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2 0 1 9 A N N U A L R E P O R T
Sustainable
processing
infrastructure
Empowering
North-western
Kazakhstan
Nostrum Oil & Gas is an
independent oil and gas
exploration and production
company based in
North-western Kazakhstan.
For more details please visit
www.nog.co.uk
Our purpose
To work as a team with people who
constantly strive to develop their
business and technical skills to
ensure excellence across our
value chain.
Our vision
We have a new vision to add value
to the region through the utilisation
of our state-of-the-art infrastructure.
Our story
Over the last 15 years, we have
built a world-class infrastructure
hub that has allowed for the
exploration and development of
the Chinarevskoye field, and can
continue to support the production
and sale of billions of cubic meters
of gas in North-western Kazakhstan
for years to come.
Our strategy
We, as management and
employees, together with our
local partners, are committed
to working towards delivering
sustainable long-term cash
flows by commercialising our
gas processing infrastructure,
mitigating sub-surface reservoir risk
and applying stringent cost control.
Our values
We are a trustworthy and
reliable partner, externally
(to our customers, suppliers and
the Kazakh government), as well
as internally (to our employees).
Corporate and social responsibility
is integral to all that we do and
where we are all committed to
the safety of all our employees.
After a challenging 2019, the Company will now
embark on a strategy to commercialise its world-
class infrastructure. We believe this infrastructure
has significant value and the management team
is working hard to realise its potential.
Kaat Van Hecke
Chief Executive Officer
Contents
Strategic report
2
What sets us apart
12
14
Executive Chairman’s statement
Business model
16 Market review
18
20
22
24
34
44
46
50
51
56
Strategy
Chief Executive Officer’s review
Key performance indicators
Performance review
Sustainable accountability
Risk management
Principal risks and uncertainties
Viability statement
Financial review
Five year summary
Corporate governance
58
Executive Chairman’s overview
62
64
66
69
72
80
82
84
86
Board of Directors
Senior management team
Our Governance framework
Board activities
and achievements
Audit Committee report
Nomination and
Governance Committee
Health, Safety, Environment
and Communities Committee
Remuneration Committee
2019 annual report
on remuneration
95
Directors’ remuneration policy
104 Directors’ report
Financial report
110 Consolidated
financial statements
164
Parent company
financial statements
Regulatory information
Investor information
182
185 Glossary
Additional disclosures
Structure chart
IBC
Nostrum Oil & Gas PLC Annual Report 2019
1
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES WHAT SETS US APART
World-class infrastructure
with the potential to increase
cash flow by fully utilising
our spare capacity
Safety is at the core
of our operations
Infrastructure, including a
4.2 bcm gas processing facility
In 2019, we formed the Health,
Safety, Environment and Communities
Committee which has oversight over
health, safety and environmental
matters. By operating safe facilities, we
aim that every employee will go home
healthy after a day’s work. We want to
ensure the safety of employees,
contractors and the environment.
Our processing infrastructure has
more than doubled in capacity. We
are utilising under 20% of this and will
now focus on third parties to fill the
spare capacity as we no longer see
the Chinarevskoye field being able
to do this.
See more on p. 4
See more on p. 6
Hazard
observation
card
GAS
TURBINE
POWER
UNIT
GTU3
GTU 1&2
OIL
TREATMENT
UNIT
CONDENSATE
STORAGE
CAMP
LPG
STORAGE
WATER
INJECTION
UNIT
GTU
INLET
MANIFOLD
2
Nostrum Oil & Gas PLC Annual Report 2019
Nostrum has invested over US$1bn into its infrastructure
in North-western Kazakhstan. The current production levels
utilise under 20% of its capacity. Our focus is to try to fill the
spare capacity with third-party gas. Unlocking this potential
is critical to our ability to grow stakeholder value.
Well-established transport
links to export markets
Our infrastructure is linked to both
major oil export pipelines and gas
export pipelines, as well as a good
rail network. This allows us to sell our
products in the export markets and
achieve export prices.
Cost optimisation
With over US$1bn of debt and
declining production levels, Nostrum
has been focused on reducing its cost
base. This is a critical part of the new
vision to maintain liquidity.
See more on p.8
See more on p.10
R U S S I A
G&A
(US$m)
2019
2018
2017
19.4
20.3
31.0
K A Z A K H S T A N
US$19.4m
Nostrum Oil & Gas PLC Annual Report 2019
3
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES WHAT SETS US APART
Safety is at the core
of our operations
• Safety is a core value of our
operations; we believe that all
accidents are preventable and
everyone at the Nostrum Group
has a right to work in a safe
environment. ‘Golden Rules’
rolled out across the Group
to ensure awareness of
company guidelines.
• All employees are accountable
and responsible to ensure safe
working conditions. We strive to
ensure all employees work in a
healthy and safe environment
by operating prudent logistics
and facilities.
HSE
leadership
QHSE
pillars which
define our
approach to
sustainable
operations
Rigorous
incident
Investigation
Process safety
critical elements
identified and
maintained
Contractor HSE
management
Commitment
to reduce
GHG emissions
4
Nostrum Oil & Gas PLC Annual Report 2019
Nostrum Oil & Gas PLC Annual Report 2019
5
WHAT SETS US APART
Infrastructure, including
a 4.2 bcm gas processing facility
• Extensive infrastructure allows
Nostrum to process raw gas
deposits in North-western
Kazakhstan, where there is a
shortage of processing capacity.
• Fully commissioned gas treatment
facility with a combined nameplate
processing capacity of 4.2 bcm
per year.
6
Nostrum Oil & Gas PLC Annual Report 2019
Processing
infrastructure
GAS TURBINE
POWER UNIT
GTU 1&2
GTU3
OIL TREATMENT
UNIT
CONDENSATE
STORAGE
CAMP
LPG STORAGE
WATER
INJECTION
UNIT
GTU INLET
MANIFOLD
Nostrum Oil & Gas PLC Annual Report 2019
7
WHAT SETS US APART
Well-established transport
links to export markets
• Access to multiple
transportation routes.
• Full control of liquid
transportation logistics
with 120km liquids pipeline
and automated rail loading
terminal owned by Nostrum.
Oil exports pipeline
Atyrau-Samara
Darjinskoye
Nostrum oil
pipeline
Rostoshinskoye
8 0 K M
Uralsk
1 0 0 K M
Stepnoy
Leopard
fields
Yuzhno-
Gremyachinskoye
Rail loading
Rail loading
terminal
terminal and
and Crude/
crude/
condensate
condensate
storage
storage
Condensate
exports via rail
8
Nostrum Oil & Gas PLC Annual Report 2019
Area
shown
R U S S I A
K A Z A K H S T A N
Chinarevskoye
field
Rozhkovskoye
Sinopec
MOLGROUP
KazMunayGas
4 0 K M
6 0 K M
Nostrum
gas export
pipeline
Gas export pipeline
Orenburg-Novopskov
Karachaganak
Shell
Eni
Lukoil
Chevron
KazMunayGas
LPG exports via rail
Aksai
K A Z A K H S T A N
Nostrum Oil & Gas PLC Annual Report 2019
9
WHAT SETS US APART
Cost optimisation
• With over US$1bn of debt and
declining production levels,
Nostrum continues to focus
on reducing its cost base and
to try to preserve capital.
• More than 200 employees
released during 2019.
• All non-core projects ceased.
10
Nostrum Oil & Gas PLC Annual Report 2019
G&A (US$m)
19.4
20.3
2019
2018
2017
OPEX (US$m)
44.4
49.8
31.0
56.3
Nostrum Oil & Gas PLC Annual Report 2019
11
EXECUTIVE CHAIRMAN’S STATEMENT
Overcoming challenges
I am proud of our people and
the culture at Nostrum. That
culture must be harnessed
to focus on delivery against
our targets, whilst ensuring
Nostrum is an attractive
place to work with an
inclusive environment
that celebrates diversity.
Q: What have been the main challenges for Nostrum
during 2019?
A: We have faced several challenges in 2019 which have not
allowed us to fully accomplish some of our priority goals for 2019.
• Despite finding hydrocarbons in more zones than expected, the
appraisal wells in the North of the Chinarevskoye licence did not
flow at commercial rates.
• Our own studies and the results of the Schlumberger and PML
Lucas reports concluded that well productivity is a major concern,
particularly in those reservoirs currently classified as Probable.
We therefore have taken the decision to reclassify most of
these reserves to contingent resources.
• We had a higher than anticipated decline in production from
our existing producing wells, which meant we had to revise
production guidance down during the year.
Q: How has the Board sought to address these challenges?
A: On the back of our disappointing operational performance
and the various associated analytical studies, the Board has taken
the decision to halt all drilling this year whilst we look for ways to
mitigate the identified reservoir risks. We cannot afford to spend
on drilling unless we are confident that we are able to drill
commercially viable wells.
Our primary focus is now on securing third-party volumes to fill the
spare capacity in our world-class gas treatment facility. We already
have one third-party, Ural Oil & Gas LLP, signed up to supply raw
gas. At the time of writing, we are in discussions with potential other
third parties who are interested in utilising our infrastructure. Should
these discussions prove successful, the anticipated gas processing
contracts would ensure our gas treatment facility can work at
capacity and provide long-term stable cash flows for Nostrum.
We appointed Kaat Van Hecke as interim CEO as soon as our
previous CEO decided to step down. She has intimate knowledge
of the Company, a strong track record of delivering projects in
these geographies and understands the challenges we are facing,
so is well placed to help the Company through this period
of transformation.
We have reduced our cost base to reflect the revised scope of
our operations and will continue to stringently monitor costs.
Q: How has the Board responded to shareholders and
bondholders in 2019?
A: We recognise how challenging it has been for our shareholders
and bondholders as the company has missed guidance, written
down significant amount of reserves and had to stop drilling. This
has clearly led to a lot of frustration from all our stakeholders and
has also led to a significant shift in our shareholder register. The
Board and I are acutely aware of the frustrations of our stakeholders
and are doing all we can to try to improve performance. We hope
we can start to make some progress during 2020 that will
demonstrate to our stakeholders the value of our existing
assets and how these can be monetised in the future.
Q: Where do you see the biggest risks to Nostrum in 2020?
A: Executing a third-party agreement on additional volumes for our
gas treatment facility with enough time to also present the value
proposition to our stakeholders well in advance of the bond
repayment in 2022.
• Given the disappointing reservoir performance of the last few
years, worse than anticipated future behaviour cannot be
ruled out.
12
Nostrum Oil & Gas PLC Annual Report 2019
Focus for 2020
• Ensure the safety of employees, contractors, the environment and
our communities;
• Advance discussions with third parties interested in supplying raw gas to
completely fill our spare capacity;
• Reduce cost base in line with new strategy to focus on processing third-party
volumes; and
• Continue studies to identify viable technologies to mitigate sub-surface risks.
• Following recent events in the oil and gas sector where we have
seen significant falls in the oil price – this has a material impact
on the liquidity of the company as we are unhedged. As a result,
we are considering further cost reductions across all areas of
the business. In addition, we announced on March 31, 2020 that
we will now seek to engage with our bondholders regarding
a possible restructuring of the Company’s outstanding bonds.
We are in the process of selecting a financial advisor to
commence negotiations with the bondholders. Whilst we
believe that consensual agreement will be reached with our
bondholders and shareholders, the outcome of the discussions
is uncertain.
• In Q1 2020, we have also seen the outbreak of COVID-19,
we will ensure the company monitors the impact of the virus
on both its operations and the wellbeing of all its employees.
At this stage, we can’t quantify the impact this will have but it
could be substantial. Currently our operations are continuing
uninterrupted and to our expected high and safe standards.
Q: How are you positioning your business for a
sustainable future?
• ESG (Environmental, Social and Governance) performance has
and will always be central to how Nostrum operates as a business.
• This includes maintaining high standards of QHSE (Quality,
Health, Safety and the Environment), with the health and safety
of our employees being paramount.
• To demonstrate that we take our responsibility with regards to
the environment and climate change seriously, we completed
the CDP (formerly the Carbon Disclosure Project) initiative in
2019 and plan to continue with this in the coming years so we
are fully accountable and comparable.
• We established a new Board committee to focus entirely on
Health, Safety, Environment and Communities, and attention
to climate change issues is among the responsibilities of
this committee.
• 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 continue to seek to quantify
climate change-related risks.
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 assets,
particularly that of the infrastructure we have built. We need to seek
additional third-party volumes, on top of Ural potential volumes,
that can allow us to monetise the full capacity we have available
in our state-of-the-art gas treatment facility. 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’s stakeholders. We also need
to overcome the reservoir productivity issues that we have faced
over recent years so that we can recover the significant volumes of
discovered hydrocarbons within the licenses we own. We recognise
that any value we create needs to be done in a sustainable manner,
and we need to be considerate of any social or environmental impact
our business has. We continue to invest in social development, as
well as education and training. We will continue to improve our
reporting in this area and ensure our future growth is carried out
in a responsible manner.
I am proud of our people and the culture at Nostrum. That culture
must be harnessed to focus on operational excellence in 2020
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,
particularly 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 diversity. We are grateful for the
quality and commitment of our employees.
I look forward to sharing our story with you over the coming months
and thank you for your support.
Atul Gupta
Executive Chairman
Nostrum Oil & Gas PLC Annual Report 2019
13
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES BUSINESS MODEL
Value potential
Business model
inputs
World-class infrastructure
Low operating costs
Attractive fiscal terms
Experienced management team
Responsible operations
Our story
Over the last 15 years,
we have built a world-class
infrastructure hub that has
allowed for the exploration
and development of the
Chinarevskoye field and
can continue to support
production and sale of
billions of cubic meters
of gas in North-western
Kazakhstan for years
to come.
Our strategy
We, as management
and employees, together
with our local partners,
are committed to
working towards
delivering sustainable
long-term cash-flows by
commercialising our gas
processing infrastructure,
mitigating sub-surface
reservoir risk and
applying stringent
cost control.
14
Nostrum Oil & Gas PLC Annual Report 2019
Value chain
Third-party
Hydrocarbons
Gas
Oil
Gas
condensate wells
Crude
oil wells
Power
generation
Associated
gas
Gas treatment
facilities (GTF)
Oil treatment
facility (OTF)
Liquified
petroleum
gas (LPG)
Dry
gas
Stabilised
condensate
Crude
oil
Final
destination
Final
destination
Stakeholder
value
Workforce
We are one of the leading
employers in North-western
Kazakhstan, delivering
sustainable benefits to
the local community.
Investors
2019 was an extremely
challenging time for investors
– the Company is working
hard with a new vision
to improve this.
Local Communities
We are a proud community
partner and strive to foster
a culture of openness and
engagement, offering social
and financial support to
promote the well-being
of local residents.
Suppliers, Contractors &
Customers
Established safety audits to
ensure trusted partnerships.
Constant communication with
our key customers.
Governments &
Regulators
We paid US$42,883,995
of tax in 2019 to governments.
Please see our website
for more information
at www.nog.co.uk.
Nostrum Oil & Gas PLC Annual Report 2019
15
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES MARKET REVIEW
Nostrum’s markets
Solid export potential
Since its independence
in 1991, Kazakhstan has
established itself as one of
the world’s most prolific
hydrocarbon centres.
The oil & gas market
in Kazakhstan
The foundation of Kazakhstan’s oil & gas
industry consists of three supergiant fields
situated in the north-west of the country
(Tengiz, Karachaganak and Kashagan).
Together, these fields hold the majority of
the country’s reserves and production, and
have allowed Kazakhstan to attract more
foreign direct investment than any other
country in the FSU over the past three
decades, including Russia. Together,
the three fields produced over 60%
of the country’s output during 2019.
As the world’s largest landlocked country,
Kazakhstan depends on an extended
network of pipelines and railways to deliver
its products to export markets. Pipeline
exports are primarily delivered via Russia
(Atyrau-Samara and the Caspian Pipeline
Consortium pipelines); via Azerbaijan and
Turkey (the Baku-Tbilisi-Ceyhan pipeline);
and one via China (Atasu-Alashankou). Rail
exports utilise Kazakhstan’s extensive rail
network, reaching markets throughout the
CIS and beyond.
R U S S I A
K A Z A K H S T A N
C H I N A
Production from the three supergiant fields
was near or at record levels during 2019.
Kashagan resumed full production during
2017 and underwent a successful
maintenance program during 2019.
Expansion projects at the Tengiz and
Karachaganak fields, which have been
producing for over two decades, are
currently being developed to increase
liquid recovery rates as the fields mature.
For Karachaganak, in particular, which is
located approximately 70km from the
Chinarevskoye field, this will require
increased gas handling capacity.
What it means for us
Nostrum’s assets are located in the
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. This advantageous
position means that the Company has
access to multiple export markets for its
products, as well as labour and specialist
equipment providers. In addition,
Nostrum has a substantial amount of spare
processing capacity in a region where there
is a significant amount of stranded gas and
a growing need for gas processing.
Competitive analysis and market share – Benchmarking our business against our peers
Strengths and opportunities
• Multiple export routes
Weaknesses and threats
• Nostrum is subject to fluctuations in the market prices for
its products, although we have a variety of sales products.
• 100% ownership of Chinarevskoye licence, infrastructure on the
field, pipelines and rail loading terminal used for transportation
to export routes.
• Increased geological risks due to deep, tight, highly
fractured reservoirs.
• Extensive infrastructure allows Nostrum to process raw gas
• Seasonal temperature fluctuations in a harsh
deposits in North-western Kazakhstan, where there is a shortage
of processing capacity.
operating environment.
• Onshore field with low operating costs.
• Lack of significant population reduces the size of the skilled
workforce locally.
16
Nostrum Oil & Gas PLC Annual Report 2019
Key macroeconomic and microeconomic trends
Oil prices
Oil prices were range-bound during
2019, with a low of US$55/bbl in
January and a high of US$75/bbl in
April. Coordinated efforts to reduce
production by OPEC+ were mitigated
by increased trade tensions between
the US and China and increasing
political uncertainty in the Middle
East. Although supply and demand
fundamentals appear to be broadly
balanced, missile and drone attacks,
which caused more than half of Saudi
Arabia’s production to be temporarily
suspended for around a month during
September, have increased the risk
premium in the crude market.
Consensus fundamental views of
long-term prices remain around
US$60-70/bbl although volatility
is bound to persist.
Oil prices
Brent price
(US$/b bl)
80
60
40
20
5
4
Kazakh economy
During 2019, Kazakhstan’s
economy grew by 3.8% (2018: 3.7%).
The KZT/USD average exchange rate
weakened to 383KZT to USD (2018:
345KZT to USD), although inflationary
pressures remained subdued with CPI
at 5.2% (2018: 6.1%).
Competitive environment
Kazakhstan and Azerbaijan are the
two main oil producing countries
in the Caspian region, producing
1.9 million bopd and 0.8 million bopd
in 2018 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 6.0 billion cubic
feet per day and 5.5 billion cubic feet
per day in 2018 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 oil.
Real GDP growth Y-on-Y
Total 2018 production
(mmtoe)
4.1%
4.1%
3.8%
Kazakhstan
XXX
112.17
XXX
63.50
XXX
55.30
XXX51.59
Turkmenistan
Azerbaijan
Uzbekistan
Oil
Natural gas
0
Jan
2019
Mar
2019
May
2019
Jul
2019
Sep
2019
Nov
2019
Dec
2019
3
2017
2018
2019
What it means for us
What it means for us
What it means for us
With no debt maturities until 2022,
approximately US$90million of cash
on our balance sheet, the Company
continues to focus on reducing its
cost base to ensure it can maintain
adequate liquidity while its strategic
options are being assessed.
While the Kazakh economy
has experienced considerable
development and a degree of
diversification since independence,
the oil & gas industry still dominates
the economy. Given its prominence,
the government has proven to be
supportive of operators over time in
its attempts to foster the development
of the country’s resources and attract
foreign investment.
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 at 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 2019
17
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES STRATEGY
A strategy for
the future
Nostrum is focused on
realising the significant
value of its gas processing
infrastructure
Strategic pillars
2020 priorities
KPIs
Risks
See KPIs section on p. 22
See Risks section on p. 44
Forecasts,
objectives
and prospects
for 2020-2022
Our purpose
To work as a team
with people who
constantly strive to
develop their business
and technical skills,
to ensure excellence
across our value chain.
Our vision
We have a new vision
to add value to the
region through the
utilisation of our state-
of-the-art infrastructure.
Commercialise
world-class
gas processing
infrastructure
• Advance ongoing discussions
with third parties interested in
supplying raw gas to completely
fill the Group’s spare capacity
• Conclude commercial
processing contracts such as
Ural Oil & Gas LLP in 2018
• Ongoing negotiations with
• Execute binding commercial
various counterparties are
complex and commercially
sensitive, and there can be
no certainty that agreement
will be reached
contracts to fill the Group’s
spare gas processing capacity
with third-party volumes
Safety
at the core
of operations
• Ensure the safety of employees,
contractors and the environment
• Continue roll-out of ‘Golden Rules’
• Implement contractor
management framework
Reduce costs
and preserve
capital
• Reduce cost base in line with new
strategy to focus on processing
third-party volumes
• Reductions to be realised in all
cost categories against 2019
levels (operating, G&A, CAPEX)
• Lost time injury frequency
• Legal framework for
• Total recordable
injury frequency
• Improve contractor
safety management
• Improve Supervisor
HSE competence
• G&A below US$20 million
• Operating costs below
US$50 million
• Manage cash resources to
ensure that the Company
remains a going concern
Reservoir
management
& well
productivity
• Utilise workover rigs and
other technologies to manage
existing production decline in
a cost-effective way
• Continue studies to identify
viable technologies to mitigate
sub-surface risks for future
drilling planning
• Finalised construction
of potential second
Low Pressure System to
prolong life of ageing
gas-condensate wells
• Maximised uptime
of existing wells and
production facilities
• Reduce decline rates in
existing producing wells
• Identify technologies to
increase well productivity and
reduce sub-surface risk for
future drilling programmes
at Chinarevskoye
environmental protection
and operational safety
still being developed
in Kazakhstan
• Impact of equipment failure
• Sustained higher prices
can lead to cost inflation
in Kazakhstan
• Restructuring charges
may offset effect of
some cost reductions
• Further spend on reservoir
assessment might be needed
• The halting of drilling will
have a negative short-term
impact on working capital
• At low production levels,
unexpected sub-surface
events could severely impact
the Group’s operating cash
flow forecasts
18
Nostrum Oil & Gas PLC Annual Report 2019
Commercialise
• Advance ongoing discussions
with third parties interested in
supplying raw gas to completely
fill the Group’s spare capacity
world-class
gas processing
infrastructure
Safety
at the core
of operations
• Ensure the safety of employees,
contractors and the environment
• Continue roll-out of ‘Golden Rules’
• Implement contractor
management framework
Reduce costs
and preserve
capital
• Reduce cost base in line with new
strategy to focus on processing
third-party volumes
• Reductions to be realised in all
cost categories against 2019
levels (operating, G&A, CAPEX)
Strategic pillars
2020 priorities
KPIs
Risks
See KPIs section on p. 22
See Risks section on p. 44
Forecasts,
objectives
and prospects
for 2020-2022
• Conclude commercial
processing contracts such as
Ural Oil & Gas LLP in 2018
• Ongoing negotiations with
various counterparties are
complex and commercially
sensitive, and there can be
no certainty that agreement
will be reached
• Execute binding commercial
contracts to fill the Group’s
spare gas processing capacity
with third-party volumes
• Lost time injury frequency
• Total recordable
injury frequency
• G&A below US$20 million
• Operating costs below
US$50 million
Reservoir
management
& well
productivity
• Utilise workover rigs and
other technologies to manage
existing production decline in
a cost-effective way
• Continue studies to identify
viable technologies to mitigate
sub-surface risks for future
drilling planning
• Finalised construction
of potential second
Low Pressure System to
prolong life of ageing
gas-condensate wells
• Maximised uptime
of existing wells and
production facilities
• Legal framework for
environmental protection
and operational safety
still being developed
in Kazakhstan
• Impact of equipment failure
• Sustained higher prices
can lead to cost inflation
in Kazakhstan
• Restructuring charges
may offset effect of
some cost reductions
• Further spend on reservoir
assessment might be needed
• The halting of drilling will
have a negative short-term
impact on working capital
• At low production levels,
unexpected sub-surface
events could severely impact
the Group’s operating cash
flow forecasts
• Improve contractor
safety management
• Improve Supervisor
HSE competence
• Manage cash resources to
ensure that the Company
remains a going concern
• Reduce decline rates in
existing producing wells
• Identify technologies to
increase well productivity and
reduce sub-surface risk for
future drilling programmes
at Chinarevskoye
Nostrum Oil & Gas PLC Annual Report 2019
19
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES CHIEF EXECUTIVE OFFICER’S REVIEW
Reshaping operations
and restructuring the
cost base
Despite the operational challenges,
G&A has continued to fall, and
operational expenses are reducing.
We believe there are opportunities
where we can fill the spare capacity of
the gas treatment facility in the future.
Q: 2019 was a tough year in terms of
production and missed guidance.
What were the main issues and how
can this be turned around?
A: In 2019, we drilled three wells in the
Northern area of our field. This decision
was based on the success we had from
Well 40, which was in a similar location.
Unfortunately, none of the wells drilled
delivered commercial levels of production.
This meant we were unable to add any new
production during the full year 2019.
In 2019, we also encountered steeper than
expected decline in our core producing
reservoir, Biski North East. This is largely due
to the pressure declining more quickly than
anticipated and the resulting impact on the
condensate to gas ratio. This results in lower
gas, LPG and condensate production from
our existing wells.
In 2020, we will continue to use one
workover rig at field site. We will use the
rig to unlock productivity from existing
closed-in wells or enhance recovery from
existing producers. Our target for workovers
is to try to reduce the rate of production
decline and better understand what
techniques will work in the future to realise
full potential at the Chinarevskoye field.
Additionally, in 2019, we approved the
extension of our low-pressure-system (LPS),
which will allow us to prolong the life of
those wells where the pressure has declined
below the inlet pressure required to feed
the gas treatment facility. From the main gas
reservoir, we currently have the first group
of wells linked to the low pressure system
with good results. We will look to increase
the number of wells once the LPS second
phase is complete by year-end.
Q: How strong is Nostrum’s
financial position?
A: Despite the operational challenges,
G&A has continued to fall, and operational
expenses are reducing with the halted
drilling and completion of GTU3.
In 2020, we will look to reshape the
operational make-up of the business
as we restructure the cost base towards a
midstream infrastructure Company versus
a pure E&P company. We expect significant
operational cost savings as a result of the
ceasing of all drilling during 2020.
We are acutely aware that the recent fall in
oil prices will mean we need to find further
cost savings. We are working hard to cut
costs across the Group. Given we have
halted drilling, we don’t expect capex
cuts to materially impact production
during 2020.
Q: What is the strategy to fill the Gas
treatment facility now that the third
train is complete, and you have
approximately 80% of your
capacity free?
A: This is the single most important focus for
the entire Board and Company. We believe
there are opportunities where we can fill the
spare capacity of the gas treatment facility
in the future. The infrastructure is located in
a region rich in raw gas hydrocarbons that
need to be processed in order to maximise
their value. We are very proud of our
facilities, and now need to realise their value
by ensuring we fill them as soon as possible.
We have already entered into agreements
with Ural Oil and Gas. We are actively
working to try and agree more third party
processing agreements that can deliver
further value from our infrastructure. I hope
that during 2020 we can provide more
concrete information in relation to
these opportunities.
Whilst we see the third party volumes as
being the core focus of our strategy today,
we also plan to continue to supply equity
barrels from Chinarevskoye.
20
Nostrum Oil & Gas PLC Annual Report 2019
Q: What is your production and sales
guidance for 2020, and how much risk
do you see to missing the guidance
again this year?
A: After reviewing the results of various
third party studies conducted last year,
including that of Schlumberger, and all
the in-house work to analyse drilling
and production performance, we have
concluded that whilst significant discovered
resources exist within our reservoirs, well
productivity in certain areas remains
challenging. The Company has therefore
decided to halt all drilling in 2020 whilst it
carries out further analysis to identify viable
technologies to mitigate sub-surface risk.
The directors and I have also concluded
that it would be prudent to transfer higher
risk hydrocarbons, identified above, from
the Reserve category to the Contingent
Resources category. Nostrum will continue
to operate a workover rig and focus on
investigating which technologies could be
appropriate to increase well productivity
in the future.
Our forecast average sales volume for 2020
is 19,000 boepd corresponding to average
production of 20,000 boepd. The Company
is reviewing its capex programme for 2020
following the recent oil price fall. We are
focused on ensuring the Group remains
a going concern through 2020.
We hope that there are limited risks of
missing guidance, as we aim to have lower
decline rates in 2020 compared with 2019
and less downtime.
Q: How did Nostrum deliver against
its QHSE commitments in 2019?
A: In 2019, we had a Lost Time Incident
Rate of 1.39.
We have set up, at Board level, a
new Health, Safety, Environment
and Communities Committee under
my chair that is working closely with
management to improve overall health,
safety, environmental and social
performance, and better address
important issues such as climate
change and gender diversity.
In 2019, we sharpened the “Golden
Rules” to clearly communicate the
safety requirements to each person
working for us. When serious incidents
happen, an improved transparent
investigation is conducted in-house,
with root cause analysis, to learn from
the events and take actions to prevent
future occurrence.
We are constantly reviewing our
contractor management systems.
As such, we have improved the
supplier selection process in 2019.
We also reported our environmental
performance under the CDP framework
last year for the first time. We are
committed to reporting in 2020
and to improving the quality of
our submissions going forward.
Section 172(1) statement
The Directors are fully aware of their
responsibilities to promote the success
of the Company in accordance with
s172 of the Companies Act and
have regard to the interests of the
Company’s employees and other
stakeholders, including the impact of
its activities on the community and the
environment when making decisions at
Board-level. The directors, acting fairly
between members, and acting in good
faith, consider what is most likely to
promote the success of the Company
for its members in the long-term.
Read more about our stakeholder
engagement on pages 61 and 70.
Read more about our governance
on pages 66-68.
Read more about delivering our
responsible business practices
on pages 34-43.
Kaat Van Hecke
Chief Executive Officer
In 2020, we will look to
reshape the operational
make-up of the business
as we restructure the cost
base towards a midstream
infrastructure company.
Nostrum Oil & Gas PLC Annual Report 2019
21
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
KEY PERFORMANCE INDICATORS
Increasingly challenging position
Financial KPIs
Whilst Nostrum has successfully built infrastructure and produced over 100m boe from
the Chinarevskoye field, it has incurred substantial debts of over US$1bn and is now facing
declining production from its producing field. This increases the pressure on its financial
position, and 2020 will be a key year in addressing those challenges. The Company needs
to execute its new strategy to be able to go forward.
Revenue
(US$m)
2019
2018
2017
2016
2015
EBITDA (see page 56)
(US$m)
Net loss
(US$m)
322
390
406
348
449
2019
2018
2017
2016
2015
200
231
232
194
215
2019
2018
2017
2016
2015
(990)
(121)
(24)
(83)
(94)
US$322m
-17.4%
US$200m
-13.5%
US$(990)m
-718%
Operating cash flow
(US$m)
Investing cash flow
(US$m)
Operating costs
(US$m)
2019
2018
2017
2016
2015
197
214
183
202
153
2019
2018
2017
2016
2015
120
172
192
200
245
2019
2018
2017
2016
2015
44
50
57
53
63
US$197m
-16.9%
US$120m
-30.1%
US$44.4m
-11.2%
2019 milestones
Mechanical
completion
of GTU3
First gas through GTU3
and commencement of
hot commissioning
December
May
June
July
Agreement to acquire
100% of Positive Invest LLP
Commencement
of review of
strategic and
operational
options
Completed drilling
of wells 41 & 42
22
Nostrum Oil & Gas PLC Annual Report 2019
Non–financial KPIs
Performing responsibly and safely is integral to our strategy 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)
2019
2018
2017
2016
2015
54.3
26,671
29,516
2019
2018
2017
2016
2015
37,844
39,043
38,576
2P reserves
(mmboe)
2019
138
98
124
2018
2017
2016
2015
147
147
410
488
466
470
26,671 boepd
-10.0%
54.3mmboe
-44.6%
138mmboe
-66.3%
Total Recordable Injury
Frequency (hours)1
Lost Time Injury
Frequency (hours)1
Total GHG emissions
(ktCO2e)
1.39
2019
2018
2017
2016
2015
2.96
2.59
2019
2018
2017
2016
2015
3.92
4.00
1.39
1.05
2.48
1.99
2.75
2019
2018
2017
2016
2015
223
255
255
210
228
2.96 hours
+113.0%
1.39 hours
+32.0%
1. Per 1 million man hours worked
1. Per 1 million man hours worked
223 ktCO2e
-12.0%
Licence
extension at
Chinareveskoye
GTU3
Technical
commissioning
complete
2019 Production
guidance
revised down to
28,000 boepd
with sales
volumes at
27,000
No
commercial
flow indicated
at well 361
CDP completed,
and ‘C’ grade
awarded
Aug
Sept
October
November
December
January 2020
Licence
extension at
Rostoshinskoye
No commercial
hydrocarbons
confirmed at
wells 41 & 42,
drilling of well
361 continues
PM Lucas and
Schlumberger
reports
received by
the Company
Kai-Uwe Kessel
steps down as
CEO and Kaat
Van Hecke
becomes
interim CEO
Stop drilling
and focus on
third party
volumes
Nostrum Oil & Gas PLC Annual Report 2019
23
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES PERFORMANCE REVIEW
Our products
y
t
i
l
a
u
Q
s
e
l
a
S
g
n
i
c
i
r
P
n
o
i
t
a
t
r
o
p
s
n
a
r
T
Crude oil
• Density – 0.815g/cm3.
• API – 42-43 degrees.
Stabilised condensate
• Average Sulphur – 0.4%.
• Density – 0.750-0.790 g/cm3.
• API – 56 degrees API.
• Average sulphur – <0.2%.
• 85% exported in accordance with the PSA.
• 15% sold domestically.
• During 2019, all exported crude oil volumes were sold
through the KTO pipeline.
• 100% exported.
• Destinations are the Russian ports.
• Urals-based pricing for
pipeline exports.
• Domestic sales at
c.50% discount.
• Brent-based pricing.
• Crude exports are
• From here it is delivered
• Sent through our own
delivered to the KTO
pipeline through an
extension to our own
120km pipeline from
the field site.
to Russian ports.
120km pipeline from the
field site to our own rail
loading terminal in Uralsk.
• From here it is loaded
onto railcars and sent
to the Russian ports.
Crude and stabilised condensate production (boepd)
and product split (%)
2019
2018
2017
2016
2015
9,798
11,490
14,937
16,105
16,887
34%
37%
38%
40%
42%
Oil treatment facility
Nostrum finalised the construction of an oil
treatment facility in 2006 (“OTF”). Currently,
the OTF has a maximum 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 & 3
The gas treatment facility includes three gas
treatment units, with the capacity to treat
4.2 billion cubic metres of raw gas per
annum. The final train of this facility
was commissioned during 2019.
Power generation plant
The gas-fired power generation plant is
linked to the gas treatment facility with an
output of 26 megawatts. The generation
capacity from the plant is sufficient to meet
the existing and anticipated energy needs
of the field site and associated operations.
Gas pipeline
Nostrum has its own 17km gas pipeline
which was completed in 2011 and is linked
to the Orenburg Novopskov gas pipeline.
Our own pipeline has a capacity sufficient
to sell all of our volumes assuming our
gas plants are at full capacity.
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.
24
Nostrum Oil & Gas PLC Annual Report 2019
LPG
Dry gas
• Field grade quality.
• No olefins and low sulphur content.
• <85% exported.
• Destinations include the Russian Black Sea Ports.
• 100% sold to KazTrans Gas.
• International
Mediterranean LPG
price Sonatrach for
Black Sea deliveries.
• Brest quotation for
Eastern European
deliveries.
• Loaded onto LPG
trucks from the field
site to our rail loading
terminal in Uralsk.
• From here it is loaded
onto railcars and sold
to third parties.
• 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.
LPG production (boepd)
and product split (%)
Dry gas production (boepd)
and product split (%)
2019
2018
2017
2016
2015
3,569
3,865
4,615
4,545
4,323
13%
12%
12%
11%
11%
2019
2018
2017
2016
2015
15,173
15,900
53%
51%
19,647
50%
19,812
49%
19,190
47%
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
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.
Low Pressure System
During 2019, Nostrum continued
commissioning its Low Pressure System,
which aims to reduce the decline rates of
ageing gas condensate reservoirs through
increasing the inlet pressure of the main
manifold at the GTF from 10 to 42 bar.
Nostrum Oil & Gas PLC Annual Report 2019
25
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES PERFORMANCE REVIEW/CONTINUED
Reserves
The Chinarevskoye field is the only producing
field Nostrum owns. It has a grandfathered
PSA from 1997 and the licence is valid until
2032. Initial hydrocarbon discoveries at the
Chinarevskoye field were made during the
Soviet era. There have been 103 wells and
side-tracks drilled under the PSA between
2004-2019. The licence is owned 100% by
Zhaikmunai, the Kazakh operating company
of Nostrum Oil & Gas PLC. 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,
Frasnian, Mullinski, Ardatovski, and
Biyski-Afoninski reservoirs.
In 1 January 2020 Ryder Scott Reserve
Report, for the Chinarevskoye field, a
total of 45 interventions, including new
wells are planned between 2020-2026,
which together with 46 existing producers,
recover the estimated 2P reserves in the
31st December 2019 assessment. This
compares to 72 interventions under the
previous year’s report, approximately
one-third less.
The Chinarevskoye field interventions
comprise 30 new wells, 2 sidetracks, 7
workovers and 6 non-rig re-completions for
a total drilling capex estimate of $324 mm,
which compares with the previous 2019
estimate of $640 mm.
are reduced by 156 mmboe compared
to last year’s report. Offsetting some of
the above reductions are inclusion of
volumes for Frasnian North, Filippovski
gas-condensate and the Biyski North-East
low-pressure production system (LPS II).
Current reserves estimates are shown in
Table 1. The Total 1P (Proven) case for
Chinarevskoye is 54.3 mmboe comprising
43.4 mmboe for Proved Developed
Producing (PDP) – from 46 current wells,
8.1 mmboe for the Proved Undeveloped
(PUD) category and 2.8 mmboe for Proved
Developed Non-Producing (PDNP). Overall
Proven volumes are down by c. 46 mmboe
due to 10.8 mmboe of 2019 production
plus a reduction in condensate yields in
the Biyski-Afoninski reservoir, to reflect
current observed and expected rates and
a reduction in Tournasian wells and
water-flood performance.
The Chinarevskoye 2P (Proven plus
Probable) volume is 138 mmboe, with the
majority of Probable Undeveloped Reserves
associated with the development of the
Biyski-Afoninski West, North-East and
North-West reservoirs. The 2P volumes
The three fields which together make up the
Trident project are now entirely classified as
contingent resources. A total of 116 mmboe
Probable Reserves for Rostoshinskoye and
Darinskoye in the 31/12/2018 reserves
report has been moved into the Contingent
Resource category pending further appraisal.
The Ryder Scott Reserves Report as
of 1 January 2020 looks purely at the
economics of a possible field development
to extract the maximum number of reserves
at a US$65 long-term oil price.
All of the information provided does not
take into account the repayment of the
company’s liabilities as they come due in
2022 and 2025. It also does not take into
account any short-term impact on the
liquidity position of Nostrum as a result
of fluctuations in the oil price.
26
Nostrum Oil & Gas PLC Annual Report 2019
Table 1 – Chinarevskoye & NOG 100% run
Fluid
Oil/Condensate
Plant products
Gas (after shrink)
Gas (after shrink)
Total
Fluid
Oil/Condensate
Plant products
Gas (after shrink)
Gas (after shrink)
Total
Fluid
Oil/Condensate
Plant products
Gas (after shrink)
Gas (after shrink)
Total
Unit
barrels
barrels
mmcf
boe
boe
Unit
barrels
barrels
mmcf
boe
boe
Unit
barrels
barrels
mmcf
boe
boe
Proved
Producing
12,044,488
6,772,009
130,905
24,575,963
43,392,460
Probable
Producing
0
0
0
0
0
Non-producing
626,846
487,689
8,932
1,676,884
2,791,419
Non-producing
596,510
555,504
11,363
2,133,277
3,285,291
Proved+Probable
Producing
12,044,488
6,772,009
130,905
24,575,963
43,392,460
Non-producing
1,223,356
1,043,193
20,295
3,810,161
6,076,710
Nostrum’s Gas
treatment facilities
Undeveloped
3,080,209
1,279,685
19,970
3,749,146
8,109,040
Undeveloped
25,327,462
11,788,401
231,358
43,434,901
80,550,764
Total proved
15,751,543
8,539,383
159,807
30,001,994
54,292,920
Total probable
25,923,972
12,343,905
242,721
45,568,179
83,836,056
Undeveloped Total proved+probable
41,675,515
20,883,288
402,528
75,570,172
138,128,975
28,407,671
13,068,086
251,328
47,184,048
88,659,805
Nostrum Oil & Gas PLC Annual Report 2019
27
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES PERFORMANCE REVIEW/CONTINUED
Table 2 – Comparison of reserves per reservoir vs. previous year
Reservoir
Biyski/Afoninski NE
Biyski/Afoninski West
Biyski/Afoninski NW
Tournaisian NE
Tournaisian South
Tournaisian West
Mullinski South
Mullinski North
Mullinski NE
Bashkirian NE & W
Ardatovski NE
Ardatovski S
Frasnian N
Vorobyovski N
Chernoyarski NE
Fillippovski
Bobrikovski S
CHN Sub-total
Rostoshinskoye
Darinskoye
Ryder Scott 31/12/2018
Ryder Scott 31/12/2019
Change 2018 vs. 2019
Unit
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
mmboe
Proven
63.9
0.0
0.0
20.9
1.9
0.3
0.0
1.1
1.6
2.3
5.1
1.4
0.0
0.0
0.0
0.0
0.0
98.4
Probable
43.8
80.6
18.0
13.6
0.0
0.0
2.9
2.7
23.5
3.7
5.3
1.7
0.0
0.0
0.0
0.0
0.0
195.9
0.0
0.0
111.0
5.0
Total
107.7
80.6
18.0
34.5
1.9
0.3
2.9
3.8
25.1
6.0
10.4
3.1
0.0
0.0
0.0
0.0
0.0
294.2
111.0
5.0
Proven
32.2
0.0
0.0
12.9
1.4
0.2
0.0
0.0
0.7
1.0
4.0
0.0
1.6
0.0
0.0
0.3
0.0
54.3
Probable
11.4
35.7
10.9
9.3
0.0
0.0
2.8
0.0
4.0
1.5
5.2
0.0
1.0
0.0
0.0
2.0
0.0
83.8
Total
43.6
35.7
10.9
22.2
1.4
0.2
2.8
0.0
4.7
2.5
9.2
0.0
2.6
0.0
0.0
2.3
0.0
138.1
Proven
-31.7
0.0
0.0
-8.0
-0.4
-0.1
0.0
-1.0
-1.0
-1.3
-1.0
-1.4
1.6
0.0
0.0
0.3
0.0
-44.1
Probable
-32.4
-44.9
-7.2
-4.3
0.0
0.0
-0.1
-2.7
-19.5
-2.2
-0.2
-1.7
1.0
0.0
0.0
2.0
0.0
-112.1
Total
-64.1
-44.9
-7.2
-12.3
-0.4
-0.1
-0.1
-3.8
-20.5
-3.5
-1.2
-3.1
2.6
0.0
0.0
2.3
0.0
-156.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-111.0
-5.0
-111.0
-5.0
Total Nostrum
mmboe
98.4
311.9
410.2
54.3
83.8
138.1
-44.1
-228.1
-272.1
28
Nostrum Oil & Gas PLC Annual Report 2019
Nostrum’s facilities
Chinarevskoye Field
The breakdown on a reservoir by reservoir
basis and comparison to the previous year
is given in Table 2. A summary of the well
interventions programme is given in
Table 3 on page 30.
Biyski-Afoninski North-East
There has been an overall 2P reduction of
64.1 mmboe since last year, spread fairly
evenly between the Proven and Probable
categories. It is planned to drill two new
wells. In addition, five wells will undergo
rig-less re-completions in the Afoninski
during 2022, which is a reduction of one
well over last year’s programme. This is a
much reduced programme compared with
the previous year which had 7 new wells
and sidetracks and 6 rigless recompletions,
and reflects a more cautious approach
considering recent production and the
results of a Schlumberger study in 2019.
During 2019, Schlumberger carried out
static and dynamic modelling studies for
the Biyski-Afoninski North-East, and West
Reservoirs, together with the Tournasian
North-East Oil Reservoir.
The Schlumberger Biyski-Afoninski North
East study comprised probabilistic dynamic
modeling, with 13 geological realisations
to assess further development potential.
Production will be monitored in the coming
year to confirm a base case scenario which
can be used for the update and justification
of future production wells. The study
concluded that the potential of further
infill drilling is limited, which has led to
a reduction and deferral in planned wells
for the current reserves evaluation.
a lower Recovery Factor for condensate
based on the 2018 natural fractures report
from Midland Valley Exploration and the
Schlumberger model data from the
North-East area.
The study also evaluated the expansion
of the existing low-pressure gathering
system, which showed positive benefits
in extending well producing life together
with gas re-injection, which was not
recommended as it was unable to restore
reservoir pressure above the dew point.
Biyski-Afoninski West
& North-West
For the Probable Category in the West,
there is a 44.9 mmboe reduction compared
to the previous year. A reduced programme
of 10 wells (from 16 previously) in the
Probable category starts with a re-entry in
2021, with further wells following in 2022
and 2026.
The Schlumberger simulation study for
the Biyski-Afoninski West concluded that
there was a high degree of uncertainty in
predicting the presence of fractures and
good quality reservoir in order to locate
wells. The reduced program recognises
that successful and economic drilling and
hydraulic fracturing techniques will need
to be established to recover the reserves.
Forecast well performance has been
reduced by -25% in boe terms. This is based
on a reduction in the in-place volumes and
The Biyski-Afoninski North-West remains in
Probable Undeveloped, but with a reduced
programme of three development wells in
2024 and early 2025 and a reduction of
7.2 mmboe in 2P.
Tournasian North-East,
West & South
The Tournaisian North-East has a Total 2P of
22.2 mmboe and is 12.3 mmboe lower than
the previous year. In the Proven category,
apart from 2019 production, the main
reduction is in the Proven Undeveloped with
a reduction of one well and replacement of
two new wells by rig-less recompletions
which are expected to recover lower
volumes than a new well. The remaining four
new wells will be drilled in 2022. In addition
to production wells, two new water injection
wells are planned, with the first in 2022 and
the second in 2024. These waterflood plans
are provisional on the results of a water
injection tracer study due later in 2020,
which will be used to help design the
next phase of the waterflood.
Nostrum Oil & Gas PLC Annual Report 2019
29
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES PERFORMANCE REVIEW/CONTINUED
Table 3 – Summary of 31/12/2019 well programme compared to the previous year
Ryder Scott 31/12/2018
Drill Schedule effective 31/12/2019
Reservoir
Biyski/Afoninski NE
Biyski/Afoninski NW
Biyski/Afoninski West
Tournaisian NE – oil
Tournaisian NE – WI
Tournaisian South
Tournaisian West
Mullinski South
Mullinski North
Mullinski NE
Bashkirian NE & W
Ardatovski NE
Ardatovski S
Frasnian N
Vorobyovski N
Chernoyarski NE
Fillippovski
Bobrikovski S
CHN Sub-total
Rostoshinskoye
Darinskoye
Grand Total
Proved wells
6
–
–
5
4
–
–
–
–
–
2
–
–
–
–
–
–
–
17
–
–
17
Probable
wells
7
4
16
3
–
–
–
1
3
9
5
2
–
–
–
–
–
–
50
24
6
80
Appraisal
–
–
–
–
–
–
–
–
–
–
–
–
–
2
3
–
–
–
5
Total Proved wells
1
–
13
4
16
8
4
–
–
1
3
9
7
2
–
2
3
–
–
–
72
Probable
wells
6
3
10
2
2
–
–
1
–
5
2
2
–
1
–
–
5
–
39
–
1
35
Appraisal
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
6
Total
7
3
10
6
2
–
–
1
–
5
2
2
–
2
–
–
5
–
45
1
1
47
4
–
–
–
–
–
–
–
–
–
1
–
–
–
–
6
–
–
6
1
1
7
25
7
104
The Schlumberger Tournasian North-East
study comprised probabilistic dynamic
modeling with six geological realisations
to assess further development potential,
including expansion of the waterflood.
As in Biyski-Afoninski, production will be
monitored in the coming year to confirm
a base case scenario which can be used
for update of future production and
injection wells.
There remain no plans for further drilling
in the Tournasian South and Tournasian
West reservoirs.
Mullinski North-East
Probable reserves have been reduced by
20.5 mmboe due to a reduced programme
of five wells (from nine in the previous year)
which is planned between 2023 and 2025.
In addition, forecast well performance has
been reduced based on analysis of the
production histories of existing wells.
Mullinski South
This remains unchanged in the programme,
with one well to be drilled in 2023.
Mullinski North
A small volume of Proven Reserves is
attributed to the existing well Ch-724_1.
Due to the marginal economics of drilling
new wells, all three previously planned
Probable wells have been removed from
the programme.
Bashkirian North-East & West
There are two new wells proposed in the
North-East to be drilled in 2023 and 2024.
These are offset wells and have been
allocated to Probable (from Proven
Undeveloped) because of observed variable
production performance in existing wells.
Five former Probable wells in the East have
been removed from the programme.
Ardatovski North-East & South
Two Probable wells remain in the plan for
the Ardatovski North-East. As in the previous
year, these are a sidetrack together with a
new well, with both to be drilled in 2023.
No further development is planned for
the Ardatovski South reservoir.
Frasnian North
Reserves from this horizon have been
booked for the first time based on the
production licence (“mining allotment”)
being extended to the northern area in
2019. Proven reserves are attributed to
the existing Ch-40_1 well, while two new
wells are planned as step-outs in 2023
and 2024 respectively.
Filippovski
Five low cost workover recompletions
have been identified for the Filippovski,
and these are planned to be carried out
in 2020 and 2021.
30
Nostrum Oil & Gas PLC Annual Report 2019
Trident project
The three fields which make up the
Trident project are now entirely classified
as contingent resources, with previous
Probable Reserves for Rostoshinskoye
and Darinskoye in the 31/12/2018
reserves report moved into the
Contingent Resource category.
Rostoshinskoye Field
The Appraisal period has been prolonged
for three years and includes a commitment
to drill one new well.
No operational activities are planned for
the Rostoshinskoye field in 2020.
Darinskoye Field
No operational activities were carried out
in 2019 and work continued on feasibility
and detailed planning for the Early Oil
Development concept comprising well
re-entry, new wells and facilities.
Yuzhno-Gremyachinskoye Field
This remains in the Contingent Resources
category with no changes during 2019.
2019 Drilling
In 2019 the Company drilled 3 appraisal
wells, 41, 42 into the Frasnian and 361 in to
the Vorobyovski. There was no commercial
inflow of hydrocarbons from any of the
wells. In addition to the appraisal wells,
two side-tracks were drilled. One Bashkirian
side-track 52_2 was drilled but flow tests did
not yield commercial production of crude
oil. One Tournaisian NE water injection
sidetrack 51_1 was drilled and completed,
and injection started immediately after
connection to surface systems.
The workover campaign in 2019 consisted
of the recompletion of two idle gas
condensate wells for further appraisal of
the Permian Filippovski reservoir. After acid
stimulation, both wells started to produce
hydrocarbons free of formation water. Two
idle oil wells were recompleted in 2019
with the workover rig to the Tournaisian
NE oil reservoir. They are now producing
with stable flow rates. After failure of the
Electrical Submersible Pump (ESP) in well
45, a replacement pump was installed
without loss of production rate after
completion. It took approximately six
months to replace the ESP, however the
well now produces at the same rate as
prior to the ESP failing.
The Company has decided to halt drilling in
2020 and operate with one work over rig.
Low cost rig-less recompletions are also
planned to contribute to the development
of remaining reserves. The focus of the
Company will now be to efficiently utilise
the work over rig and reduce costs where
possible at field site whilst working hard
to add additional third-party gas streams
through the gas treatment facility in the
future. As per the Ryder Scott reserves
report, further drilling is planned to take
place on the Chinarevskoye field from late
2021, but this is dependent on Nostrum
being able to both refinance its liabilities
and maintain sufficient liquidity to fund
such a programme. There is no guarantee
that Nostrum will be able to achieve this,
which can have a material impact on the
Company’s ability to develop the remaining
proven and probable reserves at
Chinarevskoye. As at 31 December 2019,
the Company had 46 production wells in
operation on the Chinarevskoye field.
Nostrum Oil & Gas PLC Annual Report 2019
31
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
PERFORMANCE REVIEW/CONTINUED
Infrastructure
GTU3 & Sulphur Recovery Unit
In 2019, Nostrum successfully completed
and commissioned the third train (GTU-3) of
its gas treatment facility. After introducing
raw gas, each technological element of the
GTU-3 system has been tested and verified
independently. After achieving on-spec
quality of the final products (sales gas,
stable condensate, LPG), a 72-hour
performance test was concluded. Following
the successful performance test, while
obtaining all necessary documents,
regulatory acts, documents regarding
industrial and fire-fighting safety, GTU-3 was
declared ready for operation and became
part of the Field Operation (as GTU-1-2-3).
The total capacity of the gas treatment
facility is now 4.2 billion cubic metres per
annum. The third train has a capacity of 2.5
billion cubic metres per annum. The sulphur
recovery unit allows Nostrum to process
sour gas with an H2S content of up to 16%
at the moment in direct oxidisation mode.
This is part of the sour gas stream after
processing before it gets into the Sulphur
Recovery Unit. Work is ongoing on
modifying the Sulphur Recovery Unit to
allow for the UOG gas to be processed.
Consideration will be given to enhancing
the Sulphur Recovery Unit further, to allow
for other third party gas with higher H2S
content.
Extension of LPS
In order to stabilise the decline of some
of older producing wells, Nostrum
commissioned a low pressure system in
Q4 2018. There are now 12 wells linked
up to the Low Pressure system, and further
compressor capacity is required to prolong
the life of the gas condensate wells. As a
result, an extension to the low pressure
system was approved in Q3 2019, and the
extension is scheduled for completion in
October 2020.
Demonstrating the value of
our infrastructure
The core strategy for Nostrum to create
value for its stakeholders is commercialising
the investment made in its infrastructure.
The focus is to fill the spare capacity with
third-party hydrocarbons. The first step
towards achieving this was made in 2018,
when 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%).
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.
OTU
Power plant
LPG storage & loading
GTU3
Additional third party volumes
Nostrum is focused on entering into
additional agreements which can fill all
the remaining capacity in its gas treatment
facility. Nostrum is working with other
counter-parties to secure a long-term
stream of raw gas from which it can
generate significant revenues. Without any
additional third party gas coming through
Nostrum’s facilities, it will be extremely
challenging to repay or refinance
its liabilities.
32
Nostrum Oil & Gas PLC Annual Report 2019
Oil/Cond. storage
GTU1&2
Crude
oil wells
Oil treatment
facility (OTF)
400kt
Oil
Storage:
5k m3
Oil
Gas
Storage:
25k m3
Storage:
10k m3
Gas treatment
facility (GTF)
GTU1&2
2.5bcm
H2S 2500ppm
LPG 65%
GTU3
1.7bcm
H2S 500ppm
LPG 95%
Condensate
Dry Gas
LPG
Power
generation
41MHw
Gas condensate
wells
Third party
Hydrocarbons
3k m3/d
400k m3/d
36k m³/h
Water
injection
Gas Lift
Low Pressure
System
Nostrum Oil & Gas PLC Annual Report 2019
33
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES SUSTAINABLE ACCOUNTABILITY
Operating in a
responsible manner
Our approach
to Sustainability
Nostrum aims to operate
in a responsible manner
to ensure the safety of
employees, contractors
and the environment.
Safety is a personal and shared
responsibility, and Nostrum is committed
to occupational health and environmental
impact mitigation. We believe everybody
working at or visiting our facilities has a right
to return home safely and to perform their
duties under safe working conditions.
Safety is at the core of our operations.
Our field sites are in remote locations,
making rigorous safety procedures essential
and the safety of all our employees is our
number one priority. Nostrum adheres to
internationally recognised health, safety
and environmental standards, and seeks
to comply with ISO 14001, ISO 50001
and ISO 45001 Occupational Health
and Safety Standards.
A major achievement in 2019 was
the formation of a Board Health, Safety,
Environment and Communities Committee,
which has oversight over health, safety and
environmental matters. This Committee is
focused on five key QHSE pillars which
define our approach to sustainable
operations and in 2019 redrafted
Nostrum’s ‘Golden Rules’ on safety.
For more information on HSEC Committee,
please see page 82.
Health
and safety
See page 36
Our people
See page 38
Sustainability
focus areas
Social
responsibility
See page 40
Environment
See page 42
HSE leadership
Rigorous incident investigation
Process Safety critical elements identified
and maintained
Contractor HSE management
Commitment to reduce GHG emissions
34
Nostrum Oil & Gas PLC Annual Report 2019
Golden Rules
In 2019, the committee, together with senior management,
re-drafted the ‘Golden Rules’ and stressed their importance to
employees at all levels. The ‘Golden Rules’ set out clear and
simple ‘do’s and don’ts’, covering activities deemed to have the
highest potential safety risk, based on both international and
Company statistics of incidents. Managers and Contract Owners
communicated the ‘Golden Rules’ across the Group, explaining
the purpose, expectations and consequences. Employees who
observe rule breaking or unsafe activity can use the Hazard
Observation Cards to alert their supervisor or manager.
For more information, please see
https://sustainabledevelopment.un.org.
UN Sustainable
Development Goals
Nostrum’s approach to sustainability
is guided by the 17 UN Sustainable
Development Goals (“SDGs”). These
SDGs aim to end poverty and reduce
inequality while addressing climate
change and environmental preservation.
They are an important focus for Nostrum
as they assist the Company in prioritising
sustainable development matters, and
aligning these global challenges with
our business strategy.
Total Recordable Injury
Frequency (hours)1
1.39
2019
2018
2017
2016
2015
2.96
2.59
3.92
4.00
2.96 hours
+113.0%
1. Per 1 million man hours worked
Nostrum Oil & Gas PLC Annual Report 2019
35
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES SUSTAINABLE ACCOUNTABILITY/CONTINUED
Health and safety
The wellbeing of employees and contractors
is of extreme importance to Nostrum, and we
promote an active health and safety culture
within the Company. QHSE training and
procedures are rigorous and are promoted
to an international standard.
HSE Leadership, Communication
and Awareness
HSE Golden Rules
In September 2019, a ‘Golden Rules’ safety
campaign was rolled out within all Company
facilities and distributed to all contractors.
These Golden Rules state the main safety
requirements of the Company and are
based on international best practice within
the Oil & Gas Industry and a review of
Company incident statistics. Examples
of the campaign initiatives include:
• A pop-up window appearing daily on
login screens with a notification from
the QHSE department
• HSE alerts emailed from QHSE Info
Mailbox to all employees to communicate
lessons learned following 2019 safety
incidents
• Toolbox meetings conducted regularly on
fieldsite to communicate safety initiatives
• Monthly QHSE reports issued to
communicate HSE performance and
promote accountability
There are no formal agreements with trade
unions regarding health and safety issues.
HSE Observation Cards
An awards ceremony was conducted in
September 2019 to recognise employees
who raised Hazard Observation Cards in
2019. Hazard Identification Cards allow
every employee to report unsafe conditions
observed in the workplace, or comment
upon any safe or unsafe personnel
behaviour and to make suggestions on
HSE improvement. All employees are
encouraged to actively participate in
hazard identification activity and fill
the Hazard Observation Cards.
Process Safety
In 2019, there were no Tier 1 or Tier 2
process safety events registered at
Nostrum’s production facilities. Tier 1
and 2 safety incidents are a loss of primary
containment with the greatest consequence
as defined by the American Petroleum
Institute. It is an unplanned or uncontrolled
release of any material, including non-toxic
and non-flammable materials from a process
that results in one or more of the
consequences listed below:
• an employee, contractor or subcontractor
incurs days away from work, injury
and/or fatality;
• a hospital admission and/or fatality of
a third party;
• an officially declared community
evacuation or community shelter in place
including precautionary community
evacuation or community shelter-in-place;
• fire or explosion damage greater than or
equal to US$100,000 of direct cost.
Progress against 2019 targets
The Group has activities that potentially
involve a high number of injuries. We are
pleased to report that in 2019, there were
no lost time incidents relating to Nostrum
Group employees, however contractors
were responsible for eight LTIs during the
year, all of which were in the Republic of
Kazakhstan and only involved men. As
per our health and safety procedures, all
incidents were investigated, their causes
identified and corrective action plans
developed. The accident severity rate,
the fatality frequency rate, the rate of
occupational diseases, the lost day rate,
the absenteeism rate, the number of on-job
accidents with fatalities that occurred in
the listed company were not recorded
separately from LTIs and TRIs.
In addition, we sought to improve contractor
safety management.
An updated contractor management
framework is being developed with
implementation expected to be in 2020.
In 2019, Nostrum developed HSE pre-
qualification criteria and HSE requirements
for low and high risk activities. In 2019, four
contractor audits and nine management
system audits were performed, demonstrating
an ongoing commitment to improved
contractor management. In addition, a
Contractor HSE Forum was conducted
in October 2019, which allowed the
management teams of contractor
companies to review and discuss issues.
The main areas for improvement identified
for 2020 are:
• Supervisor HSE Competence
• Contractor HSE Performance
Management
• Determination and provision of resources
needed for the operational HSE control
• HSE Leadership
36
Nostrum Oil & Gas PLC Annual Report 2019
The selection of the applicable maintenance
strategy type versus the equipment criticality
is identified based on the impact that
equipment failure has on related risk. This
will enable maintenance to be prioritised in
the event of shortage of resources and will
allow reporting against critical systems.
Safety Critical Elements are devices,
equipment or systems that are required to
ensure process conditions are maintained
within safe operating limits, or the purpose
of which is to prevent malfunctioning.
Incident Investigation
In 2019, Nostrum looked to improve
incident investigation processes with
a greater focus on leadership and
collaboration between the HSE department
and responsible business areas. Incident
levels were revised so that incidents are
now placed on a scale of 1-5, depending
on severity, and responsibility to lead an
investigation into the incident will be based
on this number. The most serious incidents
will be investigated by the CEO and COO,
and those which are less severe will be
handled by the field operations director
or head of unit.
To increase awareness of QHSE generally,
training was held by the British Institute
of Occupational Health & Safety for 35
supervisors. A key course module was
Incident Investigation which reinforced the
importance of proper incident investigation
and international QHSE practices.
2020 initiatives
• To participate in CDP 2020
• Implement a Contractor Safety
Management process with a periodical
tracking of contractors’ HSE performance;
• Provide a structured and consistent
approach considering HSE requirements
in the selection process of potential
contractors;
• Organise in-house HSE training
and examination process in order to
improve HSE competence of NOG and
contractor personnel performing safety
critical activities.
Examples include:
• Lock out/tag out;
• Permit to work process;
• Working on heights;
• Confined space entry.
Hazard Observation
Procedure
A hazard observation procedure was
developed and implemented in 2019 to
define the process of hazard identification
in the workplace. Employees and
contractors are encouraged to fill in
Hazard Observation Cards to report
unsafe conditions observed in the
workplace, any safe or unsafe behaviours
of personnel performing duties and to
make suggestions on HSE improvement.
During 2019, 216 of these cards were
raised, allowing the Company to take
corrective actions in cases of unsafe
behaviour and to implement HSE
improvements. The programme
was highly successful and staff
were incentivised to participate.
Field Director Ivan Vukov supported
this programme and personally raised
many Hazard Observation cards in
order to immediately address issues
and improve workplace safety. Mr Vukov
demonstrated safety leadership by
improving safety culture and promoting
a ‘no-fault’ approach to hazard
identification and the reporting process.
Talgat Zharmukhambetov, an engineer
from the Power Generation Department,
personally raised 22 Hazard Observation
cards in 2019. The Drilling department
and Drilling Contractors also used the
card system for hazard reporting, which
further demonstrated the operational
support for the system, and Damirzhan
Urumbaev, a shift supervisor at the Oil
Treatment Unit, raised 21 Hazard
Observation Cards in 2019.
Nostrum Oil & Gas PLC Annual Report 2019
37
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES 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
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. We strive
to be an attractive place to work with an
inclusive environment that celebrates diversity.
Nostrum is committed to improving the
gender balance at all levels of the Company,
and in 2018 & 2019 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, 22% of Group
employees are female. In the UK, 47%
of employees are female.
The Board recognises the importance
of continued improvement in this area,
and is committed to giving due regard
to the 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
2019, and gender considerations will factor
into this. Currently 22% of employees at
department head level are female.
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 30% of Group
recruitment in 2019 was female. There were
no recorded discrimination incidents with
any of the Group’s employees in 2019.
For more information on how the Equality
and Diversity Policy was implemented at
Board level in 2019, please see page 69.
In 2019, 16 employees (1 male and 15
females took maternity/paternity leave
and 19 employees (1 male and 18 females)
returned from maternity/paternity leave.
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 96% of Group employees
engaged locally. We employed a total of
668 staff from more than 17 countries,
broken down as follows:
• Uralsk: 483 males, 159 females;
• St. Petersburg: 4 males, 3 females;
• London: 10 males, 5 females;
• Brussels: 1 male, 1 female;
• Almaty: 0 males, 2 females.
We offer all staff members competitive
benefits and remuneration packages in
compliance with all regulatory bodies,
guidelines and requirements, which (to the
extent applicable) are also applied to those
hired as temporary or part-time employees.
In 2019 the average monthly salary of locally
engaged employees increased by 12% in KZT.
In an effort to promote gender equality,
we will now also monitor gender pay
discrepancies. In 2019, the average Group
employee salary was 22% higher for males,
however the median employee salary was
3% higher for females. This data was not
recorded by category and workplace.
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.
There was no advanced training in addition
to that required under the PSA and the
other subsoil use agreements. There was
no assistance for employees who stopped
working as a result of retirement or
termination of employment
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.
In 2019, Nostrum supported 722 employees
to benefit from education and training
programmes. Our total Group training
costs in 2019 were US$2,068,225, and
the total number of training days in 2019
was 7,264 days.
Training was undertaken by operational
teams, department heads, specialist
engineers and other technicians at different
levels across the organisation. The average
number of training hours per employee by
gender and category was not recorded.
Hiring and staff turnover
More than 200 employees were released
in 2019. This was the main cause of staff
turnover. The number of employees hired
in 2019 was 77 (11.5%) of which 30% were
female and 70% male.
Workforce representation
In 2018, the Company put collective
agreements in place to provide for
workforce representation and, in 2019,
the Company designated a non-executive
director, Sir Christopher Codrington, to
serve as its liaison for engagement with
the workforce.
38
Nostrum Oil & Gas PLC Annual Report 2019
The Board of Directors strives to adopt
best practices in corporate governance,
including engagement with the Group’s
workforce. In particular, the Board wishes
to understand the views of the Group’s
workforce and to take such views into
consideration in Board discussions and
decision making. Communication between
the workforce and the Board is often
referred to as the ‘employee voice’, and it
is hoped that a wide selection of views from
the workforce can be gathered through a
range of formal and informal channels.
Such channels are intended to help the
workforce share ideas and concerns with
senior management and the Board. It
provides useful feedback about business
practices from those delivering them,
and can help empower colleagues. The
Board encourages individuals to raise any
concerns they may have. Doing so acts as an
early warning system for actual or potential
problems and helps to manage risk. The
Board actively listens to workforce concerns
and subsequently provides feedback on
how the matter raised has been considered,
including any action taken. The Board
emphasised that the workforce felt safe
to raise concerns.
There is no requirement under applicable
laws for the Company to notify its employees
of significant changes relating to its activities.
Nostrum Code of Conduct
Nostrum is committed to maintaining
a Group-wide culture that recognises
international standards of human rights.
Human Rights Policy
In 2019, the Company developed and
implemented a Human Rights Policy which
reflects the Company’s desire to comply
with industry best practice. There was no
training on this policy in 2019.
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
its employees. These principles include
provisions relating to human rights and
diversity in the workplace, inside dealing
and inside 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.
Modern Slavery Act
There are no divisions of the Group
(or its vendors) believed to have significant
risk of child/forced labour/hazardous work
performance by young employees.
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.
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.
NOG Group Age Diversity
5%
10%
44%
16%
2019
25%
<30
30<39
40<49
50<59
60 and more
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
Diversity Action Plan
The aim is to set up KPIs for HR
on improving diversity at all levels.
In terms of diversity statistics, we would
like to stand out by improving female
representation across all levels. At the end
of 2019, the company was represented by
78% male & 22% female employees. We
are targeting 75% male & 25% female
split by the end of 2022.
The improvement initiatives are
the following:
• Establishing gender diversity as
a strategic business focus;
• Consult experts to build diversity
programs;
• conduct a gender audit that evaluates
how gender equality is incorporated
into policies, procedures, budgets, etc;
• Identify an internal pool of female
talent. This has already started
with our “succession planning
identification programme”;
• Support recruitment that provides
equal opportunities for men
and women;
• Arrange gender pay gap analysis to
identify main areas for improvement.
Nostrum Oil & Gas PLC Annual Report 2019
39
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES SUSTAINABLE ACCOUNTABILITY/CONTINUED
Social Responsibility
Nostrum is a proud community partner and strives
to foster a culture of openness and engagement.
We are pleased to be able to offer social and
financial support to promote the well being of
local residents.
2019 key initiatives
We support our local communities through
financing social infrastructure and community
projects. In 2019, key initiatives included:
• USD$118,416 funding of 20 regional
secondary schools to purchase
equipment and furniture. This included
the purchasing of a school bus for the
Beles District rural secondary school.
• Sponsoring of repairs for schools in
Yanvartsevo and Sulukol villages.
• Support of the Zelenovkiy area
biathlon team through the purchase
of sports equipment.
Additionally, during 2019, we supported
22 local individuals and public associations.
These included:
• Support for festive events in the
communities of Yanvartsevo, Beles and
Sulukol, including an event organised by
a disability support group.
• Sponsorship of a Beles school student
to participate in an international karate
competition where he won a silver medal.
• Support for artistic performances,
including a local singing contest
and photography exhibition.
• Sponsorship of the Condensate
Kazakhstan International
Badminton Series.
• Funding of medical treatment for
local individuals.
• Improvements to community
infrastructure, including street lighting,
water and gas supply.
• Material assistance to veterans of the
Second World War on the Victory day
and restoration of the alley of oilmen
on the 120th anniversary of the oil and
gas industry of Kazakhstan.
• Summer camp sponsorship for children
affected by emergency in the city of Arys.
Nostrum also provides support on a
continuing or needs basis, such as special
machinery in emergency situations in rural
districts on occasions of extreme snow or
infrastructure accidents, and providing
transport for rural children to participate
in excursions to historical places within
the region.
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 requirements
Environmental matters
Employees
Policies and standards which govern
our approach
• Annual environmental objectives
• Liquidation fund contribution
Information necessary to understand our business
and its impact, policy due diligence and outcomes
Environment, pages 42-43
Communities and social review, pages 40-41
• Group Code of Conduct and Human Rights
• Whistleblowing policy
• Health and Safety policy
Our People, pages 38-39
Health and safety, pages 36-37
Total Recordable Injury Frequency, page 35
Respect for
human rights
• Modern Slavery Statement
• Equality and Diversity Policy
Our people, pages 38-39
Social matters
• Sponsorship of community events
Communities and social review, pages 40-41
Anti-corruption
and anti-bribery
• 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
Communities and social review, pages 40-41
Our Governance Framework, page 66
Principal risks and uncertainties, pages 46-49
Performance review, pages 26-32
Business model, pages 14-15
Key performance indicators, page 23
Our strategic priorities, page 13
40
Nostrum Oil & Gas PLC Annual Report 2019
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 2019, a total of US$42,883,995 was
paid to governments by Nostrum and its
subsidiary undertakings. We will report on
2020 payments to governments in the first
half of 2021. For more details, please see
the Governance page of our website.
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
liquidation funds of US$23 million to
eliminate the consequences of operating
activities, namely the conservation and
liquidation of drilled wells and the elimination
of other facilities. These projects will
subsequently be approved by the Company,
the local community, and government.
At the end of 2019, US$7.6 million was held
on restricted cash accounts as liquidation
fund deposits (2018: US$7.02 million).
Anti-corruption
and bribery policy
For more information on the Group’s
Anti-corruption and bribery policy please,
see page 70.
Spend with suppliers
We are committed to partnering with local
companies, and in 2019 we spent 62%
of our supplier budget with Kazakh
national suppliers.
Labour Practices
The total number of complaints filed
against the Group for violation of the labour
practices was one, which was decided in
favour of the employee. The details of the
complaints system existing in the Group are
set out on page 61.
Ongoing support of emergency
machinery in rural districts
Kazakhstan experienced a very cold
winter during 2018-2019 and, in a short
period of time, precipitation exceeded
the annual average. As a result, almost all
the settlements in the Yanvartsevo rural
district and the Sulukol rural districts close
to our field site were cut off from regional
roads. Local stores were running out
of food provisions and governmental
snow-cleaning equipment could not
cope with demand to clear main roads,
let alone inter-village roads. Nostrum
provided assistance to nearby villages,
despite also being affected by these
conditions at our field site. Company
equipment was used to clear snow
blockages on roads to Sulukol,
Yanvartsevo, Kirsanovo, and Chinarevo
settlements and other villages. Later, with
the onset of spring, we again helped by
providing equipment for the removal
of melt water to prevent flooding of
residential and administrative premises.
In total, eight units of special machinery
were deployed and over 480 hours of
assistance was provided.
We support our local communities through financing social infrastructure and
community projects.
Liquidation fund
contribution (US$)
605 834
683 026
357 806
598 798
Spend with suppliers (US$m)
2016
2017
2018
2019
176
42
136
214
60
150
63
46
130
39 41
63
46
National
International suppliers registered in country
354
417
258
210
41
Nostrum Oil & Gas PLC Annual Report 2019
2016
2017
2018
2019
International
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES SUSTAINABLE ACCOUNTABILITY/CONTINUED
Environment
Nostrum is focused on being a responsible
operator in order to minimise as far as possible
the Company’s impact on the natural environment.
We abide by strict international environmental
protection legislation and are actively working
on GHG emission reduction initiatives.
Update on CDP
In 2019, our main environmental objectives
included participation 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 continue to focus on greenhouse
gas (GHG) emission reduction strategies.
Our CDP response was independently
assessed, and we are pleased to note
that Nostrum received a ‘C’ grade. We are
pleased with this scoring in our first year, as
it demonstrates the policies and procedures
we have developed over recent years are
positioning the Company to deal with the
issue of climate change now and into the
future. We will continue to engage with the
CDP initiative in order to maintain an open
dialogue, both internally and externally, on
this important issue.
Compliance with legislation
Nostrum engages an independent auditor
to measure and evaluate our environmental
impact. In 2019, 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 2019
AMEC report showed no non-compliance
with Kazakh legislation or any significant
environmental findings. The main conclusions
drawn from AMEC’s 2019 audit were
as follows:
• HSE management system is in place
and functional;
• Good behavioural safety is reinforced
by strong leadership and personnel
with good safety processes; and
• The Company has to focus on training for
management of change process, permit
to work system, risk assessment in order
to improve general HSE performance.
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 2019, 100% 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. 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
participated 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.
Additional quota
According to the 2018-2020 National Plan,
627,174 tonnes of CO2 was granted to
Nostrum. In 2019, the ROK Ministry of
Ecology, Geology and Natural Resources
issued an additional quote for 103,650
tonnes of CO2 for the commissioned facility,
which was not originally included in the
National Plan. At the end of 2019, the
balance of the GHG emission quota
was 272,930 tonnes.
Energy efficiency audit
Following an Energy efficiency audit
conducted in 2019, the following energy
saving measures were identified:
• Use of exhaust gas heat to hot oil heating
of lines No.1 and No.2 at GTU 1&2;
• Use of exhaust gas to heat hot oils
for amine regeneration at GTU1&2;
• Installation of control box to water
heating boilers;
• Heat insulation of pipelines;
• Construction of power line 110 kV.
42
Nostrum Oil & Gas PLC Annual Report 2019
Table 1: Scope 1 GHG emissions subdivided by gas type (tCO2e)
Carbon dioxide
Methane
Nitrious oxide
Hydroflurocarbons
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
2017
242,275.6
10,723.4
1,305.4
27.6
254,331.9
2018
244,379.2
8,436.3
1,303.5
36.6
254,155.6
2019
213,520
8,429
1,034
24
223,008
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)
2015
2016
2017
2018
2019
Stationary
combustion
Mobile
combustion
Fugitive sources
Total
205,701.9
195,576.1
243,001.1
245,362.4
214,536
1,498.2
15,346.1
222,546.2
757.9
11,015.6
207,349.6
434.9
10,896.0
254,332.0
104.9
8,535.8
254,003.2
89
8,359
223,008
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 the 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)
2015
2016
2017
2018
2019
Direct energy
(Scope 1)
Indirect energy
(Scope 2)
Total
222,546
207,350
254,332
254,156
223,008
5,482
228,029
2,263
209,613
640
254,972
559
254,714.8
297
223,305
Emissions intensity ratio
Tonnes of CO2 per tonne of output is a recommended intensity ratio for the oil and gas
sector, as per Appendix F of the Defra Environmental Reporting Guidelines (2013). Taking
into account the variety of products of Nostrum Oil & Gas – crude oil, stabilised condensate,
LPG and dry gas – the chosen intensity ratio is expressed in metric tonnes of CO2e (mtCO2e)
per tonne of oil equivalent (mmboe).
Table 4 shows intensity ratios for total (Scope 1 and Scope 2) emissions in the period
2014-2018.
Table 4: Emissions intensity ratios for total GHG emissions
Production, toe
tCO2/toe
Production,
mmboe
tCO2/mmboe
2015
2,152,421
0.106
2016
2,156,171
0.097
2017
2,088,917
0.122
2018
1,878,026
0.136
2019
1,520,928
0.1
14.743
15,467
14.768
14,193
14.300
17,820
12.9
19,801.8
10
21,434
Future GHG reduction initiatives:
• Optimisation of facilities operation,
operations and maintenance schedule
adjustment in function of reduced inlet
feed, reduction of fuel gas consumption
and flare volumes depending on GTU
operating scenarios in 2020
• Emission tracking improvement –
creation of monthly tracking system,
about 5-10% reduction,
• Use of power from GTPP at
26 megawatts while wells drilling
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 2019 was to minimise the
impact of our operations on climate change.
This remains a key goal for Nostrum. 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 assess more rigorously the impact of
climate change on our business in the near
future, including through portfolio resilience
testing. Climate change remains on our risk
register for 2020.
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 2019 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.
No further ecological data is available for
publication. Consequently, additional
disclosures in relation to materials used,
products and services, waste management,
water consumption, energy consumption
and energy efficiency, emergency and
intermittent pollution episodes, wastewater
discharges, atmospheric emissions of
greenhouse gases and other pollutants,
environmental protection and biodiversity
are not possible. There were no fines or
other sanctions against the Group as
regards compliance with environmental
requirements in 2019.
Nostrum Oil & Gas PLC Annual Report 2019
43
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
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 2019, 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.
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 receives appropriate information
for managing such risks. Management is
responsible for monitoring that systems of
risk management and internal controls are
in place to effectively manage and monitor
energy risks and other ESG matters. More
elaborate disclosure on the established
policies and procedures in these areas can
be found in the Sustainable accountability
section from page 34.
Changes from prior year
risk assessment
In 2019, the principal risks and uncertainties
managed and monitored by the Board,
and senior management mostly remained
the same as in 2018, and the related risk
assessments did not change significantly.
44
Nostrum Oil & Gas PLC Annual Report 2019
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 2019
45
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES PRINCIPAL RISKS AND UNCERTAINTIES
Principal risks and
uncertainties
Description of risk
STRATEGIC RISKS
Risk management
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 its products are based
directly or indirectly on international 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. Recent OPEC actions have shown this to be the case,
which in combination with the suppressed demand for oil and gas
as a result of measures to control the spread of COVID-19, has
resulted in a significant fall in the Brent price since the beginning of
the year. Further volatility could be caused by the ongoing impact
that COVID-19 is having on the demand for oil and gas globally.
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 for instance in the event of natural disaster, facilities
damage from accidents, crisis and other political influences as
further described below. Diversification of its sources of feedstock
is considered by the Group as a way to reduce 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 sources
of feedstock are subject to customary risk related to counter-parties
delay and non-completion 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 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.
The Group’s financial policies are designed for the group to
withstand a period of prolonged low oil prices. Also, senior
management constantly monitors the Group’s exposure to foreign
currency exchange rate changes and plans for necessary measures.
Given the uncertainties caused by a low oil price environment, the
Group is taking prudent, mitigating actions that can be executed in
the necessary time frame and which will protect liquidity. These
include cancelling uncommitted capital expenditures over the
period without having an impact on forecast production in the
going concern period of assessment and identifying further
reductions in operating costs and general and administration costs.
The Group also announced on March 31, 2020 that it will now seek
to engage with its bondholders regarding a possible restructuring
of the Group’s outstanding bonds. The Group will require
amendment to the payment terms within the bond agreements to
take effect within the going concern period. The Group is in the
process of seeking a financial advisor to commence negotiations
with bondholders. Whilst it is believed that a consensual agreement
will be reached with bondholders and shareholders the outcome of
the discussions is uncertain.
In December 2018, the Group announced mechanical completion
of GTU3 and the start of the commissioning process. In October
2019, the Group announced completion of technical commissioning
of GTU3.
Senior management and the Board continuously monitor the
timing, scope and performance of the drilling programme taking
into account 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.
A KPI in place to monitor risk management in Strategic
development initiatives, includes:
• Concluded commercial processing contracts such as those
signed with Ural Oil & Gas in 2018. See Strategy section on p.19.
46
Nostrum Oil & Gas PLC Annual Report 2019
Description of risk
OPERATIONAL RISKS
Risk management
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.
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. Additionally, as witnessed by recent
developments, the group is exposed to pandemic diseases,
such as the COVID-19 outbreak.
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 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 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.
KPIs in place to monitor risk management in Operations include:
• Finalised construction of potential second Low Pressure System
to prolong life of ageing gas-condensate wells; and
• Maximised uptime of existing wells and production facilities
(See Strategy section on p.19)
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.
The Group has been further stepping up its efforts by forming
a Health, Safety, Environment and Communities Committee.
Staff are activity encouraged to submit Hazard Observation Cards.
The Group efforts are aimed to be in line with its peers.
KPIs in place to monitor risk management in QHSE include:
• Lost time injury frequency; and
• Total recordable injury frequency.
(See more on KPI’s on p.22)
Nostrum Oil & Gas PLC Annual Report 2019
47
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES PRINCIPAL RISKS AND UNCERTAINTIES/CONTINUED
Principal risks and uncertainties
continued
Description of risk
COMPLIANCE RISKS
Risk management
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, including reputational, litigation and
government sanction 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.
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. The
recent actions of OPEC highlight these risks, which has contributed
to significant commodity price volatility in the post-balance sheet
period. The actions of OPEC led to a Brent oil price fall of over 50%
in a week. This kind of movement in prices can result in the Group’s
liquidity position becoming more strained than the severe but
plausible downside scenario in the Going Concern assessment.
This makes forecasting subject to the risk that it may prove to be
inaccurate in the future.
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 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, a Whistle-Blowing Policy and a Human Rights
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.
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.
KPIs in place to monitor risk management in Finance include:
• G&A below US$20 million; and
• Operating costs below US$50 million
(See more on KPI’s on p.22)
48
Nostrum Oil & Gas PLC Annual Report 2019
Description of risk
Risk management
FINANCIAL RISKS CONTINUED
Refinancing risk
The Group has US$1.125bn of debt
outstanding. US$725m of that matures
in July 2022. The ability of the Group to
refinance represents a material uncertainty.
There is a significant risk that the Group will
not be able to refinance the bonds and any
future repayments will be subject to
negotiations with bondholders.
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;
• Risks of higher fuel prices; and
• Risks of disruptions to supply chains.
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:
• Global pandemics, such as COVID-19
• 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.
Execution of the Group’s strategy is the premier focus of the Board and Senior
Management Team. Full utilization of build treatment capacities will significantly improve
the Group’s position.
The Board monitors progress on the KPI to concluded commercial processing contracts
such as the one signed with Ural Oil & Gas in 2018. (See Strategy section on p.19.)
Additionally, the Board continues to monitor the Group’s ability to refinance. The
Company will seek to engage with its bondholders regarding a possible restructuring
of the Company’s outstanding bonds.
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.
The Group is currently adapting to the changing regulations surrounding COVID-19
and will have a policy to deal with future pandemics once the current pandemic is over.
The Group is complying with all Government recommendations in the Countries where it
has offices and employees. The Board monitors the further development of the business
continuity plan and its implementation to the extent required by the circumstances.
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.
As part of the Risk Management function, a cyber security capability is being developed
drawing on the knowledge and experience of the existing ICT team.
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.
Nostrum Oil & Gas PLC Annual Report 2019
49
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES VIABILITY STATEMENT
Viability statement
The Group’s viability assessment is built through
integration of the principal risks and
uncertainties (described on pages 46-49 into a
financial model based on the elements of
corporate planning and modelling process,
which includes:
• Medium-term development planning
(described on pages 18-19) based on
three-year financial projections, using the
Ryder Scott Proven Developed Reserves for
forecast production. No third party volumes
have been included in the Viability
assessment as there is currently no certainty
they will arrive prior to the end of 2022; and
• 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 with
quarterly forecasts, which are monitored by
senior management and the Board.
• This viability assessment also takes into
account the requirements of principle N
provision 31 of the 2018 Code.
The Board highlights that the Viability
assessment shows significant risks to the
Group’s ability to continue in operations and
meet its liabilities due in 2022. The Group will
require amendment to the payment terms
within the bond agreements to take effect within
the going concern period. Whilst it is believed
that a consensual agreement will be reached
with bondholders and shareholders, the
outcome of the discussions is uncertain.
The Board also highlights that the Going
Concern statement on page 54 indicates
material uncertainty that may cast significant
doubt on the Group’s ability to continue in
operation for a period of not less than 12
months from the date of this report. The
material uncertainty arise from:
• The forecast cash flow of the Group over the
next 12 months from the date of approval of
the financial statements depends on the
duration of the low oil price environment and
the Group’s ability to implement the
mitigating actions within the Group’s control;
and
• The Group’s ability to successfully engage
with its bondholders and shareholders
regarding a restructuring of the Group’s
outstanding bond within the next 12 months.
the near-term reduction in the reserves
following the 2019 year end reserve audit. 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.); and
• 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 the period where the Group looks to
work on implementing its major strategic
objectives (described on pages 18-19).
For the purpose of our viability assessment
a three-year financial model was used as
a base-case scenario. The production
assumptions used in this scenario are more
conservative than those used in the impairment
testing process as the proven developed
producing reserves were used to take in
to account the risks to funding the drilling
programme under the proven and probable
production profiles. The price assumption used
for the three-year period of assessment reflects
post year end market conditions. A significant
difference with the impairment model is the
inclusion of the US$725m bond repayment in
2022 and the associated financing costs in the
periods prior to repayment. Considering the
above, the following conclusions can be
drawn from the viability assessment:
• The Group is extremely exposed in the
near term to volatility in the price of its sales
products. A fall of more than US$5 in oil
price from the price curve assumed of US$45
in 2020, US$50 in 2021 and US$55 in 2022
can result in the Group being unable to
meets its operating and interest costs in
2021 and could result in a further reduction
of reserves due to the inability to fund the
proposed drilling programme in the 31st
December 2019 Ryder Scott reserve report.
Under all reasonable assumptions the Group is
unable to meet its US$725m debt liability
coming due in July 2022.
Considering the uncertainties inherent to the
Group’s operations as well as the medium-term
development planning mentioned above, the
Board concluded that a viability assessment
over a three-year period provides a more robust
and realistic evaluation of Group’s future
performance. Importantly, the three-year period
takes in to account the significant refinancing risk
the group has in 2022, the operational changes
the Group is implementing and the impact of
For the purpose of sensitivity testing, several
principal risks and uncertainties were selected
(from those described on pages 46-49), 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 already higher than the actual
market price of those products when the viability
assessment was carried out. As a result, further
scenarios were aimed at analysing the sensitivity to
a further US$5 reduction in the oil prices and gas
prices over the period of assessment;
• Development of proved developed producing
reserves: this scenario reflected results based on the
assumption of a 10% reduction in production and
respectively sales volumes over the three-year
period so further reducing the Proven Developed
Producing reserves by 10%; and
• Severe but plausible scenario: a combination of a
US$5 reduction in the oil and gas prices and a 10%
reduction in the proven developed producing
reserves.
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 significant 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 46-49). The directors also note that the
significant risk related to the Group’s ability to meet
its liabilities, including the repayment of its Notes due
in 2022.
Based on these assessments and other matters
considered by the Board during the year, the Board
cannot reach the conclusion that there
is 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 2022.
The Board therefore highlights that the Viability
assessment shows significant risks to the Group’s
ability to continue in operations and repay its
liabilities in 2022.
This strategic report is approved by the Board.
Martin Cocker
Chief Financial Officer
29 April 2020
Kaat Van Hecke
Chief Executive Officer
29 April 2020
50
Nostrum Oil & Gas PLC Annual Report 2019
FINANCIAL REVIEW
Financial review
Results of operations for the years ended 31 December 2019 and 2018
The table below sets forth the line items of the Group’s consolidated statement of comprehensive income for the years ended
31 December 2019 and 2018 in US Dollars and as a percentage of revenue.
For the year ended 31 December
In thousands of US dollars
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 gain/(loss), net
Loss on derivative financial instruments:
Interest income
Other income
Other expenses
Loss before income tax
Income tax benefit/(expense)
Loss for the year
Currency translation difference
Total comprehensive loss for the year
2019 % of revenue
100.0%
53.4%
46.6%
6.6%
14.2%
7.1%
420.5%
13.4%
0.2%
0.1%
0.0%
0.0%
2.2%
3.9%
417.0%
109.7%
307.3%
0.1%
307.2%
322,128
(172,002)
150,126
(21,399)
(45,875)
(22,886)
(1,354,651)
(43,047)
(584)
361
–
86
7,210
(12,490)
(1,343,149)
353,222
(989,927)
211
(989,716)
2018
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)
% of revenue
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%
General note
For the year ended 31 December 2019 (the “reporting period”) total comprehensive loss amounted to US$989.7 million, an increase
in loss by US$868.1 million from US$121.6 million total comprehensive loss for FY 2018. The loss is mainly driven by additional impairment
charge on property, plant and equipment and exploration and evaluation assets, which was offset by corresponding income tax benefit, as
well as lower operating and finance costs as well as an absence of losses on derivative financial instruments as compared to previous
comparative period. These are explained in more detail below.
Revenue
The Group’s revenue decreased by 17.4% to US$322.1 million for the reporting period (FY 2018: US$389.9 million). This is mainly
explained by the 7.1% decrease in the average Brent crude oil price from 71.7 US$/bbl during FY 2018 to 64.2 US$/bbl during the
reporting period, as well as slight decrease in the sales volumes as shown in the table below, which was primarily due to the decrease
in the volumes of production during the year ended 31 December 2019 as compared to FY2018.
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$190.3 million, US$95.1 million and US$9.3 million
respectively (FY 2018: US$258.9 million, US$80.5 million and US$11.9 million).
The Group’s revenue breakdown by products and sales volumes for the reporting period and FY 2018 is presented below:
In thousands of US dollars
Oil and gas condensate
Gas and LPG
Sulphur
Total revenue
Sales volumes (boe)
Average Brent crude oil price (US$/bbl)
For the year ended 31 December
2019
196,176
125,947
5
322,128
9,735,093
64.2
2018
267,815
122,112
–
389,927
10,773,266
71.7
Variance
(71,639)
3,835
5
(67,799)
(1,038,173)
Variance, %
(26.7)%
3.1%
–
(17.4)%
(9.6)%
The following table shows the Group’s revenue breakdown by export/domestic sales for the reporting period and FY 2018:
In thousands of US dollars
Revenue from export sales
Revenue from domestic sales
Total
Nostrum Oil & Gas PLC Annual Report 2019
For the year ended 31 December
2019
218,511
103,617
322,128
2018
296,034
93,893
389,927
Variance
(77,523)
9,724
(67,799)
Variance, %
(26.2)%
10.4%
(17.4)%
51
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
FINANCIAL REVIEW/CONTINUED
Financial review continued
Cost of sales
In thousands of US dollars
Depreciation, depletion and amortisation
Payroll and related taxes
Repair, maintenance and other services
Materials and supplies
Other transportation services
Well workover costs
Environmental levies
Change in stock
Other
Total
For the year ended 31 December
2019
136,776
18,465
14,242
4,481
2,129
1,766
167
(6,228)
204
172,002
2018
115,212
18,326
16,133
5,253
6,116
2,767
367
134
837
165,145
Variance
21,564
139
(1,891)
(772)
(3,987)
(1,001)
(200)
(6,362)
(633)
6,857
Variance, %
18.7%
0.8%
(11.7)%
(14.7)%
(65.2)%
(36.2)%
(54.5)%
(4747.8)%
(75.6)%
4.2%
Cost of sales increased by 4.2% to US$172.0 million for the reporting period (FY 2018: US$165.1 million). The increase is primarily
explained by increase in depreciation, depletion and amortisation, which was partially offset by the decrease in repair and maintenance
costs, other transportation services, well workover costs and change in stock. On a boe basis, cost of sales amounted to US$17.67 for the
reporting period increasing from US$15.33 FY 2018 and cost of sales net of depreciation per boe decreased by US$1.01, or 21.8%, to
US$3.62 (FY 2018: US$4.63).
Depreciation, depletion and amortisation increased by 18.7% to US$136.8 million for the reporting period (FY 2018: US$115.2 million).
Depreciation is calculated applying units of production method. Increase of depreciation in 2019 in comparison with prior period is a
consequence of: 1) the ratio change between the volumes produced and the proven developed reserves; 2) putting into operation GTU3
close to end of 2019; as well as 3) implementation of IFRS 16 effective from 1 January 2019, resulting in recognition of right-of-use assets,
and their respective depreciation during 2019, respectively this lead to the decrease in the other transportation costs.
Repair, maintenance and other services decreased by 11.7% to US$14.2 million for the reporting period (FY 2018: US$16.1 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 65.2% to US$2.1 million for the reporting period (FY 2018: US$6.1 million). Such a decrease
is explained by the recognition of the right-of-use assets under IFRS 16, and reflection of these costs in the form of depreciation of these
assets as mentioned above.
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
For the year ended 31 December
2019
10,162
4,966
2,026
1,256
722
617
276
170
133
1,071
21,399
2018
11,292
4,346
1,869
1,570
846
774
357
168
165
825
22,212
Variance
(1,130)
620
157
(314)
(124)
(157)
(81)
2
(32)
246
(813)
Variance, %
(10.0)%
14.3%
8.4%
(20.0)%
(14.7)%
(20.3)%
(22.7)%
1.2%
(19.4)%
29.8%
(3.7)%
General and administrative expenses decreased by 3.7% to US$21.4 million for the reporting period (FY 2018: US$22.2 million). This was
mainly driven by US$1.1 million or 10.0% decrease in payroll and related taxes from US$11.3 million during FY 2018 to US$10.2 million
during year ended 31 December 2019, as well as decrease in insurance fees, lease payments and business travel costs as a result of
implementation of cost optimization by the Group. This was partially offset by slight increase in professional services, depreciation
and amortisation and other.
52
Nostrum Oil & Gas PLC Annual Report 2019
Selling and transportation expenses
In thousands of US dollars
Transportation costs
Loading and storage costs
Marketing services
Depreciation
Payroll and related taxes
Other
Total
For the year ended 31 December
2019
12,405
11,783
10,554
4,489
2,293
4,351
45,875
2018
15,017
18,881
10,963
–
2,565
2,558
49,984
Variance
(2,612)
(7,098)
(409)
4,489
(272)
1,793
(4,109)
Variance, %
(17.4)%
(37.6)%
(3.7)%
–
(10.6)%
70.1%
(8.2)%
Selling and transportation expenses decreased by 8.2% to US$45.9 million for the reporting period (FY 2018: US$50.0 million), primarily
due to decrease in transportation and loading and storage costs as a result of changes to a more favourable delivery terms. Also part of
these costs are reflected as depreciation costs resulting from recognition of right-of-use assets for rented railway tank cars under IFRS 16,
which were previously included in transportation costs.
Taxes other than income tax
In thousands of US dollars
Royalties
Export customs duty
Government profit share
Other taxes
Total
For the year ended 31 December
2019
12,802
7,281
2,802
1
22,886
2018
15,155
11,233
3,277
37
29,702
Variance
(2,353)
(3,952)
(475)
(36)
(6,816)
Variance, %
(15.5)%
(35.2)%
(14.5)%
(97.3)%
(22.9)%
Royalties, which are calculated based on production and market prices for the different products, decreased by 15.5% to US$12.8 million
for the reporting period (FY 2018: US$15.2 million), which corresponds to related decrease in hydrocarbon sales.
Export customs duty on crude oil decreased by 35.2% to US$7.3 million for the reporting period (FY 2018: US$11.2 million), mainly owing
to the relative increase of export sales to CIS countries, which are not subject to export duties.
Government profit share decreased by 14.5% to US$2.8 million for the reporting period (FY 2018: US$3.3 million), which corresponds to
related decrease in hydrocarbon sales.
Impairment charge
As a result of the further reserves downgrade and respective reflection of the updated future production profiles in the impairment
model the Group recognized further non-cash impairment charge mainly on oil & gas assets and exploration & evaluation assets in the
amount of US$1,302.0 million and US$50.5 million, respectively (FY 2018: US$117.6 million on oil & gas assets and US$32.4 million on
goodwill). Further details of impairment testing and assumptions used are disclosed in the Note 4 to the consolidated financial statements
of the Group on pages 134-135.
Finance costs
In thousands of US dollars
Interest expense on borrowings
Transaction costs
Unwinding of discount on lease liabilities
Unwinding of discount on amounts due to Government of Kazakhstan
Unwinding of discount on abandonment and site restoration provision
Other finance costs
Total
For the year ended 31 December
2019
40,399
–
1,369
820
164
295
43,047
2018
41,143
6,648
134
845
399
214
49,383
Variance
(744)
(6,648)
1,235
(25)
(235)
81
(6,336)
Variance, %
(1.8)%
(100.0)%
921.6%
(3.0)%
(58.9)%
37.9%
(12.8)%
Finance costs decreased by 12.8% to US$43.0 million for the reporting period (FY 2018: US$49.4 million) mainly due to transactions costs
on bonds refinancing incurred in the prior period as well as higher interest capitalization rate, which was slightly offset by finance charges
under finance leases of US$1.4 million recognised in accordance with IFRS 16.
Other
There was no loss/gain on derivative financial instruments during the reporting period. During FY 2018 the loss on derivative
financial instruments amounted to US$12.4 million and related to fair value of the hedging contract covering oil sales. Based on the
contract the Group 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 was 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.
Nostrum Oil & Gas PLC Annual Report 2019
53
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
FINANCIAL REVIEW/CONTINUED
Financial review continued
Other expenses increased to US$12.5 million for the reporting period (FY 2018: US$8.5 million). Such a significant increase in other
expenses is explained by various non-recurring costs related to business development and compensations.
Income tax benefit amounted to US$353.2 million for the reporting period, a change of US$381.8 million as compared to prior year
(FY 2018: income tax expense of US$28.5 million). Such a significant change resulting in income tax benefit for the period was a
consequence of impairment charges recognized as of 31 December 2019 with respective derecognition of deferred tax liabilities.
Liquidity and capital resources
During the period under review, Nostrum’s principal sources of funds were cash from operations. 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 2018:
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 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
2019
121,753
196,837
(120,391)
(104,308)
49
93,940
2018
126,951
214,041
(172,021)
(47,009)
(209)
121,753
Net cash flow from operating activities was US$196.8 million for the reporting period (FY 2018: US$214.0 million) and was primarily
attributable to:
• loss before income tax for the reporting period of US$1,343.1 million (FY 2018: US$92.2 million), adjusted by a non-cash charge for
depreciation, depletion and amortisation of US$143.3 million (FY 2018: US$117.1 million), finance costs of US$43.0 million (FY 2018:
US$49.4 million), impairment charge of US$1,354.7 million (FY 2018: US$150.0million) and payment under derivatives of US$3.7 million
(FY 2018: US$8.6 million and a loss on derivatives of US$12.4 million).
• a US$12.6 million increase in working capital (FY 2018: US$4.0 million increase) primarily attributable to a decrease in prepayments
and other current assets of US$5.5 million (FY 2018: a decrease of US$7.7 million), an increase in trade payables of US$3.9 million
(FY 2018: an increase of US$3.2 million) and a decrease in trade receivables of US$4.5 million (FY 2018: an increase of US$1.2 million).
• income tax paid of US$5.5 million (FY 2018: US$9.1 million).
Net cash used in investing activities
Net cash used in investing activities for the reporting period was US$120.4 million (FY 2018: US$172.0 million) due primarily to costs
associated with the drilling of new wells of US$56.7million for the reporting period (FY 2018: US$87.5 million), and costs associated
with the third gas treatment unit of US$36.4 million for the reporting period (FY 2018: US$55.8 million).
Net cash used in financing activities
Net cash used in financing activities during the reporting period made up US$104.3 million, and was mainly represented by the payment
of US$86.0 million of the finance costs on the Group’s 2017 Notes and 2018 Notes and payment of US$14.9 million under lease
agreements recognized in accordance with IFRS 16. Net cash used in financing activities during FY 2018 amounted to US$47.0 million,
which was primarily attributable to the US$81.1 million of the finance costs paid on the Group’s Notes, which was offset by net proceeds
from issue of 2018 Notes in the amount of US$400 million and the early redemption of 2012 Notes and 2014 Notes totalling US$353.2
million, and payment of the fees and premium paid for the arrangement of these transactions in the amount of US$9.5 million.
Going concern
The Group monitors on an ongoing basis its liquidity position, near-term forecasts and key financial ratios to ensure that sufficient funds are
available to meet its commitments as they arise. In addition, on a quarterly basis the Group performs sensitivity tests of its liquidity position
for changes in crude oil price, production volumes and timing of completion of various ongoing projects. While looking for new opportunities
to fill the spare capacity of the Group’s infrastructure, the Directors are also focused on a range of actions aimed at improving the liquidity
outlook in the near-term. These include further cost optimization to reduce capital, operating and administrative expenditures.
The base-case scenario of the going concern model has been prepared using a US$45/bbl oil price assumption throughout 2020 and
2021. The base-case liquidity model shows that the Group will be able to operate as usual and have sufficient financial headroom for the
12 months from the date of approval of the Annual Report and Accounts.
As disclosed in Note 35 to the Financial Statements, subsequent to the year-end the price of oil collapsed following a disagreement
between OPEC+ countries on production levels compounded by the perceived lack of the future demand for oil caused by disruptions to
businesses and economic activity as a result of the novel coronavirus COVID-19 (‘COVID-19’). Whilst the OPEC+ countries, together with a
wider group of producers, have subsequently agreed to lower daily production levels, the continuing uncertainty over the future demand
for oil as a result of the continuing impact of COVID-19 is restricting the recovery of the oil price.
54
Nostrum Oil & Gas PLC Annual Report 2019
The Directors have also considered any additional risks of COVID-19. Oil and gas production has been classified as an essential business
in Kazakhstan and so operations are continuing. Contingency plans have been put in place both to protect the workforce and ensure that
there are sufficient personnel to continue operations. Therefore, the Directors have concluded that there is currently no other material impact
on the Group’s operations and liquidity at the time of publication of the report as a result of COVID-19. However, it is recognised that there is
uncertainty around future developments of this matter which may affect the Group’s ability to deliver the forecast production over 2020
and early 2021.
As a result of these uncertainties, we also ran a severe but plausible scenario at US$30/bbl oil price, reflecting current market conditions
observed subsequent to the year end for the entire period covered by the model. This represents a scenario in which production is as
forecast in the base case model but the post year end conditions continue for 12 months.
The results of the severe but plausible scenario showed that in the near-term the Group’s liquidity position is exposed to a further fall in oil
prices. Without mitigating actions, a sustained period of low oil prices at US$30/bbl would result in the Group being unable to cover its
cash operating and interest costs in 2021. The Group’s liquidity position is, therefore, exposed to events outside of the Group’s control.
Therefore, the Group announced on March 31, 2020 that it will now seek to engage with its bondholders regarding a possible
restructuring of the Group’s outstanding bonds. The Group is in the process of selecting a financial advisor. The Group will require
amendment in the short term to protect the liquidity of the Group within the going concern period and restructuring to ensure ongoing
viability. Whilst it is believed that a consensual agreement will be reached with bondholders and shareholders, the outcome of the
discussions is uncertain. In the event of sustained low oil prices envisaged in the plausible downside case, the company will require
amendment to the payment terms within the bond agreements to take effect within the going concern period.
The Group is also taking other, prudent mitigating actions that can be executed in the necessary time frame and which will protect
liquidity. These include cancelling uncommitted capital expenditures over the period without having an impact on forecast production
in the going concern period of assessment and identifying further reductions in operating costs and general & administrative costs.
Therefore, in forming an assessment on the Group’s ability to continue as a going concern, the Board has made significant
judgements about:
• The forecast cash flow of the Group over the next 12 months from the date of approval of the financial statements depends on the
duration of the low oil price environment and the Group’s ability to implement the mitigating actions within the Group’s control; and
• The Group’s ability to successfully engage with its bondholders and shareholders regarding a restructuring of the Group’s
outstanding bonds.
These represent material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern.
After careful consideration of these, 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. For these reasons, they continue to adopt the going
concern basis in preparing the consolidated financial statements. Accordingly, these financial statements do not include any adjustments
to the carrying amount or classification of assets and liabilities that would result if the Group were unable to continue as a going concern.
Commitments
In thousands of US dollars
Borrowings
Lease liabilities
Trade payables
Other current liabilities
Due to Government of Kazakhstan
Total
On demand
–
6,735
21,685
30,286
–
58,706
Less than
3 months
43,000
641
–
–
258
43,258
3-12 months
43,000
–
5,953
–
773
49,726
1-5 years
953,000
–
–
–
4,124
957,124
More than
5 years
414,000
–
–
–
6,443
420,443
Total
1,453,000
7,376
27,638
30,286
11,598
1,529,898
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$114.8 million (FY 2018: US$168.3 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 full
commissioning of a third unit in during 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.
Drilling
Drilling expenditures amounted to US$56.7 million for the reporting period (FY 2018: US$87.5 million). The drilling program has been
halted for 2020, while ways to mitigate the identified reservoir risks are being analysed.
Dividend policy
The Group currently pays no dividend and has not done so for the last three years, as the Board determined it was not in the Company’s
best interests to do so. This will be reviewed annually by the Board.
Nostrum Oil & Gas PLC Annual Report 2019
55
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES FINANCIAL REVIEW/CONTINUED
Five-year summary
In millions of US$ (unless mentioned otherwise)
EBITDA reconciliation
Loss before income tax
Add back
Finance costs
Impairment charge
Finance costs – reorganisation
Employee share options – fair value adjustment
Foreign exchange gain/(loss), net
Loss on derivative financial instrument
Interest income
Other expenses
Export customs duty¹
Other income
Depreciation, depletion and amortisation
Proceeds from derivative financial instruments²
Purchase of derivative financial instruments²
EBITDA
Operating costs reconciliation
Cost of sales
Adjusted for:
Depreciation, depletion and amortisation³
Lease costs⁴
Change in stock⁵
Royalties⁶
Government profit share⁶
Operating costs
G&A reconciliation
General and administrative expenses
Adjusted for:
Depreciation and amortisation
G&A
2019
2018
(1,343.1)
(92.2)
43.0
1,354.7
–
0.6
(0.4)
–
(0.1)
12.5
–
(7.2)
143.3
–
(3.7)
199.6
49.4
150.0
–
(1.3)
1.0
12.4
(0.5)
8.4
–
(4.4)
117.1
–
(8.6)
231.3
2017
26.0
59.8
–
–
(2.1)
0.7
6.7
(0.4)
22.0
–
(4.1)
123.0
–
–
231.6
2016
(65.5)
41.7
–
–
(0.1)
0.4
63.2
(0.5)
(1.8)
–
(2.2)
131.6
27.2
–
194.0
2015
72.3
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
172.0
165.1
177.2
182.2
186.6
(136.8)
3.0
6.2
–
–
44.4
21.4
(2.0)
19.4
(115.2)
–
(0.1)
–
–
49.8
22.2
(1.9)
20.3
(120.7)
–
(0.3)
–
–
56.3
33.3
(2.3)
31.0
(129.4)
–
(2.0)
–
–
50.7
34.8
(2.2)
32.6
(107.7)
–
3.6
(14.4)
(1.9)
66.3
44.2
(1.7)
42.6
1. In 2016, 2017, 2018 and 2019, Export customs duty is included within Profit/(loss) before income tax (presented within ‘taxes other than income tax’). In 2015, Export
customs duty is included within ‘other expenses’, therefore an adjustment is made to re-include Export customs duty within respective EBITDA.
2. 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.
3. Depreciation as it applies to operating assets only.
4. Starting from 2019 certain lease costs are recognized as the right-of-use assets under IFRS 16, and these relevant costs are reflected in the form of depreciation of
these assets. Hence for better comparability with previous periods respective lease costs are included in the reconciliation.
5. Due to materiality the change in stock was introduced in the opex reconciliation from 2019, and comparatives have been adjusted accordingly for
consistency purposes.
6. Prior to 2016, royalties and government profit share were reported within the cost of sales line.
56
Nostrum Oil & Gas PLC Annual Report 2019
In millions of US$ (unless mentioned otherwise)
2019
2018
2017
2016
2015
Net debt reconciliation
Long-term borrowings
Current portion of long-term borrowings
Less
Cash and cash equivalents
Net Debt
Net cash flows from operating activities
Net cash used in investing activities⁷
Net cash from/(used in) financing activities
EBITDA margin⁸
Equity/assets ratio %
Share price at end of period (US$)⁹
Shares outstanding ('000s)
Options outstanding ('000s)
Dividend per share (US$)
1,100.5
35.6
1,094.0
35.6
1,056.5
31.3
943.5
15.5
936.5
15.0
93.9
1,042.2
196.8
(120.4)
(104.3)
61.9%
(51.1)%
0.22
188,183
3,432
–
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
–
101.1
857.9
202.1
(200.3)
(66.3)
55.7%
32.8%
4.75
188,183
2,536
–
165.6
785.9
153.3
(245.3)
(115.9)
47.9%
35.4%
5.97
188,183
2,611
0.27
7. IFRS term based on indirect cash flow methodology.
8. EBIDTA margin is calculated as EBITDA divided by total revenue.
9. 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.
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 share. This metric is relevant as it allows
management to see the cost base of the company on a cash basis.
The Strategic Report, as set out from page 2-57, has been reviewed and approved by the Board of Directors and signed on its behalf by:
Martin Cocker
Chief Financial Officer
29 April 2020
Nostrum Oil & Gas PLC Annual Report 2019
57
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
EXECUTIVE CHAIRMAN’S OVERVIEW
Executive Chairman’s overview
The Board primarily
focused on strategy
and the ways in which it
could improve production
and reduce operational
expenditures in 2019.
Remuneration policy
A revised directors’ remuneration policy
was presented to shareholders for their
vote at our 2019 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 was
approved but the Board noted that there
was a significant minority vote against
approval of the directors’ remuneration
report (25.35%) and the directors’
remuneration policy (28.93%). In line
with the Code, the Company released
a statement on 28 August 2019 (a copy
of which is available on our website and
on the Public Register maintained by
the Investment Association) to explain
what steps it plans to take to consult with
shareholders. As explained in the statement,
the Board and the Remuneration Committee
continue to believe that the Company’s
directors’ remuneration policy is appropriate
and aligned with Nostrum’s strategy and
business needs but are nevertheless
committed to keeping the directors’
remuneration policy under review and to
continuing our engagement and dialogue
with the Company’s shareholders and
advisory bodies on these and other matters
and welcome any feedback. For further
information, please see the letter from the
Chairman of the Remuneration Committee
on pages 84-85.
Atul Gupta
Executive Chairman
29 April 2020
Dear shareholder,
2019 has been another difficult year for
the Company operationally, and saw the
Board spend a considerable amount of time
reviewing the Company’s strategy. In order
to try to address the extreme weakness in
the Company’s share price and bond price,
the Board launched the strategic review
process on 24 June 2019 whereby it notified
the market that it had engaged Goldman
Sachs to carry out a review of all strategic
options available to it in order to try to
maximise value for all the Company’s
stakeholders. However, the Company
announced on 31 March 2020 that it had
not received any firm proposals as part of
the strategic review and that it has decided
to end the process and seek to engage
with bondholders regarding a possible
restructuring of the Group’s outstanding debt.
Board changes
On 16 December 2019, the Company
mutually agreed with Kai-Uwe Kessel that he
would step down from the Board with effect
from the same date. Kai was succeeded by
Kaat Van Hecke on an interim basis until a
new permanent chief executive officer is
recruited. Kaat has served on the Board as
an Independent Non-Executive Director
since 31 December 2016. In addition,
effective 31 March 2020 Tom Richardson
resigned as a director of the Company and
was succeeded by Martin Cocker on an
interim basis until a new permanent chief
financial officer is recruited. Martin has served
on the Board as an Independent Non-
Executive Director since 16 November 2017.
I look forward to continuing to work with
all Board members as we carry on trying
to build the business and reviewing our
strategic goals.
Key priority tasks in 2019
The Board primarily focused on strategy and
the ways in which it could improve production
and reduce operational expenditures in
2019. The Board was also pleased to see
that technical commissioning of GTU3 was
completed in 2019.
In addition, the Board focused on
compliance with the new requirements of
the 2018 Corporate Governance Code and,
in particular, workforce engagement. Earlier
in 2019, Sir Christopher was appointed by
the Board as the non-executive director
that would lead the Board’s engagement
with Nostrum’s workforce as foreseen in
Provision 5 of the 2018 UK Corporate
Governance Code. More information on
the work Sir Christopher has carried out
in relation to workforce engagement can
be found on page 80.
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 44 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 2019
centred around five key themes identified
by directors. Those related to interaction
with senior management for decision-
making purposes, the development of
strategy and engagement with shareholders
and stakeholders, including the workforce,
succession planning for both executive and
non-executive directors, and diversity at
Board level and among senior management.
Further details can be found on page 70.
58
Nostrum Oil & Gas PLC Annual Report 2019
Section 2: Division of
Responsibilities
The chair leads the board and is responsible
for its overall effectiveness in directing
the company. They should demonstrate
objective judgement throughout their
tenure and promote a culture of openness
and debate. In addition, the chair facilitates
constructive board relations and the
effective contribution of all non-executive
directors, and ensures that directors receive
accurate, timely and clear information.
See page 66.
The board should include an appropriate
combination of executive and non-executive
(and, in particular, independent non-
executive) directors, such that no one
individual or small group of individuals
dominates the board’s decision-making.
There should be a clear division of
responsibilities between the leadership of
the board and the executive leadership of
the company’s business. See pages 66-67.
Non-executive directors should have
sufficient time to meet their board
responsibilities. They should provide
constructive challenge, strategic
guidance, offer specialist advice and hold
management to account. See page 66.
The board, supported by the company
secretary, should ensure that it has the
policies, processes, information, time
and resources it needs in order to function
effectively and efficiently. See pages 66-68.
Section 3: Composition,
succession and evaluation
Appointments to the board should be
subject to a formal, rigorous and transparent
procedure, and an effective succession plan
should be maintained for board and senior
management. Both appointments and
succession plans should be based on
merit and objective criteria and, within this
context, should promote diversity of gender,
social and ethnic backgrounds, cognitive
and personal strengths. See pages 67 and 70.
The board and its committees should have
a combination of skills, experience and
knowledge. Consideration should be given
to the length of service of the board as a
whole and membership regularly refreshed.
See page 68 and committee reports.
Annual evaluation of the board should
consider its composition, diversity and
how effectively members work together
to achieve objectives. Individual evaluation
should demonstrate whether each director
continues to contribute effectively. See
page 70.
Section 4: Audit, risk and
internal control
The board should establish formal and
transparent policies and procedures to
ensure the independence and effectiveness
of internal and external audit functions, and
satisfy itself on the integrity of financial and
narrative statements. See pages 72-79.
The board should present a fair, balanced
and understandable assessment of the
company’s position and prospects.
See page 50.
The board should establish procedures to
manage risk, oversee the internal control
framework, and determine the nature and
extent of the principal risks the company
is willing to take in order to achieve its
long-term objectives. See page 44.
Section 5: Remuneration
Remuneration policies and practices
should be designed to support strategy
and promote long-term sustainable success.
Executive remuneration should be aligned
to company purpose and values, and be
clearly linked to the successful delivery
of the company’s long-term strategy.
See pages 84-94.
A formal and transparent procedure
for developing policy on executive
remuneration and determining director
and senior management remuneration
should be established. No director
should be involved in deciding their own
remuneration outcome. See pages 95-103.
Directors should exercise independent
judgement and discretion when authorising
remuneration outcomes, taking account of
company and individual performance, and
wider circumstances. See pages 84-94.
Compliance with the Code
The UK Corporate Governance Code
issued by the Financial Reporting Council
in July 2018 sets out the governance
principles and provisions that applied
to the Company during 2019. A copy
of the Code is available from the
Financial Reporting Council’s website at
www.frc.org.uk. The aim of the corporate
governance report is to demonstrate
how the principles of the Code have
been considered and applied by the
Company. The UK Financial Reporting
Council promotes high-quality corporate
governance and reporting through the
2018 UK Corporate Governance Code
with which all companies with a premium
listing on the London Stock Exchange
are required to either comply in full; or
explain why, and to what extent, they do
not so comply. This statement should be
read in conjunction with the Corporate
Governance section as a whole. The
following headings correspond to
the headings in the Code.
Section 1: Board Leadership and
Company Purpose
A successful company is led by an effective
and entrepreneurial board, whose role is to
promote the long-term sustainable success
of the company, generating value for
shareholders and contributing to wider
society. See pages 62-63.
The board should establish the company’s
purpose, values and strategy, and satisfy
itself that these and its culture are aligned.
All directors must act with integrity, lead by
example and promote the desired culture.
See pages 38-39.
The board should ensure that the necessary
resources are in place for the company to
meet its objectives and measure performance
against them. The board should also
establish a framework of prudent and
effective controls, which enable risk to
be assessed and managed. See page 44.
In order for the company to meet its
responsibilities to shareholders and
stakeholders, the board should ensure
effective engagement with, and encourage
participation from, these parties. See pages
61 and 70.
The board should ensure that workforce
policies and practices are consistent with the
company’s values and support its long-term
sustainable success. The workforce should
be able to raise any matters of concern.
See pages 38-39.
Nostrum Oil & Gas PLC Annual Report 2019
59
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES EXECUTIVE CHAIRMAN’S OVERVIEW/CONTINUED
Statement of compliance
Nostrum fully complied throughout 2019
with the provisions of the 2018 version of
the UK Corporate Governance Code except
in the following respects:
Provision 11
Following the appointment of Ms Van Hecke
as Chief Executive Officer on 16 December
2019 and Mr Cocker as Interim Chief
Financial Officer on 1 April 2020, at least
half of the Board, excluding the Chair, are
no longer considered to be independent.
Given recent changes in various directors’
respective roles, the Company’s announced
engagement with its bondholders and the
ongoing uncertainties caused by the Covid
19 coronavirus, the Board has not yet
commenced a search for an additional
independent non-executive director to join
the Board but this subject is being kept
under review.
Provisions 24 and 32
Following the appointment of Ms Van
Hecke as Chief Executive on 16 December
2019,she was no longer considered as
independent for the purposes of the Code
and her continued membership of both the
Audit Committee and the Remuneration
Committee contravened Provisions 24 and
32 of the Code, respectively. On 27 January
2020, Ms Van Hecke stepped down as a
member of the Audit Committee and the
Remuneration Committee and Mr Cocker
was appointed as a member of the
Remuneration Committee to ensure full
compliance with the Code in this respect.
No additional changes were made to the
composition of the Audit Committee
as following Ms Van Hecke’s departure
as a member, the membership of the
Audit Committee still consisted of three
independent non-executive directors
in full compliance with the Code.
Following the appointment of Martin Cocker
as Interim Chief Financial Officer on 1 April
2020, he was no longer considered by the
Board as independent for the purposes of
the Code and as a result his continued
membership of both the Audit Committee
and the Remuneration Committee
contravenes Provisions 24 and 32 of the
Code, respectively. On 1 April 2020 Mr
Cocker stepped down as Chairman of
the Audit Committee and was replaced
by Sir Christopher Codrington, Bt. so that
the Chairman of the Audit Committee is
an independent non-executive director.
However, the Board determined that given
that it is intended that Mr Cocker will only
serve as Chief Financial Officer on an interim
basis, he should remain as a member of the
Audit Committee and the Remuneration
Committee at this time and this matter
will be kept under review going forward.
Provision 36
The Company’s LTIP has a total holding and
vesting period of no more than three years
and therefore does not comply with the
requirements of Code Provision 36, which
requires share awards to be released for
sale on a phased basis and be subject to a
total vesting and holding period of five years
or more. As explained in the press release
released by the Company on 28 August
2019, a copy of which has also been
published on the Public Register maintained
by the Investment Association, the Board
and the Remuneration Committee believe
that the current provisions of the LTIP
relating to the performance period and
vesting period 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.
The full text of the announcement is
available to read on the Company’s
website and more information can be
found on page 84.
60
Nostrum Oil & Gas PLC Annual Report 2019
How the board are considering stakeholders in decision-making
Workforce
The Group has a workforce of 636.
The majority of workers are based
in Kazakhstan.
In 2019, the Board, through Sir
Christopher in his capacity as the Board’s
designated non-executive director for
workforce engagement, held a workforce
engagement meeting in September in
Uralsk. The majority of the issues raised
at the meeting were HR-related issues
and so, following the meeting, the Board
approved the establishment of a new
email address to which all employees
can send issues and questions of
concern. Key issues will be periodically
reported to the Board and taken into
consideration in future Board decision-
making. More information can be found
on page 80.
Investors
Executive members of the Board
regularly meet with institutional
investors and banks’ analysts at
investor conferences and industry forums
throughout the year, and the Investor
Relations team provides the Board with
regular feedback on investors’ views and
key market issues so that they can inform
Board decision-making.
A key area where shareholders have
influenced Board decision-making is in
relation to the Directors’ Remuneration
Policy, which was again tabled for
shareholder approval at the 2019 AGM
after changes were made following
investor feedback received in 2018.
More information can be found on
pages 70 and 84.
Local Communities
The Group coexists with diverse
communities in Kazakhstan. The Group
aims to strengthen engagement with
communities in order to grow together
and contribute to the long-term
development of the areas around its
operations. More information on the
ways in which Nostrum engages with
the local communities in which it
operates can be found on pages 40-41.
The recently created Health, Safety,
Environment and Communities
Committee has responsibility for making
recommendations to the Board and
fostering a healthy two-way dialogue
and good relations between the
Group and the communities with which
the Company interacts. There is an
opportunity for any issues to be raised
and discussed at every quarterly Board
meeting, which in turn informs Board
decision-making.
Suppliers, Contractors and Customers
We are committed to building a
trusted partnership with our suppliers,
contractors and customers. The Board
recognises that in order to carry out our
operations in the safest possible way
our suppliers must meet the highest
safety and legal standards. The Health,
Safety, Environment and Communities
Committee has done a lot of work in
this area during 2019 by conducting
contractor safety audits. Action items
were drawn up following each audit,
and the Company has been engaging
heavily with those contractors concerned
to ensure that any issues are addressed
and necessary corrective actions taken.
The Board is supplied with copies of all
audit reports, and there is an opportunity
for any issues to be raised and discussed
at every quarterly Board meeting (and
more frequently if required), which in
turn informs Board decision-making.
Significantly, all our hydrocarbons are
sold to two main customers. The Board
recognises the importance of ensuring
that those customers are aware of any
disruptions in supply and so the Group is
in constant communications with these
key stakeholders.
Governments and Regulators
Governments and regulators set the
framework within which we are required to
operate and changes to policy, regulations
and legislation can have a major impact
on the Group’s business. A large number
of the decisions taken by the Board
require the Board to consider
governmental and/or regulatory
issues and an overview of such issues
is always included in Board decision
papers. Nostrum operates a formal
public relations and government
relations procedure which regulates our
relationships with the local community
and government. Further details regarding
our engagement with governments and
payments made to governments can be
found on pages 40-41.
Nostrum Oil & Gas PLC Annual Report 2019
61
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES BOARD OF DIRECTORS
Board of directors
Atul Gupta
Executive Chairman
Kai-Uwe Kessel1
Chief Executive
Officer
N H
Kaat Van Hecke2
Chief Executive
Officer
Tom Richardson3
Chief Financial
Officer
DOB: 15 December 1959
Nationality: British
Date of appointment:
19 May 2014
Other current
appointments: None
Skills and experience:
• 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).
Board committees
A
N
H
Audit Committee
Nomination &
Governance Committee
Health, Safety,
Environment and
Communities
DOB: 17 December 1961
Nationality: German
Director of Nostrum’s
predecessor entities
since 2004
Date of appointment:
3 October 2013
DOB: 7 December 1971
Nationality: Belgian
Date of appointment:
31 December 2016
DOB: 17 March 1981
Nationality: British
Date of appointment:
1 September 2016
Other current
appointments:
• Axxela Limited – Director
Other current
appointments:
• Nostrum Oil & Gas UK
Other current
appointments:
• None
Skills and experience:
• 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.
Limited – Director
• TDR Enterprises
Holdings Limited –
Director
• TDR Property
Investments Ltd –
Director
• TDR Enterprises Ltd –
Director
Skills and experience:
• 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.
Skills and experience:
• 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 N R
Mark Martin
Senior Independent
Director
DOB: 17 February 1969
Nationality: British
Date of appointment:
19 May 2014
Other current
appointments: None
Skills and experience:
• 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.
R
Remuneration Committee
Chairman
1. Mr Kessel stepped down as Chief Executive Officer on 16 December 2019.
2. Ms Van Hecke was appointed as Chief Executive Officer on 16 December 2019.
3. Mr Richardson resigned as Chief Financial Officer on 31 March 2020 and was replaced by Martin Cocker.
62
Nostrum Oil & Gas PLC Annual Report 2019
NA
R
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
• Codco Limited
• Network Point
Management (Witney)
Limited
Skills and experience:
• 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.
Michael Calvey
Non-executive
director
Simon Byrne
Non-executive
director
A
H
R
Martin Cocker1
Non-executive
director
DOB: 3 October 1967
Nationality: American
Date of appointment:
25 April 2017
Other current
appointments:
• BPEP International –
Director
• Baring Vostok Capital
Partners Group Limited
– Director
• Volga Gas PLC – Director
Skills and experience:
• 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.
DOB: 8 September 1967
Nationality: British
Date of appointment:
16 November 2017
DOB: 19 September 1959
Nationality: British
Date of appointment:
16 November 2017
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
• Independent Non-
Executive Director
at Pacific Hunt
Energy Limited
Skills and experience:
• 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
positions with Asahi
Bank and Manufacturers
Hanover Limited.
Other current
appointments:
• Etalon Group PLC –
Non-Executive Director
• Tinkoff Credit Systems
Group Holdings –
Non-Executive Director
• Beverley Building Society
– Non-Executive Director
• Headhunter Group PLC
• JEC Property
Management
• Gyassi Limited
Skills and experience:
• 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.
• 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.
1. Following the resignation of Thomas Richardson as CFO on 31 March 2020, on 1 April 2020, Martin Cocker assumed responsibility for the CFO’s functions on an interim
basis until a new permanent CFO is recruited.
Nostrum Oil & Gas PLC Annual Report 2019
63
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES SENIOR MANAGEMENT TEAM
Senior management team
Robert Tinkhof
Chief Operating
Officer1
Arkadi Epifanov
Chief Commercial
Officer
DOB: 8 April 1962
Nationality: Dutch
DOB: 27 October 1957
Nationality: Russian
Skills and experience:
• Appointed as Chief
Operating Officer
of the Group on
12 February 2019.
• Held several senior
management positions,
most recently as
Managing Director at
the Scientific Research
Institute of KMG for
Production and
Technology
in Kazakhstan.
• 32 years of experience in
the oil and gas industry,
mainly with Royal Dutch
Shell with assignments in
The Netherlands, UK,
Syria, Iran, Egypt, Dubai,
Iraq and Russia.
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.
Sergey Khafizov
Chief Business
Development Officer
DOB: 14 February 1965
Nationality: Russian
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).
Thomas Hartnett
Chief Legal Officer,
Company Secretary
and Acting Head of
Human Resources
DOB: 4 July 1964
Nationality: US/Belgian
Skills and experience:
• Appointed as General
Counsel of the Nostrum
Group on 5 September
2008, as Company
Secretary of Nostrum
Oil & Gas PLC on 3
October 2013 and
as Acting Head of
Human Resources
on 13 January 2020.
• 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.
(See biographies of executive directors Kaat Van Hecke and Martin Cocker on page 62 and 63).
64
Nostrum Oil & Gas PLC Annual Report 2019
Daulet Tulegenov
Group QHSE Manager
Marina Grinevskaya2
Chief HR Officer
DOB: 29 January 1980
Nationality: Kazakh
DOB: 9 April 1963
Nationality: Russian
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’
experience in E&P
oil and gas assets
(onshore and offshore).
• 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.
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.
1. On 12 February 2019 Robert Tinkhof was appointed as Chief Operating Officer as a result of the retirement of Heinz Wendel.
2. Ms Grinevskaya left the Company on 25 December 2019 and Mr Hartnett assumed the position of Acting Head of Human Resources on 13 January 2020.
Nostrum Oil & Gas PLC Annual Report 2019
65
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
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 Group’s 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.
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.
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.
Remuneration
Committee
Reviews and
recommends to the
Board the executive
remuneration policy
and determines the
remuneration packages
of the directors.
Chairman:
Sir Christopher
Codrington, Bt.1
See page 72 for
Committee Report.
Chairman:
Sir Christopher
Codrington, Bt.
See page 80 for
Committee Report.
Chairman:
Mark Martin
See page 84 for
Committee Report.
Health, Safety,
Environment and
Communities Committee
Assists the Board to
fulfil its responsibilities
in relation to health,
safety, environment and
communities matters
arising out of the activities
of the Group, and in
overseeing and providing
stewardship of relevant
material HSEC matters
for the Company.
Chairwoman:
Kaat Van Hecke
See page 82 for
Committee Report.
Company Secretary
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.
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) public relations (v) external
communications (vi) accounting & reporting
(vii) tax (viii) budget & control (ix) insurance
(x) treasury & cash management (xi) liaison with
internal audit (xii) risk management (xiii) ICT
(xiv) company administration (accounting &
tax matters) and (xv) capital markets analysis.
Responsible for supporting the Group and
the Board in matters relating to: (i) licensing
(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) security and (viii) administration.
Head: Martin Cocker2
Head: Sergey Khafizov
Head: Robert Tinkhof
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
(Legal & Governance Matters).
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) personnel and community
health and safety and
(iii) environmental protection.
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
Acting Head: Thomas Hartnett3
1. Sir Christopher became Chairman of the Audit Committee on 1 April 2020 following the appointment of Martin Cocker as Chief Financial Officer.
2. Martin Cocker replaced Tom Richardson as Chief Financial Officer effective 1 April 2020.
3. Marina Grinevskaya left the Company on 25 December 2019 and Thomas Hartnett assumed the position of Acting Head of Human Resources on 13 January 2020.
66
Nostrum Oil & Gas PLC Annual Report 2019
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 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 66.
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 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 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 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.
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 12.5% female
representation on its Board. The Nomination
Committee remains satisfied that the Board
has the right mix of skills and experience to
operate effectively but remains committed
to monitoring diversity closely as part of
future succession planning.
In November 2017, the Board approved
its Equality and Diversity Policy, to which
the Company continued to adhere
throughout 2019.
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 the steps that have been
taken in 2019 to implement this policy:
• Despite the challenging trading
environment and a significant reduction in
recruitment activities, where recruitment
has been required 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 the promotion of
more women into senior management
positions;
• Our Human Resources team reported
regularly to the HSEC Committee on
diversity. In conjunction with the HSEC
Committee, a gender diversity action
plan has been established which aims
to increase the percentage of female
employees across all levels within the
Group to 25% by 2022;
• An analysis of any gender pay gap issues
is being conducted; and
• We continue to look into cross-company
mentor schemes to achieve our goals in
this area.
Nostrum Oil & Gas PLC Annual Report 2019
67
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES OUR GOVERNANCE FRAMEWORK/CONTINUED
Our governance framework continued
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 2019 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.
Corruption-related risks are evaluated
on a Group-wide basis (not in respect of
divisions). No confirmed corruption cases
were identified in 2019. No employees were
trained on anti-corruption policies in 2019.
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.
Further information can be found on
page 39.
An anonymous person raised one matter
under the Company’s whistle-blowing
policy in 2019 and, upon receipt of this
request, the Company followed the review
procedures contained in the whistle-blowing
policy and conducted an investigation. The
outcome of the investigation was that the
allegations made by the anonymous person
were baseless.
Both policies were reviewed by the Audit
Committee in 2019 and no updates
recommended to the Board.
Anti-facilitation of tax evasion
Further to the new rules under the Criminal
Finances Act 2017 (“CFA”) in the UK, in 2018
the Board approved a new Anti-Facilitation
of Tax Evasion Policy 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.
68
Nostrum Oil & Gas PLC Annual Report 2019
BOARD ACTIVITIES AND ACHIEVEMENTS
Board activities
and achievements
Board activities during 2019
During the financial year, the Board held 14 meetings. During these meetings, the Board spent a lot of time discussing and approving
matters relating to the strategy of the Group and, in particular, the strategic review announced by the Company on 24 June 2019.
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 2019 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 2-57 and the more detailed activities of each Board committee are located in their relevant report.
Strategy and business focus
• Discussions around the assessment of strategic and operational options for Nostrum.
• Working with the CEO and CFO on implementing the Company’s strategy in drilling, production,
the business and operations.
• Year end review of the oil and gas industry outlook and consideration of the 2020 budget and
drilling programme.
• Discussions around the full commissioning of the GTU3.
• Discussions around entry into an agreement to acquire 100% of Positive Invest LLP, the owner of the
Stepnoy Leopard licences.
Risk
• Review of all interim financial results announcements and the 2018 Annual Report and Accounts.
• Consideration of the Group’s viability statement and risk appetite for the coming year.
• Review of all insurance contracts across the Group to assess risk exposure.
Governance
• Approved the appointment of Kaat Van Hecke as Chief Executive Officer and Tav Morgan as an
alternate director for Michael Calvey.
• Received reports from Board committees.
• Consideration of the UK Corporate Governance Code and other regulatory requirements for the
Annual Report.
• Review of the Notice of AGM and matters proposed for shareholder approval.
• Conducted a roundtable internal Board evaluation for 2019.
• Reviewed and approved (where required) any updates to key Group policies.
• Consideration of director conflicts of interest.
People and culture
• Launched several initiatives focusing on equality and diversity, including the development of a
gender diversity action plan.
• Discussions around the making of a third tranche of the Company’s Long-Term Incentive Plan.
Nostrum Oil & Gas PLC Annual Report 2019
69
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
CORPORATE GOVERNANCE/CONTINUED
Board activities and achievements continued
Board evaluation
As explained in the Nomination and
Governance Committee report on pages
80-81, in 2019 the Board decided to
conduct another roundtable discussion
of any issues directors wished to raise and
discuss. The Company Secretary prepared
a document setting out the principal themes
for the evaluation based upon points raised
in 2018 which acted as a guide for
discussions. Directors were also given
the opportunity to email any issues to the
Company Secretary following the discussion
if they wanted to raise something outside
the open forum.
The Board focused on the following in 2019:
• Engagement with and understanding of
shareholders’ feedback and concerns.
The Board collectively agreed that
improvements have been made to the
information flow between shareholders
and the Board during 2019.
• Improving the interaction in decision-
making and development of strategy
between the Board and senior
management. The Board noted
that more members of the Senior
Management Team have attended
Board and committee meetings to
ensure a better interaction between
the Board and senior management.
• Succession planning which was discussed
at Board level and it was noted that
discussions regarding the initiatives the
Board should take to increase succession
planning for both executive and non-
executive directors and for Board
committee composition are ongoing.
• Diversity and, in particular, the efforts
required to build greater diversity,
including gender diversity, at Board level
and among senior management. The
Human Resources team have worked
extensively on developing a diversity
action plan which is explained in more
detail on page 39.
• Sir Christopher Codrington, Bt.
was appointed as the Company’s
designated non-executive director to
lead the Board’s engagement with the
Company and Group’s workforce as
foreseen by Provision 5 of the 2018
UK Corporate Governance Code.
Sir Christopher held a workforce
engagement meeting in Uralsk in
September which demonstrates how
the Board is taking account of the
needs and views of a wider range
of stakeholders. An aim for 2020
is for Sir Christopher to hold further
workforce engagement meetings.
In addition, by taking Board papers as read,
the Board made an effort to spend more
time discussing and debating issues at
Board meetings.
The Company intends to conduct an internal
Board self-evaluation during 2020.
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 2019, various directors suggested
potential training topics and information
sessions were held on geology, drilling
matters and ESG matters.
70
Interaction with stakeholders
The Group’s policy and strategy of
interaction with stakeholders is set out on
page 61. The identity of those stakeholders
cannot be disclosed for confidentiality and
data protection reasons.
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 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.
The Company responds 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 with over 250
investors through face-to-face meetings,
roadshows, conferences and other
corporate events. The 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.
Nostrum Oil & Gas PLC Annual Report 2019
Attendance at meetings of the Board and its committees in the 2019 financial year
The following table illustrates the attendance of directors at Board and committee meetings (as relevant) throughout the year.
Audit
Committee
Remuneration
Committee
Nomination
and Governance
Committee
Health, Safety,
Environment
and Communities
Committee8
B
A
14
139
13
14
14
14
0
14
14
–
–
5
–
5
5
–
–
5
B
–
–
5
–
5
5
–
–
5
A
–
–
4
–
4
4
–
–
–
B
–
–
4
–
4
4
–
–
–
A
–
–
4
–
4
4
–
–
–
B
–
–
4
–
4
4
–
–
–
A
–
4
4
–
–
–
–
–
4
B
–
3
4
–
–
–
–
–
4
Board
A
14
14
14
14
14
14
14
14
14
EXECUTIVE DIRECTORS
Atul Gupta
Kai-Uwe Kessel1
Kaat Van Hecke2
Tom Richardson3
NON-EXECUTIVE
DIRECTORS
Mark Martin5
Sir Christopher
Codrington, Bt.6
Michael Calvey4
Simon Byrne
Martin Cocker7
A = Total number of meetings the director was eligible to attend.
B = Total number of meetings the director did attend.
1. Mr Kessel stepped down as Chief Executive on 16 December 2019.
2. Ms Van Hecke became Chief Executive Officer on 16 December 2019 and is also Chairwoman of the HSEC Committee.
3. Mr Richardson resigned as Chief Financial Officer and as a director of the Company effective 31 March 2020.
4. Mr Calvey was unable to participate in Board meetings during 2019 due to the terms of a travel restriction to which he is subject. Mr Morgan, Mr Calvey’s alternate,
attended 13 out of 14 meetings in place of Mr Calvey.
5. Chairman of the Remuneration Committee.
6. Chairman of the Nomination and Governance Committee and became Chairman of the Audit Committee on 1 April 2020.
7. Chairman of the Audit Committee until 1 April 2020. Mr Cocker became Chief Financial Officer on 1 April 2020.
8. The Health, Safety, Environment and Communities Committee was created by the Board on 21 March 2019.
9. Mr Kessel was unable to attend one Board meeting in 2019 as he was on leave.
Nostrum Oil & Gas PLC Annual Report 2019
71
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
AUDIT COMMITTEE REPORT
Letter from the Chairman
Throughout 2019, the committee has
continued with its established practice of
meeting on the same day as the scheduled
quarterly board meetings and also having
pre-meetings several days beforehand to
ensure that we had sufficient time to address
financial, risk, audit and compliance matters,
as well as other areas of emerging risk in
addition to the impairment question
outlined above.
In these meetings, we have paid attention to
new developments in accounting standards,
especially IFRS 16 concerning leases that
were applicable from this year, as well any
developments in application and disclosures
around new accounting standards adopted
in prior years. We have also been mindful
of all comments made by the Financial
Reporting Council in their annual review
of financial reporting that was issued in
October 2019.
Kaat van Hecke stepped down as a member
of the committee in January 2020 following
her appointment as interim CEO of the
group. Kaat has provided great support
and insight to the committee, and I wish
her well in her new and important role
within the Group.
I thank all 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
Dear shareholder,
This has been another busy and challenging
year for the committee.
During the year, the committee has
continued to monitor the integrity of the
group‘s financial reporting. This has been
particularly challenging this year following
the decision to take an impairment charge
at the end of 2018. Coupled with the
continued low market capitalisation of the
Group, this has meant that the question of
further impairment charges in 2019 was
never far away from our discussions with
management and the external auditors,
Ernst & Young.
However, until all the factors had been
pulled together into one cohesive overview,
including the annual audit of our reserves,
the results of our internal studies into
the productivity of the fields and those
by Schlumberger and PML Lucas, the
evaluation of the 2019 appraisal drilling
programme and the actions taken to
monetise the spare capacity of the gas
treatment facility, it was not possible to form
any conclusion on any further impairment.
That cohesive overview has now been
completed. As a result, we have taken the
decision to reclassify some of our reserves
as contingent resources and an impairment
charge has been calculated at the year end
based on the assumptions that are further
outlined in note 4 to the financial statements
on page 134. As documented elsewhere in
this report, the committee has reviewed and
challenged those assumptions and
sensitivities with management and Ernst &
Young. As a result, the committee is satisfied
that, based on the information available at
this time, the impairment charge recognised
in these financial statements is appropriate.
The committee has also paid special
attention at the year end to the Group’s
ability to continue as a going concern.
The collapse of the oil price in early 2020
together with the potential impact of the
coronavirus, COVID-19, places significant
stress on our forecast cashflows for 2020.
Our considerations on going concern are
detailed more fully in the report of the
Audit Committee on the following pages.
72
Nostrum Oil & Gas PLC Annual Report 2019
Role and responsibilities
of the Audit Committee
Throughout the year, the committee has
remained 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,
which are categorised below:
• 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 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 from
8 May 2017 to
3 June 2019 and then
from 1 April 2020
Martin Cocker Member since
16 November 2017
Chairman from 4 June
2019 to 1 April 2020
Member since
31 December 2016
Mark Martin
Kaat van Hecke Member from
8 May 2017 to
27 January 2020
All members of the Audit Committee during
the year were independent non-executive
directors. The qualifications presented
in the biographies of the members of
the committee on pages 62-63, and their
respective contributions to the activities
of the committee demonstrated that the
committee as a whole has competence
in oil & 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 5 meetings
during 2019 and the attendance of each
committee member at meetings of the
committee is shown on page 71.
In 2019, 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 2018 (“2018 Code”),
the FRC’s Guidance on Audit Committees
dated April 2016, the committee’s terms
of reference and other relevant sources.
Interaction with the Financial Reporting
Council (“FRC”)
The committee, together with the Chief
Financial Officer, considered the key areas
highlighted in the October 2019 letter from
the FRC addressed to Audit Committee
Chairs and Finance Directors, and
undertook the following actions:
• The committee reviewed the Non-
Financial Information Statement, which
is separately identifiable and provides a
picture of the Company’s performance
and impact. The committee also paid
attention to ensure that a clear description
of the Company’s policies, any due
diligence processes implemented in
pursuance of those policies and their
outcomes in respect of environmental,
social, anti-corruption and anti-bribery
matters, employees and respect for
human rights are all either covered by
this statement or covered in other parts
of the strategic report.
• The committee reviewed the
statement required by Section 172 of
the Companies Act 2016 (the ‘Statement’)
included in the Annual Report for the first
time as required by the UK Corporate
Governance Code 2018. The committee
focused on ensuring that the Statement
met the requirements of the legislation.
• The committee paid particular attention
to the ‘Summary of Key developments for
2019/20 annual reports’ as laid out by the
Financial Reporting Council in their letter
of October 30, 2019 (the ‘Letter’). As well
as the Statement and Non-Financial
Information Statement already noted
above, the committee considered
carefully the Group’s Strategic Report
and disclosures relating to environmental
and critical judgements.
• In respect of environmental disclosures,
the committee, together with the HSEC
committee, also stayed alert to the
reporting requirements related to the
effects on the Group’s business, both
directly and indirectly, of climate change.
In particular, ensuring that, where
relevant, due consideration is given to,
and reported on, the resilience of the
Company’s business model and its risks,
uncertainties and viability in the immediate
and longer term in light of climate change,
as well as assessing any impact of climate
change on the financial statements.
• The committee continued to challenge
management to ensure there was a clear
distinction between critical judgements
and estimates used in preparing the
accounts, and that appropriate
disclosures were made to provide
an understanding of their sensitivity
to changing assumptions.
• The committee reviewed the Group’s
cash flow statement to ensure that the
detailed requirements of IAS 7 are
followed in order to assist comparability
with other companies;
• The committee reviewed the definitions,
explanations, reconciliations, prominence
and consistency of alternative performance
measurements such as EBITDA, for their
compliance with ESMA’s Guidelines;
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Audit Committee Report continued
Review of the quarterly results and half-
yearly and annual financial statements,
as well as the Annual Report by the
committee was done with an emphasis
on the following areas:
• Ensuring that critical judgements and
estimates applied by management
(described in more detail below)
were appropriate and that complete
disclosure had been made;
• Ensuring that the accounting policies
adopted were consistent with those
used in prior periods and remained
appropriate and that full disclosures
were made for compliance with financial
reporting standards and relevant
corporate governance requirements.
Particular attention was paid to the
disclosures relating to IFRS 16, which
was applied for the first time in the year;
• 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 table below
summarises the key areas where significant
judgements, estimates and assumptions
have been applied, together with the
actions taken by the committee.
• Reviewed the key changes required
by IFRS 15 ‘Revenue from contracts
with customers’ and IFRS 9 ‘Financial
Instruments’ and concluded that the
disclosures provided in the financial
statements were appropriate;
• 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.
An assessment of the impact of Brexit on the
Group concluded that any impact will likely
be insignificant. The committee continued
to review the situation to ensure that the
assessment remained valid.
Self-assessment
The committee undertakes an annual
evaluation of its performance and
effectiveness. Typically, this is performed
after the annual audit cycle is completed.
Activities during the year
In accordance with its responsibilities
outlined above, the committee’s activities
are summarised into 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 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 the 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.
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Nostrum Oil & Gas PLC Annual Report 2019
Significant judgements
Significant estimates
Significant assumptions
NON-CURRENT ASSETS’ CARRYING VALUES
Impact on
financial statement accounts
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.
OIL AND GAS RESERVES
The management applied
significant judgement when
selecting the unit-of-production
method of depletion of
assets based on the oil
and gas reserves.
Estimations of the recoverable
amount of the CGU were
prepared by management
based on the discounted
cash flow model using
significant assumptions.
Assumptions used in estimating
recoverable amount included
future commodity prices, oil and
gas reserves, future production
profiles, operating expenses and
capital expenditures estimates,
fiscal regimes, and discount rate.
Changes in the key assumptions
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 detailed reports on
impairment testing prepared by
management and agreed with
management’s approach in using
a discounted cash flow model
as the most appropriate for
this purpose.
Areas of focus were the assumed
product prices, discount rates,
production profiles and the
associated sales volumes and
forecast capital and operating
expenditures, particularly in light
of recent oil price developments
and related volatility risk.
The committee also gave
special consideration to the
sensitivity analysis in relation
to the assumptions used. The
committee also scrutinised the
disclosure of the impairment
charge in the accounts and
this report.
The 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,
the 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 reasonability
of such assumptions.
EXPLORATION ASSETS’ CARRYING VALUES
Exploration assets were
considered by management as
part of the single CGU – please
refer to the above point.
The estimations of the
recoverable amount of
exploration assets are included
in the above-mentioned single
discounted cash flow model.
Committee actions
The committee’s response is
covered as mentioned above.
The committee’s response is
covered as mentioned above.
Changes in the key assumptions
may significantly affect the
estimation of recoverable
amount of exploration assets,
and respectively may result
in their impairment in the
future periods.
In addition to the above
mentioned 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.
The committee discussed with
management the future plans
and expectations related to
further exploratory works
and concurred with
conclusions made.
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AUDIT COMMITTEE REPORT/CONTINUED
Audit Committee Report continued
Significant judgements
Significant estimates
Significant assumptions
Impact on
financial statement accounts
TAXATION
The uncertainties associated with
Kazakhstan’s tax system means
that the ultimate amount of taxes,
penalties and interest, if any, is
subject to significant judgement.
Committee actions
The committee discussed with
management any uncertainties
surrounding the Group’s
tax position
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.
Assumption used in estimating
the amount of taxation that is
payable is based on professional
advice and consideration of the
nature of current discussions with
the tax authority.
Because of the uncertainties
associated with Kazakhstan’s tax
systems, 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 2019.
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 liabilities required for taxes for
which it is considered probably
will be payable.
The committee reviews the detail
of any significant matter under
discussion with the tax authorities
and considers the likelihood of
taxes being payable
Areas of focus were the nature
of current discussions with the
tax authorities, the outcomes of
previous similar discussions and
the views of taxation specialists.
The committee also gave special
consideration to the disclosure of
any significant uncertainty in the
estimation of the tax due.
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 specifics
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
discussed with management
the lease estimates and
assumptions used.
The committee reviewed and
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 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.
Going concern
The group’s financial statements have been prepared on an assumption that the Group will continue as a going concern for a period of at
least one year from the date of this annual report. This is taken to mean that the Group has the ability to meet its financial obligations when
they fall due for at least for one year from the date of this Annual Report.
Management prepared an analysis of the Group’s ability to continue as a going concern for the next twelve months. The base-case
scenario of the going concern model used an assumption of a US$45/bbl oil price for that period. The base-case liquidity model shows
that the Group will be able to operate as usual and have a sufficient financial headroom for the 12 months from the date of approval of the
Annual Report and Accounts.
Following the collapse of the oil price in 2020 and the continued negative price impact of COVID-19, management also prepared a severe
but plausible scenario at US$30/bbl oil price for the entire period covered by the model. The results of the plausible downside scenario
showed that in the near-term the Group’s liquidity position is exposed to such a fall in oil prices.
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Nostrum Oil & Gas PLC Annual Report 2019
The Committee noted that a number of mitigating actions have been undertaken to protect liquidity. These include seeking to engage
with bondholders regarding a possible restructuring of the Group’s outstanding bonds, cancelling uncommitted capital expenditures
whilst at the same time not affecting production and identifying further reductions in operating costs and general & administration costs.
The Committee agreed that the ability of the Group to continue as a going concern requires significant judgements about a number of
material uncertainties, being:
• The forecast cash flow of the Group over the next 12 months from the date of approval of the financial statements depends on the
duration of the low oil price environment and the Group’s ability to implement the mitigating actions within the Group’s control; and
• The Group’s ability to successfully engage with its bondholders and shareholders regarding a restructuring of the Group’s
outstanding bonds.
The Committee challenged management’s assertion that there was a reasonable expectation of a successful outcome to the negotiations
with bondholders. Management acknowledged that the process was at an early stage but given the options, believed that a successful
outcome was the most likely event. Therefore, and having received appropriate legal advice, the Group consider it appropriate to prepare
the financial statements on a going concern basis.
After careful consideration of the material uncertainties arising from the future outlook for the oil price and the outcome of any discussions
with the bondholders and shareholders, and after thorough consideration of the liquidity forecast, production projections and the
ongoing and planned mitigating actions, the Committee is satisfied that the preparation of the financial statements on the assumption that
the Group will continue as a going concern is appropriate.
The Committee noted that the auditors lack sufficient audit evidence required to conclude that the Group is a going concern. The
engagement with bondholders is at an early stage and so the auditors could not obtain sufficient appropriate audit evidence to support
the assumption that a restructuring of the Group’s bonds is achievable in the necessary time frame. Therefore, the auditors would not be
able to express an opinion on the financial statements.
Significant matters communicated by the external auditor
Significant risks identified by the external auditor were related to the above-mentioned areas involving judgements 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 in the section “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 risk management systems, further information on which can be found in the Risk Management
section on pages 44-49 of the Annual Report.
In accordance with requirements of the 2018 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
Construction of GTU3 and the drilling programme continued to be a key focus for the committee, particularly in light
of low oil prices and uncertainty around the production assets. 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 rates
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 sub-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.
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Audit Committee Report continued
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.
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 4 June 2019. Mr. Richard Addison was
appointed as lead audit engagement
partner on 19 May 2014 and his tenure
came to an end with the completion of the
2018 audit. The Committee interviewed
three candidates from Ernst & Young LLP
(UK) and unanimously recommended that
Mr William Binns be appointed into this role.
William is an audit engagement partner
of FTSE 100 companies and has rich
experience in auditing oil & gas companies.
Compliance with other
legal requirements
There were no material fines or other
sanctions against the Group in 2019.
There was no antitrust litigation against
the Group in 2019
Product liability
There were no cases relating to product
liability in 2019.
Also, in the 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.
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
Following the appointment of Kaat
Van Hecke as Chief Executive Officer on
16 December 2019, the Audit Committee
was no longer comprised entirely of
independent non-executive directors
which contravened Provision 24 of the 2018
Version of the UK Corporate Governance
Code. Therefore, on 27 January 2020,
Ms Van Hecke stepped down as a member
of the Audit Committee, to ensure that
the composition of the Committee’s
membership is in full compliance with the
Code. The Board believes that compliance
with the Code ensures compliance by the
Group with appropriate corporate ethics.
Whistle-blowing arrangements
Nostrum has a Group Whistle-blowing
Policy and to ensure 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.
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.
Internal control system
The Group’s internal control system is aimed
at mitigating risks and improving efficiency.
These include:
• Corporate governance: segregation of
authorities and duties at 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.
Details of the procedures related to
compliance control are set out below
(including compliance liaison equivalent
to a hotline). No instructions for conflict of
interest settlement or compliance control
forms were in use in 2019. No sanctions or
disciplinary actions were applied in respect
of internal control in 2019.
Internal audit
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:
• 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. The 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.
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Nostrum Oil & Gas PLC Annual Report 2019
Audit and non-audit fees
(US$ thousands)
491
2019
578
171
292
2018
307
190
Audit of the financial statements
Audit-related assurance services
Services relating to corporate finance transactions
2019 audit
During Q4 2019, 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 2019, 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 2019 H1
interim and 2019 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 2019, 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 2019.
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.
The detailed breakdown of audit and
non-audit fees can be found in note 32
to the consolidated financial statements of
the Group on page 158. The ratio of audit
fees to non-audit fees in 2019 was 0.66
(2018: 0.59). A significant proportion
of 2019 non-audit fees was attributable
to quarterly reviews of interim financial
statements and assurance services related
to a potential transaction in 2019 that did
not crystalise. 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
29 April 2020
Nostrum Oil & Gas PLC Annual Report 2019
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Letter from the Chairman
Committee members
• Sir Christopher Codrington, Bt.
(chairman)
• Kaat Van Hecke
• Mark Martin
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 reappointment
as directors;
• Monitor and make recommendations
to the Board on Board governance
and corporate governance issues,
to enable the Board to operate
effectively and efficiently;
• Regularly review the structure, size
and composition (including skills,
knowledge and experience) 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.
2019 has been another busy year
for the Nomination and Governance
Committee. Following the Committee’s
recommendation to the Board that
I should be appointed to oversee
effective engagement with the workforce
as mandated under the 2018 Code,
I was appointed as the independent
non-executive director for workforce
engagement, and the Committee, with the
help of the Company Secretary, organised a
workforce engagement meeting which was
held in Uralsk on 10 September 2019. All of
the Group’s Kazakhstan-based employees
were invited to the meeting, and a system
was set up in advance of the meeting to
allow the workforce to post questions they
would like answered in a box. The top five
questions were addressed at the meeting
and then a Q&A session followed. The
majority of the questions were related
to human resources. Despite attendance
by employees being relatively low, the
Committee and the Board feel the meeting
was very beneficial for establishing a
dialogue between the Board and the wider
workforce, and all necessary steps will be
taken to encourage higher attendance at
future meetings. The workforce engagement
initiative will continue, and we hope to be
able to hold a similar meeting in London
in 2020.
Another big change in 2019 was the
creation of the Health, Safety, Environment
and Communities Committee on 21 March
2019. The Nomination and Governance
Committee endorsed the creation of the
HSEC Committee, which has made great
progress in improving the safety culture
across the Group. More information on the
work of the HSEC Committee can be found
in the Committees report on page 82.
In March 2019, I informed the Committee
that I proposed to rotate off as Chairman
of the Audit Committee with effect from
the day after the AGM and suggested
that Mr Cocker would be best placed to
succeed me. The Committee considered
this proposal carefully and approved
recommending this proposal to the
Board which the Board approved.
The Committee was also kept busy with
considering the best format for the 2019
Board self-evaluation and agreed with the
wider Board’s view that the 2019 Board
self-evaluation should be conducted
internally as a round table discussion. The
Committee asked the Company Secretary
to collate the responses from the Board’s
2018 self-evaluation and, in particular,
any concerns raised and issue a request
for feedback in advance of the Board’s
November quarterly meeting so that any
issues raised could be discussed in a round
table style discussion at such meeting.
An overview of the discussions had can be
found on page 70. None of the outcomes of
the 2019 Board self-evaluation will influence
board composition.
1. On 1 April 2020, Sir Codrington became Chairman of the Audit Committee following the appointment of Mr Cocker as Chief Financial Officer on 31 March 2020.
80
Nostrum Oil & Gas PLC Annual Report 2019
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 2020. In early
2019, the committee recommended
the approval of the appointment by
Mr Calvey of Mr Ralph Tavakolian
“Tav” Morgan as his alternate director.
Committee meetings
The Nomination and Governance
Committee met formally four times during
2019. The attendance of each Committee
member at Committee meetings held
during 2019 is shown on page 71. The
Committee reports 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.
Policies
In 2019, the Committee recommended to
the Board a number of changes to other
Group policies and procedures, to reflect
changes in legislation and best practice
or to better serve the needs of the Group.
Diversity
More information on the Group’s actions
and policies in relation to diversity and
inclusion can be found on page 38.
All directors will stand for re-election at the
2020 Annual General Meeting with the full
support of the Board.
Sir Christopher Codrington, Bt.
Chairman, Nomination and Governance
Committee
29 April 2020
Nostrum Oil & Gas PLC Annual Report 2019
81
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES HEALTH, SAFETY, ENVIRONMENT AND COMMUNITIES COMMITTEE
Letter from the Chairwoman
Committee members
• Kaat Van Hecke (Committee
Chairwoman)
• Martin Cocker
• Kai Uwe Kessel1
Key responsibilities
• Attention to climate change issues
are among the principal duties of
the committee;
• Working with the Group’s 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.
The Health, Safety, Environment and
Communities Committee was formally
created on 1 March 2019 and has had a
busy first few months. The Committee met
four times during 2019. The attendance of
each Committee member at Committee
meetings held during 2019 is shown on
page 71. 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, the Group QHSE Manager,
Chief Operating Officer, Chief HR Officer
and Chief Legal Officer all have standing
invitations to all meetings of the Committee
and are tasked with reporting to the
Committee on key areas linked to the
work of the Committee that falls within
their responsibilities.
During the Committee’s inaugural meeting
in March 2019, discussions focused on the
HSE performance of the Group during 2018
and the HSE plan for 2019. The Committee
agreed on the following QHSE pillars
which define our approach to
sustainable operations:
• HSE leadership;
• Rigorous incident investigation;
• Process safety-critical elements identified
and maintained;
• Contractor HSE management; and
• Commitment to reduce GHG emissions.
The Committee decided that its initial
actions would focus on safety at work, with
the next stage to focus on the development
of emissions reduction strategies and
potential actions.
In relation to HSE leadership and incident
investigation, which includes improving and
making the HSE database more authoritative
and robust to ensure all incidents are
properly reported, recorded and
investigated, the Committee recognised
that the culture of the Group needs to
support reporting unsafe practices and
that every employee should have access
to and be encouraged to submit Hazard
Observation Cards where they have
concerns or ideas. The Committee
discussed this in more detail with the Board
and the Board endorsed a plan to consider
positive encouragement in this area by
introducing a small financial incentive to
submit Hazard Observation Cards and to
consider including the submission of one
Hazard Observation Card a year as a KPI for
2020 for relevant staff. Please refer to page
37 for a case study of the Group’s Hazard
Observation Procedure.
The Committee also identified that the
Group’s “Golden Rules” on safety needed
to be more than a new joiner onboarding
process and, during 2019, the Committee,
together with senior management, re-
drafted the “Golden Rules” and rolled them
out across the Group to raise awareness
of their importance at all levels. More
1. Mr Kessel was a member of the HSEC committee until he stepped down as Chief Executive Officer and left the company on 16 December 2019
82
Nostrum Oil & Gas PLC Annual Report 2019
information regarding the ‘Golden Rules’
safety campaign can be found on page 35.
In addition, the Committee worked closely
with the Group QHSE Manager and the
Chief Operating Officer to develop a new
incident management procedure which
requires the Group to systematically
investigate all incidents regardless of
whether or not they will also be investigated
by State bodies. The procedure also
describes how to perform root cause
analysis, identify SMART actions and
ensure lessons learned will be properly
communicated within the organisation.
The Committee also noted that
process safety must not be confused with
industrial safety and set about defining
its understanding of process safety and,
in doing so, the Group spoke to its peers
to share experiences in relation to motor
vehicle safety and process safety more
generally. During 2019, ten safety
declarations were developed and
registered with the Process Safety Authority
Industrial Development and Process Safety
Committee in Nur-Sultan and an additional
four safety declarations are currently under
internal review. The Group also made good
progress with identifying Safety Critical
Elements for the new commissioned gas
treatment unit and defining the appropriate
periodicity to maintain the Safety Critical
Elements. This work will continue in 2020.
Contractor HSE management is an area
where I feel the Committee and the Group
as a whole has made some very good
progress in 2019. In May 2019, five key
contractors were identified by the Group to
participate in a HSE awareness programme
whereby each key contractor was audited by
the Company, a report prepared and action
items agreed with the contractor concerned.
A line manager for each contractor was
identified who has overall line safety
responsibility for the contractor concerned
and those contractors exposed to the
highest risks (rather than those with the
highest number of workers at field site)
were prioritised. Key contractors were also
mapped against the “Golden Rules” so that
an assessment could be made of their risk
profile. A contractor safety forum for all key
contractors was also held for the first time
on 21 October 2019, and the Group is
in the process of developing a new
Contractor Management Procedure.
Environment and climate change has been
discussed at length in all committee meetings
during the last year. I am very pleased that
the Group’s first CDP submission was made
in time for the 31 July 2019 deadline. The
submission process involved a lot of work
across the Group and, in 2020, consideration
will be given to ways the process for the
submission of the CDP project could be
improved going forward. In line with the
UK Companies Act 2006 (Strategic Report
and Directors’ Reports) Regulations 2013,
the Company prepares and reports our
greenhouse gas emissions which can
be found on page 43.
Diversity is another topic which took up a
lot of the Committees time in 2019, and the
Committee recognises that there is room
for improvement in this area. At present,
the Group has 22% female representation
across all levels, which is exactly in line with
its industry peers diversity statistics but low
in comparison to other industry sectors.
Despite having fair recruitment policies in
place, the Group has identified that more
job applicants are male due to the nature of
the Group’s activities, and it is factors such
as these which have a significant impact
on the Group’s ability to increase female
gender diversity. However, in the last year,
incentives have been rolled out across the
Group aimed at the retention of women,
including flexi-working arrangements,
childcare voucher schemes and childcare
provisions. In addition, the Committee has
tasked each senior manager with identifying
“high potential“ employees within their
teams, as part of proper succession
planning, that they can mentor to reach their
full potential and this initiative is something
that will be focused on in more detail in
2020. Further information on the Group’s
approach to diversity is set out on page 39.
The Committee reviews its terms of
reference annually, which can be viewed
on our website.
Kaat Van Hecke
Chairwoman, Health, Safety, Environment
and Communities Committee
29 April 2020
Nostrum Oil & Gas PLC Annual Report 2019
83
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES REMUNERATION COMMITTEE
Letter from the Chairman
In relation to the expressed desire for
minimum shareholding requirements for
executive directors, in accordance with the
remuneration policy executive directors are
encouraged to maintain a holding in the
Company to align their interests with
those of the Company’s shareholders.
The Remuneration Committee and the
Board have not to date imposed a minimum
shareholding requirement on executive
directors because the Company has not
in the past granted Company shares to
executive directors by way of bonus or
otherwise, and it was felt that imposing
such a minimum shareholding requirement
would be onerous in the circumstances.
The Company is considering awarding
future bonuses to executive directors in
part in the form of Company shares and,
if it does so the Company may require them
to hold 50% of such shares for a three-year
period and/or impose a minimum
shareholding requirement.
As regards the potential use of “golden
hellos” for new directors, the Remuneration
Committee and the Board believe that this
provision of the Remuneration Policy
gives the Company valuable flexibility, if
necessary, to recruit executive directors,
although we note that the Company has
never exercised its discretion to provide
such a “golden hello” to any director and
has no current intention to do so.
All of these decisions were announced
in an additional statement issued by the
Company on 28 August 2019 which has
been included in the Public Register
maintained by the Investment Association.
For the reasons set out above, the policy will
remain unchanged for 2020 and therefore
will not be put to a vote at the 2020 Annual
General Meeting. It is, however, included in
this year’s Directors’ report on remuneration
in full for ease of reference and to provide
context to the work of the Committee during
the year. The annual Directors’ report on
remuneration, which will be subject to an
advisory vote at our 2020 Annual General
Meeting, details how the remuneration
policy was applied in 2019 and how it will
be applied in 2020. 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.
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 2019.
Remuneration policy
Our remuneration policy aims to, amongst
other things, align the remuneration of
executives and senior management with
the interests of the Company’s shareholders
and to ensure that rewards are justified
by performance. The policy was put to a
shareholder vote at the Company’s 2019
AGM, together with the 2018 remuneration
report, and both received a significant
minority vote against their approval (28.93%
in relation to the remuneration policy and
25.35% in relation to the remuneration
report). Following the AGM, the Committee
consulted with shareholders and discussed
the views of shareholders in relation to these
two matters. The main themes expressed
by some shareholders and shareholder
advisers in relation to the remuneration
policy and the remuneration report were:
• A desire that the performance period
under the LTIP be extended from one
to three years;
• A desire that the vesting period for
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;
• A comment that there are low
shareholdings amongst the executive
directors and that no minimum
shareholding requirement has
been imposed; and
• The potential use of “golden hellos”
in connection with the recruitment of
new directors.
However, following discussions
internally and with shareholders, both the
Remuneration Committee and the Board
continue to believe that the Company’s
remuneration policy is appropriate and
aligned with Nostrum’s strategy and
business needs and after discussing the
concerns mentioned above the Board and
the Remuneration Committee concluded
that the current provisions of the LTIP
relating to performance period and vesting
period are appropriate and aligned with the
interests of shareholders, so that modifying
such provisions of the LTIP at this time
would not be the right course of action.
In relation to the LTIP rules which provide
for the accelerated vesting of awards upon
a sale of the Company, the Remuneration
Committee and the Board believe that such
provisions are appropriate and common in
long-term incentive plans. The Remuneration
Committee and the Board has added
additional conditions (i.e. a minimum sale
price) in the grant documentation for the
first two tranches of awards granted under
the LTIP which restrict any early vesting in
the event of a sale approved by shareholders
and additional conditions can and may
be applied to future LTIP awards. The
Remuneration Committee also retains
discretion under the LTIP to reduce, if
appropriate, the number of awards that may
vest early based both on (a) the likelihood
that other performance conditions to such
awards would be met and (b) the period
of time elapsed from the grant date of
such awards to the early vesting date as
compared to the normal vesting date.
84
Nostrum Oil & Gas PLC Annual Report 2019
Remuneration for 2019
Further details of executive director
performance against 2019 KPIs can be
found on page 89. In setting these targets,
the Committee focused on areas critical for
the Company: increasing annual average
sales volumes, reducing operational and
G&A cash costs, pursuing future growth
opportunities and ensuring all of our
operations are carried out as safely as
possible. All strategic targets were met in
full, one of which remains commercially
sensitive and therefore has not been
disclosed, as was one of the HSE, social and
governance targets. However, achievement
against operational and financial targets
was low, and overall the executive
directors achievement against 2019
KPIs was assessed at a level of 34.38%.
Notwithstanding this achievement, the
Committee exercised its discretion not to
award bonuses to executive directors for
2019 due to the Company’s disappointing
financial results for 2019 and to ensure a
continued focus on reducing costs across
the Group.
The 2020 key performance indicators for the
executive directors are set out on page 94.
Any commercially sensitive targets have
been omitted and it is our intention to
publish these, together with the bonus
outcome, in the Remuneration Report
for 2020.
The Committee exercised further discretion
in deciding not to make any awards under
the LTIP in 2019, and so there is no
information to provide in relation to
achievement against performance
conditions for the reporting year.
The Committee approved that the
remuneration payable to Ms Van Hecke
under her revised service agreement with
the Company be substantially on the same
terms as applied under Mr Kessel’s service
agreement.
Throughout 2019, 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.
In 2019, a 2.5% pay increase was granted to
our UK employee population below senior
management level and a 5% pay increase
was granted to our Kazakh employee
population who are paid in Kazakh Tenge.
However, it was agreed that, given the
poor performance of the Company more
generally and continued volatility in the
market, that the Executive Directors and
other members of senior management
would not receive a salary increase in 2019.
The Committee and the Board also
reviewed non-executive director fees in
March 2020 and concluded that no fee
increases would be granted.
UK Corporate Governance Code
The Terms of Reference of the Committee
have been updated to incorporate
recommendations resulting from the
2018 version of the UK Corporate
Governance Code.
In addition, in light of her appointment as
Chief Executive Officer on 16 December
2019, Kaat Ven Hecke stepped down as a
member of the Committee on 27 January
2020 to ensure that the Committee is
comprised solely of independent non-
executive directors, thereby ensuring that
the Company is in full compliance with
Provision 24 of the Code.
Further information on compliance with
the Code can be found on page 60.
Compliance statement
This report has been prepared in
accordance with the UK’s regulations
on remuneration reporting. The Companies
Act 2006 requires the Auditor to report
to shareholders on certain parts of the
Directors’ Remuneration Report and to
state whether, in the Auditor’s opinion,
those parts of the report have been
properly prepared in accordance with the
above regulations. The Chairman’s Annual
Statement and the Policy Report are not
subject to audit. The sections of the
remuneration report that are subject
to audit are indicated accordingly.
On behalf of the Committee, I would
like to thank shareholders for their
continuing support.
Mark Martin
Chairman, Remuneration Committee
29 April 2020
Nostrum Oil & Gas PLC Annual Report 2019
85
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES 2019 ANNUAL REPORT ON REMUNERATION
2019 annual report on
remuneration
In this section, we give details of
the composition of the Remuneration
Committee and activities undertaken in the
2019 financial year. We will seek an advisory
vote on the remuneration report at the 2020
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
2019 were:
Name
Membership
start date
Membership
end date
Mark Martin
(Chairman)
19 May
2014
19 May
2014
Sir
Christopher
Codrington,
Bt.
Kaat Van
Hecke
31 Dec
2016
27 January
2020
Their biographies are given on pages 62-63.
The Company Secretary acts as secretary to
the Committee.
Kaat Van Hecke was appointed as Chief
Executive Officer on 16 December 2019
and, therefore, since this date, until 27
January 2020, when Ms Van Hecke stepped
down from the Committee, she had
day-to-day involvement with the business.
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.
1. Mr Kessel stepped down as Chief Executive Officer
on 16 December 2019.
2. Ms Grinevskaya left the Company
on 25 December 2019.
86
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 2019 and the attendance of each committee member
at such meetings is shown on page 71.
The principal agenda items at the formal meetings were as follows:
Meeting
Agenda item
March 2019
• Review and approval of key performance indicators.
• Approval of executive director and 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 pay rises for employees across the Group.
• Review and approve revised directors’ remuneration policy.
• Review of pension arrangements across the Group.
• Review of Kazakh staff bonus and salary arrangements.
• Discussion of proposal for 2019 LTIP awards.
• Review and approval of AGM supplemental statement for publication
on the Investment Association’s Public Register.
May 2019
August 2019
November 2019 • Discuss 2019 LTIP Awards and Investment Association’s Position on
Executive Director Pension Provision
With the exception of the Chairman of the Board, no other directors participated in
meetings of the Committee during 2019.
During the year, the Committee received advice internally from Atul Gupta (Executive
Chairman), Kai-Uwe Kessel (Chief Executive Officer1) Thomas Hartnett (Company Secretary)
and Marina Grinevskaya2 (Chief HR Officer). 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.
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 2019 Annual General Meeting
Nostrum Oil & Gas PLC Annual Report 2019
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 2019 were approved by shareholders at the 2019 Annual General Meeting. The resolution put to shareholders at the 2019
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
Approval of directors’ remuneration policy
Approval of directors’ annual report on
remuneration
Votes FOR and
% of votes cast
Votes AGAINST and
% of votes cast
109,886,850
74.65%
37,307,525
25.35%
Votes
WITHHELD
3,331,928
104,672,170
71.07%
42,614,315
28.93%
3,239,354
At the 2020 Annual General Meeting, the directors’ remuneration report will be put to shareholders for approval by way of an advisory vote. No
changes are proposed to the remuneration policy and this will not be put to shareholders at the 2020 Annual General Meeting. In accordance with the
Act, a resolution to approve the remuneration policy will next be submitted to shareholders for a binding vote at the 2022 Annual General Meeting.
Single total figure of remuneration for executive directors
The table below shows the single total figure of remuneration for the year ended 31 December 2019 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, KZT/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)12
Kaat Van Hecke
(Chief Executive Officer)8
Period
2019
2018
Salary and
fees
455,203
36,01811
Benefits in
kind
179
–
Annual
bonus3
–
–
Phantom Share
Option Plan
–
–
LTIP7
–
–
Pension6
–
–
Total
(audited)
455,382
36,018
2019
2018
1,275,239 9
602,99813
34,6022
18,1562
2019
2018
2019
2018
580,899
580,31010
33,617 5
17,414
48,400
–
961
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,530 1,317,371
7,530
628,684
31,815
642,566
25,504
552,993
3,075
52,436
–
–
1. Mr Kessel received and Ms Van Hecke (from December
2019 when she was appointed as Chief Executive
Officer) receives part of their remuneration under
a contract for services as a director and part under
separate service agreements for their 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 was 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 bonuses for 2019 performance will be paid to
executive directors. When determining to pay no
bonuses to executive directors share price depreciation
in 2019 was a factor taken into account.
4. Mr Gupta is remunerated in USD, Mr Richardson is
remunerated in GBP, Mr Kessel was and Ms Van Hecke is
remunerated in EUR, USD and KZT but for the purposes of
this table the following exchange rates have been used:
2019: GBP:EUR (1.134225); EUR:USD (1.125);
EUR:KZT (420)
2018: GBP:EUR (1.134); EUR:USD (1.185);
EUR:KZT (431)
Nostrum Oil & Gas PLC Annual Report 2019
5. This amount was 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 2018 or 2019 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. The total amount paid to executive
directors in 2019 in lieu of pension contributions was
EUR 38,655 (2018: EUR 33,034). Executive directors are
not entitled to any additional benefit if they retire early.
7. 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. No awards were made under the LTIP in 2019.
8. Mr Kessel stepped down as Chief Executive Officer
effective16 December 2019. Ms Van Hecke was paid
her CEO salary for the period 1-31 December 2019
which included a two week handover period.
9. Kai-Uwe Kessel was remunerated on a net guarantee
basis and his gross remuneration was 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. Details of all payments made to Mr Kessel
upon termination of his contracts with the Group are
shown on page 90 and are included in his total
remuneration figure shown in this table for 2019.
10. The figure of EUR 510,075 shown as Mr Richardson’s 2018
salary and fees in the Company’s 2018 Annual Report did
not include amounts paid for National Insurance.
11. The figure of EUR 31,650 shown as Mr Gupta’s 2018 salary
and fees in the Company’s 2018 Annual Report did not
include amounts paid for National Insurance. Mr Gupta’s
2018 salary is substantially lower than his 2019 salary
because he was only Chairman from November 2018
onwards.
12. Mr Richardson resigned as Chief Financial Officer and as
a director of the Company on 31 March 2020.
13. The figure of EUR 592,079 shown as Mr Kessel’s 2018
salary and fees in the Company’s 2018 Annual Report did
not include amounts paid for National Insurance.
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2019 ANNUAL REPORT ON REMUNERATION/CONTINUED
2019 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 Hecke4
Martin Cocker5
Simon Byrne
Michael Calvey
Period
Fees
Total
(audited)
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
–
229,167
127,500
–
229,167
127,500
120,000
120,000
130,000
130,000
130,000
130,000
99,167
99,167
100,000
100,000
105,781
105,781
100,000
100,000
100,000 100,000
100,000
100,000
100,000 100,000
100,000
100,000
1. Mr Gupta became Executive Chairman in November 2018 and his salary increased to US$450,000 to reflect his additional responsibilities. All sums received by
Mr Gupta in 2019 were in respect of his role as Executive Chairman and are reported in the table on page 87.
2. Sir Christopher Codrington receives an additional fee for being the Chairman of the Nomination and Governance Committee and for being the non-executive director
responsible for workforce engagement. Sir Christopher also received an additional fee for being Chairman of the Audit Committee until 4 June 2019.
3. Mr Martin receives an additional fee for being Senior Independent Director and the Chairman of the Remuneration Committee.
4. Ms Van Hecke became Chief Executive Officer on 16 December 2019 and her salary increased to EUR 480,000 to reflect her additional responsibilities. Amounts paid
to Ms Van Hecke from 1-31 December 2019 for her role as Chief Executive officer are reported in the table on page 87.
5. Mr Cocker receives an additional fee for being Chairman of the Audit Committee (from 4 June 2019). Mr Cocker stepped down as Chairman of the Audit Committee
on 1 April 2020 following his appointment as Chief Financial Officer on 31 March 2020.
88
Nostrum Oil & Gas PLC Annual Report 2019
Notes on the single total figure remuneration table
Base salaries
The Committee reviewed salaries in March 2019 and it was decided that the executive directors would not be awarded any salary increase
for 2019.
When reviewing salaries, the Committee considered the provisions of the remuneration policy and the performance of the Company.
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 2019 to 31 December 2019, the key performance indicators for annual cash bonuses for
executive directors were as follows:
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
• Acquire a controlling stake in Stepnoy Leopard asset (in Q2 100%, in Q3 50%, in Q4 25%)
• 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%
Actual
9.38%
0%
9.38%
0%
% of base
salary
3.75%
0%
3.75%
0%
5%
0%
5%
30%
15%
15%
10%
0%
17.5%
15%
2.5%
7.5%
5%
2.5%
0%
0%
7%
6%
1%
3%
1%
5%
100%
5%
34.38%
2%
13.75%
Based on an assessment of performance towards achievement of KPIs of the executive directors during 2019 and, notwithstanding the
34.38% achievement against 2019 performance measures, the Committee exercised its discretion not to award bonuses to the executive
directors due to the Company’s disappointing financial results for 2019 and to focus on reducing costs across the Group.
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
1. Includes LTIP awards for which performance conditions have been satisfied.
Nostrum Oil & Gas PLC Annual Report 2019
89
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES 2019 ANNUAL REPORT ON REMUNERATION/CONTINUED
2019 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.
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 Committee decided not to award
any awards in 2019, and so there is no
information to provided in relation
to performance conditions for the
reporting year.
Pension entitlements
The Company did not operate a pension
scheme for executive directors in 2019
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.
Payments to past directors
No payments were made to past directors
of the Company during the year ended
31 December 2019.
Payments for loss of office
Mr Kessel received a payment equivalent
to 12 months’ basic salary (i.e. excluding
any benefits in kind or bonus). This was
calculated by reference to his contractual
notice period under his contract for services
as a director of the Company, and pursuant
to the rules on the payment of termination
indemnities in Belgium which applied to
Mr Kessel’s separate services agreements
for his role as a Group executive. The total
amounts paid were:2
• US$125,000 and £100 in respect of his
contract for services as a director of the
Company;
• EUR 408,000 in respect of Mr Kessel’s
separate services agreement for his role
as Group Executive; and
All amounts mentioned above have
been audited.
In accordance with Section 430(2B) Companies
Act 20026, details of any payments made to
Mr Richardson following his resignation as
Chief Financial Officer can be found on our
website and will be reported in our 2020
Annual Report.
Non-executive director fees
The Committee did not review non-
executive director fees in 2019 and
so no changes were made.
Directors’ shareholdings
The beneficial interests of the directors in
the share capital of the Company as at
31 December 2019 were as follows:
Director
Atul Gupta
Kai-Uwe Kessel1
Tom Richardson
Sir Christopher
Codrington, Bt.
Mark Martin
Simon Byrne
Martin Cocker
Michael Calvey
Total (audited)
178,357
10,000
–
3,312
10,000
–
25,000
–
–
The Company has not been notified of
any change in directors’ shareholdings
since year-end.
Please refer to the text in the
remuneration policy table on page 96
in relation to shareholding guidelines
applicable to directors.
• EUR 29,719 in respect of unpaid vacation.
Kaat Van Hecke
1. Mr Kessel left the Company on 16 December 2019,
and so the shareholding shown for him is correct as
of that date.
2. These amounts exclude $17,250, £14, EUR 91,921
and EUR 6,241.02, respectively, paid for National
Insurance, personal income taxes and social
security costs.
90
Nostrum Oil & Gas PLC Annual Report 2019
Phantom share option plan
The Company currently operates one non-performance-related phantom share option plan (the “Plan”). As at 31 December 2019, 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$10.00 per Ordinary Share and expiring 10 years from the date of grant, pursuant to the Plan:
(audited)
Director
Kai-Uwe Kessel
Tom Richardson
Options
held at
31
December
2018
Face
value at
date of
grant
(in USD)
Options
exercised
during the
financial
year 2019
Date
of grant
Options
lapsed
during the
financial
year
2019
Options
held
at 31
December
2019
Option
exercise
price
(US$ per
option)
10 June 2009
26 March 2013
26 March 2013
700,974
200,000
110,000
35,0491
18,0002
9,9002
–
–
–
700,974
200,000
–
–
–3
110,000
4.0
10.0
10.0
Expiry date
Expired on
9 June 2019
Lapsed 4
30 March 20215
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 2019 and the date of this Annual Report.
4. Mr Kessel left the Company by mutual agreement on 16 December 2019 and, in accordance with the terms of the Plan, all outstanding options lapsed as of the
same date.
5. Mr Richardson resigned as Chief Financial Officer and as a director of the Company on 31 March 2020 and, in accordance with the terms of the Plan, his options will
remain exercisable for one year from the date of his departure.
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. No further awards were made in 2019.
The following table provides details of the LTIP awards made to directors in 2017 and 2018:
Director
Kai-Uwe Kessel
Kai-Uwe Kessel
Tom Richardson
Tom Richardson
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
20193
0
0
0
71,195
Options capable
of being
exercised
during the
financial year
20191
0
0
0
0
Face value
(in GBP)2
0
0
0
218,458
Expiry date
N/A
N/A
N/A
N/A
1. None of the options granted were exercisable as at 31 December 2019.
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.
3. Mr Kessel left the Company on 16 December 2019 and Mr Richardson left the Company on 31 March 2020 and, in accordance with the LTIP rules, all of their
outstanding options lapsed as of these respective dates.
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 can be found on page 97.
Nostrum Oil & Gas PLC Annual Report 2019
91
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
2019 ANNUAL REPORT ON REMUNERATION/CONTINUED
2019 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
4
1
n
u
J
4
1
l
u
J
4
1
g
u
A
4
1
p
e
S
4
1
t
c
O
4
1
v
o
N
4
1
c
e
D
5
1
n
a
J
5
1
b
e
F
5
1
r
a
M
5
1
r
p
A
5
1
y
a
M
5
1
n
u
J
5
1
l
u
J
5
1
g
u
A
5
1
p
e
S
5
1
t
c
O
5
1
v
o
N
5
1
c
e
D
6
1
n
a
J
6
1
b
e
F
6
1
r
a
M
6
1
r
p
A
6
1
y
a
M
6
1
n
u
J
6
1
l
u
J
6
1
g
u
A
6
1
p
e
S
6
1
t
c
O
6
1
v
o
N
6
1
c
e
D
7
1
n
a
J
7
1
b
e
F
7
1
r
a
M
7
1
r
p
A
7
1
y
a
M
7
1
n
u
J
7
1
l
u
J
7
1
g
u
A
7
1
p
e
S
7
1
t
c
O
7
1
v
o
N
7
1
c
e
D
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
y
a
M
8
1
n
u
J
8
1
l
u
J
8
1
g
u
A
8
1
p
e
S
8
1
t
c
O
8
1
v
o
N
8
1
c
e
D
9
1
n
a
J
9
1
b
e
F
9
1
r
a
M
9
1
r
p
A
9
1
y
a
M
9
1
n
u
J
9
1
l
u
J
9
1
g
u
A
9
1
p
e
S
9
1
t
c
O
9
1
v
o
N
9
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 until he left the Company on
16 December 2019. The total CEO remuneration figure for 2019 therefore includes all amounts paid to Kaat Van Hecke in December 2019
for CEO services provided to the Group and all termination amounts paid to Kai-Uwe Kessel. Please refer to the Single Total Figure of
Remuneration Table on page 87 for more information.
Year
2014
2015
2016
2017
2018
2019
Total CEO
remuneration
(EUR)
2,050,3231
971,224
915,900
888,451
617,765
1,369,807
Annual bonus
as % of maximum
opportunity
100%
80%2
75%
31.25%
0%
0%
Percentage change in Chief Executive’s remuneration
The table below shows the percentage change in the Chief Executive’s 2019 salary, annual bonus and benefits compared to a comparative
group comprised of the Group’s European based employee population (excluding European-based members of the senior management
team who did not receive a pay rise or annual bonus in 2019). The committee has chosen this comparator group as it feels it is employed
on more readily comparable terms.
(EUR1)
Salaries2
Benefits
Annual bonus
2019
1,323,639
35,563
0
Chief Executive
2018
592,079
18,156
03
% change
124%
96%
0%
Comparator
group
% change
2.5%
0%
-55.81%
1. Mr Kessel was and Ms Van Hecke 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.
2. Salary increases are determined and awarded during the course of the calendar year. The salary figure includes all amounts paid upon termination of Mr Kessel’s
contracts with the Group on 16 December 2019 and sums paid to Ms Van Hecke from 1-31 December 2019. More details can be found on pages 87 and 90.
3. 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.
92
Nostrum Oil & Gas PLC Annual Report 2019
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
2019
38,755
0
0
0
2018
39,029
0
0
0
% change
-1%
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 agreements’ and the non-executive directors’ letters of appointment can be found in
the Company’s remuneration policy on pages 101 and 103 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 2020 remuneration policy implementation
The Company’s remuneration policy was put to a shareholder vote at the 2019 Annual General Meeting and was approved by 74.65%
of shareholders. There is no requirement for a vote on the policy in 2020 unless any changes to the policy are proposed, and as the
committee feels that the policy continues to remain appropriate and aligned with the Company’s strategy and business needs and no
changes are proposed for the coming year.
Salaries and bonuses of the executive directors are reviewed and determined annually to ensure they remain appropriate. The Company’s
bonus year runs from 1 January to 31 December each year, with bonus amounts being determined between December and March and
becoming payable between April and August of each year.
Remuneration in 2020 will be consistent with the policy described on pages 95-103.
Salaries and service fees
The Committee reviewed the salaries of the executive directors in March 2020 and determined that the executive directors would not
receive a pay rise in 2020.
Nostrum Oil & Gas PLC Annual Report 2019
93
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
2019 ANNUAL REPORT ON REMUNERATION/CONTINUED
2019 annual report on remuneration
continued
Annual bonus
In accordance with the remuneration policy applicable in 2020, 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 2020 to determine the annual bonus amounts payable to executive directors in 2021. Details of any
non-commercially sensitive KPIs are set out below. 2020 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.
2020 Bonus Performance Measures
Operational and Financial
• Achieve annual average sales (boepd) from 19,000 boepd (0%) to 21,000 boepd (100%) (sliding scale)
• Reduce operational and G&A cash costs from US$63m (0%) to US$50m (100%) (sliding scale)
• Re-start GTU-3 with stable (one month uninterrupted) sales volumes (in Q3 (100%), in Q4 (50%))
• LPS 4th compressor start-up before year end
Strategic Objectives
• A commercially sensitive strategic target therefore not disclosed
• A commercially sensitive strategic target therefore not disclosed
HSE, Social and Governance
• Demonstrate an active GHG emissions management
• Assessment by the HSEC Committee of achievement of the HSE Plan for 2019 (provided that there have been
no fatalities)
Total
Weight
50%
15%
20%
10%
5%
40%
20%
20%
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 2020.
Long-term incentive plan
The Committee does not envisage granting additional awards under the Company’s long-term incentive plan in 2020 and therefore no
performance conditions have been set for 2020.
Non-executive directors
Non-executive director fees were reviewed in March 2020 and it was decided that no change was warranted. The next review of
non-executive director fees will be conducted in 2021.
Approval of the directors’ remuneration report
The directors’ remuneration report was approved by the Board on 29 April 2020.
On behalf of the Board
Kaat Van Hecke
Chief Executive Officer
Martin Cocker
Chief Financial Officer
29 April 2020
29 April 2020
94
Nostrum Oil & Gas PLC Annual Report 2019
DIRECTORS’ REMUNERATION POLICY
Directors’ remuneration
policy
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 97-99 sets out the key
components of the reward package for
executive directors.
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. This policy
was approved by shareholders at the 2019
Annual General Meeting held on 4 June
2019 and took effect from this point. Whilst
we do not envisage making any changes
to our policy prior to the Company’s 2022
Annual General Meeting, we conduct
annual reviews to ensure that it continues to
support the strategy of the Company. If we
feel it is necessary to make a change to our
policy prior to the end of this three-year
period we will seek shareholder approval.
The policy has been included in full below
as set out in the 2018 Annual Report.
Policy coverage
This policy applies to all payments to
directors of the Company from the date
of the Company’s 2019 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 Oil & Gas PLC Annual Report 2019
95
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES DIRECTORS’ REMUNERATION POLICY/CONTINUED
Directors’ remuneration policy
continued
Executive directors’ remuneration policy table
Element of pay
BASE PAY
Purpose and
link to strategy
To provide
market-
competitive
base salaries.
Maximum opportunity
Operation
Performance criteria
Base salary is reviewed annually
and fixed for 12 months.
None
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.
BENEFITS
To reflect market
practice and
provided in
line with peer
companies.
The aggregate value of
such benefits should not
constitute a significant
proportion of any
employee’s compensation.
Benefits include:
None
• 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.
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.
96
Nostrum Oil & Gas PLC Annual Report 2019
Element of pay
NOSTRUM OIL &
GAS PLC 2017
LONG-TERM
INCENTIVE PLAN
(“LTIP”)
Purpose and
link to strategy
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.
Maximum opportunity
Operation
Performance criteria
200% of base salary in any
financial year.
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.
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.
Nostrum Oil & Gas PLC Annual Report 2019
97
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
DIRECTORS’ REMUNERATION POLICY/CONTINUED
Directors’ remuneration policy
continued
Element of pay
PHANTOM
SHARE OPTION
PLAN (THE
“PLAN”)
Purpose and
link to strategy
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.
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.
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.
98
Nostrum Oil & Gas PLC Annual Report 2019
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.
None
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.
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.
None
NON-EXECUTIVE
DIRECTORS AND
CHAIRMAN
Attract and retain
high-performing
individuals.
No prescribed maximum
annual increase in fees.
The committee monitors the
holdings of all directors.
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.
Nostrum Oil & Gas PLC Annual Report 2019
99
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
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
• As to the remaining 20% of the Ordinary
Shares in respect of which an option is
granted, from the fifth anniversary of
the date of grant.
The Board retains discretion over a number
of areas relating to the operation and
administration of the Plan, which include,
but are not limited to: (i) who participates;
(ii) the timing of the grant of 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 87 (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 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.
• The “maximum” columns illustrate total
remuneration levels in 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 Officer1
amounts in EUR thousand
Minimum
100%
On target
45%
11%
44%
Maximum
30%
12%
618
1,385
58% 2,039
Fixed pay
Bonus
LTIP
Tom Richardson,
Chief Financial Officer2
amounts in EUR thousand
Minimum
100%
On target
52%
12%
36%
Maximum
553
1,063
37%
13%
50%
1,522
Fixed pay
Bonus
LTIP
Atul Gupta,
Executive Chairman
amounts in EUR thousand
Minimum
100%
On target
100%
Maximum
100%
Fixed pay
Bonus
LTIP
380
380
380
1. Mr Kessel left the Company on 16 December 2019.
2. Mr Richardson left the Company on 31 March 2020.
100
Nostrum Oil & Gas PLC Annual Report 2019
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 96-99.
• Where an individual would be forfeiting valuable remuneration in order to join the Company, the need to retain flexibility should be
considered in order for the committee to be able to set base 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.
Service agreements
Summary details of each director’s service agreement are as follows:
Director’s service agreement date
Annual salary and fees as at 1 January 2019 (EUR)1,2
Atul Gupta
Kai-Uwe Kessel3
Originally dated 19 May 2014 and most recently amended
and restated on 1 April 2018 (effective as of 1 April 2018)
28 November 2018
Tom Richardson4 Originally dated 1 September 2016 and most recently amended
and restated on 22 March 2018 (effective as of 1 January 2018)
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.
3. Kai-Uwe Kessel left the Company on 16 December 2019 and was replaced as CEO by Kaat Van Hecke whose service agreement is dated 1 December 2019.
4. Tom Richardson left the Company on 31 March 2020 and was replaced as CFO by Martin Cocker. Mr Cocker is a Non-Executive Director and details of his letter of
appointment can be found on page 103.
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 2019
101
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
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
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.
Treatment of unvested awards under the LTIP
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”).
102
Nostrum Oil & Gas PLC Annual Report 2019
Non-executive director appointment letters
The following table provides details of non-executive director appointment letters:
Name
Position
Sir Christopher Codrington, Bt.
Independent non-executive director
Mark Martin
Michael Calvey
Martin Cocker
Simon Byrne
Senior Independent Director
Non-executive director
Non-executive director
Non-executive director
Date of letter
of appointment
19 May 2017
19 May 2017
Expiry of current term
19 May 2020
19 May 2020
25 April 2017
25 April 2020
16 November 2017
16 November 2020
16 November 2017
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.
Nostrum Oil & Gas PLC Annual Report 2019
103
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES 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 2019.
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 2-57;
• The Board and Governance report
(which includes the Board, the Corporate
Governance Report and the Directors’
Remuneration Report) on pages 58-71
and 84-94 respectively; and
• The energy and global greenhouse gas
emissions disclosure on pages 42-43.
• In addition, the following information is
also incorporated into this Directors’
Report by reference:
Subject matter
Likely future developments within
the Group
50
Related party transactions
Going concern statement
Financial position and
performance of the Group
Greenhouse gas emissions
Directors’ share interests
157
126
51-57
42-43
90
Corporate governance statement
59-60
Diversity
38-39
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.
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 62
and 63 of this Annual Report.
Dividends
No dividends were paid during the year
ended 31 December 2019.
No dividend is proposed to be paid in
2020 in respect of the year ended
31 December 2019.
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.
104
Nostrum Oil & Gas PLC Annual Report 2019
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 2019. 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.
Shareholders holding 3% or
more of the Company’s issued
share capital
As of 31 December 2019, 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.
Political donations
The Group has made no political donations
during the year 2019.
Contributions to
non-EU political parties
No contributions to non-EU political parties
were made during the year 2019.
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 2019, 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 2019
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 2019 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 2020 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
2019, 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.
Nostrum Oil & Gas PLC Annual Report 2019
105
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES DIRECTORS’ REPORT/CONTINUED
Directors’ Report continued
Name
Mayfair Investments BV
Baring Vostok Capital Partners Ltd.
Aberforth Partners LLP
M&G Investment Management Ltd.
Aberdeen Standard Investments
FPP Standard Investments
Trafigura Ventures
Interactive Brokers (EO)
RCB Bank
Number of ordinary shares
48,366,612
33,708,044
19,150,963
8,970,675
8,791,226
7,938,424
7,802,557
7,038,829
6,763,630
% of Issued ordinary shares
25.70
17.91
10.18
4.77
4.67
4.22
4.15
3.74
3.59
Nature of holding
Direct
Direct
Indirect
Indirect
Indirect
Indirect
Direct
Indirect
Indirect
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 (including those 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.
On 2 January 2020, ICU Investment Management Limited notified the Company that on 30 December 2019 it had purchased 9,649,179
shares in the Company (5.13%).
On 10 January 2020, ICU Investment Management Limited notified the Company that on 7 January 2020 it had purchased an additional
3,880,134 shares in the Company bringing its total shareholding to 7.19%.
On 27 January 2020, Aberforth Partners LLP notified the Company that on 24 January 2020 it had disposed of its 6.82% shareholding
(as at that date) in the Company and on the same day Wellcome Trust Limited, as trustee of the Wellcome Trust notified the Company
that on 24 January 2020 its shareholding had fallen below 3%. On 27 January 2020 ICU Investment Management Limited also notified
the Company that on 24 January 2020 it had purchased an additional 31,307,758 shares in the Company bringing its total shareholding
to 23.83%.
On 6 February 2020, ICU Investment Management Limited and ICU Holdings Limited notified the Company that on 5 February 2020 an
intragroup transaction occured whereby ICU’s total aggregated holdings remained unchanged from the TR-1 form filed on 27 January
2020 but the reporting entity changed from the investment manager (ICU Investment Management Limited) to the parent undertaking
(ICU Holdings Limited).
Financial risk management
The Company’s financial risk management objectives and policies, including its use of financial instruments, can be found in Note 34 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.
106
Nostrum Oil & Gas PLC Annual Report 2019
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.
Terms of the KSS Global
Relationship Agreement
Under the KSS Global Relationship
Agreement, KSS Global 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
of 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.
Nostrum Oil & Gas PLC Annual Report 2019
107
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES 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 2019 are disclosed in Note 35 to the consolidated audited financial statements.
This report was approved by the Board on 29 April 2020.
On behalf of the Board
Martin Cocker
Chief Financial Officer
Kaat Van Hecke
Chief Executive Officer
29 April 2020
29 April 2020
Nostrum Oil & Gas PLC, registered number 8717287
108
Nostrum Oil & Gas PLC Annual Report 2019
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.
Each of the directors whose names and
functions are listed on pages 62-63 confirm,
that to the best of their knowledge:
• 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;
• 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; and
• The Annual Report and financial
statements, taken as a whole, are fair,
balanced and understandable and
provide the information necessary for
shareholders to assess the Company’s
position and performance, business
model and strategy.
By order of the Board
Kaat Van Hecke
Chief Executive Officer
29 April 2020
Martin Cocker
Chief Financial Officer
29 April 2020
Nostrum Oil & Gas PLC Annual Report 2019
109
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
CONSOLIDATED FINANCIAL STATEMENTS
Contents
111
Independent auditor’s report to the members of Nostrum
Oil and Gas PLC
120 Consolidated statement of financial position
121 Consolidated statement of comprehensive income
122 Consolidated statement of cash flows
123 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 policie
5. Goodwill
6. Exploration and evaluation assets
7. Property, plant and equipment
8. Right-of-use assets
9. Advances for non-current assets
10. Inventories
11. Trade receivables
12. Prepayments and other current assets
13. Cash and cash equivalents
14. Share capital and reserves
15. Earnings per share
16. Borrowings
17. Lease liabilities
18. Abandonment and site restoration provision
19. Due to government of Kazakhstan
20. Trade payables
21. Other current liabilities
22. Revenue
23. Cost of sales
24. General and administrative expenses
25. Selling and transportation expenses
26. Taxes other than income tax
27. Finance costs
28. Employees’ remuneration
29. Other income and expenses
30. Income tax
31. Related party transactions
32. Audit and non-audit fees
33. Contingent liabilities and commitments
34. Financial risk management objectives and policies
35. Events after the reporting period
124
125
127
132
141
141
141
143
144
144
144
144
145
145
146
146
148
149
149
149
150
150
150
151
151
151
152
152
155
156
157
158
158
159
163
110
Nostrum Oil & Gas PLC Annual Report 2019
INDEPENDENT AUDITOR’S REPORT
Independent auditor’s report to the
members of Nostrum Oil & Gas PLC
Disclaimer of opinion
We were engaged to audit the financial statements of Nostrum Oil & Gas PLC (‘the Company’) and its subsidiaries (‘the Group’) for the year
ended 31 December 2019 which comprise:
Group
Parent company
Consolidated statement of financial position as at 31 December 2019
Statement of financial position as at 31 December 2019
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 35 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.
We do not express an opinion on the accompanying financial statements of the Group and Company. Because of the significance of the
matters described in the Basis for disclaimer of opinion section of our report, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on these financial statements.
Basis for disclaimer of opinion
As disclosed in note 1 to the financial statements, the financial statements of the Group and Company are prepared on the assumption
that the Group and Company will continue as a going concern.
With the outbreak of COVID-19 in the post-balance sheet period, and the uncertain demand for oil, the market price for the Group’s
products has fallen sharply and the outlook remains highly uncertain. There is a significant uncertainty in relation to the extent and period
over which these developments will continue, but they will have a significant impact on the Group and Company’s financial position, future
cashflows and results of operations.
Management prepared a cash flow forecast to support their assessment that the Group and Company will continue as a going concern,
including consideration of plausible downside scenarios. Management’s assessment highlighted that the liquidity of the Group and
Company is highly exposed to commodity prices. The Group’s outstanding bonds, including coupon payments in the going concern
period, will need to be restructured in the event conditions reflect commodity prices below management’s base case. The prices
assumed in management’s base case are significantly above current market prices.
The ability of management to restructure the outstanding bonds is a key assumption supporting the Directors’ conclusion that it is appropriate
to prepare the financial statements of the Group and Company on a going concern basis. The directors were aware that there was a need
to restructure the Group’s outstanding bonds as it was clear to them that, under all reasonable assumptions, the Group would be unable
to meet its US$725 million bond liability falling due in July 2022. This fact is disclosed in the viability statement on page 50 of the annual
report. The sharp fall in the market price and demand of the Group’s products in the post-balance sheet period, and the estimated
impact on the Group’s future cashflows, has accelerated the need to negotiate with bondholders and shareholders. A financial advisor
has recently been selected; however, engagement with bondholders has not yet commenced. Consequently, we were unable to obtain
sufficient appropriate audit evidence to support the assumption that a restructuring of the Group’s bonds, including the deferral of
associated interest due in the going concern period, is achievable in the necessary timeframe to provide a basis for us to issue an
audit opinion on these financial statements.
The financial statements do not reflect any adjustments that would be required should the Group and Company be unable to continue as a
going concern.
Nostrum Oil & Gas PLC Annual Report 2019
111
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
INDEPENDENT AUDITOR’S REPORT/CONTINUED
We are unable to conclude on principal risks, going concern and viability statement
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 significance of the matters described in the Basis for disclaimer of opinion section of our
report means that we are unable to form a view on the adequacy or otherwise of:
• the disclosures in the annual report set out on pages 46 to 49 that describe the principal risks and explain how they are being managed
or mitigated;
• the directors’ confirmation set out on page 44 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 126 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 50 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.
112
Nostrum Oil & Gas PLC Annual Report 2019
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. In addition to the matter described in the
Basis for disclaimer for opinion section, we have determined the matters described below to be the key audit matters to be communicated
in our report.
Risk
Our response to the risk
Key observations
communicated to
the Audit Committee
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 72; the estimates,
assumptions and judgements on
page 133 and the disclosures
in note 7 of the Consolidated
Financial Statements (page 142)
This was a significant risk due to
the subjective nature of reserves
estimates and the pervasive
impact on the financial statements
through impairment testing, 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 estimation
due to the technical uncertainty in
assessing reserves quantities. The
estimation is potentially susceptible
to management bias, including by
recording revisions to estimates in
the incorrect period. 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.
Based on the
audit procedures
performed we
concluded that the
reserves estimations
are reasonable for
use in impairment
testing,
management’s
going concern
assessment, the
calculation of
DD&A and the
determination of
decommissioning
dates.
We did not identify
any indication of
management bias
in the estimation
process and we are
satisfied that the
reduction in reserves
recorded in 2019
has been recorded
in the correct
period.
Our audit procedures have focused on management’s estimation process,
including whether bias exists in the determination of reserves. We assessed
management’s assumptions, including commercial assumptions, to ensure
that they are based on supportable evidence. We have:
• carried out procedures to walkthrough and understand the Group’s internal
process and key controls associated with oil and gas reserves estimation;
• 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;
• corroborated management’s commercial assumptions by checking
that 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;
• 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 estimates of reserves were made in the appropriate period, and in
compliance with relevant industry standards. Specifically, we understood
the circumstances leading to the reduction in reserves to assess whether
it was as a result of new information or evidence of management bias in
the prior year estimate; and
• validated that the updated reserves estimates were appropriately
included in the Group’s consideration of impairment, the going
concern assessment, in accounting for DD&A and the determination
of decommissioning dates.
We performed full scope audit procedures over this risk area in one
location (Kazakhstan).
Nostrum Oil & Gas PLC Annual Report 2019
113
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
INDEPENDENT AUDITOR’S REPORT/CONTINUED
Risk
Our response to the risk
The risk of impairment of
exploration licenses and oil &
gas development and production
fixed assets
Refer to the Audit Committee
Report on page 72; the estimates,
assumptions and judgements on
page 134 and the disclosures in notes
6 to 7 of the Consolidated Financial
Statements (pages 141 to 143).
Impairment charge in 2019 of
US$1,354,651 thousand.
At 31 December 2019 the carrying
value of exploration licenses was nil:
(2018: US$50,241 thousand); oil &
gas development and production
assets, including non-current
advances: US$645,460 thousand
(2018: US$1,895,431 thousand).
Owing to the reduction in the Group’s
reserves estimates and continued oil
price volatility, there is a significant
risk of further impairment.
We focused on this area due to the
significance of the carrying value of
the Cash Generating Unit (‘CGU’), the
current economic environment and
the judgements 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. The
recoverable amount of the CGU is
sensitive to changes in key inputs
and assumptions. As a result of the
impairment recorded in 2018 here is
no headroom in the carrying value
of the CGU compared to its
recoverable amount.
The risk has increased compared with
the prior year.
For exploration licenses we have evaluated management’s assessment of
each impairment trigger as per IFRS 6 ‘Exploration for and Evaluation of
Mineral Resources’. We have:
• 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;
• enquired whether 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 whether any further spend on the exploration activities had
been included. We discussed the intentions and strategy of the Group
with senior management and Directors to confirm our understanding;
• assessed whether the Group has the ability to finance future exploration
and evaluation activity; and
• 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.
In addressing the risk of impairment of 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:
• walked through the controls designed by the Group relating to the
assessment of the carrying value of oil & gas development and
production fixed assets;
• tested the integrity of models with the assistance of our own specialists;
• tested price and discount rate assumptions by comparing forecast oil
and gas price assumptions to the relevant 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;
• focused our audit procedures on oil & gas reserves estimates, as
described above in our report;
• 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;
• compared the inflation and exchange rate assumptions to external
market data;
• assessed whether the outcome of management’s impairment assessment
fell within the range of expected valuations based on the market value of
the Group’s equity and debt;
• evaluated management’s sensitivity analysis 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
• evaluated the appropriateness of the financial statement disclosures.
In addressing this risk, audit procedures were performed by the component
team in Kazakhstan and the Group engagement team. By performing these
procedures we obtained full coverage of the related balances.
Key observations
communicated to
the Audit Committee
In our view the
Group’s reserves
estimates, forecast
costs and discount
rate are appropriate
and within
reasonable ranges.
The Group’s oil
and gas price
assumptions are
within reasonable
ranges except for
the Brent oil price in
the short-term which
is conservative
based on the
31 December 2019
market position.
However, we
concluded that
the estimated
recoverable amount
of the CGU fell
within the range
of acceptable
valuations, including
implied valuations
based on the market
value of the Group’s
equity and debt.
We concluded it
is appropriate to
impair the Group’s
exploration and
evaluation assets
on the basis there
is no longer a
commercially viable
plan to develop the
exploration licenses.
Based on the
results of the
audit procedures
performed, we
concluded that the
impairment charge
was reasonable and
that the related
disclosures provided
in the Group’s
financial statements
are appropriate.
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Nostrum Oil & Gas PLC Annual Report 2019
Key observations
communicated to
the Audit Committee
We concluded
that revenue
is recognised
consistently with
the terms of sales
agreements. We
also concluded
that the financial
statements
disclosures with
respect to revenue
fulfilled the
requirements of
the accounting
standards.
Risk
Our response to the risk
Revenue recognition
Refer to the Audit Committee
Report on page 72; The Summary
of significant accounting policies
on page 140 and the disclosures
in note 22 of the Consolidated
Financial Statements (page 150)
Revenue for the year ended
31 December 2019 amounts
to US$322,128 thousand (2018:
US$389,927 thousand). Revenue
includes sales of 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.
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 performed enquiries of management and analysed contracts
to evaluate whether revenue was recognised in accordance with the
contractual terms. We also performed procedures that are designed to
address the risk of manipulation of accounting records and the ability of
management to override controls. We have:
• 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;
• analysed the entire population of revenue transactions and identified
revenue journals for which the corresponding entry was not posted
against trade receivables and where trade receivables were not cleared
through cash. We assessed the appropriateness of these journals. Of the
outstanding trade receivables due at the year-end, we confirmed the
material balances with the relevant counterparties as well as tested
that trade receivables were collected subsequent to year-end;
• 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;
• carried out analytical review procedures on each revenue stream
using disaggregated data, by 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
• 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.
Nostrum Oil & Gas PLC Annual Report 2019
115
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
INDEPENDENT AUDITOR’S REPORT/CONTINUED
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 evaluate the likelihood of
management override occurring.
We base our assessment on our
understanding of the nature
and risk of both management’s
opportunity and incentive to
manipulate accounting records,
earnings or financial ratios, or
to misappropriate assets. We
also specifically consider the
potential impact on
impairment testing.
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 estimates which relate to the risks of
estimation of oil and gas reserves, impairment of non-current assets
and revenue recognition. as highlighted above.
Using our analytics tools, we tested manual and automated journal entries
which included a selection of journals, with a focus on those journal entries
that may impact the carrying value of the long-term assets and journals,
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
operational personnel 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 three components where we performed
full scope audits.
In the prior year, our auditor’s report included a key audit matter in relation to the completeness of related party transactions and
disclosures. In the current year, following the completion of the Gas Treatment Facility (GTU) 3 construction, there has been a significant
reduction in the monetary amount of transactions between the subsidiaries of the Company and entities controlled by the shareholders
with significant influence over the Group. Consequently, the completeness of related party transactions and disclosures no longer
represents a key audit matter but remains an area of audit focus.
116
Nostrum Oil & Gas PLC Annual Report 2019
Other information
The other information comprises the information included in the annual report set out on pages 1 to 109, 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.
Because of the significance of the matter described in the Basis for disclaimer of opinion section of our report, we have been unable to
report as to whether:
• Fair, balanced and understandable set out on page 109 – 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.
Notwithstanding our disclaimer of opinion on the Group and Company financial statements, we 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:
• Audit committee reporting set out on page 72 – 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 60 – 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.
Because of the significance of the matter described in the Basis for disclaimer of opinion section of our report, we have been unable to
form an opinion, whether, 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
Notwithstanding our disclaimer of an opinion on the financial statements, 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, performed subject to the pervasive limitation described
above, 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.
Arising from the limitation of our work referred to above:
• we have not obtained all the information and explanations that we considered necessary for the purpose of our audit.
Nostrum Oil & Gas PLC Annual Report 2019
117
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
INDEPENDENT AUDITOR’S REPORT/CONTINUED
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 109, 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.
Auditor’s responsibilities for the audit of the financial statements
Our responsibility is to conduct an audit of the Group and Company’s financial statements in accordance with International Standards on
Auditing (UK) and to issue an auditor’s report.
However, because of the matter described in the Basis for disclaimer of opinion section of our report, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these financial statements.
We are independent of the Group and 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, and we have fulfilled our other ethical responsibilities in accordance
with these requirements.
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.
118
Nostrum Oil & Gas PLC Annual Report 2019
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
4 June 2019, as auditor of the Company to hold office until the conclusion of the next AGM of the Company, and signed an engagement
letter on 10 January 2020. Our total uninterrupted period of engagement is six years covering periods from our appointment through to
the period ended 31 December 2019.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent Company and we remain
independent of the Group and the Company in conducting the audit.
Our audit opinion is consistent with our additional report to the Audit Committee 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]
William Binns
(Senior statutory auditor)
For and on behalf of Ernst & Young LLP, Statutory Auditor
London, 30 April 2020
Nostrum Oil & Gas PLC Annual Report 2019
119
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statement of
financial position
In thousands of US dollars
NON-CURRENT ASSETS
Exploration and evaluation assets
Property, plant and equipment
Right-of-use assets
Restricted cash
Advances for non-current assets
Total Non-current assets
CURRENT ASSETS
Inventories
Trade receivables
Prepayments and other current assets
Income tax prepayment
Cash and cash equivalents
Total Current assets
TOTAL ASSETS
SHARE CAPITAL AND RESERVES
Share capital
Treasury capital
Retained (deficit) / earnings and reserves
Total Share capital and reserves
NON-CURRENT LIABILITIES
Long-term borrowings
Lease liabilities, long-term
Abandonment and site restoration provision
Due to Government of Kazakhstan
Deferred tax liability
Total Non-current liabilities
CURRENT LIABILITIES
Current portion of long-term borrowings
Lease liabilities, current portion
Employee share option plan liability
Trade payables
Advances received
Income tax payable
Current portion of due to Government of Kazakhstan
Other current liabilities
Total Current liabilities
TOTAL EQUITY AND LIABILITIES
Notes
31 December
2019
31 December
2018
6
7
8
13
9
10
11
12
13
14
16
17
18
19
30
16
17
28
20
19
21
–
650,229
6,875
7,620
8,412
673,136
35,849
31,239
12,040
90
93,940
173,158
846,294
50,241
1,919,662
–
7,021
15,466
1,992,390
29,583
35,732
20,014
–
121,753
207,082
2,199,472
3,203
(1,660)
(433,627)
(432,084)
3,203
(1,660)
555,456
556,999
1,100,453
641
27,502
5,070
42,787
1,176,453
35,633
6,735
4
27,638
335
263
1,031
30,286
101,925
846,294
1,093,967
–
21,894
5,280
400,981
1,522,122
35,633
–
55
52,876
394
679
1,031
29,683
120,351
2,199,472
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:
Kaat Van Hecke
Chief Executive Officer
Martin Cocker
Chief Financial Officer
The accounting policies and explanatory notes on pages 124 through 163 are an integral part of these consolidated financial statements
122
120
Nostrum Oil & Gas PLC Annual Report 2019
Nostrum Oil & Gas PLC Annual Report 2019
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 gain/(loss), net
Loss on derivative financial instrument
Interest income
Other income
Other expenses
Loss before income tax
Current income tax expense
Deferred income tax benefit/(expense)
Income tax benefit/(expense)
For the year ended 31 December
Notes
2019
2018
218,511
103,617
322,128
(172,002)
150,126
(21,399)
(45,875)
(22,886)
(1,354,651)
(43,047)
(584)
361
–
86
7,210
(12,490)
(1,343,149)
(4,972)
358,194
353,222
22
23
24
25
26
4
27
28
29
29
30
296,034
93,893
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)
(12,251)
(16,284)
(28,535)
Loss for the year
(989,927)
(120,695)
Other comprehensive income that could be reclassified to the income statement in
subsequent periods
Currency translation difference
Other comprehensive income/(loss)
Total comprehensive loss for the year
211
211
(895)
(895)
(989,716)
(121,590)
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)
(989,927)
185,234,079
(5.34)
15
15
(120,695)
185,234,079
(0.65)
All items in the above statement are derived from continuous operations.
The accounting policies and explanatory notes on pages 124 through 163 are an integral part of these consolidated financial statements
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
123
121
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
CONSOLIDATED FINANCIAL STATEMENTS/CONTINUED
Consolidated statement of cash flows
In thousands of US dollars
Cash flow from operating activities:
Loss 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 disposal 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
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
Advances for non-current assets
Acquisition of subsidiaries
Placement of bank deposits
Redemption of bank deposits
Net cash used in investing activities
Cash flow from financing activities:
Finance costs paid
Issue of notes
Repayment of notes
Fees and premium paid for early repayment and on arrangement of notes
Payment of lease liabilities
Finance charges on lease liabilities
Transfer to restricted cash
Net cash used in financing activities
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
For the year ended 31 December
Notes
2019
2018
(1,343,149)
(92,160)
23,24,25
27
7
16
16
16
17
17
13
13
13
143,291
1,354,651
43,047
584
(86)
160
96
(3,741)
–
–
(5,096)
189,757
(6,266)
4,493
5,494
3,949
(59)
(1,031)
5,977
202,314
(5,477)
196,837
86
(114,762)
(984)
(4,731)
–
–
–
(120,391)
(86,000)
–
–
–
(14,856)
(2,853)
(599)
(104,308)
117,081
150,000
49,383
(2,031)
(514)
33
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)
49
(209)
(27,813)
121,753
93,940
(5,198)
126,951
121,753
The accounting policies and explanatory notes on pages 124 through 163 are an integral part of these consolidated financial statements
124
122
Nostrum Oil & Gas PLC Annual Report 2019
Nostrum Oil & Gas PLC Annual Report 2019
Consolidated statement
of changes in equity
In thousands of US dollars
Notes
Share
capital
Treasury
capital
Other
reserves
Retained
earnings /
(deficit)
Total
As at 1 January 2018
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
Loss for the year
Other comprehensive income
Total comprehensive loss for the year
Share based payments under LTIP
As at 31 December 2019
–
–
–
–
–
–
–
(895)
(895)
(120,695)
–
(120,695)
(120,695)
(895)
(121,590)
28
28
–
3,203
–
(1,660)
711
262,233
–
293,223
711
556,999
–
–
–
–
–
–
–
211
211
(989,927)
–
(989,927)
(989,927)
211
(989,716)
–
3,203
–
(1,660)
633
263,077
–
(696,704)
633
(432,084)
The accounting policies and explanatory notes on pages 124 through 163 are an integral part of these consolidated financial statements
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
125
123
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
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.
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
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
Participatory interests
Participatory interests
Members’ interests
Ordinary shares
Nostrum Oil & Gas Finance B.V. Gustav Mahlerplein 23B, 1082MS
Ordinary shares
Nostrum Oil & Gas UK Ltd.
Nostrum Services
Central Asia LLP
Nostrum Services N.V.
Zhaikmunai LLP
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
Ordinary shares
Participatory interests
Ordinary shares
Participatory interests
100
100
100
100
100
100
100
100
100
Nostrum Oil & Gas PLC and its wholly-owned subsidiaries are hereinafter referred to as “the Group”. The Group’s operations comprise
of a single operating segment with three exploration concessions and are primarily conducted through its oil and gas producing entity
Zhaikmunai LLP located in Kazakhstan.
As at 31 December 2019, the Group employed 636 employees (2018: 781 employees).
Subsoil use rights terms
Zhaikmunai LLP carries out its activities in accordance with the Contract for Additional Exploration, Production and Production-Sharing
of Crude Hydrocarbons in the Chinarevskoye oil and gas condensate field (the “Contract”) dated 31 October 1997 between the State
Committee of Investments of the Republic of Kazakhstan and Zhaikmunai LLP in accordance with the license MG No. 253D for the
exploration and production of hydrocarbons in Chinarevskoye oil and gas condensate field.
On 17 August 2012 Zhaikmunai LLP signed Asset Purchase Agreements to acquire 100% of the subsoil use rights related to three oil and
gas fields – Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye – all located in the Western Kazakhstan region. On 1 March 2013
Zhaikmunai LLP has acquired the subsoil use rights related to these three 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 Bobrishovskiy reservoir was extended to 26 August 2018, and moved in to the production
period subsequently.
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. On 16 August 2019, the contract was amended so as to adopt the terms of the
current model contract and the exploration period was extended until 16 August 2022.
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.
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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 2019 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 judgement in the process of applying the Group’s accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial
statements are disclosed in Note 4.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Parent and its subsidiaries as at 31 December 2019.
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; and
• 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; and
• 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.
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2. Basis of preparation and consolidation continued
Going concern
These consolidated financial statements have been prepared on a going concern basis.
The Group monitors on an ongoing basis its liquidity position, near-term forecasts and key financial ratios to ensure that sufficient funds
are available to meet its commitments as they arise. In addition, on a quarterly basis the Group performs sensitivity tests of its liquidity
position for changes in crude oil price, production volumes and timing of completion of various ongoing projects. While looking for
new opportunities to fill the spare capacity of the Group’s infrastructure, the Directors are also focused on a range of actions aimed at
improving the liquidity outlook in the near-term. These include further cost optimization to reduce capital, operating and general &
administration expenditures.
The base-case scenario of the going concern model has been prepared using a US$45/bbl oil price assumption for throughout 2020 and
2021. The base-case liquidity model shows that the Group will be able to operate as usual and have sufficient financial headroom for the
12 months from the date of approval of the Annual Report and Accounts.
As disclosed in Note 35, subsequent to the year-end the price of oil collapsed following a disagreement between OPEC+ countries on
production levels compounded by the perceived lack of future demand for oil caused by disruptions to businesses and economic activity
as a result of the novel coronavirus COVID-19 (‘COVID-19’). Whilst the OPEC+ countries, together with a wider group of producers have
subsequently agreed to lower daily production levels, the continuing uncertainty over the future demand for oil as a result of the
continuing impact of COVID-19 is restricting the recovery of the oil price.
The Directors have also considered any additional risks of COVID-19. Oil and gas production has been classified as an essential business
in Kazakhstan and so operations are continuing. Contingency plans have been put in place both to protect the workforce and ensure that
there are sufficient personnel to continue operations. Therefore, the Directors have concluded that there is currently no other material
impact on the Group’s operations and liquidity at the time of publication of the report as a result of COVID-19. However, it is recognized
that there is uncertainty around future developments of this matter which may affect the Group’s ability to deliver the forecast production
over 2020 and early 2021.
As a result of these uncertainties, we also ran a plausible downside scenario at US$30/bbl oil price, reflecting market conditions observed
subsequent to the year-end, for the entire period covered by the model. This represents a scenario in which production is as forecast in
the base case model but the post year end conditions continue for 12 months.
The results of the plausible downside scenario showed that in the near-term the Group’s liquidity position is exposed to such a fall in oil
prices. Without mitigating actions, a sustained period of low oil prices at $30/bbl would result in the Group being unable to cover its cash
operating and interest costs in 2021. The Group’s liquidity position is therefore exposed to events outside of the Group’s control.
Therefore, the Group announced on March 31, 2020 that it will now seek to engage with its bondholders regarding a possible restructuring of
the Group’s outstanding bonds. The Group is in the process of selecting a financial advisor to commence negotiations with bondholders.
The Group will require amendment in the short term to protect the liquidity of the Group within the going concern period, and restructuring to
ensure ongoing viability. The results of any discussions with bond holders and shareholders are uncertain. In the event of sustained low oil
prices envisaged in the plausible downside case, the company will require amendment to the payment terms within the bonds to take
effect within the going concern period.
The Group is also taking other, prudent mitigating actions that can be executed in the necessary timeframe and which will protect liquidity.
These include cancelling uncommitted capital expenditures over the period without having an impact on forecast production in the going
concern period of assessment and identifying further reductions in operating costs and general & administration costs.
Therefore, in forming an assessment on the Group’s ability to continue as a going concern, the Board has made significant judgements about:
• The forecast cash flow of the Group over the next 12 months from the date of approval of the financial statements depends on the
duration of the low oil price environment and the Group’s ability to implement the mitigating actions within the Group’s control; and
• The Group’s ability to successfully engage with its bondholders and shareholders regarding a restructuring of the Group’s
outstanding bonds.
These represent material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern.
After careful consideration of these material uncertainties, 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. For these reasons, they continue to
adopt the going concern basis in preparing the consolidated financial statements. Accordingly, these financial statements do not include
any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group were unable to continue as
a going concern.
Subsidiaries
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.
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3. Changes in accounting policies and disclosures
New and amended standards and interpretations
The Group applied IFRS 16 Leases for the first time. The nature and effect of the changes as a result of adoption of this new accounting
standard is described below.
Several other amendments and interpretations apply for the first time in 2019, 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 16 Leases
IFRS 16 supersedes 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. The standard 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.
Lessor accounting under IFRS 16 is substantially unchanged under IAS 17. Lessors will continue to classify leases as either operating or
finance leases using similar principles as in IAS 17.
The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 January 2019
without restating prior year figures. Under this method, the standard is applied retrospectively with the cumulative effect of initially
applying the standard recognised at the date of initial application. As a result, the primary statements are shown on IFRS 16 basis for
2019 and on IAS 17 for 2018, where the lease liability and corresponding right-of-use asset are based on future rentals as determined
under the standard, and right of use assets were measured at amount equal to the lease liability adjusted by the amount of any prepaid
or accrued lease liabilities.
As previously noted, the Group has not restated comparative disclosures for the impact of IFRS 16. To provide meaningful comparatives,
the IFRS 16 results have been split out to aid comparison period on period.
The following is a reconciliation of total operating lease commitments at 31 December 2018 (as disclosed in the financial statements to
31 December 2018) to the lease liabilities recognised at 1 January 2019:
In thousands of US dollars
Total operating lease commitments disclosed at 31 December 2018
Service agreements contracts reassessed as lease agreements under IFRS 16
Total lease liabilities before discounting
Discount using incremental borrowing rate
Total lease liability as at 1 January 2019
10,848
27,397
38,245
(4,061)
34,184
The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12
months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value
(‘low-value assets’).
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3. Changes in accounting policies and disclosures continued
The effect of adoption IFRS 16 is as follows:
Impact on the statement of financial position (increase/(decrease)) as at 1 January 2019:
In thousands of US dollars
Right-of-use assets
Total non-current assets
Total assets
Current portion of long-term liability
Total current liabilities
Long-term lease liability
Total non-current liabilities
Total equity and liabilities
Impact on the statement of profit or loss (increase/(decrease)) for the year ended 31 December 2019:
In thousands of US Dollars
Cost of sales
Gross profit
General and administrative expenses
Selling and transportation expenses
Finance costs
Loss before income tax
Deferred income tax benefit
Loss for the period
Impact on the statement of cash flows (increase/(decrease)) for the year ended 31 December 2019:
In thousands of US Dollars
Net cash flows from operating activities
Net cash used in investing activities
Net cash used in financing activities
1 January 2019
34,184
34,184
34,184
17,967
17,967
16,217
16,217
34,184
For the year ended
31 December 2019
(292)
(292)
369
(495)
1,369
951
(285)
666
For the year ended
31 December 2019
8,132
9,577
(17,709)
The impact on net cash used in investing activities is represented by the costs of using the drilling rigs, which were previously presented as
“purchase of property, plant and equipment” within net cash used in investing activities, and which are now presented as lease payments
within net cash used in financing activities with implementation of IFRS 16.
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Nature of the effect of adoption of IFRS 16
The Group has contracts including lease components for vehicles, drilling rigs and rail tank cars. Before the adoption of IFRS 16, the Group
recognised the expenses classified as lease under IAS 17 at the inception date as either a finance lease or an operating lease.
A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset
to the Group; otherwise it was classified as an operating lease. Finance leases were capitalised at the commencement of the lease at the
inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments were
apportioned between interest (recognised as finance costs) and reduction of the lease liability. In an operating lease, the leased property
was not capitalised and the lease payments were recognised as rent expense in profit or loss on a straight-line basis over the lease term.
Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases, except for short-term leases
and leases of low-value assets. The standard provides specific transition requirements and practical expedients, which has been applied
by the Group.
The Group recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases or service
agreements, except for short-term leases and leases of low-value assets. The right-of-use assets were recognised based on the amount
equal to the lease liabilities. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted
using the incremental borrowing rate at the date of initial application, which was estimated at the rate of 11%.
Under IAS 17, the drilling and transportation contracts were fully recognised as service agreements and therefore not included in operating
leasing. Such contracts for lease of drilling rigs and rail-tank cars include various additional services like personnel cost, maintenance,
drilling related activities, and other items. Under IFRS 16, the Group has split the lease components and non-lease components and
recognised such non-lease components separately. Where the additional services are not separately priced, the consideration paid has
been allocated based on the relative stand-alone prices of the lease and non-lease components. The impact of recognition of the lease
components of the service agreements amounted to US$28,356 thousand.
The Group also applied the available practical expedients wherein it:
• Used a single discount rate to a portfolio of leases with reasonably similar characteristics;
• Applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial application;
• The right-of-use assets were recognised based on the amount equal to the lease liabilities which were recognised based on the present
value of the remaining lease payments;
• Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application; and
• Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
Summary of new accounting policies
Set out below are the new accounting policies of the Group upon adoption of IFRS 16, which have been applied from the date of
initial application:
Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use).
Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement
of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease
payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain
ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over
the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.
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3. Changes in accounting policies and disclosures continued
Lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be
made over the lease term. The lease payments include fixed payments (including insubstance fixed payments) less any lease incentives
receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees.
The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments
of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments
that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the
payment occurs.
In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the
interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to
reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if
there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to
purchase the underlying asset.
Separation of lease and non-lease components
When contracts for lease (like lease of drilling rigs and rail-tank cars) include various additional services like personnel cost, maintenance,
drilling related activities, and other items, the Group splits such non-lease components and recognises them separately. Where the
additional services are not separately priced, the consideration paid is allocated based on the relative stand-alone prices of the lease
and non-lease components.
Distinguishing fixed and variable lease payment elements
Certain lease contracts include fixed rates for when the asset is in operation, and various alternative rates (like “cold-stack rates” for leases
of drilling rigs) for periods where the asset is engaged in specified activities or idle, but still under contract. In general, variability in lease
payments under these contracts has its basis in different use and activity levels, and the variable elements have been determined to relate
to non-lease components only. Consequently, the lease components of these contractual payments are considered fixed for the purposes
of IFRS 16.
Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases
that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease
of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below US$ 5,000). Lease
payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.
Significant judgements relating to leases
The application of IFRS 16 requires the Group to make judgements that affect the valuation of the lease liabilities and the related right-of-
use assets, which include determining the contracts in scope of IFRS 16, and the interest rate used for discounting the future cash flows.
IFRS 16 defines the lease term as the non-cancellable period of a lease together with the options to extend or terminate a lease, if the
lessee were reasonably certain to exercise that option. Where a lease includes the option for the Group to extend or terminate lease,
the Group makes a judgement as to whether it is reasonably certain that the option will be taken. This will take into account the length
of the time before the option is exercisable, termination fees, and the level and type of planned future capital investments. The judgment
is reassessed at each reporting date. A reassessment of the remaining life of the lease could result in a recalculation of the lease liability
and a material adjustment to the associated balances.
IFRS 16 requires the Group to determine whether a contract is a lease or contains a lease at the inception of the contract. The assessment
of whether a contract is or contains a lease is usually straightforward. However, judgement is required in applying the definition of a lease
to certain arrangements. For example, in contracts for rent of drilling rigs that include significant services determining whether the contract
conveys the right to direct the use of an identified asset required significant judgment.
The present value of the lease payment is determined using the discount rate representing the incremental borrowing rate calculated on
the basis of the government bond applicable for the same tenor, adjusted by the country risk premium and by the average credit spread
of the entities with rating similar to the Group’s rating, observed in the period when the lease contract commences or is modified.
More detailed information related to the carrying amounts of the Group’s right-of-use assets and lease liabilities and the movements
during the period are shown in Note 8 and Note 17, respectively.
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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.
Upon adoption of the Interpretation, the Group considered whether it has any uncertain tax positions, particularly those related to transfer
pricing. The Group determined, based on its tax compliance studies, that it is probable that its tax treatments will be accepted by the
taxation authorities. The interpretation did not have an impact on the consolidated financial statements of the Group.
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. These amendments had no impact
on the consolidated financial statements of the Group.
Annual Improvements 2015-2017 Cycle (issued in December 2017)
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, and 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 does not expect to pay dividends in the coming reporting period,
these amendments had no 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 amendments had no impact
on the 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
The exploration expenditure continues to be carried as an asset on the balances sheet if hydrocarbons are found and
sufficient/continued progress is made in assessing whether those hydrocarbons can be commercially recovered, subject to further
appraisal activity (e.g., the drilling of additional wells).
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 on 16 August 2022, 31 December 2021 and 31 December 2021,
respectively. The Group’s applications for extension of these exploration periods are under approval by the MOE. For more
detailed information in relation to the subsoil use rights terms, please see Note 1.
Significant accounting judgement: Exploration expenditure
Management applied judgement when determining all three exploration fields as a single cash generating unit for the purpose of
assessment of their recoverable amounts. Upon recognition of proved reserves and internal approval for development, the relevant
expenditure is transferred to oil and gas properties.
The probable reserves for Rostoshinskoye and Darinskoye fields in the 31 December 2018 reserves report have been moved into the
contingent resource category as of 31 December 2019 pending further appraisal. Taking this into account, the Group recognized an
impairment charge for the full cost of exploration and evaluation assets equalling US$50,533 thousand (Note 6) as well as corresponding
VAT receivables in the amount of US$2,478 thousand as of 31 December 2019.
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.
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.
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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.
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.
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4. Summary of significant accounting policies continued
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 recoverable amount. 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 recoverable amount, 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.
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 Chinarevskoye field are processed and passed through a combination of various facilities.
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,
fiscal regimes, proved and probable reserves and respective future production profiles.
The recoverable amount is determined by taking the higher of the CGUs the value-in-use and fair value less costs of disposal
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. In 2019 the recoverable amount reflected the CGUs fair value less costs of disposal (2018: value in use). The
discounted cash flow model takes into consideration cashflows, which are expected to arise until 2032, i.e. during the licence term
of the Chinarevskoye field, and is considered a level 3 valuation under the fair value hierarchy. The period exceeding five years is
believed to be appropriate based on the proved and probable reserves audited by independent engineers. The model does not
take into account any cashflows from processing third-party hydrocarbons, since none of these meet the IFRS requirements for
inclusion in the assessment of recoverable amount, considering their stage of development at the reporting date.
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$45/bbl for 2020, US$50/bbl for 2021, US$55/bbl for 2022, and US$60/bbl for 2023-2032 (2018:
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
• Post-tax discount rate of 10.5% (2018: pre-tax discount rate of 15.4%);
Considering the results of operational performance and the associated various analytical studies, the Company has decided to halt
drilling in 2020 and focus on adding additional third-party gas streams through the gas treatment facility in the future. As per the
Ryder Scott reserves report, further drilling is planned to take place on the Chinarevskoye field from late 2021, but this is dependent
on Group being able to maintain sufficient liquidity to fund such a programme.
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As a result of these changes, and consequential further significant reduction of the 2P reserves expected to be recovered from
the Chinarevskoye field over the period of 2020-2032, in addition to oil price trends, the Group identified indicators of impairment.
The CGUs recoverable amount was estimated, and compared to its carrying amount, and a further impairment charge on oil and
gas assets in the amount of US$1,301,640 thousand was recorded, in addition to the US$150,000 thousand impairment charge
recognized in 2018.
In 2018 the impairment charge was first allocated against goodwill amounting to US$32,425 thousand (Note 5), in accordance with
IFRS requirements, which cannot be reversed in future periods in accordance with accounting policy of the Group, and the remaining
US$117,575 (Note 7) 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).
Following a consistent approach, the impairment charge in 2019 has been allocated between working oil & gas assets (US$1,169,828
thousand – Note 7), construction in progress (US$106,825 thousand – Note 7) and other property, plant and equipment (US$24,987
thousand – Note 7) proportionate to their carrying amounts at 31 December 2019, resulting in the recoverable amount of property,
plant and equipment of US$650,229 thousand (2018: US$1,919,662 thousand), equalling its recoverable amount.
Considering the significant oil price decline subsequent to 31 December 2019 (see Note 35), the Group has analysed the sensitivity
of the recoverable amount to a scenario where the oil price assumption is US$40/bbl throughout the license period and noted that
this would result in a further impairment charge of US$256,388 thousand. Additionally, further downgrades of reserves by 10%, or
an increase in the post-tax discount rate by 2% would lead to US$98,245 thousand and US$68,194 thousand additional impairment
charge, respectively, while increase in field development and operating costs by 10% throughout the license period would lead to
further impairment charge of US$65,122 thousand.
On the other hand, certain positive development like successful mitigation of reservoir risks in the future and respective changes
in the drilling plans and results, with the relevant increase in 2P reserves, or increase in utilisation of the Group’s processing facilities,
could have the effect of reversing the impairment. Any reversal would be limited so that the carrying amount of the CGU does not
exceed the lower of its recoverable amount, or the carrying amount that would have been determined, net of depreciation, had no
impairment charge been recognised for the CGU in prior years.
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 liabilities, based on
reasonable estimates, for possible for possible additional tax charges that may be imposed by the tax authorities of the respective counties
in which it operates. The amount of such liabilities is based on various factors, such as experience of previous tax audits and differing
interpretations of tax regulations by the Group and the responsible tax authority. Such differences in interpretation may arise for a
wide variety of issues depending on the conditions prevailing in the respective domicile of the Group companies.
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities.
The tax rates and tax laws used to compute the amount are those that apply to the relevant taxable income.
Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit or loss.
Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are
subject to interpretation and establishes liabilities 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.
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4. Summary of significant accounting policies continued
For more detailed information in current and deferred income tax disclosure as at 31 December 2019 and 2018, please see Note 30.
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. As at 31 December 2019 management believes that
its interpretation of the relevant legislation is appropriate. 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 2019.
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, the Group provides
for its best estimate of the amount of tax payable which it is considers probable, based on professional advice and consideration
of the nature of current discussions with the tax authority. The Group does not provide for potential tax liabilities that it does not
consider are probable to result in an outflow of funds.
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 30.
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.
Zhaikmunai LLP
Functional currency
Tenge
Russian rouble
US dollar
US dollar
US dollar
British Pound
Tenge
Euro
US dollar
Transactions in foreign currencies are initially recorded by the Group’s subsidiaries at their respective functional currency spot rates at the
date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the
reporting date.
All differences are taken to the profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value is determined.
In the consolidated financial statements, the assets and liabilities of non-US dollar functional currency subsidiaries are translated into US
dollars at the spot exchange rate on the balance sheet date. The results and cash flows of non-US dollar functional currency subsidiaries
are translated into US dollars using average rates of exchange. In the consolidated financial statements, exchange adjustments arising
when the opening net assets and the profits for the year retained by non-US dollar functional currency subsidiaries are translated into
US dollars are reported in the statement of comprehensive income.
Advances for non-current assets
Advances paid for capital investments/acquisition of non-current assets are qualified as advances for non-current assets regardless of the
period of supplies of relevant assets or the supply of work or services to close advances. Advances paid for the purchase of non-current
assets are recognised by the Group as non-current assets and are not discounted.
For more detailed information in relation to advances for non-current assets, please refer to Note 9.
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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 2019 and 2018, please see Note 10.
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 33, 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.
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 18.
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Significant accounting judgment: provisions and contingencies
Provisions and liabilities are recognised 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 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 18.
Increase in inflation rate by 1% may result in increase of abandonment and site restoration provision by US$4,025 thousand and
decrease in discount rate by 1% may result in US$4,042 thousand increase in the provision.
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.
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
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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.
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.
The Group considers a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive
the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is
written off when there is no reasonable expectation of recovering the contractual cash flows.
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.
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4. Summary of significant accounting policies continued
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 16.
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.
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.
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 2019 and 2018, please see Note 13.
Revenue recognition
The Group sells crude oil, gas condensate and LPG under agreements priced by reference to Platt’s and/or Argus’ index quotations
and adjusted for freight, insurance and quality differentials where applicable. The Group sells gas under agreements at fixed prices.
Revenue from 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.
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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 28.
5. Goodwill
As at 31 December 2019 and 31 December 2018, goodwill comprised the following due to business combinations:
In thousands of US dollars
Balance as at 1 January
Goodwill addition
Balance as at 31 December
2019
–
–
–
2018
32,425
(32,425)
–
The goodwill arises from the purchase of Nostrum Services N.V., Nostrum Services CIS BVBA and Nostrum Services Central Asia LLP, and is
annually tested for impairment.
As of 31 December 2018, 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 recognised. 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
Impairment of exploration and evaluation assets
31 December
2019
31 December
2018
15,835
34,698
(50,533)
–
15,835
34,406
–
50,241
During the year ended 31 December 2019, the Group had additions to exploration and evaluation assets of US$920 thousand offset
with derecognition of the capitalised social expenditures US$628 thousand in the view of the amendments to the subsoil agreement for
Rostoshinskoye field (FY 2018: US$2,413 thousand). Interest was not capitalised on exploration and evaluation assets.
For information in relation to impairment testing, please see Note 4.
7. Property, plant and equipment
As at 31 December 2019 and 31 December 2018 property, plant and equipment comprised the following:
In thousands of US dollars
Oil and gas properties
Other property, plant and equipment
31 December
2019
31 December
2018
637,048
13,181
650,229
1,879,965
39,697
1,919,662
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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 2019 and 2018 was as follows:
In thousands of US dollars
Working
assets
Construction in
progress
Total
1,130,385
Balance at 1 January 2018, net of accumulated depreciation and depletion
1,145
Additions
131,900
Transfers
(2,203)
Disposals
842
Disposals depreciation
(111,197)
Depreciation and depletion charge
Impairment charge
(67,740)
Balance at 31 December 2018, net of accumulated depreciation, depletion and impairment 1,083,132
15,044
Additions
839,331
Transfers
(90)
Disposals
41
Disposals depreciation
(130,344)
Depreciation and depletion charge
Impairment transfers
(43,234)
(1,169,828)
Impairment charge
594,052
Balance at 31 December 2019, net of accumulated depreciation, depletion and impairment
765,769 1,896,154
213,944
212,799
–
(131,900)
(2,203)
–
842
–
(111,197)
–
(117,575)
(49,835)
796,833 1,879,965
166,881
151,837
(2,752)
(842,083)
(90)
–
41
–
(130,344)
–
–
43,234
(106,825) (1,276,653)
637,048
42,996
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, depletion and impairment
As at 31 December 2019
Cost
Accumulated depreciation, depletion and impairment
Balance, net of accumulated depreciation, depletion and impairment
1,898,361
(767,976)
1,130,385
765,769
–
2,664,130
(767,976)
765,769 1,896,154
2,029,203
(946,071)
1,083,132
846,668
(49,835)
2,875,871
(995,906)
796,833 1,879,965
2,883,488
(2,289,436)
594,052
156,422
3,039,910
(113,426) (2,402,862)
637,048
42,996
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 12.02% and 10.33% in 2019 and 2018, respectively.
The Group engaged independent petroleum engineers to perform a reserves evaluation as at 31 December 2019. Depletion has been
calculated using the unit of production method based on these reserves estimates.
The change in the long-term inflation rate and discount rate used to determine the abandonment and site restoration provision (Note 18)
in the year ended 31 December 2019 resulted in the increase of the oil and gas properties by US$4,354 thousand (31 December 2018:
an decrease of US$2,809 thousand).The Group incurred borrowing costs including amortisation of arrangement fees.
Capitalisation rate and capitalised borrowing costs were as follows as at 31 December 2019 and 31 December 2018:
In thousands of US dollars
Borrowing costs including amortisation of arrangement fee
Capitalisation rate
Capitalised borrowing costs
31 December
2019
31 December
2018
92,543
8.62%
52,144
91,429
8.43%
50,286
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Other property, plant and equipment
In thousands of US dollars
Balance at 1 January 2018, net of
accumulated depreciation
Additions
Transfers
Disposals
Disposals depreciation
Depreciation
Translation difference
Balance at 31 December 2018, net of
accumulated depreciation
Additions
Transfers
Disposals
Disposals depreciation
Depreciation
Impairment charge
Translation difference
Balance at 31 December 2019, 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
As at 31 December 2019
Cost
Accumulated depreciation
Balance, net of accumulated depreciation
8. Right-of-use assets
In thousands of US Dollars
Buildings
Machinery &
equipment
Vehicles
Others
Construction
in progress
31,563
439
115
(324)
222
(4,048)
–
27,967
–
135
(33)
33
(3,867)
(16,147)
–
5,165
335
(168)
(78)
76
(1,463)
–
3,867
564
25
(68)
26
(1,087)
(2,291)
–
796
14
–
(48)
44
(142)
–
664
–
–
(16)
7
(147)
(326)
–
8,171
597
104
(292)
212
(1,613)
(25)
7,154
1,592
2,592
(482)
463
(1,303)
(6,223)
37
45
–
–
–
–
–
–
45
–
–
–
–
–
–
–
Total
45,740
1,385
51
(742)
554
(7,266)
(25)
39,697
2,156
2,752
(599)
529
(6,404)
(24,987)
37
8,088
1,036
182
3,830
45
13,181
50,257
(18,694)
31,563
20,194
(15,029)
5,165
50,487
(22,520)
27,967
20,283
(16,416)
3,867
1,710
(914)
796
1,676
(1,012)
664
16,129
(7,958)
8,171
16,513
(9,359)
7,154
50,589
(42,501)
8,088
20,804
(19,768)
1,036
1,660
(1,478)
182
20,252
(16,422)
3,830
45
–
45
45
–
45
45
–
45
88,335
(42,595)
45,740
89,004
(49,307)
39,697
93,350
(80,169)
13,181
Total
34,184
(1,483)
(10,086)
(15,740)
6,875
14,981
(8,106)
6,875
Balance at 1 January 2019, net of accumulated depreciation (unaudited)
Modification of lease agreements
Termination of lease agreements
Depreciation
Balance at 31 December 2019, net of accumulated depreciation
As at 31 December 2019
Cost
Accumulated depreciation
Balance, net of accumulated depreciation
Machinery &
equipment
26,825
(1,467)
(10,086)
(12,089)
3,183
7,642
(4,459)
3,183
Vehicles
7,359
(16)
–
(3,651)
3,692
7,339
(3,647)
3,692
The right-of-use assets and lease liabilities are recognized for leases of vehicles, drilling rigs and railway cars previously classified as operating
leases, service expenses or finance lease under IAS 17. The right-of-use assets were recognised based on the amount equal to the lease liabilities.
As a result of the early termination of the drilling rigs lease agreements the relevant right-of-use assets and respective lease liabilities were
derecognized with net result reflected within profit and loss.
See Note 17 for lease liabilities.
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9. Advances for non-current assets
As at 31 December 2019 and 31 December 2018 advances for non-current assets comprised the following:
In thousands of US dollars
Advances for other non-current assets
Advances for pipes and construction materials
Advances for construction services
31 December
2019
31 December
2018
8,038
274
100
8,412
1,818
520
13,128
15,466
Advances for non-current assets mainly comprised prepayments made to suppliers of services as part of the development of new
opportunities (2018: primarily services and equipment for construction of a third unit for the Group’s gas treatment facility). In the event
that the new opportunities do not materialise as currently intended then the amounts will be written off.
10. Inventories
As at 31 December 2019 and 31 December 2018 inventories comprised the following:
In thousands of US dollars
Spare parts and other inventories
Gas condensate
Crude oil
LPG
Gas
31 December
2019
31 December
2018
23,574
8,446
3,650
112
67
35,849
23,479
4,197
1,761
126
20
29,583
As at 31 December 2019 and 31 December 2018 inventories are carried at cost.
11. Trade receivables
As at 31 December 2019 and 31 December 2018 trade receivables were not interest-bearing and were mainly denominated in US dollars.
Their average collection period is 30 days.
As at 31 December 2019 and 31 December 2018 there were neither past due nor impaired trade receivables. Based on the assessments
made, the Group concluded that no provision for expected credit losses should be recognized as at 31 December 2019 and 2018.
12. Prepayments and other current assets
As at 31 December 2019 and 31 December 2018 prepayments and other current assets comprised the following:
In thousands of US dollars
VAT receivable
Advances paid
Other taxes receivable
Other
31 December
2019
31 December
2018
3,186
6,035
1,716
1,103
12,040
11,043
5,057
2,949
965
20,014
Advances paid consist primarily of prepayments made to service providers. As at 31 December 2019, advances paid in the amount of
US$1,751 thousand were impaired and fully provided for. Below table provides the movements in the provision for impairment of
advances paid:
In thousands of US dollars
As at 31 December 2017
Charge for the year
As at 31 December 2018
Write-offs for the year
As at 31 December 2019
Individually
impaired
1,867
(116)
1,751
–
1,751
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13. Cash and cash equivalents
In thousands of US dollars
Current accounts in US dollars
Current accounts in other currencies
Current accounts in tenge
Petty cash
31 December
2019
31 December
2018
88,420
4,718
791
11
93,940
118,902
1,445446
1,396
9
121,753
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$7,620 thousand, consisting of US$805 thousand with Sberbank in Kazakhstan and US$6,815 thousand with Halyk bank
(31 December 2018: US$7,021 thousand, consisting of US$658 thousand and US$6,363 thousand, respectively), which is kept as required
by the subsoil use rights for abandonment and site restoration liabilities of the Group.
14. Share capital and reserves
As at 31 December 2019, 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 GBP 0.01.
Number of shares
As at 1 January 2018
Share options exercised
As at 31 December 2018
Share options exercised
As at 31 December 2019
In circulation Treasury capital
Total
185,234,079
2,948,879 188,182,958
–
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 as trustee for the Nostrum Oil & Gas Benefit
Trust. In the case of the ESOP, upon request from employees to exercise options, the trustee would sell shares on the market and settle
respective obligations under the ESOP, and in the case of share settled LTIP awards, the trustee would transfer shares to the relevant LTIP
award holder (although no LTIP awards are currently exercisable). The Nostrum Oil & Gas Benefit Trust constitutes a special purpose entity
under IFRS and therefore, the shares held in the trust are recorded as treasury capital of the Company.
Other reserves of the Group include 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 thousand, that arose during the
reorganisation of the Group. Also, other reserves include the foreign currency translation reserves in the amount of US$3,437 thousand
accumulated before 2009, when the functional currency of Zhaikmunai LLP was Kazakhstani Tenge, as well as foreign currency translation
reserves of other subsidiaries of the Group, which have functional currencies other than US Dollar as shown in the Note 4.
Distributions
During the years ended 31 December 2019 and 2018 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 2019 the book value per share amounted to US$2.30 negative (31 December 2018:
US$2.96 positive).
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CONSOLIDATED FINANCIAL STATEMENTS/CONTINUED
15. 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.
For the year ended 31 December
2019
2018
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)
16. Borrowings
Borrowings are comprised of the following as at 31 December 2019 and 31 December 2018:
In thousands of US dollars
Notes issued in 2017 and maturing in 2022
Notes issued in 2018 and maturing in 2025
Less amounts due within 12 months
Amounts due after 12 months
2012 Notes
(989,927)
(120,695)
185,234,079 185,234,079
(0.65)
(5.34)
31 December
2019
31 December
2018
732,886
403,200
1,136,086
(35,633)
1,100,453
727,447
402,153
1,129,600
(35,633)
1,093,967
On 13 November 2012, Zhaikmunai International B.V. (the “2012 Initial Issuer”) issued US$560,000 thousand notes (the “2012 Notes”)
maturing in 2019. 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 paid 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 fully
repurchased by the Group through issue of the 2017 Notes and the 2018 Notes as described below.
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”)
maturing in 2019. 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 paid 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 fully repurchased by the Group through issue of the 2017 Notes and the 2018 Notes as described below.
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 12 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.
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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.
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, 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 recognised 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.
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 Notes), 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 the 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 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.
Nostrum Oil & Gas PLC Annual Report 2018
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16. Borrowings continued
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 27). 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.
Covenants contained in the 2017 Notes and 2018 Notes
The 2017 and the 2018 Notes contain consistent covenants that, among other things, restrict, subject to certain exceptions and qualifications,
the ability of the 2017 Issuer, the 2018 Issuer, the 2017 Guarantors, the 2018 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.
In addition, the indentures impose certain requirements as to future subsidiary guarantors, and certain customary information covenants
and events of default.
Changes in liabilities arising from financing activities
In thousands of US dollars
1 January
Impact of
IFRS 9
adoption
Cash
inflows
Cash
outflows
Borrowing
costs
including
amortisation
of
arrangement
fees
Finance
charges
under
finance
leases
Modification
and
termination
of leases Other
31
December
1,093,967
35,633
16,011
18,173
–
–
–
–
–
–
–
–
–
6,486
–
–
– 1,100,453
(86,000)
–
(17,709)
86,000
–
–
–
1,351
1,502
–
–
(11,952) (4,769)
– 4,769
35,633
641
6,735
1,056,541
(9,065) 397,280 (353,192)
2,403
–
–
– 1,093,967
31,337
–
–
(81,111)
85,539
135
–
(267)
35,633
2019
Long-term borrowings
Current portion of long-term
borrowings
Lease liabilities, long-term
Lease liabilities, current portion
2018
Long-term borrowings
Current portion of long-term
borrowings
17. Lease liabilities
In thousands of US Dollars
Lease liability as at 1 January
Modification of lease agreements
Terminations of lease agreements
Finance charges
Paid during the period
Less: current portion of lease liability
Long-term lease liability as at 31 December
For the year
ended 31
December 2019
34,184
(1,483)
(10,469)
2,853
(17,709)
7,376
(6,735)
641
150
148
Nostrum Oil & Gas PLC Annual Report 2019
Nostrum Oil & Gas PLC Annual Report 2019
The lease liabilities are recognized for leases of vehicles, drilling rigs, and railway cars previously classified as operating leases, service
expenses or finance lease under IAS 17. The finance lease was recognised based on the future rentals as determined under IFRS 16.
See Note 8 for right-of-use assets.
As a result of the early termination of the drilling rigs lease agreements the relevant right-of-use assets and respective lease liabilities were
derecognized with net result reflected within profit and loss.
The total cash outflows in respect of the Group’s lease arrangements was US$ 18,431 thousand for the year ended 31 December 2019
(2018: US$6,498 thousand).
18. Abandonment and site restoration provision
The summary of changes in abandonment and site restoration provision during years ended 31 December 2019 and 2018 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
2019
21,894
164
1,100
(10)
4,354
27,502
2018
23,590
321
792
–
(2,809)
21,894
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 2019 were
1.9% and 2.49%, respectively (31 December 2018: 2.30 % and 4.33 %).
The change in the long-term inflation rate and discount rate in the year ended 31 December 2019 resulted in the increase of the
abandonment and site restoration provision by US$4,354 thousand (31 December 2018: the decrease by US$2,809 thousand). See Note 4
for sensitivity analysis.
19. Due to government of Kazakhstan
The amount due to Government of the Republic of Kazakhstan has been recorded to reflect the present value of a liability in relation to
the expenditures made by the Government in the time period prior to signing the Contract that were related to exploration of the Contract
territory and the construction of surface facilities in fields discovered therein and that are reimbursable by the Group to the Government
during the production period. The total amount of liability due to Government as stipulated by the Contract is US$ 25,000 thousand.
Repayment of this liability commenced in 2008 with the first payment of US$ 1,030 thousand in March 2008 and with further payments by
equal quarterly instalments of US$ 258 thousand until 26 May 2031. The liability was discounted at 13%.
The summary of the changes in the amounts due to Government of Kazakhstan during the years ended 31 December 2019 and
31 December 2018 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
20. Trade payables
Trade payables comprise the following as at 31 December 2019 and 31 December 2018:
In thousands of US dollars
Tenge denominated trade payables
US dollar denominated trade payables
Euro denominated trade payables
Russian rouble denominated trade payables
Trade payables denominated in other currencies
2019
6,311
821
(1,031)
6,101
(1,031)
5,070
2018
6,497
845
(1,031)
6,311
(1,031)
5,280
31 December
2019
31 December
2018
12,852
9,864
4,617
170
135
20,684
26,951
3,702
1,051
488
27,638
52,876
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CONSOLIDATED FINANCIAL STATEMENTS/CONTINUED
21. Other current liabilities
Other current liabilities comprise the following as at 31 December 2019 and 31 December 2018:
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
2019
31 December
2018
11,325
11,609
8,867
5,564
3,010
1,520
7,856
5,419
2,181
2,618
30,286
29,683
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.
22. Revenue
In thousands of US dollars
Oil and gas condensate
Gas and LPG
Sulphur
For the year ended 31 December
2019
2018
196,176
125,947
5
267,815
122,112
–
322,128
389,927
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 2019 was US$64.2 (FY 2018: US$71.7).
During the year ended 31 December 2019 the revenue from sales to three major customers amounted to US$190,343 thousand,
US$95,064 thousand and US$9,252 thousand respectively (FY 2018: US$258,898 thousand, US$80,499 thousand and US$11,924
thousand respectively). The Group’s exports are mainly represented by deliveries to Belarus and the Black Sea ports of Russia.
23. Cost of sales
In thousands of US dollars
Depreciation, depletion and amortisation
Payroll and related taxes
Repair, maintenance and other services
Materials and supplies
Other transportation services
Well workover costs
Environmental levies
Change in stock
Other
For the year ended 31 December
2019
2018
136,776
115,212
18,465
14,242
4,481
2,129
1,766
167
(6,228)
204
18,326
16,133
5,253
6,116
2,767
367
134
837
172,002
165,145
152
150
Nostrum Oil & Gas PLC Annual Report 2019
Nostrum Oil & Gas PLC Annual Report 2019
24. General and administrative expenses
In thousands of US dollars
Payroll and related taxes
Professional services
Depreciation and amortisation
Insurance fees
Short-term leases
Business travel
Communication
Materials and supplies
Bank charges
Other
25. Selling and transportation expenses
In thousands of US dollars
Loading and storage costs
Transportation costs
Marketing services
Depreciation
Payroll and related taxes
Other
For the year ended 31 December
2019
2018
10,162
11,292
4,966
2,026
1,256
722
617
276
170
133
1,071
21,399
4,346
1,869
1,570
846
774
357
168
165
825
22,212
For the year ended 31 December
2019
2018
11,783
12,405
10,554
4,489
2,293
4,351
45,875
18,881
15,017
10,963
–
2,565
2,558
49,984
Depreciation expense is related to the right-of-use assets recognized under IFRS 16 in respect of the rented rail-tank cars effective from
1 January 2019, the corresponding lease expenses were previously included in transportation costs for the year ended 31 December 2018.
26. 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
2019
2018
12,802
7,281
2,802
1
22,886
15,155
11,233
3,277
37
29,702
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.
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27. Finance costs
In thousands of US dollars
Interest expense on borrowings
Transaction costs
Unwinding of discount on lease liabilities
Unwinding of discount on amounts due to Government of Kazakhstan
Unwinding of discount on abandonment and site restoration provision
Other finance costs
For more information on the transaction costs please see Note 16.
28. Employees’ remuneration
The average monthly number of employees (including Executive Directors) employed was as follows:
Management and administrative
Technical and operational
Their aggregate remuneration comprised:
In thousands of US dollars
Wages and salaries
Social security costs
Share-based payments
For the year ended 31 December
2019
2018
40,399
–
1,369
821
164
294
41,143
6,648
134
845
399
214
43,047
49,383
2019
177
601
778
2019
33,655
3,692
584
37,931
2018
182
704
886
2018
35,274
4,537
727
40,538
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$31,784 thousand (FY 2018: US$33,180 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
2019
5,210
155
5,365
2019
3,471
121
3,592
2018
3,819
222
4,041
2018
2,056
148
2,204
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.
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”).
154
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Nostrum Oil & Gas PLC Annual Report 2019
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.
During 2008-2015, 4,337,958 equity appreciation rights (SARs) which can only be settled in cash were granted to senior employees and
executive directors of members of the Group or their associates. These generally vest over a five year period from the date of grant, so that
one fifth of granted SARs vests on each of the five anniversaries from the date of grant. The contractual life of the SARs is ten years. The fair
value of the SARs is measured at the grant date using a trinomial lattice valuation option pricing model taking into account the terms and
conditions upon which the instruments were granted. SARs are exercisable at any time after vesting until 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 1,225,000 of SARs at 31 December 2019 is nil (31 December 2018: 1,925,974 of SARs with
carrying value of US$40 thousand). During the year ended 31 December 2019 8,000 SARs were fully vested (FY 2018: 8,000 SARs were fully
vested). Based on the estimations of the carrying value of the liability, during the year ended 31 December 2019 the Group recognized
income from employee share options fair value adjustment in the amount of US$40 thousand (2018: income of US$2,046 thousand).
The following table illustrates the number (“No.”) and exercise prices (“EP”) of, and movements in, SARs during the year:
Total outstanding at the beginning of the year (with EP of US$ 4)
Total outstanding at the beginning of the year (with EP of US$ 10)
Total outstanding at the beginning of the year
Share options lapsed
Share options lapsed
Total outstanding at the end of the year
Total exercisable at the end of the year
2019
No.
800,974
1,125,000
1,925,974
(700,974)
–
1,225,000
1,201,000
EP,US$
4
10
4
10
2018
No.
946,153
1,265,000
2,211,153
(145,179)
(140,000)
1,925,974
1,893,974
EP,US$
4
10
4
10
There were no SARs granted or exercised during the years ended 31 December 2019 and 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 2019 and 2018:
Price at the reporting date (US$)
Distribution yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Option turnover (%)
Price trigger
2019
2018
0.2
0%
53.5%
0.3%
10
10%
2.0
1.0
0%
44.0%
0.8%
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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CONSOLIDATED FINANCIAL STATEMENTS/CONTINUED
28. Employees’ remuneration continued
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.
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 2018 and 2019:
As at 1 January 2018
Share options granted
Share options performance adjusted
Share options forfeited
Share options lapsed
As at 31 December 2018
Share options performance adjusted
Share options forfeited
As at 31 December 2019
Equity-settled
awards
Cash-settled
awards
Total
awards
1,121,587
69,697
1,191,284
1,095,691
67,349
1,163,040
(542,120)
(106,235)
(24,670)
(38,140)
(580,260)
–
–
(106,235)
(24,670)
1,544,253
98,906
1,643,159
(1,058,073)
(67,349)
(1,125,422)
(19,070)
–
(19,070)
467,110
31,557
498,667
After adjusting for the nonachievement of performance conditions explained below, 498,667 share options are capable of vesting as of
31 December 2019 and 369,785 share options were vested as of 31 December 2019, in accordance with the management’s best estimate.
These represent a portion of 1,101,342 share options with a grant date of 10 October 2017, for which 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 a further 1,163,040 share options, however due to the performance conditions not being
met none of these share options are capable of vesting.
The carrying value of the liability relating to 31,557 cash-settled share-options at 31 December 2019 is US$4 thousand (31 December 2018:
98,906 share options with carrying value of US$15 thousand). Based on the estimations of the carrying value of the liability, during the
year ended 31 December 2019 the Group recognized loss from employee share options fair value adjustment in the amount of US$11
thousand (2018: loss of US$15 thousand).
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In accordance with the management’s best estimate 369,785 share options were vested as at 31 December 2019. The fair value of the
equity-settled share options at the valuation dates of 28 November 2018 and 23 March 2018 amounted to US$ 1.25 and US$ 2.76 per
share option, respectively. Based on these estimations, during the year ended 31 December 2019 the Group recognized employee
share option expense in the amount of US$633 thousand (2018: US$711 thousand).
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 reporting date
Distribution yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Option turnover (%)
Price trigger
28 November
2018
23 March
2018
1.25
0%
43.4%
1.38%
10
10%
2.0
2.76
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 may not necessarily be the actual outcome. The model considers that when share price reaches the level
of exercise price multiplied by the price trigger the employees are expected to exercise their options.
29. Other income and expenses
For the year ended 31 December 2019 other income mainly represented income from reversal of accruals under subsoil use agreements
and other accruals for the total amount of US$5,007 thousand (2018: US$1,408 thousand) recognized in previous periods, as well as
income from sales of electricity in the amount of USD$42 thousand (2018: US$1,348 thousand).
Other expenses comprise the following for the years ended 31 December 2019 and 2018:
In thousands of US dollars
Compensation
Accruals under subsoil use agreements
Training
Business development
Social program
Sponsorship
Other accruals
Loss on disposal of property, plant and equipment
Other
For the year ended 31 December
2019
2018
3,576
3,054
2,808
1,495
313
77
–
–
1,167
12,490
–
–
2,440
–
300
53
2,691
1,709
1,311
8,504
Accruals under subsoil use agreements mainly include net amounts estimated in respect of the contractual obligations for exploration
and production of hydrocarbons from Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachinskoye fields. Compensation includes the costs
related to early termination of agreements for use of drilling rigs.
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30. Income tax
The income tax expense comprised the following:
In thousands of US dollars
Corporate income tax expense
Withholding tax expense
Deferred income tax (benefit)/expense
Adjustment in respect of the current income tax for prior periods
Total income tax (benefit)/expense
For the year ended 31 December
2019
4,146
898
2018
12,490
612
(358,194)
16,284
(72)
(851)
(353,222)
28,535
The Group’s profits are assessed for income taxes mainly in the Republic of Kazakhstan. A reconciliation between tax expense and the
product of accounting profit multiplied by the Kazakhstani tax rate applicable to the Chinarevskoye subsoil use rights is as follows:
In thousands of US dollars
Loss before income tax
Tax rate applicable to the subsoil use rights
Expected tax benefit
Effect of exchange rate on the tax base
Adjustments in respect of current income tax of previous years
Effect of (income)/loss taxed at different rate¹
Non-deductible interest expense on borrowings
Non-deductible impairment charges
Deferred tax asset not recognised
Non-deductible penalties reversals/(accruals)
Net foreign exchange loss
Non-deductible social expenditures
Non-deductible cost of technological loss
Other non-deductible expenses
Income tax (benefit)/expense
For the year ended 31 December
2019
2018
(1,343,149)
(92,160)
30%
30%
(402,945)
(27,648)
13,302
18,284
(72)
(121)
26,210
9,012
228
484
(109)
81
209
499
(353,222)
(851)
473
23,847
9,728
3,891
(204)
(1,261)
203
224
1,849
28,535
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%.
The Group’s effective tax rate for the year ended 31 December 2019 is 26.2% (2018: negative 31.0%). The Group’s effective tax rate,
excluding effect of movements in exchange rates and non-deductible interest expense on borrowings, for the year ended 31 December
2019 is 29.2% (2018: 23.9%).
As at 31 December 2019, the Group has tax losses of US$103,624 thousand (2018: US$104,185 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.
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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
Inventories (change in stock)
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 (benefit)/charge in the statement of income
Balance as at 31 December
31 December
2019
31 December
2018
8,835
4,910
(3,648)
–
(42,761)
(398,115)
(5,213)
(7,776)
(42,787)
(400,981)
2019
2018
400,981
381,595
–
–
(358,194)
42,787
3,102
384,697
16,284
400,981
31. 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 2019 and 31 December 2018 consisted of the following:
In thousands of US dollars
Trade receivables and advances paid
JSC OGCC KazStroyService
31 December
2019
31 December
2018
–
11,408
Accounts payable to related parties represented by entities controlled by shareholders with significant influence over the Group as at
31 December 2019 and 31 December 2018 consisted of the following:
In thousands of US dollars
Trade payables
JSC OGCC KazStroyService
31 December
2019
31 December
2018
430
11,420
During the years ended 31 December 2019 and 2018, 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
For the year ended 31 December
2019
2018
11,322
13,975
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 fourteen supplemental agreements since 28 July 2014, the “Construction Contract”).
The Contractor is an affiliate of Mayfair Investments B.V., which as at 31 December 2019 owned approximately 25.7% of the ordinary
shares of Nostrum Oil & Gas PLC.
Remuneration (represented by short-term employee benefits) of key management personnel amounted to US$5,210 thousand for the year
ended 31 December 2019 (FY 2018: US$3,819 thousand). There were not payments to key management personnel under ESOP for the
year ended 31 December 2019 (FY 2018: US$151 thousand).
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CONSOLIDATED FINANCIAL STATEMENTS/CONTINUED
32. Audit and non-audit fees
During the years ended 31 December 2019 and 2018 audit and non-audit fees comprise the following:
In thousands of US dollars
2019
2018
Audit of the financial statements
Total audit services
Audit-related assurance services
Services relating to corporate transactions
Other non-audit services
Total non-audit services
Total fees
491
491
171
578
4
753
1,244
292
292
190
307
1
498
790
The audit fees in the table above include the audit fees of US$10 thousand in relation to the Parent.
33. 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 2019. As at 31 December 2019 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 2019, the Group had contractual capital commitments in the amount of US$27,552 thousand (31 December 2018:
US$131,373 thousand), mainly in respect to the Group’s oil field exploration and development activities.
Social and education commitments
As required by the Contract (after its amendment on 2 September 2019), 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.
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The contracts for exploration and production of hydrocarbons from the 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 the Rostoshinskoye field (as amended
on 16 August 2019) require the subsurface user to:
• invest at least US$10,982 thousand for exploration of the field during the exploration period;
• create a liquidation fund to cover the Group’s asset retirement obligations.
The outstanding obligations under the contract for exploration and production of hydrocarbons from the Darjinskoye field (after its
amendment on 31 October 2018) require the subsurface user to:
• invest at least US$19,443 thousand for exploration of the field during the exploration period;
• spend US$147 thousand to finance social infrastructure;
• fund liquidation expenses equal to US$177 thousand.
The outstanding obligations under the contract for exploration and production of hydrocarbons from the Yuzhno-Gremyachinskoye field
(after its amendment on 10 October 2018) require the subsurface user to:
• invest at least US$20,151 thousand for exploration of the field during the exploration period;
• spend US$146 thousand for the education of personnel engaged to work under the contract during the exploration stage;
• spend US$147 thousand to finance social infrastructure;
• fund liquidation expenses equal to US$202 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.
34. 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 summarised 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 2019 and 2018 as the Group had no financial instruments with floating rates as at years
ended 31 December 2019 and 2018.
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CONSOLIDATED FINANCIAL STATEMENTS/CONTINUED
34. Financial risk management objectives and policies continued
Foreign currency risk
As a significant portion of the Group’s operation is 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, i.e. devaluation of Tenge against US dollar by 60% would lead to decrease in the net
Tenge liability position by US$670 as of 31 December 2019 and respective reduction of the loss before income tax for the year ended
31 December 2019. The impact on equity is the same as the impact on profit before tax.
Change
in tenge
to US dollar
exchange rate
Effect on profit
before tax
2019
US dollar thousand
US dollar thousand
2018
US dollar thousand
US dollar thousand
+ 60.00%
– 20.00%
+ 60.00%
– 20.00%
The Group’s foreign currency denominated monetary assets and liabilities were as follows:
As at 31 December 2019
Cash and cash equivalents
Trade receivables
Trade payables
Other current liabilities
Tenge
Russian rouble
797
24,276
(12,852)
(15,561)
(3,340)
107
–
(170)
(53)
(116)
Euro
4,003
–
(4,617)
(1,131)
(1,745)
Other
613
–
(135)
(828)
(350)
1,253
(835)
7,500
(5,000)
Total
5,520
24,276
(17,774)
(17,573)
(5,551)
As at 31 December 2018
Tenge
Russian rouble
Euro
Other
Total
Cash and cash equivalents
Trade receivables
Trade payables
Other current liabilities
Liquidity risk
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)
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 total outstanding debt consists of two notes: US$725 million issued in 2017 and maturing in 2022 and US$400 million issued
in 2018 and maturing in 2025. Based on these assessments and other matters considered by the Board through viability assessment, the
Board could not reach the conclusion that there is 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 2022. The Board therefore highlighted that the Viability assessment shows
significant risks to the Groups ability to continue in operations and repay its liabilities in 2022. For more information on analysis of the
Group’s ability to meet its liabilities on repayment of the Notes please see “Viability statement” section on the Annual report on page 50.
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The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2019 and 31 December 2018 based on
contractual undiscounted payments:
As at 31 December 2019
Borrowings
Lease liabilities
Trade payables
Other current liabilities
Due to Government of Kazakhstan
As at 31 December 2018
Borrowings
Trade payables
Other current liabilities
Due to Government of Kazakhstan
Credit risk
On demand
Less than
3 months 3-12 months
1-5 years
More than
5 years
Total
–
43,000
43,000
953,000
414,000 1,453,000
6,735
21,685
30,286
–
641
–
–
258
–
5,953
–
773
–
–
–
–
–
–
4,124
6,443
7,376
27,638
30,286
11,598
58,706
43,899
49,726
957,124
420,443
1,529,898
On demand
Less than
3 months 3-12 months
1-5 years
More than
5 years
Total
–
43,000
43,000
1,011,000
442,000 1,539,000
37,843
29,858
–
–
–
258
15,033
–
773
–
–
–
–
4,124
7,474
52,876
29,858
12,629
67,701
43,258
58,806 1,015,124
449,474 1,634,363
Financial instruments, which potentially subject the Group to credit risk, consist primarily of 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, and cash and cash equivalents.
The Group places its tenge denominated cash with SB Sberbank JSC, which has a credit rating of Ba1 (stable) from Moody’s rating agency
and ING with a credit rating of P1 (stable) from Moody’s rating agency at 31 December 2019. 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. Also, the Group’s policy is to mitigate the payment risk on its off-takers by requiring all
purchases to be prepaid or secured by a letter of credit from an international bank.
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.
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 amortised cost
Interest bearing borrowings
Total
Carrying amount
Fair value
31 December
2019
31 December
2018
31 December
2019
31 December
2018
1,136,086
1,129,600
526,156
1,136,086
1,129,600
526,156
722,377
722,377
Management assessed that cash and cash equivalents, current investments, trade receivables, trade payables, lease liabilities 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 2019 and 2018 there were no transfers between the levels of fair value hierarchy of the Group’s
financial instruments.
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CONSOLIDATED FINANCIAL STATEMENTS/CONTINUED
34. Financial risk management objectives and policies continued
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, and current and non-current investments
Net debt
Equity
Total capital
Capital and net debt
Gearing ratio
For the year ended
31 December
2019
2018
1,136,086
1,129,600
(93,940)
(121,753)
1,042,146
1,007,847
(432,084)
(432,084)
556,999
556,999
610,062
1,564,846
171%
64%
No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2019 and
31 December 2018.
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35. Events after the reporting period
OPEC and non-OPEC allies
On 6 March 2020, OPEC and non-OPEC allies (OPEC+) met to discuss the need to cut oil supply to balance oil markets in the wake of the
COVID-19 outbreak which has had a material impact on oil demand. The parties failed to reach agreement on 7 March 2020, and Saudi
Aramco aggressively cut its Official Selling Prices (OSP) in an attempt to prioritise market share rather than price stability and effectively
started a price war. As a result, on 9 March 2020, Brent oil prices fell by around 20%, and the forward curve for 2020 and 2021 fell to
approximately $38/bbl and $43/bbl respectively. This was compounded by a perceived lack of future demand for oil caused by disruptions to
businesses and economic activity as a result of the novel coronavirus COVID-19 (‘COVID-19’). Whilst the OPEC+ countries together with a
wider group of producers have subsequently agreed to lower daily production levels, the continuing uncertainty over the future demand
for oil as a result of the continuing impact of COVID-19 is restricting the recovery of the oil price. These events continue to have an impact
on oil price volatility with spot prices for Brent reaching a low of $20/bbl in March 2020. The Group’s realised oil prices for January and
February 2020 averaged around $55/bbl.
Coronavirus outbreak
The existence of COVID-19 was confirmed in early 2020 and has spread across China and beyond, causing disruptions to businesses and
economic activity. Governments in affected countries are imposing travel bans, quarantines and other emergency public safety measures.
Those measures, though temporary in nature, may continue and increase depending on developments in the virus’ outbreak. Currently,
the employees of the European offices of the Group are working from home due to travel restrictions imposed by respective governments.
The Group’s offices and facilities in Kazakhstan remain open with certain travel restrictions in place, but necessary workers are able to
operate and maintain the assets to the high standards. The ultimate severity of the Covid-19 outbreak is uncertain at this time, and
therefore the Group cannot reasonably estimate the impact it may have on future operations.
There is a significant uncertainty in relation to the extent and period over which these developments will continue, but they could have a
significant impact on the Group’s financial position, future cashflows and results of operations. For more details as to how these uncertainties
have been considered in preparing these financial statements, please see the ‘Viability Statement’ and the ‘Going Concern’ section of the
Financial Review (see pages 50 and 54 of the Annual Report).
In addition, the significant estimates and judgements that will be made in preparing future financial statements may also be impacted if the
current macro-economic uncertainty continues and estimates of long-term commodity prices decrease. In particular, we expect the impact
to be as follows:
• The estimated recoverable amount of our cash generating unit related to the Chinarevskoye field and related facilities would reduce.
An additional impairment could be required as the CGU was impaired in 2019 and so is sensitive to changes in commodity prices as
described in Note 4; and
• The estimate of oil and gas reserves would be lower if the long-term planning price on which our estimates of reserves are based decreases.
Engagement with bondholders
On 31 March 2020 the Group announced that it will now seek to engage with its bondholders regarding a possible restructuring of the
Group’s outstanding bonds.
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PARENT COMPANY FINANCIAL STATEMENTS
Parent company financial statements
Contents
165
166
167
Parent company statement of financial position
Parent company statement of cash flow
Parent company statement of changes in equity
168 Notes to the Parent company financial statements
168
168
169
172
175
175
175
175
176
177
178
178
178
179
180
181
1. General
2. Basis of preparation
3. Changes in accounting policies and disclosures
4. Summary of significant accounting policies
5.
Investments in subsidiaries
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
164
Nostrum Oil & Gas PLC Annual Report 2019
Parent company statement
of financial position
In thousands of US dollars
ASSETS
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Current assets
Advances paid
Receivables from related parties
Other current assets
Cash and cash equivalents
TOTAL ASSETS
EQUITY AND LIABILITIES
Share capital and reserves
Issued share capital
Retained (deficit) / earnings
Non-current liabilities
Employee share option plan LT liability
Financial guarantee, long-term portion
Current liabilities
Financial guarantee, current portion
Trade payables
Advances received from related parties
Payables to related parties
Employee share option plan LT liability
Accrued liabilities
31 December
2019
31 December
2018
(restated*)
1 January
2018
(restated*)
Notes
5
6
7
8
9
9
14
10
42
–
42
60
116,779
116,839
–
113,371
113,371
–
665
285
1,522
2,472
–
12,302
178
38
12,518
23
15,798
–
88
15,909
2,514
129,357
129,280
3,203
(436,960)
(433,757)
3,203
106,812
110,015
3,203
106,284
109,487
–
434,117
434,117
–
158
304
859
4
829
2,154
15
4,678
4,693
1,003
495
–
12,283
–
868
14,649
–
3,228
3,228
2,899
124
–
12,982
–
560
16,565
TOTAL EQUITY AND LIABILITIES
2,514
129,357
129,280
* Certain amounts shown here do not correspond to the 2018 and 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$544,405 thousand for the financial year ended 31 December 2019 (2018: loss of US$183 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:
Kaat Van Hecke
Chief Executive Officer
Martin Cocker
Chief Financial Officer
The accounting policies and explanatory notes on pages 168 through 181 are an integral part of these financial statements
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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PARENT COMPANY FINANCIAL STATEMENTS/CONTINUED
Parent company statement of cash flows
In thousands of US dollars
Cash flow from operating activities:
Loss before income tax
Adjustments for:
Depreciation, depletion and amortisation
Finance costs
Employee share option plan fair value adjustment
Income from share premium distribution
Accrued income
Foreign exchange gain on investing and financing activities
Financial guarantee loss/(income)
Impairment charge
Accrued expenses
Operating profit/(loss) before working capital changes
Changes in working capital:
Change in other current assets
Change in receivables from related parties
Change in trade payables
Change in payables to related parties
Change in accrued 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
Subsidiary share premium received
Net cash from/(used in) investing activities
Cash flow from financing activities:
Funds borrowed
Net cash from financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
For the year ended
31 December
Notes
2019
2018
(544,405)
(183)
25
44
41
(1,000)
–
(2)
428,436
117,361
–
500
(107)
564
(336)
(592)
(39)
(10)
–
(10)
(7)
1,000
993
500
500
1
1,484
38
1,522
9
5
7
7
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
During 2019 the Company entered into Intra-Group Payment Set-Off Agreement according to which the Company performed non-cash settlement of its loan
payable to its indirect subsidiary Nostrum Oil & Gas Finance B.V. in the amount of US$3,000 thousand (Note 10) against its receivables from its subsidiary
Nostrum Oil & Gas Coöperatief U.A. in the amount of US$3,000 thousand (Note 6). These transactions had impact on “change in receivables from related
parties” and “change in payables to related parties” above.
As at 31 December 2019 the Company recognized bad debt allowance in the amount of US$8,073 thousand (2018: US$4,249 thousand) against the loan
receivable from Nostrum employee benefit trust and a similar but opposite amount against its loan payable to its subsidiary Nostrum Oil & Gas Coöperatief
U.A. (Notes 6 and 10). These transactions had impact on “change in receivables from related parties” and “change in payables to related parties” above.
The accounting policies and explanatory notes on pages 168 through 181 are an integral part of these financial statements
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Parent company statement of
changes in equity
In thousands of US dollars
As at 1 January 2018
Loss for the year
Total comprehensive loss for the year
Share based payments under LTIP
As at 31 December 2018
Loss for the year
Total comprehensive loss for the year
Share based payments under LTIP
As at 31 December 2019
Notes
Share
capital
Other
reserves
Retained
earnings
Total
3,203
–
–
–
3,203
–
–
–
13
13
–
–
–
106,284
109,487
(183)
(183)
(183)
(183)
711
711
–
711
106,101
110,015
–
–
(544,405)
(544,405)
(544,405)
(544,405)
633
–
633
3,203
1,344
(438,304)
(433,757)
The accounting policies and explanatory notes on pages 168 through 181 are an integral part of these financial statements
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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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 2019 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
Gustav Mahlerplein 23B, 1082MS
Amsterdam, The Netherlands
Gustav Mahlerplein 23B, 1082MS
Amsterdam, The Netherlands
Members’ interests
Ordinary shares
Indirect subsidiary
undertakings:
Nostrum Associated
Investments LLP
Nostrum E&P Services LLC
43/1 Karev street, 090000 Uralsk,
Republic of Kazakhstan
Liteyniy Prospekt 26 A, 191028 St.
Petersburg, Russian Federation
Participatory interests
Participatory interests
Nostrum Oil & Gas Finance B.V. Gustav Mahlerplein 23B, 1082MS
Ordinary shares
Nostrum Oil & Gas UK Ltd.
Nostrum Services
Central Asia LLP
Nostrum Services N.V.
Zhaikmunai LLP
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
Ordinary shares
Participatory interests
Ordinary shares
Participatory interests
100
100
100
100
100
100
100
100
100
On 28 December 2018, Zhaikmunai LLP acquired 100% interest in Atom&Co LLP for cash consideration of US$ 1.7 million for the main
purpose of gaining control over the administrative office in Uralsk. This transaction has been accounted as an asset acquisition, which
was under finance lease with this entity. On 20 August 2019, Zhaikmunai LLP merged with Atom & Co LLP.
Nostrum Oil & Gas PLC and its wholly-owned subsidiaries are hereinafter referred to as “the Company”.
2. Basis of preparation
The Company financial statements for the year ended 31 December 2019 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 Company is dependent on liquidity generated by its subsidiaries to continue in operation and its ability to meet its liabilities as they
become due for the foreseeable future, a period of not less than 12 months from the date of this report. Respectively, the following Group-
level going concern matters and analysis are considered directly relevant for the Company.
The Group monitors on an ongoing basis its liquidity position, near-term forecasts and key financial ratios to ensure that sufficient funds
are available to meet its commitments as they arise. In addition, on a quarterly basis the Group performs sensitivity tests of its liquidity
position for changes in crude oil price, production volumes and timing of completion of various ongoing projects. While looking for
new opportunities to fill the spare capacity of the Group’s infrastructure, the Directors are also focused on a range of actions aimed
at improving the liquidity outlook in the near-term. These include further cost optimization to reduce capital, operating and general &
administration expenditures.
The base-case scenario of the going concern model has been prepared using a US$45/bbl oil price assumption for throughout 2020 and
2021. The base-case liquidity model shows that the Group will be able to operate as usual and have sufficient financial headroom for the
12 months from the date of approval of the Annual Report and Accounts.
As disclosed in Note 16, subsequent to the year-end the price of oil collapsed following a disagreement between OPEC+ countries on
production levels compounded by the perceived lack of future demand for oil caused by disruptions to businesses and economic activity
as a result of the novel coronavirus COVID-19 (‘COVID-19’). Whilst the OPEC+ countries, together with a wider group of producers have
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subsequently agreed to lower daily production levels, the continuing uncertainty over the future demand for oil as a result of the
continuing impact of COVID-19 is restricting the recovery of the oil price.
The Directors have also considered any additional risks of COVID-19. Oil and gas production has been classified as an essential business
in Kazakhstan and so operations are continuing. Contingency plans have been put in place both to protect the workforce and ensure that
there are sufficient personnel to continue operations. Therefore, the Directors have concluded that there is currently no other material
impact on the Group’s operations and liquidity at the time of publication of the report as a result of COVID-19. However, it is recognized
that there is uncertainty around future developments of this matter which may affect the Group’s ability to deliver the forecast production
over 2020 and early 2021.
As a result of these uncertainties, we also ran a plausible downside scenario at US$30/bbl oil price, reflecting market conditions observed
subsequent to the year-end, for the entire period covered by the model. This represents a scenario in which production is as forecast in
the base case model but the post year end conditions continue for 12 months.
The results of the plausible downside scenario showed that in the near-term the Group’s liquidity position is exposed to such a fall in oil
prices. Without mitigating actions, a sustained period of low oil prices at $30/bbl would result in the Group being unable to cover its cash
operating and interest costs in 2021. The Group’s liquidity position is therefore exposed to events outside of the Group’s control.
Therefore, the Group announced on March 31, 2020 that it will now seek to engage with its bondholders regarding a possible restructuring
of the Group’s outstanding bonds. The Group is in the process of selecting a financial advisor to commence negotiations with bondholders.
The Group will require amendment in the short term to protect the liquidity of the Group within the going concern period, and restructuring
to ensure ongoing viability. The results of any discussions with bond holders and shareholders are uncertain. In the event of sustained low oil
prices envisaged in the plausible downside case, the company will require amendment to the payment terms within the bonds to take effect
within the going concern period.
The Group is also taking other, prudent mitigating actions that can be executed in the necessary timeframe and which will protect liquidity.
These include cancelling uncommitted capital expenditures over the period without having an impact on forecast production in the going
concern period of assessment and identifying further reductions in operating costs and general & administration costs.
Therefore, in forming an assessment on the Group’s ability to continue as a going concern, the Board has made significant judgements about:
• The forecast cash flow of the Group over the next 12 months from the date of approval of the financial statements depends on the
duration of the low oil price environment and the Group’s ability to implement the mitigating actions within the Group’s control; and
• The Group’s ability to successfully engage with its bondholders and shareholders regarding a restructuring of the Group’s
outstanding bonds.
These represent material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern.
After careful consideration of these material uncertainties, 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. For these reasons, they continue
to adopt the going concern basis in preparing the Company’s financial statements. Accordingly, these financial statements do not include
any adjustments to the carrying amount or classification of assets and liabilities that would result if the Company were unable to continue
as a going concern.
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 16 for the first
time. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.
IFRS 16 Leases
IFRS 16 supersedes 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. The standard 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.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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PARENT COMPANY FINANCIAL STATEMENTS/CONTINUED
Lessor accounting under IFRS 16 is substantially unchanged under IAS 17. Lessors will continue to classify leases as either operating or
finance leases using similar principles as in IAS 17.
The Company carried out review of its contracts, as a result of which it was concluded that there is no impact from adopting IFRS 16 on the
financial statements of the Company for the years ended 31 December 2018 and 2019.
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.
Standards issued, but not yet effective, as at 1 January 2019, have not been adopted early by the Company.
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.
Upon adoption of the Interpretation, the Company considered whether it has any uncertain tax positions, particularly those related to
transfer pricing. The Company determined, based on its tax compliance studies, that it is probable that its tax treatments will be accepted
by the taxation authorities. The interpretation did not have an impact on the financial statements of the Company.
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. These amendments had no impact
on the financial statements of the Company.
Annual Improvements 2015-2017 Cycle (issued in December 2017)
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 Company does not expect to pay dividends in the coming reporting
period, these amendments had no effect on its 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 Company’s current practice is in line with these amendments, the amendments had no impact
on its financial statements.
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Prior period adjustment
The Company held receivables from the Nostrum Oil & Gas Benefit Trust (“the Trust”) in the amount of US$23,812 thousand as at
31 December 2019 and 2018, which represent the loan provided to support the Company’s obligations to employees under the
Employee Share Option Plan (“ESOP”) and the Long Term Incentive Plan (“LTIP”) (Note 6). At the same time, the Company had amounts
payable to Nostrum Oil & Gas Coöperatief U.A. in the amount of US$23,812 thousand as at 31 December 2019 and 2018, which represent
a loan payable under the services agreement with Nostrum Oil & Gas Coöperatief U.A. corresponding to arrangements in respect of the
Nostrum employee benefit trust. Based on the service agreement, the amounts payable to Nostrum Oil & Gas Coöperatief U.A. in respect
to the employee benefit trust, are only repayable to the extent of amounts received (or recovered) from the Trust (Note 10).
In 2019, the Company performed an assessment of its position related to both the loan receivable and the loan payable. Considering that
both loans are repayable to the extent of the assets of the Trust, which are reflected in treasury shares held by the Trust, the Company has
recognized a bad debt allowance over the loan receivable in the amount of US$23,157 thousand, with a similar and opposite reduction in
the loan payable, representing the difference between the book value of the loans and the recoverable amount of the treasury shares as
of 31 December 2019.
The Company has also assessed the corresponding values of the loans as at 31 December 2018 with reference to the then prevailing market
share prices and Group’s net assets. As a result, the Company believes that, there was an incorrect interpretation of the facts at that time
and so it has adjusted the value of the loans as at 31 December 2018 through retrospective restatement of the corresponding balances.
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
As reported
Restatement As adjusted
As reported
Restatement
As adjusted
As at 31 December 2018
As at 1 January 2018
Receivables from related parties
Total current assets
Total assets
Payables to related parties
Total current liabilities
Total equity and liabilities
27,386
27,602
(15,084)
(15,084)
12,302
12,518
26,633
26,744
(10,835)
(10,835)
15,798
15,909
144,441
(15,084)
129,357
140,115
(10,835)
129,280
27,367
29,733
(15,084)
(15,084)
12,283
14,649
23,817
27,400
(10,835)
(10,835)
12,982
16,565
144,441
(15,084)
129,357
140,115
(10,835)
129,280
There was no net impact on the income statement and the statement of cashflows from the adjustments, other than the additional
disclosures related to the non-cash transactions included as an endnote to the statement of cashflows.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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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. Subsequently, the Company determines whether it is necessary to recognise an
impairment loss on its investment in a subsidiary. At each reporting date, the Company determines whether there is objective evidence
that the investment in the subsidiary is impaired. If there is such evidence, the Company calculates the amount of impairment as the
difference between the recoverable amount of the subsidiary and its carrying value, and then recognises the impairment loss in the
statement of profit or loss.
Significant estimates and assumptions: impairment of investments in subsidiaries
Determination as to whether, and by how much, the investment in a subsidiary is impaired involves management’s best estimates
on highly uncertain matters such as future revenues of the subsidiary, operating expenses, discount rate, as well as fiscal regimes.
In the view of the decrease in the net assets of Company’s subsidiaries Nostrum Oil & Gas Coöperatief U.A. and Nostrum Oil & Gas
B.V. during the year ended 31 December 2019, which was considered to be an indication of impairment of the investments in this
subsidiary in the amount of US$117,139 thousand (Note 5), the Company carried out respective impairment review and analysis.
Owing to the reduction of the 2P reserves expected to be recovered from the main operating subsidiary of the Company over the
period of 2020-2032, the relevant future net cash proceeds of Nostrum Oil & Gas Coöperatief U.A. have been reduced, leading to
recognition of an impairment charge for the full amount of the investments in Nostrum Oil & Gas Coöperatief U.A. of US$117,139
thousand and impairment charge of US$222 thousand on investment in Nostrum Oil & Gas B.V.
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.
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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.
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.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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PARENT COMPANY FINANCIAL STATEMENTS/CONTINUED
4. Summary of significant accounting policies continued
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.
Financial guarantees
Financial guarantees are initially recognised in the financial statements at fair value at the time the guarantee is issued. The Company
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 Company’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 13.
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5. Investments in subsidiaries
Investments of the Company as at 31 December 2019 comprised of:
In US dollars
Nostrum Oil & Gas Coöperatief U.A.
Nostrum Oil & Gas BV
Impairment of investments
31 December
2019
31 December
2018
117,139,106
222,271
(117,361,377)
–
116,556,729
222,271
–
116,779,000
The investments in Nostrum & Gas Cooperatief U.A. include the guarantee initial cost in the amount of US$9,881 thousand as described
in the Note 9 (2018: US$9,881 thousand) as well as US$582 thousand capitalized costs under the Long-term Incentive Plan 2017
(2018: US$676 thousand).
As a result of the impairment testing performed at 31 December 2019 the Company recognized impairment charge of US$117,361
thousand for its investments in subsidiaries. For more details please refer to Note 4.
6. Receivables from related parties
Receivables from related parties are comprised of the following as at 31 December 2019 and 31 December 2018:
In thousands of US dollars
Receivables from Nostrum Oil & Gas Benefit Trust
Receivables from Nostrum Oil & Gas Coöperatief U.A.
Receivables from Nostrum Oil & Gas UK Ltd.
Bad debt allowance
31 December
2019
31 December
2018
(restated)
23,812
–
10
(23,157)
665
23,812
3,574
–
(15,084)
12,302
1 January
2018
(restated)
23,812
2,821
–
(10,835)
15,798
Receivables from the Nostrum Oil & Gas Benefit Trust (“the Trust”) represent the loan provided to support the Company’s obligations
to employees under the Employee Share Option Plan (“ESOP”) and the Long Term Incentive Plan (“LTIP”) (Note 13). The loan is interest
free and unsecured. The loan is repayable in the case of an advance used to acquire securities to satisfy the exercise of options granted
pursuant to the rules of ESOP, and unless otherwise agreed in writing between the parties, the earlier of 1) ten years from the Date of
Grant, or 2) 30 days after the exercise date, and in all other cases any other date agreed in writing between the parties. Considering the
fact that the loan is repayable to the extent of the assets of the Trust, which are reflected in treasury shares held by the Trust, the Company
has recognized a bad debt allowance as at 31 December 2019 in the amount of US$23,157 thousand (2018: US$15,084 thousand),
representing the difference between the book value of the loan and the recoverable value of the treasury shares as of 31 December 2019.
During 2019 the Company entered into Intra-Group Payment Set-Off Agreement according to which the Company performed non-cash
settlement of receivables from its subsidiary Nostrum Oil & Gas Coöperatief U.A. in the amount of US$3,000 thousand against the loan
payable to its indirect subsidiary Nostrum Oil & Gas Finance B.V. in the amount of US$3,000 thousand (Note 10).
7. Cash and Cash Equivalents
In thousands of US dollars
Current accounts in US Dollars
Current accounts in Pounds Sterling
Current accounts in Euro
31 December
2019
31 December
2018
877
588
57
1,522
8
27
3
38
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.
Share capital of Nostrum Oil & Gas PLC
As at 31 December 2019 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.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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PARENT COMPANY FINANCIAL STATEMENTS/CONTINUED
9. Financial guarantees
Financial guarantees are comprised of the following as at 31 December 2019 and 31 December 2018:
In thousands of US dollars
Financial guarantee as at 1 January
Charge for expected credit losses
Release upon repayment of the Notes
Recognition on issue of the Notes
Amortisation for the period
Financial guarantee as at 31 December
Less amounts due within 12 months
Amounts due after 12 months
2019
5,681
428,436
–
–
–
434,117
–
434,117
2018
6,127
–
(2,255)
2,731
(922)
5,681
(1,003)
4,678
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. Since the guarantees are issued in favour of the Company’s indirect subsidiaries, related costs at initial
recognition are capitalized into the investments in subsidiaries (Note 5).
In 2019, the Company performed an assessment of the value of the guarantees issued under the 2017 and 2018 Notes, taking into
account the Group’s financial position as at 31 December 2019 and the fact that the Company is the parent entity in the Group and so
would ultimately assume the guarantee obligations of its subsidiaries in the event of their inability to meet such obligations. As a result, the
Company has recognized the guarantee liabilities for the total amount of US$ 434,117 thousand as at 31 December 2019, representing
the amount of expected credit losses as of the reporting date. The financial guarantee has been classified as non-current to reflect the fact
that the guaranteed notes are not due for repayment before July 2022 and August 2025, as assessed at the end of the reporting period.
Further details on the Notes are provided below.
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 year.
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.
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, maturing in 2022.
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.
12
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Nostrum Oil & Gas PLC Annual Report 2019
Nostrum Oil & Gas PLC Annual Report 2019
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.
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 February and 16 August of each year, maturing in 2025.
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.
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.
10. Payables to related parties
Payables to related parties are comprised of the following as at 31 December 2019 and 31 December 2018:
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
2019
31 December
2018
(restated)
655
204
–
–
859
8,728
2,855
650
50
12,283
1 January
2018
(restated)
12,977
–
–
5
12,982
As at 31 December 2019 amounts payable to Nostrum Oil & Gas Coöperatief U.A. represent the arrangements in respect of the Nostrum
employee benefit trust. For more details please refer to Note 6. Based on the service agreement, the amounts payable to Nostrum Oil &
Gas Coöperatief U.A. in respect to the employee benefit trust, are only repayable to the extent of amounts received (or recovered) from
the Trust. Considering the fact that the loan is repayable to the extent of the assets of the Trust, which are reflected in treasury shares
held by the Trust, the Company has remeasured and reduced the loan payable as at 31 December 2019 by US$23,157 thousand
(2018: US$15,084 thousand), representing the difference between the book value of the loan and the recoverable value of the
treasury shares as of 31 December 2019.
In 2018 the Company received a loan from its indirect subsidiary Nostrum Oil & Gas Finance B.V. in the amount of US$ 2,500 thousand,
at the interest rate of 7%, which is repayable on demand. During 2019 the Company received further proceeds on the loan agreement in
the amount of US$500 thousand. Further during the year the Company entered into Intra-Group Payment Set-Off Agreement according
to which the Company performed non-cash settlement of its loan payable to its indirect subsidiary Nostrum Oil & Gas Finance B.V. in the
amount of US$3,000 thousand against its receivables from its subsidiary Nostrum Oil & Gas Coöperatief U.A. in the amount of $3,000
thousand. The interest accrued the loan at 31 December 2019 amounted to US$204 thousand (2018: US$160 thousand).
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
PARENT COMPANY FINANCIAL STATEMENTS/CONTINUED
11. Auditors’ remuneration
The fees for the audit of the Company amount to US$10 thousand (2018: 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 2019 was US$2,777 thousand (2018: US$1,202 thousand)
and also includes remuneration paid by other companies of the Group. In addition, US$662 thousand (2018: US$854 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 Group.
For the year ended 31 December 2019 the Company employed an average of 6 non-executive directors (FY 2018: 6 non-executive directors).
Full details of individual directors’ remuneration are given in the directors’ remuneration report on pages 86-94 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 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.
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 2018 and 2019:
Total outstanding as at 1 January 2018
Share options granted
Share options performance adjusted
Share options forfeited
Share options lapsed
Total outstanding as at 31 December 2018
Share options performance adjusted
Share options forfeited
Total outstanding as at 31 December 2019
Equity-settled
awards
Cash-settled
awards
Total
awards
1,121,587
69,697
1,191,284
1,095,691
(542,120)
(106,235)
(24,670)
1,544,253
(1,058,073)
(19,070)
467,110
67,349
(38,140)
–
–
98,906
(67,349)
–
31,557
1,163,040
(580,260)
(106,235)
(24,670)
1,643,159
(1,125,422)
(19,070)
498,667
After adjusting for the nonachievement of performance conditions explained below, 498,667 share options are capable of vesting as of
31 December 2019 and 369,785 share options were vested as of 31 December 2019, in accordance with the management’s best estimate.
These represent a portion of 1,101,342 share options with a grant date of 10 October 2017, for which 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.
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Nostrum Oil & Gas PLC Annual Report 2019
Nostrum Oil & Gas PLC Annual Report 2019
On 28 November 2018 the Company granted a further 1,163,040 share options, however due to the performance conditions not being
met none of these share options are capable of vesting.
In accordance with the management’s best estimate 369,785 share options were vested as at 31 December 2019. The fair value of the
equity-settled share options at the valuation dates of 28 November 2018 and 23 March 2018 amounted to US$ 1.25 and US$ 2.76 per
share option, respectively. Based on these estimations, during the year ended 31 December 2019 the Company recognized employee
share option expense in the amount of US$633 thousand (2018: US$711 thousand). 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 reporting date
Distribution yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life (years)
Option turnover (%)
Price trigger
28 November
2018
23 March
2018
1.40
0%
43.4%
1.38%
10
10%
2.0
3.08
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.
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.
Accounts receivable from related parties represented by Company’s subsidiaries as at 31 December 2019 and 31 December 2018
consisted of the following:
In thousands of US dollars
Receivables from Nostrum Oil & Gas Benefit Trust, net (Note 6)
Receivables from Nostrum Oil & Gas Coöperatief U.A.
Receivables from Nostrum Oil & Gas UK Ltd.
31 December
2019
31 December
2018
(restated)
655
–
10
665
8,728
3,574
–
12,302
1 January
2018
(restated)
12,977
2,821
–
15,798
Accounts payable to related parties represented by Company’s subsidiaries as at 31 December 2019 and 31 December 2018 consisted of
the following:
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
2019
31 December
2018
(restated)
655
204
–
–
859
8,728
2,855
650
50
12,283
1 January
2018
(restated)
12,977
–
–
5
12,982
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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PARENT COMPANY FINANCIAL STATEMENTS/CONTINUED
Financial guarantees are comprised of the following as at 31 December 2019 and 31 December 2018:
In thousands of US dollars
Financial guarantee as at 1 January
Charge for expected credit losses
Release upon repayment of the Notes
Recognition on issue of the Notes
Amortisation for the period
Financial guarantee as at 31 December
Less amounts due within 12 months
Amounts due after 12 months
2019
5,681
428,436
–
–
–
434,117
–
434,117
2018
6,127
–
(2,255)
2,731
(922)
5,681
(1,003)
4,678
Advances received from related parties represented by Company’s subsidiaries as at 31 December 2019 were represented by advances
received from Nostrum Oil & Gas Coöperatief U.A. in the amount of US$304 thousand (2018: nil).
During the years ended 31 December 2019 and 2018 the Company had the following transactions with related parties represented by
Company’s subsidiaries:
In thousands of US dollars
Income from provision of services
Nostrum Oil & Gas Coöperatief U.A.
Income / (loss) from financial guarantee
Nostrum Oil & Gas Finance B.V. (Note 9)
31 December
2019
31 December
2018
7,590
4,039
(428,436)
3,177
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 payables to related parties, 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, British Pound and Euro denominated cash with ING which has a credit rating of P-1 (upper medium grade)
from Moody’s rating agency at 31 December 2019.
Receivables are amounts receivable from Group companies, thus risk of credit default is low, except for the loan receivable from the Trust
for which loss allowance has been recognized.
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.
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Nostrum Oil & Gas PLC Annual Report 2019
16. Events after the reporting period
OPEC and non-OPEC allies
On 6 March 2020, OPEC and non-OPEC allies (OPEC+) met to discuss the need to cut oil supply to balance oil markets in the wake of
the COVID-19 outbreak which has had a material impact on oil demand. The parties failed to reach agreement on 7 March 2020, and
Saudi Aramco aggressively cut its Official Selling Prices (OSP) in an attempt to prioritise market share rather than price stability and
effectively started a price war. As a result, on 9 March 2020, Brent oil prices fell by around 20%, and the forward curve for 2020 and 2021
fell to approximately $38/bbl and $43/bbl respectively. This was compounded by a perceived lack of future demand for oil caused by
disruptions to businesses and economic activity as a result of the novel coronavirus COVID-19 (‘COVID-19’). Whilst the OPEC+ countries
together with a wider group of producers have subsequently agreed to lower daily production levels, the continuing uncertainty over the
future demand for oil as a result of the continuing impact of COVID-19 is restricting the recovery of the oil price. These events continue to
have an impact on oil price volatility with spot prices for Brent reaching a low of $20/bbl in March 2020. The Group’s realised oil prices for
January and February 2020 averaged around $55/bbl.
Coronavirus outbreak
The existence of COVID-19 was confirmed in early 2020 and has spread across China and beyond, causing disruptions to businesses and
economic activity. Governments in affected countries are imposing travel bans, quarantines and other emergency public safety measures.
Those measures, though temporary in nature, may continue and increase depending on developments in the virus’ outbreak. Currently,
the employees of the European offices of the Group are working from home due to travel restrictions imposed by respective governments.
The Group’s offices and facilities in Kazakhstan remain open with certain travel restrictions in place, but necessary workers are able to
operate and maintain the assets to the high standards. The ultimate severity of the Covid-19 outbreak is uncertain at this time, and
therefore the Group cannot reasonably estimate the impact it may have on future operations.
There is a significant uncertainty in relation to the extent and period over which these developments will continue, but they could have a
significant impact on the Group’s financial position, future cashflows and results of operations. For more details as to how these uncertainties
have been considered in preparing these financial statements, please see the ‘Viability Statement’ and the ‘Going Concern’ section of the
Financial Review (see pages 50 and 54 of the Annual Report).
In addition, the significant estimates and judgements that will be made in preparing future financial statements may also be impacted if the
current macro-economic uncertainty continues and estimates of long-term commodity prices decrease. In particular, we expect the impact
to be as follows:
• The estimated recoverable amount of our cash generating unit related to the Chinarevskoye field and related facilities would reduce.
An additional impairment could be required as the CGU was impaired in 2019 and so is sensitive to changes in commodity prices as
described in Note 4 to the consolidated financial statements of the Group; and
• The estimate of oil and gas reserves would be lower if the long-term planning price on which our estimates of reserves are based decreases.
Engagement with bondholders
On 31 March 2020 the Group announced that it will now seek to engage with its bondholders regarding a possible restructuring of the
Group’s outstanding bonds.
Nostrum Oil & Gas PLC Annual Report 2018
Nostrum Oil & Gas PLC Annual Report 2019
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STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL REPORTREGULATORY INFORMATIONADDITIONAL DISCLOSURES
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
VAT GB302 9250 35
Nostrum Oil & Gas BV
Activity: Holding company
Registered office and principal place of
business:
Gustav Mahlerplein 23 B
1082 MS Amsterdam
The Netherlands
Directors:
Jan-Ru Muller
Thomas Hartnett
Nostrum Oil & Gas Coöperatief UA
Activity: Holding company
Registered office and principal place of
business
Gustav Mahlerplein 23 B
1082 MS Amsterdam
The Netherlands
Directors:
Jan-Ru Muller
Thomas Hartnett
Nostrum Oil & Gas Finance BV
Activity: Finance company
Registered office and principal place of
business
Gustav Mahlerplein 23 B
1082 MS Amsterdam
The Netherlands
Directors:
Jan-Ru Muller
Thomas Hartnett
Nostrum Services NV
Activity: Holding company
Registered office and principal place of
business
Kunstlaan 56
1000 Brussels
Belgium
Directors:
Jan-Ru Muller
Thomas Hartnett BVBA
Zhaikmunai LLP
Activity: Operating company
Registered office and principal place of
business
43/1 Karev Street
090000 Uralsk
Republic of Kazakhstan
Tel +77 112 933 900
Fax +77 112 933 901
General Director:
Zhomart Darkeyev
Nostrum Associated Investments LLP
Activity: Dormant
Registered office and principal place of
business
43/1 Karev Street
090000 Uralsk
Republic of Kazakhstan
General Director:
Dinara Urazova
Nostrum Services Central Asia LLP
Activity: Dormant
Registered office and principal place of
business
Building 75/38
Microrayon Aksay 3a
050031 Almaty
General Director:
Kalamkas Shakenova
Nostrum Oil & Gas UK Limited
Activity: Dormant
Registered office and principal place of
business
9th Floor
20 Eastbourne Terrace
London W2 6LG
United Kingdom
Directors:
Thomas Hartnett
Martin Cocker
Nostrum E&P Services LLC
Activity: Dormant
Registered office and principal place of
business
Prospekt Liteniy 26A
191028 St Petersburg
Russian Federation
General Director:
Tatiana Kichina
1. Information as to the direct and indirect
shareholdings is given in note 1 of the 2019
consolidated financial statements and in the
Group structure chart on page 185.
2. Information as to staffing is given on page 38.
3. No investments were made in the equity of
subsidiaries in 2019.
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 broker
Numis Securities Ltd
10 Paternoster Square
London EC4M 7LT
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 on
the environment, we encourage all
shareholders to opt for electronic
shareholder communications, including
annual reports and notices of meetings.
182
Nostrum Oil & Gas PLC Annual Report 2019
Share price performance
Financial Calendar 2020
Nostrum Oil & Gas share price (GBp)
150
120
90
60
30
0
9
1
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Q1 2020
Operational Update
30 April 2020
Q1 2020
Financial Results
19 May 2020
H1 2020
H1 2020
Operational Update
30 July 2020
Financial Results
18 August 2020
Q3 2020
Operational Update
30 October 2020
Q3 2020
Financial Results
17 November 2020
Capitalisation-weighted index of FTSE 350 E&P
Earnings per share (as at 31 December 2019): US$(5.34)/share
Book value per share (as at 31 December 2019): US$2.75/share
Share price information
Exchange
London Stock Exchange
Ticker
NOG.LN
Reuters code
NOGN.L
ISIN code
GB00BGP6Q951
Equity financing
Equity raising
IPO
Timing
March 2008
Secondary equity issue
September 2009
Amount
US$100m
US$300m
Lead manager
ING Bank NB
ING Bank NV
Mirabaud Securities
Renaissance Securities
Debt financing
Current outstanding bond issues for Nostrum Oil & Gas PLC are provided in the following table:
Settlement
Maturity
Currency
Amount
(m)
Coupon
Listing
RegS
Rule 144A
Jul 2017
Jul 2022
USD
725
8.000%
Dublin
Feb 2018
Feb 2025 USD
400
7.000%
Dublin
CUSIP
ISIN
N64884AB0
66978CAB8
USN64884AB02 US66978CAB81
Common Code 16453439
164534073
CUSIP
ISIN
N64884AD6
66978CAC6
USN64884AD67 US66978CAC64
Common Code 176959886
176959878
For a summary of certain covenants relating to the 2017 and 2018 Notes, please see the consolidated financial statements.
Internally held Bond Financing of the Nostrum Group
Bond issues wholly-owned by Nostrum Oil & Gas Finance BV are provided in the following table:
Settlement
Maturity
Currency
Amount
(m)
Coupon
Listing
RegS
Rule 144A
Feb 2014
Jan 2033
USD
400
9.5%
Dublin/Almaty
CUSIP
N64884AA2
66978CAA0
Nov 2012
Jun 2033
USD
560
9.5%
Dublin/Almaty
CUSIP
N97716AA7
98953VAA0
ISIN
USN97716AA72 US98953VAA08
Common Code 085313177
085259776
ISIN
USN64884AA29 US66978CAA09
Common Code 103302323
103302307
Nostrum Oil & Gas PLC Annual Report 2019
183
INVESTOR INFORMATION/CONTINUED
8.000% Bond output
Bond Price (US$)
120
100
80
60
40
20
0
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9
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0
2
n
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Bond Price
Yield to worst
7.000% Bond output
Bond Price (US$)
120
100
80
60
40
20
0
8
1
b
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F
8
1
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8
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Bond Price
Yield to worst
60
50
40
30
20
10
0
35
30
25
20
15
10
5
0
Credit ratings
Nostrum Oil & Gas PLC is currently being rated by two credit rating
agencies: Standard and Poor’s and Moody’s Investor Services:
Agency
Rating
Standard and Poor’s CCC
Moody’s
Caa3
Outlook
Negative
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.
184
Nostrum Oil & Gas PLC Annual Report 2019
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.
Nostrum Oil & Gas PLC Annual Report 2019
185
GLOSSARY/CONTINUED
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
186
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.
Nostrum Oil & Gas PLC Annual Report 2019
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
Nostrum Oil & Gas PLC Annual Report 2019
187
GLOSSARY/CONTINUED
K
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
188
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.
Nostrum Oil & Gas PLC Annual Report 2019
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.
Nostrum Oil & Gas PLC Annual Report 2019
189
GLOSSARY/CONTINUED
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 & 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
190
Nostrum Oil & Gas PLC Annual Report 2019
STRUCTURE CHART
Nostrum Group Structure Chart
as at 31 December 2019
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 Netherlands
Nostrum Oil & Gas Coöperatief UA
Incorporated and principal place of
business in the Netherlands
<0.1%
100%
100%
(save for one share
held by Nostrum
Oil & Gas BV)
100%
100%
100%
100%
Nostrum Oil & Gas
Finance B.V.
Nostrum
Services N.V.
Incorporated and
principal place of
business in the
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%
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
* 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. Except as stated above, there are no minority shareholdings.
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9
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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