Economic environment and main economic results
The past two years turned out to be very extraordinary, which was doubtlessly reflected in the Group’s financial indicators. We have outlined the main economic results of the reporting period below.
In 2020, the COVID-19 pandemic caused a decline in the world economy the likes of which had not been seen since the end of World War II. While even in January 2020 the World Bank forecast a global economic growth of 2.5%, the actual result – as assessed a year later – was a decline of 4.3%. The Estonian economy also fell in 2020, but somewhat less compared to the rest of the world. According to Statistics Estonia, Estonia’s gross domestic product decreased by 2.9%. Despite the economic decline, Estonia’s average gross monthly salary continued to grow. Although the 2020 salary increase was the smallest of the past decade, i.e. 2.9% (7.4% in 2019), the difference between the salary increase and economic growth was the greatest of the decade, i.e. 5.8%. As labour productivity per employed person did not change, we can conclude that the entire weight of the crisis was left for enterprises to bear in Estonia.
2021 was a year of recovery from the COVID-19 shock in the world economy. Although COVID-19 continued to influence our everyday activities, the overall economic activities improved in leaps thanks to the fast spread of vaccines and money printing by central banks. While the 2020 global economic growth of -3.3% was according to the World Bank the lowest since the end of WWII, the global economic growth of 5.5% expected for 2021 tends towards the other extreme. The global economic growth was last faster than that in 1972 and 1973, when the growth was similarly today driven by a rapid increase in energy prices.
The small and open Estonian economy raced at an even faster pace in 2021. According to Statistics Estonia, Estonia’s gross domestic product made the fastest leap of the past 15 years: 8.3% (3.0% in 2020). As the average growth of the gross salary of 6.9% (2.9% in 2020) remained close to the average level of recent years, it was for the first time in ten years lower than the GDP growth. The growth of salaries is expected to continue to accelerate in 2022, but economic growth forecasts are cautious due to the Ukraine War started by Russia.
VKG’s financial results are most of all influenced by developments in the global oil market. Although the beginning of 2020 was highly promising, the spread of the corona virus from China took the oil prices into a decline in January. The ensuing price war between Saudi Arabia and Russia poured more oil into the fire and on 21 April the most closely monitored Brent crude oil closed at 19.33 $/bbl, while the WTI future dropped into minus for the first time in history. With support from the US, OPEC and Russian soon reached new agreements, as a result of which Brent stabilised at 43 $/bbl by the beginning of June. Only the news about the vaccine that came in November gave a boost to a new rise. The year’s average Brent remained at 43 $/bbl, which is 33% lower than in 2019 and one dollar lower than in the 2016 crisis.
The overall rapid growth of economic activity in 2021 also restored the demand for fuels, but as OPEC+ increased the supply of oil only tentatively and the US shale oil producers are slow to recover from the crisis, fuel prices mainly moved upwards in 2021 on the backdrop of limited supply and growing demand. The year began with the price of Brent at 51 $/bbl and the peak was reached in October at the level of 86 $/bbl. The news about the spread of the new and particularly contagious Omicron stem pulled the price of crude oil back down to around 70 $/bbl by the beginning of December, but the price of Brent made a leap in the last week of the year and ended 2021 at the level of 78 $/bbl. The average price of the year was 71 $/bbl, which was 65% higher than in the previous years of the crisis.
VKG sells most of the produced oils on the basis of the price of fuel oil with 1% sulphur content. Compared to the Brent crude oil, the 1% fuel oil market is less liquid and the price of fuel oil may move differently from Brent, depending on the ratio between supply and demand. As VKG’s expenses are denominated in euros, the company’s results are also influence by the US dollar rate. Thus, the Group’s results are best characterised by the following fuel oil price curve.
Price of 1% fuel oil, 2020–2021
As can be seen from the diagram, the price of 1% fuel oil also rose properly in 2021, starting from the level of 260 €/t and ending at the level of 420 €/t. The year’s average price of fuel oil was 378 €/t, which was 60% higher than in the preceding year. Compared to Brent, the growth of the average price of fuel oil was a tad smaller, mainly due to the weaker dollar rate, 1.18 (1.4 in 2020) on the average.
VKG’s economic results are largely dependent on the impact of the external environment in three areas:
- shale oil as VKG’s main product competes with other types of fuel in the globally open raw materials market where prices are volatile and beyond the Group’s ability to influence;
- the availability of the oil shale resource as VKG’s main production input depends on regulative decisions;
- the regulative environment on the global, Europeal Union (EU) and national level has a significant effect on the activities of VKG through various environmental regulations and rules.
The prices of CO2 emission quotas reached record heights
The price of CO2 quotas was on the growth trend in the past two years, reaching a record price in 2021.
At the beginning of 2020, the price of the CO2 quota was 24.4 euros per tonne, but dropped to 17.7 €/t by the end of the first quarter. The price drop was mainly caused by the Covid-19 pandemic that broke out in the first quarter and brought a decline in the world markets. The situation caused an increase in the sales of CO2 by market participants. However, the CO2 quota price moved upwards from the second quarter, reaching the level of 32.7 €/MWh by the end of the year.
At the beginning of 2021, the price of the CO2 quota was 33.7 €/t and grew to 56.4 €/t by the end of the first half of the year. The price continued to grow also in the second half of the year. The average price of CO2 emission quotas was 53.7 €/t in 2021, having grown by 116.3% compared to 2020. The unprecedentedly high market prices of natural gas and CO2 emission quotas caused the electricity prices to rise to record heights in the Estonian electricity market.
2020 average CO2 price
24,8€/t2021 average CO2 price
53,7€/tThe increase in electricity prices actually means that the Green Transition has started to bear fruit. All the risks – at least with regard to energy prices – were long known: the uncontrollability of renewable energy sources (what to do when the sun is not shining and the wind is not blowing), the gradual closure of the former fossil production capacities and the increase in the price of CO2 quotas (the quota price has grown by 2.5 times in only a few months). In a sense, there has been a perfect storm in energy prices this year, where all the aforementioned risks manifested on the backdrop of a growing demand for electricity, plus the largely political factor in the form of the scarce supply of natural gas.
Viljar Kirikal
VKG Head of Regulatory Relations
The increase in electricity prices actually means that the Green Transition has started to bear fruit. All the risks – at least with regard to energy prices – were long known: the uncontrollability of renewable energy sources (what to do when the sun is not shining and the wind is not blowing), the gradual closure of the former fossil production capacities and the increase in the price of CO2 quotas (the quota price has grown by 2.5 times in only a few months). In a sense, there has been a perfect storm in energy prices this year, where all the aforementioned risks manifested on the backdrop of a growing demand for electricity, plus the largely political factor in the form of the scarce supply of natural gas.
Viljar Kirikal
VKG Head of Regulatory Relations
The changing CO2 pollution charge of the EU Emission Trading System (ETS) is one of the central instruments of EU’s climate policy. The introduction of the ETS was decided in 2003 by the 15 Member States that formed the Union. For those who joined later, including Estonia, the ETS has just been a fact to be accepted upon joining the Union.
The EU Member States issue environmental permits to allow the emission of CO2 into ambient air. In processing environmental permits, the issuer has established the obligation to assess whether the planned activity exceeds environmental tolerance. In the areas of activity included in the ETS, environmental permits thus mean the state’s confirmation that the activity is in accordance with environmental requirements and the operators of facilities have the right to emit the allowed quantities of CO2 into ambient air.
The Group’s economic results
The presented economic results are consolidated, based on the audited financial statements of 2020 and 2021.
Annual reports are approved at the annual meeting of shareholders. The 2020 and 2021 general meetings where annual reports were approved were held on 31 May 2021 and 21 June 2022, respectively, and 100% of the votes represented by shares were present. The following resolutions were adopted at the general meetings of shareholders:
- to approve the 2020 and 2021 annual reports;
- to pay dividends for the reporting years of 2020 and 2021 in the extent of 8,000,000 euros and 8,000,000 euros, respectively;
- the retained earnings after the distribution of profit amounted to 380,398,896 euros in 2021 and to 452,809,592 euros in 2022.
Every year, VKG publishes a consolidated annual report together with an auditor’s report. The transparency of financial reporting is one of the main elements of corporate management. In August 2022, the Group published the consolidated audited annual report for the year 2021. Since 2015, KPMG Baltic OÜ provides auditing services to the Group.
Revenue and its distribution
The Group’s 2020 consolidated sales revenue decreased by 19% compared to the previous year. The decrease in turnover was caused both by a decrease in production (volume of shale oil products −5%, electricity production −6%) and a decrease in the world market prices of oil products (average price of fuel oil −32%). Compared to the market prices, the turnover dropped less, as we managed to earn an additional profit of 11.7 million euros from future transactions. In conclusion, the Group ended the year with a net profit of 8.6 million euros despite adverse market conditions.
The 2021 consolidated sales revenue grew by 37% compared to the preceding year. The turnover growth was mainly related to the recovery of the world market fuel prices compared to the previous years of the crisis. However, the production of both shale oil products and electricity decreased in 2021 (−2% and −8%, respectively) due to the reduced working time of the Petroter plants. In conclusion, we can be satisfied with the 2021 economic results, as the improved market conditions allowed the company to earn a net profit of 49.8 million euros.
In thousands of euros
| 2018 | 2019 | 2020 | 2021 | ||
|---|---|---|---|---|---|
| Sales revenue | 208 924 | 256 763 | 207 841 | 285 523 | |
| Revenue from sales of products | -170 362 | -215 743 | -216 077 | -275 880 | |
| GROSS PROFIT | 38 563 | 41 020 | -8 236 | 9 643 | |
| Marketing expenses | -5 841 | -5 304 | -5 548 | -5 232 | |
| General administrative expenditure | -9 724 | -11 123 | -11 179 | -12 722 | |
| Other business revenue | 12 225 | 20 595 | 40 942 | 66 283 | |
| Other business expenditure | -853 | -2 140 | -1 232 | -1 793 | |
| BUSINESS PROFIT | 34 370 | 43 047 | 14 748 | 56 178 | |
| Financial revenue and expenditure | -6 901 | -6 077 | -4 424 | -1 860 | |
| PROFIT BEFORE INCOME TAX | 27 469 | 36 970 | 10 324 | 54 319 | |
| Unplanned expenditure | |||||
| Income tax | -560 | -1 235 | -244 | -4 532 | |
| NET PROFIT OF FINANCIAL YEAR | 26 909 | 35 736 | 10 080 | 49 787 |
Balance sheet
The balance sheet volume of Viru Keemia Grupp decreased by 48,469 euros in 2020, but grew by 347,787 euros in 2021, amounting to 1,018,118 million euros as at 31 December 2021. In 2020 and 2021, equity made up 77% and 90%, respectively, of the balance sheet volume.
In thousands of euros
| 2018 | 2019 | 2020 | 2021 | ||
|---|---|---|---|---|---|
| ASSETS | |||||
| Current Assets | 108 992 | 149 819 | 158 937 | 198 028 | |
| Fixed Assets | 613 357 | 568 980 | 511 394 | 811 342 | |
| TOTAL ASSETS | 722 348 | 718 800 | 670 331 | 1 009 370 | |
| LIABILITIES AND EQUITY CAPITAL | |||||
| Short-Term Liabilities | 172 469 | 76 640 | 51 435 | 76 586 | |
| Long-Term Liabilities | 39 074 | 128 877 | 102 191 | 27 333 | |
| Total Liabilities | 211 543 | 205 517 | 153 626 | 103 920 | |
| EQUITY CAPITAL | 510 805 | 513 283 | 516 705 | 905 451 | |
| TOTAL LIABILITIES AND EQUITY CAPITAL | 722 348 | 718 800 | 670 331 | 1 009 370 |
Investments
Due to the European Green Deal pressure, the Group reviewed its investment strategies at the end of 2019 and decided to cut its 2020 investments down to 20 million euros (30.2 million euros in 2019). Because of the oil market crisis caused by the COVID-19 pandemic, investment plans were cut by another 6 million euros during the year, down to 14.2 million euros. The volume of investments grew again in 2021, amounting to 23.9 million euros.
The investments were distributed as follows across different areas during the reporting period
Investments into reliability made up most of the amount, i.e. 11.6 million euros in 2020, including 3.1 million euros on the replacement and renewal of depreciated mining machinery, underground drifting investments in the amount of 3.6 million euros, and investments related to oil factory repairs in VKG Oil in the amount of 2 million euros. In 2021, 16.4 million euros were invested into reliability, including 3.8 million euros into the replacement and upgrading of amortised mining machinery at VKG Kaevandused, underground drifting investments in the amount of 3.7 million euros and investments related to the major repairs of the oil plants at VKG Oil in the amount of 4.7 million euros, and various reliability projects of VKG Energia, VKG Soojus and VKG Elektrivõrgud in the amount of 2.4 million euros in total.
Development investments amounted to 1.6 million euros in 2020, the largest of which included VKG Elektrivõrgud’s new client connections in the amount of 0.4 million euros, VKG Energia’s projects in the amount of 0.4 million euros and VKG Oil’s projects in the amount of 0.2 million euros. In 2021, development investments made up 6.3 million euros, the largest of which were VKG Oil’s reconstruction project of Petroter I in the amount of 3.7 million euros, VKG Oil’s other projects in the amount of 0.7 million euros, VKG Energia’s projects in the amount of 0.5 million euros, and IT developments in the amount of 0.7 million euros.
Environmental and occupational safety investments amounted to a total of 0.9 million euros in 2020, of which VKG Oil’s environmental projects made up 0.6 million euros and VKG Energia’s environmental projects 0.2 million euros. In 2021, investments in this area remained at nearly the same level, with the various environmental projects of VKG Oil and VKG Kaevandused amounting to 0.4 million euros each. The volume of investments planned for 2022 has been raised to 36 million euros, mainly due to the Petroter I reconstruction project that started in 2021.
Investments into developments activities, environment and occupational safety
In millions of euros
- Investments into developments activities
- Investments into environment and occupational safety
Loan burden
In 2020, VKG repaid the principal parts of loans to banks in a total amount of 21 million euros, thereby reducing the bank loan balance to 96.3 million euros by the end of the year. Other loan obligations were also repaid in the amount of 13.4 million euros, reducing the share of loan obligations to 28% of the balance sheet volume. VKG financed 91% of the investments made during the year from its own cash flow and 9% from new leasing contracts.
In June 2021, VKG decided to prematurely repay the entire assumed syndicate loan to banks, in order to be released from the banks’ restrictions and obligations in the management of the company. This has made the Group nearly debt-free. The only valid loan obligations are related to either leasing or long-term rental contracts. The following table provides an overview of the development of loan obligations:
LOAN BURDEN (IN MILLIONS OF EUROS)
Tax burden
In 2020, VKG paid 36.3 million euros in the state budget. The largest part of the tax burden was made up by labour taxes (18.8 million euros) and various environmental charges (9.7 million euros). In 2021, the Group paid 45.4 million euros into the state budget as taxes (+25.1%), of which labour related taxes formed 19.5 million euros and environmental charges 19.2 million euros. Environmental charges have grown by 101% in a year.
TAX BURDEN (IN MILLIONS OF EUROS)
- Labour taxes
- Environmental charges
- Excise duty
- Other taxes