Key Risk Factors

Strategic and country risks

Risks related to the global economy

An unfavourable economic environment can lead to a slowdown in energy demand and drive the cost of borrowed capital.

Risk management/mitigation

To ensure growth of revenue from energy sales PJSC Gazprom diversifies its markets and sales channels and expands the uses of natural gas. To maintain financial stability PJSC Gazprom optimises leverage.

European gas market risks

The EU pursues a policy of diversifying its gas supply sources and increasing the share of natural gas exchange trade, which affects PJSC Gazprom as one of the main suppliers of natural gas to the EU countries.

Risk management/mitigation

PJSC Gazprom ensures reliable and flexible gas supplies through long-term contracts. Additionally, to minimise the risk of lower supply levels a set of initiatives continues to be implemented to both build new infrastructure and bolster demand for natural gas, as well as strengthen PJSC Gazprom’s position in the sectors with a potential for extra supplies.

Political risks

Starting from 2014, Russia is under sanctions imposed by the EU, the United States, and other countries.

Risk management/mitigation

PJSC Gazprom pursues a policy of ensuring technological independence and import substitution to reduce the impact the economic restrictions imposed/reintroduced against Russia have on the Company.

Natural gas transit risks

Gas transmission via third countries is associated with the risk of the counterparties defaulting on their transit obligations, which exposes Gazprom Group to the risk of improper performance of its obligations under gas supply contracts.

Risk management/mitigation

A number of measures are taken to reduce reliance on transit countries, including diversification of export routes, expanding access to UGSF abroad, and development of LNG trade.

Russian regulatory risks for the gas industry

PJSC Gazprom’s operations as a natural monopoly are regulated by Federal Law No. 147-FZ dated 17 August 1995 On Natural Monopolies. The Government holds an interest of over 50% in the share capital of PJSC Gazprom.

Risk management/mitigation

PJSC Gazprom is consistently engaged in intensive dialogue with government authorities to improve the pricing policy and taxation of companies in the gas industry; objective supporting cases are prepared to inform decision making by PJSC Gazprom’s Board of Directors.

Unconventional gas development risks

Unconventional gas production has been growing since mid-2000’s, primarily from shale deposits in the US. Shale gas appeals mostly to countries with limited conventional gas reserves and resources; however, the risk that these countries will reduce gas imports in the mid-term is still assessed as insignificant.

Risk management/mitigation

PJSC Gazprom continuously monitors the evolution of the shale gas industry and developments in other unconventional hydrocarbons industries around the world. The monitoring results, including the economics of unconventional gas production and its potential as a competition to PJSC Gazprom in its existing or prospective markets, are reviewed by PJSC Gazprom’s management bodies on a regular basis, which enables PJSC Gazprom to build an effective region-specific marketing policy.

Renewable energy risks

Renewable energy output can be expected to grow in some countries, which may squeeze gas consumption in these markets.

Risk management/mitigation

The use of natural gas, inter alia, for power generation offers consumers economic, technological and environmental benefits, which, PJSC Gazprom believes, will support natural gas as the most common energy source. In most cases, renewable power generation supplements power generation from other sources and may entail certain risks for the natural gas market if aggressive policies of subsidising renewable energy are maintained at the national and/or supranational level.

Customs, currency and tax regulatory risks

Risk of changes in Russian currency regulations and tax legislation

Currency regulation and tax legislation risks persist, along with the risk of a heavier tax burden on companies operating in the fuel and energy sector. Changes in the Russian currency regulation and tax legislation, as well as tax legislation changes in the countries in which Gazprom Group has a presence may affect the operations of PJSC Gazprom and Gazprom Group’s entities.

Risk management/mitigation

Changes in currency and tax laws are consistently monitored, and relevant requirements are strictly complied with. PJSC Gazprom liaises with government authorities to ensure timely adjustment of its operations in line with changes in Russian and international laws.

Risks related to changes in Russian rules on customs control and duties

Customs authorities may introduce additional customs requirements if the rules of customs control and export duty payment are amended.

Risk management/mitigation

PJSC Gazprom complies with the requirements of customs laws, tracking proposed amendments to regulations at the earlier drafting stages, and submits its proposals while communicating with government authorities.

Financial risks

Foreign exchange and interest rate risks

High exchange rate volatility coupled with income and expenses denominated in different currencies affect PJSC Gazprom’s performance.

Risk management/mitigation

To minimise losses from exchange rate volatility, the Company hedges its foreign exchange and interest rate risks. In addition, the Company complies with the Bank of Russia’s instructions on the ratio assets and liabilities denominated in foreign currency and accounts for the foreign exchange risk using earnings at risk (EaR) assessment.

Credit and liquidity risks

Delayed or incomplete discharge of contractual obligations by some counterparties entails risks for PJSC Gazprom’s operations.

Risk management/mitigation

Relations with credit institutions are subject to credit risk limits revised on a regular basis and reflecting, inter alia, the credit rating calculated by PJSC Gazprom and its subsidiaries. Performance of contractual obligations is monitored.

Market risks

If oil prices and gas exchange quotations drop, resulting risks may lead to a decline in revenues. There are also volume risks associated with a certain flexibility that buyers have in terms of gas offtake.

Risk management/mitigation

These risks are managed by adjusting contract terms and conditions, determining approved types of transactions and financial instruments and counterparties to enter into such transactions.

PJSC Gazprom’s operating risks

Risks of early termination and suspension of subsoil licenses

Non-compliance with the licence agreements exposes PJSC Gazprom to risks of early termination or suspension of subsoil licences for the survey, exploration and production of hydrocarbons.

Risk management/mitigation

Regular monitoring, control of compliance with licence requirements and timely amendment of licence agreements minimise the likelihood of licence revocation and suspension.

Risks related to occupational health and industrial safety

PJSC Gazprom’s sustainability and performance depend on the efficiency of its occupational health and industrial safety practices.

Risk management/mitigation

The Company has in place a Unified Occupational Health and Safety Management System integrated into PJSC Gazprom’s management system.

Cost risk

Increased prices for equipment, technical devices, spare parts, as well as works and services, which form the actual cost of capital construction projects, constitute one of the most significant investment risks.

Risk management/mitigation

Competitive procurement, whereby the suppliers offering goods of adequate quality and submitting the lowest price bids are selected, helps cut the costs of procurement and sourcing of feedstock, materials, spare parts, works, and services. To control the cost of procurement from a sole supplier (contractor, service provider), Gazprom Group’s Central Procurement Office and PJSC Gazprom’s Budget Committee review the pricing procedure and fairness of prices of contracts (with changes and amendments) to be signed by Gazprom Group based on customer estimates, optimise such prices, establish price limits (additional agreements), and match the prices of the signed contracts (additional agreements) against the set prices.

Facilities risks

The key operations, including hydrocarbon production, transportation, processing/refining and storage, carry process and engineering, natural and climatic risks, as well as risks of adverse actions by personnel or third parties.

Risk management/mitigation

The Unified Gas Supply System (UGSS) ensures reliable gas supplies. Stable operation of the system is achieved by implementing advanced and innovative diagnostic methods, carrying out timely overhaul and maintenance, revamping and upgrading existing facilities. Insurance coverage is provided to protect subsidiaries’ property interests, which includes property insurance (including offshore facilities), business interruption insurance for GPPs, and liability insurance for construction, repair and operation of production facilities.

Hydrocarbon reserve estimation risks

PJSC Gazprom’s strategic and financial goals depend on hydrocarbon reserves and the accuracy of reserve estimates.

Risk management/mitigation

Independent reserve estimation procedures have been developed and are implemented in accordance with the Petroleum Resources Management System (PRMS) standards. The Company’s reserves estimated under Russian reserves classification standards are recorded in its books only after the annual review and approval by the State Reserves Commission of the Russian Ministry of Natural Resources.

Environmental risks

The key operations, including hydrocarbon production, transportation, refining/processing, and storage, carry environmental risks (risks of environmental pollution, non-compliance with environmental regulations) that may lead to legal, financial, and reputational implications.

Risk management/mitigation

PJSC Gazprom implements a unified Environmental Policy, programmes, and initiatives to reduce its environmental footprint, takes out voluntary environmental liability insurance, introduces best available innovative technology for mitigating the environmental impact. PJSC Gazprom has developed and operates an efficient environmental management system combining environmental controls of both the Company and its subsidiaries. PJSC Gazprom’s EMS successfully passed a recertification audit in December 2017 for ISO 14001:2015. Efforts taken by PJSC Gazprom help maintain high levels of environmental risk manageability.