American International Petroleum Corporation

Conference Call

Monday, April 6, 1998

GARY:
Thank you, everybody, for joining us on this conference call. I�m going to turn the call over to Dr. George Faris, and then we will talk with some other members of the company. George?

GEORGE:
Thank you, Gary. Let me first of all take this opportunity to thank you for accepting our offer to listen to me and to some of my colleagues, essentially Gene Chew and Lorrie Olivier. The reason for this conference is to explain to you the meaning and the impact on the company of the past four announcements, because I frankly believe they have not been understood by the shareholders. We have received hundreds of calls and letters regarding the Chikaduk numbers, the Russian announcement and the warrants. Obviously, we do not have the staff to respond to each inquiry. We thought, through this medium, to answer the many questions posed by you. The format today will be as follows:

Lorrie Olivier, our Vice President of Operations will speak to you about our Kazakhstan operations, as well as our Russian operations.

Gene Chew, the President of our refinery, will speak to you about the refinery operations.

I will come back and will speak to you about the joint venture operations in Kazakhstan, as well as the financing and the warrants. First, start with Lorrie Olivier. Lorrie?

LORRIE:
Yes, George. Good afternoon, everyone. I will be speaking to you first about our Russian operations and then following with our Kazakhstan press releases and operations.

When AIPC first liquidated its holdings in Latin America, our first task was to try to replace those reserves we had on our books as soon as possible, and hopefully, at a lower cost. Searching the world for oil and the type of reserves that we can best exploit because of the size of our company, we were attracted to the proven reserves and the highly prolific region of the Caspian area. In looking for reserves in Russia we were looking for a project and opportunity many of which would require vast amount of resources in which to exploit, and take a number of years to evaluate. We have centered our operations, our efforts, in looking for proven reserves, reserves that not only can be proven but can be placed on production in a very short period of time with a minimal amount of infrastructure development.

This led us to the southern and industrial region of Russia, which is where the majority of the industry and most of the refining capacity has been centered. We were fortunate enough, through a number of meetings, to develop relationships with people that have these properties. After evaluating these properties we selected one particular company that held what we consider extraordinary properties. The company is Nafta. Nafta Corporation is a Russian corporation which gives us certain types of priveleges that an international corporation would not enjoy in open tender. Therefore, we received additional benefits because we were working with a Russian company. We do, however, plan to talk and pursue tenders in the near future because of the new, improved and reduced costs that have been allowed for an international company.

The contract we executed with Nafta actually is an option agreement that gives AIPC the option to purchase the property. Our future partner, Nafta, is very excited about doing this transaction as soon as possible, however, we need time in order to verify the mountain of data that is available on these blocks. There are 17 individual licenses, and while that sounds like a lot of licenses to look at, there are really just two areas,

the Samara area, which is in Samata, Russia,

and the Saratov area, which is also located in the Samara region.

These are bordering states. The Samara area is probably the most prolific project we have because it contains 16 wells that are available for re-entry and for development as soon as we can lay a line or run a truck to carry the oil, which means within the next six months, or less. We feel that there is a lot of potential also in Saratov, because all the acreage, even though there are 16 different licenses, all but two are on offset prducing acreage.

So, there is a tremendous amount of work, both on development and continuing exploration, but the impetus is on development. We expect to begin operations once all the legal due diligence is completed, and the contracts are signed. Our outlook is to be in production by year-end.

The area of Samara and Saratov, I�d like to emphasize, provide excellent access to both internal marketing and external, or export, marketing. Internal markets in Russia previously had been characterized as basically barter arrangements where the lack of cash forced people to take other products in lieu of being paid in cash. That has changed a great deal. We are now faced with a very lucrative local market where cash transactions are the norm. Likewise, the tax structure itself has prevailed in such a way to hinder development. The government has now issued new tax regulations to encourage development and exportation.

Now, moving on to Kazakhstan.

Everyone has read, or hopefully read, about the new seismic program we�ve initiated in that area. We have actually mobilized two separate crews because we do have a tremendous amount of acreage to cover in a short period of time. Initial findings of one particular area continue to encourage us about our prospects called the Chikaduk. It initially was just one feature with one well, and now we�re seeing several features giving us added area and encouragement for that particular prospect. Additionally, data has been made available to indicate and prove that we are looking at actually three different targets.

One is a very shallow target, referred to as eocene ???;

the middle, or upper jurassic, which is the prevalent productive area in the region; and a

third, new area, a new region, a target for this entire area called a carboniferous. No well has yet penetrated this, but we are seeing massive structure development in this sector.

The company is rather excited about these potentials, and we continue to maintain a fast track to explore this area, and in that regard we are working with a couple of international drilling companies with potential to begin a well in the 3rd or maybe 4th quarter of this year.

George, that�s about all I have, I�m running out of time.

GF:
OK Lorrie, thank you very much, I�m sure we�ll come back to you later today. Gene?

CHEW:
Yes, good afternoon. My name is Gene Chew. I am president of American International Refinery. I have been brought on board to run the refining and marketing operation, the downstream end of this company. I have over 30 years experience in the petroleum industry. I am also Chairman of the Asphalt Institue, which is a group of asphalt producers throughout the United States and I�ve been in this business a long time and know and understand it.

We have a refinery in Lake Charles, Louisiana, and we have recently purchased another refinery and terminal in St. Marks, Florida, the only refinery in Florida. That is part of our plan. Our plan has been to expand and to acquire downstream terminals to move this company from the wholesale business into the retail side of the business. We are primarily concentrating on the asphalt side of the business. We�ve produced naptha, we�ve produced deisel, and we�ve produced kerosene and other middle distillates, which we market.

However, the asphalt side of the busimess is what�s going to drive the profitability of this company. We�re buying our crude oil from Mexico. The heavy sour crudes are at historically low prices and have excellent margins in them. We also intend to buy crudes from Venezuela. We have bought some crudes from the Middle East and will continue to do that. We�ll be driven in our purchases by the marketplace. The production of heavy sour crudes in the Western Hemisphere has been increasing on a steady basis and we feel there are some excellent asphalts and crudes available to this company.

Our main part of the business, ashpalt, is very interesting. The wholesale asphalt market is at very low numbers. The retail side has held up very, very well, thus our interest in terminals and the retail side. What has happened in the asphalt business over the last five years is the the Federal government stepped in and put in a program called SHRP. SHRP has forced the asphalt manufacturers to make very specific products at very tight specifications and it�s been very good for small refiners who know how to do this and how to run asphalt and are in the business specifically to make asphalt, as opposed to the gasoline manufacturers and jet fuel manufacturers and home heating oil manufacturers who are in a different part of the business and concentrate on their service stations and these are mostly the major oil companies. The other thing that it�s done is, in order to make these grades, it�s forced companies to polymer-modify their asphalts and has created a large margin between the wholesale business and the retail business.

We�re very excited about this development. We see entry and re-entry barriers being produced because of these specifications. The federal government, through its ISTEA program, is committing huge sume of money, billions of dollars, for the highway program, and that�s been in the headlines recently. We�re going to be the beneficiary of that. We currently market in Texas and Louisiana out of Lake Charles, and will be marketing in Florida and Alabama and Georgia out of St. Marks, and those five states have $5 billion committed to them for highway work and that is growing and we feel there is tremendous opportunity for our company. Now, because of the polymer-modified asphalt and the difficult specifications, I can go over some numbers on just the kind of margins we�re looking at.

Mayan crude oil currently sells for $9.45 a barrel FOB. Transportation costs and refining costs run another $2.75 or about $10.25 through the refinery. The light product, of which we make about 35% light product, sell for about $15.50 a barrel and the asphalting product that retail sell for about $19.70. We�re looking at approximately $6 margins in Louisiana and Texas and $7 margins in Florida, averaging about $6.50 - we�re looking at about a 55% gross margin in this business.

Asphalt is a specialty product, it�s hard to make a lot of these specifications, and that�s why these large margins are there and we are aggresively pursuing that market.
George, is there anything else you�d like me to address?

GEORGE:
No, that�s fine.
Thank you, Gene, and thank you, Lorrie.

Let me just basically fill in some of the gaps here. Going back to Lorrie... incidentally, both Lorrie and Gene are speaking to you from Houston, I�m speaking to you from New York, our New York office..

I�m sure we all can agree that the company has tremendous amount of potential in Kazakhstan, and on top of that now we have more potential in Russia. We are very gratified that these numbers came the way they are on Chikaduk, and I was frankly surprised of the reaction of the market. I just want to go back with you over these Chikaduk numbers a little bit to tell you that these are not the company�s numbers.

This is a collaborative effort of four companies, independent of us, they own no shares in AIPC to my knowledge, and they are Wavetech, Geotex, Restech and, of course, Huddleston.

These numbers are, as we all know, preliminary. As we continue to do the seismic throughout this summer, to continue to do probably another 300 more kilometers, on the Chikaduk additional refinement will come in and they will be made known to the public, could be more, could be less. Whatever the numbers are, we will make them available to you as soon as they are known to us. The last time we made these numbers available were within 24 hours after they were issued by Huddleston, that�s how serious we are about letting you [know] exactly what the potential reserves are in Chikaduk as well as the other structures on this block. The other company, MMG, is also acquiring for us seismic, again, if we encounter structures, again, we will make that available to you.

What Lorrie mentioned about the three separate zones, or potential zones, in the Chikaduk are the eocene, which is gas, which is prevalent over the area, again, we are planning to, we�ve already in fact asked Wavetech to map that area and give us an idea with Huddleston what are the reserves in the eocence, or potential reserves in the eocence. There have been four wells drilled on the Chikaduk structure, very shallow wells, about 600 meters in depth, and they should be able to give us an idea as to the potential reserves as far as the gas is concerned.

The second zone, is, as he said, the upper jurassic, for which the well penetrated Chikaduk #1,

and the last zone, the carboniferous, which is age- related to Tengiz zone. I�m not saying that it is the same but I�m saying it is age-related. It is the same, the rocks are the same age as Tengiz. Unfortunately, however, none of the wells on the Chikaduk structure have penetrated that zone and that�s why we cannot give you even the potential reserves.

We plan in the future to drill a well deep enough to that zone, which is approximately 4400 meters, correct me Lorrie, is that correct?

LORRIE:
You�re in the neighborhood, George.

GEORGE:
and that, as you well know, is very extensive, it could be even more that 4400 meters, and when that happens, then we�ll have an idea as to the potential reserves of that zone. But this is a very, very thick zone, much thicker than the upper jurassic, and we can tell from the seismic.

So now, going back, as Lorrie said, we are in the process, we are in fact speaking to a number of international drilling contractors, one of them is Parker Drilling. We were informed they have the window of rigs available in September and October. The process is very complicated because we need to get a permit. We have to make an ecological study to get an environmental study to get the permit to drill the well, and we are in the process of doing that, we are accumulating the data, so our next objective there would be to find a drilling location, apply for the permit, and to drill a well, by ourselves or with a partner.

And speaking about a joint venture partner, we have recently, as you know, retained Peter Holstein, (asks someone a question about Holsteins background here) who was the president of Arakis International and also was recently the chairman of another company which is Odessy. Peter has a wealth of knowledge and experience in the industry. While he was the president of Arakis Energy International he must have met with scores upon scores of oil companies from all over the world in their attempt to finance the Sudan project. He was successful in helping the company raise close to a billion dollars I understand from the Malaysian oil company and the Chinese oil company to develop the pipeline system and the financing of the project. He is very excited about helping us, and he�s retained by the company as a consultant and the past three or four days where he has officially been retained by the company he has made tremendous progress in bringing out the attention of a number of companies, which we have not been able to do that, because of the shortage of staff. So I expect that he will be successful and that will be soon. Sometimes, although you cannot put a date on these things, but we are hopeful that in the near future we will be able to have a joint venture partner.

Again, we also, on our end, we went back to the companies that we have spoken to about the block and they have shown a keen interest to go back and look at the Chikaduk and, in fact, some meetings have already been set up with Restech and Wavetech regarding that effort.

So we are moving, basically, in two paralle paths: one is to identify a location, a drilling location, and to drill a well on Chikaduk; and the other path is to accelerate our efforts to obtain a joint venture partner, which we will let you know as soon as that becomes real.

As far as the refining division is concerned, again, before we move the refining division, as far as the Russian operations are concerned, as Lorrie said, it is our option, our partners are very anxious for us to close on the deal, but we want to be very careful, we want to make sure that the legal structure is in place, that the subsidiaries have been formed, that they can operate in Russia, and we want to make sure that we have covered all the legal angles as well as the reevaluation of the reserves. Again, we have retained a Russian firm, an engineering firm, to collect the data and to give us another run at the reserve numbers, which will be again confirmed by Huddleston before we go ahead and go through with the project. The initial reaction from the Russian company are very encouraging. We are being led to believe that the numbers of the reserves will be more than what was given to us by our partners, which was the Russian government numbers. We intend, as Lorrie said, to immediately actively close on the transaction, which will be done within the next 60 days, is that correct, Lorrie?

LORRIE:
That�s correct

GEORGE:
We expect to finish the reserves study by the Russian company, and the legal part, by the end of this month, by the end of April; and Huddleston might take a week or two to reconfirm the numbers and sometime between the middle and end of May we will be ready to close on the transaction.

Again, this is our current schedule. Don�t hold me definitely to May 15th to May 30th, but this is our current plan, is to move as fast as we can to reopen those wells, put them on production targeting cash flow for the company as early as possible.

We are looking also at other projects in Russia, and when they are material, when we enter into agreement, we will let you know, but we are also, again, looking at proven reserves, development project, and then we can get in and book them on our books because as you know, as of now, we cannot book the reserves in Kazakhstan.

Moving to the refinery, the plan is to have the refinery as the cash cow to support the operations, the exploration and production operations, at this moment until we have enough cash flow from those operations so that they can carry it on their own. You will be hearing, I�m sure good news, about the refinery beginning toward the end of the second quarter. I expect that the refining operation will be profitable this year. We will have a better idea sometime toward the end of the second quarter. The plan is to have as many St. Marks terminals as we can. The charge that I gave Gene and John Munck is to scour Texas at this moment, Louisiana, Alabama, Mississippee, and whatever area they can to find terminals so that we can use Lake Charles as the manufacturing hub and then move the asphalt in bulk to the terminals and then start selling retail from those terminals. We are looking at another one now in Texas, I don�t know if it will materialize or not, but again, that will add another maybe half a million barrels or more.

Each one of those terminals, you can count on the ability to sell approximately half a million barrels of asphalt per year. And as we increase the number of these terminals, we can increase the amount of the marketing and sales for the company.

Now, as Gene has said, the margin per barrel is $7 a barrel. Well, that�s twice what we expect to get from Russia, for example, in exploration. I think if Lorrie can get $3 to $4 a barrel he�s doing a very good job. So, if you look at it from my point of view, I look at these things, who�s going to give us more dollars per barrel. Is it the refining end, or is it the exploration end? And if you can get $4 a barrel or $5 a barrel from exploration then you are doing an exceptionally good job. Certainly you cannot do that in Russia. So if you can get $7 a barrel and be in Lake Charles, LA, in an area that we all know very well, we would much rather be in Louisiana and we would want to accelerate Louisiana and Florida and get those margins that are historically high at this moment and accelerate the development of the refining division, and get the cash from it to support our efforts in the exploration division.

Now, moving into the announcement today on the financing. Frankly, I was shocked that our shareholders did not understand the impact on the company when we announced that we have an exclusive option to buy the 16 or 17 licenses in Russia. I felt that now we are moving from potential reserves, from exploration to development.

It is our option, as Lorrie said, we could sign the agreement today and finish with it. We are reluctant to do it, we want to be careful that the reserves are what they say they are. We have made our own preliminary estimate and we are comfortable with the numbers given to us by our partners. But I was surprised that our shareholders did not understand what we had done, did not focus on it, and everybody was focusing on the results of Chikaduk. And then when we announced the results of Chikaduk, and again, it was announced exactly within 24 hours after the numbers were given to us by Huddleston. There were a lot or rumors about what these numbers would be. But I�ve always told you that nobody knew what these numbers are because they were given to Huddleston 48 hours before the numbers came out from Huddleston. That�s the only numbers that could be announced by the company.

Again, when these numbers were announced, which, in fact, more than double our potential in terms of recoverable hydrocarbons, the shareholders just let it go... didn�t focus on it anymore. When that happened, we began to realize there must be a reason, something that we are missing.

And I believe that the reason for that is the fact that the warrants were becoming due on the 9th of April, and the warrants were hampering the progress for the rest of the stockholders which are the shareholders which we have almost 15,000 of. There are a few hundred warrant holders and 15,000 shareholders. So the decision was made by the board two days ago, during a meeting, that the warrants will not be extended. Don�t misunderstand me. We want these warrants to be exercised. We are hopeful that they will be exercised on the 9th, but if they are not exercised, if the shareholders feel differently, so, whatever comes, comes. Because of the uncertaintly, the company has to find alternative sources of financing.

As you heard from Lorrie, we are, we might be drilling a well very soon in Kazakhstan. We have commitments in Russia for the development of the fields, especially the Samara field. All of this requires funding. And to assure that the company will have enough funds to meet its obligation, we entered into an agreement to, in fact, get, on the black, a line of credit of both debt and equity over the next two years of $52 million. We can draw on this line as much as we want in periods of every 20 days or so. It�s not like something we can draw on it immediately all $50 million. It�s over a period of two years. We will announce the details once the documentation is complete, and it should be sometime between the 15th and the 20th. The first draw will be April 20th, if the company needs the money by then. But in the event that the warrants are not exercised, in the event that we don�t get enough funding from the exercise of the warrants, then the line is available, we can draw on it if and when we need, and I�m sure we are going to need it. And that is the reason why the company did this financing as stand-by, to make sure that the commitments that we have, and the commitments that we have announced to you that we intend to do the program, will be adequately financed for the next two years.

That�s all we have for now. Thank you very much for your patience, and for listening to us and for giving us the opportunity to talk to you about our plans. I want to thank again Lorrie and Gene for their presentation, their respective areas. I want to thank Gary Shultheis for setting up this meeting. I�m sure sometime after the 9th and sometime in April I will be available to speak to you in a different part of this country , as I did last month in Florida. Again, thank you very much, and goodbye.

-CHECK BACK OFTEN-

Back to Main