Risk Management System

GRI: 102-15, 102-20

Zarubezhneft JSC Group intends to maximize its shareholder value and works to improve performance of its activities by ensuring its sustainable development and enhancing its competitiveness while meeting the state interests. Zarubezhneft JSC pursues long-term objectives, analyzes current issues, threats and opportunities across all areas of activities and considers potential risks when making decisions.

Zarubezhneft JSC developed and continuously improves a unified approach to risk management. Together with the unified tools and methods of risks analysis, this forms a risk management system integrated with management processes.

The Company’s risk management objectives:

  • to enhance performance of managerial solutions by analyzing the intrinsic risks;
  • to ensure the maximum performance of risk management measures during implementation of adopted solutions.

The Company’s risk management tasks:

  • to build a risk management culture in the Group to achieve common understanding of the basic principles and approaches to risk management by management and employees;
  • to apply a systemic approach to identification, analysis, and evaluation of the risks specific for the Group’s activities;
  • to provide cross-functional review of information on risks in the Group’s structural units and enterprises and joint development of risk management measures;
  • to provide information to support the decision-making process at all levels of the Group’s management.

Zarubezhneft JSC’s integrated risk management system provides a structured approach to evaluating opportunities and assessing risks, which allows for making well-considered managerial decisions. The system includes a set of processes, policies, and procedures that are integrated into Zarubezhneft Group business processes, including business planning strategic processes carried out by the Board of Directors, management, and employees at all management levels, and aimed at achieving Zarubezhneft JSC’s goals. An owner is assigned responsibility for management of each risk. Risk coordinators are identified in each Segment and in all key business processes; they distribute and support application of the corporate risk management principles. Terms and objectives for risk analysis take into account the features and requirements of each business process, at the level where risk management is carried out.

The Perspective and Organizational Development Department maintain responsibility for methodological support, development, and maintenance of the risk management system.

This approach allows areas of responsibility for risk management to be formed and for monitoring of the risks at all levels of the Company’s management, as well as ensuring development of targeted response plans to significant risks in Zarubezhneft Group.

Significant Sustainable Development risks and response measures

GRI: 205-1, 102-11

Risk Response measures
Production safety risks
  • Accidents with employees and third parties.
  • Human-caused accidents and disasters.
  • Non-compliance with legal requirements in the area of industrial and environmental safety.
The Group of Companies is constantly working to improve the prevention of accidents and incidents in the process of drilling and development and operation of onshore and offshore fields.
At Zarubezhneft JSC production facilities:
  • A three-stage health, safety, and environment (HSE) control system was implemented;
  • The HSE management system is operating and constantly developing. As a part of its implementation, the Company follows the HSE and social responsibility policy, assesses HSE risks, and develops and implements measures to manage them.
To increase competitiveness (an absolute priority when entering international projects), the Company joined the international Vision Zero concept developed by the ISSA.
Climate Change Risks
  • Enforcement of climate change regulation and its physical consequences may have a negative impact on activities in the form of rising costs and reduced efficiency.
In order to reduce the risks accompanied by global climate change, the Company carries out the following activities:
  • accounting and planning of measures to control greenhouse gas emissions;
  • energy efficiency programs;
  • projects in the field of renewable energy;
  • biodiversity conservation programs in the areas of operation.
  • accounts for environmental risks when making investment decisions regarding new projects;
  • accounts for climatic changes risk when designing and construction facilities in the most vulnerable areas of the Far North;
The Company also considers environmental risks when making investment decisions on new projects and climate change risks when designing and constructing facilities in the most vulnerable areas of the Far North.
The Company has been participating in Russian oil and gas companies’ environmental responsibility transparency rating since the rating was established in 2014.
In 2019, Zarubezhneft JSC ranked second, confirming its position of the previous year.
Political Risks
  • Risk of damage to political and economic interests of the Russian Federation due to selecting a wrong strategy for the Company’s current and future activities in the country.
  • Risks of partial and complete loss of control over the Company’s assets abroad.
Zarubezhneft JSC is a state-owned company and represents the interests of the Russian Federation abroad.
Given the variability of political, economic, and legislative conditions in the countries of the Company’s current and future activities, indicators of changes in political, economic, and legislative conditions are monitored in the countries of the Company’s current and future activities for regular monitoring of political risk.
In addition, Zarubezhneft JSC regularly holds consultations with representatives of Russia’s federal executive authorities, foreign embassies, and companies on the situation in the countries of operation and the prospects of participation in certain projects abroad.
Corporate Fraud and Corruption Risks
  • Risk of the Company or its employees being involved in corrupt activities as well as failure to comply with the legislation of the Russian Federation and countries of operations, which entails imposition of legal sanctions and/or other corrective actions by supervisory authorities.
The Company has an internal system (compliance) to control combating corruption and fraud:
  • regular monitoring of corruption and fraud risk indicators for the Company’s most sensitive business processes;
  • on a systematic basis, internal regulatory documents in the field of preventing and combating corruption are updated;
  • measures are taken to inform and train employees in order to increase the level of anti-corruption culture.
River

Corporate Management System

GRI: 102-18, 102-22, 102-23

Measures to improve the corporate management system

Zarubezhneft implements a set of measures to improve corporate management, aiming to comply with the best applicable international and Russian practices. The Company takes measures to maintain a high level of corporate management, which is assessed annually in accordance with the Company-approved methodology for self-assessment of corporate management quality.

As part of the Corporate Management Code best practices, the following special committees attached to the Board of Directors were created and are successfully operating: Strategic Planning Committee, Audit Committee, Compensation, and Nominating Committee. Issues for Board of Directors consideration are preliminarily considered at the relevant committee meetings, including at in-person meetings.

In 2019, a number of the Company’s internal regulatory documents were analyzed and updated, which ensured that preparing and conducting management bodies’ meetings take into account the best corporate management practices.

Role of the Board of Directors in implementing the Development Strategy in the financial year

GRI 103-1

In 2019, the Board of Directors also considered issues aimed at fulfilling the Company’s strategic business objectives, as follows:

  • On approval of the Report on Achievement of Zarubezhneft JSC Corporate KPI Target Values for 2018;
  • Preliminary approval of the Annual Report of Zarubezhneft JSC for 2018;
  • On approval of the Report on Implementation of Zarubezhneft JSC Innovation Development Program for 2018;
  • Progress report on Implementation of Zarubezhneft JSC Corporate Development Strategy for 2019;
  • On approval of Zarubezhneft JSC KPI Target Values for 2020;
  • On approval of Zarubezhneft JSC Business Plan for 2020.

As part of updating the Company’s Long-Term Development Program (LTDP), the following annexes to the LTDP were updated by resolution of the Board of Directors, subject to the recommendations resulting from the LTDP audit and to the directives received from the Government of the Russian Federation, as below:

  • Annex No. 3 Zarubezhneft Group Innovation-Related Activity;
  • Annex No. 4 Action Plan for Zarubezhneft JSC Long-Term Development Program Risk Management up to 2030;
  • Annex No. 5 Demand of Labor Resources under Zarubezhneft JSC Long-Term Development Program;
  • Annex No. 6 Labor Performance Enhancement Program;
  • Annex No. 7 Measures to Increase Performance and Transparency of Zarubezhneft JSC Activities;
  • Annex No. 8 Measures on Planned and Phased Replacement of the Foreign Production, Works, and Services Purchased with Equivalent Domestic Products, Work, and Services;
  • Annex No. 9 Operating Expenses Reduction Program;
  • Annex No. 10 Program Measures to Ensure Achievement of the LTDP KPIs and Compensation to Zarubezhneft JSC Management.

For the purpose of implementing Zarubezhneft JSC’s digital transformation, LTDP Annex No. 13, Zarubezhneft JSC Strategy in Digital Transformation, was developed and approved by the Board of Directors.

In order to implement the sectoral section of the action plan for acceleration of the growth rates of investments in fixed capital and increase their share in the gross domestic product up to 25 percent, the Zarubezhneft JSC Board of Directors approved LTDP Annex No. 14, Long-Term Development Program Measures to Accelerate the Growth Rates of the Investments in Fixed Capital of the Upstream Segment.

Sustainable Development issues considered by the Board of Directors and attached committees

GRI 103-2

In 2019, the Board of Directors and attached committees considered the following Sustainable Development issues:

  • On the vision embodied in Zarubezhneft JSC Innovation Development Program;
  • On approval of the Report on Implementation of Zarubezhneft JSC Innovation Development Program;
  • On renewable energy sources development;
  • On finalizing corporate import phase-out plans for protection against radiation, chemical, and biological factors;
  • On consideration of the inspection results as to performance of the procedures for organizing risk management and internal control systems aimed at preventing and combating corruption;
  • On approval of the Regulation on Charitable and Sponsorship Activities.

Anti-Corruption Activities

GRI 205-2

Zarubezhneft does not accept corruption and strictly follows the requirements of Russian law and the laws of other countries where the Company conducts or plans to conduct its activities.

In 2019, among the first three largest Russian companies, Zarubezhneft JSC underwent public confirmation of compliance with the Anti-corruption Charter of Russian Business, confirming the Company’s compliance with Russian and international standards of business ethics.

In the reporting period, the Company’s anti -corruption activities were focused on developing a compliance system.

Based on experience, a unified corporate fraud and corruption risk assessment system was developed for the corporate center and subsidiaries, which ensures assessment of the risk level and efficiency of control procedures in business processes. The results obtained allowed us to develop and implement additional measures aimed at eliminating (minimizing) corruption risk.

An important element of the anti-corruption system is forming an anti-corruption attitude in employees, characterized by intolerance of any form of corruption.

As part of explanatory work, the annual anti-corruption training of all Company employees was continued, and senior Zarubezhneft JSC management received additional training at one of Russia’s leading universities.

In the following period, work will continue to improve the Company’s compliance system. In particular, it is planned to introduce automation and digitalization elements, as well as other anti-corruption practices aimed at timely identification and elimination of the causes and conditions of corruption risks.