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AGREEMENT



ON THE EXPLORATION,

DEVELOPMENT AND PRODUCTION SHARING

FOR THE SHAFAG-ASIMAN OFFSHORE BLOCK

IN THE AZERBAIJAN SECTOR OF THE CASPIAN SEA



BETWEEN



THE STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN



AND



BP EXPLORATION (AZERBAIJAN) LIMITED



AND



SOCAR OIL AFFILIATETABLE OF CONTENTS



ARTICLE 1

PARTICIPATING INTERESTS 3



ARTICLE 2

GRANT OF RIGHTS AND SCOPE 4



ARTICLE 3

WARRANTIES AND GENERAL RIGHTS AND

OBLIGATIONS OF THE PARTIES 5



ARTICLE 4

EXPLORATION PERIOD,

ADDITIONAL EXPLORATION PERIOD, AND

DEVELOPMENT AND PRODUCTION PERIOD 11



ARTICLE 5

STEERING COMMITTEE FOR PROJECT

MANAGEMENT AND ANNUAL WORK PROGRAMMES 21



ARTICLE 6

OPERATING COMPANY, PERSONNEL AND TRAINING 28



ARTICLE 7

REPORTS AND ACCESS TO

PETROLEUM OPERATIONS 35



ARTICLE 8

USE OF LAND AND SEA BEDS 38



ARTICLE 9

USE OF FACILITIES 39



ARTICLE 10

EARLY PETROLEUM PRODUCTION 43





i ARTICLE 11

CONTRACTOR'S RECOVERY OF

PETROLEUM COSTS AND

PRODUCTION SHARING | 44



ARTICLE 12

TAXATION | 49



ARTICLE 13

VALUATION OF PETROLEUM | 82



ARTICLE 14

OWNERSHIP, USE AND

ABANDONMENT OF ASSETS | 88



ARTICLE 15

NATURAL GAS | 96



ARTICLE 16

FOREIGN EXCHANGE | 100



ARTICLE 17

ACCOUNTING METHOD | 102



ARTICLE 18

IMPORT AND EXPORT | 103



ARTICLE 19

DISPOSAL OF PRODUCTION | 107



ARTICLE 20

INSURANCE, LIABILITIES AND

INDEMNITIES | 112



ARTICLE 21

FORCE MAJEURE | 121



ii

ARTICLE 22

VALIDITY, ASSIGNMENT AND

GUARANTEES 124



ARTICLE 23

APPLICABLE LAW, ECONOMIC

STABILISATION AND ARBITRATION 129



ARTICLE 24

NOTICES 132



ARTICLE 25

EFFECTIVE DATE 134



ARTICLE 26

ENVIRONMENTAL PROTECTION AND SAFETY 136



ARTICLE 27

CONFIDENTIALITY 140



ARTICLE 28

BONUS PAYMENTS AND ACREAGE FEES 143



ARTICLE 29

TERMINATION 147



ARTICLE 30

MISCELLANEOUS 153



APPENDICES

APPENDIX 1

DEFINITIONS (1)



APPENDIX 2

CONTRACT AREA AND MAP (11)



Page iii

APPENDIX 3

ACCOUNTING PROCEDURE (14)



APPENDIX 4

FORM OF CONTRACTOR PARTY’S ULTIMATE PARENT COMPANY GUARANTEE (29)



APPENDIX 5

GUARANTEE AND UNDERTAKING OF THE GOVERNMENT OF THE REPUBLIC OF AZERBAIJAN (31)



APPENDIX 6

ARBITRATION PROCEDURE (39)



APPENDIX 7

CRUDE OIL AND NATURAL GAS MEASUREMENT AND EVALUATION PROCEDURE (42)



APPENDIX 8

DESIGN STANDARDS AND SPECIFICATIONS (45)



APPENDIX 9

ENVIRONMENTAL STANDARDS AND PRACTICES (46)



APPENDIX 10

EXPLORATION WORK PROGRAMME (54)



ADDENDUM RELATING TO THE FORMATION OF SOCAR OIL AFFILIATE



Page iv

AGREEMENT ON THE EXPLORATION, DEVELOPMENT AND PRODUCTION SHARING FOR THE SHAFAG-ASIMAN OFFSHORE BLOCK IN THE AZERBAIJAN SECTOR OF THE CASPIAN SEA

THIS AGREEMENT, made and entered into in Baku, the Republic of Azerbaijan, this 7th day of O c t o b e r 2010 by and between:



THE STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN (“SOCAR”), a Government body, on the one hand; and



BP EXPLORATION (AZERBAIJAN) LIMITED (“BP”), a company incorporated in England; and



SOCAR OIL AFFILIATE (“SOA”), a company to be formed and wholly owned and controlled by SOCAR; on the other hand.



SOCAR, BP and SOA are collectively referred to herein as the “Parties” and individually referred to as a “Party”. All the Parties are legal persons in accordance with the legislation of the countries of their registration as confirmed by appropriate documentation thereof,



W I T N E S S E T H:

WHEREAS, in accordance with the Constitution of the Republic of Azerbaijan, and the Constitutional Act of State Independence of the Republic of Azerbaijan dated 18 October 1991, and the Law on Subsurface of the Republic of Azerbaijan dated 13 February 1998, ownership of all Petroleum existing in its natural state in underground or subsurface strata in the Republic of Azerbaijan is vested in the Republic of Azerbaijan, and based upon the below referenced authorisations the authority to control and manage said Petroleum has been vested in SOCAR; and



WHEREAS, pursuant to Presidential Edict No. 200 concerning the creation of the State Oil Company of the Republic of Azerbaijan dated 13 September



Page 1

1992, Presidential Edict No. 844 concerning restructuring of the State Oil Company of the Republic of Azerbaijan dated 24 January 2003, and SOCAR’s Charter, SOCAR owns all Petroleum produced and is vested with the authority to carry out the exploration and development of all Petroleum in the Republic of Azerbaijan, and pursuant to Presidential Decree No. 1089 On the Exploration, Development, and Production Sharing on the Shafag-Asiman Offshore Block in the Azerbaijan Sector of the Caspian Sea dated 7 September 2010, SOCAR is authorised to prepare and execute this Agreement on behalf of the Republic of Azerbaijan, and to represent the Republic of Azerbaijan as the Party to the Agreement on all matters related to the Agreement throughout the entire term thereof; and

WHEREAS, SOCAR has carried out certain work in the Contract Area and now wishes to promote the exploration for, and subsequent development and production of Petroleum existing in its natural state in, on or under the Contract Area; and



WHEREAS, SOCAR and BP have executed an Agreement on the Basic Commercial Principles and Provisions of an Exploration, Development and Production Sharing Agreement for the Shafag-Asiman Offshore Block in the Azerbaijan Sector of the Caspian Sea dated 6 July 2010, and such principles and provisions have constituted the framework of this Agreement; and



WHEREAS, Contractor has the technical knowledge and experience, the administrative and managerial expertise, and financial resources to efficiently develop and produce the Petroleum resources of the Contract Area, and desires to contract with SOCAR for that purpose.



NOW THEREFORE, for and in consideration of the premises and mutual covenants hereinafter set forth, the Parties agree as follows:







2 ARTICLE 1



PARTICIPATING INTERESTS



1.1 The rights and obligations under this Agreement of

each of the Contractor Parties shall be held in the

following respective percentage participating

interests (the “Participating Interest”) as of the

Execution Date:



Contractor Parties Percentage



BP fifty (50) percent

SOA fifty (50) percent

_______ ___________________



TOTAL one hundred (100) percent



1.2 The Parties agree that the percentage Participating

Interest shares replace any rights and obligations

which may exist regarding the Contract Area by

virtue of any prior agreement or contract between

any of the Contractor Parties or their Affiliates

on the one hand, and any Governmental Authority or

SOCAR on the other hand. The Parties agree that,

from the Execution Date, this Agreement constitutes

the sole and complete understanding between SOCAR

and the Contractor Parties regarding the Contract

Area.









3 ARTICLE 2



GRANT OF RIGHTS AND SCOPE





2.1 Grant of Exclusive Right



SOCAR hereby grants to Contractor the sole and

exclusive right to conduct Petroleum Operations within

and with respect to the Contract Area in accordance

with the terms of this Agreement and during the term

hereof. Except for the rights expressly provided for

herein, this Agreement shall not include rights for

any activity other than Petroleum Operations with

respect to surface areas and sea beds, sub-soil or to

any other natural resource or aquatic resources.



2.2 Exception from Contractor’s Right to Cost Recovery



Except as expressly provided elsewhere herein, in the

event production resulting from Petroleum Operations,

upon completion of commercial production from the

Contract Area at the end of the term of this

Agreement, inclusive of all extensions provided in

Article 4, is insufficient for full recovery of

Contractor’s Capital Costs and Operating Costs as

provided hereunder, then Contractor shall not be

entitled to any reimbursement or compensation for any

of its costs not recovered.





4ARTICLE 3



WARRANTIES AND GENERAL RIGHTS

AND OBLIGATIONS OF THE PARTIES



3.1 Warranties of SOCAR

SOCAR represents and warrants that:

(a) it is duly organised and validly existing in accordance with the terms of its Charter; and

(b) it has full authority under the laws of the Republic of Azerbaijan to execute and perform this Agreement, to grant the rights and interests to Contractor as provided under this Agreement and to fulfil its obligations under this Agreement.



3.2 General Obligations of SOCAR

(a) Upon the request of Contractor for the implementation of Petroleum Operations, SOCAR within the full limits of its authority shall use its best lawful endeavours with respect to Governmental Authorities to assist Contractor to obtain the following:

(i) any necessary Governmental Authority approvals, including but not limited to customs clearances, visas, residence permits, access to communication facilities, licenses to enter land or water, import and export licenses, the opening of bank accounts, the acquisition of office space and employee accommodation, as may be necessary for efficient implementation of Petroleum Operations; and



Page 5

(ii) all geological, geophysical, geochemical and technical data (including well data and any other information ) of relevance to the Contract Area not in SOCAR's possession or under its control.



(b) SOCAR within the full limits of its authority shall also use its best lawful endeavours to assist Contractor in all other relevant matters as may be necessary for the efficient implementation of Petroleum Operations.



(c) Contractor shall reimburse SOCAR for any lawful reasonable actual direct costs incurred with respect to the provision of the foregoing, provided such costs are supported by appropriate documentary evidence.



(d) Upon request of Contractor, SOCAR shall provide to Contractor all geological, geophysical, geochemical and technical data and information in the possession or control of SOCAR or its Affiliates of relevance to the Contract Area including all kinds of well data. Contractor shall pay the actual direct costs incurred by SOCAR in the implementation of this Agreement in gathering together, handling and delivering any such data or information to Contractor, which costs will be invoiced to Contractor by SOCAR on the basis that SOCAR is to suffer no loss and obtain no gain. If Contractor does not accept that any items as invoiced by SOCAR satisfy this requirement, Contractor shall notify SOCAR of any such objections and SOCAR and Contractor shall take all necessary steps to mutually resolve all objections raised by Contractor. SOCAR makes no warranties as to the accuracy or completeness of any such data or information in connection with the performance of such obligation.



63.3 Warranties and Rights of Contractor Parties



(a) Each Contractor Party represents that it is duly organised and validly existing in accordance with the terms of its foundation documents and is authorised, subject to governmental authorisations, to establish and maintain such branches and offices in the Republic of Azerbaijan and elsewhere as may be necessary to conduct Petroleum Operations in accordance with the terms and conditions of this Agreement.



(b) Each Contractor Party, its Affiliates, and Contractor’s Subcontractors are hereby authorised throughout the term of this Agreement to establish such branches, permanent establishments, permanent representation and other forms of business in the Republic of Azerbaijan as may be necessary or appropriate to qualify to do business in the Republic of Azerbaijan and to conduct or participate in Petroleum Operations, including the purchase, lease or acquisition of any property required for Petroleum Operations, provided such establishments and other forms of businesses comply with the formalities and procedures of laws of the Republic of Azerbaijan in respect thereof.



3.4 General Obligations of Contractor Parties



(a) Subject to Article 3.5, the Contractor Parties shall provide the necessary funds during the Exploration Period and the Additional Exploration Period and also funds to appraise, evaluate and develop the Petroleum resources within the Contract Area in accordance with the terms and conditions set forth in this Agreement.



(b) Contractor shall conduct Petroleum Operations in accordance with the terms of this Agreement in a diligent, safe and efficient manner and in accordance with generally accepted principles of the international Petroleum industry. As regards design standards and specifications for facilities



Page 7

and equipment the Design Standards shall apply. No

Contractor Party shall be required to act or refrain from

acting if to do so would make such Contractor Party or its

Ultimate Parent Company liable to penalization under the

laws of any jurisdiction applicable to such Contractor Party

or its Ultimate Parent Company notwithstanding anything

to the contrary in this Agreement.



3.5 Special Provision for Carrying SOA’s Participating Interest



(a) The Other Contractor Parties shall have the obligation to

carry, in the proportion that each of their Participating

Interests bears to the total of all of their Participating

Interests, one hundred (100) percent of Petroleum Costs

attributable to SOA’s Participating Interest from the

Effective Date until the date of approval of the

Development Programme (the “Carry”). Such Carry shall

be reimbursed to the Other Contractor Parties by SOA

compensating the Other Contractor Parties from a part of

Petroleum allocated to SOA’s Participating Interest share

under this Agreement in accordance with the procedures set

forth in Article 3.5(c) without any interest accrued other

than as provided for in Article 3.5(b).



(b) From the date costs related to such Carry are incurred by

the Other Contractor Parties until the date of reimbursement

to the Other Contractor Parties of the Carry in full, an

annual interest rate equal to LIBOR plus two (2) percent

shall be applied to the unrecovered balance of the Carry

(the “Unrecovered Balance”) on a Calendar Quarter basis.

The Unrecovered Balance means all funds allocated by the

Other Contractor Parties to carry SOA’s Participating

Interest share of Petroleum Costs under Article 3.5(a),

together with interest accumulated thereon as calculated

pursuant to this Article 3.5(b), less the amounts in

equivalent value of SOA’s share of Petroleum provided to



8the Other Contractor Parties as compensation therefor in the manner described in Article 3.5(c).



(c) From the Commencement Date of Commercial Production,

the Carry shall be reimbursed by SOA to the Other

Contractor Parties in the proportion that each of their

Participating Interests bears to the total of all of their Participating Interests as follows:



(i) one hundred (100) percent of the Cost Recovery

Petroleum attributable to SOA’s Participating

Interest shall be used to reimburse the Carry and

accumulated interest thereon;



(ii) the transfer of title to the Other Contractor Parties of volumes of Petroleum to reimburse the Carry

and accumulated interest thereon, as defined in Article 3.5(c)(i), shall be made at the Delivery Point. The value of the said volumes of Petroleum shall be calculated in accordance with the provisions of Article 13.1.



(d) Notwithstanding Article 3.5(c) of this Agreement to the contrary, SOA shall have the right to reimburse in advance all or part of the Unrecovered Balance out of its share of Profit Petroleum.



(e) If SOA assigns all or a part of its Participating Interest to any Third Party or a Contractor Party, the obligations of the Other Contractor Parties provided for in Article 3.5(a) of this Agreement shall be reduced to the extent of the Participating Interest assigned. The assignee of a Participating Interest from SOA shall thereupon assume the Carry obligation in the proportion that its Participating Interest share bears to the total Participating Interest shares of all of the Other Contractor Parties. SOA and/or SOA’s assignee shall reimburse to the Other Contractor Parties the portion of the Unrecovered Balance corresponding to the Participating Interest assigned which has not been







9recovered as at the date of assignment, together with interest accrued thereto in accordance with Article 3.5(b), with such reimbursement to occur at the date of the assignment. The acceptance by SOA and/or SOA’s assignee of the said obligation for reimbursement shall be a binding condition of such assignment.



(f) If one of the Other Contractor Parties assigns all or a part of its Participating Interest to a Third Party, a Contractor Party or its Affiliate, the obligations of such Other Contractor Party under Article 3.5(a) of this Agreement shall be reduced to the extent of the Participating Interest assigned. The assignee of such Other Contractor Party shall thereupon assume the Carry obligation in the proportion that its Participating Interest share bears to the total Participating Interest shares of all of the Other Contractor Parties. The acceptance by such Third Party, Contractor Party or Affiliate of the said obligation shall be a binding condition of such assignment.



(g) In no event shall an increase by SOA of its Participating Interest under this Agreement create an obligation of the Other Contractor Parties to carry such increase in SOA’s Participating Interest under Article 3.5(a).



Page 10

ARTICLE 4



EXPLORATION PERIOD,

ADDITIONAL EXPLORATION PERIOD, AND

DEVELOPMENT AND PRODUCTION PERIOD



4.1 Exploration Period



The Exploration Period shall be four (4) years from the Effective Date of Agreement.



4.2 Work Obligations During the Exploration Period



(a) During the Exploration Period Contractor shall carry out the following work:



(i) Shoot, process and interpret a minimum of one thousand and fifty nine (1,059) square kilometres of three dimensional seismic in the Contract Area and carry out an upper section site survey in the Contract Area to select a safe and environmentally sound site for drilling;



(ii) Subject to Article 4.2(d), drill in the Contract Area two (2) exploration wells;



(iii) Conduct the necessary environmental protection study;



(iv) Provide SOCAR with all information on operations specified in Articles 4.2(a) (i)-(iii), both routine and final, after completion of seismic, drilling of each well and all other work.



(b) Types, methods and scope of work as defined in Articles 4.2(a) (i)-(iii), methods and list of analysis including core samplings in the process of drilling and completion of the



11exploration wells and also types, volumes and deadlines for provision of information on such work by Contractor to SOCAR are described in the Exploration Work Programme.



(c) Contractor’s failure to perform all or a portion of its obligations as set out in Articles 4.2(a) (i)–(iii) during the Exploration Period shall constitute a Material Breach by Contractor of its obligations under this Agreement. In this case SOCAR shall have the right at its sole discretion to terminate this Agreement pursuant to Article 29.1, and all costs incurred by Contractor from the Effective Date during the Exploration Period shall not be Cost Recoverable. Termination of this Agreement by SOCAR pursuant to this Article 4.2(c) shall be SOCAR’s sole remedy against Contractor for Material Breach under this Article 4.2(c). Such termination shall be without prejudice to any claims either SOCAR or Contractor may have which arose prior to such termination.



In the event that the reservoir pressures are greater than one thousand (1,000) atmospheres requiring the development of new technologies for hydrocarbon testing and production, the Exploration Period or the Additional Exploration Period, as the case may be, may be extended for a period agreed by the Parties as necessary to develop appropriate technologies.



Lack and/or unavailability of any rigs, facilities, infrastructure and any other circumstances caused by the need to co-ordinate infrastructural requirements with the work programmes of Petroleum operators in the Republic of Azerbaijan shall not constitute a basis for Contractor to modify and change any work during the Exploration Period or the Additional Exploration Period or their extensions; provided, however, that the Exploration Period or the Additional Exploration Period, as the case may be, may be extended for a period agreed by the Parties as necessary for access to a drilling rig.



12 (d) In the event that the first exploration well to be drilled during the Exploration Period does not encounter commercial hydrocarbons, then BP and SOCAR shall consult, and BP may elect not to drill the second exploration well. In such event, the scope of work set out in Article 4.2(a)(ii) above shall be deemed to have been completely fulfilled by Contractor.



(e) The sole excuse for the failure to carry out the obligations set out in Articles 4.2(a) (i)-(iii) during the Exploration Period or its extensions or additional work as set out in Article 4.3 during the Additional Exploration Period or its extensions shall be the occurrence of Force Majeure circumstances.



4.3 Additional Exploration Period



(a) Subject to complete and timely fulfilment by Contractor of the exploration work as set out in Articles 4.2(a) (i)-(iii) to be performed during the Exploration Period, or if BP elects not to drill the second exploration well as provided in Article 4.2(d), Contractor may within ninety (90) days before the end of the Exploration Period notify SOCAR in writing of its desire to carry out additional exploration work and provide a list of types and scope of work and justification of such additional exploration work.



Such notice shall request SOCAR's written approval to the performance by Contractor of additional exploration work during the Additional Exploration Period and SOCAR shall declare in writing its approval or disapproval (such approval not to be unreasonably withheld) within ninety (90) days of receipt of such written request from Contractor and the Exploration Period shall automatically be extended until such approval has been given by SOCAR. Contractor shall have the right to proceed to the Additional Exploration



13Period which shall be three (3) years from the end of the Exploration Period or receipt of SOCAR's approval whichever is later. During the Additional Exploration Period Contractor shall drill at least two (2) exploration wells.



(b) Contractor's failure to perform the additional exploration work (or any portion thereof) to be performed during the Additional Exploration Period shall constitute a Material Breach by Contractor of its obligations under this Agreement. In this case SOCAR shall have the right at its sole discretion to terminate this Agreement, and all costs incurred by Contractor from the Effective Date during the Exploration Period and the Additional Exploration Period shall not be Cost recoverable. Termination of the Agreement by SOCAR pursuant to this Article 4.3 shall be SOCAR's sole remedy against Contractor for Material Breach under this Article 4.3. Such termination shall be without prejudice to any claims either SOCAR or Contractor may have which arose prior to such termination.



4.4 Discovery



Before the end of the Exploration Period or if Contractor enters the Additional Exploration Period then before the end of the Additional Exploration Period, Contractor shall notify SOCAR in writing of a Discovery and its commerciality, summarising relevant information relating to said Discovery, including but not limited to the following, to the extent same are available: location plan, geological maps and interpretations, seismic and other geophysical data, drilling reports, well logs, core samplings, lithologic maps and description of formations, drill stem tests, completion reports, production tests including quantities of fluids produced, build-up/draw down tests and pressure analysis, and analysis of oil, gas and water samples and other information consistent with generally accepted international Petroleum industry practice ("Notice of Discovery and its Commerciality").



14In the event Contractor does not submit a Notice of Discovery and its Commerciality before the end of the Exploration Period or if Contractor proceeds to the Additional Exploration Period then before the end of the Additional Exploration Period, as the case may be, SOCAR shall have the right to terminate this Agreement or agree with Contractor to extend the Exploration Period or the Additional Exploration Period, whichever is appropriate, for the time required to submit a Notice of Discovery and its Commerciality. In the event SOCAR elects to terminate this Agreement, all costs incurred by Contractor at the date of such termination shall not be Cost Recoverable.



In the event the appraisal of existing pool/pools and/or a Discovery indicates that the natural boundary of the existing pool/pools and/or a Discovery extends to areas outside the Contract Area, SOCAR shall be entitled (but not obligated) to grant the additional areas to Contractor and if granted such additional areas shall become the subject of this Agreement.



4.5 Development and Production Period



The Development and Production Period shall begin from the date of SOCAR's approval of the Development Programme and shall continue for thirty (30) years after such date. The Development and Production Period may be extended upon Contractor's request for the period sufficient to complete commercially reasonable production of Petroleum in the Contract Area and abandonment operations. Such Extension and its duration shall be subject to SOCAR's approval.



4.6 Development Programme



(a) In the event Contractor submits to SOCAR a Notice of Discovery and its Commerciality, Contractor shall no later than six (6) months after the date of such Notice of Discovery and its Commerciality submit to SOCAR for its approval a programme of Petroleum Operations for the development of such Discovery ("Development



15Programme”), provided that the Development Programme shall include Contractor’s commitment and terms to start production of Petroleum. Contractor undertakes to perform all reasonable steps to start commercial production of Petroleum no later than forty-eight (48) months from the date of SOCAR’s written approval of the Development Programme. SOCAR shall not unreasonably withhold its approval of the Development Programme.



In the event Contractor does not submit the Development Programme within the six (6) months period referred to in Article 4.6(a) above or during any extension(s) of such period, SOCAR shall have the right to terminate this Agreement by giving written notice to Contractor within thirty (30) days following expiry of the said six (6) months period or the applicable extension(s) of such period, and any unrecovered costs incurred by Contractor at the date of such termination shall not be Cost Recoverable.



(b) In the event of a Natural Gas Discovery, the six (6) months period provided for in Article 4.6(a) above shall be extended for an additional period of four (4) years required to conduct any necessary marketing studies to pursue markets for Natural Gas sales and enter into agreements with all the concerned parties (including without limitation potential buyers, authorities and sub-contractors) covering the elements necessary for the development, production, transportation and sales of the Natural Gas.



Contractor together with SOCAR shall use full and reasonable endeavours to rapidly conclude agreements acceptable to the Parties to develop such Discovery, and with Third Parties to enter into the necessary transportation contracts and long term Natural Gas export sale and purchase agreements that are economically and commercially acceptable to Contractor and SOCAR (“Natural Gas Sale and Purchase Agreements”). Contractor shall pursue markets for Natural Gas both within and outside the Republic of Azerbaijan.



Page 16

The Parties acknowledge that marketing studies as well as negotiations for Natural Gas Sale and Purchase Agreements and transportation contracts shall be conducted jointly by SOCAR and Contractor. The results of such studies and agreed terms of commercial development of the Natural Gas Discovery shall be considered by Contractor in preparation of the Development Programme. In the event of delay in completion of the actions referred to in this Article 4.6(b), the Parties may agree to extend the said period of four (4) years.



(c) The Development Programme shall be a long range plan for the efficient and prompt development and production of Petroleum from the Contract Area in accordance with generally accepted international Petroleum industry standards and shall include but not be limited to the following:



(i) proposals relating to the spacing, drilling and completion of all types of wells; and



(ii) proposals relating to the production and storage installations, and transportation and delivery facilities required for the production, storage and transportation of Petroleum; and



(iii) proposals relating to necessary infrastructure investments and use of Azerbaijan materials, products and services in accordance with Article 18.1(a); and



(iv) production forecasts for formation fluids for the entire Contract Area by reservoir derived from individual well forecasts and estimates of the investments and expenses involved; and



(v) an environmental impact and health and safety assessment and a plan for preventing environmental



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pollution and any environmental accident, and for steps to clean-up any pollution related to such accident; and



(vi) estimates of the time required to complete phases of the Development Programme.



(d) Within thirty (30) days of receipt of the Development Programme SOCAR may request Contractor to provide such further information as is readily available to Contractor and as SOCAR may reasonably need to evaluate the Development Programme.



(e) Unless SOCAR requests in writing to Contractor any changes to the Development Programme within ninety (90) days of receipt thereof, the Development Programme shall be deemed approved by SOCAR.



(i) In the event that SOCAR requests any changes to the Development Programme then the Parties shall meet within fifteen (15) days of receipt by Contractor of SOCAR’s written notification of requested changes and shall discuss such request. Any agreed revision to the Development Programme shall be incorporated into the Development Programme, and such revised Development Programme shall be deemed approved by SOCAR.



(ii) In the event that the Parties do not agree on changes requested by SOCAR within sixty (60) days of the commencement of such discussion, or any extended period mutually agreed by the Parties in writing, Contractor may within a further forty (40) days commence arbitration under the Arbitration Procedure on the question as to whether or not



Page 18

SOCAR’s approval of the Development Programme has been unreasonably withheld.



If the decision of the arbitrators is that approval was withheld by SOCAR unreasonably, Contractor shall be entitled to commence operations in accordance with the Development Programme in all respects as if the Development Programme had been approved by SOCAR. If Contractor fails to commence operations within one (1) year of the date of the arbitrators’ decision in accordance with the corresponding Annual Work Program and Budget SOCAR shall have the right to terminate this Agreement by giving Contractor notice in writing within sixty (60) days after expiry of the said period of one (1) year and any unrecovered costs incurred by Contractor shall not be Cost Recoverable.



If the arbitrators’ decision is that SOCAR reasonably withheld approval of the Development Programme submitted by Contractor, the Contractor shall have the right in writing either (i) to accept the changes to the Development Programme requested by SOCAR and to commence Petroleum Operations in accordance with such amended Development Programme in all respects as if the Development Programme had been approved by SOCAR, provided that recovery of costs incurred by Contractor before the date of the arbitrators’ decision with respect to elements of Contractor’s Development Programme differing from such amended Development Programme shall depend on SOCAR’s approval, or (ii) to terminate this Agreement within sixty (60) days after the date of the decision of the arbitrators and any unrecovered costs incurred by Contractor up to such date shall not be Cost Recoverable.



Page19

(f) Implementation of Petroleum Operations by Contractor shall be through Annual Work Programmes and Budgets, the approval of which shall be deemed to amend the Development Programme to the extent necessary.



(g) Contractor may at any time submit to the Steering Committee proposals to revise the Development Programme, including in the event of further Discoveries and Contractor’s decision to develop such Discoveries, provided that such decision shall not constitute a basis to extend the Development and Production Period unless such extension is approved by SOCAR. These proposals shall be consistent with the principles of efficient and optimum development and production of Petroleum from the Contract Area in accordance with international Petroleum industry standards and shall be subject to the approval of the Steering Committee, such approval not to be unreasonably withheld.



4.7 Subject to Articles 4.6(a) and 15.2, if within forty eight (48) months of the date of approval by SOCAR of the Development Programme the Discovery development pursuant to the Development Programme has not been commenced by Contractor, then unless otherwise agreed, SOCAR shall be entitled by giving written notice to terminate this Agreement and any unrecovered costs incurred by Contractor to the date of such notice with respect to the Discovery shall not be Cost Recoverable.



Page 20ARTICLE 5



STEERING COMMITTEE FOR PROJECT MANAGEMENT

AND ANNUAL WORK PROGRAMMES



5.1 Steering Committee for Project Management



SOCAR and Contractor shall, not later than thirty (30) days from the commencement of the Development and Production Period, establish the Steering Committee.



The functions of the Steering Committee shall include but not be limited to:



(a) overseeing Petroleum Operations;



(b) reviewing, revising and approving of Contractor's Annual Work Programmes and Budgets;



(c) supervising the accounting of costs and expenses in accordance with the Accounting Procedure;



(d) in case of necessity, establishing sub-committees of the Steering Committee and reviewing the work of such sub-committees;



(e) reviewing, revising and approving training programmes;



(f) reviewing and approving of the abandonment plan and cost of abandonment operations pursuant to Article 14.2(g).



5.2 Steering Committee Procedure



The Following rules shall apply with respect to the Steering Committee and meetings thereof:



21(a) The Steering Committee shall be comprised of an equal number of members from SOCAR and Contractor. Initially the Steering Committee shall consist of two (2) representatives appointed by SOCAR and two (2) representatives appointed by Contractor (one (1) representative from each Contractor Party). A person cannot represent both SOCAR and SOA. If at any time the number of Contractor Parties increases or decreases the number of representatives to be appointed by each of SOCAR and Contractor shall be increased or reduced, as the case may be, to equal the number of Contractor Parties, provided, however, that the number of representatives to be appointed by each of SOCAR and Contractor shall never be less than two (2). SOCAR and Contractor shall each be entitled to appoint an alternate for each of their representatives, who shall be entitled to attend in place of the designated representatives, such alternate to be considered a representative for all purposes at such Steering Committee meetings. SOCAR and Contractor shall each advise the other of the names of its representatives and their alternates within twenty (20) days following commencement of the Development and Production Period. Such representatives and their alternates may be replaced by SOCAR and Contractor, respectively, upon written notice to the other.



(b) SOCAR and Contractor shall each have one (1) vote to cast on any matter submitted for approval by the Steering Committee. For this purpose, each of SOCAR and Contractor shall give written notice to the other specifying the identity of the individual representative (and, if desired, his alternate), who shall be authorised to cast such vote on its behalf. Such designated individuals may be changed from time to time upon written notice by SOCAR or Contractor, as the case may be. No vote cast or purported to be cast by any representative other than said designated individuals (or, in the absence of either, his designated alternate) shall be considered as the official vote of either SOCAR or Contractor, as the case may be.



Page 22

(c) The chairman of the Steering Committee shall be appointed by SOCAR from one of its appointed representatives to the Steering Committee and shall preside over meetings of the Steering Committee.



(d) The secretary to the Steering Committee shall be appointed by Contractor from one of its appointed representatives to the Steering Committee and shall be responsible for:



(i) the production of an agenda before each meeting, such agenda to be agreed between SOCAR and Contractor; and



(ii) the production and circulation of minutes following each meeting, which minutes shall be agreed between the representatives of SOCAR and Contractor who are the representatives authorised to cast the votes in the Steering Committee.



(e) Decisions of the Steering Committee shall require the affirmative vote of both SOCAR and Contractor.



(f) SOCAR and Contractor shall each be entitled to send advisers and experts to meetings of the Steering Committee. Unless the Steering Committee agrees, the cost of such advisors and experts in attending the meetings shall not be Cost Recoverable.



(g) A quorum of the Steering Committee shall consist of at least three quarters (3/4) of the representatives from each of SOCAR and Contractor, including the two (2) individuals who have been designated by SOCAR and Contractor, respectively, as authorised to cast votes (or their alternates).



(h) The Steering Committee will meet at least two (2) times in a Calendar Year. Meetings shall be held in Baku, unless



Page 23

otherwise agreed. In the event that SOCAR and Contractor agree, the Steering Committee can take decisions without holding an actual meeting; provided that in the event of a teleconference or video conference the quorum requirements set forth in Article 5.2(g) have been complied with and in the event of a meeting via exchange of letters or faxes, such letters and faxes are copied to all Parties. Such decisions shall be recorded in writing promptly thereafter and signed by the representatives of SOCAR and Contractor who are authorised to cast the respective votes of SOCAR and Contractor. Except in an emergency, all Parties shall be given not less than fifteen (15) days advance notice of each meeting, regardless of whether the meeting is in person, by teleconference, by letter, by fax or otherwise, so that each Party may have the opportunity to contribute to the decision-making process.



(i) SOCAR and Contractor shall each have the right to call additional meetings of the Steering Committee upon fifteen (15) days prior written notice to each other.



5.3 Annual Work Programmes and Budgets



(a) Not more than thirty (30) days following the formation of the Steering Committee and thereafter at least three (3) months before the beginning of each Calendar Year during the Development and Production Period, Contractor shall prepare and submit, or cause to be prepared and submitted, to the Steering Committee for approval an Annual Work Programme together with the related Budget in respect of the Petroleum Operations Contractor proposes to be carried out in such Calendar Year. The Steering Committee shall meet within thirty (30) days of receipt of the Annual Work Programme and Budget to consider same and any revisions thereto and to approve the Annual Work Programme and the Budget in its final form. It is agreed by SOCAR and Contractor that knowledge acquired as the work proceeds or



Page 24

from certain events may justify changes to the details of the Annual Work Program and Budget; thus Contractor may at any time propose to the Steering Committee an

amendment to the Annual Work Program and Budget. Except as provided in this Article 5.3 and in Article 5.4, Contractor shall not conduct any operations which deviate materially from the applicable Annual Work Program and Budget without the prior consent of the Steering Committee. If necessary to carry out an Annual Work Program, Contractor is authorized to make expenditures during the relevant Calendar Year that are in excess of the Budget adopted therefor so long as the aggregate of such excess expenditures does not exceed ten (10) percent of the Budget unless such expenditures exceeding ten (10) percent are approved by the Steering Committee, which approval shall not be withheld where the expenditures have been demonstrated to be reasonable and necessary. In accordance with the other provisions of this Agreement, after approval of an Annual Work Program, Contractor shall conduct the Petroleum Operations in accordance therewith.



(b) In the event the Annual Work Program and Budget has not been approved by the Steering Committee in the case of the first Annual Work Program and Budget within sixty (60) days of the formation of the Steering Committee and in the case of each subsequent Annual Work Program and Budget by the first day of the Calendar Year to which it relates, Contractor shall be entitled (but not obligated) to carry out Petroleum Operations in accordance with some or all of its proposed Annual Work Program and Budget until such time as the Annual Work Program and Budget is agreed by the Steering Committee or any dispute relating to the Annual Work Program and Budget has been resolved by reference to arbitration in accordance with the Arbitration Procedure.



As soon as agreement on an Annual Work Program and Budget is reached by the Steering Committee or the decision of the arbitrators is rendered, Contractor shall



25amend the then current and/or next following Annual Work Program and Budget, as appropriate, to conform with such agreement or decision; provided that Contractor shall not be obligated to undo work already performed, may complete any work in progress to the extent Contractor deems necessary and that all costs incurred by Contractor in performing Petroleum Operations under its proposed Annual Work Program and Budget shall be deemed to be Petroleum Costs subject to Cost Recovery under this Agreement. The foregoing notwithstanding, Contractor shall not be entitled to Cost Recovery of any costs incurred under any portions of the proposed Annual Work Program and Budget as identified in the written minutes of the Steering Committee meeting at which the proposed Annual Work Program and Budget was considered and which were not approved by the Steering Committee and for which the arbitration award is issued in favor of SOCAR; except that in all cases Contractor shall be entitled to Cost Recovery of the following items:



(i) ongoing commitments of Contractor, including contracts entered into prior to the initiation of any such arbitration; and



(ii) work Contractor considers necessary for the protection of the reservoir and equipment and facilities; and



(iii) work Contractor considers necessary for the protection of the environment, health and safety.



5.4 Emergency Measures



Notwithstanding any provision of this Agreement to the contrary, in the case of an accident or other emergency (or anticipated emergency), Contractor shall take all measures reasonably considered necessary by Contractor for the protection of life, health, the environment and property. The costs of taking such measures



26shall be included automatically as an approved addition to the then current Budget and shall be deemed to be Petroleum Costs subject to Cost Recovery under this Agreement, unless such accident or other emergency (or anticipated emergency) was the result of Contractor’s Willful Misconduct.



27ARTICLE 6



OPERATING COMPANY, PERSONNEL AND TRAINING



6.1 Operating Company



BP or an Affiliate of BP shall act as the Operating Company during the Exploration Period and the Additional Exploration Period and before the commencement of the Development and Production Period and shall be ready to commence operations in accordance with the terms of this Agreement after the Effective Date.



Upon approval of the Development Program, BP and SOA shall establish a non profit joint Operating Company equally owned by BP and SOA (or any of their Affiliates).



The Operating Company shall employ personnel seconded from the Contractor Parties, expatriate personnel and Azerbaijani citizens who shall work as an integrated team under the management of the Operating Company.



The Operating Company may be incorporated or created outside of the Republic of Azerbaijan but shall be registered to do business in the Republic of Azerbaijan in accordance with Azerbaijan law.



Contractor, upon the prior agreement of SOCAR, shall have the right, in the manner and in the cases defined in the joint operating agreement which the Contractor Parties must enter into promptly after the Effective Date (“Joint Operating Agreement”), from time

to time before the commencement of the Development and Production Period to substitute the Operating Company by appointing in writing another Operating Company and after the commencement of the Development and Production Period to substitute the joint Operating Company by appointing in writing another Operating Company, provided that such substitute Operating Company shall be an Affiliate of one of the Contractor Parties. The costs relating to any such substitution shall not be Cost Recoverable. Contractor Parties shall ensure the proper and orderly



28handover of responsibilities from an outgoing Operating Company to an incoming Operating Company.



6.2 Responsibilities of Operating Company



The responsibilities of the Operating Company shall be the management, co-ordination, implementation and conduct on behalf of Contractor of the day to day Petroleum Operations, and such other functions, as may be delegated to it from time to time by Contractor.



The Operating Company shall have, to the extent authorized by Contractor, the right to subcontract any day to day work required to implement any Annual Work Program.



6.3 Organisation



The Operating Company personnel shall be kept to the minimum practicable size, and shall include management personnel, technical professionals, operating and maintenance personnel and administrative personnel required to carry out the day to day Petroleum Operations on behalf of Contractor.



6.4 Decisions



Decisions regarding the conduct of Petroleum Operations shall be made by the Contractor Parties participating in voting at the Contractor’s management committee in accordance with the voting mechanism agreed among them in the Joint Operating Agreement, and the Parties agree that during the Development and Production Period the decisions of the Contractor’s management committee shall require the affirmative vote of the Contractor Parties owning collectively at least fifty five (55) percent of the Participating Interest under the Agreement and participating interest under the Joint Operating Agreement, provided that the Contractor Parties shall develop special provisions for decisions to be taken on the matters regarding the implementation of the work to be financed by the Other Contractor Parties only under Article 3.5 of this Agreement. SOA as a Contractor Party shall participate at all



29decision levels in the same way as the Other Contractor Parties, including but not limited to the Joint Operating Agreement, committees and/or sub-committees and the Contractor’s management committee.



6.5 Procedures

The Operating Company shall be free to adopt such policies, practices and procedures as it deems necessary for the conduct of Petroleum Operations in accordance with this Agreement.



6.6 Status of Operating Company

The Operating Company shall be entitled to all of the benefits, waivers, indemnities and exemptions accorded to the Contractor Parties under this Agreement. The Operating Company shall own no assets or equipment (though it shall have the right to freely use assets or equipment owned or used by the Contractor Parties in conducting Petroleum Operations on behalf of the Contractor Parties); shall act only as operator hereunder upon Contractor Parties’ instructions and directions; shall not be entitled to any share of Petroleum produced and shall neither make a profit nor incur a loss. The Operating Company shall record all financial flows or other transactions of the Contractor Parties as passing through to the Contractor Parties in accordance with this Agreement as though the Operating Company did not exist as a commercial entity, and for all purposes the amount of its Taxable Profit shall be zero (0).



6.7 Personnel

(a) Contractor and its Sub-contractors and Operating Company and its Sub-contractors shall be free to employ such personnel as in Contractor’s and its Sub-contractors’ and Operating Company’s and its Sub-contractors’ respective opinions are required for the purpose of carrying out Petroleum Operations.



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(b) Contractor shall require Operating Company to give preference, as far as is consistent with efficient operations, to employing citizens of the Republic of Azerbaijan in the performance of Petroleum Operations, provided that such citizens have the required knowledge, qualifications and experience to meet the requirements of the Operating Company. Such citizens shall be eligible for training in accordance with Article 6.8. With respect to the employment of citizens of the Republic of Azerbaijan, Contractor agrees as follows:



(i) the Operating Company shall provide SOCAR from time to time with a list showing the numbers and job specifications for citizens of the Republic of Azerbaijan which it estimates that it may require. In addition, the Operating Company shall require its Sub-contractors to provide SOCAR from time to time with a list showing the numbers and job specifications for employees that they estimate they may require;



(ii) SOCAR shall, within thirty (30) days of receipt of such list, provide the Operating Company and such Sub-contractors with a list of candidates recommended by SOCAR;



(iii) persons from the list provided by SOCAR shall enjoy a priority consideration pertaining to any other citizen of the Republic of Azerbaijan for employment by the Operating Company and the Sub-contractors if they meet the requirements of the Operating Company or such Sub-contractors;



(iv) in the event that vacant positions remain in the Operating Company or Sub-contractors’ organisations, SOCAR shall within two (2) weeks of receipt of vacant positions provide Operating Company or such Sub-contractors an additional list



Page 31

of candidates recommended by SOCAR and if vacant positions still remain the Operating Company or such Sub-contractors shall be entitled to fill these vacant positions with such citizens of the Republic of Azerbaijan as the Operating Company or such Sub-contractors choose;



(v) in the event that the candidates selected independently by the Operating Company and such Sub-contractors include SOCAR employees, then such persons shall be hired by the Operating Company or such Sub-contractors after consultation with SOCAR;



(vi) overall target manning levels of citizen employees of the Republic of Azerbaijan pertaining to Petroleum Operations shall be as follows:



Citizens of the

Republic of Azerbaijan



Prior to Commencement Date of

Commercial Production

Professionals 50%–70%

Non-professionals 80%



Upon Commencement Date of

Commercial Production

Professionals 80%

Non-professionals 90%



Five (5) years after Commencement

Date of Commercial Production

Professionals 90%

Non-professionals 95%



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(c) Subject to Article 6.7(b), Contractor, Operating Company and any Sub-contractors are hereby authorised and shall be free, throughout the term of this Agreement, to determine the number and selection of all employees to be hired by them in connection with the conduct of Petroleum Operations.



All citizens of the Republic of Azerbaijan hired by Contractor, the Operating Company and any Subcontractors shall be hired pursuant to written employment contracts, which shall specify the hours of work required of the employee, the compensation and benefits to be paid or furnished by the employer and all other terms of employment. Such employees may be located wherever Contractor, the Operating Company or Sub-contractors deem appropriate in connection with the Petroleum Operations in accordance with such written employment contracts entered into with them. Contractor, the Operating Company and Sub-contractors shall be free to implement recruitment, dismissal, performance review and incentive compensation programmes and practices (both with respect to foreign expatriate employees and citizens of the Republic of Azerbaijan) that are customary in international Petroleum operations and in Contractor’s, the Operating Company’s and Sub-contractor’s experience and judgement are best able to promote an efficient and motivated workforce.



6.8 Training



Contractor shall provide training (including retraining) for citizens of the Republic of Azerbaijan with respect to the Petroleum Operations. Expenditures by Contractor pursuant to this Article 6.8 shall be part of the relevant Annual Work Programme and Budget and shall be included as Petroleum Costs; however, the aforesaid expenditures less than two hundred thousand (200,000) Dollars in any year shall not be Cost Recoverable. Expenditures in excess of



Page 33

two hundred thousand (200,000) Dollars in any year shall be included as Petroleum Costs and shall be Cost Recoverable. The threshold value of two hundred thousand (200,000) Dollars shall be escalated annually in line with increases in the GDP Deflator Index.



Page 34ARTICLE 7



REPORTS AND ACCESS TO PETROLEUM OPERATIONS



7.1 Reports and Records

Contractor shall keep and submit reports and records of Petroleum Operations as follows:



(a) Contractor shall record, in an original or reproducible form of good quality and on tape or other media where relevant, all geological and geophysical information and data relating to the Contract Area obtained by Contractor in the course of conducting Petroleum Operations thereon and shall deliver a copy of all such information and data, including the interpretation thereof and logs and records of wells, and any other information obtained by Contractor consistent with generally accepted international Petroleum industry standards, to SOCAR as soon as practicable after the same has come into the possession of Contractor.



(b) Contractor shall keep logs and records of the drilling, deepening, plugging or abandonment of wells consistent with generally accepted international Petroleum industry practice and containing particulars of:



(i) the strata through which the well was drilled;



(ii) the casing, drill pipe, tubing and down-hole equipment run in the well and modifications and alterations thereof;



(iii) Petroleum, water and valuable mineral resources encountered;



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and any other information consistent with generally accepted international Petroleum industry standards.



(c) The information required by Article 7.1(b) above shall be submitted to SOCAR in the form of well completion reports within ninety (90) days from completion of the well in question.



(d) Contractor may if necessary remove from the Republic of Azerbaijan, for the purpose of laboratory examination or analysis, petrological specimens (including cores and cuttings) or samples of Petroleum found in the Contract Area and characteristic samples of the strata or water encountered in a well and seismic data on tape or other media. Upon request, Contractor will provide such specimens and samples to SOCAR.



(e) Contractor shall supply to SOCAR:



(i) daily reports on drilling operations and weekly reports on field geophysical surveys as soon as they are available;



(ii) within fifteen (15) days after the end of each Calendar Quarter, a report on the progress of Petroleum Operations during the preceding Calendar Quarter covering:

(1) description of the Petroleum Operations carried out and the factual information obtained, including Petroleum production data from the Contract Area overall and on a well by well basis; and



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(2) a description of the area in which Contractor has operated; and



(3) a map indicating the location of all wells and other Petroleum Operations;



(iii) within three (3) months of the end of each Calendar Year, an annual report summarizing the matters specified in paragraph (ii) above for the preceding Calendar Year;



(iv) reports on completion of major elements of Petroleum Operations or unforeseen events and other reports requested by the Steering Committee. Additionally, Contractor will inform SOCAR of all discoveries other than of Petroleum, such as discoveries of non-Petroleum natural resources.



The daily and weekly reports required to be submitted to SOCAR pursuant to Article 7.1(e)(i) shall be submitted in the original language of the reports and all other reports and records required to be submitted to SOCAR pursuant to this Article 7.1 shall be submitted to SOCAR in the English and Azerbaijani languages.



7.2 Access to Petroleum Operations



Duly authorized representatives of SOCAR may on not less than three (3) days notice in writing inspect at justified intervals, and at reasonable times work, facilities, equipment and materials relating to the Petroleum Operations, provided that such inspection shall not unreasonably interfere with or delay the conduct of Petroleum Operations. ARTICLE 8



USE OF LAND AND SEA BEDS



Subject to Article 28.2 of this Agreement, SOCAR shall make available to Contractor, at no cost to Contractor, the use of any land and sea beds under its control as necessary to carry out Petroleum Operations throughout the term of the Agreement, (provided such use by Contractor does not interfere unreasonably with SOCAR’s use thereof and further provided that if such use by Contractor results in expense for SOCAR, Contractor shall reimburse SOCAR for such expense, without creating any profit directly or indirectly for SOCAR), and SOCAR within the full limits of its authority shall use its best lawful endeavours to make available, at no cost to Contractor, all other land owned by the State and located beyond the land which SOCAR utilises legally and sea beds necessary to carry out Petroleum Operations including, but not limited to, the construction, laying, operating and maintaining, both onshore and offshore, of pipelines, cables and equipment. Contractor shall have the right to construct and maintain, above and below any such lands and sea beds, the facilities necessary to carry out Petroleum Operations. Land allocation and location of facilities constructed by Contractor on such land shall be in accordance with Azerbaijan legislation regarding land use restrictions, except as may be modified by this Agreement.



Page 38ARTICLE 9



USE OF FACILITIES



9.1 SOCAR Facilities



Contractor shall have the right to use, at no cost to Contractor, predrilled wells in the Contract Area at the Effective Date if deemed by Contractor to be necessary for the conduct of Petroleum Operations. In the event that Contractor materially refurbishes, upgrades or improves any facilities that are under SOCAR’s direct or indirect ownership or control, including but not limited to infrastructure, vessels, rigs, means of transportation, supply bases, warehouses, port facilities, then SOCAR shall ensure that Contractor has prior right to use such facilities as may be necessary for the purpose of carrying out Petroleum Operations.



9.2 SOCAR Assistance



(a) SOCAR shall within the full limits of its authority use its best lawful endeavours with respect to Governmental Authorities and Third Parties to provide Contractor access for its share of Petroleum to all necessary transportation, treatment and export facilities and infrastructure in the Republic of Azerbaijan on terms no less favourable to Contractor than those granted to, or agreed with, any other bona fide arm’s length user of such facilities and infrastructure.



(b) SOCAR shall within the full limits of its authority use all lawful reasonable endeavours, with respect to

Governmental Authorities and Third Parties, to assist Contractor in obtaining such rights, privileges, authorisations, approvals and other agreements from authorities and jurisdictions, outside the territory of the Republic of Azerbaijan as Contractor shall reasonably deem necessary for Petroleum Operations and/or as may be required by such authorities and jurisdictions, but shall not



39be responsible if such rights, privileges, authorisations and approvals are not obtained. Such agreements may include, but need not be limited to, such matters as export pipeline rights of way and operation rights, permits and undertakings with respect to the transhipment, storage or staging of Petroleum produced and saved from the Contract Area, materials, equipment and other supplies destined to or from the territory of the Republic of Azerbaijan, and exemptions from national, local and other taxes, transit fees, and other fees and charges on Petroleum Operations being conducted in such other jurisdictions.



(c) SOCAR shall within the full limits of its authority use all reasonable lawful endeavours with respect to Governmental Authorities and Third Parties, and shall be obligated with respect to its Affiliates, joint ventures or enterprises in which it has an interest and the right to control, manage or direct the action of such companies, ventures or enterprises, to ensure that Contractor has access to inter alia onshore construction and fabrication facilities, offshore infrastructures, supply bases and vessels, warehousing, goods, services and means of transportation in the Republic of Azerbaijan provided that those items are not subject to prior and/or existing obligations to Third Parties and that Contractor’s use thereof does not interfere with the existing operations of SOCAR and/or any Third Party. As used herein, “control” shall mean the ownership of more than fifty (50) percent of the shares authorised to vote at a general meeting of shareholders, or the ability to pass or procure the passing of a decision (whether by casting of votes or otherwise) at a general meeting of shareholders, or at any meeting of the executive or management body, of the company, venture or enterprise. Such access shall be:



40(i) with respect to facilities and services of Third Parties, on terms which are no less favourable to Contractor than those granted or agreed with any other bona fide arm’s length user of such facilities and services; and



(ii) with respect to facilities and services of SOCAR and such Affiliates, joint ventures or enterprises in which SOCAR has an interest and the right to control, manage or direct the action thereof, at rates commensurate with the quality and efficiency of such facilities and services, which rates shall be the same as are available to SOCAR and/or such Affiliates, joint ventures or enterprises and as regard other terms no less favourable to Contractor than those granted to or agreed with SOCAR and/or such Affiliates, joint ventures or enterprises.



9.3 Contractor Facilities



Contractor shall be responsible for the maintenance and repair of all facilities controlled and operated by Contractor in connection with the Petroleum Operations (“Contractor Facilities”). Fees from Third Parties’ access to Contractor Facilities shall be credited to the Petroleum Operations Account. SOCAR shall have the right to use excess capacity in Contractor Facilities provided such use does not interfere with or adversely affect Petroleum Operations. Third Parties may use such excess capacity on terms agreed with Contractor. Prior to Zero Balance the priority of such use of Contractor Facilities shall be first Contractor, second Third Parties, and finally SOCAR. SOCAR shall pay a mutually agreed fee for such use to be credited to the Petroleum Operations Account. After Zero Balance the priority shall be first Contractor, second SOCAR and finally Third Parties. SOCAR’s use after Zero Balance shall be free of charge, except that maintenance of Contractor Facilities, for



Page 41

the time being not used by Contractor and being utilised exclusively by SOCAR, shall be on terms to be mutually agreed. Notwithstanding anything to the contrary in this Agreement, Contractor shall have the right to dispose of equipment and facilities, which are either obsolete or are nearing the end of their useful economic life. Contractor shall notify SOCAR of its intention to dispose of any such equipment and facilities (except in the case of fixed assets to which the provisions of Article 14.2(d) shall apply). Unless SOCAR elects, within thirty (30) days to assume responsibility for and take delivery thereof, Contractor shall be free to dispose of any such equipment and facilities at the best price obtainable. Funds from such sales prior to Zero Balance will be credited to the Petroleum Operations Account and after Zero Balance will be credited to SOCAR’s account. Notwithstanding any provision herein to the contrary, SOCAR and Contractor shall have equal priority to capacity in Contractor Facilities to transport Petroleum produced from the Contract Area in proportion to their rights to take Petroleum under this Agreement.



Page 42

ARTICLE 10



EARLY PETROLEUM PRODUCTION



If before the end of the Exploration Period or the Additional Exploration Period (which period Contractor shall have the right to proceed to in accordance with Article 4.3) Contractor submits a written Notice of Discovery and its Commerciality and Contractor’s wish to proceed to early Petroleum production, Contractor shall submit a development proposal for early Petroleum production for SOCAR’s approval. Within sixty (60) days of receipt of such proposal, SOCAR shall notify Contractor of its approval or disapproval of the development proposal. Irrespective of SOCAR’s decision relating to Contractor’s development proposal for early Petroleum production, Contractor shall not be free from its obligation to submit to SOCAR the Development Programme and perform all other procedures, provided for in Articles 4.6. Approval of the development proposal for early Petroleum production and its commencement shall not free Contractor from its obligations during the Exploration Period and Additional Exploration Period and corresponding consequences of a partial or full failure to fulfil them.



Page 43

ARTICLE 11



CONTRACTOR’S RECOVERY OF PETROLEUM COSTS AND PRODUCTION SHARING



11.1 Use of Petroleum for Petroleum Operations



Contractor shall have the right to use free of charge Petroleum produced from the Contract Area for Petroleum Operations for fuel, artificial lift, pipeline fill and pack (up to the Delivery Point), and reinjection to preserve the pressure of Petroleum reservoirs in the

Contract Area. Contractor shall endeavour to minimise use of Petroleum for Petroleum Operations. For planning purposes Contractor shall provide in the Annual Work Programme an estimate of the amount of Petroleum it anticipates will be used for the optimum implementation of Petroleum Operations. If during the implementation of the Annual Work Programme Contractor estimates that it will use more than ten (10) percent over and above the amount estimated, Contractor shall submit its proposals for the revised estimate to the Steering Committee for its review and approval.



11.2 Cost Recovery



(a) Contractor shall be entitled to the recovery of Petroleum Costs from Total Production as follows:



(i) All Operating Costs shall first be recovered;



(ii) All Capital Costs shall then be recovered from a

maximum of fifty (50) percent of Crude Oil and fifty (50) percent of Non-associated Natural Gas remaining out of Total Production after deduction of Crude Oil and Non-associated Natural Gas required to recover Contractor’s Operating Costs



44(“Capital Cost Recovery Petroleum”).



(b) Accounting of Petroleum Costs to be recovered in

accordance with Article 11.2(a) shall be in a manner

consistent with the Accounting Procedure.



11.3 Transfer of Title to Cost Recovery Petroleum



Cost Recovery by Contractor shall be achieved by transferring to Contractor title at the Delivery Point to quantities of Crude Oil and Non-associated Natural Gas from the Contract Area of equivalent value (as determined pursuant to Articles 13.1) to the Petroleum

Costs to be recovered by Contractor in accordance with Article 11.2 (“Cost Recovery Petroleum”).



11.4 Quarterly Accounting



(a) Cost Recovery shall be calculated on a Calendar Quarter basis.



(b) (i) At the end of each Calendar Quarter, Finance Costs shall be applied to any unrecovered Capital Costs and/or Operating Costs, including any unrecovered Capital Costs and Operating Costs carried forward from any previous Calendar Quarter, which have not been recovered in such current Calendar Quarter;



(ii) Finance Costs in respect of unrecovered Operating Costs for each Calendar Quarter shall, at the end of each Calendar Quarter, be aggregated with the unrecovered balance of Operating Costs at that date and thereafter be recovered as Operating Costs;



45(iii) Finance Costs in respect of unrecovered Capital

Costs for each Calendar Quarter shall, at the end of each Calendar Quarter, be aggregated with the unrecovered balance of Capital Costs at that date and thereafter be recovered as Capital Costs.



(c) Notwithstanding the above, Finance Costs shall not be applied to any unrecovered Petroleum Costs prior to the approval of the Development Programme.



(d) Contractor shall have the continuing right to carry over to subsequent Calendar Quarters accumulated Petroleum Costs which are recoverable but which have not been recovered in previous Calendar Quarters.



(e) To the extent that the unrecovered accumulated Capital Costs and Operating Costs incurred or carried forward in any Calendar Quarter are less than the value of the Capital Cost Recovery Petroleum available for Cost Recovery purposes during such Calendar Quarter, then the unused Capital Cost Recovery Petroleum shall be treated as additional Profit Petroleum.



11.5 Profit Petroleum



The balance of Total Production remaining after deducting the quantities of Crude Oil and Non-associated Natural Gas necessary to enable recovery of Operating Costs and Capital Costs (as provided in Articles 11.2 and 11.4 above) (“Profit Petroleum”) shall be calculated on a Calendar Quarter basis and, subject to the provisions of Article 19.5, shall be shared between SOCAR and Contractor according to the R Factor model as follows. Profit Petroleum Sharing Table



R Factor | SOCAR Share (%) | Contractor Share (%)

0.00 < R < 1.00 | 45.0 | 55.0

1.00 ≤ R < 2.00 | 55.0 | 45.0

2.00 ≤ R < 3.00 | 70.0 | 30.0

3.00 ≤ R < 4.00 | 80.0 | 20.0

R ≥ 4.00 | 90.0 | 10.0



R Factor is determined as Contractor's cumulative Capital Costs recovered, including interest accrued, plus Contractor's profit, divided by cumulative Capital costs.



Beginning at the Effective Date the value of the R factor in respect to Calendar Quarter (n+1) shall be determined at the end of Calendar Quarter (n) compounded, and accumulated in accordance with the procedure below:



R Factor (n+1) = (∑(CCRn+FCn+PPLn))/(∑CCSn)



where:



CCRn means Contractor's Capital Costs recovered as of the end of the nth Calendar Quarter;



FCn means Contractor's Finance Costs recovered as of the end of the nth Calendar Quarter;



CCSn means Contractor's Capital Costs incurred as of the end of the nth Calendar Quarter;



PPLn means of the value of Contractor's share of Profit Petroleum lifted as of the end of the nth Calendar Quarter;



n means the index number of the relevant Calender Quarter;



47Σ means the cumulative arithmetic sum of the items to the right of the Σ symbol up to and including Calendar Quarter (n).



11.6 Transfer of Title to Profit Petroleum



Title to Contractor’s share of Profit Petroleum shall be out of Crude Oil and Non-associated Natural Gas and shall be transferred to Contractor at the Delivery Point.



Page 48

ARTICLE 12

TAXATION

12.1 General Provisions



(a) It is a condition to the obligations of each Contractor Party under this Agreement that, except for the Profit Tax obligation described in this Article 12, the Contractor Parties shall not be subject to any Taxes of any nature whatsoever arising from or related, directly or indirectly, to Hydrocarbon Activities.

(b) It is hereby acknowledged that Double Tax Treaties shall have effect to give relief from Taxes.

(c) For the purposes of this Article 12 the following expressions shall have the meanings ascribed to them below:

(i) “State Budget” means consolidated Republican and local budgets or such other budgets as may be created by Governmental Authority pursuant to the applicable law of the Republic of Azerbaijan for the purposes of collection of Taxes.

(ii) “Fixed Assets” shall include all assets which it is usual to include in the Contractor Party's tax balance sheet under the heading of fixed or intangible asset, the total value of each of which exceeds a limit and has an anticipated useful life of more than one (1) year. This limit for the Calendar Year in which this Agreement is executed shall be five thousand (5,000) Dollars. For each subsequent Calendar Year, the limit shall be increased by four (4) percent over the limit which applied in the previous Calendar Year.



Page 49

(iii) “Hydrocarbon Activities” means all Petroleum Operations carried out in connection with this Agreement by Contractor Party, directly or through the Operating Company, whether such activities are performed in the Republic of Azerbaijan or elsewhere. Each Contractor Party shall maintain separate books and accounts for the above Hydrocarbon Activities.



(iv) “Tax Authority” means the Ministry of Taxes of the Republic of Azerbaijan or any successor thereto appointed by the Ministry of Taxes of the Republic of Azerbaijan.



(v) “Fraud” means any illegitimate and repeated action or omission of the Contractor Party expressed in deliberate, intended and premeditated cases of failures for the purpose of evasion from Taxes by means of concealing information on Taxes or prevention of submission or collection thereof.



(vi) “Profit Tax Rate” is a rate of twenty (20) percent which is the applied Profit Tax Rate existing in Republic of Azerbaijan on the day of execution of this Agreement and which shall remain fixed for the entire term of this Agreement.



12.2 Profit Tax



(a) Each Contractor Party shall be severally liable for Profit Tax in respect of its Hydrocarbon Activities in accordance with the legislation which is generally applicable and existing in the Republic of Azerbaijan on the day of execution of this Agreement and as amended by the provisions of this Agreement. In the event of any conflict



Page 50

between the provisions of such internal legislation of the Republic of Azerbaijan and those of this Agreement, the provisions of this Agreement shall govern. Each Contractor Party shall be liable for payment of the Profit Tax in connection with its business activities in the Republic of Azerbaijan that are not related to Hydrocarbon Activities, under the applicable laws and normative acts of the Republic of Azerbaijan.



(b) It is specifically acknowledged that the provisions of this Article 12 shall apply individually to each Contractor Party and regulate individual liability of every Contractor Party for the Profit Tax. Profit Tax shall be based on such Contractor Party's separate share of the items of Sales Income, Other Income and in accordance with provisions related to Deductions, as written in separate books and accounts as provided in Article 12.1(c)(iii).



(c) SOCAR shall in respect of each Calendar Year pay out of its funds on behalf and in the name of each Contractor Party such Contractor Party's Profit Tax to the State Budget in Dollars including estimated Profit Tax, and any interest, fines or penalties with respect thereto which is attributable to the failure to pay any such Profit Tax or estimated Profit Tax when it is due (except interest resulting from a Contractor Party's failure to prepare a required return by the due date therefor). SOCAR hereby guarantees to Contractor Parties that payment of each Contractor Party's Profit Tax to the State Budget including any interest, fines or penalties as aforesaid, shall have first priority upon the proceeds of sale of Petroleum to which SOCAR is entitled under this Agreement. SOCAR shall cause the Tax Authority to issue to each Contractor Party official receipts as provided for in Article 12.3(f). Upon request of any Contractor Party, SOCAR shall provide to such Contractor Party within ten (10) days of such request a document (in a form acceptable to all Contractor Parties) confirming actual transfer of funds to the State Budget in satisfaction of SOCAR's obligation as described in the preceding sentence. For purposes of



Page 51

computing the liability of SOCAR for Taxes assessed on SOCAR's income or profits, SOCAR shall not be entitled to credit against its tax liability the Profit Tax paid by SOCAR on behalf and in the name of each of the Contractor Parties pursuant to this Article 12.2(c). SOCAR shall be entitled to receive and retain any Profit Tax refunds (other than refunds of Profit Tax and penalty sanctions paid by a Contractor Party) on behalf and in the name of each of the Contractor Parties and shall provide to the appropriate Contractor Parties a statement showing that any such refund has been received.



(d) (i) On not less than thirty (30) days prior written notice each Contractor Party shall have the right at any time to have the performance by SOCAR of obligations on payment by SOCAR of that Contractor Party's Profit Tax liability from funds generated by SOCAR's share of Profit Petroleum for any Calendar Year audited by a firm of internationally recognised independent accountants selected by the Contractor Party. Contractor Party shall bear the costs of such audit and such cost shall not be Cost Recoverable. Such audit may not relate to a Calendar Year, which has been finally and conclusively determined in accordance with the procedure set out in Article 12.3(d). Such audit shall be conducted in such a fashion that it does not cause unreasonable inconvenience to SOCAR. SOCAR shall accord to the auditor reasonable access to such evidence as the auditor may require to satisfy the auditor as to full payment of Contractor Party's Profit Tax for any Calendar Year from funds generated by SOCAR's share of Profit Petroleum.



(ii) It is specifically acknowledged that Profit Petroleum sharing as set out in Article 11.5 shall be so determined to include Contractor Party's Profit Tax in SOCAR's share of Profit Petroleum from



Page 52

which SOCAR must pay such Contractor Profit

Tax to the State Budget as provided in Article

12.2(c). Therefore, the payment of the Profit Tax

by SOCAR on behalf and in the name of the

Contractor Party under Article 12.2(c) shall be

treated by SOCAR and the Tax Authority as having

been paid by the Contractor and as a complete

satisfaction and release of the Contractor's

obligation to pay Profit Tax related to its

Hydrocarbon Activities as set forth in Articles

12.2(a) and 12.2(b). Notwithstanding Contractor's

obligation to pay Profit Tax, the Tax Authority

shall look solely to SOCAR for the payment of the

Contractor's Profit Tax, unless Contractor elects to

make any Profit Tax payments according to the

provisions of Article 12.2(d)(iii).



(iii) Nevertheless, if SOCAR fails to make timely

payments of the Profit Tax, including estimated

Profit Tax, on behalf of the Contractor Parties to

the State Budget as provided for in Article 12.2(c)

or becomes so unable from time to time, each

Contractor Party shall have the right to decide to

pay the Profit Tax, including estimated Profit Tax,

any interest, fines or penalties with respect thereto,

individually directly to the State Budget. In such

case, the Contractor Party's future entitlement to lift

Profit Petroleum shall be increased, and SOCAR's

entitlement shall be correspondingly diminished, by

a volume of equivalent value to such amount of

Profit Tax, including estimated Profit Tax, any

interest, fines or penalties with respect thereto, paid

by the Contractor Party. In the event that the nonpayment

by SOCAR of a Contractor Party's Profit

Tax, including estimated Profit Tax, continues for a

period exceeding thirty (30) days from the due date

for payment, the Contractor Party shall have the

option of discharging its liability for all futurepayments of Profit Tax, including estimated Profit Tax, and there shall be made a special agreement for the reestablishment of the initial economic equilibrium between the Parties, and, thereupon, SOCAR and such Contractor Party shall notify the Tax Authority of the terms of a transfer to such Contractor Party of the liability to pay the Profit Tax as provided for in Article 12.2(c).



(e) Taxable Profit, or if such sum is negative Taxable Loss, of a Contractor Party for a Calendar Year shall be equal to the sum of the Sales Income, the Other Income received by the Contractor Party during the Calendar Year and Profit Tax Gross Up less Deductions. The terms Taxable Profit, Taxable Loss, Sales Income, Other Income, Profit Tax Gross Up and Deductions shall have the meaning ascribed to them in this Article 12.2.



(f) Taxable Losses shall be carried forward to the next Calendar Year and set off against any available Taxable Profit in that Calendar Year and Taxable Losses shall be reduced accordingly. Any balance of Taxable Losses not so set off in that Calendar Year shall be carried forward without limitation to future Calendar Years until fully set off against Taxable Profit.



(g) Taxable Profit as reduced by Taxable Losses brought forward, shall be subject to Profit Tax at the Profit Tax Rate.



(h) Sales Income shall be defined as the amount of income derived during the Calendar Year by the Contractor Party from sales of Petroleum produced in the conduct of Hydrocarbon Activities. In the event such Petroleum is exchanged or swapped, then Sales Income shall be defined as the amount of income derived during the Calendar Year by such Contractor Party from sales of the Petroleum



Page 54

received in the exchange or swap. For purposes of this Article 12.2(h), Sales Income shall be determined by applying, in the case of arm's length sales (as defined in Article 13.1(e)(v)), the actual price realised by such Contractor Party, and, in the case of arm's length sales, the principles of valuation as set out in Article 13.1 for such non arm's length sales.



(i) Other Income shall be defined as any amounts of cash received by a Contractor Party in the carrying on of Hydrocarbon Activities and such amounts shall include all Other Income received by the Operating Company and allocated to the Contractor Party under Article 6.6, including but not limited to the following:

(i) insurance proceeds;

(ii) realised exchange gains;

(iii) amounts received under Articles 14.2(d) and (e) from the Abandonment Fund;

(iv) amounts received under Article 14.2(h) for distributions of excess funds in the Abandonment Fund;

(v) interest income;

(vi) amounts received from suppliers, manufacturers or their agents in connection with defective materials and equipment;

(vii) amounts received for the use of facilities or intellectual property, compensation for services, sales of materials or charter hire;



Page 55

(viii) refunds of Profit Tax originally paid by SOCAR, and refunded to a Contractor Party, in the event SOCAR is not compensated by such Contractor Party. SOCAR shall be entitled to deduct such amount of Profit Tax in computing its own taxable profit.



Provided, however, Other Income shall not include the following amounts received by a Contractor Party:



(1) amounts received from sales of Petroleum;

(2) except as otherwise provided in Articles 12.2 (n) and (o), amounts received from sales of Fixed Assets;

(3) amounts received as loans, or funds contributed, to the Contractor Party;

(4) amounts received from sales of any of the Contractor Party's rights and obligations arising under this Agreement;

(5) amounts received as refunds of Taxes (except as provided in Article 12.2(i)(viii) above) or as dividends received by a Contractor Party from an Affiliate of such Contractor Party;

(6) amounts received in reimbursement of or otherwise in connection with expenditures incurred by a Contractor Party (or an Affiliate thereof) in excess of the amounts of such expenditures that have been treated as Deductions by the Contractor Party for purposes of computing Taxable Profit or Taxable Loss (in which case the amounts of any such excess



Page 56

shall not thereafter be treated as Deductions by the Contractor Party for such purposes and corresponding adjustments shall be made to the balance in Article 12.2(m));



(7) amounts received which are not freely at the disposal of and do not increase the wealth of the Contractor Party;



(8) income which was before subject to Profit Tax.



(j) Profit Tax Gross Up shall be defined as an amount equal to the total amount of a Contractor Party's Profit Tax liability for a Calendar Year which is payable on behalf of the Contractor Party by SOCAR pursuant to Article 12.2(c) above; such Profit Tax liability is equal to the value of the Profit Tax Rate multiplied by Contractor Party's Taxable Profit for such Calendar Year. This Article 12.2(j) shall be used to calculate the tax SOCAR shall pay on behalf of the Contractor Party. If SOCAR fails to pay such Profit Tax and the Contractor Party pays such Profit Tax instead of SOCAR, then Profit Tax Gross Up shall equal to zero (0).



(k) For purposes of determining the amount of the Taxable Profit or Taxable Loss of a Contractor Party for a Calendar Year, Deductions shall include all costs documentary supported and incurred by the Contractor Party in accordance with the practice in connection with the conduct of Hydrocarbon Activities and such amount shall include all Deductions incurred by the Operating Company and allocated to the Contractor Party under Article 6.6, whether incurred in the Republic of Azerbaijan or elsewhere, including but not limited to the following:



(i) the full amount of gross wages, salaries, and other amounts charged to all employees of the Contractor

Page 57

Party together with all costs incurred in connection with the provision of accommodation, food, public utilities, children's education, and travel to and from home country for employee and family; and



(ii) all costs of state social insurance of the Republic of Azerbaijan, including, but not limited to contributions to the pension fund, social insurance fund and medical insurance fund and all the other social payments for the employees; and



(iii) exploration and appraisal costs related to the Contract Area; and



(iv) costs associated with drilling wells (excluding the costs of any item of equipment or capital asset which is usually salvaged in accordance with practices generally accepted and recognised in the international Petroleum industry); and



(v) costs of transportation of Petroleum to the Point of Sale and of marketing, including without limitation pipeline tariffs, commissions and brokerages; and



(vi) payments made under a lease agreement for the current year of the lease; and



(vii) insurance costs; and



(viii) personnel training costs; and



(ix) costs connected with the activities of the offices or other places of business of each Contractor Party including management, research and development,



Page 58

and general administration expenses related to the Contract Area; and



(x) the cost of any item of equipment or asset which is not a Fixed Asset; and



(xi) amounts of interest, fees and charges paid in respect of any debt incurred in carrying out the Hydrocarbon Activities and any refinancing of such debts, excluding (1) in the case of Affiliate debt, interest in excess of a rate which would have been agreed upon between independent parties in similar circumstances, and (2) additional interest which becomes payable because the debt is repaid after its due date for repayment; and



(xii) an allocable portion covering costs of general administrative support provided by a Contractor Party's Affiliates outside of the Republic of Azerbaijan or by SOA and its Affiliates (in accordance with paragraph 2.14 of the Accounting Procedure) which results in an indirect benefit to Hydrocarbon Activities. Such support will include the services and related office costs of personnel performing administrative, legal, treasury, tax and employee relations, services, provision of expertise and other non technical functions which cannot be specifically attributed to particular projects. The allocable portion of such costs with respect to this Agreement for each Contractor Party for the Calendar Year shall be equal to the amount determined using the following formula:

a = (b/c) d

where:



Page 59 a = the allocable portion for a Contractor Party for

the Calendar Year;



b = the percentage Participating Interest of that

Contractor Party at the end of the Calendar Year;



c = the sum of the percentage Participating Interests

of the Contractor Parties at the end of the

Calendar Year; and



d = the sum of the general and administrative overhead

of the Contractor Parties for the Calendar Year.



The sum of the general and administrative overhead of

the Contractor Parties for the Calendar Year shall be

the amount determined using the following formula:



d = w + x + y + z



where:



d = the sum of the general and administrative overhead

of the Contractor Parties for the Calendar Year;



w = three (3) percent of the sum of the Contractor

Parties Capital Costs for the Calendar Year, if

any, up to fifteen million (15,000,000) Dollars;



x = two (2) percent of the sum of the Contractor

Parties Capital Costs for the Calendar Year from

fifteen million (15,000,000) Dollars to thirty

(30,000,000) million Dollars, if any;











60 y = one (1) percent of the sum of the

Contractor Parties' Capital Costs

for the Calendar Year in excess of

thirty million (30,000,000)

Dollars, if any; and



z = one point five (1.5) percent of the

sum of the Contractor Parties'

Operating Costs for the Calendar

Year; and



(xiii) payments into the Abandonment Fund; and



(xiv) losses of materials or assets resulting from

destruction or damage, assets which are

renounced or abandoned during the Calendar Year,

bad debts and payments made to Third Parties as

compensation for damage; and



(xv) any other losses, including realized exchange

losses, or charges directly related to

Hydrocarbon Activities; and



(xvi) other expenditures which the Contractor Party

incurs in carrying out Hydrocarbon Activities;

and



(xvii) amounts stipulated in Article 28.2; and



(xviii) incidental costs incurred for the acquisition or

occupation of land in connection with

Hydrocarbon Activities; and



(xix) liabilities and related costs charged to the

Contractor Party which are in excess of such

Contractor Party's Participating Interest share

of such liabilities and related costs and which

shall only be entered in the books and accounts

of such Contractor Party (provided that in such

case, a Contractor Party holding the

Participating Interest associated with such

financial liabilities and related costs shall

not be entitled to include Deductions







61 into the same amount); and



(xx) amortisation calculated as hereinafter

provided in Article 12.2(1).



(1) (i) Amortisation Deductions shall be calculated as

follows:



(aa) Fixed Assets which twenty five (25)

are not described percent per Calendar

in (bb) or (cc) Year declining

below balance basis



(bb) Bonus payments ten (10) percent per

referred to in Calendar Year

Article 28.1 straight line basis



(cc) Office buildings, two point five (2.5)

warehouses and percent per Calendar

similar Year straight line

constructions basis

("Buildings")



The amount of amortisation for expenditure on a

Fixed Asset shall be computed on the cost of the

Fixed Asset exclusive of Value Added Tax (VAT)

on goods purchased in the Republic of

Azerbaijan. Any item which is treated as

Deduction under Article 12.2(k) shall not be

amortised under Article 12.2(1).



(ii) All expenditures on Fixed Assets described in

Article 12.2(l)(i)(aa) incurred during the

Calendar Year shall be deemed to have been

incurred on first (1st) July with the result

that fifty (50) percent of the expenditure shall

be added to the balance of the unamortised

amounts brought forward from the preceding

Calendar Year. The balance shall then be reduced

by any amounts received from the disposal of

Fixed Assets to give an adjusted balance



62 ("Adjusted Balance"), which will then be amortised

as follows:



Balance brought forward from

preceding Calendar Year x



Add fifty (50) percent of the expenditure

incurred on Fixed Assets during Calendar Year x



Less the full amount of the actual proceeds

from sales of Fixed Assets during Calendar Year (x)



Adjusted Balance x



Less amortisation:

twenty five (25) percent of the Adjusted Balance (x)



Add excluded fifty (50) percent balance of

expenditure incurred on Fixed Assets

during the Calendar Year x



Balance to carry forward to following

Calendar Year x



(iii) If in any Calendar Year, all Fixed Assets in the

Republic of Azerbaijan used in Hydrocarbon

Activities for the purposes of this Agreement are

disposed of (including but not limited to a

transfer pursuant to Article 14) then:



(aa) if the Adjusted Balance plus the "excluded

fifty (50) percent balance of expenditure

incurred on Fixed Assets during the Calendar

Year" is positive, the full amount shall be

treated as a Deduction in that Calendar Year,

or







63









(bb) if the Adjusted Balance plus the "excluded fifty

(50) percent balance of the expenditure incurred

on Fixed Assets during the Calendar Year" is

negative, the full amount shall be treated as

Other Income in that Calendar Year.



(iv) There shall be treated as Other Income or Deductions

the amount of gains or losses recognized by a

Contractor Party during the Calendar Year from the

sale, disposition or abandonment ("Disposition") of a

Building computed as follows:



Proceeds (if any) from Building Disposition x



Less Adjusted Basis of Building (x)



Gain/(Loss) on Building Disposition x



The Adjusted Basis of such Building shall be

calculated as follows:



Original cost of the Building x



Add cost of capitalized improvements x



Less accumulated amortisation Deductions (x)



Adjusted Basis of Building x



(m) For purposes of computing a Contractor Party's

Taxable Profit or Taxable Loss, all costs incurred by

the Contractor Party in connection with Hydrocarbon

Activities (including but not limited to costs

incurred directly or indirectly in connection with

technical work in the Republic of





64

Azerbaijan or elsewhere and costs incurred by

representative offices in the Republic of Azerbaijan

of the Contractor Party) which were incurred prior

to the Effective Date shall be deemed to have been

incurred on such date. Notwithstanding the

foregoing, direct or indirect costs of conducting

the negotiation of this Agreement and in supporting

medical, cultural or charitable activities shall not

be included in computing the Contractor Party's

Taxable Profit or Taxable Loss.





(n) A Contractor Party has the right to sell or transfer

any Fixed Assets which it owns at market prices

without regard to book value of the Fixed Assets.



(o) Should any Contractor Party assign all or any part

of its Participating Interest in the Agreement, the

assigning Contractor Party shall have the option to

elect to have the assignee treat as Deductions for

the Calendar Year in which the assignment occurs

all, or a proportional part if only part is

assigned, of the Taxable Loss, if any, of the

assignor Contractor Party for such Calendar Year.



12.3 Profit Tax Accounting and Returns



(a) Each Contractor Party shall:



(i) maintain its tax books and records, and

compute its Taxable Profit and Taxable

Loss, exclusively in Dollars.



(ii) recognize items of Sales Income, Other

Income and Deductions in accordance with

the cash receipts and disbursements basis

applicable in the Republic of Azerbaijan as

of the Effective Date.



(iii) draw up its financial statements and Profit

Tax returns in Dollars and submit one set

of accounts









65 for the Calendar Year consisting of a tax balance

sheet and profit and loss account, together with

one Profit Tax computation for the Calendar Year

reflecting its Hydrocarbon Activities.



(iv) have its tax financial statements and Profit Tax

return for each Calendar Year audited by an

auditor appointed by the Contractor Party and who

has relevant permits (licenses) to carry out such

audits in the Republic of Azerbaijan.



(v) submit tax financial statements and Profit Tax

returns for each Calendar Year, together with an

appropriate opinion from the auditor, to the Tax

Authority no later than the fifteenth (15th) March

of the following Calendar Year. In the case of

preliminary Profit Tax return filing, Contractor

Party shall have the right to file the final

Profit Tax return until thirtieth (30th) June of

the current year.



(vi) beginning in the first Calendar Year in which it

estimates it will earn a Taxable Profit, be liable

based upon its estimate of its Taxable Profit for

estimated Profit Tax for such Calendar Quarter, as

well as for estimated Profit Tax for previous

Calendar Quarters in that Calendar Year. Estimated

Profit Tax shall be paid in accordance with

Article 12.2(c) or Article 12.2(d)(iii) to the

State Budget not later than within twenty five

(25) days following the end of the relevant

Calendar Quarter. Along with the payment,

computations prepared in accordance with the

agreed form shall be submitted to the Tax

Authority. In calculating the estimated Profit Tax

for a Calendar Quarter, each Contractor Party may

utilize the Annual Work Programme along with any

other information which it deems appropriate.





66

(b) Upon filing the final Profit Tax return for a Calendar Year, estimated Profit Tax paid with respect to the Calendar Quarters during such Calendar Year shall be credited against the final Profit Tax as calculated on the final Profit Tax return. Any overpayment shall be refunded by the State Budget within forty-five (45) days following the date the Contractor Party's final Profit Tax return is submitted (or, upon election of the Contractor Party, shall be offset against any advance payment amounts of the Profit Tax for such Calendar Quarter or for the following Calendar Quarter(s)). Any underpayment shall be paid by SOCAR to the State Budget in accordance with Article 12.2(c) or Article 12.2(d)(iii) within ten (10) days following the date such final Profit Tax return is submitted. In any event, the final Profit Tax for a Calendar Year as calculated in the Profit Tax return shall be payable no later than twenty-fifth (25th) March of the following Calendar Year.



(c) All estimated and final payments (and refunds of overpayments) of Profit Tax and any interest and penalty sanctions thereon as described in Article 12.3(d) below shall be made in Dollars.



(d) (i) The filing of the Profit Tax returns and payment of Profit Tax thereunder for a Calendar Year shall be deemed to be a final and conclusive settlement of all Profit Tax liabilities for that Calendar Year upon the date sixty (60) months from the date the Profit Tax return for such Calendar Year was filed.



(ii) The Tax Authority shall have the authority to conduct an audit of each Contractor Party's Profit Tax return for each Calendar Year. Upon completing such audit, the Tax Authority shall

discuss any proposed adjustments with the

Contractor Party and, where appropriate, issue a

notice of additional Profit Tax due or a notice of

refund. Any agreed underpayments or

overpayments of Profit Tax shall be paid following

receipt by the Contractor Party of the appropriate

notice in accordance with Article 12.2(c) or, as the

case may be, Article 12.2(d). If the Contractor

Party and the Tax Authority are unable to agree

upon the amount of Profit Tax underpaid or

overpaid, the issue shall be submitted to arbitration

applying the principles contained in Article 23.3.



(iii) Upon a final determination that there has been

either an underpayment or overpayment of Profit

Tax on the Contractor Party's final Profit Tax return

for a Calendar Year, SOCAR as provided in Article

12.2(c) or the Contractor Party as provided in

Article 12.2(d) shall pay to the State Budget

interest on the amount of the underpayment or

overpayment at the rate of LIBOR prevailing on the

day before payment plus four (4) percent. Such

interest shall be computed from twenty-fifth (25th)

March in the Calendar Year the final Profit Tax

return was filed until the date the Profit Tax is paid

or refunded.



(iv) In addition to interest payable as computed under

(iii) above, a Contractor Party shall be subject to

only the following penalty sanctions with respect of

Taxes:



(aa) if a Contractor Party fails to file a final Profit

Tax return on dates defined in Article 12.3 or

delays filing thereof, it shall be liable for apenalty of one hundred and ten (110) percent of the Profit Tax required to be paid with such Profit Tax return;



(bb) if the amount of Profit Tax due as shown on the final Profit Tax return for a Calendar Year was understated due to Fraud by the Contractor Party, it shall be liable for a penalty of two hundred (200) percent of the amount of the understatement. The same penalty shall apply to the Contractor Party or Sub-contractor for failure to apply the taxes envisioned in Articles 12.4 and 12.5 due to Fraud;



(cc) a Contractor Party shall be entitled to raise objection to the application of penalties referred to herein and if necessary any dispute shall be settled by arbitration in accordance with the principles of Article 23.3;



(dd) in the event that after audit it is determined that a Contractor Party, the Operating Company or a Sub-contractor has failed to withhold the correct amount of tax from payments made to a Foreign Sub-contractor, the amount of such underpayment or overpayment shall be paid by the withholding party to the State Budget, or by the State Budget to the withholding party upon the final determination in accordance with the applicable provisions. Along with such payment, interest shall be payable at a rate of LIBOR prevailing on the day before payment plus four (4) percent. Such interest shall be calculated from the date on which the tax or refund should have been paid until the date it is actually paid.



Page 69

(e) Each Contractor Party shall submit its financial statements and Profit Tax returns to the Tax Authority. Estimated and final Profit Tax payments shall be made to the State Budget by SOCAR, for and on behalf of each Contractor Party.



(f) The Tax Authority will issue to each Contractor Party

official tax receipts evidencing the payment of estimated or

final Profit Tax within ten (10) days of any such payment.

Such tax receipts shall state the date and amount of such

payment, the currency in which such payment was made

and any other particulars customary in the Republic of

Azerbaijan for such receipts.



12.4 Taxation of Foreign Sub-contractors



(a) A corporate Foreign Sub-contractor, being a legitimately

created or incorporated legal entity ("Corporate Foreign

Sub-contractor"), shall be taxed as follows:



(i) Corporate Foreign Sub-contractors shall be deemed

to earn a taxable profit of twenty five (25) percent

of the payments received in respect of work and

services performed within the Republic of

Azerbaijan in connection with Hydrocarbon

Activities and they shall be further deemed to be

subject to tax on this deemed profit at the rate of

twenty (20) percent resulting in a total tax

obligation of five (5.0) percent of such payments.

Any person making such payments shall withhold

such tax from such payments, at a rate of five (5.0)

percent and shall pay such withheld taxes to the

State Budget within thirty (30) days from the date

of payment. Such taxes withheld shall fully satisfy

such Corporate Foreign Sub-contractor's tax

compliance, including filing obligations and

liability for all Taxes.(ii) Any Corporate Foreign Sub-contractor which sells goods to a Contractor Party, the Operating Company or any other Sub-contractor within the Republic of Azerbaijan in connection with the Hydrocarbon Activities and receives payment of an amount in excess of the actual documented costs of the goods sold within the Republic of Azerbaijan being extra charges, fees for the producing of documents for supplies, brokerage fees, documentation fees, valuation or other similar payments ("Mark-up"), which excess amount is not connected with work or services provided within the Republic of Azerbaijan, shall be subject to tax on the full amount of such Mark-up paid to such Corporate Foreign Sub-contractor at a rate of twenty (20) percent. Any legal entity making such payments to the Corporate Foreign Sub-contractor shall withhold the Tax at a rate of twenty (20) percent from the Mark-up included into the payments to such Corporate Foreign Sub-contractor and shall pay such withheld taxes to the State Budget within thirty (30) days from the end of the calendar month when the payment to the Corporate Foreign Sub-contractor was made. Notwithstanding any other provisions of this Article 12, where the Corporate Foreign Sub-contractor fails to produce documents related to the Mark-up or the value of the goods sold before or on receipt of the payment for such goods, such Corporate Foreign Subcontractor shall be liable to tax at a rate of five (5.0) percent upon full amount of receivable from such sale (without deducting the expenses).



(aa) Each Corporate Foreign Sub-contractor shall be responsible for filing each Calendar Year a Profit Tax return and tax reports (returns) reporting all income earned in the Republic of Azerbaijan during the Calendar Year, including but no limited to the payments



Page 71received in connection with Hydrocarbon Activities. Each Corporate Foreign Subcontractor shall include with this return a statement provided by a firm of internationally recognised independent accountants of international standing that costs and profits incurred in connection with its activities in the Republic of Azerbaijan have been fully and fairly reported.



(bb) Each Corporate Foreign Sub-contractor shall also file all other Tax returns, reports and financial statements in accordance with the applicable law (including, but not limited to personal income Tax withholding reports, withholding Tax reports, customs documentation fee statements and social fund contribution returns).



(cc) The failure of any Corporate Foreign Subcontractor to file any Tax return, report or financial statement pursuant to (aa) or (bb) above shall not result in any interest, fines or penalties against any Party withholding such Taxes due.



(iii) Contractor Party or the Operating Company shall have no liability or responsibility for any Taxes which their Sub-contractors do not withhold or pay or for any other failure of such Sub-contractors to comply with the laws of the Republic of Azerbaijan.

(b) A Sub-contractor being a physical person shall be subject to the personal income Tax of Azerbaijan in accordance with Article 12.6 in case of provision of works and services. A Sub-contractor being a physical person shall be subject to the provisions of Article 12.4(a)(ii) in case of provision of goods.



(c) Notwithstanding the foregoing, Double Tax Treaties shall provide for application upon relevant Foreign Subcontractors of the Tax benefits provided thereby.



Notwithstanding any other provisions of this Agreement to the contrary:



(i) Article 12.5(b) shall apply to all terms of this

Agreement.



(ii) Except as provided for by Article 12.4, no Profit Tax or income tax or any other Tax shall be imposed upon or withheld from payments made to Corporate Foreign Sub-contractors.



(iii) each Sub-contractor shall be liable for payment and reporting of Taxes in connection with its business activities in the Republic of Azerbaijan that are not related to Hydrocarbon Activities under the applicable laws and regulations of the Republic of Azerbaijan.



12.5 Taxation of Payments to Foreign Entities



(a) Except as provided by Article 12.4(a), no Taxes shall be withheld or imposed on payments made by a Contractor Party to any person organised outside the Republic of Azerbaijan. Notwithstanding the preceding sentence, in accordance with the generally acceptable laws and normative acts of the Republic of Azerbaijan, Taxes may bewithheld at a rate of five (5.0) percent on the following and such Tax shall satisfy Tax obligations, reporting obligations and all liability of such legal entity for the Taxes:

(i) interest paid by a Contractor Party related to a loan to the Contractor Party received in connection with Petroleum Operations from a bank or other financial institution without a presence in the Republic of Azerbaijan;

(ii) royalties paid by a Contractor Party to authors who are not citizens of the Republic of Azerbaijan for the use of their publications, inventions or other intangible property in Petroleum Operations (but not for goods, equipment or products relating to such publications, inventions or intangible property used in Petroleum Operations).

(b) Notwithstanding the foregoing, entities organised outside the Republic of Azerbaijan shall be entitled to the provisions of an applicable Double Tax Treaty, or if there is no such treaty, the benefits that would have been available if a treaty equivalent to the OECD Model Tax Convention on Income and Capital, updated as of 1 November 1997, were in force. In either event, no further administrative action shall be necessary to enable the foreign person to take advantage of such benefits.

(c) Affiliates of any Contractor Party, in accordance with the established practice of the international Petroleum industry and with their ordinary business activities (and such activities shall not include activities directed towards avoidance of Taxes), shall provide goods, works or services on a no gain / no loss basis. If this above mentioned

condition is fulfilled, no profit shall be deemed to arise in the Republic of Azerbaijan, and therefore no Taxes shall be imposed or withheld from them.



12.6 Taxation of Employees and Physical Persons



(a) All Tax Residents, employees of each Contractor Party, the Operating Company, their Affiliates, Foreign Subcontractors, including any physical persons acting as

Foreign Sub-contractors, shall be liable to pay Azerbaijan

personal income Tax only on their income earned as a

direct result of their employment in the Republic of Azerbaijan. Employees who are not Tax Resident shall not

be liable to pay Azerbaijan personal income Tax. For

purposes of this Article 12.6, and subject to any applicable Double Tax Treaty and of a non-discriminatory nature, “Tax Resident” shall be defined as any physical person who satisfies either of the following requirements for a specific period:



(i) any person who stays in the Republic of Azerbaijan on a business trip for a period which shall exceed thirty (30) consecutive days, provided that such person shall be liable for Azerbaijan personal income Tax only on his or her income earned as a result of his or her employment in the Republic of Azerbaijan for any period which shall exceed thirty (30) consecutive days. A person whose presence in the Republic of Azerbaijan shall not exceed thirty (30) consecutive days in any Calendar Year, but whose presence in the Republic of Azerbaijan shall cumulatively exceed ninety (90) days in such Calendar Year shall be liable for Azerbaijan personal income Tax only on his or her taxable income earned after the ninetieth (90th) day of the presence in the Republic of Azerbaijan as a direct result of employment in the Republic of Azerbaijan; (ii) any person who is present in the Republic of

Azerbaijan on a routine basis for periods

cumulatively exceeding ninety (90) days in any

Calendar Year for regularly scheduled periodic

employment as his or her primary place of

employment (and which employment is not incidental

to the exercise of that primary employment outside

of the Republic of Azerbaijan), including those

persons being on rotation in accordance with the

schedule of rotation. Such a person shall be liable

for Azerbaijan personal income Tax on all income

earned as a direct result of his or her employment

in the Republic of Azerbaijan during the Calendar

Year, including income earned during the ninety

(90) days of employment in the Republic of

Azerbaijan before such person has become Tax

Resident.



(b) Each Contractor Party, the Operating Company, their

Affiliates, Sub-contractors, including any physical

person acting as a Foreign Sub-contractor shall

make contributions to the State Social Insurance

Fund of the Republic of Azerbaijan and similar

payments (including but not limited to

contributions to the pension funds, the recruitment

fund, the social insurance fund, the employment

fund and the medical fund) only with respect to

employees who are citizens of the Republic of

Azerbaijan.



(c) Each Contractor Party, its Affiliates, the

Operating Company and Sub-contractors shall

withhold from payments to persons who are citizens

of the Republic of Azerbaijan and do not have

permanent employment relationships with such Party

personal income tax of the Republic of Azerbaijan.



12.7 Tax Exemptions



(a) Each Contractor Party, the Operating Company

and their Sub-contractors shall be exempt with

credit (zero (0)







76



percent rate) from Value Added Tax in connection

with Hydrocarbon Activities. This will apply to the

following:



(i) goods, works and services supplied to or by

it;



(ii) exports of Petroleum and all products

processed or refined from such Petroleum;



(iii) imports and acquisitions of goods (excluding

tobacco, foodstuff and alcohol), works and

services.



(b) In addition, every supplier of goods, works and

services (directly or indirectly) to each Contractor

Party or the Operating Company in connection with

Hydrocarbon Activities shall treat those supplies

for the Value Added Tax purposes as being exempt

with credit (zero (0) percent rate).



(c) Where in accordance with Article 12.7(a) above a

person should pay the Value Added Tax at a zero (0)

percent and is charged and pays input VAT at a rate

more than zero (0) percent on the supply to that

person of goods, works or services, that person

shall be entitled to receive a refund or offset

against the amount of any other Taxes payable by

that person (including Taxes withheld by that person

on payments to its employees or Sub-contractors).



(d) Except as provided by Article 12.4 and Article 12.5,

no Taxes shall be withheld or imposed on payments

made by each Contractor Party or its permanent

establishments to any legally entity or organization

incorporated outside the Republic of Azerbaijan.



(e) The Tax Authority or other appropriate Tax or

customs body shall provide each Contractor Party,

Operating









77Company and their Sub-contractors with certificates confirming the exemptions and/or VAT zero (0) percent rate as provided in Article 12.7(a) of this Agreement within thirty (30) days of the Contractor Party, Operating Company or their Sub-contractors requesting such certificate.

12.8 Other

(a) Every Contractor Party, its Affiliates, Operating Company and Sub-contractors shall pay registration or similar fees imposed by a Governmental Authority to the extent they are nominal and of a non-discriminatory nature.

(b) Due to the establishment of the Operating Company in accordance with Article 6, it always has its Taxable Profit at the level of zero (0), such Operating Company shall not be treated as a legal entity subject to the Profit Tax and therefore shall be exempt from the submission of Profit Tax returns, reports and financial statements. In accordance with the applicable laws every Operating Company shall remain liable for the submission of returns, reports and statements on all other Taxes (including, but not limited to personal income Tax reports, customs documentation fee statements and reports on contributions to the social insurance fund).

(c) There shall be established a Commission for the purpose of conducting negotiations with Contractor upon the Effective Date and signing Protocols for the determination of the rules required for the administration and interpretation of Tax related provisions of this Agreement. Such Protocols shall correspond to all provisions of this Agreement and shall have the force equivalent to the force of any other Decisions or Instructions being issued or published by the Governmental Authorities in connection with interpretation of the Tax related provisions of this Agreement.

12.9 Share Transfer Profit Tax



Tax due on the Net Income received for a Sale or

Permanent Assignment of all, or any portion, of any

Contractor Party's Participating Interest to a

Third Party or any Contractor Party shall be

payable according to the following:



(a) For the purposes of this Article 12.9, the

following expressions shall have the meaning

assigned to them herein below:



(i) “Gross Income” means the total

consideration received by an assigning

Contractor Party for an assignment of any

portion of Participating Interest under

this Agreement.



(ii) “Written-Down-Value” means the un-amortised

balance of any investment (accumulated

costs), which, pursuant to this Agreement,

is not subject to Cost Recovery.



(iii) “Sale or Permanent Assignment” shall mean

any transfer or assignment of the ownership

rights to all or a portion of a

Participating Interest excluding:



(aa) a transfer resulting from a loan made

in respect of this Agreement; or



(bb) any exchange of Participating

Interests in projects where no profit

is generated in the Republic of

Azerbaijan; or



(cc) any transfer for which consideration

consists of a work obligation; or











79(dd) any involuntary transfer.



(iv) “Net Income” means the difference between the Gross Income and the total amount of established deductions (tax withholdings), which shall consist of:



(aa) Contractor Party’s share of the accumulated Petroleum Costs incurred up to date on which the assignment becomes effective;



(bb) Written-Down-Value of any investment (accumulated costs) made by the assigning Contractor Party, which is not charged to the Petroleum Costs under this Agreement;



(cc) Costs incurred for such assignment.



(b) Profit Tax Rate defined in Article 12.1(c)(vi) shall be applied to the Net Income from Sale or Permanent Assignment. Upon receipt of Gross Income, an assigning Contractor Party shall compute the Net Income, and shall apply to the Net Income the computed Profit Tax Rate indicated above.



(c) The amounts set forth in Article 12.9(a)(iii)(aa) shall be certified by the statutory auditor of the Operating Company and the amounts set forth in Article 12.9(a)(iii)(bb) shall be certified by the statutory auditor of the Contractor Party or Affiliate of a Contractor Party which incurred the costs.



(d) An assigning Contractor Party shall pay the Tax so calculated to the State Budget of the Republic of Azerbaijan no later that thirty (30) calendar days after receipt of the



80

Gross Income. In the event that Gross Income is received in instalments the total Tax due shall be paid in instalments. Each such Tax instalment shall be the same proportion of the total Tax due, as the corresponding instalment of Gross Income is in relation to total Gross Income.



(e) An assigning Contractor Party shall for the Calendar Year when it makes an assignment submit a report in the form and during the period of time specified by the legislation of the Republic of Azerbaijan.



12.10 Survival



Notwithstanding any other provisions of this Agreement to the contrary, the provisions of this Article 12 shall survive the termination of this Agreement until such time as all matters pertaining to Contractor Parties' liabilities for Taxes are finally and conclusively determined. ARTICLE 13



VALUATION OF PETROLEUM



13.1 Valuation of Crude Oil and Non-associated Natural Gas



(a) The valuation of Crude Oil for purposes of Cost Recovery, sharing of Profit Petroleum and as otherwise specifically provided in this Agreement in any Calendar Quarter shall be the net back value calculated as follows:



(i) For each export route where there have been export sales of Crude Oil from the Contract Area (or such other Crude Oil obtained through exchanged or swapped for Crude Oil from the Contract Area) by any Party in arm’s length transactions during the Calendar Quarter, the weighted average per unit price realized in all such sales (after deducting commissions and brokerages), at the Point of Sale, adjusted for costs incurred by the Parties of transporting the Crude Oil to the Point of Sale, including but not limited to pipeline tariffs, transit fees, insurances, demurrages, quality and/or quantity losses by blending, terminal fees, tanker costs and pipeline taxes to arrive at a value of the Crude Oil at the Delivery Point (“Net Back Value”), provided that the total volume of such arm’s length sales made by all Parties exceeds thirty-three and one-third (33 1/3) percent of the total volume of all sales made by all Parties during the Calendar Quarter, or



82

(ii) for each export route where the total volume of

arm’s length export sales does not exceed the

percentage of sales referred to in Article

13.1(a)(i) above, the weighted average per unit

price of: (A) Crude Oil sold in arm’s length

sales (determined as provided in Article 13. l(a)

(i) above) and (B) Crude Oil sold in non-arm’s

length sales at the average price quoted for such

Crude Oil in Platts Oilgram during the Calendar

Quarter, but if no such price is quoted then the

average of per unit FOB price quotations for

three (3) representative crude oils to be agreed

by the Parties, as published in Platts Oilgram in

the Calendar Quarter, adjusted for quality,

grade, quantity, costs of transporting the Crude

Oil to the Point of Sale as provided in (i)

above, to arrive at a Net Back Value of the Crude

Oil. In the event that Platts Oilgram ceases to

be published or is not published for fifteen (15)

days in the period required for its use in this

Article 13.1(a)(ii) then the required data shall

be taken from an available alternative

publication internationally recognized by the

Petroleum industry. If the Parties cannot agree

the three (3) representative crude oils by the

Commencement Date of Commercial Production or

fail to agree on any alternative publication the

matter shall be referred for final decision to an

internationally recognized expert in accordance

with the provisions of Article 13.1(c) below;



(iii) where export sales of Crude Oil during any

Calendar Quarter are conducted through several

export routes, the value of Crude Oil for such

Calendar Quarter shall be determined as weighted

average of Net Back Values for all export routes.





83(b) The value of Non-associated Natural Gas in any

Calendar Quarter for the purposes of Cost Recovery,

sharing of Profit Petroleum, and as otherwise

specifically provided in this Agreement shall be

the actual arm’s length sale price realized under a

gas sales agreement less costs incurred by the

Contractor Parties of transporting such Non-

associated Natural Gas to the Point of Sale

including but not limited to pipeline tariffs,

Transit Losses and pipeline taxes (“Net Back

Value”).



Where Non-associated Natural Gas is sold

by Contractor in non-arm’s length sales, Non-

associated Natural Gas shall be valued at a price

to be determined by agreement between SOCAR and

Contractor based on pricing principles prevailing

internationally, taking into account market, grade,

quality and quantity, transportation and other

relevant considerations (“Net Back Value”).



(c) Within thirty (30) days after the end of the

relevant Calendar Quarter, all Parties shall notify

Contractor of the volumes, dates, prices and Point

of Sale for all arm’s length sales of Crude Oil and

Non-associated Natural Gas during such Calendar

Quarter, and within forty five (45) days after the

end of such Calendar Quarter Contractor shall

notify SOCAR of valuations of Crude Oil and Non-

associated Natural Gas for the purposes of Article

13.1(a) and Article 13.1(b) above, which notice

shall specify volumes, dates, prices, and Points of

Sale for all arm’s length sales. If any Party does

not accept any valuation notified by Contractor

pursuant to Article 13.1(a) or Article 13.1(b) and

SOCAR and Contractor cannot reach agreement on the

value of Crude Oil or Non-associated Natural Gas

within thirty (30) days of receipt of notice by

SOCAR of Contractor’s valuation of Crude Oil or

Non-associated Natural Gas, such determination

shall be made by an internationally recognized

expert appointed by Contractor and SOCAR, but





84



if they fail to agree within thirty (30) days from

the end of the thirty (30) days referred to above on

the appointment of such expert, then such

appointment shall be made by the President of the

Stockholm Chamber of Commerce, Sweden on the

application of SOCAR or Contractor. Such expert

shall be a person internationally recognized as

having expertise in the marketing of Petroleum. The

English language text of this Agreement will be

utilized by the expert. The expert shall in writing,

report his determination within thirty (30) days of

his appointment and his determination shall be final

and binding upon SOCAR and Contractor.



Pending the determination of the Net Back Value of

Crude Oil or as the case may be Non-associated

Natural Gas for a given Calendar Quarter, the Net

Back Value of Crude Oil or Non-associated Natural

Gas determined for the preceding Calendar Quarter

shall be provisionally applied to make calculation

and payment until the applicable Net Back Value for

that period is finally determined. Any adjustment to

such provisional calculation and payment, if

necessary, will be made within thirty (30) days

after such applicable Net Back Value is finally

determined.



(d) Transit Losses (other than losses for which

Contractor has been reimbursed from any insurances

taken out by Contractor and losses for which

Contractor has been reimbursed from pipeline owners

or operators) shall be deducted from Total

Production. Insurance premiums paid by Contractor

for insurance taken out by Contractor covering

Transit Losses shall not be Cost Recoverable. Any

insurance reimbursements for such losses shall not

be credited to Cost Recovery. Contractor shall be

responsible for the insurance of Transit Losses.









85

























(e) In determining the applicable Net Back Value of

Crude Oil or Non-associated Natural Gas pursuant to

Articles 13.1(a) and (b) the following shall apply:



(i) provisions in this Article 13.1 dealing with

“sales” shall equally apply to a single sale and

shall be interpreted accordingly; and



(ii) the point in time at which title in Crude Oil or

Non-associated Natural Gas transfers at the

Point of Sale from a Party to the buyer shall be

deemed to be the time of sale; and



(iii) “Point of Sale” shall mean the geographical

location or locations where title to Crude Oil

or as the case may be Non-associated Natural Gas

passes from a seller to a buyer, whether such

sale s FOB, CIF, CFR or any other manner

generally recognized by the international

Petroleum industry. Examples of possible Points

of Sale include the sales meter at the outlet of

the terminal at the terminus of the export

pipeline, the inlet meter at a refinery, or the

inlet flange to a tanker; and



(iv) “Transit Losses” - shall mean losses incurred

during the pipeline transport of Crude Oil and

Non-associated Natural Gas from the Delivery

Point to the terminus of the export

transportation systems (including, if

applicable, any pipeline utilized for

transhipment of the Crude Oil to exit the Black

Sea area or in the case of Non-associated

Natural Gas to the Point of Sale) in excess of

the normal international pipeline loss

allowance of one-tenth of one (0.1) percent; and







86 (v) an “arm’s length sale” is a sale or exchange of Petroleum between a willing and non-affiliated buyer and seller on the international market in exchange for payment in Foreign Exchange, excluding a sale involving barter, sales from government to government and other transactions motivated in whole or in part by considerations other than the usual economic incentives involved in Petroleum sales on the international market.



13.2 Measurement



(a) The volume and quality of Petroleum produced by Contractor shall be measured by methods and appliances in accordance with generally accepted international Petroleum industry practice, and shall be monitored by the Parties in accordance with the Measurement Procedure.



(b) Contractor shall give prior written notice to SOCAR of any testing and calibration by Contractor of the appliances in the measurement and determination of quality of Petroleum pursuant to the Measure Procedure. SOCAR, at its cost and risk, shall be entitled to have witnesses participate at such testing and calibration.



(c) Where the method of measurement, or the appliances used therefor, have caused an overstatement or understatement of production, the error shall be presumed to have existed since the date of the last calibration of the measurement devices, unless otherwise proved, and an appropriate adjustment shall be made to the average value for the period of the error, or by an adjustment in deliveries in kind over an equivalent period.



(d) Petroleum produced from the Contract Area and not used by Contractor pursuant to Article 11.1 shall be measured at the Delivery Point.



87

ARTICLE 14



OWNERSHIP, USE AND

ABANDONMENT OF ASSETS





14.1 Ownership and Use



Title to the following categories of fixed and

moveable assets for use in Petroleum Operations

shall pass to SOCAR in accordance with the

following:



(a) When legally permissible to purchase land, any

land purchased by Contractor for Petroleum

Operations, including the land purchased by

Contractor under SOCAR’s guarantee, shall

become the property of SOCAR, as soon as it is

purchased.



(b) Title to fixed and moveable assets employed by

Contractor in the performance of Petroleum

Operations and the cost of which is claimed as

Petroleum Costs shall be transferred to SOCAR

upon the earlier to occur of (i) the end of the

Calendar Quarter following the achievement of

Zero Balance or (ii) the termination of this

Agreement. In this latter case, without

prejudice to Contractor’s rights under Articles

23.3(b) and 29, title to fixed assets will pass

to SOCAR irrespective of whether the costs

thereof have been Cost Recovered. Except in

respect of items which have limited residual

economic life, fixed and moveable assets the

title to which is transferred to SOCAR

following the achievement of Zero Balance shall

be in reasonable working order and shall comply

with generally accepted international technical

standards, subject to wear and tear.



(c) Contractor is entitled, at no additional cost,

to the full and exclusive use and enjoyment of

all land and fixed and moveable assets acquired

for the purpose of Petroleum









88

























Operations throughout the term of this Agreement

irrespective of whether title to such asset has

passed to SOCAR in accordance with this Article

14.1.



(d) With respect to any fixed asset Contractor shall,

upon agreement of partial relinquishment pursuant to

Article 29.5, give notice of abandonment of such

assets in the area to be relinquished which

Contractor does not intend to use or relocate

elsewhere in connection with Petroleum Operations.

Subject to Article 14.1(f), SOCAR may, within sixty

(60) days of receipt of such notice, elect to assume

ownership, possession and custody of such fixed

assets.



(e) Data and other information collected and generated

by Contractor in the course of Petroleum Operations

shall, during the term of this Agreement, be jointly

owned by SOCAR and Contractor. Following the

termination of this Agreement ownership of all such

data and information shall revert to SOCAR.

Thereafter, each Contractor Party shall be entitled

to continue to use such data and information in

relation to its other Petroleum related activities

in the Republic of Azerbaijan. Contractor shall be

entitled to trade such data and information in

accordance with the principles set out in Article

27.2 of this Agreement during the term of this

Agreement. Except as otherwise provided in Article

14.3 of this Agreement, ownership of leased

equipment shall not transfer to SOCAR at the end of

this Agreement, and Contractor shall at such time be

free to export such equipment.



(g) For purposes of Article 14, “fixed assets” means

large structures and facilities essential to the

conduct of Petroleum Operations that are located

within the Contract





89



Area, such as platforms, gathering facilities,

wells, flowlines, pipelines, jackets, oil, gas and

water separation facilities, oil pump stations,

loading terminals, gas compression stations and the

like.



14.2 Abandonment



(a) In order to finance abandonment of all fixed assets

employed in Petroleum Operations within the

Contract Area by Contractor, the Parties shall open

a joint escrow account at a bank of good

international repute to be agreed between SOCAR and

Contractor. This account shall be known as the

“Abandonment Fund” and shall be administered for

value. The structure of the escrow account and the

terms for the administration of the Abandonment

Fund monies shall be mutually agreed between SOCAR

and Contractor. All monies allocated to the

Abandonment Fund shall be recoverable as Operating

Costs. In no event shall the Abandonment Fund

exceed fifteen (15) percent of all Capital Costs.



(b) Contractor shall commence making contributions to

the Abandonment Fund in the first Calendar Quarter

following the earlier of: (i) the fifteenth (15th)

anniversary of the beginning of the Development and

Production Period, or (ii) the Calendar Quarter

when fifty (50) percent of Petroleum reserves

identified in the Development Programme have been

recovered. Should the point be reached at which

payments into the Abandonment Fund have commenced

and a Discovery is made subsequent thereto which

increased the total remaining Petroleum reserves in

the Contract Area to a level where less than

seventy (70) percent of overall combined reserves

have been recovered, then payments into the

Abandonment Fund shall be suspended. Contractor

shall resume payments into the Abandonment Fund

when the point is reached where seventy (70)

percent of Petroleum reserves (as increased by

such Discovery) have been recovered. The formula

for





90

determining the amount of such payments as set forth

in Article 14.2(c) shall be revised to take into

account the revised Petroleum reserves. Contractor

shall receive, however, full credit for all payments

previously paid into the Abandonment Fund, plus

accrued interest thereon.



(c) Contractor shall transfer funds on a Calendar

Quarter basis to the Abandonment Fund according to

the following formula:



QAT = ((COA/ARES) x PARES) - CAF



where:



QAT is the amount of funds to be transferred to the

Abandonment Fund in respect of the relevant

Calendar Quarter;



COA is the estimated cost of abandonment operations

established pursuant to Article 14.2(g), up to

the limit established in Article 14.2(a);



ARES is the estimated Petroleum reserves remaining

to be recovered from the end of the Calendar

Quarter in which the Abandonment Fund was

opened;



PARES is the cumulative production of Petroleum from

the end of the Calendar Quarter in which the

Abandonment Fund was opened;



CAF is the Abandonment Fund balance at the end of

the previous Calendar Quarter.



(d) If, at any time, Contractor recommends abandonment

of a fixed asset within the Contract Area prior to

the termination







91

of this Agreement, SOCAR may elect, within thirty

(30) days of receipt of Contractor’s recommendation,

to continue using such fixed asset, in which event

SOCAR shall be responsible for abandoning such fixed

asset as and when it decides, and the appropriate

portion of the Abandonment Fund shall be transferred

to SOCAR at the time it commences abandonment of such

fixed asset or termination of this Agreement,

whichever is earlier. If SOCAR fails to elect to

continue using such fixed asset the Steering

Committee shall determine whether to abandon such

asset provided that if the Steering Committee fails

to reach agreement on the abandonment of such fixed

asset at the meeting at which Contractor’s

recommendation first appears on the agenda then SOCAR

shall be deemed to have elected to continue using

such fixed asset and Contractor shall have no further

liability of any kind with respect to such asset. If

the Steering Committee decides to abandon such fixed

asset, within thirty (30) days of such decision SOCAR

shall notify Contractor whether Contractor or SOCAR

shall be responsible for abandoning such fixed asset.

If SOCAR fails to notify Contractor within such

thirty (30) day time period, SOCAR shall be deemed to

have decided that Contractor is to abandon such fixed

asset. The appropriate portion of the Abandonment

Fund shall be transferred to the Party responsible

for abandoning such fixed asset. Any abandonment

operations, or continued use by SOCAR, shall be

conducted in accordance with international Petroleum

industry practice and in such a manner that does not

interfere with Petroleum Operations.





(e) Upon termination of this Agreement, Contractor shall

notify SOCAR of all fixed assets employed in

Petroleum Operations within the Contract Area which

Contractor intends to abandon. SOCAR shall, within

thirty (30) days of receipt of Contractor’s notice,

notify Contractor of such fixed assets which SOCAR

elects to continue to use, as well





92



as whether SOCAR elects to abandon all other fixed

assets or have Contractor abandon such other fixed

assets. A portion of the Abandonment Fund

commensurate with and attributable to any fixed

assets shall be transferred to Contractor or SOCAR,

as the case may be, who is responsible for

abandoning such fixed assets. If SOCAR elects to

continue to use or to abandon any fixed assets,

SOCAR may abandon such fixed assets as and when it

decides. Abandonment of any fixed assets shall be in

accordance with generally accepted international

Petroleum industry practice; provided, however, in

the event there are insufficient funds in the

Abandonment Fund to enable Contractor to complete

abandonment operations for which Contractor is

responsible, Contractor shall expend all amounts

available in the Abandonment Fund in the performance

of its abandonment operations and shall thereupon

cease any further abandonment operations and have no

further liability or obligation to abandon such

remaining fixed assets. Any unabandoned fixed assets

shall as part of the abandonment operations be left

in a safe condition.





(f) Upon SOCAR electing to abandon any fixed assets in

the Contract Area or electing pursuant to (d) above,

to continue using any such fixed assets, Contractor

shall be released from all responsibility and

liability of every kind pertaining to such fixed

assets and abandonment thereof as well as payment of

any further funds should there be insufficient funds

in the Abandonment Fund. SOCAR shall indemnify

Contractor from and against any loss, damage and

liability of any nature whatsoever, as well as any

claim, action or proceeding instituted against

Contractor, or any Contractor Parties, by any person

or entity, including, but not limited to any

Governmental Authority, arising from, or in any way







93



connected with, the continued use of such fixed

assets and their ultimate abandonment, as well as

any failure by SOCAR to properly abandon any such

fixed assets.



(g) Not later than one (1) year prior to the Calendar

Year in which fifty (50) percent of the Petroleum

reserves identified in the Development Programme are

expected to be recovered, Contractor shall prepare

an abandonment plan and an estimate of the cost of

abandonment operations for approval by the Steering

Committee. Annually thereafter Contractor shall

examine the estimated costs of abandonment

operations and, if appropriate, revise the estimate

including such revision as may be necessary to take

into account subsequent Discoveries.



(h) In the event that there are excess funds in the

Abandonment Fund following completion of all

abandonment operations, then such excess shall be

distributed between SOCAR and Contractor in

proportion to the cost of abandonment operations

undertaken by Contractor and SOCAR, but in no event

shall Contractor’s share exceed an amount it would

have received had the excess funds been distributed

in the ratio of the weighted average of the last ten

(10) years Profit Petroleum distribution between

SOCAR and Contractor under the provisions of Article

11.5 prior to termination of this Agreement.



(i) No Taxes shall be imposed on any amounts paid into,

received or earned by or held in the Abandonment

Fund.





94 14.3 Leases of Equipment

Each Contractor Party shall have the right to use equipment leased from its Affiliates or Third Parties in the course of Petroleum Operations. In the case of any equipment, which is on long-term lease (which for the purposes of this Article 14 shall mean a lease in excess of ten (10) years) to Contractor, Contractor shall, with respect to such leases from such Affiliates of equipment owned by such Affiliates, ensure, and with respect to such leases from Third Parties, use reasonable lawful efforts to procure, that any such lease is transferable to SOCAR when Contractor no longer wishes to use such equipment for Petroleum Operations and that such lease includes an option to purchase exercisable by SOCAR.



Page 95

ARTICLE 15



NATURAL GAS



15.1 Associated Natural Gas



In case of a Crude Oil Discovery and provided no further Discoveries have been made during the Exploration Period or the Additional Exploration Period, then Natural Gas produced from such Crude Oil Discovery shall be classified as Associated Natural Gas and such Associated Natural Gas not used for processing (subject to Contractor's rights pursuant to Article 11.1 and Article 15.3) shall be delivered to SOCAR free of charge at the Delivery Point.



Contractor shall have the right to produce hydrocarbon liquids found within the Contract Area and to process Associated Natural Gas produced with any such liquids in order to extract such liquids for sale, provided that such processing can be conducted in a manner that is economically justified for Contractor. Liquids saved shall be treated as Crude Oil.



15.2 Non-associated Natural Gas



In the event of a Non-associated Natural Gas Discovery, additional terms for commercial development of such Non-associated Natural Gas shall be agreed between SOCAR and Contractor, and upon reaching such agreement the applicable Development Programme shall be submitted by Contractor, as set out in Article 4.6(b).



Return on Contractor's investment in the Non-associated Natural Gas Discovery and development shall be through marketing of Non-associated Natural Gas in accordance with the mechanism described in Articles 11.2 and 11.5. In the case of a Non-associated Natural Gas Discovery Profit Petroleum shall be shared through marketing of Non-associated Natural Gas in accordance with the mechanism described in Article 11.5.



96Failing agreement on the additional terms of commercial development of the Non-associated Natural Gas Discovery within the period set forth in Article 4.6(b) or any agreed extended period, then SOCAR and/or its Affiliates shall have the right exercisable at any time before Contractor has commenced development of the Non-associated Natural Gas Discovery pursuant to the Development Programme by giving written notice to Contractor to develop at SOCAR’s and/or its Affiliates’ sole risk and cost and subject to this Article 15.2 such Non-associated Natural Gas Discovery in accordance with the international Petroleum industry practice subject to reimbursement in full by SOCAR to Contractor of costs incurred by Contractor in accordance with the mechanism described in Articles 11.2 and 11.5.



SOCAR and/or its Affiliates shall conduct Petroleum Operations in a diligent, safe and efficient manner and in accordance with generally accepted principles of the international Petroleum industry and otherwise in accordance with the terms of this Agreement. SOCAR and/or its Affiliates shall conduct Petroleum Operations in the Contract Area in a manner that does not interfere or hinder the conduct of Petroleum Operations of each other and also in a manner which shall not directly or indirectly damage the overall reservoir performance.



Articles 4.6(f) and 4.6(g) and Articles 5.3 and 5.4 shall apply to SOCAR’s conduct of Petroleum Operations in all respects as if each reference therein to Contractor were a reference to SOCAR.



At any time from commencement of development by SOCAR and/or its Affiliates of the Non-associated Natural Gas Discovery and prior to the Commencement Date of Commercial Production, Contractor shall be entitled to assume responsibility for and take over operation from SOCAR and/or its Affiliates and develop Nonassociated Natural Gas and SOCAR shall thereafter be reimbursed for its costs incurred in connection with such development in accordance with the mechanism described in Article 11.2.



Page 97

If within four (4) years of the date of approval by SOCAR of the Development Programme work on the Non-associated Natural Gas development pursuant to the Development Programme has not been commenced by Contractor, then unless otherwise agreed, SOCAR shall be entitled by giving written notice to withdraw from the scope of this Agreement Non-associated Natural Gas reserves as defined in the Development Programme for such a Discovery and any unrecovered costs incurred by Contractor to the date of such notice with respect to such Discovery of Non-associated Natural Gas shall not be Cost Recoverable.



Following the withdrawal of such Non-associated Natural Gas from the scope of this Agreement each Party shall ensure that its conduct of exploration, development and production activities in the Contract Area shall be performed in a manner that does not interfere with or hinder Petroleum Operations conducted or planned to be conducted by the other Party and also in a manner which shall not directly or indirectly damage the overall reservoir performance in the Contract Area.



15.3 Flaring or Venting of Natural Gas

(a) Contractor shall have the right to flare or vent the applicable amount of Associated Natural Gas in the event of emergencies, equipment malfunctions, repairs or maintenance of any facilities, including delivery systems, or SOCAR’s failure to take delivery of Associated Natural Gas to be delivered to it by Contractor as provided in Article 15.1.

(b) In the case of Non-associated Natural Gas, in the event of a failure by any buyer thereof to take delivery, provided however, that in such event Contractor has first offered such Non-associated Natural Gas to SOCAR on the same terms agreed with such buyer and if SOCAR has refused or has failed to take delivery thereof, then Contractor shall reduce the production of Non-associated Natural Gas by the volumes not taken by any buyer or SOCAR. In the event of



Page 98

Contractor's failure to market its entitlement of Non-associated Natural Gas for any reason Contractor shall reduce the production of Non-associated Natural Gas by the applicable volumes and shut in Non-associated Natural Gas wells or restrict its production rate.



99FOREIGN EXCHANGE



Contractor and each Contractor Party, and their Affiliates and Sub-contractors, are authorised throughout the duration of this Agreement and in connection with this Agreement to:



(a) Open, maintain and operate Foreign Exchange bank accounts both inside and outside the Republic of Azerbaijan and local currency bank accounts inside the Republic of Azerbaijan;



(b) Import into the Republic of Azerbaijan funds required for Petroleum Operations in Foreign Exchange;



(c) Purchase local currency with Foreign Exchange at the most favourable exchange rate legally available to it (and in any event at a rate of exchange no less favourable than that granted by the Central Bank of the Republic of Azerbaijan to other foreign investors), without deductions or fees other than usual and customary banking charges, as may be necessary for conduct of the Petroleum Operations and performance of other obligations of Contractor hereunder;



(d) Convert local currency available for use in, or earned in connection with, Petroleum Operations exceeding their immediate local requirements into Foreign Exchange at the most favourable exchange rate legally available to it (and in any event at a rate of exchange no less favourable than that granted by the Central Bank of the Republic of Azerbaijan to other foreign investors), without deductions or fees other than usual and customary banking charges;



(e) Export, hold and retain outside the Republic of Azerbaijan, or dispose of, all proceeds obtained under this Agreement, including without limitation all payments received from export sales of



100Contractor Parties' share of Petroleum.



(f) Transfer outside the Republic of Azerbaijan any Foreign Exchange in excess of their local requirements;



(g) Be exempt from all legally required or mandatory conversions of Foreign Exchange into local or other currency;



(h) Pay in Foreign Exchange partly or wholly abroad the salaries, allowances and other benefits received by their expatriate employees working in the Republic of Azerbaijan on Petroleum Operations; and



(i) Pay directly outside the Republic of Azerbaijan in Foreign Exchange their Foreign Sub-contractors working on Petroleum Operations.



SOCAR shall within the full limits of authority use all reasonable lawful endeavours with any Government Authorities, in order for Contractor to obtain any of the above authorisations in the event that Contractor requests it to do so.



101ARTICLE 17



ACCOUNTING METHOD



Contractor shall maintain books and accounts of Petroleum Operations in accordance with the Accounting Procedure.



Page 102ARTICLE 18



IMPORT AND EXPORT



18.1 Import and Export Rights

(a) Contractor, Operating Company, their Affiliates, agents and Sub-contractors, shall have the right to import into, and reexport from the Republic of Azerbaijan free of any Taxes and restrictions in their own name the following: all equipment, materials, machinery and tools, vehicles, spare parts, foodstuff (subject to compliance with applicable regulations of the Republic of Azerbaijan pertaining to the import of foodstuff), goods and supplies (excluding alcohol and tobacco products) necessary in Contractor’s reasonable opinion for the proper conduct and achievement of Petroleum Operations, provided, however, that with respect to the purchase thereof Contractor shall give preference to Azerbaijani Suppliers in those cases in which such Azerbaijani Suppliers are in all material respects competitive in price, quality and availability with those available from other sources, even if the contract price of such an Azerbaijani Supplier is higher by not more than ten (10) percent than the contract price of the potential winning foreign supplier. For purposes of this Article 18.1, “Azerbaijani Suppliers” shall mean business entities registered and incorporated in the Republic of Azerbaijan, regardless of ownership, legally operating in the Republic of Azerbaijan and possessing and/or having access to certain land areas, infrastructure, technical facilities, advanced technology, manpower, technical and commercial knowledge, management skills and experience, financial resources, licences and other rights for activity in the Republic of Azerbaijan, including business entities established with participation of foreign investors.



Page 103

Notwithstanding the foregoing, (except when necessary for repair or maintenance provided that, within a reasonable time after completion of the repair or maintenance, such items shall be re-imported into the Republic of Azerbaijan). Contractor shall not have the right to export from the Republic of Azerbaijan any items purchased for Petroleum Operations, the costs of which have been included in the Petroleum Operations Account.



(b) Contractor, Operating Company, their Affiliates, agents and Sub-contractors, and all of their employees and family members, shall have the right to import into and re-export from the Republic of Azerbaijan, free of Taxes and restrictions and at any time, all foodstuff (subject to compliance with applicable regulations of the Republic of Azerbaijan pertaining to the import of foodstuff), furniture, clothing, household appliances, vehicles, spare parts and all personal effects (excluding alcohol and tobacco products) for personal use by the foreign employees and their families assigned to work in, or travel to, the Republic of Azerbaijan. Private sales of imported goods by Contractor and/or its Sub-contractors and their employees in the Republic of Azerbaijan to any Third Party will be taxable in accordance with Azerbaijan legislation (subject to Article 12).



(c) Any purchase of goods, works and services where the value exceeds one hundred fifty thousand (150,000) Dollars shall be made on a competitive tender basis (except when only one supplier is available). SOCAR shall be advised of the results of each tender at every bid stage. The threshold value of one hundred fifty thousand (150,000) Dollars shall be escalated annually in line with increases in the GDP Deflator Index. SOCAR shall participate at every bid stage. In that regard SOCAR shall send to the Operating Company its representatives ("SOCAR Representatives") whose



104responsibility shall include monitoring the contracting and procurement process from initial preparation of prequalification lists to the ultimate selection of contracts, and through to implementation. These SOCAR Representatives shall have responsibility to report to SOCAR and the Operating Company their findings and to give timely input to the Operating Company as to SOCAR’s position on relevant matters prior to each contract award. The SOCAR Representatives shall not have the right to vote before the contract committee; provided, however, the SOCAR Representatives may express their opinion and that of SOCAR with regard to any bids, awards, and/or subsequent implementation for the Operating Company to duly consider and take account of.



18.2 Petroleum Export

Each Contractor Party, its customers and its and their carriers shall have the right to freely export, free of all Taxes (except for Profit Tax) and at any time, Petroleum to which Contractor is entitled in accordance with the provisions of this Agreement.



18.3 Customs Laws

Subject to Articles 12, 18.1 and 18.2, all imports and exports carried out in connection with this Agreement shall be subject to the procedures and documentation required by applicable customs laws and regulations, and Contractor, the Operating Company, their Affiliates, agents and Sub-contractors shall pay any customs service/ documentation fees to the extent they are nominal and consistent with the actual costs of providing such customs service/documentation and are of a non-discriminatory nature, but in no event shall the service/ documentation fees exceed the following:



Page 105

Declared Value of Shipment in Dollars | Fee

0 – 100,000 | 0.15% of value

100,001 – 1,000,000 | $150 plus 0.10% of value over $100,001

1,000,001 – 5,000,000 | $1,050 plus 0.07% of value over $1,000,001

5,000,001 – 10,000,000 | $3,850 plus 0.05% of value over $5,000,001

more than 10,000,000 | $6,350 plus 0.01% of value over $10,000,000



18.4 Foreign Trade Regulations

Contractor, Operating Company, their Affiliates, agents and Subcontractors shall also be exempt from the provisions of the Republic of Azerbaijan foreign trade regulations concerning the prohibition, limitation and restriction of import and export and country of origin of those items indicated in Article 18.1 and with respect to the Petroleum allocated to Contractor pursuant to this Agreement.



18.5 SOCAR Assistance

SOCAR shall, within the full limits of its authority, use all reasonable lawful endeavours, when requested to do so by Contractor, to ensure that the above mentioned exemptions are applied and expedite the movement through customs of any equipment or supplies of Contractor, Operating Company, their Affiliates, agents and Sub-contractors and all of their employees and family members.



Page 106

ARTICLE 19



DISPOSAL OF PRODUCTION



19.1 Title to Petroleum

Except as expressly provided in Article 13.1(d) concerning the risk of loss of Petroleum production, the transfer of title and possession to each Contractor Party and SOCAR of the share of the Petroleum production to which such Contractor Party and SOCAR is entitled shall be made at the Delivery Point.



19.2 Overlift and Underlift

Each of SOCAR and Contractor Parties shall have the right and obligation to lift and dispose of the share of Petroleum to which it is entitled under this Agreement. Such share shall be lifted on as regular a basis as possible, it being understood that each of SOCAR and Contractor Parties, within reasonable limits, shall be authorised to lift more (overlift) or less (underlift) than its share of Petroleum produced and unlifted by the lifting day, to the extent that such overlift or underlift does not infringe on the rights of the other and is compatible with the production rate and the storage capacity. SOCAR and Contractor shall establish the rules and procedures to govern the lifting programme on the basis of the principles described above.



19.3 SOCAR Option to Purchase Crude Oil

(a) During each Calendar Quarter SOCAR shall be entitled to purchase from Contractor a portion of the Crude Oil allocated to Contractor under the provisions hereof, at the Delivery Point, by giving ninety (90) days written notice to Contractor of such purchase preceding the Calendar Quarter in which SOCAR elects to purchase the Crude Oil. Contractor shall initially invoice SOCAR for such Crude



Page 107

Oil purchased hereunder at the per Tonne price determined in accordance with Article 13.1 for the last Calendar Quarter preceding the date of lifting in which the price has been established. At such time that the per Tonne price for the Calendar Quarter in which such Crude Oil is lifted as determined in accordance with Article 13.1 is known, Contractor shall issue an amended invoice indicating any monies owed to Contractor or SOCAR, as the case may be. In no event shall the proportion of Crude Oil so purchased from Contractor exceed the proportion purchased from Third Parties under similar circumstances and in no event shall such quantities exceed more than ten (10) percent of Contractor’s entitlement at the Delivery Point during that Calendar Quarter. In the event any Taxes are levied on such Crude Oil, SOCAR shall be solely responsible for the payment thereof to the relevant Governmental Authorities and shall indemnify and hold harmless Contractor from any liability with respect thereto.



(b) SOCAR shall have the additional right to purchase up to an additional ten (10) percent of Contractor’s share of Crude Oil available in any Calendar Quarter at the Point of Sale or at any other export point located at the terminus when marketing Crude Oil through any other export alternative. The price for such Crude Oil shall be mutually agreed (using those factors normally utilised by the international Petroleum industry in determining a fair market price) prior to the relevant Calendar Quarter, and in the event any Taxes are levied on such Crude Oil, SOCAR shall be solely responsible for the payment thereof to the relevant Governmental Authorities and shall indemnify and hold harmless Contractor from any liability with respect thereto. In the event of any failure to agree on the sales price as provided above, SOCAR’s right to purchase such additional Crude Oil from Contractor shall lapse with respect to the relevant Calendar Quarter.



Page 108(c) The quantity of Crude Oil for which SOCAR may exercise its option to purchase pursuant to Articles 19.3 (a) and (b) shall be specified in a written notice to Contractor at least ninety (90) days preceding each Calendar Quarter. SOCAR shall pay for any Crude Oil purchased under this Article 19.3 in Dollars within thirty (30) days of Contractor’s invoice to be issued no earlier than the date of lifting such Crude Oil. In the event that SOCAR fails to make timely payment of sums due to Contractor then its right to purchase Crude Oil under this Article 19.3 shall be suspended until all outstanding sums have been paid. If payment so due is not paid within said thirty (30) day period, Contractor shall be entitled to lift and export from Crude Oil to which SOCAR is entitled a quantity of Crude Oil, as is necessary to satisfy sums due to Contractor. The volume of Crude Oil to which Contractor shall be entitled shall be determined in accordance with the valuation procedure set forth in Article 13.1 applicable on the date Contractor lifts such Crude Oil from SOCAR’s entitlement.



(d) To the extent that Contractor Parties (or their Affiliates) incur any fees, charges or penalties under contracts with Third Parties (including but not limited to pipeline and terminaling agreements) as a result of SOCAR’s exercise of its rights pursuant to Article 19.3(a), SOCAR shall be liable for and shall reimburse Contractor Parties in Foreign Exchange for such fees, charges and penalties. SOCAR shall have no liability to Contractor Parties for penalties Contractor Parties (or their Affiliates) may incur under contracts with Third Parties as a result of SOCAR’s exercise of its rights under Article 19.3(b). Contractor to the extent practicable will from time-to-time notify SOCAR of any anticipated fees, charges and penalties.



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19.4 Marketing of Crude Oil for SOCAR

If a marketing agreement has been mutually agreed between SOCAR and Contractor, Contractor shall market for SOCAR, if SOCAR so requests pursuant to the terms of such separate marketing agreement, all or a portion of SOCAR’s share of Crude Oil. The amount of Crude Oil which will be subject to the foregoing obligation to market shall be stated in a written notice from SOCAR to Contractor no later than ninety (90) days prior to the beginning of the applicable Calendar Quarter. Any marketing undertaken by Contractor pursuant to this Article 19.4 shall not affect title to and risk of loss of SOCAR’s share of Total Production which shall remain with SOCAR.



19.5 Maximum Efficient Rate

It is the intention of the Parties that the Petroleum resources of the Contract Area should be produced at the optimum rate which is to be fully consistent with the then current economic conditions, and the principles of sound reservoir management according to international Petroleum industry practice, in order to provide for the most economically efficient recovery of Petroleum (“Maximum Efficient Rate”). Consistent with the foregoing, and taking into account local experience in managing similar reservoirs, Contractor shall submit for agreement of the Steering Committee, at the same time as it submits the Annual Work Programme and Budget to the Steering Committee, Contractor’s estimate of the relevant Calendar Year’s production volume, but such agreed estimate shall be used for planning purposes only. However, in the event any Governmental Authority requires Contractor to produce Petroleum from the Contract Area at less than the Maximum Efficient Rate Contractor will reduce production, subject to the express condition that such reduction in Petroleum production shall in no event be greater than can be borne entirely from SOCAR’s share of Petroleum remaining after satisfying all other SOCAR obligations hereunder. Contractor’s total entitlement to Petroleum under this Agreement shall, at no time throughout the term of this Agreement, be less than it would have been had such reduction not been made.



Page 110

If due to a declared national emergency Governmental Authority requires an increase in the production rate above the Maximum Efficient Rate, Contractor shall so increase the production rate for a period of time not to exceed forty-five (45) days in any Calendar Year; provided, however, that in no event shall Contractor ever be required to increase the production rate to a level which in Contractor’s opinion could possibly cause damage to the reservoir(s).



Page 111

ARTICLE 20



INSURANCE, LIABILITIES AND

INDEMNITIES



20.1 Insurance



(a) BP shall have the freedom to self insure, or Contractor (which for purposes of clarification with respect to this Article 20 shall include the Operating Company) shall provide the annual insurance programme pursuant to this Article 20.1 included to an Annual Work Programme for the approval of the Steering Committee. Such annual insurance programme shall include purchase of insurance coverage for and in relation to Petroleum Operations for such amounts and against such risks as listed below and/or may be specifically agreed by Contractor and SOCAR. Contractor shall also furnish SOCAR with policies/certificates of insurance confirming the effectiveness of such coverage and waiver by Contractor’s insurers of their rights of subrogation against SOCAR in relation to SOCAR’s property managed by Contractor. Contractor shall appoint a reputable and internationally recognised insurance and reinsurance broking company registered in the Republic of Azerbaijan in order to arrange insurance specified in Articles 20.1(a) (i)–(vii) and (e) below and make sure that specified insurances comply with the legislation of the Republic of Azerbaijan and international standards. Such appointment shall be approved and agreed by Contractor and SOCAR. Insurance specified in Articles 20.1(a) (i) to (vi) below, shall be obtained through the appointed broker from a reputable insurance company established in the Republic of Azerbaijan, so long as risks covered by such company are comparable with customary insurance practice of international Petroleum industry. Without prejudice to the generality of the foregoing, the said insurance shall cover:



Page 112

(i) Loss or damage to any installation, equipment or other assets of Contractor used in or in connection with Petroleum Operations; however, if Contractor fails to insure any such installation, equipment or assets used in or in connection with Petroleum Operations, Contractor shall be liable for their loss or damage, except if such insurances are not available at a reasonable cost;



(ii) Loss, damage, injury arising from pollution of environment in the course of or as a result of Petroleum Operations;



(iii) Loss of or damage to property or bodily injury suffered by any Third Party in the course of or as a result of Petroleum Operations for which Contractor may be liable;



(iv) Any claim for which SOCAR may be liable relating to the loss of or damage to property or bodily injury suffered by any Third Party in the course of or as a result of Petroleum Operations;



(v) Cost of removing wreck and cleaning up operations caused by any accident in the course of or as a result of Petroleum Operations;



(vi) Contractor’s liability to its employees engaged in Petroleum Operations, to the extent that such insurances are available at a reasonable cost;



(vii) Cost of well control and redrilling expenses in accordance with Sections A, B and C of the Energy





Page 113

Exploration and Development Wording 8.86 (Standard London Insurance Market Wording issued by the Rig Committee with respect to well insurance coverage for any types of well), shall include coverage extension as follows:



(aa) unlimited redrilling;

(bb) underground blowout;

(cc) evacuation expenses;

(dd) making well safe.



(b) Unless specifically agreed by SOCAR, minimum limits for the above coverages specified in this Article 20.1 shall be as follows:



pursuant to Article 20.1(a)(i) – replacement value of the installation/property insured;



pursuant to Article 20.1(a)(ii) – a combined single limit of ten million (10,000,000) Dollars or according to requirements of the local legislation, whichever is greater;



pursuant to Articles 20.1(a)(iii) and 20.1(a)(iv) – ten million (10,000,000) Dollars for any one occurrence;



pursuant to Article 20.1(a)(v) – twenty five (25) percent of the value of property insured up to twenty five million (25,000,000) Dollars for any one accident or occurrence;



pursuant to Article 20.1(a)(vi) – a combined single limit of ten million (10,000,000) Dollars or according to requirements of the local legislation, whichever is greater.



Page 114

(c) Unless otherwise agreed between the Parties, maximum insurance deductible for any one accident or occurrence shall be two million (2,000,000) Dollars.



(d) Costs and/or expenses incurred by Contractor’s failure to provide insurance under Articles 20.1(a) (i)–(vii) above shall not be Cost Recoverable, except if such insurance is not available at a reasonable cost.



(e) Contractor shall provide medical insurance to respective employees and shall take out compulsory insurances in accordance with applicable law of the Republic of Azerbaijan.



(f) Except as provided in Article 13.1(d), the premiums for all insurance (excluding premiums for insurance covering the marketing of Petroleum) obtained by Contractor for Petroleum Operations pursuant to this Article 20.1 shall be Cost Recoverable. Insurance cover may be denominated in Foreign Exchange.



(g) Upon Contractor’s request, the local insurance company, as insurer to Contractor, shall reinsure its own liability by internationally accepted reinsurance mechanisms. The reinsurance arrangement between the local insurance company and the reinsurance company shall be approved by SOCAR and Contractor. The insurance company shall submit to SOCAR and Contractor the evidence of reinsurance cover in the form of certificates, cover notes or other legal documents of reinsurance.



(h) Each Contractor Party will be provided the opportunity to have any or all of the insurances to be obtained under Articles 20.1(a) (i)–(vii) reinsured by the local insurance



Page 115

company through such Contractor Party’s Affiliate or preferred insurance company up to its Participating Interest; provided that the security and credit worthiness of such Affiliate insurance company are satisfactory to SOCAR and Contractor.



(i) Sub-contractors, or if agreed between Contractor and Subcontractors, Contractor on behalf of Sub-contractors, shall insure the work performed for Contractor within the Republic of Azerbaijan in accordance with applicable law of the Republic of Azerbaijan and pursuant to this Article 20.1. All deductibles shall be covered by Sub-contractors.

(j) Upon request, Contractor shall furnish SOCAR with certificates and/or cover notes confirming the insurance coverage of Sub-contractor.



20.2 Liability for Damages



The Contractor Parties shall be liable to SOCAR and/or any Governmental Authority only for any loss or damage arising from their Wilful Misconduct or the Wilful Misconduct of their respective employees and Sub-contractors, and Sub-contractors’ employees acting in the scope of their employment in the performance of Petroleum Operations. SOCAR shall release each Contractor Party and its respective Affiliates and Sub-contractors from all other losses and damages suffered by SOCAR and any of its Affiliates and shall indemnify and hold harmless each Contractor Party and its respective Affiliates and Sub-contractors against all claims, demands, actions and proceedings brought against such Contractor Party and/or any of its Affiliates and Sub-contractors pertaining to all other losses and damages suffered by SOCAR and/or any Governmental Authority. The liabilities of Contractor Parties to Third Parties (other than Governmental Authorities) shall be governed by applicable laws of the Republic of Azerbaijan, provided that structures and facilities of SOCAR located in the Caspian Sea outside of the Contract Area shall be treated as if such structures and facilities were owned by a Third Party.



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20.3 Indemnity for Personnel



Notwithstanding the other provisions of this Agreement:



(a) Each Contractor Party shall indemnify and hold harmless SOCAR against all losses, damages and liability arising under any claim, demand, action or proceeding brought or instituted against SOCAR by any employee of the respective Contractor Party (or any Affiliate thereof,provided that such Affiliate, at the time of the injury or damage, is not acting in the capacity of a Sub-contractor) or dependent thereof, for personal injuries, industrial illness, death or damage to personal property sustained in connection with, related to or arising out of the performance or non performance of this Agreement regardless of the fault or negligence in whole or in part of any entity or individual.



(b) SOCAR shall indemnify and hold harmless each Contractor Party against all losses, damages, and liability arising under any claim, demand, action or proceeding brought or instituted against such Contractor Party by any employee of SOCAR (or any Affiliate thereof, which shall include any Governmental Authority, provided that such Affiliate, at the time of the injury or damage, is not acting in the capacity of a Sub-contractor) or dependent thereof, for personal

injuries, industrial illness, death or damage to personal property sustained in connection with, related to or arising out of the performance or non-performance of this Agreement regardless of the fault or negligence in whole or in part of any entity or individual. Each Contractor Party shall, if requested by SOCAR, use its reasonable lawful endeavours to assist SOCAR in its obtaining insurance with respect to its liability under this Article 20.





11720.4 Indemnity Prior to Effective Date



SOCAR shall indemnify each Contractor Party, the Operating Company and their respective Affiliates from and against all losses, damages and liabilities, arising under any claim, demand, action or proceeding instituted against any Contractor Party, the Operating Company and/or any of their Affiliates by any person or entity,

including but not limited to Governmental Authorities, arising out of or in any way connected with any injury, death or damage of any kind sustained in connection with or arising from the Contract Area, any operations of SOCAR or any of its predecessors in the Contract Area, prior to the Effective Date, including but not limited to damage to the environment.



20.5 Indemnity for Surrendered Areas and SOCAR Operations



(a) SOCAR shall indemnify each Contractor Party, the

Operating Company and their Affiliates from and against

all losses, damages and liabilities arising under any claim, demand, action or proceeding instituted against any

Contractor Party and/or any of its Affiliates by any erson or entity, including but not limited to Governmental Authorities, arising out of or in any way connected with any injury, death or damage of any kind sustained in connection with or arising from:



(i) SOCAR’s operations pursuant to Articles 21.3 and

15.2, or as the result of SOCAR access pursuant to Article 7.2; and





118(ii) Any portion of the Contract Area surrendered by

Contractor pursuant to Articles 29.3 and 29.5 and/or any continued use of any assets, and/or the abandonment of any assets, for which SOCAR has assumed control and responsibility from Contractor pursuant to Article 14 and accruing after the date of such surrender and/or SOCAR’s assumption of the use of any such assets and abandonment of any assets, including but not limited to damage to the environment (but excluding any claim, action or proceeding which results from Contractor’s Wilful Misconduct whether occurring before or after the

date of surrender).



(b) In respect of any loss, damage or liability, as well as any claim, demand, action or proceeding instituted against SOCAR by any person or entity for death or damage of any kind sustained in connection with or arising from any portion of the Contract Area surrendered by Contractor and accruing on or before the date of surrender, including but not limited to damage to the environment, the provisions of this Agreement, and Contractor’s obligations hereunder, shall continue to apply.



20.6 Joint and Several Liability



Except as provided under Articles 12 and 27.1, the liability of the Contractor Parties shall be joint and several with respect to all of the obligations of Contractor under this Agreement.



20.7 Consequential Losses

With respect to indirect or consequential loss arising out of or in connection with this Agreement or any activities thereunder, notwithstanding anything to the contrary elsewhere in the





119Agreement the Parties shall not be liable whether in contract, tort or otherwise and regardless of any negligence under any circumstances whatsoever for any indirect or consequential loss save that a Party shall be liable for indirect or consequential loss to the extent that the same arise from any derogation from the rights and benefits granted by that Party under this Agreement. For the purposes of this Article 20.7 the expression “indirect or consequential loss” shall mean any indirect or consequential loss or damage including but not limited to inability to produce Petroleum, loss of or delay in production of Petroleum or loss of profits.









120ARTICLE 21



FORCE MAJEURE



21.1 Force Majeure



Non-performance or delays in performance on the part of any Party of its obligations (or any part thereof) under this Agreement, other than the obligation to pay money, shall be excused if occasioned or caused by Force Majeure. “Force Majeure” means any event which prevents, hinders or impedes Petroleum Operations and is beyond the ability of the affected Party to control such event or its consequences using reasonable efforts, including without limitation, extraordinary events, natural disasters (for example lightning and earthquake), wars (declared or undeclared) or other military activity, jurisdictional change with respect to the Contract Area, fire, labour disputes, insurrections, rebellions, acts of terrorism, riot, civil commotion, and laws, treaties, rules, regulations, decrees, orders, actions or inactions of any governmental authority which prevent hinder or impede Contractor’s conduct of operations or which substantially impairs or threatens Contractor’s rights under this Agreement; provided, however, that laws, treaties, rules, regulations, decrees, orders or other acts of any entity or agency acting on behalf of, under the auspices of, or at the direction of any Governmental Authority within the territory of the Republic of Azerbaijan shall not constitute Force Majeure with respect to delay or non-performance on the part of SOCAR. Each Party shall use its reasonable lawful efforts to prevent the occurrence of Force Majeure events. Upon the occurrence of any Force Majeure event, the Party affected shall give prompt notice to the other Parties specifying the event of Force Majeure (and providing evidence thereof) and shall do all things possible using reasonable lawful efforts to remove or mitigate the effect of the Force Majeure event. If the government within whose jurisdiction a Contractor Party or its Ultimate Parent Company is incorporated or is subject takes actions which preclude such Contractor Party from fulfilling its obligations under this Agreement, the remaining Contractor Parties may not claim such an event as Force Majeure and shall, consistent



Page 121

with the principles set forth in Article 20.6, continue to fulfil their obligations under this Agreement.







21.2 Extension of Time



If Petroleum Operations are delayed, curtailed or prevented by Force Majeure, then the time for carrying out the obligations affected thereby, the duration of the relevant phase of Petroleum Operations, the term of this Agreement (including any extension period hereof) and all rights and obligations hereunder shall be extended for a period equal to the delay caused by the Force Majeure occurrence plus such period of time as is necessary to reestablish operations upon removal or termination of Force Majeure.



Notwithstanding any provision in this Agreement to the contrary, Finance Costs shall not be applied to any unrecovered Petroleum Costs during the period of Force Majeure.



21.3 Post-Production Force Majeure



If at any time after the Commencement Date of Commercial

Production from the Contract Area Contractor declares Force Majeure and such Force Majeure situation has continued for a period of not less than ninety (90) consecutive days and such Force Majeure results of events outside the Republic of Azerbaijan or as a result of any action on the part of Governmental Authority and as a result of such Force Majeure Contractor has been unable to produce Petroleum under this Agreement then SOCAR and Contractor shall meet within fifteen (15) days following the expiry of the said period of ninety (90) days to discuss how best to continue production.





122 Failing agreement on satisfactory arrangements within ninety (90) days thereafter SOCAR shall have the option of itself or its Affiliate assuming operations hereunder and continuing production of Petroleum during the period of Force Majeure at its risk and cost with the possible participation of sub-contractors until Contractor declares the cessation of the Force Majeure circumstance when Contractor shall resume its full responsibilities for production of Petroleum under this Agreement.







SOCAR or its Affiliate shall be entitled to recover SOCAR’s or its Affiliate’s direct costs in accordance with the Cost Recovery mechanism and shall credit the Petroleum Operations Account for the volumes of Petroleum delivered whilst the Force Majeure circumstance continued at international prices at the Points of Sale used prior to commencement of the Force Majeure.







123 ARTICLE 22



VALIDITY, ASSIGNMENT AND GUARANTEES





22.1 Validity



(a) Except as otherwise provided under Article 22.1(b), this Agreement shall constitute a valid and binding legal obligation enforceable in accordance with its terms among the Parties and their respective successors and assigns as of the Effective Date. SOCAR guarantees that as of the date of execution no other agreement exists with respect to the Petroleum rights within the Contract Area. SOCAR further guarantees that between the date of execution and the Effective Date it shall not enter into any negotiations or arrangements with any Third Party for the granting of rights to explore for, appraise or develop, Petroleum from within

the Contract Area (or any part thereof). From and after the Effective Date this Agreement shall not be cancelled, amended or modified except in accordance with its terms or by written agreement between the Parties. The Parties acknowledge the necessity of continuing to work in good faith to resolve any matters not presently covered by this Agreement.





(b) In recognition by the Parties that certain obligations have to be performed on or before the Effective Date, it is agreed that the provisions of Article 25.1(b), and SOCAR’s guarantees under Article 22.1(a) shall come into force on the Execution Date.





(c) In the event this Agreement is finally rejected by Milli Mejlis of the Republic of Azerbaijan and Contractor has notified SOCAR that any further revisions to this







124Agreement, if any, necessary for ratification are unacceptable to Contractor, this Agreement shall not become effective, the rights and obligations of the Parties under this Agreement and any previous agreements pertaining to the Contract Area shall be extinguished.



22.2 Assignment

(a) Restriction. No assignment, mortgage, pledge or other encumbrance shall be made by a Contractor Party of its rights and obligations arising under this Agreement other than in accordance with the provisions of this Article 22.2. Any purported assignment made in breach of the provisions of this Article 22.2 shall be null and void. For purposes of this Article 22 transfer of control (as defined in Article 9.2(c)) of a Contractor Party (other than for the purposes of internal reconstruction or amalgamation) shall be deemed an assignment under this Agreement. Except in the case of a Contractor Party assigning all of its percentage Participating Interest, no Contractor Party shall assign less than a five (5) percent percentage Participating Interest without SOCAR’s approval.

(b) By a Contractor Party

(i) Assignments to Third Parties. Subject to the provisions of this Article 22.2(b) a Contractor Party shall be entitled to assign all or part of its rights and obligations arising under this Agreement to any Third Party which:

(aa) has the technical and financial ability commensurate with the responsibilities and obligations which would be imposed on it hereunder;



Page 125 (bb) as to the interest assigned, accepts and assumes all of the terms and conditions of this Agreement; and



(cc) is an entity with which SOCAR can legally do business.



(ii) Encumbrance by Contractor Party. Without prejudice to its obligations hereunder, each Contractor Party shall have the right to freely mortgage, pledge or otherwise encumber its interests in the Agreement or any property in or outside the Republic of Azerbaijan which is used for Petroleum Operations, provided that any such mortgage, pledge or other encumbrance shall be made expressly subject to the terms of this Agreement.





(iii) Approval of SOCAR. Any proposed assignment, mortgage, pledge or other encumbrance by a Contractor Party to a Third Party shall require the prior approval of SOCAR which approval shall not be unreasonably withheld. If within ninety (90) days following notification to SOCAR of a proposed assignment accompanied by the relevant

information and the draft deed of assignment, mortgage, pledge or other encumbrance, SOCAR has not given its decision, such assignment, mortgage, pledge or other encumbrance shall be deemed to be approved by SOCAR.





(iv) Obligations of Assignee. In the event a Contractor

Party assigns all or a portion of its rights and obligations arising under this Agreement, and the

assignment has been approved or deemed approved







126by SOCAR, the assignor shall, to the extent of the

interest assigned, be released from all further

obligations and liabilities arising under this

Agreement after the effective date of such

assignment. The assignee with the remaining

Contractor Parties shall thereafter be jointly and

severally liable for the obligations arising from this

Agreement, except to the extent otherwise provided

under this Agreement.



(v) Assignments to Affiliates and Contractor Parties. A

Contractor Party shall be entitled at any time to

assign all or part of its rights and obligations arising

from this Agreement to one or more of its Affiliates

or to any of the Contractor Parties without the prior

consent of SOCAR, provided that SOCAR shall be

promptly advised of any such assignment.

Additionally, with respect to an assignment by a

Contractor Party to an Affiliate, any such Affiliate

must satisfy the requirements of Article 22.2(b)(i)

above, and further provided that the assigning party

shall remain liable for obligations under this

Agreement in the same manner as though no

assignment had been made.



22.3 No Tax on Assignments

Any assignment or transfer pursuant to Article 22.2 shall be free of

Taxes, except the Profit Tax as per Article 12.9, and shall be free of

any cost or charge to Contractor Parties.





22.4 Conditions on Assignment

Any assignment by a Contractor Party shall be expressly conditioned

upon the assignee providing to SOCAR an Ultimate Parent Company

Guarantee similar to that referred to in Article 22.5.



12722.5 Ultimate Parent Company Guarantees



BP shall as soon as practicable after the Execution Date but not later than the Effective Date, provide to SOCAR an Ultimate Parent Company Guarantee.



SOCAR hereby guarantees to each Contractor Party other than SOA:



(a) all funds necessary for SOA to fulfil all of its obligations, financial or otherwise, under the Agreement; and



(b) the rights granted and the obligations undertaken by SOA.



22.6 Government Guarantee



Upon the Execution Date but not later than the Effective Date, SOCAR shall procure the execution of the Government Guarantee. An executed original of the Government Guarantee shall be provided to each Contractor Party and shall be included in the executed copy of this Agreement to be submitted to Milli Mejlis of the Republic of Azerbaijan. Upon ratification and approval of this

Agreement by Milli Mejlis of the Republic of Azerbaijan and publication in the customary manner the Government Guarantee shall have the force of law of the Republic of Azerbaijan.







128 ARTICLE 23



APPLICABLE LAW, ECONOMIC

STABILISATION AND ARBITRATION



23.1 Applicable Law



This Agreement shall be governed and interpreted in accordance with principles of law common to the law of the Republic of Azerbaijan and English law, and to the extent that no common principles exist in relation to any matter then in accordance with the principles of the common law of Alberta, Canada (except for laws regarding conflicts of laws). This Agreement shall also be subject to the international legal principle of pacta sunt servanda (agreements must be observed). Upon approval by Milli Mejlis of the Republic of Azerbaijan of this Agreement, this Agreement shall constitute a law of the Republic of Azerbaijan and shall take precedence over

any other current or future law, decree or dministrative order (or part thereof) of the Republic of Azerbaijan which is inconsistent with or conflicts with this Agreement except as specifically otherwise provided in this Agreement.



23.2 Economic Stabilisation



The rights and interests accruing to Contractor (or its assignees) under this Agreement and its Sub-contractors under this Agreement shall not be amended, modified or reduced without the prior consent of Contractor. In the event that any Governmental Authority invokes any present or future law, treaty, intergovernmental agreement, decree or administrative order which contravenes the provisions of this Agreement or adversely or positively affects the rights or interests of Contractor hereunder, including, but not limited to, any changes in tax legislation, regulations, or

administrative practice, or jurisdictional changes pertaining to the Contract Area, the terms of this Agreement shall be adjusted to reestablish the economic equilibrium of the Parties, and if the rights or interests of Contractor have been adversely affected, then SOCAR shall indemnify Contractor (and its assignees) for any





129 disbenefit, deterioration in economic circumstances, loss or

damages that ensue therefrom. SOCAR shall within the full limits

of its authority use its reasonable lawful endeavours to ensure that

the appropriate Governmental Authorities will take appropriate

measures to resolve promptly in accordance with the foregoing

principles any conflict or anomaly between any such treaty,

intergovernmental agreement, law, decree or administrative order

and this Agreement.



23.3 Arbitration

(a) Except for any matter to be referred to an expert pursuant to

Article 13.1(c) in the event of a dispute arising between

SOCAR and any or all of the Contractor Parties (including

matters which are not resolved at the Steering Committee),

the disputing Parties shall meet in an attempt to resolve the

dispute to their mutual satisfaction by reference to the terms

of this Agreement. If satisfactory mutual agreement is not

achieved within thirty (30) days after receipt by a Party of

notice of such dispute, such dispute shall be settled in

accordance with the Arbitration Procedure and the

applicable law provisions of Article 23.1.



(b) Nothing in this Agreement shall limit the rights of the

Contractor Parties pursuant to the existing laws of the

Republic of Azerbaijan on protection of foreign

investments, which rights shall apply in addition to any

other rights Contractor may have under this Agreement

notwithstanding any other law, both current and future, in

the Republic of Azerbaijan. If any of Contractor’s rights,

interests or property are expropriated, nationalised or

otherwise taken by reason of any act or failure to act of any

Governmental Authority, then the arbitrators shall apply the

principle of indemnification (including prompt, full and





130effective compensation in Dollars) at the full market value, on the basis of an on-going concern utilising the discounted cash flow method, assuming a willing buyer and seller in a non-hostile environment, and disregarding the unfavourable circumstances under which or following which Contractor shall be deprived of its rights, interest (including its interest in undeveloped reserves) or property. The arbitrators shall select an investment bank of good international reputation for purpose of appraising the full market value of said rights, interest (including its interest in undeveloped reserves) or property of Contractor.







(c) The rights and obligations under this Article 23.3 shall survive the termination of this Agreement.









131ARTICLE 24



NOTICES



All notices required to be given pursuant to this Agreement shall be in writing in English and/or Azerbaijani and may be given by facsimile or letter to the address set out below for each Party (or such other address as a Party may notify to the other Parties from time to time) provided, however, that following the Effective Date any notices required to be given to Contractor Parties hereunder by SOCAR (except any notice of breach pursuant to Article 29, any notice pursuant to Article 22.2(b)(iii) and any notice of termination of this Agreement and any notice of arbitration pursuant to Article 23.3) shall be considered effective as to all Contractor Parties if given to the Operating Company in accordance with this Article 24. Contractor shall advise SOCAR of details of the name and address of the Operating Company (and of any changes thereto) as soon as practicable after its formation. A notice given by facsimile shall be deemed to be served on the first working day following the date of dispatch. A notice sent by letter shall not be deemed to be delivered until received. Notices of termination of this Agreement and notices of Material Breach shall only be given by letter.



SOCAR: State Oil Company of the Republic of Azerbaijan

Neftchilar Prospekti 73

Baku AZ1000

Republic of Azerbaijan

Fax: (+994 12) 493 64 92

Tel: (+994 12) 492 07 45

Attention: President



Page 132

BP: BP Exploration (Azerbaijan) Limited

Villa Petrolea

Neftchilar Prospekti 2

Baku AZ1003

Republic of Azerbaijan

Fax: (+994 12) 497 9602

Tel: (+994 12) 497 9000

Attention: Director



and copied for information to:



BP Exploration Operating Company Limited

Chertsey Road

Sunbury on Thames

Middlesex TW16 7BP

United Kingdom

Fax: +44 1932 756000

Attention: Asset Manager, Azerbaijan





SOA: Care of: State Oil Company of the Republic of Azerbaijan

Neftchilar Prospekti 73

Baku AZ1000

Republic of Azerbaijan

Fax: (+994 12) 493 64 92

Tel: (+994 12) 492 07 45

Attention: President ARTICLE 25



EFFECTIVE DATE



25.1 Effective Date

(a) The Effective Date shall be the date upon which SOCAR delivers to Contractor written evidence of the enactment by the legislature of the Republic of Azerbaijan in full compliance with the Constitution of the Republic of Azerbaijan and all requisite legal formalities and procedures and publication in the customary manner of legislation giving this Agreement (including the Government Guarantee), the full force of law in the Republic of Azerbaijan, provided, however, that the enactment as aforesaid shall not be sought by the Parties (and the Effective Date shall not occur) until the following conditions precedent have been satisfied:



(i) authorisation to enter into this Agreement by the Boards of Directors of each of the Parties (if applicable under the foundation documents of such Party);



(ii) delivery to SOCAR of BP’s Ultimate Parent Company Guarantee;



(iii) delivery to each of the Other Contractor Parties of the Government Guarantee.



(b) The Parties shall use their best endeavours to obtain as soon as possible: (1) satisfaction of the conditions referred to in Article 25.1(a) (i) to (iii), and upon satisfaction thereof (2) the enactment as aforesaid by the legislature of the Republic of Azerbaijan giving this Agreement and the said Government Guarantee the full force of law in the Republic of Azerbaijan.



Page 134

25.2 Pre-Effective Date Petroleum Operations

Notwithstanding the provisions of Article 25.1, in the event that, from the Execution Date and prior to the Effective Date, Contractor, with prior written consent of SOCAR, does conduct Petroleum Operations, the costs incurred by Contractor in relation to such Petroleum Operations shall be Cost Recoverable.



Page 135

ARTICLE 26

ENVIRONMENTAL PROTECTION AND SAFETY



26.1 Environmental Standards



Contractor shall develop jointly with SOCAR and the Ministry of Ecology and Natural Resources of the Republic of Azerbaijan (“MENR”) safety and environmental protection standards and practices appropriate for the regulation of Petroleum Operations. The safety and environmental protection standards shall take account of the specific environmental characteristics of the Caspian Sea and draw, as appropriate, on (i) international Petroleum industry standards and experience with their implementation in exploration and production operations in other parts of the world and (ii) existing Azerbaijan safety and environmental legislation. In compilation of such standards and practices account shall be taken of such matters as environmental quality objectives, technical feasibility and economic and commercial viability. Subject to the

first sentence of Article 26.4 the standards, which shall apply to Petroleum Operations from Effective Date shall be the standards and practices set out in part II of Appendix 9 until substituted by new safety and environmental protection standards devised and agreed between Contractor, SOCAR and MENR. Such substitution

shall take effect following the written agreement between Contractor, SOCAR and MENR on a date agreed between the Parties and MENR and from such date such agreed standards and practices shall have the force of law as if set out in full in the Agreement. In the event that safety and environmental protection standards and practices are imposed otherwise than with the agreement of Contractor it is agreed that the provisions of Article 23.2 shall apply. The Parties and MENR shall agree a separate protocol for the detailed implementation of the joint development and definition of the new standards and practices for safety and

environmental protection. The cost to Contractor of such

development and definition shall be Cost Recoverable.





13626.2 Conduct of Operations

Contractor shall conduct the Petroleum Operations in a diligent, safe and efficient manner in accordance with the Environmental Standards and shall take all reasonable actions in accordance with the Environmental Standards to minimise any potential disturbance to the general environment, including without limitation the surface, subsurface, sea, air, lakes, rivers, animal life, plant life, crops and other natural resources and property. The order of priority for actions shall be the protection of life, environment and property. Contractor shall implement an integrated management system covering all health, safety and environmental aspects of the activities carried out in relation to the Petroleum Operations as outlined in part I of Appendix 9.



26.3 Emergencies

In the event of emergency and accidents, including but not limited to explosions, blow-outs, leaks and other incidents which damage or might damage the environment, Contractor shall promptly notify MENR and SOCAR of such circumstances and of its first steps to remedy this situation and the results of said efforts. Contractor shall use all reasonable endeavours to take immediate steps to bring the emergency situation under control and protect against loss of life and loss of or damage to property and prevent harm to natural resources and to the general environment. Contractor shall also report to SOCAR and appropriate Governmental Authorities on the measures taken.



26.4 Compliance

Contractor shall comply with present and future Azerbaijani laws or regulations of general applicability with respect to public health, safety and protection and restoration of the environment, to the extent that such laws and regulations are no more stringent than the



Page 137

Environmental Standards. In the event any regional or multigovernmental authority having jurisdiction enacts or promulgates environmental standards relating to the Contract Area, the Parties will discuss the possible impact thereof on the project. The provisions of Article 23.2 shall apply to any compliance or attempted compliance by Contractor with any such standards which

adversely affect the rights or interests of Contractor hereunder.



26.5 Environmental Protection Strategy



An environmental protection strategy shall be developed which shall include:



(a) the establishment of an environmental management system as an integral part of Petroleum Operations and the formation of an environmental sub-committee as described in the Environmental Standards;



(b) an environmental work programme carried out in sequences appropriate to the normal phases of Petroleum Operations as described in the Environmental Standards (seismic survey, exploration drilling, field development and production).



26.6 Environmental Damage



(a) Contractor shall be liable for those direct losses or damages incurred by a Third Party (other than Governmental Authority) arising out of any environmental pollution determined by the appropriate court of the Republic of Azerbaijan to have been caused by the fault of Contractor. In the event of any environmental pollution or environmental damage caused by the fault of Contractor, Contractor shall reasonably endeavour, in accordance with generally acceptable international Petroleum industry







138practices, to mitigate the effect of any such pollution or

damage on the environment.



(b) Contractor shall not be responsible and shall bear no cost,expense or liability for claims, damages or losses arising out of or related to any environmental pollution or other environmental damage, condition or problems which it did not cause, including but not limited to those in existence prior to the Effective Date of this Agreement and SOCAR shall indemnify and hold harmless Contractor, its Subcontractor and its and their consultants, agents, employees, officers and directors from any and all costs, expenses and liabilities relating thereto.









(c) Any damages, liability, losses, costs and expenses incurred by Contractor arising out of or related to any claim, demand, action or proceeding brought against Contractor, as well as the costs of any remediation and clean-up work undertaken by Contractor, on account of any environmental pollution or environmental damage (except for such pollution or damage resulting from Contractor’s Wilful Misconduct) caused by Contractor shall be included in Petroleum Costs.















139ARTICLE 27



CONFIDENTIALITY



27.1 General Provisions



(a) Each Party agrees that all information and data of a technically, geologically or commercially sensitive nature acquired or obtained relating to Petroleum Operations and which on the Effective Date is not in the public domain or otherwise legally in the possession of such Party without restriction on disclosure shall be considered confidential and shall be kept confidential (subject to Contractor’s right to use such data and information in accordance with Article 14.1(e) and to trade in such data and information in accordance with Article 27.2) and not be disclosed to any person or entity not a Party to this Agreement, except:



(i) To an Affiliate, provided such Affiliate maintains confidentiality as provided in this Agreement;



(ii) To a Governmental Authority when required by this Agreement;



(iii) To the extent such data and information is required to be furnished in compliance with any applicable laws or regulations, or pursuant to any legal proceedings or because of any order of any court binding upon a Party;



(iv) Subject to (c) below, to potential Sub-contractors, consultants and attorneys employed by any Contractor Party where disclosure of such data or information is essential to such Sub-contractor’s,



Page 140

consultant’s or attorney’s work;



(v) Subject to (c) below, to a bona fide prospective

transferee of a Party’s Participating Interest (including an entity with whom a Party is conducting bona fide negotiations directed toward a merger, consolidation or the sale of a majority of its or an Affiliate’s shares);



(vi) Subject to (c) below, to a bank or other financial

institution to the extent appropriate to a Party

arranging for funding for its obligations under this

Agreement;



(vii) To the extent such data and information must be

disclosed pursuant to any rules or requirements of any government or stock exchange having jurisdiction over such Contractor Party, or its Affiliates;



(viii) Where any data or information which, through no

fault of a Contractor Party, becomes a part of the public domain; and



(ix) To the arbitrators in accordance with Article 23 or

to any expert in connection with Article 13.1(c) of this Agreement.



(b) Each Party shall take customary precautions to ensure such data and information on Petroleum Operations is kept

confidential by its respective employees.



(c) Disclosure pursuant to Articles 27.1(a) (iv), (v) and (vi) shall not be made unless prior to each such disclosure the disclosing Party has obtained a written undertaking from

the recipient party to keep the data and information strictly confidential from Third Parties (except for data which is or becomes in the public domain) and not to use or disclose the data and information except for the express purpose for which disclosure is to be made without the prior written permission of the other Parties.



(d) Any Contractor Party ceasing to own a Participating

Interest during the term of this Agreement shall nonetheless remain bound by the obligations of confidentiality set forth above and any disputes shall be resolved in accordance with the Arbitration Procedure, and the confidentiality obligations of the Contractor Parties as set forth herein shall survive a period of five (5) years from the termination of this Agreement.



27.2 Trading of Data



Notwithstanding the foregoing, in accordance with Article 14.1(e), Contractor shall have the free right to trade with Third Parties all data relating to the Contract Area for other data relating to the Republic of Azerbaijan with the approval of SOCAR, such approval

not to be unreasonably withheld.



27.3 Corporate Disclosure



Each Contractor Party, notwithstanding any other provisions in this Article 27 may make disclosures in annual reports, employee and stockholder newsletters, magazines and the like of summarisation of a general nature relating to Petroleum Operations, which are

customarily or routinely described or reported in such publications.





142ARTICLE 28



BONUS PAYMENTS AND ACREAGE FEES



28.1 Contractor Bonus Payments



The Other Contractor Parties shall pay to SOCAR the Bonus as follows:



(a) Twenty million (20,000,000) Dollars shall be paid within thirty (30) days following the Effective Date.

(b) In the event of a Crude Oil Discovery, one million (1,000,000) Dollars per each one hundred million (100,000,000) Barrels of Crude Oil specified to be commercially recoverable in the Development Programme shall be paid within thirty (30) days following SOCAR’s approval or deemed approval of the Development Programme.

(c) If the event of a Non-associated Natural Gas Discovery, the Bonus payments shall be calculated and payable, separately in respect of each Natural Gas Sale and Purchase Agreement (NGSPA), as follows:

(i) Subject to Article 28.1(c)(v), Bonus payments shall be calculated on the basis of one million seven hundred and ninety eight thousand eight hundred and eighty five (1,798,885) Dollars per one trillion cubic feet (1 tcf) of Non-associated Natural Gas and ten thousand (10,000) Dollars per one million (1,000,000) Barrels of Crude Oil.

(ii) An initial Bonus payment shall be made in respect of each NGSPA entered into during the Development and Production Period, which shall:



Page 143

(1) be calculated on the lesser of (i) the amount of Non-associated Natural Gas that Contractor is obliged to make available under the relevant NGSPA and (ii) the amount of Non-associated Natural Gas that the purchaser under the relevant NGSPA is obliged to take and pay for (or pay for if not taken) if made available, to the extent that such amount is producible within the remaining duration of the Development and Production Period, together with Crude Oil expected to be produced in association therewith; and



(2) be payable within thirty (30) days of the date upon which the relevant NGSPA enters into full force and effect with all conditions precedent having been either satisfied or agreed to be waived.



(iii) Except as provided in Article 28.1(d), no subsequent Bonus payment shall be made in respect of an NGSPA until the end of the Calendar Year in which either the actual cumulative Non-associated Natural Gas or cumulative Crude Oil production from the Contract Area in respect of such NGSPA exceeds the amount of Non-associated Natural Gas or Crude Oil production upon which the initial Bonus in respect of such NGSPA has been calculated, whereupon the following provisions shall apply in respect of such NGSPA:



(1) at the end of said Calendar Year, and at the end of each Calendar Year thereafter the actual cumulative produced volumes of Non-associated Natural Gas and Crude Oil shall be determined in respect of such NGSPA and the Other Contractor Parties shall pay to SOCAR as subsequent Bonus (i) an amount



144equal to the Bonus payable on such cumulative produced volumes of Nonassociated Natural Gas (calculated in accordance with Article 28.1(c)(i) above) less any amounts already paid to SOCAR as Bonus in respect of such Non-associated Natural Gas pursuant to this Article 28.1(c), and (ii) an amount equal to the Bonus payable on such cumulative produced volumes of Crude Oil (calculated in accordance with Article 28.1(c)(i) above) less any amounts already paid to SOCAR as Bonus in respect of such Crude Oil pursuant to this Article 28.1(c); and



(2) any subsequent Bonus payable to SOCAR pursuant to this Article 28.1(c)(iii) shall be payable within thirty (30) days of the end of the Calendar Year to which the payment relates.



(iv) The initial Bonus payment pursuant to Article 28.1(c)(ii) shall not be repayable, in whole or in part, if, for any reason, the reserves upon which it is based are not produced by Contractor.





(v) For the purposes of calculating any subsequent Bonus payable pursuant to Article 28.1(c)(iii), the Dollar amounts referred to in Article 28.1(c)(i) shall be escalated at the annual interest rate of LIBOR, from the date of payment of the initial Bonus pursuant to Article 28.1(c)(ii)(2) to the date when any subsequent Bonus becomes payable pursuant to Article 28.1(c)(iii)(2).



(d) Fifty million (50,000,000) Dollars shall be paid within thirty (30) days of the Commencement Date of Commercial Production.



Page 145

(e) For the purposes of calculation of Bonuses payable pursuant to this Article 28.1, the determination of the volume of Natural Gas equivalent to one (1) Barrel of Crude Oil included in the Development Programme shall be based on a conversion factor of five thousand five hundred and fifty nine standard cubic feet per Barrel of oil equivalent (5,559 scf/boe) (the “Conversion Factor”).



Bonus payments by the Other Contractor Parties shall be made into SOCAR’s nominated account in a bank of good international repute and shall be deemed paid when a full amount has been deposited into such bank account net of any possible charges and fees.



28.2 Acreage Fees

The Other Contractor Parties shall pay annual acreage fees of two thousand (2,000) Dollars per square kilometre of the Contract Area during the Exploration Period and the Additional Exploration Period (if Contractor proceeds to the Additional Exploration Period pursuant to Article 4.3). Acreage fees shall be paid annually in arrears on each anniversary of the Effective Date.



28.3 Miscellaneous

The payments made by the Other Contractor Parties pursuant to this Article 28 shall not be Cost Recoverable.



Page 146

ARTICLE 29



TERMINATION



29.1 Material Breach

(a) This Agreement may be terminated at any time:



(i) by SOCAR if Contractor commits, or



(ii) by Contractor if SOCAR or any Governmental Authority commits



a Material Breach of its obligations under this Agreement or the Government Guarantee, as the case may be, and fails to cure or remedy such Material Breach within ninety (90) days following written notice to it from the other describing the particulars of such Material Breach as well as its intention to terminate this Agreement on account of such Material Breach; provided however, that



(aa) if such Material Breach can be cured or remedied but not within ninety (90) days despite the exercise of reasonable diligence, then there shall be no right to terminate so long as the Party alleged to be in Material Breach commences within said ninety (90) days actions reasonably necessary to cure or remedy such Material Breach and diligently pursues such actions until the Material Breach is cured or remedied, it being understood that in such instance the Parties shall endeavour to reach mutual agreement on the actions necessary to cure or remedy the Material Breach; and



Page 147

(bb) if either Contractor or SOCAR, as the case may be, within said ninety (90) day period refers the question of Material Breach to arbitration in accordance with the Arbitration Procedure, then termination of this Agreement will not occur unless and until (1) the arbitration proceeding results in a finding that such Material Breach does in fact exist, and (2) the Party found to have been in breach has had a reasonable opportunity thereafter (but in no event less than ninety (90) days), but failed, to cure or remedy the Material Breach identified by the arbitration panel, unless such Party has been diligently pursuing such actions and continues to do so until such Material Breach is cured or remedied. The arbitration tribunal’s award shall be final and binding on the Parties and shall be immediately enforceable; and



(cc) as used in this Agreement the term “Material Breach” means a fundamental breach, which, if not cured, is tantamount to the frustration of the entire Agreement either as a result of the unequivocal refusal of either Contractor, SOCAR or a Governmental Authority, as the case may be, to perform its contractual obligations or as a result of conduct which has destroyed the commercial purpose of this Agreement.



(b) A failure to complete any of the activities listed in Articles 4.2(a) (i)–(iii) and 4.3 other than as a result of Force Majeure, shall be deemed to constitute a Material Breach of the Agreement by Contractor whereupon SOCAR shall have the right to unilaterally terminate this Agreement upon giving written notice to Contractor without Contractor being entitled to any period within which to cure or remedy such Material Breach as provided in Article 29.1(a). Termination of the Agreement by SOCAR pursuant to Articles 4.2(c) and 4.3 and this Article 29.1 shall be



Page 148

SOCAR’s sole remedy against Contractor for such Material Breach and Contractor shall have no claim for reimbursement of any costs incurred by Contractor with respect to the execution of the said activities.



29.2 Termination by SOCAR



SOCAR may terminate this Agreement by giving Contractor ninety (90) days prior written notice:



(a) If any company issuing an Ultimate Parent Company Guarantee on behalf of any Contractor Party becomes insolvent or goes into liquidation (other than for the purpose of amalgamation or reorganisation), provided that such notice of termination shall take effect as soon as the other Contractor Parties, because of their insolvency or liquidation, and subject to the provisions of joint liability, are not able to assume such Contractor Party’s rights and obligations under this Agreement and so notify SOCAR within such ninety (90) day period.



(b) If all Contractor Parties collectively become insolvent or go into liquidation (other than for the purposes of amalgamation or reconstruction).



(c) If, for reasons other than Force Majeure, production of Petroleum in commercial quantities shall have permanently ceased.





29.3 Termination/Relinquishment by Contractor



(a) Contractor may terminate this Agreement with effect on or at any time after the expiry of the Exploration Period, or if Contractor enters the Additional Exploration Period then with effect on or at any time after the expiry of the Additional Exploration Period, and after fulfilment in full to



Page 149

the satisfaction of SOCAR of the work provided in Articles 4.2(a) (i)–(iii) and 4.3(a), as the case may be, by giving SOCAR ninety (90) days prior written notice. Upon such termination, Contractor shall have no further obligations of any kind whatsoever to SOCAR except for the performance of its obligations under the then current Annual Work Programme.



(b) Subject to the remaining provisions of this Article 29.3, Contractor may at any time voluntarily relinquish all of the Contract Area by giving SOCAR not less than ninety (90) days prior written notice. Such notice shall specify the date upon which the relinquishment is to take effect and the manner in which Contractor will perform any remaining obligations pursuant to Article 29.3(c). Upon such relinquishment, this Agreement shall terminate and the Parties shall be relieved of any obligations assumed other than those set forth in Article 29.3(c). If SOCAR or Contractor requests, a meeting of the Steering Committee shall be convened to address any questions which may arise in connection with the relinquishment.



(c) Termination of this Agreement or relinquishment of the entire Contract Area by Contractor pursuant to Article 29.3 (a) or (b) shall not relieve Contractor of any remaining obligations under the then current Annual Work Programme which Contractor upon the prior agreement with SOCAR may fulfil, at Contractor’s option:



(i) by performing in full in accordance with such Annual Work Programme; or



(ii) by payment in Dollars to SOCAR of the outstanding balance of money stipulated in the respective Budget.



Page 150

(d) In the event of termination of this Agreement or relinquishment of the entire Contract Area pursuant to Article 29.3 (a) or (b), without prejudice to any rights which may have accrued, or claims which have been made, prior to such termination, Contractor shall have no further rights to conduct Petroleum Operations or to recover any Petroleum Costs not Cost Recovered by the date of termination.



(e) Without prejudice to provisions of Article 3.5, if SOCAR terminates the Agreement pursuant to Articles 4.2(c) and 4.3, or if Contractor relinquishes the entire Contract Area pursuant to Article 29.3(b), SOA shall not be bound by the obligation to reimburse to the Other Contractor Parties the costs of the Carry incurred in accordance with Article 3.5(a) and which have not been recovered as at the date of such termination or relinquishment.



29.4 Other Remedies

Subject to Articles 20.7, 29.1(b) and 29.3(b), in the event that Contractor or SOCAR terminates this Agreement pursuant to the above provisions, such termination shall be without prejudice to Contractor’s or SOCAR’s entitlement to arbitrate with the other for damages, or to any other remedy Contractor or SOCAR (as the case may be) may have in law.



29.5 Partial Relinquishment

Contractor shall have no unilateral right to relinquish a part of the Contract Area. In the event Contractor decides not to develop any portions of the Contract Area, the Parties will discuss the possibility of partial relinquishment on mutually agreed terms. In the event of partial relinquishment pursuant to this Article 29.5, Contractor shall have no right to recover out of the production from the remainder of the Contract Area not relinquished, any amount of Petroleum Costs incurred during the Development and Production Period in connection with the portion of the Contract Area relinquished which



Page 151



has not been recovered at the date of such relinquishment. All costs incurred by Contractor during the Exploration Period and the Additional Exploration Period shall be Cost Recoverable from production from the remainder of the Contract Area which is not relinquished.



Page 152

ARTICLE 30



MISCELLANEOUS



30.1 This Agreement is executed in the Azerbaijani and English languages and, subject to the Arbitration Procedure and Article 13.1(c), both languages shall have equal force.



30.2 The headings in this Agreement are inserted for convenience only and shall be ignored in construing this Agreement.



30.3 Unless the context otherwise requires, references to the singular shall include a reference to the plural and vice-versa; and reference to any gender shall include a reference to all other genders.



30.4 The Appendices to this Agreement and the attached Addendum Relating to the Formation of the SOCAR Oil Affiliate (the “Addendum”) form part of this Agreement. In the event of any conflict between the provisions of the main body of this Agreement and the Appendices (other than Appendix 1 which shall be considered part of the main body of the Agreement) or the Addendum, then the provisions of the main body shall prevail.



Page 153

IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first above written by their duly authorised representatives.



For and on behalf of the

STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN



By: ___________________

Name: ___________________

Title: ___________________



By: ___________________

Name: ___________________

Title: ___________________



For and on behalf of

BP EXPLORATION (AZERBAIJAN) LIMITED



By: ___________________

Name: ___________________

Title: ___________________



By: ___________________

Name: ___________________

Title: ___________________



Page 154

For and on behalf of

SOCAR OIL AFFILIATE



By: ______________________________



Name: ____________________________



Title: ___________________________



By: ______________________________



Name: ____________________________



Title: ___________________________



155APPENDIX 1



DEFINITIONS



In this Agreement the following words and expressions shall have the following meanings unless the context otherwise requires:



“Abandonment Fund” shall have the meaning given to it in Article 14.2(a).



“Accounting Procedure” means the procedures and reporting requirements set forth in Appendix 3.



“Additional Exploration Period” shall have the meaning given to it in Article 4.3.



“Affiliate” means,



(a) in relation to any Party, either



(i) a company, corporation or other legal entity in which such Party holds directly or indirectly shares carrying more than fifty (50) percent of the votes at a general meeting of such company, corporation or other legal entity; or



(ii) a company, corporation or other legal entity holding directly or indirectly shares carrying more than fifty (50) percent of the votes at a general meeting of such Party; or



(iii) a company, corporation or other legal entity of which shares carrying more than fifty (50) percent of the votes at a general meeting of such company, corporation or other legal entity are held directly or indirectly by a company, corporation or other legal entity which also holds directly or indirectly shares carrying more than fifty (50) percent of the votes at a general meeting of such Party;





Page (1)

(b) and, furthermore, in relation to SOCAR, any venture or enterprise in which SOCAR has an interest and the right to control (as defined in Article 9.2(c)), manage or direct the action thereof.



“Agreement” means this instrument and its Appendices 1 to 10, the Addendum Relating to the Formation of the SOCAR Oil Affiliate, together with any written extensions, renewals, replacement or modifications hereto which may be mutually agreed and signed by the Parties.



“Annual Work Programme” means the document describing, item by item, the Petroleum Operations to be carried out during a Calendar Year which has been approved by the Steering Committee.



“Arbitration Procedure” means the arbitration procedure set forth in Appendix 6.



“Associated Natural Gas” means Natural Gas which exists in a reservoir in solution with Crude Oil, such Crude Oil being producible, as initially discovered, at a gas oil ratio of not greater than ten thousand (10,000) standard cubic feet per Barrel of Crude Oil as measured at the point of separation of gas from oil.



“Azerbaijani Supplier(s)” shall have the meaning given to it in Article 18.1(a).



“Barrel” means U.S. barrel, i.e. 42 U.S. gallons (158.987 litres) measured at STP.



“Bonus” means a payment for the right to access Contract Area payable pursuant to Article 28.1.



“Budget” means estimates of itemised expenditures of all Petroleum Operations included in an Annual Work Programme.



Page (2)

“Calendar Quarter” means a period of three (3) consecutive months commencing on the 1st of January, the 1st of April, the 1st of July, or the 1st of October in any Calendar Year.



“Calendar Year” means a period of twelve (12) consecutive months beginning on the 1st of January and ending on the following 31st of December according to the Gregorian Calendar.



“Capital Costs” means those costs incurred in or in relation to the Contract Area other than Operating Costs (including without limitation costs related to the drilling and testing of exploration wells and the upgrade, refurbishment or construction of a drilling rig and/or other facilities and infrastructure).



“Capital Cost Recovery Petroleum” shall have the meaning given to it in Article 11.2(a)(ii).



“Carry” shall have the meaning given to it in Article 3.5(a).



“Commencement Date of Commercial Production” means, in respect of a Non-associated Natural Gas Discovery, the date upon which commercial production from the Contract Area conducted by Contractor has been delivered for sixty (60) consecutive days under a Natural Gas Sale and Purchase Agreement; and in respect of a Crude Oil Discovery, the later of the following: (i) the date upon which commercial production conducted by Contractor at a stable average daily rate of twelve thousand (12,000) Barrels of Crude Oil has been sustained for a period of sixty (60) consecutive days, or (ii) the date upon which commercial production conducted by Contractor from two (2) production wells has been sustained at a stable production rate for a period of sixty (60) consecutive days.



“Contract Area” means the area (from the surface to any and all depths accessible to drilling technology as may be developed at any time during the term of this Agreement and as may be extended) as described and delineated in Appendix 2.



“Contractor” means all of the Contractor Parties collectively.



Page (3)

“Contractor Facilities” shall have the meaning given to it in Article 9.3.



“Contractor Parties” means collectively BP and SOA and/or any of their successors or permitted assignees.



“Contractor Party” means any one of BP and SOA and/or any of their successors or permitted assignees.



“Conversion Factor” shall have the meaning given to it in Article 28.1(e).



“Cost Recovery” means the process by which Contractor is allocated Petroleum production from the Contract Area for the recovery of its Petroleum Costs. “Cost Recoverable” means such costs to be recovered in the future and “Cost Recovered” means such costs recovered in the past.



“Cost Recovery Petroleum” shall have the meaning given to it in Article 11.3.



“Crude Oil” means crude mineral oil, condensate, asphalt, ozocerite, and all kinds of hydrocarbons and bitumen regardless of gravity, either solid or liquid, in their natural condition or obtained from Natural Gas by condensation or extraction, including Natural Gas liquids at STP and including products refined or processed from any of the forgoing.



“Delivery Point” means the custody transfer meter at the outlet flange of the onshore Petroleum processing and storage terminal, or at the weighbridge of a rail loading system if Contractor elects to have it developed as part of the upstream facilities, or at the entry flange in an export system from Baku (including, but not limited to the inlet of the BTC pipeline) and any other place or places between well head and the said outlet flange as may be decided upon by the Steering Committee from time to time based on recommendations made by Contractor.



(4)“Design Standards” means the design standards and specifications set forth in Appendix 8.



“Development and Production Period” shall have the meaning given to it in Article 4.5.



“Development Programme” shall have the meaning given to it in Article 4.6.



“Discovery” means a discovery within the Contract Area of an accumulation of Petroleum.



“Dollars” or “$” means the currency of the United States of America.



“Double Tax Treaty” means any treaty or convention with respect to Taxes which is applicable to the Republic of Azerbaijan for the avoidance of double taxation of income.





“Effective Date” shall have the meaning given to it in Article 25.1.



“Environmental Standards” means the environmental standards and practices set forth in Appendix 9 until substituted by other standards and practices agreed between Contractor, SOCAR and the Ministry of Ecology and Natural Resources of the Republic of Azerbaijan or its successor, as provided in Article 26.1.



“Execution Date” means the date first above written in the Agreement on which duly authorised representatives of the Parties have executed the Agreement.



“Exploration Period” shall have the meaning given to it in Article 4.1.



“Exploration Work Programme” shall mean the exploration work set out in Appendix 10.



“Finance Costs” means a charge of one-quarter of the sum of LIBOR plus four (4) percent multiplied by the unrecovered balances of Capital Costs and Operating Costs at the end of each Calendar Quarter.



Page (5)

“Force Majeure” shall have the meaning given to it in Article 21.1.



“Foreign Exchange” means Dollars and/or other freely convertible foreign currency generally accepted in the international banking community.



“Foreign Sub-contractor” means a Sub-contractor which is an entity or organisation which is incorporated, legally created or organised outside the Republic of Azerbaijan.



“GDP Deflator Index” means the Implicit Price Deflator Index for United States Gross Domestic Product issued by the Bureau of Economic Analysis (BEA) of the United States Department of Commerce, as reported in the quarterly publication “Survey of Current Business”. If this publication ceases to exist the Parties shall use “International Financial Statistics” of the International Monetary Fund, or other suitable publication as mutually agreed by the Parties.



“Governmental Authority” or “Governmental Authorities” means the government of the Republic of Azerbaijan and any political or other subdivision thereof, including any local government, municipality, or other representative, agency or authority, which has the authority to govern, legislate, regulate, levy or collect taxes or duties, grant licenses and permits, approve or otherwise impact (whether financially or otherwise), directly or indirectly, any of SOCAR’s and/or Contractor’s rights, obligations or activities under the Agreement. For the purpose of Articles 20.2 and 26.6(a) only, it is agreed that any state enterprise, as well as any municipal body, which is engaged solely in the conduct of commercial or other business activities (and is not engaged in any act of governing and does not possess any legislative, regulatory or taxing functions), shall be excluded from the definition of “Governmental Authority”.



“Government Guarantee” means the Guarantee and Undertaking of the Government of the Republic of Azerbaijan in the form set forth in Appendix 5.



(6)

“Hydrocarbon Activities” shall have the meaning given to it in Article 12.1(c)(iii).



“Joint Operating Agreement” or “JOA” shall have the meaning given to it in Article 6.1.



“LIBOR” means a rate of interest calculated from the arithmetic average over a Calendar Quarter period of the three (3) month Dollar London Interbank offer rate quoted daily in the London Financial Times (or in the event that the London Financial Times ceases to be published then such other publication as the Parties shall agree).



“Material Breach” shall have the meaning given to it in Article 29.1(a).



“Measurement Procedure” means the Crude Oil and Natural Gas Measurement and Evaluation Procedure set forth in Appendix 7.



“Natural Gas” means all hydrocarbons that are in a gaseous phase at STP including but not limited to casing head gas and residue gas remaining after the extraction or separation of liquid hydrocarbons from wet gas, and all non-hydrocarbon gas or other substances (including but not limited to carbon dioxide, sulphur and helium) which are produced in association with gaseous hydrocarbons; provided that this definition shall exclude condensed or extracted liquid hydrocarbons.



“Natural Gas Sale and Purchase Agreement” or “NGSPA” means any Natural Gas export sale and purchase agreement entered into by Contractor in respect of its entitlement to Natural Gas from a Natural Gas Discovery.



“Non-associated Natural Gas” means Natural Gas other than Associated Natural Gas.



“Notice of Discovery and its Commerciality” shall have the meaning given to it in Article 4.4.



“Operating Company” means a company appointed for the time being to conduct Petroleum Operations on behalf of Contractor in accordance with







(7)Article 6, including a joint Operating Company from the time of its incorporation and appointment as the Operating Company in accordance with the terms and conditions of this Agreement and the JOA.



“Operating Costs” means those costs incurred in day to day Petroleum Operations in or in relation to the Contract Area whether directly or indirectly incurred, including but not limited to extraction, treatment, stimulation, injection, gathering, processing, storage, handling, lifting and transportation of Petroleum to the Delivery Point, maintenance, service, administration, and payments incurred in respect of abandonment including payments to the Abandonment Fund.



“Other Contractor Parties” means collectively all Contractor Parties at any time except for SOA or its successors and permitted assignees that are one hundred (100) percent owned and controlled by SOCAR.



“Participating Interest” shall have the meaning given to it in Article 1.1.



“Parties” means SOCAR, BP and SOA and any of their respective successors and permitted assignees.



“Party” means any of the Parties.



“Petroleum” means Crude Oil and Natural Gas.



“Petroleum Costs” means Operating Costs and Capital Costs and shall include all expenditures actually incurred by Contractor for the purposes of the Petroleum Operations. Petroleum Costs shall include, without limitation, (i) the amounts expressly identified in the Agreement as Petroleum Costs (including but not limited to the amounts identified in Article 18.3) and (ii) the amounts properly debited to the Petroleum Operations Account in accordance with the Accounting Procedure.



“Petroleum Operations” means all operations relating to the exploration, appraisal, development, extraction, production, stabilisation, treatment (including processing of Natural Gas), stimulation, injection, gathering, storage, building rail or roads for loading facilities, building connecting



(8) entry point to the rail network or to existing pipelines, handling, lifting, transporting Petroleum to the Delivery Point and marketing of Petroleum from, and abandonment operations with respect to the Contract Area.



“Petroleum Operations Account” shall have the meaning given to it in paragraph 1.2 of the Accounting Procedure.



“Point of Sale” shall have the meaning given to it in Article 13.1(e)(iii).



“Profit Petroleum” shall have the meaning given to it in Article 11.5.



“Profit Tax” shall have the meaning given to it in Article 12.2(a).



“Profit Tax Rate” shall have the meaning given to it in Article 12.1(c)(v).



“Standard Temperature and Pressure” or “STP” means the standard temperature and atmospheric pressure of sixty degrees Fahrenheit/fifteen point five six degrees Centigrade (60°F/15.56°C) and 1.01325 bars.



“State Budget” shall have the meaning given to it in Article 12.1(c)(i).



“Steering Committee” means the committee established pursuant to Article 5.1.



“Sub-contractor” means any natural person or juridical entity contracted directly or indirectly by or on behalf of Contractor or by or on behalf of the Operating Company, to supply goods, work or services related to this Agreement.



“Taxable Profit” shall have the meaning given to it in Article 12.2(e).



“Taxes” means all existing or future levies, duties, payments, fees, taxes or contributions payable to or imposed by any Governmental Authority.



“Tax Authority” shall have the meaning given to it in Article 12.1(c)(iv).



(9)



















"Third Party" means a natural person or juridical entity, other than a Party

hereto or an Affiliate of a Party.



"Tonne" means metric ton, i.e. one thousand (1000) kilograms as defined

by the International Bureau of Weights and Measures, Serves, France.



"Total Production" means, for any Calendar Quarter, the total production

of Crude Oil and Non-associated Natural Gas obtained from the Contract

Area, less the quantities used pursuant to Article 11.1 for Petroleum

Operations.



"Transit Losses" shall have the meaning given to it in Article 13.1(e)(iv).



"Ultimate Parent Company" means in relation to BP, BP Exploration

Operating Company Limited, a company incorporated in England; in the

case of SOA, SOCAR, a company incorporated in the Republic of

Azerbaijan; and in the case of any other Contractor Party, such Contractor

Party's ultimate parent company and the successor of any such Ultimate

parent company.



"Ultimate Parent Company Guarantee" means the guarantee given by an

Ultimate Parent Company in the form set forth in Appendix 4.



"Uncovered Balance" shall have meaning given to it in Article 3.5(b).



"VAT" means the Republic of Azerbaijan value added tax.



"Wilful Misconduct" means any unjustifiable act or omission which

constitutes an intentional, deliberate and conscious disregard of good and

prudent international oil field practices or the terms of this Agreement as

determined by arbitration pursuant to Article 23.3.



"Zero Balance" means the achievement after the commencement of the

Development and Production Period of zero balance in the accounts

maintained by Contractor with respect to Capital Costs in accordance with

the Accounting Procedure. After the occurrence of the first Zero Balance for

the purpose of Article 14.1, Capital Costs thereafter will be classified by

main budget category.







10



APPENDIX 2



As of the date of execution of the Agreement, the Contract Area is the area inside the perimeter constituted by the geographical co-ordinates set forth

below and as separately identified on the map attached hereto.



The Contract Area is bounded by straight lines on a Gauss-Kruger projection which is referenced to Pulkovo 1942 geodetic datum, Krassovski ellipsoid, and with defining parameters of:



Latitude of Origin: 0 degrees North

Longitude of Origin: 51 degrees East

Scale Factor at Origin: 1.0

Grid co-ordinates at Origin: 500,000 metres East, 0 metres North



Grid units are meters.

Geographic co-ordinates for the ten (10) corners of the Contract Area are:



Point Latitude Longitude

(North) (East)

1 39° 39' 24" 50° 57' 03"

2 39° 34' 53" 51° 04' 40"

3 39° 24' 13" 51° 01' 53"

4 39° 22' 24" 50° 49' 07"

5 39° 17' 15" 50° 42' 02"

6 39° 16' 19" 50° 35' 47"

7 39° 20' 37" 50° 31' 21"8 39° 25' 41" 50° 32' 59"

9 39° 30' 46" 50° 42' 31" 9 39° 30' 46" 50° 42' 31"

10 39° 35' 23" 50° 48' 51" 10 39° 35' 23" 50° 48' 51"

The surface of the Contract Area above defined is one thousand and fifty

nine (1,059) square kilometresKontrakt sahəsinin xəritəsi Map of the Contract Area



[map]



SHAFAG ASIMAN CONTRACT AREA

(Local Datum Pulkovo 1942)



(13)APPENDIX 3



This Appendix 3 establishes a framework of accounting principles as generally accepted within the international Petroleum industry.



The purpose of this Accounting Procedure is to establish a fair and equitable method for determining charges and credits applicable to Petroleum Operations under the Agreement and to provide a method for controlling expenditure against approved budgets. For

purposes of this Accounting Procedure any reference to Contractor shall be deemed to include the Operating Company, Contractor Parties and their respective Affiliates, as the context may imply.



The Parties agree that if any of such methods prove to be unfair or inequitable to any of the Parties then the Parties will meet and in good faith endeavour to agree on such changes as are necessary to correct any unfairness or inequity.



1.1 Definitions



For the purposes of this Accounting Procedure the following terms shall have the following meanings:



(i) Accounting Procedure shall mean the accounting

principles, practices and procedures set forth in this

Appendix.



(ii) Accepted Accounting Practices shall mean accounting

principles, practices and procedures that are generally

accepted and recognised in the international Petroleum

industry. (iii) Accruals means amounts which are expected to be paid or received after the end of an accounting period as a result of events and transactions prior to the end of the said accounting period.



(iv) Accruals Basis means the basis of accounting which

records the effect of transactions on financial conditions and income when the transactions take place, not merely when they are settled in cash.



(v) Cash Basis means the basis of accounting which records the cash flows as they are effected by the issue of instructions for payment to a bank or payments in cash and recorded in the cash books of the Operating Company.



(vi) Material and Equipment means property (with the

exception of land), including without limitation all

exploration, appraisal and development facilities together with supplies and equipment, acquired and held for use in Petroleum Operations.



(vii) Controllable Material means Material and Equipment which Contractor subjects to record control and inventory. A list of types of such Material and Equipment shall be furnished to SOCAR upon request.



Words and phrases defined in the Agreement but not defined above shall have the same meaning in this Accounting Procedure as is given to them in the Agreement.



Contractor shall maintain separate books and accounts for Petroleum Operations in accordance with this Accounting Procedure (“Petroleum Operations Account”).



Contractor shall charge to the Petroleum Operations Account only those expenditures incurred for Petroleum Operations. The Petroleum Operations Account shall be maintained by Contractor in Dollars. Costs incurred in currencies other than Dollars shall be converted into Dollars using translation rates in accordance with Accepted Accounting Practices. Any gain or loss resulting from the exchange of currencies required for Petroleum Operations or from translation shall be charged or credited to the Petroleum Operations Account.



The Petroleum Operations Account shall be kept in accordance with the Accepted Accounting Practices.



Accounting shall be carried out on an Accruals Basis, provided however that the Cash Basis principle shall be used for the purposes of Cost Recovery.



Audits



The accounts of the Petroleum Operations, together with the auditors’ report thereon, shall be submitted to SOCAR by Contractor no later than seven (7) months following the end of each Calendar Year. SOCAR may, by giving notice to that effect to Contractor not later than twelve (12) months following the end of the subject Calendar Year, request an audit of the accounts for such Calendar Year. Such audits shall be carried out by a firm of internationally recognized independent accountants selected by SOCAR. The cost of such audit shall be included into Petroleum Operations Account and shall be borne by Contractor and shall be conducted in such a manner as not to interfere unduly with ongoing operations. Unless SOCAR notifies Contractor in writing before twenty-four (24) months following the subject Calendar Year either that it has an objection to the said accounts or that there is evidence of Contractor’s Willful Misconduct (details of which shall be included in said notice), the accounts for such Calendar Year shall be deemed to have been approved as on that date. Any objection to the accounts raised by SOCAR shall, unless settled by agreement among the Parties, be submitted to arbitration in accordance with the Arbitration Procedure. In the event the arbitration award sustains any of SOCAR’s objections to the account, the Petroleum Operating Account shall be adjusted accordingly.







(16)

Notwithstanding the aforesaid, the Parties have agreed as follows:



(a) SOCAR shall not carry out audit of accounts until the commencement of the Development and Production Period; and



(b) By giving notice not later than twelve (12) months from the commencement of the Development and Production Period SOCAR shall have the right to carry out audit of accounts for the entire Exploration Period and the Additional Exploration Period, as the case may be.



The accounts and records of Contractor’s Affiliates providing services to the Petroleum Operations shall not be audited by SOCAR’s auditors.



If requested, Contractor or the Operating Company will providing an annual certificate issued by the Affiliate’s statutory auditor (such statutory auditor being an internationally recognized firm of public accountants) certifying that the calculation of the man-hour, man-day rates used in determining the charges for services provided to the Petroleum Operations do not include any element of profit as part of paragraph 2.4(b) below and that such charges are calculated pursuant to consistently applied accounting practices of such Affiliates and are charged out in a non-discriminatory manner, in accordance with its standard charge-out system.



All accounting records, returns, books and accounts relating to Petroleum Operations shall be maintained by Contractor during the entire Exploration Period and Additional Exploration Period (if Contractor proceeds thereto), and thereafter for a minimum of seven (7) years following the end of the Calendar Year to which they relate or, in the case where SOCAR alleges Wilful Misconduct, the later of (i) a minimum of seven (7) years following the end of the Calendar Year to which they relate and (ii) a minimum of one (1) year after resolution of the objections to the accounts made in respect of such Wilful Misconduct.



(17)

2. Charges And Expenditures



Contractor shall charge the Petroleum Operations Account for all costs incurred after the date of execution of this Agreement in compliance with the terms of this Agreement or those necessary to conduct the Petroleum Operations; no cost shall be charged more than once. Chargeable costs shall include, but not be limited to:



2.1 Labour and Related Costs



(a) Gross salaries, wages (including amounts imposed by Governmental Authorities) in respect of employees of Contractor and its Affiliates (except when acting as Sub-contractor) who are engaged in the conduct of Petroleum Operations whether temporarily or permanently assigned within the Republic of Azerbaijan or located in Contractor's offices elsewhere, as well as personal expenses incurred in connection therewith.



(b) Costs of all holiday, vacation, sickness, disability and other like benefits applicable to the salaries chargeable under paragraph 2.1(a) above.



(c) Expenses or contributions imposed under the laws of the Republic of Azerbaijan which are applicable to Contractor's cost of salaries and wages chargeable under paragraph 2.1(a) above or other costs chargeable under this paragraph 2.1.



(d) Cost of established plans for life insurance, hospitalisation, pensions, and other benefits of a like nature.



(e) Housing and living allowances and related expenses of the employees of Contractor assigned to Petroleum Operations.



(18) (f) In the event that Contractor is unable to provide continued employment for staff at the end of their assignment to Petroleum Operations, the proportionate share of termination payments relating to the employees’ period of assignment to Petroleum Operations shall be chargeable.



2.2 Material and Equipment



Material and Equipment purchased or furnished by Contractor for use in Petroleum Operations as provided under Section 4 of this Accounting Procedure. So far as it is reasonably practical and consistent with efficient and economical operation, only such Material and Equipment shall be purchased or transferred for use in

Petroleum Operations as may be required for immediate use or prudent contingent stock. The accumulation of surplus stocks shall be avoided.



2.3 Transportation and Employee Relocation Costs



(a) Transportation of Material and Equipment and other related costs such as expediting, crating, dock charges, inland, air and ocean freight, demurrage, transit fees and unloading at destination and any duties, licence fees, taxes and any other charges with respect thereto.



(b) Costs incurred for transportation of personnel as required in the conduct of Petroleum Operations.



(c) Relocation costs of employees permanently or temporarily assigned to Petroleum Operations to and from their point of origin. Such costs shall include travelling costs of employees and their families and transportation cost of their personal and household effects. 2.4 Services



(a) Contract services, professional consultants, and other services procured from outside sources other than services covered by paragraph 2.14.



(b) Technical services, such as, but not limited to, laboratory analysis, drafting, geophysical and geological interpretation, reservoir studies, purchasing, drilling supervision, petroleum engineering, commercial analysis and related computer services and data processing, performed by Contractor and its Affiliates (except when acting as Sub-contractor) for the direct benefit of Petroleum Operations. Such charges shall be computed in line with Contractor's usual accounting policy such that no gain or loss accrues to Contractor.



(c) Business support where the services provided are specifically attributable to Petroleum Operations, including, but not restricted to legal, purchasing, contracting, treasury, accounting, information and telecommunication, and administrative services.



(d) Services performed by Contractor and its Affiliates (except when acting as Sub-contractor) engineering division personnel, as computed and charged by such engineering division.



(e) Marketing services - all fees, commissions and other charges related to the marketing of Non-associated Natural Gas produced from the Contract Area.



(f) Use of equipment and facilities furnished by Contractor at rates commensurate with the cost of ownership and operation if such use is economically viable. Rates shall



(20)include but not be limited to costs of maintenance, repairs, other operating expenses, insurance, taxes and interest.



Services performed by Contractor or its Affiliates (except when acting as Sub-contractor) shall be performed under a work order or service agreement issued by the Operating Company and shall be charged in accordance with such Contractor Party’s and its

Affiliates’ usual practice and accounting policies such that no gain,no loss accrues to such Contractor Party.



All costs or expenses necessary for the repair or replacement of property resulting from damages or losses incurred by fire, flood, storm, theft, accident, or any other cause, not recovered from insurance except where caused by the Wilful Misconduct of Contractor.



Contractor shall furnish SOCAR with written notice of such damages or losses in excess of Dollars two hundred and fifty thousand (250,000) as soon as reasonably practicable.



2.6 Insurance



(a) All premiums for insurance carried for the benefit of Petroleum Operations, as well as the equivalent amount of premiums quoted by an independent underwriter for the risks that are self-insured by Contractor.



(b) All expenditures incurred and paid in the settlement of any and all losses, claims, damages, judgements and any other expenses, not recovered from insurance except where

caused by the Wilful Misconduct of Contractor. 2.7 Legal Expenses



All costs or expenses of handling, investigating and settling litigation or claims arising form Petroleum Operations or necessary to protect or recover property, including, but not limited to, lawyers' fees, court costs, cost of investigation of procuring evidence and amounts paid in settlement or satisfaction of any such litigation or claims except where caused by the Wilful Misconduct of Contractor.



2.8 Duties and Taxes



All Taxes imposed by Governmental Authorities (except for Profit Tax) which are not refunded to the Contractor.



2.9 Offices, Camps and Miscellaneous Facilities



The Cost of maintaining and operating any offices, sub-offices, camps, warehouses, housing and other facilities directly serving Petroleum Operations either within the Republic of Azerbaijan or elsewhere with respect to dedicated project groups which are not physically located within the Republic of Azerbaijan.



2.10 Training and Technology Transfer



The costs of the provision of training in accordance with Article 6.8, and the costs of agreed technology transfer from Contractor to SOCAR.



2.11 Energy Expenses



All costs of fuel, electricity, heat, water or other energy used for Petroleum Operations.



(22)2.12 Communication Charges



The costs of acquiring, leasing, installing, operating, repairing and maintaining communication systems and computer systems.



2.13 Environmental Charges



The costs of environmental programmes, including, but not limited to environmental baseline studies, ongoing monitoring programmes, environmental and safety training, equipment and facilities for protection of safety or the environment, activities related to environment and safety required by this Agreement or by applicable law and remedial work undertaken with respect to Petroleum Operations (including but not limited to costs incurred to sustain flora and fauna).



2.14 Other Services



(a) Contractor shall charge an administrative overhead to the Petroleum Operations Account, covering technical know-how, general administrative support provided by



(i) BP Affiliates located outside of the Republic of Azerbaijan; and/or



(ii) SOA and its Affiliates



for the indirect benefit of Petroleum Operations. Such support will include the services and related office costs of personnel performing administrative, legal, treasury, tax and employee relations, provision of expertise and other non-technical functions which cannot be specifically identified or attributed to particular projects performed under a work order or service agreement.



(23) (b) The charge under (a) above shall be charged at rates on total annual expenditures attributable to Petroleum Operations as follows:



(i) With respect to Contractor's Capital Costs:



For the first Dollars fifteen million (15,000,000) per Calendar Year -three (3) percent;



For the amount between Dollars fifteen million (15,000,000) and Dollars thirty million (30,000,000) per Calendar Year - two (2) percent;



For the amount in excess of Dollars thirty million (30,000,000) per Calendar Year - one (1) percent.



(ii) With respect of Contractor's Operating Costs:



A flat rate of one and a half (1.5) percent per Calendar Year.



2.15 Finance Costs



All Finance Costs.



2.16 Other Expenditures



Any other expenditures not covered or dealt with in the foregoing provisions which are incurred by Contractor and its Affiliates (except when acting as Sub-contractor) for the necessary and proper conduct of Petroleum Operations (including other activities prior to the Effective Date). These shall include but not be limited to any expenditures necessary to acquire and maintain rights to the Contract Area or to implement Petroleum Operations, costs for decommissioning (abandonment) and reclamation of assets including payment to the Abandonment Fund as referred in Article 14.3.



(24)3. Credits



Contractor will credit to the Petroleum Operations Account the net proceeds of the following transactions:



(a) The net proceeds of any successful insurance claim in connection with Petroleum Operations where the claim is with respect to operations or assets which were insured and where the insurance premium with respect thereto has been charged to the Petroleum Operations Account.



(b) Any adjustments received by Contractor from the suppliers/manufacturers (or their agents) in connection with defective Material and Equipment, the cost of which was previously charged by Contractor to the Petroleum Operations Account.



(c) The net proceeds of sale on disposal of assets used in Petroleum Operations, provided the cost of such assets was previously charged to the Petroleum Operations Account.



(d) The net proceeds received from Third Parties and/or SOCAR in respect of the use of facilities pursuant to Article 9.



4. Material And Equipment



4.1 Acquisitions



(a) Material and Equipment purchased shall be charged at net cost ("Net Cost") incurred by Contractor. Net Cost shall include, but shall not be limited to, such items as procurement cost, transportation, duties, licence fees and applicable taxes.



(b) New Material and Equipment owned by any of the Contractor Parties or their Affiliates and transferred to



(25)Contractor for use in connection with Petroleum Operations shall be priced at new purchase Net Cost determined in accordance with (a) above. Used Material and Equipment shall be priced at a value commensurate with its use, provided however that this price shall not exceed seventy five (75) percent of the new purchase Net Cost of such equipment.



(c) Material and Equipment not classified as Controllable Material under Accepted Accounting Practices shall be charged one hundred (100) percent to Operating Costs.



4.2 Disposal



Subject to Article 9.3 of the Agreement, Contractor shall have the right to dispose of Material and Equipment it deems to be surplus and shall advise the Steering Committee of proposed disposals having a value in the Petroleum Operations Account of Dollars two hundred and fifty thousand (250,000) or more.



4.3 Inventories



(a) Periodic inventories shall be taken by Contractor of all Controllable Material. Contractor shall give sixty (60) days written notice of intention to take such inventories to allow SOCAR to be represented. Failure of SOCAR to be represented shall bind SOCAR to accept the inventory taken by Contractor.



(b) Reconciliation of inventory with the Petroleum Operations Account shall be made. Inventory adjustments shall be made by Contractor to the Petroleum Operations Account, based on the inventory report as required by the Parties.



(26)5. Accounting Reports



5.1 Quarterly Reports



Not later than forty five (45) days after the end of each Calendar Quarter, Contractor shall supply to SOCAR a Calendar Quarter report reviewing Petroleum Costs, incurred during the preceding Calendar Quarter, in a form which permits their comparison with the corresponding budgets. Costs which are common to two or more activities shall be allocated in an equitable manner.



5.2 Annual Reports.



During the first Calendar Quarter of each Calendar Year Contractor shall supply to SOCAR an annual report reviewing Petroleum Costs incurred during the preceding Calendar Year.



6. Cost Recovery And Profit Petroleum Reports



Not later than forty-five (45) days after the end of the Calendar Quarter in which the Commencement Date of Commercial Production first occurs, and not later than forty-five (45) days after the end of each succeeding Calendar Quarter, Contractor shall supply to SOCAR a Calendar Quarter Cost Recovery report and Calendar Quarter Profit Petroleum division report showing:



(a) Unrecovered Operating Costs and Capital Costs as at the beginning of the preceding Calendar Quarter;



(b) Operating Costs and Capital Costs incurred during such preceding Calendar Quarter based on the Cash Basis principle in accordance with paragraph 1.2 above;



(c) The value and volume of Cost Recovery Petroleum lifted by Contractor during the preceding Calendar Quarter;



(27) (d) Unrecovered Operating Costs and Capital Costs carried forward for recovery in succeeding Calendar Quarters;



(e) The value and volume of (i) Petroleum produced, (ii) Petroleum used in Petroleum Operations, (iii) Petroleum available for lifting and (iv) Petroleum actually lifted by the Parties, as at the end of the preceding Calendar Quarter;



(f) Profit Petroleum allocated to each of the Contractor Parties constituting Contractor, and SOCAR, during the preceding Calendar Quarter.



Page (28)

APPENDIX 4



FORM OF CONTRACTOR PARTY'S

ULTIMATE PARENT COMPANY GUARANTEE



ULTIMATE PARENT COMPANY GUARANTEE



To: | The State Oil Company of the Republic of Azerbaijan

| Neftchilar Prospekti 73

| Baku AZ1000

| Republic of Azerbaijan



[Date]

Gentlemen,



AZERBAIJAN - SHAFAG-ASIMAN OFFSHORE BLOCK



We refer to the Agreement on the Exploration, Development and Production Sharing for the Shafag-Asiman Offshore Block in the Azerbaijan Sector of the Caspian Sea (the "Agreement") signed on _________ between the State Oil Company of the Republic of Azerbaijan, BP Exploration (Azerbaijan) Limited and SOCAR Oil Affiliate.



[ ] being the beneficial owner of [ ] hereby guarantees that [ ] will provide [ ] with all funds necessary for [ ] to fulfil all of its obligations, financial or otherwise, under the Agreement up to its Participating Interest share of such obligations. This Ultimate Parent Company Guarantee shall enter into force as from the Effective Date of the Agreement and remain in force until [subsidiary] has no further obligations to be performed by it under the Agreement.



Payment under this Ultimate Parent Company Guarantee shall be made by [ ] only after a default by [ ] under the Agreement has been established pursuant to an arbitration award against [ ] and a copy of award to support the claim has been submitted to [ ].



(29)This Ultimate Parent Company Guarantee shall be governed and interpreted by the same law as provided under the applicable law provision in the Article 23.1 of the Agreement. Any dispute under this Ultimate Parent Company Guarantee shall be resolved by arbitration in the same place and manner as provided in the Agreement.



Yours faithfully



________________

for and on behalf of

[ ]



Page (30)

APPENDIX 5



GUARANTEE AND UNDERTAKING

OF THE GOVERNMENT OF THE REPUBLIC OF AZERBAIJAN



To: BP Exploration (Azerbaijan) Limited



Gentlemen,

AZERBAIJAN – SHAFAG-ASIMAN OFFSHORE BLOCK

We the Government of the Republic of Azerbaijan (the “Government”) have full knowledge of the Agreement on the Exploration, Development and Production Sharing for the Shafag-Asiman Offshore Block in the Azerbaijan Sector of the Caspian Sea (“Agreement”) signed on ____ day of _________ 2010 between the State Oil Company of the Republic of Azerbaijan (“SOCAR”), being a company under the jurisdiction of and owned by the Government, of the First Part, and BP Exploration (Azerbaijan) Limited (“BP”) and SOCAR Oil Affiliate (“SOA”) (BP and SOA together constituting “Contractor”), of the Second Part.

The Government hereby guarantees, undertakes and agrees as to each Contractor Party severally as follows:



1. The Government hereby guarantees:



(a) those rights granted or to be granted by SOCAR to the Contractor under the Agreement; and



(b) those obligations undertaken or to be undertaken by SOCAR under the Agreement; and



(c) that the Government has and shall maintain throughout the entire duration of the Agreement sole and exclusive jurisdiction over the Contract Area and that SOCAR has full authority to grant the rights and interests to the Contractor as provided in the Agreement; and



Page (31)

(d) that the Government shall at no time during the entire duration of the Agreement enter into any treaties, intergovernmental agreements or any other arrangements which would, in any manner, diminish, infringe upon, nullify or derogate from the rights and interests of the Contractor under the Agreement; and that any treaties, intergovernmental agreements and any other arrangements which the Government might enter into which would in any way concern the Contract Area and/or the Contractor’s rights and interests under the Agreement will include an express recognition and preservation of the rights and interests of the Contractor under the Agreement; and



(e) that none of the Contractor Party’s rights, interests or property shall be expropriated, nationalised or otherwise taken by reason of any act of any authority of the Republic of Azerbaijan. In the event, however, that, notwithstanding the provisions of this Guarantee and Undertaking (“Government Guarantee”), any such expropriation, nationalisation or other taking of any of the Contractor Party’s rights, interests or property (including undeveloped reserves) occurs, the Government shall provide full and prompt compensation in Dollars at the full market value determined on the basis of a going concern utilising the discounted cash flow method, assuming a willing buyer and a willing seller in a non-hostile environment and disregarding the unfavourable circumstances under which or following which such Contractor Party has been deprived of its rights, interests or property. The Government shall submit itself to the jurisdiction of the arbitration panel as provided in Paragraph 4 below and the arbitration panel shall select an investment bank of good international reputation for the purpose of appraising the full market value of said rights, interests and property of each such Contractor Party on the principles stated herein; and



Page (32)

(f) that no grant of rights to explore for and develop Petroleum reserves in the Contract Area shall be given or permitted to be given to any parties other than the Contractor during the term of the Agreement and any extensions thereof, except as otherwise expressly provided in the Agreement; and



(g) that all of the provisions in the Azerbaijani language version of the Agreement accurately convey the same meaning as all of the provisions set forth in the English language version of the Agreement.



2. In addition the Government agrees and undertakes that within the framework of its authority all measures will be taken forthwith to enact the Agreement and this Government Guarantee into law so as to ensure that all rights, privileges and exemptions granted under the Agreement and this Government Guarantee to the Contractor, Contractor’s Affiliates and their Sub-contractors, as well as the Operating Company and any other entity established by Contractor pursuant to the Agreement, have full legal force and effect, and in particular:



(a) to provide the Contractor with the necessary licenses, permits and approvals, permissions and authorisations whether from the Government, its ministries or other official bodies in the Republic of Azerbaijan, required by Contractor to enable it to carry out Petroleum Operations, exercise its rights and fulfil its obligations in accordance with the provisions of the Agreement; and (b) to provide the Contractor with the necessary licenses, permits and approvals, customs clearances, visas, residence permits, licenses to enter land or water and import and export licenses, as well as the right to open bank accounts, lease or acquire office space and employee accommodation, operate communication facilities and to do all other such matters as may be necessary for efficient implementation of the Petroleum Operations; and



(33)(c) to ensure that the Contractor has, in accordance with the Agreement, access for its share of Petroleum to all necessary transportation, treatment and export facilities and infrastructure in the Republic of Azerbaijan, as well as access to land required by the Contractor for Petroleum Operations, and that such access to any such facilities, infrastructure or land owned or controlled by the Government (other than through SOCAR) is on terms no less favourable to the Contractor than the best terms granted or agreed with any other bona fide arm’s length user of such facilities and infrastructure; and



(d) to use its best endeavours, whether itself, or with other Azerbaijan authorities or Third Parties, to ensure that the Contractor has access to, inter alia, onshore construction and fabrication facilities, supply bases and vessels, warehousing, means of transportation, goods and services in the Republic of Azerbaijan, and that such access is on terms no less favourable to the Contractor than the best terms granted to or agreed with any other bona fide arm’s length user of such facilities and services, and at rates commensurate with the quality and efficiency of such facilities and services, which shall in no circumstances exceed prevailing international market rates for such facilities and services outside the Republic of Azerbaijan; and



(e) to use its best endeavours, whether itself, with other Azerbaijan authorities or Third Parties, to assist the Contractor in obtaining such rights, privileges, authorisations, approvals and other agreements from authorities and jurisdictions outside the territory of the



Page (34)

Republic of Azerbaijan as the Contractor shall reasonably deem necessary for the Petroleum Operations. Such agreements may include, but need not be limited to, such matters as export pipeline rights, rights of way and operation rights, permits and undertakings with respect to the transhipment, storage or staging of Petroleum produced and saved from the Contract Area, material equipment and other supplies destined to or from the territory of the Republic of Azerbaijan, and exemptions from national, local and other taxes, duties, levies, imposts, transit fees, and other fees and charges on Petroleum Operations being conducted in such other jurisdictions; and



(f) that the only abandonment obligations of the Contractor shall be as set forth in the Agreement and in particular Contractor shall have no liability for abandonment of any fixed assets which have been taken over by SOCAR upon Contractor’s notice of its intention to abandon them; and



(g) that liabilities and exemptions of each Contractor Party (and, where relevant, Affiliates, Third Parties and Operating Company, including employees and Sub-contractors of any of them) with respect to Taxes shall be as set out in the Agreement, and SOCAR shall not receive from the Government any funds or other benefit (including without limitation any rebate, refund, tax credit or deduction, payment or discharge of any obligation) which is determined, directly or indirectly, by reference either to the amount of Taxes for which any of the Contractor Parties is liable or by the Taxable Profit(s) of any of the Contractor Parties; and



Page (35)

(h) to ensure the banking and currency exchange rights

provided for in the Agreement, including the granting to

Contractor of the right to freely retain, whether in the

Republic of Azerbaijan or elsewhere, and dispose of all of

the Contractor’s proceeds from the export and/or sale of

Petroleum, and the free and unfettered right of repatriation of all proceeds from the Contractor’s activities in relation to Petroleum Operations; and



(i) that the rights and interest accruing to the Contractor (or its assignees) under the Agreement and the Government Guarantee shall not be amended, modified or reduced without the prior consent of the Contractor. In the event any Azerbaijan treaty, intergovernmental agreement, law, decree or administrative order which contravenes or conflicts with the provisions of the Agreement and/or this Government Guarantee or adversely affects the rights or interests of the Contractor thereunder, including any changes in jurisdiction over the Contract Area, tax legislation, regulations or administrative practice, then the Government shall indemnify Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom. The Government will take appropriate measures to resolve promptly in accordance with the foregoing principles any conflict or anomaly between the Agreement and/or the Government Guarantee and such treaty, intergovernmental agreement, law, decree or administrative order; and



(j) to ensure observance of confidentiality with regard to any confidential information or data disclosed to the

Government and Governmental Authorities.



(36)3. The privatisation, insolvency, liquidation, reorganisation or any other change in the structure or legal existence of SOCAR shall not affect the obligations of the Government hereunder. The Government shall, throughout the entire duration of the Agreement, ensure that the rights and obligations of SOCAR under the Agreement are always vested in and undertaken by an entity authorised to and capable of performing such obligations, failing which Government itself shall perform directly all such obligations of SOCAR under the Agreement.



4. Any dispute between the Government and the Contractor concerning this Guarantee shall be resolved by arbitration in the same place and manner and in accordance with the same principles as provided in the Agreement. For the purposes of allowing such arbitration and enforcement and execution of any arbitration decision, award, issuance of any attachment, provisional remedy or other pre-award remedy, the Government hereby waives all rights to claim sovereign immunity.



5. The rights and interests accorded to a Contractor Party under this Government Guarantee shall enure for the benefit of any successor or assignee of such Contractor Party.



6. This Government Guarantee shall enter into force upon its execution and shall, unless the Government and the Contractor agree otherwise, remain in force and apply to the Agreement (as amended from time to time) for its entire duration and for such longer time as may be necessary for enforcement of any rights accruing to any of the Contractor Parties hereunder or under the Agreement.



7. Words and phrases used in this Government Guarantee and which are defined in the Agreement shall have the same meaning as in the Agreement.



(37)8. This Government Guarantee shall be governed by and interpreted in accordance with the principles of the applicable law provisions set out in the Agreement.



IN WITNESS WHEREOF the authorised representative of the Government has executed this Government Guarantee in Baku on _______________ 2010.



For and on behalf of

THE GOVERNMENT OF THE REPUBLIC OF AZERBAIJAN





Page (38)

APPENDIX 6



ARBITRATION PROCEDURE



1.1 Except as otherwise provided in this Agreement, all disputes arising between SOCAR and any or all of the Contractor Parties, including without limitation, any dispute as to the validity, construction, enforceability or breach of this Agreement, which are not amicably resolved by the Parties in accordance with the provisions of Article 23.3(a) shall be finally settled by a sole arbitrator appointed by the unanimous decision of the Parties or, in the absence of such unanimous decision within thirty (30) days of a submission of the request for arbitration, by a panel of three (3) arbitrators under the Arbitration Rules of The United Nations Commission on International Trade Law known as UNCITRAL (the "Rules") adopted on 15 December 1976 as amended by UNCITRAL from time to time. In the event the Rules fail to make provision for any matter or situation the arbitration tribunal shall establish its own rules to govern such matter and procedure and any such rules so adopted shall be considered as a part of the Rules. For purposes of allowing such arbitration, and enforcement and execution of any arbitration decision, award, issuance of any attachment, provisional remedy or other pre-award remedy, each Party waives any and all claims to immunity, including, but not limited to, any claims to sovereign immunity.



1.2 The arbitration shall be held in Stockholm, Sweden. The language used during the procedure shall be the English language and the English language text of this Agreement will be utilised by the arbitrators.



1.3 After providing thirty (30) days prior written notice to the other Party of intent to arbitrate, either SOCAR or Contractor may initiate



(39)arbitration (the Party initiating the arbitration shall hereinafter be

called the “First Party”) submitting a request for arbitration to the

Secretary General of the Permanent Court of Arbitration in the

Hague, as provided in the Rules, and appointing an arbitrator who

shall be identified in said request. Within thirty (30) days of receipt

of a copy of the request the other Party to the dispute (“Second

Party”) shall respond, indicating whether it accepts the arbitrator

appointed by the First Party as the sole arbitrator, or identifying a

different arbitrator that it has selected.



If the Second Party does not accept the sole arbitrator appointed by

the First Party and also does not appoint its arbitrator, the Secretary

General of the Permanent Court of Arbitration in the Hague shall

appoint a second arbitrator in accordance with the Rules. The two

arbitrators shall, within thirty (30) days, select a third arbitrator

failing which the third arbitrator shall be appointed by the Secretary

General of the Permanent Court of Arbitration in the Hague, in

accordance with the Rules. Unless otherwise agreed in writing by

the Parties, the third arbitrator to be appointed shall not be a citizen

of a country in which any Party (including the Ultimate Parent

Company of such Party) is incorporated.



1.4 The Parties shall extend to the arbitration tribunal (or the sole

arbitrator as the case may be) all facilities (including access to the

Petroleum Operations and facilities) for obtaining any information

required for the proper determination of the dispute. Any Party shall

be allowed only one absence or default beyond its reasonable

control which prevents or hinders the arbitration proceeding in any

or all of its stages. Additional absences, or absences which are

within a Party’s reasonable control, shall not be allowed to prevent

or hinder the arbitration proceeding.



1.5 Without limiting the generality of their powers, the arbitrator(s) shall have the power to award costs and damages as necessary with respect to the Government Guarantee with respect to Article 23.2. 1.6 The arbitration tribunal’s award shall be final and binding on the Parties and shall be immediately enforceable. Judgement on the award rendered may be entered and execution had in any court having jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement and execution, as applicable.



1.7 Each Party shall pay the costs of its own arbitrator and the costs of the third arbitrator in equal shares, and any costs imposed by the Rules shall be shared equally by the Parties. Notwithstanding the above, the arbitrators may, however, award costs (including reasonable legal fees) to the prevailing Party from the losing Party. In the event that monetary damages are awarded, the award shall include interest from the date of the breach or other violation to the date when the award is paid in full. The rate of interest shall be LIBOR plus four (4) percent over the period from the date of the breach or other violation to the date the award is paid in full. Each Party waives any and all requirements of any national law relating to notice of a demand for interest or damage for the loss of the use of funds.



Page (41)

APPENDIX 7



CRUDE OIL AND NATURAL GAS MEASUREMENT

AND EVALUATION PROCEDURE



1.1 General



This Appendix 7 describes the method of measuring and evaluating the Petroleum produced from the Contract Area.



1.2 Crude Oil Measurement



(a) Custody Transfer Meters. Contractor will have custody transfer meters permanently installed at the Delivery Point. The custody transfer meters will capable of accurately measuring and evaluating the specific type and quantity of Crude Oil produced in the Contract Area and will be comprised of all necessary meters, meter testing devices, instruments, and other associated equipment necessary to measure, evaluate and record the quantity, quality and physical characteristic of the Crude Oil from the Contract Area. Contractor will use the custody transfer meters for measurement and evaluation of the Crude Oil from the Contract Area.



(b) Contractor will also provide necessary tools and instruments to measure BS&W and American Petroleum Institute ('API') gravity and shall store such tools and instruments in an appropriate laboratory. Contractor shall test and calibrate the accuracy of the meters being used in accordance with generally accepted international Petroleum industry practice whenever necessary and in any event at least once per month. All testing and calibration will be witnessed both by SOCAR and by Contractor with detailed reports and results signed by two (2) representatives from each of SOCAR and Contractor.



(42)1.3 Timing of Crude Oil Measurement



Official meter readings for accounting purposes will be monitored not less than weekly for purposes of providing production and Crude Oil shipment data. Information obtained from these readings will be reported to SOCAR and Contractor. The actual times of meter readings will be determined by Contractor with timely notification to SOCAR. SOCAR and Contractor will each have the right to have two (2) representatives present to witness meter readings and sign meter tickets.



1.4 Natural Gas Measurement



The quantity of Natural Gas delivered under this Agreement will be determined from data obtained from orifice meter runs using API standards and procedures. The type of Natural Gas meters to be installed will be determined by Contractor. The measurement and evaluation system installed will be comprised of all the necessary

meters, instruments and other associated equipment necessary to record the quantity, quality and physical characteristics of the Natural Gas. The entire Natural Gas metering system will have a backup and be capable of continuously recording throughput data at all times. The Natural Gas meters will be calibrated at least once per month with calibration records witnessed and signed by representatives of both SOCAR and Contractor.



1.5 Petroleum Measurement Procedures



(a) Unless Contractor and SOCAR agree otherwise, API standards and procedures will be used to measure and evaluate Petroleum flowing through the equipment. The API standards and procedures will be taken from or provided by the API’s Standard Method of Sampling and Manual of Petroleum Measurement Standards. A copy of the standards and procedures (and updates and reviews



(43)thereof) will be provided by Contractor and will be available both to SOCAR and to Contractor at all times.



(b) Specialists from Contractor and SOCAR shall meet to agree appropriate detailed Petroleum measurement and evaluation procedures to be implemented as soon as practicable after approval of the Development Programme.



Page (44)APPENDIX 8



DESIGN STANDARDS AND SPECIFICATIONS



All new production facilities and all new equipment added as part of a modification programme to existing facilities, will be designed in accordance with current international standards, modified where appropriate for the specific requirements of the Caspian Sea conditions.



Existing facilities were designed to the standards appropriate at the time of their construction. They will not be modified to comply with international standards except where determined necessary by Contractor for the safe operation of new equipment.





The design specifications used will be based on current standards and recommended practice as published by recognised international engineering organisations and associations, some of which are listed below. The design specifications may also include additional requirements developed from these international standards by Contractor.



API - American Petroleum Institute

ANSI - American National Standards Institute

ASME - American Society of Mechanical Engineers

ASTM - American Society for Testing and Materials

BSI - British Standards Institution

CEN - European Committee for Normalisation

CENELEC - European Committee for Electrotechnical Standards

DIN - The German Institute for Standards

IEC - International Electrotechnical Commission

IEEE - Institute of Electrical and Electronics Engineers (USA)

IP - Institute of Petroleum (UK)

ISA - Instrument Society of America

ISO - International Organisation for Standardisation

NACE - National Association of Corrosion Engineers (USA)

NEMA - National Electrical Manufacturers Association (USA)

NFPA - National Fire Prevention Association (USA)



Page (45)

APPENDIX 9



ENVIRONMENTAL STANDARDS

AND PRACTICES



I. Integrated Management System



A. Environmental Sub-Committee



1. The formation and organisation of an environmental sub-committee of the Steering Committee shall be set forth in a proposal of Contractor which will be submitted to SOCAR for approval. Once approved by SOCAR, the Environmental Sub-Committee shall be formed in accordance with the approved recommendation and shall be composed of environmental representatives of Contractor Parties and SOCAR, the Ministry of Ecology and Natural Resources, Azerbaijan National Academy of Sciences and other relevant research institutes.



2. Responsibilities of the environmental subcommittee shall be to:

– design monitoring program for monitoring of selected environmental parameters;

– co-ordinate monitoring program;

– publish annual report.



B. Environmental Work Programme



The environmental work programme to be pursued during Petroleum Operations pursuant to Article 26.2 shall be phased as follows:



Page (46)1. For seismic surveys

– Environmental impact assessment;

– Health, safety and environmental management plan for seismic operations, including emergency procedures, oil spill contingency plan, waste management plan and an audit programme.



2. For exploration drilling

– Drilling environment impact assessment;

– Baseline environmental study;

– Environmental monitoring programme;

– Health, safety and environment management plan for exploration drilling, including emergency procedures, oil spill contingency plan, waste management plan (including drill cuttings disposal) and an audit programme.



3. For development and production

The environmental work programme for the Development and Production Period shall be submitted together with the Development Programme to SOCAR for approval.



II. Environmental Standards



The following are general and specific guidelines relating to discharges associated with oil and natural gas exploration and production activities.



Page (47)

A. General Guidelines



1. There shall be no discharge of waste oil, produced water and sand, drilling fluids, drill cuttings or other wastes from exploration and production sites except in accordance with the following guidelines.



2. There shall be no unauthorized discharges directly

to the surface of the sea. All discharges authorized by these guidelines shall be controlled by discharging into a caisson whose open end is submerged, at all times, a minimum of two (2) feet below the surface of the sea.



B. Discharge Guidelines and Monitoring



1. Produced Water



Contractor will endeavor to utilize produced water for reservoir pressure maintenance if, through standard compatibility testing with Caspian Sea water, no damage to the reservoir resulting in a reduction in overall hydrocarbon recovery would occur by mixing the two water streams. In the event that the two water streams are compatible, Contractor may only discharge a volume of produced water after treatment to the Caspian Sea that exceeds the total volume required for reservoir pressure maintenance or in the event of an emergency, accident or mechanical failure. In the event that the two water streams are not compatible, Contractor may discharge produced water to the Caspian Sea after treatment in

accordance with generally accepted international Petroleum industry standards and practices.



(48)2. Drill Cuttings and Drilling Fluids



(a) There shall be no discharge of oil based drilling fluids, other than low toxicity and biodegradable drilling fluids.



(b) There shall be no discharge of drill cuttings generated in association with the use of oil based drilling fluids, invert emulsion drilling fluids, or drilling fluids that contain radiation, if any, waste engine oil, cooling oil, gear oil, or other oil based lubricants, other than cuttings generated in association with the use of low toxicity and biodegradable drilling fluids.



(c) There shall be no discharge of drill cuttings or drilling fluids if the maximum chloride concentration of the drilling fluid system is greater than four (4) times the ambient concentration of the receiving water.



(d) Prior to the start of the drilling programme, a drilling mud system will be designed and laboratory tested under the U.S. EPA, 96- hour acute toxicity test using mycid shrimp or other indicator organisms of the Caspian Sea agreed between Contractor and SOCAR. Those muds biodegradable and of low toxicity will be authorised for discharge during the drilling programme.



Page (49)

(e) During drilling operations, mud samples will be collected periodically to determine toxicity using procedures established for the Caspian Sea.



(f) The composition of the mud system may be altered as necessary to meet changes in the drilling operations. The modified mud system may be discharged if it has been shown to meet the above limits for discharge on oil, salinity and toxicity.



3. Other Wastes



(a) Sanitary waste may be discharged from a U.S. Coast Guard certified or equivalent Marine Sanitation Device (MSD) with total residual chlorine content greater than 0.5 mg/l but less than 2.0 mg/l as long as no floating solids are observable. The Hach method CN-66-DPD test shall be used to measure the residual chlorine.



(b) Domestic wastes and gray water may be discharged as long as no floating solids are observable.



(c) Desalinisation unit wastes shall be discharged.



(d) Deck drainage and wash water may be discharged as long as no visible sheen is observable. Oily and clean drainage or wash



(50)water shall be segregated; clean water shall be discharged to the sea and oily water shall be treated as provided in B.1 above.



(e) Trash shall not be discharged offshore. Trash shall be transported to an appropriate land-based disposal facility.



4. Monitoring



(a) Produced water



(1) The volume of produced water discharged in accordance with B.1 above and concentration of oil and grease contained in the discharge will be monitored daily.



(2) The daily and monthly average oil and grease concentration will be reported to the appropriate environmental authority monthly.



(b) Drill Cuttings and Drilling Fluids



(1) An inventory of drilling fluids additives and their volumes or mass added to the drilling fluid system will be maintained for each well.



(2) Drilling fluid properties, including volume percent oil and concentration or chlorides, will be mentioned daily for each well.



(3) The estimated volume of drill cuttings and drilling fluids discharged shall be recorded daily and reported monthly to



(51)the appropriate environmental authority.



(c) Other Wastes



The estimated volume of other wastes discharged shall be recorded daily and reported monthly to include:



(i) Sanitary waste;



(ii) Domestic waste;



(iii) Deck drainage and wash water.



C. Air Emission Guidelines and Monitoring



Contractor is authorised to discharge air emissions. Such discharges will be limited and monitored in accordance with generally accepted international Petroleum industry standards and practices.



D. Safety Guidelines



Contractor shall take into account subject to the provisions of Article 26.1 relevant Azerbaijani regulations and the following international safety and industrial hygiene standards in conducting its Petroleum Operations under the Agreement:



1. International Association of Oil and Gas Producers (OGP) reports and guidelines - HSE Management;



2. International Association of Drilling Contractors (IADC) - Drilling Safety Manual;



(52)3. International Association of Geophysical Contractors (IAGC) – Operations Safety Manual;



4. Threshold Limited Values for Chemical Substances in the Work Environment – American Conference of Governmental Industrial Hygienists.



(53)APPENDIX 10



EXPLORATION WORK PROGRAMME



For the purposes of exploring the oil and gas potential within the Contract Area Contractor shall carry out a programme of work as described in Article 4 in accordance with the following guidelines:



(i) Shoot, process and interpret three dimensional seismic which may for operational reasons upon SOCAR's approval be shot partially outside the Contract Area; and



(ii) Carry out an upper section site survey to select a safe and environmentally sound site for drilling; and



(iii) Subject to Article 4.2(d) of the Agreement, drill in the Contract Area two (2) exploration wells to ascertain the presence of oil and gas in the prospective horizons. During the Exploration Period one (1) well shall be drilled to the base of the Fasila Suite or to a depth of seven thousand (7000) metres subsea, whichever occurs first. If the decision to drill the second well is taken by BP, it shall also be drilled to the base of the Fasila Suite or to a depth of seven Thousand (7000) metres subsea, whichever occurs first.



(iv) During the Additional Exploration Period, Contractor shall drill two (2) wells to the base of the Fasila Suite or to a depth of seven thousand (7000) metres subsea, whichever occurs first.



(v) Exploratory wells drilled as set out in (iii) and (iv) shall have the objective of further defining the areal extent, downdip limits and reservoir properties of any Petroleum found within the Contract Area. Drilling of such wells shall be accomplished with conventional core acquisition techniques according to international Petroleum industry standards.



(54)(vi) To evaluate the wells an appropriate logging and testing programme may include but not be limited to the following:



(a) at the conductor casing point, gamma ray and neutron log (from approximately conductor setting point to seafloor);

(b) at the surface casing point, gamma ray log, induction logs, sonic log, density and neutron logs, sidewall cores as appropriate (from approximately surface casing point to conductor casing shoe through the Surakhany, Akchagyl and Apsheron Suites);

(c) at the intermediate casing point, gamma ray log, induction logs, sonic log, density and neutron logs, microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate (from approximately intermediate casing setting point to surface casing shoe through the upper Balakhany and Sabunchi Suites);

(d) at the final casing point, gamma ray log, induction logs, sonic log, density and neutron logs, microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate (from approximately liner casing point to the intermediate casing shoe through the Balakhany Suite);

(e) at total drilled depth, gamma ray log, induction logs, sonic log, density and neutron logs, microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate (from approximately production casing point to the linear casing shoe through the Fasila and lower Balakhany Suites) as well as a vertical seismic profile log (VSP) taken at intervals between total depth to seafloor;



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(f) drill stem tests (DST’s) of major productive horizons as appropriate.



(vii) Contractor shall have the right, but not the obligation, to sidetrack any exploration wells, drill to greater depths or drill additional exploration wells within the Contract Area for the purposes of obtaining additional geological information.



(viii) All reporting and records pertaining to exploration drilling and evaluation shall be submitted according to Article 7 of this Agreement.



Page (56)

ADDENDUM



TO



AGREEMENT ON THE EXPLORATION,

DEVELOPMENT AND PRODUCTION SHARING

FOR THE SHAFAG-ASIMAN OFFSHORE BLOCK

IN THE AZERBAIJAN SECTOR OF THE CASPIAN SEA



RELATING TO THE FORMATION OF

SOCAR OIL AFFILIATE



BETWEEN



THE STATE OIL COMPANY

OF THE REPUBLIC OF AZERBAIJAN



AND



BP EXPLORATION (AZERBAIJAN) LIMITED



(No Page #)

This Addendum is made and entered into on the same date as the Agreement on the Exploration, Development and Production Sharing for the Shafag-Asiman Offshore Block in the Azerbaijan Sector of the Caspian Sea (hereinafter called the “EDPSA”) between:



THE STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN (hereinafter called “SOCAR”), a Government body, on the one hand and



BP EXPLORATION (AZERBAIJAN) LIMITED, a company incorporated in England (hereinafter called “BP”), on the other hand.



The entities named above may sometimes be referred to individually as “Party” and collectively as “the Parties”.



WHEREAS:



1. SOCAR has informed BP that SOCAR Oil Affiliate (hereinafter called “SOA”) has not yet been formed; and



2. SOCAR is willing and fully empowered to assume and be bound by all obligations and liabilities of SOA under the EDPSA; and



3. SOCAR and BP have agreed that SOCAR will act on behalf of SOA pending the formation of the SOA and SOA’s written ratification of the EDPSA as hereinafter appears.



NOW THEREFORE, the Parties hereby agree as follows:



1. SOCAR shall be responsible for all obligations of SOA under the EDPSA and any further agreements, contracts or legal instruments between the Other Contractor Parties and SOA and shall act on behalf of SOA, until such time as: (i) SOA has been duly organised and is validly existing in accordance with the law of its country of incorporation and with its charter; (ii) SOA has ratified its



Page 1participation in the EDPSA and this Addendum through a resolution of its Board of Directors; (iii) SOA has ratified all actions taken by SOCAR on behalf of SOA; and (iv) SOA delivers to the Other Contractor Parties all documents evidencing (i), (ii) and (iii) above. The Parties may place reliance on the actions of SOCAR taken on behalf of SOA as if taken by SOA itself until such time as the events and actions required in (i), (ii), (iii) and (iv) above have occurred.



2. SOCAR hereby undertakes that: (i) SOA shall be duly organised and validly existing; (ii) SOCAR shall ensure that SOA authorises its participation in the EDPSA and this Addendum promptly after it is duly organised and is validly existing; (iii) SOCAR shall ensure that SOA ratifies all actions taken by SOCAR on behalf of SOA and all actions taken by the Other Contractor Parties promptly after it is duly organised and validly existing; and (iv) SOCAR shall ensure that SOA delivers to the Parties all documents evidencing (i), (ii) and (iii) of this Paragraph 2 promptly after it is duly organised and validly existing.



3. This Addendum modifies and/or amends the relevant terms and conditions of the EDPSA as set forth herein and shall be considered for all purposes a part of the EDPSA and shall accordingly be given the full force of law in the Republic of Azerbaijan as provided in Article 25.1 of the EDPSA.



4. Any disputes arising out of or in connection with this Addendum shall be resolved as set forth in Article 23.3 of the EDPSA and the law governing this Addendum shall be as set forth in Article 23.1 of the EDPSA.



IN WITNESS WHEREOF the Parties have executed this Addendum as of the 7th day of October 2010 by their duly authorised representatives.



Page II

For and on behalf of the

STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN



By: ___________________

Name: ___________________

Title: ___________________





By: ___________________

Name: ___________________

Title: ___________________





For and on behalf of

BP EXPLORATION (AZERBAIJAN) LIMITED



By: ___________________

Name: ___________________

Title: ___________________





By: ___________________

Name: ___________________

Title: ___________________



Page III