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. In October 2015, OOO Gazprom export held a gas auction to try out a new mechanism of gas sales in Europe. 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 the Company’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 over the conflict in Ukraine. The continuation of the conflict is very likely to extend both the list of restrictive measures and the duration of the sanctions.

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 transit via FSU countries, in particular Ukraine, 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

A dialogue with government authorities is maintained to improve the pricing policy and taxation of companies in the gas industry; objective supporting cases are prepared to inform decision making by the Board of Directors.

Unconventional gas development risks

Unconventional gas production has been growing over the last ten years, primarily from shale deposits in the US, along with limited volumes in several other regions around the world.

In North America, it stimulated the development of local LNG export projects, which had a notable effect on the structure of gas consumption.

South America, Europe and South-East Asia remain interested in unconventional gas production; however, the risk that these regions will discontinue gas imports in the mid-term is 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 the Board of Directors on an annual basis, which enables the Company to build an effective region-specific marketing policy relying on different distribution mechanisms.

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

Given the challenging economic situation in Russia due to volatility in FX and commodity markets and the resulting growth of the government’s budget deficit, the risks of changes in currency regulation and tax legislation persist, along with the risk of a heavier tax burden on companies in the fuel and energy sector. Changes in the Russian currency regulation and tax legislation may affect PJSC Gazprom’s operations.

Risk management/mitigation

Changes in currency regulation and tax legislation are monitored, and relevant requirements are strictly complied with. The Company liaises with government authorities to ensure timely adjustment of its operations in line with changes in Russian laws.

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

Following the execution of the Treaty on the Eurasian Economic Union (EEU) in May 2014, a new EEU Customs Code is expected to be enacted. Since the Code is not yet finalised and its enactment is postponed to 2017, the risk of additional customs requirements cannot be ruled out if customs authorities make amendments to the rules of customs control and export duty payment.

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 interacting with government authorities and stakeholders.

Financial risks

Foreign exchange, interest rate and inflation 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.

Credit and liquidity risks

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

Risk management/mitigation

An open policy is pursued to ensure the performance of contractual payment obligations in respect of supplies. 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, its subsidiaries and entities.

Market risks

With oil being the base product, falling oil prices put a downward pressure on prices for natural gas and energy in general. If oil prices drop even further or remain at the current level over a long period of time, 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 modifying existing, or entering into new, contracts, and by 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.

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.

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 inaccuracies in reserve estimation entail risks for PJSC Gazprom’s operations.

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 that may lead to legal, financial and reputational implications.

Risk management/mitigation

The Company is committed to maintaining its environmental policy, implementing programmes and initiatives to reduce its environmental footprint, carrying out environmental activities, taking out environmental risk insurance, and introducing environmental protection technologies. Most subsidiaries have in place and continuously improve environmental management systems certified to ISO 14001:2004.