6Operating framework
The main developments in the legal environment, which influenced the competitiveness of VKG in 2020 were as follows.
Law amendments caused by the COVID-19 pandemic
In connection with the threat of a pandemic spread of the corona virus that causes the COVID-19 disease, the Government of the Republic declared an emergency situation in Estonia on 12 March 2020. The emergency situation lasted until 18 May 2020 and involved special measures stipulated in the Emergency Act. The rules established during the emergency situation did not directly restrict the production process and everyday production activities of the enterprise. The Group did, however, apply all the safety measures related to the emergency situation, as a result of which we succeeded in avoiding a major wave of infection among VKG’s employees until the end of August.
The Government also initiated various law amendments to support enterprises that suffered from the COVID-19 crisis. The following two of these were related to VKG’s activities:
- The Environmental Charges Act was supplemented by section 683, pursuant to which the charge rate applicable to oil shale fly ash and oil shale bottom ash was temporarily reduced from 2.98 euros per ton to 1.31 euros per ton for 2020. In 2021, a study commissioned by the Ministry of the Environment will determine the charge rates applicable to oil shale industry waste for the subsequent years.
- The Fiscal Marking of Liquid Fuel Act was supplemented by section 82, pursuant to which undertakings that hold an extraction permit are allowed to use specific-purpose diesel in mines and ash deposit sites from 1 July 2020 to 30 April 2022. Considering that diesel fuel with fiscal marking is intended for industrial machinery that is not driven on public roads, it was a long-standing proposal of VKG to harmonise tax specifications between different sectors.
European Green Deal
In December 2019, the European Commission prepared the European Green Deal, the aim of which is to achieve carbon-neutrality in the European Union by 2050, using political, economic and social measures. In December 2020, the representatives of the Member States agreed on an enhanced interim objective for the European Green Deal for 2030, raising the greenhouse gas reduction objective from 40% to 55% compared to the 1990 levels. The European Commission will present the package of measures and legal acts necessary for achieving the said objective in June 2021.
In any case, this policy significantly impairs the competitiveness of the Estonian shale oil industry in the global fuel market. While the rest of Europe is having difficulties in achieving the established 55% objective by 2030, the closure of oil shale power plants has by 2020 reduced the CO2 emission of the Estonian ETS sector (installations included in the EU Emissions Trading System) by 64% compared to 1990 and even 65% compared to 2013. If the conscious decision of the Estonian state is not to protect its national interests in the European Union and considering the recent months’ CO2 price increase to 42 euros a ton as well as the reduced allocation of free quotas from 2026, it is most probable that the Estonian shale oil industry also has to close shop by 2030, as the carbon tax burden has rendered it uncompetitive.
The emissions of the Estonian ETS sector would be reduced by 83% by 2030 even if the other participants of the Estonian ETS sector did not reduce their emissions at all. In Europe, it would most definitely earn Estonian politicians an appreciative pat on the shoulder, but in Ida-Viru County it would mean the loss of thousands of jobs and for the entire country it would mean several billion euros worth of lost revenue. The saddest aspect in this development is the fact that sacrificing the Estonian shale oil industry would not reduce global emissions, as goods still need to be transported and ships still need fuel which would then be produced in regions with no such carbon tax burden.
Diagram: Fluctuation of the CO2 market price, 2017–2020
IMO 2020
2020 saw the entry into force of the International Maritime Organisation’s (IMO) requirement to reduce the maximum sulphur content of the fuel used on the seas of the world from the former 3.5% to 0.5%. As VKG’s shale oil was mainly used as an additive to improve the qualities of heavy fuels, there was a danger that the prohibition of heavy fuels may significantly reduce the demand for shale oils. In reality, the demand for VKG’s product grew, as the average sulphur content of 0.7% of our shale oils is very close to the new standard, which makes it suitable for mixing with cleaner but more expensive fuels in order to achieve an optimal end product. In conclusion, the impact of IMO 2020 turned out to be far more positive than expected for VKG, as it also improved the price of the 1% fuel oil compared to Brent as well as the price of shale oil compared to the 1% fuel oil.
