Fortum Corporation

views updated

Fortum Corporation

Snellmaninkatu 13
Post Office Box 1
00048 Helsinki
Finland
358 10 4511
Fax: 358 10 4532 770
Web site: http://www.fortum.com

Public Company (75.5 Percent Owned by the Finnish Government)
Incorporated: 1998 as IVO-Neste Group Ltd.
Employees: 19,003
Sales: Fmk 50.50 billion (US$9.90 billion) (1998)
Stock Exchanges: Helsinki
NAIC: 211111 Crude Petroleum & Natural Gas Extraction; 23331 Manufacturing & Industrial Building Construction; 325199 All Other Basic Organic Chemical Manufacturing; 32552 Adhesive Manufacturing; 32411 Petroleum Refineries; 221111 Hydroelectric Power Generation; 221113 Nuclear Electric Power Generation; 22121 Natural Gas Distribution; 48621 Pipeline Transportation of Natural Gas; 42271 Petroleum Bulk Stations & Terminals; 44711 Gasoline Stations with Convenience Store; 54133 Engineering Services; 56121 Facilities Support Services

Fortum Corporation is an international energy group formed from the 1998 merger of two state-owned Finnish firms: Neste Oy, the nation’s main oil and gas corporation, and Imatran Voima Oy, the state power company. Fortum has two primary subsidiaries: Fortum Oil and Gas Oy, which is involved in oil and gas exploration and production, petroleum refining and marketing, and the transmission, sale, and distribution of natural gas; and Fortum Power and Heat Oy, which generates, sells, transmits, and distributes power and heat, through the ownership and administration of hydroelectric, nuclear, and other power plants, as well as steam and heating plants. Other subsidiaries are involved in the operation and maintenance of power plants; in the design and construction of power plants, power transmission systems, and other power-related facilities; and in the production and marketing of chemicals, principally adhesive resins and industrial coatings. Though Fortum is a publicly traded company, the government of Finland maintains a 75.5 percent stake in the company.

Beginnings of Neste

In Finland there was never any form of nationalization of existing private industry as occurred in many countries after World War II. State ownership was considered to be a viable way of introducing a new industry in which no interest had been shown by existing companies in the sector.

Before World War II, Finland had no oil refineries. The country was one of the few in Europe that imported all its oil and petroleum products from abroad. When World War II broke out in 1939, Finland was not prepared to cope with the problems that ensued. In September 1939, petrol rationing started in Finland. Fuel and lubricant oils were placed under the control of a special agency called PVa, from the Finnish words for fuel oil storage, under the guidance of the Ministry of Defense. The new agency was led by Colonel Väinö Vartiainen, who was later to play an important part in the early days of Neste. Dr. Albert Sundgren, Finland’s only petrochemicals expert, was on the staff of PVa. Earlier he had advocated the establishment of an oil refinery in Finland.

The agency planned to store its fuel oil and lubricant supplies in caves in the granite rocks of Tupavuori, in the township of Naantali on Finland’s southwestern coast. A company was to be created to execute the plan.

The storage caves in Naantali were named NKV, from the Finnish words for Naantali Central Storage. After the end of the war, work to complete the caves went on. Responsibility for the NKV project was transferred from the Ministry of Defense to the Ministry of Trade and Industry in June 1947. NKV became a limited company, Neste Oy, and its first general meeting was held on January 2,1948. The state of Finland was registered as a shareholder with 207 shares, Oy Alkoholiliike Ab, the stateowned alcohol monopoly with 140 shares; and Imatran Voima, the state-owned power company, with three shares.

In the articles of association of the company, it was stated that its purpose was to own and rent storage for liquid fuels and lubricants, and to act as importer, transporter, and manufacturer of these products, as well as trading in them. The beginnings of Neste (Finnish for “liquid”) were not very auspicious. In the spring of 1948, Neste purchased an old tanker of 8,896 pennyweight (dwt) from Norway. The ship was a financial disaster. The caves also gave the company problems, when in July 1949 a dangerous fire broke out. The company was in financial difficulties. An agreement between Neste and the government was signed in October 1950, whereby Neste returned some of the less suitable storage space to the state for a remuneration of Fmk 150 million.

Adding Oil Refining in the 1950s

Uolevi Raade, director in the early 1950s of the Department of Industry within the Ministry of Trade and Industry, had become aware of Sundgren’s plans for an oil refinery. Raade perceived that a major plan of national importance was waiting for his imagination and will power, and he accepted the challenge. The fortunes of Neste began to change.

Finland had traditionally relied on the services rendered by the major oil companies. They had a strong influence upon Finland’s Department of Trade. They tried to make the refinery plans look unfavorable. Raade, however, was known for getting his way. He convinced the minister of trade and industry, Penna Tervo, of the importance of a national refinery. When the plan was brought to the government for the first time in 1951, however, it was not accepted. Raade had to start anew. He finally managed in 1954 to convince Dr. Urho Kekkonen, the influential politician and future president of Finland, of the importance of a national oil refinery. On December 17, 1954, the Finnish parliament authorized Neste to start building an oil refinery with 700,000 tons crude oil capacity.

Raade was named president of Neste on March 1, 1955. Vartiainen remained chairman of the board of directors, and was succeeded by Raade in 1959. Raade nominated Mikko Tanner as technical director. Raade had become aware that Tanner was an excellent engineer when constructing the fertilizer plants of Typpi Oy in Oulu. The managing director up to this time, Eino Erho, was to continue as commercial director of the company. An area near the cave storage reservoirs was selected as the future site of the refinery. The harbor conditions at Tupavuori were considered to be excellent.

The planning of the refinery was entrusted to the U.S. firm The Lummus Company, a specialist in the field. The delivery of plant and equipment was entrusted jointly to the French company Compagnie de Five-Lille and Germany’s Mannesmann. The civil engineering was carried out by Neste itself.

Construction work started at Tupavuori in Naantali in October 1955, and the inauguration of the refinery was held on June 5, 1958. The start-up of production in August 1957 had already shown that no technical problems existed. The guaranteed capacity of 700,000 tons was reached by the beginning of October, and soon it was apparent that the new refinery could reach a capacity of up to 1.2 million tons of crude oil per year.

Neste had planned to refine crude oil from many sources, half of the supply coming from the Soviet Union, and half from Western suppliers. As the company had no intention of forming a retail delivery system of its own, the marketing of products was based on cooperation with oil companies already operating in Finland. The most important of these were Shell, Esso, and Gulf. Shell and Gulf delivered crude oil of their own to be refined by Neste. All prices were tied to international market rates.

Entering Petrochemicals in the 1960s and 1970s

Raade kept up with market requirements. Neste’s strategy was to deliver all the motor petrol Finland needed and adjust the production of other derivatives of crude oil accordingly. Thus the company chose a technology that gave maximum petrol output. The bilateral trade between the Soviet Union and Finland guaranteed that increased imports from the Soviet Union would mean new possibilities for exporting Finnish products. In 1960 Neste decided to double the capacity of the Naantali refinery. When the extension was completed and production started in September 1962, a capacity of 2.5 million tons of crude oil was reached.

Raade, however, already had new plans. In November 1962 he presented to his supervisory board a plan to construct a second refinery. He also proposed to purchase the Sköldvik Manor, with an area of 628 hectares near the town of Porvoo, east of Helsinki, as the location of the new refinery. The site had good access to deep waters. This rural area was to be changed into a huge heavy chemical industrial complex within a short time. Later the “green (environmental) movement” became active in opposing Neste as responsible for the change.

Company Perspectives:

Fortum wants to be the preferred supplier of innovative, versatile energy products and services. To achieve this, we need the trust of customers, employees and society.

In 1963, however, when Lummus and Neste engineers were making plans for the new refinery, the plans received favorable publicity. Finland was living in a climate of industrial growth and was optimistic about the future expansion of technology. The plan to create a new refinery, with capacity equal to that of the enlarged Naantali refinery, was approved in June 1963. Soon Raade demanded that the construction be accelerated. Some of the suppliers had timing problems, and the start-up in spring 1966 was delayed by nearly a year. This did not stop Raade from ordering extensions to the new refinery to be built for start-up in 1968, doubling the refinery’s capacity. This new extension started production three months before the planned start-up date. Neste regained some of the reputation it had lost as a result of the earlier delays. Uolevi Raade shared the visions of Sundgren regarding the future of petrochemicals and made careful plans for the realization of his dreams. At the inauguration of the first refinery in Naantali, it was stated in public that petrochemicals were closely associated with the refinery business, and that they would eventually come into Neste’s domain. In 1959 Raade had taken Sundgren and two members of his board to Italy to study the activities of ENI and Montecatini. When presenting to the supervisory board his plans for the building of the oil refinery in Sköldvik, Raade told his audience that Neste would continue its development by entering the petrochemicals sector after 1967. Neste started detailed planning for this event, again with Lummus. In 1968 the plan was ready for presentation. The first stage included a plant for producing ethylene. This unit would form an integrated part of the oil refinery in Sköldvik. The second stage would be a plant for producing polyethylene and poly vinylchloride (PVC). This production would be carried out by a separate company, formed by Neste and its principal customers. Both units were planned to start production in 1972. In March 1969, a company named Pekema Oy was formed to realize the latter plan. Pekema had eight shareholders, all well-known Finnish industrial companies. Neste was the largest shareholder with 44 percent of the shares. The plant for the company was erected in the vicinity of the Sköldvik refinery. Production started at the beginning of 1972, at the same time as the start of production at Neste’s ethylene unit. The company worked for a few years in close cooperation with Neste, but in 1979 the production facilities of Pekema were transferred to Neste and integrated into the company.

At the beginning of the 1970s four industrial companies, one of them Neste, formed a company, Stymer Oy, to produce polystyrene, another basic material for the plastics industry. The facilities of this company were also erected in the vicinity of the Sköldvik refinery. In 1981 this facility too was integrated into Neste. Neste also purchased other outside units that were tied to the refinery and making other chemicals for the plastics industry. Neste was now the dominant petrochemicals producer in Finland.

Few industrial projects in Finland received as much publicity as Neste’s plans for a third refinery. Neste had calculated that new refinery capacity would be needed in 1976. After careful study, the company proposed to build another refinery in Lappohja near Hanko. These plans were presented to the supervisory board in October 1970. Helsinki University, whose biological station in Lappohja was considered internationally to be important for the study of wildlife in the Baltic, reacted violently against the plan. A large media debate ensued. “Green values” had become important and politicians were no longer easily converted to Raade’s plans. The government assigned an area in Pyhámaa on the Gulf of Bothnia for the planned new refinery. Plans were altered accordingly.

Some doubts still lingered in top political circles. The prime minister, Dr. Mauno Koivisto, told his cabinet that the question should be reconsidered. Against Raade’s opinion but with the consent of Tanner, it was decided that new capacity should be added onto the existing refinery.

The final decision was to double the capacity of Sköldvik, later more frequently called the Porvoo refinery, after the town where it is located. As Finland has no oil or gas resources of its own, the small amount of natural gas it required had been provided by imports, mainly from Denmark. But Finnish industry was interested in gas supply on a large scale, such as was found in many countries. The Soviet Union was interested in extending its network of natural gas pipes as far as the border of Finland and in signing a long-term delivery contract. Because of the bilateral trade, Finnish industry was continually looking for new import items from the Soviet Union in order to promote its own exports. In 1971 Finland signed an agreement with the Soviet Union for deliveries of natural gas to Finland. In the same year, Neste became involved in this project. A network for the distribution of natural gas was established by Neste and delivery contracts were drawn up with industrial customers. Gradually the network was enlarged.

Neste had decided in the 1940s that the crude oil should be imported mainly by ships owned by the company. The size of the ships altered according to changing shipping needs. Soviet oil was first imported from Black Sea ports, and later from Baltic ports. Crude oil was also imported from the Persian Gulf. In the early 1970s the Neste fleet had a capacity of over 300,000 pennyweight. After acquiring two supertankers of 260,000 pennyweight each, Neste’s fleet consisted in the mid-1980s of 18 tankers, plus five tugs. At the beginning of the 1990s Neste had 19 ships, totalling 419,000 pennyweight. The supertankers had been sold. As a new technical solution, a push barge system was introduced for transporting bitumen.

Neste made a considerable investment in its research facilities. At first, its efforts were mostly directed towards improving the quality of its products. After gaining experience in operating its refineries, Neste was able to develop a variety of products in cooperation with customers without having to modify its plant. The Neste research center was already aiming at an early stage to prepare the company for future investments in petrochemicals. Research into new applications of petrochemicals in wood-based industries produced Neswood, a plastic-impregnated wood, which was employed as flooring at Helsinki Airport.

Eventually Neste Research Center developed into a multiple division for improving technology. When the corporate organization was changed in 1981 to consist of business units with individual responsibilities for results, this included the research and development activities. The technology group included all technical research and development activities within the company. The main activities were research into oil, catalysts, energy, engine performance, bitumen, combustion, and lubrication. Neste Engineering was a separate entity, mainly responsible for planning and directing new projects within the company.

Neste was intended to be an oil refiner, but from the start it was also intended to enter the petrochemicals sector. This happened exactly as Raade had predicted. After starting production of ethylene and after the absorption of the Pekama and Stymer joint ventures into Neste as fully owned operations, Neste added other petrochemicals to its range. The benzine unit opened in 1979. In 1981 the production of many industrial chemicals, such as phenol and acetone, began.

Failed 1980s Diversifications

In 1981 Neste set up a coal trading division. It was soon found, however, that this line of business did not suit the company. In 1985 the coal business was sold to a Finnish coal merchant.

In the same way as in the coal business, Neste planned to enter another area of energy production, and bought Pakkasakku Oy, a company making lead accumulator batteries. The battery market did not, however, fare well in the years leading up to 1990, when half of the shares of Neste Battery Ltd. were sold to the Spanish Grupo Tudor.

Neste still planned to be active in the energy sector on a broad scale. The company had a unit, Neste Advanced Power Systems, which studied applications of solar and wind energy as well as electric vehicle projects. These activities were centered on projects in Scandinavia, the United Kingdom, Greece, and Kenya. Uolevi Raade retired from his position as CEO and chairman of Neste in 1979 at the age of 68. His successor was Jaakko Ihamuotila, until then managing director of Valmet Oy. He kept to the strategy established by his predecessor. Even though initial steps to diversify the company’s activities had not been successful, the main part of the strategy, strengthening Neste’s position in chemicals, had been achieved by the late 1980s. For 20 years Neste’s chemicals division had been the fastest-growing division in Neste. Comprising six business groups, the division produced a wide range of major plastics at sites in Finland, Sweden, Belgium, Portugal, France, and the United States. The petrochemical plants at the Porvoo production complex, together with an ethylene cracker at Sines in Portugal, played a central role in Neste’s chemical activities, producing ethylene, propylene, benzene, cumene, phenol, and acetone.

For Neste the international trading of crude oil and petroleum products developed into an important line of business. With offices from Espoo in Finland to London, Houston, Tokyo, and Singapore, the corporation had a network that put it among the foremost international oil traders. The composite materials group, based on reinforced plastics products and semifinished goods, included sports and leisure goods as well as products for electronics manufacturers and components for the aerospace, automotive, and paper machine industries.

Privatization and Merger in the 1990s

With the breakdown of the Soviet economy and the termination of bilateral trade between the Soviet Union and Finland, Neste entered a new era in the early 1990s. The company had been planning for just such eventualities for some time. Neste had begun reducing its dependence on Russian crude as far back as 1972, when it joined a consortium of Canadian, Swedish, and U.K. companies in a North Sea exploration venture. Other exploration and development ventures followed, all of them in partnership with other oil companies, in the Middle East and North America. In Oman, Neste had a one-third interest in a field, through a partnership with Occidental Petroleum Corp. Neste had entered the U.S. market in 1985, through a 50-50 joint venture with Weeks Exploration Co. of Houston. By the early 1990s its main U.S. producing areas were in east Texas, off the shore of Galveston, Texas, and in Mississippi. By this time, it was quite evident that Neste was no longer dependent on Russian crude. In 1990 the company failed to receive about two million metric tons of crude oil supplies it had contracted from the Soviet Union. Neste had no difficulty making up the shortfall, as its international oil trading operations were dealing more than three times the amount of crude needed by the company’s two refineries.

Neste had entered the service station market in the 1980s through the acquisition of three Finnish petroleum marketing companies. In the early 1990s Neste expanded further into petroleum retailing. In early 1992 Neste increased its ownership of Finnoil Oy from 50 percent to 95 percent, thereby increasing the number of service stations it controlled in Finland to about 900. Neste also established a growing network of service stations in the Baltic states, Poland, Germany, and in the St. Petersburg, Russia, area. St. Petersburg was a particularly attractive market because of its metro area population of eight million people, larger than the five million in all of Finland.

In a prelude to the company’s privatization and eventual merger with Imatran Voima, Neste made a series of significant restructuring moves in the mid-1990s. In early 1994 Neste and Sweden’s Statoil AS formed a 50-50 joint venture combining the bulk of the two firm’s petrochemical and plastics operations. The new entity, Borealis A/S, was headquartered in Copenhagen and instantly became Europe’s largest and the world’s fifth largest producer of polyolefins, one of the top-selling plastics in the world. In May 1994 Neste and Russia’s Gazprom, the world leader in proven natural gas reserves, set up a joint venture called Gasum Oy, with Neste holding a 75 percent stake and Gazprom 25 percent. Gasum gained responsibility for the pipeline that delivered natural gas from Russia to Finland, and for Neste’s natural gas supply grid in Finland. Around this same time, Neste altered its divisional structure. The company previously had five divisions: oil, exploration and development, chemicals, gas, and shipping. Following the restructuring it had seven, with the oil division being divided into three new divisions: oil refining, marketing companies, and international trading and supply. As a result of the creation of Borealis, the chemicals division was left with two main areas of focus: adhesive resins and industrial coatings.

Through these moves that refocused Neste on its core oil and energy operations and that reduced its workforce from 12,000 to 8,000, the company improved its balance sheet and profitability, making a partial privatization more likely to succeed. In late 1995, 8.9 million shares of Neste stock were sold through an initial public offering on the Helsinki exchange. The Finnish state was left with an 83.2 percent stake by the end of 1996. In January 1997 Neste and Gazprom formed another joint venture, North Transgas Oy, this one of the 50-50 variety and slated to build a new pipeline that would take natural gas from Russian through Finland then on to the continental European market.

In late 1997 the Finnish government announced plans to merge Neste and Imatran Voima to form an enlarged energy group that would be better able to compete in the rapidly deregulating European power industry. Imatran Voima Oy (IVO) was founded by the Finnish government in 1932 in the town of Imatran, where it built a 100-megawatt hydropower plant (the firm’s name translates as “Imatran’s water power”). In its early decades IVO concentrated on building and operating hydroelectric power plants and power transmission systems in Finland. IVO expanded further in the 1960s, building the largest coal-fired power plant in the Nordic countries to that time, and constructing power transmission links between Finland and the Soviet Union and between Finland and Sweden. In 1965 the company began electrifying the Finnish railway system. IVO entered the nuclear power generation sector in the 1970s, and began selling district heat in 1982. During the 1980s IVO began developing combined heat and power (CHP) plants and expanded overseas in the area of the design and construction of power plants. In the early 1990s IVO launched a new unit dedicated to operating and maintaining power plants on a contractual basis.

Like Neste, IVO had expanded eastward in the 1990s, for example entering into power plant construction projects in St. Petersburg; Eilenburg, Germany; Jawaorzno, Poland; and Chvaletice, Czech Republic. It had built or had plans to build nuclear power plants in Russia and China. In addition, it had operating and maintenance contracts in Malaysia, Thailand, Tanzania, and Indonesia. The 1990s were also marked by the deregulation of the Swedish electricity market, and IVO expanded its operations in that country through a series of acquisitions commencing in 1996. By the time of the proposed merger of IVO and Neste, the still state-owned IVO was the main power company for Finland, and the second largest power firm in the Nordic market, with 13 percent of the overall electricity sales. In addition to its core energy operations, which included energy generation and the supply and distribution of power and heat, IVO’s other activities included the operation and maintenance of power plants, the design and construction of power plants and transmission systems, and the manufacture of energy measurement equipment and systems. IVO had revenues of Fmk 13.8 billion (US$2.5 billion) in 1997, a considerably smaller figure than the Fmk 45.7 billion (US$8.2 billion) of Neste. But IVO was much more profitable, posting 1997 operating profits of Fmk 2.59 billion (US$466 million), compared to Neste’s Fmk 1.62 billion (US$291 million).

Despite the doubts raised by some analysts as to the wisdom of combining two companies that appeared to have little synergy, the Finnish government pressed ahead, believing that it would be easier to privatize the combined group. In any case, in mid-1998 Fortum Corporation emerged as a new holding company for the combined operations of Neste and IVO (the new company was initially known as IVO-Neste Group Ltd.). In December of that year stock in Fortum began trading on the Helsinki exchange through an initial public offering, with Neste’s shareholders also becoming shareholders in Fortum. At year-end 1998, the Finnish government held a 75.5 percent stake. In early 1999 Neste became known as Fortum Oil and Gas Oy, while Imatran Voima’s name was changed to Fortum Power and Heat Oy. The operation and maintenance division of IVO was renamed Fortum Service Oy, while IVO’s engineering operations became known as Fortum Engineering Oy. Neste’s chemical unit was incorporated as Neste Chemicals Oy. The names Neste and IVO also continued as brand names, most publicly in the form of Neste service stations.

The European Commission approved of the creation of Fortum, with a single condition—that the holding in Gasum that it inherited from Neste be reduced. In May 1999 Fortum reduced its stake to 25 percent by selling 50 percent of its shares to several entities, with 24 percent going to the Finnish state and 20 percent to Germany’s Ruhrgas Energie Beteilgungs-AG. A number of other deals in 1998 and 1999 further transfigured the nascent Fortum group. With the chemicals area identified as noncore, Fortum sold its 50 percent interest in Borealis. The following month, Gullspáng Kraft AB, a Swedish subsidiary inherited from IVO, was merged with Stockholm Energi AB to form Birka Energi AG, which was 50 percent owned each by Fortum and the City of Stockholm. Birka Energi, operating exclusively in Sweden, was a seller of electricity and heat, and owner and operator of power and heating plants, electricity distribution networks, and district heating and cooling networks.

In June 1999 Fortum and Statoil entered into an agreement to form a joint venture that would combine all the Neste and Statoil retail and direct sales operations and oil terminals in Estonia, Latvia, Lithuania, Poland, and Russia—making the venture the market leader in the region, with 285 service stations and four oil terminals. The venture would not include the Neste stations in Finland nor the Statoil outlets in Norway, Sweden, and Denmark. In July 1999 Fortum sold Enermet Oy, the maker of energy measurement equipment and systems that had been part of IVO, to a private equity fund, then acquired a 30 percent stake in a newly formed holding company, Enermet Group Oy. This move focused Fortum further on its core energy businesses, and was likely to be followed by the sale of Neste Chemicals, which would complete Fortum’s exit from the petrochemicals area. On the addition side, Fortum in September 1999 announced that it would acquire Elektrizitatswerk Wesertal GmbH for DM 760 million (Fmk 2.3 billion). Wesertal had been the second largest regional energy utility owned by German municipalities and was purchased from four German administrative districts. Wesertal was primarily involved in the distribution and supply of electricity and gas, but also offered heat, waste disposal, and public transport services.

Principal Subsidiaries

Fortum Oil and Gas Oy; Fortum Power and Heat Oy; Fortum Service Oy; Fortum Engineering Oy; Neste Chemicals Oy.

Principal Operating Units

OIL AND GAS: Oil Retail-Finland; Refining and Wholesale; Base Oils; E&P; Natural Gas; LPGas Trade and Supply; LPGas Distribution; Energy House. POWER AND HEAT: Power Portfolio Management; Power Generation Assets and Operations; Distribution; CHP and Heat Generation and Distribution; P&H, British Isles; P&H, Central Europe; P&H R&D. OPERATION AND MAINTENANCE: O&M Finland; O&M Scandinavia; Maintenance; O&M International. ENGINEERING: Power Plant Engineering; Oil, Gas and Chemicals Engineering; Transmission Engineering. OTHER: Chemicals.