ROGTEC Magazine - Russian Oil & Gas Technologies - News, Reviews & Articles

ROGTEC Magazine - Russian Oil & Gas Technologies - News, Reviews & Articles

KazMunaiGas Exploration and Production: Releases Reserves Verification and Changes

Monday, June 2nd, 2014

JSC КаzМunaiGas Exploration Production is pleased to announce the result of the verification of reserves at 31 December 2011 and 2012 in the Ozenmunaigas, Embamunaigas and Ural Oil and Gas (50% ownership) fields.

In summary, KMG EP will continue to use the reserves assessment made by Miller and Lents Ltd. (“M&L”) as of 31 December 2012 and the reserves assessment made by Gaffney, Cline & Associates (“GCA”) as of 31 December 2011 as final assessments. The estimation of the Company’s reserves at 31 December 2013, announced on 11 April 2014, is unaffected by this review.

As announced on 18 October 2013, given significant differences in KMG EP reserves estimations made by “M&L”and “GCA”, the Board of Directors of KMG EP resolved to work with a third party reserves consultant to provide an independent estimation of reserves for the years ended 31 December 2011 and 2012. DeGolyer and MacNaughton Corporation (“D&M”) was appointed to that role and the result of their work is set out below.

Reserves at 31 December 2011

The material differences in reserve assessments by D&M, compared to the assessments by GCA were as follows:

  • 1Р reserves were 112.2 million tonnes (812.8 million barrels) which was 47% higher (or 35.9 million tonnes);
  • 2Р reserves were 145.7 million tonnes (1.05 bn barrels) which was 35% lower (or 80.1 million tonnes); and
  • 3Р reserves were estimated at 199.1 million tonnes (1.4 bn barrels) which was 25% lower (or 67.7 million tonnes).

The principal reasons for the discrepancies between the two estimates are:

  • 1P: D&M’s estimation includes reserves up to the end of the cost-effective field life (2012 – 2063, 52 years) whereas GCA’s estimation is up to the end of the contract term (2012 – 2021, 10 years max); and
  • 2P and 3P: the estimation made by D&M was based on mapped in-place reserves and on methods to improve development, whereas the estimation made by GCA was based on production trends based on historical data with increased production levels from Ozenmunaigas.

Reserves at 31 December 2012

The material differences in estimations identified by D&M, compared to the assessment by M&L, were as follows:

  • 1Р reserves were 112.2 million tonnes (818.7 million barrels) which is 3.9% lower (or 4.5 million tonnes);
  • 2Р reserves were 146.7 million tonnes (1.07 bn barrels) which is 0.8% lower (or 1.2 million tonnes); and
  • 3Р reserves were 201.1 million tonnes (1.4 bn barrels) which is 9.6% higher (or 17.6 million tonnes).

D&M and M&L applied a similar approach to estimate reserves:

A decline trend was identified for each field horizon; and
Reserve volume was determined based on duration of productive life of a field.



KMG EP: Strikes New Find at the Rozhkovskoye Field

Tuesday, May 13th, 2014

KazMunaiGas Exploration Production Joint Stock Company announces a new discovery in the Bashkirian tier’s sediments of the Carboniferous period in the Rozhkovskoye field. Inflow of light dry crude oil and gas with maximum flow rates of 1.9 kboe/day and 6 million cubic feet/day, respectively, with 24/64″ (9.5 mm) choke, was produced while carrying out tests in reservoirs of the Bashkirian period at the U-24 well drilled in 2013 in the north-east wing of the field. Previous exploration at this part of the field targeted hydrocarbons in the Bobrikovskiy and Tournaisian horizons.

Oil reserves of the new discovery have not been included in Miller & Lents Ltd.’s 2013 year end reserve assessments. Positive test results from the new Bashkirian deposit increase the prospects of growing field’s reserves. A quantitative evaluation of reserves growth will occur following the results of further exploration.

Mr. Abat Nurseitov, the Chief Executive Officer of KMG EP said: “The discovery of Bashkirian deposit on Fyodorovskiy block confirms the high potential of this asset. This discovery is the result of consistent implementation of the planned exploration works focused on replacement and growth of the Company’s resource base.”

According to technical audits carried out in accordance with international standards, KMG EP 2P liquids hydrocarbon reserves of Rozhkovskoye field increased from 5.4 mt in 2012 to 7.9 mt in 2013. Production at Rozhkovskoye field is due to commence in 2017.

Ural Group Limited (UGL) is exploring the Rozhkovskoye field, and holds a 100% stake in Ural Oil and Gas LLP (UOG) which owns the exploration license for the Fyodorovskiy block in the Zelenovsk district of Western Kazakhstan, 70 km east of Uralsk city. In 2011, KMG EP acquired a 50% stake in Ural Group Limited (UGL) from Exploration Venture Limited (EVL).



JSC KazMunaiGas Exploration Production 1Q 2014 Financial Results

Wednesday, April 30th, 2014

JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces condensed consolidated interim financial statements for the three months ended 31 March 2014.
• Revenue in the first three months of 2014 was 220.8bn Tenge (US$1,301m)[1], a 9% increase compared with the same period for 2013. The average price of Brent in the first three months of 2014 was 4% lower than in the same period of 2013, down from US$112.6 per barrel to US$108.2 per barrel.
• Net profit for the first three months of 2014 was 123.5bn Tenge (US$727m) largely due to a before tax foreign exchange gain of 108bn Tenge (US$635m) as a result of the Tenge devaluation in February 2014.
• Production expenses in the first three months of 2014 were 43.8bn Tenge (US$258m), which is 2% higher compared with the same period of 2013 mainly due to increased expenses for employee benefits.

Production Highlights
In the first three months of 2014, KMG EP produced 3,048 thousand tonnes of crude oil (250kbopd), including the Company’s stakes in Kazgermunai (KGM), CCEL (CCEL) and PetroKazakhstan Inc. (PKI), which is 1% more than in the same period in 2013.
Ozenmunaigas JSC (OMG) produced 1,301 thousand tonnes (106kbopd), an increase of 5% compared with the same period of 2013. Embamunaigas JSC (EMG) produced 684 thousand tonnes (56kbopd), which is 1% less than in the same period of 2013. The total volume of oil produced at OMG and EMG in the first three months of 2014 was 1,985 thousand tonnes (162kbopd), which is 3% more than the same period for 2013.
The Company’s share in production from KGM, CCEL and PKI for the first three months of 2014 amounted to 1,063 thousand tonnes of crude oil (88kbopd), 1% lower than in the same period of 2013.

Crude oil sales
In the first three months of 2014 the Company’s combined export sales from OMG and EMG were 1,459 thousand tonnes (117kbopd), or 74% of the total sales volume from core assets. Domestic sales amounted to 519 thousand tonnes (42kbopd), or 26% of total sales volume.
The Company’s share in sales from KGM, CCEL and PKI was 1,051 thousand tonnes of crude oil (87kbopd), including 598 thousand tonnes (49kbopd), or 57% supplied to export markets.

Net Profit for the Period
Net profit in the first three months of 2014 was 123.5bn Tenge (US$727m) compared to a net loss of 0.7bn Tenge (US$4m) in the same period of 2013. In 1Q 2014 the Company recognized a foreign exchange gain of 108bn Tenge (US$637m) as a result of the Tenge devaluation in February 2014. In the first three months of 2014 KMG EP made an impairment charge of 27bn Tenge (US$162m) of the recoverable amount of JSC “Ozenmunaigas”.

Revenues
The Company’s revenues in the first three months of 2014 were 220.8bn Tenge (US$1,301m), a 9% increase compared to the same period of 2013. This was mainly due to an increase in the average Tenge-US Dollar exchange rate by 13% as a result of Tenge devaluation in February 2014, and an increase of the average domestic sales price from 40,000 Tenge per tonne in 1Q2013 to 48,000 Tenge per tonne in 1Q2014.

Taxes other than on Income
Taxes, other than on income, in the first three months of 2014 were 80.3bn Tenge (US$473m), some 5% higher than the same period in 2013, largely because export customs duty was US$60 per tonne as opposed to US$40 per tonne in the first quarter of 2013 and because the average Tenge-US Dollar exchange rate was 13% higher as a result of Tenge devaluation in February 2014. Export customs duty was raised from US$60 to US$80 per tonne, effective 1 April 2014.

Production Expenses
Production expenses in the first three months of 2014 were 43.8bn Tenge (US$258m), which is 2% higher than in the same period of 2013 mainly due to higher expenses for employee benefits.
Expenses for employee benefits in the first three months of 2014 increased by 12% compared to the same period of 2013, largely due to an indexation of salary for production personnel by 7% in  January 2014, and the introduction of mandatory professional pension contributions for production employees, fixed at 5% of monthly income.
As previously announced, the employee benefits expenses will increase further due to the implementation of a Unified System of Wages of production employees and a 10% increase of wages related to the devaluation of the Tenge from 1 April 2014 onwards.

Selling, General and Administrative Expenses
Selling, general and administrative expenses in the first three months of 2014 were 22bn Tenge (US$131m), which is 1% higher than in the same period of 2013, largely due to an increase in transportation expenses, which was offset by a decline in fines and penalties.  Transportation costs increased by 7% due to the increase of domestic tariffs from 1 January 2014, higher transportation expenses on the CPC route resulting from the transportation of larger volumes and the increase in the average Tenge – US Dollar exchange rate, as the CPC tariff is denominated in US Dollars.

Impairment Charge
In the first quarter of 2014 the management of the Company has updated its formal assessment of the recoverable amount of JSC “Ozenmunaigas”. As a result, a 27bn Tenge (US$162m) impairment charge was made. The impairment charge relates to an increase in employee benefits and an increase in export customs duty from US$60 to US$80 per tonne effective 1 April 2014.

Foreign Exchange Gain
In the first quarter of 2014 a foreign exchange gain of 108bn Tenge (US$637m) resulted from the 19% Tenge devaluation in February 2014.
On 11 February 2014, the National Bank of Kazakhstan (NBK) made a decision to abandon its support of the Tenge, reducing foreign exchange interventions and efforts to control the exchange rate of the Tenge. To prevent destabilisation of the financial markets and the economy as a whole, NBK established a Tenge-US Dollar fluctuation band at 185 Tenge per US Dollar plus or minus 3 Tenge, thus continuing the bank’s policy of smoothing over exchange rate spikes and short-term volatility.

Cash Flows from Operating Activities
Operating cash flow in the first three months of 2014 was 98bn Tenge (US$579m) compared with 30bn Tenge (US$200m) in the corresponding period of 2013, largely due to a foreign exchange gain seen in 1Q 2014.

Capex
Capital expenditures[2]  in the first three months of 2014 were 23bn Tenge (US$134m), which is 3% higher than in the same period of 2013.

Cash distribution to stockholders
On 18 March 2014 the Board of Directors of KMG EP recommended a dividend for 2013 financial year of 1,976 Tenge per ordinary and preferred share which is equivalent to about 135 billion Tenge[3]  (approximately US$730 million[4]). This proposal will be voted upon at the AGM.

Cash and Debt
Cash and cash equivalents as at 31 March 2014 amounted to 283bn Tenge (US$1.6bn) compared to 119bn Tenge (US$0.8bn) as at 31 December 2013.
Other financial assets as at 31 March 2014 were 481bn Tenge (US$2.6bn) compared to 504bn Tenge (US$3.3bn) as at 31 December 2013.
As at 31 March 2014, 86% of cash and financial assets were denominated in US Dollars and 14% were denominated in Tenge and other foreign currencies. Finance income accrued on cash, financial, and other assets in the first three months of 2014 was 5.2bn Tenge (US$31m).
Borrowings as at 31 March 2014 were 7.9bn Tenge (US$43m), compared to 6.8bn Tenge (USD$44m) as at 31 December 2013.
The net cash position[5] as at 31 March 2014 amounted to 756bn Tenge (US$4.2bn) compared to 616bn Tenge (US$4.0bn) as at 31 December 2013.
Income from associates and joint ventures
In the first three months of 2014, KMG EP’s share of results of associates and joint ventures was 16bn Tenge (US$95m) compared with 21bn Tenge (US$137m) in the same period of 2013.

Kazgermunai
In the first three months of 2014, KMG EP recognised 10.5bn Tenge (US$62m) of income from its share in KGM. This amount represents 11.5bn Tenge (US$68m) corresponding to 50% of KGM’s net profit net of the 0.9bn Tenge (US$5m) effect of amortization of the fair value of licenses and the related deferred tax.
KGM’s net profit in the first three months of 2014 declined by 27% compared with the same period of 2013. This was mainly due to lower export volumes with corresponding volumes reallocated to the domestic market, and an increase in the export customs duty from US$40 to US$60 per tonne from April 2013.
On 25 April 2014, the Company received US$100m as dividends from KGM in accordance with its ownership interest (50% share in KGM).

PetroKazakhstan Inc. 
In the first three months of 2014, KMG EP recognised 8.0bn Tenge (US$47m) of income from its share in PKI. This amount represents 9.2bn Tenge (US$54m) corresponding to 33% of PKI’s net profit net of the 1.2bn Tenge (US$7m) effect of amortization of the fair value of the licenses.
In the first three months of 2014, PKI’s net profit declined by 27% compared with the same period of 2013. The decline is primarily due to lower export volumes with corresponding volumes reallocated to the domestic market, and an increase in export customs duty from US$40 to US$60 per tonne from April 2013.

CCEL
As of 31 March 2014 the Company had 21.1bn Tenge (US$116m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 0.7bn Tenge (US$4m) of interest income in the first three months of 2014 related to the US$26.87m annual priority return from CCEL.

Tax and environmental audits
As at 31 March 2014 the Company had several claims related to tax and environmental matters. More detailed information is provided in the consolidated financial statements for the three months ended 31 March 2014.
Tax audit for 2006-2008. During 2013-2014 the tax authorities’ assessments of additional taxes payable were reduced from 16.9bn Tenge (US$100m) to 12.2bn Tenge (US$72m). As at 31 March 2014 existing tax provisions amounted to 14.8bn Tenge (US$87m).
PetroKazakhstanKumkolResources JSC (PKKR) tax audit. As a result of the comprehensive tax audit for 2009-2012 of PKKR (100% subsidiary of PKI Inc.) the Tax Department concluded that there were additional taxes payable of 10.0bn Tenge (US$54m). PKKR disagreed with the tax audit results and plan to file an appeal to the Tax Committee of the Ministry of Finance. No provision has been accrued for this matter as at March 31, 2014.
PKKR continues appealing a notification for environmental emissions for the total amount (including fines and penalties) of 19.4bn Tenge (US$105m). On 12 February 2014, the Tax Committee of the Ministry of Finance made a decision in favour of Kyzylorda Regional Tax Department. PKKR disagreed with the decision of the Tax Committee and on 20 February 2014 filed a claim to the Interregional Kyzylorda Economic Court.
Ozenmunaigas environmental audit 2011-2012. In February 2014 the Cassation Judicial Panel of the Mangystau Regional Court has fully cancelled a 59.3bn Tenge (US$321m) fine for environmental damages but there remains the remote possibility that the Department of Ecology will file an appeal to the Supreme Court. No provision has been accrued for this claim as at 31 March 2014.
Ozenmunaigas environmental audit 2012-2013. In 2014 JSC “Ozenmunaigas” (OMG) has received a notification to pay a fine of 212.6bn Tenge (US$1,249m) and an administrative fine for environmental damage of 327.9bn Tenge (US$1,926m) caused by the disposal of excessive waste to the environment at 11 waste collection points from the Department of Ecology of the Mangystau Region.
As of to date there is no avenue for appeal from the Department of Ecology of Mangystau Region on 212.6bn Tenge (US$1,249m) with the remote possibility that the Court’s ruling can be revisited by the Prosecutor’s office. In April 2014, the Court decision on the 327.9bn Tenge (US$1,926m) fine upheld in favour of OMG by the Judicial Panel of Appeals of the Mangystau Regional Court. No provision has been accrued for this matter as at March 31, 2014.
Embamunaigas gas flaring. The Company is currently in the process of appealing a notification from the Department of Ecology of Atyrau Region in the amount of 37.2bn Tenge (US$201m) in fines for environmental damage caused by violations of ecology law to the General Prosecutor’s office of RK and the Specialized Interregional Economic Court of Atyrau Region. No provision has been made for this claim as at 31 March 2014.



KMG EP: Ups Q1 Production by 1%

Friday, April 25th, 2014

JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces its operating results for the first quarter of 2014.

KMG EP produced 3,048 thousand tonnes of crude oil (250 kbopd) for the first three months of 2014, including the Company’s stakes in Kazgermunai (KGM), CCEL (CCEL) and PetroKazakhstan Inc. (PKI), which is 45 thousand tonnes or 1% more than in the same period of 2013.

Ozenmunaigas JSC (OMG) produced 1,301 thousand tonnes (106 kbopd), an increase of 5% over the same period of 2013. Embamunaigas JSC (EMG) produced 684 thousand tonnes (56 kbopd), which is 1% less than in the same period of 2013. The total volume of oil produced at OMG and EMG is 1,985 thousand tonnes (162 kbopd), which is a 3% increase over the same period of 2013 and in accordance with 2014 production plans for these companies.

The Company’s share in production from KGM, CCEL and PKI for the first quarter of 2014 amounted to 1,063 thousand tonnes (88 kbopd), which is 1% less than in the same period of 2013.

In the first quarter of 2014, the Company’s combined export sales from OMG and EMG were 1,459 thousand tonnes (117 kbopd). Domestic sales amounted to 519 thousand tonnes (42 kbopd). The Company expects that domestic sales from OMG and EMG in 2014 will amount to 1.9 million tonnes.

The Company’s share in the sales from KGM, CCEL and PKI was 1,051 thousand tonnes of crude oil (87 kbopd), including 598 thousand tonnes (49 kbopd), or 57% supplied to export markets. The growth in domestic sales volumes is related to an increase in quotas by the Kazakh Ministry of Oil and Gas.

 



KMG EP: Holds Board Meeting and Implements a Unified System of Wages for Employees

Wednesday, March 19th, 2014

Yesterday the Board of Directors of JSC KazMunaiGas Exploration Production, KMG EP, met to approve the meeting agenda and set a date for the Shareholders Annual General Meeting for 13 May 2014.

The AGM agenda: approve annual consolidated financial statements and the Company’s 2013 Annual Report, agree dividend regarding 2013 earnings per ordinary and preferred shares of KMG EP, evaluate the Board of Director’s performance in 2013 and other questions.

The Board of Directors has recommended a dividend for the 2013 earnings per ordinary and preferred share of KMG EP of 1,976 Tenge which is equivalent to about 135 billion Tenge1 (approximately US$730 million2). This will be voted upon at the AGM. If approved, the payment of the 2013 annual dividend will be made starting 24 June 2014 to shareholders of record as of 23 May 2014.

Independent directors suggested payment of a substantial special dividend. This proposal was deferred by the Board of Directors for later consideration.

The Board of Directors adopted budget adjustment taking into account the increase in export and domestic tariffs of JSC “KazTransOil” from January 1, 2014.

The Board of Directors also agreed to implement a Unified System of Wages (USoW) of employees working in the upstream oil and gas division from 1 April 2014 onwards. This ruling leads to employee benefits increase by 21 billion Tenge (US$113 million2) in 2014 budget including an increase of 10% of wages in connection with the devaluation of the Tenge in February 2014.

USoW will be implemented throughout the NC KazMunaiGas Group. The USoW will provide unified tariff rates for workers within their monthly payroll. This is a new payroll system which considers the difference in complexity of work within the same occupation for all employees.



KazMunaiGas E&P: Administrative Fine of 327.9 billion Tenge Dismissed by Court

Wednesday, March 19th, 2014

JSC KazMunaiGas Exploration Production is pleased to announce that the Specialized Administrative Court in Aktau of Mangistau region has ruled that the Act on inspection results of the Department of Ecology of Mangistau Region and the claim for environmental damage in the amount of 327.9 billion Tenge (US$ 1.8bn), which has been brought against JSC “Ozenmunaigas” (“OMG”) and referred to in the Company’s press release dated 27 February 2014 have been declared as illegitimate and have been dismissed.

There remains the possibility that the Court’s ruling may be appealed by the parties and the prosecutor’s office. However, given the positive outcome of previous appeals, the Company believes that OMG will successfully appeal this claim in following court proceedings.



Ozenmunaigas: Administrative fine of 212.6 billion Tenge dismissed by court

Thursday, March 6th, 2014

Further to the press release dated 27 February 2014, reconfirming the successful appeal of an administrative fine of 212.6 billion Tenge against JSC Ozenmunaigas (“OMG”), JSC KazMunaiGas Exploration Production (“the Company”) is today pleased to announce that the Specialized Administrative Court in Aktau of Mangistau region (“the Court”) has ruled that the case has been dismissed and there is no avenue for appeal, but there remains the remote possibility that the Court’s ruling can be revisited by the prosecutor’s office.

As previously reported, OMG continues with its legal action to appeal the claim for environmental damage of 327.9 billion Tenge in relation to the disposal of contaminated soil. The disposal of contaminated soil resulted from past activities on the site and did not occur due to activity by either OMG or KMG EP. Currently the Company believes that OMG will successfully appeal this allegation.



KMG E&P’s Ozenmunaigas Hit with Envirnomental Damage Charge

Thursday, February 27th, 2014

JSC KazMunaiGas Exploration Production announces that the Department of Ecology of Mangystau Region (“Department of Ecology”) has presented JSC “Ozenmunaigas” (OMG) with a claim for environmental damage for the amount of 327.9 billion Tenge in relation to the disposal of contaminated soil.

This claim is made on the same basis as an administrative fine of 212.6 billion Tenge, and an environmental damage fine for the amount of 59.3 billion Tenge (each referred in the press release dated 20 February 2014). Both claims have been successfully appealed during 2013 and February 2014.

OMG disputes the allegation and is taking legal action to appeal the claim. The disposal of contaminated soil resulted from past activities on the site and did not result from activity by either OMG or KMG EP.

Given the positive outcome of previous appeals, the Company believes that OMG will successfully appeal this allegation.



KazMunaiGas Exploration Production: 2013 Financial Results, Profit Down 12%

Thursday, February 20th, 2014

JSC KazMunaiGas Exploration Production announces its consolidated financial results for the year ended 31 December 2013.

  • The Company’s revenues in 2013 were 816.7bn Tenge (US$5,368m), 2% higher than in 2012. In 2013 average Brent price declined by 3% compared with 2012. Export sales volumes dropped by 1%, whereas domestic sales volumes grew by 20%, which is in line with the Company’s obligations for domestic supply.
  • Net profit in 2013 was 141.8bn Tenge (US$932m), 12% less than in 2012. This is largely due to increases in taxes, other than on income, of 14% and in production expenses of 15% and due to a decline in income from joint ventures and associates by 25% and finance income by 40%.
  • Production expenses in 2013 were 162bn Tenge (US$1,065m), which is 15% higher compared with 2012, mainly due to an increase in employee benefits, repairs and maintenance and energy expenses.

Operational Highlights

KMG EP produced 12,388 thousand tonnes of crude oil (251kbopd), including the Company’s stakes in Kazgermunai (KGM), CCEL (CCEL) and PetroKazakhstan Inc. (PKI), which is 197 thousand tonnes or 2% more than in 2012.

Ozenmunaigas JSC (OMG) produced 5,208 thousand tonnes (105kbopd), an increase of 5% compared with 2012. Embamunaigas JSC (EMG) produced 2,841 thousand tonnes (57kbopd), a 1% increase compared with 2012. The total volume of oil produced at OMG and EMG in 2013 was 8,049 thousand tonnes (162kbopd), which is a 4% increase compared with 2012.

The Company’s share in production from KGM, CCEL and PKI in 2013 amounted to 4,339 thousand tonnes of crude oil (89kbopd), 2% lower than in 2012, mainly due to 5% lower production at PKI due to the natural decline of production.

In 2013, the Company’s combined export sales from OMG and EMG were 6,017 thousand tonnes (119kbopd), or 75% of the total sales volume from core assets. Domestic sales amounted to 1,967 thousand tonnes (39kbopd), or 25% of total sales volume.

The Company’s share in the sales from KGM, CCEL and PKI was 4,319 thousand tonnes of crude oil (88kbopd), including 3,829 thousand tonnes (78kbopd), or 89% supplied to export markets.

The Company appointed Miller and Lents Ltd as an independent reserves auditor to conduct the reserves assessment as at 31 December 2013. The Company will provide further update in due course once the reserves report as at 31 December 2013 is released.

Net Profit for the Period

Net profit in 2013 was 141.8bn Tenge (US$932m), 12% less than in 2012, largely due to increase in taxes, other than on income, and in production costs and to a decline in income from joint ventures and associates and finance income.

Revenues

The Company’s revenues in 2013 were 816.7bn Tenge (US$5,368m), 2% higher than in 2012. The decline in Brent price by 3% and 61 thousand tonnes lower export sales were offset by an increase of 330 thousand tonnes from domestic sales and an increase in domestic sales price from 38 to 40 thousand Tenge per tonne.

Taxes other than on Income

Taxes, other than on income, in 2013 amounted to 312bn Tenge (US$2,049m), which is 14% higher compared with 2012, largely due to an increase in the mineral extraction tax (MET) and export customs duty. Export customs duty was raised on 12 April 2013 from US$40 per tonne to US$60 per tonne.

Production Expenses

Production expenses in 2013 were 162bn Tenge (US$1,065m), which is 15% higher compared with 2012 mainly due to an increase in employee benefits, repairs and maintenance and energy expenses.

Employee benefits expenses in 2013 increased by 11% compared with 2012 due to salary indexation for production personnel by 7% in January 2013, and the reclassification of employee expenses as a result of the start of operations activity at the two new service units (the transportation and drilling units). During 2012, most employee benefits of these two new service units were classified as general and administrative expenses.

Repairs and maintenance expenses grew in 2013 by 25% compared with 2012, due to the increase in the number of well workover, well servicing and other types of well operations to increase oil recovery.

In 2013 energy expenses grew by 23% largely due to an increase in the average tariff from January 2013 at OMG by 25% and at EMG by 17%.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2013 amounted to 92bn Tenge (US$607m), which is 1% lower than in 2012. Transportation costs increased by 16% compared with 2012 due to an increase in tariffs for the Uzen-Atyrau-Samara route and domestic sales routes of the KazTransOil transportation system, which was offset by a decline in accruals for fines and penalties and other general and administrative expenses.

Exploration Expenses

In 2013, exploration expenses amounted to 13.1bn Tenge (US$86m), compared with 6.1bn Tenge (US$41m) in 2012. In 2013 the Company recognized dry well expenses amounting to 6.2bn Tenge (US$40m) relating to the exploration well drilled on the White Bear block, expenses amounting to 2.9bn Tenge (US$19m) relating to the two exploration wells drilled on the Zharkamys East block and 1.3bn Tenge (US$9m) relating to the two exploration wells drilled at Karaton-Sarkamys block.

Impairment of Assets

As previously reported, in the first quarter of 2013 the management of the Company made a 56bn Tenge (circa US$370m) impairment charge of the recoverable value of JSC “Ozenmunaigas”. The impairment charge relates to the increase in export customs duty that occurred on 12 April 2013.

Cash Flows from Operating Activities

Operating cash flow in 2013 was 98bn Tenge (US$647m), which is 36% lower than in 2012, mainly due to higher production expenses, taxes other than on income and increase in accounts receivable. From 1 January 2014, the payment period for oil supplied to Rompetrol (through “KazMunaiGas Trading”) increased from 60 to 90 calendar days, which might affect the Company’s working capital.

Capex

Capital expenditures in 2013 amounted to 144bn Tenge (US$946m), which is 18% higher compared with 2012 mainly due to the increase in the number of wells drilled from 256 to 311 wells, construction of production facilities, purchase of equipment, and implementation of the modernization programme. In 2013 investment into modernisation programme was 14bn Tenge (US$93m) compared with 9.5bn Tenge (US$63m) in 2012.

Cash and Debt

Cash and cash equivalents as at 31 December 2013 amounted to 119bn Tenge (US$0.8bn) compared with 155bn Tenge (US$1.0bn) as at 31 December 2012.

Other financial assets (current and non-current) at 31 December 2013 were 504bn Tenge (US$3.3bn) compared with 552bn Tenge (US$3.7bn) as at 31 December 2012.

In June 2013, KMG NC fully repaid the Bond with an outstanding principal and accrued interest of 137bn Tenge (US$909m). KMG EP purchased the 222bn Tenge (US$ 1.5bn) NC KMG Bonds in June 2010 with a maturity date of June 24, 2013. As at 31 December 2013, 82% of cash and financial assets were denominated in foreign currencies and 18% were denominated in Tenge. Finance income accrued on cash and financial assets in 2013 was 20.6bn Tenge (US$135m), compared with 34.5bn Tenge (US$232m) (including the Bond income) in 2012.

Borrowings as at 31 December 2013 were 6.8bn Tenge (US$44m) compared with 7.3bn Tenge (USD$48m) as at 31 December 2012.

The net cash position as at 31 December 2013 was 616bn Tenge (US$4.0bn) compared with 699bn Tenge (US$4.6bn) as at 31 December 2012.

Income from associates and joint ventures

In 2013 KMG EP’s share of results of associates and joint ventures was 51bn Tenge (US$334m) compared with 67bn Tenge (US$452m) in 2012.

Kazgermunai

In 2013 KMG EP recognised 28bn Tenge (US$187m) of income from its share in KGM. This amount represents 46bn Tenge (US$303m) corresponding to 50% of KGM’s net profit net of the 18bn Tenge (US$116m) effect of amortization of the fair value of the licenses and the related deferred tax.

KGM’s net profit declined by 1% compared with 2012 mainly due to an increase in export customs duty rate and one-off accruals related to tax audits for 2007-2012 and an ecological audit, which was partially offset by an increase in export sales.

In 2013 KMG EP received US$200m in dividends from KGM.

PetroKazakhstan Inc.

In 2013, KMG EP recognised 22bn Tenge (US$145m) of income from its share in PKI. This amount represents 27bn Tenge (US$177m) corresponding to 33% of PKI’s net profit net of the 5bn Tenge (US$31m) effect of amortization of the fair value of the licenses.

PKI’s net profit declined by 40% compared with 2012 mainly due to a natural decline of production at PKI, lower sales of refined products and an increase in export customs duty and one-off accruals of fines and penalties related to tax and ecological audits.

In 2013 KMG EP received US$219m in dividends from PKI.

CCEL

As of 31 December 2013, the Company had 17.2bn Tenge (US$112m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 2.8bn Tenge (US$18.1m) of interest income in 2013 related to the US$26.87m annual priority return from CCEL.

Tax and environmental audits

As at 31 December 2013 the Company has several claims related to tax and environmental matters. More detailed information is provided in the consolidated financial statements for the year ended 31 December 2013.

Tax audit for 2006-2008. As a result of 2006-2008 tax audit the tax authorities estimated 16.9bn Tenge (US$112m) of additional taxes payable. The Company is currently in the process of appealing the audit results in the Tax Committee of the Ministry of Finance. During 2013 the tax authorities’ assessments was reduced by 1,8bn Tenge (US$12m). As a result, existing tax provisions as at 31 December 2013 were reduced to 14,6bn Tenge (US$96m).

Mineral Extraction Tax. Tax authorities issued a notification to the Company regarding the 8.8bn Tenge (US$58m) payable for discrepancies identified in the data reported in the Company’s Mineral Extraction Tax returns and the data supplied by the Ministry of Oil and Gas of the Republic of Kazakhstan for the period from 2009 to 2012. The Company disagrees with the above notification and has provided the written explanations of its position. The tax authorities have not yet audited the Company on this matter and hence no tax assessment was done yet. Should the tax authorities audit the Company and assess additional MET liabilties, the Company will definitely appeal such assessment. The Company management believes that the Company will be successful in its appeal and no provisions in relation to this matter have been made in the consolidated financial statements as at 31 December 2013.

PetroKazakhstanKumkolResources JSC (PKKR) tax audit. As a result of the tax audit for 2009-2012 of PKKR (100% subsidiary of PKI Inc.) tax authorities issued notification for environmental emissions for 10.7bn Tenge (US$69m) and related fines and penalties for 8.8bn Tenge (US$57m). PKKR disagrees with the tax audit results and is planning to file an appeal. PKI management assessed the risk of unfavourable outcome of this claim as probable and recognized a provision for 19.4bn Tenge (US$126m) in its financial statements (KMG EP’s 33% share 6.4bn Tenge (US$41.7m). PKI management believes that PKKR has a strong position on any other potential claims as a result of tax audit for 2009-2012.

Ozenmunaigas Environmental Audit 2011-2012. Following an inspection that covered the period from August 2011 to November 2012 JSC “Ozenmunaigas” received a notification to pay 59.3bn Tenge (US$392m) in fines for environmental damages. JSC “Ozenmunaigas” believes that the act was illegal and the calculations were not reliable, and therefore filed an appeal. The Company believes that JSC “Ozenmunaigas” will successfully appeal the results of the inspection and the related fines, and therefore no provision has been accrued for this claim as at 31 December 2013.

Ozenmunaigas environmental audit 2012-2013. As a result of an inspection during the second half of 2013 JSC “Ozenmunaigas” received a notification from the Department of Ecology of Mangystau Region to pay 212.6bn Tenge in fines for environmental damage caused by the disposal of excessive waste to the environment. JSC “Ozenmunaigas” disagrees with this notification and is currently taking appropriate action to appeal the claim. The Company management believes that JSC “Ozenmunaigas” has a strong position in this regard, as the inspection grossly violated the laws of the Republic of Kazakhstan in relation to the procedure for the inspection process. The Company believes that it can successfully appeal the results of the inspection, and therefore no provision has been made for this claim as at 31 December 2013.

Embamunaigas environmental audit. As a result of an ecological inspection in June-July 2013 JSC “Embamunaigas” received a report stating that gas utilization on three oilfields was not being handled in accordance with the approved technological development plans. To prevent the suspension of the development of the fields JSC “Embamunaigas” received a positive conclusion on adjusted development plans from Committee for Environmental Regulation. All fields are currently operating in accordance with the development plans, and there is no longer any outstanding litigation related to this matter.

Embamunaigas gas flaring. On 23 January 2014, JSC “Embamunaigas” received a notification in the amount of 37.2bn Tenge in fines for environmental damage caused by violations of ecology law, including emissions from associated gas flaring. The Company is currently taking appropriate action to appeal the claim. The Company believes that it can successfully appeal the results of the inspection and the related fines. Therefore no provision has been made for this claim as at 31 December 2013.



KMG EP: Board Meeting Results – Keen to Spend $300m USD on Exploration Activities

Thursday, December 5th, 2013

JSC KazMunaiGas Exploration Production held its regular Board of Directors meeting. Among the major decisions the Board approved the 2014 budget and business plan for the period of 2014-2018.

Production

In the first eleven months of 2013 production at Ozenmunaigas (OMG) increased by 5% compared with the corresponding period of 2012. However, having considered all factors, the Board approved a new production plan at OMG for 2014 at 5.35 million tonnes (108kbopd). Embamunaigas (EMG) production plan for 2014 was kept at 2.8 million tonnes (57kbopd). The revision of production profile at OMG reflects the lower production levels during the preceding three years, including 2011 when production was hit by labour strikes at Ozenmunaigas.

By 2018 KMG EP anticipates increasing production at OMG and EMG by 3%, including an increase by 5% to 5.57 million tonnes at OMG.

The Company’s share in the planned production of Kazgermunai (KGM), CCEL (CCEL), PetroKazakhstan Inc. (PKI) and Ural Oil and Gas (UOG)1 in 2014 is estimated at 4.1 million tonnes (84kbopd) and is expected to decline gradually to 3.4 million tonnes (68kbopd) by 2018 due to natural decline of production at KGM and PKI.

Domestic oil supplies

The Company expects annual volume of oil supply to the domestic market in 2014 to be 1.9 million tonnes (38kbopd) that will be supplied to Atyrau refinery. Additional 100 thousand tonnes of oil will be processed at Atyrau refinery for the Company’s own use. The budgeted price for the domestic supply is 48,000 Tenge per tonne (US$43.4 per barrel) which is 20% higher than in 2013. It is anticipated that over the period of 2015-2018 domestic oil supplies may increase up to 50% of the total sales from OMG and EMG.

Capital expenditure

The Board of Directors approved capital expenditure for 2014 at 133bn tenge (US$870m)2. It is expected that total investments in 2014-2018 will amount approximately to US$4.1bn, of which US$290m will be allocated to the modernisation programme. As a result, the total investments into the modernisation programme in 2012-2018 will amount to US$570m.
Following the results of exploration activities in 2011-2013 the Company has reassessed prospectivity of its existing exploration acreage. The approved business plan anticipates reduced exploration activity at the existing exploration portfolio. However, the Company reconfirms its appetite to spend up to US$300m annually in exploration activities in appearance of the perspective exploration projects.

Treasury policy

The Board has also made a decision to introduce temporary changes to the Company’s Treasury Policy. The limit of cash deposited with domestic Kazakh banks will be temporarily increased to US$2.1bn (See notes to editors).
Dividends from joint ventures and associates

The Board also approved the distribution of KGM’s 9M2013 net income in the form of dividends in the amount of US$150 million, of which KMG EP’s share in accordance with the ownership interests will be US$75 million. Considering dividends already received, KMG EP’s share in dividends from KGM in 2013 will be US$200 million.
As announced, during 9M2013 PKI has paid KMG EP US$125.4 million in dividends.







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