Iraq

21/06/2008

English

The initial contract area covers the Sangaw South Block and extends over an area of 354 square kilometers as detailed and indicated on the map attached in Annex A

Korea National Oil Corporation

Sangaw South Block

Sangaw South Block

Petroleum

Ministry of Natural Resources, Kurdistan Regional Government of Iraq

The exploration period shall be for an initial term of 5 contract years extendable on a yearly basis up to a maximum period of 7 contract years. The development period for a commercial discovery of crude oil and any associated natural gas shall be 20 years beginning on the declaration of a commercial discovery by Korea National Oil with an automatic right to a 5 year extension period. The development period for the commercial discovery of non-associated natural gas shall be 20 years commencing on the declaration of such commercial discovery by Korea National Oil with an automatic right to a 5 year extension period. If commercial production from a production area is still possible upon the expiration of a development period, then Korea National Oil shall be entitled to an extension of such development period under the same terms as contained in the contract. The term of the extension shall be 5 years for crude oil and any associated natural gas and 5 years for non-associated natural gas.

Production Sharing Contract

Koreas National Oil shall conduct and submit an environmental impact assessment to the government within 6 months after the effective date.

Korea National Oil shall contribute US$ 150,000 in advance each contract year during the exploration period and US$ 300,000 in advance for each contract year during the development period into the environment fund established by the government for the benefit of the natural environment of the Kurdistan region, pursuant to the Kurdistan region Oil and Gas Law. During the performance of petroleum operations, Korea National Oil shall take reasonable measures to ensure that it, its subcontractors and agents attend to the protection of the environment and prevention of pollution in accordance with prudent international petroleum industry practice and any then applicable Kurdistan region law. Korea National Oil shall also take reasonable precautions and measures in accordance with prudent international petroleum industry practice in similar physical and ecological environments to prevent any pollution which may arise directly as a result of the petroleum operations and to protect the environment (flora and fauna), water sources and any other natural resources. Korea National Oil shall, in accordance with prudential international petroleum industry practice in similar physical and ecological environments, respect the preservation of property, agricultural areas and fisheries when carrying out petroleum operations. Korea Natural Resources shall take reasonable measures to minimize any adverse material impact on national parks and natural reserves which may arise directly as a result of petroleum operations. The government represents and warrants that as at the effective date there are no national parks, nature reserves or other protected areas located in whole or in part within the contract area where Korea National Oil shall not be entitled to carry out petroleum operations. The government also covenants that it shall not designate or create any national parks, natural reserves or other protected areas located in whole or in part within the contract area during the term of the contract.

For the execution of petroleum operation under this contract Korea National Oil shall have the right to freely use water and any other natural resources located inside or outside the contract area for the petroleum operations. Korea National Oil shall have the right in the Kurdistan Region to take or use any water necessary for the Petroleum Operations provided it does not damage any existing irrigation or navigation systems and that land, houses or watering points belonging to third parties are not deprived of their water.

The government has the right to request an audit of Korea National Oil's accounts with regard to each year within a period of 2 years following the end of such year. The government also has the right to retain an auditor of international standing familiar with the international petroleum industry's accounting practice to undertake or assist the government in auditing the accounts of Korea National Oil. The cost of retaining the auditor shall be borne by Korea National Oil and shall be treated as petroleum cost for the purpose of cost recovery. On the basis of data and information available, if the government considers that Korea National Oil made a material mistake or there is any irregularity in its accounts and considers that any correction or adjustments should be made, the government shall make any audit exception in writing and notify Korea National Oil. Failure to give this written exception within the specified time shall be deemed to be an acknowledgment of the correctness of Korea National Oil's account. Where an audit exception is issued by the government, Korea National Oil shall have 60 days to make the necessary corrections or amendments or to present its comment to the government. Within 30 days of Korea National Oil's response, the government shall notify Korea National Oil in writing of its position on the corrections, adjustments or comments. If thereafter a disagreement exists, the dispute shall be settled by referring the dispute for expert determination.

Korea National Oil shall pay to the government the following bonuses: 1) a signature bonus of US$ 5 million on or before the effective date; 2) a capacity building bonus of US$ 45 million on or before the effective date; 3) if a crude oil commercial discovery is made, a crude oil production bonus, to be paid with the holder of the government interest pro rata the participation interest under the contract, as follows: a) US$ $2.5 million at the start of the first production of crude oil, b) US$ 5 million when the production of crude oil reaches a cumulative amount of 10 million barrels, c) US$ 10 million when production of crude oil reaches a cumulative amount of 25 million barrels, and d) US$ 20 million when production of crude oil reaches a cumulative amount of 50 million barrels; and 4) if there is a non-associated natural gas discovery, a non-associated natural gas production bonus, to be paid with the holder of the government interest pro rata the participation interest under the contract, as follows: a) US$ 2.5 million upon the start of first production of non-associated natural gas; b) US$ 5 million when production of non-associated natural gas reaches a cumulative amount of ten million barrels of oil equivalent; c) US$ 10 million when production of non-associated natural gas reaches a cumulative of 25 million barrels of oil equivalent; and d) US$ 20 million when production of non-associated natural gas reaches a cumulative amount of 50 million barrels of oil equivalent.

Without prejudice to other exemptions provided under the contract, for the duration of the contract, Korea National Oil, its affiliates and subcontractors shall be exempted from all taxes as a result of its income, assets and activities under the contract. The government shall indemnify Korea National Oil, upon demand, against any liability to pay any taxes assessed or imposed on it which relate to this exemption.

Korea National Oil shall be subject to corporate income tax on its income from petroleum operations and this shall be deemed to be inclusive and in full and total discharge of any tax on its income, receipts, revenues, gains or profit. The share of the profit petroleum to which the government is entitled in any calendar year shall be deemed to include a portion representing the corporate income tax imposed upon and due by each contractor, and which will be paid directly by the government to the tax authority on behalf of each contractor.

The rate of the corporate income tax applicable to Korea National Oil shall be the generally applicable rate prescribed in the law of taxation under the Kurdistan region, as may be amended from time to time or substituted in respect of petroleum operations but it shall not exceed 40%. The parties acknowledge and agree that at the effective date, the corporate income tax rate is 15% for all net taxable profits. The parties agree that the Korea National Oil's corporate income tax shall be calculated on its net taxable profit under the contract.

The government shall have the option of third party participation which is the option of assigning an aggregate of 20% of undivided interest in the petroleum operations under the contract to a third party as a contractor. The exercise of the option shall assign and novate all the other rights, duties, obligations and liabilities of Korea National Oil of an aggregate of 20%. The government may exercise this option at any time before the date 8 months after the effective date by notifying Korea National Oil, in writing, of a company which has adequate resources and capacity to discharge the obligations of a contractor under the contract and a joint operating agreement. If the government fails to notify Korea National Oil of a third party participant in accordance with the contract and/or if the third party participant does not complete the exercise of the option under the contract within 60 days following the assignment of the interest by the government, the third party interest and/or that part of the unassigned third party interest shall be held by a public company (wholly owned by the government) to be identified by the government and which shall act as a third party participant under the contract. Upon signing a binding and enforceable instrument of assignment and novation, the third party participant shall pay to Korea National Oil an amount equivalent to the proportion of petroleum costs incurred as at the date of such payment attributable to the interest held by the third party participant. This petroleum costs shall not include signature bonus or capacity building bonus payable under the contract. After making this payment and signing the assignment and novation agreements, the third party shall participate as a contractor under the contract from the effective date with all right, duties, obligations and liabilities. If a joint operating agreement has been executed prior to the exercise of this option, the third party shall become a party to such agreement. If the public company holds all or part of the third party interest and fails to make the payments under Art. 4.10(b) by the due date or if the government and the public company fail to complete the assignment of the interest within 90 days after the expiration of the 8 months period, then on the day after the date, the government will take all contractual and procedural measures, with immediate effect, to procure that: 1. 50% of the interest held by the public company holding the third party interest shall be deemed automatically assigned by such public company to Korea National Oil; and 2) 50% of the interest held by the public company holding the third party interest shall be deemed automatically assigned to the public company holding the government interest, and shall be considered part of the government interest. To take account of specific conditions related to natural gas and to promote its development in the Kurdistan region, the government will grant specific benefits to the company on principles materially similar to those contained in this contract, including consistent with the Kurdistan Region Oil and Gas Law, more generous provisions in respect of the recovery of petroleum costs and the sharing of profit petroleum than in respect of crude oil.

In determining Korea National Oil's percentage share of the profit crude oil and profit natural gas, the R factor shall be calculated as follows R = X/Y ( where X is equal to cumulative revenues actually received by Korea National Oil and Y is equal to cumulative costs actually incurred by the Korea National Oil). The share of profit petroleum to which Korea National Oil shall be entitled from first production is: (a) for profit crude oil, equal to the quantities of petroleum resulting from the application of the relevant percentage an indicated below to the daily volume of production of profit crude oil within the contract area at the corresponding delivery point: R < or = 1: Korea National Oil 30%; 1 < R < or = 2: Korea National Oil 30% - (30% - 15%) x (R-1); R> 2: Korea National Oil 15%; and (b) for profit natural gas, equal to the quantities of non-associated natural gas resulting from the application of the relevant percentage as indicated below to the daily volume of production of profit natural gas within the contract area at the delivery point: R < or = 1: Korea National Oil 40%; 1 < R < or = 2: Korean National Oil 40% -(40% - 20%) x (R - 1.0000); R > 2: Korean National Oil 20%.

Subject to the provisions of the contract, from the first production, Korea National Oil shall at all times be entitled to recover all petroleum costs incurred of up to 40% of available crude oil, which shall apply regardless of the gravity of the oil, and available associated natural gas produced and saved within any year. Subject to the provisions of the contract, from first production, Korea National Oil shall at all times be entitled to recover all petroleum costs incurred of up to 50% of available non-associated natural gas produced and saved with any year. If in any year, the available crude oil and/or available non-associated natural gas do not allow Korea National Oil recover all of its petroleum costs under the contract, the unrecovered petroleum costs in that year shall be carried forward indefinitely to the subsequent years until all the petroleum costs are fully recovered but, unless as provided in the contract, in no other case after the termination of the contract. The petroleum costs under the contract are not recoverable against other contract areas, outside the contract, held by Korea National Oil.

For export crude oil, the royalty rate shall be 10% which shall apply regardless of the gravity of the oil. For export non-associated natural gas, the royalty rate shall be 10%. Associated natural gas and any other petroleum are exempt from any royalty payments.

From the effective date, the government shall participate in the contract through a public company with an undivided interest in the petroleum operations and all other rights, duties, obligations and liabilities of Korea National Oil under the contract of 20% which shall be the government interest. The public company shall not have any liability to Korea National Oil to contribute its government interest share of the petroleum cost and its share shall be the responsibility of Korea National Oil for the duration of the contract. The public company shall contribute its share of production bonuses attributable to the government interest. The government interest shall be deemed to be held by the government and the public company will be individually and separately liable (and not jointly and severally liable with the contractors) to the government for its obligations, duties and liabilities under this contract. The public company may assign the interest to another public company authorized by the government provided that there shall be no transfers which would result in either the transferor or transferee holding less than 5% participating interest. In addition, any failure of the public company to perform its obligations or duties or satisfy any liabilities under the contract shall not be considered as a default of Korea National Oil and shall not be invoked by the government to terminate the contract or exercise any other rights or remedies available in respect of such default. The capacity of a public company pursuant to the contract, shall not cancel or affect Korea National Oil's right to seek to settle a dispute or refer the dispute to arbitration or expert determination under the contract. The public company may also assign all or part of the government interest to a non-public company and the provisions of Arts 39.1 - 39.3 shall not apply and such assignee shall have the same rights and responsibilities as the public company prior to the assignment. Following the assignment of the interest to a non-public company, the provisions of Arts. 39.1 - 39.3 shall apply to any subsequent assignment of the interest.

For the petroleum operation, Korea National Oil shall give, and shall require that its contractors give, preference to personnel from the Kurdistan region and other parts of Iraq to the extent that such personnel has the technical capability, qualifications, competence and experience required to perform the work. Korea National Oil shall also give due consideration to the secondment of government personnel to Korea National Oil and the secondment of Korea National Oil personnel to the government during the various phases of the petroleum operations. The parties shall mutually agree on the terms, conditions and associated costs of the secondment. Korea National Oil, its affiliates and subcontractors shall have the right to hire foreign personnel where the personnel from the Kurdistan region and other parts of Iraq do not have the required technical capabilities, qualification or experience for the position. If such foreign personnel engage in activities which breach any Kurdistan law, Korea National Oil shall take necessary steps to repatriate the foreign personnel. For the first 5 contract years, Korea National Oil is required to provide US$ 250,000 to the government in advance each contract year for the recruitment or secondment of personnel whether from the Kurdistan region, other parts of Iraq or abroad to the Ministry of Natural resources. This cost shall be recoverable as petroleum cost.

Korea National Oil shall give priority to subcontractors from the Kurdistan Region and other parts of Iraq to the extent their competence, rates, experience, reputation, qualifications, specialties, credit rating and terms of availability, delivery and other commercial terms are, in its sole opinion, comparable in all material respects with those provided by foreign companies operating in the international petroleum industry. Such subcontractors must be bona fide Kurdistan Region companies not related to any public officer, directly or indirectly, and must have all necessary resources and capacity.

In a planned way and in accordance with the provisions of the contract, Korea National Oil shall train all its personnel from Kurdistan and other parts of Iraq directly or indirectly involved in the petroleum operations to improve their knowledge and professional qualification to the same level as that of its foreign personnel with an equivalent resumé. The training shall include the transfer of knowledge of petroleum technology and the necessary management experience to enable the local personnel apply advanced technology in the petroleum operations to the extent permitted by law and agreements with third parties, and subject to appropriate confidentiality agreements. The recruitment, integration and training of Korea National Oil's local personnel shall be provided in a plan submitted to the management committee for approval. The training plan shall provide for the allocation to the government of US$ 150,000 in advance for each contract year during the exploration period and US$ 300,000 for each contract year during the development period. All reasonable training expenses shall be considered as petroleum costs. Before the end of the first contract year, Korea National Oil shall provide to the government technological and logistical assistance to the Kurdistan Region petroleum sector, including geological computing hardware and software and such other equipment as the government may require, up to the value of US$ 2 million. The form of such assistance shall be mutually agreed by the parties and any costs associated therewith shall be considered petroleum costs and shall be recoverable.

For its petroleum operations, Korea National Oil shall have the right in the Kurdistan Region to use, subject to applicable law. any railway, tramway, road, airport, landing field, canal, river, bridge or waterway, any telecommunication network and any existing pipeline or transportation infrastructure, on terms no less favorable than those offered to other entitles and, unless generally in force, to be mutually agreed. For its petroleum operation, Korea National Oil shall have the right in the Kurdistan Region to clear land, excavate, drill, bore, construct, erect, place, procure, operate, emit and discharge, manage and maintain ditches, tanks, wells, trenches, access roads, excavations, dams, canals, water mains, plants, reservoirs, basins, storage and disposal facilities, primary distillation units, extraction and processing unit, separation units, sulphur plants and any other facilities or installations for the Petroleum Operations, in addition to pipelines, pumping stations, generators, power plants, high voltage lines, telephone, radio and any other telecommunications systems, sheds, houses for personnel. hospitals, schools, premises, dikes, vehicles, railways, roads, bridges, airlines, airports and any other transportation facilities, garages, hangars, workshops, foundries, repair shops and any other auxiliary facilities for the petroleum operations and, generally, everything which is required for its performance of the petroleum operations. Korea National Oil shall have the right to design, construct, operate and maintain pipelines and any related facilities for the transportation of petroleum produced under this contract.

Subject to spare capacity being available and to their petroleum being compatible, third parties shall be entitled to transport their petroleum through any pipeline constructed by the Korea National Oil on terms to be agreed between the Korea National Oil and such third party. Those terms shall be reasonable commercial terms and shall not discriminate among third party users. Korea national Oil shall always have priority of access to such pipelines. To the extent related to transportation upstream of the delivery point, any tariffs received from third parties for use of any pipeline and related facilities by the Korea National Oil shall be applied to the recovery of petroleum costs until all pipeline costs have been fully recovered.

Gas flaring is prohibited unless it is a short term flaring of up to 12 months necessary for testing or other operational reasons in accordance with prudent international petroleum industry practice and this shall include the flaring of associated natural gas to the extent that Korea National Oil considers that re-injecting the associated natural gas is not economically and technically justified and provided the government decides not to take the associated natural gas. Flaring of natural gas would also be permitted with the prior authorization of the government. Korea National Oil shall sell and transfer to the government, upon written request of the government, any amounts of crude oil that the government shall deem necessary to meet Kurdistan Region internal consumption requirements.

During the first sub-period Korea National Oil shall: (A) carry out geological and geophysical studies, comprising the following: (i) The compilation of a technical database; (ii) The performance of a remote sensing study; (iii) A field visit to verify initial geological and geophysical work and remote sensing results and plan for 2 dimensional seismic acquisition; and (B) carry out a data search for existing data specific to this contract area, comprising the following: (i) well data, if available, for example electric logs; (ii) seismic data and gravity data, if available; and (iv) Reprocess seismic data, if available; (C) perform field work comprising structural, stratigraphic and lithologica mapping and sampling; (D) acquire, process and interpret 200 line kilometers of 2 dimensional seismic data committing for this purpose a minimum financial amount of US$ 5 million or a 3 dimensional seismic data program by agreements between the parties; and (E) drill 1 exploration well including testing and coring as appropriate, committing for this purpose a minimum financial amount of US$ 10 million. During the second sub-period, Korea National Oil shall: (A) Acquire, process and interpret further seismic data (being either 2 dimensional or 3 dimensional) if it considers that the results from the first exploration well justify the acquisition of further seismic data; and, (B) Drill 1 exploration well, including testing and cooking as appropriate, committing for this purpose a minimum financial amount of US$ 10 million unless the data from the first exploration well demonstrates that there is not a reasonable technical case for drilling the second exploration well in the contract area. In addition, each contractor shall provide the government, if so required, with a corporate guarantee issued with respect to the minimum financial commitment for each sub-period. The corporate guarantee shall expire automatically upon completion of the performance of the minimum exploration obligations.

If a dispute arises under the contract, the parties shall first use their reasonable endeavors to negotiate promptly in good faith a mutually acceptable resolution of the dispute. The parties shall attempt to settle the dispute by negotiation between senior representatives. Senior representatives are individuals who have authority to negotiate the settlement on behalf of the parties. If the dispute cannot be settled by negotiation, the dispute may be referred to mediation in accordance with the London Court of International Arbitration (LCIA) mediation procedure which is deemed incorporated in the contract by reference. If the dispute is not settled by mediation, the dispute may be referred to arbitration in accordance with the LCIA rules which is incorporated i the contract by reference for final determination. The arbitration shall be held in London, England and shall be conducted in English. The arbitration shall be heard by 3 arbitrators. During the arbitral proceeding and until the dispute is determined, the parties are required to continue to perform their obligations under the contract. The parties agree that the arbitral award shall be final and not object to any appeal including an appeal to the English courts on issues of law. The government and any public company which may be a contractor under the contract waive fully and irrevocably any claim to immunity for itself or any of its assets. This waiver includes any claim to immunity from any expert determination, mediation, arbitration, enforcement of any decision, settlement, award or judgment or the service of processes.

Unless exceptions under the contract apply, the parties undertake to keep all data and information relating to the contract and the petroleum operations confidential during the entire term of the contract and to refrain from disclosing such information to third parties without the consent of the other party. The confidentiality obligation does not apply to: 1) information which is, or through no fault of the parties becomes, a part of the public domain; 2) information which is known to the recipient at the date of disclosure; 3) information disclosed in compliance with any applicable, by a government agency having jurisdiction over Korea National Oil, or by a court order or any legal proceedings; 4) disclosure required pursuant to the rules and regulations of any government or recognized stock exchange having jurisdiction over Korea National Oil. In accordance with prudent international petroleum industry practice, confidential information may be disclosed to: 1) Korea National Oil's affiliates, employees, officers, directors for the purpose of the petroleum operations and subject to Korea National Oil ensuring that customary precautions to keep the information confidential is taken; 2) consultants or agents retained by Korea National Oil or its affiliates for the purpose of analyzing or evaluating information; 3) banks or other financial institutions, including any such consultants retained by the banks, engaged by Korea National Oil or its affiliate for the purpose of financing the petroleum operations. 4) bona fide prospective assignees of a participating interest under the contract; 5) prospective or actual subcontractors engaged by a party; and 6) any other person with the prior written approval of the non-disclosing party. Subject to the contract, Korea National Oil is precluded from engaging in the sale or exchange of any data relating to the petroleum operations without the approval of the government which shall not be unreasonably withheld or delayed where in Korea National Oils opinion such sale or exchange would benefit the petroleum operation.

The governing law is English law except any rule of English law which would refer the matter to another jurisdiction, together with any relevant rules, customs and practices of international law and by principles and practice generally accepted in petroleum producing countries and in the international petroleum industry.

The government and any public company which may be a contractor under the contract waive fully and irrevocably any claim to immunity for itself or any of its assets. This waiver includes any claim to immunity from any expert determination, mediation, arbitration, enforcement of any decision, settlement, award or judgment or the service of processes. In addition, if it is reasonably proven that this contract was obtained in violation of Kurdistan region law relating to corruption, the contract shall be void. Also, each contractor agree that if, at any time, it is reasonably proven to be in breach of Kurdistan region law concerning corruption, the government or any other contractor shall have the right to terminate this contract.

The obligations of Korea National Oil under the contract shall not be changed by the government and the general and overall equilibrium between the parties under the contract shall not be affected in a substantial and lasting manner. The government guarantees that for the entire duration of the contract, it will maintain the stability of the legal, fiscal and economic conditions of the contract as they result from the contract and from laws and regulations in force on the date of signing the contract. If at any time after the effective date there is a change in the fiscal, legal and economic framework under the Kurdistan region law or other applicable law in or to the Kurdistan region which adversely affects Korea National Oil, or any person entitled to benefits under the contract, the terms and conditions of the contract shall be altered to restore Korea National Oil or such other person to the same overall economic position as they would have been if the change did not occur. If Korea National Oil believes that its economic position or that of any person entitled to benefits under this contract has been detrimentally affected by any change, upon Korea National Oil's written request, the parties shall meet to agree on any necessary measures or amendments to the terms of the contract to reestablish the equilibrium between the parties and restore Korea National Oil and such person to the position they were prior to the occurrence of the change. If the parties fail to agree on the merit of amending the contract or on any amendment to be made within 90 days from Korea National Oil's request to meet, or such other period as may be agreed by the parties, Korea National Oil may refer the matter directly to arbitration in accordance with the provision for arbitration under the contract. Without prejudice to the foregoing, Korea National Oil shall be entitled to the benefits of any future changes in the petroleum legislation or any other legislation complementing, amending or replacing it. The government intends to present to the National Assembly of the Kurdistan Region a law(s) to authorize the government, by contract or other authorization, to exempt investors in long term projects relating to the conduct of petroleum operations in the Kurdistan Region from Kurdistan Region taxation to guarantee the stability of the applicable legal, fiscal and economic conditions of such projects.