Chairman’s letter

In 2023, Viru Keemia Grupp (VKG) focused on three key areas – ensuring reliability in production, developing a safety culture and restructuring the company with the aim of both ensuring the sustainability of existing oil production and creating the best preconditions for new development projects. A determined effort resulted in record oil production volumes and a company structure that clearly separates the refining of fossil raw materials from carbon neutral industrial production solutions.

In general, VKG’s operating environment was similar to recent years, meaning that the key themes were the same: the war in Ukraine and the mixed perspectives regarding the Green Transition. The ongoing war has made foreign investors more cautious about Estonia as a neighbour of Russia, and is also forcing local companies to reassess their expectations of return on capital. VKG decided to complete its exit from regulated businesses and sold OÜ VKG Elektrivõrgud at the end of 2023. We also decided to sell OÜ Viru RMT, a subsidiary specialising in the construction of electrical and metal structures. The closing of these transactions, although it took until 2024, marked VKG’s full commitment to the manufacturing industry.

In 2023, we processed 4.8 million tonnes of oil shale, from which we produced a record 669,000 tonnes of shale oil products and 900 GWh of energy for our customers. Things with the Green Transition have become even more confusing than before. VKG’s proposal to initiate a process of legislative drafting of a climate law to agree on the objectives, ambitions and principles of climate neutrality was included in the coalition agreement signed after the 2023 parliamentary elections, but in practice, unfortunately, the principles of the law have not even been formulated. What is very clear is that Estonia participates in pan-European debates without having a clear view of what it wants to achieve and what risks it is prepared to take. All in all, it has to be acknowledged that the assessment of market, technological, currency, etc. risks to investment has been heavily influenced by the regulatory risk of the Estonian government.

In 2023, we processed 4.8 million tonnes of oil shale, from which we produced a record 669,000 tonnes of shale oil products and 900 GWh of energy for our customers. The good production results were driven by the stable operation of the Petroter I plant, which was reconstructed a year earlier, and the shutdown of coke production. The most significant event of the year in the oil shale sector was the opening of the Uus-Kiviõli Mine, namely the construction of an inclined shaft and the start of blasting and excavation works. The biggest challenge in the coming years will be to ensure that the new mine has sufficient production capacity by the time the Ojamaa Mine is exhausted and closes. The Uus-Kiviõli Mine will provide us with raw materials until 2038 and give people in the region the certainty of continued employment.

Last year, we completely overhauled the structure of the company, bringing it in line with the changing market situation and regulatory trends. As the first step, we separated all VKG’s new development projects from fossil production assets and their operation. It was already clear that it had become impossible to raise external capital from EU banks for the oil shale sector. The legal and substantive separation of new development assets from the oil shale industry will provide a green light for VKG to finance the production of bioproducts, circular economy projects and solar and wind energy projects.

As a result of the anti-Russian sanctions, trade in oil products in the Baltic Sea region decreased significantly. Higher freight prices due to the decrease in shipping traffic had a negative impact on sales margins and we felt a clear need to expand and move closer to our customer base. At the end of 2023, we transferred the management and financing of all sales activities and the strategic management of the Group’s investments to our Swiss entity, and strengthened our sales organisation through local recruitments.

We entered 2024 with a clear organisational structure and a renewed strategy. VKG’s aim is to develop and operate projects in the manufacturing industry. The production of shale oil is the cornerstone of our business, which we will continue to develop to meet strong global demand. At the same time, we will continue to develop circular economy and bioproduction projects. VKG’s broader ambition is to contribute to the development of the Estonian manufacturing industry with all the knowledge and experience that VKG has to offer, and with the potential of the Ida-Viru County region and its people.