Risk description Risk management Fluctuations in hydrocarbon prices may have a significant impact on the
Company’s financials and its securities value. In the short run, oil prices are expected to remain highly volatile due to global economy growth uncertainty, changes in oil supplies and in the global supply/demand ratio, as well as the growing pressure of geopolitical tensions.
The issuer is a vertically integrated company (VIC) that combines production, refining and distribution assets. This structure serves as a natural hedging mechanism, where different risk factors cancel each other out.
The Company’s strategic development programs factor in several price scenarios, while its investment project portfolio is managed depending on the price sensitivity of respective projects.
A commodity supply management system has been implemented which makes it possible topromptly respond to market changes and conduct arbitrary shipments.
In its trading activities, the Company uses hedging operations which help significantly reduce the negative impact of the price fluctuations on oil and petroleum product markets as part of the Group operations.
High volatility of oil prices, exchange rates of foreign currencies to the US dollar, refining margin,petrochemistry and power generation margin, growth of tariffs and suppliers’ prices, as well as possible economic sanctions against Russia may create an imbalance in the figures included into the plans, budgets and investment programs of LUKOIL Group, thus leading to the shortage of liquidity and financing sources.
This risk is managed through sensitivity assessment of the performance figures included in the plans, budgets and investment programs to the changes in macroeconomic indicators. The Company also develops proposals on plan adjustments, possible sequestering of expenses associated with the transition to the stress scenario, shifting of due dates and project implementation dates or inclusion of optional projects in the plan in case of improvements in the macroeconomic situation, as well as the proposals to ensure timely financing of business activities. Much attention is paid to cost minimization by means of tender procedures.
FX risks
Risk description Risk management The fact that the Company’s assets are mainly concentrated in the RF
makes its financials dependent on the ruble to US dollar exchange rate. The Company’s proceeds are mainly formed by US dollar proceeds from oil and petroleum product sales, while the majority of operating and capital expenses are denominated in rubles. The Company has to sell foreign currency to finance ruble-denominated expenses. When the ruble appreciates, in order to finance ruble-denominated expenses the Company needs to sell an extra amount of its foreign currency proceeds, which will have an adverse effect on the Company’s net profit in rubles.
In order to mitigate the adverse impact of the changes in the currency exchange rates the Company takes advantage of its geographic diversification. The Company also applies hedging instruments to its currency proceeds.
Counterparty default and non-payment risk
Risk description Risk management The risk means delayed payments for products supplied by the Company.
In terms of exports, delayed payments and/or underpayments may require the Company to raise additional funding to be able to meet its financial obligations.
To mitigate these risks, the Company has contracts with third parties (non-Group entities) that provide for pre-payment terms or letters of credit or bank guarantees from end customers. Banks that can issue letters of credit and guarantees are subject to PJSC “LUKOIL” corporate center approval.
Risk description Risk management Changes in tax and customs regulation initiated by the Russian
government primarily depend on the current state of the national budget system and domestic market regulation policy. The financial performance of the Group and its entities may be adversely affected by a heavier tax burden, unexpected revisions of tax rates and duties, and cancellation of preferential customs duties applied to a number of LUKOIL Group’s fields.
In the wake of significant RUB/USD rate fluctuations over the last months and continued ruble weakening, PJSC “LUKOIL” may be forced to pay additional duties when filing a periodic customs declaration for exported energy carriers beyond the established amounts (excluding pipeline supplies).
At the same time, in accordance with the Russian Law On Customs Tariff the Government of theRussian Federation reviews export customs duties for oil and petroleum products on a monthly basis. Customs duties are calculated based on oil prices on global petroleum feedstock markets and, therefore, falling oil prices are followed by reduced duty rates, although taking effect from the next calendar month.
High ruble-rate volatility continues to bear significant risks and uncertainty in terms of amounts of export duties paid in rubles.
To manage these risks, LUKOIL Group participates in discussing legislative initiatives, timely assesses the impact of prospective changes in tax and customs laws on its performance, and takes steps to minimise or offset negative consequences of changes in the tax regulation, for example, if possible, to be able to submit customs declarations while the RUB/USD exchange rate is growing.
Risks related to amended legislation on joint-stock companies and securities market Risk description Risk management Amendments to laws and regulations of the Russian Federation aimed
at improving corporate governance, in particular, concerning the ban on voting with quasi-treasury shares, requirements to disclose transactions of Group entities, as well as transition to the Corporate Governance Code implementation as recommended by the Bank of Russia in its Letter No. 06-52/2463 of 10 April 2014, may lead to changes in the Company’s structure and corporate governance, with a potential adverse impact on its decision-making processes and performance.
The Company closely monitors the respective legislative changes and takes part in preliminary discussions of proposed changes among industry players to clarify PJSC “LUKOIL” views of the risks and uncertainties arising out of the said changes.
Efforts are underway to make sure that the Company’s representatives are involved in activities aimed at developing effective ways of applying the new corporate governance and tax rules.
Securities trading risks
Risk description Risk management The Company’s securities are traded on regulated markets in Russia
and abroad. Changes to the issuer requirements and listing structure brought in by regulatory authorities and stock exchanges may require the Company to modify its corporate governance framework and assume additional obligations with respect to disclosure and shareholder relations. If the Company fails to comply with these requirements and meet the respective obligations in due time, this may lead to the Company’s securities transferred to lower listing segments or to be delisted, which could adversely affect the liquidity and value of such securities.
PJSC “LUKOIL” keeps track of the changes in listing rules and other stock exchange and regulatory requirements to issuers of traded securities. The Company’s representatives participate in workshops and other events for issuers organized by stock exchanges and other organizations that provide consulting and awareness raising services to issuers of securities traded on regulated markets. PJSC “LUKOIL” also strives to adhere to international best practices of corporate governance and shareholder relations.
Risk description Risk management Another type of risk borne by the Company is related to non-discovery
of productive oil and gas reserves or lower than expected levels of such reserves discovered during prospecting drilling or implementing new projects. This may lead the Company to incur additional costs or discontinue operations at some of its license blocks.
PJSC “LUKOIL” manages this risk at a sufficient level to be able to timely respond to this risk, through conducting additional exploration activities.