Fitch Ratings-London-18 April 2008: Fitch Ratings has said today that the imposition of an oil export duty announced by the Kazakhstani Prime Minister is unlikely to have a material impact on the credit profiles of the oil and gas companies operating in Kazakhstan. The duty is expected to be levied on companies that do not have customs stability clauses in their contracts, including the largest national oil and gas company, KazMunaiGas Exploration Production (KMG EP; ‘BBB-’ (BBB minus)/Stable), as well as other smaller producers. At the same time, the international oil and gas consortia operating in the country are expected to be exempt from this duty, including Tengizchevroil (TCO; senior secured notes rated ‘BBB-’ (BBB minus)) and the consortium developing the Karachaganak field. “Although the introduction of the crude export duty will put pressure on profit margins, the Kazakh oil and gas companies are currently more profitable than their Russian and international counterparts. Thus, they are adequately cushioned against potential deterioration,” says Angelina Valavina, Director of Fitch’s Energy, Utilities & Regulation team. KMG EP’s FY06 EBITDAR margin was 59.5% (64% in FY07), whereas the average FY06 EBITDAR margin of the Russian oil and gas peers was 38.6% (ranging from 26.8% to 48.4%) and that of the international oil and gas companies rated by Fitch was 19.9%. In Fitch’s view, in the worst case the profitability of the Kazakh oil and gas companies may weaken to the level demonstrated by their Russian peers, which is still high compared with their international competitors. At the same time, the margins of the Kazakh companies are expected to continue to be underpinned by the benign market environment, as well as by the fact that the Kazakh export duty is three times lower than that in Russia. On the downside, Fitch notes that most Kazakh oil and gas companies are involved primarily in upstream activities and the lack of vertical integration makes them more vulnerable to changes in crude export duties compared with their Russian peers. Fitch acknowledges that lower profitability and resulting subdued cash flow could limit the companies’ ability to finance investment programmes with internally generated funds. This would primarily impact small scale companies with sizable capital expenditure programmes. However, additional financial flexibility may stem from the fact that some capital expenditures can be postponed or scaled down. In regard to KMG EP, the company plans to implement a moderate capital expenditure programme over the next five years and has sufficient financial flexibility to finance it internally, despite the anticipated negative influence of the export duty on its cash flow generating capacity. In addition, Fitch notes that KMG EP has strong credit metrics with very low gross leverage (gross debt to EBITDA of 0.1x in 2007) and a net cash position of KZT361bn (USD3bn) at FYE07. This provides it with ample headroom for additional debt and limits the impact of EBITDA and cash flow deterioration on its creditworthiness. According to a decree published in Kazakhstan’s official newspaper on 17 April, the crude export duty of USD109.9 per tonne (based on the average oil price in Q108 of about USD94/bbl) will come into force in 30 days. It will be adjusted periodically based on oil price developments. Since the most pronounced impact of the crude export duty is expected on ultimately state-owned KMG EP, the Kazakh government has to find a balance between its budgetary interests and interest in seeing the oil industry further develop. In light of the latter, it should be noted that the Russian government, on the contrary, is considering a decrease in oil taxes to boost stagnating production. Fitch will closely monitor the impact of the crude export duty, as well as other potential changes in taxation on the Kazakh oil industry. The agency will also assess the ability of the companies to continue implementing their investment programmes as scheduled on a case-by-case basis.