The Gazprom Neft’s Board of Directors approved the Risk Management and Internal Control Policy (PT-0102/14 of 26 March 2020) on 26 March 2020, which defines the goals, objectives and principles of the organisation and operation of the risk management and internal control system, and identifies this system’s participants and components.
The Policy is designed to develop and further improve Gazprom Neft’s risk management and internal control system, increase its reliability and efficiency, and ensure sufficient guarantees of achieving the company’s goals.
Risk management is built around the principle of integrating risk analysis and management tools into all key corporate processes. Responsibility for risk management and risk reporting is determined in accordance with the system of line and functional management. Each risk is assigned an owner responsible for its management. Risk coordinators among managers are identified at the level of each function and its key business process. Their role is to disseminate and support application of corporate risk management principles. Timelines and tasks for risk analysis take into account the specifics and requirements of each business process at the level of which risk management is carried out.
This approach makes it possible to form areas of responsibility for risk management and to monitor risks at all levels of the company management. It also makes possible to develop target plans to respond to significant risks both in every company’s subsidiary and across Gazprom Neft as a whole.
Objectives in risk management:
- developing risk management culture in order to achieve a common understanding of basic principles and approaches to risk management among management and employees;
- developing and deploying a systematic approach to identifying and assessing risks inherent both in the company’s operations as a whole, and in its individual areas of activity;
- stimulating the exchange of information on risks between business units of the company and joint development of actions to manage these;
- presenting systematic information on risks to the company’s management bodies.
To achieve these goals, the company has developed and operates a unified approach to the risk management process.
Risk management is an integral part of Gazprom Neft’s internal environment and includes:
- implementation of a risk-oriented approach to all aspects of production and management activities;
- conducting a systematic analysis of identified risks;
- building a system for risk control and monitoring the effectiveness of risk management activities;
- ensuring that all employees understand the basic principles and approaches to risk management adopted in the company;
- ensuring the necessary regulatory and methodological support; and
- allocation of authority and responsibility for risk management among the company’s business units.
The company continuously expands and updates its methodological framework for risk management, including general recommendations on the quantitative assessment of risks and detailed methodologies to assess the most significant risks.
As at the end of 2020, the risk management system covered all of Gazprom Neft’s significant assets. The newly launched projects or acquired in-operation assets are included in the coverage of the risk management system.
In 2021, the company plans to continue developing regulations and methodology on the analysis of individual significant risks and integrating risk analysis into decision-making processes. There are also plans to expand the company’s training programme for managers and employees on the use of risk management tools and approaches.
1.1. The risk of not achieving strategic goals
The situation in the crude-oil and petroleum-product markets, as well as the external political and regulatory environment, are constantly changing. At the moment, in the company’s opinion, there remains a high probability of unstable dynamics in the crude-oil and petroleum-products market.
The state of the global fuel and energy market depends in the long term on such complex factors as the rate of economic growth, the level of international cooperation, the speed of technology development and the intensity of decarbonisation policy. These factors drive changes in the key parameters of the environment in which the company operates, such as oil prices and oil product consumption volumes, the tax regime, technology accessibility and international development opportunities.
Significant changes in the external environment may affect the relevance of the company’s strategic goals and the ways to achieve these.
The company continuously analyses the external environment and takes into account relevant threats and opportunities in its approach to managing its project portfolio. The company allocates resources among major strategic projects and those projects that provide a quick return on investment, and thus the ongoing sustainability of the company.
To achieve the goals set out in its strategy, the company is transforming its management system. That includes digital, cultural and organisational transformation, which will ensure the necessary flexibility in management and speed of decision-making.
The company sees one of its most important tasks to be the development of an ecosystem of partnerships, which will ensure improvement of key competencies by attracting partners for joint development of scientific, human and intellectual potential across all levels of interaction with business, the state and society.
A focus on flexibility in decision-making, technology development, and improvement of operational efficiency and safety allows the company to demonstrate strong operational results and consistent positive dynamics of its financial and economic indicators, every year.
It is expected that the main contribution to production growth throughout the 2020s will come from new assets already in operation, along with those to be commissioned in the near future. The remaining part of the company’s production portfolio will be formed by entering into new prospecting zones, bringing in unconventional and hard-to-recover reserves, including the Bazhenov formation, the Domanic, Paleozoic and Achimov deposits, monetising liquid hydrocarbon reserves in the Nadym-Pur-Taz region, as well as by developing offshore projects.
The company also intends to realise the potential of emerging market niches by creating innovative products, to continue organic growth in developed petroleum-product markets, and to maintain leadership in terms of its sales-network efficiency in Russia.
2.1. Contractor credit risk
Credit risk is a risk of the group incurring financial loss as a result of a customer or contractor failing to perform their contractual obligations. This risk is mainly associated with the group’s existing receivables from customers and with investment securities.
Trade and other receivables are attributable to a large number of counterparties operating in various industries and geographic locations. Gazprom Neft implements a number of measures to manage credit risk, including the following:
- assessing counterparty creditworthiness;
- setting individual financial limits and payment terms depending on the counterparty’s financial standing;
- control over upfront payments;
- measures for handling problems with accounts receivable by business segment, etc.
2.2. Risks of debt capital financing
Sanctions imposed against Gazprom Neft by the US, EU and a number of other countries have significantly reduced the range of financing instruments available to the company.
The company effectively manages the risk associated with debt capital financing. Despite the sanctions imposed by the United States, the European Union and a number of other countries against Gazprom Neft in 2014, the company fully implemented its 2020 debt financing programme. The company also entered into loan facility agreements with extended drawdown periods, including revolving loans, giving the company’s finance policy additional flexibility and improving efficiency in liquidity management. The company is also looking into alternative sources of financing.
2.3. Foreign exchange risk
The group is exposed to the foreign exchange risk mainly due to borrowings denominated in currencies different from the functional currencies of respective group enterprises, which are primarily the local currencies of the group enterprises. For example, the functional currency for enterprises operating in the Russian Federation is the Russian rouble. The US dollar and euro are the currencies in which the major portion of the above borrowings is denominated.
Assets and liabilities denominated in foreign currencies significantly reduce the foreign exchange risk: the current structure of revenues and liabilities acts as hedge mechanism in which cash flows in different currencies offset each other. The Group applies hedge accounting for its cash flows denominated in foreign currencies to prevent profit-and-loss volatility.
2.4. Interest rate risk
Some borrowings across the group were obtained at floating rates (tied to EURIBOR or the Bank of Russia’s key rate), while other were obtained at fixed rates.
In the event of a decline in interest rates, fixed-rate borrowings may become less effective compared to floating-rate borrowings, and vice-versa. The group maintains a balanced debt portfolio allowing it to minimise risks of negative impacts arising from adverse changes in interest rates. In addition, the group’s treasury conducts periodic analysis of current interest rates in the capital market, on which basis hedging instruments may be employed, if necessary.
3.1. Risks of decline in demand for oil and oil products
The risk management strategy sets out mitigation of this risk’s consequences on the company’s financial stability and involves implementing the following measures:
- optimisation of production programmes and material flows. The company’s high level of modernisation and process flexibility of its refineries, as well as the use of cutting-edge digital systems for integrated planning across the entire value chain, allow it to respond to turbulence in external environment and changes in market demand in a predictive manner, while ensuring at the same time the maximum efficiency in petroleum product mix, timely booking of pipeline throughput capacity and storage volumes of crude oil and finished products, as well as optimum redistribution of commodity flows;
- optimisation of the company’s costs. As part of its response to decline in business activity both in Russia and globally due to the impact of epidemiological factors, the company is implementing the cost optimisation programme, which involves suspending the financing of mass cultural and sporting events, cutting down advertising and sponsorship costs, as well as general, administrative and educational expenses. A well-balanced approach to cost optimisation allows the company to increase the concentration of human and material resources deployed on fulfilling the top-priority tasks to improve the company’s financial stability;
- long-term fixed-volume-and-price contracting. Based on its historical status as a reliable partner, the company enters into fixed-volume and price agreements with key contractors allowing the sharing of risks of macroeconomic volatility, and at the same time guaranteeing contractors long-term cooperation and stable financing of works and services.
3.2. Risks associated with potential changes in the prices of purchased raw materials and services
Gazprom Neft uses the infrastructure of natural monopolies and other market-dominating entities in the course of its business activity, in particular for crude oil and petroleum product transportation and power supply, and it also uses raw materials and services purchased from a wide range of suppliers. The company has no control over the infrastructure of such natural monopolies and other entities dominant in their markets, their tariffs, under which payments to such entities are effected, and the pricing policies of suppliers of raw materials and services.
The company implements a number of measures to reduce the impact of such risks:
- long-term planning of commodity flows, timely booking of crude oil and petroleum product pipeline capacities and the necessary railway rolling stock;
- optimal redistribution of commodity flows by type of transport;
- use of alternative and own power-generating capacities;
- long-term contracting on fixed-volume and price terms for the entire duration of contracts;
- application of transparent formulas for price revision under long-term contracts for services that are highly sensitive to market fluctuations.
These measures make it possible to reduce to an acceptable level risks associated with the use of services and the purchasing of goods from monopoly suppliers and ensure uninterrupted operations of the company.
3.3. Risks associated with possible changes in prices for oil and petroleum products, gas and products of gas refining
The company’s financial results are directly linked to prices for crude oil and petroleum products. The group is unable to fully control prices for its products, which depend on fluctuations in the global and domestic supply-and-demand balance in oil and petroleum products, as well on the actions of regulators.
The company has a strategic and business planning system involving the scenario-based approach, which assesses key performance indicators under a wide range of external conditions, including crude oil and petroleum product prices. This approach makes it possible to respond to changes in market conditions, including by way of reducing or postponing investment programmes and other mechanisms.
These measures make it possible to reduce the risk to an acceptable level.
3.4. Risks relating to industry competition
In the Russian oil and gas industry there is competition between the leading oil and gas companies in the main areas of production and economic activities, including:
- acquisitions of subsoil licenses for hydrocarbon production through auctions/bidding rounds organised by state agencies;
- acquisitions of other companies holding subsoil licenses for hydrocarbon production or owning existing assets related to hydrocarbon production;
- engaging leading independent service companies;
- procurement of high-tech equipment;
- recruiting the best experienced and qualified specialists;
- accessing transport infrastructure;
- acquisitions of existing and construction of new assets/facilities, which lead to the increase in sales to end-customers.
In addition, there is competition from suppliers of energy sources that are alternatives to oil and gas, including coal, nuclear, and renewable energy.
Implementing a portfolio of strategic projects aimed at the ongoing development of Gazprom Neft’s key business areas, ensures the company’s gradual strengthening of its position in the oil and gas industry, while maintaining the risks associated with industry competition at an acceptable level.
3.5. Risks relating to possible changes in the economic environment
The Russian economy remains responsive to global market prices for crude oil, natural gas and other commodities. Negative price trends for oil and petroleum products on the global market and the slowdown of the global and Russian economies may have an adverse effect on the company’s business, curbing revenues and commodity market volumes, as well as increasing the cost of financial and other resources.
In order to reduce the negative impact of this risk on the company’s performance, work is undertaken to preserve the balance between domestic and export sales, crude oil production and refining, as well as to maintain the focus on expanding premium sales channels and increasing sales volumes outside Russia.
Gazprom Neft’s subsidiaries also contribute to the national economy as major taxpayers and take part in major infrastructure projects and projects of high social impact. The company continuously enhances its production facilities and works towards improving operational efficiency, including through implementing investment projects, upgrading and modernising its plants and equipment.
4.1. Risks associated with conducting geological exploration
A key strategic objective for the company is to increase its hydrocarbon resource base in terms of quantity and quality in order to ensure the necessary level of production which, in turn, largely depends on the success of exploration activities.
The main risks associated with exploration activities include the failure to confirm planned levels of hydrocarbon reserves and evident deterioration in quality of the resource base. An important task for the company is to carry out exploration works in various geographical regions, including areas with challenging climatic conditions and environmental constraints, which often leads to the risk of increased underlying cost levels. Risk estimates are dependent on a number of variables and assumptions, including:
- the relationship of the historical productivity level of the producing region and productivity in other regions with comparable characteristics;
- interpretation of geological exploration data; and
- the impact of requirements of state agencies and legislation.
Gazprom Neft has significant experience in conducting geological exploration and applying state-of-the-art geological and geophysical methods of hydrocarbon prospecting and exploration, as well as introducing advanced technologies in drilling and field development, including under challenging climatic conditions, which results in a lower probability of such risks occurring. The company has engaged an auditor, DeGolyer and MacNaughton, to conduct an independent audit of reserves estimated by Gazprom Neft’s subsidiaries.
The company actively interacts with government agencies at federal and local levels on issues of sustainable subsoil use.
4.2. Licensing risks
The company carries out its activities in the field of subsoil use on the basis of special permits such as licenses for the right to use subsoil plots, which determine the designated purpose (type of subsoil use), spatial boundaries, term and mandatory conditions of subsoil use. The current legislation of the Russian Federation provides for administrative liability for unlicensed use of a subsoil area and, in some cases, there may be risk of criminal liability.
In case of early termination of subsoil use right, the company may incur both reputational risks and material losses related to the costs of the acquisition of the subsoil use right, investments made in the development of the subsoil area and decrease in capitalisation due to the loss of a resource base.
One of the main tools for managing this risk is the automated software suite «The Subsoil Use Monitoring System» implemented in the company. This includes a risk matrix on the material conditions of subsoil use, which allows us to assess the current status of risks based on matrix indicators and plan for an acceptable level of risks in the future.
The status of current and potential licensing risks, as well as the implementation of planned mitigation measures, are reviewed every quarter at meetings of standing regional licensing commissions in subsidiaries.
Responsibility for maintaining subsoil licenses is placed on general directors of the company’s subsidiaries.
4.3. Project risks
The company continually develops and implements investment projects designed to achieve its strategic goals, in particular, to increase hydrocarbon extraction volumes and improve the quality of its products. In the course of project implementation, the company faces various risks, the realisation of which may lead to failure in meeting deadlines and/or increased project costs. The main reasons for such risks are incorrect planning, violation of project terms and conditions, and safety requirements by contractors, as well as the emergence of new circumstances (increase in materials’ prices, errors in assessing the state of infrastructure and changes of equipment suppliers).
The company manages these risks by paying considerable attention to the stage of design and approval of investment projects. In 2014, a risk management system was introduced into the process of preparing and implementing major projects.
This system is based on the approach generally accepted in the global industry of identifying the value of a project by applying the Stage-Gate process with assessment of project risks at each project stage. Contractor requirements are formed on the basis of risk assessment, as well as taking into account applicable legislation of a country in which the project is implemented. Furthermore, the company has implemented a project monitoring system.
4.4. Human resources risks
The company’s business is predicated on highly-qualified key personnel, to which end the insufficient number of qualified workers, particularly in the engineering and technology areas, may give rise to understaffing risks. The company’s success depends to a large extent on the efforts and abilities of key employees, including qualified technical personnel, as well as the company’s ability to recruit and retain such personnel. Recruitment competition in Russia and abroad may worsen due to the limited number of qualified specialists in the labour market. The inability to attract new qualified personnel and (or) retain existing qualified personnel may adversely affect the company’s attractiveness as employer. The demand and associated costs for qualified employees is expected to continue to grow, reflecting significant interest in them from other industries and public projects.
The company offers safe workplaces and competitive salaries, participation in large-scale projects and interesting professional tasks, and provides employee training based on specially created programmes.
In addition, the company also improves recruitment procedures and implements initiatives aimed at reducing employee turnover and stimulating self-development of personnel.
4.5. Health, safety and environment (HSE) risks
Risks associated with infringement of industrial, workplace safety and environmental legislation, as well as risks of accidents (fatalities and health-related workplace incidents, fires/explosions/accidents, incidents with federal-level environmental impact) are associated with the possible suspension of operations at facilities and revocation of licenses.
In the area of HSE, the company strives to achieve its strategic “Target Zero” meaning zero harm to people, the environment, or property in the company’s operations. In addition, pursuant to Gazprom Neft’s development strategy to 2030, the company aims to become a global industry benchmark in terms of technology and safety.
Key focus areas here include:
- organisation of safe production based on the analysis, management and minimisation of production risks;
- reduction of work-related injuries, occupational diseases, accidents and negative impact on the environment;
- consistent implementation of the world’s best practices in the field of industrial safety.
The company is fully aware of its responsibility to society for preserving the environment. It monitors its activities to ensure compliance with applicable requirements and standards, and implements initiatives in the area of industrial and workplace safety.
The philosophy behind industrial safety risk management is predicated on a risk-oriented approach and the principle of integrating the mitigation of industrial safety risks throughout the company’s key business processes.
The company implements the Safety Framework project to manage key occupational safety risks, under which 31 scenarios of possible negative consequences and guaranteed implementation of risk mitigation measures (‘barrier setting’) have been identified.
As part of implementing the risk-oriented approach, the company focuses on the following solutions:
- basic barrier - to place barriers in the way of priority risks throughout the company’s assets and guarantee their reliability;
- competence barrier - to ensure that only competent personnel have been cleared to work;
- digital barrier management - eliminating the human factor where reasonable.
The company implements environmental protection measures, including the use of technologies to minimise adverse environmental impact. This work has resulted in a significant reduction in the likelihood of environmental emissions risks.
4.6. Risks relating to information technology, automation and telecommunications
Development of the company’s business is inextricably linked with the increasing dependence of business processes on the quality of information technology, and means of automation and telecommunications (ITAT) employed.
Development of ITAT is currently one of key factors in increasing the company’s competitiveness and efficiency. That positive effect notwithstanding, it is also associated with a number of uncertainties and related risks (ITAT risks).
The factors giving rise to ITAT risks are various in nature and relate to the management of ITAT activities, the functioning of IT systems (primarily production and payment ones) and to the projects to further develop these. There is a further risk of being unable to purchase and use foreign software and equipment due to sanctions and other restrictions.
Gazprom Neft PJSC being a major high-tech company pays special attention to managing ITAT risks, acknowledges their existence and strives to manage them on a systemic basis.
The company’s goal in ITAT risk management is to increase the ability to effectively achieve business objectives by predicting the impact of ITAT risk factors and ensuring maximum effectiveness of measures to manage ITAT risk.
This goal is achieved through introducing a single and cohesive approach to the identification and assessment of ITAT risks, creating the culture of ITAT risk management, encouraging information exchange between company’s business units and joint implementation of measures in ITAT risk management.
The company constantly monitors and scrutinises both known and emerging ITAT risks. The Department for Information Technology, Automation and Telecommunications is responsible for developing regulations governing the ITAT risk management processes, and implements a number of measures designed to minimise the impact of such risks, including:
- ensuring the identification, analysis, assessment and acknowledgement of ITAT risks;
- ensuring an optimum strategy for responding to and implementing measures to manage ITAT risks; and
- ensuring ongoing monitoring of ITAT risks, as well as control over the implementation of measures in ITAT risk management.
5.1. Risks associated with the possible spread of COVID-19 to company employees or contractors
The company has established a response office, chaired by Gazprom Neft’s CEO, which is the company’s central coordinating body for managing the “Pandemic” risk. That office, together with offices across divisions and subsidiaries, performs overall coordination of activities in three areas: «Antivirus», «Operational Reliability», and «Financial Stability».
The management of this risk is carried out by selecting, implementing and monitoring, at the company-wide level, safety barriers designed to prevent and minimise the consequences of possible undesirable events relating to the spread of the pandemic among company employees and contractors.
6.1. Risks associated with the EU and US further strengthening sanctions
Since 2014, the US (taking into account the adopted changes in the US sanctions regime in 2017 and 2018), countries of the European Union and a number of other countries have imposed sanctions on the Russian energy sector and a number of Russian companies in other industries.
The strengthening of the sanctions regime may have a negative impact on the overall situation in the industry and may also have a specific impact on the company’s emerging projects and the ability of its counterparties to fulfil their obligations.
These sanctions have had a minor impact on Gazprom Neft’s business and financial standing. As a response measure, the company is implementing a dedicated import substitution programme for services and equipment. The company has no reason to believe that any new sanctions will specifically target it, even though these may have a selective impact on the company’s emerging projects.
Based on the assessment of the impact of sanctions, the company management believes they have no impact on the consolidated financial statements.
6.2. Political risks
The current political situation in Russia is stable, which is characterised by the stability of the federal and regional branches of government. Gazprom Neft PJSC is registered as a taxpayer in St Petersburg, which is the second largest city of the Russian Federation and the administrative centre of the North-West Federal District, with significant natural resource potential, highly developed industry, and an extensive transport network.
Gazprom Neft has subsidiaries in the Central, North-West, Urals, Volga, Siberian, and Far-Eastern federal districts.
Overall, the company assesses the political situation in the country as stable and believes that no risks of negative changes can be currently anticipated.
6.3. Corruption risks
As the company actively enters new international markets, risks of exposure to US and UK anti-corruption laws are increasing.
Gazprom Neft implements a Corruption Risk Management Strategy on an ongoing basis. The company has approved its Anti-Fraud and Anti-Corruption Policy. In addition to which, all subsidiaries across the Gazprom Neft Group have been given recommendations for adoption of similar regulations. Familiarisation and compliance with provisions of that Policy is mandatory for all Gazprom Neft employees. In order to train employees on key provisions of the Anti-Corruption Policy and the Corporate Code, Gazprom Neft has developed interactive training courses, which all current and newly hired employees are required to complete. To control corruption risks when dealing with external counterparties, standard anti-corruption clauses were developed and approved by order of Gazprom Neft’s CEO, and are now included in contracts with third parties (both Russian and foreign).
The company runs a 24/7 anti-fraud and anti-corruption hotline. Internal investigations are always carried out upon receipt of messages on that hotline.
6.4. Risks relating to changes in court practice on issues relevant to the company’s operations
In the current system of law enforcement in the Russian Federation, the legal positions of higher courts (the Constitutional Court of the Russian Federation, the Supreme Court of the Russian Federation) are of great importance, as they can affect the company’s conduct of its business activity.
Gazprom Neft regularly monitors rulings of the highest courts and assesses trends in law enforcement practice at the level of arbitration courts across Russia’s federal districts, actively applying and using these not only to protect its rights and legal interests in court, but also in resolving legal issues arising in the company’s operations. To that end, risks relating to changes in court practice are deemed insignificant.
At the same time, it should be noted that court practice on issues relating to activities of oil and gas companies is not always developed systematically, so it is difficult to predict its further development with sufficient certainty. In particular, the practice of the Supreme Court may undergo changes that may have a negative impact on the company’s current and future legal actions.
6.5. Risks relating to changes in Russian tax legislation
Key companies in the Gazprom Neft Group are among the largest taxpayers in the Russian Federation and pay federal, regional and local taxes, in particular mineral extraction tax (MET), excess profits tax from hydrocarbon production (EPT), excise tax, value added tax (VAT), corporate profit tax, mandatory insurance contributions, corporate property tax, and land tax. The Russian Federation’s tax system is constantly evolving and improving. Any possible increase in tax rates paid by the company in the course of its business activities, as well as any possible reduction in applicable tax concessions may result in increased expenses and decrease in the amount of funds available to the company for financing its current operations, capital expenses and performance of obligations, including those under bonds that have been issued.
- Virtually any company in Russia could potentially suffer losses as a result of claims from tax authorities that may arise in relation to past periods, as well as current operations. The company, nonetheless, assesses these risks as medium. Gazprom Neft believes that the impact of liabilities arising from such potential events on its operations will not be more material than the impact of similar liabilities on any other Russian oil company that has state participation. In order to reduce risks associated with changes in Russian tax legislation, Gazprom Neft thoroughly analyses draft laws and adopted legislation in the field of taxation. The most significant recent changes in the Russian tax legislation affecting the company’s operations are:
- changes in MET rates, export duties and excise taxes as a result of the implementation of the tax manoeuvre, and the increase of the tax burden in 2020.
- changes in taxation relating to depleted fields by granting the right to use the EPT regime instead of reduced MET rates;
- introducing, from 2019, the negative excise tax on raw petroleum feedstock, taking into account the damping component, which characterises the deviation of motor fuel prices on the domestic market relative to the exported alternative;
- introduction from 2021 of investment deduction on raw petroleum feedstock excise tax, designed to stimulate the modernisation of refining facilities.
The company assesses and forecasts the level of a possible negative impact of changes in the Russian tax legislation, directing every possible effort to minimise risks associated with such changes. A number of companies in the Gazprom Neft Group take part in tax monitoring as an innovative form of tax control. Such monitoring makes it possible to obtain a reasoned opinion of the tax authority in order to clarify disputable situations relating to tax calculation, increase the speed of tax control measures and significantly reduce the time needed for control measures, which ultimately enables companies to promptly respond to the position of tax authorities in disputable situations and effectively manage tax risks. This approach is particularly important as Gazprom Neft Group companies apply new oil industry tax regimes (excess profits tax, tax concessions for new offshore fields).
6.6. Risks associated with changes in customs regulations and duties
Gazprom Neft is engaged in foreign trade, which exposes the company to risks associated with changes in Russian law concerning state regulation of foreign trade, as well as customs legislation of the Eurasian Economic Union, governing relations in establishing the procedure for moving goods across the customs border of the Eurasian Economic Union, the establishment and application of customs regimes, and the introduction and collection of customs duties.
As a risk, we can highlight the possibility of the Government of the Russian Federation changing customs duty rates (both import and export) for certain goods, in respect of which the company concludes foreign-trade transactions, as well as changes in law enforcement practices in the field of customs regulation. The main negative consequences of these risks are higher costs and lower export efficiency.
The company complies with the customs legislation of the Russian Federation and the Eurasian Economic Union, executes in a timely manner all documentation required for both export and import operations, and has sufficient financial and human resources to comply with customs regulations and to respond promptly to changes in customs laws and law enforcement practices.
The most significant recent change in the Russian customs legislation affecting the company’s operations is the cancellation of special formulas for calculating export duty rates for crude oil, previously established under the law «On Customs Tariff”.
6.7. Risks relating to the revision of mandatory requirements, adherence to which is assessed in the course of state control (supervision)
The audit of control and oversight powers of state agencies has been conducted on the basis of a new mechanism called the regulatory or legal guillotine. Review and updating of internal regulations containing mandatory requirements, adherence to which is subject to control on the part of state agencies, has been carried out. A significant part of the legal arrangements has undergone changes. More than 11,000 regulations have been revoked (the vast majority of which were obsolete). As a result, the number of administrative barriers and unjustified costs for businesses is being reduced. Despite the expected positive effect, there are risks of inconsistent law enforcement practices.
Management of these risks and mitigation of their impact is carried out through participation in the policy-making process: conducting expert reviews at specialised platforms, consolidation of opinion with industry and business-community leaders, as well as continuous monitoring of legislative changes and analysis of enforcement practices.
7.1. Risks associated with foreign assets
Gazprom Neft is implementing a number of foreign projects designed to expand the geographic footprint of its production activities. Entering markets in new regions creates both the possibility of gaining additional competitive advantages, as well as the risks of underestimating the economic and political situation in countries where the company has assets, which may lead to failure to achieve target efficiency indicators. Gazprom Neft operates in a number of countries (Iraq, Angola) with a high level of risk, the realisation of which can significantly complicate such activities or even lead to their termination.
The main factors that could have a negative impact on Gazprom Neft’s operations in such countries include:
- destabilisation of the political situation;
- the spread and intensification of military conflicts;
- macroeconomic instability;
- forced alienation of the company’s assets; and
- ineffective legislative framework and legal system.
The vast majority of Gazprom Neft’s upstream and downstream assets are concentrated in the Russian Federation, so the impact of this risk is limited. At the same time, the company seeks to diversify its international operations.
In implementing projects in high-risk countries, the company places higher demands on such projects’ level of return. In addition, in the event of deterioration of the political or socio-economic situation in a region where the company operates, Gazprom Neft can implement a number of anti-crisis measures, including cost reduction, optimisation of the investment programme, reduction of participation share in the project, and engagement of partners.
Gazprom Neft currently assesses the level of risks associated with foreign assets as acceptable, but cannot guarantee that there will be no negative changes, as the described risks are beyond the company’s control.
8.1. Risks of engaging partners
The unstable macroeconomic environment means attracting partners for joint projects has become both critical and difficult. With large-scale cuts in investment budgets, potential partners reduce their activity and decisions to enter new projects are postponed indefinitely.
The sanctions regime imposed by the US since 2014 (taking into account the adopted changes in the US sanctions regime in 2017 and 2018), countries of the European Union and a number of other countries is an additional constraint to developing partnerships.
The company is continuously working with potential partners and considers the possibility of engaging partners from the Russian Federation and Asia-Pacific regions that have not imposed sanctions on offshore, Arctic, deep-water and shale projects.
As part of this process, regular negotiations and meetings are held, including with representatives of state agencies, including: the Government, the Ministry of Energy, the Ministry of Foreign Affairs and the Ministry of Economic Development of the Russian Federation.