ENERGY FOR PEOPLE - JSC Gazprom Neft

9MAJOR RISKFACTORSEnergy for lifeENERGY FOR PEOPLEMAJOR RISKFACTORSRISK MANAGEMENT POLICY OF THE COMPANYIn 2008 JSC Gazprom Neft developed a Risk Management Policy setting outthe risk management principles and objectives for the purpose of enhancing theefficiency of the Company’s operations in the short and long-term. The main Policyimplementation tool is the introduction of an integrated risk management system(IRMS) covering all levels and areas of the Company’s operations. In the middleof 2009 the Management Board of the Company initiated the process of applyingIRMS in subsidiaries and equity investees.INDUSTRY RISKSThe main areas of operations of GazpromNeft are production of oil and gas, oilrefining, sales of oil and petroleumproducts.Russia’s economic development in 2009was affected by the global financial crisisand was not level. By the middle of 2009the economic slowdown in Russia hadhalted. Since June a monthly growth inGDP has been seen. As a result of that,during the third quarter the productiondynamics adjusted to season went upin a positive manner, and in the fourthquarter further increases in growth wereseen.In the medium term no further aggravationis expected in the sector due to the stabledemand for oil and petroleum products ondomestic and foreign markets.Risks Associated with Potential Changesin the Prices of Target Raw Materialsand Services and their Impact on theCompany’s OperationsIn the course of its business, JSCGazprom Neft uses the infrastructureof monopoly providers of oil, petroleumproduct transportation, and energy supplyservices.The Company has no control over theinfrastructure of such monopoly providersand the amount of rates charged. It isimportant to note that though the amountof rates is regulated by the controllingbodies of the Russian Federation the ratesgrow annually and it leads to an increasein the expenses of the Company.Having no control over the infrastructure ofservice providers could lead to failures ofthe Company’s logistics system.To reduce exposure to these risks theCompany:AAperforms long-term planning ofcommodity flows, timely reserves oiland petroleum product throughputvolumes and required rolling stock;AAconducts optimal redistribution ofcommodity flows by type of transport;AAtakes measures to use alternative andown power generation sources.These measures allow the Companyto reduce risks associated with the useof services and goods acquired frommonopoly providers to an acceptablelevel and to ensure continuing operationof the Company.RISKS ASSOCIATED WITH POTENTIALCHANGES IN OIL AND PETROLEUMPRODUCT PRICESThe financial performance indicatorsof the Company are directly related tothe level of oil and petroleum productprices. The Company cannot controlprices for its products which dependon global and domestic changes tothe supply and demand balance,the volume of consumption of thesemarkets, as well as the actions ofregulatory authorities.The major consequence of a drop inoil and petroleum product prices isa deterioration in the corporate financialindicators.To reduce adverse exposure to theabove risks the Company has taken thefollowing measures:AAhas developed comprehensivemeasures for reducing the cost ofmineral production;AAhas introduced a flexible commodityflow distribution system allowing theCompany to promptly and timelyredistribute commodity flows in theevent of a gap in oil and petroleumproduct prices between the foreignand domestic markets;AAhas a business planning systembased upon a scenario approachto identifying the key performanceindicators of the Company dependenton the level of world oil prices. Thisapproach enables the Company toreduce costs, among other things,by scaling back or postponing itsinvestment programs.88