JPMorgan - KASE

Several investments with high profitability and short payback were and are being developed and
implemented. We believe process operations, after modifications to the kerosene-dewaxing unit,
and new trays in the main crude fractionator, will lead to a reduction of mazut (heavy fuel oil)
production and an increase in the production of higher value products. Energy reduction steps
and yield improvement programs already implemented are expected to add further value.
Initiatives in the safety and environmental area were undertaken to reduce emissions, increase
the available firewater volumes from new water wells, and implement various safety-related
improvements based on insurance audit recommendations.
Important changes have occurred in the refinery regarding yields since the first quarter of 2001,
and very significant margin improvements have already happened. The production of mazut,
which is a lower-end product and is present on the market in excessive quantities, was reduced
from approximately 40.6% of the product yield in the first nine months of 2001 to 32.5% during
the first nine months of 2002. This resulted in producing much more valuable products such as
gasoline and jet fuel.
We are implementing a wide range of low cost changes as part of our profit improvement
program. These changes involve energy management and saving, yield improvements,
implementation of test runs on several units with a view to optimize their performance and
setting up a modern planning/scheduling system and organization for the management of
marketing and refinery.
Trading and Marketing
Our Downstream business unit is a significant player in the oil products market in Kazakhstan,
accounting for more than 40% of the market in gasoline sales and diesel sales in 2001, and from
40% to 60% during the nine months ended September 30, 2002. Downstream sells 80% to 90%
of its refined products in the domestic market, with the remainder being sold in the export
markets.
Producers of oil in Kazakhstan are entitled to negotiate sales contracts directly with oil
purchasers, thereby allowing the market to determine the price of oil. Prices depend in part on
oil quality, prices of competing oils, distance to market and the value of refined products. In the
absence of any contrary agreement in a particular hydrocarbon contract, under Kazakhstani law,
the Kazakhstani government has a right to purchase production from a producer at world
market prices.
The terms of our hydrocarbon contracts for the Kumkol South and South Kumkol fields and each
of the Qyzylkiya, Aryskum and Maybulak fields, or QAM fields, provide that the Kazakhstani
government has the right to nominate production amounts which it wishes to buy in each year,
provided that we and the Kazakhstani government agree prior to October 1 of the previous year
as to the volume and pricing mechanism for amounts sought to be effectively nominated. To
date, the government has not nominated or redirected any of our production. The hydrocarbon
contract for Kumkol North provides that the Kazakhstani government may prohibit the delivery
of oil to certain places of destination if such delivery would interfere with the political interests
of Kazakhstan. However, the government is required to agree with the operator, Turgai
Petroleum, on the damages and lost commercial opportunity costs resulting thereby.
The trading and marketing of oil products is performed through our Downstream operation by
direct sales from the refinery or through a network of seven distribution centers. Oil products are
transported by railway, the tariff dependent upon the distance travelled.
Transportation
We created a specialized transportation and trading team in early 2001, in order to enable us to
respond better to the challenges of logistics and the commercialization of Kumkol crude. Senior
industry professionals were recruited to develop this team.
77