Exhibit
99.3


**2004
      Consolidated Financial Statements and Notes to the Consolidated Financial
      Statements****Management
      Report**
    **FS2****Comments
      by Independent Registered Public Accounting Firm to U.S. Readers on Canada
      - U.S. Reporting Differences**
    **FS3****Consolidated
      Financial Statements for the Years Ended December 31, 2004 and
      2003:****4**
    **Consolidated
      Statements of Income and Retained Earnings
    (Deficit)**
    **FS4****4**
    **Consolidated
      Balance Sheets**
    **FS5****4**
    **Consolidated
      Statements of Cash Flow**
    **FS6****Notes
      to the Consolidated Financial Statements**
    **FS7**
  FS1
 
 
 
 **Management
      Report**
 
 The
accompanying consolidated financial statements and all information in the annual
report are the responsibility of management.
 
 The
consolidated financial statements have been prepared by management in accordance
with Canadian generally accepted accounting principles. When alternative
accounting methods exist, management has chosen those it deems most appropriate
in the circumstances. The consolidated financial statements are not precise
since they include certain amounts based on estimates and judgments. Management
has determined such amounts on a reasonable basis in order to ensure that the
consolidated financial statements are presented fairly, in all material
respects. Financial information presented elsewhere in this annual report has
been prepared on a basis consistent with that in the consolidated financial
statements.
 
 PetroKazakhstan
Inc. maintains systems of internal accounting and administrative controls. These
systems are designed to provide reasonable assurance that financial information
is relevant, reliable and accurate and that the Corporation s assets are
properly accounted for and adequately safeguarded.
 
 The
Audit Committee of the Board of Directors, composed of non-management Directors,
meets regularly with management, as well as the external auditors, to discuss
auditing (external and internal), internal controls, accounting policy and
financial reporting matters. The Audit Committee reviews the consolidated
financial statements with both management and the independent auditors and
reports its finding to the Board of Directors before such statements are
approved by the Board.
 
 The
consolidated financial statements have been audited by TOO Deloitte &
Touche, the independent auditors, in accordance with the generally accepted
auditing standards on behalf of the shareholders. TOO Deloitte & Touche have
full and free access to the Audit Committee.
 
 
 
 
 
 (signed)
    (signed)Bernard
      F. Isautier
    Clayton
      CliftPresident
      and Chief Executive Officer
    Senior
      Vice President Finance and Chief Financial OfficerMarch
      1, 2005
    March
      1, 2005
 FS2PetroKazakhstan
      Inc.
 
  **Report
      of Independent Registered Public Accounting
  Firm**
 
 **To
the Shareholders of PetroKazakhstan Inc.**
 
 We have
audited the consolidated balance sheets of PetroKazakhstan Inc. ( the
Corporation ) as at December 31, 2004 and 2003 and the consolidated statements
of income and retained earnings, and cash flows for each of the years in the
three-year period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Corporation s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
 
 In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Corporation as at December 31, 2004 and
2003 and the results of its operations and cash flows for each of the years in
the three-year period ended December 31, 2004, in accordance with Canadian
generally accepted accounting principles.
 
 The
Corporation is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Corporation s internal control
over financial reporting. Accordingly, we express no such opinion.
  
 (signed)
 TOO
Deloitte & Touche
 Almaty,
Kazakhstan
 March
1, 2005
 
 ****
 ****
 **Comments
by Independent Registered Public Accounting Firm**
 **to
U.S. Readers on Canada - U.S. Reporting Differences**
 
 The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Corporation s consolidated financial
statements and changes that have been implemented in the financial statements,
such as the changes described in Note 2 to the consolidated financial
statements. Our report to the shareholders dated March 1, 2005 is expressed in
accordance with Canadian reporting standards, which do not require a reference
to such a change in accounting principles in the report of the independent
registered public accounting firm when the change is properly accounted for and
adequately disclosed in the consolidated financial statements.
   
 (signed)
 TOO
Deloitte & Touche
 Almaty,
Kazakhstan
 March
1, 2005
  FS3
 
  **Consolidated
      Statements of Income and Retained Earnings
    (Deficit)**
 Years
ended December 31 - EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS (EXCEPT PER
SHARE AMOUNTS)
 
 **2004**
    
    2003
    
    2002*(Restated
      -*
    
    *(Restated
      -**see
      Note 2)*
    
    *see
      Note 2)***REVENUE**Crude
      oil
    
    
    **992,880**
    
    
    621,126
    
    
    481,114Refined
      products
    
    
    **639,405**
    
    
    481,326
    
    
    332,639Service
      fee
    
    
    **6,484**
    
    
    11,532
    
    
    9,646Interest
      income
    
    
    **3,658**
    
    
    3,340
    
    
    1,951**1,642,427**
    
    
    1,117,324
    
    
    825,350**EXPENSES**Production
    
    
    **89,339**
    
    
    65,516
    
    
    60,596Royalties
      and taxes
    
    
    **126,444**
    
    
    82,295
    
    
    68,714Transportation
    
    
    **271,809**
    
    
    224,987
    
    
    163,801Refining
    
    
    **21,646**
    
    
    17,760
    
    
    21,721Crude
      oil and refined product purchases
    
    
    **111,339**
    
    
    56,460
    
    
    73,327Selling
    
    
    **37,934**
    
    
    28,529
    
    
    23,253General
      and administrative
    
    
    **60,915**
    
    
    54,279
    
    
    58,879Interest
      and financing costs
    
    
    **24,330**
    
    
    35,579
    
    
    35,473Depletion,
      depreciation and accretion
    
    
    **105,520**
    
    
    82,352
    
    
    46,411Foreign
      exchange (gain) loss
    
    
    **(9,919**
    **)**
    
    (5,333
    )
    
    2,233**839,357**
    
    
    642,424
    
    
    554,408INCOME
      BEFORE UNUSUAL ITEMS
    
    
    **803,070**
    
    
    474,900
    
    
    270,942UNUSUAL
      ITEMSArbitration**settlement*(Note
      18)*
    
    
    **-**
    
    
    -
    
    
    7,134INCOME
      BEFORE INCOME TAXES
    
    
    **803,070**
    
    
    474,900
    
    
    263,808INCOME**TAXES*(Note
      13)*Current
      provision
    
    
    **356,249**
    
    
    165,379
    
    
    100,808Future
      income tax recovery
    
    
    **(55,166**
    **)**
    
    (9,757
    )
    
    (465
    )**301,083**
    
    
    155,622
    
    
    100,343**NET
      INCOME BEFORE NON-CONTROLLING****INTEREST**
    
    
    **501,987**
    
    
    319,278
    
    
    163,465NON-CONTROLLING
      INTEREST
    
    
    **1,319**
    
    
    2,338
    
    
    2,068**NET
      INCOME**
    
    
    **500,668**
    
    
    316,940
    
    
    161,397**RETAINED
      EARNINGS (DEFICIT), BEGINNING****OF
      YEAR**
    
    
    **378,819**
    
    
    73,143
    
    
    (70,873
    )Substantial**issuer bid*(Note
      12)*
    
    
    **(111,335**
    **)**
    
    -
    
    
    -Normal
      course issuer bid*(Note 12)*
    
    
    **(35,528**
    **)**
    
    (11,232
    )
    
    (17,350
    )Common
      share dividends
    
    
    **(39,253**
    **)**
    
    -
    
    
    -Preferred
      share dividends
    
    
    **(35**
    **)**
    
    (32
    )
    
    (31
    )**RETAINED
      EARNINGS, END OF YEAR**
    
    
    **693,336**
    
    
    378,819
    
    
    73,143BASIC
      NET INCOME PER SHARE*(Note
      14)*
    
    
    **6.40**
    
    
    4.06
    
    
    2.00DILUTED
      NET INCOME PER SHARE*(Note 14)*
    
    
    **6.28**
    
    
    3.90
    
    
    1.92
 *See
accompanying notes to the consolidated financial statements.*
 FS4PetroKazakhstan
      Inc.
 
  **Consolidated
      Balance Sheet**
 As at
December 31 - EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
 
 **2004**
    
    2003*(Restated
      -**see
      Note 2)***ASSETS**CURRENTCash
    
    
    **199,105**
    
    
    184,660Accounts
      receivable*(Note
      5)*
    
    
    **198,504**
    
    
    150,293Inventory*(Note
      6)*
    
    
    **61,242**
    
    
    36,920Prepaid
      expenses*(Note
      7)*
    
    
    **62,179**
    
    
    44,901Current
      portion of future income tax asset*(Note
      13)*
    
    
    **65,431**
    
    
    14,697**586,461**
    
    
    431,471Deferred
      charges*(Note
      11)*
    
    
    **4,662**
    
    
    6,729Restricted**cash*(Note
      8)*
    
    
    **47,741**
    
    
    35,468Future
      income**tax
      asset*(Note
      13)*
    
    
    **28,470**
    
    
    25,466Property,
      plant and equipment*(Note
      9)*
    
    
    **601,747**
    
    
    542,317**TOTAL
      ASSETS**
    
    
    **1,269,081**
    
    
    1,041,451**LIABILITIES**CURRENTAccounts
      payable and accrued liabilities*(Note
      10)*
    
    
    **161,759**
    
    
    88,422Short-term**debt*(Note
      11)*
    
    
    **15,541**
    
    
    73,225Prepayments
      for crude oil and refined products
    
    
    **9,916**
    
    
    6,652**187,216**
    
    
    168,299Long-term
      debt*(Note
      11)*
    
    
    **134,862**
    
    
    246,655Asset
      retirement obligations*(Note
      2)*
    
    
    **32,499**
    
    
    28,625Future
      income**tax
      liability*(Note
      13)*
    
    
    **9,936**
    
    
    13,012**364,513**
    
    
    456,591Non-controlling
      interest
    
    
    **14,411**
    
    
    13,091Preferred
      shares of subsidiary
    
    
    **80**
    
    
    80**COMMITMENTS
      AND CONTINGENCIES***(Note 18)***SHAREHOLDERS
      EQUITY**Share**capital*(Note
      12)*
    
    
    **191,529**
    
    
    191,695Contributed
      surplus*(Note 2)*
    
    
    **5,212**
    
    
    1,175Retained
      earnings
    
    
    **693,336**
    
    
    378,819**890,077**
    
    
    571,689**TOTAL
      LIABILITIES AND SHAREHOLDERS  EQUITY**
    
    
    **1,269,081**
    
    
    1,041,451
 *See
accompanying notes to the consolidated financial statements.*
 
 Approved
by the Board of Directors:
 
 
 (signed)
    (signed)Bernard
      Isautier
    Jacques
      LefvreDirector
    Director
 FS5
 
 
 
 **Consolidated
      Statements of Cash Flow**
 Years
ended December 31 - EXPRESSED IN THOUSANDS OF UNITED STATES DOLLAR
 
 **2004**
    
    2003
    
    2002*(Restated
      -*
    
    *(Restated
      -**see
      Note 2)*
    
    *see
      Note 2)***OPERATING
      ACTIVITIES**Net
      income
    
    
    **500,668**
    
    
    316,940
    
    
    161,397Items
      not affecting cash:Depletion,
      depreciation and accretion
    
    
    **105,520**
    
    
    82,352
    
    
    46,411Future
      income tax recovery
    
    
    **(55,166**
    **)**
    
    (9,757
    )
    
    (465
    )Non-controlling
      interest
    
    
    **1,319**
    
    
    2,338
    
    
    2,068Compensation**expense*(Note
      2)*
    
    
    **4,037**
    
    
    1,175
    
    
    -Amortization
      of deferred charges
    
    
    **3,572**
    
    
    3,936
    
    
    1,402Other
      non-cash charges
    
    
    **541**
    
    
    2,991
    
    
    5,981Cash
      flow
    
    
    **560,491**
    
    
    399,975
    
    
    216,794Changes
      in non-cash operating working capital items*(Note
      17)*
    
    
    **(24,899**
    **)**
    
    (60,625
    )
    
    (37,816
    )Cash
      flow from operating activities
    
    
    **535,592**
    
    
    339,350
    
    
    178,978**FINANCING
      ACTIVITIES**Short-term**debt
      proceeds*(Note
      17)*
    
    
    **98,006**
    
    
    77,411
    
    
    109,954Short-term
      debt repayment*(Note
      17)*
    
    
    **(171,231**
    **)**
    
    (154,528
    )
    
    (136,564
    )Long-term
      debt proceeds*(Note
      17)*
    
    
    **-**
    
    
    312,986
    
    
    17,195Long-term
      debt repayment*(Note
      17)*
    
    
    **(97,016**
    **)**
    
    (217,699
    )
    
    (34,853
    )Deferred
      charges paid
    
    
    **(1,674**
    **)**
    
    (3,642
    )
    
    (2,850
    )Common
      share dividends
    
    
    **(26,665**
    **)**
    
    -
    
    
    -Preferred
      share dividends
    
    
    **(35**
    **)**
    
    (32
    )
    
    (31
    )Purchase
      of common shares**under
      a normal course issuer bid*(Note
      12)*
    
    
    **(38,648**
    **)**
    
    (14,848
    )
    
    (23,549
    )Purchase
      of common shares under a substantial issuer bid*(Note
      12)*
    
    
    **(121,117**
    **)**
    
    -
    
    
    -Proceeds
      from issue of share capital, net of share issuance costs
    
    
    **12,736**
    
    
    1,588
    
    
    1,417Cash
      flow (used in) from financing activities
    
    
    **(345,644**
    **)**
    
    1,236
    
    
    (69,281
    )**INVESTING
      ACTIVITIES**Restricted
      cash
    
    
    **(12,273**
    **)**
    
    (35,468
    )
    
    -Capital
      expenditures
    
    
    **(163,230**
    **)**
    
    (196,470
    )
    
    (136,852
    )Proceeds
      from sale of property, plant and equipment
    
    
    -
    
    
    1,258
    
    
    -Long-term
      investment
    
    
    **-**
    
    
    -
    
    
    40,000Acquisition
      of subsidiary, net of cash acquired
    
    
    -
    
    
    (38
    )
    
    (2,853
    )Purchase
      of preferred shares of subsidiary****
    
    
    -
    
    
    (4
    )
    
    (8
    )Cash
      flow used in investing activities
    
    
    **(175,503**
    **)**
    
    (230,722
    )
    
    (99,713
    )**INCREASE
      IN CASH**
    
    
    **14,445**
    
    
    109,864
    
    
    9,984**CASH,
      BEGINNING OF YEAR**
    
    
    **184,660**
    
    
    74,796
    
    
    64,812**CASH,
      END OF YEAR**
    
    
    **199,105**
    
    
    184,660
    
    
    74,796
 *See
accompanying notes to the consolidated financial statements.*
 FS6PetroKazakhstan
      Inc.
 
  **Notes
      to Consolidated Financial
Statements**
 Years
ended December 31 - EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, TABULAR
AMOUNTS IN THOUSANDS OF DOLLARS (UNLESS OTHERWISE INDICATED)
 
 **NOTE**
      **1**
    4
    **SIGNIFICANT
      ACCOUNTING POLICIES****Principles
      of Consolidation**
      PetroKazakhstan
      Inc. ( PetroKazakhstan  or the  Corporation ), formerly known as Hurricane
      Hydrocarbons Ltd., is an independent integrated oil and gas corporation,
      operating in the Republic of Kazakhstan, engaged in the acquisition,
      exploration, development and production of oil and gas, refining of oil,
      and the sale of oil and oil products.
      
      The
      consolidated financial statements of PetroKazakhstan have been prepared in
      accordance with Canadian Generally Accepted Accounting Principles and
      include the accounts of the Corporation, which is incorporated under the
      laws of Alberta, together with the accounts of its subsidiaries which are
      incorporated under the laws of Canada, Cyprus, England, the Netherlands,
      British Virgin Islands and Kazakhstan. Intercompany transactions are
      eliminated upon consolidation.
      
      On
      August 28, 1996, the Corporation entered into a Share Sale-Purchase
      Agreement with the Republic of Kazakhstan for the purchase of 100% of the
      issued common shares of Yuzhneftegas, a state owned joint stock company,
      later renamed to OJSC Hurricane Kumkol Munai and then to PetroKazakhstan
      Kumkol Resources ( PKKR ), operating in the South Turgai Basin, located in
      South Central Kazakhstan.
      
      On
      March 31, 2000, the Corporation acquired 88.4% of the common shares of
      OJSC Shymkentnefteorgsyntez, later renamed to OJSC Hurricane Oil Products
      and then to PetroKazakhstan Oil Products ( PKOP ). The Corporation has
      acquired an additional 8.3% interest in PKOP and had a 96.7% interest in
      PKOP as at December 31, 2004. PKOP owns and operates an oil refinery
      located in Shymkent, a city in South Central Kazakhstan.
      
      These
      consolidated financial statements are prepared in accordance with Canadian
      Generally Accepted Accounting Principles ( GAAP ) and have been reconciled
      to U.S. Generally Accepted Accounting Principles in Note 20.
      
      **Use
      of estimates**
      The
      preparation of financial statements in accordance with generally accepted
      accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities at
      the date of the consolidated financial statements and the reported amounts
      of revenues and expenses during the reporting period. These estimates are
      subject to measurement uncertainty. Actual results could differ from and
      affect the results reported in these consolidated financial
      statements.
      
      With
      respect to accounting for oil and gas properties, amounts recorded for
      depletion, asset retirement obligations and amounts used for impairment
      test calculations, are based on estimates of oil and natural gas reserves
      and future development costs. By their nature, these estimates of reserves
      and the related future cash flows are subject to measurement uncertainty,
      and the impact on the consolidated financial statements of future periods
      could be material.
      
      The
      Corporation is involved in litigation and claims as described in Notes 18
      and 19. The determination of contingent liabilities relating to litigation
      and claims is a complex process that involves judgements as to the
      outcomes and interpretation of laws and regulations. Changes in these
      judgements and interpretations may result in an increase or decrease in
      the Corporation s contingent liabilities in the future.
      
      The
      determination of the provision for income taxes is an inherently complex
      process requiring management to interpret continually changing regulations
      and to make certain judgements. While income tax filings are subject to
      audits and reassessments, management believes adequate provision has been
      made for all income tax obligations. However, changes in the
      interpretations or judgements made may result in an increase or decrease
      in the Corporation s income tax provision in the future.
      
      **Joint
      ventures**
      As
      more fully explained in Note 4, certain of PetroKazakhstan s activities
      are conducted jointly with others through incorporated joint ventures.
      Accordingly, these consolidated financial statements reflect
      PetroKazakhstan s proportionate interest in such
    activities.
 
 
 FS7
 
 
 **Foreign
currency translation**
 Foreign
currency amounts, including those of foreign subsidiaries, are translated into
United States dollars using the temporal method as follows:
 (a)
    Monetary
      assets and liabilities - at the rate of exchange in effect at year
      end.(b)
    Non-monetary
      assets and liabilities - at historical rates.(c)
    Revenues
      and expenses - at the average exchange rates during the period, except for
      provisions for depletion and depreciation, which are translated on the
      same basis as the related assets.
 
 Gains
or losses resulting from such translations are charged to operations.
 
 **Cash**
 Cash
may include term deposits with original maturity terms not exceeding 90
days.
 
 **Inventories**
 Crude
oil and oil products are recorded at the lower of average cost and net
realizable value. Materials and supplies are recorded at the lower of average
cost and replacement cost. Cost comprises direct materials and, where
applicable, direct labour costs and those overheads and costs, which have been
incurred in bringing the inventories to their present location and condition.
Net realizable value represents the estimated selling price less all estimated
costs to completion and costs to be incurred in marketing, selling and
distribution.
 
 **Deferred
charges**
 Costs
related to the issuance of long-term debt are deferred and amortized over the
term of the respective debt instrument on a straight-line basis.
 
 **Property,
plant and equipment**
 ***a)***
    ***Petroleum
      and natural gas
properties***
 PetroKazakhstan
follows the full cost method of accounting for oil and gas operations whereby
all acquisition, exploration and development expenditures are capitalized.
Capitalized expenditures include land acquisition costs, geological and
geophysical expenses, costs of drilling both productive and non-productive
wells, gathering and production facilities and equipment and overhead expenses
related to exploration and development activities. Interest is capitalized
during the development phase of capital projects until operations or production
commences. Proceeds from sales of oil and gas properties are recorded as
reductions of capitalized costs, unless the cost centre s depreciation and
depletion rate would change by a factor of 20% or more, whereupon gains or
losses are recognized as income. Maintenance and repair costs are expensed as
incurred, while improvements and major renovations to assets are
capitalized.
 
 Accumulated
oil and gas costs and the estimated future development costs are depleted using
the unit-of-production method based upon estimated proved reserves before
royalties. Significant development projects and expenditures on exploration
properties are excluded from the depletion calculation prior to assessment of
the existence of proved reserves. Other plant and equipment costs are
depreciated using the straight-line method based on the estimated useful lives
of the assets which range from 8 to 20 years.
 
 ***b)***
    ***Refining***
 Maintenance
and repairs, including minor renewals and improvements are charged to income as
incurred. The cost of major renovations and improvements, which increase useful
lives, are capitalized. Direct costs incurred in the construction of fixed
assets, including labour, materials and supplies are capitalized.
 
 Depreciation
is calculated using the straight-line method based upon the following estimated
useful lives:
 
 Buildings,
      warehouses and storage facilities
    10
      - 20 yearsProcess
      machinery and equipment
    5
      - 20 yearsTransport
      equipment
    5
      - 30 yearsOther
      tangible fixed assets
    3
      - 15 years
 
 FS8PetroKazakhstan
      Inc.
 
 
 
 ***c)***
    ***Impairment
      of property, plant and
equipment***
 *Impairment
of petroleum and natural gas properties*
 On a
quarterly basis, petroleum and natural gas properties are reviewed for
impairment. An impairment loss is recognized when the carrying amount of a cost
centre is not recoverable and exceeds its fair value. The carrying amount is not
recoverable if the carrying amount exceeds the sum of the undiscounted cash
flows expected to result from its use and eventual disposition.
 
 For
estimating the future cash flows, the Corporation uses quoted Brent benchmark
prices in the futures market and estimates made by its independent reserve
engineers for crude oil prices, less transportation and selling expenses,
royalties, production costs, general and administrative expenses, income tax and
future asset retirement obligations.
 
 *Impairment
of other assets*
 Other
assets are periodically reviewed for impairment. If the carrying value exceeds
the sum of the undiscounted future cash flows, the property s value is impaired.
The property s fair value is determined using its estimated total future cash
flows, discounted for the time value of money. Any excess carrying value is
charged to depletion and depreciation.
 
 Estimates
of future cash flows for other assets includes the future cash flows (cash
inflows less associated cash outflows) that are directly associated with, and
that are expected to arise as a direct result of, the use of the assets.
Estimate of future cash flows incorporate the Corporation s own assumptions
about its use, considering all available evidence, including internal
budgets.
 
 **Asset
Retirement Obligations**
 Asset
retirement obligations are the estimated fair value of legal obligations
associated with dismantlement and site restoration due to the retirement of
tangible long-lived assets. Asset retirement obligations are not recorded for
assets which have an indeterminable life. Estimated future asset retirement
obligations are discounted to estimate the fair value of the obligation and
recorded as a liability when the related assets are constructed and
commissioned. The fair value of the obligation is also added to the value of
property, plant and equipment and depleted using the unit-of-production method
based upon estimated proved reserves before royalties. Accretion expense
resulting from the increase in the present value of the liability due to the
passage of time is recorded as depletion, depreciation and accretion expense.
 
 **Revenue
recognition**
 Sales
of petroleum and refined products are recorded in the period in which title to
the petroleum or refined product transfers to the customer. Produced but unsold
petroleum and refined products are recorded as inventory until sold. In the case
of FCA sales (Free Carrier), title to the crude oil passes at the point of
loading. The Corporation records revenue based on a provisional Brent price at
the time of delivery, then marks to market at month end to reflect increases or
decreases in prevailing Brent prices and adjusts the final price, if necessary,
at the bill of lading date according to the contract terms.
 
 **Derivative
commodity instruments**
 The
Corporation utilizes derivative instruments to manage the Corporation s exposure
to fluctuations in the price of crude oil as described in Note 15. These
derivative financial instruments are not used for speculative purposes and a
system of controls is maintained that includes a policy covering the
authorization, reporting and monitoring of derivative activity.
 
 The
Corporation formally documents all derivative instruments designated as hedges,
the risk management objective and the strategy for undertaking the
hedge.
 
 Hedge
accounting is used when there is a high degree of correlation between movements
in the fair value of the derivative instrument and the item designated as being
hedged. Gains and losses on derivatives that are designated as and determined to
be effective hedges are deferred and recognized in the same period as the hedged
item, and are recorded in the same manner as the hedged item in the Consolidated
Statement of Income.
 
 The
Corporation assesses both at inception and over the term of the hedging
relationship, whether the derivative instruments used in the hedging
transactions are effective in offsetting changes in the fair value of cash flows
of the hedged item. If correlation ceases, hedge accounting is terminated and
changes in the market value of the derivative instruments are recognized in the
period of change.
 FS9
 
 
 
 
 
 Derivative
      instruments that are not designated as hedges for accounting purposes are
      recorded on the Consolidated Balance Sheet at fair value with any
      resulting gain or loss recognized in the Consolidated Statement of Income
      and Retained Earnings in the current period.
      
      **Stock-based
      compensation**
      The
      Corporation has a stock option plan as described in Note 12. Compensation
      expense is recognized in the Consolidated Statements of Income for all
      common share options granted to employees and non-executive directors on
      or after January 1, 2003, with a corresponding increase in contributed
      surplus recorded in the Consolidated Balance Sheet. Compensation expense
      for options granted on or after January 1, 2003 is determined based on the
      fair values at the time of grant, the cost of which is recognized in the
      Consolidated Statement of Income over the vesting periods of the
      respective options. For common share stock options granted prior to
      January 1, 2003, compensation expense is not recognized and the
      Corporation discloses the pro-forma earnings impact.
      
      **Income
      taxes**
      Income
      taxes are calculated using the liability method of tax accounting. Under
      this method, future income tax assets and liabilities are computed based
      on temporary differences between the tax basis and carrying amount on the
      balance sheet for assets and liabilities. Future income tax assets and
      liabilities are calculated using tax rates anticipated to apply in the
      periods that the temporary differences are expected to
      reverse.
      
      **Comparative
      figures**
      The
      presentation of certain amounts for previous years has been changed to
      conform with the presentation adopted for the current year.**NOTE**
      **2**
    4
    **CHANGES
      IN ACCOUNTING STANDARDS****Stock-Based
      Compensation**
      Effective
      January 1, 2002 the Corporation adopted the recommendations of the
      Canadian Institute of Chartered Accountants regarding stock based
      compensation. The Canadian Institute of Chartered Accountants revised
      their recommendations and effective January 1, 2004 recognition of
      compensation expense using the fair value of the equity instrument granted
      was required. The Corporation adopted this recommendation on a prospective
      basis, effective January 1, 2003 as provided under the transitional
      provisions. Accordingly, the Corporation recognized compensation expense
      for all common stock options granted to employees and non-executive
      directors on or after January 1, 2003 using the estimated fair value. The
      Corporation has recorded compensation expense of $4.0 and $1.2 million in
      general and administrative expenses within the consolidated statements of
      income and retained earnings for the years ended December 31, 2004 and
      2003, respectively, with a corresponding increase in contributed surplus
      within shareholder s equity. Compensation expense for options granted on
      or after January 1, 2003 is recognized as compensation expense over the
      vesting period of the respective options. For common share options granted
      prior to January 1, 2003 the Corporation discloses the pro forma impact on
      net income and net income per share as if the estimated fair value of
      common stock options granted had been recognized as an
      expense.
      
      **Asset
      Retirement Obligations**
      Effective
      January 1, 2004, the Corporation adopted the new recommendation of the
      Canadian Institute of Chartered Accountants ( CICA ) regarding asset
      retirement obligations. This new standard changes the method of estimating
      and accounting for future site restoration costs. Total estimated asset
      retirement obligations are discounted to estimate the fair value of the
      obligation and recorded as a liability when the related assets are
      constructed and commissioned. The fair value of the obligation increases
      the value of property, plant and equipment and is depleted using the
      unit-of-production method based upon estimated proved reserves before
      royalties. Accretion expense, resulting from the increase in the present
      value of the liability due to the passage of time is recorded as part of
      depletion, depreciation and accretion expense.
      
      Estimated
      cash flows are discounted at 8.5%. The total undiscounted estimated cash
      flows required to settle the obligations are $77.4 million with the
      expenditures being incurred over ten years commencing in
2014.
      
      The
      new standard has been applied retroactively, and the financial statements
      of prior periods have been
restated.
 
 FS10PetroKazakhstan
      Inc.
 
 
 Adoption
of the new standard of accounting for asset retirement obligations resulted in
the following changes in the consolidated balance sheet and statement of income
and retained earnings.
 
 Changes
in consolidated balance sheets:
  *As
      at December 31*
    
    **2004**
    
    2003*Increase
      / (decrease)*Future
      income tax asset
    
    
    **377**
    
    
    651Property,
      plant and equipment
    
    
    **14,457**
    
    
    15,181Total
      assets
    
    
    **14,834**
    
    
    15,832Asset
      retirement obligations
    
    
    **21,527**
    
    
    22,058Retained
      earnings
    
    
    **(6,693**
    **)**
    
    (6,226
    )Total
      liabilities and shareholders  equity
    
    
    **14,834**
    
    
    15,832
 
 Changes
in consolidated statements of income and retained earnings for the years ended
December 31, 2004 and 2003:
 
 Years
      ended December*As
      at December 31*
    
    **2004**
    
    2003
    
    2002*Increase
      / (decrease)*Accretion
      expense
    
    
    **2,433**
    
    
    2,124
    
    
    1,789Depletion
      and depreciation
    
    
    **(2,240**
    **)**
    
    (1,757
    )
    
    (466
    )Income
      before income taxes
    
    
    **(193**
    **)**
    
    (367
    )
    
    (1,323
    )Income
      taxes
    
    
    **274**
    
    
    181
    
    
    (152
    )Net
      income
    
    
    **(467**
    **)**
    
    (548
    )
    
    (1,171
    )Basic
      net income per share
    
    
    -
    
    
    (0.01
    )
    
    (0.01
    )Diluted
      net income per share
    
    
    -
    
    
    (0.01
    )
    
    (0.01
    )
 
 The
change in asset retirement obligations is as follows:
 
 **2004**
    
    2003Asset
      retirement obligations liability,****beginning
      of year
    
    
    **28,625**
    
    
    22,831Revisions
    
    
    **1,578**
    
    
    3,670Accretion
      expense
    
    
    **2,433**
    
    
    2,124Settlements
    
    
    **(137**
    **)**
    
    -Asset
      retirement obligations liability,****end
      of year
    
    
    **32,499**
    
    
    28,625
 
 **Full
Cost Accounting**
 In
September 2003 the CICA issued Accounting Guideline 16  Oil and Gas Accounting -
Full Cost  ( AcG 16 ), which replaced Accounting Guideline 5  Full Cost
Accounting in the Oil and Gas Industry  ( AcG 5 ). The most significant change
between AcG 16 and AcG 5 is that under AcG 16 the carrying value of oil and gas
properties should not exceed their fair value. The fair value is equal to
estimated future cash flows from proved reserves, unproved properties and major
development projects using future price forecasts and costs discounted at a
risk-free rate. This differs from the cost recovery ceiling test under AcG 5
that used undiscounted cash flows, and constant prices, less general and
administrative, financing costs and taxes. The Corporation adopted AcG 16
effective January 1, 2004 and as at December 31, 2004 there were no indications
of impairment.
 
 **Impairment
of Long-Lived Assets**
 Effective
January 1, 2004, the Corporation adopted the new recommendation of the CICA
issued in December 2002 on impairment of long-lived assets. This recommendation
provides guidance on the recognition, measurement and disclosure of impairment
of long-lived assets. There is a requirement to recognize an impairment loss for
a long-lived asset when its carrying amount exceeds the sum of the undiscounted
cash flows expected from its use and eventual disposition. The impairment loss
is measured as the amount by which carrying amount of the asset exceeds its fair
value. As at December 31, 2004 there were no indications of impairment of
long-lived assets.
 
 FS11
 
 
 
 **Hedge
      Accounting**Effective
      January 1, 2004, the Corporation adopted Accounting Guideline 13  Hedging
      Relationships  (AcG 13 ). AcG 13 provides guidance regarding the
      identification, designation, documentation and effectiveness of hedging
      relationships for the purposes of applying hedge accounting. This
      guideline establishes certain conditions for when hedge accounting may be
      applied. The Corporation has applied hedge accounting for the financial
      instruments disclosed in Note 15.**New
      Canadian GAAP pronouncements**In
      June 2003 the CICA issued Accounting Guideline 15  Consolidation of
      Variable Interest Entities  ( AcG15 ). AcG15 provides guidance for
      determining when an enterprise consolidates the assets, liabilities and
      results of activities of a variable interest entity ( VIEs ) in its
      consolidated financial statements. In general, VIEs are entities that
      either do not have equity investors with voting rights or have equity
      investors that do not provide sufficient financial resources for the
      entity to support its activities. AcG15 is effective for the Corporation
      for the interim and annual financial statements beginning on January 1,
      2005. The Corporation does not expect any impact on its consolidated
      financial statements.In
      January 2005, the CICA issued the following new
      pronouncements:**4**
    Section
      1530  Comprehensive Income .**4**
    Section
      3251  Equity  (replacing Section 3050  Surplus .**4**
    Section
      3855  Financial Instruments - Recognition and
  Measurement .**4**
    Section
      3865  HedgesThese
      are the highlights of the new standards:**4**
    All
      financial instruments, including derivatives, are to be included on the
      balance sheet and measured, either at their fair values or, in limited
      circumstances when fair value may not be considered most relevant, at cost
      or amortized cost. The standards also specify when gains and losses as a
      result of changes in fair values are to be recognized in the statement of
      income.**4**
    Existing
      requirements for hedge accounting are extended. Currently, the CICA has
      requirements that specify the circumstances under which hedge accounting
      is permissible, but do not comprehensively specify the accounting
      entries.**4**
    A
      new location for recognizing certain gains and losses,  Other
      comprehensive income , has been introduced. This provides an ability for
      certain gains and losses arising from changes in fair value to be
      temporarily recorded outside of the statement of income, but in a
      transparent manner.These
      new pronouncements are effective for interim and annual financial
      statements for fiscal years beginning on or after October 1, 2006. Earlier
      adoption is permitted only as of the beginning of a fiscal year ending on
      or after December 31, 2004. The Corporation has yet to evaluate the impact
      of these new pronouncements on its consolidated financial
      statements.
 
 **NOTE**
      **3**
    **4**
    **SEGMENTED
      INFORMATION**
 
 Following
      the acquisition of PKOP in 2000, the Corporation became an integrated oil
      and gas company. All of the commercial activity of the Corporation is
      concentrated in the Republic of Kazakhstan in Central Asia.On
      a primary basis, the business segments are:**4**
    Upstream
      comprising the exploration, development and production of crude oil and
      natural gas.**4**
    Downstream
      comprising the refining and marketing of refined products and the
      management of the marketing of crude oil.The
      accounting policies of the operating segments are the same as those
      described in Note 1. Identifiable assets are those used in the operation
      of the segment.Corporate
      income tax for the year ended December 31, 2004 includes withholding tax
      on dividends paid to Canada. The consolidated income tax impact of
      non-deductible interest expense of $2.6 million for the year ended
      December 31, 2003 ($7.5 million - 2002) has been allocated to
      Corporate.The
      Corporation does not disclose export revenue attributable to individual
      foreign countries as it is impractical to obtain the information.
  FS12PetroKazakhstan
      Inc.
 
 
  **Year
      ended December 31, 2004**
    
    Upstream
    
    Downstream
    
    Corporate
    
    Eliminations
    
    ConsolidatedREVENUECrude
      oil
    
    
    **1,090,815**
    
    
    **-**
    
    
    **-**
    
    
    **(97,935**
    **)**
    
    **992,880**Reined
      products
    
    
    **219,348**
    
    
    **480,318**
    
    
    **-**
    
    
    **(60,261**
    **)**
    
    **639,405**Service
      fees
    
    
    **3,018**
    
    
    **3,040**
    
    
    **426**
    
    
    **-**
    
    
    **6,484**Interest
      income
    
    
    **1,765**
    
    
    **638**
    
    
    **1,255**
    
    
    **-**
    
    
    **3,658****1,314,946**
    
    
    **483,996**
    
    
    **1,681**
    
    
    **(158,196**
    **)**
    
    **1,642,427**EXPENSESProduction
    
    
    **89,339**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **89,339**Royalties
      and taxes
    
    
    **120,042**
    
    
    **6,402**
    
    
    **-**
    
    
    **-**
    
    
    **126,444**Transportation
    
    
    **271,809**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **271,809**Refining
    
    
    **-**
    
    
    **21,646**
    
    
    **-**
    
    
    **-**
    
    
    **21,646**Crude
      oil and refined product purchases
    
    
    **86,943**
    
    
    **182,592**
    
    
    **-**
    
    
    **(158,196**
    **)**
    
    **111,339**Selling
    
    
    **18,083**
    
    
    **19,851**
    
    
    **-**
    
    
    **-**
    
    
    **37,934**General
      and administrative
    
    
    **34,955**
    
    
    **14,493**
    
    
    **11,467**
    
    
    **-**
    
    
    **60,915**Interest
      and financing costs
    
    
    **23,848**
    
    
    **473**
    
    
    **9**
    
    
    **-**
    
    
    **24,330**Depletion,
      depreciation and accretion
    
    
    **83,927**
    
    
    **20,338**
    
    
    **1,255**
    
    
    **-**
    
    
    **105,520**Foreign
      exchange loss (gain)
    
    
    **3,963**
    
    
    **(13,767**
    **)**
    
    **(115**
    **)**
    
    **-**
    
    
    **(9,919**
    **)****732,909**
    
    
    **252,028**
    
    
    **12,616**
    
    
    **(158,196**
    **)**
    
    **839,357**INCOME
      (LOSS) BEFORE INCOME TAXES
    
    
    **582,037**
    
    
    **231,968**
    
    
    **(10,935**
    **)**
    
    **-**
    
    
    **803,070**INCOME
      TAXESCurrent
      provision
    
    
    **272,863**
    
    
    **75,770**
    
    
    **7,616**
    
    
    **-**
    
    
    **356,249**Future
      income tax
    
    
    **(54,649**
    **)**
    
    **(517**
    **)**
    
    **-**
    
    
    **-**
    
    
    **(55,166**
    **)****218,214**
    
    
    **75,253**
    
    
    **7,616**
    
    
    **-**
    
    
    **301,083**NON-CONTOLLING
      INTEREST
    
    
    **-**
    
    
    **1,139**
    
    
    **-**
    
    
    **-**
    
    
    **1,319**NET
      INCOME (LOSS)
    
    
    **363,823**
    
    
    **155,396**
    
    
    **(18,551**
    **)**
    
    **-**
    
    
    **500,668**
 
 Included
in Upstream crude revenue are sales to one customer in the amount of $167.4
million.
 
 Eliminations
are intersegment revenue.
 
 **As
      at December 31, 2004**
    
    Upstream
    
    Downstream
    
    Corporate
    
    ConsolidatedTotal
      assets
    
    
    **1,038,727**
    
    
    **180,081**
    
    
    **50,273**
    
    
    **1,269,081**Total
      liabilities
    
    
    **335,591**
    
    
    **29,431**
    
    
    **15,982**
    
    
    **379,004**Capital
      expenditures for the year
    
    
    **148,993**
    
    
    **15,687**
    
    
    **1,272**
    
    
    **165,952**
 
 **Year
      Ended December 31, 2004**
    
    Export
    
    Domestic
    
    ConsolidatedCrude
      oil
    
    
    **912,854**
    
    
    **80,026**
    
    
    **992,880**Refined
      products
    
    
    **219,508**
    
    
    **419,897**
    
    
    **639,405**
 
 
 FS13
 
 
 
 Year
      ended December 31, 2003
    
    Upstream
    
    Downstream
    
    Corporate
    
    Eliminations
    
    ConsolidatedRevenueCrude
      oil
    
    
    719,009
    
    
    -
    
    
    -
    
    
    (97,883
    )
    
    621,126Refined
      products
    
    
    76,885
    
    
    441,200
    
    
    -
    
    
    (36,759
    )
    
    481,326Service
      fee
    
    
    9,086
    
    
    2,191
    
    
    255
    
    
    -
    
    
    11,532Interest
      income
    
    
    936
    
    
    416
    
    
    1,988
    
    
    -
    
    
    3,340805,916
    
    
    443,807
    
    
    2,243
    
    
    (134,642
    )
    
    1,117,324EXPENSESProduction
    
    
    65,516
    
    
    -
    
    
    -
    
    
    -
    
    
    65,516Royalties
      and taxes
    
    
    80,046
    
    
    2,249
    
    
    -
    
    
    -
    
    
    82,295Transportation
    
    
    223,000
    
    
    1,987
    
    
    -
    
    
    -
    
    
    224,987Refining
    
    
    -
    
    
    17,760
    
    
    -
    
    
    -
    
    
    17,760Crude
      oil and refined product purchases
    
    
    55,161
    
    
    135,941
    
    
    -
    
    
    (134,842
    )
    
    56,460Selling
    
    
    10,508
    
    
    18,021
    
    
    -
    
    
    -
    
    
    28,529General
      and administrative
    
    
    32,721
    
    
    16,075
    
    
    5.483
    
    
    -
    
    
    54,279Interest
      and financing costs
    
    
    24,226
    
    
    2,576
    
    
    8,777
    
    
    -
    
    
    35,579Depletion,
      depreciation and accretion
    
    
    63,321
    
    
    18,849
    
    
    182
    
    
    -
    
    
    82,352Foreign
      exchange loss (gain)
    
    
    2,632
    
    
    (9,863
    )
    
    1,898
    
    
    -
    
    
    (5,333
    )557,131
    
    
    203,595
    
    
    16,340
    
    
    (134,842
    )
    
    642,424INCOME
      (LOSS) BEFORE INCOME TAXES
    
    
    248,785
    
    
    240,212
    
    
    (14,097
    )
    
    -
    
    
    474,900INCOME
      TAXESCurrent
      provision
    
    
    86,803
    
    
    74,217
    
    
    4,359
    
    
    -
    
    
    165,379Future
      income tax
    
    
    (7,910
    )
    
    (1,847
    )
    
    -
    
    
    
    
    
    (9,757
    )78,893
    
    
    72,370
    
    
    4,359
    
    
    -
    
    
    155,622NON-CONTROLLING
      INTEREST
    
    
    -
    
    
    2,338
    
    
    -
    
    
    -
    
    
    2,338NET
      INCOME (LOSS)
    
    
    169,892
    
    
    165,504
    
    
    (18,456
    )
    
    -
    
    
    316,940
 
 There
were no sales to an individual customer in excess of 10% of consolidated
revenue.
 
 Eliminations
are intersegment revenue.
 
 As
      at December 31, 2003
    
    Upstream
    
    Downstream
    
    Corporate
    
    ConsolidatedTotal
      assets
    
    
    737,691
    
    
    157,474
    
    
    146,286
    
    
    1,041,451Total
      liabilities
    
    
    409,145
    
    
    58,554
    
    
    2,063
    
    
    469,762Capital
      expenditures for the year
    
    
    183,134
    
    
    19,070
    
    
    1,009
    
    
    203,213
 
 Year
      Ended December 31, 2003
    
    Export
    
    Domestic
    
    ConsolidatedCrude
      oil
    
    
    596,673
    
    
    24,453
    
    
    621,126Refined
      products
    
    
    112,316
    
    
    369,010
    
    
    481,326
 
 
 FS14PetroKazakhstan
      Inc.
 
 
 
 Year
      ended December 31, 2002
    
    Upstream
    
    Downstream
    
    Corporate
    
    Eliminations
    
    ConsolidatedREVENUECrude
      oil
    
    
    566,033
    
    
    -
    
    
    -
    
    
    (84,919
    )
    
    481,114Refined
      products
    
    
    97,761
    
    
    266,420
    
    
    -
    
    
    (31,542
    )
    
    332,639Service
      fee
    
    
    5,610
    
    
    3,423
    
    
    613
    
    
    -
    
    
    9,646Interest
      income
    
    
    282
    
    
    217
    
    
    1,452
    
    
    -
    
    
    1,951669,686
    
    
    270,060
    
    
    2,065
    
    
    (116,461
    )
    
    825,350EXPENSESProduction
    
    
    60,596
    
    
    -
    
    
    -
    
    
    -
    
    
    60,596Royalties
      and taxes
    
    
    61,400
    
    
    7,314
    
    
    -
    
    
    -
    
    
    68,714Transportation
    
    
    163,791
    
    
    10
    
    
    -
    
    
    -
    
    
    163,801Refining
    
    
    -
    
    
    21,721
    
    
    -
    
    
    -
    
    
    21,721Crude
      oil and reined product purchases
    
    
    68,758
    
    
    121,030
    
    
    -
    
    
    (116,461
    )
    
    73,327Selling
    
    
    6,815
    
    
    16,438
    
    
    -
    
    
    -
    
    
    23,253General
      and administrative
    
    
    37,093
    
    
    17,216
    
    
    4,570
    
    
    -
    
    
    58,879Interest
      and financing costs
    
    
    9,023
    
    
    1,514
    
    
    24,936
    
    
    -
    
    
    35,473Depletion.
      depreciation and accretion
    
    
    32,970
    
    
    13,347
    
    
    94
    
    
    -
    
    
    46,411Foreign
      exchange loss
    
    
    1,024
    
    
    995
    
    
    214
    
    
    -
    
    
    2,233441,470
    
    
    199,585
    
    
    29,814
    
    
    (116,461
    )
    
    554,408INCOME
      BEFORE UNUSUAL ITEMS
    
    
    228,216
    
    
    70,475
    
    
    (27,749
    )
    
    -
    
    
    270,942Arbitration
      settlement
    
    
    7,134
    
    
    -
    
    
    -
    
    
    -
    
    
    7,134INCOME
      (LOSS) BEFORE INCOME TAXES
    
    
    221,082
    
    
    70,475
    
    
    (27,749
    )
    
    -
    
    
    263,808INCOME
      TAXESCurrent
      provision
    
    
    64,500
    
    
    26,463
    
    
    9,845
    
    
    -
    
    
    100,808Future
      income tax
    
    
    7,307
    
    
    (7,772
    )
    
    -
    
    
    -
    
    
    (465
    )71,807
    
    
    18,691
    
    
    9,845
    
    
    -
    
    
    100,343NON-CONTROLLING
      INTEREST
    
    
    -
    
    
    2,068
    
    
    -
    
    
    -
    
    
    2,068NET
      INCOME (LOSS)
    
    
    149,275
    
    
    49,716
    
    
    (37,594
    )
    
    -
    
    
    161,397
 
 Included
in Upstream crude oil revenue are sales to one customer in the amount of $103.0
million.
 
 As
      at December 31, 2002
    
    Upstream
    
    Downstream
    
    Corporate
    
    ConsolidatedTotal
      assets
    
    
    506,915
    
    
    169,071
    
    
    33,737
    
    
    709,723Total
      liabilities
    
    
    172,474
    
    
    42,141
    
    
    228,242
    
    
    442,857Capital
      expenditures for the year
    
    
    131,875
    
    
    8,227
    
    
    -
    
    
    140,102
 
 Year
      Ended December 31, 2002
    
    Export
    
    Domestic
    
    ConsolidatedCrude
      oil
    
    
    445,290
    
    
    35,824
    
    
    481,114Refined
      products
    
    
    53,111
    
    
    279,528
    
    
    332,639
 
 FS15
 
 
 
 **NOTE**
      **4**
    **4**
    **JOINT
      VENTURES**
 
 The
      Corporation has the following interests in two joint
    ventures:a)
    a
      50% equity shareholding with equivalent voting power in Turgai Petroleum
      CJSC ( Turgai ), which operates the northern part of the Kumkol field in
      Kazakhstan.b)
    a
      50% equity shareholding with equivalent voting power in LLP Kazgermunai
      ( Kazgermunai ), which operates three oil fields in Kazakhstan:
      Akshabulak, Nurali and Aksai.The
      Corporation s interests in these joint ventures have been accounted for
      using the proportionate consolidation method. Under this method, the
      Corporation s balance sheets, statements of income, retained earnings and
      deficit and cash flow include the Corporation s share of income, expenses,
      assets, liabilities and cash flows of these joint
  ventures.The
      following amounts are included in the Corporation s consolidated financial
      statements as a result of the proportionate consolidation of its joint
      ventures and before consolidation
eliminations:
 
 **Year
      ended December 31, 2004**
    
    Turgai
    
    Kazgermunai
    
    TotalCash
    
    
    **34,678**
    
    
    **50,800**
    
    
    **85,478**Current
      assets, excluding cash
    
    
    **103,183**
    
    
    **57,495**
    
    
    **160,678**Property,
      plant and equipment
    
    
    **86,791**
    
    
    **62,555**
    
    
    **149,346**Current
      liabilities
    
    
    **77,849**
    
    
    **24,343**
    
    
    **102,192**Long-term
      debt
    
    
    **-**
    
    
    **-**
    
    
    **-**Revenue
    
    
    **310,221**
    
    
    **225,882**
    
    
    **536,103**Expenses
    
    
    **206,869**
    
    
    **140,312**
    
    
    **347,181**Net
      income
    
    
    **103,352**
    
    
    **85,570**
    
    
    **188,922**Cash
      flow from operating activities
    
    
    **66,634**
    
    
    **77,968**
    
    
    **144,602**Cash
      flow used in financing activities
    
    
    **(46,204**
    **)**
    
    **(25,632**
    **)**
    
    **(71,836**
    **)**Cash
      flow used in investing activities
    
    
    **(18,328**
    **)**
    
    **(11,967**
    **)**
    
    **(30,295**
    **)**
 
 Revenue
      for the year ended December 31, 2004 for Turgai includes $72.9 million of
      crude oil sales made to Downstream and $29.9 million of crude oil sales
      made by Turgai to Upstream. These amounts were eliminated on
      consolidation.Revenue
      for the year ended December 31, 2004 for Kazgermunai includes $8.1 million
      of crude oil sales made to Upstream and $4.6 million crude oil sales to
      Downstream. These amounts were eliminated on
  consolidation.
 
 Year
      ended December 31, 2003
    
    Turgai
    
    Kazgermunai
    
    TotalCash
    
    
    8,370
    
    
    10,432
    
    
    18,802Current
      assets, excluding cash
    
    
    26,890
    
    
    32,875
    
    
    59,765Property,
      plant and equipment
    
    
    82,682
    
    
    66,397
    
    
    149,079Current
      liabilities
    
    
    76,533
    
    
    11,260
    
    
    87,793Long-term
      debt
    
    
    -
    
    
    37,743
    
    
    37,743Revenue
    
    
    118,167
    
    
    111,860
    
    
    230,027Expenses
    
    
    81,623
    
    
    76,675
    
    
    158,298Net
      income
    
    
    36,544
    
    
    35,185
    
    
    71,729Cash
      flow from operating activities
    
    
    58,566
    
    
    39,089
    
    
    97,655Cash
      flow used in financing activities
    
    
    -
    
    
    (9,317
    )
    
    (9,317
    )Cash
      flow used in investing activities
    
    
    (50,503
    )
    
    (22,193
    )
    
    (72,696
    )
 
 FS16PetroKazakhstan
      Inc.
 
 
 
 
 
 Revenue
      for the year ended December 31, 2003 for Turgai includes $35.9 million of
      crude oil sales made to Downstream and $2.5 million of crude oil sales
      made to Upstream. These amounts were eliminated on
      consolidation.
      
      Revenue
      for the year ended December 31, 2003 for Kazgermunai includes $0.5 million
      of crude oil sales made to Upstream and no crude oil sales to Downstream.
      This amount was eliminated on
consolidation.
  Year
      ended December 31, 2002
    
    Turgai
    
    Kazgermunai
    
    TotalCash
    
    
    307
    
    
    2,854
    
    
    3,161Current
      assets, excluding cash
    
    
    14,248
    
    
    14,743
    
    
    28,991Property,
      plant and equipment
    
    
    41,602
    
    
    58,853
    
    
    100,455Current
      liabilities
    
    
    24,909
    
    
    4,798
    
    
    29,707Long-term
      debt
    
    
    -
    
    
    45,231
    
    
    45,231Revenue
    
    
    72,938
    
    
    48,284
    
    
    121,222Expenses
    
    
    47,241
    
    
    37,431
    
    
    84,672Net
      income
    
    
    25,697
    
    
    10,853
    
    
    36,550Cash
      flow from operating activities
    
    
    25,420
    
    
    19,264
    
    
    44,684Cash
      flow used in financing activities
    
    
    -
    
    
    (15,837
    )
    
    (15,837
    )Cash
      flow used in investing activities
    
    
    (26,613
    )
    
    (12,089
    )
    
    (38,702
    )
 
 Revenue
      for the year ended December 31, 2002 includes $55.0 million of crude oil
      sales made by Turgai and $6.3 million of crude oil sales made by
      Kazgermunai to Downstream. These amounts were eliminated on
      consolidation.**NOTE**
      **5**
    **4**
    **ACCOUNTS
      RECEIVABLE**Accounts
      receivable consist of the
following:
 
 **2004**
    
    2003Trade
    
    
    **150,462**
    
    
    70,282Value
      added tax recoverable
    
    
    **29,316**
    
    
    22,864Due
      from Turgai
    
    
    **6,942**
    
    
    37,231Other
    
    
    **11,784**
    
    
    19,916**198,504**
    
    
    150,293
 
 **NOTE**
      **6**
    **4**
    **INVENTORY**Inventory
      consists of the following:
 
 **2004**
    
    2003Refined
      products
    
    
    **16,682**
    
    
    6,626Crude
      oil produced
    
    
    **25,275**
    
    
    12,502Materials
      and supplies
    
    
    **19,285**
    
    
    17,792**61,242**
    
    
    36,920
 
 FS17
 
 
 
 **NOTE**
      **7**
    **4**
    **PREPAID
      EXPENSES**Prepaid
      expenses consist of the following:
 
 **2004**
    
    2003Advances
      for services and equipment
    
    
    **16,825**
    
    
    10,930Prepayment
      of transportation for crude oil sales
    
    
    **40,911**
    
    
    30,422Prepayment
      for pipeline tariff
    
    
    **4,443**
    
    
    3,549**62,179**
    
    
    44,901
 
 **NOTE**
      **8**
    **4**
    **RESTRICTED
      CASH**Restricted
      cash comprises:
 
 a)
    Cash
      dedicated to a debt service reserve account for the Corporation s term
      facility of $8.7 million at December 31, 2004 ($10.5 million as at
      December 31, 2003). On September 30, 2004 the term facility was repaid in
      full. The Corporation discharged all hedging liabilities related to this
      facility as at December 31, 2004. The debt service reserve account was
      repaid in January 2005.b)
    Cash
      dedicated to a margin account for the Corporation s hedging program being
      $39.0 million at December 31, 2004 ($25.0 million as at December 31,
      2003).Restricted
      cash is not available for current
purposes.
 
 **NOTE**
      **9**
    **4**
    **PROPERTY,
      PLANT AND EQUIPMENT**
 
 AccumulatedDepletion
      and
    
    Net
      Book*As
      at December 31*
    
    Cost
    
    Depreciation
    
    Value**2004**Oil
      and gas
    
    
    **830,977**
    
    
    **443,369**
    
    
    **387,608**Refining
    
    
    **168,674**
    
    
    **63,902**
    
    
    **104,772**Transportation
    
    
    **118,098**
    
    
    **14,639**
    
    
    **103,459****1,117,749**
    
    
    **521,910**
    
    
    **595,839**Other
    
    
    **10,813**
    
    
    **4,905**
    
    
    **5,908****1,128,562**
    
    
    **526,815**
    
    
    **601,747**2003Oil
      and gas
    
    
    722,015
    
    
    365,349
    
    
    356,666Refining
    
    
    154,402
    
    
    44,483
    
    
    109,919Transportation
    
    
    73,666
    
    
    4,087
    
    
    69,579950,083
    
    
    413,919
    
    
    536,164Other
    
    
    9,365
    
    
    3,212
    
    
    6,153959,448
    
    
    417,131
    
    
    542,317
 
 Excluded
      from the depletable base of oil and gas properties are undeveloped
      properties of $24.5 million (December 31, 2003 - $17.0 million). No work
      in progress is excluded from the depletable base of oil and gas properties
      as at December 31, 2004 ($29.1 million as at December 31, 2003). During
      the year ended December 31, 2004 no interest was capitalized ($0.4 million
      in 2003).
 
 FS18PetroKazakhstan
      Inc.
 
 
 
 The
      Corporation used future Brent prices for the years 2005-2009 ($40.19 per
      barrel in 2005, $38.26 per barrel in 2006, $36.62 per barrel for 2007,
      $35.04 per barrel for 2008 and $33.53 per barrel for 2009) and estimates
      made by its independent reserve engineers for periods thereafter for its
      impairment test calculation. The average annual percentage change in the
      prices after 2009 was 2%.
 
 **NOTE**
      **10**
    **4**
    **ACCOUNTS
      PAYABLE AND ACCRUED
LIABILITIES**
 
 Accounts
      payable and accrued liabilities consist of the
  following:
 
 **2004**
    
    2003Trade
    
    
    **70,160**
    
    
    66,115Due
      to Turgai
    
    
    **19,668**
    
    
    -Royalties
    
    
    **18,259**
    
    
    16,133Income
      taxes
    
    
    **30,175**
    
    
    -Common
      share dividends
    
    
    **12,588**
    
    
    -Other
    
    
    **10,909**
    
    
    6,174**161,759**
    
    
    88,422
 
 **NOTE**
      **11**
    **4**
    **INDEBTEDNESS**
 
 **Short-term
      debt**
 
 **2004**
    
    2003Current
      portion of term facility
    
    
    **-**
    
    
    35,692Current
      portion of term loans
    
    
    **2,039**
    
    
    2,039Joint
      venture loan payable
    
    
    **-**
    
    
    11,000PKOP
      bonds
    
    
    **-**
    
    
    24,494Kazgermunai
      debt
    
    
    **13,502**
    
    
    -**15,541**
    
    
    73,225
 
 **Long-term
      debt**
 
 **2004**
    
    2003Long-term
      portion of term facility
    
    
    **-**
    
    
    71,384Long-term
      portion of term loans
    
    
    **9,862**
    
    
    12,5289.625%
      bonds
    
    
    **125,000**
    
    
    125,000Kazgermunai
      debt
    
    
    **-**
    
    
    37,743**134,862**
    
    
    246,655
 
 **Committed
      credit facility**On
      May 25, 2004 the Corporation entered into a five and one half year $100.0
      million committed credit facility. This facility is unsecured, bears
      interest at LIBOR plus 2.65% and is subject to annual review. $30.0
      million of this facility has been dedicated to cover margin calls under
      the Corporation s hedging program. This amount is not available for
      general corporate purposes. Costs related to this facility amounting to
      $1.5 million are recorded as deferred charges and amortized over the life
      of the facility.**Term
      facility**On
      January 2, 2003, PetroKazakhstan Kumkol Resources ( PKKR ) entered into a
      $225.0 million term facility secured by crude oil export contracts. This
      facility was repayable in 42 equal monthly installments commencing July
      2003. The facility bore interest at a rate of LIBOR plus 3.25% per annum.
      PKKR drew $190.0 million under this facility and chose not to utilize the
      remainder. On September 30, 2004 the Corporation had fully repaid the term
      facility. Unamortized issue costs of $2.1 million related to the term
      facility have been expensed.
 FS19
 
 
 **Joint
venture loan**
 The
joint venture loan was fully repaid on October 7, 2004.
 
 **PKOP
bonds**
 On
February 16, 2001 PetroKazakhstan Oil Products ( PKOP ) registered 250,000
unsecured bonds (par value $100) in the amount of $25.0 million with the
National Securities Commission of the Republic of Kazakhstan (the  PKOP bonds ).
The PKOP bonds had a three-year maturity and bore a coupon rate of 10% per
annum. The PKOP bonds were listed on the Kazakh Stock Exchange.
 
 The
PKOP bonds were fully redeemed on February 26, 2004.
 
 **Term
loans**
 PKKR
has obtained secured term loans guaranteed by Export Credit Agencies for certain
equipment related to the KAM pipeline and the Gas Utilization Facility. The
loans are secured by the equipment purchased, bear interest at LIBOR plus 4% per
annum, are repayable in equal semi-annual installments and have final maturity
dates ranging from five to seven years.
 
 **9.625%
Notes**
 On
February 12, 2003, PetroKazakhstan Finance B.V., a wholly owned subsidiary of
PKKR issued U.S. $125.0 million 9.625% Notes due February 12, 2010. The Notes
are unsecured, unconditionally guaranteed by the Corporation, PKKR and PKOP, and
were issued at a price of 98.389% of par value. Each of the guarantors has
agreed to certain covenants, including limitations on indebtedness, restrictions
on payments of dividends, repurchase all or any part of the notes at the
holders  discretion in the case of a change of control. On March 15, 2004 the
Corporation s Notes were approved for listing on the Kazakhstan Stock Exchange.
 
 As at
December 31, 2004 issue costs and the discount on the sale of the Notes of $3.2
million are recorded as deferred charges and are amortized over the term of the
Notes.
 
 **Kazgermunai
debt**
 The
Kazgermunai debt is non-recourse to the Corporation. The amounts set out below
represent the 50% of Kazgermunai s total debt, which has been included in the
consolidated financial statements on a proportionate consolidation basis (see
Note 4).
 
 **2004**
    
    2003Subordinated
      debt
    
    
    **-**
    
    
    25,057Loan
      from Government of Kazakhstan
    
    
    **13,502**
    
    
    12,686**13,502**
    
    
    37,743
 
 ***Subordinated
Debt***
 The
subordinated debt bore interest at LIBOR plus 3% and was unsecured. Accrued
interest was added to the principal on a semi-annual basis. On June 24,
Kazgermunai repaid $24.3 million of its outstanding subordinated debt and as at
December 31, 2004 the subordinated debt was repaid in full.
 
 *Amounts
      Repaid*
    
    **2004**
    
    2003Principal
      repaid
    
    
    **13,655**
    
    
    5,224Interest
      repaid
    
    
    **11,977**
    
    
    3,848**25,632**
    
    
    9,072
 
 ***Loan
from Government of Kazakhstan***
 The
loan from the Government of Kazakhstan relates to exploration and development
work performed on the Akshabulak, Nurali and Aksai fields prior to the formation
of Kazgermunai. The loan bears interest at LIBOR plus 3% and is unsecured.
Accrued interest is added to the principal on a semi-annual basis. Kazgermunai
expects to repay the government loan in 2005.
 FS20PetroKazakhstan
      Inc.
 
 
 
 Kazgermunai
      is restricted from paying dividends until all outstanding loans have been
      repaid in full.**Repayment**Principal
      repayments due for each of the next five years and in total are as
      follows:
  Less
      amountsincluded
      in
    
    Totalshort-term
    
    long-term2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    There-after
    
    debt
    
    debtTerm
      loans
    
    
    2,039
    
    
    2,039
    
    
    1,645
    
    
    1,252
    
    
    626
    
    
    4,300
    
    
    (2,039
    )
    
    9,8629.625%
      Notes
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    125,000
    
    
    -
    
    
    125,000Kazgermunai
    
    
    13,502
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (13,502
    )
    
    -15,541
    
    
    2,039
    
    
    1,645
    
    
    1,252
    
    
    626
    
    
    129,300
    
    
    (15,541
    )
    
    134,862
 
 **Interest
      Expense**
 
 **2004**
    
    2003
    
    2002Interest
      on long-term debt
    
    
    **22,539**
    
    
    23,375
    
    
    29,897Interest
      on short-term debt
    
    
    **1,791**
    
    
    12,204
    
    
    5,576**24,330**
    
    
    35,579
    
    
    35,473
 
 **NOTE**
      **12**
    **4**
    **SHARE
      CAPITAL**
 
 The
      Corporation s common shares are listed on the New York, Toronto, London
      and Frankfurt Stock Exchanges. On October 21, 2004 PetroKazakhstan shares
      were listed on the Kazakhstan Stock Exchange.Authorized
      share capital consists of an unlimited number of Class A common shares,
      and an unlimited number of Class B redeemable preferred shares, issuable
      in series.
 
 **2004**
    
    2003*December
      31*
    
    **Number**
    
    **Amount**
    
    Number
    
    AmountBalance,
      beginning of year
    
    
    **77,920,226**
    
    
    **191,695**
    
    
    78,956,875
    
    
    193,723Shares
      repurchased and cancelled pursuant to Normal Course Issuer****Bid
      (a)
    
    
    **(1,257,500**
    **)**
    
    **(3,120**
    **)**
    
    (1,477,400
    )
    
    (3,616
    )Shares
      repurchased and cancelled pursuant to Substantial Issuer Bid****(b)
    
    
    **(3,999,975**
    **)**
    
    **(9,782**
    **)**
    
    -
    
    
    -Stock
      options exercised for****cash
    
    
    **3,531,821**
    
    
    **12,726**
    
    
    411,275
    
    
    1,608Corresponding
      convertible securities, converted (c)
    
    
    **28,558**
    
    
    **10**
    
    
    29,476
    
    
    (20
    )Balance,
      end of year
    
    
    **76,223,130**
    
    
    **191,529**
    
    
    77,920,226
    
    
    191,695
 
 (a)
    The
      Corporation s Normal Course Issuer Bid program was renewed on August 5,
      2003. Under the program up to 5,775,028 common shares may be repurchased
      for cancellation, during the period from August 7, 2003 to August 6, 2004.
      In August 2004 the Corporation again renewed this program which enabled
      the Corporation to repurchase 7,091,429 Class A common shares during the
      period from August 13, 2004 to August 12, 2005. The Corporation purchased
      and cancelled 1,477,400 shares at an average price of C$14.69 per share
      during the year ended December 31, 2003 and 1,257,500 shares at an average
      price of C$40.00 per share during the year ended December 31, 2004. The
      excess of cost over the book value for the shares purchased was applied to
      retained earnings.(b)
    In
      June 2004 the Corporation commenced a Substantial Issuer Bid to
      repurchase, for cancellation, up to C$160 million of its Class A common
      shares. As at December 31, 2004, the Corporation had purchased and
      cancelled 3,999,975 shares at an average price of C$40.00 per share. The
      excess of cost over the book value for the shares purchased was applied to
      retained earnings.
 FS21
 
 
 
 (c)
    On
      March 31, 2000, in connection with the acquisition of PKOP, the
      Corporation issued corresponding convertible securities as follows:Options
      to purchase 1,105,753 Common Shares of the Corporation at prices and terms
      which were identical to those options outstanding at March 31, 2000, but
      in each case the number of options equalled 40.80% of the outstanding
      options. As at December 31, 2004 there were 8,159 outstanding
      corresponding convertible securities (36,717 - as at December 31,
      2003).(d)
    The
      Corporation maintains an incentive stock option plan ( plan ) under which
      directors, officers and key personnel may be granted options to purchase
      class A common shares of the Corporation. The Corporation has reserved
      8,076,050 class A common shares for issuance upon the exercise of options
      granted under the terms of the plan (2003 - 8,076,050). The Board of
      Directors determines the exercise price of each option, provided that no
      option shall be granted with an exercise price at a discount to market.
      The vesting periods established under the Corporation s stock option plan
      and the term of the options are set by the board of directors, subject to
      a maximum term for any option of 10 years. Granted options have a vesting
      period of 3-5 years, except for options granted to non-executive
      directors, which vest immediately.A
      summary of the status of the Corporation s stock option plan as of
      December 31, 2004 and the changes during the year ended December 31, 2004
      and year ended December 31, 2003 is presented below (expressed in Canadian
      dollars):
 
 Weighted
      AverageOptions
    
    Exercise
      PriceOutstanding
      at December 31, 2001
    
    
    5,736,880
    
    
    3.07Granted
    
    
    605,000
    
    
    14.65Exercised
    
    
    (1,393,281
    )
    
    1.09Forfeited
    
    
    (98,463
    )
    
    6.73Outstanding
      at December 31, 2002
    
    
    4,850,136
    
    
    5.01Granted
    
    
    791,000
    
    
    25.82Exercised
    
    
    (440,751
    )
    
    3.76Forfeited
    
    
    (84,925
    )
    
    9.27Outstanding
      at December 31, 2003
    
    
    5,115,460
    
    
    8.17Granted
    
    
    724,100
    
    
    42.50Exercised
    
    
    (3,560,379
    )
    
    4.77Forfeited
    
    
    (192,525
    )
    
    15.94**Outstanding
      at December 31, 2004**
    
    
    **2,086,656**
    
    
    **25.17**Options
      exercisable as at:December
      31, 2003
    
    
    2,816,683
    
    
    5.14December
      31, 2004
    
    
    866,903
    
    
    16.29
 
 The
      weighted average fair value of the 724,100 options granted during the year
      ended December 31, 2004 was $8.7
million.
 
 FS22PetroKazakhstan
      Inc.
 
 
 All
stock options outstanding as of August 3, 2001 were re-priced in connection with
the special dividend that was issued by the Corporation. The exercise price was
reduced by C$3.78 per share. Certain options had exercise prices less than
C$3.78.
 
 **As
      at December 31, 2004**
    
    Outstanding
      Options
    
    Exercisable
      OptionsWeightedAverage
    
    Weighted
    
    
    
    WeightedNumber
      of
    
    Remaining
    
    Average
    
    Number
      of
    
    AverageRange
      of Exercise Price
    
    Options
    
    Contractual
      Life
    
    Exercise
      Price
    
    Options
    
    Exercise
      Price*(C$)*
    
    
    
    
    
    
    
    **
    **(C$)**
    **
    
    
    
    **
    **(C$)**
    **0
      to 2.50
    
    
    128,159
    
    
    0.22
    
    
    0.61
    
    
    128,159
    
    
    0.612.50
      to 7.50
    
    
    101,000
    
    
    1.25
    
    
    6.13
    
    
    68,500
    
    
    5.887.50
      to 12.50
    
    
    290,656
    
    
    1.77
    
    
    9.39
    
    
    214,253
    
    
    9.5212.50
      to 17.50
    
    
    295,500
    
    
    2.95
    
    
    14.72
    
    
    116,750
    
    
    14.6517.50
      to 31.62
    
    
    607,241
    
    
    3.96
    
    
    26.14
    
    
    289,241
    
    
    26.6831.62
      to 44.50
    
    
    664,100
    
    
    4.93
    
    
    43.48
    
    
    50,000
    
    
    43.502,086,656
    
    
    3.46
    
    
    25.17
    
    
    866,903
    
    
    16.29
 
 The pro
forma net income per share had we recognized compensation expense using the fair
value of common stock options granted for all stock options outstanding prior to
January 1, 2003 follows:
 
 **2004**
    
    2003
    
    2002Net
      incomeAs
      reported
    
    
    **500,668**
    
    
    316,940
    
    
    161,397Pro
      forma
    
    
    **499,532**
    
    
    314,752
    
    
    158,867Basic
      net income per shareAs
      reported
    
    
    **6.40**
    
    
    4.06
    
    
    2.00Pro
      forma
    
    
    **6.38**
    
    
    4.03
    
    
    1.96Diluted
      net income per shareAs
      reported
    
    
    **6.28**
    
    
    3.90
    
    
    1.92Pro
      forma
    
    
    **6.27**
    
    
    3.87
    
    
    1.89
 
 The
estimated fair value of the stock options issued were determined using the
Black-Scholes option pricing model with the following assumptions:
 
 **2004**
    
    2003
    
    2002Risk-free
      interest rate
    
    
    **3.66**
    **%**
    
    3.91
    %
    
    3.96
    %Expected
      option life
    
    
    **5
      years**
    
    
    5
      years
    
    
    5
      yearsExpected
      volatility in the price of the Corporation's common shares
    
    
    **32**
    **%**
    
    38
    %
    
    68
    %Expected
      dividends
    
    
    **2**
    **%**
    
    -
    
    
    -Weighted
      average fair value of options granted during the year
    
    **$**
    **9.88**
    
    $
    7.82
    
    $
    5.73
 
 FS23
 
 
 
 **NOTE**
      **13**
    **4**
    **INCOME
      TAXES**
 
 The
      Corporation and its subsidiaries are required to file tax returns in the
      jurisdictions in which they operate. The primary operating jurisdiction is
      Kazakhstan with substantially all income earned in
    Kazakhstan.The
      provision for income taxes differs from the results, which would have been
      obtained by applying the statutory tax rate of 30% to PetroKazakhstan s
      income before income taxes. This difference results from the following
      items:
 
 **2004**
    
    2003
    
    2002Income
      before income taxes
    
    
    **803,070**
    
    
    474,900
    
    
    263,808Statutory
      Kazakhstan income tax rate
    
    
    **30**
    **%**
    
    30
    %
    
    30
    %Expected
      tax expense
    
    
    **240,921**
    
    
    142,470
    
    
    79,142Excess
      profit tax provision
    
    
    **35,000**
    
    
    -
    
    
    -Higher
      tax rate for Kazgermunai
    
    
    **12,165**
    
    
    2,444
    
    
    -Non-deductible
      amounts, net
    
    
    **6,148**
    
    
    9,324
    
    
    16,475Withholding
      tax on dividends
    
    
    **6,849**
    
    
    1,384
    
    
    -Reversal
      of lower tax rate for South****Kumkol field
    
    
    -
    
    
    -
    
    
    4,726Income
      tax expense
    
    
    **301,083**
    
    
    155,622
    
    
    100,343
 
 The
      following are the major future income tax assets and liabilities arising
      from temporary differences between the carrying values and tax basis of
      the following assets and
liabilities:
 
 **2004**
    
    2003Future
      income tax assets:Fixed
      assets
    
    
    **34,487**
    
    
    23,126Excess
      profit tax
    
    
    **36,647**
    
    
    -Provision
      for inter-company profit eliminations
    
    
    **15,516**
    
    
    9,087Provision
      for royalties
    
    
    **5,448**
    
    
    4,831Provision
      for obsolete inventories
    
    
    **1,310**
    
    
    1,180Provision
      for doubtful debts
    
    
    **6**
    
    
    1,515Other
    
    
    **487**
    
    
    424Total
      future income tax assets
    
    
    **93,901**
    
    
    40,163Less:
      current portion of future income tax assets
    
    
    **(65,431**
    **)**
    
    (14,697
    )Long-term
      future income tax assets
    
    
    **28,470**
    
    
    25,466Future
      income tax liabilities:Fixed
      assets
    
    
    **9,936**
    
    
    13,012
 
 The
      Corporation s principal subsidiaries, PKKR and PKOP, and the Corporation s
      other subsidiaries and joint ventures operating in Kazakhstan are separate
      taxpayers under Kazakhstani tax
legislation.
 
 FS24PetroKazakhstan
      Inc.
 
 
 
 Taxes
      are payable in Kazakhstan based on financial statements prepared in
      accordance with the laws of Kazakhstan rather than financial statements
      prepared in accordance with generally accepted accounting principles in
      Canada. The majority of the differences between the two sets of financial
      statements are temporary differences where an expense or revenue item is
      recorded for Canadian GAAP purposes in a different period than allowed
      under Kazakhstani law. The provision for Kazakhstani income taxes has been
      calculated by applying the Kazakhstani statutory tax rate of 30% to the
      income of PetroKazakhstan s Kazakhstan subsidiaries.Excess
      profit tax is in addition to statutory income taxes. Excess profit tax
      takes effect after the field has achieved a cumulative internal rate of
      return higher than 20% for the specific field. The excess profit tax
      ranges from 0% to 30% of taxable income for the year for PKKR and from 0%
      to 50% for Turgai.A
      provision has been made for expected excess profit tax for the 2004 tax
      year for Turgai. Excess profit tax paid in one year is deductible in the
      computation of the excess profit tax liability in the following
      year.
 
 **NOTE**
      **14**
    **4**
    **NET
      INCOME PER SHARE**
 
 The
      income per share calculations are based on the weighted average and
      diluted numbers of Class A common shares outstanding during the period as
      follows:
 
 **2004**
    
    2003
    
    2002Weighted
      average number of common****shares
      outstanding
    
    
    **78,285,025**
    
    
    78,149,904
    
    
    80,853,597Dilution
      from options (including****convertible
      securities)
    
    
    **1,423,880**
    
    
    3,142,302
    
    
    3,346,939Diluted
      number of shares outstanding
    
    
    **79,708,905**
    
    
    81,292,206
    
    
    84,200,536
 
 649,100
      options were excluded from the calculation of diluted number of shares
      outstanding for the year ended December 31, 2004 as the exercise price was
      in excess of the average market price for the year. 774,000 options were
      excluded from the calculation of diluted number of shares outstanding for
      the year ended December 31, 2003. No options were excluded from the
      calculation of diluted number of shares outstanding for the year ended
      December 31, 2002.
 
 **NOTE**
      **15**
    **4**
    **FINANCIAL
      INSTRUMENTS**
 
 The
      nature of the Corporation s operations and issuance of long-term debt
      exposes the Corporation to fluctuations in commodity prices, foreign
      currency exchange rates, interest rates and credit risk. The Corporation
      recognizes these risks and manages operations in a manner such that
      exposure to these risks is minimized to the extent
    practical.The
      Corporation s financial instruments include cash, accounts receivable, all
      current liabilities and long-term debt. The fair value of cash, accounts
      receivable and current liabilities approximates their carrying amounts due
      to the short-term maturity of these instruments. The fair value of
      Kazgermunai debt and the term loans approximates their carrying value as
      they bear interest at market rates. The fair value of the 9.625% Notes is
      $139.5 million versus the carrying value of $125.0 million as at December
      31, 2004 as determined through reference to market
  price.
 
 **a)**
    **Commodity
      price risk**
 The
      Corporation has entered into a commodity-hedging program where it is
      utilizing derivative instruments to manage the Corporation s exposure to
      fluctuations in the price of crude oil. The Corporation has entered into
      the following contracts with a major financial
  institution.
 
 FS25
 
 
 Contract
    
    
    
    
    
    Price
      Ceiling orAmount
    
    Contract
      Period
    
    Contract
      Type
    
    Contracted
      Price
    
    Price
      Floor*(bbls
      per month)*362,000
    
    
    January
      2004 to March 2004
    
    
    Dated
      Brent
    
    
    29.80-29.82
    
    
    -75,000
    
    
    January
      2004 to December 2004
    
    
    Zero
      cost collar
    
    
    28.00
    
    
    17.0075,000
    
    
    January
      2004 to December 2004
    
    
    Zero
      cost collar
    
    
    29.00
    
    
    17.0075,000
    
    
    January
      2004 to December 2004
    
    
    Zero
      cost collar
    
    
    29.25
    
    
    17.0037,500
    
    
    January
      2004 to December 2004
    
    
    Zero
      cost collar
    
    
    29.60
    
    
    17.00110,000
    
    
    January
      2004 to December 2004
    
    
    Zero
      cost collar
    
    
    30.20
    
    
    18.00120,000
    
    
    January
      2005 to March 2005
    
    
    IPE
      Future
    
    
    26.30-26.52
    
    
    -40,000
    
    
    April
      2005 to June 2005
    
    
    IPE
      Future
    
    
    25.92
    
    
    -458,333
    
    
    January
      2005 to December 2005
    
    
    IPE
      Future
    
    
    25.65-25.90
    
    
    -
 
 During
the year ended December 31, 2004, the Corporation has foregone revenue of $42.1
million through these contracts ($5.0 million during the year ended December 31,
2003).
 
 The
unrealized loss on these hedges as at December 31, 2004 is $60.9 million. This
amount is deferred and recognized in the consolidated statement of income when
the related contract is settled. The fair value of these hedges was determined
based on forward prices as at December 31, 2004.
 
 **b)**
    **Foreign
      currency exchange rate
risk**
 Export
revenues are denominated in U.S. dollars and domestic sales of refined products
and crude oil are made in the Tenge equivalent to U.S. dollars at the time of
sale. Substantial portions of the Corporation s operating costs are denominated
in Tenge. The Corporation manages this exposure by operating in a manner that
minimizes the need to convert between these currencies.
 
 The
Corporation, through its Downstream operations, has foreign currency exposure as
the tax basis of its assets are denominated in Tenge. For Upstream, the
Corporation has the possibility to revalue the tax basis of its assets using the
industrial price index through the tax stability provisions of its Hydrocarbon
Contracts. There is no significant forward market for the Tenge, therefore, the
Corporation does not hedge this exposure.
 
 **c)**
    **Interest
      rate risk**
 The
Corporation manages its interest rate risk through utilizing fixed and floating
rate debt to finance its operations. The floating rate debt exposes the
Corporation to fluctuations in interest payments due to changes in interest
rates.
 
 **d)**
    **Credit
      risk**
 A
substantial portion of the Corporation s accounts receivable are with customers
in the energy industry and are subject to normal industry risk. The
Corporation s crude oil sales are sold on credit to purchasers with A rating and
all other sales are supported by letters of credit issued by major financial
institutions. The Corporation s sales of refined products are either made on a
prepayment basis or supported by letters of credit issued by major financial
institutions.
 
 
 FS26PetroKazakhstan
      Inc.
 
 
 
 
 **NOTE**
      **16**
    **4**
    **RELATED
      PARTY TRANSACTIONS**
 
 The
      Corporation had the following transactions with its joint
      ventures.
 
 *($
      millions)*
    
    **2004**
    
    2003
    
    2002Crude
      oil purchased from Turgai
    
    
    **205.5**
    
    
    76.8
    
    
    110.0Crude
      oil purchased from Kazgermunai
    
    
    **25.5**
    
    
    1.1
    
    
    12.6Services
      provided to Turgai
    
    
    **5.0**
    
    
    21.0
    
    
    16.4
 
 The
      amounts in the table above represent 100% of transactions with the joint
      ventures. 50% of these amounts are eliminated on consolidation of the
      Corporation s 50% interest in joint ventures. The remaining 50% remains in
      results of operations.As
      at December 31, 2004 the Corporation has an account payable to the
      shareholder of the Turgai joint venture amounting to $24.8 million ($16.6
      million as at December 31, 2003).
 
 **NOTE**
      **17**
    **4**
    **CASH
      FLOW INFORMATION**
 
 Interest
      and income taxes paid:
 
 **2004**
    
    2003
    
    2002Interest
      paid
    
    
    **22,111**
    
    
    33,988
    
    
    30,622Income
      taxes paid
    
    
    **322,907**
    
    
    173,275
    
    
    97,903
 
 Changes
      in non-cash operating working capital
items:
 
 **2004**
    
    2003
    
    2002Increase
      in accounts receivable
    
    
    **(48,211**
    **)**
    
    (57,525
    )
    
    (40,144
    )(Increase)/decrease
      in inventory
    
    
    **(20,136**
    **)**
    
    3,565
    
    
    (10,583
    )Increase
      in prepaid expenses
    
    
    **(17,278**
    **)**
    
    (306
    )
    
    (27,275
    )Increase/(decrease)
      in accounts payable and accrued liabilities
    
    
    **57,462**
    
    
    (9,470
    )
    
    44,068Increase/(decrease)
      in prepayments****for
      crude oil and refined products
    
    
    **3,264**
    
    
    3,111
    
    
    (3,882
    )**(24,899**
    **)**
    
    (60,625
    )
    
    (37,816
    )
 
 Changes
      in short-tem debt:
 
 **2004**
    
    2003
    
    2002Cash
      movements:Proceeds
      from working capital facilities
    
    
    **98,006**
    
    
    66,079
    
    
    64,954Proceeds
      from term facility
    
    
    **-**
    
    
    -
    
    
    40,000Proceeds
      from PKOP bonds
    
    
    **-**
    
    
    11,332
    
    
    -Proceeds
      from joint venture loan
    
    
    **-**
    
    
    -
    
    
    5,000Total
      proceeds
    
    
    **98,006**
    
    
    77,411
    
    
    109,954Repayment
      of working capital facilities
    
    
    **(98,006**
    **)**
    
    (69,566
    )
    
    (92,564
    )Pepayment
      of term facility
    
    
    **(35,692**
    **)**
    
    (82,923
    )
    
    (44,000
    )Repayment
      of PKOP bonds
    
    
    **(24,494**
    **)**
    
    -
    
    
    -Repayment
      of term loans
    
    
    **(2,039**
    **)**
    
    (2,039
    )
    
    -Repayment
      of joint venture loan
    
    
    **(11,000**
    **)**
    
    -
    
    
    -Total
      repayment
    
    
    **(171,231**
    **)**
    
    (154,528
    )
    
    (136,564
    )Non-cash
      movements:
    
    
    **15,541**
    
    
    134,035
    
    
    (9,640
    )Net
      change
    
    
    **(57,684**
    **)**
    
    56,918
    
    
    (36,250
    )
 
  FS27
 
 
 
 
 Changes
      in long-term debt:
 
 **2004**
    
    2003
    
    2002Cash
      movement:Proceeds
      from term facility
    
    
    -
    
    
    190,000
    
    
    -Proceeds
      for sale of 9.625% notes
    
    
    -
    
    
    122,986
    
    
    -12%
      Notes sold, net of discount
    
    
    -
    
    
    -
    
    
    17,195Total
      proceeds
    
    
    -
    
    
    312,986
    
    
    17,195Repayment
      of term facility
    
    
    **(71,384**
    **)**
    
    -
    
    
    (16,000
    )Redemption
      of 12% Notes
    
    
    -
    
    
    (208,210
    )
    
    -Repayment
      of Kazgermunai debt
    
    
    **(25,632**
    **)**
    
    (9,489
    )
    
    (18,853
    )Total
      repayment
    
    
    **(97,016**
    **)**
    
    (217,699
    )
    
    (34,853
    )Non-cash
      movement
    
    
    **(14,777**
    **)**
    
    (130,429
    )
    
    18,280Net
      change
    
    
    **(111,793**
    **)**
    
    (35.142
    )
    
    622
 
 Non-cash
      movement includes reclassifications of current portion of long-term debt
      to short-term debt and current liabilities.
  **NOTE**
      **18**
    **4**
    **COMMITMENTS
      AND CONTINGENCIES**
 
 **Agency
      for Regulation of Natural Monopolies and Protection of Competition
      ( ARNM )*****PKOP***The
      ARNM alleged that PKOP charged prices for refined oil products that in
      total were $6.3 million in excess of ARNM authorized maximum prices. PKOP
      initiated legal proceedings to annul the ARNM claim and the court of first
      instance reduced the ARNM claim to approximately $1.1 million. PKOP and
      the ARNM appealed this decision to the Supreme Court. The Supreme Court
      recognized approximately $3.6 million of the ARNM s original assessment.
      This amount has been paid and recorded in the financial statements. The
      Corporation has no plans to appeal.PKOP
      received an additional assessment from ARNM in the amount of $8.8 million
      for allegedly charging prices for refined products in excess of ARNM
      authorized maximum prices. PKOP appealed this assessment. The ARNM revoked
      approximately $5.2 million of the assessment and the court of the first
      instance recognized approximately $1.4 million of the remaining $3.6
      million. PKOP appealed this decision and was unsuccessful. $1.4 million
      has been recorded in the financial statements as a final settlement.PKOP s
      position remains that the ARNM does not have the right to establish prices
      for the refinery, and the Corporation, as the party in interest under the
      Privatization Agreement for the Shymkent Refinery, has notified the
      Government of Kazakhstan that it is in breach of provisions of the
      Privatization Agreement. The Corporation has the right to proceed to
      international arbitration under the terms of the Privatization
      Agreement.***Group
      companies***The
      ARNM claimed $34.1 million ($31.0 million at December 31, 2003) from a
      group company for allegedly violating Kazakhstan s competition law. The
      group company initiated legal proceedings and the court of first instance
      dismissed the ARNM claim. The ARNM appealed this decision; the appellate
      court upheld the decision of the lower court. The ARNM has filed a motion
      to re-open the court case on the basis of new information.The
      ARNM claimed approximately $96.4 million ($91.4 million at December 31,
      2003) from group companies for allegedly violating Kazakhstan s
      competition law. The group companies initiated legal action, and at the
      Astana City Court were unsuccessful in their challenge of allegations by
      the ARNM that these companies had violated Kazakhstan competition laws.
      The initial trial court judgment upheld the ARNM determination that these
      group companies had received unjustified revenues totaling approximately
      $96.4 million.
 
 FS28PetroKazakhstan
      Inc.
 
 
 The
group companies appealed this judgment to the Supreme Court. The initial Supreme
Court hearing on the matter was held in the second quarter of 2004 and the Court
suspended the case and instructed the parties to seek an agreed settlement.
During the period from April to May 13, 2004 the parties did engage in
discussions aimed at a settlement, but were unable to resolve the matter through
negotiations.
 
 On May
13, 2004, after a hearing on the merits, the Supreme Court overturned the lower
court decision which was in favour of the ARNM and sent the case back to the
Astana City Court for a new trial. During the third quarter of 2004, the General
Prosecutor s office filed a protest regarding the May 13 decision of the Supreme
Court with the Supreme Court Supervisory Panel. On August 25, 2004, the
Supervisory Panel issued an opinion upholding the May 13 decision and returned
the case to the Astana City Court. In September 2004, the Astana City Court
issued a ruling suspending further consideration of the merits of the case
pending the completion of parallel investigations being conducted by the  Agency
of the Republic of Kazakhstan for Fight Against Economic and Corruption
Criminality . This suspension was removed in late 2004 and the case is currently
being reviewed by economic and financial experts under order of the Court. It is
currently expected that the economic and financial expertise will be concluded
during the spring of 2005 and that the case will, at that point, be subject to
further review and decision by the Astana City Court. No provision has been made
in the consolidated financial statements for these assessments.
 
 It
remains the Corporation s view that the allegations leveled against the group
companies are without justification. A highly competitive market exists for oil
products within Kazakhstan and the current level of prices reflects current
world crude oil prices. Also, the prices charged by the group companies are
competitive with Russian imports and with those charged by distributors of the
other two refineries in Kazakhstan.
 
 The
Corporation is considering its recourse rights under the terms of the Shymkent
refinery Privatization Agreement, which clearly stipulates the right to sell any
and all its products in Kazakhstan and abroad at free market
prices.
 
 The
Corporation will continue to seek a dialogue with the appropriate authorities to
address the concerns related to the pricing of refined products and possible
measures to be taken to further promote transparency and effective monitoring of
the dynamics of competition, consistent with market economy
principles.
 
 **Tax
matters**
 The
local and national tax environment in the Republic of Kazakhstan is subject to
change and inconsistent application, interpretation and enforcement.
Non-compliance with Kazakhstan laws and regulations, as interpreted by the
Kazakh authorities, can lead to the imposition of fines, penalties and
interest.
 
 In
response to the Corporation s submission, the Minister of Finance initiated the
creation of a high-level Working Group between its officials and the
Corporation s representatives to address and seek resolution of all outstanding
tax issues through dialogue and negotiations. On January 22, 2004, the Working
Group signed a memorandum that sets out the agreed resolution of several
important tax issues which were pending. Certain actions, such as the approval
of the amendments to hydrocarbon contracts and issuance of an instruction
letter, were required to fully implement the terms of the memorandum. The
hydrocarbon contract amendments were approved on July 21, 2004, but the
instruction letter has not been issued. The terms of this memorandum are
reflected in the following discussion of the Corporation s tax
matters.
 
 ***Tax
assessments for 1998 and 1999***
 PKKR
received tax assessments for 1998 and 1999. The assessments were for a total of
approximately $10.5 million including taxes, fines, interest and penalties. PKKR
was successful in challenging the assessments at the first level of the court
system and was unsuccessful on the majority of the issues at the Supreme Court
level. Specifically, PKKR was unsuccessful in obtaining agreement of the
Supervisory Panel of the Supreme Court to hear its appeal on the assessed taxes.
Accordingly, the Corporation provided for $2.9 million of the $10.5 million
total assessment in the consolidated financial statements for the year ended
December 31, 2002.
 
 PKKR
has been disputing the remaining $7.6 million (currently $8.0 million due to
strengthening of the tenge), which relates to fines and penalties assessed,
because PKKR believes there was an incorrect application of the provisions of
tax legislation. However, PKKR paid this amount to stop the further accumulation
of fines and penalties and recorded this payment as an account receivable
pending resolution of the issue. The Working Group agreed with PKKR s position
and determined that there was an incorrect application of the provisions of the
tax legislation. This matter was
 FS29
 
 
 simultaneously
appealed to the Supervisory Panel of the Supreme Court ( Supervisory Panel ) due
to time limitations. The Supervisory Panel remanded the case back to the lower
court for a retrial. The lower court rejected the Supervisory Panel s
instruction, a retrial was not held, and the lower court let the original
decision stand. The lower court s refusal to comply with the Supervisory Panel s
instruction was appealed to the Supervisory Panel. The Supervisory Panel refused
to hear the appeal.
 
 The
Ministry of Finance has requested that the Working Group memorandum be revised
to reflect the Court s decision. The Corporation does not agree and intends to
pursue this matter with the Ministry of Finance. The Corporation believes, and
the Ministry of Finance has previously agreed, that there was an incorrect
application of the provisions of the tax legislation. Due to the uncertainty of
the outcome, the Corporation has recorded, as an expense, the remaining amount
of approximately $8.0 million in the consolidated financial statements for the
year ended December 31, 2004.
 
 ***Tax
assessments for 2000 and 2001***
 PKKR
also received assessments for 2000 and 2001. Challenges to the assessments were
divided into two court cases. The first case was for amounts totaling
approximately $13.0 million and at the first level of the court system PKKR was
successful on $6.8 million of the $13.0 million and was unsuccessful on the
remainder. The major issue on which PKKR was unsuccessful was the assessment of
royalties on flared associated gas. PKKR believes the claim for royalties on
flared associated gas, which has no commercial value, contravenes the provisions
of its hydrocarbon contracts. PKKR appealed to the Supreme Court and the
Supervisory Panel of the Supreme Court and was unsuccessful. Royalties on flared
gas were recorded in the consolidated financial statements as follows: $2.2
million in 2002, $0.2 million in 2003 and $2.1 million in 2004. As a result of
the lost cases, the Corporation recorded additional $2.9 million related to
royalties on gas for 2002 and 2003 in its consolidated financial statements for
the year ended December 31, 2004. Additionally, the Corporation has provided for
$1.6 million relating to interest charges on this tax assessment. A further
provision of $1.7 million was made regarding other issues, which was recorded in
2003.
 
 The
second case was for $13.5 million, with $6.9 million related to transfer pricing
sent back by the court for re-negotiation. The final assessment resulting from
the court hearing held in September 2003 totalled $783,000 including the
transfer pricing issue. The Ministry of Finance appealed to the Supreme Court,
approximately $2.1 million of the assessment relating to the methodology used to
revalue tax pools for currency fluctuations ($1.7 million) and the accelerated
write-off of certain assets ($0.4 million). PKKR was unsuccessful at the Supreme
Court. The Corporation had provided for these amounts in its consolidated
financial statements for the year ended December 31, 2003.
 
 **Excess
profit tax**
 The
Corporation, through its subsidiary PKKR and joint venture Turgai, is subject to
excess profit tax under the terms of the Hydrocarbon Exploration and Production
contracts they have for oil and gas production. The contracts are specific to
each field.
 
 Excess
profit tax is in addition to statutory income taxes, which are at a rate of 30%,
and excess profit tax takes effect after the field has achieved a cumulative
internal rate of return higher than 20% for the specific field. The excess
profit tax ranges from 0% to 30% of taxable income for the year for PKKR and
from 0% to 50% for Turgai. As at December 31, 2004 the Corporation through
Turgai provided for excess profit tax of $35.0 million for 2004. PetroKazakhstan
did not incur excess profit tax in any of its other fields in 2004. It may,
however be subject to excess profit tax for the year ended December 31, 2005 and
subsequent years in certain of its fields.
 
 **Turgai
tax assessments**
 During
2004, Turgai was subject to a tax audit for the years 2002-2003 and received a
tax assessment for approximately $148.0 million including penalties and interest
(the Corporation s 50% share is $74.0 million). The major issue was an
assessment for excess profit taxes of approximately $100.0 million including
fines (the Corporation s 50% share is $50.0 million). The Ministry of Finance
had adopted the position that expenditures relating to construction in progress
are not allowed as a cash outflow when computing the internal rate of return.
The Corporation believes this position is contrary to the concept of an internal
rate of return calculation and counter to the legislation of the Republic of
Kazakhstan. The Corporation, fellow shareholder Lukoil and Turgai entered into
discussions regarding this assessment with the Ministry of Finance. As a result,
the assessment was re-issued for $27.0 million (the Corporation s 50% share is
$13.5 million) and discussions will be held to determine the correct method of
calculating excess profit tax and to clarify the interpretation of current
legislation. A further revised assessment may be issued depending on the outcome
of the discussions. The Corporation will continue to work with government
authorities, Turgai, and Lukoil to resolve the dispute. No provision has been
made in the financial statements for this assessment.
 FS30PetroKazakhstan
      Inc.
 
 
 
 **Capital
      expenditures commitment**
      Pursuant
      to the Share Sale-Purchase Agreement with the Republic of Kazakhstan, a
      commitment was made to invest, in Kazakhstan, an aggregate of $280.0
      million in capital expenditures, investments or other items that may be
      treated as capital assets of PKKR on or before December 31, 2002. The
      Government of Kazakhstan audited compliance with the investment commitment
      and has agreed that PKKR has more than met its commitments.
      
      The
      Corporation has assumed the rights and obligations under the PKOP
      privatization agreement, whereby the Government of Kazakhstan privatized
      PKOP. Under this agreement, the Corporation was required to invest, or
      cause PKOP to invest, the Tenge equivalent of $150.0 million in capital
      expenditures or investments by December 31, 2001.
      
      As
      of December 31, 2004, the Corporation believes it has met this commitment.
      The Government of Kazakhstan agrees with the Corporation s assertion
      regarding $116.0 million of this commitment and is claiming the remaining
      obligation has not been met. If it is established that the Corporation has
      not met the remaining obligation, the Corporation may be required, under
      the terms of the agreement, to pay a penalty of 15% of the unfulfilled
      obligation or $5.1 million. No provision has been made in the financial
      statements for this matter.
      
      **Commitments**
      The
      Corporation has entered into a number of operating leases for rail cars,
      certain oil field equipment and office space. As at December 31, 2004 such
      commitments totaled $104.0 million. The obligations for each of the next
      five years and in total are as
follows:
 
 *($
      millions)*
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalOperating
      leases
    
    
    43.0
    
    
    38.8
    
    
    21.0
    
    
    1.0
    
    
    0.2
    
    
    -
    
    
    104.0Work
      commitments
    
    
    3.5
    
    
    2.1
    
    
    0.5
    
    
    -
    
    
    -
    
    
    -
    
    
    6.1Total
    
    
    46.5
    
    
    40.9
    
    
    21.5
    
    
    1.0
    
    
    0.2
    
    
    -
    
    
    110.1
 
 **Legal
      proceedings**
      The
      Corporation was named as defendant in a claim filed by a company alleging
      it was retained under a consulting contract from January 17, 1997 until
      services were suspended in May 1999. The liquidated principal amount
      claimed was, in aggregate, $6.6 million and an additional unspecified
      amount was claimed as an alleged penalty provision, with the total claim
      not to exceed $35.0 million. The arbitration decision was received and the
      Corporation paid $7.1 million for full settlement of the claim. This
      amount was recorded in the consolidated financial statements for the year
      ended December 31, 2002.
      
      The
      Corporation is involved in certain other litigation and claims associated
      with the normal course of operations. Management believes that
      settlements, if any, would not have a material impact on the Corporation s
      financial statements.**NOTE**
      **19**
    **4**
    **SUBSEQUENT
      EVENTS**In
      February 2005 the Corporation, through one of its operating subsidiaries
      in Kazakhstan received a court claim filed by Turgai for $17.0 million in
      damages. This claim relates to the temporary production curtailment of
      Turgai in late December 2004. The Corporation believes the claim is
      without merit and, accordingly, no provision has been made in the
      financial statements.
      
      In
      February 2005 the Corporation, through its joint venture Kazgermunai,
      received a court claim filed by the Kyzylorda Akimat for failure to
      fulfill infrastructure obligations. The claim is for approximately $102.0
      million (the Corporation s 50% share is $51.0 million), $28.1 million
      relating to infrastructure obligations with the remainder being interest
      charges.
      
      The
      Corporation believes the claim is without merit as a substantial portion
      of the obligation has been met and the agreement does not impose
      deadlines. Accordingly, no provision has been made for this claim in the
      financial statements
 
 FS31
 
 
 
 **NOTE**
      **20**
    **4**
    **RECONCILIATION
      OF RESULTS FROM CANADIAN GAAP TO U.S. GAAP**These
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in Canada ( Canadian GAAP ) which
      conform in all material respects with those applicable in the United
      States ( U.S. GAAP ), except as set forth below:
      
      **Income
      taxes**
      Recommendations
      of the CICA with respect to accounting for future income taxes differ from
      U.S. GAAP due to accounting for certain tax incentives. Under the tax
      legislation in the Republic of Kazakhstan, the Corporation may revalue the
      tax pool of its upstream assets using the prescribed inflation rate. A
      future income tax asset is recognized to reflect such revaluation in the
      consolidated financial statements, which is reversed for U.S.
      GAAP.
      
      **Foreign
      currency translation**
      PetroKazakhstan s
      principal operating subsidiaries are PKKR and PKOP and for Canadian GAAP
      are classified as integrated which leads to the use of the temporal method
      of translation (Note 1). Under U.S. GAAP, the Corporation, on a
      consolidated basis, is required to translate the accounts of its principal
      operating subsidiaries using the current rate method. The significant
      changes which result from this difference are a reduction in the carrying
      value of capital assets and the creation of a cumulative translation
      account within the equity section of the balance sheet, which reduces
      total equity.
      
      **Accounting
      for commodity hedges**
      The
      Corporation has entered into a commodity-hedging program where it is
      utilizing derivative instruments as described in Note 17. The Corporation
      has designated these as cash flow hedges under SFAS 133 and recognizes in
      earnings, changes in fair value of these derivatives in the same period as
      the hedged item. Any change in the fair value of these cash flow hedges
      before that period are recognized in other comprehensive income. For
      Canadian GAAP the fair value is deferred and recognized as part of sales
      revenue when the hedges are settled. Comprehensive income for the year
      ended December 31, 2004 was reduced by $58.3 million (2003 - $1.6
      million). The amount recorded as accounts payable as at December 31, 2004
      was $60.9 million (2003 - $2.8 million).
      
      **Accounting
      for oil and gas properties**
      The
      Corporation has completed an impairment test calculation under U.S. GAAP
      at December 31, September 30, June 30 and March 31, in 2004, 2003 and
      2002.
      
      According
      to Staff Accounting Bulletin 106 ( SAB 106 ) released by the U.S.
      Securities and Exchange Commission in September 2004, the future cash
      outflows associated with settling asset retirement obligations should be
      excluded from the computation of the present value of estimated future net
      revenues for the purposes of the full cost impairment calculations. As at
      December 31, 2004 there was no impairment of full cost
assets.
      
      There
      are certain differences between the full cost method of accounting for oil
      and gas assets as applied in Canada and as applied in the United States.
      The Corporation has reviewed such differences and determined that no
      variances in financial statement balances would have resulted from the
      application of full cost accounting in accordance with U.S.
      GAAP.
      
      Canadian
      GAAP requires that under full cost accounting, depletion for oil and gas
      properties, including future development costs, should be determined using
      proved reserves based on estimated future prices and costs. U.S. GAAP
      requires that future development costs should be based on current costs.
      As at December 31, 2004, the difference between Canadian GAAP and U.S.
      GAAP requirements for depletion was immaterial.
      
      **Comprehensive
      income**
      U.S.
      GAAP utilizes the concept of comprehensive income, which includes net
      income and other comprehensive income. As at December 31, 2004 there was
      no similar concept under Canadian GAAP. Other comprehensive income
      represents the change in equity during the period from transactions and
      other events from non-owner sources and includes items such as changes in
      the fair value of cash flow hedges.
 
 FS32PetroKazakhstan
      Inc.
 
 
 **Change
in accounting principles**
 
 *Accounting
for Asset Retirement Obligations*
 Effective
January 1, 2003, the Corporation adopted SFAS 143, Accounting for Asset
Retirement Obligations. The Corporation recognized the estimated fair value of
the liability for its assets retirement obligation. As at December 31, 2003 the
fair value of the obligation was estimated to be $11.0 million (including
accretion expense of $0.9 million for the year ended December 31, 2003). These
estimated costs were recorded as an increase in the gross book value of
property, plant and equipment with a corresponding increase in the asset
retirement obligation. The asset retirement obligation is depleted on a
unit-of-production basis over the useful life of the related assets. Accretion
expense, resulting from the increase in the present value of the liability due
to the passage of time, is recorded as part of depletion, depreciation and
accretion expense.
 
 During
the year ended December 31, 2004, the Corporation revised the estimated fair
value of its asset retirement obligations to $32.5 million (including accretion
expense of $2.4 million for the year ended December 31, 2004). The increase in
the estimate was recorded as an increase in property, plant and equipment with a
corresponding increase in asset retirement obligations. This change in estimate
had an impact of a $2.0 million decrease in net income for the year ended
December 31, 2004.
 
 The
change in asset retirement obligations is as follows:
 
 **2004**
    
    2003Asset
      retirement obligations liability, beginning of year
    
    
    **11,041**
    
    
    4,167Beginning
      balance reversed for adoption of SFAS 143
    
    
    -
    
    
    (4,167
    )Estimate
      following the adoption of SFAS 143
    
    
    -
    
    
    10,129Revisions
    
    
    **19,162**
    
    
    -Accretion
      expense
    
    
    **2,433**
    
    
    912Settlements
    
    
    **(137**
    **)**
    
    -Asset
      retirement obligations liability, end of year
    
    
    **32,499**
    
    
    11,041
 
 Under
U.S. GAAP the new accounting standard pertaining to accounting for asset
retirement obligations was effective January 1, 2003. Changes to the equivalent
Canadian accounting standards were effective January 1, 2004 (see Note 2), which
eliminated asset retirement obligations as a GAAP difference in 2004 and for
future years. Under U.S. GAAP, the cumulative effect of initial application is
required to be charged to net income in the year the standard became effective.
Canadian GAAP requires this change in accounting policy to be applied
retroactively and prior periods presented for comparative purposes
restated.
 
 The
cumulative effect from the date the liability would have been recognized at the
date of adoption of SFAS 143 was $2.1 million and is included in net income for
the year ended December 31, 2003.
 
 The
asset retirement obligation liability, had we applied SFAS 143 for all years
presented in these financial statements, would be $10.1 million as at January 1,
2003.
 
 The pro
forma information, had we applied SFAS 143 for comparative years presented in
these consolidated financial statements, would be as follows:
 
 2002Net
      incomeAs
      reported
    
    
    162,539Pro
      forma
    
    
    162,498Basic
      net income per share:As
      reported
    
    
    2.01Pro
      forma
    
    
    2.01Diluted
      net income per share:As
      reported
    
    
    1.93Pro
      forma
    
    
    1.93
 
 
 FS33
 
 
 
 ***Consolidation
of variable interest entities***
 In
January 2003, FASB issued Interpretation No. 46 ( FIN 46 ),  Consolidation of
Variable Interest Entities.  FIN 46 clarifies the application of Accounting
Research Bulletin No. 51,  Consolidated Financial Statements,  for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. This Interpretation requires variable interest entities ( VIE )
to be consolidated by the primary beneficiary, which represents the enterprise
that will absorb the majority of the VIE s expected losses if they occur,
receive a majority of the VIE s residual returns if they occur, or both. FIN 46
was effective for VIE s created after January 31, 2003 and for VIE s in which an
enterprise obtains an interest after that date. In December 2003, the FASB
issued Interpretation No. 46R ( FIN 46R ),  Consolidation of Variable Interest
Entities   an interpretation of Accounting Research Bulletin No. 51 (revised
December 2003),  which replaces FIN 46. FIN 46R was primarily issued to clarify
the required accounting for interests in VIE s. The Corporation has determined
that the adoption of FIN 46 and FIN 46R did not have a material impact on its
financial position or results of operations.
 
 **Consolidated
Statements of Income**
 The
application of U.S. GAPP would have the following effects on net income as
reported:
  **Years
      ended December 31**
    
    **2004**
    
    2003
    
    2002Net
      income as reported in accordance with Canadian GAAP
    
    
    **500,668**
    
    
    316,940
    
    
    161,397Accounting
      for income taxes
    
    
    **-**
    
    
    629
    
    
    -Amortization
      of debt issue costs
    
    
    **-**
    
    
    -
    
    
    (29
    )Depletion,
      depreciation and accretion expense
    
    
    **(6,018**
    **)**
    
    1,614
    
    
    1,171Future
      income tax
    
    
    **1,026**
    
    
    (193
    )
    
    -**Net
      income under U.S. GAAP before cumulative effect of initial application of
      SFAS 143**
    
    
    **495,676**
    
    
    318,990
    
    
    162,539Cumulative
      effect of initial application of SFAS 143
    
    
    **-**
    
    
    (2,107
    )
    
    -**Net
      income under U.S. GAAP**
    
    
    **495,676**
    
    
    316,883
    
    
    162,539*Basic
      income per*share*under
      U.S. GAAP:*Net
      income under U.S. GAAP before cumulative effect of initial application of
      SFAS 143
    
    
    **6.33**
    
    
    4.08
    
    
    2.01Cumulative
      effect of initial application of SFAS 143
    
    
    **-**
    
    
    (0.03
    )
    
    -Net
      income under U.S. GAAP
    
    
    **6.33**
    
    
    4.05
    
    
    2.01*Diluted
      income per share under U.S GAAP:*Net
      income under U.S. GAAP before cumulative effect of initial application of
      SFAS 143
    
    
    **6.22**
    
    
    3.92
    
    
    1.93Cumulative
      effect of initial application of SFAS 143
    
    
    **-**
    
    
    (0.02
    )
    
    -Net
      income under U.S. GAAP
    
    
    **6.22**
    
    
    3.90
    
    
    1.93**Comprehensive
      income**Foreign
      exchange translation adjustment
    
    
    **57,138**
    
    
    35,199
    
    
    (2,235
    )Fair
      value adjustment cash flow hedges
    
    
    **(58,102**
    **)**
    
    1,594
    
    
    (4,392
    )**Total
      comprehensive income**
    
    
    **494,712**
    
    
    353,676
    
    
    155,912
 
 
 FS34PetroKazakhstan
      Inc.
 
 
 
 **Stock
based compensation**
 The
Corporation has a stock-based compensation plan as described in Note 12. During
the year ended December 2003, the Corporation adopted SFAS 123 and 148, which
require recognition of compensation expense using the fair value of the equity
instrument granted. The Corporation has adopted this recommendation on a
prospective basis, effective January 1, 2003. Accordingly, the Corporation has
recognized compensation expense for all common stock options granted to
employees and non-executive directors on or after January 1, 2003 using the
estimated fair value. The Corporation has recorded compensation expense of $4.0
and $1.2 million in general and administrative expenses within the consolidated
statements of income and retained earnings for the years ended December 31, 2004
and 2003 with a corresponding increase in contributed surplus within
shareholder s equity. Compensation expense for options granted on or after
January 1, 2003 is recognized as compensation expense over the vesting period of
the respective options. For common share options granted prior to January 1,
2003 the pro forma impact on net income and net income per share are as follows:
 
 **Years
      ended December 31**
    
    **2004**
    
    2003
    
    2002Net
      income under U.S. GAAP:As
      reported
    
    
    **495,676**
    
    
    316,883
    
    
    162,539Add
      stock-based employee compensation expense included in reported net
      income
    
    
    **4,034**
    
    
    1,175
    
    
    -Deduct
      total stock-based employee compensation expense for all
    awards
    
    
    **(5,170**
    **)**
    
    (3,363
    )
    
    (2,530
    )Pro
      forma
    
    
    **494,540**
    
    
    314,695
    
    
    160,009Basic
      net income per share:As
      reported
    
    
    **6.33**
    
    
    4.05
    
    
    2.01Pro
      forma
    
    
    **6.32**
    
    
    4.03
    
    
    1.98Diluted
      net income per share:As
      reported
    
    
    **6.22**
    
    
    3.90
    
    
    1.93Pro
      forma
    
    
    **6.21**
    
    
    3.87
    
    
    1.90Stock
      options vested during period (thousands)
    
    
    **371**
    
    
    381
    
    
    513Weighted
      average exercise price
    
    
    **3.06**
    
    
    6.59
    
    
    6.02Weighted
      average fair value of options vested during the period
    
    
    **6.73**
    
    
    5.74
    
    
    4.93Weighted
      average fair value of options granted during the period
    
    
    **9.88**
    
    
    7.82
    
    
    5.73
 
 The
foregoing information is calculated in accordance with the Black-Scholes option
pricing model, using the following data and assumptions: volatility, as of the
date of grant, computed using the prior one to three-year weekly average prices
of the Corporation s common shares, which ranged from 32% to 68%; expected
dividend yield - 2%; option terms to expiry - 5 years as defined by the option
contracts; risk-free rate of return as of the date of grant - 3.60% to 3.96%,
based on five year Government of Canada Bond yields.
 
 FS35
 
 
 **CONSOLIDATED
BALANCE SHEETS**
 The
application of U.S. GAAP would have the following effects on balance sheet items
as reported:
 
 Foreign
    
    Fair
      valueexchange
    
    adjustment
    
    Accounting
    
    AssetAs
    
    translation
    
    cash
      flow
    
    for
      income
    
    retirement
    
    U.S.reported
    
    adjustment
    
    hedges
    
    taxes
    
    obligation
    
    GAAP**December
      31, 2004**Current
      assets
    
    
    **586,461**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **586,461**Deferred
      charges
    
    
    **4,662**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **4,662**Property,
      plant and equipment
    
    
    **601,747**
    
    
    **43,692**
    
    
    
    
    
    
    
    
    
    
    
    **645,439**Restricted
      cash
    
    
    **47,741**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **47,741**Future
      income tax assets
    
    
    **28,470**
    
    
    
    
    
    
    
    
    **(5,528**
    **)**
    
    
    
    
    **22,942**Current
      liabilities
    
    
    **187,216**
    
    
    
    
    
    **60,900**
    
    
    
    
    
    
    
    
    **248,116**Long-term
      debt
    
    
    **134,862**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **134,862**Future
      income tax liability
    
    
    **9,936**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **9,936**Provision
      for future site restoration
    
    
    **32,499**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **32,499**Non-controlling
      interest
    
    
    **14,411**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **14,411**Preferred
      shares of subsidiary
    
    
    **80**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **80**Shareholders'
      equity
    
    
    **890,077**
    
    
    **43,692**
    
    
    **(60,900**
    **)**
    
    **(5,528**
    **)**
    
    
    
    
    **867,341**December
      31, 2003Current
      assets
    
    
    431,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    431,471Deferred
      charges
    
    
    6,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,729Property,
      plant and equipment
    
    
    542,317
    
    
    (13,446
    )
    
    
    
    
    
    
    
    (11,567
    )
    
    517,304Restricted
      cash
    
    
    35,468
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,468Future
      income tax assets
    
    
    25,466
    
    
    
    
    
    
    
    
    (5,528
    )
    
    (1,025
    )
    
    18,913Current
      liabilities
    
    
    168,299
    
    
    
    
    
    2,798
    
    
    
    
    
    
    
    
    171,097Long-term
      debt
    
    
    246,655
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246,655Future
      income tax liability
    
    
    13,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,012Provision
      for future site restoration
    
    
    28,625
    
    
    
    
    
    
    
    
    
    
    
    (17,584
    )
    
    11,041Non-controlling
      interest
    
    
    13,091
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,091Preferred
      shares of subsidiary
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Shareholders'
      equity
    
    
    571,689
    
    
    (13,446
    )
    
    (2,798
    )
    
    (5,528
    )
    
    4,992
    
    
    554,909
 
 **Consolidated
Statements of Income and Retained Earnings (Deficit)
Reclassifications**
 Interest
and other income is presented within revenue under Canadian GAAP, under the U.S.
GAAP this would be presented as a separate line item after operating income.
Interest and financing costs is presented within expenses under Canadian GAAP,
under U.S. GAAP this would be presented as a separate line item after operating
income. Unusual items as presented under Canadian GAAP would be included within
expenses under U.S. GAAP. The  Cash flow  subtotal line would not be presented
in a cash flow statement prepared under U.S. GAAP.
 
 **New
U.S. GAAP pronouncements**
 In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R ( SFAS 123R )  Share Based Payment , which is a revision of Statement of
Financial Accounting Standards No. 123  Accounting for Stock-Based
Compensation . SFAS 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity s equity instruments or that may be settled by the issuance of those
equity instruments. SFAS 123R focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS 123R is effective for the Corporation as of June 30, 2005.
The Corporation is in the process of evaluating the impact of SFAS 123R on its
consolidated financial statements.
 
 The
following new U.S. GAAP pronouncements are not expected to have any impact on
the Corporation s consolidated financial statements.
 4
    Statement
      of Financial Accounting Standards No. 151 ( SFAS 151 ) - Inventory Costs,
      an Amendment of ARB No. 43, Chapter 4.4
    Statement
      of Financial Accounting Standards No. 152 ( SFAS 152 ) - Accounting for
      Real Estate Time-Sharing Transactions an amendment of FASB Statements No.
      66 and 67.4
    Statement
      of Financial Accounting Standards No. 153 ( SFAS 153 ) - Exchanges of
      Nonmonetary Assets an amendment of APB Opinion No.
  29.
 
 FS36PetroKazakhstan
      Inc.
 
 
 
 
 **Historical
      Financial Data**
 Years
ended December 31 - UNAUDITED - EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
(EXCEPT PER SHARE AMOUNTS)
  **2004**
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999
    
    1998
    
    1997**INCOME**Revenue
    
    
    **1,642.4**
    
    
    1,117.3
    
    
    825.4
    
    
    603.1
    
    
    523.2
    
    
    155.2
    
    
    175.9
    
    
    94.8Expenses
    
    
    **(733.8**
    **)**
    
    (560.1
    )
    
    (508.1
    )
    
    (323.7
    )
    
    (223.5
    )
    
    (136.8
    )
    
    (153.9
    )
    
    (56.0
    )Depletion
      and depreciation
    
    
    **(105.5**
    **)**
    
    (82.4
    )
    
    (46.4
    )
    
    (34.8
    )
    
    (14.7
    )
    
    (2.9
    )
    
    (55.3
    )
    
    (15.9
    )Ceiling
      test write-downs
    
    
    **-**
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2.1
    )
    
    (173.4
    )
    
    -Income
      taxes
    
    
    **(301.1**
    **)**
    
    (155.6
    )
    
    (100.3
    )
    
    (68.4
    )
    
    (99.7
    )
    
    (17.7
    )
    
    (22.6
    )
    
    (7.1
    )Unusual
      items
    
    
    **-**
    
    
    -
    
    
    (7.1
    )
    
    (5.5
    )
    
    (20.4
    )
    
    12.8
    
    
    -
    
    
    -Non-controlling
      interest
    
    
    **(1.3**
    **)**
    
    (2.3
    )
    
    (2.1
    )
    
    (1.9
    )
    
    (10.0
    )
    
    -
    
    
    -
    
    
    -Net
      Income (Loss)
    
    
    **500.7**
    
    
    316.9
    
    
    161.4
    
    
    168.8
    
    
    154.9
    
    
    8.5
    
    
    (229.3
    )
    
    15.8**CASH
      FLOW**Cash
      flow
    
    
    **560.5**
    
    
    400.0
    
    
    216.8
    
    
    200.3
    
    
    179.4
    
    
    17.0
    
    
    0.6
    
    
    32.0Proceeds
      from shares issued
    
    
    **13.1**
    
    
    1.6
    
    
    1.4
    
    
    0.7
    
    
    26.7
    
    
    -
    
    
    2.3
    
    
    0.3Share
      repurchased and cancelled
    
    
    **38.6**
    
    
    14.8
    
    
    23.5
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Capital
      expenditures
    
    
    **166.0**
    
    
    203.2
    
    
    140.1
    
    
    110.2
    
    
    17.0
    
    
    15.2
    
    
    113.0
    
    
    47.3**BALANCE
      SHEET**Property,
      plant and equipment
    
    
    **601.7**
    
    
    542.3
    
    
    417.6
    
    
    342.9
    
    
    264.5
    
    
    87.6
    
    
    76.8
    
    
    178.8Long-term
      debt
    
    
    **134.9**
    
    
    246.7
    
    
    281.8
    
    
    281.2
    
    
    82.0
    
    
    -
    
    
    -
    
    
    180.5Net
      debt
    
    
    **(48.7**
    **)**
    
    135.2
    
    
    223.3
    
    
    268.9
    
    
    47.8
    
    
    167.8
    
    
    178.1
    
    
    154.9Shareholders'
      Equity
    
    
    **890.1**
    
    
    571.7
    
    
    266.9
    
    
    127.6
    
    
    185.0
    
    
    (87.6
    )
    
    (96.0
    )
    
    130.9Production*(mbopd)*
    
    
    **151.1**
    
    
    151.3
    
    
    135.8
    
    
    100.9
    
    
    84.1
    
    
    64.3
    
    
    53.1
    
    
    45.0Reserves*(mmboes)*(as
      of January 1 of the following year) (proved plus probable)
    
    
    **549.8**
    
    
    495.4
    
    
    518.3
    
    
    512.3
    
    
    487.6
    
    
    458.6
    
    
    449.5
    
    
    429.9**STATISTICS**Weighted
      average common shares outstanding*(millions)*
    
    
    **78.29**
    
    
    78.15
    
    
    80.85
    
    
    79.81
    
    
    70.59
    
    
    44.51
    
    
    44.24
    
    
    42.83Per
      Share (basic)Net
      income (loss)
    
    **$**
    **6.40**
    
    $
    4.06
    
    $
    2.00
    
    $
    2.12
    
    $
    2.19
    
    $
    0.19
    
    $
    (5.18
    )
    $
    0.37Cash
      flow
    
    **$**
    **7.16**
    
    $
    5.12
    
    $
    2.68
    
    $
    2.51
    
    $
    2.54
    
    $
    0.38
    
    $
    0.01
    
    $
    0.75Market
      Price for sharesToronto*(C$)*High
    
    
    **50.58**
    
    
    30.93
    
    
    25.70
    
    
    14.30
    
    
    11.25
    
    
    3.65
    
    
    12.00
    
    
    14.40Low
    
    
    **29.00**
    
    
    13.87
    
    
    8.27
    
    
    7.10
    
    
    2.70
    
    
    0.25
    
    
    1.40
    
    
    5.05Close
    
    
    **44.53**
    
    
    29.27
    
    
    16.48
    
    
    10.80
    
    
    7.65
    
    
    3.30
    
    
    1.76
    
    
    11.10United
      States*(U.S.$)*High
    
    
    **42.62**
    
    
    23.25
    
    
    16.05
    
    
    9.05
    
    
    7.50
    
    
    2.50
    
    
    8.66
    
    
    10.62Low
    
    
    **21.67**
    
    
    9.51
    
    
    5.23
    
    
    4.41
    
    
    1.06
    
    
    0.06
    
    
    0.84
    
    
    3.67Close
    
    
    **37.10**
    
    
    22.51
    
    
    10.42
    
    
    6.82
    
    
    5.08
    
    
    2.23
    
    
    1.16
    
    
    7.80
 
 FS37
 
 
 
 
 **Share
      Price Performance**
 
 
 FS38PetroKazakhstan
      Inc.