Strategic Advisors in Global Energy Developments in Kazakhstan’s Refining Sector Julia Nanay Senior Director KazEnergy Forum Astana September 5, 2008

Kazakhstan’s Downstream | Page 2 Politics of Refining  Economic growth has led to increasing domestic demand since 2000 and upward pressure on prices  Need to ensure adequate supplies of gasoline and diesel, while keeping domestic prices in check  There are plans to upgrade 3 refineries to meet demand for high octane gasoline and diesel  Net importer of high octane gasoline & jet/kero and net exporter of fuel oil, low octane gasoline and diesel  Naphtha demand growth small, due to limited development of a petrochemical industry  Gasoline demand growth significant  Gasoil/diesel demand growth more modest, driven by agricultural use  Jet fuel demand is growing strongly, but volumes remain small

Kazakhstan’s Downstream | Page 3 Achieving Balance by Administrative Means  Russian prices for both gasoline and diesel are higher than in Kazakhstan which creates incentives to sell these products in Russia. Ukraine has been a market for diesel – surplus diesel is drawn to export markets  With large volumes of diesel being exported, domestic diesel’s price surpassed A1-92 gasoline in May. Kazakh farmers were forced to pay very high prices for diesel which meant that food price increases of 35% were expected by end-2008  Exports of oil products – mainly gasoline and diesel -- in first quarter 2008 were 50% higher than in the same period 2007  The government tries to regulate the situation with a ban on products exports and has also forced refiners to sell specified volumes of gasoline & diesel at lower than market prices  Products prices in neighboring countries will continue rising as crude prices increase  Domestic demand will continue to grow – a higher price environment is inevitable and Kazakhstan will have to adjust to this reality  Government should foster conditions that will keep prices in check through competition by allowing small retailers to access supplies at refineries directly and could consider establishing a refined products exchange

Kazakhstan’s Downstream | Page 4 Three Refineries in Segmented Markets  Pavlodar is the most complex refinery, relying on oil supplied from Russia –produces gasoline, jet/kero, diesel, fuel oil, LPG, coke, and bitumen –Produces more than 40% of the high octane gasoline in Kazakhstan, of which it sells a large share in Russia –KMG is in process of taking a controlling stake; Gazpromneft seeks equity stake  Shymkent, least complex, with 90% of oil from area’s Kumkol fields, 10% Russia –produces diesel, gasoline, vacuum gasoil (VGO), jet/kero and LPG –located in proximity to Almaty market –supplies fuel oil to China, Kyrgyzstan, Afghanistan  Atyrau, close to production in the west –produces fuel oil, diesel, gasoline, vacuum gasoil, coke, LPG and jet/kero –Produces 40,000 b/d of winter & summer diesel –Can refine high sulfur oil from Tengiz & other fields Shymkent Atyrau Pavlodar Kazakhstan has over 420,000 b/d of refining capacity in 3 refineries –Processes 240,000 b/d –Domestic demand is 220,000 b/d Kazakhstan Refineries Refinery OwnershipCapacityComplexity (mb/d) Index Atyrau 99% KMG Shymkent 50% KMG-50% CNPC Pavlodar 51% KMG-49% MMG * Total * KMG in process of taking 51%

Kazakhstan’s Downstream | Page 5 Product Balance in 3 Refineries  Refinery yields overall: 29% diesel, 20% gasoline and 20% fuel oil  Kazakhstan is short of gasoline and jet/kero and relatively balanced on diesel (net importer of gasoline, jet/kero and LPG)  95% of imports are of Russian origin and these imports - mostly gasoline- make up over 20% of domestic demand  Recent price increases, domestic shortages and concern over inflation led to ban on all oil product exports till January 2009  At end-May, oil export duty became effective, resulting in additional oil for domestic refineries – increase products output, including gasoline. Products export ban means extra products will not be exported  After January 2009, crude export duty will lead to substitution away from crude exports toward product exports, due to altered incentives. Domestic products prices will rise again 2007 Refinery Products Balance mmbbl

Kazakhstan’s Downstream | Page 6 Refinery Upgrades  Domestic refinery upgrades underway: they are quality-oriented units to meet demand for more stringent fuel specs & improve light product yields –Number of cars on the road in Kazakhstan hit the 3 million in April 2008 –For gasoline, Euro-2 standards from 2009; Euro- 3, 2011; Euro-4, 2014, though leaded gasoline is still used to some extent  Longer-term, with continued growth in domestic demand, emphasis will be on adding refining capacity rather than on exporting crudes and importing products

Kazakhstan’s Downstream | Page 7 Continuing Gasoline Shortfall  Even with refining investment, Kazakhstan is likely to remain short in gasoline –Because of logistical issues, these shortages will be isolated for certain markets and demand centers –Gasoline imports will continue to come from Russia, particularly from Gazprom Neft’s Omsk refinery –Kazakhstan will continue to supply gasoil and some gasoline to neighbors within the region –Naphtha surplus can be used for petrochemicals or for easing gasoline shortage if more investment is made in reforming capacity Kazakh prices have historically been below prices in more mature markets like Russia and Ukraine. Given this situation, local producers have preferred to exporting products

Kazakhstan’s Downstream | Page 8 European Expansion  August 2007, KMG acquired 75% of Rompetrol in Romania – with a refinery near Constanta on the the Black Sea coast across from Batumi –Petromidia and Vega refineries have about 110,000 b/d of capacity. Petromidia is 15 kms from Constanta while Vega is inland at Ploiesti –$90 million project to increase capacity of Midia terminal, north of Constanta, to 14 mmt/y –Wholesale/retail distribution network can handle over 7 million tons per year of oil products, includes 630 gasoline stations in 7 European countries –KMG supplies ,000 t cargoes each month from Odessa to Rompetrol –Batumi is eventually seen as a link to the Petromidia refinery –KMG has talked about plans to invest $340 million in refinery upgrades and expansion in the East European oil products market Source: EIA Rompetrol Source: E IA

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