Risks related to Neste's business

Despite some easing of the macroeconomic outlook, e.g., a decline in the headline inflation, overall economic activity still falls short of full recovery, and growth expectations are low. Continued slowing economic growth and elevated inflation could have an indirect impact on the demand for Neste’s products. While governments have shifted attention to the mitigation of the higher cost of living, the market has seen temporary reductions in climate ambition and targets. It has also slowed down the implementation of climate policies that would also support demand for Neste’s solutions. Inflation could also increase the operating costs and costs of ongoing capital investments related to the sourcing of feedstock, utilities, labor, services, equipment and materials.

Volatility in the oil refining margins is expected to continue. In 2023, refining margins were impacted by geopolitics, tight monetary policies, the post-Covid recovery and restricted Russian oil trading. Moreover, changes in the global crude oil quality associated with the OPEC+ supply cut, as well as unplanned refinery outages driven by weather events, further amplified the margin volatility.

In the renewable fuels market, risks relate more to balancing of fuel supply and demand in the face of changing regulation, both on the feedstock and product side. An increase in supply volumes was seen in 2023. The European renewable fuel market was slightly oversupplied as a result of large import volumes of Chinese double-countable biodiesel. Although imports have come down significantly since their peak in the spring, a delayed effect combined with stagnant demand growth has continued to place pressure on renewable fuel prices in Europe. At the US federal level, short term mandates grew at a slower pace than supply build-up in the biofuels sector, leading to a narrowed margin.

Geopolitical tensions such as the continuing war in Ukraine, conflicts in Middle Eastern countries, and other emerging military or trade conflicts could have adverse effects on international trade and finance. If geopolitical tensions increase and lead to the imposition of additional or more comprehensive trade restrictions, there could be a material adverse effect on Neste’s ability to access feedstocks, deliver products and complete investment projects. For example, US–China trade tensions could increase volatility in the renewable feedstock and oil products markets.

Changing regulation presents both an opportunity and a threat to Neste’s business. Neste’s business units mainly benefit from increased support for biofuels and renewable fuels (for example, requirements related 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 renewable products, a significant source of uncertainty is the fragmented regulation around the acceptability and use of waste and residue feedstock.

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 creates risks. The indirect economic and political consequences of climate change may contribute to the general uncertainty in the business environment and hence have an adverse effect on Neste’s business. Various governments have shifted their attention to the mitigation of the higher cost of living, and the market has seen temporary reductions in climate ambition and targets as a result. It has also slowed down the implementation of the climate policies that support demand for Neste’s solutions. In addition, changes in carbon emission trading schemes or similar initiatives at EU-, US- or individual Member-State-level may have a significant effect on Neste’s business.

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, and current competitors develop their technologies or preferences, either customer or legislative, for clean mobility change. The more rapid than anticipated development of alternative feedstocks and production technologies for liquid fuels, the evolution and adoption of engine technologies, and the introduction of alternative powertrains could increase competition for NEXBTL, which may decrease demand and lower margins for Neste’s products. Furthermore, the demand for and margins of Neste’s products could be adversely affected by regulatory preferences for technologies or products that compete with Neste’s.

Increases in global renewable refining capacity relative to growth in demand for the renewable products may have a material adverse effect on Neste. Staying ahead of the competition requires continuous improvement, the ability to challenge current business models and a strong focus on innovations such as new production technologies and feedstock platforms. Neste’s ability to source sustainable feedstocks at quantities sufficient for its production targets and at acceptable prices is vital to achieving its strategic objectives. If new competitor capacities lead to supplies of renewable products exceeding demand, or if Neste’s renewable products become less competitive, it may reduce Neste’s refining margins for renewable products.

Successful projects play a key role in Neste’s strategy deployment, operational development and the digitization of processes. Possible delays in growth projects or in the ramp-up of new production facilities pose a risk to Neste. In 2023, delays in the ramp-up of the new production line in Singapore had an adverse impact on the production and sales volumes of renewable diesel and SAF. Significant delays in project planning or execution may also reduce operational efficiency or impair Neste’s ability to secure its competitive position in the future.

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 who are needed for strategy deployment and successful operations in the future.

The importance of business continuity management has been highlighted in the changing environment. Neste has continued with the design and implementation of strategic and operational business continuity measures. At the company level, scenario work has also played an important role, e.g., in testing resilience to various climate change scenarios.

At the operational level, Neste’s business performance greatly depends on the continuous reliability of refining activities in Finland (Porvoo), Singapore and the Netherlands (Rotterdam). Any shutdown of Neste’s operations, whether planned or unplanned, could have a material adverse effect on Neste’s business. In addition to the planned maintenance turnarounds, disruptions in the supply of utilities or breakdown of critical machinery could cause unexpected shutdowns that would affect Neste’s ability to fulfill demand for end products. Likewise, interruptions in the supply chain and logistics network are a risk for Neste. For example, the vessels owned, leased or chartered by Neste are subject to inherent risks, including the risks of maritime disaster, damage to the environment, and loss of or damage to cargo and property. Such events may be caused by mechanical failure, human error, adverse weather conditions, warfare or piracy, among other factors, in the areas where the vessels operate.

Neste is subject to operational risks common in the renewable fuel and oil industry and 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.

Neste’s products and services must continuously meet customer requirements related, e.g., to product quality and sustainability. Evolving customer requirements, with more complex sourcing and logistics networks and production methods, increase the exposure to quality risks that need to be managed well 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.

Despite market stabilization and decreasing energy and utility prices in 2023, there is a continuing risk of market volatility and increasing prices. This could have direct impacts on Neste’s operating and project costs. On the feedstock side, it is expected that the high demand for different waste and residue feedstock streams will continue, as competitors are increasing their production capacity for renewable products.

Neste’s financial results are primarily affected by the price differential, or margin, between refined petroleum and renewable product prices; and the prices for the 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 the aggregate demand for and supply of raw materials and products;

• Changes in the demand for and supply of specific raw materials and products;

• Raw materials and product price fluctuations; and

• The evolution of worldwide refining capacity, and especially the development of refining capacity related to petroleum and renewable products similar to Neste’s.

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 related to changes in foreign exchange rates by hedging its currency risks in contracted and forecasted cash flows and balance sheet exposures. More information about market risks can be found in the Financial Statements Note 3 section of the Annual Report.

Neste’s refining operations and products are subject to extensive regulation (incl. environmental, health and safety, sustainability). General regulatory requirements in areas like commodity trading and data protection have also contributed to the formalization of operating procedures. As Neste’s supply base has become more fragmented and diversified, and global supply chains have expanded, there is an increased exposure to regulatory requirements, as well as business conduct and sustainability risks. It is critical that Neste stays at all times compliant with various regulatory acts related to feedstock eligibility and product characteristics. Non-compliance with applicable regulation or external requirements would have both adverse financial and reputational impact on Neste.

Counterparty risk arises from all business relationships where Neste is exposed to the counterparty’s failure to perform according to Neste’s requirements and contractual commitments. The extent of counterparty risk has increased along the continued diversification of Neste’s supply base and customer segments. To manage the risk, Neste has implemented systematic controls for counterparty screening and monitoring. Especially on the sales side, Neste is also exposed to credit risk, i.e., the potential failure of a counterparty to meet its contractual payment obligations. Risk magnitude depends on the size of the exposure concerned and the counterparty’s creditworthiness, which is assessed systematically both during onboarding and during the relationship.

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.

The operation of Neste’s core processes depends on functioning information technology systems and the availability of key data. Neste’s information technology system architecture is being continuously developed to provide better support for operations and take advantage of digitalization and emerging technologies. At the same time, the increasing sophistication of cyberattacks and generally rising frequency of attacks targeted at oil and gas companies also poses a threat to Neste.

The reliability of key information technology systems and partnerships is essential for continuous business operations. Prolonged processing disruptions or the unavailability of key systems, data or information leaks, violations of data privacy regulations, intentional cyberattacks targeted at Neste’s operational core systems or production automation systems, or any other malicious attempt to exploit Neste’s systems or data could limit Neste’s ability to conduct its business operations in a profitable, efficient and controlled manner.