JPMorgan - KASE

Š completion of the gas utilization project.
As of September 30, 2002, we had expended in excess of $100 million with respect to these
capital projects and we expended an additional $40 million over the balance of 2002 and expect
to expend a further $167 million during 2003, as follows ($ in millions):
Upstream including joint ventures ..... $135.2
Downstream........................ $ 17.6
MarketingandTrading .............. $ 8.1
CorporateServices................... $ 6.1
We believe that cash-on-hand, cash flow from operations, our working capital facilities, the net
proceeds of this offering and, subject to satisfaction of conditions precedent, the remaining
borrowings under our new Term Facility will be sufficient, after giving effect to redemption of
our Senior Notes, to fund our capital expenditure program for the balance of 2003.
Commitments
We committed to the Kazakhstani government to invest $280.0 million in HKM by the end of
2002 and $150.0 million in HOP by the end of 2001. As of September 30, 2002, we believe we met
both of these commitments. If the Kazakhstani government fails to recognize the investments we
have made, we may be required to pay a penalty of 15% of the shortfall to the Kazakhstani
government, which could have a material adverse effect on our financial condition and results of
operations.
Of the items included within our 2003 capital budget, we are legally committed to expend the
following ($ in millions):
QAM pipeline construction project ..... $27.8
Gas utilization program ............... $ 7.3
Refinery............................. $ 0.2
Risks
Foreign Exchange Risks. We report in U.S. dollars. Export revenues are denominated in U.S.
dollars, and domestic sales of refined products and crude oil are made in the Tenge equivalent to
U.S. dollars as of the date of sale. The majority of our operating costs are denominated in Tenge.
Our exposure to the Tenge is through the net bank balances maintained and the tax basis of our
capital assets. For tax purposes our accounts are maintained in Tenge. We have the possibility to
revalue the tax basis of our assets using the official annual rate of inflation. Any currency
movements in excess of the annual inflation rate will generate exchange gains and losses upon
conversion to U.S. dollars. As of January 1, 2002, the tax legislation was changed such that our
Downstream operations no longer have the possibility to revalue the tax basis of their assets. As
our Upstream operations have tax stability provisions within their hydrocarbon contracts, they
still have the possibility to revalue the tax basis of their assets. There is no significant forward
market in the Tenge, therefore, we do not hedge this exposure.
Commodity Prices. The price received for crude oil and refined product sales is linked to world
oil prices and, in the case of export FCA sales, is net of transportation and other related costs.
Although the price received for refined products is linked to world oil prices, there may be
significant time lags in the adjustment process and the relationship between the net back for
crude oil exports and refined product sales may vary from time to time. We did not hedge
commodity price risks in 2001. During the second quarter of 2002 we began to hedge a portion
of our commodity price risk by implementing a minimal forward sale program (for 45,000 tonnes
per month).
FCA Differential / Transportation. Our most significant expenditure is the FCA differential or, in
the case of non-FCA sales, the cost of transportation. The construction of the QAM pipeline and
access to the CPC and other pipelines to the extent we are able to negotiate such access will help
address this issue. The completion of the QAM pipeline is expected to lower the costs for
exported crude oil by approximately $2.00 to $2.50 per barrel shipped.
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