System of key performance indicators of Zarubezhneft Group of companies
The system of key performance indicators (KPI) of Zarubezhneft JSC is intended to motivate the management of the company and subsidiaries to fulfill the tasks set by the state as a 100% shareholder of the Company, Zarubezhneft JSC strategy key indicators, Long-term Development Program, Zarubezhneft JSC business-plan indicators, ongoing Zarubezhneft JSC investment projects.
Internal regulatory documents regulating the KPI system at Zarubezhneft JSC:
- The Policy Statement on key performance indicators of Zarubezhneft JSC approved by the decision of the Board of Directors dated November 25, 2016, Minutes No. 131;
- KPI passports of Zarubezhneft JSC were approved by the decision of the Board of Directors dated November 25, 2016, Minutes No. 131 (the passport of innovation activities integral KPI was approved on August 21, 2017, Minutes No. 141).
External control of corporate KPIs implementation is carried out through the following documents:
- Directives of the Government of the Russian Federation No. 2579p-P13 – Concerning Approval of Key Performance Indicators of Companies’ Activities dated April 25, 2014 (taking into account the accompanying guidelines on the use of KPIs);
- Directive of the Government of the Russian Federation No. 7389p-P13 – Concerning Increasing Labor Productivity in the Society dated October 31, 2014;
- Directive of the Government of the Russian Federation No. 2303p-P13 – Concerning Reducing Operating Expenses (Costs) by At Least 2-3 Percent Annually dated April 16, 2015;
- Directive of the Government of the Russian Federation No. 1472p-P13 – Concerning Innovative Development dated March 3, 2016
The KPI system indicators are synchronized with the KPI of the Long-term Development Program.
In 2018, the following activities were carried out in terms of functioning and improvement of the KPI system:
- as per the Guidelines for the application of key performance indicators by State Companies, the Board of Directors approved the Report on the Achievement of Corporate KPI Target Values for 2017 (Minutes of the Board of Directors No. 154 dated May 29, 2018), and the corporate KPIs values for 2019 were updated (Minutes of the Board Directors No. 162 dated December 20, 2018);
- the Board of Directors of Zarubezhneft JSC reviewed the interim results of KPI performance for the first quarter of 2018 (Minutes of the Board of Directors No. 155 dated May 30, 2018), a report on the achievement of corporate KPIs as per end-of-year forecasts taking into account the actual value for the first half of 2018 (Minutes No. 158 of September 26, 2018), as well as a report on achieving corporate KPIs according to the forecast by the end of the year, taking into account the actual value for 9 months of 2018 (Minutes No. 160 of November 20, 2018);
- as per the Policy Statement and Regulations on the KPI system of Zarubezhneft JSC, semi-annual and annual protection was held by the Director-General for KPIs management implementation of Zarubezhneft JSC (Deputy General directors, heads of departments), general directors of subsidiaries;
- The KPI system has been decomposed to the level of deputy general directors of subsidiaries, a production contract has been developed (a single set of indicators for subsidiary top managers).
Therefore, the KPI system of the Company covers all key management levels of the group of companies in 2018:
- Corporate center management (deputies general director and heads of departments) – 38 persons;
- General directors of Subsidiaries – 14 persons;
- Deputies general director of Subsidiaries – 71 persons.
Total amount of controlled indicators is over 400.
KPI performance monitoring is performed on quarterly, semiannual and annual basis.
To sum up, the planned indicators were normalized taking into account a significant change in the external macroeconomic conditions, exchange rates and oil price. Normalization was carried out as per the approved Procedure for normalization of the main indicators of Zarubezhneft Group of Companies activities (approved on September 21, 2016, Order No. 402).
Total aggregate degree of KPI fulfillment in 2018 is estimated to be 111.5%
|Consolidated revenue||RUB mln||5%||98,347||106.7%|
|Amount of dividends||RUB mln||20%||4,469||100.0%|
|Return on equity capital||%||10%||8.5%||120.0%|
|Labor capacity||thousand RUB/people per hour||10%||63.0||120.0%|
|Operating expenditure (cost) reduction||%||10%||3.1%||120.0%|
|Gross production volume||RUB toe||15%||5,149||107.5%|
|Amount of reserves||RUB toe||15%||100,193||120.0%|
|Integral KPI for innovations||%||10%||100%||100.0%|
|Performance on corporate KPI:||111.5%|
|Non-Exceedance of Net Debt/EBITDA Limit||–||bonus reduction indicator||0.6||Bonus reduction indicators achieved|
|Achievement of revenue target||–||bonus reduction indicator||103%||Bonus reduction ratio is 1|
As per Zarubezhneft JSC Dividend Policy approved by the Board of Directors (Minutes No. 134 dated February 16, 2017), the planned dividends are equal to 25% of the highest of two values: net profit per RAS adjusted to reflect income/expenditures from revaluation of subsidiaries’ securities and the associated income tax, and net profit per IFRS. The actual Dividends indicator in 2018 was equal to 4469 MM RUB. The indicator was achieved. The dividends due to the Russian Federation on the shares owned by the Russian Federation were paid on August 10, 2018, as per Order No. 499-р of the Federal Property Management Agency dated June 30, 2018 – Concerning Resolutions of the Zarubezhneft JSC Annual General Shareholders’ Meeting.
The actual value of “Return on Equity Capital” indicator amounted to 8.5% with the target level of 5.0%. The net profit of Zarubezhneft Group of Companies increased by 29.6% and amounted to RUB 11.6 billion in 2018.
The Labor Capacity indicator is estimated as the revenue of Zarubezhneft JSC according to RAS, calculated in conditions comparable to 2017 and correlated with the number of man-hours worked by the Company’s employees. In 2018, the figure was RUB 63.0 thousand/man-hour with the established target value of RUB 48.6 thousand/man-hour. The indicator growth rate to the level of the previous year made 111%, thus, the target growth rate of 108.2% was fulfilled, fixed in the action plan on ensuring the increased productivity, creation and modernization of high-performance workplaces approved by Decree of the Government of the Russian Federation No. 1250-r dated July 9, 2014.
Operating expenditure reduction was approved with the target value of - 2% (Directives No. 2303п-П13 dated April 16, 2015). As per the Cost Efficiency Improvement and Optimization Report for 2017, the actual Operating Expenditure Reduction value by the end of 2018 was equal to 3.1% (Minutes of the Meeting of Zarubezhneft JSC Board of Directors No. 164 dated February 26, 2019) and exceeded the value established by the Directive of the Government of the Russian Federation:
The gross hydrocarbon production of Zarubezhneft Group of Companies as actually accrued in 2018 amounted to 5,149 thousand tons of oil equivalent with a target value of 5,054 thousand tons of oil equivalent. The growth of the actual value is provided by an increase in production of LLC "JC “RUSVIETPETRO”, Kharyaga PSA, Blocks 04-3 and 09-3.
As a result of effective geological exploration, the actual amount of reserves by the end of the reporting period amounted to 100,193 thousand tons of oil equivalent with a target value of 92,147 thousand tons of oil equivalent. The increase in reserves was obtained as a result of the prospecting and exploratory drilling by JV “Vietsovpetro” and the reassessment of hydrocarbon reserves in the fields of Block 09-1.
For actual calculation of integral KPI for innovations, a 100% limit was established for each indicator component. As per with the Innovation Integral KPI Passport (approved by the Resolution of Zarubezhneft JSC Board of Directors, Minutes No. 141 dated August 21, 2017), when the threshold value (90%) is reached, the indicator is considered to be achieved. In view of the foregoing, the indicator achievement was recorded at 100% level.
The bonus reduction includes 2 indicators – Non-Exceedance of NetDebt/EBITDA Limit and Revenue Target Achievement. Both indicators are fulfilled and the bonus reduction factor is equal to 1. The NetDebt/EBITDA indicator in the reporting year is equal to 0.6, which is due to the decrease of the debt burden and the efficient management of the Group’s liquidity.