Supply chain

Each year, LUKOIL Group entities procure a significant amount of goods, work, and services and interact with a large number of suppliers and contractors from different economic sectors. At the same time, LUKOIL supplies products to a wide range of wholesale and retail consumers worldwide.

Events surrounding the COVID-19 pandemic did not have a significant impact on the operation of our supply chains, although, in some cases, delivery times for goods and equipment or the provision of work/services were extended. Each issue was discussed individually with suppliers and contractors. A joint decision was reached in each case, and a supplementary agreement was signed to extend existing contracts or postpone the timeline for delivering work/services. No cases were recorded of contractors refusing to fulfill their contractual obligations.

Tenders

In 2020, 94 percent of bidders in Russia and 100 percent abroad who were subject to HSE assessment successfully passed the due diligence procedure. The share of local suppliers of material and technical resources (MTR) in Russia remained the same in terms of quantity (in 2020, as well as in 2019, it stood at 93 percent) and rose insignificantly in financial terms (from 95 in 2019 up to 96 percent in 2020).

Most goods, work, and services are procured through public tenders, with mandatory open public bidding on the contract tendered. The selection of suppliers is performed in accordance with the Regulations on Holding Tenders to Select Suppliers and Contractors of LUKOIL Group Entities (in Russia) and based on similar documents approved by the foreign entities. Interested candidates with the right experience, resources, and technology can participate in tenders by completing a qualification questionnaire and submitting a package of documents.

When dealing with bidders in Russia and abroad, great attention is paid to safety, quality of goods, work and services supplied, responsible business practices, and technological innovations. We have introduced a procedure for assessing the level of HSE management based on completion of a qualifications questionnaire, which includes information related to injury and accident rates, availability of certificates and licenses, staff qualifications, safety compliance control procedures, and other factors. New bidders undergo field audits to confirm the information they have provided in the qualifications questionnaire. (Similar procedures are in place at foreign production entities, based on the International Standards on Internal Auditing for detecting fraud risks).

The following procedures are prescribed when interacting with suppliers of material and technical resources that are used, for example, to produce chemical reagents: incoming inspection of material and technical resources to confirm compliance with stated parameters; technical audits of suppliers; committee investigations into failures involving supplier representatives; multilevel control of supplied raw materials; and the storage rules for raw materials and finished goods. Incoming inspections involve collecting retained samples, inspecting raw materials before their transfer to production, and inspecting finished goods based on retained samples.

Candidates can contest actions taken or omissions on the part of tender organizers that may have violated their rights or tendering procedures, and can appeal the decision of the Tender Committee of a LUKOIL Group entity to the PJSC LUKOIL Internal Audit Service (in Russia) for review, as outlined in the Instructions to the Candidate.

Information on potential tender participants that submitted tender bids for the procurement of goods, work, and services for the benefit of LUKOIL Group entities
Reporting period consolidation perimeter Total number of potential tender bidders Including for tenders requiring a HSE assessment Number of potential tender participants admitted to tenders based on the assessment results
Number Percentage of the total number of potential tender participants submitting bids Number Percentage of the total number of potential tender participants checked
Russian entities
2018 4,241 1,720 41% 1,579 92%
2019 3,330 1,465 44% 1,352 92%
2020 3,181 1,588 50% 1,492 94%
Foreign entities of the Exploration and Production Business Segment
2018 268 93 35% 93 100%
2019 305 94 31% 94 100%
2020 41 16 39% 16 100%

Counterparty due diligence

In accordance with the principle of due diligence, an integrated management system “Counterparty Due Diligence Monitoring System” was introduced in 2021, allowing to assess the level of risk of Russian counterparties when signing contracts for acquisition of goods and services, as well as when executing the contract.

The system allows to automate the process of contractors due diligence and decrease the human factor impact on the assessment of tax, commercial and reputational risks. The system facilitates screening applicants and monitoring the integrity of the Group’s counterparties. LUKOIL has developed a counterparty due diligence index calculation model, which comprises 62 risk indicators and has been tested on more than two thousand active contracts. There is also a Counterparty’s Personal Account subsystem for the centralized registration of information on LUKOIL Group’s counterparties.

Corporate security, tax, and legal services are chiefly responsible for conducting these inspections. The Internal Audit Service performs an additional (selective) due diligence of bidders who are the proposed winners of tenders. In addition to this improvement, internal regulatory documents on procurement activities approved in 2021 were updated.

Detailed information on the organization of the “Procurement Management” business process, on corporate documents, the system for evaluating tenders, and also on interaction with applicants and counterparties at the stages of participation in the tender and performance of contractual obligations can be found on the website.