Eni SPA (E) Risk Analysis

Eni is the defendant in a number of civil and criminal actions and administrative proceedings. In addition to existing provisions accrued as of December 31, 2018 to account for ongoing proceedings, in future years Eni may incur significant losses in addition to the amounts already accrued in connection with pending or future legal proceedings due to: (i) uncertainty regarding the final outcome of each proceeding; (ii) the occurrence of new developments that management could not take into consideration when evaluating the likely outcome of each proceeding in order to accrue the risk provisions as of the date of the latest financial statements; (iii) the emergence of new evidence and information; and (iv) underestimation of probable future losses due to the circumstance that they are often inherently difficult to estimate. Certain legal proceedings and investigations in which Eni or its subsidiaries or its officers and employees are defendant involve the alleged breach of anti-bribery and anti-corruption laws and regulations and other ethical misconduct. Such proceedings are described in Note 27 to the 2018 Consolidated 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.

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. Eni’s results and cash flow depend on its ability to identify and mitigate the above mentioned risks and hazards which are inherent to its operations.

Eni is subject to numerous EU, international, national, regional and local laws and regulations regarding the impact of its operations on the environment and health and safety of employees, contractors, communities and properties. 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 health 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 resulting from the Group’s operations. These laws and regulations set limits to the emission of scrap substances and pollutants and discipline the handling of hazardous materials and discharges of water contaminants nad nocive air emissions 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 into the atmosphere, the soil or groundwater or the overcome of concentration threshold 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 safety in the workplace and of communities, the Company may be liable for the negligent or willful conduct on part of its employees as per Italian Law Decree No. 231/2001, which assumes that any misconduct of employees in the field of environmental and health matters can be ascribed to the Company. 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, safety in the workplace, health 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; ? • 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 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 result 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, which could diminish Eni’s productivity and materially and adversely impact Eni’s results of operations, cash flow and liquidity. Risks of environmental, health and safety incidents and liabilities are inherent in many of Eni’s operations and products. Management believes that Eni adopts high operational standards to ensure safety in running its operations and safeguard of the environment and the health of employees, contractors and communities. In spite of such measures, it is possible that incidents like blowouts, oil spills, contaminations, pollution, and release in the air, soil and ground water of pollutants and other dangerous materials, liquids or gases, and other similar events could occur that would result in damage, also of large proportion and reach, to the environment, employees, contractors, communities and property. The occurrence of any such events could have a material adverse impact on the Group’s business, competitive position, cash flow, results of operations, liquidity, future growth prospects, shareholders’ returns and damage to the Group’s reputation. 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 requirements and 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 a number of 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 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, nor 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 obligation exists 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 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) unfavourable developments in ongoing litigation on the environmental status of certain of the Company’s sites where a number of public administrations and the Italian Ministry of the Environment act as plaintiffs; (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 those risks, environmental liabilities could be substantial and could have a material adverse effect on Eni’s results of operations, cash flow, financial condition, business prospects, reputation and shareholders’ value, including dividends and the share price.

Unless the Company is able to replace 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. Based on the current portfolio of oil and gas assets, Eni’s management estimates that production entitlements vary on average by approximately 600 BBL/d for each $1 change in oil prices based on current Eni’s assumptions for oil prices. This led to negative reserves revisions of 38 mmBOE in 2018, due to the oil price increase previously described. In case oil prices differ significantly from Eni’s own forecasts, the result of the above mentioned sensitivity of production to oil price changes may be significantly different. Future oil and gas production is dependent on 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 entities 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 and this will negatively affect future results of operations, cash flow and business prospects.

In the years preceding the European gas downturn of 2013?–?2014, Eni signed a number of long-term gas supply contracts with national operators of certain key producing countries, from where most of the European gas supplies are sourced (Russia, Algeria, Libya, the Netherlands and Norway). These contracts were intended to secure Eni long-term access to gas supplies, particularly with a view to supplying the Italian gas market and in anticipation of certain pargets of gas demand growth, which however would fall short of industry’s projections. These contracts include 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 the minimum contractual quantity. Similar considerations apply to ship-or-pay contractual obligations. 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. Management believes that the current level of market liquidity, the outlook of the European gas sector which is featuring muted demand growth, strong competitive pressures and large supplies, as well as any possible change in sector-specific regulation represent risk factors to the Company’s ongoing ability to fulfil its minimum take obligations associated with its long-term supply contracts.

The large majority of Eni’s oil and gas reserves are located in countries outside Europe and North America, mainly in Africa, Central Asia and Central-Southern America, 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 additional risks and uncertainties in addition to the material risks described above, which could materially impact the ability of the Company to conduct its oil&gas operations in a safe, reliable and profitable manner. As of December 31, 2018, approximately 82% of Eni’s proved hydrocarbon reserves were located in such countries. Adverse political, social and economic developments, such as internal conflicts, revolutions, establishment of non-democratic regimes, protests, strikes and other forms of civil disorder, contraction of economic activity and financial difficulties of the local governments with repercussions on the solvency of state institutions, inflation levels, exchange rates and similar events in those non-OECD countries may impair Eni’s ability to continue operating in an economically viable way, either temporarily or permanently, and Eni’s ability to access oil and gas reserves. In particular, Eni faces risks in connection with the following, possible issues: • lack of well-established and reliable legal systems and uncertainties surrounding the enforcement of contractual rights; ? • unfavorable enforcement of laws, regulations and contractual arrangements leading, for example, to expropriation, nationalization or forced divestiture of assets and unilateral cancellation or modification of contractual terms. Eni is facing increasing competition from state-owned oil companies that are partnering Eni in a number of oil and gas projects and properties in the host countries where Eni conducts its upstream operations. These state-owned oil companies can unilaterally change contractual terms and other conditions of oil and gas projects in order to obtain a larger share of profit from a given project, thereby reducing Eni’s profit share. They can also enforce different interpretations of contractual clauses relating to the recovery of certain expenses incurred by the Company to produce hydrocarbons reserves in any given project; • 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 during the recent, three-year long oil downturn which ended by mid of 2017. Financial difficulties at country level often translate into failure on part of state-owned companies and agencies to fulfill their financial obligations towards Eni relating to funding capital commitments in projects operated by Eni or to timely paying supplies of equity oil and gas volumes; ? • restrictions on exploration, production, imports and exports; ? • tax or royalty increases (including retroactive claims); ? • political and social instability which could result in civil and social unrest, internal conflicts and other forms of protest and disorder 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, the loss of assets and threat 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; ? • difficulties in finding qualified suppliers in critical operating environments; and ? • complex processes of granting authorizations or licences affecting time-to-market of certain development projects. ? Areas where Eni operates and where the Company is particularly exposed to political risk include, but are not limited to: Libya, Egypt, Algeria, Nigeria, Angola, Kazakhstan, Venezuela and Iraq. 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 Eni’s business, results of operations and financial condition. In recent years, Eni’s operations in Libya were materially affected by the revolution of 2011 and a change of regime, which caused a prolonged period of political and social instability, still ongoing. In 2011 Eni’s operations in the country experienced an almost one-year long shutdown due to security issues amidst a civil war, causing a material impact on the Group results of operation and cash flow of the year. In subsequent years Eni has experienced frequent disruptions at its operations albeit of a smaller scale than in 2011 due to security threats to its installations and personnel. In the second half of 2018 a resurgence of socio-political instability coupled with internal clashes reduced the Country economic activity and gas demand which negatively affected the Company’s levels of production for the year. Management is closely monitoring the situation and is evaluating any possible measure to safeguard safety of Eni’s local personnel and security of plants and production infrastructures. Going forward, management believes that Libya’s geopolitical situation will continue to represent a source of risk and uncertainty to Eni’s operations in the Country. Currently, Libya represents approximately 16% of the Group’s total production; this proportion is forecasted to decrease in the medium term. In the event of major adverse events such as the resumption of internal conflict, acts of war, sabotage, social unrest, clashes and other forms of civil disorder, Eni could be forced to interrupt or reduce its producing activities at the Libyan plants, negatively affecting Eni’s results of operations, cash flow and business prospects. Venezuela is currently experiencing a situation of financial stress amidst an economic downturn due to lack of resources to support the development of the country’s hydrocarbons reserves, which have negatively affected the Country production levels and hence petroleum 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 the USA market, which is the main outlet of Venezuelan production, which are described below. Eni expects the financial and political outlook of Venezuela to negatively affect its ability to recover the investments made in the Country to develop two petroleum projects and the overdue trade receivables owned to us by the Venezuelan national oil company?–?PDVSA?–?and its affiliates for the gas supplies of the Cardon IV gas project, a 50 per cent.?–?held joint venture. In 2018, this venture was able to collect a certain percentage of the sales of the equity gas produced in the year to PDVSA. The venture is systematically accounting a loss provision on the uncollected revenues based on management’s appreciation of the counterparty risk which was estimated based on the findings of a review of the past experience of sovereign defaults. Furthermore, due to a worsening operating environment, management decided to de-book the proved undeveloped reserves (down 106 million BBL) at one of the Company’s projects in the Country, recognizing an impairment loss of around €200 million. Nigeria is also undergoing a situation of financial stress, which has translated into continuing delays in collecting overdue trade receivables and credits for the carry of the expenditures of the Nigerian joint operators at projects operated by Eni and the incurrence of credit losses. Further, Eni’s activities in Nigeria have been impacted in recent years by continuing incidences of theft, acts of sabotage and other similar disruptions, which have jeopardized the Company’s ability to conduct operations in full security, particularly in the onshore area of the Niger Delta. Eni expects that those risks will continue to affect Eni’s operations in Nigeria and other countries. It is possible that the Group may incur further asset impairments or credit losses in future reporting periods depending on the evolution of the financial outlook of the Countries where the Group is conducting its oil&gas operations. In Egypt, Eni plans to invest significantly in the next four-year plan to sustain the production plateau at the Zohr offshore gas field and to develop existing gas reserves at other projects. Since our gas production is entirely sold to local state-owned oil companies, we expect a significant increase in the credit risk exposure in Egypt, where we experienced some issues at collecting overdue trade receivables during the downturn. Eni will continue monitoring the counterparty risk in future years considering the significant volumes of gas expected to be supplied to Egypt’s national oil companies. Eni closely monitors political, social and economic risks of the countries in which it has invested or intends to invest, in order to evaluate the economic and financial return of certain projects and to selectively evaluate projects. While the occurrence of those events is unpredictable, the occurrence of any such events could adversely affect Eni’s results from operations, cash flow and business prospects, also including the counterparty risk arising from the financing exposure of Eni in case state-owned entities, which are party to Eni’s upstream projects for developing hydrocarbons, fail to reimburse due amounts.

Liquidity risk is the risk that suitable sources of funding for the Group may not be available, or the Group is unable to sell its assets on the marketplace in order to meet short-term financial requirements and to settle obligations. Such a situation would negatively affect the Group results of operations and cash flows as it would result in Eni incurring higher borrowing expenses to meet its obligations or, under the worst conditions, the inability of Eni to continue as a going concern. Global financial markets are volatile due to a number of macroeconomic risk factors, including the financial situation of certain hydrocarbons-exporting countries whose financial conditions have sharply deteriorated following the protracted downturn in crude oil prices. In the event of extended periods of constraints in the financial markets, or if Eni is unable to access the financial markets (including cases where this is due to Eni’s financial position or market sentiment as to Eni’s prospects) at a time when cash flows from Eni’s business operations may be under pressure, Eni’s ability to maintain Eni’s long-term investment program may be impacted with a consequent effect on Eni’s business prospects, results of operations and cash flows, and may impact shareholder returns, including dividends or share price. 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 business approximately €33 billion, approximately 50% of capital expenditures at the end of the four-year period refers to uncommitted projects, granting to the Group financial flexibility in case of sudden changes in the trading environment. In 2019, Eni expects to make capital expenditures of approximately €8 billion, in line with 2018. Historically, Eni’s capital expenditures have been financed with cash generated by 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 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.

Eni faces strong competition in each of its business segments. The current competitive environment in which Eni operates is characterized by volatile prices and margins of energy commodities, limited product differentiation and complex relationships with state-owned companies and national agencies of the countries where hydrocarbons reserves are located to obtain mineral rights. As commodity prices are beyond the Company’s control, Eni’s ability to remain competitive and profitable in this environment requires continuous focus on technological innovation, the achievement of efficiencies in operating cost, efficient management of capital resources and the ability to provide valuable services to the energy buyers. It also depends on Eni’s ability to gain access to new investment opportunities, both in Europe and worldwide. • In the Exploration & Production segment, Eni faces competition from both international and state-owned oil companies for obtaining exploration and development rights, and developing and applying new technologies to maximize hydrocarbon recovery. Furthermore, Eni may face a competitive disadvantage because of its smaller size relative to other international oil companies, particularly when bidding for large scale or capital intensive projects, and it may be exposed to the risk of obtaining lower cost savings in a deflationary environment compared to its larger competitors given its potentially smaller market power with respect to suppliers. If, because of those competitive pressures, Eni fails to obtain new exploration and development acreage, to apply and develop new technologies, and to control costs, its growth prospects and future results of operations and cash flow in this business may be adversely affected. ? • In the Gas & Power segment, Eni is facing strong competition in the European wholesale gas markets to sell gas to industrial customers, the thermoelectric sector and retailer companies from other gas wholesalers, upstream companies, traders and other players both in the Italian market and in markets across Europe. In recent years, competition has been fueled by muted demand growth, oversupplies and the development of very liquid European spot markets where large volumes of gas are traded daily. Players are competing mainly in terms of pricing and to a lesser extent on the ability to offer additional services to the buyers of the commodity, like volume flexibilities, different pricing options, the possibility to change the delivery point and other optionality. Management believes that competition in the European wholesale gas market will continue to negatively affect the results of operations and cash flow of Eni’s Gas & Power segment in future reporting periods. Eni’s Gas & Power segment also engages in the supply of gas and electricity to customers in the retail markets mainly in Italy, France and other areas in Europe. Customers include households, large residential accounts (hospitals, schools, public administration buildings, offices) and small and medium-sized businesses located in urban areas. The retail market is characterized by strong competition among local selling companies which mainly compete in term of pricing and the ability to bundle valuable services with the supply of the energy commodity. In this segment competition has intensified in recent years due to the progressive liberalization of the market and the option on part of residential customers to switch smoothly from one supplier to another. Management believes that competition will represent a risk factor to the Company’s results of operations and cash flow in this business unit. • Eni is facing strong competitive pressure in its business of gas-fired electricity generation which is largely sold at wholesale markets in Italy. Margins on the sale of electricity have declined in recent years due to oversupplies, weak economic growth and inter-fuel competition. This latter was due to the fact that power produced from renewable sources and coal-fired power generation are cheaper than gas-fired electricity, although coal-fired plants are expected to be progressively phased-out due to environmental issues. Management believes that these negative factors will continue to negatively affect crack-spread margins on electricity at Italian wholesale markets and the profitability of this business unit in the foreseeable future. ? • In the Refining & Marketing segment, Eni faces strong competition both in the wholesale markets and in the retail marketing activity. Margins of European refiners are facing structural headwinds due to muted trends in the European demand for fuels and continued competitive pressures from players in the Middle East, the USA and Asia, who can leverage on larger plant scale and cost economies, availability of cheaper feedstock, lower energy expenses and fewer environmental obligations. Eni believes that the competitive environment will remain challenging in the foreseeable future, also considering refining overcapacity in the European area and expectations of a new investment cycle driven by capacity expansion plans announced in Asia and the Middle East, potentially leading to a situation of global oversupplies of refinery products. In 2018 Eni’s gauge of profitability in the refining business fell by approximately 26% to 3.7 $/BBL driven by rising costs of oil-based feedstock that the Company was unable to transfer to final products prices pressured by the weak market fundamentals described above. This decline negatively affected the performance of the Company’s refining activity. Management believes that in the long-term the trading environment will not recover meaningfully with refining margins seen in a 4-5 $/BBL range. Furthermore, Eni’s refining margins are exposed to the volatility in the spreads between crudes with high sulfur content or sour crudes vs. the Brent crude benchmark, which is a low-content sulfur crude. Eni complex refineries are able to process sour crudes which typically trade at a discount over the Brent crude. However, in 2019 a shortfall in supplies of sour crudes is expected in the market due to the production cuts implemented by OPEC, lower exports from Venezuela and the USA sanctions against Iran. Those developments could result in an appreciation of the relative prices of sour crudes vs. the Brent, which would negatively affect the results of our refining business. Against this backdrop, management has designed an action plan intended to reduce the Company’s breakeven margin in its refining business to about 3 $/BBL in 2019 by means of plant and feedstock optimization, energy savings and other cost efficiencies. Additionally, management expects to close by year-end the acquisition of a 20%-stake in a large refining asset in Abu Dhabi, which will de-risk Eni’s refining business due to the fact that the asset being acquired is more profitable than Eni’s legacy refineries due to larger scale, efficiency, geographic reach and proximity to raw materials sources. In case management fails to execute on this plan, the profitability of Eni’s refining business may be negatively affected considering management’s expectations for a weak trading environment. In marketing, Eni faces competition from other oil companies and newcomers such as low-scale operators and large retailers, who tend to adopt aggressive pricing policies. All these operators compete with each other primarily in terms of pricing and, to a lesser extent, service quality. ? • In the Chemicals business, Eni faces 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), which demand is a function of macroeconomic growth. Many of those competitors based in the Far East and the Middle East are able to benefit from cost economies due to larger plant scale, wide geographic moat, availability of cheap feedstock and proximity to end-markets. Excess capacity across Europe 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 petrochemicals subsidiaries. In 2018 the operating profit of our Chemicals business fell sharply due to increased expenses for oil-based feedstock, which the Company was not able to pass to final products prices pressured by competition. The Company does not expect any meaningful improvement in the trading environment in the short to the medium-term due to competitive headwinds described above. Management intends to execute an action plan designated to diversify the product portfolio away from the more commoditized products which are exposed to crude oil prices fluctuations and cyclical market dynamics and to focus on higher-value added products, particularly in the green chemicals business and in specialty niche markets, which we believe are less exposed to the economic cycle and to the volatility of crude oil prices. If the Company fails to reduce its exposure to commodity plastics and to gain critical mass in the green chemicals business and in the specialty markets, its future results of operations and cash flows may remain cyclical and exposed to any demand or cost downturn.