JPMorgan - KASE

In 2001, we exported approximately 50% of our crude oil production and transferred
approximately 43% of our crude oil production to our refining facility at Shymkent. The
remaining 7% of our crude oil was sold domestically for cash or to the Kazakhstani government
as payment-in-kind in satisfaction of a portion of our royalty payment obligations. The majority
of our export sales were FCA sales to third parties within Kazakhstan, normally at the rail
terminal at Tekesu, adjacent to the Shymkent refinery, but in late 2001 we began transitioning to
FOB sales, where we arrange, and bear the obligations for, the transportation of the crude oil to
the shipping port. We are also concluding contracts on DAF, CPT and CIF terms, where we also
arrange, and bear the obligations for, transportation. The principal buyers of our crude oil
include Naftex, Eurasia, TotalFinaElf, BP, Vitol, Sintez and Shell. Crude oil production from our
producing fields is and will continue to be the primary source of crude oil for the Shymkent
refinery. The refined products produced at Shymkent include heating fuel, gasoline, diesel fuel
and jet fuel primarily for the Kazakhstani domestic market.
The quality of our oil properties in Kazakhstan has allowed us to increase our production from an
average of approximately 44,000 BOPD in the year ended June 30, 1997 to 128,203 BOPD in the
nine months ended September 30, 2002. However, dependence on a single customer, the
Shymkent refinery, for the sale of our oil production was a significant strategic weakness,
restricting production, preventing us from achieving an optimum price for our crude and
compromising the achievement of our growth potential. As a result, management determined
that it was imperative that our Upstream operations be combined with the Shymkent refinery as
well as the other downstream assets of HOP, which was the owner of the Shymkent refinery.
Pursuant to the HOP acquisition, we acquired, on March 31, 2000, a significant interest in HOP,
which was a domestic Kazakhstani downstream company. We subsequently transferred our
interest in HOP to Valsera, a wholly-owned subsidiary, and we transferred Valsera to HKM on
March 31, 2002. See “Business and Properties — The HOP Acquisition”. In addition to the
refinery, which is the newest refinery in Kazakhstan and strategically located in southern
Kazakhstan, other assets acquired through the HOP acquisition include a marketing and trading
operation comprised of a network of distribution centers along with several retail gasoline
outlets.
Our new Downstream organization is accountable for maximizing the value of our crude oil
production through increasing the number of options for exporting oil, reducing the cost of
transporting oil to export markets, executing market-driven strategies for petroleum products
marketing and trading and optimising the performance of the Shymkent refinery.
History of HOP
The Shymkent refinery was registered by the Kazakhstani government in November 1985, and its
processing plants were commissioned between 1985 and 1987. In 1993, the Shymkent refinery
was reorganized into the joint stock company, OJSC Shymkentnefteorgsyntez, now known as
Hurricane Oil Products OJSC. In July 1996, the Kazakhstani government privatised HOP by selling
all of its common shares of HOP to Kazvit Holdings Limited, a company affiliated with KKB. In
January 1998, CAIH purchased the HOP common shares from Kazvit and all of Kazvit’s obligations
under the HOP privatisation agreement, including the capital investment commitments
thereunder. Concurrent with the completion of our acquisition of HOP, the HOP privatisation
agreement and the obligations thereunder, including the capital investment commitments, were
assigned to us. We recently transferred direct ownership of HOP to Valsera, an intermediate
holding company which was wholly and directly owned by us, and then transferred Valsera to
HKM, together with our rights under the HOP acquisition and privatisation agreements.
The HOP Privatization Agreement
As part of the HOP acquisition, we assumed all of the rights and obligations under the HOP
privatization agreement, being the agreement whereby the government of Kazakhstan
privatized HOP. Under that agreement, we were required to invest, or cause HOP to invest, a
minimum of the Tenge equivalent of $150 million on or before December 31, 2001 in capital
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