JPMorgan - KASE

end of 1998, the Kazakhstani government changed its internal environmental regulatory
structure by eliminating and combining certain ministries. We believe that, as a result of these
changes, the environmental laws and regulations in Kazakhstan will become increasingly
protective of the environment. Also, as new environmental laws and legislation are enacted and
the old laws are repealed, interpretation, application and enforcement of the laws may become
inconsistent. Compliance with existing or more stringent laws or regulations or more vigorous
enforcement policies of any regulatory agency could in the future require material expenditures
by us for the installation and operations of systems and equipment for remedial measures, any or
all of which could have a material adverse effect on us. We cannot assure you that we will not, or
will not be required to, incur substantial or material financial obligations in connection with
environmental compliance.
Oil and Gas Operations
Our oil and gas operations in Kazakhstan are subject to periodic inspection by government
environmental protection agencies. These inspections have resulted, from time to time, in the
receipt of formal communications from these authorities detailing our non-compliance with
specified environmental regulations and requiring corrective actions on our part. In many cases,
these communications advise that, in the event that we do not take appropriate remedial action
within a required period of time, we will be subject to a number of penalties including fines and
the closing of various of our facilities. We take all reasonable steps to work with these regulatory
authorities and to correct any non-compliance matters raised by these communications. However,
from time to time we have not been able to take appropriate action within the time periods
required by the regulatory authorities. To date, the applicable regulatory authorities have not
taken any material action against us with respect to such matters. We cannot provide any
assurances that material action will not be taken against us with respect to these issues or that
we will not be required to incur substantially more expenses than we currently expect in
connection with our environmental action plans.
We incur recurring costs associated with managing pollution in our ongoing operations. We pay
environmental user fees based on the volume of pollutants we generate, including the pollutants
cited as violations by the Qyzlorda Environmental Department. In general, environmental user
fees are not material for emissions for which we possess emissions permits. We believe that, in
the long-term, with the installation of the Kumkol electrical power plant utilizing the majority of
our associated gas, and as improvements are made in our waste management and pollution
prevention practices, the volume of pollutants we generate will decrease. However, the amount
of environmental user fees may not significantly decrease because reductions in volumes of
pollutants that are generated may be offset by yearly increases in legislated environmental user
fees. All material environmental permits required for our oil and gas production operations in
Kazakhstan are currently in place. We also pay fines for discharge of wastes for which we do not
have permits. Failure to show progress in any of the items in our environmental action plans
could result in the cancellation or non-renewal of any environmental user permits that we
currently hold or the increase in fines we incur for pollution of the environment of up to 15 times
the amounts of the normal environmental user fees. The usual practice of Kazakhstani
environmental authorities in response to violations of applicable environmental protection laws
and regulations appears to be the imposition of increasing fines and penalties. Our licenses and
hydrocarbon contracts, however, provide that significant and continuing breaches of the terms of
the same, which include the requirement for compliance with applicable environmental
protection laws, could result in the suspension or termination of our licenses and hydrocarbon
contracts.
In accordance with Kazakhstani legislation, produced gas must either be used to produce energy
or be re-injected. We are currently flaring approximately 96% of the gas produced from our
fields. In September 2000, HKM entered into an agreement with the Qyzylorda Oblast,
Kazgermunai, a number of Kazakhstan government ministries and a number of other parties
whereunder the parties agreed to cooperate with respect to determining an appropriate gas
utilization program. In early 2001, we concluded discussions with Kazakhstan government
authorities to arrive at a solution for the utilization of associated gas pursuant to this agreement.
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