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.
Due to the differing nature of Neste’s businesses, main risk factors vary between the units. In particular, risks relating to legislation, technology, and intellectual property rights, as well as raw materials supply, are likely to be of greater emphasis in the Renewable Products business than in traditional oil refining.
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, operational results, and future prospects.
External risks – Economic conditions, Geopolitics
During the last few years, the uncertain world economy and geopolitics have had an effect on Neste’s key markets and the oil market in general. Also during 2018, geopolitical risks remained at high levels.
In the European Union, Brexit and other economic and political developments may impact the market conditions for supply of feedstock and sales of refined products. In the United States, discussion around the continuation of biofuel programs and potential import tariffs create business uncertainty for Neste.
Trade restrictions like international sanction regimes may have an adverse impact on Neste’s business. For example, additional trade sanctions or similar actions against Russia could limit Neste’s access to Russian crude oil and other raw materials.
External risks – Environment
A global trend is that consideration of environmental threats has extended from mapping of natural catastrophes to a holistic modeling of scenarios that relate to climate change and extreme weather events.
Stakeholders’ increased interest and commitment into combating climate change is primarily a positive driver for Neste’s business. However, 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. On a shorter term, especially initiatives and statements 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 operations and products are subject to extensive regulation (for example environmental, health & safety, sustainability). Constantly increasing regulatory pressure in areas like commodity trading, data protection, and traceability is a challenge for the whole industry.
On the other hand, especially the Renewable Products business is 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.
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 and willingness to develop operations further. In addition, Neste’s products and services must continuously meet evolving 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.
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.
Neste is exposed to foreign exchange risks due to the fact that most of 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.
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.
Risk management focus in 2018
During 2018, special risk management initiatives focused on the major investments, system transitions and business model changes. As a part of corporate level development projects, risk team participated in the renewal of company’s management system structures and supported alignment of roles in Neste’s three lines of defense.
In the end of 2018, Neste’s risk management tools were strengthened through implementation of a new web based risk management software that increases flexibility in risk tracking and monitoring of risk management actions.