scibetta.
Compensation Committee:Mario Resca (Chairman), Renzo Costi, Marco Pinto and Pierluigi Scibetta.
International Oil Committee:Alberto Clô (Chairman), Dario Fruscio, Marco Reboa and Paolo Scaroni.
The Code suggests the creation of a "Nominating Committee" in companies with shares held widely by the public, especially when the Board notices that shareholders find it difficult to prepare proposals for appointments. This committee has not been formed in consideration of the shareholding characteristics of Eni and of the fact that Directors are appointed on the basis of candidate lists submitted by shareholders or by the Board of Directors.
• Internal Control Committee: Marco Reboa (Chairman) Paolo Marchioni, Pierluigi Scibetta and Francesco Taranto. • Compensation Committee: Mario Resca (Chairman), Alberto Clô, Paolo Andrea Colombo and Francesco Taranto. • Oil-Gas Energy Committee: Alberto Clô (Chairman), Paolo Andrea Colombo, Marco Reboa, Mario Resca and Pierluigi Scibetta. Internal Control Committee
The Internal Control Committee was established in Eni in 1994 and is entrusted with advisory and consulting tasks in respect of the Board in the matter of internal control system. It is composed exclusively of independent directors, provided with the professional qualification required by the Eni Code5 and reports to the Board at least every six months at the date of the approval of the annual and semi-annual financial statements on the activity performed as well as on the adequacy of the internal control system.
The Committee performs the following main tasks:
• assesses in conjunction with the Manager charged with preparing financial reports and the External Auditors the proper use of accounting principles and their homogeneity for the preparation of the consolidated financial statements; • on request of the CEO, expresses opinions on specific aspects concerning identification of main Company risks and designing, implementing and managing the internal control system; • monitors the activities of the internal audit function and therefore examines the integrated audit plan, the annual budget, the periodical Internal Audit reports on activities performed and their outcomes; • in order to express its opinion on the adequacy of the internal control system, assesses: (i) the outcomes of internal audit reports and the evidence deriving from monitoring activities on improvement actions on control systems planned after the audits are performed; (ii) evidence resulting from periodic reports on monitoring activities on the Company’s internal control system over financial reporting; (iii) reports from the Board of Statutory Auditors and individual Statutory Auditors also for what concerns investigation activities performed by the internal control department on whistleblowing, also in anonymous form; (iv) evidence from reports and management letters of External Auditors6; (v) reports of the Watch Structure also in its capacity of Guarantor of the Code of Ethics; (vi) evidence from reports of the Manager charged with preparing financial reports and of the Manager responsible for internal audit; and (vii) as well as review and investigations from third parties; and • performs any other task attribute to it by the Board of Directors, in particular expresses an opinion on the internal guidelines for the substantial and procedural correctness of transactions with related parties, playing a relevant role in the analysis and in the final decision process of said transactions, as well as those where a director has an interest of his or third parties behalf. In 2008, the Internal Control Committee convened 18 times, with an average attendance rate of 92%, and reviewed the following items: (i) the 2007 audit activities report and the 2008 audit plan and its periodic progress; (ii) the 2007 audit activities report and 2008 audit plan prepared by the internal audit functions of Saipem and Stogit functions; (iii) outcomes of planned and unplanned Eni’s internal audit activities, as well as results of monitoring activities on progresses made by operating units in implementing planned remedial actions in order to eliminate
(5) i Unlike the Code of Borsa Italiana, the Eni Code requires that at least two (and not only one) Board members have adequate expertise in accounting and financial matters. (6) i Eni entrusted to the Board of Statutory Auditors the role of Audit Committee under the SOA and therefore of assessing the proposals of external auditors and the monitoring of their activity. 126
deficiencies highlighted by internal audit activities with special attention to specific issues; (iv) outcomes from Eni’s internal auditing interventions as specifically required by Eni’s control bodies; (v) the periodic reports concerning complaints collected; (vi) the report on Eni’s internal control system prepared by the Manager delegated for the internal control and the compliance with the independence requirements of this Manager; (vii) the future role, tasks and responsibilities of the Manager delegated for the internal control and of Eni’s Internal Audit function and the guidelines approved by the Board of Directors
in 1994, holds functions of supervision, counsel and proposal in the area of monitoring general management issues.
In its meeting of June 1, 2005, the Board appointed Marco Reboa as chairman of this Committee.
In its meeting of June 29, 2005 the Board approved its new charter (available on Eni’s internet site) in order to modify its role in accordance with the Board’s resolution of March 22, 2005 that appointed the Board of Statutory Auditors to perform the functions attributed by the Sarbanes-Oxley Act and SEC rules to audit committees of U.S. issuers, within the limits set by Italian legislation, from June 1, 2005.
In the course of 2005 the Internal Control Committee convened 14 times, with an average participation of 87% of its members, and has accomplished the following: (i) reviewed the audit programs prepared by Eni SpA’s and Group companies’concerning internal auditfunctionsactivities; (viii) updating of the Eni’s Internal Audit operating handbook; (ix) disclosures of information or notification regarding certain inquiries conducted by both Italian or foreign judicial and administrative authorities with reference to crimes or other kind of infringements which involve Eni and all its subsidiaries, in Italy or abroad, and theirprogress; (ii) revieweddirectors andevaluated resultsemployees; (x) disclosures on the development ofEni SpA’spending litigation; (xi) the essential features of the 2007 Eni’s financial statements, on a consolidated andGroup companies’ internal auditing procedures; (iii) monitored the actions taken and their effects aimed at eliminating the deficiencies identified by audit reports; (iv) examined the results of audit procedures applied to the framework agreement between Eni and Gazprom/Gazexport of June 16, 2005; (v) metindividual basis, through meetings with top level representatives of Eni’s and its subsidiaries’ administrative functions,in the main subsidiaries, chairmenand with Chairmen (or others members) ofboardsBoards ofstatutoryStatutory auditors and responsible partnersresponsible for externalfrom independent audit companiesto examinefor each subsidiary; accounting treatment adopted for specific transactions; the draft 2008 interim consolidated report prepared on the basis of the EU transparency directive and relevant opinion of external auditors confirming the compliance of this report with IAS 34; (xii) procedures and systems used for evaluating, classifying and reporting hydrocarbon reserves; (xiii) the essential features of2004Eni’s Annual Report on Form 20-F, progress on implementation of SOA activities and updating on programs and controls for 2008 to prevent and detect frauds; (xiv) the report on the administrative and accounting setup of the Manager responsible for the preparation of the Company’s financial report and the report on the internal control system over financial reporting; (xv) the implementation plan regarding Article 36 of Consob Decision No. 16191/2007; (xvi) the report on the internal control system, that was included in the Corporate Governance section of the 2007 Annual Report; (xvii) guidelines on financial statementswith specific reference to extraordinary transactionsauditing, the report on audit reports for 2007 prepared by external auditors, auditing strategies for 2007 andrelations among functions entrusted with controlling functions at Eni SpA and its subsidiaries; (vi) met the partners responsible2008; (xviii) updating of Eni’sexternal auditorsModel 231 and the periodic report presented on activities performed by the Company Watch Structure, also by meetings with its members as provided foran analysisthe new version of Model 231 (the Company’s internal control structure) approved by Eni’s2005 Half Year Report; (vii) examinedBoard of Directors in March 2008; (xix) update on Eni’s guideline for management and control of financial risk; (xx) information on Circular No. 330 of October 14, 2008 concerning Group’s procedures for theconditions necessary to avail itselfprocurement of works, goods and services; the main aspects of a Company’s project of process reengineering (BPR) concerning group procurement and updating of theexemption fromprocedures for reviewing suppliers selection following detection of illegal behaviors; (xxi) periodic report in theSarbanes-Oxley Actprocedure for the ascertainment of alleged illicit behavior on the part of Eni employees, as per Circular No. 301 of December 14, 2007; (xxii) information of Circular No. 305 of December 20, 2007 concerning dissemination andthe relevant regulations concerning the Audit Committee; (viii) reviewed the committee’s charter; (ix) examined the report presented by an internal the Watch Structure; (x) examined the reports prepared in accordance with audit document No. 260 concerning the communicationreception offactslaws andevents on auditing activities to those responsible for governance; (xi) monitored the appointment of additional functions to Eni’s external auditors and companies belonging to the networkregulations; (xxiii) review of theexternal auditors, expressing its opinion; (xii) reviewed the situationdraft report ofappointments conferred in 2004 by Eni and its consolidated subsidiaries and affiliates to external auditors registered with Consob and related subjects; (xiii) reviewed the situation of appointments of external auditors of main group companies, the relevant accounts and the opinions contained in the reports of external auditors of Eni’s Italian subsidiaries; (xiv) examined the organizational structuredirectors under Article 2433-bis of theinternal audit functions with specific focusCivil Code onoperating audits; and (xv) examinedinterim dividends for 2008; (xxiv) information on theinformation flows to the Internal Control Committee from the various functionsdevelopment plan of Eni Trading & Shipping activities; andits subsidiaries as well as from external auditors.(xxv) logical-operational flows of Eni communication activities.Compensation Committee
The
CompensationCommitteeestablished by the Board of Directors in 1996,is entrusted withadvisingproposing tasks on theBoard in relation to thematters of compensation of the Chairman and the CEO as well asofthe BoardCommittee members;Committees members, and examining theindicationsindication of the CEO,and presenting proposals on:on the following: (i)equity basedlong-term incentiveplans;plans including stock-based compensation; (ii) criteria for the compensation oftopthe managersof the Group;with strategic responsibilities; and (iii) the setting of objectives and the assessment of resultsevaluationof performance and incentive plans.In
its meeting of June 29, 2005 the Board approved its new regulation (available on Eni’s internet site) and appointed Mario Resca as Chairman.
In 2005,2008, the Compensation Committee met74 times withan average participation of 96% of its members,a 100% attendance, and accomplished the following: (i) examined the 2007 results and the objectives for 2008 in view of defining annual and long-term incentives; (ii) reviewed theobjectives of the 2005 Group Incentive Plan and the performance of 2004; (ii) drafted a proposal to be submitted to the Board of Directors for determining the variable part of the remunerationbonuses of the Chairman and CEO based on20042007 performance; (iii)drafted a proposal based on which the Board of Directors requested the Shareholders’ Meeting to authorize it to use treasury shares for servicing stock option and stock grant plans for 2005 (see "Stock compensation" above); (iv) drafted a proposal submitted to the Board of Directors concerning compensation related to the termination of employment of Eni’s former Managing Director Vittorio Mincato; (v) examined the compensation to be paid to Eni’s new CEO Paolo Scaroni, employed by Eni with the function of General Manager, in order to draft a proposal to submit to the Board of Directors; and (vi) examinedreviewed the benchmarks fortop managementthe managers with strategic responsibilities remuneration andreviewedthe criteria of the annual remunerationpolicy for Group managers, as well as the stock optionpolicy; (iv) remuneration andstock grant plans in order to draft a proposal to submitrules applying to theBoard of Directors.
International Oil Committee
The International Oil Committee established byCEO and General Manager Paolo Scaroni and remuneration for theBoard of Directors in 2002, is entrusted withpowers delegated to themonitoring of trends in oil marketsChairman; and (v) thestudy of their aspects.
In its meeting of June 1, 2005, the Board approved its new regulation (available on Eni’s internet site) and appointed Alberto Clô as Chairmanimplementation of theCommittee.
In 2005long-term incentive plans for theInternational Oil Committee met 3 times with a 100% participation of its members. The meetings concerned: (i) a plan of activities aimed at analyzingyear 2008 and relevant grants to thetrends of the oil and gas industry; (ii) an in-depth analysis of China in terms of market prospects and effects on competition in the oil industry; and (iii) an analysis of the structure and dynamics of oil and gas markets on which to base the energy scenarios for Eni’s strategic plan.CEO.Board of Statutory Auditors
In line with Italian legislation, as specified in Article 28 of Eni’s By-laws, the Board of Statutory Auditors consists of five effective members (and two alternate) who must comply with specific expertise and integrity requirements.
The following table sets forth the names, positions and year of appointment of the members of the Board of Statutory Auditors elected by the Ordinary Shareholders’ Meeting held on June 10, 2008 for a three year term, until the Shareholders’ Meeting approval of financial statements for year ended at December 31, 2010.
127
Name Position Year first appointed to Board
of Statutory AuditorsUgo Marinelli Chairman 2008
Roberto Ferranti Auditor 2008
Luigi Mandolesi Auditor 2008
Tiziano Onesti Auditor 2008
Giorgio Silva Auditor 1999
Francesco Bilotti Alternate Auditor 2005
Pietro Alberico Mazzola Alternate Auditor 2005
Roberto Ferranti, Luigi Mandolesi, Tiziano Onesti and Francesco Bilotti were candidates in the list presented by the Ministry of Economy and Finance; Ugo Marinelli, Giorgio Silva and Pietro Alberico Mazzola were candidates in the list presented by institutional investors coordinated by institutional investors.
Tasks
The Board of Statutory Auditors, in accordance with
Article 149 of Legislative Decree No. 58/1998,the TUF provisions, monitors: (i) therespect ofcompliance with the laws andofwith Eni’smemorandum of association;By-laws; (ii) therespectobservance of the principles ofpropercorrect administration; (iii) the adequacy of the Company’s organizational structure, for matters within theparts concerning administrationscope of its authority, of the internal control system and of the administrative and accountinginternal controls and administration and accounting systemssystem as well asitsthe reliability of the latter inpresenting information properly;fairly representing the Company’s transactions; (iv) the actual implementation of corporate governance rules foreseen by the Borsa Italiana Code to which the Company adheres; and(iv)(v) the adequacy ofregulations imposedinstructions conveyed by the Company to its subsidiaries to ensure fulfillment of reporting obligations provided by applicable laws.Moreover, according to
Article 114, paragraph 2 ofthementioned decree. The law onTUF and theprotection of savings also entrustedEni Code, the Board of Statutory Auditors oversight the appointment, retention and work of the Company’s principal external auditors: to this extent the Board of Statutory Audit (i) submit to the Shareholders’ Meeting called for its approval, a motivated proposal for the appointment of the principal external auditors and for their fees and (ii) monitors the independence of the principal external auditors, verifying both the compliance with themonitoringprovisions of applicable laws and regulations governing the matter, and the nature and extent of services other than the audit services provided to Eni Group companies (also through entities belonging to the auditors’ network).As provided for Article 23.3 of Eni’s By-laws, the Board of Statutory Auditors is timely informed, at least on a quarterly basis, by the Board of Directors, on the activities and on the most relevant operations regarding the operational, economic and financial management of the
proper implementationCompany and ofcorporate governance rules envisaged byits subsidiaries.Statutory Auditors are required to attend the
codesShareholders’ Meeting and the meetings ofconduct published bythe Board of Directors and must promptly notify Consob, the publicAuthority responsible for regulating the Italianstock exchangesecurities market of irregularities found in the performance of their oversight activity.In 2008, the Board of Statutory Auditors met 22 times. Average duration of meetings was 3 hours and
the associations the Company belongs to30 minutes. In 2008 attendance rate was 95% of its members andwith which the Company has declared93% at Board of Directors’ meetings. The current Board showed attendance rate of 98.4% of members in itsintention to comply.own meetings and 92.8% at Board of Directors’ meetings.Board of Statutory Auditors as Audit Committee
The Board of Directors, in its meeting of March 22, 2005, in accordance with
SEC Rule 10A-(c)(3)the provision of the U.S. Securities Exchange Commission (SEC) forforeign companies listed on the New York Stock Exchange, selectednon-U.S. private issuers (SEC rule 10A-3), identified in the Board of Statutory Auditorsto fulfiltherole attributedbody that, meeting the requirements provided for the above mentioned rule, starting from June 1, 2005, performs, to theaudit committee of a U.S. company underextent permitted by Italian legal or listing requirements, the functions assigned by SEC rules and the Sarbanes-Oxley Actand other applicable laws, within(SOA) to thelimits set by the Italian legislation from June 1, 2005.Audit Committee of U.S. registrant.On June 15, 2005, the Board of Statutory Auditors approved
the regulationsits chart for carrying out thefunctionstasks attributed to the audit committee under mentioned U.S.laws.laws and regulations7. Thisregulationcharter is published on Eni’sinternet site.website.The key functions performed by the Board of Statutory Auditors acting as an audit committee as provided for by SEC rules are as follows:
evaluating the proposals presented by the external auditors for their appointment and making its promted recommendation to the Shareholders’ Meeting about the proposal for the appointment or the retention of the external auditor;
•(7)evaluating the proposals presentedThe chart was amended on March 30, 2007, taking into account changes introduced by Legislative Decree No. 303 of 2006 on Article 159, paragraph 1 of TUF, and by theexternal auditors for their appointment and making its recommendationEni’s Code, as well as to take into account the variations adopted inthe organization structure, in respect to theBoard of Directors aboutone existing on June 15, 2005, when theproposal for the appointment or the retention of the external auditor to be submitted to the Shareholders’ Meeting;previous chart was approved.128
• performing the activities of oversight of the work of the external auditor engaged for the audit or performing other audit, review or attest services; • making recommendations to the Board of Directors on the resolution of disagreements between management and the auditor regarding financial reporting; • approving the procedures for: (a) the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and (b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters; • approving the procedures for the pre-approval of admissible non-audit services, analytically identified, and examine the information on the execution of the authorized services; • evaluating any request to have recourse to the external auditor engaged for the audit for admissible non audit services and expresses its opinion to the Board of Directors; • examining the periodical communications from the external auditor relating to: (a) all critical accounting policies and practices to be used; (b) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the Company, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the external auditor; and (c) other material written communication between the external auditor and the management; •examining complaints received by the CEO and the CFO concerning any significant deficiency in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and any material weakness in internal controls; and•examining complaints received by the CEO and the CFO concerning any significant deficiency in the design or operation of internal controls which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and any material weakness in internal controls; andexamining complaints received by the CEO and the CFO concerning any fraud that involves managementor other employees who have a significant role in the issuer’s internal controls.
The Board can engage external advisorsor otherexperts toemployees who have a significant role in theextent it determines necessary to carry out its duties. The Board is providedCompany’s internal controls.Appointment, requirements and other duties
Like the Directors and in accordance with applicable regulations, the
funds it deems necessary for payment of compensation to independent advisors or other experts and of ordinary administrative expenses involved by the execution of the Board’s duties.
The Board ofStatutory Auditorscomprises five auditors and two substitute auditors,are appointed bythe Shareholders’ Meetingmeans of a list vote as provided fora three year term.
On May 27, 2005,by Eni’sShareholders’ Meeting appointed the following statutory auditors for three yearsBy-laws. At least two Auditors andhowever until the Shareholders’ Meeting approving financial statements for fiscal year 2007: Paolo Andrea Colombo (Chairman), Filippo Duodo, Edoardo Grisolia, Riccardo Perottaone alternate are elected from lists presented by minorities andGiorgio Silva. Francesco Bilotti and Massimo Gentile are alternate auditors. A curriculum of these auditors is published on Eni’s internet site. The same Meeting also determined the yearly compensation forthe Chairman of the Board of Statutory Auditorsand each Auditor amounting to euro 115,000 and euro 80,000, respectively.shall be elected from a list other than the one obtaining the majority of votes (for a detailed description of the procedure, see "Item 10 – Minority protection provisions").
Paolo Andrea Colombo, Filippo Duodo, Edoardo Grisolia and Francesco Bilotti were candidatesAs stressed in thelist presented byCode, theMinistry of Economy and Finance; Riccardo Perotta, Giorgio Silva and Massimo Gentile were candidates in the list presented by institutional investors coordinated by Fineco Asset Management SpA.Statutory Auditors
are appointed in accordanceshall act withEni’s by-laws with a list vote; at least two auditorsautonomy andone substitute are chosen from minority candidates. Chairman of the Board is the first candidate of the list that received the highest number of votes. Auditors are autonomous and independent even fromindependence also towards the shareholders who electedthem. The lists of candidates includethem and, in accordance with the TUF, they shall possess the independence, expertise and integrity requirements prescribed by aresume of each candidate and are deposited at the Company’s headquarters at least 10 days before the dateregulation of theShareholders’ Meeting on first call and are published on national newspapers.Minister of Justice. As for the professional qualifications of the candidates, Article 28 of Eni’s
by-laws, consistentBy-laws, in line with theprovisions contained in thesaid Decree of the Minister of Justice,No. 162 of March 30, 2000, statesforesees thatat least two auditors and one substitute auditor are chosen among chartered auditors and must have performed auditing activities forthe professional requirements can also be acquired with at least three yearsand that auditors not meeting these requirements must be chosen among those provided with the levelofprofessionalism described in Decree No. 162/2000. For the purposes of said Decree, the by-laws define as related subjects commercialprofessional experience or by teaching business law,corporate economybusiness administration and finance, as well as at least a three year experience in a managerial position in geological or engineeringand geology.businesses. Eni’sauditorsAuditors are all chartered auditors.
Article 28Statutory Auditors declared consequently to possess independence, integrity and expertise requirements as foreseen by the applicable law. In compliance with the Eni Code prescriptions designed to ensure that auditors are independent subsequently to their appointment based also on the Code provisions for the same matter in the case of directors, the Board of Statutory Auditors in its meeting of January 21, 2009 verified that all its members possess such requirements (independence, integrity and expertise) and the Board of Directors in its meeting of February 26, 2009 verified this certification.With reference to positions held in other companies, until coming into force of new Consob regulation on this matter, Eni’s
by-laws also prohibitsBy-laws prohibited the appointment as statutory auditor of persons thatarewere already statutory auditors or members of the supervisory board or members of the management control committee of at least five companieslistedin regulated marketsthat are notother than listed subsidiaries of Eni SpA.At least two effectiveIn light of that, appointed Auditorsare empoweredcommunicated toconvenethe Company their positions in other entities and subsequently the Board of Statutory Auditors verified compliance with the said limit as provided by Eni’s By-laws. As of June 30, 2008, accordingly with the By-laws provisions, Statutory Auditors may assume positions in governing or controlling bodies in companies other than Eni within the limits set by the mentioned Consob regulation. In September 2008 Eni’s Statutory Auditors communicated to Consob their compliance with said limits.External Auditors
As provided for by Italian law, the auditing of financial statements is entrusted to external auditors registered on the register held by Consob. The external auditor is appointed and its fee is determined by the Shareholders’
Meetings and at least one effective Auditor is empowered to convene the Board meetings.
Statutory auditors receive in advance of meetingsMeeting on reasoned proposal of the Board ofDirectors adequate and thorough information on all issues subject to Board evaluation and resolutions.Statutory Auditors.Eni’s
by-laws allow meetingsexternal auditor, PricewaterhouseCoopers SpA, was appointed for the first time on June 1, 2001 and was reappointed by the ordinary Shareholders’ Meeting on May 28, 2004, for a term of three financial years. The129
Shareholders’ Meeting of May 24, 2007 resolved to
be heldrenew the appointment for the 2007-2009 period in accordance with Legislative Decree No. 303/2006, as it did not yet complete the maximum nine financial year engagement allowed byteleconference.the law.At the end of this engagement, PricewaterhouseCoopers SpA will cease to act as Eni’s external auditors.
In
2005 the Board met 22 times with an average participation of 83% of its members.
In 2005,2008, Eni’sexternal auditorsExternal Auditors met with Enistatutory auditorsStatutory Auditors in order to discuss: (i) critical accounting policies and practices applied for the purpose of a proper representation of Eni’s results of operations and financial condition; (ii) alternative accounting treatments provided for by generally accepted accounting principles concerning material items discussed with management, including ramifications of the use of, the impact deriving from the application of said alternative disclosures and treatments and relevant information, as well as the treatments preferred by external auditors; and (iii) the contents of any other material written communication between external auditors, and management.For a description of the special powers of the State, see "Item 10 – Memorandum and Articles of Association – Limitations on Voting and Shareholdings – Special Powers of the State" below.
Significant differences in corporate governance practices as per Section 303A.11 of the New York Stock Exchange Listed Company Manual
Corporate governancestandards followed by Italian listed companies are set forth in the Civil Code and in the Legislative Decree No. 58 of February 24, 1998, "Single text containing the provisions concerning financial intermediation" (Testo unico delle disposizioni in materia di intermediazione finanziaria, the "TUF"), as well as by the Self-discipline Code of listed companies (the "Code") issued by the Committee for corporate governance of listed companies. As discussed below, Italian corporate governance standards differ in certain aspects from NYSE standards.
The civil code and the TUF assign specific binding and irrevocable powers and responsibilities to company’s corporate bodies. The Code, based on this regulatory framework, provides recommendations on corporate governance intended to reflect generally accepted best practices. Although these recommendations are not binding, Borsa Italiana SpA requests listed companies to publish an Annual Report on corporate governance which contains, besides a general description of the corporate governance system adopted, also any recommendation that was not followed and the reasons for this choice. Eni adopted the Code.
Eni’s organizational structure follows the traditional Italian model of companies which provides for two main separate corporate bodies, the Board of Directors and the Board of Statutory Auditors to whom are respectively entrusted management and monitoring duties. This model differs from the U.S. unitary model which provides for the Board of Directors as the sole corporate body responsible for management and, through an audit committee established within the same Board, for monitoring.
Below is a description of the most significant differences between corporate governance practices followed by U.S. domestic companies under the NYSE standards and those followed by Eni.
INDEPENDENT DIRECTORSNYSE StandardsUnder NYSE standards listed U.S. companies’ Boards must have a majority of independent directors. A director qualifies as independent when the Board affirmatively determines that such director does not have a material relationship with the listed company (and its subsidiaries), either directly, or indirectly. In particular, a director may not deemed independent if he/she or an immediate family member has a certain specific relationship with the issuer, its auditors or companies that have material business relationships with the issuer (e.g. he/she is an employee of the issuer or a partner of the auditor). In addition, a director cannot be considered independent in the three year "cooling-off" period following the termination of any relationship that compromised a director’s independence.
Eni StandardsIn Italy, the Code recommends that the Board of Directors includes an adequate number of independent non-executive directors "in the sense that they: a) do not entertain, directly or indirectly or on behalf of third parties, nor have recently entertained business relationships with the company, its subsidiaries, the executive directors or the shareholder or group of shareholders who controls the company of a significance able to influence their autonomous judgement; b) neither own, directly or indirectly or on behalf of third parties, a quantity of shares enabling them to control the company or exercise a considerable influence over it nor participate in shareholders’ agreements to control the company; and c) are not immediate family members of executive directors of the company or of persons in the situations referred to in points a) and b)". The independence of directors is periodically reviewed by the Board of Directors taking into account the information provided by the directors themselves. The Code also recommends that to evaluate independence "in the case of earlier business dealings, reference should be made to the previous financial year and for work relationships and functions of executive director, to the three preceding financial years".
The Code provides for a qualitative evaluation, that considers the whole of the relationships held, in order to check as the case may be if the existing relationships between the issuer and the director are such to impair the director’s independence.
In 2005, Eni’s Board of Directors judged that the Chairman and its non-executive members comply with the independence standards, as provided for by the Code. Director Marco Pinto is an employee of the Ministry of Economy and Finance.
MEETINGS OF NON EXECUTIVE DIRECTORSNYSE StandardsNon-executive directors, including those who are not independent, must meet at regularly scheduled executive sessions without management. In addition, if the group of non-executive directors includes directors who are not independent, independent directors should meet separately at least once a year.
Eni StandardsNeither Eni’s non-executive directors nor Eni’s independent directors must meet separately, under the Code’s corporate governance rules.
AUDIT COMMITTEENYSE StandardsListed U.S. companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 and that complies with the further provisions of the Sarbanes-Oxley Act and of Section 303A.07 of the NYSE Listed Company Manual.
Eni StandardsIn its meeting of March 22, 2005, Eni’s Board of Directors, making use of the exemption provided by Rule 10A-3 for non-U.S. private issuers, has identified the Board of Statutory Auditors as the body that, starting from June 1, 2005, is performing the functions required by the SEC rules and the Sarbanes-Oxley Act to be performed by the audit committees of non-U.S. companies listed on the NYSE (see paragraph "Board of Statutory Auditors" earlier). Under Section 303A.07 of the NYSE listed Company Manual audit committees of U.S. companies have further functions and responsibilities which are not mandatory for non-U.S. private issuers and which therefore are not included in the list of functions shown in the paragraph referenced above.
NOMINATING/CORPORATE GOVERNANCE COMMITTEENYSE standardsU.S. listed companies must have a nominating/corporate governance committee (or equivalent body) composed entirely of independent directors that are entrusted, among others, with the responsibility to identify individuals qualified to become board members and to select or recommend director nominees for submission to the Shareholders’ Meeting, as well as to develop and recommend to the Board of Directors a set of corporate governance guidelines.
Eni StandardsThis provision is not applicable to non-U.S. private issuers. The Code allows listed companies to have within the Board of Directors a committee for directors’ nominees proposals, above all when the Board of Directors detects difficulties in the shareholders’ submission of nominees proposals, as could happen in publicly-owned companies. Eni has not set up a nominating committee, considering the nature of its shareholding as well as the circumstance that, under Eni by-laws, directors are appointed by the Shareholders’ Meeting based on lists presented by shareholders or by the Board of Directors.Compensation
Board members’
compensation isemoluments are determined by the Shareholders’ Meeting, whileremuneration levelsthe emoluments of the Chairman and CEO, in relation to the powers entrusted to them, are determined by the Board of Directorsbased onconsidering relevant proposalsofmade by the Compensation Committee and after consultation with the Board of Statutory Auditors.
Key elementMain elements of the compensation of the Chairman, the CEO,theother Board membersof the BoardandofEni’s three General Managers areoutlined as follows.described below.CHAIRMAN
The compensation of the Chairman of the Board of Directors has been resolved by Eni’s Shareholders’ Meetingof May 27, 2005anditincludes:
a)(a)a feebase salary of euro 265,000 and reimbursement of out of pocket expenses; andb)(b)a variablebonus which amountup to a maximum of euro 80,000 to be paidis determined in accordance withEni’s positioning amongtheeightperformance of Eni shares in the reference year as compared with the performance of the seven largest international oil companies for market capitalization,in termstaking account oftotal returnthe dividend paid. This bonus will amount toshareholderseuro 80,000 or euro 40,000, depending on whether the performance of Eni shares is rated first or second, or third or fourth in theprevious year.reference year, respectively. No bonus is paid in case Eni scores a position lower than the fourth one. In 2007, Eni rated seventh and in 2008 the bonus was not paid.With
respectregard to the powers delegated to the Chairman, the Board of Directors determined further compensation, as follows:
a)(a)a feean annual emolument of euro 500,000; andb)(b)a variable amount dependentan annual performance bonus based onreachingtheobjectives identified by the Board of Directors on proposalachievements of theCompensation Committee.Company’s target determined in the same way as for the CEO (see below). In 2008, based on 2007 Eni’s results, a bonus equal to 115% of the target level was determined, within an interval ranging from 85% to 130% of said target level. The target level ofsuch variable amountthe bonus is50%60% of thefixed amount under a) above.annual emolument. In 2008, this bonus amounted to euro 345,000.Compensation of the Chairman also includes an insurance against death or permanent inability caused by injury or sickness in the exercise of his duties or under certain other circumstances as stipulated collectively for all managers of Italian companies producing goods and services. In particular, a specific insurance policy has been underwritten which guarantees euro 500,000 to
survivors with an annual charge for Eni of euro 8,000.
In 2005 the Chairman received a total compensation amounting to euro 871,000.survivors.CEO
Compensation forPaolo Scaronithe CEO has been resolved by the Board of Directors of Eni in connection with his position both asChief Executive Officer ("CEO")CEO and as General Manager of the parent company Eni SpA.He was appointed to both positions on June 1, 2005.As General Manager of Eni SpA, his terms of employment are regulated by the "Contratto collettivo nazionale di lavoro per i dirigenti di aziende produttrici di beni e servizi" (the Italian national collective contract for managers of
manufacturing companies)companies producing goods and services), as well as by any internal agreement stipulated by the representatives of managers and Eni SpA.He may be appointed as board member of Eni’s subsidiaries and affiliates;The CEO compensation
as provided for by Article No. 2389 of the Italian Civil Code deriving from such appointments is to be repaid to Eni as it is included in his remuneration under section a) below.
Compensationincludes thefollowing:following items:
a)(a)aan annual fixed amount of euro 1,430,000,of whichincluding a base salary of euro 1,000,000 for the services as General Manager anda feean emolument of euro 430,000 for the services asCEO. In 2005, the amount received by Mr. Scaroni was of euro 840,000 relating to the period June 1-December 31;CEO;130
b)(b)a variable amount dependentan annual performance bonus based onreachingtheobjectives identifiedachievement of the Company targets. These targets are approved by the Board of Directors on proposal of the CompensationCommittee.Committee and defined consistently with the targets of the strategic plan and yearly budget. In 2007, said targets included a set level of cash flow from operations (with a 30% weight), divisional operating performances (30%), strategic projects (20%) and corporate efficiency (20%). Results achieved have been assessed assuming a constant trading environment and have been verified by the Compensation Committee and approved by the Board of Directors. The target and maximum amount ofsuch variable amount isthis bonus corresponds respectively to 77% and 100% of the fixed amount under a) above.This incentive will be paidIn 2008, based on 2007 Eni’s results, a bonus equal to 115% of the target level was determined, within an interval ranging from2006 onwards;85% to 130% and a bonus of euro 1,267,000 was paid;c)(c)yearly assignment of grants to receive Eni stocks for no considerationa long-term incentive under the incentive scheme as approved inthe 2006-2008 period, vesting after three years from the assignment, dependent on reaching the objectives identifiedMarch 2006 by the Board of Directorson proposal ofas proposed by the Compensation Committee.TheThis incentive scheme provides: (i) a deferred monetary incentive, linked to the achievement of certain Company’s financial performance annual targets; and (ii) stock option awards linked to the achievement of certain performance targets of the Eni share measured in terms of total shareholder return that considers both the stock appreciation and the dividend (see below for a more detailed description of Eni’s long-term incentive schemes applicable to top and senior managers). Under this scheme the CEO received:
(i) an annual award of a deferred monetary bonus with a target level of such amount of stock grant is 50%corresponding to 55% of the fixed amount under a) above.This incentive is effective starting from 2006. For detailsIn 2008, this award amounted to euro 1,022,500 that will be paid after three years in connection with the achievement ofEni stock grant plan, see below;certain preset Company annual targets in terms of EBITDA (earnings before interest, taxes, depreciation and amortization); and
d)a yearly assignment(ii)an annual award of stock options in the 2005-2007 periodfor 2008 for afacialface value corresponding to1110 times the fixed amounts under section a)above for the 2005-2007 period. Options are assigned at an exercise price corresponding to the market value at the date of assignment (average of the market prices of the preceding month) and can be exercised beginning from three years after the assignment and within the following five years.above. In2005,2008, a total of699,000573,000 options wereassigned atawarded with a vesting period of three years and an exercise price of euro22.509. For details22.540 corresponding to the arithmetic average ofEni stock option plan, see below;official prices registered on the Mercato Telematico Azionario in the month preceding the award;
e)(d)severance paymentpayments as regulated by Italian laws, whichconsists in yearly accrualsconsist of a lump sum tothe reserve for employee benefits that willbe paidby the companyto the employeewhen employment ceases. Each annual accrual corresponds toupon retirement. To this end, the Company recognizes yearly accruals computed by dividing the total remunerationreceivedearned as General Manager(fixed and variable amounts(base salary, bonuses and stockgrants assigned) dividedcompensation) by 13.5.TheseThe amounts accrued are revaluated yearly at a fixed rate of 1.5% plus the 75% of the yearly official consumer price index increase;
f)(e)as an integration to the severance payment described above, should the employment contract of Mr. Scaroni as General Manager of Eni SpA be terminated upon expiry of the term of his office as CEO or upon earlier termination of such office, he will be entitled to receive a lump sumpayment of euro7 million, which is also intended as waiver3,200,000 plus an amount corresponding to the average performance bonus earned in the three-year period 2008-2010, in lieu of notice thus waiving both parties from any obligation related toadvance notice of termination.notice. Thisintegrationamount will not be paid if the termination of office meets the requirement of due cause as per ArticleNo.2119 of the Italian Civil Code, in case of death and in case of resignation from office other than as the result of a reduction in the powers currently attributed to the CEO.Upon terminationFurthermore, upon expiry ofemploymentthe contract as employee of Eni,will also paythe CEO in his capacity as General Manager of the parent company is entitled to receive anamountindemnity that is accrued along the service period by taking into account social security contribution rates and post-retirement benefit computations applied to the CEO annual emolument and 50% of the maximum bonuses earned as a Director. Taking into account that the CEO has been appointed on June 11, 2008, a provision of euro 134,139.23 has accrued in 2008. A sum of euro 644,179.60 corresponding to thesocial security payments and severance payment accruals as applied toglobal amount accrued over thefixed amount and to 50%preceding three-year period ofthe variable part of the compensation received as CEO. To this end Eni accrues a yearly provision of euro 204,737.93;office was paid;g)(f)competition clause: the CEO agrees not to be engaged, on his own account and directly, in any business that may be in competition with the businesses of Eni, as per its by-laws,By-laws, in Italy, Europe and North America for a year after termination of office.In consideration forBased on thisagreement,arrangement, Eni will pay a fee corresponding tothe yearly fixed amounts under a) section above.euro 2,219,000. As a consequence of any breach of this clause, the CEO wouldlooselose the right to such feeor shouldand reimburse any amount already paid, and shall pay to Eni damages in an amount agreed among the parties to correspond to twice such non-competition fee;h)(g)the pension scheme corresponds to the scheme applied to Eni managers and provided by INPS (the Italian state social security entity) to all Italian workers. In addition, the CEO is included in an additional pension scheme under the form of an Eni groupGroup pension fund agreed collectively by Eni and Eni managers which providesanintegration, in the form of a lump sum payment oraperpetuity, to the pension paid by the State. This integration is proportional to contributions to the fund made by both the manager and the Company in equal amounts. The integration isassignedawarded to the manager when eligible for the payment of the pension from the State, provided that a minimum time period has elapsed according to thefund by-laws.Fund By-laws. An agreement signed on March 20, 2006, established that the Company’s and the manager’s payment to this Fund amounts to 3.5% ofthetotalsalary ofemoluments earned by the CEO in his position as General Manager (i.e.,the aggregate of thefixed amount, the variable amountannual salary andthe stock grantsbonuses up to a maximum of euro 200,000);i)(h)like all other Eni managers, Mr. Scaroni is entitled to participate in a health insurance Fundfund financed by Eni managers and Eni which provides reimbursement of certain medical expenses on the basis of rules and parameters as providedforby the Fund’sby-laws;By-laws; andj)(i)insurance against death or permanent inability caused by injury or disease in the exercise of his duties or under certain other circumstances as stipulated collectively for all managers of Italian manufacturing 131
companies. In particular a specific insurance policy has been underwritten on behalf of Mr. Scaroni which guarantees euro 7.5 million to survivorsbeneficiaries in case of death or disability, howeverdetermined, with an annual charge for Eni of euro 62,000.determined.MEMBERS OF THE BOARD OF DIRECTORS
The compensation of members of the Board of Directors has been determined by Eni’s Shareholders’ Meetingof May 27, 2005and includes:
a)(a)a feean annual emolument of euro 115,000 and reimbursement of out of pocket expenses; andb)(b)a variable amount up to a maximum of euro 20,000 to be paidbonus determined in accordance withEni’s positioning amongtheeightperformance of the Eni share in a given year as compared with the performance of the seven largest international oil companies for market capitalization,in termstaking account oftotal returnthe dividend paid. Said bonus amounts toshareholderseuro 20,000 or euro 10,000 depending on whether the performance of Eni shares is rated first or second, or third or fourth in theprevious year.reference year, respectively. In 2007, Eni rated seventh and in 2008 the bonus was not paid.The Board of Directors in the meeting of June 11, 2008, as proposed by the Compensation Committee and advised by the Board of Statutory Auditors, confirmed the additional element of remuneration for the Board members holding positions in Board’s committees, with the exclusion of the Chairman and CEO. Said fee amounts to euro 30,000, and euro 20,000 for the position of chairman of a committee and of member of a committee, respectively. This amount decreases to euro 27,000 and euro 18,000 in case a member holds positions in more than one committee.
GENERAL MANAGERS
The terms of employment of the General Managers of Eni’s Divisions are regulated by the "Contratto collettivo nazionale di lavoro per i dirigenti di aziende produttrici di beni e servizi" (the Italian national collective contract for managers of companies producing goods and services), as well as by any internal agreement stipulated by the representatives of managers and Eni SpA. The General Managers of Divisions may be appointed as members of the Board of Directors of Eni subsidiaries and affiliates; compensation deriving from such appointments as provided for byarticle No.Article 2389 of the Italian Civil Code is to be repaid to Eni as it is included in their remuneration under section a) below.Their remuneration includes:
a)(a)a base salary, defined considering the position held and their specific responsibilities, with reference to appropriate market levels as benchmarked against national and international companies of comparable size, complexity and scope in the oil and gas, industrial and service sectors. Base salaries are reviewed and adjusted on July 1 of each year taking into account the consistency ofa yearly basis considering individual performanceover time as well as certain market benchmarks;and career progression;b)(b)a performance bonus paid yearly, based on the achievement of specific financial, operational and strategic targets and of individual performance goals pertaining to each business units defined consistently with the Company’s targets in the strategic plan and yearly budget. The target level of the bonus corresponds to 60% of the base salary;
(c) long-term incentives in the form of a deferred monetary bonus and stock options according to the same scheme as the CEO. Under this scheme the three General Managers have received:
(i) a yearly cash incentiveaward ofup to approximately 60%a deferred monetary bonus at target level of 40% of thesalary dependent upon objectives identified for each business area;base salary. In 2008, based on 2007 Eni results, the basic deferred bonus awarded was equal to 130% of the target level, within an interval ranging from 70% to 130%; andc)(ii) a yearly assignment of grants to receive Eni stock for no consideration, vesting after three years from the assignment, dependent upon achieving the objectives identified by the Board of Directors based upon the proposal of the Compensation Committee. The target level of such amount of stock grant is 35% of the salary. For details of Eni stock option plan, see below;d)a yearly assignmentaward of stock optionsin the 2005-2007 periodfor afacialface value corresponding to24.5 times the base salary. Optionsare assigned at an exercise price corresponding to the market value at the dateawarded in 2008 have a vesting period ofassignment (average of the market prices of the preceding month) and can be exercised beginningthree yearsafter the assignmentandwithin the following five years. Options assigned in 2005 hadan exercise price of euro22.509. For details22.540 corresponding to the arithmetic average ofEni stock option plan, see below;official prices registered on the Mercato Telematico Azionario in the month preceding the award;
e)(d)a severance payment as regulated by Italian laws, which consists in yearly accrualsof a lump sum tothe reserve for employee benefit that willbe paidby the companyto the employeewhen employment ceases. Each annual accrual corresponds toupon retirement. To this end, the Company recognizes yearly accruals computed by dividing the yearly remunerationreceived as general manager divided(base salary, bonuses and stock compensation) by 13.5. These amounts are revaluated yearly at the rate of 1.5% plus the 75% of the official yearly consumer price index increase;f)(e)the pension scheme corresponds to the scheme applied to Eni managers and provided by INPS to all Italian workers. In addition, the General Managers are included in the additional pension scheme of Eni managers which provides an integration to the public pension. For further details see section h)g) of the description of compensation of the CEO;g)(f)like all other Eni managers, they are entitled to participate in a health insurance Fund financed by Eni managers and Eni which provides reimbursement of certain medical expenses on the basis of rules and parameters as provided for by the Fund’s by-laws.By-laws. For further details see sectioni)h) of the description of compensation of the CEO; andh)(g)an insurance against death or permanent inability caused by injury or disease in the exercise of his duties or under certain other circumstances as stipulated collectively for all managers of Italian manufacturing companies. With the
expectionexception of the CEO as described above, none of the Directors of Eni has service contracts with the company or any of its subsidiaries providing for benefits upon termination of employment.
Pursuant to Article 78132Remuneration earned for 2008 by members of
Consob Decision No. 11971 of May 14, 1999, compensationthe Board of Directors, including the CEO and the Chairman, the three Chief Operating Officers and Eni’s senior managers attending on a permanent basis the meetings of the Steering Committee of Eni (total amount) is reported in the table below. Emoluments earned by the Statutory Auditors of Eniand general managersare also included.Below is a description of
Eni’s divisions, who held the position in 2005 including for a fractioneach column of theyear, are reported in the table below.following table:
Pursuant to Consob decisions:
• " Compensation in respect of positions heldEmoluments for service at Eni SpA"are setinclude emoluments paid to non-executive and executive directors for service rendered, fixed fees paid to Directors attending the Board’s Committees, and fees paid to Statutory Auditors. Emoluments earned bythe Shareholders’ Meeting and the remuneration ofthe Chairman and the CEOis determinedinclude also the portion awarded for the powers entrusted to them by theBoard of Directors, in agreement with the Board of Statutory Auditors, in accordance with Article 2389, paragraph 3 of the Italian civil code;Board;• "Non cash benefits" refercomprise amounts referring to all fringe benefits, including insurance policies;• "Bonuses and other incentives" includesinclude: (i) performance bonuses awarded in thevariable partyear to Directors and the Chairman of theChairman’s compensationBoard based on the performance of the Eni share; (ii) performance bonuses awarded in the year to both the Chairman and thevariable partCEO in connection with the power entrusted to them by the Board, based on the achievement of specific company targets; and (iii) performance bonuses awarded in the year to the CEO, in his position as General Manager of thesalary ofparent company, theCEO and of the general managers of Eni’s divisions; and•"Other compensation" include the salary of the previous and the current managing director and of the general managersGeneral Managers of Eni’s divisionsin addition to compensations due in respect of positionsand other managers with strategic responsibilities based on theBoardsachievement ofStatutory Auditors in Eni’s subsidiaries. Indemnities paid upon termination are also included.specific financial, operational and strategic targets and of individual performance targets pertaining to their respective business or functional units;
The following table contains details"Salaries and other elements" report base salaries paid to the CEO, the General Mangers ofcompensationEni’s Divisions and other managers with strategic responsibilities, and indemnities paid upon termination ofdirectors, statutory auditors and general managers.the employment contract.133
Name Position
Term of office
Expiry date of the position(1)
CompensationEmoluments for service at Eni SpANon-cash benefits
BonusesBonus and other incentives(2)(a)
Other compensationsSalaries and other elementsTotal
(thousand euro)
Board of Directors Roberto Poli Chairman 768
18
345
1,131
Paolo Scaroni CEO 430
17
1,267
1,363
(b) 3,077
Alberto Clô Director 157
157
Paolo Andrea Colombo (c) Director 64
64
Renzo Costi (d) Director 85
85
Dario Fruscio (e) Director 19
19
Paolo Marchioni Director 64
64
Marco Pinto (d) Director 85
85
Marco Reboa Director 157
157
Mario Resca Director 143
143
Pierluigi Scibetta Director 149
149
Francesco Taranto Director 64
64
Board of Statutory Auditors Paolo Andrea Colombo (d) Chairman 51
33
(f) 84
Ugo Marinelli Chairman 64
64
Filippo Duodo (d) Auditor 35
71
(g) 106
Roberto Ferranti Auditor 44
44
Edoardo Grisolia (d) (h) Auditor 35
35
Luigi Mandolesi Auditor 44
44
Tiziano Onesti Auditor 44
40
(i) 84
Riccardo Perotta (d) Auditor 35
32
(l) 67
Giorgio Silva Auditor 80
24
(m) 104
Chief Operating Officers Stefano Cao (n) Exploration & Production 1
2,294
(o) 3,825
(p) 6,120
Claudio Descalzi (q) Exploration & Production 1
268
269
Domenico Dispenza Gas & Power 1
856
(r) 710
1,567
Angelo Caridi Refining & Marketing 2
268
565
835
Other managers with strategic responsibilities (s) 12
3,137
6,475
(t) 9,624
2,617
52
8,167
13,406
24,242
Board of Directors Roberto Poli Chairman
01.01-12.31
05.30.08
831
8
40
879
Vittorio Mincato CEO
01.01-05.27
230
1,386
(3)
9,649
(4)
11,265
Paolo Scaroni CEO
06.01-12.31
(5)
05.30.08
252
62
588
902
Mario Giuseppe Cattaneo Director
01.01-05.27
57
10
67
Alberto Clô Director
01.01-12.31
05.30.08
123
10
133
Renzo Costi Director
01.01-12.31
05.30.08
122
10
132
Dario Fruscio Director
01.01-12.31
05.30.08
117
10
127
Guglielmo Moscato Director
01.01-05.27
59
10
69
Mario Resca Director
01.01-12.31
05.30.08
121
10
131
Marco Pinto Director
05.28-12.31
05.30.08
68
68
Marco Reboa Director
05.28-12.31
05.30.08
68
68
Pierluigi Scibetta Director
05.28-12.31
05.30.08
68
68
Board of Statutory Auditors (6) Andrea Monorchio Chairman
01.01-05.27
51
51
Paolo Andrea Colombo Chairman
(7)
01.01-12.31
05.30.08
107
67
174
Luigi Biscozzi Auditor
01.01-05.27
38
51
89
Filippo Duodo Auditor
01.01-12.31
05.30.08
91
55
146
Edoardo Grisolia (8) Auditor
05.28-12.31
05.30.08
48
48
Riccardo Perotta Auditor
01.01-12.31
05.30.08
92
59
151
Giorgio Silva Auditor
05.28-12.31
05.30.08
48
13
61
General Managers Stefano Cao E&P Div.
01.01-12.31
397
797
1,194
Luciano Sgubini G&P Div.
01.01-12.31
311
2,286
(9)
2,597
Angelo Taraborrelli R&M Div.
01.01-12.31
229
566
795
2,591
70
2,423
14,131
19,215
(a) i Based on performance achieved in 2007. (1)(b)i The termIncluding the base salary ofposition ends witheuro 1 million paid to the CEO, in his quality of General Manager, indemnities and other elements for a total amount of euro 363,000 accrued along the service period (from 2005 to 2008), net of the indemnities described under the paragraph "post-retirement benefit of the directors".(c) i Chairman of the Board of Statutory Auditors until June 9, 2008. (d) i In office until the Shareholders’ Meeting approving financial statements for the year ending December 31, 2007. (2)(e)i Based on performance achieved in 2004.(3)Based on performance achieved in 2004 and pro rata performance related to the first five month period of 2005.(4)In addition to salary also includes indemnities paid upon termination and further compensation determined byOn January 30, 2008 Dario Fruscio resigned from the Board of Directors.(5)(f)i Appointed as director on May 28, 2005.(6)The "Other Compensation" amounts refer toIncludes the compensation obtained aschairman or as auditorChairman ofsubsidiaries.the Board of Statutory Auditors of Saipem and EniServizi.(7)(g)i AppointedIncludes the compensation obtained as Statutory Auditor in Snamprogetti SpA and in Polimeri Europa and as Chairmanon May 28, 2005. Previously Auditor.of the Board of Statutory Auditors of CEPAV Uno and CEPAV Due.(8)(h)i Compensation for the service is paid to the Ministry offor Economy and Finance.(9)(i)i Includes the compensation obtained as Chairman of the Board of Statutory Auditors of AGI and Servizi Aerei. (l) i Includes the compensation obtained as Chairman of the Board of Statutory Auditors of Snam Rete Gas SpA. (m) i Includes the compensation obtained as Statutory Auditor in Snamprogetti SpA and as Chairman of the Board of Statutory Auditors of TSKJ Italia Srl. (n) i In addition to salary also includesoffice until July 31, 2008.(o) i Includes the pro-quota portion of deferred bonus awarded for the 2006-2008 three-year period. (p) i Includes indemnities paid upon termination. (q) i Appointed on August 1, 2008. (r) i Includes long-term incentives awarded by Snam Rete Gas in 2005, for the position of Chairman of Snam Rete Gas held until December 23, 2005. (s) i Managers, who during the year with the CEO and the General Managers of Eni divisions, have been member of the Eni Directors Committee (8 managers). (t) i Includes indemnities paid upon termination. For the year ended December 31,
2005,2008, theaggregateoverall compensationpaid to or on behalfofthe executive officerspersons responsible of key positions in planning, direction and control functions of EniSpA wasGroup companies, including executive and non-executive directors, Chief Operating Officers and Eni’s senior managers amounted to euro20.0625 million. Theforegoingbreak-down is as follows:
2008
(euro million)
Fees and salaries 17
Post employment benefits 1
Other long-term benefits 3
Fair value stock grants/options 4
25
The above amounts include salaries, fees for attending meetings, lump-sum amounts paid in lieu of expense reimbursements,
stock options, stock grants,stock-based compensation and other deferred incentive bonuses, health and pension contributions and amounts accrued to the reserve for employee termination indemnities, which is used to pay severance pay as required by Italian law to employees upon termination of employment. The members of the Board of Directors in134
their capacity as such are not entitled to receive such severance pay. At December 31,
2005,2008, the total amount accrued to the reserve for employee termination indemnities with respect to members of the Board of Directors who were also employees of Eni,with respect tothe three general managers andwith respect to the executive officers of Eni SpAEni’s senior managers was euro3.36 million.
1,548 thousand. The break-down of this amount is presented in the table below:
Name (euro thousand)
Paolo Scaroni CEO and Chief Operating Officer of Eni 164 Claudio Descalzi Chief Operating Officer of the E&P Division 299 Domenico Dispenza Chief Operating Officer of the G&P Division 418 Angelo Caridi Chief Operating Officer of the R&M Division 148 Senior managers (a) 519
1,548
(a) i No. 7 managers.
Stock compensationLong-term Incentive Schemes
Stock grants
WithIn March 2006, theaimBoard ofimproving motivation and loyalty of Eni managers throughDirectors approved a new long-term incentive scheme for thelinking of compensation to the attainment of preset individual and corporate objectives, making management participate in corporate risk and motivating them towards the creation of shareholder value and increasing at the same time their contribution to the management of the Company, beginning in 2003, Eni has offered its own shares purchased under its buy-back program (treasury shares) for no consideration to thosemanagers of EniSpAand its subsidiaries (excluding listed subsidiaries), asdefinedproposed by the Compensation Committee. This new scheme is designed to motivate more effectively and retain managers, linking incentives to targets and performance achieved inArticle 2359a tighter way than previous incentives schemes. This new incentive scheme applies to the 2006-2008 three year period and is composed of a deferred monetary bonus, linked to the achievement of certain business growth and operating efficiency targets, and stock option grants based on the achievement of certain targets of total shareholder return. This scheme has a structure intended to balance monetary and stock-based components of theCivil Code15who haveremuneration, as well as to link economic and operating performance to share performance in the long-term.Deferred monetary bonus
This leg of the long-term incentive scheme provides a basic bonus paid after three years according to a variable amount equal to a percentage ranging from 0 to 170% of the amount established for the target performance in relation to the performances achieved
corporatein a three-year period as approved by the Board of Directors. Performances are measured in terms of achievement of preset annual EBITDA targets, as assessed by comparing actual results with set targets under a constant trading environment.The following table sets out the basic bonus awarded in the year 2008 to the CEO and
individual objectives.to the Chief Operating Officers of Eni’s Divisions, and the total amount awarded to Eni’s senior managers.
Name Deferred bonus awarded
(euro thousand)
Paolo Scaroni CEO and Chief Operating Officer of Eni 1,023 Stefano Cao (a) Chief Operating Officer of the E&P Division 494 Claudio Descalzi (b) Chief Operating Officer of the E&P Division 215 Domenico Dispenza Chief Operating Officer of the G&P Division 385 Angelo Caridi Chief Operating Officer of the R&M Division 312 Senior managers (c) 1,732 (d)
(a) i Position held until July 31, 2008. (b) i Appointed on August 1, 2008. (c) i No. 8 managers. (d) i Including the deferred bonus granted by Saipem to a manager with strategic responsibilities, appointed in Eni on August 1, 2008.
Assignments vest within 45 days afterStock OptionsEni can award share options to managers holding strategic positions or positions of significant responsibility for the achievement of the Company’s results. This incentive scheme is designed to ensure that managers’ interests are aligned with those of shareholders and to stimulate entrepreneurial behavior on part of managers. Differently from previous schemes, the 2006-2008 stock option plan introduced a performance condition upon which grants can be exercised. At the end of each vesting period with a three-year duration, the
third yearBoard of Directors determines the number of exercisable options, in a percentage ranging fromthe date0% to 100% of theoffer.total amount awarded for each year135
of the scheme, depending on the performance of Eni shares measured in terms of annual Total Shareholders Return as compared to that achieved by a panel of major international oil companies in terms of market capitalization. Options can be exercised for a three year period. Under this
stock grantplan,onthe Board resolved to make available 7,415,000 options pertaining to 2008 with a strike price equal to euro 22.540 and 6,128,500 options pertaining to 2007 with a strike price equal to euro 27.451.At December 31,
20052008, a total of3,127,200 grants23,557,425 options were outstanding for theassignmentpurchase of an equal amount oftreasuryordinary shares(equal to 0.08% of current capital stock) subdivided as follows: (i) a total of 1,018,400 grants (fairnominal value euro11.20 per share) related to 2003; (ii) a total of 912,400 grants (fair value euro 14.57 per share) related to 2004; and (iii) a total of 1,196,400 grants (fair value euro 20.08 per share) related to 2005.
Stock options
Eni offers to managers1 of Eni SpA,and its subsidiaries as defined in Article 2359 of the Civil Code16who hold positions of significant responsibility for achieving profitability or strategic targets, the opportunity to acquire a shareholding in the Company as an element of remuneration through the assignment of options for the purchase of Eni’s treasury shares.
Options provide grantees with the right to purchase Eni shares on a 1 to 1 ratio after three years from the date of the grant and upon a five year vesting period, at a price corresponding to the higher of the arithmetic average of official prices recorded on the Mercato Telematico Azionario in the month preceding the date of the grant and the average cost of the treasury shares as of the day prior to the assignment (strike price). Strike price for the 2005 assignment was euro 22.512 per share.
Grantees are able to make use of an advance from a Group finance company to purchase shares, on condition that at the same time they sign an irrevocable order for selling the shares through the finance company. Proceeds from the sale must then be used to repay the advance.
At December 31, 2005 there were 13,379,600 outstanding options,carrying an average strike price of euro17.705 per share.23.540. The
weighted-averageweighted average remaining contractual life of options outstanding at December 31,2003, 20042007 and20052008 was5.6 years, 6.64 years and7.67 months and 5 years and 7 months respectively.All stock options granted are considered fixed.The following is a summary of stock option activity for the years
2003, 20042007 and2005:2008:
2003
2004
2005
2007
2008
Number of shares
Weighted average exercise price
(euro)Market price (a)
(euro)Number of shares
Weighted average exercise price
(a)
(euro)
Number of shares
Weighted average exerciseMarket price (a)
(euro)
Options as of January 1 3,518,500 15.216 8,162,000 14.367 11,789,000 15.111 15,290,400 21.022 25.520 17,699,625 23.822 25.120 New options granted 4,703,000 13.743 3,993,500 16.576 4,818,500 22.512 6,128,500 27.451 27.447 7,415,000 22.540 22.538 Options exercised in the period (354,000 ) 14.511 (3,106,400 ) 15.364 (3,028,200 ) 16.906 25.338 (582,100 ) 17.054 24.328 Options cancelled in the period (59,500 ) 15.216 (12,500 ) 14.450 (121,500 ) 16.530 (691,075 ) 24.346 24.790 (975,100 ) 24.931 19.942 Options outstanding as of December 31 8,162,000 14.367 11,789,000 15.111 13,379,600 17.705 17,699,625 23.822 25.120 23,557,425 23.540 16.556 of which exercisable at December 31 73,000 14.802 - - 1,540,600 16.104 of which exercisable at December 31 2,292,125 18.440 25.120 5,184,250 21.263 16.556
(a) Below quotedMarket price relating to new rights assigned, rights exercised in the period and rights cancelled in the period corresponds to the average marketprice.value (arithmetic average of official prices recorded on Mercato Telematico Azionario in the month preceding: (i) the date of assignment; (ii) the date of the recording in the securities account of the managers to whom the options have been assigned; (iii) the date of the unilateral termination of employment for rights cancelled). Market price of shares referring to options as of the beginning and the end of the year, is the price recorded at December 31.The fair value of stock options granted during the years ended December 31,
2003, 20042007 and20052008 of euro1.50, euro 2.012.98 and euro3.33,2.60, respectively, was calculated applying the Black-Scholes method and using the following assumptions:
Fair value of stock options 2003
2004
2005
Risk-free interest rate (%) 3.16 3.21 2.51 Expected life (year) 8 8 8 Expected volatility (%) 22 19 21 Expected dividends (%) 5.35 4.5 3.98
2007
2008
Risk-free interest rate (%) 4.7 4.9 Expected life (year) 6 6 Expected volatility (%) 16.3 19.2 Expected dividends (%) 4.9 6.1
136
The following table presents the amount of stock options awarded to Eni’s CEO, the three Chief Operating Officers and Eni’s senior managers.
Stock grant for Eni’s CEO and general managers
Grants outstanding at beginning of the period
Grants assigned during the period
Grants exercised during the period
Grants outstanding at endCEO and COO ofthe period
NameEni
NumberCOO ofgrants
E&P Division
Average maturity in monthsCOO of
E&P Division
NumberCOO ofgrants
G&P Division
Average maturity in monthsCOO of
R&M Division
Number of grantsSenior managers(a)
Average market price at date of exercise (euro)
Number of grants
Average maturity in months
Paolo Scaroni (b)Stefano Cao (c) Claudio Descalzi (d) Domenico Dispenza Angelo Caridi
Vittorio Mincato (1) CEO 104,800
19
40,200
38
145,000
19.951
-
-
Stefano Cao General Manager of the E&P Division 40,500
20
16,000
38
12,800
23.785
43,700
21
Luciano Sgubini General Manager of the G&P Division 40,500
20
16,000
38
56,500
22.784
-
-
Angelo Taraborrelli General Manager of the R&M Division 17,500
20
16,000
38
5,400
23.785
28,100
24
Options outstanding at the beginning of the period: - number of options 1,953,000
406,500
178,500
232,500
269,500
(e) 30,500
122,000
(f) 1,353,000
110,000
(g) - average exercise price (euro)
24.165
24.655
24.713
25.159
3.988
22.509
21.098
23.985
18.953
- average maturity in months 63
62
62
60
61
67
60
61
56
Options granted during the period: - number of options 634,500
-
85,500
147,500
120,000
-
584,000
-
- average exercise price (euro)
22.540
-
22.540
22.540
22.540
-
22.540
-
- average maturity in months 72
-
72
72
72
-
72
-
Options exercised at the end of the period: - number of options -
-
-
-
127,500
(e) -
-
68,500
29,500
(g) - average exercise price (euro)
-
-
-
-
3.530
-
-
16.576
11.881
- average market price at date of exercise (euro)
-
-
-
-
4.095
-
-
23.996
24.541
Options expired during the period: - number of options 206,375
-
-
-
-
-
167,550
-
Options outstanding at the end of the period: - number of options 2,587,500
200,125
264,000
380,000
142,000
(e) 150,500
122,000
(f) 1,700,950
80,500
(g) - average exercise price (euro)
23.767
24.060
24.009
24.142
4.399
22.534
21.098
23.670
21.545
- average maturity in months 55
51
55
56
54
65
48
55
48
(a) i No. 8 managers. (b) The assignment to the CEO have been integrated by a monetary incentive to be paid after three-year in relation to the performance of Eni shares, and is equal to 96,000 options granted in 2006, with a strike price of euro 23.100 and 80,500 options granted in 2007, with a strike price of euro 27.451. (1)(c)i Retired on May 27, 2005.
Stock options for Eni’s CEO and general managers
CEO(1)
CEO(2)
General Manager for the E&P Division
General Manager for the G&P DivisionIn office until July 31, 2008.
General Manager for the R&M Division(d)
Paolo Scaroni
Vittorio Mincato
Stefano Cao
Luciano Sgubini
Angelo Taraborrelli
Options outstanding at the beginning of the period: - number of options - 499,000 182,000 170,000 96,500 - average exercise price (euro) - 15.090 15.185 15.086 15.379 - average maturity in months - 67 79 79 81 Options granted during the period: - number of options 699,000 - 75,500 60,500 50,000 - average exercise price (euro) 22.509 - 22.509 22.509 22.509 - average maturity in months 96 - 96 96 96 Options exercised at the end of period: - number of options - 499,000 56,000 230,500 23,500 - average exercise price (euro) - 15.090 15.216 17.035 15.216 - average market price at date of exercise (euro) - 19.980 22.784 22.964 22.784 Options outstanding at the end of the period: - number of options 699,000 - 201,500 - 123,000 - average exercise price (euro) 22.509 - 17.920 - 18.308 - average maturity in months 91 - 82 - 83
(1)i Appointed on JuneAugust 1, 2008.(e) i Options on Snam Rete Gas shares: assigned by the company to Domenico Dispenza who held the position of Chairman of Snam Rete Gas until December 23, 2005. (2)(f)i RetiredOptions onMay 27, 2005.Saipem shares: assigned by the company to Angelo Caridi who held the position of CEO of Snamprogetti until August 2, 2007.(g) i Options on Saipem shares.
The table below sets forth the amount and maturity of stock options granted to Eni’s executive officers in 2005:
Options grantedin the year
Employees
Options heldat year end
Number of options 1,350,000 2,329,500 Average exercise price (euro) 22.509 19.217 Maturity (days) 1,096 707 Expiration (days) 2,923 2,498 Weighted average exercise price for options existing as of December 31, 2005 (euro) 15.231
The information in the table above is current as of June 5, 2006. No additional options have been granted from December 31, 2005 to that date. Eni issues only ordinary shares. For further information on Eni’s stock compensation see Note 26 to the Consolidated Financial Statements.
Investor relations and information processing
In concert with the launch of its privatization process, Eni adopted a communication policy, confirmed by the Code of Conduct, aimed at promoting an ongoing dialogue with institutional investors, shareholders and the markets to ensure systematic dissemination of exhaustive complete, transparent, selective and prompt information on its activities, with the sole limitation imposed by the confidential nature of certain information. Information made available to investors, markets and the press is provided in the form of press releases, regular meetings with institutional investors and the financial community and the press, in addition to general documentation released and regularly updated on Eni’s internet site. Investor and shareholder relations are handled by special Eni functions.
Relations with investors and financial analysts are held by the Investor Relations office. Information is available on Eni’s web site and can be requested from investor.relations@eni.it.
Relations with the press are held by the Relations with the press unit.
Relations with shareholders are held by the Corporate Secretary office. Information is available on Eni’s web site and can be requested from segreteriasocietaria.azionisti@eni.it and the toll-free number 800940924 (Outside Italy 80011223456).
Information regarding periodic reports and major events/transactions is promptly released to the public, also through the internet site. A specific section of Eni’s site contains all press releases, procedures concerning corporate governance, presentations provided in meetings with the press and financial analysts, notices to shareholders and bond holders and information concerning shareholders’ and bond holders’ meetings, including proceeds thereof. Documents available to the public free of charge are mailed on request.
On February 28, 2006, Eni’s Board of Directors updated the "Procedure for the disclosure of information to the market concerning Group activities" approved on December 18, 2002 and published on Eni’s internet site. The procedure acknowledges Consob guidelines and the "Guidelines for information to the market" issued in June 2002 by the Ref Forum on company information and those included in the laws implementing the European Directive on market abuse, defines the requirements for disclosure to the public of price sensitive events (materiality, clarity, homogeneity, information symmetry, consistency and timeliness) and the information flows for acquiring data from Group companies and providing adequate and timely information to the Board and the market on price sensitive events. It also contains sanctions applied in case of violation of its rules in accordance with the crimes identified and sanctioned by the new law on the protection of savings.
Eni’s Code of Conduct defines confidentiality duties upheld by Group employees relating to the treatment of sensitive information.
Internal dealing
On February 28, 2006 the Board of Directors approved a procedure concerning the creation and updating a register of persons with a right to access privileged information at Eni, as provided for by Article 115 of Legislative Decree No. 58 of February 24, 1998 which states that "listed issuing companies and the subjects who have a control relation with them, or acting in their name, must establish and regularly update a register of the persons that, due to their professional activity or functions performed have access to information as described in Article 114 (privileged information)". The procedure implementing Consob Decision No. 11971/1999, as amended, defines: (i) terms and procedures for the recording and possible cancellation of the persons that, due to their professional activity or functions performed on behalf of Eni, have access to privileged information; and (ii) terms and procedures of information of said persons of their recording or cancellation and relevant reasons. The procedure became effective on April 1, 2006.
In the same meeting the Board approved the "Internal dealing procedure" for the identification of relevant persons and the communication of transactions involving financial instruments issued by Eni SpA and its listed subsidiaries, which substitutes the Internal Dealing Code approved by the Board on December 18, 2002.
The procedure implements the provisions of Article 114, paragraph 7 of Legislative Decree No. 58 of February 24, 1998 which states that "subjects performing administration, control or management activities for a listed issuer and managers having regular access to privileged information as per paragraph 1 and having the power to make operating decisions that can affect the development and future situation of the issuer and whoever holds shares corresponding to at least 10% of the company’s share capital and any other person controlling the issuer are obliged to inform Consob and the market of any transaction involving financial instruments issued by the issuer, also when performed by others on their behalf." This communication is due also by spouses not legally separated, children, parents, relatives living with the subject and in the other cases indicated by Consob in implementation of Directive 2004/72/CE of the European Commission. Eni’s procedure: (i) identifies relevant persons; (ii) defines the transactions involving financial instruments issued by Eni SpA; (iii) determines the terms and conditions for the disclosure to the public of such information; and (iv) reports the sanctions introduced by the law for the case of non compliance. The procedure that became effective on April 1, 2006 is published on Eni’s internet site.
EmployeesAt December 31,
2005,2008, Eni’s employeesnumbered 72,258 representingtotaled 78,880, with an increase of1,9103,018 employees from December 31,2004, or 2.7%2007, up 4%, reflecting a2,4792,965 increase in employees hired and working outside Italy anda 569 decline inan increase of 53 employees hired in Italy.Employees hired in Italy were
40,192 (55.6%39,480 (50.1% of all Group employees), of. Of these,37,49335,929 were working in Italy,2,4803,381 outside Italy and219170 on board ofvessels. As compared to 2004, the 569vessels, with a 53 unitdecline in employees was due mainly to changes in consolidation (723 employees, due to the divestment of the water business, IP and technical services at Porto Marghera) offset in part by the positive balance of persons leaving their job and new hirings and net transfersincrease fromunconsolidated subsidiaries.2007.The process of improvement in the quality mix of employees continued in
20052008 with the hiring of2,0992,517 persons, of which727781, werehiredwithopen-endfixed-term contracts. A total of1,3721,736 persons were hired withthis type of contractopen-end and with apprenticeship contracts, most of them with university qualifications(800 persons of which 509 are engineers)(1,048 persons) and533650 persons with a high school diploma. During the year2,0272,549 persons left their job at Eni, of these1,4381,903 had an open-end contract and589646 had a fixed-term contract.Employees hired and working outside Italy
at December 31, 2005were32,066 (44.4%38,400 (49.9% of all Group employees), withana 2,965 persons increase, of2,479 persons due to the positive balance of new hiringsthese approximately 1,800 employees were hired withopen-end contracts and persons leaving their job in Saipem and Snamprogetti (2,639 employees) and the negative balance (160 persons) of persons leaving the job and new hirings with open-endfixed-term contracts in therestEngineering & Construction segment due mainly to new contracts in the Caspian area (Kazakhstan, Kashagan project) and Peru/Venezuela (drilling projects), and 1,642 persons in the Exploration & Production segment, mainly following the purchase of Burren and First Calgary Petroleums (1,150 persons). In theGroup.Gas & Power segment, the acquisition of Distrigas concerned 135 persons and in the Refining & Marketing segment, Agip España (850 persons) and Galp Energia were sold.
Employees at year end 2003
2004
2005
137
Employees at year end 2006
2007
2008
(units)
Exploration & Production 7,492 7,477 7,491 8,336 9,334 11,194 Gas & Power 12,982 12,843 12,324 12,074 11,582 11,389 Refining & Marketing 13,277 9,224 8,894 9,437 9,428 8,327 Petrochemicals 7,050 6,565 6,462 6,025 6,534 6,274 Oilfield Services Construction and Engineering 25,583 25,819 28,684 Engineering & Construction 30,902 33,111 35,629 Other activities 6,380 4,983 4,638 2,219 1,172 1,070 Corporate and financial companies 2,657 3,437 3,765 4,579 4,701 4,997 75,421 70,348 72,258 73,572 75,862 78,880 The table below sets forth Eni’s employees at December 31,
2003, 20042006, 2007 and20052008 in Italy and outside Italy:
2003
2004
2005
(units)
Exploration & Production Italy 4,555 4,539 4,510 Outside Italy 2,937 2,938 2,981 7,492 7,477 7,491 Gas & Power Italy 10,302 10,216 9,733 Outside Italy 2,680 2,627 2,591 12,982 12,843 12,324 Refining & Marketing Italy 6,882 6,879 6,680 Outside Italy 6,395 2,345 2,214 13,277 9,224 8,894 Petrochemicals Italy 5,585 5,237 5,164 Outside Italy 1,465 1,328 1,298 7,050 6,565 6,462 Oilfield Services Construction and Engineering Italy 5,314 5,580 5,799 Outside Italy 20,269 20,239 22,885 25,583 25,819 28,684 Other activities Italy 6,367 4,959 4,616 Outside Italy 13 24 22 6,380 4,983 4,638 Corporate and financial companies Italy 2,577 3,351 3,683 Outside Italy 80 86 82 2,657 3,437 3,765 Total Italy 41,582 40,761 40,185 Total Outside Italy 33,839 29,587 32,073 75,421 70,348 72,258 of which senior managers 1,733 1,764 1,748
2006
2007
2008
(units)
Exploration & Production Italy 5,273 5,535 5,771 Outside Italy 3,063 3,799 5,423 8,336 9,334 11,194 Gas & Power Italy 9,602 9,114 8,810 Outside Italy 2,472 2,468 2,579 12,074 11,582 11,389 Refining & Marketing Italy 7,196 7,101 6,641 Outside Italy 2,241 2,327 1,686 9,437 9,428 8,327 Petrochemicals Italy 4,948 5,476 5,230 Outside Italy 1,077 1,058 1,044 6,025 6,534 6,274 Engineering & Construction Italy 6,164 6,618 7,316 Outside Italy 24,738 26,493 28,313 30,902 33,111 35,629 Other activities Italy 2,219 1,172 1,070 Outside Italy - - - 2,219 1,172 1,070 Corporate and financial companies Italy 4,363 4,411 4,642 Outside Italy 216 290 355 4,579 4,701 4,997 Total Italy 39,765 39,427 39,480 Total Outside Italy 33,807 36,435 39,400 73,572 75,862 78,880 of which senior managers 1,603 1,585 1,658
Share Ownership
As of April 30,
2006,2009, thetotalcumulative number of shares owned by the Eni’s directors, statutory auditors andexecutive officers of Eni SpA as a Groupsenior managers, including the three Chief Operating Officers, was202,078242,769 equal to approximately0.005%0.006% of Eni’s share capital outstandingat December 31, 2005.as of the same data. In this time frame, no further options to purchase Eni shares were granted by the Company to those persons (see tables in the section "Stock Option Plans"). Eni issues only ordinary shares, each bearing one-vote right; therefore shares held byEni SpA directors, statutory auditors and executive officersthose persons have no different voting rights. The break-down of share ownership for each of those persons is provided below.138
Name Position Number of shares owned
Board of Directors - Roberto Poli Chairman 58,549 Paolo Scaroni CEO and COO of Eni - Alberto Clô Director - Paolo Andrea Colombo Director 1,650 Paolo Marchioni Director - Marco Reboa Director - Mario Resca Director - Pierluigi Scibetta Director - Francesco Taranto Director 500 Chief Executive Officers Claudio Descalzi Chief Operating Officer of the E&P Division 24,455 Domenico Dispenza Chief Operating Officer of the G&P Division 99,715 Angelo Caridi Chief Operating Officer of the R&M Division 40,595 Board of Statutory Auditors 1,000 Senior managers 16,305
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
As of May
25, 2006,4, 2009, theMinistry of Economy and Finance, Cassa Depositi e Prestiti SpA and Gruppo Banca Intesafollowing persons werethe only personsknown by Eni to own more than 2% of any class of Eni SpA’s voting securities. At such date, the total amount of Eni SpA’s voting securities owned by these shareholders was:
Title of Class Number of Shares Owned
Percent of Class
Ministry of Economy and Finance 813,443,277
20.31%
Cassa Depositi e Prestiti 400,288,338
10.00%
Banca Intesa 97,522,352
2.44%
Title of class Number of shares owned
Percent of class
Ministry of Economy and Finance 813,443,277
20.3
Cassa Depositi e Prestiti 400,288,338
10.0
BNP Paribas Group 93,822,428
2.3
The Ministry of Economy and Finance, in agreement with the Ministry of
Productive Activities,Economic Development, retains certain special powers over Eni. See "Item10.10 – Additional Information – Memorandum and Articles of Association – Limitations on Voting and Shareholdings – Special Powers of the State". For a discussion of the Eni share buy-back program see "Item 16E – Purchases ofequity securitiesEquity Securities by theissuerIssuer andaffiliated purchasers"Affiliated Purchasers". As ofJune 10, 2005May 4, 2009 there were15,700,02444,072,282 ADRs, each representingfivetwo Eni ordinary shares outstandingon the New York Stock Exchange,corresponding to1.96%2.2% of Eni’s share capital. See "Item 9 – The Offer and the Listing".
Related Party Transactions
In the ordinary course of its business, Eni enters into transactions concerning the exchange of goods, provision of services and financing with non consolidated subsidiaries and affiliates as well other companies owned or controlled by the Italian Government. All such transactions are conducted on an arm’s length basis and in the interest of Eni companies.
Amounts and types of trade and financial transactions with related parties and their impact on consolidated earnings and cash flow, and on the Group’s assets and financial condition are
describedreported in Note2637 to the Consolidated Financial Statements.
Item 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
See Item 18 – Financial Statements.
139
Legal Proceedings
Eni is a party to a number of civil actions and administrative arbitral and other judicial proceedings arising in the ordinary course of business. Based on information available to date, and taking into account
ofthe existing risk provisions, Eni believes that the foregoing will not have an adverse effect on Eni’s Consolidated Financial Statements.
FollowingThe following is a description of the most significant proceedings currentlypending; unlesspending. Unless otherwise indicated below, no provisions have been made for these legal proceedings as Eni believes that negative outcomes are not probable or because the amount of the provisioncan notcannot be estimated reliably.Environment
Eni SpACriminal proceedingsENI SPA
Subsidence.In 1999, the public prosecutorThe Court ofGela started an investigation in order to ascertain alleged soil and sea pollutionRovigo conducted investigations concerning a subsidence phenomenon allegedly caused by hydrocarbon exploration and extraction activities in thedischargeRavenna and North Adriatic area both on land and in the sea. Eni appointed an independent and interdisciplinary scientific commission, composed ofpollutantsprominent and highly qualified international experts of subsidence caused byEni’s Gela refinery. In November 2002, "Italia Nostra"hydrocarbon exploration and extraction activities, with theassociation "Amici della Terra" filed civil claims relatedaim of verifying the magnitude and effects and any actions appropriate tothisreduce or to neutralize any subsidence phenomenon in the area. This commission produced a study which excludes the possibility of any risk to human health or damage to the environment. The study also states that worldwide there are no instances of accidents of harm to public safety caused by subsidence induced by hydrocarbon production. It also shows that Eni employs the most advanced techniques for monitoring, measuring and controlling the soil. This proceeding is in the first level hearing stage. The Veneto Region, other local bodies andrequested the payment of damage claims fortwo private entities have been acting as plaintiffs. Eni was admitted as atotal of euro 15,050 million. In July 2003, the relevantdefendant. The Court decidedforthat thetransmission of the inquiries to the public prosecutor, recognizing a violation of Article 440 of the penal code (water and food substances corruption). Three environmental organizations act as plaintiffs and requested damage payment for euro 551 million. Two of these organizations are also acting against the Gela refinery.
In 2000, the public prosecutor of Gela started an investigation on alleged prohibited emissions from the refinery of Gela, which are purported to have had negative effects on the health of a number of citizens of Gela, and on a lack of declaration of such emissions in violation of Presidential Decree No. 203 of 1988. The investigation ended with an action for events that have occurred since 1997. The Municipality of Gela, the Province of Caltanissetta and others filed civil claims in thisproceedingand requested the payment of compensatory damages for a total of euro 878 million. The judgment of first degree beforemust be heard by the Court ofGela is pending.Ravenna.Alleged damage. In 2002, the public prosecutor of Gela
started ancommenced a criminal investigationin orderto ascertain allegedpollutiondamage caused by emissions of the Gela plant, owned by Polimeri Europa SpA, Syndial SpA(former(formerly EniChem SpA) and Raffineria di Gela SpA.Some local public entities,The judge for the preliminary hearing dismissed the accusation of adulteration of food products, while the proceeding for the other allegations regarding pollution and environmentalNGOsdamage remains underway. The trial ended in acquittal with regard to the general manager andlandowners are acting as plaintiffs. On January 17, 2005, a second inquiry phase aimed at ascertaining which sortofficer pro tempore ofemissions had eventually producedthealleged pollution caused byrefinery. The sentence of the Gela Tribunal stated that the charges were lacking factual basis.Alleged negligent fire in the refinery of
Gela, was completed. On February 3, 2006, the notice of the conclusion of preliminary investigations was filed conclusion of the preliminary inquiry.Gela. In June 2002, in connection with a fire
inat the refinery of Gela, a criminal investigation began concerningarson,alleged negligent fire, environmental crimes and crimes against naturalheritage. On May 12, 2004beauty. First degree proceedings ended with an acquittal sentence. In November 2007, thefirst hearing was held.public prosecutors of Gela and of Caltanissetta filed an appeal against this decision.Investigation of the quality of ground water in the area of the refinery of Gela.In 2002, the public prosecutor of Gela
startedcommenced apenalcriminal investigation concerning the refinery of Gela to ascertain the quality of ground water in the area of the refinery.The investigation concerns theEni is charged of having breached environmental rulesaboutconcerning the pollution of water and soil and of illegal disposal of liquid and solid waste materials.On November 7, 2003The preliminary hearing phase was closed for one employee who would stand trial, while the preliminary hearing phase is ongoing for other defendants. During the hearings the judgeforadmitted as plaintiffs three environmental associations.Alleged negligent fire (Priolo). The public prosecutor of Siracusa commenced an investigation regarding certain Eni managers who were previously in charge of conducting operations at the Priolo refinery (Eni divested this asset in 2002) to ascertain whether they acted with negligence in connection with a fire that occurred at the Priolo plants on April 30 and May 1-2, 2006. After preliminary investigations
accepted to continueand based on theinquiries as requested byoutcome of preliminary hearing the public prosecutor requested the opening of a proceeding against the mentioned managers for negligent behavior.Groundwater at the Priolo site. The Public Prosecutor of Siracusa (Sicily) has started an investigation in order to ascertain the
statelevel of contamination of therefinery’s storage tanksgroundwater at the Priolo site. The Company has been notified that a number of its executive officers are being investigated who were in charge at the time of the events subject to probe, including chief executive officers and plant general managers of thepresence of infiltrations of refinery productsCompany’s subsidiaries AgipPetroli SpA (now merged into thedeep water-bearing stratum, due to a breakage in some tanks. With a decision of November 3, 2003,parent company), Syndial and Polimeri Europa. Probes on technical issues are ongoing as required by theCourt for preliminary investigation, in agreement with a request ofProsecutor.ENIPOWER SPA
Alleged unauthorized waste management activities. In 2004, the public prosecutor ofGela, ordered the preventive seizure of 92 storage tanks, later reopened except for nine tanks that remained under seizure but do not prevent full operations at the refinery. The report filed by experts of the public prosecutor is currently under review.
In March 2002 the public prosecutor of Siracusa started an investigation concerning the activity of the refinery of Priolo for intentional pollution of water used for human consumption and requested a technical opinion, not yet concluded, to ascertain alleged infiltrations of refinery products into the deep water-bearing stratum used for human consumption purposes in the Priolo area. The proceeding is still in the preliminary investigation phase. A qualified company has been given the task to verify the cause, the origin and the extension of the alleged infiltration. For protective purposes, actions have been taken to: (i) create safety measures and clean-up all of the polluted area; (ii) reallocate wells for drinking water in an area farther from and higher than the industrial site; and (iii) install a purification system for drinkable water. With a decision of June 1, 2004 the seizure was lifted on the storage tanks that had been seized on April 17, 2003, except for five storage tanks that are still under seizure. The report of experts has been filed and its findings can be opposed to defendants.
In relation to the investigations concerning a subsidence phenomenon allegedly caused by hydrocarbon exploration, on May 21, 2004, following the decision of the Court ofRovigothe Nucleo Operativo Ecologico dei Carabinieri of Venice placed under preliminary seizure the Dosso degli Angeli, Angela/Angelina - Ravenna Mare Sud fields and the related wells and platforms. On June 10, 2004 the Court responded to the claim filed by Eni and lifted the seizure of the Angela/Angelina - Ravenna Mare Sud fields and related wells and platforms. On March 10, 2005, the Court of Cassation confirmed this decision. On February 5, 2003, a seizure had already been applied to the Naomi/Pandora platform, the Naomi 4 Dir, Naomi 2 Dir and 3 Dir - Pandora 2 Dir wells, and the underwater pipeline for the transportation of gas to the Casalborsetti facility. Eni believes it has always acted in full compliance with existing laws under the required authorizations. Taking account of the observations of the consultants of the Court of Rovigo on which the Public Prosecutor based his case, Eni constituted an independent and interdisciplinary scientific commission, chaired by Prof. Enzo Boschi, professor of seismology at the Università degli Studi di Bologna and chairman of the Istituto nazionale di geofisica e vulcanologia, composed of prominent and highly qualified international experts of subsidence caused by hydrocarbon exploration, with the aim of verifying the size and the effects and any appropriate actions to reduce or to neutralize any subsidence phenomenon in the Ravenna and North Adriatic area both on land and in the sea. The commission produced a study which denies the possibility for any risk for human health and for damage to the environment. It also states that no example is known anywhere in the world of accidents that caused harm to the public safety caused by subsidence induced by hydrocarbon production. The study also shows that Eni employs the most advanced techniques for the monitoring, measuring and control of the soil. On May 11, 2006 the Court of Rovigo accepted as plaintiffs the Veneto Region, the Ente Parco della Provincia del Po, the Ferrara Province, the Venice Province, the city of Venice, the city of Comacchio, the Rovigo Province and two private entities. Eni was accepted as a defendant. The Court of Rovigo rejected the accusation of environmental disaster and therefore transferred the proceeding to the Court of Adria, where the first hearing has been scheduled for October 31, 2006.
EniPower SpAIn autumn 2004 the Public Prosecutor of Rovigo startedcommenced an investigation for alleged crimes related to unauthorized waste management activities in Loreo relating to the samples ofthesoil usedinduring the construction of the newEniPower’sEniPower power station in Mantova.EniPowerThe prosecutor requested theclosingCEO of EniPower and the managing director of theinvestigation.
Polimeri Europa SpABeforeMantova plant at theCourttime ofGela one criminal action took place relating tothe allegedviolation on partcrime to stand trial.140
Air emissions. The public prosecutor of
EniMantova commenced an investigation against two managers ofenvironmental regulations on waste management concerningtheACNMantova plant in connection with air emissions by the new power plant.SYNDIAL SPA
Porto Torres. In March 2009, the Public Prosecutor of Sassari (Sardinia) resolved to commence a criminal trial against a number of executive officers and managing directors of companies engaging in petrochemicals operations at thedisposalsite ofFOK residue deriving fromPorto Torres, including thesteam cracking process.manager responsible for plant operations of the Company’s fully-owned subsidiary Syndial. Thedefendant was found guilty and a damage payment in first instance was required to be made to ancharge involves environmentalassociation acting as plaintiff. The sentence was passed to the civil court for the quantification of any furtherdamage andclaim. Eni appealedpoisoning of water and stuff destined to feeding. A preliminary hearing is scheduled in July 2009.Civil and administrative proceedings
SYNDIAL SPA (FORMER ENICHEM SPA)
Alleged pollution caused by theCourt’s decision.
Syndial SpA (Former EniChem SpA)
activity of the Mantova plant.In 1992, the Ministry of Environment summoned EniChem SpA (now Syndial SpA) andMontecatiniEdison SpA before the Court of Brescia. The Ministry requested, primarily,to requireenvironmental remediation for the alleged pollution caused by the activity of the Mantova plant from 1976 until 1990, and provisionally, in case there was no possibility to remediate,require them to paythe payment of environmental damages.The amount is going to be determined during the proceeding, but it will not be lower than euro 136 million, or determined by the judge as compensatory liquidation. EniChem acquired the Mantova plant in June 1989, as part of the Enimont deal. Edison SpA must hold Eni harmless or pay compensatory damage for any damage caused to third parties by plant operations before Montedison’s sale, even if the damage occurred later.Edison agreed on a settlementthatwith the Ministry whereby Edison quantified compensation for environmental damageto be paid covering also Syndial. The proceeding continues forfreeing from any obligation Syndial, which purchased thealleged damageplant inthe 1989-1990 period.
In 2000, the Public Prosecutor of Brindisi started1989. Parties are working through acriminal action against 68 persons who are employees or former employees of companies that owned and managed plants for the manufacture of dichloroethane, vinyl chloride monomer and vinyl polychloride from the early 1960s to date, some of which were managed by EniChem from 1983 to 1993. At the endpossible settlement of thepreliminary investigation phase,matter.Summon before the
Public Prosecutor askedCourt of Venice for environmental damages allegedly caused to thedismissallagoon of Venice by thecase in respect of the employees and the managers of EniChem. Plaintiffs presented oppositions while the prosecutor confirmed his request for dismissal of the case.Porto Marghera plants.On December
18,13, 2002, EniChem SpA (now Syndial SpA), jointly with Ambiente SpA (now mergedininto Syndial SpA) and European Vinyls Corporation Italia SpA, was summoned before the Court of Venice by the Province of Venice. The province requested compensation for environmental damages that were not quantified, allegedly caused to the lagoon of Venice by the Porto Marghera plants, which were already the subject of two previous criminal proceedings against employees andmanagers. In a related action, European Vinyls Corporationmanagers of the defendants. EVC Italia and Ineos presented an actionfor recourse against EniChem and Ambiente.to be indemnified by Eni’s Group companies in case the alleged pollution is proved. Therequests forenvironmental damage has been assessed by an independent consultant who filed his advice to be discussed in a hearing set in October 2009.Claim of environmental damages, allegedly caused by industrial activities in the area of Crotone, commenced by the President of the
ProvinceRegional Council ofVenice and that of EVC Italia to EniChem and Ambiente have not been quantified. The final judgment is pending.
On January 16, 2003 the Court of Siracusa issued personal cautionary measures against some employees of EniChem SpA and Polimeri Europa SpA. They are accused of illicit management relating to the production, disposal and treatment of liquid and solid waste materials and of obtaining illicit income. Polimeri Europa and EniChem, will act as plaintiffs. The collection of evidence effected before the hearing starts in Court has been concluded and preliminary investigations have ended with the confirmation of accusations. During the inquiries traces of mercury were found in the sea. The Public Prosecutor of Siracusa started an inquiry for ascertaining the conditions of sediments and marine fauna in the bay of Augusta. According to the plaintiffs, mercury would have been spilled into the sea and poisoned the marine fauna and therefore resulted in fetal malformations and abortions due to the consumption of contaminated seafood fished in this area. The chlorine soda plant, built in the late 50s was conferred to Syndial in 1989 when the Enimont joint venture was formed. It was therefore easy to prove that Eni holds no responsibility for the crimes it was accused of. On March 15, 2006 the judge for preliminary investigations decided the dismissal of the case against Syndial employees.Calabria. On April 14, 2003, the President of the Regional Council of Calabria, as Delegated Commissioner for Environmental Emergency in the Calabria Region,
startedcommenced an action against EniChem SpArelated(now Syndial SpA) with reference to environmental damages for approximately euro 129 million andto financial and non-financialdamages for euro 250 million (plus interest and compensation) in connection with loss of income and damage to property allegedly caused byPertusola Sud SpA (merged into EniChem)industrial activities in the area of Crotone.On June 6, 2003 EniChem appeared beforeIn addition, thecourt and requestedProvince of Crotone is acting as plaintiff, claiming damage for euro 300 million. With a decision in May 2007, therejectionCourt of Milan declared the invalidity of thedamages and, as counterclaim,power of proxy conferred to thepaymentDelegated Commissioner to act on behalf of thetotal costs forCalabria Region with theremediation works already underway.notice served to Syndial SpA and decided the liquidation of expenses born by the defendant. The Province of Crotoneentered the proceeding, claiming environmental damages for euro 300 million. Technical aspects concerning the role of the delegated commissioner make it necessary to decide onappealed thisaspect.decision. The second instance court accepted this appeal and Syndialwas notified onrepealed this determination. On October 21, 2004,of the request of the Calabria Region to appearSyndial was convened before the Court of Milanin orderby the Calabria Region which is seeking to obtain apreliminarycondemnation of Syndial for a damage payment,in anticipationshould the office of theexpirationDelegated Commissioner for Environmental Emergency in the Calabria Region cease during this proceeding. The Calabria Region requested a damage payment amounting to euro 800 million as already requested by the Delegated Commissioner for Environmental Emergency in the Calabria Region in the proceeding commenced in 2003. This new proceeding is in the preliminary investigation stage. This proceeding was unified with the one opened by the Ministry of thespecial officeEnvironment. Syndial filed a new project formanaging emergency eventsthe environmental remediation of the site to be approved by the Ministry and the body of public administrations and entities involved inCalabria.the matter that expressed a first partial consent in January 2009. TheRegion requested payments for over euro 800 million.
On February 28,environmental provision was consequently increased. In 2006, the Council of Ministers,theMinistry for the Environment and the Delegated Commissioner forenvironmental emergencyEnvironmental Emergency in the Calabria Region represented by the State Lawyer requested Syndial to appear before the Court of Milanin orderto obtain the ascertainment, quantification and payment of damage (in the form ofpollution ofland, air and water pollution and therefore of the general condition of the population) caused by the operations of Pertusola Sud SpA in themunicipalityMunicipality of Crotone and in surrounding municipalities. The local authoritiesrequestrequested the ascertainment of Syndial’s responsibility as concerns expenses borne and to be borne for the cleanup and reclamation of sites, currently quantified at euro 129 million. This proceeding concerns the samecompanymatter anddamagesdamage claim asindicatedthe proceedings commenced by the Delegated Commissioner for Environmental Emergency in theprevious paragraph.
In March 2004, Sitindustrie SpA, which in 1996 purchased a plant in Paderno Dugnano from Enirisorse (now merged into Syndial SpA), summoned Syndial SpA beforeCalabria Region and theCourt of Milan, requesting to establish the responsibility of Syndial SpA in the alleged pollution of soils around the plant and to require it to pay environmental damages necessary for remediation. Syndial opposed the claim based on an absence of the right of action of the plaintiff. The judge has not yet decided on Syndial’s opposition.
In October 2004, Sitindustrie SpA started an analogous proceedingCalabria Region against Syndialconcerning the plantin 2003 and 2004, respectively.Summon for
the manufacture of products in copper and copper alloy at Pieve Vergonte.
In May 2003 the Minister of the Environment summoned Syndial SpA before the Court of Turin and requestedalleged environmentaldamages for euro 2,396 million in relation to allegeddamage caused by DDT pollution in the LakeMaggioreMaggiore. With a temporarily executive decision dated July 3, 2008 the District Court of Turin sentenced the subsidiary Syndial SpA (former EniChem) to compensate for environmental damages that were allegedly caused when EniChem managed an industrial plant at Pieve Vergonte during the 1990-1996 period. Specifically, the Court sentenced Syndial to pay the Italian Ministry of the Environment compensation amounting to euro 1,833.5 million, plus legal interests that141
accrue from the filing of the decision. Syndial and Eni technical-legal consultants have considered the decision and the amount of the compensation to be without factual and legal basis and have concluded that a negative outcome of this proceeding is unlikely. Particularly, Eni and its subsidiary deem the amount of the environmental damage to be absolutely ill-founded as the sentence has been considered to lack sufficient elements to support such a material amount of the liability charged to Eni and its subsidiary with respect to the volume of pollutants ascertained by the Italian Environmental Minister. As no development of the proceeding has occurred since the filing of the Court’s decision, management has confirmed its stance of making no provision for this proceeding in accordance with accounting principles. Syndial will appeal against the ruling on Pieve Vergonte
plant. On March 1, 2006site of theState Lawyer in an attempt to settleDistrict Court of Turin as soon as possible. Another administrative proceeding is ongoing regarding a ministerial decree enacted by thecase proposedItalian Ministry for the Environment. The decree provides that Syndialpay 10%executes the following tasks: (i) the upgrading of a hydraulic barrier to protect the site; and (ii) the design of a project for the environmental remediation of Lake Maggiore. The Administrative Court of Piemonte rejected Syndial’s opposition against the outlined environmental measures requested by the Ministry of therequested damage correspondingEnvironment. However, the Court judged the prescriptions of the Ministry regarding the remediation of the site toeuro 239 million. This attemptbe plain findings of an environmental enquiry tosettle failed.ascertain the state of the lake. Syndial has filed an appeal against the decision of the Court before an upper degree body, also requesting suspension of the effectiveness of the decision. The appeal has been put on hold considering that a plan to ascertain the environmental status of the site is going to be approved by all interested parties, including the Ministry and local municipalities.
The municipalityAction commenced by the Municipality of Carrarastartedfor the remediation and reestablishment of previous environmental conditions at the Avenza site and payment of environmental damage. The Municipality of Carrara commenced an actionatbefore the Court of Genova requestingtoSyndial SpAthe remediationto remediate andreestablishment of therestore previous environmental conditions at the Avenza site and the payment of certain environmentaldamage.damage which cannot be cleaned up as well as further damages of various types (e.g. damage to the natural beauty of this site). This request is related to an accident that occurred in 1984, as a consequence of which EniChem Agricoltura SpA (later merged into Syndial SpA), at the time owner of the site,hadcarried out safety and remediation works. The Ministry of the Environment joined the action and requestedtheenvironmental damage payment – from a minimum of euro 53.5 million to a maximum of euro78.593.3 million – to be broken down among the various companies thatmanagedran the plant in the past.Previous managers includeSyndialcalled into the action as a guarantor,summoned Rumianca SpA, Sir Finanziaria SpA and Sogemo SpA, who ran the plant in previous years, in order to be guaranteed. A report produced by an independent expert appointed by the judge was filed with the Court. The findings of this report quantify the residual environmental damage at euro 15 million. With a sentence of March 2008, the Court of Genova rejected all claims made by the Municipality of Carrara and the Ministry of environment. Both plaintiffs filed an appeal against this decision in June 2008, requesting to all defendants cumulative damage amounting to euro 189.9 million. Syndial filed in the appeal hearing, disputing the plaintiffs’ claims.Ministry for the Environment Augusta harbor. The Italian Ministry for the Environment with various administrative acts ordered companies running plants in the petrochemical site of Priolo to perform safety and environmental remediation works in the Augusta harbor. Companies involved include Eni subsidiaries Polimeri Europa and Syndial. Pollution has been detected in this area primarily due to a high mercury concentration which is allegedly attributed to the industrial activity of the Priolo petrochemical site. Polimeri Europa opposed said administrative actions, objecting in particular to the way in which remediation works have been designed and information on concentration of pollutants has been gathered. The Regional Administrative Court of Catania with its decision of July 2007 annulled the decision made by the Service Conference of the Ministry of the Environment concerning Priolo and the Augusta harbor. The Ministry and the municipalities of Augusta and Melilli filed a claim with an Administrative Court of the Sicily Region which accepted the claim. In January 2008 the Regional Court of Catania accepted two further claims on this matter, remitting to the European Union Court of Justice the correct application of the debated community principle on the matter of environmental responsibility. In June 2008 the Ministry for the Environment and the Municipalities of Melilli and Augusta filed and appeal against the decision of the Regional Court of Catania with the Administrative Justice Council. Syndial challenged the administrative acts of December 20, 2007 and March 6, 2008, also requesting the Court of Justice of the EU to decide on the correct application of the debated community principle. A review of the issue made by an independent consultant has been filed showing evidence supporting the thesis of the plaintiffs. The proceedings are still pending before the Administrative Court of Lazio.
ENI SPA
Reorganization procedure of the airlines companies Volare Group, Volare Airlines and Air Europe. On March 2009 Eni was notified a bankruptcy claw-back as part of a reorganization procedure filed by the airlines companies Volare Group, Volare Airlines and Air Europe which commenced under the provisions of Ministry of Production Activities, on November 30, 2004. The request regarded the override of all the payments made by those entities to Eni and its subsidiary Sofid in the year previous to the insolvency declaration from November 30, 2003 to November 29, 2004, for a total estimated amount of euro 46 million.142
Other judicial or arbitration proceedings
SYNDIAL SPA (FORMER ENICHEM SPA)
Serfactoring: disposal of receivables. In 1991, Agrifactoring SpA commenced proceedings against Serfactoring SpA, a company 49% owned by Sofid SpA and which is controlled by Eni SpA. Thejudgeclaim relates to an amount receivable of euro 182 million for fertilizer sales (plus interest and compensation for inflation), originally owed by Federconsorzi to EniChem Agricoltura SpA (later Agricoltura SpA - in liquidation), and Terni Industrie Chimiche SpA (merged into Agricoltura SpA - in liquidation), that has been merged into EniChem SpA (now Syndial SpA). Such receivables were transferred by Agricoltura and Terni Industrie Chimiche to Serfactoring, which appointed Agrifactoring as its agent to collect payments. Agrifactoring guaranteed to pay the amount of such receivables to Serfactoring, regardless of whether or not it received payment on the due date. Following payment by Agrifactoring to Serfactoring, Agrifactoring was placed in liquidation and the liquidator of Agrifactoring commenced proceedings in 1991 against Serfactoring to recover such payments (equal to euro 182 million) made to Serfactoring based on the claim that the foregoing guarantee became invalid when Federconsorzi was itself placed in liquidation. Agricoltura and Terni Industrie Chimiche brought counterclaims against Agrifactoring (in liquidation) for damages amounting to euro 97 million relating to acts carried out by Agrifactoring SpA as agent. The amount of these counterclaims has subsequently been reduced to euro 46 million following partial payment of the original receivables by the liquidator of Federconsorzi and various setoffs. These proceedings, which have all been joined, were decided with a partial judgment, deposited on February 24, 2004; the request of Agrifactoring has been rejected and the company has been ordered to pay the sum requestedan expert reportby Serfactoring and damages in favor of Agricoltura, to be determined following the decision. A final verdict on this issue is pending. Agrifactoring appealed this partial decision, requesting in particular the annulment of the first step judgment, the reimbursement of euro 180 million from Serfactoring along with the rejection of all its claims and the payment of all proceeding expenses. On June 2008, the trial was decided with a partial judgment that, reforming the previous judgment of the Court of Rome, granted the requests of Agrifactoring and condemned Serfactoring to reimburse to Agrifactoring in liquidation the amount of the receivables due from Federconsorzi and not collected as Federconsorzi went bankrupt. The Court resolved to appoint an independent accounting consultant to quantify the amount paid by Agrifactoring to Serfactoring and amounts paid by Federconsorzi to Agrifactoring. The hearing has been rescheduled to February 2010 in order to allow the Court to review the independent accounting consultant’s advice. Syndial and Serfactoring have appealed the sentence with the Supreme Court of Appeal. Agrifactoring has presented a counter-recourse. Eni accrued a provision with respect to this proceeding.ENI SPA
Fintermica. Fintermica presented a claim against Eni concerning the management of the Jacorossi joint venture with reference to an alleged abuse of key roles played by Eni SpA in the joint venture, thus damaging the other partner’s interest and the alleged dilatory behavior of Syndial in selling its interest in the joint venture to Fintermica. The parties decided to commence arbitration on the matter. The examining phase is ongoing and an independent assessment of this matter is being executed. The Board of Arbitrators issued a decision on November 26, 2008 condemning Eni and Syndial to compensate Fintermica for the damages suffered amounting to euro 5 million including monetary revaluation and accrued interest as of April 3, 2001.SNAMPROGETTI SPA
CEPAV Uno and CEPAV Due. Eni holds interests in the CEPAV Uno (50.36%) and CEPAV Due (52%) consortia that in 1991 signed two contracts with TAV SpA for the construction of two railway tracks for high speed/high capacity trains from Milan to Bologna (under construction) and from Milan to Verona (in the design phase). With regard to the project for the construction of the line from Milan to Bologna, an Addendum to the contract between CEPAV Uno and TAV was signed on June 27, 2003, redefining certain terms and conditions of the contract. Subsequently, the CEPAV Uno consortium requested a time extension for the completion of works and a claim amounting to euro 800 million. CEPAV Uno and TAV failed to solve this dispute amicably. CEPAV Uno opened an arbitration procedure as provided for under terms of the contract on April 27, 2006. With regard to the project for the construction of a high-speed railway from Milan to Verona, in December 2004, CEPAV Due presented the final project, prepared in accordance with Law No. 443/2001 on the basis of the preliminary project approved by an Italian governmental authority (CIPE). As concerns the arbitration procedure requested by CEPAV Due against TAV for the recognition of costs incurred by the Consortium in the 1991-2000 ten-year period plus suffered damage, in January 2007, the arbitration committee determined the Consortium’s right to recover the costs incurred in connection with the design activities performed. A technical independent survey is underway to assess the amount of compensation to be awarded to the Consortium as requested by the arbitration committee. TAV appealed the arbitration committee’s determination. In April 2007, the Consortium filed with the second instance court of Rome an appeal against Law Decree No. 7 of December 31, 2007, that revoked the concessions awarded to TAV resulting in the annulment of arrangements signed between TAV and the Consortium to build the high-speed railway section from Milan to Verona. The European Court of Justice was requested to judge on this matter. In the meantime, TAV decided to not request the reimbursement of advances paid to the Consortium. Subsequently, Law 133/2008 re-established the concessions awarded to TAV resulting in the continuation of the arrangements between the consortium CEPAV Due and a new entity in charge of managing the Italian railway system.143
Antitrust, EU Proceedings, Actions of the Authority for Electricity and Gas and of Other Regulatory Authorities
Antitrust
ENI SPA
Abuse of dominant position of Snam alleged by the Italian Antitrust Authority. In March 1999, the Italian Antitrust Authority concluded its investigation started in 1997 and: (i) found that Snam SpA (merged in Eni SpA in 2002) abused its dominant position in the market for the transportation and primary distribution of natural gas relating to the transportation and distribution tariffs applied to third parties and the access of third parties to infrastructure; (ii) fined Snam for euro 2 million; and (iii) ordered a review of the practices relating to such abuses. Snam believes it has complied with existing legislation and appealed the decision with the Regional Administrative Court of Lazio requesting its suspension. On May 26, 1999, stating that these decisions are against Law No. 9/1991 and the European Directive 98/30/EC, this Court granted the suspension of the decision. The Authority did not appeal this decision. The decision on the merit of this dispute is still pending before the same Administrative Court.Formal assessment commenced by the Commission of the European Communities for the evaluation of alleged participation to activities limiting competition in the field of paraffin. On April 28, 2005, the Commission of the European Communities commenced a formal assessment to evaluate the alleged participation of Eni and its subsidiaries in activities limiting competition in the field of paraffin. The alleged violation of competition is for: (i) the determination of and increase in prices; (ii) the subdivision of customers; and (iii) exchange of trade secrets, such as production capacity and sales volumes. After, the Commission requested information on Eni’s activities in the field of paraffin and certain documentation acquired by the Commission during an inspection. Eni filed the requested information. On October 2008, the Commission of the European Communities issued the final decision on the matter condemning Eni to the payment of a sanction amounting to euro 29,120,000. Eni has filed for recourse against this decision that is fully covered by the accrued risk provision.
Ascertainment by the European Commission of the level of competition in the European natural gas market. As part of its activities to ascertain the level of competition in the European natural gas market, with Decision No. C (2006)1920/1 of May 5, 2006, the European Commission informed Eni that the Group companies were subject to an inquiry under Article 20, paragraph 4 of the European Regulation No. 1/2003 of the Council in order to verify the possible existence of any business conducts breaching European rules in terms of competition and intended to prevent access to the Italian natural gas wholesale market and to subdivide the market among few operators in the activity of supply and transport of natural gas. Similar actions have been performed by the Commission also against the main operators in natural gas in Germany, France, Austria and Belgium. In April 2007, the European Commission made public its decision to start a further stage of inquiry, as the elements collected supported its suspicion that Eni adopted behaviors leading to "capacity hoarding and strategic, in its view, underinvestment in the transmission system leading to the foreclosure of competitors and harm for competition and customers in one or more supply markets in Italy". On March 9, 2009 Eni received a Statement of Objections related to a proceeding under Article No. 82 of the EU Treaty and Article No. 54 of the SEE agreement with reference to an alleged unjustifiable refusal of access to the TAG and TENP/Transitgas gas pipelines, that are interconnected with the Italian gas transport system through actions intended to "capacity hoarding, capacity degradation and strategic limitation of investment" with the effect of "hindering the development of a real competition in the downstream market and [...] harming the consumers". The European Commission envisages the possible imposition of a fine and of structural remedies. The Company is currently assessing the reasoning underlying the Commission’s objections in order to ascertain
what damagewhether the challenged actions are supported by evidence and may be qualified as infringement of the European competition rules. The Company will file its defensive memories within the proceeding. In addition, and following the aforementioned assessment, the Company may consider whether to voluntarily file a set of remedies to settle the proceeding as provided by Article No. 9 of the European Regulation No. 1/2003. Taking into account the numerous elements to be considered in determining the amount of the fine, the complex checks to carry out with respect to the Statement of Objections, and also the circumstance that the Commission’s approval of the possible remedies, presented by Eni pursuant to European Regulation No. 1/2003, would settle the matter without imposing a fine, management believes that the liability is contingent upon the future events described and cannot be measured with reasonable reliability.TTPC. In April 2006, Eni filed a claim before the Regional Administrative Court of Lazio against the decision of the Italian Antitrust Authority of February 15, 2006 stating that Eni’s behavior pertaining to implementations of plans for the upgrading of the TTPC pipeline for importing natural gas from Algeria represented an abuse of dominant position under Article 82 of the European Treaty and fined Eni. The initial fine amounted to euro 390 million and was reduced to euro 290 million in consideration of Eni’s commitment to perform actions favoring competition including the upgrade of the gasline. Eni accrued a provision with respect to this proceeding. With a decision filed on November 29, 2006, the Regional Administrative Court of Lazio partially accepted Eni’s claim, annulling such part of the Authority’s decision where the fine was quantified. Eni is waiting for the filing of the motivations of the Court decision to ascertain the impact of said decision. Pending this development, the payment of the fine has been
remediatedvoluntarily suspended. In 2007, the Regional Administrative Court of Lazio accepted in part Eni’s claim andwhat remainscancelled the quantification of the fine based on the Antitrust Authority’s inadequate evaluation of the144
circumstances presented by Eni. Eni filed an appeal with the Council of State, as did the Antitrust Authority and TTPC. Pending the final outcome, Eni awaits for the determination of the amount of the fine to be
cleaned up afterpaid.Italian natural gas market. On May 7, 2009, the
interventionsItalian Antitrust Authority started a preliminary investigation against the Company and its fully-owned subsidiary Italgas and other operators engaging in the gas retail market in Italy. The investigation targets an alleged abuse of dominant position in the gas retail market in Italy associated with commercial practices intended to make it difficult for retail clients to change the supplier and the retrieval of data on volumes.POLIMERI EUROPA SPA AND SYNDIAL SPA
Inquiries in relation to alleged anti-competitive agreements in the area of elastomers. In December 2002, inquiries were commenced concerning alleged anti-competitive agreements in the field of elastomers. These inquiries were commenced concurrently byAgricolturaEuropean andcontinuedU.S. authorities. At present, proceedings are pending before the European Commission regarding the CR and NBR products. In March 2007, the Commission sent to Eni, Polimeri Europa and Syndial a statement of objections, thus opening the second phase of this proceeding. In December 2007, the European Commission dismissed Syndial’s position on CR and imposed on Eni and Polimeri a fine amounting to euro 132.16 million. The two companies have filed an appeal with the EU Court of First Instance against this decision and, at the same time, paid the fine in March 2008. Investigations relating to other elastomers products resulted in the ascertainment of Eni having infringed European competition laws in the field of synthetic rubber production (BR and ESBR). On November 29, 2006, the Commission fined Eni and its subsidiary Polimeri Europa for an amount of euro 272.25 million. Eni and its subsidiary filed claims against this decision before the European Court of First Instance in February 2007. The Commission filed a counter appeal. Pending the outcome, Polimeri Europa presented a bank guarantee for euro 200 million and paid the residual amount of the fine. In August 2007, Eni submitted a request for a negative ascertainment with the Court of Milan aimed at proving the non-existence of alleged damages suffered byEniChem/Syndial.tire manufacturers. With regard to NBR, an inquiry is underway also in the U.S., where class actions have also been commenced. On the federal level, the class action was abandoned by the plaintiffs. However, the federal judge has yet to acknowledge this abandonment. With regard to other products under investigation in the U.S., settlements were reached with both relevant U.S. antitrust authorities and the plaintiffs acting through a class action. Eni recorded a provision for these matters.Regulation
TOSCANA ENERGIA CLIENTI SPA
Eni’s subsidiary Toscana Energia Clienti SpA started an action against a customer regarding alleged lack of measurement of gas consumption due to inability to access a measurement facility at the customer’s site, also in connection with the application of Resolution No. 229/2001 of the Italian Authority for Electricity and Gas. This customer has annual consumption in excess of 5,000 CM. Theexpert report quantifiesdefendant has filed a counter-claim in relation to this proceeding. In thedamage stillhearing of November 12, 2008 the judge resolved to partially accept the Eni’s subsidiary reasons and to limit compensation to beremediatedpaid to the defendant to only euro 1,475 with interests amounting to euro 90. The sum was paid while the defendant is evaluating the opportunity to appeal the sentence.DISTRIBUIDORA DE GAS CUYANA SA
Formal investigation of the agency entrusted with the regulations for the natural gas market ineuro 15 million.
Argentina.Enargas started a formal investigation on some operators, among them Distribuidora de Gas Cuyana SA, a company controlled by Eni. Enargas stated that the company improperly applied conversion factors to volumes of natural gas invoiced to customers and requested the company to apply the conversion factors imposed by local regulations from the date of the default notification (March 31, 2004) without prejudice to any damage payment and fines that may be decided after closing the investigation. In April 2004 the company filed a defensive memorandum. On April 28, 2006, the company formally requested the acquisition of documents from Enargas in order to have access to the documents on which the allegations are based.Tax Proceedings
ENI SPA
Eni SpAWith a decree dated December 6, 2000 the Lombardia Region decided that natural gas used for electricity generation is subject to an additional regional excise tax in relation to which Snam SpA (merged into Eni SpA in 2002) should substituteDispute for thetax authorities in its collection from customers. Given interpretive uncertainties, the same decree provides the terms within which distributing companies are expected to pay this excise tax without paying any penalty. Snam SpA and the other distributing companies of Eni believe that natural gas used for electricity generation is not subject to this additional excise tax. For this reason, an official interpretation was requested from the Ministry of Finance and Economy. With a decision of May 29, 2001, the Ministry confirmed that this additional excise tax cannot be applied. The Region decided not to revoke its decree and Snam took appropriate legal action. On the basis of action carried out by Snam, the Council of State decided on March 18, 2002 that the jurisdiction of the Administrative court did not apply to this case. In case the Region should request payment, Eni will challenge this request in the relevant Court. The Lombardia Region decided with regional Law No. 27/2001 that no additional tax is due from January 1, 2002 onwards, but still requested theomitted payment of theadditional taxes due before that date.municipal tax related to oil platforms located in territorial waters in the Adriatic Sea.With a formal assessment presented by the
municipalityMunicipality of Pineto (Teramo),in December 1999, Eni SpA has been accused of not having paid a municipal tax on real estate for the period from 1993 to 1998 on four oil platforms located in the Adriatic Seaterritorialwhich constitute municipal waters in front of the coast of Pineto. Enihas beenwas requested to pay a total of approximately euro 17 millionalsoincluding interest and afine for lacking declaration.fine. Eni filed a claim against this request stating that the sea where the platforms are located is not part of the municipal territory and the tax applicationof the tax atas requested by the municipality lacked objective fundamentals. The claim has been accepted in the first two degrees of judgment at the Provincial and Regional Tax Commissions.ButHowever, the Courtof Cassation cancelledoverturned both judgments, declaring that a municipality can consider requesting a tax on real estatealsoin the sea facing its territory and withathe decision of February21,2005 sent the proceeding to another section of the Regional Tax Commission in order145
to judge on the
other reason opposed by Eni.matters of the proceeding. This commission nominated a Board of Consultants, in order to make all the accounting/technical verifications necessary for the judgment. On December 28, 2005, themunicipalityMunicipality of Pineto presented the same request for the same platforms for the years 1999 to 2004. The total amount requestedtofrom Eni isofeuro 24million.million including interest and penalties. Eni filed a claim against thisrequest.request which was accepted by the first degree judge with a decision of December 4, 2007. Similar formal assessments related to Eni oil and gas offshore platforms were presented by the Municipalities of Falconara Marittima and Pedaso. The total amounts of those claims were approximately euro 6 million. The company filed appeal or is planning to appeal.
Agip KarachaganakAGIP KARACHAGANAK BV
Claims concerning unpaid taxes and relevant payment of interest and penalties. In July 2004, relevant KazakhauthoritiesAuthorities informed Agip Karachaganak BV and Agip Karachaganak Petroleum Operating Co BV, shareholder and operator of the Karachaganak contract, respectively, on the final outcome ofthe tax audits performed for fiscal years2000 to2003. Claims by the Kazakh authorities concern unpaid taxes for a total of $43 million, net to Eni, and the anticipated offsetting of VAT credits for $140 million, net to Eni, as well as the payment of interest and penalties for a total of $128 million.2003 tax audits. Both companiesfiledcounterclaimed against the assessment and acounterclaim. With anpreliminary agreement was reached on November 18,2004,2004. Final assessments have now been issued by theoriginal amounts were reduced to $26Kazakh Authorities, and payment has been made. The final amount assessed and paid was $39 million net toEni that includesEni; this figure included taxessurchargesand interest.MeetingsThe companies continueregarding residual matters. Eni recorded a specific provision for this matter.
Snam Rete Gas SpAWith Regional Law No. 2 of March 26, 2002,to dispute theSicilia Region introduced an environmental tax upon the owners of primary pipelines in Sicily (i.e. pipelines operating at a maximum pressure of over 24 bar). The tax was payable as of April 2002. In order to protect its interests, Snam Rete Gas filed a claim with the European Commission, aimed at opening a proceeding against the Italian Governmentassessments andthe Tax Commission of Palermo. The Authority for Electricity and Gas, although acknowledging that the tax burden is an operating cost for the transport activity, subjected inclusion of the environment tax in tariffs to the final ruling on its legitimacy by relevant authorities. With the ruling of December 20, 2002, the Court judged the tax at variance with European rules. In December 2002, Snam Rete Gas suspended payments based on the above Court ruling. Payments effected until November 2002 totalled euro 86.1 million. In January 2003 the Sicilia Region presented an appeal to the Council of State against the ruling of the Regional Administrative Court of Lombardia for the part that states the variance of the regional law with European rules. On December 16, 2003, the European Commission judged the tax instituted by the Republic of Italy, through the Sicilia Region, to be in contrast with European rules and with the cooperation agreement between the European Economic Community and the Peoples’ Democratic Republic of Algeria; the European Commission also stated that such environmental tax is in contrast with the common customs tariff because it modifies the equality of customs expenses on commodities imported from third countries and could create a deviation in trade with such countries and a distortion in access and competition rules. The Commission with its opinion presented on July 7, 2004 formally requested Italy to cancel the tax. The Italian Government must conform within two months from the reception of the opinion. As it did not conform, on December 20, 2004 the European Commission passed the case to the Court of Justice requesting a ruling. With a decision dated January 5, 2004, and confirmed on March 4, 2005 by the Regional Tax Commission, the Provincial Tax Commission of Palermo declared the environmental tax of the Sicilia Region illegitimate because it is in contrast with European rules and therefore accepted Snam Rete Gas’s claim for the repayment of the first installment of euro 10.8 million, already paid in April 2002 to the Sicilia Region. On May 4, 2004, the Sicilia Region repaid the first installment. As for the seven remaining installments paid after April 2002 (euro 75.3 million) the Provincial Tax Commission of Palermo with decision of January 5, 2005 confirmed the illegitimacy of the tax condemning the Region to repay the amounts paid and interest accrued to Snam Rete Gas. The Sicilia Region presented recourse to the Regional Tax Commission at Palermo, a hearing has been scheduled for April 5, 2006. On November 3, 2003, the Sicilia Region, following the procedure presented by Snam Rete Gas concerning the yearly liquidation of the tax for 2002, requested liquidation of tax, fines and interest (euro 14.2 million) relating to the unpaid December 2002 installment. On December 30, 2003 Snam Rete Gas filed a claim with request of suspension of payment as a result of the liquidation notice received from the Sicilia Region with the Provincial Tax Commission of Palermo, that, on June 25, 2004 accepted Snam Rete Gas’s claim and decided the cancellation of the liquidation notice served by the Sicilia Region, confirmed by the Regional Tax Commission on March 7, 2005. In any case Snam Rete Gas will not have to pay the tax: if the tax is considered illegitimate in other Courts of law, the company will havereserve the right tothe restitution of the money. If, to the contrary, the tax is considered legitimate by the other Courts, the Authority for Electricity and Gas will include the tax (Decision No. 146/2002 and No. 71/2003) in tariff with automatic and retroactive effects.
challenge their findings further.
Other judicial or arbitration proceedingsCourt Inquiries
Syndial SpA (former EniChem SpA) - Serfactoring SpA
EniPower.In1991, Agrifactoring SpA commenced proceedings against Serfactoring SpA, a company 49% owned by Sofid SpA which is controlled by Eni SpA. The claim relates to an amount receivable of euro 182 million for fertilizer sales (plus interest and compensation for inflation), originally owed by Federconsorzi to EniChem Agricoltura SpA (later Agricoltura SpA - in liquidation), and Terni Industrie Chimiche SpA (merged into Agricoltura SpA - in liquidation), that has been merged into EniChem SpA (now Syndial SpA). Such receivables were transferred by Agricoltura and Terni Industrie Chimiche to Serfactoring, which appointed Agrifactoring as its agent to collect payments. Agrifactoring guaranteed to pay the amount of such receivables to Serfactoring, regardless of whether or not it received payment at the due date. Following payment by Agrifactoring to Serfactoring, Agrifactoring was placed in liquidation and the liquidator of Agrifactoring commenced proceedings in 1991 against Serfactoring to recover such payments (equal to euro 182 million) made to Serfactoring based on the claim that the foregoing guarantee became invalid when Federconsorzi was itself placed in liquidation. Agricoltura and Terni Industrie Chimiche brought counterclaims against Agrifactoring (in liquidation) for damages amounting to euro 97 million relating to acts carried out by Agrifactoring SpA as agent. The amount of these counterclaims has subsequently been reduced to euro 46 million following partial payment of the original receivables by the liquidator of Federconsorzi and various setoffs. These proceedings, which have all been joined, were decided with a partial judgment, deposited on February 24, 2004: the request of Agrifactoring has been rejected and the company has been ordered to pay the sum requested by Serfactoring and damages in favor of Agricoltura, to be determined following the decision. Agrifactoring appealed against this partial decision, requesting in particular the annulment of the first step judgement, the reimbursement of the euro 180 million amount from Serfactoring along with the rejection of all its claims and the payment of all expense of the proceeding. The appeal pending was set to be discussed in a hearing set for March 16, 2007 but was rescheduled for October 27, 2006 upon request of Agrifactoring. The judge of the Court of Rome, responsible for the determination of the amount of damages to be paid to Serfactoring and Agricoltura decided on May 18, 2005 to suspend this determination until the publication of the decision of the Court of Appeals, in accordance with Article 295 of the Code of civil procedure. Against this suspension Serfactoring and Syndial requested to the Court of Cassation the cancellation of the suspension and the return of the case to its original court.
Syndial SpA (former EniChem SpA)In 2002, EniChem SpA was summoned by ICR Intermedi Chimici di Ravenna Srl before the Court of Milan in relation to a breach of a preliminary agreement for the purchase of an industrial area in Ravenna. ICR requested payment of compensatory damages for approximately euro 46 million, of which euro 3 million are compensatory damages and euro 43 million are for loss of profits. DuringJune 2004, thepreliminary inquiry was completed. With a judgment of October 11, 2005 the Court rejected ICR’s request and order that ICR pay all expenses. ICR filed a claim against this decision.
Antitrust, EU Proceedings, Actions of the Authority for Electricity and Gas and of Other Regulatory Authorities
Eni SpAIn March 1999, the Antitrust Authority concluded its investigation started in 1997 and: (i) verified that Snam SpA (merged in Eni SpA in 2002) abused its dominant position in the market for the transportation and primary distribution of natural gas relating to the transportation and distribution tariffs applied to third parties and the access of third parties to infrastructure; (ii) fined Snam euro 2 million; and (iii) ordered a review of these practices relating to such abuses. Snam believes it has complied with existing legislation and appealed the decision with the Regional Administrative Court of Lazio requesting its suspension. On May 26, 1999, stating that these decisions are against Law No. 9/1991 and the European Directive 98/30/EC, this Court granted the suspension of the decision. The Antitrust Authority did not appeal this decision. The decision on this dispute is still pending.
With a decision of December 9, 2004, the Italian Antitrust Authority started an inquiry on the distribution of jet fuel against six Italian companies, including Eni and some of its subsidiaries, that store and load jet fuel in the Rome Fiumicino, Milan Linate and Milan Malpensa airports. The inquiry intends to ascertain the existence of alleged limitations to competition as oil companies would agree to divide among themselves the supplies to airlines. On December 22, 2005, the Authority notified the preliminary results of the inquiry concerning: (i) information flows to oil companies related to the functioning of shared storage and uploading companies; (ii) barriers to the entrance of new competitors; and (iii) the price of jet fuel is higher than on other European markets. On June 20, 2006, the Antitrust notified Eni the final decision of this proceeding and fined Eni by an amount of euro 117 million. The Antitrust fined other oil companies involved in the matter. Eni is evaluating this decision in order to file a claim against it decision before an administrative court.
On April 28, 2005 the Commission of the European Communities started a formal assessment to evaluate the alleged participation of Eni and its subsidiaries to activities limiting competition in the field of paraffin. The alleged violation of competition would have consisted in: (i) the determination of and increase in prices; (ii) the subdivision of customers; and (iii) exchange of trade secrets, such as production capacity and sales volumes. On November 3, the Commission requested information on Eni’s activities in the field of paraffins. On November 29, 2005 Eni filed the requested information. On April 21, 2006 the Antitrust Authority requested information on the processing of raw paraffin, which Eni supplied in a letter dated May 25, 2006.
The Department of Justice of the United States of America - Antitrust Division, notified Eni Petroleum Co Inc of a subpoena requesting information and documents relating to activities in the field of wax to be filed before June 20, 2005. The Company informed the department that it does not produce nor import wax in the United States of America.
Polimeri Europa SpA and Syndial SpAIn December 2002, inquiries were commenced concerning alleged anti-competitive agreements in the area of elastomers. These inquiries were commenced concurrently by European and U.S. authorities. The first product under scrutiny was EP(D)M: the European Commission submitted to inspection the manufacturing companies of that product, among which Polimeri Europa SpA and Syndial and requested information from those two companies and to their controlling company, Eni SpA. After the inquiries the Commission decided to open a procedure for violation of competition laws and notified Eni, Polimeri Europa and Syndial the relevant charges to that effect on March 8, 2005. At a hearing held on July 27, 2005 the two companies presented memoranda and confirmed their position. The parties await for a decision of the Commission.
EP(D)M manufacture is also under scrutiny in the United States, where the Department of Justice of San Francisco requested information and documents to Polimeri Europa Americas Inc, a U.S. subsidiary of Polimeri Europa and to its deputy chairman and sales manager. Class actions were filed claiming damages in relation to the alleged violation. In July 2005 Syndial signed a settlement agreement for the civil class action which entails the payment of approximately $3.2 million, approved by the federal court.
The investigation was also extended to the following products: NBR, CR, BR, SSBR and SBR.
The European Commission started an investigation regarding BR, SBR, SSBR. On January 26, 2005 the Commission dropped the charges in relation to SSBR, while for the other two products the Commission started an infraction procedure by notifying Eni, Polimeri Europa and Syndial the relevant charges. The companies presented a written memorandum and the Commission decided to open an inquiry, as a consequence of which the Commission sent a new description of the charges. The companies are preparing a new memorandum.
With regard to NBR an inquiry is underway in Europe and the USA, where class actions also have been started. The class action at federal level was abandoned by the plaintiffs. The federal judge acknowledged this abandonment.
With regard to CR, as part of an investigation carried out in the USA, Syndial entered into a plea agreement with the Department of Justice pursuant to which Syndial would agree to pay a fine of $9 million, while the Department of Justice would agree that it will not bring further criminal charges against Syndial or against its affiliate companies. On June 27, 2005 the plea agreement was approved. For CR the civil class action was closed with a settlement agreement approved by the federal judge on July 8, 2005 whereby the company will pay $5 million. The European Commission requested Eni, Polimeri Europa and Syndial to provide information about CR. The two companies decided to cooperate with the Commission.
Eni recorded a provision for these matters.
Stoccaggi Gas Italia SpAWith Decision No. 26 of February 27, 2002, the Authority for Electricity and Gas determined tariff criteria for modulation, mineral and strategic storage services for the period starting on April 1, 2002 until March 31, 2006 and effective retroactively from June 21, 2000. On March 18, 2002 Stoccaggi Gas Italia SpA (Stogit) filed its proposal of tariff for modulation, mineral and strategic storage for the first regulated period. With Decision No. 49 of March 26, 2002, the Authority for Electricity and Gas repealed Stogit’s proposal and defined tariffs for the first regulated period. Stogit applied the tariff determined by the two decisions, but filed an appeal against both decisions with the Regional Administrative Court of Lombardia requesting their cancellation. With a decision dated September 29, 2003, that Court rejected the appeal presented by Stogit. Stogit filed an appeal to the Council of State against the sentence which was rejected by the Council of State on January 6, 2006.
Distribuidora de Gas Cuyana SAThe agency entrusted with the regulations for the natural gas market in Argentina ("Enargas") started a formal investigation on some operators, among these Distribuidora de Gas Cuyana SA, a company controlled by Eni. Enargas stated that the company has applied improperly calculated conversion factors to volumes of natural gas invoiced to customers and requested the company to apply the conversion factors imposed by local regulations from the date of the default notification (March 31, 2004) without prejudice to any damage payment and fines that may be decided after closing the investigation. On April 27, 2004, Distribuidora de Gas Cuyana presented a defense memorandum to Enargas, without prejudice to any possible appeal. On April 28, 2006, the Company filed a formal request for examining the documents used as evidence of the alleged violation.
Court inquiries
TheMilan Public Prosecutoris inquiringcommenced inquiries into contracts awarded by Eni’s subsidiary EniPower and on supplies from other companies to EniPower.The media have provided wide coverage of these inquiries.These inquiries were widely covered by the media. It emerged that illicit paymentshave beenwere made by EniPower suppliers to a manager of EniPower whohas beenwas immediately dismissed. The Court presented EniPower (commissioning entity) and Snamprogetti (contractor of engineering and procurement services) with notices of process in accordance with existing laws regulating the administrative responsibility of companies (Legislative Decree No. 231/2001). In its meeting of August 10, 2004, Eni’s Board of Directors examined the aforementioned situationmentioned aboveand Eni’s CEO approved the creationby Eni’s CEOof a task force in charge of verifying the compliance with Group procedures regarding the terms and conditions for the signing of supply contracts by EniPower and Snamprogetti and the subsequent execution of works. The Board also advised divisions and departments of Eni to cooperate fullycooperatein every respect with the Court. From the inquiries performed,that have not yet covered all relationships with contractors and suppliers,no default in the organizationandemerged, nor deficiency in internalcontrols emerged. For somecontrol systems. External experts have performed inquiries with regard to certain specificaspects inquiries have been performed by external experts.aspects. In accordance with its transparency and firmness guidelines, Eni will take the necessary stepsforin acting as plaintiff in the expected legal action in order to recover any damage thatmight derivecould have been caused to Eni by the illicit behavior of its suppliers and of their andEni’sEni employees.
Within an investigation on twoIn the meantime, preliminary investigations have found that both EniPower and Snamprogetti are not to be considered defendants in accordance with existing laws regulating the administrative responsibility of companies (Legislative Decree No. 231/2001). In August 2007, Enimanagers,was notified that the Public Prosecutor requested the dismissal ofRome on March 10, 2005 notified EniEniPower SpA and Snamprogetti SpA, while the proceeding continues against former employees of these companies and employees and managers of theseizuresuppliers under the provisions ofpapers concerning Eni’s relationsLegislative Decree No. 231/2001. Eni SpA, EniPower and Snamprogetti presented themselves as plaintiffs.Trading. An investigation is pending regarding two former Eni managers who were allegedly bribed by third parties to favor the closing of certain transactions with two oil product trading companies.
Within such investigation, on March 10, 2005, the public prosecutor of Rome notified Eni of two judicial measures for the seizure of documentation concerning Eni’s transactions with the said companies. Eni is acting as plaintiff in this proceeding. The judge for preliminary hearings rejected most of the dismissal request, forcing the public prosecutor to continue with the criminal case.TSKJ Consortium
-Investigations of the SEC and otherAuthoritiesAuthorities.
In June 2004 theThe U.S. Securities and Exchange Commission (SEC)notified Eni a request, the U.S. Department ofcollaboration on a voluntary basis, which Eni promptly carried out, in order to obtain information regardingJustice (DoJ), and other authorities are investigating alleged improper payments made by the TSKJconsortiumConsortium to certain Nigerian public officials in relation to the construction of natural gas liquefaction facilities at Bonny Island in Nigeria.The TSKJ consortium is formed bySnamprogetti(Eni 100%) withNetherlands BV had a 25%interest and, forparticipation in the TSKJ companies, with the remainingpart,participations held by subsidiaries of Halliburton/KBR, Technip, and JGC.TheSnamprogetti SpA, the holding company of Snamprogetti Netherlands BV, was a wholly owned subsidiary of Eni until February 2006, when an agreement was entered into for the sale of Snamprogetti to Saipem SpA and Snamprogetti was merged into Saipem as of October 1, 2008. Eni holds a 43% participation in Saipem. In connection with the sale of Snamprogetti to Saipem, Eni agreed to indemnify Saipem for a variety of matters, including potential losses resulting from the investigations into the TSKJ matter. In February 2009, KBR and its former parent company, Halliburton, announced that they had reached a settlement with the SEC and DoJ with respect to the TSKJ matter as well as other unspecified matters. In connection with the settlement, KBR pleaded guilty to Foreign Corrupt Practices Act (FCPA) charges stemming from the TSKJ matter. KBR and Halliburton also agreed to pay a substantial fine and entered into civil settlements with the SEC. We understand that the DoJ and the SEC believe that representatives of theCommission concern alleged improper payments. Other Authorities are currently investigating this matter. Eni is currently providing its own informationother members of the TSKJ Consortium were involved in the conduct that gave rise to theCommissionFCPA charges against KBR. Since June 2004, Eni and Saipem/Snamprogetti have been in discussions with, and have provided information in response to requests by, various regulators, including the SEC, the DoJ and the Public Prosecutor’s office of Milan, in connection with the investigations.146
Gas Metering. On May 28, 2007, a seizure order (in respect to certain documentation) was served upon Eni and other
authorities.
Settled Proceedings
Tax ProceedingsIn August 2005,Group companies as part of a proceeding brought by theinternal revenue servicePublic Prosecutor at the Courts ofVenezuelaMilan. The order was also served upon five top managers of the Group companies in addition toEni Dación BV four formal assessment on income taxesthird party companies and their top managers. The investigation alleges behavior which breaches Italian criminal law, starting from 2003, regarding the use of instruments for measuring gas, theyearsrelated payments of excise duties and the billing of clients as well as relations with the Supervisory Authorities. The allegation regards, interalia, the offense contemplated by Legislative Decree of June 8, 2001, No. 231, which establishes the liability of the legal entity for crimes committed by its employee in the interests of such legal entity, or to2004 that, by excludingits advantage. Accordingly, notice of thedeductibilitycommencement ofcertain costs: (i) annul the losses recorded for the periods amounting to a total of bolivar 910 billion (corresponding to $425 million); (ii) determine for the same periods a taxable income amounting to a total of bolivar 115 billion (corresponding to $54 million); and (iii) request a tax amounting to bolivar 52 billion (corresponding to $24 million) determined by applying a 50% tax rate rather than the 34% rate applied to other companies performing activities analogous to those of Eni Dación BV. In particular it excluded the deductibility of: (i) interest charges due to otherinvestigations was served upon Eni Group companiesthat provided loans denominated in U.S. dollars;(Eni, Snam Rete Gas and(ii) exchange rate losses recordedItalgas) as well as third party companies. The Group companies are cooperating with the Supervising Authorities in thefinancial statementsinvestigations.Agip KCO NV. In November 2007, the public prosecutor of Kazakhstan informed Agip KCO of the start of an inquiry for an alleged fraud in the award of a contract to the Overseas International Constructors GmbH in 2005.
Settled Proceedings
ENI SPA
Inquiry of the Italian Authority for Electricity andrelatedGas regarding information tosuch loans resultingclients about the right to pay amounts due for natural gas sales in installments. With Decision No. 228/2007, the Italian Authority for Electricity and Gas commenced a formal inquiry regarding information to clients about the right to pay amounts due for the natural gas sales in installments in order to possibly put a stop to the alleged infringement of the clients’ rights and to impose a fine. In April 2008, the Authority concluded its inquiry and fined the Company by euro 3.2 million.SYNDIAL SPA (FORMER ENICHEM SPA)
Criminal action commenced by the public prosecutor of Brindisi. In 2000, the public prosecutor of Brindisi commenced a criminal action against 68 persons who are employees or former employees of companies that owned and managed plants for the manufacture of dichloroethane, vinyl chloride monomer and vinyl polychloride from thedevaluationearly 1960s to date, some ofthe Venezuelan currency. The formal assessments served have a preliminary nature and do not request immediate payment nor do they specify the amount of a fine (from 10which were managed by EniChem from 1983 to250%) and of interest (average rate for the period approximately 23%). Eni Dación filed a claim for the cancellation of the assessment. In the 2005 accounts, Eni recorded a specific provision for this matter. In April 2006 the appeal was rejected and the final tax assessment was issued. The final tax assessment: (i) substantially confirmed the preliminary assessments, although reducing the originally assessed income tax liability to bolivar 39 billion ($18 million); and (ii) imposed fines and late payment interests of bolivar 109 billion ($51 million). Eni Dación BV presented a further administrative appeal before the expiration of the time limit for filing a judicial tax appeal, thereby obtaining a reduction of the overall amount from bolivar 148 billion ($69 million) to bolivar 52 billion ($24 million) including taxes in the amount of bolivar 12.5 billion ($6 million) and fines and late payment interest in the amount of bolivar 39.5 billion ($18 million). In order to avoid further charges deriving from the increase of the corresponding fines and late payment interest, Eni Dación BV paid the newly assessed amount in May 2006, thereby reaching a settlement. Consistently, Eni Dación BV filed an integrative income tax return for year 2005, considering the new tax bases for years 2001 to 2004, and paid accordingly bolivar 128 billion ($60 million) of income taxes and bolivar 4.4 billion ($2 million) of fines and late payment interest.
During 2003, the Customs District of Taranto sent 147 formal assessments and amendments to bills of entry for finished products and goods and semi finished products produced by Eni’s Taranto refinery in 2000, 2001 and 2002 to Eni SpA, as the successor entity of AgipPetroli SpA following its merger into Eni. The notification regards about euro 24 million of customs duties not paid by the company because the imported products were not yet finished goods, but were destined to processing, for which ordinary customs tariffs allow exemption. The formal assessment did not contain the determination of any administrative penalties provided for by customs rules. The penalty can be from one to ten times the amount of taxes not paid. The notification was based on the fact that the company did not have the administrative authorization to utilize the customs exemption. The company, believing it acted properly pursuant to Circular 20/D/2003, started a proceeding for an administrative resolution, according to the customs rules. The company asked the Regional Director of Customs of Puglia for the annulment of the received assessments as a measure of self-protection. With a decision of November 26, 2004 the Regional Director accepted Eni’s appeal and ended the litigation by canceling the 147 formal assessments. On March 12, 2004 the Comando Nucleo Regionale Polizia Tributaria Puglia notified a verbal action of observation to the company. In this action there is an alleged offense of smuggling and falsification of accounts for the same imports, already subjected to the previous assessments of the Customs District of Taranto and other occurrences between January 1999 and February 2003. The verbal action made by a Fiscal Officer, sent to the Public Prosecutor in the Court of Taranto, reclaims the omitted payment of customs for about euro 26 million. The notification was based on the same lack of administrative authorization, already contested by the Customs District of Taranto, that was concluded in favor of Eni by the Regional Director. On January 26, 2006 the judge for preliminary investigation of the Court of Taranto dismissed the accusations and closed the assessment.
Legal ProceedingsIn 1997, Grifil SpA summoned AgipPetroli SpA (merged into Eni SpA in 2002) before the Court of La Spezia. Grifil requested payment for the remediation of a polluted land parcel part of the La Spezia refinery (which was closed in 1985), sold to it in 1996 by Italiana Petroli SpA later merged into AgipPetroli SpA. The claims for these damages amount to euro 103 million.1993. At the end of2002 Grifil and AgipPetroli reached an agreement undertheterms of which AgipPetroli had to pay half of the clean-up costs, the total amount of which was set by an independent appraisal at euro 19 million, with AgipPetroli’s share corresponding to a maximum of euro 9.5 million, Grifil in turn had the obligation to remediate the polluted soil and to renounce any claims against Eni. Grifil did not fulfill its obligations to remediate the polluted soil; however, maintaining the possibility of precautionary requests and claims against Grifil, Eni decided to remediate the polluted soil with the assistance of a company interested in developing the parcel of land that agreed to pay 13% of the remediation costs. The first action promoted by Grifil before the Court of La Spezia remained pending. On January 7, 2004 the Municipality of La Spezia put Eni in possession of the area and from that date Eni started remediation works paying the relevant costs on its own. Eni requested the conservative seizure of Grifil’s land parcel, up to a maximum value of euro 19 million. With two administrative measures, on December 2, 2003 and January 13, 2004 respectively, the Court of Genova declared the right of Eni legitimate, based on the sale contract stipulated between Italiana Petroli and Grifil, to claim the payment of all clean-up expenses that Eni will incur as Grifil did not fulfill its obligation. The judge closed the inquiry phase and stated that the judgment can be brought to an end. As for the value attributable to the conservative seizure of Grifil’s land parcel (up to a value of euro 19 million), the Court requested Eni to file the contracts for the remediation work with the court, in which the amounts paid are recognized. The contract with an international company specializing in remediation was signed on April 15, 2004 and immediately presented to the Court. In order to preserve Grifil’s asset as a way to recover its credit versus Grifil, Eni, which is paying for the remediation works, also filed an ordinary revocation of title, so that, while waiting for the Court’s ruling, Grifil will not be able to sell the land parcel to third parties. On September 6, 2005 Eni and Immobiliare Helios SpA (that acquired all of Grifil’s share capital) reached a settlement that: (i) concluded all disputes outstanding with Grifil and constitutes a waiver to any possible future claim directly or indirectly related to the sale of the land parcel; (ii) passed to the acquirer all residual expense to be incurred for the reclamation of the land parcel with the explicit approval of the municipality of La Spezia; and (iii) provided for Eni to pay to the new owner of Grifil a lump sum of euro 15.1 million that will be paid when the new owner provides confirmation of works performed for the reclamation; the sum is covered by provisions in the risk reserve.
In 1997, an action was commenced before the Court of Venice concerning the criminal charges brought by the Venice public prosecutor for alleged mismanagement of the Porto Marghera plant starting in the 1970s until 1995 and for the alleged pollution and health damage resulting therefrom. Defendants included certain employees of Eni which has been managing the Porto Marghera plant since the beginning of the eighties. On November 2, 2001, the Court of Venice acquitted all defendants. The appeal against the decision was presented bypreliminary investigation the public prosecutor asked for theState Attorney on behalfdismissal of theMinistrycase in respect ofEnvironmentthe employees and theCouncilmanagers ofMinisters, 5 public entities, 12 associations and other entities and 48 individual persons. On December 15, 2004EniChem. Plaintiffs presented oppositions, but theVenice Court of Appealsprosecutor confirmed thepreceding judgment, changing only some marginal parts. As concerns some defendants,request to dismiss theCourtcase with a decision ofAppeals decided notJune 2008, the public prosecutor dismissed the accusation as unfounded and requested the closing of the proceeding.AGIP KCO NV
In December 2007 the Kazakh tax authority filed a notice of tax assessment for fiscal years 2004 toproceed due2006 to Agip KCO, operator of the Kashagan contract. Allegedly unpaid taxes, including interest and penalties, amounted to approximately U.S. $235 million net to Eni and related to unpaid amounts and inapplicable deductions on value added tax and the default in applying certain withholding taxes on payments to foreign suppliers. The same notice also informed the companies party to thestatute of limitationsKashagan contract that further assessments were pending on non-deductible costs forsome crimes, while it confirmed the preceding judgment for the other matters. On May 19, 2006, the Court of final instance, before which plaintiffs appealed the decision of the Court of Appeals, acquitted all defendants stating that pollution and mismanagement of the plant occurred before the eighties and consequentlyU.S. $188 million net Eni andits employees could not be deemed responsiblehigher taxable income on Kazakh branches forthat. In January 2006 Eni settled this matterU.S. $48 million net to Eni. The further assessments were subsequently issued, the company filed an appeal and a settlement was reached in October 2008 with theCouncil of Ministersfollowing outcome: the unpaid taxes net to Eni were agreed at U.S. $24 million (U.S. $235 million assessed). An adjustment to deductible costs was agreed at U.S. $38 million net to Eni (U.S. $188 million assessed) andthe Ministry for the Environment paying an amount of euro 40 million. Under terms of the settlement, the latter will abstain from the recourse to the Court of final instance and will not actit was further agreed that there would be no income taxable onany other environmental damage concerning the management of Porto Marghera until the date of the settlement. Eni had already recorded a provision for this matter which was sufficient to cover the amount of the settlement.
Kazakh branches (U.S. $48 million assessed).Dividends
Eni’s dividend policy in future periods, and the sustainability
andof the current amount offuturedividends over the nextfour yearfour-year period, will depend upon a number of factors includingthe increase in earningsfuture levels of profitability andincash flow provided by operating activities, a sound balance sheet structure, capitalexpenditureexpenditures and development plans,andin light of the "Risk Factors" set out in Item 3.Eni SpA’sThe parent Company’s net profit and, therefore, the amounts of earnings available for the payment of dividendstherefromwill also depend on the level of dividends received from Eni’s subsidiaries. However, subject to such factors,the Board of Directors expects to recommend to future meetings of shareholders to maintain a flow of dividendsinline with the level of 2005 forthe nextfour year period.four-year period management intends to pursue a dividend policy designed to ensure competitive dividend yields to Eni’s shareholders. OnMay 25, 2006,April 30, 2009, Eni’sgeneral shareholders’ meetingShareholders' Meeting approved a dividend,of euro 1.10 per sharefor fiscal year2005 as proposed by Eni’s Board2008, ofDirectors. This dividend (ofeuro 1.30 per share, of which euro0.450.65 per share wasalreadypaid in September 2008 as an interim dividend with the balance of euro 0.65 per share to be paid late inOctober 2005) represented an increase of 22% with respect toMay 2009. Total cash outlay for the 2008 dividend is expected at approximately euro 4.7 billion (including the euro 2.36 billion already paidfor fiscal year 2004 (euro 0.90 per share); the ratio of aggregate dividends payments to consolidated net profit (pay-out) for year 2004 stands at 47%in September 2008).Eni plansIn future years, management expects to continue paying interim dividends for each fiscal year, with the balance to the full year dividend to be paid infuture years.each following year.147
Significant Changes
See "Item 5 – Recent
Developments"developments" for a discussion of significant events occurred after 2008 year-end up to the latest practicable date, including a review of Eni’sresults of operationsperformance in the first quarter of20062009, the exercise by Gazprom of the call option to purchase the 20% interest in the Russian company OAO Gazprom Neft held by Eni, the divestment of 100% of Italgas SpA andother material developments that occurred after December 31, 2005.Stoccaggi Gas Italia SpA to Snam Rete Gas and the finalization of the mandatory tender offer on the minority shareholders of Distrigas.
Item 9. THE OFFER AND THE LISTING
Offer and Listing Details
The principal trading market for the ordinary shares of Eni SpA ("Eni"), nominal value euro 1.00 each (the "Shares"),
are traded on the Blue Chip segment ofis the Mercato Telematico Azionario or MTA ("Telematico"), the Italianscreen-based dealerregulated electronic share market, which is the principal trading market for shares in Italy. The Shares are traded on the Blue Chip segment of Telematico, which includes shares of the companies whose market capitalization amounts to more than euro 1,000 million. American DepositarySharesReceipts ("ADSs"ADRs"), each representing two shares, are listed on the New York Stock Exchange. The ratio has changed from oneADSADR per five Shares to oneADSADR per two Shares, effective January 10, 2006.The table below sets forth the reported high and low reference prices of Shares on Telematico and of
ADSsADRs on the New York Stock Exchange, respectively. Due to the ratio change, the historical prices ofADSsADRs have been adjusted by an adjustment factor of 2.5. See "Item 3 – Key Information – Exchange Rates" regarding applicable exchange rates during the periods indicated below.
Telematico
New York
Stock Exchange
High
Low
High
Low
(euro per
Share)share)(U.S. $ per
ADS)ADR)
2001 15.598 11.564 27.880 21.000 2002 17.145 12.938 32.844 24.360 2003 15.746 11.881 37.992 26.460 15.746 11.881 37.992 26.460 2004 18.748 14.723 50.580 36.940 18.748 14.723 50.580 36.940 2005 24.960 17.930 60.540 47.400 24.960 17.930 60.540 47.400 2006 25.730 21.820 67.690 54.650 2007 28.330 22.760 78.290 60.220 2008 26.930 13.798 84.140 37.220 2004 2007 First quarter 16.640 14.723 40.536 36.940 25.720 22.760 66.720 60.220 Second quarter 17.980 16.319 43.364 38.924 27.150 24.130 72.840 64.710 Third quarter 18.584 16.272 45.804 39.608 28.330 23.310 78.290 63.160 Fourth quarter 18.748 17.651 50.580 44.244 26.680 23.320 75.660 67.220 2005 2008 First quarter 20.480 17.930 54.288 47.400 25.580 20.870 75.130 61.790 Second quarter 22.070 19.270 54084 49.004 26.930 21.820 84.140 68.570 Third quarter 24.960 21.430 60.540 51.320 23.450 18.263 73.930 51.410 Fourth quarter 24.770 21.640 59.020 51.628 19.350 13.798 52.600 37.220 2006 2009 First quarter 24.880 23.050 60.650 55.170 17.830 12.300 49.440 31.070 January 2006 24.880 23.710 60.650 57.640 February 2006 24.860 23.840 59.510 56.550 March 2006 23.770 23.050 58.130 55.170 April 2006 24.810 23.370 61.320 57.050 May 2006 24.570 22.500 62.630 58.680 June 2006 (through June 5, 2006) 23.600 23.340 60.780 60.280 January 2009 17.830 16.210 49.440 42.390 February 2009 17.630 15.740 45.690 39.200 March 2009 15.240 12.300 41.380 31.070 April 2009 16.450 14.510 43.010 37.240 May 2009 (through May 4, 2009) 16.930 16.930 45.550 44.040
JPMorgan Chase Bank
N.A.NA (the "Depositary") functions as depositary bank issuingAmerican Depositary Receipts ("ADRs")ADRs pursuant to the Deposit Agreement among Eni, the Depositary and the beneficial owners ("Beneficial Owners") and registered holders from time to time of ADRs issued thereunder.At
June 5, 2006May 4, 2009 there were45,497,40144,072,282 ADRs outstanding, representing90,994,80288,144,564 ordinary shares or2.27%2.2% of all Eni’s shares outstanding, held by65107 holders of record (includingThethe Depository Trust Company) in the United148
States of America,
62105 of which are U.S. residents. Since certain of such ADRs are held by nominees, the number of holders may not be representative of the number of Beneficial Owners in the United States or elsewhere.The Shares are included in the S&P/MIB, the
newprimary Italian stock exchange index that measures the performance of the 40 leading companies in leading industries listed on the markets organized and managed by Borsa Italiana SpA ("Borsa Italiana"). The constituents of the S&P/MIB are selected according to the following criteria:sectorialsector representation, market capitalization of free-float shares and liquidity. Since September 20, 2004 S&P/MIB is the principal indicator used to track the performance of the Italian stock market and is the basis for future and option contracts traded in the Italian Derivatives Market ("IDEM") managed by Borsa Italiana.TheEni’s Shares are thesecondlargest component of the S&P/MIB,after the shares of Unicredito Italiano SpA,with a weighting of approximately16.5%,14.7%. as established by Standard & Poor’s and Borsa Italiana afterreviewingthecompositionquarterly rebalancing for S&P/MIB effective March 23, 2009.Trading in the Telematico is allowed in any quantity of shares or other financial instruments. Where necessary, Borsa Italiana may specify a minimum lot for each financial instrument. Since March 28, 2000, a three-day rolling cash settlement has been applied to all trades of equity securities in Italy, instead of the
S&P/MIBprevious five-day settlement. Starting from May 15, 2000, the Shares have been also trading onMay 19, 2006.a special market, named After Hours trading market or TAH ("After Hours"), after the closure of the day time of Telematico under special rules. In addition, future and option contracts on the Shares are traded on IDEM andsecuritisedsecuritized derivatives based on the Shares are traded on the ItalianSecuritisedSecuritized Derivatives Market ("SeDeX"). IDEM facilitates the trading of future and option contracts on index and shares issued by companies that meet certain required capitalization and liquidity thresholds. SeDeX is the Borsa Italiana electronic regulated market where it is possible to tradesecuritisedsecuritized derivatives (covered warrants and certificates).
Since January 14, 2002, the rule on the minimum lot of shares for transactions on the Telematico has been eliminated.OutsideTelematico,Regulated Markets, block trading is permitted for orders that meet certain minimum size requirements and must be notified to Consob and Borsa Italiana.Starting from May 15, 2000, the Shares have been also trading on a special market, named After Hours trading market or TAH ("After Hours"), after the closure of the day time of Telematico under special rules. Since March 28, 2000, a three-day rolling cash settlement has been applied to all trades of equity securities in Italy, instead of the previous five-day settlement.
Markets
Telematico is organized and administered by Borsa Italiana subject to the supervision and control of the Commissione Nazionale per le Società e la Borsa (the National Commission for Companies and the Stock Exchange or "Consob"), the public authority charged,
inter alia,interalia, with regulatinginvestment companies,the Italian securitiesmarkets and public offerings of securities in Italymarket to ensure the transparency and regularity of the dealings and protect investors. Borsa Italiana is a joint stock company (Società per Azioni) that was established to manage the Italian regulated financial markets (including Telematico) as part of the implementation in Italy of the EU Investment ServicesDirective.Directive ("ISD"). Borsa Italiana has issued rules governing the organization andthe administrationmanagement of themarketsItalian Regulated Markets it regulates, which are Telematico (shares, convertible bonds, pre-emptive rights, warrants,ETFsand Funds), Mercato MTAX (high growth companies), After Hours, Mercato Expandi (small companies), ETFplus (Exchange Traded Funds and Exchange Traded Commodities market), IDEM (index and stock derivatives market), SeDeX (covered warrants and certificates), and MOT (bondmarkets)market), as well as the admission to listing on and trading on these markets. Borsa Italiana is part of the London Stock Exchange Group, following the agreement signed in June 2007.
IfFor theopening pricepurposes ofa security (established each trading day prior tothecommencementautomatic control of the regularity of tradingbasedonbids received) differs by more than 10%Telematico, the following price variation limits shall apply to contracts concluded on shares making up the S&P/MIB: (i) ± 7.5% (or such other amount established by Borsa Italiana)fromwith respect to the static price (the static price shall be the previous day’s reference price, in the opening auction, or the auction price, in the continuous tradingin that security will not be permitted untilphase); and (ii) ± 3.5% (or such other amount established by BorsaItaliana authorizesItaliana) with respect to thetrading.dynamic price (the price of the last contract concluded during the continuous trading phase). The reference price iscalculated for each security as a weighted average ofthelast 10% of volumes traded in a single day. If in the course of a trading dayclosing-auction price. Where the price of asecurity fluctuates by more than 5% fromcontract that is being concluded exceeds one of thelast reported saleprice(or 10% from the opening price),variation limits referred to above, trading in that security will be automatically suspended and a volatility auction phase begun for a certain period of time.In the event of such a suspension, effect is not given to trades agreed but not confirmed before the suspension.Effective
JulyNovember 1,1998,2007, following theItaliannational implementation of the EU Markets in Financial Instruments Directive (2004/39/EC) ("MiFID"), the so called ’concentration rule’ has been superseded. The MiFID, that replaces the ISD, establishes the legal framework governing investment services and financial markets in Europe. With the new regulatory regime of MiFID, orders can be routed not only to Regulated Markets but also to either Multilateral Trading Facilities ("MTF"s) or Systematic Internalisers. An MTF is a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non-discretionary rules – in a way that results in a contract. A Systematic Internaliser is an investment firm or a bank which deals on own account by executing client orders outside a Regulated Market or an MTF.Italian exchanges and securities are primarily regulated by Legislative Decree No. 58 of February 24, 1998 ("Decree No. 58")
, which consolidated the previous regulation primarily by restating the provisions of Legislative Decree No. 415 of July 23, 1996.. According to Decree No. 58,
provides that tradingthe provision ofequity securities, as well as any otherinvestment servicesmay now be carried out on behalf ofand activities to the publicby società di intermediazione mobiliare (securities dealingon a professional basis is reserved to banks and investment firmsor "SIMs"("intermediaries"), which are firms authorizedintermediaries, authorized banks and certain types of finance companies.to provide investment services or activities. In addition, banks and investment firms organized in a member nation of the EU are permitted to operate in Italy provided that the intent of the bank or investment firm to operate in Italy is communicated to Consoband the Bank of Italyby the competent authority of the member state.Pursuant to Decree No. 58 the Bank of Italy, in agreement with Consob, is responsible for regulating clearance and settlement.Non-EU banks and non-EU investment149
firms may operate in Italy subject to the specific authorization of Consob, in agreement with the Bank of Italy. Pursuant to Decree No. 58, Consob shall be responsible for the transparency and correctness of conduct of intermediaries and the Bank of
Italy.Italy shall be responsible for risk containment, asset stability and the sound and prudent management of intermediaries. The Bank of Italy, in agreement with Consob, also regulates the operation of the clearing and settlement service for transactions involving financial instruments. The regulations and measures of general application adopted by Consob and the Bank of Italy are available on the website of Consob (www.consob.it) or Bank of Italy (www.bancaditalia.it).
Item 10. ADDITIONAL INFORMATION
Memorandum and Articles of Association
The full text of the memorandum and articles of association of Eni
as amended by Eni’s Extraordinary Shareholders’ Meeting held on May 25, 2006,is attached as an exhibit to this annual report. SeeExhibit 1."Exhibit 1".Eni is incorporated under the name "Eni SpA" resulting from the transformation of Ente Nazionale Idrocarburi, a public law agency, established by Law No. 136 of February 10, 1953. The
company objects areCompany’s purpose is the direct and/or indirect management, by way of shareholdings in companies, agencies or businesses, of activities in the field of hydrocarbons and natural vapors, such as exploration and development of hydrocarbon fields, construction and operation of pipelines for transporting the same, processing, transformation, storage, utilization and trade of hydrocarbons and natural vapors, all in compliance with concessions required by law.The
companyCompany also has theobjectpurpose of direct and/or indirect management, by way of shareholdings in companies, agencies or businesses, of activities in the fields of chemicals, nuclear fuels, geothermy and renewable energy sources, in the sector of engineering and construction of industrial plants, in the mining sector, in the metallurgy sector, in the textile machinery sector, in the water sector, including derivation, drinking water, purification, distribution and reuse of waters; in the sector of environmental protection and treatment and disposal of waste, as well as in every other business activity that is instrumental, supplemental or complementary with the aforementioned activities.The
companyCompany also has theobjectpurpose of managing the technical and financial co-ordination of subsidiaries and affiliated companies as well as providing financial assistance on their behalf.The
companyCompany may perform any operations necessary or useful for the achievement ofthe company objects;its purpose; by way of example, it may initiate operations involving real estate, moveable goods, trade and commerce, industry, finance and banking asset and liability operations, as well as any action that is in any way connected with thecompany objectsCompany purpose with the exception of public fund raising and the performance of investment services as regulated by Decree No. 58 of February 24, 1998.The
companyCompany may take shareholdings and interests in other companies or businesses with objects similar, comparable or complementary to its own or those of companies in which it has holdings, either in Italy or abroad, and it may provide real and or personal bonds for its own and others’ obligations, especially guarantees.Directors
The Board of Directors is invested with the fullest powers for ordinary and extraordinary management of the
companyCompany and, in particular, the Board has the power to perform all acts it deems advisable for the implementation and achievement of thecompany objects,Company purpose, except for the acts that the law or Eni’sby-lawsBy-laws reserve to the Shareholders’ Meeting. The Board of Directors has appointed a Chief Executive Officer and delegated to him all necessary powers for the administration of the Company, with the exception of those powers that cannot be delegated in accordance with current legislation and those retained exclusively by the Board on Directors on the matters regarding major strategic, operational and organizational decisions.For a complete description of the powers of the Board, the
Managing DirectorCEO and the Chairman, appointments, role of the Board and rules and procedures of the meetings of the Board see "Item 6 – Board Practices".
The Board of Directors and the Managing Director report timely, at least every three months and however in the Board of Directors meetings, to the Board of Statutory Auditors on the activities and on the most relevant operations regarding the operational, economic and financial management of the company and its subsidiaries: in particular the Board of Directors and the Managing Director report to the Board of Statutory Auditors on operations entailing potential conflicts of interest. Article 2391 of the Italian Civil Code applies in the case of interests of the Directors.
The Chairman and the members of the Board are remunerated in an amount established by the ordinary Shareholders’ Meeting. Said resolution, once taken, will remain valid for subsequent business years until the Shareholders’ Meeting decides otherwise.There are no provisions as to retirement based on age-limit requirements, or requirement of share ownership for a director’s qualification in Eni’s
by-laws.
By-laws.150
Limitations on VotingStock ownership limitation andShareholdingsvoting rights restrictionsGeneral
There are no limitations imposed by Italian law or by the
by-laws of Eni SpAEni’s By-laws on the rights of non-residents of Italy or foreign persons to hold or vote the shares other than the limitations described below (which are equally applicable to residents and non-residents of Italy).
The by-laws provide thatIn accordance with Article 6 of Eni’s By-laws and in accordance with the special provision of Article 3 of Law Decree No. 332/1994 as converted into Law No. 474/1994 ("Law No. 474 of 1994"), noperson, in any capacity, mayshareholder can directly or indirectly ownshares amounting to morea shareholding higher than 3% ofEni SpA’s votingEni’s share capital. This limitation does not apply to shares held by the State, the Public Entities or entities controlled by them. The law states in addition that this limitation is waived in case of a public offer to buy Eni’s shares whereby the bidder will hold at least the 75% of share capital giving the right to vote on the appointment or revocation of the Board of Directors.Such maximum limit at 3% is calculated taking into account the aggregate shareholding of a controlling entity, whether an individual or a legal entity (each a "person"); its directly or indirectly controlled entities, as well as entities controlled by the same controlling entity; affiliated entities, as well as relatives within the second degree by blood or marriage (except for a legally separated spouse).
Control exists with reference also to entities other than companies in the cases envisaged by in the cases envisaged by Article 2359, paragraphs 1 and 2 of the Civil Code. Affiliation exists as set forth in applicable Italian legislation, as well as between entities that, directly or indirectly, through controlled entities (other than those managing investment funds) are bound, even with third parties, by agreements relating to the exercise of voting rights or the transfer of shares or interests in third-party companies or other agreements relating to third-party companies as specified by applicable Italian legislation if such agreements relate to at least 10% of the voting share capital of a listed company or 20% of the voting share capital of a non-listed company. For purposes of calculating the 3% limit, shares held through a fiduciary nominee or
intermediarya broker are taken into account.Any voting rights attributable to shares held or controlled in excess of such 3% limit cannot be exercised, and the voting rights of each entity to whom such limit on shareholding applies are reduced proportionately, unless otherwise jointly disposed of in advance by the parties involved. In the event that shares
held or controlled in excess of the maximumexceeding this limit are voted, any shareholders’ resolution adopted pursuant to such a vote may be challenged if the majority required to approve such resolution would not have been reached without the vote of theSharesshares exceeding such maximum limit. Shares not entitled to be voted are nevertheless counted for the purpose of determining the quorum at ashareholders’ meeting.
Under the provisions of Law No. 602 of November 27, 1996, the 3% limit does not apply to shareholdings in Eni SpA held by the Ministry of Economy and Finance; state-owned entities controlled by other entities or by the State. The 3% limit does not apply, in the event that such limit is exceeded as a result of the acquisitions of shares pursuant to a mandatory tender offer (offerta pubblica di acquisto totalitaria) or a preventative tender offer (offerta pubblica di acquisto preventiva), each as provided for by Decree No. 58, regardless of whether a majority of the voting rights is acquired thereby. The approval of the Ministers as described below in "– Special Powers of the State" is however requested for Shares acquired pursuant to tender offers.Shareholders’ Meeting.For other limitations that may affect voting rights, see "– Reporting Requirements and Restrictions on Acquisitions of Shares".
Special Powers of the Italian State
Under Italian laws, the Italian State, acting through the Minister of Economy and Finance in agreement with the Minister of
Productive Activities (together with the Minister of Economy and Finance, theEconomic Development (the "Ministers"), holds certain special powers in connection with any transfer of a controlling interest in certain State-owned companies operating in public service sectors, includingEni SpA.Eni. The law places no limit on the duration of such special powers. Such powers are to be exercised in accordance with specific criteria provided for by the regulation and EU principles.Specific guidelines have been introduced byArticle 6.2 of Eni’s By-laws, in accordance with the special law referred to as Law No. 474 of 1994, attribute to the Minister of Economy and Finance, in agreement with the Minister of Economic Development, the following special powers to be used in compliance with the criteria indicated in the Decree of the President of the Council of Ministers
(DPCM), May 4, 1999, which sets forth the conditions in which the Ministers can exercise their special veto over a company’s strategic decisions. According to Article 66ofLaw 488, dated December 23, 1999, such guidelines have been confirmed by the DPCM datedJune 10,2004.
Pursuant to the DPCM of April 1, 2005, on April 13, 2005, the Eni’s Board of Directors modified the Eni’s by-laws in order to apply the provisions of Law No. 350 of December 24, 2003 (2004 budget law), which modified Article 2 of Law Decree No. 332 of May 31, 1994, as modified2004 and,converted into Law No. 474 of July 30, 1994, regarding the Special Powers of the State. Eni’s by-laws acknowledge in Article 6.2 that the Special Powers of the State are as follows:synthetically:
a)(a)opposition with respect to the acquisition of material shareholdings by entities affected by the shareholding limit as set forth in Article 3 of Law Decree 332 of May 31, 1994, converted with amendments into Law 474 of July 30, 1994, which – as per Decree issued by the Minister of Treasury on October 16, 1995 – include thoserepresentingat least3% of the Eni’s share capitalwithhaving the right to vote attheordinary Shareholders’Meeting. AnyMeeting by entities subject to such ownership limitations pursuant to Article 6.1. Such opposition is required to be duly motivated and expressed withinten10 days of the date of the notice to be filed by the Board of Directors at the time a request is made for registration in the Shareholders’Register ifregister, when theMinister considers that such an acquisition may prejudice thetransaction is considered prejudicial to vital interests of theItalianState. Until the ten-dayperiod hasterm as expired, the voting rightsor any rights other thanand theeconomicnon-asset linked rights connected with the shares representingathe material shareholdingmayshould not be exercised. If the opposition power is exercised,onby a duly motivated act in connection with thebasisprejudice thatprejudicemay be caused by the operation to the vital interests of the Italian State, thetransferee maypurchaser can not exercise the voting rightsor any rightsand the otherthan the economicnon-asset linked rights connected with the shares representingathe material shareholding and must sellsaidthe relevant shares within one year. If theshareholderpurchase fails to comply, the law court, upon request of the Minister of Economy and Finance, will order the sale of the shares representing a material shareholding according to the procedures set forth in Article 2359-ter of the CivilCode. The act through which the opposition power is exercised may be appealed by the transferee before the Regional Administrative Court of Lazio within sixty days as of its issue;Code;151
b)(b)opposition with respect to the subscription of shareholders’ pactsagreements oragreements as perother arrangements (as defined by Article 122 ofLegislative Decree No. 58 of February 24, 1998, involving – as per Decree issued bytheMinister of Treasury on October 16, 1995 – at leastTUF) whereby 3% or more of the share capitalwithof Eni having the right to vote at ordinary Shareholders’Meetings.Meetings is involved. Inorder to allow the exercise of the above mentionedexercising this opposition power,Consob notifiesthe public authority responsible for regulating Italian securities and exchanges (Consob) communicates to the Minister of Economy and Financeof the relevant pacts or agreements communicated to it pursuant to the aforementionedany significant shareholders’ agreement notified in accordance with Article 122 ofLegislative Decree No. 58 of February 24, 1998.the TUF. The opposition power may be exercised within ten days as of the date of the notice by Consob. Until the ten-dayperiod has expired,term is not lapsed, the votingrights or any rightsright and the otherthan the economicnon-asset linked rights connected with the shares held by the shareholders who have subscribed the above mentionedpacts oragreementsmaycan not be exercised. If the opposition power is exercisedonthrough a duly motivated act in consideration of thebasisprejudice thatprejudicemay be caused by saidpacts oragreements to the vital interests of the Italian State, the shareholderspacts oragreements shall be null and void. If in the shareholders’ meetings the shareholders who have signed shareholders’pacts oragreements behave as if thosepacts oragreements disciplined by Article 122 ofLegislative Decree No. 58 of February 24, 1998the TUF were still in effect, the resolutions approved with their vote, if determining for the approval,maycan besued. The act through which the opposition power is exercised may be sued by the shareholders who joined the above mentioned pacts or agreements before the Regional Administrative Court of Lazio within sixty days as of its issue;sued;
c)(c)veto power – duly motivated in connection with the prejudice to the interests of the State – with respect to Shareholders’ Meeting resolutions to dissolvewind-up the company, to transfer thebusiness,enterprise, tomerge,merger or todemerge,demerger, to transfer thecompany’s registered officeheadquarters of the company abroad, to change the company objectsandor to amend theby-lawsBy-laws canceling or modifying any of the special powersindicateddescribed in thisArticle. The act through whichsection (with reference to letters a), b), c) and theveto power is exercised shall be duly motivated in consideration of the prejudice the related resolution may cause to the vital interests of the Italian Statefollowing letter d); andmay be sued by the dissenting shareholders before the Regional Administrative Court of Lazio within sixty days as of its issue;d)(d)appointment of onea Board memberwith nowithout votingrights. Should such appointed Director lapse,right in theMinister of Economy and Finance in agreement with the Minister of Productive Activities will appoint his substitute.Board resolutions.
WithThe acts whereby these special powers are exercised may be subject to adecision published on May 23, 2000,lawsuit by the legitimate subjects before the Regional Administrative Court of Lazio within 60 days.These powers have been limited after some decisions of the European Court of
JusticeJustice. The European Court, on March 23, 2009, declared thatItaly, in grantingItalian Regulation that defined theMinistercriteria for exercising such special powers (DPCM ofEconomy and Finance "special powers" and introducing them in the by-laws of some privatized companies,June 10, 2004) violated theobligations imposed byprovisions of Articles 43 (former Article 52, right of establishment), 49 (former 59, free provision of services)and 56(former 73b, free(free movement of capitals) of the European Treaty.
In accordance with past decisions,Management can not foresee developments on this matter: only theCourt analyzed Italian legislation in force atGovernment is responsible for theexpirationamendment of theterms defined in the European Commission's informed opinion, therefore it did not take into account DPCM of May 4, 1999, Article 66 of Law No. 488/1999 and DPCM of June 10, 2004 and Law No. 350 of December 24, 2003 which included provisions limiting those "special powers" of the Minister of Economy and Finance. These are currently being analyzed by the European Commission.above mentioned regulation.
FurthermoreLaw No. 266 of December 23, 2005(the Budget Law)(Budget Law for 2006) in Article 1, paragraphsfrom381 to 384, in order tofavorpromote the process of privatization and the diffusion among the public ofinvestmentsshareholdings in companiesalso held byin which the State holds significant stakes, introduced the option to include in theby-lawsBy-laws of such listed companies,formerly owned by the State, as in the case oflike Eni,SpA, regulations against takeovers, which in particular provideprovisions for theissueissuance of shares, or securities bearing the same characteristics as shares, which give to the special meeting of their relevant holders, the right to request the issuance on their behalf of new shares, also atnominalpar value,and similar shareholding certificatesor securities bearing the right to vote at both ordinary and extraordinary Shareholders’Meetings in favor of one or more shareholders identified in terms of the number of shares held.Meeting. The introduction of these normswhich are subject to approval by the EU, will causein Eni’s By-laws would entail the cancellation of theabove mentioned special powers of the State3% threshold to individual shareholdings as contained in the mentioned Article6.26.1 of Eni’sby-laws.By-laws. To date, Eni’s By-laws doesn’t contain this provision.Minority
Protection Provisionsprotection provisions
UnderIn order to allow for the presence of representatives elected by minority shareholders, under Italian laws,the by-laws oflisted companies such asEni SpA, that impose a maximum limit on the number of shares that may be held by any shareholderEni. must provide for the election of directors and statutory auditors through thevoto"voto dilistalista" (voting list) system, to ensure that minority shareholders of a company are represented on itsboardBoard ofdirectorsDirectors andboardBoard ofstatutory auditors.Statutory Auditors. Accordingly, Eni’sby-lawsBy-laws require that the members of the Board of Directors having decisional powers and the Board of Statutory Auditorsof Eni SpA not directly appointed by the Ministers (see "– Special Powers of the State")have to be elected on the basis of candidate lists presented either bythe Board of Directors or byone or more shareholders,(including the Minister of Economy and Finance)representing, alone or intheaggregate, at least 1% of the Eni’s share capitalof Eni SpAhaving the right to vote at ordinary shareholders’meetings.meetings, or by the Board of Directors.Each shareholder can present or participate in presenting and voting for only one list. Entities controlling a shareholder and companies controlled by a common entity are forbidden from presenting or otherwise concurring to the presentation of additional lists and from voting them, also through broker or fiduciaries.
Such candidate lists, in which the independent candidates are clearly identified, must be deposited at the Eni’s registered office
of Eni SpAand published in at least three Italian newspapers having general circulation in Italy (two of which must be business dailies). Publication of the candidate list presented by the Board of Directors shall occur at least 20 days before the first call (as defined below) of the Shareholders’ Meeting. Such term is reduced to 10 days in the case of candidate lists proposed by shareholders. Each shareholder may present or participate in the presentation of only one candidate list and each candidate may appear on only one list.
UnderLists must be also be filed with Borsa Italiana and published on Eni’sby-laws,website.All candidates must posses the
electionhonorability requirements as provided for by the applicable legislation. Filing a list is a pre-requisite for its validity together with filing of a professional curriculum of each candidate and statements in which each candidate accepts his candidature and attests the lack of situations of ineligibility or incompatibility and the possession of themembershonorability and, in case, the independence requirements.151
After the votes are cast, appointments take place by extracting seven tenths of directors from the majority list in the order in which they are listed and the remaining directors from the other lists that must not be directly or indirectly connected with the shareholders that filed or voted the list that collected the majority of votes. The list vote is applied only when the whole Board is re-elected. In case of appointment of directors that for whatever reason have not been voted according to the described procedure, the Shareholders’ Meeting decides with the majorities set by the law, so that the composition of the Board complies with the law and Eni’s By-laws.
As per Article 6, paragraph 2, letter d) of
Directors will proceed as follows:
a)seven-tenths of the members to be elected will be drawn out from the candidate list that receives the majority of votes expressed by the shareholders in the numerical order in which they appear on the list, rounded off in the event of a fractional number to the next lower number;b)the remaining Board members will be drawn out from the other candidate lists; to this purpose the votes obtained by each candidate list will be divided by one or two or three depending on the number of the members to be elected. The quotients thus obtained will be assigned progressively to candidates of each said list in the numerical order in which they appear in each list. Quotients thus assigned to candidates of said lists will be set in one decreasing numerical order. Those who obtain the highest quotients will be elected.Eni’s By-laws, the Minister for Economy and Finance, in agreement with the Minister of Economic Development, may appoint one member of the Board without voting rights in addition to those appointed by the Shareholders’ Meeting. The
electionMinisters chose not to appoint such member (see "Special Powers ofmembersthe Italian State").According to Article 28.2 of Eni’s By-laws in accordance with the law, the Shareholders’ Meeting shall elect Chairman of the Board of Statutory Auditors
is governed by the same rules, except that the Board of Directors may not presentacandidate list to the Board of Statutory Auditors, and that, pursuant to Decree No. 58, Eni’s by-laws provides that, in the event of a Board of Statutory Auditors formed by more than three Auditors, at least two of them be appointed by minority shareholders.
The Extraordinary Shareholders’ Meeting held on May 28, 2004 approved an amendment to Article 17.3 of the by-laws according to which companies that are controlling entities or under common control, as defined by Article 2359, first Paragraph, of the Civil Code, or companies controlled by the same entity of the company presentingmember elected from a listshall not present nor take part inother than thepresentationone obtaining the majority ofanother candidate list.votes.Several provisions of Italian legislation are intended to increase the protection of minority shareholders. In particular: (i) shareholders’ meetings must be called also upon request of holders of at least 10% of the outstanding
Shares (the Board of Directors, however, may refuse to call the meeting when conflicting with the company’s interests)shares (Article 2367c.c.)Civil Code); (ii) the attendance quorum required for a valid shareholder meeting at an extraordinaryshareholders’meetingresolutions may be passed with the approval ofis at leasttwo-thirds50% of the outstanding shares on first call, while on second call the attendance quorum is more than 1/3 of the shares outstanding and on third and following calls the attendance quorum is at least 1/5 of the shares outstanding. On first, second and third call, resolutions shall be approved by a majority of 2/3 of the shares represented at themeeting, on the first, second or third callShareholders’ Meeting (Articles 2368-2369c.c.)Civil Code); (iii) in addition to the general action against the Board of Directors approved by themajority, one-third and one-fifth of the outstanding share capital, respectively; (iii)Shareholders’ Meeting, shareholders’ actions against the Board of Directors and the StatutoryAuditors. Official Receivers and the Managing DirectorAuditors may be initiated by shareholders holding at least5%2.5% of the outstanding shares(Article(Articles 2393,bis c.c.)2393-bis and 2407 Civil Code); (iv)the actions for whicha single shareholder may sue the directors for individual damages (Article2394-bis c.c.); and (v) collective shareholders’ complaints2395 Civil Code) or complain to the Board of Statutory Auditorsmay be promotedabout directors’ misconduct; if the complaint is filed by shareholders representing at least 2% of the share capital of a listed company, the Statutory Auditors are required to investigate with no delay and report to the Shareholders’ Meeting (Article 2408 Civil Code); and (v) shareholders holding at least 5% of the outstanding share may report to the Court directors’ serious misconduct. The Court may order the inspection of the management, adopt interim measures and replace directors with a judicial Commissioner (Article 2409c.c.)Civil Code). Thecompany’s by-lawscompanies’ By-laws may further lower the thresholds in (iii), (iv) and (v) and increase the voting quorums under (ii).Effective from July 1, 1998, accounting control functions are under the exclusive competence of company’s independent auditors, and the company’s Board of Statutory Auditors no longer carries out such functions.
Further protection to Italian minority shareholders was introduced by Law of January 12, 2006, the so called "Legge Risparmio", that provided for among others the followings:
•sets new independence and honorability requirements for directors of listed companies;•introduces the list vote for the election of directors as a protection of minority shareholders and delegates to Consob, the Italian financial markets regulator, the power to regulate the appointment of a statutory auditor by minority shareholders. The law states that shareholders representing at least 2.5% of share capital can present a list;•delegates to Consob the determination of the limits to the number of memberships of boards of directors and boards of statutory auditors that directors and auditors of listed companies can hold in other listed companies;•states that the chairman of the Board of Statutory Auditors must be elected among the candidates presented by minority lists; and•introduces the function of a "Manager responsible for the preparation of financial reporting documents" to be appointed in accordance with rules set out in a company’s by-laws, subject to a prior advice on part of the Board of Statutory Auditors.
Companies must amend their own by-laws within twelve months from the entry into force of the law. Certain provisions of this law were already reflected into Eni’s by-laws; certain other provisions have been incorporated into Eni’s by-laws effective May 25, 2006 by Eni’s Extraordinary Shareholders Meeting.Reporting
Requirementsrequirements andRestrictionsrestrictions onAcquisitionsacquisitions ofSharessharesHoldings in listed companies.Under law and Consob Regulation8, as modified following the implementation of Directive 2004/109/EC (the Transparency Directive9) any direct or indirect
participation in excess of 2%, 5%, 7.5%, 10% and subsequent multiples of 5%holding in the voting shares of a listedcompanyissuer in excess of 2%, 5%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 66,6%, 75%, 90% and 95% must benotifiedpromptly disclosed tosuchthe investee company and to Consob.The same disclosure requirements refer to holdings which fall below one of the specified threshold.
As specified in new Article 117-bis of Consob Regulation, these obligations apply also to treasury-shares owned directly or through its subsidiary companies by a listed issuer.
Due declarations shall be made within five
open markettrading daysfromof theeffectivenessdate of the transaction triggeringsuch obligation to notify.
Thethe obligation to notify,also applies to any direct or indirect participation owned through ADSs.
For listed companies, whose by-laws impose a maximum limit on the number of shares that may be held by any shareholder, Consob is entitled to fix different relevant thresholds by decree.
Further, the reductionregardless of theforegoing interest belowdate on which it is to take effect, using therelevant thresholds must be notified within the same terms.
Shares held in excess of any such threshold cannot be voted in the eventspecific forms attached to the abovenotices have not been provided. Any resolution violation of such limitation can be voided if challenged in court by shareholders and Consob, if the resolution would have not be adopted without the consent of the shares in question.
The relevant thresholds noted above shall be calculated including: (i) shares registered in the name of the relevant reporting person whose underlying voting rights are attributed to third parties, and viceversa; and (ii) shares held through third parties and shares whose voting rights are attributable to such third parties, excluding shares registered in the name of, or endorsed to, fiduciaries, as well as shares whose voting rights are attributed to intermediaries for purposes of the management of mutual or individual savings.
Furthermore, calculation of 5%, 10%, 25%, 50% and 75% thresholds shall also take into account shares outstanding which the relevant reporting person is entitled to purchase or to sell directly or through third parties. Shares to be purchased through the exercise of conversion rights or warrants shall be calculated only in the event the acquisition can take place within a sixty days period.mentioned Regulation. In the event the same relevant participation is directly or indirectly held by two or more entities,
thenthe obligation to notify may be satisfied by one of such person, provided that completeness of information is guaranteed.The relevant thresholds noted above shall be calculated including: (i) shares owned by the reporting person, even if the voting rights belong or are assigned to third parties, or are suspended, as well as shares of which the voting rights belong or are assigned to him; and (ii) shares held through third parties (and shares whose voting rights are assigned to such third parties) such as nominees, trustees or subsidiary companies.
Article 119 of Consob Decision No. 11971/1999, provide also for specific disclosure requirements (with partially different thresholds), connected to the potential holdings (such as holdings of derivatives or other equity-linked securities), so that, in calculating the defined threshold, potential holdings shall not be aggregated with actual holding.
(8) i Article 119 of Consob Decision No. 11971/1999 and subsequently amendments. (9) Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. 153
The obligation to notify also applies to any direct or indirect participation owned through ADRs.
Voting rights attached to listed shares which have not been notified pursuant the above mentioned disclosure requirements may not be exercised. Any
participation exceedingresolution or act adopted in violation of such limitation, with the contribution of those undisclosed shares, could be voided if challenged in Court, under the Civil Code, by shareholders or by Consob itself.Moreover, based on reasoned investor protection and/or market efficiency aims, Consob is entitled to fix the first relevant threshold to a measure lower than 2%, by its decree (as provided for Law Decree No. 5 of February 2, 2009, converted into Law No. 33 of April 9, 2009). This faculty may be exercised only for definite period of time, with regard to public companies with high capitalization level.
Holdings in unlisted companies. Under law and Consob Regulation (Article 125 of the mentioned decision), listed issuers holding more than 10% of the voting capital of an Italian or foreign unlisted company
including any foreign company, owned byor alisted company must be notified to such non-listed"società a responsabilità limitata" as regulated in Italian Civil Code (Articles 2462-2483), shall inform the investee company, within seven days from reaching suchthreshold. Similarly,threshold (applying, for calculating this thresholds, the some rules established for holding in listed companies).In the same way, the non-listed company must be notified about any subsequent reduction of such participation below the 10% threshold.
Listed companies are also required to notify Consob of their participation exceeding 10% of the voting share capital of non-listed companies or "società a responsabilità limitata" owned at the
endclosing date of thefirst six months and of the full year. Such notification is duefinancial year, within 30 days from the date of approval of theAnnual Report and the Report on the First Six Months, respectively.draft annual report.
In the event the same relevant participation is directly or indirectly held by two or more entities, then the obligation to notify may be satisfied by one of such entities, provided that completeness of information is guaranteed.Cross-holdings rules
The 10% threshold shall be calculated including: (i) shares registered in the name of the relevant listed company, even if voting rights are attributable to third parties; (ii) shares whose voting rights are attributable to the relevant listed company, in the event such voting rights entitle such party to exercise a dominant or material influence at the ordinary shareholder’s meeting; and (iii) shares registered in the name of third parties and shares whose voting rights are attributable to third parties.In addition to the rules of Article
2359 bis2359-bis of the Italian civil code governing the acquisition of shares of the parent company by a controlled subsidiary, Decree No. 58/1998 regulates additional cross-ownership matters as follows.Cross-ownership between listed and non-listed companies may not exceed 2% of the shares of the listed company or 10% of the shares of the non-listed
company. Forcompany (applying, for calculating these ownership thresholds, the same rules established forcalculations of interestsholdings in listedand non-listed companies apply.companies).The company
ultimately exceedingthat last exceed the limit of 2% or 10% interest in a listed or unlisted company respectively, may not exercise the voting rights on the shares held in excess of suchthresholds;thresholds and must sell such sharesmustwithin the following 12 months. In the event of failure to make the disposal within such time limit, the suspension of voting rights shall apply to the entire shareholding, and any resolution or act adopted with the contribution of relevant shares, could besold within 12 months.challenged under the Civil Code.If anyone holds an interest exceeding 2% of the share capital of a listed company, such listed company or any entity controlling such listed company may not acquire an interest exceeding 2% of the share capital of a listed company controlled by said holder. If the foregoing limit is exceeded, the holder who last exceeded the foregoing limit
or(or both the holders, if it is not possible to ascertain which holder exceeded such limitlast,last) may not exercise the voting right related to the shares exceeding the foregoing limit.Such limitsIn the event of non-compliance, the voting rights attached to the shares in excess of the limit specified shall be suspended and any resolution or act adopted with the contribution of relevant shares, could be challenged under the Civil Code.Described limitations are not applicable in case of a tender offer for acquiring at least 60% of the ordinary shares of a listed company. For a description of the limitation on cross-ownership between a company and its subsidiaries, see "Purchase by Eni SpA of its Own Shares".
Shareholders’ agreements
Under Decree No.
58,58/1998, any agreement, in whatever form, intended to regulate the exercise of voting rights in a listed company or in the companies controlling a listed company, together with any of its subsequent amendments, renewal or termination, must be: (i) notified to Consob, within five days from its execution; (ii) disclosed to the public through the publication, in summary form, inone Italian newspaper having general circulation,the daily press, within ten days from its execution; and (iii) deposited in the Companies’ Register of the place where such listed company has its registered office within 15 days from itsexecution.conclusion.154
The same requirements also apply to agreements, in whatever form, that: (a) impose an obligation of consultation prior
consultation forto the exercise of voting rights in a listed company and in its controlling companies; (b)contain undertakings limitingset limits on thetransferabilitytransfer of the related sharesandor of othersecurities granting rightsfinancial instruments that entitle holders to buy or subscribe forthe acquisition or subscription of shares;them; (c) provide for theacquisitionpurchase of the sharesand securities; andor of above mentioned financial instruments; (d)contemplatehave as their object orcauseeffect the exercise,
also in association with other persons,jointly or otherwise, of dominant influenceover the listed company that issued the shareson such companies; andits controlled entities.d-bis) which aim to encourage or frustrate a takeover bid or equity swap, including commitments relating to non-participation in a takeover bid.In the event of non-compliance with said requirements, the
obligations set out above are not completely satisfied, then the agreement is ineffectiveagreements shall be null and void, the voting rights connected to the relevant shares may not beexercised. In case of violationexercised and any resolution or act adopted with the contribution of suchlimitation imposed on the voting rights, a resolution canshares could be challengedif such resolution would have not been approved withoutunder thevote of such shares.Civil Code.If the parties have agreed upon the duration of the agreement, such duration cannot exceed three years. In
absencecase ofagreement,agreements concluded for an indeterminate period, each partyto the agreement canmay withdrawfrom such an agreement byon givingasixmonthmonths’ notice.Antitrust rules
In accordance with Law No. 287 of October 10, 1990, any merger or acquisition of sole or joint control over a company that would create or strengthen a dominant position in the domestic market in a manner that eliminates or significantly reduces competition is
prohibited.prohibited and mergers and acquisition of specified dimension must be subject to preventive authorization of Italian Antitrust Authority10. However, if the acquiring party and the company to be acquired operate in more than one EU member state and together exceed certain revenue thresholds, the antitrust approval of the acquisition falls within the exclusive jurisdiction of the European Commission.Shareholders’
Meetingsmeetings
Registered shareholders are entitled to attendThe Shareholders’ Meeting could be "ordinary" or "extraordinary". In particular, an ordinary meeting appoints and revokes directors and statutory auditors, approves financial statements within 120 days from the end of each fiscal year (December 31) and voteaton other issues that can be defined in the By-laws, while an extraordinary meeting approves amendments in By-laws and extraordinary transactions, such as capital increases and mergers.The notice of a Shareholders’ Meeting may specify two meeting dates ("calls") for ordinary meetings and three calls, in case of listed companies, for extraordinary shareholders’ meetings.
Each holder is entitled to cast one vote for each share held. Votes may be cast personally,Shareholders’ meetings are usually held at the Company registered office unless otherwise resolved byproxy or by mail,the Board of Directors, provided however they are held inaccordance with applicable regulations.Italy.Meetings are called by
Eni SpA’sEni’s Board of Directors when required or deemed necessary, or on request of shareholders representing at least 10% of outstanding shares, who must provide an agenda of the matters to be discussed to the Chairman of the Board of Directors. Meetings may also be called, by the Board of Statutory Auditors or by two auditors, provided that such call has been notified in advance.
Ordinary Shareholders’ Meetings must be convenedShareholders representing at leastonceone fortieth of Eni’s share capital, both on an individual and ayear. At these ordinary meetings, shareholders approvecumulative basis, may ask, within five days as of thefinancial statements, resolve upon dividend distribution, if any,date of publication of the Shareholders’ Meeting notice, to add other items in the agenda. The request shall contain the matters to be proposed to the Shareholders’ Meeting. Said faculty mayappoint Directors, Statutory Auditors and, when necessary, the external auditors, determine their remuneration and votenot be exercised on theliabilitymatters upon which, pursuant to the applicable legislation, the Shareholders’ Meeting resolves on the basis of a proposal of the Board of Directorsand Statutory Auditors and approveor on the basis of a project or report of the Board. The integrations accepted by the Board shall be published, through a specific notice, at least ten days before the Shareholders’ Meetingregulation. Extraordinary meetings of shareholders may be called to pass upon proposed amendments to the by-laws, capital increases, mergers, consolidations, demerger, issuance of debentures, appointment of liquidators and similar extraordinary actions. The notice of a Shareholders’ Meeting generally specifies two meeting dates ("calls") and because Eni SpA is listed such notice may specify three calls for Extraordinary Shareholders’ Meetings.date.The attendance quorum
requiredfora valid shareholder action atan ordinary meeting on first call is at least 50%or moreof the outstanding ordinary shares, while on second call there is no attendance quorum requirement. At a duly called ordinary meeting, in both first and second calls, resolutions may be approved by a simple majority of the shares represented at the meeting.The attendance quorum required for a valid shareholder meeting at an
Extraordinary Meetingextraordinary meeting ismore thanat least 50% of theoutstanding sharescompany’s share capital on first call,whileor more than 1/3 or at least 1/5 of the company’s share capital, on second callthe attendance quorum is more than 1/3 of the Shares outstandingandonthird call,the attendance quorum is more than 1/5 of the shares outstanding.respectively. On first, second and third call, resolutions may be approved by a majority of 2/3 of theSharesshares represented at the Shareholders’ Meeting.
The financial statementsWith the aim ofEni SpA are submitted for approvalfacilitating the attendance of shareholders, according tothe annual shareholders’ meeting, which must be convened within 180 days after the endlaw and Article 13 of thefinancial year. ShareholdersBy-laws, calls for meetings areinformed of all meetings to be held by publication of a notice in the Gazzetta Ufficiale and in at least one Italian newspaper of general circulationpublished, at least 30 days before the date fixed for themeeting. Under current legislation,meeting on first call, in the Official Gazette of the Italian Republic or in the "Il Sole 24 Ore", "Corriere della Sera" and "Financial Times" newspapers. The notice is filed with Borsa Italiana and published on the Company website, also. The reports and proposals of the Board of Directorsto the Shareholders’ Meetingfor any item on the agenda of the meetingandtogether with the financial statements to be submitted to the shareholders’ approval,shallmust be deposited at the shareholders’ disposal at the Company’s registered office and at BorsaItaliana.Italiana’s, during the 15 days before the Shareholders’ Meeting.
(10) Autorità garante per la concorrenza ed il mercato (AGCM - www.agcm.it). 155
The shareholders are entitled to attend and vote at ordinary and extraordinary shareholders’ meetings. Each holder is entitled to cast one vote for each share held. Votes may be cast personally, by proxy or by mail, in accordance with applicable regulations.
Admission to the
meetingShareholders’ Meeting is granted to shareholders whorequesteddeliver the notification of attendancepursuant to Article 34 of Consob Deliberation No. 11768 of December 23, 1998,issued by financial intermediaries, under applicable laws, at leastfivetwo business days prior to the date of the meeting on first call. TheExtraordinary Shareholders’ Meeting, held on May 28, 2004, approvedcommunication can be withdrawn, through theamendment of Article 13 offinancial intermediaries, in which case shareholders lose theby-laws accordingright towhich the term is reduced to two days. For a description of the procedures to be followed by Beneficial Owners of ADRs to attend shareholders’ meetings and exercise voting rights with respect to underlying Shares, see "Description of American Depositary Receipts – Voting of Deposited Securities". Beneficial Owners of Shares held with Monte Titoli need only to instruct the relevant banks associated with Monte Titoli which hold their accounts to procure admission tickets and proxy forms.
The Extraordinary Shareholders’ Meeting held on May 28, 2004, approved the amendment to Article 23 of the by-laws according to which the Board of Director is allowed to resolve: (i) the merger and demerger of at least 90% directly owned subsidiaries; (ii) the establishment and winding up of branches; and (iii) the amendment to the by-laws to adequate its provisions to the current legislation.
Pursuant to Legislative Decree No. 213 dated June 24, 1998, Eni SpA’s shares have been "dematerialized" (the shares are not longer incorporated in a certificate). Therefore for the exercise of the rights connected to outstanding Shares not yet dematerialized, Shareholders must first deliver such shares to a financial intermediary associated with Monte Titoli.participate. Shareholders may
appoint proxiesattend the meeting bycompleting the form attached to the admission ticket.proxy. Directors, Statutory Auditors,auditorsand employees of EniSpAor ofcontrolledtheir subsidiary companies,andas well as the External Auditors of Eni,SpA, banksandMonte Titoliits subsidiary companies, may not be appointed proxies. Any one proxy may not represent more than 200shareholders of Eni SpA.shareholders. A proxy may be appointed only for a single meeting, including the first, second and third call thereof, unless the proxy is general or giventoby a company, association, foundation, other entities or institutions toan employee. The by-laws of Eni SpA provide for voting by mail. There are no limitations arising under Italian law or the by-laws of Eni SpA on the right of non-resident or foreign persons to hold or vote the Shares other than limitations that apply generally to all shareholders.its employees. Rules relating to proxies solicitation are established by Decree No.
5858/1998 and the related ConsobRegulationDecision No.11971 dated May 14,11971/1999. Accordingly whereby: (i) proxies may be solicited, collected or exercised by banks, investment firms and shareholders’ associations; (ii) proxies may be granted only in respect of shareholders’ meetings that have been called; and (iii) proxies may be limited to voting on particular proposals.Decree No. 58 provisions also
allowsallow companies to implement vote by mailproceduresprocedures.Eni’s By-laws allow vote by mail and
establishes new regulations relatingthe collection of proxies in Articles 13 and 14. Vote by mail can be revoked by express communication sent toamongthe Company at least one day before the meeting. Persons that intend to attend the meeting as legal or voluntary representatives of otherthings, takeovers, cross-shareholdings, shareholders’ agreementsshareholders must present the documentation confirming their power to the proper office of the Company according to the dates andsaving shares.
Meetingsforms indicated in the call for the meeting. In addition, as provided by Article 14 of Eni’s By-laws, in order to simplify the collection of proxies issued by shareholders that are also employees of Eni and Group companies and members of associations of shareholders that comply with current regulations, Eni provides areas for communicating and collecting proxies to said associations in ways to be agreed from time to time with their legal representatives.There are no limitations arising under Italian law or the Eni’s By-laws on the right of non-resident or foreign persons to hold or vote the shares other than limitations that apply generally to all shareholders.
Meetings are conducted according to the
"Eni SpA’s"Eni’s Shareholders’ Meeting Regulation" as approved by theOrdinaryordinary Shareholders’ Meeting of Eni on December 4, 1998 and amended by theOrdinaryordinary Shareholders’ Meeting held on May 28, 2004 in order to adequatethe provisionits provisions tothenew rulescontentintroduced in the Civil Codeforon this matter.During shareholders’ meetings, the
participation toBoard of Directors provides wide disclosure on items examined and shareholders can request information on issues in theShareholders’ Meetings.agenda. Information is provided within the limits of confidentiality, taking account of applicable rules regulating price sensitive information.Subscription
RightsrightsNew shares may be issued pursuant to a resolution of shareholders at an extraordinary meeting. Under the Italian law, shareholders have a
preemptivepre-emptive right to subscribe for new issues of shares anddebenturescorporate bonds convertible into shares in proportion to their respective shareholdings. Subject to certain conditions, principally designated to prevent dilution of the rights of shareholders, this right may be waived or limited by resolution taken by an extraordinary Shareholders’ Meeting by the affirmative vote of more than 50% of the shares outstanding. Such percentage applies to all calls of the meeting. The preemptive right is waived by the law in specific cases, such as non-cash contributions.Liquidation
RightsrightsUnder the Italian law, subject to the satisfaction of the claims of all other creditors, shareholders are entitled to
athe distribution of the remaining liquidated assets of EniSpAin proportion to the nominal value of their shares. Holders of savings shares and preferred shares, if foreseen by theby-laws,By-laws, in the event such shares are issued by Eni,SpA, arewould be entitled to a preferred right to distribution from liquidation up to their nominal value. Thereafter, if there are surplus assets, ordinary shareholders rank equally in the distribution of such assets. Shares rank pari passu among ordinary shareholders in a liquidation.
Material Contracts
None.
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Documents on Display
It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 100 F Street, NE, Room 1580, Washington, DC 20549 and at the SEC’s other public reference rooms in New York City and Chicago. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC filings are also available to the public from commercial document retrieval services and in the website maintained by the SEC at www.sec.gov. It is also possible to read and copy documents referred to in this annual report on Form 20-F at the New York Stock Exchange, 20 Broad Street, 17th floor, New York.
Exchange Controls
There are no exchange controls in Italy. Residents and non-residents of Italy may effect any investments, divestments and other transactions that entail a transfer of assets to or from Italy, subject only to the reporting, record-keeping and disclosure requirements described below. In particular, residents of Italy may hold foreign currency and foreign securities of any kind, within and outside Italy, while non-residents may invest in Italian securities without restriction and may export from Italy cash, instruments of credit or payment and securities, whether in foreign currency or euro, representing interest, dividends, other asset distributions and the proceeds of dispositions.
Updated reporting and record-keeping requirements are contained in
recentthe Italian legislation which implements an EU directive regarding the free movement of capital. Such legislation requires that transfers into or out of Italy of cash or securities in excess of euro 12.5 thousand be reported in writing to the Ufficio Italiano Cambi (the Italian Exchange Office) by residents or non-residents that effect such transfers directly, or by banks, securities dealers or Poste Italiane SpA (Italian Mail) that effect such transactions on their behalf. In addition, banks, securities dealers or Poste Italiane SpA effecting such transactions on behalf of residents or non-residents of Italy are required to maintain records of such transactions for five years, which records may be inspected at any time by Italian tax and judicial authorities.Non-compliance with these reporting and record-keeping requirements may result in administrative fines or, in the case of false reporting and in certain cases of incomplete reporting, criminal penalties. The Ufficio Italiano Cambi will maintain reports for a period of ten years and may use them, directly or through other government offices, to police money laundering, tax evasion and any other crime or violation.
Taxation
The information set forth below is a summary only, and Italian, the United States and other tax laws may change from time to time. Holders of shares and
ADSsADRs should consult with their professional advisors as to the tax consequences of their ownership and disposition of the shares and ADRs, including, in particular, the effect of tax laws of any other jurisdiction.Italian Taxation
The following is a summary of the material Italian tax consequences of the ownership and disposition of shares or ADRs as at the date hereof and does not purport to be a complete analysis of all potential tax effects relevant to the ownership or disposition of shares or ADRs.
Income tax
Dividends, in respect of 2008 profits, received by Italian resident individuals in relation to
participationsinterest exceeding 2% of the voting rights or 5% of the share capital ("substantialparticipations"interest") are included in the taxable income subject to personal income tax to the extent of40%49.72% of their amount. Personal income tax applies at progressive rates ranging from 23% to 43% plus local surtaxes. Dividends received by Italian resident individuals in relation to non-substantialparticipationsinterest not related to the conduct of a business are subject to a substitute tax of 12.5% withheld at the source by the dividend paying agent. This being the case, the dividend is not to be included in the individual’s tax return. If the non-substantialparticipations areinterest is related to the conduct of a business, dividends received in respect of 2008 profits are included in the taxable business income to the extent of40%49.72% of their amount.Despite the above statement, dividends are included in the taxable income at 40% to the extent they relate to un-distributed profit of 2007 and previous years.
157
Dividends received by Italian pension funds are included in the overall result of the pension funds subject to
aan 11% substitute tax. Dividends received by Italian collective investment funds are included in the overall result of the collective investment funds subject to a 12.5% substitute tax. Dividends received by Italian real estate investment funds are not subject to tax in the hands of the real estate investmentfunds.funds (under certain circumstances a 1% tax on net asset value is applied). Entities exempt from IRES (company income tax) are subject to the substitute tax at the rate of 27%.
DividendDividends paid to non-Italian residents are subject to the same substitute tax levied at source by the dividend paying agent at the rate of 27%, provided that theparticipations areinterest is not connected to an Italian permanent establishment. Up to four-ninths of the substitute tax withheld might be recovered by the non-resident shareholder from the Italian Tax Authorities upon provision of evidence of full payment of income tax on such dividend in his/her country of residence in an amount at least equal to the total refund claimed.Dividends are subject to the 1.375% substitute tax introduced by Financial Bill for 2008 where the conditions in Article 27, paragraph 3-ter, Presidential Decree No. 600 of 1973 are met, i.e. dividends are paid to companies and entities subject to a corporate income tax in a European Union member state or in Norway.
The substitute tax may also be reduced under the tax treaty in force between Italy and the country of residence of the Beneficial Owner of the dividend. Italy has executed income tax treaties with approximately 70 foreign countries, including all EU member states, Argentina, Australia, Brazil, Canada, Japan, New Zealand, Norway, Switzerland, the United States and some countries in Africa, the Middle East and the Far East. Generally speaking, it should be noted that tax treaties are not applicable where the holder is a tax-exempt entity or, with few exceptions, a partnership or a trust.
In order to obtain the treaty benefit (reduced substitute tax rate) at the same time of payment, the Beneficial Owner must file an application to the dividend paying agent chosen by the Depositary stating the existence of the conditions for the applicability of the treaty benefit, together with a certification issued by the foreign Tax Authorities stating that the shareholder is a resident of that country for treaty purposes.
Under the tax treaty between the United States and Italy, dividends derived and beneficially owned by a U.S. resident who holds less than 10% of the Company’s shares are subject to an Italian withholding or substitute tax at a reduced rate of 15%, provided that the
participations areinterest is not effectively connected with a permanent establishment in Italy through which the U.S. resident carries on a business or a fixed establishment in Italy through which such U.S. resident performs independent personal services (for further details please refer to the relevant provisions set forth in the Italy-U.S. Tax Treaty). In the absence of such conditions, the dividend paying agent will deduct from the gross amount of the dividend the substitute tax at the statutory rate of 27%. The threshold holding will be increased to 25% following a new tax treaty that has been ratified.Based on the certification procedure required by the Italian Tax Authorities, to benefit from the direct application of the 15% substitute tax the U.S. shareholder must provide the dividend paying agent with a certificate obtained from the U.S. Internal Revenue Service (the "IRS") with respect to each dividend payment. The request for that certificate must include a statement, signed under penalties for perjury, to the effect that the shareholder is a U.S. resident individual or corporation, and does not maintain a permanent establishment in Italy, and must set forth other required information. The normal time for processing requests for certification by the IRS is normally about six to eight weeks.
Where the Beneficial Owner has not provided the above mentioned documentation, the dividend paying agent will deduct from the gross amount of the dividend the substitute tax at the statutory rate of 27%. The U.S. recipient will then be entitled to claim from the Italian Tax Authorities the difference ("treaty refund") between the domestic rate and the treaty one by filing specific forms (certificate) with the Italian Tax Authorities.
According to the Italian tax law as reflected in the Deposit Agreement, the Company is not involved: (i) in withholding amounts due by holders of
ADSsADRs to relevant taxing authorities in connection with any distributions relating toADSs;ADRs; or (ii) in the procedures through which certain holders ofADSsADRs may obtain tax rebates, credits, refunds or other similar benefits. Pursuant to the Deposit Agreement, the custodian and the Depositary have undertaken to use reasonable efforts to make and maintain arrangements to enable persons that are consideredtheto be resident in United Statesresidentsfor purposes of applicable law to receive any rebates or tax credits (pursuant to treaty or otherwise) relating to distributions on theADSsADRs to which such persons areentitled inentitled. In addition, the Depositary has agreed to establish procedures to enable all holders to take advantage of any rebates or tax credits (pursuant to treatyofor otherwise) relating to distributions on theADSsADRs to which such holders are entitled and to provide, at least annually, a written notice, in a form previously agreed to by the Company, to the holders ofADSsADRs of any necessary actions to be undertaken by such Holders.
Transfer tax158
In general terms, no Italian transfer tax is payable in the following cases:
•contracts executed on regulated financial markets;•contracts concerning shares of non-listed companies, executed between non-resident persons and banks or other authorized intermediaries (provided that certain conditions are met); and•contracts concerning listed shares even if not executed on regulated financial markets, between non-resident persons and banks or other authorized intermediaries or investment funds.
The mentioned exemption from transfer tax does not entail the application of stamp duty or registration tax.
To provide a more complete picture, transfer tax is currently payable at the following rates:
•euro 0.072 for euro 51.65 (or fraction thereof) of the price at which the Shares or ADRs are transferred, when the transfer occurs directly between the contracting parties or through intermediaries other than those listed below.•Euro 0.025 for euro 51.65 (or fraction thereof) of the price at which the Shares or ADRs are transferred, when the transfer occurs between private individuals and a bank or between private individuals through an intermediary, such as an exchange agent, a bank, a stock broker, or a SIM.•Euro 0.0061 for euro 51.65 (or fraction thereof) of the price at which the Shares or ADRs are transferred, when the transfer occurs between banks, exchange agents or SIMs.Capital
Gains Taxgains taxThis paragraph applies with respect to capital gains out of the scope of a business activity carried out in Italy.
Gains realized by Italian resident individuals upon the sale of substantial
participations areinterest is included in the taxable base subject to personal income tax to the extent of40%49.72% of their amount, while gains realized upon the sale of non substantialparticipations areinterest is subject to a substitute tax at a 12.5% rate.For gains deriving from the sale of non substantial
participations,interest, two different systems may be applied at the option of the shareholder as an alternative to the filing of the tax return:
• the so-called "administered savings" tax regime (risparmio amministrato), based on which intermediaries acting as shares depositaries shall apply a substitute tax (12.5%) on each gain, on a cash basis. If the sale of shares generated a loss, said loss may be carried forward up to the fourth following year; and • the so-called "portfolio management" tax regime (risparmio gestito) which is applicable when the shares form part of a portfolio managed by an Italian asset management company. The accrued net profit of the portfolio is subject to a 12.5% substitute tax to be applied by the portfolio. Gains realized by
non residentsnon-residents from non substantialparticipationsinterest in listed companies are deemed not to be realized in Italy and consequently are not subject to the capital gains tax.On the contrary, gains realized by non-residents from substantial
participationsinterest even in listed companies are deemed to be realized in Italy and consequently they are subject to the capital gains tax.However double taxation treaties may eliminate the capital gains tax. Under the income tax convention between the United States and Italy, a U.S. resident will not be subject to the capital gains tax unless the shares or ADRs form part of the business property of a permanent establishment of the holder in Italy or pertain to a fixed establishment available to a shareholder in Italy for the purposes of performing independent personal services. U.S. residents who sell shares may be required to produce appropriate documentation establishing that the above-mentioned conditions of non-taxability pursuant to the convention have been satisfied.
Inheritance and
Gift Taxgift tax
No inheritancePursuant to Law Decree No. 262 of October 3, 2006, converted with amendments by Law No. 286 of November 24, 2006 effective from November 29, 2006, and Law No. 296 of December 27, 2006, the transfers of any valuable assets (including shares) as a result of death or donation (or other transfers for no consideration) and the creation of liens on such assets for a specific purpose are taxed as follows:
(a) 4 per cent: if the transfer is made to spouses and direct descendants or ancestors; in this case, the transfer is subject to tax on the value exceeding euro 1,000,000 (per beneficiary); (b) 6 per cent: if the transfer if made to brothers and sisters; in this case, the transfer is subject to the tax on the value exceeding euro 100,000 (per beneficiary); (c) 6 per cent: if the transfer is made to relatives up to the fourth degree, to persons related by direct affinity as well as to persons related by collateral affinity up to the third degree; and (d) 8 per cent: in all other cases. If the transfer is made in favor of persons with severe disabilities, the tax applies
in Italy to the transfer of shares or ADRs by reason of death. Transfer of shares or ADRs, even if held outside Italy, by reason of donation are subject to the ordinary Italian transfer taxon the valueof the giftexceeding euro180,759.91, only if the donee1,500,000. Moreover, an anti-avoidance rule isnot the spouse, a direct descendant or a relative up to the fourth degreeprovided for by Law No. 383 ofthe donor. However, tax applies in the fixed amount of euro 129.11.
An anti avoidance rule applies toOctober 18, 2001 for any gift of assets(such as(including shares) which, if sold for consideration, would give rise to capitalgaingains subject to a substitute taxas per(imposta sostitutiva) provided for by Decree No. 461 of November 21, 1997. In particular, if the donee sells the shares for consideration within five years from the receipt thereof as a gift, the donee is required to pay a relevant substitute taxwill applyonthecapitalgain determinedgains as if the gift had neverbeen given.
taken place.United States Taxation
The following is a summary of certain U.S. federal income tax consequences to U.S. Holders (as defined below) of the ownership and disposition of Shares or
ADSs.ADRs. This summary is addressed to U.S. Holders that hold Shares orADSsADRs as capital assets, and does not purport to address all material tax consequences of the ownership of Shares orADSs.ADRs. The summary does notdeal withaddress special classes of investors, such as tax-exempt entities, dealers in securities, traders in securities that elect to mark to market, certain insurance companies, broker-dealers, investors liable for alternative minimum tax, investors that actually or constructively own 10% or more of Eni SpA’s Shares, investors that hold Shares orADSsADRs as part of a straddle or a hedging or conversion transaction and investors whose "functional currency" is not the U.S. dollar.This summary is based on the tax laws of the United States (including the Internal Revenue Code of 1986, as amended, (the "Code") its legislative history, existing and proposed regulations thereunder, published rulings and court decisions) as in effect on the date hereof, and which are subject to change (or changes in interpretation),
159
possibly with retroactive effect. The summary is based in part on representations of the Depositary and assumes that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. U.S. Holders should consult their own tax advisors to determine the U.S. federal, state and local and foreign tax consequences to them of the ownership and disposition of Shares or
ADSs.ADRs.As used in this section, the term "U.S. Holder" means a beneficial owner of Shares or
ADSsADRs who or that is: (i) a citizen or resident of the United States; (ii) a domestic corporation; (iii) an estate the income of which is subject to the United States federal income tax without regard to its source; or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust.The discussion does not address any aspects of the United States taxation other than federal income taxation. In particular, U.S. Holders are urged to confirm their eligibility for benefits under the income tax convention between the United States and Italy with their advisors and to discuss with their advisors any possible consequences of their failure to qualify for such benefits.
In general, and taking into account the earlier assumptions, for the United States federal income tax purposes, U.S. Holders who own ADRs evidencing
ADSsADRs will be treated as owners of the underlying Shares. Exchanges of Shares for ADRs and ADRs for shares generally will not be subject to the United States federal income tax.Dividends
DistributionsSubject to the passive foreign investment company, or PFIC, rules discussed below, distributions paid on the shares generally will be treated as dividends for U.S. federal income tax purposes to the extent paid out of Eni SpA’s current or accumulated earnings and profits as determined for U.S. federal income tax purposes, but will not be eligible for the dividends received-deduction generally allowed to corporations. To the extent that a distribution exceeds Eni SpA’s earnings and profits, it will be treated, first, as a non-taxable return of capital to the extent of the U.S. Holder’s tax basis in the shares orADSs,ADRs, and thereafter as capital gain. A U.S. Holder will be subject to U.S. federal taxation, on the date of actual or constructive receipt by the U.S. Holder (in the case of Shares) or by the Depositary (in the case ofADSs)ADRs) with respect to the gross amount of any dividends, including any Italian tax withheld therefrom, without regard to whether any portion of such tax may be refunded to the U.S. Holder by the Italian tax authorities. If you are a non-corporate U.S. Holder, dividends paid to you in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the Shares orADSsADRs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the shares orADSsADRs generally will be qualified dividend income. The amount of the dividend distribution that you must include in your income as a U.S. Holder will be the U.S. dollar value of the euro payments made, determined at the spot euro/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.Subject to certain conditions and limitations, Italian tax withheld from dividends will be treated as a foreign income tax eligible for credit against the U.S. Holder’s U.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to a U.S. Holder under Italian law or under the income tax convention, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability. See "Italian Taxation – Income Tax" above, for the procedures for obtaining a tax refund. Dividends paid on the Shares will be treated as income from sources outside the United States.
Dividend paid in taxable years beginning before January 1, 2007 generallyFor foreign tax credit purposes, dividends will beof "passive" or "financial services"income from sources outside the United States anddividends paid in taxable years beginning after December 31, 2006will, depending on your circumstances, generally be either "passive" or "general" incomewhich, in either case, is treated separately from other types of incomeforpurposepurposes of computing the foreign tax credit allowable to you.Sale or
Exchangeexchange ofSharesshares
In general,Subject to the PFIC rules discussed below, a U.S. Holder generally will recognize gain or loss for U.S. federal income tax purposes on the sale or exchange of Shares orADSsADRs equal to the difference between the U.S. Holder’s adjusted basis in the shares orADSsADRs (determined in U.S. dollars), as the case may be, and the amount realized on the sale or exchange (or if the amount realized is denominated in a foreign currency its U.S. dollar equivalent, determined at the spot rate on the date of disposition). Generally, such gain or loss will be treated as capital gain or loss if the Shares orADSsADRs are held as capital assets and will be a long-term capital gain or loss if the shares orADSsADRs have been held for more than one year on the date of such sale or exchange. Long-term capital gain of a non-corporate U.S. Holder that is recognized in taxable years beginning before January 1, 2011 is generally subject to a160
maximum tax rate of 15%. In addition, any such gain or loss realized by a U.S. Holder generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.
PFIC rules
Eni SpA believes that shares and ADRs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If Eni SpA were to be treated as a PFIC, unless a U.S. holder elects to be taxed annually on a mark-to-market basis with respect to the shares or ADRs, gain realized on the sale or other disposition of your shares or ADRs would in general not be treated as capital gain. Instead, if you are a U.S. holder, you would be treated as if you had realized such gain and certain "excess distributions" ratably over your holding period for the shares or ADRs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, your shares or ADRs will be treated as stock in a PFIC if Eni SpA were a PFIC at any time during your holding period in your shares or ADRs. Dividends that you receive from Eni SpA will not be eligible for the special tax rates applicable to qualified dividend income if Eni SpA is treated as a PFIC with respect to you either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.
Item 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the possibility that
changesthe exposure to fluctuations in currency exchange rates, interest rates oroil, natural gas, petroleum products and electricitycommodity prices will adversely affect the value of thegroup’sGroup’s financial assets, liabilities or expected future cash flows.Eni has developed policies aimed at managing the market risk inherent in its activities and, in accordance with these policies, the group enters into various transactions using derivativeEni’s financialand commodity instruments (derivatives). Derivatives are contracts whose valueperformance isderived from one or more underlying financial instruments, indices or prices that are defined in the contract. The group also trades derivatives in conjunction with these risk management activities. Eni does not enter into derivative transactions on a speculative basis.
All derivative activity, whether for risk management or trading, is carried out by specialist teams that have the appropriate skills, experience and supervision. Eni’s Board of Directors has defined a policy that requires the Treasury Department of Eni SpAparticularly sensitive todetermine the maximum level of foreign exchange rate and interest rate risks that can be assumed by Eni’s companies responsible for treasury operations. Such policy also defines the eligible counterparties in derivative transactions. Eni’s Treasury Department is responsible for monitoring compliance with Eni’s policy and the correlation between the indicators adopted for both measuring the tolerable risk level and composition of the portfolios and market conditions.
As far as interest rate and foreign exchange rate risks are concerned, calculation and measurement techniques followed by Eni’s finance companies are in accordance with established banking standards (such standards are established by the Basel Committee). However, the tolerable level of risk adopted by Eni’s subsidiaries is more conservative than the recommended one. Eni’s guidelines for the management of commodity risk contain maximum limits to the price risk deriving from trading activities.
According to International Accounting Standard No. 39 "Financial instruments: recognition and measurement" (IAS 39), derivatives are classified as hedging instruments when the relationship between the derivative and the subject of the hedge is formally documented and the effectiveness of the hedge is high and is checked periodically. When derivatives constitute a fair value hedge, the group’s exposure to market risk created by the derivative is offset by the opposite exposure arising from the asset or liability. When derivates are designated as a part of a cash flow hedge, changes in the fair value of the derivates are initially stated in net equity and then recognized in the profit and loss account consistent with effects economic produced by the hedged transaction. Derivatives that do not meet the conditions required by IAS 39 qualify as derivatives held for trading purposes and are accounted for at fair value, with change in fair value recorded in the profit and loss account.
Nature and classification of derivative financial instruments held by Eni as of December 31, 2005 and related fair value at the same date are set out in the table below.
Years ended December 31, 2005
Fair value asset
Contractual or notional amounts
Fair value liability
Contractual or notional amounts
(euro million)
Fair value of non-hedging derivates Exchange rate 73 3,681 214 8,743 Interest rate 14 1,281 101 5,145 Commodities 30 405 63 417 117 5,367 378 14,305 Fair value of cash flow-hedging derivates Exchange rate 0 5 5 42 Interest rate Commodities 32 171 32 176 5 42
Sensitivity analysis
The Company has estimated its market risk exposure using sensitivity analysis. Market risk exposure has been defined as the change in fair value of derivative financial and commodity instruments and other financial instruments assuming a hypothetical 10 percent adverse change in market prices or rates. The interest rate used for periods shorter than one year is LIBOR/EURIBOR. The Company has applied the sensitivity analysis to derivative financial and commodity instruments and other financial instruments that are exposed to interest rate, foreign exchange rate and commodities price risk. Actual changes in market prices or rates may differ from hypothetical changes.
The table below presents the potential impact on the fair value of the current financial instruments as of December 31, 2005, of an increase or a decrease of 10% in the interest rate yield curves in each of the currencies.
(euro million)
As of December 31, 2005———————————————————Assets/Liabilities
Notional value/ Carrying amount assets
Notional value/ Carrying amount liabilities
Fair value assets
Fair value liabilities
Change in fair value with a 10% interest rate increase
Change in fair value with a 10% interest rate decrease
Interest rate Financial instruments 233 1,499 236 1,698 38 (54 ) Derivative financial instruments 1,281 5,145 14 101 47 (48 ) - of which
interest rate swap1,281 5,145 14 101 47 (48 ) 1,514 6,644 250 1,799 85 (102 ) Exchange rate Financial instruments 197 120 235 120 13 (12 ) Derivative financial instruments 3,686 8,785 73 218 164 (202 ) - of which
interest currency swap1,277 2,316 58 73 170 (175 ) currency swap 2,378 6,370 15 139 (15 ) (15 ) other 31 99 6 9 (12 ) 3,883 8,905 308 338 177 (214 )
As of the same date, Eni’s exposure to commodity market risk was immaterial.
Currency riskFluctuations in exchange rates can have significant effects on the group’s reported profit. The effects of most exchange rate fluctuations are absorbed in business operating results through changing cost-competitiveness,changes in the price ofcertain products via indexation to international parameters quoted in U.S. dollars, lags in market adjustment tocrude oil and movements inratesthe euro/U.S. $ exchange rate. Overall, a rise in the price of crude oil has a positive effect on Eni’s results from operations andconversion differences accounted forliquidity due to increased revenues from oil and gas production. Conversely, a decline in crude oil prices reduces Eni’s results from operations and liquidity.The impact of changes in crude oil prices on
specific transactions. For this reason,thetotal effectCompany’s downstream gas and refining and marketing businesses and petrochemical operations depends upon the speed at which the prices of finished products adjust to reflect changes in crude oil prices. In addition, the Group’s activities are, to various degrees, sensitive to fluctuations in the euro/U.S. $ exchange ratefluctuations is not identifiable separately in the group’s reported profit, nor is the whole exchange rate risk entirely covered. In addition to the euro, which the currency adopted for financial reporting purposes, the main underlying economic currency of the group’s cash flows is the U.S. dollar. This is because Eni’s major productsas commodities are generally priced internationally in U.S. dollars or linked tocertaindollar denominated productspricedas inU.S. dollars. Eni’s foreign exchange management policy is to minimize economic and significant transactional exposures arising from movementsthe case of gas prices. Overall, an appreciation of the euro against theU.S. dollar. The group co-ordinatesdollar reduces thehandlingGroup’s results from operations and liquidity, and vice versa.Please refer to Note 29 to the Consolidated Financial Statements for a qualitative and quantitative discussion of the Company’s exposure to market risks. Please also refer to Notes 7 and 20 to the Consolidated Financial Statements for details of the different derivatives owned by the Company in these markets.
As part of its financing and cash management activities, the Company uses derivative instruments to manage its exposure to changes in interest rates and foreign exchange
risks centrally, by netting off naturally occurring opposite exposures wherever possible to reduce the risks, and then dealing with any material residual foreign exchange risks.
Interest rate riskThe group is exposed to interest rate risk on short- and long-term floating raterates. These instrumentsand as a result of the refinancing of fixed rate finance debt. Eni’s policy foresees to incur long-term debt at a floating rate, or at a fixed rate depending on opportunities at the issuance with regards to the level of interest rates, in euros or in U.S. dollars according to general corporate purposes (to optimize level of liquidity, to optimize revenue from investments considering existing interest yield curves, and to minimize the cost of borrowing).
The group is exposed predominantly to Euribor (Euro Interbank Offered Rate) and U.S. dollar LIBOR (London Inter-Bank Offer Rate) interest rates as borrowingsaremainly denominated in euro or U.S. dollars. To manage the balance between fixed and floating rate debt, the group enters intoprincipally interest rate andcross-currency swaps in which the group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed notional principal amount.currency swaps. Theproportion of floating rate debt at December 31, 2005 was 83% of total finance debt outstanding.
Commodity riskEni’s results of operations are exposed to fluctuations in prices of crude oil, petroleum prices, natural gas and electricity. Changes in commodity prices are absorbed by the Group’s business units. A decrease in oil prices generally has a negative impact on Eni’s results of operations and vice versa. EniCompany alsobears commodity risks in connection with certain trading activities. Eni’s trading function uses financial andenters into commodity derivatives as part of its ordinary commercial and trading activities and, from time to time, to hedge theassociated tradingexposure to variability in future cash flows due to movements in commodity prices, in view ofcrudepursuing acquisitions of oilrefined products, electricityandrelated instruments to manage certaingas reserves as part of thegroup’s exposuresCompany’s ordinary asset portfolio management or other strategic initiatives.These instruments and their accounting treatment are detailed in Notes 7 and 25 to
price fluctuations.the Financial Statements.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
Item 15. CONTROLS AND PROCEDURES
Disclosure controls and procedures
In designing and evaluating the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company’s management, including the
principal executive officerChief Executive Officer andprincipal financial officer,the Chief Financial Officer, recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company’s management necessarily was required to apply itsjudgementjudgment in evaluating thecost-benefitcost benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.It should be noted that
Enithe Company has investments in certainunconsolidatednon-consolidated entities. AsEnithe Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.The Company’s management, with the participation of the principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-14(c) under the Exchange Act
Rule 13a-14(c)as of the end of the period covered by this Annual Report on Form 20-F. Based on that evaluation, the principal executive officer and principal financial officer have concluded that these disclosure controls and procedures are effective.Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective
at thecan only provide reasonable assurancelevel.with respect to financial statement preparation and presentation. Also, the effectiveness of an internal control system may change over time.The Internal Control Committee assists the Board of Directors in setting out the main principles for the internal control system so as to appropriately identify and adequately evaluate, manage, and monitor the main risks related to the Company and its subsidiaries, by laying down the compatibility criteria between said risks and sound corporate management. In addition this Committee assesses, at least annually, the adequacy, effectiveness, and actual operations of the internal control system.
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of its internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on the results of this evaluation, the Group’s management concluded that its internal control over financial reporting was effective as of December 31, 2008.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, has been audited by PricewaterhouseCoopers SpA, an independent registered public accounting firm, as stated in its report that is included on pages F-1 and F-2 of this Annual Report on Form 20-F.
Changes in Internal Control over Financial Reporting
There have not been changes in the Company’s internal control over financial reporting that occurred during the period covered by this Form 20-F that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
162
Item 16A. Board of Statutory Auditors Financial Expert
Eni’s Board of Statutory Auditors has determined that
fourfive members of Eni’s Board of Statutory Auditors, qualify as "audit committee financial expert", as defined in Item 16A of Form 20-F. Thesefourfive members are:Paolo Andrea Colombo,Ugo Marinelli, who is the Chairman of the Board, andFilippo Duodo, Riccardo PerottaRoberto Ferranti, Luigi Mandolesi, Tiziano Onesti and Giorgio Silva. All members are independent.
Item 16B. Code of Ethics
Eni adopted a code of ethics that applies to all Eni’s employees including Eni’s principal executive officer, principal financial officer and principal accounting officer. Eni published its code of ethics on Eni’s website. It is accessible at www.eni.it, under the section
Publications -Sustainability – CorporateResponsibility -Governance and Corporate Ethics – Code ofPractice.Ethics. A copy of this code of ethics is included as an exhibit to thisannual report.Annual Report on Form 20-F.Eni’s code of
ethicethics contains ethical guidelines, describes corporate values andrequiredrequires standards of business conduct and moral integrity. The ethical guidelines are designed to deter wrongdoing and to promote honest and ethical conduct, compliance with applicable laws and regulations and internal reporting of violations of the guidelines. The codealsoaffirms the principles of accounting transparency and internalcontrol.control and endorses human rights and the issue of the sustainability of the business model.
Item 16C. Principal Accountant Fees and Services
PricewaterhouseCoopers SpA has served as Eni
independent public auditor for fiscal year 2003 and as Eniprincipal independent public auditor for fiscal years20042006, 2007 and2005,2008 for which audited Consolidated Financial Statements appear in thisannual reportAnnual Report on Form 20-F.The following table shows total fees paid by Eni, its consolidated and
ournon-consolidated subsidiaries and Eni’s share of fees incurred by joint ventures for services provided by Eni public auditor PricewaterhouseCoopers and its member firms, with respect to theprevious two years:years indicated:
For the yearYear ended December 31,
2006
2007
2008
(thousand euro)
Audit fees 22,240
26,383
27,962
Audit-related fees 166
169
152
Tax fees 303
81
46
All other fees 6
120
1
Total 22,715
26,753
28,161
(thousand euro) 2004
2005
Audit fees 9,344
12,591
Audit-related fees 136
190
Tax fees 344
246
All other fees 54
38
Total 9,878
13,065
Audit Fees
principallyincludefees billedprofessional services rendered by the principal accountant for thestandardauditworkof the registrant’s annual financial statements or services thatneeds to be performed each yearare normally provided by the accountant inorder to issue an opinionconnection with statutory and regulatory filings or engagements, including the audit on theConsolidated Financial Statements of Eni. It also includes other audit services which are those services that only the external auditor reasonably can provide, such as comfort letter/consent letter, certification services, assistance and revision of documents filed with the SEC.Company’s internal control over financial reporting.Audit Related Fees include
fees billed for otherassurance and related servicesprovided by auditors, but not restricted to those that can only reasonably be providedby theexternal auditor signing the audit report,principal accountant that are reasonably related to the performance of the audit or review of thecompany’sregistrant’s financial statementssuchand are not reported as Audit Fees in this Item. The fees disclosed in this category mainly include audits of pension and benefit plans, merger and acquisition due diligence, audit and consultancy services rendered in connection with acquisition deals,checks on internal control systems over financial reporting,certification services not provided for by law and regulations and consultations concerning financial accounting and reporting standards.Tax Fees include professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. The fees disclosed in this category mainly include fees billed for the assistance with compliance and reporting of income and value added taxes, assistance with assessment of new or changing tax regimes, tax consultancy in connection with merger and acquisition deals, services rendered in connection with tax refunds, assistance rendered on occasion of tax inspections and in connection with tax claims and recourses and assistance with assessing relevant rules, regulations and facts going into Eni correspondence with tax authorities.
All Other Fees include products and services provided by the principal accountant, other than the services reported in Audit Fees, Audit-Related Fees and Tax Fees of this Item and consists primarily of fees billed for consultancy services related to IT and secretarial services that are permissible under applicable rules and
regulations and consist primarily of consultancy services related to IT and secretarial services.regulations.163
Pre-approval
Policiespolicies andProceduresprocedures of the Internal Control CommitteeThe Board of Statutory Auditors
informed allhas adopted a pre-approval policy for audit and non-audit services that set forth the procedures and the conditions pursuant to which services proposed to be performed by the principal auditors may be pre-approved. Such policy is applied to entities within the Eni Groupcompanies that they cannot request Eni’s external auditorswhich are either controlled or jointly-controlled (directly or indirectly) by Eni SpA. According toperformthis policy, permissible servicesother than audits, services related to audits, and towithin thecompany’s capital markets transactions. This restriction applies to our principal external auditor and tootherexternal auditors performingaudit servicesrelating to 5% or more of Eni’s consolidated revenues or total assets. Services strictly related to audit services and to the company’s capital markets transactions have been listedcategory are pre-approved by the Board of Statutory Auditors.
Audit services and services strictly related to audit services and to the company’s capital markets transactions have been identified as permissible and have been pre-approved by theThe Board of Statutory Auditorswhich also informed all Group companies that pre-approval by the Boardapproval is required on a case by case basis forany other service requestedthose requests regarding: (i) audit-related services; and (ii) non-audit services to be performed by the external auditorsincluding those non-audit serviceswhich are permissible under applicable rules and regulations. In such cases, the Company’s internal audit department is charged with performing an initial assessment of each request to be submitted to the Board of Statutory Auditors for approval. The internal audit department periodically reports to Eni’s Board of Statutory Auditors on the status of both pre-approved services and services approved on a case-by-case basis rendered by the external auditors.During
2005,2008, no audit-related fees, tax fees or other non-audit fees were approved by the Board of Statutory Auditors pursuant to the de minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i) (c) of Rule 2-01 of Regulation S-X.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Making use of the exemption provided by Rule
10A-(c)10A-3(c)(3) for non-U.S. private issuers, Eni has identified the Board of Statutory Auditors as the body that, starting from June 1, 2005, is performing the functions required by the SEC rules and the Sarbanes-Oxley Act to be performed by the audit committees of non-U.S. companies listed on the NYSE (see "Item 6 – Board of Statutory Auditors" above).
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following tables present purchases of own shares by Eni from the beginning of the program through May
31, 2006(1):4, 2009:
Period Number of shares (million)
Average price
(euro per share)Total cost
(million euro)euro million)Share
capital %
2000 (Since September 1) 44.38 12.92 574 1.11 2000 (since September 1) 44.38 12.92 574 1.11 2001 110.00 13.58 1,494 2.75 110.00 13.58 1,494 2.75 2002 52.26 14.74 771 1.30 52.26 14.74 771 1.30 2003 23.95 13.76 329 0.60 23.94 13.76 329 0.60 2004 4.23 16.60 70 0.10 4.23 16.60 70 0.10 2005 47.06 21.97 1,034 1.18 47.06 21.97 1,034 1.18 2006, through May 31, 2006 25.02 23.74 594 0.62 Total purchased as of May 31, 2006 306.90 15.85 4,866 7.66 2006 53.13 23.35 1,241 1.33 2007 27.56 24.69 680 0.68 2008 35.90 21.67 778 0.90 2009, through May 4, 2009 - - - - Total purchased as of May 4, 2009 398.47 17.49 6,971 9.95 minus: - stock option exercised and shares grantedpursuant to stock option and stock grant plans for the 2003-2005 three year period (5.01 ) 301.89 7.54 - stock options exercised and shares granted pursuant to stock option and stock grant plans (15.51 ) Total shares held in treasury 382.95 9.56
164
Total number of shares purchased
Average price paid per share (euro)
Total number of shares purchased, as part of publicly announced plans or programs
Maximum number of shares that may yet be purchased under the plans or programs.(2)
At December 31, 2004 234,812,701 13.79 234,812,701 165,605,112 January 2005 560,260 18.17 235,372,961 165,044,852 February 2005 854,920 19.06 236,227,881 164,193,332 March 2005 1,297,742 19.92 237,525,623 162,901,290 April 2005 3,764,013 19.49 241,289,636 159,137,277 May 2005 4,030,350 19.80 245,319,986 155,307,627 June 2005 1,041,403 21.23 246,361,389 154,802,124 July 2005 57,200 21.46 246,418,589 154,812,924 August 2005 494,349 23.53 246,912,938 156,116,575 September 2005 33,900 24.57 246,946,838 156,496,575 October 2005 20,875,450 22.37 267,822,288 135,746,725 November 2005 7,974,000 22.82 275,796,288 127,864,925 December 2005 6,081,000 23.62 281,877,288 121,986,025 January 2006 4,539,921 24.23 286,417,209 117,874,304 February 2006 2,449,000 24.17 288,866,209 115,478,004 March 2006 6,163,400 23.35 295,029,609 109,420,304 April 2006 3,629,000 24.17 298,658,609 106,045,904 May 2006 8,246,033 23.43 306,904,642 (3) 98,105,871
At December 31, 2007 (1) 362,562,118 17.08 362,562,118 51,474,995 January 2008 2,709,130 22.13 365,271,248 48,873,565 February 2008 3,380,161 22.25 368,651,409 45,504,204 March 2008 2,606,938 22.01 371,258,347 42,908,766 April 2008 (3) 2,242,200 23.41 373,500,547 40,678,566 May 2008 2,728,900 25.74 376,229,447 37,949,666 June 2008 2,982,450 24.50 379,211,897 34,967,216 July 2008 2,823,050 22.37 382,034,947 32,144,166 August 2008 1,839,400 21.48 383,874,347 30,304,766 September 2008 13,426,200 19.79 397,300,547 16,878,566 October 2008 1,166,306 18.38 398,466,853 15,712,260 November 2008 - - 398,466,853 15,712,260 December 2008 - - 398,466,853 15,712,260 January 2009 - - 398,466,853 15,712,260 February 2009 - - 398,466,853 15,712,260 March 2009 - - 398,466,853 15,712,260 April 2009 - - 398,466,853 15,712,260 May 2009 (through May 4, 2009) - - 398,466,853 15,712,260
(1) SinceFrom May 2000, Eni’s Ordinary Shareholders’ Meeting has authorized Eni’s Board of Directors to carry out a program for the repurchase ofitsown shares withinsetsuch limitstaking account also of Italian law restrictions which relate toas established by theobligation of the Company to purchase its own shares paying for such shares only out of distributable earnings and distributable reserves as reflected in the most recent financial statements approved by a shareholders’ meeting. In subsequent years, Eni’s OrdinaryShareholders’ Meetingre-authorized the Board to continue this program for the repurchase of its own shares and increased the amount of cash to be spent on it. The nominal value of shares so purchased, including shares held by subsidiaries, may not exceed 10% of such company’s share capital. Shares purchased in excess of such 10% limit must be resold within one year from the date of their purchase. Identical limitations apply to purchases of shares of a company by its subsidiaries.(2)Based on the authorized purchase ceiling, deducting the total number of shares purchased and adding the total number of stock options exercised by and shares granted to Eni’s managers pursuant to stock option and stock grant plans for the 2003-2005 three year period.(3)On May 25, 2006 Eni’s Ordinary Shareholders’ Meeting authorized the continuation of the program for the repurchase of its own shares for a further 18 month period and up to 400 million ordinary shares, nominal value euro 1 each, for an aggregate amount not exceeding euro 7.4 billion. The 400 million shares and the 7.4 billion thresholds take into account the number and amount of Eni shares purchased from the beginning of the program until May 24, 2006. As of May 24, 2006, Eni purchased approximately 304.94 million own shares, equal to approximately 7.61% of Eni’s share capital, for an aggregate amount of euro 4,820 million (corresponding to an average purchase price of euro 15.81 per share).itself. The shares are to be purchased on the Telematico at a price no lower than their nominal value and no higher than 5% over the reference price recorded on the business day preceding each purchase.At(2) Based on the same date,authorized purchase ceiling, deducting the total number of shares purchased andtaking accountadding back the number of stock options exercised by and shares granted to Eni’s managers pursuant to stock option and stock grant plans as of Annual Shareholders’ Meeting date.(3) On April 29, 2008 Eni’s Ordinary Shareholders’ Meeting authorized the continuation of the program for the repurchase of own shares for a further 18-month period and up to 400 million ordinary shares, nominal value euro 1 each, corresponding approximately to 10% of Eni’s share capital, for an aggregate amount not exceeding euro 7.4 billion: The 400 million shares and the euro 7.4 billion thresholds take into account the number and amount of Eni shares held in treasury as of April 29, 2008. As of April 29, 2008, Eni held 300.13in treasury 359.08 million own sharescorrespondingat a cost of euro 6,236 million. The 18-month period will expire in October 2009. According to7.49%applicable regulations, the nominal value ofEni’sshares so purchased, including shares held by subsidiaries cannot exceed 20% of a company’s share capital. Shares purchased in excess of such 20% limit must be resold within one year from the date of their purchase.
Item 16G. Significant Differences in Corporate Governance Practices as per Section 303A.11 of the New York Stock Exchange Listed Company Manual
Corporate governance. Eni’s governance structure follows the traditional model as defined by the Italian Civil Code which provides for two main separate corporate bodies, the Board of Directors and the Board of Statutory Auditors to whom management and monitoring duties are respectively entrusted.
This model differs from the U.S. one-tier model which provides for the Board of Directors as the sole corporate body responsible for management and for the establishment of an Audit Committee within the same Board, for monitoring activities.
Below is a description of the most significant differences between corporate governance practices followed by U.S. domestic companies under the NYSE standards and those followed by Eni, also with reference to Borsa Italiana Corporate Governance Code that Eni adopted.
Independent Directors
NYSE standards. Under NYSE standards listed U.S. companies’ Boards must have a majority of independent directors. A director qualifies as independent when the Board affirmatively determines that such director does not have a material relationship with the listed company (and its subsidiaries), either directly, or indirectly. In particular, a director may not be deemed independent if he/she or an immediate family member has a certain specific relationship with the issuer, its auditors or companies that have material business relationships with the issuer (e.g. he/she is an employee of the issuer or a partner of the auditor).
In addition, a director cannot be considered independent in the three-year "cooling-off" period following the termination of any relationship that compromised a director’s independence.Eni standards. In Italy, the TUF states that at least one member, or two members if the Board is composed by more than seven members, must possess the independence requirements provided for Statutory Auditors of listed companies.
165
In particular, a director may not be deemed independent if he/she or an immediate family member has relationships with the issuer that could influence their autonomous judgment, with its directors or with the companies in the same group of the issuer.
Eni’s By-laws increases the number and states that at least one member, if the Board is made up by up to five members, or three Board members, in case the Board is made up by more than five members, shall have the independence requirement.
Eni’s Code foresees further independence requirements, in line with the ones provided by the Borsa Italiana Code, that recommends that the Board of Directors includes an adequate number of independent non-executive directors in the sense that they do not maintain, nor have recently maintained, directly or indirectly, any business relationships with the issuer or persons linked to the issuer, of such a significance as to influence their autonomous judgment.
In accordance with Eni’s By-laws, the Board of Directors periodically evaluates independence of Directors. Eni’s Code also provides for the Board of Statutory Auditors to verify the proper application of criteria and procedures adopted by the Board of Directors to evaluate the independence of its members.
The results of the assessments of the Board shall be communicated to the market.
In accordance with Eni’s By-laws, should the independence requirements be impaired or cease or the minimum number of independent directors diminish below the threshold set by Eni’s By-laws, the Board declares the termination of office of the member lacking said requirements and provides for his substitution. Board members are expected to inform the Company in case they lose their independence requirements or of any reasons for ineligibility or incompatibility that might arise.Meetings of non Executive Directors
NYSE standards. Non-executive directors, including those who are not independent, must meet at regularly scheduled executive sessions without management.
In addition, if the group of non-executive directors includes directors who are not independent, independent directors should meet separately at least once a year.Eni standards. As provided by Eni’s Code the independent Directors may hold meetings without the other Directors: this faculty was exercised on January 22, 2009.
Audit Committee
NYSE standards. Listed U.S. companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 and that complies with the further provisions of the Sarbanes-Oxley Act and of Section 303A.07 of the NYSE Listed Company Manual.
Eni standards. In its meeting of March 22, 2005, Eni’s Board of Directors, making use of the exemption provided by Rule 10A-3 for non-U.S. private issuers, has identified the Board of Statutory Auditors as the body that, starting from June 1, 2005, is performing the functions required by the SEC rules and the Sarbanes-Oxley Act to be performed by the audit committees of non-U.S. companies listed on the NYSE (see paragraph "Board of Statutory Auditors" earlier).
Under Section 303A.07 of the NYSE listed Company Manual audit committees of U.S. companies have further functions and responsibilities which are not mandatory for non-U.S. private issuers and which therefore are not included in the list of functions shown in the paragraph referenced above.Nominating/Corporate Governance Committee
NYSE standards. U.S. listed companies must have a nominating/corporate governance committee (or equivalent body) composed entirely of independent directors that are entrusted, among others, with the responsibility to identify individuals qualified to become board members and to select or recommend director nominees for submission to the Shareholders’ Meeting, as well as to develop and recommend to the Board of Directors a set of corporate governance guidelines.
Eni standards. This provision is not applicable to non-U.S. private issuers. The Borsa Italiana Code allows listed companies to have within the Board of Directors a committee for directors’ nominees proposals, above all when the Board of Directors detects difficulties in the shareholders’ submission of nominees proposals, as could happen in publicly owned companies.
Eni has not set up a nominating committee, considering the nature of its shareholding as well as the circumstance that, under Eni’s By-laws, directors are appointed by the Shareholders’ Meeting based on lists presented by shareholders.166
Code of Business Conduct and Ethics
NYSE standards. The NYSE listing standards require each U.S. listed company to adopt a code of business conduct and ethics for its directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
Eni standards. Eni’s Code of Ethic – adopted on March 14, 2008, replacing the previous version of 1998 – represents a clear definition of the value system that Eni recognizes, accepts and upholds and the responsibilities that Eni assumes internally and externally in order to ensure that all business activities are conducted in compliance with laws, in a context of fair competition, with honesty, integrity, correctness and in good faith, respecting the legitimate interests of all stakeholders with which Eni relates on ongoing basis: shareholders, employees, suppliers, customers, commercial and financial partners, and the local communities and institutions of the Countries where Eni operates. These values are stated in the Code of Ethics and all the people working for Eni, without exception or distinction, starting from Directors, senior management and members of Company’s bodies, as also requested by the SEC rules and the Sarbanes-Oxley Act, are committed to observing and enforcing these principles within their function and responsibility. The Guarantor for the Code of Ethics – that is the Watch Structure of the "Model 231" for the organizational, management and control according to Legislative Decree No. 231/2001 – acts for the protection and promotion of the above mentioned principles and every six months presents a report on the implementation of the Code to the Internal Control Committee, to the Board of Statutory Auditors and to the Chairman and the CEO, who reports on this to the Board of Directors.
167
PART III
Item 17. FINANCIAL STATEMENTS
Not applicable.
Item 18. FINANCIAL STATEMENTS
Index to Financial Statements:
Page
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheet at December 31, 2008 and 2007 Consolidated profit and loss account for the years ended December 31, 2008, 2007 and 2006 Consolidated Statements of changes in shareholder’s equity for the years ended December 31, 2008, 2007 and 2006 Consolidated Statement of cash flows for the years ended December 31, 2008, 2007 and 2006 Supplemental cash flow information for the years ended December 31, 2008, 2007 and 2006 Notes to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2004 and 2005
Profit and loss account at December 31, 2004 and 2005
Statement of changes in shareholder’s equity for the years ended December 31, 2004 and 2005
Statements of cash flows for the years ended December 31, 2004 and 2005
Supplemental cash flows information for the years ended December 31, 2004 and 2005
Notes to the Consolidated Financial Statements
Item 19. EXHIBITS
1. By-laws
as amended asofMay 25, 2006Eni SpACertifications:
12.1. Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act
12.2. Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act
168
SIGNATURES
The registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
June 21, 2006May 14, 2009
Eni SpA /s/ FABRIZIO COSCOANTONIO CRISTODOROFabrizio CoscoAntonio CristodoroTitle: Deputy CompanyCorporate Secretary
169
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of EniSpASpA.
In our opinion, the accompanying consolidated balance sheets and the related consolidated profit and loss
account,accounts, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flowsand of changes in shareholder's equitypresent fairly, in all material respects, the financial position of Eni SpA and its subsidiaries(the "Company")at December 31,2005,2008 and2004,December 31, 2007, and the results of their operations and their cash flows for each of thetwothree years in the period ended December 31,2005,2008 inaccordanceconformity with International Financial Reporting Standards asadoptedissued by the International Accounting Standards Board. Also in our opinion, theEuropean Union. TheseCompany maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements,are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of theCompany’s management.effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing in Item 15 Controls and Procedures of the 2008 Annual Report to Shareholders. Our responsibility is to expressan opinionopinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.We conducted our audits
of these statementsin accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform theauditaudits to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includesmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for ouropinion.opinions.
International Financial Reporting StandardA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded asadopted by the European Union varynecessary to permit preparation of financial statements incertain significant respects fromaccordance with generally accepted accounting principles,generally acceptedand that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of theUnited Statescompany; and (iii) provide reasonable assurance regarding prevention or timely detection ofAmerica. Information relating tounauthorized acquisition, use, or disposition of thenature andcompany’s assets that could have a material effectof such differences is presented in Notes 33, 34 and 35 ofon the financial statements.
As discussedF-1
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
Notes 2, 4, 6 and 17conditions, or that the degree of compliance with thefinancial statements, as a result of adopting IAS 32 and IAS 39 on January 1, 2005, the Company changed its method of accounting for financial instruments.policies or procedures may deteriorate.PricewaterhouseCoopers SpA
Rome,
June 21, 2006Italy
May 14, 2009
F-2
CONSOLIDATED BALANCE SHEET
Effects of the adoption of IFRS(euro million)1Starting in 2005 companies with securities listed on a regulated stock market of a Member State of the European Union are required to prepare their Consolidated Financial Statements in accordance with the international accounting principles (IFRS) approved by the European Commission.
At January 1, 2004, date of the first application of the new accounting principles, which corresponds with the first period to be compared, Eni must present a balance sheet which:
• reports all and only the assets and liabilities accounted under the new accounting principles;• accounts the assets and liabilities as if the new accounting principles had always been applied (retrospective method); and• reclassifies the items indicated under different principles instead of IFRS.
The effect of the adjustments of the initial balance of assets and liabilities to the new accounting principles has been accounted with a corresponding entry to shareholders’ equity, taking account of the relevant fiscal effects to be recognized as deferred tax liabilities or deferred tax assets.
In application of IFRS 1, the following is the indication of: (i) balance sheet at December 31, 2004 restated under IFRS; (ii) profit and loss account of 2004 restated under IFRS; (iii) the reconciliation between shareholders’ equity, including minority interest, of 2003 and 2004 reported under Italian GAAP and shareholders’ equity under IFRS; (iv) the reconciliation between net profit of the Group at December 31, 2004 reported under Italian GAAP and net profit under IFRS.
The international accounting principles are reported in the section "Principles of consolidation". The main options provided under IFRS 1 and adopted in the first time application of IFRS concern the non-reopening of the business combinations and the designation of January 1, 2005, as the date of the first application of IAS 32 and 39, concerning the valuation of financial instruments, including derivatives.
Inclusion of Saipem in consolidation
As regards to the information reported in the reports of the year 2005, the following restatements and reconciliations have been modified to include the recent guidelines of the International Accounting Standards Board (IASB), relating to the conception of "de facto" control and providing the inclusion in the scope of the consolidation of the Saipem SpA and its subsidiaries.
Saipem SpA, in which Eni held a 43.26% share of voting stock as of December 31, 2005, was excluded from consolidation due to a restrictive interpretation of the provisions of IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries, according to which full consolidation is admissible only if the parent company holds the majority of voting rights exercisable in ordinary shareholders’ meetings, or failing this, when there exists an agreement among shareholders or other situations that give to the parent company the power to appoint the majority of the Board of Directors. Under this interpretation Saipem SpA, despite being controlled by Eni in accordance with article 2359, paragraph 2 of the Italian Civil Code, was accounted for under the equity method.
IASB is reviewing the requirements of IAS 27; in October 2005, IASB Update published a statement indicating that the concept of control as defined by IAS 27 included the situation as described by article 2359, paragraph 2 of the Italian Civil Code, despite the fact that the lack of precise indications allows also for a different interpretation of this standard. IASB declared its intention to provide more detailed indications on the exercise of control in its new version of IAS 27. In consideration of the intention expressed by IASB, Eni included Saipem SpA and its subsidiaries in consolidation under IFRS starting January 1, 2004, with the aim of giving an economic and financial state of the Group more consistent with its commercial situation.
Balance sheet at December 31, 2004The following is the reconciliation to IFRS of Eni’s balance sheet calculated in accordance with Italian GAAP at December 31, 2004:
(million euro)
Italian GAAP2004Dec. 31, 2007
Exclusion of joint ventureDec. 31, 2008
Pro-forma
Adjustments
Note
Total amount IFRSof which with related partiesTotal amount of which with related parties
ASSETS Current assets Cash and cash equivalent 1,264
(261
) 1,003
1,003
Other financial assets for trading or available for sale 1,292
(4
) 1,288
(22
) 1,266
Trade and other receivables 13,715
(95
) 13,620
114
13,734
Inventories 2,658
(135
) 2,523
324
2,847
Income tax receivables 702
(28
) 674
674
Other current assets 629
(1
) 628
(40
) 588
Total current assets 20,260
(524
) 19,736
376
20,112
Non-current assets Property, plant and equipment 37,616
(293
) 37,323
3,263
40,586
Inventories - compulsory stock 662
662
724
1,386
Intangible assets 3,190
3,190
123
3,313
Investments accounted for using the equity method 2,753
313
3,066
90
3,156
Other investments 529
529
529
Other financial assets 932
4
936
936
Deferred tax assets 2,203
2,203
(376
) 1,827
Other non-current assets 967
(17
) 950
58
1,008
Total non-current assets 48,852
7
48,859
3,882
52,741
TOTAL ASSETS 69,112
(517
) 68,595
4,258
72,853
LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Current financial liabilities 4,115
35
4,150
4,150
Current portion of long-term debt 936
(9
) 927
927
Trade and other payables 11,008
(469
) 10,539
(6
) 10,533
Taxes payable 2,514
(16
) 2,498
2,498
Other current liabilities 517
(12
) 505
505
Total current liabilities 19,090
(471
) 18,619
(6
) 18,613
Non-current liabilities Long-term debt 7,674
17
7,691
(84
) 7,607
Provisions for contingencies 6,107
(4
) 6,103
(367
) 5,736
Provisions for employee benefits 820
(5
) 815
167
982
Deferred tax liabilities 2,533
(59
) 2,474
1,474
3,948
Other non-current liabilities 422
5
427
427
Total non-current liabilities 17,556
(46
) 17,510
1,190
18,700
TOTAL LIABILITIES 36,646
(517
) 36,129
1,184
37,313
SHAREHOLDERS’ EQUITY Minority interests 2,128
2,128
1,038
3,166
Eni shareholders’ equity 30,338
(1) 30,338
2,036
32,374
TOTAL SHAREHOLDERS’ EQUITY 32,466
32,466
3,074
35,540
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 69,112
(517
) 68,595
4,258
72,853
ASSETS Current assets Cash and cash equivalents (1) 2,114 1,939 Other financial assets held for trading or available for sale: (2) - equity instruments 2,476 2,741 - other securities 433 495 2,909 3,236 Trade and other receivables (3) 20,676 1,616 22,222 1,539 Inventories (4) 5,499 6,082 Current tax assets (5) 703 170 Other current tax assets (6) 833 1,130 Other current assets (7) 1,080 2,349 59 Total current assets 33,814 37,128 Non-current assets Property, plant and equipment (8) 46,919 55,833 Other assets (9) 563 Inventory - compulsory stock (10) 2,171 1,196 Intangible assets (11) 7,551 11,037 Equity-accounted investments (12) 5,639 5,471 Other investments (12) 472 410 Other financial assets (13) 923 87 1,134 356 Deferred tax assets (14) 1,915 2,912 Other non-current receivables (15) 1,110 16 1,401 21 Total non-current assets 67,263 79,394 Assets classified as held for sale (26) 383 68 TOTAL ASSETS 101,460 116,590 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Short-term debt (16) 7,763 131 6,359 153 Current portion of long-term debt (21) 737 549 Trade and other payables (17) 17,116 1,021 20,515 1,253 Income taxes payable (18) 1,688 1,949 Other taxes payable (19) 1,383 1,660 Other current liabilities (20) 1,556 4 4,319 4 Total current liabilities 30,243 35,351 Non-current liabilities Long-term debt (21) 11,330 16 13,929 9 Provisions for contingencies (22) 8,486 9,573 Provisions for employee benefits (23) 935 947 Deferred tax liabilities (24) 5,471 5,742 Other non-current liabilities (25) 2,031 57 2,538 53 Total non-current liabilities 28,253 32,729 Liabilities directly associated with the assets classified as held for sale (26) 97 TOTAL LIABILITIES 58,593 68,080 SHAREHOLDERS’ EQUITY (27) Minority interest 2,439 4,074 Eni shareholders’ equity Share capital 4,005 4,005 Reserves 34,610 40,722 Treasury shares (5,999 ) (6,757 ) Interim dividend (2,199 ) (2,359 ) Net profit 10,011 8,825 Total Eni shareholders’ equity 40,428 44,436 TOTAL SHAREHOLDERS’ EQUITY 42,867 48,510 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 101,460 116,590
(1)Net of treasury shares in portfolio at the date for euro 3,229 million (IFRS require that treasury shares be deducted from shareholders’ equity).
Profit and loss account at December 31, 2004The following is the reconciliation to IFRS of Eni’s profit and loss account for the year ended December 31, 2004:
(million euro)
2004
Exclusion of joint ventureF-3
CONSOLIDATED PROFIT AND LOSS ACCOUNT
(euro million except as otherwise stated)
Restatement of extraordinaryitems2006
Pro-forma2007
Adjustments2008
Note Total amount IFRSof which with related partiesTotal amount of which with related parties Total amount of which with related parties
Net sales from operations 58,382
(916
) 57,466
79
57,545
Other income and revenues 1,298
(12
) 79
1,365
12
1,377
Purchases, services and other (39,092
) 679
(623
) (39,036
) 689
(38,347
) Payroll and related costs (3,264
) 64
(54
) (3,254
) 9
(3,245
) Depreciation, amortization and impairments (4,861
) 72
(18
) (4,807
) (124
) (4,931
) Operating profit 12,463
(113
) (616
) 11,734
665
12,399
Financial expense, net (95
) (6
) (101
) (55
) (156
) Other income (expense) from investments 229
81
608
918
(98
) 820
Profit before extraordinary items and income taxes 12,597
(38
) (8
) 12,551
512
13,063
Extraordinary items (56
) 56
Profit before income taxes 12,541
(38
) 48
12,551
512
13,063
Income taxes (4,653
) 38
(48
) (4,663
) (859
) (5,522
) Profit before minority interest 7,888
7,888
(347
) 7,541
Minority interest in net profit (614
) (614
) 132
(482
) Net profit 7,274
7,274
(215
) 7,059
Reconciliation of shareholders’ equity at December 31, 2003The following is the reconciliation of shareholders’ equity as at December 31, 2003, including minority interest, determined under Italian GAAP to IFRS:
(million euro)
Items (*)
2003 Shareholders’ equity 28,318 1. Different useful lives of gas pipelines, compression stations, distribution networks and other assets 1,570 2. Different recognition of deferred tax 1,233 3. Application of the weighted-average cost method instead of LIFO in inventory valuation 479 4. Different criteria of capitalization of financial charges 394 5. Different recognition of the provisions for contingencies 269 6. Effect of the capitalization of estimated costs for asset retirement obligations 152 7. Underlifting 61 8. Write-off of the difference between nominal and present value of deferred taxation in business combinations (514 ) 9. Adjustment of tangible and intangible assets (189 ) 10. Employee benefits (92 ) 11. Effects on investments accounted for under the equity method (43 ) Other net adjustments (121 ) Net changes 3,199 Shareholders’ equity under IFRS 31,517
REVENUES Net sales from operations (30)
86,105
3,974
87,256
4,198
108,148
5,048
Other income and revenues 783
827
720
39
Total revenues 86,888
88,083
108,868
OPERATING EXPENSES (31)
Purchases, services and other 57,490
2,720
58,179
3,777
76,408
6,298
- of which non-recurring charge 239
91
(21
) Payroll and related costs 3,650
3,800
4,004
- of which non-recurring income (83
) Depreciation, depletion, amortization and impairments 6,421
7,236
9,815
OPERATING PROFIT 19,327
18,868
18,641
FINANCE INCOME (EXPENSE) (32)
Finance income 3,749
58
4,445
49
7,985
42
Finance expense (3,971
) (18
) (4,554
) (20
) (8,198
) (17
) Derivative financial instruments 383
26
10
(551
) 58
161
(83
) (764
) INCOME FROM INVESTMENTS (33)
Share of profit (loss) of equity-accounted investments 795
773
640
Other gain (loss) from investments 108
470
733
903
1,243
1,373
PROFIT BEFORE INCOME TAXES 20,391
20,028
19,250
Income taxes (34)
(10,568
) (9,219
) (9,692
) Net profit 9,823
10,809
9,558
Attributable to Eni 9,217
10,011
8,825
Minority interest (27)
606
798
733
9,823
10,809
9,558
Earnings per share attributable to Eni (euro per share) (35)
Basic 2.49
2.73
2.43
Diluted 2.49
2.73
2.43
(*)Each number refers to the illustration provided in the next paragraph “Description of main changes”.
Reconciliation of shareholders’ equity at December 31, 2004The following is the reconciliation of shareholders’ equity as at December 31, 2004, including minority interest, determined under Italian GAAP to IFRS:
(million euro)
Items(*)
2004 Shareholders’ equity 32,466
1.
Different useful lives of gas pipelines, compression stations, distribution networks and other assets 1,501
2.
Different recognition of deferred tax 563
3.
Application of the weighted-average cost method instead of LIFO in inventory valuation 677
4.
Different criteria of capitalization of financial charges 393
5.
Different recognition of the provisions for contingencies 295
6.
Effect of the capitalization of estimated costs for asset retirement obligations 215
7.
Underlifting 87
8.
Write-off of the difference between nominal and present value of deferred taxation in business combinations (470
) 9.
Adjustment of tangible and intangible assets (130
) 10.
Employee benefits (81
) 11.
Effects on investments accounted for under the equity method 79
12.2
Amortization of goodwill 102
Other net adjustments (157
) Net changes 3,074
Shareholders’ equity under IFRS 35,540
(*)Each number refers to the illustration provided in the next paragraph “Description of main changes”.
Reconciliation of consolidated net profit at December 31, 2004The following is the reconciliation of net profit for the year ended December 31, 2004 from Italian GAAP to IFRS:
(million euro)
Items(*)
2004 consolidated net profit under Italian GAAP 7,274
1.
Different useful lives of gas pipelines, compression stations, distribution networks and other assets (70
) 2.
Different recognition of deferred tax (671
) 3.
Application of the weighted-average cost method instead of LIFO in inventory valuation 199
4.
Different criteria of capitalization of financial charges (3
) 5.
Different recognition of the provisions for contingencies 31
6.
Effect of the capitalization of estimated costs for asset retirement obligations 63
7.
Underlifting 33
8.
Write-off of the difference between nominal and present value of deferred taxation in business combinations 38
9.
Adjustment of tangible and intangible assets 39
10.
Employee benefits 8
11.
Effects on investments accounted for under the equity method 126
12.
Other changes in 2004 results under IFRS (109
) 12.1
Adjustment on gain from sale of a 9.054% interest in Snam Rete Gas (211
) 12.2
Amortization of goodwill 102
Other net adjustments (31
) Effect of IFRS adjustment on minority interest (1) 132
Net changes (215
) Shareholders’ equity under IFRS 7,059
(*)Each number refers to the illustration provided in the next paragraph “Description of main changes”.(1)This adjustment derives from the attribution of their share of IFRS adjustments to minority interest.
Description of main changes
The following is a description of the main changes introduced in the balance sheet of Eni for 2003, whose effects are reflected in the profit and loss account and balance sheet for the 2004 and in the balance sheet at December 31, 2004.
1. Different useful lives of gas pipelines, compression stations, distribution networks and other assets
This change concerns essentially the natural gas transport pipelines, compression stations and distribution networks that until 1999 were depreciated in accordance with Italian practice applying rates established by tax authorities (10%, 10% and 8%, respectively) both in statutory and Consolidated Financial Statements. In Consolidated Financial Statements prepared in accordance with U.S. GAAP, these assets were depreciated at a 4% rate, based on the international estimate of a 25-year long useful life.
The useful life of gas pipelines, compression stations and distribution networks was changed in 2000 following a determination of tariffs for natural gas sale by the Italian Authority for Electricity and Gas which set the useful life of gas pipelines at 40 years, that of compression stations at 25 years and that of distribution networks at 50 years. Therefore, considering this change as a revision of previous estimates, starting in 2000 the value of these assets, net of amortization provisions at December 31, 1999, was depreciated based on their residual useful life both under Italian and U.S. GAAP.
For the first application of IFRS, the adoption of the retrospective method implies the adoption of the new principles as if they had always been applied using the best information available at each time frame. Therefore, the book value of gas pipelines, compression stations and distribution networks, at January 1, 2004 was restated by using until 1999 the internationally accepted rate of 25 years; from 2000 onwards the residual value was depreciated according to the useful lives estimated by the Authority for Electricity and Gas.
Consistent with this approach, the book value of tanker ships at January 1, 2004 was restated due to the revision of their useful life using until 2001 the internationally accepted rate of 20 years; from 2002 onwards their residual value was depreciated according to an estimated useful life of 30 years defined after their conferral from Snam SpA to LNG Shipping SpA.
Under Italian GAAP the book value of complex assets is divided according to various tax categories on the basis of the depreciation rate tables contained in a Decree of the Ministry of Economy and Finance. Under IFRS the components of a complex asset that have different useful lives are recorded separately in order to be depreciated according to their useful life; land parcels, which cannot be depreciated, are recorded separately even when they are bought along with buildings.
The restatement determined an increase in fixed assets of euro 2,563 million with a corresponding entry to shareholders’ equity (euro 1,570 million) and to deferred tax liabilities (euro 993 million).
The adoption of IFRS resulted in a decrease in 2004 results of euro 70 million.
2. Different recognition of deferred tax
Changes in shareholders’ equity of euro 1.233 were determined in particular by the following causes.
2.1 Recognition of deferred tax assets on the revaluation of assets (Law 342/2000)
Under Italian GAAP deferred tax assets are recorded if recoverable with "reasonable certainty".
Under IFRS deferred tax assets are recorded if their recovery is more likely than not.
In 2000 Snam SpA, now merged into Eni SpA, revalued its assets as permitted by Law 342/2000 aligning their book value to their fair value. On this revaluation of depreciable assets Eni paid a special rate tax (19% instead of the statutory 34% rate), thus recording a deferred tax asset. Eni’s transport assets were conferred in 2001 to Snam Rete Gas SpA. The revaluation carried out had no impact on Eni’s Consolidated Financial Statements; but a temporary difference arose between the taxable value and the book value which led, in accordance with Italian GAAP, to the recognition of a provision for deferred tax assets that amounted to euro 629 million at December 31, 2003, corresponding to 19%2of depreciation estimated in the 2004-2007 plan on the deductible timing difference.
Under IFRS, deferred taxes has been recognized on the entire timing difference at the current statutory tax rate (37.25%).
The application of this principle resulted in an increase in deferred tax assets of euro 828 million with a corresponding entry to shareholders’ equity.
The adoption of IFRS resulted in a decrease in 2004 results of euro 266 million, following the "reversal" of taxes related to accelerated depreciations3.
2.2 Recognition of deferred tax assets on Stogit’s inventories
In 2003 Stoccaggi Gas Italia SpA ("Stogit"), applying Law 448/2001, realigned the fiscal value to the higher book value of assets received upon contribution in kind. In the Consolidated Financial Statements these assets were stated at their book value, this resulted in a timing difference over the fiscal values from which a deferred tax asset of euro 287 million was recognized in the Consolidated Financial Statements. A portion of the timing difference concerns the inventories of natural gas; however, in Eni’s 2003 Consolidated Financial Statements the deferred tax asset related to the timing difference on natural gas inventories was not recognized on the assumption that its recoverability was not reasonably certain at the end of the concession, if not renewed.
The application of IFRS resulted in the recognition of deferred tax assets of euro 259 million, with a corresponding entry to shareholder’s equity.
In Eni’s 2004 Consolidated Financial Statements the deferred tax assets were recognized on the temporary difference related to inventories because Law 239/2001 (so called Marzano Law) permitted to set the year of recovery4; such effect resulted on equivalent decrease in the 2004 result.
2.3 Other effects of the different recognition of deferred tax assets
The application of the "more likely than not" criterion rather than that of the "reasonable certainty" of recoverability of other deductible temporary differences resulted in the recognition of deferred tax assets of euro 146 million with a corresponding entry to shareholders’ equity. Such deferred taxes were recognized in Eni’s 2004 Consolidated Financial Statements following the fulfillment of the conditions for their recognition; such effect resulted in an equivalent decrease in the 2004 result.
3. Application of the weighted-average cost method instead of LIFO
Under Italian GAAP the cost of inventories may be determined with the weighted-average cost method or with the FIFO or LIFO methods. Until January 1, 2004 Eni applied the LIFO method, in its evaluation of crude oil, natural gas and oil products inventories applied on an annual basis.
IFRS do not allow the use of the LIFO method; they allow the FIFO method and the weighted-average cost.
The application of the weighted-average cost on a three-month basis in the evaluation of crude oil, natural gas and refined products inventories resulted in an increase in the value of inventories of euro 764 million5with a corresponding entry to shareholders’ equity (euro 479 million) and to deferred tax liabilities (euro 285 million).
With the application of the LIFO method, changes in oil and refined products prices had no impact on the evaluation of inventories, which was affected only by declines in volumes. With the adoption of the weighted-average cost, changes in oil and refined products prices have a direct effect on the recognition of profit or loss on stock deriving from the difference between the current cost of products sold and the cost deriving from the application of the weighted-average cost method.
The adoption of IFRS resulted an increase in the 2004 results of euro 199 million, due to higher oil and gas prices.
4. Different criteria of capitalization of financial charges
Under Italian GAAP financial charges are capitalized when incurred within the amount not financed by internally-generated funds or contribution by third parties.
Under IFRS, when a relevant time interval is necessary until the capital asset is ready for use, finance charges can be capitalized as an increase of the asset book value for the amount of financial charges that could have been saved if capital expenditures had not been made.
The application of this principle resulted in an increase in the book value of fixed assets of euro 615 million with a corresponding entry to shareholders’ equity (euro 394 million) and to deferred tax liabilities (euro 221 million).
The adoption of IFRS resulted in a decrease in 2004 results of euro 3 million (the effect of higher amortization was partially offset by the increase of financial charges capitalized).
5. Different recognition of the provisions for contingencies
Under Italian GAAP the provisions for contingencies concern costs and charges of a determined nature, whose existence is certain or probable, but whose amounts or occurrence are not determinable at the period end. The provisions for contingencies are stated on an undiscounted basis.
Under IFRS a provision is made only if there is a current obligation considered "probable" as a consequence of events occurred before period end deriving from legal or contractual obligations or from behaviors or announcements of the company that determine valid expectations in third parties (implicit obligations), provided that the amount of the liability can be reasonably determined. When the financial effect of time is significant and the date of the expense to clear the relevant obligation can be reasonably determined, the estimated cost is discounted on the basis of the risk-free rate of interest and adjusted for the Company’s credit cost.
As for the provision for redundancy incentives, IFRS require the preparation of a detailed formalized restructuring plan, indicating at least the activities, locations, categories and approximate number of employees affected by the restructuring. The plan must have commenced or be properly communicated to the parties involved before period end, generating the expectation that the company will carry out the plan.
As for provision for catastrophic risks, Padana Assicurazioni SpA, in application of rules imposed by the Minister of Industry on June 15, 1984, makes integrative provisions for the risk of earthquakes, seaquakes, volcanic eruptions and similar events. These integrative provisions are not allowed by IFRS in absence of a current obligation.
No provision is made for periodic maintenance under IFRS. These costs are capitalized when incurred as a separate component of the asset and are depreciated according to their useful lives, as they do not represent a current obligation.
As a consequence of the absence of a current obligation, the application of this principle resulted in a reversal of the provisions for contingencies of euro 327 million with a corresponding entry to shareholders’ equity (euro 269 million), to deferred tax liabilities (euro 36 million) and to a decrease in other assets (euro 22 million) referred to the portion of re-insured risks.
The adoption of IFRS resulted in an increase in 2004 results of euro 31 million.
6. Effect of the capitalization of costs for asset retirement obligations
Under Italian GAAP, site restoration and abandonment costs are allocated annually in a specific provision so that the ratio of the allocations made and the amount of estimated costs equals the percentage of depreciation of the relevant asset. In particular in the Exploration & Production segment, the costs estimated to be incurred at the end of production activities for the site abandonment and restoration are accrued so that the ratio of the provision and the amount of estimated costs correspond to the ratio of cumulative production at period end and proved developed reserves at period end plus cumulative production.
Under IFRS, estimated site restoration and abandonment costs are recorded in a specific provision with a corresponding entry to the relevant asset; when the financial effect of time is relevant, the estimated cost is recorded considering the present value of the costs to be incurred calculated using a rate representative of the Company’s credit cost. The cost assigned to the different relevant components of the asset is recognized in the profit and loss account through the amortization process. The provision, and consequently the assets’ book value, is periodically adjusted to reflect the changes in the estimates of the costs, of the timing and of the discount rate.
The application of this principle resulted in an increase in fixed assets of euro 254 million, in shareholders’ equity of euro 152 million and in deferred tax liabilities of euro 158 million, and a decrease in the provisions for site abandonment and restoration of euro 56 million.
The adoption of IFRS resulted in an increase in 2004 results of euro 63 million.
7. Underlifting
In the Exploration & Production segment joint venture agreements regulate, among other things, the right of each partner to withdraw its own share of production volumes available in the period.
Higher production volumes withdrawn as compared to net working interest volume determine the recognition of a credit by a partner who has withdrawn lower production volumes as compared to its net working interest volume.
Under Italian GAAP, this credit is evaluated on the basis of production costs; under IFRS it is evaluated at current prices at period end.
The application of this principle resulted in an increase in other assets of euro 78 million with a corresponding entry to shareholders’ equity (euro 61 million) and to deferred tax liabilities (euro 17 million).
The adoption of IFRS resulted in an increase in 2004 results of euro 33 million.
8. Write-off of the difference between nominal and present value of deferred taxation in business combinations
Under Italian GAAP the difference between the present value of deferred taxes included in the determination of the fair value of net assets acquired as part of a business combination and related deferred tax liabilities recognized at nominal value ("difference") is recognized under the item accrued assets.
Under IFRS this difference is recognized under "Goodwill"; however, in the event of the first application goodwill can be adjusted only in case of specific circumstances that do not occur in this case. This difference is therefore written off because it cannot be considered an asset under IFRS.
The application of this principle resulted in a decrease in shareholders’ equity of euro 514 million with a corresponding entry to deferred tax assets.
The adoption of IFRS resulted in an increase in 2004 results of euro 38 million.
9. Adjustment of tangible and intangible assets
The decrease in shareholders’ equity of euro 189 million related in particular to the following aspects.
9.1 Intangible assets
Under Italian GAAP costs for extraordinary company transactions, costs for the start-up or expansion of production activities and costs for the establishment of a company or for issuance of capital stock can be capitalized.
IFRS require these costs to be charged against the profit and loss account, except for establishment and issuance of capital stock of the parent company that are recognized as a decrease in shareholders’ equity net of the relevant fiscal effect.
Under Italian GAAP costs for software development can be capitalized under certain circumstances. IFRS pose more stringent conditions for their capitalization.
The application of these principles resulted in the write-off of intangible assets for euro 114 million with a corresponding entry to a decrease in shareholders’ equity (euro 81 million) and the recognition of deferred tax assets (euro 33 million).
The adoption of IFRS resulted in an increase in 2004 results of euro 33 million.
9.2 Revaluation of assets
Under Italian GAAP revaluation of tangible assets is allowed under specific law provisions within the limit of their recovery value.
IFRS prohibit this kind of tangible asset revaluation.
The application of this principle resulted in a decrease in tangible assets of euro 75 million with a corresponding entry to a decrease in shareholders’ equity (euro 54 million) and the recognition of deferred tax assets (euro 21 million). The decrease in fixed assets takes into account the restatement of gains/losses on disposal on the basis of the historical cost and the recalculation of amortization until December 31, 2003.
The adoption of IFRS resulted in an increase in 2004 results of euro 5 million.
9.3 Pre-development costs
Under Italian GAAP costs related to preliminary studies, researches and surveys aimed at testing different options for development of hydrocarbon fields are recognized under tangible assets.
Under IFRS these costs are considered exploration costs and are expensed when incurred.
The application of this principle resulted in the write-off of capitalized pre-development costs for euro 71 million with a corresponding entry to a decrease in shareholders’ equity (euro 54 million) and the recognition of deferred tax liabilities (euro 17 million).
The adoption of IFRS resulted in an increase in 2004 of euro 1 million.
10. Employee benefits
Under Italian GAAP employee termination benefits are accrued during the period of employment of employees, in accordance with the law and applicable collective labor contracts.
Under IFRS employee termination benefits (e.g. pension payments, life insurance payments, medical assistance after retirement, etc.) are defined on the basis of post employment benefit plans that due to their mechanisms feature defined contributions plans or defined benefit plans. In the first case, the company’s obligation consists in making payments to the state or to a trust or a fund.
Plans with defined benefits are pension, insurance or healthcare plans which provide for the company’s obligation, also in the form of implicit obligation (see the above mentioneditem 5), to provide non formalized benefits to its former employees6. The related discounted charges, determined with actuarial assumptions7, are accrued annually on the basis of the employment periods required for the granting of such benefits.
The application of this principle resulted in a decrease in shareholders’ equity of euro 92 million, the recognition of deferred tax assets (euro 54 million) with a corresponding entry to an increase in the provisions for contingencies of euro 146 million, referred in particular to charges for medical assistance granted upon termination and to pension plans outside Italy.
The adoption of IFRS resulted in an increase in 2004 of euro 8 million.
11. Effects on investments accounted for under the equity method
Joint ventures and affiliates are accounted for under the equity method. The application of IFRS to the initial balance at January 1, 2004 of assets and liabilities of these companies resulted in a decrease in investments of euro 43 million with a corresponding entry to shareholders’ equity.
The adoption of IFRS resulted in an increase in 2004 of euro 126 million, essentially related to the elimination of the amortization of goodwill (see Note 12.2 below).
12. Other changes in 2004 result under IFRS
The decrease in 2004 results of euro 109 million related in particular to the following.
12.1 Adjustment on gain from sale of a 9.054% interest in Snam Rete Gas
Due to the application of IFRS, net shareholders’ equity to be compared with the sale price for determining the gain on the sale of a 9.054% interest in Snam Rete Gas SpA carried out in 2004 increased by euro 2,335 million related essentially to an increase in the book value of natural gas pipelines (see item 1) and deferred tax assets (see item 2.1).
The adoption of IFRS resulted in a decrease in 2004 results of euro 211 million.
12.2 Amortization of goodwill
Under Italian GAAP goodwill is amortized on a straight-line basis in the periods of its expected utilization, provided it is no longer than five years; in case of specific conditions related to the kind of company the goodwill relates to, goodwill can be amortized for a longer period not exceeding 20 years.
Under IFRS goodwill cannot be amortized, but it is subject to a yearly evaluation in order to define the relevant impairment, if needed.
The adoption of IFRS resulted in an increase in 2004 of euro 102 million.
Balance sheet
(million euro)
Note
Dec. 31, 2004
Dec. 31, 2005
ASSETS Current assets Cash and cash equivalent 1
1,003
1,333
Other financial assets for trading or available for sale 2
1,266
1,368
Trade and other receivables 3
13,734
17,902
Inventories 4
2,847
3,563
Income tax receivables 5
674
697
Other current assets 6
588
369
Total current assets 20,112
25,232
Non-current assets Property, plant and equipment 7
40,586
45,013
Inventories - compulsory stock 8
1,386
2,194
Intangible assets 9
3,313
3,194
Investments accounted for using the equity method 10
3,156
3,890
Other investments 10
529
421
Other financial assets 11
936
1,050
Deferred tax assets 12
1,827
1,861
Other non-current assets 13
1,008
995
Total non-current assets 52,741
58,618
TOTAL ASSETS 72,853
83,850
LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Current financial liabilities 14
4,150
4,612
Current portion of long-term debt 18
927
733
Trade and other payables 15
10,533
13,095
Taxes payable 16
2,498
3,430
Other current liabilities 17
505
613
Total current liabilities 18,613
22,483
Non-current liabilities Long-term debt 18
7,607
7,653
Provisions for contingencies 19
5,736
7,679
Provisions for employee benefits 20
982
1,031
Deferred tax liabilities 21
3,948
4,890
Other non-current liabilities 22
427
897
Total non-current liabilities 18,700
22,150
TOTAL LIABILITIES 37,313
44,633
SHAREHOLDERS’ EQUITY 23
Minority interests 3,166
2,349
Eni shareholders’ equity: Share capital: 4,005,358,876 fully paid shares nominal value euro 1 each (4,004,424,476 shares at December 31, 2004) 4,004
4,005
Share premium Other reserves 9,629
10,910
Retained earnings 14,911
17,381
Net profit 7,059
8,788
Treasury shares (3,229
) (4,216
) Total Eni shareholders’ equity 32,374
36,868
TOTAL SHAREHOLDERS’ EQUITY 35,540
39,217
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 72,853
83,850
F-4
Profit and loss accountCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(million euro) Note
2004
2005
REVENUES 25
Net sales from operations 57,545
73,728
Other income and revenues 1,377
798
TOTAL REVENUES 58,922
74,526
Operating expenses 26
Purchases, services and other 38,347
48,567
Payroll and related costs 3,245
3,351
Depreciation, amortization and impairments 4,931
5,781
Operating profit 12,399
16,827
Financial income (expense) 27
Financial income 2,589
3,131
Financial expense (2,745
) (3,497
) (156
) (366
) Income (expense) from investments 28
Effects of investments accounted for using the equity method 332
737
Other income (expense) from investments 488
177
820
914
Profit before income taxes 13,063
17,375
Income taxes 29
(5,522
) (8,128
) Net profit 7,541
9,247
Pertaining to: - Eni 7,059
8,788
- minority interest 482
459
7,541
9,247
Earnings per share pertaining to Eni (euro per share) 30
- basic 1.87
2.34
- diluted 1.87
2.34
Statement of changes in shareholders’ equity(euro million)
Eni shareholders’ equity
(million euro)Share capital
Legal reserve of Eni SpA
Reserve for treasury shares
Other reserves
Cumulative
currency translationadjustment reserve
differencesTreasury shares
Retained earnings
Interim dividend
Net profit for the
periodyearTotal
Minority
interestsinterestTotal shareholders’ equity
Balance at December 31, 2003 4,003
959
5,397
3,200
(2,505
) (3,164
) 13,221
5,585
26,696
1,622
28,318
Changes in accounting principles 2,234
2,234
965
3,199
Annulment of exchanges differences 2,505
(2,505
) Adjusted balance at January 1, 2004 4,003
959
5,397
3,200
(3,164
) 12,950
5,585
28,930
2,587
31,517
Net profit for the year 7,059
7,059
482
7,541
Net income (expense) recognized directly in equity Exchange differences from translation of financial statements denominated in currencies other than euro (750
) (750
) 1
(749
) (750
) (750
) 1
�� (749
) Total (expense) income for the period (750
) 7,059
6,309
483
6,792
Transactions with shareholders Dividend distribution of Eni SpA (euro 0.75 per share) (2,828
) (2,828
) (2,828
) Dividend distribution of other companies (248
) (248
) Allocation of 2003 net profit 22
2,735
(2,757
) Shares repurchased (Note 23) (70
) (70
) (70
) Shares issued under stock grant plans 1
(1
) Treasury shares sold under incentive plans for Eni managers (5
) 5
5
5
5
1
(5
) 26
(65
) 2,735
(5,585
) (2,893
) (248
) (3,141
) Other changes in shareholders’ equity Cost of stock option 3
3
3
Former Italgas SpA reserves reconstituted (43
) 43
Reserves from merger of EniData SpA 4
(4
) Reclassification 775
(775
) Sale of 9.054% of Snam Rete Gas SpA share capital 326
326
Exchange differences arising on the distribution of dividends and other changes 63
(38
) 25
18
43
739
63
(774
) 28
344
372
Balance at December 31, 2004 (Note 23) 4,004
959
5,392
3,965
(687
) (3,229
) 14,911
7,059
32,374
3,166
35,540
Changes in accounting principles (IAS 32 and 39) (Notes 2-4-6-17) 13
(40
) (27
) 12
(15
) Adjusted balance at January 1, 2005 4,004
959
5,392
3,978
(687
) (3,229
) 14,871
7,059
32,347
3,178
35,525
Net profit for the year 8,788
8,788
459
9,247
Net income (expense) recognized directly in equity Variation of the fair value of financial assets for trading (Note 2) 6
6
6
Variation of the fair value of cash flow hedge derivative contracts (Notes 6-17) 16
16
16
Exchange differences from translation of financial statements denominated in currencies other than euro 1,497
1,497
15
1,512
22
1,497
1,519
15
1,534
Total (expense) income for the period 22
1,497
8,788
10,307
474
10,781
Transactions with shareholders Dividend distribution of Eni SpA (euro 0.90 per share) (Note 23) (3,384
) (3,384
) (3,384
) Interim dividend (euro 0.45 per share) (Note 23) (1,686
) (1,686
) (1,686
) Dividend distribution of other companies (1,218
) (1,218
) Allocation of 2004 net profit 1,300
2,375
(3,675
) Shares repurchased (Note 23) (1,034
) (1,034
) (1,034
) Shares issued under stock grant plans 1
(1
) Treasury shares sold under incentive plans for Eni managers (47
) 47
47
47
47
1
(47
) 1,346
(987
) 2,375
(1,686
) (7,059
) (6,057
) (1,218
) (7,275
) Other changes in shareholders’ equity Cost of stock option 5
5
5
Sale of consolidated companies (40
) (40
) Exchange differences arising on the distribution of dividends and other changes 131
135
266
(45
) 221
5
131
135
271
(85
) 186
Balance at December 31, 2005 4,005
959
5,345
5,351
941
(4,216
) 17,381
(1,686
) 8,788
36,868
2,349
39,217
Balance at December 31, 2006 4,005 959 7,262 400 (398 ) (5,374 ) 25,168 (2,210 ) 9,217 39,029 2,170 41,199 Net profit for the year 10,011 10,011 798 10,809 Gains (losses) recognized directly in equity Change in the fair value of available-for-sale securities (4 ) (4 ) (4 ) Change in the fair value of cash flow hedge derivatives (1,370 ) (1,370 ) (1,370 ) Foreign currency translation differences 25 (1,954 ) (1,929 ) (51 ) (1,980 ) (1,349 ) (1,954 ) (3,303 ) (51 ) (3,354 ) Total recognized income and (expense) for the year (1,349 ) (1,954 ) 10,011 6,708 747 7,455 Transactions with shareholders Dividend distribution of Eni SpA (euro 0.65 per share in settlement of 2006 interim dividend of euro 0.60 per share) 2,210 (4,594 ) (2,384 ) (2,384 ) Interim dividend distribution of Eni SpA (euro 0.60 per share) (2,199 ) (2,199 ) (2,199 ) Dividend distribution of other companies (289 ) (289 ) Payments by minority shareholders 1 1 Allocation of 2006 net profit 4,623 (4,623 ) Shares repurchased (680 ) (680 ) (680 ) Treasury shares sold under incentive plans for Eni managers (55 ) 35 55 11 46 46 Difference between the carrying amount and strike price of stock options exercised by Eni managers 9 9 9 (55 ) 35 (625 ) 4,643 11 (9,217 ) (5,208 ) (288 ) (5,496 ) Other changes in shareholders’ equity Net effect related to the purchase of treasury shares by Saipem SpA and Snam Rete Gas SpA (201 ) (201 ) Cost related to stock option and stock grant 18 18 18 Foreign currency translation differences on the distribution of dividends and other changes 119 (238 ) (119 ) 11 (108 ) 119 (220 ) (101 ) (190 ) (291 ) Balance at December 31, 2007 4,005 959 7,207 (914 ) (2,233 ) (5,999 ) 29,591 (2,199 ) 10,011 40,428 2,439 42,867
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYcontinued
Statement of cash flows(euro million)
Eni shareholders’ equity
Share capital
Legal reserve of Eni SpA
Reserve for treasury shares
Other reserves
Cumulative
currency translation
differencesTreasury shares
Retained earnings
Interim dividend
Net profit for the year
Total
Minority interest
Total shareholders’ equity
Balance at December 31, 2007 4,005
959
7,207
(914
) (2,233
) (5,999
) 29,591
(2,199
) 10,011
40,428
2,439
42,867
Net profit for the year
8,825
8,825
733
9,558
Gains (losses) recognized directly in equity
Change in the fair value of available-for-sale securities (Note 27)
2
2
2
Change in the fair value of cash flow hedge derivatives (Note 27)
1,255
1,255
(52
) 1,203
Foreign currency translation differences
1,066
1,066
11
1,077
1,257
1,066
2,323
(41
) 2,282
Total recognized income and (expense) for the year
1,257
1,066
8,825
11,148
692
11,840
Transactions with shareholders
Dividend distribution of Eni SpA (euro 0.70 per share in settlement of 2007 interim dividend of euro 0.60 per share)
2,199
(4,750
) (2,551
)
(2,551
) Interim dividend distribution of Eni SpA (euro 0.65 per share)
(2,359
)
(2,359
)
(2,359
) Dividend distribution of other companies
(297
) (297
) Payments by minority shareholders
20
20
Allocation of 2007 net profit
5,261
(5,261
)
Shares repurchased
(778
)
(778
)
(778
) Treasury shares sold under incentive plans for Eni managers
(20
) 13
20
(1
)
12
12
Difference between the carrying amount and strike price of stock options exercised by Eni managers
2
2
2
(20
) 13
(758
) 5,262
(160
) (10,011
) (5,674
) (277
) (5,951
) Other changes in shareholders’ equity
Net effect related to the purchase of treasury shares by Saipem SpA
(31
) (31
) Cost related to stock option and stock grant
18
18
18
Put option granted to Publigaz (the Distrigas minority shareholder)
(1,495
)
(1,495
)
(1,495
) Minority interest recognized following the acquisition of Distrigas NV and Hindustan Oil Exploration Co Ltd
1,261
1,261
Foreign currency translation differences on the distribution of dividends and other changes
(1
) 198
(186
)
11
(10
) 1
(1,496
) 198
(168
)
(1,466
) 1,220
(246
) Balance at December 31, 2008 (Note 27) 4,005
959
7,187
(1,140
) (969
) (6,757
) 34,685
(2,359
) 8,825
44,436
4,074
48,510
F-6
CONSOLIDATED STATEMENT OF CASH FLOWS
(euro million)
Note
2006
2007
2008
Net profit of the year 9,823
10,809
9,558
Depreciation, depletion and amortization (31)
6,153
7,029
8,422
Revaluations, net (386
) (494
) 2,560
Net change in provisions for contingencies (86
) (122
) 414
Net change in the provisions for employee benefits 72
(67
) (8
) Gain on disposal of assets, net (59
) (309
) (219
) Dividend income (33)
(98
) (170
) (510
) Interest income (387
) (603
) (592
) Interest expense 346
523
809
Exchange differences 6
(119
) (319
) Income taxes (34)
10,568
9,219
9,692
Cash generated from operating profit before changes in working capital 25,952
25,696
29,807
(Increase) decrease: - inventories (953
) (1,117
) (801
) - trade and other receivables (1,952
) (655
) (974
) - other assets (315
) (362
) 162
- trade and other payables 2,146
360
2,318
- other liabilities 50
107
1,507
Cash from operations 24,928
24,029
32,019
Dividends received 848
658
1,150
Interest received 395
333
266
Interest paid (294
) (555
) (852
) Income taxes paid, net of tax receivables received (8,876
) (8,948
) (10,782
) Net cash provided from operating activities 17,001
15,517
21,801
- of which with related parties (37)
2,206
549
(62
) Investing activities: - tangible assets (8)
(5,963
) (8,364
) (12,082
) - intangible assets (11)
(1,870
) (2,229
) (2,480
) - consolidated subsidiaries and businesses (46
) (4,759
) (3,634
) - investments (12)
(42
) (4,890
) (385
) - securities (49
) (76
) (152
) - financing receivables (516
) (1,646
) (710
) - change in payables and receivables in relation to capital expenditures and capitalized depreciation (26
) 185
367
Cash flow from investments (8,512
) (21,779
) (19,076
) Disposals: - tangible assets 231
165
318
- intangible assets 18
35
2
- consolidated subsidiaries and businesses 8
56
149
- investments 36
403
510
- securities 382
491
145
- financing receivables 794
545
1,293
- change in payables and receivables in relation to disposals (8
) (13
) (299
) Cash flow from disposals 1,461
1,682
2,118
Net cash used in investing activities (*) (7,051
) (20,097
) (16,958
) - of which with related parties (37)
(686
) (822
) (1,598
)
F-7
CONSOLIDATED STATEMENT OF CASH FLOWS continued
(euro million)
Note
2006
2007
2008
Proceeds from long-term debt 2,888
6,589
3,774
Repayments of long-term debt (2,621
) (2,295
) (2,104
) Increase (decrease) in short-term debt (949
) 4,467
(690
) (682
) 8,761
980
Net capital contributions by minority shareholders 22
1
20
Net acquisition of treasury shares different from Eni SpA (477
) (340
) (50
) Acquisition of additional interests in consolidated subsidiaries (7
) (16
) Sale of additional interests in consolidated subsidiaries 35
Dividends paid to Eni’s shareholders (4,610
) (4,583
) (4,910
) Dividends paid to minority interest (222
) (289
) (297
) Net purchase of treasury shares (1,156
) (625
) (768
) Net cash used in financing activities (7,097
) 2,909
(5,025
) - of which with related parties (37)
(57
) 20
14
Effect of change in consolidation (inclusion/exclusion of significant/insignificant subsidiaries) (4
) (40
) (1
) Effect of exchange rate changes on cash and cash equivalents (197
) (160
) 8
Net cash flow for the period 2,652
(1,871
) (175
) Cash and cash equivalents - beginning of year (1)
1,333
3,985
2,114
Cash and cash equivalents - end of year (1)
3,985
2,114
1,939
(million euro)
2004
2005
(*) Net cash used in investing activities included investments in certain financial assets to absorb temporary surpluses of cash or as part of our ordinary management of financing activities. Due to their nature and the circumstance that they are very liquid, these financial assets are netted against finance debt in determining net borrowings. For the definition of net borrowings, see "Item 5 – Operating and Financial Review and Prospects".
Cash flows of such investments were as follows:
Cash flow from operating activities Net profit 7,541
9,247
Depreciation and amortization 4,598
5,509
Writedowns (revaluations), net 27
(288
) Net change in provisions for contingencies 418
1,279
Net change in the provisions for employee benefits 49
18
Gain on disposal of assets, net (793
) (220
) Dividend income (72
) (33
) Interest income (198
) (214
) Interest expense 567
654
Exchange differences (79
) (64
) Current and deferred income taxes 5,522
8,128
Cash generated from operating profit before changes in working capital 17,580
24,016
(Increase) decrease: - inventories (355
) (1,402
) - accounts receivable (1,241
) (4,413
) - other assets 43
351
- trade and other accounts payable 727
3,030
- other liabilities (83
) 12
Cash from operations 16,671
21,594
Dividends received 394
366
Interest received 167
214
Interest paid (533
) (619
) Income taxes paid (4,199
) (6,619
) Net cash provided from operating activities 12,500
14,936
Cash flow from investing activities Investments: (714
) (856
) - intangible assets (6,785
) (6,558
) - tangible assets (73
) - consolidated subsidiaries and businesses (316
) (54
) - investments (675
) (464
) - securities (470
) (683
) - financing receivables - change in accounts payable and receivable in relation to investments and capitalized depreciation (13
) 149
Cash flow from investments (8,973
) (8,539
) Disposals: - intangible assets 13
13
- tangible assets 279
99
- consolidated subsidiaries and businesses 538
252
- investments 61
178
- securities 659
369
- financing receivables 808
804
- change in accounts receivable in relation to disposals (1
) 9
Cash flow from disposals 2,357
1,724
Net cash used in investing activities (6,616
) (6,815
)
(euro million)
2006
2007
2008
Financing investments: - securities (44
) (75
) (74
) - financing receivables (134
) (970
) (99
) (178
) (1,045
) (173
) Disposal of financing investments: - securities 340
419
145
- financing receivables 54
147
939
394
566
1,084
Net cash flows from financing activities 216
(479
) 216
F-8
(million euro)
2004
2005
Proceeds from long-term debt 1,229
2,755
Payments of long-term debt (797
) (2,978
) Reductions of short-term debt (4,175
) (317
) (3,743
) (540
) Capital contributions/payments by/to minority shareholders 1
24
Sale (acquisition) of additional interests in subsidiaries 621
(33
) Dividends to minority shareholders (3,076
) (6,288
) Shares repurchased (65
) (987
) Net cash used in financing activities (6,262
) (7,824
) Effect of change in consolidation area 12
(38
) Effect of exchange differences (67
) 71
Net cash flow for the period (433
) 330
Cash and cash equivalent at beginning of the year 1,436
1,003
Cash and cash equivalent at end of the year 1,003
1,333
SUPPLEMENTAL CASH
FLOWSFLOW INFORMATION
(euro million)
(million euro)
2004
2005
Effect of investment of consolidated subsidiaries and businesses Non-current assets 122
Net borrowings (19
) Current and non-current liabilities (22
) Net effect of investment 81
Fair value of the participations held before the acquisition of control (8
) Purchase price 73
Cash flow on investment 73
Effect of disposal of consolidated subsidiaries and businesses Current assets 261
204
Non-current assets 285
189
Net borrowings (138
) 42
Current and non-current liabilities (167
) (217
) Exchange rate differences realized following disposal 45
Net effect of disposal 286
218
Gain on disposal 304
140
Minority interest (43
) Selling price 590
315
less: Cash and cash equivalent (52
) (63
) Cash flow on disposal 538
252
2006
2007
2008
Effect of investment of companies included in consolidation and businesses Current assets 68
398
1,938
Non-current assets 130
5,590
7,442
Net borrowings 53
1
1,543
Current and non-current liabilities (92
) (972
) (3,598
) Net effect of investments 159
5,017
7,325
Minority interests (1,261
) Fair value of investments held before the acquisition of control (13
) (601
) Sale of unconsolidated entities controlled by Eni (60
) Purchase price 99
5,004
5,463
less: Cash and cash equivalents (53
) (245
) (1,829
) Cash flow on investments 46
4,759
3,634
Effect of disposal of consolidated subsidiaries and businesses Current assets 9
73
277
Non-current assets 1
20
299
Net borrowings (1
) 26
(118
) Current and non-current liabilities (4
) (94
) (270
) Net effect of disposals 5
25
188
Gain on disposal 3
33
25
Minority interest (1
) Selling price 8
58
212
less: Cash and cash equivalents (2
) (63
) Cash flow on disposals 8
56
149
Transactions that did not produce cash flows
In 2005 the Group contributed assets and liabilities
Acquisition ofa business with a carrying amount of euro 18 millionequity investments in exchangefor equity investment in the companies to which thoseof businesseswere contributed.contribution:
(euro million)
2006
2007
2008
Current assets 23
Non-current assets 213
38
Net borrowings (44
) (4
) Long-term and short-term liabilities (53
) Net effect of contribution 139
34
Minority interest (36
) Gain on contribution 18
Acquisition of investments 121
34
F-9
Basis of presentation
The Consolidated Financial Statements
were approved by Eni’s BoardofDirectorsEni Group for the Annual Report onMarch 30, 2006.
Basis of presentation
In application of EC Regulation 1606/2002 approved by the European Parliament and Council on July 19, 2002, starting from 2005 companies with securities listed on a regulated stock market of a Member State of the European Union are required to prepare their Consolidated Financial StatementsForm 20-F have been prepared in accordance with International Financial Reporting Standards (IFRS),asapproved by the European Commission.
The Consolidated Financial Statements of Eni have been prepared in accordance with IFRSissued by the International Accounting Standards Board (IASB). Oil andadopted by the European Commission following the procedure contained in article 6 of the EC Regulation No. 1606/2002 of the European Parliament and Council of July 19, 2002. For hydrocarbonnatural gas exploration and production activity is accounted for in conformity with internationally accepted accountingpolicies followed at an international level have been applied, with particular reference toprinciples. Specifically, this concerns the determination of the amortizationaccording toexpenses using theUnit Of Productionunit-of-production method and the recognition of the production-sharing agreements and buy-backcontracts and Production Sharing Agreements.
The IFRS under which Eni’s Consolidated Financial Statements have been prepared differ in certain limited respects from the IFRS adopted by the IASB, the effect of such differences on the Consolidated Financial Statements is not material.contracts. The Consolidated Financial Statements have been prepared
by applying theon a historical costmethodbasis except for certain items that under IFRS must be recognized at fair value as described in theevaluation criteria.summary of significant accounting policies paragraph.The Consolidated Financial Statements include the
statutoryaccounts of Eni SpA and the accounts ofall Italian and foreigncontrolled subsidiary companiesin which Eni SpAwhere the company holds the right to directly or indirectly exercise control, determine financial and management decisions and obtain economic and financial benefits.
InsignificantImmaterial subsidiaries are notincluded in the scope of consolidation.consolidated. A subsidiary is generally consideredinsignificantto be immaterial when it does not exceed two ofthesethe following three limits: (i) total assets or liabilities: euro 3,125 thousand; (ii) total revenues: euro 6,250 thousand; and (iii) average number of employees: 50 units. Moreover, companies for whichtheconsolidation does not produce significant economic and financial effects are notincluded in the scope of consolidation. Such companies generally represent subsidiaries that work on account of other companiesconsolidated. These are usually entities acting asthe sole operatorsole-operator in the management ofupstreamoilcontracts; theseand gas contracts on behalf of companies participating in a joint venture. These are financed proportionately based on aproportional basis according to budgetsbudget approved by the participating companiesinvolved in the project, to which the company periodicallyupon presentation of periodical reportscostsof proceeds andreceipts deriving from the contract.expenses. Costs and revenues and other operating data (production, reserves, etc.) of the project, as well as the obligations arising from the project, are recognized proportionally in the financial statements of the companies involved. The effects of these exclusions arenot materialimmaterial81.
SubsidiariesImmaterial subsidiaries excluded from consolidation,joint ventures, affiliated companiesjointly controlled entities, associates and other interests are accounted for as described below under theheadingitem "Financial fixed assets".
FinancialSubsidiaries’ financial statementsof consolidated companiesare audited byauditing companies thatthe independent auditors who examine and certify also the information required for the preparation of the Consolidated Financial Statements.The 2008 Consolidated Financial Statements approved by Eni’s Board of Directors on March 13, 2009 were audited by the independent auditor PricewaterhouseCoopers SpA (PwC). The independent auditor of Eni SpA, as the main auditor of the Group, is in charge of the auditing activities of the subsidiaries, unless this is incompatible with local laws, and, to
be disclosed when preparingtheconsolidatedextent allowed under Italian legislation, of the work of other independent auditors.Amounts in the notes to these financial
statement.
Considering their materiality, amountsstatements arestatedexpressed in millions ofeuro.euros (euro million).Principles of consolidation
InterestsInterest in consolidated companiesincluded in the scope of consolidation
Assets and liabilities,expenserevenues andincomeexpenses related to fully consolidatedcompaniessubsidiaries are wholly incorporatedintoin the Consolidated Financial Statements; the book value of interests in theseinterestssubsidiaries is eliminated against the correspondingfractionshare of the shareholders’ equityof the companies owned,by attributing to eachitemof the balance sheetthe currentitems its fair value at thedateacquisition date.When acquired, the net equity of
acquisitioncontrolled subsidiaries is initially recognized at fair value. The excess ofcontrol. Any positive residual difference as regardthe purchase price of an acquired entity over the total fair value assigned tothe acquisition costassets acquired and liabilities assumed is recognized as"Goodwill". Negative residual differences are charged againstgoodwill; negative goodwill is recognized in the profit and loss account.Equity and net profit of minority shareholders are included in specific lines of the financial statements; this share of equity is determined using the fair value of assets and liabilities, excluding any related goodwill, at the time when control is acquired.
The purchase of additional ownership interests in subsidiaries from minority shareholders is recognized as goodwill and represents the excess of the amount paid over the carrying value of the minority interest acquired.
Gains or losses
onassociated with the sale ofsharesinterests in consolidated subsidiaries arerecordedreflected in the profit and loss account forthe amount corresponding tothe difference between proceeds from the sale and the divested portion of netequity sold.equity.
(1) According to the requirements of the Framework of international accounting standards, information is material if its omission or misstatement could influence the economic decisions that users make on the basis of the financial statements.
Fractions of shareholders’ equityF-10Inter-company transactions
Inter-company transactions, balances andof net profit of minority interest are recognized under specific items in the profit and loss account. Minority interest is determined basedunrealized gains onthe current value attributed to assets and liabilities at the date of the acquisition of control, excluding any related goodwill.
Inter-company transactions
Income deriving from inter-companytransactionsunrealized towards third parties is eliminated. Receivables, payables, revenues and costs, guarantees, commitments and risks among consolidatedbetween group companies areeliminated, as well. Inter-companyeliminated. Unrealized losses are not eliminated since theyreflectare considered anactual decrease inimpairment indicator of thevalue of divested assets.asset transferred.Foreign currency translation
Financial statements ofconsolidatedforeign companiesdenominated in currencieshaving a functional currency other thantheeuro areconvertedtranslated intoeuro applying exchange rates prevailing at year end to assets and liabilities,thehistorical exchange rates to equity accounts and the average rates for the period to profit and loss account (source: Ufficio Italiano Cambi).
Exchange rate differences from the conversion deriving from the application of differentpresentation currency using closing exchange rates for assets and liabilities,shareholders’historical exchange rates for equity accounts and average rates for the period for the profit and loss account (source: Bank of Italy).Cumulative exchange differences resulting from this translation are recognized in shareholders’ equity under
the item"Other reserves"within shareholders’ equity for the portion relatingin proportion to theGroupgroup’s interest and underthe item"Minority interest" for the portion related to minority shareholders. Cumulative exchange differences are charged to the profit and loss account when the investments are sold or the capital employed is repaid.Financial statements of foreign subsidiaries which are translated into euro are denominated in the functional currencies of the
countrycountries where theenterprise operates.entities operate. The U.S. dollar is the prevalent functional currency for the entities that do not adopt euro.
Evaluation criteriaSummary of significant accounting policiesThe most significant
evaluation criteriaaccounting policies usedforin the preparation of the Consolidated Financial Statements areshowndescribed below.Current assets
Financial assets held
Held for tradingandfinancial assetsavailable for saleand available-for-sale financial assets arestatedmeasured at fair value with gains or losses recognized in the profit and loss account under "Financial income (expense)" and as a component of equity within "Other reserves", respectively.In the
economic effectslatter case, changes in fair value recognized under shareholders’ equity are charged to the profit and loss accountitem "Financial Income (Expense)"when they are impaired or realized. The objective evidence that an impairment loss has occurred is verified considering, interalia, significant breaches of contracts, serious financial difficulties or the high probability of insolvency of the counterparty; asset write downs are included in the carrying amount2.Available-for-sale financial assets include financial assets other than derivative financial instruments, loans and
underreceivables, held for trading financial assets, held-to-maturity financial assets and investments associated with a derivative financial instrument. The latter are stated at fair value with effects of changes in fair value recognized in the profit and loss account rather than in shareholders’ equitywithin "Other reserves"(the so-called "fair value option") in order to ensure a match with the recognition in the profit and loss account of the changes in fair value of the derivative instrument3.The fair value of financial instruments is
representeddetermined by market quotations or, in their absence, by the value resulting from the adoption of suitable financial valuation models which take into account all the factors adopted bythemarket operators andtheprices obtained in similaractualrecent transactions in the market.
WhenInterests and dividends on financial assets stated at fair value with gains or losses reflected in theconditionsprofit and loss account are accounted for on an accrual basis as "Financial income (expense)" and "Income (expense) from investments", respectively. When the purchase or sale of a financialassets provide for the settlement of the transaction and theasset under a contract whose terms require delivery of theassetsasset withina given number of days determinedthe time frame established generally byentities controllingregulation or convention in the marketor by agreements (e.g. purchase of securities on regulated markets),place concerned, the transaction isentered ataccounted for on thedate of settlement.settlement date. Receivables are
statedcarried attheiramortized cost (seebelowitem "Financial fixed assets")below).Transferred financial assets are
eliminatedderecognized when thetransaction,contractual rights to receive the cash flows of the financial assets are transferred together with thecash flows deriving from it, lead to the substantial transfer of allrisks andbenefits associated torewards of theproperty.ownership.Inventories, including compulsory stocks and excluding contract work in progress,
and including compulsory stocks,are stated at the lower of purchase or production cost andmarketnet realizable value. Net realizable valuerepresented byis theproceedsestimated selling price less thecompany expectscosts tocollect from the sale of the inventories in the normal course of business.sell. The cost for inventories of hydrocarbons (crude oil, condensates and natural gas) and petroleum products is
(2) Amendments to IAS 39 "Financial Instruments: Recognition and Measurement" and to IFRS 7 "Financial Instruments: Disclosures" that permit, with certain criteria met, an entity to reclassify held for trading and available-for-sale financial assets into financial instruments valuated at cost or at amortized cost have not produced any effect for Eni. (3) Regarding the investment in OAO Gazprom Neft see Note 2 - Other financial assets held for trading or available for sale. F-11
determined by applying the weighted-average cost method on a three-month basis; the cost for inventories of the Petrochemical segment is determined by applying the weighted-average cost on an annual basis.
Contract work in progress is
recordedmeasured using the cost-to-cost method whereby contract revenue is recognized based onthe basis of contractual considerations by reference tothe stage of completionof a contract measured on a cost-to-cost basis.as determined by the cost sustained. Advances are deducted from inventories within the limits of contractual considerations; any excess of such advances over the value of thework performedinventories is recorded as a liability. Losses related to construction contracts are accrued foras soon asonce the company becomes aware of such losses. Contract work in progress not yet invoiced, whose paymentis agreedwill be made in a foreign currency, is translated to euro using the current exchange rates at year end andeffects arethe effect of rate changes is reflected in the profit and loss account.Hedging instruments are described in the section "Derivative
Instruments"instruments".Non-current assets
Property, plant and equipment
94
Tangible assets, including investment properties, are recognized using the cost model and stated at their purchase orproductionself-construction cost includingancillaryany costswhich can bedirectlyattributedattributable tothem as are required to makebringing the assetready for use.into operation. In addition, when a substantialamountperiod of time is required to make the asset ready for use, the purchase price orproductionself-construction cost includes thefinancial expensesborrowing costs incurred thatwouldcould havetheoreticallyotherwise been saved had the investment not been made.In the case of
current obligationsa present obligation for the dismantling and removal of assets and thereclamationrestoration of sites, the carrying value includes, with a corresponding entry to a specific provision, the estimated (discounted) costs to be borne at the moment the asset is retired.RevisionsChanges in estimate ofestimates for thesethe carrying amounts of provisionsfordue to the passage of time andforchanges inthediscountraterates are recognized under "Provisions for contingencies"5.The company recognizes material provisionsProperty, plant and equipment is not revalued for
the retirement of assets in the Exploration & Production business. No significant asset retirement obligations associated with any legal obligations to retire refining, marketing and transportation (downstream) and chemical long-lived assets generally are recognized, as indeterminate settlement dates for the asset retirements prevented estimation of the fair value of the associated asset retirement obligation. The company performs periodic reviews of its downstream and chemical long-lived assets for any changes in facts and circumstances that might require recognition of a retirement obligation.
No revaluation is made even in application of specific laws.financial reporting purposes.Assets carried under financial leasing or concerning arrangements that do not take the legal form of a finance lease but substantially transfer all the risks and rewards of ownership of the leased asset are recognized at fair value, net of taxes due from the lessor or, if lower, at the present value of the minimum lease payments. Leased assets are included within
the tangible assets, with aproperty, plant and equipment. A correspondingentry to thefinancial debt payable to the lessorandis recognized as a financial liability. These assets are depreciated using the criteriadetaileddescribed below. When the renewal is not reasonably certain, leased assetscarried under financial leasingare depreciated over theperiodshorter of the leaseif shorter thanterm and the estimated useful life of the asset.Expenditures on renewals, improvements and transformations which provide additional economic benefits are capitalized to property, plant and equipment.
Tangible assets, from the moment they begin or should begin to be used, are depreciated systematically using a straight-line method over
the duration oftheir useful lifetaken aswhich is an estimate of the periodforover which the assets will be used by the company. Whenthetangibleasset comprisesassets are composed of more than one significant element with different useful lives,the depreciationeach component iscarried out for each component.depreciated separately. The amount to be depreciated is represented by the book value reduced by thepresumableestimated net realizable value at the end of the useful life, if it is significant and can be reasonably determined. Land is not depreciated, evenif bought togetherwhen purchased with a building. Tangible assets held forsalessale are not depreciated but are valued at the lower ofthebook value and fair value less costs of disposal.Assets that can be used free of charge by third parties are depreciated over the shorter term of the duration of the concession and the useful life of the asset.
Renewals, improvements and transformations which extend asset lives are capitalized.
TheReplacement costsfor the substitutionof identifiable components in complex assets are capitalized and depreciated over their useful life; the residual book value of the component that has been substituted is charged to the profit and loss account.OrdinaryExpenditures for ordinary maintenance andrepair costsrepairs are expensedwhenas incurred.
When events occur that lead to a presumable reduction in the bookThe carrying value oftangibleproperty, plant and equipment is reviewed for impairment whenever events indicate that the carrying amounts for those assetstheirmay not be recoverable. The recoverability of an asset ischeckedassessed by comparingtheir bookits carrying value with therealizable value,recoverable amount represented by thegreaterhigher of fair value less costsof disposal and replacement cost. In the absenceto sell
(4) Recognition and evaluation criteria of exploration and production activities are described in the section "Exploration and production activities" below. (5) The company recognizes material provisions for the retirement of assets in the Exploration & Production business. No significant asset retirement obligations associated with any legal obligations to retire refining, marketing and transportation (downstream) and chemical long-lived assets are generally recognized, as undetermined settlement dates for asset retirements do not allow a reasonable estimate of the fair value of the associated retirement obligation. The company performs periodic reviews of its downstream and chemical long-lived assets for any changes in facts and circumstances that might require recognition of a retirement obligation. F-12
and value in use. If there is no binding sales agreement, fair value is estimated on the basis of market values,
ofrecent transactions, orofthe best available information that shows the proceeds that the company could reasonably expect to collect from the disposal of the asset.Replacement costValue in use isdetermined by discountingtheexpectedpresent value of the future cash flowsderivingexpected to be derived from the use of the asset and, if significant and reasonably determinable, the cash flows deriving from its disposal at the end of its useful life, net of disposal costs. Cash flows are determined on the basis of reasonable and documented assumptions that represent the best estimate of the future economic conditions during the remaining useful life of the asset, giving more importance to independent assumptions.The discountingOil, natural gas and petroleum products prices (and to prices for products which derive therefrom) used to quantify the expected future cash flows are estimated based on forward prices prevailing in the marketplace for the first four years and management’s long-term planning assumptions thereafter. Discounting is carried out at a rate thattakesreflects a current market valuation of the time value of money and of those specific risks of the asset that are not reflected in the estimate of the future cash flows. In particular, the discount rate used is the Weighted Average Cost of Capital (WACC) adjusted for the specific country risk of the activity.The evaluation of the specific country risk to be included in the discount rate is provided by external parties. WACC differs considering the risk associated with individual operating segments; in particular for the assets belonging to the Gas & Power and Engineering & Construction segments, taking into account the
implicitdifferent risk compared with Eni, specific WACC rates have been defined (for Gas & Power segment on the basis of a sample of companies operating in thesectors wheresame segment; for Engineering & Construction segment on theentity operates.basis of the market quotation); WACC used for impairments in the Gas & Power segment is adjusted to take into consideration the risk premium of the specific country of the activity while WACC used for impairments in the Engineering & Construction segment is not adjusted for country risk as most of the company assets are not located in a specific country. For the regulated activities, the discount rate to use for the measurement of value in use is equal to the rate of return defined by the Regulator. For the other segments, a single WACC is used considering that the risk is the same to that of Eni as a whole. Value in use is calculated net of the tax effect as this method results in values similar to those resulting from discounting pre-tax cash flows at a pre-tax discount rate deriving, through an iteration process, from a post-tax valuation. Valuation is carried out for each single asset or, if the realizable value of a single asset cannot be determined, for the smallest identifiable group of assets that generates independent cash inflows from their continuous use, theso called cashso-called "cash generatingunit.unit". When the reasons for their impairment cease to exist, Enireverses previously recorded impairment charges and recordsmakes a reversal that is recognized in profit or loss account as incomeanfrom assetrevaluation inrevaluation. This reversed amount cannot exceed theprofit and loss account for the relevant year. This asset revaluation is the lower of the fair value and the book value increased by thecarrying amountof previously incurred impairments net of related amortizationthat would have beenmadedetermined, net of depreciation, had no impairment loss been recognized for theimpairment not been made.asset in prior years.Intangible assets
Intangible assetsincludeare assetswhich lackwithout physicalqualities that are identifiable,substance, controlled by the company and able to produce future economic benefits, and goodwill acquired in business combinations. An asset is classified as intangible whenthemanagement is able to distinguishitsit clearly from goodwill. This condition is normally met when: (i) the intangible assetcan be traced back to aarises from contractual or legalor contractual right,rights, or (ii) the asset is separable, i.e. can be sold, transferred, licensed, rented or exchanged, either individually or as an integral part of other assets. An entity controls an asset if it has the power to obtain the future economic benefitsflowing fromgenerated by the underlyingresourceasset and to restrict the access of others to thosebenefits.cash flows.Intangible assets are initially stated at cost as determined
withby the criteria used for tangibleassets. No revaluation is made even in application of specific laws.assets and they are not revalued for financial reporting purposes.Intangible assets with a
defineddefinite useful life are amortized systematically overthe duration oftheir useful lifetakenestimated asan estimate ofthe periodforover which the assets will be used by the company; the amount to be amortized and the recoverability oftheir book value is checked usingthe carrying amount are verified in accordance with the criteria described in the section"Tangible Assets""Property, plant and equipment".Goodwill and other intangible assets with an indefinite useful life are not amortized. The recoverability of their carrying value is
checkedreviewed at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.With reference to goodwill, this checkGoodwill isperformedtested for impairment at the level of the smallest aggregate on which the company, directly or indirectly, evaluates the return on the capital expenditurethat included said goodwill.to which goodwill relates. When the carrying amount of the cash generating unit, including goodwill allocated thereto, exceeds the cash generating unit’s recoverable amount, the excess is recognized as impairment. The impairment loss is first allocated to reduce the carrying amount of goodwill; any remaining excess to be allocated to the assets of the unit is appliedF-13
pro-rata on the basis of the carrying amount of each asset in the unit. Impairment charges against goodwill
mayare notbe revalued.reversed6. Negative goodwill is recognized in the profit and loss account.Costs of technological development activities are capitalized when: (i) the cost attributable to the
intangible assetdevelopment activity can be reasonably determined; (ii) there is the intention,theavailability of funding andthetechnical capacity to make the asset available for use or sale; and (iii) it can beshowndemonstrated that the asset is able toproducegenerate future economic benefits. Intangible assets also include public to private service concession arrangements in which: (i) the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them and at what price; and (ii) the grantor controls – through ownership, beneficial entitlement or otherwise – any significant residual interest in the infrastructure at the end of the term of the arrangement. According to the terms of the agreements the operator has the right to operate the infrastructure, controlled by the grantor, in order to provide the public service 7 8.Exploration and production activities
109Acquisition of mineral rights
Costs associated with the acquisition of mineral rights are capitalized in connection with the assets acquired
(exploratory(such as exploratory potential, probable and possible reserves and proved reserves). When the acquisition is related to a set of exploratory potential and reserves, the cost is allocated to the different assets acquired on the basis of the value of the relevant discounted cashflow.flows.Expenditure for the exploratory potential, represented by the costs for the acquisition of the exploration permits and for the extension of existing permits, is recognized under "Intangible assets" and is amortized on a straight-line basis over the period of the exploration as contractually established. If the exploration is abandoned, the residual expenditure is charged to the profit and loss account.
Acquisition costs for proved reserves and for possible and probable reserves are recognized
under "Intangible assets" or "Tangible assets" depending onin thenature of the underlyingbalance sheet as assets.Costs associated with proved reserves are amortized on a
Unit Of Production (UOP)UOP basis, as detailed in the section "Development", considering both developed and undeveloped reserves. Expenditures associated with possible and probable reserves are not amortized until classified as proved reserves; in case of a negative result, the costs are charged to the profit and loss account.Exploration
Costs associated with exploratory activities for oil and gas producing properties incurred both before and after the acquisition of mineral rights (such as acquisition of seismic data from third parties, test wells and geophysical surveys) are initially capitalized in order to reflect their nature
ofas an investment and subsequently amortized in full when incurred.Development
Development costs are those costs incurred to obtain access to proved reserves and to provide facilities for extracting, gathering and storing oil and
gasgas. They are capitalized within property, plant andare capitalizedequipment and amortized generally on a UOP basis, as their useful life is closely related to the availability of feasible reserves. This method provides for residual costs at the end of each quarter to be amortizedthroughat a rate representing the ratio between the volumes extracted during theperiodquarter and the proved developed reserves existing at the end of theperiod,quarter, increased by the volumes extracted during theperiod.quarter. This method is applied with reference to the smallest aggregate representing a direct correlation betweeninvestmentinvestments and proved developed reserves.Costs related to unsuccessful development wells or damaged wells are expensed immediately as
losslosses on disposal.Impairments and reversal of impairments of development costs are made on the same basis as those for tangible assets.
(6) Impairment charges recognized in an interim period are not reversed also when, considering conditions existing in a subsequent interim period, they would have been recognized in a smaller amount or would not have been recognized. (7) When the operator has a unconditional contractual right to riceive cash or another financial asset from or at the direction of the grantor, considerations received or receivable by the operator for construction or upgrade of the infrastructure are recognized as a financial asset. (8) The accounting policy for service concession arrangement has been defined according to IFRIC 12 "Service concession arrangements" (IFRIC 12); the application of IFRIC 12 has determined for 2007 the reclassification of euro 3,218 million from the line item "Property, plant and equipment" to "Intangible assets"; the effects on profit and loss accounts are not material. (9) IFRS do not establish specific criteria for hydrocarbon exploration and production activities. Eni continues to use existing accounting policies for exploration and evaluation assets previously applied before the introduction of IFRS 6 "Exploration for and evaluation of mineral resources". F-14
Production
Production costs are those costs incurred to operate and maintain wells and field equipment and are expensed as incurred.
Production sharingProduction-sharing agreements and buy-back contracts
RevenuesOil andprovisionsgas reserves related toProduction Sharing Agreementsproduction-sharing agreements and buy-back contracts aresettleddetermined on the basis of contractual clauses related to the repayment of costs incurredfollowingfor the exploration, development andoperatingproduction activities executed through the use of company’s technologies and financing (cost oil) and the company’s share of production volumes not destined to cost recovery (profit oil). Revenues from the sale of the production entitlements against both cost oil and profit oil are accounted for on an accrual basis whilst exploration, development and production costs are accounted for according to therelevant amountpolicies mentioned above.The company’s share of
realized productions (profit oil).production volumes and reserves representing the profit oil includes the share of hydrocarbons which corresponds to the taxes to be paid, according to the contractual agreement, by the national government on the behalf of the company. As a consequence, the company has to recognize at the same time an increase in the taxable profit, through the increase of the revenues, and a tax expense.Retirement
Costs expected to be incurred with respect to the retirement of
thea well, including costs associated with removal of production facilities, dismantlement and site restoration, are capitalized and amortized on a UOP basis, consistent with the policy described underTangible assets."Property, plant and equipment".Grants
Grants related to assets are recordedin a contra asset account when authorized, if all the required conditions have been met andas a reduction of purchase price or production cost of therelevant assets.related assets when there is reasonable assurance that all the required conditions attached to them, agreed upon with government entities, have been met. Grantsof the yearnot related to capital expenditure are recognized in the profit and loss account.Financial fixed assets
Investments
Investments in subsidiaries excluded from consolidation,
joint venturesjointly controlled entities andaffiliatesassociates are accounted for using the equitymethod. If itmethod10. Subsidiaries, joint ventures and associates excluded from consolidation are accounted for at cost, adjusted for impairment losses if this does not result in a misrepresentation of the company’s financialcondition and consolidated results, subsidiaries, joint ventures and affiliates excluded from consolidation may be accounted for at cost, adjusted for permanent impairment of value.condition. When the reasons for their impairment cease to exist, investments accounted for at cost arerevaluedre-valued within the limit of the impairment made and their effects arecharged to the profit and loss account itemincluded in "Other income (expense) from investments".Other investments, included in non current assets, are recognized at their fair value and their effects are included in shareholders’ equity under "Other reserves"
.; this reserve is charged to the profit and loss account when it is impaired or realized. When investments are not traded in a public market and fair value cannot be reasonablyascertained,determined, investments are accounted for at cost, adjusted forpermanentimpairmentof value;losses; impairmentof valuelosses may not berevalued.reversed11.The risk deriving from losses exceeding shareholders’ equity is recognized in a specific provision to the extent the parent company is required to fulfill legal or implicit obligations towards the subsidiary or to cover its losses.
Receivables and financial assets to be held to maturity
Receivables and financial assets
that mustto be held to maturity are stated at cost represented by the fair value of the initial exchanged amount adjusted to take into account direct external costs related to the transaction (e.g. fees of agents or consultants, etc.). The initial carrying value is thencorrectedadjusted to take into account capital repayments, devaluations and amortization of the difference between the reimbursement value and the initial carryingvalue; amortizationvalue. Amortization is carried out on the basis of the effective internal rate of return represented by the rate that equalizes, at the moment of the initial revaluation, the current value of expected cash flows to the initial carrying value (so-called amortized cost method).The economic effectsAny impairment is recognized by comparing the carrying value with the present value of thevaluation accordingexpected cash flows discounted at the effective interest rate defined at the initial recognition, or at the
(10) In the case of step acquisition of a significant influence (or joint control), the investment is recognized at the acquisition date of significant influence (joint control) at the amount deriving from the use of the equity method assuming the adoption of this method since initial acquisition; the "step-up" of the carrying amount of interests owned before the acquisition of significant influence (joint control) is taken to equity.
(11) Impairment charges recognised in an interim period are not reversed also when, considering conditions existing in a subsequent interim period, they would have been recognized in a smaller amount or would not have been recognized. F-15
moment of its updating to reflect re-pricings contractually established. Receivables and financial assets to be held to maturity are recognized net of the allowance for impairment losses; when the impairment loss is definite the excess allowance for impairment losses is reversed. Changes to the carrying amount of receivables or financial assets in accordance with the amortized cost method are
chargedrecognized as "Financial income (expense)".Financial liabilities
Debt is carried at amortized cost (see item "Financial fixed assets" above).Provisions for contingencies
Provisions for contingenciesconcernare liabilities for risks and charges of a definite nature and whose existence is certain or probable but for which atyear endyear-end the timing or amountor dateofoccurrence remainsfuture expenditure is uncertain. Provisions aremaderecognized when: (i) there is a current obligationeither legal(legal orimplicit, deriving fromconstructive) as a result of a past event; (ii) it is probable that thefulfillmentsettlement of that obligation will result in an outflow of resources embodying economic benefits; and (iii) the amount of the obligation can be reliably estimated.Provisions are stated at the value that representsThe amount recognized as a provision is the best estimate of theamount thatexpenditure required to settle thecompany would reasonably pay to fulfillpresent obligation at theobligationbalance sheet date or to transfer it to third parties atyear end. Whenthat time. If thefinancialeffect of the time value issignificantmaterial, and the payment date of the obligations can be reasonably estimated, provisions to be accrued are theprovisions are discounted backpresent value of the expenditures expected to be required to settle the obligation at a discount rate that reflects the company’s average borrowing rateof indebtedness.taking into account the risks associated with the obligation. The increase in the provision due to thepassingpassage of time ischarged to the profit and loss account in the itemrecognized as "FinancialIncome (Expense)income (expense)".When the liability regards a tangible asset (e.g. site restoration and abandonment), the provision is stated with a corresponding entry to the asset to which it refers; charges to the profit and loss account charge
isare made with the amortization process.
The costsCosts that the company expects to bear in order to carry out restructuring plans are recognizedin the year in whichwhen the company formally defines the plan and the interested parties have developed the reasonable expectation that the restructuring will happen.
The provisionsProvisions are periodically updated to show the variations of estimates of costs, production times and actuarial rates; the estimated revisions to the provisions are recognized in the same profit and loss account item that had previously held the provision, or, when the liability regards tangible assets (i.e. site restoration and abandonment) with a corresponding entry to the assets to which they refer.In the
Notesnotes to theFinancial Statementsconsolidated financial statements the following potential liabilities are described: (i) possible, but not probable obligations deriving from past events, whose existence will be confirmed only when one or more future events beyond the company’s control occur; and (ii) current obligations deriving from past events whose amount cannot be reasonably estimated or whose fulfillment will probablybenotexpensive.result in an outflow of resources embodying economic benefits.Employee
post-employmentbenefits
Post employment
Post-employment benefit plans, including constructive obligations, are classified as either definedon the basis of plans, even if not formalized ones, that due to their mechanisms feature defined contributionscontribution plans or defined benefitplans.plans depending on the economic substance of the plan as derived from its principal terms and conditions. In the first case, the company’s obligation,consisting inwhich consists of making payments to the State ortoa trust or a fund, is determined on the basis of contributions due.The liabilities related to defined benefit plans,
11,net of any plan assets, are determined on the basis of actuarial assumptions12and chargedto the relevant year consistently withon an accrual basis during the employment period required to obtain thebenefits; the evaluation of liabilities is made by independent actuaries.benefits.The actuarial gains and losses of defined benefit plans
derivingare recognized pro-rata on service, in the profit and loss account using the corridor method, if and to the extent that net cumulative actuarial gains and losses unrecognized at the end of the previous reporting period exceed the greater of 10% of the present value of the defined benefit obligation and 10% of the fair value of the plan assets, over the expected average remaining working lives of the employees participating to the plan.Such actuarial gains and losses derive from
a changechanges in the actuarial assumptions used or from a change in the conditions of theplan,plan.F-16
Obligations for long-term benefits are
charged todetermined by adopting actuarial assumptions; theprofit and loss account, proportionally througheffect of changes in actuarial assumptions or a change in theresidual average working lifecharacteristics of theemployees participatingbenefit are taken tothe plan,profit or loss inthe limits of the share of the discounted profit/loss not charged beforehand, that exceeds the greater of 10% of liabilities and 10% of the fair value of the plan assets (corridor method).their entirety.Treasury shares
Treasury shares are recorded at cost and as a reduction ofshareholders’equity. Gainsfollowingresulting from subsequent sales are recordedas an increaseinshareholders’equity.Revenues and costs
Revenuesfromassociated with sales of products and servicesrenderedarerecognized upon transfer ofrecorded when significant risks andadvantagesrewards of ownership pass to the customer or when the transaction can be considered settled and associatedwith the property or upon settlement of the transaction.revenue can be reliably measured. In particular, revenues arerecognized:recognized for the sale of:
•for crude oil, generally upon shipment;•for natural gas, when the natural gas is delivered to the customer;•for petroleum products sold to retail distribution networks, generally upon delivery to the service stations, whereas all other sales are generally recognized upon shipment;•for petrochemical products and other products, generally upon shipment.
- crude oil, generally upon shipment;
- natural gas, upon delivery to the customer;
- petroleum products sold to retail distribution networks, generally upon delivery to the service stations, whereas all other sales are generally recognized upon shipment;
- chemical products and other products, generally upon shipment.
Revenues are recognized upon shipment when, at that date,
thesignificant risksof lossare transferred to theacquirer.buyer. Revenues from
the sale ofcrude oil and natural gasproduced inproduction from properties in which Eni has an interest together with other producers are recognized on the basis of Eni’s net working interest in those properties (entitlement method). Differences between Eni’s net working interest volume and actual production volumes are recognized at current prices atperiodyear end.Income related to partially rendered services
areis recognizedwith respectin the measurement of accrued income if the stage of completion can be reliably determined and there is no significant uncertainty as to theaccrued revenues, if it is possible to reasonably determinecollectability of thestate of completion and there are no relevant uncertainties concerning the amountsamount and theexistencerelated costs. When the outcome of the transaction cannot be estimated reliably, revenueand related costs; otherwise itis recognizedwithinonly to thelimitsextent of therecoverable costs incurred.expenses recognized that are recoverable.
The revenuesRevenues accrued in theperiodyear related to construction contracts are recognized on the basis of contractual revenuesbywith reference to the stage of completion of a contract measured on the cost-to-costbasis. The requestsbasis12.Requests of additional revenues, deriving from a change in the scope of
thework, are included in the total amount of revenues when it is probable that the customer will approve the variation and therelevantrelated amount; claims derivingfor instancefrom additional costs incurred for reasons attributable to the client are included in the total amount of revenues when it is probable that thecounterpartcounterparty will accept them.Revenues are stated net of returns, discounts, rebates, bonuses and
bonuses, as well as directly relateddirect taxation.ExchangesThe exchange of goods and serviceswithof a similar nature and value do not give rise to revenues and costs as they do not represent sale transactions.Costs are
recognizedrecorded when the related goods and services are sold, consumed or allocated, or when their futureuseful livesbenefits cannot be determined.Costs
related to the amount of emissions,associated with emission quotas, determined on the basis of the average prices of the main European markets attheperiod end,of the period,are reported in relation to the amount of the carbon dioxide emissions that exceed the amount assigned; related revenues are recognized upon sale. Costs related to the purchase of the emission rights are taken to intangible assets net of any negative difference between the amount of emissionsare reported when are recognized followingand thesale.quotas assigned.Operating lease payments are recognized in the profit and loss account over the length of the contract.
Labor costs include stock grants and stock options granted to managers, consistent with their actual remunerative nature. The
cost is determined basedinstruments granted are recorded at fair value on thefair value ofvesting date and are not subject to subsequent adjustments; therights awarded to the employee; thecurrent portionrelevant to the yearis calculatedpro ratapro-rata over the vesting periodto which the incentive refers (vesting period13).The fair value of stock grants is represented by the current value of the shares at the date of the award, reduced by the current value of the expected dividends in the vesting period. The fairFair value of stock options isthe value of the option calculated with the Black-Scholes method that takes into accountdetermined using valuation techniques which consider conditions related to the exerciseconditions,of options, currentprice of the shares,share prices, expected volatility and the risk-free interest rate. The fair value of the stock grants and stock options isshownrecorded as acontra-entrycharge to "Other reserves".
(12) For service concession arrangements in which customers fees do not provide a distinction compensation for construction/update of the infrastructure and compensation for operating it and in the absence of external benchmarks which could be used to determine the respective fair value of these two items, revenues recognised during the construction phase are limited to the amount of the costs incurred.
(13) For stock grants, the period between the date of the award and the date of assignation of stock; for stock options, the period between the date of the award and the date at which the option can be exercised. F-17
The costs for the acquisition of new knowledge or discoveries, the study of products or alternative processes, new techniques or models, the planning and construction of prototypes or, in any case, costs borne for other scientific research activities or technological development, which cannot be capitalized, are
generally considered current costs and expensed as incurred.
Accounting to Buy/Sell contracts
In January and February 2005, the Securities and Exchange Commission ("SEC") issued comment letters to Eni and other companiesincluded in theoilprofit andgas industry requesting disclosure of information related to the accounting for buy/sell contracts. Eni routinely enters into buy/sell contracts, principally in the downstream business in Italy, associated mainly with refined products. For refined products, buy/sell arrangements are used to support the company’s refined products marketing activity, which includes the production, purchase and sale of refined products in order to fulfill the company’s marketing needs and supply agreements to customer locations and specifications.loss account.
Eni accounts for buy/sell transactions in the consolidated income statement on a net basis, regardless of whether terms of the buy/sell agreements were established jointly, in a single contract, or separately, in individual contracts that are entered into concurrently or in contemplation of one another with a single counterparty. This accounting is consistent with the most recent guidance of the SEC staff who considers that the accounting for buy/sell contracts should be shown net on the income statement.
The topic is under deliberation by the Emerging Issues Task Force (EITF) of the FASB as Issue No. 04-13, "Accounting for Purchases and Sales Inventory with the Same Counterparty." At its September 2005 meeting, the EITF reached consensus that two or more legally separate exchange transactions with the same counterparty, including buy/sell transactions, should be combined and considered as a single arrangement when the transactions were entered into "in contemplation" of one another. EITF 04-13 was ratified by the FASB in September 2005 and is effective for new arrangements, or modifications or renewals of existing arrangements, entered into beginning on or after April 1, 2006, which will be the effective date for the company’s adoption of this standard. Upon adoption, the company will report the net effect of buy/sell transactions on its Consolidated Statement of Income as "Purchased crude oil and products" instead of reporting the revenues associated with these arrangements as "Sales and other operating revenues" and the costs as "Purchased crude oil and products." While this issue was under deliberation, the SEC staff directed Eni and other oil companies comment letter to disclose on the face of the income statement the amounts associated with buy/sell contracts and to discuss in a footnote to the financial statements the basis for the underlying accounting.
In Eni’s consolidated income statement, "Net sales from operations" and "Purchases, services and other" for the December 31, 2004 and 2005 were netted of euro 1,821 million and euro 2,595 million, respectively, for the above described buy/sell contracts.Exchange rate differences
Revenues and costsconcerningassociated with transactions in currencies other than the functional currency arestated attranslated into the functional currency by applying the exchange rateonat the datethatof thetransaction is completed.transaction.Monetary assets and liabilities denominated in currencies other than the functional currency are converted by applying the year end exchange rate and the effect is stated in the profit and loss account. Non-monetary assets and liabilities denominated in currencies other than the functional currency valued at cost are
statedtranslated at the initial exchange rate;when theynon-monetary assets that areevaluated atre-measured to fair value, recoverablevalueamount or realizable value are translated at the exchange rateapplied is thatapplicable at the date ofthe day of recognition.re-measurement.Dividends
Dividends are recognized at the date of the generalshareholders’ meetingShareholders’ Meeting in which they were declared, except when the sale of shares before the ex-dividend date is certain.Income taxes
Current income taxes are determined on the basis of estimated taxableincome; theincome. The estimated liability isrecognizedincluded inthe item"Income taxliabilities"payables". Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from) the tax authorities, usingthetaxrates (and tax laws)laws that have been enacted or substantively enacted at the balance sheetdate.date and the tax rates estimated on an annual basis. Deferred tax assets or liabilities are provided on temporary differences arising between the carrying amounts of the assets and liabilities
in the financial statementsand their taxbases.bases, based on tax rates (tax laws) that have been enacted or substantively enacted for future years. Deferred tax assets are recognized when their realization is considered probable.Deferred tax assets and liabilities are
recorded underincluded in non-current assets and liabilities and are offset at a single entity level if related to offsettable taxes. The balance of the offset, if positive, is recognized in the item "Deferred tax assets"and; if negative, in the item "Deferred tax liabilities". When the results of transactions are recognized directly intheshareholders’ equity, current taxes, deferred tax assets and liabilities are also charged to the shareholders’ equity.Derivatives
Derivatives, including embedded derivatives which are separated from the host contract, are assets and liabilities recognized at their fair
value.value which is estimated by using the criteria described in the section "Current assets". When there is objective evidence that an impairment loss has occurred (see "Current assets" paragraph) derivatives are recognized net of the allowance for impairment losses.Derivatives are classified as hedging instruments when the relationship between the derivative and the subject of the hedge is formally documented and the effectiveness of the hedge is high and is checked periodically. When hedging instruments cover the risk of variation of the fair value of the hedged item (fair value
hedge;hedge, e.g. hedging of the variabilityonof the fair value of fixed interest rate assets/liabilities),the derivatives are stated at fair value and the effects charged to the profit and lossaccount; consistently the hedgedaccount. Hedged items are consistently adjusted to reflect the variability of fair value associated with the hedged risk. When derivatives hedge the cash flow variation risk of the hedged item (cash flowhedge;hedge, e.g. hedging the variability on the cash flows of assets/liabilities as a result of the fluctuations of exchange rate), changes in the fair value of the derivatives considered effective are initially stated innetequity and then recognized in the profit and loss account consistent with the economic effects produced by the hedged transaction. Thechangechanges in the fair value of derivatives that do not meet the conditions required to qualifyas hedging instrumentsfor hedge accounting are shown in the profit and loss account.Economic effects of transactions, which relate to purchase or sales contracts for commodities entered into to meet the entity’s normal operating requirements and for which the settlement is provided with the delivery of the goods, are recognized on an accrual basis (the so-called normal sale and normal purchase exemption or own use exemption).
F-18
Financial statements
Assets and liabilities of the balance sheet are classified as current and non-current. Items of the profit and loss account are presented by nature14.The statement of changes in shareholders’ equity includes profit and loss for the year, transactions with shareholders and other changes in shareholders’ equity.
The statement of cash flows is presented using the indirect method, whereby net profit is adjusted for the effects of non-cash transactions.
Use of accounting estimates
The
preparation of thesecompany’s Consolidated Financial Statementsrequires Management to apply accounting methodsare prepared in accordance with IFRS. These require the use of estimates andpoliciesassumptions that affect the assets, liabilities, revenues and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. Estimates made are based ondifficultcomplex or subjective judgmentsestimates based onand past experience of other assumptions deemed reasonable in consideration of the information available at the time. The accounting policies andassumptions determinedareas that require the most significant judgments and estimates to bereasonableused in the preparation of the Consolidated Financial Statements are in relation to the accounting for oil andrealistic based on the related circumstances. The application of these estimates and assumptions affects the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of income and expenses during the reporting period. Key areas where estimates are applied includenatural gas activities, specifically in the determination ofoil and gasproved reserves,and proved developed reserves, accounting for exploratory drilling costs under U.S. GAAP,impairment of fixed assets, intangible assets and goodwill, asset retirement obligations, business combinations, pensions and other post-retirement benefits, recognition of environmental liabilities and recognition of revenues in the oilfield services construction and engineering businesses.ActualAlthough the company uses its best estimates and judgments, actual resultsmaycould differ fromthese estimates given the uncertainty surrounding the assumptions and conditions upon whichthe estimatesare based. Summarized below are the accountingand assumptions used. A summary of significant estimatesthat require the more subjective judgment of our management. Such assumptions or estimates regard the effects of matters that are inherently uncertain and for which changes in conditions may significantly affect future results.follows.Oil and gas activities
Engineering estimates of the Company’s oil and gas reserves are inherently uncertain. Proved reserves are the estimated volumes of crude oil, natural gas and gas condensates, liquids and associated substances which geological and engineering data demonstrate can be produced with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Although there are authoritative guidelines regarding the engineering criteria thathave tomust be met before estimated oil and gas reserves can be designated as "proved", the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment.
Reserves in a fieldField reserves will only be categorized as proved when all the criteria for attribution of proved status have beenmet, including an internally imposed requirement for project sanction that occurs when a final investment decision is made.met. Atthe point of sanction,this stage, all booked reserves will becategorizedclassified as proved undeveloped. Volumes will subsequently berecategorizedreclassified from proved undeveloped to proved developed as a consequence of development activity. The first proved developed bookings will occur at the point of first oil or gas production. Major development projects typically take one to four years from the time of initial booking to the start of production.Adjustments may be made to booked reserves due to production, reservoir performance, commercial factors, acquisition and divestment activity and additional reservoir development activity.Eni reassesses its estimate of proved reserves
on an annual basis.periodically. The estimated proved reserves of oil and natural gas may be subject to future revision and upward and downward revision may be made to the initial booking of reserves due to production, reservoir performance, commercial factors, acquisition and divestment activity and additional reservoir development activity. In particular, changes in oil and natural gas prices could impact the amount of Eni’s proved reserves as regards the initial estimate and, in the case ofProduction Sharing AgreementsProduction-sharing agreements and buy-back contracts, the share of production and reserves to which Eni isentitled to.entitled. Accordingly, the estimated reserves could be materially different from the quantities of oil and natural gas that ultimately will be recovered.Oil and natural gas reserves have a direct impact on certain amounts reported in the
financial statements.Consolidated Financial Statements. Estimated proved reserves are used in determining depreciation and depletion expenses and impairment expense.Depreciation rates on oil and gas assets using the UOP basis are determined from the ratio between the amount of hydrocarbons extracted in the
yearquarter and proved developed reserves existing at theyearend of the quarter increased by the amounts extracted during theyear.quarter.Assuming all other variables are held constant, an increase in estimated proved developed reserves for each field decreases depreciation, depletion and amortization expense.
On the contrary,Conversely, a decrease in estimated proved
(14) Further information on financial instruments as classified in accordance with IFRS is provided in Note 29 - Guarantees, commitments and risks "Other information about financial instruments". F-19
developed reserves increases depreciation, depletion and amortization expense.
Also,In addition, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whetheraor not property impairment is to be carriedout or not.out. The larger thevolumesvolume of estimated reserves, theless likelylower theproperty is impaired. See "Item 3 – Risk Factors – Uncertainties in Estimateslikelihood ofOil and Natural Gas Reserves".asset impairment.
Accounting for Suspended Well Costs under U.S. GAAP
Under U.S. GAAP costs for exploratory wells are initially capitalized pending the determination of whether the well has found proved reserves. If proved reserves are found, the capitalized costs of drilling the well are reclassified to tangible assets and amortized on a UOP basis. If proved reserves are not found, the capitalized costs of drilling the well are charged to expense. However, successful exploratory efforts are, in many cases, not declared to be proved until after an extensive and lengthy evaluation period has been completed. These issues were addressed by the FASB staff in its FSP FAS 19-1, published in April 2005, amending FAS 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". Under the provisions of FSP FAS 19-1, companies in the oil and gas industry are allowed to continue capitalization of an exploratory well after the completion of drilling when: (a) the well has found a sufficient quantity of reserves to justify completion as a producing well; and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met or if an enterprise obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well would be assumed to be impaired, and its costs, net of any salvage value, would be charged to expense. Determination of whether an exploratory well should remain capitalized after completion of drilling requires a high degree of judgment on the part of management in assessing whether the Company is making sufficient progress assessing the reserves and the economic and operating viability of a given project. The company evaluates the progress made on the basis of regular project reviews which take account of the following factors: (i) costs are being incurred to assess the reserves and their potential development; (ii) existence (or active negotiations) of sales contracts with customers for oil and natural gas; and (iii) existence of firm plans, established timetables or contractual commitments, which may include seismic testing and drilling of additional exploratory wells. As of December 31, 2005, an amount of euro 403 million remain capitalized relating to approximately 30 exploratory wells for which drilling activities have been completed for more than one year, of this capitalized amount euro 59 million (or 8 wells) relates to projects progressing towards completion of development activities, and the remaining euro 344 million (or 22 wells) relates to projects for which additional exploratory activity is underway or firmly planned. See Note 35 to the Consolidated Financial Statements.Impairment of
Assetsassets
Eni assesses itsfixedtangible assets and intangible assets, including goodwill, for possible impairment if there are events or changes in circumstances that indicate the carrying values of the assets are not recoverable.Such indicators include changes in the Group’s business plans, changes in commodity prices leading to unprofitable performance, a reduced utilization of the plants and, for oil and gas properties, significant downward revisions of estimated proved reserve
quantities.quantities or significant increase of the estimated development costs. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses, production profiles and the outlook for global or regional marketsupply-and-demandsupply and demand conditions for crude oil, natural gas, commodity chemicals and refined products.
Technically, theThe amount of an impairmentchargeloss is determined by comparing the book value of an asset with its recoverable amount. The recoverable amount is the greater of fair value net of disposal costs and value in use. The estimated value in use isusuallybased on the present values of expected future cash flowsusing assumptions commensurate with the risks involved in the asset group.net of disposal costs. The expected future cash flows used for impairment reviews are based on judgmental assessments of future production volumes, prices and costs, considering available information at the date of review and are discounted by using a rate related to the activity involved.For oil and natural gas properties, the expected future cash flows are estimated principally based on developed and non-developed proved reserves including, among other elements, production taxes and the costs to be incurred for the reserves yet to be developed. The estimated future level of production is based on assumptions
aboutconcerning: future commodity prices, lifting and development costs, field decline rates, market demand and supply, economic regulatory climates and other factors.
Under both IFRSOil, natural gas andU.S. GAAP, goodwillpetroleum products prices used to quantify the expected future cash flows are estimated based on forward prices prevailing in the marketplace for the first four years and management’s long-term planning assumptions thereafter. The estimate of the future amount of production is based on assumptions related to the commodity future prices, lifting and development costs, market demand and to other factors. The discount rate reflects the current market valuation of the time value of money and of the specific risks of the asset notamortized but, like indefinitive livedreflected in the estimate of the future cash flows.Goodwill and other intangible assets
is testedwith an indefinite useful life are not subject to amortization. The company tests such assets at the cash-generating unit level for impairmentat least annually. Under IFRSon an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce theassessment offair value below its carrying amount. In particular, goodwill impairment is based on the determination of the fair value of eachcash generating unitscash-generating unit to which goodwill can be attributed on a reasonable and consistent basis. A cash generating unit isa group of assets that generates cash inflows that are largely independent ofthecash inflows from other groups of assets.smallest aggregate on which the company, directly or indirectly, evaluates the return on the capital expenditure. If thefair valuerecoverable amount of a cash generating unit is lower than the carrying amount, goodwill attributed to that cash generating unit is impaired up to thatdifference,difference; if the carrying amount of goodwill is less than the amount of impairment, assets of the cash generating unit are impaired on a pro-rata basis for the residual difference.Asset
Retirement Obligationretirement obligations
Obligationsrelatedtothe removal ofremove tangible equipment andto the restoration ofrestore land orseabedsseabed require significant estimates in calculating the amount of the obligation and determining the amount required to be recorded presently in theConsolidated Financial Statements.consolidated financial statements. Estimatingthefuture assetremoval costsretirement obligations isdifficult andcomplex. It requires management to make estimates and judgmentsbecause most of thewith respect to removal obligationsarethat will come to term many years into the future and contracts and regulations are often unclear as to what constitutes removal.AssetIn addition, the ultimate financial impact of environmental laws and regulations is not always clearly known as asset removal technologies and costsareconstantlychanging,evolve in the countries where Eni operates, aswell asdo political, environmental, safety and publicrelations considerations.expectations. The subjectivity of these estimates is also increased by the accounting method used that requires entities to record the fair value of a liability for an asset retirementobligationsobligation in the period when it is incurred (typically, at the time the asset is installed at theproductionsproduction location). When liabilities are initially recorded, the related fixed assets are increased by an equal corresponding amount. The liabilities are increased with the passage of time(interest(i.e. interestF-20
accretion) and any change
ofin the estimates following the modification ofthefuture cash flows andthediscount rate adopted. The recognized asset retirement obligations are baseduponon future retirement cost estimates and incorporate many assumptions suchasas: expected recoverable quantities of crude oil and natural gas, abandonment time,to abandonment,future inflation rates and the risk-free rate of interest adjusted for the Company’s credit costs.Business
Combinationscombinations
Accounting forthe acquisition of abusiness combinations requires the allocation of the purchase price to the various assets and liabilities of the acquired business at their respective fairvalue.values. Any positive residual difference is recognized as "Goodwill". Negative residual differences arecharged againstcredited to the profit and loss account. Management uses all available information to make these fair value determinations and, for major business acquisitions, typically engages anoutsideindependent appraisal firm to assist in the fair value determination of the acquiredlong-lived assets.assets and liabilities.Environmental
Liabilitiesliabilities
Together with other companies in the industries in which it operates, Eni is subject to numerous EU, national, regional and local environmental laws and regulations concerning its oil and gas operations,productionsproduction and otheractivities, includingactivities. They include legislation thatimplementsimplement international conventions or protocols. Environmental costs are recognized when it becomes probable that a liability has been incurred and the amount can be reasonably estimated.
Although management,Management, considering the actions already taken,theinsurance policies to cover environmental risks and provision for risks accrued, does not expect any material adverse effect on Eni’s consolidated results of operations and financial position as a result of such laws andregulations,regulations. However, there can be no assurance that there will not be a material adverse impact on Eni’s consolidated results of operations and financial position due to: (i) the possibility ofas yetan unknown contamination; (ii) the results of theon-goingongoing surveys andtheother possible effects of statements required by Decree No. 471/1999 of the Ministry of Environment concerning the remediation of contaminated sites; (iii) the possibleeffecteffects of future environmentallegislationlegislations andrules, like the Decree No. 367 of the Ministry of Environment, published on January 8, 2004, that introduces new quality standards for aquatic environment and dangerous substances and those that may derive from the legislative decree that the Italian Government will have to enact in order to implement Directive 2000/60/EC creating a framework for joint European action in the area of water;rules; (iv) theeffecteffects of possible technological changes relating to future remediation; and (v) the possibility of litigation and the difficulty of determining Eni’s liability, if any, as against other potentially responsible parties with respect to suchlitigationlitigations and the possible insurance recoveries.
EmployeesEmployee benefits
Defined benefit plans andpost-retirementother long-term benefits
Employees benefits (such as pension payments, life insurance payments, medical assistance after retirement, etc.)are evaluated with reference to uncertain events and based upon actuarial assumptions including among others discount rates, expected rates of return onanyplan assets, expected rates of salary increases, medical costtrend rates,trends, estimated retirement dates and mortality rates.These assumptions are reviewed annually and may change from year to year impacting future results of operations.The significant assumptions used to account for pensions and other post-retirement benefits are determined as follows:
•discount and inflation rates reflect the rates at which the benefits could be effectively settled, taking into account the duration of the obligation. Indications used in selecting the discount rate include rates of annuity contracts and rates of return on high-quality fixed-income investments (such as government bonds). The inflation rates reflect market conditions observed country by country;•salary increase assumptions (when relevant) are determined by each entity. They reflect an estimate of the actual future salary levels of the individual employees involved, including future changes attributed to general price levels (consistent with inflation rate assumptions), productivity, seniority, promotion and other factors;•healthcare cost trend assumptions (when relevant) reflect an estimate of the actual future changes in the cost of the healthcare related benefits provided to the plan participants and are based on past and current healthcare cost trends including healthcare inflation, changes in healthcare utilization, and changes in health status of the participants;•demographic assumptions such as mortality, disability and turnover reflect the best estimate of these future events for the individual employees involved, based principally on available actuarial data; and•determination of expected rates of return on assets is made through compound averaging. For each plan, there are taken into account the distribution of investments among bonds, equities and cash and the expected rates of return on bonds, equities and cash. A weighted-average rate is then calculated.(i) discount and inflation rates reflect the rates at which benefits could be effectively settled, taking into account the duration of the obligation. Indicators used in selecting the discount rate include rates of annuity contracts and rates of return on high quality fixed-income investments. The inflation rates reflect market conditions observed country by country; (ii) the future salary levels of the individual employees are determined including an estimate of future changes attributed to general price levels (consistent with inflation rate assumptions), productivity, seniority and promotion; (iii) healthcare cost trend assumptions reflect an estimate of the actual future changes in the cost of the healthcare related benefits provided to the plan participants and are based on past and current healthcare cost trends including healthcare inflation, changes in healthcare utilization and changes in health status of the participants; (iv) demographic assumptions such as mortality, disability and turnover reflect the best estimate of these future events for individual employees involved, based principally on available actuarial data; and (v) determination of the expected rates of return on assets is made through compound averaging. For each plan, the distribution of investments among bonds, equities and cash and their specific average expected rate of return is taken into account. Differences between
projectedexpected and actual costs and between theprojectedexpected return and the actual return on plan assets routinely occur and are called actuarial gains and losses.
The unrecognized actuarial losses of pension benefits as at December 31, 2005 were euro 144 million compared to euro 41 million in 2004. The euro 103 million increase from 2004 reflected primarily changes in assumptions used to account for pensions and other post-retirement benefits mainly related to the decrease in discount rates (4.0% in 2005 compared whit 4.5% in 2004). Pension accounting principles require that such actuarial losses be deferred and amortized over future periods.Eni applies the corridor method to amortize its actuarial losses and gains. This method amortizes on a pro-rata basis the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period that exceed 10% of the greaterofof: (i) the present value of the defined benefitobligationobligation; and (ii) the fair value of plan assets, over the average expected remaining working lives of the employees participating in the plan.
In 2005, Eni recognizedAdditionally, obligations for other long-term benefits are determined by adopting actuarial assumptions. The effect of changes in actuarial assumptions or acharge of euro 126 million (euro 118 million in 2004)change in theprofit and loss account in connection with its obligations for employee post-retirement benefits.
See Note 20characteristics of theConsolidated Financial Statements for further information about employees post-retirement benefits.benefit are taken to profit or loss in their entirety.F-21
Contingencies
In addition to accruing the estimated costs for environmental liabilities, asset retirement obligation andenvironmental liabilities,employee benefits, Eni accrues for all contingencies that are both probable and estimable. These other contingencies are primarily related toemployee benefits,litigation and tax issues. Determining appropriate amounts for accrual is a complex estimation process that includes subjective judgments.Revenue recognition in the
Oilfield Services,Engineering & Constructionand Engineeringsegment
Revenue recognition in theOilfield Services,Engineering & Constructionand Engineering businesssegment is based on the stage of completion of a contract as measured on the cost-to-cost basis applied to contractual revenues. Use of the stage of completion method requires estimates of future gross profit on a contract by contract basis. The future gross profit represents the profit remaining afterdeducingdeducting costs attributable to the contract from revenues provided for in the contract. The estimate of future gross profit is based on a complex estimation process that includes identification of risks related to the geographical region, marketconditionconditions in that region and any assessment thatitis necessary to estimate with sufficient precision the total future costs as well as the expected timetable.VariationRequests of additional income, deriving from a change in the scope ofthework, are included in the total amount of revenues when it is probable that the customer will approve the variation andclaimsthe related amount. Claims derivingforfrom additional costs incurred for reasons attributable to the client are included in the total amount of revenues when it is probable thattheythe counterparty willresult in additional revenue.accept them.Recent accounting principles
WithAccounting standards and interpretations issued by IASB /IFRIC
IFRS 8 "Operating Segments" replaced IAS 14 "Segment Reporting". IFRS 8 sets out requirements for disclosure of information about theregulations No. 1910/2005, 2106/2005 and 108/2006 issued between November 2005 and January 2006group segments that management uses to make decisions about operating matters. The identification of operating segments is based on internal reports that are regularly reviewed by theEuropean Commission approved some modifications and integrationschief operating decision maker in order to allocate resources to theinternationalsegments and assess their performances. IFRS 8 comes into effect starting on January 1, 2009.The revised IAS 1 "Presentation of Financial Statements" requires, among other things, a statement of comprehensive income that begins with the amount of net profit for the year adjusted with all items of income and expenses directly recognized in equity, but excluded from net income, in accordance with IFRS. The revised standard comes into effect starting on January 1, 2009.
The revised IAS 23 "Borrowing Costs" requires the removal of the option of immediately recognizing as an expense borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset that take a substantial period of time to get ready for use or sale. The company is required to capitalize such borrowing costs as part of the cost of the asset. The revised standard comes into effect starting on January 1, 2009.
The revised IFRS 2 "Share-based payment" specifies the accounting
standards.treatment of all cancellations of a grant of equity instruments to employees. It also imposes that vesting conditions are only service and performance conditions required in return for the equity instruments issued. The revised standard comes into effect starting on January 1, 2009.IFRIC 13 "Customer Loyalty Programmes" addresses how companies, which grant their customers loyalty, award credits when buying goods or services, should account for their obligation to provide free or discounted goods or services if and when the customers redeem the credits. In particular IFRIC 13 requires companies to allocate some of the
main modifications/integrations concernconsideration received from thefollowing standards:
IAS 19 "Employee benefits"sales transaction to the award credits and their recognition at fair value. This interpretation came into effect for annual periods beginning on or after July 1, 2008 (for Eni: 2009 financial statements).Amendments to IAS
19 essentially concern1 "Presentation of Financial Statements" and to IAS 32 "Financial Instruments: Presentation" define theapprovalconditions that the puttable instruments issued by companies have to meet in order to be classified as equity. Moreover it allowed the classification as equity of instruments issued by the company that impose on the company an obligation to deliver to another party a pro rata share of theoption relatednet assets of the entity only on liquidation. The amendments to IAS 1 and IAS 32 come into effect starting on January 1, 2009."Improvements to IFRSs", defined in the context of the annual process of "Improvements to IFRS" regards only changes to the existing standards with a technical and editorial nature. The provisions come into effect starting on January 1, 2009.
F-22
On January 10, 2008, IASB issued a revised IFRS 3 "Business Combinations" and an amended version of IAS 27 "Consolidated and Separate Financial Statements". The revisions to IFRS 3 require, among other things, (i) the acquisition-related costs to be accounted for separately from the business combination and then recognized as expenses rather than included in goodwill, (ii) the recognition in the income statement of any change to contingent consideration, and (iii) the choice of the full goodwill method which means to treat the full value of the goodwill of the business combination including the share attributable to minority interest. In the case of step acquisitions, the revisions also relate to the recognition in the
period when they incurprofit and loss account of thetotaldifference between the fair value at the acquisition date of the net assets previously held and their carrying amounts.The amendments of IAS 27 require, among other things, that acquisitions or disposals of non-controlling interests in a subsidiary that do not result in the loss of control, shall be accounted for as equity transactions. By contrast, disposal of any interests that the parent retains in a former subsidiary may result in a loss of control. In this case, at the date when control is lost the remaining investment retained is increased/decreased to fair value with gains or losses arising from the difference between the fair value and carrying amount of
actuarial gains and losses withthe held investment recognized in the profit or loss account. The revised Standards shall be applied for annual periods beginning on or after July 1, 2009 (for Eni: 2010 financial statements).On July 3, 2008, IFRIC issued IFRIC 16 "Hedges of a
corresponding entry toNet Investment in aspecific reserve in shareholders’ equity.
IAS 39 "Financial instruments:Foreign Operation" which defines the criteria for recognition andmeasurement"
In relation to cash flow hedge operations on exchange rate risk, IAS 39 has been integrated with the aimevaluation ofqualifying as hedging instruments the intercompany transactions expected and with an high probability, on condition that: (i) these transactions are denominatedhedges of a net investment in afunctional currencyforeign operation. In particular the interpretation defines, among otherthanthings, that the object of the hedge is the exchange differences between the functional currency of theentityforeign operation and the parent’s functional currency and thatcarries outtheoperation; and (ii)hedge instrument can be held by any Group company with theexposureexception of the hedged foreign operation. This interpretation shall be applied for annual periods beginning on or after October 1, 2008 (for Eni: 2009 financial statements).On November 27, 2008, IFRIC issued IFRIC 17 "Distributions of Non-cash Assets to Owner" which defines the
exchange rate risk determines some effects in consolidated profit and loss account.
Amendments to IAS 39 also concerned thecriteria of recognition andmeasurementevaluation offinancial guarantees.the distributions of assets other than cash when it pays dividends to its owner. It also applies in those situations in which an entity gives its owner a choice of receiving either non-cash assets or a cash alternative. In particular,financial guarantees are recorded when they are issued,an entity shall measure a liability to distribute non-cash assets asliability valueddividends to its owners at themarketfair valueand, then, in relation to the execution risk, at the greater between: (i) the best estimateof thechargeassets to besustaineddistributed. The liability, with any adjustments, is recognized as a contra tofulfillequity. When theobligation; and (ii)entity settles theinitialdividend payable, the difference, if any, between the carrying amountreducedofpremiums collected.
IFRS 7 "Financial instruments: disclosures" and IAS 1, presentation of financial statements
IFRS 7 establishesthedisclosures to be given about financial instrumentsassets distributed and theabout the exposure and management of financial risks. The requirements of IFRS 7 include some disclosures currently contained in IAS 32 "Financial instruments: exposures and additional disclosures".
Also by the amendment of IAS 1, it is requested to give disclosure of objectives, policies and processes for managing capital.
IFRIC 4 "Determining whether an arrangement contains a lease"
Requirements of IFRIC 4 provide guidance for determining whether arrangements that do not take the legal form of a lease but which convey rights to use assets in return for a payment or series of payments should be treated as a lease for accounting purposes.
In particular, for determining whether an arrangement is, or contains a lease, an entity should consider the purposesfair value of theoperationdividend payable is taken to profit or loss. This interpretation shall be applied for annual periods beginning on or after July 1, 2009 (for Eni: 2010 financial statements).On January 29, 2008, IFRIC issued IFRIC 18 "Transfers of Assets from customers" which defines the criteria of recognition and
verify ifevaluation of transfers of items of property, plant and equipment by service providers that receive such transfers from their customers. The interpretation is also applied in thearrangement: (i) provides, explicitly or implicitly,cases in which theuseentity receives cash from a customer that must be used only to connect the customer to a network. When the definition of an asset(oris met, the asset is recognized at its fair value. When the connection is realized, the entity shall recognize the revenue for agroup of assets) andperiod generally determined by thefulfillmentterms of the arrangementdepends upon such specific assets;with the customer or,(ii) transfersif therightarrangement does not specify a term, over a period corresponding touse such assets.
IFRIC 5 "Rights to interests arising from decommissioning, restoration and environmental funds"
Requirements of IFRIC 5 provide guidance for determiningtherecognition and measurement for the contribution to decommissioning, restoration and environmental rehabilitation funds that have the following features: (i) the assets are held or administered by a separate legal entity; and (ii) contributor’s right to access the assetslower of thefund is restricted.
The contributor recognises its obligationlength of the supply and the useful life of the asset used topay decommissioning costs as a liability and its interest inprovide thefund separately. In the case that the interest means having control, having joint controlongoing service. This interpretation shall be applied for annual periods beginning on orsignificant influence over the fund, the entity contributor must recognize the interest in the fund as an investment in a subsidiary, associate, or a jointly controlled.
Modifications and integrations to international accounting principles will be effective starting from Januaryafter July 1,2006 and from January 31, 2007 for IFRS 7.2009 (for Eni: 2010 financial statements).Eni
presentlyisanalyzingcurrently reviewing these new IFRS and interpretations to determine thestatements and, atlikely impact on themoment, cannot determine if their adoption will have a significant effect on Eni’s consolidated financial position or operatingGroup’s results.
Table of ContentsF-23
Notes to the Consolidated Financial Statements
Currentactivitiesassets
1 Cash and cashequivalentequivalents
Cash and cashequivalentequivalents of euro1,3331,939 million (euro1,0032,114 million at December 31,2004) include2007) included financing receivables originally due within 90 days for euro122616 million (euro167415 million at December 31,2004) and include deposits2007). The latter were related to amounts on deposit with financial institutionswithaccessible only on anotice greater than 48 hours and securities available for sale with a maturity date within 90 days.
48-hour notice.
2 Other financial assets held for trading or available for sale
Other financial assets held for trading or available for saleof euro 1,368 million (euro 1,266 million at December 31, 2004) consisted of the following:are set out below:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Listed Italian treasury bonds 980
1,088
Listed securities issued by Italian and foreign merchant banks 255
243
Not quoted securities 31
37
1,266
1,368
Investments 2,476 2,741 Securities held for operating purposes Listed Italian treasury bonds 229 257 Listed securities issued by Italian and foreign financial institutions 27 45 Non-quoted securities 3 8 259 310 Securities held for non-operating purposes Listed Italian treasury bonds 168 109 Listed securities issued by Italian and foreign financial institutions 5 67 Non-quoted securities 1 9 174 185 Total other securities 433 495 2,909 3,236
SecuritiesEquity instruments of euro1,3682,741 million(euro 1,266(U.S. $3,815 million at December 31,2004) are2008 exchange rate) comprised the carrying amount of a 20% interest in OAO Gazprom Neft acquired on April 4, 2007 following finalization of a bid within the Yukos liquidation procedure. This entity is currently listed at the London Stock Exchange where approximately 5% of the share capital is traded, while Gazprom currently holds a 75% stake. This accounting classification reflects the circumstance that Eni granted to Gazprom a call option on the entire 20% interest to be exercisable by Gazprom within 24 months from the acquisition date, at a price of U.S. $3.7 billion equaling the bid price, adjusted by subtracting dividends distributed and adding possible share capital increases, a contractual remuneration of 9.4% on the capital employed and related financing expenses.The existing shareholder agreements establish that the governance of the investee will be modified to allow Eni to exercise significant influence through participation in the financial and operating policy decisions of the investee in the case that Gazprom does not exercise its call option. The carrying amount of the interest equals the strike price of the call option as of December 31, 2008. Eni decided not to adjust the carrying amount of the interest to the market prices at the balance sheet date resulting in U.S. $1,961 million for the following reasons: (i) if Gazprom decides to exercise the call option, the strike price will be equal to the current carrying amount; (ii) if Gazprom decides not to exercise the call option, Eni will be granted significant influence in the decision-making process of the investee and consequently will be in a position to account for the investee in accordance with the equity method of accounting provided by IAS 28 for interests in associates. Under the equity method, Eni is required to allocate the purchase price to the corresponding interest in net equity and the residual amount to fair values of the investee’s assets and liabilities. Subsequently, the carrying amount is adjusted to reflect Eni’s share of losses and profits of the investee. Based on available
for sale.information and the outcome of an impairment test performed also with the support of an independent consultant, the equity method assessment would result in an amount not lower than the current carrying amount of the interest.Other securities of euro 495 million (euro 433 million at December 31, 2007) were available-for-sale securities. At December 31,
20042007 and December 31,20052008, Eni did not own financial assets held for trading.
ValuationF-24The effects of the valuation at fair value
determined an increaseof securities are set out below:
(euro million) Value at
Dec. 31, 2007Changes recognized in the reserves of shareholders' equity
Value at
Dec. 31, 2008
Fair value 2
3
5
Deferred tax liabilities (1
) (1
) Other reserves of shareholders’ equity 2
2
4
Securities held for
securitiesoperating purposes of euro8 million recorded with a corresponding entry to the shareholders’ equity (euro 6 million) and deferred tax liabilities (euro 2 million). At January 1, 2005 the first application of IAS 32 and 39 determined an increase of euro 19 million with a corresponding entry to the shareholders’ equity (euro 13 million) and to deferred tax liabilities (euro 6 million).
Securities for euro 465310 million (euro474259 million at December 31,2004) are made for operating purposes and concern2007) were designed to provide coveragesecuritiesof technical reserves ofPadana Assicurazioni SpAGroup’s insurance company Eni Insurance Ltd for euro453302 million (euro474256 million at December 31,2004)2007).The fair value of securities was determined by reference to quoted market prices.
3 Trade and other receivables
Trade and other receivablesof euro 17,902 million (euro 13,734 million at December 31, 2004) consisted of the following:were as follows:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Trade receivables 10,525
14,101
Financing receivables 521
492
Other receivables 2,688
3,309
13,734
17,902
Trade receivables 15,609 16,444 Financing receivables: - for operating purposes - short-term 357 402 - for operating purposes - current portion of long-term receivables 27 85 - for non-operating purposes 990 337 1,374 824 Other receivables: - from disposals 125 149 - other 3,568 4,805 3,693 4,954 20,676 22,222
Receivables are
recordedstated net of the allowance fordoubtful accountsimpairment losses of euro8911,251 million (euro755935 million at December 31,2004)2007):
( million euro)euro million)Value at
Dec. 31,20042007Additions
Deductions
Other changes
Value at
Dec. 31,20052008
Trade receivables 570
119
(22
) (24
) 643
Other receivables 185
123
(10
) (50
) 248
755
242
(32
) (74
) 891
Trade receivables 595
251
(36
) (63
) 747
Financing receivables 14
5
19
Other receivables 340
137
(26
) 34
485
935
402
(62
) (24
) 1,251
TradeThe increase in trade receivables of euro14,101 increased by euro 3,576835 millionin 2005 as compared to 2004. This increase relateswas primarily related to the Gas & Power segment (euro1,6711,987 million), the Engineering & Construction segment (euro 513 million). These increases were partially offset by the decrease related to the Refining & Marketing segment (euro1,0101,036 million), Petrochemicals (euro 459 million) and Exploration & Production segment (euro806115 million).F-25
Trade and other receivables were as follows:
(euro million) Dec. 31, 2008
Trade receivables
Other receivables
Total
Neither impaired nor past due 12,611
3,395
16,006
Impaired (net of the valuation allowance) 1,242
88
1,330
Not impaired and past due in the following periods: - within 90 days 1,812
502
2,314
- 3 to 6 months 231
68
299
- 6 to 12 months 248
294
542
- over 12 months 300
607
907
2,591
1,471
4,062
16,444
4,954
21,398
Trade receivables not impaired and past due primarily referred to high-credit-quality public administrations and other highly-reliable counterparties for oil, natural gas and chemical products supplies.
Allowances for impairment losses of traded receivables of euro 251 million (euro 98 million in 2007) primarily referred to Refining & Marketing segment (euro 72 million), Gas & Power segment (euro 65 million), Petrochemicals (euro 60 million) and
concern exchange rate differences dueSyndial SpA (euro 27 million). In comparison with 2007 the amount of the allowance is more than double as a consequence of the larger number of clients in financial difficulties after the worsening of general economic conditions over the last part of the year.Allowances for impairment losses of other receivables of euro 137 million (euro 109 million in 2007) primarily referred to the
translationExploration & Production segment (euro 135 million) due primarily to impairment offinancial statements preparedcertain receivables associated with cost recovery with respect to local state-owned co-venturers based on underlying petroleum agreements and modifications of the Company’s interest incurrencies other than euro for euro 216 million.certain joint ventures.Trade receivables
concern advances paid as a guarantee of contractincluded guarantees for work in progress for euro101213 million (euro95156 million at December 2007).Other receivables for euro 227 million associated with cost recovery in the Exploration & Production segment are currently undergoing arbitration procedure. No impairment loss has been recognized as the Company and the third party are in the process of defining a transaction on amicable terms.
Receivables for financing operating activities of euro 487 million (euro 384 million at December 31,
2004).
Financing receivables of2007) included euro492399 million(euro 521 million) concern receivables made for operating purposes for euro 480 million (euro 510 million at December 31, 2004) and concessions, primarily, todue from not consolidated subsidiaries, joint ventures andaffiliates.
"Other" receivables of euro 3,309 millionassociates (euro2,688246 million at December 31,2004) consisted2007) and euro 47 million cash deposit to provide coverage of Eni Insurance Ltd technical reserves (euro 112 million at December 31, 2007). Receivables for financing non-operating activities amounted to euro 337 million (euro 990 million at December 31, 2007) of which euro 173 million related to thefollowing:current portion of a restricted deposit held by Eni Lasmo Plc as a guarantee of a debenture and euro 88 million related to deposit of Eni Insurance Ltd. The decrease of euro 653 million related for euro 898 million to the discharge of a collateral cash deposit made by Eni SpA to guarantee certain cash flow hedging derivatives.Other receivables were as follows:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Accounts receivable from: - joint venture operators in exploration and production 784
1,123
- insurance companies 322
539
- Italian governmental entities 216
228
1,322
1,890
Receivables relating to factoring activities 347
324
Prepayments for services 204
259
Other receivables 815
836
2,688
3,309
Accounts receivable from: - joint venture operators in exploration and production 1,699 2,242 - Italian government entities 386 378 - insurance companies 253 146 2,338 2,766 Prepayments for services 194 857 Receivables relating to factoring operations 182 171 Other receivables 979 1,160 3,693 4,954
F-26
Receivables
relating toderiving from factoringactivities foroperations of euro324171 million (euro347182 million at December 31,2004) relate2007) were related to Serfactoring SpA andconcern essentiallyconsisted primarily of advances for factoringactivitiesoperations with recourse and receivables for factoringactivitiesoperations without recourse.Receivables with related parties are described in Note
32.
37 - Transactions with related parties.
4 Inventories
Inventories of euro 3,563 million (euro 2,847 million at December 31, 2004) consistedBecause of thefollowing:short-term maturity of trade receivables, the fair value approximated their carrying amount.
4 Inventories
Inventories were as follows:
Dec. 31,
20042007Dec. 31,
20052008
(
million euro)euro million)Crude oil, gas and petroleum products
Chemical products
Work in progress
long-term contractsOther
Total
Crude oil, gas and petroleum products
Chemical products
Work in progress
long-term contractsOther
Total
Raw and auxiliary materials and consumables 303
199
394
896
210
217
645
1,072
Products being processed and semi finished products 37
19
2
58
59
18
1
78
Work in progress long-term contracts 399
399
418
418
Finished products and goods 891
482
37
1,410
1,222
572
20
1,814
Advances 84
84
181
181
1,231
700
483
433
2,847
1,491
807
599
666
3,563
Raw and auxiliary materials and consumables 861
299
809
1,969
466
263
1,155
1,884
Products being processed and semi finished products 74
27
15
116
48
17
3
68
Work in progress 553
553
953
953
Finished products and goods 1,962
703
17
2,682
2,528
557
92
3,177
Advances 179
179
2,897
1,029
732
841
5,499
3,042
837
953
1,250
6,082
Inventories increased by euro 583 million primarily due to: (i) an increase in the trade value of the inventories in the Gas & Power segment reflecting favorable trends in the gas price formulas (euro 661 million); and (ii) inclusion in consolidation of Distrigas NV (euro 322 million). Those increases were partially offset by a decrease of euro 718 million in the trade value of crude oil and petroleum products inventories in the Refining & Marketing segment primarily due to the impact of falling oil and petroleum product prices resulting in the recognition of a provision to write inventories down to their net realizable value at the year end.
Contract work in progress for euro 953 million (euro 553 million at December 31, 2007) are net of prepayments for euro 274 million (euro 577 million at December 31, 2007) within the limits of contractual considerations.
Inventories are stated net of the valuation allowance of euro
93697 million (euro12975 million at December 31,2004)2007):
( million euro)euro million)Value at
Dec. 31,20042007Additions
Deductions
Other changes
Value at
Dec. 31,20052008
12975
19628(
825)
27(1)
93697
Work in progress long-term contractsThe additions of euro418628 million (euro3999 millionat December 31, 2004) are net of the payments receivedinadvance of euro 5,180 million (euro 5,156 million at December 31, 2004).
At January 1, 2005, the date of the first application of IAS 32 and 39, inventories for work in progress long-term contracts were restated by excluding from the valuation the effects2007) primarily related toderivatives that do not meettheconditions required to qualify as hedging instruments. The exclusion of the effects related to derivatives resulted in a decrease for work in progress long-term contracts of euro 38 million with a corresponding entry to the shareholders’ equityRefining & Marketing segment (euro24402 million) and todeferredPetrochemicals (euro 215 million) as a consequence of the alignment of the inventories to their net realizable values at the closing date.F-27
5 Current tax assets
(euro 14 million).
5 IncomeCurrent taxreceivablesassets were as follows:
Income tax receivables of euro 697 million (euro 674 million at December 31, 2004) consisted of the following:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Italian tax authorities 466
422
Foreign tax authorities 208
275
674
697
Italian subsidiaries 634 53 Foreign subsidiaries 69 117 703 170
IncomeThe euro 533 million decrease in the current income tax assets primarily referred to Eni SpA which has used the tax receivablesof euro 697 millionto offset the tax payables for 2008 year (euro674 million at December 31, 2004) concern value added tax credits for euro 406 million (euro 459 million at December 31, 2004) and excise taxes customs duties natural gas and customs expenses for euro 60 million (euro 29 million at December 31, 2004)554 million).
6 Other current tax assets
Other current tax assetsof euro 369 million (euro 588 million at December 31, 2004) consisted of the following:were as follows:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Fair value of non-hedging derivatives 117
Fair value of cash flow hedge derivatives 32
Other assets 588
220
588
369
VAT 376 623 Excise and customs duties 316 167 Other taxes and duties 141 340 833 1,130
At January 1, 2005 the first application of IAS 32 and 39 resulted in the accounting at the fair value of derivatives that do not meet the conditions required to qualify
7 Other current assets
Other current assets were ashedging instruments for an amount, net of differentials on derivative contracts (Italian GAAP), of euro 76 million with a corresponding entry to the shareholders’ equity (euro 32 million) and to deferred tax liabilities (euro 44 million).follows:
At as January 1, 2005, fair value of non hedging derivative contracts of euro 117 million consisted of the following:
( million euro)euro million)
Fair valueDec. 31, 2007
CommitmentsDec. 31, 2008
Non-hedging derivatives on exchange rate Interest Currency Swap 58
1,277
Currency Swap 15
2,378
Outright 9
Options 17
73
3,681
Non-hedging derivatives on interest rate Interest Rate Swap 14
1,281
14
1,281
Non-hedging derivatives on commodities Over the counter 21
394
Other 9
11
30
405
117
5,367
Fair value of non-hedging derivatives 629 1,608 Fair value of cash flow hedge derivatives 10 474 Other assets 441 267 1,080 2,349
Commitments concerningF-28The fair value of derivative contracts which do not meet the criteria to be classified as hedges under IFRS was as follows:
Dec. 31, 2007
Dec. 31, 2008
(euro million) Fair value
Purchase commitments
Sale
commitmentsFair value
Purchase commitments
Sale
commitments
Non-hedging derivatives on exchange rate Interest currency swap 170
821
291
141
403
200
Currency swap 69
1,596
2,881
202
2,654
1,712
Other 3
18
11
314
111
1,202
242
2,435
3,183
657
3,168
3,114
Non-hedging derivatives on interest rate Interest rate swap 91
248
3,466
29
217
703
Other 4
91
248
3,466
29
221
703
Non-hedging derivatives on commodities Over the counter 12
75
22
864
1,270
2,709
Other 284
2
1,218
58
65
53
296
77
1,240
922
1,335
2,762
629
2,760
7,889
1,608
4,724
6,579
Fair value of the derivative contracts is determined using market quotations provided by the primary info-provider, or in the absence of market information, appropriate valuation methods used in the marketplace.
The increase in the fair value of the non-hedging derivatives
amountedof euro 979 million referred toeuro 5,367 million and concern commitments on exchange rate for euro 3,681 million (fairthe fair value ofeuro 73the derivatives deriving from the consolidation of Distrigas NV after the acquisition of control by the Gas & Power segment (euro 637 million), on interest rate for euro 1,281 million (fair.Fair value of the cash flow hedges of euro
14474 million referred to Distrigas NV (euro 293 million) andon commodities for euro 405 million (fairto Exploration & Production segment (euro 181 million). The Distrigas NV derivatives were designated to hedge surpluses or deficits of gas to achieve a proper balance in the gas portfolio and sales/purchases of amounts of gas and oil products at fixed price. Fair value related to the Exploration & Production segment referred to the fair value ofeuro 30 million).the future sale agreements of the proved oil reserves with a deadline by 2009. Those derivatives were entered into to hedge exposure to variability in future cash flows deriving from the sale in the 2008-2011 period of approximately 2% of Eni’s proved reserves as of December 31, 2006 corresponding to 125.7 mmBBL, decreasing to 79.7 mmBOE as of the end of December 2008 due to transactions settled in the year. These hedging transactions were undertaken in connection with acquisitions of oil and gas assets in the Gulf of Mexico and Congo that were executed in 2007.
Commitments concerningFair value of contracts expiring by 2009 is given in Note 20 - Other current liabilities; fair value of contracts expiring beyond 2009 is given in Note 15 - Other non-current receivables and in Note 25 - Other non-current liabilities. The effects of the evaluation at fair value of cash flow hedge derivatives are given in the Note 27 - Shareholders’ equity and in the Note 32 - Finance income (expense).The nominal value of cash flow hedge derivatives referred to purchase and sale commitments for euro 1,069 million and euro 3,130 million. Information on the hedged risks and the hedging policies is given in Note 29 - Guarantees, commitments and risks.
Other assets amounted to euro
176 million and concern for euro 171 million hedging derivatives contracts related to the purchase of electricity.
Other assets of euro 220267 million (euro588441 million at December 31,2004) include2007) and included prepayments and accrued incomeand prepaid expensesforanticipated provision of service ofeuro4963 million (euro91297 million at December 31,2004)2007), rentals forrentals and fees ofeuro1631 million (euro2221 million at December 31,2004)2007), and insurance premiums forpremiums due to insurance companieseuro1211 million (euro1810 million at December 31,2004)2007).
At December 31, 2004 otherF-29Non-current assets
include differentials on derivative contracts for euro 316 million,
8 Property, plant and equipment
Analysis ofwhich euro 242 million related to financing receivables and liabilities.
Non-current activities
7 Fixedtangible assets
Fixed assets of euro 45,013 million (euro 40,586 million at December 31, 2004) consisted of the following:is set out below:
( million euro)euro million)Net value at the beginning of the year Investments Depreciation ImpairmentImpairmentsExchange rateChange in the scope of consolidationCurrency translation differences Other changes Net value at the end of the year Gross value at the end of the year Provisions for amortization and writedownimpairments
Dec. 31, 2004 Dec. 31, 2007 Land 1,185
7
(8
) (987
) 197
274
77
442 4 28 123 597 627 30 Buildings 608
45
(97
) (4
) 5
1,021
1,578
3,159
1,581
1,406 74 (98 ) (3 ) 115 (3 ) (152 ) 1,339 3,123 1,784 Plant and machinery 28,246
2,878
(3,349
) (149
) (769
) 3,992
30,849
66,312
35,463
32,494 1,774 (4,642 ) (37 ) 31 (1.530 ) 4.885 32,975 78,030 45,055 Industrial and commercial equipment 517
159
(120
) (1
) (6
) (127
) 422
1,622
1,200
230 163 (112 ) 40 (8 ) 38 351 1,434 1,083 Other assets 286
91
(104
) (1
) (7
) 64
329
1,149
820
328 86 (83 ) (3 ) 1 (11 ) 23 341 1,361 1,020 Fixed assets in progress and advances 8,501
3,605
(166
) (305
) (4,424
) 7,211
7,762
551
Tangible assets in progress and advances 6,229 6,263 (97 ) 235 (648 ) (666 ) 11,316 11,969 653 39,343
6,785
(3,670
) (329
) (1,082
) (461
) 40,586
80,278
39,692
41,129 8,364 (4,935 ) (140 ) 450 (2,200 ) 4,251 46,919 96,544 49,625 Dec. 31, 2005 Dec. 31, 2008 Land 197
5
(4
) 175
373
421
48
597 8 (7 ) 27 625 655 30 Buildings 1,578
41
(108
) (8
) 12
(62
) 1,453
3,152
1,699
1,339 101 (105 ) (29 ) (122 ) 7 (341 ) 850 3,055 2,205 Plant and machinery 30,849
2,443
(4,240
) (192
) 1,827
5,881
36,568
77,806
41,238
32,975 3,486 (5,648 ) (652 ) 1.299 123 4,535 36,118 86,714 50,596 Industrial and commercial equipment 422
113
(126
) 10
(47
) 372
1,623
1,251
351 180 (158 ) (3 ) 1 230 601 1,722 1,121 Other assets 329
65
(102
) 12
14
318
1,182
864
341 124 (83 ) (6 ) (13 ) 5 9 377 1,563 1,186 Fixed assets in progress and advances 7,211
3,891
(60
) 590
(5,703
) 5,929
6,526
597
Tangible assets in progress and advances 11,316 8,183 (653 ) 2.344 414 (4,342 ) 17,262 18,481 1,219 40,586
6,558
(4,576
) (264
) 2,451
258
45,013
90,710
45,697
46,919 12,082 (5,994 ) (1,343 ) 3.501 550 118 55,833 112,190 56,357
Capital expenditures of euro
6,55812,082 million (euro6,7858,364 million at December 31,2004)2007) primarilyrelaterelated to the Exploration & Production segment (euro4,2697,611 million), the Engineering & Construction segment (euro 2,015 million), the Gas & Power segment (euro1,0791,318 million),and the Refining & Marketing segment (euro642941 million)and Oilfield Services, Construction and Engineering segment (euro 343 million, of which euro 340 million related to construction and drilling activity). Capital expendituresinclude financial expense forincluded capitalized finance expenses of euro159236 million (euro 180 million at December 31, 2007) essentiallyrelatingrelated to the Exploration & Production segment (euro97109 million), the Refining & Marketing segment (euro3144 million) and the Gas & Power segment (euro2942 million). The interest rate used for the capitalization of finance expensewas between 2.2%ranged from 3.5% to 5.1% (4.4% and6.1%5.2% at December 31, 2007).
DepreciationThe depreciation rates usedwith the exclusion of tangible assets depreciated on a UOP basis,were as follows:
(%) Buildings 2
-
10
Plant and machinery 2
-
10
Industrial and commercial equipment 4
-
33
Other assets 6
-
33
ExchangeF-30The break-down by segment of impairments amounting to euro 1,343 million (euro 140 at December 31, 2007) and the associated tax effect is provided below:
(euro million) 2007
2008
Impairment Exploration & Production 86 765 Refining & Marketing 52 292 Petrochemicals 279 Other segments 2 7 140 1,343 Fiscal effect Exploration & Production 30 213 Refining & Marketing 19 108 Petrochemicals 88 Other segments 2 49 411 Impairment net of the relevant fiscal effect Exploration & Production 56 552 Refining & Marketing 33 184 Petrochemicals 191 Other segments 2 5 91 932
In assessing whether impairment is required, the carrying value of the asset is compared with its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. Given the nature of Eni’s activities, information on the fair value of an asset is usually difficult to obtain unless negotiations with potential purchasers are taking place. Consequently the recoverable amount used in assessing the impairment charges described below is value in use. Value in use is calculated by discounting the estimated cash flows determined on the basis of the best information available at the moment of the assessment deriving from: (i) the Company’s four-year plan approved by the top management which provides information on expected oil and gas production, sales volumes, capital expenditures, operating costs and margins and industrial and marketing set-up, as well as trends in the main monetary variables, including inflation, nominal interest rates and exchange rates. For the subsequent years beyond the plan horizon, a real growth rate
differences dueranging from 0% to 2% has been used; (ii) the commodity prices have been assessed based on the forward prices prevailing in the market place as of the balance sheet date for the first four years of the cash flow projections and the long-term price assumptions adopted by the Company’s management for strategic planning purposes for the following years (see "Basis of presentation").Post-tax cash flows are discounted at the rate which corresponds for the Exploration & Production, Refining & Marketing and Petrochemicals segments to the
translationCompany’s weighted average cost offinancial statements preparedcapital, adjusted to consider the risks specific to each country of activity. The post-tax WACC used for impairment purposes has ranged from 8.5% to 12.5%. Post-tax cash flows and discount rates have been adopted as they result incurrencies other than euro of euro 2,451 million relatean assessment that is substantially equal tocompanies whose functional currency is the U.S. dollar (euro 2,300 million).a pre-tax assessment.
Impairments of euro 264 million concern primarily mineral assets ofIn the Exploration & Production segment the main impairments were associated to proved and unproved properties in Turkmenistan, Iran and Gulf of Mexico as a consequence of changes in the regulatory and contractual framework, cost increases, as well as a changed pricing environment.In the Refining & Marketing segment the main impairments referred to: (i) refining plants due to a worsening pricing environment and specific plant factors (low complexity and high fixed operating costs); and (ii) the motorway retail network of service stations due to a worsening pricing environment, lower forecast volumes, increased motorway royalties and the commitments with the grantor to execute certain capital expenditures that bear no return.
In Petrochemicals the main impairments referred to: (i) aromatic plants of the Sicilian industrial base and of Porto Marghera due to lower expected profitability associated with a worsening margin environment; (ii) styrene plants of Mantova due to the structural drop of the demand by the users of polystyrene; and (iii) polyethylene plants of the Sicilian industrial base due to the low competitiveness of the product, to the drop of the demand and the competitive pressure.
Changes in the consolidation area of euro 3,501 million (euro
156450 million at December 31, 2007) referred to the acquisition of control by the Exploration & Production segment of Burren Energy Plc (euro 2,543 million), FirstF-31
Petroleums Ltd (euro 757 million), Hindustan Oil Exploration Co (euro 199 million) and
petrochemical assetsEni Hewett Ltd (euro 118 million), the acquisition ofSyndial SpAcontrol by the Gas & Power segment of Distrigas NV (euro7530 million) and the sale by Refining & Marketing of Agip España SA (euro 146 million).The recoverable amount consideredMore information on acquisitions is included indeterminingtheimpairmentNote 28 - Other information.Foreign currency translation differences of euro 550 million were primarily related to translation of entities accounts denominated in U.S. dollar (euro 1,374 million). This effect was
calculatedpartially offset bydiscounting the future cash flows using a rate included between 6.5%translation of entities accounts denominated in Norwegian krones (euro 433 million) and9.8%British pounds (euro 308 million).Other changes in the net book value of
euro 258 million includetangible assets (euro 118 million) referred to the initial recognition and change in thereviews toestimated amount of theestimate ofcosts for the dismantling and restoration of sitesfor euro 576 million essentially relatedreferring to the Exploration & Production segment (euro562620 million); this increase. This effect was partially offset bythe change in scopeasset disposals for euro 318 million, ofconsolidation ofwhich euro122248 millionfollowing essentially the sale of Società Azionaria per la Condotta di Acque Potabili SpA (euro 82 million), Acquedotto Vesuviano SpA (euro 20 million)related to oil andAcquedotto di Savona SpA (euro 20 million) and the sale of businesses and the elimination of fixedgas assets ofeuro 97 million primarily related tothe Exploration & Productionsegment (euro 37 million).segment.The
gross carrying amount of fully depreciatedaccumulated impairments amounted to euro 3,328 million and euro 4,692 million at December 31, 2007 and 2008, respectively.At December 31, 2008, Eni pledged property, plant and equipment
that is still in use amount tofor euro11,07627 millionandprimarilyconcerned the gasline network of Snam Rete Gas SpAas collateral against certain borrowings (euro3,692 million), refineries and oil deposits of Refining & Marketing segment (euro 2,639 million) and petrochemical plants of Polimeri Europa SpA (euro 1,901 million) and Syndial SpA (euro 1,598 million)52 million at December 31, 2007).Government grants recorded as a decrease of property, plant and equipment
amountamounted to euro965651 million (euro910682 million at December 31,2004).
At December 31, 2005 fixed assets have been pledged for euro 475 million primarily as collateral on debt incurred by Eni (euro 482 million at December 31, 2004)2007).Assets acquired under financial lease
amountagreements amounted to euro134163 million,and concernof which euro72127 millionforrelated to a drilling platform by the Engineering & Construction segment, euro 25 million related to FPSO ships used by the Exploration & Production segmentasto supportofoil production and treatmentactivities.activities and euro 11 million related to service stations in the Refining & Marketing segment.Contractual commitments related to the purchase of property, plant and equipment are included in Note 29 - Guarantees, commitments and risks - Liquidity risk.
Property, plant and equipment under concession arrangements are described in Note 29 - Guarantees, commitments and risks - Assets under concession arrangements.
F-32
Fixed assetsProperty, plant and equipment by segment
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Fixed assets, gross: - Exploration & Production 40,322
49,120
- Gas & Power 20,680
21,517
- Refining & Marketing 8,947
9,420
- Petrochemicals 4,311
4,402
- Oilfield Services Construction and Engineering 3,524
3,878
- Other activities 2,300
2,248
- Corporate and financial companies 194
213
- Elimination of intra-group profits (88
) 80,278
90,710
Accumulated depreciation, amortization and writedowns: - Exploration & Production 19,561
24,640
- Gas & Power 7,445
7,757
- Refining & Marketing 5,586
5,864
- Petrochemicals 3,130
3,263
- Oilfield Services Construction and Engineering 1,878
2,031
- Other activities 2,007
2,054
- Corporate and financial companies 85
92
- Elimination of intra-group profits (4
) 39,692
45,697
Fixed assets, net: - Exploration & Production 20,761
24,480
- Gas & Power 13,235
13,760
- Refining & Marketing 3,361
3,556
- Petrochemicals 1,181
1,139
- Oilfield Services Construction and Engineering 1,646
1,847
- Other activities 293
194
- Corporate and financial companies 109
121
- Elimination of intra-group profits (84
) 40,586
45,013
Property, plant and equipment, gross Exploration & Production 54,284 66,023 Gas & Power 17,438 18,944 Refining & Marketing 12,421 12,899 Petrochemicals 4,918 5,036 Engineering & Construction 5,823 7,702 Other activities 1,543 1,550 Corporate and financial companies 344 391 Elimination of intra-group profits (227 ) (355 ) 96,544 112,190 Accumulated depreciation, amortization and impairment losses Exploration & Production 27,806 32,811 Gas & Power 6,179 6,863 Refining & Marketing 7,926 8,403 Petrochemicals 3,819 4,124 Engineering & Construction 2,310 2,548 Other activities 1,461 1,467 Corporate and financial companies 148 179 Elimination of intra-group profits (24 ) (38 ) 49,625 56,357 Property, plant and equipment, net Exploration & Production 26,478 33,212 Gas & Power 11,259 12,081 Refining & Marketing 4,495 4,496 Petrochemicals 1,099 912 Engineering & Construction 3,513 5,154 Other activities 82 83 Corporate and financial companies 196 212 Elimination of intra-group profits (203 ) (317 ) 46,919 55,833
8 Inventories - compulsory stock
Inventories - compulsory stocks9 Other assets
The carrying amount ofeuro 2,194 millionthe expropriated Dación assets (euro1,386563 million at December 31,2004) consisted2007) have been reclassified in the item "Other non-current receivables" following the settlement agreement with the Republic of Venezuela. Under the terms of this agreement, Eni will receive cash compensation, a part of which has been already collected in the year, to be paid in seven yearly installments, yielding interest income from the date of thefollowing:settlement. The net present value of this cash compensation is in line with the book value of assets, net of the related provisions.
10 Inventory - compulsory stock
Inventory - compulsory stock was as follows:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Crude oil and petroleum products 1,229
2,037
Natural gas 157
157
1,386
2,194
Crude oil and petroleum products 2,015 1,040 Natural gas 156 156 2,171 1,196
F-33
Compulsory
stocks, arestock was primarily held by Italian companies (euro1,2862,008 million and euro2,0571,184 million at December 31,20042007 and 2008, respectively) in accordance with minimum stock requirements set forth by applicable laws. The decrease of euro 975 million in crude oil and petroleum products is primarily due to the impairment for alignment of the inventories to the net realizable values recognized atDecember 31, 2005, respectively) and represent certain minimum quantities required by Italian law.year end (euro 724 million).
9
11 Intangible assets
Intangible assetsof euro 3,194 million (euro 3,313 million at December 31, 2004) consisted of the following:were as follows:
( million euro)euro million)Net value at the beginning of the year
Investments
Amortization
Changes in the scope of consolidation
Other changes
Net value at the end of the year
Gross value at the end of the year
Provisions for amortization
andwritedownwritedowns
Dec. 31, 2004 Intangible assets with a definite life Costs for research and development 167
549
(634
) 25
107
843
736
Industrial patent rights and intellectual property rights 162
60
(137
) 89
174
977
803
Concessions, licenses, trademarks and similar items 934
10
(106
) (22
) 816
2,154
1,338
Intangible assets in progress and advances 133
71
(145
) 59
64
5
Other intangible assets 203
11
(54
) 64
224
549
325
1,599
701
(931
) 11
1,380
4,587
3,207
Intangible assets with a indefinite life Goodwill 1,982
13
(62
) 1,933
3,581
714
(931
) (51
) 3,313
Dec. 31, 2005 Intangible assets with a definite life Costs for research and development 107
699
(683
) 41
164
1,059
895
Industrial patent rights and intellectual property rights 174
37
(122
) 48
137
1,056
919
Concessions, licenses, trademarks and similar items 816
31
(101
) 746
2,205
1,459
Intangible assets in progress and advances 59
74
(57
) 76
81
5
Other intangible assets 224
13
(30
) (50
) 157
470
313
1,380
854
(936
) (18
) 1,280
4,871
3,591
Intangible assets with a indefinite life Goodwill 1,933
2
(21
) 1,914
3,313
856
(936
) (39
) 3,194
Dec. 31, 2007 Intangible assets with finite useful lives Exploration expenditures 409 1,682 (1,812 ) 470 749 1,509 760 Industrial patents and intellectualproperty rights 112 40 (81 ) 77 148 1,179 1,031 Concessions, licenses, trademarksand similar items 856 12 (83 ) 1 786 2,449 1,663 Service concession arrangements 3,183 168 (96 ) (37 ) 3,218 5,699 2,481 Intangible assets in progressand advances 151 312 (86 ) 377 381 4 Other intangible assets 141 15 (24 ) 36 (10 ) 158 572 414 4,852 2,229 (2,096 ) 37 414 5,436 11,789 6,353 Intangible assets with indefinite useful lives Goodwill 2,084 31 2,115 6,936 2,229 (2,096 ) 37 445 7,551 Dec. 31, 2008 Intangible assets with finite useful lives Exploration expenditures 749 1,907 (2,097 ) 326 77 962 2,286 1,324 Industrial patents and intellectual property rights 148 44 (85 ) 42 149 1,203 1,054 Concessions, licenses, trademarks and similar items 786 17 (93 ) (15 ) 38 733 2,475 1,742 Service concession arrangements 3,218 230 (109 ) (17 ) 3,322 5,837 2,515 Intangible assets in progressand advances 377 264 (61 ) 580 590 10 Other intangible assets 158 18 (52 ) 1,600 14 1,738 2,000 262 5,436 2,480 (2,436 ) 1,911 93 7,484 14,391 6,907 Intangible assetswith indefinite useful lives Goodwill 2,115 1,439 (1 ) 3,553 7,551 2,480 (2,436 ) 3,350 92 11,037
Costs for researchExploration expenditures of euro 962 million related to acquisition costs of unproved reserves other than probable anddevelopment for euro 164 million mainly concernpossible resources included in business combinations and the purchase of mineralrights (euro 157 million). This item also includes exploration expenditures amortizedrights. Main additions in the year2005included exploration drilling expenditures which were fully amortized as incurred for euro5651,715 million included within "investments" (euro4911,610 millionin the year 2004)at December 31, 2007).Concessions, licenses, trademarks and similar items for euro
746733 million primarilyconcern thecomprised transmission rights for natural gas imported from Algeria (euro618482 million) and concessions for mineral exploration (euro67189 million).Service concession arrangements primarily refer to the Italian gas distribution activity (euro 3,111 million and euro 3,205 million at December 31, 2007 and 2008, respectively). Such activity is conducted on the basis of concessions granted by local public entities. At the expiry date of the concession, compensation is paid, defined by using criteria of business appraisal, to the outgoing operator following the sale of its own gas distribution network. Service tariffs for distribution are defined on the basis of a method established by the Authority for Electricity and Gas. Legislative Decree No. 164/2000 provides the grant of distribution service exclusively by tender, with a
F-34
maximum length of 12 years. Government grants recorded as a decrease of service concession arrangements amounted to euro 657 million (euro 513 million at December 31, 2007).
Other intangible assets with
a definitefinite useful lives of euro 1,738 million primarily referred to: (i) customer relationship and order backlog for euro 1,355 million recognized after the acquisition of control of Distrigas NV. These assets are amortized on the basis of the supply contract with the longest term (19 years) and the residual useful life ofeuro 157 million includethe sale contract (4 years); (ii) the development project of the gas storage capacity recognized after the acquisition of control of Eni Hewett Ltd (euro 208 million); (iii) royalties for the use of licenses by Polimeri Europa SpA (euro8672 million); andthe(iv) estimatedexpenditurescosts for Eni’s social responsibility projects in relation tobe incurred following contractual commitments with the Basilicata Region related to mineraloil development programs in Val d’Agri (euro3218 million).following commitments made with the Basilicata Region.
DepreciationThe depreciation rates usedarewere as follows:
(%) Costs for research and development 10
-
33
Industrial patent rights and intellectual property rights 20
-
33
Concessions, licenses, trademarks and similar items 7
-
33
Other intangible assets 4
-
25
(%) Exploration expenditures 10
-
33
Industrial patents and intellectual property rights 20
-
33
Concessions, licenses, trademarks and similar items 7
-
33
Service concession arrangements 2
-
20
Other intangible assets 4
-
25
The gross carrying amount of fully depreciatedChanges in the consolidation area related to the intangible assetsthat is still in use amount towith a finite useful life of euro10,3401,911 millionandprimarilyconcern costs for mineral research of Exploration & Production segment (euro 9,748 million).
Goodwill for euro 1,914 million concerns primarily the Oilfield Services, Construction and Engineering segment (euro 823 million, of which euro 805 million relatesrelated to thepurchaseacquisition ofBouygues Offshore SA, now Saipem SA),control by the Gas & Power segment(euro 817on Distrigas NV for euro 1,395 million (customer relationship for euro 1,216 million, order backlog for euro 165 million and software for euro 14 million), unproved reserves other than probable and possible resources recognized after the acquisition ofwhich euro 803 million relates to the Public Offering for Italgas SpA shares during 2003),control by the Exploration & Production segment on Burren Energy Plc for euro 326 million and the development project of the gas storage capacity recognized after the acquisition of control of Eni Hewett Ltd (euro220 million, of which euro 215 million relates208 million).Change in the consolidation area related to the
purchaseintangible assets with an indefinite useful life (goodwill) ofLasmo Plc, now Eni Lasmo Plc) and the Refining & Marketing segment (euro 51 million).
In order to determine the recoverable amount, goodwill relatedeuro 1,439 million primarily refers to the acquisition ofBouygues Offshore SAcontrol by the Gas & Power segment on Distrigas NV (euro 1,245 million), the acquisition of control by the Exploration & Production segment on Burren Energy Plc (euro 89 million), on First Calgary Petroleums Ltd (euro 88 million) andItalgas SpA has been allocated toon Eni Hewett (euro 39 million).The carrying amount of goodwill at the
following cash generating units:end of the year was euro 3,553 million (euro 2,115 million at December 31, 2007). The break-down by operating segment is as follows:
( million euro)euro million)Dec. 31,
20052007Dec. 31, 2008
Exploration & Production 158 266 Gas & Power 1,125 2,399 Refining & Marketing 86 142 Engineering & Construction 746 746 2,115 3,553
Bouygues Offshore SAGoodwill acquired through business combinations has been allocated to the cash generating units ("CGUs") that are expected to benefit from the synergies of the acquisition. The recoverable amount of the CGUs is the higher of: (i) fair value less costs to sell if there is an active market or recent transactions for similar assets within the same industry between knowledgeable and willing parties; and (ii) value-in-use determined by discounting the estimated future cash flows determined on the basis of the best pieces of information available at the moment of the assessment deriving from: (a) the Company’s four-year plan approved by the top management which provides information on expected oil and gas production, sales volumes, capital expenditures, operating costs and margins and industrial and marketing set-up, as well as trends in the main monetary variables, including inflation, nominal interest rates and exchange rates. For the subsequent years beyond the plan horizon, a real growth rate ranging from 0% to 2% has been used; (b) the commodity prices have been assessed based on the forward prices prevailing in the market place as of the balance sheet date for the first four years of the cash flow projections and the long-term price assumptions adopted by the Company’s top management for strategic planning purposes for the following years (see Basis of presentation).
Value-in-use is determined by discounting post-tax cash flows at the rate which corresponds: (i) for the Exploration & Production and Refining & Marketing and Petrochemicals segments at the Company’s weighted average cost of capital (post-tax WACC), adjusted to consider risks specific to each country of activity. WACC used for the impairment purposes has ranged from 8.5% to 12.5%; (ii) for the Gas & Power and Engineering
F-35
& Construction segments at their specific WACC. For the Gas & Power segment it has been estimated on the basis of a sample of companies operating in the same segment, for the Engineering & Construction segment on the basis of market data. WACC used for impairments in the Gas & Power segment has been adjusted to take into consideration risks specific to each country of activity, while WACC used for impairments in the Engineering & Construction segment has not been adjusted as most of the company assets are not permanently located in a specific country. WACC used for impairment has ranged from 7.5% to 9% for the Gas & Power segment and it was 8% for the Engineering & Construction segment; and (iii) for the regulated activities in the Italian natural gas sector, the discount rates have been assumed equal to the rates of return defined by the Italian Authority for Electricity and Gas.
Post-tax cash flows and discount rates have been adopted as they result in an assessment that is substantially equal to a pre-tax assessment.
Goodwill has been allocated to the following CGUs:
Gas & Power
Offshore constructions(euro million)
403Dec. 31, 2007Onshore constructions
165Dec. 31, 2008LNG
159MMO - Maintenance Modification and Operation
78
805
Domestic gas market 743 743 Foreign gas market 67 1,341 - of which Distrigas NV 1,245 Domestic natural gas transportation network 305 305 Other 10 10 1,125 2,399
Italgas SpADomesticGoodwill allocated to the CGU domestic gas market referred primarily to goodwill recognized following the purchase of minorities in Italgas SpA in 2003 through a public offering (euro 706 million). The key assumptions adopted for assessing the recoverable amount of the CGU which exceeds its carrying amount referred to commercial margins, forecast volumes, the discount rate and the growth rates adopted to determine the terminal value. Information on these drivers has been collected from the four-year-plan approved by the Company’s top management while the terminal value has been estimated through the perpetuity method of the last-year-plan. The excess of the recoverable amount of the domestic gas market CGU over its carrying amount including the allocated portion of goodwill (headroom) would be reduced to zero under each of the following hypothesis: (i) a decrease of 20% in the projected commercial margins in each of the four years of the plan; (ii) a decrease of 20% in the expected volumes in each of the four years of the plan; (iii) an increase of 1.7 percentage points in the discount rate; and (iv) a negative real growth rate of 2%.
Goodwill allocated to the Distrigas CGU has been recognized following the acquisition of a controlling interest of 57.24% in the Belgian company in October 2008. The allocation is on a preliminary basis. When the price allocation is finalized, goodwill is expected to be allocated to the different CGUs that are expected to benefit from the synergies of the acquisition. At that time, it will be possible to determine any excess of the recoverable amount of the CGUs over their carrying amounts, including any allocated portion of goodwill, and define the hypothesis under which the headroom would be reduced to zero.
Goodwill allocated to the domestic natural gas transportation network CGU referred to the purchase of own shares by Snam Rete Gas SpA and it is equal to the difference between the purchase cost over the carrying amount of the corresponding share of equity. The recoverable amount of the CGU is assessed based on its Regulatory Asset Base (RAB) as recognized by the Italian Authority for Electricity and Gas and it is higher than its carrying amount, including the allocated goodwill. Management believes that no reasonably possible change in the assumptions adopted would cause the headroom of the CGU to be reduced to zero.
F-36
Engineering & Construction
The segment goodwill of euro 746 million was mainly recognized following the acquisition of Bouygues Offshore SA, now Saipem SA (euro 711 million) and was allocated to the following CGUs:
(euro million)
706Dec. 31, 2007Foreign gas market
97Dec. 31, 2008
803
Offshore constructions 416 416 Onshore constructions 315 314 Other 15 16 746 746
The key assumptions adopted for assessing the recoverable amount of
cash generating units is determined basedthe CGUs which exceeds the carrying amount referred to operating results, the discount rate and the growth rates adopted to determine the terminal value. Information onexpected cash flowthese drivers has been collected from the four-year-plan approved by the Company’s top management while the terminal value has been estimated by using a perpetual growth rate of 2% applied to an average normalized terminal cash flow.The following changes in each of the
strategic marketassumptions, all else being equal would cause the headroom ofEni’s 2006-2009 planthe Offshore construction CGU to be reduced to zero: (i) decrease of 52% of the operating result of the four years of the plan; (ii) increase of 6 percentage points of the discount rate; anddiscounted(iii) negative real growth rate.Changes in each of the assumptions, all else being equal that would cause the headroom of the Onshore construction CGU to be reduced to zero are greater than those of the Offshore construction CGU described above. As well, also the headroom for the Offshore and Onshore CGUs calculated by
using a rate included between 5.6%removing the normalization of the terminal cash flows results widely positive.Other changes in goodwill of euro 1 million referred to impairments of euro 44 million of which euro 38 million primarily referred to Exploration & Production which has impaired the interest in goodwill recognized following the acquisition of Burren Energy Plc (euro 28 million) and
7.7%of Lasmo Plc (euro 9 million).For the years notMore information on acquisitions is included in thestrategic, Eni has used an incremental rate included between 0% and 2%. Key assumptions are based on past experience and take into account the current level of interest rate.Note 28 - Other
changes of euro 39 million primarily relate to the sale of Società Azionaria per la Condotta di Acque Potabili SpA (euro 18 million) and Acquedotto Vesuviano SpA (euro 3 million).
10 Investmentsinformation.
12 Investmentsaccounted for using the equity method
Investments accounted for using the equity method of euro 3,890 million (euro 3,156 million at December 31, 2004) consisted of the following:
Equity-accounted investments
Equity-accounted investments were as follows:
( million euro)euro million)Value ofat the beginning of the yearAcquisitionsAcquisition and subscriptionsGain from the valuationShare of profit of equity-accounted investmentsaccounted for using the equity methodLoss from the valuationShare of loss of equity-accounted investmentsaccounted for using the equity methodDeduction for dividends Exchange rateCurrency translation differencesOther changes Value ofat the end of the year
Dec. 31, 2004 Investments in unconsolidated subsidiaries 106
11
6
(6
) (4
) (4
) 109
Investments in joint ventures 1,851
119
215
(6
) (276
) (47
) 90
1,946
Investments in affiliates 947
119
180
(57
) (71
) (19
) 2
1,101
2,904
249
401
(69
) (347
) (70
) 88
3,156
Dec. 31, 2005 Investments in unconsolidated subsidiaries 109
30
6
(2
) (3
) 10
(4
) 146
Investments in joint ventures 1,946
12
375
(27
) (202
) 98
120
2,322
Investments in affiliates 1,101
6
389
(4
) (96
) 34
(8
) 1,422
3,156
48
770
(33
) (301
) 142
108
3,890
Dec. 31, 2007 Investments in unconsolidated entities controlled by Eni 144
4
10
(2
) (9
) (6
) 141
Joint ventures 2,506
1,109
481
(130
) (351
) (173
) (132
) 3,310
Associates 1,236
813
415
(3
) (220
) (42
) (11
) 2,188
3,886
1,926
906
(135
) (580
) (221
) (143
) 5,639
Dec. 31, 2008 Investments in unconsolidated entities controlled by Eni 141
41
27
(6
) (5
) 3
(24
) 177
Joint ventures 3,310
47
536
(94
) (444
) (123
) 25
3,257
Associates 2,188
289
198
(5
) (266
) 35
(402
) 2,037
5,639
377
761
(105
) (715
) (85
) (401
) 5,471
Acquisitions and subscriptions for euro
48377 millionconcerned mainlyrelated to thesubscriptionssubscription of capital increase for euro 345 million, ofServizi Porto Marghera Scrl (euro 17 million), Enirepsa Gas Ltd (euro 12 million) and Lasmo Petroleum Development BV (euro 10 million)which euro 254 million related to Angola LNG Ltd.F-37
Share of profit of equity-accounted investments and the
acquisition of Acam Clienti SpA by Eni SpA (euro 6 million).
Gains from the valuation of investments using the equity method of euro 770 million primarily relate to Galp Energia SGPS SA (euro 280 million), Trans Austria Gasleitung GmbH (euro 54 million), Lipardiz Construçao de Estruturas Maritimas Lda (euro 46 million), Unión Fenosa Gas SA (euro 44 million) and Blue Stream Pipeline Co BV (euro 30 million).
Losses from the valuation of investments using the equity method of euro 33 million primarily relate to Geopromtrans Llc (euro 11 million) and Enirepsa Gas Ltd (euro 11 million).
Deductiondecrease following the distribution of the dividendsof euro 301 million primarily relatesreferred toGalp Energia SGPS SA (euro 56 million), Trans Europa Naturgas Pipeline GmbH (euro 29 million) and Trans Austria Gasleitung GmbH (euro 28 million) and Supermetanol CA (euro 28 million).
The net carrying value of euro 3,890 million (euro 3,156 million at December 31, 2004) consisted ofthe following companies:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Net valueShare of profit of equity-accounted investmentsDeduction for dividends
Eni’s interest %
Net valueShare of profit of equity-accounted investmentsDeduction for dividends
Eni’s interest %
Unión Fenosa Gas SA 181
173
50.00
200
185
50.00
United Gas Derivatives Co 79
40
33.33
107
127
33.33
EnBW Eni Verwaltungsgesellschaft mbH 64
42
50.00
40
22
50.00
Trans Austria Gasleitung GmbH 43
28
89.00
39
28
89.00
Supermetanol CA 34
36
34.51
39
34
34.51
Galp Energia SGPS SA 255
126
33.34
39
88
33.34
Other investments 250
135
297
231
906
580
761
715
Unconsolidated subsidiaries: - Eni Btc Ltd 48
100.00
55
100.00
- Others (*) 61
91
109
146
Joint ventures: - Unión Fenosa Gas SA 404
50.00
459
50.00
- Blue Stream Pipeline Co BV 116
50.00
280
50.00
- Raffineria di Milazzo ScpA 168
50.00
172
50.00
- EnBW - Eni Verwaltungsgesellschaft mbH 150
50.00
168
50.00
- Azienda Energia e Servizi Torino SpA 171
49.00
165
49.00
- Eteria Parohis Aeriou Thessalonikis AE 151
49.00
152
49.00
- Super Octanos CA 82
49.00
113
49.00
- Trans Austria Gasleitung GmbH 60
89.00
88
89.00
- Supermetanol CA 59
34.51
88
35.20
- Unimar Llc 97
50.00
84
50.00
- FPSO Mystras - Produção de Petroleo Lda 75
50.00
73
50.00
- Lipardiz Construção de Estruturas Maritimas Lda 20
50.00
66
50.00
- Transmediterranean Pipeline Co Ltd 57
50.00
63
50.00
- Siciliana Gas SpA 52
50.00
60
50.00
- Toscana Gas SpA 56
46.10
55
46.10
- Eteria Parohis Aeriou Thessalias EA 41
49.00
39
49.00
- Transitgas AG 32
46.00
32
46.00
- CMS&A Wll 15
20.00
31
20.00
- Others (*) 140
134
1,946
2,322
Affiliates: - Galp Energia SGPS SA 670
33.34
896
33.34
- United Gas Derivatives Co (UGDG) 97
33.33
128
33.33
- Fertilizantes Nitrogenados de Oriente CEC 75
20.00
92
20.00
- Haldor Topsøe AS 39
50.00
62
50.00
- Acam Gas SpA 44
49.00
45
49.00
- Distribuidora de Gas del Centro SA 37
31.35
41
31.35
- Termica Milazzo Srl 27
40.00
21
40.00
- Others (*) 112
137
1,101
1,422
3,156
3,890
The share of loss of equity-accounted investments of euro 105 million primarily related to Enirepsa Gas Ltd (euro 44 million) and Lipardiz - Construção de Estruturas Maritimas Lda (euro 40 million).
Other changes of euro 401 million are due to the exclusion from the equity-accounted investments and the inclusion in the consolidation area of Burren Energy Plc after the acquisition of control by the Exploration & Production segment (euro 592 million), the disposal of Gaztransport et Technigaz SAS (euro 115 million). These effects were partially offset by the inclusion in the equity-accounted investments of Angola LNG Ltd (euro 175 million).
F-38
The following table sets out the net carrying amount relating to equity-accounted:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Net carrying amount
Eni’s interest %
Net carrying amount
Eni’s interest %
Investments in unconsolidated entities controlled by Eni: - Eni Btc Ltd 42
100.00
62
100.00
- other investments (*) 99
115
141
177
Joint ventures: - Artic Russia BV 925
60.00
895
60.00
- Unión Fenosa Gas SA 507
50.00
499
50.00
- Blue Stream Pipeline Co BV 298
50.00
351
50.00
- EnBW Eni Verwaltungsgesellschaft mbH 256
50.00
268
50.00
- Azienda Energia e Servizi Torino SpA 162
49.00
166
49.00
- Eteria Parohis Aeriou Thessalonikis AE 154
49.00
158
49.00
- Toscana Energia SpA 133
49.38
136
49.38
- Raffineria di Milazzo ScpA 126
50.00
128
50.00
- Trans Austria Gasleitung GmbH 96
89.00
109
89.00
- Super Octanos CA 90
49.00
90
49.00
- Supermetanol CA 78
34.51
90
34.51
- Unimar Llc 71
50.00
65
50.00
- Eteria Parohis Aeriou Thessalias AE 41
49.00
42
49.00
- Transmediterranean Pipeline Co Ltd 47
50.00
40
50.00
- Transitgas AG 30
46.00
33
46.00
- Altergaz SA 18
27.80
25
38.91
- Lipardiz - Construção de Estruturas Maritimas Lda 88
50.00
10
50.00
- FPSO Mystras - Produção de Petròleo Lda 58
50.00
2
50.00
- other investments (*) 132
150
3,310
3,257
Associates: - Galp Energia SGPS SA 911
33.34
862
33.34
- Angola LNG Ltd 453
13.60
- Ceska Rafinerska AS 325
32.44
323
32.44
- United Gas Derivatives Co 140
33.33
128
33.33
- ACAM Gas SpA 45
49.00
46
�� 49.00
- Distribuidora de Gas del Centro SA 33
31.35
32
31.35
- Burren Energy Plc 592
24.90
- other investments (*) 142
193
2,188
2,037
5,639
5,471
(*) Each individual amount included herein doesdid not exceed euro 25 million.The net
valuecarrying amount of investments inunconsolidated subsidiariesnot consolidated entities controlled by Eni, joint ventures andaffiliatesassociates include the differences between purchase price and Eni’s equity intheinvestments of euro553615 million. Such differencesrelateprimarily related to Unión Fenosa Gas SA (euro 195 million), EnBW - Eni Verwaltungsgesellschaft mbH (euro180187 million), Galp Energia SGPS SA (euro107106 million) andAzienda Energia e Servizi Torino SpACeska Rafinerska AS (euro7197 million).
ProvisionsArtic Russia BV (the former Eni Russia BV) held 100% interest in three Russian companies acquired on April 4, 2007 in partnership with Enel (Eni 60%, Enel 40%), following award of a bid forlosses relatedLot 2 in the Yukos liquidation procedure. The three companies – OAO Arctic Gas, OAO Urengoil and OAO Neftegaztechnologiya – engage in exploration and development of gas reserves.Eni and Enel granted to Gazprom a call option to acquire a 51% interest in the three companies to be exercisable by Gazprom within 24 months from the acquisition date. Eni assesses the investment in Artic Russia BV under the equity method as it jointly controls the three entities based on ongoing shareholder arrangements, therefore exercising significant influence in the financial and operating policy decisions of the investees. This 60% interest corresponds to the present ownership interest of Eni in the acquired companies determined by not taking
F-39
into account the possible exercise of the call option by Gazprom. The carrying amount of the three entities is lower than the strike price of the call option with respect to the underlying stake. The strike price equals the bid price adjusted by subtracting dividends received and adding possible share capital increases, a contractual remuneration of 9.4% on the capital employed and additional financing expenses.
The fair value of listed investments
of euro 21 million (euro 30 million at December 31, 2004),was as follows:
Shares Ownership
(%)Price per share
(euro)Fair value
(euro million)
Galp Energia SGPS SA 276,472,160 33.34 7.18 1,985 Altergaz SA 1,050,892 38.91 9.90 10
The table below sets out the provisions for losses included in the provisions for contingencies
relate essentially to Geopromtrans Llc (euro 19 million).
Other investments
Other investmentsof euro421119 million (euro529135 million at December 31,2004) consisted of2007), primarily related to thefollowing:following equity-accounted investments:
( million euro)euro million)Dec. 31, 2007
Dec. 31, 2008
Charville - Consultores e Serviços Lda 31 33 Polimeri Europa Elastomeres France SA (under liquidation) 50 31 Industria Siciliana Acido Fosforico - ISAF - SpA (under liquidation) 28 27 Southern Gas Constructors Ltd 14 17 Other investments 12 11 135 119
Other investments
Other investments were as follows:
(euro million) Net value at the beginning of the year AcquisitionsAcquisition and subscriptionsSalesExchange rateCurrency translation differencesOther changes Net value at the end of the year Gross value at the end of the year Accumulated impairment charges
Dec. 31, 2007 Investments in unconsolidated entities controlled by Eni 21
3
(1
) 2
25
36
11
Associates 9
1
10
11
1
Other investments 330
190
(36
) (47
) 437
443
6
360
193
(37
) (44
) 472
490
18
Dec. 31, 2008 Investments in unconsolidated entities controlled by Eni 25
1
4
30
41
11
Associates 10
(6
) 4
28
24
Other investments 437
5
11
(77
) 376
382
6
472
6
11
(79
) 410
451
41
Dec. 31, 2004 Unconsolidated subsidiaries 79
(1
) 78
86
8
Affiliates 106
2
(1
) 107
117
10
Other investments 316
65
(18
) (20
) 1
344
398
54
501
67
(18
) (20
) (1
) 529
601
72
Dec. 31, 2005 Unconsolidated subsidiaries 78
1
(38
) 41
68
27
Affiliates 107
(100
) 2
9
9
Other investments 344
23
(30
) 41
(7
) 371
375
4
529
24
(130
) 41
(43
) 421
452
31
Investments in not consolidated entities controlled by Eni and associates are stated at cost net of impairment losses. Other investments,
related to unconsolidated subsidiaries and affiliates are valued at cost adjustedforimpairment. Investments in other companies are essentially valued at cost adjusted for impairment, because thewhich fair value cannot be reliablydetermined.determined, were recognized at cost and adjusted for impairment losses.
Acquisitions and subscriptions for euro 24 million essentially concern the subscriptions to the capital increase of Darwin LNG Pty Ltd (euro 22 million).F-40
Sales of euro 130 million essentially relate to the sale of Erg Raffinerie Mediterranee SpA (euro 100 million) and Discovery Producer Services Llc (euro 20 million).The net carrying amount of
Otherother investments of euro421410 million (euro529472 million at December 31,2004) concerned2007) was related to the followingcompanies:entities:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Net
valuecarrying amountEni’s interest %
Net
valuecarrying amountEni’s interest %
Investments in unconsolidated entities controlled by Eni (*) 25
30
Associates 10
4
Other investments: - Interconnector (UK) Ltd 22
5.00
135
16.06
- Nigeria LNG Ltd 80
10.40
85
10.40
- Darwin LNG Pty Ltd 87
10.99
83
10.99
- Angola LNG Ltd 175
13.60
- other (*) 73
73
437
376
472
410
Unconsolidated subsidiaries (*) 78
41
Affiliates: - Erg Raffinerie Mediterranee SpA 100
28.00
- Others (*) 7
9
107
9
Other investments: - Darwin LNG Pty Ltd 89
12.04
126
12.04
- Nigeria LNG Ltd 86
10.40
100
10.40
- Ceska Rafinerska AS 30
16.33
35
16.33
- Discovery Producer Services Llc 19
16.67
- Interconnector (UK) Ltd 23
4.62
27
5.00
- Others (*) 97
83
344
371
529
421
(*) Each individual amount included herein doesdid not exceed euro 25 million.
The provisionsProvisions for losses related to other investments,ofincluded within the provisions for contingencies, amounted to euro6444 million (euro6128 million at December 31,2004), included2007) and were primarily inthe provisions for contingencies, concernedrelation to the followingcompanies:entities:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Industria Siciliana Acido Fosforico - ISAF SpA (in liquidation) 39
35
Caspian Pipeline Consortium R - Closed Joint Stock Co 16
21
Other investments 6
8
61
64
Caspian Pipeline Consortium R - Closed Joint Stock Co 25 24 Burren Energy Ship Management Ltd (Cyprus) 17 Other investments 3 3 28 44
Other information about investments
The followingaretable summarizes key financial data, net to Eni, as disclosed in theamounts, according to Eni’s interest, from the lastlatest available financial statements ofunconsolidated subsidiaries,not consolidated entities controlled by Eni, joint ventures andaffiliates:associates:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Not consolidated entities controlled by Eni
Joint ventures
Associates
Not consolidated entities controlled by Eni
Joint ventures
Associates
Total assets 1,247
7,781
4,252
1,361
7,761
4,020
Total liabilities 1,111
4,526
2,061
1,230
4,565
1,958
Net sales from operations 99
4,667
5,134
134
5,303
5,067
Operating profit 14
674
502
2
736
702
Net profit 14
318
410
20
490
690
The total assets and liabilities of not consolidated controlled entities of euro 1,361 million and euro 1,230 million, respectively (euro 1,247 million and euro 1,111 million at December 31, 2007) concerned for euro 923 million and euro 923 million (euro 873 million and euro 873 million at December 31, 2007) entities for which consolidation does not produce significant effects.
F-41
13 Other financial assets
Other financial assets were as follows:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Financing receivables: - receivables for financing operating activities 677 1,084 - receivables for financing non-operating activities 225 902 1,084 Securities: - securities held for operating purposes 21 50 21 50 923 1,134
Financing receivables are presented net of the allowance for impairment losses of euro 26 million (euro 24 million at December 31, 2007). Operating financing receivables of euro 1,084 million (euro 677 million at December 31, 2007) primarily concerned loans made by the Exploration & Production segment (euro 754 million), Refining & Marketing segment (euro 109 million) and Gas & Power segment (euro 76 million), as well as receivables for financial leasing (euro 128 million). Receivables for financial leasing related to the disposal of the Belgian gas network by Finpipe GIE, company included in the consolidation area after the acquisition of control by the Gas & Power segment of Distrigas NV. The following table shows principal receivable by maturity date, which was obtained by summing future lease payment receivables discounted at the effective interest rate, interest and the nominal value of future lease receivables:
(euro million) Maturity range
Within 12 months
Between one and five years
Beyond five years
Total
Principal receivable 19
95
33
147
Interests 4
13
2
19
Undiscounted value of future lease payments 23
108
35
166
Receivables with a maturity date within one year are shown in current assets in the item trade receivables for operating purposes – current portion of long-term receivables in the Note 3 - Trade and other receivables.
Non-operating financing receivables of euro 225 million at December 31, 2007 concerning a restricted deposit held by Eni Lasmo Plc as a guarantee of a debenture have been reclassified to current assets in the item financing receivables for non operating purposes in the Note 3 - Trade and other receivables.
Receivables in currencies other than euro amounted to euro 827 million (euro 821 million at December 31, 2007).
Receivables due beyond five years amounted to euro 617 million (euro 509 million at December 31, 2007).
Securities of euro 50 million (euro 21 million at December 31, 2007), designated as held-to-maturity investments, are listed securities, issued by foreign governments (euro 30 million) and by the Italian Government (euro 20 million). The increase of euro 29 million referred to Banque Eni SA.
Securities with a maturity beyond five years amounted to euro 20 million.
The fair value of financing receivables and securities did not differ significantly from their carrying amount. The fair value of financing receivables has been determined based on the present value of expected future cash flows discounted at rates ranging from 1.9% to 3.9% (3.8% and 6.0% at December 31, 2007). The fair value of securities was derived from quoted market prices.
F-42
14 Deferred tax assets
Deferred tax assets were recognized net of deferred tax liabilities able to be offset for euro 3,468 million (euro 3,526 million at December 31, 2007).
(euro million)
Unconsolidated subsidiariesValue at
Dec. 31, 2007
Joint venturesAdditions
AffiliatesDeductions
Unconsolidated subsidiariesCurrency translation differences
Joint venturesOther changes
AffiliatesValue at
Dec. 31, 2008
Total assets 1,341
6,699
3,603
1,404
7,423
2,763
Total liabilities 1,227
4,755
2,530
1,263
5,161
1,295
Net sales from operations 63
4,361
4,250
63
4,617
1,560
Operating profit (4
) 318
115
(1
) 609
176
Net profit (1
) 172
38
(2
) 328
371
1,915
1,778
(767
) (43
) 29
2,912
TotalDeferred tax assetsand total liabilities relating to unconsolidated companiesare described in Note 24 - Deferred tax liabilities.
15 Other non-currentreceivables
The following table provides an analysis ofeuro 1,404 and euro 1,263 million (euro 1,341 and euro 1,227 million at December 31, 2004) concern for euro 1,004 and euro 1,004 (euro 935 and euro 935 million at December 31, 2004) companies for which the consolidation does not produce significant effects.
other non-current receivables:
11 Other financial assets
Other financial receivables of euro 1,050 million (euro 936 million at December 31, 2004) consisted of the following:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Financial receivables 913
1,001
Securities 23
49
936
1,050
Tax receivables from: - Italian tax authorities . income tax 486 24 . interest on tax credits 325 58 . Value Added Tax (VAT) 42 2 . other 11 864 84 - foreign tax authorities 30 28 894 112 Other receivables: - in relation to disposals 7 780 - other non-current receivables 197 268 204 1,048 Fair value cash flow hedge derivative instruments 197 Other asset 12 44 1,110 1,401
Financial receivables are presented netThe decrease ofan impairment charge of euro 25 million (euro 21 million at December 31, 2004).
Financialtax receivables of euro1,001782 million(euro 913primarily referred to Eni SpA which obtained the reimbursement of the income tax and of the related interest of euro 746 million.The other receivables related to disposals amounting to euro 780 million
at December 31, 2004) concern receivables maderelated to: (i) the receivable of euro 501 million recognized after the agreement settled with the Republic of Venezuela according to which Eni will receive a cash compensation foroperating purposesthe expropriated Dación assets, for a part already received, to be paid in seven annual installments which yields interest income from the date of the settlement. More information is included in Note 9 - Other assets; and (ii) the receivable of euro754 million (euro 673 million at December 31, 2004) and non-operating financial receivables for euro 247 million (euro 240 million at December 31, 2004), of which euro 241275 million related toa fixed deposit heldthe disposal of the interest of 1.71% in the Kashagan project to the local partner kazMunaiGas on the basis of the agreements defined with the international partners of the North Caspian Sea PSA and the Kashagan government, which are effective starting from January 1, 2008.Fair value of the derivative contracts is determined using market quotations provided by
Eni Lasmo Plcprimary info-provider, or in the absence of market information, appropriate valuation methods generally accepted in the marketplace.Fair value of the cash flow hedge derivatives of euro 197 million referred to Distrigas NV (euro 105 million) and to the Exploration & Production segment (euro 92 million). Further information on cash flow hedge derivatives is given in Note 7 - Other current assets; fair value related to the contracts expiring beyond 2009 is given in Note 25 - Other non-current liabilities; fair value related to the contracts expiring in 2009 is indicated in Note 7 - Other current assets and in Note 20 - Other current liabilities. The effects of the evaluation at fair value of cash flow hedge derivatives are given in Note 27 - Shareholders’ equity and in Note 32 - Finance income (expense).
F-43
The nominal value of cash flow hedge derivatives referred to purchase and sale commitments for euro 64 million and euro 1,268 million. Information on the hedged risks and the hedging policies is given in Note 29 - Guarantees, commitments and risks.
Current liabilities
16 Short-term debt
Short-term debt was asa guaranteefollows:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Banks 4,070 2,411 Ordinary bonds 3,176 3,663 Other financial institutions 517 285 7,763 6,359
Short-term debt decreased by euro 1,404 million primarily due to the balance of
a debt issuerepayments and new proceeds (euro234 million at December 31, 2004). Financial receivables made for operating purposes primarily concern1,652 million), partially offset by currency translation differences (euro 193 million) and changes in the consolidation area (euro 48 million) due to the acquisition of Distrigas NV by the Gas & Power segment (euro49976 million) and the disposal of Agip España SA by the Refining & Marketing segment (euro 28 million). Debt comprised commercial paper of euro 3,663 million (euro 3,176 million at December 31, 2007) mainly issued by the financial company Eni Coordination Center SA.Short-term debt per currency is shown in the table below:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Euro 5,453 3,801 U.S. dollar 1,591 1,332 Other currencies 719 1,226 7,763 6,359
In 2008, the weighted average interest rate on short-term debt was 4.2% (4.9% in 2007).
At December 31, 2008 Eni had undrawn committed and uncommitted borrowing facilities available of euro 3,313 million and euro 7,696 million, respectively (euro 5,006 million and euro 6,298 million at December 31, 2007). These facilities were under interest rates that reflected market conditions. Charges for unutilized facilities were not significant.
17 Trade and other payables
Trade and other payables were as follows:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Trade payables 11,092 12,590 Advances 1,483 2,916 Other payables: - related to capital expenditures 1,301 1,716 - others 3,240 3,293 4,541 5,009 17,116 20,515
F-44
The increase of euro 1,498 million in trade payables was primarily related to the Gas & Power segment (euro 1,417 million), the Engineering & Construction segment (euro 630 million), the Exploration & Production segment (euro
170658 million) and was partly offset by a decrease relating to the Refining & Marketing segment (euro 942 million) and the Petrochemical segment (euro 251 million).The increase in financial receivables made for operating purposesAdvances of euro
81 million primarily concern the exchange rate differences related to the translation of financial statements prepared in currencies other than euro (euro 96 million).
Receivables in currency other than euro amount to euro 8452,916 million (euro7121,483 million at December 31,2004).
Receivables due beyond 5 years amount2007) were related to advances on contract work in progress for euro6252,516 million (euro402996 million at December 31,2004).
Securities of euro 49 million are considered held-to-maturity investments2007) andconcern securities issued by the Italian Governmentother advances for euro22400 millionand securities issued by Italian and foreign financial entities for euro 27 million.
At January 1, 2005, the date of the first application of IAS 32 and 39, securities for euro 50 million were reclassified as held-to-maturity.
Securities for euro 21 million concern securities made for operating purposes(euro22487 million at December 31,2004)2007).
The valuation atAdvances on contract work in progress were in respect of thefair value of other financial assets did not have any significant effect.
Engineering & Construction segment.
12 Deferred tax assetsOther payables were as follows:
Deferred tax assets of euro 1,861 million (euro 1,827 million at December 31, 2004) are net of deferred tax liabilities for which Eni possesses the legal right of offset of euro 3,347 million (euro 2,346 million at December 31, 2004).
( million euro)euro million)
Value atDec. 31,20042007
AdditionsDec. 31, 2008
Payables due to: - joint venture operators in exploration and production activities 1,624 2,007 - suppliers in relation to investments 1,015 1,057 - non-financial government entities 397 441 - employees 257 400 - social security entities 226 284 3,519 4,189 Other payables 1,022 820 4,541 5,009
Payables to related parties are described in Note 37 - Transactions with related parties.
The fair value of trade and other payables did not differ significantly from their carrying amount considering the short-term maturity of trade payables.
18 Income taxes payable
Income taxes payable were as follows:
(euro million) Dec. 31, 2007
DeductionsDec. 31, 2008
Italian subsidiaries 247 808 Foreign subsidiaries 1,441 1,141 1,688 1,949
Income taxes payable by Italian subsidiaries were affected by the fair value valuation of cash flow hedging derivatives (euro 291 million). This effect was recorded in the relevant provision within equity. Further information is provided in Note 7 - Other current assets, Note 15 - Other non-current receivables, Note 20 - - Other current liabilities and Note 25 - Other non-current liabilities.
19 Other taxes payable
Other taxes payable were as follows:
(euro million) Dec. 31, 2007
Exchange rate differencesDec. 31, 2008
Excise and customs duties 804 920 Other taxes and duties 579 740 1,383 1,660
F-45
20 Other current liabilities
Other current liabilities were as follows:
(euro million) Dec. 31, 2007
Other changesDec. 31, 2008
Fair value of non-hedging derivatives 412 1,982 Fair value of cash flow hedge derivatives 911 452 Other liabilities 233 1,885 1,556 4,319
Fair value of non-hedging derivative contracts was as follows:
Dec. 31, 2007
Value atDec. 31,20052008
(euro million) Fair value
Purchase commitments
Sale commitments
Fair value
Purchase commitments
Sale commitments
Non-hedging derivatives on exchange rate Currency swap 63
2,096
296
293
1,928
2,479
Interest currency swap 5
140
82
694
100
Other 7
76
1
327
151
1,197
75
2,312
297
702
2,773
3,776
Non-hedging derivatives on interest rate Interest rate swap 24
722
401
134
641
3,002
24
722
401
134
641
3,002
Non-hedging derivatives on commodities Over the counter 12
49
58
1,090
3,297
388
Other 301
1,187
28
56
66
119
313
1,236
86
1,146
3,363
507
412
4,270
784
1,982
6,777
7,285
1,827
1,778
(927)
158
(975)
1,861
Other changes of euro 975 million primarily concern the set-off, for each company, of deferred tax assets with deferred tax liabilities (euro 1,035 million). Such decrease has been partially offset by provisions to the reserves of the shareholders’ equity following the first application of IAS 32 and 39 (euro 60 million).
Deferred tax assets are described in Note 21.
13 Other non-current assets
Other non-current assets of euro 995 million (euro 1,008 million at December 31, 2004) consisted of the following:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Accounts receivable from: - Italian tax authorities . income tax credits 506
508
. interest on tax credits 294
309
. value added tax (VAT) 55
37
. other 8
7
863
861
- foreign tax authorities 49
44
912
905
Other receivables 32
79
Other non-current assets 64
11
1,008
995
Current liabilities
14 Current financial liabilities
Current financial liabilities of euro 4,612 million (euro 4,150 million at December 31, 2004) consisted of the following:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Banks 2,189
3,894
Financial liabilities represented by commercial papers 1,540
60
Other financing institutions 421
658
4,150
4,612
Fair value of derivative contracts was determined by using market quotations reported by major market data providers, or, if no market information was available, on the basis of valuation models generally accepted in the marketplace.
The increase in the fair value of
current financial liabilitiesnon-hedging derivatives of euro4621,570 millionis primarily due tocomprises theexchange rate differences related toinclusion of thetranslation of financial statements prepared in currencies other than euro (euro 595 million). Such increasederivative contracts held by Distrigas NV which has beenpartially offsetincluded in the consolidation area following the acquisition of control bythe balance of payments and new proceeds of liabilities (euro 144 million).
Short-term debt by currency was as follows:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Euro 2,393
4,029
U.S. Dollar 1,329
323
British Pound 253
4
Other currencies 175
256
4,150
4,612
The weighted average interest rate of Eni’s short-term debt was 2.5% and 2.8% for the years ended December 31, 2004 and 2005, respectively.
On December 31, 2005 Eni maintained committed and uncommitted unused lines of credit for euro 5,855 and euro 4,783 million, respectively (euro 5,304 million and euro 7,771 million, respectively, at December 31, 2004). These agreements provide for interest charges based on prevailing market conditions. Commission fees on unused lines of credit are not significant.
15 Trade and other payables
Trade and other payables of euro 13,095 million (euro 10,533 million at December 31, 2004) consisted of the following:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Trade payables 5,837
8,170
Advances 1,211
1,184
Other payables 3,485
3,741
10,533
13,095
Trade payables of euro 8,170 million increased by euro 2,333 million in 2005 as compared to 2004. Such increase primarily concernsthe Gas & Power segment (euro969873 million), Refining & Marketing segment.The fair value of cash flow hedges amounted to euro 452 million (euro
577 million)911 million at December 31, 2007) and related to Distrigas NV for euro 415 million and the Exploration & Production segment(euro 334 million) and includes the exchange rate differences related to the translation of financial statements prepared in currencies other thanfor euro(euro 137 million).
Advances of euro 1,18437 million (euro1,211911 million at December 31,2004) concern payments received2007). Further information on cash flow hedge derivatives is given inexcessNote 7 - Other current assets. The fair value related to the contracts expiring in 2009 is given in Note 7 - Other current assets, in Note 15 - Other non-current receivables and in Note 25 - Other non-current liabilities. The effects ofthefair value valuation of cash flow hedging derivatives are given in Note 27 - Shareholders’ equity and in Note 32 - Finance income (expense).The nominal value of
the work in progress performedcash flow hedge derivatives referred to purchase and sale commitments for euro550989 million and euro 895 million, respectively (euro5541,399 million and euro 1,977 million at December 31,2004), advances2007).Information on
contract workthe hedged risks and the hedging policies is given inprogress forNote 29 - Guarantees, commitments and risks.Other liabilities of euro
3091,885 million (euro47233 million at December 31,2004) and other advances2007) comprised the put option granted to Publigaz (the Distrigas minority shareholder) to divest its 31.25% stake in Distrigas to Eni foreuro 325 million (euro 610 million December 31, 2004). Advances on contract work in progressa total amount of euro8591,495 million(euro 601 million at December 31, 2004) concernbased on theOilfield Services, Construction and Engineering segment.
Other payables of euro 3,741 million (euro 3,485 million at December 31, 2004) included the following:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Payables due to: - joint venture operators in exploration and production 655
1,264
- suppliers in relation to investments 996
951
- employees 264
314
- Italian governmental entities 240
313
- social security entities 232
229
2,387
3,071
Cautionary deposit 20
6
Other payables 1,078
664
3,485
3,741
Payables with related parties are described in Note 32.
16 Taxes payable
Taxes payable of euro 3,430 million (euro 2,498 million at December 31, 2004) consistedsame per-share price of thefollowing:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Income taxes payable 1,200
1,742
Customs and excise duties 793
896
Other 505
792
2,498
3,430
Taxes payableongoing mandatory tender offer to minorities as part ofeuro 1,742 million increased by euro 542 million. The increase resulted primarily from foreign companiesthe Distrigas acquisition as provided foreuro 622 million followingtheincrease of profit before income taxes and the exchange rate differences related to the translation of financial statements prepared in currencies other than euro (euro 73 million); such increase was partially offsetShareholders Agreement signed by thedecrease oftwo partners on July 30, 2008. This liability was recognized against theincome taxes of Italian companies (euro 80 million).
17 Other current liabilities
Other current liabilities of euro 613 million (euro 505 million at December 31, 2004) consisted of the following:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Fair value of non-hedging derivatives 378
Fair value of cash flow hedge derivatives 5
Other liabilities 505
230
505
613
At January 1, 2005, the first application of IAS 32 and 39, resultedGroup’s net equity. In subsequent periods, changes in theaccounting atput option value will be recognized against thefair value of derivatives that do not meet the conditions required to qualify as hedging instruments for an amount, net of differentials on derivative contracts, of euro 82 million with a corresponding entry to the shareholders’ equity (euro 36 million)profit andto deferred tax assets (euro 46 million).loss account.
Fair value of non-hedging derivative contracts of euro 378 million consisted of the following:F-46
(million euro)
Fair value
Commitments
Non-hedging derivatives on exchange rate Currency Swap 139
6,370
Interest Currency Swap 73
2,316
Other 2
57
214
8,743
Non-hedging derivatives on interest rate Interest Rate Swap 101
5,145
101
5,145
Non-hedging derivatives on commodities Options 23
17
Over the counter 21
323
Future 5
67
Other 14
10
63
417
378
14,305
Commitments concerning cash flow hedge derivatives amounted to euro 42 million and concerned commitments on exchange rate derivatives.
At December 31, 2004 other liabilities of euro 505 million included differentials on derivative contracts for euro 141 million, of which euro 46 million related to financing receivables and liabilities.Non-current liabilities
18
21 Long-term debt and current portion of long-term debt
Long-term debtandincluded the current portion maturing during the year following the balance sheet date (current maturity). The table below analyzes debt by year oflong-term debt, including the relevant expiration dates, were as follows:forecasted repayment:
(
million euro)euro million)At December 31 Long-term maturity
Type of debt instrument
Maturity range
2004
2005
Current maturity 2006
2007
2008
2009
2010
After
Total
Banks: - ordinary loans 2006-2017
2,166
2,174
261
493
150
272
248
750
1,913
- interest rate assisted loans 2006-2013
101
45
32
4
3
2
2
2
13
- other financings 2006
9
3
3
Ordinary bonds 2006-2027
5,331
5,339
391
705
471
126
939
2,707
4,948
Other financing institutions 2006-2019
927
825
46
137
37
124
181
300
779
8,534
8,386
733
1,339
661
524
1,370
3,759
7,653
Type of debt instrument
Maturity range
2007
2008
Current maturity 2009
2010
2011
2012
2013
After
Total
Towards banks: - bank loans 2009-2019 6,073
6,896
145
2,503
600
2,584
324
740
6,751
- other bank loans at favorable rates 2009-2012 9
6
2
2
1
1
4
- other 2009-2010 101
101
101
6,082
7,003
147
2,606
601
2,585
324
740
6,856
Ordinary bonds 2009-2037 5,386
6,843
360
844
133
40
1,602
3,864
6,483
Other financial institutions 2009-2020 599
632
42
180
63
62
55
230
590
12,067
14,478
549
3,630
797
2,687
1,981
4,834
13,929
Long-term debt,
of euro 8,386 millionincluding the current portion of long-term debt,decreasedof euro 14,478 million (euro 12,067 million at December 31, 2007) increased by euro1482,411 million.Such decrease is primarily due toThe increase mainly reflected the balance of payments and new proceeds ofliabilitieseuro 2,466 million as well as the change in the consolidation area (euro376286 million)andprimarily due to theeffectacquisition ofexchange rateFirst Calgary Petroleums Ltd by the Exploration & Production segment that accounts for euro 229 million.This increase was offset by the negative impact of foreign currency translation differences and translation differences arising on
the alignment to the year end exchange rate of debtsdebt taken on by euro-reporting subsidiaries denominated in foreign currenciesother than functional currencywhich are translated into euro at year-end exchange rates (euro309 million) and, as increase, to the effect of exchange rate differences on the translation of financial statements prepared in currencies other than euro (euro 478383 million).Debt from other financial institutions of euro 632 million included euro 161 million of finance lease transactions. The following table shows principal outstanding by maturity date, which was obtained by summing future lease payments discounted at the effective interest rate, interest and the nominal value of future lease payments:
Maturity range
(euro million) Within 12 months
Between one and five years
Beyond five years
Total
Principal debt outstanding 134
22
5
161
Interests 3
5
2
10
Undiscounted value of future lease payments 137
27
7
171
Eni entered into
financing arrangementslong-term borrowing facilities with the European Investment Bankrelatingwhich were conditioned tobank debt that requiresthe maintenance of certainfinancial ratios generallyperformance indicators based on Eni’sConsolidated Financial Statementsor ofconsolidated financial statements or a rating not inferior toA -A- (S&P) and A3(Moodys)(Moody’s). At December 31,20042007 and2005,2008, the amount of short and long-term debt subject to restrictive covenants was euro1,1041,429 million and euro1,2581,323 million, respectively. Furthermore, Saipem SpA entered intofinancing arrangements with bankscertain borrowing facilities for euro27575 million(euro 300 million), that requirewith a number of financial institutions subordinated to the maintenance of certainfinancial ratios generallyperformance indicators based onSaipem’s Consolidated Financial Statements.the consolidated financial statements of Saipem. Eni and Saipem are in compliance with the covenants contained initstheir respective financing arrangements.Bonds of euro
5,3396,843 millionconcernconsisted of bonds issued within the Euro Medium Term Notes Program for a total of euro4,3656,391 million and other bonds for a total of euro974452 million.
BondsF-47The following table analyses bonds per issuing entity, maturity date, interest rate and currency as
ofat December 31,2005, including the issuing entity, the expiration dates and the interest rates, by currency, were as follows:2008:
Amount
Discount on bond issue and accrued expense
Total
ValueCurrencyMaturity
% rate
( million euro)euro million)from
to
from
to
Issuing entity Euro Medium Term Notes Eni SpA 1,500
43
1,543
EUR
2013
4.625
Eni SpA 1,250
(5
) 1,245
EUR
2017
4.750
Eni SpA 1,250
2
1,252
EUR
2014
5.875
Eni Coordination Center SA 682
7
689
GBP
2010
2019
4.875
6.125
Eni SpA 500
16
516
EUR
2010
6.125
Eni Coordination Center SA 366
1
367
YEN
2012
2037
1.150
2.810
Eni Coordination Center SA 350
10
360
EUR
2010
2028
2.876
5.441
Eni Coordination Center SA 183
2
185
USD
2013
2015
4.450
4.800
Eni Coordination Center SA 165
4
169
EUR
2009
2015
variable
Eni Coordination Center SA 34
34
CHF
2010
2.043
Eni Coordination Center SA 32
(1
) 31
USD
2013
variable
6,312
79
6,391
Other bonds Eni USA Inc 287
3
290
USD
2027
7.300
Eni Lasmo Plc (*) 157
(6
) 151
GBP
2009
10.375
Eni UK Holding Plc 11
11
GBP
2013
variable
455
(3
) 452
6,767
76
6,843
(*) The bond is guaranteed by a restricted cash deposit recorded under non-current financial assets (euro 173 million). As at December 31, 2008 bonds maturing within 18 months (euro 412 million) were issued by Eni Coordination Center SA for euro 261 million and by Eni Lasmo Plc for euro 151 million. During 2008, Eni SpA, Eni Coordination Center SA and Eni UK Holding Plc issued bonds for euro 1,499 million, euro 302 million and euro 11 million respectively.
The following table shows the currency composition of long-term debt and its current portion, and the related weighted average interest rates on total borrowings.
Dec. 31, 2007
from
(euro million)
toAverage rate
(%)Dec. 31, 2008
(euro million)
fromAverage rate
(%)
Euro 9,973
4.4
12,284
4.2
U.S. dollar 900
8.6
912
6.1
British pound 882
6.2
859
6.2
Japanese yen 281
1.9
367
2.0
Other currencies 31
2.0
56
3.8
12,067
14,478
At December 31, 2008 Eni had undrawn committed long-term borrowing facilities of euro 1,850 million (euro 1,400 million at December 31, 2007). Interest rates on these contracts were at market conditions. Charges for unutilized facilities were not significant.
Fair value of long-term debt, including the current portion of long-term debt amounted to euro 15,247 million (euro 12,390 million at December 31, 2007) and consisted of the following:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Ordinary bonds 5,523 7,505 Banks 6,148 7,056 Other financial institutions 719 686 12,390 15,247
F-48
Fair value was calculated by discounting the expected future cash flows at rates ranging from 1.4% to 3.9% (3.8% and 6.0% at December 31, 2007).
At December 31, 2008 Eni pledged restricted deposits as collateral against its borrowings for euro 151 million (euro 198 million at December 31, 2007).
Analysis of net borrowings, as defined in the "Item 5 – Operating and Financial Review and Prospects", was as follows:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Current
Non-current
Total
Current
Non-current
Total
A. Cash and cash equivalents 2,114
2,114
1,939
1,939
B. Available-for-sale securities 174
174
185
185
C. Liquidity (A+B) 2,288
2,288
2,124
2,124
D. Financing receivables 990
225
1,215
337
337
E. Short-term debt towards banks 4,070
4,070
2,411
2,411
F. Long-term debt towards banks 161
5,921
6,082
147
6,856
7,003
G. Bonds 263
5,123
5,386
360
6,483
6,843
H. Short-term debt towards related parties 131
131
153
153
I. Long-term debt towards related parties 16
16
9
9
L. Other short-term debt 3,562
3,562
3,795
3,795
M. Other long-term debt 313
270
583
42
581
623
N. Total borrowings (E+F+G+H+I+L+M) 8,500
11,330
19,830
6,908
13,929
20,837
O. Net borrowings (N-C-D) 5,222
11,105
16,327
4,447
13,929
18,376
Available-for-sale securities of euro 185 million (euro 174 million at December 31, 2007) were held for non-operating purposes.
Not included in the calculation above were held-to-maturity and available-for-sale securities held for operating purposes amounting to euro 360 million (euro 280 million at December 31, 2007), of which euro 302 million (euro 256 million at December 31, 2007) were held to provide coverage of technical reserves for Eni’s insurance companies.
Financing receivables of euro 337 million (euro 1,215 million at December 31, 2007) were held for non-operating purposes.
Not included in the calculation above were financing receivables held for operating purposes amounting to euro 487 million (euro 384 million at December 31, 2007), of which euro 399 million (euro 246 million at December 31, 2007) were in respect of securities granted to non-consolidated subsidiaries, joint ventures and associates primarily in relation to the implementation of certain capital projects and a euro 47 million cash deposit to provide coverage of Eni Insurance Ltd technical reserves. At December 31, 2007, non-current financial receivables of euro 225 million were related to a restricted deposit held by Eni Lasmo Plc as a guarantee of a debenture; the financial receivable has been reclassified in the current portion for euro 173 million.
F-49
22 Provisions for contingencies
Provisions for contingencies were as follows:
(euro million) Value at Dec. 31, 2007
Additions
Changes of estimated expenditures
Accretion discount
Reversal of utilized provisions
Reversal of unutilized provisions
Other changes
Value at Dec. 31, 2008
Issuing entity Euro Medium Term Notes: - Eni SpA 1,500
41
1,541
Euro
2013
4.625
- Eni Coordination Center SA 876
(2
) 874
British pound
2007
2019
4.875
5.250
- Eni Coordination Center SA 516
5
521
Euro
2007
2015
variable
- Eni SpA 500
16
516
Euro
2010
6.125
- Eni Coordination Center SA 274
5
279
Euro
2008
2024
2.876
5.050
- Eni Coordination Center SA 216
3
219
U.S. dollar
2013
2015
4.450
4.800
- Eni Coordination Center SA 161
4
165
U.S. dollar
2006
2007
variable
- Eni Coordination Center SA 152
152
Japanese yen
2008
2021
0.810
2.320
- Eni Coordination Center SA 83
1
84
Swiss franc
2006
2010
1.750
2.043
- Eni Coordination Center SA 14
14
Swiss franc
2007
variable
4,292
73
4,365
Other bonds: - Eni USA Inc 339
2
341
U.S. dollar
2027
7.300
- Eni USA Inc 254
1
255
U.S. dollar
2006
7.500
- Eni Lasmo Plc (*) 219
(11
) 208
British pound
2009
10.375
- Eni USA Inc 170
170
U.S. dollar
2007
6.750
982
(8
) 974
5,274
65
5,339
Provision for site restoration and abandonment 3,974
635
202
(113
) (8
) (116
) 4,574
Provision for environmental risks 1,858
369
38
(333
) (9
) 57
1,980
Provision for legal and other proceedings 716
90
1
(30
) (35
) 70
812
Loss adjustments and actuarial provisions for Eni’s insurance companies 418
1
(49
) 34
404
Provisions for the supply of goods 187
115
6
308
Provision for taxes 213
39
(3
) (10
) 21
260
Provision for losses on investments 163
21
(5
) (16
) 163
Provisions for marketing and promotion initiatives 65
75
(57
) (2
) 81
Provision for OIL insurance 80
14
(13
) (8
) (1
) 72
Provision for restructuring or decommissioning 130
(114
) 16
Provision for onerous contracts 50
(50
) 4
4
Other (*) 632
418
(2
) 2
(151
) (73
) 73
899
8,486
1,142
633
249
(750
) (199
) 12
9,573
(*)The bond is guaranteed by a fixed deposit recorded under non-current financial assets (euro 241 million).
Bonds due within 18 months amount to euro 435 million and concern Eni USA Inc (euro 255 million) and Eni Coordination Center SA (euro 180 million). During 2005 Eni issued bonds for euro 441 million through Eni Coordination Center SA.
Long-term debt and the current portion of long-term debt, including the weighted average interest rates, by currency, was as follows:
Dec. 31, 2004(million euro)
Average rate
Dec. 31, 2005(million euro)
Average rate
Euro 5,704
3.3
5,344
3.6
U.S. dollar 1,476
6.4
1,709
7.0
British pound 1,082
6.1
1,082
5.3
Japanese yen 96
1.4
153
1.4
Swiss franc 146
1.1
98
2.6
Other currencies 30
8.7
8,534
8,386
On December 31, 2005 Eni maintained committed unused lines of credit for euro 1,070 million (euro 710 million at December 31, 2004). These agreements provide for interest charges based on prevailing market conditions. Commission fees on unused lines of credit are not significant.
Financial liabilities for euro 251 million are guaranteed by mortgages and liens on fixed assets of consolidated companies and by pledges on securities and fixed deposits (euro 274 million at December 31, 2004).
Fair value of long-term debt, including the current portion of long-term debt, amounts to euro 8,732 million (euro 8,748 million at December 31, 2004) and consisted of the following:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Banks 2,276
2,222
Ordinary bonds 5,509
5,633
Other financing institutions 963
877
8,748
8,732
Fair value was calculated by discounting the future cash flows using rates between 2.8% and 5% (2.4% and 5.2% at December 31, 2004).
19 Provisions for contingencies
Provisions for contingencies of euro 7,679 million (euro 5,736 million at December 31, 2004) consisted of the following:
(million euro)
Value at Dec. 31, 2004
Additions
Deductions
Other changes
Value at Dec. 31, 2005
Provisions for site restoration and abandonment 1,967
694
(108
) 95
2,648
Provisions for environmental risks 1,649
522
(157
) 89
2,103
Loss adjustments and actuarial provisions for Eni’s insurance companies 573
100
(18
) 52
707
Provisions for contract penalties and disputes 208
359
(36
) 3
534
Provisions for revision of selling prices 321
321
Provisions for taxes 235
87
(38
) 25
309
Provisions for restructuring or decommissioning of production facilities 214
94
(113
) 195
Provisions for OIL insurance 91
36
127
Provisions for losses related to investments 91
24
(3
) (27
) 85
Provisions for onerous contracts 71
(6
) 15
80
Provisions for prize promotion 63
52
(57
) (6
) 52
Other (*) 645
264
(173
) (218
) 518
5,736
2,624
(709
) 28
7,679
(*) Each individual amount included herein does not exceed euro 50 million.
ProvisionsThe provision for site restoration and abandonment of euro2,6484,574 millionrepresentprimarily referred to theestimatedestimation of future costsforrelating to decommissioning of oil and natural gas production facilities at the end of the producing lives of fields, well-plugging, abandonment and site restoration (euro2,6134,494 million). Theprovisions ofincrease in the provision for the year amounted to euro 635 million and was primarily due to changes in the estimates of future costs made by subsidiaries in the Exploration & Production segment including Eni Norge AS (euro 183 million), Eni UK Ltd (euro 90 million) and Eni Petroleum Co Inc (euro 82 million) with a corresponding entry to fixed assets. Also an amount of euro694202 millioninclude the initial recognition and the reviews to the estimate of dismantling and restoration of siteswas recognizedas a balancing entry to the asset to which they refers (euro 592 million) and financial expense due to the passage of time charged to thethrough profit and lossaccount (euro 102 million);as the accretion charge for the period.The discount
rate used is included between 3% and 5.4%rates adopted ranged from 3.3% to 6.2% (from 4.2% to 6.2% at December 31, 2007). Other changes of euro95116 millioninclude exchange raterelated to negative currency translation differencesonwhich arose from the translation of financial statementsprepareddenominated in currencies other than euro (euro109157 million). Offsetting this effect was the acquisition of Eni Hewett Ltd by the Exploration & Production segment (euro 52 million).
ProvisionsThe provision for environmental risks of euro2,1031,980 millionrepresent,primarily related to the estimated future costs of remediation in accordance with existing laws and regulationsof active production facilities forrecognized by Syndial SpA (euro1,4451,382 million),and the Refining & Marketing segment (euro405454 million),. The increase in theCorporate and financial companies aggregate, relatingprovision of euro 369 million was primarily related toguarantees issued in relation to properties soldSyndial SpA (euro122222 million) and the Refining & Marketing segment (euro 108 million). Specifically, Syndial SpA recognized the estimated cost of the remediation of the divested area of Crotone as the clean-up has become probable and the associated costs can be reliably estimated. The decrease of euro 333 million was related to the reversal of utilized provisions primarily by Syndial SpA (euro 194 million) and the Refining & Marketing segment (euro 93 million). Other changes of euro 57 million included the reclassification from the provision for restructuring or decommissioning made by the Refining & Marketing segment (euro 114 million).The provision for legal and other proceedings of euro 812 million primarily included charges expected on failure to perform certain contractual obligations and estimated future losses on pending litigation including legal, antitrust and administrative matters. These provisions are stated on the basis of Eni’s best estimate of the expected probable liability and primarily relate to the Gas & Power segment (euro
61 million). Provisions in 2005 of euro 522 million primarily concern the Refining & Marketing segment (euro 282452 million), Syndial SpA (euro170225 million) and theCorporate and financial companies aggregatePetrochemical segment (euro5036 million). Other changes of euro 70 million were essentially related to the change in the consolidation area following the acquisition of Distrigas NV by the Gas & Power segment (euro 68 million).Loss adjustments and actuarial provisions for Eni’s insurance companies of euro
707404 millionrepresentrepresented the liabilities accrued for claims on insurance policies underwritten by Eni’scaptiveinsurancecompany. Deductions of euro 18 million concern deductions not corresponding to cash expenditures as regards to the reported accidents.
Provisions for contract penalties and disputes of euro 534 million are based on Eni’s best estimate of the expected probable liability. Provisions of the year for euro 359 million primarily concern the fine imposed on February 15, 2006 by the Antitrust Authority oncompany, Eni(euro 290 million). Deductions of euro 36 million concern deductions not corresponding to cash expenditures for euro 23 million.Insurance Ltd.Provisions for the
revisionsupply ofselling prices ofgoods for euro321308 millionprimarily concern the provision forrelated to Eni SpA and included the estimatedadverse impactcosts of theapplication of Decision 248/2004 by the Italian Authority for Electricity and Gas from January 1, 2005 affecting the parameters for the upgrading of the raw material component in price formulas for end users (euro 225 million).supply contracts.
ProvisionsF-50The provision for taxes of euro
309260 million primarilyincludeincluded charges for unsettled tax claimstoin connection with uncertainapplicationapplications of the tax regulation for foreigncompaniessubsidiaries of the Exploration & Production segment (euro268193 million).DeductionsThe provision for losses on investments of euro
38163 millionconcern deductions not correspondingwas made with respect tocash expenditureslosses on investments in entities incurred to date where the losses exceeded the carrying amount of the investments.The provision for marketing and promotional initiatives amounted to euro
30 million.
Provisions for restructuring or decommissioning81 million and was made in respect ofproduction facilities of euro 195 million mainly represent the estimated costs relatedmarketing initiatives involving awards and prizes todivestments and facilities closures ofclients in the Refining & Marketingsegment (euro 156 million). Deductions of euro 113 million concern deductions not corresponding to cash expenditures for euro 28 million.segment.
ProvisionsThe provision for OIL insurance cover of euro12772 millioninclude the provisions related to the increaseincluded a mutual insurance provision for future increases in insurance charge as a result ofchargespast accidents that will be paid in the next 5 yearsperiod, dueby Eni forparticipationparticipating in the mutual insurance policy of Oil InsuranceLtd, followingLtd.The provision for restructuring or decommissioning of unused production facilities of euro 16 million was primarily made for the estimated future costs of site restoration and remediation in connection with divestments and the closing of facilities in the Refining & Marketing segment (euro 10 million). Other changes of euro 114 million related to a reclassification to the
greater number of accidents occurred in 2004 and 2005.provision for environmental risks made by the Refining & Marketing segment.
Provisions for losses on investments of euro 85 million represent losses incurred to date in excess of the carrying value of investments (see Note 10).
ProvisionsThe provision for onerous contracts of euro804 millionconcern Syndial SpA and relaterelated to contracts for which the termination or execution costs exceed thebenefits arising from that contract.benefits. The reversal of utilized provisions related to Syndial SpA.
Provisions for prize promotion of euro 52 million include the provisions of the Refining & Marketing segment in relation to promotions directed towards the attainment of an increase on sales volumes on the Agip branded network and intended for station operators, for truckers and motorists that perform the fuel fill-up at the "Isole Fai da Te".
Deductions of other provisions of euro 173 million include deductions not corresponding to cash expenditures for euro 53 million, of which euro 27 million concern provisions for long-term construction contracts.
Other changes of euro 28 million include exchange differences due to the translation of financial statements prepared in currencies other than euro of euro 159 million; such increase has been partially offset by reclassifications essentially to social projects and financial receivables (euro 140 million).
2023 Provisions for employee benefits
Provisions for employee benefitsof Eni Group concern indemnities upon termination of employment, pension plans with benefits measured in consideration of the employee’s year compensation preceding the retirement and other benefits.were as follows:
(euro million) Dec. 31, 2007
Dec. 31, 2008
TFR 499 458 Foreign pension plans 219 223 Supplementary medical reserve for Eni managers (FISDE) and other foreign medical plans 99 98 Other benefits 118 168 935 947
Provisions for indemnities upon termination of employment
essentially concernprimarily related to the provisions accrued by Italian companies for employee termination indemnities ("TFR"), determined using actuarial techniques and regulated byarticleArticle 2120 of the Italian Civil Code.The indemnity is paid
outupon retirement ascapital and is determined bya lump sum payment the amount of which corresponds to the total of the provisionsset aside, calculated in consideration ofaccrued during the employee’scompensation during theservice periodandbased on payroll costs as revalued until retirement. Following changes in theretirement. Provisionsregime, starting from January 1, 2007, the amount already accrued and the future benefits have been transferred to a pension fund or the treasury fund custodied by the Italian administration for post-retirement benefits (INPS). Companies with less than 50 employees can choose not to adopt the new scheme. Therefore, the allocation of future TFRconsidered for the determination of liabilities and costs, are net of the amounts paidprovisions to pensionfunds.funds or the INPS treasury fund determines that these amounts will be classified as costs to provide benefits under a defined contribution plan. Past unpaid amounts accrued as at December 31, 2006 for post-retirement indemnities under the Italian TFR regime continue to represent costs to provide benefits under a defined benefit plan and must be assessed based on actuarial assumptions.Pension funds
concernare defined benefit plansofprovided by foreigncompaniessubsidiaries locatedprimarily,mainly inUnited Kingdom,Nigeria and in Germany. Benefitsconsistunder these plans consisted ofa returnpayments based oncapital determined on the basis of the length of serviceseniority and thecompensationsalary paid in the last year of service, oranalternatively, the average annualcompensation paid insalary over adetermineddefined periodprecedingprior to retirement.Group companies provide healthcare benefits to retired managers. Liability to these plans and the
retirement.current cost are limited to the contributions made by the company.Other benefits
essentially concern the supplementary medical reserve for Eni managers (FISDE) and jubilee awards. Liability and costsprimarily related toFISDE are calculateda deferred cash incentive scheme for managers and certain Jubilee awards. The provision for the deferred cash incentive scheme is assessed based on thebasis of the contributions paid bylikelihood that the companyforwillF-51
reach planned targets and the
retired managers.employees will reach individual performance goals. Jubilee awards are benefits due following the attainment of a minimum period of service and,regarding tofor the Italian companies,theyconsist ofa remuneration in kind.an in-kind remuneration.The value of employee benefits,
for the periods indicatedestimated by applying actuarial techniques, consisted of the following:
Foreign pension plans
( million euro)euro million)TFR
Gross liability
Plan assets
FISDE
and other foreign medical plansOther benefits
Total
2007 Current value of benefit liabilities and plan assets at beginning of year 614
771
(440
) 91
95
1,131
Current cost 13
13
1
38
65
Interest cost 23
32
4
2
61
Expected return on plan assets (23
) (23
) Employee contributions (126
) (126
) Actuarial gains (losses) (52
) 3
12
1
(1
) (37
) Benefits paid (64
) (35
) 18
(6
) (7
) (94
) Amendments 1
2
3
Curtailments and settlements (62
) (201
) 201
(62
) Currency translation differences and other changes 3
36
(4
) 1
(9
) 27
Current value of benefit liabilities and plan assets at end of year 476
621
(362
) 92
118
945
2008 Current value of benefit liabilities and plan assets at beginning of year 476
621
(362
) 92
118
945
Current cost 21
1
48
70
Interest cost 25
28
5
5
63
Expected return on plan assets (25
) (25
) Employee contributions (1
) (41
) (42
) Actuarial gains (losses) 8
(11
) 102
3
3
105
Benefits paid (65
) (25
) 20
(7
) (7
) (84
) Curtailments and settlements (2
) (2
) Currency translation differences and other changes (1
) 169
(147
) 2
1
24
Current value of benefit liabilities and plan assets at end of year 443
802
(453
) 94
168
1,054
The gross liability for foreign employee pension plans of euro 802 million (euro 621 million at December 31, 2007) included the liabilities related to joint ventures operating in exploration and production activities for euro 67 million and euro 77 million at December 31, 2007 and 2008, respectively. A receivable of an amount equivalent to such liability was recorded. Other benefits of euro 168 million (euro 118 million at December 31, 2007) primarily concerned the deferred monetary incentive plan for euro 107 million (euro 69 million at December 31, 2007) and jubilee awards for euro 47 million (euro 40 million at December 31, 2007).
F-52
The reconciliation of benefit obligations to plan assets was as follows:
TFR Foreign pension plans FISDE and other foreign medical plans Other benefits
(euro million) Dec. 31, 2007
Dec. 31, 2008
Dec. 31, 2007
Dec. 31, 2008
Dec. 31, 2007
Dec. 31, 2008
Dec. 31, 2007
Dec. 31, 2008
Present value of benefit obligations with plan assets 439
610
Present value of plan assets (362
) (453
) Net present value of benefit obligations with plan assets 77
157
Present value of benefit obligations without plan assets 476
443
182
192
92
94
118
168
Actuarial gains (losses) not recognized 23
15
(33
) (126
) 7
4
Past service cost not recognized (7
) Net liabilities recognized in provisions for employee benefits 499
458
219
223
99
98
118
168
Costs charged to the profit and loss account were as follows:
(euro million) TFR
Gross liabilityForeign pension plans
Plan assets
Net liabilityFISDE and other foreign medical plansOther benefits
Total
2007 Current cost 13
13
1
38
65
Interest cost 23
32
4
2
61
Expected return on plan assets (23
) (23
) Amortization of actuarial gains (losses) 1
3
4
Effect of curtailments and settlements (83
) 41
(42
) (46
) 66
5
40
65
2008 Current cost 19
1
48
70
Interest cost 25
28
5
5
63
Expected return on plan assets (25
) (25
) Amortization of actuarial gains (losses) 1
1
Effect of curtailments and settlements (2
) (2
) 25
25
4
53
107
Dec. 31, 2004 Current value of benefit obligation at beginning of year 521
483
(224
) 259
130
910
Current cost 54
17
17
3
74
Interest cost 25
25
25
6
56
Expected return on plan assets (14
) (14
) (14
) Contributions paid 1
(21
) (20
) (20
) Actuarial gains/losses 29
46
(7
) 39
8
76
Benefits paid (52
) (18
) 11
(7
) (9
) (68
) Amendments 11
11
11
Exchange rate differences and other changes 11
(2
) 9
9
Current value of benefit obligation at end of year 577
576
(257
) 319
138
1.034
Dec. 31, 2005 Current value of benefit obligation at beginning of year 577
576
(257
) 319
138
1.034
Current cost 59
18
18
5
82
Interest cost 25
30
30
6
61
Expected return on plan assets (16
) (16
) (16
) Contributions paid 1
(46
) (45
) (45
) Actuarial gains/losses 47
66
(24
) 42
(6
) 83
Benefits paid (49
) (19
) 11
(8
) (10
) (67
) Amendments 3
3
3
Economic effect of curtailment or settlement of the plan (6
) (5
) (5
) (11
) Exchange rate differences and other changes 87
(27
) 60
60
Current value of benefit obligation at end of year 653
757
(359
) 398
133
1,184
Gross liability relating foreign pension plansThe main actuarial assumptions used for the valuation ofeuro 757 million (euro 576 millionpost-retirement benefit obligations atDecember 31, 2004) includes pension plans with no plan assetsyear-end and foreuro 180 million (euro 166 million at December 31, 2004).
Current valuethe estimate ofbenefit obligation of foreign pension plans includes liabilities of joint ventures operating in exploration and production activities.
Current value of the obligation relating other benefits of euro 133 million (euro 138 million at December 31, 2004) concern primarily FISDEcosts expected foreuro 96 million and jubilee awards for euro 29 million (euro 106 million and euro 26 million at December 31, 2004, respectively).
Reconciliation of net liabilities for benefits recorded in the balance sheets was2009 were as follows:
(million euro)(%)TFR
Foreign pension plans
Other benefits
Total
Dec. 31, 2004 Current value of the benefit obligation 577
319
138
1,034
Actuarial gains/losses not recognized (18
) (16
) (7
) (41
) Past service cost not recognized (11
) (11
) Provisions for employee benefits 559
292
131
982
Dec. 31, 2005 Current value of the benefit obligation 653
398
133
1,184
Actuarial gains/losses not recognized (76
) (71
) 3
(144
) Past service cost not recognized (9
) (9
) Provisions for employee benefits 577
318
136
1,031
Fund for employee benefits of foreign pensions plan of euro 318 million (euro 292 million at December 31, 2004) includes liabilities of joint ventures operating in exploration and production activities for euro 95 million and euro 130 million at December 31, 2004 and 2005, respectively; a receivable was recorded against such liability.
Fund for other benefits of euro 136 million (euro 131 million at December 31, 2004) concern primarily FISDE for euro 99 million and jubilee awards for euro 29 million (euro 99 million and euro 26 million at December 31, 2004, respectively).
Costs for employee benefits recorded in the profit and loss account consisted of the following:
(million euro)
TFR
Foreign pension plans
Other benefits
Total
2004 Current cost 54
17
3
74
Interest cost 25
25
6
56
Expected return rate on plan assets (14
) (14
) Amortization of past service cost 1
1
Amortization of actuarial gains/losses 1
1
Total cost 79
29
10
118
2005 Current cost 59
18
5
82
Interest cost 25
30
6
61
Expected return rate on plan assets (16
) (16
) Amortization of past service cost 3
1
4
Amortization of actuarial gains/losses 6
6
Economic effect of curtailment or settlement of the plan (6
) (4
) (1
) (11
) Total cost 78
31
17
126
Costs for other benefits of euro 17 million (euro 10 million at December 31, 2004) concern FISDE for euro 7 million and jubilee awards for euro 7 million (euro 6 million and euro 3 million at December 31, 2004, respectively).
Principal actuarial assumptions used for the valuation of employee benefits consisted of the following:
(%)
TFR
Foreign pensionFISDE and other foreign medical plansOther benefits
2007 Discount rate 5.4
3.5-13.0
5.5
4.8-5.4
Expected return rate on plan assets 4.0-13.0
Rate of compensation increase 2.7-3.0
2.0-12.0
2.7-4.0
Rate of price inflation 2.0
1.0-10.0
2.0
2.0
2008 Discount rate 6.0
3.5-13.0
6.0
5.2-6.0
Expected return rate on plan assets 4.5-13.0
Rate of compensation increase 2.7-3.0
2.4-13.0
2.7-4.0
Rate of price inflation 2.5
1.3-11.0
2.5
2.5
2004Principal actuarial assumptionsDiscount rate
4.5
6.0-7.9
4.0-5.0Rate of compensation increase
2.7-4.5
3.0-6.8Expected return rate on plan assets
7.0Rate of price inflation
2.3
2.0-4.6
2.0-2.32005Principal actuarial assumptionsDiscount rate
4.0
4.5-7.3
4.5-4.7Rate of compensation increase
2.7-4.5
3.0-5.8
3.5Expected return rate on plan assets
7.2Rate of price inflation
2.0
2.0-4.9
2.3-2.4
ForeignF-53With regards to Italian plans, demographic tables prepared by Ragioneria Generale dello Stato (RG48) were used. The expected return rate by plan assets has been determined by reference to quoted prices expressed in regulated markets.
Plan assets consisted of the following:
(%) Plan assets
Expected return
Dec. 31, 2005 Securities 50.2
7.4
Bonds 35.0
4.9
Investment property 1.7
8.1
Other 13.1
10.5
Total 100.0
Securities 6.9 6.6-8.9 Bonds 20.4 2.8-10.0 Real estate 1.8 5.4-15.0 Other 70.9 2.0-13.0 Total 100.0
21 Deferred tax liabilities
Deferred tax liabilitiesThe effective return on plan assets amounted to a cost of euro4,89077 million(euro 3,948(a profit of euro 11 million at December 31,2004) are2007).With reference to healthcare plans, the effects deriving from a 1% change of the actuarial assumptions of medical costs were as follows:
(euro million) 1% Increase
1% Decrease
Impact on the current costs and interest costs 1 (1 ) Impact on net benefit obligation 10 (9 )
The amount expected to be accrued to defined benefit plans for 2009 is euro 32 million.
The analysis of changes in the actuarial valuation of the net liability with respect to prior year deriving from the non-correspondence of actuarial assumptions with actual values recorded at year-end was as follows:
(euro million) TFR
Foreign pension plans
FISDE and other foreign medical plans
Other benefits
2007 Impact on net benefit obligation (8
) 6
Impact on plan assets 3
2008 Impact on net benefit obligation 7
15
3
1
Impact on plan assets (62
)
24 Deferred tax liabilities
Deferred tax liabilities were recognized net of offsettable deferred tax assets forwhich Eni possesses the legal right of offset.euro 3,468 million (euro 3,526 million at December 31, 2007).
( million euro)euro million)Value at
Dec. 31,20042007Additions
Deductions
Exchange rateChanges in the scope of consolidationCurrency translation differences
Other changes
Value at
Dec. 31,20052008
5,471
952
(2,335
) 1,684
(38
) 8
5,742
F-54
Deferred tax liabilities and deferred tax assets consisted of the following:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Deferred tax liabilities 8,997
9,210
Deferred tax assets available for offset (3,526
) (3,468
) 5,471
5,742
Deferred tax assets not available for offset (1,915
) (2,912
) 3,556
2,830
The most significant temporary differences giving rise to net deferred tax liabilities were as follows:
(euro million) Value at
Dec. 31, 2007Additions
Deductions
Currency translation differences
Other changes
Value at
Dec. 31, 2008
Deferred tax liabilities: - accelerated tax depreciation 6,257
212
(895
) (60
) (148
) 5,366
- site restoration and abandonment (tangible assets) 539
191
(30
) (32
) (14
) 654
- capitalized interest expense 177
10
(15
) 1
173
- application of the weighted average cost method in evaluation of inventories 731
335
(1,070
) 83
79
- other 1,293
204
(325
) 54
1,712
2,938
8,997
952
(2,335
) (38
) 1,634
9,210
Deferred tax assets: - site restoration and abandonment (provisions for contingencies) (1,363
) (244
) 17
45
(27
) (1,572
) - accruals for impairment losses and provisions for contingencies (913
) (701
) 235
3
(21
) (1,397
) - depreciation and amortization (622
) (278
) 48
(42
) (16
) (910
) - assets revaluation as per Laws No. 342/2000 and No. 448/2001 (788
) 60
(7
) (735
) - carry-forward tax losses (79
) (10
) 37
1
(6
) (57
) - other (1,676
) (545
) 370
36
106
(1,709
) (5,441
) (1,778
) 767
43
29
(6,380
) Net deferred tax liabilities 3,556
(826
) (1,568
) 5
1,663
2,830
3,948
2,136
(484)
331
(1,041)
4,890
Other changes of euro 1,041 million primarily concern the set-off, for each company, of tax assets and deferred tax liabilities (euro 1,035 million). Such change has been partially offset by provisions to the reserves of the shareholders’ equity following the first application of IAS 32 and 39 (euro 50 million) and valuation at fair value of financial instruments (euro 2 million).
Deferred tax liabilities consisted of the following:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Deferred income taxes 6,002
8,237
Deferred income taxes available to be offset (2,054
) (3,347
) 3,948
4,890
Deferred income taxes not available to be offset (1,827
) (1,861
) Net deferred tax liabilities 2,121
3,029
The most significant temporary differences giving rise to net deferred tax liabilities were as follows:
(million euro)
Value at Dec. 31, 2004
Additions
Deductions
Exchange rate differences
Other changes
Value at Dec. 31, 2005
Deferred tax liabilities: - accelerated tax depreciation on fixed assets 3,885
1,378
(235
) 274
553
5,855
- application of the weighted average cost method in evaluation of inventories 300
351
(2
) 649
- site restoration and abandonment (fixed assets) 104
234
(35
) 8
38
349
- capitalized interest expense 219
12
(12
) 26
245
- other 1,494
161
(200
) 49
(365
) 1,139
6,002
2,136
(484
) 331
252
8,237
Deferred tax assets: - assets revaluation as per Law 342/2000 and 448/2001 (1,177
) 79
2
(1,038
) - site restoration and abandonment (provisions for contingencies) (870
) (355
) 130
(37
) 94
(1,096
) - non deductible amortization (324
) (401
) 178
(77
) (244
) (868
) - accruals for doubtful accounts and provisions for contingencies (513
) (487
) 159
2
(839
) - tax loss carryforwards (102
) (59
) 58
(15
) (42
) (160
) - other (895
) (476
) 323
(29
) (130
) (1,207
) (3,881
) (1,778
) 927
(158
) (318
) (5,208
) Net deferred tax liabilities 2,121
358
443
173
(66
) 3,029
Deferred tax assets are recognized for deductible temporary differences to the extent that
expectedis probable that sufficient taxable profit will be available against which part or all of the deductible temporary differences can be utilized. When futurefiscal profits are consideredtaxable profit is no longer deemed to be sufficientfor the utilization of these assets.
Noto absorb all existing deferred taxliabilities have been recognizedassets, any surplus is written off.Other changes of euro 1,663 million included: (i) changes in
relation tothereservesconsolidation area for euro 1,456 million following ofconsolidated subsidiaries because such reserves are not expected to be distributedthe acquisition made by the Exploration & Production segment of Burren Energy Plc (euro269733 million)., of First Calgary Petroleums Ltd (euro 108 million), of Eni Hewett Ltd (euro 91 million) and of Hindustan Oil Exploration Co Ltd (euro 31 million), the acquisition made by the Gas & Power segment of Distrigas NV (euro 504 million) and the disposal done by the Refining & Marketing segment of Agip España SA (euro 11 million); and (ii) the recognition of the deferred tax effect against equity on the fair value evaluation of derivatives designated as cash flow hedge for euro 76 million. Further information on cash flow hedging derivatives is given in Note 7 - Other current assets, in Note 15 - Other non-current receivables and in Note 25 - Other non-current liabilities.
UnderItalian taxation law allows theItalian fiscal laws,carry-forward of tax lossescan be carried forward inover the five subsequentperiods, excepting lossesyears. Losses suffered in the first threeperiods of lifeyears of thecompany thatcompany’s life can however be, for the most part, carried forwardwithout limit. Taxindefinitely. The tax rate applied by the Italian subsidiaries to determine the portion of carry-forwards tax losses to be utilized equaled 33%; 33.73% for foreign entities.F-55
Carry-forward tax losses of
foreign companies can be carry forward on average for more than five periods and for a considerable part can be carried forward without limit. Tax recover correspond to a tax rate of 33% for Italian companies and to an average tax rate of 30% for foreign companies.
Tax losses amount toeuro1,8181,024 millionandcan be used in the following periods:
( million euro)euro million)Italian
companiessubsidiariesForeign
companiessubsidiaries
2006 10
2007 7
2008 11
66
2009 8
43
2010 46
Over 2010 234
Without limit 1,393
19
1,799
2009 41 7 2010 12 2011 1 2012 2013 6 3 Beyond 2013 3 14 Without limit 38 899 88 936
TaxCarry-forward tax losses of euro 171 million expected to be offset against future taxable profit and were in respect of Italian subsidiaries forwhich is expected the utilization amounteuro 88 million and of foreign subsidiaries for euro 83 million. Deferred tax assets recognized on these losses amounted to euro54729 million andessentially concern foreign companies (euro 536 million); the relevant deferred tax assets amount toeuro16028 million,of which euro 158 million concern foreign companies.
respectively.
22
25 Other non-current liabilities
Other non-current liabilitiesof euro 897 million (euro 427 million at December 31, 2004) consisted of the following:were as follows:
( million euro)euro million)Dec. 31,
20042007Dec. 31,
20052008
Income tax liabilities 23
Other payables 204
767
Other liabilities 200
130
427
897
Fair value of cash flow hedge derivatives 1,340 499 Current income tax liabilities 215 254 Payables related to capital expenditures 22 Other payables 295 55 Other liabilities 159 1,730 2,031 2,538
Other payablesThe fair value of derivative contracts was determined by using market quotations reported by major market data providers, or, if no market information was available, on the basis of generally accepted methods for financial valuations.The fair value of cash flow hedging derivatives amounted to euro
767499 million (euro2041,340 million at December 31,2004) concern payables2007) and related tocapital expendituresthe Exploration & Production segment for euro597 million.264 million (euro 1,340 million at December 31, 2007) and to Distrigas NV (euro 235 million).Further information on cash flow hedging derivatives is given in Note 7 - Other current assets. The fair value related to the contracts expiring in 2009 is given in Note 7 - Other current assets, in Note 15 - Other non-current receivables and in Note 25 - - Other non-current liabilities. The effects of the fair value valuation of cash flow hedging derivatives are given in Note 27 - Shareholders’ equity and in Note 32 - Finance income (expense).
The nominal value of these derivatives referred to purchase and sale commitments for euro 1,878 million and euro 1,832 million, respectively (euro 2,804 million and euro 3,404 million at December 31, 2007).
Information on the hedged risks and the hedging policies is shown in Note 29 - Guarantees, commitments and risks.
The group’s liability for current income taxes of euro 254 million (euro 215 million at December 31, 2007) was due as special tax (with a rate lower than the statutory tax rate), relating to the option to increase the deductible tax bases of certain tangible and other assets to their carrying amounts as permitted by the 2008 Budget Law.
Other liabilities of euro 1,730 million (euro 159 million at December 31,
20042007) included advances received by Suez following the long-term supply of natural gas and electricity of euro200 million include1,552 million.F-56
26 Assets classified as held for sale and liabilities directly associated with the
fair valueassets classified as held for sale
Non-current assets held for sale and directly associated liabilities related to the disposal offixed interest rate financial liabilitiesFertlizantes Nitrogenados de Oriente, a company specialized in the production ofLasmo Plc (now Eni Lasmo Plc) for euro 2 million.
fertilizers.
23
27 Shareholders’ equity
Minority interest
Minority interestinand the attributable profitand shareholders’ equity relatewith reference tothe followingcertain consolidatedsubsidiaries:subsidiaries related to:
( million euro)euro million)Net profit
Shareholders’ equity
2007
2008
Dec. 31, 2007
Dec. 31, 2008
Saipem SpA 514
407
1,299
1,560
Distrigas NV 74
1,162
Snam Rete Gas SpA 268
254
865
948
Hindustan Oil Exploration Co Ltd (1
) 128
Tigàz Tiszàntùli Gàzszolgàltatò Részvénytàrsasàg 1
(11
) 79
65
Others 15
10
196
211
798
733
2,439
4,074
Eni shareholders’ equity
Eni’s net equity at December 31 was as follows:
(euro million) Dec. 31, 2007
Dec. 31, 2008
Share capital 4,005
4,005
Legal reserve 959
959
Reserve for treasury shares 7,207
7,187
Cumulative foreign currency translation differences (2,233
) (969
) Other reserves (914
) (1,140
) Retained earnings 29,591
34,685
Treasury shares (5,999
) (6,757
) Interim dividend (2,199
) (2,359
) Net profit for the period 10,011
8,825
40,428
44,436
Share capital
At December 31, 2008 the parent company’s issued share capital consisted of 4,005,358,876 shares (nominal value euro 1 each) fully paid-up (the same amount at December 31, 2007).On April 29, 2008 Eni’s Shareholders’ Meeting declared a dividend distribution of euro 0.70 per share, with the exclusion of treasury shares held at the ex-dividend date, in full settlement of the 2007 dividend of euro 1.30 per share, of which euro 0.60 per share paid as interim dividend. The balance was paid on May 22, 2008 to shareholders on the register on May 19, 2008.
Legal reserve
This reserve represents earnings restricted from the payment of dividends pursuant to Article 2430 of the Italian Civil Code. The legal reserve has reached the maximum amount required by the Italian Law.F-57
Reserve for treasury shares
The reserve for treasury shares represents the reserve restricted to the purchase of own shares in accordance with the decisions of Eni’s Shareholders’ Meetings. The amount of euro 7,187 million (euro 7,207 million at December 31, 2007) included treasury shares purchased. The decrease of euro 20 million primarily concerned the sale and grant of treasury shares to Group managers following stock option and stock grants incentive schemes.Cumulative foreign currency translation differences
The cumulative foreign currency translation differences arose from the translation of financial statements denominated in currencies other than euro.Other reserves
Other reserves of negative amount were euro 1,140 million (at December 31, 2007 other reserves of negative amount were euro 914 million) and included:
• a reserve of euro 247 million constituted following the sale by Eni SpA of Snamprogetti SpA to Saipem Projects SpA (now Saipem SpA) (same amount at December 31, 2007); • a reserve of euro 194 million (euro 181 million at December 31, 2007) deriving from Eni SpA’s equity; • a reserve of euro 86 million (at December 31, 2007 a negative for euro 1,342 million) including the related tax, for the valuation at fair value of available-for-sale securities and cash flow hedge derivatives. Further information is given in Note 2 - Other financial assets held for trading or available for sale, Note 7 - Other current assets, Note 20 - Other current liabilities and Note 25 - Other non-current liabilities; • a negative reserve of euro 1,495 million related to the put option granted to Publigaz (the Distrigas minority shareholder) to divest its 31.25% stake in Distrigas NV valued at the same per-share price of the ongoing mandatory tender offer to minorities. The valuation at fair value of securities available for sale and cash flow hedge derivatives, net of the related tax effect, consisted of the following:
Available-for-sale securities Cash flow hedge derivatives Total
(euro million) Gross reserve
Deferred tax liabilities
Net reserve
Gross reserve
Deferred tax liabilities
Net reserve
Gross reserve
Deferred tax liabilities
Net reserve
Reserve as of December 31, 2006 8
(2
) 6
1
1
9
(2
) 7
Changes of the year 2007 (2,237
) 867
(1,370
) (2,237
) 867
(1,370
) Foreign currency translation differences 51
(26
) 25
51
(26
) 25
Amount recognized in the profit and loss account (6
) 2
(4
) (6
) 2
(4
) Reserve as of December 31, 2007 2
2
(2,185
) 841
(1,344
) (2,183
) 841
(1,342
) Changes of the year 2008 3
(1
) 2
964
(364
) 600
967
(365
) 602
Changes in the scope of consolidation (68
) 23
(45
) (68
) 23
(45
) Foreign currency translation differences 48
(23
) 25
48
(23
) 25
Amount recognized in the profit and loss account 1,005
(402
) 603
1,005
(402
) 603
Reserve as of December 31, 2008 5
(1
) 4
(236
) 75
(161
) (231
) 74
(157
) of which: Eni Group 5
(1
) 4
(128
) 38
(90
) (123
) 37
(86
)
F-58
The ineffective portion of the change in fair value of cash flow hedging derivatives (time value component) entered into by the Exploration & Production segment consisted of the following:
(euro million)
2004Value at
Dec. 31, 2007Changes recognized in profit and loss account
Currency translation differences
2005Value atDec. 31,
2004
Dec. 31, 20052008
Snam Rete Gas SpA 331
321
2,025
1,158
Saipem SpA 133
115
846
915
Tigáz Tiszántúli Gázszolgáltató Részvénytársaság 4
6
78
82
Others 14
17
217
194
482
459
3,166
2,349
The decrease in the shareholders’ equity of Snam Rete Gas SpA of euro 867 million concern the distribution of an extraordinary dividend of which euro 1,171 million was paid to minority interest.
Eni shareholders’ equity
(million euro)
Value at Dec. 31, 2004(56) 7
4
Value at Dec. 31, 2005(45)
Share capital 4,004
4,005
Legal reserve 959
959
Cumulative translation adjustment reserve (687
) 941
Reserve for treasury shares 5,392
5,345
Treasury shares (3,229
) (4,216
) Other reserves 3,965
5,351
Retained earnings 14,911
17,381
Net profit for the period 7,059
8,788
Interim dividend (1,686
) 32,374
36,868
Share capital
At December 31, 2005 Eni SpA had 4,005,358,876Treasury shares(nominal value euro 1 each) fully paid-up (4,004,424,476purchased
A total of 382,954,240 ordinary shares (348,525,005 at December 31,2004). The increase concerns the issuing under the stock grant plan of 934,400 shares2007) withanominal value of euro 1 each,subscribed by managers following the expiration of the plan issuedwere held in2002 (883,300 shares) and the agreed termination of employment (51,100 shares). On May 27, 2005 Eni’s Shareholders Meeting decidedtreasury, for adividend distributiontotal cost of euro0.90 per share, with the exclusion of treasury shares. The cash dividend was made available for payment on June 23, 2005 and the ex-dividend date was June 20, 2005.
Legal reserve
The legal reserve of Eni SpA represents earnings restricted from the payment of dividends pursuant to Article 2430 of the Civil Code.
Cumulative translation adjustment reserve
The cumulative translation adjustment reserve represents exchange differences due to the translation of financial statements prepared in currencies other than euro.
Reserve for treasury shares
The reserve for treasury shares of euro 5,3456,757 million (euro5,3925,999 million at December 31,2004) contains earnings destined to purchase2007). 23,557,425 treasury sharesin accordance with the decisions of Eni’s Shareholders’ Meetings. The decrease(35,423,925 at December 31, 2007) at a cost of euro47 million concern the sale and the grant of treasury shares to the Group managers following the stock option and stock grant plans.
Treasury shares
Treasury shares amount to euro 4,216505 million (euro3,229768 million at December 31,2004)2007) were available for 2002-2005 andconsist of 278,013,975 ordinary shares nominal value euro 1 owned by Eni SpA (234,394,888 ordinary shares nominal value euro 1 at December 31, 2004). Treasury shares of euro 237 million (euro 286 million at December 31, 2004), are represented by 17,428,300 shares (21,006,600 shares at December 31, 2004) and are destined to 2002-2004 and 20052006-2008 stock optionplans (14,004,500 shares) and 2003-2005 stock grant plans (3,423,800 shares).plans.The decrease of
3,578,30011,866,500 shares consisted of the following:
(million euro)Stock option
Stock grant
Total
Number of shares at December 31, 2004 14,574,000
6,432,600
21,006,600
- reclassifications (*) 2,658,400
(2,658,400
) 17,232,400
3,774,200
21,006,600
- rights exercised (3,106,400
) (339,100
) (3,445,500
) - rights cancelled (121,500
) (11,300
) (132,800
) (3,227,900
) (350,400
) (3,578,300
) Number of shares at December 31, 2005 14,004,500
3,423,800
17,428,300
Number of shares at December 31, 2007 34,521,125
902,800
35,423,925
Rights not assigned for the 2006-2008 stock option plan (9,406,500
) (9,406,500
) Rights exercised (582,100
) (893,400
) (1,475,500
) Rights cancelled (975,100
) (9,400
) (984,500
) (10,963,700
) (902,800
) (11,866,500
) Number of shares at December 31, 2008 23,557,425
23,557,425
(*)The reclassifications have been decided in accordance with the decision of Eni’s Shareholders’ Meeting of May 27, 2005.At December 31,
20052008, optionsand grantsoutstanding were13,379,600 shares and 3,127,200 shares, respectively.23,557,425 shares. Options refer to the 2002 stock plan for903,10097,000 shares with an exercise price of euro 15.216 per share, to the 2003 stock plan for4,106,500231,900 shares with an exercise price of euro 13.743 per share, to the 2004 stock plan for3,659,000671,600 shares with an exercise price of euro 16.576 per share,andto the 2005 stock plan for4,711,0003,756,000 shares with an exercise price of euro 22.512 pershare.
Other reserves
Other reservesshare, to the 2006 stock plan for 5,954,250 shares with an weighted average exercise price of euro5,351 million (euro 3,965 million at December 31, 2004) refer to Eni distributable reserve for euro 5,219 million (euro 3,896 million at December 31, 2004) and for euro 35 million23.119 per share, to thereserve2007 stock plan for 5,492,375 with an weighted average exercise price of euro 27.451 per share and to the 2008 stock plan for 7,354,300 with an weighted average exercise price of euro 22.540 per share.Information about commitments related to stock grant and stock option plans is included in Note 31 - Operating expenses.
Interim dividend
Interim dividend for thevaluation at fair value of securities available for sale and cash flow hedge derivatives. The increase of Eni distribuitable reserveyear 2008 amounted of euro1,3232,359 millionprimarily concerncorresponding to euro 0.65 per share, as decided by thedestinationBoard ofthe residual income for 2004 (euro 1,300 million),Directors on September 11, 2008 in accordance withthe decisions of Eni’s Shareholders’ Meetings of May 27, 2005. The valuation at fair value of securities available for sale and cash flow hedge derivatives consistsArticle 2433-bis, paragraph 5 of thefollowing:Italian Civil Code; the dividend was paid on September 25, 2008.Distributable reserves
At December 31, 2008 Eni shareholders’ equity included distributable reserves for euro 39,000 million.F-59
Reconciliation of net profit and shareholders’ equity of the parent company Eni SpA to consolidated net profit and shareholders’ equity
Securities available for saleNet profit
Cash flow hedge derivativesShareholders’ equity
(euro million) 2007
2008
Dec. 31, 2007
Dec. 31, 2008
As recorded in Eni SpA’s Financial Statements 6,600
6,745
28,926
30,049
Difference between the equity value of individual accounts of consolidated subsidiaries with respect to the corresponding carrying amount in the statutory accounts of the parent company 4,122
4,140
16,320
18,999
Consolidation adjustments: - difference between cost and underlying value of equity (1
) (330
) 1,245
5,161
- elimination of tax adjustments and compliance with accounting policies 649
(1,373
) (1,235
) (2,852
) - elimination of unrealized intercompany profits (435
) 216
(3,383
) (3,127
) - deferred taxes (97
) 159
711
(15
) - other adjustments (29
) 1
283
295
10,809
9,558
42,867
48,510
Minority interest (798
) (733
) (2,439
) (4,074
) As recorded in Consolidated Financial Statements 10,011
8,825
40,428
44,436
28 Other information
Acquisitions
Burren Energy Plc
On January 11, 2008, following a non-hostile takeover by means of a cash offer, Eni acquired control over the British oil company Burren Energy Plc (Burren). Burren held producing assets in Turkmenistan and Congo, and exploratory licenses in Egypt, Yemen and India. Total consideration for this transaction of euro 2,358 million, of which euro 14 million related to additional costs directly attributable to the combination, has been allocated to assets and liabilities on a definitive basis.Hindustan Oil Exploration Co Ltd (HOEC)
On August 5, 2008, following the execution of a mandatory tender offer on a 20% stake of the HOEC share capital, Eni acquired control over the Indian company Hindustan Oil Exploration Co Ltd (HOEC). The mandatory offer was associated with Eni’s acquisition of a 27.18% of HOEC as part of the Burren deal. Total consideration for this transaction of euro 107 million, with the exclusion of the minority interest, has been allocated to assets and liabilities on a preliminary basis because of the significant amount of time required for a more precise valuation.Distrigas NV
On October 30, 2008, following the acquisition of a 57.243% majority stake from the French company Suez-Tractebel Eni acquired control over the Belgian company Distrigas NV. On December 30, 2008, Eni was granted authorization from the Belgian market authorities to execute a mandatory tender offer to the minorities of Distrigas. The deadline of the offer was March 19, 2009. Total consideration for this transaction of euro 2,751 million, of which euro 12 million related to additional costs directly attributable to the acquisition, with the exclusion of the minority interest, has been allocated to assets and liabilities on a preliminary basis because of the amount of time required for a more precise valuation.First Calgary Petroleums Ltd
On November 21, 2008, following the acquisition of all of the common shares Eni gained control of First Calgary Petroleums Ltd, a Canadian oil and gas company with exploration and development activities in Algeria. Total consideration for this transaction of euro 605 million, of which euro 5 million related to additional costs directly attributable to the acquisition, has been allocated to assets and liabilities on a preliminary basis because of the amount of time required for a more precise valuation.F-60
Eni Hewett Ltd
On November 28, 2008, following the finalization of an agreement with the British company Tullow Oil Ltd Eni acquired a 52% stake and the operatorship of fields in the Hewett Unit and relevant facilities in the North Sea, with the aim to upgrade certain depleted fields in the area so as to achieve a gas storage facility. Total consideration for this transaction of euro 224 million has been allocated to assets and liabilities on a preliminary basis because of the amount of time required for a more precise valuation.
(euro million) Burren Energy Plc
TotalHindustan Oil Exploration Co LtdDistrigas NV
First Calgary Petroleums Ltd
Eni Hewett Ltd
(million euro)
Gross reservePre- acquisition
Deferred tax liabilitiesPost- acquisition
Net reserveGross reserveDeferred tax liabilities
Net reservePre- acquisition
Gross reservePost- acquisition
Deferred tax liabilitiesPre- acquisition
Net reservePost- acquisitionPre- acquisition
Post- acquisition
Pre- acquisition
Post- acquisition
Reserve as of January 1, 2005 19
(6
) 13
19
(6
) 13
Changes of the year 8
(2
) 6
27
(11
) 16
35
(13
) 22
Reserve as of December 1, 2005 27
(8
) 19
27
(11
) 16
54
(19
) 35
Current assets 187
187
115
115
3,375
3,375
148
148
56
19
Property, plant and equipment 457
2,543
79
199
30
30
643
757
29
118
Intangible assets 47
326
8
1
1,395
208
Goodwill 89
1,245
88
39
Investments 56
53
1
1
112
112
Other non-current assets 17
17
202
203
9
Assets acquired 764
3,215
203
315
3,720
6,360
791
993
94
384
Current liabilities 62
100
37
37
1,796
1,796
45
45
17
17
Net deferred tax liabilities 36
733
(5
) 31
30
504
15
108
91
Provisions for contingencies 14
24
4
3
80
80
3
6
44
52
Other non-current liabilities 17
17
88
88
229
229
Liabilities acquired 112
857
53
88
1,994
2,468
292
388
61
160
Minority interest 79
120
748
1,141
Eni’s shareholders equity 652
2,358
71
107
978
2,751
499
605
33
224
Interim dividend
Interim dividend of euro 1,686 million concerned the interim dividend for the year 2005 for euro 0.45 per share, with the exclusion of treasury shares, as decided by Eni’s Shareholders’ Meetings in accordance with article 2433-bis, paragraph 5 of the Italian Civil Code; the dividend was paid on October 27, 2005.
Distributable reserves
At December 31, 2005 Eni shareholders’ equity included distributable reserves for approximately euro 36,000 million, a portion of which is subjected to taxation upon distribution. Deferred tax liabilities have been recorded in relation to the reserves expected to be distributed (euro 32 million).
Reconciliation of statutory net profit29 Guarantees, commitments andshareholders’ equity to consolidated net profit and shareholders’ equityrisks
Guarantees
Guarantees were as follows:
(million euro)
Net profitDec. 31, 2007
Shareholders’ equityDec. 31, 2008
2004(euro million)
2005Unsecured guarantees
Dec. 31, 2004Other
guarantees
Dec. 31, 2005TotalUnsecured guarantees
Other
guaranteesTotal
As recorded in Eni SpA’s financial statements (Italian GAAP) 4,684
5,288
29,433
29,656
Treasury shares (3,229
) (4,216
) Difference between the equity value and result of consolidated companies and the equity value and result of consolidated companies as accounted for in Eni SpA financial statements 4,444
2,718
9,470
13,483
Consolidation adjustments: - difference between cost and underlying value of equity (112
) (44
) 2,592
2,558
- elimination of tax adjustments and compliance with accounting policies (2,197
) 1,617
(244
) 313
- elimination of unrealized intercompany profits (235
) (40
) (2,498
) (2,677
) - deferred taxation 612
(313
) (133
) 2
- other adjustments 345
21
149
98
7,541
9,247
35,540
39,217
Minority interest (482
) (459
) (3,166
) (2,349
) As recorded in Consolidated Financial Statements (IFRS) 7,059
8,788
32,374
36,868
Consolidated subsidiaries 6,388
6,388
13,139
13,139
Unconsolidated entities controlled by Eni 150
150
151
151
Joint ventures and associates 5,896
1,099
6,995
6,027
1,075
7,102
Others 12
279
291
8
245
253
5,908
7,916
13,824
6,035
14,610
20,645
24 Guarantees, commitments and risks
Guarantees
GuaranteesOther guarantees issued on behalf of consolidated subsidiaries of euro12,86213,139 million (euro12,6676,388 million at December 31,2004)2007) primarily consisted of: (i) guarantees given to third parties relating to bid bonds and performance bonds for euro 7,004 million (euro 3,244 million at December 31, 2007), of which euro 5,965 million related to the Engineering & Construction segment (euro 2,351 million at December 31, 2007); (ii) guarantees issued on behalf of Eni Gas & Power Belgium SA for euro 2,739 million related to the Share Purchase Agreement with Suez-Tractebel SA for the acquisition of a 57.24% majority stake in Distrigas NV; (iii) VAT recoverable from tax authorities for euro 1,248 million (euro 1,286 million at December 31, 2007); and (iv) insurance risk for euro 257 million reinsured by Eni (euro 259 million at December 31, 2007). At December 31, 2007 the underlying commitment covered by such guarantees was euro 10,202 million (euro 6,050 million at December 31, 2007).Other guarantees issued on behalf of unconsolidated subsidiaries of euro 151 million (euro 150 million at December 31, 2007) consisted of letters of patronage and other guarantees issued to commissioning entities relating to bid bonds and performance bonds for euro 146 million (euro 144 million at December 31, 2007). At December 31, 2008, the
following:underlying commitment covered by such guarantees was euro 79 million (euro 19 million at December 31, 2007).Unsecured guarantees and other guarantees issued on behalf of joint ventures and associates of euro 7,102 million (euro 6,995 million at December 31, 2007) primarily concerned: (i) an unsecured guarantee of euro 6,001 million (euro 5,870 million at December 31, 2007) given by Eni SpA to Treno Alta Velocità - TAV - SpA for the proper and timely completion of a project relating to the Milan-Bologna train link by CEPAV (Consorzio Eni per
F-61
l’Alta Velocità) Uno; consortium members, excluding unconsolidated entities controlled by Eni, gave Eni liability of surety letters and bank guarantees amounting to 10% of their respective portion of the work; (ii) unsecured guarantees, letters of patronage and other guarantees given to banks in relation to loans and lines of credit received for euro 871 million (euro 824 million at December 31, 2007), of which euro 716 million related to a contract released by Snam SpA (now merged into Eni SpA) on behalf of Blue Stream Pipeline Co BV (Eni 50%) to a consortium of international financial institutions (euro 677 million at December 31, 2007); and (iii) unsecured guarantees and other guarantees given to commissioning entities relating to bid bonds and performance bonds for euro 107 million (euro 119 million at December 31, 2007). At December 31, 2008, the underlying commitment covered by such guarantees was euro 983 million (euro 1,562 million at December 31, 2007).
Unsecured and other guarantees given on behalf of third parties of euro 253 million (euro 291 million at December 31, 2007) consisted primarily of: (i) guarantees issued on behalf of Gulf LNG Energy and Gulf LNG Pipeline and on behalf of Angola LNG Supply Service Llc (Eni 13.6%) as security against payment commitments of fees in connection with the re-gasification activity for euro 216 million (euro 204 million at December 31, 2007); and (ii) guarantees issued by Eni SpA to banks and other financial institutions in relation to loans and lines of credit for euro 19 million on behalf of minor investments or companies sold (euro 20 million at December 31, 2007).
At December 31, 2008 the underlying commitment covered by such guarantees was euro 232 million (euro 281 million at December 31, 2007).
Commitments and contingencies
Commitments and contingencies were as follows:
(euro million) Dec. 31,
20042007Dec. 31,
20052008
Commitments 200 205 Risks 1,520 1,660 1,720 1,865
Other commitments of euro 205 million (euro 200 million at December 31, 2007) were essentially related to a memorandum of intent signed with the Basilicata Region, whereby Eni has agreed to invest euro 180 million in the future, also on account of Shell Italia E&P SpA, in connection with Eni’s development plan of oil fields in Val d’Agri (euro 177 million at December 31, 2007).
Risks of euro 1,660 million (euro 1,520 million at December 31, 2007) primarily concerned potential risks associated with the value of assets of third parties under the custody of Eni for euro 1,273 million (euro 1,126 million at December 31, 2007) and contractual assurances given to acquirers of certain investments and businesses of Eni for euro 387 million (euro 376 million at December 31, 2007).
Risk factors
FOREWORD
The main risks that the Company is facing and actively monitoring and managing are the following: (i) the market risk deriving from exposure to fluctuations in interest rates, foreign currency exchange rates and commodity prices; (ii) the credit risk deriving from the possible default of a counterparty; (iii) the liquidity risk deriving from the risk that suitable sources of funding for the Group’s operations may not be available; (iv) the country risk in the upstream business; (v) the operational risk; (vi) the possible evolution of the Italian gas market; and (vii) the specific risks deriving from exploration and production activities.Financial risks are managed in respect of guidelines defined by the parent company, targeting to align and coordinate Group companies’ policies on financial risks.
Market risk
Market risk is the possibility that changes in currency exchange rates, interest rates or commodity prices will adversely affect the value of the Group’s financial assets, liabilities or expected future cash flows. The Company actively manages market risk in accordance with a set of policies and guidelines that provide a centralized model of conducting finance, treasury and risk management operations based on three separate entities: the parent company’s (Eni SpA) finance department, Eni Coordination Center and Banque Eni which is subject to certain bank regulatoryF-62
restrictions preventing the Group’s exposure to concentrations of credit risk. Additionally, in 2007, Eni Trading & Shipping was established and has the mandate to manage and monitor solely commodity derivative contracts. In particular Eni SpA and Eni Coordination Center manage subsidiaries’ financing requirements in and outside of Italy, respectively, covering funding requirements and using available surpluses. All transactions concerning currencies and derivative financial contracts are managed by the parent company as well as the activity of trading certificates according to the European Union Emission Trading Scheme. The commodity risk is managed by each business unit with Eni Trading & Shipping ensuring the negotiation of hedging derivatives. Eni uses derivative financial instruments (derivatives) in order to minimize exposure to market risks related to changes in exchange rates and interest rates and to manage exposure to commodity prices fluctuations. Eni does not enter into derivative transactions on a speculative basis. The framework defined by Eni’s policies and guidelines prescribes that measurement and control of market risk be performed on the basis of maximum tolerable levels of risk exposure defined in accordance with value-at-risk techniques. These techniques make a statistical assessment of the market risk on the Group’s activity, i.e., potential gain or loss in fair values, due to changes in market conditions taking account of the correlation existing among changes in fair value of existing instruments. Eni’s finance departments define maximum tolerable levels of risk exposure to changes in interest rates and foreign currency exchange rates, pooling Group companies risk positions. Eni’s calculation and measurement techniques for interest rate and foreign currency exchange rate risks are in accordance with established banking standards, as established by the Basel Committee for bank activities surveillance. Tolerable levels of risk are based on a conservative approach, considering the industrial nature of the company. Eni’s guidelines prescribe that Eni’s Group companies minimize such kinds of market risks. With regard to the commodity risk, Eni’s policies and guidelines define rules to manage this risk aiming at the optimization of core activities and the pursuing of preset targets of industrial margins. The maximum tolerable level of risk exposure is pre-defined in terms of value at risk in connection with trading and commercial activities, while the strategic risk exposure to commodity prices fluctuations – i.e. the impact on the Group’s business results deriving from changes in commodity prices – is monitored in terms of value-at risk, albeit not hedged in a systematic way. Accordingly, Eni evaluates the opportunity to mitigate its commodity risk exposure by entering into hedging transactions in view of certain acquisition deals of oil and gas reserves as part of the Group’s strategy to achieve its growth targets or ordinary asset portfolio management. The Group controls commodity risk with a maximum value-at-risk limit awarded to each business unit. Hedging needs from business units are pooled by Eni Trading & Shipping which also manages its own risk exposure. The three different market risks, whose management and control have been summarized above, are described below.
Exchange rate risk
Exchange rate risk derives from the fact that Eni’s operations are conducted in currencies other than the euro (mainly in the U.S. dollar). Revenues and expenses denominated in foreign currencies may be significantly affected by exchange rates fluctuations due to conversion differences on single transaction arising from the time lag existing between execution and definition of relevant contractual terms (economic risk) and conversion of foreign currency-denominated trade and financing payables and receivables (transactional risk). Exchange rate fluctuations affect Group’s reported results and net equity as financial statements of subsidiaries denominated in currencies other than the euro are translated from their functional currency into euro (translation risk). Generally, an appreciation of the U.S. dollar versus the euro has a positive impact on Eni’s results of operations, and vice versa. Eni’s foreign exchange risk management policy is to minimize economic and transactional exposures arising from foreign currency movements. Eni does not undertake any hedging activity for risks deriving from translation of foreign currency denominated profits or assets and liabilities of subsidiaries which prepare financial statements in a currency other than the euro, except for single transactions to be evaluated on a case-by-case basis. Effective management of exchange rate risk is performed within Eni’s central finance departments which match opposite positions within Group companies, hedging the Group net exposure through the use of certain derivatives, such as currency swaps, forwards and options. Such derivatives are evaluated at fair value on the basis of market prices provided by specialized sources. Changes in fair value of those derivatives are normally recognized through the profit and loss account as they do not meet the formal criteria to be recognized as hedges in accordance with IAS 39. The VAR techniques are based on variance/covariance simulation models and are used to monitor the risk exposure arising from possible future changes in market values over a 24-hour period within a 99% confidence level and a 20-day holding period.
Interest rate risk
Changes in interest rates affect the market value of financial assets and liabilities of the company and the level of finance charges. Eni’s interest rate risk management policy is to minimize risk with the aim to achieve financial structure objectives defined and approved in the management’s finance plans. Borrowing requirements of the Group’s companies are pooled by the Group’s central finance department in order to manage net positions and the funding of portfolio developments consistently with management’s plans while maintaining a level of risk exposure within prescribed limits. Eni enters into interest rate derivative transactions, in particular interest rate swaps, to effectively manage the balance between fixed and floating rate debt.F-63
Such derivatives are evaluated at fair value on the basis of market prices provided from specialized sources. Changes in fair value of those derivatives are normally recognized through the profit and loss account as they do not meet the formal criteria to be accounted for under the hedge accounting method in accordance with IAS 39. Value at risk deriving from interest rate exposure is measured daily on the basis of a variance/covariance model, with a 99% confidence level and a 20-day holding period.
Commodity risk
Eni’s results of operations are affected by changes in the prices of commodities. A decrease in oil and gas prices generally has a negative impact on Eni’s results of operations and vice-versa. Eni manages exposure to commodity price risk arising in normal trading and commercial activities in view of achieving stable margins. In order to accomplish this, Eni uses derivatives traded on the organized markets of ICE and NyMEx (futures) and derivatives traded over the counter (swaps, forward, contracts for differences and options) with the underlying commodities being crude oil, refined products or electricity. Such derivatives are evaluated at fair value on the basis of market prices provided from specialized sources or, absent market prices, on the basis of estimates provided by brokers or suitable evaluation techniques. Changes in fair value of those derivatives are normally recognized through the profit and loss account as they do not meet the formal criteria to be recognized as hedges in accordance with IAS 39. Value at risk deriving from commodity exposure is measured daily on the basis of a historical simulation technique, with a 95% confidence level and a one-day holding period. The following table shows amounts in terms of value at risk, recorded in the first half of 2008 (compared with full year 2007) relating to interest rate and exchange rate risks in the first section, and commodity risk in the second section.(Value at risk - parametric method variance/covariance; holding period: 20 days; confidence level: 99%)
2007
2008
( million euro)euro million)
Unsecured guaranteesHigh
Other guaranteesLow
Secured guaranteesAvg
TotalAt year end
Unsecured guaranteesHigh
Other guaranteesLow
Secured guaranteesAvg
TotalAt year end
Consolidated companies 3,228
3,228
5,839
5,839
Unconsolidated subsidiaries 7
532
539
4
203
207
Affiliated companies and Joint Ventures 4,901
1,922
40
6,863
4,900
1,772
40
6,712
Others 70
169
239
64
40
104
4,978
5,851
40
10,869
4,968
7,854
40
12,862
Interest rate 7.36
0.47
1.39
4.35
12.31
0.73
4.17
6.54
Exchange rate 1.25
0.03
0.21
0.43
1.48
0.09
0.48
0.47
Guarantees given on behalf of consolidated companies of euro 5,839 million (euro 5,026 million(Value atDecember 31, 2004) consist primarily of: (i) guarantees given to third parties relating to bid bonds and performance bonds for euro 3,057 million (euro 2,929 million at December 31, 2004), of which euro 2,397 million related to the Oilfield Services Construction and Engineering segment (euro 2,296 million at December 31, 2004); (ii) VAT recoverable from tax authorities for euro 1,386 million (euro 1,156 million at December 31, 2004); and (iii) insuranceriskfor euro 298 million reinsured by Eni (euro 396 million at December 31, 2004). At December 31, 2005 the underlying commitment covered by such guarantees was euro 5,491 million (euro 4,818 million at December 31, 2004).
Unsecured guarantees, other guarantees and secured guarantees given on behalf of unconsolidated subsidiaries of euro 207 million (euro 539 million at December 31, 2004) consisted of unsecured guarantees and letters of patronage given to commissioning entities relating to bid bonds and performance bonds for euro 165 million (euro 144 million at December 31, 2004). The decrease of euro 332 million essentially concerned the reclassification to consolidated subsidiaries of the guarantees given on behalf of Eni Middle East BV (euro 367 million at December 31, 2004). At December 31, 2005, the underlying commitment covered by such guarantees was euro 145 million (euro 467 million at December 31, 2004).
Unsecured guarantees, other guarantees and secured guarantees given on behalf of joint ventures and affiliated companies of euro 6,712 million (euro 6,863 million at December 31, 2004) primarily concerned: (i) a guarantee of euro 4,894 million (the same amount as of December 31, 2004) given by Eni SpA to Treno Alta Velocità-TAV - SpA for the proper and timely completion of a project relating to the Milano-Bologna train link by the Consorzio Eni per l’Alta Velocità - Cepav Uno (Eni 50.4%historic simulation method; holding period: 1 day; confidence level: 95%); consortium members, excluding unconsolidated subsidiaries, gave Eni liability of surety letters and bank guarantees amounting to 10% of their respective portion of the work; (ii) unsecured guarantees, letters of patronage and other given to banks in relation to loans and lines of credit received for euro 1,360 million (euro 1,633 million at December 31, 2004), of which euro 844 million related to a contract released by Snam SpA (now merged into Eni SpA) on behalf of Blue Stream Pipeline Co BV (Eni 50%) to a consortium of financing institutions (euro 731 million at December 31, 2004). The decrease of euro 273 million primarily concerned the extinguishing of a guarantee of euro 250 million given on behalf of EnBW - Eni Verwaltungsgesellschaft mbH (Eni 50%) and Albacom SpA (euro 88 million), partially offset by the increase of the guarantee given on behalf of Blue Stream Pipeline Co BV (euro 113 million); (iii) unsecured guarantees, letters of patronage and other given to commissioning entities relating to bid bonds and performance bonds for euro 274 million (euro 118 million at December 31, 2004). The increase of euro 156 million essentially regarded guarantees on behalf of the Oilfield Services Construction and Engineering segment; (iv) performance guarantees of euro 62 million given on behalf of Unión Fenosa SA and Unión Fenosa Gas SA (Eni 50%) in relation to contractual commitments related to the results of operations of subsidiaries of Unión Fenosa Gas SA (euro 111 million at December 31, 2004); and (v) secured guarantees of euro 40 million (the same amount as of December 31, 2004), relate to mortgages, liens and privileges granted to banks in connection with loans. At December 31, 2005, the underlying commitment covered by such guarantees was euro 2,938 million (euro 3,500 million at December 31, 2004).
Other guarantees given on behalf of third parties of euro 104 million (euro 239 million at December 31, 2004) consist primarily of guarantees given by Eni SpA to banks and other financing institutions in relation to loans and lines of credit for euro 92 million on behalf of minor investments or companies sold (euro 160 million at December 31, 2004). At December 31, 2005 the underlying commitment covered by such guarantees was euro 75 million (euro 103 million at December 31, 2004).
Commitments and contingencies
Commitments and contingencies euro 1,655 million (euro 1,620 million at December 31, 2004) consisted of the following:
2007
2008
( million euro)U.S. $ million)
Dec. 31, 2004High
Dec. 31, 2005LowAvg
At year end
High
Low
Avg
At year end
Commitments Purchase of assets 200
219
Sale of assets 124
Other 319
220
643
439
Risks 977
1,216
1,620
1,655
Obligations for purchases and sales of assets of euro 219 million (euro 324 million at December 31, 2004) concern securities for euro 116 million (euro 183 million at December 31, 2004) and investments for euro 103 million (euro 141 million at December 31, 2004). Obligations relating to marketable securities concern the placement on the market of securities managed by Sofid Sim SpA. This company sold Italian Government bonds to investors, primarily employees, and simultaneously entered into interest rate swaps with such investors wherein it received the rate of interest on such Italian Government bonds and paid a floating rate of interest linked to Euribor. Such investors could sell their securities back to Sofid Sim SpA at any time at par value plus related interest with the simultaneous cancellation of the related swaps. Against the commitment related to interest rate swaps Sofid Sim SpA entered into derivatives for which Sofid Sim SpA receives a variable rate more profitable than the one renown by the shareholders. The operation ended on January 1, 2006 following the expiry of the government bonds. The decrease in obligations related to investments of euro 38 million primarily concerns the exercise by Erg SpA of a call option for the purchase of a 28% shares of Erg Raffinerie Mediterranee SpA (euro 100 million) and the expiry of obligations for purchases and sales of the shares of Nuovo Pignone SpA following the sale of the investment (euro 31 million); such decrease was partially offset by the obligation assumed by Eni SpA related to the acquisition from ESPI - Ente Siciliano per la Promozione Industriale (in liquidation) of 50% of the capital share of Siciliana Gas SpA and 1 share of Siciliana Gas Vendite SpA (euro 98 million).
Other commitments of euro 220 million (euro 319 million at December 31, 2004) are essentially related to a memorandum of intent signed with the Basilicata Region, whereby Eni has agreed to invest, also on account of Shell Italia E&P SpA, euro 193 million in the future in connection with Eni’s development plan of oil fields in Val d’Agri (euro 206 million at December 31, 2004). The agreements between Syndial SpA and various government entities, employee and trade groups whereby Syndial SpA, in order to further develop the chemical segment and protect the environment with respect to the Porto Marghera plant of euro 90 million at December 31, 2004, expired following the subscription of a new agreement that determined a specific provision.
Risks of euro 1,216 million (euro 977 million at December 31, 2004) primarily concern potential risks associated with the value of assets of third parties under the custody of Eni for euro 794 million (euro 551 million at December 31, 2004) and contractual assurances given to acquirors of certain investments and businesses of Eni for euro 402 million (euro 406 million at December 31, 2004).
Management of risks
Foreword
The main risks identified and managed by Eni were the following:
(i)market risks deriving from the exposure
Area oil, products 44.59
4.39
20.17
12.68
46.48
3.44
19.88
5.43
Area Gas & Power (*) 54.11
20.12
34.56
25.57
67.04
24.38
43.53
32.07
(*) Amounts relating to the fluctuationsGas & Power business also include results ofinterest rates,Distrigas NV for the months ofexchange rates betweenNovember and December 2008 based on theeuro and the U.S. dollar and the other currencies used by the Company, as wells as the volatilityclosing date ofcommodity prices;(ii)the credit risk deriving from the possible default of a counterparty;(iii)the liquidity risk deriving from the lack of financial resources to face short time commitments;(iv)the operation risk deriving from the occurrence of accidents, malfunctioning, failures with damage to persons and the environment affecting operating and financial results; and(v)country risk in oil & gas activities.acquisition.
Market risk
Market risks include exchange rate risk, interest rate risk and commodity risk. Their management follows a set of guidelines and procedures that concentrate the treasury function in two captive finance companies operating in the Italian and international financial markets.
In particular, the financial company operating on the domestic market (Enifin) manages all the transactions concerning currency exchange and derivatives. The risk of commodity prices is managed by each business unit while Enifin manages the negotiation of hedging derivatives. In order to minimize market risk related to changes in interest rates, exchange rates and commodity prices, Eni enters into financial and commodity hedging contracts for the purpose of reducing its exposure to market risk. Eni does not enter into derivative transactions on a speculative basis.
Eni’s Board of Directors has defined a policy that requires the Treasury Department of Eni SpA to determine the maximum level of foreign exchange rate and interest rate risks that can be assumed by Eni’s finance companies. Such policy also defines the eligible counterparties in derivative transactions. Eni’s Treasury Department is responsible for monitoring compliance with Eni’s policy, as well as the correlation between the indicators adopted for measuring of the tolerable risk level, the portfolio of financial instruments and market conditions. Eni’s operating subsidiaries are required to reduce foreign exchange rate risk to a minimum level by coordinating their operations with such finance companies.
As far as interest rate and foreign exchange rate risks are concerned, the calculation and measurement techniques followed by Eni’s finance companies are in accordance with established banking standards (such standards are established by the Basel Committee). However, the tolerable level of risk adopted by such companies is more conservative than that defined by the Basel Committee.
Eni’s guidelines for the management of commodity risk contain maximum limits to the price risk deriving from trading activities. Directions in this area are entrusted to a commodity risk assessment team, while the treasury department controls the respect of said limits and the development and updating of methodologies followed.
Exchange rate risk
Exchange rate risk derives from the fact that Eni’s operations are conducted in currencies other than the euro (in particular the U.S. dollar) and by the time lag existing between the recording of costs and revenues denominated in currencies other than the functional currency and their realization (transaction exchange rate risk). An appreciation of the U.S. dollar versus the euro generally has a positive impact on Eni’s results of operations.
Interest rate risk
Variations in interest rates affect the market value of assets and liabilities of the company and its net borrowings.
Commodity risk
Eni’s results of operations are affected by changes in the prices of products and services sold. A decrease in oil prices generally has a negative impact on Eni’s results of operations and vice versa.Credit risk
Credit risk is the potential exposure of the Group tolosslosses inthe event of non-performance by a counterparty.case counterparties fail to perform or pay amounts due. The Group manages differently credit risk depending on whether credit risk arises from exposure to financial counterparties or to customers relating to outstanding receivables. Individual business units are responsible for managing credit risk arisingfromin theGroup’snormalcommercial operationscourse of the business. The Group has established formal credit systems and processes to ensure that before trading with a new counterpart can start, its creditworthiness iscontrolledassessed. Also credit litigation and receivable collection activities are assessed. The monitoring activity of credit risk exposure is performed at the Group level according to set guidelines and measurement techniques that establish counterparty limits and systems to monitor exposure against limits and report regularly on those exposures. Specifically, credit risk exposure to multi-business clients and exposures higher than the limit set at euro 4 million are closely monitored. Monitoring activities do not include retail clients and public administrations. The assessment methodology assigns a score to individual clients based on publicly available financial data and capital, profitability and liquidity ratios. Based on those scores, an internal credit rating is assigned to each counterparty that is accordingly allocated to its proper risk category. The Group risk categories are comparable to those prepared byindividual operating units within Group-approved guidelines. Eni’s financial companies follow guidelines approved by Eni’s treasury departmentthe main rating agencies on thechoicemarketplace. The Group’s internal ratings are also benchmarked against ratings prepared by a specialized external source.With regard to risk arising from financial counterparties, Eni has established guidelines prior to entering into cash management and derivative contracts to assess the counterparty’s financial soundness and rating in view of
highly credit-rated counterparties in their useoptimizing the risk profile of financial activities while pursuing operational targets. Maximum limits of risk exposure are set in terms of maximum amounts of credit exposures for categories of counterparties as defined by theF-64
Company’s Board of Directors taking into accounts the credit ratings provided by the primary credit rating agencies on the marketplace. Credit risk arising from financial counterparties is managed by the Group central finance departments, including Eni’s subsidiary Eni Trading & Shipping which specifically engages in commodity derivatives transactions. Those are the sole Group entities entitled to be party to financial transactions due to the Group centralized finance model. Eligible financial counterparties are closely monitored to check exposures against limits assigned to each counterparty on a daily basis. Exceptional market conditions have forced the Group to adopt contingency plans and
commodityunder certain circumstances to suspend eligibility to be a Group financial counterparty. Actions implemented also have been intended to limit concentrations of credit risk by maximizing counterparty diversification and turnover. Counterparties have been also selected on more stringent criteria particularly in transactions on derivatives instrumentsincluding derivatives.and with maturity longer than a three-month period. Eni has not experienced material non-performance by any counterparty. As of December 31,20052007 and 2008, Eni had no significant concentrations of credit risk.Liquidity risk
Liquidity risk is the risk that suitable sources of funding for theGroup’s business activitiesGroup may not beavailable.available, or the Group is unable to sell its assets on the market place as to be unable to meet short-term finance requirements and to settle obligations. Such a situation would negatively impact the Group results as it would result in the Company incurring higher borrowing expenses to meet its obligations or under the worst of conditions the inability of the Company to continue as a going concern. As part of its financial planning process, Eni manages the liquidity risk by targeting such a capital structure as to allow the Company to maintain a level of liquidity adequate to the Group’s needs optimizing the opportunity cost of maintaining liquidity reserves also achieving an efficient balance in terms of maturity and composition of finance debt. The Group capital structure is set according to the Company’s industrial targets and within the limits established by the Company’s Board of Directors who are responsible for prescribing the maximum ratio of debt to total equity and minimum ratio of medium and long-term debt to total debt as well as fixed rate medium and long-term debt to total medium and long-term debt. In spite of ongoing tough credit market conditions resulting in higher spreads to borrowers, the Company has succeeded in maintaining access to a wide range of funding at competitive rates through the capital markets and banks. The actions implemented as part of Eni’s financial planning have enabled the Group to maintain access to the credit market particularly via the issue of commercial paper also targeting to increase the flexibility of funding facilities. The above mentioned actions aimed at ensuring availability of suitable sources of funding to fulfill short-term commitments and due obligations also preserving the necessary financial flexibility to support the Group’s development plans. In doing so, the Group has pursued an efficient balance of finance debt in terms of maturity and composition leveraging on the structure of its lines of credit particularly the committed ones.At present, the Group believes it has access to sufficient funding and has also both committed and uncommitted borrowing facilities to meet currently foreseeable borrowing requirements.
OperationAs of December 31, 2008, Eni maintained short-term committed and uncommitted unused borrowing facilities of euro 11,099 million, of which euro 3,313 million were committed, and long-term committed unused borrowing facilities of euro 1,850 million.These facilities were under interest rates that reflected market conditions. Fees charged for unused facilities were not significant. Eni has in place a program for the issuance of Euro Medium Term Notes up to euro 10 billion, of which euro 6,391 million were drawn as of the balance sheet date.
The Group has debt ratings of AA- and A-1+ respectively for the long and short-term debt assigned by Standard & Poor’s and Aa2 and P-1 assigned by Moody’s; the outlook is stable for both.
The tables below summarize the Group main contractual obligations for finance debt repayments, including expected payments for interest charges, and trade and other payables maturities.
Finance debt
Maturity year
(euro million) 2009
2010
2011
2012
2013
2014 and thereafter
Total
Non current debt 549
3,630
797
2,687
1,981
4,834
14,478
Current financial liabilities 6,359
-
-
-
-
-
6,359
6,908
3,630
797
2,687
1,981
4,834
20,837
Interest on finance debt 502
469
412
383
336
791
2,893
F-65
Trade and other payables
Maturity year
(euro million) 2009
2010-2013
2014 and thereafter
Total
Trade payables 12,590
-
-
12,590
Advances, other payables 7,925
28
27
7,980
20,515
28
27
20,570
In addition to finance debt and trade payables presented in the financial statements, the Group has in place a number of contractual obligations arising in the normal course of the business. To meet these commitments, the Group will have to make payments to third parties. The Company’s main obligations are certain arrangements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. Such arrangements include non-cancelable, long-term contractual obligations to secure access to supply and transport of natural gas, which include take-or-pay clauses whereby the Company obligations consist of off-taking minimum quantities of product or service or paying the corresponding cash amount that entitles the Company to off-take the product in future years. Future obligations in connection with these contracts were calculated by applying the forecasted prices of energy or services included in the four-year business plan approved by the Company’s Board of Directors and on the basis of the long-term market scenarios used by Eni for planning purposes to minimum take and minimum ship quantities.
The table below summarizes the Group principal contractual obligations as of the balance sheet date, shown on an undiscounted basis.
Expected payments by period under contractual obligations and commercial commitments
Maturity year
(euro million) 2009
2010
2011
2012
2013
2014 and thereafter
Total
Operating lease obligations (1) 618
1,025
697
468
395
1,084
4,287
Decommissioning liabilities (2) 269
35
61
18
256
8,830
9,469
Environmental liabilities 396
421
284
223
221
443
1,988
Purchase obligations (3) 17,938
13,777
14,326
14,405
14,112
185,415
259,973
Gas - Natural gas to be purchased in connection with take-or-pay contracts 15,694
13,041
13,574
13,610
13,343
179,067
248,329
- Natural gas to be transported in connection with ship-or-pay contracts 539
537
545
549
528
3,151
5,849
Other take-or-pay and ship-or-pay obligations 139
135
126
111
106
838
1,455
Other purchase obligations (4) 1,566
64
81
135
135
2,359
4,340
Other obligations 8
5
5
5
5
152
180
of which: - Memorandum of intent relating Val d’Agri 8
5
5
5
5
152
180
19,229
15,263
15,373
15,119
14,989
195,924
275,897
(1) Operating leases primarily regarded assets for drilling activities, time charter and long-term rentals of vessels, lands, service stations and office buildings. Such leases did not include renewal options. There are no significant restrictions provided by these operating leases which limit the ability of the Company to pay dividend, use assets or to take on new borrowings. (2) Represents the estimated future costs for the decommissioning of oil and natural gas production facilities at the end of the producing lives of fields, well-plugging, abandonment and site restoration. (3) Represents any agreement to purchase goods or services that is enforceable and legally binding and that specifies all significant terms. (4) Mainly refers to arrangements to purchase capacity entitlements at certain re-gasification facilities in the U.S. F-66
The table below summarizes Eni’s capital expenditure commitments for property, plant and equipment and capital projects at December 31, 2008. Capital expenditures are considered to be committed when the project has received the appropriate level of internal management approval. Such costs are included in the amounts shown.
Maturity year
(euro million) 2009
2010
2011
2012
2013 and subsequent years
Total
Committed on major projects 4,938
3,831
2,697
1,837
9,856
23,159
Other committed projects 5,147
4,342
3,186
2,389
9,846
24,910
10,085
8,173
5,883
4,226
19,702
48,069
Country risk
Substantial portions of Eni’s hydrocarbons reserves are located in countries outside the EU and North America, certain of which may be politically or economically less stable than EU or North American. At December 31, 2007, approximately 70% of Eni’s proved hydrocarbons reserves were located in such countries. Similarly, a substantial portion of Eni’s natural gas supplies comes from countries outside the EU and North America. In 2007, approximately 60% of Eni’s domestic supply of natural gas came from such countries. Developments in the political framework, economic crisis, social unrest can compromise temporarily or permanently Eni’s ability to operate or to economically operate in such countries, and to have access to oil and gas reserves. Further risks related to the activity undertaken in these countries, are represented by: (i) lack of well established and reliable legal systems and uncertainties surrounding enforcement of contractual rights; (ii) unfavorable developments in laws and regulations leading to expropriation of Eni’s titles and mineral assets, changes in unilateral contractual clauses reducing value of Eni’s assets; (iii) restrictions on exploration, production, imports and exports; (iv) tax or royalty increases; and (v) civil and social unrest leading to sabotages, acts of violence and incidents. While the occurrence of these events is unpredictable, it is possible that they can have a material adverse impact on Eni’s financial condition and results of operations. Eni periodically monitors political, social and economic risks of approximately 60 countries where it has invested, or, with regard to upstream projects evaluation, where Eni is planning to invest in order to assess returns of single projects based also on the evaluation of each country’s risk profile. Country risk is mitigated in accordance with guidelines on risk management defined in the procedure "Project risk assessment and management". In the most recent years, unfavorable developments in the regulatory framework, mainly regarding tax issues, have been implemented or announced also in EU countries and in North America.Operational risk
Eni’s business activitiespresent industrialconducted in and outside of Italy are subject to a broad range of laws and regulations, including specific rules concerning oil and gas activities currently in force in countries in which it operates. In particular, those laws and regulations require the acquisition of a license before exploratory drilling may commence and compliance with health, safety and environment standards. Environmental laws impose restrictions on the types, quantities and concentration of various substances that can be released into the environment and on discharges to surface and subsurface water. In particular Eni is required to follow strict operating practices and standards to protect biodiversity when exploring for, drilling and producing oil and gas in certain ecologically sensitive locations (protected areas). Breach of environmental, health and safety laws exposes employees to criminal and civil liability and in the case of violation of certain rules regarding safety on the workplace also companies can be liable as provided for by a general EU rule on businesses liability due to negligent or willful conduct on part of their employees as adopted in Italy with Law Decree No. 231/2001.Environmental, health and safety laws and regulations have a substantial impact on Eni’s operations and expenses and liabilities that Eni may incur in relation to compliance with environmental, health and safety laws and regulations are expected to remain material to the group’s results of operations or financial position in future years. Recently enacted regulation of safety and health of the workplace in Italy will impose a new array of obligations to the Company operations, particularly regarding contractors. New regulation prescribe that a company adopts certified operational and organizational systems whereby the Company can discharge possible liabilities due to a violation of health and security standards on condition that adopted operational systems and processes worked properly and were effective.
Eni has adopted guidelines for assessing and managing health, safety and environmental (HSE) risks, with the objective of protecting Eni’s employees, the populations involved in its activity, contractors and
are therefore subject to extensive government regulations concerning environmental protectionclients, andindustrial securitythe environment and being inmost countries. For example, in Europe, Eni operates industrial plants such as refineries and petrochemical complexes that meet the criteria of the European Union Seveso II directive for classification as high risk sites.
The broad scope of Eni’s activities involves a wide range of operational risks such as those of explosion, fire or leakage of toxic products, production of non biodegradable waste.
All these events could possibly damage or even destroy wells as well as related equipment and other property, cause injury or even death to persons or cause environmental damage. In addition, since exploration and production activities may take place on sites that are ecologically sensitive (tropical forest, marine environment, etc.), each site requires a specific approach to minimize the impact on the related ecosystem, biodiversity and human health.
Eni adopted the most stringent standards for the evaluation and management of industrial and environmental risks, complyingcompliance with local and international rules andstandards. Businessregulations. Eni’s guidelines prescribe the adoption of international best practices in setting internal principles, standards and solutions. The ongoing process for identifying, evaluating and managing HSE operations in each phase of the business activity and is performed through the adoption of procedures and effective pollution management systems tailored on theF-67
peculiarities of each business and industrial site and on steady enhancement of plants and process. Additionally, coding activities and procedures on operating phases allow reduce the human component in the plant risk management. Operating emergencies that may have an adverse impact on the assets, people and the environment are managed by the business units
evaluatefor each site. These units manage the HSE risk throughspecific proceduresa systematic way that involves having emergency response plans in place with a number of corrective actions to be taken that minimize damage in therelated industrialevent of an incident. In the case of major crisis, Divisions/Entities are assisted by the Eni Unit of Crises to deal with the emergency through a team which has the necessary training and skills to coordinate in a timely and efficient manner resources and facilities.The integrated management system of health, safety and environmental
risks in addition to taking accountmatters is supported by theregulatory requirementsadoption ofthe countries where these activities are located.
Since 2003, Eni has introduced a modelEni’s Model ofmanagement system, a general procedure to be appliedHSE operations in allits operating sites,the Divisions and companies of Eni Group. This is a procedure based on an annual cycle of planning, implementation, control, review of results and definition of new objectives. The model is directed towards the prevention of risks, the systematic monitoring and control of HSE performance, in a continuous improvement cycle, also subjectalsoto audits by internal and independent experts.At December 31, 2005 six system audits had been performedMajor refining andfourpetrochemical facilities of Eni areplannedcertified to international environmental standards, such as ISO14001, OHSAS 18001 and EMAS. Eni provides a program of specific training and development for2006.HSE staff in order to:
(i) promote the execution of behaviors consistent with guidelines;
(ii) drive people’s learning growth process by developing professionalism, management and corporate culture;
(iii) support management knowledge and control of HSE risks.
Any environmental emergencyPossible evolution of the Italian gas market
Legislative Decree No. 164/2000 opened the Italian natural gas market to competition, impacting on Eni’s activities, as the company ismanagedengaged in all the phases of the natural gas chain. The opening to competition was achieved through the enactment of certain antitrust thresholds on volumes input into the national transport network and on volumes sold to final customers. These enabled new competitors to enter the Italian gas market, resulting in declining selling margins on gas. Other material aspects regarding the Italian gas sector regulation are the regulated access to natural gas infrastructure (transport backbones, storage fields, distribution networks and LNG terminals), the Code adopted bybusiness units locallythe Authority for Electricity and Gas on the issue of unbundling which forbids a controlling entity from interfering in the decision-making process of its subsidiaries running gas transport and distribution infrastructures and the circumstance that the Authority for Electricity and Gas is entrusted withtheir own organization under preset reaction plans to foreseeable events aimed at limiting damagecertain powers in the matters of natural gas pricing andat activating adequate responses.
Eni has two emergency rooms (at Milan and Rome) provided with real time monitoring systemsin establishing tariffs for thecollectionuse ofdata on georeferenced maps for all Eni sites and logistics worldwide. In addition to its own emergency teams, Eni entered agreements with international agencies in order to maximize its ability to react in all its operating sites.
At year end 2005 Eni employed over 2,000 full time equivalent employees in HSE activities, prevention of environmental risk, safety and health.
Country risk
Substantial portions of Eni’s hydrocarbon reserves are located in countries outside the EU and North America, certain of which may be politically or economically less stable than EU or North American countries.
At December 31, 2005, approximately 73% of Eni’s proved hydrocarbon reserves were located in such countries. Similarly, a substantial portion of Eni’snatural gassupply comes from countries outsideinfrastructures. Particularly, theEUAuthority for Electricity andNorth America. In 2005, approximately 60% of Eni’s domesticGas holds a general surveillance power on pricing in the natural gas market in Italy and the power to establish selling tariffs for supply of natural gascame from such countries. Negative developmentsto residential and commercial users consuming less than 200,000 CM/y (qualified as non eligible customers at December 31, 2002 as defined by Legislative Decree No. 164/2000) taking into account the public goal of containing the inflationary pressure due to rising energy costs. Accordingly, decisions of the Authority on these matters may limit the ability of Eni to pass an increase in theeconomiccost of fuels onto final consumers of natural gas. As a matter of fact, following a complex andpolitical frameworklengthy administrative procedure started in 2004 and finalized in March 2007 with Resolution No. 79/2007, the Authority finally established a new indexation mechanism for updating the raw material cost component in supplies to residential and commercial users consuming less than 200,000 CM/y, establishing, among other things: (i) that an increase in the international price ofthese countries can compromise temporarily or permanently Eni’sBrent crude oil is only partially transferred to residential and commercial users of natural gas in case international prices of Brent crude oil exceed the 35 dollars per barrel threshold; and (ii) that Italian natural gas importers – including Eni – must renegotiate wholesale supply contracts in order to take account of this new indexation mechanism.Also certain provisions of law may limit the Company ability to
operate economicallyset commercial margins. Specifically, Law Decree No. 112 enacted in June 2008 forbids energy companies like Eni to pass to prices to final customers higher income taxes incurred in connection with a supplemental tax rate of 5.5 percentage points introduced by the same decree on energy companies with a yearly turnover in excess of euro 25 million. The Authority for Electricity and Gas is in charge of monitoring compliance with the rule. The Authority has subsequently established with a set of deliberations that energy companies have to adopt effective operational and monitoring systems certified by the Company CEO in order to prevent unlawful increases of final prices of gas.In order to meet the medium and long-term demand for natural gas, in particular in the Italian market, Eni entered into long-term purchase contracts with producing countries. These contracts which contain take-or-pay clauses will ensure total supply volumes of approximately 62.4 BCM/y of natural gas to Eni by 2010 (excluding take-or-pay volumes coming from Distrigas acquisition which will destined to supply the Belgian market). Despite the fact that an increasing portion of natural gas volumes purchased under said contracts is planned to be marketed outside Italy, management believes that in the long-term unfavorable trends in the Italian demand and supply for natural gas, also taking into account the start-up of new import capacity to the Italian market by Eni and third parties
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as well as implementation of all publicly announced plans for the construction of new import infrastructures (backbone upgrading and new LNG terminals), and developments within the Italian regulatory framework, represent risk factors for the ability of the Company to meet its contractual obligations in connection with its take-or-pay supply contracts. Particularly, should natural gas demand in Italy grow at a lower pace than management expectations, also in view of the expected build-up of natural gas supplies to the Italian market, the Company could face a further increase in competitive pressure on the Italian gas market resulting in a negative impact on its selling margins, taking account of Eni’s gas availability under take-or-pay supply contracts and risks in executing its expansion plans to grow sales volumes in European markets.
Specific risks associated with the exploration and production of oil and natural gas
The exploration and production of oil and natural gas requires high levels of capital expenditure and entails particular economic risks. It is subject to natural hazards and other uncertainties including those relating to the physical characteristics of oil or natural gas fields. Exploratory activity involves numerous risks including the risk of dry holes or failure to find commercial quantities of hydrocarbons. Developing and marketing hydrocarbons reserves typically requires several years after a discovery is made. This is because a development project involves an array of complex and lengthy activities, including appraising a discovery in order to evaluate its commerciality, sanctioning a development project and building and commissioning relating facilities.As a consequence, rates of return of such long lead-time projects are exposed to the volatility of oil and gas prices and the risk of an increase in developing and lifting costs, resulting in lower rates of return. This set of circumstances is particularly important to those projects intended to develop reserves located in deep water and harsh environments, where the majority of Eni’s planned and ongoing projects is located.
Managing sources of funds
Eni management makes use of the leverage as a financial measure to assess the soundness and efficiency of the Group balance sheet in terms of optimal mix between net borrowings and net equity, and tohave access to said reserves.
Eni monitors constantly the political, social and economic riskcarry out benchmark analysis with industry standards. Leverage is a measure of theapproximately 100 countries where it invested or intendscompany’s level of indebtedness, calculated as the ratio between net borrowings and shareholders’ equity, including minority interests. In the medium-term, management plans toinvest with special attentiontarget a level of leverage up to 0.4 which is intended to provide an efficient capital structure and theevaluationappropriate level ofupstream investments. Country risks are mitigated by meansfinancial flexibility.F-69
Other information about financial instruments
The carrying amount ofappropriate guidelinesfinancial instruments and relevant economic effect forrisk management that Eni defined in its procedure for project risk assessment and management.the year 2008 consisted of the following:
Finance income (expense) recognized in
(euro million) Carrying amount
Profit and loss account
Equity
Held-for-trading financial instruments Non-hedging derivatives (a) (374
) (558
) Held-to-maturity financial instruments Securities 50
2
3
Available-for-sale financial instruments Securities (a) 495
19
Receivables and payables and other assets/liabilities valued at amortized cost Trade and receivables and other (b) 22,446
(254
) Financing receivables (a) 1,908
117
Trade payables and other (c) 20,570
(53
) Financing payables (a) 20,837
(607
) Assets at fair value through profit or loss (fair value option) Investments (a) 2,741
241
Net liabilities for hedging derivatives (d) 280
1,012
964
(a) Gains or losses were recognized in the profit and loss account within "Finance income (expense)". (b) In the profit and loss account, impairments and losses on receivables were recognized within "Purchase, services and other" for euro 385 million whilst negative exchange differences arising from accounts denominated in foreign currency and translated into euro at year-end were recognized within "Finance income (expense)" for euro 100 million. (c) Positive exchange differences arising from accounts denominated in foreign currency and translated into euro at year-end were recognized in the profit and loss account within "Finance income (expense)". (d) Gains or losses were recognized in the profit and loss account within "Net sales from operations" and "Purchase, services and other" for euro 1,005 million within "Finance income (expense)" for euro 7 million (time value component).
Legal
proceedingsProceedingsEni is a party to a number of civil actions and administrative arbitral and other judicial proceedings arising in the ordinary course of business. Based on information available to date, and taking into account
ofthe existing risk provisions, Eni believes that the foregoing will not have an adverse effect on Eni’s Consolidated Financial Statements.
FollowingThe following is a description of the most significant proceedings currentlypending; unlesspending. Unless otherwise indicated below, no provisions have been made for these legal proceedings as Eni believes that negative outcomes are not probable or because the amount of the provisioncan notcannot be estimated reliably.
1. Environment1.1 Criminal proceedings
ENI SPA (i) Subsidence. The Court of Rovigo conducted investigations concerning a subsidence phenomenon allegedly caused by hydrocarbon exploration and extraction activities in the Ravenna and North Adriatic area both on land and in the sea. Eni appointed an independent and interdisciplinary scientific commission, composed of prominent and highly qualified international experts of subsidence caused by hydrocarbon exploration and extraction activities, with the aim of verifying the magnitude and effects and any actions appropriate to reduce or to neutralize any subsidence phenomenon in the area. This commission produced a study which excludes the possibility of any risk to human health or damage to the environment. The study also states that worldwide there are no instances of accidents of harm to public safety caused by subsidence induced by hydrocarbon production. It also shows that Eni employs the most advanced techniques for monitoring, measuring and controlling the soil. This proceeding is F-70
in the first level hearing stage. The Veneto Region, other local bodies and two private entities have been acting as plaintiffs. Eni was admitted as a defendant. The Court decided that the proceeding must be heard by the Court of Ravenna.
(ii) Alleged damage. In 2002, the public prosecutor of Gela commenced a criminal investigation to ascertain alleged damage caused by emissions of the Gela plant, owned by Polimeri Europa SpA, Syndial SpA (formerly EniChem SpA) and Raffineria di Gela SpA. The judge for the preliminary hearing dismissed the accusation of adulteration of food products, while the proceeding for the other allegations regarding pollution and environmental damage remains underway. The trial ended in acquittal with regard to the general manager and officer pro tempore of the refinery. The sentence of the Gela Tribunal stated that the charges were lacking factual basis. (iii) Alleged negligent fire in the refinery of Gela. In June 2002, in connection with a fire at the refinery of Gela, a criminal investigation began concerning alleged negligent fire, environmental crimes and crimes against natural beauty. First degree proceedings ended with an acquittal sentence. In November 2007, the public prosecutors of Gela and of Caltanissetta filed an appeal against this decision. (iv) Investigation of the quality of ground water in the area of the refinery of Gela. In 2002, the public prosecutor of Gela commenced a criminal investigation concerning the refinery of Gela to ascertain the quality of ground water in the area of the refinery. Eni is charged of having breached environmental rules concerning the pollution of water and soil and of illegal disposal of liquid and solid waste materials. The preliminary hearing phase was closed for one employee who would stand trial, while the preliminary hearing phase is ongoing for other defendants. During the hearings the judge admitted as plaintiffs three environmental associations. (v) Alleged negligent fire (Priolo). The public prosecutor of Siracusa commenced an investigation regarding certain Eni managers who were previously in charge of conducting operations at the Priolo refinery (Eni divested this asset in 2002) to ascertain whether they acted with negligence in connection with a fire that occurred at the Priolo plants on April 30 and May 1-2, 2006. After preliminary investigations and based on the outcome of preliminary hearing the public prosecutor requested the opening of a proceeding against the mentioned managers for negligent behavior. (vi) Groundwater at the Priolo site. The Public Prosecutor of Siracusa (Sicily) has started an investigation in order to ascertain the level of contamination of the groundwater at the Priolo site. The Company has been notified that a number of its executive officers are being investigated who were in charge at the time of the events subject to probe, including chief executive officers and plant general managers of the Company’s subsidiaries AgipPetroli SpA (now merged into the parent company), Syndial and Polimeri Europa. Probes on technical issues are ongoing as required by the Prosecutor.
ENIPOWER SPA
(i) Alleged unauthorized waste management activities. In 2004, the public prosecutor of Rovigo commenced an investigation for alleged crimes related to unauthorized waste management activities in Loreo relating to the samples of soil used during the construction of the new EniPower power station in Mantova. The prosecutor requested the CEO of EniPower and the managing director of the Mantova plant at the time of the alleged crime to stand trial. (ii) Air emissions. The public prosecutor of Mantova commenced an investigation against two managers of the Mantova plant in connection with air emissions by the new power plant.
SYNDIAL SPA
(i) Porto Torres. In March 2009, the Public Prosecutor of Sassari (Sardinia) resolved to commence a criminal trial against a number of executive officers and managing directors of companies engaging in petrochemicals operations at the site of Porto Torres, including the manager responsible for plant operations of the Company’s fully-owned subsidiary Syndial. The charge involves environmental damage and poisoning of water and stuff destined to feeding. A preliminary hearing is scheduled in July 2009. 1.2 Civil and administrative proceedings
SYNDIAL SPA (FORMER ENICHEM SPA)
(i) Alleged pollution caused by the activity of the Mantova plant. In 1992, the Ministry of Environment summoned EniChem SpA (now Syndial SpA) and Edison SpA before the Court of Brescia. The Ministry requested, primarily, environmental remediation for the alleged pollution caused by the activity F-71
of the Mantova plant from 1976 until 1990, and provisionally, in case there was no possibility to remediate, the payment of environmental damages. Edison agreed on a settlement with the Ministry whereby Edison quantified compensation for environmental damage freeing from any obligation Syndial, which purchased the plant in 1989. Parties are working through a possible settlement of the matter.
(ii) Summon before the Court of Venice for environmental damages allegedly caused to the lagoon of Venice by the Porto Marghera plants. On December 13, 2002, EniChem SpA (now Syndial SpA), jointly with Ambiente SpA (now merged into Syndial SpA) and European Vinyls Corporation Italia SpA, was summoned before the Court of Venice by the Province of Venice. The province requested compensation for environmental damages that were not quantified, allegedly caused to the lagoon of Venice by the Porto Marghera plants, which were already the subject of two previous criminal proceedings against employees and managers of the defendants. EVC Italia and Ineos presented an action to be indemnified by Eni’s Group companies in case the alleged pollution is proved. The environmental damage has been assessed by an independent consultant who filed his advice to be discussed in a hearing set in October 2009.
(iii) Claim of environmental damages, allegedly caused by industrial activities in the area of Crotone, commenced by the President of the Regional Council of Calabria. On April 14, 2003, the President of the Regional Council of Calabria, as Delegated Commissioner for Environmental Emergency in the Calabria Region, commenced an action against EniChem SpA (now Syndial SpA) with reference to environmental damages for approximately euro 129 million and damages for euro 250 million (plus interest and compensation) in connection with loss of income and damage to property allegedly caused by industrial activities in the area of Crotone. In addition, the Province of Crotone is acting as plaintiff, claiming damage for euro 300 million. With a decision in May 2007, the Court of Milan declared the invalidity of the power of proxy conferred to the Delegated Commissioner to act on behalf of the Calabria Region with the notice served to Syndial SpA and decided the liquidation of expenses born by the defendant. The Province of Crotone appealed this decision. The second instance court accepted this appeal and Syndial repealed this determination. On October 21, 2004, Syndial was convened before the Court of Milan by the Calabria Region which is seeking to obtain a condemnation of Syndial for a damage payment, should the office of the Delegated Commissioner for Environmental Emergency in the Calabria Region cease during this proceeding. The Calabria Region requested a damage payment amounting to euro 800 million as already requested by the Delegated Commissioner for Environmental Emergency in the Calabria Region in the proceeding commenced in 2003. This new proceeding is in the preliminary investigation stage. This proceeding was unified with the one opened by the Ministry of the Environment. Syndial filed a new project for the environmental remediation of the site to be approved by the Ministry and the body of public administrations and entities involved in the matter that expressed a first partial consent in January 2009. The environmental provision was consequently increased. In 2006, the Council of Ministers, Ministry for the Environment and the Delegated Commissioner for Environmental Emergency in the Calabria Region represented by the State Lawyer requested Syndial to appear before the Court of Milan to obtain the ascertainment, quantification and payment of damage (in the form of land, air and water pollution and therefore of the general condition of the population) caused by the operations of Pertusola Sud SpA in the Municipality of Crotone and in surrounding municipalities. The local authorities requested the ascertainment of Syndial’s responsibility as concerns expenses borne and to be borne for the cleanup and reclamation of sites, currently quantified at euro 129 million. This proceeding concerns the same matter and damage claim as the proceedings commenced by the Delegated Commissioner for Environmental Emergency in the Calabria Region and the Calabria Region against Syndial in 2003 and 2004, respectively. (iv) Summon for alleged environmental damage caused by DDT pollution in the Lake Maggiore. With a temporarily executive decision dated July 3, 2008 the District Court of Turin sentenced the subsidiary Syndial SpA (former EniChem) to compensate for environmental damages that were allegedly caused when EniChem managed an industrial plant at Pieve Vergonte during the 1990-1996 period. Specifically, the Court sentenced Syndial to pay the Italian Ministry of the Environment compensation amounting to euro 1,833.5 million, plus legal interests that accrue from the filing of the decision. Syndial and Eni technical-legal consultants have considered the decision and the amount of the compensation to be without factual and legal basis and have concluded that a negative outcome of this proceeding is unlikely. Particularly, Eni and its subsidiary deem the amount of the environmental damage to be absolutely ill-founded as the sentence has been considered to lack sufficient elements to support such a material amount of the liability charged to Eni and its subsidiary with respect to the volume of pollutants ascertained by the Italian Environmental Minister. As no development of the proceeding has occurred since the filing of the Court’s decision, management has confirmed its stance of making no provision for this proceeding in accordance with accounting principles. Syndial will appeal against the ruling on Pieve Vergonte site of the District Court of Turin as soon as possible. Another administrative proceeding is ongoing regarding a ministerial decree enacted by the Italian Ministry for the Environment. The decree provides that Syndial executes the following tasks: (i) the upgrading of a F-72
hydraulic barrier to protect the site; and (ii) the design of a project for the environmental remediation of Lake Maggiore. The Administrative Court of Piemonte rejected Syndial’s opposition against the outlined environmental measures requested by the Ministry of the Environment. However, the Court judged the prescriptions of the Ministry regarding the remediation of the site to be plain findings of an environmental enquiry to ascertain the state of the lake. Syndial has filed an appeal against the decision of the Court before an upper degree body, also requesting suspension of the effectiveness of the decision. The appeal has been put on hold considering that a plan to ascertain the environmental status of the site is going to be approved by all interested parties, including the Ministry and local municipalities.
(v) Action commenced by the Municipality of Carrara for the remediation and reestablishment of previous environmental conditions at the Avenza site and payment of environmental damage. The Municipality of Carrara commenced an action before the Court of Genova requesting Syndial SpA to remediate and restore previous environmental conditions at the Avenza site and the payment of certain environmental damage which cannot be cleaned up as well as further damages of various types (e.g. damage to the natural beauty of this site). This request is related to an accident that occurred in 1984, as a consequence of which EniChem Agricoltura SpA (later merged into Syndial SpA), at the time owner of the site, carried out safety and remediation works. The Ministry of the Environment joined the action and requested environmental damage payment – from a minimum of euro 53.5 million to a maximum of euro 93.3 million – to be broken down among the various companies that ran the plant in the past. Syndial summoned Rumianca SpA, Sir Finanziaria SpA and Sogemo SpA, who ran the plant in previous years, in order to be guaranteed. A report produced by an independent expert appointed by the judge was filed with the Court. The findings of this report quantify the residual environmental damage at euro 15 million. With a sentence of March 2008, the Court of Genova rejected all claims made by the Municipality of Carrara and the Ministry of environment. Both plaintiffs filed an appeal against this decision in June 2008, requesting to all defendants cumulative damage amounting to euro 189.9 million. Syndial filed in the appeal hearing, disputing the plaintiffs’ claims.
(vi) Ministry for the Environment Augusta harbor. The Italian Ministry for the Environment with various administrative acts ordered companies running plants in the petrochemical site of Priolo to perform safety and environmental remediation works in the Augusta harbor. Companies involved include Eni subsidiaries Polimeri Europa and Syndial. Pollution has been detected in this area primarily due to a high mercury concentration which is allegedly attributed to the industrial activity of the Priolo petrochemical site. Polimeri Europa opposed said administrative actions, objecting in particular to the way in which remediation works have been designed and information on concentration of pollutants has been gathered. The Regional Administrative Court of Catania with its decision of July 2007 annulled the decision made by the Service Conference of the Ministry of the Environment concerning Priolo and the Augusta harbor. The Ministry and the municipalities of Augusta and Melilli filed a claim with an Administrative Court of the Sicily Region which accepted the claim. In January 2008 the Regional Court of Catania accepted two further claims on this matter, remitting to the European Union Court of Justice the correct application of the debated community principle on the matter of environmental responsibility. In June 2008 the Ministry for the Environment and the Municipalities of Melilli and Augusta filed and appeal against the decision of the Regional Court of Catania with the Administrative Justice Council. Syndial challenged the administrative acts of December 20, 2007 and March 6, 2008, also requesting the Court of Justice of the EU to decide on the correct application of the debated community principle. A review of the issue made by an independent consultant has been filed showing evidence supporting the thesis of the plaintiffs. The proceedings are still pending before the Administrative Court of Lazio.
ENI SPA (i) Reorganization procedure of the airlines companies Volare Group, Volare Airlines and Air Europe. On March 2009 Eni was notified of a bankruptcy claw-back as part of a reorganization procedure filed by the airlines companies Volare Group, Volare Airlines and Air Europe which commenced under the provisions of Ministry of Production Activities, on November 30, 2004. The request regarded the override of all the payments made by those entities to Eni and its subsidiary Sofid in the year previous to the insolvency declaration from November 30, 2003 to November 29, 2004, for a total estimated amount of euro 46 million. F-73
2. Other judicial or arbitration proceedings SYNDIAL SPA (FORMER ENICHEM SPA) (i) Serfactoring: disposal of receivables. In 1991, Agrifactoring SpA commenced proceedings against Serfactoring SpA, a company 49% owned by Sofid SpA and which is controlled by Eni SpA. The claim relates to an amount receivable of euro 182 million for fertilizer sales (plus interest and compensation for inflation), originally owed by Federconsorzi to EniChem Agricoltura SpA (later Agricoltura SpA - in liquidation), and Terni Industrie Chimiche SpA (merged into Agricoltura SpA - in liquidation), that has been merged into EniChem SpA (now Syndial SpA). Such receivables were transferred by Agricoltura and Terni Industrie Chimiche to Serfactoring, which appointed Agrifactoring as its agent to collect payments. Agrifactoring guaranteed to pay the amount of such receivables to Serfactoring, regardless of whether or not it received payment on the due date. Following payment by Agrifactoring to Serfactoring, Agrifactoring was placed in liquidation and the liquidator of Agrifactoring commenced proceedings in 1991 against Serfactoring to recover such payments (equal to euro 182 million) made to Serfactoring based on the claim that the foregoing guarantee became invalid when Federconsorzi was itself placed in liquidation. Agricoltura and Terni Industrie Chimiche brought counterclaims against Agrifactoring (in liquidation) for damages amounting to euro 97 million relating to acts carried out by Agrifactoring SpA as agent. The amount of these counterclaims has subsequently been reduced to euro 46 million following partial payment of the original receivables by the liquidator of Federconsorzi and various setoffs. These proceedings, which have all been joined, were decided with a partial judgment, deposited on February 24, 2004; the request of Agrifactoring has been rejected and the company has been ordered to pay the sum requested by Serfactoring and damages in favor of Agricoltura, to be determined following the decision. A final verdict on this issue is pending. Agrifactoring appealed this partial decision, requesting in particular the annulment of the first step judgment, the reimbursement of euro 180 million from Serfactoring along with the rejection of all its claims and the payment of all proceeding expenses. On June 2008, the trial was decided with a partial judgment that, reforming the previous judgment of the Court of Rome, granted the requests of Agrifactoring and condemned Serfactoring to reimburse to Agrifactoring in liquidation the amount of the receivables due from Federconsorzi and not collected as Federconsorzi went bankrupt. The Court resolved to appoint an independent accounting consultant to quantify the amount paid by Agrifactoring to Serfactoring and amounts paid by Federconsorzi to Agrifactoring. The hearing has been rescheduled to February 2010 in order to allow the Court to review the independent accounting consultant’s advice. Syndial and Serfactoring have appealed the sentence with the Supreme Court of Appeal. Agrifactoring has presented a counter-recourse. Eni accrued a provision with respect to this proceeding.
ENI SPA (i) Fintermica. Fintermica presented a claim against Eni concerning the management of the Jacorossi joint venture with reference to an alleged abuse of key roles played by Eni SpA in the joint venture, thus damaging the other partner’s interest and the alleged dilatory behavior of Syndial in selling its interest in the joint venture to Fintermica. The parties decided to commence arbitration on the matter. The examining phase is ongoing and an independent assessment of this matter is being executed. The Board of Arbitrators issued a decision on November 26, 2008 condemning Eni and Syndial to compensate Fintermica for the damages suffered amounting to euro 5 million including monetary revaluation and accrued interest as of April 3, 2001.
SNAMPROGETTI SPA (i) CEPAV Uno and CEPAV Due. Eni holds interests in the CEPAV Uno (50.36%) and CEPAV Due (52%) consortia that in 1991 signed two contracts with TAV SpA for the construction of two railway tracks for high speed/high capacity trains from Milan to Bologna (under construction) and from Milan to Verona (in the design phase). With regard to the project for the construction of the line from Milan to Bologna, an Addendum to the contract between CEPAV Uno and TAV was signed on June 27, 2003, redefining certain terms and conditions of the contract. Subsequently, the CEPAV Uno consortium requested a time extension for the completion of works and a claim amounting to euro 800 million. CEPAV Uno and TAV failed to solve this dispute amicably. CEPAV Uno opened an arbitration procedure as provided for under terms of the contract on April 27, 2006. With regard to the project for the construction of a high-speed railway from Milan to Verona, in December 2004, CEPAV Due presented the final project, prepared in accordance with Law No. 443/2001 on the basis of the preliminary project approved by an Italian governmental authority (CIPE). As concerns the arbitration procedure requested by CEPAV Due against TAV for the recognition of costs incurred by the Consortium in the 1991-2000 ten-year period plus suffered damage, in January 2007, the arbitration committee determined the Consortium’s right to recover the costs incurred in connection with the design activities performed. A technical independent survey is underway to assess the amount of compensation F-74
to be awarded to the Consortium as requested by the arbitration committee. TAV appealed the arbitration committee’s determination. In April 2007, the Consortium filed with the second instance court of Rome an appeal against Law Decree No. 7 of December 31, 2007, that revoked the concessions awarded to TAV resulting in the annulment of arrangements signed between TAV and the Consortium to build the high-speed railway section from Milan to Verona. The European Court of Justice was requested to judge on this matter. In the meantime, TAV decided to not request the reimbursement of advances paid to the Consortium. Subsequently, Law 133/2008 re-established the concessions awarded to TAV resulting in the continuation of the arrangements between the consortium CEPAV Due and a new entity in charge of managing the Italian railway system. 3. Antitrust, EU Proceedings, Actions of the Authority for Electricity and Gas and of Other Regulatory Authorities 3.1 Antitrust ENI SpA (i) Abuse of dominant position of Snam alleged by the Italian Antitrust Authority. In March 1999, the Italian Antitrust Authority concluded its investigation started in 1997 and: (i) found that Snam SpA (merged in Eni SpA in 2002) abused its dominant position in the market for the transportation and primary distribution of natural gas relating to the transportation and distribution tariffs applied to third parties and the access of third parties to infrastructure; (ii) fined Snam for euro 2 million; and (iii) ordered a review of the practices relating to such abuses. Snam believes it has complied with existing legislation and appealed the decision with the Regional Administrative Court of Lazio requesting its suspension. On May 26, 1999, stating that these decisions are against Law No. 9/1991 and the European Directive 98/30/EC, this Court granted the suspension of the decision. The Authority did not appeal this decision. The decision on the merit of this dispute is still pending before the same Administrative Court.
(ii) Formal assessment commenced by the Commission of the European Communities for the evaluation of alleged participation to activities limiting competition in the field of paraffin. On April 28, 2005, the Commission of the European Communities commenced a formal assessment to evaluate the alleged participation of Eni and its subsidiaries in activities limiting competition in the field of paraffin. The alleged violation of competition is for: (i) the determination of and increase in prices; (ii) the subdivision of customers; and (iii) exchange of trade secrets, such as production capacity and sales volumes. After, the Commission requested information on Eni’s activities in the field of paraffin and certain documentation acquired by the Commission during an inspection. Eni filed the requested information. On October 2008, the Commission of the European Communities issued the final decision on the matter condemning Eni to the payment of a sanction amounting to euro 29,120,000. Eni has filed for recourse against this decision that is fully covered by the accrued risk provision. (iii) Ascertainment by the European Commission of the level of competition in the European natural gas market. As part of its activities to ascertain the level of competition in the European natural gas market, with Decision No. C (2006)1920/1 of May 5, 2006, the European Commission informed Eni that the Group companies were subject to an inquiry under Article 20, paragraph 4 of the European Regulation No. 1/2003 of the Council in order to verify the possible existence of any business conducts breaching European rules in terms of competition and intended to prevent access to the Italian natural gas wholesale market and to subdivide the market among few operators in the activity of supply and transport of natural gas. Similar actions have been performed by the Commission also against the main operators in natural gas in Germany, France, Austria and Belgium. In April 2007, the European Commission made public its decision to start a further stage of inquiry, as the elements collected supported its suspicion that Eni adopted behaviors leading to "capacity hoarding and strategic, in its view, underinvestment in the transmission system leading to the foreclosure of competitors and harm for competition and customers in one or more supply markets in Italy". On March 9, 2009 Eni received a Statement of Objections related to a proceeding under Article No. 82 of the EU Treaty and Article No. 54 of the SEE agreement with reference to an alleged unjustifiable refusal of access to the TAG and TENP/Transitgas gas pipelines, that are interconnected with the Italian gas transport system through actions intended to "capacity hoarding, capacity degradation and strategic limitation of investment" with the effect of "hindering the development of a real competition in the downstream market and [...] harming the consumers". The European Commission envisages the possible imposition of a fine and of structural remedies. The Company is currently assessing the reasoning underlying the Commission’s objections in order to ascertain whether the challenged actions are supported by evidence and may be qualified as infringement of the European competition rules. The Company will file its defensive memories within the proceeding. In addition, and following the aforementioned assessment, the Company may consider whether to voluntarily file a set of remedies to settle the proceeding as provided F-75
by Article No. 9 of the European Regulation No. 1/2003. Taking into account the numerous elements to be considered in determining the amount of the fine, the complex checks to carry out with respect to the Statement of Objections, and also the circumstance that the Commission’s approval of the possible remedies, presented by Eni pursuant to European Regulation No. 1/2003, would settle the matter without imposing a fine, management believes that the liability is contingent upon the future events described and cannot be measured with reasonable reliability.
(iv) TTPC. In April 2006, Eni filed a claim before the Regional Administrative Court of Lazio against the decision of the Italian Antitrust Authority of February 15, 2006 stating that Eni’s behavior pertaining to implementations of plans for the upgrading of the TTPC pipeline for importing natural gas from Algeria represented an abuse of dominant position under Article 82 of the European Treaty and fined Eni. The initial fine amounted to euro 390 million and was reduced to euro 290 million in consideration of Eni’s commitment to perform actions favoring competition including the upgrade of the gasline. Eni accrued a provision with respect to this proceeding. With a decision filed on November 29, 2006, the Regional Administrative Court of Lazio partially accepted Eni’s claim, annulling such part of the Authority’s decision where the fine was quantified. Eni is waiting for the filing of the motivations of the Court decision to ascertain the impact of said decision. Pending this development, the payment of the fine has been voluntarily suspended. In 2007, the Regional Administrative Court of Lazio accepted in part Eni’s claim and cancelled the quantification of the fine based on the Antitrust Authority’s inadequate evaluation of the circumstances presented by Eni. Eni filed an appeal with the Council of State, as did the Antitrust Authority and TTPC. Pending the final outcome, Eni awaits for the determination of the amount of the fine to be paid.
(v) Italian natural gas market. On May 7, 2009, the Italian Antitrust Authority started a preliminary investigation against the Company and its fully-owned subsidiary Italgas and other operators engaging in the gas retail market in Italy. The investigation targets an alleged abuse of dominant position in the gas retail market in Italy associated with commercial practices intended to make it difficult for retail clients to change the supplier and the retrieval of data on volumes. POLIMERI EUROPA SPA AND SYNDIAL SPA (i) Inquiries in relation to alleged anti-competitive agreements in the area of elastomers. In December 2002, inquiries were commenced concerning alleged anti-competitive agreements in the field of elastomers. These inquiries were commenced concurrently by European and U.S. authorities. At present, proceedings are pending before the European Commission regarding the CR and NBR products. In March 2007, the Commission sent to Eni, Polimeri Europa and Syndial a statement of objections, thus opening the second phase of this proceeding. In December 2007, the European Commission dismissed Syndial’s position on CR and imposed on Eni and Polimeri a fine amounting to euro 132.16 million. The two companies have filed an appeal with the EU Court of First Instance against this decision and, at the same time, paid the fine in March 2008. Investigations relating to other elastomers products resulted in the ascertainment of Eni having infringed European competition laws in the field of synthetic rubber production (BR and ESBR). On November 29, 2006, the Commission fined Eni and its subsidiary Polimeri Europa for an amount of euro 272.25 million. Eni and its subsidiary filed claims against this decision before the European Court of First Instance in February 2007. The Commission filed a counter appeal. Pending the outcome, Polimeri Europa presented a bank guarantee for euro 200 million and paid the residual amount of the fine. In August 2007, Eni submitted a request for a negative ascertainment with the Court of Milan aimed at proving the non-existence of alleged damages suffered by tire manufacturers. With regard to NBR, an inquiry is underway also in the U.S., where class actions have also been commenced. On the federal level, the class action was abandoned by the plaintiffs. However, the federal judge has yet to acknowledge this abandonment. With regard to other products under investigation in the U.S., settlements were reached with both relevant U.S. antitrust authorities and the plaintiffs acting through a class action. Eni recorded a provision for these matters. 3.2 Regulation
TOSCANA ENERGIA CLIENTI SPA
Eni’s subsidiary Toscana Energia Clienti SpA started an action against a customer regarding alleged lack of measurement of gas consumption due to inability to access a measurement facility at the customer’s site, also in connection with the application of Resolution No. 229/2001 of the Italian Authority for Electricity and Gas. This customer has annual consumption in excess of 5,000 CM. The defendant has filed a counter-claim in relation to this proceeding. In the hearing of November 12, 2008 the judge resolved to partially accept the Eni’s subsidiary reasons and to limit compensation to be paid to the defendant to only euro 1,475 with interests amounting to euro 90. The sum was paid while the defendant is evaluating the opportunity to appeal the sentence.F-76
DISTRIBUIDORA DE GAS CUYANA SA (i) Formal investigation of the agency entrusted with the regulations for the natural gas market in Argentina. Enargas started a formal investigation on some operators, among them Distribuidora de Gas Cuyana SA, a company controlled by Eni. Enargas stated that the company improperly applied conversion factors to volumes of natural gas invoiced to customers and requested the company to apply the conversion factors imposed by local regulations from the date of the default notification (March 31, 2004) without prejudice to any damage payment and fines that may be decided after closing the investigation. In April 2004 the company filed a defensive memorandum. On April 28, 2006, the company formally requested the acquisition of documents from Enargas in order to have access to the documents on which the allegations are based. 4. Tax Proceedings
ENI SPA
Dispute for the omitted payment of the municipal tax related to oil platforms located in territorial waters in the Adriatic Sea. With a formal assessment presented by the Municipality of Pineto (Teramo) in December 1999, Eni SpA has been accused of not having paid a municipal tax on real estate for the period from 1993 to 1998 on four oil platforms located in the Adriatic Sea which constitute municipal waters in front of the coast of Pineto. Eni was requested to pay a total of approximately euro 17 million including interest and a fine. Eni filed a claim against this request stating that the sea where the platforms are located is not part of the municipal territory and the tax application as requested by the municipality lacked objective fundamentals. The claim has been accepted in the first two degrees of judgment at the Provincial and Regional Tax Commissions. However, the Court overturned both judgments, declaring that a municipality can consider requesting a tax on real estate in the sea facing its territory and with the decision of February 2005 sent the proceeding to another section of the Regional Tax Commission in order to judge on the matters of the proceeding. This commission nominated a Board of Consultants, in order to make all the accounting/technical verifications necessary for the judgment. On December 28, 2005, the Municipality of Pineto presented the same request for the same platforms for the years 1999 to 2004. The total amount requested from Eni is euro 24 million including interest and penalties. Eni filed a claim against this request which was accepted by the first degree judge with a decision of December 4, 2007. Similar formal assessments related to Eni oil and gas offshore platforms were presented by the Municipalities of Falconara Marittima and Pedaso. The total amounts of those claims were approximately euro 6 million. The company filed appeal or is planning to appeal.AGIP KARACHAGANAK BV
Claims concerning unpaid taxes and relevant payment of interest and penalties.In1999,July 2004, relevant Kazakh Authorities informed Agip Karachaganak BV and Agip Karachaganak Petroleum Operating Co BV, shareholder and operator of the Karachaganak contract, respectively, on the final outcome of 2000 to 2003 tax audits. Both companies counterclaimed against the assessment and a preliminary agreement was reached on November 18, 2004. Final assessments have now been issued by the Kazakh Authorities, and payment has been made. The final amount assessed and paid was $39 million net to Eni; this figure included taxes and interest. The companies continue to dispute the assessments and reserve the right to challenge their findings further.5. Court Inquiries
(i) EniPower. In June 2004, the Milan Public Prosecutor commenced inquiries into contracts awarded by Eni’s subsidiary EniPower and on supplies from other companies to EniPower. These inquiries were widely covered by the media. It emerged that illicit payments were made by EniPower suppliers to a manager of EniPower who was immediately dismissed. The Court presented EniPower (commissioning entity) and Snamprogetti (contractor of engineering and procurement services) with notices of process in accordance with existing laws regulating the administrative responsibility of companies (Legislative Decree No. 231/2001). In its meeting of August 10, 2004, Eni’s Board of Directors examined the aforementioned situation and Eni’s CEO approved the creation of a task force in charge of verifying the compliance with Group procedures regarding the terms and conditions for the signing of supply contracts by EniPower and Snamprogetti and the subsequent execution of works. The Board also F-77
advised divisions and departments of Eni to cooperate fully in every respect with the Court. From the inquiries performed, no default in the organization emerged, nor deficiency in internal control systems. External experts have performed inquiries with regard to certain specific aspects. In accordance with its transparency and firmness guidelines, Eni will take the necessary steps in acting as plaintiff in the expected legal action in order to recover any damage that could have been caused to Eni by the illicit behavior of its suppliers and of their and Eni employees. In the meantime, preliminary investigations have found that both EniPower and Snamprogetti are not to be considered defendants in accordance with existing laws regulating the administrative responsibility of companies (Legislative Decree No. 231/2001). In August 2007, Eni was notified that the Public Prosecutor requested the dismissal of EniPower SpA and Snamprogetti SpA, while the proceeding continues against former employees of these companies and employees and managers of the suppliers under the provisions of Legislative Decree No. 231/2001. Eni SpA, EniPower and Snamprogetti presented themselves as plaintiffs.
(ii) Trading. An investigation is pending regarding two former Eni managers who were allegedly bribed by third parties to favor the closing of certain transactions with two oil product trading companies. Within such investigation, on March 10, 2005, the public prosecutor of Rome notified Eni of two judicial measures for the seizure of documentation concerning Eni’s transactions with the said companies. Eni is acting as plaintiff in this proceeding. The judge for preliminary hearings rejected most of the dismissal request, forcing the public prosecutor to continue with the criminal case. (iii) TSKJ Consortium Investigations of the SEC and other Authorities. The U.S. Securities and Exchange Commission (SEC), the U.S. Department of Justice (DoJ), and other authorities are investigating alleged improper payments made by the TSKJ Consortium to certain Nigerian public officials in relation to the construction of natural gas liquefaction facilities at Bonny Island in Nigeria. Snamprogetti Netherlands BV had a 25% participation in the TSKJ companies, with the remaining participations held by subsidiaries of Halliburton/KBR, Technip, and JGC. Snamprogetti SpA, the holding company of Snamprogetti Netherlands BV, was a wholly owned subsidiary of Eni until February 2006, when an agreement was entered into for the sale of Snamprogetti to Saipem SpA and Snamprogetti was merged into Saipem as of October 1, 2008. Eni holds a 43% participation in Saipem. In connection with the sale of Snamprogetti to Saipem, Eni agreed to indemnify Saipem for a variety of matters, including potential losses resulting from the investigations into the TSKJ matter. In February 2009, KBR and its former parent company, Halliburton, announced that they had reached a settlement with the SEC and DoJ with respect to the TSKJ matter as well as other unspecified matters. In connection with the settlement, KBR pleaded guilty to Foreign Corrupt Practices Act (FCPA) charges stemming from the TSKJ matter. KBR and Halliburton also agreed to pay a substantial fine and entered into civil settlements with the SEC. We understand that the DoJ and the SEC believe that representatives of the other members of the TSKJ Consortium were involved in the conduct that gave rise to the FCPA charges against KBR. Since June 2004, Eni and Saipem/Snamprogetti have been in discussions with, and have provided information in response to requests by, various regulators, including the SEC, the DoJ and the Public Prosecutor’s office of Milan, in connection with the investigations.
(iv) Gas Metering. On May 28, 2007, a seizure order (in respect to certain documentation) was served upon Eni and other Group companies as part of a proceeding brought by the Public Prosecutor at the Courts of Milan. The order was also served upon five top managers of the Group companies in addition to third party companies and their top managers. The investigation alleges behavior which breaches Italian criminal law, starting from 2003, regarding the use of instruments for measuring gas, the related payments of excise duties and the billing of clients as well as relations with the Supervisory Authorities. The allegation regards, interalia, the offense contemplated by Legislative Decree of June 8, 2001, No. 231, which establishes the liability of the legal entity for crimes committed by its employee in the interests of such legal entity, or to its advantage. Accordingly, notice of the commencement of investigations was served upon Eni Group companies (Eni, Snam Rete Gas and Italgas) as well as third party companies. The Group companies are cooperating with the Supervising Authorities in the investigations. (v) Agip KCO NV. In November 2007, the public prosecutor of Kazakhstan informed Agip KCO of the start of an inquiry for an alleged fraud in the award of a contract to the Overseas International Constructors GmbH in 2005. 6. Settled Proceedings
ENI SPA
Inquiry of the Italian Authority for Electricity and Gas regarding information to clients about the right to pay amounts due for natural gas sales in installments. With Decision No. 228/2007, the Italian Authority for Electricity and Gas commenced a formal inquiry regarding information to clients about the right to pay amounts dueF-78
for the natural gas sales in installments in order to possibly put a stop to the alleged infringement of the clients’ rights and to impose a fine. In April 2008, the Authority concluded its inquiry and fined the Company by euro 3.2 million.
SYNDIAL SPA (FORMER ENICHEM SPA)
Criminal action commenced by the public prosecutor ofGela started an investigation in order to ascertain alleged soil and sea pollution caused by the discharge of pollutants by Eni’s Gela refinery. In November 2002, "Italia Nostra" and the association "Amici della Terra" filed civil claims related to this proceeding and requested the payment of damage claims for a total of euro 15,050 million. In July 2003, the relevant Court decided for the transmission of the inquiries to the public prosecutor, recognizing a violation of Article 440 of the penal code (water and food substances corruption). Three environmental organizations act as plaintiffs and requested damage payment for euro 551 million. Two of these organizations are also acting against the Gela refinery.Brindisi.In 2000, the public prosecutor of
Gela started an investigation on alleged prohibited emissions from the refinery of Gela, which are purported to have had negative effects on the health of a number of citizens of Gela, and on a lack of declaration of such emissions in violation of Presidential Decree No. 203 of 1988. The investigation ended with an action for events that have occurred since 1997. The Municipality of Gela, the Province of Caltanissetta and others filed civil claims in this proceeding and requested the payment of compensatory damages for a total of euro 878 million. The judgment of first degree before the Court of Gela is pending.
In 2002, the public prosecutor of Gela started an investigation in order to ascertain alleged pollution caused by emissions of the Gela plant, owned by Polimeri Europa SpA, Syndial SpA (former EniChem SpA) and Raffineria di Gela SpA. Some local public entities, environmental NGOs and landowners are acting as plaintiffs. On January 17, 2005, a second inquiry phase aimed at ascertaining which sort of emissions had eventually produced the alleged pollution caused by the refinery of Gela, was completed. On February 3, 2006 the notice of the conclusion of preliminary investigations was filed conclusion of the preliminary inquiry.
In June 2002, in connection with a fire in the refinery of Gela, a criminal investigation began concerning arson, environmental crimes and crimes against natural heritage. On May 12, 2004 the first hearing was held.
In 2002, the public prosecutor of Gela started a penal investigation concerning the refinery of Gela to ascertain the quality of ground water in the area of the refinery. The investigation concerns the environmental rules about the pollution of water and soil and illegal disposal of liquid and solid waste materials. On November 7, 2003 the judge for preliminary investigations accepted to continue the inquiries as requested by the public prosecutor to ascertain the state of the refinery’s storage tanks and the presence of infiltrations of refinery products into the deep water-bearing stratum, due to a breakage in some tanks. With a decision of November 3, 2003, the Court for preliminary investigation, in agreement with a request of the public prosecutor of Gela, ordered the preventive seizure of 92 storage tanks, later reopened except for nine tanks that remained under seizure but do not prevent full operations at the refinery. The report filed by experts of the public prosecutor is currently under review.
In March 2002 the public prosecutor of Siracusa started an investigation concerning the activity of the refinery of Priolo for intentional pollution of water used for human consumption and requested a technical opinion, not yet concluded, to ascertain alleged infiltrations of refinery products into the deep water-bearing stratum used for human consumption purposes in the Priolo area. The proceeding is still in the preliminary investigation phase. A qualified company has been given the task to verify the cause, the origin and the extension of the alleged infiltration. For protective purposes, actions have been taken to: (i) create safety measures and clean-up all of the polluted area; (ii) reallocate wells for drinking water in an area farther from and higher than the industrial site; and (iii) install a purification system for drinkable water. With a decision of June 1, 2004 the seizure was lifted on the storage tanks that had been seized on April 17, 2003, except for five storage tanks that are still under seizure. The report of experts has been filed and its findings can be opposed to defendants.
In relation to the investigations concerning a subsidence phenomenon allegedly caused by hydrocarbon exploration, on May 21, 2004, following the decision of the Court of Rovigo, the Nucleo Operativo Ecologico dei Carabinieri of Venice placed under preliminary seizure the Dosso degli Angeli, Angela/Angelina - Ravenna Mare Sud fields and the related wells and platforms. On June 10, 2004 the Court responded to the claim filed by Eni and lifted the seizure of the Angela/Angelina - Ravenna Mare Sud fields and related wells and platforms. On March 10, 2005, the Court of Cassation confirmed this decision. On February 5, 2003, a seizure had already been applied to the Naomi/Pandora platform, the Naomi 4 Dir, Naomi 2 Dir and 3 Dir - Pandora 2 Dir wells, and the underwater pipeline for the transportation of gas to the Casalborsetti facility. Eni believes it has always acted in full compliance with existing laws under the required authorizations. Taking account of the observations of the consultants of the Court of Rovigo on which the Public Prosecutor based his case, Eni constituted an independent and interdisciplinary scientific commission, chaired by Prof. Enzo Boschi, professor of seismology at the Università degli Studi di Bologna and chairman of the Istituto nazionale di geofisica e vulcanologia, composed of prominent and highly qualified international experts of subsidence caused by hydrocarbon exploration, with the aim of verifying the size and the effects and any appropriate actions to reduce or to neutralize any subsidence phenomenon in the Ravenna and North Adriatic area both on land and in the sea. The commission produced a study which denies the possibility for any risk for human health and for damage to the environment. It also states that no example is known anywhere in the world of accidents that caused harm to the public safety caused by subsidence induced by hydrocarbon production. The study also shows that Eni employs the most advanced techniques for the monitoring, measuring and control of the soil. On May 11, 2006 the Court of Rovigo accepted as plaintiffs the Veneto Region, the Ente Parco della Provincia del Po, the Ferrara Province, the Venice Province, the city of Venice, the city of Comacchio, the Rovigo Province and two private entities. Eni was accepted as a defendant. The Court of Rovigo rejected the accusation of environmental disaster and therefore transferred the proceeding to the Court of Adria, where the first hearing has been scheduled for October 31, 2006.
ENIPOWER SPAIn autumn 2004 the Public Prosecutor of Rovigo started an investigation for alleged crimes related to unauthorized waste management activities in Loreo relating to samples of the soil used in the construction of the new EniPower’s power station in Mantova. EniPower requested the closing of the investigation.
POLIMERI EUROPA SPABefore the Court of Gela one criminal action took place relation to the alleged violation on part of Eni of environmental regulations on waste management concerning the ACN plant and the disposal of FOK residue deriving from the steam cracking process. The defendant was found guilty and a damage payment in first instance was recognized to an environmental association acting as plaintiff. The sentence was passed to the civil court for the quantification of any further damage and claim. Eni appealed the Court’s decision.
SYNDIAL SPA (FORMER ENICHEM SPA)In 1992, the Ministry of Environment summoned EniChem SpA and Montecatini SpA before the Court of Brescia. The Ministry requested, primarily, to require environmental remediation for the alleged pollution caused by the Mantova plant from 1976 until 1990, and provisionally, in case there was no possibility to remediate, require them to pay environmental damages. The amount is going to be determined during the proceeding, but it will not be lower than euro 136 million, or determined by the judge as compensatory liquidation. EniChem acquired the Mantova plant in June 1989, as part of the Enimont deal. Edison SpA must hold Eni harmless or pay compensatory damage for any damage caused to third parties by plant operations before Montedison’s sale, even if the damage occurred later. Edison agreed on a settlement that quantified damage to be paid covering also Syndial. The proceeding continues for the alleged damage in the 1989-1990 period.
In 2000, the Public Prosecutor ofBrindisistartedcommenced a criminal action against 68 persons who are employees or former employees of companies that owned and managed plants for the manufacture of dichloroethane, vinyl chloride monomer and vinyl polychloride from the early 1960s to date, some of which were managed by EniChem from 1983 to 1993. At the end of the preliminary investigationphase,thePublic Prosecutorpublic prosecutor asked for the dismissal of the case in respect of the employees and the managers of EniChem. Plaintiffs presented oppositions,whilebut the prosecutor confirmedhis request for dismissal of the case.
On December 18, 2002 EniChem SpA, jointly with Ambiente SpA (now merged in Syndial SpA) and European Vinyls Corporation Italia SpA, was summoned before the Court of Venice by the Province of Venice. The province requested compensation for environmental damages, not quantified, caused to the lagoon of Venice by the Porto Marghera plants, which were already the subject of two previous proceedings against employees and managers. In a related action, European Vinyls Corporation Italia presented an action for recourse against EniChem and Ambiente. The requests for damage of the Province of Venice and that of EVC Italia to EniChem and Ambiente have not been quantified. The final judgment is pending.
On January 16, 2003 the Court of Siracusa issued personal cautionary measures against some employees of EniChem SpA and Polimeri Europa SpA. They are accused of illicit management relating to the production, disposal and treatment of liquid and solid waste materials and of obtaining illicit income. Polimeri Europa and EniChem, will act as plaintiffs. The collection of evidence effected before the hearing starts in Court has been concluded and preliminary investigations have ended with the confirmation of accusations. During the inquiries traces of mercury were found in the sea. The Public Prosecutor of Siracusa started an inquiry for ascertaining the conditions of sediments and marine fauna in the bay of Augusta. According to the plaintiffs, mercury would have been spilled into the sea and poisoned the marine fauna and therefore resulted in fetal malformations and abortions due to the consumption of contaminated seafood fished in this area. The chlorine soda plant, built in the late 50s was conferred to Syndial in 1989 when the Enimont joint venture was formed. It was therefore easy to prove that Eni holds no responsibility for the crimes it was accused of. On March 15, 2006 the judge for preliminary investigations decided the dismissal of the case against Syndial employees.
On April 14, 2003 the President of the Regional Council of Calabria, as Delegated Commissioner for Environmental Emergency in the Calabria Region, started an action against EniChem SpA related to environmental damages for approximately euro 129 million and to financial and non-financial damages for euro 250 million (plus interest and compensation) allegedly caused by Pertusola Sud SpA (merged into EniChem) in the area of Crotone. On June 6, 2003 EniChem appeared before the court and requested the rejection of the damages and, as counterclaim, the payment of the total costs for the remediation works already underway. The Province of Crotone entered the proceeding, claiming environmental damages for euro 300 million. Technical aspects concerning the role of the delegated commissioner make it necessary to decide on this aspect. Syndial was notified on October 21, 2004 ofthe requestofto dismiss theCalabria Region to appear before the Court of Milan in order to obtain a preliminary damage payment, in anticipation of the expiration of the special office for managing emergency events in Calabria. The Region requested payments for over euro 800 million.
On February 28, 2006 the Council of Ministers, the Ministry for the Environment and the Delegated Commissioner for environmental emergency in the Calabria Region represented by the State Lawyer requested Syndial to appear before the Court of Milan in order to obtain the ascertainment, quantification and payment of damage (in the form of pollution of land, air and water and therefore of the general condition of the population) caused by the operations of Pertusola Sud SpA in the municipality of Crotone and in surrounding municipalities. The local authorities request the ascertainment of Syndial’s responsibility as concerns expenses borne and to be borne for the cleanup and reclamation of sites, currently quantified at euro 129 million. This proceeding concerns the same company and damages as indicated in the previous paragraph.
In March 2004, Sitindustrie SpA, which in 1996 purchased a plant in Paderno Dugnano from Enirisorse (now merged into Syndial SpA), summoned Syndial SpA before the Court of Milan, requesting to establish the responsibility of Syndial SpA in the alleged pollution of soils around the plant and to require it to pay environmental damages necessary for remediation. Syndial opposed the claim based on an absence of the right of action of the plaintiff. The judge has not yet decided on Syndial’s opposition.
In October 2004, Sitindustrie SpA started an analogous proceeding against Syndial concerning the plant for the manufacture of products in copper and copper alloy at Pieve Vergonte.
In May 2003 the Minister of the Environment summoned Syndial SpA before the Court of Turin and requested environmental damages for euro 2,396 million in relation to alleged DDT pollution in the Lake Maggiore caused by the Pieve Vergonte plant. On March 1, 2006 the State Lawyer in an attempt to settle thecaseproposed that Syndial pay 10% of the requested damage corresponding to euro 239 million. This attempt to settle failed.
The municipality of Carrara started an action at the Court of Genova requesting to Syndial SpA the remediation and reestablishment of the previous environmental conditions at the Avenza site and the payment of environmental damage. This request is related to an accident that occurred in 1984, as a consequence of which EniChem Agricoltura SpA (later merged into Syndial SpA), at the time owner of the site, had carried out safety and remediation works. The Ministry of the Environment joined the action and requested the environmental damage payment – from a minimum of euro 53.5 million to a maximum of euro 78.5 million – to be broken down among the various companies that managed the plant in the past. Previous managers include Syndial, called into the action as a guarantor, Rumianca SpA, Sir Finanziaria SpA and Sogemo SpA. The judge requested an expert report to be prepared in order to ascertain what damage has been remediated and what remains to be cleaned up after the interventions started by Agricoltura and continued by EniChem/Syndial. The expert report quantifies the damage still to be remediated in euro 15 million.
Tax Proceedings
ENI SPAWith a decree dated December 6, 2000 the Lombardia Region decided that natural gas used for electricity generation is subject to an additional regional excise tax in relation to which Snam SpA (merged into Eni SpA in 2002) should substitute for the tax authorities in its collection from customers. Given interpretive uncertainties, the same decree provides the terms within which distributing companies are expected to pay this excise tax without paying any penalty. Snam SpA and the other distributing companies of Eni believe that natural gas used for electricity generation is not subject to this additional excise tax. For this reason, an official interpretation was requested from the Ministry of Finance and Economy. With a decision of May 29, 2001, the Ministry confirmed that this additional excise tax cannot be applied. The Region decided not to revoke its decree and Snam took appropriate legal action. On the basis of action carried out by Snam, the Council of State decided on March 18, 2002 that the jurisdiction of the Administrative court did not apply to this case. In case the Region should request payment, Eni will challenge this request in the relevant Court. The Lombardia Region decided with regional Law No. 27/2001 that no additional tax is due from January 1, 2002 onwards, but still requested the payment of the additional taxes due before that date.
With a formal assessment presented by the municipality of Pineto (Teramo) Eni SpA has been accused of not having paid a municipal tax on real estate for the period from 1993 to 1998 on four oil platforms located in the Adriatic Sea territorial waters in front of the coast of Pineto. Eni has been requested to pay a total of approximately euro 17 million also including interest and a fine for lacking declaration. Eni filed a claim against this request stating that the sea where the platforms are located is not part of the municipal territory and the application of the tax at requested by the municipality lacked objective fundamentals. The claim has been accepted in the first two degrees of judgment at the Provincial and Regional Tax Commissions. But the Court of Cassation cancelled both judgments declaring that a municipality can consider requesting a tax on real estate also in the sea facing its territory andwith a decision ofFebruary 21, 2005 sentJune 2008, theproceeding to another sectionpublic prosecutor dismissed the accusation as unfounded and requested the closing of theRegional Tax Commission in order to judge onproceeding.AGIP KCO NV
In December 2007 theother reason opposed by Eni. On December 28, 2005 the municipality of Pineto presented the same request for the same platforms for the years 1999 to 2004. The total amount requested to Eni is of euro 24 million. EniKazakh tax authority filed aclaim against this request.
AGIP KARACHAGANAK BVIn Julynotice of tax assessment for fiscal years 2004relevant Kazakh authorities informedto 2006 to AgipKarachaganak BV and Agip Karachaganak Petroleum Operating BV, shareholder andKCO, operator of theKarachaganak contract, respectively, on the final outcome of the tax audits performed for fiscal years 2000 to 2003. Claims by the Kazakh authorities concernKashagan contract. Allegedly unpaid taxes,for a total of $43including interest and penalties, amounted to approximately U.S. $235 million net to Eni and related to unpaid amounts and inapplicable deductions on value added tax and theanticipated offsetting of VAT creditsdefault in applying certain withholding taxes on payments to foreign suppliers. The same notice also informed the companies party to the Kashagan contract that further assessments were pending on non-deductible costs for$140U.S. $188 million net Eni and higher taxable income on Kazakh branches for U.S. $48 million net to Eni. The further assessments were subsequently issued, the company filed an appeal and a settlement was reached in October 2008 with the following outcome: the unpaid taxes net to Eni were agreed at U.S. $24 million (U.S. $235 million assessed). An adjustment to deductible costs was agreed at U.S. $38 million net to Enias well as the payment of interest(U.S. $188 million assessed) andpenalties for a total of $128 million. Both companies filed a counterclaim. With an agreement reachedit was further agreed that there would be no income taxable onNovember 18, 2004, the original amounts were reduced to $26Kazakh branches (U.S. $48 millionnet to Eni that includes taxes, surchargesassessed).Other risks and
interest. Meetings continue regarding residual matters. Eni recorded a specific provision for this matter.
SNAM RETE GAS SPAcommitmentsWith Regional Law No. 2 of March 26, 2002, the Sicilia Region introduced an environmental tax upon the owners of primary pipelines in Sicily (i.e. pipelines operating at a maximum pressure of over 24 bar). The tax was payable as of April 2002. In order to protect its interests, Snam Rete Gas filed a claim with the European Commission, aimed at opening a proceeding against the Italian Government and the Tax Commission of Palermo. The Authority for Electricity and Gas, although acknowledging that the tax burden is an operating cost for the transport activity, subjected inclusion of the environment tax in tariffs to the final ruling on its legitimacy by relevant authorities. With the ruling of December 20, 2002, the Court judged the tax at variance with European rules. In December 2002, Snam Rete Gas suspended payments based on the above Court ruling. Payments effected until November 2002 totaled euro 86.1 million. In January 2003 the Sicilia Region presented an appeal to the Council of State against the ruling of the Regional Administrative Court of Lombardia for the part that states the variance of the regional law with European rules. On December 16, 2003, the European Commission judged the tax instituted by the Republic of Italy, through the Sicilia Region, to be in contrast with European rules and with the cooperation agreement between the European Economic Community and the Peoples’ Democratic Republic of Algeria; the European Commission also stated that such environmental tax is in contrast with the common customs tariff because it modifies the equality of customs expenses on commodities imported from third countries and could create a deviation in trade with such countries and a distortion in access and competition rules. The Commission with its opinion presented on July 7, 2004 formally requested Italy to cancel the tax. The Italian Government must conform within two months from the reception of the opinion. As it did not conform, on December 20, 2004 the European Commission passed the case to the Court of Justice requesting a ruling. With a decision dated January 5, 2004, and confirmed on March 4, 2005 by the Regional Tax Commission, the Provincial Tax Commission of Palermo declared the environmental tax of the Sicilia Region illegitimate because it is in contrast with European rules and therefore accepted Snam Rete Gas’s claim for the repayment of the first installment of euro 10.8 million, already paid in April 2002 to the Sicilia Region. On May 4, 2004, the Sicilia Region repaid the first installment. As for the seven remaining installments paid after April 2002 (euro 75.3 million) the Provincial Tax Commission of Palermo with decision of January 5, 2005 confirmed the illegitimacy of the tax condemning the Region to repay the amounts paid and interest accrued to Snam Rete Gas. The Sicilia Region presented recourse to the Regional Tax Commission at Palermo, a hearing has been scheduled for April 5, 2006. On November 3, 2003, the Sicilia Region, following the procedure presented by Snam Rete Gas concerning the yearly liquidation of the tax for 2002, requested liquidation of tax, fines and interest (euro 14.2 million) relating to the unpaid December 2002 installment. On December 30, 2003 Snam Rete Gas filed a claim with request of suspension of payment as a result of the liquidation notice received from the Sicilia Region with the Provincial Tax Commission of Palermo, that, on June 25, 2004 accepted Snam Rete Gas’s claim and decided the cancellation of the liquidation notice served by the Sicilia Region, confirmed by the Regional Tax Commission on March 7, 2005. In any case Snam Rete Gas will not have to pay the tax: if the tax is considered illegitimate in other Courts of law, the company will have the right to the restitution of the money. If, to the contrary, the tax is considered legitimate by the other Courts, the Authority for Electricity and Gas will include the tax (Decision No. 146/2002 and No. 71/2003) in tariff with automatic and retroactive effects.
Other judicial or arbitration proceedings
SYNDIAL SPA (FORMER ENICHEM SPA) - SERFACTORING SPAIn 1991, Agrifactoring SpA commenced proceedings against Serfactoring SpA, a company 49% owned by Sofid SpA which is controlled by Eni SpA. The claim relates to an amount receivable of euro 182 million for fertilizer sales (plus interest and compensation for inflation), originally owed by Federconsorzi to EniChem Agricoltura SpA (later Agricoltura SpA - in liquidation), and Terni Industrie Chimiche SpA (merged into Agricoltura SpA - in liquidation), that has been merged into EniChem SpA (now Syndial SpA). Such receivables were transferred by Agricoltura and Terni Industrie Chimiche to Serfactoring, which appointed Agrifactoring as its agent to collect payments. Agrifactoring guaranteed to pay the amount of such receivables to Serfactoring, regardless of whether or not it received payment at the due date. Following payment by Agrifactoring to Serfactoring, Agrifactoring was placed in liquidation and the liquidator of Agrifactoring commenced proceedings in 1991 against Serfactoring to recover such payments (equal to euro 182 million) made to Serfactoring based on the claim that the foregoing guarantee became invalid when Federconsorzi was itself placed in liquidation. Agricoltura and Terni Industrie Chimiche brought counterclaims against Agrifactoring (in liquidation) for damages amounting to euro 97 million relating to acts carried out by Agrifactoring SpA as agent. The amount of these counterclaims has subsequently been reduced to euro 46 million following partial payment of the original receivables by the liquidator of Federconsorzi and various setoffs. These proceedings, which have all been joined, were decided with a partial judgment, deposited on February 24, 2004: the request of Agrifactoring has been rejected and the company has been ordered to pay the sum requested by Serfactoring and damages in favor of Agricoltura, to be determined following the decision. Agrifactoring appealed against this partial decision, requesting in particular the annulment of the first step judgement, the reimbursement of the euro 180 million amount from Serfactoring along with the rejection of all its claims and the payment of all expense of the proceeding. The appeal pending was set to be discussed in a hearing set for March 16, 2007 but was rescheduled for October 27, 2006 upon request of Agrifactoring. The judge of the Court of Rome, responsible for the determination of the amount of damages to be paid to Serfactoring and Agricoltura decided on May 18, 2005 to suspend this determination until the publication of the decision of the Court of Appeals, in accordance with Article 295 of the Code of civil procedure. Against this suspension Serfactoring and Syndial requested to the Court of Cassation the cancellation of the suspension and the return of the case to its original court.
SYNDIAL SPA (FORMER ENICHEM SPA)In 2002, EniChem SpA was summoned by ICR Intermedi Chimici di Ravenna Srl before the Court of Milan in relation to a breach of a preliminary agreement for the purchase of an industrial area in Ravenna. ICR requested payment of compensatory damages for approximately euro 46 million, of which euro 3 million are compensatory damages and euro 43 million are for loss of profits. During 2004 the preliminary inquiry was completed. With a judgment of October 11, 2005 the Court rejected ICR’s request and order that ICR pay all expenses. ICR filed a claim against this decision.
Antitrust, EU Proceedings, actions of the Authority for Electricity and Gas and of other regulatory Authorities
ENI SPAIn March 1999, the Antitrust Authority concluded its investigation started in 1997 and: (i) verified that Snam SpA (merged in Eni SpA in 2002) abused its dominant position in the market for the transportation and primary distribution of natural gas relating to the transportation and distribution tariffs applied to third parties and the access of third parties to infrastructure; (ii) fined Snam euro 2 million; and (iii) ordered a review of these practices relating to such abuses. Snam believes it has complied with existing legislation and appealed the decision with the Regional Administrative Court of Lazio requesting its suspension. On May 26, 1999, stating that these decisions are against Law No. 9/1991 and the European Directive 98/30/EC, this Court granted the suspension of the decision. The Antitrust Authority did not appeal this decision. The decision on this dispute is still pending.
With a decision of December 9, 2004, the Italian Antitrust Authority started an inquiry on the distribution of jet fuel against six Italian companies, including Eni and some of its subsidiaries, that store and load jet fuel in the Rome Fiumicino, Milan Linate and Milan Malpensa airports. The inquiry intends to ascertain the existence of alleged limitations to competition as oil companies would agree to divide among themselves the supplies to airlines. On December 22, 2005, the Authority notified the preliminary results of the inquiry concerning: (i) information flows to oil companies related to the functioning of shared storage and uploading companies; (ii) barriers to the entrance of new competitors; and (iii) the price of jet fuel is higher than on other European markets. On June 20, 2006, the Antitrust notified Eni the final decision of this proceeding and fined Eni by an amount of euro 117 million. The Antitrust fined other oil companies involved in the matter. Eni is evaluating this decision in order to file a claim against it decision before an administrative court.
On April 28, 2005 the Commission of the European Communities started a formal assessment to evaluate the alleged participation of Eni and its subsidiaries to activities limiting competition in the field of paraffin. The alleged violation of competition would have consisted in: (i) the determination of and increase in prices; (ii) the subdivision of customers; (iii) exchange of trade secrets, such as production capacity and sales volumes. On November 3, the Commission requested information on Eni’s activities in the field of paraffins. On November 29, 2005 Eni filed the requested information. On April 21, 2006 the Antitrust Authority requested information on the processing of raw paraffin, which Eni supplied in a letter dated May 25, 2006.
The Department of Justice of the United States of America - Antitrust Division, notified Eni Petroleum Co Inc of a subpoena requesting information and documents relating to activities in the field of wax to be filed before June 20, 2005. The Company informed the department that it does not produce nor import wax in the United States of America.
POLIMERI EUROPA SPA AND SYNDIAL SPAIn December 2002, inquiries were commenced concerning alleged anti-competitive agreements in the area of elastomers. These inquiries were commenced concurrently by European and U.S. authorities. The first product under scrutiny was EP(D)M: the European Commission submitted to inspection the manufacturing companies of that product, among which Polimeri Europa SpA and Syndial and requested information from those two companies and to their controlling company, Eni SpA. After the inquiries the Commission decided to open a procedure for violation of competition laws and notified Eni, Polimeri Europa and Syndial the relevant charges to that effect on March 8, 2005. At a hearing held on July 27, 2005 the two companies presented memoranda and confirmed their position. The parties await for a decision of the Commission.
EP(D)M manufacture is also under scrutiny in the United States, where the Department of Justice of San Francisco requested information and documents to Polimeri Europa Americas Inc, a U.S. subsidiary of Polimeri Europa and to its deputy chairman and sales manager. Class actions were filed claiming damages in relation to the alleged violation. In July 2005 Syndial signed a settlement agreement for the civil class action which entails the payment of approximately dollar 3.2 million, approved by the federal court.
The investigation was also extended to the following products: NBR, CR, BR, SSBR and SBR.
The European Commission started an investigation regarding BR, SBR, SSBR. On January 26, 2005 the Commission dropped the charges in relation to SSBR, while for the other two products the Commission started an infraction procedure by notifying Eni, Polimeri Europa and Syndial the relevant charges. The companies presented a written memorandum and the Commission decided to open an inquiry, as a consequence of which the Commission sent a new description of the charges. The companies are preparing a new memorandum.
With regard to NBR an inquiry is underway in Europe and the USA, where class actions also have been started. The class action at federal level was abandoned by the plaintiffs. The federal judge acknowledged this abandonment.
With regard to CR, as part of an investigation carried out in the USA, Syndial entered into a plea agreement with the Department of Justice pursuant to which Syndial would agree to pay a fine of U.S. dollar 9 million, while the Department of Justice would agree that it will not bring further criminal charges against Syndial or against its affiliate companies. On June 27, 2005 the plea agreement was approved. For CR the civil class action was closed with a settlement agreement approved by the federal judge on July 8, 2005 whereby the company will pay dollar 5 million. The European Commission requested Eni, Polimeri Europa and Syndial to provide information about CR. The two companies decided to cooperate with the Commission.
Eni recorded a provision for these matters.
STOCCAGGI GAS ITALIA SPAWith Decision No. 26 of February 27, 2002, the Authority for Electricity and Gas determined tariff criteria for modulation, mineral and strategic storage services for the period starting on April 1, 2002 until March 31, 2006 and effective retroactively from June 21, 2000. On March 18, 2002 Stoccaggi Gas Italia SpA (Stogit) filed its proposal of tariff for modulation, mineral and strategic storage for the first regulated period. With Decision No. 49 of March 26, 2002, the Authority for Electricity and Gas repealed Stogit’s proposal and defined tariffs for the first regulated period. Stogit applied the tariff determined by the two decisions, but filed an appeal against both decisions with the Regional Administrative Court of Lombardia requesting their cancellation. With a decision dated September 29, 2003, that Court rejected the appeal presented by Stogit. Stogit filed an appeal to the Council of State against the sentence which was rejected by the Council of State on January 6, 2006.
DISTRIBUIDORA DE GAS CUYANA SAThe agency entrusted with the regulations for the natural gas market in Argentina ("Enargas") started a formal investigation on some operators, among these Distribuidora de Gas Cuyana SA, a company controlled by Eni. Enargas stated that the company has applied improperly calculated conversion factors to volumes of natural gas invoiced to customers and requested the company to apply the conversion factors imposed by local regulations from the date of the default notification (March 31, 2004) without prejudice to any damage payment and fines that may be decided after closing the investigation. On April 27, 2004, Distribuidora de Gas Cuyana presented a defense memorandum to Enargas, without prejudice to any possible appeal. On April 28, 2006, the Company filed a formal request for examining the documents used as evidence of the alleged violation.
Settled Legal Proceedings
In August 2005, the internal revenue service of Venezuela served to Eni Dación BV four formal assessment on income taxes for the years 2001 to 2004 that, by excluding the deductibility of certain costs: (i) annul the losses recorded for the periods amounting to a total of bolivar 910 billion (corresponding to $425 million); (ii) determine for the same periods a taxable income amounting to a total of bolivar 115 billion (corresponding to $54 million); and (iii) request a tax amounting to bolivar 52 billion (corresponding to $24 million) determined by applying a 50% tax rate rather than the 34% rate applied to other companies performing activities analogous to those of Eni Dación BV. In particular it excluded the deductibility of: (i) interest charges due to other Eni Group companies that provided loans denominated in U.S. dollars; and (ii) exchange rate losses recorded in the Financial Statements and related to such loans resulting from the devaluation of the Venezuelan currency. The formal assessments served have a preliminary nature and do not request immediate payment nor do they specify the amount of a fine (from 10 to 250%) and of interest (average rate for the period approximately 23%). Eni Dación filed a claim for the cancellation of the assessment. In the 2005 accounts, Eni recorded a specific provision for this matter. In April 2006 the appeal was rejected and the final tax assessment was issued. The final tax assessment: (i) substantially confirmed the preliminary assessments, although reducing the originally assessed income tax liability to bolivar 39 billion ($18 million); and (ii) imposed fines and late payment interests of bolivar 109 billion ($51 million). Eni Dación BV presented a further administrative appeal before the expiration of the time limit for filing a judicial tax appeal, thereby obtaining a reduction of the overall amount from bolivar 148 billion ($69 million) to bolivar 52 billion ($24 million) including taxes in the amount of bolivar 12.5 billion ($6 million) and fines and late payment interest in the amount of bolivar 39.5 billion ($18 million). In order to avoid further charges deriving from the increase of the corresponding fines and late payment interest, Eni Dación BV paid the newly assessed amount in May 2006, thereby reaching a settlement. Consistently, Eni Dación BV filed an integrative income tax return for year 2005, considering the new tax bases for years 2001 to 2004, and paid accordingly bolivar 128 billion ($60 million) of income taxes and bolivar 4.4 billion ($2 million) of fines and late payment interest.
During 2003, the Customs District of Taranto sent 147 formal assessments and amendments to bills of entry for finished products and goods and semi finished products produced by Eni’s Taranto refinery in 2000, 2001 and 2002 to Eni SpA, as the successor entity of AgipPetroli SpA following its merger into Eni. The notification regards about euro 24 million of customs duties not paid by the company because the imported products were not yet finished goods, but were destined to processing, for which ordinary customs tariffs allow exemption. The formal assessment did not contain the determination of any administrative penalties provided for by customs rules. The penalty can be from one to ten times the amount of taxes not paid. The notification was based on the fact that the company did not have the administrative authorization to utilize the customs exemption. The company, believing it acted properly pursuant to Circular 20/D/2003, started a proceeding for an administrative resolution, according to the customs rules. The company asked the Regional Director of Customs of Puglia for the annulment of the received assessments as a measure of self-protection. With a decision of November 26, 2004 the Regional Director accepted Eni’s appeal and ended the litigation by canceling the 147 formal assessments. On March 12, 2004 the Comando Nucleo Regionale Polizia Tributaria Puglia notified a verbal action of observation to the company. In this action there is an alleged offense of smuggling and falsification of accounts for the same imports, already subjected to the previous assessments of the Customs District of Taranto and other occurrences between January 1999 and February 2003. The verbal action made by a Fiscal Officer, sent to the Public Prosecutor in the Court of Taranto, reclaims the omitted payment of customs for about euro 26 million. The notification was based on the same lack of administrative authorization, already contested by the Customs District of Taranto, that was concluded in favor of Eni by the Regional Director. On January 26, 2006 the judge for preliminary investigation of the Court of Taranto dismissed the accusations and closed the assessment.
In 1997, Grifil SpA summoned AgipPetroli SpA (merged into Eni SpA in 2002) before the Court of La Spezia. Grifil requested payment for the remediation of a polluted land parcel part of the La Spezia refinery (which was closed in 1985), sold to it in 1996 by Italiana Petroli SpA later merged into AgipPetroli SpA. The claims for these damages amount to euro 103 million. At the end of 2002 Grifil and AgipPetroli reached an agreement under the terms of which AgipPetroli had to pay half of the clean-up costs, the total amount of which was set by an independent appraisal at euro 19 million, with AgipPetroli’s share corresponding to a maximum of euro 9.5 million, Grifil in turn had the obligation to remediate the polluted soil and to renounce any claims against Eni. Grifil did not fulfill its obligations to remediate the polluted soil; however, maintaining the possibility of precautionary requests and claims against Grifil, Eni decided to remediate the polluted soil with the assistance of a company interested in developing the parcel of land that agreed to pay 13% of the remediation costs. The first action promoted by Grifil before the Court of La Spezia remained pending. On January 7, 2004 the Municipality of La Spezia put Eni in possession of the area and from that date Eni started remediation works paying the relevant costs on its own. Eni requested the conservative seizure of Grifil’s land parcel, up to a maximum value of euro 19 million. With two administrative measures, on December 2, 2003 and January 13, 2004 respectively, the Court of Genova declared the right of Eni legitimate, based on the sale contract stipulated between Italiana Petroli and Grifil, to claim the payment of all clean-up expenses that Eni will incur as Grifil did not fulfill its obligation. The judge closed the inquiry phase and stated that the judgment can be brought to an end. As for the value attributable to the conservative seizure of Grifil’s land parcel (up to a value of euro 19 million), the Court requested Eni to file the contracts for the remediation work with the court, in which the amounts paid are recognized. The contract with an international company specializing in remediation was signed on April 15, 2004 and immediately presented to the Court. In order to preserve Grifil’s asset as a way to recover its credit versus Grifil, Eni, which is paying for the remediation works, also filed an ordinary revocation of title, so that, while waiting for the Court’s ruling, Grifil will not be able to sell the land parcel to third parties. On September 6, 2005 Eni and Immobiliare Helios SpA (that acquired all of Grifil’s share capital) reached a settlement that: (i) concluded all disputes outstanding with Grifil and constitutes a waiver to any possible future claim directly or indirectly related to the sale of the land parcel; (ii) passed to the acquirer all residual expense to be incurred for the reclamation of the land parcel with the explicit approval of the municipality of La Spezia; (iii) provided for Eni to pay to the new owner of Grifil a lump sum of euro 15.1 million that will be paid when the new owner provides confirmation of works performed for the reclamation; the sum is covered by provisions in the risk reserve.
In 1997, an action was commenced before the Court of Venice concerning the criminal charges brought by the Venice public prosecutor for alleged mismanagement of the Porto Marghera plant starting in the 1970s until 1995 and for the alleged pollution and health damage resulting therefrom. Defendants included certain employees of Eni which has been managing the Porto Marghera plant since the beginning of the eighties. On November 2, 2001, the Court of Venice acquitted all defendants. The appeal against the decision was presented by the public prosecutor, the State Attorney on behalf of the Ministry of Environment and the Council of Ministers, 5 public entities, 12 associations and other entities and 48 individual persons. On December 15, 2004 the Venice Court of Appeals confirmed the preceding judgment, changing only some marginal parts. As concerns some defendants, the Court of Appeals decided not to proceed due to the statute of limitations for some crimes, while it confirmed the preceding judgment for the other matters. On May 19, 2006, the Court of final instance, before which plaintiffs appealed the decision of the Court of Appeals, acquitted all defendants stating that pollution and mismanagement of the plant occurred before the eighties and consequently Eni and its employees could not be deemed responsible for that. In January 2006 Eni settled this matter with the Council of Ministers and the Ministry for the Environment paying an amount of euro 40 million. Under terms of the settlement, the latter will abstain from the recourse to the Court of final instance and will not act on any other environmental damage concerning the management of Porto Marghera until the date of the settlement. Eni had already recorded a provision for this matter which was sufficient to cover the amount of the settlement.
Other commitments and risks not included in the balance sheet
Commitments regarding long-term natural gas supply contracts stipulated by Eni, which contain take-or-pay clauses, are included in "Operating Review - Gas & Power" in the Report of the Directors in the Consolidated Financial Statement, which is considered an integral part of these Notes.Parent company guarantees
given relatingamounted to euro 11,110 million (euro 4,911 million at December 31, 2006) were issued in connection with certain contractual commitments for hydrocarbon exploration and production activities, quantified on the basis of the capital expenditures to bemade, amountincurred. The increase of euro 6,199 million primarily related to commitments that Agip Caspian Sea BV in Kazakhstan had entered into for euro5,052 million (euro 3,192 million at December 31, 2004).
With effective date April 1, 2006, the Venezuelan State oil company Petróleos de Venezuela SA (PDVSA) unilaterally terminated the service contract governing activities at the Dación oil field where Eni acted as a contractor, holding a 100% working interest. As a consequence, starting on the same day, operations at the Dación oil field are conducted by PDVSA which replaced Eni Dación BV, Eni’s wholly-owned subsidiary that had been operating the field until that date.
Eni believes that it is entitled to a market value compensation for the expropriation of the Dación field. On these basis, Eni is available to reach an agreement with the Venezuelan authorities. In case an amicable settlement is not possible, Eni will take any other action in order to protect its interest in Venezuela. Based on internal and external independent evaluation, Eni is confident that a fair market compensation will not be lower than the book value of the Dación related assets. Accordingly, management decided not to impair the book value of Eni’s Dación assets. In 2005 and in the first quarter 2006, the Dación field production rate was about 60 KBBL/d. Management expects Eni’s proved reserves of hydrocarbons to be reduced by an amount of approximately 175 mmBBL corresponding to Eni’s net proved reserves of the Dación field as of December 31, 2005 as a consequence of the loss of Eni’s title to the field.5,605 million.Under the convention signed on October 15,
20011991 by Treno Alta Velocità - TAV SpA and CEPAV (Consorzio Eni per l’Alta Velocità) Due, Eni committed to guarantee the execution of design and construction of the works assigned to the CEPAV Consortium (to which it isaparty) and guaranteed to TAV the correct and timely execution of all obligations indicated in the convention in a subsequent integration deed and in any further addendum or change or integration to the same. The regulation of CEPAV Due contains the same obligations and guarantees contained in the CEPAV Unoagreement.Agreement.A
guarantee for euro 282 million to Cameron LNG provided on behalf ofcommitment entered into by Eni USA Gas Marketing Llc(Eni’s interest 100%)on behalf of Cameron LNG forthefulfilling certain obligations in connection with a regasification contractentered intosigned on August 1, 2005. Thisguaranteecommitment is subject to a suspension clause and will comeininto force when the regasification service starts in a period included between October 1, 2008 and June 30,2009.2009 for an estimated total consideration of euro 226 million.
Non-quantifiableA commitment entered into by Eni USA Gas Marketing Llc on behalf of Gulf LNG Energy for the acquisition of unused regasification capacity (5.78 BCM/y) over a twenty-year period (2011-2031) for an estimated total consideration as high as $1,400 million equal to euro 951 million.A commitment entered into by Eni USA Gas Marketing Llc on behalf of Angola LNG Supply Service for the acquisition of regasified gas at the Pascagoula plant in the United States that will come into force when the regasification service starts in a period included between 2011-2031.
Eni is liable for certain non-quantifiable risks related to contractual assurances given to
acquirorsacquirers of certain of Eni’s assets, including businesses and investments, against certainunforeseeablecontingent liabilitiesattributable toderiving from tax,state welfaresocial security contributions, environmental issues andenvironmentalother matters applicable to periods during which suchinvestmentsassets wereownedF-79
operated by Eni. Eni believes such matters will not have a material adverse effect on
its Consolidated Financial Statements.the Company’s results of operations and liquidity.
Environmental RegulationsAssets under concession arrangements
Together with other companiesEni operates under concession arrangements mainly in theindustriesExploration & Production segment and in some activities of the Gas & Power segment and the Refining & Marketing segment. In the Exploration & Production segment contractual clauses governing mineral concessions, licenses and exploration permits regulate the access of Eni to hydrocarbon reserves. Such clauses can differ in each country. In particular, mineral concessions, licenses and permits are granted by the legal owners and, generally, entered into with government entities, State oil companies and, in some legal contexts, private owners. As a compensation for mineral concessions, Eni pays royalties and taxes in accordance with local tax legislation. Eni sustains all the operation risks and costs related to the production and development activities and it is entitled to the productions realized. In Product Sharing Agreement and in buy-back contracts, realized productions are defined on the basis of contractual agreements drawn up with State oil companies which hold the concessions. Such contractual agreements regulate the recover of costs incurred for the exploration, development and operating activities (cost oil) and give entitlement to the own portion of the realized productions (profit oil). With reference to natural gas storage in Italy, the activity is conducted on the basis of concessions with a duration that does not exceed a twenty year duration and itoperates, Eniissubjectgranted by the Ministry of Productive Activities tonumerous EU, national, regionalpersons that are consistent with legislation requirements and that can demonstrate to be able to conduct a storage program that meets the public interest in accordance with the laws. In the Gas & Power segment the gas distribution activity is primarily conducted on the basis of concessions granted by localenvironmental lawspublic entities. At the expiry date of the concession, compensation is paid, defined by using criteria of business appraisal, to the outgoing operator following the sale of its own gas distribution network. Service tariffs for distribution are defined on the basis of a method established by the Authority for Electricity andregulations concerning its oil and gas operations, productsGas. Legislative Decree No. 164/2000 provides the grant of distribution service exclusively by tender, with a maximum length of 12 years.In the Refining & Marketing segment several service stations and other auxiliary assets of the distribution service are located in the motorway areas and they are granted by the motorway concession operators following a public tender for the sub-concession of the supplying of oil products distribution service and other auxiliary services. Such assets are amortized over the length of the concession (generally, 5 years for Italy). In exchange of the granting of the services described above, Eni provides to the motorway companies fixed and variable royalties on the basis of quantities sold. At the end of the concession period, all non-removable assets are transferred to the grantor of the concession.
Environmental regulations
Risks associated with the footprint of Eni’s activities
including legislation that implements international conventions or protocols. In particular, these laws and regulations require the acquisition of a permit before drilling for hydrocarbons may commence, restrict the types, quantities and concentration of various substances that can be released intoon the environment, health and safety are described inconnection with exploration, drilling and production activities, limit or prohibit drilling activities on certain protected areas, and impose criminal or civil liabilities for pollution resulting from oil, natural gas, refining and petrochemical operations. These laws and regulations may also restrict emissions and discharges to surface and subsurface water resulting fromtheoperation of natural gas processing plants, petrochemicals plants, refineries, pipeline systems and other facilities that Eni owns. In addition, Eni’s operations are subject to laws and regulations relating torisk section above, under thegeneration, handling, transportation, storage, disposal and treatment of waste materials. Environmental laws and regulations have a substantial impact on Eni’s operations. Someparagraph "Operational risks". Regarding the environmental risk,of environmental costs and liabilities is inherent in particular operations and products of Eni, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs and liabilities will not be incurred. Althoughmanagementconsidering the actions already taken with the insurance policies to cover environmental risks and the provision for risks accrued,does not currently expect any material adverse effect upon Eni’sConsolidated Financial Statements as a resultconsolidated financial statements, taking account ofits complianceongoing remedial actions, existing insurance policies to cover environmental risks and the environmental risk provision accrued in the consolidated financial statements. However, management believes that it is possible that Eni may incur material losses and liabilities in future years in connection withsuch laws and regulations, there can be no assurance that there will not be a material adverse impact on Eni’s Consolidated Financial Statementsenvironmental matters due to: (i) the possibility of as yet unknown contamination; (ii) the results of theon-goingongoing surveys and the other possible effects of statements required by Decree No. 471/1999 of the Ministry of Environment; (iii)the possible effect of futurenew developments in environmentallegislation and rules, such as: (a) the decree of the Ministry of Environment No. 367 published on January 8, 2004, that regards the fixing of new quality standards for aquatic environment and dangerous substances and Legislative Decree No. 59/2005 concerning the integrated environmental authorization (IPPC), (b) the application of European directive 2004/35/EC concerning environmental responsibility for prevention and reclamation of environmental damage, referred to in paragraph 439 of the single article of Law No. 266/2005 (budget law for 2006), (c) a legislative decree to be issued in implementation of Law No. 308 of December 15, 2004 that delegated to the Government the restructuring of regulations concerning waste disposal and reclamation of polluted areas, protection of waters from pollution and management of water resources, payment of environmental damage, procedures for the evaluation of environmental impact and for the strategic environmental impact as well as protection from emission into the atmosphere within 18 months. The draft law approved by the Council of Ministers on February 10, 2006 is currently being examined by the President of the Republic. The also implements European directive 2000/60/EC that established a European action framework for the protection of waters;regulation; (iv) the effect of possible technological changes relating to future remediation; and (v) the possibility of litigation and the difficulty of determining Eni’s liability, if any, as against other potentially responsible parties with respect to such litigation and the possible insurance recoveries.Emission trading
Law No. 316 of December 30, 2004 converted LawLegislative Decree No.237/2004 implementing European directive216 of April 4, 2006 implemented the Emission Trading Directive 2003/87/ECwhich established a systemconcerning greenhouse gas emissions and Directive 2004/101/EC concerning the use of carbon credits deriving from projects foremission trading. From January 1, 2005 thisthe reduction of emissions based on the flexible mechanisms devised by the Kyoto Protocol. This European emission trading scheme has been in force since January 1, 2005, and on this matter, onFebruary 24, 2006November 27, 2008, theMinistryNational Committee for Emissions Trading Scheme (Ministry of Environment-Mse) published theEnvironment published a decreeResolution 20/2008 defining emission permits for the2005-20072008-2012 period. In particular, Eni was assigned permits corresponding to65.2 million tonnes127.2 mmtonnes of carbon dioxide(of which 22.4 for 2005, 21.4 for 2006 and 21.4 for 2007). In 2005 emissions(approximately 25 mmtonnes/y) in addition to approximately 7.4 million of permits expected to be assigned with respect to new plants in the five-year period 2008-2012. Emissions of carbon dioxide from Eni’s plants were lower than permitsassigned.
assigned in 2008. Emission permits for 25.9F-80
million tonnes were assigned, against emissions of carbon dioxide of approximately 25.3 million tonnes, resulting in a surplus of 0.6 million tonnes.
Subsequent events
30 Revenues
The main significant events that occurred after the balance sheet date are as follows:
•On May 5, 2006 the European Commission started an inquiry in order to verify an alleged abuse of dominant position on the part of Eni in violation of article 82 of the EEC Treaty and article 54 of the CES Agreement in the activities of international gas transport and wholesale and retail supply of gas. According to the European Commission Eni might have adopted commercial practices that constitute barriers to access to the Italian market for the wholesale supply of natural gas, in particular taking account of Eni long-term purchase contracts. In addition Eni also entered into long-term transport contracts which award Eni a majority share of transport capacity of certain international gaslines and, as a consequence, Eni may have prevented others access to infrastructure.Officials from the European Commission have conducted inspections at Eni’s headquarters and of certain of Eni’s subsidiaries and collected documents.If the existence of the alleged anti-competitive practices is confirmed, the European Commission could fine Eni.•On May 25, 2006, Eni’s Annual General Shareholders Meeting approved a euro 2 billion increase in Eni’s ongoing share repurchase program.
25 RevenuesThe following is a summary of the main components of "Revenues".
MoreFor more information about changes in revenues,is included in the "Financial review" of the "Report of the Directors"see "Item 5 – Operating and Financial Review and Prospects".Net sales from operations were as follows:
(million euro) 2004
2005
Net sales from operations 57,413
73,679
Change in contract work in progress 132
49
57,545
73,728
(euro million) 2006
2007
2008
Net sales from operations 85,957 87,103 107,843 Change in contract work in progress 148 153 305 86,105 87,256 108,148
Net sales from operations were net of the following items:
(million euro) 2004
2005
Excise tax 14,060
14,140
Exchanges of oil sales (excluding excise tax) 1,735
2,487
Exchanges of other products 86
108
Services billed to joint venture partners 1,175
1,331
Sales to service station managers for sales billed to holders of credit card 1,122
1,326
18,178
19,392
(euro million) 2006
2007
2008
Excise taxes 13,762 13,292 13,142 Exchanges of oil sales (excluding excise taxes) 2,750 2,728 2,694 Services billed to joint venture partners 1,385 1,554 2,081 Sales to service station managers for sales billed to holders of credit cards 1,453 1,480 1,700 Exchanges of other products 127 121 83 19,477 19,175 19,700
Net sales from operations by
industrybusiness segment and geographic area of destination are presented in Note31.36 - Information by industry segment and geographic financial information.Other income and revenues
Other income and revenues were as follows:
(million euro) 2004
2005
Contract penalties and other trade revenues 43
114
Lease and rental income 93
102
Compensation for damages 87
89
Gains from sale of assets 407
71
Other proceeds (*) 747
422
1,377
798
(euro million) 2006
2007
2008
Gains on price adjustments under overlifting/underlifting transactions 30 79 180 Lease and rental income 98 95 98 Gains from sale of assets 100 66 48 Contract penalties and other trade revenues 61 181 23 Compensation for damages 40 87 15 Other proceeds (*) 454 319 356 783 827 720
(*) Each individual amount included herein does not exceed euro 2550 million.
Other income of 2004 included differentials on commodity derivatives for euro 61 million.
F-81
2631 Operating expenses
The following is a summary of the main components of "Operating expenses".MoreFor more information about changes in operating expenses,is included in the "Financial review" of the "Report of the Directors"see "Item 5 – Operating and Financial Review and Prospects".Purchases, services and other
Purchases, services and other included the following:
(million euro) 2004
2005
Production costs-raw, ancillary and consumable materials and goods 27,010
35,318
Production costs-services 9,148
9,405
Operating leases and other 1,609
1,929
Net provisions for contingencies 553
1,643
Other expenses 1,066
1,100
39,386
49,395
less: - capitalized direct costs associated with self-constructed assets (1,039
) (828
) 38,347
48,567
(euro million) 2006
2007
2008
Production costs - raw, ancillary and consumable materials and goods 44,661 44,884 58,712 Production costs - services 10,015 10,828 13,355 Operating leases and other 1,903 2,276 2,558 Net provisions for contingencies 767 591 900 Other expenses 1,089 1,095 1,652 58,435 59,674 77,177 less: - capitalized direct costs associated with self-constructed assets - tangible assets (783 ) (1,325 ) (645 ) - capitalized direct costs associated with self-constructed assets - intangible assets (162 ) (170 ) (124 ) 57,490 58,179 76,408
Production costs-services included brokerage
includefees related to Engineering & Construction segment for euro24155 million (euro2639 millionat December 31, 2004)and euro 37 million in 2006 and 2007, respectively).Costs
forincurred in connection with research and developmentthatactivity recognized in profit and loss amounted to euro 216 million (euro 219 million and euro 189 million in 2006 and 2007, respectively) as they do not meet the requirements to becapitalized amount tocapitalized.The item "Operating leases and other" included operating leases for euro
202957 million (euro210860 million and euro 1,081 million in2004).
Operating leases2006 andother include2007, respectively) and royalties on hydrocarbons extracted for euro965871 million (euro741823 million and euro 772 million in2004)2006 and 2007, respectively). Future minimum lease payments expected to be paid under non-cancelable operating leases were as follows:
(euro million) 2006
2007
2008
To be paid within 1 year 594 588 618 Between 2 and 5 years 1,474 1,401 2,585 Beyond 5 years 762 942 1,084 2,830 2,931 4,287
Operating leases primarily concerned assets for drilling activities, time charter and long-term rentals of vessels, lands, service stations and office buildings. Such leases did not include renewal options. There are no significant restrictions provided by these operating leases which limit the ability of Eni to pay dividends, use assets or to take on new borrowings.
ProvisionsIncrease of provisions for contingenciesarenet ofdeductions not correspondingreversal of unutilized provisions amounted tocash expenditureseuro 874 million (euro 767 million andconcerneuro 591 million inparticular provisions for2006 and 2007, respectively) and mainly regarded environmental risks for euro515360 million (euro145248 million and euro 327 million in2004)2006 and 2007, respectively),provisions for contract penalties and disputesmarketing initiatives awarding prizes to clients for euro33673 million (euro2344 million2004), provisions for the revision of selling pricesand euro 59 million in 2006 and 2007, respectively) and legal or other proceedings for euro32155 million (euro 149 million andloss adjustments and actuarial provisions foreuro82 million (euro 1379 million in2004)2006 and 2007, respectively). More information is included in Note 22 - Provisions for contingencies.F-82
Payroll and related costs
Payroll and related costs were as follows:
(million euro) 2004
2005
Wages and salaries 2,402
2,484
Social security contributions 658
662
Cost related to defined benefit plans 118
126
Other costs 218
255
3,396
3,527
less: - capitalized direct costs associated with self-constructed assets (151
) (176
) 3,245
3,351
(euro million) 2006
2007
2008
Wages and salaries 2,630 2,906 3,204 Social security contributions 691 690 694 Cost related to defined benefits plans and defined contributions plans 230 161 107 Other costs 305 275 282 3,856 4,032 4,287 less: - capitalized direct costs associated with self-constructed assets - tangible assets (99 ) (109 ) (148 ) - capitalized direct costs associated with self-constructed assets - intangible assets (107 ) (123 ) (135 ) 3,650 3,800 4,004
Cost relatedAverage number of employees
The average number and break-down of employees by category of Eni’s subsidiaries were as follows:
(number) 2006
2007
2008
Senior managers 1,676 1,594 1,621 Junior managers 11,142 11,816 12,597 Employees 34,671 35,725 36,766 Workers 25,426 25,582 26,387 72,915 74,717 77,371
The average number of employees was calculated as the average between the number of employees at the beginning and end of the period. The average number of senior managers included managers employed and operating in foreign countries, whose position is comparable to
defined benefit plans is presented in Note 20.a senior manager status.
StockStock-based compensationStock grant
With the aim of improving motivation and loyalty of the
In 2008 residual rights for stock grant were exercised by managers of Eni SpA and its subsidiaries as defined in Article 2359 of the Civil Code14through the linking ofas eligible to this compensationto the attainment of preset individual and corporate objectives, making management participate in corporate risk and motivating them towards the creation of shareholder value and increasingplan. Therefore at thesame time their contribution to the management of the Company, Eni offers its own shares purchased along its buy-back program (treasury shares) for no consideration to those managers of Eni who have achieved corporate and individual objectives. Assignments vest within 45 days after the end of the third year from thebalance sheet dateof the offer.
At December 31, 2005, 3,127,200 of ordinary shares with nominal value euro 1 were outstanding and concerned the 2003 stock grant plan for a total of 1,018,400 shares with a fair value of euro 11.20 per share, the 2004 stock grant plan for a total of 912,400 shares with a fair value of euro 14.57 per share and the 2005 stock grant plan for a total of 1,196,400 shares with a fair value of euro 20.08 per share.there are not residual rights granted. Changes in the
2003, 20042006, 2007 and20052008 stock grant plans consisted of thefollowing (regarding stock grants, no exercise prices are provided for):following:
2003
2004
2005
2006
2007
2008
(euro)Number of sharesMarket price(a)Number of shares
Market price (a) (euro)
Market price(a)Number of shares
Market price (a) (euro)
Number of shares
Market price (a)(euro)
Stock grants as of January 1 3,551,900
15.150
3,635,050
15.101
3,112,200
18.461
Stock grants outstanding as of January 1 3,127,200
23.460
1,873,600
25.520
902,800
25.120
New rights granted 1,206,000
13.764
1,035,600
17.035
1,303,400
21.336
Rights exercised in the period (1,122,150
) 13.751
(1,552,9100
) 16.766
(1,273,500
) 23.097
(1,236,400
) 23.933
(966,000
) 24.652
(893,400
) 21.832
Rights cancelled in the period (700
) 13.604
(6,350
) 16.618
(14,900
) 22.390
(17,200
) 23.338
(4,800
) 26.972
(9,400
) 22.683
Stock grants outstanding as of December 31, 3,635,050
15.101
3,112,200
18.461
3,127,200
23.460
of which exercisable at December 31, -
-
-
-
38,700
23.460
Stock grants outstanding as of December 31 1,873,600
25.520
902,800
25.120
of which exercisable at December 31 156,700
25.520
68,100
25.120
(a) Market price relating to new rights granted, rights exercised in the period and rights cancelled in the period corresponds to the average market value (arithmetic average of official prices recorded on Mercato Telematico Azionario in the month preceding: (i) the date of the resolution of theBoard of Directors resolution regarding the stockgrantsgrant assignment; (ii) the dateof the recording in the grantee’s securities account ofon which the emission/transfer of the sharesgranted;granted were recorded in the grantee’s securities account; and (iii) the date of the unilateral termination of employment for rights cancelled), weighted with the number of shares. Market price of stockgrantsat the beginning andat theend of the year is the price recorded at December 31.F-83
Stock option
With the aim of improving motivation and loyalty of the
Stock options plans are designed for managers of Eni SpA and its subsidiaries as defined in Article 2359 of the Civil Code,15that hold significantwho are directly responsible for corporate results or for strategic positions,of managerial responsibility or that are considered as strategic managers for the Group, Eni approved stock compensationmaking them participate to an effective incentive plan.2002-2004 and 2005 plans
that provide the assignment for no consideration of purchase rights of Eni treasury shares (options).
Stock optionsprovidesplans provide the right for the assignee to purchaseoftreasuryshare inshares with a 1 to 1 ratio after the end of the third year from the date of the grantwith(vesting period) and for a maximum period of five years. The strike pricecalculated aswas determined to be the arithmetic average of official prices registered on the Mercato Telematico Azionario in the month precedingassignmentthe grant date or,(startingfrom2003), if greater, as2003 onwards, the averagecostcarrying amount of treasury sharesregistered inas of the day precedingassignment. Strike pricethe assignment, if greater.2006-2008 plan
The 2006-2008 stock option plan has introduced a performance condition for the2005 stock option grant was euro 22.512. Stock option grantees can obtain advances byexercise of theGroup financial company foroptions. At thepaymentend ofshares acquired on condition thateach three-year period (vesting period) from thegrantees contemporaneously underwrite an irrevocable warrantassignment, the Board ofsaleDirectors determines the percentage of exercisable options, from 0 to 100, in relation to theabove-mentioned financial company, regardingTotal Shareholders’ Return (TSR) of Eni’s shares as benchmarked against theshares acquired.TSR delivered by a panel of the six largest international oil companies for market capitalization. Options can be exercised for a maximum period of three years. The strike price is calculated as the arithmetic average of official prices registered on the Mercato Telematico Azionario in the month preceding assignment.At December 31,
2005 a total of 13,379,6002008, 23,557,425 optionshave been grantedwere outstanding for the purchase of13,379,60023,557,425 ordinaryshares with a nominal valueshares. The break-down ofeuro 1 of Eni SpA. Options refer tooutstanding options was the2002 stock plan for 903,100 shares with an exercise price of euro 15.216 per share, to the 2003 stock plan for 4,106,500 shares with an exercise price of euro 13.743 per share, to the 2004 stock plan for 3,659,000 shares with an exercise price of euro 16.576 per share and to the 2005 stock plan for 4,711,000 shares with an exercise price of euro 22.512 per share.following:
Rights outstanding
as of December 31Average strike price (euro)
Stock option plan 2002 97,000 15.216 Stock option plan 2003 231,900 13.743 Stock option plan 2004 671,600 16.576 Stock option plan 2005 3,756,000 22.512 Stock option plan 2006 5,954,250 23.119 Stock option plan 2007 5,492,375 27.451 Stock option plan 2008 7,354,300 22.540 23,557,425
At December 31,
20052008 the weighted-average remaining contractual life of theoptions outstandingplans at December 2002, 2003, 2004, 2005, 2006, 2007 and20052008 was 1 year and 7 months, 2 years and 7 months, 3 years and 7 months, 4 years and 7 months,53 years and 7 months,64 years and 7 months and75 years and 7 months, respectively.Changes
in the 2003, 2004 and 2005of stock option plans in 2006, 2007 and 2008 consisted of the following:
2003
2004
2005
2006
2007
2008
(euro)Number of sharesWeighted average exercise priceNumber
of sharesAverage strike price (euro)
Market price (a) (euro)
Number
of sharesAverage strike price (euro)
Weighted average exerciseMarket price(a) (euro)Number
of sharesAverage strike price (euro)
Number of shares
Weighted average exerciseMarket price(a) (euro)
Options as of January 1 3,518,500 15.216 8,162,000 14.367 11,789,000 15.111 New options granted 4,703,000 13.743 3,993,500 16.576 4,818,500 22.512 Options exercised in the period (354,000 ) 14.511 (3,106,400 ) 15.364 Options cancelled in the period (59,500 ) 15.216 (12,500 ) 14.45 (121,500 ) 16.530 Options outstanding as of December 31, 8,162,000 14.367 11,789,000 15.111 13,379,600 17.705 of which exercisable at December 31, 73,000 14.802 1,540,600 16.104
Stock options as of January 1 13,379,600
17.705
23.460
15,290,400
21.022
25.520
17,699,625
23.822
25.120
New rights granted 7,050,000
23.119
23.119
6,128,500
27.451
27.447
7,415,000
22.540
22.538
Rights exercised in the period (4,943,200
) 15.111
23.511
(3,028,200
) 16.906
25.338
(582,100
) 17.054
24.328
Rights cancelled in the period (196,000
) 19.119
23.797
(691,075
) 24.346
24.790
(975,100
) 24.931
19.942
Stock options outstanding as of December 31 15,290,400
21.022
25.520
17,699,625
23.822
25.120
23,557,425
23.540
16.556
of which exercisable at December 31 1,622,900
16.190
25.520
2,292,125
18.440
25.120
5,184,250
21.263
16.556
(a) Market price relating to new rights granted, rights exercised in the period and rights cancelled in the period corresponds to the average market value (arithmetic average of official prices recorded on Mercato Telematico Azionario in the month preceding: (i) the date of the Board of Directors resolution regarding the stock grants assignment; (ii) the date in which the emission/transfer of the shares granted was recorded in the grantee’s securities account; and (iii) the date in which the unilateral termination of employment for rights was cancelled), weighted with the number of shares. Market price of stock at the beginning and end of the year is the price recorded at December 31. F-84
The fair value of stock options granted during the years 2002, 2003, 2004 and 2005 was euro 5.39, euro 1.50, euro 2.01 and euro 3.33
forper share,respectively,respectively. For 2006, 2007 and 2008 the weighted average considering options granted wascalculatedeuro 2.89, euro 2.98 and euro 2.60 per share, respectively.The fair value was determined by applying
the Black-Scholes method usingthe following assumptions:
2002
2003
2004
2005
2006
2007
2008
Risk-free interest rate (%)
3.5
3.16
3.21
2.51
Expected life (year)
8
8
8
8
Expected volatility (%)
43
22
19
21
Expected dividends (%)
4.5
5.35
4.5
3.98
Risk-free interest rate (%)
3.5
3.2
3.2
2.5
4.0
4.7
4.9
Expected life (years)
8
8
8
8
6
6
6
Expected volatility (%)
43.0
22.0
19.0
21.0
16.8
16.3
19.2
Expected dividends (%)
4.5
5.4
4.5
4.0
5.3
4.9
6.1
Costs of the year related to stock grant and stock option plans
amountamounted to euro3525 million (euro1820 millionat December 31, 2004)and euro 27 million in 2006 and 2007, respectively).Compensation of key management
personnel
Compensation of persons responsibleoffor key positions in planning, direction and control functions of Eni Group,companies,including executive and non-executive officers, general managers and managers with strategic responsibility (keymanagement personnel) amountedmanagement) amount to euro1423 million, euro 25 million and euro1525 million for20042006, 2007 and2005,2008 respectively, and consisted of the following:
(million euro) 2004
2005
Wages and salaries 12
11
Post-employment benefits 1
1
Indemnities due upon termination of employment 1
Stock grant/option 1
2
14
15
(euro million) 2006
2007
2008
Wages and salaries 16 17 17 Post-employment benefits 1 1 1 Other long-term benefits 3 3 3 Stock grant/option 3 4 4 23 25 25
Compensation of Directors and Statutory Auditors
and General Managers
Compensation of DirectorsStatutory Auditors and General Managers amountamounted to euro4.58.7 million, euro 8.9 million and euro19.26.4 millionin 2004for 2006, 2007 and2005,2008, respectively. Compensation of Statutory Auditors amounted to euro0.6880.686, euro 0.678 million and euro0.7850.634 million in20042006, 2007 and2005,2008, respectively.Compensation
of Directors, Statutory Auditors and General Managers includeincluded emoluments and all other retributive and social security compensations due for the function ofmanagerdirectors or statutory auditor assumedinby Eni SpA orinother companies included in the scope of consolidation,that arerepresenting a cost for Eni.
The average number of employees of the companies included in the scope of consolidation by type was as follows:
(units) 2004
2005
Senior managers 1,746
1,754
Junior managers 10,449
10,747
Employees 35,393
34,457
Workers 25,623
24,345
73,211
71,303
The average number of employers is calculated as half of the total of the number of employees at the beginning and at the end of the period. The average number of senior managers includes managers employed and operating in foreign countries, whose position is comparable to a senior manager status.Depreciation, depletion, amortization and impairments
Depreciation, depletion, amortization and impairments charges consisted of the following:
(million euro) 2004
2005
Depreciation and amortization: - tangible assets 3,670
4,576
- intangible assets 931
936
4,601
5,512
Impairments: - tangible assets 329
264
- intangible assets 4
8
333
272
less: - direct costs associated with self-constructed assets (3
) (3
) 4,931
5,781
(euro million) 2006
2007
2008
Depreciation, depletion and amortization: - tangible assets 4,694 4,935 5,994 - intangible assets 1,462 2,096 2,436 6,156 7,031 8,430 Impairments: - tangible assets 231 140 1,343 - intangible assets 54 67 53 285 207 1,396 less: - reversal of impairments - tangible assets (17 ) (2 ) - reversal of impairment - intangible assets (1 ) - capitalized direct costs associated with self-constructed assets - tangible assets (1 ) (1 ) (4 ) - capitalized direct costs associated with self-constructed assets - intangible assets (2 ) (1 ) (4 ) 6,421 7,236 9,815
27F-8532 Financial income (expense)
Financial
Finance income (expense) consisted of the following:
(euro million) 2006
2007
2008
Finance income (expense) Finance income 3,749 4,445 7,985 Finance expense (3,971 ) (4,554 ) (8,198 ) (222 ) (109 ) (213 ) Gain (loss) on derivative financial instruments 383 26 (551 ) 161 (83 ) (764 )
Net finance income (expense) consisted of the following:
(euro million) 2006
2007
2008
Finance income (expense) related to net borrowings Interest due to banks and other financial institutions (215 ) (445 ) (745 ) Interest and other finance expense on ordinary bonds (248 ) (258 ) (248 ) Interest from banks 194 236 87 Interest and other income on financing receivables and securities held for non-operating purposes 62 55 82 (207 ) (412 ) (824 ) Exchange differences Positive exchange differences 2,496 2,877 7,339 Negative exchange differences (2,648 ) (2,928 ) (7,133 ) (152 ) (51 ) 206 Other finance income (expense) Income from equity instruments 188 241 Capitalized finance expense 116 180 236 Interest and other income on financing receivables and securities held for operating purposes 119 96 62 Interest on tax credits 17 31 37 Finance expense due to passage of time (accretion discount) (a) (116 ) (186 ) (249 ) Other finance income 1 45 78 137 354 405 (222 ) (109 ) (213 )
(million euro) 2004
2005
Exchange differences, net 169
Financial expense capitalized 202
159
Income from financial receivables 95
95
Net income from securities 31
36
Interest on tax credits 17
17
Net interest due to banks (110
) (38
) Financial expense due to the passage of time (1) (109
) (109
) Interest and other financial expense on ordinary bonds (247
) (265
) Income (expense) on derivatives 34
(386
) Other financial expense, net (69
) (44
) (156
) (366
)
(1)(a)The item concernedrelated to the increaseofin provisions for contingencies that areindicatedshown atan actualizedpresent value in non-current liabilities.Income from equity instruments of euro 241 million (euro 188 million in 2007) relating to the contractual remuneration of 9.4% on the 20% interest in OAO Gazprom Neft according to the contractual arrangements between Eni and Gazprom (more information is included in Note 2 - Other financial assets held for trading or available for sale).
The
decrease in income (expense)fair value gain (loss) on derivative financial instruments consisted of the following:
(euro million) 2006
2007
2008
Derivatives on exchange rate 313 120 (300 ) Derivatives on interest rate 61 35 (127 ) Derivatives on commodities 9 (129 ) (124 ) 383 26 (551 )
Net loss from derivatives of euro
420551 millionis(euro 383 million and euro 26 million of net gain in 2006 and 2007, respectively) was primarily due to theapplication from January 1, 2005 of IAS 39 which requires that derivatives be stated at fair value and the effects charged torecognition in the profit and loss accountinstead of being connected with the economic effectsof thehedged transactions as recordedchange in2004. Suchfair value of derivativesin fact, do not meet the conditions required by IFRS tothat cannot be qualified as hedginginstruments. Also the increase in net exchange differences of euro 169 million is primarily dueinstruments under IFRS. In fact, since these derivatives are enteredF-86
into for amounts corresponding to the
applicationnet exposure to exchange rate risk, interest rate risk or commodity risk, they cannot be linked to specific trade or financing transactions.The lack of
IAS 39, becausethese formal requirements in order to assess these derivatives as hedging instruments under IFRS provides also theeffectrecognition in profit or loss ofthenegative exchange translationat period end ofdifferences on assets and liabilities denominated in currencies other than functional currency,is not compensatedas these translation effects cannot be offset by changes in fair value of derivative contracts.Losses on commodity derivatives amounted to euro 124 million, included gain of euro 7 million related to the ineffective portion of the change in fair value of cash flow hedging derivatives (time value component) entered into by the
effectExploration & Production segment. Further information is given in Note 7 - Other current asset. The fair value ofthe translation at period endderivative contracts is provided in Note 7 - Other current asset, Note 15 - Other non-current receivables, Note 20 - Other current liabilities and Note 25 - Other non-current liabilities.
33 Income from investmentsShare of
the commitments for derivatives contracts.
28 Income (expense) from investments
Effectsprofit (loss) of equity-accounted investmentsaccounted for using the equity method
Effects
Share of profit (loss) of equity-accounted investmentsaccounted for using the equity methodconsisted of the following:
(million euro) 2004
2005
Gains from investments accounted for using the equity method 401
770
Losses from investments accounted for using the equity method (69
) (33
) 332
737
(euro million) 2006
2007
2008
Share of profit of equity-accounted investments 887 906 761 Share of loss of equity-accounted investments (36 ) (135 ) (105 ) Decreases (increases) in the provision for losses on investments (56 ) 2 (16 ) 795 773 640
More information
about gains and lossesis provided in Note 12 - Investments.
Other gain (loss) from investmentsaccounted for using the equity method is presented in Note 10.
Otherincome (expense) from investments
Other income (expense)gain (loss) from investments consisted of the following:
(million euro) 2004
2005
Gains on disposals 130
179
Dividends 72
33
Losses on disposals (1
) (8
) Other income (expense), net 287
(27
) 488
177
(euro million) 2006
2007
2008
Gains on disposals 98 170 510 Dividends 25 301 218 Losses on disposals (7 ) (1 ) (1 ) Other income (expense), net (8 ) 6 108 470 733
The gainsDividends of euro 510 million primarily related to Nigeria LNG (euro 453 million) and Saudi European Petrochemical Co - Ibn Zahr (euro 34 million).Gains on disposals of euro
179218 millionconcern the sale of 100% of the share capital of Italiana Petroli SpA (euro 132 million) and 2.33% of Nuovo Pignone Holding SpA (euro 24 million). Other net income from investments concern the gain recorded in the Consolidated Financial Statements dueprimarily related to the sale of9.054%Gaztransport et Technigaz SAS (euro 185 million), Agip España SA (euro 15 million) and Padana Assicurazioni SpA (euro 10 million). Gains on disposals for 2007 of euro 301 million primarily related to theshare capitalsale ofSnam ReteHaldor Topsøe AS (euro 265 million) and Camom SA (euro 25 million). Gains on disposals for 2006 of euro 25 million primarily related to the sale of Fiorentina Gas SpAto Mediobancaand Toscana Gas SpA (euro30816 million).
29F-8734 Income
tax expensetaxes
Incometax expensetaxes consisted of the following:
(million euro) 2004
2005
Current taxes: - Italian subsidiaries 1,098
1,872
- foreign subsidiaries of the Exploration & Production segment 3,116
5,116
- foreign subsidiaries 278
373
4,492
7,361
Less: - tax credits on dividend distributions not offset with current tax payment (39
) (34
) 4,453
7,327
Net deferred taxes: - Italian subsidiaries 843
334
- foreign subsidiaries of the Exploration & Production segment 215
464
- foreign subsidiaries 11
3
1,069
801
5,522
8,128
(euro million) 2006
2007
2008
Current taxes: - Italian subsidiaries 2,007 2,380 1,916 - foreign subsidiaries of the Exploration & Production segment 6,740 6,695 9,744 - foreign subsidiaries 529 482 426 9,276 9,557 12,086 Net deferred taxes: - Italian subsidiaries 230 (582 ) (1,603 ) - foreign subsidiaries of the Exploration & Production segment 1,095 246 (827 ) - foreign subsidiaries (33 ) (2 ) 36 1,292 (338 ) (2,394 ) 10,568 9,219 9,692
Current income taxes of
the year relate toeuro 1,916 million were in respect of Italiancompaniessubsidiaries foreuro 1,872 million and concernIresfor euro 1,489(euro 1,408 million) and Irapfor euro 359 million,(euro 307 million) and of foreigncompanies for euro 24 million.taxes (euro 201 million).The effective tax rate
is 46.8% (42.3%was 50.3% (51.8% and 46.0% inthe 2004)2006 and 2007, respectively) compared with a statutory tax rate of38.1% (38.2%38.2% (37.9% inthe 2004),2006 and 2007, respectively) and calculated by applying a33%33.0%15 tax rate (Ires) to profit before income taxes and4.25%3.9% tax rate (Irap) to the net value of production as provided for by Italian laws.The difference between the statutory and effective tax rate was due to the following factors:
(%) 2004
2005
Statutory tax rate 38.2
38.1
Items increasing (decreasing) statutory tax rate: - higher foreign subsidiaries tax rate 5.2
8.8
- permanent differences (0.7
) 0.8
- other (0.4
) (0.9
) 4.1
8.7
42.3
46.8
(%) 2006
2007
2008
Statutory tax rate 37.9 37.9 38.2 Items increasing (decreasing) statutory tax rate: - higher foreign subsidiaries tax rate 13.6 10.2 15.2 - changes in Italian statutory tax rate and adjustment of tax base of amortizable assets for Italian subsidiaries (2.0 ) - impact pursuant to Law Decree No. 112 of June 25, 2008, the Budget Law 2008 and enactment of a renewed tax framework in Libya (3.8 ) - permanent differences and other adjustments 0.3 (0.1 ) 0.7 13.9 8.1 12.1 51.8 46.0 50.3
Permanent differences in 2004 mainly concern the gain recordedThe increase in theConsolidated Financial Statements duetax rate of foreign subsidiaries primarily related to a 17.1 percentage points increase in the Exploration & Production segment (17.2% and 15% in 2006 and 2007, respectively).The impact pursuant to Law Decree No. 112 of June 25, 2008, the Budget Law 2008 and enactment of a renewed tax framework in Libya of 3.8% consisted of the following: (i) utilization of deferred tax liabilities recognized on higher carrying amounts of year-end inventories of oil, gas and refined products stated at the weighted-average cost with respect to their tax base according to the
salelast-in-first-out method (LIFO) (euro 528 million). In fact, pursuant to the Law Decree No. 112 of9.054%June 25, 2008 (become Law No. 133/2008), energy companies in Italy are required from 2008 to state inventories of hydrocarbons at the weighted-average cost for tax purposes as opposed to the previous LIFO evaluation and to recognize a one-off tax calculated by applying a special tax with a 16% rate on the difference between the two amounts. Accordingly, profit and loss benefited from the difference between utilization of deferred tax liabilities accrued on hydrocarbons inventories and the one-off tax (euro 229 million), for a total positive impact of euro 176 million, which consider previously applicable statutory tax rate (Ires) of 33% pursuant to the Law Decree No. 112 of June 25, 2008 instead of 27.5% of theshare capitalprevious tax regime. This one-off tax will be paid in three annual installments ofSnam Rete Gas SpA (0.7%) to Mediobanca SpA. Permanent differences in 2005 mainly concerned the undeductibilitysame amount, due fromtaxable income2009 onwards; (ii) application of theadditionItalian Budget Law for 2008 that provide an increase in limits whereby carrying amounts of assets and liabilities of consolidated subsidiaries can be recognized for tax purposes by paying a one-off tax calculated by
(15) Includes a 5.5% supplemental tax rate on taxable profit of energy companies in Italy (whose primary activity is the production and marketing of hydrocarbons and electricity and with annual revenues in excess of euro 25 million) effective January 1, 2008 and pursuant to the Law Decree No. 112 of June 25, 2008. F-88
applying a special rate of 6% (positive impact on profit and loss of euro 370 million; euro 290 million net of the special tax); (iii) enactment of a renewed tax framework in Libya regarding oil companies operating in accordance with production sharing schemes. Based on the new provisions,
for contingencies followingthefine imposedtax base of the Company’s Libyan oil properties has been reassessed resulting in the partial utilization of previously accrued tax liabilities of euro 173 million; and (iv) the impact of above mentioned Law Decree No. 112/2008 onFebruary 15,energy companies calculated by applying statutory tax rate (Ires) of 33% pursuant to the Law Decree No. 112 of June 25, 2008 instead of the previously applicable statutory tax rate (Ires) of 27.5% (euro 94 million).In 2006 the increase in the tax rate of foreign subsidiaries relating the Exploration & Production segment included the application of a windfall tax introduced by the Algerian government with effect starting from August 1, 2006 (1.6 percentage points) and a supplemental tax rate introduced by the government of the United kingdom relating to the North Sea productions with effect starting from January 1, 2006 (1 percentage point).
The adjustment to deferred tax assets and liabilities and to the 2007 tax rate for Italian subsidiaries were recognized in connection with certain amendments to the Italian tax regime enacted by the 2008 Budget Law. These included an option regarding the increase of the tax bases of certain tangible and other assets to their carrying amounts (euro 773 million) by paying a special tax (euro 325 million) and a lower statutory tax rate (Ires from 33% to 27.5%, Irap from 4.25% to 3.9%, euro 54 million).
In 2006 permanent differences mainly arose from certain charges that are not deductible because taken in connection with risk provisions arising from proceedings against the Italian Antitrust
Authority on Eni SpA (0.6%)and other regulatory Authorities (0.4 percentage points).
30
35 Earnings per shareattributable to Eni
Basic earnings per ordinary shareisare calculated by dividing"Net profit" ofnet profit for the year attributable to Eni’s shareholders by theweighted-averageweighted average number of ordinary shares issued and outstanding during the year, excluding treasury shares.The average number of ordinary shares
outstandingused for the calculation of the basic earnings per share outstanding at December 31, 2006, 2007 and 2008, was3,771,692,5843,698,201,896, 3,668,305,807 and3,758,519,603 in 2004 and 2005,3,638,835,896 respectively.Diluted earnings per share is calculated by dividing
"Net profit" ofnet profit for the year attributable to Eni’s shareholders by theweighted-averageweighted average number of shares fully-diluted which includes issued and outstanding shares during the year, excluding treasury shares and includingshares that could be issued potentially.
At December 31, 2004 and 2005,the number of shares that could be issued potentiallyconcern essentially shares granted under stock grant and stock option plan.in connection with stock-based compensation plans.The average number of shares
outstandingfully diluted usedforin the calculation ofthediluted earningsper sharewas3,774,953,7103,701,262,557, 3,669,172,762 and3,763,375,140 in 20043,638,854,276 for the years ending December 31, 2006, 2007 and2005,2008, respectively.Reconciliation of the average number of shares
outstandingused for the calculationof thefor both basic and diluted earning per shareiswas as follows:
2006
2007
2008
Average number of shares used for the calculation of the basic earnings per share 3,698,201,896
3,668,305,807
3,638,835,896
Number of potential shares following stock grant plans 1,070,676
302,092
Number of potential shares following stock options plans 1,989,985
564,863
18,380
Average number of shares used for the calculation of the diluted earnings per share 3,701,262,557
3,669,172,762
3,638,854,276
Eni’s net profit (euro million)
9,217
10,011
8,825
Basic earning per share (euro per share)
2.49
2.73
2.43
Diluted earning per share (euro per share)
2.49
2.73
2.43
Dec. 31, 2004
Dec. 31, 2005
Average number of shares used for the calculation of the basic earnings per share 3,771,692,584
3,758,519,603
Number of potential shares following stock grant plans 1,953,518
2,268,265
Number of potential shares following stock options plans 1,307,608
2,587,272
Average number of shares used for the calculation of the diluted earnings per share 3,774,953,710
3,763,375,140
Eni’s net profit (million euro)
7,059
8,788
Basic earning per share (euro per share)
1.87
2.34
Diluted earning per share (euro per share)
1.87
2.34
31F-8936 Information by industry segment and geographic financial information
Information by industry segment
(
million euro)euro million)Exploration & Production
Gas & Power
Refining & Marketing
Petrochemicals
Oilfield ServicesEngineering & Constructionand EngineeringOther activities
Corporate and financial companies
EliminationIntra-Group
profitsTotal
2004 Net sales from operations (a) 15,346
17,302
26,089
5,331
5,696
1,279
851
Less: intersegment sales (10,216
) (493
) (753
) (499
) (903
) (754
) (731
) Net sales to customers 5,130
16,809
25,336
4,832
4,793
525
120
57,545
Operating profit 8,185
3,428
1,080
320
203
(395
) (363
) (59
) 12,399
Provisions for contingencies 2
53
309
3
20
16
150
553
Depreciation, amortization and writedowns 3,335
644
476
116
184
70
106
4,931
Effects of investments accounted for using the equity method 7
164
89
(4
) 117
(41
) 332
Identifiable assets (b) 23,866
19,852
9,118
2,821
4,706
708
1,182
62,253
Investments accounted for using the equity method 273
1,773
745
5
328
30
2
3,156
Identifiable liabilities (c) 4,798
3,394
3,848
621
2,825
1,976
1,589
19,051
Capital expenditures 4,853
1,451
693
148
186
49
119
7,499
2005 Net sales from operations (a) 22,477
22,969
33,732
6,255
5,733
1,358
977
Less: intersegment sales (14,761
) (572
) (1,092
) (683
) (925
) (905
) (835
) Net sales to customers 7,716
22,397
32,640
5,572
4,808
453
142
73,728
Operating profit 12,574
3,321
1,857
202
307
(902
) (391
) (141
) 16,827
Provisions for contingencies 50
703
420
47
32
287
104
1,643
Depreciation, amortization and writedowns 4,100
685
467
147
180
106
100
(4
) 5,781
Effects of investments accounted for using the equity method 14
359
221
3
140
737
Identifiable assets (b) 28,982
21,928
11,787
2,905
5,248
612
1,377
(534
) 72,305
Investments accountedfor using the equity method 292
2,155
936
19
457
31
3,890
Identifiable liabilities (c) 6,762
5,097
4,542
702
3,204
2,249
1,975
24,531
Capital expenditures 4,964
1,152
656
112
349
69
112
7,414
2006 Net sales from operations (a) 27,173
28,368
38,210
6,823
6,979
823
1,174
Less: intersegment sales (18,445
) (751
) (1,300
) (667
) (771
) (520
) (991
) Net sales to customers 8,728
27,617
36,910
6,156
6,208
303
183
86,105
Operating profit 15,580
3,802
319
172
505
(622
) (296
) (133
) 19,327
Provisions for contingencies 153
197
264
30
(13
) 236
(100
) 767
Depreciation, amortization and writedowns 4,776
738
447
174
196
28
71
(9
) 6,421
Share of profit (loss) of equity-accounted investments 28
509
194
2
66
(4
) 795
Identifiable assets (b) 29,720
23,500
11,359
2,984
6,362
344
1,023
(666
) 74,626
Unallocated assets 13,686
Equity-accounted investments 258
2,214
874
11
483
46
3,886
Identifiable liabilities (c) 9,119
5,284
4,712
806
3,869
1,940
1,619
27,349
Unallocated liabilities 19,764
Capital expenditures 5,203
1,174
645
99
591
72
88
(39
) 7,833
2007 Net sales from operations (a) 27,278
27,633
36,401
6,934
8,678
205
1,313
Less: intersegment sales (16,475
) (760
) (1,276
) (363
) (1,182
) (31
) (1,099
) Net sales to customers 10,803
26,873
35,125
6,571
7,496
174
214
87,256
Operating profit 13,788
4,127
729
74
837
(444
) (217
) (26
) 18,868
Provisions for contingencies 5
37
256
15
11
264
3
591
Depreciation, amortization and writedowns 5,626
687
491
116
248
10
68
(10
) 7,236
Share of profit (loss) of equity-accounted investments 23
449
216
79
6
773
Identifiable assets (b) 33,435
24,530
13,767
3,427
8,017
275
854
(692
) 83,613
Unallocated assets 17,847
Equity-accounted investments 1,926
2,152
1,267
15
230
49
5,639
Identifiable liabilities (c) 11,480
5,390
5,420
939
4,349
1,827
1,380
30,785
Unallocated liabilities 27,808
Capital expenditures 6,625
1,366
979
145
1,410
59
108
(99
) 10,593
2008 Net sales from operations (a) 33,318
36,936
45,083
6,303
9,176
185
1,331
75
Less: intersegment sales (19,067
) (873
) (1,496
) (398
) (1,219
) (29
) (1,177
) Net sales to customers 14,251
36,063
43,587
5,905
7,957
156
154
75
108,148
Operating profit 16,415
3,933
(1,023
) (822
) 1,045
(346
) (686
) 125
18,641
Provisions for contingencies 155
237
206
2
36
99
165
900
Depreciation, amortization and writedowns 7,542
744
729
395
335
8
76
(14)
9,815
Share of profit (loss) of equity-accounted investments 173
413
16
(9
) 43
4
640
Identifiable assets (b) 41,989
31,894
11,081
2,629
10,630
362
789
(641
) 98,733
Unallocated assets 17,857
Equity-accounted investments 1,787
2,249
1,227
25
130
53
5,471
Identifiable liabilities (c) 11,030
11,212
4,481
664
6,177
1,638
1,780
(75
) 36,907
Unallocated liabilities 31,173
Capital expenditures 9,545
1,794
965
212
2,027
52
95
(128
) 14,562
(a) Before elimination of intersegment sales. (b) IncludesIncluded assets directlyrelated toassociated with the generation of operating profit.(c) IncludesIncluded liabilities directlyrelated toassociated with the generation of operating profit.
IntersegmentF-90Inter-segment sales
arewere conducted on an arm’s length basis.Geographic financial information
Assets and investments by geographic area of origin
( million euro)euro million)Italy
Other
EUEuropean UnionRest of Europe
Americas
Asia
Africa
Other areas
Total
2004 2006 Identifiable assets (a) 33,812
9,096
2,598
2,011
4,499
9,942
295
62,253
37,339
10,037
3,200
2,987
6,341
14,190
532
74,626
Capital expenditures 2,655
337
387
357
1,066
2,622
75
7,499
2,529
713
436
572
1,032
2,419
132
7,833
2005 2007 Identifiable assets (a) 38,229
8,768
3,085
2,670
5,864
13,445
244
72,305
39,742
11,071
3,917
6,260
6,733
15,368
522
83,613
Capital expenditures 2,442
545
415
507
1,181
2,233
91
7,414
3,246
1,246
469
1,004
1,253
3,152
223
10,593
2008 Identifiable assets (a) 40,432
15,065
3,561
6,149
10,561
22,044
921
98,733
Capital expenditures 3,674
1,660
582
1,240
1,777
5,153
476
14,562
(a) Includes assets directly related to the generation of operating profit. Sales from operations by geographic area of destination
(million euro) 2004
2005
Italy 27,100
32,846
Other European Union 13,095
19,601
Rest of Europe 3,769
5,123
Americas 5,790
6,103
Asia 3,088
4,399
Africa 4,148
5,259
Other areas 555
397
57,545
73,728
(euro million) 2006
2007
2008
Italy 36,343 37,346 42,909 Other European Union 23,949 23,074 29,341 Rest of Europe 6,975 5,507 7,125 Americas 6,250 6,447 7,218 Asia 5,595 5,840 8,916 Africa 5,949 8,010 12,331 Other areas 1,044 1,032 308 86,105 87,256 108,148
32
37 Transactions with related parties
In the ordinary course of its business, Eni enters into transactionsconcerningregarding:
a) the exchange of goods, provision of services and financing with joint ventures, associates and non-consolidated subsidiaries; b) the exchange of goods and provision of services with entities directly and indirectly owned or controlled by the Government; c) transactions with the Cosmi Holding Group related to Eni SpA through a member of the Board of Directors related to certain acquisition of engineering, construction and maintenance services. Relevant transactions which were executed on an arm’s length basis amounted to approximately euro 13 million, euro 18 million and euro 13 million in 2006, 2007 and 2008, respectively. At December 31, 2008 were outstanding receivables for euro 4 million and payables for euro 8 million; d) contributions to entities, controlled by Eni with the aim to develop solidarity, culture and research initiatives. In particular these related to: (a) Eni Foundation established by Eni as a non-profit entity with the aim of pursuing exclusively solidarity initiatives in the fields of social assistance, health, education, culture and environment as well as research and development. Transactions with Eni Foundation related to contribution of euro 200 million to the solidarity fund pursuant to Italian Law Decree No. 112/2008 and the payable of euro 100 million related to the part of the contribution that had not already been paid. Transactions in the past periods were not material; (b) Enrico Mattei Foundation established by Eni with the aim of enhancing, through studies, research and training initiatives, knowledge in the fields of F-91
economics, energy and environment, both at the national and international level. Transactions with Enrico Mattei Foundation were not material. Transactions with related parties were conducted in the
exchangeinterest ofgoods, provisionEni companies and, with exception ofservicesthose with entities with the aim to develop solidarity, culture andfinancingresearch initiatives, on an arm’s length basis.Trade and other transactions with
affiliated companiesjoint ventures, associates and non-consolidated subsidiaries as well as with entities directly and indirectly owned or controlled by theGovernment. All such transactions are mainly conducted on an arm’s length basisGovernment in theinterest of Eni companies.
The following is a description of trade2006, 2007 andfinancing transactions with related parties. Relevant transactions carried out with entities controlled by the Italian government are only those with Enel, the Italian National Electric Company.
Trade and other transactions
Trade and other transactions for the year 20042008, respectively, consisted of the following:
( million euro)euro million)Dec. 31,
20042006
20042006
Costs
Revenues
Name Receivables and other assets
Payables and other liabilities
Guarantees
Goods
Services
Goods
Services
Joint ventures and associates ASG Scarl 7 40 80 88 1 1 Azienda Energia e Servizi Torino SpA 1 22 64 1 1 Bernhard Rosa Inh. Ingeborg Plöchinger GmbH 10 96 Blue Stream Pipeline Co BV 34 19 193 1 Bronberger & Kessler Und Gilg & Schweiger GmbH 11 113 CAM Petroli Srl 103 310 CEPAV (Consorzio Eni per l’Alta Velocità) Uno 87 87 5,654 16 2 304 Charville - Consultores e Serviços Lda 7 85 4 11 Eni Oil Co Ltd 5 96 59 Fox Energy SpA 35 125 Gasversorgung Süddeutschland GmbH 14 1 123 19 Gruppo Distribuzione Petroli Srl 19 54 Karachaganak Petroleum Operating BV 23 70 29 129 7 Mangrove Gas Netherlands BV 1 52 Mellitah Oil & Gas BV 28 90 7 72 8 2 Petrobel Belayim Petroleum Co 3 181 Promgas SpA 44 39 375 419 Raffineria di Milazzo ScpA 9 12 237 109 Rodano Consortile Scarl 3 14 54 1 RPCO Enterprises Ltd 13 104 12 Supermetanol CA 13 91 Super Octanos CA 13 257 Trans Austria Gasleitung GmbH 7 78 53 138 56 Transitgas AG 8 64 Transmediterranean Pipeline Co Ltd 7 80 Unión Fenosa Gas SA 1 7 61 93 7 Other (*) 72 169 168 75 188 119 66 533 788 6,204 996 1,557 1,482 481 Unconsolidated entities controlled by Eni Agip Kazakhstan North Caspian Operating Co NV 27 132 18 16 57 Eni BTC Ltd 185 Eni Timor Leste SpA 102 Other (*) 20 30 8 1 4 8 4 47 162 295 19 20 8 61 580 950 6,499 1,015 1,577 1,490 542 Entities owned or controlled by the Government Gruppo Alitalia 12 354 Gruppo Enel 162 42 47 33 1,068 383 Other (*) 42 29 4 44 136 1 216 71 51 77 1,558 384 796 1,021 6,499 1,066 1,654 3,048 926
Name(*) Each individual amount included herein does not exceed euro 50 million. F-92
(euro million)
ReceivablesDec. 31, 20072007
Costs
Revenues
Name Receivables and other assets
Payables and other liabilities
Guarantees
Goods
Services
Goods
Services
Joint ventures and associates ASG Scarl 6 43 121 108 3 Bernhard Rosa Inh. Ingeborg Plöchinger GmbH 11 86 Blue Stream Pipeline Co BV 19 183 1 Bronberger & Kessler und Gill & Schweiger GmbH 18 106 CEPAV (Consorzio Eni per l’Alta Velocità) Uno 84 70 5,870 263 CEPAV (Consorzio Eni per l’Alta Velocità) Due 1 1 64 1 1 Eni Oil Co Ltd 7 60 141 1 Fox Energy SpA 49 139 Gasversorgung Süddeutschland GmbH 54 195 4 Gruppo Distribuzione Petroli Srl 26 50 Karachaganak Petroleum Operating BV 43 102 24 301 7 Mellitah Oil & Gas BV 10 137 105 1 6 OOO "EniNeftegaz" 215 1 Petrobel Belayim Petroleum Co 60 211 Raffineria di Milazzo ScpA 17 21 245 118 5 Supermetanol CA 11 78 1 Super Octanos CA 18 201 1 Trans Austria Gasleitung GmbH 6 80 43 147 47 Transitgas AG 8 64 Transmediterranean Pipeline Co Ltd 6 70 1 Unión Fenosa Gas SA 1 61 193 Other (*) 120 127 56 76 374 172 118 687 744 6,172 422 1,950 1,011 459 Unconsolidated entities controlled by Eni Agip Kazakhstan North Caspian Operating Co NV 49 111 11 534 52 Eni BTC Ltd 138 1 Other (*) 23 8 11 2 18 5 18 72 119 149 13 552 5 71 759 863 6,321 435 2,502 1,016 530 Entities owned or controlled by the Government Gruppo Alitalia 4 363 1 Gruppo Enel 384 8 245 894 408 GSE - Gestore Servizi Elettrici 124 63 239 37 870 7 Terna SpA 19 69 106 105 31 Other (*) 45 79 19 89 75 3 576 219 364 476 2,202 450 1,335 1,082 6,321 799 2,978 3,218 980
(*) Each individual amount included herein does not exceed euro 50 million. F-93
(euro million) Dec. 31, 2008
Guarantees2008
Costs
CommitmentsRevenues
Name
GoodsReceivables and other assets
ServicesPayables and other liabilities
GoodsGuaranteesGoods
Services
Other
Goods
Services
Other
Joint ventures and associates Agiba Petroleum 11
60
Altergaz SA 30
135
ASG Scarl 2
25
49
57
Bayernoil Raffineriegesellschaft mbH 3
4
1
6
62
4
Bernhard Rosa Inh. Ingeborg Plöchinger GmbH 5
98
Blue Stream Pipeline Co BV 23
17
171
1
Bronberger & Kessler und Gilg & Schweiger GmbH 12
175
CEPAV (Consorzio Eni per l’Alta Velocità) Uno 95
37
6,001
17
3
397
CEPAV (Consorzio Eni per l’Alta Velocità) Due 4
1
64
1
1
Eni Oil Co Ltd 9
28
660
6
Fox Energy SpA 37
2
329
1
FPSO Mystras - Produção de Petroleo Lda 94
10
Gasversorgung Süddeutschland GmbH 64
337
18
Gruppo Distribuzione Petroli Srl 20
111
InAgip doo 24
45
116
3
35
Karachaganak Petròleum Operating BV 72
207
874
380
25
12
Mellitah Oil & Gas BV 10
121
329
2
4
Petrobel Belayim Petroleum Co 77
181
Raffineria di Milazzo ScpA 11
4
276
135
3
Saipon Snc 4
58
12
Super Octanos CA 24
286
Supermetanol CA 5
90
Trans Austria Gasleitung GmbH 8
78
60
153
64
Transitgas AG 5
1
64
Unión Fenosa Gas SA 1
25
62
25
257
1
Other (*) 231
115
18
36
319
46
71
129
8
655
829
6,253
1,473
2,783
148
1,657
684
8
Unconsolidated entities controlled by Eni Agip Kazakhstan North Caspian Operating Co NV 144
166
720
11
1
367
10
Eni BTC Ltd �� 146
Other (*) 22
18
4
2
20
2
4
6
4
166
184
150
2
740
13
5
373
14
831
1,013
6,403
1,475
3,523
161
1,662
1,057
22
Entities owned or controlled by the Government Ferrovie dello Stato 4
417
2
Gruppo Alitalia 153
12
13
223
941
380
Gruppo Enel 19
7
27
1
57
GSE - Gestore Servizi Elettrici 92
63
315
79
347
16
6
Terna SpA 33
35
14
128
12
83
10
Other (*) 28
72
33
88
5
72
2
1
329
189
375
466
85
1,846
483
17
1,160
1,202
6,403
1,850
3,989
246
3,508
1,540
39
(*) Each individual amount included herein does not exceed euro 50 million.
Joint ventures and affiliated companies Albacom SpA 8
14
3
35
8
ASG Scarl 51
88
33
203
1
7
Azienda Energia e Servizi Torino SpA 1
18
68
3
Bayernoil Raffineriegesellschaft mbH 39
2
791
1
Bernhard Rosa Inh. Ingeborg Plochinger GmbH 10
108
Blue Stream Pipeline Co BV 43
10
121
5
Bronberger & Kessler und Gilg & Schweiger GmbH 13
141
Cam Petroli Srl 1
6
CEPAV (Consorzio Eni per l’Alta velocità) Uno 167
165
4,894
531
Eni Oil Co Ltd 4
163
53
Erg Raffinerie Mediterranee SpA 30
30
100
1,043
10
412
9
Gruppo Distribuzione Petroli Srl 16
45
Karachaganak Petroleum Operating BV 21
12
104
42
Modena Scarl 6
37
43
134
1
Petrobel Belayim Petroleum Co 83
240
Promgas SpA 27
23
230
259
Raffineria di Milazzo ScpA 6
4
245
62
Rodano Consortile Scarl 3
22
1
79
1
Siciliana Gas Vendite SpA 9
36
Supermetanol CA 24
79
10
Super Octanos CA 55
212
11
1
Trans Austria Gasleitung GmbH 15
167
3
Trans Europa Naturgas Pipeline GmbH 9
51
Transitgas AG 2
59
Unión Fenosa Gas Comercializadora SA 7
Unión Fenosa Gas SA 111
1
Other (*) 84
74
109
23
108
56
18
500
887
5,191
100
1,592
2,489
1,134
630
Unconsolidated subsidiaries Agip Kazakhstan North Caspian Operating Co NV 2
1
14
9
Eni BTC Ltd 143
Eni Gas BV 30
40
17
5
1
Eni Middle East BV 367
Transmediterranean Pipeline Co Ltd 1
1
90
Other (*) 30
4
10
4
8
2
11
63
45
537
5
117
2
21
563
932
5,728
100
1,597
2,606
1,136
651
Entities owned or controlledby the Government Enel 234
3
2
20
1,287
350
797
935
5,728
100
1,599
2,626
2,423
1,001
Most significant transactions with joint ventures, associates and non-consolidated subsidiaries concerned:
- transactions related to the planning and the construction of the tracks for high speed/high capacity trains from Milan to Bologna with ASG Scarl, CEPAV (Consorzio Eni per l’Alta Velocità) Uno, and related guarantees;
F-94
- acquisition of refining services from Bayernoil Raffineriegesellschaft mbH and Raffineria di Milazzo ScpA in relation to incurred costs;
- supply of oil products to Bernhard Rosa Inh. Ingeborg Plöchinger GmbH, Bronberger & Kessler und Gilg & Schweiger GmbH, Fox Energy Srl, Gruppo Distribuzione Petroli Srl and Raffineria di Milazzo ScpA on the basis of prices referred to the quotations on international markets of the main oil products, as they would be conducted on an arm’s length basis;
- acquisition of FPSO from FPSO Mystras - Produção de Petròleo Lda;
- acquisition of natural gas transport services outside Italy from Blue Stream Pipeline Co BV, Trans Austria Gasleitung GmbH and Transitgas AG;
- guarantees issued on behalf of CEPAV (Consorzio Eni per l’Alta Velocità) Due in relation to contractual commitments related to the execution of project planning and realization;
- provision of specialized services in upstream activities and payables for investment activities from Agip Kazakhstan North Caspian Operating Co NV, Agiba Petroleum Co, Eni Oil Co Ltd, InAgip doo, Karachaganak Petroleum Operating BV, Mellitah Oil & Gas BV, Petrobel Belayim Petroleum Co and, only for Karachaganak Petroleum Operating BV supply of oil products; services are invoiced on the basis of incurred costs;
- sale of natural gas to Altergaz SA and Gasversorgung Süddeutschland GmbH;
- acquisition of petrochemical products from Supermetanol CA and Super Octanos CA on the basis of prices referred to the quotations on international markets of the main products;
- performance guarantees given on behalf of Unión Fenosa Gas SA in relation to contractual commitments related to the results of operations;
- guarantees issued in relation to the construction of an oil pipeline on behalf of Eni BTC Ltd.
Most significant transactions with entities owned or controlled by the Government concerned:
- sale of oil products with Alitalia and Ferrovie dello Stato;
- sale and transportation of natural gas, the sale of fuel oil and the sale and purchase of electricity and the acquisition of electricity transmission service with Enel;
- sale and purchase of electricity with GSE - Gestore Servizi Elettrici;
- sale and purchase of electricity and the acquisition of domestic electricity transmission service jointly with Terna SpA.
Financing transactions with joint ventures, associates and non-consolidated subsidiaries as well as with entities directly and indirectly owned or controlled by the Government in the 2006, 2007 and 2008, respectively, consisted of the following:
(euro million) Dec. 31, 2006
2006
Name Receivables
Payables
Guarantees
Charges
Gains
Joint ventures and associates Blue Stream Pipeline Co BV 3
794
4
26
Raffineria di Milazzo ScpA 57
Spanish Egyptian Gas Co SAE 323
Trans Austria Gasleitung GmbH 41
6
Transmediterranean Pipeline Co Ltd 147
11
Other (*) 88
81
39
13
11
276
84
1,213
17
54
Unconsolidated entities controlled by Eni Other (*) 95
25
2
1
4
95
25
2
1
4
371
109
1,215
18
58
(*) Each individual amount included herein does not exceed euro 50 million. F-95
(euro million) Dec. 31, 2007
2007
Name Receivables
Payables
Guarantees
Charges
Gains
Derivative financial instruments
Joint ventures and associates Blue Stream Pipeline Co BV 1 711 20 Raffineria di Milazzo ScpA 60 Trans Austria Gasleitung GmbH 65 3 Transmediterranean Pipeline Co Ltd 97 9 Other (*) 108 120 52 19 11 270 121 823 19 43 Unconsolidated entities controlled by Eni Other (*) 114 26 1 1 6 114 26 1 1 6 Entities owned or controlled by the Government GSE - Gestore Servizi Elettrici 10 10 384 147 824 20 49 10
(*) Each individual amount included herein does not exceed euro 50 million.
Trade and other transactions for the year 2005 consisted of the following:
( million euro)euro million)Dec. 31,
20052008
20052008
Name
Costs
RevenuesReceivables
Name
ReceivablesPayables
PayablesGuarantees
GuaranteesCharges
GoodsGains
Services
Goods
ServicesDerivative financial instruments
Joint ventures and associates Bayernoil Raffineriegesellschaft mbH 131 Blue Stream Pipeline Co BV 752 14 PetroSucre SA 153 Raffineria di Milazzo ScpA 70 Trans Austria Gasleitung GmbH 186 7 Transmediterranean Pipeline Co Ltd 103 6 Other (*) 123 124 27 16 9 696 124 849 16 36 Unconsolidated entities controlled by Eni Other (*) 115 38 1 1 6 115 38 1 1 6 Entities owned or controlled by the Government GSE - Gestore Servizi Elettrici 58 58 811 162 850 17 42 58
Joint ventures and affiliated companies ASG Scarl 13
66
72
173
6
Azienda Energia e Servizi Torino SpA 2
24
56
2
Bayernoil Raffineriegesellschaft mbH 49
1
814
Bernhard Rosa Inh. Ingeborg Plochinger GmbH 10
172
Blue Stream Pipeline Co BV 45
12
177
4
Bronberger & Kessler und Gilg & Schweiger GmbH 12
207
Cam Petroli Srl 85
593
CEPAV (Consorzio Eni per l’Alta Velocità) Uno 105
107
4,894
411
Eni Gas BV 16
149
47
Eni Oil Co Ltd 84
50
Fox Energy Srl 22
4
240
Gruppo Distribuzione Petroli Srl 22
89
Karachaganak Petroleum Operating BV 13
46
6
99
4
Mangrove Gas Netherlands BV 55
Modena Scarl 2
12
61
56
1
1
Petrobel Belayim Petroleum Co 138
248
Promgas SpA 44
45
307
355
Raffineria di Milazzo ScpA 10
10
204
94
Rodano Consortile Scarl 2
20
80
2
RPCO Enterprise Ltd 55
Siciliana Gas Vendite SpA 13
48
Supermetanol CA 8
65
Super Octanos CA 1
14
265
Toscana Gas Clienti SpA 46
118
Trans Austria Gasleitung GmbH 43
55
43
143
47
Trans Europa Naturgas Pipeline GmbH 2
44
Transitgas AG 7
64
Transmediterranean Pipeline Co Ltd 4
88
1
Unión Fenosa Gas Comercializadora SA 4
36
37
Unión Fenosa Gas SA 4
4
62
79
16
2
Other (*) 84
84
112
33
113
62
67
598
940
5,312
838
2,456
2,032
547
Unconsolidated subsidiaries Agip Kazakhstan North Caspian Operating Co NV 4
152
5
19
28
Eni BTC Ltd 165
Other (*) 44
48
8
1
31
15
9
48
200
173
6
50
15
37
646
1,140
5,485
844
2,506
2,047
584
Entities owned or controlled by the Government Enel 187
5
12
10
1,180
333
833
1,145
5,485
856
2,516
3,227
917
(*) Each individual amount included herein does not exceed euro 50 million.
Engineering, constructionMost significant transactions with joint ventures, associates andmaintenance services were acquirednon-consolidated subsidiaries included:
- bank debt guarantee issued on
an arm’s length basisbehalf of Blue Stream Pipeline Co BV and cash deposit at Eni’s financial companies;- bank debt guarantee issued on behalf of Raffineria di Milazzo ScpA;
- financing loan to Bayernoil Raffineriegesellschaft mbH;
- receivable from PetroSucre SA following the contribution of Corocoro activities, still to be defined, in the new mixed company;
- the financing of the Austrian section of the gasline from the
Cosmi Holding Group, relatedRussian Federation toEni through a memberItaly and the construction ofthe Board of Directors, for a total of approximately euro 28 millionnatural gas transmission facilities andeuro 18 million in 2004transport services with Trans Austria Gasleitung GmbH and2005,Transmediterranean Pipeline Co Ltd, respectively.F-96
Most significant transactions
concern:with entities owned or controlled by the Government concerned the fair value of derivative financial instruments included in prices of electricity related to sale/purchase transactions with GSE - Gestore Servizi Elettrici.Impact of transactions and positions with related parties on the balance sheet, net profit and cash flows
The impact of transactions and positions with related parties on the balance sheet, net profit and cash flows consisted of the following:
•provision of specialized services in upstream activities from Agip Kazakhstan North Caspian Operating Co NV, Eni Oil Co Ltd, Eni Gas BV, Karachaganak Petroleum Operating BV and Petrobel Belayim Petroleum Co; services are invoiced on the basis of incurred costs; exclusively with Eni Gas BV, the unsecured guarantees in relation to the construction of a hydrocarbon treatment plant in Libya and receivables and payables for investment activities and with Karachaganak Petroleum Operating Co BV and Agip Kazakhstan North Caspian Operating Co NV the provision of services from the Oilfield Services Construction and Engineering segment of Eni;•communication services, data transmission and concessions of optical fibers with Albacom SpA; in 2005 the company was sold;•transportation and distribution activities with Azienda Energia e Servizi Torino SpA;•sale of petrochemical products, supply of crude oil refining activities and fuel additive purchase from Bayernoil Raffineriegesellschaft mbH, Bernhard Rosa Inh. Ingeborg Plochinger GmbH, Bronberger & Kessler und Gilg & Schweiger GmbH, Cam Petroli Srl, Gruppo Distribuzione Petroli Srl, Fox Energy Srl, Supermetanol CA and Superoctanos CA;•acquisition of natural gas transport services outside Italy from Blue Stream Pipeline Co BV and services from the Oilfield Services Construction and Engineering segment of Eni;•acquisition of refining services from Erg Raffinerie Mediterranee SpA and Raffineria di Milazzo ScpA on the basis of general conditions applied to third parties for Erg Raffinerie Mediterranee SpA and of incurred costs for Raffineria di Milazzo ScpA; in 2005 Erg Raffinerie Mediterranee SpA was sold;•guarantees given on behalf of Mangrove Gas Netherlands BV and RPCO Enterprise Ltd relating to bid bonds and performance bonds;•sale and acquisition of natural gas outside Italy with Promgas SpA;•sale of natural gas with Siciliana Gas Vendite SpA e Toscana Gas Clienti SpA;•transactions related to the planning and the construction of the tracks for high speed/high capacity trains from Milan to Bologna with the Consorzio Eni per l’Alta Velocità - CEPAV Uno, ASG Scarl, Modena Scarl and Rodano Consortile Scarl, and relevant guarantees;•acquisition of natural gas transport services outside Italy from Trans Austria Gasleitung GmbH, Trans Europa Naturgas Pipeline GmbH and Transitgas AG; transactions are regulated on the basis of compensation calculated following the same criteria used in third parties transactions;•performance guarantees given on behalf of Unión Fenosa Gas SA in relation to contractual commitments related to the results of operations and sale and acquisition of natural outside Italy with Unión Fenosa Gas SA and Unión Fenosa Gas Comercializadora SA;•guarantees given in relation to the construction of an oil pipeline on behalf of Eni BTC Ltd;•guarantees given to Eni Middle East BV against the contractual commitments with the Government of the Kingdom of Saudi Arabia in 2004; in 2005 the company has been included in the scope of consolidation; and•acquisition of natural gas transport services outside Italy from Transmediterranean Pipeline Co Ltd; transactions are regulated on the basis of tariffs, which permit the recovery of operating expenses and capital employed.
Transactions with Enel concern the sale and transportation of natural gas, the sale of fuel oil and the sale and purchase of electricity; transactions are mainly conducted on an arm’s length basis.
Financing transactions
Financing transactions in 2004 were as follows:
(million euro)Dec. 31,
20042006
2004Dec. 31, 2007Dec. 31, 2008
Name(euro million)Total
ReceivablesRelated parties
PayablesImpact %
GuaranteesTotal
ChargesRelated parties
GainsImpact % Total Related parties Impact %
Joint ventures and affiliated companies Albacom SpA 22
88
Blue Stream Pipeline Co BV 2
768
29
EnBW - Eni Verwaltungsgesellschaft mbH 250
Raffineria di Milazzo ScpA 107
Spanish Egyptian Gas Co SAE 404
9
Trans Austria Gasleitung GmbH 389
9
Transmediterranean Pipeline Co Ltd 197
9
Other (*) 52
91
55
9
11
660
93
1,672
9
67
Unconsolidated subsidiaries Other (*) 71
54
2
4
2
71
54
2
4
2
731
147
1,674
13
69
Trade and other receivables 18,799
1,027
5.46
20,676
1,616
7.82
22,222
1,539
6.93
Other current assets 855
4
0.47
1,080
2,349
59
2.51
Other non-current financial assets 805
136
16.89
923
87
9.43
1,134
356
31.39
Other non-current assets 994
1,110
16
1.44
1,401
21
1.50
Current financial liabilities 3,400
92
2.71
7,763
131
1.69
6,359
153
2.41
Trade and other payables 15,995
961
6.01
17,116
1,021
5.97
20,515
1,253
6.11
Other liabilities 634
4
0.63
1,556
4
0.26
4,319
4
0.09
Long-term debt and current portion of long-term debt 8,299
17
0.20
12,067
16
0.13
14,478
9
0.06
Other non-current liabilities 418
56
13.40
2,031
57
2.81
2,538
53
2.09
(*)Each individual amount included herein does not exceed euro 50 million.
Financing transactions in 2005 were as follows:
(million euro)
Dec. 31, 2005
2005
Name
Receivables
Payables
Guarantees
Charges
Gains
Joint ventures and affiliated companies Blue Stream Pipeline Co BV 15
887
Raffineria di Milazzo ScpA 72
Spanish Egyptian Gas Co SAE 360
Trans Austria Gasleitung GmbH 386
12
Transmediterranean Pipeline Co Ltd 190
11
Other (*) 74
125
81
27
47
650
140
1,400
27
70
Unconsolidated subsidiaries Other (*) 79
30
34
1
2
79
30
34
1
2
729
170
1,434
28
72
The impact of transactions with related parties on the profit and loss accounts consisted of the following:
(*)Each individual amount included herein does not exceed euro 50 million.
Most significant transactions in 2005 included:
•lendings and guarantees to Albacom SpA in 2004; in 2005 Albacom SpA has been sold to third parties;•bank debt guarantees given on behalf of Blue Stream Pipeline Co BV, EnBW - Eni Verwaltungsgesellschaft mbH, Raffineria di Milazzo and Spanish Egyptian Gas Co SAE and the cash deposit at Eni’s financial companies; guarantee given on behalf of EnBW - Eni Verwaltungsgesellschaft mbH expired in 2005; and•the financing of the Austrian section of the gasline from the Russian Federation to Italy and the construction of natural gas transmission facilities and transport services with Trans Austria Gasleitung GmbH and Transmediterranean Pipeline Co Ltd.
33 Adjustment of the Consolidated Financial Statements to U.S. GAAP
As its shares are listed on the New York Stock Exchange, Eni files an Annual Report (Form 20-F) with the Securities and Exchange Commission (SEC). The following information is necessary to reconcile the Italian consolidated annual report for the 2005 to generally accepted accounting principles in the United States (U.S. GAAP).
Summary of significant differences between IFRS and U.S. GAAP
Eni’s financial statements at December 31, 2005 have been prepared in accordance with International Financial Reporting Standards (IFRS)16adopted by the European Commission, which differ in certain respects from U.S. GAAP. A description of the significant differences and their effects on net profit and shareholders’ equity is set forth in the following notes17. Compared with the Italian accounting principles applied until December 31, 2004 the differences between IFRS and U.S. GAAP are considerably fewer.
A) Consolidation policy
Eni’s consolidation policy is described under "Principles of consolidation" in Note 12 to the Consolidated Financial Statements. In particular, under IFRS, the Consolidated Financial Statements include also companies in which Eni holds less than 50% of the voting rights, but over which it exercises control in shareholders’ meetings.
Under U.S. GAAP, investments of less than 50% are accounted for by applying the equity method. Saipem SpA (43.26%), and its subsidiaries which are controlled by Eni without holding the majority of voting rights have been consolidated under the equity method for U.S. GAAP purposes.
B) Exploration & production activities
Exploration
Under IFRS, the internationally specific criteria have been applied for hydrocarbons exploration and production activities. In particular, exploration costs, including successful exploratory wells, are recorded as intangible assets and are amortized in full in the period incurred (i.e. expensed as incurred for financial reporting purposes). Costs for the acquisition of exploration permits are capitalized and amortized over the expected period of benefit.
Under U.S. GAAP, costs relating to exploratory wells are initially capitalized as "incomplete wells and other" until it is determined if commercial quantities of reserves have been discovered ("successful efforts method"). That determination is made after completion of drilling the well, and the capitalized costs are either charged to expense or reclassified as part of Eni’s proved mineral interests. Costs of exploratory wells that have found commercially producible quantities of reserves that cannot be classified as proved remain capitalized after the completion of drilling if: (i) such wells have found a sufficient quantity of reserves to justify completion as a producing wells; (ii) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met or if an enterprise obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well is assumed to be impaired, and its costs, net of any salvage value, are charged to expense. Capitalized well costs related to proved properties are amortized over proved developed reserves on the basis of units of production. Other exploration costs, including geological and geophysical surveys, are expensed when incurred.
Development
Development costs are those costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas. Costs to operate and maintain wells and field equipment are expensed as incurred.
Under IFRS, costs of unsuccessful development wells are expensed immediately. Costs of successful development wells are capitalized and amortized on the basis of units of production.
Under U.S. GAAP, costs of productive wells and development dry holes, both tangible and intangible, are capitalized and amortized on UOP method.
C) Valuation of assets and subsequent revaluation
Both IFRS and U.S. GAAP require that assets which are impaired be written down to their fair value, with the exception of the following aspects.
Under IFRS, in order to determine whether an impairment exists, the book value of an asset in question is compared with its recoverable amount which is represented by the greater of fair value, net of disposal costs and value in use, which is calculated by discounting estimated cash flows arising from the use of the asset and its sale at the end of its useful life. Impairment charges of assets different from goodwill are reversed when the situation giving rise to an impairment ceases to exist.
Under U.S. GAAP, the recoverability of the value of an asset used in the production process is first checked by comparing the carrying amount with the sum of undiscounted cash flows expected from use of the asset and its disposal at the end of its useful life. Only if the result of this first check is negative does the entity write the asset down using discounted future cash flows. Under U.S. GAAP reversals of impairment charges are not permitted.
D) Deferred tax assets and liabilities
Under IFRS, taxes payable relating to certain potential distributions from shareholders’ equity or upon liquidation of a company are accrued only to the extent such distributions are planned.
Under U.S. GAAP, deferred tax liabilities are recognized regardless of expected distribution of dividends or the disposal of investments. However, U.S. GAAP does not require the accrual of deferred taxes when the investment is a foreign subsidiary and there is sufficient evidence that profits will remain permanently invested in the entity.
The adjustments included in Note 34 include the recognition of deferred taxes on undistributed earnings of subsidiaries and deferred taxes on acquired temporary differences. The adjustments also include the deferred tax effect of U.S. GAAP adjustments.
The adjustment relating to the results of 2005 includes the impact of the circumstance that starting on January 1, 2005, the Company recorded for U.S. GAAP purposes the tax effects of temporary differences of activities conducted under the terms of certain Production Sharing Agreements where the company’s income tax liability is paid out of Eni’s share of oil and gas production. The effect of recording did not have a material effect on the Company’s results of operations.
E) Intangible assets
Under U.S. GAAP intangible assets include the recording, separately from goodwill, of assets acquired in or following business combinations arising from legal or contractual rights regardless of their ability to be transferred and of other assets owned by the entity that can be transferred individually or together with other assets and liabilities. If such intangible assets have definite lives they are amortized by the straight line method over their useful lives.
IFRS are consistent with U.S. GAAP. However, considering that in the first application of IFRS, Eni has decided not to restate business combinations, the value of the intangible assets described is recorded in the item "Goodwill".
Both under U.S. GAAP and IFRS, goodwill and intangible assets with an indefinite useful life are not amortized; these assets are subject to a yearly evaluation in order to define the relevant impairment if needed. Such accounting principles have been adopted starting from January 1, 2002 for U.S. GAAP and January 1, 2004 for IFRS. The adjustments for the reconciliation of the shareholders equity included in Note 34 concern the reversal of the amortization of goodwill for the years 2002 and 2003.
F) Valuation of Inventories
Under U.S. GAAP, crude oil, petroleum products and natural gas inventories are calculated using the LIFO method.
Under IFRS the LIFO method is not permitted.
34 Reconciliation of net profit and shareholders’ equity determined under IFRS to U.S. GAAP
The following is a summary of the significant adjustments to net profit for 2004 and 2005 and to shareholders’ equity as of December 31, 2004 and as of December 31, 2005 that would be required if U.S. GAAP had been applied instead of IFRS in the Consolidated Financial Statements.
(million euro) 2004
2005
Net profit according to the financial statements prepared under IFRS 7,059
8,788
Items increasing (decreasing) reported net profit: A. effect of the differences related to companies consolidated under IFRS but carried at equity method under U.S. GAAP (1
) B. successful-efforts accounting (82
) 47
C. elimination of assets impairments and revaluations 5
D. deferred income taxes (21
) (279
) E. assets associated to the acquisition of a company (portfolio of clients) (5
) (5
) F. valuation of inventories (316
) (956
) Effect of the difference between IFRS and U.S. GAAP on investments accounted for using the equity method 34
12
Other adjustments (a) (280
) (3
) Effect of U.S. GAAP adjustments on minority interest (b) 8
(21
) Net adjustment (658
) (1,205
) Net profit in accordance with U.S. GAAP 6,401
7,583
Basic profit per share (c) 1.70
2.02
Diluted profit per share (c) 1.70
2.01
Basic profit per ADS (based on two shares per ADS) (c) 3.39
4.03
Diluted profit per ADS (based on two shares per ADS) (c) 3.39
4.03
(a)In 2004, other adjustments relate to other reconciling items between IFRS and U.S. GAAP mainly in respect of the accounting of the derivative financial instruments, which in 2004 were not accounted for under the fair value accounting method as permitted under IFRS first application exemptions.(b)Adjustment to account for minority interest portion of differences A through F, which include 100% of differences between IFRS and U.S. GAAP on less than wholly-owned subsidiaries.(c)Amounts in euro.
(million euro)Dec. 31,
20042006Dec. 31,
20052007Dec. 31, 2008
Shareholders’ equity according to the financial statements prepared under IFRS 32,374
36,868
Items increasing (decreasing) reported shareholders’ equity (a): A. effect of the differences related to companies consolidated under IFRS but carried at equity method under U.S. GAAP 61
37
B. successful-efforts accounting 2,072
2,504
C. elimination of assets impairments and revaluations 231
230
D. deferred income taxes (2,982
) (3,415
) E. goodwill 846
811
F. assets associated with the acquisition of a company (portfolio of clients) (11
) (16
) G. valuation of inventories (1,080
) (2,036
) Effect of the difference between IFRS and U.S. GAAP on investments accounted for using the equity method 269
173
Other adjustments (137
) Effect of U.S. GAAP adjustments on minority interest (b) 6
(31
) Net adjustment (725
) (1,743
) Shareholders’ equity in accordance with U.S. GAAP 31,649
35,125
(a)Items increasing (decreasing) reported shareholders’ equity of foreign companies are translated into euro at the exchange rate prevailing at the end of each period.(b)Adjustment to account for minority interest portion of differences A through G, which include 100% of differences between IFRS and U.S. GAAP on less than wholly-owned subsidiaries.
The consolidated balance sheets, if determined under U.S. GAAP would have been as follows:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
ASSETS Current assets Cash and cash equivalent 988
1,121
Other financial assets for trading or available for sale 1,475
1,484
Trade and other receivables 13,268
17,971
Inventories 2,273
1,929
Income tax receivables 636
575
Other current assets 494
387
Total current assets 19,134
23,467
Non-current assets Property, plant and equipment 39,652
43,868
Inventories - compulsory stock 662
1,462
Intangible assets 5,125
5,244
Investments accounted for using the equity method 3,892
4,589
Other investments 439
416
Other financial assets 2,015
1,105
Deferred tax assets 1,159
1,847
Other non-current assets 276
979
Total non-current assets 53,220
59,510
TOTAL ASSETS 72,354
82,977
LIABILITIES AND EQUITY Current liabilities Current financial liabilities 4,474
4,916
Current portion of long-term debt 935
809
Trade and other payables 9,392
11,552
Taxes payable 2,423
3,296
Other current liabilities 594
648
Total current liabilities 17,818
21,221
Non-current liabilities Long-term debt 7,288
7,229
Provisions for contingencies 5,720
7,615
Provisions for employee benefits 746
939
Deferred tax liabilities 6,367
8,370
Other non-current liabilities 461
1,015
Total non-current liabilities 20,582
25,168
TOTAL LIABILITIES 38,400
46,389
SHAREHOLDERS’ EQUITY Minority interests 2,305
1,463
Eni shareholders’ equity: Share capital: 4,005,358,876 fully paid shares nominal value euro 1 each (4,004,424,476 shares at December 31, 2004) 4,004
4,005
Other reserves 24,473
27,753
Net profit 6,401
7,583
Treasury shares (3,229
) (4,216
) Eni shareholders’ equity 31,649
35,125
Total shareholders’ equity 33,954
36,588
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 72,354
82,977
Fixed assets determined under U.S. GAAP consisted of the following:
( million euro)euro million)Total
Dec. 31, 2004
Dec. 31, 2005Related parties
Impact %
Fixed assets, gross: - Exploration & Production 39,584
47,882
- Gas & Power 20,106
21,514
- Refining & Marketing 8,568
9,059
- Petrochemicals 3,793
3,923
- Oilfield Services Construction and Engineering 110
72
- Other activities 1,511
1,413
- Corporate and financial companies 191
212
- Elimination of intra-group profits (88
) 73,863
83,987
Accumulated depreciation and amortization: - Exploration & Production 18,155
22,786
- Gas & Power 6,896
7,754
- Refining & Marketing 5,214
5,503
- Petrochemicals 2,564
2,715
- Oilfield Services Construction and Engineering 69
56
- Other activities 1,229
1,221
- Corporate and financial companies 84
88
- Elimination of intra-group profits (4
) 34,211
40,119
Fixed assets, net: - Exploration & Production 21,429
25,096
- Gas & Power 13,210
13,760
- Refining & Marketing 3,354
3,556
- Petrochemicals 1,229
1,208
- Oilfield Services Construction and Engineering 41
16
- Other activities 282
192
- Corporate and financial companies 107
124
- Elimination of intra-group profits (84
) 39,652
43,868
With regard to the profit and loss account, operating profit (loss) by industry segment and profit before income taxes, as determined under U.S. GAAP, would have been as follows:
(million euro) 2004
2005
Operating profit (loss) by industry segment Exploration & Production 7,946
12,672
Gas & Power 3,371
3,237
Refining & Marketing 811
881
Petrochemicals 281
202
Oilfield Services Construction and Engineering (52
) 1
Other activities (364
) (935
) Corporate and financial companies (254
) (389
) Elimination of intra-group profits (141
) 11,739
15,528
Net profit before income taxes 12,324
16,281
35 Additional financial statement disclosures required by U.S. GAAP and the SEC
Charges related to asset retirement obligations (SFAS 143)
Changes in asset retirement obligations during the year were:
(million euro) 2004
2005
Asset retirement obligations as of January 1 1,950
1,959
New obligations incurred during the year 193
311
Accretion discount 80
106
Revisions of previous estimates 40
277
Spending on existing obligations (32
) (107
) Property dispositions (234
) Foreign currency translation (36
) 110
Other adjustments (2
) (10
) Asset retirement obligations as of December 31 1,959
2,646
Revisions of previous estimates were made in connection with higher estimated costs for the retirement and removal of assets pertaining to certain fields located mainly in United Kingdom, Norway and Kazakhstan.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143" (FIN 47), which was effective for the company on December 31, 2005. In adopting FIN 47, the company did not recognize any additional liabilities for conditional retirement obligations.
Income taxes
The following information is presented according to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Domestic and foreign components of pre-tax income were as follows:
(million euro) 2004
2005
Domestic 5,468
4,727
Foreign 6,856
11,554
12,324
16,281
The provisions for income taxes were as follows:
(million euro) 2004
2005
Current 4,470
7,217
Deferred 1,112
1,116
5,582
8,333
Domestic 2,197
2,066
Foreign 3,385
6,267
The reconciliation of the income tax provision calculated under Italian tax regulation by applying a 33% rate (Ires - national corporate income tax) to pre-tax income and a 4.25% rate (Irap - regional income tax) to net value of production, to the provision for income taxes recorded on a U.S. GAAP basis in the consolidated statements of income is as follows:
(million euro) 2004
2005
Income before tax in accordance with U.S. GAAP 12,324
16,281
Italian statutory tax rate (state and local) 38.3
37.9
Expected income tax provision in accordance with U.S. GAAP at Italian statutory tax rate 4,714
6,176
Effect of items increasing (decreasing) the Italian statutory tax rate: - taxation of foreign operations at rates different from Italian statutory tax rate 835
1,946
- taxes on distributable reserves 446
252
- permanent differences (143
) 131
- devaluation/revaluation of deferred tax assets (218
) (52
) - benefits deriving from the application of favorable tax laws (8
) (11
) - other (44
) (109
) 5,582
8,333
Income taxes in accordance with U.S GAAP
Net deferred tax liabilities
The tax effects of significant temporary differences causing the tax liabilities were as follows:
(million euro)TotalRelated parties
Dec. 31, 2004
Dec. 31, 2005Impact %
Total
Deferred tax liabilities: - accelerated depreciation 4,672
6,006
- distributable reserves subject to taxes in case of distribution 2,970
3,212
- excess cost paid for the acquisition of consolidated investments 1,033
485
- successful-efforts method accounting 467
690
- capitalization of interest expense 246
245
- provisions for uncollectible receivables 137
84
- release of excess contingency provisions 83
50
- gains taxable in the future 46
34
- other (a) 378
1,151
10,032
11,957
Deferred tax assets: - accruals for doubtful accounts and contingencies (2,045
) (1,949
) - revaluation of assets in accordance with Law 342/2000 and 448/2001 (2,000
) (1,186
) - tax loss carryforwards (1,072
) (510
) - undeductible expense on investments (472
) (237
) - losses on investments and subsidiaries in excess of currently allowable tax deductions (225
) (135
) - undeductible depreciation and amortization of assets (432
) (904
) - other (a) (599
) (1,062
) (6,845
) (5,983
) Less: - valuation allowance 2,021
549
(4,824
) (5,434
) Net deferred tax liabilities 5,208
6,523
Related parties (a)Other deferred tax assets and liabilities items pertain in particular to temporary differences arising in connection with the recognition of asset removal obligations.
The valuation allowance relates to deferred tax assets of euro 549 million (euro 2,021 million at December 31, 2004) of consolidated companies whose expected future fiscal profits are not considered sufficient for the utilization of these assets.
Tax loss carryforwards
The difference in gross tax loss carryforwards between IFRS and U.S. GAAP relates to the companies which are consolidated under IFRS (see Note 21), but excluded from consolidation according to U.S. GAAP.
Investments
At December 31, 2004 and 2005, investments accounted for under the equity method of euro 3,892 million and euro 4,589 million, respectively, included shares of Saipem SpA, which is publicly listed on the Italian Stock Exchange. The following information includes its fair value:
Eni’s number of shares
Equity ratio(%)
Share price(euro)Impact %
Market value(million euro)
December 31, 2004 Saipem SpA 189,423,307
43.29
8.864
1,679
December 31, 2005 Saipem SpA 189,423,307
43.26
13.793
2,613
In 2004 and 2005, Saipem SpA was included in the consolidation under IFRS, while, under U.S. GAAP, it is valued under the equity method. Information about Saipem SpA and its subsidiaries, representing a 100% share of the companies, is as follows:
(million euro)
Dec. 31, 2004
Dec. 31, 2005
Total assets 5,137 5,968 - current 2,514 3,101 - non current 2,623 2,867 Total liabilities 3,592 4,325 - current 2,941 3,633 - non current 651 692
(million euro) 2004
2005
Net sales from operations 4,306
4,528
Operating profit 328
365
Net profit 235
255
Concentrations and certain significant estimates
The following information is presented according to Statement of Position 94-6 "Disclosures of Certain Significant Risks and Uncertainties".
Nature of operations
Eni is an integrated energy company operating in the oil and gas, electricity generation, petrochemicals and oilfield services and engineering industries.
EXPLORATION & PRODUCTION: through Exploration & Production Division and subsidiaries, Eni engages in hydrocarbon exploration and production in Italy, North Africa (Algeria, Egypt, Libya and Tunisia), West Africa (Angola, Congo and Nigeria), the North Sea (Norway and the United Kingdom), Latin America (Venezuela), the former Soviet Union countries (mainly Kazakhstan), the United States (Gulf of Mexico and Alaska) and Asia (mainly Saudi Arabia, China, India, Indonesia, Iran and Pakistan). In 2005 approximately 68% of oil production sold was supplied to Eni’s Refining & Marketing segment and approximately 29% of natural gas production sold was supplied to Eni’s Gas & Power segment.
Eni owns a storage system, made up by eight depleted fields, which is used for the modulation of supply in accordance with seasonal swings in demand (natural gas is stored in the summer and used in the winter), as strategic reserve to ensure supply and to support domestic production through mineral storage. Storage assets are owned by Stoccaggi Gas Italia (Eni 100%), a company constituted in accordance with Law Decree No. 164 of May 23, 2000 that introduced laws for the liberalization of the Italian natural gas market.
GAS & POWER: Eni is engaged in the supply, transmission and sale of natural gas in Italy and outside Italy through its Gas & Power Division, which was constituted by the incorporation of Snam SpA into Eni SpA in 2002, and through certain subsidiaries. Approximately 87% of total purchases are purchased from foreign sources (primarily Algeria, Russia, The Netherlands and Norway) under long-term contracts, which contain take-or-pay provisions, and transported to Italy through a network of over 4,300 kilometers international pipelines of which Eni owns the transmission rights. The remaining purchases in Italy are obtained principally from domestic gas produced by Eni’s Exploration & Production segment. Through an approximately 30,700-kilometer long network (corresponding to 96% of the Italian domestic natural gas network), Eni supplies natural gas to residential and commercial users (civil market), industrial users and the thermoelectric segment. Snam Rete Gas (Eni 50.05%), that was constituted in accordance with Law Decree No. 164/2000, owns the pipelines network used by Eni. Snam Rete Gas, a company listed on the Italian stock exchange, engages in natural gas transportation activities also for other operators of the segment. Following the merging of Italgas Più, Eni supply natural gas directly to approximately 5 million customers in the residential and commercial segment. Through Italgas (Eni 100%), Eni is engaged in domestic distribution of natural gas in Italy through an approximately 48,000-kilometer long network.
Eni is engaged in distribution and sale of natural gas to residential and commercial customers outside Italy, in Argentina through Distribuidora de Gas Cuyana, in Hungary through Tigáz and in Slovenia through Adriaplin doo.
Legislative Decree No. 164 of May 23, 2000 introduced laws for the liberalization of the Italian natural gas market with great impact on Eni’s activities, as the company is present in all the phases of the natural gas chain. The most important aspects of the decree are the following:
•total free market after 2003;•until December 31, 2010 the imposition of thresholds to operators in relation to a percentage share of domestic consumption set as follows: (i) 75%, by 2002, for imported or domestically produced natural gas volumes introduced in the domestic transmission network in order to sell it. This percentage decreases by 2 percentage points per year until it reaches 61% in 2009; (ii) 50% from January 1, 2003 for sales to final customers. These ceilings are calculated net of own consumption and, in case of sales, also net of losses. In 2005 Eni’s presence in the Italian natural gas market was in accordance with the above limitations;•tariffs for transport infrastructure, storage, use of LNG terminals and distribution networks are set by the Authority for Electricity and Gas; and•third parties are allowed to access natural gas infrastructure according to set conditions.
Eni through EniPower SpA (Eni 100%) and subsidiaries is engaged managing Eni’s electricity business at the power plants located in the Ferrera Erbognone, Ravenna, Livorno, Taranto, Mantova, Brindisi and Ferrara industrial sites with installed capacity of 4.5 gigawatt and a production sold of 22.77 terawatthours. The demand for gas and fuel oils of EniPower’s stations is met by Eni supplies.
REFINING & MARKETING: Eni, through its Refining & Marketing Division, which was constituted by the incorporation of AgipPetroli SpA in Eni SpA in 2002 and certain subsidiaries, engages in petroleum refining and marketing activities primarily in Italy and Europe. Eni is the largest refiner of petroleum products in Italy in terms of overall refining capacity. Approximately 56% of crude oil sold is purchased from Eni’s Exploration & Production segment, the rest is purchased from producing countries pursuant to purchase contracts (22%) and in international spot markets (22%), while the remainder is obtained. Approximately 58% of the purchased crude oil is refined. 32% of oil refined derives from the production of Eni’s Exploration & Production segment.
PETROCHEMICALS: through Polimeri Europa SpA and subsidiaries (Eni 100%), Eni engages in manufacturing of olefins, aromatics, intermediate products, styrene and elastomers. Eni’s petrochemicals production is concentrated in Italy, the other operations being primarily in Western Europe. Approximately 23% of the oil-based feedstock requirements used by petrochemical plants are supplied by Eni’s Refining & Marketing segment.
OILFIELD SERVICES CONSTRUCTION AND ENGINEERING: through Saipem SpA (Eni 43%), a company listed on the Italian stock exchange, and its subsidiaries, Eni is engaged in construction and drilling services to customers in the oil and gas industries. Through Snamprogetti SpA (Eni 100%) and subsidiaries, Eni is a leading provider of engineering and project management services to customers in the oil and gas and petrochemical industries. At December 31, 2005 approximately 7% of the order backlog of Eni’s Oilfield Services, Construction and Engineering segment related to orders from Eni Group companies.
Disclosure in accordance with SFAS No. 107
In accordance with FAS No. 107, fair value of Eni’s long-term debt (including the current portion) amounted to euro 8,384 million and euro 8,437 million at December 31, 2005 and 2004, respectively.
Accounting for Suspended Well Costs
Refer toNote 33"Adjustment of the Consolidated Financial Statements to U.S. GAAP" under the caption "B) Exploration & Production activities" for a discussion of the company’s accounting policy for the cost of exploratory wells.
Effective January 1, 2005 Eni adopted Position FAS 19-1 (FSP 19-1), "Accounting for Suspended Well Costs." FSP 19-1 amended Statement of Financial Accounting Standards No. 19 (FAS 19), "Financial Accounting and Reporting by Oil and Gas Producing Companies". Under this provision companies in the oil and gas industry are allowed to continue capitalization of an exploratory well after the completion of drilling when: (a) the well has found a sufficient quantity of reserves to justify completion as a producing well; and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met or if an enterprise obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well would be assumed to be impaired, and its costs, net of any salvage value, would be charged to expense. FSP FAS 19-1 provided a number of indicators needing to be present to demonstrate sufficient progress was being made in assessing the reserves and economic viability of the project. Among these indicators are: (i) costs are being incurred to assess the reserves and their potential development; (ii) existence (or active negotiations) of sales contracts with customers for oil and natural gas; and (iii) existence of firm plans, established timetables or contractual commitments, which may include seismic testing and drilling of additional exploratory wells.
The disclosures and discussion below address those suggested in FSP FAS 19-1.
The following table reflects the net changes in capitalized exploratory well costs during 2005 and 2004, and does not include amounts that were capitalized and subsequently expensed in the same period. Capitalized exploratory well costs for fiscal years ending December 31, 2005 and 2004, are presented based on the Company’s previous accounting policy.
(million euro) 2005
2004
Beginning balance at January 1 513 570 Addition pending determination of proved reserves 128 185 Amount previously capitalized expended during the year (96 ) (54 ) Reclassification to wells, facilities and equipment basedon the determination of proved reserves (67 ) (72 ) Others reduction (*) (1 ) (79 ) Foreign exchange changes 74 (37 ) Ending Balance at December 31 551 513
(*)Represents properties sales.
The following table provides an aging of capitalized exploratory well costs, based on the date the drilling was completed, and the number of net wells for which exploratory costs have been capitalized for the period:
2005
2004
million euro
No. of Net Wells(*)
million euro
No. of Net Wells(*)
< 1 year 148 9.35 156 11.14 1 to 3 years 323 24.09 319 27.55 3 to 8 years 80 5.53 39 3.80 551 38.97 513 42.49
Net sales from operations 86,105
3,974
4.62
87,256
4,198
4.81
108,148
5,048
4.67
Other income and revenues 783
..
827
..
720
39
5.42
Purchases, services and other 57,490
2,720
4.73
58,179
3,777
6.49
76,408
6,298
8.24
Financial income 3,749
58
1.55
4,445
49
1.10
7,985
42
0.53
Financial expense (3,971
) (18
) 0.45
(4,554
) (20
) 0.44
(8,198
) (17
) 0.21
Gain (loss) on derivative financial instruments 383
..
26
10
38.46
(551
) 58
..
(*)Net well is the sum of the fractional working interest owned in gross wells.
The following table provides, based on the date the drilling was completed, the capitalized costs and the related net well number at year end 2005 and 2004 divided by category of projects of exploratory activity.
2005
2004
million euro
No. of Net Wells(*)
million euro
No. of Net Wells(*)
Project with wells drilled in the past 12 months 148 9.35 156 11.14 Project with recent or planned exploratory activity 344 21.21 283 21.94 Project with exploration activities already underwayor firmly planned: - future exploration drilling 159 9.37 148 10.29 - other exploratory activities 185 11.84 135 11.65 Project with completed exploratory activity 59 8.41 75 9.41 Project progressing towards commercialization/sanctioning 45 6.22 61 8.32 Project waiting finalization of development facilities 14 2.19 14 1.09 Total/Number of wells at the year end 551 38.97 513 42.49 Transactions with related parties concerned the ordinary course of Eni’s business and were mainly conducted on an arm’s length basis.
F-97
Main cash flows with related parties were as follows:
(euro million) 2006
2007
2008
Revenues and other income 3,974 4,198 5,087 Costs and other expenses (2,720 ) (3,777 ) (6,298 ) Net change in trade and other receivables and liabilities 162 (492 ) 351 Dividends and net interests 790 620 798 Net cash provided from operating activities 2,206 549 (62 ) Capital expenditures in tangible and intangible assets (733 ) (779 ) (2,022 ) Investments (20 ) 8 Change in accounts payable in relation to investments (276 ) (8 ) 27 Change in financial receivables 343 (43 ) 397 Net cash used in investing activities (686 ) (822 ) (1,598 ) Change in financial liabilities (57 ) 20 14 Net cash used in financing activities (57 ) 20 14 Total financial flows to related parties 1,463 (253 ) (1,646 )
(*)Net well is the sum of the fractional working interest owned in gross wells.The impact of cash flows with related parties consisted of the following:
2006
2007
2008
(euro million) Total Related parties Impact % Total Related parties Impact % Total Related parties Impact %
Cash provided from operating activities 17,001
2,206
12.98
15,517
549
3.54
21,801
(62
) ..
Cash used in investing activities (7,051
) (686
) 9.73
(20,097
) (822
) 4.09
(16,958
) (1,598
) 9.42
Cash used in financing activities (7,097
) (57
) 0.80
2,909
20
0.69
(5,025
) 14
..
38 Significant non-recurring events and operations
Non-recurring incomes (charges) consisted of the following:
(euro million) 2006
2007
2008
Curtailment of post-retirement benefits for Italian employees 83 Risk provisions for proceedings against Antitrust authorities (184 ) (130 ) (21 ) Risk provisions for proceedings against the Italian Authority for Electricity and Gas (55 ) 39 (239 ) (8 ) (21 )
Non-recurring income related to a gain deriving from the curtailment of the provisions accrued by Italian companies for employee termination indemnities ("TFR") following the changes introduced by Italian Budget Law for 2007 and related decrees (euro 83 million). Non recurring charges for 2007 concerned risk provisions related to ongoing antitrust proceedings against the European Antitrust authorities (euro 130 million) in the fields of paraffin and elastomers.
In 2006 a risk provision was made in connection with a proceeding against the Italian Antitrust authority regarding the field of supplies of jet fuel (euro 109 million). In addition a risk provision was made for an inquiry before the European Antitrust authorities in the field of elastomers (euro 75 million). In 2006 certain fines were imposed by the Authority for Electricity and Gas regarding an inquiry relating to the use of storage capacity in thermal year 2005-2006 (euro 45 million) and an inquiry relating to an information requirement on natural gas supplying prices (euro 10 million).
F-98
39 Positions or transactions deriving from atypical and/or unusual operations
In 2006, 2007 and in 2008 no transactions deriving from atypical and/or unusual operations were reported.
Recent developmentsOn April 7, 2009 Gazprom exercised its call option to purchase a 20% interest in OAO Gazprom Neft held by Eni following agreements between the two partners. The 20% interest in Gazprom Neft was acquired by Eni on April 4, 2007 as part of a bid procedure for the assets of bankrupt Russian company Yukos. The exercise price of the call option is equal to the bid price (U.S. $ 3.7 billion) as adjusted by subtracting dividends distributed and adding the contractual yearly remuneration of 9.4% on the capital employed and related financing expenses. At the same time, Eni and Gazprom signed new cooperation agreements targeting certain development projects to be conducted jointly in Russia and other countries of interest. Terms of the call option granted to Gazprom to purchase a 51% interest in the share capital of OOO SeverEnergia, which owns 100% of the three abovementioned Russian companies engaging in gas development, are currently under review by Eni, Enel and Gazprom.
On March 19, 2009, a mandatory tender offer on the minorities of Distrigas was finalized. Shareholders representing 41.61% of the share capital of Distrigas tendered 292,390 shares on Eni’s offer. Publigaz Scrl tendered its entire interest (31.25%). The transaction has been accounted in Eni financial statements as at March 31, 2009. On April 8, 2009 Eni paid to those shareholders cash consideration amounting to euro 1,991 million. Following the tender offer, Eni owns 98.86% of the share capital of Distrigas. The squeeze-out on the residual 1.14% of the share capital has been completed early in May. Consequently Eni holds all the shares of Distrigas except for one share belonging to the Belgian State with special powers. Distrigas shares has been delisted from Euronext Brussels. For further details on this transaction see "Item 4 – Gas & Power".
On February 12, 2009, Eni’s Board of Directors approved the divestment of 100% of Italgas SpA and Stoccaggi Gas Italia SpA (Stogit) to Snam Rete Gas (50.03% owned by Eni) for total cash consideration of euro 4,720 million (euro 3,070 million and euro 1,650 million, respectively). The transaction will be financed by Snam Rete Gas through: (i) a rights issue up for a maximum of euro 3.5 billion (Eni has already committed to subscribe its relative share of the rights issue); and (ii) new medium to long-term financing for euro 1.3 billion. The main impacts expected on Eni's consolidated financial statements when the transaction closes will be: (i) a decrease of euro 1.5 billion in net borrowings and a corresponding increase in total equity as a consequence of the pro-quota subscription of the Snam Rete Gas capital increase by the minority shareholders; and (ii) a decrease in Eni’s net profit equal to 45% of the aggregate net profit of Italgas and Stogit, with a corresponding increase in net profit attributable to minorities. From an industrial perspective the transaction, expected to close in July 2009, will create significant synergies in the regulated businesses segment and maximize the value of Italgas and Stogit due to the higher visibility of regulated businesses as a part of Snam Rete Gas. For further details on this transaction see "Item 4 – Gas & Power".
By the end of
2005May 2008, based on the approval of theeuro 551 million of exploratory suspended costs, approximately euro 148 million related tofull year dividend proposal made by the9.35 net wells for which the drilling was completed in one year or less. Of the remaining euro 403 million, related to the 29.62 net wells suspended for more than one year since the completion of drilling, 85% was associated with projects for which exploration activity is still ongoing.
Subsequent events
The main significant events that occurred after the balance sheet date are as follows:
•With effective date April 1, 2006, the Venezuelan State oil company Petróleos de Venezuela SA (PDVSA) unilaterally terminated the service contract governing activities at the Dación oil field where Eni acted as a contractor, holding a 100% working interest. As a consequence, starting on the same day, operations at the Dación oil field are conducted by PDVSA which replaced Eni Dación BV, Eni’s wholly-owned subsidiary that had been operating the field until that date.Eni believes that it is entitled to a market value compensation for the expropriation of the Dación field. On these basis, Eni is available to reach an agreement with the Venezuelan authorities. In case an amicable settlement is not possible, Eni will take any other action in order to protect its interest in Venezuela. Based on internal and external independent evaluation, Eni is confident that a fair market compensation will not be lower than the book value of the Dación related assets. Accordingly, management decided not to impair the book value of Eni’s Dación assets. In 2005 and in the first quarter 2006, the Dación field production rate was about 60 KBBL/d. Management expects Eni’s proved reserves of hydrocarbons to be reduced by an amount of approximately 175 mmBBL corresponding to Eni’s net proved reserves of the Dación field as of December 31, 2005 as a consequence of the loss of Eni’s title to the field.•On May 5, 2006 the European Commission started an inquiry in order to verify an alleged abuse of dominant position on the part of Eni in violation of article 82 of the EEC Treaty and article 54 of the CES Agreement in the activities of international gas transport and wholesale and retail supply of gas. According to the European Commission Eni might have adopted commercial practices that constitute barriers to access to the Italian market for the wholesale supply of natural gas, in particular taking account of Eni long-term purchase contracts. In addition Eni also entered into long-term transport contracts which award Eni a majority share of transport capacity of certain international gaslines and, as a consequence, Eni may have prevented others access to infrastructure.Officials from the European Commission have conducted inspections at Eni’s headquarters and of certain of Eni’s subsidiaries and collected documents.If the existence of the alleged anti-competitive practices is confirmed, the European Commission could fine Eni.0.65 per share. Total cash out is estimated at euro 2.36 billion.On May 25, 2006, Eni’sCompany’s Annual General Shareholders Meetingapproved aon April 30, 2009, Eni expects to pay the balance of the dividend for fiscal year 2008 amounting to euro2 billion increase in Eni’s ongoing share repurchase program.F-99
Supplemental oil and gas information (unaudited)
The following information pursuant to "International Financial Reporting Standards" (IFRS) is presented in accordance with Statement of Financial Accounting Standards No. 69, "Disclosures about Oil & Gas Producing Activities". Amounts related to minority interests are not significant.
Capitalized costs
Capitalized costs represent the total expenditures for proved and unproved mineral interests and related support equipment and facilities utilized in oil and gas exploration and production activities, together with related accumulated depreciation, depletion and amortization. Capitalized costs by geographical area consist of the following:
( million euro)euro million)Italy
North Africa
West Africa
North Sea
Caspian Area (1)
Rest of World
Total consolidated subsidiaries
Total joint ventures and associates (2)
At December 31, 2004 Proved mineral interests (a) 9,056
7,192
6,288
7,198
7,698
37,432
Unproved mineral interests 272
70
561
1,103
2,006
Support equipment and facilities 252
1,056
209
33
75
1,625
Incomplete wells and other 662
468
1,038
397
882
3,447
Gross Capitalized Costs 9,970
8,988
7,605
8,189
9,758
44,510
Accumulated depreciation, depletion and amortization (6,416
) (3,887
) (3,907
) (3,733
) (3,252
) (21,195
) Net Capitalized Costs 3,554
5,101
3,698
4,456
6,506
23,315
At December 31, 2005 Proved mineral interests (a) 9,756
9,321
8,733
8,350
9,463
45,623
Unproved mineral interests 33
197
134
413
1,265
2,042
Support equipment and facilities 253
1,385
272
33
93
2,036
Incomplete wells and other 657
638
728
221
1,895
4,139
Gross Capitalized Costs 10,699
11,541
9,867
9,017
12,716
53,840
Accumulated depreciation, depletion and amortization (6,888
) (5,113
) (5,193
) (4,619
) (4,697
) (26,510
) Net Capitalized Costs consolidated 3,811
6,428
4,674
4,398
8,019
27,330
Net Capitalized Costs affiliates and joint ventures (b) 13
66
157
236
Net Capitalized Costs 3,811
6,441
4,740
4,398
8,176
27,566
December 31, 2007 Proved mineral interests 10,571 8,118 8,506 8,672 1,447 7,718 45,032 790 Unproved mineral interests 32 120 1,030 330 35 2,582 4,129 1,089 Support equipment and facilities 279 1,125 443 16 41 59 1,963 10 Incomplete wells and other 726 562 1,078 75 1,852 808 5,101 112 Gross capitalized costs 11,608 9,925 11,057 9,093 3,375 11,167 56,225 2,001 Accumulated depreciation, depletion and amortization (7,440 ) (4,960 ) (5,340 ) (5,670 ) (445 ) (4,909 ) (28,764 ) (345 ) Net capitalized costs (a) (b) 4,168 4,965 5,717 3,423 2,930 6,258 27,461 1,656 December 31, 2008 Proved mineral interests 10,772 10,116 11,368 7,499 2,130 8,954 50,839 813 Unproved mineral interests 32 638 2,267 316 1,051 2,908 7,212 928 Support equipment and facilities 283 1,205 520 16 51 71 2,146 14 Incomplete wells and other 1,374 1,006 1,443 159 2,631 1,797 8,410 267 Gross capitalized costs 12,461 12,965 15,598 7,990 5,863 13,730 68,607 2,022 Accumulated depreciation, depletion and amortization (7,943 ) (6,318 ) (7,027 ) (5,132 ) (858 ) (6,932 ) (34,210 ) (441 ) Net capitalized costs (a) (b) 4,518 6,647 8,571 2,858 5,005 6,798 34,397 1,581
i i i (a) i IncludesThe amounts include net capitalizedcosts for wellsfinancial charges totaling euro 441 million in 2007 andfacilities related to proved reserves.euro 537 million in 2008.(b) i Starting from 2005 data relatedThe amounts do not include costs associated with exploration activities which are capitalized in order toaffiliatesreflect their investment nature and amortized in full when incurred. The application of the "Successful Effort Method" would have led to an increase in net capitalized costs of euro 2,547 million in 2007 and euro 3,308 million in 2008 for the consolidated companies and of euro 94 million in 2007 and euro 48 million in 2008 for joint venturescarriedand associates.
(1) i Eni's capitalized costs of the Kashagan field are determined based on Eni's share of 16.81% as of December 31, 2008 and 18.52% in the equity method are included.previous year.(2) i The amounts of joint ventures and associates as at December 31, 2007 and December 31, 2008 include 60% of the three Russian companies former Yukos purchased in 2007, for which Gazprom has a call option of 51%.
CostF-100Costs incurred
Costs incurred represent amounts both capitalized and expensed in connection with oil and gas producing activities. Costs incurred by geographical area consist of the following:
( million euro)euro million)Italy
North Africa
West Africa
North Sea
Caspian
Area (1)Rest of World
Total consolidated subsidiaries
Total joint ventures and associates (2)
Year ended December 31, 2003 Proved property acquisitions 308
8
316
Unproved property acquisitions 125
6
131
Exploration 67
80
138
125
243
653
Development (a) 449
1,106
1,268
286
1,454
4,563
Total costs incurred (b) 516
1,186
1,406
844
1,711
5,663
Year ended December 31, 2004 Exploration 64
104
71
66
194
499
Development (a) 431
965
881
391
1,407
4,075
Total costs incurred 495
1,069
952
457
1,601
4,574
Year ended December 31, 2005 Proved property acquisitions 19
16
99
134
Unproved property acquisitions 13
44
99
156
Exploration 45
153
75
127
264
664
Development (a) 644
960
909
528
1,396
4,437
Total costs incurred consolidated 721
1,113
1,044
655
1,858
5,391
Total costs incurred affiliates and joint ventures (c) 2
22
25
49
Total costs incurred 721
1,115
1,066
655
1,883
5,440
2006 Proved property acquisitions 139 10 149 Unproved property acquisitions 3 3 Exploration 128 270 471 174 25 280 1,348 26 Development (a) 1,120 892 956 478 595 766 4,807 31 Total costs incurred 1,387 1,172 1,427 652 620 1,049 6,307 57 2007 Proved property acquisitions (b) 11 451 1,395 1,857 187 Unproved property acquisitions (b) 510 1,417 1,927 1,086 Exploration (b) 104 380 298 193 36 1,181 2,192 42 Development (a) (b) 320 1,047 1,425 518 744 1,185 5,239 156 Total costs incurred 424 1,438 2,684 711 780 5,178 11,215 1,471 2008 Proved property acquisitions (b) 626 413 173 83 1,295 Unproved property acquisitions (b) 384 655 33 647 1,719 Exploration (b) 135 421 581 214 144 719 2,214 48 Development (a) (b) 644 1,388 1,884 850 1,208 1,593 7,567 163 Total costs incurred 779 2,819 3,533 1,097 2,172 2,395 12,795 211
i i i (1) i Eni’s costs incurred of the Kashagan field are determined based on Eni’s share of 16.81% as of December 31, 2008 and 18.52% in the previous year. (2) i The amounts of joint ventures and associates for December 31, 2007 and December 31, 2008 include 60% of the three Russian companies former Yukos purchased in 2007, for which Gazprom has a call option of 51%. (a) i Includes the abandonment costs of the assets for assets retirement obligations pursuant to SFAS 143 "Accounting for asset retirement obligations" ofeuro841,170 millionof costs capitalized during 2003,in 2006, euro233173 million in 2007 and euro 628 million in 2008 and euro 16 million for2004joint ventures andeuro 588 million for 2005.associates.(b) i Includes costs for acquisition of Fortum Petroleum AS (now Eni Norge AS) ofOf which business combination:
(euro 434 million, net of the related gross-up for deferred taxes of euro 514 million. The amount has been allocated to the North Sea area as follows: (i) Proved property acquisitions euro 308 million, (ii) Unproved property acquisitions euro 109 million, (iii) Exploration euro 17 million.(c)million)Starting from 2005 data related to affiliates and
Italy
North Africa
West Africa
North Sea
Caspian Area
Rest of World
Total consolidated subsidiaries
Total joint ventures
carried on the equity method are included.and associates
2007 Proved property acquisitions 451 1,395 1,846 187 Unproved property acquisitions 510 1,334 1,844 1,086 Exploration 59 474 533 Development 10 345 355 101 Total 1,030 3,548 4,578 1,374 2008 Proved property acquisitions 298 173 83 554 Unproved property acquisitions 384 560 33 647 1,624 Exploration 23 115 116 42 296 Development 132 4 52 156 77 421 Total 539 977 85 1,092 202 2,895 Results of operations from oil and gas producing activities
Results of operations from oil and gas producing activities, including gas storage services used to modulate the seasonal variation of demand, represent only those revenues and expenses directly associatedtowith such activities, including operating overheads. These amounts do not include any allocation of interest expense or general corporate overhead and, therefore, are not necessarily indicative of the contributions to consolidated net earnings of Eni. Related income taxes are computed by applying the local income tax rates to the pre-tax income from producing activities. Eni is a party to certain Production Sharing Agreements (PSAs), whereby a portion of Eni’s share of oil and gas production is withheld and sold by its joint venture partners which are state-owned entities, with proceeds being remitted to the state in satisfaction of Eni’sPSA relatedPSA-related tax liabilities. Revenue and income taxes include such taxes owed by Eni but paid by state-owned entities out of Eni’s share of oil and gas production.F-101
Results of operations from oil and gas producing activities by geographical area consist of the following:
( million euro)euro million)Italy
North Africa
West Africa
North Sea
Caspian
Area (1)Rest of World
Total consolidated subsidiaries
Total joint ventures and associates (2)
Year ended December 31, 2003 Revenues: - sales to affiliates 2,609
1,469
1,946
1,913
345
8,282
- sales to unaffiliated entities 153
1,188
164
822
1,595
3,922
Total revenues 2,762
2,657
2,110
2,735
1,940
12,204
Operations costs (222
) (316
) (283
) (446
) (235
) (1,502
) Production taxes (136
) (97
) (235
) (11
) (79
) (558
) Exploration expenses (89
) (70
) (113
) (96
) (276
) (644
) DD&A and Provision for abandonment (a) (458
) (420
) (377
) (759
) (734
) (2,748
) Other income and (expenses) (170
) (264
) (121
) 14
(289
) (830
) Accretion discount (SFAS 143) (37
) (5
) (14
) (42
) (4
) (102
) Pretax income from producing activities 1,650
1,485
967
1,395
323
5,820
Estimated income taxes (629
) (788
) (617
) (750
) (111
) (2,895
) Results of operations from E&P activities 1,021
697
350
645
212
2,925
Year ended December 31, 2004 Revenues: - sales to affiliates 2,633
1,868
2,762
2,083
508
9,854
- sales to unaffiliated entities 148
1,364
306
709
2,086
4,613
Total revenues 2,781
3,232
3,068
2,792
2,594
14,467
Operations costs (223
) (292
) (322
) (405
) (289
) (1,531
) Production taxes (118
) (91
) (379
) (13
) (163
) (764
) Exploration expenses (57
) (47
) (71
) (93
) (155
) (423
) DD & A and Provision for abandonment (a) (489
) (437
) (482
) (687
) (849
) (2,944
) Other income and (expenses) (98
) (368
) (216
) 97
(208
) (793
) Accretion discount (SFAS 143) (37
) (5
) (17
) (15
) (6
) (80
) Pretax income from producing activities 1,759
1,992
1,581
1,676
924
7,932
Estimated income taxes (632
) (994
) (945
) (948
) (305
) (3,824
) Results of operations from E&P activities 1,127
998
636
728
619
4,108
Year ended December 31, 2005 Revenues: - sales to affiliates 3,133
2,813
4,252
2,707
828
13,733
- sales to unaffiliated entities 161
2,579
394
889
2,883
6,906
Total revenues 3,294
5,392
4,646
3,596
3,711
20,639
Operations costs (261
) (390
) (363
) (417
) (338
) (1,769
) Production taxes (157
) (98
) (513
) (15
) (207
) (990
) Exploration expenses (32
) (59
) (38
) (125
) (181
) (435
) DD&A and Provision for abandonment (a) (512
) (711
) (632
) (710
) (1,007
) (3,572
) Other income and (expenses) (205
) (400
) (176
) 55
(251
) (977
) Accretion discount (SFAS 143) (45
) (9
) (15
) (31
) (6
) (106
) Pretax income from producing activities 2,082
3,725
2,909
2,353
1,721
12,790
Estimated income taxes (762
) (2,197
) (1,818
) (1,386
) (580
) (6,743
) Results of operations from E&P activities consolidated 1,320
1,528
1,091
967
1,141
6,047
Results of operations from E&P activities, affiliates and joint ventures (b) 6
(19
) (13
) Total results of operations from E&P activities 1,320
1,528
1,097
967
1,122
6,034
(a)Includes asset impairments amounting for euro 210 million for 2003, euro 300 million for 2004 and euro 147 million for 2005.(b)Starting from 2005 data related to affiliates and joint ventures carried on the equity method are included.
Average sale prices and production costs per unit of production
2006 Revenues Sales to consolidated entities 3,601
4,185
4,817
3,295
261
712
16,871
Sales to third parties 184
3,012
967
983
721
1,873
7,740
120
Total revenues 3,785
7,197
5,784
4,278
982
2,585
24,611
120
Operation costs (249
) (496
) (475
) (481
) (147
) (191
) (2,039
) (18
) Production taxes (181
) (95
) (475
) (82
) (833
) (3
) Exploration expenses (137
) (273
) (186
) (160
) (25
) (293
) (1,074
) (26
) D.D. & A. and provision for abandonment (a) (457
) (795
) (737
) (684
) (80
) (895
) (3,648
) (43
) Other income and (expenses) (315
) (569
) (190
) 57
(89
) (283
) (1,389
) 8
Pretax income from producing activities 2,446
4,969
3,721
3,010
641
841
15,628
38
Income taxes (909
) (2,980
) (2,133
) (1,840
) (223
) (381
) (8,466
) (31
) Results of operations from E&P activities (b) 1,537
1,989
1,588
1,170
418
460
7,162
7
2007 Revenues Sales to consolidated entities 3,171
3,000
4,439
3,125
296
512
14,543
Sales to third parties 163
4,793
693
755
833
2,260
9,497
176
Total revenues 3,334
7,793
5,132
3,880
1,129
2,772
24,040
176
Operation costs (248
) (542
) (499
) (579
) (142
) (271
) (2,281
) (27
) Production taxes (188
) (91
) (473
) (28
) (780
) (6
) Exploration expenses (108
) (385
) (291
) (193
) (36
) (764
) (1,777
) (42
) D.D. & A. and provision for abandonment (a) (499
) (768
) (685
) (729
) (76
) (989
) (3,746
) (51
) Other income and (expenses) (283
) (627
) (297
) (45
) (72
) (243
) (1,567
) (18
) Pretax income from producing activities 2,008
5,380
2,887
2,334
803
477
13,889
32
Income taxes (746
) (3,102
) (1,820
) (1,419
) (284
) (241
) (7,612
) (49
) Results of operations from E&P activities (b) 1,262
2,278
1,067
915
519
236
6,277
(17
) 2008 Revenues Sales to consolidated entities 3,956
2,622
5,013
3,691
360
629
16,271
Sales to third parties 126
7,286
1,471
121
1,288
2,928
13,220
265
Total revenues 4,082
9,908
6,484
3,812
1,648
3,557
29,491
265
Operation costs (260
) (528
) (609
) (515
) (173
) (326
) (2,411
) (34
) Production taxes (195
) (32
) (616
) (35
) (878
) (53
) Exploration expenses (135
) (425
) (529
) (215
) (57
) (697
) (2,058
) (48
) D.D. & A. and provision for abandonment (a) (551
) (1,120
) (1,115
) (782
) (331
) (1,490
) (5,389
) (84
) Other income and (expenses) (420
) (936
) (279
) (63
) (286
) (270
) (2,254
) (15
) Pretax income from producing activities 2,521
6,867
3,336
2,237
801
739
16,501
31
Income taxes (924
) (4,170
) (2,262
) (1,581
) (315
) (435
) (9,687
) (49
) Results of operations from E&P activities (b) 1,597
2,697
1,074
656
486
304
6,814
(18
)
(million euro)
Italy
North Africa
West Africa
North Sea
Rest of World
Total
2003 Average sale prices Oil and condensates, per BBL ($) 24.24 27.14 27.60 28.37 21.53 26.29 Natural gas, per KCF 4.65 2.86 0.53 3.11 3.18 3.56 Average production costs, per BOE (1) 3.77 3.70 6.21 4.19 3.26 4.16 2004 Average sale prices Oil and condensates, per BBL ($) 30.98 35.66 36.32 36.92 30.79 34.76 Natural gas, per KCF 5.33 2.92 0.60 3.87 3.29 3.89 Average production costs, per BOE (1) 4.35 3.53 7.70 4.73 4.50 4.92 2005 Average sale prices Oil and condensates, per BBL ($) 45.46 50.26 51.58 51.96 44.39 49.32 Natural gas, per KCF 6.29 3.35 0.79 5.27 3.71 4.49 Average production costs, per BOE (1) 5.58 3.66 8.90 5.32 5.59 5.59
i i i (a) i Includes asset impairments amounting to euro 130 million in 2006, euro 91 million in 2007 and euro 770 million in 2008. (b) i The "Successful Effort Method" application would have led to an increase in results of operations of euro 220 million in 2006, euro 438 million in 2007 and euro 408 million in 2008 for the consolidated companies and of euro 15 million in 2006, euro 26 million in 2007 and no variation in 2008 for joint ventures and associates.
(1) i Eni's results of operations of the Kashagan field are determined based on Eni’s share of 16.81% as of December 31, 2008 and 18.52% in the previous year. (2) i The amounts of joint ventures and associates for December 31, 2007 and December 31, 2008 include 60% of the three Russian companies formerly part of Yukos purchased in 2007, for which Gazprom has a call option of 51%. F-102
Average sale prices and production costs per unit of production
(euro million) Italy
North Africa
West Africa
North Sea
Caspian Area Rest of World
Total
2006 Average sales prices Oil and condensates per BBL ($) 55.22 60.99 61.55 62.18 53.18 57.15 60.09 Natural gas. per KCF 8.23 4.17 1.05 6.89 0.39 5.09 5.29 Average production costs per BOE 6.36 3.87 9.02 6.03 5.02 4.52 5.79 2007 Average sales prices Oil and condensates per BBL ($) 62.47 67.86 69.77 69.40 59.34 68.63 67.70 Natural gas. per KCF 8.58 4.60 1.21 6.53 0.41 5.53 5.42 Average production costs per BOE 7.89 4.22 11.53 8.56 4.90 5.33 6.90 2008 (a) Average sales prices Oil and condensates per BBL ($) 84.87 84.71 91.58 71.90 80.43 82.06 84.05 Natural gas. per KCF 13.06 7.14 1.50 10.21 0.53 7.56 8.01 Average production costs per BOE 9.40 3.66 15.25 8.99 5.79 6.92 7.77
(a) In 2008 Eni’s liquid realizations amounted to $84.05 per barrel and were reduced by approximately $4.13 per barrel due to the settlement of certain commodity derivatives relating to the sale of 46 mmBBL in the year. This was part of a derivative transaction the Company entered into to hedge exposure to variability in future cash flows expected from the sale of a portion of the Company’s proved reserves for an original amount of approximately 125.7 mmBBL in the 2008-2011 period, decreasing to 79.7 mmBBL by the end of December 2008. Oil and natural gas reserves
Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under technical, contractual, economic and operating conditions existing at the time. Prices include consideration of changes in existing prices provided only by contractual arrangements, but noton escalationsof increases based upon future conditions.Net proved reserves exclude royalties and interests owned by others.
Proved developed oil and gas reserves are proved reserves that can be estimated to be recovered through existing wells,
with existingequipment and operating methods.Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion.
Additional oil and gas reserves expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing natural forces and mechanisms of primary recovery are included as proved developed reserves only after testing by a pilot project or after the operation of an installed program has confirmed, through production response, that increased recovery will be achieved.
Eni’s proved reserves have been estimated on the basis of the applicable U.S. Securities & Exchange Commission regulation, Rule 4-10 of Regulation S-X and its interpretations and have been disclosed in accordance with Statement of Financial Accounting Standard No. 69. The estimates of proved reserves, developed and undeveloped, for the years ended December 31,
2002, 2003, 20042006, 2007 and20052008 are based on data prepared by Eni. Since 1991 Eni has requested qualified independent oil engineering companies to carry out an independent evaluation1816 of its proved reserves on arotativerotation basis. Eni believes these independent evaluators to be experienced and qualified in the marketplace. In the preparation of their reports, these independent evaluators relied, without independent verification, upon information furnished by Eni with respect to property interest, production, current cost of operation and development, agreements relating to future operations and sale prices and other information and data that were accepted as represented by the independent evaluators. This information was the same used by Eni in determining proved reserves and include: log, directional surveys, core and PVT analysis, maps, oil/gas/water production/injection data of wells, reservoirs and fields, reservoir studies, technical analysis relevant to field performance, reservoir performance, budget data per field, long-term development plans, future capital and operating costs. In order to calculate the economic value of reserve NPV, actual prices received from hydrocarbon sales, instructions on future prices, and other pertinent information are provided. Accordingly, the work performed
(16) From 1991 to 2002 by DeGolyer and MacNaughton, from 2003 also by Ryder Scott Company. F-103
by the independent evaluators is an evaluation of Eni’s proved reserves carried out in parallel with the internal one. The circumstance that the independent evaluations achieved the same results as those of the Company for the vast majority of fields support the management’s confidence that the company’s booked reserves meet the regulatory definition of proved reserves which are reasonably certain to be produced in the future. When the assessment of independent engineers is lower than internal evaluations, Eni revises its estimates based on information provided by independent evaluators. In particular, in 2008, a total of
1.64 billion boe1.5 BBOE of proved reserves, or about24%22% of Eni’s total proved reserves at December 31,2005,2008, have been evaluated. The results of this independent evaluation have essentially confirmed,Eni’s evaluations,as in previousyears.years, the internal assessment. In the2003-20052006-2008 three-year period,84%77% of Eni’s total proved reserves were subject to independent evaluations. In the last three years, the most important of Eni’s properties as at December 31, 2008 which were not subject to an independent evaluation were: Bouri and Bu Attifel (Libya), Barbara (Italy), M’Boundi (Congo) and Elgin-Franklin (UK).Eni operates under
PSAsProduction Sharing Agreements (PSAs) in several of the foreign jurisdictions where it has oil and gas exploration and production activities. Reserves of oil and natural gas to which Eni is entitled under PSA arrangements are shown in accordance with Eni’s economic interest in the volumes of oil and natural gas estimated to be recoverable in future years. Such reserves include estimated quantities allocated to Eni for recovery of costs, income taxes owed by Eni but settled by its joint venture partners (which are state-owned entities) out of Eni’s share of production and Eni’s net equity share after cost recovery.Proved oil and gas reserves associated with PSAs represented
46%53%,51%46% and48%54% of total proved reserves as ofyear end 2003, 2004year-end 2006, 2007 and2005,2008, respectively, on an oil-equivalent basis.
A similar scheme to PSAs applies to Service and "Buy-Back" contracts; provedProved reserves associated withsuch contractsservice and "Buy-Back" represented3%2%,3%1% and 2% of total proved reserves on an oil-equivalent basis as ofyear end 2003, 2004year-end 2006, 2007 and2005,2008, respectively.Oil and gas reserve quantities include: (i) oil and natural gas quantities in excess
toof cost recovery which the company has an obligation to purchase under certain PSAs with governments or authorities, whereby the company serves as producer of reserves.In accordance with SFAS 69, paragraph 13, reserveReserve volumes associated withsuchoil and gasquantities represented 1.6%deriving from such obligations represent 1.1%,1.4%1.8% and1.7%0.1% of total proved reserves as ofyear end 2003, 2004year-end 2006, 2007 and20052008, respectively, on an oil-equivalent basis; (ii)natural gasvolumes of natural gas used for ownconsumptionconsumption; and (iii) volumes of natural gas held in certainEniof Eni’s storage fields in Italy. Proved reserves attributable to these fields include: (a) the residual natural gas volumes of the reservoirs and (b) natural gas volumes from other Eni fields input into these reservoirs in subsequent periods. Proved reserves do not include volumes owned by or acquiredfromby third parties. Gas withdrawn from storage is produced and therebydetractedremoved from proved reserves when sold.Numerous uncertainties are inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and
judgement.judgment. Results of drilling, testing and production after the date of the estimate may require substantial upward or downward revision. In addition, changes in oil and natural gas prices have an effect on the quantities of Eni’s proved reserves since estimates of reserves are based on prices and costsrelative torelevant at the date when such estimates are made.Reserve estimates areConsequently, reserves evaluation could alsosubject to revision as prices fluctuate due to the cost recovery feature under certain PSAs.diverge significantly from oil and natural gas volumes which will be actually produced.The following table presents yearly changes in estimated proved reserves, developed and undeveloped, of crude oil (including condensate and natural gas liquids) and natural gas for the years
2003, 20042006, 2007 and2005.2008.F-104
Crude oil (including
condensatescondensate and natural gas liquids)
(mmBBL)
Proved Oil Reservesoil reservesItaly
North Africa
West Africa
North Sea
Caspian
Area (1)Rest of World
Total consolidated subsidiaries
Total joint ventures and associates (2)
(mmBBL)
Reserves at December 31, 2005 228 961 936 433 778 412 3,748 25 Revisions of Previous Estimates (a) 15 61 (85 ) 20 72 (19 ) 64 1 Improved Recovery 49 41 14 104 1 Extensions and Discoveries 30 11 52 10 103 Production (28 ) (119 ) (117 ) (65 ) (23 ) (38 ) (390 ) (3 ) Sales of Minerals in Place (b) (2 ) (170 ) (172 ) Reserves at December 31, 2006 215 982 786 386 893 195 3,457 24 Purchase of Minerals in Place 32 54 86 101 Revisions of Previous Estimates 28 (35 (26 ) 14 (114 ) (31 ) (164 ) 20 Improved Recovery 9 12 1 22 1 Extensions and Discoveries 43 22 1 29 95 1 Production (28 ) (121 ) (101 ) (57 ) (26 ) (36 ) (369 ) (5 ) Reserves at December 31, 2007 215 878 725 345 753 211 3,127 142 Purchase of Minerals in Place 32 32 4 68 Revisions of Previous Estimates (8 ) 56 80 (31 ) 238 56 391 4 Improved Recovery 7 25 32 1 Extensions and Discoveries 4 4 26 13 2 3 52 Production (25 ) (122 ) (105 ) (51 ) (30 ) (38 ) (371 ) (5 ) Sales of Minerals in Place (56 ) (56 ) Reserves at December 31, 2008 186 823 783 276 939 236 3,243 142
Reserves at December 31, 2002 255
1,072
1,022
498
936
3,783
Purchase of Minerals in Place 86
86
Revisions of Previous Estimates 21
51
59
52
153
336
Improved Recovery 15
16
31
Extensions and Discoveries 6
32
28
214
280
Production (30
) (90
) (87
) (86
) (64
) (357
) Sales of Minerals in Place (21
) (21
) Reserves at December 31, 2003 252
1,080
1,038
529
1,239
4,138
Revisions of Previous Estimates (1
) (22
) 44
12
(18
) 15
Improved Recovery 11
48
4
63
Extensions and Discoveries 4
20
34
4
144
206
Production (30
) (94
) (104
) (74
) (75
) (377
) Sales of Minerals in Place (2
) (4
) (25
) (6
) (37
) Reserves at December 31, 2004 225
993
1,056
450
1,284
4,008
Purchase of Minerals in Place 2
6
47
55
Revisions of Previous Estimates 33
36
(47
) 27
(88
) (39
) Improved Recovery 43
29
15
87
Extensions and Discoveries 26
14
21
16
77
Production (32
) (111
) (113
) (65
) (83
) (404
) Reclassification 2004 affiliates and joint ventures data (26
) (9
) (1
) (36
) Reserves at December 31, 2005 consolidated 228
961
936
433
1,190
3,748
Reserves at December 31, 2005 affiliates and joint ventures (a) 18
6
1
25
Reserves at December 31, 2005 228
979
942
433
1,191
3,773
(mmBBL)
Proved Developed Oil Reservesdeveloped oil reservesItaly
North Africa
West Africa
North Sea
Caspian
Area (1)Rest of World
Total consolidated subsidiaries
Total joint ventures and associates (2)
(mmBBL)
Reserves at December 31, 2005 149 697 568 353 266 298 2,331 19 Reserves at December 31, 2006 136 713 546 329 262 140 2,126 18 Reserves at December 31, 2007 133 649 511 299 219 142 1,953 26 Reserves at December 31, 2008 111 613 576 222 321 166 2,009 33
Reserves at December 31, 2002 168
610
554
426
483
2,241
Reserves at December 31, 2003 173
640
560
464
610
2,447
Reserves at December 31, 2004 174
655
588
386
668
2,471
Reserves at December 31, 2005 consolidated 149
697
568
353
564
2,331
Reserves at December 31, 2005 affiliates and joint ventures (a) 15
3
1
19
Reserves at December 31, 2005 149
712
571
353
565
2,350
i i (a) i Starting from 2005 dataIncludes the redetermination of Eni’s share in the Val d’Agri concession in Italy.(b) i Includes 170 mmBBL related to affiliatesunilateral termination of OSA for Dación field by PDVSA.
(1) i Eni’s proved reserves of the Kashagan field are determined based on Eni's share of 16.81% as of December 31, 2008 and 18.52% in previous years. (2) i Reserves of joint ventures carried onand associates as at December 31, 2007 and December 31, 2008 include 60% of theequity method are included.three Russian companies formerly part of Yukos purchased in 2007, for which Gazprom has a call option of 51%.F-105
Natural gas
(BCF)
Proved Natural Gas Reservesnatural gas reservesItaly (a)
North Africa
West Africa
North Sea
Caspian
Area (1)Rest of World
Total consolidated subsidiaries Total joint ventures and associates (2)
(BCF)
Reserves at December 31, 2005 3,676 6,117 1,965 1,864 1,774 2,105 17,501 90 Purchase of Minerals in Place 4 4 Revisions of Previous Estimates 36 154 31 53 183 47 504 (7 ) Extensions and Discoveries 19 146 34 1 132 332 8 Production (340 ) (471 ) (103 ) (218 ) (83 ) (222 ) (1,437 ) (15 ) Sales of Minerals in Place (7 ) (7 ) Reserves at December 31, 2006 3,391 5,946 1,927 1,697 1,874 2,062 16,897 68 Purchase of Minerals in Place 5 395 400 2,963 Revisions of Previous Estimates (53 ) 250 74 67 (222 ) 6 122 5 Improved Recovery 3 3 Extensions and Discoveries 4 89 213 7 205 89 607 Production (285 ) (534 ) (97 ) (216 ) (87 ) (261 ) (1,480 ) (14 ) Reserves at December 31, 2007 3,057 5,751 2,122 1,558 1,770 2,291 16,549 3,022 Purchase of Minerals in Place 6 8 114 128 Revisions of Previous Estimates 56 1,163 45 (51 ) 773 55 2,041 6 Improved Recovery 4 4 Extensions and Discoveries 5 38 2 25 42 112 Production (274 ) (641 ) (95 ) (204 ) (90 ) (300 ) (1,604 ) (13 ) Sales of Minerals in Place (16 ) (16 ) Reserves at December 31, 2008 2,844 6,311 2,084 1,336 2,437 2,202 17,214 3,015
Proved developed natural gas reserves Italy (a)
North Africa
West Africa
North Sea
Caspian
Area (1)Rest of World
Total consolidated subsidiaries
Total joint ventures and associates (2)
(BCF)
Reserves at December 31, 2005 2,704 3,060 1,289 1,484 1,618 1,004 11,159 70 Reserves at December 31, 2006 2,449 3,042 1,447 1,395 1,511 1,105 10,949 48 Reserves at December 31, 2007 2,304 3,065 1,469 1,293 1,580 1,256 10,967 428 Reserves at December 31, 2008 2,031 3,537 1,443 1,065 2,006 1,056 11,138 420
Reserves at December 31, 2002 5,295
5,563
1,533
1,899
4,339
18,629
Purchase of Minerals in Place 10
425
8
443
Revisions of Previous Estimates (768
) (123
) 172
139
325
(255
) Extensions and Discoveries 84
242
100
426
Production (455
) (215
) (49
) (229
) (276
) (1,224
) Sales (11
) (11
) Reserves at December 31, 2003 4,166
5,467
1,656
2,223
4,496
18,008
Revisions of Previous Estimates 105
814
129
75
84
1,207
Improved Recovery 10
10
Extensions and Discoveries 29
420
38
222
709
Production (409
) (247
) (66
) (220
) (303
) (1,245
) Sales (73
) (1
) (65
) (115
) (254
) Reserves at December 31, 2004 3,818
6,453
1,729
2,051
4,384
18,435
Purchase of Minerals in Place 63
8
222
293
Revisions of Previous Estimates 159
(6
) (9
) (18
) (368
) (242
) Improved Recovery 11
11
Extensions and Discoveries 1
37
309
50
56
453
Production (365
) (357
) (70
) (219
) (281
) (1,292
) Reclassification 2004 affiliates and joint ventures data (21
) (2
) (134
) (157
) Reserves at December 31, 2005 consolidated 3,676
6,117
1,965
1,864
3,879
17,501
Reserves at December 31, 2005 affiliates and joint ventures (b) 15
2
73
90
Reserves at December 31, 2005 3,676
6,132
1,967
1,864
3,952
17,591
(BCF)
Proved Developed Natural Gas Reserves
Italy(a)
North Africa
West Africa
North Sea
Rest of World
Total
Reserves at December 31, 2002 3,397
1,084
863
1,727
1,283
8,354
Reserves at December 31, 2003 2,966
962
866
2,075
3,355
10,224
Reserves at December 31, 2004 2,850
1,760
924
1,845
3,122
10,501
Reserves at December 31, 2005 consolidated 2,704
3,060
1,289
1,484
2,622
11,159
Reserves at December 31, 2005 affiliates and joint ventures (b) 12
2
56
70
Reserves at December 31, 2005 2,704
3,072
1,291
1,484
2,678
11,229
(a) Including approximately 779, 747, 737760, 754, 749 and760746 BCF of natural gas held in storage at December 31,2002, 2003, 20042005, 2006, 2007 and20052008, respectively.(b)(1)Starting from 2005 data related to affiliatesEni’s proved reserves of the Kashagan field are determined based on Eni's share of 16.81% as of December 31, 2008 and 18.52% in previous years.(2) Reserves of joint ventures carried onand associates as at December 31, 2007 and December 31, 2008 include 60% of theequity method are included.three Russian companies formerly part of Yukos purchased in 2007, for which Gazprom has a call option of 51%.Standardized measure of discounted future net cash flows
Estimated future cash inflows represent the revenues that would be received from production and are determined by applyingyear endyear-end prices of oil and gas to the estimated future production of proved reserves.Year-end prices in 2005 were $58.205 per barrel of oil.Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved reserves at the end of the year. Neither the effects of price and cost escalations nor expected future changes in technology and operating practices have been considered.The standardized measure is calculated as the excess of future cash inflows from proved reserves less future costs of producing and developing the reserves, future income taxes and a yearly 10% discount factor.
Future cash flows as of December 31,
2003, 20042006, 2007 and20052008 includeannual revenue payments fromamounts that Eni’s Gas & Power segment and othertransport and distributiongas companieswhich represent paymentspay formodulationstorage services, required to support market demanddelivery capability. Such capability is provided through utilization of gas withdrawn from producing fields and injected into depleted gas fields as storage.flexibility needs.Future production costs include the estimated expenditures related to the production of proved reserves plus any production taxes without consideration of future inflation. Future development costs include the estimated costs of drilling development wells and installation of production facilities, plus the net costs associated with dismantlement and abandonment of wells and facilities, under the assumption that
year endyear-end costs continue without considering future inflation. Future income taxes were calculated in accordance with the tax laws of the countries in which Eni operates.The standardized measure of discounted future net cash flows, related to the preceding proved oil and gas reserves, is calculated in accordance with the requirements of Statement of Financial Accounting Standard No. 69. The standardized measure does not purport to reflect realizable values or fair market value of Eni’s proved reserves. An estimate of fair value would also take into account, among other things,
the expected recovery of reserves in excess ofhydrocarbon resources other than provedF-106
reserves, anticipated changes in future prices and costs and a discount factor representative of the risks inherent in
producingthe oil andgas.gas exploration and production activity.The standardized measure of discounted future net cash flows by geographical area consists of the following:
( million euro)euro million)Italy
North Africa
West Africa
North Sea
Caspian
Area (1)Rest of World
Total consolidated subsidiaries
Total joint ventures and associates (2)
At December 31, 2006 Future cash inflows 43,495 64,381 34,935 24,821 33,825 14,766 216,223 1,038 Future production costs (6,086 ) (9,707 ) (8,028 ) (6,426 ) (4,162 ) (1,753 ) (36,162 ) (224 ) Future development and abandonment costs (6,739 ) (5,383 ) (2,865 ) (2,265 ) (3,103 ) (1,473 ) (21,828 ) (79 ) Future cash inflow before income tax 30,670 49,291 24,042 16,130 26,560 11,540 158,233 735 Future income tax (10,838 ) (24,639 ) (14,141 ) (10,901 ) (7,649 ) (3,824 ) (71,992 ) (227 ) Future net cash flows 19,832 24,652 9,901 5,229 18,911 7,716 86,241 508 10% discount factor (11,493 ) (10,631 ) (2,994 ) (1,392 ) (13,878 ) (2,626 ) (43,014 ) (154 ) Standardized measure of discounted future net cash flows 8,339 14,021 6,907 3,837 5,033 5,090 43,227 354 At December 31, 2007 Future cash inflows 47,243 73,456 48,283 29,610 42,710 20,359 261,661 7,135 Future production costs (5,926 ) (11,754 ) (9,875 ) (6,670 ) (4,997 ) (2,782 ) (42,004 ) (1,249 ) Future development and abandonment costs (7,218 ) (4,643 ) (3,013 ) (2,461 ) (3,374 ) (2,459 ) (23,168 ) (1,721 ) Future cash inflow before income tax 34,099 57,059 35,395 20,479 34,339 15,118 196,489 4,165 Future income tax (10,778 ) (29,083 ) (23,083 ) (14,375 ) (9,977 ) (5,397 ) (92,693 ) (2,009 ) Future net cash flows 23,321 27,976 12,312 6,104 24,362 9,721 103,796 2,156 10% discount factor (13,262 ) (11,143 ) (3,953 ) (1,600 ) (17,480 ) (3,356 ) (50,794 ) (1,265 ) Standardized measure of discounted future net cash flows 10,059 16,833 8,359 4,504 6,882 6,365 53,002 891 At December 31, 2008 Future cash inflows 46,458 62,785 22,344 16,056 22,199 13,622 183,464 4,782 Future production costs (5,019 ) (10,673 ) (6,715 ) (3,414 ) (6,380 ) (2,715 ) (34,916 ) (1,104 ) Future development and abandonment costs (6,805 ) (6,153 ) (3,868 ) (2,166 ) (5,114 ) (1,897 ) (26,003 ) (1,845 ) Future cash inflow before income tax 34,634 45,959 11,761 10,476 10,705 9,010 122,545 1,833 Future income tax (11,329 ) (27,800 ) (5,599 ) (7,621 ) (2,781 ) (1,901 ) (57,031 ) (1,032 ) Future net cash flows 23,305 18,159 6,162 2,855 7,924 7,109 65,514 801 10% discount factor (13,884 ) (8,639 ) (2,155 ) (869 ) (6,272 ) (2,243 ) (34,062 ) (763 ) Standardized measure of discounted future net cash flows 9,421 9,520 4,007 1,986 1,652 4,866 31,452 38
At December 31, 2003 Future cash inflows 24,641
36,484
25,074
19,590
28,505
134,294
Future production costs (3,879
) (7,868
) (5,847
) (5,458
) (4,763
) (27,815
) Future development and abandonment costs (2,080
) (3,762
) (2,005
) (1,084
) (2,575
) (11,506
) Future net inflow before income tax 18,682
24,854
17,222
13,048
21,167
94,973
Future income tax (6,113
) (10,296
) (8,979
) (7,614
) (6,073
) (39,075
) Future net cash flows 12,569
14,558
8,243
5,434
15,094
55,898
10% discount factor (5,056
) (6,646
) (3,130
) (1,872
) (7,930
) (24,634
) Standardized measure of discounted future net cash flows 7,513
7,912
5,113
3,562
7,164
31,264
At December 31, 2004 Future cash inflows 28,582
40,373
28,395
20,435
32,619
150,404
Future production costs (3,635
) (7,237
) (6,664
) (5,082
) (4,858
) (27,476
) Future development and abandonment costs (2,210
) (4,073
) (1,873
) (1,419
) (2,873
) (12,448
) Future net inflow before income tax 22,737
29,063
19,858
13,934
24,888
110,480
Future income tax (7,599
) (11,487
) (10,949
) (8,824
) (6,736
) (45,595
) Future net cash flows 15,138
17,576
8,909
5,110
18,152
64,885
10% discount factor (6,006
) (7,592
) (3,267
) (1,350
) (9,412
) (27,627
) Standardized measure of discounted future net cash flows 9,132
9,984
5,642
3,760
8,740
37,258
At December 31, 2005 Future cash inflows 36,203
66,100
45,952
30,835
50,590
229,680
Future production costs (4,609
) (10,030
) (9,604
) (5,632
) (6,399
) (36,274
) Future development and abandonment costs (2,936
) (3,960
) (2,594
) (1,774
) (4,059
) (15,323
) Future net inflow before income tax 28,658
52,110
33,754
23,429
40,132
178,083
Future income tax (9,890
) (22,744
) (21,056
) (15,225
) (12,097
) (81,012
) Future net cash flows 18,768
29,366
12,698
8,204
28,035
97,071
10% discount factor (7,643
) (12,095
) (4,122
) (2,155
) (15,705
) (41,720
) Standardized measure of discounted future net cash flows 11,125
17,271
8,576
6,049
12,330
55,351
Standardized measure of discounted future net cash flows affiliates and joint ventures (a) 130
127
114
371
Standardized measure of discounted future net cash flows 11,125
17,401
8,703
6,049
12,444
55,722
(a)(1)Starting from 2005 data related to affiliatesEni's standardized measure of discounted future of net cash flows of the Kashagan field is determined based on Eni’s share of 16.81% as of December 31, 2008 and 18.52% in previous years.(2) The amounts of joint ventures carried onand associates as at December 31, 2007 and December 31, 2008 include 60% of theequity method are included.three Russian companies formerly part of Yukos purchased in 2007, for which Gazprom has a call option of 51%.F-107
Changes in standardized measure of discounted future net cash flows
The following table reflects the changesChanges in standardized measure of discounted future net cash flows for the years2003, 20042006, 2007 and2005.2008.
(million euro) 2003
2004
2005
Beginning of year 34,480
31,264
37,258
Reclassification 2004 affiliates and joint ventures data (357
) Beginning of year consolidated 34,480
31,264
36,901
Increase (Decrease): - sales, net of production costs (10,144
) (12,172
) (17,880
) - net changes in sales and transfer prices, net of production costs (1,050
) 13,031
33,372
- extensions, discoveries and improved recovery, net of future production and development costs 1,855
2,806
3,527
- changes in estimated future development and abandonment costs (3,576
) (3,437
) (3,654
) - development costs incurred during the period that reduced future development costs 4,864
4,229
3,865
- revisions of quantity estimates 2,348
1,658
47
- accretion of discount 5,585
5,328
6,573
- net change in income taxes 105
(4,805
) (17,327
) - purchase of reserves in-place 1,488
977
- sale of reserves in-place (222
) (727
) - changes in production rates and other (a) (4,469
) 83
8,950
Net increase (decrease) (3,216
) 5,994
18,450
End of year consolidated 31,264
37,258
55,351
End of year affiliates and joint ventures (b) 371
End of year 31,264
37,258
55,722
(euro million) 2006
2007
2008
Beginning of year 55,722 43,581 53,893 Beginning of year related to joint venture and associates (371 ) (354 ) (891 ) Beginning of year consolidated 55,351 43,227 53,002 Increase (decrease): - sales, net of production costs (21,739 ) (20,979 ) (26,202 ) - net changes in sales and transfer prices, net of production costs 4,097 34,999 (39,699 ) - extensions, discoveries and improved recovery, net of future production and development costs 3,629 3,982 1,110 - changes in estimated future development and abandonment costs (6,964 ) (4,000 ) (6,222 ) - development costs incurred during the period that reduced future development costs 3,558 4,682 6,584 - revisions of quantity estimates 383 (2,995 ) 5,835 - accretion of discount 9,489 7,968 10,538 - net change in income taxes 3,060 (17,916 ) 21,359 - purchase of reserves in-place 10 3,521 476 - sale of reserves in-place (1,252 ) 25 - changes in production rates (timing) and other (6,395 ) 513 4,646 Net increase (decrease) (12,124 ) 9,775 (21,550 ) Standardized measure of discounted future net cash flows consolidates 43,227 53,002 31,452 Standardized measure of discounted future net cash flows joint ventures and associates 354 891 38 Standardized measure of discounted future net cash flows 43,581 53,893 31,490
(a)This item relates mainly to changes in production timing and foreign exchange effects.(b)Starting from 2005 data related to affiliates and joint ventures carried on the equity method are included.F-109
EXHIBIT 1
Exhibit 1Eni
S.p.A.SpA By-lawsPart I - Establishment - Name - Registered Office and Duration of the Company
ARTICLE 1
1.1 "Eni S.p.A."SpA" resulting from the transformation of Ente Nazionale Idrocarburi, a public law agency, established by Law 136 of February 10, 1953, is regulated by these by-laws.ARTICLE 2
2.1 The registered head office of the company is located in Rome, Italy and the company’s two branches in San Donato Milanese (MI). 2.2 Main representative offices, affiliates and branches may be established and/or wound up in Italy or abroad in compliance with the law. ARTICLE 3
3.1 The company is expected to exist until December 31, 2100. Its duration may be extended one or more times by resolution of the shareholders’ meeting. Part II - Company Objects
ARTICLE 4
4.1 The company objects are the direct and/or indirect management, by way of shareholdings in companies, agencies or businesses, of activities in the field of hydrocarbons and natural vapours, such as exploration and development of hydrocarbon fields, construction and operation of pipelines for transporting the same, processing, transformation, storage, utilisation and trade of hydrocarbons and natural vapours, all in respect of concessions provided by law.
The company also has the object of direct and/or indirect management, by way of shareholdings in companies, agencies or businesses, of activities in the fields of chemicals, nuclear fuels, geothermy and renewable energy sources, in the sector of engineering and construction of industrial plants, in the mining sector, in the metallurgy sector, in the textile machinery sector, in the water sector, including derivation, drinking water, purification, distribution and reuse of waters; in the sector of environmental protection and treatment and disposal of waste, as well as in every other business activity that is instrumental, supplemental or complementary with the aforementioned activities.
The company also has the object of managing the technical and financial co-ordination of subsidiaries and affiliated companies as well as providing financial assistance on their behalf.
The company may perform any operations necessary or useful for the achievement of the company objects; by way of example, it may initiate operations involving real estate, moveable goods, trade and commerce, industry, finance and banking asset and liability operations, as well as any action that is in any way connected with the company objects with the exception of public fund raising and the performance of investment services as regulated by Legislative Decree No. 58 of February 24, 1998.
The company may take shareholdings and interests in other companies or businesses with objects similar, comparable or complementary to its own or those of companies in which it has holdings, either in Italy or abroad, and it may provide real and or personal bonds for its own and others’ obligations, especially guarantees.Part III - Capital - Shareholdings - Bonds
ARTICLE 5
5.1 The company capital is euro 4,005,358,876.00 (four billion five million three hundred and fifty-eight thousand eight hundred and seventy-six) represented by 4,005,358,876 (four billion five million three hundred and fifty-eight thousand eight hundred and seventy-six) shares of ordinary stock with a nominal value of euro 1 (one) each. 5.2 Shares may not be split up and each share is entitled to one vote. 5.3 The fact of being a Shareholder in itself constitutes approval of these by-laws. ARTICLE 6
6.1 Pursuant to Article 3 of Law Decree 332 of May 31, 1994, converted with amendments into Law 474 of July 30, 1994, no one, in any capacity, may own company shares that entail a holding of more than 3 per cent of voting share capital.
Such maximum shareholding limit is calculated by taking into account the aggregate shareholding held by the controlling entity, either a physical or legal person or company; its directly or indirectly controlled entities, as well as entities controlled by the same controlling entity; affiliated entities as well as people related to the second degree by blood or marriage, also in the case of a legally separated spouse.E-1
Control exists, with reference also to entities other than companies, in the cases envisaged by Article 2359, paragraphs 1 and 2 of the Civil Code.
Affiliation exists in the case set forth in Article 2359, paragraph 3, of the Civil Code as well as between entities that directly or indirectly, by way of subsidiaries, other than those managing investment funds, are bound, even with third parties, in agreements regarding the exercise of voting rights or the transfer of shares or portions of third companies or, in any event, in agreements or pacts as per Article 122 of Legislative Decree No. 58 of February 24, 1998 regarding third party companies if said agreements or pacts concern at least 10 per cent of the voting capital, if they are listed companies, or 20 per cent if they are unlisted companies.
The aforementioned shareholding limit (3 per cent) is calculated by taking into account shares held by any fiduciary nominee or intermediary.
Any voting rights and any other non-financial rights attributable to voting capital held or controlled in excess of the maximum limit indicated in the foregoing cannot be exercised and the voting rights of each entity to whom such limit on shareholding applies are reduced in proportion, unless otherwise jointly provided in advance by the parties involved. In the event that shares exceeding this limit are voted, any Shareholders’ resolution adopted pursuant to such a vote may be challenged pursuant to Article 2377 of the Civil Code, if the required majority had not been reached without the votes exceeding the aforementioned maximum limit.
Shares not entitled to vote are included in the determination of the quorum at shareholders’ meetings.6.2 Pursuant to Article 2, paragraph 1 of Law Decree 332 of May 31, 1994, converted with amendments into Law 474 of July 30, 1994, as modified by Article 4, Paragraphparagraph 227, of Law December 24, 2003,no.No. 350, the Minister of Economy and Finance retains the following special powers to be exercised in agreement with the Minister ofProductive Activitiesthe Economic Development and according to the criteria contained in the Decree issued by the President of the Council of Ministers on June 10, 2004:
a) opposition with respect to the acquisition of material shareholdings by entities affected by the shareholding limit as set forth in Article 3 of Law Decree 332 of May 31, 1994, converted with amendments into Law 474 of July 30, 1994, by which – as per Decree issued by the Minister of Treasury on October 16, 1995 – are meant those representing at least 3% of share capital with the right to vote at the ordinary shareholders’ meeting.
The opposition is expressed within ten days of the date of the notice to be filed by the Board of Directors at the time request is made for registration in the Shareholders’ Register if the Minister considers that such an acquisition may prejudice the vital interests of the Italian State. Until the ten-day term is not lapsed, the voting rights and the non-asset linked rights connected with the shares representing a material shareholding may not be exercised. If the opposition power is exercised, through a duly motivated act in connection with the prejudice that may be caused by the operation to the vital interests of the Italian State, the transferee may not exercise the voting rights and the other non-asset linked rights connected with the shares representing a material shareholding and must sell said shares within one year. Failing to comply, the law court, upon request of the Minister of Economy and Finance, will order the sale of the shares representing a material shareholding according to the procedures set forth in Article 2359-ter of the Civil Code. The act through which the opposition power is exercised may be sued by the transferee before the Regional Administrative Court of Latium within sixty days as of its issue;b) opposition with respect to the subscription of Shareholders’ pacts or agreements as per Article 122 of Legislative Decree No. 58 of February 24, 1998, involving – as per Decree issued by the Minister of Treasury on October 16, 1995 – at least 3% of the share capital with the right to vote at ordinary shareholders’ meetings. In order to allow the exercise of the above mentioned opposition power, Consob notifies the Minister of Economy and Finance of the relevant pacts or agreements communicated to it pursuant to the aforementioned Article 122 of Legislative Decree No. 58 of February 24, 1998. The opposition power may be exercised within ten days as of the date of the notice by Consob. Until the ten-day term is not lapsed, the voting right and the other non-asset linked rights connected with the shares held by the shareholders who have subscribed the above mentioned pacts or agreements may not be exercised. If the opposition power is exercised through the issue of an act that shall be duly motivated in consideration of the prejudice that may be caused by said pacts or agreements to the vital interests of the Italian State, the shareholders pacts or agreements shall be null and void. If in the shareholders’ meetings the shareholders who have signed shareholders’ pacts or agreements behave as if those pacts or agreements disciplined by Article 122 of Legislative Decree No. 58 of February 24, 1998 were still in effect, the resolutions approved with their vote, if determining for the approval, may be sued. The act through which the opposition power is exercised may be sued by the shareholders who joined the above mentioned pacts or agreements before the Regional Administrative Court of Latium within sixty days as of its issue; c) veto power with respect to resolutions to dissolve the company, to transfer the business, to merge, to demerge, to transfer the company’s registered office abroad, to change the company objects and to amend the by-laws cancelling or modifying the powers indicated in this Article. The act through which the veto power is exercised shall be duly motivated in consideration of the prejudice the related resolution may cause to the vital interests of the Italian State and may be sued by the dissenting Shareholders before the Regional Administrative Court of Latium within sixty days as of its issue; E-2
d) appointment of one Board member with no voting rights. Should such appointed Director lapse, the Minister of Economy and Finance in agreement with the Minister of Productive Activitiesthe Economic Development will appoint his substitute.ARTICLE 7
7.1 When shares are fully paid, and if the law so allows, they may be issued to the bearer. Bearer shares may be converted into registered shares and vice-versa.vice versa. Conversion operations are performed at the Shareholder’s expense.ARTICLE 8
8.1 In the event, and for whatever reason, a share belongs to more than one person, the rights relating to said share may not be exercised by other than one person or by a proxy for all co-owners. ARTICLE 9
9.1 The shareholders’ meeting may resolve to increase the company capital and establish terms, conditions and means thereof. 9.2 The shareholders’ meeting may resolve to increase the company capital by issuing shares, including shares of different classes, to be assigned for no consideration pursuant to Article 2349 of the Civil Code. ARTICLE 10
10.1 Payments on shares are requested by the Board of Directors in one or more times. 10.2 Shareholders who are late in payment are charged an interest calculated at the official discount rate established by the Bank of Italy besides the provisions envisaged in Article 2344 of the Civil Code. ARTICLE 11
11.1 The company may issue bonds, including convertibles and warrant bonds in compliance with the law. Part IV - Shareholders’
MeetingmeetingARTICLE 12
12.1 Ordinary and extraordinary shareholders’ meetings are usually held at the company registered office unless otherwise resolved by the Board of Directors, provided however they are held in Italy. 12.2 Ordinary shareholders’ meetings must be called at least once a year to approve the financial statements within 180120 days of the end of the businessyear, as the Company approves the Group Financial Statements.year.ARTICLE 13
13.1 Shareholders’ meetings are convened through a notice to be published on the Italian Official Gazette or the following newspapers: "Il Sole 24 Ore", "Corriere della Sera" and other newspapers with national circulation,"Financial Times", according to the current legislation and in compliance with the rules in force regulating the exercise of the vote by mail.
The Shareholders that, severally or jointly, represent at least one fortieth of Eni share capital, may ask, within five days as of the date of publication of theShareholders’ Meetingshareholders’ meeting notice, to add other items in the agenda. The request shall contain the matters to be proposed to theShareholders’ Meeting.shareholders’ meeting. Said faculty may not be exercised on the matters upon which, pursuant to the applicable legislation, theShareholders’ Meetingshareholders’ meeting resolves on the basis of a proposal of the Board of Directors or on the basis of a project or report of the Board. The integrations accepted by the Board shall be published at least ten days before theShareholders’ Meetingshareholders’ meeting date, through a notice to be published as indicated above.13.2 Admission to the shareholders’ meeting is subject to the delivery, also for registered shares, of the certificationcommunication issued by financial intermediaries at least two labour days before the date of the shareholders’ meeting on first call.ARTICLE 14
14.1 Each Shareholder entitled to attend the Meetingmeeting may also be represented in compliance with the law by a person appointed by written proxy. Incorporated entities and companies may attend theMeetingmeeting by way of a person appointed by written proxy. In order to simplify collection of proxies issued by Shareholders who are employees of the company or its subsidiaries and members of Shareholders associations incorporated under and managed pursuant to current legislation regulating proxies collection, notice boards for communications and rooms to allow proxies collection are made available to said associations according to terms and conditions agreed from time to time by the company with the associations representatives.14.2 The Chairman of the Meetingmeeting has to assure the regularity of written proxies and, in general, the right to attend theMeeting.meeting.14.3 The right to vote may also be exercised by mail according to the laws and regulations in force concerning this matter. 14.4 Eni S.p.A.SpA shareholders’ meetings are disciplined by EniS.p.A.’sSpA’s shareholders’ meeting Regulation approved by the ordinary shareholders’ meeting.E-3
ARTICLE 15
15.1 The Meetingmeeting is chaired by the Chairman of the Board of Directors, or in the event of absence or impediment, by the Chief Executive Officer; in absence of both, by another person, duly delegated by the Board of Directors, failing which theMeetingmeeting may elect its own Chairman.15.2 The Chairman of the Meetingmeeting is assisted by a Secretary, who need not be a Shareholder, to be designated by the Shareholders present, and may appoint one or more scrutineers.ARTICLE 16
16.1 The ordinary shareholders’ meeting decides on all the matters for which it is legally entitled and authorises the transfer of the business. 16.2 Resolutions either at ordinary or extraordinary meetings, either on first, second or third call, must be taken with the majority required by the law in each case. 16.3 Resolutions of the Meetingmeeting taken in compliance with the law and these by-laws are binding for all Shareholders even if absent or dissenting.16.4 The minutes of ordinary meetings must be signed by the Chairman and the Secretary. 16.5 The minutes of extraordinary meetings must be drawn up by a notary public. Part V - The Board of Directors
ARTICLE 17
17.1 The company is managed by a Board of Directors consisting of no fewer than three and no more than nine members. The shareholders’ meeting determines the number within these limits. The Minister of Economy and Finance in agreement with the Minister of Productive Activitiesthe Economic Development may appoint another member, with no voting rights, pursuant to Article 6, secondParagraph,paragraph, letter d), of the by-laws.17.2 The Board of Directors is appointed for a period of up to three financial years; this term lapses on the date of the shareholders’ meeting convened to approve the financial statements of the last year of their office. They may be reappointed. 17.3 The Board
members,of Directors, except for theonemember appointed pursuant to Article 6.2, letter d) of these by-laws,areis appointed by the shareholders’ meeting on the basis of lists presented by Shareholders and by the Board of Directors; in such lists the candidates must be listed in numerical order. Should the retiring Board of Directors present its own candidate list, it must be deposited at the company’s registered officeand published in at least three Italian newspapers of general circulation, two of them business dailies, at least twenty days before the date set for the first call of the shareholders’ meeting. Candidate lists presented by Shareholders must be depositedat the company registered officeand published as indicated in the foregoing at least ten days before the date set for the first call of the shareholders’ meeting.
Each Shareholder may present or take part in the presenting of only one candidate list andeachvote only one candidatemay appear in one list onlylist. Those who are controlling orhe will be ineligible. Companies that are controllingcontrolled entities or are under common control, as defined by Article2359, first Paragraph,93 ofthe Civil Code,Legislative Decree No. 58 issued on February 24, 1998, by the same entity of thecompanyshareholder presenting a list shall not present nor take part in the presentation of another candidatelist.list, nor vote them, also through intermediaries or fiduciaries. Each candidate may appear in one list only or he will be ineligible. Only those Shareholders who, alone or together with other Shareholders, represent at least 1 per centof voting share capital at the ordinary shareholders’ meeting may present candidate lists. In order to demonstrate the title on the number of shares necessary to present candidate lists, the Shareholders must present and/or delivertowiththecompanycompany’s registered office a copy of thecertificationcommunication issued by the authorised financial intermediaries that are depositaries of their shares at least five days prior to the date set for the first call of the shareholders’ meeting.Together with each list, within the aforementioned time limits, statements must be presented in which each candidate accepts his nomination and attests, in his own responsibility, that causes for his ineligibility and incompatibility are non existing and that he possesses the requirements, honorability and independence requirements required by the norms in force for the Statutory Auditors included.
At least one Board member, if the Board members are no more than five, or at least three Board members iftheythe Board membersare more than five, shall have the independencerequirement. The independent Board members take part, according to the provisionsrequirements setby the Board and by the Corporate Governance Codes issued by the companies that manage stock markets to which the Company adheres, to the Board Committees thatfor the Board of Statutory Auditors members of listed companies. The independent candidates shall be expressly indicated in each list.
All candidates shall also have the honorability qualifications set forth by the applicable legislation.
Together with the deposit of each list, in order to assure its validity, the following documents shall be deposited: (i) the curriculum of each candidate; (ii) statements of each candidate toaccept his nomination and attest, in his own responsibility, that causes for his ineligibility and incompatibility are non existing and that he possesses the aforementioned honorability and,if any, independence requirements.
The Directorsmay establish. Said Board Committeesappointed shall communicate to the Company if they haveadvisorylost the above mentioned independence andconsulting tasks on specific items.honorability requirements and if situations of ineligibility or incompatibility have arisen.
The Board of Directors evaluates periodically the independence and the honorability of itsmembers.members and if situations of ineligibility or incompatibility have arisen.
Ifthesethe honorability or independencerequirements declared and set forth by the legislation in force are not present or elapseand,for a Board member or ifthe minimum numbersituations ofindependent Board members set by these by-laws is not met,ineligibility or incompatibility have arisen, the Board of Directors removesthesaid Board memberwithout the independence requirementand resolves upon hissubstitution.Each person entitledsubstitution or invites him tovote may vote for a candidate list only.
remove the situation of incompatibility within the term set by the Board itself; if this last condition is not met, the Director will be removed from office.E-4
Board members will be elected in the following manner:
a) seven tenths of the members to be elected will be drawn out from the candidate list that receives the majority of votes expressed by the Shareholders in the numerical order in which they appear on the list, rounded off in the event of a fractional number to the next lower number; b) the remaining Board members will be drawn out from the other candidate lists; said lists shall not be linked in any way, neither indirectly, to the shareholders who have presented or voted the list that has obtained the highest number of votes; to this purpose the votes obtained by each candidate list will be divided by one or two depending on the number of the members to be elected. The quotients thus obtained will be assigned progressively to candidates of each said list in the order given in the lists themselves. Quotients thus assigned to candidates of said lists will be set in one decreasing numerical order. Those who obtain the highest quotients will be elected.
In the event that more than one candidate obtains the same quotient, the candidate elected will be the one of the list that has not hitherto had a Board member elected or that has elected the least number of Board members.
In the event that none of the lists has yet elected a Board member or that all of them have elected the same number of Board members, the candidate from all such lists who has obtained the largest number of votes will be elected. In the event of equal list votes and equal quotient, a new vote will be taken by the entire shareholders’ meeting and the candidate elected will be the one who obtains a simple majority of the votes;c) if through the procedure described above the minimum number of independent Directors set by these by-laws is not elected, the quotient is calculated according to letter b) above in order to be assigned to the candidates present in each list; the independent candidates not yet drawn from the lists pursuant to letters a) and b) above, who have got the highest quotients will be elected in order to meet the provision of the by-laws on the number of the independent Directors. The Directors so appointed will replace the non independent Directors to whom the lowest quotients have been assigned. If the number of independent candidates is lower than the minimum limit set by the by-laws, the shareholders’ meeting will make a resolution with the majorities prescribed by the law to substitute the not independent candidates who have got the lowest quotients; d) to appoint Board members for any reason not covered by the terms of the aforementioned procedure, the shareholders’ meeting will make a resolution with the majorities prescribed by the law.lawin order, however, to assure that the Board composition complies with the current legislation and the by-laws.
The vote by list procedure shall apply only in case of appointment of the entire Board of Directors. 17.4 The shareholders’ meeting may, even during the Board’s term of office, change the number of members of the Board of Directors, always within the limits set forth in paragraph 17.1 above, and make the relating appointments. Board members so elected will expire at the same time as the rest of the Board. 17.5 If during the term of office one or more members leave the Board, action will be taken in compliance with Article 2386 of the Civil Code with exception of the Board member appointed pursuant to Article 6.2 letter d) of these by-laws. If a majority of members leaves the Board, the whole Board will be considered lapsed and the Board must promptly call a shareholders’ meeting to appoint a new Board. 17.6 The Board may establish Board Committees that shall have advisory and consulting tasks on specific items. ARTICLE 18
18.1 If the shareholders’ meeting has not appointed a Chairman, the Board will elect one of its members. The Director appointed pursuant to Article 6, second Paragraph,paragraph, letter d) of the by-laws cannot be appointed as Chairman.18.2 The Board, at the Chairman’s proposal, appoints a Secretary, who need not belong to the company. ARTICLE 19
19.1 The Board meets in the place indicated in the notice whenever the Chairman or, in case of absence or impediment, the Chief Executive Officer deems necessary, or when written application has been made by the majority of the members. The Board of Directors may be convened also pursuant to Article 28.4 of the by-laws. The Board of Directors’ meetings may be held by video or teleconference if each of the participants to the meetings may be identified and if each is allowed to follow the discussion and take part to it in real time. If said conditions are met, the Meetingmeeting is considered duly held in the place where the Chairman and the Secretary are present.19.2 Usually notice is given at least five days in advance. In cases of urgency notice may be sent earlier. The Board of Directors decides on how to convene its meetings. 19.3 The Board of Directors must likewise be convened when so requested by at least two Board members or by one member if the Board consists of three members to decide on a specific matter considered of particular importance, pertaining to management, matter to be indicated in the request. ARTICLE 20
20.1 The Chairman of the Board or, in his absence, the oldest Board member in attendance chairs the Meeting.meeting.E-5
ARTICLE 21
21.1 A majority of members of the Board having a voting right must be present for a Board meeting to be valid. 21.2 Resolutions are taken with the majority of votes of the Board members having a voting right present; should votes be equal, the person who chairs the Meetingmeeting has a casting vote.ARTICLE 22
22.1 Resolutions of the Board are entered in the minutes, which are recorded in a book kept for that purpose pursuant to the law, and said minutes are signed by the Chairman of the Meetingmeeting and by the Secretary.22.2 Copies of the minutes are bona fide if they are signed by the Chairman or the person acting for him and countersigned by the Secretary. ARTICLE 23
23.1 The Board of Directors is invested with the fullest powers for ordinary and extraordinary management of the company and, in particular, the Board has the power to perform all acts it deems advisable for the implementation and achievement of the company objects, except for the acts that the law or these by-laws reserve for the shareholders’ meeting. 23.2 The Board of Directors is allowed to resolve on the following matters:
-the merger and the demerger of at least 90% directly owned subsidiaries;
-the establishment and winding up of branches;
-the amendment to the by-laws in order to comply with the current legislation.
23.3 The Board of Directors and the Chief Executive Officer report timely, at least every three months and however in the Board of Directors meetings, to the Board of Statutory Auditors on the activities and on the most relevant operations regarding the operational, economic and financial management of the company and its subsidiaries; in particular the Board of Directors and the Chief Executive Officer report to the Board of Statutory Auditors on operations entailing an interest on their behalf or on behalf of third parties. ARTICLE 24
24.1 The Board of Directors delegates its powers to one of its members with the exception of the Director appointed pursuant to Article 6, second
Paragraph,paragraph, letter d) of the by-laws, in compliance with the limits set forth in Article 2381 of the Civil Code. In addition the Board of Directors may delegate powers to the Chairman for researching and promoting integrated projects and strategic international agreements. The Board of Directors may at any time withdraw the delegations of powers hereon; if the Board of Directors withdraws powers delegated to the Chief Executive Officer, a new Chief Executive Officer is simultaneously appointed.
The Board of Directors, upon proposal of the Chairman and in agreement with the Chief Executive Officer, may confer powers for single acts or categories of acts to other members of the Board of Directors with the exception of the Director appointed pursuant to Article 6, secondParagraph,paragraph, letter d) of the by-laws. The Chairman and the Chief Executive Officer, in compliance with the limits of their delegations, may delegate and empower company employees or persons not belonging to the company to represent the company for single acts or specific categories of acts.
Further,onupon proposal of the Chief Executive Officer and in agreement with the Chairman, the Board of Directors may also appoint one or more General Managers and determines the powers to be conferred to them. In order to make the appointment effective, the Board of Directors shall verify if the General Manager to be appointed has the honorability requirements set by the current legislation. The Board of Directors shall periodically verify said honorability requirements. The General Managers without said requirement shall be removed.OnUpon proposal of the Chief Executive Officer presented and in agreement with the Chairman, the Board of Directors appoints the Manager responsible for the preparation of financial reportingdocuments and delegates powers and resources to him.documents. The appointment is subject to the favourable opinion of the Board of Statutory Auditors.The Manager responsible for the preparation of financial reporting documents is chosen among people who, for at least three years, have exercised:
a) administration or control activities or directive tasks in companies listed on regulated stock exchanges in Italy or other European Union countries or other countries member of OECD with a share capital not less than two million euro or b) audit activities in the companies mentioned in letter a) above, or c) professional activities or teaching activities in universities in the financial or accounting sectors, or d) managerial functions in public or private bodies in the financial, accounting, or control sectors.
The Board of Directors assures that the Manager responsible for the preparation of financial reporting documents is given adequate powers and means to execute his or her tasks and to respect the administrative and accounting procedures. ARTICLE 25
25.1 Legal representation towards any judicial or administrative authority and towards third parties, together with the company signature, are vested either onto the Chairman or the Chief Executive Officer. E-6
ARTICLE 26
26.1 The Chairman and the members of the Board are remunerated in an amount established by the ordinary shareholders’ meeting. Said resolution, once taken, will remain valid for subsequent business years until the shareholders’ meeting decides otherwise. ARTICLE 27
27.1 The Chairman:
a) represents the company according to the provisions of Article 25.1; b) chairs the shareholders'shareholders’ meeting pursuant to Article 15.1;c) convenes and chairs meetings of the Board of Directors pursuant to Articles 19.1 and 20.1; d) ascertains whether Board resolutions have been implemented; e) exercises the powers delegated to him by the Board of Directors pursuant to Article 24.1 of these by-laws. Part VI - Board of Statutory Auditors
ARTICLE 28
28.1 The Board of Statutory Auditors consists of five effective members and two alternate members. The Auditors shall have the professional and honour requirements set forth by the Ministerial Decree No. 162, dated March 30, 2000 issued by the Ministry of Justice.
Pursuant to the aforementioned Ministerial Decree, the matters strictly connected to those of interest of the Company are: companies law, business economics and corporate finance.
Pursuant to said Ministerial Decree, the sectors strictly connected with those of interest of the Company are the engineering and geological sectors.ThoseThe Statutory Auditors may be appointed members of administration and control bodies in other companies within the limits set by Consob regulation.
Until those provisions do not come in force, those who are already appointed effective auditor or supervisory board member or audit committee member in at least five companies with securities listed on regulated securities markets otherthan EniS.p.A.SpA subsidiaries may not be appointed Statutory Auditor; if elected, they will lapse.28.2 The effectiveBoard of Statutory Auditorsand the alternate Auditors areis appointed by the shareholders’ meeting on the basis of lists presented by the Shareholders; in such lists candidates are listed in numerical order.
For the presentation, deposit and publication of candidate lists the procedures set forth in Article 17.3 shallapply.apply and according to the rules set forth by Consob.
Lists shall be divided into two sections: the first one for the candidates to be appointed effective Auditors and the second one for the candidates to be appointed alternate Auditors. At least the first candidate of each section shall be chartered accountant and have exercised audit activities for not less than three years.
Three effective Auditors and one alternate Auditor will be drawn from the list that obtains the majority of votes. The other two effective Auditors and the other alternate Auditor will be appointed pursuant to Article 17.3, letter b) of the by-laws. The procedure described in this last Article shall be applied to each section of the lists involved separately.
The shareholders’ meeting appoints the Chairman of the Board of Statutory Auditors among the effective Auditors appointed according to Article 17.3 letter b) of these by-laws.
To appoint effective or alternate Auditors for any reason not elected according to the terms of the aforementioned procedure, the shareholders’ meeting will resolve with the majorities prescribed by the law.
The vote by list procedure shall apply only in case of appointment of the entire Board of Statutory Auditors.
Should an effective Auditor drawn out from the candidate list that receives the majority of votes expressed by the Shareholders be replaced, he will be succeeded by the alternate Auditor drawn out from the same candidate list; should an effective Auditor drawn out from the other candidate list be replaced, he will be substitutedpursuant to Article 17.3, letter b) ofby theby-laws.Alternate Auditor drawn by those other lists.28.3 Retiring Auditors may be reelected. 28.4 Subject to a previous communication to the Chairman of the Board of Directors, the Board of Statutory Auditors is empowered to convene the shareholders’ meeting and the Board of Directors. At least two effective Auditors are empowered to convene the shareholders’ meetings and at least one effective Auditor is empowered to convene the Board meetings.
The Board of Statutory Auditors’ meetings may be held by video or teleconference if each of the participants to the meetings may be identified and if each is allowed to follow the discussion and take part to it in real time. If said conditions are met, the Meeting is considered duly held in the place where the Chairman and the Secretary are present.Part VII - Financial Statements and Profits
ARTICLE 29
29.1 The business year ends on December 31 every year. E-7
29.2 At the end of each business year, the Board of Directors sees to the preparation of the company financial statements in conformity with the law. 29.3 The Board of Directors may, during the course of the business year, pay interim dividends to the Shareholders. ARTICLE 30
30.1 Dividends not collected within five years of the day on which they are payable will be prescribed in favour of the company and allocated to reserves. Part VIII - Winding Up and Liquidation of the Company
ARTICLE 31
31.1 IInIn the event the company is wound up, the shareholders’ meeting will decide the manner of liquidation, appoint one or more liquidators and determine their powers and remuneration.Part IX - General Provisions
ARTICLE 32
32.1 For matters not expressly regulated by these by-laws, the norms of the Civil Code and specific laws concerning these matters will apply. 32.2 ThePursuant to Article 3, paragraph 2, of Law Decree 332 of May 31, 1994, converted with amendments into Law 474 of July 30, 1994, Article 6.1, paragraph sixth, of these bylaws does not apply to the share owned by the Ministry of Economy and Finance,may retain his shareholding in the company share capital in excess of the limit set forth in Article 6.1 of these by-laws and will not be subject to the provisions of said Article 6.1 for the period setbythe law.public bodies or by entities controlled thereby.ARTICLE 33
33.1 The company retains all assets and liabilities held before its transformation by the public law agency Ente Nazionale Idrocarburi.
.Table of Contents
Exibit 8E-8
EXHIBIT 8
List of
Eni's fully consolidatedEni’s subsidiaries for year20052008
Subsidiary Country of Incorporation
Eni's interestEni’s share of net profit (%)(1)
EXPLORATION & PRODUCTION
Exploration & ProductionEni Angola SpA Italy Agip Caspian Sea BV(the Netherlands)100.00Agip Energy and Natural Resources (Nigeria) Ltd(Nigeria)100.00Agip Karachaganak BV(the Netherlands)100.00Agip Oil Ecuador BV(the Netherlands)100.00 Eni A E P LtdEast Africa SpA(the United Kingdom)100.00Eni Algeria Exploration BVItaly(the Netherlands)100.00Eni Algeria Ltd Sàr(Luxembourg)100.00Eni Algeria Production BV(the Netherlands)100.00Eni Ambalat Ltd(the United Kingdom)100.00Eni America Ltd(USA)100.00Eni Angola Exploration BV(the Netherlands)100,00Eni Angola Production BV(the Netherlands)100.00Eni Australia BV(the Netherlands)100.00Eni Australia Ltd(the United Kingdom)100.00Eni BB Petroleum Inc(USA)100.00Eni Birch Ltd(the United Kingdom)100.00Eni Bukat Ltd(the United Kingdom)100.00Eni Bulungan BV(the Netherlands)100.00Eni China BV(the Netherlands)100.00Eni Congo Holding BV (ex Eni International BV)(the Netherlands)100.00Eni Congo SA(Congo)100.00Eni Croatia BV(the Netherlands)100.00Eni Dación BV(the Netherlands)100.00Eni Deepwater Llc(USA)100.00Eni Denmark BV(the Netherlands)100.00Eni Elgin/Franklin Ltd(the United Kingdom)100.00Eni Energy BV(the Netherlands)100.00Eni Energy Ltd (in liquidation)(the United Kingdom)100.00Eni Ganal Ltd(the United Kingdom)100.00Eni Grand Maghreb BV(the Netherlands)100.00Eni Guibsen Exploration BV(the Netherlands)100.00Eni Indonesia Ltd(the United Kingdom)100.00Eni International NA NV Sàrl(Luxembourg)100.00Eni Investments Plc(the United Kingdom)100.00Eni Iran BV(the Netherlands)100.00Eni Ireland BV(the Netherlands)100.00Eni JPDA 03-13 Ltd(the United Kingdom)100.00Eni Krueng Mane Ltd(the United Kingdom)100.00Eni Lasmo Plc(the United Kingdom)100.00Eni LNS Ltd(the United Kingdom)100.00Eni Marketing Inc(USA)100.00 Eni Mediterranea Idrocarburi SpA (Italy)Italy100.00 Eni MEP LtdTimor Leste SpA(the United Kingdom)100.00Eni MHH Ltd (in liquidation)Italy(the United Kingdom)100.00Eni Middle East BV(the Netherlands)100.00Eni Middle East Ltd(the United Kingdom)100.00Eni MOG Ltd (in liquidation)(the United Kingdom)100.00Eni Muara Bakau BV(the Netherlands)100.00Eni Norge AS(Norway)100.00Eni North Africa BV(the Netherlands)100.00Eni Oil Algeria Ltd(the United Kingdom)100.00Eni Oil & Gas Inc(USA)100,00Eni Oil do Brasil SA(Brazil)100.00Eni Oil Holdings BV(the Netherlands)100.00Eni Pakistan Ltd(the United Kingdom)100.00Eni Pakistan (M) Ltd Sàrl(Luxembourg)100.00Eni Papalang Ltd(the United Kingdom)100.00Eni Petroleum Co Inc(USA)100.00Eni Petroleum Exploration Co Inc(USA)100.00Eni Popodi Ltd(the United Kingdom)100.00Eni Rapak Ltd(the United Kingdom)100.00Eni Resources Ltd (in liquidation)(the United Kingdom)100.00Eni Russia BV(the Netherlands)100.00Eni Securities Ltd(the United Kingdom)100.00Eni TNS Ltd(the United Kingdom)100.00Eni Trading BV(the Netherlands)100.00Eni Trinidad and Tobago Ltd(Trinidad and Tobago)100.00Eni TTO Ltd(the United Kingdom)100.00Eni Tunisia BEK BV(the Netherlands)100.00Eni Tunisia BV(the Netherlands)100.00Eni UFL Ltd (in liquidation)(the United Kingdom)100.00Eni UHL Ltd(the United Kingdom)100.00Eni UKCS Ltd(the United Kingdom)100.00Eni UK Ltd(the United Kingdom)100.00Eni ULT Ltd(the United Kingdom)100.00Eni ULX Ltd(the United Kingdom)100.00Eni USA Inc(USA)100.00Eni U.S. Operating Co Inc(USA)100.00Eni Venezuela BV(the Netherlands)100.00Eni Ventures Plc(the United Kingdom)100.00Ieoc Exploration BV(the Netherlands)100.00Ieoc Production BV(the Netherlands)100.00 Ieoc SpA (Italy)Italy100.00 Lasmo Sanga Sanga Ltd(Bermuda)100.00Nigerian Agip Exploration Ltd(Nigeria)100.00Nigerian Agip Oil Co Ltd(Nigeria)100.00S.A.R.C.I.S.Società Oleodotti Meridionali -Società Azionaria Ricerche Coltivazione Idrocarburi SiciliaSOM SpA(Italy)Italy100.0070.00 Società Petrolifera Italiana SpA (Italy)Italy99.96 Stoccaggi Gas Italia SpA - Stogit SpA (Italy)Italy100.00 Tecnomare - Società per lo Sviluppo delle Tecnologie Marine SpA Italy 100.00 Agip Caspian Sea BV Netherlands 100.00 Agip Energy & Natural Resources (Nigeria) Ltd Nigeria 100.00 Agip Karachaganak BV Netherlands 100.00 Agip Oil Ecuador BV Netherlands 100.00 Astrakhan Gas and Oil Co Russia 3.00 Burren Energy (Bermuda) Ltd Bermuda 100.00 Burren Energy (Buguruslan) Ltd Cyprus 100.00 Burren Energy (Congo) Ltd British Virgin Islands 100.00 Burren Energy Drilling Services Ltd (in liquidation) UK 100.00 Burren Energy (Egypt) Ltd UK 100.00 Burren Energy India Ltd UK 100.00 Burren Energy Ltd Cyprus 100.00 Burren Energy New Ventures Ltd UK 100.00 Burren Energy (Oman) Ltd UK 100.00 Burren Energy Plc UK 100.00 Burren Energy (Services) Ltd UK 100.00 Burren Energy (Yemen) Ltd UK 100.00 Burren Resources Petroleum Ltd Bermuda 100.00 Burren Shakti Ltd Bermuda 100.00 Eni AEP Ltd UK 100.00 Eni Algeria Exploration BV Netherlands 100.00 Eni Algeria Ltd Sàrl Luxembourg 100.00 Eni Algeria Production BV Netherlands 100.00 Eni Ambalat Ltd UK 100.00 Eni America Ltd USA 100.00 Eni Angola Exploration BV Netherlands 100.00 Eni Angola Production BV Netherlands 100.00 Eni Australia BV Netherlands 100.00 Eni Australia Ltd UK 100.00 Eni BB Petroleum Inc USA 100.00 Eni Bukat Ltd UK 100.00 Eni Bulungan BV Netherlands 100.00 Eni Canada Holding Ltd Canada 100.00 Eni China BV Netherlands 100.00 Eni Congo Holding BV Netherlands 100.00 Eni Congo SA Congo 100.00 Eni Croatia BV Netherlands 100.00 Eni Dación BV Netherlands 100.00 Eni Denmark BV Netherlands 100.00 Eni Elgin/Franklin Ltd UK 100.00 Eni Energy Ltd (in liquidation) UK 100.00 Eni Energy Russia BV Netherlands 100.00 Eni Ganal Ltd UK 100.00 Eni Gas & Power LNG Australia BV Netherlands 100.00 E-9
Eni Grand Maghreb BV Netherlands 100.00 Eni Hewett Ltd UK 100.00 Eni India Ltd UK 100.00 Eni Indonesia Ltd UK 100.00 Eni International NA NV Sàrl Luxembourg 100.00 Eni Investments Plc UK 100.00 Eni Iran BV Netherlands 100.00 Eni Ireland BV Netherlands 100.00 Eni JPDA 03-13 Ltd UK 100.00 Eni JPDA 06-105 Pty Ltd Australia 100.00 Eni Krueng Mane Ltd UK 100.00 Eni Lasmo Plc UK 100.00 Eni LNS Ltd UK 100.00 Eni Mali BV Netherlands 100.00 Eni Marketing Inc USA 100.00 Eni MHH Ltd (in liquidation) UK 100.00 Eni Middle East BV Netherlands 100.00 Eni Middle East Ltd UK 100.00 Eni MOG Ltd (in liquidation) UK 100.00 Eni Morocco BV Netherlands 100.00 Eni Muara Bakau BV Netherlands 100.00 Eni Norge AS Norway 100.00 Eni North Africa BV Netherlands 100.00 Eni Oil Algeria Ltd UK 100.00 Eni Oil do Brasil SA Brazil 100.00 Eni Oil & Gas Inc USA 100.00 Eni Oil Holdings BV Netherlands 100.00 Eni Pakistan Ltd UK 100.00 Eni Pakistan (M) Ltd Sàrl Luxembourg 100.00 Eni Papalang Ltd UK 100.00 Eni Petroleum Co Inc USA 100.00 Eni Petroleum US Llc USA 100.00 Eni PetroRussia BV Netherlands 100.00 Eni Popodi Ltd UK 100.00 Eni Rapak Ltd UK 100.00 Eni Resources Ltd UK 100.00 Eni Securities Ltd UK 100.00 Eni TNS Ltd UK 100.00 Eni Trasportation Ltd UK 100.00 Eni Trinidad and Tobago Ltd Trinidad & Tobago 100.00 Eni TTO Ltd UK 100.00 Eni Tunisia BEK BV Netherlands 100.00 Eni Tunisia BV Netherlands 100.00 Eni UFL Ltd UK 100.00 Eni UHL Ltd UK 100.00 Eni UKCS Ltd UK 100.00 Eni UK Holding Plc UK 100.00 Eni UK Ltd UK 100.00 Eni ULT Ltd UK 100.00 Eni ULX Ltd UK 100.00 Eni USA Gas Marketing Llc USA 100.00 Eni USA Inc USA 100.00 Eni US Operating Co Inc USA 100.00 Eni Venezuela BV Netherlands 100.00 Eni West Timor Ltd UK 100.00 First Calgary Petroleums LP USA 100.00 First Calgary Petroleums Ltd Canada 100.00 First Calgary Petroleums Partner Co ULC Canada 100.00 First Calgary Petroleums UK Ltd UK 100.00 Hindustan Oil Exploration Co Ltd India 47.18 Ieoc Exploration BV Netherlands 100.00 Ieoc Production BV Netherlands 100.00 Lasmo Sanga Sanga Ltd Bermuda 100.00 E-10
Nigerian Agip Exploration Ltd Nigeria 100.00 Nigerian Agip Oil Co Ltd Nigeria 100.00 OOO ‘Eni Energhia’ Russia 100.00 GasGAS &PowerPOWERAcqua Campania SpA (ex Eni Acqua Campania SpA)(Italy)49.05Adriaplin Podjetje za distribucijo zemeljskega plina doo LjubljanaItaly(Slovenia)51.0047.62Compagnia Napoletana di Illuminazione e Scaldamento col Gas SpA (Italy)99.69Distribuidora de Gas Cuyana SAItaly(Argentina)45.60Eni G&P Trading BV(the Netherlands)100.0099.69Eni Gas & Power CH SABelgium SpA(Switzerland)Italy100.00 Eni Gas & PowerTransport Deutschland SpA(ex Italgas Rete SpA)(Italy)Italy100.00 Eni Gas & Power GmbHHellas SpA(Germany)Italy100.00 Eni Gas & Power LNG Australia BVEniPower Mantova SpA(the Netherlands)100.00Eni Gas Trading Europe BVItaly(the Netherlands)100.0086.50EniPower SpA (Italy)100.00EniPower Trading SpAItaly(Italy)100.00 EniPower Trasmissione SpA (Italy)100.00Fiorentina Gas Clienti SpAItaly(Italy)100.00Fiorentina Gas SpA(Italy)51.03Gas Brasiliano Distribuidora SA(Brazil)100.00 GNL Italia SpA (Italy)50.07Greenstream BVItaly(the Netherlands)75.00Inversora de Gas Cuyana SA(Argentina)76.00Italgas Hellas SpA(Italy)100.0055.59LNG Shipping SpA (Italy)100.00Napoletana Gas Clienti SpAItaly(Italy)99.69Partecipazioni Industriali SpA(Italy)100.00 Snam Rete Gas SpA (Italy)Italy50.0755.59 Società EniPower Ferrara Srl (Italy)Italy51.00 Società Italiana per il Gas pA (Italy)Italy100.00 Toscana Energia Clienti SpA Italy 79.22 Adriaplin Podjetje za distribucijo zemeljskega plina doo Ljubljana Slovenia 51.00 Distribuidora de Gas Cuyana SA Argentina 45.60 Distrigas NV Belgium 57.24 Distri RE SA Luxembourg 57.24 Eni Gas & Power Belgium SA Belgium 100.00 Eni Gas & Power GmbH Germany 100.00 Eni Gas Transport GmbH (ex Eni Gas & Power GmbH) Germany 100.00 Eni Gas Transport International SA Switzerland 100.00 Eni G&P France BV Netherlands 100.00 Eni G&P Trading BV Netherlands 100.00 Finpipe GIE Belgium 36.24 Gas Brasiliano Distribuidora SA Brazil 100.00 GreenStream BV Netherlands 75.00 Inversora de Gas Cuyana SA Argentina 76.00 Société de Financement et de Participation SA Belgium 57.13 Société de Service du Gazoduc Transtunisien SA - Sergaz SA (Tunisia)Tunisia66.67 Société pour la Construction du Gazoduc Transtunisien SA - Scogat SA (Tunisia)Tunisia100.00 Tigáz-Dso Földgázelosztó Korlátolt Felelossegu Tarsasag Hungary 50.08 Tigáz Tiszántúli Gázszolgáltató Zártkörûen Mûködõ Részvénytársaság (Hungary)Hungary50.08 Transfin SA Belgium 57.13 Trans Tunisian Pipeline Co Ltd (ChannelIsland)Islands100.00 Refining & MarketingREFINING & MARKETING Agip Austria GmbH(Austria)100.00Agip Benelux BV(the Netherlands)100.00Agip Ceská Republika Sro(Czech Republic)100.00Agip Deutschland GmbH(Germany)100.00Agip Ecuador SA(Ecuador)100.00Agip España SA(Spain)100.00Agip Française SA(France)100.00Agip Hungaria Részvénytársaság(Hungary)99.41Agip Lubricantes SA(Argentina)100.00Agip Lubricants (Pty) Ltd(South Africa)100.00Agip Pannónia Kereskedelmi Kft(Hungary)99.41Agip Portugal - Combustiveis SA(Portugal)100.00Agip Romania SA(Romania)99.97Agip Schmiertechnik GmbH(Germany)100.00Agip Slovenija doo(Slovenia)100.00Agip Slovensko Spol Sro(Slovakia)100.00Agip Suisse SA(Switzerland)100.00AgipFuel SpA(Italy)100.00AgipRete SpA(Italy)100.00American Agip Co Inc(USA)100.00Big Bon Distribuzione SpA(Italy)100.00Costiero Gas Livorno SpA(Italy)65.00Ecofuel SpA(Italy)100.00Eni Portugal Investment SpA(Italy)100.00Esain SA(Ecuador)100.00Intermode Trasporti Logistica Integrata SpA(Italy)100.00Petrolig Srl(Italy)70.00Petroven Srl(Italy)68.00Praoil Oleodotti Italiani SpA(Italy)100.00Raffineria di Gela SpA(Italy)100.00PetrochemicalsAgipFuel Nord SpA Italy Dunastyr Polisztirolgyártó Zártkoruen Mukodo Részvénytársaság(ex Dunastyr Polisztirolgyártó Részvénytársaság Ltd)(Hungary)100.00 Polimeri Europa AmericasAgip Rete SpAItaly 100.00 Costiero Gas Livorno SpA Italy 65.00 Ecofuel SpA Italy 100.00 Eni Trading & Shipping SpA Italy 100.00 Petrolig Srl Italy 70.00 Petroven Srl Italy 68.00 Raffineria di Gela SpA Italy 100.00 Agip Austria GmbH Austria 100.00 Agip Benelux BV Netherlands 100.00 Agip Ceská Republika Sro Czech Republic 100.00 Agip Deutschland GmbH Germany 100.00 Agip Ecuador SA Ecuador 100.00 Agip France Sàrl France 100.00 Agip Hungaria Zrt Hungary 100.00 Agip Iberia SLU (ex Eni España Comercializadora de Gas SA) Spain 100.00 Agip Lubricantes SA Argentina 100.00 Agip Oil Ceská Republika Sro Czech Republic 100.00 E-11
Agip Oil Slovensko Spol Sro Slovakia 100.00 Agip Olaj Magyarország Kereskedelmi Korlátolt Felelõsségû Társaság Hungary 100.00 Agip Romania Srl Romania 100.00 Agip Schmiertechnik GmbH Germany 100.00 Agip Slovenija doo Slovenia 100.00 Agip Slovensko Spol Sro Slovakia 100.00 Agip Suisse SA Switzerland 100.00 American Agip Co Inc (USA)USA100.00 Polimeri Europa BeneluxEni Trading & Shipping BV (ex Eni Trading BV)Netherlands 100.00 Eni Trading & Shipping Inc USA 100.00 Esain SA (Belgium)Ecuador100.00 Polimeri Europa Elastomères France SA(France)100.00Polimeri Europa France SAS(ex Polimeri Europa Distribution France SAS)(France)100.00Polimeri Europa GmbH(Germany)100.00Polimeri Europa Ibérica SA(Spain)100.00Polimeri Europa SpA(Italy)100.00Polimeri Europa UK Ltd(the United Kingdom)100.00Oilfield Services Construction and EngineeringPETROCHEMICALSOilfield Services and ConstructionPolimeri Europa SpAItaly 100.00 Dunastyr Polisztirolgyártó Zártkoruen Mukodo Részvénytársaság Hungary 100.00 Polimeri Europa Benelux SA Belgium 100.00 Polimeri Europa France SAS France 100.00 Polimeri Europa GmbH Germany 100.00 Polimeri Europa Ibérica SA Spain 100.00 Polimeri Europa UK Ltd UK 100.00 ENGINEERING & CONSTRUCTION Intermare Sarda SpA Italy 43.55 Saipem Energy Italia SpA Italy 43.55 Saipem Energy Services SpA (ex Energy Maintenance Services SpA) Italy 43.55 Saipem SpA Italy 43.55 Snamprogetti Chiyoda SAS di Saipem SpA Italy 43.51 Snamprogetti Sud SpA Italy 43.55 Andromeda Consultoria Tecnica e Representações Ltda Brazil 43.55 BOSCONGO SA (Congo)Congo43.2543.55 BOS Investment Ltd (the United Kingdom)43.26BOS Italia SrlUK(Italy)43.2643.55BOS - UIE Ltd (the United Kingdom)43.26Camom Gesellschaft fur Instandhaltung und Montagen GmbHUK(Germany)43.26Camom SA(France)43.26Consorzio Saipem Energy International - Tecnomare(Italy)52.7143.55Delong Hersent - Estudos, Construções Maritimas e Participações, Unipessoal Lda (Portugal)43.26Energy Maintenance Services SpAPortugal(Italy)71.6343.55Entreprise Nouvelle Marcellin SA (France)France43.2643.55 ER SAI Caspian Contractor Llc (Kazakhstan)Kazakhstan21.6321.78 ERS - Equipment Rental & Services BV (the Netherlands)Netherlands43.2643.55 European Marine Contractors Ltd (the United Kingdom)UK43.2643.55 European Marine Investments Ltd (the United Kingdom)UK43.2643.55 European Maritime Commerce BV (the Netherlands)Netherlands43.2643.55 Frigstad Discoverer Invest Ltd British Virgin Islands 43.55 Firgstad Discoverer Invest (S) Pte Ltd Singapore 43.55 Global Petroprojects Services AG (ex Global Petroprojects Services AG SA Ltd)(Switzerland)43.26Hazira Cryogenic Engineering & Construction Management Private LtdSwitzerland(India)23.74Hazira Marine Engineering & Construction Management Private Ltd(India)43.26Intermare Sarda SpA(Italy)43.2643.55Katran-K Llc (Russia)Russia43.2643.55 Moss Arctic Offshore AS (Norway)Norway43.2643.55 Moss Maritime AS (Norway)Norway43.2643.55 Moss Maritime Inc (USA)USA43.2643.55 Moss Offshore AS (Norway)43.26Nigerian Services & Supply Co LtdNorway(Nigeria)43.55North Caspian Services Co 43.26Kazakhstan 43.55 Petrex SA (Peru)Peru43.2643.55 Petromar Lda (Angola)Angola30.2830.49 PT Saipem Indonesia (Indonesia)43.26PT Sofresid Engineering (ex PT SofresidIndonesiaLl)(Indonesia)43.2643.55Saibos Construções Maritimas LdaLtda(Portugal)43.26Saibos FzePortugal(United Arab Emirates)43.26Saibos SAS(France)43.2643.55Saigut SA De Cv (Mexico)Mexico34.6143.55 Saimexicana SA De Cv (Mexico)Mexico43.2643.55 Saipem America Inc (ex Sonsub Inc)(USA)USA43.2643.55 Saipem Asia Sdn Bhd (Malaysia)Malaysia43.2643.55 Saipem (Beijing) Technical Services Co Ltd China 43.55 Saipem Contracting Algerie SpA (Algeria)Algeria43.2443.55 Saipem Contracting (Nigeria) Ltd (Nigeria)Nigeria42.3742.66 Saipem do Brasil Serviçõs de Petroleo Ltda (Brazil)43.26Saipem Energy International SpABrazil(Italy)43.2643.55Saipem FPSO SpA (ex Sonsub SpA)(Italy)43.26E-12
Saipem Holding France SAS (France)France43.2643.55 Saipem India Projects Ltd (ex Saipem India Project Services LtdLtd)(India)India43.2643.55 Saipem International BV (the Netherlands)Netherlands43.2643.55 Saipem Logistics Services Ltd Nigeria 43.55 Saipem Luxembourg SA (Luxembourg)Luxembourg43.2643.55 Saipem (Malaysia) Sdn Bhd (Malaysia)Malaysia17.5618.02 Saipem Maritime Asset Management Luxembourg Sàrl Luxembourg 43.55 Saipem Mediteran Usluge doo (Croatia)Croatia43.2643.55 Saipem Misr for Petroleum Services SAE Egypt 43.55 Saipem (Nigeria) Ltd (Nigeria)Nigeria38.6838.94 Saipem -Perfurações eContruçConstruções PetroliferasAmerica do SulUnipessoal Lda(Portugal)Portugal43.2643.55 Saipem (Portugal) -Comércio Marítimo, Sociedade Unipessoal Lda(Portugal)Portugal43.2643.55 Saipem (Portugal) - Gestão de Participações SGPS Sociedade Unipessoal SA (Portugal)Portugal43.2643.55 Saipem SA (France)France43.2643.55 Saipem Services México SA De Cv (Mexico)Mexico43.2643.55 Saipem Services SA (Belgium)Belgium43.2643.55 Saipem Singapore Pte Ltd (Singapore)43.26Saipem SpASingapore(Italy)43.2643.55Saipem UK Ltd (the United Kingdom)43.26SAIR Construções Mecanicas de Estruturas Maritimas LdaUK(Portugal)43.55Saipem Ukraine Llc 37.20Ukraine 43.55 SAS Port de Tanger (France)France43.2643.55 Saudi Arabian Saipem Ltd (Saudi Arabia)25.96SB Construction and Maritime Services BVUnited Arab Emirates(the Netherlands)43.2626.13Services et Equipements Gaziers et Petroliers SA (France)France43.1643.48 Sigurd Rück AG Switzerland 43.55 Snamprogetti Canada Inc Canada 43.55 Snamprogetti Engineering BV Netherlands 43.55 Snamprogetti France Sàrl France 43.55 Snamprogetti Ltd UK 43.55 Snamprogetti Lummus Gas Ltd Malta 43.12 Snamprogetti Management Services SA Switzerland 43.55 Snamprogetti Netherlands BV Netherlands 43.55 Snamprogetti Romania Srl Romania 43.55 Snamprogetti Saudi Arabia Co Ltd Llc (ex Snamprogetti Saudi Arabia Ltd) United Arab Emirates 43.55 Snamprogetti USA Inc USA 43.55 Société de Construction d’Oleoducs Snc (France)43.16Société Nouvelle Technigaz SAFrance(France)43.2543.48Sofresid Engineering SA (France)France43.2643.55 Sofresid SA (France)France43.2643.55 Sonsub AS (Norway)Norway43.2643.55 Sonsub International Pty Ltd (Australia)Australia43.2643.55 Sonsub Ltd (in liquidation) (the United Kingdom)UK43.2643.55 Star Gulf Free ZoneFZ Co(United ArabEmirates)43.26TBE LtdEmirates(Egypt)30.2743.55Varisal - Serviços De Consultadoria e Marketing Lda Portugal 43.55 EngineeringOTHER ACTIVITIES Andromeda Consultoria Tecnica e Representações Ltda(Brazil)100.00Engineering & Management Services SpA (ex Snamprogetti Services SpA)(Italy)100.00Snamprogetti Canada Inc(Canada)100.00Snamprogetti France Sàrl(France)100.00Snamprogetti Ltd(the United Kingdom)99.99Snamprogetti Lummus Gas Ltd(Malta)99.00Snamprogetti Management Services SA(Switzerland)99.99Snamprogetti Netherlands BV(the Netherland)100.00Snamprogetti Saudi Arabia Ltd(Saudi Arabia)74.99Snamprogetti SpA(Italy)100.00Snamprogetti Sud SpA(Italy)100.00Snamprogetti USA Inc(USA)99.99Other activitiesIng. Luigi Conti Vecchi SpAItaly 100.00 Syndial SpA - Attività Diversificate Italy 100.00 CORPORATE AND FINANCIAL COMPANIES Agenzia Giornalistica Italia SpA (Italy)Italy100.00 Eni Corporate University SpA (Italy)Italy100.00 EniTecnologieEniServizi SpA(Italy)Italy100.00 Ing. Luigi Conti VecchiSerfactoring SpA(Italy)Italy100.0048.81 Servizi Aerei SpA (Italy)100.00Sieco SpAItaly(Italy)100.00 Syndial SpA - Attività Diversificate(Italy)100.00Tecnomare - Società per lo Sviluppo delle Tecnologie Marine SpA(Italy)62.16Corporate and financial companiesEni Coordination Center SA(Belgium)100.00Eni International Bank Ltd(Bahamas)100.00Eni International BV (ex Eni Exploration BV)(the Netherlands)100.00Padana Assicurazioni SpA(Italy)99.71Serfactoring SpA(Italy)48.81Società Finanziamenti Idrocarburi - Sofid - SpA (Italy)Italy99.61 Società FinanziariaBanque EniSpA - EnifinSA(Italy)Belgium100.00 Sofidsim - Società di Intermediazione Mobiliare SpAEni Coordination Center SA(Italy)99.61
(1)BelgiumThe percentage relates to Eni's share of net profit of the relevant subsidiary and coincides with the percentage of ownership interest both direct and indirect in the vast majority of cases.100.00Eni Insurance Ltd Ireland 100.00 Eni International Bank Ltd Bahamas 100.00 Eni International BV Netherlands 100.00 Eni International Resources Ltd UK 100.00
ExhibitE-13EXHIBIT 11
Code of Ethics
Approved by the Board of Directors of Eni SpA on
October 21, 1998 and on July 31, 2003 (Addendum)March 14, 2008
The English text is a translation of the Italian official "Code of Ethics"
For any conflict or discrepancies between the two texts the Italian text shall prevail
TABLE OF CONTENTS
AddendumForeword
I. GENERAL PRINCIPLES: SUSTAINABILITY AND CORPORATE RESPONSIBILITY
II. BEHAVIOUR RULES AND RELATIONS WITH STAKEHOLDERS
1.General PrinciplesEthics, transparency, fairness, professionalism
2. Relations with shareholders and with the Market
2.1. Value for shareholders, efficiency, transparency
2.2. Self-Regulatory Code
2.3. Company information
2.4. Privileged information
2.5. Media
3. Relations with institutions, associations, local communities
3.1. Authorities and Public Institutions
3.2. Political organizations and trade unions
3.3. Development of local Communities
3.4. Promotion of "non profit" activities
4. Relations with customers and suppliers
4.1. Customers and consumers
4.2. Suppliers and external collaborators
5. Eni’s management, employees, collaborators
5.1. Development and protection of Human Resources
5.2. Knowledge Management
5.3. Corporate security
5.4. Harassment or mobbing in the workplace
5.5. Abuse of alcohol or drugs and no smoking
1.1 To whomIII. TOOLS FOR IMPLEMENTING THE CODE OF ETHICS
1. System of internal control
1.1. Conflicts of interest
1.2. Transparency of accounting records
2. Health, safety, environment and public safety protection
3. Research, innovation and intellectual property protection
4. Confidentiality
4.1. Protection of business secret
4.2. Protection of privacy
4.3. Membership in associations, participation in initiatives, events or external meetingsIV. CODE OF ETHICS SCOPE OF APPLICATION AND REFERENCE STRUCTURES
1. Obligation to know the Codeapplies
1.2 Duties of Eni
1.3 Duties of Employees
1.4 Additional Duties of Managers
1.5 Applicabilityand to report any possible violation thereof
2. Reference structures and supervision
2.1. Guarantor of the Codeto Third Parties
1.6 Reference, Implementation and Control Functions (Guarantors)
1.7of Ethics
2.2. Code Promotion Team
3. Code review
4. ContractualValuevalue of the Code
2. Business ConductE-14FOREWORD
2.1 Relations with Customers
2.2 Relations with Suppliers
3. Transparency of Accounting and Internal Controls
3.1 Accounting Records
3.2 Internal Controls
4. Personnel Policies
4.1 Human Resources
4.2 Harassment in the Workplace
4.3 Abuse of Alcohol or Drugs
4.4 Smoking
5. Health, Safety and the Environment
6. Confidentiality
7. External Relations
7.1 Relations with Public Institutions
7.2 Relations with Political Organizations and Trade Unions
7.3 Relations with the Media
7.4 Presentation of Eni Objectives, Activities, Results and Points of View
7.5 "Non Profit" Initiatives
ADDENDUM
In conducting its activities as an international company, Eni refers to the protection of human and labor rights, of safety and the environment, as well as to the system of values and principles concerning transparency and integrity, energy efficiency and sustainable development, as outlined by international institutions and conventions.
In this respect Eni reaffirms its commitment to operate within the framework of the United Nations Universal Declaration of Human Rights, the Fundamental Conventions of the ILO – International Labour Organization – and the OECD Guidelines on Multinational Enterprises, with particular reference to the areas concerning the protection of labor rights, freedom of association, the rejection of all forms of discrimination, forced and child labor, corruption, the safeguarding of dignity, health and safety at the workplace, the respect for natural biodiversities and the protection of the environment.
Moreover, Eni is committed to actively contribute to promoting the quality of life and the socio-economic development of the communities where the Group operates and to the development of their human resources and capabilities, while conducting its business activities in internal and external markets according to standards that are compatible with fair commercial practice.
All of Eni's activities are carried out in the awareness of the Social Responsibility that the Group has towards all of its stakeholders (employees, shareholders, customers, suppliers, communities, commercial and financial partners, institutions, industry associations, trade unions…), in the belief that the capacity for dialogue and interaction with civil society constitutes an important asset for the company.
Therefore, Eni is committed to spreading an awareness of its values and principles both within and outside the Group and to implementing adequate control procedures.
FOREWORDEni1 is an internationally oriented industrial group which, because of its size and the importance of its activities, plays a significant role in the marketplace and in the economic development and welfare of the
communities where it is present.individuals who work or collaborate with Eni
operates in many institutional, economic, political, socialandcultural environments in constant and rapid development. Eni’s activities must be performed in full respectofthe law, in fair competition, with honesty, integrity and good faith, with due respect for the legitimate interests of its customers, employees, shareholders, commercial and financial partners andthe communities where it is present.AllThe complexity of the situations in which Eni operates, the challenges of sustainable development and the need to take into consideration the interests of all people having a legitimate interest in the corporate business ("Stakeholders"), strengthen the importance to clearly define the values that Eni accepts, acknowledges and shares as well as the responsibilities it assumes, contributing to a better future for everybody.
For this reason the new Eni’s Code of Ethics ("Code" or "Code of Ethics") has been devised.
Compliance with the Code by Eni’s directors, statutory auditors, management and employees as well as by all those who
workoperate in Italy and abroad for achieving Eni’s objectives ("Eni’s People"), each within their own functions and responsibilities, is of paramount importance – also pursuant to legal and contractual provisions governing the relationship with Eni – for Eni’s efficiency, reliability and reputation, which are all crucial factors for its success and for improving the social situation in which Eni operates.Eni undertakes to promote knowledge of the Code among Eni’s People and the other Stakeholders, and to accept their constructive contribution to the Code’s principles and contents. Eni undertakes to take into consideration any suggestions and remarks of Stakeholders, with the objective of confirming or integrating the Code.
Eni carefully checks for compliance with the Code by providing suitable information, prevention and control tools and ensuring transparency in all transactions and behaviours by taking corrective measures if and as required.
The Watch Structure of each Eni company performs the functions of guarantor of the Code of Ethics ("Guarantor").
The Code is brought to the attention of every person or body having business relations with Eni.
(1) "Eni" means Eni SpA and its direct and indirect subsidiaries, in Italy and abroad. E-15
I. GENERAL PRINCIPLES: SUSTAINABILITY AND CORPORATE RESPONSIBILITY
Compliance with the law, regulations, statutory provisions, self-regulatory codes, ethical integrity and fairness, is a constant commitment and duty of all Eni’s People, and characterizes the conduct of Eni’s entire organization.
Eni’s business and corporate activities has to be carried out in a transparent, honest and fair way, in good faith, and in full compliance with competition protection rules.
Eni undertakes to maintain and strengthen a governance system in line with international best practice standards, able to deal with the complex situations in which Eni operates, and with the challenges to face for sustainable development.
Systematic methods for involving Stakeholders are adopted, fostering dialogue on sustainability and corporate responsibility.
In conducting both its activities as an international company and those with its partners, Eni stands up for the protection and promotion of human rights – inalienable and fundamental prerogatives of human beings and basis for the establishment of societies founded on principles of equality, solidarity, repudiation of war, and for the protection of civil and political rights, of social, economic and cultural rights and the so-called third generation rights (selfdetermination right, right to peace, right to development and protection of the environment).
Any form of discrimination, corruption, forced or child labor is rejected. Particular attention is paid to the acknowledgement and safeguarding of the dignity, freedom and equality of human beings, to protection of labor and of the freedom of trade union association, of health, safety, the environment and biodiversity, as well as the set of values and principles concerning transparency, energy efficiency and sustainable development, in accordance with International Institutions and Conventions.
In this respect Eni operates within the reference framework of the United Nations Universal Declaration of Human Rights, the Fundamental Conventions of the ILO – International Labor Organization – and the OECD Guidelines on Multinational Enterprises.
All Eni’s People, without any distinction or exception whatsoever,committed to respecting theserespect the principles and contents of the Code in their actions and behaviours while performing theirrolesfunctions and according to their responsibilities, because compliance with the Code is fundamental for the quality of their working andto making sure that others respect them.professional performance. Relationships among Eni’s People, at all levels, must be characterized by honesty, fairness, cooperation, loyalty and mutual respect.
Theconvictionbelief that one is acting in favor or to the advantage of Eni can never, in any way, justifyacts or behavior– not even in part – any behaviours that conflict withthese principles.
Due tothecomplexityprinciples and contents of thesituations in whichCode.II. BEHAVIOUR RULES AND RELATIONS WITH STAKEHOLDERS
1. ETHICS, TRANSPARENCY, FAIRNESS, PROFESSIONALISM
In conducting its business, Eni
operates, itisimportant to define clearlyinspired by and complies with thevalues that Eni accepts, acknowledges and shares as well as the responsibilities assumed by Eni inside and outside Eni itself. For this reason the present Code of Practice (hereinafter called the "Code") has been produced. Respect of the Code by every Eni employee is of paramount importance for the good functioning, reliability and reputation of Eni; all of which are crucial factors for its success.
Apart from fulfilling their general dutiesprinciples of loyalty, fairness, transparency, efficiency andthe performance of their labor contract in good faith, all Eni employees must refrain from acts that compete with Eni and they must respect company rules and comply with the Code; which compliance is also required under existing laws.2
Each employee is expected to have full knowledgean open market, regardless of theCode and to contribute actively to its implementation and to report any shortcomings. Eni undertakes to facilitate and promote knowledgeimportance level of theCode among its employeestransaction in question.
Any action, transaction andto accept their constructive contribution to the Code’s contents. Any behavior violating the letternegotiation performed and,the spirit of the Code will be punished according to the rules herein defined.
Eni will check compliance with the Code by providing suitable information, prevention and control instruments and it shall ensure transparency in all operations and conduct by taking corrective measures if and as required.
The Code shall be brought to the attention of every person or body having business relations with Eni.
(1)In the present Code "Eni" or "Group" mean Eni SpA and its subsidiaries as defined in Article 2359 of the Italian Civil Code as well as other subsidiaries as defined in Article 26 of Legislative Decree No. 127 of April 9, 1991.(2)"Article 2104. Diligence of workers. Workers are expected to render diligently the services expected from them according to the nature of such services, the interests of the company and the higher interests of national production. They must also comply with the rules for work execution and discipline as set down by their employers and the superiors to whom they report."
1. GENERAL PRINCIPLES
1.1 To whom the code applies
Moral integrity is a constant duty for any person working for Eni and characterizesgenerally, the conduct ofits entire organization.
The rules of the Code are applicable to each and every Eni employee without exception and to all those who work for the achievement ofEni’sobjectives.
Eni’s management has to comply with the rules of the Code in the presentation of projects, and in actions and investments aimed at increasing in the long-term the value of Eni assets, managerial capability, technology, the return on investment for shareholders, and the welfare of employees and the community at large.
Members of the Board of Directors must bear in mind the principles contained in the Code when determining corporate objectives.
Company managers must be the first to give concrete form to the values and principles contained in the Code, by assuming responsibility for them both inside and outside the Group, and by instilling trust, cohesion and a sense of team-work.
Eni employees shall not only respect existing applicable laws but they are also expected to adjust their actions and conduct so as to conform to the principles, objectives and commitments contemplated in the Code.
The general conduct and any action, operation and negotiation performed by Eni employeesPeople in the performance of their dutiesshall beis inspired by the highest principles of fairness, completeness and transparency of information and legitimacy, both in form and substance, as well asinclarity and truthfulnessinof all accountingmatters, as per existing anddocuments, in compliance with the applicable laws in force and internal regulations.
Eni shall actively and fully cooperate with public Authorities, through its employees.
Allin-house work shallEni’s activities have to be performed with the utmost care and professionalskill. Each employee must bring adequateskill, with the duty to provide skills and expertise adequate to thetasktasks assigned, andalwaysto act in a waythat shallcapable to protect Eni’s image and reputation.
Relationships between employees,Corporate objectives, as well as the proposal and implementation of projects, investments and actions, have to be aimed atall levels, must be characterized by fairness, cooperation, loyaltyimproving the company’s assets, management, technological andmutual respect.
In order to fully comply with the Code, each employee may refer not only to his or her superior but may also contact directly any internal body or office specifically designated for the purpose.
1.2 Duties of Eni
Through the establishment of specific internal bodies ("Guarantor" and "Committee for the Code of Practice"), Eni will:
•ensure the widest dissemination of the Code among its employees and partners;•provide for further analyses and updating of the Code as required to meet evolving circumstances and laws;•make available all the tools for understanding and clarifying the interpretation and the implementation of the Code;•arrange for a careful evaluation to be carried out on any instances where the Code may have been violated;•in the event of an acknowledged violation of the Code, it shall provide for an evaluation of the facts and, if necessary, the adoption of appropriate sanctions;•ensure that no one may suffer any retaliation whatsoever for having provided information regarding possible violations of the Code or related laws.
1.3 Duties of employees
All employees are expected to know the regulations containedinformation level in theCodelong term, andthe relevant rules governing activities performed in their respective functions.
Eni employees shall:
•refrain from all conduct contrary to such rules and regulations;•consult their superior, or the Guarantor, whenever clarifications concerning the implementation of said rules are needed;•immediately report to their superiors or to the Guarantor:•any fact that comes to their direct, or indirect, knowledge concerning a possible violation of such rules;•any request they receive to violate such rules;•cooperate with the relevant office or department in ascertaining any violations.
If, after notifying a supposed violation, an employee should deem that the issue has not been fully investigated or feels that he or she has been subject to retaliation, then the employee shall be entitled to make a complaint to the Committeeat creating value and welfare forthe Code of Practice.
Employees are not allowed to conduct personal investigations, nor to exchange information, except to their superiors, the Guarantor or the Committee for the Code of Practice.
1.4 Additional duties of managers
Each manager shall:
•act in a way that shall serve as an example of good conduct to his or her subordinates;•encourage employees to respect the Code and to raise relevant questions and issues relating to the Code;•act in such a way as to demonstrate to employees that respecting the Code is an essential aspect of the quality of their work;•in so far as it is possible, try to select employees and external collaborators in such a way that will prevent assignments being given to persons who cannot be relied upon to implement the Code;•immediately report the discovery of any possible deviations from the Code to a Senior Manager or to the Guarantor. Likewise, any information on possible deviations that is received from subordinates must also be passed on immediately to Senior Management;•immediately take corrective measures whenever necessary;•prevent any kind of retaliation.
1.5 Applicability of the code to third parties
In dealing with third parties, Eni employees shall:
•properly inform all third parties about the commitments and duties contained in the Code;•require the third parties to respect the obligations in the Code relevant to their activities;•adopt proper internal actions and, if the matter comes within the limits of the employee’s own responsibilities, also external actions, in the event that any third party should fail to comply with the Code.
1.6 Reference, implementation and control functions (guarantors)
Eni has established the function of "Guarantor of the Code of Practice" with the following proposes and once the office of the Guarantor has been established,allemployees must be made aware of its purpose and of how they themselves can communicate directly with it (by telephone, fax, e-mail, etc.):
•to establish criteria and procedure aimed at reducing the risk of violations of the Code;•to promote the publication of guidelines and operational procedures in cooperation with offices and departments responsible for their preparation;•to organize information and training programs for employees aimed at providing a better knowledge of the Code’s objectives;•to promote and monitor knowledge of the Code inside and outside Eni and its implementation;•to investigate reports of any violation by initiating proper inquiry procedures;•to inform the Personnel Department about the results of any inquiries for the adoption of any sanctions;•to inform the relevant departments of the results of any inquiries in relation to the taking any further actions;•to present the Chairman, in conjunction with the Committee for the Code of Practice, with proposals for the further dissemination and updating of the Code (the Chairman then reports these to the Board of Directors);•to initiate and then maintain a proper reporting and communication flow with similar departments and bodies in Eni subsidiaries;•to present the Chairman, in conjunction with the Committee for the Code of Practice, with a yearly report on the implementation of the Code inside Eni SpA and its subsidiaries (the Chairman then reports these to the Board of Directors).
In performing its duties, the Guarantor will be aided by the relevant structures within Eni SpA.
Eni has established the Committee for the Code of Practice to carry out the following assignments:
•to express an evaluation on the Guarantor’s proposals for the dissemination and updating of the Code;•to analyze the yearly report on the Code’s implementation and suggest to the Chairman, (who reports to the Board on such matters), appropriate actions to prevent any recurrences of violations;•to take action at the request of employees in the event of receiving reports that violations of the Code have not been properly dealt with or in the event of being informed of any retaliation against employees for having reported violations.
Similar structures will be created in all Eni Group companies.
The Eni SpA Guarantor coordinates the activities of the Guarantors in subsidiaries. After review by the Board of Directors of the respective sector head companies, a copy of the yearly report concerning each sector shall be presented to the Eni SpA Guarantor. The Eni SpA Guarantor shall also receive a copy of the yearly report of directly controlled companies not included in any sector.
1.7 Contractual value of the code
Respect of the Code’s rules is an essential part of the contractual obligations of Eni employees as per Article 2104 of the Italian Civil Code.
Any violation of the Code’s rules may be considered as a violation of primary obligations under labor relations or of the rules of discipline, and can entail the consequences provided for by law, including termination of the work contract and reimbursement of damages arising from any violation therefrom.
2. BUSINESS CONDUCT
In conducting its business Eni is inspired by the principles of fairness, loyalty, transparency, efficiency and an open market.
Eni employees, and external collaborators whose actions may somehow be referred to Eni, must act correctly when conducting business in Eni’s interest and in their relations with the Public Administration, irrespective of the market conditions and the importance of the business under negotiation.Stakeholders.
Bribes, illegitimatefavors,favours, collusion,pressures, either direct or through third parties,requestsoffor personal benefits for oneself or others, either directly or through third parties, areprohibited.
Eni acknowledges and respects the right of employees to take part in investments, businesses and other kinds of activities, provided that these are not related to the activities that such employees perform in the interests of Eni and provided that such activities are permitted by law and are compatible with the duties of being employees of Eni.
Inprohibited without anyevent, Eni employees shall avoid any situation and activity where a conflict of interest may arise or which can interfere with their ability to make impartial decisions in the best interests of Eni and in full accordance with the Code. Any situation that may constitute or give rise to a conflict of interest shall be immediately reported to one’s superiors. In particular, all Eni employees shall avoid conflicts of interest between personal and family economic activities and their tasks within their company. By way of example, conflicts of interest are determined by the following situations:
•economic and financial interest of employee and/or his family in activities of supplier, customer and competitor;•use of one’s position in the company, or of information acquired during one’s work, in such a way as to create a conflict between one’s personal interests and the interests of the company;•performing any type of work for suppliers, customers and competitors;•accepting money, favors or benefits from persons or firms that have, or intend to have, business relationships with Eni;•buying or selling of shares in Eni companies or in other corporations on the basis of important information not in the public domain and obtained because of one’s position at Eni. In any case, transactions in securities of Eni companies shall always be conducted with the utmost transparency and fairness with respect to the issuing company and its Group, as well as to investors and shall always be such as not to generate any expectations, alarm or errors in judgment in third parties.exception.
It is prohibited to pay or offer, directly or indirectly, money and material benefits and other advantages of any kind to third parties, whether representatives of governments, public officers and public servants or privateindividuals,employees, in order to influence or remunerate the actions of their office.Courtesy objects,
Commercial courtesy, such as smallpresentsgifts or forms of hospitality,gifts, areis only allowedonlywhentheits valueof such objectsis small and it does not compromise the integrity and reputation ofthe partnerseither party, and cannot be construed by an impartial observer as aimed at obtaining undue advantages. In any case, these expenses must always be authorized by the designated managers as per existing internal rules, and be accompanied by appropriate documentation.
Employees receiving presents
It is forbidden to accept money from individuals or companies that have or intend to have business relations with Eni. Anyone who receives proposals of gifts or special or hospitality treatment that cannot bedirectly related to normal courteous relations mustconsidered as commercial courtesy of small value, or requests therefore by third parties, shall reject them and immediately inform their superior, or the body they belong to, as well as the Guarantor.
Eni shall properly inform all third parties about the commitments and obligations provided for in the Code, require third parties to respect the principles of thefacts.
External collaborators (including consultants, representatives, agents, brokers etc.) are requiredCode relevant to their activities and take proper internal actions and, if the matter is within its own competence, external actions in the event that any third party should fail to comply with theCode’s principles. To this purpose,Code.E-16
2. RELATIONS WITH SHAREHOLDERS AND WITH THE MARKET
2.1.Value for shareholders, efficiency, transparency
The internal structure of Eni and the relations with the parties directly and indirectly taking part inaccordanceits activities are organized according to rules able to ensure management reliability and a fair balance between the management’s powers and the interests of shareholders and of the other Stakeholders in general as well as transparency and market traceability of management decisions and general corporate events which may considerably influence the market value of the financial instruments issued.
Within the framework of the initiatives aimed at maximizing the value for shareholders and at guaranteeing transparency of the management’s work, Eni defines, implements and progressively adjusts a coordinated and homogeneous set of behaviour rules concerning both its internal organizational structure and relations with shareholders and third parties, in compliance with the highest corporate governance standards at national and international level, based on the awareness that the company’s capacity to impose efficient and effective functioning rules upon itself is a fundamental tool for strengthening its reputation in terms of reliability and transparency as well as Stakeholders’ trust.
Eni deems it necessary that shareholders are enabled to participate in decisions which come within the limits of theirresponsibilities, employees shallcompetence and makesure that:informed choices. Therefore, Eni undertakes to ensure maximum transparency and timeliness of information communicated to shareholders and to the market – by means of the corporate internet site, too – in compliance with the laws and regulations applicable to listed companies. Moreover, Eni undertakes to keep in due consideration the legitimate remarks expressed by shareholders whenever they are entitled to do so.
•code principles and procedures are followed in the selection of external collaborators and in relationships with them;•only qualified and reputable persons and companies are selected;•all information relevant to the selection of particular external collaborators be taken into proper account regardless of the source of such information;•doubts on any supposed violation of the Code by external collaborators are immediately reported to one’s superior or the Guarantor;•an explicit commitment to respect the principles of the Code of Practice be included in contracts with outside collaborators.2.2. Self-Regulatory Code
The main corporate governance rules of Eni are contained in the Self-Regulatory Code of Eni SpA, adopted in compliance with the Code promoted by Borsa Italiana SpA, which is referred to herein as far as applicable.2.3. Company information
Eni ensures the correct management of company information, by means of suitable procedures for in-house management and communication to the outside.2.4. Privileged information
All Eni’s People are required, while performing the tasks entrusted to them, to properly manage privileged information such as to know and comply with corporate procedures referring to market abuse. Insider trading and any behaviour that may promote insider trading are expressly forbidden. In any case, theremunerationpurchase or sale of shares of Eni or of companies outside Eni shall always be based on absolute and transparent fairness.2.5. Media
Eni undertakes to provide outside parties with true, prompt, transparent and accurate information.
Relations with the media are exclusively dealt with by the departments and managers specifically appointed to do so; information to bepaid shallsupplied to media representatives, as well as the undertaking to provide such information, have to be agreed upon beforehand by Eni’s People with the relevant Eni Corporate structure.
3. RELATIONS WITH INSTITUTIONS, ASSOCIATIONS, LOCAL COMMUNITIESEni encourages dialogue with Institutions and with organized associations of civil society in all the countries where it operates.
3.1. Authorities and Public Institutions
Eni, through its People, actively and fully cooperates with Authorities.
Eni’s People, as well as external collaborators whose actions may somehow be referred to Eni, must have behaviours towards the Public Administration characterized by fairness, transparency and traceability. These relations have to be exclusivelycommensuratedealt with by the departments and individuals specifically appointed to do so, in compliance with approved plans and corporate procedures.
The departments of the subsidiaries concerned shall coordinate with theservicesrelevant Eni Corporate structure for assessing the quality of the interventions to berenderedcarried out anddescribedfor the sharing, implementing and monitoring of their actions.
It is forbidden to make, induce or encourage false statements to Authorities.3.2. Political organizations and trade unions
Eni does not make any direct or indirect contributions in whatever form to political parties, movements, committees, political organizations and trade unions, nor to their representatives and candidates, except those specifically contemplated by applicable laws and regulations.E-17
3.3. Development of local Communities
Eni is committed to actively contribute to promoting the quality of life, the socio-economic development of the communities where Eni operates and to the development of their human resources and capabilities, while conducting its business activities according to standards that are compatible with fair commercial practices.
Eni’s activities are carried out in thecontractawareness of the social responsibility that Eni has towards all of its Stakeholders andpayments shall be made onlyin particular the local communities in which it operates, in the belief that the capacity for dialogue and interaction with civil society constitutes an important asset for the company. Eni respects the cultural, economic and social rights of the local communities in which it operates and undertakes to contribute, as far as possible, to their exercise, with particular reference to thecontract partnerright to adequate nutrition, drinking water, the highest achievable level of physical andwithinmental health, decent dwellings, education, abstaining from actions that may hinder or prevent thecountry indicatedexercise of such rights.
Eni promotes transparency of the information addressed to local communities, with particular reference to the topics that they are most interested in. Forms of continuous and informed consultancy are either promoted, through the relevant Eni structures, in order to take into due consideration the legitimate expectations of local communities in conceiving and conducting corporate activities and in order to promote a proper redistribution of the profits deriving from such activities.
Eni, therefore, undertakes to promote the knowledge of its corporate values and principles, at every level of its organization, also through adequate control procedures, and to protect the rights of local communities, with particular reference to their culture, institutions, ties and life styles.
Within the framework of their respective responsibilities, Eni’s People are required to participate in thecontract.definition of single initiatives in compliance with Eni’s policies and intervention programs, to implement them according to criteria of absolute transparency and support them as an integral part of Eni’s objectives.3.4. Promotion of "non profit" activities
The philanthropic activity of Eni is in line with its vision and attention to sustainable development.
Therefore, Eni undertakes to foster and support, as well as to promote among its People, its "non profit" activities which demonstrate the company’s commitment to help meet the needs of those communities where it operates.
2.1 Relations with customers
4. RELATIONS WITH CUSTOMERS AND SUPPLIERS4.1 Customers and consumers
Eni pursues its business success on markets by offering quality products and services under competitive conditions while respecting the rules protecting fair competition.
Eniknowsundertakes to respect the right of consumers not to receive products harmful to their health and physical integrity and to get complete information on the products offered to them.
Eni acknowledges that the esteem of those requesting products or services is of primary importance for success in business. Business policies are aimed at ensuring the quality of goods and services, safety and compliance with the precautionary principle. Therefore,Eni employeesEni’s People shall:
• follow internalcomply with in-house proceduresonconcerning the management of relations withcustomers;customers and consumers;• provide,supply, withcourtesyefficiency andefficiency andcourtesy, within the limits setinby thecontracts, high qualitycontractual conditions, high-quality productsthat can meet or exceedmeeting thecustomers’reasonable expectations andneeds;needs of customers and consumers;• provide sufficientsupply accurate andaccurateexhaustive informationabout itson products and services and be truthful in advertisements or other kind of communication, so that customers and consumers cantake reasoned decisions;•be truthful in all advertising and communications.make informed decisions.
2.2 Relations4.2. Suppliers and external collaborators
Eni undertakes to look for suppliers and external collaborators withsupplierssuitable professionalism and committed to sharing the principles and contents of the Code and promotes the establishment of long-lasting relations for the progressive improvement of performances while protecting and promoting the principles and contents of the Code.
Inthe case ofrelationships regarding tenders, procurement and,contracts forgenerally, the supply of goods and/or services andservices, Eni employeesof external collaborations (including consultants, agents, etc.), Eni’s People shall:follow internal procedures concerning selection and relations with suppliers and external collaborators and abstain from excluding any supplier meeting requirements from bidding for Eni’s orders; adopt appropriate and objective selection methods, based on established, transparent criteria;
•follow internal procedures concerning selection and relations with suppliers;•abstain from the exclusion of suppliers that have the proper requirements to bid for Eni’s orders, by adopting appropriate and objective selection methods, based on established, transparent criteria;• secure the cooperation of suppliers and external collaborators in guaranteeing the continuous satisfaction of Eni’s customers and consumers, to an extent adequate to that legitimately expected by them, in terms of quality, costs and delivery times, to the extent expected by customers;times;• wheneveruse as much as possible, in compliance with the laws in force andin accordancethe criteria for legality of transactions withapplicable laws, make use ofrelated parties, products and services supplied byotherEniGroupcompanies at arm’s length and market conditions;• respect allstate in contracts the Code acknowledgement and the obligation to comply with the principles contained therein;• comply with, and demand compliance with, the conditions contained in contracts; • maintain a frank and open dialogue with suppliers and external collaborators in line with good commercial practice; •promptly inform Eni SpA’s Department for Industrial Planningsuperiors, andDevelopmentthe Guarantor, about anyserious problems that may arise with a particular supplier in order to evaluatepossible violations of thepossible consequences for Eni.Code;E-18
3. TRANSPARENCY OF ACCOUNTING AND INTERNAL CONTROLS
3.1 Accounting records
Accounting transparency is based oninform theuse of true, accurate and complete information for construing entries in the books of accounts. Each employee shall cooperaterelevant Eni Corporate structure about any serious problems that may arise with a particular supplier or external collaborator, in order tohave events properlyevaluate possible consequences for Eni.The remuneration to be paid shall be exclusively proportionate to the services to be rendered and
timely registereddescribed in thebookscontract and payments shall not be allowed to any party different from the contract party nor in a third Country different from the one ofaccounts.
For each transactiontheproper supporting evidenceparties or where the contract has to bemaintained in order to:
•facilitate registration of the accounting;•identify the different degrees of responsibilities;•provide an accurate representation of the transaction so as to avoid any errors in interpretation of the facts.
Each record shall reflect exactly what is shown by the supporting evidence. Each employee shall make sure, through accurate filing according to logical criteria, that the documentation can be easily traced.performed.
Eni employees who become aware
5. ENI’S MANAGEMENT, EMPLOYEES, COLLABORATORS5.1. Development and protection of
any omissions, misrepresentations, negligence in the accounting or in the documents on which accounting is based, shall bring the facts to the attention of his or her superior or to the Guarantor.
3.2 Internal controls
It is Eni’s policy to disseminate, at every level of its organization, a culture characterized by an awareness of the existence of controls and a control oriented mentality. A positive attitude towards control is to be achieved in order to increase its efficiency.
Internal controls are all those necessary or useful tools for addressing, managing and checking activities in the company; they aim at ensuring respect of corporate laws and procedures, protecting corporate assets, efficiently managing operations and providing precise and complete accounting information.
The responsibility for building an efficient internal control system rests on all levels of the organization; therefore all Eni employees, in their respective functions, are responsible for the definition and proper functioning of internal controls.
Within their areas of responsibility, managers shall be requested to become involved in the company’s system of internal controls and inform employees thereon. Each employee shall be held responsible for the corporate tangible and intangible assets relevant to his job. No employee can make, or let others make, improper use of assets and equipment belonging to Eni.
Internal Auditors and appointed external auditors shall have full access to all data, documents and information necessary to perform their audit activities.
4. PERSONNEL POLICIES
4.1Humanresources
Human resourcesResources
People are basic components in the company’s life. The dedication and professionalism of management and employees represent fundamental values and conditions forreachingachieving Eni’s objectives.
Eni is committed to developing the abilities and skills ofeach employeemanagement and employees so thathis or hertheir energy and creativity can have full expression for thefulfillmentfulfilment of theirpotential.potential in their working performance, such as to protect working conditions as regards both mental and physical health and dignity. Undue pressure or discomfort is not allowed, while appropriate working conditions promoting development of personality and professionalism are fostered.
Enioffersundertakes to offer, in full compliance with applicable legal and contractual provisions, equal opportunities to all its employees, making sure that each of them receives a fair statutory and wage treatment exclusively based on merit and expertise, without discrimination of any kind.AllCompetent departmentsthereforeshall:
• adopt in any situation criteria of merit and ability and professionalism(and anyhow strictly professional) in all decisions concerningemployees;human resources;• select, hire, train, compensate and manage employeeshuman resources without discrimination of any kind;• create a working environment where personal characteristics or beliefs do not give rise to discrimination.discrimination and which allows the serenity of all Eni’s People.Eni
considers the protection of working conditions and the protection of the mental and physical health of workers to be part of its entrepreneurial activity, while always respecting their moral personality and avoiding any undue pressures. To this end, any personal conduct considered to be offensive and liable to produce difficulties in relationships within the working environment will be given due consideration.
Eni expects all its employees,wishes that Eni’s People, at every level,tocooperate in maintaining a climate ofreciprocalcommon respect for a person’s dignity,honorhonour and reputation. Eni shall do its best to preventthe emergence ofattitudes that can be consideredoffensive.as offensive, discriminatory or abusive. In this regard, any behaviours outside the working place which are particularly offensive to public sensitivity are also deemed relevant.
In any case, any behaviours constituting physical or moral violence are forbidden without any exception.5.2. Knowledge Management
Eni promotes culture and the initiatives aimed at disseminating knowledge within its structures, and at pointing out the values, principles, behaviours and contributions in terms of innovation of professional families in connection with the development of business activities and to the company’s sustainable growth.
Eni undertakes to offer tools for interaction among the members of professional families, working groups and communities of practice, as well as for coordination and access to know-how, and shall promote initiatives for the growth, dissemination and systematization of knowledge relating to the core competences of its structures and aimed at defining a reference framework suitable for guaranteeing operating consistency.
All Eni’s People shall actively contribute to Knowledge Management as regards the activities that they are in charge of, in order to optimize the system for knowledge sharing and distribution among individuals.
4.2 Harassment5.3. Corporate security
Eni engages in theworkplacestudy, development and implementation of strategies, policies and operational plans aimed at preventing and overcoming any intentional or non-intentional behaviour which may cause direct or indirect damage to Eni’s People and/or to the tangible and intangible resources of the company. Preventive and defensive measures, aimed at minimizing the need for an active response – always in proportion to the attack – to threats to people and assets, are favored.
All Eni’s People shall actively contribute to maintaining an optimal corporate security standard, abstaining from unlawful or dangerous behaviours, and reporting any possible activities carried out by third parties to the detriment of Eni’s assets or human resources to superiors or to the body they belong to, as well as to the relevant Eni Corporate structure.
In any case requiring particular attention to personal safety, it is compulsory to strictly follow the indications in this regard supplied by Eni, abstaining from behaviours which may endanger one’s own safety or the safety of others, promptly reporting any danger for one’s own safety, or the safety of third parties, to one’s superior.5.4. Harassment or mobbing in the workplace
Eni supports any initiatives aimed at implementing working methods for the achievement of a better organization.
Eni demands that there shall be no harassment or mobbing behaviours in personal working relationships either inside or outside the company.Harassment is:Such behaviours are all forbidden, without exceptions, and are:
• the creation of an intimidating, hostile, isolating or isolatingin any case discriminatory environment for individual employees oratmosphere for one or more employee;groups of employees;• unjustified interference in the work performed by others; • the placing of obstacles in the way of the work prospects and expectations of others merely for reasons of personal competitiveness.competitiveness or because of other employees.
Eni does not tolerateE-19Any form of violence or harassment, either sexual harassment
by which it means:or harassment based on personal and cultural diversity, is forbidden. Such harassment is for instance:
• thesubordinatingofdecisions on someone’s working life to the acceptance of sexualattentions;attentions, or personal and cultural diversity;• proposalsobtaining sexual attentions using the influence of one’s role;• proposing private interpersonal relations which are repeateddespite the recipient’s explicit or reasonably cleardistaste and which, because of the specific situation, can put the recipient in a difficult situation because they entail direct consequences on the recipient’s work and career.distaste;alluding to disabilities and physical or psychic impairment, or to forms of cultural, religious or sexual diversity.
4.35.5. Abuse of alcohol or drugs
Eni demands that each employeeand no smoking
All Eni’s People shall personally contribute to promoting and maintaining agood work environmentclimate of common respect in the workplace; particular attention is paid to respect of the feelings of others.
Eni will therefore consider individualswho:
•who work under the effect of alcohol or drugs, or substances with similar effect, of alcohol or drug abuse;•make use of or give to others any drug or similar substance during work;
as being aware of the risk they bring to such environmental conditions,during the performance of their work activities and in theworkplace.workplace, as being aware of the risk they cause. Chronic addiction to such substances, when it affects work performance, shall be considered similar to the above mentioned events in terms of
thecontractualconsequences.consequences; Eni is committed to
favor thefavour social action in this field as provided for bycollective workemployment contracts.
It is forbidden to:
• hold, consume, offer or give for whatever reason, drugs or substances with similar effect, at work and in the workplace; • smoke in the workplace. Eni supports voluntary initiatives addressed to People to help them quit smoking and, in identifying possible smoking areas, shall take into particular consideration the condition of those suffering physical discomfort from exposure to smoke in the workplace shared with smokers and requesting to be protected from "passive smoking" in their place of work.
4.4 SmokingIII. TOOLS FOR IMPLEMENTING THE CODE OF ETHICS
Without prejudice1. SYSTEM OF INTERNAL CONTROLEni undertakes to promote and maintain an adequate system of internal control, i.e. all the necessary or useful tools for addressing, managing and checking activities in the company, aimed at ensuring compliance with corporate laws and procedures, at protecting corporate assets, efficiently managing activities and providing precise and complete accounting and financial information.
The responsibility for implementing an effective system of internal control is shared at every level of Eni’s organizational structure; therefore, all Eni’s People, according to their functions and responsibilities, shall define and actively participate in the correct functioning of the system of internal control.
Eni promotes the dissemination, at every level of its organization, of policies and procedures characterized by awareness of the existence of controls and by an informed and voluntary control oriented mentality; consequently, Eni’s management in the first place and all Eni’s People in any case shall contribute to and participate in Eni’s system of internal control and, with a positive attitude, involve its collaborators in this respect.
Each employee shall be held responsible for the corporate tangible and intangible assets relevant to his/her job. No employee can make, or let others make, improper use of assets and equipment belonging to Eni.
Any practices and attitudes linked to thegeneral prohibition on smoking in workplaces where this is dangerous and where such prohibition is indicated, Eni, in its normal workplaces, will pay particular attentionperpetration or to theconditionparticipation in the perpetration ofthose suffering physical discomfortfrauds are forbidden without any exception.
Control and supervisory bodies, Eni Internal Audit department and appointed auditing companies shall have full access to all data, documents and information necessary to perform their own relevant activities.1.1. Conflicts of interest
Eni acknowledges and respects the right of its People to take part in investments, business and other kinds of activities other than the activity performed in the interest of Eni, provided that such activities are permitted by law and are compatible with the obligations assumed towards Eni. The Self-Regulatory Code of Eni SpA governs any possible conflict of interest of directors and statutory auditors of Eni SpA.
Eni’s management and employees shall avoid and report any conflicts of interest between personal and family economic activities and their tasks within the company. In particular, everyone shall point out any specific situations and activities of economic or financial interest (owner or member) to them or, as far as they know, of economic or financial interest to relatives of theirs or relatives by marriage within the 2nd degree of kinship, or to persons actually living with them, also involving suppliers, customers, competitors, third parties, or the relevant controlling companies or subsidiaries, and shall point whether they perform corporate administration or control or management functions therein.
Moreover, conflicts of interest are determined by the following situations:use of one’s position in the company, or of information, or of business opportunities acquired during one’s work, to one’s undue benefit or to the undue benefit of third parties;E-20
the performing of any type of work for suppliers, sub-suppliers and competitors by employees and/or their relatives.In any case, Eni’s management and employees shall avoid any situation and activity where a conflict with the Company’s interests may arise, or which can interfere with their ability to make impartial decisions in the best interests of Eni and in full accordance with the principles and contents of the Code, or in general with their ability to fully comply with their functions and responsibilities. Any situation that may constitute or give rise to a conflict of interest shall be immediately reported to one’s superior within management, or to the body one belongs to, and to the Guarantor. Furthermore, the party concerned shall abstain from
exposuretaking part in the operational/decision-making process, and the relevant superior within management, or the relevant body, shall:
• identify the operational solutions suitable for ensuring, in the specific case, transparency and fairness of behaviours in the performance of activities; • transmit to the parties concerned – and for information to one’s superior, as well as to the Guarantor – the necessary written instructions; • file the received and transmitted documentation. 1.2.Transparency of accounting records
Accounting transparency is grounded on the use of true, accurate and complete information which form the basis for the entries in the books of accounts. Each member of company bodies, of management or employee shall cooperate, within their own field of competence, in order tosmokehave operational events properly andwho requesttimely registered in the books of accounts.
It is forbidden to behave in a way that may adversely affect transparency and traceability of the information within financial statements.
For each transaction, the proper supporting evidence has to beprotected from "passive smoke"maintained in order to allow:
• easy and punctual accounting entries; • identification of different levels of responsibility, as well as of task distribution and segregation; • accurate representation of the transaction so as to avoid the probability of any material or interpretative error. Each record shall reflect exactly what is shown by the supporting evidence. All Eni’s People shall cause that the documentation can be easily traced and filed according to logical criteria.
Eni’s People who become aware of any omissions, forgery, negligence in accounting or in the documents on which accounting is based, shall bring the facts to the attention of theirplace of work.superior, or to the body they belong to, and to the Guarantor.
5.
2. HEALTH, SAFETY, ENVIRONMENT ANDTHE ENVIRONMENTPUBLIC SAFETY PROTECTION
In itsEni’s activitiesEni is committed to contributing to the developmentshall be carried out in compliance with applicable worker health andwelfaresafety, environmental and public safety protection agreements, international standards and laws, regulations, administrative practices and national policies of thecommunitiesCountries where itoperates by pursuing the objective of ensuring the safety and health of its employees, external collaborators, customers and local communities that may be affected by Eni’s activities and to reducing the environmental impact of such activities.operates.
Eni actively contributes as appropriate to the promotion ofresearchscientific and technological development aimed at protecting the environment and natural resources.
Eni’s industrialThe operative management of such activitiesshall be performed in full accordance with all applicable laws on prevention and protection.
Operationsshall be carried out according to advanced criteria for the protection of the environment and energy efficiency, with the aim of creating better working conditions and protecting the health and safety ofemployees.
Research and technological development must be aimed in particular at promotingemployees as well as theuse of products and processes that are as environmental friendly as possible and characterized by an ever-greater attention being paid to the safety and health of employees.
Eni employees,environment.
Eni’s People shall, within their areas of responsibility, actively participate in the process of risk preventionandas well as environmental, public safety and health protectionand safety, that is infor themselves, theirown interestcolleagues andin the interest also ofthird parties.
3. RESEARCH, INNOVATION AND INTELLECTUAL PROPERTY PROTECTIONEni promotes research and innovation activities by management and employees, within their functions and responsibilities. Any intellectual assets generated by such activities are an important and fundamental heritage of Eni.
Research and innovation focus in particular on the promotion of products, tools, processes and behaviours supporting energy efficiency, reduction of environmental impact, attention to health and safety of employees, of customers and of the local communities where Eni operates, and in general sustainability of business activities.
Eni’s People shall actively contribute, within their functions and responsibilities, to managing intellectual property in order to allow its development, protection and enhancement.
6.
4. CONFIDENTIALITY4.1. Protection of business secret
Eni’s activities constantly require theconstantacquisition,storage, handling,storing, processing, communication anddiffusiondissemination ofnews,information, documents and other datarelevant toregarding negotiations, administrativeprocedures,proceedings, financial transactions, and know-how (contracts, deeds, reports, notes, studies, drawings,photographs, software),pictures, software, etc.) that may not be disclosed to the
Eni’s data bases may contain, among other things, personal data protected accordingE-21outside pursuant to
privacy laws, some of which cannot be made known outside Eni undercontractualobligations and some of which cannot be improperlyagreements, or whose inopportune or untimelydisclosed on risk of harmfuldisclosure may be detrimental to corporate interest.
Without prejudice to the transparency of the activities carried out and to the information obligations imposed by the provisions in force, Eni’sinterest.
EmployeesPeople shallguaranteeensure the confidentiality required by the circumstances for each piece ofall information acquired in the performancenews they have got to know of because of theirwork.working function.
Any information, knowledge and data acquired or processed during one’s work or because of one’s tasks at Eni, belong to Eni and may not be used, communicated or disclosed without specific authorization of one’s superior within management in compliance with specific procedures.4.2. Protection of privacy
Eni is committed to protecting information concerning itsemployeesPeople and third parties, whether generated or obtained inside Eni or in the conduct of Eni’s business, and to avoiding improper use of any such information.
Information, know-how
Eni intends to guarantee that processing of personal data within its structures respects fundamental rights and freedoms, as well as the dignity of the parties concerned, as contemplated by the legal provisions in force.
Personal datathat are acquired andmust be processedby employees during their work at Eni or because of their responsibilities, all belong to Eni and cannot be used, communicated to others or disclosed without specific authorization of one’s superior.
Without prejudice to the prohibition to disclose information concerning the organization and methods of production or to use such informationin a lawful and fair way and, in any case, the data collected and stored is only thatcouldwhich is necessary for certain, explicit and lawful purposes. Data shall beharmfulstored for a period of time no longer than necessary for the purposes of collection.
Eni undertakes moreover toEni, each Eni employeeadopt suitable preventive safety measures for all databases storing and keeping personal data, in order to avoid any risks of destruction and losses or of unauthorized access or unallowed processing.
Eni’s People shall:
• obtain and handleprocess only data that are necessary and adequate to the aims of their work andstrictly related to the tasks being performed;responsibilities;• obtain and handleprocess such data only within specifiedprocedures;•procedures, and store said data in a way that avoids non-authorized personsprevents unauthorized parties from having access to it;• disclose suchrepresent and order dataonly pursuant to specific procedures and/or subject to specificin a way ensuring that any party with access authorizationby one’s superiormay easily get an outline thereof which is as accurate, exhausting and truthful as possible;disclose such data pursuant to specific procedures or subject to the express authorization by their superior and, in any case, only after having checked that such data may be disclosed, also making reference to absolute or relative constraints concerning third parties bound to Eni by a relation of whatever nature and, if applicable, after having obtained their consent.4.3. Membership in associations, participation in initiatives, events or external meetings
Membership in associations, participation in initiatives, events or external meetings is supported by Eni if compatible with the working or professional activity provided. Membership and participation considered as such are:
• membership in any case, only after having checked that such data are available for disclosure;associations, participation in conferences, workshops, seminars, courses;• make sure that no relative or absolute constraint exists on the disclosuredrawing up ofinformation concerning third parties connected to Eni by any kind of relationship and, whenever necessary, ensure that their consent is obtained;•file said data in such a way that any person authorized to access them may do so with as much precision, clarity and truthfulness as possible.
7. EXTERNAL RELATIONS
7.1 Relations with public institutions
Relations with Public Institutions that are aimed at the protection of Eni’s interests and related to the implementation of Eni’s programs, are to be maintained only by departments and persons specifically appointed to do so.
Specific departments in the Eni Group companies shall coordinate their work with Eni SpA’s Department for Relations with Institutions in Italy, and in the European Union, so as to have a prior evaluation of the quality of the actions to be taken for sharing, for implementation and for monitoring.
Small presents and courtesy gifts to representatives of Governments, public officers and civil servants are allowed provided that they are limited in value and do not compromise the integrity or good name of either party nor be construed by impartial observers as aimed at obtaining undue advantages. In any case this kind of expense must be authorized by the person indicated in the procedures and must always be duly documented.
7.2 Relations with political organizations and trade unions
Eni does not give any direct or indirect contributions in whatever form to political parties, organizations, committees or trade unions, nor to their representatives and candidates, except those specifically contemplated by applicable laws and regulations.
7.3 Relations with the media
Information provided to outside parties shall be truthful and transparent.
In its communications with the media, Eni shall be presented in an accurate and uniform way. Relations with the media shall be maintained only by departments and managers specifically appointed to do so and all communications shall be agreed upon beforehand with the Eni Unit responsible for Relations with the Media.
Eni employees may not give information to media representatives nor engage in providing any such information unless they are duly authorized by the relevant Eni departments.
Eni employees are never entitled to offer payments, gifts or other benefits aimed at influencing the professional activity of media representatives or that could reasonably be construed as an attempt to do so.
7.4 Presentation of Eni objectives, activities, results and points of view
Eni employees who are required to present information to the public concerning the objectives, activities, results and opinions of Eni on such occasions as:
•congresses, meetings and seminars;•essays,articles, papers and publications in general;• participation toin publicevents;events in general.
must be authorized byIn this regard, Eni’s management and employees in charge of illustrating, or providing to thehighest organizational authorityoutside data or news concerning Eni’s objectives, aims, results and points of view, shall not only comply with corporate procedures relating to market abuse, but also obtain the necessary authorization from their superior withintheir own departmentmanagement forall that relates to texts, lectures andthe lines of actionwhich they intendtomake public;follow andthey must alsothe texts as well as reports drawn up, such as to agreebeforehand with Eni SpA’s Unit for Relationson contents with theMediarelevant Eni Corporate structure.IV. CODE OF ETHICS SCOPE OF APPLICATION AND REFERENCE STRUCTURES
The principles and contents of the Code apply to Eni’s People and activities.
Any listed subsidiaries and power & gas sector subsidiaries subject to unbundling shall receive the Code and adopt it, adjusting it – if necessary – to the characteristics of their company, consistently with their management independence.
The representatives indicated by Eni in the company bodies of partially owned companies, in consortia and in joint ventures shall promote the principles and contents of the Code within their own respective areas of competence.
Directors and management must be the first to give concrete form to the principles and contents of the Code, by assuming responsibility for them both towards the inside and the outside and by enhancing trust, cohesion and a sense of team-work, as well as providing a behaviour model for their collaborators in order to have them comply with the Code and make questions and suggestions on specific provisions.
To achieve full compliance with the Code, each of Eni’s People may even apply directly to the Guarantor.
1. OBLIGATION TO KNOW THE CODE AND TO REPORT ANY POSSIBLE VIOLATION THEREOFEach of Eni’s People is expected to know the principles and contents of the Code as well as the reference procedures governing own functions and responsibilities.
Each of Eni’s People shall:refrain from all conduct contrary to such principles, contents and procedures;E-22
• carefully select, as long as within their field of competence, their collaborators, and have them fully comply with the Code; • require any third parties having relations with Eni to confirm that they know the Code; • immediately report to their superiors or the body they belong to, and to the Guarantor, any remarks of theirs or information supplied by Stakeholders concerning a possible violation or any request to violate the Code; reports of possible violations shall be sent in compliance with conditions provided for by the specific procedures established by the Board of Statutory Auditors and by the Watch Structure of Eni SpA; • cooperate with the Guarantor and with the relevant departments according to the applicable specific procedures in ascertaining any violations; • adopt prompt corrective measures whenever necessary, and in any case prevent any type of retaliation. Eni’s People are not allowed to conduct personal investigations, nor to exchange information, except to their superiors, or to the body that they belong to, and to the Guarantor. If, after notifying a supposed violation any of Eni’s People feels that he or she has been subject to retaliation, then he or she may directly apply to the Guarantor.
2. REFERENCE STRUCTURES AND SUPERVISIONEni is committed to ensuring, even through the Guarantor’s appointment:
• the widest dissemination of the principles and contents of the Code among Eni’s People and the other Stakeholders, providing any possible tools for understanding and clarifying the interpretation and the implementation of the Code, as well as for updating the Code as required to meet evolving civil sensibility and relevant laws; • the execution of checks on any notice of violation of the Code principles and contents or of reference procedures; an objective evaluation of the facts and, if necessary, the adoption of appropriate sanctions; that no one may suffer any retaliation whatsoever for having provided information regarding possible violations of the Code or of reference procedures. 2.1. Guarantor of the Code of Ethics
The Code of Ethics is, among other things, a compulsory general principle of the Organizational, Management and Control Model adopted by Eni SpA according to the Italian provision on theactual content"administrative liability oftheir presentations.legal entities deriving from offences" contained in Legislative Decree No. 231 of June 8, 2001.
Eni SpA assigns the functions of Guarantor to the Watch Structure established pursuant to the above mentioned Model. Each direct or indirect subsidiary, in Italy and abroad, entrusts the function of Guarantor to its own Watch Structure by formal deed of the relevant corporate body.
The Guarantor is entrusted with the task of:
• promoting the implementation of the Code and the issue of reference procedures; reporting and proposing to the CEO of the company the useful initiatives for a greater dissemination and knowledge of the Code, also in order to prevent any recurrences of violations; • promoting specific communication and training programs for Eni’s management and employees; • investigating reports of any violation of the Code by initiating proper inquiry procedures; taking action at the request of Eni’s People in the event of receiving reports that violations of the Code have not been properly dealt with or in the event of being informed of any retaliation against Eni’s people for having reported violations; • notifying relevant structures of the results of investigations relevant to the adoption of possible penalties; informing the relevant line/area structures about the results of investigations relevant to the adoption of the necessary measures. Moreover, the Guarantor of Eni SpA submits to the Internal Control Committee and to the Board of Statutory Auditors as well as to the Chairman and to the Chief Executive Officer, which report about it to the Board of Directors, a six-monthly report on the implementation and possible need for updating the Code.
For the performance of its tasks, the Guarantor of Eni SpA avails itself of "Technical Secretariat of the Watch Structure 231 of Eni SpA" that reports thereto and is supported by the relevant Structures of Eni SpA. The Technical Secretariat is responsible for starting and maintaining an adequate reporting and communication flow to and from the Guarantors of subsidiaries.
Each information flow is to be sent to the following email address:
organismo_di_vigilanza@eni.it2.2. Code Promotion Team
The Code is made available to Eni’s People in compliance with applicable standards, and is also available on the internet and intranet sites of Eni SpA and of subsidiaries.
In order to promote the knowledge and facilitate the implementation of the Code, a Code Promotion Team reporting to the Guarantor of Eni SpA has been established. The Team makes available within Eni all possible tools for understanding and clarifying the interpretation and the implementation of the Code.
The members of the Team are chosen by the Chief Executive Officer of Eni SpA upon proposal of the Guarantor of Eni SpA.E-23
3. CODE REVIEW
The Code review is approved by the Board of Directors of Eni SpA, upon proposal of the Chief Executive Officer with the agreement of the Chairman, after hearing the opinion of the Board of Statutory Auditors.
The proposal is made taking into consideration the Stakeholders’ evaluation with reference to the principles and contents of the Code, promoting active contribution and notification of possible deficiencies by Stakeholders themselves.
4. CONTRACTUAL VALUE OF THE CODERespect of the Code’s rules is an essential part of the contractual obligations of all Eni’s People pursuant to and in accordance with applicable law.
Any violation of the Code’s principles and contents may be considered as a violation of primary obligations under labour relations or of the rules of discipline and can entail the consequences provided for by law, including termination of the work contract and compensation for damages arising out of any violation.
7.5 "Non profit" initiatives
Eni supports "non profit" activities as evidence of its commitment to help meet the needs of those communities where it operates.
Within the framework their respective responsibilities, Eni employees shall participate in the definition of such single initiatives in full respect of Eni’s policies and programs, and they shall implement them according to criteria of absolute transparency and shall support them as an integral part of Eni’s objectives.
E-24
Certifications as separate documents filed as exhibits
EXHIBIT 12.1
Certification
I, Paolo Scaroni, certify that:
1. I have reviewed this annual report on Form 20-F of Eni SpA;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. Date:
June 21, 2006May 14, 2009
/s/PAOLO SCARONI
Paolo Scaroni
Title: Chief Executive Officer
E-25
EXHIBIT 12.2
Certification
I,
Marco Mangiagalli,Alessandro Bernini, certify that:
1. I have reviewed this annual report on Form 20-F of Eni SpA;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. Date:
June 21, 2006May 14, 2009
/s/ MARCO MANGIAGALLIALESSANDRO BERNINIMarco MangiagalliAlessandro Bernini
Title: Chief Financial OfficerE-26
EXHIBIT 13.1
Certification Pursuant to 18 U.S.C. Section 1350
For purposes of 18 U.S.C. Section 1350, the undersigned officer of Eni SpA, a company incorporated under the laws of Italy (the "Company"), hereby certifies, to such officer’s knowledge, that:
(i) the Annual Report on Form 20-F of the Company for the year ended December 31,
20052008 (the "Report") fully complies with the requirements of section 13(a) or 15(d) as applicable, of the Securities Exchange Act of 1934; and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
June 21, 2006May 14, 2009
/s/PAOLO SCARONI
Paolo Scaroni
Title: Chief Executive Officer
The foregoing certification is not deemed filed for purpose of Section 18 of the Exchange Act and not incorporated by reference with any filing under the Securities Act.
E-27
EXHIBIT 13.2
Certification Pursuant to 18 U.S.C. Section 1350
For purposes of 18 U.S.C. Section 1350, the undersigned officer of Eni SpA, a company incorporated under the laws of Italy (the "Company"), hereby certifies, to such officer’s knowledge, that:
(i) the Annual Report on Form 20-F of the Company for the year ended December 31,
20052008 (the "Report") fully complies with the requirements of section 13(a) or 15(d) as applicable, of the Securities Exchange Act of 1934; and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
June 21, 2006May 14, 2009
/s/ MARCO MANGIAGALLIALESSANDRO BERNINIMarco MangiagalliAlessandro Bernini
Title: Chief Financial Officer
The foregoing certification is not deemed filed for purpose of Section 18 of the Exchange Act and not incorporated by reference with any filing under the Securities Act.
E-28
Footnotes Item 1-15
(1)For a definition of margin see "Glossary".(2)From 1991 to 2002 DeGolyer and MacNaughton, from 2003 also Ryder Scott.(3)In PSAs the national oil company awards the execution of exploration and production activities to the international oil company (contractor). The contractor bears the mineral and financial risk of the initiative and, when successful, recovers capital expenditure and costs incurred in the year (cost oil) by means of a share of production. This production share varies along with international oil prices. In certain PSAs changes in international oil prices affect also the share of production to which the contractor is entitled in order to remunerate its capital invested (profit oil) after costs incurred are repaid by cost oil. A similar scheme applies to buy-back contracts.(4)Of these, 5 are owned through affiliates for initiatives in Saudi Arabia, Russia and Spain.(5)Of these 27,422 square kilometers are owned through affiliates for initiatives in Saudi Arabia, Russia and Spain.(6)Two of these are not yet operational.(7)In accordance with Article 19, paragraph 4 of Legislative Decree No. 164/2000, the volumes of natural gas consumed in operations by a company or its subsidiaries are excluded from the calculation of ceilings for sales to end customers and from volumes input into the Italian network to be sold in Italy.(8)Article 11 of Legislative Decree No. 79/1999 concerning the opening up of the Italian electricity market obliges importers and producers of electricity from non renewable sources to input into the national electricity system a share of electricity produced from renewable sources set at 2% of electricity imported or produced from non renewable sources exceeding 100 gigawatts. Calculations are made on total amounts net of co-generation and own consumption. This obligation can be met also by purchasing volumes or rights from other producers employing renewable sources (the so called green certificates) to cover all or part of such 2% share. Legislative Decree No. 387/2003 established that from 2004 to 2006 the minimum amount of electricity from renewable sources to be input in the grid in the following year be increased by 0.35% per year. The Minister of Productive Activities, with decrees issued in consent with the Minister of the Environment, will define further increases for the 2007-2009 and 2010-2012 periods.(9)The Refining & Marketing segment purchased approximately 70% of the Exploration & Production segment’s oil and condensate production and resold on the market those crudes and condensates that are not suited to processing in its own refineries due to their characteristics or geographic area.(10)This definition applies to the term margin whenever used in Item 5.(11)Excluding loans directed to specific capital expenditure projects in the Exploration & Production and Gas & Power segments, whose financial charges are recognized as an increase of the relevant capital goods.(12)Corresponding to euro 0.90 per share or $2.17 per ADS converted at the Noon Buying Rate of 1 euro = 1.2054 U.S. dollar as at the payment date of June 23, 2005.(13)Corresponding to euro 0.45 per share or $1.09 per ADS converted at the Noon Buying Rate of 1 euro = 1.2148 U.S. dollar as at the payment date of October 27, 2005.(14)Corresponding to euro 0.75 per share or $1.83 per ADS converted at the Noon Buying Rate of 1 euro = 1.217 U.S. dollar as at the payment date of June 24, 2004.(15)Does not include listed subsidiaries, which have their own stock grant and stock option plans.(16)Does not include listed subsidiaries, which have their own stock grant and stock option plans.
Footnotes F pages
(1)Under the requirements of paragraph 5 of "Preface to International Financial Reporting Standards", IFRS (International Financial Reporting Standards) represent the principles and the interpretations adopted by the International Accounting Standards Board (IASB), former International Accounting Standards Committee (IASC) and include: (i) International Financial Reporting Standards (IFRS); (ii) International Accounting Standards (IAS); (iii) the interpretations issued by International Financial Reporting Interpretation Committee (IFRIC) and by Standing Interpretation Committee (SIC) adopted by IASB. The name International Financial Reporting Standards (IFRS) has been adopted by IASB for the principles issued afterwards May 2003.(2)Taking into account the later conferral of assets to Eni’s subsidiary Snam Rete Gas SpA, the timing difference was considered analogous to that deriving from the cancellation of intra-group profits; under Italian GAAP the adopted 19% rate is equal to taxes paid by the conferring entity, not to the taxes recoverable by the receiving entity, Snam Rete Gas SpA.(3)"Reversal" means the effect taken to profit or loss of deferred tax assets and liabilities entered in previous years following the effect of the annulment of the temporary difference which generated them.(4)In particular article 1 paragraph 61 states: "holders of natural gas underground storage concessions are entitled to no more than two renewals, each lasting ten years, on condition that such persons carry out storage programs and all other obligations arising from the concession". Previous Law No. 170/1970 stated: "concessions can be renewed for ten years periods".(5)Of which euro 30 million concern gas stored, recorded in fixed assets.(6)Given the uncertainties related to their payment date, employee termination indemnities are considered as a defined benefit plan.(7)Actuarial assumptions concern, among other things, the following variables: (i) level of future salaries; (ii) death rates of employees; (iii) turn-over rate of employees; (iv) share of participants with successors entitled to benefits (e.g. spouses and children); (v) for medical assistance plans, frequency of requests for reimbursement and future changes in medical costs; and (vi) interest rates.(8)According to the requirements of the framework of international accounting standards, information is material if its omission or misstatement could influence the economic decisions that users make on the basis of the financial statements.(9)Recognition and evaluation criteria of exploration and production activities are described in the section "Exploration and production activities" below.(10)International accounting principles do not establish specific criteria for hydrocarbon exploration and production activities. Eni continues to use the existing accounting policies for exploration and evaluation assets previously applied before the introduction of IFRS, as permitted by IFRS 6 "Exploration for and evaluation of mineral resources".(11)Given the uncertainties related to their payment date, employees termination indemnities are considered as a defined benefit plan.(12)Actuarial assumptions relate to, inter alia, the following variables: (i) future salary levels; (ii) the mortality rate of employees; (iii) personnel turnover; (iv) the percentage of plan participants with dependents who are eligible to receive benefits (e.g. spouses and dependent children); (v) for medical plans, the frequency of claims and future medical costs; and (vi) interest rates.(13)For stock grants, the period between the date of the award and the date of assignation of stock; for stock options, period between the date of the award and the date on which the option can be exercised.(14)Does not include listed subsidiaries, which have their own stock grant plans.(15)Does not include listed subsidiaries, which have their own stock grant plans.(16)There are no material differences between the accounting principles approved by the European Commission and the ones issued by IASB in respect of these Financial Statements.(17)Eni adopted the requirements of SEC which permit to the companies that apply IFRS accounting principles to include comparative figures of one prior period.(18)From 1991 to 2002 DeGolyer and MacNaughton, from 2003 also Ryder Scott Company.