Below is the transcript of a CNBC exclusive interview with Neste President and CEO, Peter Vanacker. The interview will play out in CNBC's latest episode of Managing Asia on 25 October 2019, 5.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan: Peter, thank you so much for talking to me. We know that you spent the last 10 years trying to transform Neste from an oil refining company to one of the world's largest producers of renewable diesel. It's actually the world's largest producer of renewable diesel. What made Neste venture into this business? What was the initial motivation?
Peter Vanacker: If you look back into history, Neste is a company that is there 70 years ago - 70. And in a small country like Finland, you always need to be creative to survive and to be able to compete with the big majors in oil refinery. So, you already had in the company quite a lot of creativity, the innovation of the people. They were always looking for something new. When they saw the environment changing, they took the very bold decision to invest into renewables. Then 10 years ago approximately, the management at that time took a very bold decision to invest in the production of renewable diesel, so diesel made out of waste and residue. They were difficult times of course, because the world was not ready for it. So, things have started to happen now. After four years of very, very difficult times, then renewable diesel did take off. Today, Neste is by far the number one on a global basis. Very proud of that and we have a very large capacity of renewable diesel producing in Singapore, producing in the Netherlands and Rotterdam as well as in Finland in our home base in the site of Porvoo.
Christine: Let's talk about those difficult first few years because like you said, there was no market for renewable diesel. There was no market for renewable products. What kept Neste going?
Vanacker: They were very early at Neste. It was before my time - very early at Neste by saying what is it that drives people? What drives people is a purpose, and they created that purpose, first of all, of "we want to leave..." At that time, it was called "leave". "We want to leave a healthier planet for our children for the next generation." That attracted, of course, also more people to the company who bought into that purpose. So, they tried and started doing everything around that purpose. So, they tried and started doing everything around that purpose. So, every time when it got difficult than in the board room there was discussion around, "Yes, but this is our purpose. Do we believe in it or do we not believe in it?" They asked the employees, they were stakeholders around it. And people said, "No, we believe in it. Let's continue to go for it." And yes, good that they did. So, a lot of stamina, very courageous also to go new ways and not just look at the short term, but really look at a purpose really look at maybe 10, 15, 20 years ahead.
Christine: Today, Neste is the world's largest producer of renewable diesel contributing about 70 percent to the company's profits. Tell us about some of the raw ingredients that go into the making of renewable diesel. What are you talking about?
Vanacker: There are lots of different types of waste and residue that we are collecting across the globe. We are, of course, then the biggest collector across the globe of these types of waste and residue that can be used e.g. cooking oil. So, collecting the cooking oil that has been used in restaurants that cannot be used anymore for food purposes. Collecting all that, aggregating them, purifying them and making sure that they get transported to the main refineries where we produce renewable diesel. Today, we have 14 different types of waste from residues that we are collecting across the world, aggregating it, storing it, purifying it and then, that serves as raw material.
Christine: I understand as more component of feedstock still comes from palm oil which has attracted a lot of scrutiny because it has been linked to deforestation. How do you feel about that, and could the company eventually do away with using palm oil altogether?
Vanacker: Technically speaking, just to come to your last question, we can. We are not dependent on crude palm oil in our refinery, so no specifically in the process technology. Originally, 10 years ago, we started with crude palm oil, and then we have focused all the innovation towards reducing the dependency of crude palm oil, up to the point today that we are not dependent on crude palm anymore. We do believe that sustainably sourced crude palm oil, and we track it back to the plantation, so there is no deforestation involved. But it must be, and I am very explicit on that: it must be sustainably sourced. So, if we see and we have done that in the past that it is not sustainably sourced, it is somehow there is deforestation linked to that, we block the supplier. We don't buy from them anymore. We would do that with the remaining quantity that today we are still buying. So, no deforestation - we are completely against it forestation because of the purpose -- creating a healthier planet for our children.
Christine: But technically, just to be clear, you can actually do without palm oil?
Vanacker: Technically, we can do without palm oil.
Christine: So, compared to traditional fossil fuel, how much can your renewable diesel help cut down carbon footprint? What sort of measurements are we talking about?
Vanacker: First of all, I think it is very important and there is still a little bit of a misunderstanding in certain areas - when we talk about reduction of greenhouse gas emissions or reduction of CO2 emissions, one always needs to look at the lifecycle analysis. So, from the well to the wheels. Not just say, "Okay, I only take my car, and then I look at what is eventually the CO2 emission of my car." We need to also look at what all the raw materials that are being used. So, in batteries for example, we also need to then look at the raw materials from the well, from the mine. So, in terms of well to wheels, based upon the European type of calculations, it is up to 90 percent of lower CO2 emissions. Calculations can differ a little bit from country to country or region to region, but generally speaking, it's somewhere between 80 percent lower and 90 percent lower.
Christine: Your renewable diesel has gained a lot of traction in road transportation - it's very well established in this segment. What kind of demand are we talking about when it comes to road transportation? How fast do you see it growing?
Vanacker: I can imagine that the demand in renewable diesel is quadrupling until 2030. If I go maybe and show the big picture on the globe - there are 900 million tons of diesel being consumed, and that is still growing. Today, in terms of renewable diesel, there are about 5 million tons of renewable diesel.
Christine: You have a lot to catch up on?
Vanacker: There's a lot to catch up, but that also means there is still a lot that can be replaced by a sustainably sourced and produced raw material - renewable diesel in this case - that can lead to greenhouse gas emission reductions.
Christine: So, can your renewable diesel totally replace traditional diesel altogether? Do you see that happening one day?
Vanacker: I think it is going to extremely difficult to completely replace because of course there needs to be quite a lot of investments. We are investing now to expand in Singapore. We are helping to be part of the solution. Last year, for example, we have helped our customers reduce their CO2 emissions by nearly close to 8 million tons. Our aspiration by 2030 is by helping our customers to reduce their CO2 emissions by at least 20 million tons. So, that shows a little bit of the dimensions that we are talking about in terms of growth, in terms of capacity growth that we need to build up in order to achieve that target.
Christine: Your move into aviation is taking a lot longer. I understand about more than 1000 test flights have been conducted. What sort of progress have you made? Do you see the renewable jet fuel market taking off in a big way anytime soon?
Vanacker: Yeah, the renewable jet fuel markets... If I go back a little bit and take the same picture like in the road transportation where it is today 300 million tons of jet fuel that is being consumed every year. That 300 million tons in terms of fuel consumption are expected to grow because of mobility by two to three percent per year. So, if the ICAO which is the Association of the Aviation Industry - they have promised, non-binding but they have promised that they want to grow CO2 emission growth neutral - that means that in the next couple of years, there needs to be that let's say two percent of 300 million ton would need to be compensated one way or the other. We believe that one way is by taking renewable jet fuel because that can lead up to 80-90 percent of lower CO2 emissions.
Christine: How many airlines do you hope to secure by the end of the year?
Vanacker: By the end of the year, I think it' is going to be a one-digit number. We have in total so far around 15 memorandums of understanding, so this is before we have a sales contract that we have signed with airlines and airports across the globe. But in terms of real supply, it's going to be around I would say five six maybe until the end of the year. But we have capacity available so that if an airline wants to buy, then at least it's not because there is no volume available for renewable jet fuel.
Christine: But just to be clear, your renewable jet fuel has to be mixed with traditional jet fuel because of regulations. Do you see that changing anytime soon?
Vanacker: The need is not there to change very soon. I think this will go gradually. Norway is the first country that has set a mandate, so all the planes that are leaving Norway need to have 0.5 percent of jet fuel blended in for sale-based jet fuel. There is discussion ongoing in Sweden. There is discussion ongoing in Finland. Northern part of Europe has always been on the forefront of these kind of regulations, and I'm sure other countries will also follow. But you hear the numbers at 0.5 percent, 1 percent, maybe 2 percent. And until we are at 50 percent, it's going to take a while. So, today, the limitation in terms of regulation is 50 percent blend. But I am sure until we get to that 50 percent that is being used, by then there will be other regulations in place.
Christine: I understand Neste also has plans to get into chemical or polymer recycling. The idea is to turn waste plastics into a raw material that can be either turned into a fuel or consumer plastics. What sort of progress have you made on that front, and how soon before you have something that you can bring to the market?
Vanacker: First of all, when we started on the journey from being a fossil-based refinery moving into being the leader in renewable diesel, we were still talking about renewable energy. But then, we reflected upon that and said, should we not go a little bit broader than just focusing on energy, because at the end, the technology that we have - what are we producing in chemical terms - it is a renewable hydrocarbon. So, hydrocarbons are made out of oil or the raw material for lots of plastics and a lot of chemicals. So, why not then take the renewable hydrocarbon as raw material for plastics and for chemicals?
Christine: You are trying to create that circularity?
Vanacker: Exactly, as a starting point of creating circularity in the material space. So, we enter with renewables, then out of that for example, there is a plastic being produced -polyethylene polypropylene - and then the next step is through a new technology that we are still developing so-called chemical recycling. We are good in recycling, we're good in collecting waste residues because we do that already. So, we take that waste plastic and through chemical recycling, we make a new hydrocarbon out of it, originally made from renewables because that was the raw material we used for it. So, that new renewable hydrocarbon can be used to produce a chemical or a plastic again.
Christine: So this new technology you're developing. How soon will it be ready?
Vanacker: The renewable part of renewable hydrocarbon is ready and has been tested. We did together with the one of the leaders, if not the leader, in polyethylene polypropylene. We did in Germany a first ever world scale trial on the planets to produce polyethylene and polypropylene together and that was extremely successful. There were announcements being made. The material is now being sold in the market. Practically everything has been sold in the marketplace. So, renewable polymers technology is there. So that's not an issue anymore. The chemical recycling part, there is still an issue. I think realistically we need to three to five years until it's going to be really economical, fully available.
Christine: Building this full renewable platform has its tradeoffs because when you look at your renewable diesel, it is actually not cheap. It is three times more expensive than traditional diesel. What is actually going to drive companies and consumers to really make that switch?
Vanacker: But do we believe that oil is going to stay at the level that it was as it is today? It could very well be also that oil is going to move up because there will be a shortage of oil in the future. We have seen oil barrel prices of $140 in the past. So, it's all what do we compare with.
Christine: How high would oil prices have to be for there to be a big pickup in demand when it comes to renewable diesel?
Vanacker: If we are moving towards $80-100 a barrel, then the delta - the difference - I mean between renewable diesel and crude oil-based diesel is so minimal. But I want to also refer to certain mechanisms that are in place that actually if I take California. In California the authorities through the carp association have since a number of years have implemented a so-called LCFS (Low-carbon fuel standard) credit system. That means that who is emitting CO2 needs to buy credits from the companies that are reducing CO2 emissions so that at the end of it, there is no additional penalty let's say for people at the pump because both products are priced at the same level. There is no tax incentive as such. It is a credit system and a debit system that actually lives its own life, so based upon supply and demand.
Christine: So here in Singapore, Neste is already operating the world's largest production plant when it comes to renewable diesel. You're producing something like one point one million tons of capacity per year. You recently made an announcement you spend another 1.4 billion euros into a second plant, taking your total capacity to 4.5 million tons. Are you really betting that all your forays into aviation chemical recycling polymers is going to generally a big tick up, a big demand when it comes to renewable diesel?
Vanacker: We see the regulation also changing and especially Europe. I mean Europe is on the forefront. So, there is a new regulation that has that is being put in place. I mean it has been voted on the European level the so-called RED II (Renewable energy directive) regulation that is now being adopted by the member states. And that sets clear targets, mandates and what needs to be achieved in terms of greenhouse gas emission reductions. The same is also happening in the United States especially California being on the forefront but not just limited to California anymore. Also, some other states are setting clear regulations and enforcing mandates. We see Canada moving also in the same direction. So, due to the regulations, there is the need also for products that or helping to reduce CO2 emissions on the planet. So, based upon that we do foresee that the demand could at least quadruple by 2030. We start developing of course our acid footprint because we need to make sure that not just there is a regulation but there needs to be a solution in how to fulfill the regulation. So, therefore, we need to help our customers as well as the authorities by bringing sufficient capacity on the market. So, first step is as you said 1.4 euros that we are investing to create an additional one point three million tons of capacity. This is a huge undertaking this is not a small plant.
Christine: It's a big bet.
Vanacker: It is a big bet, but it is also a big - technically speaking - a big investment. There will be at the peak of building up the plant, there will be 6000 workers building up the plant. And this is only the people that we don't have at the plant to build up to plant. That doesn't take into consideration yet all the people that are involved in building the equipment. So, I would triple the 6000 - probably 20000 people -- being involved in total in just creating that capacity creating that plant in Singapore.
Christine: Your second plant would be up and running by 2022. So, you're hopeful and you're confident that there will be a big demand pick up by then?
Vanacker: Yes, and we build up optionality as well in the plant. So, this is not a straight forward plant that we are now building up. On one hand side, we will use lower and lower qualities of voice from residues. So that means that in our process of the plant that part of the plant that is treating that waste and residues needs to be much more complex. So, different technologies that we are using to treat the waste and residual before we actually do it into the second part of the plant which is a so-called synthesis part where we produce in the hydrocarbon. In addition to that, we have the optionality that not just the plant produces renewable diesel for road transportation, but it also produces renewable jet fuel which needs to be completely separated from the diesel. It's another quality. You have some additional steps. We also produce the renewable hydrocarbon that can be used as the raw material for polymers and chemicals. So, on one hand side, waste and residues -lower and lower qualities. On the other hand, not just geared towards road transportation with renewable diesel but different markets that we are addressing. So, that means that if one market would not grow as fast then we are sure that the other markets will grow as well. We are also in the business of creating markets. That's what we have been doing 10 years ago with renewable diesel.
Christine: So, you are giving yourself a safety net in a way?
Vanacker: You can call it the safety net. You can also call it... we are building yet Neste as a company which has which is much more versatile and not just focused on renewable energy. Also seeing the development in renewable polymers, renewable materials now polymers and chemicals.
Christine: At the end of the day, all this work that you're doing, how does it square off against Neste's traditional role as an oil refining company?
Vanacker: Yeah, we are working extremely hard to make the existing refinery that of course is still consuming crude oil to make that sustainable. So, what does it mean? That means eventually investing in technology and investing and changing the assets that we have so that we could take for example waste plastic as a raw material to replace crude oil. We could take wastes and residues, other wastes and residues that would replace crude oil. At the first test on that we have, at the beginning of next year so waste plastic that we would take as raw material in one of the smaller refineries that we have in Finland, we replace crude oil.
Christine: Do you ever see Neste getting out of oil refinery, fossil fuel refining altogether. Could that happen one day? Is there a time horizon?
Vanacker: We are working heavily on that purpose yeah. Really the target is can we replace crude oil in our existing refineries, replace it by waste and residues? Definitely if you have waste plastic, there is a lot of waste plastic on the planet. So, with our refinery, no issue with availability as long as the waste plastic is being collected. So physically, it is possible.
Christine: Do you want to?
Vanacker: We want to. Yes of course. We've made that promise that by the end of 2030, we want to use at least 2 million tons of waste and residues, replacing crude oil in our existing refineries. So, one million tons out of that is waste plastic. The other million tons or other waste and residue like the ones that we are using for renewable diesel.
Christine: So, by 2030, could we see Neste move completely out of fossil fuel refining?
Vanacker: I think it would be possible because that alone that promise is not sufficient. If we want to create a healthier planet for our children, then we need to think beyond it, as just a step on the road. Just like 14 years ago when we started our innovation in renewable diesel and then the first plant was being built in Finland, it was the first step on the road. So, I think in steps. But the ultimate target must be that we are independent of crude oil.
Christine: By 2030, it's achievable?
Vanacker: To be independent of crude oil, I would not make that promise.
Christine: You've spent two decades working for a German pharmaceutical giant Bayer, followed by specialty chemicals firm CABB before joining Neste in September last year. I understand it was your daughter who affirmed your role, gave her support getting you to accept the job. What did she say?
Vanacker: Yes. I was telling her I'm going to switch companies, and I'm going to go to Finland to a company called Neste. And as she was 20, 21 years old so as young generation immediately online you checked on Neste and she saw the purpose she saw how the company was presenting as creating reduced reduction of CO2 emissions, the environment creating a healthier planet for the children and then she immediately jumped up and she hugged me actually and she said, "Daddy, now I'm really proud of you because now you have really found the right job. You are doing something I mean for our generation." It really is there and that generation that is now 15, 16, beginning 20s. They really care. So, I was very pleased of course.
Christine: You're 53 years old, Belgian, studied chemical engineering, you specialize in polymers. How would you describe your leadership and management style? What do you like as the CEO?
Vanacker: What I like as CEO in terms of leadership and management is open communication. We are actually all sitting together in an open office and where we have executive committee meetings, we actually stand in the middle of the room where we have almost like in a bar. I would say. You would think it's Google or something like that in the atmosphere. So, that's what I like that people are very approachable. There is this exchange of opinions. Of course, when then a decision has been made that everybody is committed to the decision and then the focus is on the implementation.
Christine: As CEO of Neste, I understand you spend a lot of time talking to European regulators. What are your conversations like? What do you talk about?
Vanacker: What we talk about is actually relatively simple because the regulator wants to understand is there a solution available because what a regulator doesn't want is regulate something and then everybody is saying, "Oh come on, this is theory, it's impossible.
Christine: So really educating them?
Vanacker: I think that is a big part of that -- it is education. But it goes in both ways, as we are discussing then of course the regulator discuss about what it is they want to regulate and in what direction do they look.
Christine: So, there is a few pushing regulators to do more?
Vanacker: By putting regulations in place or taking the current solutions so that we can actually adopt those solutions in today's environment. That's one point. The second point is avoiding that there is a polarization ongoing. Again, the big picture is 900 million tons of diesel consumption in the world. And we should not compare and polarize electrical vehicles against combustion engines for example. That that is not helpful. We need combustion engines. We have the energy density that diesel has which is very high. You need to have the newer engines. With the newer engines with the renewable diesel, you can reduce immediately your CO2 emissions by 90- 95 percent. So, great solution.
Christine: And finally, Neste is now the world's largest producer when it comes to renewable diesel. Now venturing beyond road transportation, into aviation. What impact do you want to make as CEO of Neste? What do you want to achieve for the company?
Vanacker: First of all, what I want to achieve is that people who are, for example, five years in the company. After that five years for people to say, "Oh yes, we made a big difference. We got closer to creating a healthier planet for our children." And then also maybe spontaneously if I think about it - having my children saying, "OK, Daddy, you didn't just join the company but actually you have made a difference and you have taken care of over my generation."
Christine: Peter, thank you so much for talking to me.
Vanacker: You're welcome. Thank you. Thank you.
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