Market risks

The main areas of Gazprom Neft’s operations are oil and gas production, oil refining and the sale of oil and petroleum products, thus the Company is exposed to risks that are traditionally inherent to the oil and gas industry, namely:

  • risks associated with a possible change in prices for purchased raw materials and services;
  • risks associated with a possible change in oil and petroleum product prices;
  • risks associated with industry-wide competition;
  • risks caused by economic instability in the industry.

Risks associated a possible change in prices for purchased raw materials and services

In the process of its business operations, Gazprom Neft uses the infrastructure of monopoly service providers for the transportation of oil and petroleum products and the supply of electricity. The Company has no control over the infrastructure of these monopoly service providers and the amount of tariffs charged.

Risk management measures

The Company is implementing a number of measures that aim to mitigate the impact of such risks:

  • long-term planning of commodity flows and the timely provisioning of the cumulative flow of oil and petroleum products as well as the necessary rolling stock;
  • the optimal redistribution of commodity flows by transportation type;
  • the use of alternative and internal sources of power generation;
  • long-term contracting with fixed volumes and prices for the entire duration of the contracts;
  • the use of transparent cost revision formulas as part of long-term service contracts that are strictly dependent on market fluctuations.

These measures make it possible to reduce risks associated with the use of services and the acquisition of goods from monopoly providers to an acceptable level and ensure the Company’s continuity of operations.

Risks associated with a possible change in the price of oil, petroleum products, gas and gas products

The Company’s financial indicators are directly related to the price level of crude oil, petroleum products, gas and gas products. The price level depends on a number of factors which the Company cannot fully control. Such factors include:

  • the volume of oil reserves explored as well as global and regional supply of and demand for crude oil and petroleum products;
  • Russian and foreign government requirements and actions;
  • the impact of global production levels and prices from oil exporting countries (OPEC);
  • the military and political situation in resource producing regions;
  • prices and the availability of alternative and competing types of fuel;
  • prices and the availability of new technologies;
  • weather and climatic conditions and natural disasters.

Risk management measures

Comprehensive measures were prepared to reduce the cost of extracting minerals. The Company has a business planning system which at its core has a scenario-based approach for determining the Company’s key performance indicators depending on oil prices on the global market. This approach makes it possible to cut costs, including by reducing them or carrying them over to future periods of investment programmes. These measures enable the Company to reduce risks to an acceptable level and fulfil the obligations it undertook.

Risks associated with industry-wide competition

There is intense competition in the Russian oil and gas industry between the leading Russian oil and gas companies in the main areas of production and economic activities, including:

  • the acquisition of licenses for the right to use subsoil resources to produce hydrocarbons at auctions organised by the government authorities;
  • the acquisition of other companies that own licenses for the right to use subsoil resources to produce hydrocarbons or that own existing assets associated with production raw hydrocarbons;
  • the hiring of leading independent service companies;
  • the acquisition of high-tech equipment;
  • the hiring of experienced and the most qualified specialists;
  • access to critical transportation infrastructure;
  • the acquisition of existing assets and the construction of new assets that increase the product sales volume to end users.

In addition, there is competition from the suppliers of alternative energy sources, including eco-friendly sources such as solar energy and wind energy.

Risk management measures

The implementation by management of the portfolio of strategic projects that aim to develop key areas of the activities of Gazprom Neft PJSC ensures the gradual strengthening of the Company’s positions in the oil and gas industry through a reduction in risks associated with industry-wide competition.

Risks caused by economic instability in the industry

The Russian economy is sensitive to price fluctuations for crude oil, natural gas and other raw commodities on the global market. Negative oil price dynamics on the global market and a slowdown in the Russian economy may have an adverse effect on the Company’s business.

Risk management measures

In order to mitigate the negative effect of this risk on its performance results, the Company works to ensure a balance between domestic sales and exports as well as oil production and refining and also maintains a focus on expanding the markets of premium sales channels and increasing product sales in foreign countries.

Gazprom Neft companies also provide support to the Country’s economy as major taxpayers and take part in large-scale infrastructure and socially significant projects.

The Company is constantly improving production and working on enhancing performance efficiency, including by implementing investment projects as well as updating and modernising fixed assets.