Petrokazakhstan (NYSE:PKZ)
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PetroKazakhstan Inc. - Financial Results for the Second Quarter
Ended June 30, 2005
CALGARY, July 28 /PRNewswire-FirstCall/ -- PetroKazakhstan Inc.
("PetroKazakhstan") announces its financial results for the three months ended
June 30, 2005. All amounts are expressed in U.S. dollars unless otherwise
indicated.
HIGHLIGHTS:
- Net Income of $1.86 per share and Cash flow of $2.20 per share for the
quarter
- Significant Exploration and Appraisal successes in the Kyzylkiya and
Kolzhan Licenses
- Reduction of production due to regulatory restrictions on gas flaring
- Development programs fully maintained despite production restrictions
- Progress in the implementation of infrastructure to allow full
utilization of associated gas
FINANCIAL HIGHLIGHTS:
-------------------------------------------------------------------------
(in millions of Six Months ended Three Months ended
US$ except per June 30 June 30
share amounts)
-------------------------------------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
-------------------------------------------------------------------------
Gross Revenue 1,012.1 $ 731.6 509.6 $ 406.3
-------------------------------------------------------------------------
Net income 304.4 209.5 138.7 122.0
-------------------------------------------------------------------------
Per share (basic) 4.04 2.64 1.86 1.54
-------------------------------------------------------------------------
Per share (diluted) 4.02 2.60 1.85 1.51
-------------------------------------------------------------------------
Cash flow 350.8 253.9 164.4 143.1
-------------------------------------------------------------------------
Per share (basic) 4.66 3.20 2.20 1.80
-------------------------------------------------------------------------
Per share (diluted) 4.63 3.16 2.19 1.77
-------------------------------------------------------------------------
Weight Average Shares
Outstanding
-------------------------------------------------------------------------
Basic 75,288,966 79,257,431 74,666,131 79,442,775
-------------------------------------------------------------------------
Diluted 75,741,407 80,484,892 75,016,376 80,721,531
-------------------------------------------------------------------------
Shares Outstanding
at End of Period 73,996,350 80,597,166 73,996,350 80,597,166
-------------------------------------------------------------------------
PetroKazakhstan is pleased to announce its financial results for the second
quarter of 2005 achieving $138.7 million of net income and $164.4 million of
cash flow. This represents basic net income per share of $1.86 and basic cash
flow per share of $2.20 for the quarter. The comparable figures for the quarter
ended June 30, 2004 were $1.54 basic net income per share and $1.80 basic cash
flow per share.
For the six months ended June 30, 2005 net income was $304.4 million and cash
flow was $350.8 million. This represented basic net income per share of $4.04
and basic cash flow per share of $4.66. The comparable figures for the six
months ended June 30, 2004, were net income per share of $2.64 and basic cash
flow per share of $3.20.
Corporate
As the Company has previously announced, it has been approached by a number of
parties concerning the possible merger or acquisition of the Company. The Board
of Directors has set up an Independent Committee to consider these approaches.
The Company also announces the resignation of Mr. Jan Bonde Neilsen from
PetroKazakhstan's Board of Directors. Mr. Bonde Neilsen had been a Director
since 2004.
Share Buy-back program
In the second quarter of 2005 the Company repurchased and cancelled 1,806,100
shares at an average price of C$41.30 per share, under its approved Normal
Course Issuer Bid program.
UPSTREAM OPERATIONS REVIEW
--------------------------
Production
During the second quarter of 2005, PetroKazakhstan's production volumes
totalled 9.64 million barrels of oil or an average of 105,947 barrels of oil
per day ("bopd") representing a 30% decrease compared to the second quarter
2004 production of 151,104 bopd.
On 26th April production cut backs were initiated to comply with instructions
from the Kazakh regulators to stop gas flaring immediately, in accordance with
new legislation passed in December 2004. If the current production restrictions
remain through to the end of the year but PetroKazakhstan's share of Kazgermunai
production increases to 21,000 bopd in the third quarter as the Akshabulak gas
plant is commissioned, then the anticipated annual average production will be
110,000 bopd. This is a reduction of 60,000 bopd or 35.3% from the target
potential average of 170,000 bopd. The Company continues its negotiations with
the government for relaxation of the forced production cutbacks, in view of its
current investment program to achieve full gas utilization by mid-2006.
Exploration and Appraisal
During the second quarter, there has been considerable exploration activity in
the Kyzylkiya and Kolzhan areas with very successful results.
Two wells, KK40 and KK42, drilled in the Kolzhan license, which is adjacent to
the Northern margin of the Kyzylkiya field tested oil at 250 bopd and 750 bopd
respectively from the Cretaceous reservoir.
Well KK43 was drilled into a previously untested pre-mesozoic carbonate
basement formation at a total depth of 1,576 metres. The well encountered 262
metres of carbonate formation with at least 10.2 metres of net pay. Initial
testing has resulted in flow rates of 120 bopd. Further well stimulation
operations, typically applied in fractured carbonate reservoirs such as acid
fraccing, will be conducted along with additional production testing. These
wells have established the presence of a significant new dual reservoir field,
separate from the Northern part of the Kyzylkiya field but close to main
Kyzylkiya production facilities.
Another exploration well was drilled in the centre of the Kyzylkiya field to
test the large basement closure. Minor oil and gas shows were encountered but
the well did not encounter any reservoir quality rock. However, a second well
drilled in the same structure has encountered oil and gas shows with evidence
of fractures being observed in the retrieved cores and from open hole logs.
This second well is being prepared for testing.
A two well drilling programme in the South Kyzylkiya licence extension area has
started. The first well has recently been completed and encountered excellent
quality reservoir with some 3.5m net pay. This well was testing a purely
stratigraphic trap and has demonstrated the value of good quality 3D seismic
data. Consequently, the Company is planning to increase this year's 3D seismic
acquisition programme in this area from 200 sq kms to over 400 sq kms.
Acquisition of a 200sq km 3D seismic survey over the acreage to the north of
the Kumkol field has started and aims to enhance the mapping of this highly
prospective area where several structures have already been identified from 2D
seismic. This survey will be completed during the third quarter leading to the
drilling of additional exploration wells during fourth quarter 2005 and first
quarter of 2006.
Interpretation of the 3D seismic data acquired during the second half of 2004
over the potential northern extension of the North Nurali field has been
completed. The interpretation of this data has resulted in the identification
of a well to be drilled before year end.
The successful results of the exploration work in this quarter are being used
to update and enhance the Company's extensive prospect inventory and to develop
targets for more exploration and appraisal wells over and above our current
programme.
Field Developments
The company has fully maintained its capital programs for facilities and
development drilling, despite its current production restrictions.
During the second quarter, six development wells were drilled in the Northern
area of the Kyzylkiya field to further delineate the field boundaries and
continue with development drilling. Construction activity continued on the
expansion of the Kyzylkiya Central Processing Facility and detailed engineering
designs for the expanded production gathering system were performed. Material
and equipment orders were placed for the new water injection facility and
injection pipelines.
Two Jurassic sub-gas cap wells were drilled in the Aryskum field targeting
Jurassic channel sands below the main Cretaceous gas cap. These wells
encountered elevated gas-oil contacts within the Cretaceous reservoir and will
be converted to gas injection wells for gas conservation and pressure
maintenance. Two development wells were drilled in the Northern portion of the
Aryskum field, successfully extending the mapped oil-water contact further to
the Northwest. Material and equipment orders were placed for completion of the
field production gathering system.
In the Maibulak field, two appraisal wells were drilled targeting a
stratigraphic play between the crest of the field and the major bounding fault
to the East. Both of these wells encountered wet Jurassic sands, but were cased
and completed in order to further evaluate potential reservoirs in the area.
Construction activity continued in Maibulak with the installation of a 6 KVA
overhead power distribution system to utilize the installed diesel fired
electrical generator and eliminate the single well site generators which are
expensive to run.
Enhanced water injection and produced water management was reviewed for the
Kumkol South field during the second quarter and a comprehensive development
plan was prepared to convert depleted zones to water injection, to improve
water transportation throughout the field, and specifically target selected
production intervals for improved pressure maintenance and hence increased oil
recovery.
In the second quarter, Turgai Petroleum drilled three production wells in the
Kumkol North field. Equipment has been ordered for Kumkol North's oil process
facilities with completion expected in the second quarter 2006.
Kazgermunai drilled three production wells in Akshabulak Central. Well 316
discovered 17 meters of net pay in the Jurassic formation against an expected 9
meters of net pay.
Construction of the enhanced Akshabulak production facilities has progressed
and should be completed during the third quarter 2005 giving a processing
capacity of at least 64,000 bopd (gross).
Enhanced Oil Recovery Project
During the quarter, all required project documents were prepared and approved
by the various regulatory agencies and institutes for the initial test of
injecting limited volumes of Liquefied Petroleum Gas ("LPG") to a Kumkol South
well. This is a precursor to the pilot EOR project being designed and planned
to start early in 2006. The LPG injection test will be conducted in the third
quarter, 2005.
Conservation and Exploitation of Gas and LPG Reserves
PetroKazakhstan currently utilizes associated gas from the Kumkol fields,
including those of our joint venture asset, Kumkol North, in generating
electricity in the 55 megawatt ("MW") power plant.
Produced gas from certain Aryskum wells is now being injected into the field
gas cap for conservation and reservoir pressure maintenance purposes. The
volume of injected gas is gradually increasing as more wells are tied into the
main production process system. Ultimately, all of the Kyzylkiya, Aryskum and
Maibulak field produced gas will be re-injected.
As a 50% partner in the Kazgermunai Joint venture, PetroKazakhstan is
participating in the Akshabulak gas processing and LPG extraction plant.
Construction is due to be completed prior to the end of the third quarter 2005
when 2,900 bopd of LPG and 600 bopd of condensate will be extracted from
produced gas. The residual dry gas will be provided to the city of Kyzylorda
through a pipeline already constructed and commissioned.
In the first half of the year, the Company designed and commenced the
implementation of a full gas gathering and utilization scheme for the currently
remaining flared gas at Kumkol along with the re-injection and conservation of
Kyzylkiya, Aryskum and Maibulak. The target for completion is July 1, 2006.
DOWNSTREAM MARKETING, TRANSPORTATION AND REFINING
Crude Oil Marketing and Transportation
The volume of crude oil shipped for export during the second quarter of 2005
declined 25% compared to the previous quarter. This was entirely due to the
reduction in production levels imposed by the regulators discussed elsewhere in
this report. The volume of crude oil shipped for export amounted to 5.2 million
barrels ("mmbbls") or 671 thousand tonnes. Despite this curtailment, shipments
destined for China were increased by 63% in comparison to the preceding quarter
as the state operated Karakoin to Atasu pipeline was re-opened. As a consequence
volumes destined for China amounted to 24% of total shipments, their highest
level to-date. The reduction in shipments was taken on other routes. CPC
shipments were reduced by 27% and other destinations by 36%.
As a consequence of the above, the volumes shipped through the Company's
terminal at Dzhusaly accounted for 76% of total volumes, a reduction against
the previous quarter's figure of 83.5%.
Crude Oil Prices and Transportation Differentials
International crude oil prices continued to record new highs during the second
quarter of 2005, with the highest daily Platt's quotation for Brent registering
$58.48 per barrel ("/bbl") compared to the previous quarter's high of
$55.75/bbl. The level of volatility in prices whilst still significant was
lower than seen in the previous quarter. The spread between the high and the
low of the daily mean of Platt's quotations for Brent was $12.20/bbl compared
to $17.57/bbl during the first quarter of 2005. The average of the daily mean
Platt's quotation for Brent during the second quarter of 2005 was $51.63/bbl,
up $4.01/bbl against the preceding quarter.
Sweet/light crude and heavy/sour crude differentials narrowed during the
quarter. Iranian light on the Persian Gulf traded at an average discount to
Brent during the quarter of $2.32/bbl an improvement of $3.32/bbl against the
previous quarter. The CPC blend CIF Mediterranean quotation traded at an
average discount to Brent of $1.38/bbl whereas the quotation for Kumkol traded
CIF Mediterranean was on average at a discount to Brent of $0.54/bbl.
The reduction of the impact of night time shipping constraints through the
Bosporus together with the re-opening of the Karakoin to Atasu pipeline had a
positive impact on transportation costs and consequently the differentials
recorded during the quarter.
Refining and Refined Product Sales
The refinery operated without interruption during the second quarter. Average
weighted refined product prices improved by approximately $24/tonne
representing a 10% increase. The price improvements were as a result of
stronger export prices driven by a combination of the international market and
a higher proportion of non-FCA contracts where the Company sells closer to the
final end user. Domestic refined product prices also firmed in response to
strengthening international market prices.
In June 2005 the government of Kazakhstan, as is usual at this time of the
year, issued an order banning the export of diesel during the harvest season.
On this occasion however, the text of the order included Vacuum Gas Oil ("VGO")
although the detailed listing each of the custom product codes for the different
types of diesel did not include the code for VGO. As a result, the customs
authorities were unable to approve the export of the Company's VGO and these
exports ceased early June. The Company is in discussions with the Government to
correct this anomaly. During the second quarter a new transportation route for
VGO was successfully commissioned via the port of Batumi in Georgia.
MANAGEMENT DISCUSSION AND ANALYSIS ("MD&A")
-------------------------------------------
A full MD&A of the Second Quarter of 2005 is available on the Company's website
and can also be obtained on application from the Company.
PetroKazakhstan Inc. is a vertically integrated, international energy company,
celebrating its eighth year of operations in the Republic of Kazakhstan. It is
engaged in the acquisition, exploration, development and production of oil and
gas, refining of oil and the sale of oil and refined products.
PetroKazakhstan shares trade on the New York Stock Exchange, The Toronto Stock
Exchange, the London Stock Exchange, and the Frankfurt exchange under the
worldwide symbol PKZ. The Company's website can be accessed at
http://www.petrokazakhstan.com/.
The Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
This news release contains statements that constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those in the forward-looking statements as a result of various
factors. You are referred to our Annual Report on Form 20-F and our other
filings with the U.S. Securities and Exchange Commission and the Canadian
securities commissions for a discussion of the various factors that may affect
our future performance and other important risk factors concerning us and our
operations.
INTERIM CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
AMOUNTS)
UNAUDITED
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
---------- ---------- ---------- ----------
REVENUE
Crude oil 268,774 206,086 549,184 413,564
Refined products 236,799 196,949 455,141 312,896
Service fees 2,699 2,502 5,252 3,882
Interest income 1,313 797 2,492 1,240
---------- ---------- ---------- ----------
509,585 406,334 1,012,069 731,582
---------- ---------- ---------- ----------
EXPENSES
Production 20,770 27,452 43,166 49,916
Royalties and taxes 22,839 29,599 47,678 51,973
Transportation 98,531 55,488 199,737 124,104
Refining 6,376 5,427 10,823 9,515
Crude oil and refined product
purchases 57,296 31,637 85,508 64,442
Selling 4,985 6,341 10,117 11,789
General and administrative 27,142 15,702 43,581 28,745
Interest and financing costs 4,890 5,473 9,111 12,268
Depletion and depreciation 24,931 27,607 53,409 49,548
Foreign exchange loss (gain) 4,931 (1,111) 6,613 (5,795)
---------- ---------- ---------- ----------
272,691 203,615 509,743 396,505
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 236,894 202,719 502,326 335,077
---------- ---------- ---------- ----------
INCOME TAXES (Note 10)
Current provision 101,242 89,643 210,673 135,002
Future income tax benefit (3,083) (9,651) (12,979) (10,785)
---------- ---------- ---------- ----------
98,159 79,992 197,694 124,217
---------- ---------- ---------- ----------
NET INCOME BEFORE NON-
CONTROLLING INTEREST 138,735 122,727 304,632 210,860
NON-CONTROLLING INTEREST 42 (699) (216) (1,347)
---------- ---------- ---------- ----------
NET INCOME 138,777 122,028 304,416 209,513
RETAINED EARNINGS, BEGINNING
OF PERIOD 821,901 466,295 693,336 378,819
Normal course issuer bid (56,251) - (81,129) -
Common share dividends (11,501) (17,706) (23,692) (17,706)
Preferred share dividends (4) (8) (9) (17)
---------- ---------- ---------- ----------
RETAINED EARNINGS, END OF
PERIOD 892,922 570,609 892,922 570,609
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
BASIC NET INCOME PER SHARE
(Note 11) 1.86 1.54 4.04 2.64
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED NET INCOME PER SHARE
(Note 11) 1.85 1.51 4.02 2.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to the interim consolidated financial statements.
INTERIM CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
-------------------------------------------------------------------------
As at As at
June 30, December 31,
2005 2004
----------- ------------
ASSETS
CURRENT
Cash and cash equivalents 388,551 199,105
Accounts receivable (Note 5) 162,927 198,504
Inventory (Note 6) 66,712 61,242
Prepaid expenses 49,333 62,179
Current portion of future income tax asset 57,767 65,431
----------- -----------
725,290 586,461
Deferred charges 4,161 4,662
Restricted cash (Note 4) 64,035 47,741
Future income tax asset 46,823 28,470
Property, plant and equipment 631,972 601,747
----------- -----------
TOTAL ASSETS 1,472,281 1,269,081
----------- -----------
----------- -----------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
(Note 7) 123,595 161,759
Short-term debt (Note 8) 70,938 15,541
Prepayments for crude oil and refined products 3,727 9,916
----------- -----------
198,260 187,216
Long-term debt 133,529 134,862
Asset retirement obligations 33,995 32,499
Future income tax liability 6,701 9,936
----------- -----------
372,485 364,513
----------- -----------
Non-controlling interest 12,206 14,411
Preferred shares of subsidiary 80 80
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY
Share capital (Note 9) 187,100 191,529
Contributed surplus 7,488 5,212
Retained earnings 892,922 693,336
----------- -----------
1,087,510 890,077
----------- -----------
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,472,281 1,269,081
----------- -----------
----------- -----------
See accompanying notes to the interim consolidated financial statements.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
---------- ---------- ---------- ----------
OPERATING ACTIVITIES
Net income 138,777 122,028 304,416 209,513
Items not affecting cash:
Depletion and depreciation 24,931 27,607 53,409 49,548
Future income tax benefit (3,083) (9,651) (12,979) (10,785)
Non-controlling interest (42) 699 216 1,347
Stock-based compensation 1,242 1,330 2,276 2,094
Amortization of deferred
charges 246 396 501 783
Other non-cash charges 2,344 706 2,960 1,444
---------- ---------- ---------- ----------
Cash flow 164,415 143,115 350,799 253,944
---------- ---------- ---------- ----------
Changes in non-cash operating
working capital items 3,734 62,211 (9,290) 46,502
---------- ---------- ---------- ----------
Cash flow from operating
activities 168,149 205,326 341,509 300,446
---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Short-term debt proceeds 30,407 - 55,000 -
Short-term debt repayment - - - (24,494)
Long-term debt repayment (1,019) (42,392) (1,019) (58,325)
Deferred charges paid - (650) - (650)
Common share dividends (12,010) (8,829) (24,392) (8,829)
Preferred share dividends (4) (8) (9) (17)
Purchase of common shares
under normal course
issuer bid (Note 9) (60,844) - (87,580) -
Proceeds from issue of
share capital, net of
share issuance costs 780 596 2,022 4,173
---------- ---------- ---------- ----------
Cash flow used in financing
activities (42,690) (51,283) (55,978) (88,142)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
INVESTING ACTIVITIES
Restricted cash 25,365 (10,160) (16,294) (11,560)
Capital expenditures (57,154) (28,018) (79,482) (63,054)
Purchase of preferred
shares of subsidiary - - (309) -
---------- ---------- ---------- ----------
Cash flow used in
investing activities (31,789) (38,178) (96,085) (74,614)
---------- ---------- ---------- ----------
INCREASE IN CASH AND CASH
EQUIVALENTS 93,670 115,865 189,446 137,690
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 294,881 206,485 199,105 184,660
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD 388,551 322,350 388,551 322,350
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to the interim consolidated financial statements.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, TABULAR AMOUNTS IN
THOUSANDS OF UNITES STATES DOLLARS, UNLESS OTHERWISE INDICATED)
UNAUDITED
-------------------------------------------------------------------------
1 SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of PetroKazakhstan Inc.
("PetroKazakhstan" or the "Corporation") have been prepared by
management in accordance with generally accepted accounting principles
in Canada. PetroKazakhstan's main operating subsidiaries are
PetroKazakhstan Kumkol Resources ("PKKR") and PetroKazakhstan Oil
Products ("PKOP"). Certain information and disclosures normally
required to be included in the notes to the annual financial
statements have been omitted or condensed. The interim consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto in
PetroKazakhstan's Annual Report for the year ended December 31, 2004.
The accounting principles applied are consistent with those as set out
in the Corporation's annual financial statements for the year ended
December 31, 2004.
The presentation of certain amounts for previous periods has been
changed to conform with the presentation adopted for the current
period.
2 SEGMENTED INFORMATION
On a primary basis the business segments are:
- Upstream comprising the exploration, development and production of
crude oil and natural gas.
- Downstream comprising refining and the marketing and transportation
of refined products and the management of the marketing and
transportation of crude oil.
Upstream results include revenue from crude oil sales to Downstream,
reflected as crude oil purchases in Downstream, as this presentation
properly reflects segment results. This revenue is eliminated on
consolidation.
The Upstream business segment processes a portion of its produced
crude oil at the Corporation's refinery for a fee, retains title to
the refined products and records the sales revenue.
The Corporation does not disclose export revenue attributable to
individual countries as it is impractical to obtain the information.
Three months ended June 30, 2005
Elimina- Consoli-
Upstream Downstream Corporate tions dated
REVENUE
Crude oil 291,401 - - (22,627) 268,774
Refined products 142,105 133,585 - (38,891) 236,799
Service fees 29 1,854 816 - 2,699
Interest income 1,068 77 168 - 1,313
---------- --------- --------- --------- ----------
434,603 135,516 984 (61,518) 509,585
---------- --------- --------- --------- ----------
EXPENSES
Production 20,770 - - - 20,770
Royalties and taxes 19,209 3,630 - - 22,839
Transportation 93,959 4,572 - - 98,531
Refining - 6,376 - - 6,376
Crude oil and refined
product purchases 70,424 48,390 - (61,518) 57,296
Selling 1,556 3,429 - - 4,985
General and
administrative 15,493 5,197 6,452 - 27,142
Interest and financing
costs 4,890 - - - 4,890
Depletion, depreciation
and accretion 21,567 3,328 36 - 24,931
Foreign exchange (gain)
loss (2,832) 7,459 304 - 4,931
---------- --------- --------- --------- ----------
245,036 82,381 6,792 (61,518) 272,691
---------- --------- --------- --------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 189,567 53,135 (5,808) - 236,894
---------- --------- --------- --------- ----------
INCOME TAXES
Current provision 72,347 28,872 23 - 101,242
Future income tax
expense (benefit) 6,286 (9,369) - - (3,083)
---------- --------- --------- --------- ----------
78,633 19,503 23 - 98,159
NON-CONTROLLING
INTEREST - (42) - - (42)
---------- --------- --------- --------- ----------
NET INCOME (LOSS) 110,934 33,674 (5,831) - 138,777
---------- --------- --------- --------- ----------
---------- --------- --------- --------- ----------
Included in Upstream crude revenue are sales to the three individual
customers in excess of 10% of consolidated revenue in the total amount of
$164.5 million.
Eliminations are intersegment revenue.
As at June 30, 2005 Upstream Downstream Corporate Consolidated
Total assets 1,172,050 195,068 105,163 1,472,281
Total liabilities 330,759 38,535 15,477 384,771
Capital expenditures
in the quarter 53,918 3,429 292 57,639
Three months ended
June 30, 2005 Export Domestic Consolidated
Crude oil 249,636 19,138 268,774
Refined products 101,513 135,286 236,799
Three months ended June 30, 2004
Elimina- Consoli-
Upstream Downstream Corporate tions dated
REVENUE
Crude oil 221,765 - - (15,679) 206,086
Refined products 63,567 150,897 - (17,515) 196,949
Service fees 765 1,589 148 - 2,502
Interest income 211 190 396 - 797
---------- --------- --------- --------- ----------
286,308 152,676 544 (33,194) 406,334
---------- --------- --------- --------- ----------
EXPENSES
Production 27,452 - - - 27,452
Royalties and taxes 24,607 4,992 - - 29,599
Transportation 57,394 (1,906) - - 55,488
Refining - 5,427 - - 5,427
Crude oil and refined
product purchases 30,141 34,690 - (33,194) 31,637
Selling 2,386 3,955 - - 6,341
General and
administrative 7,917 3,505 4,280 - 15,702
Interest and financing
costs 5,473 - - - 5,473
Depletion, depreciation
and accretion 22,247 5,046 314 - 27,607
Foreign exchange loss
(gain) (9,836) 7,887 838 - (1,111)
---------- --------- --------- --------- ----------
167,781 63,596 5,432 (33,194) 203,615
---------- --------- --------- --------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 118,527 89,080 (4,888) - 202,719
---------- --------- --------- --------- ----------
INCOME TAXES
Current provision 52,481 36,048 1,114 - 89,643
Future income tax
benefit (5,691) (3,960) - - (9,651)
---------- --------- --------- --------- ----------
46,790 32,088 1,114 - 79,992
NON-CONTROLLING
INTEREST - 699 - - 699
---------- --------- --------- --------- ----------
NET INCOME (LOSS) 71,737 56,293 (6,002) - 122,028
---------- --------- --------- --------- ----------
---------- --------- --------- --------- ----------
There were no sales to an individual customer in excess of 10% of
consolidated revenue.
Eliminations are intersegment revenue.
As at June 30, 2004 Upstream Downstream Corporate Consolidated
Total assets 831,552 181,124 215,239 1,227,915
Total liabilities 394,345 49,336 14,489 458,170
Capital expenditures
in the quarter 24,488 2,441 362 27,291
Three months ended
June 30, 2004 Export Domestic Consolidated
Crude oil 194,437 11,649 206,086
Refined products 64,033 132,916 196,949
Six months ended June 30, 2005
Elimina- Consoli-
Upstream Downstream Corporate tions dated
REVENUE
Crude oil 604,561 - - (55,377) 549,184
Refined products 264,350 276,011 - (85,220) 455,141
Service fees 1,461 2,851 940 - 5,252
Interest income 2,021 220 251 - 2,492
---------- --------- --------- --------- ----------
872,393 279,082 1,191 (140,597) 1,012,069
---------- --------- --------- --------- ----------
EXPENSES
Production 43,166 - - - 43,166
Royalties and taxes 41,405 6,273 - - 47,678
Transportation 187,739 11,998 - - 199,737
Refining - 10,823 - - 10,823
Crude oil and refined
product purchases 111,715 114,390 - (140,597) 85,508
Selling 3,842 6,275 - - 10,117
General and
administrative 25,540 8,993 9,048 - 43,581
Interest and financing
costs 9,109 2 - - 9,111
Depletion, depreciation
and accretion 46,811 6,485 113 - 53,409
Foreign exchange (gain)
loss (3,502) 8,395 1,720 - 6,613
---------- --------- --------- --------- ----------
465,825 173,634 10,881 (140,597) 509,743
---------- --------- --------- --------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 406,568 105,448 (9,690) 502,326
---------- --------- --------- --------- ----------
INCOME TAXES
Current provision 161,961 48,502 210 - 210,673
Future income tax
benefit (1,954) (11,025) - - (12,979)
---------- --------- --------- --------- ----------
160,007 37,477 210 - 197,694
NON-CONTROLLING
INTEREST - 216 - - 216
---------- --------- --------- --------- ----------
NET INCOME (LOSS) 246,561 67,755 (9,900) - 304,416
---------- --------- --------- --------- ----------
---------- --------- --------- --------- ----------
Included in Upstream crude revenue are sales to one customer in excess of
10% of consolidated revenue in the amount of $107.4 million.
Eliminations are intersegment revenue.
As at June 30, 2005 Upstream Downstream Corporate Consolidated
Total assets 1,172,050 195,068 105,163 1,472,281
Total liabilities 330,759 38,535 15,477 384,771
Capital expenditures
in the period 74,699 12,680 827 88,206
Six months ended
June 30, 2005 Export Domestic Consolidated
Crude oil 508,512 40,672 549,184
Refined products 221,314 233,827 455,141
Six months ended June 30, 2004
Elimina- Consoli-
Upstream Downstream Corporate tions dated
REVENUE
Crude oil 445,901 - - (32,337) 413,564
Refined products 95,952 246,405 - (29,461) 312,896
Service fees 1,894 1,769 219 - 3,882
Interest income 343 224 673 - 1,240
---------- --------- --------- --------- ----------
544,090 248,398 892 (61,798) 731,582
---------- --------- --------- --------- ----------
EXPENSES
Production 49,916 - - - 49,916
Royalties and taxes 40,599 11,374 - - 51,973
Transportation 124,104 - - - 124,104
Refining - 9,515 - - 9,515
Crude oil and refined
product purchases 63,832 62,408 (61,798) 64,442
Selling 4,504 7,285 - - 11,789
General and
administrative 15,260 6,669 6,816 - 28,745
Interest and financing
costs 11,799 469 - - 12,268
Depletion, depreciation
and accretion 39,008 9,915 625 - 49,548
Foreign exchange loss
(gain) (1,364) (5,723) 1,292 (5,795)
---------- --------- --------- --------- ----------
347,658 101,912 8,733 (61,798) 396,505
---------- --------- --------- --------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 196,432 146,486 (7,841) - 335,077
---------- --------- --------- --------- ----------
INCOME TAXES
Current provision 84,389 47,931 2,682 - 135,002
Future income tax
(benefit) expense (11,569) 784 - - (10,785)
---------- --------- --------- --------- ----------
72,820 48,715 2,682 - 124,217
NON-CONTROLLING
INTEREST - 1,347 - - 1,347
---------- --------- --------- --------- ----------
NET INCOME (LOSS) 123,612 96,424 (10,523) - 209,513
---------- --------- --------- --------- ----------
---------- --------- --------- --------- ----------
There were no sales to an individual customer in excess of 10% of
consolidated revenue.
Eliminations are intersegment revenue.
As at June 30, 2004 Upstream Downstream Corporate Consolidated
Total assets 831,552 181,124 215,239 1,227,915
Total liabilities 394,345 49,336 14,489 458,170
Capital expenditures
in the period 60,086 5,686 644 66,416
Six months ended
June 30, 2004 Export Domestic Consolidated
Crude oil 384,771 28,793 413,564
Refined products 97,945 214,951 312,896
3 JOINT VENTURES
The Corporation has the following interests in two joint ventures:
a) a 50% equity shareholding with equivalent voting power in Turgai
Petroleum CJSC ("Turgai"), which operates the northern part of the
Kumkol field.
b) a 50% equity shareholding with equivalent voting power in LLP
Kazgermunai ("Kazgermunai"), which operates three oil fields:
Akshabulak, Nurali and Aksai.
The following amounts are included in the Corporation's interim
consolidated financial statements as a result of the proportionate
consolidation of its joint ventures before consolidation eliminations:
Three months ended June 30, 2005 Turgai Kazgermunai Total
Cash and cash equivalents 74,390 87,127 161,517
Current assets, excluding cash and cash
equivalents 86,400 43,634 130,034
Property, plant and equipment, net 87,302 86,795 174,097
Current liabilities 44,411 19,133 63,544
Long-term debt - - -
Revenue 115,299 50,077 165,376
Expenses 85,475 35,053 120,528
Net income 29,824 15,024 44,848
Cash flow from operating activities 3,178 32,915 36,093
Cash flow used in financing activities - - -
Cash flow used in investing activities (4,873) (27,788) (32,661)
Three months ended June 30, 2004 Turgai Kazgermunai Total
Cash and cash equivalents 28,140 24,204 52,344
Current assets, excluding cash and cash
equivalents 58,609 40,169 98,778
Property, plant and equipment 79,769 64,437 144,206
Current liabilities 76,536 19,899 96,435
Long-term debt - 14,480 14,480
Revenue 64,873 49,019 113,892
Expenses 37,315 31,673 68,988
Net income 27,558 17,346 44,904
Cash flow from operating activities 11,046 22,824 33,870
Cash flow used in financing activities - (24,266) (24,266)
Cash flow used in investing activities (1,585) (2,363) (3,948)
Six months ended June 30, 2005 Turgai Kazgermunai Total
Revenue 208,759 125,312 334,071
Expenses 144,538 73,267 217,805
Net income 64,221 52,045 116,266
Cash flow from operating activities 48,402 68,270 116,672
Cash flow used in financing activities - - -
Cash flow used in investing activities (8,690) (31,943) (40,633)
Six months ended June 30, 2004 Turgai Kazgermunai Total
Revenue 124,508 87,554 212,062
Expenses 78,594 54,602 133,196
Net income 45,914 32,952 78,866
Cash flow from operating activities 22,306 42,604 64,910
Cash flow used in financing activities - (24,266) (24,266)
Cash flow used in investing activities (2,534) (4,566) (7,100)
Turgai's revenue for the three and six months ended June 30, 2005
includes $1.7 million and $26.2 million of sales to the Corporation,
respectively ($12.5 million and $36.1 million for the three and six
months ended June 30, 2004). These amounts were eliminated on
consolidation.
Kazgermunai's revenue for the three and six months ended June 30, 2005
includes $3.7 million and $6.3 million of sales to the Corporation,
respectively ($2.9 million and $8.7 million for the three and six
months ended June 3, 2004). These amounts were eliminated on
consolidation.
4 RESTRICTED CASH
Restricted cash as at June 30, 2005 includes $64.0 million of cash
dedicated to a margin account for the Corporation's hedging program.
As at December 31, 2004 restricted cash comprised $39.0 million of
cash dedicated to the margin account for the hedging program and
$8.7 million of cash dedicated to a debt service reserve account for
the Corporation's term facility. The Corporation discharged all
hedging liabilities related to this term facility as at December 31,
2004. The debt service reserve account was released in January 2005.
Restricted cash is not available for current purposes.
5 ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
June 30, December 31,
2005 2004
Trade 110,291 150,462
Value added tax recoverable 29,605 29,316
Fines and penalties cancelled per court
decision (Note 15) 7,899 -
Due from joint ventures 4,158 6,942
Other 10,974 11,784
------------ ------------
162,927 198,504
------------ ------------
------------ ------------
6 INVENTORY
Inventory consists of the following:
June 30, December 31,
2005 2004
Refined products 17,377 16,682
Crude oil produced 18,684 22,535
Crude oil purchased 10,057 2,740
Materials and supplies 20,594 19,285
------------ ------------
66,712 61,242
------------ ------------
------------ ------------
7 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
June 30, December 31,
2005 2004
Trade 84,657 70,160
Due to joint ventures 6,069 19,668
Royalties 7,379 18,259
Income taxes 2,585 30,175
Common share dividends 11,888 12,588
Other 11,017 10,909
------------ ------------
123,595 161,759
------------ ------------
------------ ------------
8 SHORT-TERM DEBT
June 30, December 31,
2005 2004
Current portion of term loans 2,039 2,039
Kazgermunai debt 13,899 13,502
Working capital facilities 55,000 -
------------ ------------
70,938 15,541
------------ ------------
------------ ------------
Working capital facilities
The Corporation has three revolving working capital facilities
available totaling $190.0 million, with $175.0 million committed and
$15.0 million uncommitted, secured by a corporate guarantee. The
facilities have interest rates ranging from LIBOR plus 2.65% per annum
to 10% per annum.
$30.0 million of the committed facilities has been dedicated to cover
margin calls under the Corporation's hedging program. This amount is
not available for general corporate purposes.
As at June 30, 2005 the Corporation had drawn $55.0 million under
these facilities, bearing an annual interest rate of 8%.
9 SHARE CAPITAL
Authorized share capital consists of an unlimited number of Class A
common shares, and an unlimited number of Class B redeemable preferred
shares, issuable in series.
Issued Class A common shares:
Three Months Ended Three Months Ended
June 30, 2005 June 30, 2004
-------------------- --------------------
Number Amount Number Amount
-------------------- --------------------
Balance, beginning of period 75,728,337 190,913 79,865,009 195,271
Shares repurchased and
cancelled pursuant to normal
course issuer bid (1,806,100) (4,593) - -
Stock options exercised for
cash 74,113 780 732,157 596
------------ ------- ------------ -------
Balance, end of period 73,996,350 187,100 80,597,166 195,867
------------ ------- ------------ -------
------------ ------- ------------ -------
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
-------------------- --------------------
Number Amount Number Amount
-------------------- --------------------
Balance, beginning of
period 76,223,130 191,529 77,920,226 191,695
Shares repurchased and
cancelled pursuant to normal
course issuer bid (2,538,900) (6,451) - -
Stock options exercised for
cash 303,961 2,019 2,648,382 4,163
Corresponding convertible
securities, converted 8,159 3 28,558 9
------------ ------- ------------ -------
Balance, end of period 73,996,350 187,100 80,597,166 195,867
------------ ------- ------------ -------
------------ ------- ------------ -------
In August 2004, the Corporation renewed its Normal Course Issuer Bid
program which enabled the Corporation to repurchase 7,091,429 Class A
common shares during the period from August 13, 2004 to August 12,
2005. The Corporation repurchased and cancelled 1,806,100 shares at an
average price of C$41.3 per share during the three months ended
June 30, 2005 (2,538,900 shares at an average price of C$42.2 per
share during the six months ended June 30, 2005). The excess of cost
over the book value for the shares repurchased was applied to retained
earnings.
A summary of the status of the Corporation's stock option plan as of
June 30, 2005 and the changes during the six months ended June 30,
2005 and the year ended December 31, 2004 are presented below
(weighted average exercise price expressed in Canadian dollars):
Options Weighted
Average Exercise
Price
Outstanding at December 31, 2003 5,115,460 8.17
Granted 724,100 42.50
Exercised (3,560,379) 4.77
Forfeited (192,525) 15.94
-------------
Outstanding at December 31, 2004 2,086,656 25.17
-------------
-------------
Granted 321,000 40.00
Exercised (312,120) 8.03
Forfeited (28,084) 18.83
-------------
Outstanding at June 30, 2005 2,067,452 30.16
-------------
-------------
Options exercisable as at:
December 31, 2004 866,903 16.29
June 30, 2005 593,935 20.06
10 INCOME TAXES
The provision for income taxes differs from the results which would
have been obtained by applying the statutory tax rate of 30% to the
Corporation's income before income taxes. This difference results from
the following items:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Income before income taxes 236,894 202,719 502,326 335,077
Statutory Kazakhstan
income tax rate 30% 30% 30% 30%
Expected tax expense 71,068 60,816 150,698 100,523
Effect of higher tax rate in
Kazgermunai 4,253 2,138 5,732 1,465
Excess profit tax provision 19,450 6,833 34,843 9,833
Income tax assessment in
Turgai for 2002 - 2003 2,629 - 2,629 -
Other permanent differences, net 759 10,205 3,792 12,396
-------- -------- -------- --------
Income tax expense 98,159 79,992 197,694 124,217
-------- -------- -------- --------
-------- -------- -------- --------
11 NET INCOME PER SHARE
The net income per share calculations are based on the weighted
average and diluted numbers of Class A common shares outstanding
during the period as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Weighted average number
of common shares
outstanding 74,666,131 79,442,775 75,288,966 79,257,431
Dilution from
exercisable options
(including convertible
securities) 350,245 1,278,756 452,441 1,227,461
Diluted number of shares
outstanding 75,016,376 80,721,531 75,741,407 80,484,892
698,100 options were excluded from the calculation of diluted number
of shares outstanding for the three months ended June 30, 2005
(683,100 for the six months ended June 30, 2005) as the exercise price
was in excess of the average market price. No options were excluded
from the calculation of diluted number of shares outstanding for the
three and six months ended June 30, 2004 as the market price was in
excess of the exercise price.
12 FINANCIAL INSTRUMENTS
The Corporation's financial instruments include cash and cash
equivalents, accounts receivable, all current liabilities and long-
term debt. The fair value of cash and cash equivalents, accounts
receivable and current liabilities approximates their carrying amounts
due to the short-term maturity of these instruments. The fair value of
Kazgermunai debt and the term loans approximates their carrying value
as they bear interest at market rates. The fair value of the 9.625%
Notes is $136.8 million versus the carrying value of $125.0 million as
at June 30, 2005 as determined through reference to the market price.
The Corporation has entered into a commodity-hedging program where it
is utilizing derivative instruments to manage the Corporation's
exposure to fluctuations in the price of crude oil. The Corporation
had entered into the following contracts with major financial
institutions.
Contract Contract Period Contract Price Ceiling
Amount Type or
(bbls per Contracted
month) Price
120,000 January 2005 to March 2005 IPE Future 26.30-26.52
40,000 April 2005 to June 2005 IPE Future 25.92
458,333 January 2005 to December 2005 IPE Future 25.65-25.90
During the three months ended June 30, 2005 the Corporation has
foregone revenue of $39.5 million through these contracts
($77.7 million during the six months ended June 30, 2005).
The unrealized loss under these hedges as at June 30, 2005 is
$84.8 million. This amount is deferred and recognized in the
consolidated statement of income when the related contract is settled.
The fair value of these hedges was determined based on future Brent
crude oil prices as at June 30, 2005.
13 CASH FLOW INFORMATION
Interest and income taxes paid:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Interest paid 1,117 2,205 7,531 10,702
---------- ---------- ---------- ----------
Income taxes paid 168,098 61,701 238,263 104,114
---------- ---------- ---------- ----------
14 COMMITMENTS AND CONTINGENCIES
Tax Assessments
Turgai tax assessments
During 2004, Turgai was subject to a tax audit for the years 2002-2003
and received a tax assessment for $150.0 million at current exchange
rates including penalties and interest (the Corporation's 50% share is
$75.0 million).
The major assessment in the tax audit was for excess profit taxes of
approximately $101.5 million including fines and penalties (the
Corporation's 50% share is $50.75 million). The assessment was based
on the position that expenditures relating to construction in progress
are not allowed as a cash outflow when computing the internal rate of
return until construction is completed and depreciation has commenced.
The Corporation believes this position is contrary to the concept of
an internal rate of return calculation and counter to the legislation
of the Republic of Kazakhstan. The Corporation, the other 50%
shareholder Lukoil and Turgai entered into discussions regarding this
assessment with the Ministry of Finance. These discussions are being
held to determine the correct method of calculating excess profit tax
and to clarify the interpretation of current legislation. The
assessment on excess profit tax has been removed pending conclusion of
these discussions. Upon agreement with the Ministry of Finance, Turgai
will present a proposed Hydrocarbon Contract amendment to the Ministry
of Energy and Mineral Resources, clarifying the method of calculating
excess profit tax. A final assessment pertaining to excess profit tax
may be issued depending on the outcome of the discussions. The outcome
of these discussions can not be determined, and, therefore, no amounts
have been recorded in these interim consolidated financial statements.
The remaining amount of $48.5 million was discussed with the Ministry
of Finance and Turgai appealed through the courts. Turgai was
successful with respect to $20.5 million, was unsuccessful on
$11.9 million with the balance of $16.1 million still pending a
decision on appeal. Of the assessments upheld by the courts,
$10.7 million related to accelerated depreciation claims that were
disallowed under Turgai's stabilized tax legislation. The Corporation
has recorded its 50% share of the $11.9 million of assessments upheld
by the courts as an expense in the current period and recorded a
future income tax benefit amounting to $3.3 million on the accelerated
depreciation.
PKKR and PKOP transfer pricing assessments
In April 2005, the Corporation, through its subsidiaries, received two
assessments on transfer pricing for 2002 and 2003, including
$61.9 million for PKKR and $11.7 million for PKOP (at current exchange
rates). For crude oil sales, the majority of the assessment pertains
to the differentials to market benchmarks negotiated with purchasers
of PKKR's crude oil that reflect transportation costs to the
corresponding markets. For refined products, the major portion of the
assessment relates to applying retail prices to the Corporation's
wholesale sales transactions.
The Corporation believes these assessments are incorrect, as they fail
to apply the correct market prices for the type of sales transaction
and to recognize the arms length nature of the transactions. The
Corporation has appealed these assessments and is currently engaged in
discussions with the tax authorities. No provision has been made in
the interim consolidated financial statements for these assessments.
Kazgermunai tax assessments
In late 2003, the Corporation, through its joint venture Kazgermunai,
received tax assessments for 2001 and 2002 amounting to $9.6 million
at current exchange rates (the Corporation's 50% share -
$4.8 million). Kazgermunai appealed these assessments and prevailed
with respect to $4.2 million, was unsuccessful regarding $0.5 million
with the outcome of the remaining $4.9 million still pending while
under appeal. The Corporation has recorded $0.25 million, its 50%
share of the assessment upheld by the court, in these interim
consolidated financial statements.
In late 2004, Kazgermunai received a transfer pricing assessment for
2003 for approximately $6.1 million at current exchange rates (the
Corporation's 50% share - $3.05 million). Neither the Corporation nor
Kazgermunai agree with this assessment, and Kazgermunai is currently
disputing this assessment through the legal system. No amounts were
recorded related to this assessment in the interim consolidated
financial statements.
Tax inspections
The Corporation's operating subsidiaries in Kazakhstan are currently
the subject of tax inspections for the years 2002 through 2004. These
inspections are expected to be complete and assessments, if any,
issued in the third or fourth quarter of 2005.
Agency for Regulation of Natural Monopolies and Protection of
Competition ("ARNM")
The ARNM claimed $32.7 million (at current exchange rates) from a
group distribution company for allegedly violating Kazakhstan's
competition law. The group distribution company initiated legal
proceedings and the court of first instance dismissed the ARNM claim.
The ARNM appealed this decision; the appellate court upheld the
decision of the lower court. The ARNM has filed a motion to re-open
the court case on the basis of new information.
The ARNM also claimed approximately $97.3 million (at current exchange
rates) from group distribution companies for allegedly violating
Kazakhstan's competition law. The group distribution companies
initiated legal action, and at the Astana City Court were unsuccessful
in their challenge of allegations by the ARNM that these companies had
violated Kazakhstan competition laws. The initial trial court judgment
upheld the ARNM determination that these group distribution companies
had received unjustified revenues totaling approximately
$97.3 million.
The group distribution companies appealed this judgment to the Supreme
Court. The initial Supreme Court hearing on the matter was held in the
second quarter of 2004 and the Court suspended the case and instructed
the parties to seek an agreed settlement. During the period from April
to May 13, 2004 the parties did engage in discussions aimed at a
settlement, but were unable to resolve the matter through
negotiations.
On May 13, 2004, after a hearing on the merits, the Supreme Court
overturned the lower court decision which was in favour of the ARNM
and sent the case back to the Astana City Court for a new trial.
During the third quarter of 2004, the General Prosecutor's office
filed a protest regarding the May 13 decision of the Supreme Court
with the Supreme Court Supervisory Panel. On August 25, 2004, the
Supervisory Panel issued an opinion upholding the May 13 decision and
returned the case to the Astana City Court. In September 2004, the
Astana City Court issued a ruling suspending further consideration of
the merits of the case pending the completion of parallel
investigations being conducted by the "Agency of the Republic of
Kazakhstan for Fight Against Economic and Corruption Criminality"
("Finance Police"). This suspension was removed in late 2004 and the
case was reviewed by economic and financial experts under order of the
Court. It was expected that the economic and financial expertise
would be concluded during the spring of 2005 and that the case would,
at that point, be subject to further review and decision by the Astana
City Court.
In April 2005, the Finance Police placed a lien on the property of
PKOP for $13.4 billion Tenge (approximately $98.9 million) to secure
the ARNM's claim for approximately $97.3 million (at current exchange
rates) against group distribution companies and the amounts claimed as
damages under the criminal charges brought against certain executives
of PKOP. The Corporation has appealed this lien to the General
Prosecutor's Office and if unsuccessful will appeal in court.
It remains the Corporation's view that the allegations leveled against
the group distribution companies are without justification. A highly
competitive market exists for oil products within Kazakhstan and the
current level of prices reflects current world crude oil prices. Also,
the prices charged by the group distribution companies are competitive
with Russian imports and with those charged by distributors of the
other two refineries in Kazakhstan.
The Corporation is considering its recourse rights under the terms of
the Shymkent refinery Privatization Agreement, which clearly
stipulates the right to sell any and all its products in Kazakhstan
and abroad at free market prices.
The Corporation will continue to seek a dialogue with the appropriate
authorities to address the concerns related to the pricing of refined
products and possible measures to be taken to further promote
transparency and effective monitoring of the dynamics of competition,
consistent with market economy principles. The Corporation has not
provided for these amounts in the interim consolidated financial
statements. See Note 15 Subsequent Events.
Curtailment of production
On April 26, 2005 the Corporation's subsidiary PKKR commenced the
process of reducing production in accordance with new legislation
passed in December 2004 prohibiting gas flaring except under limited
circumstances. Turgai and Kazgermunai also reduced production to
comply with the new legislation.
The Corporation remains hopeful that, in view of its current
investment program to achieve full gas utilization by mid-2006, it
will be allowed to resume production at higher rates prior to the
completion of its gas re-injection program.
Kazgermunai social infrastructure obligations
In February 2005, the Corporation's joint venture Kazgermunai,
received a claim filed by the Kyzylorda Regional Oblast Akimat
(regional administration) for failure to fulfill infrastructure
obligations amounting to $31.2 million alleged to arise from the terms
of its Foundation Agreement, supplementary agreements, and subsequent
amendments to these agreements. The claim was for approximately
$102.0 million (the Corporation's 50% share is $51.0 million), with
$31.2 million relating to infrastructure obligations and the remainder
being interest charges.
In May 2005, Kazgermunai and the Akimat reached a settlement agreement
under which Kazgermunai agreed to pay $31.2 million (the Corporation's
50% share is $15.6 million) for fulfillment of all of its
infrastructure obligations. The Corporation capitalized this payment
as it settles one of the alleged obligations of Kazgermunai under its
Foundation Agreement.
Litigation
Turgai claims against PKKR
--------------------------
Migration of crude oil
In May 2005, Turgai filed a claim that alleged that PKKR has produced
crude oil that originated from Turgai's license area. The claim is for
approximately $188.2 million at current exchange rates. The first
hearing was to be held on June 21, 2005 and was delayed until July 14,
2005.
The Corporation believes that this claim is groundless, has documented
numerous technical and legal counter arguments in support of its
position, and, therefore, has made no provision for this claim in
these interim consolidated financial statements. See Note 15
Subsequent Events.
Return of crude oil
In May 2005, Turgai filed a claim seeking that PKKR return to Turgai
approximately 395,000 tonnes of crude oil (3.1 million barrels) that
Turgai alleged PKKR should not have shipped to the Shymkent refinery.
The Corporation disagrees with this claim, on the basis that the crude
oil was shipped in accordance with the MEMR monthly refinery supply
plan, as well as applicable Turgai shareholder agreements and board
resolutions. Additionally, PKOP had paid Turgai for the crude oil and
Turgai had accepted the payment. The court of first instance, the
Kyzylorda Specialized Interdistrict Economic Court, ruled in Turgai's
favor and PKKR has filed an appeal. The Appellate Court hearing was
scheduled to take place on July 20, 2005. See Note 15 Subsequent
Events.
Central processing facility curtailment
In February 2005, the Corporation, through PKKR, received a claim
filed by Turgai for $18.3 million in damages related to the temporary
production curtailment of Turgai in late December 2004 and alleged
lost revenue from export sales.
The claim was separated into two cases. The first case, for
$13.1 million, related to the alleged lost revenue from export sales
of 60,000 tonnes. In March 2005, the Kyzylorda Interregional Economic
Court issued a decision in favor of Turgai. PKKR filed an appeal, the
hearing of which was held in April 2005. The Appellate Court issued a
decision requiring PKKR to pay Turgai $13.1 million for the alleged
lost revenues from export sales of 60,000 tonnes (0.46 million
barrels), and, in return, Turgai was required to transfer title to
60,000 tonnes of crude oil to PKKR. PKKR does not plan to appeal this
ruling. The Corporation has recorded the transaction as a purchase of
crude oil in the interim consolidated financial statements.
The second case, for $5.2 million, related to compensation for damages
from the curtailment of production. The Court of first instance ruled
in favor of Turgai; PKKR appealed and the Appellate Court ruled in
Turgai's favor but reduced the amount to $3.5 million. The Corporation
has recorded the consolidated impact of $1.7 million as part of
general and administrative expenses in the interim consolidated
financial statements.
Price received for crude sold to PKOP
In April 2005, Turgai filed two claims with respect to the price paid
by PKOP for purchased crude oil. In the first claim, which covers the
period from August to October 2004, Turgai is claiming approximately
$5.5 million at current exchange rates for the alleged difference
between market price and the price paid by PKOP for crude oil
purchased from Turgai and is seeking to invalidate offsets totaling
$31.7 million that PKOP made for amounts owed by Turgai. The court of
first instance, the Kyzylorda Specialized Interdistrict Economic
Court, ruled in Turgai's favor and PKOP has lodged an appeal. The
Appellate Court hearing took place on July 20, 2005. See Note 15
Subsequent Events.
No provision has been made in the interim consolidated financial
statements because the Corporation believes that Turgai's claims are
groundless. The purchase price for crude oil is based upon a formula
that has been approved and agreed to by Turgai's Board of Directors
and its shareholders.
The second claim is for November and December 2004 crude oil purchases
and is claiming approximately $7.3 million for the alleged difference
between market price and the price paid by PKOP for crude oil
purchased from Turgai. The court of first instance, the Kyzylorda
Specialized Interdistrict Economic Court, ruled in Turgai's favor and
PKOP has appealed. The Appellate Court hearing was expected to take
place in July 2005. The date of the hearing has not been set. No
provision has been made in the interim consolidated financial
statements as the Corporation believes that Turgai's claims are
groundless.
Invalidation of export contracts
In June 2005, Turgai filed a claim seeking damages of approximately
$3.5 million for earlier actions taken by PetroKazakhstan Inc. and
PKKR to invalidate certain Turgai export contracts. Turgai petitioned
the Kyzylorda Specialized Interregional Economic Court to post as
security the Corporation's shares in Turgai pending the outcome of the
court proceedings.
PetroKazakhstan Inc. and PKKR are continuing to take measures to
release the shares and will vigorously defend themselves. In the event
that hearings proceed, PetroKazakhstan believes the claims are
groundless as Turgai sustained no damage. In the unlikely event that
PetroKazakhstan loses the case, payment of the damages awarded will
immediately release the security on PetroKazakhstan Inc.'s shares in
Turgai.
Lukoil Litigation
-----------------
PetroKazakhstan vs Lukoil Stockholm Arbitration
On July 6, 2004, PetroKazakhstan filed a Request for Arbitration with
the Arbitration Institute of the Stockholm Chamber of Commerce against
Lukoil Overseas Kumkol BV ("Lukoil") seeking compensation for lost
profits which PetroKazakhstan would have received as a 50% shareholder
of Turgai Petroleum but for Lukoil's failure to finance the joint
venture as provided under the Foundation Agreements for the Joint
Venture and for Lukoil's actions in violation of corporate governance
obligations and tender approval requirements. The Statement of Claim
also includes damages for costs incurred due to Lukoil-initiated
litigation in Kazakhstan, to force a PetroKazakhstan subsidiary, PKOP,
to accept crude oil for processing rather than sale, and will also
claim any losses incurred in current Kazakh litigation, relating to
crude oil sales pricing in August-December 2004 and crude oil delivery
and pricing in January-March 2005.
PetroKazakhstan submitted its full Statement of Claim on April 22,
2005 and its statement of the damages it is seeking on June 30, 2005.
PetroKazakhstan's Statement of Damages claims $293 million, and
injunctive relief to halt all actions that violate corporate
governance obligations.
Lukoil submitted its Preliminary Statement of Defense and Counterclaim
on July 7, 2004 and claimed $252 million for Turgai and $4 million for
Lukoil, together with a request for a $600 million letter of credit as
a surety against PetroKazakhstan requests for injunctive relief.
Lukoil is expected to file its Statement of Damages on October 3,
2005.
A preliminary hearing is scheduled before the Tribunal on
September 19, 2005.
The outcome of this litigation can not be determined, and,
accordingly, no amounts have been recorded in the interim consolidated
financial statements.
PetroKazakhstan vs Lukoil Amsterdam litigation
On July 21, 2004, PKKR filed a claim in the District Court of
Amsterdam against Lukoil for damages suffered by PKKR as a result of
unlawful actions by Lukoil related to the shut-in of certain wells
located at the border of the Kumkol North and the Kumkol South fields.
The preliminary amount of the claim, as at the date of the filing, was
an initial $65 million. This amount increases daily as the production
of Kumkol South continues to be partly constrained.
The outcome of this litigation can not be determined, and,
accordingly, no amounts have been recorded in the interim consolidated
financial statements.
PetroKazakhstan vs Lukoil/Turgai Paris Arbitration
On May 9, 2005, PetroKazakhstan filed a Request for Arbitration with
the Arbitration Institute of the International Chamber of Commerce,
Paris. PetroKazakhstan is seeking clarification of Turgai's and
Lukoil's obligations and other terms of the KAM pipeline agreements.
Lukoil and Turgai have agreed to consolidate all KAM pipeline related
disputes under this arbitration and have withdrawn all KAM pipeline
related claims from the Kazakh court system. As part of this
agreement, Lukoil and Turgai have dropped an earlier claim brought in
the Kazakh Courts seeking to invalidate the arbitration clauses of the
KAM pipeline agreements.
Lukoil/Turgai vs PetroKazakhstan Stockholm Arbitration
In April 2005, the Corporation received a copy of a Request for
Arbitration filed with the Arbitration Institute of the Stockholm
Chamber of Commerce by Lukoil and Turgai against PetroKazakhstan Inc.
for $100 million. This amount represents the alleged difference
between market prices and the prices paid by PKOP for crude oil
purchased from Turgai during the period from October 2003 to November
2004.
The Corporation believes the claim is without merit, as the price paid
was in accordance with prevailing agreements. No provision has been
made in the interim consolidated financial statements for this claim.
Ministry of Energy and Mineral Resources Geology and Subsurface Use
-------------------------------------------------------------------
Committee ("Committee") of the Republic of Kazakhstan vs. PKKR
--------------------------------------------------------------
In May 2005, the Committee filed a claim against PKKR for
approximately $4.4 million for violation of a no flaring injunction
received earlier in the year. The first hearing was held on July 6,
2005 with the decision in favor of the Committee. The Corporation does
not agree with the decision and plans to appeal. The Corporation has
not provided for this claim in the interim consolidated financial
statements.
PKOP vs. SFE Ltd.
-----------------
In October 2004, PKOP filed a claim against SFE Ltd., a minority
shareholder in PKOP, for enforcement of a share redemption agreement
pursuant to SFE Ltd. requesting redemption after voting against a
reorganization of PKOP from a joint stock company to an LLP. SFE Ltd.
has filed a number of counter claims with the most significant
disputing the valuation of its shares in PKOP and obtaining
injunctions prohibiting PKOP from entering into certain transactions.
The case regarding the injunction prohibiting certain transactions has
progressed through the Kazakhstan court system and in May of 2005, the
Supreme Court ruled that pending the outcome of the dispute, PKOP is
prohibited from entering into transactions, which would decrease the
equity of PKOP and that PKOP can not enter into share transactions.
The remaining cases are progressing through the court system.
The outcome of the litigation can not be determined, and, therefore,
no amounts were recorded in the interim consolidated financial
statements.
Other Litigation
----------------
The Corporation is involved in certain other litigation and claims
associated with the normal course of operations. Management believes
that settlements, if any, would not have a material impact on the
Corporation's interim consolidated financial statements.
15 SUBSEQUENT EVENTS
ARNM
----
On July 13, 2005 the City Court of Astana rendered a decision adverse
to the group distribution companies for an aggregate amount of
approximately $55.4 million. The judgement may be appealed to the
Supreme Court of Kazakhstan. The outcome of the appeal can not be
determined, therefore, no provision has been made in the interim
consolidated financial statements for this judgement.
The Corporation, through its subsidiaries in Kazakhstan, has been
involved in extensive negotiations aimed towards a settlement. The
Corporation does not view this judgement as an obstacle to the
settlement of the civil and related criminal cases.
Turgai claims against PKKR
--------------------------
Migration of crude oil
At a hearing on July 18, 2005, the court requested that MEMR experts
review the technical arguments. This process is expected to require a
number of months to complete.
Return of crude oil
On July 20, 2005 the Appellate Court, the Board of Civil Affairs of
Kyzylorda Oblast Court, ruled in Turgai's favor and obligated PKKR to
return approximately 395,000 tonnes to Turgai.
Turgai argued that PKKR was obliged to transfer crude oil into the
Kaztransoil pipeline system for export under a Services Contract. PKKR
argued in its appeal that oil was forwarded to the Shymkent Refinery,
by a different route in accordance with the MEMR monthly refinery
supply plan, as well as existing contractual obligations of Turgai
approved by Shareholder Resolutions and also other contractual
arrangements approved by Lukoil.
The Corporation also noted that Turgai received and accepted money
from PKOP for the crude oil supplied to the refinery by Turgai.
PKKR intends to appeal this decision to the Supervisory Panel of the
Board on Civil Affairs of the Kyzylorda Oblast Court but in the
meantime, as required by law, PKKR will execute the court decision and
return the crude oil to Turgai.
The Corporation will, in any event, pursue reimbursement of damages at
international arbitration, owing to Lukoil's failure to comply with
shareholders agreements related to Turgai and breaches of corporate
governance rules.
These interim consolidated financial statements still record the
deliveries of Turgai crude oil made to Shymkent in January-March 2005
as sales of Turgai, because the Corporation does not agree with this
decision and will appeal.
Price received for crude sold to PKOP
On July 20, 2005 the Appellate Court of the South Kazakhstan Oblast
issued a decision that PKOP should reimburse the alleged difference of
approximately $5.5 million between alleged market price and the price
paid by PKOP for crude oil purchased from Turgai during the period
from August to October 2004. PKOP disagrees with this decision as
Turgai was contractually bound to supply PKOP, at the price paid by
PKOP, because there was a crude purchase contract in force that had
been approved by the shareholders, Lukoil and PetroKazakhstan.
PKOP will appeal again to the Supervisory Panel of the South
Kazakhstan Oblast Court, but in the meantime, as required by law, will
pay the amount in question. The Corporation will, in any event, pursue
reimbursement in international arbitration owing to Lukoil's wrongful
failure to comply with the requirements of the Kazakhstan Law on Joint
Stock Companies and other breaches of the Corporation's shareholder
agreement with Lukoil. The Corporation has not recorded any provision
for this decision, as it does not agree and plans to further appeal.
Road Tax assessments for 1998 and 1999
--------------------------------------
PKKR has been disputing approximately $7.9 million (using current
exchange rates) in assessed fines and penalties relating to
assessments received for the 1998 and 1999 taxation years.
This matter was previously appealed to the Supervisory Panel of the
Supreme Court ("Supervisory Panel"), and they remanded the case back
to the lower court in Kyzylorda for a retrial. The lower court
rejected the Supervisory Panel's instruction, a retrial was not held,
and the lower court let the original decision stand.
The Corporation recorded, as an expense, $8.0 million in the
consolidated financial statements for the year ended December 31,
2004.
The lower court's refusal to comply with the Supervisory Panel's
instruction was appealed to the Supervisory Panel. On July 19, 2005 a
hearing was held, whereby the Supervisory Panel issued a decision in
favor of PKKR. The Corporation reversed $7.9 million from royalties
and expenses and recorded this amount as an account receivable in its
interim consolidated financial statements.
DATASOURCE: PetroKazakhstan Inc.
CONTACT: Ihor P. Wasylkiw, Vice President Investor Relations,
(403) 221-8658, (403) 383-2234 (cell); Jeffrey D. Auld, Vice President,
Treasurer, + 44 (1753) 410-020, + 44 79-00-891-538 (cell)