NOTICE: The text below was created automatically and may contain errors and differences from the contract's original PDF file. Learn more here

EX-10.52 21 exhibit10-52.htm PRODUCTION SHARING CONTRACT FOR CONTRACT










PRODUCTION SHARING CONTRACT FOR CONTRACT 

FOR THE CONTRACT AREA ZUUBAYAN-XIV

BETWEEN

THE MINERAL RESOURCES AND PETROLEUM AUTHORITY

OF MONGOLIA

AND 

'DWM PETROLEUM AG'



Dated     200
 Page 2 of 46








PRODUCTION SHARING CONTRACT................................................................................4


GENERAL PROVISIONS................................................................................................4


ARTICLE L REPRESENTATIVES.........................................................................................4


1.1 DES1GNA TION OF REP RESENT A T1VES................................................................ 4


1.2 RIGHTS TO ACCESS AND EXERCISE SUPER VISION 0 VER CONTRACTOR S


PETROLEUM OPERA TIONS...................................................................................................4


ARTICLE II. DEFINITIONS,*.................................................................................................4


2. DEFINED TERMS........................... 4


ARTICLE III. RIGHTS AND OBLIGATIONS OF THE MRP AM AND CONTRACTOR


...................................................................................................................................................ft


3.1 MRPAM S RIGHTS......................................................................................................8


3.2 MRPAM S OBLIGA TIONS ......................................................................................8


3.3 CONTRACTOR S RIGHTS......................................................................................... 9


3.4 CONTRACTOR S OBLIGA TIONS................................................................................9


ARTICLE IV. COSTS AND COST RECOV Kin ......................................................10


ARTICLE V. TERM OF EXPLORATION OPERATIONS................................................11


5 I FXPLORATION PERIOD................... 11


5.2 / X/ENSJON OE EXP LOR I Tit 4 V PERIOD...............................................................11


5.3 DISCOVER) AXD APPRAISAL OPERATIONS.......................................................1 1


5.4 COMMERClAl DISCOVERIES............... 1?


5 $ COMMERC11 l DISC ’() f EH I . MING. I >E 111 OP ME NT PERIOD.................... 12


5.6 REVISIONS OE APPRAISAL PROGRAMS APPRAISAL AREAS,............................12


DEVELOPMENT PLANS AND DEVELOPMENT AREAS.....................................................12


5.7 EXTENSION OF DEVELOPMENT PERIOD.............................................................12


ARTICLE VI EXPLORATION OPERATIONS..................................................................13


6.1 MANDATORY WORK AND OBLIGATIONS..........................................................13


62 DRILLING METHODS..........................................................................................13


6.3 EXPLOIT TION WORK PROGRAMS AND BUDGETS.............................................13


ARTICLE VII. RELINQUISHMENTS..................................................................................14


7.1 RELINQUISHMENTS..................................................................................................14


7.2 VOLUNTARY RELINQUISHMENTS..........................................................................14


7.3 APPRAISAL AREAS............................................................................................ 14


ARTICLE VIII. ROYALTY AND PRODUCTION SHARING...........................................14


8.1 ROY AIT)....................... 14


8.2 \RKF.TfNG OFCRLDEOIL...... 15


8.3 PRODUCTION SHARING OIL............................................................................15


8.4 VALUA TION OF CONTRACT CRUDE OIL..............................................................16


8.5 / ORECASTS OF PRODUCTION ............................................................. 17


8.6 UNDER LIFTING AND OVERLIFTING......................................................................17


ARTICLE DC NATURAL GAS.................................................................................................17


ARTICLE X. BONUSES, FEES AND PAYMENTS.............................................................17


HU BONUSES...................................................................................................................17


10.2 TRAINING BONUS........................................................................................... 18


10.3 LAND SURFACE RENTAL FEE.....................................................................................18


10.4 ADMIN 1STRA TIVE SER VICE FEES...........................................................................19


10.5 ENVIRONMENTAL RECOVERY................................................................................19


ARTICLE XI. MEASUREMENTS.............................................................................................20


11.1 PRODUCTION SI I A RING MEASUREMENTS...........................................................20








Production Snaring Contrxt Detyveeo Mineral resources and Petroleum Authonty of Morgana and


DWM Pdrolcum AO. il.itcJ .. ..... ..200


/ t





 Page 3 of 46





11.2 CORRECTIONS OF MEASUREMENTS........................................................ .20


ARTICLE XIV. GOVERNMENTAL ASSISTANCE................................................... .23


ARTICLE XVI. TAX.................................................................................................... . 24


ARTICLE XVII. EXCHANGE RIGHTS................................................................... .24


17.1 FOREIGN CURRENCIES.............................................................................. .24


17.2 FOREIGN BANK ACCOUNTS....................................................................... .25


17*3 EXCHANGE RIGHTS................................................................................ .25


17.4 PAYMENTS UNDER THIS CONTRACT........................................................ .25


ARTICLE XVIII. MONGOLIAN SUBCONTRACTORS, MATERIALS AND


EMPLOYEES .................................................... .25


18.1 SELECTING MONGOLIAN SUBCONTRACTORS. MATERIALS AND


EMPLOYEES..................................................................................... .25


ARTICLE XIX. EMERGENCIES.............................................................................. 26


19.1 EMERGENCIES IN PETROL EUM OPE&4 TIONS....................................... .26


19.2 NA TIONA L EMERGENCY.............................................................................. 26


ARTICLE XX. FORCE MAJEURE.......................... 26


ARTICLE XXL CANCELLATION ....................... .27


ARTICLE XXII. ARBITRATION AND LIABILITIES........................................... .28





ARTICLE XXIII. NOTICES.............................................................................. .28


ARTICLE XXIV. INSURANCE .................................................................... .29


ARTICLE XXV. GENERAL......................................................................................... ♦ 30


25.1 ANNEXES................................................................................................ .30


25.2 LEGISLATION................................................................................................. .30


25.3 GOOD FAITH .............................................................................................. .30


25.4 LANGUAGE.................................................................................................... .30


25.5 ENTRY INTO FORCE AND ADOPTING CHANGES IN THE CONTRACT .30


ANNEX A...................................................................................................................... .31


ANNEX B...................................................................................................................... .32


ANNEX C...................................................................................................................... . 33


ANNEX I).............................................................................................................. .33

































































Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia end


OWW Petroleum AG dated , 200


 Page 4 of 46





PRODUCTION SHARING CONTRACT


This is a Production Sharing Contract signed by the Mineral Resources and Petroleum Authority


of Mongolia, on the one side (hereinafter *'MRPAM'). and DWM Petroleum AG. on the other


(hereinafter the ‘'Contractor*') (both sides hereinafter the ‘Parties') on the......200....


GENERAL PROVISIONS


The purpose of this Contract is to establish legal regulation of relations between


Contractor and Mineral Resources and Petroleum Authority of Mongolia /MRPAM/ authorized


by the Government of Mongolia to enter on its behalf into Contract related to Petroleum


Operations in the territory of Mongolia, and exercise supervision over implementation thereof.


The Contractor shall have exclusive rights for conducting Petroleum Operations in the


Contract Area for Exploration as described in Annexes, attached hereto and made the integral


part of the present Contract.


NOW, THEREFORE, it is hereby agreed as follows:


ARTICLE 1. REPRESENTATIVES


1.1 DESIGNATION OF REPRESENTATIVES


a) The Government of Mongolia hereby designates the C hairman of the MRPAM, or any


other authorized person, as its representative (the “Government Representative**) under


this Contract.


b) The Contractor hereby designates, Alexander Becker, on behalf of DWM Petroleum AG.


or any other authorized person, as its representative (the “Contractor Representative”)


under this Contract.


c) Changes of the Government Representative or the Contractor Representative should be


noticed to the other party in accordance with Article XXI11 hereof.


1.2 RIGHTS TO ACCESS AND EXERCISE SUPER 1 1S1QN 01 ’ER COS TUlCTOR S


PETROLEUM OPERA TIONS


a) The Government Representative (or any other person assigned and authorized by the


Government Representative) shall have access and exercise the authority granted to it


hereunder over implementation in the Contract Area and over Petroleum Operations, and


the Contractor shall provide all reasonable assistance to the Government Representative


to exercise such right of access. The Government Representative shall not interfere with


the operations of the Contractor without valid cause.


b) Any legally authorized person has right to access and exercise supervision over


implementation.


ARTICLE II. DEFINITIONS


2. DEFINED TERMS











Production Shannc Contract Detween Mineral resources onj Petroleum Autfio-ity of Mongolia and


DWM Ptitiulctitti AO,. ilaicJ ... . ,200


/





 Page 5 of 46





If there is no other explanation for certain case, the defined terms and understandings,


forms originating hence shall have the meanings set forth in this Article 2:


“MRPAM™ means the Mineral Resources and Petroleum Authority of Mongolia authorized by


the Government of Mongolia to enter on its behalf into Contract related to Petroleum Operations


in connection with petroleum operations in the territory of Mongolia, and exercise supervision


over implementation thereof.


“Natural Gas’* means hydrocarbons that are in a gaseous phase at atmospheric conditions of


temperature and pressure including wet mineral gas. dry mineral gas, casing-head gas and


residue gas remaining after the extraction or separation of liquid hydrocarbons from wet gas.


and non-hydrocarbon gas produced in association with liquid or gaseous hydrocarbons.


“Barrer means a quantity or unit of 158.987 litres, at or corrected to a temperature of sixty


degrees Fahrenheit (60° F), at standard atmospheric pressure of 1.01325 bars.


“Accounting Procedure™ means procedures and reporting requirements set forth in Annex D.


“Production Sharing Contract™ means this Contract executed by the MRPAM and the


Contractor for conducting Petroleum Operations in the Contract Area and approved by the


Government of Mongolia.


“Petroleum” means liquid petroleum and different compounds of hydrocarbons in a gaseous or


solid state occurring in the entrails of the earth, which may be produced in association with


petroleum or separately, including Crude Oil. Natural Gas and Associated Substances.


“Petroleum Law” means the Petroleum Law of Mongolia, which entered into force on January


18, 1991 and any Laws amending or in substitution for, or in lieu of such law.


“Regulation for Implementing the Petroleum Law” means the Regulation for Implementing the


Petroleum Law of Mongolia adopted by Government of Mongolia /Resolution No.204 in 1991


and any Regulations amending or in substitution for. or in lieu of such regulation.


“Petroleum Operations" mean operations related to the exploration, protection, production,


processing, transportation, storage and marketing of Petroleum in scope of this Contract.


Exclusive right for conducting Petroleum Operations means only the Contractor conduct


Petroleum related operations rights within the Contract area lor in this Contract when it is in


effect.





“Contractor" means DWM Petroleum AG which enters into this Contract to conduct Petroleum


Operations in accordance with the contract regulations and conditions.


“Effective Date” means the date on which the Government ot Mongolia approves this Contract


“Contract Year” means any period of twelve (12) consecutive Calendar Months counted from


the Effective Dale of this Contract or from the anniversaries of such Effective Date.











Production Sharing Coniract between Mineral resources and Petroleum Authority of Mongolia and


DWM Petroleum AG. dated


 Page 6 of 46





"'Contract Area" means the area shown on and described in Annexes herein from the Effective


date as such area shall have been reduced from time to time by relinquishments made in


accordance with Article VII


"Contract Crude Oir means, respectively, Crude Oil which are produced and saved from the


Contract Area pursuant to this Contract; and for purpose of this definition, "produced" means


caused or allowed to rise to the surface and to pass through Production Sharing Measurement


facilities, and “saved” means made available to be taken and disposed of by a party hereto.


"Associated Natural Gas" means any Natural Gas that may be produced from or in association


with Crude Oil and capable of being developed commercially.


"Associated Substances” means any other substances that may be extracted from or in


association with Crude Oil or Natural Gas.


“Rules" means methods and procedures to be followed in process of carrying certain types of


Petroleum Operations.


"Operation Costs" means all costs and expenses except Exploration Costs and Development


Costs.


"Block Unit" means an area equal to multiplied ten (10) minutes latitude by ten (10) minutes of


longitude.


"Discovery Well" means a well which is determined by Parties to be worthy of further


evaluation for the purpose of determining w hether such reservoir, alone or w ith other reservoirs,


could constitute a Commercial Discovery.


Field means an Area containing one or more natural reservoirs discovered on one or more


wells, and similar in geological structure and stratigraphy, determined to be worthy of being


developed.


"Development Costs" means all costs and expenses (except Administrative Costs and


Exploration Costs) incurred in respect of Development Operations.


"Development Area" means an area within the Contract Area containing a Commercial


Discovery.


"Development Operations" means all operations and activities in respect of one or more


Commercial Discoveries.


“Development Period" means the period during which Development Operations will be carried


out in accordance with this Contract, as specified in Article 5.5 and 5.7.


"Development Program” means a program of work, including a Budget, for Development


Operations in respect of a Commercial Discovery.


"Cost Oil” means a quantity of Crude Oil for recovering Contractor's costs and expenses.


‘•Royalty" means payment in accordance with utilization of the natural non-renewable resources





Production Sharing Contract between Mineral resources and Petroleum Aulhonty of Mongolia and


DWM Pciidcuin AC .dated . ... ....200,


 Page 7 of 46





of Mongolia.


'•Relinquishment of Areas ' means relinquishment by Contractor voluntarily or in accordance


with Contract some pails of Contract Area at the certain phase of exploration work.


“Land Surface Rental Pee" means non-refundable payment to the Y1RPAM in each year by size


of a contract area as stated in “Regulation for Implementing the Petroleum Law” for


Contractor's exclusive right for Petroleum Operation in the contract area.


"Budget” means an estimate of money for the work program to be done during the specific


Petroleum Operations phase.


“Appraisal Development” means a well development during appraisal, as international


petroleum industry, in purpose to determine Discovery Well or Commercial Discovery Well


“Subcontractor” means any Legal Person or individual, which concluded a Contract with the


Contractor to carry out certain portions of the Petroleum Operations.


“Crude Oil” means hydrocarbons, which are in liquid state at atmospheric pressure either in a


natural subsurface reservoir or alter passing through a separator or other surface processing


facility; Crude Oil also includes asphalt, condensate and natural gas liquids, which are liquefied


in separators, plants or other surface processing facilities.


“Appraisal Area” means one or more geological structure(s) or occurrence(s) that Parties


determine to be worthy of being appraised by an Appraisal Program.


“Appraisal Program” means a plan of work for the purpose of determining whether the


Discovery made by such Discovery Well constitutes a Commercial Discovery


“Commercial Discovery” means a reservoir or a group of two (2) or more reservoirs containing


Petroleum, which Parties determines to be worthy of being developed commercially, taking into


consideration relevant technical and economic factors, including Contractor’s estimates of


recoverable reserves, prices of Petroleum and costs of development


“Exploration Costs” means all costs and expenses (except Operation Costs and Development


Costs) incurred in respect of Exploration Operations.


“Exploration Operations” means such operations as:


1. activities in respect of aerial and satellite mapping, geological, geophysical and


geochemical surveys; drilling and production of exploration and appraisal wells;


petrologic, mineralogical and paleontological studies, interpretations of data


preparing reports and other all exploration activities;


2. discovering one or more reservoirs which have not then been proved to be within


a Commercial Discovery; and


3. carrying out an Appraisal Program.


“Exploration Period” means the period during which Exploration Operations will be carried out


in accordance with this Contract, as specified in Article 5.1 and 5.2.








Production Sfianrtg extract Between Mineral resources and Petroleum Auiho'lly of Mongolia and


DWM Petroleum A(r, dated 2D0


 Page 8 of 46





"Profit Oil” or "Production Sharing Oil" means a quantity of Contract Crude oil to be allocated


between the Government representative and Contractor after the deduction of royalty and cost


oil.


"Calendar Month” means one (1) of the twelve (12) calendar months according to the Gregorian


calendar, starting on the first day of such month and ending on the last day of such month,


inclusive.


"Calendar Quarter** means a calendar quarter according to the Gregorian Calendar, being cither


the Calendar Months (i) January. February and March, lii) April. May and June, (iii) July.


August and September, or (iv) October, November, and December.


"Calendar Year” means a year according to the Gregorian calendar starting on January I and


ending on December 31, inclusive.


"Legal Person” means a corporation, company or other entity recognized as such by the Laws.


"Laws" means any applicable Mongolian laws, or any other legal acts, whether now existing or


hereafter enacted.


Measurement point means the point of measurement for purpose of marketing after processing a


produced crude oil at the Contract Area.


ARTICLE III. RIGHTS AND OBLIGATIONS OF THE \1RPAM AND CONTRACTOR


3.1 MRP AM'S RIGHTS


The MRP AM shall have the following rights;





a) To inspect Petroleum Operations and the financial statements of the Contractor,


b) To possess all the original copies of geology, geophysics, hydrogeology, petrophysics,


geochemistry, laboratory analysis and other related Petroleum Operations’ data,


c) To possess copies of documents related to all the Contractors operations, machinery,


equipment, technical definitions, houses, constructions, its diafts and others;


d) To request the Contractor to supply its share of Petroleum for Mongolia’s domestic


consumption. In this case Government Representative shall make the payment in USD at


world market price.


e) To use or exercise supervision over the marketing of Mongolia’s share of Production


Sharing Oil


f) To exercise other rights provided for in this Contract


3.2 MRP A M S OBUGA TIONS


The MRPAM shall assume the following obligations:


a) fo help and support petroleum operations conducted by Contractor,


b) To inspect and supervise the Petroleum Law of Mongolia, it’s Regulations and Rules, and


this Contract’s implementation;


c) lo fulfill other obligations provided for in this Contract.





Production Sharing Contract between Mineral resources and Petroleum Aiinonly of Mongolia ano


DWM Peiioleum AG . daicd .. ,-tW


 Page 9 of 46








3.3 CONTRACTOR’S RIGHTS





a) The Contractor shall have the exquisite nghts to conduct Petroleum Operations in the


Contract Area with permissions obtained under the Petroleum Law, the Business Fntity


Special Permission Law, and in accordance with Petroleum Law of Mongolia. Regulation


for Implementing the Petroleum Law of Mongolia, all applicable laws and this Contract.


b) The Contractor shall have a right to construct pipelines, bridges, roads, storage facilities,


houses, landing fields, radio towers and communication facilities in accordance with


requisite approvals


c) The Contractor shall have a right to access the previously compiled exploration,


geophysical, petrophysical, geochemistry and well data related to the Contract Area at data


center of the MRPAM and to buy those data if necessary.


d) To use. sell or possess (both within the Mongolia and abroad) the Contractor’s share of


Production Sharing Oil;


e) Contractor shall enjoy all rights of Mongolian legal person, unless otherwise specifically


provided in Mongolian law or international agreements to which Mongolia is a party.


f) Contractor may transfer its rights and obligations under this Contract to any third party with


the prior written consent of the Government of Mongolia.


g) Contractor shall have a right to request assistance from Mongolian government if


Contractor’s employees and field workers suffer from serious diseases, disasters, illegal


infringement and serious accidents;


h) Contractor shall have the right to hire and dismiss its staff members, to choose and


determine its sub-contractors, and to purchase materials required for implementing the


Contract.


i) To exercise other rights provided for in this Contract.


3.4 CONTRACTOR'S OBLIGATIONS


During the conduct the Petroleum Operations the Contractor shall assume the following


obligations:





a) Comply with existing Petroleum Law of Mongolia. Regulation for Implementing the


Petroleum Law of Mongolia, any changes or amendments in such laws, rule and regulations


for Petroleum Operations ratified by the authorized body and all applicable Laws of


Mongolia and this Contract;


b) Petroleum Operations will be conducted in accordance with the Mongolian and international


standard, rule and regulations;


c) Notice to the authorized organizations and MRPAM immediately if any accidents or failings


related to health, safety and protection of environment are happened, and take necessary


actions.


d) The technology, techniques and equipments imported to Mongolia for Petroleum Operations


are to be used for efficient development of Petroleum;


e) Conduct an environmental impact assessment prior to the beginning of Contractor's


activities and should submit original reports of environmental impact assessment;


0 To take the following actions necessary to protect human, animals, nature, relics of


historical and cultural importance, land surface:


I. During the conduct of Petroleum Operations, Contractor shall make plans for


preventing hazards to human, animals, nature, relics of historical and cultural








Production Sba'ing Contract between Mineral resources and ^etre'eum Authority of Mongolia and


DWM Petroleum AC* dated 2(Ki


 Page 10 of 46





importance, land surface and environment, and get approval from Government


Representative and authorized organizations for those plans and implement;


II. Prior to the Contract expiration or termination, or relinquishment or abandonment of


any part of the Contract Area, remove all equipment and installations from the area in a


manner acceptable to the Government Representative, and perform all necessary site


restoration activities in accordance with applicable Laws and regulations of Mongolia;


III. The estimates of the anticipated abandonment of wells, site restoration program and


funding sources for restoration shall be included in the annual Production program;


IV If the Contract Area is located near forbidden for Petroleum Operations Area take the


necessary precautions for protection of ecological systems, and prevent pollution of the


Contract Area.


g) All original documents of geological, hydrogeological, geophysical, geochemical


researches, drilling, well and production data, laboratory analysis results, and other data and


reports as it may compile during the term hereof shall be prepared every year in accordance


with approved Rules and submit to the MRPAM;


h) Assist the Government Representative in preparing and carrying out plans and programs for


training and education of Mongolian nationals;


i) Be responsible for the damages causes by violation of Petroleum Operations Regulations;


j) Shall include MRPAM's representatives with rights for lender of choosing or selecting


subcontractors in carrying out certain portions of the Petroleum Operations. The draft of


contracts shall be amicably agreed by the both parties prior to concluding contracts with


subcontractors and a copy of contract shall be furnished to Government Representative;


k) Shall include MRPAM's representatives for process of selecting an authorized company to


carrying out detailed environmental appraisal.


ARTICLE IV COSTS AND COST RECOVERY


a) Contractor shall bear all costs and expenses necessary to conduct Petroleum Operations.


Contractor may recover such costs and 40 (forty) percent of Contract Crude oil will be used


for cost recovery, after the deduction of royalty . Neither party hereto guarantees that any such


Commercial Discovery will be made.


b) The quantity of Cost Oil which the Contractor shall have the right to take and dispose of in


any Calendar Month shall be equal to the aggregate of all Petroleum Costs incurred by the


Contractor


c) The Contractor shall have the right to take and dispose of the certain quantity of Contract


Crude Oil in every trade of Contract Crude oil for the purpose of recovering its costs and


expenses incurred in respect of Petroleum Operations. All Operation Costs of the Contractor


that remain unrecovered hereunder shall be carried forward until fully recovered in the


succeeding Calendar Months.


d) The Contractor shall agree with the Government Representative on the planning and


accounting model for the Petroleum Operations and shall submit to the Government


Representative a copy of accounts for Petroleum Costs. The Contractor shall notify the


Government Representative of the amount of the Petroleum Costs and the method of their


recovery.


c) Contractor will classify Petroleum Cost into Exploration Cost, Operation and Development


Cost, without double concerning Those Petroleum Costs will be recovered by the following


stages


1. Exploration Cost.


2. Operation Cost and








PfOOuCUon Sharing Contrac! beltfeen Mineral resources and Pattoleum Authority of Mongolia a'ld


DWM Petroleum AG . dated .....’00


/





 Page 11 of 46





3. Development Cost


For clarification, it is approved possibility that Development Cost can occur within


Exploration Period and Exploration Cost within Development Period,


0 Notwithstanding the foregoing, the Royalty to be paid under paragraph l of Article VIU and


the bonuses and other payments to he paid under Article 10 shall not be recovered.


ARTICLE V TERM OF EXPLORATION OPERATIONS


5.1 EXPLORATION PERIOD





a) The Exploration Period shall begin on the Effective Date of this Contract. The Exploration


Period shall be up to Hve (5) years in duration and sha.il consist of three phases: -first phase I


year, second phase 2 years, third phase 2 years.


5.2 EXTENSION OF EXP LORA TION PERIOD





a) This extension of exploration period shall be extended in accordance with the Petroleum


Law and its Implementing Regulation.


b) If the Contractor has fulfilled Exploration Work Programs and Budgets and Minimum


Work Obligations as specified below for the phase of the Exploration Period, which it


desires to extend. The Government Representative shall approve the Exploration Work


Programs and Budget of the next phases to extend the Exploration Period.


c) If on the date on which the third Exploration Period would otherwise expire a Discovery


Well exists in respect of which no determination has then been made as to whether such


discovery is a Commercial Discovery, the Exploration Period shall continue in effect in


respect of the Appraisal Area for such Discovery Well until the first to occur of the


following:


i) such Discovery Well is determined to he a Commercial Discovery;


ii) such Discovery Well is determined not to be a Commercial Discovery;


iii) additional extension shall not be more than 6 months


5.3 DISCOVER V AND APPRAISAL OPEIU TIONS





a) If a well is determined to he a Discovery Well in accordance with the following table,


the Contractor shall notify within fifteen (15) days in written the Government


Representative and the date of such notice shall be deemed to be the date of such


Discovery Well.





Well depth <500 500-1000 1000-2000 >2000


(meter)


Daily recovery 0.5 1.0 3.0 5.0


(tons/day)





b) Within ninety (90) day s after the date of each Discovery Well, the Contractor shall


provide to the Government Representative for approval in respect thereof; an Appraisal


Program and Budget; and maps and other descriptions of the area to be appraised (the


“Appraisal Area'*); and after Government Representative’s approval shall begin to


implement the Appraisal Program.








Production Sharing Contract between Mineral resources and °etroteuin Authority of Mongolia and


DWM Petroleum A(J doled 2(H)


 Page 12 of 46





5.4 COMMERCIAL DISCOVERIES


a) If on the basis of reserves estimates one or more discoveries made by one or more


Discovery Wells are determined to be a Commercial Discovery, the Contractor shall


notify in writing the Government Representative within fifteen (15) days, and the date of


such notice shall be deemed to be the date of such Commercial Discovery


b) Within one hundred eighty (180) days after the date of each Commercial Discovery, the


Contractor shall provide to the Government Representative for approval in respect


thereof: a Development Plan and Budget; and maps, reserves estimates and other


descriptions of the area to be developed (the '‘Development Area”); Petroleum


Administration shall inspect revise all the documents within thirty (30) days and if


decides no amendments, no changes shall be made then within ninety (90) days shall


approve such Plan. Petroleum Administration shall have a right to extend the approval


period for one hundred eighty (180) days if decides that all documents shall be amended


and changed.


c) Contractor shall commence Development Operations within (90) days after Government


Representative's approval to implement such Development Plan.


5.5 COMMERCIAL DISCOVERY. TESTING. DEVELOPMENT PERIOD


a) I he period for each Commercial Discovery establishments shall be continued for three


hundred sixty (360) days including the period of Appraisal Development.


bj Development Period in respect of each Commercial Discovery shall take effect on the


date of approval from an authorized organization that such production can be started


from Commercial Discovery, and it shall continue for a period of up to twenty (20)


years.


5.6 REVISIONS OF APPRMSAL PROCRAMS. APPRAISAL AREAS


DEVELOPMENT PLANS AND DE VEL OPMENT AREAS


Subject to Government Representative's written approval, the Contractor may, on the basis of


additional information or evaluation, revise any Appraisal Program, Appraisal Area.


Development Plan and Development Area; provided, however, that no such revision will add to


an Appraisal Area or Development Area any parts of the Contract Area that have already been


relinquished under Article VII prior to such revision In case of revising any Appraisal Program,


Development Plan and Development Area, Contractor shall notify the Government


Representative before (15) days of such decision to be made.


5.7 EXTENSION OF DEVELOPMENT PERIOD


The Government Representative may. extend the Development Period two (2) times, with each


extension being up to five (5) years in duration in case the Contractor builds refinery, petroleum


and natural gas pipeline and other industrial infrastructure. The Government Representative


shall consider granting an extension of the Development Period, if the Contractor, at least sixty


(60) days prior to the expiration of the Development Period, gives written notice to the


Government Representative of the Contractor’s desire to extend the Development Period.














Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia ana


DWM Petroleum AG data! ,200


 Page 13 of 46











ARTICLE VI EXPLORATION OPERATIONS


6.1 MANDATORY WORK AND OBLIGATIONS


Within one hundred twenty (120) days from the Effective Date the Contractor shall commence the


Exploration Operations according to Annex C. In accordance with the Contract, the


Contractor shall perform mandatory work and obligation and shall spend certain amount at


least as included in the Plan (Annex C). If the Contractor did not spend such amount of


capital for the mandatory work then the Contractor shall pay the difference between the


mandatory work and actual invested amount to the VJRPAM wiihin (30) thirty days after the


end of the Contract Year.


b) If in any Contract Year the Contractor spends more than the Minimum Expenditure Amount,


the extra work expenditure shall be calculated for the following exploration year.


c) Contractor shall place 2.000,000 (two million) US dollars on the escrow' account in.........


Bank of Mongolia as guarantee of minimum work obligation of the first contract year the


Production Sharing Contract. Any issue related to this Guarantee fund placed on the Escrow'


Account shall be decided in accordance with the Escrow Account Service Agreement


concluded between the MRP AM and Contractor dated........ 200....


6.2 DRILLING METHODS


Any exploration well which the Contractor becomes obligated to drill under this paragraph 1 of


Article VI shall be drilled in accordance with generally accepted methods used in the


international petroleum industry and shall be deemed drilled upon the first to occur of the


following, the cost shall be recoverable cost.


a) it reaches the projected depth or target bed;


b) it becomes a Discovery Well;


c) it reaches basement rock; or


d) it encounters impenetrable substance or excessive geothermal gradients.


6.3 EXPLORATION WORK PROGRAMS AND BUDGETS


Within sixty (60) days after the Effective Date, and thereafter at least ninety (90) days prior to


the beginning of each Contract Year, the Contractor shall prepare detailed exploration work


programs and Budgets for each categories setting forth the Exploration Operations which the


Contractor proposes to conduct during such Contract Year in the Contract Area, and provide


such work programs and Budgets for approval to the Government Representative. Contractor


shall submit previous years work program report to the MRPAM.


At least thirty (30) days prior to the beginning of such Contract Year, the Contractor and


Government Representative shall meet to review and discuss such exploration work program


and Budget. If the Contractor thereafter intends to revise such approved work program and


Budget, the Contractor shall promptly provide copies of such revision to the Government


Representative and within fifteen (15) working days following the receipt thereof the Contractor


and the Government Representative shall again meet to review and discuss such changes. In the


event that obligations exceed approved budget of the certain year, the Contractor shall include


all excessive cost as recoverable cost upon a approval by the MRPAM





Proouction Sharing Contract between Mineral resources and Petroleum Authority of Mongolia end


DWM Petroleum Ali dated . 200


/





 Page 14 of 46











ARTICLE VII. RELINQUISHMENTS


7.1 RELINQUISHMENTS


The Contractor;


a) may relinquish within thirty (30) days after the expiration of the first phase of the


Exploration Period, a total of twenty five (25) to fifty (50) percent of the original


Contract Area;


b) may relinquish within thirty (30) days after the expiration of the second phase of the


Exploration Period, a total of twenty (20) to thirty (30) percent of the remaining portion


of original Contract Area, and


c) shall relinquish at or prior to the expiration of the Exploration Period, all remaining


portions of the original Contract Area, except Appraisal Areas and Developments Areas.


Contractor is obliged to restore the surface of all or any part of the Contract Area into its


original form prior to relinquishment.


d) is obliged to restore the surface, clean the polluted area, water, remove all machinery and


equipment of any part of Development Area into its original form prior to


relinquishment.


e) The Contractor shall bear all costs related with the implementation of paragraph “c" and


“d" in this Article.


7.2 VOL UNTARY RELINQUISHMENTS


a) The Contractor may voluntarily relinquish all or any part or parts of the Contract Area in


case Contractor fulfils the Obligations stated in Annex C. Any such voluntary


relinquishments shall be credited toward the relinquishments under paragraph lot* Article


VII,


b) In case the Contractor voluntarily relinquishes the Contract Area stated in Annex C


which the Contractor shall have then already become obligated, the amount for such unfulfilled


obligation shall be paid to the MRPAM not less than thirty (30) days prior to the


relinquishment.


7.3 APPRAISAL AREAS


If. after the conduct of an Appraisal Program, the Contractor determines that the


Appraisal Area does not constitute a Commercial Discovery, the Contractor shall


relinquish such Appraisal Area. If Contractor wishes voluntary relinquish the Appraisal


Area, which has not conducted its mandatory work and obligations, in accordance with


Appraisal Program the Contractor shall pay the amount for such unfulfilled obligation to


the MRPAM within thirty (30) days before relinquishment.


ARTICLE MIL ROYALTY AND PRODUCTION SHARING


8.1 ROYALTY











Production Sharing Contracl Detweer Mirers! resources and Petroleum Authority of Mongolia arid


DWM Pcirukum AG .dated ... . 200


/


/


 Page 15 of 46





1. The Contractor shall pay the Royalty based upon the price of the Contract Crude Oil for each


marketing of Contract crude oil. The Royalty shall be equal to 12.5 /twelve point five/


percent calculated with respect to total production of Contract Crude Oil. The Royalty


should be paid by production /crude oil/ or in cash.


2. The Royalty payment shall be determined pursuant to paragraph 4 of Article VIU and such


Royalty payment shall be made for each marketing of Contract Crude Oil. The Government


Representative shall notify the Contractor before (30) days in case the Government


Representative sets up any other procedure on the Royalty payment.


8.2 MARKETING OF CRUDE OIL


a) I he Contract Crude Oil tor the Royalty and share of Government of Mongolia shall be


calculated from the measurement point, and the marketing of Crude oil shall be decided in


respect with mutually approved and concluded contracts between Parlies. The value of


Crude oil shall be determined at the negotiated price with a buyer in the marketing contract


of Crude Oil.


b) If the Government of Mongolia decides to take any of its portion of Crude Oil by calculating


in currency from marketed Crude Oil, or in kind from produced and saved Crude Oil it shall


so advise the Contractor in writing not less than thirty (30) days prior to the commencement


of each Calendar Quarter specifying the quantity which it decides to take.


8.3 PRODUCTION SHARING OIL


a) After reduction by the Royalty and the quantity of Cost Oil for each Calendar Month, the


remaining quantity of Contract Crude Oil (herein referred to as “Production Sharing Oil”)


shall be allocated between the Government of Mongolia and the Contractor in proportion to


the percentages set forth below, based upon the average daily quantity of Contract Crude Oil


for a given Calendar Month:


1. If average daily quantity of Contract Crude Oil for any Calendar Month is


equal or less than 5,000 barrels:


Government of Mongolia 40%


Contractor 60%


2. If average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds 5001 barrels but is less than 10.000 barrels,


Government of Mongolia 45%


Contractor 55%


3 If average daily quantity of Contract Crude Oil for any Calendar Month


equals to or exceeds 10,001 barrels but is less than 15,000 barrels,


Government of Mongolia 50%


Contractor 50%











Production Sharing Cont/ac! Between Mineral resources 3no Petroleum Authority o» Mongolia and


DWM Petioleum AG dated 2(H)


 Page 16 of 48





4. If average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds ] 5,001 barrels but is less than 20,000 barrels.








Government of Mongolia 55%


Contractor 45%








5. If average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds 20,000 barrels,








Government of Mongolia 60%


Contractor 40%











b) When the halance of unrecovered Petroleum Costs is less than the forty (40) percent of the


total quantity of Contract Crude Oil, such the difference between the forty (40) percent of


the total quantity of Contract Crude Oil and the balance of unrecovered Petroleum Costs


shall be allocated between Parties in respect with provision '*av of Article 8.3 of this


Contract.


c) The average daily quantity of Contract Crude Oil for any Calendar Month shall be


calculated by dividing the total quantity of Contract Crude Oil for each such Calendar


Month by the number of days of production in such Calendar Month.


d) The value of the share of Government of Mongolia of Production Sharing Oil shall be


determined pursuant to paragraph 4 of Article VIII and the payment of the share of


Government of Mongolia of Production Sharing Oil shall he made to the MRPAM within


thirty (30) days from the finished marketing date, or as otherwise approved by the


Government of Mongolia.








BA VALUATJON OF CONTRACT CRUDE OIL








a) lor purposes of determining the value of Royalty to he paid to the Government of Mongolia


pursuant to Article 8.1 and the value of Production Sharing Oil pursuant to paragraph 3 of


Article VIII. the price of Contract Crude Oil shall be determined by the negotiated price


with a buyer in the marketing contract of Crude Oil.


b) If the Contractor intermediates in a marketing of Mongolian share of Contract Crude Oil, the


C ontractor shall mutually negotiate and agree with the Government Representative prior to


conclusion of agreements among three Parties in respect with the marketing and


transportation of Mongolian share of Contract Crude Oil and Royalty. The value of


Contractor’s share of Contract Crude Oil produced from Mongolia shall be determined by











Production Sharing Contract batweon Mineral resources and Petroleum Authority of Mongolia and


DWM PdrDlewn AG doled . 200


/





 Page 17 of 46





the world market’s price of same quality crude oil with the Contract Crude Oil on the date


finished marketing the Contract Crude Oil.


c) Contract Crude Oil price will he calculated by Contractor’s arm’s length method of price.


8.5 FORECASTS OF PRODUCTION


a) For each Commercial Discovery, not less than thirty (30) days prior to the beginning of each


Calendar Quarter the Contractor shall furnish to the Government Representative a forecast


setting out the total maximum possible quantity of Crude Oil that the Contractor estimates to


produce and market, price and other relevant factors according to practices in the


international petroleum industry.


b) The Contractor’s forecast shall include estimates of Royalty, Crude Oil value and the


respective entitlements of the Government of Mongolia and the Contractor to Production


Sharing Oil. The Contractor shall endeavor to produce the forecasted quantities. The


Contractor shall estimate collectively the crude oil production amount from the several


Commercial Discovery Wells.


8.6 UNDERLIFTING AND OVERUFT1NG


It is recognized that any party hereto may, from time to time, fail to take the full quantity of


Contract Crude Oil to which such party is entitled (such party being called an “Underlifter”


herein). When that occurs, full production may be continued for the benefit of the other party


(such party being called an “Overlifter" herein) and the Contractor shall maintain records to


indicate the quantity of Contract Crude Oil which the Under!ifter may make up in order to be in


correct balance with the Overlifter. The Underlifter shall he compensated extra quantities of


Contract Crude Oil in order to achieve such balance as soon as practicable; provided, however,


that the Contractor shall make such allocations in such ways so as not to unduly interfere with


orderly operations for production and sales.


ARTICLE IX. NATURAL GAS


The Contractor has exclusive right to mutually negotiate and conclude a new Production


Sharing Contract of Natural Gas with Government Representative if any discovery which is


determined to be a Discovery Well or a Commercial Discovery is capable of producing Natural


Gas.





ARTICLE X. BONUSES, FEES AND PAYMENTS





10.1 BONUSES


a) Signature Bonus: The Contractor shall pay to the MRPAM the sum of 100,000 USD (one





hundred thousand) as a Signature Bonus within 60 days alter ratification of this Contract by


the Government of Mongolia


b) Production Bonus If the Contractor starts up production, the Contractor shall pay to the


Government Representative the sum of 500.000 USD (five hundred thousand) as a


Production Start-up Bonus within 30 days after the beginning date of the Production


Operations.








Production Sharing Contract oetween Mineral resources 3nd Petroleum Authority of Mongolia and


DWM Petroleum AG . dntird 3l)0


/








Page 18 of 46


c) The Contractor shall pay to the Government Representative I /ond time in following


occurrences:


1) the sum of U.S.$ 500.000 (five hundred thousand USD) as a Production Bonus if


average daily quantity of Contract Crude Oil for any Calendar Month is


equal or less than 5,000 barrels:


2) the sum of U.S.$ 600,000 (six hundred thousand USD) as a Production Bonus It


average daily quantity of Contract Crude Oil for any Calendar Month equals to


or exceeds 5001 barrels but is less than 10,000 barrels,


3) the sum of U.S.S» 700.000 (seven hundred thousand USD) as a Production Bonus


If average daily quantity of Contract Crude Oil for any Calendar Month


equals to or exceeds 10,001 barrels but is less titan 15,000 barrels,


4) the sum of L\S.$ 800.000 (eight hundred thousand USD) as a Production Bonus


If average daily quantity of Contract Crude Oil for any Calendar Month equals to


or exceeds 15.001 barrels but is less than 20.000 barrels,


5) the sum of U.S.$ 1 000,000 (one million USD) as a Production Bonus after


average daily quantity of Contract Crude Oil for any Calendar Month exceeds


20.001 Barrels.


10.2 TURNING BONUS


a) The Contractor shall pay the Training Bonus annually within thirty (30) days after


beginning of each Contract Year as follow:


1) 1M year 60,000 /sixty thousand/ USD


2) 2nd year 60,000 /sixty thousand/ USD


3) 3,d year 60,000 /sixty thousand/ USD


4) 4" year 60,000 /sixty thousand/ USD


5) 5” year 60,000 /sixty thousand/ USD





10.3 LAND SURFACE RENTAL FEE


a) The Contractor shall pay to the Government the Land Surface rental fee for the area


within the Contract Area as prescribed in the Petroleum Law of Mongolia.


Contractor shall pay the following annual surface rentals:


i. For Contract Area during the First phase





of the exploration work per square kilometre


(excluding Development Areas) 1.00 USD





ii. For Contract Area during the Second phase


of the exploration work per square kilometre


(excluding Development Areas) 2.00 USD





iii. For Contract Area during the Third phase


of the exploration work per square kilometre


(excluding Development Areas) 4.00 USD








Production Shanng Contract between M-neral resource* and Petroleum Authority of Mongotfa and


DWM Pcuulcum AG. dated . . ,200


/





 Page 19 of 46





iv. For Contract Area during the extension terms


of the exploration work per square


kilometer extended by the Government of Mongolia


(excluding Development Areas) 10.00 USD


v) For the Development Area, pei square kilometre 50.00 USD





b) The Contractor shall pay such pledge fees within sixty (60) days from the Effective Date


and shall pay such pledge fees annually within thirty (60) days after beginning of each


Contract Year. The Government Representative shall submit the Contractor the evidence


that the payment has been made. The Land Surface Renta) shall not be recovered.





10.4 ADMINISTRA TIVE SER VICE FEES


The Contractor shall pay to the Government the administrative service fees as prescribed in the


Petroleum Law and/or other applicable Laws. Fees for Term of Exploration, Application for


Contract Area, Application for Development Area, Term of Development Operations and other


Petroleum Operations related activities shall be included as such fees.





Contractor shall pay the following Administrative Services Fees:





a) For each Contract Area Application 10.000 USD


b) For each extension of exploration term 25.000 l SD





c) For each extension of exploration term by


the decision of the Government of Mongolia 100.000 USD





d) Development Area permission 50.000 USD


d) For each change or adjustment


in the Development Area 25.000 USD





e) For each extension of Development term 100.000 l SD


f) For each application to transfer any rights and





obligations for Petroleum Operations 100.000 USD


10.5 ENVIRONMENTAL RECOVERY





The Contractor shall perform following amount of work for environmental recovery:





I / First year USD 20,000


21 Second year USD 20,000


3/ Third year USD 60,000


4/ Forth year USD 60,000


5/ Fifth year USD 90,000











Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia and


DV* M Petroleum AG . d.tted 200


/





 Page 20 of 46





ARTICLE XI. MEASUREMENTS


III PRODUCTION SHARING MEASUREMENTS


a) Measurements made for the purpose of determining the quantities of Contract Crude Oil


as to be allocated between the parties hereto ("Production Sharing Measurements") shall


be made in accordance with generally accepted methods used in the international


petroleum industry, it being mutually agreed, however, that other measurements may be


made for other purposes (including meters to test or estimate production rates of


individual wells) and will not necessarily conform to the same standards as the


Production Sharing Measurements.


b) Abovementioned measurement instruments and methodology shall be approved by the


Mongolian authorized organizations.


c) Such Production Sharing Measurements shall be made at the measurement point


d) It is understood and agreed that neither the Contractor nor the Government


Representative shall have the right to take and dispose of its share of Contract Crude Oil


until after the Production Sharing Measurements provided for in this Article XI have


been made.








11.2 CORRECTIONS OF MEASUREMENTS


a) If the Contractor intends to adjust, repair or replace any appliance used for Production





Sharing Measurements, the Contractor shall give notice to the Government


Representative and enable the Government Representative to observe such operation.


b) The Government Representative shall be entitled to observe any Production Sharing


Measurement at any time and to conduct tests to determine the accuracy thereof. If any


such testing reveals that such measurements are not in accordance with generally


accepted methods used in the international petroleum industry, the Government


Representative may request the Contractor to take appropriate remedial action. If the


Contractor has not commenced and diligently continued remedial action within thirty


(30) days following such request, or it has been commenced hut with hold up, the


Government Representative may stop production, cause the measurements to be


corrected by authorized third parties and recover the costs thereof from the Contractor.


c) In the event a measuring error is discovered, the Contractor shall use all reasonable


efforts to determine the correct production figures for the period during which there was


a measuring error and correct previously used readings. The Contractor shall submit for


the MRPAM's approval a report on the corrections carried out. If it proves impossible to


determine when the measuring error first occurred, the commencement of the error shall


he deemed to he that point in time halfway between the date of the last previous test and


the date on which the existence of the measuring error was first discovered.


I 1.3 MEASUREMENT RECORDS








The Contractor shall submit to the Government Representative a copy of records of produced


Contract Crude Oil and Production Sharing Measurements for every measurement, and maintain


those records for a period of at least live (5) years from the date thereof and the Government


Representative shall have access thereto at all reasonable times. The Contractor is obliged to


provide access to the Government Representative.








Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia and


l>W M Pelrrilruin A(i . dated 200


 Page 21 of 46





ARTICLE XII. EXPLORATION, PRODUCTION AND TECHNICAL DATA


12.I TITLE OF TECHNICAL DATA








Both Parties shall have title to Contractor’s all original data resulting from the Petroleum


Operations program, budget and research results including but not limited to geological,


geophysical, petrophysical, geochemical, hydrological all well completion reports, drilling,


petrologic, completion status reports and all other original data, geographical maps, geodesy


that Contractor may compile during the term hereof, provided, however, that such data shall not


he disclosed to third parties without a written approval of the other party.


12.2 GENERAL ACTIVITIES RECORDS


In respect with negotiated forms with the MRPAM, the Contractor shall maintain technical


records of its Petroleum Operations including but not limited to exploration, development,


production and refining operations in accordance with generally accepted practices in the


international petroleum industry'. Such records shall be in the English language. The Contractor


shall provide all such documents and reports to the Government Representative on a monthly,


quarterly and yearly basis.


12.3 GEOPHYSICAL DATA


The Contractor shall keep the original geophysics data and shall give one copy to Government


Representative in accordance with Government Representative’s verified Regulation.


12 4 EXPLORATION PETROPHYSIC LABORATORY STUDIES. PRODUCTION AND


PRt aH CTION TEST DA TA


The Contractor shall prepare such data as generally accepted methods used in the international


•petroleum industry' and submit interpretation reports and data in type of digital and papers to the


Government Representative.


Subject to the Government Representative's consent, for the purpose of petrophysics, testing and


laboratory analysis the Contractor shall have the right to take and remove from Mongolia


samples of cores /sample duplicate/, well cuttings /sample duplicate', Petroleum and rocks. The


Contractor may dispose of such samples unless the Government Representative requests to


return such samples within one (1) year following the above consent. The Contractor shall


submit testing service work, testing production reports of wells and dat3 within thirty (30) days


12.5 REPORTS ON PROCESSED DA TA. EXP LORA TJON RESUL TS A ND PETROLEUM


RESERYES


The Contractor shall provide to the Government Representative the petroleum exploration's


processed data, resource estimation, and appraisal reports in accordance to the rules and


regulations adopted by the Government Representative


• 12.6 RECORDS OF DEVELOPMENT AND PRODUCTION OPERATIONS














ProducUon Sharing Contracl between Mineral resources and Petroleum Authority ot Mongolia and


DWM Petroleum AG.. dated ...... POO...


 Page 22 of 46





1 he Contractor shall maintain records showing quantities of Petroleum produced from each well


and shall provide to the Government Representative such data and reports as outlined in the


Rules adopted by Government Representative.


12.7 DATA OF AUTOMOBILES. TECHNIQUES. EQUIPMENTS AND CONSTRUCTIONS


a) For purpose of Petroleum Operations, the Contractor shall submit to the MRP AM the


technical documents, designing drawings and other related information of automobiles,


techniques, and equipments for importing before entering into Mongolia.


b) Engineering facilities and structures shall be constructed in accordance with related


Mongolian laws and regulations. Designing drawings of such constructions shall be submitted


to MRPAM before beginning of constructions, and other related documents before


commissioning.


12 8 JOINT COMMITTEE


Upon commencement of the Development Period, the Contractor and the Government


Representative shall form a joint committee to review data and the production activities of all


productive reservoirs, and co-ordinate administrative matters between the Government


Representative and the Contractor.


«


12.9 OTHER MINERALS


The Contractor shall report within 15 days to the Government Representative the presence of


potentially commercial accumulations of minerals, which are not associated with Petroleum but


are encountered and recognized by the Contractor while conducting Petroleum Operations


within the Contract Area. Such minerals shall remain the state property of Mongolia.


12 10 CONFIDENTIALITY


The parries hereto shall maintain all documents and reports referred to in this Article XU as


confidential and shall not divulge it to any third party without the consent of the other party


hereto. The foregoing confidentiality obligation shall not apply to:


1) disclosure by either party hereto to its employees. Affiliates, consultants, prospective


assignees, prospective lenders or Subcontractors to the extent required for the conduct of


Petroleum Operations; or


2) disclosure by either party hereto to the extent required to comply with applicable Laws,


or the rules or regulations of any stock exchange on which a party’s, or its Affiliate's,


shares are listed.


3) Contractor shall inform to the MRPAM about potential investor. The potential investor


shall certify to keep information in confidential.


ARTICLE XIII


ACCOUNTING DATA





13.1 BOOKS OF ACCOUNT


The Contractor shall maintain books of account in respect of Petroleum Operations in





accordance w ith the Accounting Law of Mongolia. Accounting Procedures attached as Annex D








Production Snann.3 Contract betvveen M1rer.1l resources and Petroleum Ajinority of Mongolia and


DVN M Petuilcmn AO dated 200


 Page 23 of 46





and other applicable laws in Mongolian language and it can be in English language and in


United States Dollars with generally accepted accounting procedures as practiced in the


international petroleum industry.


13.2 ACCOUNTING REPORTS


I he Contractor shall provide accounting reports, statements and other information to the


Government Representative in accordance with the Accounting Procedure attached as Annex D


After the Contractor opens an office in Mongolia, the Contractor shall maintain copies of such


-accounting reports, statements and other information at that office, and the Government


Representative shall have access thereto at any time it desires.


13.3 FINANCIAL INSPECTIONS


a) l he Government Representative shall be entitled to have inspection of financial accounts,


financial reports, inventory and goods, voucher, salary payment, invoice, a contract directly


and indirectly related to this contract, sub-contractor’s contract, other agreements, and all


documents related to Petroleum Operations in every year. Also, the Government


Representative has right to have inspection in sites, in Mongolia and abroad, related to


Petroleum Operation, facilities, storages and offices, and to meet relative person necessary


times with considerable reason.


b) All documents shall be saved for 5 (five) years since its origin, or for the required period as


stated in Law and has to be ready to be inspected.


c) Cost related to conducting of such inspection shall be born by the Contractor.


ARTICLE XIV. GOVERNMENTAL ASSISTANCE


14.1 GENERAL ASSIST A Ni T


I he parties hereto recognize that Contractor may require assistance from Government


Representative to conduct Petroleum Operations and to accomplish the objectives of this


Contract Accordingly, and for the purpose of accomplishing the objectives of this Contract for


the mutual benefit of Mongolia and Contractor, the Government Representative shall assist


Contractor to the extent reasonably possible to enable Contractor to fulfill its obligations and


exercise its rights. The Government Representative shall assign one or more of his


representatives to assist the Contractor.


14.2 OTHER ASSISTANCE


I he Government Representative may otherwise assist and expedite the Contractor's execution


of the Petroleum Operations by providing facilities, supplies and personnel, supplying or


otherwise making available all necessary visas, work permits, transportation, security protection


and rights of way and easements as may be requested by the Contractor and made available


from the resources under the Government Representative’s control. In the event such facilities,


supplies or personnel arc not readily available, then the Government Representative may secure


the use of such facilities, supplies and personnel from alternative sources Expenses thus


incurred by the Government Representative at the Contractors' request shall be reimbursed to


the Government Representative by the Conti actor. I lie Contractor shall consider the








Production Sharing Contract Between Mineral resources and Petroleum Authority of Vonaoha and


DWM Petroleum AC . duted 200


 Page 24 of 46





reimbursement as an Operating Cost. Such reimbursements shall be made in U.S. dollars


computed at the rate of exchange at the time of conversion.


14.3 CONTRIBUTION TO REPRESENTATIVE OFFICE/GOVERNMENTAL


ASSISTANCE CONTRIBITION


For operation of Representative Office from MRPAM within Contract Area, the Contractor


shall pay to the MRPAM the sum of 100,000 USD (one hundred thousand) annually within 30


(thirty) days from the beginning of each Contract year


14.4 LOCAL ASSISTANCE CONTRIBITION


The Contractor shall pay to the local authorities within contract area the sum of 50,000 (fifty


thousand) USD within 30 (thirty) days from the beginning of each Contract year as Local


Assistance Contribution.


ARTICLE XV. USE AND OWNERSHIP OF PROPERTY


15.1 EQUIPMENT AND FACILITIES


Upon the termination of this Contract, the Contractor's imported equipment, facilities, real estate


and supplies used for Petroleum Operations shall become the state property of the Government


of Mongolia at no additional cost at the time when cost of such equipment, facilities and


supplies have been recovered by Contractor.


It is understood that Uiis paragraph 1 of Article XV' shall not apply to any item that is leased by


the Contractor from any other party, including Affiliates.


15.2 TITLE TO PETROLEUM


Title to Contract C rude Oil to which the Contractor is entitled under Article VIII shall pass to


the Contractor at the points at which the Production Sharing Measurements thereof are made.


15.3 TRANSFER THE RIGHT


The Contractor shall transfer its rights and obligations under the Production Sharing Contract by


resolution of the Government of Mongolia.








ARTICLE XVI. TAX


Contractor's tax, fee and payments in respect with Petroleum Operations shall be regulated


through any applicable Mongolian laws, or any other legal acts, whether now existing or


hereafter enacted. But contractor shall not be obliged to pay any other payments not regulated


by any applicable Mongolian laws and this Contract.








ARTICLE XVII. EXCHANGE RIGHTS


17.1 FOREIGN CURRENCIES





Production Snarng Contract between Mineral resources ana Petraieurn Autnority or r/ongotia jnd


DWM Pctiofcum AO .dated ... ______ _____200 ..


 Page 25 of 46








Purchase or sale of foreign currencies shall be transacted at the daily prevailing rates as quoted


by the Mongol Bank.





17.2 FOREIGN BANK ACCOUNTS


The Contractor is hereby authorized to open accounts, make transactions in outside or inside of


Mongolia, and to retain abroad and freely dispose of any funds in such accounts.








17.3 EXCHANGE RIGHTS


The Contractor is hereby granted the following exchange rights:





a) To provide in freely convertible foreign currencies all funds needed to conduct


Petroleum Operations and to convert such currencies to Mongolian currency through any


bank of Mongolia at the exchange rate prescribed in paragraph 1 of Article XVII;


b) To hold and freely dispose of any funds held outside of Mongolia:


c) To retain abroad and freely dispose of all proceeds received outside of Mongolia from


the export, sale or exchange of its share of Contract Crude oil;


d) To repatriate abroad and freely dispose of all proceeds received within Mongolia from


the sale, exchange or export of its share of Contract Crude oil;


e) To maintain an account in a bank in Mongolia chosen by the Contractor which can be


disbursed for the purpose of making payments to the Government Representative or the


Government of Mongolia hereunder, or making other payments required for Petroleum


Operations.


17.4 PAYMENTS UNDER THIS CONTRACT





The Contractor shall make the payments stated in this Contract in USD.








ARTICLE XVIII. MONGOLIAN SUBCONTRACTORS, MATERIALS AND


EMPLOYEES





18.1 SELECTING MONGOLIAN SUBCONTRACTORS. MATERIALS AND


EMPLOYEES





The Contractor and its Subcontractors shall:


a) Should give preference to Mongolian subcontractors in respect of Mongolian national or


business entity’s proposed price, professional capabilities and performances are


satisfying the requirements set by the Contractor. The Contractor shall inform and


negotiate about subcontractors prior to conclusion of contracts with subcontractors.


b) give preference to material, equipment, machinery and consumables manufactured in


Mongolia so long as their prices, qualities and times of delivery are comparable to


internationally available materials, equipment, machinery and consumables; and








Production Snaring Contract between Mineral resource* ana Petroleum Authority of Mongolia and


DWM Petroleum AG . tinted . 200


/





 Page 26 of 46





c) give preference in employment to Mongolian nationals provided they are suitably


qualified and provided. The Contractor has the right to employ its foreign personnel in


special professional vacancies and key positions upon the approval of the authorized


organization within the quota approved by the Government of Mongolia. It is recognized


that the Contractor may require the assistance of the Government Representative in order


to identify any such prospective Mongolian Subcontractors, locally manufactured items,


and Mongolian employees, and that the Contractor's obligations under this Article XVIII


are accordingly conditioned upon the Contractor's having timely knowledge thereof. The


Contractor shall pay disability allowances in accordance with the Laws of Mongolia to


those Mongolian national employees who may temporarily or permanently lose their


ability to work as a result of an accident while performing their duties under this


Contract.


ARTICLE XIX. EMERGENCIES


19.1 EMERGENCIES IN PEJROLEi M OPERA TJONS


Ihe Contractor may take all actions it deems necessary to meet any emergency. The Contractor


shall promptly notify the Government Representative of any such emergency.


19.2 NATIONAL EMERGENCY


a) In case of national emergency, the Government of Mongolia may requisite with


compensation all or part of Contractor's share of the Petroleum from the Contract Area


and may require Contractor to increase production of Petroleum to the maximum safe


level of production. The maximum level of production shall be determined through


negotiation by the Parties.


b) No such requisition shall be affected except after providing to the Contractor an


opportunity to express its views in respect of such requisition.


c) Any requisition of Petroleum reserves, or of any related facilities, shall be effected in


accordance with the applicable Laws of Mongolia, duly notified to the Contractor, until


such national emergency is ceased.


ARTICLE XX. FORCE MAJEL RE


20.1 "Force Majeure" within the meaning of this Article XX shall include fire, epidemics,


unavoidable accidents, declared and undeclared war. strikes, lockouts and other disturbances,


floods, storms, earthquakes and other natural disturbances, insurrections or riots.


20.2 If the Contractor is prevented or delayed by Force Majeure from performing any


obligation, from meeting any condition, or from exercising any right hereunder, an amount of


time equal to the period or periods, plus a reasonable period to prepare for the resumption or


initiation of the actions so prevented or delayed, could be added to any time provided for or


otherwise allowed therefore hereunder upon the approval of Government of Mongolia, and to


the applicable Exploration Period and/or Development Period.


20.3 If the quantity of Petroleum being produced, or which could be produced, from one or


more Commercial Discoveries is interrupted or otherwise limited by Force Majeure, then the


Development Period applicable thereto shall be extended beyond the period provided in Article





Production Sharing Contract between Miner a* resources and Petroleum Authority of Mongolia and


DWM Petroleum AG Jdlcd ........ 200


 Page 27 of 46





V until the quantities that could have been produced and saved there from at capacity have been


made up. The term "capacity" for purposes of this provision means the total quantity of


Petroleum that the wells then existing on such Commercial Discovery or Discoveries could have


produced under production plan in accordance with generally accepted practices of the


international petroleum industry had the interruption of Development Operations is not


occurred. Within ninety (90) days following each Calendar Year, the Contractor will notify the


Government Representative of the cumulative quantities of Petroleum, which are to he made up


as herein provided.


20.4 The Contractor shall submit the Government Representative the evidence proved by the


authorized organization within (30) days from the date of such Force Majeure stated in Article


XX has been occurred.








ARTIC LE XXI. C ANCELLATION


21.1 If the Effective Date does not occur within one hundred eighty (180) days following the


date on which the parties execute this Contract, the Contractor may notify the Government


authorized representative YIRPAM that this Contract is cancelled.


21.2 If the Contractor fails to commence Exploration Operations within one hundred twenty


(120) days following the Effective Date, the \1RPAM shall cancel Contract.


21.3 The Government of Mongolia shall have the right to cancel this Contract through its own


Representative’s suggestion if the Contractor knowingly breaks this Contract or commits a


material breach and if the Contractor fails to remedy or commence to remedy such breach


within the time hereinafter provided, and if the Contractor fails to commence program and


budgeted work to implement this Contract.


21.4 If the Government of Mongolia determines to exercise its rights under paragraph 2 of


Articles XXI or paragraph 3 of Article XXI, the Govenunent Representative shall give the


Contractor written notice. If within thirty (30) days from such notice the Contractor shall not


have remedied such breach, and if the Contractor shall not have been delayed or prevented there


from because of Force Majeure, the Government Representative may thereafter issue a decree to


cancel this Contract subject to the right of the Contractor to invoke the arbitration provisions of


Article XXII. The Contractor in the event ol cancellation shall pay to the MRPAM for failed


budgeted work fees for the Contract Year.


21.5 Following cancellation of this Contract, the Contractor shall have the right to remove


from Mongolia all movable property (othei than described in paragraph 1 of Article 15) used in


respect of Petroleum Operations, which is leased or otherwise not wholly owned by the


Contractor.


21.6 The Contractor shall be entitled to cancel this Contract on below-mentioned cases and


shall notify the Government Representative before (90) days outlining the cancellation;


a) not to be discovered economical reserves of petroleum on the Contract Area


b) the production period is terminated











Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia and


DNVM Petroleum AG dated 2110


 Page 28 of 46





ARTICLE XXII. ARBITRATION AND LIABILITIES


22.1 Any dispute arising between the parties hereto in respect of this Contract (including its


execution, interpretation, application, cancellation, expiration or extension) which is not settled


amicably shall be finally settled by arbitration of Mongolia.


22.2 Unless this Contract provides otherwise, any property dispute arising out of or in the





course of petroleum operations shall be settled by Mongolian Courts in accordance with the


laws of Mongolia.


22.3 Upon request of the parties concerned, any dispute related to this Contract, such as


moditication of its terms or its cancellation may he settled in accordance with the UNtCITRAL


Arbitration Rules.





22.4 If any person conducts petroleum operations arbitrarily or without permission, an


authorized organization of Mongolia shall confiscate in favour of the State the equipment used


in those operations, the property, the petroleum produced and income of the person involved. If


those operations are of a criminal nature, the matter shall be subject to the judicial organization


of Mongolia.





22.5 If Contracting parts undertake any operations in breach of the provisions of the


Petroleum Law of Mongolia or other relevant laws of Mongolia, and such breaches result in


losses to an entity, organizations or individuals, the Contractor shall be liable in accordance with


the laws of Mongolia.


22.6 Any losses resulting from a breach of contractual obligations by the Contracting parts





shall be recovered from the offending party.





22.7 In case of selecting subcontractors for carrying out certain portions ot the Petroleum


Operations, the Contractor shall be responsible to the Government of Mongolia for any losses


occurred from subcontractor operations.





ARTICLE XXI11. NOTICES





23.1 Written notices to the Contractor are effective if:


a) given by telefax to the Contractor's headquarters office designated in paragraph 3 of





Article XXI11 or. after the Contractor opens an office in Mongolia, given to such office, if


receipt thereof is acknowledged by answer back or is confirmed as received by the transmitting


facsimile machine; or


b) given by courier with acknowledged receipt or by delivery of such notice in person to





the Contractor Representative, if the Contractor Representative or one of his authorized


representatives has acknowledged receipt and the copy of such notice given by telefax to the


Contractor's headquarters office designated in paragraph 3 of Article XXIII





23.2 Written notices to the Government Representative arc effective if:








Production Sharing Contract between Mineral resources and Petroleum Authority ol Mongolia and


DWM Petroleum AG doted 200





w rCK


 Page 29 of 46





a) given by telefax to the Government Representative's office designated in paragraph 3 of


Article XXIII, if receipt thereof is acknowledged by answer back or is confirmed as received by


the transmitting facsimile machine; or


b) given by courier with acknowledged receipt or by delivery of such notice in person to


the Government Representative, if the Government Representative or one of his authorized


representatives has acknowledged receipt thereof.


23.3 Written notices provided for in paragraph I of Article XXII1 Article and paragraph 2 of


Article XXIII above shall be addressed and sent out as follows:


a. The Government Representative:


Mineral Resources and Petroleum Authority of Mongolia


211238 Ulaanbaatar, Chingeltei district


Barilgachdiin talbai 3,


Tel: (976-11 >631208,Pax: (976-11>631239


E-mail:mrpam@magicnet.mn


Ulaanbaatar, MONGOLIA


Attention: Mr. L. Bold. Chairman


b. The Contractor Representative:


DWM PETROLEUM AG


Balmhofstr. 9


CH-6341 Baar,


Switzerland


Tel: 0041-(0)1-7181030


Fax: 0041-(0)1-7181039


E-Mail: info@dwnv-ag.com


Attention: Mr. Thomas Flottmann


23.4 The address at which any party may receive a notice may be changed by thirty (30) days


notice given to the other party.


23.5 No relusal or inability of either party hereto to receive an attempted notice hereunder


shall in any way diminish or prejudice any rights of the other party hereto.


ARTICLE XXIV. INSURANCE


24.1 As to all operations performed by the Contractor under this Contract, the Contractor


shall secure and maintain insurances in accordance with applicable Laws of Mongolia.


24.2 The Contractor shall require that its Subcontractors procure similar insurances to those


required to be procured by the Contractor and such additional insurances as the Contractor shall


deem appropriate, all to be evidenced by Certificates of Insurance.


24.3 Any insurance taken out by the Contractor and Subcontractors in respect of the


Petroleum Operations pursuant to this Contract shall be effected with a Mongolian insurance


company.








Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia and


DWM Petrafeum AC daied .,. ,200.


 Page 30 of 46





24.4 Should a Mongolian insurance company be unable or unwilling to provide any of all


such insurances, the Contractor may obtain the Government Representative’s agreement to


make alternative arrangements.


24.5 The losses and expenses, in accordance with the contract concluded between an


insurance organization and the Contractor, shall be resolve by the Insurance l.aw and insurance


Contracts


ARTICLE XXV. GENERAL





25 1 ANNEXES


.Annexes A. B. C and D are hereby made a part of this ConLract, and shall be considered as


having equal force with the provisions hereof.


25.2 LEGISLATION


This Contract is in accordance with Mongolian Legislation.


25.3 GOOD FAITH


The parties hereto base their relations in respect of this Contract on the principles of goodwill


and good faith and shall accordingly cooperate to achieve the mutual objectives hereof and to


resolve amicably any misunderstandings or disputes that may arise, and no consent or other


approval required hereunder shall be unreasonably withheld or delayed.


25.4 LANGUAGE


This Contract is written in Mongolian and English languages. The Mongolian and English


versions are identical in terms of content and principles. In case of dispute between both Parties


the Mongolian version shall prevail.


25.5 ENTRY INTO FORCE AND ADOPTING CHANGES IN THE CONTRACT


1. This Contract shall come into force on the day it is ratified bv the Government of


Mongolia. This is the Effective date of the Contract.


2. Parties could make changes in the Contract, and any changes in the Contract shall be


adopted after the ratification by the Government.





ON THE BEHALF OF THE ON THE BEHALF OF THE


MINERAL RESOURCES AND DWM PETROLEUM AG


PETROLEUM AUTHORITY OF


MONGOLIA








L. BOLD


CHAIRMAN ALEXANDER BECKER











Production Sharing Contract Detween Mineral resources and Petroleum Authority o' Mongolia and


DWM Petroleum AG dated ,200


/





 Page 3T crt AS


/^NNEX A





TO THAT CURT ATM


PRODUCTION SHARING CONTRACT


between


THE MTNERAL RESOURCES AND PETROLEUM AUVWORVW OV MONOO\ \A


and


"DWM PETROCFTJM ACC


FOR CONTRACT AREA - X\\





This annex " A" is attached to and made an \nte%ta\ ipart of Vne VtodwcCowStewv'o.


Contract between the Mineral Resources and PeVcoteum AutRotVdj ofMon^»\vaa.tvd


"DWM Petroleum AG”, dated_ »





MAP 0¥ CONTRACT AREA


























































































































Produclon Shatn>^ CorTiacV bwWitsen VAmv e&foutt&i

D^VNA PctidRutn AU v dated JiSW


 Page 32 of 46








ANNEX B


TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


between


THE MINERAL RESOURCES AND PETROLEUM AUTHORITY OF MONGOLIA


and


"DWM PETROLEUM AG”


. FOR CONTRACT AREA XIV


This annex ’13" is attached to and made an integral part of the Production Sharing


Contract between the Mineral Resources and Petroleum Authority of Mongolia and


MDWM Petroleum AG", dated_ .2008











DESCRIPTION OF CONTRACT AREA








I Comract Area name: Zuunbayan -


2. Contract Area size: 8731 sq.km


3 Coordinates.


Number Longitude Latitude








1 109°29'59" 44°40'00"


2 109u29’59" 45°00'00"


3 111 °42'00'' 45°00'00"


4 111°16'00" 44°20'00"


5 110°25'00" 44°20'00"


6 110°25'00" 44°45’00"





7 110°05'00" 44°45’00''


8 110°05'00" 44°40'00''


























Production Sharing Contract Between Mine'al resources and Petroleum Authority of Mongolia and


UWM Petroleum AG , dated 200


/





 Page 33 of 46








ANNEX C


TO THAT CERTAIN


PRODUC TION SHARING CONTRACT


between


THE MINERAL RESOL RUES AND PETROLEUM AUTHORITY OF MONGOLIA


and


DYVM PETROLEUM AG


FOR CONTRACT AREA XIV





This annex “C" is attached to and made an integral pari of the Production Sharing





Contract between the Mineral Resources and Petroleum Authority of Mongolia and DWM


Pertoleum AG dated .200...








MINIMUM WORK OBLIGATIONS








Period Contract THE WORK PLAN Cost The year


Year Investment


Collection and processing of geological data | 150,000


Reconnaissance of work of the block, 4000 km 40,000


Geological Mapping 500 sq.km 50,000


Geological Mapping 100 sq.km 30,000


1 1 Geologic structural sections 400 km 140,000 625 000


Lithologic-stratigraphical sections 1900m 95,000


Paleontolic stratigraphical works 40,000


Sampling 300 15,000


Laboratory analytical works 35,000


Data Processing 30,000


Geoloqicai Mapoinq 850sq.km 85,000


Geological Mapping 400 sq.km 120,000


Uthologic-stratigraphical sections 3200m 160,000


2 Paleontolic stratigraphical works 80,000 825 000


Sampling 800 40,000


II Laboratory analytical works 75,000


Data Processing 55,000


Data Processing 15,000


3 Topographic geodesic works 50,000 1.740.000


Exploration seismology 2D, 200 km 1,600,000


Exploration seismology 3D, 5 km 75,000


Data Processing 40,000


Topographic geodesic works 20,000


Exploration seismology 2D, 100 km 800,000


III 4 Exploration seismology 3D, 20 km 300,000 4,350,000


Preparation to drilling, well 1 30,000


Well Drilling, 1 well 2,870,000


Log survey, 1 well 300,000





Production SNrlng Contract between Mineral resources and Petroleum Authority ol Mongolia and


DW M Petroleum AO , dated 200


/








 Page 34 of 46





Data Processing 50,000


Preparation to drilling, well 2 60,000


Ill 5 Well Drilling, 2 well 5,740,000


Log survey, 1 well 600,000 6,900.000


Well test, 3 well 450,000 1


TOTAL


--- --- 1 14,450,000



























































































































































Production Sbanng Contract batmen Mineral resources and Petroleum Authority of Mongolia and


DWM Petroleum AO dated , 200 ....


 Page 35 of 46


ANNEX l>





TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


between


THE MINERAL RESOURCES AND PETROLEUM AUTHORITY OE MONGOLI A


and


DWM PETROLEUM AG


FOR CONTRACT AREA XIV


ACCOUNTING PROCEDURE








ARTICLE I


GENERAL PROVISIONS





1. DEFINITIONS


Definitions contained in Article II of the Production Sharing Contract dated........ 200... shall


apply to this Accounting Procedure and have the same meaning.


2. PURPOSE OF THIS ACCOUNTING PROCEDURE AND


PRECEDENCE OF DOCUMENTS


The purpose of this Accounting Procedure is to establish fair and equitable methods for


determining costs and expenses and inventories under the Contract. If any of such methods


prove unfair or inequitable to the VIRPAM or to Contractor, the MRP AM and Contractor shall


meet and in good faith endeavour to agree on changes thereof.


In the event of any inconsistency or conflict between the provisions of this Accounting


Procedure and the provisions of the Contract, shall follow common procedures accepted in


international petroleum industry.


3. STATEMENTS OF ACTIVITY


a) During the Exploration Period, Contractor shall supply following statements to the


MRPAM within thirty (30) days from the end of each Calendar Quarter:


1) detailed accounting statement and list of costs and expenses and work


performed during Calendar Quarter in question;


2) a statement of expenditure and receipts;


b) During the Development Period, Contractor shall supply following statements to the


MRPAM within thirty (30) days from the end of each Calendar Quarter:


1) a production statement;


2) a value of production statement;


3) a cost recovery statement in every costs;








Production Storing Contract between Mineral resources and Petroleum Authority of Mongolia and


DWM Petroleum AG dated 200


 Page 36 of 46





4) a statement of expenditure and receipts;


5) a profit oil and lifting's statement;


6) a detailed accounting statement and list of costs and expenses and work


performed during Calendar Quarter in question;


A summary of the above mentioned statements will be processed on a cumulative basis. These


statements shall be in accordance with this Accounting Procedure. A summary of these


statements shall be provided on a yearly basis, within sixty (60) days from the end of each


Calendar Year.


4. FINANCIAL INSPECTIONS


a) For the purposes of financial inspections in accordance with the Article XIII of the Contract,


the Government Representative have rights to examine and confirm in every year all charges


and credits relating to the Petroleum Operations such as books of account, accounting


entries, material records and inventories, vouchers, payrolls, invoices, contracts and sub¬


contracts of any kind related directly or indirectly to the Contract and any other documents,


correspondence and records of Contractor necessary to inspect and confirm charges and


credits. Furthermore, the inspectors shall have the right in connection with such to visit and


inspect at reasonable times and on reasonable notice all sites, plants, facilities, warehouses


and offices of Contractor in Mongolia or elsewhere serving the Petroleum Operations,


including visiting personnel associated with those operations.


b) All documents must be maintained and made available for inspection and audit for five (5)


years following their date of issue or such longer period as may be required under any


legislation applicable.


5. CURRENCY EXCHANGE


Contractor's books for Petroleum Operations shall be kept in United States Dollars. All U.S.


Dollar expenditures shall be charged in the amount expended. All expenditures in Mongolian


currency shall be converted into U.S. Dollars in conformity with Article XVII of the Contract,


and all other non-U.S, Dollar expenditures shall be converted into U.S Dollars at the cost of


purchase of that currency if such currency was purchased from one of Contractor's U.S Dollars


accounts and. in any other event, at the then prevailing rate of exchange as quoted by the


Mongol Bank.


A record shall be kept of the exchange rates used in translating Mongolian currency or other


non-U.S. Dollar expenditures to U.S. Dollars.


6. BOOKS


Contractor shall keep its books in English, using appropriate accounting method. The books


shall be kept in accordance with the Laws and regulations of Mongolia and generally accepted


accounting principles prevailing in the international petroleum industry.


7. REVISION OF ACCOUNTING PROCEDURE


By mutual written agreement between MRP AM and Contractor, this Accounting Procedure may


be revised from time to time in the light of future arrangements.








Production Sharing Contract Detween Mineral resources and Petroleum Authority a\ Mongolia and


DW VI Petroleum A(j dated . 200


 Page 37 of 46








8. DETAILED OUTLINE OF ACCOi NTING SYSTEM


Within ninety (90) days alter the Effective Date, Contractor shall present to and discuss with


YIRPAM a proposed outline of a chart of accounts, detailed classifications of costs, detailed


nature of cost centres to be used, operating records and reports to be established in accordance


with the Contract and this Accounting Procedure. Such outline shall he in accordance with


generally accepted accounting systems, normal practices in the international petroleum industry


and the Laws and regulations of Mongolia. Following such discussions, after Government


Representative’s approval Contractor shall prepare and provide MRPAM with formal copies of


the comprehensive charts of accounts and the manuals to he used.








ARTICLE II


EXPENDITURES AND RECEIPTS





1. EXPENDITURES FOR RECOVERING





Contractor shall bear and directly pay the following costs and expenses, which costs and


expenses shall be classified and recovered by Contractor in accordance with Article IV of the


Contract.


a) Surface Rights


It is understood that Contractor shall bear expenses in respect with surface rights only for those


areas required by Contractor for installations and operations forming part of Petroleum


Operations.


b) Labor


1) Gross salaries and wages including cost of holiday, business trip, vacation, sickness


and disability benefits applicable to such salaries and wages of Contractor’s employees


in Mongolia.


2) Cost of living and housing allowances and other customary allowances of


Contractor s non-Mongolian employees assigned to work in Mongolia


3) Cost of expenditures or made pursuant to law or assessments imposed by


governmental authorities which aic applicable to Contractor's employee’s salaries and


wages.





c) Employee Benefits


Costs applicable to life insurance, social security, pension and retirement for


Contractor's Mongolian and non-Mongolian employees working in Mongolia.


A severance pay for Mongolia and non-Mongolian employees shall be in the same line


and it shall he regulated by Labor Law of Mongolia.


d) Material. Equipment and Supplies


Material, equipment and supplies purchased, rented or furnished as such by Contractor


1) Purchased











Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia and


DWM Petroleum AG dated 2W)


 Page 38 of 46





Material, equipment and supplies purchased shall be at the price paid by Contractor or


after deduction of all discounts actually received according to the valuation principles


established in Paragraph 3.1 of Article II of this accounting procedure


2) Material Furnished by Contractor or an Affiliate


Material, equipment and supplies required for operations shall he purchased directly


business entities and individuals of Mongolia, except that Contractor may furnish such


material, equipment and supplies from its slocks or the stocks of an Affiliate, provided


that the cost of such item shall not materially exceed the cost of a similar item purchased


from third parties under similar conditions of insurance and delivery. 1 he value of such


material, equipment and supplies shall be established according to the provisions in


Paragraph 3.2 of Article II of this accounting procedure.





3) Warranty


Contractor does not warrant the material, equipment or supplies furnished beyond or


back of the dealer's or manufacturer’s quality warranty and. in case of defective material,


equipment or supplies credit shall not be recorded until adjustment has been received by


Contractor from the manufacturers or their agents.


4) Rentals


Materials, equipment and supplies rented shall be charged at actual cost


c) T ransportation


Transportation expenses for equipment, materials and supplies necessary for


the conduct of the Petroleum Operations.


f) Services


1) The actual cost of consultants, contract serv ices and utilities procured from third


parties, provided, however, that Contractor shall obtain MRPAM's prior written approval


to hire such consultants, contract services and utilities and further provided, that that


such costs shall be competitive with those generally charged by international or domestic


suppliers for comparable work and services.


2) Cost of services, including laboratory analysis, drafting, geophysical treatment and


interpretation, geological interpretation, engineering and data processing performed by


MRPAM or by Contractor or its Affiliates in facilities inside or outside Mongolia shall


be in line with competitive rates currently prevailing in international petroleum industry


Services rendered to the Petroleum Operations by Contractor or its Affiliates will be


charged on the basis of costs without profits. The charges will be no higher than the


normal prices charged to other Affiliates and to third parties for comparable services


under similar terms and conditions elsewhere.


If necessary, certified evidence regarding the basis of prices charged, consisting of


certification of the amount of such charges which are direct costs of providing the


services concerned and of the amount which contribute an allocated proportion of the


overheads, may be obtained from the inspectors of Contractor or its Affiliate, or. as the


case may be. by MRPAM.





Production Shunng Cent/del bslweew Mineral resources. and Petroleum Authority of Mongolia and


DWM Petrolemi AG doted 2(10


 Page 39 of 46








MRPAM reserves the right to allow for cost recovery purposes in accordance with the


provision of paragraph 5 of Article II of this accounting procedure, charges for services


rendered by Contractor or its Affiliates if they are higher than the average overall cost


charged by petroleum companies to their Affiliates for similar services in the


international petroleum industry.


g) Damages and Losses


Except as made good by insurance charged under subparagraph (h) below, all costs or


expenses necessary to replace or repair damages or losses incurred by fire, flood, storm or other


causes not controlled by Contractor. Contractor shall furnish the MRPAM written notice of


damages or losses incurred as soon as practicable after report of the same has received by


Contractor.


h) Insurance Costs


Subject to provisions of Article XXIV, premiums payable for any alternative


arrangements shall be admitted for Cost Recovery.


i) Camps. Warehouses and other facilities and systems


Direct costs and expenses incurred in Mongolia in respect of maintaining and operating


of field facilities such as camps, warehouses, transportation systems, communications systems,


water systems and road or other facilities and systems.


j) Legal Expenses


All costs and expenses of litigation or legal services otherwise necessary or expedient


lor the protection of the Contract Area, Petroleum Operations and facilities, including attorney’s


fees and expenses and the pro rata portion of in-house counsel's salaries and expenses, together


with all judgments obtained against the parties or any of them on account of the operations


under the Contract and actual expenses incurred by any party or parties hereto in securing


evidence for the purpose of defending against any action or claim prosecuted or urged in


connection with the operations or the subject matter of the Contract. In the event actions or


claims affecting the interests hereunder shall be handled by the legal staff of one or more of the


parties hereto, a charge commensurate with cost of providing and furnishing such services may


be made to operations.


k) Administrative expenses


1) Cost of staffing and maintaining Contractor’s head office and other offices established


outside of Mongolia (including shareholders) shall account not more than 5% of the


annual exploration & development costs, Salaries and wages and other costs and


expenses related to Contractor's employees, inspectors, officers, administrative


personnel and, also, salaries and wages and other costs and expenses related to directing,


advising, consulting, controlling and other services, which are not charged according to


. paragraph f)


2) Administrative expenses do not include the expenses specified in Paragraph b) and i).


Article 11 of Annex D.








2. RECEIPTS








Production Shoring Contract between Mineral resources and Petroleum Authority ol Mongolia and


D^M Petroleum AO . dased .200


 Page 40 of 46





Receipts received by Contractor as a result of the Petroleum Operations or incidental


thereto shall be credited to the respective accounts. Such receipts shall include the following


transactions:


a) Claims Recovery


I he proceeds of any insurance or claim in connection with the Petroleum Operations or


any assets charged to the accounts.


b) Third Party Revenues


Revenues received from third panics for the use of property or assets, for the delivery' of


any services by Contractor or for any information or data.


c) Adjustments


Any adjustments received by Contractor from the suppliers/manufacturers or their agents


in connections with defective equipment or materials, costs of which was previously


charged to the accounts.


d) Refunds


Rentals, refunds or other credits received by Contractor which apply to any charge


which has been made to the accounts.


e) Sale or Export of Material, Equipment and Supplies


Except as otherwise specifically provided in this Contract, in case if Contractor sells or


exports or transfers to Affiliates or other entities or persons, any material, equipment and


supplies, the cost of which was previously charged to the accounts, the value of such


transfers shall be credited to the accounts.


3. VALUA TION OF MATERIAL. EQUIPMENT AND SUPPLIES


Valuation of material, equipment and supplies either charged to the accounts pursuant to sub-


paragraph 1(d) of this Article II or credited to the accounts pursuant to sub-paragraph 2(e) of


this Article 11 shall be valued in accordance with the following principles:


OExcept as otherwise provided in sub-paragraph (3)(b) below, the costs of


material, equipment and supplies purchased shall be in line with the international


market price for goods of similar quality supplied on similar terms prevailing in the


international market at the time such goods were contracted by Contractor. In case of


purchasing of material, equipment and supplies the purchase price shall reflect, where


applicable, trade and cash discounts, purchase and procurement fees, freight, forwarding


charges, insurance, taxes, customs duties, consular fees and other items chargeable


against imported material, equipment and supplies to the extent that these items have


not been charged already under other sections of this Accounting Procedure.


2) Material, equipment and supplies purchased from or sold to Affiliates shall be


charged at the prices specified in ( a) and (b) below as follows:


(a) New Material. Equipment and Supplies (Condition A) shall be in


line with the international market price for goods of similar quality


supplied on similar terms prevailing in international market at the time such


goods were contracted by Contractor.


(b) Used Material, Equipment and Supplies (Conditions R and C).


i) Material, equipment and supplies which are in sound and serviceable


condition and are suitable for reuse without reconditioning shall be





Production Sharing Contract between Mineral resources, and Petroleum Authority of Mongolia ard


DWM Petroleum AO . dalt'd 200


/





 Page 41 of 46





classified as Condition B and priced at seventy-five per cent (73%) of the


current price of new material, equipment and supplies defined in (a) above.


ii) Material, equipment and supplies which cannot be classified as


Condition B but which:


• after reconditioning will be further serviceable for original function as


good as second-hand material, equipment and supplies (Condition B); or


• are usable for original function but substantially not suitable for


reconditioning, shall be classified as Condition C and priced at fifty


percent (50%) of the current price of new material, equipment and


supplies as defined in (a) above. The cost of reconditioning shall be


charged to reconditioned material, equipment and supplies provided that


the value of Condition C material, equipment and supplies plus the cost


of reconditioning do not exceed the value of Condition B material,


equipment and supplies.


iii) Material, equipment and supplies which cannot be classified as


Condition B or C shall be priced at a value commensurate with its use.


iv) When the use of material, equipment and supplies are temporary


and the serv ice to the Petroleum Operations does not justify the


reduction in price provided for in sub-paragraph ii)b)2) hereof, such


material, equipment and supplies shall be priced on a basis that will result


in a net charge to the accounts consistent with the value of the services rendered.


4. COST CENTRES


In order to provide for an efficient control of the recoverable costs under the Contract, all costs


must be presented for MRP AM’s review on the basis of cost centres and sub-divisions of these


cosL centres.


The detailed division shall be agreed upon pursuant to Paragraph 8, Article 1 of this Annex D


However, as a minimum the following divisions shall be established.


a) The costs shall be allocated per area in the following manner:


i. Exploration area.


ii. Each individual production area.


iii. Costs related to activities outside the Contract Area, such as pipelines.


iv. Costs that cannot be reiared to a certain area


b) The costs shall be allocated per Petroleum Operation in the following manner:


t) Exploration Operations, subdivided further into:


1. Aerial, geological, geochemical, paleontological, topographical and other


surveys.


2. Each individual seismic survey.


3. Each individual Exploration or Appraisal Well


4. Infrastructure (roads, airstrips, etc.).





Production Shanng Contract betiwwn Mineral resources and Petroleum Authority of Mongoi.a and


DWM Petroleum AO . dated ..... .. 200


 Page 42 of 46





5. Support facilities (warehouses, etc.), including an allocation of common


service costs (costs related to various Petroleum Operations).


6. An allocation of the administrative overhead and general expenses.


7. Other costs.


ii) Development Operations, sub-divided further into:


1. Aerial, geological, geochemical, geophysical and other surveys.


2. Each individual Development Well.


3. Gathering lines.


4. Field facilities.


5. Tank farms and other storage facilities for Petroleum


6. Pipelines, trucks.


7. Infrastructure.


8. Support facilities, including an allocation of common service costs (cost


related to various Petroleum Operations).


9. An allocation of the administrative overheads and general expenses.


iii) Production Operations, sub-divided in the same manner as Development


Operations.


c) Costs shall be allocated to Crude Oil and Gas, where both products are being produced


and saved The allocation shall he in accordance with the following principles:


1. Where costs are exclusively related to either Crude Oil or Gas. such costs shall be


allocated completely to the respective fuel.


2. Where costs can be attributed to both Crude Oil and Gas, the costs shall be allocated


on the basis of a method agreed by the parties in accordance with international


petroleum industry principles and practices.


5. \!ON-RECO VEH lBIE COSTS


fhe following costs shall be non-recoverable for the purpose of determining Cost Oil or Cost


Recovery Gas:


a. Costs for which the records do not exist or are not correct in any material respect,


b. Costs that were not incurred within the relevant annual work program and Budget or


authority for expenditure, or are of a category not permitted by this Contract.


c. Costs in excess of those in line with the international market price for goods or services


of similar quality supplied on similar terms prevailing in the international market at the


time such goods or services were obtained or ordered by Contractor except costs


incurred in cases of emergency.


d. Charges for goods and serv ices, which are not in accordance with the relevant Contract,


as may be amended, with the sub-Contractor or supplier.


c. Where the condition of the materials is not in line with their prices in accordance with


paragraph c. above, excess costs related to such discrepancy,


f. Any costs not reasonably required for the Petroleum Operations, including


transportation and all other costs attributable to activities after the point of delivery of


Petroleum to the buyer.





Production Souring Contract between Mmtral resources and Petroleum Authority ct Mongolia and


DV/M Petroleum A

 Page 43 of 46





g. Income taxes incurred outside and inside Mongolia and other taxes incurred outside of


Mongolia.


h. Bonuses and other payments paid under Article 10 of the Contract.


i. Costs of arbitration and expert determination pursuant to Article XXI1 of the Contract,


unless the arbitrators or experts otherwise decide.


j. Fines and penalties imposed by courts or other authorized institutions or Laws of


Mongolia.


k. Donations, contributions and service, unless approved in written by MRPAM.


l. Expenditures on research into and development of new equipment, materials and


tecliniques for use in searching for, developing and producing Petroleum.


rn. Land surface rental.


n. Costs related with implementation of provision “cM and k\\" of Article 7 of the


Production Sharing Contract


o. Costs related with loan interest


p Contribution to representative office


q. Local assistance contribution


r Costs for work and services performed in the Contract Area if related such data, reports,


documents and materials were not submitted to MRPAM.








ARTICLE III


INVENTORIES AND INVENTORY STATEMENTS





1. PERIODIC INVENTORIES. NOTICE AND REPRESENTA TION





At reasonable intervals as agreed upon by MRPAM and Contractor inventories shall be taken by


Contractor of the operations material, which shall include all such material, physical assets and


construction projects.


Written notice of intention to take inventory shall be given by Contractor to MRPAM at least


thirty (30) days before any inventory is to begin so that MRPAM and may be represented when


any inventory is taken. Contractor shall take the inventory at least once per year and upon the


termination of the Contract.


2. RECONCILIA TION AND A DJUSTMENT OF INVENTORIES





Reconciliation of inventory slwll be made by MRPAM and Contractor and a list of shortages





and overages shall be jointly determined and the inventory adjusted by Contractor.


3. INVENTOR YSTA TEMENT





a) Contractor shall maintain detailed records of property in use for the Petroleum


Operations in accordance with normal international petroleum industry accounting


practices.


b) On a quarterly basis Contractor shall supply to MRPAM an Inventory Statement. Such


Inventory Statement shall contain:


1) The description and codes or identification of all controllable assets and


materials.


2) The amount charged to the accounts for each asset.








Production Sharing Contract between Mineral resources und PctrgTcum Authority or Mongolia and


DWM Petroleum AU dated .. 200.....


 Page 44 of 46





3) 1 lie date on which such asset was charged to the account; and


4) Whether the costs of such assets has been recovered pursuant to Article XV of


the Contract.


4. IDENTIFICATION


To the extent possible and reasonable, in accordance with the agreed procedures under Article


1.8 of this Annex D, all assets shall be idenrilied with the respective codes or identification for


easy inspection





ARTICLE IV


MEASUREMENT OF PRODUCTION


AND PRODUCTION STATEMENT


1. The Production Statement shall l>e prepared in accordance will) the following principles:


a) The Production Sharing Oil or Gas and Cost Oil or Cost Recovery Gas shall he


determined on the basis of all Crude Oil and all Gas produced and saved from the Area


as provided in Articles VIII and IX of the Contract.


b) The total volumes of Crude Oil and Gas produced and saved shall be determined


on a daily basis at the shipment point in each Production Area and. where various grades


of Crude Oil are being delivered at the shipment point(s>, the volumes of such grades of


Crude Oil shall be determined separately unless otherwise agreed by MRPAM and


Contractor. The shipment point shall be the point in the Production Area where the


Petroleum is being metered prior to transport by pipeline, railcar or truck from the


Production Area.


c) The production of Crude Oil in barrels per day shall be determined as provided in


Article VIII of the Contract. Where different grades of Crude Oil are being delivered at


the Production Sharing Measurement point(s), the volumes of each grade shall be


determined separately.


d) The volumes of Crude Oil shall be corrected for water and sediments and shall be


determined on the basis of standard temperatures and pressures. The gravity, sulfur


content and other quality indicators of the Crude Oil shall be determined and registered


regularly.


e) The volumes of Gas shall he determined on the basis of standard temperatures


and pressures. The energy content, sulfur content and other quality indicators of the Gas


shall be determined and registered regularly.


0 The volume of Crude Oil and Gas used in the Petroleum Operations shall be


measured and registered on a daily basis; such volumes being the volumes used:


I. for reinjection.


II. for recycling; and


III. for energy for the exploration, development and field operations as vvell


as for pipeline pumping requirements.


g) The volumes of Crude Oil burned or Gas flared or vented shall be registered on a


daily basis.


h) The size of the Crude Oil stocks shall be determined as a minimum at the


beginning and the end of each Calendar Month.














Production Sharing Contract between Mineral resources and Petroleum Authority of Mongolia and


L)WM Petroleum AO , dated 200


/





 Page 45 of 46





2. Following the commencement of initial production (testing and commercial) from the


Contract Area, Contractor shall submit a monthly Production Statement showing the


following information for each Production Area:


a) The quantity of Crude Oil produced and saved


b) The quantity of Gas produced and saved


c) The quantities of Petroleum used for the purposes of carrying on drilling and


production operations and pumping to field storage.


d) The quantities of Gas Hared.


e) The size of Petroleum stocks held at the beginning of the month.


f) The size of Petroleum stocks held at the end of the month.


g) The quantity of sold Crude Oil.


ARTICLE V


VALUE OF PRODUCTION STATEMENT


1. Contractor shall prepare each Calendar Quarter a statement providing calculations of the value





of the Crude Oil and Gas produced and sold in accordance with this Contract. This value of


Production Statement shall include:


a) The quantities and prices realized by MRPAM and Contractor as a result of sales of


Crude Oil to third parties during the Calendar Quarter in question.


b) The quantities and prices realized by MRPAM and Contractor as a result of sales of


Crude Oil during the Calendar Quarter in question to parties other than third parties.


c) If paragraph 4 of Article VIIJ of the Contract is applicable, information available to


Contractor concerning the prices of Crude Oil produced by the main Petroleum


exporting countries of relevance for the determination of the value of the Crude Oil,


including contract prices, discounts and preemie and prices obtained in the spot market.


d) The quantities and prices realized by MRPAM and Contractor as a result of the sales of


Gas.





ARTICLE VI


COST RECOVERY STATEMENT


1. Contractor shall prepare each Calendar Quarter in accordance with its obligations, a Cost


Recovery statement showing:





a) Recoverable costs incurred during the Calendar Quarter.


b) Total recoverable costs for the Calendar Quarter.


c) Quantity and value of Cost Oil or Cost Recovery Gas taken and separately


disposed of by Contractor during the Calendar Quarter


d) Amount of costs recovered for the Calendar Quarter.


e) Amount of recoverable costs to be carried into the succeeding Calendar Quarter,


if any.





2 CONTROL STATEMENTS


Contractor will establish a Cost Recovery account and an offsetting contra-account to control





therein the amount of costs remaining to be recovered and the amount of costs recovered; details


of this account will be provided on a quarterly basis to MRPAM.








Pfoducti-on Stiering Contract between Mineral resources and Petroleum Authority ot Mongolia and


DWM Petroleum ACi dated 200


/





 Page 46 of 46








ARTICLE VII


STATEMENT OF EXPENDITURES AND RECEIPTS


Contractor shall prepare each Calendar Quarter, in accordance with its obligations. Statement of


Expenditures and Receipts. This statement shall show the following:


a) The expenditures and receipts contemplated for the Calendar Year in the budget, on the


basis of the cost classification and cost centres as provided for in this Accounting


Procedure.


b) The expenditures and receipts accrued during the Calendar Quarter in question,


identified recoverable pursuant to this Contract.


c) The cumulative expendilures and receipts for the Calendar Year under consideration.


d) Modifications to the budget agreed to in accordance with the Contract.


e) The latest forecast of cumulative expenditures and receipts for year end.


f) Variations between budget forecast (as amended by paragraph (d) hereof, where


applicable) and latest forecast and reasonable explanations thereof.


ARTICLE Vm


SHARING AND PROFIT OIL STATEMENT


Each Calendar Quarter. Contractor shall prepare following statements containing the following


information:


a) Crude Oil produced during the Calendar Quarter in question.


b) Total cumulative Crude Oil produced up to the end of the Calendar Quarter


c) Volume of Profit Sharing Oil to MRP AM and Contractor during the Calendar Quarter in


question.


d) Cumulative volume ot Profit Sharing Oil to MRPAM and Contractor up to the end of the


Calendar Quarter in question.


e) Volume of Cost Oil due to Contractor during the Calendar Quarter in question.


f) Cumulative volume of Cost Oil due to Contractor up to the end of the Calendar Quarter


in question.















































Production Sha'incj Contract between Mineral resources and Petroleum Authority of Mongolia and


DWM Petroleum AG doled . 200