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Proposed changes to the relationship between NC KMG and KMG EP July 2016
Proposed changes to the relationship
between NC KMG and KMG EP
July 2016
Legal Notice
All capitalised but undefined terms in this Legal Notice shall have the same meaning as set out in the circular published by NC KMG on 17 June 2016 relating to the proposed changes to the Relationship Agreement and Charter (the “Circular”).
This document contains important information relating to the Proposed Amendments and the Purchase Offer. Holders should read the Circular and this document carefully before making any decision with respect to their Common Shares, Preferred
Shares and/or GDRs. If any Holder is in any doubt as to the action it should take, it is recommended to seek its own legal, tax, accounting and financial advice, including as to any tax consequences, from its broker, bank manager, solicitor,
accountant or other independent financial or legal adviser. Any individual or company whose Securities are held on its behalf by a broker, dealer, bank, custodian, trust company or other nominee must contact such entity if it wishes to vote its
Securities or participate in the Purchase Offer.
The Offeror is not making any recommendations to the Holders as to whether or not to offer all or any portion of their Securities for purchase. Holders must decide whether to accept the Purchase Offer, and if accepted, the amount of Securities to
offer for sale.
This document has been prepared for the purpose of complying with Kazakhstan Laws and the information disclosed may not be the same as that which would have been prepared in accordance with the laws of jurisdictions outside Kazakhstan. The
Purchase Offer is subject to the applicable rules and regulations of Kazakhstan.
It may be difficult for US Holders of Securities to enforce their rights and any claim arising out of the US federal securities laws, since the Offeror and the Company are located outside of the United States, and some or all of their officers and
directors are resident outside of the United States. US Holders of Securities may not be able to sue a foreign company or its officers or directors in a foreign court for violations of US securities laws. Further, it may be difficult to compel a foreign
company and its affiliates to subject themselves to a US court’s judgment.
Neither this document, the Circular nor any related document has been filed with the US Securities and Exchange Commission, nor has any such document been filed with or reviewed by any US state securities commission or regulatory authority of
any country. No authority has passed upon the accuracy or adequacy of this document, the Circular or any related documents, and it may be unlawful and a criminal offence to make any representation to the contrary. This document does not
constitute an offer to sell securities in any jurisdiction.
This document does not and will not constitute an offer or an invitation to participate in the Purchase Offer in any Restricted Jurisdiction. The release, publication or distribution of this document in certain jurisdictions may be affected by the laws of
relevant jurisdictions. Persons who are subject to the laws of any jurisdiction other than Kazakhstan or are not resident in Kazakhstan will need to inform themselves about, and observe, any applicable requirements.
Unless otherwise determined by the Offeror and permitted by applicable law and regulation, the Purchase Offer is not being made, directly or indirectly, in or into or by the use of the mails of, or by any other means or instrumentality (including,
without limitation, electronic mail, facsimile transmission, telex, telephone, internet or other forms of electronic communication) of interstate or foreign commerce of, or any facility of a national state or other securities exchange of any Restricted
Jurisdiction and is not capable of acceptance by any such use, means, instrumentality or facility or from within any Restricted Jurisdiction. Accordingly, unless otherwise determined by the Offeror and permitted by applicable law and regulation, copies
of this document and any other documentation relating to the Purchase Offer are not being, and must not be, directly or indirectly, mailed, transmitted or otherwise forwarded, distributed or sent in, into or from any Restricted Jurisdiction and persons
receiving this document (including, without limitation, custodians, nominees and trustees) must not mail or otherwise forward, distribute or send it in, into or from any Restricted Jurisdiction, as doing so may invalidate any purported offer to purchase
Securities under the terms and conditions of the Purchase Offer. Any person (including, without limitation, custodians, nominees and trustees) who would, or otherwise intends to, or who may have a contractual or legal obligation to, forward this
document and/or any other related document to any jurisdiction outside Kazakhstan should inform themselves of, and observe, any applicable legal or regulatory requirements of any relevant jurisdiction.
United States
The Purchase Offer will be made in compliance with, to the extent applicable, Regulation 14E (“Regulation 14E”) under the US Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Offeror is analysing whether the Purchase
Offer is exempt from certain of the requirements of Regulation 14E pursuant to Rule 14d-1(c) or 14d-1(d) under the Exchange Act (the “Cross-Border Tender Offer Exemptions”). In the event the Offeror determines that the Purchase Offer is exempt from certain of the requirements of Regulation 14E pursuant to a Cross-border Tender Offer Exemption, it and any covered person may rely on any exemption or relief provided for by such Cross-Border Tender Offer Exemption, including any
available exemption from the requirements of Rule 14e-5 that permits brokers undertaking the Purchase Offer or their affiliates to acquire, or make arrangements to acquire, Shares or GDRs outside the United States other than pursuant to the
Purchase Offer, on or off the KASE or the LSE or otherwise, before or during the Offer Period, so long as those acquisitions or arrangements comply with applicable Kazakhstan Laws and practice and the provisions of such exemption. In such
event, information about any such acquisitions or arrangements which is made public in Kazakhstan will be made available, including in the United States.
United Kingdom
This document is only being distributed to and is only directed at persons who are (i) outside the United Kingdom or (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order
2005 (the “Order”) or (iii) persons who are holders of the Securities or who otherwise fall within Article 43 of the Order or (iv) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to
(d) of the Order or (v) any other persons to whom this communication may lawfully be communicated (all such persons together being referred to as “relevant persons”). The Securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
Forward-looking statements
This document, including information included or incorporated by reference, may contain “forward-looking statements” concerning the Offeror and the Company. All statements other than statements of historical facts included in this document may
be forward looking statements. Without limitation, any statements preceded or followed by or that include the words “targets”, “plans”, “believes”, “expects”, “aims”, “intends”, “will”, “may”, “anticipates”, “estimates”, “projects” or words or terms of
similar substance or the negative thereof, are forward looking statements. Such forward looking statements involve risks and uncertainties that could significantly affect expected results or outcomes and are based on certain key assumptions. Many
factors could cause actual results or outcomes to differ materially from those projected or implied in any forward looking statements. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward looking
statements, which speak only as of the date hereof. The Offeror and the Company assume no obligation and do not intend to update these forward-looking statements, except as required pursuant to applicable law.
Rounding
Certain figures included in this document have been subject to rounding adjustments.
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Agenda
Overview
Context
Our proposals
Detailed response to KMG EP claims relating to our proposals
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OVERVIEW
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Overview
Minority shareholders are asked to approve changes to the Relationship Agreement and Charter that
are designed to:
• Improve operational and financial performance and increase the resilience of KMG EP to external
factors, including oil price movements, in the interests of all shareholders; and
• Maintain and enhance key protections for minority shareholders, including new powers over all
related-party transactions (including loans within the Samruk Kazyna group of companies), together
with amendments to address deficiencies in the existing documents.
These changes are designed to make KMG EP more resilient, more cash generative and more valuable,
although there is associated execution risk.
If the above changes are approved, an immediate exit for $9.00 per GDR, $54.00 per Common Share in
KZT equivalent calculated on a daily basis, and $31.55 per Preferred Share in KZT equivalent calculated
on a daily basis will be available via open market trades to shareholders who do not wish to take this
risk, who do not wish to wait for improved performance or who wish to exit for other reasons.
• The Purchase Offer is in addition to the put option right of minority shareholders under Kazakhstan
law which would ordinarily be triggered by a change to the Charter (at 10% discount to the share
price). Legal restrictions exist in respect of the volumes that can be absorbed under the put option.
• The Purchase Offer is not an offer to buy KMG EP, and NC KMG is not seeking to acquire a
significant additional shareholding.
• NC KMG is committed to maintaining the listing of KMG EP.
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CONTEXT
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Context: 2014-2015
The decline in the oil price since 2014 has highlighted long-
standing structural weaknesses in KMG EP
• Costs are high relative to peers
• Lifting costs over $8.6/bbl even after KZT devaluation (under cash break-even crude price at mid-$40/bbl)
• Reserve replacement has been poor and ability to sustain current production volumes is in doubt
• Production from core fields (Ozenmunaigas and Embamunaigas) has declined 12% relative to 2006; RRR for Ozenmunaigas and Embamunaigas of c.40%(1)
• KMG EP has been slow to adopt international best practice technologies or ways of working
• KMG EP has been slow to recruit international expertise
• KMG EP is highly bureaucratic, with poor decision making and accountability structures, weak strategic direction and considerable duplication with NC KMG
These structural weaknesses were reflected in very poor
performance of KMG EP in a low oil price environment
• KMG EP was loss-making ex-fx in 2014 and 2015(2)
• Reduction in cash position of more than $700m in 2015 and $160m in Q1 2016(3)
NC KMG has developed significant concerns over the ability of
KMG EP to address these structural issues within its current
organisational structure
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-
100
200
300
400
-
25
50
75
100
125
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15
Brent (LHS) Exchange rate (RHS)
Brent price and USD:KZT exchange rate (2014-2016)
Historical production (2006-2015)
($/bbl) (KZT per USD)
(kboepd)
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Source: Market data as of 1 July 2016. FactSet.
Source: http://www.kmgep.kz/eng/investor_relations/investor_tools/analyst_databook/ (as of 4 July 2016).
136 136 134 126 120 102 100 105 107 111
56 57 57 55 56 57 57 57 57 57
50 50 51 93
91 91 89 86 82 192
242 240 232
270 250 247 251 250 250
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ozenmunaigas Embamunaigas JVs
Note:
(1) Calculated as total reserves changes divided by company production for 2006-2015, based on KMG EP reserves reports.
Source: http://www.kmgep.kz/eng/investor_relations/investor_tools/analyst_databook/
(2) IFRS Financial Statements for 2015.
(3) IFRS Financial Statements for 3m 2016.
(4) JVs include Kazgermunai (KGM) (50%), Karazhanbasmunai (CCEL) (50%) and PetroKazakhstan Inc. (PKI) (33%).
(4)
Context 2016 and beyond
Recent improvements in a number of external factors benefit all investors
and are welcome
• Oil price
• Excise duty structure
• Improved performance from refinery processing for domestic supply as a result of KMG Refining and Marketing investment
• KZT devaluation
But KMG EP’s structural weaknesses remain unaddressed and the company
is still vulnerable to any negative movement in these factors and can quickly
become cash negative if they deteriorate
In addition, emerging headwinds require action to address structural
weaknesses now to maintain mid-term cash generation capability
• Annual production volumes at OMG and EMG in 2020 are expected to be 4% higher than 2015 production of 168 kbopd(2)
• Production of JVs is expected to decrease by 17% in 2020 compared to the 2015 production of 82 kbopd(2)
• The total combined production, including JVs, in 2020 is expected to be 3% lower than 2015 production of 250 kbopd(2)
• Domestic supply is expected to rise from 28% in 2016 to 45% in 2020 (for OMG and EMG) and roughly 50% out of JVs sales. Consolidated domestic supply for KMG EP assets for the first 10 years was in the range of mid-20%, with the potential to more than double in the next 10 years(2)
The case for urgent action to improve the operational and financial
performance of KMG EP and enhance its resilience to external factors
remains strategically compelling, and the interests of all shareholders are
closely aligned on this objective
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250
300
350
400
-
25
50
75
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Brent (LHS) Exchange rate (RHS)
Brent price and USD:KZT exchange rate (2016 YTD)
Production forecast (2016-2020)
($/bbl) (KZT per USD)
(kboepd)
2
113 121
57 54
77 68
247 243
2016 2020
Ozenmunaigas Embamunaigas JVs
Source: Market data as of 1 July 2016. FactSet.
Source: http://www.kmgep.kz/eng/press_center/press_release/?cid=0&rid=863
(as of 4 July 2016).
Note:
(1) JVs include Kazgermunai (KGM) (50%), Karazhanbasmunai (CCEL) (50%) and PetroKazakhstan Inc. (PKI) (33%).
(2) Source: Press release (3 December 2015), http://www.kmgep.kz/eng/press_center/press_release/?cid=0&rid=863.
(1)
OUR PROPOSALS
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What do our proposed changes seek to achieve?
Enhance the powers of KMG EP’s Board of Directors to drive strategy and
performance improvement, enhancing control over key decisions on production
plan, cost management, etc.
Realise the benefits of increased co-operation with NC KMG, by adopting its
business practices and standards and eliminating duplication in back-office
services in line with the Samruk-Kazyna Transformation initiative
Maintain key protections for minority shareholders and provide additional
protections against intra-group value leakage
Address deficiencies in the existing documents to give minority shareholders
confidence that their rights can be enforced
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What do we propose to change?
INEDs lose powers to frustrate decision making through bureaucracy, but
retain clearly defined and enhanced areas of exclusive competence,
removing powers to:
• Pre-approve Board agendas
• Frustrate decision making by failing to attend meetings (INEDs are not
necessary for a quorum in the third meeting of the Board of Directors with
an identical agenda if sufficient INEDs do not attend the first two)
A stronger Board of Directors at the expense of the Management Board,
with the Board of Directors (including INEDs) empowered to:
• Appoint and dismiss heads of branches and representative offices;
• Set staffing and operational management levels for KMG EP’s central
office and representative offices;
• Develop a long-term plan for procurement of goods, works, and services;
• Approve pricing policy and production programme
• Remove the authority of the KMG EP CEO to approve liabilities up to 5%
of KMG EP’s equity capital in favour of the Main Board and the
Management Board
NC obtains right to vote on delisting, but only if pre-approved by INEDs
Our proposals are intended to improve the focus and effectiveness of
decision making in KMG EP
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Retained protections
INED pre-approval required for:
• Major transactions (save for the ones in competency
of EGM)
• Delisting and changes to Charter
• INED nominations
• Placement of shares
• Various organizational matters of the internal audit
service
• Acquisition and transfer of subsoil use licenses or
contracts
Enhanced protections
INEDs obtain the right to approve related-party
transactions of any size, including the right to approve
Samruk Kazyna intra-company loans of any size INEDs lose exclusive competence in certain areas
• Share buybacks
• Amendment of Samruk Kazyna governance code
• Approval of social expenses
• Liquidation / reorganisation
Our proposals will retain or enhance key protections
for minority shareholders
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Why is NC qualified to implement changes?
NC KMG has created the KMG Technical and Research Institute as a center of competence and
dedicated expertise within NC KMG (excl. KMG EP)
NC KMG Transformation Initiative has identified target performance and synergy savings of
US$800m over the license period of two non-EP assets of NC KMG which will focus on lower unit
costs, higher yield and faster pay-back period activities
KMG Technical and Research Institute recommended the introduction of a number of production
enhancement technologies in 14 fields in 2015, using Electrical Submersible Pumps (ESPs)
NC KMG is well-placed to support KMG EP performance improvement and full participation in the
wider Samruk Kazyna Transformation Initiative
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NC KMG has already significantly strengthened the board of KMG EP with the appointment of
international experts
NC KMG has proactively appointed a number of professionals with proven track record in
international upstream to high-grade its management team and expertise and to drive through value
accretive change
DETAILED RESPONSE TO KMG
EP INEDS’ CLAIMS RELATING TO
OUR PROPOSALS
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Four key reasons to support NC KMG’s proposed changes
Essential to improve performance
• Turnaround plan developed by KMG Technical Institute, applying international best practice
• Proposals enable closer cooperation and direct access to resources and expertise of NC KMG Turnaround plan designed to make KMG EP more resilient, more cash generative, more valuable
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Preserves high standards of Corporate Governance
• Proposed changes preserve robust structure and standards of corporate governance
• EP INEDs role and presence on KMG EP Board in no way diminished or marginalized
• NC KMG remains committed to supporting KMG EP’s public listings
Strengthens key protections for minority shareholders
• Proposals maintain and enhance key protections for minority shareholders
• New powers of approval for EP INEDs over all related-party transactions (including loans within Samruk Kazyna group of
companies)
• Proposals address deficiencies in existing KMG EP constitutional documents
Purchase Offer provides an option to exit
• If the proposals are approved, the Purchase Offer will, based on the current share price, provide better terms than the put option which would be triggered by a Charter change; the Purchase Offer is certain, above the current share price (unlike the put option which would be priced at a 10% discount to market) and available to all minority shareholders
• Purchase Offer is not a takeover offer; no-one is compelled to sell
• NC KMG is not seeking to acquire a significant additional shareholding
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NC response to E&P claims
Do the proposed changes erode protections for minority shareholders?
E&P claim NC response
This claim is untrue. Under clause 11.2 of the current Charter, which remains unchanged, the valuation methodology for share repurchases by the Company requires approval by a qualified majority of 75% of the shareholders, so NC KMG does not have sole discretion.
The changes would give NC KMG sole discretion in setting the valuation methodology for share repurchases by the Company
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NC response to E&P claims (cont’d)
Do the proposed changes erode protections for minority shareholders?
This is not the case. Under these proposals, KMG EP will remain an independent entity and key minority shareholder protections will be maintained and in some areas enhanced. NC KMG believes that its turnaround strategy will improve operational and financial performance, as well as deliver efficiency gains, through closer co-operation between KMG EP and NC KMG. Making the Board of Directors, including the EP INEDs, the executive centre for KMG EP will ensure that the EP Board will be more accountable for operational strategy and execution. This is in the interests of all shareholders. Importantly, NC KMG is proposing to enhance EP INEDs’ control over any related-party transactions (including loans within the Samruk Kazyna group of companies) to ensure that there is no value leakage for minority shareholders.
NC KMG’s intention is to eliminate the Company’s independence
E&P claim NC response
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NC response to E&P claims (cont’d)
Do the proposed changes erode protections for minority shareholders?
E&P claim NC response
NC KMG believes that the governance framework established at IPO has over time proven to be suboptimal. These proposals address structural weaknesses in KMG EP while maintaining or enhancing protections for minority shareholders. The division of supervisory and executive powers between the EP Board and EP Management Board has not worked in the best interests of company performance in practice and a reallocation of executive powers in accordance with the proposed changes is essential to ensure appropriate control and accountability at EP Board level for the implementation of an effective turnaround strategy for KMG EP. Importantly, the EP INEDs’ role in ensuring that KMG EP complies with its corporate governance obligations is in no way marginalized by any of the proposals and INED powers of approval over related party transactions and inter-company loans are actually enhanced in NC KMG’s proposals.
The Proposed Amendments undermine corporate governance commitments made at the time of KMG EP’s IPO
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NC response to E&P claims (cont’d)
Will the changes improve performance?
E&P claim NC response
NC KMG would not be bringing these proposals forward if the existing structure of KMG EP could deliver the performance improvements that are required to generate value for shareholders. It was intended at IPO that NC KMG would have an appropriate level of influence for a majority shareholder through the ability to appoint members of the Board. In practice, however, split decision making and weak accountability enshrined in the current arrangements mean that the Board is not able to mandate and drive through strategic change, as demonstrated by the very poor performance of KMG EP in a low oil price environment and the failure to implement the performance improvement recommendations of the KMG Technical and Research Institute, drawn up by international experts. The proposals seek to remedy this, by enhancing the powers of the Board, including the EP INEDs, to deliver strategic change, while preserving or enhancing the key rights and protections of minority shareholders over their share of the economic value of KMG EP.
NC KMG already has a significant degree of control and has utilised this control
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NC response to E&P claims (cont’d)
Will the changes improve performance?
Those measures are insufficient, which are evident from the results. Since 2014 NC KMG has initiated a number of processes aimed at enhancing operating efficiency, including the Geological and Technical Measures (GTM) programme, usage of Electrical Submersible Pumps (ESPs), measures for higher quality of workovers and decreasing the number of unnecessary repeated well repair works, and decreasing well idle times. None of these initiatives are believed to have been effectively implemented by KMG EP.
The Company has already implemented initiatives to improve efficiency and performance
E&P claim NC response
As with all oil companies, lifting costs and back office costs are economically significant regardless of social or other costs. Achieving peer group performance in these areas would have a material positive impact for all shareholders. In addition, these proposals extend INED control to all related-party transactions.
The Company has limited control over a large proportion of its operating costs
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NC response to E&P claims (cont’d)
Will the changes improve performance?
E&P claim NC response
The turnaround plan is based on a detailed programme of recommendations developed by the KMG Technical and Research Institute, made up of international experts, following an in-depth study of operational performance at KMG EP. EP INEDs are familiar with the detail of the report. To date, the recommendations of this report, which was produced in 2015 for implementation at the start of 2016, have largely been either ignored, refused or delayed, to the detriment of all shareholders.
NC KMG’s Proposed Amendments are premised on a turnaround plan, the details of which have not been sufficiently defined, described or quantified.
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NC response to E&P claims (cont’d)
Is NC KMG trying to acquire KMG EP through these proposals?
The Purchase Offer is neither a takeover offer nor intended to reflect the future prospects for KMG EP, whether NC KMG’s turnaround plans are implemented or not. NC KMG is not seeking to acquire any significant additional holding in KMG EP through the Purchase Offer and nobody is compelled to sell. The Purchase Offer by NC KMG is in addition to the put option right of minority shareholders under Kazakhstan law which would ordinarily be triggered by a change to the Charter (at 10% discount to the share price) - Legal restrictions exist in respect of the volumes that can be absorbed under
the put option. NC KMG believes that KMG EP will be a more successful company after implementation of NC KMG’s turnaround plans and would like all shareholders to remain invested.
The Purchase Offer significantly undervalues the Company
E&P claim NC response
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NC response to E&P claims (cont’d)
Is NC KMG trying to acquire KMG EP through these proposals?
E&P claim NC response
There is no uncertainty whatsoever with respect to the implementation of the Purchase Offer. It is solely conditional on the proposed changes being approved by a majority of minority shareholders at the EGM. NC KMG has made firm representations and commitments to this effect in the Circular. The 2014 offer was withdrawn after KMG EP INEDs failed to put it to shareholders for 6 months. Over this period of 6 months, the oil price halved, but NC KMG was still prepared to honour its original offer.
The Purchase Offer is uncertain and previous proposed offers by NC KMG have been withdrawn
While there is a risk that the free float could fall below the technical requirement for maintaining the GDR listing, NC KMG has stated that it is committed to preserving KMG EP’s listings and will support KMG EP in complying with any remedies that may be required by the UK Financial Conduct Authority to preserve the London GDR listing.
Notwithstanding statements made by NC KMG, if the Purchase Offer proceeds, KMG EP’s free float and continued listing may become unviable
CONFIDENTIAL
Appendix
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NC KMG’s action plan is yielding results on its own asset
base
Preliminary fracking programme – 2016 guidance
Since February SRI has re-optimized frac designs: 14 frac designs have been reworked
SRI delivered significant improvement in well interventions:
~ 30 times greater than the average (MMG)
Unrealised potential due to sub-optimal application of well intervention technology:
~ 55t/day/well in MMG
Further frac technology improvements:
− Management of fracture propagation parameters during hydro-fracking operations
− Proppant volume increase
− Introduction of coiled tubing completions
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NC KMG is committed to improve its performance across its
asset base
KTM production programme MMG production programme
2016 initial annual production plan was
245 thousand tons, i.e. 669 tons per
day
As a result of NC and SRI initiatives,
KTM plans to produce an additional 45
thousand tons (+19%) in 2016 which
would increase annual production to
795 t/d and maximum daily production
to 900 t/d
Estimated annual production is 291
thousand tons
Initial production plan for 2016 was
6,285 thousand tons
Based on NC and SRI initiatives, MMG
plans to produce an additional 16
thousand tons of oil by the end of
2016
Hence, estimated 2016 production is
expected to be 6,300 thousand tons
Additional well work activities may
result in annual production of 6,597
thousand tons
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Current situation
Since 2015 NC has been proposing to implement a programme called “Top 100” wells. KMG EP experts have refused to participate in the selection of wells and, as a result, the programme is not being pursued
Planned initiatives to increase 2016 Production Programme include:
− “Target” increase in production through redistribution of budget expenses for more efficient well activities
− “Challenge” increase in production through additional costs for efficient Geological and Technical Measures (GTM)
− KMG EP has not adhered to these initiatives
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Programme realisation and development scenario
Current realisation of OMG production
programme Proposed Development Scenario for KMG EP
Unjustifiably high costs on workovers, of which about 30% are non-profitable
− Subsequently, expenditure is generated without economic benefit
Low level of implementation ESP’s for supporting “Quick Win” in production
Continued fracking of low potential wells
Current status of programme not adequate to achieve the “Target” status
Current production plan on the existing well stock not being met
Concerns about quality of impact assessment and monitoring of existing performance initiatives
Plans and programmes are not based on Economic
Value.
Significant opportunity to improve field value remains,
while resistance persists at the Senior / Technical
leadership level
Four areas of focus have been identified in order to achieve a significant increase in production:
− Optimization of existing wells (installation of ESP and screw pumps)
− Optimized fracturing design including installation of ESP’s
− Optimization of reservoir management process (water flood efficiency)
− Increased time between workovers of producing wells (improved mean time between failure – MTBF)
NC KMG plans to increase production from KMG EP
fields in 2017-2020 compared to a “Threshold” case
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Planned initiatives to reduce capital expenditures
Actions to reduce CAPEX
Following steps are planned in order to reduce well construction costs:
− Control of well design process
− Optimisation of well design and material selection
− Improvement of drilling efficiency
− Management of contractor quality and pricing
− Monitoring of the drilling market and open tendering
Reducing the number of wells drilled by substituting drilling with more cost-effective well intervention activities
Elimination of well candidates with negative NPV
Sidetracking instead of drilling new wells
Horizontal drilling instead of drilling several new wells
Phasing out turnkey drilling by implementing a segregated services model
Reducing the field facility development costs by:
− Design control
− Controlling design costs at the cost-estimate stage of the project
− Using optimised technical and construction solutions
Control over facility and well capital reconstruction costs
Synergy of subsidiaries for processing and transportation of hydrocarbons to reduce the need to build new facilities
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Planned initiatives to reduce operating costs
Actions to reduce OPEX
Reducing costs of oil servicing operations by increased workover efficiency and by
increased efficiency of repair works
Reducing expenditure on workovers and well servicing works by increasing the time
between repair of downhole equipment (MTBF)
Reducing electricity costs by implementing an overall energy efficiency programme
Reducing the costs for oil and water processing and for water injection by optimising the
water flood system
Optimisation of vehicle transportation costs, including expenses related to specialised
equipment
Optimisation of inventory purchases and controlling of inventories
Optimisation of the pricing level of services provided by contractors
Definitions
Board – means the board of directors of the Company
Charter – means the charter of the Company, as amended from time to time
Company or KMG EP – means Joint Stock Company "KazMunaiGas" Exploration Production", a company registered in accordance with Kazakhstan Laws
GDR – means global depositary receipts (each representing 1/6th of one Common Share) listed on the LSE under the Standard GDRs listing category
INEDs – means independent non-executive directors of the Company
KZT or Tenge – means the lawful currency of the Republic of Kazakhstan
KMG-RM – means JSC KazMunaiGaz – refining and marketing
Management Board – means the management board of the Company
NC KMG – means Joint Stock Company "National company "KazMunayGas", a company registered in accordance with Kazakhstan Laws
Ordinary shares – means the ordinary shares (issued or to be issued) in the capital of E&P KMG
Preferred shares – means preferred shares in the capital of the Company admitted to the first category of the official list of the KASE
RRR – means Reserve Replacement Ratio, calculated by taking the total reserve changes for the period as the numerator and dividing by the company’s production for the period
Relationship Agreement – means the Relationship Agreement between the Company and NC KMG dated 8 September 2006
USD or $ or US$ – means the lawful currency of the United States of America
Shareholders – means holders of the Common Shares and Preferred Shares
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