The fossil supply chain
Materiality and risk
Preem buys an average of 400,000 barrels of crude oil each trading day from suppliers around the world. Crude oil is our absolute largest raw material for fuel production, and it is therefore important that we can rely on our fossil supply chain. Production and transportation of crude oil must be carried out professionally with a focus on safety to prevent accidents that harm people or the environment.
Monitoring how people and the environment are treated throughout our fossil supply chain is one of the greatest challenges of our industry – a global challenge we share with all the refiners and fuel distributors of the world. As opposed to the renewable supply chain, the fossil supply chain is not subject to any legislation on traceability. The current traceability requirements for petroleum products only apply to where the finished product is produced, not the origin of the crude oil.
As a crude oil purchaser, Preem may know what country and sometimes what area the oil comes from but tracing it to a specific oilfield is rarely possible. This makes it difficult to know much about the conditions and situation at individual production sites and whether environmental issues or human rights are neglected.
Governance and activities
The Code of Conduct is one of Preem’s main tools for securing the fossil supply chain. Business partners of Preem are expected to respect the Code and work to ensure compliance with its principles throughout the supply chain. Large companies within the industry have similar documents that Preem may accept as an alternative.
Preem worked on developing a system for the fossil supply chain in 2017 where our suppliers either accept our Code of Conduct or produce a similar code that we review. The Code of Conduct was approved during the year by 5 percent of Preem's suppliers, which together account for 18 percent of Preem’s total purchased volume. Preem’s goal is for all suppliers to have approved the Code of Conduct in 2018.
Purchasing crude oil from nearby areas
Preem also takes a stand in the fossil supply chain by declining to purchase certain types of crude oil. We do not buy crude oil from Arctic waters, oil produced via fracking or oil from tar sands due to the high environmental risks associated with these types of oil production.
Approximately 80 percent of the crude oil purchased by Preem comes from Russia and the North Sea area. Purchasing oil from nearby areas means shorter distances and thus a lower risk of accidents in comparison to purchasing from areas such as the Middle East. Transport from Russia to Lysekil takes around three days, while transport from the Middle East takes around 30 days.
Supplier controls of new as well as existing crude oil suppliers
Trust is very important in Preem's fossil supply chain. Most of Preem’s crude oil suppliers are companies we have worked with for a long time and built strong mutual trust with over the years. We have worked with our largest supplier for over 30 years. Our trading organization conducts a background check of new business partners before we accept them to check for compliance with our requirements in terms of professionalism and for reputable and lawful conduct.
Preem also conducts audits of existing suppliers. In 2017, we hired a consulting firm to conduct an external audit based on information available in the media. The consulting firm assessed Preem’s four largest crude oil suppliers, which together account for 70 percent of Preem’s fossil purchases. The purpose of the audit was to identify and report on the sustainability risks associated with the operations of the suppliers. The areas probed by the consulting firm included the supplier's history, sustainability efforts, sustainability policy, code of conduct and known sustainability incidents.
Among the sustainability risks pinpointed, it was revealed that the suppliers operate in high-risk countries and some do not have environmental management systems. Accusations have been made against affiliated companys in areas such as tax evasion, environmental damage and human rights violations. None of these companies have conducted themselves in their relationship with Preem in such a way as to prompt termination of the business relationship.
This audit helps Preem highlight and clarify the challenges in the fossil supply chain in a practical manner and move forward on the issues. A first step is to get all Preem’s suppliers to accept the Code of Conduct.
Countries Preem trades with
Preem strives to purchase crude oil from countries that take responsibility for the environment and working conditions. But countries with the same requirements and standards as Sweden in these areas, such as Norway, do not produce enough crude oil to meet global needs.
Challenges in sustainability
In 2017, Preem engaged external consultants to conduct a general review of the sustainability risks in the countries from which Preem purchases the most. We also delved more deeply into the regions considered most problematic from the perspective of human rights, the environment, working conditions and corruption: Iraqi Kurdistan, Nigeria and Russia. The report revealed that Russia, the country from which Preem purchases the most crude oil, has several challenges in terms of sustainability. Corruption and human rights violations are real problems in Russia, as in other high-risk countries, and the oil industry is no exception.
It is a general problem that most of the world’s largest oil-producing countries are known to have shortcomings in areas such as human rights. Several of the oil-producing countries are also considered dictatorships. However, there is an opinion in Sweden that trade can contribute to positive development for the populations of these countries, and we share that opinion. Of course, we comply with the Swedish regulations on trade sanctions on various countries.
Unfortunately, no fuel company trading in fossil fuels at present can claim to have a completely sustainable fossil supply chain. This is a global dilemma that requires international legislation and regulation to correct. Preem calls for international legislation in the fossil raw material chain equivalent to that of the renewable raw material chain.
We are not large enough on the global market to take the lead in making the changes required. But we support these developments and welcome partnerships and dialog with other companies and organizations.
The availability of crude oil The availability of crude oil
Crude oil is the most traded raw material in the world, a finite resource that can be extracted from a limited number of sites around the world. Russia and Saudi Arabia are among the largest oil-producing countries in the world. The US is also a large producer but has previously had an export ban on crude oil. Canada has oil reserves in the form of oil sands, which is expensive to extract and not a good option for the environment.
The availability of crude oil in the North Sea is declining. Sweden has its own oil deposits outside of Gotland that the Swedish government has chosen not to prospect. Producing petroleum products based on Swedish crude oil is therefore not an option. The quality of crude oil from different countries also limits the number of potential suppliers.