JPMorgan - KASE

efineries emerge as competitors in the southern Kazakhstani market primarily when supply/
demand or currency imbalances or differing interpretations of applicable legal and tax
requirements create opportunities for them to export bulk products into the region.
As discussed above, Uzbekistan currently is a closed economy and the Shymkent refinery has had
little competition from Uzbekistan in the past five years. If the Uzbek market were to open up,
we believe that the benefits of being able to sell products in, or source feedstock from, the
Uzbek market would outweigh the risks of competition from the Uzbek refineries.
Regulatory Matters
The Kazakhstani government has a range of powers to regulate and possibly intervene in the
activities of major Kazakhstani industries, such as the oil and gas industry. We cannot provide any
assurances that in the future the Kazakhstani government will not require us to act in a manner
which may be against our commercial interests or restrict our ability to make profits, freely
convert currency or pay dividends free of currency or other controls.
Royalties are levied at differing rates for each of our oil fields and change throughout the year
depending on the level of production achieved by each field. We currently pay royalties quarterly
or monthly, depending on the particular hydrocarbon contract, to the Kazakhstani government
in cash or in kind at the option of the Kazakhstani government. During the nine months ended
September 30, 2002, we paid royalties at an effective overall average rate of 8.6%.
In addition, the hydrocarbon contracts that we entered into under our production licenses for
our fields in Kumkol South, Kumkol North, South Kumkol, Qyzylkiya, Aryskum and Maybulak,
contain provisions for an excess profits tax. The tax rate is determined by the internal rate of
return derived from the cash flow from operations in the contract area.
The Kazakhstani government has from time to time organized a program of support for
deliveries to the agricultural sector. The purpose of this program is to provide diesel and gasoline
for the use of agricultural machinery during the planting season, and arranging for payments to
be made after the harvest six months later. Under this program the refinery can choose in which
regions or municipalities to make deliveries, it can refuse to make deliveries, and it can supply
product on freely negotiated terms, including pricing terms to compensate for risk, and including
the right to ask for and collect on guarantees.
The Antimonopoly Committee may, under Kazakhstan law, review the business of any one
company having more than a 35% share of a specific market segment of the Kazakhstan market.
Since 1996 the Antimonopoly Committee has reviewed the prices of jet fuel and liquefied
petroleum gas. As a result, HOP was required to advise the Antimonopoly Committee three
months in advance of any proposed price increase. In 1999, through a number of orders of the
Antimonopoly Committee and as a result of introducing amendments to the antimonopoly law in
January 2002, HOP was included on the Kazakhstani state register of companies having a
dominant position in the market. Accordingly, we are required to obtain the approval of the
Kazakhstani government with respect to any refined product price increases.
In late December 1999, the Kazakhstani government adopted a policy restricting the amounts of
crude oil exported from Kazakhstan. Under this policy, the government has set limits, which are
negotiated monthly, on the amount of crude oil that individual crude oil producers in
Kazakhstan may export. In addition, under the policy, the government has restricted the ability
to export crude oil to only crude oil producers in Kazakhstan.
As Kazakhstan is a member of the International Energy Agency, the Kazakhstani government
maintains an oil stock for military and strategic purposes. We have no knowledge of any
requirements for us to hold stock or contribute to strategic stock calculations in any form. No
assurances can be given that the Kazakhstani government complies with the stocking
requirement of the International Energy Agency or that we will not be required to assist or
contribute to this stocking in the future.
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