The new VKG no longer holds non-current assets related to the production of shale oil products, but rents these from the related company Kirde Varad AS under a long-term contract. Pursuant to the requirements of IFRS 16, VKG still reports long-term lease obligations as non-current assets. In addition, assets related to the extraction of oil shale were still in the ownership of VKG as at 31 December 2022. Although market conditions continued to be favourable in the second half of 2022, we were unable to take full advantage of them as the Petroter I plant was due to major repairs out of operation for most of the second half of 2022.

VKG’s core activities are divided into three major stages in the process chain: the extraction of oil shale, the production of shale oil products, and the production of energy. The Group also includes two service companies which provide logistics and repair services mainly to other Group companies.

In 2022, the Ojamaa Mine continued its ordinary operation, extracting a total of 4.25 million tonnes of commercial oil shale, which was 0.14 million tonnes or 3% less than in the previous year. The main reason for the smaller production volume as the rapid spread of COVID-19 cases at the beginning of the year, at the peak of which nearly a third of the company’s employees were on sick-leave. The company’s activities were also influenced by the constant increase in the prices of inputs and the increased competition in the labour market in connection with an increase in the extraction capacity of Eesti Energia. Our focus was on the new project of opening the Uus-Kiviõli Mine, into which we invested nearly two million euros during the year. The intensity and investment volume of this project will grow considerably in the coming years, in order to ensure that the transition from the Ojamaa Mine to the Uus-Kiviõli Mine is as smooth and efficient as possible.

Availability of oil shale resource

VKG assesses the availability of the oil shale resource in the short-term perspective, i.e. current supply, and in the long-term perspective, i.e. future supply.

Considering all the oil production capacities, VKG’s need for oil shale is a total of 4.1 tonnes of the geological resource a year, i.e. 5.1 million tonnes of commercial shale. The mining permits issued to VKG allow the extraction of 2.77 million tonnes of the geological resource at the Ojamaa Mine, (3.5 million tonnes of commercial oil shale) and if other market participants do not extract their allowed volume in the full extent, the extraction volumes at the Ojamaa Mine can be increased to 3.5 million tonnes (4.35 million tonnes of commercial shale) through the retrospective extraction mechanism. This means that in order to purchase the missing 750,000 tonnes (i.e. 15% of VKG’s total oil shale need) of commercial shale, VKG has to reach agreements with other market participants.

Oil shale purchasing cooperation with Kiviõli Keemiatööstus continued in 2022. We have still not succeeded in restoring cooperation with Estonia’s biggest extractor of oil shale, Eesti Energia, that was suspended in 2020 due to the COVID-19 crisis. Although the lengthy dispute over the unfairly high price of the oil shale sold by Eesti Energia reached a positive solution for VKG in 2021, it is namely the different understanding of the fair price of oil shale that continues to be the main obstacle to. Due to this, one of the three Kiviter oil plants continues to be conserved, waiting for the day on which VKG will perhaps itself be able to supply this production capacity with raw material after the opening of the Uus-Kiviõli Mine.

Considering VKG’s extraction volumes and assessing the resource available from the Ojamaa Mine, we shall probably exhaust the Ojamaa Mine by 2028. In order to ensure raw material supply, VKG started actively investing into the opening of the Uus-Kiviõli Mine in 2022, as a smooth transition from one mine to another requires long-term planning and strict adherence to plans. Although we have reached an agreement with our good neighbour Eesti Energia to the effect that until the successful completion of the new environmental impact assessment VKG can use the extraction limits allocated to Eesti Energia at Uus-Kiviõli, there is still a risk that if raising the extraction limits fails, VKG’s raw material supply may be endangered, should Eesti Energia decide to come to extract oil shale at Uus-Kiviõli simultaneously with VKG. VKG is actively working to mitigate that risk, because a private company cannot make a 100 million euro investment without contractual assurance that it can extract a sufficient volume of oil shale from the mine to be opened.

The Uus-Kiviõli Mine should ensure the Group’s oil shale supply until 2038. In the environmental context, the Uus-Kiviõli Mine is the only right solution, as this mining field is logistically in the best location with regard to the shale oil plants in Kohtla-Järve and allows us to use the existing infrastructure to the maximum possible extent. The oil shale enrichment plant located at the Ojamaa Mine is capable of ensuring the processing of the raw material extracted from the new mining field and therefore there is no need for additional aboveground construction works and nature disruptions.

Shale oil’s advantages over residual fuel oil are its low viscosity, low sulphur content and low pour point. Shale oil mixes well with conventional fuel oils and therefore facilitates the creation of products with precise specifications. Owing to its low sulphur content, low viscosity and low pour point, shale oil is mainly used to improve the qualities of heavy fuel oil, e.g. as a marine fuel additive, as a raw material for the chemical industry, and for heating boilers and industrial furnaces. Shale oil produced by VKG is used in Estonia as fuel for boilers and industrial furnaces, but most of the production is exported.

We use two technologies to produce shale fuel oil: Petroter and Kiviter. VKG’s production territory at Kohtla-Järve includes three Petroter shale oil plants: Petroter I (2009), Petroter II (2014) and Petroter III (2015), along with two Kiviter shale oil plants. The aggregate processing capacity of the five production units is nearly 5 million tonnes of oil shale a year, of which 70% comes from the Petroter plants.

In 2022, the Group processed 4.27 million tonnes of oil shale, which is 5.8% less than in the previous year. The oil shale processing volumes mainly decreased due to the reconstruction of the Petroter I plant, but also due to extraordinary obstructions which reduced the formerly high reliability. Although we again succeeded in increasing the output of oil products per a tonne of processed oil shale, the impact of this remained modest and the production of oil products decreased by 5.7%, i.e. to 583,000 tonnes compared to the previous year. In 2023, we expect a significant increase in production mainly on account of the improved reliability of Petroter I.

By summer, the prices of liquid fuels grew by nearly 50% from the beginning of the war due to uncertainty and unknowing, but the situation calmed somewhat thanks to the expected economic decline in major production countries (China, USA, India) in the 3rd and 4th quarter. As at the end of the year, the ICE Brent was even a little lower than at the end of 2021.

Shipping is the backbone of today’s economic structure in the world – more than 80% of trade is done by sea. In connection with the global economic growth, the growing world population and the ever more intensive internationalisation, the volume of trade done by sea has notably increased over the past two decades. While in 2000, six billion tonnes of goods were transported by sea, by 2018 the volume had nearly doubled, reaching 11 billion tonnes (UNCTAD 2019, 72). At the same time, goods are transported to greater distances, and the volume of shipments in tonne-kilometres has more than doubled in the same period – from 48,000 billion tonne-kilometres to 98,000 billion tonne-kilometres (UNCTAD 2020, 6). The geography of marine transport has also expanded and the role of developing countries in sea trade has grown considerably over the past 20 years. While in 2000, developing countries were the destination of 30% of goods, by 2018 the share had grown to 64%. Over the same period, developing countries were the country of origin of 60% of goods.

Eighty percent of the fuel consumption of the shipping sector comes from international trade which has undergone a notable improvement in energy efficiency – the GHG emission per shipped tonne is 32% lower than in 2000. There are currently more than 120,000 ships with a capacity of over 100 tonnes. Of these, 90% are cargo ships with an average useful life of 21 years. Which in turn means that any technological innovations will take time.

• The shipping volumes of fuels have returned to the pre-pandemic level and keep growing.
• The lease prices of the so-called dirty tankers that transport crude oil exceed 100,000 US dollars and profits of ship owners have doubled or tripled.
• Russian sanctions – both against Russia and the counter-sanctions imposed by Russia – are forcing European countries to buy fuels from farther away, increasing ship lease prices.
• According to forecasts, changes in delivery routes will raise the demand for oil tankers to a level not seen in the past thirty years.

In addition to oil products, VKG also produces oil shale fine chemistry products. The organic part is used for producing very expensive chemicals with a purity level of over 99%, which are used in cosmetics, pharmaceutical, tyre and electronics industries. End users include renowned companies such as Schwarzkopf, Lexus, Samsung, LG.

In total, 2,117 tonnes of fine chemistry and phenol products were produced in 2022. With the currently used technology, the production of oil shale fine chemistry is based on the reprocessing of a process residue of the Kiviter plants – phenol water.

In the sales of phenol products, we continued at positions achieved in 2021, fulfilling long-term supply contracts and concluding new ones. The main flow of goods continues to move towards Asia. Of the products in the fine chemistry portfolio, 2-methylresorcinol provides the main sales volume. Phenol products, Rezol, Honeyol and pure resorcinols are primarily exported to chemical industry enterprises. China, the United Kingdom, India, Italy, Germany and the United States are the target markets.

A hundred years of experience in refining oil shale has taught us to get much more than just oil out of oil shale. Refining oil shale in VKG means the combined production of oil, heat and power, which is the most eco-friendly and economically efficient way to use this resource.

The shale oil production process generates oil shale gases that do not condense into oils and are transferred to VKG Energia where they are used for manufacturing heat, steam, and electricity. Heat energy is forwarded to the local central heating system, steam is sold to production companies located in the neighbourhood, and most of the electricity is consumed by the companies of the Group. In addition to that, we also use oil shale gases at the limestone plant, whose produce is consumed by our own sulphur-trapping devices that purify exhaust gases. This production chain guarantees the ultimately efficient and environmentally-friendly use of energy contained in oil shale.

The production of electricity decreased by 11% in 2022, to 364 GWh. This was caused by a smaller quantity of input energy due to a decrease in the re-processing of oil shale. In 2022, VKG Energia’s electricity production made up 4.2% of all the electricity produced in Estonia and 3.8% of all the electricity consumed in Estonia.

Energy for over 30,000 clients

The sale of electricity and network services is handled by VKG’s north-east Estonian subsidiary VKG Elektrivõrgud. The company’s service area includes Narva, Narva-Jõesuu and Sillamäe.

The Group’s subsidiary Viru RMT is an engineering and project management centre with diverse know-how operating in the international market. The company has several decades of experience and offers repair and assembly services as well as the production, installation and maintenance of metal structures and metal components.

• electrical works from the lamps in the ceiling to transforming substations;
• design, production and installation of technical equipment;
• automatic management systems design, software development and installation;
• installation and repair of control and measuring instruments;
• maintenance and repair of lifting equipment, and lifting works;
• project management for the performance of integral technical solutions.

• Reconstruction of the automation of the Petroter I shale oil plant;
• Gas intake device for the timber industry, commissioned by Estanс AS;
• A dumper for the cast metal industry, commissioned by Elkem Iceland Ltd;
• Modernisation of the control system of the Konsu pumping station;
• 2nd and 3rd stage of the renovation of the street lighting infrastructure in Narva-Jõesuu;
• Power supply construction works at the Vanalinna schoolhouse in Sillamäe;
• Power supply reconstruction works at the Sillamäe track and field and football stadium;
• Purchase and installation of power supply equipment for Elering’s substations;
• New substation construction works in Narva.