Complexity has always been the distinctive feature of the social, political, economic and environmental contexts in which Eni operates.
2008 was a year of such radical change as to force the world economies - and the companies that operate within them - to tackle new opportunities and thereby rethink their business models.
This constantly evolving scenario is bound to influence the role and strategies of Eni as an international energy Company while at the same time confirming and consolidating many of the choices made over time by the Company as regards product and process innovation, relationships with producer Countries and local communities, customer focus and social responsibility.

THE FINANCIAL AND ECONOMIC CRISIS

The financial crisis that erupted in the latter months of 2008 had its roots in the early 2000s and is the result of accelerated growth of household debt, real estate bubble, easy bank credit, and the illusion that the development of innovative finance could reduce the risk of insolvency.
A serious confidence crisis has hit the credit systems of the major industrialized Countries, causing key operators to be confronted with severe difficulties.
Against this backdrop, in a rapid crescendo, the outlook for all primary economies deteriorated significantly. Since autumn 2008, expectations have progressively worsened, and from the third quarter onwards many Countries were in an all-out recession.
As a consequence, the mid-term growth forecasts of all the main Countries have been reduced by the international institutions.
It is difficult at this time to predict how long it will take for a recovery to set in; it will depend largely on the effectiveness of the measures to counter the crisis that will be adopted by the Governments, first of all by the new US Administration. Another factor that will have a considerable influence on the intensity and duration of the crisis will be the ability of emerging economies to continue their fast-paced growth, despite reduced export flows towards the western markets.
Energy markets have not been immune from the financial and economic crisis. In 2008 the trends in oil prices were affected by strong fluctuations, with radical changes in both operators' expectations and benchmark fundamentals on which oil price valuations are based (see below, "Reasons of the shock in crude oil prices"). Oil demand in the US should be weak again in 2009, after a substantial decrease in 2008. The economic crisis could force consumers to cut their transportation costs in Europe as well. If Asia were to be dragged into the crisis as a result of the US and European recession, China's and India's economies could slow down and their oil demand could decrease. In this case, the support of non-OECD Countries to global oil demand would drop, and declining consumption in OECD Countries would no longer be offset by the Asian economies as it had been in the last few years. At the supply side, weaker demand could clash against operational production capabilities resulting from projects completed in recent years. Investments about to be completed may drive a boost in production capacity, particularly in the new producer Countries anxious to win market shares in order to support the growth of their national economies with oil sales. On the other hand, OPEC Countries' revenues from oil exports are rapidly dropping because of reductions in both price and quantities sold abroad. OPEC is therefore trying to contain falling crude oil prices by cutting production and, wherever possible, by postponing investments in new production capacity. Natural gas consumption is also impacted by the global economic crisis, and its growth could slow down in the next few years. The industrial sector's gas demand will predictably decrease. Since consumption growth is driven largely by the thermoelectric sector, this industry will be the most influential in determining gas demand trends. Indeed, due to the crisis, demand for electricity may grow at a reduced rate but gas could reinforce its role within the mix of energy generating options. In view of this, natural gas consumption is less likely than oil to be heavily affected by the global economic crisis.

HIGHLIGHTS - REASONS OF THE SHOCK IN CRUDE OIL PRICES

2008 will also be remembered as the year of the great shock in oil prices. In the first part of 2008, prices climbed steadily up to a peak of US$ 144 per barrel by mid July. After this date, valuations declined rapidly. The reasons of the boom are well-known: during 15 years of low prices, continuing until 2002, investments in Exploration & Production were limited and mostly concentrated in mature areas like the United States and Canada.
Added to a sustained growth in demand, driven particularly by the emerging economies, this led to a reduction in spare capacity (i.e. the capacity of unused production) and therefore to vulnerable markets, global uncertainty and soaring prices. The bust that followed can be explained by three reasons. In the first place, when oil prices rise beyond a certain level, oil product demand cannot remain unchanged, because consumers can do nothing to increase their purchasing power. Additionally, in all the developed world high oil prices and a more acute awareness of environmental issues have heightened interest in energy saving policies and promoted more responsible consumption styles.
The second factor that accelerated the drop in prices was the financial and economic crisis and its impact on operator expectations, the production system and actual resources available for expenditure. The third factor that determined the decline in oil prices concerned the supply side.
After 2002, rising prices stimulated investments in production capacity. Global investments in upstream oil projects doubled between 2002 and 2007. Consequently, production started to increase, albeit at a lower rate than investments. On top of all these considerations, financial speculations contributed first to inflate prices and then to knock them down.
High uncertainty prevails in today's oil market, with many factors likely to play a role in determining new balance levels. In the mid to long-term, once crude oil consumption picks up again, the need to balance demand and supply could arise again to support prices. The average level and volatility of crude oil prices will be a function of the intensity of this process.

LEVERS OF CHANGE FOR INTERNATIONAL ENERGY COMPANIES

According to most scenarios, the trend in global energy demand will continue to grow in the mid to long-term, although the expected growth rate varies depending on how the crisis evolves. Demand will be driven mainly by the economic - and demographic - development of emerging Countries, currently slowed down by the global crisis. In the next few years, the priorities in European and US energy policies will be promoting more responsible consumption styles, improving energy efficiency, and spreading the use of renewable sources. In all the scenarios that can be forecast today, fossil fuels are not seen as losing their significant role in the global energy mix, although opinions differ somewhat as to how much of this mix will be represented by alternative and renewable sources. As late as 2020, it is probable that more than 80% of the world's primary energy consumption will be met by oil, coal and natural gas. In effect, while people have become deeply aware of the huge environmental impact brought about by these sources, the technical and financial constraints that still affect alternative sources continue to limit their capacity to broadly replace fossil fuels, at least in the next ten years.
Against this backdrop, international energy companies can contribute to laying the foundations for global energy security: on the one hand, by strengthening cooperation with the Countries which have hydrocarbon reserves, and on the other, by committing to research for the improvement of technical-financial and environmental performance of fossil as well as alternative sources, including renewables.
International oil companies have traditionally supported reserve owning Countries and their National Oil Companies in developing and marketing their resources. Today, NOCs are taking over a leading role in the oil industry. With increasingly advanced technical and managerial skills, they are fast catching up with international companies as regards management and operating methods, as well as an increasing focus on profitability and efficiency. Many upstream projects are now handled independently or with the sole support of service companies or by NOCs. Finally - and in order to seek autonomy in their domestic markets - NOCs are expanding their activities abroad in a perspective of  business growth and diversification. In this environment, IOCs need to rethink their cooperation models with NOCs, with initiatives aimed at establishing steady relationships and wide-ranging strategic agreements for a balanced sharing of risks and profits. IOCs can bridge the gap between the western Countries' need to rely on secure hydrocarbon supplies at reasonable prices, and reserve owning Countries' need not only to market their output but also to meet their domestic energy requirements and to promote sustainable and autonomous development. Alongside improving the security of hydrocarbon supplies, we also need to promote more responsible consumption styles, enhance energy efficiency, and find solutions to the issues that are still holding back the large-scale use of alternative sources. Thus, investing in innovation is one of the factors that will make the difference: the ability to innovate in the areas of research and technology must go along with a new way of building and maintaining relationships. Commitment to attracting and recognizing people's value as well as customer and consumer satisfaction and the capacity of energy companies to create effective dialogue responding to requests from local communities and civil organizations will play an increasingly significant role in the Company's chances of success and market valuation, in an industry characterized by a growing need for security.

HIGHLIGHTS -  THE NEW ENERGY POLICIES IN EUROPE AND THE UNITED STATES

Energy consumption scenarios seem to agree on the fact that fossil sources will maintain a crucial role in the global consumption balance; however, the percentage covered by these sources vs. alternative and renewable sources differs. This variability in scenario projections is reflected in the European Union's policies as well as in those recently outlined by the new US administration. The process for the development and approval of the new European Energy Policy (EEP) was completed in December 2008.
Specifically, the measures adopted will aim at achieving the following objectives by 2020:

- 20% reduction in EU greenhouse emissions from 1990 levels (this percentage can be increased up to 30% if a global climate agreement is reached);

- energy from renewable sources to contribute 20% of final gross consumption.

The EU recognizes that energy efficiency is the key to achieving the greenhouse emission reduction objective, particularly for the transport, agriculture and residential sectors, although no binding objective is identified. Europe's policy to promote efficiency in the main industries is based on strengthening the Emissions Trading system by extending it to other sectors and gases and by issuing stricter rules for participation.
The Carbon Capture & Storage option is considered necessary to continue to use fossil sources for sustainable power generation.
Mechanisms based on cooperation between Member States are available to achieve the renewable source objective. Biofuels are viewed as the primary tool to achieve the renewable energy consumption target in the transport sector (10%).
In the United States, President Barack Obama's energy policy aims at ensuring a higher level of energy security to the Country, while assuming a leading role in environmental protection and giving new momentum to the national economy.
 These objectives will be achieved by rationalizing consumption styles, improving energy efficiency, and developing renewable sources. In detail, the plan aims at:

- saving more oil than the US currently imports from the Middle East and Venezuela by the end of the next decade;

- registering one million hybrid automobiles by 2015;

- producing 10% of the Country's power requirement from renewable sources by 2012 (25% by 2025);

- abating greenhouse gas emissions by 80% within 2050 through the introduction of a national emission trading system.

The US Administration estimates that the new energy policy will allow the creation of 5 million new jobs in the next 10 years, with investments for US$ 150 billion.

THE ROLE OF ALTERNATIVE ENERGIES IN THE ENERGY SCENARIO

With the exception of the hydroelectric segment, renewable sources typically have low energy and power density. In the case of solar and eolic energy, output is intermittent and difficult to program. Additionally, higher generating potential is often geographically remote from more intensive consumption areas.
For the hydroelectric segment, the development of new capacity in industrialized Countries is limited by the fact that the natural potential is already widely exploited. As to developing Countries, the announced projects could be opposed because of the substantial impact they would have on the conservation of complex ecosystems. Nuclear energy could provide an important tool to reduce greenhouse emissions in the energy sector. However, nuclear plants involve very long construction times, high costs and considerable authorization issues, while at the same time maintaining significant drawbacks, including the acceptance of new sites by the local communities and the disposal of radioactive waste. Whereas cost constraints can be partly compensated by government policies aimed at funding the development of these sources, technological constraints require substantial investments in research, so as to find the breakthrough solutions that will allow alternative sources to take over a primary role in meeting energy demand.
Solar energy is plentiful and is the most promising long-term option, provided strong research efforts are made to overcome the constraints that currently limit its role in the energy mix.
Transports are today the primary field of use of crude oil, where other fossil or renewable sources seem to be still marginally employed. In the mid term, biofuels could at least partly replace oil products. Their use ensures the absence of certain pollutants, like sulphur and polyaromatic hydrocarbons, although their energy yield is lower. For this opportunity to materialize, technological innovation shall have to find solutions to the limits that hinder the production and use of biofuels. Currently available technologies pose doubts on the Sustainability of the entire production chain, as biofuel cultivations require vast extensions of arable land and large amounts of water and fertilizers.
Moreover, current industrial processes for biomass conversion only use part of the plant, and generate large quantities of by-products for which little valuable use has so far been found. Other considerations concern the potential competition with food products for arable land and raw materials, with unfavourable implications on foodstuff availability and prices. Second-generation technologies for biofuels may represent an important step forward in overcoming these problems, also thanks to the capacity of converting the whole biomass of biofuels in a efficient and economically sustainable way, without secondary productions difficult to exploit. Among biomasses suitable to these production chains there are fast-growing or highly-producible vegetable species per hectare, or else algae duly selected to produce huge amouns of biodiesel forerunners or alcohols utilizable as gasoline substitutes (e.g. ethanol or butyl alcohol). Another system to use biomasses is the process of trasforming organic substances into gas (gasification), to be utilized for the subsequent fuel synthesis (GTL - Gas To Liquids Technology).