russian energy markets - potential for fortum€¦ · russian power market russian oil market...
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Russian Energy Markets- potential for Fortum
Juha Laaksonen, CFO
12 January 2004
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Fortum´s scope in the Nordic and Baltic Rim area
The Nordic power market
Russian power market
Russian oil market
Fortum and Russia
Separation of oil, upgrade in Porvoo
Concluding remarks
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Second largest Nordic generator and supplier of powerThe leading provider of district heating in Finland and SwedenThe leading Nordic refiner of clean traffic fuels
EBIT: EUR 1.0 billion, EPS: EUR 0.64 (Q1-Q3 2003)
Total assets: EUR 16.2 billion (30 September 2003)
Privatised in December 1998• Market capitalisation EUR 7.0 billion• More than 50,000 shareholders
Overview of Fortum
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Fortum focuses on the Nordic energy market as a platform for long-term profitable growth
Excel in business performance
Create the leading
power and heat company
Become the energy supplier
of choice
Strengthen position as the leading clean fuels refining
company
Fortum’s strategy
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Focus on core businesses and the Nordic area
Billion euro
Elnova
Birka Energi
Stora Ensopower assets
Merger ofLänsivoima
Humber
BriggGerman power businesses
Oman
Budapesti Erömü
Transmission Engineering
Shares inEspoon Sähkö
Acquisitions Divestitures
NorwegianE&P assets
Rearrangement ofPower Plant Engineering
Edenderry
Hafslund ASAØstfoldFredrikstads Energi AS*
Distr. in Småland
AO Lenenergo
2.56.7
Consistency and determination9 billion worth of restructuring 2000-2003
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Strengthened presence as a leading Nordicenergy company
Population in key geographic markets
Million
1 2 73
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Fortum´s scope in the Nordic and Baltic Rim area
The Nordic power market
Russian power market
Russian oil market
Fortum and Russia
Separation of oil, upgrade in Porvoo
Concluding remarks
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Aiming for an open European power market
EU Commission's strategy 2003
Iberian market(2005?)
Central European market
(2005-2008?)
South-East European market
(2005-2008?)
Nordic market
Baltic market(2008?)
UK/Ireland market(2005?)
Italian market(2004?)
East European market
(2005-2008?)
EU Commission's strategy 2003
Through development of regional markets ...
... to liberalized European power market
To increase efficiency of the industryFor the benefit of the customers and society To secure a healthy power sector development
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The Nordic market is at the forefront
Free trade of electricity across the Nordic market No cross-border transmission tariffsCapability to cope even with the extreme conditions of winter 2002/2003
1354
930
-3178-1716
Nordic peak demand and transmission January 3, 2003 at 17-18 pm
2072
1238
298
983
674
772
Transmitted power, MWh/h
1470
Power balance
■ Transparent market with hundreds of actors and comprehensive information availability
■ Market behavior of actors scrutinized by Nord Pool and competition authorities
Members400
300
200
100
0
400
300
200
100
0
TWh
Spot tradeDerivatives trade*Nord Pool members
-93 -94 -95 -96 -97 -98 -99 -00 -01
910 TWh
-02
1019 TWh
* In addition OTC clearing 1700 TWh (2001) and 2055 TWh (2002)
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New capacity will be neededNordic generation and demand
0
100
200
300
400
500TWh/a
1990 2000 2010E 2020EOtherOilNatural gas
PeatCoalNuclear
RenewablesHydroWind
Demand
Price signals are necessary
In order to ensure long term supply securityhighest efficiency
- New base load capacityrequires a long term price
of 30-35 €/MWh
Source: Europrog / Finergy
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Fortum´s scope in the Nordic and Baltic Rim area
The Nordic power market
Russian power market
Russian oil market
Fortum and Russia
Separation of oil, upgrade in Porvoo
Concluding remarks
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Power sector reform – separation of monopoly and competitive sectors
Natural monopolies
Competitive sectors
Regulated tariffs
Securing equal access to gridsEstablishing the market infrastr.
Market rules
Free price-settingStimulating market entry
GenerationSupply
TransmissionDistributionDispatching
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First reform steps taken as plannedLaws initiating power reform has been ratified with an aim for aderegulated Russian power market by 2008.
■ Action plan for sector reform 2003-2005 approved bygovernment resolution 6/2003
■ 6 thermal and 4 hydro federal wholesale generation companies to be established, auctions expectedstarting 2004 (pilot), rest during 2005-2006; structure of wholesale generation companies approved bygovernment resolution 9/2003
■ Restructuring in about 30 regional energy companiesinitiated
■ Merging of regional assets expected finalized by 2006, composition suggestion for territorial generation companies published by RAO UES in November, 2003
■ As of Nov 1, 2003 competitive wholesale marketestablished; target for complete liberalization 2006
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Fortum´s scope in the Nordic and Baltic Rim area
The Nordic power market
Russian power market
Russian oil market
Fortum and Russia
Separation of oil, upgrade in Porvoo
Concluding remarks
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Russia has the 4th largest oil reserves in the world
Proved oil reserves, 2002
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It is becoming a leading producer and exporter globally
0 2 4 6 8
Mexico
Nigeria
UAE
Iran
Venezuela
Norway
Russia
Saudi Arabia 7,07
5,59
3,08
2,43
2,33
2,05
1,86
1,73
million barrels per day
Exports, average 2002
0 2 4 6 8 10
Canada
Norway
China
Iran
Mexico
US
Saudi Arabia
Russia 8,63
8,63
8,08
3,80
3,71
3,42
3,16
3,12
million barrels per day
Production August, 2003
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North Sea Crude Production in Decline, Growth in RussiaNorth Sea crude production is expected to decline rapidly in the next 2-3 years
The rapidly increasing production in Russia will more than compensate the decline in North Sea production
European refineries should be prepared for this change as Russian crude is generally heavier and sourer than North Sea crude
0
1
2
3
4
5
6
7
1990 1995 2000 2005 2010 2015Denmark, Netherlands, Germany
Norway
UK
North Sea Crude ProductionMM barrels per day
0
2
4
6
8
10
12
14
16
1990 1995 2000 2005 2010 2015Russia Kazakhstan
Azerbaijan Turkmenistan
Other FSU
Russian and FSU Crude ProductionMM barrels per day
Source PIRA Source PIRA
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Mega-mergers transforming Russian oil industry landscape
1 960mboed
■ Western majors facing decline rates in production
■ US domicile potentially a disadvantage is some areas
■ Gaining strong position in the Russian market with long-term growth potential
■ Russian companies interesting due to relatively low valuations in comparison with western counterparts
■ Yukos-Sibneft merger - one goal assumedly to block the entry of other foreign supermajors (in addition to BP) - failed
■ Further negotiations with ExxonMobil (ChevronTexaco) discontinued for the time being
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Significant Developments in Crude Export Routes Around Baltic Rim
Belarus
Lithuania
Germany
Poland Ukraine
Russia
Latvia
Estonia
Finland
Sweden
Russia
Rostock
Plock
Gdansk
Kaliningrad
Butinge
Primorsk
Porvoo
Mozyr
Kirishi
Schwedt
Mazeikiai
Novopolotsk
Ventspils
BalticSea
From Yaroslavl
Refinery
Pipeline
Terminal
Muuga
Primorsk12 30 -50mt
2005..7
Vysotsk10 mt 2004
Bukhta Batareyana7,5 15 mt
2004..5
Muuga20 mt
Ventspils(25 mt pipeline shut)Now 10 mt by railcars
Butinge12 mt
Riga5 - 7 mt
2004
Murmansk50 -80mt
2007St Petersburg
10 20 mt
Kaliningrad5 mt
Klaipeida5 mt
CrudeProductCrude and Product
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Fortum´s scope in the Nordic and Baltic Rim area
The Nordic power market
Russian power market
Russian oil market
Fortum and Russia
Separation of oil, upgrade in Porvoo
Concluding remarks
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Fortum in Russia today
Business in Russia
Crude and feedstock sourcing Power imports Nuclear fuel imports
Traffic fuel salesLubricants salesOperation & maintenance projects
NTG50% share
(Gasprom 50%)
Lenenergo15,9% share
MoscowRep.offie
Neste St.Petersburg
100% SeverTEK50% share
(Lukoil 50%)
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Lenenergo the Fortum power foothold in Russia
■ Lenenergo■ Largest utility in North-West
Russia - ranks 7th in total capacity among 73 regional companies
■ Electricity production capacity ca. ■ 3 200 MW (12,5 TWh)*■ Heat production about 29.5 TWh■ Electricity sales 23,5 TWh■ Electricity customers 1,3 million■ Net sales in 2002 654 MEUR **■ Fortum ownership 15,9 %
* excl. expired lease in December 2002 (2 100 MW, 4,2 TWh)
** EUR/RUB 34,4
1 23
7
Population in key geographic marketsMillion
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• Crude oils & feedstocksfrom Russia
• Refining at Porvoo and Naantali
• Products for western/global markets
Opportunity for deeper cooperation with Russian oil industry
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0
2000
4000
6000
8000
10000
12000
14000
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2
1 000 t
Other countries
Denmark
Norway
Great Britain
Middle East
Russia
Feedstock fromRussia
Crude oil and feedstock sourcing -Russian share increasing again
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Oil production started in Russia
• JV with Lukoil
• start of productionin 2003
• Fortum´s share offull capacity 25,000barrels per day
• Fortum´s share ofreserves about82 million barrels
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Oil Retail outletsTotal 1036 stations *)
885
34
29
28
32
28
RussiaEstonia
Latvia
Lithuania
Poland
*) Including D-stations and salespoints; in October 2003
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Fortum´s scope in the Nordic and Baltic Rim area
The Nordic power market
Russian power market
Russian oil market
Fortum and Russia
Separation of oil, upgrade in Porvoo
Concluding remarks
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Separating and listing of oil businessProcess initiated to list Fortum’s oil business as a separate company on the Helsinki stock exchangeInvestment of EUR 0.5 billion to upgrade the Porvoo refineryThe separation and listing will – Enable Fortum to further increase its focus on its Nordic utility
strategy– Allow Fortum’s oil business to take full advantage of attractive
market developments– Facilitate the upgrade of the Porvoo refineryEnsure availability of sufficient resources to secure the strategic development of both businesses
Creating two focused and leading Nordic energy companies with strong competitive positions
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European Product Balances
A surplus of gasoline and fuel oil, and significant deficit of jet/kero and diesel in Europe are anticipated
Mt
(40)
(30)
(20)
(10)
0
10
20
30
40
50
60
Gasoline Jet/Kero Gas/Diesel Fuel Oil Total Products
1998 2000 2005 2010 2015 2020
Surplus
Deficit
Source Wood Mackenzie
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The Porvoo upgrade takes advantage of well established market trends
Demand for sulphur-free and higher margin diesel is rapidly growing in Europe Demand for low margin heavy fuel oil is in decline
North Sea crude production is in decline Production of less expensive Russian crude is increasing rapidly
The current deficit of diesel is anticipated to grow while surplus of heavy fuel oil is expected to increase
Provides an attractive opportunity to further improve profitability by changing the product mix and crude intake without increasing production capacity
Proven and tested technologyExpected completion by the end of 2006Highly attractive investment opportunity – increase in refining margin premium at least USD 1/bbl
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Fortum´s scope in the Nordic and Baltic Rim area
The Nordic power market
Russian power market
Russian oil market
Fortum and Russia
Separation of oil, upgrade in Porvoo
Concluding remarks
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on Russia
Big potential, markets under development
Uncertainties related to development of regulative and legal framework
Core needs for investors: consistency, stability and transparency in development
Concluding remarks
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Disclaimer
This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Fortum shares.
Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.