Our dearest stakeholders,
We left behind a year of disappointing growth in global economic activity amid the effects of trade wars, while new refining capacity - amounting to double the growth in demand - came on stream. In addition to the decision by OPEC plus Russia to cut production, the sanctions imposed on countries with a significant share in the world’s crude oil supply, such as Iran and Venezuela, exacted a heavy toll on the profitability of complex refineries.
It was a year marked by continuing global uncertainties, increasing signs of an economic slowdown in both developed and developing countries and downward revisions to forecasts for global growth and demand for oil products, with a global increase of half of its 5-year average in demand for oil. In addition, we underwent a period when the currencies of developing countries were buffeted by further volatility, even though there were no sharp depreciations as in 2018, and when the negative repercussions of cumulative falls in the value of currencies were observed on purchasing power and demand.
The change in crude oil supply slates in 2019 significantly affected profitability in our sector. The decisions by the OPEC+ grouping to cut production and the sanctions imposed against Iran and Venezuela led to a squeeze in supply of medium and heavy crudes. Substantial refinery capacities entered operation during the year, particularly in the Asia region, with these refineries preferring Ural and the Middle East crudes, increasing the costs of medium and heavy crudes, thus eroding the advantage of those refineries able to process heavy crudes.
While global demand for oil products grew by a mere 0.9 million bpd, a total of 2 million bpd of new refining capacity came online, mostly in the Middle East and Asia regions. Due to the loss of momentum in the global economy, the increase in demand, particularly in the medium distillates, fell short of expectations throughout the year. Use of diesel for maritime use remained subdued, even though middle distillate margins, especially for diesel, had been expected to surge, especially in the last quarter, as diesel became the main fuel for shipping instead of High Sulphur fuel oil, the use of which was banned following the IMO’s regulatory change in the last quarter. The reason for this is that major ports such as Singapore planned ahead and procured Very Low Sulphur Fuel Oil (VLSFO). The margins on fuel oil, whose use as a maritime fuel is banned on ships without a scrubber, fell to historical lows, while diesel margins fell well below expectations. In addition, demand for heating diesel and kerosene remaining below sectoral averages due to the mild winter experienced in the northern hemisphere was another factor suppressing medium distillate margins. On the other hand, supplies of light distillate increased as the share of LNG continues to increase in the global charging blend in addition to light crudes and condensate with high gasoline efficiency. The decline in gasoline and light distillate margins that started at the end of 2018, as demand growth fell short of expectations, continued in the first quarter of 2019. Although margins started to improve with the decrease in the charge in FCC units in European and US refineries, annual averages remained below both their averages for last year and the last 5 years. As a result of these factors, the Mediterranean refining margin, which was USD 4.6/barrel in 2018, decreased to USD 1.7/barrel in 2019.
Introduced in May 2018, the sliding scale special consumption tax (SCT) application, which regulates fuel duties on products in order to ensure that pump prices remain constant due to the loss of value and volatility in the Turkish Lira, in addition to the fluctuating course in the crude oil price, remained in place in 2019. Nevertheless, due to the loss of momentum in economic growth, the decline in the consumption of oil products, which began in August 2018, continued throughout the first half of 2019. According to EMRA figures, demand for diesel on an annual basis declined by 0.4% to stand at 24.9 million tons, despite starting to rise with the support of base effect from July. Gasoline consumption stood at 2.4 million tons, increasing by 3.2% while jet fuel consumption grew by 6.5% to reach 5.3 million tons on the back of the improvement in the tourism sector. With all of these developments, total demand for petroleum products in this period increased by 2.2%.
Tüpraş procured 26.8 million tons of crude oil from 8 countries, including Turkey.
Our company procured a total of 26.8 million tons in 15 different crude oil types, including domestic crude oil, from eight countries in a manner to form the most cost-effective charging composition in 2019, when the exemption to the sanctions against procuring crude oil from Iran, which was granted in November 2018, was entirely removed in May 2019. Despite planned maintenance at our Fuel Oil Conversion Facility and other refineries, a total of 29.3 million tons of raw materials were processed in 2019 with optimal capacity utilization. With 28.1 million tons of production, a 79.0% white product yield was achieved. With the support of commercial sales, a total of 29.2 million tons of products were sold in 2019, of which 22.4 million were sold domestically.
We set ourselves apart with our financing management.
While the impacts of the market volatility which occurred in August 2018 extended into the first half of 2019, the mounting uncertainty made it difficult to manage the risks. The volatility in product margins in the last quarter of the year dashed the hopes pinned on the expected recovery in the refinery sector. However, by managing financial risks under a disciplined and dynamic approach, we aimed to keep our company’s operations resistant to negative shocks by maintaining a robust balance sheet structure despite these challenging conditions, and through our effective management of working capital, we generated free cash flow of TL 10.8 billion for the 2019 full year, despite the challenging conditions in the refining industry.
Our investments are the key to sustainable high growth.
At Tüpraş, we see our investments as the key to a sustainable high performance. With this approach, despite the headwinds posed by the challenging investment environment and the crises experienced in 2019, a total of USD 157 million was invested in our refining activities, with our total investments amounting to USD 236 million.
Thanks to our investments to save energy and reduce emissions, we achieved an annual energy saving of 113,106 Gcal and a reduction of 26.3 thousand tons in CO2 emissions at Tüpraş.
Our subsidiary, Ditaş, continues its operations with a total of 14 tankers and a carrying capacity of approximately 703,000 DWT. In 2019, Ditaş installed a flue gas cleaner (scrubber) to comply with the rules of the 2020 International Maritime Organization in its 4 tankers with a total carrying capacity of 346,000 DWT.
Also, Körfez Ulaştırma A.Ş., fully owned by Tüpraş and Turkey’s first private rail operator which entered operation in 2018, carried a total of 1.83 million tons of products by further improving its operations with five new locomotives which it purchased in 2019, as well as its wagon investments. In addition, within the scope of the ongoing investments undertaken Körfez Ulaştırma A.Ş., a contract was signed for the purchase of 7 twin fuel locomotives with state-of-the-art technological features, to be delivered in 2021. The locomotives, to be used for freight transportation services by bringing together both electrical and diesel operating modes on high-incline lines where a strong traction force is needed, will also be Turkey’s first hybrid locomotives.
Aware of the advantages offered by the digital world, as well as being aware that the biggest disadvantage is cyber threats, our company implements global and sector-wide standards in the field of cyber security, as in all areas. By investing in the technologies being developed in this field, our company created a road map and strategy that also aims to achieve the highest level of protection in cyber security as well as in technical safety.
Our London Office successfully continues its activities
While we at Tüpraş continue to focus on our refinery activities, we took concrete strategic steps in 2018 by closely following the possible investment opportunities in domestic and international areas within the scope of our business diversification strategies in the sector. Our office, which was opened at the end of 2018, successfully carried out highly important operations in its first year and demonstrated that it would contribute significantly to Tüpraş’s international commercial operations.
We have become the largest supplier of jet fuel for Istanbul Airport.
As a result of the tender organized by IGA İstanbul Havalimanı Akaryakıt Hizmetleri A.Ş. to cover the Istanbul Airport’s jet fuel needs, Tüpraş won the tender to supply 1.8 million tons of jet fuel annually to the new Istanbul Airport for a duration of 5 years. Tüpraş also contributes to closing our country’s current account deficit, meeting 60% of the annual fuel needs of Istanbul Airport, which is one of the world’s largest airports.
We act with the priority of “My Safety is My Future” in all of our business processes.
By defining risks in all of our operations, we continue our activities in line with the goal of eliminating risks or reducing them to an acceptable level within the framework of national and international standards. In this context, we expect our solution partners, together with all employees, to unwaveringly comply with our “Health, Safety, Environment (HSE) and Process Safety Standards”. In our safe working indicators, where we achieved significant improvements in the past period, our goal is to attain even better results and to reach a position where we will be taken as an example in our sector.
As we always have, going forward we will continue to produce the highest added value for our country, our employees, our business partners, our shareholders and all of our stakeholders.
I would like to thank my colleagues who have contributed to our company with their safe and self-sacrificing efforts despite all the negativities experienced in 2019, and all our stakeholders who gave us strength with their support.
Our dearest stakeholders,