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LICENSE CONTRACT FOR THE EXPLORATION

AND EXPLOITATION OF HYDROCARBONS

BLOCK……

PERUPETRO S.A.

WITH

……………………

INDEX

PRELIMINARY CLAUSE: GENERAL POINTS

CLAUSE ONE: DEFINITIONS

CLAUSE TWO: PURPOSE OF THE CONTRACT

CLAUSE THREE: TERM, CONDITIONS & GUARANTY

CLAUSE FOUR: EXPLORATION

CLAUSE FIVE: EXPLOITATION

CLAUSE SIX: SUBMISSION OF INFORMATION & STUDIES

CLAUSE SEVEN: SUPERVISION COMMITTEE

CLAUSE EIGHT: ROYALTY & VALUATION

CLAUSE NINE: TAXES

CLAUSE TEN: CUSTOMS DUTIES

CLAUSE ELEVEN: FINANCIAL RIGHTS

CLAUSE TWELVE: EMPLOYEES

CLAUSE THIRTEEN: ENVIRONMENTAL PROTECTION

CLAUSE FOURTEEN: CONSERVATION OF HYDROCARBONS & LOSS

PREVENTION

CLAUSE FIFTEEN: TRAINING & TECHNOLOGY TRANSFER

CLAUSE SIXTEEN: ASSIGNMENT

CLAUSE SEVENTEEN: ACT OF GOD OR FORCE MAJEURE

CLAUSE EIGHTEEN: ACCOUNTING

CLAUSE NINETEEN: MISCELLANEOUS

CLAUSE TWENTY: NOTICES & COMMUNICATIONS

CLAUSE TWENTYONE: SUBMISSION TO PERUVIAN LAW AND DISPUTES

RESOLUTION

CLAUSE TWENTYTWO: TERMINATION

ANNEX “A”: DESCRIPTION OF CONTRACT AREA

ANNEX “B”: MAP OF CONTRACT AREA

ANNEXES “C-1” TO “C-X”: LETTERS OF GUARANTY FOR THE MINIMUM WORK

PROGRAM

ANNEX “D”: CORPORATE GUARANTY

ANNEX “E”: ACCOUNTING PROCEDURE

ANNEX “F”: EXPLORATION WORKING UNITS - Table of Equivalencies



LICENSE CONTRACT FOR THE EXPLORATION AND EXPLOITATION OF

HYDROCARBONS - BLOCK ……

PERUPETRO S.A.

With

……………………………..



PRELIMINARY CLAUSE - GENERAL POINT

I.



PERUPETRO participates in compliance with Law Nº26221 to enter into this

License Contract for the Exploration and Exploitation of Hydrocarbons in Block …



II.



“In situ” hydrocarbons are property of the State. The ownership rights over

extracted hydrocarbons are transferred from PERUPETRO to the Contractor on

the Signature Date, in accordance with the provisions of the Contract and under

the terms of Article 8, Law Nº 26221.

The Contractor shall pay the State, through PERUPETRO, a cash royalty at the

times and under the conditions set forth in the Contract.



III.



In accordance with the provisions of Article 12°, Law 26221, the Contract is

governed by Peruvian private law and the provisions of Article 1357 of the Civil

Code apply.



IV.



For all purposes relative to and derived from the Contract, the Parties agree that

the headings of the clauses are irrelevant to the interpretation of their content.



V.



Any reference to the Contract includes the annexes. In the event of discrepancy

between the annexes and the provisions contained in the body of the Contract,

the latter shall prevail.



CLAUSE ONE - DEFINITIONS

The definitions agreed by the Parties in this clause are aimed at given the required

meaning to the terms used herein and these meanings shall be the only ones

accepted in interpreting the Contract, unless the Parties expressly agree otherwise in

writing.

The terms defined and used herein, whether singular or plural, shall be capitalized in

the first letter and shall have the following meanings:

1.1



Affiliate

Any entity, fifty per cent (50%) or more of voting share capital of which is owned,

either directly or indirectly, by any of the Parties, or any entity or person who

owns, either directly or indirectly, fifty per cent (50%) or more of the voting share

capital of one of the Parties, or any entity, fifty per cent (50%) or more of whose

voting share capital of which is owned, either directly or indirectly, by a



shareholder or share holders who owns or own, either directly or indirectly, fifty

per cent (50%) or more of the voting share capital of any of the Parties.

1.2



Year

A period of twelve (12) consecutive months, using the Gregorian Calendar,

counted from a specific date.



1.3



Contract Area

The area described in Annex “A” and shown in Annex “B”; known as Block ….,

with an extension of ……… hectares.

The Contract Area shall be redefined after excluding those areas released by the

Contractor under the terms of the Contract. In the event of any discrepancy

between Annex “A” and Annex “B”, Annex “A” shall prevail.



1.4



Barrel

Is the unit of measurement for Liquid hydrocarbons consisting of forty two (42)

United States gallons at a temperature of sixty degrees Fahrenheit (60º F) at sea

level pressure, without water, mud or other sediments (BS&W).



1.5



British Thermal Unit - BTU

British Thermal Unit. Is the unit of measurement of the quantity of heat required

to raise the temperature of one pound of water by one degree Fahrenheit,

equivalent to 1055.056 Joules.



1.6



Act of God or Force Majeure.

Includes, among others: fires, earth tremors and earthquakes, tidal waves, land

slides, avalanches, floods, hurricanes, storms, explosions, unforeseeable events,

wars, guerrilla actions, sabotage, civil strife, blockades, unavoidable delays in

transport, strikes and stoppages, the unavailability, even when foreseen, of

adequate facilities for the transport of materials, licenses and permits, equipment

and services, or any other event whether similar to or different from those

specified herein, which cannot be reasonably controlled or foreseen or, when

foreseen, cannot be avoided.



1.7



Supervisory Committee

The entity made up by the Parties, through which PERUPETRO verifies and

coordinates compliance with and execution of the Contract, whose conformation

and powers are set forth in Clause Seven.



1.8



Technical Conciliation Committee

A temporary body, formed to decide on discrepancies arising from the

Operations, which shall be established in accordance with the provisions of

section 21.2 of the Contract.



1.9



Condensates

Liquid hydrocarbons formed by the condensation of Hydrocarbons separated

from Natural Gas, as a result of changes in pressure and temperature when

Natural Gas is extracted from the Reservoir, or in one or more stages in the

compression of Natural Gas. Remains liquid at the atmospheric temperature and

pressure.



1.10 Fiscalized Condensates

Condensates produced in the Contract Area and measured at the Production

Fiscalization Point.

1.11 Contractor

……….., recorded in the Public Hydrocarbons Registry under entry .., page … of

volume … of the Book of Operations Contractors, subject to what is established

for in this Contract.

Notice: In the event the Contractor is made up of more than one individual or

body corporate, the text model will be modified as it may corresponds.

1.12 Contract

This agreement between the Parties, which stipulates the terms and conditions

contained in this document and the appendices which form part thereof, including

additional agreements which may be arrived at by the Parties by virtue of this

document and any modifications thereto in accordance with the law.

1.13 Development

The execution of any activity appropriate to the Production of Hydrocarbons,

such as: drilling, completion and deepening of wells, the design, construction and

installation of equipment, pipelines, storage tanks and other installations,

including the use of artificial lift production methods and primary and enhanced

recovery methods , in the Contract Area and outside it when necessary.

This includes the construction of the Transport and Storage Systems, facilities at

the Production Fiscalization Point of the Main Pipeline and if applicable, primary

distillation plants for the manufacture of products to be used in the Operations, or

Natural Gas Processing Plants.

1.14 Commercial Discovery

A discovery of Hydrocarbons which, in the opinion of the Contractor, can be

exploited commercially.

1.15 Day

A period of twenty four (24) hours which starts at zero hours (00:00) and ends at

twenty four hours (24:00).



1.16 Business Day

All days from Monday to Friday, except those days declared either total or partial

holidays in the city of Lima, by the competent authority.

1.17 Dollar or US$

The currency unit of the United States of America.

1.18 Main Pipeline

A main pipeline that the Contractor may build and operate and which, starting at

the end of the Transport and Storage System, carries the Hydrocarbons

produced in the Contract Area to a third party property point, to a sale or export

point or to a Production Fiscalization Point without prejudice to the approval

described in section 2.3, if applicable. It may include measurement points

connected to the pipeline, any necessary storage and shipping areas, secondary

pipelines, pumping or compression stations, communication systems, roads for

access and maintenance and any other installations necessary and required for

the prompt and permanent conveyance of Hydrocarbons, including the design,

construction, maintenance and equipment of all of the above. The open access

to any Main Pipeline will be from the beginning of the Fifth Year (as a maximum)

to be counted from the Date of Commencing Commercial Production.

1.19 Exploration

The planning, execution and evaluation of all geological, geophysical,

geochemical and other studies, as well as the drilling of Exploratory Wells and

related activities necessary to discover Hydrocarbons, including the drilling of

Appraisal Wells for evaluating the discovered Reservoirs..

1.20 Exploitation

Development and/or Production.

1.21 Date of Commencing Commercial Production

The date of the first measurement of Hydrocarbons at the Production

Fiscalization Point which gives rise to the payment of royalties.

Volumes produced for testing and other purposes agreed specifically between

the Parties are not included in this definition.

1.22 Signing Date

The …………..day of …… of ……, on which the Parties sign the Contract.

1.23 Effective Date

The date within the sixty (60) Days after the Signature Date in which the

Contractor shall begin Operations.



1.24 Fiscalization

Activities which, according to legal dispositions and technical standards, are

carried out by the Supervisory Body of Investment in Energy (OSINERG) over

the Exploration and Exploitation activities executed by the Contractor.

1.25 Natural Gas

A mixture of hydrocarbons found in a gaseous state or in solution with oil under

initial reservoir conditions. Includes Associated Natural Gas and Non-associated

Natural Gas.

1.26 Associated Natural Gas

Natural Gas produced with the Liquid Hydrocarbons of the Reservoir.

1.27 Fiscalized Natural Gas

Natural Gas produced in the Contract Area and measured at a Production

Fiscalization Point.

1.28 Non-associated Natural Gas

Gas occurring in a reservoir where, under initial conditions, Liquid Hydrocarbons

are not present.

1.29 Hydrocarbons

Any organic compound, whether gaseous, Liquid or solid, which consists

principally of carbon and hydrogen.

1.30 Fiscalized Hydrocarbons

Hydrocarbons produced in the Contract Area and measured at a Production

Fiscalization Point.

1.31 Liquid Hydrocarbons.

Oil, Condensates and generally all those Hydrocarbons that under atmospheric

conditions of temperature and pressure, remain in a Liquid state at the site of

their measurement, including those Hydrocarbons that are in a Liquid state at a

temperature higher than the atmospheric temperature.

1.32 Fiscalized Liquid Hydrocarbons

Liquid Hydrocarbons produced in the Contract Area and measured at a

Production Fiscalization Point.

1.33 Law Nº 26221

Law Nº 26221 - Organic Law of Hydrocarbons, extensions, regulations and

amendments included.



1.34



NGL or Natural Gas Liquids

Liquid Hydrocarbons obtained from Natural Gas composed by mixes of ethane,

propane, butane and other heavier hydrocarbons.



1.35



Fiscalized NGL or Fiscalized Natural Gas Liquids

Natural Gas Liquids measured at a Production Fiscalization Point.



1.36 Month

Period counted from any Day in a calendar month which ends on the Day before

the same Day of the following calendar month or, if there is no such day, the last

day of said month.

1.37 MPC

One thousand (1000) standard cubic feet (scf). One (1) SCF is the volume of gas

necessary to fill a space of one (1) cubic foot at 14.695 pounds per square inch

absolute pressure at a temperature of sixty degrees Fahrenheit (60º F).

1.38 Operations

All Exploration and Exploitation activities, as well as those related to the

Transport and Storage System, and all other activities covered by the Contract or

related to the performance thereof.

Note: Operator

In case of one company the Operator is the Contractor. In case of more than one

Company which made up the Contractor, the Company that has been designated

by those companies to carry out the Operations for and on behalf of the

Contractor.

On the Signing Date, ........................, has been designated as Operator.

1.39 Parties.

PERUPETRO and the Contractor.

1.40 PERUPETRO

PERUPETRO S.A., is the Private Law State Company from the Energy and

Mines Sector, created by Law Nº26221.

1.41 Oil

Hydrocarbons which, under initial temperature and pressure conditions in the

Reservoir are in the Liquid state, and which are mainly kept in a liquid state

under atmospheric conditions; do not include Condensates, Natural Gas Liquids

or Liquefied Natural Gas.

1.42 Fiscalized Oil

Oil produced in the Contract Area and measured at a Production Fiscalization

Point.



1.43 Heavy Oil

Liquid Hydrocarbons, that due to its density and viscosity require of non

conventional recovery methods for its Exploitation, and for its transport require of

surface heating processes, or other procedures, excluding the mixing of oil

produced in the same Field.

1.44 Appraisal Well

A well drilled to evaluate the discovered Hydrocarbon Reservoirs.

1.45 Development Well

A well drilled to extract the discovered Hydrocarbons.

1.46 Exploratory Well

A well drilled for the purpose of discovering a new Reservoir or to determine the

stratigraphy of an area, as well as the wells drilled in the structural culminations

which are geologically separated from the part of the same previously studied

structured.

1.47 Production

All activities in the Contract Area, or outside it if necessary, for the purpose of

extracting and handling Hydrocarbons, including the operation and recompletion

of wells, the installation and operation of equipment, pipelines, Transport and

Storage System, treatment and measurement of Hydrocarbons, and all methods

of primary and enhanced recovery.

1.48 Production Fiscalization Point

Place or places to be agreed between the Parties, located inside or outside the

Contract Area, where volumetric measurements are taken, the water and

sediment content determined and other measurements made in order to

determine the volume and quality of Fiscalized Hydrocarbons, in accordance with

the respective API and ASTM standards.

1.49 Reservoir

Underground stratum or strata, forming part of a Field, which are producing or

have been defined to be capable of producing Hydrocarbons, and which have a

common pressure system throughout its extension.

1.50 Transport and Storage System

System of pipelines, pumping stations, compression stations, storage tanks,

river facilities, delivery systems, roads, other facilities and all other means

necessary and useful for the transportation of the Hydrocarbons produced in

the Contract Area to a Production Fiscalization Point, (or to a Main Pipeline)

or to a pipeline belonging to third parties, including the design, construction,

maintenance and equipment of all the above.



1.51 Subcontractor

Any individual or body corporate, whether Peruvian or foreign hired by the

Contractor to provide services related to the Operations.

1.52 Supervision

Activities carried out by PERUPETRO to verify compliance with the Contractor’s

obligations..

1.53 Taxes

Taxes and contributions set forth in the Tax Code.

1.54 Term of the Contract

Period between the Date of Signing and the end of the term established in

section 3.1 of the Contract.

1.55 Field

Surface below which one or more Reservoirs exist which are producing or have

been defined to be capable of producing Hydrocarbons.

CLAUSE TWO - PURPOSE OF THE CONTRACT

2.1



PERUPETRO authorizes the Contractor to carry out the Operations, in

accordance with Law Nº 26221, the pertinent legislation and the provisions of the

Contract, with the common purpose of discovering and producing Hydrocarbons

in the Contract Area



2.2



The Contractor shall have the rights of ownership over the Hydrocarbons

produced from the Contract Area, according to the provisions of Preliminary

Clause, paragraph II.



2.3



The Contractor shall carry out the Operations according to the terms of the

Contract, either directly or through Sub-contractors. Field operations outside the

Contract Area shall require the approval of PERUPETRO.



2.4



PERUPETRO shall carry out the Supervision of the Operations according to the

law and in agreement with the Contract.

Osinerg shall carry out the Fiscalization activities according to the law.



2.5



Representatives of PERUPETRO shall carry out the Supervision at any time,

with prior notification, they must identify themselves and be authorized for such

a purpose by PERUPETRO. The Contractor shall provide all facilities reasonably

possible in the Operations to allow the representatives to carry out their duties,

which shall not interfere with the Operations.

Costs and expenditures corresponding to the representatives of PERUPETRO

shall be borne by PERUPETRO.



2.6



The Contractor shall provide, and be responsible for, all technical, economic and

financial resources required for the execution of the Operations.



CLAUSE THREE - TERM, CONDITIONS & GUARANTY



3.1 The Hydrocarbons exploration phase shall last seven (7) years, which can be

extended according to the law. This period is counted from the Effective Date,

unless this term varies in accordance with other provisions contained in the

Contract.

The Oil exploitation phase is the term remaining after the end of the exploration

phase until the completion of the term of thirty (30) years from the Effective Date

unless this term varies in accordance with other provisions contained in the

Contract.

The exploitation phase for Non-associated Natural Gas and Non-associated

Natural Gas and Condensates is the time remaining after the end of the

Exploration phase until the completion of forty (40) years, from the Effective

Date unless this term varies in accordance with other provisions contained in

the Contract.

Notice: It is possible exploitation of Oil and Non Associated Natural Gas and of

Non Associated Natural Gas and Condensates.

The exploration phase is divided into …….. (X) periods:

(Duration of first and second period will depend on the agreed Work Program,

the quantity and quality of available technical information, hydrological seasons,

etc. For the next periods, duration period has been fixed in 15 months,

excepting the last period which shall be adjusted as to complete the exploration

phase.)

3.2.1 A first period lasting ……..(….) months, counted from the Effective Date.

3.2.2 A second period lasting ….. (….) months, counted from the end of the

period specified in sub-section 3.2.1

3.2.3 A third period lasting fifteen (15) months, counted from the end of the

period specified in sub-section 3.2.2.

3.2.X A X period lasting …… (X months, counted from the end of the period

specified in sub-section 3.2.X-1.

3.3



During the exploration phase the Contractor shall notify PERUPETRO of its

intention to continue with the following period, thirty (30) Days before the end of

the period in progress. In case the Contractor has not complied with the

obligations corresponding to the present period, the provisions of sub-section

22.3.1 shall apply, and the corresponding guaranty executed.



3.4



If, during the periods indicated in section 3.2, the Contractor is prevented for

economical or technical reasons duly substantiated from completing the

respective minimum work programs described in sub-sections 4.6. it may extend

the said periods up to a maximum of six (6) Months provided that it has

requested authorization from PERUPETRO for such extension at least thirty (30)



Days before the end of the period in progress, and the reasons stated in such

request have been proven and accepted by PERUPETRO. In this case, the

Contractor shall, before the end of the period in progress, provide a new

guaranty or extend the existing guaranty to cover the new term, in accordance

with the provisions of section 3.10. In case these extensions result in the

extinction of the term of the last exploration phase period, and the Contractor

decides to continue with the exploration works, obligations for such period shall

be complied during an extension of the exploration phase to be agreed within the

Parties, according to the law.

After the fulfillment of the minimum program obligations of the current period,

with in the correspondent term established in section 3.2, and after having used

the extension, referred to in the above paragraph, if applicable, as long as that

obligation has been the drilling of at least one Exploratory Well; the Contractor

could request an extraordinary term up to a maximum of six (6) months, to reevaluate all the information and results obtained until that period, with the

purpose of preparing and integral and complete survey in order to take the

decision of going through the next period.

Approvals, referred to in this section, shall be granted at the criteria of

PERUPETRO.

3.5



The exploration phase may continue, at the Contractor’s discretion, after the

Date of Commencement of Commercial production until the end of that phase as

indicated in section 3.1. In this case the provisions of section 10.3 shall apply

until the end of the exploration phase. At the same time, the straight-line method

of depreciation referred to in section 9.6 shall be applied from the Date of

Commencement of Commercial Extraction.



3.6



If the Contractor makes one or more Hydrocarbon discoveries during any period

of the exploration phase which is, or are, not commercial solely due to r transport

reasons , it may request a retention period of up to five (5) years for the Field or

Fields discovered, in which to make transport of the production possible.

The right to that retention is subject to at least the following requirements:



3.7



a)



That the Contractor can prove to the satisfaction of PERUPETRO, that the

volumes of the Hydrocarbons discovered in the Contract Area are

insufficient to justify the construction of a Main Pipeline.



b)



That the aggregation of discoveries in adjoining areas and in that of the

Contractor are insufficient to economically justify the construction of a Main

Pipeline, and;



c)



That the Contractor can demonstrate on economic grounds that the

Hydrocarbons discovered cannot be transported from the Contract Area to

a place where they can be sold, by any means of transportation.



If the Contractor makes a discovery of Non-associated Natural Gas or Nonassociated Natural Gas and Condensates during any period of the exploration

phase, it may request a retention period of up to ten (10) years for the Field or

Fields discovered, in which to develop the market.



3.8 If the Contractor discovers Oil or Non-associated Natural Gas or Non-associated

Natural Gas and Condensates during any period of the exploration phase, and

the conditions described in sections 3.6 and 3.7 apply, the Contractor may

request a retention period for Oil and another for Non-associated Natural Gas or

Non-associated Natural Gas and Condensates, for the purposes indicated in the

said paragraphs.

3.9



The retention periods referred to in sections 3.6 and 3.7, extend the term of the

Contract by a period equal to the retention period granted by PERUPETRO.

The retention period shall be established in writing. The Contractor shall request

the retention period and submit supporting documentation to PERUPETRO,

including a schedule of activities to be carried out. The exploration phase shall

terminate at the beginning of the retention period. The exploitation phase shall

commence with the declaration of a Commercial Discovery during this period.

The granting of the retention period referred to in sections 3.6 and 3.7 and their

duration shall be determined at the criteria of PERUPETRO, such not affecting or

diminishing the obligation of the fulfillment of the work minimum program of the

current exploratory phase.



3.10 The Contractor shall guarantee fulfillment compliance of each minimum work

program for the exploration phase in accordance with the provisions of sections

3.2 and 4.6, through a joint and several guaranty, which shall exclude the

requirements that remedies be exhausted against the Contractor prior to

executing on the guarantee, and which shall be unconditional irrevocable and

automatically executable in Peru. Such guaranties shall be issued by a duly

qualified entity of the financial system domiciled in Peru and accepted by

PERUPETRO. PERUPETRO may request the Contractor to substitute a

guaranty and the Contractor must provide a new guaranty no later than fifteen

(15) Business Days after receipt of the request from PERUPETRO.

The amount of the guaranty for the minimum work program for each period, will

be the result from multiplying the equivalence in dollars established in Annex “F”

by the number of Exploration Unit Works corresponding for each period, referred

in sub-section 4.6

The guaranty for the minimum work program of the first period shall be delivered

to PERUPETRO on the Signing Date. The guaranties corresponding to the work

minimum program of each period, according to period 4.6, shall be delivered to

PERUPETRO before the commencement of each period. If not, the provisions of

sub-section 22.3.3 shall apply.

The guaranty in case of extension of exploration phase period terms, shall be

delivered to PERUPETRO by the Contractor, before starting the mentioned

extension, on the contrary PERUPETRO shall not approved the requested

extension, independently from what is set forth in section 3.4.

The guaranties, following the models given in Annexes “C-1” to “C-X”, shall be

issued for each period of the minimum work program.

The guaranty for the minimum work program for each period shall remain in force

for a term which exceeds that of each minimum work program by thirty (30)

Business Days.



If any of the guaranties delivered by the Contractor are not maintained in effect

for the term established, the Contractor must provide a new guaranty or extend

the existing guaranty, no later than fifteen (15) Business Days after receipt by the

Contractor of PERUPETRO’s notification. If not, the provisions of sub-section

22.3.3 shall apply.

On compliance with the obligations covered by each guaranty, PERUPETRO

shall immediately return the corresponding guaranty to the guarantor through the

Contractor. Execution of any guaranty shall have the effect of discharging the

Contractor from its obligation to carry out the minimum work program, without

affecting application of the provisions of sub-section 22.3.1.

3.11 (The Head Office Company), participates to provide the corporate guaranty set

forth in Annex “D”, which shall be delivered to PERUPETRO on the Date of

Signing.

The corporate guaranty shall be effective whilst the Contractors obligations are

enforceable. The provisions of sub-section 22.3.5 shall apply if, on occurrence of

any event which affects its validity or nature, the Contractor fails to provide a

replacement within a period of fifteen (15) Business Days.

CLAUSE FOUR - EXPLORATION

4.1



The Contractor shall commence exploration activities starting on the Effective

Date.



4.2



The Contractor may relinquish the entire Contract Area, without penalty, by

notifying PERUPETRO at least thirty (30) Days in advance, provided that it has

completed the minimum work program of the period of the exploration phase in

progress.

If the Contractor relinquish the entire Contract Area, abandons it or fails to

complete the corresponding minimum work program within the term of the period

in progress, without giving technical reasons which are approved by

PERUPETRO, the latter shall execute the guaranty, without affecting application

of the provisions of sub-section 22.3.3.

The Contractor may make partial relinquishments of the Contract Area by

notifying PERUPETRO at least thirty (30) Days in advance, without incurring a

fine or other penalty, but this shall not affect or diminish its obligation to complete

the minimum work program for the period of the exploration phase in progress.

The Parties shall leave a record of the areas relinquished by the Contractor in the

form of a Minute of the Supervision Committee.

The Contractor may continue to make use of the surface of the areas

relinquished on which facilities related to the Operations have been built.



4.3



During the execution of the Contract relinquishments will be performed as

follows:

a)



At least twenty five (25%) of the original Contract Area at the end of the

second period described in sub-section 3.2.2



b) At the end of the third or fourth period described in sub-sections 3.2.3 and

3.2.4, the Contractor shall have relinquished at lest fifty per cent (50%) of the

original Contract Area, including for such purposes the relinquishment

performed according preceding literal a); unless the Contractor pledges

himself to perform exploration activities (seismic or well drilling) additional to

that of the following period, and that the activity to be performed corresponds

to the respective area relinquishment. In this case, at the end of the fourth or

fifth period, Contractor shall relinquish at least fifty per cent (50%) of the

original Contract Area, including for such purposes the relinquishment

performed according preceding literal a).

c) At the end of the exploration phase, Contractor shall keep the remaining

Contract Area, for which he must pledge himself to drill one (01) Exploratory

Well or perform five (5) Exploration Work Units for each ten thousand

hectares (10,000.00) of Contract Area, each two (2) years, up to a maximum

period of six years.

d) In the event the Contractor decides not to continue executing the exploration

activities described in literal c), or in the event he does not fulfills such

pledge , and without detriment of the application of the respective contractual

provisions, he will keep only those Fields included in the Initial Development

Plan, or in the work programs referred to in section 5.3, as it may correspond,

in Production or subject to a retention period plus a surrounding area of five

(5) kilometers up to the boundary of the Contract Area.

4.4



For the purposes of sections 4.2 and 4.3, Parties will opportunely

coordinate, in order that PERUPETRO divides the Contract Area into

rectangular parcels, as far as possible with an area of twenty thousand

hectares (20,000.00 has.) and if this is not possible, with a different area. It

is not necessary for the areas released by the Contractor to be adjoining.



4.5



All the areas relinquished by the Contractor, including Fields within such

areas, shall revert to the State at no cost to the State or to PERUPETRO.



4.6



The minimum work program for each of the periods of the exploration

phase, which the Contractor is obliged to carry out, is as follows:

Period

1st

2nd

3rd

…..

X



UTE / 10 mha

(Work Exploration Units for each 10,000

ha or portion)

-----------------4.0 or drilling of one exploratory well

5.0 or drilling of one exploratory well

5.0 or drilling of one exploratory well



Notice:

Works for the first and second period of the work minimum

program are agreed between the parties, according to the area potential, quantity and

quality of available technical information, hydrologic season, etc, works agreed are

turned into Exploration Work Units. For the following periods Exploration Work Units

for each ten thousand hectares are established.



The established Work Minimum Program, expressed in Exploration Work Units for

each 10,000 ha, includes the original area and the minimum area relinquishments

established for each period in section 4.3, for such effect relinquishments established

in section 4.2 are not considered.

In order to comply with the obligations described in this paragraph, the following

must be taken into account:

a)



In case of the recording of seismic lines, the corresponding kilometers will

be counted from the initial shot point to the final shot point of each seismic

line.



b)



The exploration working units referred to in this paragraph will be fulfilled

according to the table of equivalencies established in Annex “F”.



c)



Only the exploration working units resulting from the registry of 2D or 3D

seismic lines, as well as from the drilling of Exploration Wells, performed in

excess at any period of the exploration phase, in relation with what is

established in paragraph 4.6, will be considered as fulfillment of the

obligations of the following periods without being necessary to deliver the

guaranty corresponding to the period in which those work units are

guaranteed, as long as the minimum work program has been completely

executed in advance; if not, the guaranty shall be submitted according to

the terms and procedures established in paragraph 3.10.

In case of drilling Exploratory Wells, exploration work units effectively

executed will be determined according to the table of equivalences

established in Annex “F”, setting the difference with the number of

exploration work units represented by the drilling obligation according to

this section , the same which will be used to accredit future works, if it is

pertinent, or to complete other exploration works, as it may correspond.



d)



4.7



Before the beginning of each period of the exploration phase the

Contractor shall inform PERUPETRO in detail about the scheduled

exploration activities in order to fulfill the number of exploration working

units committed for such period. The Contractor shall inform PERUPETRO

any modification of the contents of such program through a supporting

technical report, before its execution. In case the modification refers to

switching the obligation of drilling a exploratory well by other exploration

activities, according the equivalences table of Annex “F”, prior approval of

PERUPETRO will be necessary.



The Exploratory Wells corresponding to the Minimum Work Program and referred

to in section 4.6, shall be considered drilled and, therefore, the Contractor’s

obligations fulfilled, when a minimum vertical depth (TVD) of ….. meters,

measured from the surface, or a minimum of 100 meters into the ……. formation,

is reached, whichever occurs first, according to the activities program delivered

to PERUPETRO at the beginning of each period.

If, before starting to drill any of the Exploratory Wells corresponding to the work

minimum program, referred to in section 4.6, the Contractor demonstrates to

PERUPETRO’s satisfaction, based on geological and geophysical evaluations,

that it cannot comply with the objective agreed in the first paragraph of this

section, the Parties may agree a new geological objective and/or depth.



Likewise, if during drilling of any of the Exploratory Wells corresponding to the

work minimum program, referred to in section 4.6, geological or mechanical

problems arise which cannot be overcome, the Contractor may request

PERUPETRO to recognize that its obligation to drill has been complied with, by

submitting a supporting technical report for the approval of PERUPETRO.

4.8



If the Contractor decides to declare a Commercial Discovery, it shall notify

PERUPETRO of its declaration and submit an “Initial Development Plan” to make

viable the Exploitation of the Hydrocarbons discovered, no later than one

hundred and eighty (180) Days after making the declaration. This Plan shall

include the following:

a)



The physical and chemical characteristics of the Hydrocarbons discovered,

the percentage of associated products and the impurities they contain.



b)



Estimated production profiles during the Term of the Contract for the Field

or Fields.



c)



Estimated number of development wells and their production capacity.



d)



Transport and Storage System and Projected Production Fiscalization

Points.



e)



Main Pipeline, if applicable.



f)



Safety measures



g)



Schedule of work to be carried out.



h)



The period which will elapse before the Date of Commencement of

Commercial Production.



The “Initial Development Plan” must include the specific investments, costs and

expenditure estimated for Exploitation of the Commercial Discovery as well as

any other information considered suitable by the Contractor.

4.9



PERUPETRO must advise the Contractor of its comments on the “Initial

Development Plan” within sixty (60) Days of having received it. It may question

the Date of Commencement of Commercial Production if this is not reasonable.

In the event of dispute, the Technical Conciliation Committee shall be convened.



4.10 If the Contractor makes a declaration of Commercial Discovery, it shall be obliged

to commence Development no later than one hundred and eighty (180) Days

following the expiration of the sixty (60) Days period indicated in section 4.9 of

the Contract.

A declaration of Commercial Discovery does not imply the reduction or

suspension of obligations under the minimum work program.

4.11 Development of the Hydrocarbons discovered shall be carried out in accordance

with the work program submitted by the Contractor to PERUPETRO in

accordance with the provisions of section 5.3.



The Parties agree that when appropriate and necessary, the terms for

submission of the “Initial Development Plan” or the annual work program, may be

adjusted, extended or modified. For this purpose, the Contractor shall submit its

proposals to PERUPETRO so that agreement on such adjustment, extension or

modification can be reached.

4.12 The end of the exploration phase shall not affect any of the terms and periods for

the above mentioned procedures which may be in progress at the time of

produced such expiration.

4.13 In exceptional cases, due to technical and economic reasons, which make

unfeasible the fulfillment of the obligations and/or terms of the work minimum

program periods established in sections 4.6 and 3.2 respectively, and at request

of the Contractor, through the submission of a supporting report about the

change, obligations and/or terms of the work minimum program periods shall be

replaced, provided that PERUPETRO accepts and approves the requested

replacement. In any case, such replacement shall modify the initial commitment

of Exploration Work Units for the exploration phase, reducing obligations.

Likewise, when the exploration results justify a new Contract Area configuration

and upon request of the Contractor, through the submission of a supporting

report to PERUPETRO, the Contract Area shall be delimited again, as well as it

is complied the established in section 4.3, the Contractor submits work

proposals for the new area, and PERUPETRO accepts and approves the new

delimitation requested. In any case, the new delimitation will increase the total

original Contract Area.

The above-mentioned replacements and new delimitations accepted and

approved by PERUPETRO, may originate changes in the amounts and terms of

the established guaranties; if applicable, the Parties shall calculate the new

guaranties amounts and the Contractor shall comply to submit a new guaranty or

shall extend the one in force, replacing it with the new amount and/or term

established, according to the requirements set forth in sections 3.4 and 3.10,

likewise the Exploration Working Units for the new area will be calculated.

CLAUSE FIVE - EXPLOITATION

5.1



The exploitation phase shall commence the Day after the end of the exploration

phase, provided that a declaration of Commercial Discovery has been made

during the exploration phase. However, the Contractor has the option of

commencing the exploitation phase and ending the exploration phase earlier, on

the Date of Commencement of Commercial Production. If a retention period

applies, the exploitation phase shall commence once the declaration of

Commercial Discovery is made.



5.2



The Contractor is obliged that the Date of Commencement of Commercial

Production must take place within the period established in sections 4.8 and 4.9.



5.3



The Contractor shall submit to PERUPETRO, no less than sixty (60) Days before

the end of each calendar Year after a declaration of Commercial Discovery, the

following:

a)



An annual work program and detailed budget showing income, costs,

expenditure and investment for the following calendar Year.



b)



An annual work program and detailed budget showing income, costs,

expenditure and investment for Exploration aimed at discovering additional

reserves, if applicable.



c)



A work program and projected income, costs, expenditure and investment

covering Development and/or Production for the next five (5) calendar

Years.



5.4



In carrying out each work programs, the Contractor shall use the equipment

and/or methods necessary and appropriate to allow operations evaluation and

monitoring.



5.5



The Contractor is obliged to produce and recover the Hydrocarbon reserves in

the Contract Area economically, in accordance with the programs referred to in

this Clause Five and shall carry out this work in accordance with technical and

economic principles generally accepted and employed in the international

hydrocarbons industry.



5.6



The Contractor has the right to use the Hydrocarbons produced in the Contract

Area in its Operations at no cost whatever, which are not considered in the

royalty determination. At the same time, such hydrocarbons could be processed

within the Contract Area to be exclusively used in the Operations.

Notice: Hydrocarbons processing is only accepted for remote areas.



5.7



The Contractor shall have the right to recover Liquid Hydrocarbons from any

Natural Gas which may be produced in the Contract Area and extract them at

any stage of handling the said Natural Gas.

Liquids thus separated shall be considered as Condensates for the purposes of

determining the royalty, except when, for economic or operational reasons, it is

not possible to collect them, in which case they may be mixed with Oil and

fiscalized together.



5.8



Natural Gas not used by the Contractor in the Operations in accordance with

section 5.6, may be sold, re-injected into the Reservoir, or both, by the

Contractor. Natural Gas not used, nor sold or re-injected may be flared by the

Contractor after obtaining authorization from the Ministry of Energy and Mines.



5.9



When a commercially exploitable Field or Fields extend continuously from the

Contract Area to another area or areas, the Contractor and the contractors

operating these other areas must reach agreement on a single Exploitation plan

or common Exploitation plan. If agreement cannot be reached, the Ministry of

Energy and Mines shall order the differences to be submitted to the technical

conciliation committee referred to in Article 32, of Law 26221. The decision of this

committee shall be binding.

If the area adjacent to the commercially exploitable Field is not assigned to a

contractor, or is not in a process of negotiation or bidding and there are no

environmental constraints, the Contractor shall have first refusal to negotiate and

incorporate the said adjacent area into the Contract Area, provided that it submits

its request within the Exploration phase.



5.10 After drilling one (1) well, the Contractor must inform PERUPETRO when the well

will be tested and, if applicable. The well test shall be performed within the three

(3) Months following to the end of drilling.

5.11 PERUPETRO may at any time examine and test the equipment and measuring

instruments used to measure the volume and determine the quality of Fiscalized

Hydrocarbons.

The equipment and measuring instruments shall be periodically calibrated in

accordance with applicable regulations. Representatives of PERUPETRO may

be present during calibration.

5.12 Before the Date of Commencing of Commercial Production and in order to

determine the volume and quality of Fiscalized Hydrocarbons, the Parties shall

agree the equipment, the methods and the corresponding measuring procedures.

5.13 For the production of Heavy Oil in the Contract Area, it could be blended with

Light Oil produced out of the Contract Area. Such Light Oil will be measured and

fiscalized by the parties in a measuring point at the entrance of the Contract

Area.

The volume of such hydrocarbons produced out of the Contract Area will be

discounted from the volume of Fiscalized Hydrocarbons in the Contract Area in

order to determine the royalty to be paid by the Contractor.

CLAUSE SIX - SUBMISSION OF INFORMATION & STUDIES

6.1



The Contractor shall keep PERUPETRO permanently, promptly and regularly

informed regarding the Operations, providing all information in the manner set

forth in this clause and in any applicable legislation. It shall also provide

information on other natural resources or archaeological remains found or

discovered in the course of the Operations during the term of the Contract. The

technical information, studies, processed and unprocessed data as well as

results provided by the Contractor to PERUPETRO in accordance with this

Clause shall be of the best quality that has been obtained by the Contractor. If

when securing information and results, methods or systems are used that solely

belong to him or to of any of his companies, it will not be obliged to disclose

those methods or systems when he provides the information.



6.2 The Contractor must provide a copy of all studies concerning the Development of

the Fields, prepared from technical information obtained in the Contract Area.

The Contractor shall also provide any further explanatory information regarding

such studies required by PERUPETRO.

6.3



Contractor must submit to PERUPETRO, the information and studies

corresponding to the obligations of the minimum work program no later than the

date in which each period of the exploration phase covered in section 3.2.

No later than ninety (90) Days after the end of each period of the exploration

phase, Contractor must submit to PERUPETRO a report containing an

evaluation, including a study and interpretation of the geological, geophysical,

geochemical, petrophysical and reservoir analyses carried out in relation to the

minimum work program for each period.



6.4



The Contractor shall submit the to PERUPETRO a “Monthly Production Report”

an a “Monthly Income and Expenditure Report”. Both reports will be submitted

in the forms delivered to the Contractor by PERUPETRO for such purpose, at the

latest at the thirtieth (30) calendar day of each month.



6.5



As PERUPETRO requires, the Contractor must provide PERUPETRO with a

copy of all information supplied to the Central Reserve Bank of Peru in

accordance with the provisions of Clause Eleven..



6.6



Within the thirty (30) days after the end of each calendar Month, the Contractor

must provide PERUPETRO with a list of the contracts entered into with

Subcontractors during that Month, as well as copies of any of these contracts

which PERUPETRO may require.



6.7



PERUPETRO or any of the enterprises conforming the ContractorEither Party

may reveal information obtained from the Operations without obtaining the

approval of the other Party in the following circumstances:

a) To an Affiliate of the Party.

b) In relation to financing or insurance hiring, provided that a confidentiality

agreement is obtained.

c) If required by law, regulation or resolution of the competent authority

including, without limitation, regulations and resolutions of government

authorities, insurance companies or the stock exchange on which the shares

of the Parties or Affiliates of the Parties are registered.

e) To consultants, accountants, auditors, financiers, professionals, possible

purchasers or assignees of the Parties or of a share in the Contract, as far as

is necessary in relation to the Operations, provided that a confidentiality

agreement is obtained.

When the Parties agree to communicate certain confidential or reserved

information to third parties, the character of such information must be expressly

stated so that it shall not be divulged by those third parties.



CLAUSE SEVEN - SUPERVISORY COMMITTEE

7.1

The Supervisory Committee shall be convened and shall approve up regulations

governing its functioning within sixty (60) Days after the Effective Date .

7.2



The Supervisory Committee shall have the following duties:

a)



To discuss and exchange, among its members, all information relative to

the operations.



b)



To evaluate the execution of the Exploration minimum work program

referred to in section 4.6.



c)



To evaluate the work programs and plans referred to in sections 4.8 and

5.3, and coordinate the execution of them.



7.3



d)



Verify and coordinate the execution of the Operations, for which the

representatives of the Parties accredited to the Supervisory Committee

shall have available all necessary advice.



e)



Verify and coordinate the fulfillment of all obligations relative to the

Operations set forth in the Contract or agreed by the Parties in any other

document.



f)



Other powers established in the Contract or agreed between the Parties.



The Committee shall meet whenever requested by either Party, and at a

frequency established by its regulation. At least one representative or each Party

must be present for the Supervisory Committee to be validly constituted.

Each one of the Parties shall bear the costs incurred in maintaining its respective

members in the Supervisory Committee.



7.4



Whenever a discrepancy between the Parties arises and continues in the

Supervisory Committee, each one may request any legal or technical opinion it

deems appropriate, which shall be submitted to an extraordinary meeting of the

Supervisory Committee. If during the extraordinary meeting no agreement is

reached, the subject shall raised to the General Managements of the Parties in

order to solve it. If the discrepancy continues, the Technical Conciliation

Committee shall be convened.



CLAUSE EIGHT - ROYALTY & VALUATION

8.1



The Contractor shall pay a royalty in cash, based on the Fiscalized

Hydrocarbons valued at one or more Production Fiscalization Points, in

accordance with sections 8.3, 8.4 and 8.5. In the event of a loss of

Hydrocarbons, the provisions of section 14.2 shall apply.



8.2



For the purposes of this Clause, the following terms shall have the meanings

set forth below:

8.2.1



8.2.2



Transportation and Storage Cost: is the cost, expressed in Dollars

per Barrel or Dollars per MMBtu as the case may be, which includes:

a)



The tariff paid to third parties or the Estimated Tariff, expressed

in Dollars per Barrel or Dollars per MMBtu, as the case may be,

for transportation and storage of Fiscalized Hydrocarbons from a

Production Fiscalization Point to the point of sale or export.



b)



Costs of handling and carrying Fiscalized Hydrocarbons to a

vessel’s manifold or to the sale installations.



Valuation Period: is each fortnight of a given calendar Month, the first

fortnight being the period from the first to the fifteenth Day of that

calendar Month and the second fortnight being the remainder of the said

calendar Month.



Insofar as the relevant legislation permits, the Valuation Period may be

extended or shortened by agreement between the Parties.

8.2.3



Basket Price: is a price, expressed in Dollars per Barrel, representing

the Peruvian export port FOB value, based upon a basket of prices for

Liquid Hydrocarbons defined in accordance with sub-section 8.4.1 for

the Oil Basket Price, sub-section 8.4.3 for the Natural Gas Liquids

Basket Price and sub-section 8.4.4 for the Condensate Basket Price.



8.2.4



Sale Price: is the agreed price, expressed in Dollars per million BTU,

effectively paid or payable by a purchaser to the Contractor for

Fiscalized Natural Gas produced in the Contract Area. This must also

include other concept derived directly from the respective sales of

Fiscalized Natural Gas and from the volume of Fiscalized Natural Gas

produced in the Contract Area effectively delivered, expressed in Dollars

per MMBtu.

The following shall not be taken into account in the calculation of the

Sale Price:

a)



Payments resulting from the reconciliation of Natural Gas

volumes contained in the respective sales/purchase contracts.



b)



General Sales Tax, Selective Consumption Tax, Municipal

Promotion Tax and/or any other consumption tax.



8.2.5



Estimated Tariff: the cost, expressed in Dollars per Barrel or Dollars

per MMBtu as it may be applicable, of transportation from a Production

Fiscalization Point to the point of sale or export or to a pipeline

belonging to a third party. This cost must take into account the concepts,

methodologies and procedures referred to in the “Regulations for

Hydrocarbon Transportation by Pipeline”, its amendments and any

regulation replacing it.



8.2.6



Value of Fiscalized Oil Production: is the result of multiplying the

Fiscalized Oil for a given Valuation Period by the Oil Basket Price for

that period from which the corresponding Transportation and Storage

Cost has been deducted, if it is pertinent.



8.2.7



Value of Fiscalized Natural Gas Production: is the result of

multiplying the Fiscalized Natural Gas, in terms of its heat content in

millions of BTUs for a given Valuation Period by the Sale Price for that

period from which the corresponding Transportation and Storage Cost

has been deducted, if it is pertinent.



8.2.8



Value of Fiscalized NGL Production: is the result of multiplying the

Fiscalized Volume of Natural Gas Liquids for a given Valuation Period

by the Natural Gas Liquid Basket price for the Fiscalized Natural Gas

Liquids for that period, from which the corresponding Transportation and

Storage Price has been deducted, if it is pertinent.



8.2.9



Value of Fiscalized Condensate Production: is the result of

multiplying the Fiscalized Condensates for a given Valuation Period by

the Condensate Basket Price for that period from which the



corresponding Transportation and Storage Cost has been deducted, if it

is pertinent.

8.3 The Contractor at the moment of declaring Hydrocarbons Commercial Discovery

will choose the application of one of the two methodologies established in

paragraphs 8.3.1 and 8.3.2. Once chosen, the Contractor could not change the

methodology during remaining of the Contract Period.

8.3.1



Methodologies based on Production Scales: It will be applied according to the

Liquid Hydrocarbons and/or Natural Gas Liquids Fiscalized Production. The

Fiscalized Production levels and the royalty percentages, are the following:

Fiscalized Production Levels

In MBDC



Royalty in

Percentage

%

5

5 – 20

20



<5

5 – 100

> 100



MBDC: Thousand of barrels per calendar day.

For a Fiscalized Production which is less than 5 MBDC a royalty percentage of

5% is applied. For a Fiscalized Production greater than 100 MBDC a royalty

percentage of 20% is applied. For a Fiscalized Production within the average of

5 MBDC to 100 MBDC the royalty percentage resulting from the calculation

performed by the linear interpolation method is applied.

For the Natural Gas Fiscalized Production the same royalty percentages and

the Fiscalized Production Levels used for Liquid Hydrocarbons will be applied,

for which the following formula will be used: Barrels shall be equivalent to the

Natural Gas volume expressed in standard cubic feet divided between the

factor five thousand six hundred twenty six (5,626).

8.3.2



Methodology based on Economic Results (RRE) : Will be applied according to

the following ratio:

RRE = 5% + % t Variable Royalty

Variable Royalty (%t) = ((Xt-1 – Yt-1 ) / Xt-1)*(1-(1/(1+(Factor Rt-1 - 1.15 )))) * 100

It is applied when



:



Rt-1 Factor  1.15 and the range of:

0%



<



Variable Royalty



<



20%



For negative results it is considered 0% and for

results the same or greater than 20% it is

considered 20 %

X t-1:



Revenue corresponding to the former annual period at the moment of

executing the calculation of the Variable Royalty (%t). Include concepts

applicable to Rt-1 Factor.



Y t-1:



Expenditure corresponding to the former annual period at the moment of

executing the calculation of the Variable Royalty (%t). Include concepts

applicable to Rt-1 Factor.



Factor R t-1:



Is the quotient between the income and expenditure

accumulated since the signing date up to the period t-1.



Where:

Cumulative revenue:

Cum[PFP*(PCP - CTAP)] + Cum[PFC*(PCC - CTAC)] +

Cum[PFG*(PRG - CTAG)] + Cum [PFL*(PCL - CTAL)] + Cum[OI]

PFP

=

Fiscalized Oil Production

PCP

=

Oil Basket Price

CTAP

=

Oil Transportation & Storage Cost

PFC

=

Fiscalized Condensate Production

PCC

=

Condensate Basket Price

CTAC

=

Condensate Transportation & Storage Cost

PFG

=

Fiscalized Natural Gas Production

PRG

=

Natural Gas Sale Price

CTAG

=

Natural Gas Transportation & Storage Cost

PFL

=

Natural Gas Liquids Fiscalized Production

PCL

=

Basket Price for Natural Gas Liquids

CTAL

=

Natural Gas Liquids Transportation & Storage

Cost

OI

=

Other Income

Cum (Investment + Costs + Royalties + Other Expenditure)

Details of revenue and expenditure and the occasions for recording the

components of the “R” Factor are given in Appendix “E”, Accounting

Procedures.

The Variable Royalty Percentage calculation is performed twice a year. One

during January, with Revenue and Expenditure information from January to

December from the last calendar year; and the other in July, with information

from July of last calendar year to June of current calendar year.

8.4



For the purposes of the Contract, the value of each class of Fiscalized

Hydrocarbons shall be expressed in Dollars per Barrel or Dollars per million Btu

as the case may be, and determined as indicated below:

8.4.1



To determine the Value and calculate the Basket Price for Oil, the

following procedure shall be used:

a)



At least ninety (90) Days before the Date of Commencement of

Commercial Production, the Parties shall determine the quality of

Oil to be produced in the Contract Area.



b)



No later than thirty (30) Days after the determination referred to

in a) above, the Parties shall select a basket of Oil consisting of

a maximum of four (4) components which must fulfill the

following requirements:



1.



They should be of a similar quality like the Oil to be

produced in the Contract Area.



2.



Their prices should appear regularly in “Platts” publication

or another source recognized by the petroleum industry

and agreed between the Parties.



3.



They should be competitive in the market or markets in

which the Oil to be produced in the Contract Area could

be sold.



Every six (6) Months, or earlier if requested by either of the

Parties, the Parties must review the basket established for the

valuation of the Liquid Hydrocarbons produced in the Contract

Area, in order to verify that they still comply with the above

conditions. If it is shown that any of the above conditions no

longer applies, the Parties must modify the basket no later than

thirty (30) Days after the date on which the review of the basket

commences. If, at the end of this period the Parties are unable to

agree on a new basket, the procedures set forth in sub-section

8.6.4 of the Contract shall be applied.

Regarding the quality, if it is shown that the API density

(weighted average), sulphur content or other quality element of

the Oil produced in the Contract Area has varied significantly

from the quality of the Oil which make up the basket (simple

arithmetic average), the Parties must modify the composition of

the basket to reflect the quality of the Oil in the Contract Area.

c)



Once the quality of the Oil referred to in the previous paragraph

has been determined, the Parties shall sign a “Valuation

Agreement” in which terms and conditions additional to those

detailed in this paragraph shall be established, which are

necessary for correct application.

The “Valuation Agreement” shall define the procedures for

adjustments which may be necessary for quality reasons. Quality

adjustments shall take into account awards and/or penalties for

improvement and/or deterioration of the quality of the Oil

produced in the Contract Area, compared to the quality of the

oils making up the basket. The “Valuation Agreement” shall also

establish the in force period and frequency when the agreed

methods and procedures shall be reviewed, so as to guarantee

at all times a realistic determination of the prices of the Oil

produced in the Contract Area. If, at any time, either Party

considers that application of the methods and procedures

established in the “Valuation Agreement” does not result in a

realistic determination of the value of Oil produced in the

Contract Area, the Parties may agree to apply other methods

and procedures to achieve that result.



d)



If, in the future, the price of one or more of the oils making up the

basket is quoted in a currency different than the Dollar, those



prices shall be converted into Dollars using the exchange rates

applicable on the dates of each of the above mentioned

quotations to the average of the exchange rates quoted by New

York Citibank N.A., New York,. In the absence of this, the

Parties may agree on an adequate substitute.

e)



8.5



The Basket Price used to calculate the value of the Oil produced

in the Contract Area during a Valuation Period shall be

determined as follows:

1.



The average price of each of the Oils making up the

basket shall be determined by calculating the arithmetic

mean of its quotations published during the Valuation

Period. Only those Days on which all the Oils making up

the basket are quoted shall be used.



2.



The average prices resulting from the above procedure,

for each of the Oils making up the basket, shall, in turn,

be averaged to obtain the Basket Price corresponding to

the value of the Oil produced in the Contract Area.



8.4.2



The Value of Natural Gas for the royalty payment shall be represented

by the Sale Price, which must reflect the national market or export price,

referred to an established point within the national territory, as it may

correspond. The minimum Sale Price to be applied shall be US$ 0.6

/MMBtu.



8.4.3



The applicable parts of the procedure laid down in sub-section 8.4.1

shall be applied in the case of Natural Gas Liquids The Parties may

agree the necessary adjustments to the Basket Price in order to

establish the Natural Gas Liquids Basket Price, as to reflect as accurate

as possible, the value of the Natural Gas Liquids produced in the

Contract Area.



8.4.4



The applicable parts of the procedure laid down in sub-section 8.4.1

shall be applied in the case of Condensates. The Parties may agree on

the necessary adjustments to the Basket Price in order to establish the

Condensate Basket Price, as to reflect as accurate as possible, the

value of the Condensates produced in the Contract Area.



8.4.5



In case the Parties cannot reach any of the agreements considered in

this section, the Technical Conciliation Committee shall be convened.



Without detriment of what is established for in literal d) of paragraph 2.5 of

“Appendix E”, Accounting Procedure; if at any moment the parties found out

that a mistake in the calculation of Rt-1 Factor had produced, and that as a result

of that mistake it is necessary to apply a Rt-1 factor different to the one

previously applied, or that it should have been applied at a different moment to

that in which it was applied, the corresponding correction will be executed

affecting the period in which the mistake occurred, readjusting the royalty

percentage since that period. Every adjustment resulting from a minor royalty

payment, will accrue interests in favor of the affected Party since the moment

the mistake occurred. Devolutions made to the Contractor as a result of a

greater royalty payment, will be performed during the next fortnights against the



balances that PERUPETRO has to transfer to the Treasury because of the

Contract, according to literal g) of article 6° of Law N° 26221.

8.6



The amount of the royalty shall be calculated for each Valuation Period.

Payment shall be made, in Dollars, no later than the second Working Day after

the end of the corresponding fortnight. The volume of Fiscalized Hydrocarbons

for each fortnight shall be supported by fiscalization tickets which PERUPETRO

shall provide, duly signed in agreement, to the Contractor.



8.7



If the Contractor fails to pay PERUPETRO all or part of the royalty during the

period stipulated in section 8.6, the Contractor hereby makes available to

PERUPETRO a sufficient quantity of Hydrocarbons extracted from the Contract

Area as to cover the owed amount , incurred costs and corresponding interests

according to the provisions of section 19.6.



CLAUSE NINE – TAXES

9.1



The Contractor is subject to the ordinary tax regime of the Republic of Peru,

including the ordinary Income Tax regime and specific regulations set forth in

Law Nº 26221, in force on the Signing Date.

The State, through the Ministry of Economy and Finance guarantees the

Contractor a tax stability during the Term of the Contract, so it shall be subject

solely to the tax regime in force on the Date of Signing, according to the

provisions of the “Guaranty Tax Stability Regime and Taxation Regulations of

Law Nº26221, Organic Law of Hydrocarbons”, approved by Supreme Decree

Nº32-95-EF, the “Law Governing the Stability with the State under the Sector

Laws .- Law N° 27343”, as it is applicable, and the “Updated Law of

Hydrocarbons – Law N° 27377”.



9.2



Hydrocarbon Exports from the Contract Area made by the Contractor are

exempted from all Taxes, including those requiring specific mention.



9.3



Payments by means of “canon”, “sobrecanon”, and “participacion en la renta” to

state entities, shall be made by PERUPETRO.



9.4



Regarding the current legislation, the Contractor shall pay those taxes applicable

to imports of goods and supplies require by the Contractor to carry out the

Operations, according to the law.



9.5



Regarding the provisions of Article 87 of the Tax Code, the Contractor may keep

its accounts in Dollars and, therefore, determination of the basis for Taxes

payable by the Contractor, the amount of such Taxes and payment thereof shall

be carried out according to the law.



9.6



It is established that the Contractor shall use the straight-line method of

depreciation over a period of five (5) Years starting from the financial year

corresponding to the Date of Commencement of Commercial Production.

This straight-line depreciation shall be applied to all Exploration and

Development expenditure and to all investments made by the Contractor from

the Signature Date until the Date of Commencement Commercial Production.



The above mentioned depreciation period shall be extended, without exceeding

the term of the Contract, if for price reasons or due to any other factor agreed by

the Parties and after applying the linear depreciation referred to above, the

Contractor’s (or any of the enterprises that made up the Contractor) accounts

show a loss or a fiscal loss which, in the Contractor’s judgement (or such

enterprise), will not be compensated by fiscal effects according to the current

tax legislation. Extensions of the depreciation period shall be made known in

advance to the National Superintendence of Tax Administration.

CLAUSE TEN - CUSTOM DUTIES.

10.1 The Contractor is authorized to import, either permanently or temporarily,

according to the current legislation, all goods necessary for the efficient and

economic execution of the Operations.

10.2 The Contractor may import temporarily, for a period of two (2) Years, goods to be

used for its activities without paying import Duties, including those requiring

specific mention. If an extension is required, a request shall be made to

PERUPETRO up to two (2) times, for periods of one (1) Year each, and

PERUPETRO shall make arrangements with the General Hydrocarbons Bureau

for the corresponding Directorial Resolution. With this documentation, the

National Superintendence of Tax Administration shall authorize an extension of

the temporary import regime.

The procedure, requirements and guarantees necessary for the application of the

temporary import regime shall be subject to the regulations contained in the

General Customs Law, its Regulation and Amendments.

10.3 The importing of goods and supplies required by the Contractor for Exploration

activities in the exploration phase are exempt from all Taxes, including those

requiring specific mention, provided that they are contained in the list of goods to

which this entitlement applies, according to the provisions of Article 56 of Law Nº

26221. This entitlement shall be applied for the duration of the said phase.

10.4 Taxes levied on imports of goods and supplies required by the Contractor for the

Exploitation activities and Exploration activities in the exploitation phase shall be

borne by the importer.

10.5 PERUPETRO may inspect the goods imported either permanently or temporarily

under the provisions of this Clause, for the Exploration activities in the

exploration phase, in order to verify that such goods have been imported

exclusively for the Operations.

10.6 The Contractor must periodically inform PERUPETRO about the goods and

supplies which have been exonerated from Taxes, according to the provisions of

Article 56 of Law Nº 26221.

The Contractor may not re-export or use for other purposes, the goods and

supplies referred to in the previous paragraph, without the authorization of

PERUPETRO. Once such authorization is obtained, the Contractor must apply

the corresponding Taxes, in accordance with the provisions of Article 57 of Law

Nº 26221.

CLAUSE ELEVEN - FINANCIAL RIGHTS



11.1 State Guaranty

The Central Reserve Bank of Peru participates in the Contract, according to the

provisions of Law Nº26221 and Legislative Decree Nº668, to grant to the

Contractor on behalf of the State the guarantees indicated in this clause,

according with the regime in force on the Signing Date.

The guarantees mentioned in this clause also cover the assignee in the event of

assignment, subject to the Organic Hydrocarbons Law and to this Contract.

11.2 Exchange Rate Regime

The Central Reserve Bank of Peru, on behalf of the Peruvian State and in

compliance with the legislation in force at the Signing Date, guarantees that the

Contractor shall be subject to the exchange rate regime in force on the Signing

Date and, therefore, that the Contractor shall have the right to free possession,

availability, use and disposal, both internally and externally, of foreign currency,

as well as the freedom to exchange local currency into foreign currency on the

open market, under the terms and conditions set forth in this Clause.

The Central Reserve Bank of Peru, on behalf of the Peruvian State, guarantees

the Contractor (or each one of the enterprises which made up the Contractor) the

following, according to with the regime in force on the Signature Date.

a)



Free disposal for Contractor of up to one hundred per cent (100%) of the

foreign currency generated by its exports of Fiscalized Hydrocarbons,

which may be deposited in its bank accounts in Peru or abroad.



b)



Free disposal of and the right to convert freely into foreign currency, up to

one hundred per cent (100%) of the Local currency generated by the sale

of Fiscalized Hydrocarbons in the Peruvian market and the right to deposit

directly in its bank accounts in Peru or abroad, both foreign currency and

local currency.



c)



The right to maintain, control and operate bank accounts in any currency,

either in Peru or abroad, to exercise control over and enjoy free use of

such accounts and to maintain and freely dispose of the funds in such

accounts, abroad, with no restriction whatsoever.



d)



Notwithstanding, the above paragraphs the Contractor’s right to freely

dispose, distribute, remit or retain abroad with no restriction whatsoever, its

net annual profits determined in accordance with the law.



11.3 Availability and Conversion to Foreign Currency

It is agreed that the Contractor shall use the entities of the Peruvian financial

system to have access to foreign currency as referred to in paragraph b) of

section 11.2.

In case the foreign currency referred to in the previous paragraph cannot be

supplied, either wholly or in part, by the said entities, the Central Reserve Bank

of Peru shall guarantee the supply of the necessary foreign currency. For this

purpose, the Contractor must apply in writing to the Central Bank enclosing



photocopies of communications received from at least three (3) entities of the

financial system stating that it is impossible to supply, either wholly or in part, the

Contractor’s foreign currency requirements. The communications referred to

above shall be valid for two (2) Business Days after the date of issue.

Before 11:00 a.m. on the following Business Day after the above mentioned

documents have been submitted, the Central Bank shall communicate the

Contractor the exchange rate to be used for the purchase, which rate shall be

applied provided that the Contractor supplies the exchange value in Peruvian

currency on the same day.

If, for any reason, the exchange value in Peruvian currency is not provided by the

Contractor on the same day, the Central Reserve Bank of Peru shall inform the

Contractor on the following Business Day, with the same time limit, the exchange

rate to be used if the purchase takes place on that day.

Notwithstanding the above, if the Central Reserve Bank of Peru finds that the

foreign currency required cannot be supplied, either wholly or in part, by the

above mentioned entities, it shall request the Contractor to supply the Central

Bank with the corresponding Peruvian currency so that the foreign currency

purchase can be effected.

11.4 Modification of Exchange Rate Regime

The Central Reserve Bank of Peru, on behalf of the Peruvian State, guarantees

that the regime set forth in this clause shall continue to be applied to the

Contractor for the term of the Contract. If, for any reason, the exchange rate is

not determined by supply and demand, the exchange rate applicable to the

Contractor shall be:

a) If a unique official exchange rate is established having the same value for all

foreign currency and related operations, this rate shall be applied to the

Contract from the date on which it takes effect.

b) In case of multiple exchange rates are established, or different values are

given to a unique exchange rate, the exchange rate to be used for all the

Contractor’s operations shall be the highest with respect to the foreign

currency.

11.5 Application of other Legislation

The guarantees granted by the Central Reserve Bank of Peru to the Contractor

shall apply during the Term of the Contract.

The Contractor shall have the right to avail itself /themselves, totally or partially

when pertinent, of new exchange rate legislation or regulations issued during the

Term of the Contract , including those concerning exchange rate aspects not

considered in this clause, provided that they are general in nature or apply to

Hydrocarbon activities. Such a decision shall not affect the validity of the

guarantees covering aspects other than those considered in the new exchange

rate legislation or regulations of which the Contractor may have availed itself.

It is expressly agreed that the Contractor may, at any time, revert to the

guarantees it decided not to make use of temporarily and that reversion to such



guarantees does not create rights or obligations on the Contractor with respect to

the period during which it availed itself of the above mentioned new legislation or

regulations.

It is also agreed that reverting to such guarantees does not affect these or any

other guarantees, nor creates additional rights or obligations on the Contractor.

The Contractor’s decision to avail itself of new exchange rate legislation or

regulations, as well as any decision to revert the guarantees that it/(they)

decided not to make use of temporarily, must be communicated in writing to the

Central Reserve Bank of Peru and to PERUPETRO.

The provisions of this section do not affect the provisions of the first paragraph of

section 11.4.

11.6 Economic Information.

The Contractor shall provide monthly information to the Central Reserve Bank of

Peru relating to its economic activity, according with Article 74 of the Organic

Banking Law approved by Legislative Decree Nº26123.

CLAUSE TWELVE - EMPLOYEES

12.1 The Parties agree that at the end of the fifth Year from the Date of

Commencement of Commercial Production, the Contractor shall have replaced

all its foreign personnel by Peruvian personnel with equivalent professional

qualifications. Foreign personnel in management positions and those necessary

for specialized t technical work related to the Operations are exempted from the

above. The Contractor agrees to train Peruvian personnel in specialized

technical work in order to that Peruvian personnel may progressively replace

foreign personnel in such positions.

12.2 At the commencement of the Operations, and at the end of each calendar Year,

the Contractor shall provide PERUPETRO an statistical chart of the personnel

involved in the Operations, According to the form provided by PERUPETRO to

the Contractor.

CLAUSE THIRTEEN - ENVIRONMENTAL PROTECTION AND COMMUNITY

RELATIONS

13.1 The Contractor according to law, shall comply with the provisions and regulations

of the “Environmental Regulations for Hydrocarbon Activities” approved by

Supreme Decree Nº046-93-EM and its amendments; Legislative Decree Nº613,

the “Environment and Natural Resources Code” and other relevant regulations.

For such purpose, if pertinent, PERUPETRO will facilitate the coordinations

between the Contractor and the competent authorities.

13.2 The Contractor in coordination with PERUPETRO, each time it is necessary, will

divulge the scope of the Exploration and Exploitation activities derived from the

Contract to local authorities and native communities, located within the direct

influence of Contract Area,.

CLAUSE FOURTEEN - CONSERVATION OF HYDROCARBONS AND LOSS

PREVENTION



14.1 The Contractor must adopt all reasonable measures as to prevent any form of

loss of Hydrocarbons on the surface or in the subsoil, during Exploration and

Exploitation activities.

14.2 In the event of a spillage of Hydrocarbons on the surface either inside or outside

the Contract Area, that must be informed in accordance to the legal regulations in

force, the Contractor must inform PERUPETRO immediately, indicating the

estimated volume spilled and the measures taken to correct the causes thereof.

PERUPETRO has the right to verify the volume spilled and to investigate the

cause of the spillage.

If Hydrocarbons are lost on the surface either inside or out side the Contract Area

before the Production Fiscalization Point, due to serious negligence or fraud on

the part of the Contractor, the volume lost shall be valued in accordance with the

provisions of Clause Eight and included in the royalty calculation, notwithstanding

the provisions of section 13.1.

In the event of losses before the Production Fiscalization Point in circumstances

other than those described in the previous paragraph and which give rise to

compensation to the Contractor from third parties, the compensation obtained for

the hydrocarbons lost, multiplied by the factor resulted from dividing the amount

of the paid Royalty for the Fiscalized Hydrocarbons in the Production

Fiscalization Point to which correspond the lost hydrocarbons, during the

“fortnight” in which occurred the loss, between the value of such Fiscalized

Hydrocarbons, established according to section 8.2, during the same fortnight,

will be the amount the Contractor shall pay for the Royalty of the loss

hydrocarbons, at the latest the second working day of receiving such

compensation, without detriment of what is set forth in section 13.1.

CLAUSE FIFTEEN - TRAINING AND TECHNOLOGY TRANSFER

15.1 In compliance with the provisions of Article 29 of Law 26221, the Contractor is

obliged to provide PERUPETRO with the following sum, each calendar Year

during the Term of the Contract:

ANNUAL CONTRIBUTION

(US$)

------------------------------------a)

Until the calendar Year of the Date

of Commencement of Commercial Production

50,000.00

b)



The Year of the Date of Commercial Production onwards

Barrels per Day

From 0 to 10,000

From 10,001 to 30,000

From 30,001 to 50,000

More than 50,001



50,000.00

80,000.00

120,000.00

180,000.00



The first payment shall be made on the Signature Date and shall be determined

by multiplying the annual contribution corresponding to a) above by the fraction

resulting from dividing the number of Days remaining in the calendar Year in

progress by three hundred and sixty five (365).



The annual training contribution for b) above shall be that corresponding to the

range which includes the average daily production of fiscalized Hydrocarbons in

the previous calendar Year, which will be obtained by dividing the total volume of

the Hydrocarbons that were supervised during that Year by the respective

number of days.

The payments referred to in this section, with the exception of the first payment,

shall be made during the Month of January of each calendar Year.

To determine the Barrels/Day equivalent for Natural Gas, the following formula

shall be used: Barrels shall be equivalent to the volume of Natural gas expressed

in standard cubic feet divided by a factor of 5,626.

15.2 The Contractor shall comply with its obligations set forth in section 15.1 by

depositing its contributions in an account indicated by PERUPETRO.

PERUPETRO shall provide the Contractor a letter establishing its conformity to

the payment, within five (5) Business Days after receiving the contribution.

15.3 The Contractor and PERUPETRO shall agree on the execution of technical cooperation programs for research and development in subjects of mutual interest.

Within ninety (90) Days before the end of each calendar Year, the Parties shall

submit to the Supervisory Committee the projects to be implemented in the

following calendar Year.

15.4 Training programs established by the Contractor for its personnel, whether in

Peru or abroad, shall be notified to PERUPETRO.

CLAUSE SIXTEEN - ASSIGNMENT

16.1 If the Contractor agrees to assign all or part of its share in the Contract, and is

disposed to accept said offer, it shall notify PERUPETRO about the proposal.

This notification must be accompanied by a request for qualification of the

assignee as well as the complementary information necessary for obtaining

qualification as a petroleum contractor, in accordance with the law.

If PERUPETRO grants the qualification requested, the assignment shall take

place through an amendment to the Contract, carried out in accordance with the

law.

16.2 The Contractor shall assign, previous notification to PERUPETRO, according to

the law all or part of its share in the Contract to an Affiliate

16.3 The assignee shall provide all the guaranties and assume all the rights,

responsibilities and obligations of the assignor.

16.4 Each one of the enterprises which made up the Contractor shall be jointly

responsible for all the obligations derived from the Contract.

Without detriment of the above-mentioned, one of the enterprises which made up

the Contractor shall be designated as the “Operator” as per an “Operations

Agreement” to be signed within the Operator and the other enterprises which

made up the Contractor.



The Operator will represent the enterprises which made up the Contractor before

PERUPETRO in the fulfillment of all the Contractor’s obligations derived from the

Contract, for which they are jointly responsible before PERUPETRO, and to

exercise the rights and duties granted by the Contract to the Contractor and that

by its nature shall not be exercised in separate by each one of the mentioned

enterprises.

When a change of Operator occurs, within those enterprises conforming the

Contractor, such change shall be previously approved in written by

PERUPETRO, which shall not be denied without justification.

Each one of the enterprises which made up the Contractor are individually

responsible of their tax responsibilities and for such responsibilities derived from

these. At the same time, in relation to the financial rights established in eleventh

clause, those which separately and proportionally correspond to them.

16.5 In all cases of partial assignment of sharing percentages, within the same

enterprises which made up the Contractor, which not imply withdrawal of one or

more than one from the Contract or the partnership with third parties, Contractor

shall previously notify PERUPETRO. PERUPETRO will evaluate and determine

about the qualification granted; and the Contractor shall submit documents

including the new sharing percentages, for PERUPETRO’s approval, if it is

according to law and rules.

CLAUSE SEVENTEEN - ACT OF GOD OR FORCE MAJEURE

17.1 Neither Party shall be liable for failure to comply with an obligation, or partial, later

or defective compliance therewith, during any period in which that Party is

affected by Act of God or Force Majeure, provided it can prove that Act of God or

Force Majeure has prevented due compliance.

17.2 The Party affected by Act of God or Force Majeure shall notify the other Party

within five (5) Days of the event and provide evidence of how this has affected

compliance with the corresponding obligation. The other Party shall reply in

writing accepting, or not, the reason no later than fifteen (15) Days after receiving

the above mentioned notification. The lack of response from the notified Party

within the established term will be understood as an acceptation of the invoked

reason.

In the event of partial, late or defective compliance with an obligation due to Act

of God or Force Majeure, the Party obliged to comply shall do its utmost to

comply in accordance with the common intention of the Parties expressed in the

Contract, and the Parties must continue to comply with the contractual

obligations not affected by Act of God or Force Majeure.

The Party affected by Act of God or Force Majeure must resume compliance with

its contractual obligations and conditions within a reasonable period of time, after

the reason or reasons have disappeared, and must notify the other Party within

five (5) Days of disappearance of the reason. The Party not affected shall

collaborate with the affected Party in this respect.

In the event of strikes, stoppages or similar occurrences, one Party may not

impose a solution on the other against its will.



17.3 The period during which Act of God or Force Majeure affects compliance with

contractual obligations shall be added to the period envisaged for compliance

with those obligations and to the corresponding phase of the Contract and to the

Term of the Contact, if necessary.

If Act of God or Force Majeure affects compliance with any of the minimum work

programs referred to in section 4.6, the guaranty covering this period shall

remain in force without being executed for the period during which compliance is

affected by Act of God or Force Majeure or until PERUPETRO makes a decision

on the reasons invoked by the Contractor and, if any discrepancy arises

regarding the existence of Act of God or Force Majeure, until such discrepancy is

resolved. To this end the Contractor must extend or replace the guaranty as

applicable.

Likewise, until PERUPETRO makes a decision on the reasons invoked by the

Contractor, or while any discrepancy on the existence of Act of God or Force

Majeure remains unresolved, the period for completion of the minimum work

program shall be suspended. If PERUPETRO accepts the existence of the Act of

God or Force Majeure invoked by the Contractor, the latter shall resume

compliance with the minimum work program as soon as possible after the

disappearance of the Act of God or Force Majeure.

17.4 PERUPETRO shall take all necessary steps to obtain the aid and co-operation of

the appropriate government authorities to ensure the continuity and safety of the

activities covered by the Contract.

It is agreed that when either of the Parties, at its sole discretion, considers that its

personnel or that of its sub-contractors cannot operate in the Contract Area

because of risks to their personal safety, the other Party shall not dispute that

this constitutes Act of God or Force Majeure, provided that the provisions of

Articles 1314 and 1315 of the Civil Code have been complied with.

17.5 If the Contractor is affected by Act of God or Force Majeure preventing it from

complying with the minimum work program in progress, after twelve (12)

consecutive Months commencing on the date the Act of God or Force Majeure

occurs, the Contractor may terminate the Contract, giving PERUPETRO a thirty

(30) Days notice before relinquishing the Contract Area.

17.6 The provisions of this Clause Seventeen do not apply to obligations involving the

payment of sums of money.

CLAUSE EIGHTEEN ACCOUNTING

18.1 The Contractor shall keep its accounts according to the accounting principles and

practices established and accepted in Peru. It must also keep all books, detailed

registers and documentation necessary to account for and control its activities in

Peru and abroad, related to the purpose of the Contract, as well as to adequately

support the income, investments, costs, expenditure and Taxes incurred in each

financial year. No later than one hundred and twenty (120) Days after the

Signature Date, (each company making up) the Contractor shall provide

PERUPETRO with a copy of a “Manual of Accounting Procedures” which it

proposes to use for recording its operations.



The “Manual of Accounting Procedures” must contain, among other points, the

following:

a)



The language and currency in which the accounts are to be kept.



b)



Applicable accounting principles and practices.



c)



Accounts Plan and Structure, in accordance with the provisions of the

Companies Supervision Commission (CONASEV).



d)



Mechanisms for distinguishing accounts corresponding to the Contract and

other Hydrocarbons contacts from those related to other activities.



e)



Mechanisms for attributing revenues, investments, common expenditures

and costs to the Contracts, to other hydrocarbons contracts to related

activities and to other activities.



f)



Determination of income and expenditure accounts and the detailed

registers for the purpose of calculating the “Rt-1” Factor, as well as details

of the procedures described in Appendix “E” herein, if pertinent.



18.2 If what is established in the preceding literal f) is included in the “Manual of

Accounting Procedures”, PERUPETRO, no later than thirty (30) Days after

receiving it, shall inform the Contractor of its approval of the “Rt-1” Factor

accounting procedure referred to in such literal,,or, of its suggestions for

improving and/or extending this procedure. If no notification is received from

PERUPETRO within the said period, the procedure referred to in literal f) of

section 18.1 shall be considered as approved in its entirety.

Within the same period of thirty (30) Days after receiving the “Manual of

Accounting Procedures”, PERUPETRO may make suggestions and/or

observations to improve, extend or eliminate one or more of the other accounting

procedures set forth in the Manual. All changes to the approved “Rt-1” Factor

accounting procedure shall previously be submitted to PERUPETRO for approval

and for this purpose the procedure set forth in the first paragraph of this section

shall be followed.

In case of modifications in the sharing of the enterprises which made up the

Contractor, the new enterprises shall be obliged to submit its corresponding

“Manual of Accounting Procedures”. The enterprises which, after modifying the

participation, continue to be constituent part of the Contractor shall submit a

modification of their “Manual of Accounting Procedures”.

18.3 The Contractor accounts, financial statements and their support documentation

shall be made available to the authorized representatives of PERUPETRO for

inspection after prior notice has been given.

18.4 The Contractor shall carry out records of the assets , used in the Contract

Operations, according to the Peruvian accounting regulation in force and to the

accounting practices generally accepted within the world oil industry.

PERUPETRO may, at its own criteria, request the Contractor information about

its properties. At the same time, PERUPETRO may request the Contractor its



physical inventories schedule of the goods inherent to the Operations, classifying

them according to their ownership, the Contractor or third parties. PERUPETRO

may also request to take part in the inventories if considered convenient.

18.5 The Contractor shall submit within thirty (30) Days of publication, a copy of the

external auditors’ report on the financial statements corresponding to the

previous financial year. In case the Contractor has entered into more than one

contract with PERUPETRO, or performs activities different than those of the

Contract, it is obliged to carry out separated accounts with the purpose of

formulating financial statements for each contract and/or activity, and as a

consequence, the report executed by its external auditors shall include also

financial statements by each contract and/or activity.

18.6 Contractor shall submit, within the fifteen (15) Days of having submitted before

the National Superintendence of Tax Administration or any entity replacing it,

copy of all the documents enclosed to the income tax affidavit.

18.7 The agreement entered into the enterprises which made up the Contractor,

governing the relations between them and the capacities, rights and obligations

of the Operator, named “Operations Agreement”, amendments or extensions or

new “Operations Agreements” shall be delivered to PERUPETRO in Spanish

language, within the thirty (30) days following the Signing Date.

The enterprise designated as Operator will keep a special accounts system in

which shall be registered everything related to Operations.

CLAUSE NINETEEN - VARIOUS

19.1 If, on one or more occasions, either Party fails to invoke or insist on compliance

with any of the provisions of the Contract, or on exercising any of the rights

granted under this Contract, this shall not be construed as waiving such provision

or right.

19.2 In carrying out the Operations, the Contractor shall comply with all the resolutions

issued by the competent authorities in the exercise of their legal powers. The

Contractor is also obliged to comply with all the dispositions of the competent

authorities relating to defense and national security.

19.3 The Contractor has the right to free entry to and exit from the Contract Area.

19.4 In accordance with current legislation, the Contractor shall have the right to use

for the Operations timber, water, gravel and other construction materials found in

the Contract Area, respecting the rights of third parties if applicable.

19.5 Technical information from the Contract Area or other areas which the Contractor

wishes to acquire must be requested from PERUPETRO, which will provide it in

accordance with its Use and Transference Policy for PERUPETRO’s technical

information. For this purpose the Parties shall sign a “Letter of Agreement”.

19.6 If either Party fails to make payments within the agreed period, the amount of the

payment shall be subject to the following rates of interest commencing on the

Day after the date on which it should have been paid:

a)



For accounts expressed and payable in Peruvian currency, the applicable

rate shall be the local currency lending rate (TAMN) for loans of up to three



hundred and sixty (360) Days, published by the Banking and Insurance

Superintendent, or that which replaces it, applicable to the period between

the due date and the effective date of payment.

b)



For accounts expressed in Dollars, and payable in local currency or

Dollars, the applicable rate shall be the Prime Rate plus three (3)

percentage points, published by the Federal Reserve of the United States

of America, applicable to the period between the due date and the effective

date of payment or, failing this, the Parties shall agree another adequate

replacement rate.



19.7 The provisions of section 19.6 shall apply to all accounts between the Parties

arising from the Contract or any other agreement or transaction between the

Parties. Different arrangements for the payment of interest may be established

by written agreement between the parties. The provisions contained herein for

the application of interest shall not modify in any way the Parties’ legal rights and

means to ensure payment of sums owed.

19.8 In the event of a national emergency decreed by law, in virtue of which the State

must acquire Hydrocarbons from local producers, these shall be acquired at

prices according to the provisions of Clause Eight and payment shall be made

thirty (30) Days after delivery.

19.9 The Peruvian State, through the Ministry of Defense and Ministry of the Interior,

shall provide the Contractor, as far as possible, with all necessary security

measures for the Operations.

19.10 The Contractor shall release and, if necessary, compensate PERUPETRO and

the Peruvian State as the case may be, from any third party claim, legal action,

charge or lien resulting from the Operations and relations covered by the

Contract, and arising from any contractual or non-contractual relationship, except

those arising from the actions of PERUPETRO or the Peruvian State.

19.11 Contractor shall have free availability of the Hydrocarbons corresponding to it,

according to the Contract.

19.12 In the event of variation in the participation percentages of natural persons or

legal entities constituting the Contractor, and as long as there is no assignment

of contractual position, the Contractor shall notify PERUPETRO, before

performing the mentioned variation, in order that PERUPETRO evaluates and

declares itself about the qualification granted to the Contractor. If the participation

variation proceeds, Contractor shall enclose the documents reflecting the new

variation percentages.

(Se eliminó de está cláusula pero se puso en la 18)



CLAUSE TWENTY - NOTICES AND COMMUNICATION

20.1 All notices and communications related to the Contract shall be considered validly

delivered if in writing and with proof of delivery, or received by means of register

post or facsimile or other method agreed between the Parties on a Business Day

at the following addresses:



PERUPETRO:

PERUPETRO S.A.

General Management

Av. Luis Aldana Nº 320

Lima 41 - Peru.Fax: 475 7722 / 475 9644

Contractor:

----------------------------------------Fax: -------------Corporate Guarantor:

----------------------------------------Fax: -------------20.2 Either Party shall have the right to change its address or facsimile number for the

purposes of notices and communications, through a notice to the other Party at

least five (5) Business Days before the change takes effect.

The provisions of the first paragraph of this section also apply to the Corporate

Guarantor.

CLAUSE TWENTY ONE - SUBMISSION TO PERUVIAN LAW AND SETTLEMENT

OF DISPUTES

21.1 Submission to Peruvian Law

The Contract has been negotiated, drafted and signed in accordance with the

laws of Peru, and its content, execution and other consequences arising

therefrom are governed by the domestic legislation of the Republic of Peru.

21.2 Technical Conciliation Committee

The Technical Conciliation Committee shall meet no later than fifteen (15)

Business Days after being called by either Party and shall consist of three.(3)

members qualified in the subject under discussion. Each of the Parties shall

select one (1) member and the third by the members appointed by the Parties. If

either Party fails to nominate its representative within the time allowed, or if the

members nominated by them cannot agree on the third member within the time

allowed, or if the Technical Conciliation Committee fails to reach a decision within

the time allowed, either Party may submit the discrepancy to arbitration as set

forth in section 21.3 of the Contract.

The Parties shall agree on the procedures which are to govern this Committee no

later than sixty (60) Days after the Signature Date.

The decisions of the Technical Conciliation Committee shall be published no later

than thirty (30) Days after it has been installed and shall be binding until an

arbitration tribunal, if applicable, arrives at a final decision. Without affecting

compliance with the decision of the Technical Conciliation Committee, either

Party may resort to arbitration in accordance with the provisions of section 21.3,

within sixty (60) Days after the date of receipt of the above mentioned decision.



21.3 Arbitration Agreement

Any lawsuit, controversy, dispute or claim between the Contractor and

PERUPETRO arising from the Contract or concerning the interpretation,

compliance, resolution, termination, effectiveness or validity thereof, which

cannot be resolved by mutual agreement between the Parties must be resolved

through international arbitration, in accordance with the provisions of Article 68 of

Law Nº26221.

Arbitration shall take place in Spanish, in accordance with the provisions of this

clause. The arbitration shall be administered by the International Chamber of

Commerce, hereinafter referred to as ICC. In all matters not considered in this

clause, the arbitration shall be organized and carried out in accordance with the

ICC Arbitration Regulations in force on the Signature Date. In addition to this

clause and the said Regulation, the regulations contained in Law Nº 26572,

General Arbitration Law, or any legislation which may replace it, shall apply.

Three (3) arbitrators shall be appointed, one by each of the Parties and the third

by the arbitrators appointed by the Parties. If, after thirty (30) Days from the

appointment of the arbitrators by the Parties, these have not appointed the third,

either Party may request the ICC to make the appointment.

The matter in dispute shall be determined by the petition, its plea and eventually,

if applicable, by the counterclaim and its plea. At request of any of the Parties,

after fifteen (15) Working Days counted upon the corresponding summons, if

there is no reply to the petition or counterclaim, the arbitrators are empowered to

precise the dispute if any of the Parties denies to do it.

The arbitrators shall apply the domestic law of the Republic of Peru in arriving at

a solution to the lawsuit, controversy, dispute or claim submitted to arbitration.

Arbitration shall take place in the city of Lima, Peru, unless the Arbitral Court

could not meet in this city due to circumstances foreign to the will of its members.

Under these circumstances, the Parties shall agree other place to carry out the

arbitration. If after fifteen (15) Days, counted upon the summons of the

arbitrators impediment to the Parties, these would not reach an agreement about

the new place to carry out the arbitration, the CCI will establish the place.

If the amount at issue exceeds five hundred thousand and 00/100 Dollars

(US$500,000.00) and one of the Parties considers that the arbitration should take

place in another city and country, it shall be sufficient to state this and propose

another city and country in the first written communication notifying the other

Party of the decision to resort to arbitration. If the Parties have not reached

agreement on an alternative location for the arbitration after fifteen (15) Days

from the above mentioned notification, the ICC shall decide where the arbitration

is to be held.

If there is a discrepancy over the amount at issue, or if the amount cannot be

determined, it is the responsibility of the ICC to fix the place where the arbitration

is to be held, taking into account the provisions of the previous paragraph.

The Parties waive all rights of appeal, annulment or protest against the decision

of the arbitrators. An appeal for annulment against the decision shall only be



allowed under those circumstances envisaged by law. The Parties declare that

the arbitrators’ decision is final and binding and shall be acted upon immediately.

The Parties bind themselves to do everything necessary to ensure that the

arbitration process is carried to completion and execution.

The maximum duration of the arbitration process shall be one hundred and

eighty (180) Business Days, commencing on the date of the Act of installation of

the arbitration tribunal, or other similar Act. If an extension to this period is

required, the provisions of the ICC Arbitration Regulations shall apply.

If the arbitrators’ decision is reached outside Peru, acknowledgement and

execution thereof shall be governed by the “Convention on the

Acknowledgement and Execution of Foreign Arbitration Decisions - New York

10th June 1958” (the New York Convention) or the “Interamerican Convention on

International Commercial Arbitration - Panama, 30th January 1975” (the Panama

Convention), or the provisions concerning this matter of Law Nº 26572, General

Arbitration Law, or any legislation which may replace it, as determined by the

Party requesting acknowledgement and execution of the decision.

Whilst arbitration is taking place, the Parties shall continue to comply with their

contractual obligations, as far as possible, including those subject to the

arbitration process. If the arbitration concerns compliance with the contractual

obligations covered by the guaranties referred to in section 3.10, these

guaranties cannot be executed and must be maintained in force in a period that

exceeds in thirty (30) during the arbitration process.

During the development of the arbitration the Parties shall continue fulfilling their

contractual obligations, as it may be possible, including those which are matter of

arbitration.

Without detriment of the above-mentioned, if the arbitration matter is related to

the fulfillment of the contractual obligations guaranteed with the guaranties to

which are referred to in section 3.10, the calculation of the respective term will

remain in suspense, and the guaranties could not be executed. Those guaranties

shall be maintained un force during the arbitration proceeding. For such purpose

the Contractor shall extent or replace such guaranties, as it may be necessary.

21.4 The Parties waive the right to claim through diplomatic channels.

21.5 This Contract is drafted and interpreted in Spanish, and the Parties agree that this

is the only and the official version.

CLAUSE TWENTY TWO - TERMINATION.

22.1 Termination of this Contract is governed by the provisions contained herein and,

additionally, by the regulations contained in Law Nº 26221; and, regarding

anything not envisaged therein, by the regulations contained in the Civil Code.

Except in the cases envisaged in section 22.3, when either Party fails to comply

with any of the obligations set forth in the Contract for reasons other Act of God

or Force Majeure, the other Party may notify said Party of the failure to comply

and its intention to terminate the Contract after sixty (60) Days if the non



compliance is not made good within this period or the first Party cannot show that

it is making good the non compliance to the satisfaction of the other Party.

If the Party which receives a notification of non compliance questions or denies

the existence of such non compliance, that Party may refer the matter to

arbitration in accordance with the provisions of Clause Twenty One, within a

period of thirty (30) Days after receiving the notification. In this case, the above

mentioned period of sixty (60) Days shall be suspended until the arbitrators’

decision has been communicated to the Parties; the Contract shall be terminated

if the non compliance is confirmed and is not made good within the said period.

The Contract may terminate before the end of its Term, by express agreement

between the Parties.

22.2 On termination of the Contract, all rights and obligations of the Parties specified in

the Contract shall cease entirely and the following shall be taken into account:

a)



The rights and obligations of the Parties derived from this Contract before

the date of termination should be respected; including, within others, the

right of the Contractor over the hydrocarbons extracted and the guaranties

established in the Contract; and



b)



In the event of non compliance with and responsibility for any of the

obligations specified in the Contract, incurred before the date of termination

by either Party these shall be made good by the infringing Party, with the

exception of the obligations specified in the Contract which cease on

termination thereof.



22.3 The Contract shall terminate as by operation of law and without prior proceedings

in the following cases:

22.3.1



If the Contractor has failed to comply with the execution of the

minimum work program for any period of the exploration phase after

making use of the extensions contemplated in section 3.4, if

appropriate, and without giving satisfactory reasons to PERUPETRO,

unless the provisions of sections 4.7 and 4.13 apply.



22.3.2



If at the end of the exploration phase, or retention period, whichever

occurs last, no declaration of Commercial Discovery has been made.



22.3.3



In the specific cases set forth in sections 3.10, 4.2 and 17.5.



22.3.4



If the Contractor has been declared insolvent, bankrupt, dissolved or

Liquidated, and the other enterprise or other enterprises that are part

of the Contractor, or a third party duly qualified by PERUPETRO do

not take over the participation in the Contract of the enterprise

dissolved, liquidated or bankrupted within the fifteen business days.



22.3.5



If the corporate guaranty(ies) referred to in section 3.11 are not in

force or should the insolvency, dissolution, Liquidation or bankruptcy

of any entity that granted the guarantee mentioned in section 3.11

have been declared and said guarantee has not been assumed by a

third party and accepted by PERUPETRO.



22.3.6



By order of an arbitration tribunal declaring, in the cases set forth in

section 22.1, non compliance and this is not made good in

accordance with the provisions of that section, or by order of an

arbitration tribunal which declares the Contract terminated.



22.3.7



At the end of the Contract Term.



22.4 In accordance with the provisions of Article 87 of Law Nº 26221, the Contract

may also be terminated when activities cease permanently as a result of applying

the “Environmental Regulations for Hydrocarbons Activities” approved by

Supreme Decree Nº 046-93-EM and its modifications.

22.5 If the Contractor or any of the entities providing the guaranty referred to in section

3.11 seeks judicially protection through the Courts against the actions of

creditors, PERUPETRO may terminate the Contract if it deems that its rights

under the Contract are not duly protected.

22.6 At the termination of the Contract, the Contractor shall return to the Peruvian

State, through PETROPERU, at no charge whatsoever to the latter, unless it

does not require them, the buildings, energy installations, encampments, means

of communication, pipelines and other production assets belonging to the

Contractor, which will allow the Operations to continue. Such assets must be

returned in good condition, well maintained and in working order, taking into

account fair wear and tear.

If joint Oil Production, Non-associated Natural gas and/or Non-associated Natural

gas and Condensates is taking place, at the end of the period established in

section 3.1 for the Petroleum exploration phase, the Contractor shall return to the

Peruvian State, through PETROPERU, at no charge whatsoever to the latter,

unless it does not require them, the assets and installations used for Oil

Production which are not necessary for the Production of Non-associated Natural

gas and/or Non-associated Natural gas and Condensates. Such assets must be

returned in good condition, well maintained and in working order, taking into

account fair wear and tear.

The assets and installations retained by the Contractor for the Production of Nonassociated Natural gas and/or Non-associated Natural gas and Condensates

which have also been utilized in Oil Production, even when these continue as the

Contractor’s property, shall be used in the production of both products and an

agreement shall be entered into between the Parties to this effect.

If the Contractor has been using the assets and installations described in the first

paragraph of this section, but they are not devoted exclusively to the Operations,

that is, they have also been used for operations in other areas covered by a

current contract for the Exploration and Exploitation of Hydrocarbons in Peru, the

Contractor shall continue to own and make use of such assets.

22.7 For the purpose of complying with the provisions of section 22.6, during the last

Year of the Contract Term, the Contractor shall carry out those actions and enter

into those agreements required by PERUPETRO and aimed at ensuring an

ordered and uninterrupted transition of the Operations being carried out at the

date of termination of the Contract.



ANNEX “A”

BLOCK …… DESCRIPTION

LOCATION

LOCATION

Block …… is located offshore, Pacific Ocean, in front of ...........…………Department,

and its boundaries are shown in Annex “B” (map) and described as follows:

REFERENCE POINT

The Reference Point (P.R.) is the Geodesic Station..........,known as ……..located in

the Province of ………….., Department of ……………..

DEPARTURE POINT

From Station ....... (P.R.), measure …………….. m. West and then ……………m. North

to arrive at Point ………., which is the Departure Point (P.P.) on the perimeter of the

Block.

CONFIGURATION OF THE BLOCK

Description of each corner

ADJOINING AREAS

To the North, ……..

To the South, ……..

To the West, ……..

To the East, ……..

LIST OF COORDINATES OF REFERENCE POINT AND CORNERS OF BLOCK

POINT



EXTENSION



GEOGRAPHICAL

COORDINATES



PLANE U.T.M.

COORDINATES



ANNEX “B”

BLOCK MAP



ANNEX “C-1”, “C-X”,

LETTER OF GUARANTY FOR THE .............. PERIOD OF THE MINIMUM WORK

PROGRAM

LETTER OF GUARANTY Nº

Lima

Messrs.

PERUPETRO S.A.

Dear Sirs,

We, ……(entity of the financial system)…… hereby stand as joint and several

guarantors

with ……………………….., hereinafter referred to as the Contractor, to PERUPETRO

S.A.,

hereinafter referred to as PERUPETRO, for the sum of ………. and 00/100 Dollars

(US$………..) in order to guarantee faithful compliance of the Contractor’s obligation to

............................................................................................... under the minimum work

program for the ......... period, contained in sub-section 4.6..... of Clause Four of the

License Contract for the Exploration and Exploitation of Hydrocarbons in the Block …,

entered into with PERUPETRO, (hereinafter referred to as the Contract).

The obligation assumed by ……(entity of the financial system)…… under this

Guaranty is limited to paying PERUPETRO the sum of …………. and 00/100 Dollars

(US$……….) against their request for payment.

1.



This is an irrevocable, unconditional, joint and several guaranty, without

excussio, automatically executable and payable, whilst it is in force, against

presentation of a notarial letter sent by PERUPETRO to ……(entity of the

financial system)……, requesting payment of …………… and 00/100 Dollars

(US$ …………)



2.



This guaranty shall expire on the ……………, unless ……(entity of the financial

system)…… has received, prior to this date, a letter from PERUPETRO,

absolving ……(entity of the financial system)…… and the Contractor from all

responsibility under this guaranty, in which case this guaranty shall cease to be

effective from the reception date of the said letter from PERUPETRO.



3.



Any delay on our part in honouring this guaranty in your favor shall accrue

interest equivalent to the Foreign Currency Lending Rate (TAMEX), used by

financial institutions and published by the Banking and Insurance

Superintendent, applicable during the period of the delay, or any rate which may

replace it. Interest shall be calculated from the reception date of the notarial

request sent by PERUPETRO to ……(entity of the financial system)…….

No claim whatsoever regarding this guaranty may be made after the date of

expiry, or the date on which it ceases to be effective, and ……(entity of the

financial system)…… and the Contractor shall be absolved of all responsibility

and obligation arising from this guaranty.



Yours faithfully,

……………………………….

(entity of the financial system)



ANNEX “D”

CORPORATE GUARANTY

Messrs.

PERUPETRO S.A.

Luis Aldana 320

Lima 41

PERU

In accordance with the provisions of section 3.11 of the License Contract for the

Exploration and Exploitation of Hydrocarbons in Block 70, to be entered into between

PERUPETRO S.A. (“PERUPETRO”) and ……………(“Contractor”), we, ……., hereby

stand as joint and several guarantors with …….., to PERUPETRO, in order to

guarantee compliance with all its obligations assumed under the minimum work

program described in section 4.6 of the Contract of each one of the annual Exploration

programs, however amended or changed, submitted by the Contractor to

PERUPETRO in compliance with section 5.3 of the Contract.

This guaranty shall remain in force while the obligations derived from the Contract are

enforceable. For the purposes of this Guaranty, ……………….., submits itself to the

laws of the Republic of Peru, expressly waives all claims through diplomatic channels

and submits itself to the arbitration procedure for the solution of disputes set forth in

Clause Twenty One of the Contract.

Yours faithfully,

Company

(Authorized Officer).



ANNEX “E”

ACCOUNTING PROCEDURES

1.



GENERAL PROVISIONS



1.1



PURPOSE

The purpose of this Annex is to establish accounting rules and procedures

enabling the Contractor’s income, investments, expenditure and operating costs

to be determined for the purposes of calculating the “Rt-1” Factor referred to in

Clause Eight of the Contract.



1.2



DEFINITIONS

The terms used in this Annex which have been defined in Clause One of the

Contract shall have the meaning assigned to them in that clause. The accounting

terms included in this Annex shall have the meanings given to them by the

accounting rules and practices accepted in Peru and in the international

Petroleum industry.



1.3



ACCOUNTING RULES



a)



The Contractor shall keep its accounts in accordance with current legislation and

the accounting principles and practices established and accepted in Peru and in

the international Petroleum industry, and in accordance with the provisions of

these Accounting Procedures.



b)



The “Accounting Procedures Manual” referred to in section 18.1 of the Contract

must take into account the stipulations of this Appendix.



2.



ACCOUNTS LEDGERS, INSPECTION AND ADJUSTMENTS



2.1



SYSTEM OF ACCOUNTS

In order to determine the “R t-1” Factor, the Contractor shall keep a special system

of accounts to record, in Dollars, income and expenditure related to the Contract

Operations. This system shall consist of two main accounts: the “R t-1” Factor

Income Account, and the “R t-1” Factor Expenditure Account.



2.2



EXCHANGE RATE

Transactions carried out in Peruvian currency shall be recorded using the sales

exchange rate current on the Day in which the expenditure was effected or the

income received. Transactions carried out in Dollars and valuation of the

production shall be recorded in accordance with the provisions of point 3.3

herein.



2.3



SUPPORT DOCUMENTATION

The Contractor shall keep the original documentation supporting the charges

made to the “R t-1” Factor accounts.



2.4



“Rt-1” FACTOR STATEMENT OF ACCOUNT

During the exploration phase, the Contractor shall submit to PERUPETRO, no

later than thirty (30) Days after the end of each period, a Month per Moth

Statement of Account for the “Rt-1” corresponding to such period.

If Contractor chooses to apply the methodology described in section 8.3.2, for the

royalty calculation, he shall submit PERUPETRO, within thirty (30) Days

following the date of Declaring Commercial Discovery, a detailed statement

Month per Month of Accounts for the R t-1 Factor Income and Expenditure

corresponding to the period elapsed since last statement submitted until July or

December of the preceding year, as it may correspond.

Henceforth, Contractor shall submit to PERUPETRO, within the fifteen (15) Days

following the end of January and July of each calendar year, a detailed month

per month Statement of Accounts for the Rt-1 Factor Income and Expenditure,

corresponding to the preceding semester.

a)



Statement of Account of “Rt-1” Factor Income

The Month per Month Statement of Account of the “R t-1” Factor Income

includes the valuation of Fiscalized Production corresponding to the

reported semester. It shall also include, in detail and classified according to

nature, all transactions by which the Contractor has received income,

including the dates on which this income was effectively received, a short

description of the transaction, the number of the accounts receipt, amount

in Dollars or in local currency and in Dollars if the income is received in

local currency, and the corresponding exchange rate.



b)



Statement of Account of “R t-1” Factor Expenditure

The Statement of Account of the “R t-1” Factor Expenditure shall contain,

in detail and classified by nature, all transactions by which the Contractor

has made payments including the dates on which these payments were

effectively made, a short description of the transaction, the number of the

accounts receipt, amount in Dollars or in local currency and in Dollars if the

income is received in local currency, and the corresponding exchange rate.



2.5



INSPECTION OF THE ACCOUNTS AND ADJUSTMENTS

a)



The account ledgers and original documentation supporting the

transactions included in each Monthly Statement shall be placed at the

disposal of authorized representatives of PERUPETRO, during office

hours, for inspection, whenever required.

Inspections of the account ledgers and supporting documentation shall be

carried out in accordance with generally accepted auditing rules, including

sampling procedures if necessary.



b)



The Statements of Account of the “R t-1” Factor shall be considered to

have been accepted if PERUPETRO makes no written objection within a

maximum period of twenty four (24) Months commencing on the date they

were submitted to PERUPETRO.



The Contractor must reply, providing documents, to comments made by

PERUPETRO no later than three (3) Months after receipt of the

communication in which PERUPETRO states its comments. If the

Contractor fails to do so within the above mentioned period,

PERUPETRO’s comments shall be taken as accepted.



3.



c)



Any discrepancy arising from an inspection of the accounts must be

resolved by the Parties within a maximum period of three (3) Months

commencing on the date on which PERUPETRO receives the Contractor’s

reply. At the end of this period, the discrepancy shall be put to the

Supervisory Committee which shall proceed in accordance with the

provisions of section 7.4 of the Contract. If the discrepancy persists, the

Parties may agree that it be examined by a firm of external auditors

previously accepted by PERUPETRO, or that the procedures set forth in

section 21.3 of the Contract be followed. The decision of the external

auditors or arbitration tribunal shall be final.



d)



If an inspection of the accounts establishes that in a given Month a

different “R t-1” Factor to that which was actually used should have been

applied, every adjustment shall accrue interests as it is set forth in section

8.5 of the Contract.



REVENUES AND EXPENDITURES IN THE “R t-1” FACTOR ACCOUNTS

3.1



REVENUES

The following shall be recognized as revenues and recorded in the “R

Factor Revenue Account:



t-1”



a)



The valuation of Fiscalized Hydrocarbon Production in accordance

with Clause Eight of the Contract.



b)



Sales of assets acquired by the Contractor for Contract Operations,

the cost of which was recorded in the “R t-1” Factor Expenditure

Account.



c)



Services rendered to third parties involving personnel whose

remuneration and benefits are recorded in the “R t-1” Factor

Expenditure Account and/or involving goods whose acquisition cost

has been recorded in the “R t-1” Factor Expenditure Account.



d)



Revenues from letting assets belonging to the Contractor, whose

acquisition cost has been recorded in the “R t-1” Factor Expenditure

Account or sub-letting of goods whose hire is charged to the “R t-1”

Factor Expenditure Account.



e)



Compensation received from insurance policies taken out in relation

to Contract activities for damaged goods, including compensation for

loss of profits. The income obtained as a result of a Hedging is not

considered.



f)



Other revenues representing credits applicable to charges to the “R t1” Factor Expenditure Account.



3.2



EXPENDITURES

From the Date of Signing, all investments, expenditures and operating

costs which are duly supported by a corresponding receipt shall be

recognized. This recognition shall nevertheless be subject to the following

limitations:

a)



Regarding personnel:

The remuneration and benefits granted to Contractor’s personnel

assigned permanently or temporarily to the Operations. For such

purpose the Contractor shall put at disposal of PERUPETRO, as it

may deem convenient, the payroll and the internal personnel policy of

the enterprise.

In general, all remuneration and benefits of the Contractor’s

operations and administrative personnel incurred in the execution of

the Operations shall be recorded, classified according to their nature.

If the Contractor carries out activities other than those of the

Contract, the cost of personnel assigned temporarily or partially to

the Operations shall be charged to the Expenditure Account in

accordance with the provisions of line h) of this point 3.2.



b)



Regarding services of Affiliates:

When services are provided by Affiliates, the prices charged shall be

competitive with those of other companies.



c)



Regarding materials and equipment:

Materials and equipment acquired by the Contractor shall be recorded in

the “R t-1” Factor Expenditure Account in accordance with the following

points:

-



New materials and equipment (condition “A”)

Condition “A” includes new materials and equipment which can be

used without any reconditioning whatsoever and they shall be

recorded at the price appearing on the corresponding commercial

invoice plus those costs generally accepted in accounting practice,

including additional importing costs if applicable.



-



Used materials and equipment (condition “B”)

Condition “B” includes those materials and equipment which,

although not new, can be used without any reconditioning

whatsoever and they shall be recorded at seventy five per cent (75%)

of the prices being quoted at that time for new materials and

equipment, or at the purchase price shown on the corresponding

commercial invoice, whichever value is lower.



-



Materials and equipment (condition “C”)

Condition “C” includes those materials and equipment which can be

used for their original function after adequate reconditioning and they

shall be recorded at fifty per cent (50%) of the prices being quoted at

that time for new materials and equipment, or at the purchase price



shown on the corresponding commercial invoice, whichever value is

lower.

d)



Regarding freight and transport costs:

Only travel expenses for Contractor’s personnel and their families shall be

recognized, as well as transport costs for personal and household effects,

according to the internal policy of the enterprise.

In transport of equipment, materials and supplies necessary for the

Operations, the Contractor shall avoid payment of “false freights”. If this

occurs, recognition of such payments shall require PERUPETRO’s express

acceptance in writing.



e)



Regarding insurance:

Premiums and net costs of insurance taken out wholly or partially with

Affiliates of the Contractor shall be recognized only insofar as they are

competitive compared to insurance companies which are unconnected to

the Contractor.

It shall not be considered payments performed as a results of Hedging

contracts.



f)



Regarding taxes:

Only taxes paid in relation to activities inherent in the Contract shall be

recognized.



g)



Regarding expenditure on research:

Research expenditure for the development of new equipment, materials,

procedures and techniques to be used in the search for, development and

production of Hydrocarbons, as well as expenditure on improvement to

these, shall be recognized after approval in writing has been obtained from

PERUPETRO.



h)



Regarding the proportional assignment of general expenditure:

If the Contractor is carrying out activities other than those of the Contract or

has entered into more than one contract with PERUPETRO, a proportion of

the costs of technical and administrative personnel, the costs of

maintaining administrative offices, warehousing costs and expenditure as

well as other indirect costs and expenditure shall be charged to the “R t-1”

Factor Expenditure Account in accordance with a policy previously

proposed by the Contractor and accepted by PERUPETRO.



3.3



TIME OF RECORDING

a)



Income corresponding to the valuation of Fiscalized Hydrocarbons

Production in a given calendar Month, shall be recorded as income for the

calendar Month in which it was monitored.



b)



The income referred to in lines b), c), d), e) and f) of point 3.1 herein, shall

be charged to the Income Account at the moment at which it is effectively

received.



c)



Expenditures shall be recorded at the moment at which the corresponding

payments are made.



4. UNRECOGNISED INCOME AND EXPENDITURE

4.1



4.2



UNRECOGNISED INCOME

The following shall not be recognized as income for the purposes of calculating

the “R t-1” Factor:

a)



Financial income in general.



b)



Income received for services rendered by the Contractor or sales of

Contractor’s assets occurring before the Signing Date of the Contract.



c)



Income received for activities not related to the Contract Operations.



UNRECOGNISED EXPENDITURE

Payments made for the following concepts shall not be recognized as

expenditures for the purposes of calculating the “R t-1” Factor:

a)



Investments, expenditure and costs incurred by the Contractor before the

Signature Date.



b)



Interest paid on loans, including interest on suppliers’ credit.



c)



Financial costs in general.



d)



The cost of inventories in the event of a transfer of Contractor’s rights in

virtue of the Contract.



e)



Depreciation and amortization of assets.



f)



Amounts payable as a result of failing to comply with contractual

obligations, as well as fines, penalties and compensation payments

imposed by the authorities.



g)



Fines, surcharges and adjustments derived from failure to comply with

prompt payment of taxes currently in force in Peru.



h)



Income Tax applicable to the Contractor and Tax on to profits available to

the parent company abroad, if applicable.



i)



Value Added Tax and Municipal Promotion Tax, unless it is an expenditure

according to Income Tax Law.



j)



Donations in general, except those approved by PERUPETRO.



k)



Publicity expenses, except those approved by PERUPETRO.



l)



Costs and expenditures incurred for transport and sale of Hydrocarbons

beyond the Production Fiscalization Point.



5.



ll)



Investment in facilities for the transportation and storage of Hydrocarbons

produced in the Contract Area, after the Production Fiscalization Point.



m)



Other investments and expenditures not connected with the Contract

Operations.



REVIEW OF THE ACCOUNTING PROCEDURES

The provisions of these Accounting Procedures may be modified by agreement

between the Parties, indicating the date on which such modifications take effect,

without detriment of the corresponding regulations.



ANEXO "F"

EXPLORATION WORKING UNITS

Table of Equivalencies



TABLE OF EQUIVALENCIES OF THE

EXPLORATORY WORKING UNITS - UTE

Geophysics

Activity

UTE – Jungle UTE

Northwest

Seismic 2D – Km-Onshore

1,00

0,50

Seismic 3D – Km2 -Onshore

3,00

1,30

Reprocessing 2D – Km

0,02

0,02

Gravimetry – Km

0,02

0,02

Magnetometry – Km

0,02

0,02

Studies per period

20

20

Exploratory Wells

Depth in meters – m

0 – 1000

0,10 x m

0,045xm

1001 – 2000

0,13 x m

0,050xm

2001 – 3000

0,18 x m

0,055xm

3001 – 4000

0,22 x m

0,065xm

4001 upwards

0,25 x m

0,075xm



UTE

Offshore

0,20

1,00

0,02

0,02

0,02

20



0,10 x m

0,13 x m

0,18 x m

0,22 x m

0,25 x m



Notice: To the effect of valuation of the guaranties established in section 3.10, it shall

be used the following equivalence: 1UTE = US$ 5,000