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KMG EP’s goal is to build on its position as a leading oil and gas company in Kazakhstan by increasing its production and replacing its reserves both through acquisitions in the short-to-medium term and through exploration in the longer term. As part of the process of achieving this goal, the Company has developed a five year strategy, with the following key priorities:

Grow and replace reserves

  • Exploit the rights granted by NC KMG in respect of existing producing and unlicensed blocks.
  • Selective acquisitions in Kazakhstan and abroad.
  • Continue exploration efforts on existing and new blocks.
Maintain production in existing fields

  • Sustain production from the existing reserve base over the medium term.
  • Continue the use of secondary and enhanced oil recovery techniques.
Cost and asset rationalization

  • Initiatives in place to reduce production costs and capex over the medium term.
  • Asset Optimisation Programme underway to divest non-core subsidiaries.
Environmental improvements

  • Policies under implementation to meet international environmental, labour, HR and safety standards.
One of the main objectives of KMG EP in 2008 was to retain and consolidate its position as a leading oil and gas producer in Kazakhstan and to build a strong platform for future growth. This was achieved by utilising the Company’s strong relationships with its parent company, NC KMG, which gives KMG EP preferential access to onshore assets in Kazakhstan and helps build its portfolio of assets through its acquisition strategy.

Acquisitions in particular became the main focus of the Company after its IPO on the LSE and KASE in October 2006, following which in 2007 the company acquired a 50% interest in an Kazgermunai and additional 50% interest in Karazhanbasmunai.

The Kazgermunai acquisition, for $969m, was completed in April 2007 and made KMG EP Kazakhstan’s second largest oil producer. The acquisition was approved by the Company’s Independent Non-Executive Directors and the minority shareholders. NC KMG has not participated in voting as an interested party to this transaction.

As a result of the acquisition reserves attributed to KMG EP from the total production level of Kazgermunai were 1062 thousand tonnes. Dividends received from Kazgermunai by KMG EP since acquiring the 50% interest were $375 millions.

The 50% interest in Karazhanbasmunai (KBM), was completed on 12 December 2007. KBM operates in Karazhanbas oil and gas field in Mangistau region in Western Kazakhstan. The deal utilised an innovative financial solution for the benefit of the Company and its shareholders. The Company paid $150 million in cash from its own funds, and received funding for the remaining $780 million on competitive terms. Furthermore, the Company also receives an annual priority income of $26.2 million from the dividend flow.

According to Miller & Lents, Karazhanbasmunai’s proven and probable reserves now attributed to KMG EP are 32.8 million tonnes. By acquiring this asset, the Company added a further 10% to its production levels. Karazhanbasmunai has a favourable access to the markets through the Aktau port via the Caspian Sea, and through theTransneft pipeline on to western markets as well as to the Atyrau oil refinery.

The consolidated production level of the Company increased considerably as a result of the acquisitions in Kazgermunai and Karazhanbasmunai. The current total production level is approximately 240 thousand barrels per day, a 25% increase in production levels per day excluding the acquisitions.

The acquisitions-led strategy still remains as important for 2009. The Company is interested in acquiring a 33% stake in PetroKazakhstan Inc., which operates in various locations at the Turgai basin in South Kazakhstan. The 2P reserves of PetroKazakhstan Inc. are 75 million tonnes whilst its total production for 2007 was 6.8 million tonnes. This potential addition to KMG EP’s domestic portfolio is still being carefully considered by the Company and is expected to be completed in 2009.

The Company is also considering the possible acquisition of a 50% interests in Kazakhoil-Aktobe and Kazakhturkmunai from its parent company. The Company also has a potential interest in an acquisition of a large share of Mangistaumunaigaz. This is currently being evaluated by NC KMG.

It is important to stress that any potential acquisitions and additions to KMG EP assets are always thoroughly analysed by the Company’s management and that the deals are completed according to market prices and in the best interest of all shareholders.

A strong financial position, good knowledge of local markets and excellent managerial expertise enable the Company to expand its domestic portfolio on favourable terms. The company is also considering acquisitions and joint partnership opportunities on a number of assets both in and outside Kazakhstan.