Dedication across the board
Annual Report 2012

Business Review

Chief Executive’s Review

Kai-Uwe Kessel

Kai-Uwe Kessel2012 was an outstanding year from an operational perspective. It saw full production levels and a complete range of hydrocarbon products being delivered to various destinations outside Kazakhstan, including crude oil, stabilised condensate, LPG and dry gas. Zhaikmunai started its third development phase, which will entail the engineering, planning, procurement, construction and the commissioning of new infrastructure as well as a sizeable drilling programme spanning the next 5 to 6 years. Plans for a third train to the Gas Treatment Facility (GTF) were, for example, developed in 2012 and contracts will be awarded in 2013. Reserves growth is expected to happen through the traditional route of proving up reserves from one category to a higher one: in addition to its 195 million Proven Reserves (1P), Zhaikmunai has over 800 million boe in Probable and Possible Reserves. Reserves growth will likely also be boosted by opportunistic acquisitions aimed at leveraging Zhaikmunai’s existing infrastructure. Very exciting times thus lie ahead for Zhaikmunai. They all pursue the aim of solid and steady growth as well as return to shareholders.

Operations at Optimal Levels

The Chinarevskoye field is now in full production: both the Oil Treatment Facility (OTF) and the Gas Treatment Facility (GTF) can be operated at their nameplate capacities. Zhaikmunai expects a daily total production average of at least 45,000 boepd for 2013, after factoring in the necessary equipment maintenance, annual shutdown and well tie-in or workover time. All products - crude oil, stabilised condensate, LPG and dry gas - are sold at the best possible prices on the world markets, and our operations are running at optimal levels.

2012 also saw the building of a new employee field camp, which was inaugurated recently. The new camp offers many attractive facilities including a capacity of 460 beds, a large canteen with fully equipped kitchen, in- and outdoor recreational areas, and a clinic, all equipped with central heating, air conditioning, internet, satellite TV, waste water collection and treatment, laundry facilities, etc.

Drilling

In 2013, we have already allocated US$ 200 million for the drilling of 15 - 17 wells; 9 appraisal wells, one exploration well and 5-7 production wells. Further sustained drilling activities are planned for 2014 and 2015, also at an average budgeted cost of US$ 11 million per well.

Expanding the GTF’s Treatment Capacity

Chief Executive's ReviewEstablishing the impressive infrastructure of the GTF in the remote pre-Caspian basin of North-western Kazakhstan has afforded Zhaikmunai a unique learning platform. As a result, we are now particularly well positioned to repeat the process in the third phase of development of the Chinarevskoye field.

In its first two development phases, Zhaikmunai has developed a very good understanding of the nature and behaviour of the different hydrocarbon bearing reservoirs and of the gas condensate streams. It also gained substantial hands-experience in construction, operations and maintenance. This will prove extremely valuable in the next 3 years, as it plans to build a third GTF train next to the existing ones. This will allow faster monetisation of reserves, by increasing treatment capacity by an additional 2.5 bcm of raw gas per year, bringing total capacity to 4.2 bcm of raw gas per annum. Investments have already been made on the initial design of this third train and early stage procurement, and final decisions on the contracts are expected in the coming few months. Construction and commissioning of this state-of-the-art infrastructure is expected to be completed by mid 2016.

Proving Up Reserves in the Chinarevskoye Field

The multi-layered nature of the Chinarevskoye field allows us to pursue drilling in the current production areas. The recent renewal of our exploration licence will also contribute to the generation of more Possible Reserves, the conversion of Possible Reserves into Probable Reserves and the further conversion of Probable Reserves into Proved Reserves (1P). There is significant exploration potential in reservoirs, which are yet to be accessed, and these also hold promise for the future. This is confirmed by the latest independent Ryder Scott report from December 31, 2012, showing a 15.2% increase in Proved Reserves (1P) during 2012 to 194.8mboe, whereas the Proved plus Probable Reserves (2P) remained over 500mmboe.

Building Up Further Reserves Beyond the Chinarevskoye Field

Chief Executive's ReviewIn addition to proving up reserves, Phase II of the Chinarevskoye development plan also focuses on sustaining its long-term production potential beyond the initial full capacity plateau. These two imperatives are the cornerstone of Zhaikmunai’s Mergers & Acquisitions strategy. The recent acquisition of the subsoil use rights related to three adjacent oil and gas fields, Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachenskoye, in close vicinity of the Chinarevskoye field, serves these two imperatives perfectly. Zhaikmunai looks forward to appraising these fields in the next 2–3 years, with an initial budget of US$ 85 million. Activities will include the acquisition of new and/or the reprocessing of existing 3D seismic data, as well as exploration/appraisal drilling, to validate and expand the existing reserves. These three fields give Zhaikmunai an attractive upside potential, allowing for further reserve and production growth.

By virtue of its size, development stage and production track record, Zhaikmunai has acquired enviable visibility and is regularly informed of further growth expansion opportunities. Its approach is to remain both pragmatic and prudent as it considers these options in its areas of specific expertise. Zhaikmunai’s main focus remains on North-western Kazakhstan, where it knows the landscape and is already operating successfully. In addition, it will look for logistical or managerial synergies in current and future operations. Each new project will be considered on its own merits and could give rise, in due time, to other acquisitions or joint ventures.

Optimizing Shareholder Value

Delivering shareholder value has, so far, been achieved through a clear capital structure and a financial policy hinging on a balanced approach of investment in growth and a capital expenditure programme funded in large part from operating cash flow. In addition, in 2012 the Board of Directors approved the payment of an inaugural dividend being a cash distribution of 32 cents per partnership interest (equal to US$ 60.2 million), and the adoption of a dividend policy of not less than 20% of the Partnership’s consolidated net profit per annum. Finally, in early 2013 the Board has also considered a GDR buy-back programme, which was approved by the limited partners of the Partnership in a Special General Meeting.

Closing Remarks

Zhaikmunai’s development plans offer exciting opportunities in 2013. We look forward to pursuing our exploration, appraisal, development and production activities to the highest standards, whilst we continue to deliver the planned results to our shareholders. My sincere appreciation goes to our wider Kazakhstan community, including the full Zhaikmunai team, for all their hard work in bringing us at this unique juncture.

Chief Executive Officer
Kai-Uwe Kessel