REG-Zhaikmunai LP Interim Results - Part 4
Released: 01/09/2009
Part 4 : For preceding part double-click [nRn3A2713Y]
Translation difference 3,741 6,221 9,962 111 74 44 47 276 10,238
Balance at December 31, 2007, net of accumulated depreciation 98,691 184,124 282,815 2,387 2,209 1,015 1,107 6,718 289,533
Additions 3,290 228,734 232,024 376 849 734 797 2,756 234,780
Transfers 73,546 (72,645) 901 264 (1,044) - (121) (901) -
Transferred to inventory - (37) (37) - - - - - (37)
Write off - (442) (442) - (14) - (3) (17) (459)
Depreciation charge (7,132) - (7,132) (311) (362) (203) (261) (1,137) (8,269)
Depreciation on write off - - - - 14 - 2 16 16
Translation difference (670) (1,373) (2,043) (9) (7) (7) (7) (30) (2,073)
Balance at December 31, 2008, net of accumulated depreciation 167,725 338,361 506,086 2,707 1,645 1,539 1,514 7,405 513,491
At cost at December 31, 2007 146,324 184,124 330,448 2,912 2,974 1,507 1,514 8,907 339,355
Accumulated depreciation (47,633) - (47,633) (525) (765) (492) (407) (2,189) (49,822)
Balance at December 31, 2007, net of accumulated depreciation 98,691 184,124 282,815 2,387 2,209 1,015 1,107 6,718 289,533
At cost at December 31, 2008 222,275 338,361 560,636 3,538 2,754 2,232 2,178 10,702 571,338
Accumulated depreciation (54,550) - (54,550) (831) (1,109) (693) (664) (3,297) (57,847)
Balance at December 31, 2008, net of accumulated depreciation 167,725 338,361 506,086 2,707 1,645 1,539 1,514 7,405 513,491
Category "Oil and Gas properties" represents mainly wells, oil treatment
facilities and other related assets.
Category "Non Oil and Gas properties" represents mainly buildings, vehicles,
machinery, equipment and other assets.
The Partnership calculates depreciation, depletion and amortization of oil and
gas properties using the unit-of-production method. A depletion rate is computed
by dividing the unamortized costs of proved oil and gas properties by the total
estimated proved developed reserves. This depletion rate is applied to the
physical units of oil and gas produced during the relevant period. The
unamortized costs of proved oil and gas properties include all capitalized costs
net of accumulated amortization.
The depletion rate for oil and gas working assets was 6.18% and 6.76% in 2008
and 2007 respectively. The unamortized costs of proved oil and gas properties
include all capitalized costs net of accumulated amortization.
The Partnership engaged independent petroleum engineers to perform a reserves
evaluation as at July 1, 2008. Depreciation has been calculated using the unit
of production method based on these reserves estimates.
A depreciation charge of US$ 8,269 thousand has been charged to depreciation and
amortization expense for 2008 less US$ 224 thousand which represent the effect
of capitalization of depreciation as part of crude oil inventory (2007: US$
6,191 thousand and US$ 65 thousand, respectively).
Additions to property, plant and equipment during the year ended December 31,
2008, included assets, works and services not yet paid for in the amount of US$
21,606 thousand (2007: US$ 19,077 thousand).
The Partnership incurred borrowing costs including amortization of arrangement
fee, of US$ 31,558 thousand, and US$ 19,414 thousand for the years ended
December 31, 2008 and 2007, at the average interest rates of 8.6% and 13% per
annum, respectively. For the same periods, the Partnership capitalized borrowing
costs totaling US$ 19,640 thousand and US$ 12,960 thousand, respectively.
5. Trade Receivables
As at December 31, trade receivables were denominated in US$, are less than 30
days, and are not impaired.
6. prepayments and other CURRENT assets
As at December 31, prepayments and other current assets comprised the
following:
In thousands of US Dollars 2008 2007
VAT receivable 20,606 11,561
Advances paid 2,104 1,644
Receivable under hedging contract 2,613 -
Advance to Probel Capital Management B.V. 1,620 -
Other 1,138 1,146
28,081 14,351
Advances paid consist primarily of prepayments made to service providers.
7. Cash and Cash equivalents
In thousands of US Dollars 2008 2007
Current accounts in US Dollars 7,345 6,019
Current accounts in Tenge 4,222 1,341
Cash accounts in other currencies 320 -
11,887 7,360
No interest is earned on current accounts.
In addition the Partnership has restricted cash accounts representing the
Partnership's pledges under the Facility agreement with BNP Paribas (Note 9) of
US$ 19,078 thousand and a drilling contract of US$ 2,000 thousand.
8. PARTNERSHIP CAPITAL
The ownership interests in Zhaikmunai LP consist of Common Units, which
represent a fractional entitlement in respect of all of the limited partner
interests in the Zhaikmunai LP and the General Partner. At any general meeting
every holder of Common Units shall have one vote for each Common Unit of which
he or she is the holder. Under the Partnership Agreement, distributions to
limited partners will be made either as determined by the General Partner in its
sole discretion or following the approval of a majority of limited partners
provided such amount does not exceed the amount recommended by the General
Partner. Any distributions to the Zhaikmunai LP's limited partners will be made
on a pro rata basis according to their respective partnership interests in the
Zhaikmunai LP and will be paid only to the recorded holders of Common Units.
There were no distributions declared for the years ended December 31, 2008 and
2007.
The issuance cost of listing the GDR's amounted to US$ 7,928 thousand.
9. Borrowings
Borrowings, including interest accrued thereon, comprise the following as at
December 31:
In thousands of US Dollar 2008 2007
Current Non-current Current Non-current
Credit line due to Bank Turan Alem - - 38,793 203,982
Loan due to Blavin Holdings Limited - - 6,728 -
Credit line due to BNP Paribas 365,439 - - -
365,439 - 45,521 203,982
Facility agreement with BNP Paribas
On December 12, 2007 the Partnership entered into a US$ 550 million senior
secured facility agreement between BNP Paribas (" Facility agreement"), as a
facility agent, and the Partnership, as a borrower, and Zhaikmunai LP as
guarantor. The Partnership drew down on March 7, 2008 approximately US$ 291
million for (inter alia) the purpose of fully refinancing the BTA Facility and
fully refinancing the loan from Blavin. The Partnership used the further
proceeds of the BNP Paribas Facility to finance the construction of a gas
treatment facility and otherwise towards developing the field. Initially, the
BNP Paribas Facility comprised three tranches of US$ 200 million, US$ 200
million and US$ 150 million. Drawdowns above US$ 450 million are subject to
certain conditions relating to syndication by BNP Paribas which have not been
satisfied as of the date of this publication. As of December 31, 2008 the
Partnership had drawn down US$ 381 million.
The rate of interest payable on outstanding amounts under each tranche will be
LIBOR plus mandatory cost plus, under tranche 1, a margin of 3%, under tranche
2, a margin of 4% and under tranche 3, a margin of 5%.
The total amount outstanding is repayable in accordance with the schedule,
reducing the total commitments to zero by December 31, 2014. In addition, the
BNP Paribas Facility is mandatorily prepayable to the extent of the proceeds of
any material disposals, debt offerings and a cash sweep of 50% of the
Partnership collected revenue (in excess of US$ 25 million). The Partnership is
also entitled to voluntarily prepay the amounts outstanding. The Partnership is
required to give customary representations and warranties, repeated periodically
and certain covenants relating to profitability.
The Partnership maintains a hedging programme pursuant to which it hedges a
minimum Brent crude oil price of US$ 70 per bbl for at least 25% of the initial
production profile, as assessed by BNP Paribas, for the NE and W Tournasian
horizons for the period 2008 to 2013. The Partnership is additionally required
to maintain and fund a debt service reserve account with a balance equal to at
least 5% of the amount outstanding under the BNP Paribas Facility. Lastly, the
Partnership is required to maintain annual oil and gas off-take contracts (gas
sales to be commenced in 2010) with off-takers required to purchase 80% of total
production and 100% of production available for export. The Partnership's
obligations under the BNP Paribas Facility are secured by various forms of
security, including, (i) a pledge over 100% of the participatory interests in
the Partnership; (ii) pledges over its bank accounts; (iii) the assignment of
rights under the off-take contracts; (iv) assignment of all guarantees or
performance bonds issued in connection with the contract with KSS for the gas
treatment facility; and (v) assignment of the benefit of the Partnership's
relevant existing and future insurance policies. The Partnership's restricted
cash under the terms of the BNP Paribas Facility amounted to US$ 19,078 thousand
as at December 31, 2008 (Note 7).
As a result of lower than anticipated EBITDA at December 31, 2008 the
Partnership was in breach of the covenant related to its EBITDA to interest
expense and total indebtness ratios. Consequently, BNP Paribas, pursuant to the
loan agreement, has confirmed to the Partnership that they will not distribute
the balance of US$ 69 million at this time. However, the Partnership believes
BNP Paribas will not call the loan as a result of the breach. The Partnership is
also currently working with BNP Paribas EBRD, and other financial institutions
to secure alternative funding of an amount of US$ 300 million to finance the
Partnership's ongoing capital expenditure program (Note 2).
In thousands of US Dollar 2008 2007
Principal amount as at December 31 381,677 -
Fees incurred on arrangement of BNPP facility (19,943) -
Amortization of arrangement fees 3,705 -
365,439 -
10. Abandonment and Site Restoration liabilities
The summary of changes in abandonment and site restoration liabilities during
the years ended December 31 are as follows:
In thousands of US Dollar 2008 2007
Abandonment and site restoration liability as at January 1,299 1,214
1,
Unwinding of discount 271 102
Additional provision 271 410
Change in estimates 1,570 (427)
3,411 1,299
The long-term inflation and discount rates used to determine the abandonment and
site restoration liabilities at December 31, 2008 were 5.0% and 9.4%,
respectively (2007: 5.0% and 13%).
11. Due to government of kazakHstan
The amount due to Government of the Republic of Kazakhstan has been recorded to
reflect the present value of 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 Partnership to the
Government during the production period.
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 May 26, 2031. The liability was discounted
at 13%.
The total amount of liability due to Government as stipulated by the Contract is
US$ 25,000 thousand. The balances as at December 31, and changes in the amount
due to Government of Kazakhstan for the year were as follows:
In thousands of US Dollar 2008 2007
Due to Government of Kazakhstan as at January 1, 8,379 8,094
Unwinding of discount 1,044 964
Revision of contractual obligation - (679)
Paid during the year (2,062) -
7,361 8,379
Less: current portion of due to Government of Kazakhstan (1,031) (2,062)
Due to Government of Kazakhstan 6,330 6,317
12. trade payables
In thousands of US Dollars 2008 2007
Tenge denominated trade payables 41,679 19,065
US dollar denominated trade payables 18,617 16,489
Trade payables denominated in other currencies 657 512
60,953 36,066
13. Other current liabilities
In thousands of US Dollars 2008 2007
Taxes payable, other than corporate income tax 1,950 2,892
Training accrual 3,049 1,687
Equity option plan (Note 20) 516 -
Due to employees 491 270
Other 1,127 639
7,133 5,488
14. Cost of Sales
In thousands of US Dollar 2008 2007
Depreciation and amortization 7,883 6,126
Well workover costs 6,355 7,103
Royalties 5,705 5,265
Repair, maintenance and other services 5,149 4,453
Payroll and related taxes 4,661 3,048
Materials and supplies 3,855 2,800
Rent and operation of oil separation units 2,926 2,678
Environmental levies 2,752 913
Management fees 1,771 1,957
Other transportation services 1,681 1,243
Government profit share 1,125 994
Other 747 821
44,610 37,401
15. selling and oil transportation expenses
In thousands of US Dollar 2008 2007
Oil export duty 15,086 -
Transporting oil to the railway loading terminal costs 4,985 4,236
Oil loading and storage costs 2,835 1,621
Other 1,306 936
24,212 6,793
In 2008 Kazakhstan introduced an oil export duty on the major oil production
companies in the Republic of Kazakhstan. In 2009 the Partnership will not be
subject to the oil export duty.
16. General and administrative expenses
In thousands of US Dollars 2008 2007
Management fees 5,385 3,082
Professional services 4,612 1,978
Payroll and related taxes 2,956 2,187
Training 2,501 1,698
Bank charges 588 1,298
Equity option plan (Note 20) 516 -
Sponsorship 346 314
Communication 395 298
Social program 300 255
Insurance fees 724 211
Materials and supplies 163 197
Lease payments 268 187
Business trip 352 155
Other taxes 418 4
Other 775 678
20,299 12,542
17. FINANCE COSTs, net
In thousands of US Dollar 2008 2007
Interest expense 10,151 6,454
Amortization of fees incurred on arrangement of syndicated 1,330 -
loan agreement
Revision of contractual obligation to Government (Note 11) - (679)
Commitment fees on syndicated loan agreement 437 -
Unwinding of discount on Abandonment and Site Restoration 261 102
Liability
Unwinding of discount on amounts Due to Government 992 964
13,171 6,841
18. income Tax Expenses
The provision for income taxes consisted of the following:
In thousands of US Dollar 2008 2007
Income tax expenses comprise:
- current income tax expense 4,193 6,382
- deferred income tax expense 30,995 9,268
Total income tax expense 35,188 15,650
The Group's profits are assessed for income taxes only in the Republic of
Kazakhstan. A reconciliation of income tax expense applicable to profit before
income tax using the Kazakhstani tax rate, applicable to the license, of 30% to
income tax expense as reported in the Group's consolidated financial statements
for the years ended December 31 is as follows:
In thousands of US Dollar 2008 2007
Profit before income tax 98,666 51,980
Statutory tax rate 30% 30%
Expected tax provision 29,600 15,594
-Non-deductible interest expense on borrowings 4,686 2,565
-Adjustments in respect of current income tax of previous (1,116) (2,128)
year
-Foreign exchange loss / (gain) 460 (1,875)
-Difference arising on on Abandonment and Site Restoration 263 83
Liability and payables Due to Government
-Other non-deductible expenses 1,295 1,411
Income tax expense reported in the accompanying financial 35,188 15,650
statements
Deferred tax balances are calculated by applying the Kazakhstani statutory tax
rates in effect at the respective balance sheet dates to the temporary
differences between the tax and the amounts reported in the financial statements
and are comprised of the following at December 31:
In thousands of US Dollar 2008 2007
Deferred tax asset:
Accounts payable and provisions 1,413 610
1,413 610
Deferred tax liability:
Crude oil inventory (551) (216)
Hedging contract at fair value (18,877) -
Property, plant and equipment (38,925) (26,585)
Net deferred tax liability (56,940) (26,191)
As at December 31, the movements in the deferred tax liability were as follows:
In thousands of US Dollar 2008 2007
Balance at January 1, (26,191) (15,867)
Current year charge / (benefit) to translation reserve 246 (1,056)
Current year charge to statement of income (30,995) (9,268)
Balance at December 31, (56,940) (26,191)
19. Hedging of oil export sales
Pursuant to the terms of the BNP Paribas facility the Partnership has entered,
at nil cost, into a hedging contract covering oil export sales commencing March
2008 through till December 2013.
Year Quantity
Barrels ('bbls') per month
2008 96,769
2009 107,639
2010 99,461
2011 96,956
2012 60,493
2013 48,384
The hedging contract specifies that on payment date, either
a) if the Floating Amount determined in respect of the preceding Calculation
Period is positive, then the Partnership shall receive such Floating Amount from
BNP Paribas; or
b) if the Floating Amount determined in respect of the preceding Calculation
Period is negative, then BNP Paribas shall receive the absolute value of such
Floating Amount from the Partnership.
The Floating Amount shall be determined as follows: Floating Amount = %
[A-B}*Quantity where, A and mean the following:
a) in the Calculation Periods from, and including, March 2008, to, and
including, December 2009:
A= Max (0; 70 - Floating Price) ; and
= Max (0; Floating Price - 123)
b) in the Calculation Periods from, and including, January 2010, to, and
including, December 2013:
A = (70 - Floating Price),
= Min (0; 79 - Floating Price)
The Floating Price is the arithmetic average of the settlement prices per barrel
of Brent crude oil for each commodity business day in the calculation period, on
the 1PE for the first nearby ICE Brent crude futures contract.
Gains and losses on the hedge contract, which do not qualify for hedge
accounting, are taken directly to income statement.
In thousands of US Dollar 2008 2007
Realized hedging gain 1,596 -
Unrealized hedging gain 63,184 -
Gain on hedging contract 64,780 -
Unrealized hedging gain 63,184 -
Translation difference (261) -
Hedging contract at fair value 62,923 -
20 EQUITY-BASED TRANSACTIONS
Employees (including senior executives and executive directors) of members of
the Group receive remuneration in the form of equity-based payment transactions,
whereby employees render services as consideration for share appreciation
rights, which can only be settled in cash ('cash-settled transactions').
The cost of cash-settled equity-based employee compensation is measured
initially at fair value at the grant date using a binomial model. This fair
value is expensed over the period until vesting with the recognition of a
corresponding liability. The liability is remeasured at each balance sheet date
up to and including the settlement date with changes in fair value recognised in
profit or loss.
The expense recognised for employee services received during the year is shown
in the following table:
In thousands of US dollars 2008 2007
Expense arising from cash-settled share-based payment 516 -
transactions
The equity-based payment plan is described below. There have been no
cancellations or modifications to any of the plans during 2008.
On March 27, 2008, 2,500,000 equity appreciation rights (SARs) were granted to
senior employees and executive directors of members of the Group, which can only
be settled in cash. These will 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 date. The contractual life of the SARs is ten years. The
fair value of the SARs is measured at the grant date using a binomial option
pricing model taking into account the terms and conditions upon which the
instruments were granted. SARs are exercisable at any time after vesting till
the end of the contractual life and give its holder a right to a difference
between the market value of the Group's GDRs at the date of exercise and the IPO
value of GDR's, which is 10 US Dollars. 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 amount of the liability relating to the SARs at December 31, 2008
is US$ 516 thousand (2007: nil). No SARs had vested at December 31, 2008 (2007:
Nil).
The following table illustrates the number (No.) and exercise prices (EP) of,
and movements in, equity options during the year:
December 31, 2008 December 31, 2007
No. EP, No. EP,
US Dollar US Dollar
Outstanding at the beginning of period - - - -
Granted 2,500,000 10 - -
Exercised - - - -
Outstanding at the end of period 2,500,000 10 - -
Exercisable at the end of period - - - -
The following table lists the inputs to the models used for the plan for the
year ended December 31, 2008:
Dividend yield (%) 0
Expected volatility (%) 87%
Risk -free interest rate (%) 3.2
Expected life (years) 7.2
Option turnover (%) 10
Price trigger 2
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.
21. Related Party Transactions
For the purpose of these financial statements transactions with related parties
mainly comprise transactions between the Group and the participants and/or their
subsidiaries or associated companies.
Balances with related parties at the balance sheet dates and transactions with
related parties for the respective years follow.
Accounts receivable from related parties at December 31 consisted of the
following:
In thousands of US Dollars 2008 2007
Trade receivables and advances
Probel Capital Management B.V. 1,620 -
Total 1,620 -
Accounts payable to related parties as at December 31 consisted of the
following:
In thousands of US Dollars 2008 2007
Trade payables
Amersham Oil LLP 108 81
Probel Capital Management B.V. 163 190
Total 271 271
During the year ended 31 December 2008 the Group had the following transactions
with related parties:
In thousands of US Dollars 2008 2007
Management fees and consulting services
Amersham Oil LLP 1,245 965
Probel Capital Management B.V. 5,987 4,121
Total 7,232 5,086
Management fees are payable in accordance with the Technical Assistance
Agreements signed between the Partnership, Amersham Oil LLP and Probel Capital
Management BV relate to the rendering of geological, geophysical, drilling,
scientific, technical and other consultancy services.
Annual remuneration of four key managers amounted to US$ 238 thousand for 2008
(2007: four, US$ 199 thousand). Other key management personnel were employed and
paid by Amersham Oil LLP, Frans Van Der Schoot B.V. and Probel Capital
Management and whose remuneration forms part of management fees and consulting
services above.
All related parties are companies indirectly controlled by Frank Monstrey.
22. Contingent, COMMITMENTS and Operating risks
Operating environment
Kazakhstan continues economic reforms and development of its legal, tax and
regulatory frameworks as required by a market economy. The future stability of
the Kazakhstan economy is largely dependent upon these reforms and developments
and the effectiveness of economic, financial and monetary measures undertaken by
the Government.
The Kazakhstan economy is vulnerable to market downturns and economic slowdowns
elsewhere in the world. The ongoing global financial crisis has resulted in
capital markets and commodity price instability, significant deterioration of
liquidity in the banking sector and tighter credit conditions within Kazakhstan.
Consequently, the Kazakhstan Government has introduced a range of stabilization
measures aimed at providing liquidity and supporting finance for Kazakhstan
banks and companies.
While management believes it is taking appropriate measures to support the
sustainability of the Partnership's business in the current circumstances,
unexpected further deterioration in the areas described above could negatively
affect the Partnership's results and financial position in a manner not
currently determinable.
Legal actions
In the ordinary course of business, the Partnership is subject to legal actions
and complaints. Management believes that the ultimate liability, if any, arising
from such actions or complaints will not have a material adverse effect on the
financial condition or the results of future operations of the Partnership.
The Partnership assesses the likelihood of material liabilities arising from
individual circumstances and makes provision in its consolidated financial
information only where it is probable that actual events giving rise to a
liability will occur and the amount of the liability can be reasonably
estimated. No provision has been made in these consolidated financial
information for any of the contingent liabilities mentioned above.
Taxation
Kazakhstan's tax legislation and regulations are subject to ongoing changes and
varying interpretations. Instances of inconsistent opinions between local,
regional and national tax authorities are not unusual. The current regime of
penalties and interest related to reported and discovered violations of
Kazakhstan's tax laws are severe. Penalties are generally 50% of the taxes
additionally assessed and interest is assessed at the refinancing rate
established by the National Bank of Kazakhstan multiplied by 2.5. As a result,
penalties and interest can amount to multiples of any assessed taxes. Fiscal
periods remain open to review by tax authorities for five calendar years
preceding the year of review. Under certain circumstances reviews may cover
longer periods. Because of the uncertainties associated with Kazakhstan's tax
system, the ultimate amount of taxes, penalties and interest, if any, may be in
excess of the amount expensed to date and accrued at December 31, 2008. As at
December 31, 2008 management believes that its interpretation of the relevant
legislation is appropriate and that it is probable that the Partnership's tax
positions will be sustained.
Abandonment and site restoration (decommissioning)
As Kazakh laws and regulations concerning site restoration and cleanup evolve,
the Partnership 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 Partnership 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. As Kazakh laws and regulations evolve concerning
environmental assessments and site restoration, the Partnership 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
unfavorable claims or penalties assessed by the Kazakh regulatory agencies, it
is possible that the Partnership's future results of operations or cash flow
could be materially affected in a particular period.
Capital commitments
As at December 31, 2008 the Partnership had contractual capital commitments in
amount of US$ 247,237 thousand (2007: US$ 186,148 thousand).
Operating leases
The Partnership entered into a cancellable lease agreement for the main
administrative office in Uralsk in October 2007 for a period of 20 years for US$
15 thousand per month.
Social and education commitments
As required by the Contract with the Government, the Partnership is obliged to
spend: (i) US$ 300 thousand per annum to finance social infrastructure and (ii)
one percent from the capital expenditures incurred during the year for education
purposes of the citizens of Kazakhstan on an annual basis until the end of the
Contract.
23. Financial RISK MANAGEMENT OBJECTIVES AND POLICIES
The Partnership's principal financial liabilities comprise bank loans, 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. The Partnership's
financial assets consist of trade and other receivables, cash and cash
equivalents.
The main risks arising from the Partnership's financial instruments are interest
rate risk, foreign exchange risk, liquidity risk, commodity price risk and
credit risk. The Partnership's management reviews and agrees policies for
managing each of these risks which are summarized below.
Interest Rate Risk
The Group's exposure to the risk of changes in market interest rates relates
primarily to the Partnership's long-term debt obligations with floating interest
rates.
The Partnership was not exposed to interest rate risk in 2007 as rates of
interest on its borrowings were fixed for the whole term of such borrowings.
The following table demonstrates the sensitivity to a reasonably possible change
in interest rates, with all other variables held constant, of the Partnership's
loss before tax through the impact on floating rate borrowings.
Increase / decrease interest rate Effect on profit before tax Effect on profit before tax
for the year ended for the year ended
December31, 2008 December 31, 2007
In thousands of US Dollar
+1.5% (4,921) -
-1.5% 4,921 -
Foreign Currency Risk
As significant portion of the Group's operation is the Kazakhstani Tenge
denominated, the Group's balance sheet can be affected significantly 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 (due to changes in the fair value of monetary assets
and liabilities).
Change in Effect on profit
Tenge to US$ before tax
exchange rate
2008
US thousand dollar +25% (65,715)
US thousand dollar +40% (105,144)
2007
US thousand dollar + 5% (6,934)
US thousand dollar - 5% 6,934
Liquidity Risk
Liquidity risk is the risk that the Partnership 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.
Liquidity requirements are monitored on a regular basis and management ensures
that sufficient funds are available to meet any commitments as they arise.
The table below summarizes the maturity profile of the Partnership's financial
liabilities at December 31, 2008 based on contractual undiscounted payments:
Year ended Less than more than
December 31, 2008 On demand 3 months 3-12 months 1-5 years 5 years Total
Borrowings 381,677 - - - - 381,677
Trade payables 60,028 - - - - 60,028
Other current liabilities 5,906 - - - - 5,906
Due to Government of Kazakhstan - 258 773 4,124 17,784 22,939
447,611 258 773 4,124 17,784 470,550
Y ended Less than 3 months more than
December 31, 2007 On demand 3-12 months 1-5 years 5 years Total
Borrowings - 3,061 42,460 203,982 - 249,503
Trade payables 30,431 - 5,309 - - 35,740
Other current liabilities 5,036 - - - - 5,036
Due to Government of Kazakhstan - 1,288 774 4,124 18,814 25,000
35,467 4,349 48,543 208,106 18,814 315,279
As discussed in Note 9, the Partnership believes BNP Paribas will not call the
outstanding balance of the loan of US$ 381,677 thousand during 2009 and is in
the process of obtaining a waiver from BNP Paribas in this respect.
Commodity Price Risk
The Partnership is exposed to the effect of fluctuations in price of crude oil,
which is quoted in US Dollar on the international markets. The Partnership
prepares annual budgets and periodic forecasts including sensitivity analyses in
respect of various levels of crude oil prices in the future.
Other than the hedge arrangement described in Note 19 the Partnership does not
hedge its exposure to the risk of fluctuations in the price of crude oil. As at
December 31, 2008 a US$ 1 per barrel movement in the price of oil had a US$ 2
million impact on the fair value of the hedge contract.
Credit Risk
Financial instruments, which potentially subject the Partnership 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 Partnership considers that its maximum exposure is reflected by the amount
of trade accounts receivable and advances.
The Partnership places its cash with Bank Turan Alem, which has a credit rating
of BB (negative) and BNP Paribas with a relative credit rating of AA (negative)
on long-term US Dollar deposits from Standard and Poor's rating agency for the
year ended December 31, 2008. The Partnership does not guarantee obligations of
other parties.
The Partnership sells oil and makes advance payments only to recognized,
creditworthy third parties. In addition, receivable balances are monitored on an
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