6. RISK MANAGEMENT
Information about the main risks associated with the activities of Transneft PJSC is quarterly published in the report of the emitent on the Company's website. In addition, below there is a brief description of the specified critical risks and the measures taken by the Company to parry their possible adverse effects.
Risk of illegal actions
One of the main risk factors that complicate the production activity of Transneft PJSC and its subsidiaries, are the threats of terrorism and sabotage on the oil trunk pipelines facilities, as well as assaults of mercenary orientation associated with the theft of oil and petroleum products, components of pipeline rout equipment, cables and wires, dismantled pipes and so on.
Risk of freight turnover alternation (including due to oil price behavior)
Transneft PJSC is subject to risks associated with the dynamics of production and commercial activities of Russian oil producing companies and oil refinery plants, which, in their turn, depends on the price of crude oil and petroleum products and the evolution of their cost structure, including tariffs for pumping and export duties. Currently, oil companies adjust their plans on the volume and timing of oil production at the fields, oil from which is planned for transportation both as via pipelines currently under construction, as well as via the Company's already existing oil pipelines. The volumes and directions of oil transportation is also adjusted.
In this regard, the freight turnover of goods through pipelines is heavily dependent on Russian oil industry, and changes in the volume of oil and petroleum products transported via pipeline system operated by Transneft PJSC and haul of transport has a significant impact on the Company's revenues.
Interest rate and currency risks.
Transneft PJSC has no significant income in foreign currency, as carries out its core business activities on the territory of the Russian Federation, as well as has no significant investments in foreign companies, the net asset value of which is exposed to changes in currency exchange rates.
The increase in 2015 year of interest rates on loans led to a rise in price of the Company's debt service. The main obligation of the Company, subject to interest rate risk, is the loan from China Development Bank with repayment until 2029, interest payments on this loan depend on the changes in LIBOR 6M rate that changed during 2015 year from 0.36% up and to 0.85%.
In 2015 year, there were significant fluctuations and a general depreciation of the national currency, as of December, 31st, 2014 year it was 56.26 rubles per a dollar, and as of December 31st, 2015 year - 72.88 rubles per a dollar.
These factors not only had a negative impact on the financial performance of the company, since a significant portion of the Company's debt contracted in US dollars, at a floating interest rate (based on LIBOR 6M), but also led to the realization of additional losses on transactions entered into by the Company against the relatively stable backdrop of market in 2013-2014 years.
In accordance with the approved Policy for managing of currency and interest rate risks, the Company enters into exchange risks hedging transactions in order to minimize the possible adverse impact of changes in exchange rates on the Company's performance indicators.
Tax and legal risks.
Russian legislation, including tax, currency and customs ones, allows various interpretations and are subject to frequent changes. Transneft PJSC, as a law-abiding business unit and taxpayers, under an imperfect and often changing legislation is making every effort to its observance, and if necessary, takes to defend its positions in the courts (additional information is represented in the Appendices №9 and №10 of this report). In general, risks impact on the Company's operations is assessed as limited.
A credit risk for the Company is considered to be failure to fulfill their financial obligations by counterparties, including non-payment of advances, and non-payment of services provided, etc.
Rejection of such risks is performed by means of the preliminary analysis and monitoring of financial and economic condition of counterparties, as well as the applicable contractual guarantees and penalty mechanisms. Contracts for the main activities are executed basis on the prepayment principle; therefore, the impact of these risks is limited. However, on the Company's financial statements negatively affected the formation of reserves in connection with the adoption in 2016 by the Bank of Russia of a number of decisions to revoke the licenses of the Company's counterparties banks.
Mutual international sectoral restrictions (financial penalties).
In 2015 year, there was international discriminating pressure against Russian companies, which also affected the Transneft PJSC as one of the backbone companies of the Russian oil and gas complex.
Due to the complicate political situation and the introduction of economic sanctions against Russia, the sovereign credit rating was downgraded by Moody`s and Standard & Poor`s rating agencies during 2015 year by one step. The credit ratings of Transneft PJSC were downgraded accordingly, even though the own financial strength of the Company as a whole is assessed by rating agencies to be at the same level.
In the area of financial activities, the Company conducts a centralized policy of foreign borrowings, which allows providing the possible lowest cost of debt for Transneft PJSC.
Risk the import / export of goods and services ban.
The share of import goods in the volume of products purchased by the Company is estimated on average at 10%, but the proportion of components and parts in some product categories is significantly higher and the termination of their supply could have a material impact on the volume and quality of work performed by the Company.
To minimize this risk, the Company implements measures on localization of the production of certain categories of imported products. Additional information can be found in Paragraph 12.4 of this Report.
Regulatory decisions (tariffs, customs, and dividends).
Transneft PJSC is the subject of the Russian legislation on natural monopolies. Therefore, the tariffs of Transneft PJSC are regulated by the Federal Antimonopoly Service (FAS of Russia). Due to the fact that one of the main activities of the Company is to provide services directly related to the export of oil and petroleum products, changes in customs laws and regulations may materially affect the direction of traffic and revenue of the Company. Changing the conditions of the state regulation of the industry, including tariff establishment practice, may lead to a change in the Company's revenues.
Risks of changes in prices of purchased goods, works and services.
Inflation processes in the Russian economy have a significant impact on the financial results of the Company in connection with the fact that the possibility of Transneft PJSC to raise tariffs for the provision of services for the transportation of oil and petroleum products through oil trunk pipelines system is limited by the government control, that is, the Company can not changed them depending on changes in the inflation rate and, at the same time, the Company's expenses, which are mainly denominated in rubles are changed in accordance with the inflation rate. At the same time, Transneft PJSC developed and the Board of Directors has approved and implemented the Actions Plan to reduce operating and capital costs of Transneft PJSC, which provides achievement of the index of operating expenses (costs) reducing by not less than 2-3% annually, that is largely allows to compensate the impact of this risk. Additional information is represented in the Paragraph 12.23. of this Report.
Risks associated with climatic and natural phenomena.
Carrying out activities in the regions of Eastern Siberia, the Far East and the Far North, the Company bears the risks associated with severe climatic conditions, as well as a number of dangerous geological processes and phenomena that can have a significant impact on the geotechnical conditions such as waterlogging, erosion, landslides, permafrost soil and others.
To minimize the potential consequences of these risks realization, the Company carries out a set of measures provided by the Long-term development programme, including the monitoring of the technical condition of the system and the introduction of innovative solutions that make it to a large extent possible to neutralize the negative effects of climatic and natural phenomena.
Accidents and incidents risks.
In consequence of accidents and incidents there may occur a suspension of operations of the local site of the oil trunk pipelines system and, as a result, additional costs and losses. However, the distributed structure of the Company's production facilities helps to ensure the continuity of the transportation process, resulting in the fact, that the risk of suspension of production as a whole is estimated as insignificant.
The property and responsibility of the entities of Transneft PJSC system, including the facilities of the linear part, oil pumping stations, oil depots, buildings and facilities, vehicles and buses, as well as the equipment and process oil / and petroleum product which are in the oil trunk pipelines and tank farms are insured (further information is represented in the Paragraph 10.7 of this Report).
HR and social risks.
Increasing the length of the linear part of oil trunk pipelines and the number of pumping stations requires a corresponding additional attraction of personnel, including engineers and technical specialties. In order to reject the possible impact on the Company's business of the change in the demographic situation in the Russian Federation and the level of competition in the labor market there are carried out activities aimed at:
- ensuring of staffing the companies of entities of Transneft system by personnel of the necessary qualifications;
- maintaining of their stability level;
- increasing of productivity and efficiency of the staff costs.
Safety and anti-terrorist control of Transneft oil trunk pipelines.
In 2015 year one of the major risk factors that complicated the business activity of Transneft PJSC and its subsidiaries, were threatening of committing of terrorist acts on the oil trunk pipelines (OTP) facilities and oil products trunk pipelines (OPTP), as well as assaults of mercenary orientation connected with the theft of crude oil and petroleum products.
In these circumstances, the Company has implemented a series of organizational and practical measures to ensure the safety of facilities and the linear part of the OTP and OPTP.
Ensuring of the safety of property and production and technological complexes of Transneft PJSC, pursuant to the Federal Law dated from 20.04.2014 year № 75-FZ "On amendments to certain legislative acts of the Russian Federation on the establishment of departmental security to ensure the safety of the fuel and energy complex" was made by departmental security, consisted of: "Transneft-Security" LLC management unit , directorate of departmental security of the Moscow region and 13 inter-regional directorates of departmental security that are subsidiaries of the Company, consisting in its turn of 64 units of a total number about 16.6 thousand persons.
Total in 2015 year in the entities of Transneft system (ETS) there was performed a physical security of 566 objects, from them: 484 OTP objects and 82 PPS objects, more than 36 thousand km of oil trunk pipelines in the corridor calculation (66.1 thousand km in single line calculation), 20 entities of Transneft system, located on the territory of 60 subjects of the Russian Federation; every twenty-four hours there were posted 1865 security guards in stationary objects and 411 crews of mobile groups , 24 prompt response groups on the linear part. In the 261 secured OTP facilities there were used 555 sniffing dogs.
An important element in the prevention of terrorist acts is ensuring of pass control and intrabuilding regimes on the secured objects. Guard forces employees are focused on detection and suppression of attempts of unauthorized persons access to the objects, as well as entry of weapons, explosives and explosive devices. In 2015 year, security guards managed to detain more than 8000 offenders of admission control at the facilities of the Company, including more than 6000 intrabuilding regimes and about 2 thousand violations of the buffer zones of linear part of MN and OPTP, in respect of which there were executed the acts.
In order to improve the readiness of personnel and guard forces to act in emergency situations of terrorist orientation there were performed more than 3 thousands of exercises and training, including 616 of them with the participation of representatives of the Ministry of Internal Affairs, the Federal Security Service and Ministry of Emergency Situations of the Russian Federation subjects.
As part of the technical upgrading and revamping programme, Capital maintenance programme and Programme of liquidation of planned for the removal out of operation and already decommissioned facilities of entities of Transneft system within the period of 2015-2021 years, in 2015 year there were constructed 62 objects of engineering and technical means of security (ETMS) of a total value in the amount of 1.243 billion rubles. There were constructed (reconstructed) 6 buildings of checkpoints and security stations and 23.54 km of fencing (basic and preventive), assembled 32.94 km of perimeter security alarm systems, 28 security television systems, 23 systems of control and access control and 12 security lighting systems.
In the list of security threats of OTP and OPTP there are dominated theft of oil and petroleum products as a result of illegal tapping, share of which in the overall structure of criminal attacks accounted for approximately 68.4%.
In 2015 year there was recorded an increase by 6.8% of the number of illegal pipelines tapping of OTP (110 tapping, in 2014 year - 103 tapping). On petroleum pipelines there were detected by 5.8% more of illegal tapping than in 2014 year (275 against 260).
Significant growth of illegal tapping was recorded on pipelines in the Samara region by 26.3% (from 19 up and to 24), in the Volgograd region by 66.7% (from 7 up and to 10), in the Republic of Dagestan by 120% (from 5 up and to 11) and the Rostov region by 600% (from 1 up and to 7). The growth of illegal tapping on OPTP, first of all, is connected with the growth of such crimes in the Ryazan region by 163% (from 11 up and to 29), the Moscow region by 50% (from 24 up and to 36) and Bashkortostan by 100% (from 5 up and to 10).
In these circumstances, the security department has consistently implemented a range of measures to strengthen the security of the linear part of the OTP and OPTP from criminal attacks. The guard forces number has been optimized, and matter of material and technical equipment has been resolved. In the inventory of mobile crews of departmental security subdivisions and search-and-technical groups of SS there are 1203 units of search devices of various modifications (pipeline finders, insulation damages searchers, ground penetrating radars, metal detectors, etc..), with the use of which in the reporting period there were examined in a total 22 thousand km of OTPs and OPTPs, and 64 illegal tapping were detected. Security Service of ETS in security activities were actively used in-line inspection data, using the results of which revealed 40 carefully disguised illegal tapping.
In accordance with the instruction of the Russian Ministry of Internal Affairs on conduct of the preventive operations complex “OIL” in the regions of OTP and OPTP passage, the security forces subdivisions together with the police conducted 3554 activities to detect and prevent criminal attacks on the OTP and OPTP (raids, ambushes, hidden observation, etc.), checked more than 2 thousand objects, reasonably suspected of involvement in the illicit trafficking of oil (petroleum products). The joint action resulted in the arrest on suspicion of committing the criminal attacks on the OTP and OPTP of 13 persons and 5 units of vehicles used for transportation of oil and petroleum products. Law enforcement agencies opened 14 criminal cases. There were seized about 108 tons of stolen oil and petroleum products, set 2 illegal oil refinery plants.
In total in 2015 year security subdivisions, both independently and in cooperation with law enforcement authorities prevented 57 facts of thefts of oil and petroleum products from the oil trunk pipelines for which conduct there were detained 175 persons and 44 cars with stolen oil and petroleum products. There were confiscated 829.4 tons of stolen oil, 869 tons of gasoline and diesel fuel.
For all crimes related to theft of oil and petroleum products, the law enforcement authorities received 411 applications and there were filed 336 criminal cases. The courts considered 20 criminal cases (including 17 ones of the previous years), for which 42 persons were arraigned on to criminal charge, 24 brought to the real jail terms.
Ensuring of environmental safety of Transneft PJSC.
Transneft PJSC determines environment protection and ensuring of a high level of environmental safety at production facilities as its higher and constant priority.
In accordance with the Long-term development programme of Transneft PJSC till 2020 year the systematic work on reducing of emissions of harmful substances into the atmosphere was executed.
Gross emissions in the reporting year decreased relative to 2014 year down and to 5.69 thous. tons (6.56%) and amounted to 81.045 thous. tons. In total for the reporting period around the company there were caught and neutralized 7,449 thous. tons of harmful emissions, which is by 359 tons (5%) more than in 2014 year.
Ecological level of production was defined as the key performance indicator of the programme “Reduction of specific emissions of pollutants into the atmosphere”, reflecting the complex characteristics of the works ensuring the reduction of negative impacts on the environment during the oil and oil products transportation through Transneft PJSC pipelines system.
Specific emissions in 2015 year decreased by 0.012 kg/t (6.95%) compared to the previous year and amounted to 0.158 kg/t of the plan to reduce the specific emissions of pollutants into the atmosphere by 5% a year in 2015.
Within the implementation of the Innovative Development Program in 2015 year there were constructed and set into operation one treatment plant with total capacity of 240 m3/day.
In accordance with the technical upgrading and revamping programme in 2015 year there were set into operation 5 wastewater treatment plants with total capacity of 1319 m3/day.
As a result of the conducted measures the amount of pollution (poorly treated) of waste waters treated to surface water bodies in 2015 year decreased relative to 2014 year and amounted to 148.542 thous. m3 and 186.539 thous. m3.
Within the whole year there was performed the great work on waste disposal. In total the Company disposed of 136.672 thous. tons of waste over the past year.
In all production facilities of the Company there was formed an effective system of industrial environmental monitoring of the state of air, water and land resources. It is provided by 53 eco-analytical laboratories approved by the Russian State Standard, staffed by highly qualified specialists and updated analytical equipment. Ecological and analytical control is conducted in accordance with the schedule agreed with the regulatory authorities. In 2015 year there were made 250 thous. analysis of environmental state. Minutes of all tests and analysis in due time are submitted to the regulatory authorities in accordance with the approved monitoring schedules. According to the results of conducted tests and analysis, no any exceedances of established standards were determined.
With a view to the unconditional fulfillment of the environmental legislation of the Russian Federation in the field of emissions and discharges of pollutants valuation substances into the environment and licensing over the past year there was developed and approved in the supervisory bodies (authorities) 110 drafts of standards for permissible emissions (SPE), 50 projects of the standards for waste production and limits on their disposal (SWPLD), 14 projects of standards for permissible discharge (SPD).
As part of the exploratory researches of Technology Platform “Environmental Development Technologies” in 2015 year there were implemented the scientific-research project “Development of environmentally friendly hydrophobic peat-lite self-disposed oil bio sorbent designed to eliminate the consequences of oil and oil products spills in water and soil”.
During the reporting year, there was continued implementation of the following projects:
- Technological works (TW) “Development of remediation technologies of oil- and petroleum products contaminated lands in the summer and winter periods in isolated locations with a help of bio sorbents”;
- Research and development (R&D) “Analysis of the wastewater treatment plants at the production facilities of Transneft PJSC. Development of recommendations".
Insurance against risks.
Basic principles of own property risks insurance system and procedure for application of types of insurance that are used on the oil and oil products trunk pipelines transportation are set forth in the “Regulations on insurance of own property risks of Transneft PJSC and entities of Transneft system” (approved by the Order of Transneft PJSC dated from 27.02.2014 year № 26).
Insurance is considered as a Company risk management tool that allows transferring to the insurance company, totally or partially, of the financial losses from the realization of risks to be subject to insurance and thereby compensate (reimburse) the losses from these risks occurrence.
In carrying out of own property risks insurance, the Company is guided by the following principles:
- the principle of centralization;
- standardization principle;
- the principle of the validity of the decision on the implementation of voluntary insurance;
- the application of the principle of adequate net retention;
- the principle of quality, reliability and transparency of the placement of risks in insurance.
The objects of property insurance contracts are all kinds of real estate property and movables (excluding land plots), including, but not limited to, the following property groups:
- tanks and containers;
- power lines and communication lines;
- oil and oil products pipelines;
- heating, water supply and sanitation networks;
- cars and equipment;
- pipeline accessories;
- computer and office equipment;
- roads and sites;
- other buildings and property.
Operated property of the entities of Transneft PJSC system, including the linear part facilities, oil pumping stations (OPS), tank farms, buildings and facilities, vehicles and buses, as well as the equipment and process oil / petroleum products located in the oil / oil products pipelines and tank farms are insured against the following risks: the loss (destruction); damage to property caused by fire, explosion, lightning, water damage, natural disasters; illegal actions of the third parties.
Also entities of Transneft PJSC system made public indemnity insurance against damage to the third parties:
- of the owners of motor vehicles;
- of the owners of hazardous industrial facilities;
- of the owners of water transport;
- of the organizations for causing harm to the environment as a result of the accident at the hazardous production facilities;
- of the organizations that operate objects using nuclear energy;
- of the organizations against damage resulting from defects of works, affecting the safety of capital construction objects.
In the course of its business activities the entities of Transneft system as it was required independently made insurance against cargos and construction and mounting risks.