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 areas mentioned below. 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, Pandemic
Overall market volatility, geopolitical tensions and the risk of an economic slowdown may have an adverse effect on the market conditions for the supply of feedstock and sales of refined products. During 2021, the global economic and financial markets started to recover from the heavy impact brought by the COVID-19 pandemic. The continuing COVID-19 pandemic could bring risks to oil product demand, in the form of slow economic recovery and reintroduction of local virus containment measures (“lockdowns”) that started to be implemented in many markets to some extent towards the end of 2021. This, in combination with ample global refining capacity could continue to pressure refining margins globally.
The OPEC+ plan to taper its crude production cuts continues until later 2022. Any additional supply cuts from the OPEC+ as well as continued sanctions on oil exports from Iran and Venezuela, could narrow the discount of Urals relative to Brent crude oil, with negative impact on Neste’s business.
Natural gas prices reached record highs in Europe in 2021 due to limited Russian supplies, and led to rising utility costs at Neste’s refinery as well as an increase in EU ETS allowance prices. Further increase in natural gas prices, for instance through a particularly cold winter, could continue to negatively impact Neste’s business.
Renewable fuels policies in the EU continued to take concrete shape as the transposition of the Renewable Energy Directive II into national legislation has been successfully concluded in a number of Member States. In the United States, existing state-level policies like California’s LCFS program and US federal-level Renewable Fuel Standard in combination with the Blenders Tax Credit adopted through 2022, made for a fairly stable regulatory environment for biofuels.
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 the low-carbon transition and the 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 refining operations and products are subject to extensive regulation (incl. environmental, health & safety, sustainability). General regulatory requirements in areas like commodity trading and data protection have also contributed to the formalization of operating procedures.
Neste’s business units mainly benefit from increased support for biofuels and renewable fuels (for example requirements that relate to renewable content in diesel and gasoline). However, changes in regulation especially in the European Union and the United States also create uncertainties as these may influence the speed at which the demand for renewable products develops, and new raw materials sources are brought into use. For the renewable products, a significant source of uncertainty is fragmented regulation around the acceptability and use of waste and residue feedstock.
Risks relating to strategic choices and strategy implementation
The majority of strategic risks relate to the viability of 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 producing 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 for clean mobility change. In addition to the development of alternative feedstocks and production technologies for liquid fuels, the evolution of engine technologies and introduction of alternative powertrains can be faster than expected.
Staying ahead of competition requires continuous improvement, the ability to challenge current business models and a strong focus on innovations such as new production technology and feedstock platforms. 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 and logistics 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. As risk mitigation, Neste has implemented systematic quality management measures both in its own operations and in partner networks.
Strong governance practices and the 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 the highly skilled employees that are needed for strategy deployment and successful operations in the future. There is also a risk that Neste will not be able to build and manage strategic partnerships that contribute to future success.
Successful projects play a key role in Neste’s strategy deployment, operational development, and the 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 refineries in Finland (Porvoo), Singapore and the Netherlands (Rotterdam). In addition to the planned maintenance turnarounds, for example disruptions in the supply of utilities or breakdown of critical machinery may cause unexpected shutdowns that affect Neste’s ability to fulfill demand for end products.
The vessels chartered to Neste or owned by Neste are subject to inherent risks like maritime disaster, damage to the 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 insurance in place to reduce the financial impact of property damage, business interruption, and maritime disasters. However, insurance does not cover all potential losses and Neste could therefore be seriously harmed by operational catastrophes or deliberate sabotage.
The extent of the disrupting impact that COVID19 has had on the commodity and financial markets has challenged many industries and companies. In the oil & energy industry the pandemic has caused a global demand shock, increased the uncertainty with regard to the climate policies and targets and emphasized the need for Company-level business continuity arrangements. The economic and social impacts of the pandemic have also affected Neste’s business environment and operating practices. Therefore, there has been an increased focus on business continuity both at Neste’s own offices and sites and in the customer interface and supply chains.
Commodity markets have been and are expected to continue to be very volatile. General market turbulence may result in unexpected swings in the market prices of crude oil and other raw materials. It is also expected that the high demand for different waste and residue feedstock streams continues as competitors are increasing their production capacity for renewable products.
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. The main factors that may affect the refining margins include:
• Changes in aggregate demand for and supply of raw materials and products.
• Changes in demand for and supply of 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 risk management, Neste uses derivative instruments to protect its position against fluctuations in commodity prices.
Neste is exposed to foreign exchange risks because most of the sales are denominated in US dollars, whereas operating expenses (except the 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 part of the Review by the Board of Directors in the Annual Report.
ICT and cyber risks
Digitalization and emerging technologies (for example the use of artificial intelligence and robotics) offer opportunities to automate dangerous or error-prone tasks and increase the efficiency of operations. At the same time, the increasing sophistication of cyber threats and generally rising frequency of attacks targeted at oil & gas companies is also a concern for Neste. Cyber risks multiply the impact of other risks and as individual risks could also have a major negative impact on Neste’s reputation or continuity of business operations.
The 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.