JPMorgan - KASE

Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following management’s discussion and analysis of the financial condition and results of our
operations should be read in conjunction with the selected financial and operating data, audited
financial statements and related notes and unaudited financial statements and related notes
appearing elsewhere in this offering memorandum. Our financial statements have been prepared
in accordance with Canadian GAAP. Canadian GAAP differs in certain significant respects from
U.S. GAAP. For a discussion of the most significant differences between Canadian GAAP and U.S.
GAAP relevant to us, see the U.S. GAAP reconciliations contained in the notes to our consolidated
financial statements included in this offering memorandum. This discussion and analysis contains
forward-looking statements which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result of certain factors,
including those set forth under “Risk Factors” and elsewhere in this offering memorandum.
Except as otherwise required by the context, references in this offering memorandum to “our”,
“we” or “us” refer to the combined business of Hurricane Hydrocarbons Ltd. and all of its
subsidiaries, including HKM and HOP.
Overview
General
We are an integrated oil company that owns and operates oil and gas production and a refinery
in Kazakhstan. We use the term “Upstream” to refer to the exploration for and production of oil
and gas from our licenses in the South Turgai Basin, Kazakhstan. We use the term “Downstream”
to refer to the operations of our refinery located in Shymkent, Kazakhstan and marketing
activities relating to Upstream operations and the refinery.
We acquired the Shymkent refinery, through our acquisition of HOP (then known as ShNOS), in
March 2000, and assumed a greater role in the management of the Kazgermunai joint venture at
the end of November 2000. Accordingly, our 2001 results reflect the inclusion of the Shymkent
refinery and Kazgermunai for a full year, as compared to nine months (in the case of the
Shymkent refinery) and one month (in the case of Kazgermunai) in 2000.
Factors affecting our results
Production. We derive our revenues principally from the sale of crude oil and refined products
and to a lesser extent from refining crude oil on behalf of third parties, from which we derive
processing fees, and production and ancillary support facilities provided to our Turgai Petroleum
joint venture on a fee basis. Our results are dependent on the levels of our oil production and on
prevailing prices for such production. Prices for oil are subject to large fluctuations in response to
a variety of factors beyond our control.
During the third quarter of 2002, our production volumes totaled 13.17 million barrels or an
average of 143,175 BOPD, representing a 37.2% increase over the third quarter 2001 production
rates of 104,379 BOPD and a 21.5% increase over the second quarter 2002 production rates of
117,844 BOPD. Record export sales combined with enhanced performance from all fields led to
these increases. Total production during 2002 was 49.6 MMbbls or an average of 135,842 BOPD,
representing a 34.8% increase over the 36.8 MMbbls produced in 2001.
In the third quarter of 2002, production increases were recorded in all fields. Major contributions
came from the optimization of individual well rates in Kumkol South by pump optimization and
off take control, the continued development drilling in Kumkol North and the enhanced
performance of the South Kumkol field. Two new Kumkol South free water knockout facilities,
commissioned in early October, relieve water handling issues at the Central Processing Facility,
thereby increasing production. Our facilities are now handling some 275,000 barrels of fluid per
day, with crude oil production of 116,000 BOPD. We currently have eight service rigs in operation
throughout the producing fields that are contributing to the enhancement of daily production.
These rigs are conducting artificial lift pump replacements and installations. At South Kumkol,
with 21 wells now on production, all but one with artificial lift pumps, daily production
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