The Company has launched an anti-crisis program with cost optimization. Dastan Abdulgafarov, the Deputy Chairman of the Management Board for Strategy, Investment and Business Development of Company, spoke about the crisis and its impact on KMG.
– Dastan Yelemesovich, the crisis in the world as a whole has contributed to a sharp reduction in consumption, restrictions on imports, reduction of road and air transport, and restrictions on the movement of labor. What negative phenomena did KazMunayGas have to deal with in particular?
– In the oil and gas industry of the Republic of Kazakhstan, the crisis was reflected in a decrease in energy prices, a drop in exports and domestic consumption of petroleum products, a reduction in the volume of crude oil processing at refineries and the filling of storage tanks. As a result, KMG faced significant negative consequences. First of all, we will not achieve the planned financial indicators mainly due to a significant decrease in revenue, which, in turn, may lead to cash gaps, lower credit ratings and violation of covenants.
The crisis also affected other areas of our company's activities. Demand fell, so there was a slight decrease in gas exports to China in comparison with previously planned values. For the same reason, KMG reduces the production of petroleum products at its plants to avoid overstocking their storage volumes.
The crisis has a significant impact on KMG's investment activities. The introduction of a quarantine with the closure of borders has complicated the implementation of some investment projects and pushed the deadlines for their implementation. The increase in the exchange rate against the tenge led to an increase in project costs, which, along with a drop in revenue forecasts, negatively affects the payback of projects and decision-making on launching new projects.
Taking all this into account, it becomes more difficult for KMG to cover current expenses, taking into account the current and projected low level of income in the future. Continuing to work according to the usual patterns, we risk «eating through» the previously accumulated funds that could have been spent on development, and we risk losing our safety cushion in the event of the next crisis. If the price of oil does not rise to the level of 2019, KMG may not only not recover from the consequences of the crisis, but also lose its stable position in the market.
– That is why KMG announced the development of an anti-crisis strategy. What has already been done, what is planned and what effect is expected?
– Indeed, the company has developed an anti-crisis strategy for 2020-2021. It is short-term, and therefore flexible, and provides for a rapid response of the company to the current changes. We need not only to adapt the company to low oil prices while preserving its production and human resources as much as possible, but also to accumulate the resources, technologies and competencies that KMG will use to launch after the end of the crisis.
When developing an anti-crisis strategy, we are preparing for the option that low oil prices may continue until the end of 2021. Therefore, we have set a number of key tasks for ourselves.
First, KazMunayGas has started to cut costs, as almost all oil and gas companies do, including such giants as Bipi, shell, total, and Exxon Mobil. As of today, we have already reduced expenses by 146 billion tenge, including capital expenditures by 103 billion tenge, operating expenses by 26 billion tenge, and administrative expenses by 17 billion tenge. We have rebuilt the work of the corporate center. The Central office should be mobile, compact, and able to make quick and effective decisions. We have revised the organizational structure of the corporate center and reduced the number of employees. Reduced salaries for the company's management. Salaries of ordinary employees were left at the same level. In addition, we have completely abandoned bonuses. No bonuses or bonuses will be paid to employees of the corporate center until the end of the year.
If you add all this up, it turns out that the income of our managers has fallen by 50 percent or more. Savings on the payroll Fund for the corporate center alone will amount to 5 billion tenge.
In the subsidiaries, all expenses that do not affect production and employment were reduced. Depending on the situation, we will continue to look at what costs can still be optimized.
We are not going to reduce our production staff. This is our main task – to save jobs.
Secondly, we have the task of ensuring flexible production. This means that production volumes can be reduced by stopping unprofitable well stock. In addition, the reduction in production volumes will also occur due to the obligations assumed by the Republic of Kazakhstan under the OPEC + deal.
Third, as you know, we are implementing a strategy to withdraw non-core assets. At the same time, as part of the anti-crisis measures, we are considering the possibility of taking more drastic measures in terms of the divestiture program, including the inclusion of core assets, as an example, that have paid for themselves and are on the decline in production, or without great prospects for dividends. This will provide additional optimization and cash flow, which is now so necessary.
Last but not least, it is an increase in the resource base of oil and gas. From any crisis situation, you can learn not only experience, but also find opportunities. Thus, in the current conditions, KMG is considering the possibility of acquiring assets with a synergistic effect on the KMG group, access to export markets, as well as those with advanced technologies. These may be promising assets, and they are worth paying attention to.
– KMG announced the division of functions between the national company and its subsidiaries. How will this happen?
– Flexibility in asset management in times of crisis is of paramount importance. We must make high-quality management decisions quickly, taking a proactive position in management. To do this, it is necessary to clearly divide the powers and responsibilities between the corporate center and the SDCs, which will significantly reduce the bureaucratic burden by optimizing business processes and reducing the number of intermediate solutions. For example, the corporate center will be more focused on solving strategic issues of the group, such as planning business targets in the medium-long term, financial stability, investment efficiency, value chain management, digitalization, etc. At the same time, we plan to transfer part of the routine processes in financial functions, HR, procurement, etc.to our General service center. IT functions have already been transferred to such a service center.
Separately, it should be noted that KMG Engineering LLP will be responsible for technological development and innovation, especially in the direction of exploration and production, since this is a separate layer of work that requires the concentration of highly specialized high-level experts
- At the same time, KazMunayGas develops depleted fields, which even in good times had issues with the cost price. What will happen to them?
– You correctly noticed that some of the operating assets of KazMunayGas JSC belong to the so-called Mature fields, where the peak of production has already passed. This is a task that KMG has been solving for years. The focus is on improving the quality and efficiency of work, finding solutions to replenish resources, preparing new reserves and putting them into development both at new fields and at Mature ones, including based on the results of additional exploration.
Thus, in 2017, KMG developed a detailed program of additional exploration, which included proposals on the types, volumes and terms of implementation of measures for additional exploration of certain fields, including high-precision 3D seismic exploration and drilling of new wells. Today there is a result, additional reserves are put on the balance sheet and included in production.
We also work with government agencies in terms of tax relief. For a separate part of the Uzen field, a preferential mineral extraction tax rate of 2.6% is set for the next 3 years. At the same time, part of the saved funds will be directed to the socio-economic development of the city of Zhanaozen, and part will be invested in OzenMunaiGaz's own production processes.
Unfortunately, the current crisis in the global financial and oil markets and low oil prices will not allow a number of KMG's oil-producing assets to achieve a break-even level of production, which will affect the decline in oil production. This is especially true for «Mature» deposits with high unit cost.
– What measures are being taken in terms of geological exploration to attract foreign investment?
– KMG, together with its strategic partners, continues to work on exploration assets, where most of the work is carried out under the terms of carry financing, when the strategic partner provides 100% financing of all the costs of the exploration stage. This makes it possible not only to share the risks of discovering new deposits, since exploration is a high-risk activity, but it is also an excellent tool for attracting advanced technologies and exchanging experience with world experts. Agreements are also being signed with global oil and gas companies to jointly study the sedimentary basins of the Republic of Kazakhstan and exploration blocks.
I can mention several significant events in the field of exploration with the participation of foreign partners. In particular, in April 2019, KMG together with LUKOIL signed a contract for subsurface use under the Zhenis Project with the Ministry of Energy of the Republic of Kazakhstan. In July 2019, KazMunayGas, together with ENI, signed by the Ministry of Energy of the Republic of Kazakhstan the Contract of exploration and development of hydrocarbons on the Abai site. These projects are being prepared for the drilling of the first exploration wells. The work is generally going according to plan.
In early 2020, an agreement of intent was signed with BP, under which BP expresses its readiness to conduct joint exploration and production in Kazakhstan with KMG. Areas of mutual interest have been identified, evaluated, and negotiations are planned to obtain an exploration and production contract. The geological study of oil and gas basins in Kazakhstan is carried out jointly with companies such as Equinor, LUKOIL, Chevron, etc.
Of course, during the period of declining oil prices, the Сompany is obliged to take anti-crisis measures in all areas, including geological exploration, to ensure its own stability. To date, work has been done to rank the risks and capital intensity of new projects. Based on the results, appropriate decisions were made to continue work on the most promising areas, taking into account the presence of partners to share risks, both domestic and foreign.
The issue of replenishing reserves and conducting effective exploration is and will always be one of KMG's strategic objectives.
– Will the digital transformation program be implemented?
– We consider digital transformation as one of the directions of the anti-crisis strategy. We understand that this requirement of time and with a competent approach will allow us to strengthen the company. But at the same time, this is not the time to digitize for the sake of digitalization. And we will carefully and carefully approach the selection of transformational projects. Real financial benefits are a priority.
The current portfolio includes multi-directional projects, many of which we will continue. The creation of a multifunctional shared service center and the introduction of an updated ERP system are aimed at reducing costs and increasing the transparency of business processes. There are also HR initiatives and the Lean Six Sigma program that help develop a culture of continuous improvement in the workplace. All this changes people's attitude to daily work, increases motivation.
In General, world practice shows that digitalization gives the greatest impact in the upstream sector. And it is in this direction that we are going to look for new projects. KMG has been developing the concept of a Smart Field for many years, which will allow for more efficient production management using advanced data analysis from fields.
We are studying the possibilities of using artificial intelligence and machine learning, taking into account the specifics of our companies. We expect that the implementation of such projects will increase the efficiency and quality of technological solutions, as well as lead to optimization of operating costs in the first place.
– What results does the company expect after implementing anti-crisis measures?
– We will consider the completed tasks successful if KMG balances its operating flows so that current costs are brought to the current low level of revenue. It will also be a success if the company keeps the accumulated funds as much as possible at the current date and directs most of these funds to strategic development projects, taking into account the existing debt load.
With the timely implementation of these measures, we expect to get a Company with a flexible management model that can quickly respond to future possible challenges. And they are not far off.
