Simple
Sustainable
Successful
Nostrum Oil & Gas PLC Annual Report 2015
Nostrum Oil & Gas PLC is an independent
oil and gas company engaging in the
production, development and exploration
of oil and gas in the pre-Caspian Basin.
Our track record demonstrates that we
have successfully achieved our strategic
goals to date.
Our vision is to become one of the leading
independent oil and gas exploration
and production companies in the
region. In order to achieve our vision
we recognise that our responsibilities
need to go beyond our financial and
operational targets.
In order to establish Nostrum as one of the
leading independent E&P companies in
the FSU, we have developed a simple and
sustainable strategy that will allow us to
successfully deliver near-term growth
combined with long-term value creation.
Corporate structure
Nostrum Oil & Gas PLC (“Nostrum”) is a public limited
company incorporated and registered in England and
Wales with its corporate headquarters located in
Amsterdam, the Netherlands. Nostrum’s ordinary shares
are admitted to the premium listing segment of the Official
List of the Financial Conduct Authority and to trading on
the London Stock Exchange PLC’s main market for listed
securities. Nostrum indirectly holds a 100% interest in
Zhaikmunai LLP, a Kazakhstan-registered limited liability
partnership engaged in the exploration, production and
sale of hydrocarbons from the Chinarevskoye field in
north-west Kazakhstan.
See the report online:
http://annualreport2015.nostrumoilandgas.com
Contents
Sweden
Finland
Russia
Norway
Denmark
Estonia
Latvia
Lithuania
Ireland
United
Kingdom
Netherlands
Belgium
Germany
France
Switzerland
Belarus
Poland
Czech
Republic
Austria
Slovenia
Slovakia
Hungary
Croatia
Ukraine
Moldova
Romania
Kazakhstan
Italy
Bosnia
Serbia
Bulgaria
Macedonia
Albania
Greece
Georgia
Azerbaijan
Armenia
Turkey
Uzbekistan
Kyrgyzstan
Turkmenistan
Tajikistan
Spain
Portugal
Nostrum at a glance
Find out more on page 02
Where we operate
Find out more on page 06
Revenue
US$449m
737
895
782
449
301
KPIs
Find out more on page 08
Our business model
Find out more on page 20
Strategic objective
To become one of the leading
independent oil and gas
companies in the FSU.
Our business strategy
Find out more on page 22
Corporate governance
Find out more on page 66
Management report
Strategic report
02 Nostrum at a glance
04 Our investment case
06 Where we operate
08 Key performance indicators
09 2015 milestones
10 Key historical developments
12 Chairman’s statement
14 Chief Executive’s review
16 Market overview
20 Our business model
22 Our business strategy
24 Performance review
36 Corporate social responsibility
48 Financial review
59 Risk management
61 Principal risks and uncertainties
Corporate governance
65 Chairman’s overview
66 Board of directors
68 Nostrum Oil & Gas PLC
management team
68 Zhaikmunai LLP
management team
70 Corporate governance approach
82 Audit Committee Report
88 Nomination and Governance
Committee Report
89 Remuneration Committee Report
90 Annual report on remuneration
98 Directors’ remuneration policy
104 Directors’ Report
Financial report
113 Consolidated Group
financial statements
169 Parent Company
financial statements
Regulatory information
181 Investor information
183 Glossary
Additional disclosures
191 Structure chart
How we are performing
Find out more on page 08
Subsidiary companies
The Company currently has a number of intermediary companies between the Company and its
operating entity in Kazakhstan, Zhaikmunai LLP. The corporate structure of the Group is continually
reviewed and simplifications to the structure are made from time to time, if considered in the best
interests of the Group. The structure of the Group as at 31 December 2015 can be found in the
Additional disclosures.
01
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Nostrum at a glance
Overview
Who we are
Nostrum Oil & Gas PLC is an
independent multi-field oil and
gas company engaging in the
production, development and
exploration of oil and gas in the
pre-Caspian Basin.
We are a simple, sustainable
and successful company and,
by employing these core values,
we aim to become one of the
leading independent oil and gas
exploration and production
companies in the Former Soviet
Union (FSU).
We pursue our financial and
operational targets in a
responsible way, maintaining
a track record that clearly
demonstrates the successful
achievement of our strategic
goals.
Whilst we continue to make
progress towards our financial
and operational goals, we have
developed a simple strategy
that will allow us to successfully
deliver the near-term growth
we have targeted, combined
with long-term, sustainable
value creation.
Nostrum is listed on the London
Stock Exchange, with operations
in Kazakhstan as well as offices in
Amsterdam, London, Brussels and
St. Petersburg.
Our commercial
products
Our range of products at
Nostrum are crude oil, stabilised
liquid condensate, LPG and dry
gas. Currently all our production
comes from the Chinarevskoye
licence. We have invested
in developing our own
infrastructure to control the
transportation of our products
until they reach the final off-taker,
serving a wide network of
destinations and off-takers and
helping to ensure we always
obtain the best possible prices.
What we do
We focus on creating long-term
shareholder value through the
development and discovery
of oil and gas reserves, as well
as the production and sale of
crude oil, stabilised condensate,
LPG and dry gas. Our experienced
management team has overseen
the investment of more than
US$1.5 billion in our licence
area since 2004, delivering
on a number of infrastructure
projects, as well as significantly
expanding the reserve base
over the last ten years through
our own appraisal work
combined with successful
M&A activity.
02
Key statistics
Production
40,391 boepd
46,178
44,400
40,391
36,940
13,158
2011
2012
2013
2014
2015
Revenue
US$449m
895
782
737
301
449
2011
2012
2013
2014
2015
EBITDA
US$229m
551
495
457
188
229
2011
2012
2013
2014
2015
2P reserves
470 mboe
522
506
582
571
470
2011
2012
2013
2014
2015
Nostrum Oil & Gas PLC Annual Report 2015 FY 2015 product mix %
Average daily
production rates
Market
positioning
47
42
11
Crude oil and condensate
LPG
Dry gas
We have successfully grown our
production every year from 2004–2013
when full capacity of our processing
facilities was achieved. We have since
targeted an average daily production
of 45,000 boepd and expect to double
our production capacity in 2017 to
100,000 boepd. With this increased
nameplate capacity we will fortify our
competitive advantage in the market
and deliver substantial value to
our shareholders.
We are in a unique position in the
market, with our front-loaded
investment programme meaning
we are now a leader in terms of
infrastructure in the region. Our
location in the north-west of
Kazakhstan places us close to our final
off-take destinations, including the
Black Sea ports and Finland. We are
able to process and export both
liquids and gas using our wholly-owned
treatment facilities and transport links.
Operational structure
Nostrum has a simple and effective
operating structure. It has a board of
directors led by the chairman and an
Executive Committee led by the CEO.
The Executive Committee manages all
major units involved in operations
according to the interaction charts and
key management principles described
on pages 70 to 80. The team has
a breadth of expertise as well as deep
sector experience, which has led to
the successful oversight of Nostrum’s
operations throughout the challenging
oil price environment seen over the
last year.
Reserves
Ryder Scott completed an update
of Nostrum’s reserves report in
December 2015. This report included
the reserves at Chinarevskoye and
the three additional licences acquired
in 2013.
For more information on
reserves, please see our website:
www.nog.co.uk
1P
147 mboe
2P
470 mboe
03
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Our investment case
A simple investment case
Nostrum has developed a world-class portfolio of assets in the reserve rich
area of north-west Kazakhstan. The front-loaded investment programme has
been the foundation upon which strong production growth has been built.
Over 450 million
of 2P reserves
Targeting steady levels
of production
With 470 mboe of 2P reserves
and production of more than 14 million
barrels of oil equivalent per year,
we provide a unique combination
of significant production and reserve
upside along with consistent
operational cash flow.
2015’s average daily production was
40,391 boe, down marginally on last
year due to one-off repair work on the
pipeline used to transport Nostrum’s
gas. We will target an average daily
production of over 40,000 boe in 2016
as we continue the construction of
our new Gas Treatment Facility.
Stable financial platform
with strong cash flows
and flexibility
Nostrum generated US$153.26m
of operating cash flow in 2015.
In addition, the Group ended the
year with over US$165.56m of cash1
on its balance sheet. Nostrum
announced in January that it had
signed a new hedge of 15,000 bopd
for US$49.16 per barrel, with a
24 month tenor. The hedge and
cash position give Nostrum the
financial flexibility to actively manage
the pursuit of our operational
goals accordingly as the oil price
environment fluctuates. We believe
that the prudent management of our
liquidity has given us a competitive
advantage and leaves us in a strong
position despite the challenging oil
price environment seen over the
last year, reflecting our core values
of simplicity and sustainability.
1 Cash on the balance sheet is defined as cash and cash equivalents including current and non-current investments.
04
Nostrum Oil & Gas PLC Annual Report 2015 With low operating costs, we have been able to maintain an average daily
production of over 40,000 boe throughout the challenging conditions of 2015,
sustaining positive cash flow and progressing towards our operational target
of doubling production capacity.
World-class assets
Strong governance
and responsibility
Experienced
management team
We have four licence areas, all located
in the Pre-Caspian Basin towards the
north of Uralsk. Nostrum’s current
producing asset is the Chinarevskoye
field and the three additional licences
are all located within 60-120km of
the field.
We are committed to achieving
an excellent standard of corporate
governance and social responsibility
and are aiming for a positive and
lasting contribution to the areas in
which we operate, with a focus on
delivering long-term shareholder
value for a sustainable future.
We are confident in the ability of
our experienced and dedicated
management team, who have
expertise in operating in Kazakhstan,
to deliver on our clear strategy.
Simple business case, successful model and sustainable strategy
We have a clear strategy, based
on a solid financial foundation and
compelling business case. We
will deliver near-term production
growth, with preparations to double
production upon completion of
the new Gas Treatment Facility.
In addition, with our continued
appraisal of the existing Chinarevskoye
field and our three additional licences
we are continually transferring
reserves to the 1P category, aiming
for 700 mboe of proved reserves over
the longer-term. This will allow us
to maintain production above
100,000 boepd up until the end of the
Chinarevskoye licence (2031-2033).
We monitor all opportunities for
acquisitions both within our operating
region of north-west Kazakhstan as
well as further afield within the FSU
that would enable us to expand our
reserve base and facilitate sustained
production through to the end of
our licence.
05
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Where we operate
Advantageous location of assets
Our main operational facilities are located at
the 274 square kilometre Chinarevskoye field
in north-west Kazakhstan. We now have three
additional licences, all within a 120km radius
of this location. This advantageous location is
core to our business case, allowing us to leverage
our existing infrastructure and experienced
operating and development teams.
Key
Current destinations
Oil/condensate
Transportation dynamics and routes
Crude
Crude oil is transported through our
own liquids pipeline directly from the
field site. 15% is sold domestically
and the remainder is sold through for
export to two main buyers, Neste Oil
in Finland and SOCAR in Azerbaijan.
Condensate
Condensate is transported through
our own oil pipeline from the field site
and then 100% is exported by rail to
the Russian Black Sea port of Taman.
LPG
LPG is transported on trucks from
the field site to the rail terminal where
it is loaded on to special trains and
then transported to the off-taker. The
majority of our LPG is sold at Black Sea
ports and distributed by traders to
Eastern Europe and Turkey.
06
Nostrum Oil & Gas PLC Annual Report 2015 UnitedKingdomIrelandFranceSpainItalySwedenNorwayFinlandEstoniaLatviaPolandSlovakiaHungaryBelarusUkraineCzechRepublicRomaniaBulgariaAustriaSerbiaBosniaTurkeyGreeceMacedoniaAlbaniaGeorgiaAzerbaijanArmeniaCroatiaSloveniaNetherlandsBelgiumDenmarkUzbekistanKyrgyzstanTajikistanPortugalLithuaniaGermanySwitzerlandRussiaKazakhstanTurkmenistanMoldova Transportation dynamics and routes
Russia
Chinarevskoye
field
North-west Kazakhstan
Yuzhno-Gremyachenskoye
field
Darjinskoye
field
Rostoshinskoye
field
Uralsk
Key
Border
Gas pipeline
Nostrum oil pipeline
Nostrum gas pipeline
Oil pipeline
Nostrum oil loading rail
terminal at Rostoshi
Gas treatment facility (GTF)/
Oil treatment facility (OTF)
Dry gas
Dry gas is transported from the
Chinarevskoye field through the
Company’s own 17km gas pipeline,
which connects to the InterGas Central
Asia pipeline. 25% of gas produced
is sold domestically at this connection
point and the remaining 75%
is exported.
Expanding for the future
With the preparatory work to
double production capacity nearing
completion, all of the related
infrastructure, upon completion of
GTU3, will be able to accommodate
increased levels of production. This will
further improve our efficiencies and
effective use of existing infrastructure.
Nostrum is continually evaluating the
destinations to which we sell in order
to achieve the best possible netbacks
for the company. At present, however,
transportation routes and destinations
are expected to remain unchanged.
07
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 UnitedKingdomIrelandFranceSpainItalySwedenNorwayFinlandEstoniaLatviaPolandSlovakiaHungaryBelarusUkraineCzechRepublicRomaniaBulgariaAustriaSerbiaBosniaTurkeyGreeceMacedoniaAlbaniaGeorgiaAzerbaijanArmeniaCroatiaSloveniaNetherlandsBelgiumDenmarkUzbekistanKyrgyzstanTajikistanPortugalLithuaniaGermanySwitzerlandRussiaKazakhstanTurkmenistanMoldova
Key performance indicators
Resilient financial performance
Financial KPIs
Nostrum has maintained high operational margins and positive cash flows for the year from our processing facilities
despite the volatile oil price environment of 2015. We come to the end of the year in a strong financial position, fully
funded to complete GTU3 on schedule, and with US$165.56m in cash and cash equivalents on our balance sheet.
Revenue
US$449m -42.6%
895
782
737
EBITDA
US$229m -53.7%
551
495
457
EPS
US$-0.51 -164.6%
1.19
0.87
0.79
301
449
188
229
0.44
(0.51)
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Net income
US$-95m -165.0%
220
162
146
82
Operating cash flow
US$153m -56.3%
Opex per barrel
US$4.3 -14.0%
359
350
8.4
292
(95)
132
153
5.3
5.7
5.0
4.3
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
The main factors contributing to the variance between forecast and actual results were the drop in the average
Brent oil price by 46% in 2015 and the unforeseen repair work on the third party pipeline used to transport
Nostrum’s dry gas.
Non-financial KPIs
In order for Nostrum to achieve
sustainability and success in the longer
term, we remain conscious that our
performance must be measured not
only in financial terms, but also with
regards to our operational and
social output. We therefore target
non-financial KPIs to ensure that
we maintain our focus in these areas.
08
Production
40,391 boepd -9.0%
2P reserves
470 mboe -17.7%
46,178
44,400
40,391
36,940
522
506
582
571
470
13,158
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Proven reserves
147 mboe -23.5%
195
199
192
169
Number of man-hours without
loss of working hours (in millions)
1.91m +1.1%
147
1.66
1.47
1.83
1.89
1.91
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
Nostrum Oil & Gas PLC Annual Report 2015 2015 milestones
Principal developments in the reporting period
Strategic
Financial
Operational
Hedging – 15,000 barrels of oil
per day hedged at US$49.16 until
December 2017. The previous
hedge value of US$92m was used
to purchase put options with a strike
price of US$49.16 per barrel in
December 2015. The put options
are settled in cash on a quarterly
basis and mature in December 2017.
The options mean that Nostrum
is receiving US$49.16 per barrel
on at least 1.35m barrels of oil each
quarter. This represents over two
thirds of its liquids production.
There is no cost to Nostrum if the
oil price goes above US$49.16 as
Nostrum has only bought put
options and has not given away
any upside with this hedge.
Export gas paid in US Dollars – at
the start of 2015 Nostrum entered
in to an agreement to sell 75% of
its dry gas for export at prices
denominated in US$.
Dividend – a dividend of US$0.27
per ordinary share was paid in
June 2015.
GTU3 – following the continued fall
in the oil price Nostrum has taken
the decision to phase the payments
of GTU3 over 2016 and 2017.
Completion will now be during
2017. The phasing of payments
will involve no additional cost for
Nostrum and the total budget
remains at US$500m. The phasing
of the payments will now match
the new hedge and will allow for
a continued preservation of cash
on Nostrum’s balance sheet over
the next 24 months.
Production ramp up – as a result
of completion of GTU3 being
moved back in to 2017 production
guidance has been revised down
from 70,000 to a range between
40,000 boepd and 60,000 boepd
for 2017.
First appraisal well on
Rostoshinskoye field – the first
appraisal well on Rostoshinskoye
has been started and will be
completed during 2016.
Rostoshinskoye is the largest of
the three fields adjacent to
Chinarevskoye. Together, the
three fields contain an estimated
87m 2P barrels.
Offer for Tethys Petroleum – Nostrum
made an all share offer for Tethys
Petroleum during 2015. The offer
was later withdrawn by Nostrum and
subsequently no further offer has
been made.
Unexpected repair work on export
gas pipeline – during October the
pipeline Nostrum uses for the sale
of export gas was closed by its
operator for unforeseen repair work.
The result of this unexpected repair
work was that the annual average
production was lower than initially
expected, at 40,391 boepd.
Successful GTU1&2 maintenance –
the semi-annual scheduled
shutdowns for maintenance were
completed within the expected
timeframe budgeted for the year.
Total shut down time for planned
maintenance did not exceed
15 days over 2015.
Producing wells – 21 oil wells and
18 gas wells were producing at
the Chinarevskoye field. In 2015
Nostrum had three rigs working at
Chinarevskoye and in the second
half of 2015 this was reduced to
one rig. At the start of 2016 this is
scheduled to increase to three rigs.
Eight wells completed – during
2015 eight wells were completed
at Chinarevskoye. During 2016
four wells are scheduled at
Chinarevskoye plus one to be
completed at Rostoshinskoye.
09
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Key historical developments
Successful development
First phase of development
2004-2013
Total capex:
US$1.5 billion
2008
120km crude oil and stabilised
condensate pipeline
completed (between the
Chinarevskoye field and the
rail terminal, near Uralsk)
2011
17km dry gas
pipeline completed
2013
Annual average
production of
46,178
boepd
2008
US$100m IPO
at $10 per GDR
and US$550m
borrowing-based
facility in place
2004
2008
2010
2011
2012
2013
2004
Zhaikmunai LLP
is acquired
2010
US$450m
bond
raised
at 10.5%
2008
Production of
5,095
bopd
2012
US$560m bond
issued at 7.125% to refinance
part of bond debt and for
general corporate purposes
$
2011
Gas
Treatment
Facility
completed
10 Nostrum Oil & Gas PLC
10
Annual Report 2015
Strategic report
Corporate governance
Financial report
Regulatory information
Additional disclosures
Second phase of development
2014-2018
Total expected capex approximately:
US$1.2 billion
2014
Admission to the
premium
listing
category
of the London
Stock Exchange
and FTSE 250
2014
Completion
of 3-D seismic
on three
additional
licences
2017
Expansion of
processing
capacity of
GTU3
completed
2018
Development
programme
submitted
for new fields
2014
2012
2015
2013
2016
2017
2018
2014
US$400m bond
issued at 6.375% for refinancing
and general corporate purposes
$
2018
Ramp-up
of production
from GTU3
Nostrum Oil & Gas PLC
Annual Report 2015
1111
Chairman’s statement
Steady progress amidst falling oil prices
With oil prices falling to around
US$30 and the devaluation of the
Tenge in 2015 we are focusing our
efforts to further reduce operating
costs as part of our cost reduction
programme. Given the low operating
costs of our field we can continue to
generate positive cashflow even at
the current low oil prices. Whilst cost
cutting and liquidity management
are the short-term focus, we remain
committed to creating value through
the construction of our new gas plant,
the doubling of production capacity
and expanding our reserves base.
2016 dividend
As a result of the falling oil prices in
2015, we are not proposing a dividend
payment for 2016. We believe that in
the current environment maintaining
short-term liquidity will ultimately lead
to greater shareholder value in the
longer term. This is a tough decision
to make as we had established a track
record of distributing a small portion
of cash to shareholders. However the
Board believes that cash preservation
is paramount in these uncertain times.
Stable production levels
The financial performance of the
Company was built on another steady
year of operational results. Production
of 40,391 boepd was below our
guidance due to unforseen repair
works to the pipeline through which
gas is exported. Excluding the period
of maintenance we would have met our
target guidance figure for production
for the year. Along with our new
hedge, this steady production and
associated cash flow continues to allow
Nostrum to fully finance its investment
in further infrastructure to double our
production capacity.
Our vision
Nostrum’s vision is to grow production
to over 100,000 boepd and to
build a reserve base that allows the
Company to continue to produce at
this level far into the future. This goal
is now less than 24 months away from
being realised, with the new gas plant
due for delivery in 2017. Our target
remains to become one of the leading
companies in the FSU.
Nostrum intends to realise its vision
through a clearly defined strategy,
balancing organic development
with carefully considered expansion
through acquisitions. Its main priority
remains, as always, to continue to
deliver growth and shareholder value
in a responsible and efficient way.
Resilient financial and
operational performance
Nostrum delivered a steady
performance in 2015 with production
averaging over 40,000 boepd for the
entire year. The falling oil price meant
that the Group’s financial results for
the year were not as strong as in 2014,
but with the continuation of our cost
reduction programme and an increase
in gas revenue from our new export
contract for 75% of our gas, we
maintained a resilient EBITDA margin
of over 50%. We made good progress
this year on our new gas plant and look
forward to its completion next year,
enabling us to double our production
capacity to 100,000 boepd. I believe
that Nostrum is uniquely placed to
not only survive the current fall in oil
prices but also to prosper once we
have completed our new gas plant.
Our ambitions to build one the leading
independent E&P companies in the
FSU remain as strong as ever and
I believe the current environment can
provide us with growth opportunities,
rather than limitations.
Flexible financial position
We continue to manage our cash
position prudently and have ended
the year with over US$160m of cash
on our balance sheet. Given the
volatile oil price, we also took steps
to further protect the liquidity position
of the Company. A new hedge was
entered into that covers the Company
over 2016 and 2017 and locks in
US$49.16 per barrel on 15,000 boepd.
The cost of the new hedge was paid
for entirely by the proceeds of the
previous hedge. In addition we have
decided to phase the payments for the
construction of our gas plant over the
next 24 months to match the cash we
will receive under our hedge. This
ensures that the Company can execute
its business plan under any oil price
over the next 24 months.
12
Nostrum Oil & Gas PLC Annual Report 2015 “ Nostrum’s ability to navigate this period
of low oil prices centres on the quality of its
asset base and the commitment of our people.”
Multi-field asset base established
Nostrum has started the appraisal
programme on the three additional
licences acquired in 2013 which are
estimated by Ryder Scott to hold
87 mboe equivalent. We have adopted
the same approach with our additional
fields that we undertook with
Chinarevskoye. The first step is to fully
understand the geology and de-risk
the development progamme as much
as possible. We have carried out new
3-D seismic on each field and have
now interpreted it, allowing us to
have a much better understanding
of where to position our first appraisal
wells. We started drilling the first
appraisal well in the largest field,
Rostoshinskoye, in 2015, and its initial
results are looking promising We look
forward to developing these fields and
to bringing them into production to
utilise our infrastructure development.
Governance and the Board
The Board understands the
importance of providing effective
and clear leadership and direction
on all matters relating to corporate
governance and places great
significance on achieving high
standards of governance to underpin
the Group’s good business conduct
and strong ethical culture. With this in
mind I am very pleased with how the
Company has handled its first full year
since its regulatory obligations were
increased as a result of the Company’s
admission to the premium listing
segment of the Official List of the
Financial Conduct Authority and to
trading on the London Stock Exchange
PLC’s main market for listed securities
in June 2014. I believe the Company
has handled this transition very well.
During 2015 the Board continued
to work closely with management to
maintain high standards of corporate
governance and to ensure the
Company’s continued compliance
with the rules imposed by the Financial
Conduct Authority and associated
guidance under the UK Corporate
Governance Code.
Our commitment to corporate
responsibility
At Nostrum we strive to be a
responsible and transparent business.
Our corporate responsibility
approach covers the relationships
we have with all our stakeholders
including shareholders, employees,
contractors, local communities and
host governments, as well as the
environments in which we work.
Nostrum’s strategy on Corporate
Responsibility focuses around three
key areas – people, planet, and profit –
and includes the following initiatives:
• Nostrum has made it a priority to
communicate its approach to its
various stakeholders, emphasising
its stringent corporate governance
provisions and business ethics;
• Nostrum monitors and reports on
the wellbeing of its employees,
health and safety measures, working
environment specifics and overall
benefits. Nostrum also reports on its
direct involvement in the community
through programmes providing
social infrastructure, sponsoring
activities and charitable work; and
• Nostrum manages its environmental
footprint carefully and adheres fully
to relevant legislation. The Company
is also proactive in linking its
environmental objectives to the
highest possible standards and
ensuring stringent compliance and
progress monitoring.
In 2015, we believe Nostrum’s actions
have had a positive impact on its wide
range of stakeholders, including
investors, business partners,
regulators, employees, customers,
local communities, the environment
and society more generally.
Our people
Nostrum’s growth and success revolves
around the quality and commitment
of our people and we believe we have
an excellent team that can deliver our
strategy notwithstanding a lower oil
price. Our global workforce now totals
more than 1,000 people. We remain
committed to developing local content
and 98% of the people employed in
our activities in Kazakhstan are Kazakh
nationals as at the end of 2015. We will
continue to develop our employment
practices and policies to ensure we
can attract and retain the best talent.
At the same time we are implementing
a cost reduction programme to adapt
to the new low oil price environment
which will ensure we do not carry
unnecessary excess costs into 2016.
The future
2015 was a challenging year for
Nostrum as we adapted to the falling
oil price. We reacted quickly in cutting
costs and took steps to protect the
financial stability of the Company
whilst not deviating from our strategy
to double our processing capacity
and reach a production level in excess
of 100,000 boepd in the near future.
In 2016 we need to remain vigilant
on cost cutting and ensure that each
dollar we invest will deliver future
returns for shareholders in the new oil
price environment. Whilst the industry
is still adapting to the low oil prices
I believe at Nostrum we have made
quick decisive decisions that will
protect our stakeholders under all
possible oil price scenarios. With these
solid foundations I look forward to
completing our near-term initiatives
and seeing Nostrum prosper under
any recovery in the oil price in
the future.
Frank Monstrey
Chairman
13
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Chief Executive’s review
Maintaining financial stability to
secure future production growth
How we performed in 2015
2015 was a stable year from an
operational perspective. It saw the gas
treatment facility continue to operate
at full capacity with a complete range
of hydrocarbon products being
delivered to a range of customers
and destinations outside Kazakhstan.
We suffered an unexpected downtime
in October due to unforeseen repair
work made to the pipeline through
which we export our gas. Outside of
this downtime production was stable.
Nostrum is now deep into its second
development phase, which will entail
the construction and commissioning
of the new gas plant in combination
with a scalable drilling programme in
order to ramp up the plant as quickly
as possible.
Our performance against the three
key objectives for the Company in
2015 was as follows:
1. Ensure that the financial position
of the Company remains stable:
The financial position of the Company
remained stable despite the
challenging oil price environment
and we have ended the year with
over US$160m of cash on our balance
sheet. Given the severity of the oil
price fall we have ensured that
Nostrum has the financial security to
survive any fall in the oil price during
the next 24 months and still complete
all its committed capex without the
need for additional funding.
2. Ensure construction of the new
gas plant remains on track for 2016:
Significant steps have been made
in the construction of our next GTU,
which will allow us to double our
production capacity during 2017. We
have spent over US$250m and expect
the total cost to be below US$500m.
Due to the falling oil price environment
we decided in 2015 to phase the
remaining payments on GTU3 across
2016 and 2017. This means the
scheduled completion date has been
pushed back into 2017 as it allows us
to preserve the liquidity position of the
Company and match the hedging
payment profile we have put in place.
14
The phasing of payments on GTU3 in
this way allows the Company to remain
fully financed for the next 24 months
whilst it completes the gas plant.
3. Optimise the drilling programme
to ensure that we can fill the GTU3
as quickly as possible whilst not
jeopardising the Company’s financial
position:
We have closely monitored the drilling
schedule during 2015 to ensure it is
kept in balance with the falling oil
price and corresponding reduction in
operating cash flow. We reduced the
number of rigs on the Chinarevskoye
field in the second half of 2015 to one
rig before increasing this to start 2016
with three rigs. We are continually
analysing and adjusting the drilling
programme to optimise the current
drilling capex as well as to maximise
the speed of the ramp up once
GTU3 is complete. The main driver for
the speed of ramp up is the oil price
during 2017. The oil price will dictate
how many additional wells we can
drill over our base case of simply
maintaining production during 2017.
Steady production levels
The Chinarevskoye field is now in
stable production with all facilities
running smoothly. Nostrum expects
a daily total production average of
at least 40,000 boepd for 2016 and
2017. All products – crude oil, stabilised
condensate, LPG and dry gas – are
sold at the best possible prices on the
world markets, and our operations
are running at stable levels. We are
targeting the doubling of production
capacity during 2017.
Future drilling programme at
Chinarevskoye
In 2015, we completed eight wells,
in line with the number we set out to
complete at the start of the year. Our
drilling programme has always been
designed to be scalable and the falling
oil prices have resulted in us scaling
down the proposed drilling schedule
for 2016 as we will only drill three
production wells and one appraisal
well at Chinarevskoye in addition to
Nostrum Oil & Gas PLC Annual Report 2015 “ During 2015 we have ensured that Nostrum has the
financial security to survive any fall in the oil price during
the next 24 months and still complete all its committed
capex without the need for additional funding.”
completing the appraisal well at
Rostoshinskoye. Our current drilling
programme allows us to maintain
production above 40,000 boepd
without jeopardising our liquidity
position. We plan to increase drilling
as we get closer to GTU3 completion
in 2017 so that we can start to ramp
up production as we increase our
production capacity. The speed of
the ramp up will be contingent on oil
prices – the higher the oil price the
quicker the ramp up.
Construction of second Gas Plant
During 2015 we have made significant
steps towards the construction of our
new gas plant. The rationale behind
the plant is that it will allow faster
monetisation of reserves, by increasing
treatment capacity by an additional
2.5 bcm of raw gas per year, bringing
total capacity to 4.2 bcm of raw gas
per annum. Over US$250m has already
been invested in the plant. We have
revised the targeted completion
date to 2017 as we have decided to
phase construction payments to match
the proceeds of our hedge position,
which protects us against the current
low oil prices. We are now on track
to deliver the plant on time and on
budget, below US$500m, during 2017.
Building up further reserves
As a result of the falling oil price we
have seen a reduction in the amount
of proved and probable reserves over
and above the amount produced
during the year 2015. I am confident
that we will recover these reserves
under a higher oil price environment
as the field remains in good condition
and hydrocarbons in place remain
broadly unchanged. I am therefore
optimistic that any recovery in oil price
can drive an increase in 2P reserves
without having to undertake any
additional exploration work on
Chinarevskoye.
By virtue of its size, development stage
and production track record, Nostrum
has acquired high visibility both
locally and internationally. As a result
it regularly monitors further M&A
opportunities. Its approach is to
remain both pragmatic and prudent
as it considers these options.
Nostrum’s core focus remains on
north-west Kazakhstan, where it knows
the landscape and is already operating
successfully.
Key priority tasks for 2016
Our four key objectives for the
Company in order to continue to
deliver on our strategy are as follows:
1. Ensure that the financial position
of the Company remains stable
2. Ensure construction of the next
gas plant remains on track for 2017
3. Optimise the drilling programme
to ensure that we can fill the GTU3
as quickly as possible whilst not
jeopardising the Company’s
financial position
4. Implement the cost reduction
programme
I believe that these objectives, if
successfully achieved, will provide the
platform to enhance shareholder value
in the future. We have demonstrated in
the past that we can deliver on all
these objectives and I am therefore
confident as we enter 2016 that we
are well placed to achieve our goals.
I believe that we are well positioned
to successfully execute the next phase
of infrastructure, whilst also ensuring
that we can maximise the value of our
processing facilities by adding reserves
over the coming years.
Kai-Uwe Kessel
Chief Executive Officer
15
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Market overview
The oil and gas market in Kazakhstan1
Kazakhstan is a vast country, the size of
western Europe. Its substantial reserves
of natural resources ensure its enormous
economic potential.
Kazakhstan’s oil reserves
3.9 billion MT
Kazakhstan’s gas reserves
1.5 trillion m3
1616 Nostrum Oil & Gas PLC
Annual Report 2015
UnitedKingdomIrelandFranceSpainItalySwedenNorwayFinlandEstoniaLatviaPolandSlovakiaHungaryBelarusUkraineCzechRepublicRomaniaBulgariaAustriaSerbiaBosniaTurkeyGreeceMacedoniaAlbaniaGeorgiaAzerbaijanArmeniaCroatiaSloveniaNetherlandsBelgiumDenmarkUzbekistanKyrgyzstanTajikistanPortugalLithuaniaGermanySwitzerlandRussiaKazakhstanTurkmenistanMoldova Economic growth and
investment in Kazakhstan’s
oil and gas Industry
Since 2000, Kazakhstan has experienced
significant economic growth mainly
through economic reform and foreign
investment. Exports of crude oil
have grown significantly and, due to
Kazakhstan being landlocked, most
of the oil from Kazakhstan is currently
delivered to international markets
using pipelines, which run through
Russia, to shipping points on the
Black Sea.
International investment into the
Kazakh oil and gas sector has largely
taken the form of joint ventures,
including cooperation with the
state-owned oil and gas company
NC KazMunayGas JSC (“NC KMG”),
as well as production sharing
agreements and direct grants of
exploration/production rights to
subsoil users. Major projects in
Kazakhstan include the Tengiz,
Karachaganak and Kashagan fields.
Oil supply and demand
Oil price outlook
According to BP’s Statistical Review of
World Energy 2015, as at 31 December
2014 Kazakhstan ranked twelfth in the
world by oil reserves and twentieth in
the world by gas reserves. Kazakhstan
is the second largest oil producer
(after Russia) among the former
Soviet Republics and has the Caspian
region’s largest recoverable oil
reserves. Kazakhstan’s proved oil
and gas reserves were 3.9 billion
tonnes and 1.5 trillion cubic metres
respectively, as at 31 December 2014.
The Kazakh government has stated
that it expects oil and gas production
in 2016 to amount to 77 million tons,
followed by an increase in oil output
to 92 million tons in 2020. Most of this
growth is expected to come from the
Tengiz, Karachaganak and Kashagan
fields.
There are three major refineries in
Kazakhstan supplying the northern
region (at Pavlodar), the western
region (at Atyrau) and the southern
region (at Shymkent). All three major
refineries are either under the control
or joint control of NC KMG.
The continued volatility and decline
in oil prices throughout 2015 has led
to the Group taking a number of
strategic decisions to mitigate the
impact of continued volatility and
depressed prices. As such, Nostrum
is well positioned to withstand
continued low oil prices over the short
to medium term and to deliver growth
at a US$50.0/bbl long-term oil price.
Overview – The larger
Caspian Region
To date, Kazakhstan and Azerbaijan are
the two significant crude oil producing
countries in the Caspian region. It is
expected that these countries will
continue to lead the region in crude
oil production in the near future, driven
by production growth from existing
fields and the development of recently
discovered fields. Turkmenistan and
Uzbekistan are the predominant gas
producers in the region. Russia plays
an important role in the region by
providing a transportation corridor
between the Caspian Sea and the
Black Sea, however this part of Russia
is not a source of substantial crude.
1
This information has, unless otherwise stated, been extracted from documents, websites and other publications released by the President of Kazakhstan, the Statistics Agency
of Kazakhstan, the Ministry of Finance of Kazakhstan, the Competent Authority and other public sources.
Some of the market and competitive position data has been obtained from US government publications and other third-party sources, including publicly available data from
the World Bank, the Economist Intelligence Unit, the annual BP Statistical Review of World Energy for 2015, as well as from Kazakh press reports and publications, and edicts and
resolutions of the Kazakh government. In the case of statistical information, similar statistics may be obtainable from other sources, although the underlying assumptions and
methodology, and consequently the resulting data, may vary from source to source.
Certain sources are only updated periodically. This means that certain data for current periods cannot be obtained and we cannot assure you that such data has not been revised
or will not be subsequently amended.
17
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015UnitedKingdomIrelandFranceSpainItalySwedenNorwayFinlandEstoniaLatviaPolandSlovakiaHungaryBelarusUkraineCzechRepublicRomaniaBulgariaAustriaSerbiaBosniaTurkeyGreeceMacedoniaAlbaniaGeorgiaAzerbaijanArmeniaCroatiaSloveniaNetherlandsBelgiumDenmarkUzbekistanKyrgyzstanTajikistanPortugalLithuaniaGermanySwitzerlandRussiaKazakhstanTurkmenistanMoldova
Market overview continued
The oil and gas market in Kazakhstan
Gas supply and demand
Transportation
Crude oil
Increases in Kazakhstan’s gas
production are expected to come
primarily from associated gas at the
Tengiz, Karachaganak and Kashagan
fields. Most of Kazakhstan’s gas
reserves are located in the west of
the country and over half are located
in the Karachaganak field.
Gas production has increased
significantly since 2004 when the
Parliament passed a law prohibiting
the industrial production of oil and
gas deposits without the utilization
of natural and associated gas.
An important aspect of increasing
hydrocarbon production in Kazakhstan
has been the development of
transportation infrastructure, as this
in turn has raised Kazakhstan’s export
capacity.
Currently over 7,920km of Kazakhstan’s
20,238km of pipeline are used in
oil transportation. The three main
pipelines are the Uzen-Atyrau-Samara
(“UAS”) pipeline, the CPC pipeline,
and the Kazakhstan-China pipeline.
Other pipeline routes from Kazakhstan
are being considered, such as routes
through the Caucasus region to
Turkey and routes through Iran and
Afghanistan.
Natural gas
Macro economic and micro economic changes
Most of the gas pipelines in western
Kazakhstan, with the exception of
Makat-Atyrau-Astrakhan, are designed
to provide gas to CAC. The pipeline
has two branches that meet in the
south-western Kazakh city of Beyneu
before crossing into Russia and
connecting with the Russian pipeline
system.
The construction of the Beineu-
Bozoi-Shymkent gas pipeline designed
to transport gas from west Kazakhstan
for use in the southern regions of
Kazakhstan and export to China,
started in 2010.
The Bukhara Urals gas pipeline
was initially built to supply gas from
Uzbekistan to north-east Kazakhstan
and Russia’s southeast Urals region.
Bukhara-Tashkent-Bishkek-Almaty
is a transit pipeline that provides gas
from Uzbekistan to Kazakhstan’s main
southern population centre.
Macro economic and micro economic
changes that occurred in the reporting
period and their impact on results:
• With effect from 1 January 2016,
Kazakhstan reduced export duties
for crude oil from US$60 to US$40
per tonne
• With effect from 1 February 2016,
Kazakhstan introduced floating rates
of export duties for crude oil based
on average market prices
• The average price of Brent crude oil
for the year ended 31 December
2015 fell to US$53.6 per barrel, 46%
lower than the average price the
previous year
• In August 2015 the Kazakh Tenge
abandoned its peg against the US
Dollar allowing the market to set the
price. In initial response to the
change in policy the Tenge devalued
by c.25%. Throughout the remainder
of 2015 the currency continued to
devalue with the exchange rate at
year end being 345.0 per US Dollar
(a devaluation since the de-pegging
of c.45%)
• The major part of the Group’s tax
bases of non-monetary assets and
liabilities is determined in Kazakh
Tenge. Therefore, any change in the
US Dollar/Tenge exchange rate
results in a change in the temporary
difference between the tax bases of
non-current assets and their carrying
amounts in the financial statements.
During the twelve months to
31 December 2015, the devaluation
of the Tenge resulted in an increase
of the temporary differences on
non-current assets which was
recognised as a deferred tax
expense for the period
• A large proportion of the Company’s
operating expenses in Kazakhstan
are denominated in Tenge, whereas
only a small proportion of the
Company’s revenues are received
in Tenge. As such, the Tenge
devaluation has brought about
some cost savings in US Dollar terms
• Overall, the net cash impact of
the Tenge devaluation was broadly
neutral
18
Nostrum Oil & Gas PLC Annual Report 2015 Major oil and gas projects in Kazakhstan
TCO
The TCO joint venture was created in
1993 with the aim of developing the
Tengiz and Korolev fields that have
estimated recoverable reserves
of between 5.5 billion barrels and
8.1 billion barrels of oil. The
participants in the joint venture
are Chevron Overseas Company,
ExxonMobil, NC KMG and LukArco.
Karachaganak project
The Karachaganak field is a 280 square
kilometre gas condensate field located
in north-west Kazakhstan which
was discovered in 1979. BG Group and
ENI are joint operators and each hold
a 29.25% interest in the venture.
The Karachagank field is Kazakhstan’s
main gas field, holding an estimated
9 billion barrels of gas condensate
and 48 trillion cubic feet of gas.
Proven reserves
(billion barrels)
• Venezuela 297.6
• Saudi Arabia 267.9
• Canada
173.1
• Iran
154.6
• Iraq
141.4
• Kuwait
104.0
• UAE
97.8
• Russia
80.0
• Libya
48.0
• Nigeria
37.2
• USA
33.4
• Kazakhstan 30.0
• Qatar
25.4
• China
23.7
• Brazil
13.2
• Algeria
12.2
• Angola
10.5
• Mexico
10.3
Source: EIA May 2015
North Caspian project
The Kashagan field is located off the
northern shore of the Caspian Sea,
near the city of Atyrau. In 1997,
a consortium of companies signed
a 40-year production sharing
agreement covering five structures.
The structures consist of 11 offshore
blocks over an area of 5,600 square
kilometres. The North Caspian
Operating Company (NCOC), a
consortium that includes ENI S.p.A.,
ExxonMobil, Shell, Total S.A., INPEX
Corporation and NC KMG owns
the project.
Benchmarking of our business
against peers
Strengths
• Advantageous location gives
access to multiple transportation
routes
• Investment in infrastructure gives
the Company complete control of
its liquids transportation
• Investment in gas plant allows
Nostrum to produce raw gas in
north-west Kazakhstan where
there is a shortage of processing
capacity
• High-quality light sweet crude
and condensate
Weaknesses
• Nostrum is subject to fluctuations
in the market prices for its
products, however we do have
hedges in place
• Geological risks are unavoidable
in the oil and gas business
• The harsh operating environment
means temperatures fluctuate
significantly between summer
and winter
• Lack of significant population
reduces size of skilled workforce
19
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Our business model
A simple, sustainable and successful business model
Our track record of successfully building
and financing large infrastructure while
developing reserves into commercial
production puts us in a unique position.
With our management team’s
outstanding technical and regional
expertise in both oil and gas we can
use this platform to deliver future growth
to our shareholders.
World-class assets
High standards
of corporate
governance
Over 450 mboe 2P reserves
Experienced team
A strong and growing
reserve base in north-west
Kazakhstan
State-of-the-art
infrastructure
Outstanding technical
and regional expertise
Social and economic
development
Continued financial
stability of the Company
Production,
development &
exploration
Expand processing
capacity
Continue to grow the
proven reserve base
through the appraisal of
Chinarevskoye and the three
new fields
Analysis of new 3-D seismic
data for the three additional
licences
Russia
Chinarevskoye
field
Yuzhno-Gremyachenskoye
field
Darjinskoye
field
North-west Kazakhstan
Rostoshinskoye
field
Uralsk
20 Nostrum Oil & Gas PLC
20
Annual Report 2015
How we run our business is equally
important in enabling us to successfully
deliver our business plan and map our
growth strategy. Protecting our business,
sustaining our good reputation,
maintaining our entrepreneurial culture
and contributing to social and economic
development are the cornerstones on
which we continue to build the Company.
Fully funded
M&A
$
Access to capital markets
US$1.2 billion investment
programme in place
Resilient financial
performance
Creating economies of
scale through the value
chain
Investing in strategic
acquisitions
Established business
development team
in the region
Shareholder
returns
Nostrum Oil & Gas PLC
Annual Report 2015
21
21
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosures Our business strategy
A sustainable strategy for growth
Strategic priorities
Our progress in 2015
KPIs aligned to our
strategic objectives
Risks associated with
our strategy
Forecasts, objectives and
prospects for 2016-2018
Delivering near-term
production growth
• GTU3 construction has continued on budget.
Production (boepd)
Payments have been phased into 2017 in
order to preserve liquidity in the current oil
price environment
• Production for the full year was 40,391 boepd,
down on 2014 as a result of unforeseen repair
work carried out in Q4 on third party pipelines
used to transport Nostrum’s dry gas.
Production in the first three quarters of the
year was steady, at around 44,000 boepd
46,178
44,400
40,391
36,940
13,158
2011
2012
2013
2014
2015
• GTU3 development project is subject
• GTU3 scheduled for completion
to risks related to delay, non-completion
in 2017
and cost overruns
• Production target of 40,000 boepd
in 2016, 40,000-60,000 boepd in 2017
and 60,000-90,000 boepd in 2018
Appraising
and developing
near-term projects
• Continued to target growth of proven reserve
base through appraisal of Chinarevskoye and
three new fields
Proven reserves (m boe)
194.80
199.00
192.20
169.10
• Eight wells drilled during 2015, comprising
six production wells and two appraisal wells
146.95
• Inaccurate assessments or
unsuccessful exploration of the new
fields could result in the overstatement
of the Group’s oil and gas reserves
• Completion of Rostoshinskoye
appraisal well expected during 2016
• Dynamic drilling programme in order
to maintain production and ramp-up
in line with oil price movements
2011
2012
2013
2014
2015
Exploration upside
through M&A
• Continuously monitored M&A opportunities
in and around the Chinarevskoye field, as well
as in other strategic areas of Kazakhstan
2P reserves (mboe)
522
506
582
571
470
• Our strong cash flow, in combination with the
challenges posed to the sector by the volatile
oil price environment, allows the Group to look
for compelling acquisitions
2011
2012
2013
2014
2015
• Future earnings may be adversely
impacted by changes in the market
• Opportunities for acquisitive growth
will be evaluated on an ongoing and
opportunistic basis
• Increased presence in local communities,
and reported on well-being of employees and
working environment
• Benefits to all stakeholders through creation
of economic growth
Number of man-hours without loss
of working hours (in millions)
1.47
1.66
1.83
1.89
1.91
• Legal framework for environmental
• Focus on expanding QHSE policy
protection and operational safety still
to include initiatives that go beyond
being developed in Kazakhstan
day-to-day activities, such as
contractor HSE management and
environmental reporting
2011
2012
2013
2014
2015
• Paid dividend of US$0.27 per ordinary share
in 2015, recognising the business’s growth
and cash generation
Dividend per share (US$)
0.32
0.34
0.35
0.27
• The Group’s activities in the
Chinarevskoye field are currently the
Group’s sole source of revenue
• The Group aims to strike a balance
between reinvesting in future growth
and returning cash to our shareholders
2011
2012
2013
2014
2015
• The dividend policy will be progressively
reviewed by the Board of directors
in line with the achievement of the
Group’s strategic milestones
Linking corporate
responsibility
to the growth
of the Company
Focusing
on delivering
shareholder value
22
Nostrum Oil & Gas PLC Annual Report 2015 Strategic priorities
Our progress in 2015
KPIs aligned to our
strategic objectives
Risks associated with
our strategy
Forecasts, objectives and
prospects for 2016-2018
Delivering near-term
production growth
• GTU3 construction has continued on budget.
Payments have been phased into 2017 in
order to preserve liquidity in the current oil
price environment
• Production for the full year was 40,391 boepd,
down on 2014 as a result of unforeseen repair
work carried out in Q4 on third party pipelines
used to transport Nostrum’s dry gas.
Production in the first three quarters of the
year was steady, at around 44,000 boepd
Appraising
and developing
near-term projects
• Continued to target growth of proven reserve
base through appraisal of Chinarevskoye and
three new fields
• Eight wells drilled during 2015, comprising
six production wells and two appraisal wells
Exploration upside
through M&A
• Continuously monitored M&A opportunities
in and around the Chinarevskoye field, as well
as in other strategic areas of Kazakhstan
• Our strong cash flow, in combination with the
challenges posed to the sector by the volatile
oil price environment, allows the Group to look
for compelling acquisitions
Linking corporate
responsibility
to the growth
of the Company
• Increased presence in local communities,
and reported on well-being of employees and
working environment
• Benefits to all stakeholders through creation
of economic growth
Focusing
on delivering
shareholder value
• Paid dividend of US$0.27 per ordinary share
in 2015, recognising the business’s growth
and cash generation
• GTU3 development project is subject
to risks related to delay, non-completion
and cost overruns
• GTU3 scheduled for completion
in 2017
• Production target of 40,000 boepd
in 2016, 40,000-60,000 boepd in 2017
and 60,000-90,000 boepd in 2018
• Inaccurate assessments or
unsuccessful exploration of the new
fields could result in the overstatement
of the Group’s oil and gas reserves
• Completion of Rostoshinskoye
appraisal well expected during 2016
• Dynamic drilling programme in order
to maintain production and ramp-up
in line with oil price movements
• Future earnings may be adversely
impacted by changes in the market
• Opportunities for acquisitive growth
will be evaluated on an ongoing and
opportunistic basis
• Legal framework for environmental
• Focus on expanding QHSE policy
protection and operational safety still
being developed in Kazakhstan
to include initiatives that go beyond
day-to-day activities, such as
contractor HSE management and
environmental reporting
• The Group’s activities in the
Chinarevskoye field are currently the
Group’s sole source of revenue
• The Group aims to strike a balance
between reinvesting in future growth
and returning cash to our shareholders
• The dividend policy will be progressively
reviewed by the Board of directors
in line with the achievement of the
Group’s strategic milestones
Strategic
objective
To become one
of the leading
independent
oil and gas
companies
in the FSU
23
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Performance review
Building a world-class portfolio of assets
Chinarevskoye field
The 274 square kilometre Chinarevskoye
licence is located in the Batys province of
northwestern Kazakhstan, approximately
100 kilometres north-east of Uralsk and
near to the Russian border.
2P reserves breakdown
for Chinarevskoye field %
Annual boe production – 2015
14,742,614 boe
,
7
2
0
5
5
8
6
1
,
,
1
4
6
5
0
2
,
6
1
,
4
1
6
2
4
7
4
1
,
,
6
0
0
3
8
4
3
1
,
,
3
5
5
2
0
8
4
,
2011
2012
2013
2014
2015
48
39
13
Crude oil and condensate
LPG
Dry gas
2424 Nostrum Oil & Gas PLC
Annual Report 2015
Strategic report
Corporate governance
Financial report
Regulatory information
Additional disclosures
Nostrum Oil & Gas PLC
Annual Report 2015
25
25
Performance review continued
Building a world-class portfolio of assets
Chinarevskoye field
Geology
Multi-layered
structure
Stable business environment
Exploration and production licence
We were granted an exploration
and production licence for the
Chinarevskoye field in May 1997,
which was extended in 2008, to 2033
for all oil and gas bearing reservoirs
and horizons covering 185 square
kilometres of the licence area. The
licence for the north-eastern
Tournaisian reservoir is valid until 2031.
Production Sharing Agreement
(PSA)
Nostrum operates under a grandfathered
PSA with the Government of
Kazakhstan, which sets the parameters
for the exploration and development
of the Chinarevskoye field, and the
respective royalties, profit share and
tax liabilities payable to the
government.
Outlook
The licence and the PSA are currently
valid until 2031 (with respect to the
north-eastern Tournaisan reservoir)
and 2033 (for the rest of the
Chinarevskoye field), and we must
comply with the terms of the
exploration permit, the production
permit and the development plans
during this period. To date, Nostrum
has met all of its capital investment
obligations under the PSA.
Geology, reserves and drilling
Drilling
Hydrocarbons were first discovered
in the Chinarevskoye reservoirs during
the drilling of nine wells in the Soviet
era. Between 2004-2015, 72 wells and
side-tracks have been drilled under
the PSA.
We completed our drilling 2015
programme, successfully completing
six production wells and two appraisal
wells.
Our 2016 drilling programme will
initially be set targeting the addition
of three new production wells and
the completion of an appraisal well
on the Rostoshinskoye field. This will
allow production to be maintained at
approximately 40,000 boepd during
2016. The drilling programme is
reviewed on a quarterly basis and
can be scaled up at short notice.
Geology
The Chinarevskoye field is a multi-layer
structure with ten reservoirs and
44 compartments spread over three
areas: the western area contains
16 compartments; the northern
area has 24 compartments and the
southern area has four compartments.
Commercial hydrocarbons have
been found in the Lower Permian,
Bashkirian, Bobrikovski, Tournaisian,
Famennian, Mulinski, Ardatovski,
and Biski-Afoninski reservoirs.
Reserves
Based on the Ryder Scott report,
dated December 2015, the proved
and probable reserves for the
Chinarevskoye field amount to
383 mboe (2014: 473 mboe). Proven
reserves amount to 147 mboe
(2014: 192 mboe) and probable
reserves to 236 mboe (2014: 281 mboe).
Oil and condensate amount to
148 mbbl of proven and probable
reserves (2014: 198mbbl), LPG to
51 mbbl (2014: 68mbbl) and gas to
184 mboe (207 mboe). The decrease
in reserves from 2014 was primarily
a result of the fall in oil price, but was
also impacted by a number of other
factors, including production in 2015,
the deferral of development projects.
26
Nostrum Oil & Gas PLC Annual Report 2015 On-site facilities
Location
All our facilities are close to major
international railway lines, as well as
several major oil and gas pipelines.
This advantageous location provides
access to flexible transportation
links for the off-takers of our products.
Our on-site facilities have grown
substantially, with our second
US$1.2 billion capital investment
phase currently underway.
Crude oil infrastructure
Our oil infrastructure consists of an oil
treatment and gathering facility (OTF),
capable of processing 400,000 tonnes
of crude oil per year; a 120km
oil pipeline; oil gathering and
transportation lines; an oil-loading
facility at the rail terminal; oil storage
facilities for up to 30,000 cubic metres
of oil and railway cars for the
associated crude oil and stabilised
liquid condensate.
Oil and stabilised condensate
pipeline and railway loading
terminal
Our 120km oil pipeline and
railway-loading terminal, at Rostoshi
near Uralsk, were successfully
completed in 2008. Since 2009, our
crude oil has been transported via the
pipeline from the Chinarevskoye field
site to the railway-loading terminal
where it is stored and transported
by rail car to final off-takers.
Our stabilised liquid condensate is also
transported through the same pipeline
using a “PIG” system, which separates
the crude oil from the stabilised
condensate. This protects the
product’s quality from being reduced
as it would in a multi-purpose pipeline
and ensures the ability to command
higher export prices.
Our oil pipeline has a maximum
throughput of 3 million tonnes per
year. The rail-loading terminal, which
receives the crude oil and condensate,
has a capacity of 3-4 million tonnes
per year.
Our infrastructure also includes crude
oil storage tanks on site and at the rail
terminal; condensate tanks on site and
at the terminal and a loading facility
at the railway terminal. The loading
terminal allows for 32 railcars to be
loaded simultaneously. The facility is
also equipped with a vapour recovery
unit – the first in Kazakhstan’s history.
All of our infrastructure has the
capacity to accommodate the planned
increase in throughput, in line with
our strategy to double production.
27
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Performance review continued
Assessing the potential of our adjacent fields
Rostoshinskoye,
Darjinskoye & Yuzhno-
Gremyachenskoye
fields
Value accretive acquisitions form part of
our strategy to grow. In 2013, we acquired
three additional fields within 120km of
Chinarevskoye, to add additional reserves
to our portfolio.
2828 Nostrum Oil & Gas PLC
Annual Report 2015
Strategic report
Corporate governance
Financial report
Regulatory information
Additional disclosures
60-120km
from Chinarevskoye
license area
US$10m
appraisal programme
planned for 2016
2P reserves of
87 mboe
Nostrum Oil & Gas PLC
Annual Report 2015
29
29
Performance review continued
Assessing the potential of our adjacent fields
Rostoshinskoye, Darjinskoye & Yuzhno-Gremyachenskoye fields
30
Nostrum Oil & Gas PLC Annual Report 2015 Rostoshinskoye, Darjinskoye & Yuzhno-Gremyachenskoye fields
Appraisal programme
The cost of the appraisal programme
for the next 2-3 years is expected
to be approximately US$85 million.
During 2014, we processed and
interpreted the 3-D seismic survey
of Rostoshinskoye, and completed
the re-processing and re-interpretation
of the Darjinskoye 3-D and
Yuzhno-Gremyachenskoye 3-D seismic
surveys. A new reserves report will be
prepared after drilling of new appraisal
wells. The results of the reserves report
will determine the development
programme as well as provide greater
detail on reservoir size and fluid
composition.
Total combined reserves
At Nostrum, we have an outstanding
track record of converting reserves.
An updated reserve report by
Ryder Scott, as at December 2015,
has shown 470 mboe of proved
and probable reserves for the
Chinarevskoye and adjacent fields.
In line with our strategy, we will
continue to look to increase our
reserve base and secure production
growth.
Subsoil rights acquisition
completed
In 2013, Nostrum signed an asset
purchase agreement to acquire
100% of the subsoil use rights
related to three oil and gas fields
in the pre-Caspian Basin to the
north-west of Uralsk. The signing
of the supplementary agreements
by the Ministry of Oil & Gas became
effective from 1 March 2013.
Geology
Exploration activities over the past
decades have successfully shown
that the three fields contain
hydrocarbons suitable for commercial
production in several reservoirs
of Permo-Carboniferous age.
More specifically, the bulk of the
hydrocarbons are located in the
Bashkirian stage of the Carboniferous.
Significant appraisal of the existing
accumulations and exploration of
deeper intervals is still required prior
to their development.
31
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Performance review continued
Products and processes
Oil
Crude oil wells
Oil treatment facility (OTF)
Exploration & production
Associated gas
Gas condensate wells
Gas treatment facility (GTF)
Power generation
Gas
32
Nostrum Oil & Gas PLC Annual Report 2015 Oil
Gas
Leveraging our competitive advantage
through our products and processes.
Railway terminal
Refineries
Crude oil
C5C25
NOG pipeline
(120km – with PIG-system)
Sea port
Final destination
Intergas Central Asia gas pipeline
Connection point
Stabilised
condensate
C5C10
G pip eline (17k m )
O
N
Dry gas
Liquid
petroleum
gas
(LPG)
Truck transport
Railway terminal
Final destination
33
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Performance review continued
Products and processes
Products
Quality
Sales
Pricing
Transportation
Crude oil
Stabilised
condensate
• Density –
0.815g/cm3
• 42-43 degrees API
• Average sulphur –
0.4%
• Superior in quality
to other primary
benchmark crude
oils produced in
Kazakhstan
• Density –
0.750-0.790g/cm3
• Average sulphur –
<0.2%
• 56 degrees API
LPG
• Field grade quality.
No olefins and low
sulphur content
• 85% exported in
accordance with
the PSA, 15% sold
domestically.
Destinations
include Neste’s
refinery in Finland
and SOCAR in
Azerbaijan
• 100% exported,
30,000 tonnes
per month are
sold to Trafigura.
Destinations
include the Russian
Black Sea port
of Taman
• 85%-100%
exported.
Destinations
include the Russian
Black Sea ports
Dry gas
• 75% exported
• Brent–based pricing
for exports
• Domestic sales at
50% discount
• Brent-based pricing
• International
Mediterranean LPG
price Sonatrach
for Black Sea
deliveries, or the
Brest quotation for
Eastern European
deliveries
• Export supply
agreement
negotiated
annually.
• Local supply
agreements
(negotiated
annually with
the off-takers
in a long-term
framework
agreement)
• Shipped through
our own 120km
pipeline from the
field site to our
own rail terminal
in Uralsk, from
where it is shipped
in railcars to
off-takers at various
destinations
• Shipped through
the same 120km
pipeline to the rail
terminal in Uralsk,
from where it is
shipped in railcars
to various
destinations
• Shipped in special
LPG trucks from
the field to the rail
terminal in Uralsk.
From here it is
shipped in railcars
to end consumers
and traders
• Shipped through
our own 17km
pipeline from
the field to the
connection point
with the Intergas
Central Asia gas
pipeline, from
where it is
distributed by
the off-taker
34
Nostrum Oil & Gas PLC Annual Report 2015 Market share, sales
and pricing policy
We closely monitor the production,
marketing and transportation of our
liquids as this makes up the largest
proportion of our revenues. We are
able to achieve a relatively high
netback for our export production due
to the transportation of our products
through our own infrastructure and
the resulting quality guarantees.
The commercial production of dry gas
adds significant benefits through the
easy off-take of dry gas volumes using
straightforward pipeline logistics, the
generation of our own power supply,
and the partially sponsored supply of
dry gas to neighbouring communities.
Marketing and sales
Our sales and marketing department
employs experienced traders. The
team is constantly working towards
negotiating new off-take contracts
and identifying efficient transportation
options for these new products.
Development of infrastructure
The gas treatment facility uses a gas
utilisation concept, and was designed
to treat raw gas from gas condensate
reservoirs (and the associated gas
coming from the OTF) into three
separate products – stabilised
condensate, LPG and dry gas. The GTF
associated infrastructure includes a
power generation station, an LPG
storage tank farm, an LPG loading
facility at the rail terminal, LPG railcars
and a 17km dry gas pipeline.
GTU1&2
This included the construction of
two gas treatment units, each with
the capacity to treat approximately
850 million cubic metres of raw gas.
The gas treatment facility is now
producing at capacity with an average
annual production of 40,391 boepd
for 2015.
GTU3
The third unit of the gas treatment
facility will add 2.5 billion cubic metres
of processing capacity, bringing the
total to 4.2 billion cubic metres and
consequently more than doubling
production capacity. GTU3 is due
to be completed in 2017.
Power generation plant
The gas-fired power generation plant
is linked to the gas treatment facility
with an output of 15 megawatts
and provides the field site with the
electricity it requires.
Gas pipeline
Nostrum has its own 17km gas pipeline
that was completed in 2011 and is
linked to the Orenburg-Novopskov
gas pipeline. The maximum annual
throughput of this pipeline is several
billion cubic metres.
Changes in production
Production %
Production boepd
Crude and condensate
Crude and condensate
2015
2014
2013
LPG
2015
2014
2013
Dry gas
2015
2014
2013
42
42
42
2015
2014
2013
LPG
11
2015
10
9
2014
2013
Dry gas
16,877
18,624
19,384
4,323
4,496
4,259
47
2015
19,191
48
2014
49
2013
21,280
22,535
35
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate social responsibility
A sustainable business
Our continuing development as a successful
and sustainable E&P company, in Kazakhstan,
has created economic growth and increased
our presence in both the local and regional
communities. Our approach to corporate social
responsibility (CSR) is based on our commitment
to make a positive impact on all our stakeholders
through our business activities.
We place public interest at the core of our
business decision-making process, and through
our operations, the Board and management
team have developed a thorough understanding
of and strong commitment to Kazakhstan.
The sustainability of our business is made possible
through the active management of our people,
programmes, and our specific focus on
environmental issues such as greenhouse gas
(GHG) emissions.
3636 Nostrum Oil & Gas PLC
Annual Report 2015
Increase in liquidation fund deposit
US$352,000
Total number of training days
12,891
Total workforce growth
6.3%
Nostrum Oil & Gas PLC
Annual Report 2015
3737
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosures Corporate social responsibility continued
Our people
A diverse management team
Nostrum has a dedicated management team with
specialised teams in strategic locations as well as
operational personnel in Kazakhstan.
The Nostrum and Zhaikmunai LLP management team
has 15 members and is composed as follows:
Age diversity %
13
7
20
30-39
40-49
50-59
60 or more
A large team of dedicated employees
One of our most significant contributions to Kazakhstan
is the wealth generated by hundreds of employees working
in our fields and in Uralsk. The number of employees at
our operations has more than doubled since 2005, making
us one of the largest employers in Batys province.
In addition to our assets and representative offices in
Kazakhstan, we have offices in Amsterdam, London,
St. Petersburg and Brussels.
Number of employees
Location
Chinarevskoye
Uralsk
Other
Total
2011
552
170
36
758
2012
631
207
46
884
2013
633
274
56
2015
2014
710
686
305
268
51
53
963 1,005 1,068
60
In 2015, the total workforce grew by 6.3%.
Nationality diversity %
Dutch
7%
British
7%
Belgian
20%
German
33%
Russian
7%
Kazakh
26%
Gender diversity %
7
Female
Male
< 30
30-39
40-49
50-59
≥ 60
Age diversity %
4
16
23
20
37
Gender diversity %
22
Female
Male
93
78
38
Nostrum Oil & Gas PLC Annual Report 2015 Salary package and growth rates
Nostrum offers competitive remuneration packages
to its employees and is in full compliance with all labour
regulations, guidelines and requirements.
Effective social guarantees
We offer effective social guarantees in the following areas:
• Social security
• Pension fund
• Medical assistance and care
• Insurance plans
Training
Under the terms of the PSA with the Government of
Kazakhstan, we are required to adhere to an accrual of
1% per annum of the field development cost relating
to the Chinarevskoye field. We also adhere to training
obligations under the Rostoshinskoye, Darjinskoye and
Yuzhno-Gremyachenskoye subsoil use contracts.
Total training cost in 2015:
US$1,584,369
Total number of training days in 2015:
12,891 days
Number of employees benefitting
from education and training
programmes in 2015:
920 employees
Case study 1:
Specialised training abroad
a. Brussels, Belgium
In 2015, ten employees were trained in the repair and
maintenance service of “Mycom” compressors and oil
pumps at the company’s plant in Brussels, Belgium.
Employees have mastered skills of disassembly, repair
and assembly of the turbine compressor class 3225S
and of the Mycom oil pump. Training was held under the
guidance of experienced instructors with real equipment
and professional tools.
b. Ufa State Oil Technical University, Russia
In October 2015, five employees were trained in device
diagnostics of PROBE-SCAN pipelines at the Ufa State Oil
Technical University, Russia. The training focused on the
examination of pipelines and advanced methods for
detecting unauthorised tie-in through contactless
magnethometric methods.
c. Dubai, United Arab Emirates
In October 2015, two employees received training in
project management in Dubai, United Arab Emirates.
The training focused on understanding the principles of
project management and improving the tendering process
in terms of contracts and supplies.
Case study 2:
Higher professional education
Twelve employees currently receive higher professional
education in universities in:
• Kazakhstan: five employees
• Russia: five employees
• Italy/USA: two workers are majoring in Petroleum
Engineering at the Turin Polytechnic University, Italy
and at Tulsa University, USA.
In addition, three heads of departments have begun a
Master’s in Business Administration (MBA) programme in:
• KNOW Almaty Management University, Almaty,
Kazakhstan: one employee
• Russian Academy of National Economy and Public
Administration, Moscow, Russia: two employees
39
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate social responsibility continued
Our people
The following local personnel training programme has
been achieved in 2015:
Categories and numbers of Nostrum
personnel trained
Operations (field workers)
Heads of departments
Engineers and technicans
4
1
95
Labour relations
We consider our relations with our employees to be strong,
and have not experienced any work stoppages, strikes
or similar actions to date. Relations with our employees
are a key priority for our business.
Human rights policy and diversity
The Group Code of Conduct sets out certain principles
that guide business conduct and provides a non-exhaustive
outline of what Nostrum considers permissible conduct by
its employees. These principles include provisions relating
to human rights and diversity in the workplace. Violations
of this Code of Conduct may result in disciplinary action,
including dismissal from employment, or criminal
prosecution.
40
Nostrum Oil & Gas PLC Annual Report 2015 Our community
Our community approach
Nostrum’s approach to community relations places great
emphasis on creating an integrated, caring and secure
community for its personnel and subcontractors.
Our social infrastructure
Under the terms of the PSA linked to the Chinarevskoye
field and the subsoil use contracts for the Rostoshinskoye,
Yuzhno-Gremyachenskoye and Darjinskoye fields, we
have continued to finance social infrastructure.
New offices in Uralsk, Kazakhstan
Following the completion of the construction of a new
six-storey building in 2015 in Uralsk, Kazakhstan, Zhaikmunai
LLP will move into its new offices in the course of 2016.
Located in the heart of Uralsk, the new offices will house
all main administrative and technical support services over
an area of some 4,900 square metres.
Liquidation fund
Under the terms of the PSA and the subsoil use agreements
for Rostoshinskoye, Yuzhno-Gremyachenskoye and
Darjinskoye, US$5,375,000 is held on restricted cash
accounts as liquidation fund deposit (2014: US$5,023,000),
an increase of US$352,000.
41
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate social responsibility continued
QHSE
Our QHSE approach and organisation
QHSE policy and priorities
QHSE at Nostrum focuses on
improving the management and
mitigation of risks relating to health,
safety and the environment, and
preventing any injury or ill health to
employees. This is achieved through
the provision of comprehensive rules
and guidelines based on a series of
well-defined strategic objectives.
Leadership &
Commitment
Management will provide
visible and active leadership
in developing and maintaining
an HSE culture
Organisation
The organisation and
responsibilities for the
management of HSE issues
are defined and documented
People, Competency
& Behaviour
All people will be selected,
trained and developed to
carry out their duties
competently and under
safe working conditions
Hazards & Effects
Hazards are identified, the risks
are assessed and appropriate
controls are implemented
Engineering
Facilities are being engineered
to meet codes of practice and
specifications, operational
requirements and statutory
regulations, safe practices and
environmental protection
Operations
All operations involving
exploration, development,
production and transportation
of hydrocarbons will have safe
systems of work defined
Contractor Management
A control system for suppliers
and contractors is developed
and implemented to ensure
their compliance with RoK legal
requirements and company
HSE standards
Planning & Performance
Monitoring
Objectives are planned in
accordance with the established
key performance indicators
to measure the implementation
of HSE activities
Emergency & Crisis Control
Four main priorities in emergency
management are: People,
Environment, Asset and Reputation.
Organisational arrangements,
facilities and training are being
provided to effectively respond
to an emergency or crisis
Stakeholder Dialogue
& Documentation
An active dialogue is established
with stakeholders and
communities to ensure
confidence in the integrity
of our activities
Audit & Review
An independent audit and
review system is implemented
to assess the effectiveness of
HSE management and to identify
areas for improvement
42
Nostrum Oil & Gas PLC Annual Report 2015
Number of man-hours without loss of working hours
(in millions)*
1.66
1.47
1.83
1.89
1.91
2011
2012
2013
2014
2015
* Total number of man-hours worked by the Company and contractors’ personnel
without any injuries resulting in a lost working day, while performing activities
on Company premises or non-Company premises subject to Company
management controls applied through contractual terms, if they are executed
on behalf of the Company.
Centralised function
Our QHSE strategy is demonstrable throughout our
organisation thanks to a centralised function with a flexible
organisational structure.
This organisational structure encompasses such activities
as health & safety (production facilities, drilling, camp
and roads), occupational health & hygiene (including
environmental and greenhouse gases monitoring), civil
defence and emergency response, as well as overarching
safety and engineering best practice implementation.
QHSE policy
Priorities for 2016
Building on the progress made in 2015, the focus for 2016
goes beyond our day-to-day activities. Specifically:
• HSE leadership and supervision;
• Contractor HSE management;
• Hazard awareness and risk control;
• Driving and transportation safety; and
• Environmental performance reporting.
Health and safety
A safe working environment
Health and safety at Kazakh oil and gas companies is
subject to state legislation and regulation. Our PSA and
other subsoil use contracts also require that our operations
meet applicable health and safety requirements.
HSE Code of Conduct
Nostrum’s QHSE Policy and associated Code of Conduct
stipulate that we must comply with all applicable laws and
regulations, as well as best practice with regard to health,
safety and environmental issues.
To ensure the well-being of employees the Company
frequently undertakes the following practices:
• Safety training;
• Implementing a proactive prevention culture; and
• Written plans and policies with regard to the mandatory
supply of personal protective equipment including
protective clothes, adapted footwear and special tools.
Standards reached
In 2015, standards have been established around indicators
such as lost time injuries and total recordable injuries as well
as established HSE milestones. Ongoing monitoring is done
against these standards and reported monthly.
43
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate social responsibility continued
Our environment
Managing our environmental footprint through
our Site Environmental Monitoring Programme
Our approach to environmental protection follows
a structured commitment to a series of yearly environmental
objectives. These key priorities are in line with strategic,
regulatory and communication imperatives and structured
in accordance with Kazakh regulations:
• Air pollution controls;
• Increasing compliance with environmental requirements;
• Increasing the efficiency of the QHSE management
system; and
• Taking account of environmental risks in investment and
finance decisions.
Programme methods and controls:
• Compulsory criteria to be followed in site monitoring;
• Water resources protection and rational use;
• Time, duration and frequency of site monitoring activities
• Land protection;
• Control and sustainable subsurface use;
• Flora and fauna protection;
• Radiological, biological and chemical safety;
• Ecological education and information; and
• Research and development, exploration development
and other works.
In 2015, specific monitoring activities were carried out in
these areas in order to establish benchmarks which are/will
be integrated into our environmental targets. These include
the monitoring of the atmosphere, surface water, soil and
the control of pollutant emissions sources and sewage
works.
Nostrum has developed a Site Monitoring Programme, to
monitor our environmental activities, identify any potential
operational environmental impact and enable us to take
prompt corrective measures in case of any incident.
Programme aims:
• Obtaining relevant information for environmental policy
decision-making, including environment quality target
values and information on regulatory instruments
applicable to environmental impact of production
processes;
and measurements;
• Detailed site monitoring methodologies;
• Sampling points and places of measurement;
• Methods and frequency of data accounting, analysis and
reporting;
• Schedule of internal checks and procedures for rectifying
violations of national environmental laws, including the
internal response to any violations;
• Monitoring quality assurance procedures;
• Emergency action plans;
• Organisational and functional structure of internal employee
responsibilities for carrying out site environmental
monitoring; and
• Other data on organising and carrying out site
environmental monitoring.
Compliance with legislation
The “Health, Safety and Environmental Compliance Audit
(2015)” submitted by AMEC, an independent auditor,
is a comprehensive document detailing the content,
methodology and results of the environmental efforts
at Nostrum. It shows that the environmental monitoring
programme activities were carried out according to the
established scope.
• Ensuring full compliance with the environmental
legislation of the Republic of Kazakhstan;
Based on the results of the audit the following main
conclusions were:
• Reducing the impact of production processes on the
environment;
• Increasing the efficiency of natural and energy resource
• Production activities of the Company generally comply
with high standards of environmental, industrial and
occupational safety;
use;
• Developing a pre-emptive operational emergency
response;
• Increasing environmental awareness and responsibility
among managers and employees;
• Reporting on environmental activities and community
health risks;
• During 2015 conversion to full self-sufficiency in electric
energy supply has been prepared, a gaslift system was
introduced, a unit for processing of drilling cuttings into
construction materials was installed and main camps were
relocated outside the sanitary protection zone of ChOGF.
All these greatly improve economic, environmental and
safety performance of the Company and accord with the
sustainability principles;
44
Nostrum Oil & Gas PLC Annual Report 2015 • At the audited facilities of the Company no serious
violations of the requirements of legal, regulatory acts
and international standards have been observed;
• Recommendations of the previous audit have been largely
fulfilled, including improvement of the environmental,
health and safety management system;
• At the same time a number of shortcomings have
been noted. Their correction will allow even greater
improvement of the Company’s achievements in this area.
Industrial waste management and contaminated
soil reclamation
Nostrum complies with all current Kazakh legislation with
regard to industrial waste management and contaminated
soil reclamation.
Our greenhouse gas (GHG) reporting
Nostrum has been monitoring and reporting its GHG
emissions since 2011 in accordance with Kazakh
regulatory requirements. Starting in 2013, the Company
has also developed its GHG reporting in line with the new
regulations amending company law requirements in the UK.
The data is reported from all emission sources, as required
under the Companies Act 2006 (Strategic Report and
Directors’ Report) – Regulations 2013. The period for which
the Company is reporting the information matches the
periods in respect of which the Directors’ Report is
prepared. No responsibility is taken for any emission
sources, which are not included in the consolidated financial
statements. The results of the GHG emissions inventory
are presented in the format recommended by the
GHG Protocol.
Direct GHG emissions (Scope 1)
The baseline in the GHG emissions allocation plan was
set as the mean value of the total emissions for the years
2011–2012 (in carbon dioxide emissions equivalent).
The quota allocated for 2015 is calculated based on
commitments to reduce carbon dioxide emissions by
1.5% from this baseline.
The following direct GHG emissions (Scope 1) sources have
been identified: flares, heaters, incinerators, boilers, gas
turbine plants, electric power stations, compressors and
fugitive emissions.
Historically, the major part of stationary combustion
emissions was attributed to flaring of associated gas at the
Oil Treatment Unit (OTU) and at the Gas Treatment Facility
(GTF). The situation has changed considerably since the
GTF was completed.
Total direct GHG emissions (Scope 1) subdivided by
gas types and by source types are summarised in
Tables 1 and 2.
2011
2013
2012
Table 1: Scope 1 GHG emissions subdivided by gas types
GHG emissions
(mtCO2e)
Carbon dioxide
(CO2)
Methane (CH4)
Nitrous oxide
(N2O)
Hydrofluoro-
carbons (HFCs)
Total
420,992.8 256,050.4 188,604.0 236,556.0
27,424.8
16.1
437,603.9 257,154.8 217,479.4 264,121.2
805.2 28,693.6
208,466.2
13,919.8
34.0
222,546.2
15,419.7
1,188.4
126.2
165.7
124.3
283.1
2015
2014
16.1
16.1
3.0
2011
Table 2: Scope 1 GHG emissions subdivided by source
types
GHG emissions
(mtCO2e)
Stationary
combustion
Mobile
combustion
Fugitive sources
Total
2,135.2
1,861.6
437,603.9 257,154.8 217,479.4 264,121.2
433,132.5 252,138.9 212,612.3 260,124.4
2,086.7
2,384.7
2,312.1
2,703.8
2,876.3
1,990.8
2014
2012
2013
205,701.9
1,498.2
15,346.1*
222,546.2
2015
*
The reported figure is the result of a new calculation methodology introduced in the
rules for reporting greenhouse gas inventories as per the Republic of Kazakhstan’s
Ministry of Energy Decree No. 502 28.07.2015, in line with “IPCC Guidelines for
National Greenhouse Gas Inventories, 2006”. Calculations of previous years were
based on the RoK methodology of standards for maximum permissible emissions.
The main driver in fugitive sources is associated gas (methane).
45
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate social responsibility continued
Our environment
Indirect GHG emissions (Scope 2)
Nostrum does not use purchased steam, heating or cooling.
The only purchased power related to indirect GHG
emissions is electrical power, which is supplied to
Nostrum facilities via the Zelenovskaya distribution
network (ZapKazREK JSC), through its subsidiary Batys
Energoresursy LLC. The regional emission factor
(0.27086 tCO2/MWh) was calculated using Methodological
Guidelines for the Calculation of GHG Emissions from
Electrical Power Stations and Boiler Houses (Astana, 2010)
and regional net thermal efficiency of Urals Natural Gas
Fired Power Plants (73.3%).
Total direct and indirect GHG emissions (Scope 1 and
Scope 2) and total GHG emissions are summarised in
Table 3.
Table 3: Scope 1, Scope 2, and total GHG
GHG emissions
(mtCO2e)
Direct (Scope 1)
Indirect Energy
(Scope 2)
Total emissions
(mtCO2e)
4,058.4
4,094.5
3,766.5
441,370.4 261,249.3 221,537.8 269,399.8
2011
2015
2013
437,603.9 257,154.8 217,479.4 264,121.2 222,546.2
2014
2012
Total GHG emissions (mtCO2e)
Emissions intensity ratio
Tonnes of CO2 per tonne of output is a recommended
intensity ratio for the oil and gas sector, as per Appendix F
of the Defra Environmental Reporting Guidelines (2013).
Taking into account the variety of products of Nostrum Oil
& Gas – crude oil, stabilised condensate, LPG and dry gas –
the chosen intensity ratio is expressed in metric tonnes of
CO2e (mtCO2e) per tonne of oil equivalent (mmboe).
Table 4 shows intensity ratios for total (Scope 1 and Scope 2)
emissions in the period 2011 to 2015.
Table 4: Emissions intensity ratios for total GHG emissions
(Scope 1 and Scope 2) in the period 2010-2015
Production –
intensity ratio
Production, toe
mtCO2/toe
Production, mmboe
mtCO2/mmboe
2015
2013
672,000 1,189,841 2,307,748 2,369,823 2,152,423
0.106
14.74
15,467.3
0.11
16.23
91,952.17 19,351.80 13,065.07 16,598.88
0.1
16.48
0.22
13.5
0.66
4.8
2014
2012
2011
5,278.6
5,482.3
Emission intensity ratios (mtCO2/toe)
228,028.5
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
500000
400000
300000
200000
100000
0
46
Nostrum Oil & Gas PLC Annual Report 2015 Developing a GHG reduction capacity
According to its GHG emissions reduction strategy,
Nostrum evaluates the potential for GHG emissions
reductions yearly to plan for the subsequent introduction
of energy and resource saving measures. To establish this
reduction potential we go through the following steps:
• Create a conceptual framework for our greenhouse gas
emissions enterprise management system (GHG EMS);
• Create a consistent information system for GHG emissions
monitoring;
• Perform an energy audit at the Company’s production
facilities;
• Develop an action plan to improve energy efficiency
at industrial sites;
• Develop the concept of transition to low-carbon
development;
• Consider the participation of the Company in carbon
finance activities; and
• Demonstrate the efficiency of the Company’s GHG
emissions reduction measures.
To meet these ambitious targets, Nostrum has developed
the commitment of its managers and contractors to provide
effective assistance in improving energy efficiency and
reducing GHG emissions.
47
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Financial review
Maintaining strong margins and building
financial flexibility in response to adverse
macroeconomic circumstances
Effect of realised loss on the structure of assets, capital, liquidity and liability
The loss realised is appropriated to equity. The loss does not impair the Group’s ability to finance its ongoing investment
in oil & gas assets. The Group at all times maintains an adequate level of liquidity and net debt is kept at defined levels.
As a result of the realized loss the Group will not pay a dividend in 2016. Reference is made to KPIs on page 8.
Results of operations for the years ended 31 December 2015 and 2014
The table below sets forth the line items of the Group’s interim condensed consolidated statement of comprehensive
income for the years ended 31 December 2015 and 2014 in US Dollars and as a percentage of revenue.
In thousands of US Dollars
Revenue
Cost of sales
Gross profit
General and administrative expenses
Selling and transportation expenses
Finance costs
Finance costs – reorganisation
Employee share option plan fair value adjustment
Foreign exchange loss, net
Gain on derivative financial instruments
Interest income
Other income
Other expenses
Profit before income tax
Income tax expense
(Loss)/profit for the year
Currency translation difference
Other comprehensive income
Total comprehensive (loss)/income for the year
2015 % of revenue
100.0%
41.6%
58.4%
11.0%
20.7%
10.2%
0.2%
0.5%
4.7%
8.3%
0.1%
2.5%
6.8%
16.1%
37.1%
21.0%
0.1%
0.1%
21.1%
448,902
(186,567)
262,335
(49,309)
(92,970)
(45,998)
(1,053)
2,165
(21,200)
37,055
515
11,296
(30,560)
72,276
(166,641)
(94,365)
(456)
(456)
(94,821)
2014
781,878
(221,921)
559,957
(54,878)
(122,254)
(61,939)
(29,572)
3,092
(4,235)
60,301
986
10,086
(49,844)
311,700
(165,275)
146,425
–
–
146,425
% of revenue
100.0%
28.4%
71.6%
7.0%
15.6%
7.9%
3.8%
0.4%
0.5%
7.7%
0.1%
1.3%
6.4%
39.9%
21.1%
18.7%
0%
0%
18.7%
48
Nostrum Oil & Gas PLC Annual Report 2015 General note
For the year ended 31 December 2015 (the ‘reporting period’) realised profit decreased by US$241.2 million to
US$94.8 million loss (FY 2014: US$146.4 million), which was mainly driven by decrease in the Group’s revenue.
Revenue
The Group’s revenue decreased by 42.6% to US$448.9 million for the reporting period (FY 2014: US$781.9 million). This
is mainly explained by the decrease in the average Brent crude oil price from 99.7 US$/bbl during 2014 to 53.6 US$/bbl
on average during the reporting period. The pricing for all of the Group’s crude oil, condensate and LPG is, directly
or indirectly, related to the price of Brent crude oil.
Revenues from sales to the Group’s largest three customers amounted to US$141.4 million, US$105.0 million and
US$86.0 million respectively (FY 2014: US$321.8 million, US$124.8 million and US$77.0 million).
The Group’s revenue breakdown by products and sales volumes for the reporting period and FY 2014 is presented below:
In thousands of US Dollars
Oil and gas condensate
Gas and LPG
Total revenue
Sales volumes (boe)
Average Brent crude oil price (US$/bbl)
2015
297,777
151,125
448,902
14,080,339
53.6
2014
620,164
161,714
781,878
16,205,641
99.7
Variance
(322,387)
(10,589)
(332,976)
(2,125,302)
Variance, %
(52.0)%
(6.5)%
(42.6)%
(13.1)%
The following table shows the Group’s revenue breakdown by export/domestic sales for the reporting period and FY 2014:
In thousands of US Dollars
Revenue from export sales
Revenue from domestic sales
Total
Cost of sales
In thousands of US Dollars
Depreciation, depletion and amortisation
Repair, maintenance and other services
Payroll and related taxes
Royalties
Materials and supplies
Well workover costs
Other transportation services
Government profit share
Environmental levies
Change in stock
Other
Total
2015
426,764
22,138
448,902
2015
107,678
26,557
18,682
14,364
7,838
5,182
3,049
1,880
1,391
(3,613)
3,559
186,567
2014
676,064
105,814
781,878
2014
110,460
35,818
21,560
24,330
10,929
6,296
2,929
4,594
1,098
376
3,531
221,921
Variance
(249,300)
(83,676)
(332,976)
Variance, %
(36.9)%
(79.1)%
(42.6)%
Variance
(2,782)
(9,261)
(2,878)
(9,966)
(3,091)
(1,114)
120
(2,714)
293
(3,989)
28
(35,354)
Variance, %
(2.5)%
(25.9)%
(13.3)%
(41.0)%
(28.3)%
(17.7)%
4.1%
(59.1)%
26.7%
(1,060.9)%
0.8%
(15.9)%
49
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Financial review continued
Cost of sales decreased by 15.9% to US$186.6 million for the reporting period (FY 2014: US$221.9 million). The decrease
is primarily explained by the change in royalties, repair, maintenance and other services and depreciation, depletion
and amortization, referred to below. On a boe basis, cost of sales decreased marginally by US$1.0 or 7.6% to US$12.7
for the reporting period (FY 2014: US$13.7) and cost of sales net of depreciation per boe decreased by US$1.5, or 22.2%,
to US$5.4 (FY 2014: US$6.9).
Depreciation, depletion and amortisation for the reporting period is in line with prior year. Depreciation is calculated with
units of production method. The fact that depreciation is lower in the reporting period when compared to FY 2014 is
a consequence of the ratio between the volume produced and the proven developed reserves decrease in the reporting
period when compared to prior year.
Repair, maintenance and other services decreased by 25.9% to US$26.6 million for the reporting period (FY 2014:
US$35.8 million). These expenses include maintenance expenses related to the gas treatment facility and other facilities
of the Group, engineering and geophysical study expenses. These costs fluctuate depending on the planned works on
certain objects.
Royalties, which are calculated on the basis of production and market prices for the different products, decreased by
41.0% to US$14.4 million for the reporting period (FY 2014: US$24.3 million). This decrease follows the decline of revenues
for sold products.
Materials and supplies expenses decreased by 28.3% to US$7.8 million for the reporting period (FY 2014: US$10.9 million).
This decrease resulted from less need for spare parts and other materials for repairs and maintenance of the facilities,
specifically for the gas treatment facility and wells.
Well workover costs decreased by 17.7% to US$5.2 million for the reporting period (FY 2014: US$6.3 million). The decrease
resulted from adjustments to the drilling and workover programme.
Costs for government profit share decreased by US$2.7 million to US$1.9 million for the reporting period (FY 2014:
US$4.6 million). This decrease follows the decline of revenues for sold products.
General and administrative expenses
In thousands of US Dollars
Payroll and related taxes
Professional services
Business travel
Training
Insurance fees
Depreciation and amortisation
Sponsorship
Lease payments
Communication
Materials and supplies
Bank charges
Other taxes
Social program
Management fees
Other
Total
2015
16,636
13,997
6,091
3,110
1,715
1,673
1,314
1,012
766
635
607
339
302
–
1,112
49,309
2014
15,668
19,776
4,786
2,535
1,768
1,409
1,826
895
1,195
626
813
1,006
300
605
1,670
54,878
Variance
968
(5,779)
1,305
575
(53)
264
(512)
117
(429)
9
(206)
(667)
2
(605)
(558)
(5,569)
Variance, %
6.2%
(29.2)%
27.3%
22.7%
(3.0)%
18.7%
(28.0)%
13.1%
(35.9)%
1.4%
(25.3)%
(66.3)%
0.7%
(100.0)%
(33.4)%
(10.1)%
General and administrative expenses decreased by 10.1% to US$49.3 million for the reporting period (FY 2014:
US$54.9 million). This was primarily due to decrease in professional services, in particular audit fees, legal services and
other consultancy fees, offset by an increase in payroll and related taxes driven partly by the agreement on 19 May 2014
to acquire Nostrum Services BVBA (formerly Prolag BVBA) and Nostrum Services Central Asia LLP (formerly Amersham
Oil LLP), which led to the elimination of intercompany management fees, decrease in consultancy fees and recognition
of those expenses as payroll and related taxes.
50
Nostrum Oil & Gas PLC Annual Report 2015 Selling and transportation expenses
In thousands of US Dollars
Transportation costs
Loading and storage costs
Payroll and related taxes
Management fees
Other
Total
2015
45,071
41,229
1,901
159
4,610
92,970
2014
54,878
56,351
2,211
183
8,631
122,254
Variance
(9,807)
(15,122)
(310)
(24)
(4,021)
(29,284)
Variance, %
(17.9)%
(26.8)%
(14.0)%
(13.1)%
(46.6)%
(24.0)%
Selling and transportation expenses decreased by 24.0% to US$93.0 million for the reporting period (FY 2014:
US$122.3 million) being combination of lower sales quantities of liquid products in the reporting period, lower rail tariffs
and rail tank car (RTC) leasing costs offset, however, by transportation costs incurred in relation to export gas sales in the
reporting period under new sales contract.
Finance costs
In thousands of US Dollars
Interest expense on borrowings
Unwinding of discount on amounts
due to Government of Kazakhstan
Unwinding of discount on abandonment
and site restoration provision
Total
2015
44,670
2014
60,825
Variance
(16,155)
Variance, %
(26.6)%
902
917
(15)
(1.6)%
426
45,998
197
61,939
229
(15,941)
116.2%
(25.7)%
Finance costs decreased by 25.7% to US$46.0 million for the reporting period (FY 2014: US$61.9 million). These costs
were higher in H1 2014 due primarily to the expenses relating to the early redemption of the Notes issued in 2010 and
the amortisation of the remainder of transaction cost, incurred for the issuance of these Notes.
Finance costs – reorganisation
The ‘finance costs – reorganisation’ are represented by the costs associated with the introduction of Nostrum Oil & Gas PLC
as the new holding company of the Group and respective reorganisation that took place in June 2014.
Other
Foreign exchange losses amounted to US$21.2 million for the reporting period (FY 2014: US$4.2 million). Higher losses
in 2015 are explained by the fact that on 20 August 2015 the Tenge was devalued against the US Dollar and other
major currencies due to decision of Kazakhstan to switch to free-float, triggering a 23% slide in the Tenge to a record
257,21 Tenge for 1 US Dollar. As per 31 December 2015 the exchange rate made up 340,6 Tenge for 1 US Dollar. Since
the Group had a net asset position of Tenge denominated accounts around this date, the devaluation of the Tenge resulted
in a significant foreign exchange loss recognised in the reporting period.
Gain on derivative financial instruments amounted to US$37.1 million for the reporting period. Movement in the fair value
of the derivative financial instruments is disclosed in the Note 29 of the Consolidated financial statements included in
this report.
Other expenses decreased marginally by 38.7% to US$30.6 million for the reporting period (FY 2014: US$49.8 million)
mainly due to lower export custom duties, compensation for social gas and expenses for accruals under subsoil use
agreement.
Income tax expense increased by 0.8% to US$166.6 million for the reporting period (FY 2014: US$165.3 million). The
decrease in income tax expense was primarily driven by lower taxable profit offset by additional deferred tax expenses
due to decrease of the tax base due to effect of exchange rates changes.
51
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Financial review continued
Results of operations for the years ended 31 December 2014 and 2013
The table below sets forth the line items of the Group’s consolidated statements of comprehensive income for the year
ended 2014 and 2013 in US Dollars and as a percentage of revenue.
In thousands of US Dollars
Revenue
Cost of sales
Gross profit
General and administrative expenses
Selling and transportation expenses
Finance costs
Finance costs – reorganisation
Employee share option plan fair value adjustment
Foreign exchange loss
Gain on derivative financial instruments
Interest income
Other expenses
Other income
Profit before income tax
Income tax expense
Profit for the year
2014 % of revenue
100.0
28.4
71.6
7.0
15.6
7.9
3.8
0.4
0.5
7.7
0.1
6.4
1.3
39.9
21.1
18.7
781,878
(221,921)
559,957
(54,878)
(122,254)
(61,939)
(29,572)
3,092
(4,235)
60,301
986
(49,844)
10,086
311,700
(165,275)
146,425
2013
895,014
(286,222)
608,792
(56,019)
(121,674)
(43,615)
–
(4,430)
(636)
–
764
(25,593)
4,426
362,015
(142,496)
219,519
% of revenue
100.0%
32.0%
68.0%
6.3%
13.6%
4.9%
0.0%
0.5%
0.1%
0.0%
0.1%
2.9%
0.5%
40.4%
15.9%
24.5%
For the year ended 31 December 2014 (the “reporting period”) realised profit of the Group decreased by US$73.1 million
to US$146.4 million (FY 2013: US$219.5 million). The decrease in realised profit is mainly driven by a decrease in the oil
prices during the second half year of 2014, resulting in a decrease in revenue combined with an increase in other operating
costs and income tax expenses, partially offset by a gain on derivative financial instruments.
Revenue
The Group’s revenue decreased by 12.6% to US$781.9 million for the reporting period (FY 2013: US$895.0 million). The
decrease in Group revenue was driven primarily by a significant decrease in the overall oil prices during the second half
of 2014.
The Group’s revenue breakdown by products, sales volumes and the commodity price of Brent crude oil for the years
ended 31 December 2014 and 2013 is presented below.
In thousands of US Dollars
Oil and gas condensate
%Gas and LPG
Total revenue
Sales volumes (boe)
Average Brent crude oil price on which
Nostrum Oil & Gas based its sales (US$/bbl)
2014
620,164
161,714
781,878
16,205,641
2013
709,107
185,907
895,014
16,854,970
Variance
(88,943)
(24,193)
(113,136)
(649,329)
Variance, %
(12.5)%
(13.0)%
(12.6)%
(3.9)%
99.6
108.4
52
Nostrum Oil & Gas PLC Annual Report 2015 The following table shows the Group’s revenue breakdown
by export/domestic sales for the years ended 31 December
2014 and 2013.
In thousands of
US Dollars
Revenue from
export sales
Revenue from
domestic sales
Total
2014
2013
Variance Variance, %
676,064 765,029
(88,965)
(11.6)%
105,814 129,985
781,878 895,014
(24,171)
(113,136)
(18.6)%
(12.6)%
Cost of sales
Cost of sales decreased by 22.5% to US$221.9 million for the
reporting period (FY 2013: US$286.2 million). The decrease
is primarily explained by a decrease in depreciation,
depletion and amortisation, royalties, government profit
share, repair, maintenance and other services, materials
and supplies expenses, although this is partially offset by
an increase in payroll and related taxes, well workover costs
and other expenses. On a boe basis, cost of sales decreased
by US$3.29 or 19.4% to US$13.69 for the reporting period
(FY 2013: US$16.98) and cost of sales net of depreciation
per boe decreased by US$3.05, or 30.7%, to US$6.88
(FY 2013: US$9.92).
Depreciation, depletion and amortisation decreased by
7.1% to US$110.5 million for the reporting period (FY 2013:
US$119.0 million). The decrease is mainly due to an increase
in proved developed reserves starting from 31 August 2013,
which was partially offset by an increase of production
volumes.
Repair, maintenance and other services decreased by
31.6% to US$35.8 million for the reporting period (FY 2013:
US$52.4 million). These expenses include maintenance
expenses related to the gas treatment facility and other
facilities of the Group, and engineering and geophysical
study expenses. These costs fluctuate depending on the
planned works on certain objects.
Royalties, which are calculated on the basis of production
and market prices for the different products, decreased
by 38.2% to US$24.3 million for the reporting period
(FY 2013: US$39.4 million). This decrease resulted from the
reversal of royalty expenses from prior periods amounting
to US$5.5 million. The reversal was due to the adoption of
a new work programme for oilfield operations and a change
in the coefficients used for converting condensate, sales
gas and LPG volumes into natural gas equivalent volumes.
Costs for government profit share decreased by
US$26.2 million to a credit of US$4.6 million for the
reporting period (FY 2013: US$30.7 million). The decrease
resulted from the adoption of a new work programme
for oilfield operations and a change in the coefficient of
natural gas equivalent which resulted in a reversal of the
government profit share expense from prior periods
amounting to US$17.8 million.
Materials and supplies expenses decreased by 10.9%
to US$10.9 million for the reporting period (FY 2013:
US$12.3 million). This decrease resulted from less need
for spare parts and other materials for repairs and
maintenance of the facilities, specifically for the gas
treatment facility and wells.
Well workover costs increased by 125.3% to US$6.3 million
for the reporting period (FY 2013: US$2.8 million). The
increase resulted from the scheduled work on several wells.
Management fees are absent in cost of sales for the
reporting period (FY 2013: US$3.6 million). The fees
incurred by the Group relate to the services provided
by Probel Capital Management N.V., which was acquired
by the Group on 30 December 2013 and is now being
consolidated. The related costs of this entity are included
in general and administrative expenses for the reporting
period as professional services (related to the rendering
of geological, geophysical, drilling, technical and other
consultancy services) and payroll and related taxes.
General and administrative expenses
General and administrative expenses decreased by
2.0% to US$54.9 million for the reporting period (FY 2013:
US$56.0 million). This was primarily due to an increase in
expenses for professional services, payroll and related
taxes, which was partially offset by decreased management
fees, other taxes and training. The change in the structure
of general and administrative expenses can be explained
by the acquisition of Probel Capital Management N.V.
on 30 December 2013, which led to the elimination of
intercompany management fees, and the recognition
of its expenses as professional services and payroll and
related taxes.
Selling and transportation expenses
Selling and transportation expenses increased by 0.5%
to US$122.3 million for the reporting period (FY 2013:
US$121.7 million). The significant decrease in transportation
costs and increase in loading and storage costs is primarily
due to transportation costs including certain loading and
storage costs for the prior year. Part of the increase in
loading and storage costs was driven by a rise in sales
volumes for LPG and condensate.
53
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 The following table shows the Group’s total corporate
income tax split between current income tax, adjustments
and deferred income tax for the years ended 31 December
2014 and 2013.
In thousands of
US Dollars
Current income
tax
Adjustment in
respect of the
current income
tax for the prior
periods
Deferred income
tax expense/
(benefit)
Total
2014
2013
Variance Variance, %
117,827 138,883
(21,056)
(15.2)%
(6,785)
–
(6,785)
n/a
54,233
3,613
165,275 142,496
50,620
22,779
1401.1%
16.0%
Financial review continued
Finance costs
Finance costs increased by US$18.3 million to US$61.9
million for the reporting period (FY 2013: US$43.6 million).
The increase in these costs was primarily driven by the
expenses relating to the early redemption of the 2010
Notes and the amortisation of the remainder of the
transaction cost, incurred for the issuance of 2010 Notes.
Finance costs – reorganisation
The “finance costs – reorganisation” represent the costs
associated with the introduction of Nostrum Oil & Gas PLC
as the new holding company of the Group and respective
reorganisation.
Derivative financial instruments
The “gain on derivative financial instruments” represents
the fair value of the hedge that the Group entered into on
3 March 2014 and which runs through 29 February 2016.
Other
Foreign exchange losses amounted to US$4.2 million
for the reporting period (FY 2013: US$0.6 million). This
is explained by the fact that on 11 February 2014 the
Tenge was devalued against the US Dollar and other major
currencies. The exchange rates before and after devaluation
were 155 Tenge/US Dollar and 185 Tenge/US Dollar
respectively. Since the Group had a net asset position
of Tenge denominated accounts around this date, the
devaluation of the Tenge resulted in a significant foreign
exchange loss recognised in the reporting period.
Other expenses increased by 94.8% to US$49.8 million
for the reporting period (FY 2013: US$25.6 million). Other
expenses mainly represent export duties paid by the Group.
The export duties represent custom duties for the export
of crude oil and customs fees for services such as
processing of declarations, temporary warehousing etc.
Other expenses for the reporting period also include fines
and penalties amounting to US$2.6 million, which were
the result of court decisions.
Income tax expense increased by 16.0% to US$165.3 million
for the reporting period (FY 2013: US$142.5 million).
The increase in income tax expense is primarily due to an
increased deferred tax for the reporting period. This was
driven by the Tenge devaluation in February 2014, which
led to a significant decrease in the tax base of property,
plant and equipment, which is denominated in Tenge.
54
Nostrum Oil & Gas PLC Annual Report 2015 Net cash used in investing activities
The substantial portion of cash used in investing activities
is related to the drilling programme and the construction
of a third unit for the gas treatment facility.
Net cash used in investing activities for the reporting
period was US$245.3 million (FY 2014: US$304.5 million)
due primarily to costs associated with the drilling of
new wells of US$58.7 million for the reporting period
(FY 2014: US$126.8 million), costs associated with the
third gas treatment unit of US$112.4 million (FY 2014:
US$142.8 million), costs associated with Rostoshinskoye,
Darjinskoye and Yuzhno-Gremyachenskoye fields of
US$7.6 million (FY 2014: US$10.4 million) and placement
of US$17.0 million of bank deposits, partially offset by
the redemption of US$42.0 million of cash deposits
(FY 2014: redemption of US$55.0 million and placement
of US$25.0 million of bank deposits).
Net cash (used in)/provided by financing activities
Net cash used in financing activities during the reporting
period was US$115.9 million, and was mainly represented
by the payment of US$49.1 million in distributions and the
finance costs paid on the Group’s 2012 Notes and 2014
Notes. Net cash provided by financing activities during
FY 2014 was US$147.5 million, which was primarily
attributable to the issue of the 2014 Notes amounting
to US$400.0 million, offset by an early redemption of the
2010 Notes amounting to US$92.5 million, payment of
US$64.6 million in distributions and the finance costs paid
on the Group’s 2010 Notes, 2012 Notes and 2014 Notes.
Liquidity and capital resources – 2015/2014 comparison
During the period under review, Nostrum’s principal
sources of funds were cash from operations and amounts
raised under the 2012 Notes and the 2014 Notes. Its
liquidity requirements primarily relate to meeting ongoing
debt service obligations (under the 2012 Notes and the
2014 Notes) and to funding capital expenditures and
working capital requirements.
Cash flows
The following table sets forth the Group’s consolidated cash
flow statement data for the reporting period and FY 2014:
In thousands of US dollars
Cash and equivalents
at the beginning of the period
Net cash flows from
operating activities
Net cash used in investing activities
Net cash from/(used in)
financing activities
Effects of exchange rate changes
on cash and cash equivalents
Cash and equivalents
at the end of the period
2015
2014
375,443
184,914
153,257
(245,317)
349,122
(304,549)
(115,864)
147,462
(1,959)
(1,506)
165,560
375,443
Net cash flows from operating activities
Net cash flow from operating activities was US$153.3 million
for the reporting period (FY 2014: US$349.1 million) and
was primarily attributable to:
• profit before income tax for the reporting period of
US$72.3 million (FY 2014: US$311.7 million), adjusted
by a non-cash charge for depreciation, depletion
and amortisation of US$109.4 million (FY 2014:
US$111.9 million), finance costs of US$46.0 million
(FY 2014: US$61.9 million) and gain on derivative financial
instruments of US$ 37.1 million (FY 2014: US$60.3 million).
• a US$9.3 million change in working capital (FY 2014:
US$19.5 million) primarily attributable to an increase in
trade receivables of US$1.2 million (FY 2014: a decrease
of US$36.5 million), a decrease in prepayments and other
current assets of US$12.2 million (FY 2014: an increase
of US$7.7 million), a decrease in trade payables of
US$7.3 million (FY 2014: a decrease of US$5.6 million)
and a decrease in other current liabilities of US$2.1 million
(FY 2014: an increase of US$0.3 million).
• income tax paid of US$41.2 million (FY 2014:
US$118.2 million).
55
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Financial review continued
Commitments
Liquidity risk is the risk that the Group will encounter difficulty raising funds to meet commitments associated with its
financial liabilities. Liquidity requirements are monitored on a regular basis and management seeks to ensure that sufficient
funds are available to meet any commitments as they arise. The table below summarises the maturity profile of the Group’s
financial liabilities as at 31 December 2015 based on contractual undiscounted payments:
Borrowings
Trade payables
Other current financial
liabilities
Due to the government
of Kazakhstan
Total
On demand
–
37,934
17,554
–
55,488
Less than
3 months
12,750
–
3-12 months
52,650
3,529
1-5 years
1,156,200
–
more than
5 years
–
–
Total
1,221,600
41,463
–
–
–
–
17,554
258
13,008
773
56,952
4,124
1,160,324
10,567
10,567
15,772
1,296,339
Capital commitments
During the reporting period, Nostrum’s cash used in capital expenditures for purchase of property, plant and equipment
(excluding VAT) was approximately US$256.1 million (FY 2014: US$325.5 million). This reflects drilling costs, field
infrastructure development projects and development costs for the oil treatment unit and the gas treatment facility.
Drilling
Drilling expenditures amounted to US$58.7 million for the reporting period (FY 2014: US$126.8 million).
Gas Treatment Facility
Following the successful completion of the first phase of the gas treatment facility, consisting of two units, the Group is
constructing a third unit for it. The construction of GTU3 is important for implementing the Group’s strategy to increase
operating capacity and production of liquid hydrocarbons. Management estimates, based on the production profile
of both proved and probable reserves reported in the 2015 Ryder Scott Report and assuming the successful completion
of the gas treatment facility in 2017, that the Company’s annual production will more than double from the 2015 annual
production (with an average of 40,391 boepd in 2015) by the end of 2018.
Total costs for the completion of GTU3 are estimated to be not more than US$500 million, of which US$250 million have
been spent as of the end of the reporting period.
56
Nostrum Oil & Gas PLC Annual Report 2015 Net cash used in investing activities
The substantial portion of cash used in investing activities
is related to the drilling programme and the construction
of a third unit for the gas treatment facility.
Net cash used in investing activities for the reporting
period was US$305.1 million (FY 2013: US$239.0 million)
due primarily to the drilling of new wells resulting in
cash spent of approximately US$126.8 million (FY
2013: US$108.1 million), costs associated with the third
gas treatment unit of approximately US$142.8 million
(FY 2013: US$12.4 million) and costs associated with the
Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye
fields of US$10.4 million (FY 2013: US$5.0 million), partially
offset by the redemption of US$30.0 million of cash
deposits (FY 2013: redemption of US$25 million and
placement of US$30.0 million of bank deposits).
Net cash (used in)/provided by financing activities
Net cash provided from financing activities during the
reporting period was US$147.5 million, primarily attributable
to the issue of the 2014 Notes amounting to US$400.0
million, offset by an early redemption of the 2010 Notes
amounting to US$92.5 million, payment of US$64.6 million
in distributions and the finance costs paid on the Group’s
2010 Notes, 2012 Notes and 2014 Notes. Net cash used in
financing activities during the FY 2013 was US$132.4 million,
which was mainly represented by the finance costs paid on
the Group’s 2010 Notes and 2012 Notes.
Liquidity and capital resources – 2014/2013 comparison
General
During the period under review, Nostrum’s principal
sources of funds were cash from operations and amounts
raised under the 2012 Notes and the 2014 Notes. Its
liquidity requirements primarily relate to meeting ongoing
debt service obligations (under the 2012 Notes and the
2014 Notes) and to funding capital expenditures and
working capital requirements.
The following table sets forth the Group’s consolidated cash
flow statement data for the years ended 31 December 2014
and 2013.
In thousands of US Dollars
Cash and equivalents at the
beginning of the period
Net cash flows from operating
activities
Net cash used in investing activities1
Net cash from/(used in) financing
activities
Effects of exchange rate changes
on cash and cash equivalents
Cash and equivalents
at the end of the period*
* Excluding deposits and restricted cash.
2014
2013
184,914
197,730
349,636
(305,063)
358,554
(239,020)
147,462
(132,350)
(1,506)
–
375,443
184,914
Net cash flows from operating activities
Net cash flow from operating activities was US$349.6 million
for the reporting period (FY 2013: US$358.6 million) and
was primarily attributable to:
• profit before income tax for the reporting period of
US$311.7 million (FY 2013: US$362.0 million), adjusted
by a non-cash charge for depreciation, depletion
and amortisation of US$111.9 million (FY 2013:
US$120.4 million), and finance costs of US$61.9 million
(FY 2013: US$43.6 million).
• a US$19.5 million change in working capital (FY 2013:
US$16.7 million) primarily attributable to a decrease
in trade receivables of US$36.5 million (FY 2013:
US$12.6 million), an increase in prepayments and other
current assets of US$7.7 million (FY 2013: a decrease
of US$6.8 million), a decrease in trade payables of
US$5.6 million (FY 2013: a decrease of US$5.7 million)
and an increase in other current liabilities of US$0.3 million
(FY 2013: US$8.8 million).
• income tax paid of US$118.2 million (FY 2013:
US$154.5 million).
57
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Five-year summary
In millions of US Dollars unless stated otherwise
Revenue
Cost of sales
Gross profit
General and administrative expenses
Selling and transportation expenses
Finance costs
Finance costs – reorganisation
Employee share option plan fair value adjustment
Foreign exchange (loss)/gain, net
Gain on derivative financial instruments
Interest income
Other income
Other expenses
Profit before income tax
Income tax expense
(Loss)/profit for the year
Other comprehensive loss
Total comprehensive (loss)/income for the year
Non-current assets
Current assets
Total assets
Equity
Non-current liabilities
Current liabilities
Total equity and liabilities
Net cash flows from operating activities
Net cash used in investing activities1
Net cash from/(used in) financing activities
Profit margin %
Equity/assets ratio %
Share price at end of period (US$)2
Shares outstanding (‘000s)
Options outstanding (‘000s)
Dividend per share (US$)
2015
Audited
448.9
(186.6)
262.3
(49.3)
(93.0)
(46.0)
(1.1)
2.2
(21.2)
37.1
0.5
11.3
(30.6)
72.3
(166.4)
(94.3)
(0.5)
(94.8)
2014
Audited
781.9
(221.9)
560.0
(54.9)
(122.3)
(61.9)
(29.6)
3.1
(4.2)
60.3
1.0
10.1
(49.8)
311.7
(165.3)
146.4
–
146.4
2013
Audited
895.0
(286.2)
608.8
(56.0)
(121.7)
(43.6)
–
(4.4)
(0.6)
–
0.8
4.4
(25.6)
362.0
(142.5)
219.5
–
219.5
2012
Audited
737.0
(238.2)
498.8
(62.4)
(103.6)
(46.8)
–
(2.5)
(0.8)
–
–
4.0
(6.6)
282.4
(120.4)
162.0
–
162.0
2011
Audited
300.8
(70.8)
230.0
(36.0)
(35.4)
(1.7)
–
(3.5)
(0.4)
–
–
3.4
(7.9)
149.0
(67.4)
81.6
–
81.6
1,854.1 1,698.6
509.6
1,126.9
1,426.0
179.3
334.8
2,188.4 2,208.2 1,760.8 1,602.7 1,306.2
1,251.6
351.1
334.3
773.8
1,305.9
108.7
585.2
599.7
121.3
2,188.4 2,208.2 1,760.8 1,602.7 1,306.2
917.7
1,163.7
126.9
832.5
793.6
134.7
695.1
781.9
125.7
153.3
(245.3)
(115.9)
349.6
(305.1)
147.5
358.6
(239.0)
(132.4)
291.8
(269.7)
50.4
132.2
(103.7)
(47.4)
(21.0%)
35.4%
18.7%
41.6%
24.5% 22.0%
27.1%
47.3% 43.4% 44.8%
5.97
6.56
13.00
9.70
188,183 188,183 188,183 188,183 186,762
2,868
–
2,912
0.34
2,132
0.32
2,611
0.35
2,611
0.27
10.70
1 IFRS term based on indirect cash flow methodology.
2 Prior to 20 June 2014 the equity of the Group was represented by GDRs, 2015 end of period share price is calculated as 4.05 GBP/share x 1.4747 US$/GBP = 5.97 US$/share.
58
Nostrum Oil & Gas PLC Annual Report 2015 Risk management
Identification and assessment of the Group’s key risks
The Board acknowledges its responsibility for determining
the significant risks which may potentially affect the Group
in achieving its strategic objectives. A Group-wide risk
assessment is performed periodically to identify the
nature and extent of such risks and determine appropriate
mitigating actions.
In 2013 the Group formalised the Director’s Risk Register,
which identified the risks and associated mitigating
control activities and future actions. These identified
risks were aggregated and categorised into the following
risk categories:
• strategic;
• operational;
• financial; and
• compliance.
Based on this risk register and further analysis and
discussions the executive management and the Board
periodically review previously identified significant risks,
update their likelihood of occurrence and potential impact,
and identify potential new significant risks emerging as
Risk assessment and management
a result of the changing environment. These significant risks
are discussed in more detail below in the section “Principal
risks and uncertainties”.
Risk assessment and management
The Group has in place risk management processes and
procedures which are formalised in the Risk Management
Policy, reflecting the following process:
The Risk Management Policy contains a description of the
risk management process consisting of the following cycle
of coordinated activities:
• recognition or identification of risks;
• ranking or evaluation of risks;
• responding to significant risks:
• tolerate, when it is outside the Group’s ability
to mitigate;
• treat by reducing its impact or likelihood
of occurrence;
• transfer to a third party;
• terminate the activity creating them;
The Audit Committee
performs an ongoing review
of the significant risks as
well as controls put in place
to mitigate those risks
by management
Board
Review and confirmation by the Board
Audit Committee
Risks and mitigation measures validated with
the executive management and presented
to the Audit Committee for review
Executive Committee
Internal audit manager
As from January 2015 for the purposes of
internal risk management procedures, the
Company’s Executive Committee replaced
the executive management
The internal audit manager, who is also
acting as the Group’s Risk Manager,
consolidates the operating companies’
and Group risks to compile the Group’s risk
register and key risks
Senior management of
Group functions
Senior management of
operating companies
Senior management identify the key
risks and develop mitigation actions
Local management create a register
of their top ten risks and mitigation
actions
59
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Risk management continued
• resourcing controls;
• reaction planning;
• reporting and monitoring risk performance;
• reviewing the risk management framework.
In 2015, the processes related to risk management and
internal control systems were consistent with the UK
Corporate Governance Code and the Guidance on Risk
Management, Internal Control and Related Financial and
Business Reporting issued in September 2014.
Changes from prior year risk assessment
During 2015 the Board and senior management remained
conscious of the same principal risks and uncertainties
which were identified and disclosed in the 2014 Annual
Report and the related risk assessments did not significantly
change. However, particular attention was paid to the
following areas:
• commodity price risk in view of the current market
oil price environment and related impact on future
performance and investments of the Group;
• risks related to GTU3 construction and drilling
programme;
• risks related to repair works on gas pipelines used by
the Group (similar to the instance which occurred in 2015),
which is considered as part of the principal risk of
“single revenue source and business interruption”;
• the effect of devaluation of the Kazakh Tenge against
US Dollar on income taxes and related future cash flows.
The principal risks and uncertainties are presented on the
following pages grouped into the four above-mentioned
categories.
In addition, in line with the requirements of the 2014 UK
Corporate Governance Code the Board made a robust
assessment of the principal risks and uncertainties faced by
the Group, including those that would threaten its business
model and future performance, also included as part of
a longer-term viability assessment.
Viability statement
The Group’s corporate planning process includes
medium- and long-term financial projections and analysis
as well as annual budgeting and forecasting. The long-term
financial model extends through 2032, i.e. the licence term
of the Chinarevskoye field, currently the main production
source of the Group. The long-term model supports the
Board’s activities described on pages 71 to 72, including
annual strategic planning and decision-making processes.
For the purpose of monitoring the Group’s performance in
terms of strategic objectives, related KPIs and risks, as well
as medium-term development plans (as described on
pages 22-23) the Board assesses its five-year financial
projections. In addition, such financial projections are
supported by the five-year drilling program (mentioned
in the Chief Executive’s review on page 14). Finally, these
medium- and long-term planning processes are cascaded
down to a budgeting and forecasting process, which
incorporates preparation of the draft annual budget for next
year in the fourth quarter of every calendar year, which is
reviewed and approved by the Board, and preparation of
quarterly forecasts during the year for the Board’s review.
The Board has chosen a five-year period to December 2020
as a reasonable time-frame, over which it is possible to form
a reasonable expectation as to the Group’s longer-term
viability, given the inherent uncertainty involved. This period
representing the period used for the Group’s mid-term
business plans has been selected because it provides the
Board and therefore readers of the annual report with
a reasonable degree of confidence whilst still providing
an appropriate longer-term outlook.
The corporate planning process is closely linked with the
risk management process described on pages 58 to 59.
For the purpose of the Group’s viability assessment various
scenarios are considered on the basis of the five-year cash
flow model for the purpose of testing its sensitivity to the
significant risks listed on pages 60-61 (to the extent such
assessment of the risks is practicable), also including a
severe but plausible scenario, resulting from a combination
of those risks. The scenarios take into account the availability
and likely effectiveness of the mitigating actions that could
be taken to avoid or reduce the impact or occurrence of the
underlying risks and that realistically would be open to the
Group in the circumstances. In considering the likely
effectiveness of such actions, the conclusions of the Board’s
regular monitoring and review of risk and internal control
systems are taken into account. The assumptions used for
the purpose of the assessment of longer-term viability are
consistent with the assumptions used in the budgeting &
forecasting process and include assumptions about the
results of the drilling program, the completion of GTU3, the
subsequent uptake of production, the ability to refinance
debt as it falls due and consistent sales performance.
The directors paid particular attention to the risks
associated with development projects as well as commodity
price risk, which may impact the Group’s ability to meet its
liabilities, including the repayment of its Notes due in 2019.
Based on these assessments and other matters considered
by the Board during the year, the Board has a reasonable
expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the
period to December 2020.
60
Nostrum Oil & Gas PLC Annual Report 2015 Principal risks and uncertainties
Strategic risks
Description of risk
Risk management
Development
projects
The Group’s planned development
projects, in particular GTU3 and well
drilling, are subject to customary risks
related to delay, non-completion and cost
overruns, which could impact future
production and the Group’s performance.
Commodity
price risk
The Group is exposed to the risk that
its future earnings will be adversely
impacted by changes in the market price
of crude oil, given that all sales prices of
crude oil and condensate are based on
market prices. Crude oil prices are
influenced by factors such as OPEC
actions, political events and supply and
demand fundamentals.
The Group could also be compelled by
governmental authorities, purportedly
acting based on Kazakh legislation, to sell
its gas domestically at prices determined
by the Kazakh government, which could
be significantly lower than prices which
the Group could otherwise achieve.
The Group has formed an experienced
project management team and expects to
benefit from the technical expertise and
significant experience gained from the
construction of GTU-1 and GTU-2 in the
construction of GTU-3. The project
management team reports on a monthly
basis to senior management and the Board
on the progress of engineering, procurement
and construction.
The Group has concluded the majority of the
procurement process in relation to GTU3 and
monitors logistics, engineering, expedition
of materials and equipment on an ongoing
basis. JSC “OGCC KazStroyService” has been
engaged to construct GTU-3, having gained
experience on similar projects including
GTU-1 and GTU-2 and other large projects in
Kazakhstan.
Senior management and the Board constantly
monitor the timing, scope and performance
of the drilling programme and tailor it taking
into account the status of the GTU3 project
and current oil prices. For each well a detailed
drilling programme is approved by senior
management, which is the basis against which
the progress of works and costs are reported.
The Group’s hedging policy is that, upon
entering into longer-term non-scalable capital
expenditure commitments, it will hedge its
liquids production.
In January 2016, Nostrum announced that it
had rolled its pre-existing hedge into a new
hedge of 15,000 bopd with a strike price of
US$49.16 per barrel. The cost of the hedge
was paid entirely from the sale of the
Company’s previous hedge for US$92m.
The new hedge has 24-month tenor, maturing
in December 2017, with cash settlement on
a quarterly basis.
Senior management and the Board
continuously monitor the timing, scope and
performance of the drilling programme taking
into account the oil price environment.
Additionally, in 2015 the Group started
exporting the majority of its dry gas under
a new contract. The export prices are usually
substantially higher than domestic prices.
61
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Principal risks and uncertainties continued
Operational risks
Description of risk
Risk management
Single revenue
source and
business
interruption
The Group’s activities in the Chinarevskoye
oil and gas condensate field are currently
the Group’s sole source of revenue.
Estimation of
oil and gas
reserves
The Group is subject to the risk that if
there are inaccurate assessments and
overstatement of the oil and gas reserves
the Group’s non-current assets and
goodwill may be overstated or impaired.
This may also be a consequence of
unsuccessful exploration of the new fields
and may also result in inappropriate
decision-making.
The Group has a team of dedicated specialists
who assess possible acquisitions of oil and
gas fields and assets. In 2013 the Group
acquired subsoil use rights for three oil and
gas fields near the Chinarevskoye field. In
2016, the drilling programme will initially be
set targeting the addition of three new
production wells at Chinarevskoye as well as
the completion of an appraisal well on the
Rostoshinskoye field. The drilling programme
is reviewed on a quarterly basis and can be
scaled up at short notice. A supplementary
agreement for the Rostoshinskoye field has
been signed extending the exploration
period until February 2017.
In addition, Nostrum’s approach made during
2015 to the board of Tethys Petroleum Limited
regarding a possible offer to acquire the
company represents an example of the
Group’s further efforts towards diversification
of the Group’s portfolio of assets. This offer
was subsequently withdrawn by Nostrum.
The Group has a department of highly skilled
geologists, who perform periodic
assessments of the oil and gas reserves
in accordance with international standards
on reserve estimations. The results of the
assessments are reviewed by the Group’s
independent reserve consultant, Ryder Scott.
Compliance risks
Description of risk
Risk management
Subsoil use
agreements
The Group may have disagreements with
the Kazakh government regarding its
subsoil operations or compliance with
the terms of its subsoil use agreements.
The Group believes that it is in full compliance
with the terms of its PSA for the Chinarevskoye
field and maintains an open dialogue with
Kazakh governmental authorities regarding all
of its subsoil use agreements. In the event of
non-compliance with a provision of any such
agreement the Group endeavours to have
such terms modified and pays any penalties
and fines that may apply.
62
Nostrum Oil & Gas PLC Annual Report 2015 Compliance risks
Description of risk
Risk management
Environmental
compliance
The legal framework for environmental
protection and operational safety is not
yet fully developed in Kazakhstan and,
given the changing nature of
environmental regulations, there is
a risk that the Group will not be in full
compliance with all such regulations
at all times.
The Group has further strengthened its
QHSE department during 2015. The Group’s
QHSE policies are periodically revised to
ensure compliance with changes and new
requirements in this area. Key indicators such
as GHG emissions, lost-time injuries, waste
management, etc., as well as progress of
work is reported to senior management on
a monthly basis. Periodic training on the
requirements of policies and regulations are
held for employees. The Group is working
towards obtaining ISO 14001 Environmental
Management Systems and ISO 50001
Energy Management Systems certification.
The Group also regularly commissions
independent environmental audits to monitor
its compliance and best practice in this area.
Perceived risk of
non-compliance
with anti-bribery
legislation
There is a risk that the Group’s employees
will unintentionally or deliberately take
actions prohibited by anti-bribery
legislation given the perceived
heightened risk in the jurisdiction in
which the Group operates.
The Group has adopted an anti-bribery
and corruption policy, and has included a
provision on this subject in the Group’s Code
of Conduct and conducted training for
employees in relation to their obligations
in this area.
Financial risks
Description of risk
Risk management
Tax law
uncertainty
Going concern
and liquidity risk
The uncertainty of application, including
retroactive application, of tax laws and
the evolution of tax laws in Kazakhstan
create a risk of additional payments of
tax from assessments which the Group
believes are inapplicable to it.
The Group regularly challenges, either with
the Kazakh tax authorities or through the
Kazakh courts, tax assessments that it believes
are inapplicable to it, either pursuant to the
terms of its subsoil use agreements or
applicable law.
The Group is subject to the risk of
encountering difficulties in raising funds
to meet commitments associated with
its financial liabilities and respective
inappropriateness of going concern
assumptions.
Liquidity requirements are monitored on a
monthly basis and management ensures that
sufficient funds are available to meet any
commitments as they arise. The treasury
policy provides for the Group to maintain
a minimum level of cash of US$50 million.
The risks listed above do not comprise all those associated with the Group’s business and are not set out in any order of
priority. Additional risks and uncertainties not presently known to management, or currently deemed to be less material,
may also have an adverse effect on the Group’s business. The risks listed above are continuously monitored by the
management team and assessed when making business decisions.
This strategic report is approved by the Board.
Kai-Uwe Kessel
Chief Executive Officer
29 March 2016
Jan-Ru Muller
Chief Financial Officer
29 March 2016
63
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate governance
Committed to
excellence in
our governance
65 Chairman’s overview
66 Board of directors
68 Nostrum Oil & Gas PLC management team
68 Zhaikmunai LLP management team
70 Corporate governance approach
82 Audit Committee Report
88 Nomination and Governance Committee Report
89 Remuneration Committee Report
90 Annual report on remuneration
98 Directors’ remuneration policy
104 Directors’ Report
6464 Nostrum Oil & Gas PLC
Annual Report 2015
Chairman’s overview
“ We strive to govern the business in a manner that is both straightforward
and effective, and which promotes the long-term success of the Group.”
Dear shareholder
Nostrum is a simple, sustainable and successful business –
these are our values and we apply them not only to our
operational and financial goals, but also to our corporate
governance. Adopting and implementing good corporate
governance is a core principle of the Group’s relations
with each and all of our stakeholders. We strive to govern
the business in a manner that is both straightforward
and effective, and which promotes the long-term success
of the Group.
The Group continues to embrace and address the
demands of the additional regulatory obligations that
are applicable to the Group as a result of Nostrum moving
to a premium listing on the LSE in 2014. We highlight
on our website the few areas where the Group does not
fully comply with the UK Corporate Governance Code
and explain the reasons behind such non-compliance.
For further information, please see page 76 and the
governance section of Nostrum’s website http://
www.nostrumoilandgas.com/en/corporate-governance.
While our Company evolves in the short and the long
term, both organically and through potential M&A activity,
we will seek to place issues of corporate governance at the
core of our decision-making processes. We also continue
to review and develop our corporate governance practices
to ensure full compliance with regulatory requirements
and to promote the success and sustainability of our
business.
One of the products of our continuous efforts to excel in
corporate governance is the new Executive Committee,
which was established earlier this year. The Executive
Committee is comprised of all of the executive directors
together with Thomas Hartnett, Gudrun Wykrota and
Heinz Wendel and was formed in order to better align
the goals and objectives of each business function and
to simplify the way in which we manage our business. The
biographies of each member of the Executive Committee
can be found on pages 66 to 69.
We also look to achieve a better balance in the gender
diversity of our Board. Together with the Nomination and
Governance Committee, I have been working to recruit
a suitable female Board member to replace one of the
Company’s current non-executive directors. I hope to
be able to report on this shortly.
Alongside this, we will continue to foster Board diversity
in all regards in order that Nostrum’s directors have the
appropriate mix of skills, experience, independence and
knowledge to enable them to discharge their duties and
responsibilities effectively.
During the coming year we will conduct an externally-
facilitated Board evaluation and we look forward to
deriving concrete benefits from that evaluation process.
I look forward to updating you on the progress of our
ongoing efforts to achieve excellence in corporate
governance during the year ahead.
Frank Monstrey
Chairman
65
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Board of directors
Frank Monstrey
Executive Chairman
• DOB: 22 April 1965
• Nationality: Belgian
Jan-Ru Muller
Chief Financial Officer
• DOB: 20 May 1964
• Nationality: Dutch
Chairman of Nostrum’s predecessor
entities since 2004. First appointed
as director of Nostrum Oil & Gas
PLC on 3 October 2013.
Other positions1
• Previously served as chairman of
the board of Nostrum’s
predecessor entities since 2004.
Other current appointments
Claremont Holdings C.V., RusPetro plc,
Crest Capital Management N.V.
The Chairman has no other
significant commitments.
• From 1991-2015, Chief Executive
Officer of Probel Capital
Management N.V (now called
Nostrum Services N.V.), a private
equity and asset management
firm based in Belgium specialising
in long-term capital management
in emerging markets.
• Holds a degree in Business
Economics from the University
of Leuven (KUL), Belgium.
Board Committees
• Nomination and Governance
Appointed as Chief Financial Officer
of Nostrum’s predecessor entity on
16 November 2007 and as a director
of Nostrum Oil & Gas PLC on
3 October 2013.
• 1988-1990, Andersen Consulting.
• Holds a BEng degree from Utrecht
Municipal Institute of Technology
and an MBA degree from the
University of Leuven (KUL).
Other current appointments
Telco B.V. – Director
Board Committees
• None
Other positions1
• Since 2000, served in various
capacities at Nostrum Services
N.V. overseeing Nostrum’s
adoption of IFRS and the
implementation of SAP.
• 1990-2000, founder and
Managing Director of Axio
Systems, an information
technology company.
Eike von der Linden
Senior independent
non-executive director
• DOB: 7 July 1941
• Nationality: German
• 1992-2001, Managing Director of
Erdas Erdöl GmbH, an oil and gas
company owned by Gaz de
France, and director and chairman
of the board of KazGermanai.
First appointed as a director of
Nostrum Oil & Gas Group Ltd on
16 November 2007 and as a
director of Nostrum Oil & Gas PLC
on 19 May 2014.
• Graduate of the Gubkin Russian
State University of Oil and Gas.
Board Committees
• None
Other current appointments
Linden Advisory & Consulting
Services – managing director,
Jordan Energy and Mining Ltd. –
technical director, Schullermann
und Partner AG – member of
supervisory board, Financial Auditor
and Tax Consultant Group –
member of supervisory board
Other positions1
• Since 1988, managing director of
Linden Advisory and Consulting
Services.
• Since 1985, independent adviser
to financial institutions for equity
investments and mezzanine and
debt funding (project finance) in
the field of natural resources.
• Holds a PhD in mining economics
from the Technical University
of Clausthal.
Board Committees
• Audit (Chairman)
• Remuneration
• Nomination and Governance
Kai-Uwe Kessel
Chief Executive Officer
• DOB: 17 December 1961
• Nationality: German
Director of Nostrum’s predecessor
entities since 2004. First appointed
as director of Nostrum Oil & Gas PLC
on 3 October 2013.
Other current appointments
BelGerAs S.A. – Director, Gervanca
Investments Sarl – Director,
Cavendish Affiliates Limited
Other positions1
• 2002-2005, director of Gaz de
France’s North African E&P
division.
1 Chronological order.
66
Nostrum Oil & Gas PLC Annual Report 2015 Atul Gupta
Independent non-executive
director
• DOB: 15 December 1959
• Nationality: British
First appointed as a director of
Nostrum Oil & Gas Group Ltd on
30 November 2009 and as a
director of Nostrum Oil & Gas PLC
on 19 May 2014.
• 30 years’ board experience in
international upstream oil and
gas businesses: Charterhouse
Petroleum, Petrofina, Monument
and Burren Energy.
• Graduate in chemical engineering
(Cambridge University) and
Masters in petroleum engineering
(Heriot Watt University,
Edinburgh).
Board committees
• Audit
Sir Christopher
Codrington, Bt.
Independent non-executive
director
• DOB: 20 February 1960
• Nationality: British
Appointed as a director on
19 May 2014.
Other current appointments
Navarino Services Limited – director,
Capital Marketing Investments Ltd –
director
Other positions
• More than 28 years’ executive
board and senior management
experience in the oil and gas
sector and the hospitality and
other industries.
Mark Martin
Independent non-executive
director
• DOB: 17 February 1969
• Nationality: British
• Spent eight years living in
Houston, Texas, developing
prospects in various oil and gas
fields for COG, Inc., Texas General
Resources, Inc., TexBrit
Corporation, Inc. and Whitehall
Energy Limited.
• Royal Agricultural University –
DipAFM.
Board committees
• Nomination and Governance
(Chairman)
• Remuneration
• Audit
Other positions1
• Since 1993, partner in the VWEW
Appointed as a director on
19 May 2014.
Advocaten law firm.
• Since 1986, lawyer at the Brussels
Bar (active in the field of Belgian
business law).
• Graduate from the University of
Leuven (KUL) (1984) and from the
College of Europe (Bruges) (1985),
Belgium.
Board committees
• Remuneration2
Other current appointments
None
Other positions
• 20 years of investment banking
experience with Barclays, Baring
Securities and ING where he was
Global Head of Equity Capital
Markets from 2003-2011.
• 2011-2014 served as Chief
Executive Officer of Exillon Energy
PLC in Moscow.
• Graduate of Cambridge University
with a degree in Social and
Political Sciences.
Board committees
• Remuneration (Chairman)
Other positions1
• Since 2009, Chief Executive
Officer of the KazStroyService
(KSS) Group.
• More than 20 years extensive
experience in EPC (engineering,
procurement and construction)
projects in India, Kazakhstan,
the Middle East and the Far East.
• Graduate from the Regional
Engineering College, Trichy, India
(BEng (Hons) in Civil Engineering
(Major: oil and gas infrastructure)).
Board committees
• None
Other current appointments
Seven Energy International Limited –
non-executive director, Vetra
Energy – non-executive director
Other positions1
• Chief Executive Officer
(2006-2008) and Chief Operating
Officer (1999-2006) of Burren
Energy.
Piet Everaert
Non-executive director
• DOB: 28 March 1961
• Nationality: Belgian
First appointed as a director of
Nostrum Oil & Gas Group Ltd on
16 November 2007 and as a director
of Nostrum Oil & Gas PLC on
19 May 2014.
Other current appointments
BVBA Piet Everaert – director,
VWEW Advocaten VOF – partner
Pankaj Jain
Non-executive director
• DOB: 14 June 1967
• Nationality: Indian
First appointed as a director
of Nostrum Oil & Gas LP on
26 November 2013 and as a director
of Nostrum Oil & Gas plc on
19 May 2014.
Other current appointments
KazStroyService Global B.V. –
Chief Executive Officer, ABN
Heritage Developers Private Limited –
director, RMG Properties Private
Limited – director
2 Mr Everaert resigned as a member of the Remuneration Committee on 22 March 2016.
67
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Nostrum Oil & Gas PLC management team
(See biographies of executive directors Frank Monstrey, Kai-Uwe Kessel and Jan-Ru Muller on page 66).
Thomas Hartnett
General Counsel and
Company Secretary
• Year of birth: 1964
• Nationality: U.S./Belgian
Appointed as Group General
Counsel of the Nostrum Group on
5 September 2008 and as Company
Secretary of Nostrum Oil & Gas PLC
on 3 October 2013.
Skills and experience
• More than 16 years’ experience
with the law firm White & Case LLP
where he was a Partner and
specialised in cross-border
corporate and M&A transactions
based in the firm’s New York,
Istanbul, London, Brussels and
Bangkok offices.
Jan Laga
Head of M&A
• Year of birth: 1963
• Nationality: Belgian
Appointed Deputy CEO of Nostrum
on 1 January 2010.
Skills and experience
• Wide experience in industrial
group management: Picanol,
Berry Group, Ackermans & van
Haaren and Koramic.
Tom Richardson
Group Head of
Corporate Finance
• Year of birth: 1981
• Nationality: British
• 1996-1998 served as Senior
Corporate Counsel for
Intercontinental Hotels Group
(formerly Bass Hotels & Resorts).
• Holds a Bachelor of Arts degree in
Comparative and Developmental
Politics from the University of
Pennsylvania and a Juris Doctor
degree from New York University
School of Law.
• Member of the New York Bar.
Appointed as Group Head of
Corporate Finance on 31 August 2011.
Skills and experience
• Over seven years’ experience in
banking covering the emerging
markets and has been involved
in raising over US$5 billion for
emerging markets companies
in the capital markets.
• Two years of experience in
consultancy work across the
emerging markets, being involved
in over US$1.25 billion of
financings.
Alexei Erber
Head of Business
Development
• Year of birth: 1959
• Nationality: German
• Holds a Masters degree in
electro-mechanical engineering
(University of Leuven) and an MBA
(INSEAD).
Appointed as Director of Geology
and Reservoir Management of
Zhaikmunai LLP in October 2007.
Skills and experience
• More than 20 years’ experience
with the geological and
exploration departments of Erdas
Erdöl GmbH and Gaz de France.
• Graduate of the Gubkin Russian
State University of Oil and Gas
(Geology and Geology
Engineering) and the Ernst Moritz
Arndt University of Greiswald
(Mathematical Methods in
Geology).
Zhaikmunai LLP management team
Heinz Wendel
General Director,
Zhaikmunai LLP
• Year of birth: 1953
• Nationality: German
Gudrun Wykrota
Chief Financial Officer,
Zhaikmunai LLP
• Year of birth: 1960
• Nationality: German
Appointed as Chief Operating
Officer of Zhaikmunai LLP in January
2012, and as General Director of
Zhaikmunai LLP in August 2013.
Skills and experience
• 30 years’ experience in oil & gas
exploration and production,
primarily as an oil and gas
engineer.
• Served in various managerial and
technical capacities in Germany,
Poland, Russia and Kazakhstan
with GDF Suez E&P, East German
Erdas Erdöl GmbH and others.
• Graduate of the Oil & Gas Institute
of Baku, Azerbaijan.
Appointed as Chief Financial Officer
of Zhaikmunai LLP in April 2010.
Skills and experience
• Prior experience in the energy
field: Head of Asset Management
Upstream (Gazprom Germania
GmbH), Finance and
Administration Manager (Gaz de
France Produktion Exploration
Deutschland GmbH).
• Holds an MSc (Mining Engineering
and Economy) from Moscow
Geological Exploration University,
and a Certificate in International
Accounting from the German
Chamber of Industry and
Commerce in Berlin, Germany.
68
Nostrum Oil & Gas PLC Annual Report 2015 Zhaikmunai LLP management team
Berik Brekeshev
Commercial Director,
Zhaikmunai LLP
• Year of birth: 1975
• Nationality: Kazakh
Appointed as Commercial Director
of Zhaikmunai LLP in January 2010.
Skills and experience
• More than 10 years’ extensive
experience in the oil and gas
industry in Kazakhstan.
Zhomart Darkeev
Administrative Director,
Zhaikmunai LLP
• Year of birth: 1966
• Nationality: Kazakh
Skills and experience
• Previously worked for Derku Oil &
Gas Drilling as assistant driller
and Kazakhgas State Holding
Company as a leading reservoir
engineer. At Zhaikmunai LLP, he
has held the positions of Assistant
General Director, Chief
Administrative Manager, Engineer
Manager and Deputy General
Manager.
Vyascheslav Druzhinin
Government Authorities
Relations Director,
Zhaikmunai LLP
• Year of birth: 1954
• Nationality: Russian
Amankeldy Sanatov
Acting Operations Director,
Zhaikmunai LLP
• Year of birth: 1975
• Nationality: Kazakh
• Previously held senior positions
with Starleigh Ltd, Tallahassee
Holdings Limited and JSC NNGRE
and commercial roles at Nelson
Resources, Kazakhoil Aktobe,
Buzachi Operating, Atlas Global
Investment and Western-Siberian
Drilling Company.
• Holds an MBA (International
Marketing) from the Maastricht
School of Management.
Appointed as Acting Operations
Director in 2013.
Skills and experience
• Diplomas in Operation of Oil and
Gas Fields and Oil and Gas
Geology from Saraov
Chernyshevsky State University.
• Has previously worked in other
positions within the Company
including as Site Manager,
Manager of the Oil and Gas
Production department and Field
Superintendent for Zhaikmunai LLP.
Gernot Voigtländer
Director of Geology and
Reservoir Management,
Zhaikmunai LLP
• Year of birth: 1968
• Nationality: German
• Graduate of Furmanov Secondary
School with further education
completed at the Ivano-Frankivsk
Institute of Oil and Gas with
a specialisation in drilling of oil
and gas wells.
Appointed as Director of Geology
and Reservoir Management in 2013.
Skills and experience
• Previously worked at GDF Suez
Exploration & Production
Deutschland GmbH and gained
experience in petroleum geology
from 1984.
• Extensive subsurface experience
in the exploration, appraisal,
development and production
of hydrocarbons.
• Diploma of Geology from the
Technical University of Berlin and
degree in Exploration Geology
from Moscow Institute of
Exploration Geology, Russia.
Serik Sultanov
Acting Drilling Director,
Zhaikmunai LLP
• Year of birth: 1961
• Nationality: Kazakh
Skills and experience
• Qualified mining engineer from
the Polytechnical Institute, Tomsk
(Russia) and the USSR Ministry
of Geology.
• Completed drilling engineer
training at the Hughes Christensen
Company, Houston, Texas.
• Previous experience includes
various positions in the Field
Development Department
of KazakhGaz State Holding
Company, State Holding
Company “Zharyk” and
Volkovgeologia KGGP.
Skills and experience
• Previously worked for ELF
Neftegas Kazakhstan, JV Aktobe
Preussag Munay Ltd, Ural Oil &
Gas LLP, North Caspian Oil
Development LLP and other
companies, has experience in
drilling since 1986.
• Holds a qualification from the
Kazakh Politechnical Institute with
a specialisation in drilling of oil
and gas wells.
69
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate governance approach
Corporate governance is very important to Nostrum and the
Board promotes high standards of corporate governance
as a key component of its activities. The Company is now
subject to the provisions of the September 2014 version
of the UK Corporate Governance Code (the “Code”). The
Code is publicly available on the website of the UK Financial
Reporting Council (www.frc.co.uk).
Changes in the operating structure: the
Executive Committee
In February 2015 the Group established an executive
committee comprised of all of the executive directors,
whose details are provided on page 66, together
with Thomas Hartnett, Heinz Wendel and Gudrun Wykrota,
whose details are provided on page 68.
Please refer to pages 77 to 80 for a detailed explanation
of the ways in which the Company complies with each
provision of the Code. The Company fully complies with all
provisions of the Code with the exception of those matters
set out on page 76, in respect of which the reasons for
a divergence from the Code position is explained.
The Board considers all of its non-executive directors,
other than Piet Everaert and Pankaj Jain, to be independent
within the meaning of such term as defined in the Code.
Piet Everaert and Pankaj Jain are not deemed to be
independent as a result of having been nominated by
Claremont Holdings C.V. (a Dutch limited partnership
indirectly controlled by Frank Monstrey, the chairman of
the Company, and his spouse) and Mayfair Investments B.V.
(“Mayfair”), respectively, who are the two largest
shareholders in the Company.
The Code recommends that the Board should appoint
one of its independent non-executive directors to act in the
capacity of senior independent director. Eike von der Linden
serves in such capacity as the Board’s senior independent
director.
The Board has appointed an audit committee,
a remuneration committee and a nomination and
governance committee. The members of these committees
are appointed principally from among the independent
directors and all appointments to these committees are
for a period of one year. The terms of reference of the
various committees have been drawn up in accordance
with the provisions of the Code.
Each committee and each director has the authority to
seek independent professional advice where necessary
to discharge their respective duties, in each case at the
Company’s expense. In addition, each director and
committee has access to the advice of the Company
Secretary, Thomas Hartnett.
Subject to Kai-Uwe Kessel’s overall responsibility as Chief
Executive for executive management, each member of the
Executive Committee has oversight responsibility for
particular functional areas as follows:
Executive Committee
Member(s)
Frank Monstrey/
Kai-Uwe Kessel
Frank Monstrey
Jan-Ru Muller
Gudrun Wykrota
Kai-Uwe Kessel/
Frank Monstrey
Heinz Wendel
Functional Area
Strategy
Corporate Finance and
Communications, including:
• Corporate Finance
• Economic Analysis
• Investor Relations
• External Communications
• Public Relations
Finance, including:
• Budget & Control
• Treasury & Cash Management
• Risk Management
• Liaison with Internal Audit
• Information & Communication
Technology (ICT)
Accounting and Tax, including:
• Accounting and Reporting
• Tax Matters
Business Development, including:
• Exploration
• Appraisal
• Governmental Interaction
• Transaction Management
• Peer Analysis & Market Intelligence
Operations, including:
• Development
• Production
• Abandonment
• QHSE
• Relations with Government
Authorities
• Procurement
• Research & Development
• Security
• Administration
• Licensing
70
Nostrum Oil & Gas PLC Annual Report 2015 Executive Committee
Member(s)
Kai-Uwe Kessel
Thomas Hartnett
Functional Area
Sales & Marketing, including:
• Sales Oil & Gas Products
• Marketing
• Logistics & Transportation
Legal, HR and Company
Administration, including:
• Legal Matters
• Compliance
• Corporate Governance
• Company Administration
• Oversight of Service Companies
• Human Resources
Each member of the Executive Committee has functional
management authority over the respective organisational
units and areas within the Group listed next to their name
in the above table. Their ongoing responsibilities include
ensuring that goals and objectives are aligned with
the Group’s overall strategy and vision. Functional
responsibilities of Executive Committee members in
their respective areas include but are not limited to:
• implementing decisions taken by the Executive
Committee within their functional team
• tracking business processes and managing tasks
• allocating resources to achieve better efficiency within
their functional area
• identifying and addressing inefficiencies, establishing
standards and best practices
• providing direction to employees within their functional
team
• providing professional guidance, training and career
development within their functional team
• reviewing performance of functional team members and
making recommendations to line managers regarding
employee performance and remuneration
• working together with line managers and promoting
cross-functional integration.
The Executive Committee meet on a weekly basis to discuss
and approve matters affecting or required for the
day-to-day ordinary operation of the Group.
Governance framework
Board
Remuneration
Committee
Board Audit
Committee
Board
Nomination
& Governance
Committee
Board
C
hief Executive O f
e r
f i c
Executive Com m i
t
t e e
How the Board works
The Board schedules four regular meetings during the
course of the year and in addition meets when appropriate
to review trading performance, budgets and funding, set
and monitor strategy, examine acquisition opportunities
and report to shareholders.
The Board has a formal schedule of matters reserved
for its decision which cover decisions relating to:
• strategy and management;
• structure and capital;
• financial reporting and controls;
• internal controls;
• contracts and expenditure;
• communication;
• Board membership and other appointments;
• remuneration;
• delegation of authority;
• corporate governance matters; and
• approval of certain Group policies.
The schedule is reviewed annually and is available on our
website. Other specific responsibilities are delegated to
Board committees.
71
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate governance approach continued
The Board is responsible for considering all important
management and policy matters in relation to the Company
and the Group and has the powers and duties set out in
the relevant laws of England and Wales and the Company’s
articles of association.
The key responsibilities of the Board include:
• setting the Company’s strategic aims;
• ensuring that the necessary financial and human resources
are in place for the Company to meet its objectives;
• reviewing Group management performance; and
• setting the Group’s values and standards to ensure that
its obligations to all shareholders are understood and met.
Board activities in the 2015 financial year
Board activities are structured to assist the Board in achieving its goal to support and advise executive management
on the delivery of the Group’s strategy within a transparent governance framework.
The diagram below shows the main areas of focus of the Board during 2015.
Board
Diversity and talent
• Succession planning
• Talent capability and
diversity
• Gender diversity
Business risks
• Strategic and
operational risks
• Sanctions
• Russia
• Oil prices
Governance
• Board performance
and evaluation
• Board committee
reports
• Corporate governance
updates
• Review committee
membership
Financials
• Chief Financial
Officer’s report
• Quarterly and
full year results
• Internal audit
Business performance
• Chief Executive’s
business report
• Commercial
performance
in local markets
• Business development
• Exploration
• Operations updates
Business strategy
• Strategy and
operations report
Being responsible
• Health and safety
• Legal and compliance
• Reputation
• Environment
Shareholder focus
• Returns to
shareholders
• Communication with
shareholders
• Investor relations
Sustainability
• Sustainable business
practices
72
Nostrum Oil & Gas PLC Annual Report 2015 Appointment and tenure
All executive directors have service agreements with the
Company and all non-executive directors have letters of
appointment with the Company. For all executive directors
there is no term limit on their services, as the Company
proposes all executive directors for annual re-election at
each subsequent Annual General Meeting of the Company.
The appointment of each of the non-executive directors
commenced on 19 May 2014. Each appointment is for an
initial term of three years, subject to being re-elected as
a director at each subsequent Annual General Meeting of
the Company. The letters of appointment for non-executive
directors do not set a fixed time commitment as it is
anticipated that the time required of directors may fluctuate
depending on the demands of the Company’s business
and other events. It is expected that directors will allocate
sufficient time to the Company in order to discharge their
duties effectively.
Copies of the service agreements of the executive directors
and the letters of appointment for the non-executive
directors are available for inspection at the Company’s
registered office and will also be available for inspection
at the Annual General Meeting.
Company Secretary
The Company Secretary is responsible for advising the
Board, through the Chairman, on all governance matters.
All directors have access to the advice and services of the
Company Secretary, who is responsible for ensuring Board
procedures are complied with and that there is a good flow
of information between the Board and its committees. The
appointment of the Company Secretary is a matter reserved
for the Board as a whole.
Board composition
The Board consists of nine directors. As at 31 December
2015, in addition to the Chairman, Frank Monstrey,
there were two executive directors and six non-executive
directors.
Within the Board, the roles of chairman and chief executive
are separate, with each having distinct and clearly defined
responsibilities. The chairman, Frank Monstrey, is
responsible for leadership of the Board and for ensuring its
effectiveness in all aspects of its role. The chairman sets the
agenda for Board meetings in consultation with the chief
executive, the chief financial officer and the general counsel
and company secretary. The chairman is also responsible for
ensuring that the directors receive accurate, timely and clear
information and that there is effective communication with
the directors. The chief executive provides leadership to
the Group, which enables the successful planning and
execution of the objectives and strategies agreed by the
Board. The chief executive is also responsible for care of the
Group’s assets and, jointly with the chairman, representation
of the Group to third parties.
Eike von der Linden as senior independent non-executive
director provides a sounding board for the chairman and
serves as an intermediary for the other directors when
necessary. He is available should the need arise to convey
concerns to the Board other than through the chairman or
the chief executive.
The Board’s Nomination and Governance Committee keeps
the balance, independence and succession plans of the
Board under review so as to maintain an appropriate
balance of skills and experience within the Company and
on the Board in accordance with the Code.
Board diversity
The Board has due regard for the importance of, and
benefits from, diversity in its membership, including gender
diversity, and strives to maintain an appropriate balance
on the Board. The Board is comprised of individuals with
diverse sectoral experience, ages and geographic and
ethnic origin.
Whilst there are currently no women on Nostrum’s Board,
gender diversity is important to us and the Nomination and
Governance Committee is currently working together with
the chairman to source a suitable female Board member
to replace one of the Company’s current non-executive
directors in 2016.
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Board evaluation
In line with the requirements of the Code, the Company
aims to review Board effectiveness annually, with Board
effectiveness also being reviewed through an external
performance evaluation every three years.
In 2015 a detailed questionnaire was prepared by the
Company Secretary and distributed to each director for
their feedback regarding the Board’s performance and
effectiveness. The directors were asked to provide their
views on a range of subjects, including multiple questions in
four principal areas: leadership, effectiveness, accountability
and engagement.
• One director suggested that additional Board training
should be considered to keep the Board up-to-date
on values and standards. In addition to training that the
Company organises for directors, all directors are regularly
encouraged to discuss any training and development
needs at Board meetings and to make recommendations
to the chairman outside of such meetings. However,
to ensure that all directors feel able to make such
suggestions going forward consideration will be given
to adding the discussion of director training as
a fixed agenda item at all quarterly Board meetings
of the Company.
Key findings and action items coming out of the
self-evaluation include the following:
• Several directors noted that the implementation of
a board portal across the Group designed to improve
the efficiency of information sharing and the distribution
of Board and committee materials has improved
communications between the executive and
non-executive directors and the timeliness of the
dissemination of information to the Board.
• One director suggested that the gender balance of the
Board be addressed when appropriate. This has been
adopted as an action item for the Nomination and
Governance Committee which is currently in the process
of identifying a suitable female Board candidate to
replace one of the non-executive directors in 2016.
• Certain directors suggested that the Board’s dialogue
with shareholders and shareholder representative
groups could be developed further and feedback from
management to the non-executive directors regarding
any shareholder concerns could be improved. Whilst
the Company regularly engages with shareholders
it does so mainly via its investor relations team and
executive directors. Going forward the aim is to expand
this engagement to the non-executive directors by
arranging meetings with shareholders and/or shareholder
representative groups as and when requested or appropriate.
• One director suggested that strategic issues should
be discussed at Board level at an earlier stage and this
suggestion is being considered further by the Board
and senior management.
Director induction and training
Each individual joining the Board receives a full, formal
induction package with materials on the Group’s business
and operational, financial and legal matters. They also
participate in discussions with members of the Board and
representatives of major shareholders in order to obtain
a good understanding of the challenges and opportunities
faced by the Group. Directors are often given the opportunity
to discuss their training and development needs and to
make recommendations to the chairman regarding topics
on which they would like to receive training.
In response to requests from directors, a site visit for the
Board to the Group’s Chinarevskoye field operations in
Kazakhstan was arranged in 2015. Geology and reservoir
training was given as part of the site visit and covered topics
such as certain regional field studies, production forecasts
and exploration and appraisal activities.
The directors regularly attend training events organised
by third parties and the Company actively encourages
directors to attend such events. During 2015, members
of the Audit Committee have been attending various
workshops hosted by third parties regarding the new
requirement under provision C.2.2 of the Code for the
Company to include a viability statement in its Annual
Report and the Audit Committee has regularly reported
to the Board on such matters and requested additional
meetings with the chairman to discuss this new requirement.
Shareholder engagement
Nostrum is in regular contact with its shareholders and
sell-side analysts and has maintained an active and
transparent dialogue throughout the year. We keep all
existing and prospective investors abreast of company
news by issuing regular operational and financial press
releases via the London Stock Exchange’s Regulatory
News Service, as well as on Nostrum’s website. Additionally,
each of our quarterly, half-yearly and annual financial results
are accompanied by a conference call for investors and
analysts to hear from Nostrum’s senior management.
Russian translations of all press releases and financial
reports together with a variety of other shareholder
information are also available on our website.
74
Nostrum Oil & Gas PLC Annual Report 2015 We respond to daily queries from existing and prospective
shareholders and sell-side analysts through our Investor
Relations team. Our registrars, Capita Asset Services,
also have a team who respond to any technical queries
shareholders have regarding their holdings in the Company.
Extensive information is available on our website, where
shareholders or those with an interest in the Group can
log their details to receive email updates.
Nostrum attends investor conferences and industry forums
throughout the year and we publish a list of these in
advance on the investor relations section of our website.
We are available for ad hoc shareholder meetings with
management and welcome enquiries. Over the year, the
Investor Relations team and management met with over
100 institutions internationally.
Shareholders are encouraged to attend the Annual General
Meeting to discuss the progress of the Group. Our Annual
General Meeting is open to all our shareholders to attend
and advance notice of the time, date and location is given.
It provides an opportunity for shareholders to meet
with and ask questions of the Board in a more informal
environment.
Policies
The Company has adopted a share dealing code, which
incorporates the Model Code as published in the Listing
Rules and applies to the directors, senior management
and other relevant employees of the Group. The Company’s
share dealing code will be updated to take account of the
new market abuse rules which come into force in July 2016.
Bribery and corruption are significant risks in the oil and gas
industry and as such the Company operates a Group-wide
anti-bribery and corruption policy, which applies to all
Group employees and contractor staff. The policy requires
annual bribery and corruption risk assessments; risk-based
due diligence on all parties with whom the Company does
business; appropriate anti-bribery and corruption clauses
in contracts; and the training of personnel in anti-bribery
and corruption measures. In addition, the Company’s code
of conduct requires that employees or others working
on behalf of the Company do not engage in bribery or
corruption in any form.
In addition, the Company has adopted a whistle-blowing
policy that takes account of the Whistle-blowing
Arrangements Code of Practice issued by the British
Standards Institute and Public Concern at Work.
Board Committees
The Board has established a nomination and governance
committee, an audit committee and a remuneration
committee. Further details on each of these committees
can be found in their reports on pages 88 to 97. The terms
of reference of each of these committees can be found
on our website at www.nog.co.uk.
The committees are provided with all necessary resources
to enable them to undertake their duties in an effective
manner. The company secretary acts as secretary to the
committees. The minutes of committee meetings are
circulated to all directors.
Meetings of the Board and its committees are scheduled
for March, May, August and November each year. Directors
unable to attend a Board meeting because of another
engagement are provided with the briefing materials and
can discuss issues arising in the meeting with the chairman
or the chief executive. In addition to scheduled Board
meetings, there are other ad hoc meetings called to deal
with specific matters as and when they arise.
Attendance at meetings of the Board and its
committees in the 2015 financial year
Board
B
A
Audit
Committee
B
A
Remuneration
Committee
B
A
Nomination &
Governance
Committee
B
A
4
4
7
7
7
Executive directors
Frank Monstrey
Kai-Uwe Kessel
Jan-Ru Muller
Non-executive directors
Eike von der
Linden1
Piet Everaert
Atul Gupta
Pankaj Jain
Mark Martin2
Sir Christopher
Codrington, Bt.3
7
7
7
6
7
7
7
6
7
7
7
6
4
6
7
8
8
8
7
8
8
4
4
4
4
4
4
4
4
4
4
4
4
A = Total number of meetings the director was eligible to attend.
B = Total number of meetings the director did attend.
1 Chairman of the Audit Committee.
2 Chairman of the Remuneration Committee.
3 Chairman of the Nomination and Governance Committee.
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Corporate governance approach continued
Compliance with the 2014 UK Corporate
Governance Code
Nostrum fully complied throughout 2015 with the provisions
of the 2014 version of the UK Corporate Governance Code
(the “Code”) except in the following respects:
D.2.1 The Company’s Remuneration Committee consists
of three independent non-executive directors (Mark Martin,
Eike von der Linden and Sir Christopher Codrington, Bt.)
and one non-independent non-executive director
(Piet Everaert).
Provision D.2.1 of the Code provides that the Remuneration
Committee must include at least three independent
non-executive directors and the Company’s remuneration
committee meets such requirement. However, the Company
understands that the most common interpretation of
provision D.2.1 of the Code is that any additional director
appointed as a member of the committee must also be an
independent non-executive director. If such interpretation
is correct, Mr Everaert’s membership in the Remuneration
Committee does not comply with provision D.2.1 of the Code.
In order to ensure there would be no conflict of interest,
the committee decided in 2015 that Mr Everaert would not
participate in any discussions, or vote on any resolutions,
regarding Frank Monstrey’s remuneration. In addition, on
22 March 2016 Mr Everaert resigned from the Remuneration
Committee so that the composition of the committee would
comply with Provisions D.2.1 of the Code.
E.2.3 All directors did not attend the 2015 Annual General
Meeting, however those directors who did not attend were
available by teleconference to answer questions from
shareholders.
We describe how we have applied the main principles of
the 2014 Code in the following table, cross-referencing
to other parts of this annual report. The table helps us to
evaluate our compliance during the year and should be
read in conjunction with the Corporate Governance section
as a whole. Headings in the table correspond to the
headings in the Code.
A.3.1 The chairman does not meet the independence
criteria set out in B.1.1 of the Code, in part given his
executive position in the Company. Companies owned and
controlled by the chairman acquired the Group’s assets
outright in 2004 and the chairman has been a leading driver
behind the successful development of the business since
that date. As such, the other members of the Board consider
that the chairman’s continued involvement as an executive
director is important for the future of the business, given
the chairman’s experience and expertise in the development
of the Group’s oil and gas assets in Kazakhstan.
B.1.2 Given that the chairman fulfils an executive role and
Piet Everaert and Pankaj Jain are not categorised as
independent directors as a result of having been nominated
by Claremont Holdings C.V. and Mayfair Investments B.V.
(“Mayfair”), respectively, five of the nine directors on the
Board are not considered independent for the purposes
of the Code. Mayfair, whilst not considered independent
for the purposes of the Code, is independent of the other
shareholders in the Company. Mayfair has no alignment
with any other major shareholder and hence Mayfair’s
nominee to the Board is considered to be independent in
character and judgement with no relationships that directly
affect his judgement and no single group is therefore able
to exercise majority influence over the Board as a whole.
In order to provide additional protections to the Company
in respect of these areas of non-compliance with the Code,
the Company has entered into relationship agreements
with each of Claremont Holdings C.V. and KazStroyService
Global B.V. (“KSS Global”). On 30 January 2015 Mayfair (an
affiliate of KSS Global) acquired 48,333,300 ordinary shares
in the Company from KSS Global and pursuant to a deed
of adherence of the same date undertook to the Company
to be bound by the terms of the relationship agreement
previously signed between the Company and KSS Global
and to observe and perform all of the provisions and
obligations of such relationship agreement in so far as
they fall to be observed or performed on or after the date
of the transfer.
76
Nostrum Oil & Gas PLC Annual Report 2015 A. Leadership
A.1 The role of the Board
The Board’s responsibilities are set out in the section
entitled “How the Board Works” on page 71 of the
Annual Report.
The Board met formally seven times during 2015. All
directors are, where possible, expected to attend all
Board and relevant Committee meetings. Details of Board
meeting attendance for the year are set out on page 75
of the Annual Report.
The Board has approved certain policies including
a formal schedule of matters reserved for the Board,
a delegation of signature authority policy and an internal
approvals policy which delegates the approval of certain
matters to the Executive Committee and/or certain of its
members. Further information can be found on page 75
of the Annual Report.
A.3 The chairman
The chairman sets the agenda for Board meetings and
promotes a culture of openness and debate by ensuring
there is effective communication between executive and
non-executive directors.
As explained in more detail on page 76 of the Annual
Report the chairman does not meet the independence
criteria set out in provision B.1.1 of the Code.
A.2 Division of responsibilities
Frank Monstrey, the chairman, is responsible for leading
the Board while Kai-Uwe Kessel, the chief executive, is
responsible for the day-to-day management of the Group.
Further details of the roles of chairman and chief executive
can be found on page 73 of the Annual Report.
A.4 Non-executive directors
The Board has appointed Eike von der Linden as senior
independent non-executive director. Mr von der Linden
provides a communication channel between the chairman
and the non-executive directors. Further information
regarding Mr von der Linden’s role can be found on
page 73 of the Annual Report.
The chairman is available to the non-executive directors
and often attends meetings of the Audit and Remuneration
Committees in the absence of the other executive
directors.
The Nomination and Governance Committee Report can
be found on pages 88 of the Annual Report.
B. Effectiveness
B.1 The composition of the Board
The Board consists of nine directors; three executive
directors, four independent non-executive directors and
two non-executive directors who are not considered
independent for the purposes of the Code. Therefore,
as explained in further detail on page 76 of the Annual
Report, the current composition of the Board does not
comply with provision B.1.1 of the Code as five of the nine
directors on the Board are not considered independent.
B.2 Appointments to the Board
The Nomination and Governance Committee leads
the appointment of new directors. The report of the
Nomination and Governance Committee can be found
on pages 88 of the Annual Report and provides an
overview of what the committee has done during the year.
The Nomination and Governance Committee terms of
reference can be found at: http://www.nostrumoilandgas.
com/en/nomination-committee.
The Nomination and Governance Committee is
responsible for regularly reviewing the composition of
the Board. No changes were made to the composition
of the Board during 2015.
A majority of members of the Nomination and Governance
Committee are independent and Sir Christopher
Codrington, Bt. in his capacity as an independent
non-executive director is chairperson of the committee.
All directors are subject to annual re-election at the
Company’s Annual General Meeting.
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Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate governance approach continued
B.4 Development
Details of director induction and training are provided
on page 74 of the Annual Report.
B. Effectiveness
B.3 Commitment
Details of each directors’ other significant commitments
are set out in their biographies on pages 66 to 67 of
the Annual Report. Directors’ are required to report
any changes to their commitments to the Board.
The executive directors’ service contracts and the
non-executive directors’ letters of appointment are
available for inspection at the Company’s registered office
and will be available for inspection at the Company’s
Annual General Meeting.
Non-executive directors are advised of the time
commitment expected from them on appointment and
by accepting their appointment non-executive directors
undertake that they will be able to allocate sufficient time
to meet the time commitment required of the role.
B.5 Information and support
The Company has an agreed procedure for directors to
take independent professional advice at the expense of
the Company which is managed by the company secretary.
No such independent advice was sought in the 2015
financial year.
B.6 Evaluation
The Board and its committees undertook an internal
evaluation during 2015. In accordance with provision
B.6.2 and as the Board has conducted internal evaluations
for the past two years, the Board will arrange for an
externally facilitated evaluation of the Board during 2016.
The outcomes of the 2015 Board evaluation exercise
can be found on page 74 of the Annual Report.
The company secretary assists the chairman by organising
induction and training programmes and is responsible for
ensuring that the correct Board procedures are followed.
The company secretary also assists the chairman in
ensuring that all directors have full and timely access to all
relevant information and advises the Board on corporate
governance matters. The removal of the company
secretary is a matter for the Board as a whole.
B.7 Re-election
All directors were subject to shareholder election at the
2015 Annual General Meeting, as will be the case at the
2016 Annual General Meeting. The biographies for all of
the Company’s directors can be found on pages 66 to 67
of the Annual Report.
78
Nostrum Oil & Gas PLC Annual Report 2015 C.2 Risk management and internal control
An overview of the Company’s principal risks and
uncertainties can be found on pages 61 to 63 of the
Annual Report.
The Board has overall responsibility for determining the
significant risks that may affect the Group in achieving its
strategic objectives. More details on this matter together
with details of how the Audit Committee, internal audit
manager and senior management of the Group assist the
Board with its responsibilities in relation to risk can be
found in the Risk Management section of the Annual
Report on pages 59 to 60.
The directors’ viability statement can be found on page 60
of the Annual Report.
C. Accountability
C.1 Financial and business reporting
The directors’ statement of responsibility regarding
the financial statements is set out on page 111 of the
Annual Report. The directors’ going concern statement
is given on page 120 of the Annual Report.
The statement from the Company’s auditor regarding
its reporting responsibilities is set out on page 114
of the Annual Report.
C.3 Audit committee and auditors
The Board has delegated a number of functions to the
Audit Committee which are explained in more detail
in the Audit Committee report which can be found on
pages 82 to 87 of the Annual Report and in the terms of
reference for the Audit Committee which can be found at:
http://www.nostrumoilandgas.com/en/2012fy.
Regular updates are provided to the Board by the
Audit Committee chairman.
The Audit Committee consists of at least three
independent directors. The chairman is not a member
of the Audit Committee.
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Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Corporate governance approach continued
D. Remuneration
D.1 The level and components of remuneration
The Remuneration Committee is responsible for setting
the Group’s remuneration policy. For further information
see the Remuneration Committee report on pages 89
to 97 of the Annual Report and the directors’ remuneration
policy which was approved by shareholders at the 2015
Annual General Meeting on pages 98 to 103 of the
Annual Report.
E. Relations with shareholders
E.1 Dialogue with shareholders
The Board seeks to engage with shareholders regularly
and the chairman seeks to ensure that the Board is kept
appraised of shareholder views.
Further information regarding shareholder engagement
can be found on pages 74 to 75 of the Annual Report.
D.2 Procedure
The Remuneration Committee consists of at least
three independent non-executive directors, however,
Mr Everaert, a non-independent non-executive director,
is also a member of the Remuneration Committee and the
Company understands that the common interpretation of
provision D.2.1 of the Code is that any additional director
appointed as a member of the Remuneration Committee
must also be an independent non-executive director
and therefore the Company does not fully comply with
provision D.2.1 of the Code1. Further details can be found
on page 76 of the Annual Report.
The Board has delegated a number of responsibilities to
the Remuneration Committee including determining the
remuneration of the chairman, the chief executive, the chief
financial officer, the company secretary and the executive
committee. Full details are set out in the Remuneration
Committee terms of reference which can be found at:
http://www.nostrumoilandgas.com/en/
remuneration-committee.
The chairman, the chief executive and the chief financial
officer determine the remuneration of all non-executive
directors, including members of the committees.
E.2 Constructive use of General Meetings
The Company’s Annual General Meeting provides
shareholders with the opportunity to vote on certain
aspects of the Group’s business and to speak with the
directors.
Voting on all resolutions at the Annual General Meeting
is on a poll. The proxy votes cast, including details of the
votes withheld, are disclosed to those in attendance at the
meeting and the results are published on the Company’s
website and via the Regulatory News Service.
A copy of the notice of the Annual General Meeting
will be posted on our website and sent by post to those
shareholders who have not opted-in to electronic
communications at least twenty working days before
the Annual General Meeting.
1 Mr Everaert resigned as a member of the Remuneration Committee on 22 March 2016.
The corporate governance approach has been approved by the Board.
Kai-Uwe Kessel
Chief Executive Officer
29 March 2016
Jan-Ru Muller
Chief Financial Officer
29 March 2016
80
Nostrum Oil & Gas PLC Annual Report 2015 Strategic report
Corporate governance
Financial report
Regulatory information
Additional disclosures
Nostrum Oil & Gas PLC
Annual Report 2015
81
Audit Committee Report
Letter from the Chairman
It is paramount that the duties of the Audit Committee
are performed effectively in market conditions such as
these, with the last year punctuated by the continued
decline in oil prices. I am pleased to say that throughout
2015 the Audit Committee has remained focused on
its responsibilities to Nostrum’s shareholders and has
continued to deliver oversight and control successfully.
In addition, the Committee has embraced the new
regulatory requirement of the viability statement and
looks forward to building this firmly into Nostrum’s
corporate governance practices from now on.
Since its last reporting date, the Audit Committee has
held eight formal meetings, of which four were held in
preparation and connection with Board meetings
and three in anticipation of the viability statement. In
addition, eight Audit Committee conference calls were
conducted, the last four in connection with tendering
of external audit services for the year 2016.
My private meetings with Nostrum’s external audit
partner gave the Audit Committee an opportunity to
share our views on the Group’s potential risk areas and
discuss the areas of concern raised by the committee
members. In addition, we were periodically updated
by the Group’s internal audit manager on the audits of
internal controls, development of the risk management
function and other assignments given to internal audit.
When the committee members had questions or
comments on the monthly management reports, those
were immediately discussed with the Group’s CFO and,
when considered necessary, recommendations were
made to the executive management team.
Quarterly meetings of the committee usually take place a
few days or just prior to a Board meeting to maximise the
efficiency of the committee’s interaction with the Board.
As chairman of the committee, it is my responsibility to
report to the Board on key topics discussed at committee
meetings to ensure that all directors are informed of the
committee’s work.
I believe that the committee consists of members with
an excellent balance of skills and experience, allowing the
committee to perform its tasks effectively whilst being
supported by the management, the external auditor and
the Group’s internal audit manager.
Eike von der Linden
Chairman, Audit Committee
Senior independent non-executive director
82
Nostrum Oil & Gas PLC Annual Report 2015 Role and responsibilities of the Audit Committee
The primary role of the committee is to assist the Board in
fulfilling its responsibilities in achieving the Group’s strategic
objectives and protecting stakeholder interests.
The key areas of responsibility of the committee are
categorised as follows and are described in more detail in
the committee terms of reference available on the Group’s
website at www.nog.co.uk:
• review the Group’s annual and interim reports including
financial statements as well as formal announcements of
the financial results and other information;
• review the effectiveness of the Group’s internal controls
and risk management systems including impairment
testing, by assessing the consistency and clarity of related
disclosures and conducting operating and financial
reviews;
• monitor compliance with applicable legal and regulatory
requirements and the Group’s Code of Conduct;
• monitor and review the effectiveness of the Group’s
internal audit function;
• maintain the relationship with the Company’s external
auditor and oversee its appointment, remuneration and
terms of engagement whilst continually assessing its
independence and objectivity; and
• review audit findings and assess the standard and
effectiveness of the external audit.
The members of the committee during 2015 were:
Name
Eike von der Linden
Atul Gupta
Sir Christopher Codrington, Bt.
Membership
start date
19 May 2014
19 May 2014
19 May 2014
The members of the Audit Committee were selected
with the aim of providing a wide range of financial and
commercial expertise necessary to meet the responsibilities
of the Committee. All members of the Committee are
considered to have the required recent and relevant
financial experience.
The committee meets on a quarterly basis or additionally
as and when required. The chief financial officer and the
internal audit manager are also invited to the meetings
if regarded necessary together with the external auditor.
In addition to these activities, on a monthly basis the
members of the committee are updated by management
and the internal audit manager on key issues and
developments including the status of the Group’s strategic
initiatives, financial performance, risk management and
internal controls.
Activities of the Audit Committee during the year
The committee held eight meetings in 2015 and below is a
summary of the major activities of the committee during the
year, which include: compliance with corporate governance
standards, financial reporting, external audit, internal audit,
internal controls and risk management, significant issues
and related actions and the committee review.
Compliance with corporate governance standards
Nostrum’s approach to corporate governance is primarily
based on the UK Corporate Governance Code published by
the Financial Reporting Council (FRC) and the Listing Rules
of the UK Listing Authority.
As of 31 December 2015, Nostrum complied with all the
principles and provisions of the UK Corporate Governance
Code in relation to the work of the committee.
The committee held several meetings with the external
auditor to discuss the new requirements of the 2014 UK
Corporate Governance Code relating to the viability
statement. In addition, the committee gave appropriate
attention to the recently emerging risks related to cyber
security and participated in the 2015 Cyber Governance
Health Check conducted by the UK authorities.
Nostrum has also established a Group Whistle-blowing
Policy and has appointed two compliance liaison officers;
one Russian-speaking compliance liaison officer based
in Kazakhstan and a further Dutch- and English-speaking
compliance liaison officer based in Brussels, to ensure
that all Group employees have access to someone who
can provide them with support and guidance on their
rights and obligations regarding whistle-blowing. The
Audit Committee maintains close contact with the
compliance liaison officers.
Financial reporting
While reviewing the draft quarterly and annual financial
statements as well as the Annual Report, the committee
focused on challenging:
• the compliance of the accounting policies applied and
disclosures made with financial reporting standards and
relevant corporate governance requirements;
• the significant judgements and estimates applied by the
management, which are discussed in more detail in the
section entitled “Significant issues and related actions”
below; and
• whether the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the
information necessary for shareholders to assess the
Group’s performance, business model and strategy.
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Audit Committee Report continued
Any questions and comments arising from the Committee
and from the external auditor were discussed with
Nostrum’s management at meetings of the committee.
Subsequently, based on its overall assessment the
committee recommended that the Board approve the
financial statements and the Annual Report.
19 May 2014 based on the recommendation of the
committee and upon approval by the Company’s
shareholders and re-appointed as an auditor of the Group
on 19 May 2015. Mr Richard Addison was appointed as lead
audit engagement partner on 19 May 2014 and continued
in this role for the 2015 Group audit.
The committee continuously provides feedback to
management on ways to improve the effectiveness and
clarity of the Group’s corporate reporting and has
encouraged management to support and adopt regulatory
initiatives that would enhance the Group’s reporting.
External audit
During Q4 2015 the Audit Committee reviewed and
discussed the detailed audit plan prepared by Ernst &
Young LLP (UK) which identifies the audit scope and its
assessment of key risks. The key risks monitored by the
committee correspond with those identified and assessed
by management and the external auditor. These risks and
remediating actions are explained in detail in the section
entitled “Significant issues and related actions” below.
All members of the committee support the application
of professional scepticism by the Group’s external auditor.
During 2015 and 2016 the members of the committee held
private meetings with the external auditor, which provided
a mutual opportunity for open dialogue and feedback
without management being present. Topics covered at
such meetings include: the external auditor’s assessment
of significant risks and related management actions,
confirmation that there has been no restriction in the scope
placed on it by management, the adequacy of the audit
fees, the independence of its audit and how it has exercised
professional scepticism.
The effectiveness of the external auditor is evaluated by the
committee each year and takes into account the quality of
the work and communication undertaken by the external
auditor and the level of audit fees. The committee reviewed
the 2015 H1 interim and 2015 annual auditor’s reports
giving particular consideration to the audit procedures
and findings in the areas of significant judgements and
estimates. The committee also reviewed and discussed the
Group’s significant risks identified by the external auditor,
and reviewed the effectiveness of the Group’s risk
management framework related to such risks.
The committee also reviewed the letter of representation
to be signed by management in respect of both the interim
review and the annual audit.
Appointment of external auditor
Ernst & Young LLP (Kazakhstan) was the auditor of the
predecessor group of companies since 2007, and continued
auditing Zhaikmunai LLP in 2015, while Ernst & Young LLP
(UK) was first appointed as an auditor of the Group on
Given guidance contained under provision C.3.7 of the
UK Corporate Governance Code that provides that
companies should put their external audit contract out to
tender at least once every ten years together with sustained
low oil prices the committee decided to initiate a tender
process for the external audit arrangements for the year
ending 31 December 2016 to ensure that the Group is
receiving high quality audit services at the best available
price. Several Big4 audit firms as well as one Tier2 audit
firm participated in the tender process as a result of which
it was concluded that it would be in the best interests of
shareholders to continue engaging Ernst & Young LLP (UK)
as the Group’s external auditor and on that basis the Board,
on the recommendation of the committee, will ask
shareholders to approve the re-appointment of Ernst &
Young LLP (UK) as the Group’s auditor at the Company’s
2016 annual general meeting.
Non-audit services
The committee monitors the external auditor to ensure that
it does not provide non-audit services that are prohibited
by the UK Auditing Practices Board (APB), and limits such
services to due diligence services, other assurance services
and tax compliance and advisory services.
In 2015, non-audit fees totalled US$203 thousand (2014:
US$1,089 thousand, including US$730 thousand for
services relating to corporate finance transactions and
US$40 thousand for tax compliance services) including
US$180 thousand (2014: US$319 thousand) for quarterly
reviews of the interim financial statements and
US$23 thousand for other non-audit services. The Audit
Committee is satisfied that adequate safeguards to ensure
Ernst & Young’s independence are in place. The committee
concurred with the external auditor’s position that the
non-audit services do not impair the external auditor’s
independence.
The Group’s “Policy on the provision of non-audit services
by the external auditor” was developed on the basis of the
requirements of the UK Corporate Governance Code and
Auditing Practices Board’s (APB) Ethical Standards. The
main principle of the policy is that non-audit services may
only be provided by the external auditor where the external
auditor maintains the necessary degree of independence
and objectivity and standard supplier selection procedures
are carried out. The following are the main areas covered
by the policy:
• the Group’s main principles in relation to non-audit
services,
84
Nostrum Oil & Gas PLC Annual Report 2015 • prohibited services – the services which must not be
provided by the Group’s external auditor;
• permissible non-audit services – the services which may
be provided by the Group’s external auditor to the extent
that they are allowed by the APB Ethical Standards and
provided that all necessary safeguards are applied;
• procedures for the approval of services to be provided
by the Group’s external auditor, including thresholds for
such approvals;
• safeguards that must be considered for non-audit
services;
• independence requirements, including requirements
related to hiring employees of the external auditor,
requirements related to external auditor’s partner rotation;
and
• reporting requirements related to non-audit services.
The policy is available on the Group’s website at
www.nog.co.uk. and will be reviewed and amended as
and when required.
Internal audit
The committee periodically receives reports from the
Group’s internal audit manager throughout the year.
The reports summarise internal audit findings and any
action to be taken by management as a result.
In 2014 the Group developed its internal audit function
and hired an internal audit manager. In connection with
this an internal audit charter has been adopted, which sets
out the responsibilities of the internal audit function, and
a three-year internal audit plan has been developed. The
primary role of the internal audit function is to help the
Board and executive management to protect the assets,
reputation and sustainability of the organisation. This is
intended to be achieved through:
• building strong and effective risk awareness within
the Group;
• continuously improving risk management and control
processes so that they operate effectively and efficiently
and reflect leading practice; and
• sharing best practice with regard to risk management
and assurance across the Group.
The Group aims to further develop its ongoing process for
identifying, evaluating and managing the significant risks
faced by the Group in accordance with the FRC’s Internal
Control: Revised Guidance for Directors on the Combined
Code (formerly, the “Turnbull Guidance”). The system is
intended to manage rather than eliminate the risk of failure
to achieve business objectives and can only provide
reasonable and not absolute assurance against material
misstatement or loss.
The Group plans to enhance the internal audit function
by assigning internal resources to support the function
(provided that all necessary safeguards are considered)
and refining the terms of the internal audit charter in
consultation with the committee to ensure that it is effective
and meets the requirements of the business.
Internal controls and risk management
The committee has been focusing on the Group’s risk
assessment and management systems. A comprehensive
financial procedures report (dated 20 May 2014) was
developed by the Group during the process of its move to
a premium listing and was reviewed by the committee. The
committee established a director’s risk register and actively
participates in further enhancing it. In 2015 the Group’s
risk management policy has been drafted and considerable
progress has been made towards further development of
a comprehensive risk matrix, and a dedicated software
solution is in process of deployment, which is expected to
support the risk management at various levels and locations
within the Group.
Particular attention is also paid by the committee to the
areas of risk management related to ensuring adequate
maintenance of accounting records and accurate recording
of transactions, which permit the preparation of financial
statements in accordance with IFRS. In view of the oil price
fluctuation, the committee focused on the review of
impairment testing, going concern and viability statement.
The Group’s system of internal controls is aimed at
mitigating risks and improving efficiency, and includes but
is not limited to the following:
• corporate governance approach, segregation of
authorities and duties at various levels;
• policies and procedures covering various areas, including
director’s remuneration, compliance, accounting and
reporting, health, safety and environment, and others as
mentioned in the relevant sections of the Annual Report;
• periodic revision of policies and procedures, and related
trainings and internal communications;
• constant monitoring by senior management and the
Board of short-term, medium-term and long-term
planning and decision-making processes;
• internal audit work and the remedial actions taken by
management in response to findings
In the committee’s view the Group maintains robust and
defensible systems of risk management and internal
controls, and the committee makes recommendations
to the senior management on further improvements as
and when considered necessary.
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The Committee review
The committee undertakes an annual evaluation of its
performance and effectiveness.
In August 2015 the committee used a survey which
examined governance processes such as the mix of
experience and skills amongst members, meeting content,
information, training and resources. Areas of focus for 2015
arising from the evaluation include monitoring the length
of committee membership and suggestions for further
committee training. Aside from this observation, the
committee concluded that its mandate and oversight
performance were appropriate.
Significant issues and related actions
The following are the key risks and issues that the committee focused on during 2015:
Significant issues
Committee actions
Recoverability of non-current assets’ carrying values
The Group performs impairment testing of goodwill on an annual basis
as required by IFRS. Moreover, the continuing fall in market oil prices since
Q4 2014 was considered an impairment trigger event for oil & gas assets
and exploration & evaluation assets. The impairment testing is subject
to application of management judgement and various assumptions,
underlying the calculation of the value in the use of this single cash
generating unit, being the achievability of the long-term business plan
and the macroeconomic and related modelling assumptions underlying
the valuation process.
Oil & gas reserves estimation and accounting
Oil & gas reserves, which are estimated by the Group’s reserve engineers
and audited by the independent reserve engineers, are used to
calculate the depletion of oil & gas assets, and also used as input data
for impairment testing models. Judgements and estimates are used
when estimating the oil & gas reserves.
Revenue recognition
The timing of revenue recognition in accordance with Incoterms, the
recognition of revenue on a gross or net basis, and the treatment of
discounts are complex areas of accounting.
Related party transactions and disclosures
This has been assessed as a significant risk area due to the inherent
complexity of identifying related parties and the extensive disclosure
requirements of IAS 24 regarding related party disclosures as well as
the past history of significant related party transactions carried out by
the Group.
GTU3 construction and well drilling
There are internal and external factors threatening the ability of the Group
to achieve its strategic objectives such as the construction of GTU3 and
the drilling programme. These include, but are not limited to, inadequate
project management, supplier delays, availability of financial and other
resources and cost overruns.
The committee reviewed the detailed reports on impairment testing
prepared by management and challenged the appropriateness of the
assumptions made. Areas of focus were the achievability of the business
plans, as well as assumptions in relation to oil prices and discount rates,
which have been subject to volatility given the current macroeconomic
conditions. Special consideration was also given to the sensitivity analysis
in relation to these assumptions. In addition, these assumptions and
sensitivity analysis were considered as part of the viability assessment. This
has also been one of the main areas of audit focus and Ernst & Young LLP
provided detailed reporting on these matters to the committee.
The committee reviewed judgemental aspects of the reserve estimation
report as part of the Group’s annual due diligence process. In addition,
it reviewed the reserves analysis paper prepared by the internal audit
in cooperation with the business development team. The committee also
examined the governance framework for the oil & gas reserves process,
training for staff and developments in regulations and controls.
The committee has reviewed the Company’s policy and controls in relation
to revenue recognition and specifically compliance with the PSA.
The committee has been monitoring the procedures in place for the
identification of related parties and ensures that pre-approvals are
obtained before entering into contracts with them. Also the committee
considered any observations made by the auditor as part of its reporting
to the committee.
The construction of GTU3 and the drilling programme continued to be
one of the key areas of focus for the committee in 2015, particularly in light
of the decline in oil prices. The committee has been reviewing reports
prepared by management and meeting regularly to review and discuss
potential problems and to provide advice on future steps to be taken
by the Group.
Other areas of committee risk focus
In addition to the abovementioned significant risks, the committee also paid attention to the following risks areas during 2015:
Tax contingencies and compliance with PSA
The Group is subject to risks associated with uncertainties surrounding
the application of tax laws in Kazakhstan as well as the uncertainties and
complexities of the calculation of taxes and other obligatory contributions
under its production sharing agreement. As a result, management is
required to make judgements and estimates in relation to provisioning
for related taxes and contributions.
The committee considered management reports setting out the results
of assessments in relation to significant taxes and other contributions to
the government. Having received input from the external auditor and
challenging decisions made, the committee agreed with management’s
assessment of the provision to be recognised in respect of taxes and
uncertain tax positions (transfer pricing and social commitments) and
the associated disclosures. In addition, the committee continuously
monitored that the Group’s projected liquidity position accounts for
any potential claims.
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Nostrum Oil & Gas PLC Annual Report 2015
Significant issues
Committee actions
Provisions and contingencies
The recognition of provisions for the future decommissioning of oil & gas
assets at the end of their economic lives requires management’s
judgement when estimating settlement dates, the scope of work,
technology and legal requirements. Also the level of provisioning for
contingent and other liabilities is an issue where management and legal
judgements are important.
Commercial tests: going concern, viability statement,
impairment test
The determination that the Group will continue on a going concern basis
for the foreseeable future requires management to exercise judgement.
This obligation also applies for the medium term viability statement
and for the long term impairment test.
Derivative financial instruments
The estimation of the fair value of derivative financial instruments involves
the use of judgement and estimations in relation to oil price volatilities by
both external service providers and management. In addition, there are
risks associated with the complexity of accounting and disclosures related
to derivative financial instruments.
Information security risks
Given its public nature the Group needs to ensure that its environment is
sufficiently secure to protect it against the risk of loss or corruption of
sensitive information. Failure to adequately protect such information could
have a material adverse effect on the Group’s reputation and may lead to
legal action against the Group.
Environmental compliance
Given the changing nature of environmental regulations in Kazakhstan,
there is a risk that the Group will not be in full compliance with all
regulations at all times.
On behalf of the Board
The committee reviewed management’s reports on the Group’s
decommissioning, environmental remediation and litigation provisioning,
including key assumptions used, the governance framework applied,
discount rates and the movement in provisions over time.
The committee considered the reports prepared by management and
their assumptions and concluded that management’s recommendation
to prepare the accounts on a going concern basis was appropriate. The
viability statement approves the company’s robustness under conservative
oil price assumptions and the impairment test evidences the companies
sound long term perspectives. The committee also considered the
external auditor’s findings on these reports and assumptions.
The committee reviewed management’s report on the valuation of
derivative financial instruments and the respective disclosures made in
the notes to the financial statements. The external auditor’s conclusions
on the valuation models were also discussed at committee meetings.
At its quarterly meetings, the Committee pays attention to information
security related matters and discusses with the management past and
planned actions directed at addressing the recommendations from
external consultants. Also, the Chairman of the committee received timely
updates on the risks and responses in the context of the Cyber Governance
Health Check carried out by the UK authorities.
As part of the monthly management reports the committee reviewed the
Group’s activities to ensure an appropriate level of protection for health,
safety and the environment. The committee has also reviewed the annual
report prepared by the independent environmental auditor outlining the
Group’s compliance and the environmental auditor’s recommendations
for improvement.
Eike von der Linden
Chairman, Audit Committee
Senior independent non-executive director
29 March 2016
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Nomination and Governance Committee Report
Letter from the Chairman
Main activities of the committee during the year
During 2015 the committee has continued to focus on
succession planning by assessing the current balance of
skills, experience, independence and knowledge on the
Board and those required of future appointments to the
Board. The committee is satisfied that the mix of skills,
experience and knowledge on the Board and, in
particular, those of the chairman and chief executive
remain appropriate. The committee has focused its
attention on developing profiles for future Board
candidates.
The committee discussed executive succession planning
and, in relation to the chairman, it was agreed that in the
event the chairman became unable to continue in that
role for any reason, the senior independent director would
replace him on an interim basis until a new chairman
is selected.
Diversity is an important issue for the Board and it
recognises that steps should be taken to meet the
voluntary Board gender diversity targets set by Lord
Davies. Therefore, the committee has spent much of
2015 focusing on the subject resulting in the engagement
of two search firms to assist with identifying suitable
female Board candidates. When a suitable female Board
candidate is identified and agrees to join the Board
a member of the Board will step down to allow for the
appointment of a female Board member.
The committee discussed Mr Everaert’s position on the
Remuneration Committee during 2015 and it was agreed
that Mr Everaert should remain as a member of the
Remuneration Committee but that given his non-independent
status he should not be involved in any discussions
or decisions regarding Mr Monstrey’s remuneration.
However, on 22 March 2016 Mr Everaert resigned from
the Remuneration Committee so that the Company
would comply unquestionably with the UK Corporate
Governance Code on this point.
The committee has also kept the training needs of the
directors under review throughout the year, especially in
relation to operational, environmental and social matters.
During the year ahead the committee intends to continue
to build on the progress it has made in terms of
succession planning and gender diversity, to keep the
composition of the Board and its committees under
constant review and to assess how talent is developed
internally to create a pipeline to the Board to ensure that
good governance practices are being achieved.
Sir Christopher Codrington, Bt.
On behalf of the Nomination and Governance Committee
29 March 2016
Chairman’s introduction
I am pleased to report on the Nominations and
Governance Committee, which I chair.
The Nomination and Governance Committee has met
four times this year. The attendance of each committee
member at committee meetings held during 2015
is shown on page 75.
Membership
The committee consists of three members: Frank Monstrey,
Eike von der Linden and myself who have all been
members since 19 May 2014. The primary responsibilities
of the committee are set out in its terms of reference
which are reviewed and updated annually and which
are available for download on the Company’s website.
Alternatively, copies can be obtained on request from
the company secretary.
Role of the Nomination and Governance Committee
The key responsibilities of the committee are to:
• lead the process for Board appointments and make
recommendations to the Board regarding candidates
for appointment or reappointment as directors;
• monitor and make recommendations to the Board on
board governance and corporate governance issues, to
enable the Board to operate effectively and efficiently;
• regularly review the structure, size and composition
(including skills, knowledge and experience) required
of the Board;
• keep under review the leadership needs of the
Company, both executive and non-executive, with a
view to ensuring the continued ability of the Company
to compete effectively in the marketplace; and
• review annually the time required from non-executive
directors.
Committee meetings
Only members of the committee have the right to attend
committee meetings. However, other individuals such
as the chief executive, the head of human resources and
external advisers may be invited to attend all or part of
any meeting, as and when appropriate.
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Nostrum Oil & Gas PLC Annual Report 2015 Remuneration Committee Report
Letter from the Chairman
“ No bonuses will be payable to
the executive directors in 2016.”
Dear shareholder
2015 was a challenging year for the Group given the
substantial drop in the oil price, but as regards
performance by senior executives against KPIs:
• stable production of 40,391 boepd was achieved,
despite a prolonged shutdown of a customer’s gas
pipeline in October that severely disrupted production
during that month;
• significant progress was made on GTU3 construction
and the project was expected to be completed on time
and on budget until a slowdown in works and payments
was announced by the Company in 2016 due to the
precipitous fall in the oil price;
• preparatory work for exploration of the Rostoshinskoye
field progressed in 2015;
• the Company established a full business development
team and pursued various M&A opportunities; and
• an Executive Committee was established for the Group
and the project for the establishment of a functional
(rather than entity-based) organisation is proceeding.
Notwithstanding these achievements, given (i) the
precipitous drop in the oil price in the second half of 2015,
with the resulting effect on the Group’s revenues (ii) the
need for the Group to maintain liquidity and ensure
sufficient funding is available to complete GTU-3 and its
other capex requirements (iii) management’s decision to
cut operating expenditures in 2016 by 25% from the level
of actual 2015 expenditures management proposed and
the committee accepted, that no bonuses will be payable
to the executive directors in 2016 for 2015 performance.
Bonuses and salary increases awarded to executive
directors remain extremely low in comparison to the
Company’s peer group.
In addition, the committee has discussed the 40%
maximum annual bonus opportunity referenced in the
remuneration policy and would like to assure investors
that, notwithstanding any flexibility afforded by the
current remuneration policy, the committee considers the
40% maximum bonus opportunity to be a firm maximum
that will not be exceeded under any circumstances.
The committee has also been reviewing the effectiveness
of the Group’s phantom share option plan in incentivising
and retaining key employees of the Group and is currently
considering alternative long-term incentive plan options.
On 22 March 2016, Piet Everaert resigned as a member of
the committee to ensure the Company fully complies with
Provision D.2.1 of the UK Corporate Governance Code
and I would like to take this opportunity to thank Piet for
his hard work and contribution to the committee.
At the 2015 Annual General Meeting, shareholders
approved the remuneration policy. The Remuneration
Committee believes that the remuneration policy
continues to support the Company’s strategy and will not
propose any changes to the policy at the 2016 Annual
General Meeting. Although the committee does not
propose to make any changes to the remuneration policy,
in line with guidance, the existing policy has been
included in this years Directors’ remuneration report for
the information of shareholders.
This report has been prepared in accordance with the
UK’s regulations on remuneration reporting and will be
subject to an advisory shareholder vote at the forthcoming
Annual General Meeting.
Mark Martin
Remuneration Committee Chair
29 March 2016
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Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Remuneration Committee Report continued
2015 annual report on remuneration
In this section we give details of the composition of the
Remuneration Committee and activities undertaken in the
2015 financial year. We will seek an advisory vote on the
remuneration report at the 2016 Annual General Meeting.
Remuneration Committee
The remuneration of the chairman, the chief executive, the
chief financial officer, the company secretary and all other
senior members of executive management is determined
by the committee under delegated powers from the Board
and in accordance with the committee’s terms of reference.
The chairman and the executive members of the Board
determine the remuneration of all non-executive directors,
including members of the committees.
• reviewing the scale and structure of executive directors’
remuneration and the terms of their service or
employment contracts, including share based schemes,
other employee incentive schemes adopted by the
Company from time to time and pension contributions;
• demonstrating to the shareholders of the Company
that the remuneration of the executive directors of the
Company and other senior members of executive
management of the Company and its subsidiaries is set
by a committee of the Board whose members have no
personal interest in the outcomes of the decisions of the
committee and who will have due regard to the interests
of the shareholders; and
In accordance with the terms of reference, members of
the committee shall be appointed by the Board on the
recommendation of the Nomination and Governance
Committee in consultation with Mr Martin as chairman
of the committee. The committee must always include
at least three independent non-executive directors who
comprise a majority of the committee. The members of
the committee during 2015 were:
Name
Mark Martin (Chairman)
Eike von der Linden
Piet Everaert
Sir Christopher Codrington, Bt.
Membership
start date
19 May 2014
19 May 2014
19 May 20141
19 May 2014
1 Mr Everaert resigned as a member of the committee on 22 March 2016.
Given Mr Everaert’s non-independent status in light of
the common interpretation of Provision D.2.1 of the UK
Corporate Governance Code, Mr Everaert resigned as
a member of the Remuneration Committee with effect from
22 March 2016 so that the Company will comply with the
Code on this point.
None of the committee members have day-to-day
involvement with the business. Their biographies are given
on pages 66 to 67. The company secretary acts as secretary
to the committee.
The primary responsibilities of the committee are set out
in its terms of reference which are reviewed and updated
annually and which are available for download on the
Company’s website. Alternatively, copies can be obtained
on request from the company secretary.
In summary, the committee’s key responsibilities include:
• ensuring payments made on termination comply with the
relevant provisions of the Company’s remuneration policy.
When making recommendations to the Board regarding
executive directors’ remuneration the committee is able to
consider corporate performance on environmental, social
and governance issues and ensures that any incentive
structures do not raise any environmental, social or
governance risks by inadvertently motivating irresponsible
behaviour.
The committee held four meetings in 2015 and the
attendance of each committee member at such meetings
is shown on page 75. The principal agenda items at the
formal meetings were as follows:
Meeting
March 2015
Agenda item
• Review and approve the remuneration
May 2015
August 2015
policy and remuneration report.
• Approval of senior management
compensation and bonuses.
• Review and discuss proxy adviser
reports regarding the resolutions to
approve the Company’s remuneration
report and remuneration policy to be
put to a vote at the Company’s Annual
General Meeting.
• Review and discuss Mr Everaert’s
position on the Remuneration
Committee.
• Review current incentive compensation
procedures.
• Discuss proposed principles for
a future long-term incentive plan
and/or employee share option plan.
• making recommendations to the Board on the Company’s
November 2015 • Discuss and develop Group wide key
overall framework for remuneration and its cost and,
in consultation with the chairman and chief executive,
determining the remuneration packages of each of the
executive directors;
performance indicators.
• Discuss options for a new long-term
incentive plan.
With the exception of the chairman of the Board and the
chief executive, no other executive directors participated
in the committee meetings during 2015.
90
Nostrum Oil & Gas PLC Annual Report 2015 During the year the committee received advice internally from Frank Monstrey (Chairman of the Board), Kai-Uwe Kessel
(Chief Executive) and Thomas Hartnett (Company Secretary). The chairman and the chief executive were consulted on the
remuneration of the other executive directors and senior members of executive management and on matters relating
to the performance of the Company and the company secretary was consulted on regulatory requirements; none of the
chairman of the Board, the chief executive nor the company secretary participated in decisions on their own remuneration.
Members of the Group’s human resources team may attend relevant portions of committee meetings to ensure appropriate
input on matters related to senior members of the executive management team below board level.
During 2015 the Company did not engage any external advisers to advise on remuneration.
Voting on remuneration matters
At the Annual General Meeting held on 26 May 2015, two resolutions were put to shareholders relating to directors’
remuneration. The first resolution related to the remuneration policy and was subject to a binding vote. The second
resolution related to the directors’ annual report on remuneration and was subject to an advisory vote. The votes received
were as follows:
Resolution
Approval of Directors’ Remuneration Policy
Approval of Directors’ Annual Report on Remuneration
Votes FOR
and % of votes cast
Votes AGAINST
and % of votes cast
86,069,341
89,688,471
83.68% 16,785,416
88.41% 11,752,424
Votes
WITHHELD
16.32% 1,827,934
11.59% 3,241,796
At the 2016 Annual General Meeting the directors’ remuneration report will be put to shareholders for approval by way of
an advisory vote. No changes are proposed to the remuneration policy and this will not be put to shareholders at the 2016
Annual General Meeting.
Single total figure of remuneration for executive directors
The table below shows the single total figure of remuneration for each of the executive directors.
The executive directors are remunerated in euros and to avoid any anomalies in the figures reported due to fluctuations
in the EUR/USD exchange rate the Company has decided not to convert amounts paid to executive directors into USD,
the Group’s functional currency, but instead to report all figures in relation to executive director remuneration in euros
throughout this report.
Director1
Amounts in EUR
Frank Monstrey (Chairman)
Kai-Uwe Kessel (Chief Executive Officer)
Jan-Ru Muller (Chief Financial Officer)
Period
2015
2014
2015
2014
2015
2014
Salary
and fees
691,976
680,063
729,031
705,176
435,845
432,112
Benefits
in kind
–
–
5,931
5,115
–
–
Annual
bonus2
204,019
236,250
236,262
253,624
108,028
125,430
Option
exercise
–
–
–
Total
(audited)
895,995
916,313
971,224
1,086,408 2,050,323
543,873
557,542
–
–
1
Mr Muller is remunerated for his services in part through a director’s fee under his service agreement with Nostrum Oil & Gas PLC and in part as a Group executive through fees
payable under a service agreement with Nostrum Services NV. Mr Monstrey and Mr Kessel are remunerated entirely as Group executives under separate service agreements with
Nostrum Services NV.
2 Bonus figures relate to bonuses paid in 2015 and 2014 in respect of the prior year performance period. No bonuses will be paid to executive directors in 2016 for 2015 performance.
Given the significant drop in the oil price in 2015 and the resulting effect on the Group’s revenues, the Company has
decided that no annual bonuses will be paid to executive directors in 2016 for 2015 performance.
91
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Remuneration Committee Report continued
2015 annual report on remuneration
Single total figure of remuneration for non-executive directors
The table below shows the single total figure of remuneration for each of the non-executive directors. Non-executive
directors are remunerated in US dollars.
Director
Amounts in USD
Eike von der Linden1
Piet Everaert
Sir Christopher Codrington, Bt.2
Mark Martin3
Pankaj Jain
Atul Gupta
Period
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
Fees
130,000
115,000
100,000
100,000
110,000
55,000
110,000
55,000
100,000
100,000
100,000
100,000
Total
(audited)
130,000
115,000
100,000
100,000
110,000
55,000
110,000
55,000
100,000
100,000
100,000
100,000
1 Mr Von der Linden receives an additional fee being both the senior independent director and the chairman of the Audit Committee.
2 Sir Codrington receives an additional fee being the chairman of the Nomination and Governance Committee.
3 Mr Martin receives an additional fee being the chairman of the Remuneration Committee.
Notes on the single total figure remuneration table
Base salaries
In the past salaries have been reviewed annually in July of each year. In July 2015 salaries were increased by 2% for the
chairman of the Board and the chief financial officer and by 3.38% for the chief executive , effective July 2015.
Going forward the committee intends to review salaries at the end of each year with increases taking effect on 1 July.
Therefore, the next review of executive director salaries will be in December 2016. In making salary determinations,
the committee will consider the provisions of the remuneration policy.
Annual bonus
In the last financial year all executive directors were eligible for a bonus. Currently, the bonus year runs from 1 January to
31 December each year with bonus amounts being determined in July of each year. Going forward and in order to facilitate
better reporting and transparency in relation to the remuneration of executive directors, the committee intends to review
performance and determine annual bonus entitlements at the end of each year.
In accordance with the Company’s remuneration policy the maximum annual bonus opportunity is 40% of base
compensation and is assessed against financial and operational objectives. Refer to page 99 of the remuneration policy
for more information in relation to the Company’s bonus policy.
All bonuses are discretionary and can be reduced from the maximum annual bonus opportunity level for reasons such
as poor performance by the employee or due to disappointing financial performance of the Group as a whole. For the
bonus year which ran from 1 January 2014 to 31 December 2014, the key performance indicators for annual cash bonuses
for executive directors were as follows:
2014 bonus performance measures
Operational and financial
Hydrocarbon production of 46,500 boe/day
Issue $400m bond to secure medium-term financial needs of the Group
GTU3 construction on time and on budget
Strategic objectives
Premium listing on the LSE and KASE
Creation of business development team
HSE, social and governance
Sub-total: Corporate KPIs
Weight
35%
15%
10%
10%
20%
10%
10%
5%
60%
Actual
30%
10%
10%
10%
20%
10%
10%
5%
55%
% of
base salary
12%
4%
4%
4%
8%
4%
4%
2%
22%
92
Nostrum Oil & Gas PLC Annual Report 2015
2014 bonus performance measures
Personal objectives
Frank Monstrey – a selection of specific targets supporting the
Actual
% of
base salary
Weight
40%
Kai-Uwe Kessel – a combination of specific targets supporting the
corporate KPIs and Board functions
40%
20%
corporate KPIs and including production, development,
exploration and strategic targets
40%
20%
8%
8%
Jan-Ru Muller
– a combination of specific targets supporting the
corporate KPIs including maintaining financial strength,
financial reporting and risk assessment
Total
40%
3%
7.5%
100% Between 25% and 30%
As the Group did not meet its full targeted average production during 2014 and based on its assessment of Company
and individual performance of the executive directors the committee awarded bonuses of between 25 and 30 per cent
of salary to the executive directors. Annual bonuses were paid in cash and are summarised in the following table:
Director
Frank Monstrey
Kai-Uwe Kessel
Jan-Ru Muller
Bonus as
% of salary
30%
30%
25%
Cash (EUR)
204,019
236,262
108,028
The Company does not provide for any clawback provisions regarding annual bonuses as annual bonuses are awarded
on a lump sum basis based on past performance and so the rationale behind a clawback mechanism is less relevant.
Long-term incentive awards
In 2015 the Company did not operate a performance based long-term incentive scheme.
Pension entitlements
The Company does not operate a pension scheme and accordingly no element of remuneration is pensionable.
Payments to past directors
No payments were made to past directors of the Company during the year ended 31 December 2015.
Payments for loss of office
No payments were made in respect of loss of office during the year ended 31 December 2015.
Non-executive director fees
A review of non-executive director fees was conducted in 2015 and it was decided that the annual fees for non-executive
directors will remain the same for 2016 as those for 2015, being $100,000 per annum. The next review of non-executive
director fees will be conducted in 2016.
Directors’ shareholdings
The beneficial interests of the directors in the share capital of the Company as at 31 December 2015 were as follows:
Director
Frank Monstrey
Kai-Uwe Kessel
Jan-Ru Muller
Eike von der Linden
Atul Gupta
Sir Christopher Codrington, Bt.
Mark Martin
Piet Everaert
Pankaj Jain
Total
(audited)
32,599,586
10,000
–
13,160
–
3,312
10,000
22,000
119,700
On 22 January 2016, Eike von der Linden purchased an additional 2,000 ordinary shares bringing his total shareholding
in the Company to 15,160 ordinary shares.
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2015 annual report on remuneration
Phantom share option plan
The Company currently operates one non-performance related share option plan (the “Plan”). As at 31 December 2015,
the executive directors each held the following options over ordinary shares of the Company, generally vesting over
a five-year period, exercisable at either US$4.00 or US$10.00 per ordinary share and expiring ten years from the date
of grant, pursuant to the Plan:
(Audited)
Director
Frank Monstrey
Kai-Uwe Kessel
Jan-Ru Muller3
Options
held at
31 December
2014
–
700,974
200,000
120,130
70,000
Date
of grant
–
27.03.08
26.03.13
27.03.08
26.03.13
Face value
(in USD)
–
–¹
18,000²
–¹
6,300²
Options
exercised
during
the financial
year
2015
–
–
–
–
–
Options
lapsed
during
the financial
year
2015
–
–
–
–
–
Options
held at
31 December
2015
–
700,974
200,000
120,130
70,000
Option
exercise
price
(US$ per
option)
–
4.0
10.0
4.0
10.0
Expiry
date
–
26.03.18
25.03.23
26.03.18
25.03.23
1 The options do not have a face value at the date of the grant, since the grant date was before the GDR listing on the London Stock Exchange on 1 April 2008.
2 Calculated by multiplying the market value of the options at the date of grant (US$10.09) less $10.00 by the number of options granted.
3 Such options are held by a company associated with Mr Muller, Tenggara Capital B.V.
There have been no changes in the interests in the Plan between the end of the financial year 2015 and the date of this
annual report.
The Plan rules do not contain any malus or clawback mechanisms but going forward management will require any
recommendations by the Company to the option trustee of an option award to be made subject to an express right for
the Company to suspend further vesting and to claw back unvested options previously awarded where there has been
exceptional circumstances of misstatement or misconduct, misbehaviour, significant risk failures or material downturns
in the Group’s financial performance prior to vesting.
Remuneration statistics and comparisons
The following performance graph shows the growth in value of a notional £100 invested in the Company since the
premium listing of the Company compared to the FTSE 350 E&P Index. The committee selected the FTSE 350
Oil & Gas Index as the most appropriate comparator as it feels that it is a broad-based index which includes many
of the Company’s competitors.
Share price performance
110
100
90
80
70
60
50
40
94
4
1
n
u
J
4
1
l
u
J
4
1
g
u
A
4
1
p
e
S
4
1
t
c
O
4
1
v
o
N
4
1
c
e
D
5
1
n
a
J
5
1
b
e
F
5
1
r
a
M
5
1
r
p
A
5
1
y
a
M
5
1
n
u
J
5
1
l
u
J
5
1
g
u
A
5
1
p
e
S
5
1
t
c
O
5
1
v
o
N
5
1
c
e
D
Total Return on £100 (Dividends not re-invested)
Total Return on £100 (FTSE 350 Oil&Gas)
Nostrum Oil & Gas PLC Annual Report 2015
History of CEO remuneration
The total remuneration figures compared with a respective maximum opportunity for the chief executive during each
of the last five financial years are shown in the table below. Kai-Uwe Kessel was in the position for all five years shown.
Year
2011
2012
2013
2014
2015
Total CEO
remuneration
(EUR)
687,344
792,812
889,217
2,050,3232
971,224
Annual bonus as
% of maximum
opportunity1
100%
100%
100%
100%
80%
1 For the period 2010 until 2014 the bonus scenarios were either 0% or 100%. For the bonus scenarios as of 2015 refer to the remuneration policy on pages 98 to 103.
2 Total CEO remuneration for 2014 includes remuneration from the exercise of share options.
Percentage change in chief executive’s remuneration
The table below shows the percentage change in the chief executive’s 2015 salary, annual bonus and benefits compared to
a comparative group comprised of the Group’s European based employee population. The committee has chosen this
comparator group as it feels it is employed on more readily comparable terms.
(EUR)1
Salaries2
Benefits
Annual bonus
2015
729,031
5,931
236,262
705,176
5,115
253,624
Chief Executive
2014 % change
3.38%
Comparator
Group
% change
2%
16% 5,527.593
-7%
-3.75%
1
2
3
Mr Kessel is remunerated in euros and to avoid any anomalies in the figures reported due to fluctuations in the EUR/USD exchange rate the amounts shown in the table have not been
converted into USD, the Group’s functional currency.
Salary increases are determined and awarded during the course of the calendar year.
This figure represents the total amount of benefits paid per employee in the comparator group. As the majority of employee benefits have only been established since 2014 and most
of the employees in the comparator group only started work for the Group in 2014 or later, a meaningful comparator percentage change amount could not be generated.
Relative importance of spend on pay
The table below shows the Company’s actual spend on pay (for all employees) relative to dividends.
Key expenditure areas
(in thousands of US$)
Remuneration paid to all employees1
Dividends to shareholders (total)2
– Dividends
– Share buy-backs
2015
40,850
49,060
49,060
0
2014
40,358
64,615
64,615
0
%
Change
1.2%
-24.1%
-24.1%
–
1
2
Total remuneration reflects overall payroll and related taxes. Refer to the consolidated financial statements for further information.
In 2014, the Group was reorganised and the parent company of the group became a PLC, replacing the prior LP parent. Dividends are now paid per ordinary share but prior to 2015,
distributions were paid per common unit.
For further information on dividends and expenditure on remuneration for all employees please see the notes to the
consolidated financial statements.
95
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2015 annual report on remuneration
Service contracts
Details of the executive directors’ service contracts
and the non-executive directors’ letters of appointment
can be found in the Company’s remuneration policy on
page 101 of this annual report. All directors are subject
to annual re-appointment and accordingly all executive
and non-executive directors will stand for re-election
at the Annual General Meeting.
Statement of 2016 remuneration policy
implementation
The Company’s remuneration policy was put to a
shareholder vote at the 2015 Annual General Meeting
and was approved by 83.68% of shareholders. There is
no requirement for a vote on the policy in 2016 unless any
changes to the policy are proposed and as the committee
feels that the policy continues to remain both appropriate
and effective no changes are proposed for the coming year.
Salaries and bonuses of the executive directors are
reviewed and determined annually to ensure they remain
appropriate. The Company’s bonus year runs from
1 January to 31 December each year with bonus amounts
being determined in July of each year. Going forward and in
order to permit the Company to report on annual bonuses
awarded for the achievement of performance measures and
targets for the reported year, annual bonus entitlements will
be determined before publication of the Company’s annual
report so that annual bonus amounts payable to executive
directors in respect of performance in the reported year can
be reported in the relevant annual report. To allow for this
transition bonuses for executive directors based upon 2014
performance were awarded in June 2015 but bonuses for
executive directors based upon 2015 performance were
assessed in March 2016. As a result of such assessment it
was decided that as a result of the significant drop in the
oil price in 2015 and the resulting effect on the Group’s
revenues, the Company will not pay any discretionary
bonuses to the executive directors based upon 2015
performance.
Remuneration in 2016 will be consistent with the policy
described on pages 98 to 103.
Salaries and service fees
Salaries and service fees of the executive directors were
reviewed by the committee in May 2015 and were increased
effective as of 1 July 2015. The average salary increase
across the Group is 2%.
The table below shows the impact of the salary review
on the monthly salary of the executive directors.
Salary/
service fee
from 1 July
Director
2015 (EUR)
Frank Monstrey Chairman 57,093.75 58,235.63
Kai-Uwe Kessel1 Chief
50,659.18 52,372.91
Salary/
service fee
from 1 July
2014 (EUR)
Position
Percentage
increase
2%
3.38%
Executive
Jan-Ru Muller Chief
35,364.03 36,071.28
2%
Financial
Officer
1
Since Mr Kessel is remunerated on a net guarantee basis, the 2% increase applied to
remuneration was applied on the net amount paid to him, resulting in the figure shown.
Annual bonus
Details of the key performance indicators used to determine
annual bonus amounts paid to the executive directors in
2015 for performance in 2014 can be found in the table
on pages 92 to 93.
The key performance indicators used to determine that
executive directors would not be paid a bonus in 2016 for
2015 performance are as follows:
20%
20%
15%
5%
2015 bonus performance measures Weight
40%
Operational and Financial
Hydrocarbon production above
42,000 boe/day
GTU3 construction on time and
on budget
Strategic Objectives
Adjacent fields exploration
Deliver growth through business
development
Pursue Group internal
reorganisation
HSE, social and governance
Sub-total: Corporate KPIs
Personal Objectives
Frank Monstrey
Kai-Uwe Kessel
Jan-Ru Muller
Total
5%
5%
60%
40%
40%
40%
40%
100%
5%
% of
base
salary
Actual
0%1
0%
1
As a result of the significant drop in oil price in 2015 and the resulting effect on the
Group’s revenues, the Company decided not to pay any discretionary bonuses to the
executive directors and the other members of Group executive management in 2016
based on 2015 performance.
96
Nostrum Oil & Gas PLC Annual Report 2015 In addition, the Remuneration Committee has compiled
a list of suitable key performance indicators against which
the performance of the executive directors will be
measured at the end of 2016 to determine the annual bonus
amounts payable to executive directors in 2017. Details
of any non-commercially sensitive KPI’s are set out below.
2016 performance will be measured against these key
performance indicators and the committee will consider
such performance together with the Company’s financial
position, in deciding whether and at what level to award
bonuses for that year.
Phantom share option plan
The committee does not envisage the award of any
additional phantom share options to executive directors
in 2016.
The committee is currently reviewing the effectiveness
of the phantom share option plan for the executive
directors and wider employee population and is
considering alternative long-term incentive plan options.
Discussions will continue in 2016 and should any change
occur, shareholders will be consulted and approval sought,
as appropriate.
2016 bonus performance measures
Operational and Financial
Stabilise production at the specific target
level set by the Remuneration Committee1
Progress GTU3 construction to achieve mechanical
completion by a specific target date set by the
Remuneration Committee2
Implement cost-reduction programme
targeting reduction in operational and
G&A expenses by at least 25% and specific
transport and sales expenses by at least 15%,
compared to 2015 actuals
Strategic Objectives
Renegotiate PSA terms to allow full cost
recoverability and with the goal of restoring
the PSA balance of economic interests
Develop and implement functional organisation
within the Group and delegate authority to
budget owners to improve efficiency
HSE, social and governance
Including reduction in lost time injuries per
1 million man hours worked below 2
Sub-total: Corporate KPIs
Personal Objectives
Frank Monstrey – a selection of specific targets
supporting the corporate KPIs
and Board functions
Kai-Uwe Kessel – a combination of specific targets
supporting the corporate KPIs
and including production,
development, exploration and
strategic targets
Jan-Ru Muller – a combination of specific targets
supporting the corporate KPIs
including maintaining financial
strength, financial reporting
and risk assessment
Total
Weight
40%
20%
10%
Non-executive directors
Non-executive director fees were last reviewed in 2015.
The next review of non-executive director fees will be
conducted in 2016.
Approval of the Directors’ remuneration report
The Directors’ remuneration report was approved by the
Board on 22 March 2016.
On behalf of the Board
Mark Martin
Remuneration Committee Chair
29 March 2016
10%
15%
10%
5%
5%
60%
40%
40%
40%
40%
100%
1
2
The Group regards this production target as commercially sensitive information
and will disclose the target in next year’s annual report.
The Group regards details of the target date as commercially sensitive information
and will disclose the target date in next year’s annual report.
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Directors’ remuneration policy
This sets out the remuneration policy (the “Policy”) for the
Board which was approved by shareholders at the 2015
Annual General Meeting held on 26 May 2015 and took
effect from this point. Whilst we do not envisage making any
changes to our policy prior to the Company’s 2018 Annual
General Meeting, we conduct annual reviews to ensure that
it continues to support the strategy of the Company. If we
feel it is necessary to make a change to our policy prior to
the end of this three year period we will seek shareholder
approval.
No changes have been made to our remuneration policy
since the 2015 Annual General Meeting and the policy has
been included in full below as set out in the 2014 Annual
Report.
Policy coverage
This policy applies automatically to the following: 1) all
executive directors of the Company and the company
secretary, 2) any other senior members of the executive
management of the Group, 3) any other member of the
executive management of the Group as may be required
by the Board, and 4) any grant of shares, options or similar
securities or rights relating to more than 10,000 Company
shares.
Policy objectives
This policy is designed to:
1. Provide a structure and level of pay that attracts and
retains high calibre directors, managers and employees
capable of delivering the Company’s strategic objectives.
2. Provide clear and transparent performance incentives in
a manner that is consistent with best practice and aligned
with the interests of the Company’s shareholders.
3. Align the remuneration of executives and senior
managers with the interests of the Company’s
shareholders, and ensure that rewards are justified by
performance.
4. Ensure that the pay of the executive directors and senior
members of the executive management takes into
account: (i) pay and conditions throughout the Company;
and (ii) corporate governance best practice including
health & safety, environmental, social and governance
risks.
Peer group
For the purposes of benchmarking appropriate
compensation, the committee currently regards the
following companies as the most relevant peer group
for Nostrum:
• FTSE 250 companies of a similar size to Nostrum.
• Oil and gas E&P companies globally which compete
for scarce skills within the industry.
• Companies operating predominantly in the FSU which
compete for expatriate and local staff.
Risk management
The committee will review incentive arrangements regularly
to ensure that they comply with the risk management
systems, and that controls are operating effectively. The
committee also ensures that inappropriate operational or
financial risk-taking is neither encouraged nor rewarded
through the Company’s remuneration policies. Instead,
a sensible balance will be struck between fixed and variable
pay, short- and long-term incentives and cash and equity.
The committee has access to the Audit Committee and
senior executive management as and when required to
discuss any matters of risk assessment.
Nostrum operates in an industry that is inherently subject to
operational risks. Particular emphasis is therefore placed on
ensuring that health and safety best practice is reinforced by
this policy. The committee consults regularly to ensure that
this is the case.
Ongoing review of policy
The committee will periodically review whether this policy is
operating appropriately. Any actions arising from this review
will be assigned to an appropriate person with a deadline to
report back to the committee. The level and structure of the
compensation system will also be reviewed annually by the
committee.
The remuneration policy table
The table on page 99 sets out the key components of the
reward package for executive directors.
98
Nostrum Oil & Gas PLC Annual Report 2015 Executive directors’ remuneration policy table
Element of pay
Base pay
Purpose and
link to strategy
Maximum
opportunity
Operation
Performance
criteria
• To provide
• There is no prescribed
• Base salary is reviewed annually and
• None.
market-competitive base
salaries.
fixed for 12 months.
maximum annual
increase. The
Committee takes into
account remuneration
levels at peer group
companies together
with the performance
of the Company and
each individual’s
personal contribution.
Benefits
• To reflect market practice
and provided in line with
peer companies.
• The aggregate value
of such benefits should
not constitute a
significant proportion
of any employee’s
compensation.
• Benefits include:
– medical
– life insurance
– permanent health insurance
(long-term disability or income
protection insurance)
– a company car is provided to the CEO.
• None.
Annual
bonus
• Executive directors may
be eligible for an annual
cash bonus for good
performance (as
determined at the
Board’s discretion).
• In general, maximum
opportunity of 40%
of base salary
compensation.
by reference to performance in the
prior calendar year.
• Annual bonuses are generally paid
• Any larger bonus
in cash in August of each year.
will be set based on
specific medium-term
objectives that have
been agreed in
advance by the
committee.
• The annual bonus is determined
• Good performance (as determined
at the Board’s discretion).
• In exercising its discretion to
determine whether there has been
good performance by executive
directors the Board shall have regard
primarily to the extent to which the
performance target set by the Board
for such executive directors have been
achieved.
• Targets for bonuses are those to which
individuals can personally contribute
by strong performance and not based
on macro variables (such as market
cap, oil prices, etc.) that are not within
the control of individuals.
Phantom
share option
plan
• Share awards will only
be made on the basis
of achieving concrete
long-term objectives
defined in advance by
the committee. Share
awards will vest over
several years.
• The Board places great
importance on minimising
dilution of existing
shareholders. Share
awards will therefore
only be made to senior
management who are
able to make a material
contribution to
shareholder value that
substantially exceeds the
value of any share awards
made.
• Elian Employee Benefit Trustee Limited
administers the Plan and is responsible
for granting rights under the Plan.
• Each right entitles holders to receive,
on exercise, a cash amount equal to
the excess of the market value on the
exercise date of the ordinary shares of
the Company to which it relates over
a base value set at the date of grant.
• All executive directors of the Company
are eligible to participate in the Plan
at the discretion of the Board.
• Awards vest on the basis described
in the notes on the following page.
• Long-term objectives are to be
reviewed at every committee meeting
to ensure that they are appropriate,
relevant and rigorous.
• Share awards made in future may be
reduced at any time prior to vesting,
at the discretion of the committee,
following events such as (but not
restricted to) a material misstatement
of results, failure of risk management,
breach of health and safety regulations
or serious reputational damage to the
Company.
Pensions
Shareholding • Aligns interests of
• Not currently provided.
executive directors with
those of shareholders.
• n/a
• n/a
• The Committee monitors the holdings
of executive directors.
• Executive directors
are encouraged to
maintain a holding in
the Company to align
their interests with
shareholders.
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Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Remuneration Committee Report continued
Directors’ remuneration policy
Phantom share option plan
The Company operates the Plan in accordance with
the Plan rules, the Listing Rules, the Disclosure and
Transparency rules and other applicable rules. In order
to retain talent, options are generally granted in tranches
exercisable at the following times:
• as to 20% of the ordinary shares in respect of which an
option is granted, from the first anniversary of the date
of grant;
• as to a further 20% of the ordinary shares in respect of
which an option is granted, from the second anniversary
of the date of grant;
• as to a further 20% of the ordinary shares in respect of
which an option is granted, from the third anniversary
of the date of grant;
• as to a further 20% of the ordinary shares in respect of
which an option is granted, from the fourth anniversary
of the date of grant; and
• as to the remaining 20% of the ordinary shares in respect
of which an option is granted from the fifth anniversary
of the date of grant.
The Board retains discretion over a number of areas relating
to the operation and administration of the Plan, which
include, but are not limited to; (i) who participates; (ii) the
timing of the grant of award; and (iii) the size of the award.
Treatment of existing arrangement
For the avoidance of doubt, authority is given to the
Company to honour any commitments entered into with
current or former directors notwithstanding the approval
of the Policy. This will last until the existing incentives vest
(or lapse) or the benefits of any contractual arrangements
no longer apply.
Remuneration scenarios for executive directors
The bar charts below provide estimates of the potential
remuneration of the executive directors for 2015 and
therefore do not reflect the latest remuneration information.
Three scenarios are presented for each executive director:
(i) “minimum” remuneration, reflecting no bonus award; (ii)
“on target” remuneration, where the Board’s expectations
for the executive director’s performance have been met
and a bonus of 25% of base salary is awarded; and (iii)
“maximum” remuneration, where the Board’s expectations
for good performance by the executive director have been
exceeded and a bonus of 40% of base salary is awarded.
At present, the executive directors do not receive any
pension or any long-term compensation.
According to the policy of the Board, benefits are not
expected to be a significant component of remuneration.
In 2015, only Mr Kessel is expected to receive benefit
payments directly. Benefits are not paid to Mr Monstrey
and Mr Muller. Instead, Mr Monstrey and Mr Muller are
paid a base salary out of which they may arrange any
benefits themselves.
The bar charts below do not include any amounts in relation
to the Phantom share option plan because:
(i) as at the time of this Annual Report the Board is not able
to determine whether any options will be issued under the
Phantom share option plan in 2015 (as described in the
Directors’ remuneration policy, option awards will only
be made on the basis of achieving concrete long-term
objectives defined in advance by the committee and will
vest over several years); and
(ii) as at the date of this annual report, any options vesting in
2015 in respect of awards made from prior years would not
generate proceeds to the executive directors at the current
share price.
Kai-Uwe Kessel, Chief Executive Officer
amounts in USD thousand
1,600
1,400
1,200
1,000
800
600
400
200
0
968
1%
99%
1,207
1%
20%
79%
1,350
1%
28%
71%
Minimum
On target
Maximum
Salary
Bonus
Benefits
Frank Monstrey, Chairman of the Board
amounts in USD thousand
1,600
1,400
1,200
1,000
800
600
400
200
0
911
100%
1,138
20%
80%
1,275
29%
71%
Minimum
On target
Maximum
Salary
Bonus
100
Nostrum Oil & Gas PLC Annual Report 2015 Jan-Ru Muller, Chief Financial Officer
amounts in USD thousand
1,600
1,400
1,200
1,000
800
600
400
200
0
564
100%
705
20%
80%
790
29%
71%
Minimum
On target
Maximum
Salary
Bonus
Recruitment
The committee expects any new executive directors to be
engaged on terms that are consistent with this Policy but
the committee acknowledges that it cannot always predict
the circumstances under which any new executive director
may be recruited and so accordingly, in each case, the
committee will consider:
• The objective of attracting, motivating and retaining
the highest calibre directors in a manner that is consistent
with best practice and aligned with the interests of the
Company’s shareholders.
• Salary, benefits, annual bonus and long-term incentives
will be determined within the framework of the
remuneration policy table on page 99.
• Where an individual would be forfeiting valuable
remuneration in order to join the Company, the need
to retain flexibility should be considered in order for
the committee to be able to set base salary at a level
necessary to facilitate the hiring of the highest calibre
candidates including awards or payments to compensate
for remuneration arrangements forfeited on leaving
a previous employer. The committee would require
reasonable evidence of the nature and value of any
forfeited compensation and would, to the extent
practicable, ensure any compensation awarded was
no more valuable than the forfeited award.
• Judgement will be exercised to determine the appropriate
measure of compensation for any forfeited award by
taking account of relevant factors such as the value of
any lost award, performance conditions and the time
over which they would have vested or been paid.
• Where an existing employee of the Company is promoted
to the Board, the Company will honour any commitment
to remuneration made in respect of a prior role including
any outstanding awards of options under the Plan.
• The need, in order to recruit the best candidates, for the
Company to offer forms of sign-on remuneration the
necessity and level of which will depend on circumstances.
• Where an individual is relocating in order to take up
a role, the Company may provide certain one-off benefits
including, but not limited to, reasonable relocation
expenses, accommodation, housing allowance and
assistance with visa applications.
In making any decisions on remuneration for new joiners the
committee will endeavour to balance the expectations of
shareholders with current market and corporate governance
best practice and the requirements of any new joiner and
would strive to pay no more than is necessary to attract the
right talent to the role.
Service agreements
Summary details of each director’s service agreement are
as follows:
Frank Monstrey
Kai-Uwe Kessel
Jan-Ru Muller
Service
agreement
date
19 May 2014
19 May 2014
19 May 2014
Salary as at
1 January
2015 (US$)1
911,216
955,996
564,409
1
The executive directors are remunerated in EUR, the EUR amounts are converted to
USD using EUR/USD exchange rate (1.33).
The appointment of each of the executive directors
continues until the Company’s Annual General Meeting and
their ongoing appointment is subject to being re-elected
as a director at each subsequent Annual General Meeting.
Each executive director may be required to resign at any
time in accordance with the Company’s Articles or for any
regulatory reason such as the revocation of any approvals
required from the Financial Conduct Authority (“FCA”).
The Company may lawfully terminate the executive
directors’ employment in the following ways:
• at any time upon 12 months’ written notice;
• without notice in circumstances where the Company
is entitled to terminate for cause.
The lawful termination mechanisms described above are
without prejudice to the employer’s ability in appropriate
circumstances to terminate in breach of the notice period
referred to above, and thereby to be liable for damages
to the executive director.
The executive directors are not permitted to take up any
office or employment with, or have any direct or indirect
interest in any firm or company which is in direct or indirect
competition with the Company or any other member of the
Group or any company in which any member of the Group
has an interest, without the consent of the Board.
101
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Remuneration Committee Report continued
Directors’ remuneration policy
In addition, the executive directors are subject to certain restrictive covenants in their service agreements relating to share
dealings and non-competition and non-solicitation covenants in relation to relevant Group companies for six months from
the date of termination of the relevant executive’s service contract.
Copies of the executive directors’ service agreements and the non-executive directors’ letters of appointment are available
for inspection at the Company’s registered office during normal business hours.
Payments for departing executive directors
Provision
Notice period and
compensation for loss of
office in service contracts
Policy
• 12 months’ notice from the Company to the executive director.
• Up to 12 months’ base salary (in line with notice period). Notice period payments will either
be made as normal (if the executive director continues to work during the notice period
or is on gardening leave) or they will be made as monthly payments in lieu of notice (subject
to mitigation if alternative employment is found).
Treatment of annual
bonus on termination
Treatment of unvested
share option awards
• No entitlement.
• An executive director’s awards will generally lapse to the extent they have not vested on the
date of voluntary cessation of employment and any portion that remains outstanding but
unexercised after 12 months following such cessation will lapse.
In particular circumstances, an arrangement may be agreed to facilitate the exit of a particular individual. Any such
arrangement would be made bearing in mind the desire to minimise costs for the Group and only in circumstances where
it is considered in the best interests of shareholders.
Non-executive directors’ remuneration policy table
Fee structure
Approach to setting fees
Other remuneration
• Non-executive directors
receive a fixed annual fee
for their directorship.
• Additional annual fees
are payable to any director
who serves as senior
independent director
or as a Board committee
chairman.
• The Chairman of the Board
and the executive directors
determine the remuneration
of all non-executive directors,
including members of the
committees.
• Business expenses incurred in respect of the
performance of a non-executive director’s duties will
be reimbursed by the Company. Such expenses
could include travel between the home and office
or between the home and the location of a Board
or committee meeting.
• Non-executive directors are not eligible to participate
in the Plan.
Non-executive directors
The Chairman and executive directors set the remuneration package for non-executive directors in line with the
non-executive directors’ Remuneration Policy Table and subject to the Company’s Articles of Association (the “Articles”).
Non-executive director appointment letters
All non-executive directors of the Company were appointed on 19 May 2014. The Company intends to comply with
provision B.7.1 of the UK Corporate Governance Code and accordingly all directors will stand for re-election by
shareholders at future Annual General Meetings until the Board determines otherwise.
Each appointment is for an initial term of three years, subject to being re-elected at each Annual General Meeting, save that
a non-executive director or the Company may terminate the appointment at any time upon one month’s written notice,
or that a non-executive director may be required to resign at any time in accordance with the Articles of the Company, the
UK Corporate Governance Code or for any regulatory reason such as the revocation of approvals required from the FCA.
Each of the non-executive directors is entitled to an annual fee paid quarterly and to reimbursement of reasonable
expenses. There is no entitlement for non-executive directors to participate in the Plan.
102
Nostrum Oil & Gas PLC Annual Report 2015 The non-executive directors are not permitted to take up any office or employment with, or have any direct or indirect
interest in any firm or company that is in direct or indirect competition with the Company without the consent of the Board.
Upon termination of the appointment and where such termination is for any reason other than due to the non-executive
director’s gross misconduct, material breach of the terms of the appointment, act of fraud or dishonesty or wilful neglect
of the non-executive director’s duties, the non-executive director will be paid a pro rated amount of their fees in respect of
the period between the beginning of the quarter in which termination took place and the termination date. Otherwise none
of the non-executive directors are entitled to any damages for loss of office and no fee shall be payable in respect of any
unexpired portion of the term of the appointment.
Statement of consideration of employment conditions elsewhere in the Company
We have not consulted with employees on the executive remuneration policy. However, when determining the policy
for executive directors we have been mindful of the pay and employment conditions of employees across the Group as
a whole.
Statement of consideration of shareholder views
Senior executive management of the Company regularly meets with shareholders and solicits their views on the Company’s
policies in relation to director and executive remuneration, and takes such views into account when formulating
remuneration policies and remuneration levels in specific cases.
103
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Directors’ Report
The directors submit their report and the consolidated
audited financial statements of the Group and the audited
parent financial statements of the Company for the year
ended 31 December 2015.
This report has been prepared in accordance with The
Large and Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008. Certain information that
fulfils the requirements of the directors’ report can be
found elsewhere in this document and is referred to below.
This information is incorporated into this directors’ report
by reference.
Directors and their interests
Full biographical details of the individuals who were
directors of the Company during the financial year ended
31 December 2015 are set out on pages 66 to 67 of this
annual report.
Details of each director’s interests in the Company’s
ordinary shares and options held over ordinary shares
are set out in full in the directors’ remuneration report
on pages 93 and 94 respectively.
Dividends
Details of the dividend paid during the year are disclosed
in the notes to the consolidated audited financial statements
for the year ended 31 December 2015.
No dividend is proposed to be paid for the year ended
31 December 2015 due to lower revenues as a result
of declining oil prices.
Auditor
Each director in office at the date of this directors’ report
confirms that (a) so far as he is aware, there is no relevant
audit information of which the Company’s auditor is
unaware and (b) he has taken all the steps that he ought
to have taken as a director to make himself aware of any
relevant audit information and to establish that the
Company’s auditor is aware of that information.
Directors’ liabilities and indemnities
The Company maintains liability insurance for its directors.
All directors are also in receipt of an indemnity from the
Company under the Company’s Articles in respect of (a)
liability incurred by any director due to the negligence,
default, breach of duty or breach of trust in relation to the
affairs of the Company, or any subsidiary undertaking or (b)
any liability incurred by any director in connection with the
activities of the Company, or any subsidiary undertaking, in
its capacity as a trustee of an occupational pension scheme,
in both instances to the extent permitted under the
Companies Act 2006. Copies of the Company’s articles of
association (the “Articles”) are available on the Company’s
website or at the Company’s registered office during normal
business hours and will be available for inspection at the
Annual General Meeting.
In May 2015 the Board approved a policy for the
indemnification of directors, officers and other designated
beneficiaries and the entry by the Company into an
accompanying deed of indemnity.
The policy clarifies that the Company will seek to provide
the maximum indemnification and protection to Group
directors and officers permissible under applicable law,
except in cases of fraud or wilful default, including but not
limited to: (i) providing compensation for losses suffered in
the course of acting as a director or officer in the interests
of the Group (ii) providing directors and officers with quality
external legal representation and external professional
advisers (iii) assisting directors or officers with repatriation
following a third party claim (iv) continuing to make payment
of a director’s or officer’s remuneration and benefits while
such director or officer is under suspension, investigation
or detention by order of a third party (v) taking reasonable
steps to place any such director or officer in a similar
position working in another location or elsewhere in the
Group which would allow his/her employment to continue
and to compensate for any adverse financial consequences
they incur as a result of their loss of office or (vi) maintaining
customary directors and officers liability insurance policies.
The deed of indemnity is intended to cover any insufficiency
in the protection granted to directors and officers under the
Articles which could expose such persons to substantial
liability to third parties, including governmental authorities,
in particular in jurisdictions where significant uncertainty
exists in relation to the interpretation and application of the
law. The deed of indemnity allows directors, officers and
other designated beneficiaries to enforce the protection
provided for under the Articles without any further action
by the Company being required.
Political donations
The Group has made no political donations during the
year 2015.
Contributions to non-EU political parties
No contributions to non-EU political parties were made
during the year 2015.
104
Nostrum Oil & Gas PLC Annual Report 2015 Financial risk management objectives and policies
Disclosures relating to financial risk management objectives
and policies, including our policy for hedging are set out
in Principal risks and uncertainties on page 61.
Future developments within the Group
The strategic report on pages 2 to 61 contains details of
likely future developments in the business of the Group.
Research and development
The Group is not involved in any activities in the field of
research and development.
Transfer of shares
The Articles provide that transfers of certificated shares
must be effected in writing duly signed by or on behalf
of the transferor and, except in the case of fully paid shares,
by or on behalf of the transferee. The transferor shall remain
the holder of the shares concerned until the name of the
transferee is entered on the Register of Members in respect
of those shares. Transfers of uncertificated shares may be
effected by means of the relevant electronic system unless
the Uncertificated Securities Regulations 2001 provide
otherwise.
Branches
The Company is registered in England and Wales but has
its place of effective management and tax residence in the
Netherlands. As the Group is a global business our interests
and activities are held or operated through subsidiaries and
branches and subject to the laws and regulations of many
different jurisdictions.
Share capital
As of 31 December 2015 the Company’s issued share
capital was £1,881,829.58 divided into 188,182,958 ordinary
shares each having a nominal value of £0.01, all of which
are in free circulation1. All of the Company’s issued ordinary
shares are fully paid up and rank equally in all respects.
The rights attached to them, in addition to those conferred
on their holders by law, are set out in the Articles. The
Elian Employee Benefit Trustee Limited holds shares in
the Company in trust (the “Trust”) for the purposes of the
Company’s phantom share option plan, and the rights
attaching to them are exercised by independent trustees.
As at 31 December 2015 the Trust held 3,354,139 ordinary
shares in the Company.
Share rights
Without prejudice to any rights attached to any existing
shares, the Company may issue shares with rights or
restrictions as determined by either the Company by
ordinary resolution or, if the Company passes a resolution,
the directors.
Voting rights
There are no restrictions on voting rights or transfers
of shares in the Articles and at a general meeting every
member present in person or by proxy has one vote for
every share held by him. No member shall be entitled to
vote either personally or by proxy or to exercise any other
right in relation to general meetings if any sum due from
him to the Company in respect of that share remains unpaid.
The directors may refuse to register a transfer of shares
in favour of more than four persons jointly.
Directors, articles and purchase of shares
The Articles were adopted on 19 May 2014 and may only
be amended by special resolution at a general meeting
of the shareholders.
The directors’ powers are conferred on them by UK
legislation and by the Articles. In accordance with the
Articles the Board has the power at any time to elect any
person to be a director. Any person so appointed by the
directors will retire at the next Annual General Meeting in
accordance with the UK Corporate Governance Code;
retiring directors may be eligible for annual re-election.
The Company did not repurchase any shares during 2015.
The Board has the power conferred on it by shareholders
to purchase its own shares and will seek a renewal of that
power at the forthcoming Annual General Meeting within
the limits set out in the notice of the meeting.
Employment policies and equal opportunities
The Group is an inclusive and equal opportunity
employer and complies with all applicable laws governing
employment practices. The Group has also adopted and
implemented policies and procedures which cover the
recruitment, selection, training and development and
promotion and retirement of its employees.
Nostrum aims to create a workplace that has an open
atmosphere of trust, honesty and respect. Harassment or
discrimination of any kind based on race, religion, national
origin, age, gender, disability, sexual orientation or political
opinion or any other similarly protected characteristic
is not tolerated. This principle applies to all aspects of
employment from recruitment and promotion through
to termination and all other terms and conditions of
employment.
It is the Group’s aim that all employment policies are fair
and equitable and consistent with the skills and abilities
of the employee and the needs of the business. Employees
are free to join a trade union or participate in collective
bargaining arrangements.
105
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Directors’ Report continued
Further details are included in “Our People” on
pages 38 to 40.
In accordance with the Group’s Code of Conduct the
Company’s policy is to fully comply with the UK Equality
Act 2010, which imposes a duty on employers to make
reasonable adjustments to help disabled job applicants,
employees and former employees in certain circumstances
and prohibits direct disability discrimination, discrimination
arising from disability, indirect disability discrimination,
harassment relating to disability and victimisation.
Where the duty to make reasonable adjustments arises,
the Company’s policy is to effectively treat the disabled
person more favourably than others in an attempt to reduce
or remove that individual’s disadvantage.
The Company’s policy is to give full and fair consideration
to applications for employment made by disabled people.
Disabled job applicants and employees are encouraged to
tell the Company about their condition so that the Company
can support them as appropriate. Employees experiencing
difficulties at work because of a disability may contact their
supervisor or the Human Resources Department to discuss
any reasonable adjustments that would help overcome or
minimise the difficulty. Their line manager or the Human
Resources Department may consult with the disabled
person and his or her medical adviser about possible
adjustments. The Company will consider the matter
carefully and try to accommodate the disabled person’s
needs within reason. Support provided by the Company
to disabled employees may include training and career
development support. If the Company considers a
particular adjustment would not be reasonable it will
explain its reasons and try to find an alternative solution
where possible.
The Company will monitor the physical features of its
premises to consider whether they might place anyone with
a disability at a substantial disadvantage. Where necessary,
it will take reasonable steps to improve access.
Employee communications and involvement
The Group has processes in place for communicating
and consulting with all its employees so that their views
can be taken into account in making decisions which are
likely to affect their interests and so that employees are
made aware of any financial and economic factors affecting
the Company’s performance. Employee communications
include information about the performance of the Group,
on major matters affecting their work, employment or
workplace. The Group has also developed an intranet,
which assists in communicating with employees across
borders and provides key information to all Group
employees.
106
The Company also operates an employee share option
plan, further details of which can be found in the Directors’
remuneration policy on page 100 and the notes to the
consolidated audited financial statements for the year
ended 31 December 2015.
Substantial shareholders
As of 31 December 2015, the following significant
shareholdings of voting rights in the share capital of the
Company had been disclosed to the Company under
Disclosure and Transparency Rule 5 or otherwise.
Name
Mayfair Investments B.V.
Claremont Holdings C.V.
Baring Vostok
Capital Partners
M&G Investment
Management Limited
Harding Loevner LP
Number of
Ordinary Shares
48,333,300
32,599,586
% of Issued
Ordinary Shares
25.7
17.3
29,050,054
10,983,070
9,442,565
15.4
5.8
5.0
There were no major transactions in the share capital of the
Company or any change in the structure of shareholders
holding 3 or more per cent of the Ordinary Shares in the
reporting period apart from the transfer of KazStroyService
Global B.V.’s shareholding as described on page 108 of this
report, as well as the decrease in the holdings of Claremont
Holdings C.V. from 27.2% as at 31 December 2014 to 17.3%
as at 31 December 2015. Claremont Holdings C.V. also
notified the Company that it holds a call option over
5,191,491 Ordinary Shares which, if exercised, would
increase its shareholding by 2.76% to 20.05%. In addition,
Nostrum received a TR1 notification from VTB Capital in
April 2015 notifying the Company that it had acquired
a stake of 3.4484%.
There have been no changes in the interests disclosed to
the Company in respect of substantial shareholders in the
period between the end of the financial year 2015 and the
date of this annual report.
Related party transactions
Refer to note 32 of the consolidated financial statements
for a description of related party transactions in the
reporting period.
Nostrum Oil & Gas PLC Annual Report 2015 Significant contractual arrangements
On 19 May 2014 the Company entered into relationship
agreements with Claremont Holdings C.V. (“Claremont”)
(the “Claremont Relationship Agreement”) and
KazStroyService Global B.V. (“KSS Global”) (the “KSS Global
Relationship Agreement and together with the Claremont
Relationship Agreement, the “Relationship Agreements”)
to regulate (in part) the degree of influence that Claremont
and KSS Global and their affiliates may exercise over the
management of the Company. The principal purposes
of the Relationship Agreements are to ensure that the
Company is capable at all times of carrying on its business
independently of Claremont and KSS Global and their
affiliates and that all of the Company’s transactions and
relationships with Claremont and KSS Global and its
affiliates are at arm’s length and on normal commercial
terms.
Pursuant to its terms each of the Relationship Agreements
will continue until the earlier of (a) the Ordinary Shares
ceasing to be admitted to the Official List of the Financial
Conduct Authority and to trading on the London Stock
Exchange or (b) Claremont and/or KSS Global (together
with any of their affiliates) ceasing to be entitled to exercise,
or to control the exercise of, 10% or more of the rights to
vote at the Company’s general meetings.
Terms of the Claremont Relationship Agreement
Under the Claremont Relationship Agreement, Claremont
has agreed that (a) it will, and will procure its affiliates to,
allow the business and affairs of the Company and the
Group to be operated in the best interests of the
shareholders as a whole (b) it will, and will procure its
affiliates will, allow the Company and its affiliates at all
times to carry on its business independently of Claremont
and its affiliates (c) it will not, and will procure its affiliates
will not, act in any way which shall prejudice the ability
of the Company and its affiliates to carry on its business
independently of Claremont or its affiliates (d) it will,
and will procure its affiliates to, allow the Company to be
managed in accordance with the Corporate Governance
Code to the extent and on such terms as may be
determined by the Board and to comply with any further
amendments or supplements to the Corporate
Governance Code as may be adopted by the Board,
and it acknowledges its obligations under, and agrees
to comply with, and will procure its affiliates comply with,
the Disclosure and Transparency Rules in respect of its
interests in the Ordinary Shares (e) it will not, and will
procure its affiliates will not, take any action (or omit to take
any action) to prejudice the Company’s status as a listed
company or its suitability for listing under the Listing Rules
after Admission has occurred or the Company’s ongoing
compliance with the Listing Rules and the Disclosure and
Transparency Rules or have the effect of preventing the
Company from complying with its obligations under the
Listing Rules, provided that this shall not prevent Claremont
(or any other person) from: (i) accepting a takeover offer
for the Company made in accordance with the City Code
(a “Takeover Offer”) in relation to their respective interests
in the Company or, where such Takeover Offer is made
by way of a scheme of arrangement under Part 26 of the
Companies Act (a “CA2006 Scheme”), voting in favour of
such CA2006 Scheme at the court and related shareholder
meetings or otherwise agreeing to sell their Ordinary
Shares in connection with a Takeover Offer; or (ii) making
a Takeover Offer by way of a general offer for all the
outstanding Ordinary Shares or by way of a CA2006
Scheme and de-listing the Company after such Takeover
Offer has become wholly unconditional or, in the case of
a CA2006 Scheme, after it has become effective (f) it will
not, and will procure that its affiliates will not, influence the
day-to-day running of the Company at an operational level
or hold or acquire a material shareholding in one or more
significant subsidiaries of the Company; and (g) it will
exercise its voting rights in such a manner as to procure (to
the extent possible): (i) at least half of the Board comprises
independent directors (excluding the chairman of the
Board); (ii) the Audit Committee shall comprise entirely
independent directors and the Remuneration Committee
shall comprise not less than three independent directors;
and (iii) the Nomination Committee and any other
committee of the Board to which significant powers,
authorities or discretions are delegated shall at all times
consist of a majority of independent directors.
Terms of the KSS Global Relationship Agreement
Under the KSS Global Relationship Agreement, KSS Global
has agreed that (a) it will, and will procure its affiliates will,
allow the Company and its affiliates at all times to carry on
its business independently of KSS Global and its affiliates
(b) it will not, and will procure its affiliates will not, act in any
way which shall prejudice the ability of the Company and
its affiliates to carry on its business independently of KSS
Global or its affiliates (c) it will comply with, and will procure
its affiliates comply with, the Disclosure and Transparency
Rules in respect of its interests in the Ordinary Shares (d) it
will not, and will procure its affiliates will not, take any action
(or omit to take any action) to prejudice the Company’s
status as a listed company or its suitability for listing under
the Listing Rules after Admission has occurred or the
Company’s ongoing compliance with the Listing Rules
and the Disclosure and Transparency Rules or have the
effect of preventing the Company from complying with
its obligations under the Listing Rules, provided that this
shall not prevent KSS Global (or any other person) from:
(i) accepting a Takeover Offer for the Company in relation
to their respective interests in the Company or, where such
Takeover Offer is made by way of a CA2006 Scheme, voting
in favour of such CA2006 Scheme at the court and related
107
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Directors’ Report continued
shareholder meetings or otherwise agreeing to sell their
Ordinary Shares in connection with a Takeover Offer; or
(ii) making a Takeover Offer by way of a general offer for
all the outstanding Ordinary Shares or by way of a CA2006
Scheme and de-listing the Company after such Takeover
Offer has become wholly unconditional or, in the case of
a CA2006 Scheme, after it has become effective (e) it will
not, and will procure that its affiliates will not, influence the
day-to-day running of the Company at an operational level
or hold or acquire a material shareholding in one or more
significant subsidiaries of the Company and (f) it will exercise
its voting rights in such a manner as to procure (to the
extent possible): i) at least half of the Board comprises
independent directors (excluding the chairman of the
Board); ii) the Audit Committee shall comprise entirely
independent directors and the Remuneration Committee
shall comprise not less than three independent directors;
and iii) the Nomination and Governance Committee and
any other committee of the Board to which significant
powers, authorities or discretions are delegated shall at
all times consist of a majority of independent directors.
Deed of adherence with Mayfair Investments B.V.
On 30 January 2015 KSS Global transferred its 50 million
ordinary shares in the Company as follows: (a) 48,333,300
shares to Mayfair Investments B.V. (“Mayfair”), a company
indirectly owned by KSS Global’s three principal
shareholders on the date of the transfer, and (b) 1,666,700
shares to KSS Global’s other shareholder on such date.
In connection with such transfer, Mayfair entered into
a Deed of Adherence with Nostrum pursuant to which
Mayfair has undertaken to Nostrum to be bound by the
KSS Global Relationship Agreement in all respects and to
observe and perform all of the provisions and obligations
of such relationship agreement previously applicable to or
binding on KSS Global in so far as they fall to be observed
or performed on or after the date of the transfer.
Change of control
The following are significant agreements the Company
has entered into which would be affected on a change
of control of the Company following a takeover:
• In the event of a takeover of the Company all options
under the Company’s employee share option plan shall
be deemed to have vested and the Board shall direct
Elian Employee Benefit Trustee Limited to allow each
optionholder to exercise his or her options at any time
from the date of the change of control up to the tenth
anniversary of the date of grant. Any options that have
not been exercised will lapse at the end of this period.
• The 2012 Bonds and the 2014 Bonds contain change
of control provisions. If a change of control occurs the
Company will be required to offer to repurchase the 2019
Bonds and the New 2019 Bonds at 101% of their principal
amount, plus accrued and unpaid interest to the date
of purchase.
Greenhouse gases
Information regarding the Group’s greenhouse gas
emissions for activities for which the Group is responsible
is set out on pages 45 to 47.
Corporate governance statement
Pursuant to Disclosure and Transparency Rule 7, certain
parts of the corporate governance statement are required
to be outlined in the directors’ report. This information
is laid out in the corporate governance section of this
Annual Report. Information regarding the main features
of the Company’s internal control and risk management
arrangements in relation to the financial reporting process
can be found in the strategic report and the report of the
Audit Committee.
Going concern
The financial position and performance of the Company
and the Group and its cash flows are set out in the financial
review section of this annual report on pages 48 to 57.
The going concern statement required by the Listing Rules
and the UK Corporate Governance Code is set out in the
notes to the consolidated audited financial statements for
the year ended 31 December 2015.
108
Nostrum Oil & Gas PLC Annual Report 2015 Requirements of the listing rules
The following table provides references to where the information required by listing rule 9.8.4R is disclosed.
Listing rule requirement
A statement of the amount of interest capitalised by the Group
during the period under review with an indication of the amount
and treatment of any related tax relief.
Please refer to note 8 in the financial statements.
Any information required by LR 9.2.18R (publication of unaudited
financial information).
Not applicable.
Details of any long-term incentive schemes as required by LR 9.4.3R. Not applicable.
Details of any arrangements under which a director of the company
has waived or agreed to waive any emoluments from the company
or any subsidiary undertaking. Where a director has agreed to
waive future emoluments, details of such waiver together with those
relating to emoluments which were waived during the period under
review.
Details required in the case of any allotment for cash of equity
securities made during the period under review otherwise than to
the holders of the company’s equity shares in proportion to their
holdings of such equity shares and which has not been specifically
authorised by the company’s shareholders.
No such waivers.
No such share allotments.
Where a listed company has listed shares in issue and is a subsidiary
undertaking of another company, details of the participation by the
parent undertaking in any placing made during the period under
review.
Not applicable.
Details of any contract of significance subsisting during the period
under review:
(a) to which the listed company, or one of its subsidiary
undertakings, is a party and in which a director of the listed
company is or was materially interested; and
(b) between the listed company, or one of its subsidiary
undertakings, and a controlling shareholder.
Details of contracts for the provision of services to the Company
or any of its subsidiary undertakings by the controlling shareholder,
unless:
(a) it is a contract for the provision of services which it is the principal
business of the shareholder to provide; and
(b) it is not a contract of significance.
Details of any arrangement under which a shareholder has waived
or agreed to waive any dividends, where a shareholder has agreed
to waive future dividends, details of such waiver together with those
relating to dividends which are payable during the period under
review.
Board statement in respect of relationship agreement with the
controlling shareholder.
Please refer to the Directors’ Report.
Not applicable.
Under the trust deed relating to the Phantom share
option plan, the trustee has agreed to waive any
dividends on shares held under the Phantom share
option plan.
Not applicable as the Company does not have
a “controlling shareholder” within the definition
under Listing Rule 6.1.2A R, however, please see
Directors’ Report for details of relationship
agreements the Company has entered into with
certain shareholders.
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Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Directors’ Report continued
Important events since the end of the financial year
Following a FTSE quarterly market capitalisation review the Company was moved from the FTSE 250 Index to the
FTSE Small Cap Index effective as of 21 March 2016.
Major events after 31 December 2015 are disclosed in note 36 to the consolidated audited financial statements.
This report was approved by the Board on 22 March 2016.
On behalf of the Board
Kai-Uwe Kessel
Chief Executive Officer
29 March 2016
Jan-Ru Muller
Chief Financial Officer
29 March 2016
110
Nostrum Oil & Gas PLC Annual Report 2015 To the best of the directors’ knowledge
(a) the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and
fair view of the assets, liabilities, financial position and
profit or loss of the issuer and the undertakings included
in the consolidation taken as a whole; and
(b) the management report includes a fair review of the
development and performance of the business and the
position of the Company and the undertakings included
in the consolidation taken as a whole, together with
a description of the principal risks and uncertainties that
they face.
By order of the Board
Kai-Uwe Kessel
Chief Executive Officer
29 March 2016
Jan-Ru Muller
Chief Financial Officer
29 March 2016
Responsibility statement
The directors are responsible for preparing the Annual
Report and the financial statements in accordance with
applicable law and regulations.
The directors are required by the Companies Act 2006
to prepare accounts for each financial year and, with
regards to Group accounts, in accordance with Article 4
of the IAS Regulation. The directors have prepared
individual accounts in accordance with IFRS as adopted
by the EU. The accounts are required by law and IFRS to
present fairly the financial position of the Company and the
Group and the performance for that period. The directors
must not approve such accounts unless they are satisfied
that they give a true and fair view of the state of affairs
of the Company and the consolidated Group.
The Directors consider that the Group has used appropriate
accounting policies, supported by reasonable judgements
and estimates, in preparing the financial statements, and
that all accounting standards which they consider to be
applicable have been followed.
Having taken all the matters considered by the Board and
brought to the attention of the Board during the year into
account, and having reviewed the Annual Report (including
the strategic report), the directors consider the Annual
Report and accounts, taken as a whole, to be fair, balanced
and understandable, providing the information necessary
for shareholders to assess the Company’s position and
performance, business model and strategy.
The directors have responsibility for:
• ensuring that the Company and the Group keep
accounting records which disclose with reasonable
accuracy the financial position of the Company and the
Group and which enable them to ensure that the accounts
comply with the Companies Act 2006;
• taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and
detect fraud and other irregularities; and
• the maintenance and integrity of the corporate and
financial information on the Company’s website1.
1
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
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financial statements
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Annual Report 2015
Consolidated financial statements
Contents
Page
Independent auditor’s report ........................................................................................................................................ 114
Consolidated statement of financial position ............................................................................................................. 126
Consolidated statement of comprehensive income ................................................................................................... 127
Consolidated statement of cash flows ........................................................................................................................ 128
Consolidated statement of changes in equity ............................................................................................................ 129
Notes to the consolidated financial statements ......................................................................................................... 130
1. General ................................................................................................................................................................... 130
2. Basis of preparation and consolidation ................................................................................................................... 131
3. Changes in accounting policies and disclosures ..................................................................................................... 132
4. Summary of significant accounting policies ............................................................................................................ 135
5. Business combinations ........................................................................................................................................... 143
6. Goodwill .................................................................................................................................................................. 144
7. Exploration and evaluation assets .......................................................................................................................... 145
8. Property, plant and equipment ................................................................................................................................ 145
9. Advances for non-current assets ............................................................................................................................ 148
10.
Inventories .............................................................................................................................................................. 148
11. Trade receivables ................................................................................................................................................... 148
12. Prepayments and other current assets ................................................................................................................... 148
13. Current investments ................................................................................................................................................ 148
14. Cash and cash equivalents ..................................................................................................................................... 149
15. Share capital and reserves ..................................................................................................................................... 149
16. Earnings per share ................................................................................................................................................. 150
17. Borrowings .............................................................................................................................................................. 150
18. Abandonment and site restoration provision ........................................................................................................... 152
19. Due to government of Kazakhstan .......................................................................................................................... 152
20. Trade payables ....................................................................................................................................................... 153
21. Other current liabilities ............................................................................................................................................ 153
22. Revenue ................................................................................................................................................................. 154
23. Cost of sales ........................................................................................................................................................... 154
24. General and administrative expenses ..................................................................................................................... 155
25. Selling and transportation expenses ....................................................................................................................... 155
26. Finance costs .......................................................................................................................................................... 155
27. Finance costs – reorganisation ............................................................................................................................... 156
28. Employees’ remuneration ....................................................................................................................................... 156
29. Derivative financial instruments .............................................................................................................................. 158
30. Other expenses ...................................................................................................................................................... 158
Income tax .............................................................................................................................................................. 159
31.
32. Related party transactions ...................................................................................................................................... 160
33. Audit and non-audit fees ......................................................................................................................................... 161
34. Contingent liabilities and commitments ................................................................................................................... 162
35. Financial risk management objectives and policies ................................................................................................ 163
36. Events after the reporting period ............................................................................................................................. 167
113 Nostrum Oil & Gas PLC
Annual report 2015
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Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
We present our audit report on the Group and Parent company financial statements of Nostrum Oil & Gas PLC (the
‘financial statements’), which comprise the Group and Parent primary statements and related notes.
Our opinion on the financial statements
In our opinion:
► Nostrum Oil & Gas PLC’s Group financial statements and Parent company financial statements (the “financial
statements”) give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December
2015 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European
►
Union;
the Parent company financial statements have been properly prepared in accordance with the requirements of the
►
Companies Act 2006 and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and,
►
as regards the Group financial statements, Article 4 of the IAS Regulation.
What we have audited
Nostrum Oil & Gas PLC’s financial statements comprise:
Group
Parent company
Consolidated statement of
31 December 2015
financial position as at
Statement of
31 December 2015
financial position as at
Consolidated statement of Comprehensive Income for the
year then ended
Statement of changes in equity for the year
then ended
Consolidated statement of cash flows for the year then ended Cash flow statement for the year then ended
Consolidated statement of changes in equity for the year then
ended
Related notes 1 to 14 to the financial
statements
Related notes 1 to 36 to the financial statements
The financial reporting framework that has been applied in their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial
statements, as applied in accordance with the provisions of the Companies Act 2006.
114 Nostrum Oil & Gas PLC
114
Annual report 2015
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Overview of our audit approach
Risks of
material
misstatement
Estimation of oil and gas reserves and its impact on the impairment
testing, depreciation, depletion and amortisation and decommissioning
provision
Audit scope
Impairment of exploration
development and production fixed assets
licenses, goodwill and oil & gas
Revenue recognition
Completeness of related party transactions and related disclosures
Risk of management override
We performed an audit of the complete financial information of 3
components across United Kingdom, Kazakhstan and Belgium and
audit procedures on specific balances for a further 5 components
across United Kingdom, Kazakhstan, Russia and the Netherlands.
The components where we performed full or specific audit procedures
accounted for approximately 100% of Profit before tax, Revenue and
Total assets.
Materiality
Overall Group materiality of US$3.6m which represents 5% of Profit
before tax.
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Annual report 2015
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Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Our assessment of risk of material misstatement
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit
strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these
risks, we have performed the procedures below which were designed in the context of the financial statements as a whole
and, consequently, we do not express any opinion on these individual areas.
Risk
Our response to the risk
What we concluded to the
Audit Committee
Estimation of oil and gas reserves
and its impact on the impairment
testing, depreciation, depletion and
amortisation and decommissioning
provision
Refer to the Audit Committee Report on
page 82; the estimates and judgements
on page 123 and the disclosures in note
8 of
the Consolidated Financial
Statements (page 133)
the
This was considered to be a significant
risk due to the subjective nature of
reserves estimates and their pervasive
impact on
financial statements
through impairment, DD&A calculations
and
provision
estimate. Reserves are also considered
a fundamental indicator of the future
potential of the Group’s performance.
decommissioning
The estimation of oil and gas reserves
is a significant area of judgement due to
the technical uncertainty in assessing
reserves quantities. Consistent with the
has
previous
in
engaged a
connection with
the estimation of
reserves volumes.
third party specialist
year, management
116 Nostrum Oil & Gas PLC
116
Annual report 2015
the
that
Based on our procedures we
consider
reserves
estimations are reasonable for use
testing,
in
impairment
calculation of DD&A and
the
determination of decommissioning
dates.
the
focused on
Our audit procedures have
management’s estimation process, including
whether bias exists
in determination of
reserves. We challenged management’s
assumptions
commercial
including
assumptions to ensure that they are based
on supportable evidence. We have:
carried out procedures to walkthrough
and understand the Group’s internal
process and key controls associated
reserves
with
estimation process.
the oil and gas
they
satisfy
met with management’s third party
specialist during
the planning and
execution of the audit and assessed
their competence and objectivity by
inquiring their qualifications, practical
experience and
independence. We
have also assessed the competence
of internal management’s specialists,
to
are
ourselves
appropriately qualified to carry out the
volumes estimation and prepare the
input data used by the third party
specialist. We checked the accuracy
of the data transfer to the third party
specialist.
corroborated
management’s
commercial assumptions by checking
they lie within an acceptable range
compared
available
benchmarks where appropriate. We
internal
compared management’s
assumptions to the latest plans and
budgets for consistency; we have also
challenged management’s capabilities
to execute on such plans by
comparison to prior performance.
reviewed the final oil and gas reserves
estimation
by
management’s third party specialist in
light of our understanding of
the
business and we confirmed with them
that all significant changes in reserves
were made in appropriate period, and
in compliance with relevant industry
standards.
validated that the updated reserves
prepared
publicly
report
to
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Risk
Our response to the risk
What we concluded to the
Audit Committee
estimates were included appropriately
in
the Group’s consideration of
impairment, in accounting for DD&A
and determination of decommissioning
dates.
The Group’s price assumptions
are within the range of analyst
expectations and other market
data, including the range of what
we understand other market
participants are considering as a
long-term oil and gas prices. The
pre-tax discount rate of 14% is
our
within
expectations.
range
the
of
that
cash
Based on our procedures, we
flow
the
believe
are
estimated
projections
reasonable, the assumptions are
range of
supportable and
economic conditions
that could
exist over the remaining useful
lives of the assets have been
considered appropriately.
the
this
We performed full scope audit procedures
over
location
(Kazakhstan), which covered 100% of the
risk.
risk area
in one
For exploration licenses we have evaluated
management’s
each
impairment trigger per IFRS 6 ‘Exploration
for and Evaluation of Mineral Resources’.
We have:
assessment
of
in
by
with
cash-flow
responses
the Group
verified that the Group had the right to
explore in the relevant exploration
licence which included obtaining and
reviewing supporting documentation
such as
license agreements and
signed supplemental agreements and
communication
relevant
government agencies. In the event of
non-compliance
can
evidence that the terms are modified
and any relevant penalties and fines
accrued.
inquired that management had the
intention to carry out exploration and
evaluation activity
the relevant
exploration area and corroborated
reviewing
these
management’s
forecast
models to verify they include further
spend on the exploration activities. We
discussed the intentions and strategy
of the Group with senior management
and Directors
our
to
understanding.
validated whether the Group has the
ability to finance any planned future
exploration and evaluation activity.
assessed
of
management’s experts, and (where
the competency and
applicable),
objectivity of third party specialists
engaged
of
the
assessing the reserves and resources
associated with those exploration and
evaluation assets.
corroborated the commercial viability
of the exploration fields to the cash-
flow forecast models.
competency
purposes
confirm
the
for
The risk of Impairment of exploration
licenses, goodwill and oil & gas
development and production fixed
assets
Refer to the Audit Committee Report on
page 82; the estimates and judgements
on page 123 and the disclosures in
the Consolidated
notes 6
Financial Statements (page 132-134).
to 8 of
At 31 December 2015 the carrying
value of goodwill was US$32,425
thousand (2014: US$32,425 thousand);
exploration
US$36,917
licenses:
thousand (2014: US$24,380 thousand);
oil & gas development and production
assets, including non-current advances:
(2014:
US$1,697,363
US$1,536,196 thousand).
thousand
The continued decline
in worldwide
crude oil prices and the prices of related
refined products over the current year
pose a heightened impairment risk for
the Group. Management have identified
an impairment trigger with respect to the
oil & gas development and production
fixed assets in Kazakhstan.
the
and
recoverable amount of
We focused on this area due to the
significance of the carrying value of the
assets being assessed,
the current
economic
the
environment
judgement involved in the assessment
of
the
Group’s Cash Generating Unit (‘CGU’)
around the future prices of oil, natural
gas and related products, both in the
short and long-term, the discount rate
applied to future cash flow forecasts
and
to
production volumes.
the assumptions
relevant
In addressing the risk of impairment for
117 Nostrum Oil & Gas PLC
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Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Risk
Our response to the risk
What we concluded to the
Audit Committee
Goodwill and oil & gas development and
fixed assets we utilised our
production
valuation
challenged
and
specialists
management’s impairment assessment by
evaluating the key assumptions. We have:
to
cash
price
relating
forecast
forecasts;
the Group
walked through the controls designed
by
the
assessment of the carrying value of
goodwill and oil & gas development
and production fixed assets.
tested the integrity of models with the
assistance of our own specialists.
tested price and discount
rate
assumptions by comparing forecast oil
price assumptions to the latest market
evidence available, including forward
curves, broker’s estimates and other
long-term
and
benchmarking the discount rate to the
risks faced by the group.
focused our audit procedures on oil &
gas reserves estimates, as described
elsewhere in our report.
flows by
tested
comparing
the assumptions used
within the impairment models to the
approved budgets, business plans and
other evidence of future intentions. We
assessed the historical accuracy of
management’s budgets and forecasts
actual
by
performance.
compared the inflation and exchange
rate assumptions to external market
data.
evaluated management’s sensitivity
analysis of goodwill and oil & gas
development and production
fixed
assets impairment testing in order to
assess the potential impact of a range
reasonably possible outcomes.
of
included
These
adjustments
the discount rate,
prices,
future production volumes,
opex and capex assumptions.
evaluated
financial statement
the
disclosures for compliance with the
requirements of accounting standards.
sensitivities
comparing
them
to
to
the Group
this risk area at
We performed full scope audit procedures
over
level
(Goodwill), we also audited the impairment
assessment prepared by management for
exploration
licenses and oil & gas
development and production fixed assets in
Kazakhstan.
these
procedures we obtained coverage of 100%
performing
By
118 Nostrum Oil & Gas PLC
118
Annual report 2015
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Risk
Our response to the risk
What we concluded to the
Audit Committee
agreements. We
that Revenue
is
We believe
in accordance with
recognised
also
sales
consider
the disclosures with
respect to Revenue included in the
financial
are
statements
reasonable and adequate.
Revenue recognition
Refer to the Audit Committee Report on
page 82; The Summary of significant
accounting policies in page 123and the
disclosures
the
Consolidated Financial Statements
(page 141)
in note 22 of
for
2015
the year ended 31
Revenue
to
amounts
December
(2014:
US$ 448,902
US$ 781,878 thousand). Revenue sales
include crude oil, gas condensate, dry
gas and liquefied petroleum gas (‘LPG’).
thousand
There exists a risk of management
manipulation to overstate or understate
revenue. This could be achieved by
potentially
in an
incorrect period.
recording sales
of the risk amount.
component
Our
in Kazakhstan
team
performed procedures to walkthrough and
understand the process and test key controls
associated with the revenue recognition and
accounts receivable process.
to
be
sales
recognised
agreements
We made enquiries of management and
analysed contracts
to evaluate whether
revenue was recognised in accordance with
the terms. We have:
audited
to
understand the contractual terms and
appropriate revenue recognition by
inspecting supporting evidence for a
sample of revenue transactions and
agreeing the period when revenue
should
the
contractual terms.
performed substantive test of details
on a sample of sales transactions by
inspecting
documents,
delivery
delivery terms, volumes and prices.
performed audit procedures on the
trade debtors’ ageing and collectability
to
identify any doubtful and or
irrecoverable debtors, confirmed the
material debtor balances with
the
relevant counterparties as well as
that debtor amounts were
tested
received subsequent to year-end.
carried out other analytical review
procedures
individual
revenue stream using disaggregated
volume by product, by customer and
by month to assess the respective
products’ underlying performance and
corroborate the appropriateness of the
timing of revenue recognition.
evaluated
financial statement
the
disclosures for compliance with the
requirements of accounting standards.
each
on
this
We performed full scope audit procedures
location
over
(Kazakhstan), which covered 100% of the
risk amount.
risk area
in one
focused on
Our audit procedures have
obtaining evidence over the completeness
of related party transactions and the related
disclosures. We have:
obtained an understanding of
the
on
procedures
the
Based
performed, we have not noted any
undisclosed
party
transactions that may result in a
material misstatement. We believe
the disclosures of related
that
related
119
Completeness of
transactions
disclosures
(“RPT”) and
related party
related
Refer to the Audit Committee Report on
119 Nostrum Oil & Gas PLC
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Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
What we concluded to the
Audit Committee
party transactions are complete.
We have not
identified any
instances of management override
or bias in significant estimates and
judgements.
Risk
Our response to the risk
page 82 and the disclosures of related
party transactions in note 32 of the
Group Financial Statements (page 147)
transactions between
Transactions with related parties mainly
comprise
the
subsidiaries of
the Company and
entities controlled by the shareholders
with significant influence of the Group.
Given the number of related parties and
the
significant monetary amounts
involved we consider RPTs and related
disclosures to be a significant risk.
Risk of management override
on
our
consider
likelihood
consideration
We
of
the
management override occurring. We
base
our
understanding of the nature and risk of
both management’s opportunity and
incentive
to manipulate accounting
records and earnings or financial ratios
or to misappropriate assets given the
sizable
senior
executives.
shareholdings
of
considered
Specifically we
the
heightened impairment risks, the risk of
overstatement
hedge
of
instruments’ valuation, and compliance
with bank covenants in the light of the
continued decline in worldwide crude oil
prices and the prices of related refined
products over the current year.
the
120 Nostrum Oil & Gas PLC
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Annual report 2015
significant RPTs
that management
process
has
established to identify, account for
and disclose RPTs and authorise and
and
approve
the normal
arrangements outside
course of business.
inspected
legal
bank
confirmations, minutes of meetings
and significant agreements with new
counterparties.
identified high value and unusual
transactions, if any, and if necessary
performed further procedures.
and
obtained an updated list of all related
parties to the Group and reviewed the
general ledger against this list to
ensure completeness of transactions;
made enquiries of management in
order to identify if any related party
transactions outside
the normal
course of business have taken place.
verified
disclosures
statements.
of
financial
completeness
the
the
in
In addressing this risk, audit procedures
were performed by component team in
Kazakhstan and the Group engagement
team.
statements.
We considered whether there was evidence
the Directors and senior
of bias by
management
significant accounting
in
estimates and judgements relevant to the
financial
included
performing procedures with a particular
judgements and
those key
focus on
the risks of
estimates which relate
to
estimation of oil and gas
reserves,
impairment of non-current assets, revenue
recognition and related parties transactions
as highlighted above.
This
We tested manual and automated journal
entries and included a selection of journals,
with a focus on those journal entries that
may impact the carrying value of the long
term assets, related to other significant risks
identified as part of our audit engagement.
As part of our audit procedures to address
this fraud risk, we assessed the overall
control environment and interviewed senior
management and the Group’s internal audit
function to understand whether there had
been any
reported actual or alleged
instances of fraudulent activity during the
year.
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Risk
Our response to the risk
What we concluded to the
Audit Committee
In addressing this risk, audit procedures
were performed by component team in
Kazakhstan and the Group engagement
team. We tested manual and automated
journal entries for all 3 components where
we performed full scope audit.
Our audit approach and assessment of the risks of material misstatements change in response to changes in
circumstances affecting the Group financial statements. The continued decline in worldwide crude oil prices and the
prices of related refined products over the current year has resulted in the deterioration of the recoverable amount of oil &
gas development and production fixed assets and an increased potential impact of this risk on the Group’s financial
statements. This has led us to an increased focus on this area, unlike the 2014 audit where the primarily focus of our
audit effort was on the risk of impairment of exploration licenses and goodwill.
The scope of our audit
our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our
audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated
financial statements under International Standards on Auditing (UK and Ireland). We take into account size, risk profile,
the organisation of the group and effectiveness of group-wide controls, changes in the business environment and other
factors such as recent Internal audit results when assessing the level of work to be performed at each entity.
Tailoring the scope
In establishing our overall approach to the Group audit we determined the type of work that needed to be undertaken at
each of the components by us, as the Group engagement team, or by component auditors from another EY global
network firm operating under our instructions. The Group engagement team performed the audit of the consolidation in
the United Kingdom. In assessing the risk of material misstatement to the Group financial statements, our Group audit
scope focused on the Group’s main operating locations. Of the 16 reporting components of the Group, we selected eight
components covering entities within the Netherlands, Belgium, Russia, United Kingdom and Kazakhstan, which represent
the principal business units within the Group and account for approximately 100% of the Group’s profit before tax. Of the
eight components selected, we performed an audit of the complete financial information of three components (“full scope
components”) which were selected based on their size or risk characteristics. For the remaining five components
(“specific scope components”), we performed audit procedures on specific accounts within that component that we
considered had the potential for the greatest impact on the significant accounts in the financial statements either because
of the size of these accounts or their risk profile. The three full scope components account for 85% of the Group net
assets, 100% of the Group’s revenue and 117% of the Group’s profit before tax. The profit before tax coverage of 117%
represents one full scope components having a positive contribution of 133% offset by two full scope components having
a negative contribution of 16%. The specific scope locations do not have income generating activities and we audited
cash, payroll, general and administrative costs, the employee share option plan and other current liabilities.
Of the remaining 8 components having together a negative contribution of 3% of the Group’s Profit before tax, none are
individually greater than 1% of the Group’s Profit before tax. For these components, we performed other procedures,
including analytical review, inquiry procedures and testing of consolidation journals and intercompany eliminations to
respond to any potential risks of material misstatement to the Group financial statements.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
121 Nostrum Oil & Gas PLC
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Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Profit before tax
Revenue
100% Full scope
components
0% Specific
scope
components
0% Other
procedures
117% Full scope
components
(14)% Specific
scope
components
(3)% Other
procedures
Total assets
97% Full scope
components
1% Specific
scope
components
2% Other
procedures
Changes from the prior year
Our scope allocation in the current year is broadly consistent with 2014 in terms of overall coverage of the Group.
However we have made some changes in the number of components subject to full and specific scope procedures. In
particular, we changed our scope to include three service entities which are now considered significant based on
materiality of payroll and general and administrative costs.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at
each of the components by us, as the primary audit engagement team, or by component auditors from other EY global
network firms operating under our instruction. For the one full scope component in Kazakhstan, where the work was
performed by the component auditor, we determined the appropriate level of involvement to enable us to determine that
sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. The work on the Group
consolidation and remaining 7 full and specific scope components in Russia, the Netherland and Belgium was performed
by the primary audit team.
During the 2015 audit cycle the primary audit team continued to have close interactions with the component audit team in
Kazakhstan. The primary audit team held a global audit team event in the year led by the Senior Statutory Auditor, where
both teams came together in Almaty, Kazakhstan, to consider the audit risk and strategy. The primary team visited the
component team in Kazakhstan to attend the component closing meeting with local management, visited the operating
field, reviewed key working papers and was responsible for the scope and direction of the audit process. Video and
telephone conference meetings were also held with the component team in Kazakhstan throughout the current year’s
audit cycle. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our
opinion on the Group financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified
misstatements on the audit and in forming our audit opinion.
122 Nostrum Oil & Gas PLC
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Annual report 2015
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to
influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the
nature and extent of our audit procedures.
We determined materiality for the Group to be US$3.6 million (2014: US$17 million), which is approximately 5% (2014:
5%) of Profit before tax (2014: adjusted Profit before tax. In 2014 profit before tax was adjusted by US$29 million mainly
relating to the costs associated with the reorganisation of the Group that we concluded are non-recurring and therefore
added back when calculating materiality. We believe this provides us with a consistent year on year basis for determining
planning materiality and the most relevant performance measure for the stakeholders of the group. This provided a basis
for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of material
misstatement and determining the nature, timing and extent of further audit procedures.
Performance materiality
Application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately
low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our
judgement was that performance materiality was 50% (2014: 50%) of our planning materiality, namely US$1.8m (2014:
US$8.5m). We have set performance materiality at this percentage due to our past experience of the audit that indicate a
higher risk of misstatements, both corrected and uncorrected.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement
accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each
component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the
risk of misstatement at that component. In the current year, the range of performance materiality allocated to components
was US$0.2m to US$1.4m (2014: US$1.7m to US$6.4m).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all audit differences in excess of US0.2m (2014:
US0.85m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in
light of other relevant qualitative considerations in forming our opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or
error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent
company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of
significant accounting estimates made by the directors; and the overall presentation of the financial statements. In
addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies
with the audited financial statements and to identify any information that is apparently materially incorrect based on, or
materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of
any apparent material misstatements or inconsistencies we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 111, the directors are responsible for
the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is
to audit and express an opinion on the financial statements in accordance with applicable law and International Standards
123 Nostrum Oil & Gas PLC
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Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards
for Auditors.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a
body, for our audit work, for this report, or for the opinions we have formed.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
►
Companies Act 2006; and
the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial
►
statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
ISAs (UK and Ireland)
reporting
We are required to report to you if, in our opinion, financial and
non-financial information in the annual report is:
materially inconsistent with the information in the audited
We have no
exceptions to
report.
financial statements; or
apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired in
the course of performing our audit; or
otherwise misleading.
In particular, we are required to report whether we have identified
any inconsistencies between our knowledge acquired in the course
of performing the audit and the directors’ statement that they
consider the annual report and accounts taken as a whole is fair,
balanced and understandable and provides
information
necessary for shareholders to assess the entity’s performance,
business model and strategy; and whether the annual report
appropriately addresses those matters that we communicated to
the audit committee that we consider should have been disclosed.
We are required to report to you if, in our opinion:
the
adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
the parent company financial statements and the part of
the Directors’ Remuneration Report to be audited are not
in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by
law are not made; or
we have not received all the information and explanations
we require for our audit.
We are required to review:
the directors’ statement in relation to going concern, set
out on page 108, and longer-term viability, set out on
page 60; and
the part of the Corporate Governance Statement relating
Companies Act 2006
reporting
Listing Rules
requirements
review
124 Nostrum Oil & Gas PLC
124
Annual report 2015
We have no
exceptions to
report.
We have no
exceptions to
report.
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Independent auditors’ report to the members of
Nostrum Oil & Gas PLC
to the company’s compliance with the provisions of the
UK Corporate Governance Code specified for our review.
Statement on the Directors’ Assessment of the Principal Risks that Would Threaten the
Solvency or Liquidity of the Entity
We have
nothing
material to
add or to
draw
attention to.
ISAs (UK and Ireland)
reporting
We are required to give a statement as to whether we have
anything material to add or to draw attention to in relation to:
the directors’ confirmation in the annual report that they
have carried out a robust assessment of the principal risks
facing the entity, including those that would threaten its
business model, future performance, solvency or liquidity;
the disclosures in the annual report that describe those risks
and explain how they are being managed or mitigated;
the directors’ statement in the financial statements about
whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them, and their
identification of any material uncertainties to the entity’s
ability to continue to do so over a period of at least twelve
financial
the date of approval of
months
statements; and
the directors’ explanation in the annual report as to how they
have assessed the prospects of the entity, over what period
they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a
reasonable expectation that the entity will be able to
continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related
disclosures
necessary
attention
qualifications or assumptions.
drawing
from
any
the
to
Signature
Richard Addison (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
29 March 2016
Notes:
The maintenance and integrity of the Nostrum Oil&Gas PLC’s web site is the responsibility of the directors; the work carried
1.
out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since they were initially presented on the web site.
2.
legislation in other jurisdictions.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from
125 Nostrum Oil & Gas PLC
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Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Consolidated statement of financial position
As at 31 December 2015
In thousands of US dollars
ASSETS
Non-current assets
Exploration and evaluation assets
Goodwill
Property, plant and equipment
Restricted cash
Advances for non-current assets
Derivative financial instruments
Current assets
Inventories
Trade receivables
Prepayments and other current assets
Derivative financial instruments
Income tax prepayment
Current investments
Cash and cash equivalents
TOTAL ASSETS
EQUITY AND LIABILITIES
Share capital and reserves
Share capital
Treasury capital
Retained earnings and reserves
Non-current liabilities
Long-term borrowings
Abandonment and site restoration provision
Due to Government of Kazakhstan
Deferred tax liability
Current liabilities
Current portion of long-term borrowings
Employee share option plan liability
Trade payables
Advances received
Income tax payable
Current portion of due to Government of Kazakhstan
Other current liabilities
Notes
31 December 2015
31 December 2014
7
6
8
14
9
29
10
11
12
29
13
14
15
17
18
19
31
17
28
20
19
21
36,917
32,425
1,605,756
5,375
130,660
43,005
1,854,138
28,951
31,337
27,411
54,095
26,926
–
165,560
334,280
24,380
32,425
1,442,157
5,024
134,355
60,301
1,698,642
25,443
30,110
39,642
–
13,925
25,000
375,443
509,563
2,188,418
2,208,205
3,203
(1,888)
772,441
773,756
936,470
15,928
5,777
347,769
1,305,944
15,024
4,284
41,463
245
1,692
1,031
44,979
108,718
3,203
(1,888)
916,365
917,680
930,090
20,877
5,906
206,784
1,163,657
15,024
6,449
49,619
2,670
1,459
1,031
50,616
126,868
TOTAL EQUITY AND LIABILITIES
2,188,418
2,208,205
The consolidated financial statements of Nostrum Oil & Gas PLC, registered number 8717287, were approved by the
Board of Directors. Signed on behalf of the Board:
Kai-Uwe Kessel
Chief Executive Officer
Jan-Ru Muller
Chief Financial Officer
The accounting policies and explanatory notes on pages 130 through 167 are an integral part of these consolidated
financial statements
126 Nostrum Oil & Gas PLC
126
Annual report 2015
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Consolidated statement of comprehensive income
For the year ended 31 December 2015
In thousands of US dollars
Notes
2015
2014
Revenue
Revenue from export sales
Revenue from domestic sales
Cost of sales
Gross profit
General and administrative expenses
Selling and transportation expenses
Finance costs
Finance costs - reorganisation
Employee share option plan fair value adjustment
Foreign exchange loss, net
Gain on derivative financial instruments
Interest income
Other income
Other expenses
Profit before income tax
Current income tax expense
Deferred income tax expense
Income tax expense
(Loss)/profit for the year
Currency translation difference
Other comprehensive loss
22
23
24
25
26
27
28
29
30
31
426,764
22,138
448,902
(186,567)
262,335
(49,309)
(92,970)
(45,998)
(1,053)
2,165
(21,200)
37,055
515
11,296
(30,560)
72,276
(25,656)
(140,985)
(166,641)
676,064
105,814
781,878
(221,921)
559,957
(54,878)
(122,254)
(61,939)
(29,572)
3,092
(4,235)
60,301
986
10,086
(49,844)
311,700
(111,042)
(54,233)
(165,275)
(94,365)
146,425
(456)
(456)
–
–
Total comprehensive (loss)/income for the year
(94,821)
146,425
(Loss)/profit for the period attributable to the shareholders (in
thousands of US dollars)
Weighted average number of Common Units/shares
Basic and diluted earnings per share (in US dollars)
(94,821)
184,828,819
(0.51)
146,425
184,678,352
0.79
All items in the above statement are derived from continuous operations.
The accounting policies and explanatory notes on pages 130 through 167 are an integral part of these consolidated
financial statements
127 Nostrum Oil & Gas PLC
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Consolidated financial statements
Consolidated statement of cash flows
For the year ended 31 December 2015
In thousands of US dollars
Cash flow from operating activities:
Profit before income tax
Adjustments for:
Depreciation, depletion and amortisation
Finance costs - reorganisation
Finance costs
Employee share option plan fair value adjustment
Interest income
Foreign exchange gain on investing and financing activities
Loss on disposal of property, plant and equipment
Proceeds from derivative financial instruments
Purchase of derivative financial instruments
Gain on derivative financial instruments
Accrued expenses
Operating profit before working capital changes
Changes in working capital:
Change in inventories
Change in trade receivables
Change in prepayments and other current assets
Change in trade payables
Change in advances received
Change in due to Government of Kazakhstan
Change in other current liabilities
Payments under Employee share option plan
Cash generated from operations
Income tax paid
Net cash flows from operating activities
Cash flow from investing activities:
Interest received
Purchase of property, plant and equipment
Sale of property, plant and equipment
Exploration and evaluation works
Acquisition of subsidiaries
Placement of bank deposits
Redemption of bank deposits
Loans granted
Repayment of loans granted
Net cash used in investing activities
Cash flow from financing activities:
Finance costs paid
Issue of notes
Expenses paid on arrangement of notes
Repayment of notes
Transfer to restricted cash
Treasury shares sold/(purchased)
Distributions paid
Funds borrowed - reorganisation
Funds repaid - reorganisation
Finance costs - reorganisation
Net cash (used in)/from financing activities
Effects of exchange rate changes on cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Notes
2015
2014
23,24
27
26
29
7
5
17
15
27
14
14
72,276
109,351
1,053
45,998
(2,165)
(515)
(3,003)
39
92,255
(92,000)
(37,055)
(1,098)
185,136
(3,508)
(1,227)
12,231
7,337
(2,426)
(1,031)
(2,090)
–
194,422
(41,165)
153,257
515
(256,136)
543
(12,943)
(2,296)
(17,000)
42,000
(5,000)
5,000
(245,317)
(65,400)
–
–
–
(351)
–
(49,060)
–
–
(1,053)
–
(115,864)
(1,959)
(209,883)
375,443
165,560
311,700
111,869
29,572
61,939
(3,093)
(986)
(574)
–
–
–
(60,301)
(2,296)
447,830
(3,358)
36,455
(7,714)
(5,633)
2,921
(1,032)
341
(2,475)
467,335
(118,213)
349,122
986
(325,462)
–
(10,445)
372
(25,000)
55,000
–
–
(304,549)
(62,229)
400,000
(6,525)
(92,505)
(807)
3,715
(64,615)
2,350,405
(2,350,405)
(29,572)
–
147,462
(1,506)
190,529
184,914
375,443
The accounting policies and explanatory notes on pages 130 through 167 are an integral part of these consolidated
financial statements
128 Nostrum Oil & Gas PLC
128
Annual report 2015
Nostrum Oil & Gas PLC Annual Report 2015
Consolidated financial statements
Consolidated statement of changes in equity
For the year ended 31 December 2015
In thousands of US dollars
Notes
Share
capital
Share
premium
Partnership
capital
Treasury
capital
Additional
paid-in
capital
Other
reserves
Retained
earnings
Total
380,874
(30,751)
8,126
3,437
470,765
832,451
As at 1 January 2014
Profit for the year
Total comprehensive income for the year
Sale of treasury capital (GDRs)
Profit distribution
Group reorganisation:
Replacement of GDRs
Issue of share capital
Effect of the Group reorganisation
Transfer to distributable reserves
Sale of treasury capital
Transaction costs
As at 31 December 2014
15
Loss for the year
Other comprehensive loss
Total comprehensive loss for the year
Profit distribution
Transaction costs
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,203
3,203
–
–
–
3,203
–
102,797
102,797
(102,797)
–
–
–
(380,874)
–
(380,874)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
As at 31 December 2015
3,203
–
–
440
–
30,311
(2,001)
28,310
–
113
–
(1,888)
–
–
–
–
–
(1,888)
–
–
769
–
(8,895)
–
(8,895)
–
–
–
–
–
–
–
–
146,425
146,425
146,425
146,425
–
(64,615)
1,209
(64,615)
255,459
–
255,459
–
2,393
–
–
–
–
102,797
–
(296)
(103,999)
103,999
–
–
2,506
(296)
261,289
655,076
917,680
–
–
–
–
–
–
–
(456)
(456)
(94,365)
–
(94,365)
(456)
(94,365)
(94,821)
–
–
(49,060)
(43)
(49,060)
(43)
260,833
511,608
773,756
The accounting policies and explanatory notes on pages 130 through 167 are an integral part of these consolidated
financial statements
129 Nostrum Oil & Gas PLC
Annual report 2015
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Consolidated financial statements
Notes to the consolidated financial statements
1. GENERAL
Overview
Nostrum Oil & Gas PLC (“the Company” or “the Parent”) is a public limited company incorporated on 3 October 2013
under the Companies Act 2006 and registered in England and Wales with registered number 8717287. The registered
address of Nostrum Oil & Gas PLC is: 4th Floor, 53-54 Grosvenor Street, London, UK, W1K 3HU.
The Parent became the holding company of the remainder of the Group (via its subsidiary Nostrum Oil Coöperatief U.A.)
on 18 June 2014 and was listed on the London Stock Exchange (“LSE”) on 20 June 2014 (Note 15). On the same date
the former parent of the Group, Nostrum Oil & Gas LP, was delisted from the LSE. In addition to the subsidiaries of
Nostrum Oil & Gas LP, Nostrum Oil Coöperatief U.A. acquired substantially all of the assets and liabilities of Nostrum Oil
& Gas LP on 18 June 2014. The Parent does not have an ultimate controlling party.
These consolidated financial statements include the financial position and the results of the operations of Nostrum Oil &
Gas PLC and its following wholly owned subsidiaries:
Company
Country of registration or
incorporation
Form of capital
Ownership, %
British Virgin Islands
Russian Federation
British Virgin Islands
Republic of Kazakhstan
Russian Federation
Netherlands
Netherlands
England and Wales
Republic of Kazakhstan
Belgium
Belgium
Republic of Kazakhstan
Claydon Industrial Limited
Grandstil LLC
Jubilata Investments Limited
Nostrum Associated Investments LLP¹
Nostrum E&P Services LLC²
Nostrum Oil & Gas Coöperatief U.A.³
Nostrum Oil & Gas BV
Nostrum Oil & Gas UK Ltd.
Nostrum Services Central Asia LLP
Nostrum Services CIS BVBA
Nostrum Services N.V.
Zhaikmunai LLP
1 Formerly Condensate Holding LLP
2 Formerly Investprofi LLC
3 Formerly Nostrum Oil Coöperatief U.A.
4 Formerly Zhaikmunai Netherlands B.V, which was also merged with Nostrum Oil & Gas Finance BV and Nostrum Oil BV during 2015
5 Formerly Amersham Oil LLP
6 Formerly Prolag BVBA
7 Formerly Probel Capital Management N.V.
Ordinary shares
Participatory interests
Ordinary shares
Participatory interests
Participatory interests
Members' interests
Ordinary shares
Ordinary shares
Participatory interests
Ordinary shares
Ordinary shares
Participatory interests
⁵
⁶
⁷
⁴
100
100
100
100
100
100
100
100
100
100
100
100
Nostrum Oil & Gas PLC and its wholly-owned subsidiaries are hereinafter referred to as “the Group”. The Group’s
operations comprise of a single operating segment with three exploration concessions and are primarily conducted
through its oil and gas producing entity Zhaikmunai LLP located in Kazakhstan.
As at 31 December 2015, the Group employed 1,063 employees (2014: 1,010).
Subsoil use rights terms
Zhaikmunai LLP carries out its activities in accordance with the Contract for Additional Exploration, Production and
Production-Sharing of Crude Hydrocarbons in the Chinarevskoye oil and gas condensate field (the “Contract”) dated 31
October 1997 between the State Committee of Investments of the Republic of Kazakhstan and Zhaikmunai LLP in
accordance with the license MG No. 253D for the exploration and production of hydrocarbons in Chinarevskoye oil and
gas condensate field.
On 17 August 2012 Zhaikmunai LLP signed Asset Purchase Agreements to acquire 100% of the subsoil use rights
related to three oil and gas fields – Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye – all located in the
Western Kazakhstan region. On 1 March 2013 Zhaikmunai LLP has acquired the subsoil use rights related to these three
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oil and gas fields in Kazakhstan following the signing of the respective supplementary agreements related thereto by the
authority now known as the Ministry of Energy (the “MOE”) of the Republic of Kazakhstan.
The term of the Chinarevskoye subsoil use rights originally included a 5-year exploration period and a 25-year production
period. The exploration period was initially extended for additional 4 years and then for further 2 years according to the
supplements to the Contract dated 12 January 2004 and 23 June 2005, respectively. In accordance with the supplement
dated 5 June 2008, Tournaisian North reservoir entered into production period as at 1 January 2007. Following additional
commercial discoveries during 2008, the exploration period under the Chinarevskoye subsoil use rights, other than for the
Tournaisian horizons, was extended for an additional 3-year period, which expired on 26 May 2011. A further extension to
26 May 2014 was made under the supplement dated 28 October 2013. The extensions to the exploration periods have
not changed the Chinarevskoye subsoil use rights term, which expires in 2031. On 28 July 2015 the eleventh
supplementary agreement to the Contract was signed extending the exploration period to 26 May 2016. Zhaikmunai
LLP’s application for further extension of the Chinarevskoye exploration period is under approval at the MOE.
The contract for exploration and production of hydrocarbons from Rostoshinskoye field dated 8 February 2008 originally
included a 3-year exploration period and a 12-year production period. On 27 April 2009 the exploration period was
extended so as to have a total duration of 6 years. Subsequently, the exploration period was extended until 8 February
2017.
The contract for exploration and production of hydrocarbons from Darjinskoye field dated 28 July 2006 originally included
a 6-year exploration period and a 19-year production period. Subsequently, the exploration period was extended until 31
December 2017.
The contract for exploration and production of hydrocarbons from Yuzhno-Gremyachinskoye field dated 28 July 2006
originally included a 5-year exploration period and a 20-year production period. Subsequently, the exploration period was
extended until 31 December 2017.
Royalty payments
Zhaikmunai LLP is required to make monthly royalty payments throughout the entire production period, at the rates
specified in the Contract.
Royalty rates depend on hydrocarbons recovery levels and the phase of production and can vary from 3% to 7% of
produced crude oil and from 4% to 9% of produced natural gas. Royalty is accounted on a gross basis.
Government “profit share”
Zhaikmunai LLP makes payments to the Government of its “profit share” as determined in the Contract. The “profit share”
depends on hydrocarbon production levels and varies from 10% to 40% of production after deducting royalties and
reimbursable expenditures. Reimbursable expenditures include operating expenses, costs of additional exploration and
development costs. Government “profit share” is expensed as incurred and paid in cash. Government profit share is
accounted on a gross basis.
2. BASIS OF PREPARATION AND CONSOLIDATION
Basis of preparation
These consolidated financial statements for the year ended 31 December 2015 have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) issued by International Accounting Standards Board (“IASB”) as
adopted by the European Union and the requirements of the Disclosure and Transparency Rules (“DTR”) of the Financial
Conduct Authority (“FCA”) in the United Kingdom as applicable to annual financial statements.
The consolidated financial statements have been prepared based on a historical cost basis, except for certain financial
instruments which are carried at fair value as stated in the accounting policies (Note 4). The consolidated financial
statements are presented in US dollars and all values are rounded to the nearest thousand, except when otherwise
indicated.
The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting
estimates. It also requires from management to exercise its judgment in the process of applying the Group's accounting
policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements are disclosed in Note 4.
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Basis of consolidation
The consolidated financial statements comprise the financial statements of the Parent and its subsidiaries as at 31
December 2015. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group
controls an investee if, and only if, the Group has:
power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the
investee);
exposure, or rights, to variable returns from its involvement with the investee;
the ability to use its power over the investee to affect its returns.
Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when
the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and
circumstances in assessing whether it has power over an investee, including:
the contractual arrangement with the other vote holders of the investee;
rights arising from other contractual arrangements;
the Group’s voting rights and potential voting rights.
The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes
to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over
the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a
subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the
Group gains control until the date the Group ceases to control the subsidiary.
Group reorganisation
The Group has been formed through a reorganisation that took place in June 2014 in which Nostrum Oil & Gas PLC
became a new parent entity of the Group (Note 15). The reorganisation is not a business combination and does not result
in any change of economic substance of the Group. Accordingly, the consolidated financial statements of Nostrum Oil &
Gas PLC are a continuation of the existing group (Nostrum Oil & Gas LP and its subsidiaries). The consolidated financial
statements reflect the difference in share capital as an adjustment to equity (Other reserves) that is not subject to
reclassification to income statement in the future periods.
Going concern
These consolidated financial statements have been prepared on a going concern basis. The directors are satisfied that
the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months
from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the consolidated
financial statements.
3. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
New standards, interpretations and amendments thereof, adopted by the Group
The accounting policies adopted are consistent with those of the previous financial year, except for the following
amendments to IFRS effective as at 1 January 2015. The Group has not early adopted any other standard, interpretation
or amendment that has been issued but is not yet effective.
The nature and the impact of each new standard or amendment which is applicable to the consolidated financial
statements of the Group is described below:
Annual improvements 2010-2012 Cycle
IFRS 2 Share-based Payment
This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and
service conditions which are vesting conditions. The clarifications are consistent with how the Group has identified any
performance and service conditions which are vesting conditions in previous periods. In addition, the Group had not
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granted any awards during 2014 and 2015. Thus, these amendments did not impact the Group’s financial statements or
accounting policies.
IFRS 3 Business Combinations
The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as
liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or
loss whether or not they fall within the scope of IAS 39. This is consistent with the Group’s current accounting policy and,
thus, this amendment did not impact the Group’s accounting policy.
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets
The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference
to observable data by either adjusting the gross carrying amount of the asset to market value or by determining the
market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying
amount equals the market value. In addition, the accumulated depreciation or amortisation is the difference between the
gross and carrying amounts of the asset. This amendment did not have any impact on the financial statements of the
Group considering that the Group's property, plant and equipment are stated at historical cost.
IAS 24 Related Party Disclosures
The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key
management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses
a management entity is required to disclose the expenses incurred for management services. These amendments did not
have impact on the Group’s consolidated financial statements, since the Group always disclosed the companies providing
management services as related parties.
Annual improvements 2011-2013 Cycle
These improvements are effective from 1 July 2014 and are not expected to have a material impact on the Group. They
include:
IFRS 3 Business Combinations
The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that:
Joint arrangements, not just joint ventures, are outside the scope of IFRS 3
This scope exception applies only to the accounting in the financial statements of the joint arrangement itself
These amendments did not have any impact on the Group’s consolidated financial statements, since the Group has no
joint arrangements.
IFRS 13 Fair Value Measurement
The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to
financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable).
The amendment did not have material effect on the Group’s financial position or performance.
Standards issued but not yet effective
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s
consolidated financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when
they become effective.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial
instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions
of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge
accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.
Retrospective application is required, but comparative information is not compulsory. Early application of previous
versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. The
adoption of IFRS 9 is not expected to have an effect on the classification and measurement of the Group’s financial
assets and the Group’s financial liabilities.
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IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts
with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity
expects to be entitled in exchange for transferring goods or services to a customer.
The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue
standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a
full or modified retrospective application is required for annual periods beginning on or after 1 January 2017 with early
adoption permitted. The Group is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the
required effective date.
Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation
The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are
generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed
through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and
equipment and may only be used in very limited circumstances to amortise intangible assets.
The amendments are effective prospectively for annual periods beginning on or after 1 January 2016, with early adoption
permitted. These amendments are not expected to have any impact on the Group given that the Group has not used a
revenue-based method to depreciate its non-current assets.
IFRS 7 Financial Instruments: Disclosures
Applicability of the amendments to IFRS 7 to condensed interim financial statements
The amendment clarifies that the offsetting disclosure requirements do not apply to condensed interim financial
statements, unless such disclosures provide a significant update to the information reported in the most recent annual
report. This amendment must be applied retrospectively.
IAS 34 Interim Financial Reporting
The amendment clarifies that the required interim disclosures must either be in the interim financial statements or
incorporated by cross-reference between the interim financial statements and wherever they are included within the
interim financial report (e.g., in the management commentary or risk report). The other information within the interim
financial report must be available to users on the same terms as the interim financial statements and at the same time.
This amendment must be applied retrospectively.
Amendments to IAS 1 Disclosure Initiative
The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1
requirements. The amendments clarify:
The materiality requirements in IAS 1
That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may
be disaggregated
That entities have flexibility as to the order in which they present the notes to financial statements
That the share of OCI of associates and joint ventures accounted for using the equity method must be presented
in aggregate as a single line item, and classified between those items that will or will not be subsequently
reclassified to profit or loss
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the
statement of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for annual
periods beginning on or after 1 January 2016, with early adoption permitted. The Group will apply those amendments
from the effective date.
IFRS 16 Leases
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to
a contract, ie the customer (‘lessee’) and the supplier (‘lessor’).
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All leases result in a company (the lessee) obtaining the right to use an asset at the start of the lease and, if lease
payments are made over time, also obtaining financing.
Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by
IAS 17 and, instead, introduces a single lessee accounting model. Applying that model, a lessee is required to recognise:
assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low
value; and
depreciation of lease assets separately from interest on lease liabilities in the income statement.
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to
classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
IFRS 16 is effective from 1 January 2019. A company can choose to apply IFRS 16 before that date but only if it also
applies IFRS 15 Revenue from Contracts with Customers.
IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations.
The amendments are not yet endorsed for use in the EU, expected endorsement is not yet determined. The Group is
currently assessing the impact of IFRS 16 and plans to adopt the new standard on the required effective date.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting judgments, estimates and assumptions
The key assumptions concerning the future, and other key sources of estimation uncertainty at the statement of financial
position date, that have a significant risk of causing a material change to the carrying amounts of assets and liabilities are
discussed below:
Oil and gas reserves
Oil and gas reserves are a material factor in the Group’s computation of depreciation, depletion and amortisation
(the “DD&A”). These reserve quantities are used for calculating the unit of production depletion rate as it reflects the
expected pattern of consumption of future economic benefits by the Group.
The Group uses the reserve estimates provided by an independent appraiser on an annual basis to assess the oil and
gas reserves of its oil and gas fields. The reserves estimates are made in accordance with the methodology of the Society
of Petroleum Engineers (the “SPE”). In estimating its reserves under the SPE methodology, the Group 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 (Note 6) 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 mainly 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. 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 developed
reserves are used to calculate the unit of production rates for DD&A. Estimates of economically recoverable oil and gas
reserves and related future net cash flows also impact the impairment assessment of the Group.
Fair value of financial instruments
The fair value measurement of the Group’s financial and non-financial assets and liabilities utilises market observable
inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different
levels based on how observable the inputs used in the valuation technique utilised are (the ‘fair value hierarchy’):
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Level 1: quoted prices in active markets for identical items (unadjusted)
Level 2: observable direct or indirect inputs other than Level 1 inputs
Level 3: unobservable inputs (i.e. not derived from market data).
The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant
effect on the fair value measurement of the item. Transfers of items between levels are recognised in the period they
occur.
The financial statements for the years ended 31 December 2015 and 2014 include derivative financial instruments
recognised at fair value. For more detailed information in relation to the derivative financial instruments, please refer to
Note 29.
An analysis of fair values of financial instruments and further details as to how they are measured are provided in
Note 35.
Abandonment and site restoration (decommissioning)
Provision for decommissioning is recognised in full, when the Group has an obligation to dismantle and remove a facility
or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that provision can be
made. Estimating the future closure costs involves significant estimates and judgments by management. Significant
judgments in making such estimates include estimates of timing of cash flow and discount rate. The management made
its estimates based on the assumption that cash flow will take place at the expected end of the subsoil use rights.
The Group estimates future dismantlement and site restoration costs for oil and gas properties with reference to the
estimates provided from either internal or external engineers after taking into consideration the anticipated method of
dismantlement and the extent of site restoration required in accordance with current legislation and industry practice. The
amount of the provision is the present value of the estimated expenditures expected to be required to settle the obligation
at current year prices adjusted for expected long-term inflation rate and discounted at applicable rate. The management
of the Group believes that the long-term interest rates on the Eurobonds issued by the Ministry of Finance of the Republic
of Kazakhstan provide the best estimates of applicable risk uncorrected discount rate.
The unwinding of the discount related to the obligation is recorded in finance costs. A corresponding amount equivalent to
the provision is also recognised as part of the cost of the related oil and gas properties. This asset is subsequently
depreciated as part of the capital costs of the oil and gas properties on a unit-of-production basis.
The Group reviews site restoration provisions at each financial reporting date and adjusts them to reflect current best
estimates in accordance with IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities.
Changes in the measurement of an existing decommissioning liability that result from changes in the estimated timing or
amount of the outflow of resources embodying economic benefits required to settle the obligation, or changes to the
discount rate:
are added to, or deducted from, the cost of the related asset in the current period. If deducted from the cost of
the asset the amount deducted shall not exceed its carrying amount. If a decrease in the provision exceeds the
carrying amount of the asset, the excess is recognised immediately in the profit or loss; and
if the adjustment results in an addition to the cost of an asset, the Group considers whether this is an indication
that the new carrying amount of the asset may not be fully recoverable. If it is such an indication, the Group tests
the asset for impairment by estimating its recoverable amount, and accounts for any impairment loss in
accordance with IAS 36.
Movements in the provision for decommissioning liabilities are disclosed in Note 18.
Other current liabilities
The Group makes accruals for liabilities related to the underperformance and or adjustments of work programs under
subsoil use agreements (SUA) on a regular basis. When evaluating the adequacy of an accrual, management bases its
estimates on the latest work program included in the SUA and relevant signed supplements and potential future changes
in payment terms (including the currency in which these liabilities are to be settled). Future changes in the work programs
may require adjustments to the accrual recorded in the consolidated financial statements.
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For more detailed information in relation to the accruals under the subsoil use agreements instruments, please refer to
Note 21.
Impairment of Goodwill
Goodwill is tested for impairment annually as at 31 December and when circumstances indicate that the carrying value
may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of
CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an
impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.
For more detailed information in relation to goodwill, please refer to Note 6.
Taxation
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and
timing of future taxable income. Given the wide range of international business relationships and the long-term nature and
complexity of existing contractual agreements, differences arising between the actual results and the assumptions made,
or future changes to such assumptions, could necessitate future adjustments to tax bases of income and expense already
recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the
tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors,
such as experience of previous tax audits and differing interpretations of tax regulations by the Group and the responsible
tax authority. Such differences in interpretation may arise for a wide variety of issues depending on the conditions
prevailing in the respective domicile of the Group companies.
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the
taxation authorities. The tax rates and tax laws used to compute the amount are those that apply to the relevant taxable
income.
Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit
or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable
tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred income tax
Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred
income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their
carrying values for financial reporting purposes, except where the deferred income tax arises from the initial recognition of
goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit or loss.
A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are
expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been
enacted or substantively enacted at the reporting date.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except
where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets
against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
For more detailed information in current and deferred income tax disclosure as at 31 December 2015 and 2014, please
see Note 31.
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Significant accounting policies
Property, plant and equipment
Exploration expenditure
Costs directly associated with exploration wells are capitalised within exploration and evaluation assets until the drilling of
the well is complete and the results have been evaluated. These costs include employee remuneration and materials and
fuel used, rig costs and payments made to contractors and asset retirement obligation fees. If hydrocarbons are found
and, subject to further appraisal activity (e.g., the drilling of additional wells), it is probable that they can be commercially
developed, the costs continue to be carried as an asset while sufficient/continued progress is made in assessing the
commerciality of the hydrocarbons.
All such carried costs are subject to technical, commercial and management review at least once a year to confirm the
continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are
written off.
Subsoil use rights acquisition costs are initially capitalised in exploration and evaluation assets. Subsoil use rights
acquisition costs are reviewed at each reporting date to confirm that there is no indication that the carrying amount
exceeds the recoverable amount. This review includes confirming that exploration drilling is still under way or firmly
planned, or that it has been determined, or work is under way to determine that the discovery is economically viable
based on a range of technical and commercial considerations and sufficient progress is being made on establishing
development plans and timing. If no future activity is planned or the subsoil use rights have been relinquished or has
expired, the carrying value of the subsoil use rights acquisition costs is written off through profit or loss. Upon recognition
of proved reserves and internal approval for development, the relevant expenditure is transferred to oil and gas
properties.
For more detailed information in relation to exploration and evaluation assets, please see Note 7.
Oil and gas properties
Expenditure on the construction, installation or completion of infrastructure facilities such as treatment facilities, pipelines
and the drilling of development wells, is capitalised within property, plant and equipment as oil and gas properties. The
initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the
asset into operation and the initial estimate of decommissioning obligation, if any. The purchase price or construction cost
is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. When a
development project moves into the production stage, the capitalisation of certain construction/development costs ceases
and costs are either regarded as part of the cost of inventory or expensed, except for costs which qualify for capitalisation
relating to oil and gas property asset additions, improvements or new developments
All capitalised costs of oil and gas properties are depleted using the unit-of-production method based on estimated proved
developed reserves of the field, except the Group depreciates its oil pipeline and oil loading terminal on a straight line
basis over the life of the relevant subsoil use rights. In the case of assets that have a useful life shorter than the lifetime of
the field the straight line method is applied.
Other properties
All other property, plant and equipment are stated at historical cost less accumulated depreciation and impairment.
Historical cost includes expenditures that are directly attributable to the acquisition of the items. Subsequent costs are
included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
All other repairs and maintenance are charged to the profit or loss during the year in which they are incurred.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
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Consolidated financial statements
Notes to the consolidated financial statements
Buildings and constructions
Vehicles
Machinery and equipment
Other
Years
7-15
8
3-13
3-10
For more detailed information in relation to property plant and equipment, please refer to Note 8.
Foreign currency translation
The functional currency is the currency of the primary economic environment in which an entity operates and is normally
the currency in which the entity primarily generates and expends cash.
The functional currency of the Company is the United States dollar (the “US dollar” or “US$”). The functional currencies of
the Group’s subsidiaries are as follows:
Company
Claydon Industrial Limited
Grandstil LLC
Jubilata Investments Limited
Nostrum Associated Investments LLP
Nostrum E&P Services LLC
Nostrum Oil & Gas Coöperatief U.A.
Nostrum Oil & Gas BV
Nostrum Oil & Gas UK Ltd.
Nostrum Services Central Asia LLP
Nostrum Services CIS BVBA
Nostrum Services N.V.
Zhaikmunai LLP
Functional currency
US dollar
Russian rouble
US dollar
Tenge
Russian rouble
US dollar
US dollar
British Pound
Tenge
Euro
Euro
US dollar
Transactions in foreign currencies are initially recorded by the Group’s subsidiaries at their respective functional currency
spot rates at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of
exchange at the reporting date.
All differences are taken to the profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign
currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured
at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
In the consolidated financial statements, the assets and liabilities of non-US dollar functional currency subsidiaries are
translated into US dollars at the spot exchange rate on the balance sheet date. The results and cash flows of non-US
dollar functional currency subsidiaries are translated into US dollars using average rates of exchange. In the consolidated
financial statements, exchange adjustments arising when the opening net assets and the profits for the year retained by
non-US dollar functional currency subsidiaries are translated into US dollars are reported in the statement of
comprehensive income.
Advances for non-current assets
Advances paid for capital investments/acquisition of non-current assets are qualified as advances for non-current assets
regardless of the period of supplies of relevant assets or the supply of work or services to close advances. Advances paid
for the purchase of non-current assets are recognised by the Group as non-current assets and are not discounted.
For more detailed information in relation to advances for non-current assets, please refer to Note 9.
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Consolidated financial statements
Notes to the consolidated financial statements
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the
aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling
interest (“NCI”) in the acquiree. For each business combination, the Group elects whether to measure NCI in the acquiree
at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition related costs are expensed
as incurred and included in administrative expenses.
When the Group acquires a business, it assesses the assets and liabilities assumed for appropriate classification and
designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the
acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Those acquired
petroleum reserves and resources that can be reliably measured are recognised separately in the assessment of fair
values on acquisition. Other potential reserves, resources and rights, for which fair values cannot be reliably measured,
are not recognised separately, but instead are subsumed in goodwill.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount
recognised for NCI over the fair value of the identifiable net assets acquired and liabilities assumed. If the fair value of the
identifiable net assets acquired is in excess of the aggregate consideration transferred (bargain purchase), before
recognising a gain, the Group reassesses whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If
the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration
transferred, then the gain is recognised in the statement of profit or loss and other comprehensive income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of
impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the
Group’s CGUs that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the
acquiree are assigned to those units.
Where goodwill forms part of a Cash Generating Unit (“CGU”) and part of the operation in that unit is disposed of, the
goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the
gain or loss on disposal. Goodwill disposed of in these circumstances is measured based on the relative values of the
disposed operation and the portion of the CGU retained.
Impairment of non-financial assets
The Group assesses assets or groups of assets for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Individual assets are grouped for impairment assessment
purposes at the lowest level at which there are identifiable cash inflows that are largely independent of the cash flows of
other groups of assets. If any such indication of impairment exists or when annual impairment testing for an asset group is
required, the Group makes an estimate of its recoverable amount. An asset group’s recoverable amount is the higher of
its fair value less costs of disposal and its value in use. Where the carrying amount of an asset group exceeds its
recoverable amount, the asset group is considered impaired and is written down to its recoverable amount. In assessing
value in use, the estimated future cash flows are adjusted for the risks specific to the asset group and are discounted to
their present value using a pre-tax discount rate that reflects current market assessments of the time value of money.
In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions
can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples,
quoted share prices for publicly traded companies or other available fair value indicators.
An assessment is made at each reporting date as to whether there is any indication that previously recognised
impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is
estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to
determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying
amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount
that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior
years. Such reversal is recognised in the profit or loss.
After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount,
less any residual value, on a systematic basis over its remaining useful life.
Impairment losses of continuing operations, including impairment of inventories, are recognised in profit or loss in those
expense categories consistent with the function of the impaired asset.
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Consolidated financial statements
Notes to the consolidated financial statements
Borrowing costs
The Group capitalises borrowing costs on qualifying assets. Assets qualifying for borrowing costs capitalisation include all
assets under construction that are not being depreciated, depleted, or amortised, provided that work is in progress at that
time. Qualifying assets mostly include wells and other operations field infrastructure under construction. Capitalised
borrowing costs are calculated by applying the capitalisation rate to the expenditures on qualifying assets. The
capitalisation rate is the weighted average of the borrowing costs applicable to the Group’s borrowings that are
outstanding during the period. All other borrowing costs are recognised in the consolidated statement of comprehensive
income in the period in which they are incurred.
For more detailed information in relation to capitalisation of borrowing costs, please refer to Note 8.
Inventories
Inventories are stated at the lower of cost or net realisable value (“NRV”). Cost of oil, gas condensate and liquefied
petroleum gas (“LPG”) is determined on the weighted-average method based on the production cost including the
relevant expenses on depreciation, depletion and impairment and overhead costs based on production volume. Net
realisable value is the estimated selling price in the ordinary course of business, less selling expenses.
For more information in relation to the breakdown of inventories as at 31 December 2015 and 2014, please see Note 10.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable
estimate of the amount of the obligation can be made. Provisions are reviewed by the Group at each balance sheet date
and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision is reversed.
Contingent liabilities
The Group classifies as contingent liabilities those possible obligations that arise from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise and the present obligations that arise from past events but are not recognised because it is not
probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount
of the obligation cannot be measured with sufficient reliability.
The Group does not recognise contingent liabilities but discloses contingent liabilities in Note 28, unless the possibility
of an outflow of resources embodying economic benefits is remote.
Financial assets
Initial recognition and measurement
Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and
receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging
instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial
recognition.
All financial assets are recognised initially at fair value plus, in the case of investments not at fair value through profit or
loss, directly attributable transaction costs.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or
convention in the marketplace (regular way trades) are recognised on the trade date, i.e., the date that the Group
commits to purchase or sell the asset.
The Group’s financial assets include cash, long-term and short-term deposits, trade and other receivables.
Loans and receivables
Loans and receivables are carried at amortised cost using the effective interest method if the time value of money is
significant. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as
well as through the amortisation process. This category of financial assets includes trade and other receivables. Cash
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Consolidated financial statements
Notes to the consolidated financial statements
equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash, are subject to
insignificant risk of changes in value and have a maturity of three months or less from the date of acquisition.
Derecognition
Financial assets are de-recognised when the rights to receive cash flows from the asset have expired.
Impairment of financial assets
The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of
financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there
is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the
asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset
or the group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other
financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future
cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Financial assets carried at amortised cost
For financial assets carried at amortised cost the Group assesses individually whether objective evidence of impairment
exists. If there is objective evidence that an impairment loss has incurred, the amount of the loss is measured as the
difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future
expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is
discounted at the financial assets original effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is
recognised in the profit or loss. Financial assets together with the associated allowance are written off when there is no
realistic prospect of future recovery. If, in a subsequent year, the amount of the estimated impairment loss increases or
decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss
is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited
to finance costs in the profit or loss.
Financial liabilities
Initial recognition and measurement
All financial liabilities are recorded initially at fair value. The Group’s financial liabilities include trade and other payables
and borrowings .
Subsequent measurement
After initial recognition, interest bearing borrowings are subsequently measured at amortised cost using the EIR. Gains
and losses are recognised in the profit or loss when the liabilities are derecognised as well as through the EIR
amortisation process.
Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an
integral part of the EIR. The EIR amortisation is included in finance cost in the profit or loss.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original
liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the
profit or loss.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and
only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a
net basis, or to realise the assets and settle the liabilities simultaneously.
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Consolidated financial statements
Notes to the consolidated financial statements
Derivative financial instruments and hedging
The Group uses hedging contracts for oil export sales to cover part of its risks associated with oil price fluctuations. Such
derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered
into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and
as liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value of derivatives during the year that do not qualify for hedge
accounting are taken directly to profit or loss.
For more detailed information in relation to derivative financial instruments, please refer to Note 29
Cash and short-term deposits
Cash and cash equivalents in the statement of financial position comprise cash at banks and at hand and short term
deposits with an original maturity of three months or less, but exclude any restricted cash which is not available for use by
the Group and therefore is not considered highly liquid – for example, cash set aside to cover decommissioning
obligations.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and cash
equivalents, as defined above, net of outstanding bank overdrafts.
For more detailed information in relation to cash and cash equivalents as at 31 December 2015 and 2015, please see
Note 14.
Revenue recognition
The Group sells crude oil, gas condensate and LPG under agreements priced by reference to Platt’s and/or Argus’ index
quotations and adjusted for freight, insurance and quality differentials where applicable. The Group sells gas under
agreements at fixed prices.
Revenue from the sale of crude oil, gas condensate, gas and LPG is recognised when delivery has taken place and risks
and rewards of ownership have passed to the customer.
Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the
Group and the amount of revenue can be reliably measured.
Treasury shares
Own equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or
loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any
difference between the carrying amount and the consideration, if reissued, is recognised in other reserves. Voting rights
related to treasury shares are nullified for the Group and no distributions are accepted in relation to them. Share options
exercised during the reporting period are satisfied with treasury shares.
Share-based payments
The Group measures the cost of cash-settled transactions with employees by reference to the fair value of the equity
instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires
determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This
estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of
the share option, volatility and distribution yield and making assumptions about them. The assumptions and models used
for estimating fair value for share-based payment transactions are disclosed in Note 28.
5. BUSINESS COMBINATIONS
On 19 May 2014 the Group agreed to acquire 100% of the share capital of Nostrum Services CIS BVBA (formerly Prolag
BVBA) and Nostrum Services Central Asia LLP (formerly Amersham Oil LLP), companies providing management and
consulting services to the Group, from related parties of the Group, in connection with the premium listing on the London
Stock Exchange of the Group’s listed entity, so as to comply with certain exchange requirements that listed companies be
managed by persons employed by entities within the listed company’s group.
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Consolidated financial statements
Notes to the consolidated financial statements
A cash consideration consisting of initial purchase price of US$1 and a price adjustment of US$212 thousand was agreed
and paid with respect to the acquisition of Nostrum Services CIS BVBA during the year ended 31 December 2014.
Historically, it provided consulting services to the Group on certain marketing, transportation and logistics matters.
Nostrum Services Central Asia LLP was acquired in exchange for a cash consideration consisting of initial purchase price
of US$1,915 thousand and a price adjustment of US$381 thousand which were paid by the Group during the year ended
31 December 2015. Certain managers of the Group historically provided services to the Group pursuant to a service
agreement between Nostrum Services Central Asia LLP and the Group.
The goodwill arising on acquisition represents the savings of the Group on management fees and is not expected to be
deductible for tax purposes.
There were no significant revenues or profits/losses of the acquired subsidiaries since the respective acquisition dates
included in the consolidated statements of comprehensive income for the year ended 31 December 2014.
The fair values of the identifiable assets and liabilities of Nostrum Services CIS BVBA and Nostrum Services Central Asia
LLP as at the date of acquisition were:
In thousands of US dollars
Assets
Property, plant and equipment
Advances for non-current assets
Prepayments and other current assets
Cash and cash equivalents
Liabilities
Trade payables
Other current liabilities
Total identifiable net assets at fair value
Goodwill arising on acquisition
Gain arising on acquisition
Total purchase consideration
The purchase consideration comprised of:
In thousands of US dollars
Consideration satisfied by cash
Working capital adjustment
Total purchase consideration
Consideration satisfied by cash
Cash and cash equivalents acquired
Purchase of subsidiaries per the cash flow statement
6. GOODWILL
Nostrum
Services
CIS BVBA
Nostrum
Services
Central
Asia LLP
15
287
721
219
1,242
496
427
923
319
(107)
212
2
–
15
365
382
7
12
19
363
2,039
–
2,402
2015
2,296
106
2,402
(2,296)
–
(2,296)
Total
17
287
736
584
1,624
503
439
942
682
2,039
(107)
2,614
2014
212
2,402
2,614
(212)
584
372
As at 31 December 2015 and 31 December 2014, goodwill comprised the following due to business combinations:
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Consolidated financial statements
Notes to the consolidated financial statements
In thousands of US dollars
Balance as at 1 January
Goodwill addition
Balance as at 31 December
Impairment testing
2015
32,425
–
32,425
2014
30,386
2,039
32,425
The goodwill arising from the purchase of Nostrum Services CIS BVBA and Nostrum Services Central Asia LLP (Note 5)
relates to a single cash-generating unit. Respectively, goodwill is tested for impairment by comparing the recoverable
amount against the carrying value of the underlying cash generating unit.
The management has determined a single cash-generating unit within the Group’s non-current assets consisting of all
Group’s assets related to its Chinarevskoye and exploration fields and gas treatment facility. Impairment testing is
performed by comparing the recoverable amount against the carrying value of the cash generating unit. The recoverable
amount is determined by calculation of the value-in-use based on the discounted cash flow model as no recent third party
transactions exist on which a reliable market-based fair value can be established. The value-in-use calculation model,
which formally approved by the management, takes into consideration cashflows, which are expected to arise until 2032,
i.e. during the license term of the Chinarevskoye field. The period exceeding five years is believed to be appropriate
based on the proved and probable reserves audited by independent engineers and respective past history of the Group’s
ability to transfer probable reserves into proved.
The key assumptions used in the Group’s discounted cash flow models reflect past experience and take account of
external factors. These assumptions are:
Oil prices (in real terms): US$30/bbl for 2016-2017 and US$60/bbl for 2018-2032;
Proved and probable hydrocarbon reserves confirmed by independent reserve engineers;
Production profiles based on Group’s internal estimates confirmed by independent reserve engineers;
All cash flows are projected on the basis of stable prices, i.e. inflation/growth rates are ignored;
Cost profiles for the development of the fields and subsequent operating costs consistent with reserves
estimates and production profiles; and
Pre-tax discount rate of 14% (2014: 14%).
None of the reasonably possible changes in key assumptions causes the cash generating unit’s carrying amount to
exceed its recoverable amount.
7. EXPLORATION AND EVALUATION ASSETS
In thousands of US dollars
31 December 2015
31 December 2014
Subsoil use rights
Expenditures on geological and geophysical studies
15,835
21,082
36,917
15,835
8,545
24,380
During the year ended 31 December 2015 the Group had additions to exploration and evaluation assets of US$12,537
thousand which mainly includes capitalised expenditures on geological studies and drilling costs (FY 2014: US$3,946
thousand). Interest was not capitalised on exploration and evaluation assets. During the year ended 31 December 2014
the Group repaid capitalised contingent consideration under the acquisition agreements for the Darjinskoye and Yuzhno-
Gremyachinskoye oil and gas fields in the amount of US$ 5,300 thousand.
8. PROPERTY, PLANT AND EQUIPMENT
As at 31 December 2015 and 31 December 2014 property, plant and equipment comprised the following:
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Consolidated financial statements
Notes to the consolidated financial statements
In thousands of US dollars
31 December 2015
31 December 2014
Oil and gas properties
Other property, plant and equipment
Oil and gas properties
1,566,703
39,053
1,605,756
1,401,847
40,310
1,442,157
The category “Oil and Gas properties” represents mainly wells, oil and gas treatment facilities, oil transportation and other
related assets. The movement of oil and gas properties for the years ended 31 December 2015 and 2014 was as follows:
In thousands of US dollars
Balance at 1 January 2014, net of accumulated depreciation and
depletion
Additions
Transfers
Disposals
Disposals depreciation
Depreciation and depletion charge
Balance at 31 December 2014, net of accumulated depreciation
and depletion
Additions
Transfers
Depreciation and depletion charge
Balance at 31 December 2015, net of accumulated depreciation
and depletion
As at 31 December 2013
Cost
Accumulated depreciation and depletion
Balance, net of accumulated depreciation and depletion
As at 31 December 2014
Cost
Accumulated depreciation and depletion
Balance, net of accumulated depreciation and depletion
As at 31 December 2015
Cost
Accumulated depreciation and depletion
Balance, net of accumulated depreciation and depletion
Working
assets
Construction
in progress
Total
1,089,822
9,730
38,640
(666)
214
(104,852)
1,032,888
(1,131)
101,481
(101,694)
202,251
205,153
(38,445)
–
–
–
368,959
265,569
(99,369)
–
1,292,073
214,883
195
(666)
214
(104,852)
1,401,847
264,438
2,112
(101,694)
1,031,544
535,159
1,566,703
1,411,752
(321,930)
1,089,822
1,459,457
(426,569)
1,032,888
202,251
–
202,251
1,614,003
(321,930)
1,292,073
368,959
–
368,959
1,828,416
(426,569)
1,401,847
1,559,807
(528,263)
1,031,544
535,159
–
535,159
2,094,966
(528,263)
1,566,703
The category “Construction in progress” is represented by employee remuneration, materials and fuel used, rig costs,
payments made to contractors, and asset retirement obligation fees directly associated with development of wells until the
drilling of the well is complete and results have been evaluated.
The depletion rate for oil and gas working assets was 10.20% and 10.02% in 2015 and 2014, respectively.
The Group engaged independent petroleum engineers to perform a reserves evaluation as at 31 December 2015 and
2014. Starting from 1 October 2015 and 2014 the depletion has been calculated using the unit of production method
based on these reserves estimates.
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Consolidated financial statements
Notes to the consolidated financial statements
The change in the long-term inflation rate and discount rate used to determine the abandonment and site restoration
provision (Note 18) in the year ended 31 December 2015 resulted in the decrease of the oil and gas properties by
US$ 5,622 thousand (31 December 2014: an increase of US$ 4,306 thousand).The Group incurred borrowing costs
including amortisation of arrangement fees. Capitalisation rate and capitalised borrowing costs were as follows as at 31
December 2015 and 31 December 2014:
In thousands of US dollars
31 December 2015
31 December 2014
Borrowing costs including amortisation of arrangement fee
Capitalisation rate
Capitalised borrowing costs
Other property, plant and equipment
71,782
7.01%
27,112
77,959
7.28%
17,134
In thousands of US dollars
Buildings
equipment Vehicles
Others
Machinery
&
Construction
in progress
Total
Balance at 1 January 2014, net of
accumulated depreciation
Additions
Transfers
Disposals
Disposals depreciation
Depreciation
Balance at 31 December 2014, net
of accumulated depreciation
Additions
Transfers
Disposals
Disposals depreciation
Depreciation
Translation difference
Balance at 31 December 2015, net
of accumulated depreciation
As at 31 December 2013
Cost
Accumulated depreciation
Balance, net of accumulated
depreciation
As at 31 December 2014
Cost
Accumulated depreciation
Balance, net of accumulated
depreciation
As at 31 December 2015
Cost
Accumulated depreciation
Balance, net of accumulated
depreciation
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26,296
585
24
(6)
5
(3,136)
23,768
1,101
270
–
–
(3,213)
–
6,478
1,501
309
(24)
16
(2,430)
5,850
1,699
912
(24)
22
(2,535)
–
1,395
324
412
(159)
157
(484)
1,645
268
(6)
(1,933)
1,370
(363)
(4)
4,614
6,279
(940)
(244)
193
(1,160)
8,742
6,126
(3,071)
(285)
57
(1,549)
(113)
47
258
–
–
–
–
305
231
(217)
–
–
–
–
38,830
8,947
(195)
(433)
371
(7,210)
40,310
9,425
(2,112)
(2,242)
1,449
(7,660)
(117)
21,926
5,924
977
9,907
319
39,053
30,887
(4,591)
13,285
(6,807)
3,513
(2,118)
7,166
(2,552)
47
–
54,898
(16,068)
26,296
6,478
1,395
4,614
47
38,830
31,497
(7,729)
15,068
(9,218)
4,167
(2,522)
12,270
(3,528)
305
–
63,307
(22,997)
23,768
5,850
1,645
8,742
305
40,310
32,868
(10,942)
17,655
(11,731)
2,461
(1,484)
14,895
(4,988)
319
–
68,198
(29,145)
21,926
5,924
977
9,907
319
39,053
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9. ADVANCES FOR NON-CURRENT ASSETS
In thousands of US dollars
31 December 2015
31 December 2014
Advances for pipes and construction materials
Advances for construction services
Advances for purchase of software licenses
76,806
53,854
–
130,660
67,465
66,884
6
134,355
Increase in the advances for non-current assets is mainly driven by an increase in prepayments made to suppliers of
services and equipment for construction of a third unit for the Group’s gas treatment facility.
10. INVENTORIES
As at 31 December 2015 and 31 December 2014 inventories comprised the following:
In thousands of US dollars
31 December 2015
31 December 2014
Materials and supplies
Gas condensate
Crude oil
LPG
20,368
5,684
2,528
371
28,951
20,472
3,383
1,262
326
25,443
As at 31 December 2015 and 31 December 2014 inventories are carried at cost.
11. TRADE RECEIVABLES
As at 31 December 2015 and 31 December 2014 trade receivables were not interest-bearing and were mainly
denominated in US dollars, their average collection period is 30 days.
As at 31 December 2015 and 31 December 2014 there were neither past due nor impaired trade receivables.
12. PREPAYMENTS AND OTHER CURRENT ASSETS
As at 31 December 2015 and 31 December 2014 prepayments and other current assets comprised the following:
In thousands of US dollars
31 December 2015
31 December 2014
VAT receivable
Other taxes receivable
Advances paid
Other
18,709
2,888
4,254
1,560
27,411
22,581
5,921
9,184
1,956
39,642
Advances paid consist primarily of prepayments made to service providers.
13. CURRENT INVESTMENTS
Current investments as at 31 December 2014 were represented by an interest-bearing short-term deposit placed on 30
September 2014 for a six-month period with an interest rate of 0.24% per annum.
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14. CASH AND CASH EQUIVALENTS
In thousands of US dollars
31 December 2015
31 December 2014
Current accounts in US dollars
Current accounts in tenge
Current accounts in other currencies
Petty cash
Bank deposits with maturity less than three months
114,346
2,038
7,167
9
42,000
165,560
356,316
8,709
10,413
5
–
375,443
Bank deposits were represented by an interest-bearing deposit placed on 30 December 2015 for a one-month period with
an interest rate of 0.25% per annum and an interest-bearing deposit placed on 23 June 2015 for a six-month period with
an interest rate of 0.45% per annum.
In addition to the cash and cash equivalents in the table above, the Group has restricted cash accounts as liquidation
fund deposit in the amount of US$5,375 thousand with Sberbank in Kazakhstan (31 December 2014: US$5,023
thousand), which is kept as required by the subsoil use rights for abandonment and site restoration liabilities of the Group.
15. SHARE CAPITAL AND RESERVES
As at 31 December 2015 the ownership interests in the Parent consist of 188,182,958 issued and fully paid ordinary
shares, which are listed on the London Stock Exchange. The ordinary shares have a nominal value of GB£ 0.01.
Number of GDRs/shares
As at 1 January 2014
Share options exercised
As at 31 December 2014
As at 31 December 2015
In
circulation
Treasury
capital
Total
184,527,884
3,655,074 188,182,958
300,935
184,828,819
(300,935)
–
3,354,139 188,182,958
184,828,819
3,354,139 188,182,958
Treasury shares were issued to support the Group’s obligations to employees under the Employee Share Option Plan
(“ESOP”) and are held by Elian Employee Benefit Trustee Limited, which upon request from employees to exercise
options, sells shares on the market and settles respective obligations under the ESOP. This trust constitutes a special
purpose entity under IFRS and therefore, these shares are recorded as treasury capital of the Company.
Other reserves of the Group include foreign currency translation reserve accumulated before 2009, when the functional
currency of Zhaikmunai ZLLP was Kazakhstani Tenge and the difference between the partnership capital, treasury capital
and additional paid-in capital of Nostrum Oil & Gas LP and the share capital of Nostrum Oil & Gas PLC amounting to
US$255,459, that arose during the reorganisation of the Group (Note 2).
Distributions
During the year ended 31 December 2015 Nostrum Oil & Gas PLC made a distribution of US$ 0.27 per share to the
shareholders which amounted to a total of US$ 49,060 thousand and was paid in full on 26 June 2015.
During the year ended 31 December 2014 Nostrum Oil & Gas LP made a distribution of US$ 0.35 per common unit to the
holders of common units representing limited partnership interests which amounted to a total of US$ 64,615 thousand
and was paid in full on 6 June 2014.
Kazakhstan stock exchange disclosure requirement
The Kazakhstan Stock Exchange has enacted on 11 October 2010 (as amended on 18 April 2014) a requirement for
disclosure of “the book value per share” (total assets less intangible assets, total liabilities and preferred stock divided by
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the number of outstanding shares as at the reporting date). As at 31 December 2015 the book value per share amounted
to US$3.94 (31 December 2014: US$4.70).
16. EARNINGS PER SHARE
Basic EPS amounts are calculated by dividing the profit for the period by the weighted average number of Common Units/
shares outstanding during the period.
The basic and diluted EPS are the same as there are no instruments that have a dilutive effect on earnings.
There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and
the date of authorisation of these financial statements.
In thousands of US dollars
2015
2014
(Loss)/profit for the period attributable to the shareholders (in
thousands of US dollars)
Weighted average number of Common Units/shares
Basic and diluted earnings per share (in US dollars)
(94,821)
184,828,819
(0.51)
146,425
184,678,352
0.79
17. BORROWINGS
Borrowings comprise the following as at 31 December 2015 and 31 December 2014:
In thousands of US dollars
31 December 2015
31 December 2014
Notes issued in 2012 and maturing in 2019
Notes issued in 2014 and maturing in 2019
Less amounts due within 12 months
Amounts due after 12 months
2012 Notes
545,868
405,626
951,494
(15,024)
936,470
540,793
404,321
945,114
(15,024)
930,090
On 13 November 2012, Zhaikmunai International B.V. (the “2012 Initial Issuer”) issued US$ 560,000 thousand notes (the
“2012 Notes”).
On 24 April 2013 Zhaikmunai LLP (the “2012 Issuer”) replaced the 2012 Initial Issuer of the 2012 Notes, whereupon it
assumed all of the obligations of the 2012 Initial Issuer under the 2012 Notes.
The 2012 Notes bear interest at the rate of 7.125% per year. Interest on the 2012 Notes is payable on 14 May and 13
November of each year, beginning on 14 May 2013. Prior to 13 November 2016, the 2012 Issuer may, at its option, on
any one or more occasions redeem up to 35% of the aggregate principal amount of the 2012 Notes with the net cash
proceeds of one or more equity offerings at a redemption price of 107.125% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided that (1) at least 65% of the original principal amount
of the 2012 Notes (including Additional Notes as defined in the indenture relating to the 2012 Notes) remains outstanding
after each such redemption; and (2) the redemption occurs within 90 days after the closing of the related equity offering.
In addition, the 2012 Notes may be redeemed, in whole or in part, at any time prior to 13 November 2016 at the option of
the 2012 Issuer upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each holder of 2012
Notes at its registered address, at a redemption price equal to 100% of the principal amount of the 2012 Notes redeemed
plus the Applicable Premium (as defined below) as of, and accrued and unpaid interest to, the applicable redemption date
(subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest
payment date). Applicable Premium means, with respect to any 2012 Note on any applicable redemption date, the greater
of: (1) 1.0% of the principal amount of such 2012 Note; and (2) the excess, if any, of: (a) the present value at such
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redemption date of (i) the redemption price of such 2012 Note at 13 November 2016 plus (ii) all required interest
payments (excluding accrued and unpaid interest to such redemption date) due on such 2012 Note through 13 November
2016 computed using a discount rate equal to the United States treasury rate as of such redemption date plus 50 basis
points; over (b) the principal amount of such 2012 Note.
The 2012 Notes are jointly and severally guaranteed (the “2012 Guarantees”) on a senior basis by Nostrum Oil & Gas
PLC and all of its subsidiaries other than the 2012 Issuer (the “2012 Guarantors”). The 2012 Notes are the 2012 Issuer’s
and the 2012 Guarantors’ senior obligations and rank equally with all of the 2012 Issuer’s and the 2012 Guarantors’ other
senior indebtedness. The 2012 Notes and the 2012 Guarantees do not have the benefit of first priority pledges over the
shares of Zhaikmunai Finance B.V. and Zhaikmunai Netherlands B.V.
2014 Notes
On 14 February 2014, Nostrum Oil & Gas Finance B.V. (the “2014 Initial Issuer”) issued US$ 400,000 thousand notes
(the “2014 Notes”).
On 6 May 2014, Zhaikmunai LLP (the “2014 Issuer”) replaced Nostrum Oil & Gas Finance B.V. as issuer of the 2014
Notes, whereupon it assumed all of the obligations of the 2014 Initial Issuer under the 2014 Notes.
The 2014 Notes bear interest at the rate of 6.375% per annum. Interest on the 2014 Notes is payable on 14 February and
14 August of each year, beginning on 14 August 2014. Prior to 14 February 2017, the 2014 Issuer may, at its option, on
any one or more occasions redeem up to 35% of the aggregate principal amount of the 2014 Notes with the net cash
proceeds of one or more equity offerings at a redemption price of 106.375% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided that (1) at least 65% of the original principal amount
of the 2014 Notes (including Additional Notes as defined in the indenture relating to the 2014 Notes) remains outstanding
after each such redemption; and (2) the redemption occurs within 90 days after the closing of the related equity offering.
In addition, the 2014 Notes may be redeemed, in whole or in part, at any time prior to 14 February 2017 at the option of
the 2014 Issuer upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail to each holder of 2014
Notes at its registered address, at a redemption price equal to 100% of the principal amount of the 2014 Notes redeemed
plus the Applicable Premium (as defined below) as of, and accrued and unpaid interest to, the applicable redemption date
(subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest
payment date). Applicable Premium means, with respect to any 2014 Notes on any applicable redemption date, the
greater of: (1) 1.0% of the principal amount of such 2014 Notes; and (2) the excess, if any, of: (a) the present value at
such redemption date of (i) the redemption price of such 2014 Notes at 14 February 2017 plus (ii) all required interest
payments (excluding accrued and unpaid interest to such redemption date) due on such 2014 Notes through 14 February
2017 computed using a discount rate equal to the United States treasury rate as of such redemption date plus 50 basis
points; over (b) the principal amount of such 2014 Notes.
The 2014 Notes are jointly and severally guaranteed (the “2014 Guarantees”) on a senior basis by Nostrum Oil & Gas
PLC and all of its subsidiaries other than the 2014 Issuer (the “2014 Guarantors”). The 2014 Notes are the 2014 Issuer’s
and the 2014 Guarantors’ senior obligations and rank equally with all of the 2014 Issuer’s and the 2014 Guarantors’ other
senior indebtedness. Claims of secured creditors of the 2014 Issuer or the 2014 Guarantors will have priority with respect
to their security over the claims of creditors who do not have the benefit of such security, such as the holders of the 2014
Notes.
Costs directly attributable to the 2014 Notes arrangement amounted to US$6,525 thousand.
Covenants contained in the 2012 Notes and the 2014 Notes
The indentures governing the 2012 Notes and the 2014 Notes contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of the 2012 Guarantors and the 2014 Guarantors to:
incur or guarantee additional indebtedness and issue certain preferred stock;
create or incur certain liens;
make certain payments, including dividends or other distributions;
prepay or redeem subordinated debt or equity;
make certain investments;
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create encumbrances or restrictions on the payment of dividends or other distributions, loans or advances to and
on the transfer of assets to the Parent or any of its restricted subsidiaries;
sell, lease or transfer certain assets including shares of restricted subsidiaries;
engage in certain transactions with affiliates;
enter into unrelated businesses; and
consolidate or merge with other entities.
Each of these covenants is subject to certain exceptions and qualifications.
In addition, the indentures impose certain requirements as to future subsidiary guarantors, and certain customary
information covenants and events of default.
18. ABANDONMENT AND SITE RESTORATION PROVISION
The summary of changes in abandonment and site restoration provision during years ended 31 December 2015 and
2014 is as follows:
In thousands of US dollars
Abandonment and site restoration provision as at 1 January
Unwinding of discount
Additional provision
Change in estimates
Abandonment and site restoration provision as at 31 December
2015
20,877
426
247
(5,622)
15,928
2014
13,874
197
2,500
4,306
20,877
The management made its estimate based on the assumption that cash flow will take place at the expected end of the
subsoil use rights in 2033. There are uncertainties in estimation of future costs as Kazakh laws and regulations
concerning site restoration evolve.
The long-term inflation and discount rates used to determine the abandonment and site restoration provision at 31
December 2015 were 2.49% and 5.54%, respectively (31 December 2014: 3.75% and 4.88%).
The change in the long-term inflation rate, discount rate and liquidation cost estimates in the year ended 31 December
2015 resulted in the decrease of the abandonment and site restoration provision by US$ 5,622 thousand (31 December
2014: the increase by US$ 4,306 thousand).
19. DUE TO GOVERNMENT OF KAZAKHSTAN
The amount due to Government of the Republic of Kazakhstan has been recorded to reflect the present value of a liability
in relation to the expenditures made by the Government in the time period prior to signing the Contract that were related
to exploration of the Contract territory and the construction of surface facilities in fields discovered therein and that are
reimbursable by the Group to the Government during the production period. The total amount of liability due to
Government as stipulated by the Contract is US$ 25,000 thousand.
Repayment of this liability commenced in 2008 with the first payment of US$ 1,030 thousand in March 2008 and with
further payments by equal quarterly instalments of US$ 258 thousand until 26 May 2031. The liability was discounted at
13%.
The summary of the changes in the amounts due to Government of Kazakhstan during the years ended 31 December
2015 and 31 December 2014 is as follows:
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In thousands of US dollars
2015
2014
Due to Government of Kazakhstan as at 1 January
Unwinding of discount
Paid during the year
Less: current portion of due to Government of Kazakhstan
Due to Government of Kazakhstan as at 31 December
6,937
902
(1,031)
6,808
(1,031)
5,777
7,052
917
(1,032)
6,937
(1,031)
5,906
20. TRADE PAYABLES
Trade payables comprise the following as at 31 December 2015 and 31 December 2014:
In thousands of US dollars
31 December 2015
31 December 2014
Tenge denominated trade payables
US dollar denominated trade payables
Euro denominated trade payables
Russian rouble denominated trade payables
Trade payables denominated in other currencies
22,364
14,032
2,875
1,928
264
41,463
27,030
17,889
3,479
965
256
49,619
21. OTHER CURRENT LIABILITIES
Other current liabilities comprise the following as at 31 December 2015 and 31 December 2014:
In thousands of US dollars
31 December 2015
31 December 2014
Accruals under the subsoil use agreements
Training obligations accrual
Due to employees
Taxes payable, other than corporate income tax
Liability accrued with respect to acquisitions
Other current liabilities
16,902
11,443
3,992
9,748
–
2,894
44,979
14,435
9,686
4,605
17,191
2,402
2,297
50,616
Accruals under subsoil use agreements mainly include amounts estimated in respect of the contractual obligations for
exploration and production of hydrocarbons from Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye fields.
The changes in the adjusted work programs in the supplements to the subsoil use agreements lead to an overall increase
of the accrued liability of US$ 2,467 thousand compared to the previous year, predominantly due to SUA amendments
and the occurred underperformance per license as well as the statute of limitations.
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22. REVENUE
The pricing for all of the Group’s crude oil, condensate and LPG is, directly or indirectly, related to the price of Brent crude
oil. The average Brent crude oil price during the year ended 31 December 2015 was US$53.6 (FY 2014: US$99.7)
In thousands of US dollars
Oil and gas condensate
Gas and LPG
2015
297,777
151,125
448,902
2014
620,164
161,714
781,878
During the year ended 31 December 2015 the revenue from sales to three major customers amounted to US$141,359
thousand, US$104,978 thousand and US$85,954 thousand respectively (FY 2014: US$321,755 thousand, US$124,823
thousand and US$77,113 thousand respectively). The Group’s exports are mainly represented by deliveries to Finland,
the Black Sea ports of Russia and the United Arab Emirates.
23. COST OF SALES
In thousands of US dollars
2015
2014
Depreciation, depletion and amortisation
Repair, maintenance and other services
Payroll and related taxes
Royalties
Materials and supplies
Well workover costs
Other transportation services
Government profit share
Environmental levies
Change in stock
Other
107,678
26,557
18,682
14,364
7,838
5,182
3,049
1,880
1,391
(3,613)
3,559
186,567
110,460
35,818
21,560
24,330
10,929
6,296
2,929
4,594
1,098
376
3,531
221,921
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24. GENERAL AND ADMINISTRATIVE EXPENSES
In thousands of US dollars
Payroll and related taxes
Professional services
Business travel
Training
Insurance fees
Depreciation and amortisation
Sponsorship
Lease payments
Communication
Materials and supplies
Bank charges
Other taxes
Social program
Management fees
Other
25. SELLING AND TRANSPORTATION EXPENSES
In thousands of US dollars
Transportation costs
Loading and storage costs
Payroll and related taxes
Management fees
Other
26. FINANCE COSTS
In thousands of US dollars
Interest expense on borrowings
Unwinding of discount on amounts due to Government of
Kazakhstan
Unwinding of discount on abandonment and site restoration
provision
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2015
2014
16,636
13,997
6,091
3,110
1,715
1,673
1,314
1,012
766
635
607
339
302
–
1,112
49,309
2015
45,071
41,229
1,901
159
4,610
92,970
2015
44,670
902
426
45,998
15,668
19,776
4,786
2,535
1,768
1,409
1,826
895
1,195
626
813
1,006
300
605
1,670
54,878
2014
54,878
56,351
2,211
183
8,631
122,254
2014
60,825
917
197
61,939
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27. FINANCE COSTS – REORGANISATION
The “finance costs – reorganisation” are represented by the costs associated with introduction of Nostrum Oil & Gas PLC
as the new holding company of the Group and respective reorganisation that took place in June 2014. In 2014 these
costs included US$14,389 thousand under the facility agreements with VTB Capital plc (under which US$3,000,000
thousand were committed and US$2,350,405 thousand were lent), US$7,193 thousand related to the new listing and the
cancellation of the GDR program and US$7,990 thousand financing costs related to advisory and other services incurred
in relation to the reorganisation. During the year ended 31 December 2015 additional costs related to advisory and other
services in amount of US$1,053 thousand were incurred by the Group with regard to reorganisation.
28. EMPLOYEES’ REMUNERATION
The average monthly number of employees (including Executive Directors) employed was as follows:
Management and administrative
Technical and operational
Their aggregate remuneration comprised:
In thousands of US dollars
Wages and salaries
Social security costs
Share-based payments
2015
303
765
1,068
2015
35,092
5,757
–
40,849
2014
289
721
1,010
2014
36,025
4,333
2,475
42,833
Part of the Group’s staff costs shown above is capitalised into the cost of intangible and tangible oil and gas assets under
the Group’s accounting policy for exploration, evaluation and oil and gas assets.
The amount ultimately remaining in the income statement was US$38,789 thousand (FY 2014: US$39,440 thousand).
Key management personnel remuneration
In thousands of US dollars
Short-term employee benefits
Share-based payments
Directors’ remuneration
In thousands of US dollars
Short-term employees benefits
Share-based payments
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2015
4,703
–
4,703
2015
3,328
–
3,328
2014
5,273
2,475
7,748
2014
3,767
1,750
5,517
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Consolidated financial statements
Notes to the consolidated financial statements
Employee share option plan
The Group operates one option plan (the Phantom Option Plan), that was adopted by the board of directors of the
Company on 20 June 2014 to allow for the continuation of the option plan previously maintained by Nostrum Oil & Gas
LP. The rights and obligations in relation to this option plan were transferred to Nostrum Oil & Gas PLC from Nostrum Oil
& Gas LP following the reorganisation (Note 2).
Employees (including senior executives and executive directors) of members of the Group or their associates receive
remuneration in the form of equity-based payment transactions, whereby employees render services as consideration for
share appreciation rights, which can only be settled in cash (“cash-settled transactions”).
The cost of cash-settled equity-based employee compensation is measured initially at fair value at the grant date using a
trinomial lattice valuation model. This fair value is expensed over the period until vesting with the recognition of a
corresponding liability. The liability is remeasured at each reporting date up to and including the settlement date with
changes in fair value recognised in the statement of comprehensive income.
The equity-based payment plan is described below.
During 2008-2015, 4,297,958 equity appreciation rights (SARs) which can only be settled in cash were granted to senior
employees and executive directors of members of the Group or their associates. These generally vest over a five year
period from the date of grant, so that one fifth of granted SARs vests on each of the five anniversaries from the date of
grant. The contractual life of the SARs is ten years. The fair value of the SARs is measured at the grant date using a
trinomial lattice valuation option pricing model taking into account the terms and conditions upon which the instruments
were granted. SARs are exercisable at any time after vesting till the end of the contractual life and give its holder a right to
a difference between the market value of the Group’s ordinary shares at the date of exercise and a stated base value.
The services received and a liability to pay for those services are recognised over the expected vesting period.
Until the liability is settled it is remeasured at each reporting date with changes in fair value recognised in profit or loss as
part of the employee benefit expenses arising from cash-settled share-based payment transactions.
The carrying value of the liability relating to 2,611,413 of SARs at 31 December 2015 is US$ 4,284 thousand
(31 December 2014: 2,611,413 SARs with carrying value of US$ 6,449 thousand). During the year ended 31 December
2015 302,000 SARs were fully vested (FY 2014:302,000).
The following table illustrates the number (“No.”) and exercise prices (“EP”) of, and movements in, SARs during the year:
Total outstanding at the beginning of the year (with EP of US$ 4)
Total outstanding at the beginning of the year (with EP of US$ 10)
Total outstanding at the beginning of the year
Share options exercised
Share options exercised
Total outstanding at the end of the year
Total exercisable at the end of the year
2015
No.
1,351,413
1,260,000
2,611,413
–
–
2,611,413
2,117,413
EP,US$
2014
No.
4 1,646,348
10 1,266,000
2,912,348
(294,935)
4
(6,000)
10
2,611,413
1,815,413
EP,US$
4
10
4
10
There were no SARs granted during the years ended 31 December 2015 and 2014. The weighted average price at the
date of exercise for SARs exercised during the year ended 31 December 2014 amounted to US$ 8.22 per SAR. The Hull-
White trinomial lattice valuation model was used to value the share options. The following table lists the inputs to the
model used for the plan for the years ended 31 December 2015 and 2014:
Price at the reporting date
Distribution yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Option turnover (%)
Price trigger
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2015
6.0
3.0%
45.0%
2.5%
10
10.0%
2.0
2014
6.6
3.0%
85.0%
1.0%
10
10.0%
2.0
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The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may
occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may
also not necessarily be the actual outcome. Option turnover rate represents the rate of employees expected to leave the
Company during the vesting period, which is based on historical data and is may not necessarily be the actual outcome.
The model considers that when share price reaches the level of exercise price multiplied by the price trigger the
employees are expected to exercise their options.
29. DERIVATIVE FINANCIAL INSTRUMENTS
On 3 March 2014, in accordance with its hedging policy, Zhaikmunai LLP entered, at nil upfront cost, into a long-term
hedging contract covering oil sales of 7,500 bbls/day, or a total of 5,482,500 bbls running through to 29 February 2016,
which was sold for US$ 92,256 thousand before expiration on 14 December 2015.
On 14 December 2015, Zhaikmunai LLP entered, at cost of US$ 92,000 thousand, into a long-term hedging contract
covering oil sales of 14,674 bbls/day for the first calculation period and 15,000 bbls/day for the subsequent calculation
periods or a total of 10,950,000 bbls running through 14 December 2017. The counterparty to the hedging agreement is
VTB Capital Plc. Based on the hedging contract Zhaikmunai LLP bought a put, which protects it against any fall in the
price of oil below US$ 49,16/bbl.
During the years ended 31 December 2015 and 2014 the movement in the fair value of derivative financial instruments
was presented as follows:
In thousands of US dollars
Derivative financial instruments at fair value at 1 January
Proceeds from sale of hedging contract
Purchase of hedging contract
Gain on derivative financial instruments
Derivative financial instruments at fair value at 31 December
Less current portion of derivative financial instruments
Derivative financial instruments at fair value as at 31 December
2015
60,301
(92,256)
92,000
37,055
97,100
(54,095)
43,005
2014
–
–
–
60,301
60,301
–
60,301
Gains and losses on the derivative financial instruments, which do not qualify for hedge accounting, are taken directly to
profit or loss.
An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note
35.
30. OTHER EXPENSES
In thousands of US dollars
Export customs duty
Compensation
Accruals under subsoil use agreements
Other expense
2015
14,669
2,531
2,156
11,204
30,560
2014
19,733
10,116
16,083
3,912
49,844
Export customs duty is comprised of customs duties for export of crude oil and customs fees for services such as
processing of declarations, temporary warehousing etc. Based on their interpretation of CIS free-trade legislation the
Kazakhstan customs authorities imposed customs duties on oil exports from Kazakhstan to Ukraine starting from
December 2012.
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Notes to the consolidated financial statements
Accruals under subsoil use agreements mainly include net amounts estimated in respect of the contractual obligations for
exploration and production of hydrocarbons from Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye fields.
31. INCOME TAX
The income tax expense comprised the following:
In thousands of US dollars
2015
2014
Deferred income tax expense
Corporate income tax
Withholding tax
Adjustment in respect of the current income tax for the prior periods
Total income tax expense
140,985
24,219
2,821
(1,384)
166,641
54,233
116,948
879
(6,785)
165,275
The Group’s profits are assessed for income taxes mainly in the Republic of Kazakhstan. A reconciliation between tax
expense and the product of accounting profit multiplied by the Kazakhstani tax rate applicable to the Chinarevskoye
subsoil use rights is as follows:
In thousands of US dollars
Profit before income tax
Tax rate applicable to the suboil use rights
Expected tax provision
Effect of exchange rate on the tax base
Adjustments in respect of current income tax of previous years
Effect of income taxed at different rate¹
Non-deductible interest expense on borrowings
Deferred tax asset not recognised
Non-deductible penalties
Non-deductible compensation for gas
Net foreign exchange loss
Non-deductible social expenditures
Non-deductible cost of technological loss
Non-deductible training expenditures
Other non-deductible expenses
Income tax expenses reported in the consolidated financial
statements
2015
72,275
30%
21,682
101,043
(1,384)
(2,921)
20,698
5,297
3,656
–
12,086
1,021
141
561
4,761
2014
311,700
30%
93,510
34,533
(6,785)
(3,790)
23,390
10,384
4,556
2,813
1,020
886
192
–
4,566
166,641
165,275
1Jurisdictions which contribute significantly to this item are Republic of Kazakhstan with an applicable statutory tax rate of 20% (for activities not
related to the Contract), and the Netherlands with an applicable statutory tax rate of 20%.
As at 31 December 2015 the Group has tax losses of US$21,233 thousand that are available to offset against future
taxable profits in the companies in which the losses arose within 9 years after generation and will expire in the period
2023-2024. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset
taxable profits elsewhere in the Group.
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Consolidated financial statements
Notes to the consolidated financial statements
Deferred tax liability is calculated by applying the Kazakhstani statutory tax rate applicable to the Chinarevskoye subsoil
use rights to the temporary differences between the tax amounts and the amounts reported in the consolidated financial
statements and are comprised of the following:
In thousands of US dollars
Deferred tax asset
Accounts payable and provisions
Deferred tax liability
Property, plant and equipment
Derivative financial instruments
Other
Net deferred tax liability
The movements in the deferred tax liability were as follows:
In thousands of US dollars
Balance as at 1 January
Current period charge to statement of comprehensive income
Balance as at 31 December
32. RELATED PARTY TRANSACTIONS
31 December 2015
31 December 2014
4,486
(332,835)
(19,420)
–
(347,769)
2015
206,784
140,985
347,769
3,616
(196,855)
(12,060)
(1,485)
(206,784)
2014
152,545
54,239
206,784
For the purpose of these consolidated financial statements transactions with related parties mainly comprise transactions
between subsidiaries of the Company and the shareholders and/or their subsidiaries or associated companies.
Accounts receivable from and advances paid to related parties represented by entities controlled by shareholders with
significant influence over the Group as at 31 December 2015 and 31 December 2014 consisted of the following:
In thousands of US dollars
Trade receivables and advances paid
KazStroyService JSC
Cervus Business Services
Crest Capital Management N.V.
Telco B.V.
31 December 2015
31 December 2014
35,832
132
78
4
36,915
–
–
–
Accounts payable to related parties represented by entities controlled by shareholders with significant influence over the
Group as at 31 December 2015 and 31 December 2014 consisted of the following:
In thousands of US dollars
31 December 2015
31 December 2014
Trade payables
KazStroyService JSC
Telco B.V.
4,144
–
2,753
29
During the years ended 31 December 2015 and 2014 the Group had the following transactions with related parties
represented by entities controlled by shareholders with significant influence over the Group:
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Notes to the consolidated financial statements
In thousands of US dollars
Purchases
KazStroyService JSC
Management fees and consulting services
Cervus Business Services
Crest Capital Management N.V.
Telco B.V.
Nostrum Services Central Asia LLP
Nostrum Services CIS BVBA
2015
2014
29,906
1,392
990
499
–
–
6,538
1,981
824
744
455
668
On 28 July 2014 the Group entered into a contract with JSC “OGCC KazStroyService” (the “Contractor”) for the
construction of the third unit of the Group’s gas treatment facility for a consideration of US$ 150 million, which was
amended with effect from 10 August 2015 by a supplementary agreement increasing that consideration to US$ 160
million.
With effect from 1 August 2015 the Group entered into a technical support & service agreement with the Contractor for an
initial term ending on 31 December 2015 and an initial consideration of US$ 3,375 thousand.
With effect from 10 September 2015 the Group entered into a service agreement with the Contractor valid until 31 March
2016 for the provision of engineering staff for an aggregate consideration of US$ 245 thousand.
The Contractor is an affiliate of Mayfair Investments B.V., which as at 31 December 2015 owned approximately 25.7% of
the ordinary shares of Nostrum Oil & Gas PLC.
Management fees are payable in accordance with the Technical Assistance Agreements signed between Zhaikmunai LLP
and Nostrum Services Central Asia LLP (formerly Amersham Oil LLP) and Nostrum Services CIS BVBA related to the
rendering of geological, geophysical, drilling, technical and other consultancy services. Following the agreement on 19
May 2014 to acquire Nostrum Services Central Asia LLP and Nostrum Services CIS BVBA, these management fees were
eliminated as intercompany transactions.
During the year ended 31 December 2015 management and consulting services were provided in accordance with
business centre and consultancy agreements signed between members of the Group and Cervus Business Services
BVBA, Crest Capital Management N.V. and Telco B.V.
Remuneration (represented by short-term employee benefits) of key management personnel amounted to US$4,703
thousand for the year ended 31 December 2015 (FY 2014: US$5,273 thousand). There were no payments made under
the ESOP during the year ended 31 December 2015 (FY 2014: US$2,475).
33. AUDIT AND NON-AUDIT FEES
During the years ended 31 December 2015 and 2014 audit and non-audit fees comprise the following:
In thousands of US dollars
2015
Audit of the financial statements
Total audit services
Audit-related assurance services
Taxation compliance services
Services relating to corporate finance transactions
Other non-audit services
Total non-audit services
Total fees
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358
358
180
–
–
23
203
561
2014
684
684
319
40
730
–
1,089
1,773
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Consolidated financial statements
Notes to the consolidated financial statements
The audit fees in the table above include the audit fees of US$10 thousand in relation to the Parent.
34. CONTINGENT LIABILITIES AND COMMITMENTS
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 the refinancing rate established by the National Bank
of Kazakhstan multiplied by 2.5. As a result, penalties and interest can amount to multiples of any assessed 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 31 December 2015. As at 31 December 2015 management believes that its interpretation of the relevant
legislation is appropriate and that it is probable that the Group’s tax position will be sustained.
Abandonment and site restoration (decommissioning)
As Kazakh laws and regulations concerning site restoration and clean-up evolve, the Group may incur future costs, the
amount of which is currently indeterminable. Such costs, when known, will be provided for as new information, legislation
and estimates evolve.
Environmental obligations
The Group may also be subject to loss contingencies relating to regional environmental claims that may arise from the
past operations of the related fields in which it operates. Kazakhstan’s environmental legislation and regulations are
subject to ongoing changes and varying interpretations. As Kazakh laws and regulations evolve concerning environmental
assessments and site restoration, the Group may incur future costs, the amount of which is currently indeterminable due
to such factors as the ultimate determination of responsible parties associated with these costs and the Government’s
assessment of respective parties’ ability to pay for the costs related to environmental reclamation.
However, depending on any unfavourable court decisions with respect to any claims or penalties assessed by the Kazakh
regulatory agencies, it is possible that the Group’s future results of operations or cash flow could be materially affected in
a particular period.
Capital commitments
As at 31 December 2015 the Group had contractual capital commitments in the amount of US$123,529 thousand (31
December 2014: US$248,644 thousand) mainly in respect to the Group’s oil field exploration and development activities.
Operating lease
The Group entered into a cancellable lease agreement for the main administrative office in Uralsk in October 2007 for a
period of 20 years for US$ 15 thousand per month.
In 2010 the Group entered into several agreements on lease of 650 railway tank wagons for transportation of hydrocarbon
products for a period of up to seven years for KZT 6,989 (equivalent of US$ 47) per day per one wagon. The lease
agreements may be early terminated either upon mutual agreement of the parties, or unilaterally by one of the parties if
the other party does not fulfil its obligations under the contract.
The total of future minimum lease payments under non-cancellable operating leases was represented as follows:
In thousands of US dollars
31 December 2015
31 December 2014
No later than one year
Later than one year and no later than five years
Later than five years
12,471
4,623
–
14,788
17,671
–
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Consolidated financial statements
Notes to the consolidated financial statements
Lease expenses of railway tank wagons for the year ended 31 December 2015 amounted to US$15,690 thousand (FY
2014: US$14,622 thousand).
Social and education commitments
As required by the Contract (as amended by, inter alia, Supplement No. 9), the Group is obliged to:
spend US$ 300 thousand per annum to finance social infrastructure;
make an accrual of one percent per annum of the actual investments for the Chinarevskoye field for the
purposes of educating Kazakh citizens; and
adhere to a spending schedule on education which lasts until (and including) 2020.
The contracts for exploration and production of hydrocarbons from Rostoshinskoye, Darjinskoye and Yuzhno
Gremyachinskoye fields require fulfilment of several social and other obligations.
The outstanding obligations under the contract for exploration and production of hydrocarbons from Rostoshinskoye field
(as amended on 3 July 2015) require the subsurface user to:
spend US$ 1,000 thousand for funding of development of Astana city in case of commercial discovery;
invest at least US$ 5,888 thousand for exploration of the field during the exploration period;
reimburse historical costs of US$ 383 thousand to the Government upon commencement of production stage;
and
fund liquidation expenses equal to US$ 35 thousand.
The outstanding obligations under the contract for exploration and production of hydrocarbons from Darjinskoye field
(after its amendment on 30 December 2015) require the subsurface user to:
invest at least US$ 18,976 thousand for exploration of the field during the exploration period;
fund liquidation expenses equal to US$ 130 thousand.
The outstanding obligations under the contract for exploration and production of hydrocarbons from Yuzhno-
Gremyachinskoye field (after its amendment on 30 December 2015) require the subsurface user to:
invest at least US$ 30,453 thousand for exploration of the field during the exploration period;
fund liquidation expenses equal to US$ 154 thousand.
Domestic oil sales
In accordance with Supplement # 7 to the Contract, Zhaikmunai LLP is required to deliver at least 15% of produced oil to
the domestic market on a monthly basis for which prices are materially lower than export prices.
35. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group’s principal financial liabilities comprise borrowings, payables to Government of Kazakhstan, trade payables
and other current liabilities. The main purpose of these financial liabilities is to finance the development of the
Chinarevskoye oil and gas condensate field and its operations as well as exploration of the three new oil and gas fields –
Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye. The Group's financial assets consist of trade and other
receivables, non-current investments, current investments and cash and cash equivalents.
The main risks arising from the Group’s financial instruments are interest rate risk, foreign exchange risk, liquidity risk,
credit risk and commodity price risk. The Group’s management reviews and agrees policies for managing each of these
risks, which are summarized below.
Commodity price risk
The Group is exposed to the effect of fluctuations in price of crude oil, which is quoted in US dollar on the international
markets. The Group prepares annual budgets and periodic forecasts including sensitivity analyses in respect of various
levels of crude oil prices in the future.
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Consolidated financial statements
Notes to the consolidated financial statements
Interest rate risk
The Group is not exposed to interest rate risk in 2015 and 2014 as the Group had no financial instruments with floating
rates as at years ended 31 December 2015 and 2014.
Foreign currency risk
As a significant portion of the Group’s operation is the tenge denominated, the Group’s statement of financial position can
be affected by movements in the US dollar / tenge exchange rates. The Group mitigates the effect of its structural
currency exposure by borrowing in US dollars and denominating sales in US dollars.
The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all
other variables held constant, of the Group’s profit before tax. The impact on equity is the same as the impact on profit
before tax.
2015
US dollar thousand
US dollar thousand
2014
US dollar thousand
US dollar thousand
Change in tenge to
US dollar exchange
rate
Effect on profit
before tax
+ 60.00%
- 20.00%
+ 17.37%
- 17.37%
18,250
(6,083)
(1,168)
1,168
The Group’s foreign currency denominated monetary assets and liabilities were as follows:
As at 31 December 2015
Cash and cash equivalents
Trade receivables
Trade payables
Other current liabilities
As at 31 December 2014
Cash and cash equivalents
Trade receivables
Trade payables
Other current liabilities
Liquidity risk
Tenge
2,047
1,455
(22,364)
(11,554)
(30,416)
Tenge
8,713
12,331
(27,030)
(19,331)
(25,317)
Russian
rouble
70
–
(1,928)
(159)
(2,017)
Russian
rouble
–
–
(965)
(115)
(1,080)
Euro
Other
Total
6,472
–
(2,876)
(855)
2,741
626
–
(264)
(1,783)
(1,421)
9,215
1,455
(27,432)
(14,351)
(31,113)
Euro
Other
Total
10,307
–
(3,479)
(7,010)
(182)
106
–
(256)
(7)
(157)
19,126
12,331
(31,730)
(26,463)
(26,736)
Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with its
financial liabilities. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.
The Group monitors its risk to a shortage of funds using a liquidity planning tool. The tool allows selecting severe stress
test scenarios. To ensure an adequate level of liquidity a minimum cash balance has been defined as a cushion of liquid
assets. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of
notes, loans, hedges, export financing and financial leases.
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Consolidated financial statements
Notes to the consolidated financial statements
The Group’s policy is that, while it has an investment program on-going: a) not more than 25% of borrowings should
mature in the next twelve-month period and b) a minimum balance of US$ 50 million is retained on the balance sheet post
repayment or refinancing of any debt due in the next twelve-month period.
The Group's total outstanding debt consists of two notes: US$ 560 million issued in 2012 and maturing in 2019 and
US$ 400 million issued in 2014 and maturing in 2019. The Group assessed the concentration of risk with respect to
refinancing its debt and concluded it to be low.
The table below summarizes the maturity profile of the Group's financial liabilities at 31 December 2015 and 31
December 2014 based on contractual undiscounted payments:
As at 31 December 2015
On
demand
Less than
3 months
3-12
months
Borrowings
Trade payables
Other current liabilities
Due to Government of Kazakhstan
–
37,934
17,554
–
55,488
12,750
–
–
258
13,008
52,650
3,529
–
773
56,952
As at 31 December 2014
On
demand
Less than
3 months
3-12
months
Borrowings
Trade payables
Other current liabilities
Due to Government of Kazakhstan
–
48,095
18,126
–
66,221
12,750
–
–
258
13,008
52,650
1,524
–
773
54,947
Credit risk
1-5 years
1,156,200
–
–
4,124
1,160,324
1-5 years
1,221,600
–
–
4,124
1,225,724
More than
5 years
Total
–
–
–
10,567
10,567
1,221,600
41,463
17,554
15,722
1,296,339
More than
5 years
Total
–
–
–
11,340
11,340
1,287,000
49,619
18,126
16,495
1,371,240
Financial instruments, which potentially subject the Group to credit risk, consist primarily of derivative financial
instruments, accounts receivable and cash in banks. The maximum exposure to credit risk is represented by the carrying
amount of each financial asset. The Group considers that its maximum exposure is reflected by the amount of trade
accounts receivable, cash and cash equivalents and derivative financial instruments.
The Group places its tenge denominated cash with SB Sberbank JSC, which has a credit rating of Ba3 (stable) from
Moody's rating agency and ING with a credit rating of A1 (stable) from Moody's rating agency at 31 December 2015. The
Group does not guarantee obligations of other parties.
The Group sells its products and makes advance payments only to recognised, creditworthy third parties. In addition,
receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts and
recoverability of prepayments made is not significant and thus risk of credit default is low.
Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control
relating to customer credit risk management. Credit quality of a customer is assessed based on an extensive credit rating
scorecard. Outstanding customer receivables are regularly monitored.
An impairment analysis is performed at each reporting date on an individual basis for major clients. The maximum
exposure to credit risk at the reporting date is the carrying value of each class of financial assets. The Group does not
hold collateral as security. The Group evaluates the concentration of risk with respect to trade receivables as low, as its
customers are located in several jurisdictions and industries and operate in largely independent markets.
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Consolidated financial statements
Notes to the consolidated financial statements
Fair values of financial instruments
Set out below, is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments, other
than those with carrying amounts reasonably approximating their fair values:
In thousands of US dollars
Derivative financial instruments
Interest bearing borrowings
Total
Carrying amount
31 December
2015
31 December
2014
31 December
2015
Fair value
31
December
2014
97,100
(951,494)
(854,394)
60,301
(945,114)
(884,813)
97,100
(809,824)
(712,724)
60,301
(1,037,320)
(977,019)
The management assessed that cash and cash equivalents, current investments, trade receivables, trade payables and
other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.
The fair value of the financial assets and liabilities represents the amount at which the instruments could be exchanged in
a current transaction between willing parties, other than in a forced or liquidation sale. Fair value of the quoted notes is
based on price quotations at the reporting date and respectively categorised as Level 1 within the fair value hierarchy.
The fair value of derivative financial instruments is categorised as Level 3 within the fair value hierarchy and is calculated
using Black-Scholes valuation model based on Brent Crude Futures traded on the Intercontinental Exchange, with the
relative expiration dates ranging from the current reporting date until December 2017.
The following table shows ranges of the inputs depending on maturity, which are used in the model for calculation of the
fair value of the derivative financial instruments as at 31 December 2015 and 31 December 2014:
Future price at the reporting date (US$)
Historical volatility (%)
Risk-free interest rate (%)
Maturity (months)
31 December 2015
31 December 2014
37.19-48.75
30.31
0.32-0.69
1-23
59.2-67.9
16.02-17.73
0.25-0.67
3-15
The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not
necessarily be the actual outcome.
The following table reflects the results of the changes in volatilities and oil price assumptions on the fair value of the
derivative financial instrument:
Increase/(decrease) in gain on derivative financial instruments
due to change in oil price assumption (+/-US$2/bbl)
Increase/(decrease) in gain on derivative financial instruments
due to change in volatility rate assumption (+/-2%)
Movement in the derivative financial instruments is disclosed in Note 29.
Increase in the
assumption
Decrease in the
assumption
(12,857)
3,590
15,521
(3,561)
During the years ended 31 December 2015 and 2014 there were no transfers between the levels of fair value hierarchy of
the Group’s financial instruments.
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Consolidated financial statements
Notes to the consolidated financial statements
Capital management
For the purpose of the Group’s capital management, capital includes issued capital, additional paid-in capital and all other
equity reserves attributable to the equity holders of the parent. The primary objective of the Group’s capital management
is to maximise the shareholder value.
In order to achieve this overall objective, the Group’s capital management, amongst other things, aims to ensure that it
meets financial covenants attached to the notes that define capital structure requirements. Breaches in meeting the
financial covenants would permit the lenders to immediately call borrowings. There have been no breaches in the
financial covenants of the notes in the current period nor the prior period.
The Group manages its capital structure and makes adjustments in light of changes in economic conditions and the
requirements of the financial covenants. To maintain or adjust the capital structure, the Group may adjust the distribution
payment to participants, return capital to participants or increase partnership capital. The Group monitors capital using a
gearing ratio, which is net debt divided by total capital plus net debt. The Group’s policy is to keep the gearing ratio
between 20% and 40%. The Group includes within net debt, interest bearing loans and borrowings, less cash, short-term
deposits and long-term deposits.
In thousands of US dollars
2015
2014
Interest bearing borrowings
Less: cash and cash equivalents, restricted cash and current and
non-current investments
Net debt
Equity
Total capital
Capital and net debt
Gearing ratio
951,494
(170,935)
780,559
773,756
773,756
945,114
(405,467)
539,647
917,680
917,680
1,554,315
1,457,327
50%
37%
No changes were made in the objectives, policies or processes for managing capital during the years ended 31
December 2015 and 31 December 2014.
36. EVENTS AFTER THE REPORTING PERIOD
The technical support and service agreement with the Contractor that was originally valid until 31 December 2015 was
extended on 24 February 2016 until 30 June 2016.
With effect from 1 January 2016 Kazakhstan reduced export duties for crude oil from US$60 to US$40 per tonne.
With effect from 1 February 2016 Kazakhstan introduced floating rates of export duties for crude oil based on average
market prices.
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Parent Company
financial statements
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Parent company financial statements
Contents
Page
Parent company statement of financial position ........................................................................................................ 170
Parent company statement of cash flows ................................................................................................................... 171
Parent company statement of changes in equity ....................................................................................................... 172
Notes to the Parent company financial statements .................................................................................................... 173
1. General ................................................................................................................................................................... 173
2. Basis of preparation ................................................................................................................................................ 173
3. Changes in accounting policies and disclosures ..................................................................................................... 174
4. Summary of significant accounting policies ............................................................................................................ 175
5.
Investments in subsidiaries ..................................................................................................................................... 177
6. Receivables from related parties ............................................................................................................................ 178
7. Cash and сash equivalents ..................................................................................................................................... 178
8. Shareholders’ equity ............................................................................................................................................... 178
9. Payables to related parties ..................................................................................................................................... 178
10. Auditors’ remuneration ............................................................................................................................................ 179
11. Directors’ remuneration........................................................................................................................................... 179
12. Related party transactions ...................................................................................................................................... 179
13. Financial risk management objectives and policies ................................................................................................ 179
14. Events after the reporting period ............................................................................................................................. 180
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Parent company financial statements
Parent company statement of financial position
As at 31 December 2015
In thousands of US dollars
ASSETS
Non-current assets
Investments in subsidiaries
Current assets
Receivables from related parties
Cash and cash equivalents
TOTAL ASSETS
EQUITY AND LIABILITIES
Share capital and reserves
Issued share capital
Retained earnings
Current liabilities
Trade payables
Payables to related parties
Accrued liabilities
Notes
31 December 2015
31 December 2014
5
6
7
8
9
106,222
106,222
26,538
1,052
27,590
106,000
106,000
26,367
216
26,583
133,812
132,583
3,203
103,810
107,013
170
25,655
974
26,799
3,203
102,391
105,594
238
26,333
418
26,989
TOTAL EQUITY AND LIABILITIES
133,812
132,583
The financial statements of Nostrum Oil & Gas PLC, registered number 8717287, were approved by the Board of
Directors. Signed on behalf of the Board:
____________
Kai-Uwe Kessel
___________
Jan-Ru Muller
Chief Executive Officer
Chief Financial Officer
The accounting policies and explanatory notes on pages 173 through 180 are an integral part of these financial
statements
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Parent company financial statements
Parent company statement of cash flows
For the year ended 31 December 2015
In thousands of US dollars
Notes
2015
2014
Cash flow from operating activities:
Profit/(loss) before income tax
Adjustments for:
Foreign exchange gain on investing and financing activities
Accrued expenses
Investment income
Operating profit before working capital changes
Changes in working capital:
Change in trade receivables
Change in prepayments and other current assets
Change in trade payables
Cash generated from operations
Net cash flows from operating activities
Cash flow from investing activities:
Contribution in subsidiary - reorganisation
Dividend received
Net cash used in investing activities
Cash flow from financing activities:
Dividends paid
Funds borrowed - reorganisation
Funds repaid - reorganisation
Proceeds from issue of share capital
Redemption of shares
Net cash from / (used in) financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
7
7
50,479
(806)
556
(50,000)
229
–
(171)
(968)
(910)
(910)
–
50,000
50,000
(49,060)
–
–
–
–
(49,060)
806
836
216
1,052
(406)
–
418
–
12
43
–
243
298
298
(106,000)
–
(106,000)
–
2,244,405
(2,244,405)
106,000
(656)
105,344
(2)
(360)
576
216
The accounting policies and explanatory notes on pages 173 through 180 are an integral part of these financial
statements
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Parent company financial statements
Parent company statement of changes in equity
As at 31 December 2015
In thousands of US dollars
Notes
Share
capital
Share
premium
Retained
earnings
Total
As at 1 January 2014
Loss for the year
Total comprehensive loss for the year
Redemption of shares
Issue of share capital
Transfer to distributable reserves
As at 31 December 2014
Profit for the year
Total comprehensive income for the year
Profit distribution
As at 31 December 2015
656
–
–
(656)
3,203
–
3,203
–
–
–
3,203
–
–
–
–
102,797
(102,797)
–
–
–
–
–
–
656
(406)
(406)
–
–
102,797
102,391
50,479
50,479
(406)
(406)
(656)
106,000
–
105,594
50,479
50,479
(49,060)
103,810
(49,060)
107,013
The accounting policies and explanatory notes on pages 173 through 180 are an integral part of these financial
statements
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Parent company financial statements
Notes to the Parent company financial statements
1. GENERAL
Nostrum Oil & Gas PLC (“the Company”) is a public limited company incorporated on 3 October 2013 under the
Companies Act 2006 and registered in England and Wales with registered number 8717287. The registered address of
Nostrum Oil & Gas PLC is: 4th Floor, 53-54 Grosvenor Street, London, UK, W1K 3HU.
The subsidiary undertakings of the Company as at 31 December 2015 and the percentage holding of their capital are set
out below:
Company
Country of registration or
incorporation
Form of capital
Ownership, %
Direct subsidiary undertakings:
Nostrum Oil & Gas Coöperatief U.A.¹
Nostrum Oil & Gas BV²
Netherlands
Netherlands
⁴
British Virgin Islands
Russian Federation
British Virgin Islands
Indirect subsidiary undertakings:
Claydon Industrial Limited
Grandstil LLC
Jubilata Investments Limited
Nostrum Associated Investments LLP³ Republic of Kazakhstan
Nostrum E&P Services LLC
Nostrum Oil & Gas UK Ltd.
Nostrum Services Central Asia LLP
Nostrum Services CIS BVBA
Nostrum Services N.V.
Zhaikmunai LLP
1 Formerly Nostrum Oil Coöperatief U.A.
2 Formerly Zhaikmunai Netherlands B.V.
3 Formerly Condensate Holding LLP
4 Formerly Investprofi LLC
5 Formerly Amersham Oil LLP
6 Formerly Prolag BVBA
7 Formerly Probel Capital Management N.V.
Russian Federation
England and Wales
Republic of Kazakhstan
Belgium
Belgium
Republic of Kazakhstan
⁶
⁵
⁷
Members' interests
Ordinary shares
Ordinary shares
Participatory interests
Ordinary shares
Participatory interests
Participatory interests
Ordinary shares
Participatory interests
Ordinary shares
Ordinary shares
Participatory interests
100
100
100
100
100
100
100
100
100
100
100
100
Nostrum Oil & Gas PLC and its wholly-owned subsidiaries are hereinafter referred to as “the Group”.
As part of the reorganisation the Company became the holding company of the Group through its direct subsidiaries.
Notes 8 of the financial statements of the Company provides more information on the reorganisation.
2. BASIS OF PREPARATION
The Company financial statements for the year ended 31 December 2015 have been prepared on a going concern basis
and in accordance with the Companies Act 2006 and International Financial Reporting Standards (“IFRS”) issued by
International Accounting Standards Board (“IASB”) as adopted by the European Union.
The Company financial statements have been prepared based on a historical cost basis. The Company financial
statements are presented in US dollars and all values are rounded to the nearest thousands, except when otherwise
indicated.
As permitted by section 408(3) of the Companies Act 2006, the profit and loss account of the Company is not presented
in the Company’s financial statements. During the reporting periods there were no transactions impacting the statement of
other comprehensive income.
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Parent company financial statements
Notes to the Parent company financial statements
Going concern
These Company financial statements have been prepared on a going concern basis. The directors are satisfied that the
Company has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months
from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the Company
financial statements.
3. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
New standards, interpretations and amendments thereof, adopted by the Company
The accounting policies adopted are consistent with those of the previous financial year, except for the following
amendments to IFRS effective as at 1 January 2015:
Annual improvements 2010-2012 Cycle
These improvements are effective from 1 July 2014 and are not expected to have a material impact on the Company.
They include:
IAS 24 Related Party Disclosures
The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key
management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses
a management entity is required to disclose the expenses incurred for management services. These amendments are not
expected to have effect on the Company’s future financial statements, since the Company always disclosed the
companies providing management services as related parties.
Annual improvements 2011-2013 Cycle
These improvements are effective from 1 July 2014 and are not expected to have a material impact on the Company.
They include:
IFRS 13 Fair Value Measurement
The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to
financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable). It
is not expected that the amendment will have material effect on the Company’s financial position or performance.
Standards issued but not yet effective
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company’s
financial statements are disclosed below. The Company intends to adopt these standards, if applicable, when they
become effective.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial
instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions
of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge
accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.
Retrospective application is required, but comparative information is not compulsory. Early application of previous
versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. The
adoption of IFRS 9 is not expected to have an effect on the classification and measurement of the Company’s financial
assets and the Company’s financial liabilities.
Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests
The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation,
in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business
combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not
remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In
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Parent company financial statements
Notes to the Parent company financial statements
addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties
sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party.
The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any
additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1
January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Company.
Amendments to IAS 27: Equity Method in Separate Financial Statements
The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and
associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity
method in its separate financial statements will have to apply that change retrospectively. For first-time adopters of IFRS
electing to use the equity method in their separate financial statements, they will be required to apply this method from the
date of transition to IFRS. The amendments are effective for annual periods beginning on or after 1 January 2016, with
early adoption permitted. These amendments are not expected to have any impact on the Company’s financial
statements.
Annual improvements 2012-2014 Cycle
These improvements are effective from 1 January 2016 and are not expected to have a material impact on the Company.
They include:
Amendments to IAS 1 Disclosure Initiative
The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1
requirements. The amendments clarify:
• The materiality requirements in IAS 1
• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be
disaggregated
• That entities have flexibility as to the order in which they present the notes to financial statements
• That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in
aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to
profit or loss
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the
statement of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for annual
periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to
have any impact on the Company.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Foreign currency translation
The functional currency is the currency of the primary economic environment in which an entity operates and is normally
the currency in which the entity primarily generates and expends cash.
The functional currency of the Company is the United States dollar (the US dollar or US $).
Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate
ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of
exchange at the reporting date.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange
rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are
translated using the exchange rates at the date when the fair value is determined.
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Parent company financial statements
Notes to the Parent company financial statements
Investments
Investments in subsidiaries are recorded at cost. The Company assesses investments for impairment whenever events or
changes in the circumstances indicate that the carrying value of an investment may not be recoverable. If any such
indication of impairment exists the Company makes an estimate of its recoverable amount. Where the carrying amount of
an investment exceeds its recoverable amount, the investment is considered impaired and is written down to its
recoverable amount.
Financial assets
Initial recognition and measurement
Financial assets within the scope of IAS 39 are classified as financial assets at fair value through the statement of
comprehensive income, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as
derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the
classification of its financial assets at initial recognition.
All financial assets are recognised initially at fair value plus, in the case of investments not at fair value through profit or
loss, directly attributable transaction. Purchases or sales of financial assets that require delivery of assets within a time
frame established by regulation or convention in the marketplace (regular way trades) are recognised on the trade date,
i.e., the date that the Company commits to purchase or sell the asset.
The Company’s financial assets include investments, loans, cash and cash equivalents and receivables.
Subsequent measurement
Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the
effective interest rate method, less impairment. Amortised cost is calculated by taking into account any discount or
premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate
amortisation is included in finance income in the statement of profit or loss and other comprehensive income. The losses
arising from impairment are recognised in the statement of profit or loss and other comprehensive income in finance costs
for loans and in cost of sales or other operating expenses for receivables
Accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible
amounts. An estimate for uncollectible amounts is made when collection of the full amount is no longer probable. These
estimates are reviewed periodically, and as adjustments become necessary, they are reported as expense (credit) in the
period in which they become known.
Cash and cash equivalents
Cash and cash equivalents in the statement of financial position comprise cash at banks.
Derecognition
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is
derecognized when:
The rights to receive cash flows from the asset have expired
The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the
received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the
Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred
nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Impairment of financial assets
The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of
financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there
is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the
asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset
or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the
debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal
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Parent company financial statements
Notes to the Parent company financial statements
payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data
indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
Financial liabilities
Initial recognition and measurement
Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans
and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company
determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at
fair value and in the case of loans and borrowings, net of directly attributable transaction costs.
The Company’s financial liabilities include payables and accrued liabilities.
Subsequent measurement
After initial recognition, interest bearing borrowings are subsequently measured at amortized cost using the effective
interest rate method (EIR). Gains and losses are recognized in the profit or loss when the liabilities are derecognized as
well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or
premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortization is included in finance
cost in the statement of comprehensive income.
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original
liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit
or loss.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and
only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a
net basis, or to realize the assets and settle the liabilities simultaneously.
Fair value of financial instruments
The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference
to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without
any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined
using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions;
reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or
other valuation models.
5. INVESTMENTS IN SUBSIDIARIES
Investments of the Company as at 31 December 2015 comprised of:
In thousands of US Dollars
31 December 2015
31 December 2014
Nostrum Oil & Gas Coöperatief U.A.
Nostrum Oil & Gas BV
Nostrum Oil BV
106,000,000
222,271
–
106,222,271
106,000,000
–
1
106,000,001
On 22 June 2015 the Company acquired Nostrum Oil & Gas B.V. from its subsidiary Nostrum Oil & Gas Coöperatief U.A.
for a consideration of US$ 222,270. The payment of the consideration was deferred and the Company entered into a
loan, reflecting an obligation to pay US$ 222,270 to Nostrum Oil & Gas Coöperatief U.A.
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Parent company financial statements
Notes to the Parent company financial statements
Following the acquisition of Nostrum Oil & Gas B.V., the Company's other investment, Nostrum Oil B.V., was merged with
Nostrum Oil & Gas B.V. on 8 August 2015. Nostrum Oil & Gas B.V. is the surviving entity of this merger.
Hence at 31 December 2015 the total investment of the Company in Nostrum Oil & Gas B.V. was US$ 222,271.
6. RECEIVABLES FROM RELATED PARTIES
As at 31 December 2015 receivables from related parties are represented by a receivable from the Nostrum employee
benefit trust in amount of US$ 25,433 thousand (2014: US$ 25,433 thousand) and a receivable from Nostrum Oil & Gas
Coöperatief U.A. in amount of US$ 1,105 thousand (2014: US$ 934 thousand).
7. CASH AND CASH EQUIVALENTS
In thousands of US Dollars
31 December 2015
31 December 2014
Current accounts in US Dollars
Current accounts in Euro
Current accounts in Pounds Sterling
8. SHAREHOLDERS’ EQUITY
130
454
468
1,052
174
4
38
216
Nostrum Oil & Gas PLC became the new holding company for the business of Nostrum Oil & Gas LP based on the
resolution passed by its limited partners on 17 June 2014 followed by the Group reorganisation referred to in that
resolution.
On 18 June 2014, following the decision of the board of directors, Nostrum Oil & Gas LP commenced the Group’s
reorganisation. This was implemented by means of an exchange offer made by the Company to the GDR holders of
Nostrum Oil & Gas LP, which were entitled to receive 1 share of Nostrum Oil & Gas PLC for each GDR of Nostrum Oil &
Gas LP.
On 17 September 2014 US$102,797,484 were transferred from the share premium account to distributable reserves
based on a Special Resolution passed at a general meeting of the Company, which was confirmed by an Order of the
High Court of Justice.
As part of the reorganisation scheme the Company received funds in the amount of US$2,244,405 thousand from VTB
Capital plc under the facility agreement and repaid them on the same day.
Share capital of Nostrum Oil & Gas PLC
As at 31 December 2015 the ownership interests in the Company consist of ordinary shares, which are listed on the
London Stock Exchange, these shares have been issued and fully paid. As at 1 January 2014 the Company had
subscriber shares and redeemable preference shares, all of which were cancelled on 7 August 2014.
The subscriber and redeemable preference shares had a nominal value of GBP 1 and the ordinary shares have a nominal
value of GBP 0.01.
As permitted by section 408 of the Companies Act 2006, the Company has elected not to present its own profit and loss
account for the year. The Company reported a profit for the financial year ended 31 December 2015 of US$50,516
thousand, which mainly relates to the dividend income of US$50,000 thousand received from the Company’s subsidiary
Nostrum Oil & Gas Coöperatief U.A. (2014: loss of US$406 thousand).
9. PAYABLES TO RELATED PARTIES
As at 31 December 2015 amounts payable to related parties include US$25,433 thousand represented by arrangements
with the Company’s subsidiary Nostrum Oil & Gas Coöperatief U.A. in respect of the Nostrum employee benefit trust
(2014: US$26,333 thousand) and US$ 222 thousand represented by the loan payable to the Company's subsidiary
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Parent company financial statements
Notes to the Parent company financial statements
Nostrum Oil & Gas Coöperatief U.A. in respect of the consideration payable for the acquisition of Nostrum Oil & Gas B.V.
(2014: nil).
10. AUDITORS’ REMUNERATION
The fees for the audit of the Company amount to US$10 thousand (2014: US$12 thousand).
11. DIRECTORS’ REMUNERATION
The directors of the Company are also directors of the Group. The aggregate amount of remuneration paid to or
receivable by directors in respect of qualifying services for the financial year ended 31 December 2015 was
US$2,678 thousand (2014: US$4,992 thousand) of which, US$650 thousand (2014: US$325 thousand) was paid by the
Company to the non-executive directors. The remaining amount was paid by other group companies to the executive
directors. The directors do not believe that it is practicable to apportion these amounts between their services as directors
of the Company and their services as directors of the Group.
Full details of individual directors’ remuneration are given in the directors’ remuneration report on pages 90-97 of the
annual report.
12. RELATED PARTY TRANSACTIONS
Related parties of the Company include its direct and indirect subsidiaries, associates key management personnel and
other entities that are under the control or significant influence of the key management personnel.
During the year ended 31 December 2015 based on the service agreement between the Company and its directly owned
subsidiary Nostrum Oil & Gas Coöperatief UA, Nostrum Oil & Gas PLC recorded an income of US$5,984 thousand (2014:
US$2,252).
As at 31 December 2015 receivables from related parties include US$25,433 thousand from Nostrum employee benefit
trust (2014: US$25,433 thousand), and US$1,105 thousand from Nostrum Oil & Gas Coöperatief U.A. (2014: US$ 934
thousand).
As at 31 December 2015 liabilities to related parties include US$25,655 thousand payable to Nostrum Oil & Gas
Coöperatief U.A. (2014: US$26,333 thousand) .
13. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Company's financial assets consist of receivables from shareholders and cash and cash equivalents. The Company’s
financial liabilities consist of trade and other payables and accrued liabilities.
The main risks arising from the Company’s financial instruments are foreign exchange risk and credit risk. The
Company’s management reviews and agrees policies for managing each of these risks, which are summarized below.
Foreign currency risk
Most of the Company’s operation is denominated in USD, therefore the Company’s statement of financial position is not
significantly affected by exchange rate movements.
Credit risk
Financial instruments, which potentially subject the Company to credit risk, consist primarily of receivables and cash in
banks. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The Company
considers that its maximum exposure is reflected by the amount of receivables from shareholders and cash and cash
equivalents.
The Company places its US Dollar and Euro denominated cash with ING with a credit rating of A1 (upper medium grade)
from Moody's rating agency at 31 December 2015.
Receivables are amounts receivable from group companies, thus risk of credit default is low.
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Parent company financial statements
Notes to the Parent company financial statements
Fair values of financial instruments
The fair value of the financial assets represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The management assessed that its assets and liabilities approximate their carrying amounts largely due to their nature or
the short-term maturities of these instruments.
Capital management
For the purpose of the Company’s capital management, capital includes issued capital and all other equity reserves
attributable to the equity holders of the Company. The primary objective of the Company’s capital management is to
maximise the shareholder value.
14. EVENTS AFTER THE REPORTING PERIOD
The loan of US$ 222 thousand to Nostrum Oil & Gas Coöperatief U.A. in respect of the consideration amount payable for
the acquisition of Nostrum Oil & Gas B.V. has been repaid in full on 22 February 2016.
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Investor information
Investor information
Investor relations
ir@nog.co.uk
Tel: +44 20 3740 7430
Corporate headquarters
Nostrum Oil & Gas PLC
Gustav Mahlerplein 23 B
1082 MS Amsterdam
The Amsterdam
Tel: +31 20 737 2288
Fax: +31 20 737 2292
VAT number: NL 85 00 288 B01
Registration number: KvK 59058323
Registered office
Nostrum Oil & Gas PLC
53-54 Grosvenor Street
London W1K 3HU
United Kingdom
ir@nog.co.uk
Tel: +44 20 3740 7430
Fax: +44 20 7493 3606
Registered number: 8717287
Place of registration: England and Wales
Zhaikmunai LLP registered office
Zhaikmunai LLP
59/2, Eurasia Prospect
Uralsk, 090002
Republic of Kazakhstan
Astana representative office
Zhaikmunai LLP
Office 319, 2/2
Kurman Batyr Prospect
Astana, 010000
Republic of Kazakhstan
Auditor
Ernst & Young LLP
London
United Kingdom
Legal counsel
White & Case LLP
London
United Kingdom
Registrar
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
Tel: 0871 664 0300 / +44 20 8639 3399
Website and electronic communications details
Nostrum’s website provides valuable information on the
activities of the Company, both regulatory and other, as
well as the opportunity to sign up to our mailing list to
ensure stakeholders are kept up to date with the most
recent information. Please see www.nog.co.uk for more
information.
In addition, to reduce the impact on the environment,
we encourage all shareholders to receive the shareholder
communications (including annual reports and notices
of meetings) electronically.
Share price information
Exchange
Ticker
Reuters code
ISIN code
London Stock Exchange
NOG.LN
NOGN.L
GB00BGP6Q951
Historic share price performance
Share price performance (p)
700
600
500
400
300
200
100
0
5
1
n
a
J
5
1
b
e
F
5
1
r
a
M
5
1
r
p
A
5
1
y
a
M
5
1
n
u
J
5
1
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5
1
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5
1
p
e
S
5
1
t
c
O
5
1
v
o
N
5
1
c
e
D
NOG share price (post listing)
Capitalisation-weighted index of FTSE 350 E&P
• Earnings per share US$(0.51)
• Book value per share US$4.19
Financial results
Financial calendar – 2016
2016 Q1 Operational update
2016 Q1
2016 H1 Operational update
2016 H1
2016 Q3 Operational update
2016 Q3
Financial results
Financial results
Wednesday 27 April
Wednesday 25 May
Wednesday 27 July
Tuesday 30 August
Wednesday 26 October
Wednesday 23 November
181
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Investor information continued
Equity financing
Equity raising
IPO
Secondary equity issue
Timing
March 2008
September 2009
Amount
US$100m
US$300m
Lead manager
ING Bank NV
ING Bank NV
Mirabaud Securities
Renaissance Securities
Debt financing
Current outstanding bond issues for Nostrum Oil & Gas are provided in the following table:
Settlement
Feb 2014
Maturity Currency Amount (m) Coupon
Listing
400 6.375% Dublin/Almaty
Feb 2019
USD
Nov 2012
Nov 2019
USD
560
7.125% Dublin/Almaty
CUSIP
RegS
N964884AA2
ISIN USN64884AA29
103302323
Rule 144A
66978CAA0
US66978CAA09
103302307
N97716AA7
USN97716AA72
085313177
98953VAA0
US98953VAA08
085259776
Common
Code
CUSIP
ISIN
Common
Code
For the summary of certain covenants relating to 2012 Notes and 2014 Notes, please see the consolidated financial statements.
Bond yield information
February 2019
November 2019
110
105
100
95
90
85
80
75
70
16.1
14.1
12.1
10.1
8.1
6.1
4.1
2.1
0.1
110
105
100
95
90
85
80
75
70
16.1
14.1
12.1
10.1
8.1
6.1
4.1
2.1
0.1
4
1
c
e
D
5
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5
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5
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p
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5
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5
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5
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4
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5
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Price
Yield-to-worst
Price
Yield-to-worst
Credit ratings
Nostrum Oil & Gas is currently being rated by two credit
rating agencies: Standard and Poor’s and Moody’s Investor
Services:
Agency
Standard and Poor’s
Moody’s
Rating
B
B2
Outlook
Stable
Negative
Zhaikmunai LLP’s equity is not listed and it is a
wholly-owned indirect subsidiary of Nostrum. Nostrum’s
equity is listed on the premium segment of the London
Stock Exchange. The Group’s investor relations programme
aims at developing an open and transparent communication
between the Group (including Zhaikmunai LLP) and its
shareholders, providing information about the financial
and operational performance of the Company. The policy
of the investor relations department of the Group is to
ensure all questions that any of the Group’s stakeholders
have are dealt with in a timely manner based on the
underlying principles that the Group is viewed as being
approachable and responsive to any potential queries.
182
Nostrum Oil & Gas PLC Annual Report 2015
Glossary
3-D seismic survey
2010 Notes
2012 Notes
2014 Notes
A
Anti-Monopoly Agency
API
API gravity
Seismic survey that is acquired, processed and interpreted to yield a three-dimensional
picture of the subsurface.
10.5% notes issued in 2010.
7.125% notes issued in 2012.
6.375% notes issued in 2014.
The Republic of Kazakhstan anti-monopoly authority.
American Petroleum Institute.
The industry standard method of expressing specific density of crude oil or other liquid
hydrocarbons as recommended by the American Petroleum Institute. Higher API
gravities mean lower specific gravity and lighter oils. When the API gravity is greater
than 10, the product is lighter and floats on water; if it is less than 10, it is heavier than
water and sinks. Generally speaking, oil with an API gravity between 40 and 45
commands the highest prices.
A well or wells drilled to follow up a discovery and evaluate its commercial potential.
Water bearing structure.
Gas, which occurs in crude oil reservoirs in a gaseous state.
appraisal well
aquifer
associated gas
Authorised Oil and Gas Agency The State’s authorised agency in the area of oil and gas, acting on the instructions
B
barrel/bbl
basin
bcf
boe
bopd
boepd
bscf/d
btu
C
C1
C2
C3
C4
C5
C6
C7
CAC
cash
casing
Caspian region
of the President and the Government, currently, the MOE.
The standard unit of volume:
1 barrel = 159 litres or 42 US gallons.
A large area holding a thick accumulation of sedentary rock.
Billion cubic feet, a billion defined as 1,000,000,000. On average 1 bcf of sales gas =
1.055 petajoules.
Barrels of (crude) oil equivalent, i.e. the factor used by Nostrum to convert volumes
of different hydrocarbon production to barrels of oil equivalent.
Barrels of crude oil per day.
Barrels of (crude) oil equivalent per day.
Billion standard cubic feet per day.
British Thermal Unit – measurement unit for energy.
Methane.
Ethane.
Propane.
Butane.
Pentane.
Hexane.
Heptane.
A pipeline with two branches originating in Turkmenistan and meeting in Kazakhstan
before crossing into Russia and connecting to the Russian pipeline system, with an
annual throughput capacity of 60.2 billion cubic metres.
Cash and cash equivalents including current and non-current investments.
Relatively thin-walled, large diameter steel rods that are screwed together to form
a casing string, which is run into a core hole or well and cemented in place.
Parts of countries adjacent to the Caspian Sea.
183
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Glossary continued
The Chinarevskoye oil and gas condensate field.
Compressed natural gas.
Carbon dioxide.
A sedimentary rock composed primarily of carbonaceous material formed by plant
remains transformed by heat and time.
Limited partner interests each representing a fractional part of the rights and
obligations of all limited partners of Nostrum Oil & Gas LP.
The State’s central executive agency, designated by the Government to act on behalf
of the State to exercise rights relating to the execution and performance of subsoil use
contracts, except for contracts for exploration and production of commonly occurring
minerals. This is the Ministry of Energy of the Republic of Kazakhstan (MOE) with respect
to the oil and gas industry.
The Kazakhstan Law “On Competition” (No 112-IV, dated 25 December 2008, which
came into effect on 1 January 2009).
Hydrocarbons which are gaseous in a reservoir, but which condense to form a liquid
as they rise to the surface where the pressure is much less.
Deposits that are estimated, on a given date, to be potentially recoverable from known
accumulations but that are not currently considered commercially recoverable.
Cost oil denotes an amount of crude oil produced in respect of which the market value
is equal to Nostrum’s monthly expenses that may be deducted pursuant to the PSA
(include all operating costs, exploration costs and development costs up to an annual
maximum of 90% of the annual gross realised value of hydrocarbon production).
A mixture of liquid hydrocarbons of different molecular weights.
Cubic feet.
Sales made on delivery at frontier terms.
During development, engineering teams design the most efficient development
options to build wells and associated infrastructure to produce hydrocarbons from a
gas field within a proven productive reservoir (as defined by exploration and appraisal
activities). The three phases of development are exploration and appraisal, development
and production.
The development plans approved by the SCFD in March 2009.
The directors of the Company.
Downstream refers to all petroleum operations occurring after delivery of crude oil
or gas to refinery or fractionation plant.
Downtime is all time during which an operation is postponed, usually due to bad
weather or mechanical failure.
A mixture of water and drilling additives used to cool the drill bit, lift cuttings and control
swelling clays. Drilling fluid is stored in a sump during drilling.
Dry gas is natural gas (methane and ethane) with no significant content of heavier
hydrocarbons. It is gaseous at subsurface and surface conditions.
Chinarevskoye field
CNG
CO2
coal
Common Units
Competent Authority
Competition Law
condensate
contingent resources
cost oil
crude oil
cuft
D
DAF
development
Development Plans
Directors or Board
downstream
downtime
drilling fluid/mud
dry gas
184
Nostrum Oil & Gas PLC Annual Report 2015 E
E&P
EBIT
EBITDA
ecological risk
EEA
Environmental Code
ethane
Exploration Permit
exploration phase
exploration well
F
farm-in
farmee
farmor
farm-out
FCA
FCA
FCA Uralsk
field
FOB
FSMA
FSU
G
gas
gas condensate
Exploration and production.
Earnings before interest and tax.
Profit Before Tax non recurring expenses + finance costs + foreign exchange loss/(gain)
+ ESOP + depreciation – interest income + other expenses/(income).
Environmental stressors such as chemicals, land change, disease, invasive species
and climate change.
European Economic Area.
The Kazakhstan Environment Code (No 212, dated 9 January 2007, as amended).
Saturated hydrocarbon (alkane) with two carbon atoms in its molecule (C2H6). The
second member of the paraffin series. A gas under normal conditions. A basic feedstock
for petrochemical industries.
The geological allotment (Annex to the Licence) issued by the Competent Authority to
Zhaikmunai LLP.
The phase of operations which covers the search for oil or gas by carrying out detailed
geological and geophysical surveys followed up where appropriate by exploratory
drilling.
Well drilled purely for exploratory (information gathering) purposes in a particular area.
Transfer of a percentage of an oil or gas permit held by the farmor in return for (partial
or complete) delivery of the work program by the farmee(s). Note that this work would
normally have had to have been delivered and paid for by the farmor.
Earns a percentage interest in an oil an gas permit by helping the company that holds
the permit to deliver the work program required by permit.
A farmor holds an oil and gas permit and agrees to work with another company who
can deliver the work program required by the permit. In return, the farmee is given
a percentage interest in the permit.
A contractual agreement with the holder of an oil and gas permit to assign all
(or a percentage of) that interest to another party in exchange for delivering the work
program required by the permit, or fulfilling other contractually specified conditions.
Financial Conduct Authority of the United Kingdom.
Sales made under free carrier terms.
Sales made under free carrier terms according to which Nostrum delivers to the terminal
in Uralsk and transportation risk and risk of loss are transferred to the buyer after
delivery to the carrier.
An area consisting of a single reservoir or multiple reservoirs all grouped on or related
to the same individual geological structure feature and/or stratigraphic condition.
Sales made under free on board terms.
The Financial Services and Markets Act 2000 (as amended).
Former Soviet Union.
Petroleum that consists principally of light hydrocarbons. It can be divided into lean gas,
primarily methane but often containing some ethane and smaller quantities of heavier
hydrocarbons (also called sales gas), and wet gas, primarily ethane, propane and butane
as well as smaller amounts of heavier hydrocarbons; partially liquid under atmospheric
pressure.
The mixture of liquid hydrocarbons that results from condensation of petroleum
hydrocarbons existing initially in a gaseous phase in an underground reservoir.
185
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Glossary continued
Gas Treatment Facility (GTF)
GDRs
geology
geophysics
GJ
GJ/d
Government
greenhouse gas
gross (oil and gas) wells/acres
Group
H
HSE
hydrocarbons
hydrocarbon reserves
I
IAS
IFRS
INED
Incoterms
J
joint venture
joule
K
Kazakhstan
KASE
KazMunaiGas
KazMunaiGas Exploration
Production (KMG EP)
kBOE
km
Kyoto Protocol
186
Facility for the treatment of associated gas and gas condensate resulting in different
products (stabilised condensate, LPG and dry gas) for commercial sales.
GTU1 refers to the first unit of the Gas Treatment Facility.
GTU2 refers to the second unit of the Gas Treatment Facility.
GTU3 refers to the third unit of the Gas Treatment Facility.
The global depository receipts of Nostrum Oil & Gas LP.
The study of rocks.
The study of the earth using physics and mathematics. Geophysics uses methods
such as seismic surveying, magnetic and gravity imaging to explore the subsurface.
Gigajoule.
Gigajoules per day.
The government of Kazakhstan.
A gas that contributes to the greenhouse effect by absorbing infrared radiation,
e.g. carbon dioxide.
Gross oil and gas wells or gross acres are the total number of wells or acres in which
the Group has an interest, without regard to the size of that interest.
Nostrum Oil & Gas PLC and, as the context requires, its direct and indirect consolidated
subsidiaries.
Health, safety and environment.
Compounds formed from the elements hydrogen (H) and carbon (C), which may be
in solid, liquid or gaseous form.
Hydrocarbon reserves have been proved, and are referred to as 3P, 2P and 1P
depending on the likelihood of commercial production from that field.
International Accounting Standards.
International Financial Reporting Standards.
Independent Non-Executive Director.
A globally accepted set of contractual terms for domestic and international trade
(Incoterms 2010), published by the International Chamber of Commerce (ICC).
A joint venture is a set of trading entities who have agreed to act in concert to share
the cost and rewards of exploring for and producing oil or gas from a permit.
Unit of energy used for measuring gas volumes.
• megajoules = 106
• gigajoules = 109
• terrajoules = 1012
• petajoules = 1015
The Republic of Kazakhstan.
Kazakhstan Stock Exchange.
State-owned oil and gas company of Kazakhstan.
Onshore oil and gas exploration production subsidiary of KazMunayGas.
Thousand barrels of oil equivalent.
Kilometre(s).
The Kyoto Protocol to the United Nations Framework Convention on Climate Change.
Nostrum Oil & Gas PLC Annual Report 2015 L
Licence
Licencing Law
liquids
LNG
Listing Rules
London Stock Exchange or LSE
LPG
Licence series MG No. 253-D (Oil) issued to Zhaikmunai LLP by the Government on
26 May 1997, including amendments.
The Kazakhstan Law “On Licensing” (No. 214, dated 11 January 2007, as amended,
which came into effect on 9 August 2007).
A sales product in liquid form produced as a result of further processing by the onshore
plant; for example, condensate and LPG.
Liquefied natural gas. Comprises mainly methane.
The listing rules made by the Financial Services Authority (FSA) under section 73A
of the FSMA.
London Stock Exchange.
Liquefied petroleum gas, the name given to the mix of propane and butane in their
liquid state.
M
m
m3
m3/d
man–hours
mbbls
mmbbls
MJ
mboe
mmboe
mmcm
MEP
MINT
MOE
mmscf/d
mscf
mtpa
multilateral well
N
NBK
NED
Nostrum
Nostrum Oil & Gas PLC
Metre(s).
Cubic metre.
Cubic metres per day.
An hour regarded in terms of the amount of work that can be done by one person
within this period.
Thousands of barrels of crude oil.
Millions of barrels of oil.
Megajoules.
Thousands of barrels of oil equivalent.
Millions of barrels of oil equivalent.
Millions of cubic metres.
The Kazakhstan Ministry of Environmental Protection.
The Kazakhstan Ministry of Industry and New Technologies.
The Ministry of Energy of Kazakhstan, the State’s central executive agency, acting based
upon its Regulations approved by the Resolution of the Government, which is currently
the Competent Authority in oil and gas and the Authorised Oil and Gas Agency.
Million standard cubic feet per day (for dry gas).
One thousand cubic feet.
Million tonnes per annum.
A well with several small branches (laterals) drilled out from the main well.
National Bank of Kazakhstan.
Non-executive director.
Nostrum Oil & Gas PLC, the listed company of the Group.
Registered Office:
53-54 Grosvenor St
London
W1K 3HU
UK
Corporate Headquarters:
Gustav Mahlerplein 23B
1082 MS Amsterdam
The Netherlands
187
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015
Glossary continued
The individual or company responsible for conducting oil and gas exploration,
development and production activities on an oil and gas lease or concession on its own
behalf and, if applicable, for other working interest owners, generally pursuant to the
terms of a joint operating agreement or comparable agreement.
Plugged and abandoned – to place a cement plug into a dry hole or non-economic well
and abandon the well.
Nostrum Oil & Gas LP, which was the holding company of the Group before the
reorganisation.
Hydrocarbons, whether solid, liquid or gaseous. The proportion of different compounds
in a petroleum find varies from discovery to discovery. If a reservoir primarily contains
light hydrocarbons, it is described as a gas field. If heavier hydrocarbons predominate,
it is called an oil field. An oil field may feature free gas above the oil and contain a
quantity of light hydrocarbons, also called associated gas.
Petajoule.
Petajoules per annum.
2007 Petroleum Resources Management System, which are a set of definitions and
guidelines designed to provide a common reference for the international petroleum
industry, sponsored by the Society for Petroleum Engineers, the American Association
of Petroleum Geologists, World Petroleum Council and the Society for Petroleum
Evaluation Engineers.
processing of saleable product from hydrocarbons sourced from oil wells and gas wells
The mining allotment (Annex to the Licence), issued by the Competent Authority to
Zhaikmunai LLP.
A well that has been drilled for producing oil or gas, or one that is capable of production
once the producing structure and characteristics are determined.
Profit oil is the difference between cost oil and the total amount of crude oil produced
each month, which is shared between the State and Zhaikmunai LLP.
Quantities of petroleum which are estimated, on a given date, to be potentially
recoverable from undiscovered accumulations.
Proven or proved reserves (1P) are those reserves that, to a high degree of certainty
(90% confidence), are recoverable. There is relatively little risk associated with these
reserves. Proven developed reserves are reserves that can be recovered from existing
wells with existing infrastructure and operating methods. Proven undeveloped reserves
require development.
Probable reserves are those reserves that analysis of geological and engineering data
suggests are more likely than not to be recoverable. There is at least a 50% probability
that reserves recovered will exceed Probable Reserves. Proven plus probable reserves
are referred to as 2P.
Possible reserves are those reserves that, to a low degree of certainty (10% confidence),
are recoverable. There is relatively high risk associated with these reserves. Proven,
probable and possible reserves are referred to as 3P.
The contract for additional exploration, production and production sharing of crude oil
hydrocarbons in the Chinarevskoye oil and gas condensate field in the West-Kazakhstan
oblast No. 81, dated October 31, 1997, as amended, between Zhaikmunai LLP and the
Competent Authority (currently MOE), representing the State.
Kazakhstan Law No. 68-III “On Production Sharing Agreements for Constructing
Offshore Petroleum Operations”, dated 8 July 2005.
O
operator
P
P&A
Partnership
petroleum
PJ
PJ/a
PRMS
processing
Production Permit
production well
profit oil
prospective resources
Proven Reserves (1P)
Probable Reserves
Possible Reserves
PSA or Production Sharing
Agreement
PSA Law
188
Nostrum Oil & Gas PLC Annual Report 2015 Q
QIB
R
recovery
reservoir
RoK
royalty
Ryder Scott
S
sales gas
scf
scfd
SEC
secondee
Securities Act
seismic
shut in
sidetrack well
social infrastructure
SPE
spud
stakeholder
State
State Acceptance Commission
State Share
– Old Subsoil Law
– New Subsoil Law
Substitution
suspended well
A qualified institutional buyer as defined in Rule 144A under the Securities Act.
The second stage of hydrocarbon production during which an external fluid such as
water or gas is injected into the reservoir to maintain reservoir pressure and displace
hydrocarbons towards the wellbore.
A porous and permeable underground formation containing a natural accumulation
of producible oil and/or gas that is confined by impermeable rock or water barriers
and is individual and separate from other reservoirs.
Republic of Kazakhstan.
An interest in an oil and gas property entitling the owner to a share of oil or gas
production free of costs of production.
Independent petroleum consultants Ryder Scott Company LP, headquartered at
621 Seventeenth Street, Suite 1550, Denver, Colorado, 80293, USA.
Natural gas that has been processed by gas plant facilities and meets the required
specifications under gas sales agreements.
Standard cubic feet.
Standard cubic feet per day.
The United States Securities and Exchange Commission.
A person who is transferred temporarily to alternative employment, or seconded
The United States Securities Act of 1933, as amended.
The use of shock waves generated by controlled explosions of dynamite or other means
to ascertain the nature and contour of underground geological structures.
Cease production from a well.
A well or borehole that runs partly to one side of the original line of drilling.
Assets that accommodate social services, i.e. hospitals, schools, community housing etc.
Society of Petroleum Engineers.
The commencement of drilling operations.
A person or entity who may affect, be affected by or perceive themselves to be affected
by an entity’s decisions or activities.
Republic of Kazakhstan.
A State Acceptance Commission of the Republic of Kazakhstan is the competent body
authorised to, among other things, confirm that permanent operations can commence
for certain facilities, including the Gas Treatment Facility.
The share of hydrocarbon production due (in cash or kind) to the Republic of Kazakhstan
under the PSA.
The Kazakhstan Law “On Subsoil and Subsoil Use” (No. 2828, dated 27 January 1996,
as amended), recently replaced with the New Subsoil Law.
The most recent Kazakhstan Law “On Subsoil and Subsoil Use” (No. 291-IV, dated
24 June 2010 as amended).
The ability for Zhaikmunai LLP to elect to undertake, upon satisfaction of certain
conditions, to be substituted for the Issuer as Issuer of the Notes, whereupon it will
assume all of the obligations of the Issuer under the Notes.
A suspended well is not currently used for assessment or production and has been shut
in. It will either be returned to assessment or production or plugged and abandoned.
189
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Glossary continued
T
Takeover Code
tcf
Tenge or KZT
titleholder
TJ
tonne
trillion
The UK City Code on Takeovers and Mergers.
One trillion cubic feet.
The lawful currency of the Republic of Kazakhstan.
The titleholder is the party to whom a permit is granted by the government.
Terajoule.
Metric tonne.
10 to the power of 12.
U
UK Corporate Governance Code Set of principles of good corporate governance for listed companies promulgated
UNGG
US Dollars or US$
W
well
wellhead
workover
work program
Water Code
WUP or Water Use Permit
Z
Zhaikmunai LLP
by the UK Financial Reporting Council.
Uralsk Oil and Gas Explorations Expedition. The Government of the Kazakh Soviet
Socialist Republic decided in March 1960 to create a consortium
“Uralskneftegazrazvedka” for conducting oil and gas exploration in the Uralsk region.
In the 60s, the consortium was involved in more than 59 exploration projects. In 1970,
the consortium was renamed “Uralsk Enlarged Oil-Gas Exploration Expedition.”
The lawful currency of the United States of America.
A hole drilled to test an unknown reservoir or to produce from a known reservoir.
The wellhead includes the forged or cast steel fitting on top of a well (welded or bolted
to the top of the surface casing), as well as casingheads, tubingheads, Christmas tree,
stuffing box and pressure gauges.
Routine maintenance or remedial operations on a producing well in order to maintain,
restore or increase production.
A schedule of works agreed between parties (permit holders, farmees and government)
contracted to be delivered in a defined time frame.
The Water Code of Kazakhstan (No. 481, dated 9 July 2003, as amended).
The permit granted by the relevant Government authority with respect to water use
pursuant to the Water Code.
Principal operating entity of the Group
Corporate Office:
59/2, Eurasia Prospect
Uralsk, 090002
Republic of Kazakhstan
Representative Office:
Office 319
2/2 Kurman Batyr Prospect
Astana, 010000
Republic of Kazakhstan
190
Nostrum Oil & Gas PLC Annual Report 2015
Structure chart
as at 31 December 2015
Nostrum Oil & Gas PLC
Incorporated in the UK
Principal place of business in the NL
100%
>99.9%
Nostrum Oil & Gas BV1
Incorporated and principal place
of business in the NL
Nostrum Oil & Gas Coöperatief UA2
Incorporated and principal place
of business in the NL
<0.1%
(save for one
share held by
Nostrum Oil
& Gas BV)
100%
100%
100%
99.92%
100%
100%
(save for one
share held by
Nostrum Oil
& Gas BV)
Nostrum
Services N.V.
Incorporated
and principal
place of
business
in Belgium
Jubilata
Investments
Limited
Incorporated
in the BVI
Principal place
of business
in the NL
100%
Claydon
Industrial
Limited
Incorporated
in the BVI
Principal place
of business in
the NL
0.036%
Nostrum
Services Central
Asia LLP 3
Incorporated and
principal place of
business in
Kazakhstan
Nostrum
Services
CIS BVBA
Incorporated and
principal place of
business in
Belgium
100%
100%
Nostrum E&P
Services LLC
Incorporated
and principal
place of
business in
Russia
Grandstill
LLC
Incorporated
in Russia
Dormant
Nostrum Associated
Investments LLP4
Incorporated and
principal place of
business in Kazakhstan
0.044%
100%
Nostrum Oil & Gas
UK Limited
Incorporated and
principal place of
business in the UK
Zhaikmunai LLP
Incorporated
and principal
place of business
in Kazakhstan
1 During 2015, Nostrum Oil & Gas Finance BV and Nostrum Oil BV were merged into Nostrum Oil & Gas BV.
2 During 2015, Nostrum Oil Coöperatief UA changed its name to Nostrum Oil & Gas Coöperatief UA.
3 During 2015, Amersham Oil LLP changed its name to Nostrum Services Central Asia LLP.
4 During 2015, Condensate-Holding LLP changed its name to Nostrum Associated Investments LLP.
The above structure chart shows the Group’s structure as at 31 December 2015.
The contribution and results of Nostrum Oil & Gas PLC and all its subsidiaries (apart from Zhaikmunai LLP) to the KPIs
and results of the Group were insignificant.
191
Strategic reportCorporate governanceFinancial report Regulatory informationAdditional disclosuresNostrum Oil & Gas PLC Annual Report 2015 Notes
192
Nostrum Oil & Gas PLC Annual Report 2015 This report is printed on paper which is FSC
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Nostrum Oil & Gas PLC
Gustav Mahlerplein 23 B
1082 MS Amsterdam
The Netherlands
Tel: +31 20 737 2288
Fax: +31 20 737 2292
www.nostrumoilandgas.com
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