Major Risks

Critical Risks

A risk is classified as critical based on the key parameters of the Risk Management System, approved annually by the Board of Directors of the Company. When prioritising, each risk is assessed according to two scales, the damage assessment scale and the risk probability assessment scale. Damage assessment implies that a risk is evaluated by its possible financial consequences and by its potential industrial safety impact, with the worst-case scenario taken as the risk impact score. The resulting estimates are then compared with the matrix for classifying risks as critical.

The 2019 list of critical risks was approved by the Board of Directors of TransneftApproved by the resolution of the Board of Directors of Transneft dated 11 December 2018 (Minutes No. 19). in 2018 and amended by the Board of Directors of Transneft in 2019Approved by the resolution of the Board of Directors of Transneft dated 28 June 2019 (Minutes No. 12).. In 2019, the register of risks was updated for further prioritisation and adoption of the list of critical risks for 2020. The risk prioritisation was approved by resolution of the Risk Management Council of TransneftApproved by the resolution of the Risk Management Council of Transneft dated 24 December 2019 (Minutes No. 8).. The list of critical risks for 2020 was approved by resolution of the Board of Directors of TransneftApproved by the resolution of the Board of Directors of Transneft dated 30 December 2019 (Minutes No. 24)..

Appointed for each of the Transneft critical risks is a risk owner who determines and authorises a business unit to manage the given risk, decides on the key risk indicators to monitor the risk dynamics and approves an action plan to manage the critical risk developed by the authorised business unit. The register of risks is revised annually, with special reporting on critical risks being generated.

Amendments to the List of Critical Risks
Critical Risks in 2019 Critical Risks in 2020
  • State regulation of oil and petroleum products transportation tariffs
  • Fiscal risks
  • Shutdown of external power supply to Transneft’s facilities
  • International sanctions
  • Non-compliance of oil (petroleum products) quality indicators with established standards
  • Credit risk concerning partner banks
  • The risk of changes in regulatory documents and legal acts setting and regulating technical requirements
  • Unlawful interference including terrorist attacks or attempts
  • State regulation of oil and petroleum products transportation tariffs
  • Fiscal risks
  • Shutdown of external power supply to Transneft’s facilities
  • International sanctions
  • Non-compliance of oil (petroleum products) quality indicators with established standards
  • Credit risk concerning partner banks
  • The risk of new technical standards or changes to the existing ones, which may affect the technological processes related to design, construction and operation of the trunk pipeline (including environmental and industrial safety requirements)
Critical Risks Management at Transneft in 2019
Possible consequences Measures taken to reduce risk materialisation likelihood and to mitigate the impact of materialised risks Actual materialisation of risks in 2019
1. State regulation of oil and petroleum products transportation tariffs
Restrictions on oil and petroleum products transportation tariffs below the level required for the development of the Transneft system or for ensuring reliable operation of the Transneft system in the long term. Dependence of petroleum products transportation tariffs upon the Russian Railways tariffs and the changes in them for the same transportation routes, which affects the tariff-based revenue of the Company.
Project schedule slips. Reduced efficiency of certain transportation routes. Insufficient revenue to cover the costs required for maintenance of the reliability of the Transneft system.
  • Interaction with the Federal Antimonopoly Service (FAS) of Russia on the matters of scheduled (or, where necessary, unscheduled) review of oil and petroleum products transportation tariffs, as well as on setting and abolishment of oil and petroleum products transportation tariffs.
  • Interaction with the FAS of Russia in setting (review, abolishment) of approved oil and petroleum products transportation tariffs.
  • Interaction with federal executive authorities on deregulation of prices for petroleum products transportation.
The partial risk materialisation in 2019 did not substantially affect the Company’s financial performance.
2. Fiscal risks
Changes to tax, customs, social security and pension insurance laws and regulations.
Unbudgeted costs. Claims by tax authorities.
  • Determining the level of tax burden on revenue and monitoring its change.
  • Tracking changes in the tax law, studying bills submitted to the State Duma.
  • Monitoring specialised press and other information resources.
  • Monitoring the legislation and arbitration practices.
  • Adjusting budget items, based on changes to the law, taxation, customs regulations, social and pension insurance.
  • Analysing certain aspects of operational activities and projects for taking tax risks into account.
  • Adjusting the accounting policy and other methodological documents.
  • Collecting information on the number of tax disputes and the sum in dispute.
The partial risk materialisation in 2019 did not substantially affect the Company’s financial performance.
3. Unlawful interference including terrorist attacks or attempts
Wrongful action (inaction) threatening safe operation of a fuel and energy sector (FES) facility. Threat of attack (or actual attack) on line facilities of Transneft and its subsidiaries. Threatening calls (“telephone terrorism”) and other acts that may entail significant disruption of the operation of the Company’s security facilities. Illegal tapping into oil and petroleum products trunk pipelines. (Except for cybersecurity issues).
Disruption of oil and petroleum products pipeline transportation facilities and power supply, control, automation and communications systems.
  • Making a list of TPT facilities protected by departmental security.
  • Organising and controlling the process of classification of Transneft subsidiaries’ facilities in need of protection and drafting security profiles for fuel and energy sector facilities.
  • Ensuring control over security units of Transneft subsidiaries and Transneft Security Services to address the challenges of ensuring security at TPT facilities.
  • Assessing technical security equipment facilities in the course of implementing technical upgrading, revamping and overhaul programmes, as well as the Company’s investment programmes.
  • Supporting the activities of the ATS Commission for facilities of Transneft and its subsidiaries.
  • Carrying out of joint actions with law enforcement bodies on decriminalisation of the situation in regions where Transneft subsidiaries operate. Submitting a proposal to the Ministry of Energy of Russia to improve the legislation in terms of regulation of issues related to protection of FES facilities, including against unauthorised use of unmanned aerial vehicles.
  • Submitting a proposal to the Department of FES Economic Security (the Ministry of Energy of Russia) to limit the application of certain provisions of the Methodological Recommendations on Analysing the Vulnerability of the Operational and Technological Process and Identifying the Critical Elements of a Facility, Assessing the Social and Economic Consequences of a Terrorist Attack and the Level of Anti-Terror Security of the Facility in Classifying and Issuing a FES Security Profile.
  • Submitting Transneft`s proposal to the Department of FES Economic Security (the Ministry of Energy of Russia) based on the results of consideration of the target structure of regulatory documents in the field of ensuring the safety of fuel and energy facilities (except for nuclear power facilities).
  • Implementing measures to increase the protection level at TPT facilities in case of aggravation of the situation, as well as on weekends and public holidays.
  • Arranging drills and trainings at Transneft’s and Transneft subsidiaries’ facilities protected by departmental security services.
  • Detecting and identifying persons from among the staff of Transneft subsidiaries and contractor (subcontractor) organisations intending and / or attempting to commit a terrorist act for the purpose of unlawful interference in the operations of the Company’s TPT facilities and the facilities belonging to Transneft subsidiaries.
In 2019, the risk materialised partially in terms of detection of illegal tappings into trunk pipelines but had no impact on the implementation of oil / petroleum products pumping plans.
4. International sanctions
Foreign economic restrictions, embargoes, freezing of accounts and settlements, US extraterritorial sanctions
Ban on the import of necessary equipment into the Russian Federation. Disruptions in supply of imported components. Restrictions on settlements with foreign contractors. Restrictions on access to international markets.
  • Participation in the development of a comprehensive response to restrictive measures at the state level (including through intergovernmental committees / combined intergovernmental committees, business councils and field-specific panels and committees).
  • Search for, establishment and development of contacts with relevant influencer agencies abroad and identification of opportunities to circumvent restrictions.
  • Development of proposals for gaining access to services and technologies through neutral or friendly jurisdictions, or alternative suppliers.
  • Monitoring and analysis of draft laws and regulations, as well as of laws that have been passed, and official press releases of the US and the EU departments in charge of sanctions.
In 2019, there were no changes to the sanctions regime with respect to Transneft, the risk did not materialise.
5. Credit risk concerning partner banks
The risk of failure of partner banks to fulfill obligations to Transneft and Transneft subsidiaries.
Financial and reputational losses.
Delayed contract settlements.
  • Establishing limits for transactions with partner banks.
  • Monitoring compliance with the set limits.
  • Monitoring partner banks’ creditworthiness.
The risk did not materialise in 2019.
6. Shutdown of external power supply to Transneft’s facilities
Interruption of external power supply to the Company’s facilities through no fault of “in-house” reasons.
Pipeline downtime. Unbudgeted costs. Emergency.
  • Ensuring that Transneft subsidiaries coordinate requests for changing the operational condition of electrical equipment in keeping with OR-03.100.50-KTN-170-15, based on the analysis of the operation mode of the adjacent grid.
  • Updating Transneft subsidiaries on the decreased reliability of power supply, based on the analysis of monthly maintenance and repair schedules for 220-500 kV class power supply equipment.
  • Cooperating with Rosseti personnel to inspect overhead transmission lines (OTL) providing external power supply to Transneft subsidiaries’ facilities.
  • Monitoring the checks of Transneft subsidiaries’ stable operation when one source is disconnected.
The partial materialisation of the risk in 2019 had no impact on implementing the plan in the field of oil / petroleum products pumping.
7. The risk of changes in regulatory documents and legal acts setting and regulating technical requirements
Changes in the statutory and regulatory requirements in the field of technical regulation (including environmental requirements and requirements to operation of hazardous operating facilities).
Unbudgeted costs. Suspension of operations. Project schedule slips.
  • Monitoring of bills and other draft laws and regulations (LAR) published on the Federal LAR portal and establishing (governing) technical requirements affecting the Company’s operations.
The risk did not materialise in 2019.
8. Non-compliance of oil (petroleum products) quality indicators with established standards
Non-compliance of oil (petroleum products) quality indicators with established standards (in terms of sulphur content, organochlorine compounds or other parameters).
Unbudgeted costs. Pipeline downtime. Reputational losses.
  • Interaction between Transneft subsidiaries and the Repair and Operational Needs Department on timely provision of oil testing laboratories with materials and equipment for quality control.
  • Inspection of oil testing laboratories at Transneft subsidiaries to check their compliance with the requirements of the QMS, risk management approach and impartiality.
  • Interaction with commodity transport operations sections of Transneft subsidiaries on minimising oil batches that do not meet the requirements of the Rational (Process) Routing Scheme.
  • Cooperation with the Department for Engineering Development and Operation of Pipeline Facilities of Transneft on issues related to minimisation of oil batches not meeting the requirements of GOST R 51858.
  • Interaction with commodity transport operations sections of Transneft subsidiaries on blending oil to improve its quality after the repairs.
  • Interaction with Transneft subsidiaries on implementation of the approved Road Map for Measures to Replace Oil with Excess Organic Chloride Mass Fraction.
  • Interaction with commodity transport operations sections of Transneft subsidiaries on minimisation of off-spec petroleum products and implementation of measures to improve the quality of petroleum products by blending them with fuel with a quality reserve.
  • Interaction with the Department for Engineering Development and Operation of Pipeline Facilities of Transneft on minimisation of volumes of off-spec petroleum products.
  • Interaction with commodity transport operations sections of Transneft subsidiaries on improving the quality of petroleum products by sedimentation and filtering.
The risk materialised in 2019. In April 2019, an incident at the Druzhba oil trunk pipeline was caused by third parties, when high concentrations of organochlorine compounds were released into the transported oil.
On 24 July 2019, the Board of Directors agreed on the maximum amount of payments to shippers under contracts for the provision of oil transportation services at the rate of USD 15 per barrel of substandard oil.
The RUB 23,031 mln spent on the creation of a reserve are included in other expenses in the Profit and Loss Statement for 2019. As of 31 December 2019, the payments from the created reserve based on consignors’ claims amounted to RUB 3,322 mln.

Risk Insurance

The Company uses the system of property risk insurance quite effectively on a par with the risk management tools introduced within the RMS framework. Insurance is an instrument of managing risks, allowing to fully or partially transfer financial losses from materialisation of risks to insurance companies and thus indemnify for losses of the Company or its subsidiaries.

The main principles of the property risk insurance system, as well as of insurance application and types used for oil and petroleum products trunk pipeline transport, are set out in the Regulations on Property Risk Insurance of Transneft and its SubsidiariesApproved by Transneft Order No. 26 dated 27 February 2014..

The objects of property insurance contracts are all types of fixed operational assets that, if damaged, may affect the operations of Transneft subsidiaries; they are insured against loss (demise) or damage on the terms of insurance “against all risks”. Transneft subsidiaries also insure vehicles and civil liability for damage to third parties and the environment.

In the course of operational activities, Transneft subsidiaries independently insure cargoes and construction risks as required.

Risk Management System Efficiency Assessment

The Department of Internal Audit and Analysis of Core Business Activities has assessed the performance of Transneft’s risk management system in 2019. According to the evaluation, the RMS efficiency can be recognised satisfactory.