1.4 Company's Investment Policy and Planning

KazTransGas develops Amangeldy group of gas fields in Zhambyl region under the Contract for Combined Exploration and Production of Hydrocarbon Raw Materials dated 12.12.2000. Development of the contract area started from the most explored block of Amangeldy gas field.

The start of production of natural gas from Amangeldy gas filed has reduced the energy dependence of the southern regions of Kazakhstan from imports of Uzbek gas. Other benefits account for new jobs and improvement of professional skills of the local population and its involvement in wider range of business opportunities. Effectively, this development provided for the basic potential for participation of local staff in development and operation of new gas fields.

During 2006-2007 the company continued combined testing and commercial development of Amangeldy gas field in Zhambyl region, that brings an important social and economic contribution into stability of gas supplies to the south region of Kazakhstan .

The planning for 2007 includes:

completion of seismic testing at Airakty and Kumyly (Koskuduk) fields;

beginning of prospecting and exploratory drilling of well no.1 on the territory of Anabay and Zharkum fields (as of today, the seismic testing has been completed, one well was restored at Zharkum field with gas flow rate 142,000 c.m of gas, doubling the gas flow rate of previous years).

Once the proved gas reserves are confirmed, the production level of natural gas will reach 300 mm cm per year.

From the national perspective, its gas transit potential has the strategic, geopolitical and economic importance for Kazakhstan . In this context the main gas pipeline route, Central Asia-Center (CFC) has a special importance. Main gas pipeline route of CAC is the only viable way for transmission of Central Asian and Kazakhstani-produced gas. CAC connects the countries in the region and Kazakhstan with Russia , from where the gas is further transported to European and world markets. Development of transit capacity of this main gas transmission pipeline is the priority for securing incremental volumes of international transit of natural gas and more effective utilization of the available pipeline assets.

For this reason, the KazTransGas primary activity is focused on rehabilitation of existing and construction of new trunk pipeline infrastructure. KazTransGas invests significant financial and material resources to maintain the reliable operations of CAC.

The objective of development of domestic gas supplies and securing of energy independence through deliveries of own gas resources provides for further enhancement of the domestic gas transmission ad distribution networks by means of construction of supplying and connecting pipelines. This endeavor will both, secure the technological integrity of the gas system and give opportunity to manage internal cross flows within the territory of the country.

One of the most important directions in investment policy of the national gas transportation company is to enhance domestic gas supplies business. Development of distribution network includes a number of investment projects aimed at rehabilitation and reconstruction of all of the existing regional gas pipelines and servicing facilities.

KazTransGas group is now in the process of evaluating prospective options as to identify the most optimal arrangement to finance the urgent rehabilitation and reconstruction of the gas distribution networks and at the same time to avoid possible negative impact which implementation of these projects may have on the level of gas pricing in the region.

Mangistau region is supplied with gas through the only gas pipeline Uzen-Aktau built in 1981 with D700 mm, which throughput capacity currently being insufficient to cover the gas demand in the region. The project of Construction of Standby Pipeline on Uzen-Zhetybai section of Uzen-Aktau main gas pipeline will result in upgrading of the throughput capacity of the gas transportation system from the current 1.5 bcm upto 3.4 bcm per year. This is a long-term project addressing construction of new assets.

Another project for Rehabilitation of Regional Gas Distribution System in Southern Kazakhstan provides for rehabilitation, reconstruction and technical upgrading of the gas distribution system in the town of Shymkent through replacement of steel pipes with modern polyethylene ones, improvement of gas supply scheme and installation of individual combined gas pressure reduction valves and gas meters and with a SMART card, and ultimately, installation of block type gas distribution units. The guaranteed operating lifetime of these pipelines exceeds 50 years. Unlike the steel pipes, polyethylene pipes do not require expensive, in terms of capital and operations costs, system of electrical and chemical protection indispensable for buried steel gas pipelines.

Three southern region, i.e. South-Kazakhstan, Zhambyl and Almaty are supplied with natural gas transported through the trunk gas pipeline system “Bukhara Gas Bearing Region–Tashkent-Bishkek-Almaty” (“BGR-TBA”). The gas is imported from the gas fields in Uzbekistan .

The planned reconstruction of BGR-TBA gas transmission pipeline system is undertaken to ensure higher reliability of pipeline operation, and on synergy rails, to gasify neighboring settlements and ensure uninterruptible gas supplies to the southern regions of Kazakhstan .

The new direction in KazTransGas activities enabled the Company to enter into the gas markets of foreign countries. So, in 2006, KazTransGas acquired the gas distribution networks in Tbilisi , Georgia . The Company views the gas market in Tbilisi as a prospective one, where the level of demand and growth potential are adequate to ensure sufficient levels of both, payback of investments and rates of return.

KazTransGas-Tbilisi became the owner of the assets of Tbilgas, JSC upon their auction sale held to organize reliable and secure supply of natural gas to the domestic gas users in Tbilisi .

The investment plan for rehabilitation of gas supply system in Tbilisi was enunciated and put into implementation to address the urgent needs in improvement of the technical condition of the networks.

In dealing with the issue of the tariff increase for the supplied gas, KazTransGas proceeds with the obtaining of the special treatment status being granted to its investments. Preparatory actions have been carried out to sign an agreement between KazTransGas-Tbilisi LLS and the national Investment Agency of Georgia responsible for represent and protect the interests of investors in the relationships with the state bodies of Georgia .

In addition, the Company has outlined an investment intention to participate in the energy business in Bosnia and Herzegovina through establishment of an international consortium with the state-owned companies of the countries operating on the market of the Federation of Bosnia and Herzegovina and participating in various projects in the power sector of this country.

KazTransGas was selected as a strategic partner for the Government of Bosnia and Herzegovina for two power projects, thermal power plants Tuzla and Kakanj, including the coal mine.

As the strategic partner, the Company will ensure its contribution into the Project's implementation being based on its experience in managing analogous power projects in Kazakhstan , through employment of highly qualified technical experts, brining benefits from its participation in reforming of the power market in Kazakhstan and from collaboration with international financial institutions and investors.

Involvement in the power business in that region offers certain interest especially taking into account the deficit of electrical power capacity in the range of about 8,000 MW. Participation in privatization of the power plants Tuzla and Kakanj will let KazTransGas not only to operate on the international power markets, but gain additional revenues, put in place an effective system in support of non resource-based economy and export, and ultimately, provide for the basis for integration of Kazakhstan into the power market of Eastern Europe .

In view of prospective joining to the WTO by Kazakhstan , KazTransGas will also continue to enhance quality standards, and further to line up business flow processes with the international standards for quality management in the sphere of corporate governance, environment and safety.