Renewable fuel operations still loss-making; company expects significant improvement in 2012, has completed its "major investment programme".

Neste Oil, the Finnish oil refiner, has reported full-year comparable operating profit of €156 million (US$204 million) for 2011, down from the €240 million seen in 2010. Profits were also down on year for 4Q11, at €14 million, compared with the €90 million reported for 4Q10.

“We completed our major investment programme in 2011, when both the new renewable diesel refinery in Rotterdam and our joint venture base oil plant in Bahrain came on stream,” says Matti Lievonen, Neste’s CEO.

“The renewable fuels business was in ramp-up mode last year, but we made encouraging progress in increasing sales volumes and expanding our customer base during the year. During the last quarter of 2011, we increased renewable diesel sales volumes by 55% compared with the third quarter. Although the renewable fuels segment remained loss-making in 2011, we are on the right track to making it profitable. In line with our strategy, we also succeeded in extending our renewable feedstock base and all our renewable fuel production facilities are now ISCC- certified,” he says.

“Despite the current uncertainties in the market conditions, we expect Neste Oil’s full-year comparable operating profit to improve significantly compared with 2011, assuming that Neste Oil’s reference refining margin remains at last year’s level and that quarterly sales volumes of renewable diesel are similar or above those seen during the last quarter of 2011,” Lievonen adds.

Neste experienced a total refining margin of US$8.48/bbl in 2011, compared with the US$8.14/bbl seen in 2010. Margins shrank in 4Q11 to US$6.97/bbl, from the US$9.67/bbl seen in 4Q10. Investment in 2011 totalled €364 million in 2011, down from the €943 million made in 2010. 2011 saw the completion of Neste’s major investment programme, “designed to increase the company’s capacity in both renewable diesel and high-quality base oil”.

This included the commissioning of a new 800,000tpa renewable diesel refinery in Rotterdam in September 2011.

Neste’s production in 2011 came in at 15.2Mt, up from 13.6Mt, of which 0.7Mt was in the form of NExBTL renewable diesel. The company attributes the increase in output primarily to the major maintenance turnaround performed at the Porvoo refinery in spring 2010, but also “increasing volumes from the Singapore renewable diesel refinery”.

The Porvoo and Naantali refineries saw an average capacity utilisation rate of 85% in 2011, up from the 82% and 84%, respectively, seen in 2010.

The refineries’ use of Russian Export Blend crude represented 66% of their crude slate for 2011 as a whole, falling to 64% in 4Q11. Production costs at the two refineries came to US$4.3/bbl for 2011 and US$4.2/bbl in 4Q11, up from the US$4.0/bbl and US$3.4/bbl seen in 2010 and 4Q10.

As far as the company’s outlook for 2012 is concerned, “Neste Oil expects to see good productivity and higher production volumes at its Porvoo refinery. Diesel production line 4 at the Porvoo refinery will be offline for five weeks in the second quarter due to planned coke removal. A six-week maintenance turnaround is scheduled to take place at the Naantali refinery in the second quarter of 2012. Refining margins have recovered from the low levels seen in December due to some capacity closures,” says a company statement.

“The market appears to expect that margins for complex refiners, such as Neste Oil, will remain roughly at 2011 levels; they will be sensitive to developments in economic activity, however. Diesel is projected to be the strongest part of the barrel going forward, while gasoline margins are expected to stay at 2011 levels and be subject to seasonal variations. Demand for base oil has remained healthy, but base oil margins are currently depressed.”

“Diesel demand growth on the Finnish retail market is closely linked to industrial transportation activity and may slow in 2012, and could also be affected by the excise tax increase implemented at the beginning of the year. Gasoline demand is expected to continue declining. Outside Finland, the Polish market is expected to remain challenging and other markets to perform as in 2011. Oil retail’s full-year comparable operating profit is expected to be at least equal to that seen in 2011.”

“Approximately 30% of Neste Oil’s volume in 2012 is hedged at a US$4.7/bbl reference margin level, assuming a Urals-Brent differential of US$–1.0/bbl. As a result of all these factors, oil products’ full-year comparable operating profit is expected to improve compared with 2011, assuming that Neste Oil’s reference refining margin remains at last year’s level,” the company says.

For more on Neste Oil and the Finnish oil product market, see our market report here.