Appendix
Country and regional risks, competition risks
| Risk | Description | Risk management / mitigation |
|---|---|---|
| Risks related to the global economy development | Adverse economic conditions, deceleration of demand growth rates for energy carriers. | Seeking to boost revenue from sales of energy carriers, PJSC Gazprom diversifies sales markets and channels, and expands the scope of natural gas use. |
| Sanction-related risks | Russia is under the sanctions imposed by the EU, USA, and other countries. There is a probability that the restrictions will be expanded and will remain in effect for a longer time. | PJSC Gazprom pursues the policy of technological self-sufficiency and import substitution to reduce the Company’s exposure to economic restrictions imposed on or enacted against Russia. |
| Natural gas transit risks | Natural gas transit through the territory of third countries is subject to the risk of non-fulfilment of transit obligations, which entails the risk of the Gazprom Group failing to properly perform its obligations under gas supply contracts. | In order to reduce dependence on transit countries, the Company is taking steps to diversify export routes, broaden access to underground gas storage facilities outside Russia, and develop liquefied natural gas trade. |
| Risks associated with the development of gas production from unconventional sources | Since the mid-2000s, gas production from unconventional sources, primarily from the shale deposits in the USA, was on the rise. In the long run, rapid development of shale gas production in other regions of the world may have a negative impact on the demand for Russian pipeline gas supplied by PJSC Gazprom, in particular, in the European and Chinese markets. | PJSC Gazprom monitors, on a regular basis, the progress of the shale gas sector development throughout the world. The results of the monitoring, including economic indicators of gas production from unconventional sources and its competitive potential in the Company’s existing and prospective markets, are regularly reviewed by PJSC Gazprom Board of Directors. |
Credit, market, and financial risks
| Risk | Description | Risk management / mitigation |
|---|---|---|
| Credit risks | Late or incomplete performance of the contractual obligations by counterparties. | PJSC Gazprom and its subsidiaries assess and monitor the creditworthiness of counterparties with assigning them internal credit ratings. The credit risk exposure of export activities is managed by determining payment conditions and securing the payments of counterparties (guarantees, letters of credit, prepayments). Quantitative assessment of credit risks is performed by modelling potential losses with due regard to the creditworthiness of counterparties. The results are taken into account while determining the payment terms under the contracts. As regards interaction with banks and credit institutions, continued efforts are taken to establish and update credit limits, monitor the financial health of Russian and foreign credit institutions, and monitor compliance with credit limits by the Gazprom Group entities. |
| Market risk | Possible decline of oil prices and stock exchange quotations for gas and/or their long-time stagnation at low levels give rise to risks that, if materialize, can result in revenue loss. | The risk is managed by adjusting contract terms or entering into new contracts with terms and conditions corresponding to the current market environment, defining permitted transaction types and financial instruments, as well as counterparties qualified for such transactions. |
| Financial risks | PJSC Gazprom’s operating results are exposed to currency exchange rate volatility along with the multicurrency structure of its revenues and expenditures. Performance of contractual obligations by banks and financial institutions may be delayed or incomplete. | To minimize losses arising from currency exchange rate volatility, some of the Gazprom Group companies apply hedging strategies to address the risk of market-driven shifts in exchange and interest rates. Transactions with credit institutions stay within credit risk limits, which are revised regularly, in particular with regard to the credit rating calculated by PJSC Gazprom and the Gazprom Group entities. Performance of contractual obligations is monitored. PJSC Gazprom achieves financial stability by optimizing its debt burden. Liquidity risk management measures include enforcing compliance with the instructions of the Bank of Russia as to the asset/debt ratio denominated in foreign currencies, keeping cash available in different currencies based on liquidity forecasts, ensuring the availability of financial resources through credit lines, and control over limits set for counterparty banks. |
Operational risks
| Risk | Description | Risk management / mitigation |
|---|---|---|
| Risks associated with the core business operations | Core business operations involving hydrocarbon production, transportation, processing, and storage are associated with technological, technical, natural and climate risks, as well as the risk of inappropriate actions by employees or third parties. | The Unified Gas Supply System ensures overall reliability of gas supplies. Its operational stability is achieved through the implementation of up-to-date and innovative diagnostic methods, scheduled major repair and maintenance operations, modification and upgrades. Subsidiaries are provided with a property and liability insurance coverage, which comprises physical property (including offshore facilities), interruption of operations at gas processing plants, and contractor liability for construction, repair and operation of production facilities. |
| Occupational health and industrial safety risks | PJSC Gazprom’s business activities are exposed to risks of adverse impact on employees’ health and safety. The risk factors may have a material adverse effect on PJSC Gazprom’s financial condition, operating results, and reputation. | The Gazprom Group has in place the Integrated System of Process Safety Management (ISPSM). The system is part of PJSC Gazprom’s integrated management system. It is designed to manage occupational health and industrial safety risks, achieve targets and fulfil obligations in the area of occupational health, industrial, and fire safety. |
| Tax risks | Risks associated with the assessment and payment of taxes, charges and insurance premiums, incorrect calculation of the tax base, choice of inefficient tax models and schemes, transfer pricing risks. | The key approaches to identifying, assessing, responding to, monitoring, reporting and disclosing tax risk management information are defined in the Regulation on Operational Risk Management in the Gazprom Group. |
Environmental and climate risks
| Risk | Description | Risk management / mitigation |
|---|---|---|
| Risk of noncompliance with environmental legislation in the course of construction and operation of PJSC Gazprom’s facilities | The core hydrocarbon production, transportation, processing, and storage operations are associated with environmental pollution risk that may entail legal, financial, and reputational implications. | The Company implements its Environmental Policy, as well as programs and activities designed to reduce its environmental footprint; engages in environmental protection activities; obtains environmental risk insurance; adopts green technologies. The majority of subsidiaries have put in place and continuously improve their respective environmental management systems certified for compliance with ISO 14001:2015. |
| Environmental damage risk resulting from accidents/incidents associated with PJSC Gazprom’s business operations | Environmental impact of accidents resulting from PJSC Gazprom’s business operations may adversely affect stakeholder, investor and government relations and may entail administrative or criminal liability that involves payment of applicable indemnities for environmental damage. |
PJSC Gazprom carries out the following activities:
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| Risks associated with an adverse impact on the environment | Industry-specific operations give rise to the risks of land and water pollution, deterioration of soil and vegetation, and erosion. This may lead to degradation of natural ecosystems and loss of habitat for rare and endangered plant and animal species. | Gazprom is implementing biodiversity preservation activities based on a list of plant and animal species signalling the level of sustainability of marine ecosystems within the Arctic zone of the Russian Federation. Comprehensive initiatives are underway, including those related to the enhancement of reliability of pipeline systems, landscape stabilization, soil reclamation, and vegetation rehabilitation. |
Natural and climate-related risks
| Risk | Description | Risk management / mitigation |
|---|---|---|
| Risks associated with climate change and greenhouse gas emissions | Some risks stem from temperature changes, high sensitivity of frozen soil, and adverse weather conditions causing deformation of buildings and structures, pipeline transportation systems and service lines. | Reduction of GHG emissions is part of PJSC Gazprom’s corporate strategy. The Company is implementing a set of measures seeking to minimize the adverse impact of climate change on the Company’s operations. Steps are taken to reduce (cease) flaring of associated petroleum gas, and energy efficiency and energy saving programs are being developed and implemented. |
| Risks associated with climate conditions | Climate conditions in the Gazprom Group’s key regions of operation affect its business performance in a significant way. A major part of the natural gas produced by Gazprom comes from Western Siberia, where production is difficult and relatively costly because of harsh climate. | The Company has designed and implemented effective operating procedures adapted to severe climatic conditions. Programs are underway to boost the efficiency of production and transportation systems and gas transmission network operation. |
Legal and industry-specific risks
| Risk | Description | Risk management / mitigation |
|---|---|---|
| Risks of tariff (pricing) regulation of natural monopolies | Risks associated with state regulation of wholesale prices for gas produced by PJSC Gazprom and its affiliates and sold on the domestic market, as well as tariffs for gas transportation via trunklines, and affecting PJSC Gazprom’s operations and performance of its obligations. If this risk materializes, it could result in a failure to receive the planned revenue from gas sales and gas transportation services on the domestic market. | The Company maintains relations with the federal executive authorities in order to justify and defend the regulated gas prices and tariffs for gas transportation services. In order to reduce the said risks, PJSC Gazprom maintains an active dialogue with the federal executive authorities as regards improvement of gas pricing, including the development of justified pricing principles enabling the Company to benefit from sustainable economic conditions for supplying gas to the domestic market. PJSC Gazprom takes part in the development of laws and regulations governing pipeline-based gas transportation and is engaged in expert examination of draft laws and regulations, while also contributing to the establishment of the regulator’s law enforcement practice and judicial practice. |
| Government regulation risks | Risks of changes in currency regulation and tax laws in the Russian Federation and other countries of the Gazprom Group’s operations still remain. New requirements may be imposed by customs authorities as a result of changes in customs rules and export duty payment procedures. PJSC Gazprom maintains an ongoing dialogue with government authorities on improvements of the pricing and tariff policy, corporate taxation, and customs law. Amendments to tax and currency legislation are monitored on an ongoing basis to ensure strict compliance with their requirements. PJSC Gazprom interacts with government authorities for the purpose of timely adjusting its operations to the legislative changes in the Russian Federation and abroad. |