Caspian Seeks Regulatory Approvals to Restart Zhengeldy Production

Caspian Holdings has reported mixed progress in completing regulatory approvals to restart production and exports at its Zhengeldy oil field in Kazakhstan.

On June 25, 2008, Caspian reported that it had received sign off of its 2008 Work Program as a critical first step as part of the overall regulatory process necessary to restart production at Zhengeldy. On July 3, the Company received a letter from Zapkaznedra of the Ministry of Energy and Mineral Resources (MEMR) stating that the Company should apply to the Committee of Geology and Oil Use of the MEMR for the restart of production. 

On July 16, 2008 (dated July 16), the Company received a letter from the Committee of Geology and Oil Use, of the MEMR confirmed in writing that there were no outstanding contract violations and that the Company should apply to the Central Commission of the MEMR for confirmation of the approval of the Supervision of the Development Plan in order to restart the production. We expected that the Central Commission will review the Supervision of the Development Plan at its next meeting. 

On August 26, 2008 the Company received a letter (dated July 29) from the MEMR stating that "the Contract 385 (Zhengeldy Sub Soil Use Contract - (SSUC)) of December 14, 1999 on the production of hydrocarbons on the oil field Zhengeldy in the area of XXIV-13-F (partially) in Aturay region (then SSUC), in the connection with the considerable violations of the obligations established by the Contract and the Work Program - is terminated in unilateral way and stopped the activity of the License."

The Company has received advice from its Kazakh counsel that it has sixty (60) days from the date of receipt of the letter to seek to set aside the purported termination of the SSUC by the MEMR.

This latest letter is in conflict with the earlier letter of the Committee of Geology of MEMR (dated 13 days earlier) and in contrast to the steady progress the Company has been making toward regulatory approval to restart oil production at Zhengeldy. In addition, under the SSUC that the Company has with the State of Kazakhstan, the Ministry does not have the right to unilaterally terminate the contract without a Kazakh Court decision and must provide a reasonable period for the company to rectify any default. 

Upon receipt of the letter the Company has held various formal discussions with various MEMR officials. The Company is also considering commencing legal proceedings in the Kazakhstan courts to set aside the MEMR's decision to terminate the SSUC. The Company has received preliminary advice that its prospects if such proceedings are commenced are high and that its contractual obligations under the SSUC should be upheld and production at the Field recommenced.

Commenting on the situation, Chairman Michael Masterman stated, "Despite this recent set back, we remain cautiously optimistic that we can reinstate full contractual rights and later this year return to oil production from the Zhengeldy field. It is important for Kazakhstan that even relatively small fields are returned to oil production if the Country is to reverse the recent slowdown in oil production growth.

"With the conflicting Kazakh regulatory environment, Caspian Holdings decision to significantly diversify its asset base towards the United States is proving to be a wise and timely decision."

The Company will continue to keep the market informed of developments in particular with respect to any legal action the Company may take.