Ruspetro Regulatory News (RPO)

Key risks

Risk description

Risk mitigation

Health, safety, and environment

Health and safety

The Group conducts its business in a regulated industry and may be subject to claims and liabilities under environmental, health, safety and other laws and regulations, which could be material.

Ensuring that best HSE practices are in place is a focal point in all our activities. The Company adopted a set of HSE policies, appointed a HSE Director, and implemented a system to collect, process, and report HSE information. A renewed and updated programme of HSE training for our staff is currently being developed.

Operations, production and sales

Reserves and production forecasts

Reserves estimates and production forecasts are inherently uncertain; the Group's total reserves may decline in the future and the Group may not achieve estimated production levels.

Internationally proven appraisal and development techniques are utilised to maximise the economically recoverable hydrocarbons for our reservoirs and rigorous probabilistic methodologies are in place for reserves assessment. In addition, appropriately risked production forecasting methodology is in place for forecasting and modelling purposes. Competent persons reports are prepared and released periodically, with the next one planned for the end of 2015.

Operational execution

Well and facility construction, and production operations involve numerous operational risks. These may result in losses or additional expenditures and lead to the Group not achieving its planned production and financial targets.

The Company is focused on putting in place a first-class operational, engineering, drilling and completion team, and applying best global practices in operational execution. In addition, Ruspetro has a rigorous procedure of selecting contractors and prefers to use services of well known international companies. Importantly, insurance of drilling and operational risks is also in place.

Licence rights

The Group has the right to explore and extract oil and gas within part of the Krasnoleninsk field in Western Siberia. If the Group's appraisal and production licences are suspended, restricted, terminated or not extended prior to expiry, this would have a material adverse effect on the Group.

Renewal of mineral right licences is regulated by Russian legislation. A plan for the renewal of licences is in place, and a dedicated team for managing licence obligations has been established. Matters related to licence obligations are routinely reviewed at Audit Committee meetings.

Transportation route

The Group relies on the Transneft pipeline for transportation of its crude oil and does not have control over its functionality or the cost of its service.

Ruspetro's fields are strategically located, with access to various transportation routes. Delivery through the Transneft pipeline system is the most widely used option for Ruspetro, while rail and truck deliveries are available as an alternative to pipeline sales. The cost of Transneft services is regulated by the government and is predictable. The relative attractiveness of alternative sales routes is evaluated on a monthly basis and appropriate decisions to use a certain route are made accordingly.

Insurance coverage

The Group does not have the types of insurance coverage customary in more developed countries for a business of its size and nature, and a significant event could materially impact its business.

Ruspetro has put in place insurance arrangements in accordance with the regulations in the markets in which it operates and given current business needs. Decisions to increase insurance coverage are evaluated on an ad hoc basis.

Reliance on third-party contractors

The Group relies on the services of third parties, the availability and quality of which cannot be assured. The oil industry is intensely competitive and the Group may not be able to compete effectively with much larger competitors.

The Company has implemented rigorous procedures for selecting contractors. Engineering, subsurface, and drilling and completion teams ensure that the performance of contractors is properly monitored and managed.

Procurement

Lack of effectiveness in negotiating and managing purchases and contracts could increase costs for Ruspetro and/or cause delays to project completions and operations. The vetting of counterparties, in particular for business ethics and integrity as well as financial and operating capability, represents an associated risk area.

Ruspetro operates effective policies, procedures and controls in relation to prior approval of counterparties and competitive procurement within strict levels of delegated authority with the objective of achieving arm's-length, transparent purchasing. Specifically, Contracts Committees consisting of key Company executives are established in the field and Moscow offices. They, our Board and the Audit Committee monitor carefully and undertake close, regular scrutiny of the effectiveness of the Company's counterparty policies.

Protection of Company property

Damage, theft or interference to Ruspetro's assets in the field can stop or limit production resulting in reduced cash flow and increased costs.

A security strategy that includes improved training, processes and procedures for security personnel and improved surveillance technology has been developed and implemented. In addition, the system of infield oil pipelines and infrastructure is designed to prevent oil theft.

Business integrity

The Company is subject to the United Kingdom Bribery Act 2010. Its failure to comply with the laws and regulations thereunder could result in penalties that harm its reputation and have a material adverse effect on the Group's business.

Internal policies based on the United Kingdom Bribery Act 2010 are in place and the Company is focused on ensuring their implementation.

Financial

Oil prices

The Group may be adversely affected by a substantial or extended decline in prices for crude oil.

Thanks to its relatively small size, the Company can quickly evaluate changes in macroeconomic environment and adjust its operations if necessary. Although Ruspetro does not currently hedge its oil price exposure, hedging options are evaluated quarterly based on production forecast, pricing and other business needs. In addition, the Company's oil is of comparatively better quality than the Urals blend, which allows Ruspetro to receive a premium for sales via rail or truck. When we make investment decisions, we strive to do so after careful consideration of various oil price scenarios.

Currency fluctuations

Fluctuations in currency exchange rates (particularly RUB/US$) may materially and adversely affect the Group's financial position.

The majority of Company's revenues are denominated in US$ or linked to international US$-based oil prices. On the other hand, all material service contracts are denominated in RUR or have caps on the RUR/US$ exchange rate. Therefore, the Company's costs expressed in US dollars decrease as the ruble depreciates, and vice versa. The Company currently manages its foreign exchange exposure without engaging in long-term currency hedging contracts, and this practice is reconsidered periodically as circumstances change.

Debt facility covenants

If the Group's development plan does not succeed, the Group will be unable to comply with its current debt facility covenants or with their other requirements.

The Group's medium-term planning is being done with careful consideration of debt facility covenants, and performance against covenants is evaluated on a monthly basis with the necessary adjustments made in a timely manner. In addition, covenants are based on cumulative four quarterly periods, which may smooth the impact of short-term fluctuations.

Long-term funding

The Group must make significant capital expenditures to increase its revenues, cash flows and production levels. The inability to finance these and other expenditures in the longer term could have a material adverse effect on the Group's business.

Ruspetro's status as a UK publicly traded company with strong local Russian shareholders is of advantage in accessing domestic and international sources of finance.

Human resources

Key technical and management skills

The Group is dependent on senior management personnel and on maintaining a highly qualified and skilled core workforce.

Long-term incentive programmes are in place for key personnel to attract and retain key management and staff. All new employees are interviewed by executives to ensure that interests are aligned and the right candidates are selected. Evaluations of management and staff are performed twice a year, with relevant actions taken thereafter.

Shareholders and free float

Free-float obligation

The Company's ordinary shares may be delisted from the Official List if the Company does not establish or maintain a sufficient free float in its shares.

Further to UKLA guidance, several options are currently under consideration to ensure sufficient free float in the Company's shares, including the sale of shares by significant shareholders and the issue of new shares. A broker has been retained to advise on the most effective ways to meet the requirements for free-float in the Company's shares and help in executing any necessary transactions

Dominant shareholders

Certain shareholders have significant influence over the Company. Their interests may not be aligned with those of the other shareholders, and such concentrated ownership of the Company could affect the market price and liquidity of its shares.

The Company treats its shareholders equally and carefully manages its relationships with key shareholders. Relationship agreements are in place with Limolines Transport Limited, Makayla Investments Limited, Mastin Holdings Limited and Nervent Limited to limit their influence on operations. Additionally, four of the eight directors are independent and management engages directly with investors to increase transparency and liquidity.

Political and regional

Sanctions compliance

Non-compliance with EU or US sanctions or export restrictions, an expansion of EU and/or OFAC sanctions programmes or a significant expansion of the Group's dealings with any parties subject to sanctions could adversely impact the Group's business.

Most of the materials, machinery and equipment used in the Company's operations or provided by key contractors are sourced locally or from non-sanctioned jurisdictions (such as China). In addition, existing and new contractors are evaluated taking into consideration existing sanctions and advice from an external legal counsel.

Regional political Instability

Political and governmental instability in Russia and the region could adversely affect the value of the Group's investments in Russia.

The Company's assets are located in Western Siberia, which limits the risks of operational distractions due to political instability. In addition, export sales are carried out without the use of export pipelines.

Regional economic instability

Economic instability in Russia and the region could adversely affect the value of the Group's investments in Russia.

Our domestic sales netback is linked to the prevailing international oil price and is not impacted by regional economic stability. In addition, Ruspetro carefully monitors the prevailing economic environment to ensure that necessary operational adjustments are implemented.

Russian legal framework

The Russian legal system and Russian legislation continue to develop, and this may create an uncertain environment for investment and for business activity.

The Legal framework in Russia was actively developed throughout the 1990s and 2000s, and recently became more stable. Licences and key contracts with governmental organisations (e.g. land leases) are generally long-term and renewed in advance to the extent possible. In addition, our main contractors are internationally recognised companies capable of adapting if the legal environment changes. Some contacts are signed subject to English law to avoid ambiguity.

Russian taxation

The Russian taxation system is still in the process of developing and is subject to frequent changes that could have an adverse effect on the Group.

Ruspetro engages in ongoing dialogue on the current and future tax regime with the relevant ministries of the Russian government. In addition, Ruspetro enjoys certain tax breaks mandated for fixed periods of 10-15 years. These are committed and less likely to change.