Chief Executive
Officer’s
statement

Chief Executive Officer’s statement
Kurmangazy Iskaziyev,
Chief Executive Officer
(Chairman of the Management Board))
«In 2017, the Company achieved its goal to keep production at a stable, optimum level, even though the majority of its producing fields are mature and past the peak of their production.»
  • 11,868
    thousand
    tonnes
    Oil produced in 2017
    (including stakes in KGM,
    CCEL and PKI)
  • 2,533
    thousand
    tonnes
    of crude oil
    to the domestic
    refineries
  • 1.9
    billion Тенге
    alloted for social
    projects in the Atyrau and
    Mangistau regions in 2017

The year 2017 was successful for KMG EP thanks to the foundations that were laid the previous year. Measures to keep production stable at mature fields and to control operating and capital costs, as well as the Company’s adoption of a proven oil processing and marketing programme for refined products, all helped it to report impressive results. Net profit totalled 195 billion tenge (US$ 599 million), free cashflow was 186 billion tenge (US$ 570 million) and net cash increased by 167 billion tenge (US$ 512 million) to end the year at 1,339 billion tenge (US$ 4.0 billion).

In 2017, the Company achieved its goal to keep production at a stable, optimum level, even though the majority of its producing fields are mature and past the peak of their production.

The total production volume at our main assets — Ozenmunaigas (OMG) and Embamunaigas (EMG) — amounted to 8,320 thousand tonnes (168 kbpd) in 2017, which was 1% less than in 2016. At the same time, EMG produced 0.3% more than in 2016, partly offsetting a dip in production at OMG.

Including the Company’s stakes in Kazgermunai (KGM), Karazhanbasmunai (CCEL) and PetroKazakhstan Inc. (PKI) LLP, the Company produced 11,868 thousand tonnes of crude oil (240 kbpd) in 2017, just 2% less than in 2016. The main reason for the decline was a natural, planned reduction in oil production at PKI and KGM.

Equally successful was the Company’s work on reserves replacement. According to an independent assessment of reserves carried out by DeGolyer and MacNaughton, in 2017, the replacement ratio of 2P reserves at OMG and EMG was 100%.

Capital expenditures in 2017 amounted to 111 billion tenge (US$ 341 million), about the same level as the previous year. Under the five-year business plan approved in December 2017, the Company is aiming for a slight increase in capital expenditure in 2018, then a subsequent reduction to an average of 118 billion tenge (US$ 347 million) in 2019-2022.

I would also like to note that in 2017, we completed the construction of a complex gas treatment unit (CGTU) at the Prorva group of fields at Embamunaigas. Once commissioned, marketable gas, commercial granular sulphur and stable gas condensate will be produced there. The launch of the facility will allow the Company to eliminate the flaring of gas at the Prorva group of fields.

Another important initiative was the introduction of the ‘Smartfield’ concept to our assets. In 2017, we began replicating the successful digitalisation project at 14 fields within the KMG EP group, including Uzen, Karazhanbas, Akshabulak, the Prorva group of fields, Zhanatalap and others. These fields account for about 90% of annual oil production and about 90% of residual recoverable oil reserves and are where we see the potential for growth. It is worth emphasising that this project is a key part of the national Digital Kazakhstan programme, which envisages the widespread introduction of digital technologies to enhance the competitiveness of certain sectors of the country’s economy. Details of the ‘Smartfield’ project implemented at EMG’s Uaz deposit were presented to the President of Kazakhstan last September.

Last year, we signed Memorandums of Understanding and Cooperation with the Gubkin Russian State University of Oil and Gas, Agip Karachaganak BV, Shell Kazakhstan and the Research Institute of Production and Drilling Technologies KazMunayGas. Within the framework of these memorandums, we plan to collaborate to create concepts for developing the Uzen and Karamandybas fields, explore the possibility of developing joint projects in exploration and production, conduct a joint feasibility study on implementing enhanced oil recovery methods, assess production efficiency at selected Company fields and develop a knowledge and experience exchange. Initial research works have been completed and pilot tests have commenced. Also, this year, we plan to introduce the concept at one of the fields at Karazhanbasmunai JSC, with the involvement of the Gubkin University, as well as at the JV Kazgermunai LLP fields, in tandem with Tomsk Polytechnic University and Heriot-Watt University.

In April 2016, the Company switched to the new oil processing and oil products marketing scheme for the domestic market in the Republic of Kazakhstan.

n 2017, the Company sold 2,388 thousand tonnes of oil products. As of early 2018, KMG EP accounted for around 16% of all light oil products from Kazakhstan’s refineries.

Our people are our key asset and the Company puts great effort into maintaining social stability in the regions where it operates and into ensuring a decent standard of living for the local population.

KMG EP signed a new collective agreement for a period of three years with staff at Ozenmunaigas in August 2017. The terms of the contract, as before, provide for monthly and premium payments, health-insurance payments and training costs. In addition, the Company played an active role in the international EXPO event held in Astana from 10 June to 10 September 2017. Almost 6,000 of the Company’s employees visited the exhibition and became acquainted with modern green technologies.

he Company appreciates the contribution of all its employees and offers them opportunities to develop their potential and boost their careers. To keep production levels stable and improve production efficiency, the Company pays special attention to the training of production personnel. In 2017, it allocated 1.6 billion tenge to improve the skills of 49,071 employees of the KMG EP group of companies, including 36,299 production personnel.

The Company continues to take an active role in social projects. In 2017, it allotted 1.9 billion tenge (US$ 6 million) for social projects in the Atyrau and Mangistau regions, financing the repair of highways, the improvement of city microdistricts and the creation of social workplaces, among other things. The distribution of funds was determined by local executive bodies based on the needs of the population.

I would also like to mention the Company’s major corporate event in 2017, the agreement reached by shareholders on the repurchase of common shares and GDRs from minority holders, as well as the termination of KMG EP’s listings on the London and Kazakhstan stock exchanges.

Despite the importance of this decision for the strategic development of the Company, I want to stress that the goals of our day-to-day operations remain unchanged. We will continue to work on our mature fields, to make efforts to increase commercial efficiency and to maintain our priorities in the field of social policy. Management’s task has been — and will continue to be — to maximize long-term economic efficiency from the exploitation of the Company’s assets, while fulfilling its social responsibilities. These are the tasks that our shareholders have set us, and I am grateful for their continued support, despite the strains in relations between various groups of shareholders from time to time.

I am confident that every employee of KMG EP will not only be in demand once the Company is more closely integrated into the NC KMG group, but will also find new opportunities to apply their experience, knowledge and business expertise.

I want to thank all of our employees for the results they achieved in 2017 and for their readiness to embark on this new chapter in the Company’s history.