FINLAND'S NESTE PRESSES CAMPAIGN TO PLAY A BIGGER INTERNATIONAL ROLE

Finland's state owned Neste Oy has taken on a new look. Russia's oil and gas industry was the key to Neste's growth, and collapse of the Soviet regime was the main cause of a sharp change in Neste's strategy.

Finland's government has opened the country's oil and gas industry to competition in the wake of the Soviet Union's dismemberment. With its sole supply source, the U.S.S.R., in difficulty and its markets under threat, Neste was under siege.

Yet the company secured new crude oil supplies during the siege and organized itself as a competitive downstream player. This experience and Neste's view of the future have turned the company into an international force.

Much of the recovery flowed from a corporate revamping program known internally as Neste 95, intended to revive the company's efficiency by the end of 1995.

The Neste 95 program was started in early 1993 after Neste was hit simultaneously by a number of problems in 1991 and 1992. The problems caused relatively poor financial performances in 1992 and 1993, but 1994 figures reflected a rebound in fortunes.

PROFITS TURNAROUND

Neste's net sales amounted to 57 billion markka ($13.3 billion U.S.) in 1992, rose to 63 billion markka ($14.7 billion) in 1993, then fell dramatically to 50 billion markka ($11.6 billion) in 1994.

The 1994 figure is a reflection of reduced trading and breakout of Neste's polyolefins business into a joint venture with Norway's state owned Den norske stats oljeselskap AS.

Borealis AS, as the Neste-Statoil venture was named, started operations Mar. 1, 1994, and reported unexpectedly high returns after its first year, because of resurgent petrochemicals prices.

Yet Neste remains Finland's largest company. Second largest is the Nokia communications group, which last year booked net sales of 30 billion markka ($7 billion).

Although the net sales figure has fallen, the story of recovery is shown in recent profits.

During 1992 Neste hit its low point, a loss of 2.2 billion markka ($510 million). Last year Neste returned a profit of 1.2 billion markka ($280 million), a recovery from a loss of 1.5 billion markka ($350 million) in 1993. This year the company is looking to improve the balance sheet further.

"Neste in 1995 has started to solve a number of problems," said a spokesman. "The problems include a downturn in chemicals, world recession, currency losses because of a weak markka, and trading losses. These problems hit at the same time as a recession in Finland, which was worse than Neste had experienced before."

Neste restructuring has involved job losses. In 1993 the company employed 12,000 persons, and last year this was reduced to 8,000. The reductions amounted to 10% cut in Neste staff, along with the transfer of polyolefins personnel to the Borealis venture.

ORIGINS

Neste was established by Finland's government in 1948, after the country's winter campaigns of World War II showed the strategic importance of oil. Neste's first assets were the army's store of fuel, which was held in caves.

The company built its first refinery at Naantali, near Turku in 1956. A second refinery was built at Porvoo, east of Helsinki, in 1966.

After the refineries were built, Neste's role in the Finnish economy became increasingly important because of the prospects for trade with the Soviet Union.

The two governments set up a barter arrangement in which oil and gas from the Soviet Union was exchanged mainly for consumer goods and technology from Finland.

A spokesman said this represented good trade for the Finns but highlighted the "Finnish paradox."

He said, "After the oil shocks of the 1970s, the Finnish economy was at its best. We made more and more money on products from Soviet raw materials, which we were able to export."

But the growth of oil production in western European countries and increasing problems in the Soviet regime, to which Finland's exports were strongly linked, meant that the Finnish government had to work toward reviving its own economy.

Neste had a monopoly on oil imports until the end of the 1980s, but then everything changed.

ABOUT FACE

By the time the Soviet empire had begun to collapse, Neste's empire had grown to include refining, retailing, and manufacture of petrochemicals. The company was importing about 10 million metric tons/year of crude oil to refine for product sales in Baltic markets.

"Russia's glasnost caused traumatic changes in Finland," said Jukka Viinanen, Neste senior executive director and chief operating officer. "Bilateral trade ceased, and in only 1 or 2 months crude oil supplies fell away"

Before glasnost, Russia supplied 80% of Finland's crude oil requirements. After supplying more than 9 million metric tons of crude oil to Finland in 1988, Russia sends only 3 million metric tons/year to Finland today.

"We suddenly had to start thinking about our long term supplies," Viinanen said. "We had to invest to change our tanker fleet, which was made up mainly of 40,000-50,000 metric ton capacity vessels., to include tankers of more than 100,000 metric ton capacity for operating in the North Sea. Then we had to learn how to run new crude oils through our crackers."

Neste's approach has been to diversify its sources of raw materials and reassess its petroleum projects while making the most of its firm grip on oil and gas markets in Northeast Europe.

EXPLORATION, PRODUCTION

Neste at present meets 15-20% of its crude oil requirements from its producing interests. Long term, the target is to increase this to 30%.

Neste's oil production is split about equally among the U.K. North Sea, Norwegian North Sea, and Oman.

Neste's target is to obtain one third of crude oil supplies from its own fields. The company has no plans to take on field operating roles.

Viinanen explained that the company will focus its European exploration efforts on Norway because it is long term a more profitable place than the U.K. for the company.

"We are too spread out at the moment," Viinanen said. "Our main exploration and production focus will be on Norway and Oman, but we are also preparing to move into Russia."

Viinanen said the company is particularly interested in Russia's Timan Pechora region because it is comparatively close to Finland.

"Neste has identified a production license in which it would like to participate in Nenets province," Viinanen said. "We are in discussions with the authorities and have signed a protocol of intent, so we will be one of the candidates when the authorities are prepared to release licenses."

Viinanen is sure Neste will have the opportunity to produce oil in Russia within 5 years.

NORWAY'S BENEFITS

Bo Lindfors, executive vice-president of Neste exploration and production, said planned development of Smoerbukk, South Smoerbukk, and Midgard discoveries off mid-Norway is an important project for Neste, which has a 7% interest in the project.

Lindfors said every appraisal well on the Smoerbukk prospect is proving up more liquids reserves. This is improving the economics for development of these gas fields in an area without a gas export system. One scenario involves early liquids production (OGJ, Apr. 10, p. 41).

Neste's only operating asset was the U.K. North Sea's Emerald field, through subsidiary Sovereign Oil & Gas plc. This was sold in 1992, while an interest in Forties field was sold in 1993.

Now Neste has U.K. producing interests only in Ninian, Brae, Nelson, and Claymore fields, yielding it a net 9,000 b/d of oil.

Lindfors said, "We are at the stage of advanced negotiations to sell these assets because, compared with our Norwegian assets, our U.K. shareholdings are small, the largest being Ninian at 4.3%."

Neste's 11.4% interest in Brage field off Norway, currently its only producing asset in the region, yields 11,000 b/d net. Lindfors said planned reservoir tests in Brage may lead to increased production, giving Neste 15,000 b/d net.

Lindfors said a production test showed Brage facilities could handle 120,000 b/d. A production ceiling of 97,000 b /d is set by Oslo.

Drilling of a production well in Brage proved up a new reservoir that was thicker than anticipated. If it is commercial, the new reservoir could be developed outside the Brage license, yielding better returns for the project.

Neste also owns a 5% interest in Heidrun field development off Norway, due to begin production in August. Lindfors reckons Heidrun oil will boost Neste's Norwegian oil production to 22 25,000 b/d from the current 11,000 b/d.

Lindfors also expects further optimization in Heidrun.

"I wouldn't be surprised if Heidrun turns out to be a 1 billion bbl field," Lindfors said, "compared with the 750 million bbl estimate now."

Besides the Smoerbukk-Midgard prospect, which could begin early production in 1997-98, Neste has interests in a gas discovery in the More basin off mid-Norway and in North Heidrun oil discovery, which is separate from the main Heidrun field.

In Oman, Neste's chief asset is a one third interest in Safah field, where the main partner is operator Occidental Petroleum Corp. Neste's share of production from Safah is about 6,300 b/d.

Lindfors said estimates of Safah reserves are rising as development progresses. Exploration in the license area has yielded discoveries such as Al Barakah and Wadi Lathan, producing small volumes of oil.

Improved recovery and further reserves increases are anticipated in Safah field. Also, a licensing drive by the Omani government, involving acreage relinquished by Petroleum Development Oman, is viewed as an opportunity.

RUSSIAN PROSPECTS

Neste is pursuing three projects in Russia: two in the Timan Pechora region and one in the Barents Sea.

With Komineft and local authorities Neste is considering development of the Yuzhno-Shapkinskoye discovery, estimated to be a 120 million bbl reservoir.

"Several studies have been conducted for development and transportation of produced oil to northern ports," Lindfors said, "but any development is likely to be via existing pipelines."

With exploration organizations and local authorities from Murmansk, Neste also is pursuing exploration and field development offshore in the Nenets region. A local joint venture company called Pechormorneft is being formed to explore shallow waters (OGJ, Apr. 17, p. 28).

Lindfors said there is one discovery, Pomorskoye, in the target area, and several other prospects on which the venture is negotiating. Pomorskoye possibly holds several million barrels of oil, Lindfors said, but it is too early to tell for certain.

Following last year's oil pipeline spill in the Komi Republic, Neste was asked by Nenets regional authorities to study potential effects of the spill on the region's environment.

Besides having an interest in exploration in the area of the survey, Neste said at the time it was one of a group of organizations planning a coastal/offshore oil terminal in the area (OGJ, Nov. 14, 1994, Newsletter).

In the Russian Barents Sea, Neste was a member of a group that included Norsk Hydro AS and Conoco Inc. that was negotiating for development of giant Shtokmanovskoye discovery, estimated to hold the equivalent of the North Sea's gas reserves.

"Two years ago the license was given to a Russian company effectively controlled by Gazprom," Lindfors said. "Now Gazprom is looking at development, and Neste has had negotiations to that effect."

Lindfors said 15 billion cu m/year of gas is envisaged from Shtokmanovskoye field, but: "markets are a problem, and there are technical challenges because of the deep water, ice, and distance of the field from the mainland."

Development of Shtokmanovskoye holds great significance for Finland, hence Neste's wish to be part of the development project.

"Neste's E&P strategy is to focus on Norway and the Middle East and get started in Russia," Lindfors said. "Oman will build, but we will also look selectively at other Middle East countries, including Iraq."

Lindfors said Neste is pursuing a project in Iraq and recently held discussions with the Iraqi oil ministry: "Iraq is very interesting, with large potential."

PIPELINES

Neste is a 75% partner in Finland's natural gas distributor Gasum Oy, along with Russia's Gazprom. The company operates a gas pipeline from Russia to southern Finland.

Gasum imported 2.9 billion cu m of gas from Russia in 1993, and this increased 10% in 1994.

Viinanen said Gasum plans to double capacity of a pipeline from Russia in a 700 million markka ($160 million) project.

Gasum was formed in May 1994 to take over the operations of Neste's natural gas supply grid (OGJ, Mar. 28, 1994, p. 28).

Neste explained at the time that Gazprom's stake in the company is intended to guarantee the Russian firm's commitment to developing Finland's natural gas market and to increase transmission capacity.

Finland last year imported 2.9 billion cu m of gas from Russia, but the Gasum venture intends to take imports to about 4 billion cu m/year by 2000.

Neste also is considering a plan with Russia's Transneft oil transportation company to expand a pipeline to Porvoo.

Viinanen said Neste has 5 million cu m in underground oil storage capacity at Porvoo, so Porvoo could act as a terminal for Russian export crude oil, bypassing the problem of icing in Russian ports.

Natural gas consumption is relatively low in Finland, accounting for less than 10% of the country's energy needs.

"The ideal from Neste's view would be to connect to North Sea gas pipelines," a spokesman said. "This would give us the benefits of having two suppliers, and a Nordic line through Sweden to the European grid would give a strategic link to Europe for Gasum supplies from Russia."

Among Neste's long term plans are a gas pipeline from the Haltenbanken area offshore mid-Norway. Among field developments key to opening up mid-Norway's gas reserves are Smoerbukk, South Smoerbukk, and Midgard (OGJ, Apr. 10, p. 41).

The planned pipeline would be routed from mid-Norway north of Stockholm to Helsinki, said the spokesman. Another planned pipeline would take gas from Helsinki to Copenhagen, then on to Berlin.

TANKERS

Barents Sea oil and gas developments are seen as interesting for the future by Neste, the only company operating tankers as far east across the northern Russia coast as the mouth of the Yana river, which feeds into the Laptev Sea.

Viinanen said Neste was the first shipping company to operate in the southeast passage across northern Russia, which is open only in the summer.

The company has two ice breaking vessels that move crude oil out of the region and deliver products: "North Russia's big cities are without rail and road links, so these tankers are like gifts from heaven."

Viinanen said increasing amounts of oil may be exported from Russia's Timan Pechora fields via northern ports. Although existing pipelines are the export route of choice, several studies by Timan Pechora ventures involved export by northern ports rather than southern pipelines.

Neste's long term plan is to operate tankers through the Arctic Ocean from Finland to Japan. But for the moment, the Baltic Sea is the focus.

Neste operates 20 double hull oil tankers, with half the fleet's business being charters for other companies around the world.

"We are planning to concentrate on operating a strategic fleet to maintain our own crude supplies and fuel exports," Viinanen said. "Gradually we will reduce our charters and focus on our own work."

REFINING

Neste's strength is around the Baltic Sea and in northern Europe because it operates the only modern complex refineries in the region. All retail companies buy from Neste refineries.

Only two other modern refineries are on the Baltic coast: one in St. Petersburg and one in Lithuania. These are said to be noncompetitive, while the nearest competitive plants, in Sweden, are on the west coast.

Viinanen said Neste's Porvoo refinery, a 10 million metric ton/year throughput capacity plant, is the most efficient in Europe.

Naantali refinery, a 2.5 million metric ton/year plant, has more specialized output. Solvents and bitumen are major products from the plant. Site is near Sweden's east coast, which provides a ready market for its motor fuels.

Neste shut down 4 million metric tons/year of capacity at the two plants during the 1980s.

"We don't think we should close down any more capacity," said Viinanen. "On the shelf we have plans to expand output if necessary, but we don't think Europe needs more capacity at the moment. Any expansion will depend on our local markets."

Viinanen said Neste plans "a small investment" in a Russian refinery. This is the Kirichi refinery, an 80,000 metric ton/year throughput capacity plant about 50 km from St. Petersburg, which Neste plans to help upgrade.

One of the plans for this plant is cooperation in bitumen production. Neste sees an opportunity to produce good quality bitumen for sale in its Baltic region and St. Petersburg strongholds.

"We have an advantage over European refiners for working in Russia because we have 40 years' experience in refining Russian crude oil," Viinanen said.

Risto Riekko, senior executive vice-president for Neste Oil Refining, said his company currently has a little too much capacity, but expected increases in demand in the St. Petersburg area will solve this.

"A positive surprise has been the Baltic states market," Riekko said, "which has exceeded all plans. The market here is building more rapidly than expected."

Riekko said it is unlikely Neste will invest in new refining capacity for some years, although there is a prospect for expansion of the Mazeikei refinery in Lithuania, which, along with the Kirichi refinery, supplies products to Neste.

Riekko said the key to profitability of Neste's refineries is productivity, although location in the northeast corner of Europe has given Neste a competitive edge.

"Porvoo refinery is one of the most sophisticated in Europe, and it is the best in Europe in terms of energy efficiency," Riekko said. "It has recently been running almost flat out, at 90-95% of capacity."

Naantali's small size makes unit fixed costs comparatively higher. But this plant too is running virtually flat out because of demand for solvents and bitumen in the region.

"The target is to take Naantali even further into a specialized position," Riekko said, "to increase added value to improve profitability as a small refinery."

Neste's plan is to expand in the Baltic area and build captive outlets in the Baltic states and Poland.

"We are looking to find suitable ways for growth in this area," Riekko said, "but it is not easy because the European market is so oversupplied. It takes some years before excess refining capacity is shut down.

"Our plan depends on how the West Russian market develops. Neste is well positioned in the only area in Europe that is growing. There is more upside than downside in the Baltics and western Russia, making the area unique in Europe."

Riekko said Neste is ahead of all environmental regulations for products. So the company does not expect to make major environmental investments during the next 5 years.

About 300 million markka ($70 million)/year is expected to be invested in the refineries to 2000, mainly productivity investments, for which payback time is short.

Neste is studying costs for installation of a gasification plant at Porvoo. A decision on whether to proceed is due in September.

Among other refining projects, Neste is working toward production of gasoline oxygenates at Porvoo using a proprietary process.

This summer Neste expects to begin commercial production of as much as 110,000 metric tons/year of tertiary amyl ether, which will be added to reformulated gasoline sold by Neste and other retailers in Finland and the Baltic states.

The new process, called Nextame, is being marketed by Bechtel Corp. throughout North and South America under an agreement signed in March (OGJ, Apr. 10, p. 40).

RETAILING

"Pricing is now based on competition," Viinanen said, "whereas in the old days prices were dictated by government. There are more than enough gasoline stations in Finland, although the competition doesn't think so. Competition is fierce."

Although Neste remains the only company with refineries in Finland, five companies operate in the country's retail sector: Neste, Shell Oy AB, Esso Oy Ab, Conoco Inc. under its Jet brand name, and Teboil Oy AB, a Finnish incorporated company owned mainly by a Russian distributor.

Neste's two refineries are roughly at the center of a 1,000 km radius circle that is the company's retailing stronghold.

One advantage Neste claims over western companies is that, while many western firms have discovered the risks of operating in Russia, Neste has already learned to operate there.

Neste operates one terminal at Tallinn, Estonia, from which tank trucks carry fuel throughout the Baltic states. The company is leading a project to build another oil terminal at Riga, Latvia.

Riekko said the Tallinn terminal can store 26,000 cu m of products, which arrive in weekly cargoes from the refineries.

The Riga import and export terminal will give Neste a focal point for another 1,000 km radius circle, enabling the company to supply Latvia, Lithuania, and Belorus by rail.

Capacities for the Riga terminal are still under consideration, but throughput has been predicted at 1.2 million metric tons in 1997, rising to 3-4 million metric tons in 2000.

Riekko said the new terminal is likely to be operated by Neste in a venture with a western partner.

Six companies plan to use the terminal: Neste and Statoil are the majors involved, along with independents Visbija AS, Man-Tess Ltd., Unitrade Petroleum Ltd., and Lsa Hanza Bunkering Ltd.

"Riga terminal will put the last of our logistical requirements in place," Viinanen said. "Currently we have to rent a terminal at Ventspils, Latvia."

Neste has 1,300 retail gasoline stations in Finland and 50 in the Baltic states, St. Petersburg, and Poland.

The retail chain outside Finland is growing at about 50 stations/year. They sell about five to 10 times more than the average Finnish station.

Neste sees St. Petersburg as a key area for growth because there are 8 million people in the metropolitan area, compared with 5 million in all of Finland.

"There is an increasing number of quality cars registered in St. Petersburg," said a spokesman, "with greater growth potential than Finland's car population, so this is a good market for Neste."

Viinanen said St. Petersburg's relatively low gasoline consumption compared with western countries provides Neste a good market.

The company also has opened two unmanned gasoline stations in northern Germany, where payment is by credit card. And Neste is considering a retail push into Moscow, which lies just inside the 1,000 km circle.

Viinanen said, "For a few years there is no reason for us to look beyond nearby markets. Although we are looking to Moscow long term, it is currently at the edge of our area of influence."

Viinanen said Neste is considering buying other retail assets in Russia: "But to buy old gasoline stations is to take an environmental risk. If you can get a good location, it is easier to build."

PETROCHEMICALS

Neste's joint venture last year with Statoil to create the Borealis polyolefins giant transferred most of Neste's petrochemicals business to the new company (OGJ, Aug. 29, 1994, p. 78).

At the Porvoo complex, Borealis operates a 250,000 metric ton/year ethylene cracker, 100,000 metric ton/year phenol plant, 150,000 metric ton/year polypropylene plant, and 200,000 metric ton/year low density polyethylene plant. Another polyethylene unit is under construction.

Viinanen said Neste retains a good position in the polystyrene markets of Finland and Sweden. The company operates two 20,000 metric ton/year polystyrene units: one at Porvoo and the other at Kokemaki in Southwest Finland.

Neste recently sold its polyvinyl chloride manufacturing business to the Rovin joint venture of Shell Chemical Co. and Akzo Chemicals International BV, which will take over marketing starting in 1996. A 100,000 metric ton/year PVC plant is on the Porvoo site.

Viinanen said Neste is focusing on petrochemicals products sales in two main areas: binders for the forestry industry, where the company is said to be worldwide No. 2 supplier, and industrial coatings.

"Neste is one of the few petrochemicals producers doing what should be done," Viinanen said. "That is, combining resources."

POWER GENERATION

A number of cogeneration joint ventures, most of them fueled by gas, have been set up in Finland to supply municipalities.

Neste is evaluating a larger project at Porvoo to use heavy residue from the refinery as fuel. Viinanen said the project is planned as a joint venture with a power company to generate 400,000 kw of power and 400,000 kw of steam.

Neste would use the steam at its Porvoo complex and meet its own electricity needs at the site, while the power company would sell the balance of electricity.

"If the economics are there, the CHP project should be operational this decade," Viinanen said.

Neste is committed to provide natural gas based power generation, Viinanen said.

"Natural gas generation is held back by a supply security problem, hence fuel oil was chosen to supply the Porvoo project. Further gas based projects will need independent sources."

PRIVATIZATION

Finland's decision to open the oil and gas industry has been backed up by a decision to seek private investment in Neste.

Just before yearend 1994, Neste's board was authorized to decide on the best timing for the first stage of a planned privatization of the state company.

A Neste spokesman said new shares equal to 20% of Neste's current share capital would be issued, which means that one sixth of the company would be in private hands.

"Neste is still 100% state owned," said the spokesman, "and it is still seen by government as a strategically important asset. Hence Parliament has decided that the state is to keep a minimum 50.1% of the company."

Privatization is to be gradual and open to international investors. Although the company has authorization to sell its first block of shares this year, no deadline has been set for 49.9% of the company to be in private hands.

Timing of the share issue depends on market conditions. It is an open question as to how much the share issue must raise, but some analysts have valued the planned share issue at 2 billion markka ($460 million).

"If Neste is successful with its plans," said the spokesman, "and with a growing need for Russian oil and gas in Europe, Neste could be the link between Russian and Europe and the rest of the world. Neste has experience of working with Russians for almost 50 years."

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