Company Strategy and Key Results

KMG Development Strategy for 2022–2031 was approved by the resolution of KMG Board of Directors in November 2021.

Our main task is to expand the value chain, stability of cash flows from the core business within the framework of the sustainable development agenda.

The oil and gas industry continues to be influenced by various factors shaping its dynamics. New trends affecting the oil and gas sector emerged in 2023.

The industry has experienced several significant fluctuations over the past decade, from the price boom in 2014, when a barrel of oil reached over $100, to the crisis of 2020, when prices temporarily went into negative territory. However, in 2022, the impact of economic, geopolitical, trade and financial factors has intensified the challenges of underinvestment in the industry.

Disrupted energy trade between Europe and Russia, feedstock shortages for renewable energy development, and problems in low-carbon supply chains have slowed the energy transition. These imbalances have resulted in record high energy prices and strong growth in oil and gas company cash flows in 2022, although investment policy remains uncertain.

In the context of global trends in 2023, energy security, supply and business diversification, and a focus on low-carbon development become key drivers for balanced development of oil and gas companies in 2024. Thus, KMG’s current challenge is to maintain a balance between increasing investment and maintaining capital discipline.

KMG maintains its competitive advantage through a stable production cycle of hydrocarbon production, transportation and processing. The Company is actively exercising its priority right to obtain subsoil use assets, which contributes to replenishing the resource base.

Access to cheap raw materials identifies oil and gas chemistry as a natural growth point for KMG, allowing it to expand its value chain. Stable cash generation through production growth and the implementation of a sustainable development strategy are key success factors. Given the trends towards energy transition, KMG is implementing its Low-Carbon Development Programme, including through the implementation of low-carbon projects.

The Company’s growth is planned to be achieved by increasing the resource base, improving the efficiency of current production, developing oil and gas chemistry, introducing modern technologies to conserve resources and reducing the carbon footprint.

Taking into account external and internal challenges, KMG implements a balanced strategy between oil, petrochemical and green projects.

Strategic Directions

Strategic goals

All business areas

Strategic Goal 1

Sufficient resource base to support the Company’s growth

To ensure stable production levels in the next decade, KMG is implementing geological exploration projects both onshore and offshore in the Caspian Sea.

As part of this strategic goal, KMG plans to ensure an increase in reserves sufficient for both traditional activities and prospects through organic and inorganic growth.

Exploration and development of new reserves in Kazakhstan is implemented by KMG, including through strategic partnerships with international oil and gas companies.

In 2023, we moved into the active phase of the Abai offshore projects, Turgai Palaeozoic, Karaton Subsalt, Taisogan onshore projects; KMG and LUKOIL PJSC entered into a number of agreements on the Kalamkas-Sea, Khazar, Auezov subsoil area development project in the Kazakhstan sector of the Caspian Sea. KMG also put the Eastern Urikhtau field into commercial production. Urikhtau Operating LLP was one of the first in Kazakhstan to transition to commercial development of the field under the Enhanced Model Contract.

In 2022, the Geological Exploration Programme was adopted and implementation of the following promising areas started: Mugodzhary, Berezovsky, Zharkyn, Bolashak, North Ozen. Field work and data interpretation are expected to be completed in 2024.

Strategic Goal 2

Better performance of the Company’s value chain

KMG focuses on its core business in order to maximise the benefits of its oil production, refining, transportation and marketing activities and to improve operational performance in all key segments.

In order to compensate for the natural decline in production levels at its operating assets, the Company will continue to work on increasing oil recovery rates and intervals between workovers, as well as on taking other actions to improve operational efficiency in order to maximise well productivity. In 2023, the Ozenmunaigas field rehabilitation project was launched, which has already started introducing well pumps at 83 wells, drilled 23 additional wells, and provided a daily increment of more than 140 tonnes/day. The Company plans to launch new fields Karaton Subsalt and Turgai Poleozoic.

For the major Tengiz, Karachaganak and Kashagan projects, the Company is focusing on successful implementation of projects to expand, extend and maintain the production shelf.

The Company aims to efficiently utilise the established oil transportation infrastructure to increase export and transit volumes. Taking into account external factors and geopolitical challenges, KMG continues to develop additional export routes for Kazakh oil.

Additional export routes were introduced: to Germany via the Druzhba pipeline and in the direction of Baku-Tbilisi-Ceyhan. KMG started studying the development of the Trans-Caspian route together with international oil companies. The joint venture (JV) with Abu Dhabi Ports is active, in particular tankers Taraz and Liwa have started transportation in the Caspian Sea, 4 tankers of the JV are involved in transportation of TCO oil in the open seas, and an agreement has been signed to build its own shipbuilding and ship repair yard in Kazakhstan.

An important task of KMG is to ensure uninterrupted operation of refineries and the domestic market needs for oil products. Today, due to the modernisation of refineries in the country, the Company meets this strategic goal for the country and, moreover, supplies some oil products for export. In order to increase bitumen production, expansion projects have been launched at Caspian Bitumen and Pavlodar Oil Chemistry Refinery. Additional bitumen storage tanks are under construction.

The Company is constantly working to optimise operating costs and improve the efficiency of the supply chain.

Strategic Goal 3

Business diversification and product portfolio expansion

As part of the development of the oil and gas chemical business to diversify its activities, KMG will utilise existing and attract additional hydrocarbon resources to provide oil and gas chemical projects and produce new conversion products under the conditions of redistribution of global demand for oil in the long term.

In November 2022, Kazakhstan Petrochemical Industries (KPI) Integrated Gas Chemical Plant was launched with a capacity of 500 thousand tonnes of polypropylene per year. In 2023, the plant produced 6 different product grades. In 2024, the range will be expanded to 12 brands, including premium ones. The needs of the domestic market will be fully met.

The second important project is the 1.2 million tonne capacity polyethylene plant project, in 2023 the Enhanced Basic Design (EBD/FEED) agreements have been signed and the legal entry of SIBUR into the project has been completed and the legal entry of Sinopec as the 2nd partner is ongoing.

In addition to the main project, an auxiliary project for the construction of a gas separation plant is underway. In December 2023, the project was agreed to be financed by the National Fund of RoK.

Other important projects include the gas separation plant, terephthalic acid and polyethylene terephthalate production, and urea production.

Strategic Goal 4

Sustainable development and gradual decline of carbon intensity of operations

In 2023, KMG continues to actively integrate the principles of sustainable development into its business processes, recognising the importance of its impact on the economy, environment and society. The Company’s focus is on ensuring alignment of economic, environmental and social priorities, as well as improving ESG performance.

KMG aims to improve its ESG rating by integrating ESGs into management’s strategic and medium-term KPIs. As a result of assessment by Sustainalytics, an international rating agency, in 2023, the Company’s ESG risk rating is estimated at 32.3 points, placing KMG in the high risk category.

As part of of the Employee Health Management initiative, the Company is developing a corporate Health Programme, including pandemic control, prevention of occupational diseases and promotion of healthy lifestyles.

In line with the climate agenda, KMG is implementing the 2022–2031 Low-Carbon Development Programme with the aim of reducing greenhouse gas emissions by 15 % by 2031. The Company also plans to introduce renewable energy projects with a total capacity of at least 300 MW per share of KMG.

Having joined the OGMP 2.0 initiative, the Company is actively involved in methane emissions management and is successfully completing the CCUS pilot project phase. RES projects are also under development.

The Company actively selects and prioritises investment projects, investing only in highly efficient and strategically important ones. KMG supports prudent capital allocation, maximising benefits for shareholders and respecting the interests of the state in the oil and gas sector.

All these steps are aimed at contributing to the diversification of the national economy, reducing the carbon footprint and maintaining environmental sustainability for future generations in the Republic of Kazakhstan.

PERFORMANCE ASSESSMENT

The employee performance assessment is applied as part of the processes of monitoring and controlling the implementation of the Company’s Development Strategy, as well as motivating personnel to achieve strategic and priority goals expressed in measurable, interrelated, logically structured and balanced motivational key performance indicators (KPIs). The KPI balance provides for the inclusion of indicators in the areas of sustainable development, corporate governance, social and environmental development along with production, financial and economic indicators. Corporate KPIs are unified for all KMG employees.

As part of the performance assessment process, the effectiveness of employees’ contribution to the achievement of the Company’s strategic and priority goals for the reporting period is assessed. The performance assessment based on motivational KPIs is used to calculate employee remuneration.

Key Performance Indicators of JSC NC “KazMunayGas” for 2023

The Corporate KPIs for 2023 have been developed to reflect management’s continued need to focus on improving operational efficiency, maintaining financial sustainability, as well as the environmental, social and corporate governance aspects of KMG’s operations.

The following Corporate KPIs (motivational KPIs of the Chairman of the Management Board) related to the implementation of the sustainable development system were approved in order to ensure the implemention of strategic objectives on sustainable development.

• Implementation of investment projects, including, inter alia, the sustainable development projects Construction of a seawater desalination plant in the Kenderli Village, Construction of a new gas processing plant in Zhanaozen, Reconstruction and modernisation of the Astrakhan-Mangyshlak water pipeline.
• Comprehensive Occupational Safety Indicator, which is aimed at reducing the accident rate, as well as identifying and reporting unsafe conditions, hazardous factors, etc. across KMG Group.

Among the motivational KPIs at the level of members of the Management Board (Deputy Chairmen of the Management Board), Directors of KMG’s departments, as well as Top Managers of subsidiaries and dependent entities for 2023, KPIs in the area of sustainable development have been determined, including:

• Implementation of investment projects, including a number of sustainable development projects.
• Implementation of the Action Plan to Implement the KMG 2022–2031 Low-Carbon Development Programme in the supervised areas.
• ESG rating.
• Development of KMG’s internal carbon pricing mechanism.
• Social stability index for KMG Group.
• Reduction of the associated petroleum gas flaring intensity indicator.
• Recovery of historical oil waste.
• Automation of OHS management functions.
• Development of the Water Management Programme.
• Implementation of the Action Plan “Personnel Health Management in KMG Group for 2023–2025“.
• Reduction in the rate of non-labour related fatalities.
• Carbon footprint size (an indicator aimed at monitoring and gradual reduction of carbon footprint of of subsidiaries and dependent entities).