5Economic environment
2021 was a year of recovery from the shock of COVID-19 in the economy of the world. Although COVID-19 still affected our everyday activities, the overall economic activity improved in a surge thank to the rapid dissemination of vaccines and the money-printing of central banks.
While the global economic growth of -3.3% in 2020 was according to the World Bank the lowest since the end of World War II, the global economic growth of 5.5% expected for 2021 tends towards the other extreme on that diagram. The global economic growth was last more rapid in 1972 and 1973 when it was similarly to today driven by a rapid increase in the prices of energy carriers.
The small and open Estonian economy raced at an even faster pace in 2021. According to Statistics Estonia, Estonia’s gross domestic product (GDP) made the fastest leap in the past 15 years: 8.3% (2020: -3.0%). As the growth of the average gross salary of 6.9% (2020: 2.9%) remained near the average level of recent years, it was for the first time in 10 years lower than the GDP growth. The salary increase is expected to continue to accelerate in 2022, but economic growth forecasts are tentative due to the war started by Russia in Ukraine.
VKG’s financial results are influenced the most by what is happening on the global oil market. The rapid growth in the overall economic activity also restored the demand for fuels, but as OPEC+ increased the supply of oil carefully and it takes time for the US shale oil producers to recover from the crisis, the prices of fuels mainly moved up in 2021 on the backdrop of limited supply and growing demand. The year started with the Brent price of 51 $/bbl, reaching the peak by the end of October at 86 $/bbl. News of the spread of the new and particularly contagious Omicron strain brought the price of crude oil back to around 70 $/bbl by the beginning of December, but as a result of a leap made in the last week of the year, Brent 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 year 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.
Fuel Oil 1% (Rotterdam Cargo FOB) €/t
As can be seen from the above diagram, the price of the 1% heating oil also rose notably in 2021, starting the year at the level of 260 €/t and ending it as the level of 420 €/t. The year’s average price of heating oil was 378 €/t, which was 60% higher than the year before. Compared to Brent, the increase of the average price of heating oil was a tad smaller, mainly due to the weaker dollar exchange rate, with was 1.8 on the average (2020: 1.14).
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.
Economic indicators
Income statement
In thousands of euros| 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|
| Sales revenue | 208 924 | 256 763 | 207 841 | 285 523 |
| Cost of goods sold | -170 362 | -215 743 | -216 077 | -275 972 |
| Gross profit | 38 563 | 41 020 | -8 236 | -9 551 |
| Marketing expenses | -5 841 | -5 304 | -5 548 | -5 232 |
| General administrative expenses | -9 724 | -11 123 | -11 179 | -12 631 |
| other business earnings | 12 225 | 20 595 | 40 942 | 66 106 |
| Other business expenses | -853 | -2 140 | -1 232 | -1 616 |
| Business profit | 34 370 | 43 047 | 14 747 | 56 178 |
| Total financial income and expenses | -6 901 | -6 077 | -4 424 | -1 859 |
| Profit before income tax | 27 469 | 36 970 | 10 323 | 54 319 |
| Extraordinary expenses | ||||
| Income tax | -560 | -293 | -244 | -4 532 |
| Net profit for the reporting year | 26 909 | 36 677 | 10 079 | 49 787 |
The Group’s 2021 consolidated sales revenue increased by 37% compared to the previous year. The turnover growth mainly stemmed from the world market fuel prices recovering compared to the previous year of the crisis. However, the production of both shale oil products and electricity decreased in 2021 (-2% and -8%, respectively) due to the diminished working time of the Petroter plants. In conclusion, we can be satisfied with the financial results of 2021, as the improved market conditions allowed the company to earn a net profit of 49.8 million euros.
Investments
In 2020, in the conditions of the COVID-19 pandemic and the oil market crisis, the Group reduced the volume of investments to 14 million euros. The volume of investments grew again in 2021, reaching 23.9 million euros, being 68% higher than last year.
The estimated volume of the project in 2022 will be 12 million euros. The remaining 24 million euros of investments will be divided into investments into ensuring the Group’s reliability in the amount of 18 million euros, development investments in the amount of 5 million euros and investments into the environment and work safety in the amount of 1 million euros.
Investments into reliability
made up 16,4 million euros of that, including 3.8 million euros on the replacement and renewal of depreciated mining machinery in VKG Kaevandused, underground drifting investments in the amount of 3.7 million euros, investments related to major oil factory repairs in VKG Oil in the amount of 4.7 million euros, and the various reliability projects of VKG Energia, VKG Soojus and VKG Elektrivõrgud 2.4 million euros in total.
Development investments
In millions of euros
Development investments amounted to 6,3 million euros, the largest of which included 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 0.5 million euros, and VKG’s IT developments in the amount of 0.7 million euros.
Environmental and occupational safety investments
In millions of euros
Environmental and occupational safety investments amounted to a total of 0,8 million euros, of which the various environmental projects of VKG Oil and VKG Kaevandused made up 0.4 million euros each.
The planned volume of investments in 2022 has been raised to 36 million euros, mainly due to the Petroter I reconstruction project started in 2021.
Balance sheet volume
In thousands of euros| 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|
| ASSETS | ||||
| Current assets | 108 992 | 149 819 | 158 936 | 198 028 |
| Fixed assets | 613 357 | 568 980 | 511 395 | 817 909 |
| TOTAL ASSETS | 722 348 | 718 800 | 670 331 | 1 015 937 |
| LIABILITIES AND EQUITY | ||||
| Total current liabilities | 172 469 | 76 640 | 51 435 | 76 586 |
| Total long-term liabilities | 44 673 | 128 877 | 102 191 | 27 334 |
| Total liabilities | 217 142 | 205 517 | 153 626 | 103 920 |
| Total equity | 505 206 | 513 283 | 516 705 | 912 017 |
| TOTAL LIABILITIES AND EQUITY | 722 348 | 718 800 | 670 331 | 1 015 937 |
Balance sheet
In millions of euros- Equity
- Obligations