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06ALMATY3178 2006-09-11 08:48:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY US Office Almaty
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1. (SBU) Summary: On September 4, KazMunaiGas Exploration
and Production company (KMG E&P), the onshore production
subsidiary of Kazakhstan's state-owned oil company,
formally announced its intention to issue shares on both
Kazakhstan's stock exchange (KASE) and the London Stock
Exchange. According to KMG insiders and press reports,
the IPO -- which will cover up to 40% of the company's
shares, and is expected to raise as much as $2 billion --
will occur before year-end. The company simultaneously
announced the appointment of three Western executives to
its Board, and may be preparing other moves designed -- or
timed -- to peak investor interest in the IPO. End



2. (SBU) KMG E&P issued a September 4 press release
confirming its long-rumored intention to offer shares on
KASE and global depositary receipts (GDRs) on the London
Stock Exchange. KMG insiders have generally refused to
talk about the IPO, citing non-disclosure agreements, but
Galiausat Keshubayev, Director of the Samruk Holding
Company's Office for Management of KMG, recently confirmed
to Econoff that the offering would occur in 2006. KMG E&P
will likely float approximately 40% of its shares, leaving
a majority share in the hands of its KMG parent company.

3. (SBU) According to a recent (January 2006) law, adopted
in part to strengthen Kazakhstan's weak domestic stock
market, KMG E&P must float at least 20% of its total offer
on the KASE. The remainder will be issued, to
institutional investors only, on the London Stock Exchange
in the form of Global Depository Receipts. This type of
offering requires relatively little disclosure on the part
of the issuer.



4. (SBU) According to industry analysis, KMG E&P may raise
as much as $2 billion from the IPO. Asked the reasons for
the IPO, our KMG and GOK interlocutors most often cite
KMG's need for cash to maintain - and even increase - its
offshore presence. (Note: A 2005 law granted KMG the
right to at least 50% in future offshore projects. KMG is
rumored to already be under fiscal strain due to delays
and cost overruns at the offshore Kashagan project, in
which it is an 8.33% participant. End note.)



5. (SBU) KMG E&P is Kazakhstan's third-largest oil
producer (behind TengizChevrOil and the Karachaganak
Petroleum Operating company) at 186,000 barrels/day.
Analysts often speculate that, with its "easy" oil already
tapped, KMG E&P may have reached its production peak - a
fact which, if true, would likely dampen investor interest
in the IPO. However, ExxonMobil's local E&P
representative, Peter Claypoole, recently told Econoff
that his company is nearing final agreement with KMG E&P
to conduct joint "deep seismic" studies of a large portion
of the onshore North Caspian - a development which shows
clear investor confidence in onshore growth potential.
(The agreement would give ExxonMobil certain "first
rights" to purchase and develop promising blocks, in
partnership with KMG.)

6. (SBU) Claypoole told Econoff that the KMG E&P
negotiators have drastically accelerated the pace of
negotiations of late, a move he interprets as a sign that
KMG wants to announce the news of a deal - "with a big
American major" -- prior to the IPO. In another move
presumably aimed to bolster investor confidence, KMG E&P
announced the appointment of three new outside, Western
board members on September 4.

7. (SBU) KMG E&P has also moved quietly to remove a
potential political obstacle to its IPO. In August 2005
the Asar political party - led, at the time, by Dariga
Nazerbaeva, the President's eldest daughter and
parliamentarian - publicly criticized the idea of a KMG
E&P IPO, arguing that the sale of the "only state-owned
oil production and refining enterprise" would "undermine
the President's efforts to develop a strong and
economically independent state." In December 2005,
following lively debate in Kazakhstan's Lower House, KMG

ALMATY 00003178 002.2 OF 002

E&P sold its shares in the Atyrau refinery - one of only
three in Kazakhstan - to its parent, KMG, thus shielding
the refinery from the planned privatization and defusing
potential criticism of the IPO on "national security"

8. (SBU) Comment: While this IPO has been in the works
for a long time, Kazakhstan's decision-makers were likely
encouraged to move forward by the relative success of
Rosneft's July 2006 IPO. As the only state-owned onshore
producer, KMG E&P has clear advantages that will appeal to
investors, including a "pre-emptive right" to buy existing
onshore contracts and preferential access to new onshore
licenses. End comment.