REFERENCE: KazTransOil CJSC (Kazakhstan) - comments of KASE Listing commission

27.08.01 00:00
/IRBIS, information of the KASE Listing commission, Aug 27, 01/ - The following are the comments of the Kazakhstan Stock Exchange (KASE) Listing commission regarding KazTransOil CJSC. The information is published due to the passing the listing procedure of the Kazakhstan Stock Exchange (KASE) under category "A" by first issue euronotes of KazTransOil CJSC. STATE REGULATION One hundred percent of KazTransOil CJSC shares is owned by the Holding, whose 100% of shares is owned by the Government. The management. The company's management means that the management of the Holding will be conducted by the Government in the same manner as the previous management of the company. Based on the resolutions #1159 and #1252 of the Government, the dividends paid out by the KazTransOil CJSC till the year 2006 should not exceed 10% of its net income. However, there is no certainty that the Government, as an indirect shareholder of the company, does not change its opinion regarding the amount of dividends paid by the company, and that it will support the company's activities, including those aimed at expansion and planned investments indicated in strategic plans. Also, there is no certainty that the Government will not change the management manner of the Holding, or the size of the block of shares of KazTransOil CJSC indirectly owned by the Government, and makes negative impact on the holders of notes. Tariffs on the services of KazTransOil CJSC are calculated based on the law on natural monopolies, which is in effect in Kazakhstan, and along with the expenses component of it, is approved by the Antimonopoly Agency. From March 16, 2000 tariff coefficient gives a 15% return on assets and compensates for the expenses (depreciation, wearout and financing cost). Since the cost of the company's fixed assets is of great importance on the calculation of the tariffs coefficient, the fixed assets were re-evaluated on March 10, 2000 by American Appraisals Inc. on the basis of international standards. Now, KazTransOil CJSC is working towards the acceptance of a new tariffs coefficient method, where the expenses compensation and returns on assets remain unchanged. However, new method will incorporate fixed and variable components, which will make it more flexible and therefore, more competitive. Fixed component will cover some financial expenses, excluding the oil transportation distances, variable component will take into account the transportation distance. Quotation. Cash inflow of KazTransOil CJSC directly depends on the quotation of oil and oil products transportation through Russia. Based on the minutes of the talks between the Ministry of Energy and Mineral Resources of Kazakhstan and the Ministry of Fuel and Energy of Russia on December 25, 2000 the quota for Kazakhstan was set at 17.3m tons. The memorandum between Kazakhstan and Russia of October 9, 2000 sets the principle of "a single route", whose sole operator is the Company. Annual volume of quotas depends mainly on the political relations between Kazakhstan and Russia. The management of KazTransOil CJSC is not sure that the transportation volume or quota distribution on oil transportations will not change in the future and damages the company's interests. MARKET RISKS The success of the activities of KazTransOil CJSC is significantly dependent on the favorable oil market conditions. If oil prices fall, then there is no hope that oil companies will keep investing in the future, which is required to maintain oil production levels. Decline in oil production may force the company not to meet its strategic goals set in the plan. TECHNICAL RISKS The main factor of technical risk for KazTransOil CJSC is a high degree of pipelines wearout on certain directions, which may have a negative impact on the effectiveness and the quality of the services. Most of the company's pipeline system has been built in 70's (more than 60% of oil pipelines of Western branch) and 80's (Aktobe branch and 75% of Eastern branch). The pipelines are to be used for 30 years. As of December 31, 2000, the company's 55% of pipelines has been used for 10 to 20 years, 32% - 20 to 30 years, 12% - more than 30 years, and 1% - less than 10 years. To increase the effectiveness of the services, cut the oil and water transportation expenses, and increase the safety and reliability of its systems and equipment, KazTransOil CJSC conducts rehabilitation and modernization each year. In 1998-1999 the company's investments into the repair and modernization of pipelines equaled KZT8.8bn ($61.1m), of which KZT600.0m ($4.4m) was used to diagnose linear part of the pipelines. In 2000 new objects were put into service (oil pipelines, water pipelines, pumping stations) costing KZT6.2bn. Till 2006 KazTransOil CJSC plans to spend KZT2.8bn ($19.2m) to maintenance and repair of equipment and offices. CASPIAN PIPELINE CONSORTIUM (CPC) CPC pipeline, with the capacity of up to 67m tons of oil a year, which is to be put into service in August 2001, is an alternative exporting route to Atyrau- Samara pipeline. CPC will help to transport oil to Russian sea port of Novorossiisk, where the oil will be transported to European sea ports. All operators of the Tengiz and Karachaganak oil fields are the participants of CPC and have obligations (including NOC KAZAKHOIL CJSC) to transport significant proportion of oil extracted from these field through CPC. By the estimates of KazTransOil CJSC management, 70% (6.3m tons) of crude oil, extracted at Tengiz field, is transported by railroad, and remaining 30% (about 3.5m tons) - through Atyrau-Samara export route. This pipeline has a capacity of 15m tons of oil a year, and it is considered not to be able to transport the amount of oil from Tengiz and Karachaganak fields when they reach their full capacity. Management of KazTransOil CJSC believes that the construction of Kenkyak-Atyrau oil pipeline, which will give access to export routes (CPC or Atyrau-Samara) to the companies in Aktobe region, and it will ease the loss of Tengiz and Karachaganak oil for the company, and especially due to the fact that the oil from Aktobe region is transported to more far distances. Therefore, KazTransOil CJSC believes that the outflow of Tengiz and Karachaganak oil to CPC will not have a deep negative impact on its annual revenues, and the introduction of CPC pipeline will provide the company with additional revenues. CPC pipeline gives its members more lower tariffs compared to those oil companies, who are not the members of CPC. Besides, actual payment for the transportation depends on whether the sender is the member of CPC or not, and transportation cost increases for the companies, whose oil does not meet the standards of CPC. Since the oil of Aktobe and Kumkol regions does not meet the requirements of CPC their transportation costs will be higher. It is expected that this factor will create a price competitive advantage for the company over the CPC. In future KazTransOil CJSC plans to establish "an oil bank" (collection of additional fees for producers of low quality oil, because after mixing with the oil of high quality, it lowers the overall quality of oil at the terminal) for Atyrau-Samara pipeline, where tariffs will be set so that it will provide price advantage over CPC. ENVIRONMENTAL RISKS Activities of KazTransOil CJSC are accompanied with environmental risks, typical to oil extraction and transportation industry; too much removal and mechanical disturbance of soil; emergency situation during oil pipelines exploitation (explosions within the equipment, at facilities, in an open air areas and pipelines if there is leak, oil overshooting to the water and into the air during the depressurization of the equipment, pipelines and tanks); damage to the vessel, barge as a result of collisions or unfavorable weather conditions, collision or derail of the trains resulting to oil spilling, explosions and fires. In 2001 KazTransOil CJSC plans to spend about KZT102m ($0.7m) for environment protection measures, as well as begin SKADA system project, the first stage of it to be completed in late 2002. Up until now, the measures taken by KazTransOil CJSC regarding environment protection, were not affecting its financial condition. Though the company acknowledges that such expenses may increase in the future. REGULATION OF NOTES CIRCULATION IN KAZAKHSTAN Notes have been registered based on the practice adopted on eurobonds market. The circulation terms of the notes and their obligation terms are set by the conditions of the notes, Trust and Agent contracts dated July 6, 2001 with The Chase Manhattan Bank, through its London office. All disputes, claims and disagreements, related to the issuer's obligations on notes, are regulated by the English law.