Annual Report for 2010

KazMunaiGas Exploration Production releases its Annual Report for 2010

Astana, 26 April 2011. JSC KazMunaiGas Exploration Production has published today its Annual Report for 2010*. The report is posted on the Company's website at www.kmgep.kz.

Further, the Company provides below the extracts from its Annual Report in unedited full text as required in accordance with DTR 6.3.5 (1)

* Information presented in this annual report is as of March 25, 2011.

COMPANY OVERVIEW

The Company, KazMunaiGas Exploration Production JSC (KMG EP) was established through the merger of Uzenmunaigas JSC (UMG) and Embamunaigas JSC (EMG) in March 2004.

The total volume of 2P reserves at the UMG and EMG fields is 1.7 billion barrels (over 234 million tonnes). Today the Company operates 41 fields excluding acquisitions made from 2007 through 2010. Including the stakes in JV Kazgermunai LLP, CCEL and PetroKazakhstan Inc. the total volume of proved and probable reserves is about 2.2 billion barrels. KMG EP is the second largest oil producer in Kazakhstan.

The Company's shares are listed on the Kazakhstan Stock Exchange (KASE) and its GDRs are listed on the London Stock Exchange (LSE).

KMG EP has many years' experience of oil production in Kazakhstan and expert geological knowledge of the area.

KMG EP has unique comparative advantages over other companies, since it enjoys privileged access to the oil and gas assets and onshore infrastructure in Kazakhstan as a result of relations with its parent company, National Company KazMunayGas (NC KMG).

Financial and Operational Highlights

Letter to shareholders from the Chairman of the Board of Directors

In 2010 JSC KazMunaiGas Exploration Production once again demonstrated net profit growth, earning about USD$1.6bn for its shareholders. Consolidated production rose by 16% to about 13.3 million tonnes (270kbopd). More than 20% of the oil from the "Ozenmunaigaz" and "EMG" subsidiaries was delivered to the domestic market, with the remainder sold for export. Income from shares in associated companies and jointly controlled entities amounted to more than USD$380m.

These figures testify to the stability of KMG EP and its adherence to the principles and objectives that were stated at the time of the Company's IPO in 2006. Good results in 2010 were largely a result of the very profitable acquisitions that the Company has made in recent years. KMG EP has confirmed its position as Kazakhstan's second largest crude oil producer. In summer of 2010 the Board of Directors approved three additional transactions to acquire large stakes in Mangistaumunaigas, Kazakhoil Aktobe and Kazakhturkmunai. Now KMG EP is awaiting Government approval for the acquisitions.

In addition, the Board of Directors approved the Company's participation in several projects outside Kazakhstan. In 2010 it signed an agreement on the White Bear project (North Sea), together with BG, and also won a tender to develop the Akkas field (Iraq) together with KOGAS. Participation in the White Bear project will allow the Company to obtain invaluable off-shore experience in cooperation with a large multinational company. The Akkas project is of great interest as it will be the first time that KMG EP has been involved in the development of commercial gas production. In both cases what is particularly appealing is the controllability of risks and, if successful, the profitability of the projects.

In 2010 the reserves replacement ratio at Uzen and Emba was, at 73%, significantly better than in 2009 but still not entirely satisfactory. The current reserves replacement ratio is a consequence of the depletion of deposits. Thanks to the acquisition of new assets this depletion rate has been mitigated, but KMG EP intends to make additional efforts, especially in the field of exploration, to ensure a higher level of reserves replacement at its core assets. This is reflected in the budget of the Company and the Board of Directors approval of a 21% increase in capital expenditure in 2011 to USD$709m. In addition, the Company is expanding its portfolio of exploration assets. In particular, it is working on the transfer of four exploration blocks - Temir, Teresken, Uzen-Karamandybas, Karaton-Sarykamys - from NC KMG to KMG EP.

Now let me say a few words about our plans for the future. I would like to pay special attention to the new development strategy of KMG EP up to 2020, which was approved by the Board of Directors in December 2010. Members of the Board of Directors, as representatives of the shareholders, set an ambitious goal for the management of KMG EP - to become one of the world's top 30 oil and gas companies. The main goal of KMG EP is to increase the Company's shareholder value. KMG EP seeks to achieve value growth through growing its reserves and its production of hydrocarbons, increasing the profitability of existing assets, and by continuing to develop the business in new directions.

Efficiency should become one of the priorities of KMG EP. The first steps have already been made - the Board of Directors has approved the Cost Control Programme and key performance indicators will be taken into account in the balanced scorecard system that will provide better motivation for employees. However, this is only the beginning of an extensive and focused plan which the management will be following over the coming years.

KMG EP plays an important role in the development of the stock market in Kazakhstan. Today, trading in the securities of the Company accounts for a significant share of transactions on the Kazakhstan Stock Exchange. The preferred share buyback programme that started in 2010 has been a success. In addition, the Company also represents the oil and gas sector of Kazakhstan on the London Stock Exchange - a great responsibility that is well understood by all members of the Board of Directors.

The efficient work of the entire Board of Directors and of its Committees was recognized by Standard&Poor's, who confirmed the GAMMA-6 corporate governance rating of the Company in November 2010. The S&P report acknowledged the improvement in our work and governance and we have tackled the small number of points raised by S&P which should help our rating in future.

I am sure that our current team of employees, whose experience and professionalism are beyond any doubt, will be able to meet the challenges before them and will continue our proven track record of working for the interests of all stakeholders. The Board of Directors will continue to ensure that all decisions are taken in the interests of all shareholders.

Askar Balzhanov

Chairman of the Board of Directors

Letter to shareholders from the Chief Executive Officer

2010 was an important year for KMG EP, the Company achieved a number of goals that it has been systematically pursuing over the last few years. This period of success is a good time to analyze our core strengths and the opportunities to improve our business; in order to find better solutions for future challenges. This is why, in 2010 we started to review some of our approaches, to make plans for the reorganization of our structure and to continue to look for new sources of steady business growth.

Relying on the support of National Company KazMunaiGas, we have continued to acquire new assets throughout Kazakhstan. We entered transactions for the acquisition of large stakes in Mangistaumunaigas, Kazakhoil Aktobe and Kazakhturkmunai. Completion of these transactions is awaiting approval from the relevant state agencies of the Republic of Kazakhstan.

I would especially like to note the independent acquisition of NBK's and SBS' assets. We are constantly looking out for promising companies in Kazakhstan and these two assets are especially attractive in terms of exploration.

The past year was marked by a great exploration success when the Company made its first significant onshore oil discovery at the Liman Block in West Kazakhstan. The Company has entered into negotiations for exploration rights at a number of other blocks and the search for new and promising oil-bearing structures has become one of our key priorities.

We believe that we should not limit our business activities to operations in Kazakhstan alone. While taking any opportunity for profitable investment in Kazakhstan, we are also looking for relevant international projects.

The Company participated in the consortium which was the successful bidder for the Akkas gas field development in Iraq and we will participate in this project on profitable terms. Another benefit from this field is that the Company's employees will also gain new experience in the area of gas field development. Clearly we have dealt with gas before, as many of the Company's fields have associated gas, and we also operate our own gas processing plant in Kazakhstan, located on the Mangyshlak peninsula. However, our specialists have not been fully engaged in gas production in the past. They will now get detailed, practical experience working in one of the largest oil and gas regions in the world together with one of the largest international gas companies - Korean KOGAS. This experience will serve the Company well in the future.

It is even more important for us to participate in the White Bear Project in the North Sea, where we are partners with BG Group. Marine exploration and, we hope in the future, production are areas of growing importance for us. This again will provide invaluable experience for our specialists, especially in view of our desire to work in the Kazakh sector of the Caspian Sea.

The White Bear Project is being implemented under the broad agreement on cooperation signed between NC KazMunaiGas, KMG EP and BG in 2008. This strategic partnership with such a large and reputable company as BG, opens up many prospects for our Company.

All the priorities for the development of our Company have been reflected in the new Strategy which was approved at the end of 2010. The Company has evolved over the years. First of all, the structure of production assets has changed. If in 2006 KMG EP was just an operating company that worked on the production facilities of the Uzenmunaigas and Embamunaigas fields, today, KMG EP is an operating and holding company with production assets comprising JV Kazgermunai LLP, Karazhanbasmunai JSC, PetroKazakhstan Inc and NBK LLP. In addition, KMG EP is awaiting Government approval for the acquisition of interests in Mangistaumunaigas, Kazakhoil Aktobe and Kazakhturkmunai. The production volume from new assets should reach about 47% of the total consolidated production of the Company, post acquisitions.

The global financial crisis also made us think more about the efficient use of our current assets. In 2011 the Company will focus on containing and reducing costs.

We have set ourselves a very ambitious but achievable target - to become one of the world's top 30 oil and gas companies within ten years. By 2020 the Company intends to achieve the same level of net production per barrel of hydrocarbon material as the top 30 oil and gas companies. This is a hard task, but we have already taken the first steps towards it.

The revised Strategy keeps some of the priority commitments which have brought KMG EP its current success. We will continue searching for, and acquiring, promising new assets, both in Kazakhstan and abroad. Special attention will be paid to exploration, both in the licensed territories which are already in the Company's possession and at new sites located outside Kazakhstan.

Discussion of the new Collective Agreement for the next three years took the best part of 2010. The document provides significant social guarantees for KMG EP employees. We have approached this issue with keen attention to detail. Many meetings with trade union leaders and discussions with employees took place and the new Collective Agreement takes into account workers' needs while keeping expenditure on social projects within acceptable limits.

The Company expects 2011 to become a year of further change. We will start implementing our new Strategy, cost management and efficiency improvement programmes and the overall business management model will be revitalized. We also intend to adjust our HR-policy and increase our influence in the projects in which we have a stake.

The Company looks to the future with confidence. We believe that in the near future we will be able to take great strides in the company's development and to bring the Company to a new level to the benefit of all our shareholders.

Kenzhebek Ibrashev,

Chief Execurive Officer

2010 MILESTONES

Q1 

·; In Q1 of 2010 KMG EP produced 3,183 thousand tonnes of crude oil (262 kbopd), including production from the Company's share in Kazgermunai, CCEL and PetroKazakhstan Inc. (PKI). This is 440 thousand tonnes or 16% more than the corresponding period of 2009. This increase in production is mainly attributed to the inclusion of PKI production (487 thousand tonnes) [in the total production volume].

·; According to the unaudited interim consolidated financial statements, operating profit for Q1 of 2010 amounted to KZT 54.6 billion (USD 370 million), 174% more than reported for Q1 of 2009. Net earnings amounted to KZT 51.7 billion (USD 350 million). Earnings per share amounted to KZT 708 (USD 0.8 per GDR).

·; In accordance with the decision of the Board of Directors, the preferred shares of KMG EP have been listed on the Kazakhstan Stock Exchange (KASE) and the share buyback programme has begun.

·; The new Board of Directors of KMG EP was elected at the Extraordinary General Meeting of Shareholders. Askar Balzhanov was elected Chairman of the Board of Directors.

·; The transition to the new wage payment system resulted in industrial action in UMG. This was discontinued after a constructive agreement between KMG EP and the participants of the industrial action was negotiated.

Q2

·; The Board of Directors approved a decision to adjust the annual oil production targets for the main assets of the Company (UMG and EMG) from 9,200 thousand tonnes to 9,082 thousand tonnes. In addition, the Board of Directors decided to reduce the 2010 Capex budget from KZT 95 billion (USD 633 million) to KZT 83 billion (USD 555 million).

·; As decided by shareholders, the 2009 dividends per share (ordinary and preferred) amounted to KZT 704 (including taxes withheld in accordance with the applicable laws of the Republic of Kazakhstan). The total amount of dividends for 2009 was KZT 50.9 billion (about USD 346 million). Dividends paid during 2010 amounted to KZT 48 billion (USD 327 million).

·; Philip Dayer was elected Independent Non-Executive Director at the General Meeting of Shareholders.

·; After negotiation with trade unions from 1 June 2010 salaries of production staff at the branches' subsidiaries were raised.

·; In the first 6 months of 2010, KMG EP produced 6,283 thousand tonnes of crude oil (257 kbopd) including the Company's share of production in JV Kazgermunai LLP, CCEL and PetroKazakhstan Inc.. This is 610 thousand tonnes or 11% more than the same period of 2009. The increase is mainly attributed to the incorporation of PKI production (733 thousand tonnes) in the total production volume.

·; Operating profit for the first six months of 2010 amounted to KZT 103.5 billion (USD $703 million), 81% more than the KZT 57.0 billion (USD$394 million) received for the corresponding period of 2009. This was mainly due to higher oil prices. Net earnings for the period amounted to KZT 100billion (USD$679 million) and earnings per share amounted to KZT 1,370 (USD$1.6 per GDR), as compared with KZT 128.8 billion (USD $890 million) and KZT 1,752 (USD$2.0 per share), respectively, for the same period of the previous year.

Q3 

·; Under an agreement with NC KMG, KMG EP announced the acquisition of a 50% interest in Kazakhoil Aktobe LLP, a 51% stake in Kazakhturkmunai LLP and a 50% stake in Mangistau Investments B.V., the owner of 100% share capital of Mangistaumunaigas JSC. These acquisitions are awaiting Government approval.

·; KMG EP purchased bonds issued by NC KMG to the amount of KZT 220 billion (USD $1.5 billion) at a coupon rate of 7% p.a., due in three years.

·; KMG EP and BG Group announced the signing of an agreement to farm-in to a BG Group operated license in the British sector of the North Sea for joint production within the White Bear prospect. KMG EP received a 35% interest in the license.

·; KMG EP completed its transactions with Eastern Gate Management Ltd. to acquire a 100% interest in NBK LLP and with Halyk Komir to acquire a 100% interest in SapaBarlau Services LLP.

·; An export customs duty at a rate of USD 20 per 1 tonne of crude oil was introduced under a Resolution of the Government of the Republic of Kazakhstan.

·; In the first 9 months of 2010 KMG EP produced 9,946 thousand tonnes of crude oil (270 kbopd) including the Company's stakes in JV Kazgermunai LLP, CCEL and PetroKazakhstan Inc., which is 1,302 thousand tonnes or 15% more than reported in the corresponding period of 2009.

·; Operating profit for the first 9 months of 2010 amounted to KZT 141.9 billion (USD 963 million), 32% more than the KZT 107.2 billion (USD 730 million) received for the corresponding period of 2009, mostly due to higher oil prices. Net earnings for the period amounted to KZT 156.8 billion (USD 1,064 million) and earnings per share were KZT 2,155 (USD 2.44 per GDR), demonstrating a 13% decline as compared with KZT 180.6 billion (USD 1,231 million) and KZT 2,467 (USD 2.8 per GDR), respectively, received for the same period of the previous year.

·; PetroKazakhstan Inc. (PKI) and Lukoil Overseas Kumkol B.V. (Lukoil) entered into the Amicable Agreement on the dispute regarding the title of JSC, Turgai Petroleum (TP). According to the Agreement the ownership structure of TP remains unchanged: PKI and Lukoil will continue to own TP in equal shares. In addition, PKI agreed to pay to Lukoil the settlement amount of approximately USD 438 million as compensation. In addition to the aforementioned Agreement, CNPC Exploration and Development Company Limited and KMG EP signed an agreement on the principles in accordance with which the compensation payment to Lukoil would be financed by PKI. KMG EP will not be liable for any damage or liability in relation to the payment of such compensation or any liability associated therewith.

Q4

·; Based on the tender results, KMG EP in partnership with Korea Gas Corporation (KOGAS) was awarded the rights to develop the Akkas gas field in the Republic of Iraq.

·; An oil discovery was announced at the Liman exploration block. The accumulation is located on the southern slope of the Novobogat salt dome which is in close proximity to the fields operated by Embamunaigas.

·; KMG EP was recognized as Company of the Year with the Altyn Zhurek National Award for the implementation of social projects in Kazakhstan.

·; KMG EP was ranked 47th out of 91 exploration and production companies in EMEA (Europe, Middle East and Africa) and achieved a ranking of 101 on overall global performance according to the Platts Top 250 Global Energy Companies Rankings.

·; The international rating agency Standard&Poor's (S&P) confirmed the GAMMA-6 corporate governance rating of KMG EP.

·; KMG EP was awarded the Most Active Player on the M&A Market in the Expert-100-Kazakhstan rating.

·; The Board of Directors approved the 2011 budget for KMG EP based on the annual average Brent oil price of USD 65 per barrel in accordance with the official forecasts of the Government of the Republic of Kazakhstan and NC KMG. The Company's capital expenditure for 2011 is expected to be KZT 99.1 billion (USD 661 million). The increase in capital expenditure as compared to 2010 is due to an increase in production drilling from 213 wells to 239 wells and an increase in the exploration budget from KZT 4 billion (USD 27 million) to KZT 8 billion (USD 55 million).

·; The Board of Directors approved the KMG EP Development Strategy for 2010-2020. In accordance with the Strategy the Company will focus on the improvement of production efficiency, exploration, participation in offshore Caspian projects, and expansion of the Company's production base in Kazakhstan and its new acquisitions outside the country.

·; The international rating agency Standard & Poor's confirmed KMG EP's long-term credit rating at BB+ and gave a "Stable" forecast.

·; In 2010 KMG EP produced 13,285 thousand tonnes of crude oil (270 kbopd) including the Company's stakes in JV Kazgermunai LLP, CCEL and PetroKazakhstan Inc., which is 1,788 thousand tonnes or 16% more than reported in 2009. The increase in production is mostly attributed to the acquisition of a 33% interest in PetroKazakhstan Inc. in December 2009. The 2010 production targets were exceeded by all production branches and associated companies, except for UMG.

·; Net earnings for 2010 amounted to KZT 235 billion (USD 1,591 million) and earnings per share amounted to KZT 3,232 (USD 3.66 per GDR). Operating profit amounted to KZT 187 billion (USD 1,267 million).

Evaluation of KMG EP activity by independent experts

In 2010, the success of KMG EP has been widely noted, not just in Kazakhstan, but also by foreign experts.

KMG EP was ranked 47th out of 91 exploration and production companies in EMEA (Europe, Middle East and Africa) and achieved a ranking of 101 in overall global performance according to the Platts Top 250 Global Energy Companies Rankings.

The Platts Top 250 Global Energy Companies Rankings measures financial performance of public companies by examining each company's assets, revenues, profits and return on invested capital. To be ranked, companies must have assets greater than USD 3 billion.

In November 2010, the international rating agency Standard&Poor's (S&P) confirmed the GAMMA-6 corporate governance rating of KMG EP.

Besides the strength of KMG EP's corporate governance, S&P noted in its report the effective work of independent non-executive directors in balancing the interests of the main shareholder and minority shareholders, as well as thorough monitoring of the Company's management work.

S&P noted that, although there is a significant influence of the Government of the Republic of Kazakhstan and Samruk-Kazyna through KMG EP major shareholder,

NC KMG, the relationship between KMG EP and NC KMG is legally secured and transparent. The obligation of the parent company to use its preemptive right to acquire assets and licenses in the interests of KMG EP has been fulfilled in full during the recent years.

S&P evaluates the level of transparency of KMG EP as high. The Company interacts effectively with its investors and regularly updates its three-language website. The financial statements prepared in accordance with the International Financial Reporting Standards (IFRS) are published quarterly and within reasonable time. The general level of transparency and efficiency of the auditing process is also evaluated as high. The Company's risk management procedures are being successfully and efficiently implemented. The shareholders are empowered with a wide range of rights, the procedures for the preparation and holding of shareholders' meetings are generally evaluated as efficient.

In terms of managing cash funds, S&P regarded a bond deal of USD 1.5 billion with NC KMG as positive, as the credit rating on liabilities in foreign currency of NC KMG was BB + / Stable/-- (at the moment of issue of a KMG EP GAMMA Corporate Governance Report). This was at least three notches above the ratings of domestic banks in which KMG EP was holding deposits. In December 2010 S&P confirmed KMG EP's long-term credit rating at BB+ Stable/--.

In addition, in 2010 the Company was awarded the Most Active Player on the M&A Market in the Expert-100-Kazakhstan rating. KMG EP received that award for implementing its acquisition strategy.

Expert-100-Kazakhstan Project is implemented by the Expert RA Kazakhstan Rating Agency and the Expert of Kazakhstan magazine with the support of the Government of the Republic of Kazakhstan. The purpose of the Project is to identify leaders of the Kazakh national economy, promote the best practices, analyze the main economic development trends of the Republic, develop proposals to improve economic policy.

KMG EP also won awards for the implementation of social projects. In October 2010 KMG EP became a winner of the Altyn Zhurek National Award as Company of the Year for its charity, sponsorship and large-scale social support in the regions where it operates.

The Altyn Zhurek is the annual public national award which expresses great public appreciation of the contribution made by citizens, organizations, enterprises and institutions whose socially important charitable activities have a positive influence on community development.

Financial analysts reacted positively to the decision of KMG EP to list its preferred shares as "such securities efficiently attract the interest of the population to the national stock market". Experts noted that from March 2010 through to the end of the year nearly all trading volume on KASE was due to the interest of investors in KMG EP's preferred shares.

S&P analysts consider that the listing of the preferred shares and the commencement of the buyback programme have significantly improved the position of KMG EP's preferred shareholders.

Throughout the year a number of equity analysts evaluated KMG EP's shares as one of the most attractive instruments for long-term investment in the sector.

Experts noticed positive trends in key performance indicators of the Company which build a basis for future share performance. Like other petroleum companies, KMG EP operates under significant risk conditions. The risks are partially associated with the specifics of the industry, and to some extent reflect the peculiarities associated with investment in developing markets. However analysts believe that KMG EP's current achievements, business opportunities, and corporate governance system constitute a synergy which creates the potential for generating considerable shareholder value.

KMG EP share price dynamics

Table of share price and Brent crude oil price

Source: Bloomberg

OPERATIONAL ACTIVITY

Crude oil production and sales

In the full year of 2010 KMG EP produced 13,285 thousand tonnes (270 kbopd), including the Company's stakes in JV Kazgermunai LLP, CCEL (JSC "Karazhanbasmunai") and JSC "PetroKazakhstan Inc.". This is 1,788 thousand tonnes or 16% more than in 2009. The increase in production mainly results from the acquisition of a 33% stake in PetroKazakhstan Inc. in December 2009. Production plans for 2010 were exceeded by all associated companies and production facilities except Uzenmunaigas.

In 2010 the Company produced 8,766 thousand tonnes (177kbopd) of oil at the Uzenmunaigas and Embamunaigas production facilities. This is 196 thousand tonnes, or 2% less than the 8,962 thousand tonnes (181kbopd) produced in 2009. Embamunaigas outperformed the production plan by 1%, while Uzenmunaigas produced 1% less than the target.

The decline in Uzenmunaigas production was mainly caused by the failure to perform well service operations and timely oilfield equipment repairs during a strike by Uzenmunaigas workers from 4 March 2010 through 18 March 2010. From June to September 2010 there were also a number of emergency power cuts in the fields, caused by severe weather conditions.

In 2010 the Company's share in production volumes from KGM, CCEL and PKI amounted to 4,519 thousand tonnes (93kbopd).

Planned production from the Company's core assets (Embamunaigas and Uzenmunaigas) is expected to be 9,100 thousand tonnes (183kbpod) in 2011, an increase from the 2010 target of 8,781 thousand tonnes (177kbopd). From this amount 1,900 thousand tonnes will be supplied to the domestic market for processing at Atyrau oil refinery.

UMG and EMG data as at 2009 year-end

In 2010 the Company supplied 8,643 thousand tonnes of crude oil (174kbopd), excluding the share in supply from KGM, CCEL and PKI. Of this amount, 6,860 thousand tonnes (138kbopd) were exported. The CPC pipeline was a more profitable route in 2010.

In 2010 the Company's share in the sales volumes from KGM, CCEL and PKI was 5,004 thousand tonnes of crude oil (103kbopd), including 3,801 thousand tonnes (78kbopd) supplied to export markets.

KEY FIGURES OF KGM (100%)[5]

KEY FIGURES OF CCEL (100%)[6]

KEY FIGURES OF PETROKAZAKHSTAN INC. (100%)[7]

OIL RESERVES

According to the report by Gaffney, Cline & Associates (GCA) as of 31 December 2010 the total Proved and Probable (2P) reserves of KMG EP (excluding its shares in JV Kazgermunai, CCEL and PetroKazakhstan Inc.) were 232 million tonnes (1,707kbopd).

The reserve replacement ratio was 73% which implies that 6.4 million tonnes (47 million barrels) were added to reserves against production of nearly 8.8 million tonnes (65 million barrels). The reserves-to-production ratio at the end of 2010 was 26 years.

Proved oil reserves (1P) are 88 million tonnes (646 million barrels). Proved, probable and possible reserves (3P) stand at 270 million tonnes (1,989 million barrels).

COMPANY DEVELOPMENT

As the timeframe covered by the Development Strategy adopted in 2006 has elapsed, and in the light of new factors that influence the Company's priorities, on 13 December 2010 the Board of Directors approved KMG EP's Development Strategy for 2010-2020.

KMG EP has identified several priorities in the implementation of its revised Strategy. The provision of safe working conditions for employees, the rational utilization of natural resources in accordance with world class environmental protection and safety standards are the unconditional top priorities of KMG EP.

Exploration, as one of the key priorities for the long-term development of the Company, is a foreground activity aimed at achieving the growth targets for KMG EP's resource base.

The main purpose of KMG EP is to increase the Company's shareholder value. KMG EP intends to achieve this through the increase of its reserve base and the production of hydrocarbons, the more efficient utilization of its assets and the development of new business opportunities.

The Company will work on maintaining oil production at the current level, improving oil recovery at existing fields, the exploration of promising sites in Kazakhstan and beyond and the supplementary exploration of the operating fields to provide the targeted growth of production and reserves. In addition, the Company is going to acquire new assets, mainly in the selected regions, and expand its asset portfolio with offshore projects and gas assets, both in Kazakhstan and overseas.

The profitability of current assets will be maintained by means of efficient cost control, improvement of business-processes and workflows, including automation, the implementation of new technologies, asset structure optimization and the improvement of the business management model.

According to this strategy, new business opportunities will be developed by means of building long-term partnerships with leading oil and gas companies in the areas of exploration, production and services together with the training and professional development of highly qualified personnel and the development of our own technical and technological expertise. Performance will also be improved through gaining experience in the management of offshore projects, in the gas business and international assets, including in partnership with large international oil and gas companies.

The Company prefers to invest its funds in Kazakhstan, if an opportunity for the efficient investment is available. At the same time, investing in foreign E&P assets is also an important part of KMG EP's strategy. In view of good intergovernmental relations and similar conditions with respect to the oil operations, KMG EP perceives Russia, Turkmenistan and Uzbekistan as prospective countries for expanding its business interests. KMG EP aims to purchase exploration blocks and projects in these areas with potential for considerable production growth, and production assets with low lifting costs.

Other attractive regions for extending the Company's activities include Iraq, Vietnam, North Africa, the Middle East and undeveloped regions in the North Sea and the Barents Sea.

So far, KMG EP has limited experience of international project management. Therefore, the initial stage of the strategy for entering foreign markets is based on partnerships with international oil and gas companies. Participation of strategic alliances will be based on the need to gain experience in international project management and get access to modern technologies. Thereafter KMG EP will be striving for independent development of international hydrocarbon production projects located outside the territory of Kazakhstan.

EXPLORATION IN KAZAKHSTAN

ONSHORE PROJECTS

At present, KMG EP exploration portfolio comprises three blocks: Liman, R-9 and Taisoigan. The Company processes geological data, drills exploration wells and carries out 2D and 3D seismic surveys at these blocks. In 2010, exploration expenditures[9] amounted to KZT 5.0 billion (USD 33 million). In 2011, the exploration budget will amount to KZT 17.6 billion (USD 117 million).

In October 2010, an oil accumulation was discovered at the Liman block. The accumulation is located on the south slope of the Novobogatinsk Salt Dome 70km west of Atyrau and is in close proximity to the Novobogat Southeast oil field operated by Embamunaigaz.

An oil flow was evident at the first exploration well in Middle Triassic layer which was over 1,200m deep. At the conclusion of geophysical research of wells it was recommended to perform testing of the three layers in production casing. The discovery of light crude oil with 34 API density indicates existing potential of post salt Triassic layers in the region. The Company's 2011 working programme schedules conducting of 3D seismic surveys in the area of 165 sq.km., drilling of two exploration wells for a detailed study of the geological structure of discovered deposits and to assess its commercial importance for the earliest launch of testing operation.

KMG EP is actively working on obtaining exploration and onshore production contracts through outside subsoil users and through its partnership with NC KMG under the Service Agreement. Currently, the Company is analyzing geological data for certain onshore sites in West Kazakhstan and other regions to identify promising blocks.

In 2010, KMG EP completed its transactions with Eastern Gate Management Ltd. to acquire a 100% interest in NBK LLP (NBK) and with Halyk Komir to acquire a 100% interest in SapaBarlau Services LLP (SBS).

The acquisition price for the 100% interest in NBK was USD 35 million and USD 30 million for the 100% interest in SBS.

NBK develops the "Novobogatinskoe West" field under a Subsoil Exploration and Production Contract expiring in 2027 with an option to extend. The field adjoins the license area of EMG and uses its existing infrastructure for oil treating, storage and transportation. Currently, the field is at the production testing stage. In the future, KMG EP plans to merge the assets of NBK with the assets of EMG in order to realize synergies in exploration and production.

SBS operates under the exploration contract that expires at the end of 2012 with an option to extend. According to KMG EP's geotechnical service, this license has significant exploration potential in subsalt structures. In view of this fact, in future the Company intends to drill a deep subsalt well there.

The assets being acquired are located in close proximity to the assets of Kazakhoil Aktobe LLP (KOA) and Kazakhturkmunai LLP (KTM), as well as other exploration assets, which may be of interest to KMG EP. The geographical location of the newly acquired assets provides an opportunity for further synergies.

In future the Company intends to expand its exploration portfolio to 10-11 projects by buying additional exploration blocks from NC KMG such as Temir, Terseken, Karaton-Sarkamys, the territories that belong to Uzen-Karamandybas field, and 2 or 3 exploration assets from third parties.

OFFSHORE PROJECTS

As referred to above, KMG EP is awaiting government approval for the acquisition of a 50% interest in Mangistaumunaigas JSC. MMG would provide KMG EP with access to two promising offshore exploration assets in the Kazakhstan sector of the Caspian Shelf.

KMG EP intends to expand the share of offshore assets in its portfolio in line with the strategic ambitions of the Company relating to the Caspian Sea.

INTERNATIONAL EXPANSION

KMG EP is actively looking for attractive opportunities to take part in global projects. Starting in 2008, the Company independently and as a part of consortia participated in license rounds for the rights to explore and develop oil and gas fields in various countries worldwide.

In August 2010, KMG EP added the first international project to its exploration portfolio. KMG EP and BG Group signed an agreement to farm-in to a BG Group operated license in the British sector of the North Sea for joint production within the White Bear prospect. KMG EP acquired a 35% stake in the project.

The White Bear prospect, within the P1722 license, is located close to the BG Group's existing Everest and Armada producing assets. BG retains the remaining interests and will continue to operate the license on behalf of the partners. It is scheduled to drill an exploration well in 2011, as specified by the contractual commitments.

The transfer of an interest meets the terms and conditions of the cooperation agreement signed in 2008. KMG EP's farm-in financial risks, including drilling costs and other project liabilities at the HC pre-discovery stage, are estimated to be USD 25-30 million. KMG EP's evaluation of the project was based on the corporate investment payback criteria reflecting the cost of capital and the risks associated with such projects.

Thanks to this project the Company gets access to BG Group's offshore skills, techniques and experience which is important for KMG EP's mid and longer-term development and for the future expansion of its exploration and production activity on the Caspian Shelf.

In October 2010 KMG EP, in partnership with Korea Gas Corporation (KOGAS) was awarded the rights to develop the Akkas gas field in the Republic of Iraq in the Third Licensing Round organized by the Petroleum Contracts & Licensing Directorate of the Iraqi Ministry of Oil. The terms of the proposed deal implied a USD 5.5/boe Remuneration Fee Bid and a 400 MMSCFD plateau production target.

In accordance with the conditions of the Third Licensing Round, the State Company owned by the Iraqi Government will hold a 25% equity share in the final consortium with the remainder equally split between KMG EP and KOGAS (37.5% / 37.5%).

The Akkas gas field is located in Anbar province, in the Western part of Iraq near the Syrian border. The Oil Ministry of Iraq estimates its gas reserves at 5.6 TSCF.

Not only does the Akkas project expand KMG EP's international portfolio, but it is also the first large gas asset that supports the Company's intention to develop gas production as its new business priority. Iraq is quite an attractive region for any oil and gas company, as it is famous for its considerable reserves and extremely low production costs.

KMG EP believes that these foreign projects meet its criteria for international expansion; they will provide access to the skills and technology that will allow The Company to achieve the goal of becoming one of the world's top 30 oil and gas companies.

ACQUISITION OF NEW ASSETS

KMG EP considers the acquisition of onshore assets in Kazakhstan to be one of the major priorities for the Company's development in the mid-term.

Relations with NC KMG and its preemptive right to acquire the assets in Kazakhstan in accordance with national law enables KMG EP to participate successfully in acquisitions of oil and gas assets in Kazakhstan on favorable economic terms. The previous transactions demonstrate the effectiveness of this strategy.

In July 2010, KMG EP announced the acquisition of a 50% interest in Kazakhoil Aktobe LLP (KOA), a 51% stake in Kazakhturkmunai LLP (KTM) and 50% in Mangistau Investments B.V. (MIBV), the owner of 100% share capital of Mangistaumunaigas JSC (MMG). According to the preliminary estimates, these acquisitions will result in an over 27% growth in the consolidated oil production of KMG EP and an increase of 406 million barrels in 2P reserves (18.5%).

The acquisition price of the three assets is USD 750 million, of which USD 350 million is for the interest in KOA, USD 70 million for the interest in KTM and USD 330 million for the interest in MIBV. The acquisitions will be financed from KMG EP's own cash funds. The total net debt for the interests being acquired is USD 1,499 million, of which USD 116 million is KOA's net debt, USD 53 million is KTM's net debt and USD 1,330 million is MIBV's consolidated net debt.

The transaction is subject to a number of conditions, including obtaining the approval of the regulatory agencies and, pursuant to the law of the Republic of Kazakhstan, and a written waiver by the remaining KOA and KTM shareholders of their preemptive right.

CORPORATE SOCIAL RESPONSIBILITY

Social responsibility is one of the key features of KMG EP's operation. The Company's efforts in this area focus on creating safe and comfortable working conditions, providing social protection for employees and their families, providing for the continuous professional development of personnel, and facilitating the sustainable development of regions where the Company operates.

KMG EP implements its social policy in strict compliance with the programmes developed both independently and jointly with local and regional authorities. The Company annually allocates considerable funds to improving the living standards of the population in the regions where it operates, and monitors all social projects to ensure they are implemented in full and on schedule.

KMG EP SOCIAL PROJECTS IN MANGISTAU REGION AND ZHANAOZEN

Starting from 2008, KMG EP annually allocates KZT 900 million (USD 6.1 million) to fulfil its contractual obligations in accordance with the Social Infrastructure Development Programme for the town of Zhanaozen and Karakiya district. The funds are spent on the development of municipal housing, public services and the social infrastructure of the city.

Aside from that, KMG EP and the Mangistau Region Administration (Akimat) signed a Memorandum for additional financial support for regional social projects. Under the memorandum in 2010, the Company allocated over KZT 970 million (USD 6.6 million) for municipal needs, in addition to the Company's contractual commitments. The funds were used in Zhanaozen to create 1,000 social jobs, build a 200-apartment communal residential building and expand the territory of a subsistence farm in Tenirekshin village to 500 hectares. They were also used to construct playgrounds in 63 residential yards and provide sports grounds with artificial cover for 10 of the town's schools. The funds were also used to pay the utility bills for veterans of the World War II.

The Company has also undertaken a commitment to improve the supply of drinking water to Senek village.

Disabled children, families with many children and families in need, war and labour veterans, and the vulnerable elderly are also not ignored.. The Company supported the Junior Boxing Federation and a sports club for disabled people. In 2010, KMG EP spent a total of KZT 37 million (USD$0.25 million) from its net profit on sponsorship and charity in the Mangistau Region.

In addition, a medical centre with an in-patient department with a capacity of 50 beds will be built in Zhanaozen within the 2010-2012 period. In 2010, work started on remodelling the Kenderly recreation zone into a medical rehabilitation centre. A children's holiday camp for 250 kids is also being built on the Caspian coast, costing over KZT 570 million (USD$3.9 million). It will provide remedial treatment and rehabilitation for employees of oil companies and their family members. The renovation and complete overhaul of existing social facilities will be carried out along with the improvement of adjacent territories.

KMG EP supports about three thousand people under its social programme for non-working pensioners. KMG EP is one of a few companies in Kazakhstan that provides financial assistance to its non-working pensioners in the form of travel tours to health centres and free annual subscriptions to national and regional printed media. The Company also finances recreation projects in summer camps for the children of oil industry workers in Kazakhstan and neighbouring countries.

The Company pays special attention to the development of sport and the promotion of a healthy lifestyle in the region. A multifunctional sports and leisure complex, costing more than KZT 2 billion to build operates in Zhanaozen. The sports complex has boxing, judo, aikido, basketball, volleyball, football and rhythmic gymnastics facilities. It also has a 25-metre swimming pool, a 50-metre shooting gallery and a weight-lifting room. Zhanaozen also enjoys a stadium with 3,000 seats which was also built with funds from KMG EP.

SOCIAL PROJECTS IN ATYRAU REGION

In 2010, KMG EP paid KZT 276.5 million (USD 1.9 million) in line with its commitments under the subsoil use contracts to finance projects envisaged by the Atyrau Region Social Development Programme for 2010-2014.

In the same year, under the social partnership programme for the support of social infrastructure being implemented jointly with the Administration (Akimat) of Atyrau Region, KMG EP allocated KZT 970 million (USD 6.6 million) for social projects in Makat, Kyzylkugin, Zhylyoy and Makhambet districts. The Company also allocated KZT 750 million (USD 5.1 million) to relocate people from Komsomol, Koshkar, Bek-Bike villages. In Makat a rehabilitation centre was opened for patients of the local tuberculosis hospital. In Miyaly village of Kyzylkoginskiy district the design and construction of a sports and leisure complex has been started and is to be completed in 2011.

KMG EP continues to provide fuel oil to public utility enterprises for heating houses in Baichunas and Iskene villages of Makat district.

KMG EP annually provides sponsorship and charitable assistance to the Ak-Bota Orphanage, the orphan home for disabled children, the Association of Mothers of Disabled Children, the Association of Disabled Persons and the Association of Blind Persons, large and needy families in Atyrau, city sports organisations; as well as financial assistance to World War II veterans and those who worked on the home front. In 2010, the Company spent KZT 125 million (USD 0.8 million) for that purpose.

PROJECTS OF JV KAZGERMUNAI LLP

Signing of a Memorandum for Social and Economic Development of the Region with the local Administration (Akimat) is one of the components of social policy of JV Kazgermunai.

In May 2010 Kazgermunai allocated almost USD 2 million to Igilik Corporate Fund for the development of regional economic and social projects.

In addition, the company agreed with the regional Akimat to provide social sponsorship worth USD 1 million to support education, healthcare, sports, cultural heritage, the disabled, children with disabilities, and the low-income population of Kyzylorda Region. In total the Company allocated more than KZT 600 million (USD 4.1 million) for the different social needs of the regional population.

To date, JV Kazgermunai is the only company in the region that provides the city with dry gas. This is supplied at a fixed price agreed with the regional Akimat of KZT 20 per cubic meter in 2010.

JV Kazgermunai was named the Most Socially Responsible Company in the 2010 Paryz contest.

PROJECTS OF KARAZHANBASMUNAI JSC

Karazhanbasmunai JSC actively supports socially important projects in Mangistau Region, which are mostly focused on the support of the low-income population, on education and the extension of regional infrastructure .

In 2010 the amount of sponsorship was about KZT 300 million (USD$2 million), It was spent on the repair and construction of the Aktau-Kalamkas Road and for gasification of the houses of the low-income and socially vulnerable population of Fort-Shevchenko city, Bautino and Atash villages. In addition, the Company provided assistance to World War II veterans, sportsmen of the Kazakhstan Boxing Federation and also financially supported large sports and cultural events in the region.

PROJECTS OF PETROKAZAKHSTAN INC.

PetroKazakhstan Inc's main priority is to support programmes focused on assistance to the low-income population; support of qualified personnel and the creation of jobs; the popularization of sports; as well as environmental and educational projects. Memorandums of Cooperation were signed with the Administrations of South-Kazakhstan and Kyzylorda Regions so that this work could be carried out on a continuous basis. The Company provides its financial assistance for gasification, the installation of telephones, water and electric power supplies in villages, and contributes to the development of culture and sports.

With the support of PetroKazakhstan the Youth Achievement Public Fund has been functioning in Kyzylorda Region since 2008. The purpose of the fund is to teach schoolchildren the laws of economics and inculcate practical entrepreneurial skills. The financial support of the fund's activity enabled 37 thousand schoolchildren to learn the laws of market relations. In addition, the fund trained and issued its certificates to 210 teachers of the region.

For many years PetroKazakhstan has been a sponsor of a number of schools in the region and Sairam Orphanage No. 4. The Company financially supports the only ballet school in the region working in Shymkent city. The school is for 250 children, out of which 38 children are from Sairam Orphanage No. 4 and Komesh Bulak Orphanage.

Along with the support of various sports organizations, PetroKazakhstan is a sponsor for the National Federation of Jujitsu. The sportsmen of the Federation actively participate in international competitions and honorably represent Kazakhstan- taking prize-winning places.

In Almaty city the Company supports the Mercy Voluntary Society and is a permanent partner in the campaign "Save Children's Lives" administered by the Society. The campaign provides assistance to children suffering from diseases currently untreatable in Kazakhstan.

IMPROVEMENT OF WORKING CONDITIONS

The management of KMG EP considers maintenance of good working conditions for the Company's employees to be one of the most important aspects of increasing productivity.

KMG EP has developed a programme for the improvement of social and living conditions at the structural subdivisions of UMG for 2009-2012. In 2010, over KZT 1.6 billion (USD 10.7 million) was allocated in the budget for that purpose. These funds were spent on building new dining halls and amenity blocks for personnel of the structural subdivisions and the acquisition and installation of modular offices for operators who work in group units. First-aid medical stations are being built and the Company has purchased ambulance cars and special vehicles for the delivery of hot food. The contract for the fleet of buses for the transportation of personnel has been renewed.

The Company annually allocates funds for the improvement of social and living conditions in the structural subdivisions of Embamunaigas Production Branch (EMG). According to the expenditure budget for 2009-2010, about KZT 700 million (USD 4.7 million) was allocated for the renovation of functioning dormitories and dining halls located at oilfield facilities and the construction of new ones, the replacement of household equipment and the reconstruction of sports and recreation facilities.

HR POLICY

The development of human resources is considered by the Company to be the main factor supporting its long-term growth.

Investment in human capital is among the strategic priorities of the Company. KMG EP will continue to promote the professional development of its employees, the realization of their talents and creative initiatives. In its turn, KMG EP expects employees to enhance their contribution to the Company's development.

The HR policy of KMG EP is focused on identifying the need for specialists in strategically important areas for the optimal distribution of human resources and the development of workforce motivational schemes. It is aligned with the profit received by the Company, and aims to produce a working environment based on respect for individuals.

The competence of KMG EP personnel is evaluated not just during the hiring process, but continuously. The Company certifies all its employees on a regular basis. This enables it to make an objective judgment of each employee's professional level; to focus his/her efforts on the factors, tasks and areas of operation that will lead to the improvement of his/her performance and the efficiency of the Company as a whole. It also enables evaluation of the manager's work over the reporting period and his/her contribution to the achievement of corporate goals.

Today, the Company employs professionals of the highest quality, many of whom have extensive experience of the oil and gas industry of Kazakhstan, as well as young specialists who studied abroad and had internships with foreign companies. The constant improvement of employees' qualifications is a necessary condition of KMG EP's success. It is impossible to achieve higher production and economic indicators without training personnel in new work methods and the use of new equipment and technologies.

In 2010, 4,500 employees of the Company improved their level of qualification through participation in seminars, training, certification programmes and conferences.

Special attention is paid to the training of workers, and the engineering and technical personnel of the Company. During the year employees were also trained in crisis and emergency situation response, occupational health and safety, blowout safety, hazardous cargo handling safety, etc.

In 2010, several large corporate training exercises for the managers of central administrative offices and branches were conducted to improve the level of corporate governance and the efficiency of the Company.

The Company spent KZT 500 million (USD 3.4 million) on training in the reporting period.

The Company attaches great importance to communicating its development strategy and the short-term and long-term plans to its personnel. During 2010 the core business working groups of the Company held a series of meetings with personnel where the new wage payment system was introduced, entailing a raise of salary by 25% on average. Together with the trade unions of the production branches, a collective agreement for 2011-2013 was developed that determined the basis of the employer - employee relations. This includes guarantees and benefits, wage forms and rates, compensation and financial assistance, standard working and rest hours.

The management of the Company regularly holds meetings with representatives of employees during which the trade union representatives and informal leaders of personnel from the production branches discuss matters related to personnel development, work improvement and other areas of HR policy.

The Company publishes The Munaily Meken newspaper which is distributed among all employees of KMG EP to raise the awareness of personnel and discuss important social and HR-related problems.

HEALTH, SAFETY AND ENVIRONMENT

OCCUPATIONAL HEALTH AND SAFETY

Occupational health and safety is one of the main priorities for management at KMG EP. Company personnel and top managers of its structural subdivisions are personally liable for the observance of the standards and requirements of the labour and environmental protection laws during the production process. The implemented measures are aimed at improving working conditions, accident prevention, readiness to localise and eliminate the consequences of accidents and guarantee indemnity of damage inflicted upon third parties and the environment. All measures are supported financially and performed, in full, year after year.

The permanent commission carries out comprehensive audits and analyses of occupational safety and environmental conditions, inspects equipment, protective means and the whole working environment for compliance with safety-related requirements and international standards.

To prevent and reduce occupational diseases, the staff of KMG EP head office and branches have to pass an annual medical check-up while drivers and other personnel must pass a medical check-up before their shifts.

The production facilities of oil companies are inherently hazardous, therefore KMG EP is actively working to reduce risks that pose a threat to the health and safety of personnel. Analysis of the last few years clearly shows stabilisation of the level of industrial injuries. Nevertheless, the problem of occupational accidents is still an issue. In 2010, three hazard-related incidents at the Company's production facilities were reported.

In 2010 the number of accidents was 4 times less than in 2004, when the Company was established.

ENVIRONMENTAL PROTECTION

The environmental policy of the Company comprises the following main tasks: to provide environmental protection through the application of the best technologies and practices; to observe environmental legislation; to maintain implementation of the quality control system (according to ISO 9001) and environmental management system (according to ISO 14001); to utilize production wastes and eliminate land contamination.

The Company operates in compliance with all applicable requirements in the area of health, safety and environment, methods and best international petroleum industry practices for the development of oilfields.

In 2010, the Company allocated KZT 6.6 billion (USD$44.7 million) for the implementation of environmental measures.

The funds were spent to eliminate contamination that occurred previously, to utilize accumulated production wastes, prevent contamination of the Caspian Sea and to conduct ecological monitoring of the environmental situation.

For the current year the Company obtained the ecological permits and approval of its environmental protection plans from the Ministry for Environmental Protection, which must be fulfilled.

In addition, the Company has developed and coordinated with the Ministry for Environmental Protection and Ecological Control Programme through which the ecosystems of the fields are being permanently monitored.

The Company monitors the environmental situation of its production facilities annually. For this purpose the Company engages independent specialized organizations which have necessary permits, licenses and accredited laboratories to carry out tests.

The financing of measures for the elimination of historical contamination from fuel oil grows every year. The Company has been carrying out measures to process oil-contaminated ground and clean up contaminated lands using the latest biotechnologies for the reclamation of oil-contaminated land. For this purpose the Company has supplied specialized companies with the necessary permits, licenses, equipment and qualified personnel.

The volume of oil-contaminated soil processed in 2010 amounted to 120,000 tonnes. Land cleaned with the use of biotechnologies amounted to 106.4 hectares while 0.816 hectares of contaminated land were technically reclaimed.

UTILIZATION OF ASSOCIATED GAS

From 2005 through 2010 work at 8 facilities of Embamunaigas PB was completed under the Associated Gas Utilization Programme and, starting from 2011 these facilities have made possible the complete utilization of associated gas, just as the facilities of Uzenmunaigas did.

The volume of associated gas consumed by the production branches was increased and helped to reduce gas flaring and increase gas utilization by up to 65%.

The multi-staged selection of associated petroleum gas (APG) desulfurization technology for the Prorva group of fields was completed. The technology provides a high level of APG treatment and the conversion of hydrogen sulfide into elemental sulphur.

In 2011, two options for the implementation of the gas transportation project at the Prorva group of fields are to be considered. The first requires construction of a 75km long gas pipeline from the Prorva Oil Gathering Center to the Oil and Gas Production Department of Tolkynmunaigas LLP (Borankol Oil Refinery). The second calls for the construction of a110km long gas pipeline from the Prorva Oil Gathering Center to the Central Asia - Center Gas Pipeline System (Opornaya Compressor Station).

Taking into account the need for the full utilization of gas before 2014, KMG EP intends to organize production of natural gas at the Prorva group of fields and transport it, together with associated gas, to the Tolkynneftegas Oil and Gas Production Department or to the Central Asia - Center Gas Pipeline System.

Corporate governance information

COMBINED CODE COMPLIANCE

This section of the Annual Report has been prepared in compliance with the requirements of the FSA's (Financial Services Authority) Disclosure and Transparency Rules (DTR 7.2) (Corporate Governance Statements).

As an overseas company with GDRs admitted to the Official List of the United Kingdom Listing Authority, the Company is not required to comply with the UK Code on Corporate Governance or its previous version, the Combined Code on Corporate Governance. However, in accordance with DTR 7.2 it is required to disclose in its Annual Report whether or not it complies with the corporate governance code of the Republic of Kazakhstan and the actual principles of corporate governance, which being applied in addition to the practices to be observed in accordance with applicable laws of the Republic of Kazakhstan. In addition, the Company shall specify where its actual governance practices differ from those set out in the Combined Code. The Directors recognize the importance of the corporate governance and support the development of high corporate governance standards in the Company.

The Company acknowledges the issue of the Code on Corporate Governance (the "Code") adopted in May 2010 by the Financial Reporting Council, UK's independent regulator responsible for promoting high quality corporate governance. The Code applies to the companies with a premium listing of shares in the UK for the reporting periods starting on or after 29 June 2010. Therefore, the Company will report on compliance with the UK Code on Corporate Governance in its annual report for 2011.

KAZAKHSTAN CORPORATE GOVERNANCE CODE AND COMPANY'S CORPORATE GOVERNANCE CODE

Corporate governance best practice in Kazakhstan is set out in the Kazakhstan Corporate Governance Code. This Code is based on the best international practices in the area of corporate governance and Recommendations on Application of Corporate Governance by Kazakhstan Joint Stock Companies, approved by the Securities Market Expert Council of the National Bank of the Republic of Kazakhstan in September 2002. The Code was approved by the Financial Institutions' Association of Kazakhstan in March 2005 and by the Board of Issuers in February 2005.

Throughout 2010 the Company has complied with the provisions of the Code on Corporate Governance of Kazakhstan in all material respects.

The Company has adopted the Code on Corporate Governance of Kazakhstan as its own Code, amended to include certain provisions of the Combined Code. The amendments adopted by the Company impose additional obligations on KMG EP in respect of corporate governance. The Company believes that these additional amendments will significantly strengthen the corporate governance practices applied by the Company. KMG EP also takes into consideration other provisions of the UK Combined Code and will seek to improve its standards of corporate governance in the future.

Additional provisions of the Code on Corporate Governance of the Company in addition to the requirements of applicable laws of the Republic of Kazakhstan (namely, the Code on Corporate Governance of the Republic of Kazakhstan) are as follows:

·; Additional principles of corporate governance were introduced:

o Principle of independent activities of the Company.

o The principle of responsibility.

·; Some of the corporate governance principles are supplemented by various provisions, such as:

o Social Policy principles.

o Provisions regarding relationship with shareholders.

o Division of responsibility between the Chairman of the Board of Directors and the Chief Executive Officer (CEO).

o The provisions describing the role of the Chairman of the Board of Directors.

o Requirement of a minimum number of independent directors.

o Additional provisions governing the criteria for establishing the "independence" of independent directors, which are similar to the equivalent provisions of the Combined Code.

o Provisions on access to information and professional development for directors of the Company.

o Provisions governing the principles of directors' remuneration.

o Provisions concerning treatment of inside information.

The copy of the Code on Corporate Governance of the Company along with description of the Company's practices on corporate governance are available on KMG EP's website.

DIFFERENCES BETWEEN THE CODE ON CORPORATE GOVERNANCE OF THE COMPANY AND PROVISIONS OF THE COMBINED CODE

Below are the main differences between the Code on Corporate Governance of the Company and provisions of the Combined Code.

·; According to the Combined Code, the Directors should meet without the Chairman of the Board of Directors present at least annually to appraise the Chairman's performance and on such other occasions as are deemed appropriate. The KMG EP's Code on Corporate Governance has no such requirement.

Throughout 2010, the Independent Non-Executive Directors met eight times without the Chairman of the Board to discuss the following issues: development of the updated Company's strategy; acquisition projects for oil and gas assets in the Republic of Kazakhstan and abroad, relations of the Company with its major shareholder, cash funds management and observance of the Treasury Policy, internal audit and control matters, election to the Board of Directors and to the Management Board, Succession Policy.

No official evaluation of the activity of the Chairman of the Board of Directors was made by the Non-Executive Directors. The Board's activity was evaluated by an external independent consultant. More detailed information on the Board of Directors evaluation may be found on page 53 of this report.

·; According to the Combined Code, the Chairman should on appointment meet the independence criteria set out therein.

The Code on Corporate Governance of the Company does not contain the provision on independence of the Chairman of the Board of Directors, and, in the opinion of the Directors, the Chairman would not meet the criteria of independence stated in the respective provisions of the Combined Code.

The Audit Committee Provision specifies that the Chairman of the Board of Directors must not be a member of the Audit Committee, notwithstanding such an option in the Combined Code. This difference is intentionally included in the Audit Committee Provision as the Chairman of the Board of Directors is the representative of the major shareholder.

·; According to the Combined Code at least half of the Board of Directors, excluding the Chairman, should comprise of Independent Non-Executive Directors. On the other hand, the Code on Corporate Governance of the Company and the Charter specify that Independent Non-Executive Directors shall make at least one third of the Board of Directors.

The term of appointment of the previous Board of Directors expired in March 2010. Christopher Mackenzie decided to withdraw from the reappointment process to the Board of Directors at the Extraordinary General Meeting of Shareholders on 26 March 2010. Two out of three Independent Non-Executive Directors were reappointed at the meeting: Paul Manduca and Edward Walshe. According to the Company's Charter, the Board of Directors shall have at least eight Directors (in the absence of temporary positions), and the Independent Non-Executive Directors shall make at least one third of the total number of members. Therefore, one position of an Independent Non-Executive Director was temporarily vacant until election of the new Independent Non-Executive Director. Accordingly, Philip Dayer was elected to the Board as an Independent Non-Executive Director at the Annual General Meeting as of May 25 2010, by the Board of Directors upon recommendation of the Nominations Committee, in which the Independent Non-Executive Directors constituted a majority.

According to the Charter of the Company a number of key issues, including related-party transactions, shall be approved by a majority of the Independent Non-Executive Directors. The Charter of the Company is available for review at the corporate website.

·; The Combined Code also states that the Board shall appoint one of the Independent Non-Executive Directors to be the Senior Non-Executive Director.

The Board of Directors did not appoint the Senior Non-Executive Director in a view of the current structure of shareholders. The requirement on appointment of the Senior Non-Executive Director will be a subject for consideration from time to time.

DIRECTORS' RESPONSIBILITY STATEMENT

In accordance with the Code on Corporate Governance of the Company, the Board of Directors and the Management Board shall be responsible for the fair presentation of the Company's annual report and financial statements.

In compliance with the UKLA Disclosure and Transparency Rules, each of the Directors (as stated on pages 12-15 hereof), confirms that to the best of his or her knowledge:

·; the financial statements prepared in accordance with the International Financial Reporting Standards (IFRS), give a true and fair account of the Company's assets, liabilities, and financial position, the results of its financial and economic activities and those of the subsidiary enterprises included in the consolidated Company's balance sheet taken as a whole; and

·; the management report includes a fair review of the development and performance of the business and the financial position of the Company and its joint obligations in the matter of subsidiary enterprises, together with the description of the principal risks and uncertainties they face.

STRUCTURE OF THE BOARD OF DIRECTORS

As of 31 December 2010 the Board of Directors comprised the following eight members:

In connection with the expiration of the term of appointment, pursuant to Article 12.2 (2) of KMG EP's Charter, the Board of Directors resolved to call an Extraordinary General Meeting of Shareholders on 26 March 2010 where the following changes were approved:

·; Kairgeldy Kabyldin, Chairman of the Board, and Christopher Mackenzie, Independent Non-Executive Director, decided to withdraw from the Board reappointment process.

·; As proposed by the major shareholder (NC KMG), Assiya Syrgabekova was elected as a member of KMG EP's Board of Directors.

·; Pursuant to the Article 12.16 of KMG EP's Charter, the Chairman of the Board is elected from among its members by a simple majority of votes. Accordingly, on 30 March 2010 Askar Balzhanov was elected as the new Chairman of the Board.

·; In accordance with the resolution of the annual General Meeting of Shareholders, Philip Dayer was elected to the Board of Directors as an Independent Non-Executive Director on 25 May 2010.

In compliance with the Corporate Governance Code of the Company, the Board of Directors established the independence of the Directors and considers that Philip Dayer, Paul Manduca and Edward Walshe are independent by nature and in decision-making. The Board of Directors determined that there exist no relations or circumstances that have or may have significant impact on independent decisions made by these Directors.

STRUCTURE OF THE MANAGEMENT BOARD

In 2010 the Management Board comprised senior executives of the Company, including CEO and his deputies.

The members of the Management Board as of 31 December 2010 are as follows:

During 2010-2011, based on resolutions of the Board of Directors the structure of the Management Board was changed as follows:

·; On 26 January 2010 the BoD's decision on the resignation of Dovulbai Abilkhanov and Kairolla Yerezhepov from the Management Board was approved. Bagitkali Biseken (as a Director of UMG) was elected to the Management Board.

·; On 30 March 2010 the BoD's decision on the resignation of Bagitkali Biseken, who was transferred from the position of Director of UMG, was approved and Kiikbai Yeshmanov was elected to the Management Board.

·; On 21 September 2010 Taras Khituov was elected to the Management Board.

·; On 13 December 2010 the BoD's decision on the resignation of Isturgan Baimukhanov (Director PF EMG) from the Management Board was approved, and Zhumabek Zhamauov was elected to the Management Board.

RESPONSIBILITY OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD

The distribution of authority between the Board of Directors, the Management Board and the CEO of the Company is set out in Articles 12 and 13 of the Company's Charter.

The Board of Directors is responsible to shareholders for effective management and control of the Company and acts in compliance with the approved decision-making system. The most important functions of the Board of Directors are to determine the main directions of the Company's strategic development and policy, make decisions on potential acquisitions of the oil and gas assets, and review other essential matters.

The Management Board, in its turn, is responsible for developing an action plan for the implementation of these functions and for the current operating activity of the Company. The Management Board reports to the Board of Directors on progress made in achieving the Company's goals.

The Board of Directors holds its meetings on a regular basis and as required.

In 2010, the Board of Directors held 21 meetings, including seven meetings held by voting in person and 14 by proxy voting.

Throughout the year, the Board of Directors reviewed such issues as:

·; Approval of the 2010-2020 Strategy of the Company.

·; Acquisition of the oil and gas assets by the Company: a 51% interest in Kazakhturkmunai LLP, 50% interest in Kazakhoil Aktobe LLP, 50% interest in Mangistau Investments B.V.; a 100% interest in NBK LLP; a 100% interest in SapaBarlauService LLP; a 50% interest in Ural Group Limited; a 100% subsoil use rights under the contracts for exploration of hydrocarbons in Mangistau and Atyrau Regions.

·; Participation of the Company in the project in the North Sea and in the Third Licensing Round in the Republic of Iraq.

·; Consideration of prospective development plans for the fields of Uzenmunaigas and Embamunaigas Production Branches.

·; Purchase of NC KMG's bonds.

·; Buyback programme for preferred shares of the Company.

·; Treasury Policy compliance.

·; Preliminary approval of the Company's consolidated financial statements for the previous year.

·; Matters on relations with the affiliated persons, subsidiaries of NC KMG.

·; The performance report of the Board of Directors and the Management Board for 2009.

·; Performance evaluation report of the Board of Directors for 2009.

·; Consideration of plans and reports of the Internal Audit Service, status of the implementation of recommendations made by the Internal Audit Service.

·; Conclusion of related-party transactions by the Company.

·; Matters pertaining to the competence of superior bodies of the subsidiaries.

·; Election of the Chairman of the Board of Directors.

·; Formation of the Committees of the Board of Directors.

·; Labor relations issues.

·; Final results of the key performance indicators (KPI) of the Management Board, Head of the Internal Audit and Corporate Secretary of the Company.

·; Election of members to the Management Board.

·; Granting options in accordance with the Option Programme.

·; Determination of remuneration for members of the Management Board.

·; HR-related matters of the Internal Audit Service and the Corporate Secretary.

In 2010, the Board of Directors approved the following documents:

·; The 2010-2020 Development Strategy of the Company.

·; Perspective development plans for the fields of Uzenmunaigas and Embamunaigas Production Branches.

·; Cost Control Policy.

·; Cost Control Programme.

·; Wage payment rules for employees.

·; Changes and amendments to the Audit Committee Provision.

·; Amendments to the Treasury Policy and Budgeting Regulations.

·; Annex "Procedure for Distribution of General Costs for the Purposes of Separate Tax Accounting" to the Accounting Policy.

·; Regulations for branches of the Company's subsidiary.

The Board of Directors also considered amendments to the Charter of the Company and recommended to the General Meeting of Shareholders to approve them.

DIRECTORS' ATTENDANCE AT THE MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES

The Management Board is an executive body, managing daily activities of the Company. In 2010, the Management Board held 46 regular and extraordinary meetings.

During 2010, the Management Board considered and approved the following most important issues relating to the Company's operating activity:

·; Acquisition of the participating interest and a 100% subsoil rights in a number of oil and gas companies in Kazakhstan.

·; Participation of the Company in the licensing rounds in the Republic of Iraq for the development of gas condensate fields that thereafter allowed the Company to win the tender and enter the international level.

·; KMG EP Development Strategy.

·; Production Programme for 2011.

·; Prospective development plans for the fields of Uzenmunaigas and Embamunaigas Production Branches for 2010-2020.

·; Buyback Programme for Preferred Shares of the Company.

·; Cost Control Programme.

·; Principal parameters of the new wage payment system for the KMG EP production personnel.

·; KMG EP Business Plan for 2010-2014.

·; A number of procedures regulating internal activities of the Company in accordance with the Integrated Management Standards.

The Management Board also makes decisions on other issues of the Company's operations, not pertaining to the exclusive competence of the General Meeting of Shareholders, the Board of Directors and officials of the Company.

PERFORMANCE EVALUATION OF THE BOARD OF DIRECTORS

The Board evaluation has been carried out by an external independent consulting company.

The KMG EP Board has been comprehensively assessed on its performance and the performance of its committees in 2010. The review covered the analysis of 12 months of board agendas and minutes, the detailed questionnaires and discussions with directors and key management. The review examined the implementation of top-priority goals by the Board, the professional balance and independence of the Board, its interaction with the management, and the quality of key procedures of the Board.

The report has concluded that the KMG EP Board is led by the Chairman well and the standards of governance and Board performance are in line with the good practice.

The areas for improvement were identified and discussed with the Board. The recommendations were to continue to improve the quality of information for the Board and to re-order agendas to spend more time on the substantive issues and less on administrative matters. Some observations were also made to the Board to improve the risk assessment and management process along with succession planning at the board and key management level. An action plan reflecting these areas has been developed for its further implementation.

AUDIT COMMITTEE

MEMBERS

In 2010 the Audit Committee comprised only Independent Non-Executive Directors: Paul Manduca (Chairman), Christopher Mackenzie (until 26 March 2010), Philip Dayer (since 29 June 2010) and Edward Walshe. The appointment to the Audit Committee is made for a period not exceeding three years which may be extended for no longer than two additional periods of three years, if so decided by the Board of Directors, provided the members of the Audit Committee continue to be independent.

NUMBER OF MEETINGS

During 2010 the Audit Committee held five meetings. The Chairman of the Audit Committee decides on the frequency and timing of the Committee's meetings. The number of meetings is determined in accordance with the requirements for the role and responsibilities of the Committee. However, there should be at least four meetings within the year which must coincide with the key dates of financial statements preparation and audit cycle of the Company (when internal and external audit plans are available and when interim financial statements, preliminary announcements and the annual report are close to being completed).

ROLE AND RESPONSIBILITIES

The Audit Committee is responsible, among other things, for any statements containing financial information of the Company, monitoring of the risk management and internal control systems, as well as involving the Company's auditors in this process. Also, it receives information from the Internal Audit Service that monitors compliance with internal control procedures of the Company. In particular, the Committee deals with the issues related to compliance with legal requirements, accounting standards and applicable rules of the UKLA and the Kazakhstan Stock Exchange (KASE), provision of the effective internal control system. The Board of Directors is responsible for the preliminary approval of the annual financial report.

The Audit Committee regularly checks major acquisition and disposal transactions and considers any other matters which may be addressed to the Audit Committee by the Board of Directors.

Annually, at the General Meeting of Shareholders the Chairman of the Audit Committee through the Chairman of the Board of Directors reports on the Audit Committee's performance and answers questions related to the Audit Committee's activity.

THE 2010 ACTIVITIES

·; Financial reporting.

o Reviewed the preparation of financial statements in compliance with the IFRSs.

o Approved quarterly and annual financial statements to be disclosed to the Kazakhstan and London Stock Exchanges.

·; Internal control and risk management systems.

o Assessed the effectiveness of the internal control and risk management systems.

o Self-assessed the performance of the Audit Committee.

·; Internal audit.

o Reviewed and approved a three-year plan of the Internal Audit Service.

o Assessed the internal audit effectiveness.

o Reviewed and approved the 2009 work progress report of the Audit Committee.

·; External audit.

o Recommended the appointment of an external auditor of the Company for 2011-2013.

·; Other issues.

o Reviewed the mid-term cash flows forecasts of the Company.

o Audited for compliance with the Treasury Policy of the Company.

REMUNERATION COMMITTEE

MEMBERS

In 2010 the Remuneration Committee comprised only Independent Non-Executive Directors, namely those were: Christopher Mackenzie (Chairman of the Committee through 26 March 2010), Philip Dayer (Chairman of the Committee since 29 June 2010), Paul Manduca and Edward Walshe. The terms of office of the Committee members coincide with their terms of office as members of the Board of Directors.

ROLE AND RESPONSIBILITIES

The Remuneration Committee is responsible for monitoring of the Company's current remuneration system for members of the Board of Directors, CEO, members of the Management Board and other employees of the Company, including analysis of the remuneration policy in comparison with other companies.

In addition, the Remuneration Committee is responsible for developing and making recommendations to the Board of Directors on principles and criteria for the determination of amount and payment terms of remuneration and compensations to the members of the Board of Directors, CEO and members of the Management Board. It is also responsible for the approval of terms and conditions of the Company's option plans and long-term incentive programmes for senior managers and other personnel of the Company.

The Remuneration Committee supervises the Company's remuneration policy and current remuneration system for compliance with the Company's strategy, financial position and the labour market situation.

The Remuneration Committee supervises the disclosure of information related to remuneration and compensations paid to the members of the Management Board and the Board of Directors to be in compliance with the requirements of applicable laws of the Republic of Kazakhstan, Listing Rules and internal documents of the Company.

In addition, the Remuneration Committee controls the implementation of decisions approved by the General Meeting of Shareholders in terms of determining the amount and procedure of remuneration payment to the members of the Board of Directors.

The Remuneration Committee regularly reports on its work to the Board of Directors and annually submits to the Board an analysis on compliance of the Committee's activities with its Terms of Reference.

THE 2010 ACTIVITIES

During 2010 the Remuneration Committee met on seven occasions. The meetings were held when required, but in any case no less than once in six months. The meetings may be convened on the initiative of the Chairman or members of the Committee or upon a decision of the Board of Directors.

In 2010 the Remuneration Committee considered the following issues:

·; Granting options to the Company's management and employees.

·; Remuneration and approval of KPI for members of the Company's Management Board, employees of the Internal Audit Service and Corporate Secretary.

·; Review of the 2009 results as per KPI of the members of the Management Board.

·; Payment of the annual remuneration (bonus) for 2008 and 2009.

·; Succession of the positions held by expatriates.

The total amount of remuneration accrued to the Independent Non-Executive Directors for the year ended 31 December 2010 is presented in the table below:

Other members of the Board of Directors receive no remuneration as members of the Board, but are entitled to compensation for the costs associated with such appointment.

The total amounts of remuneration accrued to the members of the Management Board for the year ended 31 December 2010 are presented in the tables below:

The members of the Board of Directors and Management Board were granted KMG EP's GDR Options in accordance with the provisions of the Option Programme.

The table below represents GDR options which were granted but have yet to be exercised:

NOMINATIONS COMMITTEE

In 2010 the Nominations Committee comprised: Kairgeldy Kabyldin (Chairman of the Committee through 26 March 2010), Askar Balzhanov (Chairman of the Committee through 30 March 2010), Christopher Mackenzie (through 26 March 2010), Edward Walshe, Paul Manduca and Philip Dayer (since 29 June 2010).

The main purpose of the Committee's activity is to improve the effectiveness and quality of work of the Board of Directors in the selection of suitable candidates to fill vacancies in the Company's structure as and when they arise. It also ensures continuity in the replacement of the Company's personnel and determines criteria for election of candidates for the positions in the Board of Directors, CEO, members of the Management Board and Corporate Secretary of the Company.

The Nominations Committee reviews issues related to changes in the membership structure of the Board of Directors and the Management Board, resignation and appointment of the Corporate Secretary, retirement and appointment of additional and substituting directors.

THE 2010 ACTIVITIES

During 2010 the Committee met on two occasions to consider the following issues:

·; Recommendations to the General Meeting of Shareholders on election of an Independent Non-Executive Director.

·; Election of Chairman of the Remuneration Committee and members of the Internal Audit and Nominations Committees.

·; Election of members to the Management Board.

STRATEGIC PLANNING COMMITTEE

In 2010 the Committee comprised: Edward Walshe (Chairman of the Committee), Askar Balzhanov (through 26 March 2010), Tolegen Bozzhanov (since 30 March 2010), Kenzhebek Ibrashev.

The main purpose of the Committee's activity is to develop and advise the Board of Directors on the foreground directions of activities and development strategy.

THE 2010 ACTIVITIES

During 2010 the Committee met on two occasions to consider the following issues:

·; The 2010-2020 Development Strategy of the Company.

·; Prospective development plans for the fields of Uzenmunaigas and Embamunaigas Production Branches.

·; Acquisition of the oil and gas assets by the Company: a 51% interest in Kazakhturkmunai LLP, 50% interest in Kazakhoil Aktobe LLP, 50% interest in Mangistau Investments B.V.; a 100% interest in NBK LLP; a 100% interest in SapaBarlauService LLP; a 50% interest in Ural Group Limited; a 100% subsoil use rights under the contracts for exploration of hydrocarbon material in Mangistau and Atyrau Regions.

·; Participation of the Company in the project in the North Sea.

·; Participation of the Company in the Third Licensing Round in the Republic of Iraq.

·; Prospective acquisition projects in the Republic of Kazakhstan and abroad.

·; Cost Control Policy.

INTERESTS OF THE DIRECTORS AND MEMBERS OF THE MANAGEMENT BOARD

The interests of the Directors and Management Board members in ordinary shares, preferred shares and GDRs, according to the information provided by the Board of Directors and the Management Board as of 31 December 2010 are as follows:

PRINCIPAL SHAREHOLDERS AND/OR GDR HOLDERS

Below is the list of shareholders of the Company as at 31 December 2010, which must be reported in accordance with the legislation of the Republic of Kazakhstan.

This requirement is not applicable to GDR holders, however the Company considers it necessary to note that on 30 September 2009 the State Investment Fund of the People's Republic of China, China Investment Corporation (CIC), announced the purchase of about 11% of the Company's shares in the form of GDRs.

DIRECTORS' EMPLOYMENT CONTRACTS, LETTERS OF APPOINTMENT AND EMPLOYMENT CONTRACTS OF MEMBERS OF THE MANAGEMENT BOARD

EMPLOYMENT CONTRACTS WITH DIRECTORS

On 26 March 2010 the new members to the Board of Directors were elected for the following three years as the previous tenure of appointment had expired.

Kairgeldy Kabyldin was Chairman of the Board of Directors of the Company until 26 March 2010.

Askar Balzhanov was re-elected the member of the Board of Directors on 26 March 2010. On 30 March 2010 the Board of Directors elected him as the Chairman of the Board of Directors of the Company.

Kenzhebek Ibrashev was a member of the Board of Directors, CEO and Chairman of the Management Board of the Company. He was re-elected the member of the Board of Directors at the General Meeting of Shareholders on 26 March 2010.

Erzhan Zhangaulov was a member of the Board of Directors of the Company. He was re-elected the member of the Board of Directors on 26 March 2010.

Tolegen Bozzhanov was a member of the Board of Directors of the Company. He was re-elected the member of the Board of Directors on 26 March 2010.

Christopher Mackenzie decided not to participate in the re-election to the Board of Directors as the term of office expired in 2010.

Paul Manduca was re-elected the Independent Non-Executive Director of the Company on 26 March 2010.

Edward Walshe was re-elected the Independent Non-Executive Director of the Company on 26 March 2010.

Phillip Dayer was elected the Independent Non-Executive Director of the Company on 25 May 2010.

EMPLOYMENT CONTRACTS OF MEMBERS OF THE MANAGEMENT BOARD

All members of the Management Board have entered into employment contracts with the Company that generally provide for business travel insurance and reimbursement of costs incurred during business trips on the Company's behalf in accordance with the Company's internal regulations. Other than those set out above, no employment contracts exist, or are anticipated to be entered into, between the Company and members of the Board of Directors or the Management Board.

INTERNAL CONTROL AND RISK MANAGEMENT

The Company has a system of internal control and risk management. This system is designed to identify, evaluate and manage significant risks associated with the Company's achievement of its business objectives, taking into account the safeguarding of shareholders' investments into the Company.

The Directors confirm that throughout the year ended 31 December 2010 there have been processes in place for identifying, evaluating and managing the significant risks faced by the Company. In addition, the Directors have used a risk-based approach in establishing the system of internal control and reviewing its effectiveness.

The key elements of the Company's system of internal control are as follows:

·; Internal documentation of the Company, such as financial, operating, administrative and treasury policies along with other procedures.

·; Continuous monitoring of operating and financial performance, safety-related activities of the Company.

The Internal Audit provides the Board of Directors of the Company with objective data on efficiency and adequacy of the established internal control system. The reports of the Internal Audit include recommendations on the design and work of the internal control system. The Internal Control Service supervises the implementation of recommendations by the management and reports on that to the Audit Committee.

In addition, the information on financial risks can be found in the Operating and financial review starting from page 63, the general information on risk profile can be found in the section "Risk Factors" on page 75 and information on initiatives in the area of health, safety and environment can be found in the "Health, Safety and Environment" section on page 46.

In respect of risk management, the Management Board has established a Risk Management Committee. More details on its performance can be found below.

RISK MANAGEMENT COMMITTEE

In 2010 the Risk Management Committee was headed by Kenzhebek Ibrashev. It comprised the deputy CEO for Production - Head of Operating Management Group in Aktau, CFO, Deputy CEO for Corporate Development and Asset Management, Managing Director - Financial Controller, Managing Director for Economics and Finance, Managing Director for Legal Issues, Managing Director for Information Technologies, Managing Director for Human Resources and Social Policy, Managing Director for HSE and Corporate Secretary. The head of Internal Audit participated in the Committee's meetings as an observer.

The primary goal of the Committee is to provide prompt consideration of issues related to risk management, preparation of recommendations to the Management Board to support decision-making on such issues, and monitoring of the risk management system performance. It is also concerned with formulating recommendations to the structural subdivisions of the Company on improving the risk management system in order to increase the effectiveness of business processes and reach the Company's strategic goals.

In 2010 the Risk Management Committee had three meetings where it considered and made decisions on the following issues:

·; Annual plan of the Risk Management department and risk management system development for 2010-2011.

·; Report on identification and evaluation of the Company's risk portfolio.

·; Legal security programme of the Company.

·; Improvement of corporate governance, GAMMA rating.

·; Organizational structure in the risk management system of the Company.

·; Key risks of the Company.

·; Automation of contract making processes and claim administration data accounting in the Company.

·; Activities to manage some key risks.

·; Succession plans in respect of the key positions.

·; Discussion on managing free cash flows of the Company.

·; Implementation of recommendations provided by the Internal Audit Service.

·; Corporate insurance programme for 2010.

·; Consideration of current situations arisen in the course of operation of the structural subdivisions of the Company in 2010.

UK TAX CONSIDERATIONS

The overview given below is based on the UK law and the HM Revenue & Customs practices in force as at the date of this document, both of which are subject to change, possibly with retrospective effect. Except where otherwise stated, the overview discusses only certain UK tax consequences for absolute beneficial owners of shares or GDRs who are (1) considered to be the UK residents for tax purposes; (2) considered to be non-residents for tax purposes in any other jurisdiction; and (3) not in possession of a permanent establishment in the Republic of Kazakhstan to which the holding of shares or GDRs is related ("the UK Holders").

In addition, this overview (1) addresses only the tax consequences for the UK Holders who own shares and GDRs as capital assets, but it does not addresses the tax consequences that may apply to certain other categories of the UK holders, e.g. dealers; (2) assumes that the UK Holder does not, directly or indirectly, control 10% or more of the voting shares of the company; (3) assumes that a holder of the GDRs is beneficially entitled to the underlying shares and to the dividends on those shares; and (4) does not address the tax consequences for the UK Holders that are insurance companies, investment companies or pension funds connected with the Company.

The following is intended only as a general guide and is not intended to be, nor should be considered to be, legal or tax advice to any particular UK Holder. Accordingly, potential investors should satisfy themselves as to the overall tax consequences, including, specifically, the consequences under the UK law and HM Revenue & Customs practice, of the acquisition, ownership and disposal of shares or GDRs in their own particular circumstances.

WITHHOLDING TAX

If assumed that income received from GDRs is from the non-UK source, it should not be subject to withholding tax in the UK. Dividend payments on shares will not be subject to the UK withholding tax.

TAXATION OF DIVIDENDS

A UK Holder receiving dividend on shares or GDRs may be subject to the UK income tax or corporate tax, as the case may be, on the gross amount of any dividend paid before the deduction of any Kazakhstan withholding taxes, subject to the availability of any credit for Kazakhstan tax withheld. A UK Holder who is an individual resident and domiciled in the UK will be subject to the UK income tax on the dividend paid on shares or GDRs and who is entitled to a non-refundable tax credit equal to one ninth of the amount of dividend received. A UK Holder who is an individual resident but not domiciled in the UK and who is entitled to be taxed in the UK on the remittance basis will be subject to the UK income tax on the dividend paid on shares or GDRs to the extent that the dividend is remitted or treated as remitted to the UK, and will also be entitled to a non-refundable tax credit equal to one ninth of the amount of dividend received.

A UK Holder residing in the UK is, effective from 1 July 2009, not subject to the UK corporate tax on the dividend paid on shares or GDRs, unless it relates to certain anti-avoidance rules in the tax law.

TAXATION OF DISPOSALS OR DEEMED DISPOSALS

The disposal by a UK Holder of interests in the shares or GDRs may result in a chargeable gain or an allowable loss for the purposes of UK taxation of chargeable gains, depending on the UK Holder's circumstances and subject to any available exemption or relief. A UK Holder who is an individual and domiciled in the UK will generally be liable to the UK capital gains tax on chargeable gains made on the disposal of an interest in the shares or GDRs. A UK Holder who is an individual but not domiciled in the UK and who is entitled to be taxed in the UK on the remittance basis will generally be liable to the UK capital gains tax to the extent that the chargeable gains made on the disposal of an interest in the shares or GDRs are remitted or treated as remitted in the UK. In particular, dealings in the GDRs on the London Stock Exchange may give rise to remitted profits that would, therefore, give rise to the UK capital gains tax liability.

An individual holder of shares or GDRs who ceases to be a resident or an ordinarily resident in the UK for tax purposes for a period of less than five years and who disposes of such shares or GDRs during that period may also be liable on returning to the UK to UK tax on capital gains, even though the individual may not be a resident or an ordinarily resident in the UK at the time of the disposal.

A corporate UK Holder will generally be subject to the UK corporation tax on any chargeable gains arising from a disposal of shares or GDRs.

EFFECT OF KAZAKHSTAN WITHHOLDING TAXES

Dividend payments in respect of shares and GDRs are subject to the Kazakhstan withholding tax. A UK Holder, who is an individual resident, should generally be entitled to a credit for Kazakhstan tax properly withheld from such payments against the income tax liability on such amounts, subject to the UK tax rules for calculation of such a credit. From 1 July 2009 the UK Holder, residing in the UK, is not subject to the UK corporate tax on the dividend payment and so is not be able to claim credit for any Kazakhstan taxes.

STAMP DUTY AND STAMP DUTY RESERVE TAX ("SDRT")

Assuming that any document effecting the transfer of, or containing an agreement to transfer, one or more shares or GDRs is neither (i) executed in the UK nor (ii) relates to any property located in the UK, or to any matter or thing done or to be done in the UK (which may include involvement of UK bank accounts in payment mechanism), then no UK ad valorem stamp duty should be payable on such a document.

Even if the document effecting the transfer of, or containing an agreement to transfer, one or more shares or GDRs is (i) executed in the UK and/or (ii) relates to any property located in the UK, or to any matter or thing done or to be done in the UK, in practice it should not be necessary to pay any UK ad valorem stamp duty on this document unless the document is required for any purposes in the UK. If it is necessary to pay the UK ad valorem stamp duty, it may also be necessary to pay interest and penalties associated therewith.

As the GDRs relate to the securities expressed in a currency other than sterling, no "bearer instrument" stamp duty should be payable on either the issue of the GDRs or any transfer of the securities transferable by means of the GDRs.

Assuming that the shares are neither (i) registered in the UK register nor (ii) paired with shares issued by a company incorporated in the UK, no SDRT should be paid in respect of any agreement to transfer shares or GDRs.

YEAR 2010 OPERATING AND FINANCIAL REVIEW

The following document is intended to assist the understanding and assessment of trends and significant changes in the Group's results and financial condition.In this document, the consolidated financial statements presented are those of the Company. This review is based on the consolidated financial statements of the Company and should be read in conjunction with those statements and the accompanying notes. All the financial data and discussions thereof are based upon financial statements prepared in accordance with IFRS.

Overview

KazMunaiGas Exploration Production Joint Stock Company ("the Company" or "KMG EP") is engaged in the acquisition, exploration, development, production, processing and export of hydrocarbons. The Company's core operations are oil and gas properties located in the Pre-Caspian and Mangistau basins of western Kazakhstan. The Company's majority shareholder is KazMunaiGas, the wholly state-owned joint stock company which represents the state's interests in the Kazakh oil and gas industry. The Company conducts its core production activities at 41 oil and gas fields, including "Uzenmunaigas" ("UMG"), which consists of two fields, and "Embamunaigas" ("EMG"), consisting of 39 fields. The Company also has a 50% interest in the oil and gas production joint ventures Kazgermunai LLP and CCEL, and a 33% interest in its associate PetroKazakhstan Inc.

Total 2010 oil production of the Company, together with the share of its joint ventures and its associate company, was approximately 13.285k tonnes or 270kbopd. This includes oil derived from its 50% share in JV Kazgermunai LLP, its 50% share in CCEL and its 33% stake in PetroKazakhstan Inc., The stake in UMG and EMG produced 177kbopd with a further 33kbopd from JV Kazgermunai LLP, 18kbopd from CCEL and 42kbopd from PetroKazakhstan Inc.(1)

Further details of the above joint ventures and associate are given in the section: Overview of Joint Ventures and Associates' Operations. Elsewhere in this Operating and Financial Review the discussion is limited to the core assets of the Company unless indicated otherwise.

Business Environment and Outlook

Economic factors affecting the Company's financial performance for the 2010 year under review include movements in crude oil prices, domestic inflation, and foreign exchange rates, particularly the tenge-US dollar rate.

Business Environment in 2010

The average price for Brent type oil in 2010 was US$79.18 per barrel; an increase of US$17.51 per barrel from the average price in 2009.

Most of the Company's revenues, financial assets and borrowings are denominated in US dollars, while most of the Company's operating expenses are denominated in tenge. The impact of foreign currency fluctuations on the Company's results depends on its net foreign currency position and the magnitude and direction of any fluctuation in foreign exchange rates.

Tenge-US dollar exchange rates and domestic inflation, as measured by the consumer price index ("CPI") were as follows:

The tenge weakened insignificantly against the US dollar from average 147.50 KZT/US$ in 2009 to 147.35 KZT/US$ average in 2010. The inflation rate in 2010 was 7.8 % compared to 6.2 % in 2009.

(1) Including 50% share in operational results of JSC "Turgai Petroleum" for 12 month 2010

Production activity in 2010

The Company narrowly missed its target production goals for 2010 with oil production of 8,766 thousand tonnes compared to 8,781 thousand tonnes planned. Actual oil production in 2010 decreased by 2% in comparison with 2009.

As of December 31, 2010, the number of wells operated by the company included 5,884 production and 1,623 injection wells.

The majority of the Company's existing oil fields are at the mature stage of development, characterized by high water cuts and declining oil production. The Company engaged in production drilling, work-over operations and enhanced recovery in order to mitigate the natural production decline and accomplish its oil production targets.

In 2010 the Company drilled and put into operation 215 production wells, 120 more than in 2009. Oil production generated by new wells rose to 206.99 thousand tonnes compared to 133.44 thousand tonnes in 2009. The workover of 1234 wells provided an incremental production of 674.14 thousand tonnes. In this period the Company also applied enhanced recovery techniques, including hydro-fracturing and polymer systems to boost production. As a result of 295 enhanced recovery operations, an additional 327.94 thousand tonnes were produced.

During 2010 the Company carried out exploration works in the R-9, Liman and Taisoigan blocks together with appraisal works in the S. Nurzhanov, Eastern Makat, Prorva Western, Zhanatalap oilfields.

On block R-9, the technical project for field work and the processing and interpretation of 3D seismic data was developed and agreed for a 400 square kilometer block together with 2D-MOGT seismic data for 40 square kilometers on structures Kyzylkuduk and Zhantai. Recommendations were also made for further exploratory drilling in 2011 - 2012 on future structures in both sub-salt and supra-salt parts of the block.

Discovery of a new deposit on the area South-East Novobogat allowed continuing the process to extend the period of exploration for another three years to conduct appraisal work in the area of detection. According to the terms of the existing contract, area of Liman block will be fully refunded to the State except for the assessment section.

In the reporting period on the block Taisoigan performed works on reserves estimation, field supervision and extension of the trial phase of the fields Uaz and Kondybay till January 9, 2012.

On the S. Nurzhanov field the Company commenced drilling at wells 507, 508, 700 with a total planned depth of 9000 meters. It wasestablished industrial productivity of Valanginian deposit.

The Central Committee for Exploration and Development (CCED) and the Committee of Geology also approved the project for further exploration of fields in Western Prorva, S. Nurzhanov, East Makat to a total projected depth of 5000 meters.

On Kenbay field, the processing and interpretation of 3D-MOGT seismic exploration of an area of 128 square kilometers on the Eastern Moldabek and Northern Kotyrtas sites were completed.

On Zhanatalap field, the processing and interpretation of 3D-MOGT seismic exploration of an area of 300 square kilometers on the Zhanatalap, Balgymbayev, Karachaganak fields and the Northern Martysh structure were also completed.

Planned production activity in

Crude oil production in 2011 is expected to be 9.1 million tonnes, which is 4% or 334 thousand tonnes higher than produced in 2010. In order to ensure this increase and compensate for the natural production decline in 2011, the Company is planning to drill 185 oil producing wells and 54 injections wells. In addition to well workovers, the Company will apply bottomhole treatment and will bring some inactive wells back on line.

In 2011 the Company is also planning exploration works on prospective blocks to specify the geological structure and justify the objects for prospect drilling and to increment the proven reserves of oil and gas. In particular, on the block

R-9 Company is planning to continue drilling of five supra-salt wells on the Southern Kamyskol, Northern Kamyskol,

South - Eastern Kyzylkala, Northern Esbolai, Masabai and continue works to evaluate the structure of the rocks of the upper Paleozoic. Drilling of exploratory wells and 3D seismic research on the prospective structure South Eastern Novobogatinsk will be continued and will be conducted over 165 square kilometers area.

On the Taisoigan block will be drilled 3 wells on the Kondybay field according to the trial exploration project. Also planned to conduct 3D-MOGT seismic works on the Uaz field over 68 square kilometers and on the Kondybay field over 82 square kilometers in order to create solid model of the objects and planning of further exploration works. It is planned to begin drilling of exploratory well to determine the hydrocarbon potential of Middle Triassic deposits on the structure Bazhir East.

At the S. Nurzhanov field well 509 will be drilled to a planned depth of 3500 meters to explore and assess oil and gas prospects in the upper part of the Valanginian horizon of the lower cretaceous. A second exploration well with planned depth of 2000 meters is also scheduled for 2011 as part of the wider exploration project for the Valanginian horizon at S. Nurzhanov.

At the Eastern Makat field to clarify the geological structure in the prospective productive layer of the well 101, will be drilled second exploratory well down to the 1500 meter.

On the Western Prorva field work proceeded to clarify the geological structure and determine the hydrocarbon potential in the Triassic and Jurassic deposits. Detailed exploration work was drafted and drilling is recommended for the 3 independent and 1 dependent wells. As a result of the interpretation of seismic data 3D-MOGT clarified the fault tectonics of the block, and of new areas not yet included in the drilling area.

In accordance with contractual obligations in 2011 will begin large-scale geological-geophysical research on the exploration block East Zharkamys. 

In 2011 the capital expenditure of the Company is expected to reach KZT106.4 billion. The Company's budget will be periodically reviewed to reflect changes in the crude oil price, and foreign exchange and inflation rates, among other factors.

Results of Operations

Amounts shown in US dollars are included solely for the convenience of the reader at the average exchange rate over the applicable period. Assets and liabilities are translated at the closing rate. Income and expenses are translated at the average exchange rate. See "Business Environment and Outlook"

Key Indexes

Transport Routes

The Company delivers its crude oil through three principal routes: export markets via the pipeline owned by Caspian Pipeline Consortium (CPC) and the Uzen-Atyrau-Samara pipeline (UAS) owned by KazTransOil JSC (in Kazakhstan) and the domestic market, as outlined in the following table:

(1) Converted at 7.36 barrels per tonne of crude oil.

(2) Operating expenses net of rent tax and customs duty

(3) Net income for the period

(4) Oil production and other costs represent an aggregate of the following operating expenses line items (as presented in the Company's consolidated financial statement for the period ending December 31, 2010 (see Company website for a copy): employee benefits, materials and supplies, repairs, maintenance and other services, energy and other costs. These include costs related to gas producing and processing activities, oil processing activities and general and administrative costs which are not directly related to oil production and which increased the US dollar cost per barrel by approximately US$1.91 and US$1.55 for the years 2010 and 2009 respectively (US$2.61 and 1.58 for the quarters ending December 31, 2010 and December 31, 2009 respectively).

The relative profitability of the two export routes depends on the quality of oil in the pipeline, the prevailing international market prices and the relevant pipeline tariffs. Specifically, CPC tends to be more the advantageous route owing to the higher quality of crude oil in the CPC pipeline in a higher price oil environment, even after taking into account quality bank payments.

It should be noted that the volume of crude oil that can be shipped through the pipelines has to be agreed with the Kazakh Ministry for Oil and Gas; the Company's ability to allocate export volume to different pipelines is, therefore, limited.

Revenue

The following table shows sales volumes and realised prices for Q3 2010, Q4 2010, Q42009, 12m 2010 and 12m 2009:

(1) Average sales price under financial statement (realized price), converted at 7.23 barrels per tonne of crude oil.

Crude Oil Sales in 2010

The total value of sales of crude oil in 2010, increased by 26% to KZT597 billion compared to 2009. This was due to, a 30% increase in the average sales price and a 3% or 261 thousand tonnes decrease in the volume of sales. The overall decrease in the volume of sales was caused by a reduction in the volume of crude oil produced in comparison with 2009.

Export - UAS Pipeline

Sales of crude oil exported via the UAS pipeline in 2010 increased by 10% to KZT345 billion owing to the increase of the average sales price by 27% to KZT80,086 per tonne which was partially offset by the decrease of volume exported via the UAS which declined by 633 thousand tonnes, or 13%.

Revenue from export sales through the UAS pipeline in Q4 2010 in comparison with Q4 2009 decreased by 2% owing to a 13% drop in the volume in sales, which were 148 thousand tonnes lower. This effect was partially offset by a 12% increase in the average sales price to KZT86,748 per tonne.

The decrease of sales volume in 2010 was also caused by a 5% decline in OMG oil production, which dropped 292 thousand tonnes, in comparison with 2009 mainly due to walkouts by employees in March 2010.

Export - CPC Pipeline

In 2010 sales of exported crude oil via the CPC pipeline increased by 72% to KZT211 billion in comparison with 2009. The increase was due to an increase in the average realization price of 35% to KZT82,893 per tonne and the 27% increase of volume exported via the CPC.

Revenues from export sales through the CPC pipeline in Q4 2010 increased by 80% compared with Q4 2009, due to the 9% increase in the average sales price to KZT89,965 and the 65% or 264 thousands tonnes increase in the volume of sales.

Domestic Market - Sales of Crude Oil

Domestic sales of crude oil in 2010 increased by 10% to KZT41 billion, compared to 2009, due to a 21% increase in the average sales price. Sales volume decreased by 9% or 176 thousand tonnes.

In Q4 2010 domestic sales decreased by 2% to KZT11 billion, compared with Q4 2009, influenced by the decline in sales volume by 23% or 133 thousand tonnes. However, the average sales price in domestic market increased by 27%.

The following table shows the Company's realized sales prices adjusted for crude oil transport and other expenses for the periods ending 2010, December 31 and 2009, December 31, 2010, September 30:

The difference between the benchmark quote and the realized price of sales through the CPC mainly comprises freight expenses, port charges, customs fees, certain sales commissions and averaging effects. Averaging effects usually appear because of the difference between the average mean of quoted price on the sale date and the average published price over the whole period. This difference may be significant on account of the high volatility of oil prices. The price received for domestic sales of crude oil is determined primarily by the agreement with NC KMG (production cost + 3%).

Operating Expenses

The following table presents a breakdown of the Company's operating expenses:

(1) The Brent (DTD) quoted price is used as benchmark

(2) Average realized price by financial report converted at 7.23 barrels per tonne of crude oil

Operating expenses in 2010 increased by 28% or KZT91.9 billion, compared to 2009. This is primarily due to the increased rent tax, mineral extraction tax (MET), employee benefits, transportation, depreciation, depletion and amortization, export customs duty, repairs, maintenance and other services.

Rent tax expenses in 2010 increased by 66% in comparison with 2009 due to the increase in crude oil market prices. In 2010 Brent price increased by 28% to 79.18 USD per barrel. As a result, the rent tax rate increased from 12% during 2009 to 16% in 2010.

The increase of Mineral Extraction Tax expenses in 2010 compared to 2009 is due to the increased crude oil market prices, which was partially offset by a decrease in production volume.

Employee benefits expenses for 2010 increased by 30% compared to 2009, owing to the 28% increase in average expenses per employee and 2% increase in number of personnel. The increase of personnel by 294 employees was due to changing production needs. The average salary increased owing to adjustments in the basic tariffs by 9% due to inflation and by 60% - due to the new compensation plan introduced in 01 June, 2010. This was partially offset by the decrease of production personnel bonuses from 80% to 33% in accordance with Labor Code requirements (the variable part of the payroll should not exceed 25%) and strike downtime in OMG from 1 to18 March, 2010.

Transportation expenses increased by 7% compared to 2009 mainly due to the increase in CPC transportation volumes by 27% from 1.99 ktonnes during 2009 to 2.54 ktonnes during 2010 and an increase in depressor mixture expenses by 12% from KZT1,430 to KZT1,600 per tonne. Also "Transneft" increased its tariff for transportation through Russian territory by 10%.

Depreciation, depletion and amortization expenses increased by 14%. This was mainly due to the increased number of production units and an increase in the depletion rate from 10.34% in 2009 to 11.38% in 2010.

Repairs, maintenance and other service expenses increased by 36% and material expenses by 18% compared to 2009. This was caused by an increase in well workovers due to postponed tenders and the delayed signing of contracts in 2009. In 2010 some 1234 well workovers were performed compared with 1206 in 2009 while electric fracturing increased from 143 in 2009 to 188 wells in 2010 and hydrofracturing rose from 120 to 205 wells. Reperforation rose from 409 to 418 wells. Additionally, the cost of materials also increased because of higher prices for solvents, inhibitors and other chemicals.

Energy expenses also increased by 5% owing to an increase in power tariffs and power transmission tariffs from KZT8.71 to KZT14.1 per thousands kilowatt-hours.

Management fees are paid according to the management services agreement with NC KMG adjusted for a budgeted inflation rate of 7,8%.

Export customs duties were introduced starting from August 16, 2010, which was not used in 2009.

The Company committed more funds to social infrastructure projects to finance the "Zharylkau" and "Zhaiyk" social funds, allocating KZT780 and KZT65 millions more than 2009 respectively. It also supported the Atyrau oblast akimat with a KZT750 million for social development

Fines and penalties for the 2010 decreased compared to 2009 due to the following facts: during 2009 the Company provided accruals due to results of Complex Tax Audit for 2004-2005, in contrast during 2010 the Company reversed part of provision related to Transfer Pricing.

Expense related to the disposal of dry exploratory wells occurred due to an increase in the investments program of KMG EP for exploration projects, particularly at the Liman, R-9 and Taisoigan projects. During 2010 wells on R9 block were found to be dry and were subsequently disposed of.

The increase in G&G expenses during 2010 compared to 2009 is due to the increase in 3D and other seismic research expenses mainly for the Liman and R9 fields.

Expenses listed under "Change in crude oil balance" reflect the change in the balance of crude oil stocks at the end of the year.

Other expenses in 2010 compared to 2009 increased mainly due to reversal of bad debt allowance and impairment of investments in KPI in 2009, also by impairment of assets owned by "EmbaEnergoMunai" LLP due to its liquidation.

Finance Income (Cost) and Exchange Rate Difference (Net Finance Income/Expense)

The Company's financial income in each of the periods relates mainly to interest on deposits, and, when the tenge depreciates, foreign exchange gains. The Company's financial expenses in each of the periods comprise mainly interest on borrowings and the termination of a discount related to asset retirement obligations and historical obligations.

The net financial income for 2010 was KZT27.08 billion which is KZT105.9 billion less than the net financial income for 2009. This was due to the foreign exchange gain of KZT89.53 billion, resulting from devaluation of the tenge in February 2009 and a KZT15.26 billion decrease in interest income. Interest income decreased due to a reduction in the average rate of interest on deposits.

Share of Income in Associates and Joint Ventures

The Company's income from its share in associates and joint ventures in 2010 was KZT56.6 billion compared to KZT2.5 billion losses in 2009. Increase is explained by the fact that consolidated financial statements of the Company for the year 2009 included share of income in PetroKazakhstan Inc. from acquisition date December 22, 2009 to December 31 2009. Whereas, share of income in PetroKazakhstan Inc in 2010 was consolidated for a full year. Share of income in JV Kazgermunai LLP increased due to high prices for crude oil in 2010 and decrease in fines and penalties in comparison with 2009. In 2010 income from the share in JV Kazgermunai LLP equaled to KZT22.6 billion and recognition of share in Petrokazakhstan Inc. equaled to KZT34.08 billion.

Income Tax Expense

The income tax expenses in 2010 decreased mainly due to applied in 2010 double tax depreciation, increased MET, Rent tax, customs duty and salary expenses. The effective tax rate increased to 27% due to huge amount of foreign exchange gain in 2009 which was partially offset by decrease in EPT in 2010.

Profit for the Period

As a result of the factors mentioned above, in 2010 the Company's profit for the period increased by 12% to KZT234.5 billion compared to 2009.

JV Kazgermunai LLP

JV Kazgermunai LLP's (Kazgermunai) key financial and operational indicators are shown below: