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Main page Sustainable Development Key Sustainability Factors
Key Sustainability Factors

Key Impacts

As a major employer in Russia, Rosneft has a substantial influence on the national economy, society, and environment.

  • considerable contribution to ensuring Russia’s energy security and petroleum product supplies to its regions;
  • the Company is among Russia’s major taxpayers, with a total contribution to the consolidated national budget from taxes and customs duties exceeding RUB 3 trillion in 2012;
  • significant influence on the pipeline, machine-building and service markets;
  • the Company’s subsidiaries are major employers in some Russian regions and serve as local economic mainstays for several municipalities, thus making a considerable contribution to social and economic development and growing Investorsment attractiveness of such localities.
  • air pollution (air contaminant and greenhouse emissions);
  • impacts on water resources (water consumption for process needs; water pollution resulting from operations, leakages and accidents);
  • land use for industrial development;
  • potential impacts on biodiversity;
  • pollution resulting from consumption of Company-produced petroleum products (indirect impacts).
  • the Company ensures stable employment and offers competitive compensation and social assistance;
  • promoting ethical social and business practices through strict observance of human rights, equality, transparent supplier and contractor relations, and a socially responsible approach to integration of the Company, its subsidiaries and affiliates;
  • contributing to educational potential of the host regions; promoting sports and healthy lifestyle;
  • charitable support of local communities and cultural institutions;
  • significant contribution to supporting traditional lifestyles of the indigenous minorities of the Far North in the host regions.

Risks and Mitigation Opportunities

Rosneft continuously monitors and evaluates legal, financial, industrial, environmental and other risks that may adversely affect its sustainable development.

In 2012, Rosneft started building up a comprehensive risk management system. It formed the Risk Management Department, which created the system development roadmap. In order to develop the risk management system, the Company created an action plan that accounts for Rosneft’s scale of operation. Besides, Rosneft has developed the Risk Management System Concept, which is being negotiated at this time.

The Concept suggests that the top management defines a risk appetite, identifies and assesses risks, risk management efforts and their relation to the Company’s management processes, respective reports and raises risk awareness of in-house and external stakeholders.

In an effort to develop the concept, the Company started devising a risk classifier and identifying key corporate risks. All the risks have been divided into 4 main groups: strategic, operating, financial and legal risks. The most prominent risks will be selected from these groups, which will later be scrutinized by means of qualitative assessment approaches. The risks were selected subject to experience of consultants in the real sector in general and oil and gas industry in particular, as well as prior qualitative assessment of risks and their key properties. The key risks were selected in accordance with opinions expressed by Rosneft’s experts, who knew the special nature of the Company’s business.

Among the key operating risks, Rosneft identified environmental risks, which play an important role both amidst production and processing risks. The energy price increase risks together with currency gap, interest rate and credit risks are the most essential risks in the group of financial risks, which is due to the energy performance programs.

Other operating risks arising from exploration, production and processing also include such important risks, as personnel professionalism and qualification, fraud, health and safety risks. Marketing risks include energy alternative risks, which may affect consumer perception of the Company in future. Strategic, financial and legal risks include risks related to human resources, legislative amendments to environment and health safety and protection.

The company adapts and tunes up the risk management system subject to Rosneft’s new needs following the integration of TNK-BP assets.

Formation of the Risk Management System

In 2012, the Company started building up a comprehensive risk management system. It formed the Risk Management Department, which created the system development roadmap. In order to develop the risk management system, the Company created an action plan that accounts for Rosneft’s scale of operation. Besides, Rosneft has developed the Risk Management System Concept, which is being negotiated at this time. The Concept suggests that the top management defines a risk appetite, identifies and assesses risks, risk management efforts and their relation to the Company’s management processes, respective reports and raises risk awareness of in-house and external stakeholders.

In an effort to develop the concept, the Company started devising a risk classifier and identifying key corporate risks. All the risks have been divided into 4 main groups: strategic, operating, financial and legal risks. The most prominent risks will be selected from these groups, which will later be scrutinized by means of qualitative assessment approaches. The risks were selected subject to experience of consultants in the real sector in general and oil and gas industry in particular, as well as prior qualitative assessment of risks and their key properties. The key risks were selected in accordance with opinions expressed by Rosneft’s experts, who knew the special nature of the Company’s business. The company adapts and tunes up the risk management system subject to Rosneft’s new needs following the integration of TNK-BP assets.

Industrial and production risks

Below are the major risks, which may considerably affect the Company’s operations. Industrial, country and regional, financial and legal risks are listed below. For more information, see quarterly reports of the issuer at the Company’s website.

 

A decline in oil, gas and petroleum product prices can result in falling commercial production, a decrease in the Company’s reserves or lower economic efficiency of exploration programs.

Rosneft is heavily dependent on such oil and petroleum product transportation monopolies, as Transneft, Russian Railways and Gazprom and has no control over the infrastructure they operate and fees they charge.

Winter subnormal temperatures in several northern regions may complicate operations of the Company’s oil producing assets. Low winter temperatures, harsh ice and wave conditions in the northern seas increase risks related to offshore exploration safety that may lead to project delays. Oil export via the Black Sea terminals to the Mediterranean ports may be limited to the Bosporus throughput and weather conditions in the Black Sea (gales) in autumns. The export terminals in the Baltic Sea and De-Kastri may also be closed due to difficult ice conditions in winter. Any prolonged delay in operations of export terminals may adversely affect operating results and financial standing of the Company.

The Unified Gas Supply System (UGSS), which is owned and operated by Gazprom, transports virtually all gas in Russia. Further growth in the Company’s gas production and sales to independent regional traders and industrial consumers primarily depends on sufficient access to UGSS capacity, which is not secured for the time being.

Crude oil and gas reserves data is only estimates and chiefly based on the internal analysis carried out by D&M, an independent oil production technology advisor to the Company. The actual size of accumulations may differ materially from these estimates.

The oil and gas industry is described by stiff competition. Rosneft chiefly competes against other leading Russian oil and gas companies and hold a leading position in the industry both in Russia and worldwide, which drastically increases its positions in the competitive struggle. It has a substantial portfolio of new projects to maintain and improve its positions in the future competition.

The Company’s operations – exploration, production, refining and transportation of oil, gas and petroleum products – may adversely affect environment and be harmful for the health and lives of employees. The source of danger includes both human factor, such as a failure to observe safety rules, and equipment malfunctions, acts of God or unlawful actions of third persons. It is increasingly more important when it comes to operations in harsh climatic and geographical conditions, for example, in development of the offshore license blocks. These risks may lead to considerable environmental harm and threat for the health and lives of people, as most processes involve large amounts of oil, gas and petroleum products that are flammable and explosive. As a result, the Company may face both considerable loss of income and additional costs, and possible phasedown of certain facilities followed by dramatic injury to reputation of the Company.

The Company’s operating processes are associated with big chance of accidents and emergencies. Therefore, all the processes and facilities of the Company exposed to such things, as accidents and emergencies, have respective response plans. Poor efficiency of the plan or inability to act in line with such plans may contribute to negative consequences from accidents and emergencies. It may lead to additional material costs on cure of effects and recovery of standard operations.

Qualified personnel both employees and executives are one of the major success factors for the Company. No strategic objectives or high performance indicators could be achieved without concerted efforts of the personnel. Poor qualification of the Company’s personnel or lack of qualified employees may render it impossible to achieve strategic objectives, expected financial performance and lead to additional expenses on the search for the personnel replacements and negative consequences for the Company’s reputation.

Today, alternative energy is in its early stage of development. However, many traditional energy companies Investors in the alternative energy projects. Such projects are mostly a part of the marketing policies for now but in future they may become one of the competitive advantages. Poor development of alternative energy projects may in future be associated with additional financial losses and have negative impact on the Company’s reputation.

The Company operates in all the Russian federal districts and its operations should be in line with the regional development strategies. Rosneft also faces risks, arising from operations in foreign countries. In most cases, these are emerging markets exposed to more substantial political, economic, social and legal risks than mature markets. In many aspects, any risks, arising from operations in such countries, may be comparable to or higher than the risks the Company faces in Russia.

The Company increases and expands its business activities by attracting equity and borrowed funds to that end. A major proportion of the Company’s gross revenue is attributable to export of oil and petroleum products. Consequently, any foreign exchange fluctuations affect operating results of the Company, which is a foreign exchange risk factor. The Company’s foreign exchange risk is considerably reduced due to expenses and costs in foreign currencies and loans that are also repayable in US dollars.

As a large borrower, the Company is also exposed to interest rate risks.

These risks are associated with potential changes in customs and tax legislation, licensing legislation or licensing of rights to use objects with limited turnover (including natural resources),legal regulation of land use and town-planning relations, court practice with respect to the Company’s operations (including licensing issues), which may have an adverse impact on its operating results and current litigations the Company is a party to. Legal risks also include violations of anti-trust laws, which may lead to large fines calculated in percentage of the annual revenue (8% and more) in the certain commodity market. Another important part of legal risks is risks related to changes in environment and industrial safety and protection laws.

Insurance

The Company considers insurance as a risk management tool, which allows it to shift financial losses from insurable risks to insurance companies. The most substantial risks are placed in the international reinsurance market.

Every year, the Company signs and renews contracts for insurance against oil and petroleum product exploration, refining and storage. The insurance coverage encompasses producing and refining facilities, shell and core works. In accordance with the Russian laws, Rosneft signs third-party liability insurance contracts.

The Company has launched the program on insurance of risks inherent in key assets, including insurance of property, equipment malfunctions, losses from business interruption, comprehensive insurance for the shell and core works under the refinery modernization program.

In 2012, the Company implemented the comprehensive third-party liability insurance program covering Rosneft’s operations in Russia and foreign countries, including insurance against damage resulting from shore and offshore operations.

 

Sustainability Report 2014, 12.2 Mb

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