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 PETROLEUM CONTRACT





BETWEEN


CHINA NATIONAL OFFSHORE OIL CORPORATION


AND


PRIMELINE ENERGY CHINA LIMITED


PRIMELINE PETROLEUM CORPORATION


FOR


CONTRACT AREA 25/34


IN


THE EAST CHINA SEA


OF


« THE PEOPLE’S REPUBLIC OF CHINA





March 24, 2005


 CONTENTS





Preamble...........................................................................................................1


Article 1 Definitions........................................................................................................2


Article 2 Objective of the Contract..................................................................................8


Article 3 Contract Area....................................................................................................9


Article 4 Contract Term.................................................................................................10


Articles Relinquishment...............................................................................................13


Article 6 Minimum Exploration Work Commitment and Expected Minimum


Exploration Expenditures................................................................................14


Article 7 Management Organization and Its Function..................................................17


Article 8 Operator..........................................................................................................24


Article 9 Assistance Provided by CNOOC....................................................................31


Article 10 Work Program and Budget.............................................................................33


Article 11 Determination of Commerciality....................................................................35


Article 12 Financing and Cost Recovery.........................................................................39


Article 13 Crude Oil Production and Allocation.............................................................42


Article 14 Quality, Quantity and Price of Crude Oil.......................................................48


Article 15 Preference to the Employment of the Chinese Personnel, Goods and


Services............................................................................................................54


Article 16 Training of Chinese Personnel and Transfer of Technology..........................55


Article 17 Ownership of Assets and Data.......................................................................58


Article 18 Associated Natural Gas and Non-associated Natural Gas..............................59


Article 19 Accounting, Auditing and Personnel Costs....................................................65


Article 20 Taxation..........................................................................................................68


Article 21 Insurance.........................................................................................................68


Article 22 Confidentiality................................................................................................71


Article 23 Assignment.....................................................................................................73


Article 24 Environmental Protection and Safety.............................................................74


Article 25 Force Majeure............................................... 75


Article 26 Consultation and Arbitration..........................................................................76


Article 27 Effectiveness, Termination and Cancellation of the Contract........................77


Article 28 The Applicable Law.......................................................................................79


Article 29 Language of Contract and Working Language..............................................80


Article 30 Miscellaneous.................................................................................................80


Annex I Geographic Location and Co-ordinates of Connecting Points of


Boundary Lines of the Contract Area


Annex II Accounting Procedure


Annex III Personnel Costs


 Preamble





THIS CONTRACT is entered into in Beijing on this 24th day of March. 2005


BETWEEN:


China National Offshore Oil Corporation (hereafter referred to as “CNOOC”), a company


organized and existing under the laws of the People’s Republic of China, having its


headquarters domiciled in Beijing, as one part; and


Primeline Energy China Limited (hereafter referred to as “PECL”), a company organized


and existing under the laws of Cayman Islands, having its headquarters in London, U.K.;


and


Primeline Petroleum Corporation (hereafter referred to as “PPC”), a company organized


and existing under the laws of British Virgin Islands, having its headquarters in London,


U.K., as the other part.


PECL and PPC are collectively referred to as the “Foreign Contractor”.








WITNESSETH


WHEREAS, all Petroleum resources under the internal waters, territorial sea, and


continental shelf of the People’s Republic of China and under all sea areas within the


limits of national jurisdiction over the maritime resources of the People’s Republic of


China are owned by the People’s Republic of China;


WHEREAS, CNOOC, in accordance with the “Regulations of the People’s Republic of


China on Exploitation of Off-Shore Petroleum Resources in Co-operation with Foreign


Enterprises” released on 30 January 1982 and revised under the “State Council’s


Decision on the Modification of Regulations of the People’s Republic of China


Concerning the Exploitation of Off-Shore Petroleum Resources in Co-operation with


Foreign Enterprises” promulgated on 23 September; 2001 (hereafter referred to as


'•'Petroleum Regulations") has exclusive rights concerning exploration, production,


development and sales of the petroleum produced within the Contract Area, and the rights


assigned by the Petroleum Regulations to sign this Petroleum Contract; and


WHEREAS, the Foreign Contractor desires and agrees to provide funds, and apply its


appropriate and advanced technology and managerial experience to cooperate with


CNOOC for the exploitation of Petroleum resources within the Contract Area and agrees


to be subject to the laws, decrees, and other rules and regulations of the People’s


Republic of China in the implementation of the Contract.


NOW, THEREFORE, IT IS MUTUALLY AGREED as hereafter set forth:








Article 1


Definitions


The following words and terms used in the Contract shall have, unless otherwise


specified herein, the following meanings:


1.1 “Petroleum” means Crude Oil and Natural Gas deposited in the subsurface


and being extracted or already extracted, including any valuable non-hydrocarbon


substances produced in assoeiation with Crude Oil and/or Natural Gas separated or


extracted therefrom.


1.2 “Crude Oil” means solid and liquid hydrocarbons in their natural state,


including any liquid hydrocarbons extracted from Natural Gas except for


methane (CH4).


1.3 “Natural Gas” means Non-associated Natural Gas and Associated Natural Gas


in their natural state.


1.4 “Non-associated Natural Gas” means all gaseous hydrocarbons produced from


gas reservoirs, including wet gas, dry gas and residue gas remaining after the


extraction of liquid hydrocarbons from wet gas.








2


1.5 ‘‘Associated Natural Gas” means all gaseous hydrocarbons produced in


association with Crude oil from oil reservoirs, including residue gas remaining after


the extraction of liquid hydrocarbons therefrom.


1.6 ‘‘Oil Field” means an accumulation of Petroleum within the Contract Area


composed of one or several overlapping oil-bearing zones, within one trap or within


associated traps of the same independent geological structure, which may or may not


be complicated by faulting, and which has commercial value determined in


accordance with the procedures stipulated in Article 11 hereof.


1.7 “Gas Field” means an accumulation of Petroleum within the Contract Area


composed of one or several overlapping gas bearing zones, within one trap or within


associated traps of the same independent geological structure, which may or may not


be complicated by faulting, and which has commercial value determined in


. accordance with the procedures stipulated in Article 18 hereof.


1.8 “Petroleum Operations” means the Exploration Operations, the Development


Operations, the Production Operations, and other activities related to these operations


carried out under the Contract.


1.9 “Exploration Operations” means operations carried out for the purpose of


discovering Petroleum-bearing traps by means of geological, geophysical,


geochemical and other methods including exploratory well drilling; all the work


undertaken to determine the commerciality of traps in which Petroleum has been


discovered including Appraisal Well drilling; and feasibility studies, formulation of


the Overall Development Program; and activities related to all such operations.


1.10 “Development Operations” means operations carried out for the realization of


Petroleum production from the date of approval of the Overall Development Program


for any Oil Field and/or Gas Field by the competent authorities of the Chinese


Government including design, construction, installation, drilling, and related research


work as well as relevant activities carried out before the Date of Commencement of


Commercial Production for the realization of Petroleum production.


1.11 "Production Operations5' means operations and all activities related thereto


carried out for Petroleum production of an Oil Field and/or Gas Field from the Date


of Commencement of Commercial Production, such as extraction, injection,


stimulation, treatment, storage, transportation, lifting, etc.


1.12 “Basic Block” means a section of the surface of the earth bounded by the


segments of longitude and latitude of equal distance of ten (10) minutes.


1.13 “Contract Area” means an offshore surface area demarcated with geographic


coordinates for the cooperative exploitation of Petroleum resources, and in the


Contract, means the offshore surface area stipulated in Article 3.1 hereof.


1.14 “Exploration Area” means an offshore surface area within the Contract Area


which has not been relinquished before the expiration of the exploration period and in


which Development Operations and Production Operations have not begun.


1.15 “Development Area55 means a portion of the Contract Area covering an Oil


Field and/or Gas Field which has been designated for development and any potential


contiguous extension areas to such Field(s) within the Contract Area. The


Development Area(s) shall be proposed by the Operator, demarcated by the Joint


Management Committee (“JMC”) and delineated as such in the Overall Development


Program approved by the competent authorities of the Chinese Government. The


Development Area shall automatically cease to be in force as of the date of approval


of the Production Area by CNOOC.


1.16 “Production Area” means an offshore surface area within any Development


Area for the purpose of the performance of the Production Operations within the said


Development Area after completion of the Development Operations. The Production


Area proposed by the Operator, demarcated by JMC shall be submitted to CNOOC


for approval before the Date of Commencement of Commercial Production.


1.17 “Date of Commencement of Commercial Production” means the date of


commencement of the production of Crude Oil and/or Natural Gas from any Oil Field


and/or Gas Field determined and announced by JMC in accordance with the








4


provisions in Article 7.2.5 hereof, after completion of the Development Operations as


provided in the Overall Development Program for the said Oil Field and/or Gas Field


and having obtained the Operation Permission License of the Production Installation


issued by the competent authorities of the Chinese Government.


1.18 “Calendar Year” means a period of twelve (12) consecutive Gregorian months


under the Gregorian Calendar beginning on the first day of January and ending on the


following thirty-first day of December in the same year.


1.19 “Contract Year” means a period of twelve (12) consecutive Gregorian months


under the Gregorian Calendar, within the term of the Contract, beginning on the Date


of Commencement of the Implementation of the Contract as mentioned in


Article 1.40 herein or any anniversary thereof.


1.20 “Production Year” means, in respect of each Oil Field and/or Gas Field, a


period of twelve (12) consecutive Gregorian months under the Gregorian Calendar


beginning on the Date of Commencement of Commercial Production of such Field or


anniversary thereof


1.21 “Calendar Quarter” means a period of three (3) consecutive Gregorian months


under the Gregorian Calendar beginning on the first day of January, the first day of


April, the first day of July, or the first day of October.


1.22 “Exploratory Well” means any Wildcat and/or Appraisal Well drilled within


the exploration period, including dry hole(s) and discovery well(s).


1.23 “Wildcat” means a well drilled on any geological trap for the purpose of


searching for Petroleum accumulations, including wells drilled for the purpose of


obtaining geological and geophysical parameters.


1.24 “Appraisal Weil” means an Exploratory Well drilled for the purpose of


evaluating the commerciality of a geological trap in which Petroleum has been


discovered.


1.25 ''Development Well” means a well drilled after the date of approval of the


Overall Development Program for the purpose of producing Petroleum, increasing


production or accelerating extraction of Petroleum, including production wells,


injection wells and dry holes. Any Appraisal Well drilled during the production


period shall be deemed as Development Well.


1.26 “Work Program” means all types of plans formulated for the performance of


the Petroleum Operations, including plans for exploration, development and


production.


1.27 “Overall Development Program” means a plan prepared by the Operator for





the development of an Oil Field and/or Gas Field which has been reviewed and


adopted by JMC, confirmed by CNOOC and approved by the competent authorities


of the Chinese Government and such plan shall include, but shall not be limited to,


recoverable reserves, the development well pattern, master design, production profile,


economic analysis and time schedule of the Development Operations.


1.28 “Deemed Interest” means interest on the development costs calculated in


accordance with the rate of interest stipulated in Article 12.2.3.2 hereof when the


development costs incurred in each Oil Field and/or Gas Field within the Contract


Area are recovered by the Parties.


1.29 “Oil Field and/or Gas Field Straddling a Boundary” means an Oil Field and/or


Gas Field extending from the Contract Area to one or more other contract areas


and/or areas in respect of which no Petroleum contracts have been signed.





1.30 “Annual Gross Production of Natural Gas” means the total amount of Natural


Gas produced from each Oil Field and/or Gas Field within the Contract Area


considered separately in each Calendar Year, less the amount of Natural Gas used for


Petroleum Operations and the amount of losses, which is saved and measured by a


measuring device at the delivery point specified in Article 14.3.1 hereof.





1.31 “Annual Gross Production of Crude Oil” means the total amount of Crude Oil


produced from each Oil Field within the Contract Area considered separately in each








6 i





Calendar Year, less the amount of Crude Oil used for Petroleum Operations and the


amount of losses, which is saved and measured by a measuring device at the delivery


point specified in Article 14.3.1 hereof.


1.32 “Contractor” means the Foreign Contractor specified in the Preamble hereto,


including assignee(s) in accordance with Article 23 hereof.


1.33 “Parties” means CNOOC and the Contractor.


1.34 “Operator” means an entity responsible for the performance of the Petroleum


Operations under the Contract.


1.35 “Subcontractor” means an entity which provides the Operator with goods or


services for the purpose of the Contract.


1.36 “Third Party” means any individual or entity except CNOOC, the Contractor


and any of their Affiliates.


1.37 “Chinese Personnel” means any citizen of the People’s Republic of China,


including CNOOC’s personnel and Chinese citizens employed by the Contractor


and/or the Subcontractor(s), involved in Petroleum Operations under the Contract.


1.38 “Expatriate Employee” means any person employed by the Contractor,


Subcontractor(s) or CNOOC who has not the nationality of the People’s Republic of


China. Overseas Chinese who reside abroad and have the nationality of the People’s


Republic of China and other Chinese abroad, when they are employed by the


Contractor, Subcontractor(s) or CNOOC shall also be deemed as Expatriate


Employees within the scope of the Contract.


1.39 “Affiliate” means in respect of the Contractor:


(a) any entity in which any company comprising the Contractor directly or


indirectly holds fifty percent (50%) or more of the voting rights carried by its share


capital; or








7


 (b) any entity which directly or indirectly holds fifty percent (50%) or more of the


aforesaid voting rights of any company comprising the Contractor; or


(c) any other entity whose aforesaid voting rights are held by an entity mentioned


in (b) above in an amount of fifty percent (50%) or more;


“Affiliate” means, in respect of CNOOC, any subsidiary, branch, or regional


corporation of CNOOC and any entity in which CNOOC directly or indirectly holds


fifty percent (50%) or more of the voting rights carried by its share capital.


1.40 “Date of Commencement of the Implementation of the Contract” means the


first day of the month following the month in which the Contractor has received the


notification from CNOOC of the approval of the Contract by the Ministry of


Commerce of the People’s Republic of China.








Article 2


Objective of the Contract


2.1 The primary objective of the Contract is to explore for, develop and produce


Petroleum that may exist within the Contract Area.





2.2 The Contractor shall apply its appropriate and advanced technology and


assign its competent experts to perform the Petroleum Operations.


2.3 During the performance of the Petroleum Operations, the Contractor shall


transfer its technology to the Chinese Personnel and train them.


2.4 The Contractor shall pay all the exploration costs required for the Exploration


Operations. In the event that any Oil Field and/or Gas Field is discovered within the


Contract Area, the development costs of such Oil Field and/or Gas Field shall be paid


by the Parties in proportion to their participating interests: fifty-one percent (51%) by


CNOOC and forty-nine percent (49%) by the Contractor. In the event that CNOOC


opts to participate at a level less than fifty-one percent (51%) of the participating








8


/ A


interests, or not to participate in the development of the Field, the Contractor shall


pay the remaining development costs necessary for the development of the Field in


accordance with Article 12.1.2 hereof.


2.5 If any Oil Field and/or Gas Field is discovered within the Contract Area, the


Petroleum produced therefrom shall, from the Date of Commencement of


Commercial Production of such Field, be allocated in accordance with Articles 12, 13


and/or 18 hereof.


2.6 Nothing contained in the Contract shall be deemed to confer any right on the


Contractor other than those rights expressly granted hereunder.








Article 3


Contract Area





3.1 The Contract Area as of the date of signature of the Contract covers a total


area of seven thousand and six (7,006) square kilometers, as marked out by the


geographic location and the coordinates of the connecting points of the boundary


lines in Annex I attached hereto.


The said total area of the Contract Area shall be reduced in accordance with





Articles 4, 5, 11 and 18 hereof.


3.2 Except for the rights as expressly provided by the Contract, no right is granted


in favor of the Contractor to the surface area, subsea, sea-bed, sub-soil or to any


natural resources or aquatic resources other than Petroleum existing therein, and any


things left on the sea-bed within the Contract Area.























9


 Article 4


Contract Term


4.1 The term of the Contract shall include an exploration period, a development


period and a production period.


4.2 The exploration period, beginning on the Date of Commencement of the


Implementation of the Contract, shall be divided into three (3) phases and shall


consist of seven (7) consecutive Contract Years, unless the Contract is sooner


terminated, or the exploration period is extended in accordance with Article 25 hereof


and/or Article 4.3 herein. The three (3) phases shall be as follows:


(a) the first phase of three (3) Contract Years (the first Contract Year through the


third Contract Year); and


(b) the second phase of two (2) Contract Years (the fourth Contract Year through


the fifth Contract Year); and


(c) the third phase of two (2) Contract Years (the sixth Contract Year through the


seventh Contract Year).


4.3 Where time is insufficient to complete the appraisal work on a Petroleum


discovery made close to the expiration of the exploration period or where the time of


the appraisal work on a Petroleum discovery in accordance with the appraisal Work


Program approved by JMC as stated in Articles 11 and 18 hereof extends beyond the


exploration period, the exploration period as described in Article 4.2 herein shall be


extended. The period of extension shall be whatever period CNOOC regards as a


reasonable period of time required to complete the above-mentioned appraisal work


in order to enable JMC to make a decision on the commerciality of the said Petroleum


discovery in accordance with Article 11 or 18 hereof, and until the competent


authorities of the Chinese Government approves or finally rejects the overall


Development Program.











10


4.4 The development period of any Oil Field and/or Gas Field within the Contract


Area shall begin on the date of approval of the Overall Development Program of the


said Oil Field and/or Gas Field by the competent authorities of the Chinese


Government and end on the date of the entire completion of the Development


Operations set forth in the Overall Development Program, excluding the time for


carrying out additional development projects in the production period in accordance


with Article 11.9 hereof.


4.5 The production period of any Oil Field and/or Gas Field within the Contract


Area shall be a period of fifteen (15) consecutive Production Years beginning on the


Date of Commencement of Commercial Production unless otherwise provided in


Article 4.6 herein and Article 18.2 or 25 hereof. Under such circumstances as where


the construction of an Oil Field and/or Gas Field is to be conducted on a large scale,


and the time span required therefore is long, or where separate production of each of


the multiple oil or gas producing zones of a Field is required, or under other special


circumstances, the production period thereof shall, when it is necessary, be properly


extended with the approval of the competent authorities of the Chinese Government.


4.6 Suspension or abandonment of production of an Oil Field and/or Gas Field.


4.6.1 In the event that the Parties agree to suspend temporarily production from an





Oil Field and/or Gas Field which has entered into commercial production, the


Production Area covered by that Oil Field and/or Gas Field may be retained within


the Contract Area. In no event shall the period of such retention extend beyond the


date of the expiration of the production period of that Oil Field and/or Gas Field


except as otherwise provided in Article 25.4 hereof. The duration of the relevant


period of production suspension and the arrangement for the maintenance operations


during the aforesaid period of suspension shall be proposed by the Operator, and shall


be decided by JMC through discussion. With respect to the aforesaid Oil Field and/or


Gas Field which has been suspended and retained within the Contract Area, in the


event that production is restored during the period of such retention, the production


period of that Oil Field and/or Gas Field shall be extended correspondingly. In the














^TTOenrcr'


event that the Parties fail to reach an agreement on the restoration of production by


the expiration of the production suspension period decided by JMC through


discussion, the party to the Contract who wishes to restore production shall have the


right to restore production solely. The other party to the Contract may later elect to


participate in production but shall have no rights or obligations in respect of such


Field for the solely restored production period.


4.6.2 Abandonment of production from Oil Field and/or Gas Field within the


production period.


4.6.2.1 During the production period, either party to the Contract may propose to


abandon production from any Oil Field and/or Gas Field within the Contract Area,


provided, however, that prior written notice shall be given to the other party to the


Contract. The other party to the Contract shall make a response in writing within


ninety (90) days from the date on which the said notice is received. If the other party


to the Contract also agrees to abandon production from the said Oil Field and/or Gas


Field, then the abandonment costs shall be paid by the Parties in proportion to their


participating interests in the development of such Oil Field and/or Gas Field. From


the date on which the other party to the Contract makes the response in writing that it


agrees to abandonment, the production period of such Oil Field and/or Gas Field shall


be terminated and such Oil Field and/or Gas Field shall be excluded from the


Contract Area.


4.6.2.2 If the Contractor notifies CNOOC in writing of its decision on abandoning


production from an Oil Field and/or Gas Field, while CNOOC decides not to abandon


production from such Oil Field and/or Gas Field, then from the date on which the


Contractor receives CNOOC’s written response of its aforesaid decision, all of the


Contractor’s rights and obligations under the Contract in respect of the said Field,


including but not limited to the responsibilities for payment of abandonment costs in


respect of such Field, shall be terminated automatically, provided that the Contractor


shall not transfer to CNOOC any of the Contractor’s liabilities and obligations in


respect of the said Field. The said Field shall be excluded from the Contract Area.








12


4.7 The term of the Contract shall not go beyond thirty (30) consecutive Contract


Years from the Date of Commencement of the Implementation of the Contract, unless


otherwise stipulated hereunder.








Article 5


Relinquishment


5.1 The Contractor shall relinquish portions of the Contract Area in accordance


with the following provisions:


5.1.1 At the expiration of the first phase of the exploration period, the Contractor


shall relinquish twenty---five percent (25%) of the Contract Area as of the date of


signature of the Contract.


5.1.2 At the expiration of the second phase of the exploration period, the Contractor


shall relinquish twenty---five percent (25%) of the Contract Area remaining in the


second phase after deducting each Development Area and/or Production Area


therefrom.


5.1.3 In any of the following cases, the Contractor shall relinquish the remaining


Contract Area except the areas referred to in Article 5.1.4 herein:


(a) at the expiration of the last phase of the exploration period; or


(b) if the Contractor exercises its option under Article 6.3(b) of the Contract, at


the expiration of the said exploration phase if the Contractor so selects; or


(c) at the expiration of the extended period, in the event that the exploration


period is extended in accordance with Article 4.3 or 25 hereof.


5.1.4 In the execution of Article 5.1.3 herein, a Development Area, Production Area


or an area corresponding to a trap with a Petroleum discovery which will be appraised


and/or being appraised or included in an Overall Development Program awaiting


approval shall not be regarded as an area to be relinquished.


 5.1.5 At the expiration of the production period specified in Article 4.5 hereof, any


Oil Field and/or Gas Field within the Contract Area shall be excluded from the


Contract Area.





5.2 The areas relinquished pursuant to Articles 5.1.1 and 5.1.2 herein shall be


made up of as few rectangles as possible so as to facilitate further Exploration


Operations.


5.3 Within ninety (90) days prior to the date of each relinquishment, the


Contractor shall submit to CNOOC a report on its completed Exploration Operations


on the areas to be relinquished, including a map showing the areas to be relinquished


with its coordinates of the connecting points of the boundaries.








Article 6


Minimum Exploration Work Commitment and Expected Minimum Exploration


Expenditures


6.1 The Contractor shall use its reasonable efforts to begin to perform the offshore


Exploration Operations within six (6) months from the Date of Commencement of the


Implementation of the Contract and to spud the first Wildcat within ten (10) months


from the Date of Commencement of the Implementation of the Contract.





6.2 The Contractor shall fulfil the minimum exploration work commitment for


each phase of the exploration period in accordance with the following provisions.
































14


 .4 The Wildcats specified in Articles 6.2.1, 6.2.2 and 6.2.3 herein for each


exploration phase shall not be substituted by Appraisal Wells without the consent of


CNOOC.





6.2.5 With respect to the minimum exploration work commitment for each phase of


the exploration period committed by the Contractor in accordance with Articles 6.2.1,


6.2.2 and 6.2.3 herein when calculating whether the minimum exploration work


commitment has been fulfilled, the number of Wildcats drilled and the kilometers of


seismic lines actually completed shall be the basis of such calculation. However, the


Wildcats abandoned for technical reasons without reaching their predetermined


geological objective shall not count as the Wildcats actually fulfilled by the


Contractor thereunder without the consent of CNOOC.


6.3 At the expiration of the first phase or the second phase of the exploration





period, the Contractor has the following options in accordance with the terms of this


Contract:


fa) to enter the next phase and continue exploration; or


(b) to conduct only appraisal operations and/or development operations in the





Petroleum discoveries awaiting appraisal decided by proceduies under Article 11 of





15


the Contract, provided that the minimum obligations of the selected exploration phase


by the Contractor have been fulfilled; and the areas under Article 5.1.3(b) hereof have


been relinquished; or


(c) to terminate the Contract.


6.4 At the expiration of any phase of the exploration period, if the actual


exploration work fulfilled by the Contractor is less than the minimum exploration


work commitment set forth for the said exploration phase and if the Contractor opts to


enter the next phase and continue exploration under Article 6.3(a) herein, the


Contractor shall give reasons to CNOOC for the underfulfillment; and, with the


consent of CNOOC, the unfulfilled balance of the said phase shall be added to the


minimum exploration work commitment for the next exploration phase.


At any time within the exploration period if there is any commercial discovery,


JMC shall, at the request of any party to the Contract, discuss the possibility of


increasing the exploration work. Any Wildcats and seismic lines involved in such


increase shall be deducted from the minimum exploration work commitment.


6.5 Where the Contractor has fulfilled ahead of time the minimum exploration


work commitment for any phase of the exploration period, the duration of such


exploration phase stipulated in Article 4.2 hereof shall not be shortened thereby, and


if the exploration work actually fulfilled by the Contractor exceeds the minimum


exploration work commitment for the said exploration phase, the excess Wildcat shall


be deducted from and credited against the minimum exploration work commitment


for the next exploration phase.


6.6 If any addition or deduction is made under Article 6.4 or Article 6.5 herein in


regard to the minimum exploration work commitment for any phase of the


exploration period, the increased or reduced exploration work shall become the new


minimum exploration work commitment for the Contractor to fulfill in the said phase.


6.7 At the expiration of any phase during the exploration period, if the exploration


work actually fulfilled by the Contractor is less than the minimum exploration work





16


 commitment for such phase or less than the new minimum exploration work


commitment as mentioned in Article 6.6 herein, and if, regardless of whether the


expected minimum exploration expenditures are fulfilled or not fulfilled, the


Contractor opts to terminate the Contract under Article 6.3(c) herein, or if the said


phase is the last exploration phase, the Contractor shall, within thirty (30) days from


the date of the decision of election to terminate the Contract or within thirty (30) days


from the date of the expiration of the exploration period, pay CNOOC only any


unfulfilled balance of the minimum exploration work commitment (or of .the new one)


for the phase or phases entered into in U.S. dollars after it has been converted into a


cash equivalent using the method provided in Annex II - Accounting Procedure


hereto. However, if the minimum exploration work commitment for the exploration


period is fulfilled while its expected corresponding minimum exploration


expenditures are not fulfilled, the unfulfilled part shall be deemed as a saving and


shall not be paid to CNOOC.








Article 7


Management Organization and Its Function


7.1 For the purpose of the proper performance of the Petroleum Operations, the


Parties shall establish a JMC within forty-five (45) days from the Date of


Commencement of the Implementation of the Contract.


7.1.1 CNOOC and the Contractor shall each appoint an equal number of





representatives (one to three) to form JMC, and each party to the Contract shall


designate one of its representatives as its chief representative. The representative of


the Operator of the companies comprising the Contractor shall be the chief


representative of the Contractor. All the aforesaid representatives shall have the right


to present their views on the proposals at meetings held by JMC. When a decision is


to be made on any proposal, the chief representative from each party to the Contract


shall be the spokesman on behalf of the party to the Contract.














17


The chairman of JMC shall be the chief representative designated by CNOOC,


and the vice chairman shall be the chief representative designated by the Contractor.


The chairman of JMC shall preside over meetings of JMC. In his absence, one


representative present at the meeting from CNOOC shall be designated to act as the


chairman of the meeting. In the absence of the vice chairman of JMC. one


representative present at the meeting from the Contractor shall be designated to act as


the vice chairman of the meeting. The Parties may, according to need, designate a


reasonable number of advisors, who may attend, but shall not be entitled to vote at,


JMC meetings.


7.1.2 A regular meeting of JMC shall be held at least once a Calendar Quarter, and


other meetings, if necessary, may be held at any time at the request of any party to the


Contract, upon giving reasonable notice to the other party to the Contract of the date,


time and location of the meeting and the items to be discussed.


7.2 The Parties shall empower JMC to:


7.2.1 Review and agree to the Work Program and budget proposed by the Operator


and the amendment thereof;


7.2.2 Determine the commerciality of each trap on which a Petroleum discovery has


been made in accordance with the Operator’s appraisal report and report its decision


to CNOOC for confirmation;


7.2.3 Review and agree to the Overall Development Program and budget and any


amendments thereto for each Oil Field and/or Gas Field;


7.2.4 Approve or confirm the following items of procurement and expenditures:


(a) approve procurement of any item within the budget with a unit price


exceeding Five Hundred Thousand U.S. dollars (U.S. $500,000) or any single


purchase order of total monetary value exceeding Three Million U.S. dollars (U.S.S


3,000,000);











18


(b) approve a lease of equipment, or an engineering subcontract or a service


contract within the budget worth more than Three Million U.S. dollars (U.S. $


3,000,000); and


(c) confirm excess expenditures pursuant to Article 10.2.1 hereof and the


expenditures pursuant to Article 10.2.2 hereof;


7.2.5 Determine and announce the Date of Commencement of Commercial


Production of each Oil Field and/or Gas Field within the Contract Area;


7.2.6 Determine the type and scope of information and data provided to any Third


Party and Affiliate in relation to the Petroleum Operations in accordance with the


“Provisions of the Ministry of Petroleum Industry of the People’s Republic of China


for the Control of Data Concerning the Exploitation of Offshore Petroleum Resources


in Cooperation with Foreign Enterprises” (hereafter referred to as “Provisions for the


Control of Data”) and Article 22.4 hereof;


7.2.7 Demarcate boundaries of the Development Area and the Production Area of


each Oil Field and/or Gas Field;


7.2.8 Review and approve plans for transfer of the Production Operations in


accordance with Article 8.8 hereof;


7.2.9 Review and approve the insurance program proposed by the Operator, and


emergency procedures on safety and environmental protection;


7.2.10 Review and approve personnel training programs;


7.2.11 Discuss, review, decide and approve other matters that have been proposed by


either party to the Contract or submitted by the expert groups or the Operator; and


7.2.12 Review and examine matters required to be submitted to relevant authorities


of the Chinese Government and/or CNOOC for approval.











19


7.3 Decisions of JMC shall be made unanimously through consultation. All


decisions made unanimously shall be deemed as formal decisions and shall be equally


binding upon the Parties. When matters upon which agreement can not be reached


arise, the Parties may convene another meeting in an attempt to find a new solution


thereto based on the principle of mutual benefit.


7.3.1 In the exploration period, the Parties shall endeavour to reach an agreement


through consultation on exploration programs and annual exploration Work Program.


If the Parties fail to reach agreement through consultation, the Contractor’s proposal


shall prevail, provided that such proposal is not in conflict with the relevant


provisions in Articles 4, 5, and 6 hereof.


7.3.2 If it is considered by the chairman and/or the vice chairmen or their nominees


that a matter requires urgent handling or may be decided without convening a


meeting, JMC may make decisions through facsimile or the circulation of documents.


7.4 JMC shall establish the following subordinate bodies:


7.4.1 Secretariat


The secretariat shall be a permanent organization consisting of two (2)


secretaries. One secretary shall be appointed by each of the Parties. The secretaries


shall not be members of JMC, but may attend meetings of JMC as observers. The


duties of the secretariat are as follows:


(a) to keep minutes of meetings;


(b) to prepare summaries of and resolutions for JMC meetings;


(c) to draft and transmit notices of meetings; and


(d) to receive and transmit proposals, reports or plans, etc. submitted by the


Operator and/or any party to the Contract, that require discussion, review or approval


by JMC.








20


7.4.2 Expert Groups





Advisory expert groups shall be established in accordance with the


requirements of the Petroleum Operations in various periods. Each expert group shall


consist of Chinese Personnel and the Contractor’s employees, and, with the


agreement of JMC, any other personnel. JMC shall discuss and decide upon their


establishment or dissolution, size, and the appointment of their leaders in accordance


with the requirements of their work. The expert groups shall have the following


functions:


(a) to discuss and study matters assigned to them by JMC and submitted by the


Operator to JMC for its review and approval and any other matter assigned to them


by JMC, and to make constructive suggestions to JMC;


(b) to have access to and observe and investigate the Petroleum Operations


conducted by the Operator at its office and operating sites as work requires and to


submit relevant reports to JMC; and


(c) to attend meetings of JMC as observers at the request of JMC.


7.5 When one of the companies comprising the Contractor acts as the Operator,


CNOOC shall have the right to assign professional, representatives to the Operator’s


administrative and technical departments which are related to the Petroleum


Operations, who may work at length together with the Operator’s staff.


The professional representatives shall have access to the centers of research,


design, and data processing related only to the execution of the Contract and to the


operating sites to observe all the activities and study all the information with respect


to the Petroleum Operations. Such access to the aforesaid centers outside the People’s


Republic of China shall be decided by JMC through discussion and shall be arranged


by the Operator. The Operator shall use all reasonable endeavors to assist the


professional representatives to have access to Third Parties’ sites. The Operator’s


staff shall regularly discuss their work with the professional representatives of


CNOOC.








21


The work of professional representatives of CNOOC shall be arranged by


manager(s) of the departments of the Operator in which professional representatives


work. Professional representatives of CNOOC, except for the professional


representatives in charge of procurement who shall undertake their functions in


accordance with Article 7.6 herein, shall not interfere in the decision making on


relevant matters by departmental manager(s) of the Operator. However, such


professional representatives shall have the right to make proposals and comments to


departmental manager(s) of the Operator or to report directly to CNOOC’s


representatives in JMC. When CNOOC acts as the Operator, the Contractor may also


assign professional representatives including professional representatives in charge of


procurement.


7.5.1 On the principle of mutual cooperation and coordination, the Operator shall


provide the professional representatives with necessary facilities and assistance to


perform office work and to observe the operating sites, etc.


7.5.2 The numbers of professional representatives shall be decided by JMC through


consultations.


7.6 When one of the companies comprising the Contractor acts as the Operator, in


respect of the items listed in the procurement plan, the procedures and provisions


hereunder shall be followed:


7.6.1 The procurement department of the Operator shall inform the professional


representatives appointed by CNOOC in charge of procurement of all the items of


procurement.


7.6.2 The Operator shall be subject to Articles 15.1 and 15.3 hereof and reach


agreement through consultation with the professional representatives of CNOOC in


charge of procurement when preparing the procurement plan in accordance with the


Work Program and budget. The professional representatives of CNOOC in charge of


procurement shall work out an inventory listing the equipment and materials which


can be made and provided in China and a list of manufacturers, engineering and








??


construction companies and enterprises in China which can provide services and


undertake subcontracting work.


7.6.3 Unless otherwise agreed upon by the Parties, the Operator shall, in general,


make procurement by means of calling for bids and shall notify at the same time


manufacturers and enterprises concerned both inside and outside China, and the work


of calling for bids shall be done within the territory of China.


7.6.4 When any procurement is to be made by means of calling for bids, the


manufacturers and enterprises in China applying for bidding which are included in a


list delivered in advance to the Operator by the professional representatives of


CNOOC in charge of procurement shall be invited. The professional representatives


of CNOOC in charge of procurement shall have the right to take part in the work of


calling for bids, including examination of the list of bidders to be invited, preparing


and issuing bidding documents, opening bids and evaluation of bids, and shall have


the right to consult with the Operator the determination of award of contracts and to


participate in negotiation for subcontracts and service contracts.


7.6.5 With respect to the items of procurement by means of not calling for bids, the


Operator’s procurement department and the professional representatives of CNOOC


in charge of procurement shall, in accordance with the provisions specified in Article


7.6.2 herein, define items which are to be procured in the People’s Republic of China


and items are to be procured abroad.


7.7 All costs and expenses with respect to the staff members of the Parties in the


subordinate bodies of JMC established in accordance with Article 7.4 herein and


those with respect to the professional representatives referred to in Article 7.5 herein


and wages and salaries, costs and expenses incurred by the representatives of JMC


referred to in Article 7.1 herein while attending JMC meetings shall be paid by the


Operator and charged respectively to the exploration costs, development costs and


operating costs in accordance with Annex II - Accounting Procedure hereto.


7.8 The specific responsibilities and working procedures within JMC shall be


discussed and determined by JMC in accordance with the relevant provisions herein.








Article 8


Operator


8.1 The Parties agree that Primeline Energy Operation International Ltd. (PEOIL),


established by Primeline Energy China Limited and Primeline Petroleum Corporation,


shall act as the Operator for the Exploration Operations, Development Operations and


Production Operations within the Contract Area, unless otherwise stipulated in


Article 8.8 herein and Article 30.4 hereof.


8.2 For the implementation of the Contract, each company comprising the


Contractor and any entity that becomes the Operator shall register with the State


Administration for Industry and Commerce of the People’s Republic of China in


accordance with the relevant provisions of the said State Administration for Industry


and Commerce and shall obtain in advance the necessary approval from CNOOC.


The person in charge of the Operator shall have the full right to represent the


Contractor in respect of the performance of the Petroleum Operations. The names,


positions and resumes of the staff and organization chart of the Operator shall be


submitted in advance to CNOOC and the senior staff thereat shall be subject to the


consent of CNOOC.


The parent corporation of each company comprising the Contractor which is


not itself a parent corporation shall, at the request of CNOOC, provide CNOOC with


a written performance guarantee with terms acceptable to CNOOC.


8.3 The Operator shall have the following obligations:


8.3.1 To apply the appropriate and advanced technology and business managerial


experience of the Contractor, including each company comprising the Contractor or











24


its and their Affiliates to perform the Petroleum Operations reasonably, economically


and efficiently in accordance with sound international practice.


8.3.2 To prepare Work Programs and budgets related to the Petroleum Operations


and to carry out the approved Work Programs and budgets.


8.3.3 To be responsible for procurement of installations, equipment, and supplies


and entering into subcontracts and service contracts related to the Petroleum


Operations, in accordance with the approved Work Programs and budgets and the


applicable provisions of Articles 7.2.4, 7.6 and 10.2 hereof.


8.3.4 To prepare in advance, in accordance with Article 16 hereof, a personnel


training program and budget before the commencement of the Development


Operations and Production Operations respectively, and, in accordance with the said


program and budget, to be responsible for preparing an annual personnel training


program and budget and carrying out the annual program and budget after approval


by JMC.


8.3.5 To establish an insurance program, and to enter into and implement the


insurance contracts in accordance with Article 21 hereof.


8.3.6 To issue cash-call notices to all the parties to the Contract to raise the required


funds based on the approved budgets and in accordance with Article 12 hereof and


Annex II - Accounting Procedure hereto.


8.3.7 To maintain complete and accurate accounting records of all the costs and


expenditures for the Petroleum Operations in accordance with the provisions of


Annex II - Accounting Procedure hereto and to keep securely the accounting books in


good order.


8.3.8 To make necessary preparation for regular meetings of JMC, and to submit in


advance to JMC necessary information related to the matters to be reviewed and


approved by JMC.








25


8.3.9 To inform directly or indirectly all the Subcontractors which render services


for the Petroleum Operations in China and all the Expatriate Employees of the


Operator and of Subcontractors who are engaged in the Petroleum Operations in


China that they shall be subject to the laws, decrees, and other rules and regulations


of the People’s Republic of China.


8.3.10 To report its work to JMC as provided in Article 7.2 hereof.


8.4 In the course of the performance of the Petroleum Operations, any direct loss


arising out of the gross negligence or wilful misconduct of the Operator or its


employees shall be solely borne by the Operator. The Operator shall make its best


efforts in accordance with the international Petroleum industry practice to include


provisions similar to this Article 8.4 herein in related subcontracts and service


contracts.


8.5 In the course of the performance of the Petroleum Operations, the Operator


shall handle the information, samples or reports in accordance with the following


provisions:


8.5.1 The Operator shall provide CNOOC with various information and data in


accordance with Article 13 and 23 of the “Petroleum Regulations” and the


“Provisions for the Control of Data” and the Operator shall use and handle such


information and data referred to herein in accordance with the said provisions. The


information and data within the scope of the “Provisions for the Control of Data”


shall be reported to CNOOC at the same time when the Operator reports them to its


parent corporation. Upon receipt by the Operator of any report from its parent


corporation concerning such information and data, a copy of such report shall be


furnished to CNOOC.


8.5.2 The Operator shall furnish CNOOC in a timely manner with reports on safety,


environmental protection and accidents related to the Petroleum Operations and with


financial reports prepared in accordance with the provisions of Annex II - Accounting


Procedure hereto.








26


8.5.3 The Operator shall provide the non-operator(s) of the Contractor with copies


of the relevant data and reports reasonably required by non-operator(s) and referred to


in Articles 8.5.1 and 8.5.2 herein.


8.5.4 The Operator shall, at the request of any party to the Contract, furnish that


party to the Contract with the following:


8.5.4.1 Procurement plans for purchasing equipment and materials, inquiries, offers,


orders and service contracts, etc.;


8.5.4.2 Manuals, technical specifications, design criteria, design documents


(including design drawings), construction records and information, consumption


statistics, equipment inventory, spare parts inventory, etc.;


8.5.4.3 Technical investigation and cost analysis reports; and


8.5.4.4 Other information relating to the Petroleum Operations already acquired by


the Operator in the performance of the Contract.


8.6 In the course of performing the Petroleum Operations, the Operator shall


abide by the laws, decrees, and other rules and regulations with respect to


environmental protection and safety of the People’s Republic of China and shall


endeavour in accordance with the international petroleum industry practice to:


8.6.1 Minimize the damage and destruction to marine organisms and their living


oceanic environments;


8.6.2 Control blowouts promptly and prevent or avoid waste or loss of Petroleum


discovered in or produced from the Contract Area;


8.6.3 Prevent Petroleum from flowing into low pressure formations or damaging


adjacent Petroleum-bearing formations;


8.6.4 Prevent water from flowing into Petroleum-bearing formations through dry


holes or other wells, except for the purpose of secondary recovery;








27


8.6.5 Prevent land, forests, crops, buildings and other installations from being


damaged and destroyed; and





8.6.6 Minimize the danger to personnel safety and health.





8.7 Project Management Team





In any Oil Field and/or Gas Field within the Contract Area where CNOOC has


the participating interest in the development of said Field, a project management team





(hereafter referred to as “PMT”) shall be established in the organization of the


Operator at the date of approval of the Overall Development Program for said Field


by the competent authorities of the Chinese Government.


The PMT shall comprise those personnel designated by the Parties and the


number of CNOOC’s personnel shall no less than one third (1/3) of the total number


of personnel within the PMT. The Contractor shall designate the person acting as the


manager of PMT, and CNOOC shall designate the person acting as the deputy


manager of PMT.





The PMT shall be located at the Operator’s office within the Chinese territory.


The working iocation(s) of the members of PMT shall be decided according to the


need of the work.


The specific organization, staffing and working system of PMT and





responsibilities and competence of various positions including those of CNOOC’s


personnel assigned to PMT shall be determined by the Parties through consultation


prior to the approval of the Overall Development Program for said Oil Field and/or


Gas Field.





8.8 Transfer and take over of the Production Operations





Before the full recovery of the development costs actually incurred in


accordance with the Overall Development Program of any Oil Field and/or Gas Field


within the Contract Area, CNOOC may, after agreement reached through


consultations of JMC, take over the Production Operations of that Oil Field and/or








28


Gas Field, if conditions permit. After the full recovery of the development costs


actually incurred in accordance with the Overall Development Program of any Oil


Field and/or Gas Field within the Contract Area, CNOOC shall, at any time, have the


right by giving a written notice to the Contractor to take over the Production


Operations of that Oil Field and/or Gas Field. Both aforesaid cases shall be effected


in accordance with the procedures described hereunder.


8.8.1 The Contractor shall submit a transfer plan of the Production Operations to


CNOOC and JMC respectively within sixty (60) days following the date of receiving


the written notice of CNOOC. Such transfer plan shall include, but not be limited to,


a list of various posts to be taken over by CNOOC, a schedule of transfer by stages,


inventories of the relevant facilities and equipment and an inventory of all documents,


manuals, data and information necessary for the Production Operations. Where the


transfer of some of the Production Operations involves any Third Party, the


Contractor shall consult with CNOOC in advance and propose a solution thereto in


the transfer plan, however, this situation shall not be taken by the Contractor as an


excuse to delay and hinder the transfer of the Production Operations.


JMC shall, within thirty (30) days from the date of receiving the said plan,


review and approve it.


8.8.2 CNOOC shall, within sixty (60) days from the date of receiving the transfer


plan of the Production Operations approved by JMC, submit to the Contractor and


JMC respectively the lists and resumes of CNOOC’s personnel who will take over the


posts. The personnel named in the lists shall be persons who have been trained by the


Contractor in accordance with the provisions set forth in Article 16 hereof or


personnel who are considered by CNOOC to be competent. Within one hundred and


eighty (180) days from the date of receiving CNOOC’s lists of the personnel who will


take over the operations, the Contractor shall arrange for such personnel to undergo


step by step practical training for the posts to be taken over by them and shall assist


CNOOC to manage the qualification test.











29


8.8.3 Within three hundred and thirty (330) days from the date of receiving the


written notice of CNOOC, the Contractor shall submit to JMC a report on the


completion of preparations for the transfer of the Production Operations. Such report


shall include the results of the qualification test for CNOOC’s personnel who will


take over the Production Operations and shall be confirmed by JMC within thirty (30)


days after the receipt of the said report. The transfer of the Production Operations


shall begin on the date when JMC makes such confirmation.


8.8.3.1 When the completion of the preparations for the transfer of the Production


Operations is confirmed by JMC, the Contractor shall, in accordance with the transfer


schedule by stages, transfer to CNOOC’s take-over personnel control of all facilities


and equipment relating to the Production Operations in the Oil Field and/or Gas Field,


and all documents, manuals, data and information regarding the use and operation of


such facilities and equipment, so that CNOOC’s personnel are able to manage the


operation of such facilities and equipment.


8.8.3.2 If JMC believes that preparations for the transfer of the Production Operations


have not been completed and sets another deadline for the completion of preparations


for the transfer of the Production Operations, the preparations for the transfer shall be


completed prior to the deadline and the transfer shall begin thereafter.


8.8.4 The transfer in respect of the accounting and financial aspects shall be handled


in accordance with Annex II - Accounting Procedure hereto.


8.8.5 During the preparation for the transfer of the Production Operations and in the


course of the actual transfer, the Contractor shall perform the functions provided for


in Article 8.3, 8.4, 8.5 and 8.6 herein in respect of an Oil Field and/or Gas Field


undergoing the transfer of the Production Operations, until the date when CNOOC


has completely assumed control of and taken over the Production Operations of the


Oil Field and/or Gas Field. Thereafter, the functions of the Operator provided for in


Article 8.3, 8.4, 8.5 and 8.6 herein shall be by analogy applicable to CNOOC.














30


8.8.6 After CNOOC has taken over the Production Operations and become the


Operator of an Oil Field and/or Gas Field, the Contractor shall still have the


obligation, pursuant to Article 2 hereof, to provide CNOOC with the relevant


technical and personnel training assistance, and the costs incurred thereby shall be


charged to the operating costs in accordance with the provisions of Annex II - the


Accounting Procedure hereto.


8.8.7 When CNOOC takes over the Production Operations in any Oil Field and/or


Gas Field, the Chinese Personnel employed by the Contractor for the Production


Operations of the said Oil Field and/or Gas Field shall be transferred to CNOOC's


employment. If CNOOC needs to retain the services of any of the Expatriate


Employees employed by the Contractor or the Contractor still needs to keep some of


the Chinese Personnel in its employment, an agreement shall be reached through


consultation between the Parties prior to the transfer.


8.8.8 The expenses incurred in the transfer and take-over of the Production


Operations shall be charged to the operating costs.





Article 9


Assistance Provided by CNOOC


9.1 To enable the Contractor to carry out expeditiously and efficiently the


Petroleum Operations, CNOOC shall have the obligation to assist the Contractor at its


request to:


9.1.1 Obtain the approvals or permits needed to open accounts with Bank of China;





9.1.2 Go through the formalities of exchanging foreign currencies;


9.1.3 Obtain office space, office supplies, transportation and communication


facilities and make arrangements for accommodation as required;





9.1.4 Go through the formalities of the customs;


9.1.5 Obtain entry and exit visas for the Expatriate Employees who will come to


China for the implementation of the Contract and for their dependants who will visit


them or reside in China for a long period and provide assistance for their


transportation and moving as well as medical services and travel in China;


9.1.6 Obtain necessary permission to send abroad, if necessary, documents, data


and samples for analysis or processing during the Petroleum Operations; and


9.1.7 Contact departments engaged in fishing, aquatic products, meteorology, ocean


shipping, civil aviation, railway, transportation, communication and services for


supply bases etc. for relevant matters and otherwise assist the Contractor in obtaining


on a timely basis approvals necessary for the conduct of the Petroleum Operations


under the Contract.


9.2 In accordance with Article 15 hereof, CNOOC shall assist the Contractor with


the recruitment of the Chinese Personnel.


9.3 CNOOC shall, at the request of the Contractor, sell to the Contractor data and


samples concerning the Contract Area other than those produced as a result of


Petroleum Operations hereunder in accordance with any relevant rules and


regulations and CNOOC shall also assist the Contractor to arrange the purchase of


any oceanic environmental, hydrological, meteorological, earthquake and other data


available from the relevant departments in China.


9.4 CNOOC shall, at the request of the Contractor, also assist the Contractor with


matters other than those under Articles 9.1, 9.2 and 9.3 herein if possible.


9.5 All expenses incurred in the assistance provided by CNOOC in accordance


with this Article 9 shall be paid by the Contractor and shall be handled in accordance


with the provisions of Annex II - Accounting Procedure hereto.

















32


 Article 10


Work Program and Budget


10.1 Before the fifteenth (15) of September of each Calendar Year after the Date of


Commencement of the Implementation of the Contract, the Operator shall complete


and submit to JMC for its review an annual Work Program and budget, including


estimated schedule of monthly expenditures, for the next Calendar Year. JMC shall


complete the review of the annual Work Program and budget and submit them to


CNOOC for review and approval before the thirty-first (31st) of October of the


Calendar Year in which they are submitted to JMC. Within fifteen (15) days


following the receipt of the annual Work Program and budget, CNOOC shall notify


JMC in writing of its approval or any modifications thereto with its detailed reasons.


If CNOOC requests any modifications on the aforesaid annual Work Program and


budget, the Parties shall promptly hold meetings to make modifications and any


modifications agreed upon by the Parties shall be effected immediately. In case


CNOOC fails to notify JMC of its approval within fifteen (15) days, the annual Work


Program and budget proposed by the Operator shall be deemed to have been


approved by CNOOC. The Operator shall make its best efforts to perform the


Petroleum Operations in accordance with the approved or modified annual Work


Program and budget.


As required for reviewing Work Program and budget by JMC, the Operator


shall submit to JMC the supporting data as detailed as possible.


Commercial scale personnel day rates for the Contractor’s representatives in


JMC and the PMT (and the Contractor's representatives in the expert groups on an "as


needed basis") including travel costs, shall be submitted by the Contractor to the JMC.


Such costs shall be approved by JMC and included in the Work Program and budget


and amendments thereto. After approval by JMC, such costs incurred shall be charged


to the Joint Account.


10.2 The Operator may, in accordance with the following provisions, incur excess


expenditures or expenditures outside the budget in carrying out the Work Program


 (b) If expenditures or excess expenditures are determined to be unreasonable, the


Operator shall not incur such expenditures or excess expenditures again during the


same Calendar Year and such unreasonable expenditures or excess expenditures shall


be dealt with in accordance with Article 5.4 of Annex II - Accounting Procedure


hereto.








Article 11


Determination of Commerciality


11.1 If any Petroleum discovery is made within the Contract Area, the Operator


shail promptly report such discovery to JMC.


If JMC or the Contractor makes a decision that a Petroleum discovery is


worthy of appraisal, the Operator shall submit to JMC an appraisal Work Program


including appraisal work and timetable for such Petroleum discovery as soon as


possible. Such an appraisal Work Program shall be worked out no later than


ninety (90) days from the date of the aforesaid decision made by JMC or the


Contractor. The appraisal Work Program shall, in so far as is practicable, be based on


conducting the appraisal work continuously, with a view to commencing offshore


operations within one hundred and eighty (180) days from the date of the aforesaid


decision made by JMC or the Contractor.


11.2 After the approval by JMC of the appraisal Work Program referred to in


Article 11.1 herein, the Operator shall carry out the operations as soon as possible


without unreasonable delay in accordance with the timetable set forth in the approved


appraisal Work Program.


11.3 Within one hundred and eighty (180) days after the completion of the last


Appraisal Well, the Operator shall submit to JMC a detailed report on the appraisal of


the commerciality of the discovered Petroleum-bearing trap. Under special


circumstances, the above mentioned periods may be reasonably extended upon


agreement of the Parties.








35


The appraisal report shall include the evaluation on geology, development,


engineering and economics, including estimated project costs, and the Overall


Development Program to be approved and the Overall Development Program shall


include the Maximum Efficient Rate (MER) and the duration of the production period


determined in accordance with the international petroleum industry practice.


Prior to the submission of the Overall Development Program, the Operator


shall:


(a) submit to CNOOC the report of oil and/or gas in place of Oil Field and/or Gas


Field; and


(b) entrust a qualified organization to prepare the Environmental Impact


Statements.


The reports and statements mentioned in (a) and (b) above shall be submitted


to the competent authorities of the Chinese Government through CNOOC for review


and approval.


4 Within thirty (30) days following the submission of the appraisal report on


any Crude Oil bearing trap, JMC shall convene a meeting to review such report.


When JMC decides unanimously after its review that the said Crude Oil bearing trap


is an Oil Field with commercial value and is to be developed, or the Contractor


considers, in accordance with Article 11.6.2 herein, that a Crude Oil bearing trap is an


Oil Field with commercial value and is to be developed, JMC shall submit to


CNOOC for confirmation the appraisal report and the Overall Development Program


of the said Oil Field to be developed and CNOOC shall submit the Overall


Development Program of the Oil Field to the competent authorities of the Chinese


Government as soon as possible for its review and approval. The Operator shall


perform the Development Operations in accordance with the Overall Development


Program of each Oil Field approved by the competent authorities of the Chinese


Government. If such Development Operations do not commence within ninety (90)


days after the date of approval of the Overall Development Program of an Oil Field











36


by the competent authorities of the Chinese Government, or if an intentional delay


caused unilaterally by the Contractor acting as the Operator, results in a suspension or


halt of ninety (90) continuous days in the Development Operations of an Oil Field,


the Contractor shall be deemed to have automatically waived all its rights in the said


Oil Field.


11.5 If, after the appraisal, JMC determines that a Crude Oil bearing trap is non¬


commercial, such Crude Oil bearing trap may, at the Contractor’s option, be retained


within the Contract Area during the term of the exploration period; before the


expiration of the exploration period, if, because of certain positive factors, JMC


considers unanimously that it is necessary to reappraise the commerciality of the


Crude Oil bearing trap, the Operator shall submit a further appraisal report on such


Crude Oil bearing trap to JMC for its review and adoption; if the JMC’s


determination of non-commerciality of such Crude Oil bearing trap has not altered by


the expiration of the exploration period, the relevant area of such Crude Oil bearing


trap shall be excluded from the Contract Area.


11.6 If JMC can not reach an agreement on the commerciality of a Crude Oil


bearing trap, the Parties shall make their best efforts to seek another solution thereto.


However, if JMC can not reach an agreement on the commerciality of any Crude Oil


bearing trap within ninety (90) days following the submission of the appraisal report


prepared by the Operator in accordance with Article 11.3 herein or any further


appraisal report prepared by the Operator in accordance with Article 11.5 herein, then


such trap shall be dealt with in accordance with the following procedure:


11.6.1 If the Contractor informs CNOOC by notice that it considers a Crude Oil


bearing trap without commercial value, then the Contractor shall be deemed to have


waived its rights to participate in the development of that Crude Oil bearing trap. The


relevant area covered by that Crude Oil bearing trap shall, however, be retained


within the Contract Area until the expiration of the exploration period. In case that


CNOOC decides, within the exploration period, to develop solely such Oil Field, then,


within the development period, the Contractor shall be allowed to participate in the











37


development. If the Contractor decides, within the development period of the said Oil


Field, to participate in the development of such Oil Field by giving a written notice to


CNOOC, then, the Contractor shall pay CNOOC an amount of money, in addition to


the forty-nine percent (49%) of the development costs spent by CNOOC on the said


Oil Field with Deemed Interest thereon up to the date of Contractor's submission of


the written notice to CNOOC. Such amount shall be equal to three times (300%) the


foregoing payable development costs with Deemed Interest thereon and such amount


of money shall not be recovered after commercial production of the Oil Field


commences. Thereafter, the development costs to be incurred in such Oil Field shall


be provided by the Parties in proportion to their respective participating interests. In


the event that the Contractor still decides not to participate in the development of the


said Oil Field by the expiration of the development period of such Oil Field, then the


said Oil Field shall be excluded from the Contract Area upon the Date of


Commencement of Commercial Production of the said Oil Field.


11.6.2 If CNOOC considers a Crude Oil bearing trap to have no commercial value


while the Contractor considers that it is a Crude Oil bearing trap having commercial


value, the Contractor may solely provide the entire development costs and undertake


development of the said Oil Field, and the said Oil Field shall be deemed as an Oil


Field in which CNOOC has no participating interests. The entire risk related to the


development costs spent for the said Oil Field shall be borne solely by the Contractor.


11.6.3 Unless otherwise decided by CNOOC, the Development Operations and





Production Operations of an Oil Field solely financed for the development by


CNOOC shall still be, upon agreement between the Parties through consultation,


performed by the Operator subject to the agreement of terms and conditions entered


into by CNOOC and the Operator.





11.7 In the event of an Oil Field and/or Gas Field Straddling a Boundary, CNOOC


shall arrange for the Contractor and the neighbouring parties involved to work out a


unitized Overall Development Program for such Field and to negotiate the relevant


provisions thereof.








38





A-


11.8 If a Petroleum-bearing trap without commercial value within the Contract


Area can be most economically developed as a commercial Oil Field and/or Gas Field


by linking it up with facilities located outside the Contract Area, then the


development of such Field shall be dealt with in the same manner as provided in


Article 11.7 herein.


11.9 The procedures specified in this Article 11 shall be applied, by analogy, to


determination of additional development projects in any Oil Field and/or Gas Field


within the Contract Area during the production period, such projects being designed


to increase the level of production and/or total quantity of Petroleum recoverable


from the said Field.


11.10 If an appraisal trial production or temporary trial production is deemed by the


Parties to be necessary with respect to any trap in which Petroleum is discovered or


any Oil Field and/or Gas Field within the Contract Area, the Parties shall reach a


written agreement through negotiation on terms and conditions of appraisal trial


production or temporary trial production, which shall be attached hereto as a


supplementary document.








Article 12


Financing and Cost Recovery


12.1 Funds required for the Petroleum Operations shall be raised by the Operator in


accordance with Work Programs and budgets determined pursuant to the relevant


provisions of the Contract, the provisions described in Annex II - Accounting


Procedure hereto, and the provisions described hereunder.


12.1.1 All the exploration costs required for Exploration Operations shall be


provided solely by the Contractor. However, the exploration costs required for the


fulfillment of the minimum exploration work commitment shall be deemed the equity


capital of the Contractor.











39


12.1.2 The development costs required for Development Operations in each Oil Field


and/or Gas Field within the Contract Area shall be provided by CNOOC and the


Contractor in proportion to their respective participating interests: fifty-one


percent (51%) by CNOOC and forty-nine percent (49%) by the Contractor, unless


CNOOC applies the provisions in the second paragraph of this Article 12.1.2 herein.


In the event that CNOOC, at its option, decides not to participate in the


development of an Oil Field and/or Gas Field or decides to participate in the


development of such Field to an extent of less than fifty-one percent (51%) of the


participating interests, CNOOC shall notify the Contractor in writing of its decision


of non-participation or a specific lesser percentage of its participating interests before


the appraisal report is to be reviewed by JMC pursuant to Article 11.4 or


Article 18.2.2 hereof. In such case, if CNOOC does not participate in the


development of such Field, the development costs therein shall be borne solely by the


Contractor, or in case CNOOC participates in the development of such Field to an


extent of less than fifty-one percent (51%) of the participating interests, such


development costs shall be borne by the Parties in proportion to their actual


respective participating interests.


12.1.3 The operating costs required for the Production Operations in each Oil Field


and/or Gas Field within the Contract Area shall be paid respectively by CNOOC and


the Contractor in proportion to their participating interests of the development costs


of the said Field.


12.1.4 For the purpose of implementation of the Contract, CNOOC shall agree that


the Contractor may, when financing, use the entitlement of its share of production


under the Contract as a security for loans, provided that the Contractor shall apply to


CNOOC in advance and the application therefor shall be examined by CNOOC, and


provided further that the right and interests of CNOOC under the Contract shall not


be impaired thereby.














40


12.2 All the costs incurred in the performance of Petroleum Operations shall be


recovered in accordance with Annex II - Accounting Procedure hereto and the


provisions described as follows:


12.2.1 The operating costs for any given Calendar Year actually incurred by CNOOC


and the Contractor in respect of each Oil Field pursuant to Article 12.1.3 herein, shall


be recovered in kind by the Parties out of the Crude Oil produced from the said Oil


Field during that Calendar Year in accordance with Annex II - Accounting Procedure


hereto, after the operating costs have been converted into a quantity of Crude Oil on


the basis of the Crude Oil price determined in accordance with Article 14 hereof.


Unrecovered operating costs shall be carried forward to the succeeding Calendar Year.


12.2.2 The exploration costs incurred by the Contractor shall be recovered as follows:


(a) After the Date of Commencement of Commercial Production of an Oil Field


within the Contract Area, the exploration costs incurred by the Contractor in respect


of the Contract Area shall be recovered in kind out of the Crude Oil produced from


any Oil Field within the Contract Area in accordance with Article 13.2.2.3 hereof,


after the exploration costs have been converted into a quantity of Crude Oil based on


the Crude Oil price determined in accordance with Article 14 hereof. The exploration


costs shall be recovered without any interest.


(b) If no Oil Field and/or Gas Field is discovered within the Contract Area, the


exploration costs incurred by the Contractor shall be deemed as its loss. Under no


circumstances shall CNOOC reimburse the Contractor for such loss.


12.2.3 The development costs incurred by CNOOC and the Contractor and Deemed


Interest thereon for each Oil Field shall be recovered as follows:


12.2.3.1 After the Date of Commencement of Commercial Production of any Oil Field


within the Contract Area, the development costs in respect of such Field incurred by


CNOOC and the Contractor and Deemed Interest thereon calculated in accordance


with Article 12.2.3.2 herein shall be recovered in kind out of the Crude Oil produced


from such Field in accordance with Article 13.2.2.3 hereof, after the development





41


costs have been converted into a quantity of Crude Oil based on the Crude Oil price


determined in accordance with Article 14 hereof.


12.2.3.2 Deemed Interest on the development costs incurred by CNOOC and the


Contractor for each Oil Field within the Contract Area shall be calculated with the


fixed annual compound rate of nine percent (9%) from the first day of the month


following the month in which such development costs expended by each party to the


Contract are actually received in the bank account of the joint account opened by the


Operator. The detailed method for such calculation shall be as provided in Annex II -


Accounting Procedure hereto.


12.3 The provisions in Article 12.2 herein shall apply by analogy to Gas Fields.


Article 13


Crude Oil Production and Allocation


13.1 The Operator shall, in accordance with the production profile, adjusted as the


case may be, set forth in the Overall Development Program for each Oil Field as


approved by the competent authorities of the Chinese Government, work out a Crude


Oil production plan for each Oil Field in each Calendar Year and carry out Crude Oil


production pursuant to such plan.


13.2 The Annual Gross Production of Crude Oil of each Oil Field within the


Contract Area in each Calendar Year within the production period shall be allocated


in accordance with the following sequence and proportions:


13.2.1 Five percent (5%) of the Annual Gross Production of Crude Oil shall be used


for payment of the Value Added Tax and shall be paid in kind to the competent


authorities of the Chinese Government through CNOOC.


13.2.2 Sixty two point five percent (62.5%) of the Annual Gross Production of Crude


Oil shall be used for the payment or recovery in the following sequence:











42


13.2.2.1 Royalty shall be paid in accordance with “Regulations on the Payment of


Royalty for the Exploitation of Offshore Petroleum Resources5’ issued by the Ministry


of Finance of the People’s Republic of China.


13.2.2.2 The Crude Oil less the amount of Crude Oil for payment of royalty in


accordance with Article 13.2.2.1 shall be “cost recovery oil”. Payment in kind for the


operating costs actually incurred but not yet recovered by the Parties shall be made


pursuant to Article 12.2.1 hereof after the price of the said “cost recovery oil” has


been determined in accordance with Article 14 hereof.


13.2.2.3 The remainder of the “cost recovery oil” shall, after payment for operating


costs in accordance with Article 13.2.2.2 herein, be deemed as “investment recovery


oil”. Such “investment recovery oil” shall be used for the recovery of the exploration


costs in respect of the Contract Area which were incurred and not yet recovered by


the Contractor, and shall be used for the recovery of the development costs in respect


of the Oil Field itself which were incurred and not yet recovered by CNOOC and the


Contractor in accordance with Articles 12.2.2 and 12.2.3 hereof, and Deemed Interest


thereon. The method of recovery and the recovery sequence are as follows:


(a) Beginning in the Calendar Year during which the production of any Oil Field


within the Contract Area commences, the “investment recovery oil” referred to in


Article 13.2.2.3 herein, based on the price which has been determined in accordance


with Article 14 hereof shall be paid in kind first to the Contractor for the recovery of


the exploration costs which were incurred in respect of, and have not yet been


recovered from, the Contract Area. The unrecovered exploration costs shall be carried


forward to the succeeding Calendar Years until fully recovered.


(b) Beginning in the Calendar Year during which the exploration costs incurred


by the Contractor in respect of the Contract Area have been fully recovered, the


remainder of the “investment recovery oil” of an Oil Field shall be used for the


simultaneous recovery of the development costs incurred and not yet recovered


respectively by CNOOC and the Contractor and Deemed Interest thereon in respect of


such Field in proportion to their respective participating interests therein after the








43


7^wA'


 price of such remainder of the '‘investment recovery oil” has been determined in


accordance with Article 14 hereof. The unrecovered development costs and Deemed


Interest thereon shall be carried forward to the succeeding Calendar Years until fully


recovered.





(c) During the production period of an Oil Field, costs for an additional


development project incurred pursuant to Article 11.9 hereof and Deemed Interest


thereon shall be recovered together with the unrecovered development costs and


Deemed Interest thereon. If the development costs and Deemed Interest thereon in


respect of such Oil Field have been fully recovered, then costs for the said additional


development project and Deemed Interest thereon in respect of such Oil Field shall be


recovered from the “investment recovery oil” of such Field referred to in Article


13.2.2.3 herein in accordance with the provisions specified in Article 13.2 herein.


The unrecovered costs for the additional development project and Deemed Interest


thereon shall be carried forward to the succeeding Calendar Years until fully





recovered.





(d) After the recovery of an Oil Field’s development costs and Deemed Interest


thereon and/or costs for the additional development project and Deemed Interest


thereon from the said Field by the Parties, the remainder of the “investment recovery


oil” shall automatically be regarded as part of the “remainder oil” referred to in


Article 13.2.3 herein. By the date of expiration of the production period of an Oil





Field pursuant to Article 4.5 hereof, if any development costs and Deemed Interest


thereon and/or costs for the additional development project incurred in respect of such


Field an Deemed Interest thereon have not yet been fully recovered, then such


unrecovered costs and Deemed Interest thereon shall be regarded as a loss, and the


Parties shall bear the loss in proportion-to their respective participating interests.





13.2.3 The remainder of the Annual Gross Production''of Crude Oil after the


allocation referred to in Articles 13.2.1 and 13.2.2 herein shall be deerped as


“remainder oil"'. Such ‘‘remainder oil” shall be divided into “share oil” of the Chinese


side and '‘allocable remainder oil".











44


 ] 3.2.4 The “allocable remainder oil” of each Oil Field in each Calendar Year referred


to in Article 13.2.3 herein shall be shared by the Parties in proportion to their


respective participating interests in the development costs, fifty-one percent (5T%) for


CNOOC and forty-nine percent (49%) for the Contractor, [n the event that CNOOC


does not participate in the development of an Oil Field within the Contract Area, the


Contractor shall obtain one hundred percent (100%) of the “allocable remainder oil'*


of that Field. In the event that CNOOC participates to an extent less than fifty-one


percent (51%) in the development of an Oil Field within the Contract Area, the


“allocable remainder oil” of such Field in that Calendar Year shall be shared by the


Parties in proportion to their actual respective participating interests in such Oil Field.


13.3 Pursuant to the method of allocation specified in this Article, the Contractor


may obtain an aggregate amount of Crude Oil consisting of the following three


categories:





13.3.1 The total amount of Crude Oil as converted from the actual operating costs


paid by the Contractor in all Oil Fields in proportion to its participating interests in


the development costs stipulated in Article 12.1.3 hereof when recovering such costs;


13.3.2 The total amount of the “investment recovery oil” from all Oil Fields due to


the Contractor provided for in Article 13.2.2.3 herein; and


13.3.3 The total amount of the “allocable remainder oil” of all Oil Fields due to the





Contractor in accordance with Article 13.2.4 herein.


13.4 In the event that the Contractor wishes to purchase a portion of all of the total


amount of the Crude Oil obtained by CNOOC from the “investment recovery oil” in


addition to the Crude Oil obtained by the Contractor in accordance with Article 13.3











46


herein, the Parties shall negotiate the terms and conditions of purchasing such Crude


Oil and reach an agreement as a supplementary document hereto.


13.5 CNOOC and each company comprising the Contractor shall, throughout the


entire Contract term, have the right and obligation to, in each Calendar Quarter, lift


and take, and separately dispose of their respective full shares of all Crude Oil


produced and determined pursuant to Articles 13.3 and 13.4 herein.


In the event that the Crude Oil production of any Oil Field is reduced because


CNOOC or any company comprising the Contractor does not lift and take its full


share of Crude Oil or lifts nothing, then such reduction in Crude Oil production shall


not affect the full shares of Crude Oil due to or the shares of Crude Oil available to be


lifted and disposed of by each of the other parties as provided in Article 13.6(c)


herein.


13.6 A Crude Oil lifting procedure shall be agreed upon by the Parties no later than


six (6) months prior to the Date of Commencement of Commercial Production within


the Contract Area and shall include, but not be limited to:


(a) Operator’s notification of Crude Oil production to CNOOC and each company


comprising the Contractor;


(b) notification by CNOOC and each company comprising the Contractor of its


expected offtake to the Operator;


(c) Operator’s notification to CNOOC and each company comprising the


Contractor of the final Crude Oil lifting schedule which shall be binding on CNOOC


and each company comprising the Contractor;


(d) limitation and calculation of overlift and underlift of CNOOC and each


company comprising the Contractor; and provisions to ensure timely and ratable


lifting of Crude Oil;


(e) determination of allowable operational tolerance on liftings; and











47


(f) other terminal procedures as may be required to reflect the particular


circumstances.


13.7 For the purpose of implementing the procedures as described in Article 13.6


herein, CNOOC and each company comprising the Contractor shall jointly set up a


Crude Oil lifting coordination group consisting of representatives one each appointed


by CNOOC and each company comprising the Contractor, with the representative of


CNOOC as the chairman. Such group shall be responsible for the preparation of


Crude Oil lifting plans of Calendar Year, of Calendar Quarter and of calendar month


and shall also be responsible for the reasonable and unified arrangements and


adjustments of the aforesaid Crude Oil lifting plans through close contact with any


operator in charge of the storage and loading facilities.








Article 14


Quality, Quantity and Price of Crude Oil


14.1 In accordance with Article 13.3 hereof, the Contractor may obtain the


aggregate amount of three categories of the Crude Oil referred to in Articles 13.3.1,


13.3.2 and 13.3.3 hereof. In addition, the Contractor may purchase a portion or all of


the total amount of the Crude Oil allocated to CNOOC from the “investment recovery


oil” in all Oil Fields within the Contract Area in accordance with Article 13.4 hereof.


14.2 Quality of the Crude Oil


14.2.1 The quality analysis of Crude Oil produced from each Oil Field within the


Contract Area shall be undertaken on loading such Crude Oil to each tankship. Such


analysis shall be carried out on a sample taken immediately prior to or during loading,


by the Chinese Commodity Inspection Bureau (hereafter referred to as the “Bureau”)


or any representative agency delegated by the Bureau pursuant to standards issued by


the State Bureau of Standardization of the People’s Republic of China or by the


competent authorities of petroleum industry of the Chinese Government.











48


14.2.2 The Crude Oil quality analysis referred to in Article 14.2.1 above shall include


the following:


(a) density at 20 degrees Centigrade, in grams per cubic centimetre;


(b) sulphur content, in weight percentage;


(c) water content, in weight percentage; and


(d) basic sediment content, in weight percentage.


14.3 Quantity of the Crude Oil


14.3.1 The quantity measurement of the Crude Oil produced from each Oil Field


within the Contract Area, when being lifted, shall be made at a delivery point and


with measuring devices both to be agreed upon by the Parties. A relevant measuring


organization of the Chinese Government or a representative agency delegated thereby


shall, at appropriate regular intervals, calibrate all the measuring devices, conduct


special testing and issue certificates of confirmation with respect thereto before the


measuring devices are put into use. The quality and quantity of the Crude Oil


delivered shall be authenticated in accordance with the commodity quality certificate


and weight certificate issued by the Bureau and such quality and quantity shall be the


basis for the accounting settlement.


14.3.2 If any party to the Contract believes that the Crude Oil measuring devices,


sampling or analysis are inaccurate, or has any objection to the results specified in the


above-mentioned certificates, onsite investigations, technical exchanges and


discussions may be conducted by the Parties to resolve the issue in a manner


satisfactory to the Parties.


14.4 Determination of the Crude Oil Price


14.4,1 The price of various grades of the Crude Oil shall be expressed as FOB price


at the delivery point in China. Determination of the Crude Oil price shall be made


with reference to the prevailing price in arm’s length transaction of the long-term-








49


contract-sales of similar quality Crude Oil on the main world oil markets and the


adjustment in such price shall be made in accordance with such determinants as the


quality of the Crude Oil, the terms of delivery, transportation, payment and other


terms.


The aforesaid price in arm’s length transactions in this Article refers to a price


at which a seller sells its Crude Oil to a buyer who is independent of the seller, but


not including the prices used by them for government to government transactions


which do not reflect the international oil market price, Crude Oil exchange, barter or


spot transactions.


14.4.2 Where the Crude Oil produced from each Oil Field within the Contract Area


differs in grade, the prices of such Crude Oil with different grades shall be


individually determined.


14.4.3 The price of the Crude Oil produced from all the Oil Fields within the


Contract Area shall be denominated in U.S. dollars per metric ton. However, if an


international currency other than the U.S. dollar prevails on the main world oil


markets as the pricing unit of Crude Oil, the Parties may also use that international


currency therefore upon mutual agreement.


14.4.4 Procedure for the Determination of the Crude Oil Price


14.4.4.1 The Crude Oil price shall be determined each month. In case the Crude Oil


price prevailing on most world oil markets fluctuates, CNOOC and the Contractor


each shall have the right to propose, at any time, that a new Crude Oil price shall be


negotiated and determined.


14.4.4.2 The Contractor shall, no later than fifteen (15) days prior to commencement of


any month, notify CNOOC of its proposed price for Crude Oil to be lifted in such


month (for the purpose of this Article hereafter referred to as the said month).


14.4.4.3 CNOOC shall notify the Contractor of its decided price within ten (10) days


after the receipt of the aforesaid proposed price as provided by the Contractor. In the








50


absence of a different price notified by CNOOC to the Contractor within ten (10)


days after the receipt of the aforesaid notification, the proposed price notified by the


Contractor as referred to in Article 14.4.4.2 herein shall be applied to the Crude Oil to


be lifted in the said month.


14.4.4.4 The Contractor shall, within five (5) days following its receipt of notice of a


price decided by CNOOC, state to CNOOC whether the price is acceptable. If it is


acceptable, the said decided price shall be regarded as the price agreed upon by the


Parties for the said month. If not acceptable, the Parties shall, within ten (10) days,


carry out further negotiation in an amicable manner to determine the price for the said


month.


14.4.4.5 In the event that the Parties still can not reach an agreement on the Crude Oil


price for the said month through further negotiations by the Parties, the Contractor


may lift the Crude Oil in accordance with the quota specified for the said month in


Article 13.2 hereof, and the Crude Oil price for the preceding month shall apply


provisionally to the Crude Oil of such quota and/or the payment shall be made


accordingly. Then, the Parties shall negotiate further on the Crude Oil price for the


said month, taking into account relevant independent and non-proprietary market data


on Third Party long-term-contract-sales of Crude Oil in substantial quantities on the


main world oil markets, adjusted for quality, transportation and other applicable


differentials. The Parties shall each take into account the information supplied and


discussed and attempt to agree on a Crude Oil price based upon such information by


the end of the said month.


(A) In the event that the Parties still can not reach an agreement on Crude Oil


price by the end of the said month, then the Crude Oil price shall be the weighted


average FOB price of the Crude Oil of same or similar quality sold by CNOOC


and/or the Contractor to a Third Party or Third Parties and produced in the said month


from the Oil Fields described hereafter, adjusted for such differences as the quality,


delivery, transportation, payment and other terms, but excluding the government to











51


government transactions which do not reflect the international oil market price, Crude


Oil exchange, barter or spot transactions.


The application of the above-mentioned price of Crude Oil sold to a Third


Party or Third Parties shall be in the following sequence:


(i) Firstly, the price, calculated and determined in accordance with the


above-mentioned stipulations, of the Crude Oil produced from the relevant Oil Field


or Oil Fields in the Contract Area and sold to a Third Party or Third Parties shall be


applied;


(ii) In the event no sales as referred to in Paragraph (i) above were made in


the said month, the price, calculated and determined in accordance with the above-


mentioned stipulations, of the Crude Oil produced from other oil fields in the


Contract Area and sold to a Third Party or Third Parties shall be applied; and


(iii) In the event no sales mentioned in Paragraphs (i) and (ii) above were


made in the said month, the price, calculated and determined in accordance with the


above-mentioned stipulations, of the Crude Oil produced from the Oil Fields of other


Contract Areas in offshore areas for Chinese-foreign cooperative exploitation of


Petroleum resources and sold to a Third Party or Third Parties shall be applied.


(B) In the event there are no such Third Party sales of the Crude Oil during the


said month, then the Crude Oil price for the said month shall be equal to the same


Crude Oil price of the preceding month adjusted by the differences in the individual


arithmetic average of the daily weighted average of the official government selling


price of a basket of three or more internationally traded Crude Oils in the said month


compared with that of such basket of Crude Oils for the preceding month. The


adjusted price shall be the Crude Oil price for the said month. The Crude Oils


selected for the basket shall each be similar in quality to that from the Contract Area


and chosen from different countries and shall reflect the conditions of the main world


oil markets and shall be mutually agreed by the Parties at a reasonable time prior to


the Date of Commencement of the Commercial Production of Crude Oil.








52


(C) If the Parties are unable to agree on a Crude Oil price for a month in which


Crude Oil is first produced and delivered from or the production of Crude Oil is


restored in a Field in the Contract Area, then the Crude Oil for the month shall be


priced and/or paid in accordance with the arithmetic average price of the prices


finally proposed by the Parties in the month. Based on the Crude Oil price agreed


upon by the Parties for the succeeding month, the Crude Oil price for the month shall


be determined by adjusting retroactively by the difference between the arithmetic


average prices of the basket of the Crude Oils for the month and the succeeding


month in accordance with the calculation method referred to in Paragraph 14.4.4.5(B)


herein.


14.4.4.6 If, due to the delayed announcement of Crude Oil prices by the main world


oil-producing countries or the main world oil markets, or if, as agreed by CNOOC


and the Contractor, an unstable main world oil market exists, then, the period for the


determination of the price referred to in Article 14.4.4.2 herein may be extended to


the end of the said month in question.


14.4.4.7 If the Crude Oil prices are adjusted retroactively by the main world oil-


producing countries, then the Crude Oil price may be retroactively adjusted by the


Parties after consultation, provided that the period for such retroactive adjustment


shall not exceed the current month.


14.4.5 The Crude Oil for each month due to CNOOC pursuant to Article 13 hereof


shall be converted into an amount of money in the currency utilized pursuant to


Article 14.4.3 herein based on the Crude Oil price for that month finally determined


in accordance with the aforesaid provisions specified in Article 14.4 herein and such


amount of money shall be entered into the joint account as of the date on which such


Crude Oil is lifted.


14.4.6 The Crude Oil for each month due to the Contractor pursuant to Article 13


hereof shall be converted into an amount of money in the currency utilized pursuant


to Article 14.4.3 herein based on the Crude Oil price for that month finally


determined in accordance with the aforesaid provisions specified in Article 14.4


herein and such amount of money shall be entered into the joint account as of the date


on which the Crude Oil is lifted.


14.5 Terms of Payment for the Purchased Crude Oil pursuant to Article 3 3.4.


14.5.1 Before the Crude Oil price is determined, the time limit for payment shall be


agreed upon by the Parties through consultation in accordance with the practice then


prevailing on the main world oil markets.


14.5.2 In case the Contractor is in default of such payment, the Contractor shall pay


interest on arrears of the payment, starting from the first day of such default. The


interest rate shall be the seven day term London Interbank Offered Rate (LIBOR) for


U.S. dollars quoted by Barclays Bank PLC in London at eleven (11:00) a.m. on the


first working day following the due date of payment plus five percent (5%).


14.6 Destination of Crude Oil


14.6.1 The destination of Contractor's Crude Oil obtained under the Contract shall be


at the discretion of the Contractor, except as stipulated in Article 02 herein.


14.6.2 The Contractor agrees that it shall not deliver any Crude Oil obtained hereunder


to any destination which is prohibited by the laws, regulations or official requirements of


the Government of the People’s Republic of China. CNOOC shall notify the Contractor


of all such officially prohibited destinations in writing on a timely basis.








Article 15


Preference to the Employment of the Chinese Personnel, Goods and Services


15.1 The Operator, in carrying out the Petroleum Operations, under the conditions


of such factors as quality, price, delivery time and services are competitive, shall give


preference to the goods, equipment and service provided within the territory of


People’s Republic of China.














54


15.2 The Contractor, in carrying out the Petroleum Operations, shall give


preference to the employment of qualified Chinese Personnel. For this purpose, the


Contractor shall submit in advance to CNOOC and JMC respectively a plan for the


employment of Chinese Personnel listing the posts and number of the persons


involved, indicating those Chinese Personnel to be employed directly and those


required to be furnished by CNOOC. CNOOC shall, in accordance with the plan, and


if so requested by the Contractor, provide or assist in recruiting Chinese employee


candidates for such employment. For the performance of Petroleum Operations, the


Contractor shall have the obligation to employ competent Chinese Personnel and to


employ those who have become qualified after being trained in accordance with the


training program. The Contractor shall be given preference in employing the Chinese


Personnel who have participated in the training program provided by the Contractor.


15.3 In accordance with Article 19 of the “Petroleum Regulations”, the engineering





design corporations under CNOOC shall have the right to participate in the master


designs and engineering designs made by the Contractor for the purpose of the


implementation of the Contract. Engineering design companies within the territory of


the People’s Republic of China shall be given preference in entering into the


subcontracts for the aforesaid master designs and engineering designs provided that


their technical level, price and delivery time are competitive.





15.4 After the Contractor signs equipment leasing contracts, service contracts or


subcontracts with CNOOC or its Affiliates in accordance with Article 15.1 herein, the


Contractor shall endeavor to provide technical assistance to CNOOC or its Affiliates,


at the request of CNOOC, so as to enable them to meet the needs of operations to be


undertaken. The expenses so incurred shall be borne by CNOOC or its Affiliates.








Article 16


Training of Chinese Personnel and Transfer of Technology


16.1 In the implementation of the Contract, the Contractor or its Affiliates





including each company comprising the Contractor shall, apply in the Petroleum





03





si


Operations their appropriate and advanced technology and managerial experience,


including their proprietary technology e.g. patent, know-how or other confidential


technology, etc. At the same time, the Contractor shall have the obligation to transfer


its technology and managerial experience, including their proprietary technology e.g.


patented technology, know-how or other confidential technology, etc. At the same


time, the companies comprising the Contractor shall have the obligation to transfer


their technology and experience and the necessary data and/or information for


mastering that technology and experience, to CNOOC and its Affiliates. Provided


however, such technology to be transferred shall be proprietary to the Contractor and


if the transfer of any of such technology is restricted in any way during the term of


the Contract, the Contractor shall, to the extent reasonably possible, endeavour to


obtain permission for the transfer to such restricted technology.


16.2 Within ninety (90) days following the approval of the Overall Development


Program of the first Oil Field and/or Gas Field within the Contract Area by the


responsible authorities of the Chinese Government, the Contractor shall, after the


consultation with CNOOC, complete and submit a training and technology transfer


program for the Chinese Personnel in the development period and the corresponding


budget to JMC for review and approval, and upon approval by JMC, put it into


practice. The Contractor shall, after consultation with CNOOC complete and submit


training and technology transfer programs and corresponding budgets for the Chinese


Personnel in the production period to JMC for its review and approval before the Date


of Commencement of Commercial Production, and upon approval by JMC, put them


into practice in time so as to have ample time in advance for such training and


technology transfer.


In accordance with the provisions in Article 8.8 hereof and in order to


facilitate the transfer of the Operatorship to CNOOC as early as possible, the


Operator shall, through the training of the Chinese Personnel, gradually increase the


percentage of the Chinese Personnel including the key personnel while the percentage


of the Expatriate Employees shall be reduced accordingly. By the end of the fifth year


of the production, the total number of the Chinese Personnel shall be no less than








56


ninety percent (90%) of the total number of personnel. The total number of the


Chinese Personnel mentioned above shall not include those personnel rendering


living services of any Third Party.


16.3 The purpose, requirement, fields of specialization, scope of personnel,


specified job categories, type, method and etc. of the training of Chinese Personnel


and technology transfer shall be determined through consultation by the Parties.


16.4 The expenses and costs incurred for performing the training and technology


transfer program stipulated in this Article shall be charged to the development costs if


such costs are incurred after the date of approval of the Overall Development


Program of the first Oil Field and/or Gas Field and before the Date of


Commencement of Commercial Production of the first Oil Field and/or Gas Field, or


shall be charged to the operating costs if such costs are incurred after the Date of


Commencement of Commercial Production of the first Oil Field and/or Gas Field.


16.5 In the course of the implementation of the Contract, the Parties shall have


scientific and technical cooperation and exchange in connection with the Petroleum


Operations. The relevant provisions concerning the plan, participating personnel and


type shall be determined by the Parties to the Contract through consultation. The


expenses required by the scientific and technical cooperation and exchange shall be


included in the budget specified in Article 16.2 herein and charged to the joint


account. In the scientific and technical cooperation, all inventions, experiments or


research results shall be shared by and belong to the Parties who, subject to the


provisions of Article 22 hereof, shall not disclose them to any Third Party.


16.5.1 In the course of the implementation of the Contract, those scientific research


projects which are required by the Petroleum Operations but not carried out by the


Parties, with the approval of JMC, may be commissioned to, and carried out by, any


Third Party, and the Parties shall enter into subcontracts or service contracts with


relevant scientific research departments within the territory of the People’s Republic


of China, provided that they are competitive. The aforesaid required expenses shall be


included in the budget specified in Article 16.2 herein and charged to the joint





57


account. Ali inventions and experimental or research results developed from the


aforesaid research projects carried out by a Third Party delegated by the Operator


shall also be shared by and belong to the Parties who, subject to the provisions of


Article 22 hereof, shall not disclose any of them to any other Third Parties. The


Operator shall endeavour to incorporate the provisions herein in the subcontracts or


service contracts signed with a Third Party.


16.6 The advanced technology and managerial experience, including proprietary


technology, e.g. patent, knowhow or other confidential technology and data or


information that the Contractor shall transfer to CNOOC or its Affiliates, shall remain


the exclusive property of the Contractor and also be subject to the confidentiality


restrictions of Article 22 hereof.








Article 17


Ownership of Assets and Data





17.1 All assets purchased, installed and constructed under the Work Program and


budget for each Oil Field and/or Gas Field within the Contract Area shall be owned


by CNOOC from the date on which all the development costs actually incurred by the


Contractor in the development period of each Oil Field and/or Gas Field have been


fully recovered or from the date on which the production period expires, even though


the aforesaid costs have not been fully recovered. Before the dates referred to in the


above paragraph all assets mentioned above shall be jointly owned by the Parties. The


Operator shall be responsible for the acceptance inspection or testing of the said


assets and CNOOC may, as it deems necessary, send its experts to participate in such


acceptance inspection or testing. In the production period, the Operator can use these


aforesaid CNOOC-owned assets free of charge for performing the Petroleum


Operations. Such assets shall not be used in any operations other than the Petroleum


Operations or in any operations by Third Parties without the written consent of the


Parties.














58


17.2 Equipment and facilities which are owned by a Third Party and are either


leased by the Operator or temporarily brought into the territory of the People's


Republic of China for the performance of the Petroleum Operations shall not be


deemed as assets owned by CNOOC. Such equipment and facilities may be exported


from the People’s Republic of China, but export formalities shall be handled by


CNOOC.


17.3 The ownership of all of the data, records, samples, vouchers, and other


original data obtained in the course of performing the Petroleum Operations shall vest


in CNOOC.








Article 18


Associated Natural Gas and Non-associated Natural Gas


18.1 Associated Natural Gas





18.1.1 The Associated Natural Gas produced from any Oil Field within the Contract


Area shall be primarily used for purposes related to the operations of production and


production enhancement of Oil Fields such as gas injection, gas lifting and power


generation.


18.1.2 Based on the principle of full utilization of the Associated Natural Gas and


with no impediment to normal production of the Crude Oil, the Overall Development


Program of each Oil Field shall include a plan of utilization of the Associated Natural


Gas. If there is any excess Associated Natural Gas in any Oil Field after utilization


pursuant to Article 18.1.1 herein (hereafter referred to as “excess Associated Natural


Gas”), the Operator shall carry out a feasibility study regarding the utilization of such


excess Associated Natural Gas of such Oil Field. Such feasibility study, if carried out


before the Development Operations of an Oil Field, shall be included as part of the


feasibility study on the development of the Oil Field. With respect to any Oil Field


already under commercial production, if a further feasibility study on the utilization


of its excess Associated Natural Gas is required, such study shall be carried out by the











59


Operator and a report thereon shall be submitted to JMC for review and discussion. If


the Parties decide to utilize the excess Associated Natural Gas of any Oil Field, the


construction of facilities for such utilization and the production of the excess


Associated Natural Gas shall be carried out at the same time as the Oil Field


construction and production.


18.1.2.1 If the Parties agree that the excess Associated Natural Gas of an Oil Field has


no commercial value, then such gas shall be disposed of by the Operator, provided


that there is no impediment to normal production of the Crude Oil.


18.1.2.2 If any party to the Contract considers unilaterally that the excess Associated


Natural Gas of an Oil Field has commercial value, such gas may be utilized by that


party to the Contract at its own expense without affecting the amount of “cost


recovery oil” and “allocable remainder oil” due to the other party to the Contract


which does not invest in such utilization.


18.1.2.3 If the Parties agree that excess Associated Natural Gas of an Oil Field has


commercial value, they shall make further investment in its utilization in proportion


to their respective participating interests in the development of the Oil Field. If the


Parties disagree on the commercial utilization of such excess Associated Natural Gas


of that Oil Field, they shall, guided by the principle of mutual benefit, carry out


further negotiations to find a new solution to the utilization of the said excess


Associated Natural Gas and reach an agreement in writing. If the Parties fail to reach


an agreement through such negotiations, CNOOC shall reserve the right to dispose of


such excess Associated Natural Gas unilaterally.


18.1.3 Expenses incurred in the utilization of the Associated Natural Gas of any Oil


Field as stipulated in Article 18.1.1 herein, and those incurred in carrying out a


feasibility study on the utilization of the excess Associated Natural Gas after


commencement of commercial production of the Oil Field referred to in Article


18.1.2 herein shall be charged to the development costs of the Oil Field.











60


18.2 Non-associated Natural Gas





18.2.1 When any Non-associated Natural Gas Field (hereinafter referred to as the


“Gas Field'’) is discovered within the Contract Area, the Parties shall carry out


friendly negotiations regarding the development and production of the Gas Field and


marketing said Non---associated Natural Gas in the domestic and international markets


with a view to reaching an agreement of principle, which shall form a supplementary


document to the Contract, and shall include the following principles:


18.2.1.1 The price of the Natural Gas produced from the Contract Area shall be


determined based on general pricing principles prevailing internationally taking into


consideration such factors as the market, the grade, quality and quantity of the


Natural Gas, etc.


18.2.1.2 The Contract term for the Gas Field within the Contract Area shall be


separately determined according to the conditions for development and production of


such Field and marketing of the Natural Gas; and


18.2.1.3 The allocation of the Natural Gas shall be in conformity with general


principles of allocation for the Crude Oil stipulated in Article 13 hereof. However, the


percentages of the allocation shall be adjusted by the Parties through negotiations in


the light of actual conditions in the Gas Field so that the Contractor shall be able to


obtain a reasonable economic benefit. Following the signature of the agreement of


principle herein, the Operator shall work out an evaluation Work Program for the


discovered Gas Field in accordance with the terms and conditions in the said


agreement of principle and submit it to JMC for its review and approval. Upon


approval by JMC, the Operator shall carry out the evaluation Work Program. The


expenses incurred by the Operator in carrying out the said evaluation Work Program


shall be charged to the exploration costs of the Contract Area.


18.2.2 After completion of evaluation of a Gas Field, the Operator shall submit a


report thereon to JMC for review and discussion.














61


18.2.2.1 If JMC decides unanimously that a gas reservoir is non-commercial, the


corresponding area covered by the gas reservoir may be retained in the Contract Area


during the exploration period. But if, at the expiration of the exploration period, JMC


still considers the said gas reservoir to be non-commercial, the area covered by the


gas reservoir shall be excluded from the Contract Area. For a Gas Field which has


potential commercial value but which has not been developed due to a lack of market


or a shortage of consuming facilities, the period for which the Gas Field is retained in


the Contract Area may be extended at the request of any party to the Contract. Such


extended period, however, shall not exceed three (3) consecutive Contract Years after


the date of expiration of the exploration period hereunder. In case the time needed for


the market to develop or for the consuming facilities to be constructed for the Gas


Field exceeds such extended period, a further extended period shall be subject to the


approval of the competent authorities of the Chinese Government. Prior to the


expiration of the exploration period, if JMC considers that a gas reservoir which has


been determined to be non---commercial needs to be reappraised because of some


favourable factors, the Operator shall work out a new evaluation report on that gas


reservoir and submit it to JMC for review and approval.


18.2.2.2 If the Contractor considers any gas reservoir to be non-commercial, the


Contractor shall he deemed to have waived its rights of participating in the


development of that gas reservoir.


18.2.2.3 Where the Parties consider a gas reservoir to be commercial, the Parties shall


negotiate to reach an agreement on the development of the said gas reservoir, based


on the terms and conditions provided in the agreement of principle referred to in


Article 18.2.1 herein. The agreement concerning the development shall be a


supplementary document and an integral part hereof. If the Parties fail to reach such


agreement through negotiations within three (3) years after the date of


commencement of such negotiations, CNOOC shall have the right unilaterally to put


up the gas reservoir for bidding. In such case, the Contractor shall still be entitled to


participate in the bidding.











62


 18.3 Natural Gas Production and Allocation





18.3.1 The Operator shall, in accordance with the production profile, adjusted as the


case may be, set forth in the Overall Development Program for each Gas Field as


approved by the competent authorities of the Chinese Government and in accordance


with the daily delivery quantity, delivery pressure and quality specifications specified


in the Natural Gas sales contract(s), carry out Natural Gas production.


18.3.2 The provisions of Articles 13.1, 13.2.1, 13.2.2, 13.2.4 and 13.3 shall apply by


analogy to Gas Fields.


The provisions of sub Article 13.2.3 shall also apply by analogy to Gas Fields


subject to the following:


The remainder of the Annual Gross Production of Natural Gas after the


allocation referred to in Articles 13.2.1 and 13.2.2 herein shall be deemed as “remainder


gas”. Such “remainder gas” shall be divided into “share gas” of the Chinese side and


18.4 Notwithstanding the provisions in Article 18.2 hereof, in order to encourage


the exploration for and development of Natural Gas, CNOOC is willing to act as a


buyer and to purchase the Natural Gas produced from the Contract Area provided that


the total volume of the Natural Gas purchased by CNOOC from one or more


Contractors plus the shares of Natural Gas due to CNOOC shall be sufficient to


supply three point five (3.5) billion cubic meters per annum of Natural Gas supply


and in accordance with the following provisions:


18.4.1 CNOOC shall make investment required for laying the pipelines for landing


the Natural Gas in domestic market, and shall organize the Contractors to consult the


possibility of joint development of the Gas Fields.


18.4.2 The purchase of the Non-associated Natural Gas and hydrocarbon (such as


condensate) associated therefrom and the Associated Natural Gas of commercial


value produced from the Contract Area shall be at the wellhead.


18.4.3 The Parties shall determine through consultation the wellhead price of the


Non-associated Natural Gas, and in principle, the wellhead price shall be linked to the


equivalent thermal value of the international oil price and the substitute energy price


in domestic market.


18.4.4 The purchase of the Non-associated Natural Gas and hydrocarbon associated


therefrom shall be paid in U.S. dollars.


18.4.5 The price of Associated Natural Gas shall be separately determined through


consultation by the Parties.


18.4.6 If the intention expressed in writing by the Contractor of selling its share of


the Non-associated Natural Gas in accordance with the provisions mentioned above is


accepted by CNOOC, the acreage containing the structure in relation to said Non-


associated Natural Gas shall be automatically retained in the Contract Area. At the





64


expiration of the exploration period, in case the volume of Natural Gas to be


purchased by CNOOC has not yet achieved the target of supplying Natural Gas of


three point five (3.5) billion cubic meters or the said target has been achieved but the


Parties have not yet reached agreement on the terms and conditions for purchasing


said Non-associated Natural Gas, said acreage shall be retained in the Contract Area


until the Gas Field is to be developed, but such retention shall no longer than ten (10)


consecutive Contract Years as of the date of expiration of the exploration period.





18.5 If CNOOC utilizes unilaterally the excess Associated Natural Gas of an Oil


Field or develops solely a Gas Field and requires to apply thereto the Contractor’s


appropriate and advanced technology and managerial experience, the Parties shall


negotiate terms and conditions related thereto and the Contractor shall carry out the


operations after an agreement has been reached on such terms and conditions.








Article 19


Accounting, Auditing and Personnel Costs





19.1 Accounting





Annex II - Accounting Procedure hereto contains the guidelines for the


Operator to keep accounting books and records and make financial settlements. The


Operator shall keep and settle the accounts for all the financial activities in respect of


the Contract Area and maintain all the accounting books and records in accordance


with Annex II - Accounting Procedure hereto in order to accurately reflect the


exploration costs, development costs with Deemed Interest thereon and operating


costs, incurred in the performance of the Petroleum Operations in respect of the


Contract Area, as well as quantity and monetary value of the production and


allocation of Crude Oil and Natural Gas. The Operator shall submit detailed


statements and relevant written reports to JMC and the departments concerned.




















65 N


19.2 Auditing


19.2.1 Any non-Operator party to the Contract shall have the right to audit all the


Operator's joint account accounting books and records after the end of each Calendar


Year and give the Operator a written notice of the auditing results. The auditing shall


be completed within twenty-four (24) months after the end of each Calendar Year. In


the absence of any written notice of the exception to the auditing results given by the


non-Operator party within such period or if the annual joint account accounting books


and records of the Operator are not audited by the non-Operator party within such


period, the Operator’s joint account accounting books and records shall be deemed


correct. A special auditing of the Operator’s joint account accounting books and


records may be made due to some special requirements during a Calendar Year.


19.2.2 If the auditing referred to in Article 19.2.1 herein is conducted, the Operator


shall be given thirty (30) days notice prior to the date of commencement of such


auditing. There shall be no impediment to normal Petroleum Operations during any


audit.


19.2.3 The auditors shall be entitled to access to all relevant joint account records,


files and other information and may inspect such sites and facilities as necessary.


19.2.4 Upon receipt of a notice of the non-Operator party audit reports or exceptions


to the auditing results, the Operator shall separately give response in writing and


resolve these matters in due time (no later than sixty (60) days thereafter).


19.3 Personnel Costs


19.3.1 The personnel costs mean the remuneration and other related charges


concerned paid on the basis of the working time spent by personnel who are engaged


in administration, management, accounting, finance, tax, employee relations,


procurement, legal affairs, computer services, engineering, geology, geophysics,


drilling and Production Operations as well as all other work for the implementation of


the Contract.








66


19.3.1.1 The salaries or wages of personnel in various subordinate bodies of JMC and


of all employees engaged in the performance of the Petroleum Operations shall be


included in the personnel costs as provided in Article 19.3.1 herein.


19.3.1.2 Personnel costs which are classified as the overhead of the superior


management organization pursuant to Article 5.2.18 of Annex 11 - Accounting


Procedure hereto shall not be included in the personnel costs mentioned herein.


19.3.2 After the effective date of the Contract, the Operator shall work out a staffing


plan and a personnel costs plan with respect thereto (including salary or wage


standards of each personnel and its breakdown content, such as basic salary or wage,


overseas allowance, area allowance, insurance, various benefits and subsidies and the


extra portion of individual income tax paid by the Contractor’s employees in China


exceeding the individual income tax payable by them in their home countries etc.)


before the beginning of each Calendar Year.


During the exploration period, the Operator shall submit a staffing plan for its


organization and a personnel costs plan with the annual Work Program and budget to


JMC for review and examination.


In the development period and production period, the Operator shall submit a


staffing plan for its organization and a personnel costs plan with the annual Work


Program and budget to JMC for review and examination and the Contractor shall


provide to CNOOC with an itemized plan of personnel costs of the Expatriate


Employees, CNOOC shall bear the obligation of confidentiality to such information


provided by the Contractor.


The Operator shall charge the personnel costs of the Contractor’s personnel


actually incurred to the joint account.


CNOOC shall have the right to audit the personnel costs charged to the joint


account.











67


19.3.3 The level of the salaries and wages paid to the personnel appointed by


CNOOC in accordance with the provisions of Article 1.2 of 0 Personnel Costs hereto


shall be determined pursuant to the provisions of 0 Personnel Costs hereto.


The salaries and wages of the Chinese Personnel employed by the Operator in


accordance with Article 2 of 0 Personnel Costs hereto shall be determined through


consultation and specified in employment contracts. The settlement of accounts for


the salaries and wages of the personnel of CNOOC shall be made by CNOOC to the


Operator. The Operator shall not be liable for any individual income tax of such


Chinese Personnel.








Article 20


Taxation


20.1 The Contractor shall pay taxes to the Government of the People’s Republic of


China subject to the tax laws and regulations of the People’s Republic of China.


20.2 The Operator shall advise the Subcontractors who render services for the


Contract that they and their employees shall pay taxes to the Government of the


People’s Republic of China subject to the tax laws and regulations of the People’s


Republic of China.








Article 21


Insurance





21.1 The Operator shall work out an insurance program for the Exploration


Operations and submit it to JMC for review and approval within one hundred and


twenty (120) days after the Date of Commencement of the Implementation of the


Contract. The Operator shall, on behalf of the Parties, obtain the insurance contracts


in accordance with such program as approved by JMC before commencement of


offshore operations within the Contract Area.











68


Notwithstanding this Article 21.1 either Party, at its sole discretion, may


obtain insurance in excess of the limits approved by the JMC with respect to that


Party’s participating interest. The costs of the insurance in excess of the limit


approved by the JMC shall not be charged to the joint account.


Similar provisions shall apply in respect of Development Operations and


Production Operations.


21.2 All of the insurance items as approved in the insurance program shall be


insured with an insurance company or companies organized under the laws of the


People’s Republic of China (hereinafter “Chinese Insurance Companies”).


21.3 The insurance programs worked out by the Operator shall include, but not be


limited to, the following insurance covering:


(a) damages and expenses to all drilling installations and equipment, including


damages and expenses to the properties used in work-sites and supply bases for the


Petroleum Operations, while the equipment and properties owned by Third Party


rendering services to the Operator shall be handled in accordance with Article 21.5


herein;


(b) damages and expenses to any of the equipment or installations for production,


storage and transportation, and buildings in the course of construction and installation


both onshore and offshore;


(c) damages and expenses to the Crude Oil and/or Natural Gas production


installations, facilities, equipment and pipelines, both onshore and offshore;


(d) liability to Third Parties;


(e) liability for pollution and expenses for cleaning up in the course of drilling


and the Production Operations;


(f) expenses for killing blowouts:








69


(g) liability incurred by the Operator who takes the responsibility in chartering


drilling vessels, supply boats or other boats, ships and aircraft serving the Petroleum


Operations;


(h) liabil ity for removal of wrecks; and


(i) losses and expenses incurred during the transportation and storage in transit of


goods shipped from different parts of the world to work-sites.


21.4 In the insurance contracts, the deductibles borne by the Operator alone shall


be determined by the Parties through consultation, and losses within the deductible


limits shall be borne by the Parties.


21.5 When signing subcontracts or lease contracts, the Operator shall endeavour to


compel Subcontractors and lessors to insure their risks under the relevant


subcontracts with Chinese Insurance Companies and ask these -Subcontractors or


lessors to contact Chinese Insurance Companies for arrangement of the necessary


insurance.


21.6 In the course of the Petroleum Operations, the Parties shall cover separately


personal accidental death and injury insurance with respect to personnel assigned by


them respectively. The premiums in respect thereof shall be dealt with in the


following way: the premiums for personnel accidental death and injury insurance


with respect to personnel whose costs are charged to the joint account pursuant to the


provisions of the Contract shall be charged to the joint account, and those with


respect to other personnel shall be borne respectively by the Parties by which they are


assigned.


21.7 Insurance companies owned by or affiliated with any party to the Contract, or


the Parties themselves, may approach the Chinese Insurance Companies for


reinsurance if they are interested in covering any part of the insurance program hereof.














70


21.8 The premiums of insurance in the exploration period and the development


period shall be charged respectively to the exploration costs and development costs


while those in the production period shall be charged to the operating costs.


21.9 Any claim under the insurance of the agreed insurance program charged to the


joint account shall be handled by the Operator and any recovery made from insurers


shall be credited to the joint account.








Article 22


Confidentiality


22.1 CNOOC shall, in conformity with applicable laws and regulations of the


Government of the People’s Republic of China on confidentiality and by taking into


account the international practice, determine the confidentiality periods for which the


Contract and all documents, information, data and reports related to the Petroleum


Operations within the Contract Area shall be kept confidential.


22.2 Without the written consent of CNOOC, no company comprising the


Contractor or any assignee shall disclose documents, information, data and reports


referred to in Article 22.1 herein or any other information regarded by JMC as


confidential to any Third Party except the Third Parties in Article 22.4 herein and to


any Affiliate not directly connected with the implementation of the Contract, and no


party to the Contract shall otherwise transfer, present, sell or publish them in any way


within the confidentiality periods. Within the confidentiality period, CNOOC shall


bear the obligations for confidentiality for the aforesaid contract, document,


information, data and reports. However, CNOOC has the right to furnish the


following original information and data or interpretation thereof with respect to the


Contract Area to the relevant Third Parties:


(a) original information and data held by CNOOC for over two (2) years; and


(b) interpretation as of original information and data, which has been held by


CNOOC for over five (5) years.





71


CNOOC shall require relevant Third Parties to undertake to keep confidential


the aforesaid data, information, and interpretation thereof furnished to them by


CNOOC.


22.3 During the term of the Contract and after termination or cancellation of the


Contract, CNOOC shall not disclose to any Third Party any patent, know-how or


proprietary technology transferred to CNOOC by the Contractor without the written


consent of the Contractor except for any patent technology of which has expired and


any proprietary and confidential technology which have entered the public domain.


22.4 For the implementation of the Contract, CNOOC and each company


comprising the Contractor may, after review by JMC and CNOOC, furnish the


necessary documents, information, data and reports to Third Parties and Affiliates


related to the Petroleum Operations. The Third Parties and Affiliates include:


22.4.1 banks or other credit institutions from which finance is sought by or other


financial institutions which provide or propose to provide financing to any party to


the Contract for the implementation of the Contract;


22.4.2 Third Parties and Affiliates which provide services for the Petroleum


Operations, including Subcontractors and other service contractors; and


22.4.3 an assignee or assignees to whom rights and obligations under the Contract


are intended to be assigned.


22.5 Necessary information, documents, data and reports may be furnished by the


Contractor in accordance with the laws of its home country to the government and


stock exchanges provided that the Contractor reports to JMC in advance.


22.6 CNOOC and each company comprising the Contractor when furnishing the


documents, information, data and reports to Third Parties and Affiliates as mentioned


in Article 22.4 herein shall require them to assume the confidentiality obligations as


set forth herein, or shall bear full responsibility for any violation thereof.











72


22.7 No Party may issue a press release relating to the Contract Area or Petroleum


Operations without the prior written consent of the other Party; provided that this


limitation shall not prevent the Operator from issuing a press release in the event of


an emergency.








Article 23


Assignment


23.1 The Contractor may assign part or all of its rights and/or obligations under the


Contract to its Affiliate with the prior consent of CNOOC and in accordance with the


following provisions:


(a) the Contractor shall submit to CNOOC copies of a written agreement on the


corresponding part of its rights and/or obligations to be assigned;


(b) the Contractor shall guarantee in writing to CNOOC the performance of the





assigned obligations;


(c) no such assignment shall interfere with the performance of the Petroleum


Operations or affect the organizational structure.


23.2 The Contractor may assign part or all of its rights and/or obligations under the


Contract to any Third Party, provided that such assignment shall be approved by


CNOOC in advance. However, CNOOC shall have the right of first refusal in respect


of such assignment provided that the conditions offered by CNOOC are comparable;


provided that if CNOOC elects to exercise its right of first refusal, it shall make this


election within ninety (90) days of receiving notice from the Contractor of its intent to


assign to a Third Party.





The written agreement of assignment mentioned above and the consent or


approval of CNOOC to the assignment shall be submitted in time to the original


authority approving the Contract for its record through CNOOC.











73





/y


23.3 Except for the retention of CNOOC's management functions stipulated in the


Contract, CNOOC shall without the prior consent of the Contractor, assign all of its


rights and obligations under the Contract to one of its Affiliates (it is understood by


the Parties that such Affiliate shall be CNOOC China Limited), however CNOOC


shall submit to the Contractor copies of a written agreement for the assignment of all


of its rights and obligations. CNOOC shall guarantee the performance of the assigned


obligations and such assignment shall not interfere with the performance of the


Petroleum Operations.


23.4 CNOOC may assign part of its rights and/or obligations hereunder to a


Chinese Government controlled Third Party, provided that prior written consent of


the Government of the People’s Republic of China shall be obtained. CNOOC shall


guarantee the performance of the assigned obligations and such assignment shall not


interfere with the performance of the Petroleum Operations.








Article 24


Environmental Protection and Safety


24.1 In the performance of the Petroleum Operations, the Operator shall be strictly


subject to the laws, decrees and regulations on environmental protection and safety


promulgated by the Chinese Government and make its best efforts to prevent


pollution and damage to the atmosphere, oceans, rivers, lakes, harbours and land, and


secure the safety and health of the operating personnel. The Operator shall use all


reasonable endeavors to eliminate promptly any pollution occurring in the


performance of the Petroleum Operations and minimize its consequences. Economic


losses caused by any pollution shall be charged to the joint account, unless otherwise


provided in Article 8.4 hereof.


24.2 When competent authorities under the Chinese Government assign any person





to inspect environmental protection and safety within the scope of the Petroleum


Operations according to the laws, decrees, rules and regulations, the Operator shall











74


 i








25.4 If the Petroleum Operations in the Contract Area are partially or entirely


suspended as a result of the force majeure referred to in Article 25.1 herein, the


period of the Petroleum Operations may be extended by a period not exceeding the


corresponding period of such suspension. Within fifteen (15) days following the end


of each Calendar Year, the Operator shall report to JMC in writing on the suspension


of the Petroleum Operations caused by force majeure, if any, during the preceding


Calendar Year.








Article 26


Consultation and Arbitration


26.1 The Parties shall make their best efforts to settle amicably through





consultation any dispute arising in connection with the performance or interpretation


of any provision hereof.





26.2 Any dispute mentioned in Article 26.1 herein that has not been settled through


such consultation within ninety (90) days after the dispute arises may be referred to


arbitration at the request of and by either party to the Contract. The arbitration shall


be conducted in accordance with the following provisions:


26.2.1 If agreed upon by the Parties, such dispute shall be referred to arbitration


conducted by the China International Economic and Trade Arbitration Commission in


accordance with the arbitration rules thereof.


26.2.2 If the Parties fail to reach an agreement on the arbitration arrangement


mentioned in Article 26.2.1 herein, the Parties shall establish an ad hoc arbitration


tribunal to conduct arbitration in accordance with the following provisions:


26.2.2.1 The ad hoc arbitration tribunal shall consist of three (3) arbitrators. The


Parties shall each appoint an arbitrator and the two arbitrators so appointed shall


designate a third arbitrator. If one of the Parties does not appoint its arbitrator within


sixty (60) days after the first appointment, or if the two arbitrators once appointed fail


to appoint the third within sixty (60) days after the appointment of the second





76


arbitrator, the relevant appointment shall be made by the Arbitration Institute of the


Stockholm Chamber of Commerce. Sweden.


26.2.2.2 The third arbitrator shall be a citizen of a country which has formal diplomatic


relations with both the People’s Republic of China and any home country of the


companies comprising the Contractor, and shall not have any economic interests or


relationship with the Parties.


26.2.2.3 The place of arbitration shall be determined by the Parties through


consultation or, failing the agreement of the Parties, by the majority of arbitrators of


the ad hoc arbitration tribunal.


26.2.2.4 The ad hoc arbitration tribunal shall conduct the arbitration in accordance with


the arbitration rules of United Nations Commission on International Trade Law,


(“UNCITRAL”) of 1976. However, if the above-mentioned arbitration rules are in


conflict with the provisions of this Article 26 including the provisions concerning


appointment of arbitrators, the provisions of this Article 26 shall prevail.


26.3 Both the Chinese and English languages shall be official languages used in the


arbitral proceedings. All hearing materials, statements of claim or defense, award and


the reasons supporting them shall be written in both Chinese and English.


26.4 Any award of the arbitration shall be final and binding upon the Parties.


26.5 The right to arbitrate disputes under the Contract shall survive the termination


or cancellation of the Contract.








Article 27


Effectiveness, Termination and Cancellation of the Contract


27.1 After the Contract is signed, it shall be approved by the Ministry of


Commerce of the People’s Republic of China. The date of such shall be the effective











77


date of the Contract. The above mentioned approval shall be notified by CNOOC to


the Contractor as soon as possible.


27.2 All annexes to the Contract shall be regarded as integral parts of the Contract.


If there is any inconsistency between the provisions of the annexes and the main body


of the Contract, the main body of the Contract shall prevail. All references to the


"‘Contract5’ hereof refer to the main body of the Contract.


27.3 If, in the course of implementation of the Contract, the Parties decide through


consultation to make amendment of or supplement to any part of the Contract, a


written agreement signed by the authorized representatives of the Parties shall be


required. Significant modifications shall require a written approval from the Ministry


of Commerce of the People’s Republic of China. Such agreement shall be regarded as


an integral part of the Contract.


27.4 The Contract shall terminate under any of the following circumstances:


27.4.1 exercise of the Contractor’s election to terminate the Contract under


Article 6.3(c) hereof;


27.4.2 failure to discover any commercial oil or gas reservoir within the Contract


Area prior to the expiration of the exploration period or the extended exploration


period granted under Article 4.3 or 18.2.2.1 hereof;


27.4.3 if there is only one (1) commercial Oil Field or Gas Field in production in the


Contract Area, on termination of the production period of such Field;


27.4.4 if there are two (2) or more commercial Oil Fields or Gas Fields in production


in the Contract Area, on termination of the production period of the Field with the


latest termination date; or


27.4.5 at the end of the last day of the thirtieth (30th) Contract Year from the Date of


Commencement of the Implementation of the Contract, unless the production period


is extended by approval of the responsible authorities of the Chinese Government








78


under Article 4.5 hereof or unless otherwise stipulated in Article 4.6.1, 18.2.1.2 or


25.4 hereof.


27.5 Before the expiration of the first phase of the exploration period as specified


in Article 4.2 hereof, the Contractor shall not propose termination of the Contract


unless the Contractor has fulfilled the minimum exploration work commitment for the


first phase of the exploration period ahead of time.


27.6 If either party to the Contract commits a material breach of the Contract, the


other party to the Contract shall have the right to demand that such breach be


remedied within a reasonably specified period of time. If such breach is not remedied


within such period of time, the complaining party shall have the right to cancel the


Contract by giving ninety (90) days’ written notice to the defaulting party. However,


such material breach of the Contract and unremedied material breach shall have been


judged by the final award of arbitration in accordance with Article 26 hereof.





Article 28


The Applicable Law


28.1 The validity, interpretation and implementation of the Contract shall be





governed by the laws of the People’s Republic of China. Failing the relevant


provisions of the laws of the People’s Republic of China for the interpretation or


implementation of the Contract, the principles of the applicable laws widely used in


petroleum resources countries acceptable to the Parties shall be applicable.





28.2 If a material change occurs to the Contractor’s economic benefits after the


effective date of the Contract due to the promulgation of new laws, decrees, rules and


regulations or any amendment to the applicable laws, decrees, rules and regulations


made by the Government of the People’s Republic of China, the Parties shall consult


promptly and make necessary revisions and adjustments to the relevant provisions of


the Contract in order to maintain the Contractor’s normal economic benefits


hereunder.








79


 Article 29


Language of Contract and Working Language


29.1 The text of the Contract, annexes and supplementary documents attached


hereto shall be written in both Chinese and English languages, and both versions shall


have equal force and effect.


29.2 The Parties agree that both Chinese and English shall be used as working


languages. After the effective date of the Contract, technical documents and


information concerning the Petroleum Operations hereunder shall, in general, be


written in English except for technical documents and information available


previously and from Third Parties.


Unless otherwise agreed by CNOOC, documents and information in respect of


administration shall be written in both Chinese and English. Forms for production and


other reports and records shall be printed with headings in both Chinese and English


and may be filled out in either Chinese or English.








Article 30


Miscellaneous


30.1 All notices and documents required hereunder shall be deemed to have been


properly given and delivered to either party to the Contract only when received.


30.2 Notices and documents shall he delivered by hand or sent by mail, registered


airmail or telex or facsimile transmission to the address hereunder specified:























80


 Address of CNOOC Address of the representative


of the Contractor


Primeline Energy China Limited


China National Offshore Oil Corporation


No. 6 Parkview House, Fourteen South Audley


Dongzhimenwai Xiao Jie Street, Mayfair, London W1Y 5DP, UK


Beijing, China Tel: 44-20-7501-0688


Postal Code: 100027 Fax: 44-20-7501-0699


P.O. Box 4705, Beijing, China For the attention of: Mr. Victor Hwang


Tel: 86-10-8452-1056 The representative appointed by PECL


Fax: 86-10-6460-2834 Primeline Petroleum Corporation


For the attention of: Mr. Cao Yunshi Parkview House, Fourteen South Audley


The representative Street, Mayfair, London W1Y 5DP, UK


appointed by CNOOC Tel: 44-20-7501-0688


Fax: 44-20-7501-0699


For the attention of: Mr. Victor Hwang


The representative appointed by PPC





30.3 Each party to the Contract may change its address or representative by a


written notice to the other party to the Contract.


30.4 Companies comprising the Contractor have the following percentages of


participating interests as of the effective date of the Contract.


(I) Primeline Energy China Limited - seventy five percent (75%)


(II) Primeline Petroleum Corporation ---twenty five percent (25%)


Subject to Article 30.6 herein, the rights and obligations of each company


comprising the Contractor hereunder may, as between themselves, be varied by the


operating agreement between such companies and the Contractor shall advise


CNOOC in writing of any expected variation and thereafter, of the actual variation.











81


 If such variation leads to the transfer of the Operatorship or the companies


comprising the Contractor have made a decision to change the Operator, the Operator


referred to in Article 8.1 hereof may be replaced after obtaining a written consent





from CNOOC.






































30.6 Companies comprising the Contractor signing the Contract with CNOOC


agree to undertake the obligations of the Contractor under the Contract jointly and


severally.





THIS CONTRACT is signed on this 24th day of March, 2005 in Beijing by the






























































82


 ANNEX 1 Geographic Location and Co-ordinates of Connection Points


W # - Of Boundary Lines of the Contract Area





& m EJfesHi as immii








jiUi


rt&'r













































































AREA:7006km3





E N E N


1 122* 30* 00" 28* 05' 00" 17 121* 21' 00" 27* 07' 00"


2 123* 00' 00" 28* 05 1 00" 18 121* 28' 00" 27* 07' 00 '■


3 123" 00' 00’ 28* 00' 00" 19 121* 28’ 00" 27* 20' oo"


1 122° 30' 00" 28* 00' 00” 20 121* •10’ 00" 27* 20' 00"


5 122° 50’ oo" 27* 55' 00" 21 121* ■10’ 00" 27* 30' 00"


'-£i 6 122° •10' 00" 27* 55' 00" 22 121* *15' 00" 27* 30' 00"


7 122° 10' 00" 27* 15' 00" 23 121* 15' 00“ 27* 35' 00"


8 122° 30' 00" 27* -15' 00" 2-1 121* 50' 00" 27* 35' 00"


122° 00’ 00" 121* 00" r- 00"


9 30' 27* 35 1 25 50' CM •10'


]0 122* 20' 00" 27* 35' 00" 26 121* 55' 00" 27* •10' 00"


11 122° 20' 00" 27* 15' 00" 27 121* 55' 00“ 27* 15' 00"


/•"■V 12 122* In ' 00 " 27* 15' 00" 28 122* 00' 00" 27* ■15' 00"


1.3 122* 15' 00" 27* 07' 30'' 29 122* 00' 00" 27* 50' 00"


1-1 122’ 05' 00" 27* 07' 30" 30 122* 10' 00" 27* 50' 00"


CA 15 122* 05' 00" 27* o-r 00" 31 122* 10' 00" 27* 55' 00"


,fV9 ■J 121’ 00" 00" 122* 00"


■ n 18 2-r 27* or .32 30' 27* 55' no"


;vi CV





£:lb














“TIFT? TiFFo


ANNEX II












































ACCOUNTING PROCEDURE


 CONTENTS





Article 1 General Provisions


Article 2 Definitions


Article 3 Cash Calls


Article 4 Accounting and Management of Materia!


Article 5 Expense Accounting


Article 6 Recovery of Costs, Expenses and Deemed Interest


Article 7 Accounting Reports


Article 8 Audit


Article 9 The Transfer Procedure for the Joint Account









































✓"7


 Article 1


General Provisions





1.1 This Accounting Procedure is an integral part of the Contract. The definitions


set forth in Article 1 of the Contract are equally applicable to this Accounting


Procedure. The definitions and provisions in this Accounting Procedure have the


same force and effect as those in the Contract. If the provisions in this Accounting


Procedure are in conflict with those in the Contract, the provisions in the Contract


shall prevail.


1.2 Purpose:


The purpose of this Accounting Procedure is to establish equitable control


methods for determining charges and credits applicable to the Petroleum Operations


according to the relevant provisions of the “Petroleum Regulations” and of the


Contract, including guidelines for accounting settlements in respect of managing


funds and materials, financing, Accounting Records, and for compiling accounting


statements.


The Operator shall neither gain nor lose in relation to the other parties by


means of the fact that it acts as the Operator.


1.3 Accounting Methods: The double-entry method of accounting shall be used in


this Accounting Procedure.


1.4 Working Language: Pursuant to the provisions of Article 29 of the Contract,


Chinese or English shall be used as the working languages for the Accounting


Records and analyses of financial conditions in respect of the Joint Account, at the


Operator’s option.


1.5 Currency for accounting:





The U.S. dollars shall be the unit of currency for accounting in the Joint


Account and shall be the currency for the investments and reimbursements under the


Contract. In case currencies other than U.S. dollars are used to carry out business


activities, the relevant bank accounts and other current asset and current liability


accounts shall be kept both in U.S. dollars and in the currencies used.


1.6 Currency translation:





For the purpose of accounting, currency translation entered into the Joint


Account shall be made in accordance with the following guidelines:


The rate of exchange to be used for the conversion into U.S. dollars of cash


calls received in Renminbi shall be the arithmetic average of buying and selling rates


of exchange applicable to any individual or commercial entity quoted by the Bank of


China at 11:00 a.m. on the date of receipt of such cash call. If the relevant date is a


non-business day of the Bank of China, the rate quoted on the- previous working day


by the Bank of China shall apply.


All other transactions recorded in the Joint Account which are made in


Renminbi shall be translated into and recorded in U.S. dollars at the rate of exchange


as quoted above on the last working day of the previous month, while those


transactions which are made in currencies other than Renminbi and U.S. dollars shall


be recorded in U.S. dollars at the actual cost in U.S. dollars of effecting the


transaction.





Neither CNOOC nor the companies comprising the Contractor shall


experience an exchange gain or loss, at the expense or benefit of the other party.


The Operator shall make its best efforts to minimize any exchange loss.


All gains or losses from currency conversion or translation shall be recorded


in the Joint Account.











?


S


 1.7 Accounting Records and statements:





1.7.1 All Accounting Records related to the Petroleum Operations shall be


established and maintained by the Operator within the territory of the People’s


Republic of China.


1.7.2 All vouchers, accounts, books and statements shall be prepared in accordance





with the Petroleum Operations Accounting System established by CNOOC.


1.7.3 Annual accounting statements and important accounting books, including


asset records, cash or bank journals, general and subsidiary ledgers, balance sheets,


and gross oil production allocation statements shall be maintained for the term of the


Contract as per Article 4.7 of the Contract, or for any further period if required by the


laws and regulations of the People’s Republic of China. Other accounting vouchers


and books shall be kept for fifteen (15) years. Quarterly and monthly statements shall


be maintained for five (5) years.


Upon the expiration of the custody period, a list shall be made of the





accounting files to be disposed of. Disposal shall only be made after the approval of


CNOOC. The list of the accounting files disposed of shall be maintained with the


annual accounting statements.








Article 2


Definitions


The terms used in this Accounting Procedure shall have the definitions


ascribed to them as follows:


2.1 “Accounting Records” means all accounting books, source documents,


original vouchers, approved documents, analytical data, work papers and accounting


statements maintained for the Petroleum Operations.


2.2 “Accounting System” means the Petroleum Operations Accounting System


prepared by CNOOC, specifying the accounting titles to be used by the Operator and


instructions for implementation, forms and contents of various accounting statements


and their preparation methods, including a material classification section, a definition


of Controllable Material, standards for itemizing assets and the provisions for fixed


asset accounting. If the contents of the Accounting System are in conflict with the


provisions of the Accounting Procedure, the provisions of the Accounting Procedure


shall prevail.


2.3 “Material” means materials, tools, facilities, equipment and consumables


procured, leased or otherwise acquired and held for Petroleum Operations.


2.4 “Joint Account” means accounts established by the Operator for the


implementation of the Contract to record all debits and credits related to the


Petroleum Operations.


2.5 “Controllable Material” means the Material referred to in the Accounting


System described in Article 2.2 of this Accounting Procedure.


2.6 “LIBOR” means the seven-day term London Inter-Bank Offered Rate of U.S.


dollars for similar amounts to the sums in question, quoted by Barclays Bank PLC in


London at 11:00 a.m. on the first business day of the relevant period.


2.7 “Investing Party” means any of the Parties that are contributing the funds for


the Petroleum Operations in accordance with their participating interest determined


pursuant to the relevant provisions of the Contract.





Article 3


Cash Calls


3.1 Except as otherwise provided in the Contract, the Contractor shall provide all


the exploration costs for the Exploration Operations according to the provision of


Article 12.1.1 of the Contract; and all the Investing Parties shall provide the


development costs for the Development Operations in proportion to their respective


participating interests as provided in Article 12.1.2 of the Contract. In accordance


with each approved annual budget, the Operator shall issue monthly cash call notices


to each Investing Party to provide the Operator with funds to cover the planned


expenditure of the next month. Whether or not the cash call notices for the


exploration costs are to be issued shall be at the option of the Operator.


3.2 Development Operations cash call and default:





3.2.1 According to the needs of the Petroleum Operations, the Operator shall


regularly issue monthly cash call notices within the amount of approved annual


budget to request each Investing Party to respectively make advances as specified by


the Operator. The Operator shall, before twenty (20) days prior to the commencement


of each month, issue cash call notices for the development costs and each Investing


Party shall provide its percentage share of funds according to the requirement and


within the time limit specified in the cash call notice, but no sooner than the first day


of the month for which cash is called. Each Investing Party shall transfer its


percentage share of funds to the Operator’s bank account(s) established particularly


for the Joint Account. Such bank account(s) will in all cases be interest bearing


account(s).


Any excessive or deficient advances made by each Investing Party for any


month shall be adjusted in the next cash call.





In case that the Operator, owing to the needs of the Petroleum Operations, has


to incur expenditures which are unforeseen in the cash call for any month, written


notices shall be issued to all the Investing Parties who shall finance their own shares


for additional amount within ten (10) days following the receipt of the written notice.


3.2.2 Interest shall be paid by CNOOC or the companies comprising the Contractor


failing to pay its share of funds on the due date specified in the cash call at LIBOR on


delinquent date plus 5% on the delinquency of less than one (1) month and thereafter


at the average seven (7) LIBOR rate ruling throughout each subsequent month plus








5


S)


5%, such interest being compounded on a monthly basis throughout the period of the


delinquency. The non-defaulters shall make up the delinquent portion on behalf of the


defaulters. When the defaulters advance cash to meet both their delinquent portion


and accrued interest thereon, the Operator shall reimburse the non-defaulters who


made up the delinquent portion.


All amount advanced by the non-defaulting parties plus accrued interest not


reimbursed by the defaulting party shall constitute a debt due from the defaulting


party to the non-defaulting parties who shall be entitled to all remedies at law and


equity. The Operator on behalf of the non-defaulting parties is entitled to take the


defaulting party’s share of the Annual Gross Production of Crude Oil and apply the


proceeds of the sale of such Crude Oil against all sums due and payable by the


defaulting party including accrued interest. Any excess funds remaining from such


proceeds after deduction of all amounts due including interest and the costs, charges


and expenses incurred by the Operator in connection with such sale, shall be paid


over to the defaulting party. Any deficiency remaining due, after deducting the


proceeds of sale shall remain an obligation of the defaulting party and may be


collected as any other debt.


3.3 Each monthly cash call notice shall clearly indicate the following information:





3.3.1 Annual development costs to be shared by each Investing Party as shown in


the approved annual budget.


3.3.2 Amount of funds advanced by each Investing Party at the end of the month


prior to the month in which the call is prepared and the actual expenditures recorded


and actual balance (i.e. funds unused) in the Joint Account, accompanied by the bank


statements related to the Joint Account for the previous month.


3.3.3 The estimated expenditure which will be charged to the Joint Account in the





month of the cash call (the estimate expenditure shall be itemized in accordance of


the annual budget).











6


\


3.3.4 Amount of funds to be called from each Investing Party and the estimated


amounts of funds to be called in the following two (2) months.


3.3.5 The clear indication of requirement for the date when funds are to be provided,


the amount of funds, currency account number, name of the account, the recipient


bank and its address.


3.4 On the Date of Commencement of Commercial Production of an Oil Field


and/or Gas Field, any development investment for the Oil Field and/or Gas Field


advanced by the Investing Party not expended or not to be expended shall be returned


to each of the Investing Parties in proportion to its share.


3.5 In accordance with Article 12.1.3 of the Contract, the cash for the Production


Operations undertaken by the Parties jointly and approved by the JMC shall be


provided by all the Investing Parties to the Contract in proportion to their respective


participating interests in the development costs and shall bear no Deemed Interest.


Based on the needs of the Production Operations, the Operator may make timely


adjustments of the amount of cash to be provided by all the Investing Parties to the


Contract. The Operator shall issue cash call notices quarterly to call for cash for the


Production Operations. In proportion to its share, each Investing Party shall


respectively provide advances on a monthly basis in accordance with requirements


and within the time limit specified in the cash call notice of the current month.


In case that the Operator, owing to the needs of the Petroleum Operations, has


to incur expenditures which are unforeseen in the cash call for any month, written


notices shall be issued to all the Investing Parties who shall finance their own shares


for additional amount within ten (10) days following their receipt of such written


notices.


3.6 According to the requirement of the Petroleum Operations, the Operator shall


indicate in any cash call notices the U.S. dollar equivalent of the total cash called.


The Operator shall also specify the amounts of Renminbi and U.S. dollars required as


estimated to make payment. CNOOC shall provide the advance of its own share


either in Renminbi or in Renminbi and U.S. dollars with respect to the amount called


for by the Operator, but CNOOC’s funding in Renminbi shall not exceed the total


amount of Renminbi called for by the Operator in any cash call notice. The


Contractor shall provide the advance of its own share in U.S. dollars.


3.7 Provisions for recording the sources of funds:





3.7.1 Funds for exploration costs, development costs and operating costs, when


received, pursuant to each cash call shall be credited against the relevant accounts of


the Investing Parties in the Joint Account.


3.7.2 In case either party to the Contract decides to develop an Oil Field and/or Gas


Field for its sole account pursuant to Article 11.6 and/or Article 18.2.2 of the Contract,


or undertakes any other operation for its sole account, the funds required shall be


financed and accounted for separately.


3.7.3 The Contractor shall, within twenty (20) days after the date of submission to





CNOOC of a written notice expressing its decision to participate in the development


of an Oil Field developed solely by CNOOC, pay CNOOC in cash the amounts


stimulated in Article 11.6.1 of the Contract.





3.7.4 In accordance with Article 6.3 of the Contract, if the Contractor opts to


terminate the Contract as provided in Article 6.3(c) of the Contract or if the phase is


the last exploration phase, the Contractor shall, within thirty (30) days from the date


of its decision to terminate the Contract or thirty (30) days from the date of the


expiration of the exploration period, pay CNOOC in U.S. dollars the unfulfilled


balance of the minimum exploration work commitment (or of the new commitment)


for the exploration phase, converted into cash. The detailed method by which the


unfulfilled balance of the minimum exploration work commitment is converted into


U.S. dollars is that the actual average unit cost, excluding the abnormal drilling costs


such as those of the sidetrack, fishing, severe loss of mud circulation etc. (i.e. U.S.


$/kilometre of seismic line; U.S. $/meter of drilling footage), of the last portion of a


seismic line shot under the Contract or of the last well drilled is multiplied by the








8


sn


unfulfilled amount of the minimum exploration work commitment. The formula for


such calculation is as follows:





I = Ac x Pu





in which:





I = converted cash amount of the unfulfilled balance of the minimum exploration


work commitment;


Ac = actual average unit cost of the last portion of a seismic line shot or of the last


well drilled; and


Pu = the unfulfilled amount of the minimum exploration work commitment, the


unfulfilled amount in respect of seismic line is the difference between the kilometers


specified in Article 6.2 of the Contract and actual kilometers of the seismic line. The


unfulfilled footage of a Wildcat is footage or aggregate of well or wells which has or


have to be fulfilled but not yet been fulfilled as specified in Article 6.2 of the Contract.








Article 4


Accounting and Management of Material





Procurement of Material:


The procurement of Material shall be implemented in accordance with the





procedure specified in Articles 15.1 and 7.6 of the Contract. In order to prevent


overstocking of Material, the Operator shall use all reasonable best efforts to ensure


that the procurement of Material shall be made in accordance with the Material


procurement plans and that the quality of Material conforms to specifications and


prices are fair and reasonable. The Operator does not warrant the Material furnished


beyond, or back of, the supplier’s or manufacturer’s guarantee.














9


4.2 Costs of procuring Material:





The costs of Material purchased shall be the invoice prices less discounts plus


related transportation and other expenses, including expenses for freight to the port of


destination, insurance premiums proportion to with the Material covered, fees of


forwarding agents, duties, fees, handling expenses from shipside to and within any


water terminal warehouse or yard, and any other reasonable expenses actually paid


and expenses of inland transportation.


4.3 The following provisions shall be applied for pricing Material furnished from


the stocks of the Parties and/or their Affiliates for use in the Petroleum Operations:


(1) New Material:


New Material shall be priced on the basis of current market value plus


expenses in moving such Material directly to the job-site where Material is used.


(2) Used Material:


(A) Material which is in sound and serviceable condition and is suitable for reuse


without reconditioning shall be priced by the Parties, and the ceiling price shall not


exceed seventy-five percent (75%) of the current value of new Material.


(B) Material which, after being reconditioned, will be further serviceable for its


original function shall be priced by the Parties, and the ceiling price shall not exceed


fifty percent (50%) of the current value of new Material.


(C) Used Material which can not be classified as (A) or (B) above shall be priced


by the Parties through discussions at a value commensurate with its use.


(D) If the Operator wishes to use a method other than the above for pricing used


Material, such other method shall be agreed upon in advance by the Parties through


consultations.














10


4.4 Price determination and leasing expense calculation method for properties


purchased or leased from other contract areas:


The Operator may lease equipment and facilities and purchase Material and





fuel from other contract areas. The Operator shall charge the leasing expenses or


purchase price as agreed upon by the Operator and its suppliers. Such leasing


expenses or purchase prices shall not exceed those currently prevailing in similar


contract areas.





4.5 For certain Material which is in short supply in the world markets and difficult


to procure at published market prices and the lack of which will hinder normal


operations, the Operator may. after the approval of JMC, purchase such Material


urgently needed by the Petroleum Operations and charge actual purchase costs to the


Joint Account.


4.6 Disposal of equipment and Material:


The Operator shall not dispose or sell Material with bock value exceeding Ten


Thousand U.S. dollars (U.S. $10,000) without the prior consent of the Parties. The


Operator shall use all reasonable endeavors to minimize losses in the disposal of or


sales of such Material.


Sales of properties to Third Parties shall be recorded in accordance with actual


sales income. No guaranty or warranty for Material sold or disposed of under this


Article shall be given by the Operator to any purchaser.


4.7 Accounting for Material:


The costs of Material which is procured by the Operator and is directly used at


the job-site shall be charged to the respective accounts of exploration costs,


development costs or operating costs at actual purchase prices (as defined in


Article 4.2 herein) and on the basis of the intended use of Material. Should such


Material subsequently be used other than as intended, the relevant charges shall be


transferred from the original cost accounts to the appropriate cost accounts.


Material for general use which is first stored in warehouses or which is first


stored on supply boats used as warehouses shall be subject to inventory control


procedures.


The quantities, unit prices and total value shall be recorded for Material in


inventory using perpetual inventory methods. Material in stock shall be priced at


purchase costs and the Operator, upon the commencement of or during the Contract


period, has the freedom to choose one of the following pricing methods such as FIFO,


weighted average method and moving average method etc. for Material to be


transferred out of the stock. Accounts for inventory Material shall be regarded as


exploration cost, development cost or operating cost and shall be recovered in


accordance with Article 12.2 of the Contract.


At the request of any non-Operator, the Operator shall furnish to the non-


Operator a detailed statement of Controllable Material.


The Operator shall conduct physical inventory of Material in warehouses and


supply boats used as warehouses prior to the annual final accounts or whenever


depending upon the actual situation. The Operator shall give a written notice to the


JMC sixty (60) days before the date of proposed physical inventory in order to enable


the non---Operator for participation and failure to participate by any non-Operator in


the physical inventory shall be regarded as approval of the physical inventory


conducted by the Operator.


If any gain or loss is found as a result of the physical inventory, the Operator


shall compile a detailed statement of the gain or loss and attach to it an explanation


for the gain or loss, which shall be submitted to the JMC for examination and


approval.


4.8 In accordance with Article 17.1 of the Contract, the Operator shall exercise


strict control over the fixed assets of the Petroleum Operations and set up accounts


and record cards, and shall conduct physical inventory of the fixed assets at year-end


or whenever depending upon the actual situation to make sure that the book records,











12


 card records and physical fixed assets are in conformity. In case that any damage and


loss arises to the fixed assets, the Operator shall determine the reasons and submit


them to the JMC for examination and approval.








Article 5


Expense Accounting





5.1 Rules for Accounting


5.1.1 According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of the


Contract, all development costs and operating costs of the Parties as well as the


Contractor’s exploration costs shall be recorded in the Joint Account separately.


The Operator shall establish and maintain three separate accounts, namely:


5.1.1.1 exp loration costs account





5.1.1.2 development costs account and


5.1.1.3 operating costs account


in which shall be reflected all charges and costs as classified pursuant to Articles 5.2





and 5.3 of this Accounting Procedure.


5.1.2 If either CNOOC or the Contractor, in accordance with Article 11.6.1, 11.6.2


or 18 of the Contract, makes the decision to develop an Oil Field and/or Gas Field for


its sole account or to undertake any other operation for its own account, the relevant


costs shall be accounted for separately.


5.1.3 All items related to the Petroleum Operations such as discounts, deductions,





allowances, interest income, gains from various services, indemnities from insurance


and other miscellaneous income by the Operator, shall be credited to the relevant


expense accounts.











A,





5.1.4 All direct services or research work (including personnel) provided by the


superior organizations or Affiliates of CNOOC or of the Contractor and by the Third


Parties for the Petroleum Operations shall be subject to the form of work order


procedures in advance and shall be charged to the Joint Account after verification of


the relevant invoices.


Work Order Procedure shall be established through consultations at JMC


meetings by both Parties within three (3) months as of the Date of Commencement of


the Implementation of the Contract. The rates charged for direct services or research


work (including personnel cost) provided by the superior organizations or Affiliates


of CNOOC or of the Contractor shall be on the basis of actual costs incurred and


more competitive when compared with the rates of similar services furnished by the


Third Parties. The Operator shall, in accordance with Article 15 of the Contract, give


priority to use direct services or research work (including personnel) provided by


CNOOC.


5.2 Cost items:


The following items shall be chargeable to the Joint Account by Operator’s


net cost.


5.2.1 Subcontractor charges:


The charges paid to Subcontractors in accordance with contracts signed


between the Operator and Subcontractors.


5.2.2 Personnel expenses:


The contents and control of personnel expenses shall be as stipulated in


Article 19.3 of the Contract.


5.2.3 Travel and living expenses:


Travel and living expenses paid according to Article 19 of the Contract to the


personnel involved in the Petroleum Operations.





14


5.2.4 Material expenses:





Expenses paid in accordance with Article 4 of this Accounting Procedure to


purchase Material for use in the Petroleum Operations.





5.2.5 Relocation and transportation expenses:





Relocation and transportation expenses for personnel involved in the


Petroleum Operations to be relocated into or out of the People’s Republic of China


and transferred from job-site to job-site within the People’s Republic of China.





5.2.6 Maintenance, repair and leasing expenses:





Expenses for maintenance, repair or replacement of the properties used in the


Petroleum Operations and leasing expenses paid for leased properties and equipment.





5.2.7 Insurance premiums:





Necessary net payment made for the insurance of Petroleum Operations and


related costs and expenses.





5.2.8 Legal expenses:





In order to protect the interests of the Parties, all costs or expenses paid for


attorney’s fees, litigation or investigation, including expenses in securing evidence,


mediation and settlements. The expenses for handling legal matters incurred for the


interests of any party to the Contract shall be borne solely by such party.


5.2.9 Taxes:


All taxes paid according to the tax laws of the People’s Republic of China,


except for those which do not belong to the scope of expenditures in the Joint


Account the income taxes, Value Added Tax and royalties to be paid by the


companies comprising the Contractor or CNOOC and individual income tax to be


paid by employees and other related costs.


 5.2.10 Energy expenses:





All costs in respect of fuel, electricity, heat, water or other energy used and


consumed for the Petroleum Operations.


The costs of Crude Oil and/or Natural Gas produced and used in any Oil Field


and/or Gas Field (provided the Parties have the same interests in such Fields) within


the Contract Area by the Operator for the performance of the Development


Operations and Production Operations or for well stimulation or for maintaining the


reservoir pressure shall not be charged. However, the costs of transporting such Crude


Oil and/or Natural Gas to their points of use shall be charged under this item.


5.2.11 Field office facility charges:


The costs and expenses of establishing, maintaining and operating any offices,


camps or housing facilities necessary for the performance of job-site operations,


^-----1 t--- -i.rr j.v. -±;-------1- ----------' - | ' * ' '


. . . _ . w ~ a .l.v ui t J <-! J JVU11 ultuvuilg JUVI1 VJJ-/W UIIL/11J ^waivuiaiwu \j y


apportioning office costs and expenses on the basis of space occupied by such staff).


5.2.12 Communication charges:


The costs of acquiring, leasing, installing, operating, repairing and


maintaining communication systems, including radio and microwave facilities


between the Contract Area and the base facilities.


5.2.13 Ecological arid environmental protection charges:


All charges for any measures undertaken for the Petroleum Operations within


the Contract Area as required by relevant statutory regulations or pursuant to


programs agreed by the Parties.


5.2.14 Service charges





5.2.14.1 Technical service charges:


The charges paid for services such as rock specimen analysis, oil quality tests,


geological evaluation, data processing, design and engineering, well site geology,


drilling supervision and special research programs and other technical services.


5.2.14.2 General service charges:


General service charges refer to professional consultant charges incurred for


the common interests of both Parties and charges for other services to obtain original


data needed for Petroleum Operations from outside sources, except legal service.


5.2.14.3 CNOOC’s assistance charges:


(A) The charges for the assistance provided by CNOOC for the Contractor to


carry out the Petroleum Operations in accordance with Article 9 of the Contract. The


charges for services provided by CNOOC according to Article 9.1.5 of the Contract


in respect of services not chargeable to the Joint Account shall not be charged to the


Joint Account.


(B) For all assistance to be provided by the head office organization of CNOOC in


Beijing to the Contractor in the course of the Development Operations and the


Production Operations before CNOOC takes over the said Production Operations,


CNOOC shall charge an administrative fee of Three Hundred Thousand U.S. dollars


(U.S.$ 300,000) for each Calendar Year. If the whole process of the Development


Operations conducted for any Oil Field in any Calendar Year is less than twelve (12)


calendar months, the administrative fee for such Calendar Year shall be calculated in


proportion to the actual calendar month(s) spent thereon (if the actual time spent


thereon in any calendar month is less than thirty (30) days, the calculation shall be


made based on a full calendar month. The aforesaid administrative fee shall be paid


respectively on June 1 and Dec. 1 each Calendar Year, with One Hundred Fifty


Thousand U.S. dollars (U.S.S 150,000) for each time.








17


L/) .2.15 Damages and losses to the assets:


All costs and expenses necessary for the repair, replacement or supplement of





assets resulting from damages or losses incurred by fire, flood, storm, theft or any


other force majeure causes, excluding the losses specified in Article 8.4 of the


Contract, which shall be borne by the Operator alone.





5.2.16 Personnel training costs:


Costs incurred for personnel training pursuant to Article 16 of the Contract.


5.2.17 Miscellaneous expenses:


Any reasonable miscellaneous expenses needed for the Petroleum Operations


excluded in the above items of expenses, such as bank charges, books, stationery and


conference expenses as well as other reasonable expenses.


5.2.18 Overhead:


Overhead refers to the costs for the managerial and operational services


provided by the Operator’s superior management organizations for the Petroleum


Operations, including management, administration, accounting, treasury,


intercompany audit, tax, legal matters, employee relations, financing, the collection of


electronic data and costs which not chargeable under Article 5.1.4 of this Accounting


Procedure for general consultation such procurement, planning, design, research and


operational activities etc. The overhead shall be calculated in accordance with the


following tiers arrd based on the sum of the total actual costs from Article 5.2.1


through Article 5.2.17 and Article 5.2.19 of this Accounting Procedure, but not


including CNOOC’s assistance charges under Article 5.2.14.3 of this Accounting


Procedure.




















18


The Overhead Rates for the Exploration Operations





Direct Costs for Exploration Percentage Rate


(US. $./Year) %


First Tier 0 to 5,000,000 5%





Second Tier 5,000,001 to 15,000,000 3%


Third Tier 15,000,001 to 25,000,000 2%


Fourth Tier over 25,000,000 1%


The Overhead Rates for the Development Operations





Direct Costs for Development Percentage Rate


(US. $./Yeaf> %





First Tier 0 to 5,000,000 2.5%


Second Tier 5,000,001 to 10,000,000 1.5%


Third Tier 10,000,001 to 20,000,000 1.0%


Fourth Tier 20,000,001 to 30,000,000 0.5%


Fifth Tier Over 30,000,000 0.25%





The overhead rate for the Production Operations shall be of one point eight


percent (1.8%) of the total amount of the direct costs for the Production Operations in


each Calendar Year and shall be calculated in accordance with the calculation method


referred to in the provisions of the last paragraph of Article 5.2.18 herein.


The costs and expenses for offices established by the Operator within the


Chinese territory which are not specifically dedicated to the Petroleum Operations


shall be allocated by the Operator to the Petroleum Operations within the Contract


Area or to other beneficiary Parties, including the Contractor, on the basis of actual


service time recorded, or may be allocated by other methods agreed upon by the


Parties. The amount of allocation charged to the Petroleum Operations within the


Contract Area shall be included in the cost item of Article 5.2.19 of this Accounting


Procedure. The costs and expenses incurred by the offices established by the Operator


and its superior organizations outside the Chinese territory (excluding costs and


expenses chargeable under Article 5.1.4 of this Accounting Procedure) has been


included in the overhead and shall not be again charged to the Joint Account.


On the last working day of each month, the Operator shall make provision into


the Joint Account for the overhead fees for the current month, calculated on the basis


of cumulative actual expenditure for the Calendar Year to that date and payment shall


be made from the Joint Account on the last working day of the following month. The


final adjustment of the overhead shall be made at the end of the Calendar Year in


respect to any difference between the actual payment by the Joint Account and the


total overhead for that Calendar Year calculated on the annual cumulative actual


investment expenditure at the end of such year. Any excess shall be refunded and


deficiencies made good.


5.2.19 General and administrative expenses:


General and administrative expenses refer to the administrative expenses


incurred for any offices established by the Operator within the Chinese territory and


for the JMC and its subordinate bodies for the performance of the Petroleum


Operations.


5.3 Except as otherwise provided in this Accounting Procedure the allocation of


common costs and expenses for each item of operations shall be charged in


proportion to the exploration costs, development costs and operating costs actually


incurred in each month.


5.4 With respect to the expenditures or excess expenditures as mentioned in


Article 10.2.4(b) of the Contract which are determined by the JMC to be


unreasonable, the JMC will form an expert group for further investigation to


determine whether they shall be charged to the Joint Account or shall be borne by the


Operator alone before the year-end final closing of accounts.

















20


 Article 6


Recovery of Costs, Expenses and Deemed Interest


6.1 According to the provisions of Article 12.2.2 of the Contract, exploration


costs shall bear no interest.


6.2 The calculation of Deemed Interest on the development costs:


Deemed Interest on the development costs shall be calculated at the specified


rate from the first day after the end of the month in which the development funds of


any of the Investing Parties have been received in the Operator’s bank account for the


Joint Account in accordance with the provisions of Article 12.2.3 of the Contract.


There are three hundred and sixty-five (365) days in each Calendar Year for


the interest calculation and the interest shall be compounded once each Calendar Year


on December 31 based on the actual number of days eligible for the interest.


Worked Example:


Development Costs_ US $100 received on tenth of March


US $100 received on twentieth of





The aggregate amount received in March is US $ 200.


Deemed Interest shall be calculated from the first of April through the end of


such Calendar Year with a total number of two hundred and seventy-five (275) days.


Formula: Interest = US $200 * 9% x





At the end of the year interest is added to the capital and interest runs thereon


until cost recovery is fully achieved, i.e. interest is compounded at year end.


6.3 Recovery of exploration costs, development costs with Deemed Interest


thereon and operating costs.








21


x


6.3.1 In accordance with the provisions of Article 12.2.2. of the Contract, the


exploration costs shall be recovered from the Oil Fields and/or Gas Fields within the


Contract Area which have been developed and are producing and the Contractor has


participated in the development of said Oil Fields and/or Gas Fields.


6.3.2 In accordance with the provisions of Articles 12.2.1, 12.2.3.1 and 12.3 of the


Contract, the principal of development costs and Deemed Interest thereon and


operating costs, respectively, of each Oil Field and/or Gas Field shall be recovered


only form the production of each respective Oil Field and/or Gas Field.


. 6.3.3 As at the date of completing each lifting of Crude Oil, the Operator shall make





the separate records into the Joint Account for the appropriate reimbursements of the


principal of exploration costs, development costs with Deemed Interest thereon and


operating costs respectively in accordance with Article 12.2 of the Contract. Written


notices shall be sent by the Operator to CNOOC and the Investing Parties at the same


time.





6.4 In accordance with provisions of Article 19.1 of the Contract, the Operator


shall establish complete books for recording the volume and value of Crude Oil


and/or Natural Gas, precisely reflecting the production and the disposal of the Crude


Oil and/or Natural Gas within the Contract Area.


6.5 Crude oil production in each Calendar Year for each Oil Field within the


production period shall be accounted according to the allocation proportions specified


in Article 13 of the Contract and at the Crude Oil price determined pursuant to Article


14.4 of the Contract The amount of the Non-associated Natural Gas in each Calendar


Year within the production period shall be accounted for in accordance with the


provisions specified in Article 18 of the Contract.























22





/7


 Article 7


Accounting Reports


7.1 The Operator shall provide relevant accounting reports and statements based


on the Accounting System to CNOOC and each company comprising the Contractor.


Monthly reports shall be submitted within thirty (30) days after the end of each month,


quarterly reports within forty-five (45) days after the end of each Calendar Quarter


and annual reports within forty-five (45) days after the end of each Calendar Year.


Monthly, quarterly and annual reports shall be submitted in accordance with the


requirements and formats specified in the Accounting System.


7.2 Any Investing Party to the Contract may require the Operator to allow its staff





to have access to the Joint Account Accounting Records relating to the application of


expenses in the stipulated custody period, upon giving thirty (30) days notice but such


access shall not unduly hinder Operator’s normal operations.








Article 8


Audit


8.1 Audits shall be carried out in accordance with Article 19.2 of the Contract.


8.2 The expenses of audits for any non-Operators shall be borne by any non-


Operator which conducts the audit. Expenses for any joint audit conducted by the


non-operator shall be allocated in proportion to their respective participating interests


in the development costs.





Article 9


The Transfer Procedure for the Joint Account


9.1 When the Exploration operations are successful and the Contract Area enters


the development period, the Operator shall conduct an inventory and check of all


properties and accounts for CNOOC. When each Oil Field and/or Gas Field within








23


^-7


the Contract Area goes from development into production, when the Contractor


terminates the Contract, an inventory and check of all properties and accounts shall be


conducted.


If the Contract Area is entered into the development period or the production


period, the Operator (after taking an inventory of all properties by all Investing


Parties) shall make a proposal to JMC, and the JMC shall approve the remaining


equipment and materials needed for the Petroleum Operations of the following period,


and shall be carried forward to the next period in book values in Joint Account, but,


the Operator shall be responsible for handling the equipment and materials not needed


for Petroleum Operations, the gains or losses derived from such disposal shall be


adjusted against the original accounts in accordance with its own share of the


Investing Party in proportion to the overall investment amount of all Investing Parties.


If the Contract terminates, the method of an inventory to all of the remaining


equipment and materials as mentioned above, the gains and losses derived from such


disposal shall be adjusted against the accounts of the original Investing Party in


accordance with the above mentioned methods.


9.2 In accordance with the provisions of Article 8.7 of the Contract, when


CNOOC becomes the Operator of all the Oil Fields and/or Gas Fields within the


Contract Area, the former Operator shall transfer to CNOOC all the Accounting


Records relating to the Joint Account.


9.3 In accordance with the provisions of Article 8.7 of the Contract, when


CNOOC becomes the Operator of a single Oil Field and/or Gas Field, the former


Operator shall transfer to CNOOC the Accounting Records relating to the


development and operating costs of that Field as contained in the Joint Account. The


Accounting Records relating to the exploration costs of the Contract Area shall be


retained by the Operator until the total exploration costs of the Contract Area have


been recovered. Copies shall be provided by the Operator to CNOOC if required by


CNOOC.











24


9.4 Upon the termination of the Contract, the Operator shall transfer all the


relevant vouchers, books and statements over to CNOOC for custody.





9.5 In conducting the transfer of the accounting books and inventory and check of


all the properties in accordance with the provisions of this Accounting Procedure, the


implementation procedure for the transfer and verification, the accounting files to be


transferred and accounting matters to be settled as well as other details shall be


negotiated and agreed in advance between the Operator and CNOOC. The transfer


procedure shall be completed within the time period agreed upon by the Parties.


Thereafter, owing to the needs of any Investing Party to the Contract, CNOOC shall


allow that party’s staff access to the Accounting Records within the relevant


Accounting Records custody period and provide them with duplicates, if necessary.

































































25


ANNEX III






































PERSONNEL COSTS


 Article 1


General Provisions


1.1 This Annex is an integral part of the Contract. The definitions set forth in


Article 1 of the Contract are applicable to this Annex. If the provisions in this Annex


are in conflict with those in the Contract, the provisions of the Contract shall prevail.


1.2 The provisions in this Annex with respect to personnel costs shall only be


applicable to the following personnel:


(1) representatives of JMC appointed by CNOOC referred to in Article 7.1 of the


Contract;


(2) personnel of CNOOC in the subordinate bodies of JMC referred to in Article


7.4 of the Contract;


(3) professional representatives assigned by CNOOC to the Operator’s


(Contractor’s) organizations referred to in Article 7.5 of the Contract; and


(4) personnel assigned by CNOOC to the project management team (not


including personnel recruited by CNOOC for the Contractor) referred to in Article 8.7


of the Contract.


1.3 Personnel costs referred to in this Annex shall include salaries and wages of


personnel specified in Article 3 hereof and other expenses specified in Article 4


hereof.





1.4 There is a table attached to this Annex, i.e. Table of Salary and Wage


Standards of Personnel.

















1


7





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