In the pursuit of its objectives and targets, Neste is exposed to different risk factors that stem from the external environment, internal decision making, operating processes, and systems in use.
The most significant risk factors relate to the areas mentioned below. Any one of the risks, either singly or in the aggregate, may have a material adverse effect on Neste’s business, financial condition, operating results, and future prospects.
External risks – Economic conditions, Geopolitics, Pandemic
Overall market volatility, geopolitical tensions and the risk of an economic slowdown may have an adverse effect on the market conditions for the supply of feedstock and sales of refined products. During 2020, uncertainty in the global economic and financial markets was amplified by the COVID-19 pandemic. The continuing COVID-19 pandemic could bring risks to oil product demand, in the form of slow economic recovery and reintroduction of local virus containment measures ("lockdowns"). This, in combination with ample global refining capacity could continue to pressure refining margins globally.
Continued sanctions on oil exports from Venezuela and Iran, as well as continued OPEC+ crude supply cuts, could continue supporting Urals crude prices relative to Brent crude, thus negatively impacting Neste's business.
Renewable fuels policies in the EU remained firmly in place in 2020, and planning for transposition of the Renewable Energy Directive II into national legislation next year kicked off in most Member States. In the United States, existing state-level policies like California’s LCFS program and US federal-level Renewable Fuel Standard in combination with the Blenders Tax Credit adopted through 2022, made for a fairly stable regulatory environment for biofuels, with some risks to market sentiment linked to pending EPA decisions on how to handle small refinery exemptions going forward.
External risks – Environment
Neste’s strategic ambition is to be the global leader in renewable and circular solutions. Growing pressure to combat climate change and reduce greenhouse gas emissions is therefore primarily a positive driver for Neste’s business. However, political and societal focus on the low-carbon transition and the energy sector’s carbon footprint also create risks. Indirect economic and political consequences from climate change may contribute to the general uncertainty in the business environment and hence have an adverse effect on Neste’s business. In addition, changes in carbon emission trading schemes or similar initiatives on EU-, US- or individual Member State-level may have a significant effect on Neste’s business.
External risks – Laws and regulation
Changing regulation presents both an opportunity and threat to Neste’s business. Neste’s refining operations and products are subject to extensive regulation (incl. environmental, health & safety, sustainability). General regulatory requirements in areas like commodity trading and data protection have also contributed to the formalization of operating procedures.
Neste’s business units mainly benefit from increased support for biofuels and renewable fuels (for example requirements that relate to renewable content in diesel and gasoline). However, changes in regulation especially in the European Union and the United States also create uncertainties as these may influence the speed at which the demand for renewable products develops, and new raw materials sources are brought into use. For the renewable products, a significant source of uncertainty is fragmented regulation around the acceptability and use of waste and residue feedstock.
Risks relating to strategic choices and strategy implementation
The majority of strategic risks relate to the viability of strategic choices and risks in strategy implementation. Opportunities and threats may arise from changes in the competitive landscape or from internal decision making and use of technology.
Neste’s competitive position in the selected key markets is good. Neste’s proprietary NEXBTL production technology is a proven technology for producing high-quality diesel from renewable raw materials. However, there is no assurance that this competitive position will continue as new players enter the market, current competitors develop their technologies or customer preferences for clean mobility change. In addition to the development of alternative feedstocks and production technologies for liquid fuels, the evolution of engine technologies and introduction of alternative powertrains can be faster than expected.
Staying ahead of competition requires continuous improvement, the ability to challenge current business models and a strong focus on innovations such as new production technology and feedstock platforms. In addition, Neste’s products and services must continuously meet customer requirements relating e.g. to product quality and sustainability. Evolving customer requirements together with more complex sourcing and logistics networks and production methods increase the exposure to quality risks that need to be managed well in order to maintain the high-quality brand image. As risk mitigation, Neste has implemented systematic quality management measures both in its own operations and in partner networks.
Strong governance practices and the continued contributions of Neste’s senior management, personnel and partners are vital for the company’s success. Due to fierce competition for talent, there is a risk that Neste may not be able to recruit and retain the highly skilled employees that are needed for strategy deployment and successful operations in the future. There is also a risk that Neste will not able to build and manage strategic partnerships that contribute to future success.
Successful projects play a key role in Neste’s strategy deployment, operational development, and the digitalization of processes. Significant delays in project planning or execution may reduce operational efficiency or impair Neste’s ability to secure its competitive position.