Joint Stock Company
Exploration and Production KazMunaiGas
and its subsidiaries
Consolidated Financial Statements
For the years ended December 31, 2005, 2004, 2003
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Contents
Page
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets ------------------------------------------------------------------------------------- 1
Consolidated Statements of Income ----------------------------------------------------------------------------- 2
Consolidated Statements of Cash Flows ------------------------------------------------------------------------ 3
Consolidated Statements of Changes in Equity ---------------------------------------------------------------- 4
Notes to the Consolidated Financial Statements ----------------------------------------------------------- 5-25
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Consolidated Balance Sheets
Tenge thousands
As at December 31,
Notes
2005
2004
2003
243,131,834
53,963,138
8,665,381
257,958,200
8,198,366
23,762,804
223,984,629
261,418
6,664,601
305,760,353
289,919,370
230,910,648
15,409,658
22,121,101
6,993,525
45,918,226
19,993,257
20,187,588
20,848,151
4,484,643
5,027,135
19,826,746
26,520,000
14,127,579
16,453,723
6,168,667
5,358,874
13,487,247
6,006,984
9,310,184
130,623,355
90,834,254
56,785,679
436,383,708
380,753,624
287,696,327
11,792,208
−
161,860,819
11,761,130
1,315,825
154,162,438
11,761,130
−
142,406,287
173,653,027
167,239,393
154,167,417
79,536
1,494,303
1,391,740
173,732,563
168,733,696
155,559,157
54,028,740
14,197,680
49,701,648
50,758,435
18,485,814
48,805,791
8,145,588
17,537,946
47,582,248
117,928,068
118,050,040
73,265,782
21,121,175
46,994,090
51,167,595
25,440,217
18,100,418
20,390,400
34,646,110
20,832,960
10,160,262
11,108,227
30,096,811
7,506,088
144,723,077
93,969,888
58,871,388
Total liabilities
262,651,145
212,019,928
132,137,170
Total liabilities and equity
436,383,708
380,753,624
287,696,327
ASSETS
Non-current assets
Property, plant and equipment
Financial assets
Other assets
Current assets
Inventories
Taxes prepaid and VAT recoverable
Prepaid and deferred expenses
Trade and other receivables
Other financial assets
Cash and cash equivalents
7
8
9
10
8
8
8
Total assets
EQUITY
Share capital
Other reserves
Retained earnings
11
Equity holders of the Company
Minority interest
Total equity
LIABILITIES
Non-current liabilities
Borrowings
Deferred tax
Provisions
Current liabilities
Borrowings
Income taxes payable
Trade and other payables
Provisions
13
18
14
13
6
14
The notes on pages 5 to 25 are an integral part of these consolidated financial statements.
1
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Consolidated Statements of Income
Tenge thousands
For the year ended December 31,
Notes
2005
2004
2003
346,429,445
(204,575,552)
237,103,218
(162,276,362)
177,757,373
(136,586,864)
141,853,893
74,826,856
41,170,509
1,094,568
(3,436,830)
(2,228,285)
142,948,461
71,390,026
38,942,224
(99,192,639)
(58,209,157)
(31,513,204)
43,755,822
13,180,869
7,429,020
1,521,130
283,718
74,211
Profit for the year
45,276,952
13,464,587
7,503,231
Attributable to:
Equity holders of the Company
Minority interest
45,074,642
202,310
13,426,853
37,734
7,493,361
9,870
45,276,952
13,464,587
7,503,231
0.93
0.03
0.28
0.01
0.16
0.00
CONTINUING OPERATIONS
Revenue
Operating expenses
15
16
Profit from operations
Finance income (expense)
17
Profit before tax and minority interest
Income tax expense
18
Profit for the year from continuing operations
DISCONTINUED OPERATIONS
3
Profit for the year from discontinued operations
EARNINGS PER SHARE
12
Attributable to equity holders of the Company
From continuing operations – basic and diluted
From discontinued operations – basic and diluted
The notes on pages 5 to 25 are an integral part of these consolidated financial statements.
2
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Consolidated Statements of Cash Flows
Tenge thousands
For the year ended December 31,
Notes
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment (PPE)
Proceeds from sale of PPE
Purchases of intangible assets
Purchases of held-to-maturity financial assets
Loans granted to related parties
Loan repayments received from related parties
Investments in associates
Disposal of subsidiaries, net of cash disposed
Interest received
7
8
19
19
9
3
Net cash used in investing activities
Cash flows from financing activities
Issue of shares
Proceeds from borrowings
Repayment of borrowings
Dividends paid to Company’s shareholders
Other distributions to owners
Interest paid
11
13
13
11
19
Net cash from (used in) financing activities
2005
2004
2003
333,283,661
(181,300,015)
(76,929,923)
263,575,257
(166,205,944)
(36,875,099)
201,293,826
(120,242,253)
(35,840,039)
75,053,723
60,494,214
45,211,534
(61,916,479)
2,755,953
(650,170)
(25,696,389)
(30,304,487)
17,000,000
(1,810,335)
(2,978,059)
4,103,536
(50,525,604)
192,062
(23,853)
(28,288,259)
−
−
(4,585,000)
451,227
440,882
(28,948,826)
1,515,635
(79,173)
(6,238,676)
−
−
−
285,655
−
(99,496,430)
(82,338,545)
(33,465,385)
31,078
71,002,146
(30,407,622)
(3,408,598)
(2,115,615)
(5,019,287)
−
32,714,103
(2,269,803)
(2,404,513)
−
(878,838)
−
877,085
(3,840,544)
(1,613,195)
−
(503,888)
30,082,102
27,160,949
(5,080,542)
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Exchange gains (losses) on cash and cash equivalents
8
5,639,395
14,127,579
420,614
5,316,618
9,310,184
(499,223)
6,665,607
2,783,589
(139,012)
Cash and cash equivalents at end of the year
8
20,187,588
14,127,579
9,310,184
The notes on pages 5 to 25 are an integral part of these consolidated financial statements.
3
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Consolidated Statements of Changes in Equity
Tenge thousands
Attributable to equity holders of the
Company
Share
capital
Other
reserves
Retained
earnings
Minority
interest
Total
equity
As at January 1, 2003
Changes in ownership in subsidiaries
Profit for the year
Dividends (Note 11)
11,761,130
−
−
−
− 136,937,835
−
−
−
7,493,361
− (2,024,909)
1,373,925 150,072,890
7,945
7,945
9,870
7,503,231
− (2,024,909)
As at December 31, 2003
11,761,130
− 142,406,287
1,391,740 155,559,157
Gain on loan from Parent Company (Note 19)
Revaluation of assets, net of tax effects
Changes in ownership in subsidiaries
Profit for the year
Dividends (Note 11)
As at December 31, 2004
Issue of shares (Note 11)
Changes in ownership in subsidiaries (Note 3)
Profit for the year
Dividends (Note 11)
Other distributions to owners (Note 19)
As at December 31, 2005
−
−
−
−
−
11,761,130
−
1,315,825
−
−
−
1,008,692
−
16,065
13,426,853
(2,695,459)
154,736
1,163,428
196,776
1,512,601
(286,683)
(270,618)
37,734 13,464,587
− (2,695,459)
1,315,825 154,162,438
1,494,303 168,733,696
31,078
−
−
−
31,078
− (1,315,825) (31,253,594) (1,617,077) (34,186,496)
−
− 45,074,642
202,310 45,276,952
−
− (3,499,715)
− (3,499,715)
−
− (2,622,952)
− (2,622,952)
11,792,208
− 161,860,819
79,536 173,732,563
The notes on pages 5 to 25 are an integral part of these consolidated financial statements.
4
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
1.
Organization and principal activities
Joint Stock Company Exploration and Production KazMunaiGas (the “Company”) is engaged in the
acquisition, exploration, development, production, processing and export of hydrocarbons with its core
operations of oil and gas properties located in the Pre-Caspian and Mangistau basins of western
Kazakhstan. The Company’s direct majority shareholder is National Company KazMunaiGas Joint
Stock Company (“NC KMG” or the “Parent Company”), which represents the state’s interests in the
Kazakh oil and gas industry and which holds 97.87% of the Company’s voting shares. NC KMG, in
turn, is 100%-owned by the government of the Republic of Kazakhstan (the “Government”).
The Company was formed in March 2004 through a merger of the state-owned exploration and
production companies held by NC KMG (Note 2). On December 29, 2004, the Company acquired an
86.7% interest in Atyrau Refinery LLP (“the refinery”) from NC KMG and subsequently increased its
interest to 99.1% before selling the refinery back to an entity controlled by NC KMG on December 29,
2005 (Note 3).
The Company conducts its principal operations through the UzenMunaiGas and EmbaMunaiGas
production divisions. These consolidated financial statements reflect the financial position and results
of operations of those divisions, the refinery and certain other controlling and non-controlling interests
in predominantly non-core entities. Such other interests represented approximately 7% of the
Company’s net assets at December 31, 2005 (2004: 11%, 2003: 4%). Following the disposal of the
refinery and other non-core assets in 2005, the Company plans to dispose of the remaining non-core
businesses by the end of 2007.
These consolidated financial statements were authorized for issue by the Company’s Chief Executive
Officer, Chief Financial Officer and Group Financial Controller on June 2, 2006.
2.
Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) based on statutory financial statements that were adjusted for the
purpose of fair presentation in accordance with IFRS. The principal adjustments relate to property,
plant and equipment, abandonment liability and deferred income taxes.
In the absence of specific IFRS guidance for oil and gas producing companies, the Company has
developed accounting policies in accordance with other generally accepted accounting principles for oil
and gas producing companies insofar as they do not conflict with IFRS principles.
The consolidated financial statements have been prepared under the historical cost convention. At the
Company’s date of transition to IFRS at January 1, 2003, the Company measured property, plant and
equipment at fair value which was determined primarily with reference to depreciated replacement
cost.
The transfer of the state-owned exploration and production companies held by NC KMG and the
refinery to the Company in 2004 represented a reorganization of enterprises under common control
and, accordingly, was accounted for at predecessor book values in a manner similar to a pooling of
interests. The financial statements have therefore been presented as if these common control
transactions occurred from the beginning of the earliest period presented, i.e. January 1, 2003. The
share capital of the contributed enterprises prior to the respective transaction dates in 2004 is presented
as additional paid in capital. Earnings per share for periods prior to the common control merger are
based on the weighted average of the shares outstanding at the date of the merger because the one-toone share exchange with the holders of shares in the state-owned exploration and production companies
did not result in a corresponding changes in resources.
The Company’s functional currency is the Kazakhstan Tenge because most of the Company’s
operating expenses are incurred and settled in Tenge.
5
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
Use of estimates. The preparation of consolidated financial statements in conformity with IFRS
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities during the reporting period. The most significant estimates relate to the
fair values of property, plant and equipment, estimates of oil and gas reserves which are used to deplete
those assets, asset retirement obligations, deferred taxes, contingent liabilities and the recoverability of
inventories and accounts receivable. Actual results could differ from those estimates.
Exchange rates, restrictions and controls. The official rate of the Kazakhstan Tenge to the US Dollar
(“USD”) at 31 December 2005, 2004 and 2003 was 133.77, 130.00 and 144.22 Tenge to USD 1.00
respectively. The Tenge has historically been falling against the USD due to inflation in Kazakhstan
and other factors. However, the Tenge depreciated by 2.9% in 2005 after appreciating 9.86% and
7.31% against the USD in 2004 and 2003. The official consumer price index inflation rates for
Kazakhstan were 7.6%, 6.7% and 6.4% in 2005, 2004 and 2003, respectively. There are no exchange
restrictions or controls relating to conversion of Tenge into other currencies or other currencies into
Tenge. At present, the Tenge is not a convertible currency outside of Kazakhstan. Any translation of
Tenge amounts to USD or any other hard currency should not be construed as a representation that
such Tenge amounts have been, could be or will in the future be converted into hard currency at the
exchange rate shown or at any other exchange rate.
Changes in accounting policies. In December 2003, the IASB released 15 revised International
Accounting Standards and withdrew one IAS standard. In 2004, the IASB published five new
standards, two revisions and two amendments to existing standards. In addition, the IFRIC issued six
new interpretations in 2004. Significant changes relevant to the Company are discussed below.
The revisions to IAS 1, Presentation of Financial Statements, include several amended presentation
requirements. Most significantly for the Company, the revised standard requires that minority interest
be presented within equity. The Company has retrospectively reflected the revised presentation
standard for equity in the consolidated statements of changes in shareholders’ equity.
IAS 24, Related Party Disclosures, as revised, requires the disclosure of compensation of key
management personnel and clarifies that such personnel may include non-executive directors. Other
revised and amended standards adopted by the Company in these financial statements are as follows:
IAS 2, Inventories; IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors; IAS 10,
Events after the Balance Sheet Date; IAS 16, Property, Plant and Equipment; IAS 17, Leases; IAS 19,
Employee Benefits; IAS 21, The Effects of Changes in Foreign Exchange Rates; IAS 27, Consolidated
and Separate Financial Statements; IAS 28, Investments in Associates; IAS 32, Financial Instruments:
Disclosure and Presentation; IAS 33, Earnings per Share; IAS 39, Financial Instruments: Recognition
and Measurement (amendment, transition and initial recognition of financial assets and financial
liabilities); IAS 36, Impairment of Assets and IAS 38, Intangible Assets. The adoption of these revised
and amended standards has not had a material effect on the Company’s financial position, statements of
income or cash flows.
Other new standards and interpretations are as follows: IFRS 2, Share-based Payment; IFRS 3,
Business Combinations; IFRS 4, Insurance Contracts; IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations; IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar
Liabilities; IFRIC 2, Members’ Shares in Co-operative Entities and Similar Instruments; IFRIC 6,
Liabilities arising from Participating in a Specific Market: Waste Electrical and Electronic Equipment
and IFRIC Amendment to SIC-12, Scope of SIC-12 Consolidation-Special Purpose Entities. The
Company adopted all of the relevant new, revised and amended standards and the new IFRIC
interpretations from their respective effective dates. The adoption of these standards did not have a
material effect on the Company’s financial position, statements of income or cash flows.
The following guidance becomes effective in 2006 and 2007: IAS 1 amendment (capital disclosures);
IAS 19 amendment (actuarial gains and losses, group plans and disclosures); IAS 39 amendment (cash
flow hedge accounting of forecast inter-group transactions, the fair value option); IAS 39 and IFRS 4
amendment (financial guarantee contracts); IFRS 6, Exploration for and Evaluation of Mineral
6
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
Resources; IFRS 7, Financial Instruments: Disclosures; IFRIC 4, Determining whether an
Arrangement contains a Lease; IFRIC 5, Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds. The Company will adopt all of the relevant new,
revised and amended standards and the new IFRIC interpretations from their respective effective dates.
Management does not expect the adoption of these standards to have a material effect on the
Company’s financial position, statements of income or cash flows.
3.
Discontinued operations
On December 29, 2005 the Company disposed of the refinery within the NC KMG Group for 3.5
billion Tenge after acquiring the refinery in a par value share exchange with the Parent Company (Note
2 and Note 11). In 2005 the Company increased its interest from 86.7% to 99.1% through cash
contributions of approximately 25 billion Tenge. The disposal resulted in a decrease in shareholders
equity of 34.2 billion Tenge. The effects of the disposal were recorded in equity because the
counterparty to this transaction is controlled by the principal equity holder. The disposal also resulted
in decreases in the following balance sheet items: non-current assets (primarily property, plant and
equipment) 58.7 billion Tenge, current assets 17.7 billion Tenge, borrowings 32.5 billion Tenge and
other liabilities 6.1 billion Tenge.
2005
2004
2003
8,854,241
(5,350,959)
3,503,282
(1,982,152)
5,646,105
(4,060,113)
1,585,992
(1,302,274)
3,192,337
(2,082,470)
1,109,867
(1,035,656)
1,521,130
283,718
74,211
Operating cash flows
Investing cash flows
Financing cash flows
160,194
(13,401,139)
(809,995)
(7,077,357)
(9,193,617)
4,960,250
(3,921,807)
(883,604)
(537,348)
Total cash flows of discontinued operations
(14,050,940)
(11,310,724)
(5,342,759)
Revenue
Expenses
Profit before tax of discontinued operations
Tax
Profit after tax of discontinued operations
Historically the Company has purchased tolling services from the refinery to meet its local market
obligation (Note 19, Note 20 and Note 21). Tolling expenses amounted to around 5 billion Tenge in
each of the years presented and have been eliminated in these financial statements with all other intercompany transactions. In late 2005 the Company began selling crude oil directly to the refinery.
Those sales amounted to around 6.5 billion Tenge and were also eliminated in consolidation. Going
forward at least through 2010 the Company expects to increase crude oil sales to the refinery to around
2.2 million metric tons (“tons”) per year at terms of cost plus 3% and reduce to an insignificant amount
the purchase of tolling services. The Company’s accounting policies with respect to determining the
amounts of profit from continuing and discontinued operations are described in Note 6.
7
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
4.
Significant non-cash transactions
During 2005 the Company settled in crude oil 13,676,456 thousand Tenge due under the terms of a preexport financing agreement (2004 and 2003: nil).
The Company received 11,586,446 thousand Tenge of loan proceeds during 2005 in the form of goods
and services that were settled by the ultimate lender directly with the suppliers (2004: 21,882,920
thousand Tenge, 2003: nil).
During 2005 the Company offset corporate income tax payable of 1,394,000 thousand Tenge with
VAT recoverable (2004: 1,698,668 and 2003: 1,540,909 thousand Tenge).
These non-cash transactions are excluded from the consolidated statement of cash flows.
5.
Summary of significant accounting policies
Property, plant and equipment. Property, plant and equipment is stated at deemed cost at the date of
transition to IFRS (hereafter “cost”) less accumulated depreciation, depletion and impairment, except
for the refinery assets which are stated at revalued amounts. The Company follows the successful
efforts method of accounting for its oil and gas properties and equipment, as described below. The cost
of self-constructed assets includes the cost of materials, direct labor and an appropriate proportion of
production overheads. Property, plant and equipment other than oil and gas assets principally comprise
buildings and machinery and equipment which are depreciated on a straight-line basis over useful lives
of 8-50 years and 5-15 years respectively. Borrowing costs are not capitalized but expensed as
incurred.
Oil and gas assets. License, property acquisition costs and costs of exploratory wells are capitalized as
unproved properties pending determination of whether the wells found proved reserves. Unproved
properties are not amortized until proved successful. Once a project is sanctioned for development, the
carrying values of license and property acquisition costs and exploration and appraisal costs are
transferred to production assets within tangible assets. Costs of unsuccessful exploratory wells and
associated license and property acquisition costs are expensed upon determination that the well does
not justify commercial development. Development costs are those costs incurred to obtain access to
proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas. All
development costs together with related plant and equipment and site restoration and abandonment
assets are capitalized as proved properties. Proved properties are depreciated by field on a unit-ofproduction basis using the total estimated proved developed reserves of the field over the shorter of the
contract or license periods. Costs to operate and maintain wells and field equipment are expensed as
incurred. Proved oil and gas reserves are estimated quantities of commercially viable hydrocarbons
which existing geological, geophysical and engineering data show to be recoverable in future years
from known reservoirs. The Company estimates its reserves of oil and gas in accordance with the
methodology of the Society of Petroleum Engineers (SPE).
Impairment of assets. When there is an indication that an asset may be impaired and there is no
reliable basis for determining fair value less costs to sell, the asset is measured at its estimated
recoverable amount based on the asset’s value in use determined using future cash flows discounted
using Kazakhstan government risk free rates.
Held to maturity investments. The Company classifies its cash deposits and bonds as held-to-maturity
investments because management has the positive intention and ability to hold these instruments to
maturity.
Inventories. Inventories are stated at the lower of cost and net realizable value on a first-in first-out
(“FIFO”) basis. Cost includes all costs incurred in the normal course of business in bringing each
product to its present location and condition. The cost of crude oil and refined products is the cost of
production, including the appropriate proportion of depreciation and overheads based on normal
8
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
capacity. Net realizable value of crude oil and refined products is based on estimated selling price in
the ordinary course of business less any costs expected to be incurred to completion and disposal.
Materials and supplies inventories are carried at amounts that do not exceed the expected amounts
recoverable in the normal course of business.
Trade and other receivables. Trade and other receivables generally have 30-90 day terms and are
carried at original invoice amount less an allowance for any uncollectible amounts. Provision is made
when there is objective evidence that the Company will not be able to collect the original amount of an
invoice. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy
or financial reorganization and default or delinquency in payments are considered indicators that the
trade receivable is not recoverable.
Value added tax (VAT). The tax authorities permit the settlement of VAT on sales and purchases on a
net basis. VAT recoverable represents VAT on domestic purchases net of VAT on domestic sales.
Export sales are zero rated.
Cash and cash equivalents. Cash and cash equivalents comprise cash on hand, cash deposits held with
banks and investments which are readily convertible to known amounts of cash, are subject to
insignificant risk of change in value and have an original maturity of three months or less.
Borrowings. Borrowings received or provided are recognized initially at cost, which is the fair value
of the consideration received or provided, net of transaction costs incurred, if any. Such borrowings
are subsequently measured at amortized cost and, for borrowings provided, net of any impairment
losses.
Revenue recognition. The Company sells crude oil under short-term agreements priced by reference to
Platt’s index quotations and adjusted for freight, insurance and quality differentials. Title typically
passes and revenues are recognized when crude oil is physically placed onboard a vessel or offloaded
from the vessel, transferred into pipe or other delivery mechanism depending on the contractually
agreed terms. The Company’s crude oil sale contracts generally specify maximum quantities of crude
oil to be delivered over a certain period. Crude oil shipped but not yet delivered to the customer is
recorded as inventory in the balance sheet. Revenues on sales of oil products are recognized when
transfer of ownership occurs and title is passed, either at the point of delivery or the point of receipt,
depending on contractual conditions.
Income taxes. Excess profit tax (EPT) is treated as an income tax and forms part of income tax
expense. In accordance with the subsoil agreements, the Company accrues and pays EPT at rates
ranging from 30% to 50% when the internal rate of return exceeds 20%. The internal rate of return is
calculated based on the cash flows from each subsoil agreement, adjusted for the national inflation rate.
Deferred tax is calculated with respect to both corporate income tax (CIT) and EPT. Deferred EPT is
calculated on temporary differences for assets allocated to contracts for subsoil use at the expected rate
of EPT to be paid under the contract.
Reportable segments. The Company’s principal operations are in the upstream oil and gas business in
the Republic of Kazakhstan. Management evaluates performance and makes strategic decisions based
upon a review of profitability for the Company as a whole. At year end 2005 the Company’s activities
are considered by management to comprise one geographic segment and one business segment because
the risks and rewards inherent in the various fields, contracts and operating divisions do not materially
differ.
9
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
6.
Critical accounting estimates and judgments
The Company makes estimates and assumptions concerning the future and judgments about facts,
circumstances and the substance of transactions. Estimates and judgments are continually evaluated
and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. The resulting accounting estimates will, by
definition, seldom equal the related actual results. The estimates and assumptions that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within
the next financial year are discussed below. Also described below are certain judgments made by
management in the process of applying the Company’s accounting policies which, apart from those
involving estimations, can significantly affect the amounts recognized in the financial statements.
Oil and gas reserves. Oil and gas reserves are a material factor in the Company’s computation of
depreciation, depletion and amortization (“DD&A”) which represents 12% of total operating expenses.
The Company estimates its reserves of oil and gas in accordance with the methodology of the Society
of Petroleum Engineers (SPE), which differs from the basis of determining reserves required by the
United States Securities and Exchange Commission (“SEC”). In estimating its reserves under SPE
methodology, the Company uses long-term planning prices which are also used by management to
make investment decisions about development of a field. Using planning prices for estimating proved
reserves removes the impact of the volatility inherent in using year end spot prices. Management
believes that long-term planning price assumptions are more consistent with the long-term nature of the
upstream business and provide the most appropriate basis for estimating oil and gas reserves. All
reserve estimates involve some degree of uncertainty. The uncertainty depends chiefly on the amount
of reliable geological and engineering data available at the time of the estimate and the interpretation of
this data. The relative degree of uncertainty can be conveyed by placing reserves into one of two
principal classifications, either proved or unproved. Proved reserves are more certain to be recovered
than unproved reserves and may be further sub-classified as developed and undeveloped to denote
progressively increasing uncertainty in their recoverability. The Company’s proved reserves almost
exclusively comprise proved developed reserves. Estimates are reviewed and revised annually.
Revisions occur due to the evaluation or re-evaluation of already available geological, reservoir or
production data; availability of new data; or changes to underlying price assumptions. Reserve
estimates may also be revised due to improved recovery projects, changes in production capacity or
changes in development strategy. Proved reserves are used to calculate the unit of production rates for
DD&A. The Company has included in proved reserves only those quantities that are expected to be
produced during the initial license period. This is due to the uncertainties surrounding the outcome of
such renewal procedures, since the renewal is ultimately at the discretion of the Government. An
increase in the Company’s license periods and corresponding increase in reported reserves would
generally lead to lower DD&A expense and could materially affect earnings. A reduction in proved
developed reserves will increase DD&A expense (assuming constant production), reduce income and
could also result in an immediate write-down of the property’s book value. Given the relatively small
number of producing fields, it is possible that any changes in reserve estimates year on year could
significantly affect prospective charges for DD&A.
Asset retirement obligations. Under the terms of certain contracts, legislation and regulations the
Company has legal obligations to dismantle and remove tangible assets and restore the land at each
production site. Specifically, the Company’s obligation relates to the ongoing closure of all nonproductive wells and final closure activities such as removal of pipes, buildings and recultivation of the
contract territories. Since the license terms cannot be extended at the discretion of the Company, the
settlement date of the final closure obligations has been assumed to be the end of each license period.
If the asset retirement obligations were to be settled at the end of the economic life of the properties,
the recorded obligation would increase significantly due to the inclusion of all abandonment and
closure costs. The extent of the Company’s obligations to finance the abandonment of wells and for
final closure costs depends on the terms of the respective contracts and current legislation. Where
neither contracts nor legislation include an unambiguous obligation to undertake or finance such final
abandonment and closure costs at the end of the license term, no liability has been recognized. There is
some uncertainty and significant judgment involved in making such a determination. Management’s
10
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
assessment of the presence or absence of such obligations could change with shifts in policies and
practices of the Government or in the local industry practice. If the Company’s asset retirement
obligation included the costs of abandoning all productive wells at the end of the license period and
recultivating the related sites, the total asset retirement obligation would increase by approximately 9.5
billion Tenge. The Company calculates asset retirement obligations separately for each contract. The
amount of the obligation is the present value of the estimated expenditures expected to be required to
settle the obligation adjusted for expected inflation and discounted using average long-term risk-free
interest rates for emerging market sovereign debt adjusted for risks specific to the Kazakhstan market.
Changes in the obligation are reassessed at each balance sheet date. Estimating the future closure costs
involves significant estimates and judgments by management. Most of these obligations are many
years in the future and, in addition to ambiguities in the legal requirements, the Company’s estimate
can be affected by changes in asset removal technologies, costs and industry practice. Approximately
11% of the provision at December 31, 2005 relates to final closure costs. Uncertainties related to the
final closure costs are mitigated by the effects of discounting the expected cash flows. The Company
estimates future well abandonment cost using current year prices and the average long-term inflation
rate. The long-term inflation and discount rates used to determine the balance sheet obligation at
December 31, 2005 were 5.0% and 7.9% respectively (2004: 5.0% and 8.8%, 2003: 5.0% and 9.6%).
Movements in the provision for asset retirement obligations are disclosed in Note 14.
Valuation of property, plant and equipment. For the purpose of transition to IFRS the Company
appointed an independent appraiser to determine the fair value of property, plant and equipment as at
January 1, 2003 which was determined primarily with reference to depreciated replacement cost.
Management believes that the valuation result appropriately reflects the economic condition of the
Company’s property, plant and equipment at that time.
Environmental remediation. The Company also makes judgments and estimates in establishing
provisions for environmental remediation obligations. Environmental expenditures are capitalized or
expensed depending upon their future economic benefit. Expenditures that relate to an existing
condition caused by past operations and do not have a future economic benefit are expensed.
Liabilities are determined based on current information about costs and expected plans for remediation
and are recorded on an undiscounted basis if the timing of the procedures has not been agreed with the
relevant authorities. The Company’s environmental remediation provision represents management’s
best estimate based on an independent assessment of the anticipated expenditure necessary for the
Company to remain in compliance with the current regulatory regime in Kazakhstan. Pursuant to a
memorandum of understanding (“MOU”) signed with the Ministry of the Environment in July 2005,
the Company agreed to take responsibility for remediation of certain soil contamination and oil waste
disposal which resulted from oil extraction dating back to the commencement of production. For
accounting purposes the Company has recorded the obligation at the earliest period presented due to
obligations under legislation existing prior to signing the MOU. The scope and timing of the
remediation plan is expected to be finalized and formally agreed with the Government by the end of
2006 (Note 20). Accordingly, the liability has not been discounted. Because the original terms of the
liability have not yet been established and management reasonably expects to execute the remediation
plan over a period of up to ten years, the Company has classified this obligation as non-current except
for the portion of costs expected to be incurred in 2006. For environmental remediation provisions,
actual costs can differ from estimates because of changes in laws and regulations, public expectations,
discovery and analysis of site conditions and changes in clean-up technology. Further uncertainties
related to environmental remediation obligations are detailed in Note 20. Movements in the provision
for environmental remediation obligations are disclosed in Note 14.
Taxation. In assessing tax risks, management considers to be probable obligations the known areas of
non-compliance which the Company would not appeal or does not believe it could successfully appeal,
if assessed by tax authorities. Such determinations inherently involve significant judgment and are
subject to change as a result of changes in tax laws and regulations, amendments to the taxation terms
of the Company’s subsoil agreements, the determination of expected outcomes from pending tax
proceedings and current outcome of ongoing compliance audits by tax authorities. The provision for
tax risks disclosed in Note 14 relates mainly to the Company’s application of Kazakhstan transfer
pricing legislation to export sales of crude oil during the years 2001 to 2005. In addition to amounts
provided in these financial statements, at December 31, 2005 the Company had a possible tax
11
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
obligation of approximately 7 to 8 billion Tenge related to excess profits tax compliance. Further
uncertainties related to taxation are detailed in Note 20.
Historical obligation. Included in trade and other payables is an accrual of 8.4 billion Tenge (2004:
8.2 billion, 2003: 9.1 billion) related to obligations of the Company under one of the subsoil
agreements to reimburse the Government for exploration costs incurred prior to the beginning of the
current license agreements. The Company was to conclude a separate agreement with the Government
with respect to such reimbursement within sixty days of the signing the subsoil use contract in 1998.
As at December 31, 2005 no such agreement had been concluded. The amount of the accrual has been
determined based on calculations prepared by regulatory authorities in 2003 which relate to about half
of the contract fields. The remaining part of the accrual was estimated by management based on
historical exploratory well data. The accrual is classified as current at December 31, 2003, 2004 and
2005 respectively because at each of those dates the Company did not have the unconditional right to
defer such obligation for at least 12 months. Because the obligation is denominated in US dollars the
carrying value is adjusted each period for foreign exchange movements.
Discontinued operations.
The Company’s presentation of discontinued operations involved
considerable judgment due to the fact that IFRS does not prescribe how to determine the amount of
profit or loss from discontinued operations and, in particular, does not address the issue of continuing
cash flows or other types of continuing involvement following the disposal of a component. Since
following the disposal of the refinery the Company will continue domestic market activities,
management has allocated to continuing operations the estimated cost to the refinery of providing the
tolling services in 2003, 2004 and 2005 (about 5 billion Tenge in each year) and the estimated revenues
of the refinery related to the further sale of the crude oil sold by the Company in 2005 (about 6.5 billion
Tenge). In each case the adjustments were determined with reference to the amounts of the underlying
inter-company transactions which are further described in Note 3. Management believes such
adjustments were necessary for a fair presentation of the continuing and discontinued operations of the
Company.
12
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
7.
Property, plant and equipment
Oil-and-gas
properties
Other assets
Construction
work-inprogress
Total
Net book amount
154,869,976
46,978,133
10,516,771
212,364,880
Year ended 31 December 2003
Opening net book amount
Additions
Disposals
Transfers from capital work-in-progress
Depreciation charge
Impairment
154,869,976
7,179,013
(505,660)
16,147,923
(13,362,914)
−
46,978,133
5,726,385
(1,233,995)
515,200
(4,423,988)
(367,599)
10,516,771
18,840,835
(232,328)
(16,663,123)
−
−
212,364,880
31,746,233
(1,971,983)
−
(17,786,902)
(367,599)
Closing net book amount
164,328,338
47,194,136
12,462,155
223,984,629
At 31 December 2003
Cost
Accumulated depreciation
177,629,229
(13,300,891)
51,300,566
(4,106,430)
12,462,155
−
241,391,950
(17,407,321)
Net book amount
164,328,338
47,194,136
12,462,155
223,984,629
Year ended 31 December 2004
Opening net book amount
Additions
Disposals
Transfers from capital work-in-progress
Revaluation surplus
Depreciation charge
Impairment
164,328,338
9,603,105
(3,232,751)
18,180,651
−
(17,088,003)
−
47,194,136
9,090,526
(4,512,748)
4,629,981
1,858,922
(4,241,613)
(3,000,894)
12,462,155
45,735,596
(42,952)
(22,810,632)
−
−
(195,617)
223,984,629
64,429,227
(7,788,451)
−
1,858,922
(21,329,616)
(3,196,511)
Closing net book amount
171,791,340
51,018,310
35,148,550
257,958,200
At 31 December 2004
Cost
Accumulated depreciation
201,883,749
(30,092,409)
57,105,071
(6,086,761)
35,148,550
−
294,137,370
(36,179,170)
Net book amount
171,791,340
51,018,310
35,148,550
257,958,200
Year ended 31 December 2005
Opening net book amount
Additions
Disposals
Transfers from capital work-in-progress
Depreciation charge
Impairment
171,791,340
10,975,517
(3,003,271)
26,314,228
(18,332,498)
−
51,018,310
10,766,359
(17,153,627)
7,160,857
(6,224,762)
(66,908)
35,148,550
60,065,268
(51,852,444)
(33,475,085)
−
−
257,958,200
81,807,144
(72,009,342)
−
(24,557,260)
(66,908)
Closing net book amount
187,745,316
45,500,229
9,886,289
243,131,834
At 31 December 2005
Cost
Accumulated depreciation
235,613,254
(47,867,938)
54,966,841
(9,466,612)
9,886,289
−
300,466,384
(57,334,550)
Net book amount
187,745,316
45,500,229
9,886,289
243,131,834
At 1 January 2003
13
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
8.
Financial assets
Deposits and other financial assets
2005
2004
2003
US dollar-denominated deposits
Other
47,488,350
6,474,788
6,500,000
1,698,366
−
261,418
Total non-current
53,963,138
8,198,366
261,418
US dollar-denominated deposits
Loans receivable (Note 19)
Other
6,688,500
12,639,487
665,270
26,520,000
−
−
2,376,673
−
3,630,311
Total current
19,993,257
26,520,000
6,006,984
73,956,395
34,718,366
6,268,402
The weighted average interest rate on US dollar-denominated deposits in 2005 was 6.6% (2004: 7.6%,
2003: 7.3%). In 2005 and 2004 other non-current financial assets primarily comprise US dollardenominated bonds with weighted average interest rates of 5% and 3.3% respectively. In 2003 other
current financial assets comprise Tenge-denominated deposits with a weighted average interest rate of
7.6%. Loans receivable are mainly US dollar-denominated. The remaining balances are Tengedenominated.
Trade and other receivables
Trade receivables
Allowance for doubtful receivables
Other
2005
2004
2003
38,752,145
(895,784)
8,061,865
22,613,311
(3,485,045)
698,480
15,670,338
(3,333,302)
1,150,211
45,918,226
19,826,746
13,487,247
Between 75% and 90% of total trade and other receivables are US dollar-dominated in each of the
years presented. The remaining balances are Tenge-denominated.
Cash and cash equivalents
Term deposits with Kazakhstani banks
Cash in bank and in hand
2005
2004
2003
9,815,804
10,371,784
6,592,743
7,534,836
−
9,310,184
20,187,588
14,127,579
9,310,184
The weighted average interest rate on term deposits in 2005 was 4.8% (2004: 3.6%). About 70% of
total cash and cash equivalents at year end 2005 are US dollar-denominated (about 40% for 2004 and
2003). The remaining balances are Tenge-denominated.
14
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
9.
Other assets
Intangible assets
Investments in associates
Advances
VAT receivable
Other
2005
2004
2003
1,340,657
4,516,696
765,598
−
2,042,430
972,885
5,937,035
5,771,894
10,275,938
805,052
732,365
991,267
1,154,586
3,477,718
308,665
8,665,381
23,762,804
6,664,601
In 2004 the Company purchased a 50% interest in Atoll JSC for approximately 5 billion Tenge. In
2005 the Company sold a 35% interest in Atoll to the other shareholder for 3.4 billion Tenge. The
financial statements of Atoll principally comprise property, plant and equipment under reconstruction.
Management uses the equity method to account for its remaining 15% interest because the Company
continues to exercise significant influence through representation on the Board of Directors.
10.
Inventories
Materials
Crude oil and refined products
2005
2004
2003
11,060,833
4,348,825
15,818,583
5,029,568
14,134,079
2,319,644
15,409,658
20,848,151
16,453,723
Inventory write downs of 1,087,325 thousand Tenge were recognized as expense in 2005 (2004:
101,377 thousand Tenge, 2003: 136,909 thousand Tenge).
15
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
11.
Share capital
Number of
shares
outstanding
Common
shares
Preferred
shares
Additional
paid-in
capital
Total share
capital
As at January 1, 2003
−
−
−
11,761,130
11,761,130
As at December 31, 2003
−
−
−
11,761,130
11,761,130
Issue of shares
47,044,519
10,731,705
1,029,425
(11,761,130)
−
As at December 31, 2004
47,044,519
10,731,705
1,029,425
−
11,761,130
124,312
31,078
−
−
31,078
47,168,831
10,762,783
1,029,425
−
11,792,208
Issue of shares
As at December 31, 2005
Share capital. The total number of authorized ordinary shares is 70,220,935 (2004: 43,051,132, 2003:
nil) with a par value of 250 Tenge per share. 43,051,132 ordinary shares are authorized, issued and
outstanding (2004: 42,926,820 shares, 2003: nil). The total number of authorized preferred shares is
4,136,107 (2004: 4,136,107, 2003: nil) with a par value of 250 Tenge per share. 4,117,699 preferred
shares are authorized, issued and outstanding (2004: 4,117,699, 2003: nil).
The common control merger in March 2004 was transacted through a one-to-one exchange of
41,342,667 shares with shareholders of the predecessor entities. On December 29, 2004, the Group
acquired an 86.7% interest in Atyrau Refinery from the Parent Company by issuing 5,701,852 shares.
Prior to the date of the common control merger these amounts are presented in additional paid-incapital.
In 2005 the Company issued common shares to minority shareholders to comply with statutory
requirements following the share exchange with the refinery’s majority shareholder in 2004.
Preferred stock. Preferred stockholders are entitled to participate equally in dividends with the holders
of common stock and in any case are entitled to an annual cumulative dividend of 10% of the par value
of the preferred stock or 25 Tenge per share. Preferred shareholders receive the right to vote if the
general meeting of shareholders considers decisions restricting rights of preferred shareholders,
decisions on reorganization or liquidation of the Company and if dividends on preferred shares are not
paid within three months after a specified payment date.
Dividends. In accordance with Kazakhstan legislation, dividends may not be declared if the Company
has negative equity in its Kazakh statutory financial statements or if the payment of dividends would
result in negative equity in the statutory financial statements. Total dividends per share recognized as
distributions to equity holders during the period amounted to 74.20 Tenge (2004: 57.30 Tenge per
share, 2003: 43.04 Tenge per share) for both ordinary and preferred shares.
16
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
12.
Earnings per share
2005
2004
2003
Weighted avg. number of all shares outstanding
47,150,748
47,044,519
47,044,519
Continuing operations
Profit attributable to equity holders of the Company
43,755,822
13,180,869
7,429,020
0.93
0.28
0.16
1,318,820
245,984
64,341
0.03
0.01
0.00
Basic and diluted earnings per share
Discontinued operations
Profit attributable to equity holders of the Company
Basic and diluted earnings per share
The above presentation includes both ordinary and preferred shares because preferred shareholders
have cumulative participating rights which result in identical earnings per share for both classes of
shares. The weighted average shares outstanding as at December 31, 2004 has been used for prior
periods presented (Note 2).
13.
Borrowings
2005
2004
2003
Fixed interest rate borrowings
Weighted average interest rates
Variable interest rate borrowings
Weighted average interest rates
69,309,083
6.32%
5,840,832
6.33%
24,476,807
4.47%
44,382,046
5.07%
3,011,093
8.22%
15,294,757
4.86%
Total long-term borrowings
75,149,915
68,858,853
18,305,850
Tenge-denominated borrowings
US dollar-denominated borrowings
Other currency-denominated borrowings
859,377
74,290,538
−
5,284,293
46,093,381
17,481,179
1,409,865
16,895,985
−
Total long-term borrowings
75,149,915
68,858,853
18,305,850
Current portion
Maturity between 1 and 2 years
Maturity between 2 and 5 years
Maturity over 5 years
21,121,175
19,082,221
34,451,834
494,685
18,100,418
12,074,755
31,600,352
7,083,328
10,160,262
1,415,417
4,258,865
2,471,306
Total long-term borrowings
75,149,915
68,858,853
18,305,850
Undrawn facilities at fixed rate:
Expiring within one year
Expiring beyond one year
3,986,709
13,709,100
−
70,762,398
−
4,883,660
17,695,809
70,762,398
4,883,660
Most of the Company’s borrowings (2005: 66,598,200 thousand Tenge, 2004: 26,000,000 thousand
Tenge, 2003: nil) relate to a pre-export financing arrangement which requires settlement in crude oil.
The Company pays a commitment charge of 0.75 % per annum on the undrawn facilities.
17
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
14.
Provisions
Environmental
remediation
Taxes
Asset
retirement
obligation
Other
Total
At 1 January 2003
33,028,060
1,869,403
13,869,223
626,210
49,392,896
Additional provisions
Unused amounts reversed
Unwinding of discount
Changes in estimate
Used during the year
Current portion
Non-current portion
−
−
−
−
−
−
33,028,060
4,197,567
−
−
−
−
6,066,970
−
243,490
(30,636)
1,336,993
612,640
(884,009)
1,248,559
13,899,142
405,038
−
−
−
(185,643)
190,559
655,046
4,846,095
(30,636)
1,336,993
612,640
(1,069,652)
7,506,088
47,582,248
At 31 December 2003
33,028,060
6,066,970
15,147,701
845,605
55,088,336
Additional provisions
Unused amounts reversed
Unwinding of discount
Changes in estimate
Used during the year
Current portion
Non-current portion
−
−
−
−
−
1,331,100
31,696,960
12,577,976
−
−
−
−
18,644,946
−
274,368
(39,751)
1,332,998
737,534
(1,146,981)
667,401
15,638,468
1,004,830
−
−
−
(190,559)
189,513
1,470,363
13,857,174
(39,751)
1,332,998
737,534
(1,337,540)
20,832,960
48,805,791
At 31 December 2004
33,028,060
18,644,946
16,305,869
1,659,876
69,638,751
Additional provisions
Unused amounts reversed
Unwinding of discount
Changes in estimate
Used during the year
Current portion
Non-current portion
−
−
−
(663,230)
(1,331,100)
821,577
30,212,153
4,874,542
−
−
−
−
23,519,488
−
351,046
(29,772)
1,293,055
995,322
(869,172)
900,163
17,146,185
1,072,412
−
−
−
(189,989)
198,989
2,343,310
6,298,000
(29,772)
1,293,055
332,092
(2,390,261)
25,440,217
49,701,648
At 31 December 2005
31,033,730
23,519,488
18,046,348
2,542,299
75,141,865
A description of these provisions, including critical estimates and judgments, is included in Note 6.
18
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
15.
Revenue
Export:
Crude oil
Refined products
Domestic (Note 19):
Crude oil
Refined products
Gas products
Other sales and services
16.
2004
2003
300,030,298
651,491
203,059,607
6,791,761
146,167,659
3,347,074
6,930,889
32,812,045
4,082,068
1,922,654
94,638
18,487,681
3,886,963
4,782,568
3,153,951
19,641,750
2,905,790
2,541,149
346,429,445
237,103,218
177,757,373
2005
2004
2003
37,647,849
37,116,032
24,362,896
21,658,853
16,845,303
15,484,134
15,180,580
11,976,634
7,103,491
5,824,741
11,375,039
37,562,638
27,391,069
21,099,460
13,519,834
13,910,249
6,687,529
10,663,765
15,449,283
6,081,130
5,816,881
4,094,524
34,947,198
20,014,387
17,736,031
12,157,515
6,870,125
1,717,173
6,902,033
17,604,303
4,792,099
5,548,549
8,297,451
204,575,552
162,276,362
136,586,864
2005
6,221,012
(5,402,485)
276,041
2004
1,045,815
(3,359,880)
(1,122,765)
2003
101,431
(4,354,614)
2,024,898
1,094,568
(3,436,830)
(2,228,285)
Operating expenses
Transportation (Note 19)
Employee benefits
Depreciation, depletion and amortization
Materials
Repair, maintenance and other services
Fines and penalties (Note 20)
Royalties
Management fees and sales commissions (Note 19)
Taxes other than on income
Energy
Other
17.
2005
Finance income (expense)
Financial income
Financial expense
Foreign exchange gains (losses)
19
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
18.
Income taxes
Income tax expense comprised the following for the years ended December 31:
2005
2004
2003
Corporate income tax
Excess profit tax
55,407,550
47,411,026
33,994,534
23,822,252
18,271,342
8,472,111
Current income tax
102,818,576
57,816,786
26,743,453
Corporate income tax
Excess profit tax
(1,983,507)
(1,642,430)
(31,619)
423,990
(1,685,841)
6,455,592
Deferred income tax
(3,625,937)
392,371
4,769,751
Income tax expense
99,192,639
58,209,157
31,513,204
A reconciliation of income tax expense applicable to profit from continuing operations before income
tax at the statutory income tax rate to current income tax expense was as follows for the years ended
December 31:
2005
2004
2003
142,948,461
30%
71,390,026
30%
38,942,224
30%
42,884,538
21,417,008
11,682,667
Excess profit tax
Income not subject to tax
Expenses not deductible for tax purposes
45,768,596
(504,054)
11,043,559
24,246,242
(1,025,239)
13,571,146
14,927,703
(562,060)
5,464,894
Income tax expense
99,192,639
58,209,157
31,513,204
Profit before tax and minority interest
Statutory tax rate
As at December 31 the movements in the deferred tax liability relating to CIT and EPT were as
follows:
Fixed assets
Provisions
Other
Total
16,377,793
(2,202,722)
(1,406,876)
12,768,195
Income statement effect
9,029,416
(1,136,830)
(3,122,835)
4,769,751
At 31 December 2003
25,407,209
(3,339,552)
(4,529,711)
17,537,946
Income statement effect
Tax charged to equity
3,538,064
555,497
631,594
−
(3,777,287)
−
392,371
555,497
At 31 December 2004
29,500,770
(2,707,958)
(8,306,998)
18,485,814
Income statement effect
Acquisitions and disposals
(4,965,164)
(662,197)
70,825
−
1,268,402
−
(3,625,937)
(662,197)
At 31 December 2005
23,873,409
(2,637,132)
(7,038,596)
14,197,680
At 1 January 2003
20
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
19.
Related party transactions
The category ‘entities under common control’ comprises entities of the Parent Company group. The
category ‘other state-controlled companies’ includes entities other than those of the Parent Company
group.
2005
2004
2003
260,592,495
−
286,373
8,965
199,774,652
−
428,544
174,256
113,338,671
−
327,321
26,738
Purchases of goods and services (Note 16)
Entities under common control
Parent Company
Other state-controlled enterprises
Associates
32,570,132
11,244,000
689,881
1,007,035
39,962,404
11,256,000
1,270,620
1,653,692
39,430,748
11,224,980
208,025
377,066
Trade and other receivables (Note 8)
Entities under common control
Parent Company
Other state-controlled enterprises
Associates
36,199,861
180,772
519,757
667,877
19,346,165
149,254
490,237
−
16,066,649
149,254
486,088
199,235
Trade payables
Entities under common control
Parent Company
Other state-controlled enterprises
Associates
881,439
408,124
247,041
129,324
2,462,437
1,007,712
61,933
108,883
1,579,454
3,487,787
153,184
10,397
Loans receivable (Note 8)
Entities under common control
Parent Company
Other state-controlled enterprises
Associates
3,639,487
9,000,000
−
−
−
−
−
9,000
−
−
−
−
Loans payable (Note 13)
Entities under common control
Parent Company
Other state-controlled enterprises
Associates
−
5,840,833
−
−
509,305
38,316,526
−
−
137,701
11,847,664
−
−
133,483
−
−
−
−
227,311
−
−
−
−
98,364
−
−
−
−
Sales of goods and services (Note 15)
Entities under common control
Parent Company
Other state-controlled enterprises
Associates
Key management compensation
Salaries and other short-term benefits
Termination benefits
Post employment benefits
Other long-term benefits
Share-based payments
21
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
Sales and receivables. Sales to related parties comprise mainly export and domestic sales of crude oil
and oil product to KMG group entities. Export sales to related parties represented 4,693,968 tons of
crude oil in 2005 (2004: 5,611,717 tons, 2003: 3,732,085 tons). The sales of crude oil are priced by
reference to Platt’s index quotations and adjusted for freight, insurance and quality differentials. For
these exports of crude oil the Company received an average price per ton of approximately $360 in
2005 (2004: $230, 2003: $160). In addition, the Company supplies oil and oil products to the local
market at the directive of the Kazakhstan government, the controlling shareholder of the Parent
Company. These supplies to the domestic market represented 2,733,409 tons of crude oil production in
2005 (2004: 2,105,886 tons, 2003: 1,822,253 tons). Prices for the local market sales are determined by
agreement with the agent distributors. For deliveries to the local market in 2005 the Company received
an average price per produced crude oil ton of around $100 (2004: $80, 2003: $100). Trade and other
receivables from related parties principally comprise amounts related to export sales transactions. At
December 31, 2005 the Company had commitments under a government directive to deliver 2.2 million
tons of crude oil to local markets in 2006.
Purchase and payables. Management fees to the Parent Company amounted to 11,244,000 thousand
Tenge in 2005 (2004: 11,256,000 thousand Tenge, 2003: 11,224,980 thousand Tenge). Agency
commissions for crude oil sales amounted to 732,634 thousand Tenge in 2005 (2004: 4,193,283
thousand Tenge, 2003: 6,379,323 thousand Tenge). Transportation services for 7,554,859 tons of
crude oil in 2005 (2004: 7,764,454, 2003: 7,219,228) were purchased from a KMG group entity and
amounted to 28,965,459 thousand Tenge in 2005 (2004: 31,453,591 thousand Tenge, 2003: 31,960,651
thousand Tenge).
Loans and guarantees. Loans from related parties mainly comprise three loans obtained by the
refinery from the Parent Company. The most significant of the loans had a carrying value of nil at year
end 2005 (2004: 21,882,920 thousand Tenge, 2003: nil) with interest of 4.14% per annum on the Yendenominated principal and Libor plus 4.5% per annum on the US dollar-denominated principal. Also,
two interest-free loans of 2,059,073 and 2,306,793 thousand Tenge were received by the refinery from
the Parent Company in 1999 and 2004. The difference between these nominal values and the
discounted amounts has been recorded in equity. In 2005 the Company disposed of the refinery and,
accordingly, these loans.
In addition, in 1996 a predecessor entity of the Company received from the Parent Company a facility
of 109,000 thousand US dollars for the rehabilitation of the Uzen oil field. Amounts drawn in 2005
totaled 2,633 thousand US dollars (2004: 2,453 thousand US dollars, 2003: 5,146 thousand US dollars).
The Company pays semi-annual installments of 4,542 thousand US dollars through 2013 and a
commitment charge of 0.75% per annum on the principal amount of the unutilized facility. This loan is
secured by certain non-current assets of the Company (Note 20).
The Parent Company also guarantees repayment of the Company’s pre-export financing obligation.
Loans receivable from related parties comprise short-term interest-free loans.
Other distributions to owners. In 2005 the Company made a capital contribution of 2,622,952
thousand Tenge on behalf of the Parent Company to an entity under common control.
20.
Contingencies
Operating environment. The Kazakh economy, while deemed to be of market status beginning in
2002, continues to display certain characteristics consistent with that of an economy in transition.
These characteristics have in the past included higher than normal historical inflation, lack of liquidity
in the capital markets, and the existence of currency controls, which cause the national currency to be
illiquid outside of Kazakhstan. The Company’s operations and financial position will continue to be
affected by Kazakh political developments including the application of existing and future legislation
and tax regulations. The Company does not believe that these contingencies, as related to its
operations, are any more significant than those of similar enterprises in Kazakhstan.
22
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
Local market obligation. The Kazakhstan government requires oil producers to supply a portion of
their crude oil production to meet domestic energy requirements (Note 19). While the price for such
additional supplies of crude oil is regulated, this price may be materially below international market
prices and may even be set at the cost of production. If the Government does require additional crude
oil to be delivered over and above the quantities currently supplied by the Company, such supplies will
take precedence over market sales and will generate substantially less revenue than crude oil sold on
the export market, which may materially and adversely affect the Company’s business, prospects,
financial condition and results of operations.
Taxation. Kazakhstan’s tax legislation and regulations are subject to ongoing changes and varying
interpretations. Instances of inconsistent opinions between local, regional and national tax authorities
are not unusual. The current regime of penalties and interest related to reported and discovered
violations of Kazakhstan’s tax laws are severe. Penalties are generally 50% of the taxes additionally
assessed and interest is assessed at 20% per annum. As a result, penalties and interest can amount to
multiples of any unreported taxes. Fiscal periods remain open to review by tax authorities for five
calendar years preceding the year of review. Under certain circumstances reviews may cover longer
periods. Because of the uncertainties associated with Kazakhstan’s tax system, the ultimate amount of
taxes, penalties and interest, if any, may be in excess of the amount expensed to date and accrued at
December 31, 2005. As at December 31, 2005 management believes that its interpretation of the
relevant legislation is appropriate and that it is probable that the Company’s tax positions will be
sustained, except as provided for or otherwise disclosed in these financial statements (Notes 6 and 14).
Environment. The enforcement of environmental regulation in Kazakhstan is evolving and subject to
ongoing changes. Penalties for violations of Kazakhstan’s environmental laws can be severe. At year
end 2005 the Company accrued fines of 11.4 billion Tenge for exceeding permitted norms at certain
production sites. The Government has linked the fines to the delayed submission by the Company of a
remediation plan in accordance with the terms of a Memorandum of Understanding (“MOU”) signed
with the Company in mid-2005. Until the terms of the MOU are amended to extend the deadline
specified therein, there can be no assurances that additional fines will not be assessed. Potential
liabilities which may arise as a result of stricter enforcement of existing regulations, civil litigation or
changes in legislation cannot be reasonably estimated. Other than those contingencies discussed here
and obligations disclosed in Note 14, under existing legislation management believes that there are no
probable or possible liabilities which could have a material adverse effect on the Company’s financial
position, statement of income or cash flows.
Legal proceedings. During the year, the Company was involved in a number of court proceedings
(both as a plaintiff and a defendant) arising in the ordinary course of business. There are no current
legal proceedings or claims outstanding which management believes could have a material effect on the
Company’s financial position, statement of income or cash flows and which have not been accrued or
disclosed in these financial statements.
Oilfield licenses. The Company is subject to periodic reviews of its activities by governmental
authorities with respect to the requirements of its oilfield licenses and related subsoil use contracts.
Management cooperates with governmental authorities to agree on remedial actions necessary to
resolve any findings resulting from these reviews. Failure to comply with the terms of a license could
result in fines, penalties, license limitation, suspension or revocation. The Company’s management
believes that any issues of non-compliance existing at the balance sheet date will be resolved through
negotiations or corrective actions without any material effect on the Company’s financial position,
statement of income or cash flows.
The Company’s oil and gas fields are located on land belonging to the Mangistau and Atyrau regional
administrations. Licenses are issued by the Ministry of Energy and Mineral Resources of Kazakhstan
and the Company pays royalties and excess profits tax to explore and produce oil and gas from these
fields.
23
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
The principle licenses of the Company and their expiry dates are:
Field
Uzen (8 fields)
Emba (1 field)
Emba (1 field)
Emba (23 fields)
Emba (15 fields)
Contract
Expiry date
No. 40
No. 37
No. 61
No. 211
No. 413
2020
2021
2016
2015
2015
Management believes that the Company will be successful in its attempts to extend its licenses beyond
the initial expiration date under existing legislation where such extension is in the economic interest of
the Company.
Guarantees, pledges and covenants. At 31 December 2005 the Company had collateralized noncurrent assets related to loans received in the amount of approximately 23 billion Tenge (2004: nil,
2003: nil). Also, some of the Company’s financing agreements require compliance with certain
financial ratios and other terms. Non-compliance with such terms could result in long-term debt
becoming callable by the creditor. At the end of each period presented management believes that the
Company was in full compliance with all terms of such agreements.
21.
Commitments
Oilfield licenses and contracts. Some of the Company’s oilfield contracts specify a minimum level of
expenditures through the end of the license period. The total future obligation under those agreements
amounted to about 39 billion Tenge at December 31, 2005. Each of the oilfield contracts also requires
the Company to agree with the local governments annual business plans which include capital and
social infrastructure projects. Total obligations under these agreements and additional constructive
obligations at December 31, 2005 amounted to about 48 billion Tenge.
Crude oil supply commitments. Under the provisions of a pre-export financing agreement the
Company has committed to deliver 150,000 tons of crude oil per month to the lender until September
2009 for fair value consideration determined at the date of shipment. The Company has further
obligations to supply oil and oil products to the local market under government directives (Note 19).
Purchase commitments. At December 31, 2005 the Company had an obligation to purchase three
drilling rigs for approximately 1 billion Tenge.
22.
Financial risk factors
Commodity price risk. The Company is exposed to commodity price risk, since oil prices are
determined by the world market. The Company does not hedge this risk.
Interest rate risk. The Company’s interest rate risk relates to interest receivable and payable on its
cash deposits and borrowings. In December 2005 the Company began to hedge its variable rate debt
instruments.
Foreign exchange risk. Most of the Company’s cash inflows as well as accounts receivable balances
are denominated in US dollars, while most all of the Company’s purchases are denominated in Tenge.
The Company does not use foreign exchange or forward contracts to manage its exposure to changes in
foreign exchange rates.
Credit risk. Financial instruments that could subject the Company to credit risk principally comprise
related party loans, accounts receivable and cash deposits. Most notably, at December 31, 2005 the
Company had 68% (2004: 61%, 2003: 64%) of total trade accounts receivable from one customer, a
related party (Note 19). While the Company may be subject to losses up to the contract value of the
instruments in the event of non-performance by its counterparts, it does not expect such losses to occur.
24
JSC EXPLORATION AND PRODUCTION KAZMUNAIGAS
Notes to the Consolidated Financial Statements
Tenge thousands unless otherwise stated
Fair values. The fair value of financial instruments, consisting of cash, loans and receivables, and
payables and obligations under debt instruments, approximate their carrying values. For trade
receivables fair value is the nominal value less provision for uncollectible amounts. The fair value of
financial liabilities and other financial assets for disclosure purposes is estimated by discounting the
future contractual cash flows at the current market interest rate that is available to the Company for
similar financial instruments.
23.
Subsequent events
In January 2006 the Company purchased from Aral Petroleum LLP a contract and a license for
exploration, production and development activities in Kazakhstan for total cash consideration of 8.6
billion Tenge and a commitment to invest approximately 0.5 million US dollars in 2006, 5 million US
dollars in 2007 and 3 million US dollars in 2008.
During 2006 the Tenge continued to strengthen against the US dollar (December 31, 2005: 133.77
Tenge to 1 US dollar; June 2, 2006: 121.26 Tenge to 1 US dollar).
Per shareholder decision on June 2, 2006 the Company is committed to provide to the Parent Company
an interest-free loan in the amount of 26 billion Tenge to be repaid by December 31, 2006.
25
Contact information
The Company’s registered office is:
JSC Exploration and Production Kazmunaigas
20/1 Kabanbay Batyr Avenue
Astana 010000
Republic of Kazakhstan
Telephone:
Fax:
www.kmgep.kz
+7 (3172) 977 401
+7 (3172) 977 403