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MD&A / Risk Management / Industry Risks

The main businesses of Gazprom Neft are the production of crude oil and gas, oil refining, and the sale of crude oil and petroleum products. The risks that confront the Company are typical for the oil and gas industry, specifically:

  • Risks related to possible changes in prices for purchased materials and services;
  • Risks related to possible changes in prices for crude oil and petrochemicals;
  • Risks related to competition within the industry; and
  • Risks related to geological exploration.

Risks

Description

Risk management activities

RISKS RELATED TO POSSIBLE CHANGE IN PRICES FOR PURCHASED MATERIALS AND SERVCIES

In the course of its business, Gazprom Neft utilizes the transportation infrastructure of monopolistic providers of crude oil and petroleum transportation services, and monopolistic suppliers of electrical energy.

The Company has no control over the infrastructure of these monopolistic providers, nor can it control the tariff rates payable. Tariff rates are controlled by Russian Government agencies, but the rates increase from year to year, creating additional costs for the Company.

The Company takes various steps to mitigate such risks:

  • Long-term planning of commodity flows, timely reservation of capacity for crude oil and product transport, and of rolling stock;
  • Optimizing the distribution of commodity flows between different types of transportation; and
  • Using alternative energy and the Company’s own sources of power generation.

These efforts reduce the risks related to services and products purchased from monopolists to acceptable levels, and ensure the continuity of the Company’s operations.

RISKS RELATED TO POSSIBLE CHANGES IN PRICES FOR CRUDE OIL AND PETROCHEMICALS

The Company’s financial performance directly relates to prices for crude oil and petrochemicals. The Company is unable to fully control the prices of its products, which depend on the balance of supply and demand in global and domestic markets for crude oil and petroleum products, and on the actions of regulatory agencies.

  • The Company uses a range of actions to reduce mineral extraction costs.
  • A business planning system is used to calculate different scenarios for the Company’s key performance factors depending on global oil prices. This approach enables cost cutting by reducing or rescheduling investment programs, and by other mechanisms.

Such activities help to lower risks to an acceptable level and ensure that the Company can perform as planned.

RISKS ASSOCAITED WITH COMPETITION WITHIN THE INDUSTRY

There is tough competition between leading Russian oil and gas producers in their main lines of business, including:

  • The acquisition of sub-soil usage licenses for hydrocarbon production in auction sales arranged by the Russian Government;
  • The purchase of other companies that own sub-soil licenses or assets related to hydrocarbon production;
  • The implementation of foreign projects;
  • Contracting with major third-party service providers;
  • The purchase of high-tech equipment;
  • The purchase of existing retail chains and of land to build new retail outlets; and
  • Expanding sales markets and sales volumes.

Management implements a portfolio of strategic projects for developing Gazprom Neft’s business in its main segments, ensuring the gradual strengthening of the Company’s positions in the competitive oil and gas industry, and lowering of risks associated with industry competition.

Gazprom Neft has extensive experience in geological surveying and in using the most advanced geophysical methods for hydrocarbon exploration and surveying, and also has modern technologies for drilling and deposit development. These capabilities reduce risk levels due to geological factors.

RISKS ASSOCIATED WITH GEOLOGICAL EXPLORATION

A key strategic objective for the Company is to increase the quantity and quality of its hydrocarbon resource base in order to ensure satisfactory production levels. This in turn is largely dependent on the success of geological exploration.

The main risk associated with geological exploration is that target levels of hydrocarbon reserves will fail to be confirmed. An important factor is that geological surveying is carried out in various geographical regions, including some with harsh climates, which frequently involves the risk of additional costs.

Gazprom Neft has extensive experience in geological surveying and in using the most advanced geophysical methods for hydrocarbon exploration and surveying, and also has modern technologies for drilling and deposit development. These capabilities reduce risk levels due to geological factors.

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