JPMorgan - KASE

The daily business of Kazgermunai is managed by a two-member Management Board. The
Management Board is supervised by the eight-member Supervisory Board, the body that makes
all of the important decisions for the joint venture. Resolutions of the Supervisory Board must be
passed by a 75% majority of its members. HKM is entitled to name four members of the
Supervisory Board, while our joint venture partners name the remaining four members.
The Kazakhstani government has granted Kazgermunai 30-year exploration and production
licenses for the Akshabulak, Nurali and Aksai fields. Through HKM’s interest in Kazgermunai LLP,
we own a 50% interest in the Akshabulak, Nurali and Aksai fields.
Funding for the development of the central part of the Jurassic III formation of the Akshabulak
field is obtained by Kazgermunai from shareholder loans from its shareholders other than HKM,
which has no obligation to fund any of the costs of the initial development phase of that
formation. These shareholder loans, which totalled approximately $63 million at September 30,
2002, are non-recourse to us except to the extent of our interest in Kazgermunai. Kazgermunai is
restricted from paying dividends to its shareholders until all outstanding loans have been paid.
We recently commenced an arbitration proceeding against our two German partners over a
dispute concerning amounts due to the joint venture in respect of crude oil purchases made by
such partners.
The HOP Acquisition
On March 31, 2000, pursuant to the terms of an agreement dated October 9, 1999 among CAIH,
HOP, Kazkommertsbank OJSC, or KKB, Hurricane and HKM, as amended, or the HOP Transaction
Agreement, we closed our acquisition of all of the common shares of HOP held by CAIH,
representing 88.35% of the issued and outstanding shares of HOP, for total consideration of
$118.0 million, which we refer to as the HOP Acquisition. HOP owns the Shymkent refinery
located near Shymkent, Kazakhstan. See “Business and Properties — Downstream Operations:
Refining, Marketing and Trading”. We paid the consideration for this acquisition through a
combination of $45.1 million in cash, the issuance of common shares and the issuance of special
warrants. In addition, we issued to CAIH, at the time of the closing of the HOP Acquisition, a
security convertible into our common shares, pursuant to which CAIH acquired additional
common shares. Since the closing of the HOP Acquisition, we have increased our indirect
ownership interest in HOP to 96.7% of the outstanding shares. At the time of the closing of the
HOP Acquisition, we entered into an agreement with CAIH, which governs certain aspects of the
relationship between CAIH, our largest shareholder, and ourselves. See “Management — Related
Party Transactions — Shareholders’ Agreement”.
Upstream Operations
We conduct our Upstream operations through HKM and our Kazgermunai and Turgai Petroleum
joint ventures. Our Upstream activities involve the exploration for new oil fields in the territory
covered by our exploration licences and the production of oil and gas from our producing fields.
Principal Properties
Our oil and gas exploration and production operations are located in the 80,000 square km South
Turgai Basin in south-central Kazakhstan. We have interests in eleven fields, seven of which are
producing through permanent facilities (Kumkol South, Kumkol North, South Kumkol,
Akshabulak, Qyzylkiya, Aryskum and Maybulak), and four (Nurali, Aksai, North Nurali and East
Kumkol) are on test production for appraisal. We hold exploration licenses covering
approximately 414,000 acres of undeveloped property. One of the fields on test production for
appraisal is contained within the area covered by the exploration license.
Estimated proved reserves for these properties were 348.1 MMbbls as of January 2002. Average
production net to us from these fields was 100,877 BOPD in 2001 and 128,203 BOPD in the nine
months ended September 30, 2002.
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