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KazMunaiGas Exploration Production Year End Numbers Hit by Strike Action and Tax Increases

Friday, March 2nd, 2012

JSC KazMunaiGas Exploration Production released its consolidated financial statements for the year ended December 31, 2011.

- Revenues increased by 19% to 708bn Tenge (US$4,832m) compared to 2010 on higher Brent and domestic prices offset by reduced export volumes. Average Brent price in 2011 increased by 41% to US$111 per barrel from US$79 per barrel in 2010.

- Net profit in 2011 amounted to 209bn Tenge (US$1,425m)1 and earnings per share – 2,950 Tenge (US$3.4 per GDR), a decrease of 11% and 9%, respectively, compared to 2010.

- The main factors that had a negative impact on KMG EP’s results were production and export decline due to the illegal strike that took place in May-August 2011 and introduction of export duty in 2010 and doubling of its rate in 2011.

Production Highlights

In 2011 KMG EP’s consolidated production was 12,341 thousand tonnes of crude oil (250 kbopd) including the Company’s stakes in LLP Kazgermunai JV (KGM), CCEL (CCEL, Karazhanbasmunai) and PetroKazakhstan Inc. (PKI). This was 944 thousand tonnes or 7% less than in 2010.

Uzenmunaigas (UMG) produced 5,082 thousand tonnes (102kbopd), which is 884 thousand tonnes less than in 2010. Embamunaigas (EMG) produced 2,818 thousand tonnes (57kbopd), which is 18 thousand tonnes more than in 2010, thereby the total volume of the oil produced at production facilities of UMG and EMG in 2011 was 7,900 thousand tonnes (159kbopd), which is 866 thousand tonnes, or 10% less than in 2010. The results were negatively affected by the illegal strike at UMG that took place in May-August 2011 and power cuts throughout the year. The loss of production has mainly impacted on the Company’s export volumes, which in turn was a major reason of Company’s weaker financial results compared to previous year.

Production plans

The Company is currently implementing a number of measures to increase production level at Uzen in the short term and ensure sustainability and efficiency of UMG operating activities going forward. In early 2012 the Company followed a suggestion by Kazakh authorities to set up two new service subsidiaries which created jobs for approximately 2,000 people previously dismissed from KMG EP and one of its joint ventures. This measure has expanded oil service capacity in Mangistau region and has significantly contributed to social stability in the region thereby facilitating normal operations of UMG. Given the social nature of this initiative and the need to take into account the interests of all shareholders, it was agreed after discussions between the Board of directors of KMG EP, the Government, National Wealth Fund Samruk-Kazyna and the National Company KazMunaiGas that the subsidised price applied to most of the crude shipments by KMG EP to Atyrau refinery would be gradually increased during the course of 2012. The resulting economic
benefit to KMG EP is estimated to reach 8.5bn Tenge in 2012 which will partly offset the expenditure associated with setting up the two service subsidiaries budgeted in 2012 at 20.6bn Tenge. Further offsets are being considered.

In 2012 the Company intends to implement a number of modernisation projects at Uzen field with the goal to improve efficiency, stability and safety of the field operation. In particular, the plan for 2012 and 2013 envisages construction of two subsurface equipment testing and service centers, two mud preparation units as well as a specialised vehicles service center. The Company will expand utilisation of higher quality pumps and will drill a number of horisontal wells. In addition, the Company will continue implementation of security, surveillance and vehicle monitoring projects.

Also during 2012 the production divisions UMG and EMG will be transformed into separate legal entities (joint stock companies 100% owned by KMG EP). This will give the business units necessary autonomy in the conduct of their operations and will ensure their management’s responsibility for the results.

KMG EP management is confident that Uzen field and certain other mature assets offer significant potential in terms of production growth and maintaining stable production levels for years ahead.

As previously announced the current plan envisages production growth at Uzen from 5.1 million tonnes in 2011 to 5.8 million tonnes in 2012. The combined production of EMG and UMG is expected to increase from 7.9 million tonnes in 2011 to 8.6 million tonnes in 2012. The set of technical and organisational measures being implemented by the Company this year is designed not only to meet these production targets for 2012 but also to achieve sustainable improvements of production practices at the Company’s mature assets.

Net Profit for the Period

Profit after tax (net income) in 2011 was 209bn Tenge (US$1,425m). This represents an 11% decline compared to 2010, which is mainly explained by production and export decline and increase in operating taxes partly offset by an increase in oil price.

Taxes other than on Income

Taxes, other than on income, in 2011 were 284bn Tenge (US$1,937m), which is 58% higher compared to 2010. The increase is due to the higher applicable tax rates as a result of the higher oil price, as well as reintroduction of crude oil customs export duty (CED) on 16th August 2010 at US$20 per tonne and its subsequent increase to US$40 per tonne from 1st January 2011. This was partially offset by reduced production and export volumes.

Production Expenses

Production expenses in 2011 were 117bn Tenge (US$801m), which is 6% higher compared to 2010. A significant part of the production cost increase is due to an increase in payroll which reflects salary increase at the production units in the second half of 2010 and salary indexation from 1st January 2011.

Income from Strategic Acquisitions

In 2011 KMG EP’s share of results of associates and joint ventures was 84bn Tenge (US$575m) compared to 57bn Tenge (US$384m) in 2010. The financial results of associates and joint ventures in 2011 were primarily driven by the higher oil price compared to 2010.

Kazgermunai

In 2011 KMG EP recognised a 38bn Tenge (US$262m) income from its share in KGM. This amount represents 50% of KGM’s net profit of 46bn Tenge (US$314m) and a 1.0bn Tenge (US$7m) deferred income tax benefit net of 8.7bn Tenge (US$59m) from the effect of purchase price premium amortization.

In 2011 KGM’s net income increased by 47% compared to 2010 due to higher oil price, optimization of the structure of crude oil supplies and purchases for the purposes of meeting domestic supply requirements. This was partly offset by accrual of fines related to customs export duty (CED) on crude oil exported in December 2008 and reintroduction of CED on crude oil on 16th August 2010 and its subsequent increase to US$40 per tonne from 1st January 2011. In 2011 the Company received dividends from KGM in the amount of 36.6bn Tenge (US$250m).

PetroKazakhstan Inc.

In 2011 KMG EP recognised a 46bn Tenge (US$312m) income from its share in PKI. This amount represents 33% of PKI’s net profit of 57bn Tenge (US$391m) net of 12bn Tenge (US$79m) from the effect of purchase price premium amortization.
PKI’s net income increased by 17% in the reported period compared to 2010 mainly due to higher oil price and consolidating of 50% of the results of JSC “Turgai Petroleum” in the reported period (for more details refer to KMG EP’s press-release of 20 August 2010).

In 2011 the Company received dividends from PKI in the amount of 53bn Tenge (US$363m), 80% of this amount is directed to blocked account as security for the repayment of the long term debt of KMG PKI Finance B.V.

CCEL

As of 31 December 2011 the Company has recognised the amount of 19.5bn Tenge (US$131m) as a receivable from CCEL, a jointly controlled entity with CITIC Group. The Company has accrued 3.0bn Tenge (US$20m) of interest income in 2011 related to the US$26.87m annual priority return from CCEL. Remaining US$6.7m was recognised as reduction of receivable from CCEL.

Source

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