Neste Oil’s businesses are subject to a range of laws and regulations adopted by governmental and local authorities in the jurisdictions in which Neste Oil operates. For example, Neste Oil’s facilities, including its refineries, plants, terminals and retail sites, are subject to increasingly stringent environmental regulation; its feedstock materials and products are classified as chemicals or hazardous chemicals and, as such, are subject to numerous regulations and controls governing their handling and storage; and the Company’s tanker and carrier fleet is subject to technical approvals and certification requirements.
Certain regulatory schemes affecting Neste Oil’s operations are described below.
Environmental Regulation
General
The operations of Neste Oil involve the manufacture, use, storage, disposal, transport and sale of materials that may be considered to be contaminants when released into the environment. In addition, its operations involve emissions into air, soil and water and result in waste products requiring disposal. All of these activities are subject to limits and controls designed to prevent environmental hazards. In the event that Neste Oil’s operations result in the unlawful or impermissible release of contaminants into the environment, the Company may be required to pursue certain remedial and compensatory actions. In addition, the Company could be subject to criminal sanctions if the release was deemed to be intentional or due to gross-negligence. Certain areas of environmental regulation affecting the Company are described in more detail below.
To monitor and improve the environmental performance of its operations, Neste Oil has in place environmental management systems that are certified in accordance with the ISO 14001 (environmental management), OHSAS 18001 (safety management) and ISO 9001 (quality) standards at several of Neste Oil’s sites. Specifically, the Company has implemented environmental management systems complying with the ISO 14001 standard at nine sites, including both the Porvoo and Naantali refineries and across its shipping fleet. Prior to the completion of the Offering, environmental regulatory compliance reports have been reviewed monthly and an annual environmental regulatory compliance summary published in a separate report. As an independent company, Neste Oil intends to implement a similar environmental regulatory compliance review. Any significant and material findings of such review will be published as a part of Neste Oil’s annual report. In addition, Neste Oil is planning to carry out periodical compliance audits at its sites to verify the compliance data reported by the Company’s operating divisions.
Integrated Pollution Prevention and Control Directive
The Integrated Pollution Prevention and Control Directive (1996/61/EC) (the ‘‘IPPC Directive’’), issued in 1996, requires each EU member state to unify its environmental licensing regime relating to emissions into air, soil and water with the aim of minimizing pollution from various sources. In Finland, the Environmental Protection Act (2000/86), as amended, implementing the IPPC Directive, entered into force on March 1, 2000. The IPPC Directive already applies to new industrial installations and, from October 2007, existing industrial installations will be subject to the requirement to obtain national emissions permits.
Neste Oil has filed applications with the Environmental Permit Authority for Western Finland and the relevant regional environment centers to renew its environmental permits for the Porvoo and Naantali refineries and the Company’s terminals in Finland prior to the end of 2004 as required by the Decree on Environmental Protection (169/2000), as amended, issued in connection with the implementation of the IPPC Directive. In the summer of 2005, the Company intends to file an application for an environmental permit for the new biodiesel production unit to be constructed at the Porvoo refinery. The current
environmental permits for the Company’s refineries and terminals are valid until issuance of the new permits. Typically, even following the implementation of the IPPC, environmental permits will be re-issued every fifth to tenth year.
Emissions Trading
The ‘‘Rio Convention’’ (United Nations Framework Convention on Climate Change, 1992) and the Conferences of Parties to the Rio Convention form the global framework for EU and national climate policies. More specific emissions targets were defined in the Kyoto Protocol of 1997, ratified by the European Union and its member states in 2002. Each Member State has an overall target for its national emissions under the European Union burden sharing agreement associated with the Kyoto Protocol. The Kyoto Protocol came into force in the European Union on February 16, 2005.
Following on from the targets identified in the Kyoto Protocol, the Emissions Trading Directive (2003/87/EC), issued in 2003, establishes a scheme for trading greenhouse gas emissions allowances. The Emissions Trading Directive introduces mandatory trading of carbon dioxide emissions from combustion plants and certain specific industry sectors effective as of January 1, 2005. Oil refineries are included in the mandatory scope of application of the Emissions Trading Scheme of the European Union (the ‘‘ETS’’). At a later stage, but not before 2008, the remaining five climate gases (methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride) are expected to become subject to emissions allowances and trading.
Each EU member state has set limits on greenhouse gas emissions by allocating a specific amount of ‘‘emissions allowances’’ to operators of installations covered by the ETS. In Finland, allowances were allocated and set for an initial three-year period of 2005 to 2007 by a decision of the Finnish Council of State, and compliance with these allowances is monitored by the Finnish Energy Market Authority. Management currently estimates that Neste Oil’s allocated allowance for the 2005 to 2007 period will cover approximately 90 to 95 percent of its aggregate projected emissions during that period. Based upon its current emissions estimates, management believes that the Company may be required to purchase additional emissions allowances in the market place for the year 2007. From 2008 onwards, the impact of the ETS cannot be determined at this stage.
EU Commission MTBE Risk Assessment
Although Neste Oil no longer markets MTBE to the United States, it continues to market it to EU member states. At the end of 2001, the European Commission published its recommendations on the results of its comprehensive risk assessment of MTBE. The Commission concluded that risks for consumers and for human health are not expected, and that risk reduction measures which are already being applied are sufficient. However, the Commission also concluded that there is a need for specific measures to limit the risks to workers and humans exposed to MTBE via the environment, aquatic ecosystem and groundwater. This is based upon, among other things, concerns for the potability of drinking water in respect of taste and odor as a consequence of exposure to MTBE because of leaking underground storage tanks or spillage from the overfilling of storage tanks. The Commission recommended that monitoring programs be implemented for the early detection of groundwater contaminated by MTBE. The Commission urged the EU member states to consider mandatory requirements, especially for service stations located in groundwater recharge areas and called for the European Committee for Standardization to develop harmonized technical standards for the construction and operation of storage tanks. In addition, the Commission recommended that potential past release sites should be investigated and, where necessary, remedied. However, neither the European Union nor Finland has yet enacted legislation to ban or significantly limit the use of MTBE.
Sulphur in Shipping Fuels Directive
On November 20, 2002, the European Commission presented a proposal aimed at reducing emissions of sulphur dioxide of ships by modifying the directive on the sulphur content of marine fuels (1999/32/EC). The key aim of the proposed amendments to the directive is to extend its scope to all petroleum-derived liquid fuels used by ships operating in waters of the EU member states. In particular, the proposal aims to remove existing derogations relating to marine gasoil, introduce a 1.5 percent sulphur limit for marine fuels used by all seagoing vessels in the North Sea, English Channel and Baltic Sea, require ships at berth in the EU harbors to use fuel containing no more than 0.2 percent sulphur and provide for the use of approved abatement technologies as an alternative to sulphur-free fuel. Should the 1.5 percent sulphur limit for marine fuels come into force, management estimates that it would increase the fuel costs of Neste Oil’s shipping fleet by approximately ten percent.
Fuel Quality Regulation
As a result of the Auto Oil I program, which involved the European oil producers and vehicle manufacturers, the Council of the European Union and European Parliament adopted the Fuel Quality Directive (98/70/EC) in 1998. The Fuel Quality Directive lays down detailed specifications for gasoline and diesel fuels, which had to be complied with by January 1, 2000, and a more limited set of stricter specifications, which had to be complied with by 2005. For example, maximum limits are set for aromatics, benzene, oxygenates and sulphur content. As a result of the Fuel Quality Directive, the market for low-emission gasolines and sulphur-free diesel fuels has grown significantly.
As a result of the Auto Oil II program, which followed the Auto Oil I program, the Council of the European Union and the European Parliament adopted Directive (2003/17/EC), on March 3, 2003, amending the specifications provided for in the Fuel Quality Directive by way of a phased reduction of the sulphur content in gasoline and diesel fuels. The directive is aimed at introducing sulphur-free fuels into the market place, by requiring that fuels with maximum sulphur levels of ten ppm are marketed and made available on a balanced geographic basis as from January 1, 2005. Full conversion to such sulphur-free fuels would take place by January 1, 2009, which date is subject to review by the Commission in relation to diesel fuel. The EU member states are obliged to determine sanctions applicable to breaches of the national provisions adopted pursuant to this directive and also to establish a fuel quality monitoring system in accordance with the requirements of the relevant European standard.
The Fuel Quality Directive, amended by Directive (2003/17/EC), has been implemented in Finland by amending the Decision of the Council of the State on the Requirements for the Quality of Gasoline Motor and Diesel Fuel (1271/2000) and the Decision of the Council of the State on the Sulphur Content of Heavy Fuel and Heating oil (766/2000). As from January 1, 2005, the maximum sulphur content of all gasoline and diesel fuels is 50 ppm. The maximum sulphur level of ten ppm will be effective as from January 1, 2009, as required in the Fuel Quality Directive, amended by Directive (2003/71/EC).
The Council of the European Union and the European Parliament adopted Directive (2003/30/EC), on May 8, 2003, on the promotion of the use of biofuels or other renewable fuels for transport. The directive aims at promoting the use of biofuels or other renewable fuels to replace diesel fuel or petrol for transport purposes in each EU member state, with a view to contributing to meeting climate change commitments, environmental-friendly security of supply and promoting renewable energy sources. The EU member states must ensure that a minimum proportion of total supply of biofuels and other renewable fuels is placed on their markets and, to that effect, must set national indicative targets. A reference value for these targets shall be two percent, calculated on the basis of energy content, of all petrol and diesel fuel for transport purposes placed on their markets by December 31, 2005 and 5.75 percent by December 31, 2010.
Pursuant to Directive 2003/30/EC, the EU member states will prepare a report on the promotion of the use of biofuels or other renewable fuels for transport. The Finnish Ministry of Trade and Industry has
prepared a report on the promotion of the use of biofuels or other renewable fuels for transport in Finland. Pursuant to the report prepared by the Finnish Ministry of Trade and Industry, given the current level of the use of biofuels for transportation, the limited possibilities of producing biofuels and the trend to increase the use of bioenergy for heat and power production, Finland’s national indicative target for the minimum proportion of biofuels for the year 2005 is set at 0.1 percent.
Chemicals Registration Regulation
In October 2003, the European Commission issued a legislative proposal for a new regulatory framework for chemicals. Under the proposed new system called REACH (Registration, Evaluation and Authorization of Chemicals), enterprises that manufacture or import more than one ton of chemical substances per year would be required to register such chemical substances in a central database. The aim of the proposed regulation is to improve the protection of human health and the environment while maintaining the competitiveness and enhancing the innovative capability of the EU chemicals industry. Further, REACH would give greater responsibility to industry to manage the risks related to chemicals and to provide safety information on the substances.
The October 2003 proposal is currently subject to considerable discussion and debate, in particular regarding its potential cost impact. As a result, it is currently difficult to estimate the real cost impact that REACH may eventually have on the Company.
Minimum Oil Stocks Regulation
EU legislation provides for an intervention system designed to ensure a minimum level of security of regional oil supply. The legislation provides for the maintenance of minimum oil stocks and for measures to be taken in the event of an oil supply crisis. The current stockholding systems in the European Union are regulated by Directive 68/414/EEC imposing minimum stocks of crude oil and petroleum products (the ‘‘1968 Oil Stock Directive’’). The directive initially required EU member states to maintain oil stocks for each of the main petroleum product categories (gasolines, middle distillates, fuel oils) at a minimum level equivalent to at least 65 days’ consumption. This was increased by a 1972 directive to 90 days. Individual EU member states are left free to organize their own internal stockholding regimes as they see fit.
The 1968 Oil Stock Directive was amended in 1998 by Directive 98/93/EC in order to increase the efficiency, transparency and fairness of stockholding arrangements in the EU member states. The Directive requires the EU member states to ensure that stocks are available and accessible at all times, and that the costs resulting from maintenance of stocks are identified by transparent arrangements allowing the EU member states to make such information available to interested parties. The EU member states are encouraged to set up a stockholding body which would be responsible for holding all or part of the stocks. The required stocks may be maintained in the form of crude oil and intermediate products, as well as in the form of finished products. The EU member states would also be allowed to hold stocks in other EU member states. The EU member states are required to verify the stocks and to establish a system of sanctions to ensure the effective application of the provisions of the directive.
Finland implemented the 1968 Oil Stock Directive on January 1, 1995, through the Finnish Act on Mandatory Stocks for Imported Fuels (1994/1070), as amended. In accordance with the 1968 Oil Stock Directive and the decision of the Finnish Council of State on May 8, 2002, Finland requires importers of crude oil, feedstocks and petroleum products to maintain stocks of such imports equivalent to at least the importing company’s average volume imported over a two-month period, with maintenance of the minimum stock financed by the importing company.
Safety Standards for Oil Tankers Regulation
The European Commission issued various legislative measures at the end of 2000 following the sinking of the Erika oil tanker off the northwest coast of France. One of these measures is
Regulation 417/2002, which aims to reduce the risk of accidental oil pollution in European waters by establishing a scheme for accelerating the phasing in of double-hull or equivalent design requirements for single-hull oil tankers. After the sinking of the Prestige oil tanker off the northwest coast of Spain, Regulation 417/2002 was amended by Regulation 1726/2003, which came into force on October 21, 2003. From that date, single-hull oil tankers may not be used to carry heavy grades of crude oil to or from EU harbors. In addition, the timetable for the phasing-out of such tankers has been accelerated, and oil tankers which are more than 23 years-old were banned from EU harbors. During the gradual phasing-out period, tankers that are 15 or more years-old, of which Neste Oil had four owned tanker vessels in its fleet as of February 28, 2005, must go through exhaustive technical inspections.
MANAGEMENT