Asmann: VKG needs to be split in two to fund climate neutral business
CEO of Estonian oil shale chemistry company Viru Keemia Grupp (VKG) Ahti Asmann said on the "Esimene stuudio" talk show that securing funding for developing fossil fuels has become all but impossible, which is why VKG plans to split in two to be able to finance climate neutral business directions. VKG would scrap plans for a bioproducts factory if Estonia slashes logging volumes.
The energy market has been a rollercoaster ride from hell for the private consumer, while as a producer, you should be smiling – I suppose Christmas came early. But how long will it last?
When I received the invitation to appear on this show and gave these matters some thought, I came up with two and a half positive things and two and a half problems. Regarding the former – we are glad that our products are in high demand in the world, and to be honest, I do not see that demand subsiding in the next decade.
The other thing is the rediscovery of oil shale in district heating as a replacement for Russian gas. That Estonia has the capacity to produce fuel that could be used to heat the entire country, provided the decision will be finalized – I believe this has been drastically unappreciated.
And the half comes from the fact that soaring energy prices are good news for an energy producer. Why half – I have worked at VKG for seven years in which time the price of Brent crude has dropped from $80 per barrel to $20 inside a month on two occasions. Whatever we do, you are always haunted by the thought that everything might change at the drop of a hat. As soon as the global economy slows, the price of oil drops. We are working every day to achieve competitive cost price.
Your profit grew five times last year – from €10 million to €50 million. What about this year?
I cannot tell you at this time. We will crunch the numbers toward the end of the year. We are mainly looking at tons of production and what it costs. Production volume will fall this year as one of our oil shale plants spent five months undergoing repairs after two years of planning. Timing was unfortunate. /.../ The good news is that we got it up and running in mid-November, five days ahead of schedule. We hope next year will be solid in terms of production volume.
However, profit will exceed €50 million?
I believe so.
Oleg Ossinovski gave a colorful interview in fall where he said he is ashamed to accept money made off the energy crisis. Any such scruples?
Certainly not. Oleg Ossinovski was talking about renewables producers who also get green benefits.
I happened to read in the news that the renewable energy fee will go up 10 percent because consumption fell 5 percent. I find this situation to be completely absurd. It is obvious overcompensation, and I cannot fathom why something like that is possible.
Have you sold your next year's production in advance? How much of it will go abroad and how much to Estonia?
We keep in Estonia as much as the market needs. This year's sales were largely done in advance, until the need arose to abruptly hike local volumes. We weren't sure we would have enough product. Now we know that we do. The new year's contracts were open, so we have reserved more of our product. If we used to sell around 20,000 tons for the Estonian market, we are counting on 70,000 for this year.
How many boiler plants are using shale oil to generate heat this winter? Do you have a map or a figure?
I cannot give you a number off the top of my head, but we have a map on our office wall and it's full of pins. [Tallinn district heating provider] Utilitas uses shale oil to replace Russian gas when demand peaks. Consumption will depend on winter temperatures. Estonian district heating mostly uses wood chips and other biomass, with gas used to cover spikes.
We do have quite a few business clients. Their number has not grown that much as you need a certain preparedness [to use shale oil] but volumes have gone up. It is a logistical headache for sure, but we try to cope.
To what extent can energy market developments be forecast in a situation where Russia is fighting Ukraine, China has frozen social life which has resulted in unrest and Europe is busy trying to figure out a way to shake its fossil fuels reliance.
None of it can be forecast. But it's hardly new as the oil market is always unpredictable. The only thing we can reliably say is that the global economy slowing down will cause fossil fuels demand and price to fall. But we are talking about additional restrictions for Russian fuel today and the price is falling. So, there is no logic really.
The planned price cap on Russian oil and gas could be good for you?
Yes and no. It will also deliver setbacks. Talking about two and a half problems, the latter is that the price of oil depends on how the global economy is doing. It cannot put up with soaring energy prices for long and the correction is coming.
What is a growing concern for us – embargos have been criticized in terms of whether they would have the desired effect. Oil is still leaving Russia – but it is clear that is no longer happening via the Baltic Sea. We are seeing considerably fewer ships in the Baltic Sea, and while the price our products fetch on the world market is fluctuating, that of transport has gone up in no uncertain terms. In other words, we will get to keep a lot less of our money next year. We do not really know the extent or depth of this problem yet.
Has this potentially great concern of energy companies' excessive profits and the need to tax them, as proposed by the European Commission a few months ago, fallen off the agenda or could VKG be looking at making a sizable donation to state coffers?
The Estonian government's position has been clear. The oil shale resource fees system was changed and tied to the price of oil in the 2016 oil crisis. The fee falls and rises with the world market oil price. Back then the government was criticized for the decision, while this yields considerable revenue today. The resource fee per ton of oil shale has gone from €1.5 back then to €6 today. The price of oil will see us pay an extra €22-24 million into state coffers this year. This will likely be even more for Eesti Energia depending on their volumes.
I cannot say what will be decided on the European level, while I would not underestimate their capacity to make harebrained decisions. The Estonian government opposed the idea in this case as it clearly constitutes a tax, which they are trying to style as a solidarity contribution. It would be unconstitutional, require a unanimous decision in the EU etc. The entire initiative – to pursue an energy policy that leads you to trouble in Europe and then proceed to tax the few companies still generating energy. One would be hard-pressed to be more counterproductive.
I find it an extremely bad idea in general and simply a way for politicians to try and find ways to pay for their mistakes. It would not solve a single core problem. Rather, it would make matters worse.
Still, we can understand the temptation to tax those who have multiplied their profits in the energy crisis. But let us talk about another major VKG project –your so-called major factory. How far have things come? I understand it will be a wood chemistry plant?
Our bioproducts plant project, special plan is moving at the pace permitted by the law – slowly in other words. But the planning process is coming along.
But our preparations for this production are more diverse. One is the special plan, but we are also removing weaknesses in our organizational structure. It is one of the problems VKG has in today's regulative environment, in terms of financing. We are still an industrial company mostly making fossil fuel products.
And banks are done funding fossil fuel projects?
It is all but impossible. Not only can we not secure funding for oil production, we need to restructure ourselves and separate our oil shale assets from other assets. We could not even borrow to fund a climate neutral business today.
In other words, we are doing two things today. We are restructuring the company to secure funding for climate neutral projects, including bioproducts, and looking for ways to secure oil shale financing. We need €25-30 million in so-called keeping the lights on investments to which we can add capital plant repairs running tens of millions.
What are some of the things we are doing today? We have no choice, we're opening an office in Switzerland to be closer to financial markets, introduce ourselves to foreign investors, because we have no other option. Eesti Energia's €500-million bonds are not a widely known fact – they have failed to refinance them on two occasions now. The Estonian government borrows at a rate of 4 percent.
The green transition is some 30 years away, and we need to go about our business. And the situation is peculiar to say the least – we have people in Estonia, we have assets in Estonia, we pay taxes in Estonia, but we still have to engage in jurisprudence to open an office in a different jurisdiction that another financial market somewhere finds legible. Though I understand the reluctance were someone to propose investing in a factory on the shores of the Dnieper, saying it is on the Ukrainian side. Looking from afar, we lie just 50 kilometers from the Russian border. It is not a simple situation.
Minister of the Environment Madis Kallas suggested in October that VKG should build a smaller plant as logging volumes need to come down. Will you be taking his advice?
Definitely not. Because when we met with the minister, we clearly said the plant is the smallest possible. /.../
What is the logging volume you are counting on for the plant?
A company planning an activity expects certain logics to apply. That the economic, environmental and socioeconomic aspects are in balance. And we looked at Estonian forests – how much we have, how it should be managed, what is the logical approach.
May the University of Tartu forgive me, but Estonia's best forestry specialists can be found at the Estonian University of Life Sciences, and they have done the necessary work. To simplify a great deal: if we were to manage Estonian forests in exactly the same way for the next 100 years, the [optimal] logging volume would be 10.9 or 11 million [cubic meters].
Other scientists say this would result in an ecological disaster.
The state of Estonian forests today suggests we could log 19 million. But it is clear society would not stand for that, and it is indeed too much.
The scientists also don't...
There are different scientists. As I see it, the choice is whether to switch to that long-term average now and leave a part of timber rotting in the woods or do it gradually. As concerns voices suggesting the volume could be even lower than what we have taken into account, those 10.9 or 11 million vs 19 million... Reducing the volume further would mean abandoning seeing economic, environmental and socioeconomic aspects on the same footing. This would amount to saying that biodiversity is so much more important that we are willing to sacrifice the economic and socioeconomic aspects.
I believe that is what scientists are saying today, that if we want to maintain Estonia's unique natural environment, which would be lost if we replaced forests with fields of trees, alongside a large part of biodiversity – that is just what we should be doing. What would it mean for your business were felling volume to drop below 10 million?
Basically, if the political decision would be to prioritize diversity over forest management...
It is possible to manage 9 million cubic meters.
The plant would not happen in such a [business] environment. No one would invest.
It would not be built?
Absolutely. Because, let us be honest. There are many details involved, but regulation has turned everything upside down and ruined the market. It is good that Estonia is turning high-quality timber into proper materials – sawn timber, furniture, other timber products sporting a long lifespan. /.../
The question is what of pulpwood. This should be used to make chemical pulp, bioproducts. There is no such production in Estonia, and what are we doing instead? We are turning it into pellets and simply exporting it. Pellets help third countries meet their green targets, while we give up on value added. Alternatively, timber is sent to Scandinavia where such plants are everywhere, even in cities. Our approach is very simple – 50 percent of Estonia is covered in forests, Estonia does not generate value added from pulpwood, and logging volume could be 10.9-11 million if forests were to be managed in the same way for a century. Whereas we need to compete with pellets that are subsidized by the British government and God knows who else, as well as with Scandinavia where such factories exist.
We are not afraid to compete with the Scandinavians as we can create the same kind of technology here. Competing against all manner of subsidies is again something you cannot effectively plan for.
Estonia's GDP was down 2.4 percent in the third quarter, inflation remains very high. How difficult are the times we are heading into, looked at from where you stand?
I would not go as far as to call it the vestibule of hell. Things will get harder still. Inflation and its effect on the economy – it is taking a toll on the population. The most vulnerable people who make the least money will be hit hardest as there is no way around basic needs.
Why is inflation so high? I found that we important a great many things and do not make use of local materials. We are also importing raw materials the prices of which have grown. The few raw materials we have – oil shale and timber – we have hiked the prices ourselves. The fact that firewood and pulpwood are twice as expensive in Estonia than they are in Finland is clearly having an effect and is also why inflation is higher here. We can add the effects in the energy sector.
What about criticism that the government is not helping businesses enough that is causing our competitive ability to suffer? Do you find it justified?
I support right-wing economic policy and would rather not be talking about support at all. However, the situation resembles the Covid period in that if you create the problem, you must also propose the solution. I believe the energy crisis is self-made to an extent. We need to look in the mirror to answer the question of why is energy more expensive in Estonia than in Finland or the rest of Scandinavia. We must do something.
Let us take the aforementioned renewable energy fee – why does it still happen at someone's expense? It is not lowering the price of electricity, while it is lowering [producers'] expenses. Something needs to be done and can be done, while showering [companies] with benefits is not it. Economic self-regulation needs to be maintained. It is part of capitalism and a progressive force.
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Editor: Barbara Oja, Merili Nael, Marcus Turovski
Source: "Esimene stuudio"