KazMunai Gaz Exploration Production JSC ANNUAL REPORT 2014 2014 CONTENTS: I. Strategic reporting 1. About the Company • Company Overview • Mission and Strategy • Financial and Operating Highlights • Ownership Structure • Chairman’s Statement • Competitive Advantages and Industry Position • Share Listings • Overview of the Kazakhstan oil & gas sector • Milestones of the year 2. Operational activities overview • Chief Executive’s Statement • Production and sales of oil • Capital investment and modernisation of production • Crude oil reserves • Exploration work 3. Operating and financial review 4. Risk Factors II. Social policy • Social responsibility • Our people • Health, safety and environment III. Corporate Governance • Board of Directors of KMG EP • Board of Directors’ Committees • Remuneration of the Board of Directors • Remuneration of the Management Board • Internal controls and audit IV. Consolidated Financial Statements • Independent auditors’ report • Consolidated Statement of Financial Position • Consolidated Statement of Comprehensive Income • Consolidated Statement of Cash Flows • Consolidated Statement of Changes in Equity • Notes to the Consolidated Financial Statements V. Information for Shareholders VI. Reference Information 1 I. STRATEGIC REPORTING 1. About the Company Company overview KazMunayGas Exploration Production JSC (KMG EP or ‘the Company’) was formed in March 2004 through the merger of Ozenmunaigas JSC (OMG) and Embamunaigas JSC (EMG). Throughout 2014 the Company maintained its position as one of Kazakhstan’s top three oil producers, delivering a total of 12.3 million tonnes of crude oil (250 kbopd), including production from the Company’s stakes in JV Kazgermunai LLP (KGM), CCEL (Karazhanbasmunai) and PetroKazakhstan Inc (PKI). As of year-end 2014, the proven and probable reserves of KMG EP, including its subsidiaries and joint venture interests, stood at 177 million tonnes (1.3 billion barrels), of which OMG, EMG, Kazakh Gas Processing Plant LLP and Ural Oil and Gas LLP (Fedorovskiy block) account for 132 million tonnes (1.0 billion barrels). The Company’s shares are listed on the Kazakhstan Stock Exchange (KASE) and its global depositary receipts (GDRs) are listed on the London Stock Exchange (LSE). Mission and strategy Mission KMG EP’s mission is to produce hydrocarbons in an efficient and sustainable manner that will maximise benefits for its shareholders, create long-term economic and social value for the regions where it operates, and help each employee realise his or her potential. Strategy Since its flotation on the London and Kazakhstan Stock Exchanges in 2006, KMG EP has followed its shareholder-approved strategy. Having successfully achieved its earlier objectives, KMG EP updated its strategy in 2010 while keeping its core principles unchanged. The aim of KMG EP is to maximize the Company's potential and to continue further development, taking into account current market conditions and the interests of shareholders, and to seek opportunities to increase the Company’s resources. The Company’s strategy for its existing fields involves maintaining basic levels of production, cost optimization, improving the efficiency of business and technological processes, and raising the levels of oil recovery. All these measures are aimed at improving production efficiency. The Company’s strategic goals are focused on strengthening the Company’s prominent position, and further consolidation of oil and gas assets. In order to achieve these goals the Company plans to search for promising new blocks, explore existing blocks and expand its oil and gas portfolio through the acquisition of producing assets in Kazakhstan and abroad. 2 Financial and operational highlights 2013 2014 Variation % 2Р reserves, million tonnes 149 132 -11% Oil production, million tonnes per year 12.4 12.3 -0.5% Sales, million tonnes per year 12.3 12.2 -1.2% Exports, million tonnes per year 9.8 7.5 -23.7% Revenue, billion KZT 817 846 3.6% Net profit, billion KZT 142 47 -66.8% Capital expenditure, billion KZT 144 128 -11.1% Net cash, billion KZT 616 727 18.0% Brent, US$/bbl 108.7 99.0 -8.9% Ownership structure 100% 100% 50% 50% 33% 100% 50% 51% 3 Chairman’s Statement Last year was one of the most difficult years of the decade for the oil and gas industry. Slumping oil prices in the second half of 2014 impacted oil and gas companies throughout the world, regardless of their size. The market value of some oil and gas companies fell by 40-50% over this period. Kazakhstan’s oil and gas industry did not avoid these negative trends, affected not only by falling crude oil prices globally but also by delays in starting oil production at Kashagan, in addition to the suspension of several offshore and onshore exploration projects for an indefinite term. In spite of these complex market conditions, however, KMG EP achieved the targets set for 2014 and enjoys a sufficient margin of safety to continue working to increase shareholder value, even under conditions of macroeconomic instability. This is due to both the financial robustness of the Company and to its stable levels of production. In line with the business plan for 2015-2019, we intend to maintain production output at our core assets (OMG and EMG) without substantial reduction. The new low level of crude oil prices will however undoubtedly affect the Company’s financial position. Taking into account the volatility of oil prices, KMP EP intends to work on a planned reduction in non- production costs primarily administrative expenses and infrastructure costs. Special attention will also be given to improving management systems and enhancing productivity. The main focus of the Company’s future development is to increase the efficiency of production from mature fields. This requires a series of measures to support production, including the optimisation of production costs, the implementation of energy saving policies, and research into enhancing oil recovery. As for the growth of KMG EP, we expect to achieve this through a gradual increase in the Company's asset portfolio in line with our business transformation process. KMG EP aims to make efficient use of its resources and we believe this will allow us to achieve our goals for 2015 and stay resilient to negative external factors. We think that KMG EP is well prepared to face new challenges and will be able to maintain its previously leading position. Christopher Hopkinson, First Deputy Chairman of the Management Board of JSC NC KazMunayGas, Chairman of the Board of Directors of KMG EP 4 Competitive advantages and industry position • The largest oil and gas company in Kazakhstan with shares listed on LSE and KASE National Company KazMunayGas (NC KMG) is the Company’s majority shareholder, holding 57.9% of the common and preferred shares. Under the three share buyback programmes in 2009-2012 the Company repurchased 8.3% of the total common and preferred shares. China Investment Corporation (CIC), the state investment fund of the People’s Republic of China, holds roughly 11% of the common shares (10.4% of common and preferred shares), while the remaining shares are held by institutional investors from the UK, continental Europe, the US, Asia, and Kazakhstan. • Pre-emptive access to Kazakhstan’s onshore oil and gas assets NC KMG has the right to enter into contracts for subsoil use at unlicensed areas without participating in competitive tenders, but on the basis of direct negotiations. NC KMG is entitled to purchase on behalf of the state both subsoil use rights, and the assets associated with these rights, in fields and associated sub-surface resources categorised as being of strategic importance Operating as a subsidiary of NC KMG, KMG EP may avail itself of these rights should the economic interest be mutual. In 2014 several amendments and additions were made to the law “on sub-surface reserves and sub-surface reserves usage”, to establish procedures for the exercise of the government’s priority rights through the participation of the sovereign wealth fund or the national company and to create a unified system of oil and gas production in Kazakhstan. • Corporate governance complies with international standards and protects the rights of minority shareholders KMG EP has been a pioneer among Kazakh enterprises in its extensive application of corporate governance practice in conformity with international standards. Over the years, this system has been put to the test under various conditions and market circumstances. The Company has invariably received highest praise for the effectiveness of its corporate governance from credit rating agencies, analysts, and from parent company NC KMG and Samruk-Kazyna. • Successful partnerships and equity stakes in Kazakh oil and gas producers At present, KMG EP holds 50% stakes in oil and gas production joint ventures Kazgermunai and CCEL (Karazhanbasmunai), as well as a 33% stake in PetroKazakhstan Inc. Each of these companies makes a tangible contribution to the development of Kazakhstan’s petroleum sector and participates in the implementation of social programmes in its areas of operation. Relationships with these companies have proven successful and offer a strong foundation for the development of KMG EP. • Substantial cash balance KMG EP is financially robust and has sufficient cash for investments and dividend payments. As a result, the Company is in a position to continue searching for acquisition opportunities, either independently or with strategic partners who possess the relevant expertise and technology. • Well-explored reserves base The Company’s core assets include well-explored reserves base that are sufficient for long- term production. 5 Share Listings During 2014 the maximum and the minimum price per KMG EP GDR on the London Stock Exchange was US$18.4 and US$12.7, respectively. The average price per GDR in 2014 was US$15.6. During 2014 the maximum and the minimum price per KMG EP common share on the Kazakhstan Stock Exchange was KZT 20,000 and KZT 13,905, respectively. The average price per common share in 2014 was KZT 16,741.