Kavilesh Gupta sees that biofuel is a viable option for Finland’s future, but acknowledges it will not solve the problem once global demand for oil outweighs supply.
WHILE the world grapples with overpopulation and its subsequent drain on resources, oil continues its dominance in people’s everyday lives. But what happens when the oil dries up? How to implement strategies that offer viable alternatives? How economical is each option?
Grappling with this issue is Indian Kavilesh Gupta. Having arrived in Finland nine years ago, recently he took a detour from his day job as a seasoned IT specialist and commenced studying the oil industry. Before long he graduated in global oil & gas management, strategy and finance, “the most capital intensive industry in the world”.
However, this latest was in a long line of successes for Gupta. Currently working for Atos and having worked for Tieto, he was the first non-Finn ever to grace the cover of a business magazine, when he appeared on the cover of Fakta in July 2010.
But, it’s oil that has his attention these days, in particular biofuels, and the positive potential for the alternative to oil in Finland.
With the blooming Finnish spring outside contrasting with the dust and bustle of his hometown Delhi, the conversation begins with the country he left behind 14 years ago, following his business pursuits to the US, the UK and then here to northern Europe.
You are very passionate about your home country, India. What brought you to Finland in the first place?
I was working for a Tata Consultancy Services (TCS) in India. They first sent me to the US for three years back in 2000, and from there I was sent to the UK. I did not like it there, so I asked my boss for a transfer and he suggested Finland. I said yes, and then immediately went to have a look on the map where exactly Finland was. My wife and daughter said it is too far, but we said we would try.
I liked it, my wife liked it and my daughter loves it. We are settled and have our own home. My wife and daughter, even though they are of Indian origin, they both hold a Finnish passport. I still hold an Indian passport.
What aspects of the culture have you embraced here, making it easier to settle down?
It wasn’t really easy, but it’s not that tough either. The best thing is that the acceptability is good overall. That is the good part of being here. There are certain things that are different. No doubt about it. This happens in every society. If I had my way I would definitely make Finns more risk averse; they should be more willing to take risks compared to other nationalities. American’s are ready to go for a project if they have 80 per cent surety. Swedes will go at 90 per cent. But Finns want 99 per cent. By the time you reach 99 per cent the world has already tried it, and you have to go for version two.
The second thing is that this country needs to be more on the marketing side. For instance, a neighbouring country like Sweden has marketed itself so well. Finland has many great things, but telling their good stuff to the outside world is absent.
I like living here, I like the country’s people and infrastructure; people are simple and have yet created one of the most developed nations in the world. When it comes to the long winter, I’m fine with -27 degrees Centigrade, as you can put another jacket. The national infrastructure is equipped for that sort of thing. But, it’s too long: six months of going through that grind. I wish winter could be a little shorter. There are three types of weather in Finland. One is very cold, another is biting cold, the third one is devilishly cold. You have a choice on a platter – take your pick.
During your time here in Finland you have developed your understanding of the oil industry. What interests you so much you about oil?
It’s not something that will keep coming. It is finite. It is something that mankind will need, at least for the next few decades. While there are theories that the US has found so much shale oil that now they can become a net exporter instead of a net importer, I believe that the demand of oil in China and India will be so high, that shale oil will not be able to take care of it. The growth in demand there is going to be greater than the supply growth here. This commodity will always be in demand.
The countries that have oil have the way forward. Otherwise you are depending on someone. For instance, in India, 30 per cent of India’s import bill is oil. Imagine if they didn’t import oil, and that 30 per cent runs into many, many billions of euros that can be put elsewhere. India is country where there is little oil production. Locally, in Norway, they have so much exploration and production capability. They were lucky to find oil in the ‘60s and this changed the face of the nation. They are one of the largest sweet crude oil producing countries; the economy is built on oil. This doesn’t apply to Finland or Sweden. Even Denmark does not produce all its oil. That helps in the national wealth creation. It’s not here in Finland.
Therefore, countries are now getting in the act of finding alternate fuels. When you find alternate fuels, you have to find a reason why someone should use it: it’s green, less carbon emission, global climate change, etc. But, on the other hand, I feel you should talk about growing the economy as well. This is the reason I feel that when going forward, oil is going to be the key to the economy. It has always been. Many wars have been fought because of oil. Whether someone acknowledges it or not is a different issue.
Date and place of birth: 31 March 1968, Delhi.
Which wars are you referring to?
The saying is that for the Iraq war, there could be some reason related to oil. Look at Libya, one of the wealthiest nations in terms of oil. Just yesterday I was reading that because of the Libya tragedy, oil production stopped as there was a glut in the African market. Now that Libya is getting back on track, the market is looking better. Look at Venezuela. They have too much oil. They have the world’s largest reserves of bitumen: a highly viscous form of petroleum that needs more processing. They are enemies of many countries because they have oil. This is the curse of having oil. There are countries like Chad, Cameroon, Angola, which have oil. But these are the countries that are known for the ‘curse of oil’. They are not able to utilise their national wealth for the welfare and development of their own society. Rather, the presence of oil acts as a dampener to their economic growth. The wealth is limited to some people and is not accessible to all. For example, with Norway, they utilised their oil wealth for the development of the nation.
Are we running out of oil?
There is a concept called peak oil. It means the point at which the highest petroleum production level of oil is reached and after which rate of global oil production will enter a terminal decline Whether that point has been reached or not, it’s not yet known. Some people say it has already been reached. This is one of the basic theories which says the amount of oil is finite. The second theory is that the quality of available oil is declining, meaning the new oil being discovered is more heavy and sour. The quality of oil is measured in terms of what we call sweet/sour and light/heavy crude oil. We need a lot more processing power in the refineries if the crude oil is heavy and sour. Companies will have to invest.
The whole oil economy is linked to the big companies like Shell, ExxonMobil, Chevron Texaco and BP that are really investing in the finding of oil. Over the past five years these countries have put in excess of 100 billion dollars to discovering oil. When you find oil, it’s not just important that you find it, but it is more important that you find it and extract it at today’s price. For example, at today’s price oil is 106 dollars per barrel. But if you find oil and the resources required for its extraction and production shoot the price up to 130 dollars per barrel, who’s going to buy it? You need to produce oil at today’s price, at a price that people will buy it.
The shale oil presence and concept in the US was known even in the 1960s. Everybody knew there was oil in shale, but there was no technology at the time to extract the oil. These technologies, like horizontal drilling and hydraulic fracturing become available now, so that we have oil available at today’s price. In the 1960s there was no way to extract that oil. The whole point is that yeah, there could be oil, but how can you get it at the right price?
You can also talk about biofuels, but will there come a time where every car will be using only biofuel? I don’t think so.
Why is that?
You must understand when you put biofuel into a car from a gas station, it’s not 100 per cent biofuel. Something like 10 per cent of biofuel is mixed-in regular diesel, in order to reduce the carbon emission and increase the octane power of the fuel. You never have 100 per cent biofuel. While it is a great lead to some economic activities, there’s currently not a lot of investment opportunities with biofuel. It is nice to have, but it may take a few years to pick up.
The legislators in Finland should push for biofuel. Unless there is a will from the government to create a biofuel roadmap that says we have to be using a certain percentage of biofuel by a particular year, it will not pick up on its own. When you go fill up your gas tank, tell me, do you go to a gas station that sells biofuel, or do you even care about it? Would you especially drive to find that biofuel?
I don’t have a car, but if I did I would go by price.
So, in terms of biofuels, what will bring the price down and make it more competitive in future?
Biofuel is not even aiming to be in the lower price segment. It is aiming at the segment where the consumer says that he or she is contributing towards lower carbon emission. Biofuel advocates are talking about the bigger picture: ‘let us contribute towards a greener environment.’
But are these steps towards generating a profit…
The companies that have adopted biofuels as their strategy are taking steps towards generating a differentiation. If you see the oil industry, you play with two kinds of strategy normally. Either you say ‘my product is the cheapest’, or you say ‘my product is different’, and you charge a premium. Either you play on price or you play on differentiation.
In the oil industry there is no differentiation in the final product like gasoline and diesel, which goes to the consumers. That is the reason why if you look at the financial statements of all refineries, they all focus on and are measured by investors and analysts on a metric called return on capital employed (ROCE). The strategy is how do you ensure that your operating costs come down. The big companies are constantly investing in technology to bring down the cost. But for biofuel, it is not just the lower production cost which is the attraction. Companies are working on biofuel as an alternative fuel and to create something that is good and green for the environment. Neste Oil, which is world’s largest renewable diesel producing refinery, also had its NEXBTL renewable diesel, based on the company’s own technology, named the most groundbreaking Finnish business innovation of the new millennium in a survey by the financial magazine, Talouselämä.
There are companies that have adopted biofuel as their core growth strategy. UPM is opening the first biorefining plant in the world in Lappeenranta in the summer. The company that makes paper has decided to get into energy, biorefining. They are now investing close to 150 million euros and are doing it because their core industry produces the raw material that will be used as the input here. Instead of crude oil, the feed stock here is the waste of living things. They are using it to create a differentiation, saying that here is an alternative fuel. But can that take care of the world’s global energy needs? Not necessarily so. There is no definite answer to this question right now.
Currently, there’s a lot of scepticism surrounding the whole concept of alternate fuel sources to fossil fuels. How probable is being able to replace something like oil with an alternate fuel source? At the moment it appears the technology is underdeveloped and insignificant compared to the planet’s consumption of oil.
85 per cent of our energy demand comes from fossil fuels. What does that fossil fuel mean? Coal and oil. The remaining 15 per cent is nuclear energy, hydro energy, wind power, things like that. Still the world is 85 per cent dependant on fossil fuels. It is not so easy or not such a quick process to develop technologies that can become an alternative to the 85 per cent. In 50 years we’ve only been able to create 15 per cent of energy that isn’t fossil fuels. Therefore, getting rid of fossil fuels is not something that is foreseeable in the near future. Maybe 50 years down the line there is something else, but not now, no way.
The whole planet’s population has been raised on the production of oil. It is responsible for so many things we take for granted.
Exactly, we don’t even realise how much is created by oil.
Let’s say tomorrow it ran out and there was no more oil, or the oil became a scarce fuel source, there would be lots of things such as certain foods and medicine missing that people rely on.
The fear that oil can become a scarce commodity is already changing the behaviour of people. The oil price is rising. For example, in late ‘60s it was something near 3-4 dollars a barrel. Unthinkable. It was cheaper than milk today. In July 2008 it was 147 dollars a barrel.
In countries like India and China it is not the price of oil that is a barrier to using oil, but it is the price of an automobile. In India, the Tata group came out with a car called Nano. At the time it was introduced it cost 2,000 dollars. Nowhere in the world was there a real car with four wheels that runs well and you can put a family of four into it. Now maybe it costs 2,500 dollars. Tata group got the innovation award of the year for introducing the car. People are ready to fill up their gas tank in these countries, but the availability of the car is the barrier. Because of the rise in the oil price, the changes and innovations of lifestyle are taking place. You are already seeing it in the US; those SUVs that used to guzzle gasoline have gone down in demand. Even Americans now look for efficient cars, as price is important.
Consumption is growing in the developing areas of the world. This will outweigh the production on the other side. That is the crux of the whole theory. This will happen some day. If you look at countries that depend too much on oil like Saudi Arabia, now they have started using their own oil to produce electricity, which they were not always doing. The biggest producers of oil are also becoming consumers of oil. Which means there is more and more demand that is rising. But ask them if they are using biofuel to produce it – no way. They can’t, they don’t have alternative energy.
There’s a lot of controversy regarding whether the predicted amount of oil resources left on the planet are accurate. You’ve got large sources of oil, where the oil makers, like in Saudi Arabia, are actually looking to offshore drilling, which is less cost effective and less efficient. Then there’s all the trouble of trying to drill in the Arctic, which seems even less thought out. Beforehand these options were swept aside as being too expensive, yet more and more people are looking to them now. It makes one think that scarcity is more of an issue than these companies let on. Is it being hidden away, and are the figures accurate? Or is it too difficult to quantify at this stage?
Firstly, Arctic drilling has stopped. They pumped billions of dollars into it and decided to stop. Secondly, if you are an investor and you want to invest in a refinery, what’s the first financial metric you look at? It’s the return on capital employed (ROCE). Is the refinery utilising its capital in the right way and getting an acceptable return on it? For an upstream oil company which is into the exploration and production of oil, how does an investor read its financial statement, to figure out should I put my dollar here or not?
One important metric that upstream oil companies show, and on which their market capitalisation depends, is the proved oil reserves. Every upstream oil and gas company announces every year what is their oil reserve and what is their daily production, which can translate into annual production, hence their total reserve life. If they don’t find new oil reserves, their total available reserve life reduces. Every year they have to show that the proved oil reserve is more. The oil reserve is measured as 1P, 2P and 3P. 1P is the proved oil reserve the company has. It is proven that there is a 90 per cent or more certainty of production.
2P means the company has proven and probable oil reserves which cannot be reported to investors as the probability of production is about 50 per cent. Then there is 3P, where it is proved plus probable plus possible, and the recovery factor is less than 10 per cent. But 2P and 3P are not counted. They are not part of a company’s wealth. Each company is trying to find and secure more and more proven reserves. That is the reason why the quest to go to offshore drilling. It’s a very heavy investment. That’s why small countries like Finland are not into it. For a country like Finland with a 193-billion-euro GDP, it may not be wise to invest in oil exploration. These giant international oil companies understand that they need to have an ever-increasing amount of oil reserves. The moment they say their proven oil reserves have gone down, you can see the share prices going down dramatically. Immediately. Investors will not go in for it.
So, biofuel then becomes an option for countries like Finland if they are not investing in finding crude oil.
It is an option. The logical reasons for Finland could be lowering carbon emissions and cleaner traffic. Countries such as Finland have a very clean environment, compared with other countries. If you go to Delhi, after four days you will start coughing, or maybe even on the very first day. But here, it is clean and they want to maintain it. That is what’s happening. They are talking about sustainability. When you are talking about sustainability one element is a clean environment. This currently does not apply as much to China and India. They are not following it as stringently. That is the biggest challenge. There are zones in China and India where huge manufacturing takes place. Nobody talks about a cleaner environment out there; they talk about the final product. If everybody starts thinking in these terms then it’s fine, it’s a level playing field. But currently not everybody is thinking like that. Finland making biofuels, selling it in Finland and Europe – yeah, it’s great, you can do that. But is it something that’s going to be sustainable in future? That cannot be decided by Finland alone, it has to be a concerted effort by the EU. Finland has to push the EU to work out a biofuel roadmap. This will definitely help Finland because it has the lead. As of now there is no other biorefining plant in the world except for the one UPM will soon go into production with. Opening UPM’s biorefinery in summer this year will be brilliant. It definitely will put Finland on the global map for very positive reasons.
Text James O’Sullivan, images Tomas Whitehouse.