Finanical director Jaanis Sepp told ERR, the current situation at VKG is difficult after the oil producing countries OPEC and Russia launched a price war causing a sharp drop in world oil prices.
VKG has concluded hedging agreements for such situations and this helps to avoid making sudden snap decisions in the current situation, but these plans will not work indefinitely.
Sepp said: “We have been forward-thinking enough to insure about half of our production volumes against such price drops through futures transactions. Nevertheless, it hurts us. If the decline continues or stays in the markets for a longer period of time, we will be forced to think about closing down less efficient units.” He said this would mean redundancies.
Sepp explained that the hedging elements ensure that the company has sufficient cash flow to cover its costs but does not cover losses.
“Production becomes unprofitable when costs outweigh revenues, and it has not yet happened. If oil prices fall by another twenty percent, we will be able to make production unprofitable,” he said.
Brend crude oil futures fell Monday night to US$33.96 a barrel. According to Sepp, the critical range for them is $25 to $30 a barrel, if the price falls below that, they will have to make decisions about which production units to continue and which ones to close.
VKG currently has about 1,700 employees. The company also produces heat and electricity.
“Such decisions are not made overnight. If it is clear that the price will stay [low] for such a long time, then decisions have to be made. Closures have not been discussed because it is only the first day. It will probably take weeks before (closure and redundancy) decisions can be made”, said Sepp.
Sepp said the company’s financial position is now “solid” because in recent years enough buffers have been created to survive such difficult situations. “The picture is getting clearer by the day, but the market is constantly changing.”
Sepp said it is hoped that the major oil producers will make up their minds because the price war is not beneficial to anyone.
VKG intends to get through the price drop by itself and does not intend to ask the state for support. “At the moment, I think we can handle this situation ourselves and do not expect state aid,” Sepp said.
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