A strong end to a volatile year
Major fluctuations around the world, particularly in our industry, made for an eventful 2016. At Preem we initiated and pursued a number of extensive investment projects to boost our competitive capability and efficiency for the future. We have considerable innovative strength, and 2016 saw the launch of the world’s first Nordic Ecolabeled liquid fuel; yet another step in achieving our vision of leading the transition toward a sustainable society.
In many respects, the past year has been characterized by high volatility. The price of crude oil varied during the year, at its lowest reaching USD 26 a barrel in January, followed by an increase of more than 100 percent over subsequent months to end the year at USD 55 a barrel. There have been substantial declines in the price of crude oil since 2014, from over USD 114 a barrel to the lowest price of USD 26 a barrel in January. However, the price of crude oil is not the only key factor for Preem, as our margin is determined by the difference between the product price and the crude oil price. But when major fluctuations occur, the product price and crude oil price are not always synchronized, in which case the margins may also vary and have a knock-on effect on profitability.
Other factors that impacted Preem in 2016 include the Brexit vote, which will probably change the EU on many levels over the next few years, and the election of Donald Trump as President of the United States. It is too early to be specific about the consequences of these developments. All we can say is that we are living in a period of great change and uncertainty.
In terms of earnings, 2016 was a highly satisfactory year, despite a challenging market with low diesel prices and average gasoline prices. Although earnings did not reach the same levels as our record year 2015, we matched our budget both on the income and cost side and still performed well from a historical perspective.
With the highest result ever both in terms of customer satisfaction and EBIT, 2016 was a particularly successful year for the Marketing and Sales business segment. Our ambitious annual earnings target of SEK 500 million was exceeded by almost SEK 100 million, two years ahead of schedule. Long-term, systematic efforts involving strategic investments in the station network, customer loyalty-building initiatives and increased sales of sustainable fuels are just a few of the factors behind the healthy earnings.
Despite facing some challenges during the year, the Refining and Supply and Trading segments made a remarkable recovery in the final quarter and achieved their ambitious budget targets. As with Marketing and Sales, Supply and Trading also achieved its highest result ever with regard to customer satisfaction, evidence that work focusing on the customer offering has been successful.
During the year we grappled with a number of problems at our refineries, which meant that operations needed to be flexible and agile. Fantastic contributions were made within both Refining and Supply and Trading to manage operational disruptions and the resulting changed conditions in a safe and optimal way.
The safety result for 2016 was excellent, with an LWIF rate of 1.4 (lost workday injury frequency per million working hours) compared to our target of 2.0. This is extremely gratifying and the best safety result ever. It encourages us to continue with our systematic efforts with regard to both workplace and employee safety.
We got established in Norway in early 2016. Less than a year later we achieved a relevant position on the market, with our own depot in southeast Norway and a strategically significant partnership with UnoX Group.
Preem’s healthy earnings were generated alongside several ongoing projects that have required considerable resources in 2016. These will boost our competitive capability and efficiency in the future:
The new vacuum distillation unit project in Lysekil is progressing and will raise profitability and boost competitiveness, giving Preem independence from imported vacuum gas oil.
The IT and working process project SVAR involves upgrading all IT systems and working processes throughout the entire company, which will lead to modernization and efficiency savings.
The project involving converting heavy oil into lighter products is an extensive collaborative study into heavy oil in collaboration with US firm Beowulf, with the aim of building a new facility at the refinery in Lysekil that can transform heavy oil into sulfur-free gasoline and diesel.
It is particularly pleasing to see that the investment in a new hydrogen unit has been approved, one of the most important projects to date for the refinery in Gothenburg. The facility will be completed and ready for operation in 2018, and it will ensure long-term profitability for the refinery as more hydrogen gas will both increase the refinery’s flexibility and efficiency and double production capacity for renewable products.
Toward a sustainable society
Preem is the operator with the highest proportion of renewables in Sweden and is at the same time the most profitable. Of our fuel delivered to the retail market in Sweden, 19.5 percent is now renewable and contains products such as tall oil, a residual product from the Swedish forest industry. We are in an enviable position in that both private and corporate customers want to buy more of our products than we are currently able to produce, and we are continually exploring ways to expand production to meet the substantial level of demand. In 2016, we were proudly able to present the world’s first Nordic Ecolabeled liquid fuel, Preem Evolution Diesel +, which contains over 50 percent renewable raw materials. The Nordic Ecolabel allows our customers to make a conscious choice.
For many years now, Preem has been demanding clearer, long-term rules for sustainable production. March 2017 saw the proposal on a reduction obligation from the government, which involves a requirement to cut greenhouse gas emissions by adding biofuel to gasoline and diesel. The proposed quotas will be gradually raised to achieve a 40-percent carbon dioxide reduction by the year 2030.
The reduction obligation is a welcome and important decision to hasten the transition to fossil-free vehicles, and the high level of ambition means Preem can continue to invest in new sustainable production. Another important point raised is that all biofuels used as part of the reduction obligation must satisfy specific sustainability criteria. Tall oil and residual forest products – which are what Preem mainly uses – have been highlighted as good examples, while palm oil and PFAD were mentioned as non-sustainable raw materials. This is consistent with Preem’s ambition and high standards for long-term sustainability in the raw materials we choose for our renewable fuel production. We do not want to replace one environmental problem with another, such as deforestation of the rainforest in other countries.
If we can make use of even more of our domestic forest industry’s residual products, then we can for example not only further reduce our dependency on crude oil from other nations but also lessen the need to import renewable raw materials. This will create new green jobs and business opportunities in Sweden.
Continuing growth in 2017
As always, our main priorities are employee safety and operational reliability. The challenge for 2017 will be to demonstrate that our healthy earnings in 2016 were not down to luck, but rather the result of improved attitudes and a concerted effort to enhance processes and procedures.
Over the coming year we also need to continue preparing for the UN shipping agency IMO’s new sulfur specifications, involving requirements to cut the sulfur content in marine fuels from the current 3.5 percent, to 0.5 percent as of 2020. Competition will be much stronger and we are considering several alternatives for our future production of heavy oil. The forthcoming lengthy shutdown at the refinery in Gothenburg that takes place every six years is also a major challenge for 2017.
Exciting times lie ahead. In 2017, we plan to invest in the region of SEK 2.4 billion, which equates to roughly SEK 10 million per working day. The government’s clearer set of rules for sustainable production and use means we now have a better idea of where we need to prioritize and how to tackle the challenges ahead.
I would like to conclude by thanking all our employees for their excellent work in 2016, and to hope for a stable 2017 with solid progress in our major projects, and steady and secure operations.
President and CEO