In the pursuit of its objectives and targets, Neste is exposed to different risk factors that stem from the external environment, internal decision making, operating processes, and systems in use.
The most significant risk factors relate to the below mentioned areas. Any one of the risks, either singly or in the aggregate, may have a material adverse effect on Neste’s business, financial condition, operating results, and future prospects.
External risks – Economic conditions, Geopolitics
During the last few years, the uncertain global economic and financial market conditions have had an adverse effect on general business conditions. Despite the measures taken by various governmental and regulatory authorities as well as central banks around the world, due to the US-China trade policy tensions and various other factors, risks for a slowdown or even a recession must be taken into account, rendering a continuing unstable economic situation. Brexit and other economic and political developments in EU countries may impact the market conditions for the supply of feedstock and sales of refined products. In the United States, uncertainty around the continuation of biofuel programs and potential import tariffs create business uncertainty for Neste.
Market uncertainties and geopolitical tensions in oil-producing countries continued in 2019. The attack on some central production facilities in Saudi Arabia, tensions between Iran and other nations, restlessness in Iraq and military developments in Syria all are among factors creating turbulence and posing risks to world crude oil supplies. Trade restrictions like international sanctions regimes may have an adverse impact on Neste’s business e.g. by limiting access to Russian crude oil and other raw materials.
External risks – Environment
Neste’s strategic ambition is to be the global leader in renewable and circular solutions. Growing pressure to combat climate change and reduce greenhouse gas emissions is therefore primarily a positive driver for Neste’s business. However, political and societal focus on low carbon transition and energy sector’s carbon footprint also create risks. Indirect economic and political consequences from climate change may contribute to the general uncertainty in the business environment and hence have an adverse effect on Neste’s business. In addition, changes in carbon emission trading schemes or similar initiatives on EU, US or individual member state level may have a significant effect on Neste’s business.
External risks – Laws and regulation
Changing regulation presents both an opportunity and threat to Neste’s business. Neste’s business Units are benefiting from increased support for biofuels and renewable fuels (for example requirements that relate to renewable content in diesel and gasoline). Changes in regulation especially in the European Union and the United States may influence the speed at which the demand for renewable products develops, and new raw materials sources are taken into use.
On the other hand, Neste’s operations and products are subject to extensive regulation (for example environmental, health & safety, sustainability). Also general regulatory requirements in areas like commodity trading and data protection have created a need to review and update operating procedures. For the renewable products, a significant source of uncertainty is fragmented regulation around acceptability and use of waste & residue feedstock.
Risks relating to strategic choices and strategy implementation
The majority of strategic risks relate to the viability of made strategic choices and risks in strategy implementation. Opportunities and threats may arise from changes in the competitive landscape or from internal decision making and use of technology.
Neste’s competitive position in the selected key markets is good. Neste’s proprietary NEXBTL production technology is a proven technology for production of high-quality diesel from renewable raw materials. However, there is no assurance that this competitive position will continue as new players enter the market, current competitors develop their technologies or customer preferences change. In addition to the development of alternative diesel production technologies, the evolution of engine technologies and introduction of alternative powertrains can be faster than expected.
Staying ahead of competition requires ability to challenge current business models, strong focus on new innovations such as renewable aviation fuels, renewable and circular chemicals; and new feedstock and fuel technologies. In addition, Neste’s products and services must continuously meet customer requirements relating e.g. to product quality and sustainability. Evolving customer requirements together with more complex sourcing networks and production methods increase the exposure to quality risks that need to be managed well in order to maintain the high quality brand image. In order to manage the risks Neste has implemented systematic quality management measures both in its own operations and in partner networks.
As business complexity is increasing, strong governance practices and continued contributions of Neste’s senior management, personnel and partners are vital for the company’s success. Due to fierce competition for talent, there is a risk that Neste may not be able to recruit and retain highly skilled employees that are needed for strategy deployment and successful operations in the future. There is also a risk that Neste is not able to build and manage strategic partnerships that are contributing to future success.
Successful projects play a key role in Neste’s strategy deployment, operational development, and digitalization of processes. Significant delays in project planning or execution may reduce operational efficiency or impair Neste’s ability to secure its competitive position.
Business continuity risks
Neste’s business is dependent to a significant extent on its wholly owned fossil fuel refineries in Finland (Porvoo and Naantali) and its renewable diesel refineries in Singapore and the Netherlands (Rotterdam). Neste’s conventional oil refineries are scheduled to have a major maintenance turnaround every five years. In addition to these, for example disruptions in the supply of utilities or breakdown of critical machinery may cause unexpected shutdowns that affect Neste’s ability to fulfil demand for end products.
The vessels chartered to Neste or owned by Neste are subject to inherent risks like maritime disaster, damage to environment and loss of, or damage to cargo and property. Such events can be caused by multiple factors, such as adverse weather conditions or mechanical failures. Neste has insurances in place to reduce the financial impact of property damage, business interruption, and maritime disasters. However, insurances do not cover all potential losses and Neste could therefore be seriously harmed by operational catastrophes or deliberate sabotage.
The oil market has been and is expected to continue to be very volatile. General turbulence in the oil markets may result in unexpected swings in crude oil and raw materials prices.
The financial results of Neste are primarily affected by the price differential, or margin, between refined petroleum and renewable product prices; and the prices for crude oil, different vegetable oils and other feedstock used. Historically, refining margins have been volatile and they are likely to continue to be so in the future. Main factors that may affect the refining margins include:
- Changes in aggregate demand and supply for raw materials and products.
- Changes in demand and supply for specific raw materials and products.
- Raw materials and product price fluctuations.
- Evolution of worldwide refining capacity, and in particular development of refining capacity that relates to petroleum and renewable products similar to Neste.
As a part of management of risks relating to fluctuations in commodity prices, Neste uses derivative instruments to protect its position.
As a part of management of risks relating to fluctuations in commodity prices, Neste uses derivative instruments to protect its position. Neste is exposed to foreign exchange risks due to the fact that most of the sales are denominated in US dollars, whereas operating expenses (except purchase of raw materials) are recorded in euros. Neste limits the uncertainties relating to changes in foreign exchange rates by hedging its currency risks in contracted and forecasted cash flows and balance sheet exposures.
More information on market risks can be found in the Financial Statements Note 3 section of the Annual Report.
Credit and counterparty risk arises from sales, hedging, and trading transactions, as well as cash investments. The risk is linked to the potential failure of a counterparty to meet its contractual payment obligations, and is therefore dependent on the creditworthiness of the counterparty and the size of the exposure concerned. In order to manage the risk, Neste has implemented systematic controls for counterparty screening and monitoring.
The most significant sustainability risks that relate to Neste’s own operations or to the extended enterprise have been reported in line with the requirements of the Non-Financial Reporting Directive as a part of the review by the Board of Directors.
ICT and cyber risks
Digitalization and emerging technologies (for example use of artificial intelligence and robotics) offer chances to automate dangerous or error-prone tasks and increase efficiency of operations. At the same time, increasing sophistication of cyber threats and generally rising frequency of attacks targeted at oil & gas companies is a concern also for Neste. Cyber risks multiply the impact of other risks and could also like individual risks have a major negative impact on Neste’s reputation or continuity of business operations.
Reliability of the key IT systems and partnerships is essential for continuous business operations. Prolonged disruption in the availability of the key systems, data or interfaces could limit Neste’s ability to conduct its business operations in a profitable, efficient and controlled manner.
Risk management focus in 2019
In 2019, special risk management initiatives focused on the major investments, system transitions, business model changes and harmonization of counterparty risk management practices.