JPMorgan - KASE

Domestic Transportation. Oil produced from the Kumkol and South Kumkol fields is transported
east from our Central Processing Facility via a 28 inch lateral pipeline extending 200 kms from the
Kumkol field to Karakoin, Kazakhstan, where this pipeline connects with the Central Pipeline.
The Central Pipeline provides access for our crude oil to the Shymkent refinery. There is also a 20
inch pipeline which runs parallel to the 28 inch pipeline from the Kumkol and South Kumkol
fields to Karakoin. The combined rated capacity for these two lateral pipelines is 350,000 BOPD.
We believe that there is substantial unutilized excess capacity in the Central Pipeline.
Currently, all oil and gas pipelines in Kazakhstan are owned by the Kazakhstani government. We
currently have access to the lateral pipelines and the Central Pipeline under a short-term contract
with KazTransOil, the Kazakhstani national oil transportation corporation, which is renewable by
mutual agreement annually. The contract does not designate specific volumes available to us and
provides for tariff rates established by the Kazakhstaini government. The contract can be
cancelled by either KazTransOil or us on 45 days’ notice. In the HKM acquisition agreement, the
Kazakhstani government agreed to assist us in obtaining commitments for the transportation of
oil through the Central Pipeline.
On October 16, 2002, we received permission from the Kazakhstani government to proceed with
the construction of the 177 km Qyzylkiya Aryskum Maybulak pipeline, or QAM pipeline, connecting
Kumkol to a rail loading station in Dzhusaly via the QAM fields. The QAM pipeline will have an
initial capacity of 100,000 BOPD and is expected to be in full operation by the third quarter of 2003.
KazMunaiGas has the right to participate in the pipeline from Aryskum to Dzhusaly, and
KazTransOil will be the technical operator under a service contract. We estimate the combined cost
of constructing the QAM pipeline and the terminal at Dzhusaly (see “— Transportation to Export
Markets” below) to be approximately $72 million.
Transportation of crude oil to the export market remains our largest single operating cost.
During 2001 and through the first nine months of 2002, the cost of transportation from the
Shymkent loading terminal to Black Sea ports remained relatively constant at approximately $12
per barrel of crude oil. On completion of the QAM pipeline, it is anticipated the cost of this
transportation for crude oil exports will be reduced.
Transportation to Export Markets. Once crude oil arrives at Shymkent from the fields, it is
divided into volumes for export and volumes for refining at Shymkent. Export crude oil barrels
are loaded at the nearby rail terminal of Tekesu onto railcars, to be transported for export west
across Kazakhstan to Atyrau or Aktau, both Kazakhstan ports on the Caspian Sea. From these
ports, there are various routes via pipeline, railroad and tanker for the oil to reach Black Sea
ports and Europe. From Tekesu, crude oil can also be transported by rail east to Druzhba, for
Chinese purchasers, and south to Bukhara (in Uzbekistan), and from there by rail to
Turkmenbashi (a Turkmenistan port on the Caspian Sea) or Aktau, for Europe.
We have entered into swap arrangements with other oil and gas companies, to export crude oil
from the Samara pipeline junction along the Russian Druzhba Export Pipeline System to western
Europe. However, these arrangements are not being utilized and are currently being
renegotiated. In addition, we have the ability to transport our crude oil and refined products to
the Black Sea by rail for export to western Europe. The Shymkent refinery has rail access to
Druzhba rail terminal on the Kazakhstan-Chinese border, where the Kazakhstani rail line
connects with an existing Chinese rail line. In November 1997, we formed Hurricane Dostyk, a
limited liability partnership with Eastern Gate Corporation of Kazakhstan, to construct an oil
trans shipment terminal at Druzhba, which would facilitate exports to western China. The trans
shipment terminal is designed to have a throughput capacity of approximately 20,800 BOPD.
Construction of the terminal was suspended in late 1998. The cost of completion of the terminal
will be funded 100% by us. We will control and operate the facility once it is completed.
Completion of the terminal is planned for 2003 but will be dependent on the development of a
market in and the establishment of long-term contracts with China, and acceptable levels of
transportation tariffs.
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