Dedication across the board
Annual Report 2012

Business Review

Zhaikmunai’s Strategy

Zhaikmunai’s long-term objective is to further consolidate its position as one of the leading independent oil and gas companies in Kazakhstan and in the Commonwealth of Independent States (CIS). The first two phases of development of the Chinarevskoye field have now been completed. Its large infrastructure, including the Gas Treatment Facility (GTF), is fully operational and average daily production currently runs above 45,000 boepd.

Zhaikmunai’s third phase of development has now started. It is served by a healthy Balance Sheet showing more than US$ 250 million in cash. It also rests on over 800 million boe of Probable and Possible Reserves in the Chinarevksoye field as well as additional reserves in the three recently acquired new fields (Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachenskoye) close to the Chinarevskoye field.

The constituents of Zhaikmunai’s strategy in delivering the future growth potential of the company comprise:

  • Delivering organic production growth;
  • Actively pursuing reserve growth;
  • Developing a multi-field model;
  • Making sustainable development a priority;
  • Focusing on delivering shareholder value.

All of these contribute towards enhancing value for all of Zhaikmunai’s stakeholders.

Deliver Organic Production Growth

Zhaikmunai aims to double production levels by the end of 2016. To do this, it plans to erect an additional third train to the GTF next to the existing two trains, which can currently treat a total of 1.7 bcm of raw gas per year. The capacity of this third train will be 2.5 bcm of raw gas, bringing the total GTF capacity to 4.2 bcm of raw gas annually when all three trains will be in operation. This extension will benefit from the technical expertise and from the important experience gained with the first two trains of the GTF.

The roadmap for the third train to the GTF includes the FEED (Front End Engineering Design), the selection of vendors, construction, commissioning and production ramp-up. The decision to initiate the construction is naturally predicated on meeting Zhaikmunai’s internal macroeconomic environment conditions and financial criteria including cash management. Zhaimunai intends, for example, on hedging the planned non-scalable infrastructure expenditure.

The significant investment in infrastructure will be fully funded from operational cash flow, and will also focus on such items as the expansion of the Oil Treatment Facility (OTF). All other existing Zhaikmunai owned and operated infrastructure, such as pipelines and rail terminals, has ample capacity to accommodate for at least a doubling of the current production levels.

Actively Pursuing Reserve Growth

Zhaikmunai’s StrategyThe Chinarevskoye field currently has over 1 billion boe in reserves. Ryder Scott, in its December 2012 report, confirmed Proven Reserves of 195 million boed, an increase of 15.2% compared to 2011. Zhaikmunai’s appraisal programme will focus on the Chinarevskoye field’s Probable Reserves (311 mmboe) and Possible Reserves (559 mmboe). Over the next few years the target is to build Zhaikmunai’s Proven Reserves base towards some 700 million boe. This will ensure that Zhaikmunai can produce over 100,000 boedpd until the end of its current license in 2032. To support future growth of proven reserves, Zhaikmunai also intends to start appraising the three recently acquired adjacent fields (Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachenskoye).

Over the last 4 years, drilling has focused mainly on production wells in order to secure feedstock for the GTF and maintain crude oil production at levels above 7,000 bbl per day. Now that the feedstock is in place, the onus will lie on a renewed appraisal drilling programme in order to transfer more of Zhaikmunai’s Possible Reserves and Probable Reserves into the Proven Reserves category. Under the existing oil price environment, the current drilling plan foresees some 60 wells over the next 5 years. For 2013 alone, approximately 15 wells are planned, the majority of which will be appraisal wells.

Taken together, these growth programmes will lay the foundations for doubling total production by the end of 2016, and extending the production plateau at this level well beyond 2020.

Develop a Multi-Field Model

Zhaikmunai is also pursuing a strategy of growth through value-accretive acquisitions. This is in line with its desire to leverage existing infrastructure to further add reserves at low-finding costs. The recent acquisition of the Rostoshinskoye, Darinskoye and Yuzhno-Gremyachenskoye fields, all of which are located between 80 and 120 km from the existing GTF marked a first step in this direction. The appraisal work on these 3 fields will commence in 2013 and will be spread over the next 3 years.

Opportunities for acquisitive growth in Kazakhstan are being evaluated on a continuous basis. Zhaikmunai, with its enviable development and operational track record in Kazakhstan will continue to look for compelling acquisitions, which will further improve shareholder value.

Making Sustainable Development a Priority

Zhaikmunai’s long presence in Kazakhstan has led to a natural, gradual and ambitious involvement in sustainable development. Over the years, it has built a comprehensive CSR roadmap comprised of employee security and welfare, investment in community building and environmental protection and reporting. Each of these priorities is now taken up in the overall yearly management plan and monitored against specific voluntary as well as compliance objectives. As such, Zhaikmunai continues to strive to improve and implement new policies each year in order to integrate further sustainability in all of its operations.

Zhaikmunai sees Corporate Social Responsibility as an important indicator of non-financial risk and is constantly developing internal best practices to improve its standards. This is an important standalone part of Zhaikmunai’s strategy while it is also complementary to all of the other strategic initiatives. Sustainable development will remain a priority in 2013 and onwards.

Focus on Delivering Shareholder Value

Zhaikmunai’s strategy is centred on a balanced approach to investment in growth. This entails both a prudent cash management policy and returns to shareholders.

Zhaikmunai is in strong financial position: both revenue and EBITDA more than doubling in 2012 compared to 2011. For the next 5 years, its capital expenditure (CAPEX) programme can be fully funded from its operational cash flow. In addition, it intends on hedging all the non-scalable CAPEX components against oil price fluctuations. Finally, it wishes to keep its Net Debt to EBITDA ratio of 1.5 X objective in addition to a healthy cash position in order to mitigate any volatility in the oil price.

Zhaikmunai’s progressive dividend policy was adopted in 2012. This will be pursued over the coming years, assuming it doesn’t impact its cash balance or growth strategy in a fluctuating oil price environment. Zhaikmunai has also started implementing a GDR (Global Depositary Receipt) buy-back programme in 2013. Finally, Zhaikmunai will continue to consider options for an alternative listing.