JPMorgan - KASE

As a result of these discussions, HKM will install a 55-megawatt electrical power plant in the
Kumkol field to use associated gas from the Kumkol South, South Kumkol and Kumkol North
fields. It is anticipated that the cost of construction of the plant will be approximately
$32 million. This cost will be shared with our Turgai Petroleum joint venture. It is intended that
the plant will provide stable electrical power for field operations and will provide excess
electricity for sale to Kyzylorda city and a credit for Shymkent refinery power usage. Engineering
and construction are underway and the plant will be completed in the second quarter of 2003. In
addition, as a joint venture partner in the Akshabulak fields, we are participating in a project to
provide natural gas to the Kyzlorda region.
When we begin exploration activities in a new field, at certain stages in the development of the
field and every five years during the operation of the field, we must perform environmental
impact assessments. We must also provide, every five years, the documentation demonstrating
that we do not exceed applicable maximum allowable limits on emission to the atmosphere. The
annual cost incurred in connection with these assessments varies from year to year, depending
upon our exploration and development activities in that year.
We are not currently subject to significant expenditures in connection with the remediation of
contaminated sites. The HKM acquisition agreement, as well as Kazakhstan’s privatisation law,
allocates financial responsibility for environmental damage which occurred prior to the date we
acquired HKM to the Kazakhstani government. Therefore, we are responsible only for
environmental damage which has occurred in connection with our operations since December
1996. In 1997, we hired Golder Associates, Ltd. to perform a baseline study of environmental
damages to the properties acquired in the HKM acquisition. The Kazakhstani government has
reviewed and approved the results of the phase one environmental site assessment. Local
environmental consultants, Ecotera LLP, have finalized the results of the baseline study and
performed the Ecological Monitoring stipulated by Order 340-P of the Ministry of Natural
Resources and Environmental Protection of the Republic of Kazakhstan. We have identified some
environmental damage that occurred before our acquisition of HKM. We believe that the
Kazakhstan government will be responsible for those damages as provided for in the HKM
acquisition agreement and the Kazakhstan privatization laws.
To date, there have been no significant releases of contaminants under our operation of the
Kazakhstani oil fields. We could incur significant liability for damages, clean-up costs and/or
penalties in the event of certain discharges into the environment or environmental damage
caused by non-compliance with environmental laws or regulations which occurred after we
acquired HKM. Any environmental liability with respect to our production activities could
materially adversely affect our financial condition and results of operations.
Refining Operations
Similarly to our Upstream oil and gas operations, we pay environmental user fees for our
Downstream operations based on the volumes of pollutants we generate. The fees are generally
not material for emissions for which we possess emissions permits. However, fines can be
multiplied by as much as 15 times the normal environmental user fee for those emissions for
which we do not have permits. We believe that all material permits required for the operations
of the Shymkent refinery are in place.
Kazakhstani regulations specify that a refinery should be built with a minimum protection zone
of one kilometre from human habitation. The Shymkent refinery is located in the city of
Shymkent’s industrial zone five km southeast of the residential district.
The crude and light oil product tanks at the Shymkent refinery are equipped with pontoons and
floating roofs that reduce hydrocarbon emissions more effectively than fixed roof reservoirs. The
system of oil traps and separation ponds with skimmers is designed to prevent the leakage of
harmful substances and permit re-refining of recovered oil. The system returns treated water to
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