JPMorgan - KASE

has increased to 24,000 BOPD in the third quarter of 2002 compared to 18,400 BOPD in the
second quarter of 2002, a 30% increase. Current production is averaging 28,500 BOPD.
Additional production testing continues in the QAM fields. The combined production rate for all
three fields increased 44% to 15,900 BOPD in the third quarter of 2002 compared to 11,000 BOPD
in the second quarter. This production is delivered from 23 wells. The QAM field's year-to-date
average production is 11,700 BOPD.
The program of further development and production enhancement of the Akshabulak field,
operated by Kazgermunai, required the installation of a new process facility in 2002. The
purchase order for this new facility is being delayed by our joint venture partners, pending
assurances from the government of Kazakhstan on marketing and transportation issues.
However, we operate in a regulated environment and from time to time, governmental action
can impact, among other things, our level of production.
The 38-well 2002 drilling program of the Turgai Petroleum joint venture has been completed. An
additional 17 wells were added to the 2002 drilling program. Gross production increased by 20%
to 49,800 BOPD in the third quarter of 2002 compared to 41,400 BOPD in the second quarter of
2002.
Overall, in the first nine months of 2002, we participated in the drilling of 50 new wells. An
additional 22 wells were drilled in the fourth quarter of 2002.
Sales. Through the end of the second quarter of 2002, the majority of crude oil export sales were
FCA (freight carriage assurance) sales to third parties within Kazakhstan, normally at the rail
terminal at Tekesu, adjacent to the Shymkent refinery. The price achieved for these export sales
is shown net of a differential to the prevailing Brent price at the time of the sale. The differential
reflects a number of factors, the most significant of which relates to rail transportation costs.
Title to the crude oil passes to the buyer at the point of loading the crude into rail cars. In the
tables below, these sales are shown as “Crude sales sold FCA” (freight carriage assurance).
In addition, beginning in 2001 we made our first direct sale from a Black Sea port (Batumi) on
FOB (free on board) terms. Under these types of sales, we arrange all transportation to the port
and assume the obligations for this transportation. The sale price reflects the Brent price plus or
minus a quality differential to the Black Sea port at the time of sale. With this type of sale, title
to the crude does not pass to the buyer until the crude is loaded into an oil tanker in the
respective Black Sea port. Sales contracts are also being concluded on DAF (delivery at frontier)
terms, where title to the crude oil passes to the buyer at the border, and CIF (cost, insurance and
freight) and CPT (carriage paid to) terms, where title to the crude oil passes at the final
destination. In the tables below, these sales are shown as “Crude sales sold FOB”.
Revenue is recognized at the time title passes. In the case of FCA sales, we record revenue based
on a provisional Brent price at the time of delivery at Tekesu, then mark to market at month end
if the crude is still in Kazakhstan to reflect increases or decreases in prevailing Brent prices, and
adjust if necessary by reference to the bill of lading date based on the contract terms.
In the third quarter, 45% of crude oil export sales represented “Crude sales sold FOB”, including
exports made CIF to Italian refineries, FOB Batumi, FOB Odessa via Atyrau-Samara, CPT
Novorossiisk and DAF China, albeit these Chinese volumes remain relatively small. The remaining
sales were made on an FCA basis.
The FCA differential or, in the case of non-FCA sales, the cost of transportation, represents our
largest operating cost. As we continue to increase non-FCA sales in 2003, we anticipate that
crude oil revenue and transportation costs will increase significantly, even in the event that prices
and volumes remain consistent with prior periods, and we also anticipate significant increases in
working capital requirements.
Crude export sales volumes continued to rise, showing an 11% increase compared to the second
quarter despite the uninterrupted operation of the refinery during the third quarter. Shipments
from the loading station at Tekesu also continued to improve, recording a 10% increase against
the second quarter. The quarter closed with record export shipments averaging 90,179 BOPD
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