2 0 1 8 A N N U A L R E P O R T
ESTABLISHING AN
INFRASTRUCTURE
HUB
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We are an independent
multi-field oil and gas
company engaging in the
production, development
and exploration
of oil and gas in the
pre-Caspian Basin
For more details
please visit
www.nog.co.uk
STRATEGICALLY
POSITIONED AT
THE CROSSROADS
OF MAJOR CENTRAL
ASIAN PIPELINES...
Our advantageous location allows the Group to
access multiple export markets to support our
operations, including three export pipelines and
one rail loading terminal.
Russia,
Eastern
Europe
R U S S I A
Black
Sea
ports
K A Z A K H S T A N
Central
Asia
China
C H I N A
2018 Overview
What sets us apart
GTU3 MECHANICALLY COMPLETE
Commissioning on track for 2019
A UNIQUE INFRASTRUCTURE FOOTPRINT
We have invested more than US$2 billion since 2004 to create
a world-class top-to-tail infrastructure hub in North-western
Kazakhstan, which is advantageously placed in proximity to
major export routes.
BINDING DEAL WITH URAL OIL & GAS LLP
Please read more on page 2.
Terms agreed for the processing of third-party
hydrocarbons in our state-of-the-art facilities
CONTINUED IMPROVEMENT IN COST
REDUCTION
Improved efficiencies leading to a 11.8%
reduction in gross operating expenditure
STRONG EBITDA MARGIN
Improved at 59.3%
CONTINUED CASH GENERATION
Low operating costs and a stringent focus on
return on capital
PRODUCTION UPDATE
During 2018 we faced a number of issues
relating to our reservoirs and drilling, with
sales volumes of 29,516 boepd and a
78 mmboe decline in 2P reserves
RESOURCE-RICH SURROUNDINGS
Our licence areas are located in the pre-Caspian basin, an
area rich in hydrocarbons. New discoveries in the Northern
Area of our Chinarevskoye field and stranded gas assets in the
region could provide additional growth potential.
Please read more on page 4.
POTENTIAL FOR FUTURE GROWTH
Low operating costs and more than US$100 million of cash on
our balance sheet ensures the Group is in a stable position to
execute its drilling programme over the next two years.
Please read more on page 6.
LONG TRACK RECORD OF OPERATING IN
KAZAKHSTAN
Our management team has extensive experience in delivering
large and complex projects in-country, supported by decades
of collective technical, operational and sector knowledge.
Please read more on page 8.
OUR STORY
Nostrum Oil & Gas is an independent oil
and gas exploration company based in
North-western Kazakhstan, with substantial
infrastructure assets and connections to
major export destinations.
OUR VISION
To sustainably and responsibly grow our
operations to become a leading independent
oil and gas exploration and production
company in the Former Soviet Union.
OUR STRATEGY
To leverage our unique infrastructure footprint
to fully develop the Group’s reserve base and
the hydrocarbon resources in the region.
Contents
Strategic report
2 What sets us apart
10 Executive Chairman’s statement
12 Business model
14 Chief Executive Officer’s review
16 Market review
18 Strategy
20 Key performance indicators
22 Performance review
30 Sustainable accountability
39 Risk management
41 Principal risks and uncertainties
45 Viability statement
46 Financial review
Corporate governance
54 Executive Chairman’s overview
56 Board of Directors
58 Senior Management Team
60 Our governance framework
63 Board activities and achievements
66 Audit Committee Report
74 Nomination and Governance
Committee Report
76 Remuneration Committee Report
78 2018 annual report
on remuneration
87 Directors’ remuneration policy
96 Directors’ Report
Financial report
102 Consolidated financial statements
156 Parent company financial statements
Regulatory information
171 Investor information
174 Glossary
Additional disclosures
180 Structure chart
1
What sets us apart80KM100KMKazTransOil pipelineOther fieldsNostrum fields>100wells drilled at Chinarevskoye since 2004DarjinskoyeWe have invested more than US$2 billion since 2004 to create a world-class top-to-tail infrastructure hub which is ideally positioned to monetise the resources in the region.Nostrum’s current producing asset is the Chinarevskoye field – a 274km2 licence located to the north of Uralsk, near to the Russian border. Both national and regional pipelines run in close proximity to our hub, allowing us to transport all processed products safely and efficiently.KAZAKHSTANArea shownYuzhno-Gremyachinskoye ...FORMING AN INFRASTRUCTURE HUB IN NORTH-WESTERN KAZAKHSTAN...Rostoshinskoye2Nostrum Oil & Gas PLC Annual Report 2018 RUSSIA40KM60KMChinarevskoye fieldIntergas Central Asia pipelineNostrum gas pipelineRailway>3mtannual throughput capacity1,790bed accommodation capacity onsite at field camp4.2 bcmraw gas processing capacityNostrum oil pipelineGTU3WATER INJECTION UNITCAMPGTU INLET MANIFOLDCONDENSATE STORAGEOIL TREATMENT UNITLPG STORAGEGAS TURBINE POWER UNITGTU 1&2Chinarevskoye field infrastructureKAZAKHSTAN2rigs onsite for 2019STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES3Nostrum Oil & Gas PLC Annual Report 2018 What sets us apart / continued
...IN A
RESOURCE-RICH
REGION...
The Chinarevskoye field has produced
more than 100 million boe since 2007.
It is positioned in the pre-Caspian
basin, which is the location of
numerous gas discoveries. These
include the Karachaganak and
Rozhkovskoye fields (Ural Oil & Gas
LLP) and our neighbouring three
licences.
These three licence areas can provide
additional growth potential, as well as
the Northern Area of Chinarevskoye
and other stranded gas assets in the
region.
R U S S I A
West
410 mmboe
2P reserves
98 mmboe
1P reserves
Area shown
R U S S I A
• No commercial production to
date
• Large portion of probable
reserves (+25%)
• Well 234 currently
on hold following
a wellbore collapse
• Technical review under way
to establish best way forward
• Further appraisal activities to
continue following conclusion
of investigation
K A Z A K H S T A N
K A Z A K H S T A N
4
Nostrum Oil & Gas PLC Annual Report 2018
Source: Ryder Scott – 1 January 2019
Chinarevskoye field overview:
fields within a field
North
North-West
• Well 40
• 75 wells drilled since
currently shut-in
pending licence
extension
• Area to be
focus of H1
2019 drilling
campaign
2007 with no dry
holes
• More than 100
mmboe sold over
this period
• Overall, the North-
east area currently
contributes more
than 90% of Group
sales volumes
• Majority of current
proven reserves
(+95%)
• Further
development
following technical
study (H2 2019)
R U S S I A
• No current
reserves
booked
• Successful
discovery with
well 40
• Successful
open hole
production test
during 2018
• +2,000 boepd test
production with
c. 1,500 boepd
condensate
North-East
South
• Small
amount of
production
• Small
amount of
probable
reserves
• Very small
proportion of
production and
reserves
Nostrum Oil & Gas PLC Annual Report 2018
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What sets us apart / continued ...WITH POTENTIAL FOR FUTURE GROWTH...Infrastructure developmentsFinancial developmentsGeological developmentsAcquisition of ChinarevskoyeZhaikmunai LLP is acquiredSales volumes (boepd)2P reserves* (mmboe)US$100m IPOat $10 per GDR and US$550m borrowing-based facility in placeUS$300mplacing at $4 per GDRUS$450m bond raised at 10.5%2011201020092008200720062004200512,6834,841Oil treatment unit120km crude oil and stabilised condensate pipeline completed between the Chinarevskoye field and the rail terminal, near UralskOpening of fully automated rail loading terminalGas Treatment Facility completed 17km dry gas pipeline completedWater injection facilitiesGas pipeline539530529535397317199199Major discovery of condensate reservoirs at Chinarevskoye GTU1&2 project commencedIndependent HSE Compliance Report first undertaken by AMECNostrum begins reporting on GHG emissions4,9097,2017,5626Nostrum Oil & Gas PLC Annual Report 2018 Low operating costs and more than US$100 million of cash on our balance sheet ensure the Group is in a stable position to execute its drilling programme over the next two years.Realised target depth on the Company’s first exploration well at RostoshinskoyeUS$560m bond issued at 7.125% to refinance part of bond debt and for general corporate purposesUS$725m of 8.000% senior Notes due 2022 with proceeds used in part to refinance existing NotesUS$400m bond issued at 7.000% to fully refinance the remainder of the Company’s bond debt due 2019Admission to the premium listing category of the London Stock Exchange and FTSE 2502017201620182019201520132014201244,73143,18138,57639,04337,84429,51635,745Acquisition of three adjacent licencesPower plant Gas lift facilitiesConnection to the KazTransOil pipeline completedGTU3 completedLow Pressure SystemWorking to better understand and respond to climate change risk466488410470571582506522Ural Oil & Gas offtake agreementSTRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES7Nostrum Oil & Gas PLC Annual Report 2018 What sets us apart / continued
...LED BY A HIGHLY
EXPERIENCED SENIOR
MANAGEMENT TEAM
Our management team has extensive experience
in delivering large and complex projects in
Kazakhstan, supported by decades of collective
technical, operational and sector knowledge.
We possess world-class
infrastructure with the
capability to develop our
substantial asset base.
Kai-Uwe Kessel
Chief Executive Officer
Efficient operations, a long track
record of exports and an acute focus
on costs allow the Group to generate
cash flow to develop our assets.
Tom Richardson
Chief Financial Officer
8
With GTU3
complete we will
have 4.2 bcm raw
gas processing
capacity and
exceptional
regional capability.
Heinz Wendel
Chief Operating Officer
Nostrum Oil & Gas PLC Annual Report 2018
We are utilising our location by
consistently assessing the best
transportation options and terms
available to us at the crossroads
of national and international
infrastructure.
Arkadi Epifanov
Chief Commercial Officer
Nostrum’s binding
deal with Ural Oil
& Gas LLP
demonstrates
the value of our
infrastructure in
North-western
Kazakhstan.
Sergey Khafizov
Chief Business
Development Officer
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We have established an
excellent reputation through
operating in a responsible and
socially conscious manner for
the benefit of our stakeholders
and the local community.
Daulet Tulegenov
Group QHSE Manager
We are focused on engaging
and supporting diverse and
skilled employees throughout
the business.
Nostrum Oil & Gas PLC Annual Report 2018
Marina Grinevskaya
Chief HR Officer
9
Executive Chairman’s statement
ENSURING STABILITY
AND DELIVERY
Ensuring operational
delivery and meeting
our stated targets is
the Company’s and
my number one
priority.
Atul Gupta
Executive Chairman
Q: How has the Board responded
to shareholders in 2018?
A: We have always listened and responded
to concerns raised by our shareholders. For
example, we made improvements to our
Remuneration Committee structure and
remuneration packages during the year.
Michael Calvey, who continues to serve as
a director of the Board, stepped down as a
member of the Remuneration Committee in
August this year. Following this change the
committee is comprised solely of
independent non-executive directors,
thereby ensuring that the Company is in full
compliance with Provision D.2.1 of the UK
Corporate Governance Code.
Following consultation with our
shareholders over the course of the year
regarding independent non-executive
director participation in our LTIP scheme, we
have since amended the terms of the LTIP to
make non-executive directors ineligible to
participate and will modify the remuneration
policy to prohibit non-executive directors
from participating in the LTIP in the future.
We have provided additional information
and clarity regarding KPIs for bonuses for
executive directors in future in the
remuneration report within this Annual
Report, which can be found on page 86.
Q: What has been the biggest challenge
for Nostrum during 2018?
A: The single biggest challenge we faced
in 2018 was the disappointing operational
performance of the Biyski North-east
reservoir and western area of
Chinarevskoye. Therefore, while our
long-term vision and growth expectations
remain unchanged, we have not made the
progress we wanted to make in 2018 owing
to these unforeseen operational difficulties
within our licence area. The impact of
subsurface challenges is a reduction in our
2P reserves by 78 million boe. We are
focused on reversing both production
decline and reserve decline during 2019.
Q: How has the Board sought to address
these challenges?
A: The Board has assumed greater
oversight of operational decision making.
We now hold technical workshops each
quarter where those Board members with a
technical background act as a further
sounding board for management on
decisions related to drilling and reservoir
plans. Given improving production is our
priority, this is where the Board has
specifically sought to support management
in its decision making.
In addition to the Board bringing its own
technical knowledge, it has requested that
we seek leading external advice.
Accordingly, we have contracted
Schlumberger to conduct a technical study
of our main reservoirs to better understand
their behaviour. We have also requested
Schlumberger to evaluate the best way
forward to complete our multi-frac appraisal
well 234 in the west of the field. The
technical work required to be able to move
forward with further drilling activities in both
areas is expected to be complete in
Q3 2019.
We are also cognisant the cash position
of the Company needs to be carefully
monitored to avoid any stress on our
short-term liquidity position. As a result, the
Board requested that we reduce the number
of rigs from three to two, which will be
focused in the Northern Area, whilst we are
working on both Schlumberger studies. In
addition, the Board also now approves each
well that is drilled to ensure we are all taking
responsibility for maximising the best
possible chance of success on the
investments we make.
From a financial perspective, the Board
decided to err on the side of caution and
take an impairment against the reduction in
our 2P reserves. Whilst we have a significant
volume of 2P reserves, we are cognisant of
the challenges we faced with 2018
production and therefore have looked to
stress the 2P production profile with higher
sensitivities, resulting in an impairment
being taken.
10
Nostrum Oil & Gas PLC Annual Report 2018
Q: What will you bring as
Executive Chairman?
A: At the end of last year, the Board took
the decision to appoint me as Executive
Chairman. Whilst the Board is mindful of
best practice corporate governance
regarding the Chairman role, ensuring
operational delivery and meeting our stated
targets is the Company’s and my number
one priority in order to deliver value for our
shareholders, and I will endeavour to do this
to the best of my abilities.
I will be working closely with the
management team to ensure this happens.
My experience is firmly grounded in
petroleum engineering with over thirty years
working in the upstream sector, which I’m
confident will prove useful for the Company
at present.
As a result, I have stepped down from
the Board’s Nomination and Governance
Committee in line with best practice.
More information on our Nomination and
Governance, Audit, and Remuneration
Committees can be found in the corporate
governance section of this Annual Report
and on our website.
I am now working closely with our CEO,
Kai-Uwe Kessel, on how best to turn around
the operational issues we have been
confronted with and, most importantly, on
how we can increase production.
Q: What do you see as the biggest risks
to Nostrum in 2019?
QHSE priorities for 2019
• Formalise Health, Safety,
Environment and Communities
Board Committee
• Foster diversity at all
levels of the Group
• Participate in CDP disclosure
• Focus on improving contractor safety
management practices
For further information see page 30.
Q: How are you positioning the business
for a sustainable future?
A: An environmental, social and
governance focus.
ESG performance has and will always be
central to how Nostrum operates as a
business. This includes maintaining high
standards of QHSE, with the health and
safety of our employees being paramount.
Our 2018 Health, Safety and Environment
Compliance Audit, conducted
independently by AMEC, found our HSE
systems conform to all applicable standards
and best practice, and have consistently
shown improvement year-on-year.
To demonstrate that we take our
responsibility with regard to the
environment and climate change seriously,
we plan to begin reporting to the CDP
initiative this year.
A: While the commodity price environment
is an ever-present risk in the industry, the
key risks to Nostrum in 2019 are
encountering poor drilling results in
the Northern Area.
We are proposing a new committee of the
Board be established to deal with Health,
Safety, Environment and Communities, and
attention to climate change issues will be
among the duties of this committee.
Q: What is the company strategy
to create shareholder value in
the medium to long-term?
A: Our fundamental mission is to maximise
the value of our reservoirs and the
associated infrastructure we have built. In a
region rich in hydrocarbon resources and in
particular gas, we not only have both our
own hydrocarbons to process but can also
seek to enter into agreements with
surrounding licences to ensure we fill our
gas plants as quickly as possible. We
successfully signed a deal with Ural Oil &
Gas in 2018 that will result in gas and
condensate from their licence area being
processed in Nostrum’s facilities, and this is
anticipated towards the end of next year.
This will provide an immediate source of
free cash flow for Nostrum. The
infrastructure we have built will last for many
years and the quicker we can fill it, the
higher the value will be for Nostrum
stakeholders. As such, we will continue to
seek business development opportunities
during 2019.
We recognise that our future growth must
be achieved sustainably, with a focus on our
social and environmental impact in the
region in which we operate. We continue to
invest in social development locally as well
as education and training. We are constantly
improving our independent environmental
impact auditing and mitigation to ensure
our future growth and long-term value
creation is measured with a sustainable
approach for all stakeholders.
I look forward to sharing our story with you
over the coming months and thank you for
your ongoing support.
Atul Gupta
Executive Chairman
We understand that the Company needs
to deliver on the guidance it gives to the
market and 2019 is about hitting the targets
that we set and can control. In 2018 we
rebased our production guidance for this
year based on current producing wells,
which we believe is appropriately
conservative given the drilling programme
is focusing on the unproven Northern Area.
We are awaiting the results from the
technical studies undertaken on Biyski
North-east and the western area which
will help us define our drilling strategy
going forward and these results therefore
present an inherent risk.
However, we believe our tight cost control,
focused drilling campaign and third-party
contractor and buyer relationships leave us
well placed from a balance sheet
perspective to maintain a healthy cash
position and mitigate financial risk.
Nostrum Oil & Gas PLC Annual Report 2018
The Audit Committee and the Board have
recognised that climate change should be
included among the risks and uncertainties
faced by Nostrum and we will seek to
quantify climate change related risks.
A: Developing our people and culture.
I am proud of our people and the
culture at Nostrum. That culture must
be harnessed to focus on operational
excellence in 2019 and on delivery against
our targets, whilst ensuring Nostrum is an
attractive place to work with an inclusive
environment that celebrates diversity.
We will continue to focus on diversity, and
in particular gender diversity, across all
levels throughout the Group. We are setting
up a mechanism for regular reporting by our
Human Resources team to the Board on this
issue and we are grateful for the quality and
commitment of our employees.
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Business model
CREATING VALUE
Nostrum seeks to safely and responsibly develop the resources in North-
western Kazakhstan through leveraging our world-class infrastructure
platform to deliver value to our stakeholders.
Business model element
Key strengths
World-class infrastructure
Well-placed to develop
regional resources
Substantial asset base
Four licences within 120km
of processing facilities
Stable financial platform
Low operating costs and
strong cash generation
Experienced management
Extensive management experience
in delivering large and complex
projects in Kazakhstan
Responsible operations
Track record of safe development,
proactively minimising any adverse
environmental and social impact
Shared prosperity
A leading employer in North-western
Kazakhstan delivering sustainable
benefits to the local community
• +US$2 billion invested since 2004 in production,
storage and export facilities
• Advantageous location is central to our business
case, allowing us to leverage our existing
footprint to develop assets within a tie-back
radius of our facilities to deliver value through
economies of scale
• 4.2bcm of raw gas processing capacity
• Highly attractive 100% owned and
operated asset base
• Our main activities are located at the 274km²
Chinarevskoye field which has produced more
than 100 mmboe since 2007
• We have three additional licences with
substantial upside potential
• Efficient operations, a grandfathered PSA, a
long track record of exports and an acute focus
on costs allow the Group to generate cash flow
to develop our assets
• Access to multiple export markets allows the
Group to proactively manage its netbacks for
all sales products
• Conservative financial policies ensure the
Group can maintain at least US$50 million
of cash at all times
• Operating in Kazakhstan since 2004, we
have extensive experience in exploring,
appraising and developing hydrocarbon
assets in the pre-Caspian basin
• Unique understanding of regional geology
and what is required to realise its potential
• Strong corporate governance framework
• We have established a good reputation in
Kazakhstan through operating in a responsible
and socially conscious manner to create value
for our stakeholders and the local community
• Long track record of delivering on local
content and sponsorship commitments
• Active engagement with local communities
12
Nostrum Oil & Gas PLC Annual Report 2018
29,516 boepdof sales volumes410 mmboeof 2P reserves US$231.3mEBITDA59.3%EBITDA marginUS$50 million minimum cash reserves96%of total Group workforce in Kazakhstan11% average salary increase in KZTof locally-engaged employeesLinking corporate responsibilityto the growth of the CompanyTRIF reduced to 1.39Total Recordable Injury Frequency (hours) per 1 million man hours workedLTIF reduced to 1.05Lost Time Injury Frequency (hours) per 1 million man hours worked2018 achievements GTU3 mechanical completionLow Pressure System completionUral Oil & Gas LLPbinding agreementsOilGasCrude oil wellsPipelineRailway terminalConnection pointRefineriesSea portSea portRailway terminalRailway terminalCrude oilStabilised condensateAssociated gasLiquid petroleum gas (LPG)Dry gasGas condensate wellsGas treatment facilities (GTF)Power generationOil treatment facility (OTF)Final destinationFinal destinationValue chainIntegrated production systemSTRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES13Nostrum Oil & Gas PLC Annual Report 2018 Chief Executive Officer’s review
ESTABLISHING A SOLID
FOUNDATION FOR
OPERATIONAL SUCCESS
Balancing capital
preservation with
investment in drilling
during 2019 will
remain a priority for
the Company in
order to meet our
operational targets.
Kai-Uwe Kessel
Chief Executive Officer
Q: How strong is Nostrum’s
financial position?
A: A challenging operational year was
tempered by a more positive financial
performance. While this was in part due
to improved prices for our sales products
during 2018 as a result of higher commodity
prices, our continued implementation of
cost reduction initiatives across the business
led to a healthy EBITDA margin in 2018.
We managed to reduce our total General
& Administrative expenses to US$22 million
and total operating costs to US$50 million
and we proactively managed the best
possible netbacks across our sales products
in the period, leading to stable operating
cash flow margins.
We also successfully refinanced the
remaining part of our debt. As a result, we
have no debt maturities due until July 2022.
This provides time to focus on turning
around our operational performance and
engage with the prudent research being
undertaken into the issues faced.
Balancing capital preservation with
investment into drilling during 2019
will remain a priority for the Company
as we work through the challenges we
encountered at the Chinarevskoye field,
to increase our production.
Q: 2018 was a tough year in terms of
production and missed guidance.
What were the main issues and how
can this be turned around?
A: During 2017 we saw three wells water
out in our main producing reservoir, the
Biyski North-east. The plan for 2018 was to
stabilise our production decline by drilling
four production wells in this reservoir.
Unfortunately, our first well encountered
water leading to a longer than anticipated
period without new production coming
online, and further questions being raised
regarding the source of the water. We had
a further delay on the second well due to
technical drilling issues. Overall, these
issues set back our production guidance
by roughly six months.
In the second half of the year we successfully
brought three producing wells in the Biyski
online and stabilised production above
30,000 boepd. However, as a result of the
water inflow we have seen, before we invest
further money into the Biyski North-east
we will conduct a thorough review of the
reservoir with Schlumberger. This will allow
us to more accurately estimate what
additional wells we can drill or recover
to further stabilise and continue to grow
production in 2019 and beyond.
We had planned to bring the western
area of the field into production during
2018 with a multi-frac planned for well 234.
Unfortunately, before we were able to test
the reservoir qualities, we suffered a
wellbore collapse, meaning we could not
continue with the planned multi-frac. Given
the importance of this area, with 81 million
barrels of probable reserves attributed to it,
we have decided to halt all further drilling
investment in the Biyski West until we
receive a full analysis from Schlumberger.
Due to the well bore collapse of 234, we did
not have any production from the western
part of the field which, again, impacted our
production guidance. We remain optimistic
that we can prove the technology works and
bring the reserves to production in 2020
and into the future.
As result of the issues we faced in 2018,
we uncovered more information about our
existing reservoirs which resulted in a
reduction in our 2P reserves by 78 million
boe, in accordance with an independent
report by Ryder Scott. This is largely down
to two factors. Firstly, the water in the Biyski
North-east meant that we lost reserves in the
areas to this, and secondly, we have seen
the commercial rates of some probable
areas in the Mullinski reservoir in the
North-east not being commercial to
drill under current oil prices.
Looking forward, we have three key areas
to focus on in order to grow production:
1) Identifying additional areas from
production from the Biyski North-east;
2) Demonstrating the multi-frac can work
in the west and unlocking the probable
reserves there; and
3) Developing the Northern Area around
wells 724 and 40.
14
Nostrum Oil & Gas PLC Annual Report 2018
Q: Can you provide an update on the
GTU3 project?
A: We successfully achieved mechanical
completion of GTU3 in December 2018 and
we are now looking forward to
commissioning the plant. Cold
commissioning has commenced, with
first gas targeted for Q2 2019 and full
commissioning of the plant during 2019.
When commissioning is completed,
GTU3 – our third gas treatment unit, will
more than double our production capacity
to over 100,000 boepd.
Q: What is the strategy to grow
production beyond Chinarevskoye as
you have a deal to process raw gas
from Ural Oil & Gas LLP?
A: Our long-term strategy is to build a
portfolio of reserves and resources in
North-western Kazakhstan to fill the GTU
capacity for the next 25 years. We are not
tied to owning the licences but the goal is
ensuring that we can monetise the
infrastructure we have built by processing all
the raw gas in the region at economically
attractive terms to Nostrum. Given our
limited liquidity position, we cannot develop
all our licences at once. Thus, I was pleased
to announce the binding agreements we
signed with Ural Oil & Gas (“UOG”) in 2018.
This is an alternative to acquiring reserves
and resources whereby we are generating a
return through agreements that result in
Nostrum making money from hydrocarbons
UOG delivers to our plant. We are not
required to invest in any material capital
expenditure and will simply allocate part of
our GTU for processing their raw gas. This is
an extremely economic and effective way to
monetise our infrastructure without us
having to risk money on drilling. This deal
demonstrates the value our infrastructure
has in North-western Kazakhstan and we are
continuously assessing other opportunities
in the region.
Q: What are your development plans
for Chinarevskoye?
A: During the year we saw encouraging
results from our drilling operations at well
40 in the northern part of the Chinarevskoye
exploration licence area, and we confirmed
the discovery made in well 724 at the end of
last year in the Upper Devonian formation.
How we
engage
with our
stakeholders
Nostrum has always focused
on creating social and
economic benefits for
our employees, business
partners, local communities,
the Kazakh people and the
government. In line with
our corporate and social
responsibility values, our
commitment translates into
activities aimed at ensuring
security, generating
employment, developing
reliable infrastructure and
investing in local communities.
Well 40 was tested with stable flow rates
exceeding 1,500 boe per day. This is a very
significant result as it can potentially open
up a new area in the Chinarevskoye field
that is rich in hydrocarbons and is of
material scale. This is one of the highest
yielding condensate wells in the
field’s history.
Therefore, to better understand the full
potential of those reserves in 2019, our
two-rig drilling programme during the first
half of 2019 will pursue the area around well
40 (wells 41 and 42) to define the extent
of this encouraging prospect.
Q: What is your production guidance
for 2019?
A: Our 2019 drilling programme will be
conducted with only two rigs and we are
expecting to drill six wells in the year. As we
prioritised capital preservation this year,
we believe this programme is a sound
allocation of capital that will ensure we
sustain existing production while targeting
de-risked growth opportunities.
During 2018, we maintained regular
dialogue with investors, whose feedback
helped us further develop certain key
Company initiatives, and, in particular,
prepare ourselves for the launch of a
Board Health, Safety, Environment and
Communities committee. This will
improve oversight and accelerate our
ESG performance and practices in order
to further align them with recognised
international standards.
In line with our focus on stabilising
production, and as part of our efforts
to establish an infrastructure hub in
Kazakhstan, we entered into agreements
with Ural Oil & Gas. We will continue
to partner with local businesses in the
future as we seek to fill the processing
capacity of our three gas treatment
facilities. In 2019, we will have an
ongoing focus on ensuring we are
suitably prepared for and resourced to
manage our supply chain, and continue
to strengthen our relationships and
dialogue with all external stakeholders
to enable future growth and long-term
value creation.
While the Northern Area has shown
encouraging results, it is not yet fully
appraised and therefore there is some
uncertainty in predicting potential
production volumes. As a result, we are
changing our approach to production
guidance so as not to include any appraisal
wells to be drilled in 2019. This means that
the average forecast field production for
2019 will be 30,000 boepd, corresponding
to sales volumes of approximately
28,000 boepd.*
Kai-Uwe Kessel
Chief Executive Officer
25 March 2019
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* The difference of 2,000 boepd between the field production and sales volumes is largely the amount
of produced gas that is consumed within our extensive processing facilities.
Nostrum Oil & Gas PLC Annual Report 2018
15
Market review
NAVIGATING CHALLENGING
MARKET CONDITIONS
ECONOMIC AND POLITICAL
OVERVIEW
The oil and gas market in Kazakhstan
Kazakhstan is the largest land-locked
country in the world and has three primary
export routes for its production: one via
Russia (Atyrau-Samara and the Caspian
Pipeline Consortium pipelines); one via
Azerbaijan and Turkey (the Baku-Tbilisi-
Ceyhan pipeline); and one via China
(Atasu-Alashankou).
Since independence, Kazakhstan has been
able to attract more foreign direct
investment than any other country in the
FSU, including Russia. The majority of
Kazakhstan’s production comes from three
supergiant fields situated in the north-west
of the country (Tengiz, Karachaganak and
Kashagan fields). The resumption of full
scale production at the Kashagan field
during 2017 has been a significant
contributor to recent overall production
growth in the country, with crude oil and
condensate output at the project exceeding
expectations. During 2018 total oil
production at the three major projects
amounted to 49 million tonnes. Expansion
projects at the Tengiz and Karachaganak
fields are currently being developed to
increase liquid recovery volumes as the
fields mature.
What it means for us
Nostrum’s assets are all located in the
oil-rich Pre-Caspian Basin close to the
Russian border and in close proximity to
some of the most significant hydrocarbon
resources in the Former Soviet Union. In
addition to the Company’s own processing,
storage and transportation infrastructure,
Nostrum’s advantageous location means
that the Group has access to multiple export
markets and additional resources to support
its operations over the long term. During
2018, Nostrum’s signing of binding
agreements with Ural Oil & Gas to process
hydrocarbons from the Rozhkovskoye field
demonstrates the substantial value of the
Group’s infrastructure and competitive
positioning in the region.
Kazakhstan is one of the world’s
top countries in terms of oil and
gas reserves and is the second
largest oil producer in the
Former Soviet Union after
Russia. Since achieving
independence in 1991, the
country has more than trebled
its oil and gas production,
becoming one of the fastest-
growing oil-producing nations
outside of OPEC.
Kazakhstan’s proven
oil reserves
30 billion
barrels
Kazakhstan’s proven
gas reserves
1.1 trillion
cubic metres
Kazakhstan’s 2017 oil
production
1.8 million
barrels of oil per day
Kazakhstan’s 2017 gas
production
27 billion
cubic metres
COMPETITIVE ANALYSIS
AND MARKET SHARE –
BENCHMARKING OUR BUSINESS
AGAINST OUR PEERS
Strengths
• Advantageous location with access
to multiple transportation routes
• Full control of liquid transportation
logistics
• Extensive processing infrastructure allows
Nostrum to develop raw gas deposits in
North-western Kazakhstan where there
is a shortage of processing capacity
• High quality, light, sweet crude
Weaknesses
• Nostrum is subject to fluctuations in the
market prices for its products, although
we have a variety of sales products
• Unavoidable geological risks inherent
in the oil and gas industry
• Seasonal temperature fluctuations
in a harsh operating environment
• Lack of significant population reduces
the size of the skilled workforce locally
Nostrum is fortunate to
operate in an area with
significant hydrocarbon
resources and benefits
from access to large oil
and gas reserves within
our licence boundaries
and surrounding fields.
Arkadi Epifanov
Chief Commercial Officer
Source: BP Statistical Review of World Energy 2018
16
Nostrum Oil & Gas PLC Annual Report 2018
Key macroeconomic and microeconomic trends
CONTINUED OIL PRICE
VOLATILITY
Oil prices continued to be volatile
throughout 2018, reaching a high of US$86/
bbl in October and a low of US$51/bbl in
December. Despite this volatility, consensus
views of long-term prices of around
US$60-70/bbl have remained broadly
consistent as the industry continues to
adjust to profoundly different global supply
dynamics brought about by the rapid
evolution of the US shale industry.
KAZAKHSTAN ECONOMY
During 2018 Kazakhstan’s economy grew
by 3.7% (2017: 4.0%). Economic growth
remains heavily dependent on the oil
industry so an increase in oil prices and
activity in the sector played a significant
role. The KZT/USD average exchange rate
remained broadly flat year-on-year at 345
KZT to USD (2017: 326 KZT to USD) and
inflationary pressures were subdued with
core inflation at 6.1% (2017: 7.4%).
COMPETITIVE ENVIRONMENT
Kazakhstan and Azerbaijan are the two main
oil producing countries in the Caspian
region, producing 1.8 million bopd and
0.8 million bopd in 2017 respectively. It is
expected these countries will continue to
lead the region in oil production.
Turkmenistan and Uzbekistan are the
predominant gas producers in the region,
producing 62 bcm and 53 bcm in 2017
respectively. Russia plays an important role
in the region by providing a transportation
corridor between the Caspian Sea and the
Black Sea, although this part of Russia is not
a substantial source of crude.
GDP progression
Q-on-Q real GDP growth (%)
CIS production excl. Russia
(mm tonnes)
Oil prices
US$/bbl
66.65
74.54
4.00
3.25
2.50
50.57
1.75
1.00
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Oil
Natural gas
110.2
23.3
65.8
53.3
54.4
15.2
48.4
45.9
86.9
12.4
2.5
39.2
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What it means for us
What it means for us
What it means for us
With no debt maturities until 2022 and over
US$100 million of cash on our balance
sheet, the Group is well positioned to
weather near-term fluctuations in the oil
price. Nostrum continues to focus on
reducing its cost base to ensure the Group
generates healthy cash flow and preserves
capital while operational issues at the
Chinarevskoye field are addressed
during 2019.
The prominence of the oil industry in
Kazakhstan meant that the downturn in oil
prices during and after 2014 had a material
impact on the country’s economy. Although
long-term broader structural reforms are
required to address this imbalance, in the
near-term the government has been
extremely supportive of the industry as it
seeks to foster growth, development and
investment. The government’s decision to
unpeg the KZT/USD exchange rate has had
a meaningful effect on the operating cost
bases of producers as prices have recovered
and inflation has remained subdued.
Vast distances between Central Asian
markets, long-established trading
relationships and in-place infrastructure
promote co-dependency between FSU
exporters. Kazakhstan naturally benefits
from its geo-strategic position between
Russia and China. Nostrum is situated in
the heart of the export corridor that exists
between Russia and multiple markets to
the west of the Caspian.
Nostrum Oil & Gas PLC Annual Report 2018
17
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Strategy
CREATING VALUE
Our strategy for future growth
is focused on leveraging the
strengths across our value chain
to serve the interests and meet
the needs of all of our
stakeholders.
We have a dedicated
and experienced team
who are committed to
achieving the Company’s
goals and objectives in
2019 and beyond.
Strategic pillars
2019 priorities
Maintain stable
production
levels while
operational
issues are
addressed
Continued
cost
reduction
• Two-rig drilling programme
to drill up to six wells
• Connecting existing wells to
the Low Pressure System and
full commissioning of GTU3
to increase liquid production
efficiency
• Continued reductions in both
G&A and operating expenses
against 2018 levels
• Focus on bringing drilling
costs and related capex
as low as possible
2P reserve
growth
through M&A
• Continuously monitor M&A
opportunities in a tie-back
radius to the Company’s
existing infrastructure
footprint
• Increase presence in local
communities and reported-on
wellbeing of employees and
working environment
Integrating
corporate
responsibility
into our
business
Focus on
delivering
shareholder
value
• Preserve capital while
operational issues at
Chinarevskoye are
addressed
• Post GTU3, start to generate
positive post-tax free
cash flow
Heinz Wendel
Chief Operating Officer
18
Nostrum Oil & Gas PLC Annual Report 2018
KPIs
• 30,000 boepd field production
with 28,000 boepd of sales volumes
• Full commissioning of GTU3
• G&A below US$20 million
• Operating costs
below US$55 million
• Drilling capex
below US$70 million
• Grow 2P reserves
in North-western
Kazakhstan
• Number of man hours without
loss of working hours (millions)
Forecasts, objectives and
prospects for 2019-2021
• Maintain production above
a level of 30,000 boepd
• Prolong the life of existing
wells to maximise the
extraction of 2P reserves
• Appraise Northern Area
around well 40
• Reduce costs by a further 20%
on a boe basis by 2021
Risks
• Drilling can be subject
to cost overruns and
technical issues
• Drilling programme for
2019 may be subject to
change depending on
appraisal results obtained
throughout the year
• Sustained higher oil prices
can lead to cost inflation
• Cutting costs too
aggressively can lead to
adverse operational
outcomes
• Acquisitions come with
geological risk such that
expected reserve figures
can prove to be lower
following further appraisal
• Grow reserves to ensure full capacity
utilisation of the Group’s processing
facilities for many years beyond 2021
• Legal framework for
• Focus on expanding QSHE policies
environmental protection
and operational safety still
being developed in
Kazakhstan
to include initiatives such as
contractor QSHE management,
environmental reporting and
developing GHG reduction
strategies
• Formalise Board HSEC Committee
to have oversight of QHSE issues,
including those relating to climate
change
• Generate significant post-tax
free cash flow beyond 2021
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• Approx. US$100 million of cash
at YE 2019, with a minimum of
US$50 million held at all times
• Target post-tax free cash flow
post commissioning of GTU3
• Commodity prices
• Production performance
• Success and specification
of drilling programme
Nostrum Oil & Gas PLC Annual Report 2018
19
Key performance indicators
A STABLE PERFORMANCE
Financial KPIs
Nostrum’s extensive infrastructure footprint, variety of sales products and multiple routes to export
markets allow the Company to generate stable operating cash flows throughout the commodity
cycle through proactively managing netbacks. The Company is positioned to realise the value of
surrounding resources in North-western Kazakhstan.
Revenue (US$m)
EBITDA (US$m)
Net income (US$m)
782
475
146
449
348
406
390
215
194
232
231
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
US$390m
-3.8%
US$231m
-0.1%
(94)
(83)
(24)
(121)
2014
2015
2016
2017
2018
US$(121)m
Operating cash flow (US$m)
Investing cash flow (US$m)
Operating costs (US$m)
349
202
183
214
153
305
245
200
192
172
63
53
57
50
83
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
US$214m
+17.1%
US$172m
-10.6%
US$50m
-11.8%
2018
performance
During 2018 Nostrum worked
to achieve key strategic,
financial and operational
targets in line with our
strategy for progression.
Strategic
Ural Oil & Gas
We continuously monitored opportunities
in and around the Chinarevskoye field to
identify where stranded gas reserves could
be processed through Nostrum infrastructure, in
accordance with our 2017 goal. The Company
signed binding agreements with Ural Oil &
Gas LLP to process third-party hydrocarbons
delivered to our processing facilities.
Financial
Cost reduction
In 2018 we targeted reductions in G&A
and opex against 2017 figures. Continued
efficiencies saw a reduction in G&A by
33.3% and operating costs by 11.8%.
While this was partly a result of reduced
production, we also streamlined our
corporate structure leading to reduced
payroll, as well as renegotiated
key contracts.
For further information see Financial Review
on page 46.
20
Nostrum Oil & Gas PLC Annual Report 2018
Non–financial KPIs
Performing responsibly is integral to our success and to the sustainability of our business. We believe
that long-term value comes from seeing success as a part of a bigger picture, encompassing people
and the environment. We have set ourselves specific non-financial KPIs to track our progress, as we
believe it to be the best way to monitor our achievements in relation to environmental, social and
governance matters.
Sales volumes (boepd)
1P reserves (mmboe)
2P reserves (mmboe)
43,181
38,576 39,043 37,844
192
29,516
147
147
571
470
466
488
410
124
98
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
29,516 boepd
-22%
98 mmboe
-21%
410 mmboe
-16%
Total GHG emissions
(tCO2e/mmboe)
269,400
228,029
209,613
254,972 254,715
Lost Time Injury Frequency
(hours)1
Total Recordable Injury
Frequency (hours)1
2.75
2.48
1.99
1.54
4.00
3.92
3.09
2.59
1.05
1.39
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
254,715 tCO2e/mmboe
-0.1%
1.05 hours
-57.6%
Bond refinancing
In February 2018 Nostrum successfully
issued a US$400 million bond with a seven
year maturity and a fixed coupon of 7.000%
in order to refinance the remainder of its
outstanding debt due 2019. Following this
transaction, Nostrum has no debt maturities
until 2022.
Operational
Production and reserves
In 2018 we did not meet our production
or reserve KPIs. Production was 20% lower
due to operational challenges at field site.
2P reserves also declined by 78 million boe
due to water losses and also other areas
being moved into contingent resources,
due to it not being commercially viable to
drill in them at current oil prices.
For further information see Financial Review
on page 46.
1.39 hours
-64.5%
1. Per 1 million man hours worked.
Infrastructure
We targeted mechanical completion of GTU3
in 2018 and this was achieved in December
2018. Commissioning was planned for 2018
but is now anticipated in 2019. Additionally,
we successfully implemented a Low
Pressure System to extend the life of
our producing wells.
QHSE
Reduction in TRIF and LTIF
Following a commitment to improve our
Health & Safety processes in 2018, we saw
our Total Recordable Injury Frequency rate
reduced from 3.92 to 1.39 per million man
hours worked, and our Lost Time Injury
Frequency from 2.48 to 1.05 per million
man hours worked.
Nostrum Oil & Gas PLC Annual Report 2018
21
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Performance review
OUR PRODUCTS AND PROCESSES
Quality
Sales
Pricing
Transportation
Crude oil
Density at 150C– 0.813
kg/m3.
API – 42-43 degrees.
85%
Exported in
accordance with
the PSA.
Average sulphur –
0.45%.
Superior in quality
to other primary
benchmark crude
oils produced
in Kazakhstan.
15%
Sold
domestically.
During 2018 all exported
crude oil volumes were sold
through the KTO pipeline.
Rail exports to multiple
destinations are also available.
Urals-based pricing
for pipeline exports.
Brent-based pricing
for railcar exports.
Domestic sales at
c.50% discount.
Crude exports are
delivered to the KTO
pipeline through an
extension to our own
120km pipeline from
the field site.
From here it is delivered
to the Russian Baltic Sea
port of Ust-Luga.
Stabilised
condensate
Density at 150C –
0.740kg/m3.
API – 59 degrees API.
Average sulphur
– <0.4%.
100%
Exported.
Destinations include
the Russian Black Sea
port of Taman.
Brent-based pricing.
Sent through our own
120km pipeline from the
field site to our own rail
loading terminal
in Uralsk.
From here it is loaded
onto railcars and sent to
various destinations.
LPG
Field grade quality.
No olefins and low
sulphur content.
>80%
Exported.
Destinations include the
Russian Black Sea Ports.
International
Mediterranean LPG
price Sonatrach for
Black Sea deliveries.
Loaded onto LPG trucks
from the field site to rail
loading terminal in
Uralsk.
ARGUS DAF Brest
quotation for Eastern
European deliveries.
From here it is loaded
onto railcars and sold
to third parties.
ARGUS DAF Bekabad/
Galaba quotations for
Asian deliveries.
Dry gas
100%
Sold
domestically.
Price
agreed annually.
Sent through our own
17km pipeline from
the field site to the
connection point with
the Intergas Central Asia
gas pipeline.
Sold at the connection
point.
22
Nostrum Oil & Gas PLC Annual Report 2018
Production (boepd) and product split (%)
42% 42% 40% 38% 37%
18,624
16,877 16,061
14,937
11,490
2014
2015
2016
2017
2018
10% 11% 11% 12% 12%
4,496
4,323 4,532 4,615
3,865
2014
2015
2016
2017
2018
48% 47% 49% 50% 51%
21,280
19,190 19,758 19,647
15,900
2014
2015
2016
2017
2018
Liquids pipeline
Nostrum has its own 120km liquids pipeline
that was completed in 2008. The pipeline
runs from the field site to the Company’s rail
loading terminal in Uralsk. The pipeline has
a maximum annual throughput capacity of
over three million tonnes.
Rail loading terminal
Nostrum commissioned its own automated
rail loading terminal in the city of Uralsk in
2009. The rail loading terminal currently
receives all domestic crude oil and export
condensate produced by Zhaikmunai and
has a capacity of approximately four million
tonnes of crude oil and condensate
per annum.
Storage facilities
Nostrum has over 30,000 cubic metres of
storage capacity for liquids at its field site
and rail loading terminal.
KTO pipeline connection
During 2017 Nostrum completed the
construction of a secondary crude oil
pipeline to enable export sales via the
Atyrau-Samara international export pipeline
operated by KazTransOil. The KTO pipeline
substantially reduced Nostrum’s crude oil
transportation costs by more than 50% and
has enhanced the Company’s ability to
manage crude oil netbacks through the
commodity cycle. The total completion cost
of the KTO pipeline was under US$7 million
and the project was completed on time and
under the projected budget of
US$10 million.
Low Pressure System
During 2018 Nostrum completed and
commissioned new a Low Pressure System
which aims to reduce the decline rates of
ageing gas condensate reservoirs through
reducing the inlet pressure of the main
manifold at the GTF from 10 to 42 bar.
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Infrastructure overview
Oil treatment facility
Nostrum finalised the construction of an oil
treatment facility in 2006 (“OTF”). Currently
the OTF has a maximum annual throughput
capacity of 400,000 tonnes per annum.
Raw gas processing
infrastructure
The gas treatment facility (“GTF”) 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
The GTF currently includes two gas
treatment units, each with the capacity to
treat approximately 850 million cubic metres
of raw gas per annum. The GTF is currently
operating close to nameplate capacity.
GTU3
The third treatment unit of the GTF was
mechanically completed in 2018, with
commissioning beginning in 2019. Once
commissioned, GTU3 will add 2.5 billion
cubic metres of additional raw gas
processing capacity, bringing the Group’s
combined capacity to 4.2 billion cubic
metres per annum.
Power generation plant
The gas-fired power generation plant is
linked to the gas treatment facility with an
output of 15 megawatts. The generation
capacity from the plant is sufficient to meet
the existing and anticipated energy needs of
the field site and associated operations as
the Company grows production.
Gas pipeline
Nostrum has its own 17km gas pipeline
which 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.
Nostrum Oil & Gas PLC Annual Report 2018
23
Performance review / continued
Our main asset
THE CHINAREVSKOYE
FIELD
Nostrum has a 100% owned top-to-tail infrastructure
footprint in the resource rich pre-Caspian basin in
North-western Kazakhstan. The Company currently
owns four licences, all located within a 120km radius
of its substantial processing facilities.
Nostrum’s current producing asset is the Chinarevskoye field – a 274km² licence
located to the north of Uralsk, near to the Russian border. The Chinarevskoye licence
comprises a 185km² production and 89km² exploration licence.*
Despite recent operational setbacks, Nostrum will continue to try to extract as many
hydrocarbons as possible from our licence areas. We see the potential for our fields to
produce for many years to come, and we are still opening up new areas after more
than ten years of drilling at Chinarevskoye.
During 2018 Nostrum made an application to the state authorities to extend its
production licence to cover the full extent of its licence area following the exploration
success of well 40 during 2017-2018. For this purpose, changes were approved to
the mining allotment in the Northern Area of the field which will be reflected in a
supplemental agreement to the PSA once the updated RoK development project
has been approved.
Total sales volumes (boe)
2P reserve breakdown for
the Chinarevskoye field (%)
,
1
4
6
5
0
2
6
1
,
,
9
3
3
0
8
0
4
1
,
,
4
5
6
9
8
2
4
1
,
,
9
8
0
3
1
8
3
1
,
2014
2015
2016
2017
,
6
6
2
3
7
7
0
1
2018
,
10,773,266 boepd
XX
17
reservoirs
* Licence areas as at 31 December 2018.
Dry gas
LPG
Crude
oil and
condensate
49%
37%
14%
Over
100 million
boe produced since
2007
24
Nostrum Oil & Gas PLC Annual Report 2018
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Nostrum Oil & Gas PLC Annual Report 2018
25
Performance review / continued
The Chinarevskoye field
continued
Stable business environment
Exploration and production
licence
Nostrum was first granted an exploration
and production licence for the
Chinarevskoye field in May 1997. The
current production licence granted in 2008
covers 185km2, with validity to 2032 for the
North-eastern Tournaisian reservoir, and
until 2033 for all other oil and gas bearing
reservoirs and horizons.
Production Sharing Agreement
(PSA)
A grandfathered PSA exists between
Nostrum and the Government of
Kazakhstan, which specifies the exploration
and development boundaries of the
Chinarevskoye field. The PSA also addresses
the respective royalties, profit share and tax
liabilities payable to the government.
Outlook
The licence and PSA are currently valid until
2032 (with respect to the North-eastern
Tournaisian reservoir) and 2033 (for the rest
of the Chinarevskoye field), and Nostrum
must comply with the terms of the
exploration permit, the production permit
and the development plans during this
period. To date, the Company has met all
of its capital investment obligations under
the PSA.
Geology, reserves and drilling
Geology
The Chinarevskoye field is a multi-layer
structure with 17 reservoirs and 53
compartments spread over three areas.
Commercial hydrocarbons have been found
in the Lower Permian, Bashkirian,
Bobrikovski, Tournaisian, Mullinski,
Ardatovski, and Biyski-Afoninski reservoirs.
The Company is carrying out an appraisal
programme to investigate the commerciality
of the Frasnian reservoir found in well 40
in 2018.
observed on the southern flank of the Biyski
structure which resulted in a lower than
expected average daily production from
this main producing reservoir. In the western
area of the field, the multi-frac appraisal well
234 was drilled to planned final depth.
However, the multi-fracs could not be
performed due to technical issues in the
wellbore. Comprehensive technical work
is being carried out and will be completed
in H1 2019. Therefore, the Company plans
to focus on an appraisal drilling programme
in H1 2019 in the Northern Area of the
Chinarevskoye field where well 724 and 40
discoveries were made in 2017 and 2018.
The drilling programme will be conducted
with two drilling rigs on the Chinarevskoye
field. When the results of these appraisal
wells are known the Company will be able to
decide how best to proceed with the drilling
programme for the remainder of the year.
Reserves
Based on a Ryder Scott report dated
1 January 2019, the proved and probable
reserves for the Chinarevskoye field amount
to 294 mmboe (2017: 358 mmboe).
Proven reserves amount to 98 mmboe
(2017: 124 mmboe) and probable reserves
to 196 mmboe (2017: 234 mmboe). Oil
and condensate amount to 110 mmbbl
of proven and probable reserves
(2017: 135 mmbbl), LPG to 42 mmbbl
(2017: 54 mmbbl) and gas to 142 mmboe
(2017: 168 mmboe).
Drilling
Initial hydrocarbon discoveries at the
Chinarevskoye field were made during
drilling exploration conducted during the
Soviet era. Subsequent to this discovery,
there have been 100 wells and side-tracks
drilled under the PSA between 2004-2018.
At the Chinarevskoye field 20 oil wells and
25 gas condensate production wells were
in operation as at 31 December 2018. Three
new gas condensate production wells were
brought online in 2018. The first well for
production, well 224, drilled in 2018 in a
flank position of the Biyski North-east
reservoir, encountered water and could not
be brought to production. An increased
water inflow to other existing wells was also
20
25
crude oil
production wells*
gas condensate
production wells*
100
wells drilled
since 2004
* Producing as at 31 December 2018
26
Nostrum Oil & Gas PLC Annual Report 2018
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Comprehensive
technical work is being
carried out and…the
Company plans to
focus in 2019 on an
appraisal drilling
programme in the
Northern Area of the
Chinarevskoye field.
Ablay Alzhanov
Head of Geology Department
On-site facilities
Location
Our facilities are located in an advantageous
geographical position which encourages
flexible transportation links for the off-takers
of our sales products. The proximity to
major international railway lines and oil and
gas pipelines allows for convenient
transport to markets in Central Asia and
Eastern Europe.
Transportation
Crude oil transportation is provided by a
short pipeline completed in 2017 which
provides access to the KazTransOil (“KTO”)
pipeline for export.
GTU3
GTU3 was mechanically completed in
December 2018. Commissioning of GTU3
is ongoing with first raw gas into the plant
expected in 2019.
Oil and stabilised condensate
pipeline and railway loading
terminal
Since its completion in 2008 and
commissioning in 2009, our 120km liquids
pipeline and railway loading terminal
located at Rostoshi near Uralsk have been
used for the transportation of our crude oil
and stabilised condensate. The products
travel through the pipeline from the
Chinarevskoye field site to the railway
loading terminal, where it is first stored and
then transported by railcar to final off-takers.
The separation between our stabilised liquid
condensate and crude oil occurs during
transportation through the same pipeline
using a “PIG” system. This ensures quality
is not compromised as it would be in a
multi-purpose pipeline and allows for higher
export prices. The maximum throughput of
our oil pipeline is three million tonnes per
year. The rail loading terminal, which
receives the crude oil and condensate, has
a capacity of three to four million tonnes per
year. Additional infrastructure in use also
includes crude oil storage tanks on site and
at the rail terminal, condensate tanks on site
and at the terminal, and a railcar loading
facility at the railway terminal. This terminal
allows for 32 railcars to be loaded
simultaneously. The first vapour recovery
unit in Kazakhstan’s history can also be
found at the facility. Forecasted increases
in throughput, in line with our strategy to
double production, will be accommodated
by our existing infrastructure.
Nostrum Oil & Gas PLC Annual Report 2018
27
Performance review / continued
Advancing our
growth prospects
ROSTOSHINSKOYE,
DARJINSKOYE
AND YUZHNO-
GREMYACHINSKOYE
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, and we continue to appraise
other nearby opportunities.
Subsoil rights acquisition
Nostrum has rights to 100% of the subsoil
use related to three oil and gas fields in
the pre-Caspian Basin to the North-west
of Uralsk, namely the Rostoshinskoye,
Darjinskoye and Yuzhno-
Gremyachinskoye fields. These fields
were acquired under an asset purchase
agreement in 2013. The Ministry of Oil &
Gas signed supplementary agreements
relating to those rights, which became
effective from 1 March 2013. Nostrum
subsequently applied for extensions to
these three licences, two of which are
effective with one outstanding decision
expected to be received in H1 2019.
Geology
Decades of successful exploration
activities have shown that the three
fields contain hydrocarbons suitable
for commercial production. The bulk
of the hydrocarbons are located in the
Bashkirian stage of the Carboniferous,
with other reservoirs being of Permo-
Carboniferous age. Prior to development
there will be significant appraisal required
to explore existing accumulations and
deeper intervals.
Appraisal programme
During 2016, we drilled an appraisal
well at Rostoshinskoye. The results of
this appraisal well were evaluated in 2017
and changed the geological model of the
Rostoshinskoye field and also increased the
reserves potential of the Bashkirian section
of the adjacent Darjinskoye field.
Total combined reserves
Nostrum has an outstanding track record
of converting reserves. An independent
reserve report by Ryder Scott dated
1 January 2019 has shown Nostrum has
410 mmboe of proved and probable
reserves, 116 mmboe of which are
contained in the three adjacent fields. In line
with our strategy, we will continue to look to
increase our reserve base and secure
production growth.
Contingent resources
In addition to the estimated 2P reserves,
contingent resources have been identified
in the Chinarevskoye, Rostoshinskoye,
Darjinskoye and Yuzhno-Gremyachinskoye
licence areas. The 1C+2C contingent
resources estimated as of 1 January 2019
for the Chinarevskoye area amount to
111 million barrels of liquids and 462 billion
cubic feet of sales gas. For the three
additional licences the contingent resources
amount to 16 million barrels of liquids and
269 billion cubic feet of sales gas.
60-120km
from Chinarevskoye
licence area
28
Nostrum Oil & Gas PLC Annual Report 2018
BINDING
AGREEMENTS
WITH URAL OIL
& GAS LLP (“UOG”)
Chinarevskoye
Intergas
Central Asia
pipeline
Rozhkovskoye
Demonstrating the value of
our infrastructure
During 2018, Nostrum entered into
binding agreements to process third party
hydrocarbons delivered by UOG from the
Rozhkovskoye field which is situated less
than 20km from the Chinarevskoye field.
UOG will fund the connection of existing
wells at the Rozhkovskoye field to Nostrum’s
licence area. Thereafter, Nostrum will
process all of the hydrocarbons coming into
the field. UOG is a company owned by
KazMunaiGas (“KMG”) (50%), Sinopec
(27.5%) and MOL Group (“MOL”) (22.5%).
Commercial terms agreed
The commercial terms comprise two parts.
Firstly, a tolling fee for the stabilisation of
liquid condensate which will be US$8 per
barrel, and secondly the purchasing of raw
gas from UOG at a price to be agreed at the
point of delivery to Nostrum’s facilities.
The Rozhkovskoye field
The pre-salt Rozhkovskoye gas condensate
field was discovered in 2008 on the
Fedorovsky exploration block by UOG. The
field has broadly analogous geology to the
Chinarevskoye field which sits
approximately 20km to the north.
Rozhkovskoye’s primary Tournaisian (Lower
Carboniferous) reservoir tested positive for
gas-condensate in all nine exploration and
appraisal wells drilled by UOG. The
Tournaisian consists of shallow marine
limestones at 4,200-4,600 metres. The
Bobrikovski horizon (Lower Carboniferous)
also contains gas-condensate. In 2014, an
oil discovery was announced in the
Bashkirian (Upper Carboniferous). In April
2015, UOG signed a 25-year production
contract for the Rozhkovskoye field,
demonstrating a commitment to developing
its licence area.
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Nostrum Oil & Gas PLC Annual Report 2018
29
Sustainable accountability
MAKING A POSITIVE
IMPACT
Nostrum maintains and
promotes the highest standards
of Environmental, Social and
Governance practice. The
Company recognises it has a
responsibility to operate in a
sustainable and ethical manner
for the benefit of the local
community and all of our
stakeholders.
We have operated in Kazakhstan for more
than 20 years and during this time the
Company has sought to be a responsible
and transparent company which places the
public interest at the core of decision-
making processes. We have a deep
understanding of, and respect for, the needs
of the communities in which we operate,
and we therefore prioritise the ethical
management of our people, our
communities and our environment.
In 2019 we will form a Board Health, Safety,
Environment and Communities Committee
which will have oversight over health, safety
and environmental matters. This committee
will be focused upon Leadership &
Commitment, Incident Investigation,
Contractor Management, Process Safety,
Environmental & Climate Change and Social
Responsibility. This will be undertaken as
part of a five year strategic roadmap to
achieve Nostrum’s HSE goals and objectives.
Nostrum recognises both Kazakh and UK
legislative and regulatory requirements in
relation to our QHSE standards and we seek
to comply with ISO 14001 Environmental
Management System and ISO 50001 Energy
Management standards.
QHSE policy and
priorities
QHSE at Nostrum focuses on
improving the management
and mitigation of risks relating
to quality, health, safety and the
environment, 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.
Hazards & Effects
Hazards are identified, risks
are assessed and appropriate
controls are implemented
Leadership &
Commitment
Management will provide
visible and active leadership in
developing and maintaining
QHSE culture
Organisation
The organisation and
responsibilities for the
management of QHSE 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
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 Kazakh
legal requirements and
company QHSE standards
Planning &
Performance
Monitoring
Objectives are planned in
accordance with the
established key performance
indicators to measure the
implementation of
QHSE 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 QHSE
management and to identify
areas for improvement
30
Nostrum Oil & Gas PLC Annual Report 2018
Health and safety
Our operational
success is reliant
upon a strong health
and safety culture
within our business.
To ensure the security
of all employees and
contractors, we utilise
active QHSE training
and reporting
procedures.
Health and safety
Lost Time Injury Frequency (hours)*
2.75
2.48
1.99
1.54
2014
2015
2016
2017
2018
1.05
Heath and safety
1.05 hours
-57.6%
Total Recordable Injury Frequency
(hours)*
4.00
3.92
3.09
2.59
1.39
2014
2015
2016
2017
2018
1.39 hours
Nostrum has a complete HSE Policy and
QHSE management system which records
-64.5%
comprehensive information on safety and
environmental performance and health and
hygiene monitoring results and statistics, as
required by Kazakh law. This information is
reported to management on a monthly
basis, reflecting a strong commitment to
employee safety at senior levels.
*
Per 1 million man hours worked
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QHSE Management System
Framework
A QHSE Management System Framework
was developed and approved in March
2018. This provides a reference tool to assist
employees and contractors in their efforts to
ensure the system is implemented at all
levels of the Group. The Framework
provides an overview of all QHSE reference
documentation and describes the elements
of the integrated management system,
including planning, implementation,
monitoring and review.
Contractor management
The Company sought to improve contractor
management practices in 2018. During
the year an updated Road Safety Procedure
was developed in response to concerns
about contractor transportation safety.
In addition, two contractor transport audits
were performed.
An updated contractor management
framework is planned for 2019, which
will involve HSE selection criteria in
contractor prequalification, QHSE
management system audits, periodic
meetings with key contractors and senior
management on both sides, contractor
HSE safety forums and a final performance
review. In 2019 nine contractor audits and
six internal management safety audits have
been scheduled, demonstrating an
ongoing commitment to improved
contractor management.
2019 initiatives
A further initiative planned for 2019 is the
implementation of management leadership
tours, which would increase visibility and
promote ownership of QHSE targets. We
plan to support this by hosting additional
events to further promote health and safety,
such as a HSE Day and Forum.
Additionally, an annual HSE Compliance
Audit Report is consolidated to show the
results of audits and inspections that have
occurred over the year to identify trends and
areas for improvement. In 2019 nine
contractor audits and six internal safety
audits have been scheduled.
Process safety
In 2019 the Company intends to
set up a Process Safety Roadmap.
The implementation of this Roadmap
will involve KPIs and the development
of a maintenance plan for all safety-critical
elements with performance standards,
frequency and methods.
In 2018 both of our major injury frequency
metrics were improved, with a significant
reduction in both Lost Time Injury
Frequency and Total Recordable Injury
Frequency. This was owing to the successful
implementation of HSE observation cards
in 2018, Job Safety Analysis being adopted
as a part of the Permit to Work System,
reinforcement of HSE requirements
amongst contractors and personnel
adopting positive safety
behaviour generally.
Safety communications
In 2018 there was an effort to improve
employee safety communications. A pop-up
HSE messaging system was developed in
May 2018 in which a pop-up window
appears on all PC screens when staff are
logging in, and at 11:00 am every day,
featuring a message from the QHSE
department relating to safety, health or the
environment. HSE Posters were also printed
to communicate hazards and enhance HSE
awareness.
The HSE Card System, which was developed
in 2017, continued to be used in 2018 to
report unsafe conditions observed by
employees and contractors and to allow
them to make suggestions on HSE
improvements.
Nostrum Oil & Gas PLC Annual Report 2018
31
Sustainable accountability / continued
Our people
Nostrum is proud to
engage a diverse
workforce spanning
many ages,
nationalities and
genders. The Nostrum
Code of Conduct
protects all employees
and contractors against
illegal discrimination on
the basis of race,
religion, national origin,
age, gender, disability,
sexual orientation or
political opinion.
Our business is led by a dedicated and
experienced management team, diverse in
age, nationality and gender. This is integral
to advancing the Group’s approach to
diversity throughout the business.
Gender diversity at
department head level
12%
2018
88%
Male
Female
Whilst we are encouraged by our diversity at
Board and department head levels, we do
recognise that diversity remains an ongoing
issue in the oil and gas industry, particularly
with regards to gender diversity. Nostrum is
committed to improving the gender balance
at all levels of the Company and in 2018 we
engaged with interest groups to better
understand how we might do this.
Additionally, Nostrum adopted a corporate
Equality and Diversity Policy in November
2017 to further support these ambitions. At
present, 195 out of 820 Group employees
are female and 625 are male.
The Board recognises the importance of
continued improvement in this area and is
committed to giving due regard to the
32
Nostrum encourages
diversity – we believe it
supports innovation and
personal advancement in
the workplace.
Marina Grinevskaya
Chief HR Officer
males however the median employee salary
was 2.72% higher for females.
In addition to remuneration, Nostrum also
offers personnel benefits in relation to:
• Social security
• Pension funds
• Medical assistance and care
• Insurance plans.
Education and training
We believe investing in our people is key to
economic self-empowerment in the
communities in which we operate. Under the
terms of our PSA, we are required to adhere
to an accrual of 1% per annum of the field
development cost relative to the
Chinarevskoye field. We also adhere to training
obligations under subsoil use agreements
for the Rostoshinskoye, Darjinskoye and
Yuzhno-Gremyachinskoye fields.
Our employees and their children are
eligible for educational grants and financial
support to assist with university and college
expenses. Educational fellowships and
assistance may also be awarded on a
discretionary basis.
Nostrum Oil & Gas PLC Annual Report 2018
benefits of diversity in our future
appointments, including ensuring Kazakh
nationals are properly represented at senior
levels of the Company. The Board also
focused on succession planning during 2018,
and gender considerations will factor into this.
In addition, Human Resources is working
toward a policy of promotion from within
and building a pipeline of diverse
employees at all levels of the business. We
are pleased to report that 50% of Group
recruitment in 2018 was female.
For more information on how the Equality
and Diversity Policy was implemented at
Board level in 2018 please see page 61.
Employee relations and
social guarantees
Nostrum prides itself on being an integral
community partner and the Company is one of
the largest employers in Western Kazakhstan,
with 789 of 820 of Group employees engaged
locally. In addition to our Kazakh operations,
we employ staff from more than 20 countries in
offices in Amsterdam, London, St Petersburg
and Brussels.
We offer all staff members competitive
remuneration packages in compliance with
all regulatory bodies, guidelines and
requirements. In 2018 the average monthly
salary of locally-engaged employees
increased by 11% in KZT.
In an effort to promote gender equality we
will now also monitor gender pay
discrepancies. In 2018 the average Group
employee salary was 21.99% higher for
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More than two decades
of operational success
has been underpinned
by strong employee
relations and social
responsibility.
50%
female
recruitment in 2018
In 2018, Nostrum supported 763 employees
to benefit from education and training
programmes. Our total Group training costs in
2018 were US$1,372,150 and the total number
of training days in 2018 was 9,936 days.
Training was undertaken by operational
teams, department heads, specialist
engineers and other technicians at different
levels across the organisation.
its employees. These principles include
provisions relating to human rights and
diversity in the workplace. In 2018 the Code
was updated to reflect changes in legislation
relating to insider dealings and disclosure of
insider information.
A copy of the Code is available on the
Group’s intranet in both Russian and English
and can be downloaded from our website:
www.nog.co.uk.
Nostrum Code of Conduct and
Human Rights Policy
Nostrum is committed to maintaining a
Group-wide culture that recognises
international standards of human rights.
In 2019 the Company will develop and
implement a Human Rights Policy which
reflects a desire to comply with industry
best practice.
This is in addition to the Nostrum Code of
Conduct (“the Code”) which defines the
principles that guide business conduct and
provide a non-exhaustive outline of what
Nostrum considers permissible conduct by
Modern Slavery Act
Under the Group’s standard supply
contracts, the Group is entitled to require
suppliers to demonstrate compliance with
the Code and to hold its suppliers
responsible for compliance by their supply
chain with equivalent terms.
A copy of our Modern Slavery and
Transparency Statement is available on our
website: www.nog.co.uk.
In 2018 the Company also put collective
agreements in place to provide for
workforce representation.
Whistleblowing Policy
We have a Whistleblowing Policy which
takes into account the Whistleblowing
Arrangements Code of Practice issued by
the British Standards Institute and Public
Concern at Work and which applies to all
individuals working for the Group at all
levels and grades.
The Whistleblowing Policy sets out details of
three compliance liaison officers who speak
a variety of languages for the purposes of
reporting any concerns. The Whistleblowing
Policy is also mentioned in the Code and a
person who reports any matter in good faith
will be protected against any sanctions.
A copy of the Whistleblowing Policy is
available in both Russian and English and on
the Company’s website. At the time of
writing we have received no reports under
our Whistleblowing Policy of forced/
involuntary labour or human trafficking in
relation to our business or supply chains.
For further details please see our website:
www.nog.co.uk.
+2.72%
median female
employee salary
compared to male
9,936
total number of
training days in 2018
US$1.37m
total Group training
costs in 2018
Nostrum Oil & Gas PLC Annual Report 2018
33
Sustainable accountability / continued
Communities and social review
Nostrum engages both
formally and informally
with the communities in
which we operate and
strives to be responsive
to stakeholder
feedback, including
from local residents,
suppliers and
government.
Nostrum seeks to foster a culture of
openness in regards to community
engagement. The Company provides an
avenue for feedback through an online
portal and proactively engages with staff
and contractors regarding appropriate
behaviour towards local residents.
Additionally, we support our local
communities through financing social
infrastructure and community projects.
In 2018 key initiatives included:
Support of the ‘Akzhaik’ Charitable
Foundation, including financing of the
‘Tugan Zher’ social project. This involved
the funding of:
• Local historical educational programmes;
• Ecology and landscaping;
• The study of regional history;
• The restoration of cultural sites and
historical monuments;
• Infrastructure support;
• Assistance to youth representatives; and
• Sponsorship of WKO children’s
participation in the ‘Burabay Summer
Fest’ children’s festival.
We also provided for social projects in the
Zelenovskii Area, the location of the
Company’s field and supporting
infrastructure, involving:
• Improvements to Yanvartsevo Village
including street lighting and repairing
monuments, as well as support for the
local primary school and other
festive events;
• Financing of a children’s playground in
Sulukol rural district and support for the
local secondary school;
• Part-financing of a recreation park
construction in Beles rural district and
support for the local secondary school;
• Financial support of the ‘Zhas Kanat’
Youth Association to assist with a festive
concert dedicated to the city day;
• Ongoing sponsorship of the West
Kazakhstan Volleyball Federation to
support local youth teams;
• Financing of acquisitions and construction
at local regional ecological and biological
centre (city zoo);
• Funding of a regional orphanage,
including repair of the ‘Zhuldyz’ rooms,
medical post and purchase of furniture;
and
• Financial support of the Baiterek Public
Association, an organisation dedicated to
assisting those with cerebral palsy.
In addition, grants totalling over
US$100,000 were made to sixteen schools
in the region in order to upgrade equipment
and technical capabilities.
Use of Group facilities
The Group allows the use of certain
Company facilities by members of the
community when it can be of assistance.
This includes our medical staff and
transportation being used in cases of
emergency to provide first aid and deliver
local residents to hospital. Additionally, our
Fire Department provides community
support in the event of wildfires. The
Company also offers the local government
support with the clearing of rural roads and
driveways when state machinery is not
available, including during the winter of
2018-2019 when the community dealt with
record-breaking amounts of snow.
Over
US$100,000
granted to local
schools in 2018
34
Nostrum Oil & Gas PLC Annual Report 2018
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A community partner
Nostrum completed the construction of
36km of road from the “Spartak” Village
to our facilities in 2012. Before the
construction of this road, the local
community was forced to use the
unpaved steppe roads and at least seven
villages did not have a permanent
transport link with both the field and
adjoining villages. In addition to the
construction of the road, the Company
annually allocates funds for maintenance,
clearing and necessary repairs of this
route. This project has improved the living
conditions of an estimated 3,000
local residents.
Liquidation fund contribution
(US$)
351,380
605,834
683,026
357,806
2015
2016
2017
2018
Spend with suppliers (US$m)
387
77
84
354
136
42
417
143
60
258
46
63
226
176
214
150
5
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2
6
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2
7
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2
8
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National
International suppliers
registered in country
International
Payment to governments
Nostrum is committed to transparency in its
business activities and payments to
governments. We have a formal Public
Relations and Government Relations
procedure which regulates our relationships
with the local community and government,
and it details how and why we engage with
various stakeholder groups.
In 2017 a total of US$32,909,896 was paid
to governments by Nostrum and its
subsidiary undertakings. We will report on
2018 payments to governments in the first
half of 2019. For more details please see the
Transparency page of our website.
Anti-corruption and bribery
policy
For more information on the Group’s
Anti-corruption and bribery policy please
see page 62.
Liquidation fund contribution
Under the terms of the Chinarevskoye PSA
and the subsoil use agreements for
Rostoshinskoye, Yuzhno-Gremyachinskoye
and Darjinskoye, Nostrum is building up a
liquidation fund of US$23 million to provide
funds for the removal of oil and property at
the end of the PSA. The fund will be used to
eliminate the consequences of operating
activities, namely the conservation and
liquidation of drilled wells and the
elimination of other facilities. We have
engaged a contractor to prepare a
liquidation project which will be completed
by the end of 2019 and will reflect the
details of all liquidation activities, including
the specific distribution of funds to offset
infrastructure assets. This project will
subsequently be approved by the Company,
the local community, and government. At
the end of 2018 US$7.02 million was held
on restricted cash accounts as a liquidation
fund deposit (2017: US$6.66 million).
Spend with suppliers
We are committed to partnering with local
companies and in 2018 we spent 58% of our
supplier budget with Kazakh companies.
Nostrum Oil & Gas PLC Annual Report 2018
35
Sustainable accountability / continued
Our environment
Nostrum is committed
to operating in a safe
and environmentally
sustainable manner.
We comply with all
legal and regulatory
environmental
requirements, and are
working towards ISO
standards in our
environmental
management system.
We recognise the importance of minimising
our impact in the areas in which we operate
to prevent harm to the natural environment.
Our approach to environmental protection
follows a structured commitment to a series
of yearly environmental objectives. We
manage our environmental footprint
through a site monitoring programme,
which has thorough controls in relation to:
• Air pollution;
• Water resources protection and
rational use;
• Land protection;
• Control and sustainable subsurface use;
• Flora and fauna protection;
• Radiological, biological and
chemical safety;
• Ecological education, information and
monitoring;
• Research and development, exploration
development and other works;
• Production waste utilisation; and
• Soil reclamation.
For more detailed information on our site
monitoring programme please visit our
website at www.nog.co.uk.
In 2019 our main environmental objectives
are to participate in the CDP (formerly
Carbon Disclosure Project), which is a key
way for companies to disclose their
environmental impact and risk management,
as well as continuing to focus on
greenhouse gas (GHG) emission
reduction strategies.
Compliance with legislation
Nostrum engages an independent auditor
to measure and evaluate our environmental
impact. In 2018 AMEC was again engaged
to undertake a “Health, Safety and
Environmental Compliance Audit” and
report upon the content, methodology and
results of the environmental efforts at
Nostrum during the year. Our 2018 AMEC
report showed no non-compliance with
Kazakh legislation or any significant
environmental findings. The main
conclusions drawn from AMEC’s 2018 audit
were as follows:
• HSE management systems meet national
and international standards and have
demonstrated continuous improvement
over several years;
• Major incident statistics were reduced in
2018, showing the effectiveness of QHSE
initiatives; and
• The HSE card initiative and distribution of
monthly HSE reports has facilitated the
involvement of staff into the HSE control
process.
Waste, water and soil
management
The impact of Nostrum’s operational
activities on the environment are monitored
through detailed waste, water and soil
management systems. The Company
undertakes air, soil and subsurface water
testing to ensure sanitary and
epidemiological compliance with
Kazakh legislation.
In 2018 93.4% of drilling waste was recycled
by a contracted company. Soil and water
survey results demonstrated compliance
with all applicable environmental legislation.
For more detailed information please visit
our website at www.nog.co.uk.
GHG emission reduction and
reporting
Nostrum seeks to minimise all GHG
emissions and continues to invest in new
technologies to improve GHG emission
performance. In 2018 this included the
commissioning of a Sulphur Regeneration
Unit which will lead to a decrease in
emissions. Nostrum strictly adheres to both
UK and Kazakh regulatory requirements with
regard to GHG emissions and has been
monitoring and reporting GHG emissions
since 2011. In 2019 we will seek to
participate in the CDP disclosure process to
demonstrate our commitment to
improvement and transparency in this area.
As a dually-listed entity, Nostrum also
follows UK company law requirements
regarding GHG reporting as required under
the Companies Act 2006 (Strategic Report
and Directors’ Report) Regulations 2013,
which requires the disclosure of all emission
sources. The Company’s GHG reporting
period is aligned with the period 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.
36
Nostrum Oil & Gas PLC Annual Report 2018
GHG emissions
The baseline in the GHG emissions allocation plan was set as the mean value of the total
emissions for the years 2013-2014 (in carbon dioxide emissions equivalent). According to
the established limit, GHG emissions for 2018 should not exceed the 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.
Total direct GHG emissions (Scope 1) subdivided by gas types and by source types are
summarised in Tables 1 and 2.
Planned
CDP
participation in 2019
Table 1: Scope 1 GHG emissions subdivided by gas type (tCO2e)
2014
236,556.0
27,424.8
124.3
16.1
264,121.2
Carbon dioxide
Methane
Nitrous oxide
Hydrofluorocarbons
Total
2015
208,466.2
13,919.8
126.2
34.0
222,546.2
2016
195,453.3
10,817.0
1,045.7
33.6
207,349.6
2018
242,275.6 244,379.2
8,436.3
1,303.5
36.6
254,332.0 254,155.6
10,723.4
1,305.4
27.6
2017
GHG emission structure is shown in Table 1. The composition of the GHG emissions
predominantly consisted of carbon dioxide and methane.
Table 2: Scope 1 GHG emissions subdivided by source types (tCO2e)
2017
Stationary combustion
Mobile combustion
Fugitive sources
Total
2014
260,124.4
2,135.2
1,861.6
264,121.2
2015
205,701.9
1,498.2
15,346.1
222,546.2
2016
195,576.1
757.9
11,015.6
207,349.6
2018
243,001.1 245,467.3
115.9
8,572.4
254,332.0 254,155.6
434.9
10,896.0
Stationary combustion sources formed the major portion of emitted GHGs. The reduction
in emissions from mobile combustion is related to the fact that the majority of vehicles were
transferred to a transport services company.
Indirect GHG emissions (Scope 2)
Nostrum does not use purchased steam, heating or cooling. Electrical power is the only
such purchased power related to indirect GHG emissions, and it 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 emissions (tCO2e)
2014
264,121.2
2015
222,546.2
2016
207,349.6
2017
254,332.0
2018
254,155.6
Direct energy (Scope 1)
Indirect energy
(Scope 2)
Total
5,278.6
269,399.8
5,482.3
228,028.5
2,262.9
209,612.5
640.3
254,972.3
559.2
254,714.8
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).
ESG
performance
considered by
Remuneration
Committee
The independent
review conducted by
AMEC found Nostrum’s
environmental practices
conformed to all
required legislation.
Table 4 shows intensity ratios for total (Scope 1 and Scope 2) emissions in the period
2014-2018.
Daulet Tulegenov
Group QHSE Manager
Nostrum Oil & Gas PLC Annual Report 2018
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Sustainable accountability / continued
Our environment continued
Table 4: Emissions intensity ratios for total GHG emissions
2014
2015
2016
2017
2018
Production, toe
tCO2/toe
Production, mmboe
tCO2/mmboe
2,366,023.6 2,152,421.6 2,156,171.2 2,088,917.0
0.1
14.3
17,820.7
0.1
16.2
16,623.8
0.1
14.7
15,467.3
0.1
14.8
14,193.4
1,878,026.2
0.1
12.9
19,801.8
According to adjusted GHG National
Allocation Plan for 2018-2020, the total
Nostrum GHG distribution allowance has been
set to 627,174 tonnes of CO2. The Kazakh
Ministry of Energy is currently in co-operation
with the World Bank to develop and
implement an electronic GHG reporting
platform which at present is being used in the
deployment of a national GHG quota trading
system. While we targeted a reduction in our
GHG emission intensity ratio in 2018, our
total emission levels stayed broadly the
same whilst our levels of production fell.
Unfortunately this resulted in an increase in
our GHG emission intensity ratio and this is
something that we are continually working
to improve.
Climate change
Nostrum recognises that hydrocarbon
exploration and production is a major
contributor to GHG emissions and
consequently we have a responsibility to work
to address climate change. One of our key
CSR goals in 2018 was to better understand
and respond to this challenge. During the
year we partnered with an external agency to
assist us in understanding and reporting on
potential impacts to our business. We hope
this will be a key step in our ongoing efforts to
address the issue of climate change long term
within our business.
Climate change can affect our business
through physical disruption to operations
due to changing weather conditions,
legislative and policy changes, technology
to help reduce emissions, and future
changes in energy market demands. We
plan to more rigorously assess the impact of
climate change on our business in the near
future, including through portfolio resilience
testing. Climate change has been added to
our risk register for 2018. For more details
please see page 44.
Future GHG reduction initiatives
We are committed to reducing our GHG
emissions, and future plans include:
• Modernisation of equipment at the Oil
Treatment Unit to reduce GHG emissions;
and
• Undertaking an energy audit to identify
ways in which GHG emissions can be
reduced.
ESG risk is already a primary consideration
of Nostrum’s Board, however the Company
is working to ensure Senior Management
are focused on key issues affecting the
business. In addition, the Remuneration
Committee has the remit to take into
account ESG issues when deciding on the
remuneration of Nostrum’s directors.
Nostrum must also balance climate change
responsibilities with our commitments to our
shareholders and other stakeholders. We
believe in the sustainability of our business
and see a continuing demand for the
Company’s products into the foreseeable
future. We do not believe that a
fundamental change in business strategy
would be in the best interest of the
Company or our stakeholders, particularly
given the economic importance of our
activities in the communities in which
we operate.
Non-financial information statement
This section of the strategic report constitutes the Company’s Non-Financial Information Statement, produced to comply with sections
414CA and 414CB of the Companies Act. The information is incorporated by cross reference.
Reporting requirement
Environmental
matters
Policies and standards which govern our
approach
• Annual environmental objectives
• Liquidation fund contribution
Employees
• Group Code of Conduct and Human Rights
• Whistleblowing Policy
• Health and Safety Policy and QHSE
Management System Framework
Respect for human
rights
Social matters
Anti-corruption and
anti-bribery
• Modern Slavery Statement
• Equality and Diversity Policy
• Use of Group facilities
• Anti-Corruption and Bribery Policy
• Anti-Facilitation of Tax Evasion Policy
• Payments to Governments
Description of principal risks and impact of business activity
Description of the business model
Non-financial key performance indicators
Information necessary to understand our business and its
impact, policy due diligence and outcomes
Our environment, pages 36 to 38
Communities and social review, pages 34 to 35
Results from independent environmental audit, page 36
Climate change, page 38
Our people, pages 32 to 33
Our people, page 33
Health and safety, page 31
Reduction in Total Recordable Injury Frequency, page 31
Our people, page 33
Our people, page 32
Communities and Social Review, page 34
Communities and Social Review, page 35
Our Governance Framework, page 62
Communities and Social Review, page 35
Drilling results in the Northern Area, pages 24 to 27
Our principal risks and uncertainties, pages 41 to 44
Our Business Model, page 12
Key Performance Indicators, page 21
Our Strategic Priorities, pages 18 to 19
Education and training, page 32
38
Nostrum Oil & Gas PLC Annual Report 2018
Risk management
Risk management
The Group continuously develops its risk management system in order
to ensure it remains in line with best practice in achieving the primary
purpose of managing, monitoring and reporting on the risks that may
impact achievement of the Group’s strategic objectives, whilst
maintaining compliance with respective regulatory requirements.
Risk management framework
Under the UK Corporate Governance Code, the Board is responsible
for determining the nature and extent of the significant risks it is willing
to take in achieving its strategic objectives. The Board should maintain
a sound system of risk management and internal control systems.
Therefore, the Board, supported by the Audit Committee and senior
management, has the ultimate responsibility for risk management and
internal control, including responsibility for the determination of the
nature and extent of the principal risks it is willing to take to achieve its
strategic objectives and for ensuring that an appropriate risk-awareness
culture has been embedded throughout the Group.
The Group is in the process of formalising risk management roles and duties
according to “The Three Lines of Defence” model as further described in the
diagram below, whereby the Board and senior management are the
primary stakeholders served by the three lines of defence as follows:
1. Heads of business functions;
2. Risk control and compliance oversight functions; and
3. The internal audit function.
The risk management process goes through a set of coordinated
activities starting with risk identification and ending with a review
of the risk management framework, as shown in the diagram below.
The principal risks and uncertainties, which are managed and
monitored at Board level, are supported by the directors’ risks,
which are identified, managed and reported by senior management.
Risks are inherent in the various business functions within the Group
and have therefore been categorised as business function risks. The
members of the Senior Management Team have overall responsibility
for managing the business function risk(s) relevant to their functional
responsibility but delegate such responsibilities to various heads of
business sub-functions. The identified risks are then aggregated and
categorised into the following risk categories; strategic, operational,
financial, compliance and other.
Based on these risk registers, related analysis and discussions senior
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 a result
of the changing environment. These significant risks are discussed in
more detail below in the section “Principal risks and uncertainties”.
In 2018, the processes related to risk management and internal control
systems were consistent with the UK Corporate Governance Code and
FRC Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting issued in September 2014.
Risk management framework
Strategic goals / KPIs
Reports
Risk universe
Roles and responsibilities (The Three Lines of Defence)
Principal risks
and uncertainties
Board (supported by Audit Committee)
Director’s risks
Senior management team
1st line of defence
2nd line of defence
3rd line of defence
Business function
risks
Heads of
business
sub-functions
Risk management
Compliance, QHSE,
Security, Controlling
Internal audit
Risk management process
1. Risk identification
2. Risk assessment
3. Risk response (tolerate, treat, transfer, terminate)
4. Resourcing controls
5. Reaction planning
6.
Reporting
and monitoring
7.
Reviewing risk
management
framework
The Board oversees the design and
implementation of systems of risk
management and internal control
and manages and reports on
principal risks.
The Senior Management Team
supports the Board in its oversight
and monitoring role and perform
management and reporting on the
level of director’s risks.
Heads of business functions, being
the 1st line of defence, own and
manage operational risks related to
their respective area of activity.
2nd line of defence has a general
oversight function to ensure that the
risk management practices followed
are effective.
Internal audit, acting as the 3rd line
of defence, provides independent
assurance over the effectiveness of
the systems of risk management and
internal control.
Nostrum Oil & Gas PLC Annual Report 2018
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Risk management / continued
Risk management continued
Environmental, social and governance (ESG) matters
ESG matters form an integral part of the areas covered by the Group’s
systems of risk management and internal controls, and the Board
recognises their significance and importance which are assessed
consistently in accordance with regulatory requirements and
established rules. Identified ESG risks and related responses can be
seen within operational and other risks in the “Principal risks and
uncertainties” disclosure on the next page.
The Board receive appropriate information for managing such risks and
ensures that systems of risk management and internal controls are in
place to effectively manage and monitor them. More elaborate
disclosure on the established policies and procedures in these areas
can be found in the Sustainable accountability section on page 30.
Changes from prior year risk assessment
In 2018, the principal risks and uncertainties managed and monitored
by the Board and senior management mostly remained the same as in
2017, and the related risk assessments did not change significantly.
One change relates to the section “Other Risks” where the risk of
climate change has now been addressed.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Principal risks and uncertainties
Principal risks and uncertainties
Description of risk
Risk management
STRATEGIC RISKS
Business and market environment
The Group is exposed to various risks related to the market and external
business environment, which are out of the Group’s control. Such risks
include:
• The volatility of commodity prices on the markets;
• The geopolitical, regional situation affecting the Group’s areas of
operations; and
• Changes in currency exchange rates.
Given that the Group’s sales prices of crude oil and condensate are
based on market prices, the Group’s future earnings are exposed to
adverse impact by changes in the market price of crude oil. 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’s strategy and business model are not directly influenced by
any significant risk resulting from Brexit.
Strategic development initiatives
The Group’s activities in the Chinarevskoye oil and gas condensate field
are currently the Group’s sole source of revenue, which puts the Group
at a significant risk of not meeting shareholder expectations in the event
of natural disaster, facilities damage from accidents, crisis and other
political influences. Diversification of its activity areas is considered by
the Group as a way of minimising this risk while also providing the
Group with an opportunity to gain from expanding the use of available
capacities, technological resources and human capital.
The Group’s strategic initiatives towards diversification of its activity
areas including M&A activities and further development projects, such
as the GTU3 construction project and the well drilling programme, are
subject to customary risks related to delay, non-completion and cost
overruns which could impact future production and the Group’s
performance.
In addition, the Group’s strategic initiatives, as well as certain other
ordinary activities, are subject to the risks that terms of the transactions
with related parties may deviate from market terms, as well as
associated risks related to the disclosure of such transactions.
The Group uses financial instruments to manage commodity price risks
and liquidity risks. See note 29 - Derivative Financial Instruments in the
Consolidated financial statements for details of the nature and extent
of such position(s), and for qualitative and quantitative disclosures of
these instruments.
In addition, the Group is selling the majority of its dry gas under
contract referencing export prices which are usually substantially higher
than domestic prices. In 2017 the Group expanded its transportation
options as it completed a connection to an oil pipeline. It can now
transport its crude oil either via rail or pipeline.
To mitigate the geopolitical, regional and customer risks, the Group has
been strengthening customer relationships through establishing long‐
term off‐take agreements while also looking at possibilities to
geographically diversify its customer portfolio.
Also, senior management constantly monitors the Group's exposure
to foreign currency exchange rate changes and plans for necessary
measures.
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.
For the purpose of GTU3 construction, the Group has formed a
dedicated experienced project management team and engaged JSC
“OGCC KazStroyService”. In December 2018 the Group announced
mechanical completion of GTU3 and the start of the commissioning
process.
Senior management and the Board continuously monitor the timing,
scope and performance of the drilling programme and take into
account the status of the GTU3 project and current oil prices. A detailed
drilling programme is approved by senior management for each well
which forms the basis against which the progress of works and costs are
reported.
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Principal risks and uncertainties / continued
Principal risks and uncertainties continued
Description of risk
Risk management
OPERATIONAL RISKS
Oil and gas reserves and operations
Oil and gas reserves estimation, exploration, development and
production are accompanied by typical risks inherent to activities in this
industry, which may adversely affect the Group’s financial performance
and achievement of strategic objectives.
Estimation of oil and gas reserves requires exercise of judgement
owing to the inherent uncertainty in any oil and gas field. There are also
uncertainties and risks related to a field’s geological structure and
choice of development methods to maximise the reservoir performance.
Hence, there are a number of risks that may lead to a deviation of
production volumes from estimated and projected volumes.
Unsuccessful drilling activities and failure to find additional commercial
reserves could reduce future production of oil and natural gas, which is
dependent on the rate of success of drilling activity.
Well drilling and workover activities as well as construction, operation
and maintenance of surface facilities are also subject to various
risks including the availability of adequate services, technologies,
expertise, etc., which may adversely affect the fulfilment of the Group’s
strategic objectives.
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 and prepare production
forecasting using advanced exploration risk and resource assessment
systems. The results of the assessments are reviewed by the Group’s
independent reserve consultant, Ryder Scott.
For well drilling and workover activities the Group engages highly
skilled personnel, leading service suppliers as well as operations and
cost monitoring systems, based on which the management oversees
the work progress.
Maintenance of the wells and surface facilities is scheduled in advance
in accordance with technical requirements and all necessary
preparations are performed in a timely manner and within budget
ensuring high quality. In addition, the Group has emergency response
and disaster recovery plans in place and periodically conducts
necessary training and testing procedures.
Health, safety and environment
Linking corporate social responsibility (CSR) to growth is one of the
strategic priorities of the Group. Relevant health, safety and
environmental risks are also considered to be one of the key areas of
focus in terms of risk management. The Group faces typical health,
safety and environmental risks in the oil and gas industry, including risks
related to gas flaring, waste management, environmental pollution, fires
and explosions at facilities, and transportation accidents.
These risks may have a broad range of results including, but not limited
to, injury of employees or local residents, pollution of the local
environment and respective regulatory actions, legal liabilities, business
interruption and any consequential impact on financial performance.
It should also be noted that 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 a QHSE department of highly skilled and competent
specialists. The Group’s QHSE policies are periodically revised to
ensure compliance with changes and new requirements in this area.
Periodic training on the requirements of policies and regulations are
held for employees. In addition, at the supplier selection and
contracting stage the Group places a high degree of importance on a
supplier’s resources and ability to comply with the Group’s QHSE
requirements and, subsequently, the Group’s dedicated team in this
area conducts supplier audits. Key indicators such as GHG emissions,
lost time injuries, waste management, water and soil pollution rates,
etc., as well as progress of work are reported to senior management on
a monthly basis.
The Group is working towards full compliance with ISO 14001
Environmental Management Systems, ISO 45001 Occupational Health
& Safety Management System and ISO 50001 Energy Management
Systems. The Group also regularly engages an independent auditor to
conduct HSE audits to monitor its compliance and best practice in this
area and takes all necessary measures on the basis of the audit
recommendations.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Description of risk
Risk management
COMPLIANCE RISKS
Subsoil use agreements
As the Group performs exploration, development and production
activities in accordance with related licences for the oil and gas fields,
there are related risks that the Group might not be able to obtain
extensions when necessary, risks of non-compliance with the licence
requirements owing to ambiguities, risks of alteration of the licence
terms by the authorities and others. These risks may result in the
Group’s inability to fulfil scheduled activities; fines, penalties,
suspension or termination of licences by authorities; and, respectively,
significant and adverse impact on the Group's business, financial
performance and prospects.
Compliance with laws and regulations
The Group carries out its activities in a number of jurisdictions and
therefore must comply with a range of laws and regulations, which
exposes the Group to the respective risks of non-compliance. In
addition, the Group must comply with the Listing Rules, the Disclosure
Guidance and Transparency Rules, FRC guidance and requirements, as
well as KASE and bond indenture requirements, in light of its publicly
traded shares and notes. Hence, there are non-compliance risks to
which the Group is exposed.
The impact of these risks may vary in magnitude and include regulatory
actions, fines and penalties by authorities, diversion of management
time, and may have an overall adverse effect on the Group’s
performance and activities towards achieving its strategic objectives.
The Group has procedures and processes in place for the timely
application for extension of licence periods when it is considered
appropriate, however, uncertainty remains in relation to timing and
results of decisions of authorities. 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.
For the purpose of compliance with laws, regulations and rules the
Group has adopted a number of policies including a code of conduct,
inside information and disclosure policy, related party transactions
policy, code for dealing in securities, Anti-Corruption and Bribery Policy
and a Whistle-Blowing Policy. The Group also performs periodic
updates based on the changes in regulatory requirements and carries
out related communications and training for employees.
Necessary communication lines are established with authorities to
ensure timely and adequate inbound and outbound flow of
information. Management and the Board monitor significant matters
related to legal and compliance matters in order to act promptly in
response to any actions.
The Group continuously monitors its compliance with its policies on the
level of authorisations for transactions. In addition, the management
maintains an open dialogue with its sponsors in relation to any matter
related to non-compliance with Listing Rules and other regulatory
requirements.
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Principal risks and uncertainties / continued
Principal risks and uncertainties continued
Description of risk
Risk management
FINANCIAL RISKS
Tax risks and uncertainties
The uncertainty of application, including retroactive application, of tax
laws and the evolution of tax laws in Kazakhstan create risks related to
additional tax liabilities from assessments or risks related to
recoverability of tax assets. Tax risks and uncertainties may adversely
affect the Group’s profitability, liquidity and planned growth.
Liquidity risks
Forecasting to maintain an adequate liquidity position is subject to the
risk that inaccurate information or assumptions are used for the
forecasts, risks of counterparty delay or failure to meet their contractual
obligations owing to severe market conditions, etc.
Financing risks
The Group’s ability to access and source debt or equity capital is also
exposed to volatility and uncertainties in global financial markets,
which may adversely impact the Group's ability to meet its
commitments associated with its financial liabilities, increase the cost of
financing and affect the plans towards realisation of its strategic
initiatives.
CLIMATE CHANGE RISKS
Climate change
Climate change risks is the group of risks including those stemming
from more intense extreme weather events, rising energy intensity in
the oil and gas industry, the changing regulatory landscape, the risk of
fugitive emissions and climate change policies driving down the
demand.
The risk of more intense extreme weather events, for example, may lead
to the following sub-risks:
• Risks of reduced asset operation;
• Risks of higher insurance premiums; and
• Risks of disruptions to supply chains.
The Group has policies and procedures related to various tax
assessments and positions, as well as other control activities to ensure
the timely assessment and filing of tax returns, payment of tax
obligations and recovery of tax assets.
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.
Management and the Board constantly monitor the Group’s liquidity
position, forecasts and key financial ratios to ensure that sufficient funds
are available to meet any commitments as they arise. In addition, the
treasury policy provides that the Group should maintain a minimum
level of cash of US$50 million.
The Group performs financial reviews, establishes credit limits and
engages with reliable financial counterparties.
The Group’s corporate finance function continuously monitors debt and
equity markets and maintains an open dialogue with investors to be
able to react quickly to any need for financing.
The Group is actively planning and managing projects designed to
mitigate certain climate change related risks:
• To decrease its exposure to rising fuel prices it retooled drilling rigs
to derive more power from electricity rather than diesel;
• In operations there is a permanent effort and commitment improve
energy efficiency and to reduce flaring, venting and leaks; and
• At campsite most of the water the Group utilises now is recycled.
Climate change is on the Board’s agenda. The Senior Management
Team actively evaluates opportunities to further adapt and implement
cost-effective mitigation measures.
OTHER RISKS
Other significant risks
Other risks are those that are not specifically identified within any of the
principal risks and uncertainties but may be related to several such
areas or be organisation-wide. These include risks related to:
• Fraudulent activities;
• Cyber security;
• The Group’s supply chains;
• Accounting and reporting management systems; or
• The availability of human resources.
They may also significantly impact the Group's financial performance,
reputation and achievement of its strategic objectives.
The Group has an Anti-Bribery and Corruption Policy and provisions
relating to the same are included in the Group’s Code of Conduct.
Related training and updates are periodically provided for employees
in relation to their obligations in this area.
The Group has a wide range of internal controls over its supply chains
and accounting and reporting processes, including policies,
procedures, segregation of duties for authorisation of matters, periodic
training for employees, etc.
Senior management and the Board stay alert to emerging challenges
related to various management systems and related governance
matters and, when necessary, initiate change initiatives to ensure
enhancement and integration of certain management systems.
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.
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Nostrum Oil & Gas PLC Annual Report 2017
Nostrum Oil & Gas PLC Annual Report 2018
Viability statement
Viability statement
The Group’s viability assessment is built through integration of the
principal risks and uncertainties (described on pages 41-44 into the
model based on the elements of corporate planning and modelling
process, which includes:
• The long-term projections and analysis based on a financial model
(extending through 2032, i.e. the licence term of the Chinarevskoye
field), based on which the senior management and the Board
perform annual strategic planning and decision-making;
• Medium-term development planning (described on pages 18-19)
based on three-year financial projections, which is also used for
monitoring the Group's performance in terms of strategic objectives,
related KPIs and risks;
• Annual budgeting and forecasting process incorporating preparation
of an annual budget for the following year, which is reviewed and
approved by the Board, and followed up by quarterly forecasts,
which are monitored by the senior management and the Board.
This viability assessment also takes into account the requirements of
Principle N Provision 31 of the 2018 Code.
Considering the uncertainties inherent to the Group’s operations as well
as the medium-term development planning mentioned above, the
Board came to conclusion that a viability assessment over a three-year
period provides more robust and realistic evaluation of Group’s future
performance in the context of potential risks and uncertainties, recent
operational developments and refinancing of the Notes in 2017 and
2018. With this approach the Board continues to believe that the
assessment:
• Improves the optimal balance between a reasonable degree
of confidence and an appropriate longer-term outlook;
• Is aligned with medium-term development planning mentioned
above;
• Is consistent with other current and/or recent communications
(e.g. production forecasts etc.);
• Is appropriate for the current stage of development of the Group and
gives an opportunity to reasonably assess sensitivity of the Group's
performance to principal risks during and after realisation of major
strategic objectives (described on pages 18-19), including
production ramp-up.
For the purpose of our viability assessment a three-year financial
model was used as a base-case scenario. The assumptions used in
this scenario are consistent with those used in the impairment testing
process (as described in the financial statements on page 125, except
for the three-year period of assessment. Considering the shorter
assessment period as compared to the impairment testing model,
it was expected that, the base-case scenario is more sensitive to the
following assumptions:
• Implementation of the drilling programme, which is based on the
most recent Ryder Scott reserve report. The drilling programme is
based on the required programme to produce all 2P reserves and
does not cover any of the contingent resource base; and
• GTU3 completion (as described on page 14): it is assumed to
be fully commissioned in H2 2019 for viability purposes.
For the purpose of sensitivity testing, several principal risks and
uncertainties were selected (from those described on pages 41-44),
which were deemed to have the highest potential financial impact
on the Group’s future performance, taking into account prior period
assessments. The effect of those principal risks and uncertainties or
their combination on the base-case scenario were analysed within
following scenarios:
• Deterioration in the business and market environment: taking into
account the fact that the oil price assumptions applied in the base
case scenario were based on the most conservative projections
by institutional analysts, this scenario was aimed at analysing the
sensitivity to further 10% reduction in the oil prices over the
period of assessment;
• Development of proved reserves: this scenario reflected results
based on the assumption of 20% reduction in production and
respectively sales volumes over the three-year period;
• Severe but plausible scenario: a combination of 10% reduction in
the oil and gas prices, removal of production from western part of the
license, together with impact of the risks related to one-year delays in
commissioning of GTU3 and starting of processing of hydrocarbons
from UOG, to the extent such assessments were practicable.
The scenarios took into account the availability and likely effectiveness
of any mitigating actions that are in place or could be implemented to
avoid or reduce the impact or occurrence of the underlying risks which
would realistically be available to the Group in such 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 were taken into account.
The directors remained mindful of the risks associated with the Group’s
development projects, commodity price risks as well as risks associated
with oil and gas reserves and operations (described on pages 41-44),
which may impact the Group’s ability to meet its liabilities, including the
repayment of its Notes due in 2022 and 2025.
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 2021.
This strategic report is approved by the Board.
Kai-Uwe Kessel
Chief Executive Officer
Tom Richardson
Chief Financial Officer
25 March 2019
25 March 2019
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Financial review
Financial review
Results of operations for the years ended 31 December 2018 and 2017
The table below sets forth the line items of the Group’s consolidated statement of comprehensive income for the years ended 31 December 2018
and 2017 in US Dollars and as a percentage of revenue.
In thousands of US dollars
2018
% of revenue
2017
% of revenue
For the year ended 31 December
Revenue
Cost of sales
Gross profit
General and administrative expenses
Selling and transportation expenses
Taxes other than income tax
Impairment charge
Finance costs
Employee share options – fair value adjustment
Foreign exchange loss, net
Loss on derivative financial instruments
Interest income
Other income
Other expenses
Profit before income tax
Income tax expense
Loss for the year
Other comprehensive (loss)/income for the year
Total comprehensive loss for the year
General note
389,927
(165,145)
224,782
(22,212)
(49,984)
(29,702)
(150,000)
(49,383)
1,320
(978)
(12,387)
514
4,374
(8,504)
(92,160)
(28,535)
(120,695)
(895)
(121,590)
100.0%
42.4%
57.6%
5.7%
12.8%
7.6%
38.5%
12.7%
0.3%
0.3%
3.2%
0.1%
1.1%
2.2%
23.6%
7.3%
31.0%
0.2%
31.2%
405,533
(177,246)
228,287
(33,303)
(66,441)
(19,967)
–
(59,752)
2,099
(688)
(6,658)
374
4,071
(22,055)
25,967
(49,849)
(23,882)
825
(23,057)
100.0%
43.7%
56.3%
8.2%
16.4%
4.9%
0.0%
14.7%
0.5%
0.2%
1.6%
0.1%
1.0%
5.4%
6.4%
12.3%
5.9%
0.2%
5.7%
For the year ended 31 December 2018 (the “reporting period”) total comprehensive loss increased by US$98.5 million to US$121.6 million (FY 2017:
US$23.1 million). The increase in loss is mainly due to the impairment charge for the year, which was partially offset by the improvement mainly driven by
reductions in cost of sales, general and administrative expenses, selling and transportation expenses and finance costs, as explained in more detail below.
Revenue
The Group’s revenue decreased by 3.8% to US$389.9 million for the reporting period (FY 2017: US$405.5 million). This is mainly explained by the
decrease in production and sales volumes, which was partially offset by increase in the average Brent crude oil price from 54.7 US$/bbl during
2017 to 71.7 US$/bbl during the reporting period. The pricing for all 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$258.9 million, US$80.5 million and US$7.0 million respectively
(FY 2017: US$200.6 million, US$102.8 million and US$30.9 million).
The following tables present the Group’s revenue breakdown by products and sales volumes and the breakdown by export/domestic sales for the
reporting period and FY 2017:
In thousands of US dollars
Oil and gas condensate
Gas and LPG
Total revenue
Sales volumes (boe)
For the year ended 31 December
2018
2017
Variance
Variance, %
267,815
122,112
389,927
261,069
144,464
405,533
6,746
(22,352)
(15,606)
10,773,266
13,813,060
(3,039,794)
2.6%
(15.5)%
(3.8)%
(22.0)%
Average Brent crude oil price (US$/bbl)
71.7
54.7
In thousands of US dollars
Revenue from export sales
Revenue from domestic sales
Total
46
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For the year ended 31 December
2018
2017
Variance
Variance, %
296,034
93,893
389,927
262,767
142,766
405,533
33,267
(48,873)
(15,606)
12.7%
(34.2)%
(3.8)%
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Cost of sales
In thousands of US dollars
Depreciation, depletion and amortisation
Payroll and related taxes
Repair, maintenance and other services
Other transportation services
Materials and supplies
Well workover costs
Environmental levies
Change in stock
Other
Total
For the year ended 31 December
2018
2017
Variance
Variance, %
115,212
18,326
16,133
6,116
5,253
2,767
367
134
837
165,145
120,692
17,652
18,960
8,335
6,333
4,159
375
297
443
177,246
(5,480)
674
(2,827)
(2,219)
(1,080)
(1,392)
(8)
(163)
394
(12,101)
(4.5)%
3.8%
(14.9)%
(26.6)%
(17.1)%
(33.5)%
(2.1)%
(54.9)%
88.9%
(6.8)%
Cost of sales decreased by 6.8% to US$165.1 million for the reporting period (FY 2017: US$177.2 million). The decrease is primarily explained by
the decrease in depreciation, depletion and amortization, repair, maintenance and other services, other transportation services, materials and
supplies and well workover costs, further described in more detail below. On a boe basis, cost of sales increased by 19.6% to US$15.33 for the
reporting period (FY 2017: US$12.83) and cost of sales net of depreciation per boe increased by US$0.54, or 13.2%, to US$4.63 (FY 2017:
US$4.09).
Depreciation, depletion and amortisation decreased marginally by 4.5% to US$115.2 million for the reporting period (FY 2017: US$120.7 million).
Depreciation is calculated applying units of production method. Decrease of depreciation in 2018 in comparison with prior period is a
consequence of the ratio change between the volumes produced and the proved developed reserves as well as addition to O&G assets in the
amount of US$131.5 million during reporting period.
Repair, maintenance services decreased by 14.9% to US$16.1 million for the reporting period (FY 2017:US$19.0 million) and materials and
supplies decreased by 17.1% to US$5.3 million for the reporting period (FY 2017: US$6.3 million). These expenses include services on repairs and
maintenance of the facilities, specifically for the gas treatment facility as well as related spare parts and other materials. These costs fluctuate
depending on the timing of the periodic scheduled maintenance works.
Other transportation services decreased by 26.6% to US$6.1 million for the reporting period (FY 2017:US$8.3 million). The decrease is explained
by the successful cost optimisation implemented by the Group during the reporting period.
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Financial review / continued
Financial review continued
General and administrative expenses
In thousands of US dollars
Payroll and related taxes
Professional services
Depreciation and amortisation
Insurance fees
Lease payments
Business travel
Communication
Materials and supplies
Bank charges
Other
Total
2018
11,292
4,346
1,869
1,570
846
774
357
168
165
825
22,212
For the year ended 31 December
2017
Variance
Variance, %
13,578
11,095
2,294
1,640
797
1,487
411
363
221
1,417
33,303
(2,286)
(6,749)
(425)
(70)
49
(713)
(54)
(195)
(56)
(592)
(16.8)%
(60.8)%
(18.5)%
(4.3)%
6.1%
(47.9)%
(13.1)%
(53.7)%
(25.3)%
(41.8)%
(11,091)
(33.3)%
General and administrative expenses decreased by 33.3% to US$22.2 million for the reporting period (FY 2017: US$33.3 million). This was mainly
driven by US$6.7 million or 60.8% decrease in professional services from US$11.1 million in 2017 to US$4.3 million in 2018.
Selling and transportation expenses
In thousands of US dollars
Loading and storage costs
Transportation costs
Marketing services
Payroll and related taxes
Other
Total
2018
18,881
15,017
10,963
2,565
2,558
49,984
For the year ended 31 December
2017
Variance
Variance, %
26,940
20,160
14,363
2,033
2,945
66,441
(8,059)
(5,143)
(3,400)
532
(387)
(16,457)
(29.9)%
(25.5)%
(23.7)%
26.2%
(13.1)%
(24.8)%
Selling and transportation expenses decreased by 24.8% to US$50.0 million for the reporting period (FY 2017: US$66.4 million), owing primarily
to decrease in sales volumes as well as further decrease effect in oil transportation costs resulting from successful connection to the KTO pipeline.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Taxes other than income tax
In thousands of US dollars
Royalties
Export customs duty
Government profit share
Other taxes
Total
2018
15,155
11,233
3,277
37
29,702
For the year ended 31 December
2017
Variance
Variance, %
15,724
3,864
248
131
19,967
(569)
7,369
3,029
(94)
9,735
(3.6)%
190.7%
1221.4%
(71.8)%
48.8%
Royalties, which are calculated based on production and market prices for the different products, decreased by 3.6% to US$15.1 million for the
reporting period (FY 2017: US$15.7 million), which is mainly owing to the relative decrease in the production volumes.
Export customs duty on crude oil increased by 190.7% to US$11.2 million for the reporting period (FY 2017: US$3.9 million), mainly owing to the
relative decrease of export sales to CIS countries, which are not subject to export duties.
Government profit share increased by US$3.0 million to US$3.3 million for the reporting period (FY 2017: US$0.2 million).
Impairment charge
Considering the reserves downgrade the Group has stress-tested the impairment model with higher sensitivities and recognised non-cash
impairment charge totalling US$150.0 million (FY 2017: nil), including impairment of goodwill in the amount of US$32.4 million and impairment of
oil and gas assets of US$117.6 million.
Finance costs
In thousands of US dollars
Interest expense on borrowings
Transaction costs
Unwinding of discount on amounts due to Government of Kazakhstan
Unwinding of discount on abandonment and site restoration provision
Other finance costs
Finance charges under finance leases
Total
2018
41,143
6,648
845
399
214
134
49,383
For the year ended 31 December
2017
Variance
Variance, %
42,797
15,709
866
225
–
155
59,752
(1,654)
(9,061)
(21)
174
214
(21)
(10,369)
(3.9)%
(57.7)%
(2.4)%
77.3%
100%
(13.5)%
(17.4)%
Finance costs decreased by 17.4% to US$49.4 million for the reporting period (FY 2017: US$59.8 million), which is mainly owing to lower
transactions costs on bonds refinancing, as well as relatively higher interest capitalisation rate.
Other
Loss on derivative financial instruments amounted to US$12.4 million in the reporting period and relates to fair value of the hedging contract
covering oil sales. Based on the contract the Group has covered the cost of the floor price by selling a number of call options with different strike
prices for each quarter: Q1:US$67.5/bbl, Q2:US$64.1/bbl, Q3:US$64.1/bbl, Q4:US$64.1/bbl. The amount of upside given away has been capped
through the purchase of a number of call options with different strike prices: Q1:US$71.5/bbl, Q2:US$69.1/bbl, Q3:US$69.6/bbl, Q4:US$69.6/bbl.
Movement in fair value of financial derivative instruments is disclosed in Note 29 of the Consolidated financial statements included in this report.
Other expenses decreased to US$8.5 million for the reporting period (FY 2017: US$22.0 million). Such a significant decrease in other expenses is
mainly explained by non-recurring business development expenses incurred in 2017 in relation to potential acquisitions of oil and gas exploration
and appraisal assets in Kazakhstan.
Income tax expense decreased by US$21.3 million to US$28.5 million for the reporting period (FY 2017: US$49.8 million). The decrease in income
tax expense was primarily driven by impairment of oil and gas properties in the current period, the effect of which on the deferred tax liabilities was
partially offset by the devaluation of Tenge against US Dollar during the reporting period.
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Financial review / continued
Financial review continued
Liquidity and capital resources
During the period under review, Nostrum’s principal sources of funds were cash from operations and amounts raised under the 2018 Notes. Its
liquidity requirements primarily relate to meeting ongoing debt service obligations (under the 2017 Notes and the 2018 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 2017:
In thousands of US dollars
Cash and cash equivalents at the beginning of the year
Net cash flows from operating activities
Net cash used in investing activities
Net cash (used in)/from financing activities
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the year
Net cash flows from operating activities
For the year ended 31 December
2018
2017
126,951
214,041
101,134
182,788
(172,021)
(192,391)
(47,009)
(209)
34,589
831
121,753
126,951
Net cash flow from operating activities was US$214.0 million for the reporting period (FY 2017: US$182.8 million) and was primarily attributable to:
• Loss before income tax for the reporting period of US$92.2 million (FY 2017: profit before income tax of US$26.0 million), adjusted by a non-
cash charge for depreciation, depletion and amortisation of US$117.1 million (FY 2017: US$123.0 million), impairment charge of US$150.0
million (FY 2017: nil), finance costs of US$49.4 million (FY 2017: US$59.8 million), loss on derivatives of US$12.4 million (FY 2017: US$6.7million)
and payments made under derivatives of US$8.6 million.
• A US$4.0 million decrease in working capital (FY 2017: US$18.8 million increase) was mainly due to a decrease in prepayments and other
current assets of US$7.7 million (FY 2017: a increase of US$5.7 million), a decrease in trade payables of US$3.2 million (FY 2017: US$4.6 million)
and a decrease in other current liabilities of US$5.5 million (FY 2017: a decrease of US$1.6 million).
• Income tax paid of US$9.1 million (FY 2017: US$15.9 million).
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$172.0 million (FY 2017: US$192.4 million) due primarily to costs associated
with the drilling of new wells of US$87.5 million for the reporting period FY 2017: US$57.5 million), costs associated with the third gas treatment
unit of US$55.8 million (FY 2017: US$157.5 million), and costs associated with Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye fields of
US$2.5 million (FY 2017: US$3.6 million).
Net cash from/(used) in financing activities
Net cash used in financing activities during the reporting period made up US$47.0 million, and was mainly represented by proceeds from issue
of 2018 Notes in the amount of US$397.3 million, offset by the early redemption of 2012 Notes and 2014 Notes totalling US$353.2 million, the
fees and premium paid for the arrangement of these transactions in the amount of US$9.5 million, and the payment of US$81.1 million of the
finance costs, primarily on the Group’s 2017 Notes and 2018 Notes. Net cash from financing activities during FY 2017 made up US$34.6 million,
which was mainly represented by proceeds from issue of 2017 Notes in the amount of US$725 million, offset by the early redemption of 2012
Notes and 2014 Notes totalling US$606.8 million, the fees and premium paid for the arrangement of these transactions in the amount of US$27.0
million, and the payment of US$57.0 million of the finance costs on the Group’s 2012 Notes and 2014 Notes.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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 2018 based on contractual
undiscounted payments:
As at 31 December 2018
Borrowings
Trade payables
Other current liabilities
On demand
Less than 3
months
3-12 months
1-5 years
More than 5
years
Total
–
43,000
43,000
1,011,000
456,000
1,553,000
37,843
29,858
–
–
15,033
–
773
–
–
–
–
4,124
7,474
52,876
29,858
12,629
Due to Government of Kazakhstan
–
258
67,701
43,258
58,806
1,015,124
463,474
1,648,363
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$131.4 million (FY 2017: US$188.1 million). This mainly reflects costs associated with the construction of the third gas treatment
unit, drilling costs and other field infrastructure development projects.
Gas Treatment Facility
Following the successful completion of the first phase of the gas treatment facility, consisting of two units, the Group achieved mechanical
completion of a third unit in December 2018, with commissioning anticipated to be completed in 2019. The construction of GTU3 is important for
implementing the Group’s strategy to increase operating capacity and as a result increase production and processing of liquid hydrocarbons.
Management estimates, based on the production profile of both proved and probable reserves reported in the 2018 Ryder Scott Report and
assuming the full commissioning of the gas treatment facility in H2 2019, that the Company’s annual production will gradually increase from 2019
onwards. The remaining costs for the completion of GTU3 are estimated at US$34.6 million.
Drilling
Drilling expenditures amounted to US$87.5 million for the reporting period (FY 2017 US$57.5 million). After the completion of GTU3, it is
expected that the drilling expenditure will become the primary driver of the Company’s investing activities.
Dividend policy
The Group currently pays no dividend and has not done so for the last three years, as the Board determined it was not in the Company’s best
interests to do so. This will be reviewed annually by the Board.
Nostrum Oil & Gas PLC Annual Report 2018
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Financial review / continued
Five-year summary
In millions of US$ (unless mentioned otherwise)
2018
2017
2016
2015
2014
EBITDA reconciliation
(Loss)/profit before income tax
Add back
Impairment charge
Finance costs
Finance costs – reorganisation¹
Employee share options – fair value adjustment
Foreign exchange loss, net
Loss on derivative financial instruments
Interest income
Other expenses
Export customs duty²
Other income
Depreciation, depletion and amortisation
Proceeds from derivative financial instruments³
Purchase of derivative financial instruments³
EBITDA
Operating costs reconciliation
Cost of sales
Less
Depreciation, depletion and amortisation4
Royalties5
Government profit share5
Operating costs
Net debt reconciliation
Long-term borrowings
Current portion of long-term borrowings
Less
Current investments
Cash and cash equivalents
Net debt
Net cash flows from operating activities
Net cash used in investing activities6
Net cash from / (used in) financing activities
EBITDA margin7
Equity/assets ratio %
Share price at end of period (US$)7
Shares outstanding ('000s)
Options outstanding ('000s)
Dividend per share (US$)
(92.2)
26.0
(65.5)
72.3
311.7
150.0
49.4
–
(1.3)
1.0
12.4
(0.5)
8.4
–
(4.4)
117.1
–
(8.6)
231.3
–
59.8
–
(2.1)
0.7
6.7
(0.4)
22.0
–
(4.1)
123.0
–
–
231.6
–
41.7
–
(0.1)
0.4
63.2
(0.5)
(1.8)
–
(2.2)
131.6
27.2
–
194.0
–
46.0
1.1
(2.2)
21.2
(37.1)
(0.5)
30.6
(14.7)
(11.3)
109.4
92.3
(92.0)
215.0
–
61.9
29.6
(3.1)
4.2
(60.3)
(1.0)
49.8
(19.7)
(10.1)
111.9
–
–
475.0
165.1
177.2
182.2
186.6
221.9
(115.2)
–
–
49.9
(120.7)
–
–
56.5
1,094.0
35.6
1,056.5
31.3
–
121.8
1,007.8
214.0
(172.0)
(47.0)
59.3%
25.3%
1.03
188,183
3,432
–
–
127.0
960.8
182.8
(192.2)
34.6
57.1%
29.6%
4.41
188,183
3,333
–
(129.4)
–
–
52.8
943.5
15.5
–
101.1
857.9
202.1
(200.3)
(66.3)
55.7%
32.8%
4.75
188,183
2,536
–
(107.7)
(14.4)
(1.9)
62.6
936.5
15.0
–
165.6
785.9
153.3
(245.3)
(115.9)
47.9%
35.4%
5.97
188,183
2,611
0.27
(110.5)
(24.3)
(4.6)
82.5
930.1
15.0
25.0
375.4
544.7
349.1
(304.5)
147.5
60.7%
41.6%
6.56
188,183
2,611
0.35
1. The reorganisation costs are represented by the costs associated with the introduction of Nostrum as the new holding company of the Group and the respective
reorganisation that took place in June 2014.
2. In 2016, 2017 and 2018, Export customs duty is included within Profit / (loss) before income tax (presented within ‘taxes other than income tax’). In 2014 and 2015,
Export customs duty is included within ‘other expenses’, therefore an adjustment is made to re-include Export customs duty within respective EBITDA.
3. Cash received from hedge contract represents the cash proceeds from the long-term hedging contract which in accordance with IAS7 Statement of Cash Flows is
included within operating cash flows. While this item is not required to be presented in the Consolidated Income Statement, we have included this in our definition
of EBIT and EBITDA in order to better align these non-GAAP measures with our operating cash flows.
4. Depreciation as it applies to operating assets only.
5. Prior to 2016, royalties and government profit share were reported within the cost of sales line.
6. IFRS term based on indirect cash flow methodology
7. EBIDTA margin is calculated as EBITDA divided by total revenue.
8. Prior to 20 June 2014 the equity of the Group was represented by GDRs, the share price as at 31 December 2018 was 1.03 GBP/share x 1.28 US$/GBP = 1.32 US$/share
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Nostrum Oil & Gas PLC Annual Report 2018
Alternative performance measures
In the discussion of the Group’s reported operating results, alternative performance measures (APMs) are presented to provide readers with
additional financial information that is regularly reviewed by management to assess the financial performance or financial health of the Group,
or is useful to investors and stakeholders to assess the Group’s performance and position. However, this additional information presented is not
uniformly defined by all companies including those in the Group’s industry. Accordingly, it may not be comparable with similarly titled measures
and disclosures by other companies. Certain information presented is derived from amounts calculated in accordance with IFRS but is not itself an
expressly permitted IFRS measure. Such measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure.
EBITDA
EBITDA is defined as the results of operating activities before depreciation and amortisation, share-based compensation, fair value gains and
losses on derivative instruments, foreign exchange losses, finance costs, finance income, non-core income or expenses and taxes, and includes
any cash proceeds received or paid out from hedging activity. This metric is relevant as it allows management to assess the operating performance
of the Group in absence of exceptional and non-cash items.
Operating costs
Operating costs are the cost of sales less depreciation, royalties and government profit share5. This metric is relevant as it allows management to
see the cost base of the company on a cash basis.
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Executive Chairman’s overview
Executive Chairman’s overview
Remuneration policy
A revised remuneration policy will be
presented to shareholders for their vote
at our upcoming Annual General Meeting.
The Remuneration Committee led the
process in proposing amendments to our
policy in response to feedback received
from shareholders in 2018. The policy will
specifically preclude the making of any LTIP
awards to non-executive directors.
Compliance with the Code
The UK Corporate Governance Code 2016
is the standard against which we measured
ourselves in 2018. A copy of the Code is
available from the Financial Reporting
Council’s website. Nostrum complied
with all provisions of the Code except for
those provisions set out in our Corporate
Governance Statement, available on
our website: www.nog.co.uk.
Until 16 August 2018, the Company did not
comply with Provision D.2.2 of the Code as
one member of the Remuneration
Committee was not an independent non-
executive director. As previously
announced, with effect from
16 August 2018, the Committee is
comprised solely of independent
non-executive directors.
New Corporate Governance
Code
The Nomination and Governance
Committee reviewed the Company’s
compliance with the terms of the newly-
issued 2018 Code of Corporate
Governance, in advance of its
implementation on 1 January 2019,
and has recommended actions to ensure
compliance going forward, particularly
around workforce engagement. The
Company will report more fully on such
actions in due course.
Key priority tasks in 2018
In February 2018 the Board was pleased
to oversee the completion of the issuance
of a new US$400 million bond at 7.000%
that allowed the Company to refinance the
remainder of its outstanding debt that was
to come due in 2019, such that Nostrum
has no debt maturities until 2022.
In addition, mechanical completion of GTU3
was completed in 2018 and commissioning
of the plant has commenced.
The Board maintains its focus on managing
risk as Nostrum builds out its infrastructure
and the Board discusses risk regularly
as part of the Board’s wider discussion of
our strategy and business model. Further
information is set out on page 39 where
we aim to demonstrate how decisions taken
by the Board are underpinned by a robust
risk management framework.
Board evaluation
The Board self-evaluation in 2018
centered around five key themes identified
by directors. Those related to engagement
with shareholders, interaction with senior
management, engagement with the
workforce, succession planning and
diversity. The Board adopted a concrete
action plan following up on this self-
evaluation and further details on this
can be found on page 64.
Dear shareholder,
I am pleased to report that the Board has set
up several important initiatives in the
area of corporate governance during 2018,
which we intend to follow up on in a
systematic way going forward. These
included the promotion of our heads
of QHSE and Human Resources into our
senior management team, additional ESG
reporting, a greater emphasis on improving
diversity at all levels of our workforce and
the creation of our Group Anti-Facilitation
of Tax Evasion Policy.
In addition, following on from initiatives
taken in 2018, in early 2019 we created a
Health, Safety, Environment and
Communities Committee of the Board which
will allow us to place a greater focus on the
Board’s efforts in those areas, including in
particular further attention to environmental
and climate changes issues.
Board changes
With 2017 being a year of change in the
composition of the Board, 2018 has been
a period of ‘bedding in’ for the Board
members and I can report that there have
been no changes in the composition of the
Board in 2018.
My role as Chairman has been expanded
and I now have assumed certain executive
responsibilities, particularly in the areas of
business development, strategic initiatives
and investor relations.
In addition, Michael Calvey stepped down
from the Remuneration Committee during
2018 to ensure that the committee is
comprised solely of independent non-
executive directors.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Governance summary
Leadership
Your Board rigorously challenges strategy,
performance, responsibility and
accountability to ensure that every decision
we make is of the highest quality.
Learn more on page 60.
Effectiveness
Your Board continuously evaluates the
balance of skills, experience, knowledge
and independence of the directors.
We scrutinise the effectiveness of our
performance in an annual Board evaluation,
more details of which can be found on
page 64.
As a Board, we have made a particular effort
during 2018 to improve our dialogue and
engagement with shareholders. The
additional statement on the Company’s
remuneration policy and Report announced
and posted on the Investment Association’s
Public Register in response to shareholder
feedback is an indication of the Board’s
commitment to such dialogue.
We will continue to review and develop
our corporate governance practices in 2019
to ensure full compliance with regulatory
requirements, to strive for best practice and
to ensure that all our practices promote the
long-term success and development of our
business as a whole for the benefit of all its
stakeholders and the communities in which
we operate.
Accountability
All of our decisions are discussed within the
context of the risks involved. Effective risk
management is central to achieving our
strategic objectives.
Atul Gupta
Executive Chairman
25 March 2019
Discover more about how we remain
accountable as a Board on page 61.
Remuneration
Our remuneration policy and practices aim
to attract, retain and motivate by linking
reward to performance.
A copy of our remuneration policy can be
found on pages 78 to 95.
Relations with shareholders
The Board seeks to engage with
shareholders regularly.
Further information regarding shareholder
engagement can be found on page 64.
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Board of Directors
Board of directors
N
Atul Gupta
Executive Chairman1
Kai-Uwe Kessel
Tom Richardson
Mark Martin
Chief Executive Officer
Chief Financial Officer
DOB:
15 December 1959
DOB:
17 December 1961
Nationality:
British
Nationality:
German
DOB:
17 March 1981
Nationality:
British
Director of Nostrum’s
predecessor entities
since 2004
Date of appointment:
3 October 2013
Date of appointment:
1 September 2016
Other current
appointments:
• Sokoni Medical Limited
Other current
appointments:
• None
Other positions by
date:
• 2002-2005, director of
Gaz de France’s North
African E&P division.
• 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.
• Graduate of the
Gubkin Russian State
University of Oil and
Gas.
– Director
• Sokoni Ventures
Limited – Director
• TDR Enterprises
Holdings Limited –
Director
• Nostrum Oil & Gas UK
Limited – Director
• TDR Enterprises Ltd
– Director
• TDR Investments Ltd
– Director
Other positions by
date:
• Since 2011, provided
corporate finance
services to the
Nostrum Group.
• Worked for a number
of financial institutions
including Rothschild,
JP Morgan and ING.
• Eight years of
experience in
banking covering
emerging markets.
• Holds a Bachelor of
Science degree from
Bristol University.
Date of appointment:
19 May 2014
Other current
appointments:
• Midway Resources LLC
– Director
Other positions by
date:
• Chief Executive Officer
(2006-2008) and
Chief Operating
Officer (1999-2006)
of Burren Energy.
• 30 years’ broad
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).
1. Atul Gupta resigned
as a member of the
Nomination Committee
on 26 November 2018
following his appointment
as Executive Chairman.
Board
committees
A
N
Audit Committee
Nomination
and Governance
R
Remuneration
Chairman
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A
N
R
A
N
R
Senior Independent
Director
DOB:
17 February 1969
Nationality:
British
Date of appointment:
19 May 2014
Other current
appointments:
• None
Other positions by
date:
• 20 years of investment
banking experience
with Barclays, Baring
Securities and ING
where he was Global
Head of Equity Capital
Markets from
2003 to 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.
Sir Christopher
Codrington, Bt.
Independent
non-executive director
DOB:
20 February 1960
Nationality:
British
Date of appointment:
19 May 2014
Other current
appointments:
• Navarino Services
Limited – Director
• Capital Marketing
Investments Ltd –
Director
Other positions by
date:
• More than 30 years’
executive board and
senior management
experience in the oil
and gas sector and
the hospitality and
other industries.
• 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.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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N
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Kaat Van Hecke
Independent
non-executive director
DOB:
7 December 1971
Nationality:
Belgian
Date of appointment:
31 December 2016
Other current
appointments:
• Axxela Limited -
Director
Other positions by
date:
• 2013-2016 served as
Managing Director and
Senior Vice President
of the Austrian
Upstream business at
Österreichische
Mineralölverwaltung
(OMV).
• 2010-2013 served as
E&P Group Head of
Business Support at
OMV.
• 2002-2010 held
various positions with
Shell in Russia, Nigeria
and The Netherlands.
• 1995-2001 held
various positions with
ExxonMobil in Belgium
and The Netherlands.
• Obtained a Master of
Science degree in
Chemical Engineering
from the University
of Ghent, Belgium.
Also holds a Master in
General Management
from the Vlerick
Management School,
Belgium.
A
Martin Cocker
Independent
non-executive director
DOB:
19 September 1959
Nationality:
British
Date of appointment:
16 November 2017
Other current
appointments:
• Etalon Group PLC –
Non-Executive Director
• Tinkoff Credit Systems
Group Holdings –
Non-Executive Director
• Beverley Building Society –
Non-Executive Director
• Zeminik Trading Limited
Michael Calvey
Simon Byrne
Non-executive director
Non-executive director
DOB:
3 October 1967
Nationality:
American
DOB:
8 September 1967
Nationality:
British
Date of appointment:
25 April 2017
Date of appointment:
16 November 2017
Other current
appointments:
• Public Joint Stock
Company “Orient
Express Bank” – Director
• BPEP International
– Director
• Kaspi Bank – Member of
Advisory Council
• Volga Gas PLC – Director
• Atlantic Council of United
Other current
appointments:
• Chief Executive Officer
of Steppe Capital Pte
Ltd
• Director of Mayfair
Investments B.V.,
Kazstroyservice Global
B.V. and various other
entities within the
Steppe Capital Group
States – Director
• Independent Non-
– Director
• Etalon Group Limited
– Director
• Baring Vostok Capital
Partners – Director and
Senior Partner
• Baring Vostok Holding
Limited – Director
• Baring Vostok Capital
Partners Limited (Cyprus)
– Director
• Baring Vostok Capital
Partners Group Limited
– Director
Other positions by
date:
• 1994 – present, Founder
and Senior Partner at
Baring Vostok Capital
Partners.
• Prior to 1994 worked on
oil and gas investment
projects for the European
Bank for Reconstruction
and Development and
Salomon Brothers.
• Obtained a Masters
degree in Finance from
the London School of
Economics and a
Bachelors degree in
Business from Oklahoma
University.
Executive Director at
Pacific Hunt Energy
Limited
Other positions by
date:
• Chief Executive Officer
of Steppe Capital Pte
Ltd, an investment
holding company
and international
family office based
in Singapore.
• More than 30 years’
corporate finance and
banking experience
and previously served
as a Managing Director
at RBS Global Banking
& Markets and at ABN
Amro and held
position with Asahi
Bank and
Manufacturers
Hanover Limited.
Other positions by
date:
• Chartered accountant with
over 30 years’ business
experience.
• Held several line
management, project
leader and CEO-level
positions and currently is an
independent non-executive
director and Chairman of
the audit committee at
Etalon Group PLC and TCS
Group Holdings PLC.
• Managing Director
and co-owner of Bliss
Development and a
member of the investment
committee of Pride Capital.
• Previously held senior
positions with Deloitte &
Touche, KPMG, Ernst &
Young and Amerada Hess.
• Obtained a BSc joint
honours in Mathematics
and Economics from the
University of Keele.
• Member of the Institute
of Chartered Accountants
of England and Wales.
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Senior Management Team
Senior management team
(See biographies of executive directors Kai-Uwe Kessel and Tom Richardson on page 56).
Sergey Khafizov
Role:
Chief Business
Development Officer
Arkadi Epifanov
Role:
Chief Commercial
Officer
DOB:
14 February 1965
DOB:
27 October 1957
Nationality:
Russian
Nationality:
Russian
Thomas Hartnett
Role:
Chief Legal Officer and
Company Secretary
DOB:
4 July 1964
Nationality:
US/Belgian
Skills and experience:
• Appointed as Chief
Commercial Officer
on 13 January 2017.
• 2009-2017 held
position as marketing
consultant for
Zhaikmunai LLP.
• Over 20 years’
experience in senior
management and
directorial positions in
Nafta, Transoil, Lukoil,
Litasco and Baltic Oil
Terminal.
• Has worked in the oil
sector across diverse
regions including
Finland, Belgium,
Romania, Russia,
Switzerland, The
Netherlands and
the British Isles.
• Holds qualifications
in Economics from
Leipziger University.
Skills and experience:
• Appointed as
Chief Business
Development Officer
in September 2016.
• 2015-2016 held
position as Project
Director and Head of
Exploration
Department.
• Over 33 years’ of
experience in
geological exploration
and production,
leading large
exploration projects,
research and project
teams.
• Previously held
managerial and
technical positions
with Gazprom Neft
and TNK-BP.
• Graduate of the
Gubkin Russian State
University of Oil and
Gas, Doctor of Science,
Geology Professor, Full
Member
(Academician) of the
Russian Academy of
Natural Sciences,
Member of the
American Association
of Petroleum
Geologists (AAPG) and
Society of Petroleum
Engineers (SPE).
Skills and experience:
• Appointed as General
Counsel of the
Nostrum Group on 5
September 2008 and
as Company Secretary
of Nostrum
Oil & Gas PLC on
3 October 2013.
• 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.
• 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.
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Daulet Tulegenov
Marina Grinevskaya
Role:
Group QHSE Manager
Role:
Chief HR Officer
Heinz Wendel
Role:
Chief Operating
Officer1
DOB:
22 August 1953
Nationality:
German
Skills and experience:
• Appointed as Chief
Operating Officer
of the Group in
November 2016.
• 2013-2016 held
position as General
Director of
Zhaikmunai LLP.
• 2012-2013 held
DOB:
29 January 1980
Nationality:
Kazakh
Skills and experience:
• Appointed as Group
QHSE Manager in
October 2018.
• 2017-2018 HSE
Transformation
team leader at
KazMunaiGas JSC.
• 2010-2016 HSE
manager at Lukoil.
• Over 15 years
position as Operations
Director of Zhaikmunai
LLP.
experience in E&P oil
and gas assets
(onshore and offshore).
• Near to 40 years’
• Took part in major
international projects
at Chevron, Shell,
Lukoil, Tengizchevroil
and CNPC companies
in Kazakhstan
• Graduate of the
Tyumen State Oil &
Gas University, Russian
Federation.
experience and oil and
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, among others,
GDF Suez E&P
Deutschland and East
German Erdöl-Erdgas
Gommern (EEG).
• Graduate of the Oil &
Gas Institute of Baku,
Azerbaijan.
1. On 12 February 2019
Robert Tinkhof was
appointed as Chief
Operating Officer as a
result of the retirement of
Heinz Wendel.
DOB:
9 April 1963
Nationality:
Russian
Skills and experience:
• Appointed as Group
HR Manager on 15
September 2016 and
as Chief HR Officer on
1 February 2019.
• More than 24 years’
experience in human
resources
management.
• Worked for
international
companies in various
industries: professional
services, sales and
marketing, oil and gas,
production.
• Held HR Manager and
HR Director positions
at KPMG, Lumene,
Farmos, Gazprom Neft
Middle East B.V., DS
Controls.
• Graduate of the St.
Petersburg State
University with a PhD
degree in English
Philology, holds a
diploma and certificate
in Human Resources
Management from the
St. Petersburg State
University of
Economics and
Finance and Pierre
Mendès-France
University of Grenoble.
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Our governance framework
Our governance framework
The Board is chaired by Atul Gupta and meets a minimum of four times a year. The Board is collectively responsible to shareholders for the long-term
success of the Group. This is achieved by reviewing trading performance, budgets and funding, setting and monitoring the Groups strategic objectives,
reviewing acquisition opportunities and engaging with stakeholders. The Board is supported by a number of committees whose Terms of Reference (TORs)
are available on our website.
`
The Board
Chairman
Chief Executive Officer
Non-executive directors
Senior Independent Director
Responsible for leadership of
the Board and for ensuring its
effectiveness in all aspects of
its role.
Responsible for the successful
planning and execution of the
objectives and strategies
agreed by the Board.
Audit Committee
Responsible for oversight of
the Group’s financial reporting
processes. Scrutinises the work
of the external auditor and
regularly reviews the risk
management framework and
the work of internal audit.
Nomination and Governance
Committee
Reviews the structure, size and
composition of the Board and
its committees and makes
recommendations to the Board
accordingly, and leads the process
for new Board appointments.
Responsible for bringing
an external perspective,
sound judgement and
objectivity to the Board’s
decision-making. Scrutinise
management performance
and constructively
challenge strategy.
Provides a sounding board for
the Chairman and a trusted
intermediary for the
other directors.
Remuneration Committee
Company Secretary
Reviews and recommends to
the Board the executive
remuneration policy and
determines the remuneration
packages of the directors.
Responsible for advising
the Board, through the
Chairman, on all governance
matters and for ensuring that
Board procedures are complied
with and there is a good flow
of information between the
Board and its committees. The
appointment of the Company
Secretary is a matter reserved
to the Board as a whole.
Chairman:
Sir Christopher Codrington, Bt.
Chairman:
Sir Christopher Codrington, Bt.
Chairman:
Mark Martin
See page 66 for
Committee Report.
See page 74 for
Committee Report.
See page 76 for
Committee Report.
Company Secretary:
Thomas Hartnett
The senior management team supports the Chief Executive Officer in making important decisions regarding the overall management of the Group
in respect of all Group matters that are not reserved for the Board and ensuring that operational activities and performance are aligned with the
overarching strategy of the Group. Each member of the team reports directly to the Chief Executive Officer, who then directly reports to the Board.
The functional responsibilities of the senior management team members in their respective area include but are not limited to implementing
Chief Executive Officer and Board decisions, allocating resources, managing risk, maximising efficiencies, guiding and developing employees,
reviewing performance and supporting cross-functional integration.
Senior management team
Finance
Business Development
Operations
Responsible for supporting the Group and
the Board in matters relating to: (i) corporate
finance (ii) investor relations (iii) economic
analysis (iv) tax (v) budget and control (vi)
insurance (vii) risk management and (viii) ICT.
Responsible for supporting the Group and
the Board in matters relating to: (i)
hydrocarbon reserves management (ii)
preparation and implementation of E&P
strategy (iii) geological exploration and
analysis (iv) asset portfolio management (v)
market intelligence (vi) transaction
management and (vii) peer analysis.
Responsible for supporting the Group and the
Board in matters relating to: (i) production
engineering and reservoir management (ii)
drilling and workover management production
(iii) production (iv) engineering and construction
field operations (v) relations with governmental
authorities (vi) procurement (vii) research and
development (viii) security and (ix)
administration licensing.
Head: Tom Richardson
Head: Sergey Khafizov
Head: Heinz Wendel
Legal
Sales and Marketing
QHSE
Responsible for supporting the
Group and the Board in matters
relating to: (i) all legal matters
(ii) compliance (iii) corporate
governance (iv) company
administration and (v) internal
communications.
Responsible for supporting the
Group and the Board in matters
relating to: (i) sales of oil and
gas products (ii) marketing and
(iii) logistics and transportation.
Responsible for supporting the
Group and the Board in matters
relating to: (i) product quality,
(ii) health, (iii) safety and (iv)
the environment.
Human Resources
Responsible for supporting the
Group and the Board in matters
relating to: (i) personnel and the
workforce matters generally (ii)
training and (iii) remuneration.
Head: Thomas Hartnett
Head: Arkadi Epifanov
Head: Daulet Tulegenov
Head: Marina Grinevskaya
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Nostrum Oil & Gas PLC Annual Report 2018
HSEC Committee
Following on from discussions by the Board during 2018, the
Company is in the process of forming a Health, Safety, Environment
and Communities Committee of the Board. Among the matters that
will be dealt with by the Committee are the following:
• Attention to climate change issues will be among the principal
duties of this committee;
• Working with our operational teams on site, compiling and
evaluating the relevant information for the Company to self-
report environmental data in 2019 using the CDP submission
process;
• Assessing the requirements for TCFD disclosure and analysing
our preparedness to meet these; and
• Working with the Audit Committee and the Board to include
climate change among the principal risks and uncertainties faced
by Nostrum and to endeavour to quantify climate change-related
risks.
Equality and 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,
geographic and ethnic origin and gender.
The Company has 11% female representation on its Board. The
Nomination and Governance Committee remains satisfied that the
Board has the right mix of skills and experience to operate
effectively, but remains committed to monitoring diversity closely
and increasing diversity where possible as part of future succession
planning.
Board policies and governance arrangements
Nostrum recognises the important role that good corporate
governance plays in the success of the Company. As a result, the
Board promotes high standards of corporate governance as a key
component of its activities. Clearly defined roles and
responsibilities, non-executive independence, boardroom and
workplace diversity, an open and transparent culture and the work
of our committees in implementing the Company’s values and
policies throughout the Group are all vital ingredients to get this
right for our stakeholders.
In order to ensure that it is involved in making important decisions
for the Group and to ensure there is a clear division of
responsibilities between the Board and executive management, the
Board has identified certain “reserved matters” that are subject to its
approval. Other matters, responsibilities and authorities have been
delegated to its committees and the senior management team, as
set out in the governance framework on page 60. The schedule of
matters reserved for the Board is reviewed annually and is
available on our website.
Division of responsibilities
On 27 November 2018 the Board resolved to expand the role of the
Company’s Chairman, Atul Gupta, to give him certain executive
responsibilities, in particular in relation to business development,
strategic initiatives and investor relations. Notwithstanding this, in
accordance with the Code, the roles of Chairman and Chief
Executive remain separate, with each having distinct and clearly
defined responsibilities, as summarised in the Board structure
diagram. Mr Gupta’s new role as Executive Chairman is to guide,
advise, counsel and assist the Chief Executive Officer in overseeing
the Company’s implementation of its strategy. The Chief Executive
Officer remains responsible for line-management of his direct
reports and implementation of the Company’s strategy.
The Chairman’s overarching role in leading an effective Board is
supported by the Senior Independent Director, while the Chief
Executive’s Officer’s strategic capabilities are strengthened by the
Senior Management Team.
Independence
Robust oversight is crucial for strong corporate governance and the
Board is committed to securing this through the appropriate
balance of independent non-executive directors.
The Board considers all of its non-executive directors, other than
Michael Calvey and Simon Byrne, to be independent within the
meaning of such term as defined in the Code. Michael Calvey and
Simon Byrne are not deemed to be independent as a result of
having been nominated by Baring Vostok Capital Partners and
Mayfair Investments B.V. respectively, who are two of the largest
shareholders in the Company.
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Our governance framework / continued
Our governance framework continued
In November 2017 the Board approved its Equality and Diversity
Policy, to which the Company continued to adhere throughout
2018.
In accordance with the policy, the Group is committed to
eliminating discrimination and encouraging equality and diversity in
all of our business activities, including the provision of employment.
The policy applies to all who work for the Group, including
directors, together with the managerial, supervisory and
administrative bodies of all entities within the Group. The policy
also applies equally to the treatment of our supply chain, applicants
and visitors by our staff and the treatment of our staff by these third
parties. The objective of the policy is to promote equality of
opportunity and to ensure that no individual suffers unlawful
discrimination, directly or indirectly, on the grounds of race, colour,
ethnicity, religion, sex, gender identity or expression, gender
reassignment, national origin, age, marital status, disability or
sexual orientation.
The Group aims to ensure the objective of the policy is met by:
• Ensuring all recruitment advertising and publicity aims to
encourage applications from any individual who has appropriate
qualifications and/or experience;
• Not offering discriminatory conditions of employment;
• Ensuring all promotions are made strictly on the basis of the
ability to do the job and no such decision is made on a
discriminatory basis;
• Considering requests for part-time work or job-sharing
opportunities wherever appropriate and practicable and aiming
to ensure that part-time employees receive fair treatment;
• Ensuring that the demands of religion (e.g. prayer time and
religious holidays), culture (e.g. traditional dress) and special
dietary needs are accommodated where possible; and
• Taking reasonable steps to assist employees with domestic
responsibilities (e.g. young children and dependent elderly
relatives).
The following are steps that have been taken in 2018 to implement
this policy:
• In 2018 a woman was promoted into the Senior Management
Team;
• We have continued to focus on attracting more female
candidates across all levels throughout the Group and are
assessing our performance in attracting female employees at
junior management levels in Kazakhstan and reviewing our
current training, retention and promotion schemes to encourage
promotion of more women into senior management positions;
• We are setting up a mechanism for regular reporting by our
Human Resources team to the Board on diversity and any gender
pay gap issues we may have; and
• We are looking into cross-company mentor schemes to achieve
our goals in this area.
Conflicts of interest
A director has a duty to avoid a situation in which they have, or may
have, a direct or indirect interest that conflicts or may conflict with
the interests of the Company.
Formal procedures are in place to ensure that the Board’s powers of
authorisation of conflicts or potential conflicts of interest of directors
are operated effectively. The Board is satisfied that during 2018
these procedures were enforced and adhered to appropriately.
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.
Each non-executive director appointment is for an initial term of
three years, subject to being re-elected at each subsequent Annual
General Meeting.
Bribery, corruption and Whistle-Blowing
Bribery and corruption are significant risks in the oil and gas
industry and as such the Company operates a Group-wide Anti-
Corruption and Bribery 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.
The Company has also adopted a Whistle-Blowing Policy that takes
account of the Whistleblowing Arrangements Code of Practice
issued by the British Standards Institute and Public Concern at
Work. No matters were raised under the Whistle-Blowing Policy in
2018. Further information can be found on page 33.
Both policies were reviewed by the Audit Committee in 2018 and
minor changes were recommended to the Board and implemented.
Anti-facilitation of tax evasion
Further to the implementation of new rules under the Criminal
Finances Act 2017 (“CFA”) in the UK, the Board approved a new
Anti-Facilitation of Tax Evasion Policy during the year, applicable to
the Group and its associated persons. In connection with the
preparation of this policy, the Company commissioned an
independent, bespoke risk assessment and incorporated findings
from such assessment in the policy in this area.
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Board activities and achievements
Board activities and achievements
Board activities during 2018
During the financial year, the Board held five meetings. During these meetings, the Board spent a significant amount of time discussing
and approving matters relating to the strategy of the Group.
The Board and committee agendas were shaped to ensure that discussion was focused on the Group’s key strategies and monitoring
activities, as well as reviews of significant issues arising during the year. The Group’s ongoing financial and strategic performance is
reviewed at every meeting and the Chief Executive Officer and the Chief Financial Officer comment on drilling, production, share price
performance, the market and shareholder feedback.
The table below gives the highlights of how the Board and its committees spent their time during the 2018 financial year but should not be
regarded as an exhaustive list. More information regarding the Group’s strategic objectives and focus during the year can be found in the
Strategic Report on pages 2–53, and the more detailed activities of each committee are located in their relevant report.
Strategy and business focus
• Working with the CEO and CFO on implementing the Company’s strategy in drilling, production,
Risk
Governance
People and culture
the business and operations.
• Year-end review of the oil and gas industry outlook and consideration of the 2019 budget
and drilling and operations programme.
• Discussions around completion of the construction and commissioning of GTU3.
• Overseeing the refinancing of the Company’s bonds.
• Review of all interim financial results announcements and the 2017 Annual Report and Accounts.
• Consideration of the Group’s viability statement and risk appetite for the coming year.
• Review of Group tax matters including the Group’s tax residency and approach to tax risk.
• Approval of a new Anti-Facilitation of Tax Evasion Policy.
• Review of all insurance contracts across the Group to assess risk exposure.
• Received reports from Board committees.
• Consideration of the new UK Corporate Governance Code applicable to the Company in 2019
and other regulatory requirements and proposed various changes in governance in the light
thereof.
• Review of the Notice of AGM and the matters proposed for shareholder approval.
• Conducted a roundtable internal Board evaluation for 2018.
• Reviewed and approved various updates to key Group policies.
• Consideration of director conflicts of interest.
• Review of the Equality and Diversity Policy and reviewed the equality and diversity provisions
contained in other Group policies and launched several initiatives in this area.
• Implemented the second tranche of the Company’s Long-Term Incentive Plan.
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Board activities and achievements / continued
Board activities and achievements
continued
Board evaluation
As explained in the Nomination and Governance Committee report
on page 74 , due to the numerous changes to the composition of
the Board during 2017 it was felt that it was appropriate to conduct
a Board self-evaluation in a roundtable format discussing the issues
directors wished to raise and discuss in 2018. Directors were also
given the opportunity to email any issues to the Company Secretary
following the discussion if they wished to raise additional points
outside the open forum.
The Board focused on the following in 2018:
• Engagement with and understanding of shareholders’ feedback
and concerns. An improved information flow of shareholder
feedback to the Board will be developed, through additional
information in Board materials on comments from investors and
analysts and improved dialogue through meetings with investors;
• The interaction between the Board and Senior Management will
be improved through closer interaction with senior managers,
their participation in regular Board meetings and the sharing of
information on the budgetary responsibilities of managers;
• Engagement and understanding of a wider range of views of
stakeholders within the business (including the workforce) will be
improved by the appointment of an independent non-executive
director to the role of leading engagement with the workforce;
• The Board will work further on succession planning for executive
and non-executive directors, in particular a plan for an eventual
successor to the CEO; and
• Building greater diversity, including gender diversity, at Board
and Senior Management level.
In addition, by taking Board papers as read, the Board made an
effort to spend more time actively discussing and debating issues
at Board meetings.
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 meet with members of the
Board in order to obtain a good understanding of the challenges
and opportunities faced by the Group. The directors are given the
opportunity to discuss their training and professional development
needs at every quarterly Board meeting and on an ad hoc basis as
required and to make recommendations to the Chairman regarding
topics on which they would like to receive training. In addition to
training organised by the Company, the directors regularly attend
training events organised by third parties and the Company actively
encourages directors to attend such events.
During 2018 various directors suggested potential training topics
and information sessions were held on geology, drilling matters and
ESG matters.
Shareholder engagement
Nostrum is in regular contact with its shareholders and sell-side
analysts, and maintains an active and transparent dialogue with
them 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 posting them 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.
We respond to daily queries from existing and prospective
shareholders and sell-side analysts through our Investor Relations
team. Our registrars, Link 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 past year, the Investor Relations team and management
met more than 250 investors through face-to-face meetings,
roadshows, conferences and other corporate events. The Executive
Chairman, Chief Executive Officer and Chief Financial Officer, in
particular, regularly meet with major investors and analysts and
provide feedback on any shareholder concerns or views to the
Board.
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.
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Attendance at meetings of the Board and its committees in the 2018 financial year
The following table illustrates the attendance of directors at Board and committee meetings (as relevant) throughout the year.1
Board
Audit
Committee
Remuneration
Committee
Nomination and
Governance Committee
EXECUTIVE DIRECTORS
Atul Gupta
Kai-Uwe Kessel
Tom Richardson
NON-EXECUTIVE DIRECTORS
Mark Martin2
Sir Christopher Codrington, Bt.3
Kaat Van Hecke
Michael Calvey
Simon Byrne
Martin Cocker
A
5
5
5
5
5
5
5
5
5
B
5
5
5
5
5
5
5
5
5
A
B
A
B
3
3
3
3
3
3
6
6
6
6
6
6
6
6
A
4
4
4
4
B
3
4
4
4
A = Total number of meetings the director was eligible to attend.
B= Total number of meetings the director did attend.
1. A meeting of an implementation committee for the Company’s 2018 Bond refinancing was held on 15 January 2018, which all three committee members,
Messrs Gupta, Codrington and Richardson attended.
2. Chairman of the Remuneration Committee
3. Chairman of the Audit Committee and the Nomination and Governance Committee
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Audit Committee Report
Audit Committee Report
Financial position, results and prospects of the Group were under
our constant monitoring, through reviewing the financial
statements, liquidity forecasts, viability assessments and long-term
modelling in the context of the above-mentioned operational
developments. When we considered additional information was
necessary for our understanding of the various matters in these
areas, we addressed our requests to the senior management and
held additional meetings and workshops with involvement of the
subject-matter experts in relevant topics. I am pleased to report that
throughout the year positive improvements were made with various
aspects of financial reporting that are the results of strengthening of
the Group finance team in our head office in London.
We have also paid attention to the new developments in the
accounting standards as well as the FRC’s expectations for annual
financial reporting. As an example, we have reviewed
management’s position and financial statement disclosures
relating to the application of IFRS 9 Financial Instruments adopted
by the Group from 1 January 2019, and management’s assessments
and related disclosures on application of IFRS 16 Leases. Further
details of our work are described in the next sections of the Audit
Committee report.
I’m pleased to report that the committee has successfully worked
through and addressed its tasks in addition to supporting the Board
with its insight in financial, audit, assurance and compliance matters,
as well as guiding and challenging the senior management team as
we embark on the Group’s next stage of development:
commissioning the GTU3, stabilising production and managing the
opportunities for further growth.
I would like to thank my fellow committee members for their
contribution to the effective discharge of the committee’s duties
throughout the year.
Sir Christopher Codrington, Bt.
Chairman, Audit Committee
Independent non-executive director
25 March 2019
Dear shareholder,
Following another busy year for the committee alongside the
operational and fiscal challenges faced by the Group, this report
summarises our activities carried out in relation to the financial year
ended 31 December 2018.
With four members onboard during the year, we kept our practice
of formally meeting on the same date as the scheduled quarterly
Board meetings and having the pre-meetings several days prior to
have enough time and opportunity for covering various topics on
financial, risk, audit and compliance matters, as well as other
emerging critical issues. The external auditors were invited to our
meetings for discussion of their review and audit work as well as
other relevant matters.
We recognise the Company is going through a challenging time
operationally. GTU3 delays have coincided with both subsurface
issues and challenges with the technical execution of drilling wells.
The Chinarevskoye field, whilst containing many hydrocarbons, is
comprised of multiple deep and tight reservoirs. This makes both
extracting the hydrocarbons and forecasting future production
difficult. This has had a direct impact on the impairment analysis,
and we have worked with management and EY to come up with a
view that takes into account the challenges we have encountered,
especially in relation to drilling in the western area of the field. We
have sought to run a number of sensitivities both on the impairment
model and in the viability statement to ensure that we have
considered all eventualities. On the back of reserve downgrades
and the challenges of drilling in the west, we felt it prudent to take
an impairment against our assets. We will continue to monitor the
progress of drilling in the Northern Area, the speed at which UOG is
moving forward and the results of the Schlumberger reports on the
Biyski-west and North-east, in order to assess whether these impact
our view on impairment going forward. The Committee noted that
both the Northern area and UOG agreements provide for possible
future upside but this needs to be balanced against the challenges
in our core areas over the last twelve months.
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Role and responsibilities of the Audit Committee
The Committee is committed to its primary role of assisting the Board
in achieving the Group’s strategic objectives whilst protecting
stakeholder interests. There were no substantial changes in the key
areas of responsibility of the committee as categorised below:
Interaction with the Financial Reporting Council (“FRC”)
The Committee, together with the Chief Financial Officer,
considered the key areas highlighted in the October 2018 letter
from the FRC addressed to Audit Committee Chairs and Finance
Directors, and undertook the following actions:
• Review the Group’s annual and interim reports including financial
statements, formal announcements of financial results and other
related announcements;
• Review the effectiveness of the Group’s internal control and risk
management systems;
• Monitor compliance with applicable regulatory and legal
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.
More detail on these key areas can be found in the committee’s
terms of reference which are available on the Group’s website at
www.nog.co.uk.
Membership
Sir Christopher Codrington, Bt. Member since 19 May 2014
Chairman since 8 May 2017
Member since 31 December 2016
Mark Martin
• Reviewed the key changes required by IFRS 15 ‘Revenue from
contracts with customers’ and concluded that there is no
substantial impact on the Group, hence the disclosures provided
in the financial statements were considered appropriate;
• Reviewed the disclosures related to IFRS 9 ‘Financial Instruments’
in the quarterly financial statements and recommended the
management to implement certain improvements, which were
discussed and implemented in the annual financial statements;
• Reviewed management’s report on the assessment of the impact
on implementation of IFRS 16 ‘Leases’ and concurred with the
conclusions reached, accounting treatment applied, and
disclosures made in the financial statements;
• While reviewing critical judgements and estimates applied by
management, focused on challenging distinction between
judgements and estimates, disclosures of the sensitivities of
carrying amounts to the relevant assumptions and estimates, and
appropriateness of other relevant disclosures;
• Continued monitoring the internal controls over financial
reporting through discussions with those involved in the
accounting and financial reporting and external auditors as well
as reviewing the periodic information provided;
• Gave due consideration to the Brexit impact, even though there
has previously been an assessment and it was concluded to have
an insignificant influence on the Group;
Member since 8 May 2017
• Stayed alert on appropriate accounting treatment and related
Kaat van Hecke
Martin Cocker
Member since 16 November 2017
disclosures related to significant complex supplier arrangements;
• Reviewed management’s assessment of the prospects based on a
three-year model and assessed whether the viability statement
adequately reflects significant assumptions and qualifications, if
necessary; and
• Paid attention to presentation in the Annual Report of a balanced
and comprehensive analysis of the Group’s financial position and
performance. As part of this review, the Committee continued to
challenge the definitions, explanations, reconciliations,
prominence and consistency of alternative performance
measurements such as EBITDA, etc. Also, the committee
reviewed the Non-Financial Information Statement, which
provides a picture of the Company’s performance and impact;
where information was not provided on a specified non-financial
matter, the committee requested a reasoned explanation of why
it was not provided.
All members of the Audit Committee are independent non-executive
directors. The qualifications presented in the biographies of the
members of the Committee on pages 56-57 and their respective
contributions to the activities of the committee demonstrated that the
committee as a whole has competence in oil and gas upstream and
downstream operations, and that it also has the necessary levels of
competence in accounting and auditing as well as recent and relevant
financial experience.
Meetings
In addition to its scheduled quarterly meetings, the committee also
meets when it is necessary. The Chief Financial Officer, the Chief
Legal Officer and Company Secretary and the external auditor are
invited to the meetings. The committee held six meetings during
2018 and the attendance of each committee member at meetings
of the Committee is shown on page 65.
In 2018 the Committee continued to use its annual planner, which
summarises various topics requiring the committee’s attention, and
which were accumulated based on the requirements of the UK
Corporate Governance Code 2016 (“the 2016 Code”), the FRC’s
Guidance on Audit Committees dated April 2016, the Committee’s
Terms Of Reference and other relevant sources.
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Audit Committee Report / continued
Audit Committee Report continued
Self-assessment
In 2018, the Board held a round table internal self-evaluation of its
performance as detailed on page 64. In its activities following this
exercise, the committee considered relevant points through
contribution to communications with shareholders, closer interaction
with the management team, and paying attention to diversity matters.
Activities during the year
In accordance with its responsibilities outlined above, the
Committee’s activities fell under the following four main areas, each
of which is explained in more detail in the following Sections 1 to 4:
• Financial reporting
• Risk management and internal controls
• Compliance with laws and regulations
• External audit.
1. Financial reporting
The key areas of the Committee’s activities related to financial
reporting can be summarised as follows:
• Review of and discussions on quarterly and annual financial
statements and recommendation to the Board for approval;
• Review and discussions on matters of liquidity and going concern
analysis as well as impairment considerations;
• Review of periodic press releases and results presentations prior
to their publication;
• Review of annual budgets and periodic forecasts;
• Review of monthly management updates covering key issues
including financial and operational performance and the status of
key initiatives; and
• Discussion of various ad hoc matters related to financial
accounting and reporting.
Review of the quarterly and annual financial statements as well as
the Annual Report by the committee was undertaken with an
emphasis on the following areas:
• Ensuring that the accounting policies adopted, and disclosures
made for compliance with financial reporting standards and
relevant corporate governance requirements, with particular
attention to the appropriate and timely implementation of any
changes and new standards and requirements, e.g. activities
related implementation of new IFRS as mentioned above;
• Ensuring the reasonableness of the significant judgements and
estimates applied by management (described in more detail
below) and their appropriate disclosures as mentioned earlier;
• Assessing whether the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the information
necessary for the shareholders to assess the Group’s
performance, business model and strategy; and
• Discussing any significant matters with management and the
external auditor and providing feedback to management on ways
to improve the effectiveness and clarity of the Group’s corporate
reporting.
Significant judgements, estimates and assumptions
Significant judgements, estimates and assumptions applied by
management when preparing the financial statements are closely
related to the principal risks and uncertainties faced by the Group,
which are subject to constant monitoring by the Board and the
committee. The following table summarises the key areas where
significant judgements, estimates and assumptions are applied, and
the corresponding actions taken by the committee to address them:
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Significant judgements
Significant estimates
Significant assumptions
Impact on financial statement accounts
Oil and gas reserves
Management applied significant
judgement when selecting the
unit-of-production method of
depletion of assets based on the
oil and gas reserves.
Management uses internal
estimates, confirmed by Ryder
Scott on an annual basis, to
perform an annual assessment
the oil and gas reserves. The
reserves estimates are made in
accordance with the
methodology of the Society of
Petroleum Engineers (the
“SPE”).
While making such estimates
management uses various
assumptions related to future
commodity prices, capital and
operating expenditures
necessary for the development
of a field, geological and
technical assumptions, future
production volumes, drilling
programme, etc.
Changes in the key assumptions
may significantly affect the
estimation of oil and gas
reserves, and respectively result
in substantial changes in
depletion expense and carrying
value of working oil and gas
properties in the future periods.
Committee actions
The Committee concurred with
the continued application of the
unit-of-production method of
assets depletion, as this method
reflects the expected pattern of
consumption of future economic
benefits by the Group.
The Committee gained comfort
on the outcomes of the oil and
gas reserves’ estimations based
on its review of the key
assumptions, and confirmation
by independent reserve
engineers using consistent
methodology of estimations.
Considering the most recent
available information, the
Committee reviewed various
key assumptions used by
management in estimating the
oil and gas reserves and was
satisfied with the
reasonableness of such
assumptions.
Non-current assets’ carrying values
For impairment analysis,
management used judgement
and determined a single cash-
generating unit (CGU) within the
Group’s non-current assets,
which includes all assets related
to Chinarevskoye and
exploration fields and gas
treatment facilities.
Committee actions
The Committee concurred with
management’s position in
determining a single CGU for
the majority of the Group’s non-
current assets.
Estimations of the recoverable
Assumptions used in estimating
Changes in the key assumptions
amount of the CGU were
prepared by management
based on the discounted cash
flow model using significant
assumptions.
the recoverable amount
included future commodity
prices, oil and gas reserves,
future production profiles,
operating expenses and capital
expenditure estimates, fiscal
regimes, and discount rate.
may significantly affect the
estimation of recoverable
amount of non-current assets,
and respectively may result in
impairment of non-current
assets in the future periods.
The Committee reviewed the
Areas of focus were the
The Committee also gave
detailed reports on impairment
testing prepared by management
and agreed with management’s
approach in using a discounted
cashflow model as the most
appropriate for this purpose.
assumed oil prices and discount
rates particularly in light of
recent oil price developments
and related volatility risk.
special consideration to the
sensitivity analysis in relation to
the assumptions used.
Exploration assets’ carrying values
Exploration assets were
considered by management as
part of the single CGU – please
refer to the above point.
The estimates of the
In addition to the
Changes in the key assumptions
recoverable amount of
exploration assets are included
in the above-mentioned single
discounted cash flow model.
abovementioned assumptions
integrated in the discounted
cash flow estimations,
exploration assets are subject to
management’s assumptions and
plans on performing further
exploration works as well as
term of subsoil use rights.
may significantly affect the
estimation of recoverable
amount of exploration assets,
and respectively may result in
their impairment in the future
periods.
Committee actions
The Committee’s response is
covered as mentioned above.
The Committee’s response is
covered as mentioned above.
The Committee discussed with
management future plans and
expectations related to further
exploratory works and concurred
with conclusions made.
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Significant judgements
Significant estimates
Significant assumptions
Impact on financial statement accounts
Financial liabilities – modification (IFRS 9)
Significant judgement was used
by management in determining
whether 2017 and 2018
refinancing of the Notes
contained modification of
existing liabilities.
Committee actions
The Committee discussed with
management modification of
financial liabilities and
challenged the arguments used
to reach conclusions.
Leases (IFRS 16)
Management used significant
judgement in assessing whether
supplier contracts contain leases.
This included assessment of
whether assets subject to lease
can be identified, identification of
who obtains substantial benefits
from such assets, and who
operates them. Also, judgement
was required to identify
components of each lease.
Committee actions
The Committee reviewed
management’s analysis of
significant supplier contracts
and challenged the application
judgement.
Where modification is
Significant assumptions were
determined, the gross carrying
amount of the new Notes is
recalculated taking in
consideration the relative
proportion of the arrangement
fees associated with the Notes
being exchanged.
made in relation to the
proportion of the Notes
determined to be modified.
The Committee discussed with
management the approach
taken in estimating the carrying
amount of the modified Notes.
The Committee reviewed and
discussed with management its
assumptions used in estimating
the carrying amount of the
modified Notes.
For those contracts with suppliers,
which were concluded to contain
a lease, management estimated
the net present value of the lease
liability based on the amounts of
future payments, and any other
applicable components of a lease.
In the process of estimating the
net present value of lease liability,
management’s assumptions were
related to their expectation of the
future minimum number of assets,
discount rates and other specific
assumptions depending on the
nature of a contract.
Changes in the key assumptions
may lead to significant changes
in the amount of right-of-use
assets and lease liabilities in the
future periods.
The Committee reviewed and
The Committee reviewed and
discussed with management the
lease estimates and
assumptions used.
discussed with management the
lease estimates and
assumptions used.
Other significant judgements and estimates
The decommissioning of oil and gas assets at the end of their
economic lives, the provisioning for contingent and other liabilities,
current and deferred income tax and the fair value of financial
instruments are all areas that require the management to use
judgement and estimates. The Committee examined each of these
issues and sought clarifications as and when necessary, including
discussions with the Company’s auditor.
Significant matters communicated by the external auditor
Significant risks identified by the external auditor were related to
the above-mentioned areas involving judgments and estimates as
well as the following areas which were additionally considered by
the Committee:
• Revenue recognition - the Committee believes that the Group’s
policy and internal controls in relation to revenue recognition
adequately respond to this risk.
• Related party transactions and disclosures - the Committee has
been monitoring procedures for identification of related parties
to ensure that pre-approvals are obtained before entering into
any such contracts, depending on the thresholds as per Group’s
policy on approval of matters and transactions.
• Risk of management override - in the Committee’s view a set of
internal controls, as described below under the heading "internal
control system", sufficiently minimises the risks related to
management’s ability to manipulate accounting records or to
misappropriate assets.
2. Risk management and internal controls
The Committee continuously monitored the Group’s risk
management systems, further information on which can be found in
the Risk Management section on pages 39-44 of the Annual Report.
In accordance with requirements of the 2016 Code relating to the
viability statement, the committee reviewed the impact and
sensitivity analysis of such risks on the Group’s long-term viability.
The principal areas of risk management assessed by the Committee
are described in the table below.
Key areas of the committee’s focus in relation to principal risks
GTU3 construction and
Construction of GTU3 and the drilling programme continued to be a key focus for the Committee,
well drilling
particularly in light of low oil prices. The Committee reviewed progress reports and met regularly with
management to discuss potential problems and to provide recommendations on future steps to be taken by
management.
management.
Oil and gas production
Oil and gas production volumes, being one of the strategic indicators of the Group’s performance, are
rates
subject to risks and uncertainties of a geological and technological nature. The Committee has been
constantly monitoring forecast production rates in comparison to actual rates. Any material variances were
discussed, and explanations sought either during committee meetings or dedicated presentations given by
Health, safety and
As part of the monthly management reports the Committee reviewed the Group’s activities to ensure an
environment
appropriate level of protection for health, safety and the environment. This area will be within the scope of
responsibilities of the newly established HSEC Committee of the Board.
Cyber security
The Committee examined cyber security matters and discussed with management past and planned actions
directed at addressing the recommendations from external consultants.
Financial reporting
The Committee seeks to ensure the accurate maintenance of accounting records and related transactions.
Considering the volatility of oil prices, the Committee focused on the review of impairment testing, going
concern and the viability statement.
Internal control system
Internal audit
The Group’s internal control system is aimed at mitigating risks and
The primary role of the internal audit function is to assist the Board
improving efficiency. These include:
• Corporate governance: segregation of authorities and duties at
and senior management to protect the assets, reputation and
sustainability of the organisation. This is achieved through:
various levels;
• Building strong and effective risk awareness within the Group;
• Policies and procedures covering directors’ remuneration,
• Continuously improving risk management and control processes
compliance, accounting and reporting, health, safety and
so that they operate effectively and efficiently and reflect leading
environment as described in the relevant sections of the Annual
practice; and
Report;
• Sharing best practice regarding risk management and assurance
• Training and internal communications; and
across the Group.
• Continuous monitoring by senior management and the Board of
short-term, medium-term and long-term planning and decision-
making processes.
In the Committee’s view, the Group maintained robust and
defensible systems of risk management and internal control, and
the committee made recommendations to senior management on
further improvements as and when considered necessary.
To adequately resource the internal audit function, the Group has
outsourced the work to experts in relevant areas on a case-by-case
basis. A dedicated member of the finance team has been assigned
with a role of collecting requests for internal audit work from the
management and the committee, organising the outsourcing of
such work and coordinating delivery of results.
Also, in Committee’s view the Group has sufficient internal processes
providing assurance to the management, Audit Committee and the
board about effectiveness of systems of internal control and risk
management, e.g. monthly management reports and their review
by management and the Board, assurance provided by QHSE and
Security personnel.
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2. Risk management and internal controls
The Committee continuously monitored the Group’s risk
management systems, further information on which can be found in
the Risk Management section on pages 39-44 of the Annual Report.
In accordance with requirements of the 2016 Code relating to the
viability statement, the committee reviewed the impact and
sensitivity analysis of such risks on the Group’s long-term viability.
The principal areas of risk management assessed by the Committee
are described in the table below.
Key areas of the committee’s focus in relation to principal risks
GTU3 construction and
well drilling
Oil and gas production
rates
Construction of GTU3 and the drilling programme continued to be a key focus for the Committee,
particularly in light of low oil prices. The Committee reviewed progress reports and met regularly with
management to discuss potential problems and to provide recommendations on future steps to be taken by
management.
Oil and gas production volumes, being one of the strategic indicators of the Group’s performance, are
subject to risks and uncertainties of a geological and technological nature. The Committee has been
constantly monitoring forecast production rates in comparison to actual rates. Any material variances were
discussed, and explanations sought either during committee meetings or dedicated presentations given by
management.
Health, safety and
environment
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. This area will be within the scope of
responsibilities of the newly established HSEC Committee of the Board.
Cyber security
The Committee examined cyber security matters and discussed with management past and planned actions
directed at addressing the recommendations from external consultants.
Financial reporting
The Committee seeks to ensure the accurate maintenance of accounting records and related transactions.
Considering the volatility of oil prices, the Committee focused on the review of impairment testing, going
concern and the viability statement.
Internal control system
Internal audit
The Group’s internal control system is aimed at mitigating risks and
improving efficiency. These include:
• Corporate governance: segregation of authorities and duties at
The primary role of the internal audit function is to assist the Board
and senior management to protect the assets, reputation and
sustainability of the organisation. This is achieved through:
various levels;
• Policies and procedures covering directors’ remuneration,
compliance, accounting and reporting, health, safety and
environment as described in the relevant sections of the Annual
Report;
• Training and internal communications; and
• Continuous monitoring by senior management and the Board of
short-term, medium-term and long-term planning and decision-
making processes.
In the Committee’s view, the Group maintained robust and
defensible systems of risk management and internal control, and
the committee made recommendations to senior management on
further improvements as and when considered necessary.
• 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 regarding risk management and assurance
across the Group.
To adequately resource the internal audit function, the Group has
outsourced the work to experts in relevant areas on a case-by-case
basis. A dedicated member of the finance team has been assigned
with a role of collecting requests for internal audit work from the
management and the committee, organising the outsourcing of
such work and coordinating delivery of results.
Also, in Committee’s view the Group has sufficient internal processes
providing assurance to the management, Audit Committee and the
board about effectiveness of systems of internal control and risk
management, e.g. monthly management reports and their review
by management and the Board, assurance provided by QHSE and
Security personnel.
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3. Compliance with laws and regulations
The Chief Legal Officer and Company Secretary attends the
Committee’s quarterly meetings which allow the Committee to raise
any concerns related to legal, compliance, whistle-blowing and the
status of any ongoing litigation.
UK Corporate Governance Code
In relation to the work of the Committee, as of 31 December 2018,
Nostrum had complied with all the principles and provisions of the
UK Corporate Governance Code 2016.
Whistle-blowing arrangements
Nostrum has a Group Whistle-Blowing Policy and ensures that all
Group employees have access to someone who can provide them
with support and guidance. The Group has two compliance liaison
officers: one Russian-speaking officer based in Kazakhstan and
another Dutch and English-speaking officer based in Brussels. The
Audit Committee maintained close contact with the compliance
liaison officers. There were no whistle-blowing instances reported
during 2018.
Corporate Bonds Covenants
At its quarterly meetings, the Committee is updated by
management on the Group’s compliance with covenants contained
in the 2017 and 2018 Corporate Bonds.
4. External audit
Appointment of external auditor
Since 2007, Ernst & Young LLP (Kazakhstan) has been the auditor of
the predecessor group of companies. On the recommendation of
the Committee and subsequent approval by the Company’s
shareholders, Ernst & Young LLP (UK) was first appointed as an
auditor of the Group on 19 May 2014.
In accordance with The Statutory Audit Services for Large
Companies Market Investigation (Mandatory Use of Competitive
Tender Processes and Audit Committee Responsibilities) Order
2014 (the “CMA Order 2014”) companies should put their external
audit contract out to tender at least once every ten years. The
Committee carried out a tender for the external audit arrangements
in 2015 to ensure that the Group was receiving the highest possible
quality audit services commensurate with the best available price.
Based on the results of the tender it was concluded that it would be
in the best interests of the stakeholders to continue engaging Ernst
& Young LLP (UK) as the Group’s external auditor.
Following a recommendation to that effect from the Board, the
shareholders approved the re appointment of Ernst & Young LLP
(UK) at the Annual General Meeting held on 5 June 2018. Mr.
Richard Addison was appointed as lead audit engagement partner
on 19 May 2014 and has to-date continued in this role. However, he
has given notice about his tenor coming to end with the completion
of the 2018 audit, hence the Committee interviewed three
candidates from Ernst & Young LLP (UK) and unanimously
recommended that William Binns continues in this role. William is
an audit engagement partner of FTSE 100 companies and has rich
experience in auditing oil and gas companies.
2018 audit
During Q4 2018 the Audit Committee reviewed and discussed the
detailed audit plan prepared by Ernst & Young LLP (UK) which
identified the audit scope and its assessment of significant risks. The
key risks monitored by the Committee corresponded with those
identified and assessed by management and the external auditor.
All members of the Committee supported the application of
professional scepticism by the Group’s external auditor.
During 2018, 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 included: the external auditor’s
assessment of significant risks and related management actions,
confirmation that there had been no restriction in the scope placed
on it by management, the adequacy of the audit fees, the
independence of its audit and how the auditor had exercised
professional scepticism.
The Committee reviewed the H1 2018 interim and 2018 annual
auditor’s reports giving consideration to the audit procedures and
findings in the areas of significant judgements and estimates. The
Committee also reviewed the letter of representations in respect of
both the interim review and the annual audit, which were
subsequently signed by management.
The Committee evaluated the effectiveness of the external audit
process for the year ended 31 December 2018, by completing a
questionnaire, which addressed areas such as processes, audit
team, audit scope, communications, technical expertise, audit
governance and independence and audit fees. Based on such
evaluation the committee concluded that the performance of the
external auditor remains at an appropriately high level and
recommend its re-appointment.
Non-audit services
In 2016, the Group’s “Policy on the provision of non-audit services
by the external auditor” was revised based on the requirements of
the FRC Revised Ethical Standards dated June 2016 and the FRC’s
Guidance on Audit Committees dated April 2016. There were no
significant changes made to the policy during 2018.
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.
Committee pre-approval is required before the external auditor is
engaged to provide any permitted non-audit services (as defined in
the policy) in addition to any other approvals required by the Board
and management pursuant to powers delegated by the Board or
Nostrum’s internal approvals policies. The Committee monitors the
external auditor to ensure that it does not provide non-audit
services that are prohibited by the FRC and limits such services to
due diligence services and other assurance services. The revised
policy is available on the Group’s website at www.nog.co.uk and will
be reviewed and amended as and when required.
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Audit and non-audit fees (US$ thousands)
292
312
2018
2017
307
190
250
155
Audit of the financial statements
Audit related assurance services
Services relating to corporate finance transactions
The detailed breakdown of audit and non-audit fees can be found
in the Note 31 to the consolidated financial statements of the Group
on page 151. The ratio of audit fees to non-audit fees in 2018 was
0.69 (2017: 0.77). A significant proportion of non-audit fees was
attributable to quarterly reviews of interim financial statements and
assurance services related to the bond refinancing projects carried
out in 2017 and 2018. Considering the assurance nature of these
services, the committee concluded that it was in the best interest of
the Group that such services were provided by the external auditor.
By operating in accordance with the above policy and other
practices established within the Group, the committee was satisfied
that adequate safeguards were in place to ensure the objectivity
and independence of the external auditor.
Sir Christopher Codrington, Bt.
Chairman, Audit Committee
Independent non-executive director
25 March 2019
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Nomination and Governance Committee Report
Letter from the Chairman of the
Nomination and Governance Committee
Committee members
• Sir Christopher Codrington, Bt. (Chairman)
• Kaat Van Hecke
• Mark Martin
• Atul Gupta (committee member until 26 November 2018)
The Chairman does not have any other significant commitments
to report.
Key responsibilities
• Lead the process for Board appointments and make
recommendations to the Board regarding candidates
for appointment or re-appointment 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) 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.
The Committee during 2018 recommended the formation of a new
Health, Safety, Environment and Communities Committee which
was created in early 2019 to emphasise the importance of these
matters to the Board.
We believe that the current composition of the Board and its
committees remains appropriate for the time being, but this will be
kept under review during 2019. The Committee in early 2019
recommended the approval of the appointment by Mr Calvey of
Ralph Tavakolian Morgan as his alternate director.
The Committee also played an important role in the recruitment
during 2018 of a new Chief Operating Officer for the Group, to
ensure a smooth succession process and that the Group’s
leadership needs in this area are met.
The Nomination and Governance Committee has played a key role
in the review of the new 2018 Corporate Governance Code and
implementation of key matters to ensure the Company’s adherence
to the new 2018 Code.
The Committee concluded and recommended to the Board that
one of the independent non-executive directors be appointed to
oversee effective engagement with the workforce as mandated
under the 2018 Code.
During 2017, the Committee had discussed Mr Calvey’s
appointment to the Remuneration Committee. At the time of
recommending Mr Calvey’s appointment to the Remuneration
Committee, the Committee recognised that it was doing so in
contravention of Provision D.2.1 of the Code but at that time
felt that, notwithstanding this provision, Mr Calvey, as a non-
independent director representing a significant shareholder,
could bring a valuable additional perspective to discussions
regarding the remuneration and incentivisation of directors and
senior management in the long-term interest of the Company.
This has since been reviewed by the Committee during the financial
year ended 31 December 2018 and Mr Calvey subsequently
stepped down as a member of the Remuneration Committee on
16 August 2018 to ensure that the Company complies with the
Code in this area. In addition, Atul Gupta stepped down from the
Committee when he became Executive Chairman on 26 November
2018. As a result, the Committee is now comprised solely of
independent non-executive directors.
The Committee approved Mr Gupta’s assumption of certain
executive responsibilities because the respective responsibilities of
the Chairman of the Board and the Chief Executive Officer remain
clearly defined in accordance with UK Corporate Governance Code
2018 Principle F, and the Committee believe that the Company will
benefit from Mr Gupta’s assumption of such responsibilities.
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Committee meetings
The Nomination and Governance Committee met formally four
times during 2018. The attendance of each Committee member
at Committee meetings held during 2018 is shown on page 65.
I report to the Board, as a separate agenda item, on the activities
of the committee at each quarterly Board meeting.
Only members of the Committee have the right to attend
committee meetings. However, other individuals such as the Chief
Executive Officer, the Chief HR Officer and external advisers may be
invited to attend all or part of any meeting, as and when
appropriate.
Board self-evaluation
The Committee analysed the results of the Board self-evaluation
conducted, a description of which is set out on page 64.
The Senior Independent Director led the evaluation of the Executive
Chairman.
Policies
Adherence to, and implementation of, the Group-wide Equality and
Diversity Policy was kept under review during 2018 and I was
pleased to see a woman join our Senior Management Team. A copy
of the policy is available to download on our website. More
information in relation to Board diversity can be found on page 61.
In addition to the approval of the new Anti-Facilitation of Tax
Evasion Policy in 2018, the Committee also recommended to the
Board a number of changes to other Group policies and
procedures to reflect changes in legislation and best practice.
All directors will stand for re-election at the 2019 Annual General
Meeting with the full support of the Board.
Sir Christopher Codrington, Bt.
Chairman, Nomination and Governance Committee
25 March 2019
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Remuneration Committee Report
Letter from the Chairman of
the Remuneration Committee
The Committee and the Board continue to believe that the Company’s
remuneration policy is appropriate and aligned with Nostrum’s strategy
and business needs. However, as a result of its engagement with
shareholders Nostrum has taken a number of specific actions:
• Following the decision mentioned above by Nostrum’s non-
executive directors who had been granted LTIP awards, the
Company amended the terms of its LTIP to make non-executive
directors ineligible to participate in the LTIP;
• The Board has resolved to propose to shareholders at this year’s
AGM that the remuneration policy be modified to prohibit non-
executive directors from participating in the LTIP;
• The composition of the Committee has been changed such that it
is now comprised solely of independent non-executive directors;
and
• The Committee will endeavour to provide additional information
and clarity regarding KPIs for bonuses for executive directors in
future in the remuneration report published in the Company’s
annual reports.
After taking the actions mentioned above, the Committee and the
Board concluded that the current provisions of the LTIP relating to the
performance period, vesting period and accelerated vesting of awards
upon a sale of the Company are appropriate and aligned with the
interest of shareholders, so that modifying such provisions of the LTIP at
this time would not be the right course of action.
All of these decisions were announced in an additional
statement issued by the Company on 30 November 2018 which
has been included in the Public Register maintained by the
Investment Association.
The Committee and the Board have also recommended a clarification
to the remuneration policy to allow for a possible pension entitlement,
but only up to 10% of remuneration or to the extent that the same is
required under applicable law to ensure the Company complies with
such law.
The Board and the Committee are committed to continuing their
engagement and dialogue with the Company’s shareholders and
their advisory bodies on these and other matters and welcome
their feedback.
Remuneration for 2018
Further details of executive director performance against 2018 KPIs
can be found on page 81. On the basis of the above and the overall
performance of the Group, the Committee has decided not to
award the executive directors with an annual bonus payment for
2018.
The 2019 key performance indicators for the executive directors are
set out on page 86.
Details of the Committee’s determination regarding the satisfaction
in 2018 of the performance conditions under the Group’s long-term
incentive plan can be found on page 82.
Throughout 2018, the Committee continued to consider updates to
corporate governance guidelines in its decision-making and will
continue to monitor best practice guidelines and take account of
these and the views of shareholders in the decision-making process.
The committee has the freedom to consider any issues it regards as
of importance when setting executive directors’ remuneration,
including environmental, social or governance issues.
Dear shareholder,
I am pleased to introduce the Directors’ Remuneration Report which
has been approved by both the Remuneration Committee and the
Board for the year ended 31 December 2018.
On 16 August 2018, Michael Calvey stepped down as a member of
the Committee to ensure the Company’s full compliance with
Provision D.2.1 of the Code and I would like to thank him for his
valuable contributions to the committee.
Remuneration report and remuneration policy
During 2018 the Committee focused in particular on feedback
received from shareholders and shareholder advisory bodies prior
to the Company’s Annual General Meeting on 5 June 2018,
regarding the remuneration report and remuneration policy.
As previously announced, the Company’s non-executive directors
who had been granted awards under the Company’s LTIP agreed to
renounce such awards and agreed that they will not accept any
future LTIP awards from the Company.
Following the AGM, the Committee continued its consultations with
shareholders and has discussed at length the views of shareholders
in relation to these two matters. The main themes expressed by
some shareholders and shareholder advisers were:
• That non-executive directors should not be eligible for
participation in the LTIP;
• That the performance period under the LTIP be extended from
one to three years;
• That the vesting period for the LTIP awards be increased from
three to five years;
• That the LTIP be modified to remove the provisions for
accelerated vesting of awards in the event of certain sales of the
Company;
• That there be additional clarity that the targets for certain
bonuses were agreed in advance by the Remuneration
Committee; and
• That the Remuneration Committee be comprised solely of
independent non-executive directors and the Company
Executive Chairman.
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The Committee and the Board reviewed non-executive director fees
in November 2018 and concluded that Mr Gupta’s fee should be
increased from US$250,000 to US$450,000 per annum to reflect the
increase in his responsibilities since becoming Executive Chairman
of the Company. No other changes were made to the fees of the
non-executive directors.
This report has been prepared in accordance with the UK’s
regulations on remuneration reporting.
On behalf of the Committee, I would like to thank shareholders for
their continuing support.
Mark Martin
Chairman, Remuneration Committee
25 March 2019
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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2018 annual report on remuneration
2018 annual report on remuneration
In this section we give details of the composition of the
Remuneration Committee and activities undertaken in the 2018
financial year. We will seek an advisory vote on the remuneration
report at the 2019 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.
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 2018 were:
Name
Membership start
date
Membership end
date
Mark Martin (Chairman)
19 May 2014
Sir Christopher Codrington, Bt. 19 May 2014
31 Dec 2016
Kaat Van Hecke
8 May 2017
Michael Calvey
16 August 2018
None of the Committee members has day-to-day involvement with
the business. Their biographies are given on pages 56–57. 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 to download from the Company’s website.
Alternatively, copies can be obtained on request from the Company
Secretary.
In summary, the Committee’s key responsibilities include:
• Making recommendations to the Board on the Company’s overall
framework for remuneration and its cost and, in consultation with
the Executive Chairman and Chief Executive, determining the
remuneration packages of each of the executive directors;
• 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
• 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 2018 and the attendance of
each committee member at such meetings is shown on page 65.
The principal agenda items at the formal meetings were as follows:
Meeting
Agenda item
March 2018
• Review and approval of key performance
indicators.
• Approval of senior management
compensation and bonuses.
• Review and approve the 2018
remuneration report.
• Discuss achievement against performance
conditions under the long-term incentive plan.
• Review and approval of the CEO contractual
arrangements
• Review and approve its terms of reference
• Review of composition and approval of the
change (Michael Calvey stepping down)
• Review and discussion of non-executive
director exclusion in long-term incentive plan.
• Review and discussion of the lengthening of
the long-term incentive plan performance
period from one year to three years.
• Discussion of the pension contribution or
provisions for executive directors.
• Review and approval of changes to the
Company’s remuneration policy.
• Review of Executive Chairman’s remuneration.
• Discuss implementation of the long-term
incentive plan.
• Discuss 2017-2018 key performance
indicators.
• Discuss changes to remuneration policy.
May 2018
August 2018
November 2018
With the exception of the Chairman of the Board and the Chief
Executive Officer, no other directors participated in meetings of the
Committee during 2018.
During the year the Committee received advice internally from
Atul Gupta (Executive Chairman), Kai-Uwe Kessel (Chief Executive
Officer) and Thomas Hartnett (Company Secretary). The Chairman
and the Chief Executive Officer 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 Executive Chairman of the Board, the
Chief Executive Officer 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 the
remuneration of senior members of the executive management
team below Board level.
The Remuneration Committee will keep the external adviser
relationship under review to ensure it remains comfortable that the
advice it is receiving is objective and independent.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Voting on remuneration matters
Section 439A of the Companies Act 2006 (the “Act”) requires the remuneration policy to be submitted to shareholders for a binding vote every
three years or where there is a change in the remuneration policy. The remuneration policy was last approved by shareholders at the 2018
Annual General Meeting by way of a binding vote and the results of the votes received are shown in the table below. The changes proposed
to the remuneration policy for 2018 were approved by shareholders at the 2018 Annual General Meeting. The resolution put to shareholders at
the 2018 Annual General Meeting relating to directors’ remuneration was a resolution to approve the directors’ annual report on remuneration
and, in accordance with the Act, the resolution was subject to an advisory vote. The votes received are set out in the table below.
Resolution
Votes FOR and
% of votes cast
Votes AGAINST and
% of votes cast
Votes
WITHHELD
Approval of directors’ remuneration policy
95,280,475
65.49% 50,197,586
Approval of directors’ annual report on remuneration
109,351,784
75.17% 36,126,277
34.51%
24.83%
0
0
At the 2019 Annual General Meeting the directors’ remuneration report and revised remuneration policy will be put to shareholders for
approval by way of an advisory vote. In accordance with the Act, a resolution to approve the Company’s revised remuneration policy will
also be submitted to shareholders for a binding vote.
Single total figure of remuneration for executive directors
The table below shows the single total figure of remuneration for the year ended 31 December 2018 for each executive director that served as an
executive director at any time during the year. The information contained in the table is as prescribed by the Large and Medium-sized Companies
and Groups (Accounts and Reports) (Amendment) Regulations 2013 and contains a single total figure of remuneration for each executive director.
The executive directors are remunerated in either EUR, GBP, USD or KZT and, to avoid any anomalies in the figures reported owing to
fluctuations in the EUR/USD, GBP/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 EUR4
Atul Gupta
Kai-Uwe Kessel (Chief Executive Officer)
Tom Richardson (Chief Financial Officer)
Period
2018
2017
2018
2017
2018
2017
Salary
and fees
Benefits
in kind
Annual
bonus3
31,650
–
592,0799
773,5679
510,075
359,700
–
18,1562
18,1882
17,414
17,4655
–
–
–
96,696
–
159,0937
Phantom
Share
Option
Plan
–
–
–
–
–
–
LTIP8
Pension6
Total
(audited)10
31,650
–
–
–
7,530 617,765
– 888,451
25,504 552,993
17,985 554,243
–
–
–
–
–
–
1. Mr Kessel received part of his remuneration under his contract for services as a director and part under separate service agreements for his role as a Group
executive. Mr Richardson and Mr Gupta (from November 2018 when he was appointed as Executive Chairman) receive their remuneration under Group
executive service contracts. Prior to November 2018, Mr Gupta was not an executive director. For clarity, this table presents their total remuneration from
the Group whether received under a contract for services as a director or a Group executive services contract.
2. Mr Kessel is provided with a company car and payments in lieu of the provision of life insurance under his employment contract for his role as Chief
Executive Officer and not under his service contract as an executive director but, for completeness, the amount received has been included in this table.
3. No bonus for 2018 will be paid to executive directors.
4. Mr Gupta is remunerated in USD, Mr Richardson is remunerated in GBP and Mr Kessel is remunerated in EUR, USD and KZT but for the purposes of this
table the following exchange rates have been used:
2018: GBP:EUR (1.134); USD:EUR (1.185); KZT:EUR (431)
2017: GBP:EUR (1.1413)
5. This amount is paid to Tom Richardson in lieu of the provision of medical insurance under his employment contract for his role as Chief Financial Officer
and not under his service contract as an executive director but, for completeness, the amount received has been included in this table.
6. The Company did not operate a pension scheme for executive directors in 2017 or 2018 but may make a pension contribution or a payment in lieu of
pension contributions to executive directors under their employment contracts as executives of the Group as opposed to under their service agreements
as directors of the Company.
7. Tom Richardson was awarded an annual bonus in 2017 of 12.5% of his base salary based on the executive directors’ performance against 2017 KPIs.
In addition, the committee awarded him with an additional bonus of £100,000 for his outstanding performance in connection with the refinancing of the
Group’s outstanding debt.
8. Awards made under the LTIP in 2017 have not vested yet and so no amounts have been received/are receivable by the executive directors in respect of
such awards. No awards made under the LTIP in 2018 are capable of vesting as the performance conditions were not met in 2018.
9. Kai-Uwe Kessel is remunerated on a net guarantee basis and his gross remuneration is adjusted to achieve the relevant agreed level of net remuneration.
The salary and fees figure shown in the table represents the total cost to the Company in connection with his employment.
10. Remuneration figures stated for 2017 and in the historical period include employer taxes borne by Nostrum. For 2018 it was decided to show only gross
personal salary, fees and benefits paid to directors by Nostrum and exclude other employer taxes. The difference in the reporting basis results in a large
comparative difference between 2017 and 2018 remuneration.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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2018 annual report on remuneration / continued
2018 annual report on remuneration
continued
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
Atul Gupta1
Sir Christopher Codrington, Bt.2
Mark Martin3
Kaat Van Hecke
Martin Cocker4
Simon Byrne5
Michael Calvey6
Period
Fees
Total
(audited)
229,167
205,509
100,027
120,000
116,667
110,000
130,000
130,000
110,055
100,000
100,000
274
100,000
12,443
–
229,167
205,509
100,027
120,000
116,667
110,000
130,000
130,000
110,055
100,000
100,000
274
100,000
12,443
–
100,000
100,000
12,443
–
12,443
–
100,000
100,000
68,311
–
68,311
–
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
1. Mr Gupta became Executive Chairman in November 2018 and his salary increased to US$450,000 to reflect his additional responsibilities.
2. Sir Christopher Codrington receives an additional fee for being the Chairman of both the Nomination and Governance Committee and the Audit Committee.
3. Mr Martin receives an additional fee for being Senior Independent Director and the Chairman of the Remuneration Committee.
4. Mr Cocker joined the Board on 16 November 2017.
5. Mr Byrne joined the Board on 16 November 2017.
6. Mr Calvey joined the Board on 25 April 2017.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Notes on the single total figure remuneration table
Base salaries
The Committee reviewed salaries in March 2018 and it was decided that the executive directors would be awarded a 2% salary increase
for 2018 effective as of 1 March 2018.
When reviewing salaries, the Committee also considered the provisions of the remuneration policy.
Annual bonus
In the last financial year all executive directors were eligible for a bonus.
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.
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 2018 to 31 December 2018, the key performance indicators for annual cash bonuses for
executive directors were as follows:
2018 Bonus Performance Measures
Operational and Financial
• Achieve annual average sales (boepd) from 32,000 boepd (0%) to 36,000 (100%)
(sliding scale)
• Complete and commission GTU3 construction project on budget
• Reduce operational and G&A cash costs from US$85.7m (0%) to US$68.56m (100%)
(sliding scale)
Strategic Objectives
• A commercially sensitive strategic target
• A commercially sensitive strategic target
HSE, social and governance
Reduce LTIs per 1 million man hours below 2
Sub-total: Corporate KPIs
Personal Objectives
Kai-Uwe Kessel – Deliver 2018 Company objectives (to be defined individually)
Tom Richardson – Deliver the 2018 Company financial objectives
(to be defined individually)
Total
Weight
60%
40%
15%
5%
20%
15%
5%
7%
7%
87%
13%
13%
13%
100%
Actual
% of
base salary
0%
0%
2%
0%
0%
0%
7%
7%
9%
N/A
N/A
N/A
9%
0%
0%
0.8%
0%
0%
0%
2.8%
2.8%
3.6%
N/A
N/A
N/A
3.6%
Based on an assessment of Group and individual performance towards achievement of KPIs of the executive directors during 2018 the
Committee exercised its discretion not to award bonuses to the executive directors notwithstanding the modest achievement against
performance measures.
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 payable in the following year and so the rationale behind a clawback mechanism is less relevant.1
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1. Includes LTIP awards for which performance conditions have been satisfied.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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2018 annual report on remuneration / continued
2018 annual report on remuneration
continued
Long-term incentive awards
In 2017, the Company implemented its new performance-based
long-term incentive plan and granted additional awards on 28
November 2018.
Based on the above levels of performance, the Committee has
determined that none % of the LTIP awards granted in 2018 will be
capable of vesting at the end of the two-year holding period.
No awards were made to the non-executive directors.
The LTIP awards granted are based on performance over one
calendar year which is followed by an additional two-year holding
period such that no awards may vest before the third anniversary of
the date of grant.
The performance conditions attaching to the awards made under
the LTIP in 2018, together with the levels of achievements against
such performance measures are as follows:
Pension entitlements
The Company did not operate a pension scheme for executive
directors in 2018 but may make a pension contribution or a
payment in lieu of pension contributions to executive directors
under their employment contracts as executives of the Group as
opposed to under their service agreements as directors of the
Company.
50% of an award was based on average sales boepd measurements
calculated as follows:
Boepd for
the year ended
31 December 2018
% of the first 50%
of the award that
may vest
Actual %
achievement
% of LTIP
award
opportunity
(maximum 50%)
36,000 or greater
(average sales)
32,000
100%
0%
On a straight line
basis between
32,000 and
36,000
Actual
achievement
29,516
0%
0%
The remaining 50% of an award was based on a reserves
measurement calculated as follows:
2P barrels of
oil per share
% of the second
50% of the award
that may vest
% of LTIP award
opportunity
(maximum 50%)
% of LTIP
award
opportunity
(maximum 50%)
3.0 or greater
100%
2.5
0%
On a straight line
basis between
2.5 and 3.0
Actual
achievement
2.18
0%
0%
Payments to past directors
No payments were made to past directors of the Company during
the year ended 31 December 2018.
Payments for loss of office
No payments were made in respect of loss of office during the year
ended 31 December 2018.
Non-executive director fees
The Committee and the Board reviewed non-executive director fees
in November 2018 and concluded that Mr Gupta’s fee should be
increased from US$250,000 to US$450,000 per annum to reflect the
increase in his responsibilities since becoming Executive Chairman of
the Company. No other changes were made to the fees of the other
directors.
Directors’ shareholdings
The beneficial interests of the directors in the share capital of the
Company as at 31 December 2018 were as follows2:
Director
Atul Gupta
Kai-Uwe Kessel
Tom Richardson
Sir Christopher Codrington, Bt.
Mark Martin
Kaat Van Hecke
Simon Byrne
Martin Cocker
Michael Calvey
Total (audited)
178,357
10,000
–
3,312
10,000
–
25,000
–
–
Please refer to the text in the remuneration policy table on page 82
in relation to shareholding guidelines applicable to directors
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Nostrum Oil & Gas PLC Annual Report 2018
Phantom share option plan
The Company currently operates one non-performance related phantom share option plan (the “Plan”). As at 31 December 2018, 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$10.00 per ordinary share and expiring 10 years from the date of grant, pursuant to the Plan:
Options
held at
31 December
2018
Date
of grant
10 June 2009
26 March 2013
26 March 2013
–
–
–
Face
value at
date of
grant
(in USD)
35,0491
18,0002
9,9002
Options
exercised
during the
financial
year 2018
Options
lapsed
during the
financial
year
2018
Options
held at
31 December
2018
Option
exercise
price
(US$ per
option)
Expiry
date
–
–
–
–
–
–
700,974
200,000
110,000
4.0
9 June 2019
10.0 25 March 2023
10.0 25 March 2023
(Audited)
Director
Kai-Uwe Kessel
Tom Richardson
1. Calculated by multiplying the market value of the options at 10 June 2009 (US$4.05) less $4.00 by the number of options granted.
2. Calculated by multiplying the market value of the options at 26 March 2013 (US$10.09) less $10.00 by the number of options granted.
3. There have been no changes in the interests in the Plan between the end of the financial year 2018 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.
It is intended that the Company’s new long-term incentive plan will replace the Plan going forward and so it is not currently envisaged to
make any further awards under the Plan.
Long-term incentive plan
On 24 August 2017, the Board approved the making of certain initial grants under the Company’s new long-term incentive plan (“LTIP”)
and on 28 November 2018 additional grants were made to executive directors.
The following table provides details of the LTIP awards made to directors in 2017 and 2018:
Date of
grant
28 November 2018
10 October 2017
28 November 2018
10 October 2017
Options
at date
of grant
332,706
332,706
174,900
174,900
Options capable
of vesting as at
31 December
2018
0
150,649
0
79,195
Face value
(in GBP)2
0
415,585
0
218,458
Options
capable of being
exercised
during the
financial year
20181
Expiry date
0 27 November 2028
9 October 2027
0
0 27 November 2028
9 October 2027
0
Director
Kai-Uwe Kessel
Kai-Uwe Kessel
Tom Richardson
Tom Richardson
1. None of the options granted are currently exercisable.
2. The face value has been calculated by multiplying the number of options capable of vesting by the fair value of the options at grant date (£2.76 for 2017
options) and as performance conditions for 2018 were not met the 2018 options have no face value. A nominal amount of 0.01p per option will be payable
by all directors upon exercise. The Company has the option to waive the nominal cost.
As previously mentioned, all non-executive directors who had been granted awards under the LTIP (including the Chairman) have formally
renounced such awards and the Company has amended the terms of its LTIP to make non-executive directors ineligible to participate in
the LTIP.
Further information regarding how the LTIP operates and the performance conditions applicable to grants made in 2018 can be found
on page 82.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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2018 annual report on remuneration / continued
2018 annual report on remuneration
continued
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 with the FTSE 350 Oil & Gas 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.
Total share return
Share price (GBp)
120
100
80
60
40
20
0
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1
y
a
M
7
1
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7
1
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7
1
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7
1
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7
1
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O
7
1
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7
1
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8
1
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J
8
1
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F
8
1
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8
1
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p
A
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1
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1
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O
8
1
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N
8
1
c
e
D
Total Return on £100 (FTSE 350 Oil & Gas)
Total Return on £100 (Dividends not re-invested)
Total Return on £100 (Dividends re-invested)
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
2013
2014
2015
2016
2017
2018
Total CEO
remuneration
(EUR)
Annual bonus
as
% of maximum
opportunity
889,217
2,050,3231
971,224
915,900
888,451
617,765
100%
100%
80%2
75%
31.25%
0%
Percentage change in Chief Executive’s remuneration
The table below shows the percentage change in the Chief Executive’s 2018 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.
(EUR3)
Salaries4
Benefits
Annual bonus
Chief Executive
Comparator
group
2018
2017
% change
% change
592,079
25,687
0
773,567
18,188
96,6965
-23
41
2
0
-100.00
-66.67
1. Total CEO remuneration for 2014 includes remuneration from the exercise of share options.
2. These figures include a bonus amount of EUR 236,262 paid in 2015 in respect of 2014 performance. No bonuses were paid for 2015 performance.
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.
4. Salary increases are determined and awarded during the course of the calendar year.
5. Remuneration figures stated for 2017 and in the historical period include employer taxes borne by Nostrum. For 2018 it was decided to show only gross
personal salary, fees and benefits paid to directors by Nostrum and excludes other employer taxes. The difference in the reporting basis results in a large
comparative difference between 2017 and 2018 remuneration.
84
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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 dollars
Remuneration paid to all employees1
Dividends to shareholders (total)
• Dividends
• Share buy-back
2018
2017
% change
39,029
39,802
-1.95%
0
0
0
0
0
0
0%
0%
1. Total remuneration reflects overall payroll and related taxes. Refer to the consolidated financial statements for further information.
For further information on dividends and expenditure on remuneration for all employees please see the notes to the consolidated
financial statements.
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 pages 93 and 95 respectively of this Annual Report. All directors are subject to annual re-appointment and
accordingly all executive and non-executive directors will stand for election or re-election (as appropriate) at the Annual General Meeting.
Statement of 2018 remuneration policy implementation
The Company’s remuneration policy was put to a shareholder vote at the 2018 Annual General Meeting and was approved by 65.49% of
shareholders. The Board recognises that a significant minority of shareholders voted against this resolution. We are therefore putting a
revised directors’ remuneration policy to a shareholder vote at our 2019 Annual General Meeting. A copy of the revised policy can be
found on pages 87-95 and an explanation of the key changes can be found on page 76.
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 between December and March and
becoming payable between April and August of each year.
Remuneration in 2019 will be consistent with the policy described on pages 88-91.
Salaries and service fees
The Committee is currently reviewing the structure of the executive directors contractual arrangements as employees of the Group and
will determine any salary increases later in the year.
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Number of outstanding shares at 1 January 2019: 188,182,958
2P reserves at 1 January 2019: 410 mmboe
Ratio at 1 January 2019: 2.179 boe/share
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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2018 annual report on remuneration / continued
2018 annual report on remuneration
continued
Annual bonus
In accordance with the remuneration policy applicable in 2019, the executive director annual bonus opportunity is up to 40% of base
compensation. Annual performance will be assessed against a performance scorecard of which a portion is based on operational and
financial measures, a portion on strategic objectives and a portion on HSE, social and governance objectives.
The 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 2019 to determine the annual bonus amounts payable to executive directors in 2020. Details of any non-
commercially sensitive KPIs are set out below. 2019 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.
2019 Bonus Performance Measures
Operational and Financial
• Achieve annual average sales (boepd) from 30,000 boepd (0%) to 35,000 (100%) (sliding scale)
• Reduce operational and G&A cash costs from US$79m (0%) to US$63m (100%) (sliding scale)
• Successful appraisal from the Northern Area of the Chinarevskoye field
• Complete and commission GTU3 construction project on budget by mid-2019 (50%) with first sales from it by end-2019 (50%)
• Implement new cost management system so that it is operational group-wide by end-2019 (50%) and on budget (50%)
Strategic Objectives
• A commercially sensitive strategic target
• A commercially sensitive strategic target
HSE, Social and Governance
Inventorise GHG emissions by Q2 2019 and demonstrate an active GHG emissions reduction plan by Q4 2019
Assessment by the HSEC Committee of achievement of the HSE Plan for 2019 (provided that there have been no fatalities)
Total
Weight
60%
30%
10%
10%
5%
5%
30%
15%
15%
10%
5%
5%
100%
Phantom share option plan
The Committee does not envisage the award of any additional phantom share options to executive directors in 2019.
Long-term incentive plan
The Committee does envisage granting additional awards under the Company’s long-term incentive plan in 2019. The performance
conditions for such grants in 2019 will be as follows:
2019 LTIP Performance Conditions
Boepd (average accrued sales) for year ended 31 December 2019 (75% weighting)
% of the award that may vest
35,000 or greater
30,000
2P barrels of oil equivalent per share (25% weighting)1
3.0 or greater
2.5
100%
0%
On a straight line between 30,000 and 35,000
% of award that may vest
100%
0%
On a straight line between 2.5 and 3.0
Non-executive directors
Non-executive director fees were reviewed in March 2018 and it was decided that no change was warranted. The next review of non-
executive director fees will be conducted in 2020.
Approval of the directors’ remuneration report
The directors’ remuneration report was approved by the Board on March 2019.
On behalf of the Board
Kai-Uwe Kessel
Chief Executive Officer
Tom Richardson
Chief Financial Officer
25 March 2019
25 March 2019
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Directors’ remuneration policy
Future directors’ remuneration policy
This part of the directors’ remuneration report sets out the
remuneration policy for the Company and has been prepared
in accordance with the Companies Act 2006, the Large and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013, the UK Corporate Governance
Code and the Listing Rules of the UK Listing Authority. Our
directors’ remuneration policy for 2018 was approved by
65.49% of our shareholders at our AGM on 30 April 2018. We
have considered the views of our shareholders, including those
who did not approve the policy in 2018, and a revised policy will
be put to a binding vote of shareholders at the Company’s 2019
Annual General Meeting and will apply for a maximum of three
years from the date of shareholder approval.
Policy coverage
This policy applies to all payments to directors of the Company
from the date of the Company’s 2018 AGM.
Policy objectives
This policy is designed to:
1. Provide that the Company may not make any LTIP awards to its
non-executive directors or Chairman.
2. Provide a structure and level of pay that attracts and retains
high calibre directors capable of delivering the Company’s
strategic objectives.
3. 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.
4. Align the remuneration of executives with the interests of the
Company’s shareholders, and ensure that rewards are justified
by performance.
5. Ensure that the pay of the executive directors takes into
account: (i) pay and conditions throughout the Company;
and (ii) corporate governance best practice including health
and safety, environmental, social and governance risks.
6. Allow for future bonuses to be paid in whole or part in deferred
shares.
7. Allow for pension contributions to executive directors for their
services under service contracts up to a 10% maximum
opportunity or higher if required by applicable law.
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 350 companies of a similar size to Nostrum;
• Oil and gas E&P companies globally which compete for scarce
skills within the industry; and
• 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.
Remuneration policy table
The table on pages 88-91 sets out the key components of the
reward package for executive directors.
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Directors’ remuneration policy / continued
Directors’ remuneration policy continued
Executive directors’ remuneration policy table
Element of pay
BASE PAY
Purpose and
link to strategy
Maximum
opportunity
To provide market-
competitive base
salaries.
There is no
prescribed
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.
The aggregate
value of such
benefits should
not constitute
a significant
proportion of
any employee’s
compensation.
Operation
Performance criteria
Base salary is reviewed annually and
fixed for 12 months.
None
None
Benefits include:
• Medical insurance.
• Life insurance.
• Permanent health insurance
(long-term disability or income
protection insurance).
• A company car is provided to
the CEO.
The Company may make payments
to directors in lieu of benefits and
may also make separate benefit
arrangements for executive directors
in connection with their service as
executives of Group companies.
BENEFITS
To reflect market
practice and
provided in
line with peer
companies.
ANNUAL BONUS
Executive directors
may be eligible
for an annual
bonus in cash
and/or deferred
shares for good
performance (as
determined at the
Board’s discretion).
In general,
maximum
opportunity of
40% of base salary
compensation.
The annual bonus is determined
by reference to performance in
the prior calendar year.
Annual bonuses are generally
paid sometime between
April and August of each year.
Malus and clawback provisions apply
to the award of annual bonuses such
that executive directors may be
liable to repay some or all of their
annual bonus if there is a material
misstatement of results, or error in
calculation of any KPI or serious
misconduct. The discovery period is
one year commencing on the date
on which the bonus is determined.
Key performance indicators against
which the performance of the
executive directors will be measured
in the following year are determined
at the end of each year and all
non-commercially-sensitive key
performance indicators are
disclosed in the directors’
remuneration report. Any
commercially sensitive performance
measures will be disclosed
retrospectively following completion
of the relevant financial year.
Performance against key
performance indicators for the
previous year is also disclosed in the
directors’ remuneration report to
show how the Board has determined
executive director performance
against the relevant key performance
indicators for that year and
consequently the levels of annual
bonus payable to the executive
directors.
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Nostrum Oil & Gas PLC Annual Report 2018
Element of pay
NOSTRUM OIL &
GAS PLC 2017
LONG-TERM
INCENTIVE PLAN
(“LTIP”)
Purpose and
link to strategy
Maximum
opportunity
Operation
Performance criteria
Performance measures are generally
measured over one year though the
committee have the discretion to
apply a longer performance period
to awards.
The committee has the discretion
to set any performance condition
attaching to awards granted under
the LTIP.
Vesting of awards would ordinarily
be based:
• In part on average accrued sales
volumes measured in barrels of oil
equivalent per day; and
• In part on reserves measurement
on the basis of 2P barrels of oil
per share.
To incentivise
executive directors
and employees
over a longer
time frame and
to increase their
interest in the
Company’s long-
term business
goals and
performance
through share
ownership.
To help retain
executives and
other key
employees and
align their interests
with shareholders
through building
a shareholding in
the Company.
200% of base
salary in any
financial year.
Awards of nominal-cost options
are made at the sole discretion
of the committee.
It is anticipated that awards will
be granted annually for calendar
years 2017-2019, subject to annual
performance conditions. Generally,
awards have a one-year performance
period attached to them and will
not vest for an additional two years
following the date on which the
committee determines whether or
not a performance condition has
been wholly or partly satisfied such
that no award may vest before the
third anniversary of the date of grant.
The committee has the discretion to
decide, on or before the grant of an
award, that a participant shall be
entitled to receive dividend
equivalents arising over the period
between the grant date and the
vesting date with such amounts
being payable in cash or shares in
respect of shares which vest.
Malus and clawback provisions apply
to the LTIP such that participants are
liable to repay/forfeit some or all of
their shares if there is a material
misstatement of results, or error in
calculation, or if there is serious
misconduct. The discovery period is
three years commencing on the date
on which the award vests, which can
be extended by the committee for
an additional two years if an event
occurs which the committee
determines could result in the
operation of recovery or
withholding.
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Directors’ remuneration policy / continued
Directors’ remuneration policy continued
Executive directors’ remuneration policy table continued
Element of pay
PHANTOM SHARE
OPTION PLAN (THE
“PLAN”)
Purpose and
link to strategy
Maximum
opportunity
Operation
Performance criteria
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.
In accordance with
the Plan rules, the
total number of
shares that may be
granted pursuant
to the Plan is
five million.
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.
The Plan has
effectively been
replaced by the
LTIP and no
awards are
expected to
be made under
the Plan in 2019.
None
• Intertrust 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.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Element of pay
PENSIONS
Purpose and
link to strategy
Maximum
opportunity
Operation
Performance criteria
To remain
competitive in the
marketplace and
provide income
in retirement.
10% or, if higher,
any minimum
pension
contribution which
may be required
under applicable
law.
There are ordinarily no pension
contributions
or provisions for directors, although
there may be pension arrangements
made for executive directors in
connection with their service as
executives of Group companies.
None
None
SHAREHOLDING
GUIDELINE
Aligns interests of
executive directors
with those of
shareholders.
Executive directors
are encouraged to
maintain a holding
in the Company to
align their interests
with shareholders.
If the Company grants shares to
directors outside the LTIP by way
of bonus or otherwise they will
be required to hold 50% of such
shares for a three year period.
The committee monitors the
holdings of all directors.
NON-EXECUTIVE
DIRECTORS AND
CHAIRMAN
Attract and retain
high performing
individuals.
No prescribed
maximum annual
increase in fees.
Any fee increases are usually
considered at the end of each year
and the Board and, where
applicable, the committee considers
pay data at comparable companies
of a similar scale.
The Senior Independent Director
and the Chairmen of the committees
receive additional fees.
No eligibility for participation in
bonuses but limited benefits may
be delivered (provision of iPad
and travel-related expenses).
Non-executive directors and the
Chairman are not eligible to
participate in the LTIP.
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Directors’ remuneration policy / continued
Directors’ remuneration policy continued
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
whether or not the applicable performance measures have been
met. Given that neither of these incentive arrangements explicitly
stipulate an ‘on target’ amount and grant levels under the LTIP for
2019 have not been determined yet, the assumed levels for the
scenario are:
• For the LTIP, the illustration is based on 50% vesting in
relation to the percentage of base salary over which the
relevant LTIP grant was made (up to a maximum of 200% of
base salary as stated under the LTIP rules). We have used the
grant levels made to each of the executive directors under
the LTIP in 2018 to determine the on target and maximum
percentage of base salary over which share options could be
awarded in 2019 (being an LTIP award equivalent to 200% of
base salary for Kai-Uwe Kessel and 150% of base salary for
Tom Richardson); and
• In case of the annual bonus, a bonus of 25% of base salary.
• As to the remaining 20% of the ordinary shares in respect of
• The “maximum” columns illustrate total remuneration levels in
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 an
award; and (iii) the size of the award.
Treatment of existing arrangements
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 2019. Three scenarios
are presented for each executive director which are based on the
following assumptions:
• The “minimum” columns are intended to show the fixed level of
remuneration to which executive directors are entitled in 2019
irrespective of performance levels, namely base salary, benefits
using the details set out in the single-figure table provided on
page 79 (which includes any payments made in lieu of
benefits made under the executive directors employment
contracts for their roles as executives of the Group and not under
their service contracts as executive directors) and any payments
made in lieu of the provision of a pension scheme (which are paid
under the executive directors employment contracts for their
roles as executives of the Group and not under their service
contracts as executive directors). The base salary for each of the
executive directors is currently under review and so their
estimated 2018 base salary has been used for the purposes of
the bar charts for Mr Kessel and Mr Richardson. Mr Gupta’s salary,
agreed in November 2018, has been used for his bar chart. No
bonus payments or vesting of shares are assumed for minimum
performance.
• The “on target” scenario seeks to illustrate the remuneration the
executive directors would receive if performance was in line with
expectation. In addition to the fixed elements summarised above,
it assumes a specified level of payout/vesting under the annual
bonus scheme and awards made in 2019 under the LTIP though
no LTIP awards made in 2019 would be eligible for vesting until
two years after the date on which the committee determine
circumstances where the variable elements pay out in full, namely
an annual bonus payment of 40% of base salary and 100%
vesting of LTIP awards to be granted in 2019.
• During 2018 the non-executive directors who had been granted
awards under the LTIP agreed to renounce such awards.
The bar charts below do not include any amounts in relation to the
phantom share option plan because, as at the time of this Annual
Report, the Board does not intend to grant any further awards
under the phantom share option plan in 2019.
Kai-Uwe Kessel, Chief Executive Officer
amounts in EUR thousand
1,385
44%
11%
45%
618
100%
2,039
58%
12%
30%
Minimum
On target
Maximum
LTIP
Bonus
Fixed pay
Tom Richardson, Chief Financial Officer
amounts in EUR thousand
1,063
36%
12%
52%
553
100%
1,522
50%
13%
37%
Minimum
On target
Maximum
LTIP
Bonus
Fixed pay
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Atul Gupta, Executive Chairman
amounts in EUR thousand
380
100%
380
100%
380
100%
Minimum
On target
Maximum
LTIP
Bonus
Fixed pay
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 pages 88-91.
• 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
salaries 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 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.
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Service agreements
Summary details of each director’s service agreement are as
follows:
Atul Gupta
Kai-Uwe
Kessel
Tom
Richardson
Director’s service
agreement
date
28 November 2018
Originally dated 19 May 2014 and
most recently amended and
restated on 1 April 2018 (effective
as of 1 April 2018)
Originally dated 1 September
2016 and most recently amended
and restated on 22 March 2018
(effective as of 1 January 2018)
Annual salary
and fees as at
1 January 2019
(EUR)1,2
379,803
555,914
510,075
1 Mr Gupta is remunerated in USD, Mr Richardson is remunerated in GBP
and Mr Kessel is remunerated in EUR, USD and KZT but for the purposes of
this table the following exchange rates have been used:
2018: GBP:EUR (1.134); USD:EUR (1.185); KZT:EUR (431)
2017: GBP:EUR (1.1413).
2 Annual salary and fees represents the total salary and fees (excluding
benefits/pension, and discretionary remuneration) from the Group for both
the director’s executive and director service roles.
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; and
• 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.
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 and at the Annual General Meeting.
Nostrum Oil & Gas PLC Annual Report 2017
Nostrum Oil & Gas PLC Annual Report 2018
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Directors’ remuneration policy / continued
Directors’ remuneration policy continued
Payments for departing executive directors
Provision
Policy
Notice period and compensation for loss
of office in service contracts
• 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 No entitlement.
Treatment of unvested share option
awards under the Plan
Treatment of unvested awards under the
LTIP
An executive director’s award 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.
For a director considered to be a ‘good leaver’ before the original vesting date (including
leaving the Company on retirement, redundancy, ill health, as a result of death in service or
in other circumstances determined by the committee), outstanding awards will be pro-rated
for time and vest subject to performance on the original vesting date. For a director who is
considered a ‘good leaver’ after the original vesting date, any awards will remain exercisable
for a period of 12 months commencing on the date of cessation. For a director whose
employment is terminated for any other reason, the award will lapse in full.
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.
Change of control
In accordance with the LTIP rules and the terms of the awards granted in 2017 and 2018 under the LTIP if there is a sale of all or
substantially all of the Company or the Company’s business in circumstances where such sale has been approved by a majority of
shareholders and is at a price of $10 per share or more then all awards granted will vest in full regardless of the achievement or otherwise
of applicable performance conditions on the date of such event if they have not already vested and all awards will remain exercisable for
one month from such date. To the extent that any option is not exercised in such period, it shall lapse at the end of that period.
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”).
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Non-executive director appointment letters
The following table provides details of non-executive director appointment letters:
Name
Position
Date of letter of appointment
Expiry of current term
Sir Christopher Codrington, Bt.
Independent non-executive director
19 May 2017
19 May 2020
Kaat Van Hecke
Mark Martin
Michael Calvey
Martin Cocker
Simon Byrne
Independent non-executive director
20 December 2016
31 December 2019
Senior Independent Director
Non-executive director
19 May 2017
25 April 2017
Independent non-executive director
16 November 2017
Non-executive director
16 November 2017
19 May 2020
25 April 2020
16 November 2020
16 November 2020
The Company intends to comply with provision 18 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 or the LTIP.
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 meet with shareholders and solicit their views on the Company’s policies in
relation to director and executive remuneration, and take such views into account when formulating remuneration policies and
remuneration levels in specific cases.
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Directors’ Report
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 2018.
This report has been prepared in accordance with The Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008.
The following are incorporated by reference and shall be deemed
to form part of this Directors’ Report:
• The Strategic Report on pages 1-53;
• The Board and Governance report (which includes the Board, the
Corporate Governance Report and the Directors’ Remuneration
Report) on pages 54–101; and
• The energy and global greenhouse gas emissions disclosure on
37-38.
In addition, the following information is also incorporated into this
Directors’ Report by reference:
Subject matter
Likely future developments within the Group
Related party transactions
Going concern statement
Financial position and performance of the Group
Greenhouse gas emissions
Directors’ share interests
Corporate governance statement
Page
45
150
118
46-53
37-38
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Directors
Full biographical details of all current directors of the Company
(all of whom held office at some point during the reported year)
and the Board committees of which they are members are set out
on pages 56-57 of this Annual Report.
Dividends
No dividends were paid during the year ended 31 December 2018.
No dividend is proposed to be paid in 2019 in respect of the year
ended 31 December 2018.
Auditor
In accordance with section 418(2) of the Companies Act 2006,
each director in office at the date of this Directors’ Report confirms
that (a) so far as the director is aware, there is no relevant audit
information of which the Company’s auditor is unaware and (b)
the director has taken all the steps that he/she ought to have taken
as a director to make him/herself aware of any relevant audit
information and to establish that the Company’s auditor is aware
of that information.
Ernst & Young LLP has confirmed its willingness to continue
in office as auditor and a resolution to reappoint them will be
proposed at the forthcoming AGM.
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 AGM.
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.
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Political donations
The Group has made no political donations during the year 2018.
Contributions to non-EU political parties
No contributions to non-EU political parties were made during the
year 2018.
Research and development
The Group is not involved in any activities in the field of research
and development.
Branches
The Company is registered in England and Wales and during 2018
moved its place of effective management and tax residence from
the Netherlands to the United Kingdom. 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 2018, 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 circulation. 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.
Subject to applicable law and the Company’s Articles of Association
the directors may exercise all powers of the Company, including
the power to authorise the issue and/or market purchase of the
Company’s shares, subject to an appropriate authority being given
to directors by shareholders in a General Meeting and any
conditions attaching to such authority. The current authority,
approved at the 2018 Annual General Meeting, for the allotment of
relevant securities is for a nominal amount of up to: (i) £1,240,000
and (ii) equity securities up to a nominal amount of £620,000 less
the nominal amount of any securities allotted under part (i) of the
authority. No shares were allotted during the year.
Furthermore, at the 2018 Annual General Meeting, shareholders
authorised the directors to make market purchases up to a
maximum of approximately 10% of the Company’s issued share
capital (being £18,600,000 ordinary shares) excluding treasury
shares. Any shares purchased under this authority may either be
cancelled or may be held as treasury shares provided that the
number of shares held does not exceed 10% of issued share capital.
No shares were bought back during the year.
Resolutions to renew these authorities will be proposed at the
2019 AGM.
Intertrust 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 2018 the
Trust held 2,948,879 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 shareholders 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 shareholder present in person
or by proxy has one vote for every share held by him. No shareholder
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.
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.
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 2018. 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.
Further details are included in the “Our people” section on pages
32-33.
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Directors’ Report / continued
Directors’ Report continued
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
team to discuss any reasonable adjustments that would help
overcome or minimise the difficulty. Their line manager or the
Human Resources team 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.1
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 Company also operates an employee phantom share option
plan and in 2017 implemented a new employee long-term incentive
plan, further details of which can be found in the directors’
remuneration policy on page 89 and the Notes to the consolidated
audited financial statements for the year ended 31 December 2018.
Shareholders holding 3% or more of the
Company’s issued share capital
As of 31 December 2018, the following significant shareholdings
of voting rights in the share capital of the Company had been
disclosed to the Company under Disclosure Guidance and
Transparency Rule (DTR) 5 or otherwise.
Name
Number of
ordinary
shares
% of Issued
ordinary
shares
Nature of
holding
48,333,300
Mayfair Investments BV
Baring Vostok Capital
33,708,044
Partners Ltd.
Aberforth Partners LLP
21,525,026
Standard Life Investments Ltd. 14,628,559
Harding Loevner LP
9,000,357
M&G Investment
Management Ltd.
Majedie Asset Management Ltd.
Trafigura Ventures V B.V.
JPMorgan Asset Management
(UK) Ltd.
Wellcome Trust Ltd.
8,970,675
8,876,021
7,860,500
6,353,673
5,765,977
25.68
Direct
17.91
11.44
7.77
4.78
4.77
4.72
4.18
3.38
3.06
Direct
Indirect
Indirect
Indirect
Indirect
Indirect
Direct
Indirect
Direct
Details of all information provided to the Company pursuant to
Financial Conduct Authority’s (‘FCA’) DTRs is publicly available to
view via the regulatory information service on the Company’s
website. This publicly available information also covers the
requirements of the Kazakh Stock Exchange to provide information
about all major transactions with the listed company’s shares in the
reporting period and any changes in the structure of shareholders
holding five and more per cent of the outstanding shares over the
reporting period.
Between 31 December 2018 and the date of this report there have
been no notifications to the Company under DTR 5.
Financial risk management
The Company’s financial risk management objectives and policies,
including its use of financial instruments, can be found in Note 33 of
the financial statements.
Significant contractual arrangements
On 19 May 2014, the Company entered into a relationship agreement
with KazStroyService Global B.V. (“KSS Global”) (the “KSS Global
Relationship Agreement”) to regulate (in part) the degree of influence
that KSS Global and its affiliates may exercise over the management of
the Company. The principal purpose of the KSS Global Relationship
Agreement is to ensure that the Company is capable at all times of
carrying on its business independently of KSS Global and its affiliates
and that all of the Company’s transactions and relationships with
KSS Global and its affiliates are at arm’s length and on normal
commercial terms.
Pursuant to its terms, the KSS Global Relationship Agreement 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) KSS Global (together with
any of its 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.
1. These disclosures have been made on a voluntary basis as the Company does not have more than 250 employees employed under contracts
of service working wholly or mainly in the UK each week as required by the Large and Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008.
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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 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:
1. In the event of a takeover of the Company all options under the
Company’s phantom share option plan shall be deemed to have
vested and the Board shall direct Intertrust 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 10th anniversary of the date of grant. Any options that have
not been exercised will lapse at the end of this period.
2. In the event of a takeover of the Company all options under the
Company’s employee long-term incentive plan shall be deemed
to have vested and the Board shall direct Intertrust Employee
Benefit Trustee Limited to allow each optionholder to exercise his
or her options during the one-month period following the change
of control event. Any options that have not been exercised will
lapse at the end of this period.
3. The 2012 Bonds, 2014 Bonds, 2017 Bonds and 2018 Bonds
contain change of control provisions. If a change of control
occurs the Company will be required to offer to repurchase the
2012 Bonds, 2014 Bonds, 2017 Bonds, and 2018 Bonds at 101%
of their principal amount, plus accrued and unpaid interest to the
date of the purchase.
There are no agreements between the Company and its Directors
or employees providing for compensation for loss of office or
employment or otherwise that occurs specifically because of
a takeover.
Corporate governance statement
Pursuant to Disclosure Guidance 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.
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Directors’ Report / continued
Directors’ Report continued
Requirements of the Listing Rules
The following table provides references to where the information required by Listing Rule 9.8.4R is disclosed.
Information required
Capitalised interest
Publication of unaudited financial information
Details of any long-term incentive schemes
established to specifically recruit or retain a director.
Waiver of emoluments by a director
Allotment of equity securities for cash
Participation in a placing of equity securities
Contracts of significance
Contracts for the provisions of services by
a controlling shareholder
Sub-section of
Listing Rule 9.8.4R Reference
(1)
(2)
(4)
(5) (6)
(7) (8)
(9)
(10)
(11)
Please refer to Note 7 in the financial statements
Not applicable
Not applicable
No such waivers
No such share allotments
Not applicable
Please refer to the Directors’ Report
Not applicable
Dividend waiver
(12) (13)
Agreements with controlling shareholder
(14)
Under the trust deed relating to the phantom share option
plan and the LTIP, the trustee has agreed to waive any
dividends on shares held under both plans.
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
Important events since the end of the financial year
Major events after 31 December 2018 are disclosed in Note 34 to the consolidated audited financial statements.
This report was approved by the Board on 25 March 2019.
On behalf of the Board
Kai-Uwe Kessel
Chief Executive Officer
Tom Richardson
Chief Financial Officer
25 March 2019
25 March 2019
Nostrum Oil & Gas PLC, registered number 8717287
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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.
In preparing these financial statements the directors are required to:
• Select suitable accounting policies in accordance with IAS 8
‘Accounting Policies, Changes and Accounting Estimates
and Errors’ and then apply them consistently.
• Make judgements and accounting estimates that are reasonable
and prudent.
• Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information.
• State that the Group and the Company have complied with
IFRS as adopted by the EU, subject to any material departures
disclosed and explained in the financial statements.
• Provide additional disclosures when compliance with
specific requirements of IFRS is insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the Group’s and Company’s financial
position and performance.
• Prepare the Group’s and Company’s financial statements on
a going concern basis, unless it is inappropriate to do so.
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 website.1
Each of the directors whose names and functions are listed on page
56-57, confirm that to the best of their knowledge:
a. The Company and Group financial statements, which have been
prepared in accordance with IFRS as adopted by the EU, give a
true and fair view of the assets, liabilities, financial position and
profit or loss of the Company and the undertakings included in
the consolidation taken as a whole; and
b. The Strategic Report contained in the Annual 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
Tom Richardson
Chief Financial Officer
25 March 2019
25 March 2019
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1. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Nostrum Oil & Gas PLC Annual Report 2017
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Consolidated financial statements
Consolidated financial statements
Contents
Independent auditor’s report to the members
of Nostrum Oil and Gas PLC
!Consolidated statement of financial position
!Consolidated statement of comprehensive income
!Consolidated statement of cash flows
!Consolidated statement of changes in equity
!Notes to the consolidated financial statements
1. General
2.
Basis of preparation and consolidation
3. Changes in accounting policies and disclosures
4.
Summary of significant accounting policies
5. Goodwill
6.
7.
Exploration and evaluation assets
Property, plant and equipment
8. Advances for non-current assets
9.
Inventories
10. Trade receivables
11. Prepayments and other current assets
12. Cash and cash equivalents
13. Share capital and reserves
14. Earnings per share
15. Borrowings
16. Abandonment and site restoration provision
17. Due to government of Kazakhstan
18. Trade payables
19. Other current liabilities
20. Revenue
21. Cost of sales
22. General and administrative expenses
23. Selling and transportation expenses
24. Taxes other than income tax
25. Finance costs
26. Employees’ remuneration
27. Other expenses
28.
Income tax
29. Derivative financial instruments
30. Related party transactions
31. Audit and non-audit fees
32. Contingent liabilities and commitments
33. Financial risk management objectives and policies
34. Events after the reporting period
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Independent Auditor’s Report
Independent auditor’s report to the
members of Nostrum Oil & Gas PLC
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 2018 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 IFRSs as adopted by the European Union
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.
We have audited the financial statements of Nostrum Oil & Gas PLC which comprise:
Group
Parent company
Consolidated statement of financial position as at 31 December 2018
Statement of financial position as at 31 December 2018
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
Statement of cash flows for the year then ended
Consolidated statement of changes in equity for the year then ended
Related notes 1 to 16 to the financial statements
including a summary of significant accounting policies
Related notes 1 to 34 to the financial statements, including a summary of
significant accounting policies
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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report
below. We are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs(UK) require us to report
to you whether we have anything material to add or draw attention to:
• the disclosures in the annual report set out on pages 41 to 44 that describe the principal risks and explain how they are being managed
or mitigated;
• the directors’ confirmation set out on page 39 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 directors’ statement set out on page 118 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 months from the date of approval of the financial statements
• whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3)
is materially inconsistent with our knowledge obtained in the audit; or
• the directors’ explanation set out on page 45 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 drawing attention to any necessary qualifications or assumptions.
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Independent Auditor’s Report / continued
Overview of our audit approach
Key audit
matters
(cid:120) Estimation of oil and gas reserves and its impact on impairment testing, depreciation, depletion and amortisation (‘DD&A’)
and the decommissioning provision
(cid:120) Impairment of exploration licenses, goodwill and oil & gas development and production fixed assets
(cid:120) Revenue recognition
(cid:120) Completeness of related party transactions and related disclosures
(cid:120) Risk of management override
Audit scope (cid:120) We performed an audit of the complete financial information of four components across the United Kingdom, Belgium,
and Kazakhstan, and audit procedures on specific balances for a further five components across the United Kingdom,
the Netherlands, Russia and Kazakhstan.
(cid:120) The components where we performed full or specified procedures accounted for full coverage of Profit before tax,
EBITDA, Revenue and Total assets.
Materiality
(cid:120) Overall group materiality of $6.7m which represents 3% of EBITDA.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of
the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified.
These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as
a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Key observations
communicated to the
Audit Committee
Based on audit
procedures
performed we
consider that the
reserves estimations
are reasonable for
use in impairment
testing,
management’s
going concern
assessment,
calculation of
DD&A and the
determination of
decommissioning
dates.
Risk
Our response to the risk
Estimation of oil and gas reserves
and its impact on impairment
testing, depreciation, depletion
and amortisation (‘DD&A’) and
the decommissioning provision
Refer to the Audit Committee
Report on page 66; the estimates,
assumptions and judgements on
page 124 and the disclosures in note
7 of the Consolidated Financial
Statements (page 134)
This was a significant risk due to
the subjective nature of reserves
estimates and the pervasive impact
on the financial statements through
impairment, DD&A calculations and
the decommissioning provision.
Reserves are also considered a
fundamental indicator of the
future potential of the Group’s
performance and its ability to
continue as a going concern.
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
previous year, management has
engaged a third-party specialist
in connection with the estimation
of reserves volumes.
The risk has increased compared
with the prior year.
Our audit procedures have focused on management’s estimation process,
including whether bias exists in determination of reserves. We assessed
management’s assumptions including commercial assumptions to
ensure that they are based on supportable evidence. We have:
(cid:120) carried out procedures to walkthrough and understand the Group’s
internal process and key controls associated with the oil and gas reserves
estimation process;
(cid:120) met with management’s third-party specialist during the planning and
execution of the audit and assessed their competence and objectivity by
enquiry of their qualifications, practical experience and independence.
We have also assessed the competence of internal management’s
specialists, to satisfy ourselves that they are 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;
(cid:120) corroborated management’s commercial assumptions by checking
they lie within an acceptable range compared to publicly available
benchmarks where available. We compared management’s internal
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;
(cid:120) reviewed the final oil and gas reserves estimation report prepared
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 the appropriate period, and in compliance with
relevant industry standards; and
(cid:120) validated that the updated reserves estimates were included
appropriately in the Group’s consideration of impairment, in
accounting for DD&A and determination of decommissioning dates.
We performed full scope audit procedures over this risk area in one
location (Kazakhstan).
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Risk
Our response to the risk
The risk of impairment of
exploration licenses, goodwill
and oil & gas development
and production fixed assets
Refer to the Audit Committee
Report on page 66; the estimates,
assumptions and judgements on
page 126 and the disclosures in
notes 5 to 8 of the Consolidated
Financial Statements (pages 133
to 136).
Impairment charge in 2018
of US$150,000 thousand.
At 31 December 2018 the carrying
value of goodwill was nil (2017:
US$32,425 thousand); exploration
licenses: US$50,241 thousand (2017:
US$47,828 thousand); oil & gas
development and production assets,
including non-current advances:
US$1,895,431 thousand (2017:
US$1,910,752 thousand).
Owing to the continued oil price
volatility combined with technical
and operational challenges that
arose during the year, there is a
related risk of impairment.
Accounting standards require
management to test goodwill
for impairment annually.
We focused on this area due to
the significance of the carrying value
of the Cash Generating Unit (‘CGU’)
containing goodwill, the current
economic environment and the
judgement involved in the key
assumptions of the future prices
of oil, natural gas and related
products the discount rate applied
to future cash flow forecasts and the
assumptions relevant to production
volumes. Changes to any of these
key inputs could lead to a
potential impairment.
The risk has increased compared
with the prior year.
For exploration licenses we have evaluated management’s assessment
of each impairment trigger per IFRS 6 ‘Exploration for and Evaluation of
Mineral Resources’. We have:
(cid:120) 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 with relevant government agencies.
In the event of non-compliance, the Group can evidence that the
terms are modified and any relevant penalties and fines accrued;
(cid:120) enquired that management had the intention to carry out exploration
and evaluation activity in the relevant exploration area and
corroborated these responses by reviewing management’s cash-flow
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 to confirm our understanding;
(cid:120) validated whether the Group has the ability to finance any planned
future exploration and evaluation activity;
(cid:120) assessed the competency of management’s experts, and (where
applicable), the competency and objectivity of third party specialists
engaged for the purposes of assessing the reserves and resources
associated with those exploration and evaluation assets; and
(cid:120) compared the commercial viability of the exploration fields to the
cash-flow forecast models.
In addressing the risk of impairment for Goodwill and oil & gas
development and production fixed assets we utilised our valuation
specialists and evaluated management’s impairment assessment
by testing the key assumptions. We have:
(cid:120) walked through the controls designed by the Group relating to the
assessment of the carrying value of goodwill and oil & gas development
and production fixed assets;
(cid:120) tested the integrity of models with the assistance of our own specialists;
(cid:120) 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 price forecasts;
and benchmarking the discount rate to the risks faced by the group;
(cid:120) focused our audit procedures on oil & gas reserves estimates, as
described above in our report;
(cid:120) tested forecast cash flows by 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 by comparing them to actual
performance;
(cid:120) compared the inflation and exchange rate assumptions to external
market data;
(cid:120) 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 of reasonably possible
outcomes. These sensitivities included adjustments to the discount rate,
prices, future production volumes, opex and capex assumptions; and
(cid:120) evaluated the appropriateness of the financial statement disclosures.
We performed full scope audit procedures over this risk area at the
Group level (goodwill). We also audited the impairment assessment
prepared by management for exploration licenses and oil & gas
development and production fixed assets in Kazakhstan. By performing
these procedures we obtained full coverage of the risk amount.
Key observations
communicated to the
Audit Committee
We consider that
management’s
estimates are
reasonable with
the most sensitive
assumptions falling
within an expected
range. 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 long-
term oil and gas prices.
The pre-tax discount
rate is within the range
of our expectations.
Based on the results
of audit procedures
performed, we
concluded that the
impairment charge
was reasonable.
We concluded that
the related disclosures
provided in the
Group’s financial
statements are
appropriate.
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Independent Auditor’s Report / continued
Key observations
communicated to the
Audit Committee
We consider that
Revenue is recognised
consistently with
the terms of sales
agreements. We also
consider the financial
statements disclosures
with respect to
Revenue to fulfil the
requirements of the
accounting standards.
Based on the
procedures
performed, we
did not detect any
undisclosed related
party transactions.
Risk
Our response to the risk
Revenue recognition
Refer to the Audit Committee
Report on page 66; The Summary
of significant accounting policies
in page 132 and the disclosures
in note 20 of the Consolidated
Financial Statements (page 143)
Revenue for the year ended
31 December 2018 amounts
to US$389,927 thousand
(2017: US$405,533 thousand).
Revenue sales include crude oil,
gas condensate, dry gas and
liquefied petroleum gas (‘LPG’).
There is the risk of management
manipulation to overstate or
understate revenue. This could be
achieved by potentially recording
sales in an incorrect period.
The risk has remained consistent
with the prior year.
Completeness of related party
transactions (“RPT”) and related
disclosures
Refer to the Audit Committee Report
on page 66 and the disclosures of
related party transactions in note
30 of the Group Financial Statements
(page 150)
Transactions with related parties
mainly comprise transactions
between the subsidiaries of the
Company and entities controlled
by the shareholders with significant
influence over the Group. Given
the significant monetary amounts
involved we consider RPTs and
related disclosures to be a
significant risk.
The risk has remained consistent
with the prior year.
Our component team in Kazakhstan performed procedures to
walkthrough and understand the process and key controls associated
with the revenue recognition and accounts receivable process.
We made enquiries of management and analysed contracts to evaluate
whether revenue was recognised in accordance with their terms, we
also performed procedures that are designed to address the risk of
manipulation of accounting records and the ability to override controls.
We have:
(cid:120) tested a sample of third party evidence to verify revenue transactions
are recorded appropriately, this included inspection of sales contracts
with customers and delivery documents. We performed substantive
audit procedures on cash accounts to verify cash collection
from customers;
(cid:120) analysed the entire population of revenue transactions and identified
revenue journals for which the corresponding entry was not posted
against trade debtors and trade debtors not cleared through cash.
From the outstanding debtor accounts identified, we confirmed the
material debtors balances with the relevant counterparties as well as
tested that debtors amounts were received subsequent to year-end;
(cid:120) tested the appropriateness of journal entries impacting revenue, using
data extracted from the accounting system, as well as other adjustments
made in the preparation of the financial statements;
(cid:120) carried out other analytical review procedures on each 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; and
(cid:120) evaluated the financial statement disclosures for compliance with the
requirements of accounting standards.
We performed full scope audit procedures over this risk area in one
location (Kazakhstan). By performing these procedures we obtained
full coverage of the risk amount.
Our audit procedures have focused on obtaining evidence over the
completeness of related party transactions and the related disclosures.
We have:
(cid:120) obtained an understanding of the process that management has
established to identify, account for and disclose RPTs and authorise
and approve significant RPTs and arrangements outside the normal
course of business;
(cid:120) inspected bank and legal confirmations, minutes of meetings and
significant agreements with new counterparties;
(cid:120) identified high value and unusual transactions, if any, and if necessary
performed further procedures;
(cid:120) obtained an updated list of all related parties to the Group and
reviewed the general ledger against this list to ensure completeness
of transactions;
(cid:120) made enquiries of management in order to identify if any related
party transactions outside the normal course of business have
taken place; and
(cid:120) verified the completeness of disclosures in the financial statements.
In addressing this risk, audit procedures were performed by the
component teams in Kazakhstan and Belgium and the Group
engagement team.
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Key observations
communicated to the
Audit Committee
We have not
identified any
instances of
management
override or bias in
significant estimates
and judgements.
Risk
Our response to the risk
Risk of management override
We consider the likelihood of
management override occurring.
We base our consideration on
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. We
also specifically considered any
potential impact on impairment.
The risk has remained consistent
with the prior year.
We considered whether there was evidence of bias by the Directors and
senior management in significant accounting estimates and judgements
relevant to the financial statements. This included performing procedures
with a particular focus on those key judgements and estimates which relate
to the risks of estimation of oil and gas reserves, impairment of non-current
assets, revenue recognition and related parties transactions as
highlighted above.
Using our analytics tools 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.
In addressing this risk, audit procedures were performed by the
component team in Kazakhstan and the Group engagement team.
We tested manual and automated journal entries for four components
where we performed full scope audit.
An overview of the scope of our audit
Tailoring the scope
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. 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.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of
significant accounts in the financial statements, of the 10 reporting components of the Group, we selected 9 components covering entities
within the Netherlands, Belgium, Russia, United Kingdom and Kazakhstan, which represent the principal business units within the Group.
Of the 9 components selected, we performed an audit of the complete financial information of four components (“full scope components”)
which were selected based on their size or risk characteristics. For the remaining five components (“specified procedures scope
components”) we performed procedures on the existence and valuation of cash balances and the completeness and measurement of
payroll and general and administrative expenses. The audit scope for specified procedures are those where we perform procedures that
address only specific account assertions rather than the account balance as a whole.
The four full scope components account for 100% of the Group’s revenue and 102% of the Group’s EBITDA. The EBITDA coverage
of 112% represents one full scope component having a positive contribution of 112% offset by three full scope components having a
negative contribution of 10%. The specified procedures scope locations do not have income generating activities and we audited cash,
payroll, general and administrative expenses, and other current liabilities.
The remaining one component has a contribution of less than 1% of the Group’s EBITDA. For this component, we performed other
procedures, including analytical review, inquiries and testing of consolidation journals and intercompany eliminations to address any
residual risk of material misstatement to the Group financial statements.
Changes from the prior year
We changed scope for one entity from specific scope to full due to the size and the risk. The entity has a full year finance cost charge
(2017: only half year) and includes a new material derivative financial instrument in 2018.
Also, we changed scope for three entities from specific scope to specified procedures because no overall risk associated with entities was
identified; risk is limited to completeness of costs and cash balances.
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Independent Auditor’s Report / continued
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 two full scope components in Kazakhstan and Belgium, where the work was performed by component auditors, 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.
During the current year’s audit cycle, we held a global audit team event led by the Senior Statutory Auditor, where the primary audit
team and the component teams considered the audit risk and strategy. In the course of the year the Senior Statutory Auditor met and
communicated at least quarterly with the engagement partner of the component team in Kazakhstan and discussed key audit matters.
The primary audit team visited the component team in Kazakhstan to attend the component closing meeting with local management,
visited the operating field and the GTU3 construction site and reviewed key working papers. The primary team was ultimately responsible
for the scope and direction of the audit process. Video and telephone conference meetings were also held with the component teams
in Kazakhstan and Belgium throughout the current year’s audit cycle. The primary team interacted regularly with the component teams
during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process.
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.
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 $6.7 million (2017: $6.5 million), which is 3% (2017: 3%) of EBITDA. EBITDA is a key
performance indicator for the Group and is also a key metric used by the Group in the assessment of the performance of management.
We also noted that market and analyst commentary on the performance of the Group uses EBITDA as a key metric. We therefore,
considered EBITDA to be the most appropriate performance metric on which to base our materiality calculation as we considered
that to be the most relevant performance measure to the stakeholders of the Group.
We determined materiality for the parent company to be $1.0 million (2017: $975 thousand), which is 1% (2017: 1%) of total assets.
Performance materiality
The 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.
Based on our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that
performance materiality was 50% (2017: 50%) of our planning materiality, namely $3.35m (2017: $3.25m). 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 $1m to $3m (2017: $0.3m to $2.4m).
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 uncorrected audit differences in excess of $0.35m (2017: $0.3m),
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.
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Other information
The other information comprises the information included in the annual report set out on pages 1 to 101, including the Strategic Report
and Corporate Governance sections, other than the financial statements and our auditor’s report thereon. The directors are responsible
for the other information.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required
to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information.
If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required
to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the
following conditions:
• Fair, balanced and understandable set out on page 101 – the statement given by the directors that they consider the annual report
and financial statements 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, is materially inconsistent with our knowledge obtained in the audit; or
• Audit committee reporting set out on page 66 – the section describing the work of the audit committee does not appropriately
address matters communicated by us to the audit committee / the explanation as to why the annual report does not include a section
describing the work of the audit committee is materially inconsistent with our knowledge obtained in the audit; or
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 54 – the parts of the directors’
statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
Opinions 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.
In our opinion, based on the work undertaken in the course of the audit:
• 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; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the
audit, we have not identified material misstatements in the strategic report or the directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if,
in our opinion:
• 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
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 101, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and parent company’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
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Independent Auditor’s Report / continued
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
Explanation as to what extent the audit was considered capable of detecting irregularities,
including fraud
The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements
due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through
designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity
and management.
Our approach was as follows:
• We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most
significant are those that relate to the reporting framework (IFRS, Companies Act 2006, the UK Corporate Governance Code and the
Listing Rules of the UK Listing Authority requirements) and the relevant subsoil use and tax compliance regulations.
• We understood how Nostrum Oil & Gas PLC is complying with those frameworks by making enquiries of management, internal audit,
those responsible for legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review
of Board minutes, papers provided to the Audit Committee and correspondence received from regulatory bodies and noted that there
was no contradictory evidence.
• We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by utilising
internal and external information to perform a fraud risk assessment for each of the countries of operation.
• We considered the risk of fraud through management override and, in response, we incorporated data analytics across manual journal
entries into our audit approach. Our procedures included testing of transactions back to source information and were designed to
provide reasonable assurance that the financial statements were free from fraud or error.
• Based on the results of our risk assessment we designed our audit procedures to identify non-compliance with such laws and
regulations identified above. Our procedures involved journal entry testing, with a focus on journals meeting our defined risk criteria
based on our understanding of the business; enquiries of legal counsel and group management.
• If any instance of non-compliance with laws and regulations were identified, these were communicated to the relevant local EY teams
who performed sufficient and appropriate audit procedures supplemented by audit procedures performed at the group level.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
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Other matters we are required to address
Following the recommendation of the Audit Committee we were re-appointed by the Company’s Annual General Meeting (AGM) on
5 June 2018, as auditor of the Company to hold office until the conclusion of the next AGM of the Company, and signed an engagement
letter on 17 September 2018. Our total uninterrupted period of engagement is five years covering periods from our appointment through
to the period ended 31 December 2018.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to Nostrum Oil & Gas PLC or the parent company and
we remain independent of Nostrum Oil & Gas PLC and the parent company in conducting the audit.
Our audit opinion is consistent with our additional report to the AC explaining the results of our audit.
Use of our report
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.
[Signature]
Richard Addison
(Senior statutory auditor)
For and on behalf of Ernst & Young LLP, Statutory Auditor
London, 25 March 2019
Notes:
1. The maintenance and integrity of the Nostrum Oil & Gas PLC web site is the responsibility of the directors; the work carried 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 the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
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Consolidated financial statements / continued Consolidated statement of financial position The accounting policies and explanatory notes on pages 116 through 155 are an integral part of these consolidated financial statements. In thousands of US dollars Notes 31 December 2018 31 December 2017 NON-CURRENT ASSETS Exploration and evaluation assets 6 50,241 47,828 Goodwill 5 – 32,425 Property, plant and equipment 7 1,919,662 1,941,894 Restricted cash 12 7,021 6,663 Advances for non-current assets 8 15,466 14,598 Total Non-current assets 1,992,390 2,043,408 CURRENT ASSETS Inventories 9 29,583 29,746 Trade receivables 10 35,732 34,520 Prepayments and other current assets 11 20,014 27,103 Income tax prepayment – 3,380 Cash and cash equivalents 12 121,753 126,951 Total Current assets 207,082 221,700 TOTAL ASSETS 2,199,472 2,265,108 SHARE CAPITAL AND RESERVES 13 Share capital 3,203 3,203 Treasury capital (1,660) (1,660) Retained earnings and reserves 555,456 668,010 Total Share capital and reserves 556,999 669,553 NON-CURRENT LIABILITIES Long-term borrowings 15 1,093,967 1,056,541 Abandonment and site restoration provision 16 21,894 23,590 Due to Government of Kazakhstan 17 5,280 5,466 Deferred tax liability 28 400,981 381,595 Total Non-current liabilities 1,522,122 1,467,192 CURRENT LIABILITIES Current portion of long-term borrowings 15 35,633 31,337 Employee share option plan liability 26 55 2,086 Trade payables 18 52,876 56,855 Advances received 394 1,279 Income tax payable 679 499 Current portion of due to Government of Kazakhstan 17 1,031 1,031 Other current liabilities 19 29,683 35,276 Total Current liabilities 120,351 128,363 TOTAL EQUITY AND LIABILITIES 2,199,472 2,265,108 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 Tom Richardson Chief Executive Officer Chief Financial Officer 112Nostrum Oil & Gas PLC Annual Report 2018 Consolidated statement of
comprehensive income
In thousands of US dollars
Revenue
Revenue from export sales
Revenue from domestic sales
Cost of sales
Gross profit
General and administrative expenses
Selling and transportation expenses
Taxes other than income tax
Impairment charge
Finance costs
Employee share options - fair value adjustment
Foreign exchange loss, net
Loss on derivative financial instruments
Interest income
Other income
Other expenses
(Loss)/profit before income tax
Current income tax expense
Deferred income tax expense
Income tax expense
Loss for the year
Other comprehensive income that could be reclassified to the income statement in
subsequent periods
Currency translation difference
Other comprehensive (loss)/income for the year
For the year ended 31 December
Notes
2018
2017
20
21
22
23
24
5,7
25
26
29
27
28
296,034
93,893
389,927
262,767
142,766
405,533
(165,145)
224,782
(177,246)
228,287
(22,212)
(49,984)
(29,702)
(150,000)
(49,383)
1,320
(978)
(12,387)
514
4,374
(8,504)
(92,160)
(12,251)
(16,284)
(28,535)
(33,303)
(66,441)
(19,967)
–
(59,752)
2,099
(688)
(6,658)
374
4,071
(22,055)
25,967
(13,883)
(35,966)
(49,849)
(120,695)
(23,882)
(895)
(895)
825
825
Total comprehensive loss for the year
(121,590)
(23,057)
Loss for the year attributable to the shareholders (in thousands of US dollars)
Weighted average number of shares
Basic and diluted earnings per share (in US dollars)
(120,695)
185,234,079
(0.65)
(23,882)
185,068,917
(0.13)
All items in the above statement are derived from continuous operations.
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The accounting policies and explanatory notes on pages 116 through 155 are an integral part of these consolidated financial statements.
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Consolidated financial statements / continued
Consolidated statement of cash flows
In thousands of US dollars
Cash flow from operating activities:
Profit before income tax
Adjustments for:
Depreciation, depletion and amortisation
Impairment charge
Finance costs
Employee share option plan fair value adjustment
Interest income
Net foreign exchange differences
Loss on write-off of property, plant and equipment
Payments under derivative financial instruments
Loss on derivative financial instruments
Provision for doubtful debts
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
Exploration and evaluation works
Acquisition of subsidiaries
Placement of bank deposits
Redemption of bank deposits
Loans granted
Net cash used in investing activities
Cash flow from financing activities:
Finance costs paid
Issue of notes
Repayment of notes
Fees and premium paid on arrangement of notes
Treasury shares sold
Payment of finance lease liabilities
Transfer to restricted cash
Net cash (used in) / from financing activities
For the year ended 31 December
Notes
2018
2017
(92,161)
25,967
21, 22
5,7
25
29
29
6
117,081
150,000
49,383
(2,031)
(514)
34
1,712
(8,649)
12,387
(116)
–
227,126
163
(1,212)
7,664
(3,183)
(886)
(1,031)
(5,538)
–
223,103
(9,062)
214,041
514
(168,343)
(2,518)
(1,674)
(45,000)
45,000
–
(172,021)
(81,111)
397,280
(353,192)
(9,496)
–
(132)
(358)
(47,009)
122,986
–
59,752
(2,099)
(374)
(1,541)
1,285
–
6,658
1,756
3,046
217,436
1,561
(5,468)
(5,733)
(4,555)
(531)
(1,289)
(1,597)
(1,162)
198,662
(15,874)
182,788
374
(188,060)
(3,482)
–
–
–
(1,223)
(192,391)
(57,013)
725,000
(606,808)
(27,084)
1,853
(676)
(683)
34,589
Effects of exchange rate changes on cash and cash equivalents
(209)
831
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
12
12
(5,198)
126,951
121,753
25,817
101,134
126,951
The accounting policies and explanatory notes on pages 116 through 155 are an integral part of these consolidated financial statements.
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Consolidated statement of changes
in equity
In thousands of US dollars
Notes
Share capital
capital Other reserves
Treasury
Retained
earnings
Total
As at 1 January 2017
3,203
(1,846)
260,918
429,537
691,812
Loss for the year
Other comprehensive income
Total comprehensive loss for the year
Sale of treasury capital
Transaction costs
As at 31 December 2017
–
–
–
–
–
–
–
–
186
–
–
825
825
674
–
(23,882)
–
(23,882)
825
(23,882)
(23,057)
–
(62)
860
(62)
3,203
(1,660)
262,417
405,593
669,553
Impact of adopting IFRS 9
3
–
–
–
8,325
8,325
Restated opening balance under IFRS 9
3,203
(1,660)
262,417
413,918
677,878
Loss for the year
Other comprehensive loss
Total comprehensive loss for the year
Share based payments under LTIP
As at 31 December 2018
–
–
–
–
–
–
–
–
–
(895)
(120,695)
–
(120,695)
(895)
(895)
(120,695)
(121,590)
711
–
711
3,203
(1,660)
262,233
293,223
556,999
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Consolidated financial statements / continued
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: 9th Floor, 20 Eastbourne Terrace, London, W2 6LG, UK.
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. 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 were authorised for issue by the Board of directors of the Company on 25 March 2019.
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
Registered office
Form of capital
Ownership, %
Nostrum Associated Investments LLP
Nostrum E&P Services LLC
Nostrum Oil & Gas Coöperatief U.A.
Nostrum Oil & Gas BV
Nostrum Oil & Gas Finance B.V.
Nostrum Oil & Gas UK Ltd.
Nostrum Services Central Asia LLP
Nostrum Services N.V.
Atom&Co LLP
Zhaikmunai LLP
43/1 Karev street
090000 Uralsk
Republic of Kazakhstan
Liteyniy Prospekt 26 A
191028 St. Petersburg
Russian Federation
Gustav Mahlerplein 23B
1082MS Amsterdam
The Netherlands
Gustav Mahlerplein 23B
1082MS Amsterdam
The Netherlands
Gustav Mahlerplein 23B
1082MS Amsterdam
The Netherlands
20 Eastbourne Terrace
London W2 6LA
United Kingdom
Aksai 3a, 75/38
050031 Almaty
Republic of Kazakhstan
Kunstlaan 56
1000 Brussels
Belgium
43/1 Karev street
090000 Uralsk
Republic of Kazakhstan
43/1 Karev street
090000 Uralsk
Republic of Kazakhstan
Participatory interests
Participatory interests
Members' interests
Ordinary shares
Ordinary shares
Ordinary shares
Participatory interests
Ordinary shares
Participatory interests
Participatory interests
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100
100
100
100
100
100
100
100
100
Grandstil LLC was liquidated as of 6 December 2017.
On 28 December 2018, the Group acquired 100% interest in Atom&Co LLP for a cash consideration of US$ 1.7 million for the main
purpose to gaining control over the administrative office in Uralsk, which was under finance lease with this entity. This transaction has been
accounted for as an asset acquisition (Note 15).
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 2018, the Group employed 820 employees (FY 2017: 989).
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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 licence 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 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.
Subsequently the exploration period for the Bobrikovski reservoir was extended to 26 August 2018.
The contract for exploration and production of hydrocarbons from the Rostoshinskoye field dated 8 February 2008 originally included a 3-
year exploration period and a 12-year production period. Subsequently, the exploration period was extended until 8 February 2019. The
Group’s application for further extension of the exploration period is in process.
The contract for exploration and production of hydrocarbons from the 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 2021.
The contract for exploration and production of hydrocarbons from the 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 2021.
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 2018 have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) issued by the 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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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
2. Basis of preparation and consolidation continued
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Parent and its subsidiaries as at 31 December 2018. 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 results 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 13). 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.
Subsidiaries
Nostrum Oil & Gas UK Ltd. registered and incorporated in the United Kingdom under Companies Number 08071559 is exempt from the
requirements of the UK Companies Act 2006 relating to the audit of the individual accounts by virtue of the section 479A of the Act.
3. Changes in accounting policies and disclosures
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous financial year, except for the application of IFRS 9 and IFRS 15
for the first time. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.
Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the consolidated financial
statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are
not yet effective.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after
1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement;
impairment; and hedge accounting.
The Group has applied IFRS 9 retrospectively, with the initial application date of 1 January 2018. However, as permitted by IFRS 9 the
Group elected not to restate comparative information for the year ended 31 December 2017 for the financial instruments in the scope of
IFRS 9. Therefore, the comparative information for 2017 is reported under IAS 39 and is not comparable to the information presented for
2018. Differences arising from the adoption of IFRS 9 have been recognized directly in retained earnings as of 1 January 2018.
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As of 1 January 2018, the effect of adopting IFRS 9 resulted in the following adjustments to the carrying amounts of the financial
instruments, which were previously accounted for under IAS 39, as well as other balances on the consolidated statement of
financial position:
In thousands of US dollars
Property, plant and equipment
Total non-current assets
Total assets
Retained earnings
Total equity
Long-term borrowings
Deferred tax liabilities
Total non-current liabilities
Total equity and liabilities
As previously
reported
Remeasuremen
t
As
adjusted
1,941,894
2,043,408
2,265,108
2,362
1,944,256
2,362
2,045,770
2,362
2,267,470
668,010
669,553
8,325
8,325
676,335
677,878
1,056,541
381,595
(9,065)
1,047,476
3,102
384,697
1,467,192
(5,963)
1,461,229
2,265,108
2,362
2,267,470
The nature of these adjustments is described below:
(a) Classification and measurement
Under IFRS 9, debt instruments are subsequently measured at fair value through profit or loss, amortised cost, or fair value through other
comprehensive income. The classification is based on two criteria: the Group’s business model for managing the assets; and whether the
instruments’ contractual cash flows represent ‘solely payments of principal and interest’ on the principal amount outstanding.
The classification and measurement requirements of IFRS 9 did not have a significant impact on the Group’s financial assets. Trade
receivables are held to collect contractual cashflows and are expected to give rise to cashflows representing solely payments of principal
and interest, if applicable. Hence, the Group continued to measure these at amortised cost.
The classification and measurement of the Group’s financial liabilities has remained materially unchanged on application of IFRS 9 with the
exception of long-term borrowings accounted at amortised cost.
Under IFRS 9, when a financial liability measured at amortised cost is modified without this resulting in derecognition, a gain or loss should
be recognised in profit or loss, whereas under IAS 39 there was no such requirement to recognize gain or loss in such circumstances. The
gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the
original effective interest rate. Any fees and costs incurred are amortised over the remaining term of the asset.
The Group performed an assessment of impact of this change in the requirement on the refinancing of the Notes in 2012, 2014 and 2017
as of the date of initial application, 1 January 2018, and then applied the remeasurement retrospectively to the 2012 Notes, the 2014
Notes and the Notes 2017, that were not derecognised as of 1 January 2018.
In accordance with the requirements of IFRS 9, the Group identified the modified part of the Notes on each refinancing and estimated
gains and losses on modification, which should have been recognized in profit and loss at the date of each transaction, while the premium
paid on early redemption and the transaction costs and fees were assumed to be capitalized under the long-term borrowings. The
unamortised costs, portion of the premium and fees and expenses related to the extinguished debt, were deemed to be expensed at the
date of each refinancing. As a result of these estimations, the Group decreased the carrying values of the 2012 Notes, the 2014 Notes and
the 2017 Notes by US$ 99 thousand, US$ 85 thousand and US$ 8,881 thousand, respectively, by increasing the respective capitalized
transaction costs.
The adjustment of capitalized transaction costs and fees resulted in the change of the effective interest rate on the Notes from each date of
refinancing. Hence, the interest capitalization rate has been revised and related adjustments made to the carrying amounts of property,
plant and equipment and deferred taxes at 1 January 2018.
(b) Impairment
IFRS 9 requires the Group to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month
or lifetime basis. The Group applies the simplified approach and record lifetime expected losses on all trade receivables. There was no
significant impact on Group’s equity due to the short-term nature and high quality of its trade receivables as well as anticipation of low
trade impairment losses on trade receivables based on the historical data.
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
3. Changes in accounting policies and disclosures continued
IFRS 15 Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related interpretations and it applies, with limited exceptions, to
all revenue arising from contracts with its customers. IFRS 15 establishes a five-step model to account for revenue arising from contracts
with customers and requires that revenue be 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.
IFRS 15 requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each
step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a
contract and the costs directly related to fulfilling a contract. In addition, the standard requires relevant disclosures.
The Group has adopted IFRS 15 with effect from January 1, 2018, which did not represent a change from the Group’s existing practice and
did not have a significant effect on the Group’s accounting or disclosures, and therefore no transition adjustment is presented.
(a) Sale of goods
The Group is in the business of production and sale of oil and gas products. All goods are sold in separate identified contracts with
customers. For such contracts with customers in which the sale of goods is the only performance obligation, adoption of IFRS 15 had no
significant impact on the revenues and profit or loss.
(b) Variable consideration
IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. The Group recognises
revenue from the sale of goods measured at the fair value of the consideration received or receivable, net of returns and allowances, trade
discounts and volume rebates. Historically, the goods sold by the Group were not returned by customers, neither were there material
volume rebates in contracts. Therefore, application of IFRS 15 has not resulted in a different amount of revenue being recognised than
under current IFRS.
(c) Advances received from customers
Under IFRS 15, the Group must determine whether there is a significant financing component in its contracts. However, the Group decided
to use the practical expedient provided in IFRS 15, and did not adjust the promised amount of the consideration for the effects of
significant financing components in the contracts, where the Group expects, at contract inception, that the period between the Group
transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Therefore, for short-term advances, the Group does not account for a financing component. The Group receives only short-term advances
from its customers. However, the Group may receive from customers long-term advances in the future. Therefore, close monitoring of the
advances from customers will be made to reveal any significant financing component because of the length of time.
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Considerations
The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income
(or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the
transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance
consideration. If there are multiple payments or receipts in advance, then the entity must determine the date of the transactions for each
payment or receipt of advance consideration. This Interpretation does not have any impact on the Group’s consolidated financial
statements.
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions
The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the
measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net
settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based
payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the
amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other
criteria are met. The Group’s accounting policy for cash-settled share based payments is consistent with the approach clarified in the
amendments. In addition, the Group has no share-based payment transaction with net settlement features for withholding tax obligations
and had not made any modifications to the terms and conditions of its share-based payment transaction. Therefore, these amendments do
not have any impact on the Group’s consolidated financial statements.
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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.
Standards issued, but not yet effective, as at 1 January 2018, have not been adopted early by the Group.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15
Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the
principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a
single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition
exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12
months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability)
and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required
to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a
change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally
recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all
leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
IFRS 16, which is effective for annual periods beginning on or after 1 January 2019, requires lessees and lessors to make more extensive
disclosures than under IAS 17.
Transition to IFRS 16
The Group plans to apply IFRS 16 retrospectively, with the initial application date of 1 January 2019. However, as permitted by IFRS the
Group plans to elect not to restate comparative information for the year ended 31 December 2018, and recognize differences arising from
the adoption of IFRS 16 by restating the balances of assets and liabilities as at 1 January 2019.
The Group will elect to use the exemptions applicable to the standard on lease contracts for which the lease terms ends within 12 months
as of the date of initial application, and lease contracts for which the underlying asset is of low value. The Group has leases of certain office
equipment that are considered of low value.
During 2018, the Group has performed a detailed impact assessment of IFRS 16 and expects the most significant impact from recognition
of right-of-use assets and lease liabilities for leased drilling rigs, rail tank cars and vehicles.
In summary the impact of IFRS 16 adoption on the statement of financial position is expected to be, as follows:
In thousands of US dollars
Property, plant and equipment (right-of-use asset)
Total non-current assets
Total assets
Lease liabilities, long-term portion
Total non-current liabilities
Lease liabilities, current portion
Total current liabilities
Total equity and liabilities
1 January 2019
33,747
33,747
33,747
17,207
17,207
16,540
16,540
33,747
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
3. Changes in accounting policies and disclosures continued
The impact of the standard on 2019 underlying earnings and profit before tax following adoption is not expected to be significant
although the income statement presentation of the cost of leases is expected to be changed. Instead of a rent expenses, the cost of leases
will be allocated between the depreciation of right-of-use assets, and a finance charge representing the unwinding of the discount on
lease liabilities.
IFRIC Interpretation 23 Uncertainty over Income Tax Treatment
The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12
and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and
penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:
• Whether an entity considers uncertain tax treatments separately
• The assumptions an entity makes about the examination of tax treatments by taxation authorities
• How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates
• How an entity considers changes in facts and circumstances
An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax
treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for
annual reporting periods beginning on or after 1 January 2019, but certain transition reliefs are available. The Group will apply the
interpretation from its effective date. Since the Group operates in a complex multinational tax environment, applying the Interpretation
may affect its consolidated financial statements. In addition, the Group may need to establish processes and procedures to obtain
information that is necessary to apply the Interpretation on a timely basis.
Amendments to IFRS 9: Prepayment Features with Negative Compensation
Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that
the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the
instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset
passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which
party pays or receives reasonable compensation for the early termination of the contract. The amendments should be applied
retrospectively and are effective from 1 January 2019, with earlier application permitted. These amendments have no impact on the
consolidated financial statements of the Group.
Annual Improvements 2015-2017 Cycle (issued in December 2017)
These improvements include:
IAS 12 Income Taxes
The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that
generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends
in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or
events. An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application is
permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or
after the beginning of the earliest comparative period. Since the Group’s current practice is in line with these amendments, the Group
does not expect any effect on its consolidated financial statements.
IAS 23 Borrowing Costs
The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset
when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. An entity applies those
amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those
amendments. An entity applies those amendments for annual reporting periods beginning on or after
1 January 2019, with early application permitted. Since the Group’s current practice is in line with these amendments, the Group does not
expect any effect on its consolidated financial statements.
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4. Summary of significant accounting policies
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, materials, fuel used, rig costs, payments
made to contractors and asset retirement obligation fees.
Significant estimates and assumptions: Exploration expenditure
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, which is subject to estimation uncertainties. 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.
The Group owns licences in the Western Kazakhstan region, including the Rostoshinskoye, Yuzhno-Gremyachenskoye and
Darjinskoye fields where the exploration periods will expire or have expired (respectively on 8 February 2019, 31 December 2021 and
31 December 2021). The Group’s applications for extension of these exploration periods are under approval by the MOE. The Group
remains committed to developing its exploration assets and based on the past history of the Group’s ability to obtain extension,
therefore, continues to carry the capitalized costs on its balance sheet. For more detailed information in relation to the subsoil use
rights terms, please see Note 1.
Significant accounting judgement: Exploration expenditure
Judgement is also required when determining the appropriate grouping of the exploration assets into a CGU when assessing their
recoverable amounts. The management has determined all three exploration fields as a single cash generating unit.
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 6.
Property, plant and equipment
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
of its purchase price or construction cost, any costs directly attributable to bringing the asset into operation and the initial estimate of
decommissioning obligations, 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.
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
4. Summary of significant accounting policies continued
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:
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 7.
Significant accounting judgment: 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.
Significant estimates and assumptions: oil and gas reserves
The Group uses the internal estimates confirmed by independent reserve engineers 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 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, whereby changes in proved reserves are dealt with prospectively by amortizing the remaining carrying value of the
asset over the expected future production. Further downward revision of the proved reserves estimates in the future could lead to
relative increase in depreciation expense. Estimates of economically recoverable oil and gas reserves and related future net cash
flows also impact the impairment assessment of the Group. Details on carrying values of oil and gas properties and related
depreciation, depletion and amortization are shown in Note 7.
In addition, provisions for decommissioning may require revision — where changes to reserves estimates affect expectations about
when such activities will occur and the associated cost of these activities (see Decommissioning related significant judgements,
estimates and assumptions for further details). Also, the recognition and carrying value of deferred tax assets may change due to
changes in the judgements regarding the existence of such assets and in estimates of the likely recovery of such assets.
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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 property, plant and equipment, exploration and evaluation assets and goodwill
The Group assesses assets or groups of assets, called cash-generating units (CGUs), for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or CGU may not be recoverable; for example, changes in the Group’s business
plans, significant decreases in the market commodity prices, low plant utilisation, evidence of physical damage or, for oil and gas assets,
significant downward revisions of estimated reserves or increases in estimated future development expenditure or decommissioning
costs. If any such indication of impairment exists, the Group makes an estimate of the asset’s recoverable amount. Individual assets are
grouped into CGU for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. A CGU’s recoverable amount is the higher of its fair value less costs of disposal
and its value in use. Where the carrying amount of a CGU exceeds its recoverable amount, the CGU is considered impaired and is written
down to its recoverable amount.
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 5.
The business cash flow internal model, which is approved on an annual basis by senior management, is the primary source of information
for the determination of value in use. It contains forecasts for oil and gas production, sales volumes for various types of products, revenues,
costs and capital expenditure. As an initial step in the preparation of this model, various assumptions are set by senior management. These
assumptions take account of commodity prices, global supply-demand equilibrium for oil and natural gas, other macroeconomic factors
and historical trends and variability. 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 rate.
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
4. Summary of significant accounting policies continued
Significant accounting judgment: identification of cash-generating unit
Judgement is required to identify cash-generating units for the purpose of testing the assets for impairment. 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 as well as facilities. This is mainly based on the fact that hydrocarbons extracted from the fields are processed and passed through a
combination of various facilities, so it is impracticable to clearly separate assets solely dedicated to each product.
Significant estimates and assumptions: impairment of property, plant and equipment, exploration and evaluation assets and goodwill
Determination as to whether, and by how much, the CGU containing goodwill is impaired involves management’s best estimates on
highly uncertain matters such as future commodity prices, operating expenses and capital expenditures estimates, discount rate,
future production volumes and fiscal regimes.
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 takes into
consideration cashflows, which are expected to arise until 2032, i.e. during the licence 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 recoverability of exploration assets is covered under Exploration expenditure above.
The key assumptions used in the Group’s discounted cash flow model reflecting past experience and taking in account of external
factors are subject to periodic review. These assumptions are:
• Oil prices (in real terms): US$67.5/bbl for 2019-2032;
• 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 15.4% (2017: 14.7%);
• Considering mechanical completion of GTU3 in December 2018 and the ongoing commissioning works, the first gas is planned for Q2 2019
and full commissioning of the plant during 2019, which is expected to lead to a gradual increase in the annual production volumes.
Owing to drilling challenges in the western area of the Chinarevskoye field accompanied with reduction of the 2P reserves expected
to be recovered from the field over the period of 2019-2032, the Group performed stress-testing of the discounted cashflow model
by applying higher sensitivities to oil prices and forecast production profiles while keeping discount rate at the same level. Based on
such analysis the Group evaluated the value-in-use of the single CGU and recognized an impairment charge US$150,000 thousand.
In accordance with IFRS requirements the impairment charge was first allocated against goodwill amounting to US$32,425 thousand.
This impairment cannot be reversed in future periods in accordance with accounting policy of the Group. The remaining US$117,575
thousand of impairment charge was allocated between working oil & gas assets and construction in progress proportionate to their
carrying amounts at 31 December 2018 (US$67,740 thousand and US$49,835 thousand, respectively), resulting in the recoverable
amount of property, plant and equipment of US$1,919,662 thousand. Further downgrades of reserves by 5% or decline in oil prices
by 5% may result in increase of the impairment charge in future periods by US$125,500 thousand and US$98,700 thousand,
respectively. Successful drilling results in the western area, 2P reserves increase, and increase in utilisation of the Group’s processing
facilities would have the effect of reversal of the impairment partially or in full. Delay in commissioning of GTU3 up to 1-2 years will
have no material impact on the VIU model used by management for the purpose of the impairment testing.
More detailed information related to carrying values of oil and gas properties and related depreciation, depletion, amortisation and
impairment are shown in Note 7. For information related to goodwill and related impairment, please refer to Note 5.
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.
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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 2018 and 2017, please see Note 28.
Significant accounting judgment: 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. 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 2018.
The Group is subject to routine tax audits and also a process whereby tax computations are discussed and agreed with the tax
authorities. Whilst the ultimate outcome of such tax audits and discussions cannot be determined with certainty, management
estimates the level of provisions required for taxes for which it is considered probable will be payable, based on professional advice
and consideration of the nature of current discussions with the tax authority.
As at 31 December 2018 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. To the extent that actual outcomes differ from management’s estimates, income tax charges or credits,
and changes in current and deferred tax assets or liabilities, may arise in future periods. For more information, see Note 28.
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
Nostrum Associated Investments LLP
Nostrum E&P Services LLC
Nostrum Oil & Gas Coöperatief U.A.
Nostrum Oil & Gas BV
Nostrum Oil & Gas Finance BV
Nostrum Oil & Gas UK Ltd.
Nostrum Services Central Asia LLP
Nostrum Services N.V.
Atom & Co LLP
Zhaikmunai LLP
Functional currency
Tenge
Russian rouble
US dollar
US dollar
US dollar
British Pound
Tenge
Euro
Tenge
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.
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
4. Summary of significant accounting policies continued
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 8.
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 7.
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 2018 and 2017, please see Note 9.
Provisions and contingencies
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.
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 32, unless the possibility of an outflow of
resources embodying economic benefits is remote.
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.
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 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.
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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 abandonment and site restoration provision are disclosed in Note 16.
Significant accounting judgment: provisions and contingencies
Provisions and liabilities are recognized in the period when it becomes probable that there will be a future outflow of funds resulting
from past operations or events and the amount of cash outflow can be reliably estimated. The timing of recognition and quantification
of the liability require the application of judgment to existing facts and circumstances, which can be subject to change. The carrying
amounts of provisions and liabilities are reviewed regularly and adjusted to take account of changing facts and circumstances.
Significant management judgment is required to evaluate any claims and actions to determine whether a provision relating to a
specific litigation should be recognized or revised, or a contingent liability is required to be disclosed, since the outcome of litigation
is difficult to predict.
Significant estimates and assumptions: provisions and contingencies
The Group holds provision for the future decommissioning of oil and gas properties and site restoration. The estimation of the future
dismantlement and site restoration costs involves use of significant estimates and assumptions by management, specifically for
determining the timing of the future cash outflows and discount rate.
Management made its estimates based on the assumption that cash flow will take place at the expected end of the subsoil use rights.
Therefore, the most decommissioning events are many years in the future and the precise date of wells abandonment and site
restoration may change with the relative impact on the cash outflows. 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 denominated in US Dollars provides the best
estimates of applicable risk uncorrected discount rate. Any changes in the expected future costs are reflected in both the provision
and the asset. Moreover, actual decommissioning costs can differ from estimates because of constantly changing decommissioning
technologies as well as changes in environmental laws and regulations and public expectations. As a result, there could be significant
adjustments to the provisions established which would affect future financial results. For more details on abandonment and site
restoration provision please refer to Note 16.
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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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
4. Summary of significant accounting policies continued
Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive
income (OCI), and fair value through profit or loss. The Group determines the classification of its financial assets at initial recognition.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the
Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component
or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of
a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing
component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15.
In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows
that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI
test and is performed at an instrument level.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The
business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the
market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
• Financial assets at amortised cost (debt instruments)
• Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments)
• Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity
instruments)
• Financial assets at fair value through profit or loss
Financial assets at amortised cost (debt instruments)
This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions
are met:
• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on
the principal amount outstanding
Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment.
Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
The Group’s financial assets at amortised cost include cash, long-term and short-term deposits, trade and other receivables.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e.,
removed from the Group’s consolidated statement of financial position) when:
• The rights to receive cash flows from the asset have expired; or
• The Group 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 Group has transferred substantially all
the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the
asset, but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates
if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the
risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of
its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability
are measured on a basis that reflects the rights and obligations that the Group has retained.
Impairment of financial assets
The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss.
ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the
Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash
flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
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ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial
recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month
ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is
required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not
track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date.
Financial liabilities
Initial recognition, measurement and derecognition
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, long-term borrowings,
payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are recognised initially at fair value and, in the case of long-term borrowings and payables, net of directly attributable
transaction costs.
The Group’s financial liabilities include trade and other payables, long-term borrowings, and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon
initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also
includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships
as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective
hedging instruments.
Gains or losses on liabilities held for trading are recognised in the statement of profit or loss.
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of
recognition, and only if the criteria in IFRS 9 are satisfied. The Group’s financial liability as at fair value through profit or loss include
derivative financial instruments.
Long-term borrowings
This is the category most relevant to the Group. After initial recognition, interest-bearing borrowings are subsequently measured at
amortised cost using the EIR method. Gains and losses are recognised in 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 fees or costs that are an integral part of
the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss.
This category generally applies to interest-bearing borrowings. For more information, refer to Note 15.
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 the derecognition of the original liability and the recognition of a new liability.
The difference in the respective carrying amounts is recognised in the statement of profit or loss.
Significant accounting judgment: modifications of liabilities
When an existing financial liability is replaced by another from the same lender judgement is required to determine whether the
terms of the new financial liability are substantially different from the terms of the original liability. As part of its capital management
strategy, the Group can repurchase issued Notes (“old Notes”) and issue new Notes on different terms.
The holders of the old Notes are given an option to exchange the old Notes for the new Notes. If the terms are not substantially
different, the exchange of Notes does not result in derecognition of the financial liability, and the Group recalculates the gross
carrying amount of the new Notes taking in consideration the relative proportion of the arrangement fees associated with the Notes
being exchanged. In relation to the portion of the Notes which are repurchased rather than exchanged for newly issued Notes, the
Group derecognises those Notes along with the relative portion of the unamortised arrangement fees. For more information on the
application of judgement in relation to the Group’s long-term borrowings please refer to Notes 3 (IFRS 9 Financial Instruments)
and 15.
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
4. Summary of significant accounting policies continued
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.
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 2018 and 2017, please see Note 12.
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. For
contracts that contain separate performance obligations the transaction price is allocated to those separate performance obligations by
reference to their relative standalone selling prices.
Revenue from contracts with customers is recognised when control of the goods is transferred to the customer. For sales of crude oil, gas
condensate and LPG, this generally occurs when the product is physically transferred into a vessel, pipe, railcar, trucks or other delivery
mechanism; for sales of gas, it is when the product is physically transferred into a pipe.
The Group has generally concluded that it is the principal in its revenue arrangements, because it typically controls the goods before
transferring them to the customer.
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 cost of cash-settled equity-based employee compensation is measured initially at fair value at the grant date. 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 cost of equity-settled transactions are measured at fair value at the grant date. This fair value is expensed over the period until vesting
with the recognition of a corresponding equity element, which is not remeasured subsequently until the settlement date.
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 26.
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5. Goodwill
As at 31 December 2018 and 31 December 2017, goodwill comprised the following due to business combinations:
In thousands of US dollars
Balance as at 1 January
Goodwill impairment
Balance as at 31 December
2018
32,425
(32,425)
–
2017
32,425
–
32,425
The goodwill arises from the purchase of Nostrum Services CIS BVBA and Nostrum Services Central Asia LLP and is annually tested for
impairment.
The Group performed annual review of goodwill and oil and gas assets for impairment at the year end, as a result of which impairment of
goodwill in the amount of US$ 32,425 thousand was recognized. For information in relation to goodwill impairment testing, please see
Note 4.
6. Exploration and evaluation assets
In thousands of US dollars
Subsoil use rights
Expenditures on geological and geophysical studies
31 December
2018
31 December
2017
15,835
34,406
50,241
15,835
31,993
47,828
During the year ended 31 December 2018 the Group had additions to exploration and evaluation assets of US$2,413 thousand which
mainly includes capitalised expenditures on geological studies and drilling costs (FY 2017: US$3,557 thousand). Interest was not
capitalised on exploration and evaluation assets.
7. Property, plant and equipment
As at 31 December 2018 and 31 December 2017 property, plant and equipment comprised the following:
In thousands of US dollars
Oil and gas properties
Other property, plant and equipment
31 December
2018
31 December
2017
1,879,965
39,697
1,896,154
45,740
1,919,662
1,941,894
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
7. Property, plant and equipment continued
Oil and gas properties
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 2018 and 2017 was as follows:
In thousands of US dollars
Working assets
Construction in
progress
Total
Balance at 1 January 2017, net of accumulated depreciation and depletion
1,133,031
626,221
1,759,252
Additions
Transfers
Depreciation and depletion charge
8,580
104,664
(115,890)
243,927
(104,379)
–
252,507
285
(115,890)
Balance at 31 December 2017, net of accumulated depreciation and depletion
1,130,385
765,769
1,896,154
Additions
Transfers
Disposals
Disposals depreciation
Depreciation and depletion charge
Impairment charge
1,145
131,900
(2,203)
842
(111,197)
(67,740)
212,799
(131,900)
–
–
–
(49,835)
213,944
–
(2,203)
842
(111,197)
(117,575)
Balance at 31 December 2018, net of accumulated depreciation and depletion
1,083,132
796,833
1,879,965
As at 31 December 2016
Cost
Accumulated depreciation and depletion
Balance, net of accumulated depreciation and depletion
As at 31 December 2017
Cost
Accumulated depreciation and depletion
Balance, net of accumulated depreciation and depletion
As at 31 December 2018
Cost
Accumulated depreciation, depletion and impairment
Balance, net of accumulated depreciation and depletion
1,785,127
(652,096)
626,221
–
2,411,348
(652,096)
1,133,031
626,221
1,759,252
1,898,361
(767,976)
765,769
–
2,664,130
(767,976)
1,130,385
765,769
1,896,154
2,029,203
(946,071)
846,668
(49,835)
2,875,871
(995,906)
1,083,132
796,833
1,879,965
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 10.33% and 10.89% in 2018 and 2017, respectively.
The Group engaged independent petroleum engineers to perform a reserves evaluation as at 31 December 2018. Depletion has been
calculated using the unit of production method based on these reserves estimates.
During the year ended 31 December 2018 the Group evaluated the value-in-use of the single CGU and recognized an impairment charge
US$ 117,575 thousand attributable to oil and gas properties (Note 4).
During the year ended 31 December 2018 the Group has written off two water wells and a power transformer with the carrying value of
US$ 1,712 thousand.
The change in the long-term inflation rate and discount rate used to determine the abandonment and site restoration provision (Note 16)
in the year ended 31 December 2018 resulted in the decrease of the oil and gas properties by US$ 2,809 thousand (31 December 2017:
an increase of US$ 1,391 thousand).
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The Group incurred borrowing costs including amortisation of arrangement fees. Capitalisation rate and capitalised borrowing costs were
as follows as at 31 December 2018 and 31 December 2017:
In thousands of US dollars
Borrowing costs including amortisation of arrangement fee
Capitalisation rate
Capitalised borrowing costs
Other property, plant and equipment
31 December
2018
31 December
2017
91,429
8.43%
50,286
76,395
6.98%
33,599
In thousands of US dollars
Balance at 1 January 2017, net of
accumulated depreciation
Additions
Transfers
Disposals
Disposals depreciation
Depreciation
Translation difference
Balance at 31 December 2017, net of
accumulated depreciation
Additions
Transfers
Disposals
Disposals depreciation
Depreciation
Translation difference
Balance at 31 December 2018, net of
accumulated depreciation
As at 31 December 2016
Cost
Accumulated depreciation
Balance, net of accumulated depreciation
As at 31 December 2017
Cost
Accumulated depreciation
Balance, net of accumulated depreciation
As at 31 December 2018
Cost
Accumulated depreciation
Balance, net of accumulated depreciation
Buildings
Machinery &
equipment
Vehicles
Others
Construction in
progress
Total
34,528
1,039
67
(8)
7
(4,070)
–
31,563
439
115
(324)
222
(4,048)
–
4,255
2,530
22
(452)
360
(1,550)
–
5,165
335
(168)
(78)
76
(1,463)
–
1,211
21
–
(1,223)
981
(194)
–
796
14
–
(48)
44
(142)
–
9,233
1,308
(374)
(468)
276
(1,830)
26
8,171
597
104
(292)
212
(1,613)
(25)
45
49,272
–
–
–
–
–
–
4,898
(285)
(2,151)
1,624
(7,644)
26
45
45,740
–
–
–
–
–
–
1,385
51
(742)
554
(7,266)
(25)
27,967
3,867
664
7,154
45
39,697
49,159
(14,631)
34,528
18,094
(13,839)
4,255
50,257
(18,694)
31,563
20,194
(15,029)
5,165
50,487
(22,520)
27,967
20,283
(16,416)
3,867
2,900
(1,689)
1,211
1,710
(914)
796
1,624
(960)
664
15,587
(6,354)
9,233
16,129
(7,958)
8,171
16,278
(9,124)
7,154
45
–
45
45
–
45
45
–
45
85,785
(36,513)
49,272
88,335
(42,595)
45,740
88,717
(49,020)
39,697
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
8. Advances for non-current assets
Advances for non-current assets mainly comprised prepayments made to suppliers of services and equipment for construction of a third
unit for the Group’s gas treatment facility.
In thousands of US dollars
Advances for construction services
Advances for pipes and construction materials
Advances for other non-current assets
9. Inventories
As at 31 December 2018 and 31 December 2017 inventories comprised the following:
In thousands of US dollars
Spare parts and other inventories
Gas condensate
Crude oil
LPG
Gas
31 December
2018
31 December
2017
13,128
520
1,818
15,466
9,512
5,086
–
14,598
31 December
2018
31 December
2017
23,479
4,197
1,761
126
20
29,583
23,506
4,063
1,968
189
20
29,746
As at 31 December 2018 and 31 December 2017 inventories are carried at cost.
10. Trade receivables
As at 31 December 2018 and 31 December 2017 trade receivables were not interest-bearing and were mainly denominated in US dollars.
Their average collection period is 30 days.
As at 31 December 2018 and 31 December 2017 there were neither past due nor impaired trade receivables.
11. Prepayments and other current assets
As at 31 December 2018 and 31 December 2017 prepayments and other current assets comprised the following:
In thousands of US dollars
VAT receivable
Advances paid
Other taxes receivable
Other
31 December
2018
31 December
2017
11,043
5,057
2,949
965
20,014
14,960
6,826
4,279
1,038
27,103
Advances paid consist primarily of prepayments made to service providers. As at 31 December 2018, advances paid in the amount of
US$ 1,751 thousand were impaired and fully provided for. Below table provides the movements in in the provision for impairment of
advances paid:
In thousands of US dollars
As at 31 December 2016
Charge for the year
As at 31 December 2017
Write-offs for the year
As at 31 December 2018
Individually
impaired
–
1,867
1,867
(116)
1,751
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12. Cash and cash equivalents
In thousands of US dollars
Current accounts in US dollars
Current accounts in tenge
Current accounts in other currencies
Petty cash
31 December
2018
31 December
2017
118,902
1,396
1,446
9
121,753
106,487
17,342
3,110
12
126,951
In addition to the cash and cash equivalents in the table above, the Group has restricted cash accounts as a liquidation fund deposit for the
amount of US$ 658 thousand with Sberbank in Kazakhstan and US$ 6,363 thousand with Halyk bank (31 December 2017: a total of
US$6,663 thousand), which is kept as required by the subsoil use rights for abandonment and site restoration liabilities of the Group.
13. Share capital and reserves
As at 31 December 2018 the ownership interests in the Parent consists 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 shares
As at 1 January 2017
Share options exercised
As at 31 December 2017
As at 31 December 2018
In circulation
Treasury
capital
Total
184,903,754
3,279,204 188,182,958
330,325
(330,325)
–
185,234,079
2,948,879 188,182,958
185,234,079
2,948,879 188,182,958
Treasury shares were issued to support the Group’s obligations to employees under the Employee Share Option Plan (“ESOP”) and the
Long-term Incentive Plan (“LTIP”) and are held by Intertrust Employee Benefit Trustee Limited, which upon request from employees to
exercise options, sells shares on the market and settles respective obligations under the ESOP and LTIP. 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 reserves accumulated before 2009, when the functional currency of
Zhaikmunai LLP 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 years ended 31 December 2018 and 2017 there were no distributions made.
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 the number of outstanding shares
as at the reporting date). As at 31 December 2018 the book value per share amounted to US$2.96 (31 December 2017: US$3.39).
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129
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
14. Earnings per share
Basic EPS amounts are calculated by dividing the profit for the period by the weighted average number of shares outstanding during
the period.
The basic and diluted EPS are the same as there are no instruments that have a dilutive effect on earnings.
There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of
authorisation of these financial statements.
Loss for the year attributable to the shareholders (in thousands of US dollars)
Weighted average number of shares
Basic and diluted earnings per share (in US dollars)
15. Borrowings
Borrowings are comprised of the following as at 31 December 2018 and 31 December 2017:
In thousands of US dollars
Notes issued in 2012 and maturing in 2019
Notes issued in 2014 and maturing in 2019
Notes issued in 2017 and maturing in 2022
Notes issued in 2018 and maturing in 2025
Finance lease liability
Less amounts due within 12 months
Amounts due after 12 months
2012 Notes
For the year ended
31 December
2018
2017
(120,695)
(23,882)
185,234,079 185,068,917
(0.65)
(0.13)
31 December
2018
31 December
2017
–
–
727,447
402,153
–
167,731
187,863
731,474
–
810
1,129,600
(35,633)
1,087,878
(31,337)
1,093,967
1,056,541
On 13 November 2012, Zhaikmunai International B.V. (the “2012 Initial Issuer”) issued US$ 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 a 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.
On and after 13 November 2016, the 2012 Issuer shall be entitled at its option to redeem all or a portion of the 2012 Notes upon not less
than 30 nor more than 60 days’ notice, at the redemption prices (expressed in percentages of principal amount of the 2012 Note), plus
accrued and unpaid interest on the 2012 Notes, if any, 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), if redeemed during the twelvemonth period
commencing on 13 November of the years set forth below:
Period
2016
2017
2018 and thereafter
Redemption
Price
103.56250%
101.78125%
100.00%
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 are unsecured. Claims of secured creditors of the 2012 Issuer or the 2012 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 2012 Notes.
130
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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 a 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.
On and after 14 February 2017, the 2014 Issuer shall be entitled at its option to redeem all or a portion of the 2014 Notes upon not less
than 30 nor more than 60 days’ notice, at the redemption prices (expressed in percentages of principal amount of the 2014 Note), plus
accrued and unpaid interest on the 2014 Notes, if any, 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), if redeemed during the twelve month period
commencing on 14 February of the years set forth below:
Period
2017
2018 and thereafter
Redemption
Price
103.1875%
100.00%
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. The 2014 Notes and the
2014 Guarantees are unsecured. 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.
2017 Notes
On 25 July 2017, a newly incorporated entity, Nostrum Oil & Gas Finance B.V. (the "2017 Issuer") issued US$ 725,000 thousand notes (the
"2017 Notes").
The 2017 Notes bear interest at a rate of 8.00% per year, payable on 25 January and 25 July of each year.
On and after 25 July 2019, the 2017 Issuer shall be entitled at its option to redeem all or a portion of the 2017 Notes upon not less than 30
nor more than 60 days’ notice, at the redemption prices (expressed in percentages of principal amount of the 2017 Note), plus accrued
and unpaid interest on the 2017 Notes, if any, 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), if redeemed during the twelve-month period commencing on
25 July of the years set forth below:
Period
2019
2020
2021 and thereafter
Redemption
Price
106.0%
104.0%
100.0%
The 2017 Notes are jointly and severally guaranteed (the "2017 Guarantees") on a senior basis by Nostrum Oil & Gas PLC, Nostrum Oil &
Gas Coöperatief U.A., Zhaikmunai LLP and Nostrum Oil & Gas B.V. (the "2017 Guarantors"). The 2017 Notes are the 2017 Issuer's and the
2017 Guarantors’ senior obligations and rank equally with all of the 2017 Issuer's and the 2017 Guarantors’ other senior indebtedness.
The issue of the 2017 Notes was used primarily to fund the Tender Offer and Consent Solicitation, as described below.
Tender Offer and Consent Solicitation for the 2012 Notes and the 2014 Notes
On 29 June 2017, Nostrum Oil & Gas Finance B.V., a subsidiary of Nostrum Oil & Gas PLC, announced a tender offer and consent
solicitation in respect of the 2012 Notes and the 2014 Notes (the "Tender and Consent"). The Tender and Consent closed at 11:59 NY time
on 27 July 2017, and was settled on 31 July 2017.
As a result of the Tender and Consent, on 31 July 2017, Nostrum Oil & Gas Finance B.V. purchased from bondholders US$ 390,884
thousand in principal amount of the outstanding 2012 Notes and US$ 215,924 thousand in principal amount of the outstanding 2014
Notes. Total tender consideration was US$ 102.60 per US$ 100 for the outstanding 2012 Notes and US$ 100.60 per US$ 100 for the
outstanding 2014 Notes validly tendered during the Early Bird window. In addition, a consent payment of US$ 40c per US$ 100 was paid
for all 2012 Notes and 2014 Notes validly tendered during the Early Bird window or if a Consent Only Instruction was received during the
Early Bird window. Both consent solicitations were approved by bondholders such that the covenants contained in the 2012 Notes and the
2014 Notes have been aligned with the 2017 Notes.
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Nostrum Oil & Gas PLC Annual Report 2018
131
139
Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
15. Borrowings continued
Transaction costs
Fees and expenses directly attributable to the 2017 Notes and the Tender and Consent Solicitation amounted to US$ 12,256 thousand.
For the purposes of the accounting treatment Nostrum considers part of the purchased 2012 Notes and 2014 Notes to be modified and
the remainder is treated as extinguished. In 2017 consolidated financial statements unamortised costs, portion of the premium and fees
and expenses related to the extinguished debt, were expensed (Note 24), and fees and expenses directly attributable to the modified
portion of the debt were capitalised under the long-term borrowings. However, with application of IFRS 9 effective from 1 January 2018
the Group has restated the balances of the Notes as of 1 January 2018, whereby for the modified part of the borrowings the Group
recognized loss on modification through retained earnings and reserves, while the premium paid on early redemption and the transaction
costs and fees were capitalized under the long-term borrowings. For more details please see
Note 3.
2018 Notes
On 16 February 2018, Nostrum Oil & Gas Finance B.V. (the "2018 Issuer") issued US$ 400,000 thousand notes (the "2018 Notes"). The
2018 Notes bear interest at a rate of 7.00% per year, payable on 16 August and 16 February of each year.
On and after 16 February 2021, the 2018 Issuer shall be entitled at its option to redeem all or a portion of the 2018 Notes upon not less
than 10 nor more than 60 days’ notice, at the redemption prices (expressed in percentages of principal amount of the 2018 Note), plus
accrued and unpaid interest on the 2018 Notes, if any, 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), if redeemed during the twelve-month period
commencing on 16 February of the years set forth below:
Period
2021
2022
2023
2024 and thereafter
Redemption
Price
105.25%
103.50%
101.75%
100.00%
The 2018 Notes are jointly and severally guaranteed (the "2018 Guarantees") on a senior basis by Nostrum Oil & Gas PLC, Nostrum Oil &
Gas Coöperatief U.A., Zhaikmunai LLP and Nostrum Oil & Gas B.V. (the "2018 Guarantors"). The 2018 Notes are the 2018 Issuer's and the
2018 Guarantors’ senior obligations and rank equally with all of the 2018 Issuer's and the 2018 Guarantors’ other senior indebtedness.
The issue of the 2018 Notes was used primarily to fund Call of the 2012 Notes and the 2014 Notes, as described below.
Call of the 2012 Notes and the 2014 Notes
On 18 January 2018, Nostrum issued conditional call notices for all outstanding 2012 Notes and 2014 Notes held by persons other than
Nostrum Oil & Gas PLC and its subsidiaries. The 2012 Notes were called at a price of 101.78125% plus accrued interest and the 2014
Notes were called at a price of 100.00% plus accrued interest.
On 16 February 2018, Nostrum announced that the conditions to the call notices had been satisfied by the issue of the 2018 Notes by
Nostrum Oil & Gas Finance B.V. (see above). Therefore, with effect on 17 February 2018 (the “Call Date”), US$ 169,116 thousand in
principal amount of the outstanding 2012 Notes and US$ 184,076 thousand in principal amount of the outstanding the 2014 Notes
held by persons other than Nostrum Oil & Gas PLC and its subsidiaries were purchased from the bondholders by Nostrum Oil & Gas
Finance B.V.
Transaction costs and discounts
For the purpose of the accounting treatment the purchased 2012 Notes and 2014 Notes were treated as extinguished and new liabilities
were recognised for issue of the 2018 Notes, since the transaction does not fall under modification guidance under IFRS 9. The
unamortised transaction costs and premiums paid on early redemption related to the 2012 Notes and the 2014 Notes amounting to of
US$ 3,636 thousand and
US$ 3,012 thousand, respectively, were expensed in profit and loss (Note 20). Fees and expenses of US$ 6,484 thousand directly
attributable to the issue of 2018 Notes and discount on issue of the notes amounting to US$ 2,720 thousand were capitalized under the
long-term borrowings.
132
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
Covenants contained in the 2012 Notes, 2014 Notes, 2017 Notes and 2018 Notes
Following the consent solicitation discussed above, the 2012 Notes, 2014 Notes and 2017 Notes contain consistent covenants that, among
other things, restrict, subject to certain exceptions, the ability of the 2012 Guarantors, the 2014 Guarantors, the 2017 Guarantors, and
certain other members of the Group 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;
• 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.
In thousands of US dollars
1 January
Impact of
IFRS of
adaption
Finance
charges under
finance leases
Cash
inflows
Cash
outflows
Borrowing
costs including
amortisation of
arrangement
fees
Other 31 December
1,056,541
(9,065)
–
397,280
(353,192)
2,403
–
1,093,967
–
–
–
135
–
(81,111)
85,539
(267)
35,633
–
725,000
(633,892)
21,899
–
1,056,541
156
–
(57,013)
71,585
1,091
31,337
2018
Long-term borrowings
Current portion of
long-term borrowings
2017
31,337
Long-term borrowings
Current portion of
long-term borrowings
943,534
15,518
Finance lease
On 12 April 2016 Zhaikmunai LLP entered into a finance lease agreement with Atom & Co LLP for the main administrative office in
Uralsk for a period of 20 years for a fee of US$ 66 thousand per month, and a finance lease prepayment amounting to equivalent of
US$ 12,163 thousand.
On 28 December 2018, the Group acquired 100% interest in Atom & Co LLP for a cash consideration of US$ 1.7 million and became the
owner of the administrative building, hence the finance lease was derecognized (Note 1). At the date of the transaction the remaining
balance of the finance lease prepayment in the amount of 11,236 together with the cash consideration paid were considered to be part
of the purchase price, has been allocated to the individually identifiable assets and liabilities on the basis of their fair values at the date of
the transaction.
Future minimum lease payments under the finance lease, together with the present value of the net minimum lease payments were as follows:
In thousands of US dollars
No later than one year
Later than one year and no later than five years
Later than five years
Total minimum lease payments
Less amounts representing finance charges
Present value of minimum lease payments
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
31 December 2018
31 December 2017
Minimum
payments
Present value
of payments
Minimum
payments
Present value
of payments
–
–
–
–
–
–
–
–
–
–
–
143
558
1,900
2,601
(1,791)
810
131
345
334
810
810
133
141
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
16. Abandonment and site restoration provision
The summary of changes in abandonment and site restoration provision during years ended 31 December 2018 and 2017 is as follows:
In thousands of US dollars
Abandonment and site restoration provision as at 1 January
Unwinding of discount
Additional provision
Provision used
Change in estimates
Abandonment and site restoration provision as at 31 December
2018
23,590
321
792
–
(2,809)
21,894
2017
19,635
225
2,429
(90)
1,391
23,590
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 2018 were
2.30% and 4.33%, respectively (31 December 2017: 2.50% and 3.63%).
The change in the long-term inflation rate and discount rate in the year ended 31 December 2018 resulted in the decrease of the
abandonment and site restoration provision by US$ 2,809 thousand (31 December 2017: the increase by US$ 1,391 thousand).
17. 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 2018 and
31 December 2017 is as follows:
In thousands of US dollars
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
18. Trade payables
Trade payables comprise the following as at 31 December 2018 and 31 December 2017:
In thousands of US dollars
US dollar denominated trade payables
Tenge denominated trade payables
Euro denominated trade payables
Russian rouble denominated trade payables
Trade payables denominated in other currencies
2018
6,497
845
(1,031)
6,311
(1,031)
5,280
2017
6,920
866
(1,289)
6,497
(1,031)
5,466
31 December
2018
31 December
2017
26,951
20,684
3,702
1,051
488
52,876
22,861
27,153
5,395
1,098
348
56,855
134
142
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
19. Other current liabilities
Other current liabilities comprise the following as at 31 December 2018 and 31 December 2017:
In thousands of US dollars
Training obligations accrual
Accruals under the subsoil use agreements
Taxes payable, other than corporate income tax
Due to employees
Other current liabilities
31 December
2018
31 December
2017
11,609
7,856
5,419
2,181
2,618
29,683
11,592
9,941
6,278
3,627
3,838
35,276
Accruals under subsoil use agreements mainly include amounts estimated in respect of the contractual obligations for exploration and
production of hydrocarbons from the Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye fields.
20. 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 2018 was US$71.7 (FY 2017: US$54.7)
In thousands of US dollars
Oil and gas condensate
Gas and LPG
For the year ended 31 December
2018
267,815
122,112
389,927
2017
261,069
144,464
405,533
During the year ended 31 December 2018 the revenue from sales to three major customers amounted to US$258,898 thousand,
US$80,499 thousand and US$6,987 thousand respectively (FY 2017: US$200,572 thousand, US$102,813 thousand and US$30,871
thousand respectively). The Group’s exports are mainly represented by deliveries to Belarus and the Black Sea ports of Russia. All revenues
of the Group are from contracts with customers.
21. Cost of sales
In thousands of US dollars
Depreciation, depletion and amortisation
Payroll and related taxes
Repair, maintenance and other services
Other transportation services
Materials and supplies
Well workover costs
Environmental levies
Change in stock
Other
For the year ended 31 December
2018
2017
115,212
18,326
16,133
6,116
5,253
2,767
367
134
837
165,145
120,692
17,652
18,960
8,335
6,333
4,159
375
297
443
177,246
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135
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
22. General and administrative expenses
In thousands of US dollars
Payroll and related taxes
Professional services
Depreciation and amortisation
Insurance fees
Lease payments
Business travel
Communication
Materials and supplies
Bank charges
Other
23. Selling and transportation expenses
In thousands of US dollars
Loading and storage costs
Transportation costs
Marketing services
Payroll and related taxes
Other
24. Taxes other than income tax
In thousands of US dollars
Royalties
Export customs duty
Government profit share
Other taxes
For the year ended
31 December
2018
11,292
4,346
1,869
1,570
846
774
357
168
165
825
22,212
2017
13,578
11,095
2,294
1,640
797
1,487
411
363
221
1,417
33,303
For the year ended
31 December
2018
18,881
15,017
10,963
2,565
2,558
49,984
2017
26,940
20,160
14,363
2,033
2,945
66,441
For the year ended
31 December
2018
15,155
11,233
3,277
37
29,702
2017
15,724
3,864
248
131
19,967
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.
25. Finance costs
In thousands of US dollars
Interest expense on borrowings
Transaction costs
Unwinding of discount on amounts due to Government of Kazakhstan
Unwinding of discount on abandonment and site restoration provision
Other finance costs
Finance charges under finance leases
For more information on the transaction costs please see Note 15.
For the year ended
31 December
2018
41,143
6,648
845
399
214
134
49,383
2017
42,797
15,709
866
225
–
155
59,752
136
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
26. 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
2018
201
619
820
2018
35,274
4,537
727
40,538
2017
246
731
977
2017
34,573
5,229
1,008
40,810
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$33,180 thousand (FY 2017: US$34,927 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
Employee share option plan
2018
3,819
222
4,041
2018
2,056
148
2,204
2017
4,304
1,008
5,312
2017
2,594
–
2,594
The Group’s Phantom Option Plan 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, – 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 1,925,974 of SARs at 31 December 2018 is US$ 40 thousand (31 December 2017: 2,211,153
SARs with carrying value of US$ 2,086 thousand). During the year ended 31 December 2018 8,000 SARs were fully vested (FY
2017:205,000).
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
26. Employees’ remuneration continued
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 granted
Share options lapsed
Total outstanding at the end of the year
Total exercisable at the end of the year
2018
2017
No.
EP,US$
No.
EP,US$
946,153
1,265,000
2,211,153
–
–
(285,179)
1,925,974
1,893,974
4
10
4
10
10
1,276,478
1,260,000
2,536,478
(330,325)
40,000
(35,000)
2,211,153
1,926,153
4
10
4
10
10
There were no SARs granted during the years ended 31 December 2018 and 2017: 40,000 thousand SARs). The weighted average price
at the date of exercise for SARs exercised during the year ended 31 December 2017 amounted to US$ 5.57 per SAR, and there were no
SARs exercised during the year ended 31 December 2018.
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 2018 and 2017:
Price at the reporting date (US$)
Distribution yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Option turnover (%)
Price trigger
2018
1.03
0%
44.0%
0.8%
10
10%
2.0
2017
4.40
0%
41.4%
0.7%
10
10%
2.0
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.
2017 Long-term incentive plan
In 2017 the Group started operating a Long-term incentive plan (“the LTIP”), that was approved by the shareholders of the Company on
26 June 2017 and adopted by the board of directors of the Company on 24 August 2017. The LTIP is a discretionary benefit offered by the
Company for the benefit of selected employees. Its main purpose is to increase the interest of the employees in the Company's long-term
business goals and performance through share ownership. The LTIP is an incentive for the employees' future performance and
commitment to the goals of the Company. The remuneration committee of the board of the Company has the right to decide, in its sole
discretion, whether or not further awards will be granted in the future and to which employees those awards will be granted.
Employees (including senior executives and executive directors) of members of the Group or their associates may receive an award, which
is a "nominal cost option" over a specified number of ordinary shares in the capital of the Company. The option has an exercise price of
1p per share (but the Company has the discretion to waive this prior to exercise). In addition, under the Rules of the LTIP the Company has
discretion to settle awards other than by transfer of shares such as by way of cash settlement. Generally, the awards are classified as equity-
settled transactions. The share options are treated as equity-settled since there are no legal limitations expected on issue of shares for
these upon vesting, the Group has a choice of settlement and the intention is to settle them in equity. However, in certain jurisdictions due
to regulatory requirements the Company may not be able to settle the awards other than by transfer of cash, in which case the awards are
classified as cash-settled transactions, and accounted for similar to SARs.
The award ordinarily vests and becomes exercisable as from later of the third anniversary of grant or two years after the date on which the
Company determines whether the performance condition has been satisfied, subject to employee’s continued service and to the extent to
which the performance condition is satisfied, till the end of the contractual life. The contractual life of the share options is ten years.
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.
138
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
The cost of equity-settled transactions are measured 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 equity element of “shares to be issued under LTIP”,
which is not remeasured subsequently until the settlement date.
The following table summarizes the movement in the number of share options during 2017 and 2018:
Total outstanding as at 1 January 2017
Share options granted
Share options forfeited
Share options lapsed
Total outstanding as at 31 December 2017
Share options granted
Share options performance adjusted
Share options forfeited
Share options lapsed
Equity-settled
awards
Cash-settled
awards
Total awards
–
–
–
1,139,146
69,697
1,208,843
(11,838)
(5,721)
–
–
(11,838)
(5,721)
1,121,587
69,697
1,191,284
1,095,691
67,349
1,163,040
(580,260)
(106,235)
(24,670)
–
–
–
(580,260)
(106,235)
(24,670)
Total outstanding as at 31 December 2018
1,506,113
137,046
1,643,159
On 23 March 2018 the remuneration committee of the board of the Company determined the level of performance conditions that were
met for the performance conditions set upon issue of the share options granted in 2017. On 28 November 2018 the Company granted
further 1,163,040 share options.
As at 31 December 2017 106,713 share options were vested in accordance with the management’s best estimate. The fair value of the
equity-settled share options at the valuation dates of 28 November 2018 and 23 March 2018 amounted to US$ 2.76 and US$ 1.25 per
share option, respectively. 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 valuation of the share options at the grant date:
Price at the valuation date
Distribution yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Option turnover (%)
Price trigger
28 November
2018
23 March
2018
1.3
0%
43.4%
1.38%
10
10%
2.0
2.8
0%
40.4%
1.45%
10
10%
2.0
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.
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
139
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
27. Other expenses
In thousands of US dollars
Other accruals
Training
Loss on disposal of property, plant and equipment
Social program
Sponsorship
Business development
Accruals under subsoil use agreements
Inventory write-offs and provisions
Other
For the year ended 31 December
2018
2,691
2,440
1,709
300
53
–
–
–
1,311
8,504
2017
3,024
2,752
1,810
316
256
9,295
587
201
3,814
22,055
Business Development expenses incurred in relation to potential acquisitions of oil and gas exploration and appraisal assets in Kazakhstan.
28. Income tax
The income tax expense comprised the following:
In thousands of US dollars
Corporate income tax
Withholding tax
Deferred income tax (benefit) / expense
Adjustment in respect of the current income tax for the prior periods
Total income tax expense
For the year ended 31 December
2018
2017
12,490
612
16,284
(851)
28,535
12,992
424
35,966
467
49,849
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 Kazakh tax rate applicable to the Chinarevskoye subsoil use rights is as follows:
In thousands of US dollars
(Loss)/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 loss / (income) taxed at different rate¹
Non-deductible interest expense on borrowings
Non-deductible goodwill impairment
Deferred tax asset not recognised
Non-deductible penalties
Net foreign exchange loss
Non-deductible social expenditures
Non-deductible cost of technological loss
Non-deductible training expenditures
Non-deductible business development costs
Other non-deductible expenses
Income tax expenses reported in the consolidated financial statements
For the year ended 31 December
2018
2017
(92,161)
30%
(27,648)
18,284
(851)
473
23,847
9,728
3,891
(204)
(1,261)
203
224
88
–
1,761
28,535
25,966
30%
7,790
(194)
466
1,551
19,755
–
9,498
3,222
588
256
224
282
2,787
3,624
49,849
1. Jurisdictions 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 25%.
140
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Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2018
The Group’s effective tax rate for the year ended 31 December 2018 is negative 31.0% (2017: 192.0%). The Group’s effective tax rate,
excluding effect of movements in exchange rates, non-deductible interest expense on borrowings and non-deductible impairment of
goodwill, for the year ended 31 December 2018 is 23.9% (2017: 114.4%).
In addition, the effective tax rate was impacted by the effect of losses and gains taxed at different rates which decreased effective tax rate
by 0.5% for the year ended 31 December 2018 (2017: increased by 6.0%).
As at 31 December 2018 the Group has tax losses of US$104,185 thousand (2017: US$90,210 thousand) that are available to offset against future
taxable profits in the companies in which the losses arose within 9 years after generation and will expire in the period 2023-2027. Deferred tax
assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group.
Deferred tax liability is calculated by applying the Kazakhstani statutory tax rate applicable to the Chinarevskoye subsoil use rights to the temporary
differences between the tax amounts and the amounts reported in the consolidated financial statements and are comprised of the following:
In thousands of US dollars
Deferred tax asset
Accounts payable and provisions
Deferred tax liability
Property, plant and equipment
Long-term borrowings
Net deferred tax liability
The movements in the deferred tax liability were as follows:
In thousands of US dollars
Balance as at 1 January
Impact of adopting IFRS 9
Restated opening balance under IFRS 9
Current period charge to statement of income
Balance as at 31 December
29. Derivative financial instruments
The movement in the fair value of derivative financial instruments was presented as follows:
In thousands of US dollars
As at 1 January 2017
Loss on derivative financial instruments
As at 31 December 2017
Loss on derivative financial instruments
Payments made under derivative financial instruments
Reclassification to trade payables upon expiry of the contract
As at 31 December 2018
31 December
2018
31 December
2017
4,910
4,960
(398,115)
(7,776)
(400,981)
(386,555)
–
(381,595)
2018
2017
381,595
3,102
384,697
16,284
400,981
345,607
–
–
35,988
381,595
current
non-current
current
non-current
current
non-current
6,658
–
(6,658)
–
–
(12,387)
8,649
3,738
–
–
On 14 December 2015, Zhaikmunai LLP entered, at cost of US$ 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
to 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.
On 4 January 2018, the Group entered into a hedging contract equating to production of 9,000 barrels of oil per day. The hedging contract
is a zero-cost capped collar with a floor price of US$60.0/bbl. The Group has covered the cost of the floor price by selling a number of call options
with different strike prices for each quarter: Q1:US$67.5/bbl, Q2:US$64.1/bbl, Q3:US$64.1/bbl, Q4:US$64.1/bbl. The amount of upside given
away has been capped through the purchase of a number of call options with different strike prices: Q1:US$71.5/bbl, Q2:US$69.1/bbl,
Q3:US$69.6/bbl, Q4:US$69.6/bbl. There were no upfront costs to the Group for the hedging contract. The hedging contract was settled in cash
on a quarterly basis and matured on 31 December 2018, hence the balance of US$ 3,738 thousand was reclassified to accounts payable.
Gains and losses on the derivative financial instruments, which do not qualify for hedge accounting, are taken directly to account “Loss on
derivative financial instruments” within profit and loss. An analysis of fair values of financial instruments and further details as to how they
are measured are provided in Note 33.
Nostrum Oil & Gas PLC Annual Report 2018
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Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
30. Related party transactions
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 2018 and 31 December 2017 consisted of the following:
In thousands of US dollars
Trade receivables and advances paid
JSC OGCC KazStroyService
31 December
2018
31 December
2017
11,408
7,573
Accounts payable to related parties represented by entities controlled by shareholders with significant influence over the Group as at 31
December 2018 and 31 December 2017 consisted of the following:
In thousands of US dollars
Trade payables
JSC OGCC KazStroyService
31 December
2018
31 December
2017
11,420
10,063
During the years ended 31 December 2018 and 2017 the Group had the following transactions with related parties represented by
entities controlled by shareholders with significant influence over the Group:
In thousands of US dollars
Purchases
JSC OGCC KazStroyService
Management fees and consulting services
Cervus Business Services
VWEW Advocaten VOF
For the year ended
31 December
2018
2017
13,975
50,350
–
–
948
5
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 (as amended by seven supplemental agreements since 28 July 2014, the “Construction
Contract”).
The Contractor is an affiliate of Mayfair Investments B.V., which as at 31 December 2018 owned approximately 25.7% of the ordinary
shares of Nostrum Oil & Gas PLC.
During the year ended 31 December 2018 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 and VWEW Advocaten VOF. Starting
from April 2017 these entities ceased to be considered related parties in accordance with IAS 24 definitions.
Remuneration (represented by short-term employee benefits) of key management personnel amounted to US$ 3,439 thousand for the
year ended 31 December 2018 (FY 2017: US$4,304 thousand). Payments to key management personnel under ESOP for the year ended
31 December 2018 amounted to US$ 151 thousand (FY 2017: no payments under ESOP were made).
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Nostrum Oil & Gas PLC Annual Report 2018
31. Audit and non-audit fees
During the years ended 31 December 2018 and 2017 audit and non-audit fees comprise the following:
In thousands of US dollars
Audit of the financial statements
Total audit services
Audit-related assurance services
Services relating to corporate finance transactions
Other non-audit services
Total non-audit services
Total fees
2018
292
292
190
307
1
498
790
2017
312
312
155
250
–
405
717
The audit fees in the table above include the audit fees of US$10 thousand in relation to the Parent.
32. 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 1.25. 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 2018. As at 31 December 2018 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 2018 the Group had contractual capital commitments in the amount of US$131,373 thousand (31 December 2017:
US$139,462 thousand) mainly in respect to the Group’s oil field exploration and development activities.
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Nostrum Oil & Gas PLC Annual Report 2018
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151
Consolidated financial statements / continued
Notes to the consolidated financial
statements continued
32. Contingent liabilities and commitments continued
Operating lease
In 2010 the Group entered into several agreements on lease of 650 railway tank wagons for transportation of hydrocarbon products for
a period of up to seven years for KZT 6,989 (equivalent of US$ 47) per day per one wagon. The lease agreements may be terminated
early 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 lease was represented as follows:
In thousands of US dollars
No later than one year
Later than one year and no later than five years
31 December
2018
31 December
2017
5,417
5,431
7,019
14,057
Lease expenses of railway tank wagons for the year ended 31 December 2018 amounted to US$5,296 thousand (FY 2017: US$7,394 thousand).
Social and education commitments
As required by the Contract (as amended by, inter alia, Supplement No. 14), the Group is obliged to:
• spend US$ 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 12 April 2018) require the subsurface user to:
• spend US$133 thousand for funding of development of Astana city;
• invest at least US$12,209 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;
• spend US$1,250 thousand to finance social infrastructure.
The outstanding obligations under the contract for exploration and production of hydrocarbons from Darjinskoye field (after its amendment
on 31 October 2018) require the subsurface user to:
• invest at least US$19,837 thousand for exploration of the field during the exploration period;
• spend US$201 thousand for education of personnel engaged to work under the contract during the exploration stage;
• spend US$221 thousand to finance social infrastructure;
• fund liquidation expenses equal to US$201 thousand.
The outstanding obligations under the contract for exploration and production of hydrocarbons from Yuzhno-Gremyachinskoye field
(after its amendment on 10 October 2018) require the subsurface user to:
• invest at least US$20,351 thousand for exploration of the field during the exploration period;
• spend US$176 thousand for education of personnel engaged to work under the contract during the exploration stage;
• spend US$220 thousand to finance social infrastructure;
• fund liquidation expenses equal to US$176 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.
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33. 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.
Interest rate risk
The Group is not exposed to interest rate risk in 2018 and 2017 as the Group had no financial instruments with floating rates as at years
ended 31 December 2018 and 2017.
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.
2018
US dollar thousand
US dollar thousand
2017
US dollar thousand
US dollar thousand
Change in
tenge to US
dollar
exchange rate
Effect on profit
before tax
+ 60.00%
- 20.00%
+ 60.00%
- 20.00%
12,001
(4,000)
12,863
(4,288)
The Group’s foreign currency denominated monetary assets and liabilities were as follows:
As at 31 December 2018
Tenge Russian rouble
Euro
Other
Total
Cash and cash equivalents
Trade receivables
Trade payables
Other current liabilities
1,430
16,231
(20,684)
(16,978)
(20,001)
224
–
(1,051)
(104)
(931)
1,163
–
(3,702)
(279)
34
–
(410)
(890)
2,851
16,231
(25,847)
(18,251)
(2,818)
(1,266)
(25,016)
As at 31 December 2017
Tenge Russian rouble
Euro
Other
Total
Cash and cash equivalents
Trade receivables
Trade payables
Other current liabilities
17,350
9,228
(27,153)
(20,864)
23
–
(1,098)
(379)
2,727
–
(5,394)
(519)
364
–
(348)
(2,095)
20,464
9,228
(33,993)
(23,857)
(21,439)
(1,454)
(3,186)
(2,079)
(28,158)
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Notes to the consolidated financial
statements continued
33. Financial risk management objectives and policies continued
Liquidity risk
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.
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 three notes: US$ 169 million issued in 2012 and maturing in 2019, US$ 184 million issued in
2014 and maturing in 2019 and US$ 725 million issued in 2017 and maturing in 2022. 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 2018 and 31 December 2017 based on
contractual undiscounted payments:
As at 31 December 2018
On demand
Less than
3 months
3-12 months
1-5 years
More than
5 years
Total
Borrowings
Trade payables
Other current liabilities
-
43,000
43,000
1,011,000
456,000
1,553,000
37,843
29,858
-
-
15,033
-
773
-
-
-
-
4,124
7,474
52,876
29,858
12,629
Due to Government of Kazakhstan
-
258
As at 31 December 2017
On demand
Less than
3 months
3-12 months
1-5 years
More than
5 years
Total
67,701
43,258
58,806
1,015,124
463,474
1,648,363
Borrowings
Trade payables
Other current liabilities
Due to Government of Kazakhstan
Credit risk
–
20,482
43,593
17,274
–
–
–
258
61,445
13,262
–
773
1,297,688
1,900
1,381,515
–
–
–
–
4,124
8,505
56,855
17,274
13,660
60,867
20,740
75,480
1,301,812
10,405
1,469,304
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 (negative) from Moody's rating
agency and ING with a credit rating of P1 (stable) from Moody's rating agency at 31 December 2018. 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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Nostrum Oil & Gas PLC Annual Report 2018
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
Financial liabilities measured at amortized cost
Interest bearing borrowings
Finance lease liabilities
Total
Carrying amount
Fair value
31 December
2018
31 December
2017
31 December
2018
31 December
2017
1,129,600
1,087,068
722,377
1,141,803
–
810
–
1,267
1,129,600
1,087,878
722,377
1,143,070
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.
During the years ended 31 December 2018 and 2017 there were no transfers between the levels of fair value hierarchy of the Group’s
financial instruments.
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 dividend payment to shareholders, return
capital to shareholders or increase share capital. The Group monitors capital using a gearing ratio, which is net debt divided by total
capital plus net debt. 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
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
For the year ended
31 December
2018
2017
1,129,600
(128,774)
1,087,878
(133,614)
1,000,826
954,264
556,999
556,999
669,553
669,553
1,557,825
1,623,817
64%
59%
No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2018 and 31
December 2017.
34. Events after the reporting period
There were no significant events between the reporting date and the date of publication.
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Parent company financial statements
Parent company financial statements
Contents
Parent company statement of financial position
Parent company statement of cash flows
Parent company statement of changes in equity
Notes to the Parent company financial statements
1. General
2. Basis of preparation
3. Changes in accounting policies and disclosures
4. Summary of significant accounting policies
Investments in subsidiaries
5.
6. Receivables from related parties
7. Cash and Cash Equivalents
8. Shareholders’ equity
9. Financial guarantees
10. Payables to related parties
11. Auditors’ remuneration
12. Directors’ remuneration
13. Long-term incentive plan
14. Related party transactions
15. Financial risk management objectives and policies
16. Events after the reporting period
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Parent company statement of financial position As at 31 December 2018 In thousands of US dollars Notes31 December 2018 31 December 2017Restated*1 January 2017Restated*ASSETS Non-current assets Property, plant and equipment 60 ––Investments in subsidiaries 5116,779 113,371109,499 116,839 113,371109,499 Current assets Advances paid – 2323Receivables from related parties 627,386 26,63327,659Other current assets 178 ––Cash and cash equivalents 738 88761 27,602 26,74428,443 TOTAL ASSETS 144,441 140,115137,942 EQUITY AND LIABILITIES Share capital and reserves Issued share capital 83,203 3,2033,203Retained earnings 106,812 106,284105,478 110,015 109,487108,681 Non-current liabilities Employee share option plan LT liability 15 ––Financial guarantee, long-term portion 94,678 3,2282,255 4,693 3,2282,255 Current liabilities Financial guarantee, current portion 91,003 2,899810Trade payables 495 124243Payables to related parties 1027,367 23,81725,331Accrued liabilities 868 560622 29,733 27,40027,006 TOTAL EQUITY AND LIABILITIES 144,441 140,115147,942* Certain amounts shown here do not correspond to the 2017 financial statements and reflect adjustments made, please refer to Note 3 for more details. 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. The Company reported a loss of US$183 thousand for the financial year ended 31 December 2018 (2017: profit of US$806 thousand). During the reporting periods there were no transactions impacting the statement of other comprehensive income. 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 Tom Richardson Chief Executive Officer Chief Financial Officer The accounting policies and explanatory notes on pages 152 through 162 are an integral part of these financial statements STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES157Nostrum Oil & Gas PLC Annual Report 2018 Parent company financial statements / continued
Parent company statement of cash flows
For the year ended 31 December 2018
In thousands of US dollars
Cash flow from operating activities:
(Loss)/profit before income tax
Adjustments for:
Depreciation, depletion and amortisation
Finance costs
Employee share option plan fair value adjustment
Accrued income
Foreign exchange gain on investing and financing activities
Financial guarantee income, net
Accrued expenses
Operating profit before working capital changes
Changes in working capital:
Change in receivables from related parties
Change in trade payables
Change in other current liabilities
Cash generated from operations
Income tax paid
Net cash used in operating activities
Cash flow from investing activities:
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flow from financing activities:
Funds borrowed
Net cash from financing activities
For the year ended 31 December
Notes
2018
2017
Restated*
(183)
821
10
160
50
(1,338)
(1)
(3,177)
620
(3,859)
430
371
384
(2,674)
(2)
(2,676)
(70)
(70)
2,695
2,695
1
(50)
88
38
–
–
–
–
(77)
(810)
(63)
(129)
(493)
(118)
5
(735)
(15)
(750)
–
–
–
–
77
(673)
761
88
Effects of exchange rate changes on cash and cash equivalents
Net 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
* Certain amounts shown here do not correspond to the 2017 financial statements and reflect adjustments made, please refer to Note 3 for more details.
The accounting policies and explanatory notes on pages 152 through 162 are an integral part of these financial statements
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Nostrum Oil & Gas PLC Annual Report 2018
Parent company statement
of changes in equity
As at 31 December 2018
In thousands of US dollars
Notes
Share capital Other reserves
As at 1 January 2017 (as previously reported)
Impact of restatement
As at 1 January 2017 (restated*)
Profit for the year
Total comprehensive income for the year
As at 31 December 2017 (restated*)
Loss for the year
Total comprehensive loss for the year
Share based payments under LTIP
3,203
–
3,203
–
–
3,203
–
–
–
Retained
earnings
Total
105,266
108,469
212
212
105,478
108,681
806
806
806
806
106,284
109,487
(183)
(183)
(183)
(183)
–
–
–
–
–
–
–
–
711
–
711
As at 31 December 2018
3,203
711
106,101
110,015
The accounting policies and explanatory notes on pages 152 through 162 are an integral part of these financial statements
Nostrum Oil & Gas PLC Annual Report 2018
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Parent company financial statements / continued
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: 20 Eastbourne
Terrace, London W2 6LA, United Kingdom.
The subsidiary undertakings of the Company as at 31 December 20188 and the percentage holding of their capital are set out below:
Company
Registered office
Form of capital
Ownership, %
Direct subsidiary undertakings:
Nostrum Oil & Gas Coöperatief U.A.
Nostrum Oil & Gas BV
Indirect subsidiary undertakings:
Nostrum Oil & Gas Finance B.V.
Nostrum Associated Investments LLP
Nostrum E&P Services LLC
Nostrum Oil & Gas UK Ltd.
Nostrum Services Central Asia LLP
Nostrum Services N.V.1
Atom&Co LLP
Zhaikmunai LLP
Gustav Mahlerplein 23B
1082MS Amsterdam
The Netherlands
Gustav Mahlerplein 23B
1082MS Amsterdam
The Netherlands
Gustav Mahlerplein 23B
1082MS Amsterdam
The Netherlands
43/1 Karev street
090000 Uralsk
Republic of Kazakhstan
Liteyniy Prospekt 26 A
191028 St. Petersburg
Russian Federation
20 Eastbourne Terrace
London W2 6LA
United Kingdom
Aksai 3a, 75/38
050031 Almaty
Republic of Kazakhstan
Kunstlaan 56
1000 Brussels
Belgium
43/1 Karev street
090000 Uralsk
Republic of Kazakhstan
43/1 Karev street
090000 Uralsk
Republic of Kazakhstan
Members' interests
100
Ordinary shares
100
Ordinary shares
100
Participatory interests
100
Participatory interests
100
Ordinary shares
100
Participatory interests
100
Ordinary shares
100
Participatory interests
100
Participatory interests
100
Merged with Nostrum Services CIS BVBA during 2016
Grandstil LLC was liquidated as of 6 December 2017.
On 28 December 2018, Zhaikmunai LLP acquired 100% interest in Atom&Co LLP for a cash consideration of US$1.7 million for the main
purpose to gaining control over the administrative office in Uralsk, which was under finance lease with this entity.
Nostrum Oil & Gas PLC and its wholly-owned subsidiaries are hereinafter referred to as “the Company”.
As part of the reorganisation the Company became the holding company of the Company through its direct subsidiaries. Notes 8 of the
financial statements of the Company provides more information on the reorganisation.
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2. Basis of preparation
The Company financial statements for the year ended 31 December 20188 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.
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 and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous financial year, except for the application of IFRS 9 and IFRS 15
for the first time. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.
Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the consolidated financial
statements of the Company. The Company has not early adopted any standards, interpretations or amendments that have been issued but
are not yet effective.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after
1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement;
impairment; and hedge accounting.
The nature of these adjustments is described below:
(a) Classification and measurement
Under IFRS 9, debt instruments are subsequently measured at fair value through profit or loss, amortised cost, or fair value through other
comprehensive income. The classification is based on two criteria: the Company’s business model for managing the assets; and whether
the instruments’ contractual cash flows represent ‘solely payments of principal and interest’ on the principal amount outstanding.
The classification and measurement requirements of IFRS 9 did not have a significant impact on the Company’s financial assets. Trade
receivables are held to collect contractual cashflows and are expected to give rise to cashflows representing solely payments of principal
and interest, if applicable. Hence, the Company continued to measure these at amortised cost.
The classification and measurement of the Company’s financial liabilities has remained materially unchanged on application of IFRS 9 with
the exception of long-term borrowings accounted at amortised cost.
Under IFRS 9, when a financial liability measured at amortised cost is modified without this resulting in derecognition, a gain or loss should
be recognised in profit or loss, whereas under IAS 39 there was no such requirement to recognize gain or loss in such circumstances. The
gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the
original effective interest rate. Any fees and costs incurred are amortised over the remaining term of the asset.
The Company performed an assessment of impact of this change in the requirement on the refinancing of the Notes in 2012, 2014 and
2017 as of the date of initial application, 1 January 2018, and then applied retrospectively to the 2012 Notes, the 2014 Notes and the
Notes 2017, that were not derecognised as of 1 January 2018.
In accordance with the requirements of IFRS 9, the Company identified the modified part of the Notes on each refinancing and estimated
gains and losses on modification, which should have been recognized in profit and loss at the date of each transaction, while the premium
paid on early redemption and the transaction costs and fees were assumed to be capitalized under the long-term borrowings. The
unamortised costs, portion of the premium and fees and expenses related to the extinguished debt, were deemed to be expensed at the
date of each refinancing. As a result of these estimations, the Company decreased the carrying values of the 2012 Notes, the 2014 Notes
and the 2017 Notes by US$ 99 thousand, US$ 85 thousand and US$ 8,881 thousand, respectively, by increasing the respective capitalized
transaction costs.
The adjustment of capitalized transaction costs and fees resulted in the change of the effective interest rate on the Notes from each date of
refinancing. Hence, the interest capitalization rate has been revised and related adjustments made to the carrying amounts of property,
plant and equipment and deferred taxes at 1 January 2018.
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Parent company financial statements / continued
Notes to the Parent company financial
statements continued
3. Changes in accounting policies and disclosures continued
(b) Impairment
IFRS 9 requires the Company to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-
month or lifetime basis. The Company applies the simplified approach and record lifetime expected losses on all trade receivables. There
was no significant impact on Company’s equity due to the short-term nature and high quality of its trade receivables as well as anticipation
of low trade impairment losses on trade receivables based on the historical data.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related interpretations and it applies, with limited exceptions, to
all revenue arising from contracts with its customers. IFRS 15 establishes a five-step model to account for revenue arising from contracts
with customers and requires that revenue be 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.
IFRS 15 requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each
step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a
contract and the costs directly related to fulfilling a contract. In addition, the standard requires relevant disclosures.
The Company has adopted IFRS 15 with effect from January 1, 2018, which did not represent a change from the Company’s existing
practice and did not have a significant effect on the Company’s accounting or disclosures, and therefore no transition adjustment is
presented.
(a) Sale of goods
The Company is in the business of production and sale of oil and gas products. All goods are sold in separate identified contracts with
customers. For such contracts with customers in which the sale of goods is the only performance obligation, adoption of IFRS 15 had no
significant impact on the revenues and profit or loss.
(b) Variable consideration
IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. The Company recognises
revenue from the sale of goods measured at the fair value of the consideration received or receivable, net of returns and allowances, trade
discounts and volume rebates. Historically, the goods sold by the Company were not returned by customers, neither were there material
volume rebates in contracts. Therefore, application of IFRS 15 has not resulted in a different amount of revenue being recognised than
under current IFRS.
(c) Advances received from customers
Under IFRS 15, the Company must determine whether there is a significant financing component in its contracts. However, the Company
decided to use the practical expedient provided in IFRS 15, and did not adjust the promised amount of the consideration for the effects of
significant financing components in the contracts, where the Company expects, at contract inception, that the period between the
Company transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or
less. Therefore, for short-term advances, the Company does not account for a financing component. The Company receives only short-
term advances from its customers. However, the Company may receive from customers long-term advances in the future. Therefore, close
monitoring of the advances from customers will be made to reveal any significant financing component because of the length of time.
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Considerations
The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income
(or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the
transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance
consideration. If there are multiple payments or receipts in advance, then the entity must determine the date of the transactions for each
payment or receipt of advance consideration. This Interpretation does not have any impact on the Company’s consolidated financial
statements.
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions
The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the
measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net
settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based
payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the
amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other
criteria are met. The Company’s accounting policy for cash-settled share based payments is consistent with the approach clarified in the
amendments. In addition, the Company has no share-based payment transaction with net settlement features for withholding tax
obligations and had not made any modifications to the terms and conditions of its share-based payment transaction. Therefore, these
amendments do not have any impact on the Company’s consolidated financial statements.
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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 consolidated financial
statements are disclosed below. The Company intends to adopt these standards, if applicable, when they become effective.
Standards issued, but not yet effective, as at 1 January 2018, have not been adopted early by the Company.
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. Overall, the Company expects no significant impact of IFRS 9 on its balance sheet and equity.
Correction of an error
In 2018, the Company performed reassessment of its position related to the treatment of its guarantees under 2012 Notes, 2014 Notes,
2017 Notes and 2018 Notes issued by its indirect subsidiary undertakings. Further details on these Notes are provided in the Note 9.
Based on this review it was concluded that at the time when the Company became a guarantor under the Notes respective financial
guarantee contracts should have been recognised at fair value in accordance with requirements of IAS 39 Financial Instruments:
Recognition and Measurement, and subsequently measured at the greater of (a) the amount determined in accordance with IAS 37 and (b)
the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with IAS 18. IFRS 9 Financial
Instruments replaced IAS 39 for annual periods beginning on or after 1 January 2018, with similar requirements.
As a result, corrections have been reflected by restating each of the affected financial statement line items for the prior periods, as follows:
Effect on statement of financial position
In thousands of US dollars
Investments in subsidiaries
Total non-current assets
TOTAL ASSETS
Retained earnings and reserves
TOTAL share capital and reserves
Financial guarantee, long-term portion
Total non-current liabilities
Financial guarantee, current portion
Total current liabilities
TOTAL EQUITY AND LIABILITIES
Effect on statement of cash flows
In thousands of US dollars
Profit before income tax
Adjustments for:
Financial guarantee (income)/loss, net
Net cash used in operating activities
As at 1 January 2017
As at 31 December 2017
As reported
Restatement
As adjusted
As reported
Restatement
As adjusted
106,222
106,222
3,277
3,277
109,499
109,499
106,222
106,222
7,149
7,149
113,371
113,371
134,665
3,277
137,942
132,966
7,149
140,115
105,266
108,469
–
–
–
26,196
134,665
212
212
2,255
2,255
810
810
105,478
105,262
108,681
108,465
2,255
2,255
810
–
–
–
27,006
24,501
3,277
137,942
132,966
1,022
1,022
3,228
3,228
2,899
3,229
7,149
106,282
109,487
3,228
3,228
2,899
27,400
140,115
For the year ended 31 December 2017
As reported
Restatement
As adjusted
11
–
(750)
810
821
(810)
–
(810)
(750)
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Parent company financial statements / continued
Notes to the Parent company financial
statements continued
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 at 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.
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 are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive
income (OCI), and fair value through profit or loss. The Company determines the classification of its financial assets at initial recognition.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the
Company’s business model for managing them. With the exception of trade receivables that do not contain a significant financing
component or for which the Company has applied the practical expedient, the Company initially measures a financial asset at its fair value
plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.
In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows
that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI
test and is performed at an instrument level.
The Company’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows.
The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the
market place (regular way trades) are recognised on the trade date, i.e., the date that the Company commits to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
• Financial assets at amortised cost (debt instruments)
• Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments)
• Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity
instruments)
• Financial assets at fair value through profit or loss
Financial assets at amortised cost (debt instruments)
This category is the most relevant to the Company. The Company measures financial assets at amortised cost if both of the following
conditions are met:
• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows,
and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on
the principal amount outstanding
Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment.
Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
The Company’s financial assets at amortised cost include cash and receivables from related parties.
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Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a Company of similar financial assets) is primarily derecognised
(i.e., removed from the Company’s consolidated statement of financial position) when:
• The rights to receive cash flows from the asset have expired; or
• 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.
When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement,
it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained
substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognise the
transferred asset to the extent of its continuing involvement. In that case, the Company also recognises an associated liability. The
transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has
retained.
Impairment of financial assets
The Company recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or
loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that
the Company expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will
include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial
recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month
ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is
required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
For trade receivables and contract assets, the Company applies a simplified approach in calculating ECLs. Therefore, the Company does
not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date.
Financial liabilities
Initial recognition, measurement and derecognition
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, long-term borrowings,
payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are recognised initially at fair value and, in the case of long-term borrowings and payables, net of directly attributable
transaction costs.
The Company’s financial liabilities include payables to trade payables, payables related parties and financial guarantee liabilities
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
• Financial liabilities at fair value through profit or loss
• Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon
initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also
includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge
relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as
effective hedging instruments.
Gains or losses on liabilities held for trading are recognised in the statement of profit or loss.
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition,
and only if the criteria in IFRS 9 are satisfied. The Company’s financial liability as at fair value through profit or loss include derivative
financial instruments.
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 the derecognition of the original liability and the recognition of a new liability.
The difference in the respective carrying amounts is recognised in the statement of profit or loss.
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Parent company financial statements / continued
Notes to the Parent company financial
statements continued
Financial guarantees
Financial guarantees are initially recognised in the financial statements at fair value at the time the guarantee is issued. The Group
estimates the fair value of the financial guarantee contract as the difference between the net present value of the contractual cashflows
required under a debt instrument, and the net present value of the net contractual cashflows that would have been required without the
guarantee. The present value is calculated using a risk-free interest rate.
Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amount initially recognised
less cumulative amortisation recognised in profit and loss, and the amount of expected credit losses (ECL). Financial guarantee ECL reflect
the cash shortfalls adjusted by the risks that are specific to the cashflows. If the ECL exceeds the initially recognised guarantee amount less
cumulative amortisation the difference is taken to profit and loss.
A financial guarantee liability is derecognised when the liability underlying the guarantee is discharged or cancelled or expires, or if the
guarantee is withdrawn or cancelled. The carrying amount of the financial guarantee is taken to the statement of profit or loss.
Share-based payments
The cost of cash-settled equity-based employee compensation is measured initially at fair value at the grant date. 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 cost of equity-settled transactions are measured at fair value at the grant date. This fair value is expensed over the period until vesting
with the recognition of a corresponding equity element, which is not remeasured subsequently until the settlement date.
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 12.
5. Investments in subsidiaries
Investments of the Company as at 31 December 2018 comprised of:
In US dollars
Nostrum Oil & Gas Coöperatief U.A.
Nostrum Oil & Gas BV
31 December
2018
31 December
2017
1 January
2017
116,556,729
113,149,199
109,277,357
222,271
222,271
222,271
116,779,000
113,371,470
109,499,628
The investments in Nostrum & Gas Cooperatief U.A. include the guarantee costs in the amount of US$ 9,881 thousand as described in
the Note 9 (2017: US$ 7,149 thousand; 2016: US$3,277 thousand) as well as US$676 thousand capitalized costs under the Long-term
Incentive Plan 2017 (Note 13).
6. Receivables from related parties
Receivables from related parties are comprised of the following as at 31 December 2018 and 31 December 2017:
In thousands of US dollars
Receivables from Nostrum employee benefit trust
Receivables from Nostrum Oil & Gas Coöperatief U.A.
7. Cash and Cash Equivalents
In thousands of US dollars
Current accounts in US Dollars
Current accounts in Euro
Current accounts in Pounds Sterling
31 December
2018
31 December
2017
23,812
3,574
27,386
23,812
2,821
26,633
31 December
2018
31 December
2017
8
3
27
38
16
54
18
88
8. Shareholders’ equity
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 Company reorganisation referred to in that resolution.
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Share capital of Nostrum Oil & Gas PLC
As at 31 December 2018 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.
9. Financial guarantees
Financial guarantees are comprised of the following as at 31 December 2018 and 31 December 2017:
In thousands of US dollars
Financial guarantee as at 1 January
Release upon repayment of the Notes
Recognition on issue of the Notes
Amortisation for the period
Charge for expected credit losses
Financial guarantee as at 31 December
Less amounts due within 12 months
Amounts due after 12 months
2018
6,127
(2,255)
2,731
(922)
–
5,681
(1,003)
4,678
2017
3,065
(1,937)
3,872
–
1,128
6,127
(2,899)
3,228
In June 2014, as part of the Group reorganisation the Company became the new parent entity (as a successor of Nostrum Oil & Gas LP)
and respectively became a guarantor under the Notes issued in 2012 and 2014. Also, the Company acts as a guarantor under the Notes
issued in 2017 and 2018. Further details on the Notes are provided below. Since the guarantees are issued in favour of the Company’s
indirect subsidiaries, related costs are capitalized into the investments in subsidiaries (Note 5).
2012 Notes
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 bore interest at a rate of 7.125% per year. Interest on the 2012
Notes was payable on 14 May and 13 November of each year, beginning on 14 May 2013.
The 2012 Notes were 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 were the 2012 Issuer’s and the 2012 Guarantors’ senior
obligations and ranked equally with all of the 2012 Issuer’s and the 2012 Guarantors’ other senior indebtedness. The 2012 Notes and the
2012 Guarantees were unsecured. Claims of secured creditors of the 2012 Issuer or the 2012 Guarantors would 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 2012 Notes.
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 bore interest at a rate of 6.375% per annum.
Interest on the 2014 Notes was payable on 14 February and 14 August of each year, beginning on 14 August 2014.
The 2014 Notes were 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 were the 2014 Issuer’s and the 2014 Guarantors’ senior
obligations and ranked equally with all of the 2014 Issuer’s and the 2014 Guarantors’ other senior indebtedness. The 2014 Notes and the
2014 Guarantees were unsecured. Claims of secured creditors of the 2014 Issuer or the 2014 Guarantors would 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.
Tender Offer and Consent Solicitation for the 2012 Notes and the 2014 Notes
On 29 June 2017, Nostrum Oil & Gas Finance B.V., a subsidiary of Nostrum Oil & Gas PLC, announced a tender offer and consent
solicitation in respect of the 2012 Notes and the 2014 Notes (the "Tender and Consent"). The Tender and Consent closed at 11:59 NY time
on 27 July 2017 and was settled on 31 July 2017. As a result of the Tender and Consent, on 31 July 2017, Nostrum Oil & Gas Finance B.V.
purchased from bondholders US$ 390,884 thousand in principal amount of the outstanding 2012 Notes and US$ 215,924 thousand in
principal amount of the outstanding 2014 Notes. Both consent solicitations were approved by bondholders such that the covenants
contained in the 2012 Notes and the 2014 Notes have been aligned with the 2017 Notes.
Since part of the 2012 Notes and 2014 Notes were payable by the Company’s one subsidiary to its another subsidiary, the probability of
outflow of economic benefits under the related guarantees was assessed as remote, and the related portion of the guarantee balances
was taken to profit and loss in 2017.
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Notes to the Parent company financial
statements continued
Call of the 2012 Notes and the 2014 Notes
On 18 January 2018, Nostrum issued conditional call notices for all outstanding 2012 Notes and 2014 Notes held by persons other than
Nostrum Oil & Gas PLC and its subsidiaries. The 2012 Notes were called at a price of 101.78125% plus accrued interest and the 2014
Notes were called at a price of 100.00% plus accrued interest. On 16 February 2018, Nostrum announced that the conditions to the call
notices had been satisfied by the issue of the 2018 Notes by Nostrum Oil & Gas Finance B.V. (see above). Therefore, with effect on 17
February 2018 (the “Call Date”), US$ 169,116 thousand in principal amount of the outstanding 2012 Notes and US$ 184,076 thousand in
principal amount of the outstanding the 2014 Notes held by persons other than Nostrum Oil & Gas PLC and its subsidiaries were
purchased from the bondholders by Nostrum Oil & Gas Finance B.V.
Considering the fact that as a result of the transaction the full amount of the 2012 Notes and 2014 Notes became payable by the
Company’s one subsidiary to its another subsidiary, the probability of outflow of economic benefits under the related guarantees was
assessed as remote, and the related remaining balance of the guarantee balances was taken to profit and loss in 2018.
2017 Notes
On 25 July 2017, a newly incorporated entity, Nostrum Oil & Gas Finance B.V. (the "2017 Issuer") issued US$ 725,000 thousand notes (the
"2017 Notes"). The 2017 Notes bear interest at a rate of 8.00% per year, payable on 25 January and 25 July of each year.
The 2017 Notes are jointly and severally guaranteed (the "2017 Guarantees") on a senior basis by Nostrum Oil & Gas PLC, Nostrum Oil &
Gas Coöperatief U.A., Zhaikmunai LLP and Nostrum Oil & Gas B.V. (the "2017 Guarantors"). The 2017 Notes are the 2017 Issuer's and the
2017 Guarantors’ senior obligations and rank equally with all of the 2017 Issuer's and the 2017 Guarantors’ other senior indebtedness.
2018 Notes
On 16 February 2018, Nostrum Oil & Gas Finance B.V. (the "2018 Issuer") issued US$ 400,000 thousand notes (the "2018 Notes"). The
2018 Notes bear interest at a rate of 7.00% per year, payable on 16 August and 16 February of each year.
The 2018 Notes are jointly and severally guaranteed (the "2018 Guarantees") on a senior basis by Nostrum Oil & Gas PLC, Nostrum Oil &
Gas Coöperatief U.A., Zhaikmunai LLP and Nostrum Oil & Gas B.V. (the "2018 Guarantors"). The 2018 Notes are the 2018 Issuer's and the
2018 Guarantors’ senior obligations and rank equally with all of the 2018 Issuer's and the 2018 Guarantors’ other senior indebtedness.
10. Payables to related parties
Payables to related parties are comprised of the following as at 31 December 2018 and 31 December 2017:
In thousands of US dollars
Payables to Nostrum Oil & Gas Coöperatief U.A.
Loan and interest payable Nostrum Oil & Gas Finance B.V.
Payables to Nostrum Oil & Gas UK Ltd.
Payables to Nostrum Oil & Gas BV
31 December
2018
31 December
2017
23,812
2,855
650
50
27,367
23,812
–
–
5
23,817
As at 31 December 2018 amounts payable to Nostrum Oil & Gas Coöperatief U.A. represent the arrangements in respect of the Nostrum
employee benefit trust.
In 2018 the Company received a loan from its indirect subsidiary Nostrum Oil & Gas Finance B.V. in the amount of US$ 2,695 thousand
(2017: nil), at the interest rate of 7%, which is repayable on demand. The interest accrued the loan at 31 December 2018 amounted to US$
160 thousand.
11. Auditors’ remuneration
The fees for the audit of the Company amount to US$10 thousand (2017: US$10 thousand).
12. Directors’ remuneration
The directors of the Company are also directors of the Group. The aggregate amount of remuneration paid to or receivable by executive
directors in respect of qualifying services for the financial year ended 31 December 2018 was US$1,202 thousand (2017: US$1,824
thousand) and was paid by other Company companies. In addition, US$854 thousand (2017: US$771 thousand) was paid by the Company
to the non-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 Company.
For the year ended 31 December 2018 the Company employed an average of 6 non-executive directors (FY 2017: 6 non-executive directors).
Full details of individual directors’ remuneration are given in the directors’ remuneration report on pages 76-95 of the annual report.
13. Long-term incentive plan
In 2017 the Company started operating a Long-term incentive plan (“the LTIP”), that was approved by the shareholders of the Company on
26 June 2017 and adopted by the board of directors of the Company on 24 August 2017. The LTIP is a discretionary benefit offered by the
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Company for the benefit of selected employees. Its main purpose is to increase the interest of the employees in the Company's long-term
business goals and performance through share ownership. The LTIP is an incentive for the employees' future performance and
commitment to the goals of the Company. The remuneration committee of the board of the Company has the right to decide, in its sole
discretion, whether or not further awards will be granted in the future and to which employees those awards will be granted.
Employees (including senior executives and executive directors) of members of the Company or their associates may receive an award,
which is a "nominal cost option" over a specified number of ordinary shares in the capital of the Company. The option has an exercise
price of 1p per share (but the Company has the discretion to waive this prior to exercise). In addition, under the Rules of the LTIP the
Company has discretion to settle awards other than by transfer of shares such as by way of cash settlement. Generally, the awards are
classified as equity-settled transactions. The share options are treated as equity-settled since there are no legal limitations expected on
issue of shares for these upon vesting, the Company has a choice of settlement and the intention is to settle them in equity. However, in
certain jurisdictions due to regulatory requirements the Company may not be able to settle the awards other than by transfer of cash, in
which case the awards are classified as cash-settled transactions, and accounted for similar to SARs.
The award ordinarily vests and becomes exercisable as from later of the third anniversary of grant or two years after the date on which the
Company determines whether the performance condition has been satisfied, subject to employee’s continued service and to the extent to
which the performance condition is satisfied, till the end of the contractual life. The contractual life of the share options is ten years.
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 cost of equity-settled transactions are measured 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 equity element of “shares to be issued under LTIP”,
which is not remeasured subsequently until the settlement date.
The following table summarizes the movement in the number of share options during 2017 and 2018:
Total outstanding as at 1 January 2017
Share options granted
Share options forfeited
Share options lapsed
Total outstanding as at 31 December 2017
Share options granted
Share options performance adjusted
Share options forfeited
Share options lapsed
Equity-settled
awards
Cash-settled
awards
Total awards
–
–
–
1,139,146
69,697
1,208,843
(11,838)
(5,721)
–
–
(11,838)
(5,721)
1,121,587
69,697
1,191,284
1,095,691
67,349
1,163,040
(580,260)
(106,235)
(24,670)
–
–
–
(580,260)
(106,235)
(24,670)
Total outstanding as at 31 December 2018
1,506,113
137,046
1,643,159
On 23 March 2018 the remuneration committee of the board of the Company determined the level of performance conditions that were
met for the performance conditions set upon issue of the share options granted in 2017. On 28 November 2018 the Company granted
further 1,163,040 share options.
As at 31 December 2017 106,713 share options were vested in accordance with the management’s best estimate. The fair value of the
equity-settled share options at the valuation dates of 28 November 2018 and 23 March 2018 amounted to US$ 2.76 and US$ 1.25 per
share option, respectively. 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 valuation of the share options at the grant date:
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Distribution yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Option turnover (%)
Price trigger
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28 November
2018
23 March
2018
1.3
0%
43.4%
1.38%
10
10%
2.0
2.8
0%
40.4%
1.45%
10
10%
2.0
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Parent company financial statements / continued
Notes to the Parent company financial
statements continued
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.
14. Related party transactions
Related parties of the Company include its direct and indirect subsidiaries, 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 2018 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$4,039 thousand (2017: US$2,786 thousand). In
addition, during the year ended 31 December 2018 the Company recorded net guarantee income of US$3,177 thousand (2017: US$820
thousand) in relation to guarantees under the Notes issued by Nostrum Oil & Gas Finance B.V. and Zhaikmunai LLP (Note 9).
As at 31 December 2018 receivables from related parties include US$23,812 thousand from Nostrum employee benefit trust (2017:
US$23,812 thousand) and US$3,574 thousand from Nostrum Oil & Gas Coöperatief UA (2017: US$1,821 thousand).
As at 31 December 2018 liabilities to related parties include US$23,812 thousand loan payable to Nostrum Oil & Gas Coöperatief UA.
(2017: US$23,812 thousand), US$2,695 thousand loan payable and US$160 thousand interest payable to Nostrum Oil & Gas Finance B.V.
(2017: nil), US$650 thousand payable to Nostrum Oil & Gas UK Ltd. (2017: nil) and US$50 thousand payable to Nostrum Oil & Gas B.V.
(2017: US$5 thousand). Further details on payables to related parties is presented in Note 10.
15. 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 which has a credit rating of P1 (upper medium grade) from
Moody's rating agency at 31 December 2018.
Receivables are amounts receivable from Company companies, thus risk of credit default is low.
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.
16. Events after the reporting period
There were no significant events between the reporting date and the date of publication.
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Investor information
Investor information
Contact information
Investor contacts
Investor Relations
ir@nog.co.uk
Tel: +44 20 3740 7430
Registered office
Nostrum Oil & Gas PLC
9th Floor
20 Eastbourne Terrace
London W2 6LG
United Kingdom
Tel: +44 20 3740 7430
Registered number: 8717287
Place of registration: England and Wales
Zhaikmunai LLP registered office
Zhaikmunai LLP
43/1 Alexander Karev str.
Uralsk, 090000
Kazakhstan
Tel.: +7 7112 933900
Fax: +7 7112 933901
Astana representative office
Zhaikmunai LLP
Mariam Zhagorkyzy st. 17
Astana, 020000
Kazakhstan
Auditor
Ernst & Young LLP
1 More London Place
London SE1 2AF
United Kingdom
Registrar
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
Tel: 0871 664 0300
Tel: +44 20 8639 3399
Corporate brokers
Numis Securities Ltd
10 Paternoster Square
London EC4M 7LT
United Kingdom
Peel Hunt LLP
Moor House
120 London Wall
London EC2Y 5ET
United Kingdom
Website and electronic communications details
Nostrum’s website provides 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 impact our to on environment, we encourage
all shareholders to opt for electronic shareholder communications,
including annual reports and notices of meetings.
Share price information
Exchange
Ticker
Reuters code
ISIN code
London Stock Exchange
NOG.LN
NOGN.L
GB00BGP6Q951
Share price performance
Nostrum Oil & Gas share price (GBp)
500
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Capitalisation-weighted index of FTSE 350 E&P
Earnings per share (as at 31 December 2018): US$(0.65)/share
Book value per share (as at 31 December 2018): US$2.96/share
Financial Calendar 2019
Q1 2019
Q1 2019
H1 2019
H1 2019
Q3 2019
Q3 2019
Operational Update
30 April 2019
Financial Results
21 May 2019
Operational Update
30 July 2019
Financial Results
20 August 2019
Operational Update
29 October 2019
Financial Results
19 November 2019
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Investor information / continued
Investor information continued
Equity financing
Equity raising
IPO
Timing
March 2008
Secondary equity issue
September 2009
Amount
US$100m
US$300m
Lead manager
ING Bank NB
ING Bank NV
Mirabaud Securities
Renaissance Securities
Debt financing
Current outstanding bond issues for Nostrum Oil & Gas PLC are provided in the following table:
Settlement
Maturity
Currency
Amount (m)
Coupon
Listing
RegS
Rule 144A
Jul 2017
Jul 2022
USD
725
8.000%
Dublin
CUSIP
ISIN
Common Code
N64884AB0
USN64884AB02 US66978CAB81
16453439
66978CAB8
164534073
Feb 2018 Feb 2025 USD
400
7.000%
Dublin
CUSIP
N64884AD6
66978CAC6
ISIN
Common Code
USN64884AD67 US66978CAC64
176959886
176959878
For a summary of certain covenants relating to the 2017 and 2018 Notes, please see the consolidated financial statements.
Internally-held Bond Financing of the Nostrum Group
Bond issues wholly owned by Nostrum Oil & Gas Finance BV are provided in the following table:
Settlement
Maturity
Currency
Amount (m)
Coupon
Listing
RegS
Rule 144A
Feb 2014
Jan 2033 USD
400
9.5%
Dublin/ Almaty CUSIP
ISIN
Common Code
Nov 2012
Jun 2033 USD
560
9.5%
Dublin/ Almaty CUSIP
ISIN
Common Code
N64884AA2
USN64884AA29 US66978CAA09
103302323
66978CAA0
103302307
N97716AA7
USN97716AA72 US98953VAA08
085313177
98953VAA0
085259776
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Credit ratings
Nostrum Oil & Gas PLC is currently being rated by two credit rating
agencies: Standard and Poor’s and Moody’s Investor Services1:
(%)
Agency
Standard and Poor’s
Moody’s
Rating
B-
B2
Outlook
Stable
Negative
Zhaikmunai LLP is a wholly-owned indirect subsidiary of Nostrum
and its equity is not listed, while Nostrum’s equity is listed on the
premium segment of the London Stock Exchange and the
Kazakhstan Stock Exchange.
The Group’s Investor Relations programme aims to develop 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 Investor Relations department of the Group seeks to
ensure all questions received from any of the Group’s stakeholders
are dealt with in a timely manner based on the underlying principle
that the Group is approachable and responsive to any potential
queries.
Bond yield information
July 2022
8.000% Bond output
Bond Price (US$)
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Feb 2025
7.000% Bond output
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1. On 18 February 2019 Moody’s re-rated Nostrum as a B3 rating
1. On 18 February 2019 Moody’s re-rated Nostrum as a B3 rating
with a Stable outlook.
with a Stable outlook.
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Glossary
Glossary
2010 Notes
2012 Notes
2014 Notes
2017 Notes
2018 Notes
A
API
API gravity
appraisal well
associated gas
B
barrel/bbl
basin
bcm
Boe
Boepd
Bopd
C
C1
C2
C3
C4
C5
C6
C7
CAC
Cash
Casing
10.500% notes issued in 2010.
7.125% notes issued in 2012.
6.375% notes issued in 2014.
8.000% notes issued in 2017.
7.000% notes issued in 2018.
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.
Gas, which occurs in crude oil reservoirs in a gaseous state.
The standard unit of volume:
1 barrel = 159 litres or 42 US gallons.
A large area holding a thick accumulation of sedimentary rock.
Billion cubic metres.
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 equivalent per day.
Barrels of crude oil per day.
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.
Caspian region
Parts of countries adjacent to the Caspian Sea.
CDP
CDP is an organisation based in the United Kingdom which supports companies to disclose their
environmental impact (formerly known as the Carbon Disclosure Project).
Chinarevskoye field
The Chinarevskoye oil and gas condensate field.
CO2
commissioning
Carbon dioxide.
Process to assure a facility or plant such as GTU3 is tested to verify if it functions according to technical
objectives and specifications before use.
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Competent Authority
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.
condensate
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.
contingent resources
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
crude oil
D
development
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.
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.
downstream
Downstream refers to all petroleum operations occurring after delivery of crude oil or gas to a refinery or
fractionation plant.
Development Plans
The development plans approved by the SCFD in March 2009.
directors or Board
The directors of the Company.
dry gas
E
E&P
EBITDA
Dry gas is natural gas (methane and ethane) with no significant content of heavier hydrocarbons. It is
gaseous at subsurface and surface conditions.
Exploration and production.
Profit Before Tax non-recurring expenses + Finance Costs + Foreign Exchange Loss/(Gain) + ESOP +
Depreciation – Interest Income + Other Expenses / (Income).
Environmental Code
The Kazakhstan Environment Code (No 212, dated 9 January 2007, as amended).
Exploration Permit
The geological allotment (Annex to the Licence) issued by the Competent Authority to Zhaikmunai LLP.
exploration phase
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.
exploration well
Well drilled purely for exploratory (information gathering) purposes in a particular area.
F
farm-in
farm-out
FCA
FCA Uralsk
field
FOB
FSU
Transfer of a percentage of an oil or gas permit held by the farmor in return for (partial or complete)
delivery of the work programme by the farmee(s). Note that this work would normally have had to have
been delivered and paid for by the farmor.
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 programme required by the permit, or
fulfilling other contractually specified conditions.
Financial Conduct Authority of the United Kingdom.
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.
Former Soviet Union.
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Glossary / continued
Glossary continued
G
G&A
gas
General and administrative expenses.
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.
gas condensate
The mixture of liquid hydrocarbons that results from condensation of petroleum hydrocarbons existing
initially in a gaseous phase in an underground reservoir.
Gas Treatment Facility (GTF) Facility for the treatment of associated gas and gas condensate resulting in different products (stabilised
condensate, LPG and dry gas) for commercial sales.
GTU1 means the first unit of the Gas Treatment Facility.
GTU2 means the second unit of the Gas Treatment Facility.
GTU3 means the third unit of the Gas Treatment Facility.
GDRs
The global depository receipts of Nostrum Oil & Gas LP.
greenhouse gas
A gas that contributes to the greenhouse effect by absorbing infrared radiation, e.g. carbon dioxide.
Group
H
HSE
hydrocarbons
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
Hydrocarbon reserves have been proved, and are referred to as 3P, 2P and 1P depending on the
likelihood of commercial production from that field.
I
IAS
IFRS
INED
J
International Accounting Standards.
International Financial Reporting Standards.
Independent non-executive director.
joint venture
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.
joule
Unit of energy used for measuring gas volumes.
• megajoules = 106
• gigajoules = 109
• terrajoules = 1012
• petajoules = 1015
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KASE
Kazakhstan
KazMunaiGas
KazMunaiGas Exploration
Production (KMG EP)
Kazakhstan Stock Exchange.
The Republic of Kazakhstan.
State-owned oil and gas company of Kazakhstan.
Onshore oil and gas exploration production subsidiary of KazMunayGas.
KazTransOil (KTO) pipeline A tie-in to the KTO pipeline enables crude oil export sales via the Atyrau-Samara international export
pipeline.
L
Licence
Licencing Law
liquids
LNG
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.
Listing Rules
The listing rules made by the Financial Services Authority (FSA) under section 73A of the FSMA.
London Stock Exchange or
LSE
London Stock Exchange.
LPG
LTIP
M
m
m3
m3/d
Man–hours
Mboe
Liquefied petroleum gas, the name given to the mix of propane and butane in their liquid state.
Long-term incentive plan.
Metre(s).
Cubic metres.
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 oil equivalent.
Mechanical completion
Final construction or installation phase whereby a facility can then undergo commissioning activities
Mmbbls
Mmboe
N
NBK
NED
Millions of barrels of oil.
Millions of barrels of oil equivalent.
National Bank of Kazakhstan.
Non-executive director
Nostrum
Nostrum Oil & Gas PLC, the listed company of the Group.
Nostrum Oil & Gas PLC
Registered Office:
9th Floor
20 Eastbourne Terrace
London
W2 6LG
United Kingdom
O
OPEC
operator
The Organisation of Petroleum Exporting Countries.
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.
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Glossary / continued
Glossary continued
P
Partnership
petroleum
Possible Reserves (3P)
Probable Reserves (2P)
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.
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.
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.
processing
processing of saleable product from hydrocarbons sourced from oil wells and gas wells.
Production Permit
The mining allotment (Annex to the Licence), issued by the Competent Authority to Zhaikmunai LLP.
production well
Profit oil
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.
Prospective resources
Quantities of petroleum which are estimated, on a given date, to be potentially recoverable from
undiscovered accumulations.
Proven Reserves (1P)
PRMS
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.
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.
PSA or Production Sharing
Agreement
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.
PSA Law
Q
QHSE
R
recovery
Reservoir
RoK
Royalty
Ryder Scott
Kazakhstan Law No. 68-III “On Production Sharing Agreements for Constructing Offshore Petroleum
Operations”, dated 8 July 2005.
Quality, Health, Safety and the Environment.
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.
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S
sales gas
Seismic
Shut in
Natural gas that has been processed by gas plant facilities and meets the required specifications under
gas sales agreements.
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.
sidetrack well
A well or borehole that runs partly to one side of the original line of drilling.
Social infrastructure:
assets that accommodate social services, i.e. hospitals, schools, community housing etc.
spud
stakeholder
State
State Share
Suspended well
T
TCFD
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.
The share of hydrocarbon production due (in cash or kind) to the Republic of Kazakhstan under the PSA.
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.
Task Force on Climate-related Financial Disclosures.
Tenge or KZT
The lawful currency of the Republic of Kazakhstan.
Tonne
Trillion
U
UNGG
Metric tonne.
10 to the power of 12.
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 1960’s, the consortium was involved in more than 59 exploration
projects. In 1970, the consortium was renamed “Uralsk Enlarged Oil-Gas Exploration Expedition”.
UOG
Ural Oil and Gas LLP.
UK Corporate Governance
Code
Set of principles of good corporate governance for listed companies promulgated by the UK Financial
Reporting Council.
W
well
wellhead
work programme
workover
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.
A schedule of works agreed between parties (permit holders, farmees and government) contracted to be
delivered in a defined time frame.
Routine maintenance or remedial operations on a producing well in order to maintain, restore or increase
production.
WUP or Water Use Permit
The permit granted by the relevant Government authority with respect to water use pursuant to the
Water Code.
Z
Zhaikmunai LLP
Principal operating entity of the Group
Corporate Office:
43/1 Karev str.
Uralsk, 090000
Republic of Kazakhstan
Representative Office:
Mariam Zhagorkyzy st. 17
Yes District
Astana, Republic of Kazakhstan
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Structure chart
Nostrum Group Structure Chart
as at 31 December 2018
Nostrum Oil & Gas PLC
Incorporated in the UK
Principal place of business in the UK
100%
>99.9%
Nostrum Oil & Gas BV
Incorporated and principal place
of business in the NL
Nostrum Oil & Gas Coöperatief UA
Incorporated and principal place of
business in the NL
<0.1%
100%
100%
(save for one share
held by Nostrum
Oil & Gas BV)
100%
100%
100%
Nostrum Oil & Gas
Finance B.V.
Nostrum
Services N.V.
Incorporated and
principal place of
business in
Netherlands
Incorporated and
principal place of
business in Belgium
Zhaikmunai LLP
Incorporated and
principal place
of business
in Kazakhstan
Nostrum Associated
Investments LLP
Nostrum Services
Central Asia LLP
Incorporated and
principal place
of business
in Kazakhstan
Incorporated and
principal place
of business
in Kazakhstan
100%
100%
100%
Nostrum Oil & Gas
UK Limited
Nostrum E&P
Services LLC
Incorporated and
principal place of
business in the UK
Incorporated and
principal place of
business in Russia
Atom & Co LLP
Incorporated and
principal place
of business
in Kazakhstan
* Apart from the external debt held by Nostrum Oil & Gas Finance B.V, the contribution and results of Nostrum Oil & Gas PLC and all of its subsidiaries
(other than Zhaikmunai LLP) to the KPIs and results of the Group were insignificant.
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Nostrum Oil & Gas PLC
9th Floor
20 Eastbourne Terrace
London W2 6LG
United Kingdom
T: +44 203 740 7430
E: ir@nog.co.uk
www.nog.co.uk
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