Key Risk Factors
|Type||Description and mitigation||Risk management operations|
|Related to crude oil, gas and petroleum product prices||Crude oil, gas and petroleum product prices are key factors that impact the Rosneft financial performance and indirectly, its operations. The prices of the Company's products mainly depend on the global market environment, as well as demand and supply balance in some regions of Russia. Rosneft’s abilities to control its own product prices are significantly limited. A decline in oil, gas and petroleum product prices has an adverse impact on Rosneft’s performance and financial standing. Decreasing prices may result in less profitable oil and gas production by the Company which will in turn entail the reduction of Rosneft’s effective reserves and financial viability of exploration.||Rosneft has sufficient capabilities to re-distribute its commodity flows in case of a significant price difference between the domestic and international markets. Furthermore, the Company may promptly reduce its CAPEX and OPEX to fulfill its commitments in case of a sharp decline in oil, gas, and petroleum product prices. Besides, negative impact of price risk on financial performance of the Company is partially offset by FX rates changing (natural hedge effect).|
|Related to the dependency on monopoly service providers of oil, gas, and petroleum product transport and their tariffs||Rosneft depends on monopoly service providers of oil, gas, and petroleum product transport and cannot control the infrastructure they operate and payments they charge. JSC Transneft is a national monopoly providing oil and petroleum product transport services via its main pipelines. During their cooperation, the Company did not incur any substantial loss due to failures or leaks in Transneft pipelines. However, any serious failure in Transneft pipeline operation or limited access to Transneft capacities may disrupt oil and petroleum product export and adversely impact Rosneft’s performance and financial standing. Rosneft similarly to other Russian oil producers, shall pay for Transneft transportation services. Transneft charges are regulated by the Federal Tariffs Service. Transneft periodically increases charges for the use of its network. Tariff increase results in higher costs for the Company which adversely impacts its performance and financial standing. Similar risks may result from the use of Gazprom's pipeline system. The Company is dependent on the railway transportation of its oil and petroleum products. Russian Railways (hereinafter, RZhD) is a national monopoly rendering railway transportation services. RZhD tariffs are subject to anti-monopoly control and traditionally they tend to grow. Further tariff increase entails higher costs for oil and petroleum product export and may have a negative effect on the Company's performance and financial standing.||Rosneft takes into account negative impact of changes in the natural monopolies’ rate for hydrocarbons transportation for the Company future business operations planning. Decisions to change transportation flows and optimize the schedule of the Company products supply via the oil and gas pipeline system of Russia are made depending on the amount of the risk impact.|
|Related to geographical and climatic conditions||The regions where Rosneft operates have a stable climate and are mainly not exposed to natural calamities and disasters. However abnormally low temperatures in winter in some northern regions can make the operation of the Company's oil producing sites more difficult. Delays at export terminals can be caused by climate peculiarities at their locations. Rosneft exports some oil via its own offshore terminals and Transneft-controlled terminals. Petroleum products are exported via its offshore terminals in Tuapse (Krasnodar Territory) and Nakhodka (Primorsky Territory). Export via the terminals in the Black Sea to Mediterranean ports may be limited by the capacity of the Bosporus and weather conditions of the Black Sea (storms) in fall. Complex ice conditions in winter may require the shutdown of export terminals in the Baltic Sea and DeKastri (Khabarovsk Territory). Any long delay in export terminal operation may have a negative effect on the Company's performance and financial standing.||Rosneft offers options for redistribution of commodity flows with account of climatic conditions, including alternatives for oil and petroleum products transfer as well as the shipment schedule adjustment.|
|Related to the sale of own gas||
The key factor that may have negative impact on gas sales of the Company — failure to take the required volume of gas by the consumers. The natural gas sales are also affected by the factors as follows:
||The Company diversifies the consumers portfolio to ensure the planned gas consumption scopes, and lays claims to ensure efficient cash funds receipt for the sold gas. Mitigation of risk due to the quality of gas sent to the natural gas transportation system may be performed by carrying out technical steps to raise the quality indicators up to the set standards. The Company performs constant monitoring of conditions and ensures non-discriminating access to the Gazprom gas transportation system. We also developed the action plan for mitigating the occurred risk of restricted access to the transportation system, including changes in gas supply schedules, volumes redistribution among various consumers and alternative gas supply scenarios to the consumers via the third producers.|
|Related to actual reserves||Oil and gas reserves are mere estimates and are inevitably uncertain. Actual reserves may significantly differ from these estimates. Oil and gas reserves mentioned in this Report are estimations mainly based on the results of analytical work performed by DeGolyer&MacNaughton, Rosneft's independent consultant for oil production technology. An oil production technology is subjective evaluation of underground oil and natural gas reserves which may not be accurately measured. Estimation and scoping of profitably recovered oil and gas reserves, production volumes, future funds, as well as expense periods for reserves development inevitably depend on a number of variables and assumptions. Many of the assumptions used for reserves estimation do not depend on the Company and may turn out to be false with time. Estimation of reserves and use of alternative calculation systems according to the Russian classification system inevitably imply a high degree of uncertainty. The accuracy of estimation of any reserves and resources depends on the quality of available information and interpretation of oil production technology and geological data available. Post-evaluation exploration drilling, data interpretation, testing, and production may require significant upward or downward adjustment of Rosneft reserves and resources. Moreover, different specialists responsible for reserves and resources estimation may evaluate reserve and funds differently using the same data. Actual production volumes, revenue, and costs related to reserves and resources might significantly differ from the operations estimate. Uncertainty is related to the Russian reserves classification system. It can consider geological factors only and ignores the feasibility of production. Prospecting drilling also entails multiple risks, including the risk of the oil companies' failure to find pay oil or gas zones.||Rosneft is a global leader in oil production and has extensive resources which minimize any risk of lower oil production as a result of future reserves re-estimation.|
|Related to actual reserves||The Company performs prospecting in different geographical regions, including areas with unfavorable climate conditions and high costs. Well drilling, infrastructure, and operation costs are often uncertain. Therefore, Rosneft may incur additional costs or will have to downscale, suspend, or terminate drilling due to many factors. They include contingent geological conditions, abnormally high or low formation pressure; unforeseen non-homogeneity of geological formations; equipment breakdown or emergencies; unfavorable weather conditions; shortage or untimely delay of drilling rigs and equipment. If Rosneft cannot perform efficient exploration or acquire assets with proven reserves, its proven reserves will decrease as it produces oil and gas and developed fields are depleted. The Company’s future production efforts significantly depend on successful detection, acquisition, and development of oil- and gas-bearing fields. If Rosneft attempts do not pay off, it will have fewer proven reserves and decrease its hydrocarbon production, which will in turn have an adverse effect on the Company’s performance and financial standing.|
There is strong competition within the oil and gas industry. Rosneft mainly competes with other leading Russian oil and gas companies to:
The following measures are taken to minimize risks during the sale of petroleum products in the highly competitive domestic market.
|COUNTRY AND REGIONAL RISKS|
|Related to the country and region of operation||Rosneft operates in all federal districts of the Russian Federation. Our prospects and potential social and economic risks are outlined in the Program of Mid-Term Social and Economic Development of the Russian Federation. The Company believes that the risk of war conflicts, civil commotion, strikes, and announcement of a state of emergency in the regions where it operates is insignificant. The Company comments on the impact of the risks related to changes in foreign policy. It also encounters operational risks outside the Russian Federation. It is exposed to higher political, economic, social, and legal risks in developing economies as compared to more developed countries. The risks related to operation in such countries are in many respects similar to or may be higher than in Russia, also due to possible changes in foreign policy.||
In case of any risks related to the political, economical, or social situation in Russia on the whole, or in some regions, or any risks related to global economic instability, the Company will take every effort to limit its negative effect. Its actions will depend on a specific situation and will be determined on a case-by-case basis.
In case of an adverse impact of country-related and regional changes on its operations, the Company plans to take the following measures aimed at maintaining its operations:
|Currency risks||A significant portion of Rosneft’s gross revenue is oil and petroleum product export. Therefore, any FX fluctuations on RUB impact the Company's financial performance which is a currency risk factor.||The Company identifies and manages FX risks by using complex approach allowing for natural (economic) hedging application. To perform short-term FX risk management the Company selects a foreign currency for free cash funds balancing among Russian ruble, US dollar and other foreign currencies. Long-term FX risk management strategy of the Company provides for using derivative and non-derivative instruments to mitigate potential openness to the risk of FX fluctuations.|
|Changes in interest rates||Being a major borrower, Rosneft is exposed to the risks related to changes in interest rates. The main source of borrowings is an international credit market. The majority of the Company's loan portfolio consists of USD loans. An interest rate on most of these loans is based on LIBOR and EURIBOR interbank lending rates. An increase in these interest rates may result in higher debt service fees for Rosneft. The growth of loan fees for the Company may have a negative effect on its solvency and liquidity. As at end of 2015, the Company had the following credit ratings assigned by leading rating agencies: Moody’s (Ва1), S&P (BВ+).||The Company analyses exposure to interest rates changes, including development of various scenarios to assess the influence of interest rate changes to financial indicators.|
|Inflation||Inflation rates in the Russian Federation significantly impact the Company's performance.||Planning business operations we take into account the impact of inflation growth rate to financial performance of the Company, including the impact of the cost of procured materials and equipment as well as the rate of the contractors’ services cost changes. We develop activities to mitigate risk impact, including the search of alternative contractors and suppliers of materials and equipment.|
|Related to inspections by the regulator||Based on Order No. 824 / 14 dated December 31, 2014 of the Federal Antimonopoly Service, Rosneft was included in the 2015 legal entity and sole proprietor field inspection plan. FAS of Russia issued Order No. 882 / 15 dated September 25, 2015 and No. 1004 / 15 dated October 26, 2015 to conduct a scheduled field inspection from September 29, 2015 through December 29, 2015. The inspection was aimed at checking compliance by the Company with Russian anti-trust laws during its operations in 2013 and 2014. FAS of Russia drew up Inspection Report No. 368 dated December 25, 2015 based on the inspection results. The Company submitted its objections to the Inspection Report subject to compliance with the established administrative procedures.||Rosneft continuously monitors amendments to the current legislation, resolutions of the supreme courts and follows the trends of legal precedents. In the case of any legal precedents Rosneft submits the proposal for updating the legislation and applies to the state bodies for explanations and recommendations for implementing the specific regulations.|
|Related to the amendment to currency laws||Rosneft is actively involved in foreign trade and has FX assets and liabilities. Therefore, government currency regulation impacts the Company's business. Generally, there were no significant amendments to Russian currency laws that could impact Rosneft operations in the reporting period.||Rosneft performs ongoing monitoring of the resolutions on currency regulation and control procedures, made by the supreme court and assesses legal precedents. In the case of any legal precedents Rosneft submits the proposal for updating the legislation and applies to the state bodies for explanations and recommendations for implementing the specific regulations.|
|Related to the amendment to tax laws||Rosneft is a major tax payer with its operations built on the principles of good faith and transparency of information for tax authorities. The Company pays VAT, excise, income tax, severance tax, property tax, land tax, as well as other taxes and duties. Tax laws are subject to rapid changes,||Rosneft implements ongoing monitoring of amendments to tax laws, evaluates, and forecasts the degree of the potential impact of such amendments on its operations, follows the appearing legal precedents with account of amendment to the legislation related to the Company business field, the Company specialists regularly take part in various task forces developing tax laws.|
|Related to amendments to customs regulation||Rosneft is actively involved in foreign trade. Therefore, the Company faces some risks related to amendments to government regulation of foreign trade and customs laws governing the procedure for goods movement across the border, determination, and use of customs procedures, determination, enactment, and collection of customs charges. Review of the most significant changes in the customs regulations of the Russian Federation is given in Par. 1.7. of the Annual Report. Probability of any risks due to the effected amendments to the customs regulations in the reporting period in low.||Rosneft implements ongoing monitoring of amendments to customs laws, evaluates, and forecasts the degree of the potential impact of such amendments on its operations, the Company specialists regularly take part in various task forces developing customs laws. Throughout 2015 the Rosneft specialists were actively involved in development of the EEU Customs code within the task forces and expert groups at various platforms of the European Economic Committee and the federal state bodies of the Russian Federation to promote the Company’s initiatives for mitigating customs risks.|
|Related to the amendment to anti-trust laws||
Rosneft has a significant share in the wholesale gasoline, diesel fuel, jet kerosene, and fuel oil market. Therefore, the Company shall meet additional requirements aimed at protecting competition and might face risks related to any amendments to anti-trust laws. Anti-trust regulation is in line with the federal laws of the Russian Federation and related
regulations that were amended during the reporting period, and these amendments could affect the Company's operations.
Federal Law No. 275-FZ dated October 05, 2015 significantly amended Federal Law on Protection of Competition (the so called "the fourth anti-trust package") effective from January 05, 2016. In particular, the following key amendments can be pointed out as capable of impacting the Company's operations.
||Rosneft preforms ongoing monitoring of the resolutions on anti-trust regulation and control procedures, made by the supreme court and assesses legal precedents. In the case of any legal precedents Rosneft submits the proposal for updating the legislation and applies to the state bodies for explanations and recommendations for implementing the specific regulations. In 2015 the Company enacted the Regulation for General pricing principles and the procedure for selling motor fuel in the domestic market of the Russian Federation, approved by the FAS of Russia.|
|Related to the amendment to anti-trust laws||The Order expanded the list of commodities to be sold at the stock-exchange by the entities with a dominant positions in the relevant commodity market: it also included LHGs (CPBM — commercial propane / butane mix, CP — commercial propane; CB — commercial butane, AGP&B — autogas (propane and butane), AGP — autogas (propane)). Once the Order is enacted and to generate objective stock indicators to be recognized by the market regulator, the Company shall ensure monthly sales of minimum petroleum product and gas refinery volumes at the exchange established by the Order subject to compliance with other stock trading established by the Order. The Company fully observes the specified requirements.|
|Legal statutory regulation of subsoil||
Compliance with the requirements for subsoil regulation is one of the key components of the Company's core operation regulation which involves ongoing monitoring of amendments to industry laws for Rosneft to take them into account in its operations.
A series of amendments were made to the subsoil laws in the reporting year:
||At present the Company is actively involved in law-making to develop the optimal and minimum required lists of geological information to be submitted to the funds. This shall allow the Company to keep the right of possessing the key geological information and, as a result, commercial value of the Rosneft capital assets — sites of subsurface resources.|
|Legal statutory regulation of land use||
The enforcement of land laws is one of Rosneft priorities since land is the Company's key property.
||Rosneft performs ongoing monitoring of the amendments to the applicable legislation, resolutions and control procedures, made by the supreme court and assesses legal precedents. In the case of any legal precedents Rosneft submits the proposal for updating the legislation and applies to the state bodies for explanations and recommendations for implementing the specific regulations. The Company continuously sticks to land protection principles as an integral part of the environment.|
|Industrial and environmental safety||
The Federal Law No. 89-FZ, On Industrial and Consumer Waste, as of June 24, 1998, was amended with the prohibition to operations with the Hazard Class 1 to 4 waste (except for detoxification and placement) without the relevant license for such waste collection, transportation, handling, and recycling.
The transition period was extended until July 01, 2016.
Many of Rosneft’s facilities are categorized as hazardous facilities. In order to prevent production risks, Rosneft is guided by statutory provisions pertaining to the regulation of hazardous industrial facilities.
The following actions were taken during the reporting period as part of safety regulations at hazardous industrial facilities:
||Due to the amendments to the Federal Law No. 89-FZ, On Industrial and Consumer Waste, as of June 24, 1998, and transition period prolongation, the Company and the Group companies made efforts to align their operations with statutory requirements throughout the reporting period. This will provide availability of Hazard Class 1 to 4 waste collection, transportation, handling, and recycling licenses.|
|Related to the court proceedings in progress the Company is involved in||
Rosneft has been or is currently involved in the following court processes which may have a significant impact on its financial performance:
1. Since 2006, the Company has had court proceedings re demands YUKOS Capital S. a. r. l. against OJSC Yuganskneftegaz (Rosneft predecessor) to recover an alleged debt under the awards based on four loan agreements in the amount of about RUB 12.9 billion, demands of Glendale Group Ltd. regarding the recovery of about RUB 3.53 billion as principal, interest, penalty fee, and expenses due under eight promissory notes of OJSC Yuganskneftegaz, and the demands of Yukos International UK BV regarding a loss of up to USD 333 million plus interest allegedly inflicted by the order of the Amsterdam Court on freezing of a number of assets. These disputes were detailed earlier in the Company's quarterly reports.
Rosneft and some of its subsidiaries signed a Dispute Settlement Agreement in March 2015 with some companies, including YUKOS Capital S. a. r. l., Yukos International UK BV, and Financial Performance Holdings B. V. (successor of Glendale Group Ltd.) which resolved the aforementioned disputes. Under the Agreement, Rosneft and the said companies abandoned their mutual claims and terminated the court proceedings. The Agreement does not provide for any cash or other payments by Rosneft or its subsidiaries.
2. Rosneft is involved in the bankruptcy procedure of JSC NNGC Sakhneftegaz to recover its funds under individual loan agreements and suretyship agreements totally worth RUB 1.3 billion. A provision was created to cover the entire debt. The register of the creditors’ claims includes Rosneft’s demands worth RUB 1,625,526,926.64 (with interest accrued).
3. Former JSC RN-Holding shareholders filed claims against Rosneft in October and November 2014 to recover losses inflicted by incorrect (according to the claimants) determination of a share price during mandatory buyout. In the first instance the court rejected the claims. The appellation court currently reviews of the claimants’ appeals.
Rosneft is involved in a number of other court proceedings which have arisen during its operations. According to Rosneft management, the outcome of such court proceedings will not have a significant effect on the Company’s performance or financial standing.
|Rosneft performed regular monitoring of the judgments passed by supreme courts and evaluates the law enforcement trend in district arbitration courts, actively uses and applies it both during protection of its rights and legal interests in court and when settling any legal issues during its operations. Therefore, the risks related to changes in court practice are considered minor.|
EU and US sanctions
|The United States and EU introduced a number of sectoral changes in 2014. These sanctions stipulate restrictions for US and EU persons to provide new financing to the persons specified in US and EU regulations, as well as work, goods, and services which may be used by certain persons in the Russian Federation for deep water exploration, oil production, oil exploration and production in the Arctic, and slate oil projects.||The Company takes these sanctions into account in its operations and is consistently monitoring the sanctions to minimize their adverse effects.|