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E Eni Spa

Filed: 3 Sep 21, 7:58am

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

 

 

Form 6-K

 

 

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

 

For the month of August 2021

 

 

Eni S.p.A.

(Exact name of Registrant as specified in its charter)

 

 

Piazzale Enrico Mattei 1 -- 00144 Rome, Italy

(Address of principal executive offices)

 

_________________________

 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

 

Form 20-F x  Form 40-F ¨

_________________________

 

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2b under the Securities Exchange Act of 1934.)

 

Yes ¨  No x

 

(If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): )

 

 

 

 

 

 

Table of contents

 

·Interim Consolidated Report as of June 30, 2021

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorised.

 

 

 

 Eni S.p.A.
  
 /s/ Paola Mariani
 Name:Paola Mariani
 Title:Head of Corporate
  Secretary’s Staff Office  

 

Date: August 31, 2021

 

 

 

 

 

 

 

Mission
  
  
 We are an energy company.
 We concretely support a just energy transition,
with the objective of preserving our planet

and promoting an efficient and sustainable access to energy for all.

 

Our work is based on passion and innovation,

 

on our unique strengths and skills,

on the equal dignity of each person,
recognizing diversity as a key value for human development,
on the responsibility, integrity and transparency of our actions.
We believe in the value of long-term partnerships with the Countries
and communities where we operate, bringing long-lasting prosperity for all.

 

 

The mission represents more explicitly the Eni's path to face the global challenges, contributing to achieve the SDGs determined by the UN in order to clearly address the actions to be implemented by all the involved players.

  
  
 

Global goals for a sustainable development

 

The 2030 Agenda for Sustainable Development, presented in September 2015, identifies the 17 Sustainable Development Goals (SDGs) which represent the common targets of sustainable development on the current complex social problems. These goals are an important reference for the international community and Eni in managing activities in those Countries in which it operates.

  
 

 

 

 

 

Interim Consolidated Report as of June 30, 2021 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer

 

This report contains certain forward-looking statements in particular under the section “Outlook”, regarding capital expenditure, development and management of oil and gas resources, dividends, share buy-back, allocation of future cash flow from operations, future operating performance, gearing, targets of production and sales growth, new markets, and the progress and timing of projects. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results may differ from those expressed in such statements, depending on a variety of factors, including the impact of the pandemia disease, the timing of bringing new fields on stream; management’s ability in carrying out industrial plans and in succeeding in commercial transactions; future levels of industry product supply; demand and pricing; operational problems; general economic conditions; political stability and economic growth in relevant areas of the world; changes in laws and governmental regulations; development and use of new technology; changes in public expectations and other changes in business conditions; the actions of competitors and other factors discussed elsewhere in this document.

“Eni” means the parent company Eni SpA and its consolidated subsidiaries.

For the Glossary see website eni.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Interim Consolidated Report
  
4Highlights
8

Key operating and financial results

 Operating review
10Exploration & Production
12Global Gas & LNG Portfolio
14Refining & Marketing and Chemicals
17Eni gas e luce, Power & Renewables
Financial review and other information
20Financial review
41Risk factors and uncertainties
58Outlook
59Other information
  
 Condensed consolidated interim financial statements
  
62Financial statements
68

Notes to the condensed consolidated interim financial statements

  
107Management’s certification
108Report of Independent Auditors
  
 Annex
  
110

List of companies owned by Eni SpA
as of June 30, 2021

144

Changes in the scope of consolidation
for the first half of 2021

 

 

 

4HIGHLIGHTS

 

Highlights

 

| Financial performance

 

·Eni’s first half 2021 results were recorded on the back of a strong performance of all commodities: the Brent crude oil price increased from 40 $/bbl in the first half 2020 to an average of 65 $/bbl in the first six months of 2021; natural gas spot prices in Europe more than doubled; in the chemical sector the polyethylene-ethylene spread reached the highest value since 2015 to about 800 $/ton. On the negative side, the refining margins were extremely weak in the European/Mediterranean region, with the Eni benchmark margin SERM down to historic lows (-0.5 $/bbl on average in the first half 2021). This was due to continuing pandemic effects, which on one side with the gradual easing of OPEC+ production quotas supported the cost of the oil feedstock, while on the other side negatively affected demand for products, particularly middle distillates. In the wholesale gas business, spreads between the Italian PSV spot market and the spot prices at the "TTF" continental hub narrowed remarkably down to 2 €/kcm in the first half from 17 €/kcm in the first half 2020.

 

·Strong recovery in Group adjusted EBIT: €3.4 billion in the first half; up by €2.5 billion y-o-y. The Group result was driven by:

 

-a robust performance in the E&P segment, which reported €3.2 billion of EBIT, €3 billion higher than 2020, thanks to a better pricing environment and lower expenses, despite 110 kboe/d less hydrocarbon production due to seasonal maintenance activities. The half year result also benefitted from retroactive contractual revisions;

 

-the Chemical segment, which reported its best ever result with EBIT of €241 million (up by €372 million) due to an improved macro backdrop, higher products margins and higher production availability, allowing the segment to capture a rebound in demand, in addition to a contribution from the green chemical business;

 

-resilient results from the Eni gas e luce & Renewables business, which earned €247 million of EBIT (up by €74 million) benefitting from effective marketing activities, a growing customer base and better margins.

 

The other Eni’s segments which have lagged the recovery so far have nonetheless seen their trends improving during the first half:

 

-the GGP business reported a loss of €6 million (compared to a profit of €363 million in the first half of 2020) due to the reduction of gas spreads (PSV vs. TTF) and one-off gains in 2020 due to portfolio optimizations, partly offset by the benefits of contract renegotiations;

 

-the R&M business reported a loss to €171 million compared to a profit of €220 million of the same period of the previous year, mainly in the refining business, due to the long-lasting effects of COVID-19 leading to suppressed margins, as well as higher expenses for the purchase of emission allowances.

 

·Adjusted net profit back to pre-COVID levels: €1.20 billion in the first half of 2021 (up by €1.9 billion) from a loss of €0.66 million in the first half of 2020, due to a better operating performance and the normalization of the tax rate (it was 58% in the first half of 2021) due to an improved oil price scenario and an increased profitability outlook of the green activities in Italy.

 

·Cash flow from operations before changes in working capital at replacement cost: in the first half of 2021, the Group generated €4.76 billion of cash flow, which after funding €2.91 billion of net capex (unchanged y-o-y) left a free cash flow before working capital of €1.82 billion.

 

·Portfolio: net investment of about €0.87 billion, including net borrowings of acquired entities, fully deployed to accelerate growth in the green businesses.

 

·Net borrowings ante IFRS 16: €10 billion, down by €1.5 billion vs. December 31, 2020. Leverage lowered to 0.25 (vs. 0.31 as of December 31, 2020).

 

 

 HIGHLIGHTS5

 

|Eni’s shareholders remuneration

 

·Having reviewed the fundamentals of the energy scenario and the prospects of the oil market, Eni’s Board of Directors resolved to define a Brent reference scenario of 65 $/bbl. Based on the shareholders’ remuneration policy approved on February 18, 2021, this means:

 

-an annual dividend of €0.86/sh. for the fiscal year 20211, representing an increase of more than 100% from 2020 recovering the pre-COVID level;

 

-the start of a buy-back program of €400 million2.

 

·As announced by the proxy conferred by the Shareholders Meeting held on May 12, 2021, the Board of Directors approved the distribution of 50% of the expected dividend, equal to €0.43/sh., as 2021 interim dividend to be paid in September3. This distribution is planned to be made from the retained earnings and other available capital reserves of the parent company Eni SpA.

 

|Operating performance

 

·Hydrocarbon production: 1.65 million boe/d, down by approximately 6% net of price effects compared to the same period of 2020. This change was due to greater maintenance activity (in Norway, Italy and the UK), which in the first half of 2020 was postponed, and due to lower activity in Nigeria and mature fields decline. Robust growth in Egypt driven by the performance of the Zohr gas field and in Indonesia with the Merakes start-up.

 

·In the first half of 2021, start-ups and ramp-ups added 50 kboe/d mainly due to Merakes in Indonesia that achieved the first gas in April, Berkine in Algeria, Agogo in Angola, and the Mahani gas project in the Sharjah Emirate (UAE).

 

·In the first half discovered 320 mmboe of explorative resources, more than 60% of the yearly target, with short time-to-market, leveraging the strategy focused on acreage close to existing infrastructures (infrastructure-led-exploration). Renewed the exploration portfolio with the addition of approximately 13,000 square kilometers of new leases in the UAE, Vietnam, the UK and Norway.

 

·Growth of the retail and business customers portfolio to 9.95 million of PoD, up by 250,000 PoD compared to December 31, 2020 (up by about 3%) leveraging the organic development in France and Greece and the 100% acquisition of Aldro Energía, engaged in the retail market in Spain.

 

·As of June 30, 2021, the renewable installed capacity was 331 MW, up by 8% compared to December 31, 2020. 2 GW of installed or under construction capacity is expected at year end, a strong increase over the previous target of approximately 1 GW. Leveraging the last acquisitions, the installed capacity is expected at 1.2 GW at year-end, up from an initial forecast of 0.7 GW.

 

Portfolio developments:

 

·In line with the rationalization program of Eni’s upstream portfolio, signed a memorandum of understanding with bp to evaluate the combination of the respective upstream portfolios in Angola, establishing a jointly-controlled venture based on the Vår Energi business model.

In Pakistan divested to a local player the entire upstream portfolio in the Country, including interests in eight development and production licenses and in four exploration licenses. In Nigeria divested the onshore production and development block OML 17 (Eni’s interest 5%).

 

 

1 In line with the dividend policy announced to the financial market during the strategy presentation held on February 19, 2021, (see page 31) of which at the following URL https://eni.com/assets/documents/eng/investor/presentations/2021/strategy-4q-2020/strategy-2021-2024.pdf.

2 The procedure to implement the buy-back program are detailed in the section “Other information – start of the buy-back program” of this Report.

3 Ex-dividend date being September 20, 2021 (record date September 21, 2021). The dividend will be paid on September 22, 2021. The Board of Directors resolved to distribute part of retained earnings and/or available capital reserves of the parent company Eni SpA as 2021 interim dividend in place of the resolution of the 2021 interim dividend, in accordance to Art. 2433 – bis c.c., scheduled in Eni’s financial calendar on September 16, 2021. The Company’s financial calendar has been amended accordingly and a dedicated press release has been disseminated to the market. ADR holders will receive €0.86/ADR.

 

 

6HIGHLIGHTS 

 

·In the GGP segment, in March 2021, it was agreed with the Arab Republic of Egypt (ARE) and the Spanish partner Naturgy of the JV Unión Fenosa Gas (UFG) to resolve all pending issues with the Egyptian partners and to resume operations at the Damietta plant. Through the subsequent restructuring of the UFG venture, Eni acquired a 50% interest in the Damietta plant and related liquefaction capacity as well as the gas marketing activities in Spain owned by UFG. The deal will strengthen Eni’s portfolio of LNG and its integrated strategy, leveraging on the integration with its upstream assets. Restarted the Damietta liquefaction plant and made few LNG loadings, leveraging on the capacity available to the Egyptian counterparty.

 

·Eni gas e luce entered the Iberic energy market with the signing of an agreement to acquire 100% of Aldro Energía, with a portfolio of approximately 250,000 retail customers of power, natural gas and services, and an agreement with X–Elio for the acquisition of three photovoltaic projects for an overall capacity of 140 MW.

 

·Established GreenIT, a joint venture with the Italian agency CDP Equity, for building, commissioning and managing power generation plants from renewable sources in Italy. The JV will target by 2025 an installed capacity of approximately 1 GW (51% Eni, 49% CDP Equity).

 

·The acquisition of FRI-EL Biogas Holding, the Italian leader in the biogas producing sector has now been completed, in order to transform biogas into biomethane to be supplied to the Eni’s retail service stations.

 

·Signed an agreement in Italy with Glennmont Partners and PGGM Infrastructure Fund to acquire 100% of a portfolio of thirteen onshore wind facilities already in operation, with a total capacity of 315 MW.

 

·Established an equal partnership with Red Rock Power, a leading Scottish company in the development of offshore wind projects, with the aim of presenting a competitive offer in Scotwind, the tender for wind power in Scotland and for further future projects. The two companies will also benefit from the support of Transmission Investment, a company engaged in the field of electricity transmission in the UK.

 

·In July 2021, signed an agreement for the acquisition from Azora Capital of a portfolio of nine renewable energy projects in Spain, for a total capacity of 1.2 GW. The operation includes the acquisition of three wind plants in development, one wind plant under construction, in the centre-north area of Spain, for a total of 230 MW, as well as, five large photovoltaic projects in an advanced stage of development for approximately 1 GW.

 

·In July 2021, acquired the Dhamma Energy Group, which owns photovoltaic projects under development in France and Spain. The portfolio includes a pipeline of projects distributed in the two countries, at different levels of maturity (approximately 3 GW), as well as plants, already in operation or at an advanced stage of construction, in France for about 120 MW.

 

Decarbonization initiatives:

 

·As part of the Hynet North West project for the construction of a CO2 capture/storage hub in the UK, signed a framework agreement with the partner Progressive Energy Limited to accelerate the project, where Eni will develop and manage transport and storage of CO2at the semi-depleted oilfields in the Liverpool Bay.

 

·Eni signed a memorandum of understanding with Uniper in the United Kingdom to evaluate decarbonisation initiatives in Wales with possibility of developing depleted Eni oilfields in the Liverpool Bay into CO2 storage hubs.

 

·As part of the net zero emissions strategy of the E&P segment by 2030 (relating Scope 1 and 2 emissions), Vårgronn, a subsidiary of Vår Energi, has signed a collaboration agreement with Equinor for the possible development of offshore wind installations in the North Utsira area.

 

 

 HIGHLIGHTS7

 

·In line with the strategy of energy transition in Egypt, Eni signed an agreement with the state energy and gas companies to assess the economic feasibility of green and blue hydrogen production, in synergy with the storage of CO2 in depleted natural gas fields.

 

·Agreement with the Italian operator Be Charge, to increase the national supply of charging infrastructures for electric mobility. The charging stations will be powered by renewable energy supplied by Eni gas e luce.

 

·In the first half of 2021, the volumes of palm oil supplied to the production of bio-diesel was reduced leveraging on the start-up of a new Biomass Treatment Unit (BTU) at the Gela bio-refinery enabling the use of up to 100% of biomass not in competition with the food chain for the production of biofuels. Confirmed target to achieve zero use of palm oil to manufacture biofuels by 2023.

 

·Versalis signed an agreement with Saipem to internationally promote PROESA®, Versalis’ proprietary technology used to produce sustainable bioethanol and chemicals from lignocellulosic biomass.

 

·Signed an agreement with A2A for a 20-year supply of cogenerated heat from the EniPower production plant in Bolgiano, to feed the Milan district heating network with approximately 54 GWh/year of low-emitting thermal energy.

 

|ESG performance and sustainable finance

 

·Issued the Sustainability-Linked Financing Framework, the first of its kind globally in the oil&gas sector, setting sustainable KPIs as credit ratings for the Group. Highlighted four KPIs: renewable energy installed capacity, Net Carbon Footprint Upstream (Scope 1 and 2), Net GHG Lifecycle Emissions (Scope 1, 2 and 3) and Net Carbon Intensity (Scope 1, 2 and 3) and the related medium-long term targets. Launched a seven-year sustainability-linked bond, in line with this framework, subject to the achievement of two targets: Net Carbon Footprint Upstream (Scope 1 and 2) equal or lower than 7.4 MtonCO2eq as of December 31, 2024 (down by 50% compared to the 2018 baseline) and renewable energy installed capacity equal or higher than 5 GW as of December 31, 2025.

 

·TRIR (Total recordable injury rate) of the workforce: amounted to 0.37, a slight increase from the first half 2020 due to more adverse events recorded at Eni’s employees.

 

·Direct GHG emissions (Scope 1) from Eni’s operated assets: amounted to 19.5 mmtonnes CO2eq., a slight increase from the first half 2020, due to an ongoing recovery of the operations which in 2020 were affected by lockdown measures to contain the COVID-19 emergency.

 

·Direct GHG emissions (Scope 1)/operated hydrocarbon gross production (upstream) amounted to 20.2 tons CO2 eq./kboe the index highlighted a better trend compared to the same period of 2020 mainly considering an ongoing recovery in operations.

 

·Emissions from methane fugitive (upstream): amounted to 6.6 ktonnes CH4, a slight increase from the first half of 2020, due to an ongoing recovery of operations. Expected improvements by the end of 2021 with the finalization of the ongoing monitoring campaigns.

 

·Volumes of hydrocarbon sent to routine flaring at Eni’s operated assets (upstream): amounted to 0.6 billion Sm3, a slight increase from the same period of 2020, mainly due to the recovery of operations in certain plants located onshore Libya and impacted by routine flaring, which were shutdown in 2020 due to force majeure. Confirmed the flaring down projects planned for the year.

 

·Total volume of oil spills: amounted to 2.83 kbbl, reducing by the first half of 2020 benefitting from lower spills due to sabotage in Nigeria where Eni is applying the proprietary technology e-vpms (Eni Vibroacoustic Pipeline Monitoring System) for the detection of vibro-acoustic variations in pipelines and transported fluid.

 

·Water reinjection in the upstream segment: amounted to 59%, increased from the first half of 2020, due to the resolution of certain issues at the reinjection system at the Loango and Zatchi fields in Congo and the recovery of the operations at the Abu-Attifel and El Feel libyan fields.

 

 

8HIGHLIGHTS 

 

KEY OPERATING AND FINANCIAL RESULTS

 

  First Half
  20212020
Sales from operations(€ million)30,78822,030
Operating profit (loss) 3,857(3,775)
Adjusted operating profit (loss) ⁽ᵃ⁾ 3,366873
Exploration & Production 3,219230
Global Gas & LNG Portfolio (6)363
Refining & Marketing and Chemicals 7089
Eni gas e luce, Power & Renewables 310276
Adjusted net profit (loss) ⁽ᵃ⁾⁽ᵇ⁾ 1,199(655)
per share ⁽ᶜ⁾(€)0.32(0.18)
per ADR ⁽ᶜ⁾⁽ᵈ⁾($)0.77(0.40)
Net profit (loss) ⁽ᵇ⁾ 1,103(7,335)
per share ⁽ᶜ⁾(€)0.30(2.05)
per ADR ⁽ᶜ⁾⁽ᵈ⁾($)0.72(4.52)
Comprehensive income ⁽ᵇ⁾(€ million)1,971(7,533)
Net cash flow from operating activities(€ million)4,0932,378
Capital expenditure 2,4072,568
of which:  exploration 160247
hydrocarbons development 1,5471,740
Total assets at period end 119,989115,085
Shareholders' equity including non-controlling interests at period end 40,58038,839
Net borrowings at period end after IFRS 16 15,32319,971
Net borrowings at period end before IFRS 16 10,04014,329
Net capital employed at period end 55,90358,810
of which:  Exploration & Production 46,48850,083
Global Gas & LNG Portfolio 387502
Refining & Marketing and Chemicals 9,1038,966
Eni gas e luce, Power & Renewables 3,4632,185
Leverage before IFRS 16 2537
Leverage after IFRS 16 3851
Gearing 2734
Coverage 8.2(7.2)
Current ratio 1.41.2
Debt coverage 26.711.9
Share price at period end(€)10.278.49
Weighted average number of shares outstanding(million)3,572.53,572.5
Market capitalization ⁽ᵉ⁾(€ billion)37.030.9
    
    
(a) Non-GAAP measure.
(b) Attributable to Eni's shareholders.
(c) Fully diluted. Ratio of net profit (loss)/cash flow and average number of shares outstanding in the period. Dollar amounts are converted on the basis of the average EUR/USD exchange rate quoted by Reuters (WMR) for the period presented.
(d) One American Depositary Receipt (ADR) is equal to two Eni ordinary shares.
(e) Number of outstanding shares by reference price at period end.

 

EMPLOYEES

 

  First Half
  20212020
Exploration & Production(number)9,61610,348
Global Gas & LNG Portfolio 862678
Refining & Marketing and Chemicals 11,39411,517
Eni gas e luce, Power & Renewables 2,2522,185
Corporate and other activities 7,3127,449
Total group employees 31,43632,177
of which: women 7,6687,728
              outside Italy 10,14810,459
Female managers(%)2726
    

 

 

 HIGHLIGHTS9

 

HEALTH, SAFETY AND ENVIRONMENT (a)

 

  First Half
  20212020
    
TRIR (Total Recordable Injury Rate)(total recordable injuries/worked hours) x 1,000,0000.370.24
                    employees 0.560.17
                    contractors 0.280.28
Direct GHG emissions (Scope 1)(mmtonnes CO₂eq)19.518.9
Direct GHG emissions (Scope 1)/operated hydrocarbon gross production (upstream)(tonnes CO₂eq./kboe)20.221.0
Methane fugitive emissions (upstream)(ktonnes CH₄)6.65.7
Volumes of hydrocarbons sent to routine flaring(billion Sm³)0.60.5
Total volume of oil spills (>1 barrel)(barrels)2,8263,210
                   of which: due to sabotage 1,6832,765
R&D expenditure(€ million)7378
   
(a) KPIs refer to 100% of the operated assets, unless otherwise specified.  

 

MAIN OPERATING DATA

 

  First Half
  20212020
EXPLORATION & PRODUCTION   
Hydrocarbon production ⁽ᵃ⁾(kboe/d)1,6501,760
             liquids(kbbl/d)797873
             natural gas(mmcf/d)4,5314,711
Production sold(mmboe)277288
Average hydrocarbons realizations($/boe)43.3627.50
Produced water re-injected(%)5954
Direct GHG emissions (Scope 1)⁽ᵇ⁾(mmtonnes CO₂eq)11.2410.74
Oil spills due to operations (>1 barrel)⁽ᵇ⁾(barrels)240370
GLOBAL GAS & LNG PORTFOLIO   
Natural gas sales  (bcm)34.4330.44
of which:       Italy 17.7318.10
            outside Italy 16.7012.34
LNG sales 5.24.5
Direct GHG emissions (Scope 1)⁽ᵇ⁾(mmtonnes CO₂eq)0.330.18
REFINING & MARKETING AND CHEMICALS   
Capacity of biorefineries(mmtonnes/year)1.11.1
Bio throughputs(ktonnes)308376
Average bio refineries utilization rate 6167
Retail market share in Italy 22.623.6
Retail sales of petroleum products in Europe(mmtonnes)3.262.96
Average throughput of service stations in Europe(kliters)684621
Average oil refineries utilization rate(%)7367
Production of petrochemical products(ktonnes)4,3543,498
Average petrochemical plant utilization rate(%)6959
Direct GHG emissions (Scope 1)⁽ᵇ⁾(mmtonnes CO₂eq)3.293.14
SOₓ emissions (sulphur oxide)(ktonnes SOₓeq.)1.481.54
Direct GHG emissions (Scope 1)/refinery throughputs (raw and semi-finished materials)⁽ᵇ⁾(tonnes CO₂ eq./ktonnes)219246
ENI GAS E LUCE, POWER & RENEWABLES   
Retail gas sales  (bcm)4.604.51
Retail power sales to end customers(TWh)7.526.02
Thermoelectric production 10.2010.34
Power sales in the open market 12.9712.10
Renewable installed capacity at period end(MW)331251
Energy production from renewable sources(GWh)258144
Direct GHG emissions (Scope 1)⁽ᵇ⁾(mmtonnes CO₂eq)4.64.9
Direct GHG emissions (Scope 1)/equivalent produced electricity (EniPower)⁽ᵇ⁾ (gCO₂ eq./kWh eq.)384298
 
(a) Includes Eni's share in joint ventures and equity-accounted entities.
(b) KPIs refer to 100% of the operated assets.

 

 

10OPERATING REVIEW | EXPLORATION & PRODUCTION 

 

Operating review

 

EXPLORATION & PRODUCTION

 

PRODUCTION AND PRICES

 

  First half  
  20212020Change% Ch.
Production     
Liquids(kbbl/d)797873(76)(8.7)
Natural gas(mmcf/d)4,5314,711(180)(3.8)
Hydrocarbons(kboe/d)1,6501,760(110)(6.3)
Average realizations     
Liquids($/bbl)60.5633.4927.0780.8
Natural gas($/kcf)4.753.840.9123.6
Hydrocarbons($/boe)43.3627.5015.8657.7

 

In the first half of 2021, oil and natural gas production averaged 1,650 kboe/d, down by 6% compared to the same period of 2020. The decline was driven by maintenance activity mainly in Norway, Italy and the United Kingdom, which in the first half of 2020 was postponed, lower activity in Nigeria and mature field declines. On the positive side, production was supported by the increase in Egypt driven by the performance of the Zohr field, global gas demand recovery and the restart of the Damietta liquefaction plant as well as the Merakes start-up in Indonesia.

 

Liquids production was 797 kbbl/d, representing a reduction from the first half of 2020. The reduction was due to higher maintenance activity, price effects, a decrease in Nigeria and mature field declines, partly offset by continuing growth in Egypt.

 

Natural gas production amounted to 4,531 mmcf/d, down by 3.8% or down by 180 mmcf/d compared to the first half of 2020. Lower production was due to higher maintenance activity, mature field declines and a decrease in Nigeria. These negatives were partly offset by a robust recovery of natural gas demand in certain areas (mainly in Egypt) and the start-up of Merakes in Indonesia.

 

Oil and gas production sold amounted to 276.6 mmboe. The 22 mmboe difference over production (298.6 mmboe) mainly reflected volumes consumed in operations (20 mmboe), changes in inventory levels and other changes.

 

MINERAL RIGHT PORTFOLIO AND EXPLORATION ACTIVITIES

 

In the first half of 2021, Eni performed its operations in 42 countries. As of June 30, 2021, Eni’s mineral right portfolio consisted of 794 exclusive or shared properties for exploration and development oil and gas activities as well as 1 shared property for the CCUS project in the United Kingdom. Total acreage was 340,188 square kilometers net to Eni, of which 577 square kilometers related to the CCUS activities in the United Kingdom. As of December 31, 2020, total acreage was 336,449 square kilometers net to Eni.

 

In the first half of 2021, changes in total net acreage mainly derived from: (i) acquisition of new leases mainly in Vietnam, Angola, Norway, the United Arab Emirates and Egypt, as well as the CCUS project in the United Kingdom for a total acreage of approximately 13,100 square kilometers; (ii) the relinquishment of licenses mainly in Myanmar, Egypt, Norway, Italy and the United Kingdom for a total acreage of approximately 7,900 square kilometers; (iii) net acreage increase also due to interest changes mainly in Italy and the United States for a total acreage of 60 square kilometers; and (iv) net acreage decrease mainly in Italy and Mozambique for a total acreage of 1,500 square kilometers.

 

In the first half of 2021, a total of 14 exploratory wells were drilled (7.1 being Eni’s share), as compared to 19 exploratory wells drilled in the first half of 2020 (9.5 being Eni’s share).

 

 

 OPERATING REVIEW | EXPLORATION & PRODUCTION11

 

PRODUCTION OF OIL AND NATURAL GAS BY REGION

 

  First half
  20212020
Production of oil and natural gas ⁽ᵃ⁾⁽ᵇ⁾  (kboe/d)     1,650     1,760
Italy           82        109
Rest of Europe         205        249
North Africa         260        255
Egypt         363        285
Sub-Saharan Africa         301        379
Kazakhstan         150        171
Rest of Asia         158        183
Americas         114        112
Australia and Oceania           17          17
Production sold ⁽ᵃ⁾  (mmboe)277288
    
PRODUCTION OF LIQUIDS BY REGION   
  First half
  20212020
Production of liquids(kbbl/d)        797        873
Italy           34          47
Rest of Europe         128        144
North Africa         128        117
Egypt           82          66
Sub-Saharan Africa         190        232
Kazakhstan         101        115
Rest of Asia           76          91
Americas           58          61
Australia and Oceania   
    
PRODUCTION OF NATURAL GAS BY REGION   
  First half
  20212020
Production of natural gas(mmcf/d)     4,531     4,711
Italy         254        329
Rest of Europe         411        559
North Africa         702        733
Egypt      1,492     1,160
Sub-Saharan Africa         590        781
Kazakhstan         262        297
Rest of Asia         436        489
Americas         296        274
Australia and Oceania 8889
    
(a) Includes Eni’s share of production of equity-accounted entities.
(b) Includes volumes of hydrocarbons consumed in operation (111 and 120 kboe/d in the first half of 2021 and 2020, respectively).

 

12OPERATING REVIEW | GLOBAL GAS & LNG PORTFOLIO 

 

GLOBAL GAS & LNG PORTFOLIO

 

SUPPLY OF NATURAL GAS

 

In the first half of 2021, Eni’s consolidated subsidiaries supplied 34.40 bcm of natural gas, with an increase of 5.14 bcm or 17.6% from the first half of 2020.

 

Gas volumes supplied outside Italy from consolidated subsidiaries (32.44 bcm), imported in Italy or sold outside Italy, represented approximately 95% of total supplies, with an increase of 6.14 bcm or up by 23.3% from the first half of 2020 mainly reflecting higher volumes purchased in Russia (up by 3.54 bcm), Algeria (up by 3.52 bcm), and the Netherlands (up by 0.34 bcm) partially offset by lower purchases in Libya (down by 0.77 bcm) and in Qatar (down by 0.17 bcm). Supplies in Italy (1.96 bcm) decreased by 33.8% from the first half of 2020.

 

  First half  
 (bcm)20212020Change% Ch.
Italy 1.962.96(1.00)(33.8)
Russia 13.7910.253.5434.5
Algeria (including LNG) 5.351.833.52..
Libya 1.602.37(0.77)(32.5)
Netherlands 0.980.640.3453.1
Norway 3.743.630.113.0
United Kingdom 1.150.880.2730.7
Indonesia (LNG) 0.760.560.2035.7
Qatar (LNG) 1.161.33(0.17)(12.8)
Other supplies of natural gas 0.863.26(2.40)(73.6)
Other supplies of LNG 3.051.551.5096.8
OUTSIDE ITALY 32.4426.306.1423.3
TOTAL SUPPLIES OF ENI'S CONSOLIDATED SUBSIDIARIES34.4029.265.1417.6
Offtake from (input to) storage (0.34)0.04(0.38)..
Network losses, measurement differences and other changes(0.01)(0.02)0.0150.0
AVAILABLE FOR SALE BY ENI'S CONSOLIDATED SUBSIDIARIES34.0529.284.7716.3
Available for sale by Eni's affiliates 0.381.16(0.78)(67.2)
TOTAL AVAILABLE FOR SALE 34.4330.443.9913.1

 

SALES

 

  First half  
 20212020Change% Ch.
Spot Gas price at Italian PSV(€/kcm)23197134138.2
TTF 22980150187.3
Spread PSV vs. TTF 217(15)(89.5)
Natural gas sales(bcm)    
Italy 17.7318.10(0.37)(2.0)
Rest of Europe 13.9010.473.4332.8
of which: Importers in Italy 1.451.94(0.49)(25.3)
                European markets 12.458.533.9246.0
Rest of World 2.801.870.9349.7
Worldwide gas sales  ⁽*⁾ 34.4330.443.9913.1
of which: LNG sales 5.204.500.7015.6
      
(*) Data include intercompany sales.     

 

 

 OPERATING REVIEW | GLOBAL GAS & LNG PORTFOLIO13

 

In the first half of 2021, natural gas sales were 34.43 bcm, up by 13.1% from the first half of 2020, mainly due to higher volumes marketed outside Italy (Turkey and France) leveraging on the economic recovery and increasing LNG volumes marketed mainly by the Damietta plant.

 

Sales in Italy were down by 2% to 17.73 bcm, mainly due to lower sales marketed mainly to hub and thermoelectric segment. Sales in European markets (12.45 bcm) increased by 46% as result of the recovery in consumptions, mainly in Turkey following higher gas nominations made by Botas and in France.

 

  First half  
 (bcm)20212020Change%Ch.
ITALY 17.7318.10(0.37)(2.0)
Wholesalers 7.446.860.588.5
Italian gas exchange and spot markets 4.815.40(0.59)(10.9)
Industries 2.072.13(0.06)(2.8)
Power generation 0.430.74(0.31)(41.9)
Own consumption 2.982.970.010.3
INTERNATIONAL SALES 16.7012.344.3635.3
Rest of Europe 13.9010.473.4332.8
Importers in Italy 1.451.94(0.49)(25.3)
European markets: 12.458.533.9246.0
Iberian Peninsula 1.901.820.084.4
Germany/Austria 0.240.170.0741.2
Benelux 1.911.600.3119.4
United Kingdom 1.150.870.2832.2
Turkey 4.061.682.38..
France 3.052.300.7532.6
Other 0.140.090.0555.6
Extra European markets 2.801.870.9349.7
WORLDWIDE GAS SALES 34.4330.443.9913.1
      

 

  First half  
 (bcm)20212020Change%Ch.
Total sales of subsidiaries 33.9729.294.6816.0
Italy (including own consumption) 17.7318.10(0.37)(2.0)
Rest of Europe 13.589.813.7738.4
Outside Europe 2.661.381.2892.8
Total sales of Eni's affiliates (net to Eni) 0.461.15(0.69)(60.0)
Rest of Europe 0.320.66(0.34)(51.5)
Outside Europe 0.140.49(0.35)(71.4)
WORLDWIDE GAS SALES 34.4330.443.9913.1

 

LNG SALES

 

  First half  
 (bcm)20212020Change%Ch.
Europe 2.42.6(0.2)(7.7)
Outside Europe 2.81.90.947.4
TOTAL LNG SALES 5.24.50.715.6

 

LNG sales (5.2 bcm, included in worldwide gas sales) mainly concerned LNG from Qatar, Egypt, Nigeria, Indonesia and mainly marketed in Europe, China and Pakistan.

 

 

14OPERATING REVIEW | REFINING & MARKETING AND CHEMICALS 

 

REFINING & MARKETING AND CHEMICALS

 

  First half  
 20212020Change% Ch.
Standard Eni Refining Margin (SERM)($/bbl)(0.5)2.9(3.4)(117.2)
Throughputs in Italy(mmtonnes)7.857.210.648.9
Throughputs in the rest of World 5.304.161.1427.4
Total throughputs 13.1511.371.7815.7
Average refineries utilization rate(%)7367  
Bio throughputs(ktonnes)308376(68)(18.1)
Average bio refineries utilization rate(%)6167  
Marketing     
Retail sales in Europemmtonnes3.262.960.3010.1
Retail sales in Italy 2.312.010.3014.9
Retail sales in the rest of Europe 0.950.950.000.0
Retail market share in Italy(%)22.623.6  
Wholesale sales in Europe(mmtonnes)3.723.83(0.11)(2.9)
Wholesale sales in Italy 2.752.670.083.0
Wholesale sales in the rest of Europe 0.971.16(0.19)(16.4)
Chemicals     
Sales of petrochemical products(mmtonnes)2.321.910.4121.6
Average plant utilization rate(%)6959  

 

REFINING & MARKETING

 

In the first half of 2021, Eni’s Standard Refining Margin – SERM – reported non-remunerative values (minus 0.5 $/barrel, down by 3.4 $/barrel from the first half of 2020). This trend reflects the continuing pandemic effects, which on one side with the only gradual easing of OPEC+ supported the cost of the oil feedstock, while on the other side it negatively affected demands for products, particularly the middle distillates. On the positive side, the discount between sour crudes like the Ural vs. light-sweet crudes widened, which helped margins (the spread was minus 1.4 $/bbl vs. a minus 0.9 $/bbl in the first half of 2020).

 

Eni refining throughputs on own account were 13.15 mmtonnes, up by 15.7% from the first half of 2020, in response to a lower impact of the COVID-19 pandemic compared to the comparative period which was negatively affected by the almost full lockdown of the economy, partly offset by a depressed refining scenario. Throughputs elsewhere increased mainly at the ADNOC plants, where the performance was negatively affected by a prolonged plant standstill in the first half of 2020. Increased by 6 percentage points the average plant utilization rate (73%).

 

Bio throughputs were 308 ktonnes, down by 18% from the same period of the previous year against the backdrop of a depressed trading environment, which nonetheless saw an improvement in June.

 

  First half  
 (mmtonnes)20212020Change%Ch.
Retail 2.312.010.3014.9
Wholesale 2.752.670.083.0
Petrochemicals 0.300.30  
Other sales 4.914.680.234.9
Sales in Italy 10.279.660.616.3
Retail rest of Europe 0.950.95  
Wholesale rest of Europe 0.971.16(0.19)(16.4)
Wholesale outside Europe 0.250.230.028.7
Other sales 0.660.490.1734.7
Sales outside Italy 2.832.83  
TOTAL SALES OF REFINED PRODUCTS 13.1012.490.614.9

 

 

 OPERATING REVIEW | REFINING & MARKETING AND CHEMICALS15

 

In the first half of 2021, sales volumes of refined products (13.10 mmtonnes) were up by 0.61 mmtonnes or by 4.9% from the first half of 2020.

 

Retail sales in Italy were 2.31 mmtonnes increasing in all the segments (up by 14.9%) thanks to the gradual restart of economic activities being the first half of 2020 impacted by the lockdown measures. Eni’s retail market share was 22.6% (23.6% in the first half of 2020).

 

As of June 30, 2021, Eni’s retail network in Italy consisted of 4,127 service stations, recording a decrease from June 30, 2020 (4,153 service stations), resulting from the negative balance of acquisitions/releases of lease concessions (26 units).

 

Average throughput (684 kliters) increased by 63 kliters from the first half of 2020 (621 kliters).

 

Wholesale sales in Italy were 2.75 mmtonnes, up by 3% from the first half of 2020 mainly due to higher sales of fuel oil and gasoil, partly offset by declining sales of gasoline, jet fuel and bunker due to the prolonged effects of lockdown to contain the spread of the COVID-19.

 

Supplies of feedstock to the petrochemical industry (0.30 mmtonnes) were substantially in line from the comparative period.

 

Retail and wholesale sales in the rest of Europe of 1.92 mmtonnes were down by 9% from the first half of 2020 mainly as a result of lower volumes marketed in Germany, Austria and Switzerland, following the lower demand due to the lockdown, partly offset by higher sales in France.

 

Other sales in Italy and outside Italy were 5.57 mmtonnes, up by 7.7% from the first half of 2020.

 

Retail and wholesale sales of refined products First half  
 (mmtonnes)20212020Change%Ch.
Italy 5.064.680.388.1
Retail sales 2.312.010.3014.9
Gasoline 0.590.500.0918.0
Gasoil 1.561.380.1813.0
LPG 0.140.120.0216.7
Other 0.020.010.01..
Wholesale sales 2.752.670.083.0
Gasoil 1.481.410.075.0
Fuel Oil 0.130.010.12..
LPG 0.090.09  
Gasoline 0.040.13(0.09)(69.2)
Lubricants 0.040.04  
Bunker 0.310.33(0.02)(6.1)
Jet Fuel 0.280.34(0.06)(17.6)
Other 0.380.320.0618.8
Outside Italy (retail+wholesale) 2.172.33(0.16)(6.9)
Gasoline 0.460.52(0.06)(11.5)
Gasoil 1.271.30(0.03)(2.3)
Jet Fuel 0.020.06(0.04)(66.7)
Fuel Oil 0.030.07(0.04)(57.1)
Lubricants 0.060.040.0250.0
LPG 0.260.240.028.3
Other 0.070.10(0.03)(30.0)
TOTAL RETAIL AND WHOLESALE SALES 7.237.010.223.1

 

 

16OPERATING REVIEW | REFINING & MARKETING AND CHEMICALS 

 

CHEMICALS

 

  First half  
 (ktonnes)20212020Change%Ch.
Intermediates 3,2252,43179432.7
Polymers 1,1291,067625.8
Production 4,3543,49885624.5
Consumption and losses (2,345)(1,790)(555)(31.0)
Purchases and change in inventories 31220011256.0
TOTAL AVAILABILITY 2,3211,90841321.6
Intermediates 1,3641,02833632.7
Polymers 957880778.8
TOTAL SALES 2,3211,90841321.6

 

Petrochemical production of 4,354 ktonnes increased by 856 ktonnes (up by 24.5%) mainly in the intermediates business due to higher product availability, compared to the comparative period, which were affected by higher prolonged maintenance standstills following COVID-19 emergency.

 

Petrochemical sales of 2,321 ktonnes increased by 413 ktonnes (up by 21.6%). Main increases were reported in the intermediate, driven by recovery of demand in the reference segments, lower imports from producer countries, as well as higher product availability.

 

Petrochemical product margins improved significantly driven by the macroeconomic recovery, which mitigated the competitive pressure, and contingent factors due to a temporally supply shortage. Sharp increases were recorded in the polyethylene segment driven by the recovery in products demand, partial shortage in commodities production, as well as weak trends in the upturn of the logistic segment; furthermore, in the styrenics/elastomers segments due to higher demand. Cracker margin recorded a significant reduction in the two reporting periods, due to higher cost of commodities.

 

 

 OPERATING REVIEW | ENI GAS E LUCE, POWER & RENEWABLES17

 

ENI GAS E LUCE, POWER & RENEWABLES

 

  First half  
 20212020Change% Ch.
EGL & Renewables     
Retail gas salesbcm4.604.510.092.0
Retail power sales to end customersTWh7.526.021.5024.9
Retail/business customers (POD)mln pod9.959.690.272.7
Energy production from renewable sourcesGWh258.1144.1114.079.1
Renewable installed capacity at period endMW3312518031.9
of which:  - photovoltaic%7178  
                 - wind 2619  
                 - installed storage capacity 33  
Power     
Power sales in the open marketTWh12.9712.100.877.2
Thermoelectric production 10.2010.34(0.14)(1.4)

 

ENI GAS E LUCE

 

  First half  
(bcm)20212020Change% Ch.
ITALY 2.973.06(0.09)(2.9)
Resellers 0.100.100.000.0
Industries 0.170.130.0430.8
Small and medium-sized enterprises and services 0.420.410.012.4
Residential 2.282.42(0.14)(5.8)
INTERNATIONAL SALES 1.631.450.1812.4
European markets:     
France 1.331.180.1512.7
Greece 0.240.220.029.1
Other 0.060.050.0120.0
RETAIL GAS SALES 4.604.510.092.0

 

In the first half of 2021, retail gas sales in Italy and in the rest of Europe amounted to 4.60 bcm, up by 0.09 bcm or 2% from the previous year. Sales in Italy amounted to 2.97 bcm down by 2.9% compared to the first half of 2020, the reduction was mainly due to lower volumes marketed at residential segment, partially mitigated by higher volumes marketed at the industrial segment.

 

Sales in the European markets (1.63 bcm) reported an increase of 12.4% or 0.18 bcm compared to the first half of 2020. In France, sales increased by 0.15 bcm compared to the comparative period due to the effective commercial initiatives.

 

In the first half of 2021, retail power sales to end customers, managed by Eni gas e luce and the subsidiaries in France and Greece, amounted to 7.52 TWh, an increase by 24.9% from the first half of 2020, due to growth of retail customers portfolio (up by 250,000 customers vs. December 31, 2020) and higher volumes sold to the retail and industrial segments in Europe, leveraging on the expansion in Spain and Portugal, as consequence of Aldro Energía acquisition.

 

 

18OPERATING REVIEW | ENI GAS E LUCE, POWER & RENEWABLES 

 

RENEWABLES

 

  First half  
 20212020Change% Ch.
Energy production from renewable sources(GWh)258.1144.1114.079.1
of which: photovoltaic 135.1109.825.223.0
wind 123.034.388.8..
of which: Italy 62.452.59.918.8
outside Italy 195.791.6104.1..
Renewable installed capacity at period end(MW)3312518031.9
of which: photovoltaic 2361954020.7
wind 87483981.1
installed storage capacity 8800
      
(a) Electricity for Eni’s production sites consumptions.

 

Energy production from renewable sources amounted to 258.1 GWh (of which 135.1 GWh photovoltaic and 123.0 GWh wind) up by 114.0 GWh compared to the first half of 2020. The increase in production compared to the previous year benefitted from the entry in operations of new plants in Italy and abroad, as well as the contribution of assets already operating in the United States, acquired in the fourth quarter of 2020.

 

As of June 30, 2021, the renewable installed capacity was 331 MW, up by 32% compared to the first quarter of 2020. Compared to June 30, 2020 the capacity increased by 80 MW thanks to the completion of plants in Australia (up by 25 MW, photovoltaic capacity), in Italy (up by 24 MW, onshore wind capacity), as well as the acquisition of the U.S. assets already in operation (up by 30 MW, photovoltaic and wind capacity).

 

Renewable installed capacity at period end (Eni's share)    
  First half  
(MW)20212020Change% Ch.
 (technology)    
ITALYphotovoltaic848400
OUTSIDE ITALY 1601204034
Algeriaphotovoltaic5500
Australiaphotovoltaic64392564
Pakistanphotovoltaic101000
Tunisiaphotovoltaic9900
United Statesphotovoltaic72571527
Total photovoltaic installed capacity 2442034020
Italywind24024#DIV/0!
United Stateswind15015 
Kazakhstanwind484800
Total onshore wind installed capacity 87483981
      
TOTAL RENEWABLE INSTALLED CAPACITY AT PERIOD END (INCLUDING INSTALLED STORAGE POWER)3312518032
of which installed storage power 8800
      

 

As of June 30, 2021, the capacity under construction/advanced stage of development amounted to approximately 2 GW mainly relating to the latest acquisitions mainly in Italy, and the ongoing projects in Spain and France, new capacity in Kazakhstan (98 MW, of which 48 MW wind onshore and 50 MW PV solar), as well as the development of Eni’s activities in Italy and USA and wind offshore projects in UK (Dogger Bank A/B).

 

 

 OPERATING REVIEW | ENI GAS E LUCE, POWER & RENEWABLES19

 

POWER

 

  First half  
 20212020Change% Ch.
Purchases of natural gas(mmcm)2,1702,110602.8
Purchases of other fuels(ktoe)387(84)(96.6)
Power generation(TWh)10.2010.34(0.14)(1.4)
Steam(ktonnes)3,8013,861(60)(1.6)
      
Availability of electricity First half  
(TWh)20212020Change% Ch.
Power generation 10.2010.34(0.14)(1.4)
Trading of electricity ⁽ᵃ⁾ 10.327.932.3930.1
Availability 20.5218.272.2512.3
      
Power sales in the open market 12.9712.100.877.2
      
(a) Includes positive and negative imbalances (difference between the electricity effectively fed-in and as scheduled).   

 

Eni’s power generation sites are located in Brindisi, Ferrera Erbognone, Ravenna, Mantova, Ferrara and Bolgiano. As of June 30, 2021, installed operational capacity of EniPower’s power plants was 4.6 GW. In the first half of 2021, thermoelectric power generation was 10.20 TWh, slightly decreased compared to 2020. Electricity trading (10.32 TWh) reported an increase of 30.1% from 2020, thanks to the optimization of inflows and outflows of power.

 

In the first half of 2021, power sales in the open market were 12.97 TWh, representing an increase of 7.2% compared to 2020, due to economic downturn.

 

 

20FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW 

 

Financial review

 

PROFIT AND LOSS ACCOUNT

 

  First Half  
 (€ million)20212020Change% Ch.
Sales from operations 30,78822,0308,75839.8
Other income and revenues 65146019141.5
Operating expenses (23,677)(18,939)(4,738)(25.0)
Other operating income (expense) 48(373)421..
Depreciation, depletion, amortization (3,322)(3,857)53513.9
Net impairment reversals (losses) of tangible
and intangible and right-of-use assets
 (602)(2,749)2,14778.1
Write-off of tangible and intangible assets (29)(347)31891.6
Operating profit (loss) 3,857(3,775)7,632..
Finance income (expense) (473)(526)5310.1
Income (expense) from investments (427)(1,379)95269.0
Profit (loss) before income taxes 2,957(5,680)8,637..
Income taxes (1,845)(1,652)(193)(11.7)
Tax rate (%) 62.4.... 
Net profit (loss) 1,112(7,332)8,444..
attributable to:     
- Eni's shareholders 1,103(7,335)8,438..
- Non-controlling interest 936..

 

Reported results

 

Commodities and energy prices performed strongly in the first half of 2021: the Brent price increased from 40 $/bbl in the first half of 2020 to 65 $/bbl in the first half of 2021; natural gas prices in Europe more than doubled for the Italian reference spot price “PSV” and the continental reference spot price “TTF”; in the chemical sector the polyethylene-ethylene spread reached the record value to about 800 $/ton. On the negative side, the refining margins continued to be extremely weak in the European/Mediterranean region with the Eni benchmark margin SERM down to historic lows (-0.5 $/bbl on average in the first half of 2021). This was due to the continuing pandemic effects, which on one side with the gradual easing of OPEC+ supported the cost of the oil feedstock, while on the other side negatively affected demand for products, particularly middle distillates. In the wholesale gas business, spreads between the Italian PSV spot market and the spot prices at the "TTF" continental hub narrowed remarkably down to 2 €/kcm in the first half of 2021 from 17 €/kcm in compared period of the previous year.

 

In the first half of 2021, net profit attributable to Eni’s shareholders was €1,103 million compared to the net loss of €7,335 million in the same period of 2020. Net cash provided by operating activities increased by 72% to €4,093 million, while net borrowing excluding the IFRS 16 lease liabilities decreased by €1,528 million from December 31, 2020 to €10,040 million. These results, the progress on delivering Eni’s strategy, the outlook and a Brent reference scenario of 65 $/bbl have allowed to increase dividend back to the pre-COVID levels at €0.86 per share and to start a €400 million share buy-back program over the next 6 months.

 

Against a more constructive macro backdrop and improved fundamentals in the energy scenario, net result was supported by operating performance compared to a loss reported in the first half of 2020 following the negative impact of the COVID-19 pandemic. Operating performance was affected by the impairment losses of €602 million (compared to €2,749 million in the first half of 2020) mainly relating to the refining assets due to the projections of lower expected future cash flows driven by a deteriorated margin environment and the forecast of higher expenses for emission allowances. Finally, net profit benefitted from a tax rate which was in line with the average historical value at consolidated level.

 

 

FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW21 

 

The following table shows the main scenario indicators reported in the first half of 2021:

 

  First Half 
  20212020% Ch.
Average price of Brent dated crude oil in U.S. dollars (a) 64.8639.7363.3
Average EUR/USD exchange rate (b) 1.2051.1029.3
Average price of Brent dated crude oil in euro 53.8336.0549.3
Standard Eni Refining Margin (SERM) (c) (0.5)2.9(117.2)
Spot Gas price at Italian PSV (d) 23197138.2
TTF (d) 22980187.3
Spread PSV vs. TTF (d) 217(89.5)
     
(a) Price per barrel. Source: Platt’s Oilgram.    
(b) Source: ECB.    
(c) In $/bbl FOB Mediterranean Brent dated crude oil. Source: Eni calculations. Approximates the margin of Eni's refining system in consideration of material balances and refineries' product yields.
(d) €/kcm.    

 

Adjusted results and breakdown of special items

 

 First Half  
(€ million)20212020Change% Ch.
Operating profit (loss)3,857(3,775)7,632..
Exclusion of inventory holding (gains) losses(815)1,394  
Exclusion of special items3243,254  
Adjusted operating profit (loss)3,3668732,493285.6
Breakdown by segment:    
Exploration & Production3,2192302,989..
Global Gas & LNG Portfolio(6)363(369)..
Refining & Marketing and Chemicals7089(19)(21.3)
EGL, Power & Renewables3102763412.3
Corporate and other activities(257)(339)8224.2
Impact of unrealized intragroup profit elimination and  other consolidation adjustments30254(224) 
Net profit (loss) attributable to Eni's shareholders1,103(7,335)8,438..
Exclusion of inventory holding (gains) losses(581)991  
Exclusion of special items6775,689  
Adjusted net profit (loss) attributable to Eni's shareholders1,199(655)1,854..

 

In the first half of 2021, the Group’s adjusted operating profit of €3,366 million was €2.5 billion higher than the first half of 2020. The result was driven by a robust performance in the E&P segment leveraging on a better pricing environment and lower costs, despite lower hydrocarbon production due to seasonal maintenance activities. The result also benefitted from retroactive contractual revisions. The Chemical business reported an outstanding performance (up by €372 million of adjusted operating profit) driven by a strong macro backdrop, higher products margins and higher production availability, allowing the segment to capture a rebound in demand, in addition to a growing contribution from the green chemical business. Finally, resilient results from the Eni gas e luce & Renewables business benefitting from effective marketing activities, a growing customer base and better margins. The GGP and R&M segments reported weak results reflecting a difficult market environment and tough comparison with the excellent results earned the year-ago periods.

 

The Group’s adjusted net profit was back at pre-COVID levels with €1,199 million, a noticeable improvement compared to the first half of 2020 loss of €655 million due to an improved operating profit and benefitting from a better consolidated tax rate which was 58% in the first half of 2021. The main driver of this trend was the normalization of the E&P tax rate, which was driven by a better geographical mix of profits on the back of the strengthened scenario, which lowered the relative weight of jurisdictions characterized by higher tax rates, like Libya, Egypt, Algeria and UAE, as well as the fact that the 2020 reporting period was affected by a number of tax dis-optimizations resulting in a particularly high tax rate. Furthermore, an improved profitability outlook of Italian green activities, mainly Eni gas e luce & Renewables, allowed for the recognition of deferred tax assets against the fiscal losses incurred in the reporting period.

 

 

22FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

 First Half
(€ million)20212020
Special items of operating profit (loss)3243,254
- environmental charges7962
- impairment losses (impairment reversals), net6022,749
- impairment of exploration projects22 
- net gains on disposal of assets(88)(4)
- risk provisions2787
- provisions for redundancy incentives5638
- commodity derivatives(269)112
- exchange rate differences and derivatives53(24)
- other(158)234
Net finance (income) expense2(2)
of which:  
- exchange rate differences and derivatives reclassified to operating profit (loss)(53)24
Net income (expense) from investments4021,341
of which:  
- impairment/revaluation of equity investments402894
Income taxes(51)1,096
Total special items of net profit (loss)6775,689

 

The breakdown of special items recorded in operating profit by segment (a net charge of €324 million) is as follows:

 

·E&P: reported net gains of €446 million due to the reversal of previously recognized impairment losses for €376 million, which related to gas fields in Italy and fields in Turkmenistan, Libya, Algeria, Nigeria, Timor Leste and the USA driven by an improved hydrocarbon pricing environment. A gain from the disposal of a non-strategic asset in Nigeria was recorded (€75 million). The main losses are attributable to the write-off of exploration projects due to the complexity in the geopolitical and environmental context;
·GGP: net charges of €234 million included the accounting effect of certain fair-valued commodity derivatives lacking the formal criteria to be classified as hedges or to be elected under the own use accounting (€215 million); the reclassification to adjusted operating profit of the positive balance of €56 million related to derivative financial instruments used to manage margin exposure to foreign currency exchange rate movements and exchange translation differences of commercial payables and receivables; and a gain due to the difference between the gas inventories value accounted for under the weighted-average cost method provided by IFRS and management’s own measure of inventories which moves forward at the time of inventory drawdown the margins captured on volumes in inventories above their normal levels leveraging the seasonal spread in gas prices net of the effects of the associated commodity derivatives (€66 million);
·R&M and Chemicals: net charges of €1,017 million relating to impairment losses takes at the residual net book value of refining assets in Italy and of a joint operation in Europe (for an overall amount of approximately €900 million) due to the projections of lower expected future cash flows driven by a deteriorated margin environment and the forecast of higher expenses for emission allowances. Other charges include the write down (approximately €70 million) of capital expenditures made for compliance and stay-in-business at certain Cash Generating Units with expected negative cash flows. Other special items related to environmental charges (€65 million), as well as the accounting effect of certain fair-valued commodity derivatives lacking the formal criteria to be classified as hedges (charge of €32 million);
·EGL, Power & Renewables: net gains of €518 million mainly related to the accounting effect of certain fair-valued commodity derivatives lacking the formal criteria to be classified as hedges.

 

Special items recorded at equity-accounted investments mainly included: (i) charges of €397 million relating to impairment losses recorded at certain CGUs at the JV Vår Energi, mainly driven by a delay in the start-up of certain projects and cost overruns; (ii) a gain of €69 million relating to the alignment of raw material and products inventories to their net realizable values at period end at ADNOC R> and (iii) Eni’s interest of extraordinary charges/impairment losses recognized by the Saipem joint venture.

 

 

FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW23 

 

| Analysis of profit and loss account items

 

Revenues

 

 First Half  
(€ million)20212020Change% Ch.
Exploration & Production8,9216,7512,17032.1
Global Gas & LNG Portfolio5,9433,6202,32364.2
Refining & Marketing and Chemicals17,58412,1485,43644.7
- Refining & Marketing15,69110,9844,70742.9
- Chemicals2,7201,5551,16574.9
- Consolidation adjustments(827)(391)(436) 
EGL, Power & Renewables4,7423,94779520.1
- EGL3,6133,25735610.9
- Power1,20790230533.8
- Renewables116583.3
- Consolidation adjustments(89)(218)129 
Corporate and other activities812748648.6
Consolidation adjustments(7,214)(5,184)(2,030) 
Sales from operations30,78822,0308,75839.8
Other income and revenues65146019141.5
Total revenues31,43922,4908,94939.8

 

Total revenues amounted to €31,439 million. Eni’s sales from operations in the first half of 2021 (€30,788 million) increased by 39.8% from the first half of 2020, reflecting the effect of the strong performance in all energy commodities, in particular: the Brent price increased from 40 $/bbl in the first half of 2020 to 65 $/bbl in the first half of 2021; natural gas prices (TTF and PSV) in Europe increased more than doubled; in the chemical sector the polyethylene-ethylene spread, reference indicator, reached the record value to about 800 $/ton as well as the reopening of the economy leading to a rebound in sale volumes mainly in the R&M and Chemicals segment. In particular, the chemical business took advantage from improvements in global demand for plastics thanks to a broadening economic recovery, with many end-markets like consumer durables and the automotive and packaging sector performing well, and higher volume sold thanks to higher plant availability, leveraging on the lower imports from the producer countries (USA and Middle East). The retail gas&power business was supported by gains in the extra-commodity business, marketing initiatives in Italy and a growth in the customer base.

 

Operating expenses

 

 First Half 
(€ million)20212020Change
Purchases, services and other22,11717,1864,931
Impairment losses (impairment reversals) of trade and other receivables, net67211(144)
Payroll and related costs1,4931,542(49)
of which:   provision for redundancy incentives and other563818
 23,67718,9394,738

 

Operating expenses in the first half of 2021 (€23,677 million) increased by €4,738 million from the first half of 2020. Purchases, services and other (€22,117 million) increased by €4,931 million, reflecting higher costs for hydrocarbon supplies (gas under long-term supply contracts and refinery and chemical feedstocks). Payroll and related costs (€1,493 million) were barely unchanged from the first half of 2020.

 

 

24FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

Finance income (expense)

 

 First Half 
(€ million)20212020Change
Finance income (expense) related to net borrowings(404)(502)98
- Interest expense on corporate bonds(234)(270)36
- Net income from financial activities held for trading19(7)26
- Interest expense for banks and other financing istitutions(44)(52)8
- Interest expense for lease liabilities(153)(183)30
- Interest from banks27(5)
- Interest and other income from receivables and securities for non-financing operating activities633
Income (expense) on derivative financial instruments(218)(76)(142)
- Derivatives on exchange rate(235)(28)(207)
- Derivatives on interest rate17(48)65
Exchange differences, net24620226
Other finance income (expense)(129)(7)(122)
- Interest and other income from receivables and securities for financing operating activities2757(30)
- Finance expense due to the passage of time (accretion discount)(75)(69)(6)
- Other finance income (expense)(81)5(86)
 (505)(565)60
Finance expense capitalized3239(7)
 (473)(526)53

 

Net finance expense (€473 million) reduced by €53 million from the first half of 2020. The main drivers were: (i) lower financial expense on debt (down by €36 million) due to favourable trends in key market benchmarks and gains recognized in fair value evaluation of certain derivative instruments on interest rates (up by €65 million) which did not meet the formal criteria to be designated as hedges under IFRS; (ii) recognition of lower losses on exchange rate (down by €226 million) offset by the negative change of fair-valued currency derivatives (down by €207 million) lacking the formal criteria to be designated as hedges under IFRS 9; (iii) lower interest expense for lease liabilities (down by €30 million) due to currency translation effects. Other finance expense reported an increase of €86 million due to a discounted receivable in the E&P segment.

 

Net income (expense) from investments

 

 First Half 
(€ million)20212020Change
Share of gains (losses) from equity-accounted investments(477)(1,404)927
Dividends6672(6)
Other income (expense), net(16)(47)31
Income (expense) from investments(427)(1,379)952

 

Net income from investments amounted to €427 million and related to:

-a loss of €477 million recorded at the equity-accounted investments and mainly related to the JV Vår Energi due to impairment losses recorded at certain Cash Generating Units driven by a delay in the start-up of certain projects and cost overruns as well as Eni’s share of losses recorded by the Saipem joint venture; and
-dividends of €66 million paid by minor investments in certain entities which were designated at fair value through OCI under IFRS 9 except for dividends which are recorded through profit. These entities mainly comprised Nigeria LNG (€36 million) and Saudi European Petrochemical Co. (€14 million).

 

 

FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW25 

 

 

SUMMARIZED GROUP BALANCE SHEET 1

 

 

(€ million)Jun. 30, 2021Dec. 31, 2020Change
Fixed assets   
Property,  plant and equipment53,80253,943(141)
Right of use4,8064,643163
Intangible assets3,3982,936462
Inventories - Compulsory stock1,318995323
Equity-accounted investments and other investments7,3727,706(334)
Receivables and securities held for operating purposes1,0461,0379
Net payables related to capital expenditure(1,453)(1,361)(92)
 70,28969,899390
Net working capital   
Inventories4,5933,893700
Trade receivables9,4467,0872,359
Trade payables(10,098)(8,679)(1,419)
Net tax assets (liabilities)(3,728)(2,198)(1,530)
Provisions(12,733)(13,438)705
Other current assets and liabilities(670)(1,328)658
 (13,190)(14,663)1,473
Provisions for employee benefits(1,226)(1,201)(25)
Assets held for sale including related liabilities3044(14)
CAPITAL EMPLOYED, NET55,90354,0791,824
Eni's shareholders equity40,49637,4153,081
Non-controlling interest84786
Shareholders' equity40,58037,4933,087
Net borrowings before lease liabilities ex IFRS 1610,04011,568(1,528)
Lease liabilities5,2835,018265
- of which Eni working interest3,6353,366269
- of which Joint operators' working interest1,6481,652(4)
Net borrowings post lease liabilities ex IFRS 1615,32316,586(1,263)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY55,90354,0791,824
Leverage0.380.44(0.06)
Gearing0.270.31(0.03)

 

As of June 30, 2021, fixed assets of €70,289 million were almost unchanged from December 31, 2020: capital expenditures and acquisitions of the period and the positive impact of exchange rates were offset by DD&A and net impairment charges.

 

Net working capital (-€13,190 million) increased by €1,473 million y-o-y due to a higher balance between trade payables and trade receivables (approximately up by €0.9 billion) and an increased value of oil and products inventories due to the weighted-average cost method accounting in an environment of rising prices.

 

Shareholders’ equity (€40,580 million) increased by €3,087 million compared to December 31, 2020, due to the net profit for the period (€1,112 million), the emission in May 2021 of hybrid bonds for €2 billion and the positive foreign currency translation differences (€1,037 million) reflecting the appreciation of the dollar vs. the euro as of June 30, 2021 vs. December 31, 2020, offset by the payment of the balance dividend 2020 to Eni shareholders (€857 million).

 

 

1 For a reconciliation to the statutory statement of cash flow see the paragraph “Reconciliation of Summarized Group Balance Sheet and Statement of Cash Flows to Statutory Schemes”.

 

 

26FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

Net borrowings2 as of June 30, 2021 was €15,323 million decreasing by €1,263 million from 2020. When excluding the lease liabilities, net borrowings were re-determined at €10,040 million decreasing by €1,528 million.

 

Leverage3 – the ratio of the borrowings to total equity - was 0.38 at June 30, 2021. The impact of the lease liability pertaining to joint operators in Eni-led upstream unincorporated joint ventures weighted on leverage for 4 points. Excluding the impact of IFRS 16 altogether, leverage would be 0.25.

 

 

 

 

2 Details on net borrowings are furnished on page 36.

3 Non-GAAP financial measures and other alternative performance indicators disclosed throughout this press release are accompanied by explanatory notes and tables in line with guidance provided by ESMA guidelines on alternative performance measures (ESMA/2015/1415), published on October 5, 2015. For further information, see the section “Non-GAAP measures” of this report.

 

 

 FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW27

 

SUMMARIZED GROUP CASH FLOW STATEMENT4

 

 First Half 
(€ million)20212020Change
Net profit (loss)1,112(7,332)8,444
Adjustments to reconcile net profit (loss) to net cash provided by operating activities:   
- depreciation, depletion and amortization and other non monetary items4,2738,305(4,032)
- net gains on disposal of assets(88)(4)(84)
- dividends, interests, taxes and other changes2,1351,966169
Changes in working capital related to operations(1,797)688(2,485)
Dividends received by investments35432826
Taxes paid(1,502)(1,072)(430)
Interests (paid) received(394)(501)107
Net cash provided by operating activities4,0932,3781,715
Capital expenditure(2,389)(2,568)179
Investments and purchase of consolidated subsidiaries and businesses(871)(264)(607)
Disposal of consolidated subsidiaries, businesses, tangible and intangible assets and investments23721216
Other cash flow related to investing activities and disinvestments75(393)468
Free cash flow1,145(826)1,971
Net cash inflow (outflow) related to financial activities(1,185)463(1,648)
Changes in short and long-term financial debt(361)2,907(3,268)
Repayment of lease liabilities(445)(462)17
Dividends paid and changes in non-controlling interests and reserves(844)(1,537)693
Net issue (repayment) of perpetual hybrid bond1,975  
Effect of changes in consolidation and exchange differences of cash and cash equivalent22(12)34
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT307533(226)
Adjusted net cash before changes in working capital at replacement cost4,7573,3701,387

 

 First Half 
(€ million)20212020Change
Free cash flow1,145(826)1,971
Repayment of lease liabilities(445)(462)17
Net borrowings of acquired companies(241)(67)(174)
Exchange differences on net borrowings and other changes(62)40(102)
Dividends paid and changes in non-controlling interest and reserves(844)(1,537)693
Net issue (repayment) of perpetual hybrid bond1,975  
CHANGE IN NET BORROWINGS BEFORE LEASE LIABILITIES1,528(2,852)4,380
Repayment of lease liabilities445462(17)
Inception of new leases and other changes(710)(456)(254)
Change in lease liabilities(265)6(271)
CHANGE IN NET BORROWINGS AFTER LEASE LIABILITIES1,263(2,846)4,109

 

Net cash provided by operating activities for the first half of 2021 was €4,093 million, increasing by 72%, due to the better scenario in the upstream segment. This benefitted from a higher amount of trade receivables due in subsequent reporting periods divested to financing institutions compared to the fourth quarter 2020 (about +€0.2 billion).

 

Cash flow from operations before changes in working capital at replacement cost was €4,757 million. This non-GAAP measure includes net cash provided by operating activities before changes in working capital excluding inventory holding gains or losses and provisions for extraordinary credit losses and other charges, as well as the fair value of commodity derivatives lacking the formal criteria to be designated as hedges and the fair value of forward gas sale contracts with physical delivery which were not accounted in accordance with the own use exemption.

 

 

4 For a reconciliation to the statutory statement of cash flow see the paragraph “Reconciliation of Summarized Group Balance Sheet and Statement of Cash Flows to Statutory Schemes”.

 

 28FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

Net financial borrowings before IFRS-16 decreased by €1.5 billion due to the emission of hybrid bonds for €2 billion, the cash inflows of the operating activity (€1.1 billion), partly offset by the payment of the balance dividend of €0.24 per share for a total amount of approximately €840 million, the payment of lease liabilities for €445 million and the consolidation of debt of acquired subsidiaries (€241 million).

 

A reconciliation of cash flow from operations before changes in working capital at replacement cost to net cash provided by operating activities for the first half of 2021 and 2020 is provided below:

 

 First Half
(€ million)20212020
Net cash provided by operating activities4,0932,378
Changes in working capital related to operations1,797(688)
Exclusion of commodity derivatives(269)112
Exclusion of inventory holding (gains) losses(815)1,394
Provisions for extraordinary credit losses and other charges(49)174
Adjusted net cash before changes in working capital at replacement cost4,7573,370

 

Capital expenditure, investments and business combinations

 

 First Half  
(€ million)20212020Change% Ch.
Exploration & Production ⁽ᵃ⁾1,8062,018(212)(10.5)
- acquisition of proved and unproved properties60 60..
- exploration160247(87)(35.2)
- oil and gas development1,5471,740(193)(11.1)
- CCUS projects20 20..
- other expenditure1931(12)(38.7)
Global Gas & LNG Portfolio1578114.3
Refining & Marketing and Chemicals335377(42)(11.1)
- Refining & Marketing234274(40)(14.6)
- Chemicals101103(2)(1.9)
EGL, Power & Renewables1601411913.5
 - EGL878078.8
- Power2522313.6
- Renewables4839923.1
Corporate and other activities943262193.8
Impact of unrealized intragroup profit elimination(3)(7)4 
Capital expenditure ⁽ᵃ⁾2,4072,568(161)(6.3)
Investments and purchase of consolidated subsidiaries and businesses871264607229.9
Total capex and investments and purchase of consolidated subsidiaries and businesses3,2782,83244615.7

 

(a) Includes reverse factoring operations in the first half of 2021.

 

Cash outflows for capital expenditure, investments and business combinations were €3.3 billion, including the acquisition of a 20% interest in the Dogger Bank A/B offshore wind project in the North Sea, the 100% share in Aldro Energía in the retail gas business and the Fri-El Biogas Holding engaged in the bio-gas business in Italy. Net of the above-mentioned non-organic items and of utilization of trade advances cashed by Egyptian partners in previous reporting periods in relation to the financing of the Zohr project (€0.57 billion), net capital expenditures amounted to €2.91 billion, about 2% lower than the same period of 2020 (almost unchanged at constant exchange rates). In the first half of 2021 net capex were fully funded by the adjusted cash flow.

 

 FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW29

 

In the first half of 2021, capital expenditure amounted to €2,407 million (€2,568 million in the first half of 2020) and mainly related to:

 

- oil and gas development activities (€1,547 million) mainly in Indonesia, Egypt, the United States, Mexico, the United Arab Emirates and Angola;

 

- refining activity in Italy and outside Italy (€198 million) mainly relating to the activities to maintain plants’ integrity and stay-in-business, as well as HSE initiatives; marketing activity (€36 million) for regulation compliance and stay-in-business initiatives in the retail network in Italy and in the rest of Europe;

 

- initiatives relating to gas and power marketing in the retail business (€87 million).

 

 30FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

 

| Results by segment 5

 

Exploration & Production

 

 First Half  
(€ million)20212020Change% Ch.
Operating profit (loss)3,665(1,678)5,343..
Exclusion of special items(446)1,908(2,354) 
Adjusted operating profit (loss)3,2192302,989..
Net finance (expense) income(193)(169)(24) 
Net income (expense) from investments21943176 
   of which: Vår Energi1438  
Income taxes(1,473)(677)(796) 
Adjusted net profit (loss)1,772(573)2,345..
Results also include:    
Exploration expenses:132436(304)(69.7)
- prospecting, geological and geophysical expenses1021002 
- write-off of unsuccessful wells30336(306) 

 

In the first half of 2021, the recovery in the profitability of the Exploration & Production has strengthened, as signaled by an increase of €3 billion in the adjusted operating profit from the first half of 2020 reflecting the significant rebound from the bottom of the demand and economic crisis and supported by the full recovery of the oil scenario with the reference Brent price increasing by 63%. Against this backdrop, Eni’s realized prices of liquids increased by 81%, whereas natural gas realized prices increased by 24%. The positive trend in the pricing environment was partly softened by lower production volumes due to the seasonal maintenance activities. The result was helped by expense optimizations and lower write-offs of exploration expenditures relating unsuccessful wells and benefitted from retroactive contractual revisions.

 

The segment reported an adjusted net profit of €1,772 million compared to a loss of €573 million in the same period of the previous year, up by €2,345 million, due to a recovery in operating profit and better results of the Vår Energi JV (up by €135 million). The adjusted net profit benefitted from an improved scenario that drove a reduction in the tax rate due to a more favourable geographic mix of profits (in terms of reducing share of taxable income in Countries with a higher tax rate), as well as to the circumstance that the 2020 reporting period was affected by a number of drivers leading to tax dis-optimization.

 

 

5 Explanatory notes and tables detail certain other alternative performance indicators in line with guidance provided by ESMA guidelines on Alternative performancemeasures (ESMA/2015/1415), published on October 5, 2015. For a detailed explanation, see section “Alternative performance measures” in the following pages of this interim report. 

 

 

 FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW31

 

Global Gas & LNG Portfolio

 

 First Half  
(€ million)20212020Change% Ch.
Operating profit (loss)(240)163(403)..
Exclusion of special items23420034 
Adjusted operating profit (loss)(6)363(369)..
Net finance (expense) income(4) (4) 
Net income (expense) from investments(2)(13)11 
Income taxes(11)(123)112 
Adjusted net profit (loss)(23)227(250)..

 

In the first half of 2021, the Global Gas & LNG Portfolio segment reported an adjusted operating loss of €6 million, down from the performance recorded in the same period of 2020 (adjusted operating profit of €363 million) which benefitted from one-off positive effects from portfolio optimizations. Furthermore, the first half of 2021 was negatively affected by narrowing spreads between the PSV vs. the TTF spot gas prices partly offset by economic benefits from gas contracts renegotiation.

 

The segment reported an adjusted net loss of €23 million compared to the adjusted net profit of €227 million in the first half of 2020.

 

Refining & Marketing and Chemicals

 

 First Half  
(€ million)20212020Change% Ch.
Operating profit (loss)(115)(2,302)2,187..
Exclusion of inventory holding (gains) losses(832)1,370(2,202) 
Exclusion of special items1,0171,021(4) 
Adjusted operating profit (loss)7089(19)(21.3)
- Refining & Marketing(171)220(391)..
- Chemicals241(131)372..
Net finance (expense) income(10)(7)(3) 
Net income (expense) from investments(33)(29)(4) 
   of which: ADNOC R&GT(49)(32)  
Income taxes(3)(37)34 
Adjusted net profit (loss)2416850.0

 

In the first half of 2021, the Refining & Marketing and Chemicals segment reported an adjusted operating profit of €70 million, down by 21% from the first half of 2020.

 

In the first half of 2021, the Refining & Marketing business reported an adjusted operating loss of €171 million compared to an adjusted operating profit of €220 million in the same period of 2020, driven by a depressed refining scenario due to the long-lasting effects of COVID-19 as demonstrated by the slow recovery in air travel and other market dislocations, as well as higher expenses for the purchase of emission allowances. The optimization of the industrial set-up allowed for a partial recovery of the loss driven by scenario. The marketing business benefitted from the reopening of the economy leading to a rebound in sales volumes, partly offset by lower margins.

 

In the first half of 2021, the Chemical business, managed by Versalis, reported an adjusted operating profit of €241 million, significantly better than the first half of 2020 when an adjusted operating loss of €131 million was incurred. The performance was driven by a broad-based recovery in the demands for commodities in key end-markets like the automotive, the packaging and the consumer staples sectors, which sustained volumes and margins. The green chemicals business also performed well. Furthermore, the segment was able to capture additional sale volumes (volumes increased by 21% in the first half) thanks to higher plant availability, leveraging on the rebound in demand and the lower imports from the producing countries (the USA and the Middle East).

 

 32FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

The Refining & Marketing and Chemicals reported an adjusted net profit of €24 million (adjusted net profit of €16 million in the same period of 2020) due to the worsening performance of the R&M business.

 

Eni gas e luce, Power & Renewables

 First Half  
(€ million)20212020Change% Ch.
Operating profit (loss)828213615..
Exclusion of special items(518)63(581) 
Adjusted operating profit (loss)3102763412.3
- Eni gas e luce & Renewables2471737442.8
- Power63103(40)(38.8)
Net finance (expense) income(1)(1)  
Net income (expense) from investments37(4) 
Income taxes(89)(87)(2) 
Adjusted net profit (loss)2231952814.4

 

In the first half of 2021, the Eni gas e luce & Renewables business reported an adjusted operating profit of €247 million, up by 43% from the first half of 2020. The performance was supported by gains in the extra-commodity business, also leveraging the integration of the distributed photovoltaic business (Evolvere), marketing initiatives in Italy, a growth in the customer base following organic growth and the acquisition of Aldro Energía in Spain, and lower than expected credit losses, following an improving economic cycle.

 

The power generation business from gas-fired plants reported an adjusted operating profit of €63 million, down by 39% from the first half of 2020, driven by an unfavourable trading environment and lower one-off effects.

 

The segment reported an adjusted net profit of €223 million, up by 14%, due to an improved operating performance.

 

 

 FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW33

 

| Alternative performance measures (Non-GAAP measures)

 

Management evaluates underlying business performance on the basis of Non-GAAP financial measures, which are not provided by IFRS (“Alternative performance measures”), such as adjusted operating profit, adjusted net profit, which are arrived at by excluding from reported results certain gains and losses, defined special items, which include, among others, asset impairments, including impairments of deferred tax assets, gains on disposals, risk provisions, restructuring charges, the accounting effect of fair-valued derivatives used to hedge exposure to the commodity, exchange rate and interest rate risks, which lack the formal criteria to be accounted as hedges, and analogously evaluation effects of assets and liabilities utilized in a relation of natural hedge of the above mentioned market risks. Furthermore, in determining the business segments’ adjusted results, finance charges on finance debt and interest income are excluded (see below). In determining adjusted results, inventory holding gains or losses are excluded from base business performance, which is the difference between the cost of sales of the volumes sold in the period based on the cost of supplies of the same period and the cost of sales of the volumes sold calculated using the weighted average cost method of inventory accounting as required by IFRS, except in those business segments where inventories are utilized as a lever to optimize margins.

 

Finally, the same special charges/gains are excluded from the Eni’s share of results at JVs and other equity accounted entities, including any profit/loss on inventory holding.

 

Management is disclosing Non-GAAP measures of performance to facilitate a comparison of base business performance across periods, and to allow financial analysts to evaluate Eni’s trading performance on the basis of their forecasting models.

 

Non-GAAP financial measures should be read together with information determined by applying IFRS and do not stand in for them. Other companies may adopt different methodologies to determine Non-GAAP measures.

 

Follows the description of the main alternative performance measures adopted by Eni. The measures reported below refer to the performance of the reporting periods disclosed in this press release:

 

Adjusted operating and net profit

 

Adjusted operating and net profit are determined by excluding inventory holding gains or losses, special items and, in determining the business segments’ adjusted results, finance charges on finance debt and interest income. The adjusted operating profit of each business segment reports gains and losses on derivative financial instruments entered into to manage exposure to movements in foreign currency exchange rates, which impact industrial margins and translation of commercial payables and receivables. Accordingly, also currency translation effects recorded through profit and loss are reported within business segments’ adjusted operating profit. The taxation effect of the items excluded from adjusted operating or net profit is determined based on the specific rate of taxes applicable to each of them. Finance charges or income related to net borrowings excluded from the adjusted net profit of business segments are comprised of interest charges on finance debt and interest income earned on cash and cash equivalents not related to operations. Therefore, the adjusted net profit of business segments includes finance charges or income deriving from certain segment operated assets, i.e., interest income on certain receivable financing and securities related to operations and finance charge pertaining to the accretion of certain provisions recorded on a discounted basis (as in the case of the asset retirement obligations in the Exploration & Production segment).

 

Inventory holding gain or loss

 

This is the difference between the cost of sales of the volumes sold in the period based on the cost of supplies of the same period and the cost of sales of the volumes sold calculated using the weighted average cost method of inventory accounting as required by IFRS.

 

Special items

 

These include certain significant income or charges pertaining to either: (i) infrequent or unusual events and transactions, being identified as non-recurring items under such circumstances; (ii) certain events or transactions which are not considered to be representative of the ordinary course of business, as in the case of environmental provisions, restructuring charges, asset impairments or write ups and gains or losses on divestments even though they occurred in past periods or are likely to occur in future ones. Exchange rate differences and derivatives relating to industrial activities and commercial payables and receivables, particularly exchange rate derivatives to manage commodity pricing formulas which are quoted in a currency other than the functional currency are reclassified in operating profit with a corresponding adjustment to net finance charges, notwithstanding the handling of foreign currency exchange risks is made centrally by netting off naturally-occurring opposite positions and then dealing with any residual risk exposure in the derivative market. Finally, special items include the accounting effects of fair-valued commodity derivatives relating to commercial exposures, in addition to those which lack the criteria to be designed as hedges, also those which are not eligible for the own use exemption, including the ineffective portion of cash flow hedges, as well as the accounting effects of commodity and exchange rates derivatives whenever it is deemed that the underlying transaction is expected to occur in future reporting periods.

 

Correspondently, special charges/gains also include the evaluation effects relating to assets/liabilities utilized in a natural hedge relation to offset a market risk, as in the case of accrued currency differences at finance debt denominated in a currency other than the reporting currency, where the cash outflows for the reimbursement are matched by highly probable cash inflows in the same currency. The deferral of both the unrealized portion of fair-valued commodity and other derivatives and evaluation effects are reversed to future reporting periods when the underlying transaction occurs.

 

As provided for in Decision No. 15519 of July 27, 2006 of the Italian market regulator (CONSOB), non-recurring material income or charges are to be clearly reported in the management’s discussion and financial tables.

 

Leverage

 

Leverage is a Non-GAAP measure of the Company’s financial condition, calculated as the ratio between net borrowings and shareholders’ equity, including non-controlling interest. Leverage is the reference ratio to assess the solidity and efficiency of the Group balance sheet in terms of incidence of funding sources including third-party funding and equity as well as to carry out benchmark analysis with industry standards.

 

Gearing

 

Gearing is calculated as the ratio between net borrowings and capital employed net and measures how much of capital employed net is financed recurring to third-party funding.

 

Adjusted net cash before changes in working capital at replacement cost

 

Adjusted net cash is defined as net cash provided from operating activities before changes in working capital at replacement cost and excluding certain non-recurring charges.

 

Free cash flow

 

Free cash flow represents the link existing between changes in cash and cash equivalents (deriving from the statutory cash flows statement) and in net borrowings (deriving from the summarized cash flow statement) that occurred from the beginning of the period to the end of period. Free cash flow is the cash in excess of capital expenditure needs. Starting from free cash flow it is possible to determine either: (i) changes in cash and cash equivalents for the period by adding/deducting cash flows relating to financing debts/receivables (issuance/repayment of debt and receivables related to financing activities), shareholders’ equity (dividends paid, net repurchase of own shares, capital issuance) and the effect of changes in consolidation and of exchange rate differences; (ii) changes in net borrowings for the period by adding/deducting cash flows relating to shareholders’ equity and the effect of changes in consolidation and of exchange rate differences.

 

 34FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

Net borrowings

 

Net borrowings is calculated 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. Financial activities are qualified as “not related to operations” when these are not strictly related to the business operations.

 

Coverage

 

Financial discipline ratio, calculated as the ratio between operating profit and net finance charges.

 

Current ratio

 

Measures the capability of the company to repay short-term debt, calculated as the ratio between current assets and current liabilities.

 

Debt coverage

 

Rating companies use the debt coverage ratio to evaluate debt sustainability. It is calculated as the ratio between net cash provided by operating activities and net borrowings, less cash and cash-equivalents, securities held for non-operating purposes and financing receivables for non-operating purposes.

 

First Half 2021(€ million)Exploration
&
Production
Global Gas &
LNG
Portfolio
Refining &
Marketing and
Chemicals
EGL,
Power &
Renewables
Corporate
and other
activities
Impact of unrealized
intragroup
profit
elimination
GROUP
Reported operating profit (loss) 3,665(240)(115)828(294)133,857
Exclusion of inventory holding (gains) losses  (832)  17(815)
Exclusion of special items:        
- environmental charges 9 65 5 79
- impairment losses (impairment reversals), net (376) 970 8 602
- impairment of exploration projects 22     22
- net gains on disposal of assets (75) (13)(1)1 (88)
- risk provisions 32 (4) (1) 27
- provision for redundancy incentives 15 18122 56
- commodity derivatives  21532(516)  (269)
- exchange rate differences and derivatives 156(2)(2)  53
- other (74)(37)(49) 2 (158)
Special items of operating profit (loss) (446)2341,017(518)37 324
Adjusted operating profit (loss) 3,219(6)70310(257)303,366
Net finance (expense) income ⁽ᵃ⁾ (193)(4)(10)(1)(263) (471)
Net income (expense) from investments ⁽ᵃ⁾ 219(2)(33)3(212) (25)
Income taxes ⁽ᵃ⁾ (1,473)(11)(3)(89)(77)(9)(1,662)
Tax rate (%)       57.9
Adjusted net profit (loss) 1,772(23)24223(809)211,208
of which attributable to:        
- non-controlling interest       9
- Eni's shareholders       1,199
Reported net profit (loss) attributable to Eni's shareholders       1,103
Exclusion of inventory holding (gains) losses       (581)
Exclusion of special items       677
Adjusted net profit (loss) attributable to Eni's shareholders       1,199

 

(a) Excluding special items.  

 

 

 FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW35

 

 

First Half 2020

(€ million)

Exploration
&
Production
Global Gas &
LNG
Portfolio
Refining &
Marketing and
Chemicals
EGL,
Power &
Renewables
Corporate
and other
activities
Impact of unrealized
intragroup
profit
elimination
GROUP
Reported operating profit (loss) (1,678)163(2,302)213(401)230(3,775)
Exclusion of inventory holding (gains) losses   1,370  241,394
Exclusion of special items:        
- environmental charges 1 61   62
- impairment losses (impairment reversals), net 1,681 1,05666 2,749
- net gains on disposal of assets 1 (3) (2) (4)
- risk provisions 85   2 87
- provision for redundancy incentives 1015121 38
- commodity derivatives  151(98)59  112
- exchange rate differences and derivatives  (7)(14)(3)  (24)
- other 1305514 35 234
Special items of operating profit (loss) 1,9082001,0216362 3,254
Adjusted operating profit (loss) 23036389276(339)254873
Net finance (expense) income ⁽ᵃ⁾ (169) (7)(1)(351) (528)
Net income (expense) from investments ⁽ᵃ⁾ 43(13)(29)7(46) (38)
Income taxes ⁽ᵃ⁾ (677)(123)(37)(87)30(65)(959)
Tax rate (%)       ..
Adjusted net profit (loss) (573)22716195(706)189(652)
of which attributable to:        
- non-controlling interest       3
- Eni's shareholders       (655)
Reported net profit (loss) attributable to Eni's shareholders       (7,335)
Exclusion of inventory holding (gains) losses       991
Exclusion of special items       5,689
Adjusted net profit (loss) attributable to Eni's shareholders       (655)
  
(a) Excluding special items. 

 

 36FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

LEVERAGE AND NET BORROWINGS

 

Leverage is a measure used by management to assess the Company’s level of indebtedness. It is calculated as a ratio of net borrowings to shareholders’ equity, including non-controlling interest. Management periodically reviews leverage in order to assess the soundness and efficiency of the Group balance sheet in terms of optimal mix between net borrowings and net equity, and to carry out benchmark analysis with industry standards.

 

    
(€ million)June 30, 2021December 31, 2020Change
Total finance debt26,67726,686(9)
 -  Short-term debt5,5874,791796
 -  Long-term debt21,09021,895(805)
Cash and cash equivalents(9,713)(9,413)(300)
Securities held for trading(6,407)(5,502)(905)
Financing receivables held for non-operating purposes(517)(203)(314)
Net borrowings before lease liabilities ex IFRS 1610,04011,568(1,528)
Lease Liabilities5,2835,018265
- of which Eni working interest3,6353,366269
- of which Joint operators' working interest1,6481,652(4)
Net borrowings post lease liabilities ex IFRS 1615,32316,586(1,263)
Shareholders' equity including non-controlling interest40,58037,4933,087
Leverage before lease liability ex IFRS 160.250.31(0.06)
Leverage after lease liability ex IFRS 160.380.44(0.06)

 

 

 FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW37

 

COMPREHENSIVE INCOME

 

 First Half
(€ million)20212020
Net profit (loss)1,112(7,332)
Items that are not reclassified to profit or loss in later periods188
Share of other comprehensive income on equity accounted entities2 
Change in the fair value of interests with effects on other comprehensive income168
Items that may be reclassified to profit or loss in later periods850(206)
Currency translation differences1,037(164)
Change in the fair value of cash flow hedging derivatives(221)(123)
Share of other comprehensive income on equity-accounted entities(30)46
Taxation6435
Total other items of comprehensive income (loss)868(198)
Total comprehensive income (loss)1,980(7,530)
attributable to:  
- Eni's shareholders1,971(7,533)
- Non-controlling interest93

 

CHANGES IN SHAREHOLDERS’ EQUITY

 

(€ million)   
Shareholders' equity at January 1, 2020  47,900
Total comprehensive income (loss) (7,530) 
Dividends paid to Eni's shareholders (1,536) 
Dividends distributed by consolidated subsidiaries (3) 
Other changes 8 
Total changes  (9,061)
Shareholders' equity at June 30, 2020  38,839
attributable to:   
- Eni's shareholders  38,767
- Non-controlling interest  72
    
    
Shareholders' equity at January 1, 2021  37,493
Total comprehensive income (loss) 1,980 
Dividends paid to Eni's shareholders (857) 
Dividends distributed by consolidated subsidiaries (5) 
Issue of perpetual subordinated bonds 2,000 
Payments on perpetual subordinated bonds (10) 
Cost for the issue of perpetual subordinated bonds (15) 
Other changes (6) 
Total changes  3,087
Shareholders' equity at June 30, 2021  40,580
attributable to:   
- Eni's shareholders  40,496
- Non-controlling interest  84

 

 38FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

|Reconciliation of Summarized Group Balance Sheet and Summarized Group Cash Flow Statement to Statutory Schemes

Summarized Group Balance Sheet

 

Items of Summarized Group Balance Sheet

      
  June 30, 2021December 31, 2020
(where not expressly indicated, the item derives directly from the statutory scheme)Notes to the Consolidated Financial StatementPartial
amounts from statutory scheme
Amounts of the summarized Group schemePartial amounts from statutory schemeAmounts of the summarized Group scheme
 
(€ million)
Fixed assets     
Property, plant and equipment  53,802 53,943
Right of use  4,806 4,643
Intangible assets  3,398 2,936
Inventories - Compulsory stock  1,318 995
Equity-accounted investments and other investments  7,372 7,706
Receivables and securities held for operating activities(see note 14) 1,046 1,037
Net payables related to capital expenditure, made up of:  (1,453) (1,361)
- receivables related to disposals(see note 6)32 21 
- receivables related to disposals non-current(see note 8)11 11 
- liabilities related to capital expenditure(see note 8)(15)   
- payables for purchase of non-current assets(see note 15)(1,481) (1,393) 
Total fixed assets  70,289 69,899
Net working capital     
Inventories  4,593 3,893
Trade receivables(see note 6) 9,446 7,087
Trade payables(see note 15) (10,098) (8,679)
Net tax assets (liabilities), made up of:  (3,728) (2,198)
- current income tax payables (442) (243) 
- non-current income tax payables (342) (360) 
- other current tax liabilities(see note 8)(2,272) (1,124) 
- deferred tax liabilities (5,947) (5,524) 
- other non-current tax liabilities(see note 8)(26) (26) 
- current income tax receivables 160 184 
- non-current income tax receivables 153 153 
- other current tax assets(see note 8)392 450 
- deferred tax assets 4,409 4,109 
- other non-current tax assets(see note 8)180 181 
- receivables for Italian consolidated accounts(see note 6)8 3 
- payables for Italian consolidated accounts(see note 15)(1) (1) 
Provisions  (12,733) (13,438)
Other current assets and liabilities, made up of:  (670) (1,328)
- short-term financial receivables for operating purposes(see note 14)24 22 
- receivables vs. partners for exploration and production activities and other(see note 6)4,094 3,815 
- other current assets(see note 8)7,080 2,236 
- other receivables and other assets non-current(see note 8)892 1,061 
- advances, other payables, payables vs. partners for exploration and production activities and other(see note 15)(2,722) (2,863) 
- other current liabilities(see note 8)(7,668) (3,748) 
- other payables and other liabilities non-current(see note 8)(2,370) (1,851) 
Total net working capital  (13,190) (14,663)
Provisions for employee benefits  (1,226) (1,201)
Assets held for sale including related liabilities  30 44
made up of:     
- assets held for sale 136 44 
- liabilities directly associated with held for sale (106)   
CAPITAL EMPLOYED, NET  55,903 54,079
Shareholders' equity including non-controlling interest  40,580 37,493
Net borrowings     
Total debt, made up of:  26,677 26,686
- long-term debt 21,090 21,895 
- current portion of long-term debt 2,426 1,909 
- short-term debt 3,161 2,882 
less:     
Cash and cash equivalents  (9,713) (9,413)
Securities held for trading  (6,407) (5,502)
Financing receivables for non-operating purposes(see note 14) (517) (203)
Net borrowings before lease liabilities ex IFRS 16  10,040 11,568
Lease liabilities, made up of:  5,283 5,018
- long-term lease liabilities 4,312 4,169 
- current portion of long-term lease liabilities 971 849 
Total net borrowings post lease libilities ex IFRS 16 ⁽ᵃ⁾  15,323 16,586
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  55,903 54,079
 
(a) For details on net borrowings see also note 17  to the condensed consolidated interim financial statements.

 

 

 FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW39

 

Summarized Group Cash Flow Statement

 

Items of Summarized Cash Flow Statement and
confluence/reclassification of items in the statutory scheme
 First Half 2021 First Half 2020
  Partial amounts from statutory schemeAmounts of the summarized Group scheme Partial amounts from statutory schemeAmounts of the summarized Group scheme
   
 
(€ million)
Net profit (loss)  1,112  (7,332)
Adjustments to reconcile net profit (loss) to net cash provided by operating activities:      
Depreciation, depletion and amortization and other non monetary items  4,273  8,305
- depreciation, depletion and amortization 3,322  3,857 
- impairment losses (impairment reversals) of tangible, intangible and right of use, net 602  2,749 
- write-off of tangible and intangible assets 29  347 
- share of profit (loss) of equity-accounted investments 477  1,404 
- other changes (176)  (78) 
- net change in the provisions for employee benefits 19  26 
Gains on disposal of assets, net  (88)  (4)
Dividends, interests, income taxes and other changes  2,135  1,966
- dividend income (66)  (72) 
- interest income (38)  (72) 
- interest expense 394  458 
- income taxes 1,845  1,652 
Cash flow from changes in working capital  (1,797)  688
- inventories (890)  1,061 
- trade receivables (1,916)  2,016 
- trade payables 1,016  (2,605) 
- provisions for contingencies (242)  (399) 
- other assets and liabilities 235  615 
Dividends received  354  328
Income taxes paid, net of tax receivables received  (1,502)  (1,072)
Interests (paid) received  (394)  (501)
- interest received 15  33 
- interest paid (409)  (534) 
Net cash provided by operating activities  4,093  2,378
Investing activities  (2,389)  (2,568)
- tangible assets (2,276)  (2,469) 
- prepaid right of use (2)    
- intangible assets (111)  (99) 
Investments and purchase of consolidated subsidiaries and businesses  (871)  (264)
- investments (540)  (155) 
- consolidated subsidiaries and businesses net of cash and cash equivalent acquired (331)  (109) 
Disposals  237  21
- tangible assets 176  15 
- intangible assets 1    
- Consolidated subsidiaries and businesses net of cash
and cash equivalent disposed of
 76    
- tax disposals (35)    
- investments 19  6 
Other cash flow related to capital expenditure, investments and disposals  75  (393)
- investment of securities and financing receivables held for operating purposes (69)  (100) 
- change in payables in relation to investing activities 75  (370) 
- disposal of securities and financing receivables held for operating purposes 79  77 
- change in receivables in relation to disposals (10)    
Free cash flow  1,145  (826)

 

 40FINANCIAL REVIEW AND OTHER INFORMATION | FINANCIAL REVIEW

 

 

continued Summarized Group Cash Flow Statement

 

Items of Summarized Cash Flow Statement and
confluence/reclassification of items in the statutory scheme
 First Half 2021First Half 2020
(€ million) Partial
amounts from
statutory
scheme
Amounts of the
summarized
Group scheme
Partial amounts
from statutory
scheme
Amounts of
the summarized
Group scheme
Free cash flow  1,145 (826)
Borrowings (repayment) of debt related to financing activities  (1,185) 463
- net change of securities and financing receivables held for non-operating purposes (1,185) 463 
Changes in short and long-term finance debt  (361) 2,907
- increase in long-term debt 1,333 4,292 
- repayments of long-term debt (1,912) (2,116) 
- increase (decrease) in short-term debt 218 731 
Repayment of lease liabilities  (445) (462)
Dividends paid and changes in non-controlling interest and reserves  (844) (1,537)
- dividends paid to Eni's shareholders (839) (1,534) 
- dividends paid to non-controlling interest (5) (3) 
Net issue (repayment) of perpetual hybrid bond  1,975  
- issue of perpetual subordinated bonds 1,985   
- payments on perpetual subordinated bonds (10)   
Effect of changes in consolidation, exchange differences and cash and cash equivalent  22 (12)
- effect of exchange rate changes on cash and cash equivalents and other changes 22 (12) 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT  307 533

 

 

 FINANCIAL REVIEW AND OTHER INFORMATION | RISK FACTORS AND UNCERTAINTIES41

 

Risk factors and uncertainties

 

Strategic risks and risks related to the business activities and industries of Eni and its consolidated subsidiaries (together, the “Group”)

 

The Company’s performance is affected by volatile prices of crude oil and produced natural gas and by fluctuating margins on the marketing of natural gas and on the integrated production and marketing of refined products and chemical products

 

The price of crude oil is the single, largest variable that affects the Company’s operating performance and cash flow. The price of crude oil has a history of volatility because, like other commodities, it is cyclical and is influenced by several macro-factors that are beyond management’s control. Crude oil prices are mainly driven by the balance between global oil supplies and demand and hence the global levels of inventories and spare capacity. In the short-term, worldwide demand for crude oil is highly correlated to the macroeconomic cycle. A downturn in economic activity normally triggers lower global demand for crude oil and possibly a supply build-up. Whenever global supplies of crude oil outstrip demand, crude oil prices weaken. Factors that can influence the global economic activity in the short-term and demand for crude oil include several, unpredictable events, like trends in the economic growth in China, India, the United States and other large oil-consuming countries, financial crisis, geo-political crisis, local conflicts and wars, social instability, pandemic diseases, the flows of international commerce, trade disputes and governments’ fiscal policies, among others. All these events could influence demands for crude oil. In the long-term, factors which can influence demands for crude oil include on the positive side demographic growth, improving living standards and GDP expansion. Negative factors that may affect demand in the long-term comprise availability of alternative sources of energy (e.g., nuclear and renewables), technological advances affecting energy efficiency, measures which have been adopted or planned by governments all around the world to tackle climate change and to curb carbon-dioxide emissions (CO2 emissions), including stricter regulations and control on production and consumption of crude oil, or a shift in consumer preferences. The civil society and several governments all over the world, with the EU leading the way, have announced plans to transition towards a low-carbon model through various means and strategies, particularly by supporting development of renewable energies and the replacement of internal combustion vehicles with electric vehicles, including the possible adoption of tougher regulations on the use of hydrocarbons such as the taxation of CO2 emissions as a mitigation action of the climate change risk. The push to reduce worldwide greenhouse gas emissions and an ongoing energy transition towards a low carbon economy, which are widely considered to be irreversible trends, will represent in our view major trends in shaping global demand for crude oil over the long-term and may lead to structural lower crude oil demands and consumption. We also believe that the dramatic events of 2020 in relation to the spread of the COVID-19 pandemic could have possibly accelerated those trends. See the section dedicated to the discussion of climate-related risks below. Global production of crude oil is controlled to a large degree by the OPEC cartel, which has recently extended to include other important oil producers like Russia and Kazakhstan to form the so-called alliance OPEC+. Saudi Arabia plays a crucial role within the cartel, because it is estimated to hold huge amounts of reserves and a vast majority of worldwide spare production capacity. This explains why geopolitical developments in the Middle East and particularly in the Gulf area, like regional conflicts, acts of war, strikes, attacks, sabotages and social and political tensions can have a big influence on crude oil prices. Also, sanctions imposed by the United States and the EU against certain producing countries may influence trends in crude oil prices.

 

To a lesser extent, factors like adverse weather conditions such as, hurricanes in sensitive areas like the Gulf of Mexico, and operational issues at key petroleum infrastructure can influence crude oil prices.

 

The recovery of crude oil prices that commenced in the final months of 2020 strengthened throughout the first half of 2021 due to a favorable combination of market and macro developments, most notably: a break-through in the development and approval of effective vaccines against COVID-19 and the subsequent effectiveness of the vaccination campaign, an acceleration in the pace of economic activity in Asia, the outcome of the presidential election in the United States, the continuing production management implemented by the OPEC+ alliance and finally the progressive reopening of the economies of the USA and of countries in Northern-Western Europe. Against the backdrop of a more constructive macro environment and better energy fundamentals, crude oil prices recovered strongly in the first half of 2021 with the Brent crude oil benchmark up by 60% to 65 $/bbl on average.

 

42FINANCIAL REVIEW AND OTHER INFORMATION | RISK FACTORS AND UNCERTAINTIES

 

 

Notwithstanding the Brent price rebound in 2021, in its 2021 interim consolidated financial report, Eni’s management confirmed its long-term forecast for hydrocarbon prices, which are the main driver of capital allocations decisions and of the recoverability assessment of the book values of our non-current assets. The revised scenario adopted by Eni foresees a long-term price of the marker Brent of 60 $/bbl in 2023 real terms.

 

Gas prices, also negatively affected in 2020 by the economic crisis due to COVID-19 pandemic, recorded an even more significant recovery than oil, due to the absorption of the excess supply of LNG due to the financial discipline of the US shale producers which reduced associated gas production to be exported. In addition, global gas demand recorded a significant increase in 2021 also in relation to a particularly cold winter season in the South-East Asia and subsequently due to the resumption of industrial activity. The spot prices of natural gas recorded in the main markets of continental Europe more than doubled: PSV Italia average of 231 €/thousand cubic meters (up by 138% when comparing the first half of 2021 vs. the first half of 2020), even more accentuated the TTF which directly benefited from decreasing LNG import flows with an average price of €229/thousand cubic meters (up by 187%) in the first half of 2021.

 

Lower hydrocarbon prices from one year to another negatively affect the Group’s consolidated results of operations and cash flow. This is because lower prices translate into lower revenues recognized in the Company’s Exploration & Production segment at the time of the price change, whereas expenses in this segment are either fixed or less sensitive to changes in crude oil prices than revenues. In the first half of 2021, the Group’s operating performance on an adjusted basis (excluding non-recurring items and special items) reported an increase of €2.5 billion compared to the same period of the previous year, an almost four-fold increase, benefitting from the recovery in hydrocarbons prices. The Group cash flow from operating activities grew by €1.7 billion or 72%.

 

Eni estimates that approximately 50% of its current production is exposed to fluctuations in hydrocarbons prices. Exposure to this strategic risk is not subject to economic hedging, except for some specific market conditions or transactions. The remaining portion of Eni’s current production is largely unaffected by crude oil price movements considering that the Company’s property portfolio is characterized by a sizeable presence of production sharing contracts, whereby the Company is entitled to a portion of a field’s reserves, the sale of which is intended to cover expenditures incurred by the Company to develop and operate the field. The higher the reference prices for Brent crude oil used to estimate Eni’s proved reserves, the lower the number of barrels necessary to recover the same amount of expenditure and hence production, and vice versa. In the first half 2021, we estimated 300 boe/d of lower entitlements for each one-dollar increase in the price of the Brent crude oil (for a total lower volume of 6 kboe/d).

 

The oil and gas industry is capital intensive. Eni makes and expects to continue to make substantial capital expenditures in its business for the exploration, development and production of oil and natural gas reserves. Over the next four years, the Company plans to invest in the oil&gas business approximately an average of €4.5 billion per year (approximately €6 billion, before the COVID-19 pandemic). Historically, Eni’s capital expenditures have been financed with cash generated from operations, proceeds from asset disposals, borrowings under its credit facilities and proceeds from the issuance of debt and bonds. The actual amount and timing of future capital expenditures may differ materially from Eni’s estimates as a result of, among other things, changes in commodity prices, available cash flows, lack of access to capital, actual drilling results, the availability of drilling rigs and other services and equipment, the availability of transportation capacity, and regulatory, technological and competitive developments. Eni’s cash flows from operations and access to capital markets are subject to a number of variables, including but not limited to:

 

the amount of Eni’s proved reserves;

the volume of crude oil and natural gas Eni is able to produce and sell from existing wells;

the prices at which crude oil and natural gas are sold;

Eni’s ability to acquire, find and produce new reserves; and

the ability and willingness of Eni’s lenders to extend credit or of participants in the capital markets to invest in Eni’s bonds.

 

If revenues or Eni’s ability to borrow decrease significantly due to factors such as a prolonged decline in crude oil and natural gas prices, Eni might have limited ability to obtain the capital necessary to sustain its planned capital expenditures. If cash generated by operations, cash from asset disposals, or cash available under Eni’s liquidity reserves or its credit facilities is not sufficient to meet capital requirements, the failure to obtain additional financing could result in a curtailment of operations relating to development of Eni’s reserves, which in turn could adversely affect its business, financial condition, results of operations, and cash flows and its ability to achieve its growth plans. These factors could also negatively affect shareholders’ returns, including the amount of cash available for dividend distribution and share repurchases, as well as the share price. In addition, funding Eni’s capital expenditures with additional debt will increase its leverage and the issuance of additional debt will require a portion of Eni’s cash flows from operations to be used for the payment of interest and principal on its debt, thereby reducing its ability to use cash flows to fund capital expenditures and dividends.

 

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In case the Company’s exploration efforts are unsuccessful at replacing produced oil and natural gas, its reserves will decline. In addition to being a function of production, revisions and new discoveries, the Company’s reserve replacement is also affected by the entitlement mechanism in its production sharing agreements (“PSAs”), whereby the Company is entitled to a portion of a field’s reserves, the sale of which is intended to cover expenditures incurred by the Company to develop and operate the field. The higher the reference prices for Brent crude oil used to estimate Eni’s proved reserves, the lower the number of barrels necessary to recover the same amount of expenditure, and vice versa. Although Eni has not currently experienced any difficulties in accessing bank credits, obtaining new loans is exposed to the risk of growing distrust by banks and other financial institutions to provide funds to support new oil & gas projects in relation to the energy transition. This could lead to an increase of new issues’ cost or the need to revise development programs. For these reasons, Eni management has retained financial discipline and strict selective criteria in assessing capital projects to increase the resilience of oil & gas asset portfolio to the volatility of oil prices, reducing the Brent price floor at which Eni's oil & gas business is able to self-finance its expenditures. The capex plan for exploration and development of hydrocarbon reserves has a significant "uncommitted" share, allowing the company to maintain adequate financial flexibility in case of sudden changes in the trading environment.

 

All these risks may adversely and materially impact the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s share.

 

Eni’s Refining & Marketing and Chemical business are in highly-cyclical sectors. Their results are impacted by trends in the supply and demand of oil products and plastic commodities, which are influenced by the macro-economic scenario and by products margins. Generally speaking, margins for refined and chemical products depend upon the speed at which products’ prices adjust to reflect movements in oil prices.

 

Our Refining business has been negatively affected for years by structural headwinds due to muted trends in the European demand for fuels, refining overcapacity and continued competitive pressure from players in the Middle East, the United States and Far East Asia. Those competitors can leverage on larger plant scale and cost economies, availability of cheaper feedstock and lower energy expenses. This unfavorable competitive environment has been exacerbated by the effects of the 2020 economic crisis due to the COVID-19 pandemic, the consequent lockdown of entire economies and travel restrictions, which drove a collapse in the consumption of motor gasoline, jet fuels and other refined products. The macroeconomic recovery in the first half of 2021 removed only partially those headwinds as travel restrictions in the civil airline sector continued to negatively affect demands for jet fuels driving downward the refining margins.

 

Furthermore, the profitability of our business was also negatively affected by the appreciation of sour crude oils towards medium/light qualities such as the Brent, due to market dislocations and the effects of the production cuts implemented by the OPEC+, which reduced availability of sour crudes in the marketplace. This latter trend negatively affected the profitability of conversion plants, which are normally supported by the fact that heavy and sour crudes trade at a discount vs. the light qualities as the Brent. Due to these market trends, in the first half 2021 the Company’s own internal performance measure to gauge the profitability of its refineries, the SERM (see glossary), fell to historic lows, plunging into negative territory at minus 0.5 $/bbl on average compared to 2.9 $/bbl in the comparative period.

 

Furthermore, costs associated with emission quotas, incurred to meet the compliance requirements (e.g. Emission Trading Scheme) determined on the basis of market prices, recognized in relation to the amounts of the carbon dioxide emissions that exceed free allowances, negatively affected operating expenses. In the first half of 2021, cost of emission allowances doubled compared to the first half of 2020 (on average around 44 €/tonnes) reflecting both the recovery in industrial activity and the expectations of increasingly stringent EU allocation policies in relation to the climate objectives set in the European Green Deal.

 

On the basis of these developments in the trading environment, management revised downwardly the projections of refining margins in the short to medium term, while forecast of CO2 charges have been revised upwards with a consequent negative revision of expected future cash flows associated with refinery activity recognizing assets impairment losses of approximately €0.9 billion. These, added to approximately €1.8 billion of impairment losses recorded in the previous two years, substantially zeroed the book value of Eni’s European refineries.

 

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Eni’s Chemical business is characterized by market trends similar to those of the refining business. We have been facing for years strong competition from well-established international players and state-owned petrochemical companies, particularly in the most commoditized market segments such as the production of basic petrochemical products (like ethylene and polyethylene), where demand is a function of macroeconomic growth. Many of these competitors based in the Far East and the Middle East have been able to benefit from cost economies due to larger plant scale, wide geographic moat, availability of cheap feedstock and proximity to end-markets. Excess worldwide capacity of petrochemical commodities has also fueled competition in this business. Furthermore, petrochemical producers based in the United States have regained market share, as their cost structure has become competitive due to the availability of cheap feedstock deriving from the production of domestic shale gas from which ethane is derived, which is a cheaper raw material for the production of ethylene than the oil-based feedstock utilized by Eni’s petrochemical subsidiaries. Finally, rising public concern about climate change and the preservation of the environment has begun to negatively affect the consumption of single-use plastics. In 2020, these competitive dynamics were greatly amplified by the economic crisis triggered by the lockdown measures in response to the COVID-19 pandemic, which negatively affected plant utilization rates and sales volumes, particularly in those segments more exposed to the recession of their customer segments, like in the case of sales volumes of elastomers to the automotive industry. In the first half of 2021 Eni’s chemical business benefitted from improved petrochemical product margins mainly driven by a macroeconomic recovery, which mitigated the competitive pressure, and contingent factors due to temporary supply shortages. In the second half of 2021, is expected a rebalancing of the supply-demand in the reference industry, entailing a downward trend on products prices; however, margins are foreseen to remain at a higher level than those recorded in the second half of 2020.

 

Eni’s management is implementing a strategic path to re-position these two businesses to reduce the weight of the commodity segments with weak fundamentals in its portfolio and exposed to the volatility of hydrocarbon margins, while increasing biofuels and chemical business from renewable and recycled source, as well as increasing high added value polymers, characterized by greater stability and interesting growth prospects.

 

Risks related to political considerations

 

As of December 31, 2020, approximately 83% of Eni’s proved hydrocarbon reserves were located in non-OECD countries, mainly in Africa and central-south East Asia, where the socio-political framework, the financial system and the macroeconomic outlook are less stable than in the OECD countries. In those non-OECD countries, Eni is exposed to a wide range of political risks and uncertainties, which may impair Eni’s ability to continue operating economically on a temporary or permanent basis, and Eni’s ability to access oil and gas reserves. Particularly, Eni faces risks in connection with the following potential issues and risks:

 

   socio-political instability leading to internal conflicts, revolutions, establishment of non-democratic regimes, protests, attacks, strikes and other forms of civil disorder and unrest, such as strikes, riots, sabotage, acts of violence and similar events. These risks could result in disruptions to economic activity, loss of output, plant closures and shutdowns, project delays, loss of assets and threats to the security of personnel. They may disrupt financial and commercial markets, including the supply of and pricing for oil and natural gas, and generate greater political and economic instability in some of the geographical areas in which Eni operates. Additionally, any possible reprisals because of military or other action, such as acts of terrorism in Europe, the United States or elsewhere, could have a material adverse effect on the world economy and hence on the global demand for hydrocarbons;

     lack of well-established and reliable legal systems and uncertainties surrounding the enforcement of contractual rights;

     unfavourable enforcement of laws, regulations and contractual arrangements leading, for example, to expropriation, nationalisation or forced divestiture of assets and unilateral cancellation or modification of contractual terms;

     sovereign default or financial instability due to the fact that those countries rely heavily on petroleum revenues to sustain public finance and petroleum revenues have dramatically contracted in 2020 due plunging hydrocarbons prices as a consequence of the global economic crisis caused by the COVID-19 pandemic. Financial difficulties at country level often translate into failure by state-owned companies and agencies to fulfil their financial obligations towards Eni relating to funding capital commitments in projects operated by Eni or to timely paying for supplies of equity oil and gas volumes;

•     restrictions on exploration, production, imports and exports;

 

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       tax or royalty increases (including retroactive claims);

       difficulties in finding qualified international or local suppliers in critical operating environments; and

       complex processes of granting authorisations or licences affecting time-to-market of certain development projects.

 

The financial outlook of several, non-OECD countries where Eni is operating was significantly affected by the material contraction recorded in hydrocarbons revenues following the COVID-19 pandemic, which also increased the counterparty risk of a few state-owned or privately-held local companies that are Eni’s partners in certain projects to develop oil&gas reserves.

 

Areas where Eni operates and where the Company is particularly exposed to political risk include, but are not limited to Libya, Venezuela and Nigeria.

 

Eni’s operations in Libya are currently exposed to significant geopolitical risks. The social and political instability of the Country dates back to the revolution of 2011 that brought a change of regime and a civil war, triggering an uninterrupted period of lack of well-established institutions and recurrent episodes of internal conflict, clashes, disorders and other forms of civil turmoil. In the year of the revolution, Eni’s operations in Libya were materially affected by a full-scale war, which forced the Company to shut down its development and extractive activities for almost all of 2011, with a significant negative impact on the Group’s results of operation and cash flow. In subsequent years Eni has experienced frequent disruptions to its operations, albeit on a smaller scale than in 2011, due to security threats to its installations and personnel. The situation begun to improve in September 2020, thanks to a temporary agreement between the conflicting factions which enabled a full resumption of operations at all Libyan oilfields, revoking force majeure declared at the start of 2020. In the first half 2021, Eni’s production in Libya amounted to 167 kboe/d, increasing from the first half 2020 and was in line with management’s plans. Despite this, management believes that Libya’s geopolitical situation will continue to represent a source of risk and uncertainty to Eni’s operations in the country and to the Group’s results of operations and cash flow. Currently, Libyan production represents approximately 10% of the Group’s total production; this percentage is forecasted to decrease in the medium term in line with the expected implementation of the Group’s strategy intended to diversify the Group’s geographical presence to better balance the geopolitical risk of the portfolio by expanding the Group’s presence in the United Arabian Emirates and Norway.

 

Venezuela is currently experiencing a situation of financial stress, which has been exacerbated by the economic recession caused by the effects of the COVID-19 pandemic. Lack of financial resources to support the development of the country’s hydrocarbons reserves has negatively affected the country’s production levels and hence fiscal revenues. The situation has been made worse by certain international sanctions targeting the country’s financial system and its ability to export crude oil to U.S. markets, which is the main outlet of Venezuelan production.

 

Presently, the Company retains only one valuable asset in Venezuela: the 50%-participated Cardón IV joint venture, which is operating a natural gas offshore project and is supplying its production to the national oil company, PDVSA, under a long-term supply agreement. We also hold an equity interest in other two oil projects: the PetroJunin oilfield and the Corocoro field, with respect to which in past years we have registered significant impairment losses and reserves de-bookings, with currently little value left to recover. The main risk to Eni’s ability to recover its investment is the continued difficulty on the part of PDVSA to pay the receivables for the gas supplies of Cardón IV, resulting in a significant amount of overdue receivables. The joint-venture is systematically booking a loss provision on the revenues accrued. As at June 30, 2021, Eni’s invested capital in Venezuela was approximately $1 billion. Due to a tightening of the international sanction regime, during the course of the first half 2021 Eni was unable to obtain any in-king reimbursement of its outstanding trade receivable towards PDVSA, including any amounts billed by the venture during the period for the gas volumes supplied.

 

We have significant credit exposure in Nigeria to state-owned and privately-held local companies, where the overall financial and economic outlook of the country has been made worse by the contraction of petroleum revenues due to the crisis of the oil sector in 2020 caused by the COVID-19 pandemic. Our credit exposure relates to the funding of the share of capital expenditures pertaining to Nigerian joint operators at Eni-operated oil projects. We have incurred in the past and it is possible to continue incurring in the future significant credit losses because of the ongoing difficulties of our Nigerian counterparts to reimburse amounts past due.

 

Furthermore, we have requested the conversion of our asset “Oil Prospecting License 245” that expired in May 2021 to an oil mining license in compliance with contractual terms and conditions. However, the relevant Nigerian authorities are holding back the approval. We have started an arbitration before an ICSID court to preserve the value of our asset. For more information please refer to note 9 to the consolidated financial statements of this interim report.

 

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Climate-related risks

 

The civil society and the national governments adhering to the 2015 COP 21 Paris Agreement are stepping up efforts to reduce the risks of climate change and to support an ongoing transition to a low-carbon economy, which will likely lead to the adoption of national and international laws and regulations intended to curb carbon emissions, as well as to the implementation of fiscal measures which could possibly drive technological breakthrough in the use of hydrogen, exponential growth in the development of renewables energies and fast-growing adoption of electric vehicles, thus reducing the world’s economy reliance on fossil fuels. These trends could materially affect demand for hydrocarbons in the long-term, while we expect increased compliance costs for the Company in the short-term. Eni is also exposed to risks of unpredictable extreme meteorological events linked to climate change. All these developments may adversely and materially affect the Group’s profitability, businesses outlook and reputation

 

The civil society and the national governments adhering to the 2015 COP 21 Paris Agreement, with the EU playing a leading role, are advancing plans and initiatives intended to transition the economy towards a low-carbon model in the long run, as the scientific community has been sounding alarms over the potential, catastrophic consequences for human life on the planet in connection with risks of climate change, based on the scientific relationship between global warming and increasing GHG concentration in the atmosphere, mainly as a result of burning fossil fuels. This push, as well as increasingly stricter regulations in this area, could adversely and materially affect the Group’s business.

 

Those risks may emerge in the short and medium-term, as well as over the long term.

 

Eni expects that the achievement of the Paris Agreement goal of limiting the rise in temperature to well below 2° C above pre-industrial levels, or the more stringent goal advocated by the Intergovernmental Panel on Climate Change (IPCC) of limiting global warming to 1.5° C, will strengthen the global response to the issue of climate change and spur governments to introduce measures and policies targeting the reduction of GHG emissions, which are expected to bring about a gradual reduction in the use of fossil fuels over the medium to long-term, notably through the diversification of the energy mix, likely reducing local demand for fossil fuels and negatively affecting global demand for oil and natural gas.

 

Recently, governmental institutions have responded to the issue of climate change on two fronts: on the one side, governments can both impose taxes on GHG emissions and incentivize a progressive shift in the energy mix away from fossil fuels, for example, by subsidizing the power generation from renewable sources; on the other side they can promote worldwide agreements to reduce the consumption of hydrocarbons. This trend has been progressively gaining traction with an increasing number of governments adopting national agendas and strategies intended to reach the goals of the Paris Agreement and formally pledging to obtain net-zero emissions by 2050, like the EU’s Green Deal, which may lead to the enactment of various measure to constrain, limit or prohibit altogether the use of fossil fuels. This trend could increase both in breadth and severity if more governments follow suit.

 

The dramatic fallout of the COVID-19 pandemic on economic activity and people’s lifestyle could possibly result in a breakthrough in the evolution towards a low-carbon model of development. The unprecedented contraction in economic activity caused by the lockdown measures adopted throughout the world to contain the spread of the virus, which resulted in the suppression of demand for hydrocarbons, could have an enduring impact on the future role of hydrocarbons in satisfying global energy needs. This is because many governments and the EU have deployed massive amounts of resources to help rebuild entire economies and industrial sectors hit by the pandemic-induced crisis and a large part of this economic stimulus has been or is planned to be directed to help transitioning the economy and the energy mix towards a low-carbon model, as in the case of the EU’s recovery fund, which provides for huge investments in the sector of renewable energies and the green economy, including large-scale adoption of hydrogen as a new energy source. At the same time, the auto industry is ramping up production of electric vehicles (EVs) and boosting the EVs line-up, while large amounts of risk capital and financing is propelling the growth of an entire new industry of pure-EV players. The growing role of EVs in transportation is leveraging on state subsidies to incentivize the purchase of EVs and growing interest among consumers towards EVs. Other potentially disruptive technologies designated to produce energy without fossil fuels and to replace the combustion engine in the transport sector are emerging, driven by the development of hydrogen-based innovations. These trends could disrupt demand for hydrocarbons in the not so distant future, with many forecasters, both within the industry, or state agencies and independent observers predicting peak oil demand sometimes in the next ten years or earlier; some operators still consider 2019 as the peak year for oil demand. A large portion of Eni’s business depends on the global demand for oil and natural gas. If existing or future laws, regulations, treaties, or international agreements related to GHG and climate change, including state incentives to conserve energy or use alternative energy sources, technological breakthrough in the field of renewable energies or mass-adoption of electric vehicles trigger a structural decline in worldwide demand for oil and natural gas, our results of operations and business prospects may be materially and adversely affected.

 

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We expect our operating and compliance expenses to increase in the short-term due to the likely growing adoption of carbon tax mechanisms. Some governments have already introduced carbon pricing schemes, which can be an effective measure to reduce GHG emissions at the lowest overall cost to society. Today, about half of the direct GHG emissions coming from Eni’s operated assets are included in national or supranational Carbon Pricing Mechanisms, such as the European Emission Trading Scheme (ETS), as a result of which the Company incurs operating expenses. For example, under the European ETS, Eni is obligated to purchase, on the open markets, emission allowances in case its GHG emissions exceed a pre-set amount of free emission allowances. In 2020 to comply with this carbon emissions scheme, Eni purchased on the open market allowances corresponding to 10.5 million tonnes of CO2 emissions. Due to the likelihood of new regulations in this area and expectations of a reduction in free allowances under the European ETS and of the adoption of similar schemes by a rising number of governments, Eni is aware of the risk that a growing share of the Group’s GHG emissions could be subject to carbon-pricing and other forms of climate regulation in the not so distant future, leading to additional compliance obligations with respect to the release, capture, and use of carbon dioxide that could result in increased investments and higher project costs for Eni. Eni also expects that governments will require companies to apply technical measures to reduce their GHG emissions.

 

The scientific community has concluded that increasing global average temperature produces significant physical effects, such as the increased frequency and severity of hurricanes, storms, droughts, floods or other extreme climatic events that could interfere with Eni’s operations and damage Eni’s facilities. Extreme and unpredictable weather phenomena can result in material disruption to Eni’s operations, and consequent loss of or damage to properties and facilities, as well as a loss of output, loss of revenues, increasing maintenance and repair expenses and cash flow shortfall.

 

Finally, there is a reputational risk linked to the fact that oil companies are increasingly perceived by institutions and the general public as entities primarily responsible for global warming due to GHG emissions across the hydrocarbons value-chain, particularly related with the use of energy products. This could possibly make Eni’s shares less attractive to investment funds and individual investors who have been more and more assessing the risk profile of companies against their carbon footprint when making investment decisions. Furthermore, a growing number of financing institutions, including insurance companies, appear to be considering limiting their exposure to fossil fuel projects, as witnessed by a pledge from the World Bank to stop financing upstream oil and gas projects and a proposal from the EU finance minister to reduce the financing granted to oil&gas projects via the European Investment Bank (EIB). This trend could have a material adverse effect on the price of our securities and our ability to access equity or other capital markets. Accordingly, our ability to obtain financing for future projects or to obtain it at competitive rates may be adversely impacted. Further, in some countries, governments and regulators have filed lawsuits seeking to hold fossil fuel companies, including Eni, liable for costs associated with climate change. Losing any of these lawsuits could have a material adverse effect on our business prospects.

 

As a result of these trends, climate-related risks could have a material and adverse effect the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s shares.

 

The Group strategy to decarbonize its operations and its exposure to various decarbonization scenarios is fully described in Eni’s Annual Report on Form 20-F for the year 2020 filed with the US SEC.

 

One of the milestones of our decarbonization strategy is to achieve by 2030 a net zero carbon footprint in our E&P business relating to scope 1 and 2 emissions on equity basis, with an intermediate target of 50% reduction in 2024 vs. 2018. We are planning to reach this goal:

 

– by increasing efficiency to minimize direct upstream CO2 emissions. As part of this target by 2025 we plan to eliminate routine gas flaring at our industrial processes to extract and treat hydrocarbons and reduce fugitive methane emissions by 80% in our operated assets; and

 

– by offsetting residual upstream emissions through the ramp up of our projects designed to build carbon sinks like the projects for the conservation of primary and secondary forests, projects for the capture and storage of carbon dioxide leveraging our technologies and availability of depleted reservoirs, as well as for carbon capture and reuse which aim at recycling the carbon dioxide to manufacture valuable basic materials.

 

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Our portfolio of oil and gas properties features a large weight of natural gas, the least GHG-emitting fossil energy source, which represented approximately 48% of Eni’s production in 2020 on an available-for-sale basis; as of December 31, 2020, gas reserves represented approximately 49% of Eni’s total proved reserves of its subsidiary undertakings and joint ventures. The other pillar of our resilient portfolio of oil&gas properties is the high incidence of conventional projects, developed through phases and with low CO2 intensity. We estimate that oil&gas projects under execution, which will drive the expected production increase in the next four-year period and attract a large part of the projected development expenditures in the same period, have a price breakeven of around 23 $/bbl. We believe that those characteristics of our portfolio coupled with a relatively low pay-back period will mitigate the risk of stranded reserves going forward, should risks of structurally declining hydrocarbons demands materialize because of stricter global environmental constraints and regulations and changing consumers’ preferences resulting in trends like the mass adoption of electric vehicles or a lower weight of hydrocarbons in the energy mix.

 

On May 18, 2021, the International Energy Agency published its set of assumptions underlying the "NZE2050" scenario. Among those it is worth mentioning: (i) the immediate stop to new oil&gas projects; (ii) a 75% reduction in oil demand by 2050 (24 million bbl/d from the current 96 million bbl/d) and a forecast Brent price of 35 $/bbl by 2030 and 25 $/bbl by 2050, in money of the day. Eni is going to consider this scenario among the third-party information that the Company considers as a reference for its sensitivity analysis.Please refer to the Eni’s Annual Report on Form 20-F for the year 2020 filed with the US SEC for more information on Eni's exposure to climate-related risks based on the guidelines of the TCFD and for the resilience assessments of the oil & gas portfolio to low carbon scenarios (sensitivity analysis).

 

Eni is exposed to the risk of material environmental liabilities in addition to the provisions already accrued in the consolidated financial statement.

 

Eni has incurred in the past and may incur in the future material environmental liabilities in connection with the environmental impact of its past and present industrial activities. Eni is also exposed to claims under environmental requirements and, from time to time, such claims have been made against us. Furthermore, environmental regulations in Italy and elsewhere typically impose strict liability. Strict liability means that in some situations Eni could be exposed to liability for clean-up and remediation costs, environmental damage, and other damages as a result of Eni’s conduct of operations that was lawful at the time it occurred or of the conduct of prior operators or other third parties. In addition, plaintiffs may seek to obtain compensation for damage resulting from events of contamination and pollution or in case the Company is found liable of violations of any environmental laws or regulations. In Italy, Eni is exposed to the risk of expenses and environmental liabilities in connection with the impact of its past activities at certain industrial hubs where the Group’s products were produced, processed, stored, distributed or sold, such as chemical plants, mineral-metallurgic plants, refineries and other facilities, which were subsequently disposed of, liquidated, closed or shut down. At these industrial hubs, Eni has undertaken several initiatives to remediate and to clean-up proprietary or concession areas that were allegedly contaminated and polluted by the Group’s industrial activities. State or local public administrations have sued Eni for environmental and other damages and for clean-up and remediation measures in addition to those which were performed by the Company, or which the Company has committed to perform. In some cases, Eni has been sued for alleged breach of criminal laws (for example for alleged environmental crimes such as failure to perform soil or groundwater reclamation, environmental disaster and contamination, discharge of toxic materials, amongst others). Although Eni believes that it may not be held liable for having exceeded in the past pollution thresholds that are unlawful according to current regulations but were allowed by laws then effective, or because the Group took over operations from third parties, it cannot be excluded that Eni could potentially incur such environmental liabilities. Eni’s financial statements account for provisions relating to the costs to be incurred with respect to clean-ups and remediation of contaminated areas and groundwater for which a legal or constructive obligations exist and the associated costs can be reasonably estimated in a reliable manner, regardless of any previous liability attributable to other parties. The accrued amounts represent management’s best estimates of the Company’s existing liabilities. Management believes that it is possible that in the future Eni may incur significant or material environmental expenses and liabilities in addition to the amounts already accrued due to: (i) the likelihood of as yet unknown contamination; (ii) the results of ongoing 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 sites; (iii) unfavorable developments in ongoing litigation on the environmental status of certain of the Company’s sites where a number of public administrations, the Italian Ministry of the Environment or third parties are claiming compensation for environmental or other damages such as damages to people’s health and loss of property value; (iv) the possibility that new litigation might arise; (v) the probability that new and stricter environmental laws might be implemented; and (vi) the circumstance that the extent and cost of environmental restoration and remediation programs are often inherently difficult to estimate leading to underestimation of the future costs of remediation and restoration, as well as unforeseen adverse developments both in the final remediation costs and with respect to the final liability allocation among the various parties involved at the sites. As a result of these risks, environmental liabilities could be substantial and could have a material adverse effect the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s shares.

 

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Risks associated with the exploration and production of oil and natural gas

 

The exploration and production of oil and natural gas require high levels of capital expenditures and are subject to natural hazards and other uncertainties, including those relating to the physical characteristics of oil and gas fields. The exploration and production activities are subject to mining risk and the risks of cost overruns and delayed start-up at the projects to develop and produce hydrocarbons reserves. Those risks could have an adverse, significant impact on Eni’s future growth prospects, results of operations, cash flows, liquidity and shareholders’ returns.

 

The production of oil and natural gas is highly regulated and is subject to conditions imposed by governments throughout the world in matters such as the award of exploration and production leases, the imposition of specific drilling and other work obligations, higher-than-average rates of income taxes, additional royalties and taxes on production, environmental protection measures, control over the development and decommissioning of fields and installations, and restrictions on production. A description of the main risks facing the Company’s business in the exploration and production of oil and gas is provided below.

 

Exploratory drilling efforts may be unsuccessful

 

Exploration activities are mainly subject to mining risk, i.e. the risk of dry holes or failure to find commercial quantities of hydrocarbons. The costs of drilling and completing wells have margins of uncertainty, and drilling operations may be unsuccessful because of a large variety of factors, including geological failure, unexpected drilling conditions, pressure or heterogeneities in formations, equipment failures, well control (blowouts) and other forms of accidents. A large part of the Company exploratory drilling operations is located offshore, including in deep and ultra-deep waters, in remote areas and in environmentally-sensitive locations (such as the Barents Sea, the Gulf of Mexico, deep water prospect off West Africa, Indonesia, the Mediterranean Sea and the Caspian Sea). In these locations, the Company generally experiences higher operational risks and more challenging conditions and incurs higher exploration costs than onshore. Furthermore, deep and ultra-deep water operations require significant time before commercial production of discovered reserves can commence, increasing both the operational and the financial risks associated with these activities. Because Eni plans to make significant investments in executing exploration projects, it is likely that the Company will incur significant amounts of dry hole expenses in future years. Unsuccessful exploration activities and failure to discover additional commercial reserves could reduce future production of oil and natural gas, which is highly dependent on the rate of success of exploration projects and could have an adverse impact on Eni’s future performance and returns.

 

Development projects bear significant operational risks which may adversely affect actual returns

 

Eni is executing or is planning to execute several development projects to produce and market hydrocarbon reserves. Certain projects target the development of reserves in high-risk areas, particularly deep offshore and in remote and hostile environments or in environmentally sensitive locations. Eni’s future results of operations and business prospects depend heavily on its ability to implement, develop and operate major projects as planned. Key factors that may affect the economics of these projects include:

 

    the outcome of negotiations with joint venture partners, governments and state-owned companies, suppliers and potential customers to define project terms and conditions, including, for example, Eni’s ability to negotiate favourable long-term contracts to market gas reserves;

 

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•    commercial arrangements and granting of all necessary administrative authorizations to build pipelines and related equipment to transport and market hydrocarbons;

•    timely issuance of permits and licenses by government agencies;

    the ability to carry out the front-end engineering design in order to prevent the occurrence of technical inconvenience during the execution phase; timely manufacturing and delivery of critical equipment by contractors, shortages in the availability of such equipment or lack of shipping yards where complex offshore units such as FPSO and platforms are built; delays in achievement of critical phases and project milestones;

    risks associated with the use of new technologies and the inability to develop advanced technologies to maximise the recoverability rate of hydrocarbons or gain access to previously inaccessible reservoirs;

    performance in project execution on the part of contractors who are awarded project construction activities generally based on the EPC (Engineering, Procurement and Construction) contractual scheme;

    changes in operating conditions and cost overruns;

    the actual performance of the reservoir and natural field decline; and the ability and time necessary to build suitable transport infrastructures to export production to final markets.

 

The occurrence of any of such risks may negatively affect the time-to-market of the reserves and cause cost overruns and a delayed pay-back period, therefore adversely affecting the economic returns of Eni’s development projects and the achievement of production growth targets.

 

Development projects normally have long lead times due to the complexity of the activities and tasks that need to be performed before a project final investment decision is made and commercial production can be achieved. Those activities include the appraisal of a discovery to evaluate the technical and economic feasibility of the development project, obtaining the necessary authorizations from governments, state agencies or national oil companies, signing agreements with the first party regulating a project’s contractual terms such as the production sharing, obtaining partners’ approval, environmental permits and other conditions, signing long-term gas contracts, carrying out the concept design and the front-end engineering and building and commissioning the related plants and facilities. All these activities normally can take years to perform. Therefore, rates of return for such projects are exposed to the volatility of oil and gas prices and costs which may be substantially different from those estimated when the investment decision was made, thereby leading to lower return rates. Moreover, projects executed with partners and joint venture partners reduce the ability of the Company to manage risks and costs, and Eni could have limited influence over and control of the operations and performance of its partners. Furthermore, Eni may not have full operational control of the joint ventures in which it participates and may have exposure to counterparty credit risk and disruption of operations and strategic objectives due to the nature of its relationships.

 

Finally, if the Company is unable to develop and operate major projects as planned, particularly if the Company fails to accomplish budgeted costs and time schedules, it could incur significant impairment losses of capitalised costs associated with reduced future cash flows of those projects.

 

Inability to replace oil and natural gas reserves could adversely impact results of operations and financial condition

 

In case the Company’s exploration efforts are unsuccessful at replacing produced oil and natural gas, its reserves will decline. In addition to being a function of production, revisions and new discoveries, the Company’s reserve replacement is also affected by the entitlement mechanism in its production sharing agreements (“PSAs”), whereby the Company is entitled to a portion of a field’s reserves, the sale of which is intended to cover expenditures incurred by the Company to develop and operate the field. The higher the reference prices for Brent crude oil used to estimate Eni’s proved reserves, the lower the number of barrels necessary to recover the same amount of expenditure, and vice versa.

 

Future oil and gas production is a function of the Company’s ability to access new reserves through new discoveries, application of improved techniques, success in development activity, negotiations with national oil companies and other owners of known reserves and acquisitions.

 

An inability to replace produced reserves by discovering, acquiring and developing additional reserves could adversely impact future production levels and growth prospects. If Eni is unsuccessful in meeting its long-term targets of production growth and reserve replacement, Eni’s future total proved reserves and production will decline.

 

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The development of the Group’s proved undeveloped reserves may take longer and may require higher levels of capital expenditures than it currently anticipates, or the Group’s proved undeveloped reserves may not ultimately be developed or produced

 

At December 31, 2020, approximately 30% of the Group’s total estimated proved reserves (by volume) were undeveloped and may not be ultimately developed or produced. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The Group’s reserve estimates assume it can and will make these expenditures and conduct these operations successfully. These assumptions may not prove to be accurate and are subject to the risk of a structural decline in the prices of hydrocarbons due to possible long-lasting effects associated with the COVID-19 pandemic, including acceleration towards a low-carbon economy and a shift in consumers’ behaviour and preferences. In case of a continued decline in the prices of hydrocarbon the Group may not have enough financial resources to make the necessary expenditures to recover undeveloped reserves. The Group’s reserve report at December 31, 2020 includes estimates of total future development and decommissioning costs associated with the Group’s proved total reserves of approximately €27.7 billion (undiscounted, including consolidated subsidiaries and equity-accounted entities). It cannot be certain that estimated costs of the development of these reserves will prove correct, development will occur as scheduled, or the results of such development will be as estimated. In case of change in the Company’s plans to develop those reserves, or if it is not otherwise able to successfully develop these reserves as a result of the Group’s inability to fund necessary capital expenditures or otherwise, it will be required to remove the associated volumes from the Group’s reported proved reserves.

 

Oil and gas activity may be subject to increasingly high levels of income taxes and royalties

 

Oil and gas operations are subject to the payment of royalties and income taxes, which tend to be higher than those payable in many other commercial activities. Furthermore, in recent years, Eni has experienced adverse changes in the tax regimes applicable to oil and gas operations in a number of countries where the Company conducts its upstream operations. As a result of these trends, management estimates that the tax rate applicable to the Company’s oil and gas operations is materially higher than the Italian statutory tax rate for corporate profit, which currently stands at 24%. Management believes that the marginal tax rate in the oil and gas industry tends to increase in correlation with higher oil prices, which could make it more difficult for Eni to translate higher oil prices into increased net profit. However, the Company does not expect that the marginal tax rate will decrease in response to falling oil prices. Adverse changes in the tax rate applicable to the Group’s profit before income taxes in its oil and gas operations would have a negative impact on Eni’s future results of operations and cash flows.

 

In the current uncertain financial and economic environment, governments are facing greater pressure on public finances, which may induce them to intervene in the fiscal framework for the oil and gas industry, including the risk of increased taxation, windfall taxes, and even nationalizations and expropriations.

 

The present value of future net revenues from Eni’s proved reserves will not necessarily be the same as the current market value of Eni’s estimated crude oil and natural gas reserves

 

The present value of future net revenues from Eni’s proved reserves may differ from the current market value of Eni’s estimated crude oil and natural gas reserves. In accordance with the SEC rules, Eni bases the estimated discounted future net revenues from proved reserves on the 12-month un-weighted arithmetic average of the first-day-of-the-month commodity prices for the preceding twelve months. Actual future prices may be materially higher or lower than the SEC pricing used in the calculations. Actual future net revenues from crude oil and natural gas properties will be affected by factors such as:

 

     the actual prices Eni receives for sales of crude oil and natural gas;

     the actual cost and timing of development and production expenditures;

     the timing and amount of actual production; and

     changes in governmental regulations or taxation.

 

The timing of both Eni’s production and its incurrence of expenses in connection with the development and production of crude oil and natural gas properties will affect the timing and amount of actual future net revenues from proved reserves, and thus their actual present value. Additionally, the 10% discount factor Eni uses when calculating discounted future net revenues may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with Eni’s reserves or the crude oil and natural gas industry in general.

 

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Oil and gas activity may be subject to increasingly high levels of regulations throughout the world, which may impact our extraction activities and the recoverability of reserves

 

The production of oil and natural gas is highly regulated and is subject to conditions imposed by governments throughout the world in matters such as the award of exploration and production leases, 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. These risks can limit the Group’s access to hydrocarbons reserves or may cause the Group to redesign, curtail or cease its oil&gas operations with significant effects on the Group’s business prospects, results of operations and cash flow.

 

In Italy, the activities of hydrocarbon development and production are performed by oil companies in accordance with concessions granted by the Ministry of Economic Development in agreement with the relevant Region territorially involved in the case of onshore concessions. Concessions are granted for an initial twenty-year term; the concessionaire is entitled to a ten-year extension and then to one or more five-year extensions to fully recover a field’s reserves and investments on the condition that the concessionaire has fulfilled all obligations related to the work program agreed in the initial concession award. In case of delay in the award of an extension, the original concession remains fully effective until the administrative procedure to grant an extension is finalized. These general rules are to be coordinated with a new law that was enacted in February 2019. This law requires certain Italian administrative bodies to adopt by September 2021 a plan intended to identify areas that are suitable for carrying out exploration, development and production of hydrocarbons in the national territory, including the territorial seawaters. Until approval of such a plan, a moratorium on exploration activities, including the award of new exploration leases, has been imposed. Following the plan approval, exploration permits are set to resume in areas that have been identified as suitable and new exploration permits can be awarded. However, in areas that that will be considered unsuitable for such activities, exploration permits will be repealed, applications for obtaining new exploration permits ongoing at the time of the law enactment will be rejected and no new permit applications can be filed. As far as development and production concessions are concerned, pending the national plan approval, ongoing concessions retain their efficacy and administrative procedures underway to grant extensions to expired concessions remain unaffected; however, no applications to obtain new concessions can be filed. Once the above mentioned national plan is adopted, development and production concessions that fall in suitable areas can be granted further extensions and applications for new concessions can be filed; however, development and production concessions in place as at the approval of the national plan that fall in unsuitable areas will be repealed at their expiration and no further extensions will be granted. According to the statute, areas that are suitable to the activities of exploring and developing hydrocarbons must conform to a number of criteria including morphological characteristics and social, urbanistic and industrial constraints, with particular bias for the hydrogeological balance, current territorial planning and with regard to marine areas for externalities on the ecosystem, reviews of marine routes, fishing and any possible impacts on the coastline.

 

The Group’s largest operated development concession in Italy is Val d’Agri, which term expired on October 26, 2019. Development activities at the concession have continued since then in accordance with the “prorogation regime” described above, within the limits of the work plan approved when the concession was first granted. The Company filed an application to obtain a ten-year extension of the concession in accordance to the terms set by the law and before the enactment of the new law on the national plan for hydrocarbons activity. In this application the Company confirmed the same work program as in the original concession award. Similarly, Company operations are underway in accordance to the ongoing prorogation regime at another 41 expired Italian concessions for hydrocarbons development and production. The Company has also filed requests for extensions within the terms of the law for those concessions.

 

As far as proven reserves estimates are concerned, management believes the criteria laid out in the new law to be high-level principles, which make it difficult to identify in a reliable and objective manner areas that might be suitable or unsuitable to hydrocarbons activities before the plan is adopted by Italian authorities. However, based on the review of all facts and circumstances and on the current knowledge of the matter, management does not expect any material impact on the Group’s future performance.

 

Eni’s future performance depends on its ability to identify and mitigate the above-mentioned risks and hazards which are inherent to its oil&gas business. Failure to properly manage those risks, the Company’s underperformance at exploration, development and reserve replacement activities or the occurrence of unforeseen regulatory risks may adversely and materially impact the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s shares.

 

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Uncertainties in estimates of oil and natural gas reserves

 

The accuracy of proved reserve estimates and of projections of future rates of production and timing of development expenditures depends on a number of factors, assumptions and variables, including:

 

•    the quality of available geological, technical and economic data and their interpretation and judgement;

    management’s assumptions regarding future rates of production and costs and timing of operating and development expenditures. The projections of higher operating and development costs may impair the ability of the Company to economically produce reserves leading to downward reserve revisions;

    changes in the prevailing tax rules, other government regulations and contractual conditions;

    results of drilling, testing and the actual production performance of Eni’s reservoirs after the date of the estimates which may drive substantial upward or downward revisions; and

    changes in oil and natural gas prices which could affect the quantities of Eni’s proved reserves since the estimates of reserves are based on prices and costs existing as of the date when these estimates are made. Lower oil prices may impair the ability of the Company to economically produce reserves leading to downward reserve revisions.

 

Many of the factors, assumptions and variables underlying the estimation of proved reserves involve management’s judgement or are outside management’s control (prices, governmental regulations) and may change over time, therefore affecting the estimates of oil and natural gas reserves from year-to-year.

 

The prices used in calculating Eni’s estimated proved reserves are, in accordance with the SEC requirements, calculated by determining the unweighted arithmetic average of the first day-of-the-month commodity prices for the preceding twelve months. Accordingly, the estimated reserves reported as of the end of any given year could be significantly different from the quantities of oil and natural gas that will be ultimately recovered. Any downward revision in Eni’s estimated quantities of proved reserves would indicate lower future production volumes, which could adversely impact Eni’s business prospects, results of operations, cash flows and liquidity.

 

Safety, security, environmental and other operational risks

 

The Group engages in the exploration and production of oil and natural gas, processing, transportation and refining of crude oil, transport of natural gas, storage and distribution of petroleum products and the production of base chemicals, plastics and elastomers. By their nature, the Group’s operations expose Eni to a wide range of significant health, safety, security and environmental risks. Technical faults, malfunctioning of plants, equipment and facilities, control systems failure, human errors, acts of sabotage, attacks, loss of containment and adverse weather events can trigger damaging consequences such as explosions, blow-outs, fires, oil and gas spills from wells, pipeline and tankers, release of contaminants and pollutants in the air, the ground and in the water, toxic emissions and other negative events. The magnitude of these risks is influenced by the geographic range, operational diversity and technical complexity of Eni’s activities. Eni’s future results of operations and liquidity depend on its ability to identify and address the risks and hazards inherent to operating in those industries.

 

In the Exploration & Production segment, Eni faces natural hazards and other operational risks including those relating to the physical and geological characteristics of oil and natural gas fields. These include the risks of eruptions of crude oil or of natural gas, discovery of hydrocarbon pockets with abnormal pressure, crumbling of well openings, leaks that can harm the environment and the security of Eni’s personnel and risks of blowout, fire or explosion.

 

Eni’s activities in the Refining & Marketing and Chemical segment entail health, safety and environmental risks related to the handling, transformation and distribution of oil, oil products and certain petrochemical products. These risks can arise from the intrinsic characteristics and the overall lifecycle of the products manufactured and the raw materials used in the manufacturing process, such as oil-based feedstock, catalysts, additives and monomer feedstock. These risks comprise flammability, toxicity, long-term environmental impact such as greenhouse gas emissions and risks of various forms of pollution and contamination of the soil and the groundwater, emissions and discharges resulting from their use and from recycling or disposing of materials and wastes at the end of their useful life.

 

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All of Eni’s segments of operations involve, to varying degrees, the transportation of hydrocarbons. Risks in transportation activities depend on several factors and variables, including the hazardous nature of the products transported due to their flammability and toxicity, the transportation methods utilized (pipelines, shipping, river freight, rail, road and gas distribution networks), the volumes involved and the sensitivity of the regions through which the transport passes (quality of infrastructure, population density, environmental considerations). All modes of transportation of hydrocarbons are particularly susceptible to risks of blowout, fire and loss of containment and, given that normally high volumes are involved, could present significant risks to people, the environment and the property.

 

Eni has material offshore operations relating to the exploration and production of hydrocarbons. In 2020, approximately 65% of Eni’s total oil and gas production for the year derived from offshore fields, mainly in Egypt, Libya, Angola, Norway, Congo, Indonesia, the United Arab Emirates, Italy, Ghana, Venezuela, the United Kingdom, Nigeria and the United States. Offshore operations in the oil and gas industry are inherently riskier than onshore activities. Offshore accidents and spills could cause damage of catastrophic proportions to the ecosystem and to communities’ health and security due to the apparent difficulties in handling hydrocarbons containment, pollution, poisoning of water and organisms, length and complexity of cleaning operations and other factors. Furthermore, offshore operations are subject to marine risks, including storms and other adverse weather conditions and perils of vessel collisions, which may cause material adverse effects on the Group’s operations and the ecosystem.

 

The Company has invested and will continue to invest significant financial resources to continuously upgrade the methods and systems for safeguarding the reliability of its plants, production facilities, transport and storage infrastructures, the safety and the health of its employees, contractors, local communities and the environment, to prevent risks, to comply with applicable laws and policies and to respond to and learn from unforeseen incidents. Eni seeks to manage these operational risks by carefully designing and building facilities, including wells, industrial complexes, plants and equipment, pipelines, storage sites and other facilities, and managing its operations in a safe and reliable manner and in compliance with all applicable rules and regulations, as well as by applying the best available techniques in the marketplace. However, these measures may ultimately not be completely successful in preventing and/or altogether eliminating risks of adverse events. Failure to properly manage these risks as well as accidental events like human errors, unexpected system failure, sabotages or other unexpected drivers could cause oil spills, blowouts, fire, release of toxic gas and pollutants into the atmosphere or the environment or in underground water and other incidents, all of which could lead to loss of life, damage to properties, environmental pollution, legal liabilities and/or damage claims and consequently a disruption in operations and potential economic losses that could have a material and adverse effect on the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s shares.

 

Eni’s operations are often conducted in difficult and/or environmentally sensitive locations such as the Gulf of Mexico, the Caspian Sea and the Arctic. In such locations, the consequences of any incident could be greater than in other locations. Eni also faces risks once production is discontinued because Eni’s activities require the decommissioning of productive infrastructures and environmental sites remediation and clean-up. Furthermore, in certain situations where Eni is not the operator, the Company may have limited influence and control over third parties, which may limit its ability to manage and control such risks. Eni retains worldwide third-party liability insurance coverage, which is designed to hedge part of the liabilities associated with damage to third parties, loss of value to the Group’s assets related to unfavourable events and in connection with environmental clean-up and remediation. As of the date of this filing, maximum compensation allowed under such insurance coverage is equal to $1.2 billion in case of offshore incident and $1.4 billion in case of incident at onshore facilities (refineries). Additionally, the Company may also activate further insurance coverage in case of specific capital projects and other industrial initiatives. Management believes that its insurance coverage is in line with industry practice and is enough to cover normal risks in its operations. However, the Company is not insured against all potential risks. In the event of a major environmental disaster, such as the incident which occurred at the Macondo well in the Gulf of Mexico several years ago, for example, Eni’s third-party liability insurance would not provide any material coverage and thus the Company’s liability would far exceed the maximum coverage provided by its insurance. The loss Eni could suffer in case of a disaster of material proportions would depend on all the facts and circumstances of the event and would be subject to a whole range of uncertainties, including legal uncertainty as to the scope of liability for consequential damages, which may include economic damage not directly connected to the disaster. The Company cannot guarantee that it will not suffer any uninsured loss and there can be no guarantee, particularly in the case of a major environmental disaster or industrial accident, that such a loss would not have a material adverse effect on the Company. The occurrence of any of the above mentioned risks could have a material and adverse impact on the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s shares and could also damage the Group’s reputation.

 

 

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Risks associated with the regulatory powers entrusted to the Italian Regulatory Authority for Energy, Networks and Environment in the matter of pricing to residential customers

 

Eni’s wholesale gas and retail gas&power businesses are subject to regulatory risks mainly in our domestic market in Italy. The Italian Regulatory Authority for Energy, Networks and Environment (the “Authority”) is entrusted with certain powers in the matter of natural gas and power pricing. Specifically, the Authority retains a surveillance power on pricing in the natural gas market in Italy and the power to establish selling tariffs for the supply of natural gas to residential and commercial users until the market is fully opened. Developments in the regulatory framework intended to increase the level of market liquidity or of de-regulation or intended to reduce operators’ ability to transfer to customers cost increases in raw materials may negatively affect future sales margins of gas and electricity, operating results and cash flow.

 

Risks related to environmental, health and safety regulations and legal risks

 

Eni has incurred in the past, and will continue incurring, material operating expenses and expenditures, and is exposed to business risk in relation to compliance with applicable environmental, health and safety regulations in future years, including compliance with any national or international regulation on GHG emissions

 

Eni is subject to numerous European Union, international, national, regional and local laws and regulations regarding the impact of its operations on the environment and on health and safety of employees, contractors, communities and on the value of properties. We believe that laws and regulations intended to preserve the environment and to safeguard health and safety of workers and communities are particularly severe in our businesses due to their inherent nature because of flammability and toxicity of hydrocarbons and of industrial processes to develop, extract, refine and transport oil, gas and products. Generally, these laws and regulations require 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, including refinery and petrochemical plant operations, limit or prohibit drilling activities in certain protected areas, require to remove and dismantle drilling platforms and other equipment and well plug-in once oil and gas operations have terminated, provide for measures to be taken to protect the safety of the workplace and of plants and infrastructures, the health of employees, contractors and other Company collaborators and of communities involved by the Company’s activities, and impose criminal or civil liabilities for polluting the environment or harming employees’ or communities’ health and safety as result from the Group’s operations. These laws and regulations control the emission of scrap substances and pollutants, discipline the handling of hazardous materials and set limits to or prohibit the discharge of soil, water or groundwater contaminants, emissions of toxic gases and other air pollutants or can impose taxes on polluting air emissions, as in the case of the European Trading Scheme that requires the payment of a tax for each tonns of carbon dioxide emitted in the environment above a pre-set allowance, resulting from the operation of oil and natural gas extraction and processing plants, petrochemical plants, refineries, service stations, vessels, oil carriers, pipeline systems and other facilities owned or operated 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. Breaches of environmental, health and safety laws and regulations as in the case of negligent or willful release of pollutants and contaminants into the atmosphere, the soil, water or groundwater or exceeding the concentration thresholds of contaminants set by the law expose the Company to the incurrence of liabilities associated with compensation for environmental, health or safety damage and expenses for environmental remediation and clean-up. Furthermore, in the case of violation of certain rules regarding the safeguard of the environment and the health of employees, contractors and other collaborators of the Company, and of communities, the Company may incur liabilities in connection with the negligent or willful violation of laws by its employees as per Italian Law Decree No. 231/2001.

 

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Environmental, health and safety laws and regulations have a substantial impact on Eni’s operations. Management expects that the Group will continue to incur significant amounts of operating expenses and expenditures in the foreseeable future to comply with laws and regulations and to safeguard the environment and the health and safety of employees, contractors and communities involved by the Company operations, including:

 

    costs to prevent, control, eliminate or reduce certain types of air and water emissions and handle waste and other hazardous materials, including the costs incurred in connection with government action to address climate change (see the specific section below on climate-related risks);

    remedial and clean-up measures related to environmental contamination or accidents at various sites, including those owned by third parties (see discussion below);

•    damage compensation claimed by individuals and entities, including local, regional or state administrations, should Eni cause any kind of accident, oil spill, well blowouts, pollution, contamination, emission of GHG and other air pollutants above permitted levels or of any other hazardous gases, water, ground or air contaminants or pollutants, as a result of its operations or if the Company is found guilty of violating environmental laws and regulations; and

    costs in connection with the decommissioning and removal of drilling platforms and other facilities, and well plugging at the end of oil&gas field production.

 

As a further consequence of any new laws and regulations or other factors, like the actual or alleged occurrence of environmental damage at Eni’s plants and facilities, the Company may be forced to curtail, modify or cease certain operations or implement temporary shutdowns of facilities. For example, in Italy Eni has experienced in recent years a number of temporary plant shutdowns at our Val d’Agri oil treatment centre due to environmental issues and oil spillovers, causing loss of output and of revenues. The Italian judicial authorities have started legal proceedings to verify alleged environmental crimes or crimes against the public safety and other criminal allegations as described in the notes to the Consolidated Financial Statements. If any of the risks set out above materialise, they could adversely impact the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s shares.

 

Risks specific to the Company’s gas business in Italy

 

Current, negative trends in gas demands and supplies in Europe may impair the Company’s ability to fulfil its minimum off-take obligations in connection with its take-or-pay, long-term gas supply contracts

 

In the first half of 2021, gas prices in Europe, following the strong recovery in the energy scenario, recorded very significant increases in the main benchmarks compared to the first half of 2020 (PSV for the Italian market up by 138%; TTF for the North-Western European markets up by 187%). This performance was driven by a growth in gas demand in Europe which substantially recovered to pre-COVID-19 levels as well as by lower LNG imports due to higher demand, mainly in the Pacific basin, both for the economic recovery and for the particularly winter conditions in the South-East Asia. Gas reference prices at the continental spot markets (TTF) driven by the reduction in LNG import flows reported a greater increase compared to the benchmark price of the Italian spot market (PSV), the latter being held back by the persistence of oversupply in the Italian market due to the start-up of the new TAP import pipeline and the greater imports from North Africa. These drivers were reflected in the substantial reduction of the spreads between the two benchmarks. This trend in the spreads of gas prices significantly and negatively affected the performance of wholesale marketing business in the first half of 2021, which is exposed to the spread between spot prices in the Italian market, the main benchmark of selling prices, and spot prices at the continental hubs to which supply costs are indexed. The low liquidity of the Italian spot market does not allow the implementation of effective risk management activities to limit exposure to this market risk.

 

Eni is currently party to a few long-term gas supply contracts with state-owned companies of key producing countries, from where most of the gas supplies directed to Europe are sourced via pipeline (Russia, Algeria, Libya and Norway). These contracts which were intended to support Eni’s sales plan in Italy and in other European markets, provide take-or-pay clauses whereby the Company has an obligation to lift minimum, pre-set volumes of gas in each year of the contractual term or, in case of failure, to pay the whole price, or a fraction of that price, up to a minimum contractual quantity. Similar considerations apply to ship-or-pay contractual obligations which arise from contracts with pipeline owners, which the Company has entered into to secure long-term transport capacity. Long-term gas supply contracts with take-or pay clauses expose the Company to a volume risk, as the Company is obligated to purchase an annual minimum volume of gas, or in case of failure, to pay the underlying price. The structure of the Company’s portfolio of gas supply contracts is a risk to the profitability outlook of Eni’s wholesale gas business due to the current competitive dynamics in the European gas markets. In past downturns of the gas sector, the Company incurred significant cash outflows in response to its take-or-pay obligations. Furthermore, the Company’s wholesale business is exposed to volatile spreads between the procurement costs of gas, which are linked to spot prices at European hubs or to the price of crude oil, and the selling prices of gas which are mainly indexed to spot prices at the Italian hub.

 

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Eni’s management is planning to continue its strategy of renegotiating the Company’s long-term gas supply contracts in order to constantly align pricing terms to current market conditions as they evolve and to obtain greater operational flexibility to better manage the take-or-pay obligations (volumes and delivery points among others), considering the risk factors described above. The revision clauses included in these contracts state the right of each counterparty to renegotiate the economic terms and other contractual conditions periodically, in relation to ongoing changes in the gas scenario. Management believes that the outcome of those renegotiations is uncertain in respect of both the amount of the economic benefits that will be ultimately obtained and the timing of recognition of profit. Furthermore, in case Eni and the gas suppliers fail to agree on revised contractual terms, both parties can start an arbitration procedure to obtain revised contractual conditions. All these possible developments within the renegotiation process could increase the level of risks and uncertainties relating the outcome of those renegotiations.

 

Risks related to legal proceedings and compliance with anti-corruption legislation

 

Eni is the defendant in a number of civil and criminal actions and administrative proceedings. In future years Eni may incur significant losses 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 or to judge a negative outcome only as possible or to conclude that a contingency loss could not be estimated reliably; (iii) the emergence of new evidence and information; and underestimation of probable future losses due to circumstances that are often inherently difficult to estimate. Certain legal proceedings and investigations in which Eni or its subsidiaries or its officers and employees are defendants involve the alleged breach of anti-bribery and anti-corruption laws and regulations and other ethical misconduct. Such proceedings are described in the notes to the condensed consolidated interim financial statements, under the heading “Legal Proceedings”. Ethical misconduct and noncompliance with applicable laws and regulations, including noncompliance with anti-bribery and anti-corruption laws, by Eni, its officers and employees, its partners, agents or others that act on the Group’s behalf, could expose Eni and its employees to criminal and civil penalties and could be damaging to Eni’s reputation and shareholder value.

 

Disruption to or breaches of Eni’s critical IT services or digital infrastructure and security systems could adversely affect the Group’s business, increase costs and damage our reputation

 

The Group’s activities depend heavily on the reliability and security of its information technology (IT) systems and digital security. The Group’s IT systems, some of which are managed by third parties, are susceptible to being compromised, damaged, disrupted or shutdown due to failures during the process of upgrading or replacing software, databases or components, power or network outages, hardware failures, cyber-attacks (viruses, computer intrusions), user errors or natural disasters. The cyber threat is constantly evolving. The oil and gas industry is subject to fast-evolving risks from cyber threat actors, including nation states, criminals, terrorists, hacktivists and insiders. Attacks are becoming more sophisticated with regularly renewed techniques while the digital transformation amplifies exposure to these cyber threats. The adoption of new technologies, such as the Internet of Things (IoT) or the migration to the cloud, as well as the evolution of architectures for increasingly interconnected systems, are all areas where cyber security is a very important issue. The Group and its service providers may not be able to prevent third parties from breaking into the Group’s IT systems, disrupting business operations or communications infrastructure through denial-of-service attacks, or gaining access to confidential or sensitive information held in the system. The Group, like many companies, has been and expects to continue to be the target of attempted cybersecurity attacks. While the Group has not experienced any such attack that has had a material impact on its business, the Group cannot guarantee that its security measures will be sufficient to prevent a material disruption, breach or compromise in the future. As a result, the Group’s activities and assets could sustain serious damage, services to clients could be interrupted, material intellectual property could be divulged and, in some cases, personal injury, property damage, environmental harm and regulatory violations could occur. If any of the risks set out above materialize, they could adversely impact the Group’s results of operations, cash flow, liquidity, business prospects, financial condition, and shareholder returns, including dividends, the amount of funds available for stock repurchases and the price of Eni’s share.

 

58FINANCIAL REVIEW AND OTHER INFORMATION | OUTLOOK

 

  

Outlook

 

FY 2021 cash flow from operations before changes in working capital at replacement cost expected to be above €10 billion at a Brent scenario of 65 $/bbl and assuming a SERM benchmark refining margin slightly in negative territory.
Reaffirming the guidance for hydrocarbon production at about 1.7 million boe/d for the FY 2021. In the third quarter hydrocarbon production is expected at 1.68 million boe/d.
Fast growing renewable installed and under construction capacity: expected to be 2 GW at year end, a strong increase from the previous outlook of about 1 GW. Leveraging recently acquired assets, installed capacity is expected to increase from a previous target of 0.7 GW to 1.2 GW at year end 2021.

All the other targets are reaffirmed as previously guided:

-2021 organic capex expected at approximately €6 billion, of which approximately €4.5 billion in the E&P segment;
-about 500 million boe of new explorative resources to be discovered in 2021;
-GGP: adjusted EBIT expected to reach breakeven despite a worsening trading environment. Expected €200 million of free cash flow from this segment in 2021;
-Eni gas e luce & Renewables adjusted EBIT projected at €350 million, cash flow from operations expected at approximately €400 million;
-Downstream: pro-forma adjusted EBIT at about €400 million. The greater portion of this result is related to the Chemical segment, offsetting R&M result affected by slightly negative SERM refining margins;
-Organic leverage expected lower than 0.3 at year end, at a Brent price of 65 $/bbl and a slightly negative SERM refining margin.

 

Shareholders Remuneration

 

Having reviewed the fundamentals of the energy scenario and the prospects of the oil market, Eni’s Board of Directors resolved to define a Brent reference scenario of 65 $/bbl. Based on the shareholder remuneration policy approved on February 18, 2021, this means:
-an annual dividend of €0.86/sh. for the fiscal year 20211, representing an increase of more than 100% from 2020 recovering the pre-COVID level;
-the start of a buy-back program of €400 million2.
As announced by the proxy conferred by the Shareholders Meeting held on May 12, 2021, the Board of Directors approved the distribution of 50% of the expected dividend, equal to €0.43/sh, as 2021 interim dividend to be paid in September3. This distribution is planned to be made from the retained earnings and other available capital reserves of the parent company Eni SpA.

 

 

 

 

 

 

 

 

 

1 In line with the dividend policy announced to the financial market during the strategy presention held on February 19, 2021, (see page 31) of which at the following URL https://eni.com/assets/documents/eng/investor/presentations/2021/strategy-4q-2020/strategy-2021-2024.pdf.

2 The procedure to implement the buy-back program are detailed in the section “Other information – start of the buy-back program” of this Report.

3 Ex-dividend date being September 20, 2021 (record date September 21). The dividend will be paid on September 22, 2021.

 

OTHER INFORMATION59

 

 

 

Other information

 

Article No. 15 (former Article No. 36) of Italian regulatory exchanges (Consob Resolution No. 20249 published on December 28, 2017). Continuing listing standards about issuers that control subsidiaries incorporated or regulated in accordance with laws of extra-EU countries.

Certain provisions have been enacted to regulate continuing Italian listing standards of issuers controlling subsidiaries that are incorporated or regulated in accordance with laws of extra-EU Countries, also having a material impact on the consolidated financial statements of the parent company.

Regarding the aforementioned provisions, the Company discloses that:

- as of June 30, 2021, thirteen of Eni’s subsidiaries: NAOC – Nigerian Agip Oil Co. Ltd, Eni Petroleum Co Inc, Eni Congo SA, Nigerian Agip Exploration Ltd, Eni Canada Holding Ltd, Eni Ghana Exploration and Production Ltd, Eni Trading & Shipping Inc, Eni Finance USA Inc, Eni UK Ltd, Eni UK Holding Plc, Eni Investments Plc, Eni Lasmo Plc and Eni ULX Ltd;

- the Company has already adopted adequate procedures to ensure full compliance with the new regulations.

 

Subsequent events

No significant events were reported after June 30, 2021.

 

Transactions with related parties

For the description of the main transactions with related parties, see Note 32 of the Condensed consolidated interim financial statements.

 

Start of the buy-back program

Eni's Board of Directors, chaired by Lucia Calvosa, on July 29, 2021, approved the start of the buy-back program for 2021, for a maximum amount of €400 million and a share count no greater than 252 million, in accordance with the targets set by the 2021-2024 strategic plan assuming a Brent reference scenario of 65 $/barrel and in execution of the authorization granted by the Shareholders Meeting held on May 12, 2021.

The buy-back program is aimed at recognizing shareholders an additional remuneration to complement the dividend distribution.

Purchases will be initiated in the last part of August 2021 and will end at the latest in April 2022.

The program will be executed through an authorized agent, who will take decisions regarding purchases at its own discretion, also in relation to the timing of the transactions and in compliance with daily price and volume thresholds. In particular, the purchase price of the shares will not deviate upwardly or downwardly by more than 5% from the official price of the day prior to each individual transaction recorded for the Eni S.p.A. share in the Electronic Share Market organized and managed by Borsa Italiana S.p.A. (“MTA”).

However, it cannot be higher than the higher price between the price of the last independent transaction and the price of the highest current independent purchase offer on the MTA.

Purchases will be made on the MTA, in compliance with art. 144-bis, paragraph 1, lett. b) of Consob Regulation 11971/1999 and the additional conditions provided for by the resolution of the Shareholders' Meeting of May 12, 2021, as well as complying with the provisions of Regulation (EU) 596/2014 on market abuse and the Delegated Regulation (EU) 2016/1052.

 

 

60OTHER INFORMATION

 

As of July 29, 2021, Eni holds 33,045,197 treasury shares, equal to 0.92% of the share capital, purchased under previous buy-back programs. Eni’s controlled subsidiaries do not hold Eni’s shares. Details on purchases will be disseminated to the market in compliance with terms and conditions defined by the current legislation.

 

 

 

62CONSOLIDATED INTERIM FINANCIAL STATEMENTS | FINANCIAL STATEMENTS 

Consolidated Balance Sheet

 

  June 30, 2021December 31, 2020
(€ million)NoteTotal
amount
of which
with
related
parties
Total
amount
of which
with
related
parties
ASSETS     
Current assets     
Cash and cash equivalents 9,713 9,413 
Financial assets held for trading(5)6,407 5,502 
Other current financial assets(14)5634425441
Trade and other receivables(6)13,58067610,926802
Inventories(7)4,593 3,893 
Income tax receivables 160 184 
Other current assets(8) (20)7,4723142,686145
  42,488 32,858 
Non-current assets     
Property, plant and equipment(9)53,802 53,943 
Right-of-use assets(10)4,806 4,643 
Intangible assets(11)3,398 2,936 
Inventory - Compulsory stock(7)1,318 995 
Equity-accounted investments(13)6,368 6,749 
Other investments(13)1,004 957 
Other non-current financial assets(14)1,0248071,008766
Deferred tax assets(19)4,409 4,109 
Income tax receivables 153 153 
Other non-current assets(8) (20)1,083441,25374
  77,365 76,746 
Assets held for sale(21)136 44 
TOTAL ASSETS 119,989 109,648 
LIABILITIES AND EQUITY     
Current liabilities     
Short-term debt(16)3,1611242,88252
Current portion of long-term debt(16)2,426 1,909 
Current portion of long-term lease liabilities(10)97112684954
Trade and other payables(15)14,3021,78512,9362,100
Income tax payables 442 243 
Other current liabilities(8) (20)9,9552014,872452
  31,257 23,691 
Non-current liabilities     
Long-term debt(16)21,090 21,895 
Long-term lease liabilities(10)4,312454,169112
Provisions(18)12,733 13,438 
Provisions for employee benefits 1,226 1,201 
Deferred tax liabilities(19)5,947 5,524 
Income tax payables 342 360 
Other non-current liabilities(8) (20)2,3964171,87723
  48,046 48,464 
Liabilities directly associated with assets held for sale(21)106   
TOTAL LIABILITIES 79,409 72,155 
Share capital 4,005 4,005 
Retained earnings 24,530 34,043 
Cumulative currency translation differences 4,932 3,895 
Other reserves and equity instruments 6,507 4,688 
Treasury shares (581) (581) 
Profit (loss) 1,103 (8,635) 
Equity attributable to equity holders of Eni 40,496 37,415 
Non-controlling interest 84 78 
TOTAL EQUITY(22)40,580 37,493 
TOTAL LIABILITIES AND EQUITY 119,989 109,648 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS | FINANCIAL STATEMENTS  63

 

Profit and Loss Account

 

  First Half 2021First Half 2020
(€ million)NoteTotal
amount
of which
with
 related
parties
Total
amount
of which
with
 related
parties
Sales from operations(25)30,78883522,030556
Other income and revenues 6511646019
REVENUES AND OTHER INCOME 31,439 22,490 
Purchases, services and other(26)(22,117)(3,702)(17,186)(3,329)
Net (impairments) reversals of trade and other receivables(6)(67)(3)(211)61
Payroll and related costs(26)(1,493)(16)(1,542)(19)
Other operating income (expense)(20)48252(373)(75)
Depreciation and amortization(9) (10) (11)(3,322) (3,857) 
Net (impairments) reversals of tangible and intangible assets and right-of-use assets(12)(602) (2,749) 
Write-off of tangible and intangible assets(9) (11)(29) (347) 
OPERATING PROFIT (LOSS) 3,857 (3,775) 
Finance income(27)1,831312,15364
Finance expense(27)(2,105)(40)(2,596)(10)
Net finance income (expense) from financial assets held for trading(27)19 (7) 
Derivative financial instruments(20) (27)(218) (76) 
FINANCE INCOME (EXPENSE) (473) (526) 
Share of profit (loss) from equity-accounted investments (477) (1,404) 
Other gain (loss) from investments 50 25 
INCOME (EXPENSE) FROM INVESTMENTS(13) (28)(427) (1,379) 
PROFIT (LOSS) BEFORE INCOME TAXES 2,957 (5,680) 
Income taxes(29)(1,845) (1,652) 
PROFIT (LOSS) 1,112 (7,332) 
Attributable to Eni 1,103 (7,335) 
Attributable to non-controlling interest 9 3 
Earnings (loss) per share (€ per share)(30)    
Basic 0.30 (2.05) 
Diluted 0.30 (2.05) 

 

64CONSOLIDATED INTERIM FINANCIAL STATEMENTS | FINANCIAL STATEMENTS 

 

Statement of Comprehensive Income

 

(€ million) First Half
2021
First Half
2020
Net profit (loss) 1,112(7,332)
Other items of comprehensive income (loss)   
Items that are not reclassified to profit or loss in later periods   
Share of other comprehensive income (loss) on equity-accounted investments   2 
Change of minor investments measured at fair value with effects to OCI 168
  188
Items that may be reclassified to profit or loss in later periods   
Currency translation differences   1,037(164)
Change in the fair value of cash flow hedging derivatives   (221)(123)
Share of other comprehensive income (loss) on equity-accounted investments   (30)46
Tax effect 6435
  850(206)
Total other items of comprehensive income (loss) 868(198)
Total comprehensive income (loss) 1,980(7,530)
Attributable to Eni 1,971(7,533)
Attributable to non-controlling interest   93

 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS | FINANCIAL STATEMENTS  65

 

Statement of Changes in Shareholders’ Equity

 

  Equity attributable to equity holders of Eni  
(€ million)NoteShare
capital
Retained
earnings
Cumulative
currency translation
differences
Other
reserves
and equity
instruments
Treasury
shares
Net
profit
(loss)
for the
period
TotalNon-
controlling
interest
Total
equity
Balance at December 31, 2020(22)4,00534,0433,8954,688(581)(8,635)37,4157837,493
Incme (loss) for the first six months of 2021      1,1031,10391,112
Other items of comprehensive income (loss)          
Share of “Other comprehensive income (loss)” on equity-accounted investments    2  2 2
Change of minor investments measured at fair value with effects to OCI    16  16 16
Items that are not reclassified to profit or loss in later periods    18  18 18
Currency translation differences   1,037   1,037 1,037
Change in the fair value of cash flow hedge derivatives net of tax effect    (157)  (157) (157)
Share of “Other comprehensive income (loss)” on equity-accounted investments    (30)  (30) (30)
Items that may be reclassified to profit or loss in later periods   1,037(187)  850 850
Total comprehensive income (loss) of the period   1,037(169) 1,1031,97191,980
Dividend distribution of Eni SpA  429   (1,286)(857) (857)
Dividend distribution of other companies        (5)(5)
Allocation of 2020 net income  (9,921)   9,921   
Increase in non-controlling interest relating to acquisition of consolidated entities        11
Issue of perpetual subordinated bonds    2,000  2,000 2,000
Coupon of perpetual subordinated bonds  (10)    (10) (10)
Transactions with holders of equity instruments  (9,502) 2,000 8,6351,133(4)1,129
Costs for the issue of perpetual subordinated bonds  (15)    (15) (15)
Other changes  4 (12)  (8)1(7)
Other changes in shareholders’ equity  (11) (12)  (23)1(22)
Balance at June 30, 2021(22)4,00524,5304,9326,507(581)1,10340,4968440,580

 

66      CONSOLIDATED INTERIM FINANCIAL STATEMENTS | FINANCIAL STATEMENTS 

 

Statement of Changes in Shareholders’ Equity (continued)

 

  Equity attributable to equity holders of Eni  
(€ million)NoteShare capitalRetained earningsCumulative currency translation differencesOther reserves and equity instrumentsTreasury sharesNet profit (loss) for the periodTotalNon-controlling interestTotal equity
Balance at December 31, 2019 4,00535,8947,2091,564(981)14847,8396147,900
Profit (loss) for the first six months of 2020      (7,335)(7,335)3(7,332)
Other items of comprehensive income (loss)          
Change of minor investments measured at fair value with effects to OCI    8  8 8
Items that are not reclassified to profit or loss in later periods    8  8 8
Currency translation differences   (162)(2)  (164) (164)
Change in the fair value of cash flow hedge derivatives net of tax effect    (88)  (88) (88)
Share of “Other comprehensive income (loss)” on equity-accounted investments    46  46 46
Items that may be reclassified to profit or loss in later periods   (162)(44)  (206) (206)
Total comprehensive income (loss) of the period   (162)(36) (7,335)(7,533)3(7,530)
Dividend distribution of Eni SpA  1,542   (3,078)(1,536) (1,536)
Dividend distribution of other companies        (3)(3)
Allocation of 2019 income  (2,930)   2,930   
Cancellation of treasury shares    (400)400    
Increase in non-controlling interest relating
to acquisition of controlled entities
        1111
Transactions with shareholders  (1,388) (400)400(148)(1,536)8(1,528)
Other changes  (26) 23  (3) (3)
Other changes in equity  (26) 23  (3) (3)
Balance at June 30, 2020 4,00534,4807,0471,151(581)(7,335)38,7677238,839
Income (loss) for the second six months of 2020      (1,300)(1,300)4(1,296)
Other items of comprehensive income (loss)          
Remeasurements of defined benefit plans net of tax effect    9  9 9
Changes of minor investments measured at fair value with effects to OCI    16  16 16
Items that are not reclassified to profit or loss in later periods    25  25 25
Currency translation differences   (3,151)1  (3,150) (3,150)
Change in the fair value of cash flow hedge derivatives net of tax effect    557  557 557
Share of “Other comprehensive income (loss)” on equity-accounted investments    (14)  (14) (14)
Items that may be reclassified to profit or loss in later periods   (3,151)544  (2,607) (2,607)
Total comprehensive income (loss) of the period   (3,151)569 (1,300)(3,882)4(3,878)
Interim dividend distribution of Eni SpA  (429)    (429) (429)
Increase in non-controlling interest relating
to acquisition of consolidated entities
        44
Issue of perpetual subordinated bonds    3,000  3,000 3,000
Transactions with holders of equity instruments  (429) 3,000  2,57142,575
Costs for the issue of perpetual subordinated bonds  (25)    (25) (25)
Other changes  17(1)(32)  (16)(2)(18)
Other changes in shareholders’ equity  (8)(1)(32)  (41)(2)(43)
Balance at December 31, 2020(22)4,00534,0433,8954,688(581)(8,635)37,4157837,493

 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS | FINANCIAL STATEMENTS      67 

 

Statement of Cash Flows

 

(€ million)NoteFirst Half 2021First Half 2020
Profit (loss) of the period  1,112 (7,332)
Adjustments to reconcile profit (loss) to net cash provided by operating activities     
Depreciation and amortization(9) (10) (11) 3,322 3,857
Net Impairments (reversals) of tangible and intangible assets and right-of-use assets(12) 602 2,749
Write-off of tangible and intangible assets(9) (11) 29 347
Share of (profit) loss of equity-accounted investments(13) 477 1,404
Net gain on disposal of assets  (88) (4)
Dividend income(28) (66) (72)
Interest income  (38) (72)
Interest expense  394 458
Income taxes(29) 1,845 1,652
Other changes  (176) (78)
Cash flow from changes in working capital:  (1,797) 688
- inventories (890) 1,061 
- trade receivables (1,916) 2,016 
- trade payables 1,016 (2,605) 
- provisions (242) (399) 
- other assets and liabilities 235 615 
Net change in the provisions for employee benefits  19 26
Dividends received  354 328
Interest received  15 33
Interest paid  (409) (534)
Income taxes paid, net of tax receivables received  (1,502) (1,072)
Net cash provided by operating activities  4,093 2,378
- of which with related parties(32) (2,584) (2,312)
Cash flow from investing activities  (3,254) (3,302)
- tangible assets(9) (2,276) (2,469)
- prepaid right-of-use assets  (2)  
- intangible assets(11) (111) (99)
- consolidated subsidiaries and businesses net of cash and cash equivalent acquired(23) (331) (109)
- investments(13) (540) (155)
- securities and financing receivables held for operating purposes  (69) (100)
- change in payables in relation to investing activities  75 (370)
Cash flow from disposals  306 98
- tangible assets  176 15
- intangible assets  1  
- consolidated subsidiaries and businesses net of cash and cash equivalent disposed of(23) 76  
- tax on disposals  (35)  
- investments  19 6
- securities and financing receivables held for operating purposes  79 77
- change in receivables in relation to disposals  (10)  
Net change in securities and financing receivables held for non-operating purposes  (1,185) 463
Net cash used in investing activities  (4,133) (2,741)
- of which with related parties(32) (320) (643)
Increase in long-term financial debt(16) 1,333 4,292
Payments of long-term financial debt(16) (1,912) (2,116)
Payments of lease liabilities(10) (445) (462)
Increase (decrease) in short-term financial debt(16) 218 731
Dividends paid to Eni's shareholders  (839) (1,534)
Dividends paid to non-controlling interest  (5) (3)
Issue of perpetual subordinated bonds(22) 1,985  
Coupon payment on perpetual subordinated bonds  (10)  
Net cash used in financing activities  325 908
- of which with related parties(32) 29 3
Effect of exchange rate changes and other changes on cash and cash equivalents  22 (12)
Net increase (decrease) in cash and cash equivalents  307 533
Cash and cash equivalents - beginning of the period  9,413 5,994
Cash and cash equivalents - end of the period (a)  9,720 6,527
      
(a) As of June 30, 2021, cash and cash equivalents included €7 million of cash and cash equivalents of consolidated subsidiaries held for sale that were reported in the item "Assets held for sale".

 

68      CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS 

 

Notes on Condensed Consolidated Interim Financial Statements

 

IMPACT OF COVID-19 PANDEMIC

 

The macroeconomic environment has progressively improved during the first half of 2021 due to an effective vaccination campaign against Covid-19 in USA, UK and in the countries of Northwestern Europe, allowing for the gradual reopening of the economies and the recovery of the production activities. The strong performance of the Chinese GDP has strengthened the business cycle. In this context, oil demand rebounded significantly from the depressed level recorded during the pandemic peak in the second quarter of 2020. In the first half of 2021, oil prices increased 60% compared to the same period of 2020, also supported by the production management carried out by OPEC+ and by financial discipline of the international oil companies that maintained their investments at the levels of 2020. These developments have underpinned the significant improvement in the consolidated results of the Eni Group in the first half of 2021. The Group earned a profit of €1,103 million compared to a loss of €7,335 million of the first half of 2020, while the cash flow from operating activities increased by 72.1% to €4,093 million. However, the economy and consumer behavior have not yet returned to pre-pandemic normalcy as highlighted by the slow recovery in the airline sector, while downside risks are still lingering of the possible spread of new virus variants that can derail the growth trend of economies and the recovery of the global energy demand. Some operating segments of the Group have continued to face a difficult market environment, particularly the refining business which performance was affected by weak demands for jet fuel which led to an excess of supply in middle distillates and a significant deterioration of product spreads with respect to cost of crude oil with refining margins at historic lows, not seen even during the most severe phase of the pandemic. Based on a depressed refining scenario and higher compliance costs for the purchase of emission allowances, management has revised the profitability outlook of the refining assets with the recognition of impairment of about €900 million. Management confirms a conservative and selective financial framework in making investment decisions and continues to favor the preservation of the balance sheet in the cash allocation policy against a more constructive macro-backdrop compared to the beginning of the year or the corresponding period a year ago. Overall, the measures implemented in 2020, consisting in containing capital expenditures and reducing costs to counter the effects of the pandemic, allowed the Group to fully benefit from the recovery of the oil scenario with the exception, as highlighted, of the refining activity. The improvement in the Company's fundamentals, the robustness of the balance sheet, growth in cash flow after funding capital expenditures and the prospects of the oil market and the Group performance for the reminder of the year allow the management to significantly increase the cash returns to the shareholders in a Brent scenario of $65/bbl based on the Eni’s Remuneration Policy. The Company is planning for an annual dividend of €0.86 per share, of which 50% will be paid as interim in September; also a share buy-back program of €400 million will be activated over the next six months.

 

1 BASIS OF PRESENTATION

 

The Condensed Consolidated Interim Financial Statements as of June 30, 2021 (hereinafter Interim Financial Statements) have been prepared on a going concern basis in accordance with the requirements of IAS 34 “Interim Financial Reporting” (hereinafter IAS 34).

 

The Interim Financial Statements have been prepared in accordance with the same principles of consolidation and accounting policies described in the last Consolidated Annual Financial Statements (see the related report for more information), except for applying the International Financial Reporting Standards (hereinafter also IFRSs) effective from January 1, 2021, disclosed in the note “IFRSs not yet effective” of the last Consolidated Annual Financial Statements. Consistently with the requirements of IAS 34, the Interim Financial Statements include selected explanatory notes; conversely, the primary financial statements have been prepared in conformity to the requirements of IAS 1 “Presentation of Financial Statements” for a complete set of financial statements.

 

Current income taxes have been calculated based on the estimated taxable profit for the interim period. Current income tax assets and liabilities have been measured at the amount expected to be paid to/recovered from the taxation Authorities, using tax laws that have been enacted or substantively enacted by the end of the reporting period and the tax rates estimated on an annual basis.

 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS      69 

 

Investments in subsidiaries, joint arrangements and associates as of June 30, 2021 are presented in the annex “List of companies owned by Eni SpA as of June 30, 2021”. This annex includes also the changes in the scope of consolidation.

 

On July 29, 2021, Eni’s Board of Directors approved the Interim Financial Statements as of June 30, 2021. The external auditor PricewaterhouseCoopers SpA carried out a limited review of the Interim Financial Statements; a limited review is significantly less in scope than an audit performed in accordance with the generally accepted auditing standards.

 

The Interim Financial Statements are presented in euros and all values are rounded to the nearest million euros (€ million).

 

2 CHANGES IN ACCOUNTING POLICIES

 

As indicated in the last Consolidated Annual Financial Statements, starting from 2021, the amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 “Interest Rate Benchmark Reform — Phase 2” (hereinafter the amendments) are effective. The amendments provide practical expedients and temporary exceptions from the application of some IFRS requirements related to financial instruments measured at amortised cost and/or hedging relationships modified as a consequence of the interest rate benchmark reform. This reform, still ongoing, provides for the replacement of some benchmark interest rates, e.g. LIBOR (London Interbank Offered Rate), with alternative risk-free rates.

 

With reference to the Eni Group, the cases affected by the IBOR reform essentially concern floating rate financial assets and floating rate financial liabilities measured at amortised cost and derivative financial instruments for which operational issues are mainly identified (e.g. renegotiation of loans with counterparties, implementation of fallback clauses, updating of information systems, etc.).

 

On this regard, an internal working group has been set up to monitor the regulatory and market developments, as well as to support the assessment of the impacts arising from the reform, the measurement of the exposures to benchmark rates to be replaced, the identification of the changes to be implemented and the transition to alternative risk-free rates.

 

As June 30, 2021, the Group holds, principally, financial instruments indexed to EONIA (European OverNight Index Average) and USD LIBOR benchmark rates, affected by the reform, which will be replaced, respectively, by December 31, 2021 and June 30, 2023, with €STR (Euro Short-Term Rate) and with SOFR (Secured Overnight Financing Rate). Furthermore, the Group plans to adhere, by the end of 2021, to the IBOR fallbacks protocol published by the International Swaps and Derivatives Association (ISDA).

 

The Group is currently completing the mapping of the contracts affected by the reform and assessing any related impacts.

 

3 SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS

 

The significant accounting estimates and judgements made by management are disclosed in the last Consolidated Annual Financial Statements.

 

4 INTERNATIONAL FINANCIAL REPORTING STANDARDS NOT YET ADOPTED

 

Besides the IFRSs not yet effective already disclosed in the last Consolidated Annual Financial Statements, a brief description of the recent pronouncements from the IASB and the EU endorsement activities is set out below.

 

IFRSs ISSUED BY THE IASB AND ADOPTED BY THE EU

 

By the Commission Regulation No. 2021/1080 issued by the European Commission on June 28, 2021, the following amendments were adopted:

 

·the amendments to IAS 37, aimed to provide clarifications for the purpose of assessing whether a contract is onerous;

 

70       CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS 

 

·the amendments to IAS 16, aimed to state that the proceeds from selling items produced while the company is preparing the asset for its intended use shall be recognised in the profit and loss account, together with the related production costs;

 

·the amendments to IFRS 3, aimed to: (i) replace all remaining references to the previous versions of the IFRS Framework with references to the new Conceptual Framework for Financial Reporting included in IFRS 3; (ii) provide clarifications on the requirements for recognising, at the acquisition date, provisions, contingent liabilities and levies assumed in a business combination; (iii) state explicitly that a contingent asset acquired in a business combination cannot be recognised;

 

·the document “Annual Improvements to IFRS Standards 2018-2020 Cycle”, which includes, basically, technical and editorial amendments to existing IFRS standards.

 

The abovementioned amendments shall be applied for annual reporting periods beginning on or after January 1, 2022.

 

IFRSs ISSUED BY THE IASB AND NOT YET ADOPTED BY THE EU

 

On March 31, 2021, the IASB issued the amendments to IFRS 16 “Covid-19-Related Rent Concessions beyond 30 June 2021” (hereinafter the amendments to IFRS 16), aimed to extend the availability of the practical expedient, introduced in 2020 to permit lessees not to apply the lease modification requirements to rent concessions that occur as a direct consequence of the Covid-19 pandemic, also to rent concessions that reduce lease payments originally due on or before 30 June 2022, provided the other conditions for applying the practical expedient are met. The amendments to IFRS 16 shall be applied for annual reporting periods beginning on or after April 1, 2021.

 

On May 7, 2021, the IASB issued the amendments to IAS 12 “Deferred Tax related to Assets and Liabilities arising from a Single Transaction” (hereinafter the amendments to IAS 12), aimed to require companies to recognise deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments to IAS 12 shall be applied for annual reporting periods beginning on or after January 1, 2023.

 

Eni is currently reviewing the International Financial Reporting Standards not yet effective in order to determine the likely impact on the Group’s financial statements.

 

5 FINANCIAL ASSETS HELD FOR TRADING

 

(€ million)June 30,
2021
December 31,
2020
Bonds issued by sovereign states1,3421,223
Other5,0654,279
 6,4075,502

 

The breakdown by issuing entity and credit rating of securities does not show significant changes compared to the Annual Report 2020.

 

The fair value hierarchy is level 1 for €6,068 million and level 2 for €339 million. During the first half of 2021, there were no significant transfers between the different hierarchy levels of fair value.

  

6 TRADE AND OTHER RECEIVABLES

 

(€ million)June 30,
2021
December 31,
2020
Trade receivables9,4467,087
Receivables from divestments3221
Receivables from joint ventures in exploration and production activities2,4092,293
Other receivables1,6931,525
 13,58010,926

 

The increase in trade receivables of €2,359 million related to the Refining & Marketing and Chemical segment for €1,146 million and to Global Gas & LNG Portfolio segment for €833 million.

 

 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS71 

 

In the first half of 2021, Eni divested without recourse receivables due beyond June 30, 2021 for €1,585 million (€1,377 million at December 31, 2020 due in 2021). Derecognized receivables related to trade receivables of the Refining & Marketing and Chemical segment for €1,131 million, Global Gas & LNG Portfolio segment for €398 million and Eni gas e luce, Power & Renewables segment for €56 million.

 

Receivables from joint ventures in exploration and production activities included amounts due by partners in unincorporated joint operations in Nigeria for €949 million (€1,015 million at December 31, 2020) in respect of contractual recovery of expenditures incurred at certain oil projects operated by Eni. The Nigerian national oil company NNPC owed Eni €510 million (€605 million at December 31, 2020), in relation to the funding of past investments. About 50% of this amount is subject to a “Repayment Agreement”, whereby Eni is to be reimbursed through the sale of the entitlement attributable to NNPC in certain rig-less petroleum initiatives with low mineral risk, with an expected completion of the reimbursement plan within the next two years based on Eni’s Brent price scenario. The receivable is stated net of a discount factor equal to 8%, calculated based on the risk of the underlying mineral initiative.

 

A privately held Nigerian oil company owed Eni €153 million of overdue receivable in connection with the funding of capital expenditures (€134 million at December 31, 2020). This amount was stated net of a provision based on the loss given default (LGD) defined by Eni for international oil companies in default status. During the first half of 2021, the partner suspended the payments of the cash calls, making a claim against the amounts billed. Arbitration procedures have been started for the resolution of the dispute.

 

At 30 June 2021, Egyptian national oil companies owed Eni €433 million of trade receivables for the supply of the gas produced by Eni in the country. In the previous years, an overdue receivables repayment plan (Proceed Settlement Agreement) was carried out starting in 2015, which provided cash advances in favor of Eni in Egyptian Pounds in relation to the funding of the operations of the Concession Agreements (including the Zohr project) in Country, to be offset by up to 35% of the amounts billed for the gas supplies to the national oil companies. The agreement ensured the repayment of the overdue until June 2021 when the advance was fully utilized.

 

Receivables from other counterparties comprised overdue trade receivables for €388 million (€376 million at December 31, 2020) towards the state-owned oil company of Venezuela, PDVSA, in relation to gas equity volumes supplied by the joint venture Cardón IV, equally participated by Eni and Repsol. Those trade receivables were divested by the joint venture to the two shareholders. The receivables were stated net of an allowance for doubtful accounts calculated considering an expected loss rate of 53%, estimated on the basis of average recovery percentages obtained by creditors in the context of sovereign defaults, adjusted to reflect the strategic value to an economy of the Oil & Gas sector. The tightening of the US sanction framework against Venezuela has prevented the implementation of a mechanism of credit offsetting through in-kind refunds, with assignments to Eni of oil products of PDVSA. Therefore, the amount of the receivable remained unchanged compared to the end of 2020, while the joint venture did not record collections for the supplies of gas volumes supplied in the period.

 

Amounts billed to customers following the triggering of the take-or-pay clause at long-term supply contracts amounted to €212 million (€325 million at December 31, 2020).

 

Trade and other receivables were stated net of a valuation allowance for doubtful accounts of €3,056 million (€3,157 million at December 31, 2020).

 

Net (impairment losses) reversals of trade and other receivables are disclosed as follows:

 

(€ million)First Half
2021
First Half
2020
Net (impairment losses) reversals of trade and other receivables  
New or increased provisions(243)(297)
Net credit losses(23)(4)
Reversals19990
 (67)(211)

 

Additions to the allowance for doubtful accounts for trade and other receivables related: (i) for €140 million to the Exploration & Production segment provisions in relation to cash calls towards joint operators – State Oil Companies or International Oil Companies – in oil projects operated by Eni; (ii) for €89 million to the Eni gas e luce business line, particularly in the retail business.

 

   
72

CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS

 

 

Reversals of unused provisions related to the Exploration & Production segment for €169 million of which €150 million in relation to utilizations against the derecognition of receivables from the Nigerian state-owned company NNPC due to a settlement which recognized Eni’s rights to cost recovery as part of a larger agreement defining the extension and revision of the contractual terms of the license. The settled amounts will be reimbursed through the attribution to Eni and the other partners of a share of the state company’s oil entitlements in the project.

 

Receivables with related parties are disclosed in note 32 – Transactions with related parties.

 

7 NON-CURRENT AND CURRENT INVENTORIES

 

(€ million)Current
inventories
Non-current
inventories
Gross carrying amount at December 31, 20204,2411,006
Write down provisions at December 31, 202034811
Net carrying amount at December 31, 20203,893995
Changes of the period567323
Other changes133 
Net carrying amount at June 30, 20214,5931,318
Gross carrying amount at June 30, 20214,9151,318
Write down provisions at June 30, 2021322 

 

Non-current inventories – compulsory stock held for compliance purposes related to Italian subsidiaries for €1,299 million (€977 million at December 31, 2020) in accordance with minimum stock requirements for oil and petroleum products set forth by applicable laws.

 

The increase in current and non-current inventories was essentially due to recovery in hydrocarbons prices and oil products.

 

8 OTHER ASSETS AND LIABILITIES

 

 June 30, 2021December 31, 2020
 AssetsLiabilitiesAssetsLiabilities
(€ million)CurrentNon-currentCurrentNon-currentCurrentNon-currentCurrentNon-current
Fair value of derivative financial instruments6,1661026,3021371,5481521,609162
Contract liabilities  331759  1,298394
Other Taxes3921802,272264501811,12426
Other9148011,0501,4746889208411,295
 7,4721,0839,9552,3962,6861,2534,8721,877

 

The fair value related to derivative financial instruments is disclosed in note 20 – Derivative financial instruments.

 

Other assets include: (i) gas volumes prepayments due to the take-or-pay obligations in relation to the Company’s long-term supply contracts, whose underlying current portion Eni plans to recover within the next 12 months for €259 million (€53 million at December 31, 2020) and beyond 12 months for €456 million (€651 million at December 31, 2020); (ii) underlifting positions of the Exploration & Production segment of €281 million (€338 million at December 31, 2020); (iii) non-current receivables for divesting activities for €11 million (same amount as of December 31, 2020).

 

Contract liabilities included: (i) in the first half of 2021, advances in Egyptian Pounds with an opening balance of €546 million relating to future supplies of equity hydrocarbons to Egyptian State-owned partners were completely offset by amounts billed for the gas supplies made in the period. These advances were cashed in previous reporting periods to fund the operations of Eni’s Concession Agreements in the Country, in particular the Zohr project. No further advances were cashed in the period due to the substantial completion of the investment activities; (ii) the current portion of advances received by Engie SA (former Suez) relating to a long-term agreement for supplying natural gas and electricity for €61 million (€62 million at December 31, 2020), the non-current portion amounting to €363 million (€393 million at December 31, 2020); (iii) advances received from Società Oleodotti Meridionali SpA for the infrastructure upgrade of the crude oil transport system at the Taranto refinery for €394 million (same amount as of December 31, 2020).

 

Other liabilities included: (i) overlifting imbalances of the Exploration & Production segment for €673 million (€559 million at December 31, 2020); (ii) liabilities for prepaid revenues and income for €378 million, of which current for €83 million (€398 million at December 31, 2020, of which current for €75 million); (iii) the value of gas not withdrawn by customers due to the triggering of the take-or-pay clause provided for by the relevant long-term contracts, the underlying volumes of which are expected to be withdrawn within the next 12 months for €69 million and beyond 12 months for €379 million (€65 million and €372 million at December 31, 2020, respectively); (iii) cautionary deposits from retail customers for the supply of gas and electricity for €225 million (€228 million at December 31, 2020); (iv) payables related to investing activities for €15 million.

 

 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS73 

 

Transactions with related parties are described in note 32 – Transactions with related parties.

 

9 PROPERTY, PLANT AND EQUIPMENT

 

(€ million)Property, plant
and equipment
Gross carrying amount at December 31, 2020184,641
Provisions for depreciation and impairments at December 31, 2020130,698
Net carrying amount at December 31, 202053,943
Additions2,276
Depreciation capitalized45
Depreciation(a)(2,778)
Reversals480
Impairment losses(1,077)
Write-off(8)
Currency translation differences1,416
Initial recognition and changes in estimates(601)
Changes in the scope of consolidation212
Other changes(106)
Net carrying amount at June 30, 202153,802
Gross carrying amount at June 30, 2021189,567
Provisions for depreciation and impairments at June 30, 2021135,765
  
(a) Before capitalization of depreciation 

 

Capital expenditures related to the Exploration & Production segment for €1,786 million (€2,010 million in the first half of 2020).

 

Information about impairment review performed in this interim report is reported in note 12 –Impairment review of tangible and intangible assets and right-of-use assets.

 

Currency translation differences primarily related to subsidiaries which utilize the US dollar as functional currency for €1,366 million.

 

Initial recognition and change in estimates include the decrease in the asset retirement cost of Exploration & Production segment mainly due to the increase in discount rates.

 

Changes in the scope of consolidation related to the inclusion of Spanish Egyptian Gas Co SAE for €174 million and the group FRI-EL Biogas (now EniBioCh4in) for €38 million.

 

   
74

CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS

 

 

Property, plant and equipment included capitalized costs related to wells, plant and machinery, pending exploration and appraisal activities and tangible assets in progress of the Exploration & Production segment as follows:

 

(€ million)Wells, plant
and machinery
Exploration
assets and
appraisal
Tangible
assets in
progress
Total
Book amount at December 31, 202039,6481,3417,11848,107
Additions401611,5671,768
Depreciation capitalized 113445
Depreciation(a)(2,523)  (2,523)
Reversals412 68480
Impairment losses(49) (75)(124)
Write-off (7) (7)
Currency translation differences1,140422031,385
Initial recognition and changes in estimates(605)(10)14(601)
Transfers2,116(2)(2,114) 
Other changes(66)(7)31(42)
Book amount at June 30, 202140,1131,5296,84648,488
     
(a) Before capitalization of depreciation.    

 

Transfers from E&P tangible assets in progress to E&P UOP wells, plant and machinery related for €2,114 million to progress in the development of reserves primarily in Indonesia, Kazakhstan, United States, Egypt and Iraq.

 

Other changes include the carrying amount of a 5% participating interest in the OML 17 property in Nigeria, which has been divested to a local operator. The transaction is currently being reviewed by the Nigerian antitrust authorities for alleged lack of communication regarding the transaction.

 

Exploration and appraisal activities of the first half of 2021 included write-offs of unsuccessful exploration wells costs for €7 million mainly in Angola and Egypt.

 

Unproved mineral interests, classified as tangible assets in progress, included the purchase price allocated to unproved reserves following business combinations or acquisition of individual properties in exploration/pre-development phase. Unproved mineral interests were as follows:

 

(€ million)CongoNigeriaTurkmenistanUSAAlgeriaEgyptUnited Arab
Emirates
Total
Book amount at the December 31, 2020203860 114100184681,763
Increases 16 3   19
Net (impairments) reversals(54) 8    (46)
Currency differences and other changes621 43 1549
Book amount at June 30, 20211558978121103184831,785

 

Unproved mineral interests comprised the Oil Prospecting License 245 property in pre-development phase located offshore Nigeria, with an initial value of €825 million corresponding to the price paid in 2011 to the Nigerian Government to acquire a 50% interest in the property, with the partner Shell acquiring the remaining 50%. As of June 30, 2021, the net book value of the property amounted to €1,120 million, including capitalized exploration costs and pre-development costs. The acquisition of OPL 245 is subject to judicial proceedings in Italy and in Nigeria for alleged corruption and money laundering in respect of the Resolution Agreement signed on April 29, 2011, relating to the purchase of the license by Eni and Shell. This proceeding is fully disclosed in note 27 – Guarantees, Commitments and Risks of the Annual Financial Report 2020. The exploration period of the license OPL 245 expired on May 11, 2021. Eni is awaiting the conversion of the license into an Oil Mining Lease (OML) from the relevant Nigerian authorities to start the development of the reserves, having submitted an application for the conversion within the contractual terms and having verified compliance with all conditions and requirements provided for. Based on these considerations, Eni believes to have acquired the right to conversion. Consistently, the assessment of the recoverability of the asset book value was made in accordance with its value-in-use, which confirmed the book value also incorporating a stress test assuming possible delays in the start of production activities. However, considering the inaction of the Nigerian authorities in charge of the matter towards the legitimate request of the Company, in September 2020 Eni started an arbitration at ICSID, the International Centre for Settlement of Investment Disputes, to protect the value of its asset. In case of refusal to conversion, a continuing deadlock by the Nigerian authorities or other action suggesting an expropriation, in the next financial reports the Company will consider a reclassification of the asset and the evaluation of the underlying right for compensation.

 

 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS75 

 

 

With regard to the legal proceedings before the Italian Judicial Authority, after the end of the reporting period, the Company was informed of an appeal filed by the Public Prosecutor and the recurring plaintiffs against the first instance acquittal sentence issued by the Court of Milan on 17 March, 2021.

 

10 RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

 

(€ million)Right-of-use
assets
Lease
Liabilities
Gross carrying amount at December 31, 20206,381 
Provisions for amortization and impairment at December 31, 20201,738 
Net carrying amount at December 31, 20204,6435,018
Additions687685
Decreases (445)
Depreciation(a)(454) 
Impairment losses(19) 
Currency translation differences97103
Other changes(148)(78)
Net carrying amount at June 30, 20214,8065,283
Gross carrying amount at June 30, 20216,994 
Provisions for depreciation and impairment at June 30, 20212,188 

 

(a) Before capitalization of depreciation for tangible assets

 

Right-of-use assets (RoU) related: (i) for €3,240 million (€3,274 million at December 31, 2020) to the Exploration & Production segment and mainly comprised leases of certain FPSO vessels hired in connection with operations at offshore development projects in Ghana (OCTP) and Angola (Block 15/06 West and East hub) and, in addition, the lease component of long-term leases of offshore rigs; (ii) for €817 million (€788 million at December 31, 2020) to the Refining & Marketing and Chemical segment relating to motorway concessions, land leases, leases of service stations for the sale of oil products, leasing of vessels for shipping activities and the car fleet dedicated to the car sharing business; (iii) for €566 million (€526 million at December 31, 2020) to the Corporate and other activities segment mainly regarding property rental contracts.

 

Lease liabilities related for €1,648 million (€1,652 million at December 31, 2020) to the portion of the liabilities attributable to the joint operators in Eni-led projects which will be recovered through the mechanism of the cash calls.

 

The short-term portion of liabilities for leased assets amounted to €971 million (€849 million at December 31, 2020).

 

Other changes in right-of-use assets and lease liabilities essentially related to early termination or renegotiation of lease contracts.

 

Lease liabilities with related parties are described in note 32 — Transactions with related parties.

 

76      CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS 

  

11 INTANGIBLE ASSETS

 

(€ million)Intangible
assets with
finite useful
lives
GoodwillTotal
Gross carrying amount at December 31, 20207,635  
Provisions for amortization and impairment at December 31, 20205,996  
Net carrying amount at December 31, 20201,6391,2972,936
Additions111 111
Amortization(135) (135)
Impairment losses(6) (6)
Reversals20 20
Write-off(21) (21)
Changes in the scope of consolidation222248470
Currency translation differences21526
Other changes(3)(3)
Net carrying amount at June 30, 20211,8481,5503,398
Gross carrying amount at June 30, 20217,999  
Provisions for amortization and impairment at June 30, 20216,151  

 

Additions of €111 million (€99 million in the first half of 2020) included the capitalization of costs for customer acquisition in the Eni gas luce business line for €70 million (€57 million in the first half of 2020).

 

Write-offs of €21 million related to exploration licenses due to the abandonment of underlying initiatives for geopolitical and environmental factors.

 

As of June 30, 2021, the carrying amount of intangible assets with finite useful life included exploration licence and leasehold acquisition costs as follows:

 

(€ million)June 30,
2021
December 31,
2020
Proved licence and leasehold property acquisition costs239225
Unproved licence and leasehold property acquisition costs655653
Other mineral interests10
 894888

  

Changes in the scope of consolidation of goodwill related for €167 million to the 100% acquisition of Aldro Energía y Soluciones SLU, a company operating in the market for the sale of electricity, gas and energy services to residential customers, small and medium-sized businesses and big companies and for €79 million to the 100% acquisition of FRI-EL Biogas Holding (now EniBioCh4in SpA), leader in the Italian biogas production sector. Goodwill deriving from business combinations was determined on a provisional basis.

 

The carrying amount of goodwill is stated net of cumulative impairment charges amounting to €2,466 million as of June 30, 2021.

 

In the first half of 2021, management did not identify any impairment indicator relating to goodwill.

 

12 IMPAIRMENT REVIEW OF TANGIBLE AND INTANGIBLE ASSETS AND RIGTH-OF-USE ASSETS

 

The criteria adopted to identify the Group’s Cash Generating Units (CGU) and to perform the impairment review of the recoverability of the carrying amounts of fixed assets remain unchanged from the Annual Report 2020 (see note 14 – Impairment review of tangible and intangible assets and right-of-use assets).

 

During the first half of 2021, the energy scenario has strengthened considerably compared to the corresponding period of last year and the situation at the beginning of the year. Oil market were supported by better fundamentals due to the reopening of the US and European economies which lifted consumption, while oil supply was limited by the production management implemented by countries of the OPEC+ alliance and by the financial discipline and capital constraints of international oil companies and, in particular, US producers of shale oil. World crude oil inventories gradually normalized, returning in line with historical averages. These developments drove an increase in the price of crude oil with the Brent reference price up by of approximately 60%. Natural gas prices recorded double or triple increases due to a particularly cold winter season in Southern-Eastern Asia and the reduction in the production of associated gas by US shale upstreamers which reduced global LNG oversupply. Therefore, there were no impairment indicators for the Exploration & Production segment.

  

   
CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS77

  

The weighted average cost of capital (WACC) used to discount cash flows associated to the CGUs remained essentially unchanged, as management recognized a low reduction in the market risk premium parameters and in the yields of risk-free assets, offset by an increase in the volatility of the Eni stare.

 

In addition, the impairment indicator represented by the difference between the market capitalization of Eni and the book value of consolidated net assets has substantially halved compared to the end of 2020.

 

The improvement in the economic cycle has yet to be felt in other of Eni's operating segments. The refining business was negatively and materially affected by a depressed scenario with the Eni SERM benchmark margin falling to historical lows and below zero throughout the first half 2021. This trend was driven by the persistence of the effects of the pandemic which forced the countries of the OPEC+ alliance to slowly curb the production quotas thus supporting the cost of crude oil, while demands for products was weak, in particular for middle distillates. In addition, expenses for the purchase of emission allowances under the European ETS have doubled as result of the recovery in the economic activities and the emission reduction targets provided for by the new European climate law. Based on these drivers, management revised downwards the short-to-medium term projections of future expected cash flows associated to refineries, recognizing an impairment of about €900 million, substantially zeroing the residual carrying amount of Sannazzaro and Milazzo plants and of the joint operations in Germany. Cash flows were discounted by using the WACC adjusted for country risk equal to 6.3%.

 

These impairments were partially offset by reversals of previous impairment losses at some Exploration & Production CGUs for €376 million, in particular, gas fields in Italy and other assets in Turkmenistan, Libya, Algeria, Nigeria, Timor Leste and USA, mainly driven by higher hydrocarbon prices.

 

13 INVESTMENTS

 

Equity-accounted investments

 

(€ million)Equity-
accounted
investments
Carrying amount at December 31, 20206,749
Additions and subscriptions534
Divestments and reimbursements(252)
Share of profit (loss) of equity-accounted investments(468)
Deduction for dividends(291)
Currency translation differencies166
Other changes(70)
Carrying amount at June 30, 20216,368

 

Acquisitions and share capital increases mainly related for €478 million to the acquisition from Equinor New Energy and SSE Renewables of a 20% stake in Doggerbank Offshore Wind Farm Project 1 Holdco Ltd and Doggerbank Offshore Wind Farm Project 2 Holdco Ltd, which are developing the Dogger Bank (A and B) offshore wind project for electricity production in the British North Sea for a total capacity at 100% of 2.4 GW (480 MW in Eni’s interest). The construction is expected to be completed by 2023-2024.

 

Divestments and reimbursement essentially related to the sale of Unión Fenosa Gas SA for €233 million to the Spanish partner Naturgy following the corporate restructuring of Unión Fenosa Gas through the splitting of the related assets among the shareholders.

 

Eni’s share of the results of entities accounted for under the equity method mainly comprised a loss incurred at the Vår Energi AS joint venture for €254 million due to impairment losses recorded at the CGUs of the investee driven by a delayed start-up of certain projects and cost overruns and of the Saipem SpA joint venture for €242 million driven by losses at contract works.

 

Deduction for dividends related for €276 million to Vår Energi AS.

 

   
78CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS

  

As of June 30, 2021, the carrying amount and the market value of Saipem SpA, the only company owned by Eni listed in a regulated stock market, was as follows:

 

   Saipem SpA
Number of shares held  308,767,968
% of the investment  31.08
Share price(€) 2.041
Market value(€ million) 630
Book value(€ million) 662

 

As of June 30, 2021, the fair value of Saipem was 5% lower than the book value in Eni’s financial statements. Given the volatility of the stock and the significant investment cuts implemented by the oil companies in the short and medium term in response to the uncertainties of the oil scenario and the review of capital allocation policies, management performed an impairment review of the book value of the investment based on an internal estimation of its value in use, which supported the carrying amount.

 

As of June 30, 2021, the book value of the investments included Abu Dhabi Oil Refining Co (Takreer) for €2,401 million, Angola LNG Ltd for €1,098 million, Saipem SpA for €662 million and Vår Energi AS for €640 million.

 

Other investments

 

(€ million)Other
investments
Carrying amount at December 31, 2020957
Additions and subscriptions6
Valuation at fair value with effects to OCI16
Other changes25
Carrying amount at June 30, 20211,004

 

Other investments are minority interests in unlisted entities functional to the business. For the evaluation method applied, see the Annual Report 2020.

 

As of June 30, 2021, the book value primarily related to Nigeria LNG Ltd for €597 million, Saudi European Petrochemical Co “IBN ZAHR” for €137 million and Novamont SpA for €77 million.

 

Dividends distributed are disclosed in note 28 – Income (expense) from investments.

 

Investments in subsidiaries, joint arrangements, associates and significant investments as of June 30, 2021 are presented in the annex “List of companies owned by Eni SpA as of June 30, 2021”.

 

14 OTHER FINANCIAL ASSETS

 

 June 30, 2021December 31, 2020
(€ million)CurrentNon-currentCurrentNon-current
Long-term financing receivables held for operating purposes2296929953
Short-term financing receivables held for operating purposes24 22 
 4696951953
Financing receivables held for non-operating purposes517 203 
 563969254953
Securities held for operating purposes 55 55
 5631,0242541,008

  

Financing receivables are stated net of the valuation allowance for doubtful accounts of €393 million (€352 million at December 31, 2020).

 

Financing receivables held for operating purposes primarily related to funds provided to joint agreements and associates for the execution of industrial projects of interest to Eni in the Exploration & Production segment (€900 million). These receivables are the expression of long-term interests in the underlying industrial initiatives. The largest exposure was towards the joint venture Cardón IV SA (Eni's interest 50%) in Venezuela, which is currently operating the Perla offshore gas field, with €421 million of financing receivable (€383 million at December 31, 2020). This amount will be recovered through the cash flows associated with the sales of gas reserves which have discounted to factor in a higher level of the counterparty risk by considering a deferral in the timing of collection of future revenues.

  

   
CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS79

  

  

Fair value of non-current financing receivables held for operating purposes of €969 million has been estimated based on the present value of expected future cash flows discounted at rates ranging from -0.5% to 1.8% (-0.5% and 1.4% at December 31, 2020).

 

Financing receivables held for non-operating purposes primarily related to bank deposits and restricted deposits in escrow to guarantee transactions on derivative contracts.

 

Fair value of securities derived from quoted market prices and amounted to €55 million.

 

Receivables with related parties are described in note 32 – Transactions with related parties.

 

15 TRADE AND OTHER PAYABLES

 

(€ million)June 30,
2021
December 31,
2020
Trade payables10,0988,679
Down payments and advances from joint ventures in exploration & production activities429417
Payables for purchase of non-current assets1,4811,393
Payables due to joint ventures in exploration & production activities1,1141,120
Other payables1,1801,327
 14,30212,936

 

The increase in trade payables of €1,419 million related to the Global Gas & LNG Portfolio segment for €1,040 million and the Refining & Marketing and Chemical segment for €506 million.

 

Other payables included: (i) the amounts to be paid due to the triggering of the take-or-pay clause of the long-term supply contracts for €210 million (€376 million at 31 December 2020); (ii) payroll payables for €205 million (€255 million at December 31, 2020); (iii) payables for social security contributions for €90 million (€92 million at December 31, 2020).

 

Payables due to related parties are described in note 32 – Transactions with related parties.

 

16 FINANCIAL DEBTS

 

 June 30, 2021December 31, 2020
(€ million)Short-term
debt
Current
portion of
long-term
debt
Long-term
debt
TotalShort-term
debt
Current
portion of
long-term
debt
Long-term
debt
Total
Banks6073362,3443,2873377593,1934,289
Ordinary bonds 1,68117,72919,410 1,14018,28019,420
Convertible bond 398398  396396
Sustainability-Linked bond  996996    
Commercial papers2,116  2,1162,233  2,233
Other financial institutions43811214703121026348
 3,1612,42621,09026,6772,8821,90921,89526,686

 

In the first half of 2021, Eni signed sustainability-linked financial contracts with leading banking institutions which provide for an adjustment mechanism of the funding cost linked to the achievement of certain sustainability targets. At June 30, 2021, financial liabilities to banks included sustainability-linked contracts for €1,300 million.

 

Eni entered into long-term borrowing facilities with the European Investment Bank. These borrowing facilities are subject to the maintenance of a minimum level of credit rating. According to the agreements, should the Company lose the minimum credit rating, new guarantees could be required to be agreed upon with the European Investment Bank. As of June 30, 2021, debts subjected to restrictive covenants amounted to €975 million (€1,051 million at December 31, 2020). Eni was in compliance with those covenants.

 

Ordinary bonds were issued as a part of the Euro Medium Term Notes Program for a total of €16,248 million. Other bonds amounted to €3,162 million.

 

 
80CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS 

 

The following table provides a breakdown of ordinary bonds by issuing entity, maturity date, interest rate and currency:

 

 AmountDiscount on
bond issue
and accrued
expense
TotalCurrencyMaturityRate %
(€ million)    fromtofromto
         
Issuing entity        
Euro Medium Term Notes        
    Eni SpA1,200381,238EUR 2025 3.750
    Eni SpA1,000291,029EUR 2023 3.250
    Eni SpA1,000101,010EUR 2029 3.625
    Eni SpA1,00021,002EUR 2026 1.500
    Eni SpA1,000 1,000EUR 2031 2.000
    Eni SpA1,000(1)999EUR 2030 0.625
    Eni SpA1,000(6)994EUR 2026 1.250
    Eni SpA9001901EUR 2024 0.625
    Eni SpA80013813EUR 2021 2.625
    Eni SpA800(6)794EUR 2028 1.625
    Eni SpA7503753EUR 2024 1.750
    Eni SpA7501751EUR 2027 1.500
    Eni SpA750 750EUR 2034 1.000
    Eni SpA700 700EUR 2022 0.750
    Eni SpA650 650EUR 2025 1.000
    Eni SpA600 600EUR 2028 1.125
    Eni Finance International SA1,471(3)1,468USD20262027 variable
    Eni Finance International SA7951796EUR202520431.2755.441
 16,1668216,248     
Other bonds        
    Eni SpA8416847USD 2023 4.000
    Eni SpA8413844USD 2028 4.750
    Eni SpA841(1)840USD 2029 4.250
    Eni SpA2941295USD 2040 5.700
    Eni USA Inc336 336USD 2027 7.300
 3,15393,162     
 19,3199119,410     

 

As of June 30, 2021, bonds maturing within 18 months amounted to €1,513 million. During the first half of 2021, Eni did not issue new ordinary bonds.

 

Eni has in place a program for the issuance of Euro Medium Term Notes up to €20 billion, of which €17.2 billion were drawn as of June 30, 2021.

 

Commercial papers were issued by the Group’s financial subsidiaries.

 

The following table provides a breakdown of convertible bond issued by Eni SpA as of June 30, 2021:

 

(€ million)AmountDiscount on
bond issue and
accrued expense
TotalCurrencyMaturityRate (%)
    Eni SpA400(2)398EUR20220.000

 

The non-dilutive equity-linked bond provides for a redemption value linked to the market price of Eni’s shares. The bondholders have "conversion" rights at certain times and/or in the presence of certain events, while the bonds will be cash-settled, without dilutive effects for the shareholders. Accordingly, to hedge its exposure, Eni purchased cash-settled call options relating to Eni shares that will be settled on a net cash basis. The bond conversion price is equal €17.62 and includes a 35% premium with respect to the Eni’s share reference price at the date of issuance. The convertible bond is measured at amortized cost. The conversion option, embedded in the financial instrument issued, and the call option on Eni’s shares acquired are valued at fair value with effects recognized through profit and loss. The bond expires within the next 18 months.

 

 
CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS81 

 

As part of the Euro Medium Term Notes program, in the first half of 2021, Eni issued a sustainability-linked bond for a nominal amount of €1 billion linked to the achievement of the following sustainability targets: (i) net carbon footprint upstream (GHG emission Scope 1 and 2) equal to or lower than 7.4 million tons of CO2 equivalent as of December 31, 2024; (ii) renewable energy installed capacity equal to or greater than 5 GW as of December 31, 2025. If one of the targets is not achieved, a step-up mechanism will be applied, increasing the interest rate.

 

Information relating to the sustainability-linked bond is as follows:

 

       
(€ million)AmountDiscount on bond issue and accrued expenseTotalCurrencyMaturityRate (%)
    Eni SpA1,000(4)996EUR20280.375

 

As of June 30, 2021, Eni retained undrawn short-term uncommitted borrowing facilities amounting to €6,286 million (€7,183 million at December 31, 2020) and undrawn long-term committed borrowing facilities of €5,050 million (€5,295 million at December 31, 2020) and undrawn long-term sustainability-linked borrowing facilities for €3,200 million. Those facilities bore interest rates reflecting prevailing conditions on the marketplace.

 

As of June 30, 2021, Eni did not identify any default on covenants or other contractual provisions in relation to borrowing facilities.

 

Fair value of long-term debt, including the current portion of long-term debt is described below:

 

(€ million)June 30,
2021
December 31,
2020
Ordinary bonds23,81922,429
Convertible bonds511497
Banks2,7164,008
Other financial institutions3236
 27,07826,970

 

Fair value of financial debt has been estimated based on the present value of expected future cash flows discounted at rates ranging from –0.5% to 1.8% (-0.5% and 1.4% at December 31, 2020).

 

Because of the short-term maturity and conditions of remuneration of short-term debts, the fair value approximated the carrying amount.

 

CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES

  

(€ million)Long-term
debt and
current
portion of long-
term debt
Short-term
debt
Long-term and
current
portion of long-
term lease
liabilities
Total
Carrying amount at December 31, 202023,8042,8825,01831,704
Cash flows(579)218(445)(806)
Currency translation differences114(52)115177
Other non-monetary changes177113595885
Carrying amount at June 30, 202123,5163,1615,28331,960

 

Other non-monetary changes include €685 million of lease liabilities assumptions.

 

Lease liabilities are described in note 10 – Right-of-use assets and lease liabilities.

 

Debts with related parties are described in note 32 – Transactions with related parties.

 

 
82CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS 

 

17 INFORMATION ON FINANCIAL INDEBTEDNESS

 

The statement of indebtedness was updated on the basis of Consob provisions which required new items or new aggregations of existing items. Financial indebtedness of the comparative period was restated without quantitative changes.

 

(€ million)June 30,
2021
December 31,
2020
A. Cash2,1292,500
B. Cash equivalents7,5846,913
C. Other current financial assets6,9245,705
D. Liquidity (A+B+C)16,63715,118
E. Current financial debt5,2404,022
F. Current portion of non-current financial debt1,3181,618
G. Current financial indebtedness (E+F)6,5585,640
H. Net current financial indebtedness (G-D)(10,079)(9,478)
I. Non-current financial debt6,6777,388
J. Debt instruments18,72518,676
K. Non-current trade and other payables  
L. Non-current financial indebtedness (I+J+K)25,40226,064
M. Total financial indebtedness (H+L)15,32316,586

 

Cash and cash equivalents included approximately €210 million subject to foreclosure by third parties.

 

Other current financial assets include: (i) financial assets held for trading disclosed in note 5 – Financial assets held for trading; (ii) financial receivables disclosed in note 14 – Other financial assets.

 

The breakdown of current and non-current financial debts is disclosed in note 16 – Financial debts.

 

Current portion of non-current financial debt and non-current financial debt include lease liabilities of €971 million and €4,312 million (€849 million and €4,169 million at December 31, 2020, respectively) of which €1,648 million (€1,652 million at December 31, 2020) related to the share of joint operators in upstream projects operated by Eni which will be recovered through a partner cash-call billing process.

 

18 PROVISIONS

 

(€ million)Provisions for
contingencies
Carrying amount at December 31, 202013,438
New or increased provisions216
Initial recognition and changes in estimates for site restoration, abandonment and social project(601)
Accretion discount75
Reversal of utilized provisions(465)
Reversal of unutilized provisions(58)
Currency translation differences197
Other changes(69)
Carrying amount at June 30, 202112,733

 

Provisions recognized in the first half of 2021 primarily related to environmental costs and contractual disputes.

 

The decrease in initial recognition and changes in estimates for site restoration, abandonment and social project of the Exploration & Production segment was primarily due as consequence of an increase in the discount rates.

 

Utilizations related to the progress in spending the accrued amounts in environmental remediation projects and compensations for insurance claims.

 

 
CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS83 

 

19 DEFERRED TAX ASSETS AND LIABILITIES

 

(€ million)June 30,
2021
December 31,
2020
Deferred tax liabilities before offsetting8,9388,581
Deferred tax assets available for offset(2,991)(3,057)
Deferred tax liabilities5,9475,524
Deferred tax assets before offsetting (net of accumulated write-down provisions)7,4007,166
Deferred tax liabilities available for offset(2,991)(3,057)
Deferred tax assets4,4094,109

 

The following table summarizes the changes in deferred tax liabilities and assets:

 

(€ million)Deferred tax
liabilities
before
offsetting
Deferred tax
assets before
offsetting,
gross
Accumulated
write-downs
of deferred tax
assets
Deferred tax
assets before
offsetting,
net of
accumulated
write-downs
Carrying amount at December 31, 20208,581(16,231)9,065(7,166)
Changes of the period(51)(14)163149
Currency translation differences260(268)72(196)
Other changes148(268)81(187)
Carrying amount at June 30, 20218,938(16,781)9,381(7,400)

 

Income taxes are described in note 29 – Income taxes.

 

 
84CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS 

 

20 DERIVATIVE FINANCIAL INSTRUMENTS

 

 June 30, 2021December 31, 2020
(€ million)Fair value
asset
Fair value
liability
Level of
Fair value
Fair value
asset
Fair value
liability
Level of
Fair value
Non-hedging derivatives      
Derivatives on exchange rate      
 - Currency swap3812721251272
 - Interest currency swap71 212822
 - Outright452472
 113132 257136 
Derivatives on interest rate      
 - Interest rate swap1357223742
 1357 2374 
Derivatives on commodities      
 - Future1,00290214184471
 - Over the counter160142289772
 - Other71725 2
 1,1691,061 512524 
 1,2951,250 792734 
Trading derivatives      
Derivatives on commodities      
 - Over the counter5,9075,82421,1671,4512
 - Future2,4662,47214405251
 - Options17191432
 8,3908,315 1,6111,979 
Cash flow hedge derivatives      
Derivatives on commodities      
 - Over the counter42982209302
 - Future204149111981
 - Options 513 512
 208498 32889 
Derivatives on interest rate      
 - Interest rate swap 11   
  1    
 208499 32889 
Option embedded in convertible bonds112222
Gross amount9,89410,065 2,7332,804 
Offsetting(3,626)(3,626) (1,033)(1,033) 
Net amount6,2686,439 1,7001,771 
Of which:      
 - current6,1666,302 1,5481,609 
 - non-current102137 152162 

 

During the first half of 2021, Eni entered into sustainability-linked interest currency swaps with leading banking institutions which provide for a cost adjustment mechanism linked to the achievement of certain sustainability targets. At June 30, 2021, the fair value of these contracts amounted to €3 million.

 

Derivative fair values are estimated based on market quotations provided by primary info-provider while fair values of non-quoted derivative instruments are determined by appropriate valuation techniques generally adopted in the financial field.

 

During the first half of 2021, there were no transfers between the different hierarchy levels of fair value.

 

 
CONSOLIDATED INTERIM FINANCIAL STATEMENTS I NOTES ON FINANCIAL STATEMENTS85 

 

 

Effects recognized in other operating profit (loss)

 

Other operating profit (loss) related to derivative financial instruments on commodity consisted of the following:

 

(€ million)First Half
2021
First Half
2020
Net income (loss) on cash flow hedging derivatives6(1)
Net income (loss) on other derivatives42(372)
 48(373)

 

Effects recognized in finance income (loss)

 

Finance income (loss) on derivative financial instruments consisted of the following:

 

(€ million)First Half
2021
First Half
2020
Derivatives on exchange rate(235)(28)
Derivatives on interest rate17(48)
 (218)(76)

 

Derivative financial instruments with related parties are reported in note 32 — Transactions with related parties.

 

21 ASSETS HELD FOR SALE AND LIABILITIES DIRECTLY ASSOCIATED WITH ASSETS HELD FOR SALE

 

As of June 30, 2021, assets held for sale and directly associated liabilities of €136 million and €106 million, respectively, related to: (i) an agreement for the sale of the entire Pakistan assets to Prime International Oil & Gas Company involving the 100% stake of the consolidated companies Eni AEP Ltd, Eni Pakistan Ltd, Eni Pakistan (M) Ltd Sàrl and Eni New Energy Pakistan (Private) Ltd. The activities covered by the agreement include interests in eight development and production licenses in the Kithar Fold Belt, and the Middle Indus Basins and four exploration licenses in the Middle Insud and the Indus Offshore Basins. The carrying amount of assets held for sale and liabilities directly associated amounted to €113 million (of which current assets for €74 million) and €106 million (of which current liabilities for €21 million), respectively; (ii) the sale of tangible assets for a total carrying amount of €23 million.

 

22 EQUITY

 

EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF ENI

 

(€ million)June 30,
2021
December 31,
2020
Share capital4,0054,005
Retained earnings24,53034,043
Cumulative currency translation differences4,9323,895
Other reserves and equity instruments:  
- Perpetual subordinated bonds5,0003,000
- Legal reserve959959
- Reserve for treasury shares581581
- Reserve for OCI on cash flow hedging derivatives(174)(5)
- Reserve for OCI on defined benefit plans(163)(165)
- Reserve for OCI on equity-accounted investments6292
- Reserve for OCI on other investments valued at fair value5236
- Other reserves190190
Treasury shares(581)(581)
Net profit (loss)1,103(8,635)
 40,49637,415

 

 

86CONSOLIDATED INTERIM FINANCIAL STATEMENTS | NOTES ON FINANCIAL STATEMENTS

 

SHARE CAPITAL

 

As of June 30, 2021, the parent company’s issued share capital consisted of €4,005,358,876 (same amounts as of December 31, 2020) represented by 3,605,594,848 ordinary shares without nominal value (same amounts as of December 31, 2020).

 

On May 12, 2021, Eni’s Shareholders’ Meeting declared: (i) to distribute a dividend of €0.24 per share, with the exclusion of treasury shares held at the ex-dividend date, in full settlement of the 2020 dividend of €0.36 per share, of which €0.12 per share paid as interim dividend. The balance was paid on 26 May 2021, to shareholders on the register on May 24, 2021, record date on May 25, 2021; (ii) to authorize the Board of Directors pursuant to and for art. 2357 of the Civil Code to proceed, within 18 months from the date of the resolution, with the purchase of a maximum number of shares equal to 7% of the ordinary shares (and 7% of the share capital) of the Company (without calculating treasury shares already own), for a total amount up to €1,600 million. At June 30, 2021, in execution of this resolution, no shares were acquired.

 

PERPETUAL SUBORDINATED HYBRID BONDS

 

In the first half of 2021, perpetual subordinated hybrid bonds increased by €2 billion as consequence of two new emissions amounting to €1 billion each, issuing costs amounting to €15 million.

 

The hybrid bonds are governed by English law and are traded on the regulated market of the Luxembourg Stock Exchange.

 

The key characteristics of the two new bonds issued in the first half of 2021 are: (i) €1 billion perpetual 6-year subordinated non-call hybri