Transformation

The modern world is throwing new challenges for the oil and gas industry and the participants of the rank, among which the main trends are:

  • mature deposits;
  • reduction of oil production;
  • increase in operating costs;
  • volatility in global crude oil prices.

Due to these market and economic changes, it becomes necessary to develop new approaches for successful competition in the world market. Competent and intelligent solutions for long-term competitiveness are required. Regular implementation of changes, improvement of production and other business processes is a matter of competitiveness of any company, and for the oil and gas industry to some extent is is even the question of survival in conditions of low crude oil prices.

Understanding the need for changes from 2015, KazMunayGas continues the Transformation Program of Samruk-Kazyna JSC. Transformation is a systemic, interrelated process, affecting all areas of the organization’s activities, aimed at optimizing business processes, increasing production efficiency, launching a process of continuous improvement and, ultimately, increasing the company’s value. The tasks of transformation are:

  • increasing organizational potential;
  • improving the managing processes;
  • specialization of operating units in core activities;
  • optimization of business processes;
  • increasing the efficiency of all production units;
  • personnel development and training;
  • social satisfaction and prospects for future generations.

A portfolio of projects was formed in three key areas of transformation: improvement of KazMunayGas business processes, organizational and structural adjustments and changes in the company’s supporting business processes. As such, in the second direction, two projects were initiated: transition to a new operating model and creation of a shared service center for JSC “NC “KazMunayGas”. Initiatives have been formed along the production lines. They are called “Quick Wins” and represent specific projects with a fast payback, requiring the least cost. In general, the portfolio of transformation projects at the end of 2017 included:

  • 32 “quick wins”, that is, specific, quick-payback projects that require the least costs;
  • transition to a new operating model;
  • 13 projects of systemic and methodological changes in management and supporting processes with implementation of automation, including creation of shared service centers (SSC) for IT and financial functions;

At the heart of sustainable transformation, parallel work is being done in three key areas:

  • processes – formation of a single, transparent, standardized process model describing the company’s activities;
  • people – analysis and improvement of the skills and competencies of people needed to perform new tasks;
  • technologies – definition of prerequisites for automation of business processes.

The following subsidiaries and dependent entities of KMG are included in the transformation perimeter: KazMunayGas Exploration & Production JSC, KazTransGas, and the Transportation, Refinery and Marketing Division.

The “quick wins” in production in 2017 recorded successful results, such as:

  • increase in production in Kazakhturkmunay LLP;
  • implementation of a new model of MRO management in Embamunaygas JSC (EMG) and Mangistaumunaygas JSC;
  • implementation of the “UAZ Digital Oil Field” concept in EMG;
  • transition to the increased overhaul period at the refinery, including automation of the maintenance system;
  • implementation of Lean 6 Sigma/Lean Productions Programs in the companies of the TRM division and others.

New operating model

In 2017, as part of implementation of the Transformation Program, implementation of the Project “Development of the target organizational structure of the Group of companies of JSC NC “KazMunayGas” and the plan of transition” was launched. The project is aimed at improving the Company’s efficiency by reducing management levels.

The perimeter of the project includes a corporate center and all business lines of the Company, including exploration and production, transportation of oil and gas, refining and marketing of oil and oil products, oilfield services. Within the Project, extensive diagnostics of corporate and production processes of the KMG Group of companies, analysis of the best world practices among the leading vertically integrated oil and gas companies were carried out. A value chain along the entire vertical structure of the Company’s business was modeled, the Target Operating Model of JSC NC “KazMunayGas” was developed, which was approved by the Company’s Board of Directors on June 29, 2017.

According to the new operating model, KMG transits from the holding management system to the active management of production assets. As a result, Management levels are reduced to two levels: at the first level – a single Corporate Center, at the second level – subsidiaries and dependent entities of the Company. The KMG Corporate Center forms a strategy, carries out planning and full innovative support, and its subsidiaries focus exclusively on implementation of production plans.

The developed Transition Plan assumes the implementation of a whole set of measures for the gradual transformation of the company from the current management model (“as is”) to the target model (“to be”). Expected results are the following:

  • simplified legal structure (without subholdings);
  • direct influence on production activities;
  • centralization of support processes, conclusion of routine operations in the Shared Service Center;
  • centralized management of financial reserves and investments of the Group;
  • centralized management of a margin across all of the value-added chain and realization of products of the KMG Group.

Within the Plan at the initial stage in 2017 the liquidation of the sub-holding of KazMunayGas Refining and Marketing JSC, which became a part of the Corporate Center in the form of the oil “Transportation, Refinery and Marketing” (TRM) Division, was successfully completed, the blocks of the corporate center of KMG “Exploration and Production” and “Oilfield Services” in the “Exploration, Production and Oilfield Services” Division.

In the future, in order to increase efficiency and rapidness of decision-making in the company, abolishment of duplicative functions and simplification of procedures, the main sub-holdings of KMG in the form of divisions will be gradually introduced into the Corporate Center – JSC “KazMunayGas Exploration and Production”, JSC “KazTransOil” JSC “KazTransGas”, and “KazMunayTeniz”.

Building and improving the business processes

In addition to the foregoing, within the Project, in order to improve the management system, systematic and metho-dological activities were undertaken aimed at further automating and implementing the process approach in the Company on the basis of the ARIS platform within the “Transformation of Core Business Functions and ERP Implementation” Project.

Thus, the description and detailing to the third level of core corporate and production business processes was completed, the modeling of processes in ARIS with decomposition of processes up to fourth level (the level of performers) is carried out.

The results of the Project will allow to provide methodological support for the forecast of the target number, the formation of a typical organizational structure for SDEs, the unloading of the Rules and Regulations for each business process separately and business functions in general, to implement the system of risk analysis, dependencies and control procedures at key stages of the processes in each structural subdivision of the Company.

Great attention is also paid to the development of new skills and competences for the process approach and modeling in ARIS among the Company’s employees. The Department of Organizational and Sustainable Development, established in 2017, becomes a full Process Office, responsible for management of business processes architecture, mana-gement of organizational design and facilitation of continuous improvement of the Company’s business processes.

As a result of implementation of the Transformation Program for the period 2015–2017 actual net benefits amoun-ted to KZT 61.8 billion.

In the period from 2018 to 2025 from the projects of the Transformation Program it is expected to receive net benefits in the amount of KZT 215 billion.

Shared Service Centers

In 2017, the shared service centers (SSC) of KMG for IT and HR (“HR Qyzmet”) officially started operating. In the SSC for IT, in the form of a separate legal entity, IT specialists from several KMG subsidiaries were removed to perform routine IT service operations. Currently, SSC for IT has already started servicing the corporate center of KMG, the TRM division, as well as Production and Drilling Technology Research & Development LLP in the “single window” mode based on service level agreements (SLA). In the current year, the replication of the operational model of the SSC for IT to the remaining subsidiaries of the TRM division begins.

“HR Qyzmet”, created on the basis of Samruk-Kazyna Corporate University (SKCU), is engaged in functions in the field of personnel management. Now the center serves 3.5 thousand employees of 9 companies of the Samruk-Kazyna group. Until the end of 2018, the coverage of the center, as planned, will be 28 thousand people.

Changes in the field of human resources management are aimed at solving the following problems:

  • a sufficient number of specialists to achieve current and prospective business results;
  • high level of involvement and social stability of employees;
  • labor productivity at the level of the world’s leading oil and gas companies;
  • professional personnel service, capable of effectively solving tasks with personnel in partnership with business customers;
  • a transparent system for attracting, selecting and evaluating staff;
  • efficient and quality management of administrative functions at minimal cost through automation and use of the Shared Service Center (SSC) for HR.

The work on implementation of this initiative continues with the preparation of the necessary methodology within the accompanying project of “Transformation of core business functions and ERP implementation.”

In general, for the KMG subsidiaries, establishment of the SSC has several benefits in terms of reducing the cost of maintaining these non-core support functions, improving the quality of service services, executing business proces-ses according to uniform standards and methodologies, and increasing the availability of information necessary for prompt decision-making.

Category Procurement Management

As part of the work to improve the procurement system and implementation of category management in the past year, the methodological part was completed. The transition to practical activities began – establishment of a Competence Center for category management. Three key categories for KMG have already been developed: the drilling and production pipes, oil production pumps and transport. The company is tasked with implementing category management by 70 % of the total volume of KMG purchases in 5 years.

The Competence Center has been tasked with reducing costs for the procurement function, reducing the timing of procurement and improving the quality of purchased goods, works and services. For this, it is necessary to develop and approve procurement category strategies in 39 categories.

For reference: the status of the “Creation of a competence center for category management” project / Department of category management and GWS provision of large projects:

  • The Competence Center for KMG categorical management / the Department of category mana-gement and GWS provision of large projects was created – 16 people.
  • Six Procurement Category Strategies were develo-ped, approved and are being implemented.
  • The economic effect of KZT 546 million was received from implementation of the Procurement Category Strategy under the “Purchase of motor transport services for a Group of companies in Astana” category.
  • Participation in the development of Procurement Category Strategies in the “Cars and buses” category for JSC “Samruk-Kazyna”.