Creating Two Leading Nordic Energy Companies
Investor Presentation September 9, 2003 Fundamental Changes in the European Oil Sector
Consolidation and privatisations
New environmental Nordic Region Russian Upstream requirements Asset sales in the Acquisitions of TNK by Nordic region – e.g. BP and Sibneft by Norsk Hydro, Swedish Yukos Major demand shift Shell away from gasoline Murmansk
and fuel oil to Planned new export terminal sulphur-free diesel North Sea
North Sea oil output in Upgrades to meet decline St. Petersburg Area existing and future Primorsk port and demand and fuel pipeline expansion Amsterdam/ Kirishi refinery upgrade specifications Rotterdam/Antwerp
Refinery upgrades (e.g. Decline in North Sea TotalFinaElf and Shell) Mazeiku
oil output and Acquisition and upgrade of Mazeikiu refinery by growing importance Yukos
of Russian crude Germany Balkans Sale of Veba and RWE R&M assets to BP and Expansion of Russian Shell Poland crude export capacity Refinery upgrades (e.g. Privatisations (e.g. Ongoing restructuring of Shell) recent sale of INA to R&M sector MOL)
2 Major Consolidation in the Russian Oil Sector
The Russian majors Russian Industry Position Proven Oil Reserves 2002 production thousand boed MM Barrels are comparable to 1,960 2,000 mboe YukosSibneft the western super 1,800 d LUKoil 1,600 majors in terms of 1,400 ExxonMobil size of their reserves 1,200 BP (incl. 50% TNK-BP) 1,000 RD Shell 800 The Russian majors 600 ChevronTexaco 400 Petrobras are still lagging 200 TNK-BP 0
t t l TotalFinaElf somewhat behind o f f z o s i c e e K a o o n n n N C k k f g u u a a ib T te w L id T S f e Y Surgutneftegas S e N the “supermajors” in tn u rg u 0 5,000 10,000 15,000 20,000 production volumes S
Crude Oil Production Proven Oil & Gas Reserves 2002 thousand bpd MM boe
BP (incl. 50% TNK-BP) ExxonMobil
ExxonMobil RD Shell
RD Shell YukosSibneft
YukosSibneft BP (incl. 50% TNK-BP)
ChevronTexaco LUKoil
TotalFinaElf ChevronTexaco
LUKoil TotalFinaElf
TNK-BP Petrobras
Surgutneftegas Surgutneftegas
Repsol YPF TNK-BP
0 500 1,000 1,500 2,000 2,500 3,000 0 5,000 10,000 15,000 20,000 25,000
3 Overview
Process initiated to list Fortum’s oil business as a separate company on the Helsinki stock exchange
Investment of EUR 0.5 billion to upgrade the Porvoo refinery
The separation and listing will
– Enable Fortum to further increase its focus on its Nordic utility strategy
– Allow Fortum’s oil business to take full advantage of attractive market developments
– Facilitate the upgrade of the Porvoo refinery
4 IPO Allows Both Companies to Take Advantage of Strategic Opportunities
Fortum wants to ensure the availability of sufficient resources to secure the strategic development of both businesses
– Both businesses very capital intensive
The listing of the oil business will enable the new company to best pursue an independent strategy and facilitates the Porvoo upgrade
Following the listing Fortum will increase focus on its core Power & Heat operations in the Nordic region
Î These measures will create two focused and leading Nordic energy companies with strong competitive positions
5 Implementation of the Separation and IPO
Process will start by internal separation of the oil business
– Expected completion by the end of 1H 2004
The new company will include Fortum’s oil refining, marketing, shipping and production assets and operations
Fortum will assess the timing of the IPO based on market conditions, following the internal restructuring,
6 Assets to be Included in the New Company
The three core Fortum businesses of Corporation Fortum’s oil business (refining, marketing and shipping) will be included in the new company Fortum Power Fortum Oil and and Heat Oy Gas Oy Existing employee benefits will remain unchanged following the separation Remains in To New Fortum Group Company
• Fortum Markets • Porvoo and Naantali (electricity customers) refineries • Heat companies • Retail stations • Gas companies Illustrative Financials for IPO Company • Shipping activities including Gasum and • Fortum Markets (oil 2002 Nova Naturgas customers) Net Sales EUR 7.2 Bn • Certain other non-oil • Nynäs JV EBIT EUR 260 MM related • SeverTek JV Number of assets/activities • Certain other oil related Employees 4,300 assets/activities
7 Upgrade Takes Advantage of Well Established Market Trends
Demand for sulphur-free and higher margin diesel is rapidly growing in Europe
Demand for low margin heavy fuel oil is in decline
ÎThe current deficit of diesel is anticipated to grow while surplus of heavy fuel oil is expected to increase
North Sea crude production is in decline
Production of less expensive Russian crude is increasing rapidly
ÎProvides an attractive opportunity to further improve profitability by changing the product mix and crude intake without increasing production capacity
8 Overview of the Porvoo Upgrade
Will allow increased production of sulphur-free diesel from less expensive crude oil
Total refining capacity maintained
Proven and tested technology
Investment of EUR 500 MM
Expected completion by the end of 2006
ÎThe upgrade is a highly attractive investment opportunity
– Increase in refining margin premium by at least USD 1/bbl
– Provides attractive returns on investment using relatively conservative assumptions
9 Creation of Fortum Was An Important Step
Fortum Share Price Performance Euro (rebased to Fortum’s share price) The creation of Fortum in 1997 was a necessary step and a right 18.0 decision at the time 12.0 8,0 The merger of IVO and Neste Fortum created a strong company with 7,5 +36% sufficient resources to advance 7,0 the restructuring of both the oil 6,5 and utility businesses and the HEX Nordic expansion 6,0 +10% 5,5 – These measures have been 5,0 very successful 4,5 The creation of Fortum made it Utilities 4,0 possible to reach the current Index -28%(1) situation which allows Fortum to 3,5 take advantage of new market 3,0 opportunities in both the utility 1998 1999 2000 2001 2002 2003 and refining & marketing Notes 1. MSCI Europe Utilities index industries
10 The Group Has Changed Significantly Since the Merger of Neste and IVO
Fortum has sold IVO at the End of 1997 euro 4.2 billion worth of assets IVO since the end of 1997
During the same time, Fortum has Finnish Swedish Enermet IVO’s Engineering acquired new Power & Heat Power & Heat (electricity international assets worth operations operations measurement operations operations) approximately euro 7.9 billion
Neste at the End of 1997
Neste
Refining Marketing Shipping Oil E&P Chemicals Borealis Gasum (50%) 75%Æ 25%
11 Summary Conclusions
The separation and listing will
– Enable Fortum to further increase its focus on its Nordic utility strategy
– Allow Fortum’s oil business to take full advantage of attractive market developments
– Facilitate the upgrade of the Porvoo refinery
ÎThese measures will create two focused and leading Nordic energy companies with strong competitive positions
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