CJSC "NOC "KAZAKHOIL" (Kazakhstan): brief description of the risks

/KASE, May 25, 00/ - Following is brief description of the risk of CJSC "NOC "KAZAKHOIL", compiled based on the conclusion of Listing commission of Kazakhstan stock exchange (KASE). The characteristics are published due to the entrance of the company's bonds into KASE official list of securities under category "A". Risks, associated with the fall in oil prices Prices on oil sold by the company are calculated on the basis of the correlation between the price of "Urals" blend and price of "Brent" blend. Average production cost per barrel of oil at the enterprises of CJSC "NOC "KAZAKHOIL" is $6.5-$7, including the transportation - about $11. In case the prices on Brent oil fall below $18 per barrel, the company has to cut long- term capital investments. However, as the demand grows constantly and measures to maintain the prices are taken by OPEC, such decrease is hardly possible in next years. Risks, associated with the reduction in production volumes Low oil prices in 1997-1998 caused the investments into the development of new deposit sites and into the repairs to decline. In 1999 11 wells were put into operation, against 30 in 1998. Significant growth in oil prices in 1999 and their stability in the near term will let the company to catch up. In 2000 CJSC "NOC "KAZAKHOIL" plans to drill 65 new wells and open again 6 wells at Alibekmola deposit site, as well as to allocate KZT1,420 mln to make a major overhaul of 943 wells. Major changes in sales of oil, that the company accounted for in last three years, were related, first of all, to the removal of share holding in several oil producing companies. Hardly forecasted risk of the decrease in sales due to structural reorganization is also related to it. Risks, associated with the competition The company controls 64% production of oil and the production of 32% of petroleum products in Kazakhstan. Also, considering its participation in most of oil projects, domestic competition should be considered crucial. The competition with the Russian and the Azerbaijan oil companies takes place solely due to insufficient capacities of existing pipelines. Putting into service and reconstruction of Atyrau-Novorossiisk, Baku-Supsa, Atyrau-Samara and Makhachkala-Novorossiisk pipelines should provide the region with necessary exports for the near future. Risks, associated with the export quotas In order to increase the load on domestic oil refineries in late 1999 the government of Kazakhstan limited maximum exports to 22 mln tons this year. On April 14, 00 this restriction was removed, however, there is still a possibility of returning to such measures of protecting the market. Presently, most of the company's profit comes from the exports of crude oil (more than 70% of all inflows in 1999). By supplying oil into the domestic market instead of exporting it, the enterprises of the company lose about $70 per ton under current price level, or $13-14 mln a month. Partially, the losses can be compensated by an increase in the production and sales of petroleum products of OJSC "ANPZ". Risks, associated with ecological consequences When building the wells both in Soviet era, and in 90s quite often temporary reservoirs for drilling solutions, liquid wastes and oil were created, which later were not liquidated. As a result, there are about 500 to 1,000 th. tons of wastes in Atyrau and Mangistau region. The thickness of the layer in the soil saturated with oil is about 15-20 centimeters. If the level of Caspian sea rises there is a great risk that spilled oil would get into the sea. To prevent this major overhaul of 7.5 km of protection dams and strengthening weak parts on the area of 10 th. square kilometers for a total of KZT10 mln are planned in 2000. The enterprises of the holding allocate up to 1% of all expenses to environmental issues annually. The budgets of affiliated companies provide more than KZT400 mln for environmental problems in 2000. Liquidation of closed wells Presently, there are 1,010 wells in West Kazakhstan, that were not liquidated properly and are in bad condition. In 1999 CJSC "NOC "KAZAKHOIL" shut down 342 wells and created a liquidation fund for KZT607 mln. KZT390 mln was allocated for the conservation and liquidation of the wells in 2000. Risks, associated with social factors Most of the expenses in social sphere are related to the maintenance of housing in Jana-Ozen - the base of OJSC "Uzenmunaigas". In 1994 a decision was made to switch the base to municipal budget for 5 years. The expenses of OJSC "Uzenmunaigas" in 1999 equaled KZT480 mln. Beginning form the year 2000 the allocations will equal $5 mln a year.