Form 6-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

For the month of July 29, 20003

PetroKazakhstan Inc.
(Translation of registrant’s name into English)

140-4th Avenue S.W. #1460, Calgary Alberta, Canada T2P 3N3
(Address of principal executive offices)

     Indicate by check mark whether the registrant files or will file annual reports under cover of Form20-F or Form40-F:

      Form20-F |_|    Form40-F |X|

     Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

     Yes |_|    No |X|

     If “ Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule
12g3-2(b): 82-

 

   

 

 

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant, , has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: July 29, 2003
PetroKazkhstan Inc.

By:

/s/ Ihor Wasylkiw
Ihor Wasylkiw
Vice President Investor Relations

 

   

 

 

NEWS RELEASE

FOR IMMEDIATE RELEASE - July 29, 2003
FOR:            PetroKazakhstan Inc.
SUBJECT:   Financial Results for the Second Quarter Ending June 30, 2003

CALGARY, Alberta - PetroKazakhstan Inc. (“PetroKazakhstan”) announces its financial results for the three months ending June 30, 2003. All amounts are expressed in U.S. dollars unless otherwise indicated.

HIGHLIGHTS:
• Second consecutive quarter of record earnings and cash flow
• KAM pipeline completed and operational
• Record crude oil export shipments
• Increasing quarterly production of 145,066 barrels of oil per day
• New reserves found in Aryskum and Maibulak fields
• Gas utilization project progressing and on schedule

FINANCIAL HIGHLIGHTS:
(in millions of US$ except per
share amounts) 		Six Months ended June 30 Three Months ended June 30
2003
2002
2003
2002
Gross Revenue $              498.7 $              320.7 $              252.1 $              177.4  
Net income 136.4 56.9 68.2 33.8  
    Per share (basic) 1.74 0.70 0.87 0.42  
    Per share (diluted) 1.67 0.67 0.84 0.40  
Cash flow 180.0 81.3 91.0 45.3  
    Per share (basic) 2.29 1.00 1.17 0.56  
    Per share (diluted) 2.20 0.96 1.12 0.53  
Weight Average Shares Outstanding
    Basic 78,538,671 80,911,226 78,000,877 81,196,383  
    Diluted 81,676,831 84,405,177 81,173,957 84,690,334  
Shares Outstanding at End of Period 77,653,139 81,371,497 77,653,139 81,371,497  

PetroKazakhstan is pleased to announce its financial results for the second quarter of 2003 with $68.2 million of net income, a 101.8% increase over the quarter ended June 30, 2002 and $91.0 million of cash flow, a 100.8% increase over the quarter ended June 30, 2002. This represents basic net income per share of $0.87 and basic cash flow per share of $1.17 for the quarter. The comparable figures for the quarter ended June 30, 2002 were $0.42 basic net income per share and $0.56 basic cash flow per share.

For the six months ended June 30, 2003 net income was $136.4 million, a 139.7% increase over the same period of 2002, and cash flow of $179.9 million, a 121.3% increase over the same period of 2002. This represents basic net income per share of $1.74 and basic cash flow per share of $2.29. The comparable figures for the six months ended June 30, 2002, were net income per share of $0.70 and basic cash flow per share of $1.00.

PetroKazakhstan’s second quarter 2003 average production was 145,066 barrels of oil per day (“bopd”). This represents a 23.1% increase as compared to 117,844 bopd in the second quarter of 2002.

The Company’s share repurchase program, in effect since August 7, 2002 will terminate on August 6, 2003. The Company is in the process of renewing the repurchase program for a second year.

 

 1 

 

 

UPSTREAM OPERATIONS REVIEW

KAM Pipeline

The 177 kilometre, 16-inch pipeline from Kumkol to Druzhaly via the KAM fields has been completed and now operational with the first railcars loaded on June 20th. The pipeline is capable of transporting and loading into rail cars 140,000 bopd and negates some 1,300 kilometres of pipeline and rail transportation currently in use. This material development has shown transportation cost savings in the region of $2.40 to $2.50 per barrel for the initial shipments. These cost savings may vary depending on the ultimate destination of future shipments. Full utilisation of this facility is expected to be achieved in the third quarter of 2003 providing additional transportation and marketing capacity and flexibility in addition to the cost savings.

Production

During the first quarter of 2003, PetroKazakhstan’s production volumes totaled 13.20 million barrels or an average of 145,066 barrels of oil per day (“bopd”). This represents a 23.1% increase over the second quarter 2002 production of 117,844 bopd and a 3.1% increase over the first quarter of 2003 production rates of 140,765 bopd. Adverse transportation conditions restricted crude oil exports, necessitating production restrictions in the early part of the second quarter. In addition, a temporary production injunction from the authorities, which has since been lifted, reduced production from the Aryskum field by some 9,000 bopd. Due to these deferrals in the first half of the year, the Company considers that the average production over the full year will now be in the region of 155,000 bopd representing a 14.1% increase over 2002 average production of 135,842. The revised production target for 2003 represent a 6.1% reduction from the original 2003 target of 165,000 bopd. For the week ending July 26, 2003, production had increased to approximately 162,000 bopd.

PetroKazakhstan currently has 8 service rigs operating that are conducting repair and maintenance work on wells to optimize daily production.

Kumkol Facilities and Fields

Construction started on 2 new Free Water Knockout (FWKO) facilities. When commissioned later in the third quarter of 2003, these facilities will further enhance the fluid handling capabilities within the field as water production gradually increases.

Additional down hole pumps are due to be installed in Kumkol South and South Kumkol wells, which will result in production increases.

An additional high pressure pump has been installed in the Kumkol South Water Injection Facility and will result in an increased injection capacity of over 20,000 barrels per day. Final electrical and instrumentation connections are in progress and will be completed in July.

Exploration

The exploration of the Company’s 260 D1 license, in which we are targeting previously unexplored stratigraphic plays continued on the discovery field, North Nurali, with the acquisition and interpretation of 3D seismic. The existence of the North Nurali field confirms the Company’s opinion that stratigraphic plays work in this region. Well locations have now been clearly identified and the first of three appraisal wells to delineate the field will be started in July. Four additional exploration wells, targeting stratigraphic plays in the basin, are planned for 2003; three in deep prospects and one shallow. All wells are expected to be completed by the first quarter of 2004.

 

 2 

 

 

Gas Utilization

The 55 megawatt gas power plant at Kumkol is 96.0% complete and on schedule for commissioning during the third quarter of 2003. This project will enable PetroKazakhstan to utilize associated produced gas and to establish a more reliable source of electricity within its fields. Excess electricity will be provided for sale into the Kazakhstan domestic market. The gas utilization project is jointly owned, with PetroKazakhstan and Turgai Petroleum CJSC (“Turgai”), each having an equal share.

Appraisal and Developments

East Kumkol

Joint Venture agreements with Turgai for the development and operation of the East Kumkol field, which extends unto the Kumkol North license, continue to progress. Production is planned to resume in the fourth quarter of 2003.

KAM Fields

Six new wells were drilled in the KAM fields during the second quarter, three producers in Aryskum and three injectors in Maibulak. The Aryskum wells targeted possible category reserves along the oil rim and were each successful in proving additional reserves and tested at over 1,400 bopd. The three Maibulak well locations, selected for injectors based on 3D seismic and reservoir modeling, have each encountered new multiple productive sections and are being flow tested.

The 6-inch pipeline connecting Kyzylkiya to Aryskum is complete and the upgrade of the processing facility to handle water production is on schedule for completion in the third quarter.

Construction of the Aryskum 8-inch pipeline to the main KAM pipeline is in progress as well as the Aryskum truck offloading facility and oil processing facility. Completion of the Aryskum construction is on schedule for the third quarter.

Equipment has been procured for the Maibulak water injection system; construction is expected to be completed by the end of the third quarter. Pumps have been installed on two producing wells and artificial lift will commence in July.

Kumkol North

A 27 well 2003 drilling program is progressing with 8 wells having been drilled to the end of June. Work has started on a new water injection plant due for commissioning in the third quarter and a new FWKO facility will be on line at the same time.

Kazgermunai

The program designed to increase field production by de-bottlenecking the system continued with the installation of larger export pumps. In addition, construction is underway for a water injection facility to be on-line in the fourth quarter. By the end of the year three production wells will be drilled, one in each of the Nurali, Aksai and Akshabulak East fields. The Company continues to address certain disputes with the joint venture partners regarding the ongoing management and operation of the joint venture.

CRUDE OIL MARKETING & TRANSPORTATION

The operational problems seen in the first quarter of 2003 and for the first month of the second quarter at various ports were vastly improved during the last two months of the second quarter. Shipments of crude increased to 7.04 million barrels or 77,317 bopd (908,352 tonnes) in the second quarter of 2003 compared to 5.25 million barrels or 58,354 bopd (677,983 tonnes) in the first quarter of 2003 and 6.71 million barrels or 73,778 bopd (866,708 tonnes) in the second quarter of 2002. That represents an increase of 34.0% versus the first quarter of 2003 and an increase of 4.8% versus the second quarter of 2002.

 

 3 

 

 

Shipments to China increased by approximately 6.0% versus the first quarter of 2003. The Company has also initiated, in late May, shipments to China from the terminal of Atasu, owned and operated by KazTransOil. The use of the Atasu terminal reduces rail distance to the Chinese border by about 435 kilometres, as compared to the southern route via the Company’s terminal at Tekesu. Shipments to the Fergana refinery in Uzbekistan, a new outlet, grew in the second quarter of 2003.

Progress on the modifications at the unloading Ray Terminal, located near the Tehran refinery, continues for the Iranian swap. Exports of crude oil by this route are expected to commence in the fourth quarter of 2003. Kumkol crude will be transported by rail from Shymkent through Uzbekistan and Turkmenistan and on to the Tehran refinery via the Sarakhs border crossing station. The swap contract includes compensation to recognise the higher quality of Kumkol crude compared to Iranian Light. A minor amount of work is required at the Ray Terminal to receive Kumkol crude at the Tehran refinery. The work is being financed and carried out by the refining and distribution arm of National Iranian Oil Company (NIOC) and the national railway company.

Crude oil sales volumes recorded in the second quarter of 2003 increased by 17.9% or 1.1 million barrels (142,023 tonnes) as compared to the first quarter of 2003.

Although generally lower than the first quarter of 2003, Brent quotations in the second quarter remained buoyant throughout the quarter despite the cessation of hostilities in Iraq. US oil stocks remained low on the back of the Venezuelan strike and the civil disturbances in Nigeria. In addition the market did not expect a rapid return of Iraqi oil to the market place and this together with the US oil stocks issue kept world prices firm. The average Brent quotation for the second quarter was $26.03 per barrel compared to $31.51 during the first. The spread of the daily average quotations during the second quarter was a little over $6.00 per barrel with a low of $22.88 per barrel and a high of $28.96 per barrel.

REFINING AND REFINED PRODUCT SALES

Refined product sales were up 6.7% in the second quarter of 2003 versus the first quarter of 2003. The opportunity was taken to optimize returns when domestic netbacks were better than export netbacks for short periods during the second quarter. As a result of this opportunity, the maintenance shutdown planned for June 2003 was postponed. The next maintenance shutdown is planned for the fourth quarter of 2003. The refinery processed 7.5 million barrels or 82,659 bopd of crude during the second quarter of 2003 compared to 8.3 million barrels or 91,746 bopd during the first quarter of 2003. No third party crude was processed in either the second quarter of 2003 or second quarter of 2002 while 0.23 million barrels were refined for third parties in the first quarter of 2003 and is included in this production. The reduction in volumes processed is due to higher processing rates during the first quarter required in part as a result of the export problems faced during the first quarter. Comparison to the second quarter of 2002 is not meaningful as the refinery maintenance shutdown took place during that period.

A number of the efficiency improvement programs initiated at the refinery began to yield benefits through improved energy usage and cost reductions. The project to revamp and bring on stream the Vacuum Distillation Unit continues to progress and is on track for completion later in 2003. The completion of this upgrade will allow the refinery to increase its production of higher valued distillates and reduce the overall production of lower value Mazut fuel oil.

Product prices continued to improve in the second quarter versus the first. Weighted average prices were approximately $1.20 per barrel ($9.31 per tonne) better against the first quarter of 2003 and $2.44 per barrel ($18.90 per tonne) better than the same period last year.

 

 4 

 

 

MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)

A full MD&A of the Second Quarter of 2003 is available on the Company’s website and can also be obtained on application from the Company.

PetroKazakhstan Inc. is an independent, integrated, international energy company, celebrating its sixth 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 in the United States on the New York Stock Exchange under the symbol PKN. They also trade on the Toronto Stock Exchange under the symbol PKN and on the Frankfurt exchange under the symbol PKZ.

The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.

For further information please contact:

 
 
    Nicholas H. Gay Ihor P. Wasylkiw
  Senior Vice President Finance and CFO Vice President Investor Relations
  +44 (1753) 410-020 (403) 221-8658
 
 

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.

 

 5 

 

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED

Three Months Ended
June 30, 		Six Months Ended
June 30,
2003
2002
2003
2002
REVENUE
Crude oil 134,175 113,223 276,417 175,786
Refined products 116,959 62,061 217,625 139,445
Processing fees - 3 449 1,434
Interest and other income 967 2,111 4,244 4,064
   
 
 
 
 
252,101 177,398 498,735 320,729
   
 
 
 
 
EXPENSES
Production 16,893 12,225 34,149 26,413
Royalties and taxes 15,117 9,795 24,631 22,171
Transportation 60,269 36,347 115,272 49,938
Refining 4,393 5,798 7,402 12,327
Crude oil and refined product purchases 16,046 20,549 25,416 38,649
Selling 6,719 4,892 12,190 10,621
General and administrative 12,254 15,330 25,574 27,831
Interest and financing costs 6,867 8,825 21,126 17,250
Depletion and depreciation 19,787 8,852 38,501 17,378
Foreign exchange loss (gain) (3,428 ) (65 ) (5,526 ) 409
   
 
 
 
 
154,917 122,548 298,735 222,987
   
 
 
 
 
INCOME BEFORE UNUSUAL ITEM 97,184 54,850 200,000 97,742
   
 
 
 
 
UNUSUAL ITEM
Arbitration settlement - 1,001 - 7,091
   
 
 
 
 
INCOME BEFORE INCOME TAXES 97,184 53,849 200,000 90,651
   
 
 
 
 
INCOME TAXES (Note 9)
Current provision 27,080 18,360 63,252 28,348
Future income tax 1,272 1,253 (958 ) 4,105
   
 
 
 
 
28,352 19,613 62,294 32,453
   
 
 
 
 
NET INCOME BEFORE MINORITY INTEREST 68,832 34,236 137,706 58,198
MINORITY INTEREST 621 428 1,271 1,281
   
 
 
 
 
NET INCOME 68,211 33,808 136,435 56,917
   
RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD 146,245 (43,265 ) 78,821 (66,366 )
                   
Normal Course Issuer Bid (Note 8) (10,440 ) - (11,232 ) -
Preferred share dividends (8 ) (8 ) (16 ) (16 )
   
 
 
 
 
RETAINED EARNINGS (DEFICIT), END OF PERIOD 204,008 (9,465 ) 204,008 (9,465 )
   
 
 
 
 
BASIC NET INCOME PER SHARE (Note 10) 0.87 0.42 1.74 0.70
   
 
 
 
 
DILUTED NET INCOME PER SHARE (Note 10) 0.84 0.40 1.67 0.67
   
 
 
 
 

See accompanying notes to the interim consolidated financial statements.

 

 6 

 

 

INTERIM CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
June 30, 2003
December 31, 2002
ASSETS           
CURRENT          
Cash and cash equivalents (Note 4) 224,342      74,796   
Accounts receivable (Note 5) 127,192     92,431  
Inventory 30,805     40,529  
Prepaid expenses 41,121     44,594  
Current portion of future income tax asset 9,181     9,049  
 
   
 
  432,641     261,399  
           
Deferred charges 7,836     5,321  
Future income tax asset 23,135     24,529  
Property, plant and equipment 455,888     405,479  
 
   
 
TOTAL ASSETS 919,500     696,728  
 
   
 
LIABILITIES          
CURRENT          
Accounts payable and accrued liabilities 66,879     96,076  
Short-term debt (Note 6) 101,583     25,947  
Prepayments for crude oil and refined products 8,244     3,540  
 
   
 
  176,706     125,563  
           
Long-term debt (Note 7) 314,766     266,603  
Provision for future site restoration costs 6,545     4,167  
Future income tax liability 14,794     17,015  
 
   
 
  512,811     413,348  
 
   
 
Minority interest 12,024     10,753  
Preferred shares of subsidiary 80     83  
COMMITMENTS AND CONTINGENCIES (Note 13)          
SHAREHOLDERS’ EQUITY          
   Share capital (Note 8) 190,577     193,723  
   Retained earnings 204,008     78,821  
 
   
 
  394,585     272,544  
 
   
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 919,500     696,728  
 
   
 

See accompanying notes to the interim consolidated financial statements

 

 7 

 

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED

  Three Months Ended June 30, Six Months Ended June 30,
  2003 2002 2003 2002
 
 
 
 
 
OPERATING ACTIVITIES                        
  Net income 68,211     33,808     136,435     56,917    
  Items not affecting cash:                        
   Depletion and depreciation 19,787     8,852     38,501     17,378    
   Amortization of deferred charges 359     466     3,052     625    
   Minority interest 621     428     1,271     1,281    
   Other non-cash charges 770     468     1,593     1,007    
   Future income tax 1,272     1,253     (958 )   4,105    
 
   
   
   
   
Cash flow 91,020     45,275     179,894     81,313    
Changes in non-cash operating working capital items (61,493 )   (10,668 )   (42,368 )   (25,148 )  
 
   
   
   
   
Cash flow from operating activities 29,527     34,607     137,526     56,165    
 
   
   
   
   
FINANCING ACTIVITIES                        
   Short-term debt (33,827 )   (482 )   16,675     (1,938 )  
   Purchase of common shares (Note 8) (13,816 )   --     (14,848 )   --    
   Long-term debt 34,698     (8,760 )   98,808     25,195    
   Deferred charges paid (1,150 )   --     (3,601 )   --    
   Proceeds from issue of share capital, net of                        
   share issuance costs 20     24     470     613    
   Preferred share dividends (8 )   (8 )   (16 )   (16 )  
 
   
   
   
   
   Cash flow (used in) from financing activities (14,083 )   (9,226 )   97,488     23,854    
 
   
   
   
   
INVESTING ACTIVITIES                        
   Long-term investment --     40,000     --     40,000    
   Capital expenditures (35,143 )   (33,995 )   (85,464 )   (53,504 )  
   Purchase of preferred shares of subsidiary (2 )   (5 )   (4 )   (5 )  
 
   
   
   
   
   Cash flow (used in) from investing activities (35,145 )   6,000     (85,468 )   (13,509 )  
 
   
   
   
   
                         
(DECREASE) / INCREASE IN CASH (19,701 )   31,381     149,546     66,510    
                         
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD		 244,043     99,941     74,796     64,812    
 
   
   
   
   
CASH AND CASH EQUIVALENTS,
END OF PERIOD		 224,342     131,322     224,342     131,322    
 
   
   
   
   

There were no cash equivalents as at June 30, 2003 and December 31, 2002.

See accompanying notes to the interim consolidated financial statements

 

 8 

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS TABULAR AMOUNTS IN THOUSANDS OF 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 Inc. was formerly known as Hurricane Hydrocarbons Ltd. Its main operating subsidiaries Hurricane Kumkol Munai (“HKM”) and Hurricane Oil Products (“HOP”) were renamed PetroKazakhstan Kumkol Resources (“PKKR”) and PetroKazakhstan Oil Products (“PKOP”), respectively. Certain information and disclosures normally required to be included in the notes to the annual financial statements has 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, 2002. The accounting principles applied are consistent with those as set out in the Corporation’s annual financial statements for the year ended December 31, 2002.

  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 of refined products and the management of the marketing 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.

 

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3 months ended June 30, 2003
Upstream  Downstream  Corporate  Eliminations Consolidated 
REVENUE                    
Crude oil 162,240   -   -   (28,065 ) 134,175  
Refined products 13,866   110,955   -   (7,862 ) 116,959  
Processing fees -   -   -   -   -  
Interest and other income 197   357   413   -   967  
 
 
 
 
 
 
  176,303   111,312   413 (35,927 ) 252,101  
 
 
 
 
 
EXPENSES                  
Production 16,893   -   - -   16,893  
Royalties and taxes 14,911   206   - -   15,117  
Transportation 60,244   25   - -   60,269  
Refining -   4,393   - -   4,393  
Crude oil and refined product                  
purchases 14,816   37,157   - (35,927 ) 16,046  
Selling 2,490   4,229   - -   6,719  
General and administrative 7,333   4,421   500 -   12,254  
Interest and financing costs 6,127   695   45 -   6,867  
Depletion and depreciation 15,104   4,651   32 -   19,787  
Foreign exchange loss (gain) (2,294 ) (1,484 ) 350 -   (3,428 )
 
 
 
 
 
  135,624   54,293   927 (35,927 ) 154,917  
 
 
 
 
 
INCOME (LOSS) BEFORE
INCOME TAXES		 40,679   57,019   (514 ) -   97,184  
 
 
 
 
 
INCOME TAXES                  
Current provision 14,879   12,305   (104 ) -   27,080  
Future income tax (3,508 ) 4,780   - -   1,272  
 
 
 
 
 
  11,371   17,085   (104 ) 28,352  
MINORITY INTEREST -   621   - -   621  
 
 
 
 
 
NET INCOME (LOSS) 29,308   39,313   (410 ) -   68,211  
 
 
 
 
 
Intersegment revenue 19,564   5,920   - -   -  
 
 
 
 
 

      As at June 30, 2003    Upstream    Downstream    Corporate    Consolidated  
  Total assets 588,855 179,373 151,272 919,500  
  Total liabilities 450,800 55,018 6,993 512,811  
  Capital expenditures in
the quarter		 32,853 3,658 183 36,694  

 

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3 months ended June 30, 2002

Upstream Downstream Corporate Eliminations Consolidated
REVENUE      
Crude oil 135,783    -    -    (22,560 ) 113,223
Refined products 17,812 57,659 - (13,410 ) 62,061
Processing fees - 3 - - 3
Interest and other income 1,475 617 19 - 2,111
 
 
 
 
 
 
155,070 58,279 19 (35,970 ) 177,398
 
 
 
 
 
 
EXPENSES                    
Production 12,225 - - - 12,225
Royalties and taxes 9,276 519 - - 9,795
Transportation 36,347 - - - 36,347
Refining - 5,798 - - 5,798
Crude oil and refined product
purchases 21,354 35,165 - (35,970 ) 20,549
Selling 1,004 3,888 - - 4,892
General and administrative 9,027 4,086 2,217 - 15,330
Interest and financing costs 2,170 336 6,319 - 8,825
Depletion and depreciation 6,044 2,784 24 - 8,852
Foreign exchange loss (gain) (317 ) 86 166 - (65 )
 
 
 
 
 
 
97,130 52,662 8,726 (35,970 ) 122,548
 
 
 
 
 
 
INCOME (LOSS) BEFORE
UNUSUAL ITEMS		 57,940 5,617 (8,707 ) - 54,850
 
 
 
 
 
 
UNUSUAL ITEM                    
Arbitration settlement 1,001 - - - 1,001
 
 
 
 
 
 
INCOME (LOSS) BEFORE
INCOME TAXES		 56,939 5,617 (8,707 ) - 53,849
 
 
 
 
 
 
INCOME TAXES                    
Current provision 13,757 4,486 117 - 18,360
Future income tax 2,550 (1,297 ) - - 1,253
 
 
 
 
 
 
  16,307   3,189   117   -   19,613  
MINORITY INTEREST - 428 - - 428
 
 
 
 
 
 
NET INCOME (LOSS) 40,632 2,000 (8,824 ) - 33,808
 
 
 
 
 
 
Intersegment revenue 22,560 13,410 - - -
 
 
 
 
 
 

Included in Upstream crude oil revenue are sales to one customer in the amount of $30.4 million.

      As at June 30, 2002 Upstream    Downstream    Corporate          Consolidated  
  Total assets 366,167   161,319   130,493       657,979  
  Total liabilities 173,870   48,942   218,545       441,357  
  Capital expenditures in
the quarter		 31,319   2,573   103       33,995  

 

 11 

 

 

6 months ended June 30, 2003

Upstream    Downstream    Corporate    Eliminations    Consolidated
REVENUE
Crude oil 338,699   -   -   (62,282)   276,417
Refined products 14,536   212,355   -   (9,266)   217,625
Processing fees -   449   -   -   449
Interest and other income 2,719   796   729   -   4,244
 
 
 
 
 
355,954   213,600   729   (71,548)   498,735
 
 
 
 
 
EXPENSES                  
Production 34,149   -   -   -   34,149
Royalties and taxes 24,326   305   -   -   24,631
Transportation 115,272   -   -   -   115,272
Refining --   7,402   -   -   7,402
Crude oil and refined product
purchases 16,920   80,044   -   (71,548)   25,416
Selling 4,507   7,683   -   -   12,190
General and administrative 15,121   8,930   1,523   -   25,574
Interest and financing costs 11,181   1,182   8,763   -   21,126
Depletion and depreciation 29,122   9,321   58   -   38,501
Foreign exchange loss (gain) (3,668)   (2,450)   592   -   (5,526)
 
 
 
 
 
246,930   112,417   10,936   (71,548)   298,735
 
 
 
 
 
INCOME (LOSS) BEFORE
INCOME TAXES		 109,024   101,183   (10,207)   -   200,000
 
 
 
 
 
INCOME TAXES                  
Current provision 39,048   24,076   128   -   63,252
Future income tax (5,722)   4,764   -   -   (958)
 
 
 
 
 
33,326   28,840   128   -   62,294
MINORITY INTEREST --   1,271   -   1,271  
 
 
 
 
 
NET INCOME (LOSS) 75,698   71,072   (10,335)   -   136,435
 
 
 
 
 
Intersegment revenue 62,282   9,266   -   -   -
 
 
 
 
 

       As at June 30, 2003 Upstream    Downstream    Corporate          Consolidated
      Total assets 588,855   179,373   151,272       919,500
  Total liabilities 450,800   55,018   6,993       512,811
  Capital expenditures in
the half year		 77,426   9,248   341       87,015

 

 12 

 

 

 

Upstream    Downstream    Corporate    Eliminations    Consolidated

REVENUE

Crude oil

223,669

-

-

(47,883)

175,786

Refined products

28,799

136,195

-

(25,549)

139,445

Processing fees

-

1,434

-

-

1,434

Interest and other income

2,737

330

997

-

4,064

 
 
 
 
 
 

255,205

137,959

997

(73,432)

320,729

 
 
 
 
 
EXPENSES

Production

26,413

-

-

-

26,413

Royalties and taxes

21,444

727

-

-

22,171

Transportation

49,938

-

-

-

49,938

Refining

-

12,327

-

-

12,327

Crude oil and refined product purchases

37,202

74,879

-

(73,432)

38,649

Selling

1,136

9,485

-

-

10,621

General and administrative

16,165

7,424

4,242

-

27,831

Interest and financing costs

4,271

676

12,303

-

17,250

Depletion and depreciation

11,812

5,520

46

-

17,378

Foreign exchange loss (gain)

590

(244)

63

-

409

 
 
 
 
 
 

168,971

110,794

16,654

(73,432)

222,987

 
 
 
 
 
INCOME (LOSS) BEFORE UNUSUAL ITEMS

86,234

27,165

(15,657)

-

97,742

 
 
 
 
 
                   
UNUSUAL ITEM

Arbitration settlement

7,091

-

-

-

7,091

 
 
 
 
 
 

INCOME (LOSS) BEFORE INCOME TAXES

79,143

27,165

(15,657)

-

90,651

 
 
 
 
 
 

INCOME TAXES

Current provision

19,041

8,942

365

-

28,348

Future income tax

4,216

(111)

-

-

4,105

 
 
 
 
 
 

23,257

8,831

365

32,453

 

MINORITY INTEREST

-

1,281

-

-

1,281

 
 
 
 
 
 

NET INCOME (LOSS)

55,886

17,053

(16,022)

-

56,917

 
 
 
 
 
 

Intersegment revenue

47,883

25,549

-

-

-

 
 
 
 
 

Included in Upstream crude oil revenue are sales to one customer in the amount of $62.7 million.

     As at June 30, 2002 Upstream    Downstream    Corporate        Consolidated
       Total assets 366,167   161,319   130,493       657,979
  Total liabilities 173,870   48,942   218,545       441,357
  Capital expenditures in
the half year		 49,458   3,895   151       53,504

 

  13  

 

 

 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 in Kazakhstan.

  b) a 50% equity shareholding with equivalent voting power in LLP Kazgermunai (“Kazgermunai”), which operates three oil fields in Kazakhstan: Akshabulak, Nurali and Aksai.

  The following amounts are included in the Corporation’s consolidated financial statements as a result of the proportionate consolidation of its joint ventures before consolidation eliminations:

  3 months ended June 30, 2003

  Turgai    Kazgermunai    Total
 
  Cash 13,206 14,123 27,329
  Current assets, excluding cash 6,511 20,758 27,269
  Property, plant and equipment, net 59,565 58,342 117,907
  Current liabilities 26,643 6,467 33,110
  Long-term debt 46,035 46,035
             
  Revenue 29,494 20,653 50,147
  Expenses 16,360 15,968 32,328
  Net income 13,134 4,685 17,819
             
  Cash flow from operating activities 24,255   4,930   29,185
  Cash flow used in financing activities - (6,016) (6,016)
  Cash flow used in investing activities (11,200) (2,342) (13,542)

  Revenue for the three months ended June 30, 2003 includes $10.6 million of crude oil sales made by Turgai to Downstream. This amount was eliminated on consolidation.

  3 months ended June 30, 2002

 

 

Turgai    Kazgermunai    Total
 
  Cash 1,483 9,033 10,516
  Current assets, excluding cash 5,593 15,603 21,196
  Property, plant and equipment 22,359 54,812 77,171
  Current liabilities 11,518 1,581 13,099
  Long-term debt - 62,441 62,441
 
  Revenue 18,634 10,017 28,651
  Expenses 10,868 6,989 17,857
  Net income 7,766 3,028 10,794
 
  Cash flow from operating activities 1,786 (1,306) 480
  Cash flow used in financing activities - 629 629
  Cash flow used in investing activities (2,959) (2,010) (4,969)

  Revenue for the three months ended June 30, 2002 includes $7.0 million of crude oil sales made by Turgai and $1.9 million of crude oil sales made by Kazgermunai to Downstream. These amounts were eliminated on consolidation.

 

  14  

 

 

  6 months ended June 30, 2003

  Turgai    Kazgermunai    Total
 
  Cash 13,206 14,123 27,329
  Current assets, excluding cash 6,511 20,758 27,269
  Property, plant and equipment, net 59,565 58,342 117,907
  Current liabilities 26,643 6,467 33,110
  Long-term debt - 46,035 46,035
             
  Revenue 59,710 42,787 102,497
  Expenses 38,810 28,573 67,383
  Net income 20,900 14,214 35,114
             
  Cash flow from operating activities 34,314 17,693 52,007
  Cash flow used in financing activities - (6,016) (6,016)
  Cash flow used in investing activities (21,416) (6,251) (27,667)

  Revenue for the six months ended June 30, 2003 includes $18.7 million of crude oil sales made by Turgai to Downstream. This amount was eliminated on consolidation.

 

 

Turgai    Kazgermunai    Total
 
  Cash 1,483 9,033 10,516
  Current assets, excluding cash 5,593 15,603 21,196
  Property, plant and equipment 22,359 54,812 77,171
  Current liabilities 11,518 1,581 13,099
  Long-term debt - 62,441 62,441
             
  Revenue 30,586 15,255 45,841
  Expenses 18,142 13,786 31,928
  Net income 12,444 1,469 13,913
             
  Cash flow from operating activities 4,254 (968) 3,286
  Cash flow used in financing activities - 1,373 1,373
  Cash flow used in investing activities (4,270) (2,888) (7,158)

  Revenue for the six months ended June 30, 2002 includes $15.5 million of crude oil sales made by Turgai and $5.9 million of crude oil sales made by Kazgermunai to Downstream. These amounts were eliminated on consolidation.

 4 CASH AND CASH EQUIVALENTS

  As at June 30, 2003 cash and cash equivalents included $15.6 million of cash dedicated to a debt service reserve account for the Corporation’s Term Facility (nil as at December 31, 2002). This cash is unavailable for general corporate purposes.

  As at June 30, 2003 cash and cash equivalents included $3.1 million of cash dedicated to a margin account for the hedging program. As at December 31, 2002 the balance on this margin account was $5.7 million, which was subsequently released.

 

  15  

 

 

 5 ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

      June 30,
2003		    December 31,
2002
 
  Trade 75,096 61,085
  Value added tax recoverable 9,708 1,718
  Due from Turgai 25,196 17,357
  Other 17,192 12,271
 
  127,192 92,431
   
 

 6 SHORT-TERM DEBT

      June 30,
2003		    December 31,
2002
 
  Working capital facilities 9,765 14,947
  Current portion of term facility 54,285 -
  Current portion of term loans 2,039 -
  Joint venture loan payable 11,000 11,000
  PKOP Bonds (Note 7) 24,494 -
 
  101,583 25,947
   
 

  The working capital facilities are revolving, for terms of one to eight years, are secured and have interest rates ranging from Libor plus 3.5% per annum to 14% per annum.

 7 LONG-TERM DEBT

      June 30,
2003		    December 31,
2002
 
  Term facility 135,715 -
  9.625% Notes 125,000 -
  Kazgermunai debt 40,191 45,231
  Term loans 13,860 -
  12% Notes - 208,210
  PKOP bonds - 13,162
 
  314,766 266,603
   
 

 

  16  

 

 

  Term facility

  On January 2, 2003, PetroKazakhstan Kumkol Resources (“PKKR”) entered into a secured $225.0 million term facility secured by crude oil export contracts. This facility is repayable in 42 equal monthly installments commencing July 2003. The facility bears interest at a rate of LIBOR plus 3.25% per annum. PKKR has drawn $190.0 million under this facility and has chosen not to utilize the remainder. PKKR has the right to repay the facility prior to its maturity, under certain terms and conditions.

  As a guarantor of the facility, the Corporation must comply with certain covenants including a limitation as to total debt and certain other financial covenants. The Corporation must also maintain a minimum cash balance of $40.0 million, of which an amount equal to 3 months principal and interest payments must be maintained in a security deposit account (see Note 4).

  PKKR is also required to hedge 450,000 barrels of crude oil production per month for 2004 with a minimum price of $17.0 per bbl. As PKKR has not drawn the full amount of the facility, the hedged volumes have been reduced to 372,500 barrels of crude oil per month for 2004.

  Included in deferred charges as at June 30, 2003 are $3.1 million of issue costs related to the Term facility, which will be amortized over the term of the facility.

  9.625% Notes

  On February 12, 2003, PetroKazakhstan Finance B.V., a wholly owned subsidiary of PKKR issued U.S. $125.0 million 9.625% Notes due February 12, 2010. The Notes are unsecured, unconditionally guaranteed by the Corporation, PKKR and PKOP, and were issued at a price of 98.389% of par value. Each of the guarantors has agreed to certain covenants, including limitations on indebtedness, restrictions on payments of dividends and on pledging of assets as security.

  Issue costs of $1.8 million and the discount on the sale of the Notes of $2.0 million are recorded as deferred charges and will be amortized over the term of the Notes.

  Kazgermunai debt

  The Kazgermunai debt is non-recourse to the Corporation. During the three months ended June 30, 2003, Kazgermunai repaid $11.6 million (50% - $5.8 million) of principal and interest.

  Term loans

  PKKR has obtained loans guaranteed by Export Credit Agencies for certain equipment related to the Kyzylkiya, Aryskum and Maibulak (“KAM”) pipeline and the Gas Utilization Facility. The loans are secured by the equipment purchased, bear interest at LIBOR plus 4% per annum, are repayable in equal semiannual installments and have final maturity dates ranging from five to seven years.

 

  17  

 

 

  12% Notes

  On February 3, 2003 the Corporation redeemed all $208.2 million of its outstanding 12% Notes due in 2006. The Notes were redeemed for an aggregate redemption price of $212.4 million, representing 102% of the principal amount of the Notes, plus accrued and unpaid interest of $12.5 million, for a total of $224.9 million. Deferred charges of $1.4 million recorded as at December 31, 2002 were expensed upon redemption.

  PKOP bonds

  On March 20, 2001 PetroKazakhstan Oil Products (“PKOP”) registered 250,000 unsecured bonds (par value $100) in the amount of $25 million with the National Securities Commission of the Republic of Kazakhstan (the “PKOP bonds”). The PKOP bonds have a three-year maturity, are due on February 26, 2004 and bear a coupon rate of 10% per annum. The PKOP bonds are listed on the Kazakh Stock Exchange.

  As at December 31, 2002 134,800 bonds had been issued for consideration of $13.2 million. On February 13, 2003, PKOP issued the remaining 115,200 Bonds for consideration of $11.4 million.

  The PKOP bonds contain certain covenants including a limitation on indebtedness.

  Repayment

  Principal repayments due for each of the next five years and in total are as follows:

     2003 2004 2005 2006 2007 There-
after		 Less amounts
included in
short term
debt		 Total
long-
term
debt
 
  Working capital facilities 9,765 - - - - - (9,765)    -
  Joint venture loan payable 11,000 - - - - - (11,000)   -
  PKOP bonds - 24,494 - - - - (24,494)   -
  9.625% Notes - - - - - 125,000 -   125,000
  Term Facility 27,143 54,285 54,286 54,286 - - (54,285)   135,715
  Kazgermunai - - - - - 40,191 -   40,191
  Term loans 707 2,665 2,665 2,665 2,271 4,926 (2,039)   13,860
     
 
  48,615 81,444 56,951 56,951 2,271 170,117 (101,583)   314,766
   

  The Kazgermunai debt does not have fixed repayment terms.

  The fair value of long-term debt as at June 30, 2003 approximates its carrying value, as it bears interest at market rates.

 

  18  

 

 

 8 SHARE CAPITAL

  Authorized share capital consists of an unlimited number of Class A common shares, and an unlimited number of Class A redeemable preferred shares, issuable in series.

  Issued Class A common shares:

   Three Months Ended
June 30, 2003		 Three Months Ended
June 30, 2002
 
  Number    Amount    Number    Amount
   
 
  Balance, beginning of period 79,028,539 193,933 81,041,713 199,097
 
  Shares repurchased and cancelled
pursuant to Normal Course Issuer Bid (a)		 (1,379,300) (3,376) - -
  Stock options exercised for cash 3,900 20 232,075 (64)
  Corresponding convertible securities,
converted		 - - 97,709 88
 
   
 
  Balance, end of period 77,653,139 190,577 81,371,497 199,121
   
 

     Six Months Ended
June 30, 2003		   Six Months Ended
June 30, 2002
   
 
    Number    Amount    Number    Amount
                 
 

Balance, beginning of period

78,956,875   193,723   80,103,784   198,506
   
 
 

Shares repurchased and cancelled
pursuant to Normal Course Issuer Bid (a)

 (1,477,400)   (3,616)     -
 

Stock options exercised for cash

170,400   467   1,168,125   529
 

Corresponding convertible securities,
converted

3,264   3   107,908   97
 

Cancelled shares

-   -   (8,320)   (11)
                 
   
 
 

Balance, end of period

77,653,139   190,577   81,371,497   199,121
   
 

  (a) During the third quarter of 2002, the Corporation adopted a normal course issuer bid to repurchase, for cancellation, up to 5,253,238 common shares during the period from August 7, 2002 to August 6, 2003. As at December 31, 2002, the Corporation had purchased and cancelled 2,531,870 shares at an average price of C$14.57 per share. The Corporation purchased and cancelled an additional 1,477,400 at an average price of C$14.69 per share during the six months ended June 30, 2003. The excess of cost over the book value for the shares purchased was applied to retained earnings.

 

  19  

 

 

  (b) The Corporation has elected to use the intrinsic value method of accounting for stock options and to disclose the pro forma results of using the fair value method.

    The pro forma net income per share had we applied the fair-value based method of accounting for stock options follows: Three Months Ended June 30, Six Months Ended June 30, 2003 2002 2003 2002

      Three Months Ended June 30,    Six Months Ended June 30,
  2003 2002 2003 2002
 

 

 
  Net income

 

 
    As reported 68,211    33,808      136,435    56,917   
    Pro forma 68,002   33,406     136,196   56,458  
  Basic net income per share                  
    As reported 0.87   0.42     1.74   0.70  
    Pro forma 0.87   0.41     1.73   0.70  
  Diluted net income per share                  
    As reported 0.84   0.40     1.67   0.67  
    Pro forma 0.84   0.40     1.67   0.67  

  A summary of the status of the Corporation’s stock option plan as of June 30, 2003 and the changes during the six months ended June 30, 2003 and year ended December 31, 2002 is presented below (expressed in Canadian dollars):

        Options   Weighted Average
Exercise Price
 

  Outstanding at December 31, 2001 5,736,880    3.07
         
  Granted 605,000   14.65
  Exercised (1,393,281)   1.09
  Forfeited (98,463)   6.73
   
 
  Outstanding at December 31, 2002 4,850,136   5.01
         
  Granted 17,000   16.20
  Exercised (173,664)   0.06
  Forfeited (28,300)   9.62
   
 
  Outstanding at June 30, 2003 4,665,172   5.06
   
 
  Options exercisable as at:      
  December 31, 2002 (amended) 1,908,798   3.87
  June 30, 2003 2,527,127   2.82

 

  20  

 

 

 9 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 June 30,    Six Months Ended June 30,
  2003 2002 2003 2002
 

 

 
 

Statutory Kazakhstan income tax

 30%    30%      30%    30%   
 

                 
 

Expected tax expense

 29,155   16,155     60,000   27,196  
 

Non-deductible amounts, net

(803)   4,390     2,294   3,500  
 

Lower tax rate for South Kumkol field

-   (932)     -   (1,096)  
 

Future tax recognized

-   -     -   2,853  
 

 
   
 
 
 

Income tax expense

28,352   19,613     62,294   32,453  
   
 
   
 
 

 10 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 June 30,      Six Months Ended June 30,
  2003 2002 2003 2002
 

 

 
  Weighted average number of common
   shares outstanding 		78,000,877    81,196,383      78,538,671    80,911,226   
     Dilution from exercisable options
       (including convertible securities) 		3,173,080   3,493,951     3,138,160   3,493,951  
                     
  Diluted number of shares outstanding 81,173,957   84,690,334     81,676,831   84,405,177  

  No options were excluded from the calculation of diluted number of shares outstanding for the three months and six months ended June 30, 2003 and 2002, as the market price was in excess of exercise price.

 

  21  

 

 

 11 FINANCIAL INSTRUMENTS

  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 has entered into the following contracts with a major financial institution.

      Contract
Amount
(bbls per month) 		   Contract Period    Contract
Type 		   Price
Ceiling
($/bbl) 		   Price
Floor
($/bbl)
  187,500   January 2003 to December 2003   Zero cost collar   29.00   17.00
  75,000   January 2003 to December 2003   Zero cost collar   30.00   17.00
  112,500   January 2003 to December 2003   Zero cost collar   29.00   18.00
  75,000   January 2003 to December 2003   Zero cost collar   29.50   19.00
 
               
  450,000        
 
               
  75,000   January 2004 to December 2004   Zero cost collar   28.00   17.00
  75,000   January 2004 to December 2004   Zero cost collar   29.00   17.00
  75,000   January 2004 to December 2004   Zero cost collar   29.25   17.00
  37,500   January 2004 to December 2004   Zero cost collar   29.60   17.00
  75,000   January 2004 to December 2004   Zero cost collar   30.20   18.00
  35,000   January 2004 to December 2004   Zero cost collar   30.20   18.00
 
               
  372,500        
 
               

  During the three and six months ended June 30, 2003, the Corporation has foregone revenue of $3.1 million through these contracts.

 12 CASH FLOW INFORMATION

Interest and income taxes paid:

      Three Months Ended June 30,    Six Months Ended June 30,
  2003 2002 2003 2002
 

 

 
  Interest paid 7,363    3,202      16,832    22,505   
   
 
   
 
 
                     
  Income taxes paid 36,050   17,246     26,292   61,468  
   
 
   
 
 

 

  22  

 

 

 13 COMMITMENTS AND CONTINGENCIES

  Kazakhstani environment

  Kazakhstan, as an emerging market, has a business infrastructure that is not as advanced as those usually existing in more developed free market economies. As a result, operations carried out in Kazakhstan can involve risks that are not typically associated with those in developed markets.

  The development of instability in the ongoing market transformation process could lead to changes in the fundamental business infrastructure in which the Corporation currently operates. Changes in the political, legal, tax or regulatory environment could adversely impact the Corporation’s operations.

  Government taxes and legislation

  The local and national tax environment in the Republic of Kazakhstan is subject to change and inconsistent application, interpretation and enforcement. Non-compliance with Kazakhstan laws and regulations can lead to the imposition of penalties and interest.

  The Corporation through its operating subsidiaries in Kazakhstan, has disputed tax assessments received for the years 1998 through 2001.

  The Corporation has been engaged in two court cases in Kazakhstan pertaining to the disputed assessments for 1998 and 1999. The first involved PKOP and was for approximately $8.8 million. PKOP has successfully argued its case at the first level of the court system in Kazakhstan and at the Supreme Court level. There is a possibility that the Ministry of State Revenue may appeal to the ultimate appellate level, the Supervisory Commission of the Supreme Court. No provision has been made in the consolidated financial statements for this assessment.

  The second case involved PKKR and was for a total of approximately $10.5 million including taxes, fines, interest and penalties. PKKR was successful at the first level of the court system and was unsuccessful on the majority of the issues at the Supreme Court level. PKKR was unsuccessful in obtaining the Supervisory Commission’s agreement to hear its appeal on the assessed taxes. The Corporation provided for $2.9 million of the $10.5 million in the December 31, 2002 consolidated financial statements. PKKR is currently disputing the remaining $7.6 million of the $10.5 million, which relates to fines and penalties assessed, as PKKR believes there was an incorrect application of the provisions of the tax act. No provision has been made for the disputed penalties.

  The Corporation, through its operating subsidiaries in Kazakhstan received tax assessments for 2000 and 2001 amounting to $56.0 million, which were reduced through negotiations to $45.0 million (including our 50% share of Turgai’s assessments). The Corporation does not agree with these assessments and has filed court cases disputing these amounts, hence no provision was made in the consolidated financial statements. PKOP has been successful at the first level of the court system and at the Supreme Court with respect to the entire $12.5 million of its assessment. This assessment was for withholding taxes on the acquisition of an interest in the Caspian Pipeline Consortium (“CPC”) and this transaction was not completed. Turgai has been successful at the first two levels of the court system on almost its entire assessment of $12.0 million, of which $6.0 million is our 50% share.

 

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  The PKKR court cases commenced in February of 2003. The disputed assessment was split into two cases. The first case was for amounts totaling approximately $13.0 million and at the first level of the court system PKKR was successful on $3.8 million of the $13.0 million and lost on the remainder. The issues that PKKR lost were the assessment of royalties on flared associated gas (approximately $7.2 million) and a claim for social taxes under tax stability provisions of PKKR’s Hydrocarbons Contracts. This claim on social taxes was made in spite of an agreement revising this clause of the contract. There were a number of items amounting to $3.8 million upon which PKKR was successful. The Corporation has appealed to the Supreme Court and the case will be heard in the third quarter of 2003. The second case was for $13.5 million, with $6.9 million related to transfer pricing sent back by the court for re-negotiation. The amount has been reduced through re-negotiation by $3.3 million to $3.6 million. The other $6.6 million is comprised of a number of items and the Corporation expects that the determination of this $6.6 million and the remaining $3.6 million related to the transfer pricing will be subject to further court proceedings.

 

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