JPMorgan - KASE

financial expenditure commitments. In the event a hydrocarbon contract cannot be negotiated, a
producer runs the risk of losing all rights to its exploration and/or production licenses. In
addition, the producer and a governmental design institute must formulate a development plan
for each field specifying detailed drilling and production targets. The development plan may be
periodically modified with the approval of the Kazakhstani government in order to reflect
changing circumstances. Default by a producer under the terms of a license and related
hydrocarbon contract or development plan can result in the loss of a production license and
related hydrocarbon contract and, accordingly, all production rights.
Hydrocarbon contracts for Kumkol South, Kumkol North, South Kumkol and the QAM fields have
been negotiated and executed. The foundation agreement for Kazgermunai, as amended and
supplemented, effectively serves as the hydrocarbon contract for the Akshabulak, Nurali and
Aksai fields. The East Kumkol development program proceeds and the field will be operated
jointly by HKM and Turgai Petroleum. Government approval of reserves has been obtained and
production contract and license agreements are being negotiated.
Royalties are payable quarterly or monthly, depending upon the particular hydrocarbon contract,
to the Kazakhstani government in cash or in kind at the option of the Kazakhstani government.
The following table sets forth the royalties for each of our fields:
Name of Field
Royalty
Kumkol South (1) ...... —3%onfirst500,000 tons of cumulative annual production
Akshabulak, Nurali and
Aksaifields ..........
— 6% on next 500,000 tons of cumulative annual production
—10%onnext 500,000 tons of cumulative annual production
— 15% on cumulative annual production in excess of 1.5 million tons
Kumbol North (2) ...... —9%ofproduction
South Kumkol (3) field . . — 10% of production, plus an excise tax of seven euros per ton for
domestic crude oil sales
Maybulak field ....... —3%onfirst350,000 tons of cumulative annual production plus an
excise tax of two euros per ton for domestic crude oil sales
— 4% on next 150,000 tons of cumulative annual production plus an
excise tax of two euros per ton for domestic crude oil sales
— 6% on cumulative annual production in excess of 500,000 tons plus
an excise tax of two euros per ton for domestic crude oil sales
Qyzylkiya field .......
Aryskumfield ........
—1.5%onfirst 1,600,000 tons of aggregate cumulative production
from the date of the hydrocarbon contract
— 2% on next 1,600,000 tons of aggregate cumulative production
— 2.5% on aggregate cumulative production above 3,200,000 tons
—1.5%onfirst 3,400,000 tons of aggregate cumulative production
from the date of the hydrocarbon contract
— 2% on next 3,400,000 tons of aggregate cumulative production
— 2.5% on aggregate cumulative production above 6,800,000 tons
(1) We paid a production bonus of $5,000,000 in 1999 and $5,000,000 in 2001 to the Kazakhstan government because we
reached cumulative production of 5,000,000 and 10,000,000 tons of crude oil, respectively, from the Kumkol South field. A
further production bonus payment of $5,000,000 will be required to be paid once cumulative production from the Kumkol
South field reaches 15,000,000 tons of crude oil, which is anticipated during 2003.
(2) Turgai Petroleum paid a production bonus of $500,000 in 1997 and $1,000,000 in 2001 to the Kazakhstan government
because it reached cumulative production of 1,000,000 and 5,000,000 tons of crude oil, respectively, from the Kumkol North
field. Further bonuses of $1,500,000 and $2,000,000 will be required to be paid once cumulative production from the Kumkol
North field reaches 10,000,000, and 15,000,000 tons of crude oil, respectively, which are anticipated to occur during 2003 and
2005.
(3) We paid a production bonus of $500,000 in 2000 and $500,000 in 2002 to the Kazakhstan government because we reached
cumulative production of 1,000,000 and 2,000,000 tons of crude oil, respectively, from the South Kumkol field. Further
bonuses of $500,000 each will be required to be paid once cumulative production from the South Kumkol field reaches
3,000,000 and 4,000,000 tons of crude oil, respectively, which is anticipated to occur during 2003.
Royalties for North Nurali and East Kumkol are still to be negotiated in connection with
obtaining hydrocarbon contracts and licenses.
The hydrocarbon contracts that we entered into under our production licenses contain provisions
for an excess profits tax. The tax rate is determined by the economic rate of return derived from
the cash flows from operations in the contract area. The cash flow calculation takes into account
the capital costs incurred in developing the field (in the case of HKM a portion of the purchase
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