VKG headed towards hefty yearly loss

Photo: Tairo Lutter

Since spring no longer CEO of Estonian Railways due to private use of company fuel card, Ahti Asmann sits at helm of a leading private-capital-based chemical industry enterprise Viru Keemia Grupp (VKG).

Kütusehindade madalseisu tõttu esimest korda kahjumisse langenud Ida-Virumaa suurimaid tööandjaid kavatseb siiski lähiajal kõik olulised töökohad säilitada, sest kokkuhoiu nimel tehtav vallandamine tooks kaasa ettevõtte sulgemise. Eesti Raudtee asjadest ei soovinud Asmann rääkida.

-I noticed that after leaving Estonian Railways and assuming the post at VKG, you body language is altered. While at the railway company you were walking on thin ice, now your steps are forceful and energetic.

Can’t say about the body language. There’s some similarities to these companies, as both are very capital intensive, decisions need to be taken a long while ahead. Therefore, both are somewhat vulnerable to rapidly altering environment.

-Both operate on falling markets.

Well, talking about VKG it’s a volatile market. Oil price, the sales indicator for our production, is volatile. The oil price we cannot affect, but we are attempting to fix for us the shale oil price futures so as to ensure stability of cash flow.

-Rivals at Eesti Energia think the time of volatility is over and for a long time we must keep living with the low oil price. What predicts VKG?

There are those who say the price may fall, but there are those who say it may rise. We must be ready for the prices to remain at current levels, but we must also be in readiness for falls in times to come.

-Estonian oil shale industry is characterised by being composed or four companies and by two determining the development: Eesti Energia and VKG.

The bad effect of the situation is that while on political level they are talking about supporting the sector, then it is easy for the critics to ask why should we support two companies.

-Both Eesti Energia and VKG recently saw CEOs go whose activities were characterised by whirlwind investments and forceful public presentations. How do you intend to act in the new situation?   

What VKG was doing up to now was no science-fiction at all, but vitally needed development. The investments volume was ballooned by environmental requirements – like the sulphur traps. With our investments we have arrived where we control the entire production from start to finish. Past investments are now helping us to live with the low oil price.

-With oil plant Petroter III opened this Wednesday, will you be entering into an era where large investments are not planned?

The simple answer is yes, as we have no money left over for investments. The fast growth phase is over, and we are focussing on further effectiveness of the operations. Meanwhile, without investments we cannot boost the income; however, with enhanced effectiveness, we can have better profitability.  

-These past years, VKG turnover has shown nice development. What will the results be like this year?

Though 2015 is not over yet, it can be said we will end with nearly seven million euros in the red. I would not be predicting the turnover right now.

We are planning no new bid business directions, nor large investments. The money that we are making will mainly go to pay bank loans. While our yearly depreciation is about €50–55m, we are only making investments for half of that. Short-term we can afford that, but long-term investments would have to be in equal volume with depreciation. As the new Petroter are just completed, the need for running investments is somewhat smaller at the moment.

-As me and photographer parked before your main building, four or five men in prime of life were rather idly raking fallen leaves into a large excavator bucket. Will the hard times mean that, next year, an old lady with a blower will get the job done?

I do like that with the media, when they draw these far-reaching conclusions out of nothing. We cannot apply overly large changes as we need to ensure the entire production process 24 hours from mining to producing the steam. Naturally, it is our aim to reduce costs, but for the rank-and-file worker it means that someplace they do have some idle time, then we remove the costs thereof. At the moment, no large lay-offs have been planned.

-What will happen with the wages?

In 2014, the average gross income for employees was €1,390. Due to the global oil price crisis, this year begun with large-scale lay-offs for us, and the staff that remained had shorter working week and salary cuts. The pre-cuts wages were restored at the beginning of second quarter. We are concentrating at keeping the wages at current level.

-Won’t Kohtla-Järve city government have to worry about income tax revenue shrinking?

Well they have to, indeed. We have over 2,100 on our payroll. In oil shale sector, there are three aspects: environmental protection, financial, and the socio-economic. Talking about the tax policy, in our case it has thus far rather been sought to get extra money from us for the state coffers with added taxes. A telling example of underestimating the financial and socio-economic effect is the closure of the Nitrofert plant leading to nearly 400 people losing their jobs. That has had an obviously negative effect on the state, the region, and the people who lost the jobs, and their families.

-For how long can VKG take the loss?

If oil price stays the same, the next vital variable is state’s tax policy. We have been seeking to have part of our taxes to be tied to oil price. That way we could survive the hard times, and in the good times the state could earn more and get a fairer price out of the energy from mineral resources.  

-When a few years ago industrialists were telling the environmental ministry that oil price may suddenly drop, they laughed them to scorn. But as the oil price dropped by half, the mirth seemed to continue. How does the state see it now?

As a company, we see that the understanding of the state changes too slowly for the sector. Communicating with the state, we feel that the environmental protection aspects dominate over the financial and socio-economic ones. But, honestly, no-one could foresee such a steep drop of oil price. For that very reason, the state must make the tax systems more flexible.

-Is the oil shale development plan just «travelling on» like nothing changed?

We find not much fault with the development plan, except for the fact that it has been written with price levels belonging to distant past. That price level will create a deceptive feeling that there are no problems in oil shale industry at all. As prescribed by the schedule set by the state, a tax rise is on its way which will lead to shrinking of investments short-term, and the industry fading away long-term.

-In case of a good scenario, what would be you next steps in investments?

We have shelved the establishing of cement factory and refinery. The current macroeconomic environment allows no new risks.  

-How do you explain that at Eesti Energia, formerly in sharp rivalry with VKG, they are currently gentle and even cooperative towards VKG?

Tough times bring people together. With the entire oil shale sector stressed out, makes no sense to waste resources nagging among ourselves.

VKG

Counts itself as descendant of First Estonian Oil Shale Industry (Esimene Eesti Põlevkivitööstus) established in 1924.

This year, the enterprise with a staff of 2,200 invested €70m. Over ten years, €800m have been placed in production and environmental development.

Financial results in millions of euros:

Year                2014    2013    2012

Turnover         195      213      216

Profit               16        19        35

Source: VKG