(1) the “Zhilankyr”, “South Rovnoe” crude oil deposits in the Kyzylorda district in Kazakhstan (hereinafter the “Deposits”);
(2) the construction and operation of the fuel deposit terminal in the Almaata district in Kazakhstan (hereinafter, the “Terminal”); and
(3) construction and operation of a 100,000 tons crude oil refinery in the Almaata district in Kazakhstan (hereinafter, the “Refinery”)
(hereinafter jointly referred to as the “Projects”),
or will hold at least 90% of shares in the companies (hereinafter the “Subsidiaries”) which will be the sole and exclusive owner of the Rights, so that the Company will have full control over the Projects.
The objective behind the establishment of the Company and the implementation of the investment consisting in construction and operation of the Terminal and the Refinery is to put in motion the entire technological cycle of crude oil and gas production using the Deposits, the processing of thereof in a self-owned Refinery, and the export sale of the ready made products, mostly to China, using the international railway Zhetygen-Khorgos which is in the direct neighbourhood of the Terminal and the Refinery. According to the data obtained by Petrolinvest regarding the Deposits, which were provided by an international firm, Petroleum Geo-Services (PGS), the Zhilankyr deposit contains light crude oil with proved recoverable reserves of 21.9 MMbbl in the C1+C2 category and prospective resources of over 33 MMbbl in the C3 category. There are three wells at the deposit which could be quickly converted into wells for commercial production of hydrocarbons. The South Rovnoe deposit is a crude oil and condensate deposit with proved recoverable reserves of 112 MMbbl of crude oil in the C2 category, 1.26 MMbbl of condensate in the C1+C2 category, and approximately 8 billion cm of gas in the C1+C2 category.
Under the Agreement the Parties resolved that Petrolinvest had the right to conduct a detailed due diligence, and specifically a legal, tax, business, operating and geological due diligence of the Company, the Projects and the Subsidiaries, if applicable (hereinafter the “Due Diligence”).
Petrolinvest has exclusivity to the extent of holding discussions and negotiating the terms of acquisition of the assets which are considered to be incorporated in the Projects, and as far as the conduct of the Due Diligence of the Projects, for three months from the date on which the documents and information are made available within the scope of the Due Diligence (hereinafter, the “Exclusivity Period”).
Petrolinvest and the Seller will execute the ultimate investment agreement (the “Investment Agreement) on the following conditions:
(1) satisfactory outcome of the Due Diligence, as judged by Petrolinvest;
(2) the Company being the sole and exclusive owner of the Rights and holding at least 90% of shares in the Subsidiaries which are the sole and only owners of the Rights;
(3) the Company and the Subsidiaries, if any, will not be indebted in any way;
(4) the Company and the Subsidiaries, if any, will be the sole and exclusive entities authorised under all the required permits, consents, licences (koncesje) or other administrative decisions allowing for the prospecting and production of natural gas and crude oil from the Deposits;
(5) the Parties will agree on the wording of the Investment Agreement which will not be different from the terms defined in the Agreement; and
(6) all the consents of any government authorities or any internal consents of the Parties will be granted as required.
According to the Agreement, if Petrolinvest resolves to execute the Investment Agreement, such agreement will be executed on the terms as stated below;
Purchase Price
The purchase price for 50.01% of shares in the Company will amount to USD 45 million (the “Purchase Price”), though the understanding regarding the Purchase Price may change if Petrolinvest resolves to execute the Investment Agreement even if the outcome of the Due Diligence is not fully satisfactory to Petrolinvest.
The Purchase Price will be payable in three tranches:
(1) First tranche of USD 15 million will be paid as follows:
(i) USD 5 million payable within 14 calendar days from the date of execution of the Investment Agreement;
(ii) USD 5 million payable within 6 calendar weeks from the date of execution of the Investment Agreement;
(iii) USD 5 million payable in cash (from the dividend paid by the Company) or in shares in Petrolinvest subscribed for by the Seller at the price equal to the nominal value of PLN 10 per share with the right to sell such shares after 3 months; the Parties would consider agreeing to payment of this part of the first tranche partly in cash – USD 2.5 million and partly in shares in Petrolinvest having the value of USD 2.5 million.
(2) The second tranche of USD 15 million will be payable in shares in Petrolinvest to be subscribed for by the Seller at the price equal to the nominal value of PLN 10 per hare with the right to sell such shares within one year after the execution of the Investment Agreement. If the market value (established as the average value of the closing price for the Petrolinvest shares on the Warsaw Stock Exchange during 10 session days prior to the date of issue of the Warrants (as defined below) in favour of the Seller) (hereinafter, the “Market Value”) of the Petrolinvest Shares subscribed for by the Seller decreases below USD 15 million, the Seller will be authorised to subscribe for an additional number of shares in Petrolinvest so that the total Market Value amounted to USD 15 million. If the Market Value of the shares increased, all the profits from the sale thereof will be kept by the Seller. The above-described mechanism of issuing shares in Petrolinvest will also be applied in the event of potential issues of shares in accordance with section (1)(iii) above. The shares will be allocated directly after execution of the Investment Agreement.
(3) The third tranche of USD 15 million will be paid from the dividend generated by the Company in result of sale of crude oil and any derivative products once the Company generates USD 30 million of accumulated profit. The Seller will receive the relevant part of the Purchase Price payable thereto on priority basis, before the dividend is paid to the other Company shareholders. The dividend paid to the Company shareholders will be decreased by the resources designated for the payment of the third tranche until it has been paid in full. The Parties reached a preliminary understanding that the third tranche will be settled by the end of 2012, provided that if the Company does not generate the accumulated profit of USD 30 million, the above deadline will be moved until the required profit has been generated.
Under the Agreement, if the payment of any part of the Purchase Price is to be made with shares in Petrolinvest, such payment will be done through the issuance of gratuitous subscription warrants of Petrolinvest (hereinafter the “Warrants”) which, once they are subscribed for by the Seller, will authorise the Seller to subscribe for ordinary shares in Petrolinvest at the price equal to the nominal value thereof, i.e. PLN 10 per share. Under the Agreement the shares subscribed for in result of exercise of the rights attached to the Warrants will be paid by way of contractual set off of Petrolinvest’s receivables owed by the Seller for payment of the issue price for the subscribed for shares against the Seller’s receivable owed by Petrolinvest for payment of the relevant part of the Purchase Price under the Investment Agreement.
Capital Expenditures
Petrolinvest will provide the Company with USD 35 million for the necessary capital expenditures, where USD 20 million will be used to develop the Deposit and Terminal infrastructure, while USD 15 million for the construction of the Refinery.
The tranche of USD 20 million for the Deposit and Terminal related investments, will be paid as follows:
(1) USD 2 million within one month from the date of execution of the Investment Agreement;
(2) USD 15 million within 4-6 months from the date of execution of the Investment Agreement, however, not earlier than after registration of the Company or the Subsidiaries, if any, as the beneficiaries of the permits related to the Deposits; and
(3) USD 3 million within one year from the execution of the Investment Agreement.
The tranche of USD 15 million for the construction of the Refinery will be paid as follows:
(1) USD 2 million within one month from the execution of the Investment Agreement;
(2) USD 10 million after completion of construction of the Refinery and satisfactory start-up tests confirming the readiness to commence production at the Refinery;
(3) USD 3 million after commencement of production.
Under the Agreement, if it is necessary to pay any advance for the purposes of the Refinery investment in excess of the USD 2 million tranche (section 1 above), some of that sum may be paid from the USD 10 million tranche (section 2 above) to be paid upon completion of construction of the Refinery, provided that payment of the additional advance will be preceded by the Parties’ discussions and the execution of an understanding regarding such matter.
Corporate Governance
Petrolinvest and the Seller shall have the right to appoint five out of five members of the Company’s supervisory board as follows: (i) two persons will be appointed by Petrolinvest, (ii) two persons will be appointed by the Seller; and (iii) one person will be appointed by Petrolinvest following consultation with and the consent of the Seller. On the date of execution of the Investment Agreement the Parties will execute a shareholders’ agreement defining the rules of corporate governance.
The Agreement was executed for a specific term until the earlier of, the end of the Exclusivity Term or until the execution of the Investment Agreement.
The above Agreement satisfies the criteria of a material agreement, because its value exceeds 10% of Petrolinvest’s equity.
Petrolinvest will make the decision regarding execution of the Investment Agreement after completion of the full Due Diligence of the Projects, and specifically the geological potential of the Deposits as well as the economics of completion of the Refinery project. In the opinion of Petrolinvest’s management board, the closing of the above transaction, which depends on the outcome of the Due Diligence being satisfactory to Petrolinvest, will be advantageous, because of (i) the ability to quickly commence commercial operation of the confirmed hydrocarbon resources available in the Deposits; and (ii) the projected high profitability of the entire Project combining production of hydrocarbons and the processing thereof at the Refinery followed by sale of the oil products to China. In result of the above Petrolinvest will be able to consolidate the full margin on the sale of products in the complete chain of crude oil production and processing.

Download current report no. 98/2011