Neste total refining margin

Neste uses a per barrel or unit measure, quoted in US dollars, to express the difference between the value of the petroleum products produced by its refineries that the company sells in any given period and the cost of the crude oil and other feedstocks used to produce the products in question, as well as other direct refining costs, such as energy and transportation (‘Total Refining Margin’).

The company has historically calculated its total refining margin for a given period by first calculating its current cost sales margin which is the euro amount equal to net sales for the period, less the cost, at average price levels, of feedstocks consumed to produce products sold during the period, less the other direct costs of refining, including energy and transportation.

This current cost of sales margin is then translated into US dollars using the average foreign exchange rate for the applicable period and is then reduced to a per barrel measure by dividing it by the sales volumes of Neste's refineries from its own production (currently assuming a standard refinery yield of 94.8% of petroleum product volumes from feedstock volumes and an average of refined petroleum products in barrels per ton of 7.30). This may be expressed as:

R = (AxE)/(B/CxD)

where:

A = current cost sales margin, expressed in millions of euro B = refined sales volume, expressed in millions of tons C = standard refinery yield, expressed in percent and assumed to be 94.8 percent D = standard barrels per ton, expressed in barrels and assumed to be 7.30 E = average euro/US dollar exchange rate for the period R = Total Refining Margin, expressed in US dollars per barrel

The principal factors affecting Neste's total refining margin include:

• aggregate demand and supply for crude oil, other feedstocks, and petroleum products

• relative and absolute pricing of the petroleum products that Neste sells, which affects realized sale prices and cash flows in the period

• relative and absolute movements in the prices of relevant crude oil and other feedstock qualities that Neste refines, and

• changes in the configuration, capacity, and utilization rate of Neste’s refineries.

Other factors affecting Neste’s refining margin include changes in the cost and availability of logistics services for feedstocks (which is often reflected directly in the cost of feedstocks) and for petroleum products (the effect of which is likely to be greater where transport distances are greater), as well as changes in the direct costs of operating Nestel’s refineries, as reflected in things such as energy costs.

The strength of Neste’s refining margins depends to a critical extend on the company’s ability to maximize its use of lower-cost feedstocks and the availability of its advanced refineries to produce the optimal mix of higher-value products.

In recent years, Neste’s refining margins have benefited from favorable trends in the key relationships between its feedstock supply costs and petroleum product prices. These relationships are reflected primarily in the price differential between Brent Dated and Russian Export Blend, and in the price differentials between various petroleum products, in particular between gasoline and diesel on the one hand and heavy fuel oil on the other.