Contribution to economic development

CONTRIBUTION TO ECONOMIC DEVELOPMENT

In 2018, we approved a new Development Strategy for 2018–2028. The strategy defines the target state of the Company in the medium term as a stable company with an acceptable level of debt and a strict leverage management system.

Financial stability improvement

In 2018 we managed to cover losses and significantly improve our financial performance. In 2018, the KMG external debt was reduced, limits on investments were set and the regulations were adopted for project deadlines. We were also able to bring non-core activities into the market environment, which allowed us to reduce duplicate functions.

Businesses should support a precautionary approach to environmental challenges.

Undertake initiatives to promote greater environmental responsibility.

Encourage the development and diffusion of environmentally friendly technologies.

Businesses should work against corruption in all its forms, including extortion and bribery.

LOW-CARBON DEVELOPMENT

In our long-term KMG Development Strategy, we have identified the following priority areas on climate aspects:

• management of greenhouse gas emissions;

• reduction of regular flaring of associated petroleum gas;

• improvement in emission rates per production volume and energy efficiency.

In 2018, KMG developed an emission management policy consisting of eight key principles, six of which are directly related to climate change:

• compliance with the volume of established quotas for greenhouse gas emissions;

• regular accounting, inventory and monitoring of emissions, including indirect greenhouse gas emissions;

• cessation of regular flaring of raw gas while extraction of hydrocarbons;

• implementation of measures to reduce emissions and reduce the carbon footprint;

• carbon asset management;

• continuous improvement of emission management activities (e.g. forecasting, prevention and mitigation of climate changerelated damage).

Climate change issues require the identification of risks and the adoption of measures to reduce burden on the environment.

In order to mitigate these risks, we are actively involved as part of the Working Groups under the Ministry of Energy of Kazakhstan in improving the regulatory framework of Kazakhstan in the field of state regulation of greenhouse gas emissions.

Every year the Company builds new recycling facilities, reconstructs the existing production facilities, invests in the construction of pipelines and infrastructure, for example, the construction of integrated gas processing at the Prorvinskaya group of fields, the construction of the Saryarka gas pipeline. In 2019, it is planned to put the gas treatment plant-40 into full-scale operation at the Kozhasay field in Aktobe region. These measures contribute to the increase of APG utilization level and, accordingly, lead to the reduction of direct carbon dioxide emissions.

At the same time, the role of natural gas will grow in connection with the desire of electricitygenerating companies to transit to fuels that would reduce emissions into the atmosphere. It is expected that in about ten years gas will become one of the main fuels for electricity generation.

As part of modernization in 2019–2021, it is planned to introduce at the Kazakhstan refineries an automated system of technical energy accounting to be implemented on the basis of microprocessor-based computing facilities and control systems, which is an information and computer system with centralized control and distributed measurement function.

Implementation of this project will lead to:

• reduction of energy costs by optimizing the operating mode and quality control of electricity consumption;

• automation of the process of collecting and processing data on electricity consumption in the context of large consumers, units, assemblies;

• management of power consumption modes, increasing the efficient electricity use in the technological processes of the refineries;

• predictive analysis, real-time monitoring;

• creation of a common environment for monitoring and analysis of electricity consumption of subsidiaries and affiliates of KMG Oil Refining;

• development of a statistical database on electricity consumption in the context of time and facilities;

• identification of emergency situations and development of solutions;

• implementation of one of the main steps in establishment of a digital enterprise.

Also, research of the current level of development of the Kazakhstan refineries is in progress as compared with the world’s best refineries under the HSB Solomon Associates LLC methodology (hereinafter – Solomon). The purpose of Solomon’s research is: determination of the main indicators – “Solomon indices” – refineries in a comparable basis, i.e. how effectively the available capacity is used. Performance indicators are designed to compare refineries that are similar in size and configuration, and are better used for operational comparisons that allow comparison of refinery performance (both production and economic) with the performance of other refineries in different groups.

In 2019, it is planned to install solar panels with a total capacity of 10 kW to power the lighting network of the industrial site of “Amangeldy Gas” LLP.

Renewable energy sources (hereinafter – RES) implemented in KTG subsidiaries and affiliates in previous years operate effectively: waterkotte geothermal heat pumps; monocrystalline solar panels (batteries); thermoelectric generators (Closed cycle vapor turbogenerator).

The total amount of generated (produced) renewable energy by sources for 2018 was:

678.53 Gcal

Output of geothermal (thermal) energy by heat pumps is

103 572  Gcal

Output of electric power generation solar panels is

240 900 kW*hour

Output of electric power generation by thermal power generators (TPG – Rankine cycle) is

ECONOMIC PERFORMANCE

The Company makes a significant contribution to development of the Kazakhstan regions, increase of socio-economic capacity and improvement of welfare of the population of the regions.

The economic performance of the Company allows assessing this contribution to the country’s economy, revenues, liabilities and taxes paid.

KMG does not receive financial assistance from the state.

Direct economic value generated and distributed*

Indicator	Units	2016	2017	2018
Direct economic value generated (gross revenue)	KZT billion	4,035	5,451	7,905
Economic value distributed (gross expenses)	KZT billion	3,675	4,926	7,211
Economic value retained (profit)	KZT billion	360	525	694
Other taxes and payments (without CIT)	KZT billion	781	914	1258
Income tax paid	KZT billion	106	113	186
Payments to providers of capital	KZT billion	294	275	291

* Data are taken from the KMG Audited Financial Statements for 2018, prepared in accordance with the international financial reporting standards (IFRS). Economic performance indicators are presented in accordance with GRI Standards (201-1).

Social Benefits and Pension Contributions

In accordance with the national legislation, pension savings of citizens are in the Unified Pension Savings Fund. Pension savings consist of: the minimum pension rate guaranteed by the state, the individual pension savings (monthly contribution of 10 % of salary) and additional regional allowances.

In addition to the state social security and pension program, the KMG Group implements a pension program for non-working pensioners, according to which employees, after going on a well-deserved rest, can receive some material support.

In some oilfield service organizations of KMG Group of Companies, such as “Oil Transport Corporation” LLP, “Oil Construction Company” LLP, “Oil Services Company” LLP, a project is implemented on provision of the preretirement age employees with early retirement with compensation to be paid upon termination of labor relations by agreement of the parties with employees who have reached retirement age, with compensation being paid upon termination of labor relations.

In 2018, expenses for social support of KMG Group employees amounted to KZT 22 billion (in 2017 – KZT 18.9 billion), including social assistance to non-working pensioners.

Indicator	Units	2016	2017	2018
Social benefits and pension contributions paid	KZT billion	43	52	52

Indirect Economic Impacts

Capital expenditures for 2016–2018

	Units	2016	2017	2018
Сapital expenditures	KZT billion	554	669	628

As part of the region gasification program, KazTransGas continues the gasification and modernization of settlements in Kazakhstan. A road map has been developed for implementation of Five Social Initiatives of the President of Kazakhstan in terms of the Project “Construction of Gas Distribution Networks to Connect to Saryarka Pipeline”. The project will create the necessary conditions for development of production capacities of the existing enterprises and the establishment of new plants, stable gas supplies to Nur-Sultan and Central Kazakhstan, improving the environmental situation, improving the quality of life of the population, attracting and increasing employment of the local population by creating additional jobs at the stage of construction and operation of the main gas pipeline and infrastructure facilities of the main gas pipeline, as well as stable socioeconomic development of Nur-Sultan and central region.

In 2018, the following investment projects were successfully completed:

1. Increase in Capacity of Kazakhstan – China Pipeline (Line C). With the commissioning of the third line of the gas pipeline (Line C), the capacity of Kazakhstan – China Pipeline was increased to 55 billion m³ per year.

2. Expansion of Gasification of Kostanay Region Settlements. 7 settlements have been gasified (Kachar settlement in Rudny, Oktyabrsky settlement in Lisakovsk, Toguzak village in Karabalyk district, Antonovka, Alchanovka in Denisovsk district, Auliyekol in Auliyekol district – a supply pipeline has been commissioned, continued gasification in Rudny). In total, the Project plans to connect about 7 thousand new subscribers, including 6.7 thousand houses and apartments, 184 small municipal enterprises, 12 industrial enterprises (with a total consumption of 28 million m³ of gas).

3. As part of the gasification of the Northern and Central regions of the Republic of Kazakhstan, the Saryarka Pipeline construction DED was developed in 2018.

In 2018, the following new investment projects were launched:

1. Construction of three compressor stations at Beyneu – Bozoy – Shymkent Pipeline.

2. Work has begun on development of a Feasibility Study “Increase in Capacity of Kazakhstan – China Pipeline (Lines A and B) to 40 billion m³per year.

3. Work has begun on development of a Technical and Economic Assessment to expand the capacity of Beyneu – Bozoy – Shymkent to 15 billion m³ per year.

4. Gasification of Almaty, modernization, reconstruction of gas distribution systems of Almaty. The Project contributes to improvement of the environmental situation in the city, will connect about 4.1 thousand new subscribers to the gas supply with an average annual consumption of 15.8 million m³ of gas.

5. “MunaiTas” LLP launched the Kenkiyak – Atyrau oil pipeline reverse project. The project is aimed at ensuring the transportation of West Kazakhstan oil in the amount of up to 6 million tons per year to PPCP and PKOP.

PROCUREMENT PRACTICES

One of the principles of procurement in Company is to provide all potential suppliers with equal opportunities to participate in the procurement process.

The purchases of goods, works and services in 2018 amounted to 2,428 billion tenge.

In 2018, the purchase of goods, works and services from resident companies of Kazakhstan (regardless of the citizenship of their employees and the availability of certificates of origin of goods of the form “CT-KZ”) amounted to KZT 2,280.8 billion, which is 93.9 % of the total amount of purchases.

At the same time, the calculation of the local content share in the procurement of goods, works and services is made on the basis of the Unified Methodology of Local Content Calculations for the Procurement of Goods, Work and Services, approved by order of the Minister for Investment and Development of the Republic of Kazakhstan No. 260 dated April 20, 2018.

The amount of procurement from resident companies of Kazakhstan

Bn, KZT

Year	Total	Goods	Works & Services
2016	1,602.5	637.5	965
2017	2,257.9	775.1	1,482.8
2018	2,280.8	739.8	1,541

The total amount of procurement of goods, works and services and the share of local content (bn, KZT)

			Goods		Works & Services
Year	Total	LC share, %	Amount	LC share, %	Amount	LC share, %
2016	1,870	76	721	83	1,149	71
2017	2,553	75	863	79	1,690	73
2018	2,428	79	824	77	1,604	80

The above indicators reflect consolidated data for all subsidiaries of KMG, in which fifty or more percent of voting shares (interests)

are directly or indirectly owned by KMG under the right of ownership or trust management, and which are subjects of the Procurement Rules for goods, works and services of Samruk-Kazyna JSC.

ANTI-CORRUPTION

The Company is taking systematic, organizational and practical measures to prevent corruption among the employees of the Group of companies. In 2017, by the decision of the KMG Management Board, the “Rules for conducting anti-corruption monitoring and internal analysis of corruption risks” (hereinafter – Rules) and “Anticorruption Standard” were approved and implemented.

As part of the work carried out in 2018, 3 actualized risks of a corruption nature, such as theft, bribery and conflict of interest (in 2016 – 2 risks, in 2017 – 0) were recorded.

For commission of corruption offenses, 2 criminal cases were initiated against 3 employees with whom the employment agreement was terminated on the initiative of the employer and all of them were convicted by the courts with various punitive measures. 5 cases of violation of the rights of workers related to the illegal termination of employment contracts and disciplinary proceedings have been established.

There were no cases of renewal or termination of contracts with business partners due to violations related to corruption during 2018.

According to information received from the subsidiaries and affiliates, there were no cases of abuse of power, violations of the workers’ rights by employees of the corporate security divisions in the exercise of their duties.

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ENVIRONMENTAL RESPONSIBILITY AND SAFETY IN THE WORKPLACE

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