Analyst Day London 2 November 2007
Agenda Introduction 15 min 09:00-09:15 Strategy update 15 min 09:15-09:30 Oil Refining 20 min + 15 min Q&A 09:30-10:05 Biodiesel 20 min + 15 min Q&A 10:05-10:40 Break 20 min 10:40-11:00 Specialty products 20 min 11:00-11:20 Oil Retail 15 min 11:20-11:35 Shipping 15 min 11:35-11:50 15 min Q&A 11:50-12:05 Financials 15 min 12:05-12:20 Summary + discussion 30 min 12:20-12:50 Lunch 1 hour 1:00-2:00 1
Update on Strategy Jarmo Honkamaa Deputy CEO
Vision: The leading provider of cleaner traffic fuels 3
We'll continue reinforcing the key elements of our strategy... Delivering high-quality products for cleaner traffic Increasing the range of feedstocks Leveraging refining excellence 4
...which is based on two main growth areas Refining the future The leading provider of cleaner traffic fuels Oil Refining Biodiesel Complementary businesses ( Base oils, Gasoline components ) Supporting businesses ( Retail & Shipping ) Excellent operational and financial performance 5
Growth is aimed at maximizing the shareholder value Refinery upgrading projects Organic investments in Renewable Diesel Large-scale NExBTL plants Key projects fully implemented Diesel production line NExBTL plants in Porvoo Leverage next generation technology to extend leadership in Renewable Diesel Investments in base oils and gasoline components Shareholder value Short-Term Medium-Term Long-Term 6
The new divisional structure President & CEO Risto Rinne Specialty Products Kimmo Rahkamo Base Oils Gasoline Components Nynäs Oil Refining Jorma Haavisto Porvoo Refinery Naantali Refinery Wholesale Trading & Supply Biodiesel Jarmo Honkamaa (Deputy CEO) NExBTL Production NExBTL Projects Sales & Supply Oil Retail Sakari Toivola Retail Station Networks Direct Sales LPG Distribution Shipping Risto Näsi Tanker Operations Chartering 7
Key focus areas for Divisions Oil Refining Organic growth through profitable conversion projects Enhance productivity of Porvoo and Naantali refineries Biodiesel Specialty Products Oil Retail Shipping Establish global operations and leading market position Develop technology and expand feedstock base Implement growth investments in Base Oils Utilize growth opportunities in Gasoline Components Maximize our shareholder value in Nynäs Maintain leading brand and market position in Finland Improve profitability Continue profitable growth in Baltic Rim Improve profitability Create alternatives to maximize value 8
Oil Refining Jorma Haavisto Executive Vice President 9
Highly advanced Porvoo refinery; ensuring our ever-better performance Porvoo refinery compared to WE refineries ROI Ref Util Net cash margin NCM Non-energy NEI efficiency index PL PL OA Operational availability PEI Energy intensity index EII Personnel efficiency index MEI Maintenance efficiency index Note: rankings based on Solomon Study 2006 10
Our production and export flexibility gives ability to serve different markets Strong position in the home markets Volumes in 2006 Almost half of our diesel production being winter grade Approximately 1/3 of total gasoline sales goes to North America 1.4 MT 2.4MT 10 MT 11
Changes in input and output after the new diesel line is fully operational Russian crude replaces North Sea crude Crude Oil Sourcing, Porvoo + Naantali (MT) 16 14 12 10 8 6 4 Diesel replaces heavy fuel oil Production, Porvoo+Naantali (MT) 16 14 12 10 8 6 4 Other Gasoline Diesel, Jet fuel, Gasoil 2 0 2006 Estimate after the 2006 Estimate after the Diesel project Diesel project Other crudes Russian export blend Other feedstocks 2 0 Heavy products 12 Note: very rough "After Diesel project" -estimate is based on 2005/2006 production yields with the Diesel Project added
The new diesel line already contributed positively in the third quarter The line was running for only part of the quarter Taken down in mid-september for maintenance, which was prolonged due to faulty valves Moving on the learning curve; still room for yield improvement Experience from operating the line proves the estimate of an additional refining margin of more than USD 2 /bbl valid 13
Assumptions of market fundamentals Crude prices sustained high crude prices expected short-term heavy-light crude differentials tighter than historically Demand demand growth +1,6 %/a through 2015 with middle distillates driving growth - macroeconomic growth as key sensitivity Supply major capacity growth in Asia and Middle East - ME and India to become major exporters Investment bottlenecks Supply/Demand Balance investment costs have increased 6-7 %/a in 2003-07 - continued cost escalation expected mid-term lack of engineering and other resources tight balance seems to remain demand growth and project delays as key sensitivities 14
Our complexity will increase and ensure healthy margins 2015 supply curve vs demand Western Europe Relative Cost Illustrative Zero margin Expected Demand 2015 Average margin Price level Highest margin High Conversion Refineries 25% Medium Conversion refineries 48% Low Conversion refineries 27% 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Refining Capacity (Kbpd) 15 Notes: Low Conversion < 25%, Medium Conversion >25% <50%, High Conversion >50% Relative Normalised Conversion Capacity Sources: Oil and Gas Journal; Internal Analysis
Refining margins expected to remain at historically high levels 8 NWE Cracking Margin $/bbl 7 6 5 4 3 2 1 0 MorganStanley (July 07) CERA (July 07) WMackenzie (May 07) IEA actual 2003 2004 2005 2006 2007 2008 2009 2010 16
Next steps in organic growth Implementing bottom-of-the-barrel upgrades at existing sites Naantali hydrocracker in planning phase Porvoo coker following after learnings from the new diesel line Both aiming at increased diesel production and use of external feedstock Both valued at hundreds of millions of euros depending on the scope Continuous focus on productivity A number of smaller investments valued at roughly EUR 50-100 million a year Examples of these are isomerization and cracker feedstock optimization 17
Oil Refining summary Advanced refining assets and high-quality products provide competitive edge Flexibility to play different markets and exploit opportunities Strong focus in further upgrades at Naantali and Porvoo; careful planning needed in the wake of higher costs Market fundamentals attractive for clean fuel strategy; demand growth being a key issue Our in-house R&D and engineering provide valuable support for future projects 18
Q&A
Biodiesel Jarmo Honkamaa Executive Vice President Deputy CEO 20
Neste Oil Position On Biofuels Technological Neutrality legislation not to choose technology winners Performance Driven legislation to set standards for outcome Sustainable Feedstock criteria for feedstock sustainability based on sound science, not to be used as trade barriers Cost-Efficiency And Energy-Efficiency industrial scale solutions "well-to-wheel" energy-efficiency Maintain Fuel Quality no backsliding in performance standards or emissions 21
How does the market look like? Poor profitability of FAME industry likely to ease in the long run Mandatory legislation winning ground Feedstock price differentials converged Over-capacity mitigated by increasing mandated demand US B99 imports shaping the current market situation Legislation still fragmented, moving towards mandatory markets Biodiesel pricing not linked to fossil fuels pricing Price level of all vegetable oils has increased Trend towards environmental criteria Healthy demand prospects for NExBTL Increasing sustainability requirements from both customers and regulators Feedstock certification progressing faster than anticipated Quality implications from FAME usage Environmental benefits Product price premiums higher than expected 22
Building blocks of NExBTL strategy Leading provider of biodiesel globally Build Capacity Growth and economies of scale by large-scale plants and efficient implementation Product price premium & feedstock cost advantage key drivers Develop Premium Biodiesel Market Proactive work with oil majors and engine manufacturers Requirement for high-quality fuels supports the value of NExBTL Feedstock management - Get Away from the Food Chain Sustainable feedstock required Develop new feedstock, particularly in bio-organisms CO2 balance efficiency Define Investment Program and Secure Resources Secure resources Utilize partnerships Manage investment portfolio 23
Ensuring sustainability of feedstocks The need for sustainable feedstocks continues Sustainable feedstocks are the only solution Complete traceability of the palm oil We actively contribute to building certification systems Ways to grow production of vegetable oils Incresing yields from current land areas Utilization of wasteland Not acceptable to exploit rainforests No human rights should ever be violated 24
Does our NExBTL strategy work? Technology Porvoo 1 has confirmed that the NExBTL process works Solved problems with standard equipment not related to NExBTL technology Sustainable feedstock Availability of sustainable feedstock remains a bottleneck in the industry This challenge can be mitigated by The flexibility of the NExBTL technology, whereas competitors have limitations Good supplier base, contacts and partnerships Active involvement in the development work of sustainability targets, principles and certification Focused R&D to develop alternative feedstock Competitive edge Demand for high-quality renewable diesel is strong We have the first-mover advantage Alternative hydro-treatment solutions emerging => No show-stoppers for the strategy implementation 25
Illustrative pricing for NExBTL Components of NExBTL price Assumptions Cost / price difference (in $/t) 1200 900 600 300 ~ 200 170 100 800 NExBTL Premium FAME over Rapeseed Oil Rapeseed Oil over Palm Oil Palm Oil (CPO) NExBTL premium of ~200 USD/t includes: density premium energy content premium premium for higher cetane, better cold properties and branding value FAME premium of 170 USD/t over Rapeseed oil to keep the existing biodiesel industry alive Price differential between Palm oil and Rapeseed oil 100$/t Base price for Palm Oil is 800 USD/t 0 26
Status of NExBTL projects Porvoo 1 (170 000 t/a) Plant restarted in October Technology working as planned, some equipment and catalyst defective Learnings transferred to other projects Porvoo 2 (170 000 t/a) Some designs being reviewed and modified Start-up in 2009 Schwechat (200 000 t/a) JV with OMV Environment Impact Analysis ongoing Investment decision in H1 2008, start-up 2010/2011 World-scale plants Two projects in advanced planning phase, located in Europe and Asia Capacity ~800,000 t/a each Construction will take 2.5-3 years after investment decision 27
Alternative feedstocks: get out from the food chain! Food should not be used as fuel, but that is all we have currently all feedstock should have equal treatment Long-term solutions include use of non-edible vegetable oils (Jatropha, Castor etc.) new feedstock as algae and bacteria 3 rd generation solutions (wood gasification FT etc.) Extensive R&D needed 28
3rd generation BTL - JV with Stora Enso Aiming to produce renewable diesel from forest chip raw materials Based on biomass gasification and Fischer-Tropsch Low feedstock cost and heat integration compensate high capital costs Demonstration plant at Stora Enso s Varkaus Mill in Finland, start-up in 2009 Commercial plant development in the second phase 29
Q&A
Specialty Products Kimmo Rahkamo Executive Vice President
Specialty Products businesses have grown and provide attractive possibilities Nynäs: - Three refineries in Sweden and the UK, as well as stakes in other sites specializing in production and marketing bitumen and napthenics (50/50 JV with PdVSA) - Bitumen volumes about 2.5MT and napthenics close to 0.8MT (2006) Base oils: - Plant in Belgium, 50,000 ton/a - 250,000 ton/a production in Porvoo Gasoline Components: - Iso-Octane production 265,000 ton/a, corresponding to 50% share, in Edmonton - ETBE production, 50,000 ton/a in Sines Base Oils under development: - Lubricant base oils production 400,000 ton/a in Bahrain with Bapco 32 Gasoline Components' assets in production Base Oils' assets in production Nynäs' assets in production Projects under development
Base oils are key component in automotive lubricant production Base oils companies Retail channel (Service fill) Lubricant manufacturer Additive companies Auto manufacturers 33
Demand for high quality base oils is growing... OEM needs Engine cleanliness Fuel economy Legislation Emission reduction Fuel economy Consumer preferences fuel economy 34
Market shift increases attractiveness of high-quality base oils Global Base oils capacity outlook Mtpa 50 45 40 35 30 Group I 25 20 15 10 Group II 5 Group III 0 Group IV 1998 2001 2004 2007 2010 2013 Industrial usage Automotive usage 35 Sources: ExxonMobil; Neste Oil; Fuels & Lubes Our focus
..and that s why supply-demand balance forecast for Group III base oils is lucrative... t/a 5,000,000 4,500,000 4,000,000 Demand growth is linked to GTL plants timetable 3,500,000 3,000,000 Demand growth + 15% / year 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Neste Oil demand estimate Global capacity estimate 36 Sources: Press releases, Neste Oil estimates
...and we will leverage our market position to exploit those growth opportunities Company 4 48% European merchant market (group III) 2006 Global merchant market (group III) 2006 Competitors 53% Company 3 12% Neste Oil 47% Competitors 82% Neste Oil 18% Total market 370 ktpa Total market 985 ktpa Key strategic advantages Focus on higher quality base oils Extensive portfolio of car industry approvals Broad customer portfolio Leading position in Europe 37
Iso-octane - a bespoke component for the US gasoline pool 1. Gasoline blend-stocks from main refinery units Lower than desired octane 2. Bio-components blended per regulation Increasing use of ethanol as blending components increases vapour pressure Specialty gasoline components + = Our focus 1. or 2. without addition of specialty gasoline components Gasoline that meets stringent specifications X Gasoline that DOES NOT meet stringent specifications 38
Iso-octane economics and market dynamics Market value driven by blending value driven by specifications Renewable fuel standard Strong seasonality in pricing pricing peaks in summer gasoline vs. crude oil expensive butane feedstock during wintertime 39
Production economics for alkylate/iso-octane Production margin is affected by three drivers: 1. butane-crude price differential 2. gasoline price differential vs. crude 3. iso-octane premium vs. gasoline usd/bbl 70 iso-octane price = alkylate + premium 60 50 40 30 20 10 Crude oil 0-10 -20-30 01/2006 03/2006 05/2006 07/2006 09/2006 11/2006 01/2007 03/2007 05/2007 07/2007 09/2007 40 Mt. Belvieu Butane Alkylate USG Unleaded gasoline
We'll increase the shareholder value of Nynäs Petroleum PdVSA s crude sourcing combined with Neste Oil s refining excellence = "a winning formula" Positive outlook for naphthenics Demand growth driven by legislative changes (tyre oils) Positive outlook for bitumen Reduced supply due to resid upgrading capacity growth FSU imports as main threat for European bitumen market Current performance Nynäs has fulfilled Neste Oil profitability criteria since 2004 41 Selected strategy Support Nynäs shareholder value growth
Aim to increase capacity growth in both base oils and gasoline components Gasoline Components: - We are looking for several possibilities in North- America to meet growing demand for gasoline components due to increasing use of ethanol Base Oils: - Lubricant base oils production 400,000 ton/a in Bahrain with Bapco - We are aiming to increase base oil capacity at our Naantali and Porvoo refineries - We are also looking for possibilities in Middle East 42
Oil Retail Sakari Toivola Executive Vice President
Strong retail presence Neste Oil Retail The leading petroleum products marketer and distributor in Finland Important player in the growing markets in Baltic Rim including the St. Petersburg area An important channel for - testing new products - launching new products - collecting market data 44 Note: 9/2007
Significant restructuring on the Finnish market Development Of Market Shares Gasoline 2002-2006 Development Of Market Shares Diesel 2002-2006 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 SEO Shell St1 Esso 1) ABC JET Teboil Neste Oil 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 SEO Shell St1 Esso 1) ABC JET Teboil Neste Oil 45 Note : Sale of Esso and JET has resulted in significant redistribution of market shares Sources: Oil & Gas Federation; Neste Oil; BAH analysis
Aim to strengthen position in Finland Build network concepts for customer segments Retail market shares in Finland 1) 100% Improve loyalty system Refresh brand image Optimize network Enhance functional quality Improve cost efficiency 80% 60% 40% 20% 0% 26% 41% 34% Gasoline Diesel Heating oil Neste Oil market share Competitor market shares 50% Heavy fuel oil 1) 12-month period of Sept 06 - Aug 07 46 Source: Finnish Oil and Gas Federation
Growth in the Baltic Rim will continue Retail position outside Finland A significant player in the Baltic Rim especially in the St. Petersburg area Growing market with healthy margins Neste Oil's operations are set to grow on this market Baltic Rim sales volumes 1,000 m3 1,600 1,400 1,200 1,000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 LTM * Gasoline Diesel Fuel Heating Oil 47 Notes: Baltic rim = Estonia, Latvia, Lithuania, Poland, St. Petersburg area. Figures include both direct sales and sales through retail network. *LTM = last 12 months (Oct 06 - Sept 07)
Our market shares in the Baltic Rim Estimated Baltic Rim total market growth in 2007 Estimate for our market shares in Baltic Rim area in 2007 12% 25% 10% 8% Highest margin and our first priority 20% 1) 15% 6% 10% 2) 4% 2% 5% 0% St. Petersburg Estonia Latvia Lithuania Poland 0% St. Petersburg Estonia Latvia Lithuania Poland Gasoline Diesel Gasoline Diesel 48 1) Gasoline and diesel together 2) Market share is around 10% in selected areas
Oil Retail summary Maintain leading brand and market position in Finland Improve profitability Continue profitable growth in Baltic Rim 49
Shipping Risto Näsi Executive Vice President
Shipping supports the growth strategy Security of supply and exports, especially in winter time Capability to schedule crude supply and product exports Shipping plays an important role in our growth in oil refining and NExBTL Renewable Diesel Leverage scale benefits by using larger cargo sizes 51
Core competencies Deep knowledge of the business environment Neste Oil refineries are the only refineries in the world surrounded by ice part of the year Good communication and cooperation with our ports Better understanding of value creation process to our customers The largest ice classed tanker fleet operating regularly in ice conditions Arctic experience since 1948 Motivated and skillful personnel Continuous upgrade and maintenance of professional skills Simulator training in Sydväst maritime school, Turku 52
Multiple world-class achievements Condition of Ships: Best in the World ( Port State Control Assessment) Standards: First to implement international standards within Shipping Innovation: European Innovation Prize in tanker class Improved safety: First ice-strengthened escort tugs Quality of fleet: All vessels registered to the highest Finnish-Swedish ice-class Utilization rate: ~96 % average, one of the highest 53
Tanker capacity in general as well as crude oil transportations in the Baltic Sea are growing (Million tons) Primorsk 70 60 50 40 30 20 10 0 Million tons 2003 2004 2005 2006 Oil export from Primorsk 54
Supply of and demand for ice-classed tankers on the Baltic continues to change Number of ships 80 70 60 50 40 30 20 10 0 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 Required number of ships Available number of ships 55
Overall tanker market rate lookout 33,000 31,000 29,000 27,000 25,000 usd/day 23,000 21,000 19,000 17,000 15,000 13,000 2004.1 2005.1 2006.1 2007.1 2008.1 2009.1 2010.1 2011.1 source: Marsoft High Mar-07 Low Mar-07 Base Mar-07 TANKER MARKET RATES WILL BE CHALLENGING IN THE NEXT FEW YEARS 56
Primorsk rates and ice premium have decreased Ice premium has basically eroded because of oversupply of ice class tanker capacity In case of harsh winter, ice premium will still exist Source: Braemar Seascope 57
We have already reacted to the changing situation by renewing and modernizing our fleet Number of ships 40 35 30 25 20 15 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Time charter Bareboat Own 58
Northern Gates project is interesting also from our point of view 1 Export of oil from Pechora sea 2-3 Oil and gas condensate from the Gulf of Ob 4-5 Export of gas from Harasavey gas field Ice boundary in winter Ice boundary in summer Gas pipeline 59
Q&A
Financials Petri Pentti Chief Financial Officer
Track record of excellent financial results Cracking refining margins $/bbl 14 The Group's comparable operating profit MEUR 240 62 12 10 8 6 4 2 0 Q1 2005 Q2 2005 Q3 2005 Neste Oil s Refining Margin Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Reference: IEA Brent Cracking Margin 200 160 120 80 40 0 Q1 2005 Q2 2005 Note: Comparable operating profit is calculated by excluding inventory gains/losses, gains/losses from sales of fixed assets, and changes in the fair value of oil derivatives from the reported operating profit. Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007
Balance Sheet Total assets Total equity and liabilities 5000 4500 4000 4,517 4,723 5000 4,517 4,723 53 4500 4000 3500 3000 2,523 2,724 3500 3000 1,941 2,331 2500 2500 2000 2000 961 934 1500 1500 1000 500 1,941 1,999 1000 500 1,615 1,458 0 30 Sept 06 30 Sept 07 0 30 Sept 06 30 Sept 2007 Non-current assets Current assets Equity Int-free liabilities Int-bear. liabilities 30 Sept 07 30 Sept 06 63 Capital employed, MEUR 3,265 2,902 Equity-to-assets, % 49.4 43.0 Leverage, % 27.4 30.5 Gearing, % 37.7 43.8
Key ratios well in target Leverage 1), % 50 40 target: between 25-50% 30 20 10 0 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 ROACE 2),% 25 20 target: at least 15% 15 10 5 0 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 64 1) Net debt/net debt + equity 2) After tax, rolling 4 quarters
Changes in segment reporting Current segments Segments in 2008 Oil Refining - Biodiesel - Specialty Products Oil Retail Shipping Other Oil Refining Biodiesel Specialty Products Oil Retail Shipping Other 65
Impact from the financial market turbulence Neste Oil Corporation Neste Oil s commercial paper spread has not widened (outstanding 250M at + 5 bps) Due to the higher level of interest rates, interest costs will rise approx. 1.5 M during the next 12 mths Domestic bond spreads: 2009: unchanged 2012: widening of approx. 5 b.p. from June (mid-swap + 40 b.p.) Impact on new funding would be approximately 20-30 b.p. increase in spreads The continued weakness of the US dollar likely to have an impact on Neste Oil in 2008 66
Impact from the financial market turbulence Neste Oil Pension Fund (total assets 800 M ) Since 2006, Pension Fund assets have been diversified in order to decrease risk Year to-date return is 8.0 % (At the end of Q3) Investments in Risk Free assets are 162 M (Money Market and reborrowing) Investments in equity markets are 380 M Assets where the negative influence, primarily on valuation, have been higher Hedge Fund of Funds 40 M High Yield loans 12 M Investment Grade loans 79 M 67
Summary and discussion