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MODEL EXPLORATION AND PRODUCTION

SHARING CONTRACT



REPUBLIC OF CYPRUS



MINISTRY OF COMMERCE , INDUSTRY AND TOURISM



[NICOSIA, FEBRUARY 2012 ]



1



TABLE OF C ONTENTS



1



INTERPRETATION ............................................................................................. 5



2



GRANT OF RIGHTS AND TITLE TO HYDROCARBONS ......................... 14



3



SCOPE .................................................................................................................. 15



4



JOINT

OPERATING,

OPERATOR

AND

MANAGEMENT

COMMITTEE...................................................................................................... 16



5



EXPLORATION .................................................................................................. 18



6



RELINQUISHMENTS ........................................................................................ 23



7



DEVELOPMENT AND PRODUCTION PERIOD .......................................... 26



8



RECOVERY OF HYDROCARBONS COSTS AND PRODUCTION

SHARING ............................................................................................................ 33



9



VALUATION ....................................................................................................... 36



10



MEASUREMENT................................................................................................ 38



11



WORK PROGRAMMES AND BUDGETS ...................................................... 39



12



DECOMMISSIONING ....................................................................................... 40



13



CONTRACTOR’S GENERAL RIGHTS AND OBLIGATIONS ................... 41



14



SALE AND PURCHASE OF THE REPUBLIC’S PROFIT OIL AND

PROFIT GAS ....................................................................................................... 43



15



SUPPLY TO THE DOMESTIC MARKET ...................................................... 44



16



INTERNAL CONTROL ..................................................................................... 45



17



DATA AND INFORMATION ............................................................................ 46



18



BOOKS, ACCOUNTS AND AUDITS ............................................................... 48



19



REPORTING ....................................................................................................... 49



20



INSPECTIONS .................................................................................................... 50



21



ASSIGNMENT AND CHANGE OF CONTROL............................................. 51



22



LIFTING/DISPOSAL.......................................................................................... 54



23



CONSERVATION OF HYDROCARBONS AND PREVENTION OF

LOSS ..................................................................................................................... 55



24



OWNERSHIP AND TRANSFER OF ASSETS UPON TERMINATION ..... 56



25



EMPLOYMENT AND TRAINING ................................................................... 57



26



LOCAL GOODS AND SERVICES ................................................................... 58



27



RESEACH AND DEVELOPMENT .................................................................. 59

2



28



IMPORT AND EXPORT FROM A THIRD COUNTRY AND

TRANSFER FROM / TO ANOTHER MEMBER STATE OF THE

EUROPEAN UNION ........................................................................................... 60



29



TAXATION .......................................................................................................... 61



30



SURFACE FEES AND BONUSES..................................................................... 62



31



PAYMENTS ......................................................................................................... 64



32



LIABILITY AND INSURANCE ........................................................................ 65



33



FORCE MAJEURE ............................................................................................. 66



34



TERMINATION OF THE CONTRACT ......................................................... 67



35



GOVERNING LAW ............................................................................................ 69



36



DISPUTE SETTLEMENT.................................................................................. 70



37



IMPLEMENTATION OF THE CONTRACT / MISCELLANEOUS............ 72



38



GUARANTEES .................................................................................................... 73



39



AMENDMENTS/RENEGOTIATION............................................................... 74



40



EFFECTIVE DATE............................................................................................. 75



ANNEX A: DESCRIPTION OF THE ORIGINAL CONTRACT AREA

ANNEX B: MAP OF THE ORIGINAL CONTRACT AREA

ANNEX C: ACCOUNTING AND FINANCIAL PROCEDURES

ANNEX D: EXPLORATION WORK OBLIGATIONS

ANNEX E: PERFORMANCE GUARANTEE



3



THE PRESENT CONTRACT WAS MADE ON THE ………….

BETWEEN

THE REPUBLIC OF CYPRUS (hereinafter referred to as the "Republic"),

represented for the purposes of this Contract by THE MINISTER OF COMMERCE,

INDUSTRY AND TOURISM of the REPUBLIC (hereinafter referred to as the

"Minister"), by the powers vested to him pursuant to the decision of the Council of

Ministers No. ………, dated……………………..

AND

_______________________________________, a company organized and existing

under the laws of _______, having its headquarters in _________________________

(hereinafter referred to as the "Contractor"), represented for purposes of this Contract

by

__________________________________, its ___________.

The Republic and the Contractor hereinafter are referred to either individually as

"Party" or collectively as "Parties".

WITNESSETH:

WHEREAS, the ownership of Hydrocarbons wherever they occur in the Republic,

including the territorial waters, the continental shelf and the exclusive economic

zone, is vested in and are deemed to always have been vested in the Republic;

WHEREAS, the Council of Ministers of the Republic by virtue of the Hydrocarbons

(Prospecting, Exploration and Exploitation) Law of 2007, as amended or replaced

from time to time, has the authority following a submission of an application, to

grant an authorization for Hydrocarbons Operations;

WHEREAS, the Republic wishes to promote the development of Hydrocarbons

resources within and throughout the Contract Area and the Contractor desires to join

and assist the Republic in evaluating the Hydrocarbons potential and promptly and

efficiently developing Hydrocarbons resources which may be discovered within the

Contract Area;

WHEREAS, the Contractor represents that it has the financial ability, technical

competence and professional skills necessary to carry out the Hydrocarbons

Operations hereinafter described;

NOW THEREFORE, in consideration of the undertakings and covenants herein

contained, the Parties hereby agree as follows:

4



1



INTERPRETATION



1.1



In this Contract, words importing the singular include the plural and vice

versa, and except where the context otherwise indicates, shall have the

meaning set forth in this Article. Words that are not defined herein, but are

defined in the law and regulations pertaining to the prospecting, exploration

and exploitation of hydrocarbons in force at any given time in the Republic,

shall have the meanings set forth in the said law and regulations.

“Affiliated Company”



means any other Person directly or indirectly

controlling or controlled by or under direct or indirect

common control with such specified Person. For the

purposes of this definition, "control" when used with

respect to any specified Person means the power to

direct, administer and dictate policies of such Person,

through the ownership of a percentage of such

Person's voting securities enough to hold a majority

of voting rights at general meetings or through other

means; and the terms "controlling" and "controlled"

have meanings correlative to the foregoing.



“Annex”



means any and all of the annexes:

(a)

Annex A - Description of the Original

Contract Area;

(b)

Annex B - Map of the Original Contract

Area;

(c)

Annex C - Accounting and Financial

Procedures;

(d)

Annex D – Exploration Work Obligations;

(e)

Annex E - Performance Guarantee.



“Applicable Environmental

Legislation”



means all relevant environmental legislation, whether

primary or secondary, national, European Union or

international, applicable from time to time in the

Republic, and includes judgments, rulings and orders

of any competent court.



“Appraisal”



means all work carried out by the Contractor subsequent to a Discovery of Hydrocarbons for the

purpose of delineating one or more Hydrocarbons

reservoirs to which that Discovery relates in terms of

thickness and lateral extent and in order to further

define the quantity of recoverable Hydrocarbons

therein and all activities related thereto.



“Appraisal Area”



means a geographical area within the Contract Area,

encompassing the surface of the geological structure

5



or prospect where Appraisal is intended to be

performed and a reasonable margin surrounding such

structure or feature to be mutually agreed by the

Minister and the Contractor.

“Arm’s Length Sales”



means sales of Hydrocarbons in freely convertible

currencies between sellers and buyers having no

direct or indirect relationship or common interest

whatsoever with each other that could reasonably

influence the sales price.



“Available Gas”



means Natural Gas produced and saved hereunder

and not used in Hydrocarbons Operations, to the

extent permitted under the provisions of Article 8.



“Available Hydrocarbons”



means Available Oil and Available Gas.



“Available Oil”



means Crude Oil produced and saved hereunder and

not used in Hydrocarbons Operations, to the extent

permitted under the provisions of Article 8.



“Barrel”



means a quantity or unit of Crude Oil equal to

158.9874 litres (forty-two [42] United States gallons)

at a temperature of 15.56 degrees centigrade (sixty

[60] degrees Fahrenheit) under one atmosphere of

pressure.



“Budget”



means the estimate of the costs of all items included

in a Work Programme.



“Calendar Year”



means a period of twelve (12) months commencing

January 1st and ending on the following December

31st, according to the Gregorian Calendar.



“Commercial Discovery”



means a Discovery that, in the judgment of the

Contractor, can be produced commercially after

consideration of all pertinent operating and financial

data collected during the performance of the appraisal

work programme and otherwise, as provided in

Article 5.5, including, but not limited to Crude Oil or

Natural Gas recoverable reserves, sustainable

production levels and other relevant technical and

economic factors, according to generally accepted

international petroleum industry practice.



“Contract”



means this present document and pertaining Annexes

as may be amended from time to time.



“Contract Area”



means the geographic area which is subject to this

Contract, after relinquishment, surrender, withdrawal,

amendment, extension or otherwise from time to time

pursuant to the terms of this Contract.



6



“Contract Year”



means a period of twelve (12) months commencing

on the Effective Date, or on any anniversary of it, and

ending on the calendar day immediately before the

next anniversary thereof.



“Cost Gas”



means the portion of the Available Gas as set out in

accordance with Article 8 that the Contractor may

freely retain each Calendar Year for the purposes of

recovery of its Hydrocarbons Costs.



“Cost Hydrocarbons”



means Cost Oil and Cost Gas.



“Cost Oil”



means the portion of the Available Oil as set out in

accordance with Article 8 that the Contractor may

freely retain each Calendar Year for the purposes of

recovery of its Hydrocarbons Costs.



“Council of Ministers”



means the Council of Ministers of the Republic.



“Crude Oil”



means unrefined hydrocarbons which are produced at

the wellhead in liquid state at a temperature of 15°C

and pressure of 1 Atmosphere and the liquid

hydrocarbons known as condensate and Natural Gas

liquids obtained from Natural Gas by condensation or

extraction.



“Designated Area”



means the area pertaining to a Discovery that does not

merit Appraisal or is not a Commercial Discovery or

a Significant Gas Discovery, as provided for in

Article 5.4.



“Development”



shall include but not be limited to:

(i)

all the operations and activities under the

Contract with respect to the drilling of wells other

than Exploration Wells and Appraisal wells, the

deepening, plugging, completing and equipping of

such wells, together with the design, construction and

installation of such equipment, pipeline or lines,

installations, production units and all other systems

relating to such wells as may be necessary in

conformity with sound oilfield and generally

prevailing environmental practices in the international

petroleum industry;

(ii)

all operations and activities relative to the

servicing and maintenance of pipelines, lines,

installations, production units and all related activities

for Production and management of wells.



“Decommissioning”



means, in respect of the Contract Area, to abandon,

decommission, transfer, remove and/or dispose of

structures,

facilities,

installations,

pipelines

equipment and other property, and other works, used

in Hydrocarbons Operations in the area, to clean up

the area and make it good and safe, and to protect the

7



environment.

“Decommissioning Cost”



has the meaning given in Article 12.



“Decommissioning Plan”



means a plan of works, and an estimate of

expenditures therefore, for Decommissioning,

including environmental, engineering and feasibility

studies in support of the plan.



“Delivery Point”



means the location specified in the approved

Development and Production Plan within or outside

of the Contract Area.



“Development and Production

Expenditures”



means direct expenditures of a capital nature on

Development and Production Operations and general

expenses made in connection with the development

and production of a Field, excluding expenditures

made within the corresponding Exploitation Area

before the Discovery has been declared as

Commercial Discovery, and Operating Expenditures,

all as determined in accordance with the Accounting

Procedure attached hereto as Annex C.



“Development and Production

Operations”



means all operations other than Exploration

Operations conducted to facilitate the extraction and

the production of Crude Oil and Natural Gas.



“Development and Production

Plan”



means a plan for the development and production of

the Exploitation Area as determined in accordance

with Article 7 in this Contract



“Discovery”



means an occurrence of Hydrocarbons recovered at

the surface which was not previously known to have

existed and which is measurable by conventional

petroleum industry practices.



“Discovery Well”



means an Exploration Well that hits a Discovery



“EEA”



means the European Economic Area created by the

Agreement on the European Economic Area signed in

Porto on 2 May 1992, adjusted by the Protocol signed

in Brussels on 17 March 1993.



“Effective Date”



means the date of execution of this Contract by the

Parties, as set out in Article 40.



“Exploitation Area”



means a geographical area within the Contract Area,

encompassing the extent of the geological structure or

prospect which is subject to a Development and

Production Plan.



8



“Exploitation License”



means an authorization granted by the Council of

Ministers and providing its holder with the rights set

forth in Section 14(3) of the Law.



“Exploitation Period”



means a period of time running from the Council of

Ministers’ approval of an authorization for

exploitation and for a period of twenty five (25)

Contract Years or if such period is extended for such

additional time as is set out in the authorization to

extend the period until the expiry of such extended

period.



“Exploration”



means any and all operations conducted for the

purpose of making a Discovery, including but not

limited to: any activities necessary to commence

operations; any topographical, hydrographical,

geological, geophysical, aerial and other surveys and

activities (including interpretations, analyses and

related studies) to investigate the subsurface for the

location of Hydrocarbons; drilling of shot holes, core

holes and stratigraphic test holes; spud, drilling,

testing, coring, logging and equipping of Exploration

Wells or Appraisal Wells; procurement of such

material, equipment, machinery, items and supplies as

may be required or expedient for the foregoing

activities; and all auxiliary operations and activities

required or expedient for the better conduct or result

of the foregoing activities.



“Exploration Expenditures”



means direct expenditures on Exploration Operations

and other expenses made in connection with

exploration of the Contract Area, as these

expenditures shall be determined in accordance with

the Accounting Procedure attached hereto as Annex

C, but expenditures made within an Exploitation Area

shall be excluded.



“Exploration Licence”



means an authorization granted by the Council of

Ministers and providing its holder with the rights set

forth in Section 14(2) of the Law.



“Exploration Period”



means the period commencing on the Effective date

and ending at the expiry of the First Renewal Period,

the Second Renewal Period or any extensions

permitted in accordance with the provisions of this

Contract as the case may be.



“Exploration Phase”



means any of the Initial Licensing Period, the First

Renewal Period and the Second Renewal Period

including any extensions thereof as the case may be.



“Exploration Well”



means any well drilled for the purpose of confirming

a structure or a separate geological feature in which

9



no Discovery has previously been made by the

Contractor.

“Exploration Work

Obligations”



means the work obligations specified for each

Exploration Phase as set out in Annex D .



“Exploration Operations”



includes, without limitation, geological studies,

geophysical studies, aerial mapping, investigations

relating to the subsurface geology, stratigraphic test

drilling, exploratory wells, and related activities such

as drillsite preparation, surveying and all work

necessarily connected therewith, that is conducted in

connection with exploration for Crude Oil and/or

Natural Gas.



“Field”



means a Hydrocarbons reservoir or multiple

Hydrocarbons reservoirs all grouped on or related to

the same individual geological structural features or

stratigraphic conditions. All reservoirs overlying and

underlying a Field shall constitute part of such Field.



“First Renewal Period”



means a period of time running from the expiry of the

Initial Licensing Period and for a period of two (2)

Contract Years.



“Foreign Exchange”



means currency acceptable to the Parties other than

that of the Republic.



“Hydrocarbons”



means any kind of petroleum products in solid, liquid

or gaseous state, including crude oil or natural

gasoline, natural hydrocarbon gases as well as all

related minerals or substances of any kind extracted

together therewith;



“Hydrocarbons Cost”



means expenditures made and obligations incurred by

the Contractor in carrying out Hydrocarbons

Operations hereunder, determined in accordance with

the Accounting Procedure attached hereto as Annex

C.



“Hydrocarbons Operations”



means Exploration Operations, Development and

Production Operations and all other related activities

carried out under this Contract, including the lifting

of Hydrocarbons from the Contract Area but

excluding any storage, transportation or processing

beyond the Delivery Point.



“Initial Licensing Period”



means a period of time running from the Effective

Date and for a period of three (3) Contract Years

thereafter.



“Law”



means the Hydrocarbons (Prospecting, Exploration

10



and Exploitation) Law, No. 4 (I) of 2007 as amended

from time to time or any law replacing the above.

“Lifting Schedule”



means the planned programme of Hydrocarbons

liftings by each Party approved by the Minister.



“Minister”



shall have the meaning ascribed to such term in the

Law



“Natural Gas”



means hydrocarbons that at a temperature of 15°C

and pressure of 1 Atmosphere are in a gaseous phase,

including wet mineral gas, dry mineral gas, wet gas

and residue gas remaining after the extraction,

processing or separation of liquid hydrocarbons from

wet gas, as well as non-hydrocarbon gas or gases

produced in association with liquid or gaseous

hydrocarbons.



“Original Contract Area”



means the geographical area that is described in

Annex A and delineated on the map attached as

Annex B.



“Operating Expenditures”



means those costs described in Article 2.5 of Annex

C.



“Operator”



means the Person appointed pursuant to Article 4 to

serve as Operator with responsibility for carrying out

Hydrocarbons Operations in the Contract Area in

accordance with the provisions of this Contract. If

more than one Operator exists at any time under this

Contract, references to the term “Operator” shall be to

each Operator with respect to the parts of the Contract

Area in which it conducts Hydrocarbons Operations.



“Person”



means any individual, company, co-operative,

partnership, joint venture, association, trust, estate,

public body, unincorporated organization of

government or any agency or political subdivision

thereof.



“Production”



shall include but not be limited to operations and all

activities related thereto carried out for Hydrocarbons

production after the Council of Ministers’ approval of

the Development and Production Plan, such as

extraction,

injection,

stimulation,

treatment,

transportation, storage, lifting, and related operations,

but does not include any storage or transportation

beyond the Delivery Point.



"Profit Gas"



means the remaining Available Gas, after the

Contractor has taken the Cost Gas pursuant to the

provisions of Article 8.1.

11



“Profit Hydrocarbons”



means Profit Oil and Profit Gas.



“Profit Oil"



means the remaining Available Oil, after the

Contractor has taken the Cost Oil pursuant to the

provisions of Article 8.1.



“Quarter”



means a period of three (3) consecutive months

beginning January 1st, April 1st, July 1st or October 1st

and ending March 31st, June 30th, September 30th or

December 31st, respectively.



“Regulations”



means the regulations issued under the Law.



“Research and Development”



means activities related to but not limited to research

and development studies, development and testing of

concepts and technical solutions and product

development.



“Second Renewal Period”



means a period of time running from the expiry of the

First Renewal Period and for a period of two (2)

Contract Years thereafter.



“Semester”



means a period of six (6) consecutive months,

commencing January 1st and July 1st and ending June

30th and December 31st, respectively.



“Significant Gas Discovery”



means a Discovery of Natural Gas from an

Exploration Well in the Contract Area which has

tested significant flow rates of Natural Gas

(predominantly methane) from one or more

reservoirs, and which is estimated to be capable of

continuous production from the said reservoir(s) over

a reasonable period and which in the opinion of the

Contractor could be declared a Commercial

Discovery in the future, provided inter-alia that:

(a)

adequate gas pipeline transportation facilities

are installed, or

(b)

markets have been sufficiently developed for

sale of Natural Gas on a commercial basis, or

(c)

the requirements of both (a) and (b) have

been met.



“Significant

Area”

“Territory”



Gas



Discovery means a geographical area within the Contract Area,

encompassing the surface of the geological structure

or prospect of a Significant Gas Discovery.

means the land territory, the internal waters, the

territorial waters, the continental shelf and the

exclusive economic zone of the Republic.



12



“Well”



means any opening in the ground or seabed made or

being made by drilling or boring, or in any other

manner, for the purpose of discovering and/or

producing Crude Oil or Natural Gas, or for the

injection of any fluid into a hydrocarbon reservoir,

other than a seismic hole or a structure test hole or

stratigraphic test hole.



“Work Programme”



means a statement itemizing the Hydrocarbons

Operations to be carried out pursuant to this Contract

during any Calendar Year or part thereof.



13



2



GRANT OF RIGHTS AND TITLE TO HYDROCARBONS



2.1



Grant of Rights

The Contractor is granted the exclusive right to conduct Hydrocarbons

Operations in the Contract Area at its sole risk, cost and expense and in

accordance with applicable law and the terms and conditions set out herein.

This Contract shall not include rights for any activity other than

Hydrocarbons Operations with respect to surface areas, sea beds, sub-soil or

to any other natural resources or aquatic reserves.



2.2



Title to Hydrocarbons

Title to Cost Oil and Cost Gas and the Contractor’s share of Profit Gas and

Profit Oil shall pass to the Contractor at the Delivery Point.



14



3



SCOPE



3.1



This is an exploration and production sharing contract, the object of which

is the Exploration, Appraisal, Development and Production of

Hydrocarbons in the Contract Area and the supply of required infrastructure

within and outside of the Contract Area up to the Delivery Point, all at the

Contractor's sole risk and expense.



3.2



The Contractor shall be responsible to the Republic for the execution of

such Hydrocarbons Operations in accordance with the provisions of the

Contract. Without prejudice to the Contractor's position as an independent

Contractor hereunder, the work to be done by the Contractor shall be subject

to the general inspection, supervision and review of the Minister in

accordance with the Contract.



15



4



JOINT

OPERATING

AGREEMENT,

MANAGEMENT COMMITTEE



OPERATOR



AND



4.1



Where the Contractor consists of several entities, the entities shall enter into

a joint operating agreement binding the entities constituting the Contractor.

The Contractor shall nominate, and the Council of Ministers shall approve,

an Operator.



4.2



The Contractor shall provide the Minister with a copy of the joint operating

agreement for approval by the Council of Ministers. The Minister may

require alterations to be made in the joint operating agreement. Without

prejudice to the Law and the Regulations, any changes to the joint operating

agreement to be made after the Effective Date shall be approved by the

Council of Ministers.

The joint operating agreement shall establish a Management Committee for

the purposes of controlling and supervising the conduct of Hydrocarbons

Operations, ensuring cooperation between the Parties, overseeing and

supervising the implementation of Hydrocarbons Operations and the

compliance with Work Programmes and Development and Production

Plans. The joint operating agreement shall establish the functions and the

procedures of the Management Committee.



4.3



The Republic is entitled to appoint government representatives who shall be

part of the Management Committee and shall act as government observers

in all Management Committee activities. The Contractor shall ensure that

the appointed government representatives in the Management Committee

receive all information in connection with the activities of the Management

Committee. The Contractor shall ensure that the government representatives

receive written notice within reasonable time and latest at the same time as

the other Contactor representatives in the Management Committee.



4.4



Where the Contractor consists of one entity, a Management Committee with

the functions as provided for in Article 4.2 shall be established and the

provisions of Article 4.3 shall apply.



16



4.5



The Operator shall execute the Hydrocarbons Operations on behalf of the

Contractor.

For all purposes of this Contract, the Operator shall represent the Contractor

and the Minister may deal with the Operator. The Operator shall be subject

to all of the specific obligations provided for in this Contract and in the

applicable law and shall have the exclusive control and administration of the

Hydrocarbons Operations.

The Operator shall be the only entity which, on behalf of the Contractor,

may execute contracts, incur expenses, make commitments and implement

other actions in connection with the Hydrocarbon Operations.



4.6



Any change in Operator shall be subject to the prior approval of the Council

of Ministers.



4.7



Where the Minister determines that an Operator is no longer competent to

be an Operator, the Minister may, by written notice to the Operator and the

entities constituting the Contractor, request that a new Operator shall be

proposed. The Contractor must then within thirty (30) days propose to the

Minister a new Operator. If the Contractor does not put forward a proposal

for a new Operator or a proposed Operator is not approved, the Council of

Ministers may, by written notice to the Operator and the entities constituting

the Contractor, revoke the authorization and terminate this Contract.



17



5



EXPLORATION



5.1



Authorization to explore



5.1.1



The Contractor is, subject to the provisions of this Contract, authorized to

conduct Exploration Operations within the Contract Area during the

Exploration Period.



5.2



Exploration Work Obligations



5.2.1



The Contractor shall, during the Exploration Period and subject to the

provisions of Annex D, carry out the Exploration Work Obligations.

The licensees will conduct a preliminary Environmental Impact Assessment

study prior to the initiation of any exploration work and a full Environmental

Impact Assessment study prior to the initiation of any exploitation work, both

of which will comply with the provisions of the Strategic Environmental

Assessment (SEA) of the hydrocarbon licensing programme within the EEZ

of the Republic of Cyprus and with the relevant opinion of the Environmental

Authority, as well as with the relevant provisions of the Directive

85/337/EEC. The SEA study is available on the MCIT website

(www.mcit.gov.cy) while the relevant opinion of the Environmental

Authority is available at

http://www.moa.gov.cy/moa/environment/environment.nsf/All/0F381D48CB

93F576C22579A30040CCE4/$file/2008-3%20b.pdf



5.2.2



If in an Exploration Phase the Contractor drills a number of wells greater

than the minimum drilling obligations specified for said phase in the

Exploration Work Obligations, the excess exploration wells may be carried

forward to a subsequent Exploration Phase and shall be deducted from the

minimum drilling obligations specified for said Exploration Phase, provided

that at least one Exploration Well shall be drilled during each Exploration

Phase.



5.2.3



Appraisal Wells drilled under an Appraisal Work Program with respect to a

Discovery shall not be considered as Exploration Wells and, in the event of

a Hydrocarbons Discovery, only the Discovery Well shall be deemed to be

an Exploration Well.



5.3



Renewal of authorization to explore



5.3.1



At the expiry of any Exploration Phase of the Exploration Period, provided

that the Contractor has completed the Exploration Work Obligations for that

Exploration Phase, the Contractor shall have the option, exercisable by

filing at least three (3) months prior to the expiry of the current Exploration

Phase a written application, to the Minister, who shall seek the approval of

the Council of Ministers, either:

18



i.



to proceed to the next Exploration Phase on presentation of the

requisite guarantees as provided for in Article 38; or



ii.



to relinquish the entire Contract Area except for any Appraisal

Area and any Exploitation Area and to conduct Appraisal

Operations and/or Development and Production Operations in

relation to any Commercial Discovery in accordance with the

terms of this Contract, and the Contractor shall have no further

obligation in respect of the Exploration Work Obligations for

any subsequent Exploration Phases of the Exploration Period.



If neither of the options provided for in Article 5.3.1.(i) and Article 5.3.1(ii)

is exercised by the Contractor, this Contract shall terminate at the end of the

then current Exploration Phase and the Exploration License shall be

automatically cancelled.

5.3.2



The application for renewal shall be accompanied with a map specifying the

Contract Area retained by the Contractor, specified in accordance with the

provisions of Article 6.1, together with a report specifying the work

performed on the area to be relinquished in accordance with Article 6.1.(a)

since the Effective Date and the results obtained therefrom.



5.3.3



Any renewals shall be approved by the Council of Ministers and granted in

writing by the Minister.



5.4



Discovery



5.4.1



In the event of a Discovery of Hydrocarbons in the Contract Area, the

Contractor shall promptly inform the Minister in writing thereof. The notice

shall include all relevant information on the Discovery and particulars on

any testing program which the Contractor intends to carry out, in

accordance with best international petroleum industry practice, to contribute

to the evaluation of the Hydrocarbons encountered during drilling.



5.4.2



Not later than thirty (30) days after the suspension or abandonment of the

Discovery Well, the Contractor shall submit to the Minister a report

including, but not limited to:

a) All the results of the drilling of the Discovery Well;

b) The results of any tests being made of the Discovery Well;

c) A preliminary classification of the Discovery as Crude Oil or

Natural Gas; and

d) A recommendation with respect to any Appraisal to be made of the

Discovery.



19



5.4.3



If the Contractor notifies the Minister that the Discovery does not merit

Appraisal, the Minister shall have the option, on three (3) months written

notice, to require the Contractor to immediately relinquish the Designated

Area unless the Contractor has provided valid justification to retain the area

covering the Discovery. The Designated Area shall:

a) comprise the vertical projection to the surface of the geological

structure on which the Discovery Well was drilled; and

b) be determined based on geophysical and other technical

information obtained from the Discovery.



5.5



Appraisal



5.5.1



If the Contractor considers that the Discovery merits Appraisal, it shall no

later than three (3) months following the submission of the report referred to

in Article 5.4.2 diligently submit to the Minister a detailed Appraisal Work

Program and the estimated corresponding Budget for approval.



5.5.2



The Appraisal Work Program shall:

i.



specify in reasonable detail the Appraisal work including

seismic, drilling of wells and studies to be carried out, the

estimated cost of these works and the time frame within which

the Contractor shall commence and complete the programme;

and



ii.



specify the presumed extension of said Discovery which shall

not exceed the area encompassing the geological structure or

feature and a reasonable margin surrounding such structure or

feature proposed to be the Appraisal Area.



5.5.3



The Contractor shall diligently carry out the approved Appraisal Work

Programme and within the time frame specified therein. The Contractor may

amend the Appraisal Work Programme subject to the Minister's prior

approval.



5.5.4



Within three (3) months after completion of the Appraisal Work Programme

the Contractor shall submit to the Minister a comprehensive evaluation

report on the work performed relative to the Appraisal Work Programme.

Such evaluation report shall include, but not be limited to, the following

information: geological conditions, such as structural configuration;

physical properties and extent of reservoir rocks; pressure, volume and

temperature analysis of the reservoir fluid; fluid characteristics, including

gravity and composition of liquid and gaseous hydrocarbons, sulphur

percentage, sediment and water percentage, and product yield pattern;

production forecasts (per Well and per Field); and estimates of recoverable

20



reserves, projected delivery rate and pressure, quality specifications and

other relevant technical and economic factors including economic feasibility

studies carried out by the Contractor in respect of its declaration made under

Article 5.6.

5.5.5



If upon expiry of the Second Renewal Period an Appraisal Work

Programme with respect to a Discovery is actually under progress, the

Contractor may obtain, upon an application to the Minister, with respect to

the Appraisal Area related to said Discovery, the extension of the

Exploration Period for a period of time necessary to complete the relevant

Appraisal Operation. Such extension shall not exceed a period of six (6)

months if the Appraisal Work Programme relates to Crude Oil and not

exceed a period of twenty-four (24) months if the Appraisal Work

Programme relates to Natural Gas. The Council of Ministers shall decide on

the extension sought.



5.5.6



If the Contractor, after completion of Appraisal, considers that the

Discovery is not commercial, the Minister, with the approval of the Council

of Ministers may, with a three (3) months’ prior notice, require the

Contractor to relinquish its rights on the Appraisal Area related to said

Discovery.



5.5.7



Where the Council of Ministers makes use of the right provided in Article

5.5.6, the Contractor shall forfeit its rights on all Hydrocarbons which could

be produced from said Discovery, and the Republic may then carry out, or

cause to be carried out, all the appraisal, development, production,

treatment, transportation and marketing work relating to that Discovery,

without any compensation to the Contractor, provided, however, that said

work shall not cause prejudice to the performance of the Hydrocarbons

Operations by the Contractor.



5.5.8



Any quantity of Hydrocarbons produced from a Discovery prior to it being

declared as a Commercial Discovery, if it is not used for the Hydrocarbons

Operations or lost, shall be subject to the provisions of Article 8.



5.5.9



Subject to the provisions of Article 5.5.5, if no Commercial Discovery has

been made in the Contract Area by the end of the Exploration Period, this

Contract shall terminate.



5.6



Declaration of Commerciality



5.6.1



With the submission of the evaluation reports pursuant to Article 5.5.4, the

Contractor shall submit a written declaration to the Minister indicating one

of the following:



21



a) that based on the results of its Appraisal Work Programme it has

determined that the Discovery is a Commercial Discovery;

b) that based on the results of its Appraisal Work Programme it has

determined that the Discovery is not a Commercial Discovery;

c) that based on the results of its Appraisal Work Programme it has

determined that the Discovery is a significant Discovery which

may become a Commercial Discovery conditional on the

outcome of further work that the Contractor commits itself to

carry out under a further Exploration or Appraisal Work

Programme in specified areas within or outside the Appraisal

Area.

5.6.2. If the Contractor declares pursuant to Article 5.6.1.(a) that a Discovery is a

Commercial Discovery, the Contractor shall submit to the Minister for

approval within four (4) months of such declaration:

i.



a proposed Development and Production Plan; and



ii.



a proposed designation of the Production Area;

both of which shall be subject to the Council of Ministers’

prior approval; and



iii.



a full environmental impact study prepared in accordance with

the Applicable Environmental Legislation, covering the

proposed Development and any related facilities or

infrastructure inside or outside of the Contract Area, which

shall be subject to prior approval in accordance with the

Applicable Environmental Legislation.

The licensees will conduct a full Environmental Impact

Assessment study prior to the initiation of any exploitation

work, which will comply with the provisions of the Strategic

Environmental Assessment (SEA) of the hydrocarbon

licensing programme within the EEZ of the Republic of

Cyprus and with the relevant opinion of the Environmental

Authority, as well as with the relevant provisions of the

Directive 85/337/EEC. The SEA study is available on the

MCIT website (www.mcit.gov.cy) while the relevant opinion

of the Environmental Authority is available at

http://www.moa.gov.cy/moa/environment/environment.nsf/All

/0F381D48CB93F576C22579A30040CCE4/$file/20083%20b.pdf



The proposed Development and Production Plan and Production Area shall

be deemed approved as submitted if, respectively, the Council of Ministers

or the competent authority according to the Applicable Environmental

Legislation, does not respond within ... (...) days of receipt.

22



6



RELINQUISHMENTS



6.1



Periodic relinquishment

a) The Contractor shall:

i.



at the end of the Initial Licensing Period relinquish not less

than twenty five percent (25%) of the Original Contract

Area;



ii.



at the end of the First Renewal Period relinquish an

additional portion of the Contract Area not less than twenty

five percent (25%) of the Original Contract Area.



iii.



at the end of the Second Renewal Period relinquish the

remaining portion of the Contract Area.



b) Notwithstanding paragraph 6.1.(a) above, the Contractor shall not

be obliged to relinquish any part of the Contract Area which has

been made subject to an Appraisal Area or Exploitation Area or

Significant Gas Discovery Area.

c) Subject to paragraph 6.1.(h), the Contractor may at any time with

at least three (3) months’ prior written notice to the Minister

relinquish all or part of the Contract Area. Any area so

relinquished will be credited against the next relinquishment

obligation of the Contractor under paragraph 6.1(a).

Any such voluntary relinquishment of part of the Contract Area

during the Exploration Period shall not reduce the Exploration

Work Obligations set forth in Annex D nor the amount of the

corresponding guarantee.

d) The Contractor shall, subject to paragraphs 6.1.(a) and 6.1.(e),

propose the size, shape and location of the portion of the Contract

Area which it intends to relinquish pursuant to the provisions of

this Contract.

e) The notice submitted by the Contractor in accordance with

paragraph 6.1.(c) shall be accompanied by a description of the area

to be relinquished with pertaining map of the area.



23



f) The area to be relinquished by the Contractor pursuant to the

provisions of this Contract shall be contiguous and delimited by

meridians and parallels of latitude expressed in whole minutes of a

degree, all of sufficient size and convenient shape to enable

Hydrocarbons Operations to be conducted thereon. This applies

correspondingly to the areas retained by the Contractor.

g) The Council of Ministers shall approve the shape and size of the

Contract Area that will remain after relinquishment and may

exempt from the requirement that the areas are to be contiguous.

When particular reasons so warrant, the Council of Ministers may

exempt from the requirement to delimit the area in whole minutes

of a degree.

h) If the Contractor does not relinquish a portion of the Contract Area

at the time and in the manner required by this Article 6.1., all of

the Contract Area shall be deemed relinquished at the end of the

Contract Year concerned.

i) Without the consent of the Council of Ministers, and

notwithstanding paragraph 6.1.(b), the Contractor may not

relinquish all of the Contract Area if it has not then fulfilled the

Exploration Work Obligations or is then in breach of any

provision of this Contract.

6.2



Final Relinquishment of Exploration Area

a) The Contractor shall, at the expiry of the Exploration Period, relinquish

all of the Contract Area other than such part thereof as is an Exploitation

Area.

b) If, at the end of the Exploration Period, a Discovery has been made but

there has been insufficient time for the Contractor (acting, and having

acted, in accordance with this Contract) to Appraise such Discovery, the

obligation of the Contractors under this Article 6.2. shall, subject to the

provisions of the Regulations, be postponed:

i.



for such area as the Contractor proposes and the Minister may

determine to be reasonably necessary for Appraisal of the

Discovery;



ii.



for such period as is reasonably necessary to permit the

Contractor to Appraise (or to complete the Appraisal of) the

Discovery; and

24



iii.



6.3



as a consequence of that Appraisal, for the Contractor to

decide whether to declare a Commercial Discovery and, if it

does so, for the Council of

Ministers to declare an

Exploitation Area in respect of it.



Relinquishment of Exploitation Area

a) Except with the approval of the Council of Ministers, an

Exploitation Area shall be deemed to be relinquished on the first to

occur of:

i.



production from the Exploitation Area ceasing permanently

or for a continuous period of twelve (12) months (or, if

because of Force Majeure, twenty four (24) months or such

greater period as determined by the Council of Ministers,

in consultation with the Contractor); and



ii.



the expiry of the Exploitation Period.



b) Without the approval of the Council of Ministers, the Contractor

may not otherwise relinquish all or any part of an Exploitation

Area.

6.4



Termination of Agreement and Continuing Obligations in respect of

Relinquished Area

a) This Contract shall terminate in respect of a part of the Contract

Area which is relinquished.

b) Relinquishment of all or a part of the Contract Area is without

prejudice to the obligations of the Contractor to Decommission.

c) No relinquishment made in accordance with this Article 6 shall

relieve the Contractor of the obligation to pay surface fees

accrued, or making payments due and payable as a result of

Hydrocarbons Operations conducted prior to the date of

relinquishment.



25



7



DEVELOPMENT AND PRODUCTION PERIOD



7.1



Approval of a Development and Production Plan

The Contractor shall prepare and submit the Development and Production

Plan and any amendments to the same to Minister with the approval of the

Council of Ministers, through the Minister, for approval. The Contractor

may not perform any activities with reference to the Development and

Production Plan prior to such approval being obtained, save with the express

permission to enter into specific activities granted by the Minister.



7.2



Development and Production Plan



7.2.1



Except with the consent of the Minister a Development and Production Plan

shall include but not be limited to:

i. a description and a map of the estimated extent of the

Exploitation Area;

ii. all information and data pertaining to the characteristics of

the Commercial Discovery, including but not limited to:

Geological and geophysical information, areas, thickness

and extent of the productive strata, petrophysical

properties of the reservoir formations, PVT data, the

reservoir’s productivity indices for the wells tested at

various flow rates, permeability and porosity of the

reservoir formation, the relevant characteristics and

qualities of the Hydrocarbons discovered, additional

geological data and evaluations of the reservoir, reserves

estimates, and any other relevant characteristics and

properties of the reservoir and fluids contained therein, as

well as evaluations, interpretations and analysis of such

data;

iii. a description of the proposed reservoir development and

management programme;

iv. an evaluation of the commerciality of the Development,

including a full economic evaluation with an estimate of

the hydrocarbons reserves, both proven and probable, and

of the corresponding production profiles, as well as a study

on the methods for recovery of Hydrocarbons and

utilization of Natural Gas, if any;

v. In the event of Associated Natural Gas, the Contractor

shall give an assessment of the possibility of such

Associated Natural Gas exceeding the quantities of Natural

Gas necessary for the requirements of the Hydrocarbons

26



Operations related to the production of Crude Oil

(including reinjection operations) and if it considers that

such excess Associated Natural Gas is capable of being

produced in commercial quantities together with any

analysis made thereof;

vi. an assessment and presentation of the possible outlets for

the Natural Gas from the Discovery in question, both on

the local market and for export, together with an

evaluation of the necessary means for its marketing, with

due consideration to the sale and marketing of the

Republic’s Profit Gas in accordance with Article [14];

vii. proposals as to the possibility of a joint marketing of the

Parties shares of Hydrocarbons;

viii. details of:

a.



b.



c.



d.



e.



f.



the geological and the reservoir work done,

together with the production profiles simulated, in

order to reach the best depletion alternative;

the work, facilities and services required for the

development and production of the reservoir,

including, inter alia, drilling schedules, number of

wells, well spacing and any other related activities.

Proposals relating to production procedures shall

ensure that the area does not suffer an excessive rate

of decline of production, or an excessive loss of

reservoir pressure, and shall ensure environmental

protection conforming to best practices in the

petroleum industry and comply with the Regulations;

the plan for the production, processing, storage,

transportation, sale, and other disposal of

Hydrocarbons (hereunder exploitation of Associated

Natural Gas) to be extracted from the Contract Area;

the production, treatment and transportation

facilities to be located in the Republic. Proposals

relating to facilities shall provide for the optimal use

of existing or planned facilities;

facilities, wherever located, which are

connected to any such facilities as aforesaid and

which (or the operation of which) might affect the

integrity, management or operation thereof;

the Delivery Point;



ix. the production profiles for all hydrocarbon products,

including possible injections for the life of the

27



Development, the commencement of Production and the

specific rates of Hydrocarbons production, and the level of

production and of deliveries which the Contractor submits,

should constitute the start of Commercial Production;

x. a decommissioning plan, in such detail as the Minister

requires, including a calculation of the decommissioning

costs, the annual amount in the decommissioning fund

provided for in Article [12.4], and the Contractor’s

proposal for the Decommissioning Security;

xi. a risk management plan prepared in accordance with the

requirements of the Law and the Applicable

Environmental Legislation, including the measures and

directions established by the Minister to prevent any

damage and remove any hazards that the Hydrocarbons

Operations may cause to affected communities,

Contractor’s personnel and the environment;

xii. an environmental impact assessment study, prepared in

accordance with the Applicable Environmental

Legislation, containing a description of the ecosystem

prior to the commencement of the development (baseline

study), including the flora and fauna, soil, air quality,

underground and surface water, landscape aesthetics prior

to commencement of Hydrocarbons Operations, and the

aspects of the ecosystem which may be affected

qualitatively and quantitatively by the Hydrocarbon

Operations and the effect of said operations on local

populations and industries, if any, and the socio-economic

conditions of those individuals;

The licensees will conduct a full Environmental Impact

Assessment study prior to the initiation of any exploitation

work, which will comply with the provisions of the

Strategic Environmental Assessment (SEA) of the

hydrocarbon licensing programme within the EEZ of the

Republic of Cyprus and with the relevant opinion of the

Environmental Authority, as well as with the relevant

provisions of the Directive 85/337/EEC. The SEA study is

available on the MCIT website (www.mcit.gov.cy) while

the relevant opinion of the Environmental Authority is

available at

http://www.moa.gov.cy/moa/environment/environment.nsf

/All/0F381D48CB93F576C22579A30040CCE4/$file/2008

-3%20b.pdf

xiii. an environment management plan, including a socioeconomic management plan, prepared in accordance with

28



the requirements of the Regulations and of the Applicable

Environmental Legislation, including the measures

planned for the protection of the environment, the

elimination or the reduction of pollution and the protection

and compensation of affected populations and industries if

applicable, and the verification of the effectiveness of said

measures;

xiv. an emergency response plan prepared in accordance with

the requirements of the Regulations and of the Applicable

Environmental Legislation, including measures to respond

to any accident that may occur at the site of the

Hydrocarbon Operations, medical treatment and

evacuation of employees and surrounding populations and

the protection of the environment;

xv. the Contractor’s proposals for:

a.

b.



the use of local goods and services;

training and employment of nationals of the

Republic and of the EEA member states residing in

Cyprus; and



xvi. a plan for Research and Development activities;

xvii. the estimated Development and Production Expenditure

covering the feasibility, fabrication, installation,

commissioning and pre-production stages of the

Development;

xviii. the Contractor’s proposals for financing, hereunder full

information as to the Contractor’s current financial status,

technical competence and experience;

xix. summary details and copies of:

a.



all contracts and arrangements made or to be

made by each Contractor for the sale of Natural Gas;

b.

all contracts and arrangements made or to be

made by persons in respect of that Natural Gas

downstream of the point at which it is to be sold by

the Contractor and which are relevant to the price at

which (and other terms on which) it is to be sold by

the Contractor or are otherwise relevant to the

determination of the value of it for the purposes of

this Contract, but not beyond the point at which it is

first disposed of in an arm’s length transaction; and

c.

all contracts and arrangements made or to be

made by the Contractor in respect of facilities

downstream of the Field export point for transporting,

29



processing, liquefying, storing,

delivering that Natural Gas;



handling



and



xx. the programme and time-schedule for the performance of

the Development and Production Operations, including the

estimated date of the commencement of Hydrocarbons

production; and

xxi. such other data and information (including in respect of

insurance to be obtained by the Contractors, and buyers

and shippers of Hydrocarbons) as the Law and Regulations

require and as the Minister otherwise requires.

7.2.2



From time to time, and in like manner, the Contractor may submit, for the

approval of the Council of Ministers, amendments to the Development and

Production Plan.



7.2.3



In determining whether to approve a Development and Production Plan or

an amendment to it properly submitted by the Contractor, the Council of

Ministers shall give due consideration to the Contractor’s proposal to secure

the implementation of a Decommissioning Plan in respect of the

Exploitation Area.



7.2.4



The Council of Ministers may propose amendments or modifications to the

Development and Production Plan, as well as the requested Exploitation

Area.



7.2.5



The Council of Ministers may set as a condition for approval of the

Development and Production Plan that Hydrocarbons are to be transported

in specified transportation systems.



7.2.6



The Council of Ministers shall specify its reasons for not approving a

Development and Production Plan or an amendment to it.



7.2.7



A Development and Production Plan will be such as would be undertaken

by a person seeking diligently to develop and exploit (in accordance with

this Contract) the Hydrocarbons in the Exploitation Area in the long term

best interests of the Parties.



7.2.8



The Contractor shall proceed with the development and production of the

Hydrocarbons in accordance with the Development and Production Plan

submitted to and approved by the Council of Ministers pursuant to the

provisions of Article 7.1.



7.3



Development Work Programmes and Budgets

a) At such time and in such manner as the Law and Regulations

require, and as the Minister otherwise requires, the Contractor

30



shall submit, for the approval of the Minister, a Development

Work Programme and Budget for each Exploitation Area for

each Calendar Year. At any time and from time to time, the

Contractor may submit, for approval, amendments to it.

b) A Development Work Programme and Budget for a Calendar

Year shall be substantially in accordance with the

Development and Production Plan for the Exploitation Area.

7.4



Exploitation Licence



7.4.1



Upon approval of a Development and Production Plan of a Commercial

Discovery pursuant to Article 7.1, the Contractor shall submit an application

through the Minister for approval by the Council of Ministers for an

Exploitation License in respect of the proposed Exploitation Area.



7.4.2



Where a part of a Reservoir in respect of which a Commercial Discovery

has been declared extends beyond the Contract Area, such area shall be

included in the proposed Exploitation Area, in relation to which application

for an Exploitation License is made, on terms and conditions as decided by

the Council of Ministers, provided that such area is:

i. not subject to a License granted to any other Person;

ii. not the subject of negotiations/bidding for an Exploration

License or an Exploitation License; and

iii. available for licensing (i.e. is not an area over which

Hydrocarbons Operations are excluded).



7.4.3



Where a Development and Production Plan has been approved pursuant to

Article [7.1] and the Contractor has complied with the terms and conditions

of the Exploration License and this Contract and is not in breach of any of

the terms thereof, or the provisions of any law and subject to normal

Government clearances/approvals being obtained by the Contractor as

applicable before grant/issue of the Exploitation License, the Council of

Ministers shall, subject to the Law and the Regulations, grant to the

Contractor an Exploitation Licence over the Exploitation Area as agreed,

subject to Section 14(2) of the Law to enable the Contractor to carry out

Hydrocarbons Operations in the Exploitation Area in accordance with the

Development and Production Plan.



7.4.4



Upon expiry of the initial Exploitation Period, such period may be extended

for an additional period of ten (10) years, at the Contractor’s request

submitted to the Council of Ministers thought the Minister at least one (1)

year prior to said expiry, provided that the Contractor has fulfilled all its

contractual obligations during the initial Exploitation Period and provided

that it can demonstrate that a commercial production from the

corresponding field is still possible after the initial Exploitation Period.

31



7.4.5



The Contractor shall commence Exploitation Operations within six (6)

months after the date of approval of the Exploitation Licence and shall

pursue said operations diligently. The Contractor undertakes to perform the

Exploitation Operations in accordance with best international petroleum

industry practice and the provisions of the Law and the Regulations.



32



8



RECOVERY OF HYDROCARBONS COSTS AND PRODUCTION

SHARING



8.1



Recovery of Hydrocarbons Costs



8.1.1



In case of a Commercial Discovery, the Contractor shall be entitled to

recover its Hydrocarbons Costs. Any Available Oil and/or any Available

Gas produced from the Hydrocarbon Operations conducted in accordance

herewith shall be shared between the Parties as set out in this Article 8 and

the Contractor shall be entitled to take and receive and freely export its Cost

Oil and Cost Gas and share of Profit Oil and Profit Gas.



8.1.2



The Contractor shall be entitled to recover its Hydrocarbons Costs out of the

sales proceeds or other disposition of Available Oil and Available Gas, to

the extent permitted under the provisions of Article 8.1.3.



8.1.3



For purposes of recovery of its Hydrocarbons Costs, the Contractor may

freely retain each Calendar Year Cost Oil and Cost Gas in no event greater

than percent (

%) of the Available Oil and of the Available Gas

respectively, or only any lesser percentage which would be necessary and

sufficient.



8.1.4



The value of Cost Oil and Cost Gas shall be determined in accordance with

the provisions of Article 9.



8.1.5



To the extent that in a Calendar Year outstanding recoverable Hydrocarbons

Costs exceed the value of Cost Hydrocarbons for such Calendar Year, the

excess shall be carried forward for recovery in the next succeeding Calendar

Year until fully recovered, or until termination of the Contract, where such

termination occurs earlier, whatever the reason thereof. No unrecovered cost

can be recovered by the Contractor after such termination.



8.2



Production Sharing



8.2.1



From the first day of production and as and when Hydrocarbons are being

produced, the Contractor shall be entitled to take a percentage share of

Profit Oil and/or Profit Gas, in consideration for its investment in the

Hydrocarbons Operations, which percentage share shall be determined in

accordance with Article 8.2.4.



8.2.2



To determine the percentage share of Profit Oil and/or Profit Gas to which

the Contractor is entitled, the "R" Factor shall be calculated each Quarter in

accordance with Article 8.2.3.



8.2.3



The “R” Factor shall be calculated as follows:

R=X/Y

33



where:

X: is equal to the “Cumulative Net Revenues” actually received by the

Contractor;

Y: is equal to the “Cumulative Capital Expenditures” actually incurred by

the Contractor

For the purpose of this Article 8.2.3:

“Cumulative Net Revenues” means total Net Revenues, as defined below,

received by the Contractor from the Effective Date until the end of the

Quarter preceding the relevant Quarter;

“Net Revenues” means the total amount actually received by the Contractor

for recovery of its Hydrocarbons Costs and its share of Profit Hydrocarbons

in the Contract Area, less all Operating Expenditures actually incurred by

the Contractor in the Contract Area;

“Cumulative Capital Expenditures” means all Development and Production

Expenditures and all Exploration Expenditures in the Contract Area,

actually incurred by the Contractor from the Effective Date until the end of

the Quarter preceding the relevant Quarter.

8.2.4



The share of Profit Hydrocarbons to which the Contractor shall be entitled

to [from the first day of production] is equal to the relevant percentage

according to the value of the “R” factor as indicated in the table below:

"R" Factor



Contractor’s Share of Profit Hydrocarbons

(in percentage)



R≤1



[A] %



1 < R ≤ 2.5

R > 2.5



[A] –



( [A] – [B] ) X ( R – 1 )

( 2.5 – 1 )

[B] %



The Republic’s share of Profit Hydrocarbons shall be 100% minus the

Contractor’s share of Profit Hydrocarbons.

[Note: A and B shall be open to bid. B shall always be lower than A].

8.2.5



Both the [A] % as well as the percentage (%) referred to in Article 8.1.3,

shall be such to ensure the highest percentage of commercially recoverable

reserves will be exploited over the period that R≤ 1 (based on prudent

industry practice).

34



8.2.6



The Contractor shall account separately for all components for the

calculation of the values of X and Y, pursuant to the Accounting Procedure

referred to in Annex C .



8.3



Calculations

Cost Hydrocarbons and Profit Hydrocarbons calculations shall be done for

each Quarter. To the extent that actual quantities, expenditures and/or prices

are not known, provisional estimates based on the approved annual Work

Programme and Budget and any other relevant documentation and

information shall be used. Within sixty (60) days of the end of each Year, a

final calculation based on actual quantities, expenditures and/or prices shall

be made and any necessary adjustments to the sharing of Hydrocarbons

shall be agreed upon between the Minister and the Contractor.



35



9



VALUATION



9.1



The value of Crude Oil to be considered under this Contract shall be

the F.O.B. realized market price at the Delivery Point expressed in Euros

per Barrel and payable thirty (30) days after the date of the bill of lading, as

determined hereinafter for each Quarter and referred to as “Market Price”.

A value shall be established for each grade of Crude Oil or for each Crude

Oil blend, if any.



9.2



The Market Price applicable to liftings of Crude Oil during a Quarter

shall be calculated at the end of that quarter and shall be equal to the

weighted average of the prices obtained by the Contractor and the Republic

for Crude Oil sold to third parties during the Quarter, on an Arm’s Length

basis, adjusted to reflect the variances in quality, grade, as well as F.O.B.

delivery terms and conditions of payment; provided that the quantities so

sold to third parties during the Quarter represents at least thirty per cent

(30%) of the total quantities of Crude Oil obtained from all the Fields under

this Contract and sold during said Quarter.



9.3



In the event such sale to third parties are not made during the Quarter

in question, or represent less than thirty per cent (30%) of the total

quantities of Crude Oil obtained from all the Fields under this Contract and

sold during said Quarter, the Market Price shall be determined by

comparison with the “Current International Market Price”, during the

Quarter in question, of Crude Oils produced in the Republic of Cyprus and

the neighboring producing countries, taking into account the variances in

quality, grade, transportation and payment conditions.

The term “Current International Market Price” means the price which

permits the Crude Oil sold to reach, at the treatment or consumption places,

a competitive price equivalent to that of Crude Oils of same quality coming

from other regions and delivered under comparable commercial conditions,

including quantities as well as destination and utilization of such Crude

Oils, taking into account the market conditions and the type of contracts.



9.4



The following transactions shall, inter alia, be excluded from the

calculation of the Market Price:

a)

sales in which the buyer is an Affiliated Company of the seller as well

as sales between entities constituting the Contractor;

b)

sales in which the buyer has any direct or indirect relationship or

common interest with the Contractor which could reasonably influence the

sales price;



36



c)

sales in exchange for other than payment in freely convertible

currencies and sales fully or partially made for reasons other than the usual

economic incentives involved in Crude Oil sales on the international market,

such as exchange contracts, sales from government to government or to

government agencies.

9.5



A committee headed by the Minister or his authorized representative

and consisting of representatives from the Republic and representatives

from the Contractor shall meet upon request from its president in order to

establish in accordance with the provision of this Article 9 the Market Price

of the Crude Oil produced, which shall apply to the preceding Quarter. The

Contractor shall provide evidence to the committee that the sales of Crude

Oil are Arm’s Length Sales. The decisions of the committee shall be taken

unanimously.

In the event no decision is taken by the committee within thirty (30) days

after the end of the Quarter in question, the Market Price of the Crude Oil

produced shall be determined by a worldwide recognized expert appointed

in accordance within the Rules of Technical expertise of the International

Chamber of Commerce. The expert shall establish the price in accordance

with the provisions of this Article 9 within twenty (20) days from his

appointment. The determination of the expert shall be final and binding on

the Republic and the Contractor. The expertise cost shall be shared equally

by the Parties.



9.6



Pending the determination of the price, the Market Price provisionally

applicable to a Quarter shall be the Market Price of the preceding Quarter.

Any necessary adjustment shall be made no later than thirty (30) days after

the determination of the Market Price for the Quarter in question.



9.7



The Contractor shall make any and all gas sales agreements, including all

the terms and conditions contained therein or related thereto together with

any pertaining annexes or appendices, concluded for the sale of Natural Gas

extracted in accordance with the provisions of this Contract, available to the

Minister and shall ensure that the gas sales agreements contain provisions to

this effect.



9.8



The price of Natural Gas shall be the actual price obtained at the Delivery

Point (which may take into account quantities to be sold, quality, geographic

location of markets to be supplied as well as costs of production,

transportation and distribution of Natural Gas from the Delivery Point to the

relevant market, in accordance with standard practice in the international

gas industry). The Minister shall have the right to review and approve

Natural Gas sales contracts.



37



10



MEASUREMENT



10.1



Hydrocarbons used for internal consumption for Hydrocarbons Operations,

flared, produced and saved and sold from the Contract Area shall be

measured by methods and appliances and in accordance with the provisions

of Regulation 20 of the Regulations.



38



11



WORK PROGRAMMES AND BUDGETS



11.1



No later than forty-five (45) days prior to the beginning of each Calendar

Year, and, for the first Calendar Year, no later than two (2) months after the

Effective Date, the Contractor shall prepare and submit for approval by the

Minister a detailed itemized annual Work Programme, along with the

corresponding annual Budget for the Contract Area, setting forth the

Hydrocarbons Operations the Contractor proposes to carry out during the

ensuing Calendar Year.



11.2



Each annual Work Programme and corresponding annual Budget shall be

broken down into the various Exploration Operations and, as the case may

be, the Appraisal with respect to each Appraisal Area, and the Development

and Production Operations with respect to each Exploitation Area.



11.3



The Minister may propose amendments or modifications to the annual Work

Programme and corresponding annual Budget by notice to the Contractor,

including all justifications deemed necessary, within sixty (60) days

following receipt of said Work Programme. In such a case, the Minister and

the Contractor shall meet as soon as possible to review the requested

amendments or modifications and establish by mutual agreement the annual

Work Programme and corresponding annual Budget in final form, in

accordance with best international petroleum industry practice. The date of

approval of the annual Work Programme and corresponding annual Budget

shall be the date of the above-mentioned mutual agreement.



11.4



Failing notice by the Minister to the Contractor of his wish to amend or

modify the annual Work Programme and corresponding annual Budget

within the abovementioned period of sixty (60) days, said Work Programme

and Budget shall be deemed approved by the Minister upon the expiry date

of said period.



11.5



It is acknowledged by the Minister and the Contractor that the results

acquired as the work progresses or certain changes in circumstances may

justify modifications to the annual Work Programme, in accordance with

best international petroleum industry practice.



11.6



In that case, after notification to the Minister, the Contractor may make such

modifications provided the basic objectives of the annual Work Programme

are not modified.



11.7



In any case, the expenditures incurred for purposes of such modifications

shall not exceed the initial Annual Budget approved by the Minister by

more than five percent (5%) without his written consent.



39



12



DECOMMISSIONING



12.1



No later than six (6) years prior to the anticipated date of Decommissioning

of a Field or as soon as possible prior to the termination of, or

relinquishment of part of, any Exploitation Area, the Contractor shall in

accordance with applicable law submit to the Minister for his approval the

relevant Decommissioning Plan including the estimated decommissioning

expenditures.



12.2



The Minister may request amendments or modifications to the abovementioned Decommissioning Plan, by notice to the Contractor including all

the justifications deemed necessary, within ninety (90) days following

receipt of said plan. In such a case, the Minister and the Contractor shall

meet as soon as possible to review the requested amendments or

modifications and establish by mutual agreement the plan in final form, in

accordance with best international petroleum industry practice. The date of

approval of the plan shall be the date of the above-mentioned mutual

agreement.



12.3



The Decommissioning Plan shall be revised and resubmitted to the Minister

for his approval at such times as are reasonable having regard to the

likelihood that the Decommissioning Plan, including estimated

decommissioning expenditures thereunder, may need to be revised.



12.4



In order to secure the implementation of the Decommissioning Plan, the

Contractor shall be required to establish a reserve fund, as from the approval

of the Development and Production Plan. Such fund shall be deposited in an

escrow account in a bank acceptable to the Minister. Such annual provisions

shall be deemed to be Hydrocarbons Costs and recoverable pursuant to

Article 0.



12.5



In the event that the actual Decommissioning Costs exceed the total

accumulated provisions, the remaining balance of the abandonment costs

shall be borne exclusively by the Contractor. In the event that actual

abandonment costs are lower than the total accumulated provisions, the

remaining balance of the reserve fund shall be vested in the Republic.



40



13



CONTRACTOR’S GENERAL RIGHTS AND OBLIGATIONS



13.1



Contractor’s general rights

For the effective execution of Hydrocarbon Operations under this Contract,

the Contractor shall have the right to freely access and operate within the

Contract Area, as well as any facilities associated with Hydrocarbon

Operations wherever they may be located; perform or cause to be performed

any infrastructure work required for carrying out, under normal economic

conditions, the Hydrocarbons Operations and related activities, such as

transportation and storage of equipment and substances extracted,

establishment of equipment of telecommunications and lines of

communication, as well as production and supply of energy required for the

Hydrocarbons Operations.

The works set forth in this Article 13.1 shall be the subject of an application

filed with the Minister, specifying the location of said works and the

contemplated use thereof. All relevant laws, regulations and procedures in

force shall be applicable.



13.2



Subject to the provisions of Articles 26 and 28, the Contractor may

freely select its suppliers and subcontractors.



13.3



The entry, residence, circulation, employment and repatriation of

persons and their families and property for the employees of the

Contractor and its subcontractors shall be according to the legislation

applicable in the Republic.



13.4



Contractor’s general obligations



13.5



The Contractor shall supply all the necessary funds and purchase or rent all

the equipment and materials required for the performance of the

Hydrocarbons Operations. It shall also supply all the technical expertise,

including the use of the foreign personnel required for the performance of

the Work Programmes. The Contractor shall be responsible for the

preparation and implementation of the Work Programmes which shall be

performed in the most appropriate way in accordance with Article 11 of this

Contract and best international petroleum industry practice.



41



13.6



Within three (3) months following the Effective Date, the Contractor shall

open an office in the Republic of Cyprus and keep it during the term of this

Contract. Said office shall include in particular a representative authorized

to conduct the Hydrocarbons Operations to whom any notice under this

Contract may be served.



13.7



The Contractor shall conduct the Hydrocarbons Operations provided under

this Contract diligently and in accordance with applicable law and best

international petroleum industry practice.



13.8



The Contractor shall provide working conditions, living accommodations on

offshore installations, and access to medical attention and nursing care for

all personnel employed by it or its subcontractors in Hydrocarbons

Operations in accordance with applicable law and best international

petroleum industry practice.



13.9



If, after the Effective Date, other Persons are granted permits or licenses

within the Contract Area concerning the exploration and production of any

minerals or substances other than Hydrocarbons, the Contractor shall use its

best efforts to avoid obstruction or interference with such licensees'

operations within the Contract Area and the Minister shall use his best

efforts to ensure that operations of third parties do not obstruct the

Contractor's Hydrocarbons Operations within the Contract Area.



13.10



In the exercise of its right to build, perform, work and maintain all facilities

necessary for purposes of this Contract, the Contractor shall not occupy land

located within less than fifty (50) meters from any building, used for

religious purposes or not, burial place, enclosing wall, yard and garden,

house, group of dwellings, village, urban centre, well, water point, reservoir,

street, road, pipeline, works of public interest, infrastructure works, tourist

areas, unless prior authorization by the Minister has been granted. The

Contractor shall repair any damage caused during such work.



42



14



SALE AND PURCHASE OF THE REPUBLIC’S PROFIT OIL AND PROFIT

GAS



14.1



Sale of the Republic’s Profit Oil and Profit Gas

Upon the Minister’s prior notice of at least ninety (90) days, the Contractor shall

provide, free of charge, sales and marketing assistance to the Minister for the sale of

all or part of the quantities of Profit Oil and Profit Gas to which the Republic is

entitled hereunder.



14.2



Obligation to purchase the Republic’s Profit Oil and Profit Gas

The Minister or any Person authorized by the Minister therefor shall have the right to

require the Contractor to purchase any part of the Republic’s share of Profit Oil and

Profit Gas under normal commercial terms and conditions in the international

petroleum industry and at the market price, as determined in accordance with Article

9 for Crude Oil and Natural Gas respectively, in force at the time the Hydrocarbons

in question are lifted.

The right referred to in the preceding paragraph shall be exercised in accordance with

the following rules:

a) no later than six (6) Months prior to the start of a Quarter, the Minster shall give

written notice to the Contractor that he requires the Contractor to purchase a

specified quantity of Hydrocarbons to be lifted rateably over a period of two (2)

consecutive Quarters;

b) the Contractor's obligation to purchase Hydrocarbons from the Republic will

continue mutatis mutandis from Quarter to Quarter after the initial two (2)

consecutive Quarters until and unless the Minister gives the Contractor written

notice of termination which, subject to the above mentioned minimum period,

shall take effect six (6) months after the end of the Quarter in which such written

notice was given.



43



15



SUPPLY TO THE DOMESTIC MARKET



15.1



The Contractor, if requested in writing, is obligated to sell to the Republica portion

of the Contractor's share of Profit Oil and Profit Gas for the domestic consumption of

the Republic at a price to be agreed between the Contractor and the Minister or any

Person authorized by the Minister therefor.



15.2



In case of war or imminent expectation of war or grave national emergency, the

Minister may requisition all or a part of the Hydrocarbons produced from the

Contract Area and require the Contractor to increase such production to the extent

required. In such event, the price to be paid by the Republic for the Hydrocarbons

shall be the value determined in accordance with Article 9 of this Contract and

payment shall be made within thirty (30) days after delivery in Euro at a bank outside

of the Republic designated by the Contractor.



15.3



In the event of any requisition as provided above, the Republic shall indemnify the

Contractor in full for the period, during which the requisition is maintained,

including all reasonable damages, if any, which result from such requisition.



44



16



INTERNAL CONTROL



16.1



The Contractor is obliged to comply with the Law, the Regulations and individual

administrative decisions issued by virtue of the Law as well as with all other

legislation at any time in force in the Republic through the implementation of

necessary systematic measures.



16.2



The Contractor shall see to it that anyone performing work for him, either personally,

through employees or through contractors or subcontractors, shall comply with the

provisions of Article 16.1.



45



17



DATA AND INFORMATION



17.1



The Contractor shall have the right to use and have access to all geological,

geophysical, drilling, well production, well location maps and other information held

by the Minister related to the Contract Area and areas adjacent to the Contract Area

in consideration of the payment of the required fees.



17.2



The Contractor shall promptly provide the Minister, free of cost, with all data

obtained as a result of Hydrocarbons Operations under this Contract including

seismic data, geological, geophysical, geochemical, petrophysical, engineering, well

logs, maps, magnetic tapes, cores, cuttings and production data as well as all

interpretative and derivative data, including reports, analyses, interpretations and

evaluations prepared in respect of Hydrocarbons Operations.



17.3



The Minister shall have title to all original data and information resulting from

Hydrocarbons Operations under this Contract, including but not limited to

geological, geophysical, petrophysical and engineering data; well logs and

completion status reports; and any other data that the Contractor or anyone acting on

its behalf may compile or obtain during the term of this Contract. The Contractor is

entitled to retain and use a copy of all such data, subject to the provisions of this

Article 17.



17.4



The Contractor acknowledges the proprietary rights of the Minister in all data and

information referred to in this Article 17 and agrees to treat all such data and

information as confidential and to comply with applicable law with respect to the

storage and any transport or export out of the Republic of any such data and

information.



17.5



The Contractor may disclose such information to its employees to the extent required

for efficient conduct of Hydrocarbons Operations, provided such individuals have

signed an undertaking relating to the confidentiality of the same information as part

of their employment contract or to affiliates and consultants, or to bona fide

prospective assignees of rights under this Contract or to banks or financial

institutions from which finance is sought, provided that the Contractor obtains from

such entities, prior to disclosure, a written confidentiality undertaking. In the case of

disclosure to prospective assignees, any disclosure of such information shall require

the prior written consent of the Minister, which consent shall not be unreasonably

withheld.



17.6



The Contractor may disclose information as and to the extent required by a

regulatory or judicial authority having proper jurisdiction over the Contractor,

provided that the Minister is first notified of such disclosure and of the information

so disclosed.



46



17.7



The Contractor’s obligation of confidentiality under this Article shall be of a

continuing nature and shall not be cancelled by the expiration, suspension or

termination of this Contract.



47



18



BOOKS, ACCOUNTS AND AUDITS



18.1



The Contractor shall maintain its records and books in accordance with the

provisions of applicable companies and taxation legislation and the regulations

thereof, in force in the Republic from time to time, and the Accounting Procedure

attached hereto as Annex C.



18.2



Records and books shall be maintained in the English language and expressed in

Euros. They shall be supported by detailed documents demonstrating the expenses

and receipts of the Contractor under this Contract.

Such records and books shall be used, inter alia, to determine the Contractor’s gross

income, Hydrocarbons Costs and net profits and to establish the Contractor’s tax

return. They shall include the Contractor’s accounts showing the sales of

Hydrocarbons under this Contract.



18.3



The originals of the records and books referred to in Article 18.1 shall be kept at the

Contractor’s office in the Republic of Cyprus. As from the date the Contractor has

declared the first Commercial Discovery in the Contract Area, said records and

books shall be maintained in the Republic of Cyprus.

Within ninety (90) days after the expiry of a Calendar Year, the Contractor shall

submit to the Minister detailed accounts showing the Hydrocarbons Costs which the

Contractor has incurred during said past Calendar Year. The accounts shall be

certified by an independent external auditor acceptable to the Parties, who is

authorized to carry out the statutory audit of annual and consolidated accounts in

accordance with the provisions of Law No. 42(I)/2009 as amended from time to time

or any law replacing the above.

After notifying the Contractor in writing, the Minister may cause to be examined and

audited the records and books relating to Hydrocarbons Operations and any sale of

Hydrocarbons produced in accordance with this contract by experts of his election or

by agents of the Republic. The Minister will have a period of seven (7) years from

the end of a given Calendar Year to perform such examinations or audits with respect

to said Year and notify his objections to the Contractor for any contradictions or

errors found during such examinations or audits. The Contractor will provide the

Minister with its explanations the soonest possible and in any case not later than the

end of the following month.

The Contractor shall provide any necessary assistance to the persons designated by

the Minister for that purpose and facilitate their performance.



48



19



REPORTING



19.1



Without prejudice to reporting obligations existing under the applicable legislation,

the Contractor shall regularly inform the Minister of the performance of

Hydrocarbons Operations and immediately of the accidents or dangerous occurrences

which have occurred, if any.



19.2



Notices and reports shall be provided by the Contractor to the Minister in accordance

with Regulation 23 of the Regulations. Additionally, the Contractor would be

required to have documented management systems in place based on best

international practice for health, safety and environmental management, as well as

for normal day to day operations. These should be made available for review by the

Minister. The reporting requirements to the Minister should be consistent with best

international practices.



49



20



INSPECTIONS



20.1



Hydrocarbons Operations shall be subject to supervision by authorized officers.

Pursuant to Section 19 of the Law, the authorized officers shall have the right, inter

alia, to supervise Hydrocarbons Operations and to inspect the facilities, equipment,

materials, records and books relating to Hydrocarbons Operations, provided that such

inspection shall not unduly delay the proper conduct of said Operations.



20.2



For purposes of permitting the exercise of the above-mentioned rights, the Contractor

shall provide the authorized officers with reasonable assistance regarding

transportation and accommodation..



50



21



ASSIGNMENT AND CHANGE OF CONTROL



21.1



Assignment

a) No assignment or other dealing by the Contractor with respect to this

Contract shall be of any force or effect without prior approval in

writing by the Council of Ministers given in accordance with Section

27 of the Law.

b) Paragraph 21.1(a) includes any assignment, transfer, conveyance,

novation, merger, encumbering or other dealing in any manner

whatsoever or howsoever (whether legally, beneficially or otherwise,

and whether conditionally or not) by the Contractor or any one of the

entities constituting the Contractor (hereinafter “the Entities”) with

respect to:

i. this Contract, or all or any part of its rights, interests,

benefits, obligations and liabilities under it;

ii. Hydrocarbons which has not then been, but might be,

recovered in the Contract Area, or any proceeds of sale

of such Hydrocarbons; and

iii. anything whereby this Contract, that Hydrocarbons or

any of those rights, interests and benefits would, but for

this Article 21.1, be held for the benefit of, or be

exercisable by or for the benefit of, any other person.

c) Paragraph 21.1(a) does not apply to an agreement for the sale of Crude

Oil under which the price therefor is payable (or such Crude Oil is

exchanged for other Hydrocarbons) after title thereto has passed to the

Contractor.

d) If, notwithstanding Paragraphs 21.1(a) and (b), any assignment or other

dealing is effective under the laws of the Republic, or any other place

without that consent, the Minister may terminate this Contract.

e) For the purposes of the foregoing, encumbrance includes any mortgage,

charge, pledge, hypothecation, lien, assignment by way of security, title

retention, option, right to acquire, right of pre-emption, right of set off,

counterclaim, trust arrangement, overriding royalty, net profits interest,

or any other security, preferential right, equity or restriction, any

agreement to give or to create any of the foregoing and any transaction

which, in legal terms, is not a secured borrowing but which has an

economic or financial effect similar to that of a secured borrowing.



51



21.2



Change of Control

a) No change of control or change in any of the Factors Constituting

Control of the Contractor or any one of the Entities can be of any force

or effect with respect to this Contract, except with the consent of the

Council of Ministers.

b) Any changes of the Factors Constituting Control of the Contractor or of

any one of the Entities shall promptly be reported by the Contractor to

the Council of Ministers through the Minister. The Minister may at any

time inquire about the Factors Constituting Control of the Contractor or

any Entity.

c) For the purpose of this Article, “Factors Constituting Control” means:

i.



protocols, agreements or contracts binding the Contractor or the

Entity with another contractor or Entity or with third parties and

relating to the conduct of operations and management of their

companies, to the sharing of expenditures and profit, or to the

sharing and disposal of products and, if such companies are

liquidated, to the distribution of assets;



ii.



Provisions of the Contractor’s or the Entity’s articles of

incorporation and by-laws relating to the head office, the right

attached to capital stock, the majority required in annual

meetings;



iii.



The list and nationality of any physical or legal person which

holds more than five percent (5%) of the Contractor’s or the

Entity’s capital stock; and



iv.



Generally, any transaction the result of which is to make one or

more physical or legal persons gain or lose a controlling interest

in the operations and management of the Contractor or the

Entity.



d) If there is a change in the Factors Constituting Control except with the

consent of the Council of Ministers, the Minister may serve notice on

the Contractor within thirty (30) days after the Contractor has advised

the Minister in reasonable detail of the change in control, that this

Contract shall be terminated unless such a further change in control of

the Contractor or the Entity as is specified in the notice takes place

within the period specified in the notice.

e) Paragraph 21.2(d) does not apply if the change in control is the direct

result of an acquisition of shares or other securities listed on a

recognised stock exchange.

f) For the purposes of paragraph 21.2(a), “change of control” includes a

Person ceasing to be in control (whether or not another Person becomes

52



in control), and a Person obtaining control (whether or not another

Person was in control).



53



22



LIFTING/DISPOSAL



22.1



Subject to this Contract, the Contractor may lift, dispose of and export from the

Republic its share of Hydrocarbons and retain the proceeds from the sale or other

disposition of that share. It shall also have the right to proceed with the separation of

liquids from all Natural Gas produced, transport, store as well as sell on the local

market or export its share of liquid Hydrocarbons so separated, which will be

considered as Crude Oil for purposes of sharing thereof between the Parties under

Article 8.



22.2



The Contractor and the Minister shall, from time to time, make such agreements

between them as are reasonably necessary, in accordance with best international

petroleum industry practice for the separate lifting of their shares of Hydrocarbons.



22.3



Each of the Parties (and as for the Contractor, each Entity constituting it) shall have

the right to proceed separately to the commercialization, lifting and export of the

Hydrocarbons to which it is entitled to under this Agreement.



22.4



Twelve (12) months prior to the scheduled initial export of Crude Oil or Natural Gas

as the case may be, from each Field, the Contractor shall submit to the Minister for

approval proposed procedures and related operating regulations covering the

scheduling, storage and lifting of Crude Oil and Natural Gas produced from the

Field. The procedures and regulations shall be consistent with the terms of this

Contract and shall comprise the subjects necessary for efficient and equitable

operations including, but not limited to, rights of the Parties, notification time,

maximum and minimum quantities, duration of storage, scheduling, conservation,

spillage, liabilities of the Parties, throughput fees and penalties, over and

underlifting, safety and emergency procedures and any other matters that may be

agreed between the Parties.



22.5



In any event, the agreed lifting procedures and regulations, as provided in the

previous paragraph, shall always comply with applicable law.



22.6



In the case of more than one Commercial Discovery in the Contract Area or more

than one quality of Crude Oil in a Field, the Minister and Contractor shall, unless

they mutually agree that the Crude Oils should be commingled, lift from each

Commercial Discovery Crude Oil qualities in proportion to their respective total

liftings from the Contract Area. Natural Gas deriving from more than one

Commercial Discovery in the Contract Area shall to the extent feasible be lifted and

transported in one commingled stream.



54



23



CONSERVATION OF HYDROCARBONS AND PREVENTION OF LOSS



23.1



The Contractor shall adopt all those measures which are necessary and appropriate

and consistent with the best available technology to prevent loss or waste of

Hydrocarbons above or under the ground in any form during Hydrocarbon

Operations, gathering and distribution, storage or transportation operations.



23.2



Production of Hydrocarbons shall take place in such a manner that as much as

possible of the Hydrocarbons in place in each individual Hydrocarbons deposit, or in

several deposits in combination, will be produced. The production shall take place in

accordance with prudent technical and sound economic principles and in such a

manner that waste of Hydrocarbons or reservoir energy is avoided. The Contractor

shall carry out continuous evaluation of production strategy and technical solutions

and shall take the necessary measures in order to achieve this.



23.3



Hydrocarbons shall not be produced from multiple independent Hydrocarbons

productive zones simultaneously through one string of tubing, except with the prior

approval of the Minister.



23.4



In the event the Contractor should not consider the exploitation of the excess of

Natural Gas as justified and if the Minister, at any time, would wish to utilize it, the

Minister shall notify the Contractor thereof, in which event:

(i) the Contractor shall make available to the Republic free of charge at the Crude Oil

and Natural Gas separation facilities all of the excess that the Minister wishes to lift;

(ii) the Republic shall be responsible for the gathering, treatment, compression and

transportation of that excess from the above-mentioned separation facilities, and shall

bear any additional costs related thereto;

(iii) the construction of the facilities necessary for the operations referred to in

paragraph (ii) above, together with the lifting of that excess by the Republic, shall be

carried out in accordance with best international petroleum industry practice and in

such a manner as not to hinder the production, lifting and transportation of Crude Oil

by the Contractor.



23.5



Any excess of Associated Natural Gas which would not be utilized under Article 7

shall be re-injected by the Contractor. However, the Contractor shall have the right to

flare said gas in accordance with best international petroleum industry practice,

provided that the Contractor furnishes the Minister with a report demonstrating that

said gas cannot be economically utilized to improve the rate of recovery of Crude Oil

by means of reinjection, and provided, further, that the Minister approves said

flaring, which approval shall not be unreasonably withheld.



55



24



OWNERSHIP AND TRANSFER OF ASSETS UPON TERMINATION



24.1



The Contractor shall be the owner of the assets, whether movable or immovable,

which it has acquired for purposes of Hydrocarbons Operations, subject to the

following provisions.



24.2



Upon termination, relinquishment or cancellation of this Contract, whatever the

reason therefor, with respect to all or part of the Contract Area, the assets belonging

to the Contractor and necessary for Hydrocarbons Operations in the relinquished area

shall become the ownership of the Republic, free of charge, unless it is the intent that

they shall be used by the Contractor for purposes of exploitation of other Fields

located in the Republic. Such transfer of ownership shall cause, as the case may be,

the automatic cancellation of any surety or security concerning those assets or which

those assets constitute.



24.3



If the Minister decides not to use said assets, he shall have the right to require the

Contractor to remove them at the latter's expense, it being understood that the

abandonment operations shall be carried out by the Contractor in accordance with

best international petroleum industry practice, and in accordance with the time

schedule and conditions defined in the Decommissioning Plan which will have been

approved pursuant to Article 12.



24.4



The Contractor shall take all necessary measures in order to free the said assets from

any charge and liability and settle any V.A.T. that may become due under the

provisions of the V.A.T. legislation in force.



56



25



EMPLOYMENT AND TRAINING



25.1



From the commencement of the Hydrocarbons Operations, the Contractor shall

assure priority employment for Cypriot and EEA personnel and contribute to the

training of those personnel in order to allow them access to any position of

skilled worker, foreman, executive and manager.



25.2



For that purpose the Contractor shall establish at the end of each Calendar Year in

agreement with the Minister a plan for recruiting Cypriot and EEA

personnel and a plan for training and improving such personnel residing in

Cyprus, in order to achieve progressively greater participation of Cypriot and EEA

personnel in the Hydrocarbons Operations.



25.3



The Contractor shall also contribute to the training and improving of the

professional skills of the civil servants of the Republic or anyone else

nominated by the Minister, in accordance with a plan established in agreement

with the Minister at the end of each Calendar Year. For that purpose:

a)



during the term of the exploration period, the Contractor shall

allocate to said plan or, at the Minister's election, place at the

disposal of the Minister for implementing said plan, a minimum amount

of

(

) Euros per year.

b) from the date of first declaration of a Commercial Field within the

Contract Area, said amount shall be increased to (

) Euros per year.



57



26



LOCAL GOODS AND SERVICES



26.1



The Contractor and its sub-contractors undertake to give preference to Cypriot

and EEA enterprises and goods, under equivalent conditions in terms of price,

quantity, quality, conditions of payment and delivery time.



26.2



The Contractor and its sub-contractors undertake to issue calls for bids to Cypriot

and foreign candidates for supply, construction or services contracts that

exceeds the values applicable from time to time in accordance with the rules on

public procurement applicable in the Republic, it being understood that the

Contractor shall not unduly break down said contracts into components.



26.3



A copy of such contracts shall be provided to the Minister upon execution thereof.



26.4



The Contractor and its sub-contractors undertake to give preference, under

equivalent economic conditions, to the purchase of goods required by the

Hydrocarbons Operations versus the renting thereof or any other kind of leasing.



26.5



For that purpose, the Contractor shall specify in the annual Work Programmes all the

leasing contracts the value of which exceeds fifty thousand (50,000) Euros.



58



27



RESEACH AND DEVELOPMENT



27.1



The Contractor shall prepare and submit to the Minister for approval a

detailed plan on proposed Research and Development activities for the

coming Calendar Year and 5 years ahead.



27.2



The Contractor and its sub-contractors undertake to give preference to Cypriot

and EEA enterprises for the implementation of Article 27.



59



28



IMPORT AND EXPORT FROM A THIRD COUNTRY AND TRANSFER

FROM / TO ANOTHER MEMBER STATE OF THE EUROPEAN UNION



28.1



The Contractor shall have the right to import to the Republic from a third country or

transfer from a member state of the European Union, in its own name or on behalf of

its subcontractors, all the goods, materials, machinery, equipment, spare parts and

consumable directly necessary for the proper conduct of the Hydrocarbons

Operations according to the provisions of the European Union legislation and the

national V.A.T. and customs and excise legislation in force.



28.2



It is understood that the Contractor and its subcontractors agree to effect the

aforesaid imports only to the extent the materials and equipment are not available in

the Republic in equivalent conditions of price, quantity, quality, conditions of

payment and delivery term.



28.3



The foreign employees and their families assigned to work in the Republic for the

account of the Contractor or its subcontractors shall have the right to import to the

Republic from a third country or transfer from another member state of the European

Union their personal property according to the provisions of the European Union

legislation and the national V.A.T. and customs and excise legislation in force.



28.4



Subject to the provisions of Article 29.3, the Contractor, its clients and their carriers

shall have the right to freely export the quantities of Hydrocarbons to which the

Contractor is entitled under the terms of this Contract at the export point selected for

that purpose, at any time, free of any duties and taxes, after having deducted all the

deliveries made to the Republic, subject to the provisions of the V.A.T. and Customs

and Excise legislation. However, the Contractor agrees at the Minister’s request not

to sell Hydrocarbons produced from the Contract Area to an entity that is effectively

controlled by countries declared hostile to the Republic or nationals of such

countries.



60



29



TAXATION



29.1



The Contractor and its subcontractors shall comply with the applicable taxation

laws and regulations of the Republic as well as with any European Union tax rules

applicable from time to time in the Republic.



29.2



The agreements for the Avoidance of Double Taxation and the Prevention of

Fiscal Evasion with respect to income and capital, which the Republic has concluded

and agreed, as well as the various international conventions which the Republic has

adopted and/or to which it has acceded will also be applicable.



61



30



SURFACE FEES AND BONUSES



30.1



The Contractor shall pay the Republic the following surface fees:

a)

Twenty five (25) Euros per square kilometer of Contract Area annually during

the initial terms of the exploration period;

b)

Thirty (30) Euros per square kilometer of Contract Area annually during the

first renewal for the exploration period;

c)

Thirty five (35) Euros per square kilometer of Contract Area annually during

the second renewal of the exploration period and any extension thereof as provides

for in Article 6.2;

d)

In addition to fees paid in respect of paragraphs (a), (b) and (c) above, five

hundred (500) Euros per square kilometer of Exploitation Area annually during the

term of exploitation of each Exploitation Area.

For the Year in which this Contract is executed, the surface fee set forth in paragraph

(a) above shall be prorated from the Effective Date through December 31st of said

Year, and shall be paid within thirty (30) calendar days after the Effective Date.

For succeeding Years the surface fees set forth in paragraphs (a), (b) and (c) above

shall be paid in advance, thirty (30) calendar days before the beginning of each

Calendar Year.

For the Year in which an Exploitation License is granted for a given area, the surface

fee set forth in paragraph (d)shall be prorated from the date of granting said

Exploitation License through December 31st of said Year.

The basis of computation of said surface fees shall be the surface of the Contract

Area and, where applicable, of the Exploitation Areas, kept by the Contractor on the

date of payment of said surface rentals.

In the event of surface relinquishment during a Calendar Year or in the event of

Force Majeure, the Contractor shall have no right to be reimbursed for the surface

fees already paid.



30.2



The Contractor shall pay the Republic the following amounts as bonus:

a)

_____ (_____) Euros as signature bonus within thirty (30) days after the

Effective Date;



62



b)

_____ (_____) Euros after daily production from the Contract Area averages

__________ (______) barrels per day and/or averages __________ (______) million

standard cubic feet of gas per day, whichever is applicable, for a period of sixty (60)

consecutive days;

c)

_____ (_____) Euros after daily production from the Contract Area averages

__________ (______) barrels per day and/or averages __________ (______) million

standard cubic feet of gas per day, whichever is applicable, for a period of sixty (60)

consecutive days;

Such payments shall be made within thirty (30) calendar days following the last day

of the respective sixty (60) calendars day’s period.

30.3



The surface fees and bonuses required under this Article 30 shall not be

included in the Hydrocarbons Costs for purposes of cost recovery under Article 8.1.



63



31



PAYMENTS



31.1



Fees

The Contractors shall pay to the Republic fees and other payments as provided for in

this Contract and in the Law, in accordance with the laws of the Republic.



31.2



Payment Mechanism

All payments that the Contractor shall make to the Republic under this Contract shall

be made to the:

Central bank of Cyprus

80 Kennedy Avenue

1076 Nicosia,Cyprus

Account name: Government Central Account

Account number: 6001010

IBAN: CY16 0010 0001 0000 0000 0600 1010

Note: “Care of the Ministry of Commerce, Industry and Tourism, Hydrocarbons

Activities”

All payments under this Contract shall be made in Euros, unless otherwise agreed,

and within thirty (30) Calendar Days after the end of the month in which the

obligation to make the payment is incurred.



31.3



Late Payment

Any amount not paid in full when due shall bear interest, compounded on a monthly

basis, at a rate per annum equal to one (1) month term, LIBOR (London Interbank

Offer Rate) for Euro deposits, as published in London by the Financial Times current

from day to day, plus five (5) percentage points, on and from the due date for

payment until the amount, together with interest thereon, is paid in full.



31.4



Minimum Payment

If this Contract is terminated for any reason before the end of the third (3rd) Contract

Year, the Contractor shall, on such termination, pay, to the Minister, those fees and

payments which it would have so paid if termination had not occurred until the end

of the third (3rd) Contract Year.

64



32



LIABILITY AND INSURANCE



32.1



The Contractor shall indemnify and compensate any person, including the Republic,

for any damage or loss which the Contractor, its employees or subcontractors and

their employees may cause to the person, the property or the rights of other persons,

caused by or resulting from Hydrocarbons Operations, including any environmental

damage.



32.2



The Contractor shall indemnify, defend and hold harmless the Republic against all

claims, losses or damage whatsoever caused by or resulting from Hydrocarbons

Operations.



32.3



The Contractor shall take out and maintain in force, and cause to be taken out and

maintained in force by its subcontractors, all insurances with respect to

Hydrocarbons Operations, of the type and for such amounts customarily used in the

international Hydrocarbons industry, including, inter alia, third party liability

insurances and insurances to cover damage to property and environment, without

prejudice to such insurances as may be required under the legislation of the Republic.



32.4



The Contractor shall provide the Minister with the certificates proving the

subscription and maintenance of the above-mentioned insurances. The Minister shall

approve the said insurance policies for exclusions and verify the financial capacity of

Insurers. The Minister shall have the right to require amendments to the said

insurance policies in order to secure the compliance with the requirements pursuant

to this Article.



32.5



Where the Contractor consists of several entities, the obligations and responsibilities

of those entities under this Contract shall be joint and several.



32.6



Each entity constituting the Contractor which is a subsidiary of another legal person,

shall submit to the Minister for approval an undertaking where its ultimate parentcompany is guaranteeing the proper performance of the obligations arising from this

Contract.



65



33



FORCE MAJEURE



33.1



Force majeure relief

Any obligation or condition arising from this Contract which either Party is

prevented from performing whether in whole or part, except with respect to the

payments such Party is liable to, shall not be considered as a breach of this Contract

if said non-performance is caused by a case of Force Majeure, provided, however,

that there is a direct cause-and-effect relationship between the non-performance and

the case of Force Majeure invoked.

For purposes of this Contract, cases of Force Majeure are considered to include all

events which are unforeseeable, irresistible and beyond the control of the Party

which invokes it, such as earthquake, riot, insurrection, civil disturbances, acts of war

or acts attributable to war. The intent of the Parties is that the term Force Majeure

shall be interpreted in accordance with the principles and practice of international

law.



33.2



Procedure

Where either Party considers it is prevented from performing any of its obligations

due to a case of Force Majeure, it shall immediately notify the other Party thereof,

stating the grounds for establishing such case of Force Majeure, and it shall, in

agreement with the other Party, take all necessary and useful action to assure the

resumption of the obligations affected by the case of Force Majeure upon termination

of that case of Force Majeure.

The obligations other than those affected by the case of Force Majeure shall continue

to be performed in accordance with the provisions of this Contract.



33.3



Extension of time

If the performance of any of the obligations of this Contract is delayed due to a case

of Force Majeure, the duration of the resulting delay together with such time period

as may be required for the repair of any damage caused by the case of Force

Majeure, shall be added to the term of this Contract.



66



34



TERMINATION OF THE CONTRACT



34.1



This Contract may be terminated by the Minister and the license pertaining to the

Contract Area revoked by the Council of Ministers, without compensation, under one

of the following occurrences:

a)

b)

c)

d)

e)

f)



material breach or recurrent breach by the Contractor of the provisions

of the Law and/or the Regulations and/or the provisions of this Contract;

delay exceeding three (3) months incurred by the Contractor with

respect to a

payment due to the Republic;

disruption of development work with respect to a Field during six (6)

consecutive months;

after commencement of production from a Field, disruption of

production for at least six (6) months or repetitive disruption of production,

decided without the Minister's consent;

failure of the Contractor to comply, within the prescribed time period,

with an

arbitration award rendered in accordance with the provisions of Article 36; or

bankruptcy, composition with creditors or liquidation of assets of the

Contractor or its parent-company or any entity constituting the Contractor, as

the case may be.



34.2



Except with respect to the occurrence set forth in paragraph 34.1.(f) above, the

Minister shall pronounce the forfeiture provided for in Article 34.1. only after having

served formal notice on the Contractor, by registered mail with acknowledgement of

receipt, to remedy the breach in question within three (3) months (or within six (6)

months with respect to the occurrences set forth in paragraphs 34.1.(c) and 34.1.(d)

above) from the date of receipt of such notice.



34.3



Should the Contractor fail to comply with such prescription within the prescribed

time period, the Minister may pronounce ipso jure the termination of this Contract.



34.4



Any disruption of production for a period of at least six (6) months, or any repetitive

disruption of production, decided by the Contractor without the Minister's consent

may give rise to the termination of this Contract in accordance with the provisions of

this Article 34.



34.5



For the duration of the exploration period, the Minister may, with at least six (6)

months' prior notice, request the Contractor to relinquish immediately without any

compensation all its rights over the area encompassing a Discovery, including

Hydrocarbons which may be produced from said Discovery, if the Contractor:

67



a) has not submitted an appraisal work programme with respect to said

Discovery within twelve (12) months following the date on which said

Discovery has been notified to the Minister; or

b) does not declare the Discovery as a Commercial Discovery within eighteen

(18) months after completion of appraisal work with respect to said

Discovery.

34.6



The Minister may then perform or cause to be performed any appraisal,

development, production, treatment, transportation and marketing work with respect

to said Discovery, without any compensation to the Contractor; provided, however, it

shall not cause prejudice to the performance of the Hydrocarbons Operations by the

Contractor in the remaining part of the Contract Area.



34.7



Any dispute as to whether any ground exists to justify the termination of this

Contract pronounced by the Minister due to the forfeiture may be subject to

arbitration in accordance with the provisions of Article 36. In that event, the Contract

shall remain in force until the execution of the arbitration award by the Parties.



68



35



GOVERNING LAW



35.1



This Contract and all Hydrocarbons Operations carried out under this Contract shall

be governed by the legislation in force at any time in the Republic.



35.2



The Contractor shall be subject at any time to the legislation in force in the

Republic.



69



36



DISPUTE SETTLEMENT



36.1



Amicable settlement

In the event of any difference or disagreement or dispute (hereinafter referred to as

the “dispute”) between the Republic and the Contractor regarding the interpretation

or implementation of any provisions of this Contract, the Parties shall first attempt to

resolve that dispute amicably through negotiations which shall not exceed a period of

sixty (60) days after the receipt by one Party of a notice from the other Party of the

existence of such a dispute.



36.2



Expert determination

In the event of failure of the Parties to reach an amicable settlement within the

aforesaid period of sixty (60) days, the Parties shall, within ten (10) days, by mutual

agreement, request an expert to provide his expert decision on the dispute. Failing

such agreement, any one of the Parties may request the International Centre for

Technical Expertise of the International Chamber of Commerce to appoint such

expert in accordance with its Rules for Technical Expertise.

The expert shall render his decision no later than one hundred and twenty (120) days

after his or her appointment. The Parties agree to cooperate fully in the conduct of

such expert determination and to provide the expert with all necessary information to

make a fully informed decision in an expeditious manner.

The expert’s decision shall be final and binding upon the Parties unless the Parties

refer the dispute to arbitration pursuant to Article 36.3 within sixty (60) days of the

date on which the expert’s decision is received by the Parties by double-registered

letter or by courier.

The expert expenses and fees shall be paid as determined in the decision of the

expert.



36.3



Arbitration

If the dispute is not resolved through amicable settlement or expert determination

within the period set out in Articles 36.1 and 36.2 above or if one of the Parties

wishes to challenge the decision reached by the expert pursuant to Article 36.2, the

dispute shall be referred to arbitration. The dispute shall be submitted to the

International Centre for Settlement of Investment Disputes (ICSID) upon request by

one or both Parties, and shall be tried and decided in accordance with the rules set

70



forth by the Convention on the Settlement of Investment Disputes between States

and Nationals of other States.

The seat of arbitration shall be Nicosia, Republic of Cyprus. The language used

during the arbitration proceedings shall be the English language and the applicable

law shall be the laws of the Republic of Cyprus.

The arbitral tribunal shall consist of three (3) arbitrators.

The arbitration award shall be final and binding on the Parties and immediately

enforceable.

A request to arbitration shall give the right to either Party to apply to the arbitral

tribunal for the suspension of the contractual provisions concerning the subject

matter of the dispute, but all other rights and obligations of the Parties under this

Contract shall not be suspended.

The arbitration expenses shall be borne equally by the Parties, subject to the award of

the tribunal regarding the sharing thereof. In the event a Party does not pay all or part

of its share of the arbitration expenses, the arbitration process shall not be suspended

and the settlement of payment shall be included in the arbitration award.



71



37



IMPLEMENTATION OF THE CONTRACT/MISCELLANEOUS



37.1



The Parties hereby agree to cooperate in any possible manner to achieve the

objectives of this Contract.



37.2



The Minister shall, when specifically requested by the Contractor, assist the

Contractor in obtaining permits, licenses and access rights necessary for the

requirements of the Hydrocarbons Operations, and in dealing with Government

authorities of the Republic.



37.3



All reasonable expenses incurred in the assistance provided by the Minister pursuant

to this Article 37 shall be reimbursed by the Contractor.



37.4



Any consent, notice and other communications required or given under this Contract

shall be deemed given when delivered in writing either by hand in person or through

registered mail, courier service or fax transmission confirmed by a letter and after

acknowledgement of receipt by the addressee, to the addresses indicated below:

- To the Minister:

The Hon. Minister

Ministry of Commerce, Industry and Tourism

1421 Nicosia

Cyprus

- To the Contractor:

The Minister or the Contractor may at any time change their authorized

representative, or modify the addresses mentioned in this Article 37.4, subject to at

least ten (10) days’ prior notice.



37.5



Any waiver of the Republic concerning the execution of an obligation of the

Contractor shall be in writing and signed by the Minister, and no waiver shall be

considered as a precedent if the Republic does not exercise any of the rights which it

is entitled to under this Contract.



37.6



The headings in this Contract are inserted for purposes of convenience and reference

and in no event shall define, restrict or describe the scope or object of the Contract or

of any of its clauses.



72



38



GUARANTEES



38.1



As a condition precedent to the effectiveness of this Contract, upon the Effective

Date, the Contractor shall provide an irrevocable bank guarantee, payable to The

Permanent Secretary, Ministry of Commerce, Industry and Tourism, guaranteeing its

Exploration Work Obligations for the Initial Licensing Period. The bank guarantee

shall be issued by a bank licensed to operate in any of the following countries: the

Republic of Cyprus, any member state of the European Union, any country of the

EEA, any country that had signed the Government Procurement Agreement (GPA)

and any country that had signed and ratified Association Agreements or Bilateral

Agreements with the European Union or the Republic of Cyprus and has the right to

do so, according to the legislation of those countries.



38.2



a)

The amount of the guarantee shall be calculated by using the unit costs per km

of seismic survey and per exploratory well set forth as follows:

i. Euros _____ (____) per km of seismic survey to be performed;

ii. Euros _____ (____) million per exploratory well to be drilled.

b)

Three (3) months after completion of a seismic survey or an exploratory well

drilled to the minimum contractual depth, the above mentioned guarantee shall be

adjusted in such a manner as to guarantee the outstanding balance of the Exploration

Work Obligations for the current Exploration Phase, as valued in accordance with the

provisions of the foregoing paragraph.



38.3



In the event of a renewal of an authorization to explore, the Contractor shall also

provide a similar guarantee guaranteeing the Exploration Work Obligations for that

renewal. The amount of the said guarantee shall be calculated in accordance with the

provisions of Article [38.2(a)]. If, upon expiry of the Initial Licensing Period or any

renewal or extension thereof, or in the event of whole relinquishment or termination

of the Contract, the exploration work has not reached the applicable Exploration

Work Obligations, the Minister shall have the right to call for the guarantee as

compensation for the non-performance of the Exploration Work Obligations entered

into by the Contractor.



38.4



After the payment has been made, the Contractor shall be deemed to have fulfilled its

Exploration Work Obligations for the relevant Exploration Phase under

this

Contract. The Contractor may, except in the event of termination of the Exploration

Period due to a material breach of this Contract, continue to benefit from the

provisions of said Contract and obtain the renewal of an authorization to explore,

subject to applying therefor in the appropriate manner.



73



39



AMENDMENTS/RENEGOTIATION



39.1



This Contract may be amended or modified only in writing and by mutual agreement

of the Parties and with the approval of the Council of Ministers.



74



40



EFFECTIVE DATE



This Contract shall become effective as of the Effective Date upon execution of this Contract

by each Party, and this Contract shall be binding for each Party. Prior to being executed by

the Parties, the Contract shall be approved by the Council of Ministers, and a copy of such

approval in a form reasonably satisfactory to Contactor shall be provided to the Contractor

simultaneously with the execution of this Contract.

In witness whereof, the parties hereto have caused this Contract to be executed in …

three (3) originals in the English language, each page having been signed with initials by

the two Parties.



75



ANNEX A: DESCRIPTION OF THE ORIGINAL CONTRACT AREA

ANNEX B: MAP OF THE ORIGINAL CONTRACT AREA

ANNEX C: ACCOUNTING AND FINANCIAL PROCEDURE

ANNEX D: EXPLORATION WORK OBLIGATIONS

ANNEX E: PERFORMANCE GUARANTEE



76



ANNEX A: DESCRIPTION OF THE ORIGINAL CONTRACT AREA



77



ANNEX B: MAP OF THE ORIGINAL CONTRACT AREA



78



ANNEX C

Attached to and made an integral part of this Contract between the Republic of Cyprus and

the Contractor.



ACCOUNTING AND FINANCIAL PROCEDURE

ARTICLE 1

GENERAL PROVISIONS

1.1



Purpose

The purpose of this accounting procedure is to establish the manner in which the

Hydrocarbons Costs will be classified and determined, and the Contractor’s books and

accounts will be prepared and maintained.



1.2



Interpretation

The definitions contained in Article 1 of the Contract shall apply to this accounting

procedure and shall have the same meaning when used herein.

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

procedure and the provisions of the Contract, then the provisions of the Contract shall

prevail.



1.3



Accounting Records

The Contractor shall maintain complete accounts, books and records, on an accrual

basis, of all costs, expenses and revenues of, or relating to, Hydrocarbons Operations

in accordance with generally accepted accounting procedures and standards of the

international petroleum industry and in accordance with the charts of accounts

approved under the following paragraph.

Within sixty (60) days after the Effective Date, the Contractor shall submit to the

Minister for approval an outline of charts of accounts, books, records and reports to be

used for the purposes of this accounting procedure and for reporting to the Minister

thereon.

Notwithstanding the generality of the foregoing, the Contractor shall submit to the

Minister, at regular intervals, statements relating to the Hydrocarbons Operations, with

79



respect to production, value of production and pricing, Hydrocarbons Costs,

production sharing, annual budget, final end-of-year statement.

1.4



Language and Units of Account, Currency Exchange

Unless otherwise agreed, the accounting records and all reports to the Minister shall be

in English.

The accounting records will be in Euros. Any amount incurred in this currency shall

be recorded in this currency. Any amount incurred in another currency shall be

converted into Euros at the exchange rate set on the day the cost is incurred or the

revenue is realized at a time and by a bank designated by the Minister.

A separate record shall be kept of the exchange rates used in conversion.

Exchange gains or losses will be respectively credited or charged to the accounting

records, provided that they have been actually incurred in connection with the

Hydrocarbons Operations.



1.5



Revision of the Accounting Procedure

By mutual agreement between the Minister and the Contractor, this accounting

procedure may be revised from time to time by a document in writing executed by the

Parties.

ARTICLE 2

CLASSIFICATION OF HYDROCARBONS COSTS



2.1



Principles of Classification

The Hydrocarbons Costs shall be classified in accordance with the purpose for which

such expenditures are made, and under the categories defined in this Article 2. Such

classification shall be used in each Work Programme and Budget. The records shall be

maintained in such a way as to enable proper allocation to each Field with respect to

each Exploitation Area.



2.2



Exploration Expenditures

Exploration Expenditures are those costs, whether of a capital or operating nature,

which directly relate to Exploration for Hydrocarbons incurred under the Contract,

including costs of:

80



a) Surveys, including labor, material and services, used in aerial, geophysical,

geochemical, geological and seismic surveys and core hole drilling, including desk

studies and interpretation of survey data.

b) Drilling Wells, including labor, material and services, provided such Wells are not

completed as producing Wells.

c) Facilities used solely in support of the performance of activities mentioned in

paragraphs (a) and (b).

2.3



Appraisal Expenditures

Appraisal Expenditures are those Exploration Expenditures which directly relate to the

Appraisal of a Hydrocarbons Discovery.



2.4



Development and Production Expenditures

Development and Production Expenditures are those costs of a capital nature which

directly relate to the Development and Production of a Field with respect to an

Exploitation Area under the Contract, including costs of:

a) Drilling Wells, including labor, material and services, provided such Wells are

completed as producing Wells or as injection Wells.

b) Facilities used in support of the performance of activities mentioned in paragraph

(a)

c) Production facilities including offshore platforms, wellhead production tubing,

pumps, flow lines, gathering equipment, delivery lines, treatment facilities, storage

facilities, export terminal and piers, enhanced recovery facilities.

d) Pipelines and related facilities for transporting Hydrocarbons produced in the

Contract Area to the Delivery Point.

e) Engineering and design studies for facilities mentioned in paragraph (c) and (d).



2.5



Operating Expenditures

Operating Expenditures are, with respect to an Exploitation Area and after the start of

commercial production therefrom, those costs of an operating nature which directly

relate to the development and production thereof.

81



2.6



Apportionment

Where any cost or receipt relates only partially to the performance of the

Hydrocarbons Operations under the Contract, only such portion of the cost or receipt

which relates to the performance of the Hydrocarbons Operations under the Contract

shall be allocated to the Hydrocarbons Costs or assessed as a receipt in the accounting

records.

Where any cost or receipt relate to more than one of Exploration, Appraisal,

Development and Production, and Operation Expenditures, or to more than one

Exploitation Area, the cost or receipt shall be apportioned in an equitable manner, with

all supporting elements.



ARTICLE 3

ALLOWABLE HYDROCCARBONS COSTS

FOR COST RECOVERY

The following costs and expenses incurred by the Contactor for the purposes of the Contract,

shall be classified in accordance with the provisions of Article 2 of this accounting procedure,

and shall be included as Hydrocarbons Costs allowed for cost recovery under Article 8.1 of

the Contract, subject as otherwise provided in the Contract and in Article 3.17 of this

accounting procedure.

3.1



Surface Rights

All direct costs necessary for the acquisition, renewal or relinquishment of surface

rights acquired and maintained in force for the purpose of the Contract, excluding the

surface fees paid to the Republic referred to in Article 30 of the Contract.



3.2



Labor and Associated Labor Costs

a) Contractor’s locally recruited employees based in Cyprus:

Cost of all locally recruited employees who are directly engaged in the conduct of

Hydrocarbons Operations in the Republic of Cyprus.

Such costs shall include the costs of employee benefits and state benefits for

employees and levies imposed on the Contractor as an employer, transportation

82



and relocation costs within Cyprus of such employee and such members of the

employee’s family (limited to spouse and dependent children) as required by law

or customary practice in Cyprus.

If such employees are also engaged in activities other than the Hydrocarbons

Operations, in addition, the cost of such employees shall be apportioned on a time

sheet basis according to sound and acceptable accounting principles.

b) Assigned personnel:

Costs of salaries and wages including bonuses of the Contractor’s employees

directly and necessarily engaged in the conduct of the Hydrocarbons Operations,

whether temporarily or permanently assigned, irrespective of the location of such

employees, it being understood that, in the case of those personnel only a portion

of whose time is wholly dedicated to the Hydrocarbons Operations under the

Contract, only that pro-rata portion of applicable salaries, wages, and other costs as

delineated in paragraphs 3.2(c), (d), (e), (f) and (g) below, shall be charged and

the basis of such pro-rata allocation shall be specified.

c) The Contractor’s costs regarding holiday, vacation, sickness and disability benefits

and living and housing and other customary allowances applicable to the salaries

and wages changeable under paragraph 3.2(b) above.

d) Expenses or contributions made pursuant to assessments or obligations imposed

under the laws of the Republic which are applicable to the Contractor’s cost of

salaries and wages chargeable under paragraph 3.2(b) above.

e) The Contractor’s cost of established plans for employees group life insurance,

hospitalization, pension, stock purchases, savings, bonus, and other benefit plans

of a like nature customarily granted to the Contractor’s employees, provided

however that such costs are in accordance with generally accepted standards in the

international petroleum industry, applicable to salaries and wages chargeable to the

Hydrocarbons Operations under paragraph 3.2(b) above.

f) Reasonable transportation and travel expenses of employees of the Contractor,

including those made for travel and relocation of the expatriate employees,

including their families and personal effects, assigned to Cyprus whose salaries

and wages are chargeable to the Hydrocarbons Operations under paragraph 3.2(b)

above.

Actual transportation expenses of expatriate personnel transferred to the

Hydrocarbons Operations from their country of origin shall be charged to the

Hydrocarbons Operations. Transportation expense of personnel transferred from

83



the Hydrocarbons Operations to a country other than the country of their origin

shall not be charged to the Hydrocarbons Operations.

Transportation cost as used in this Article shall mean the cost of freight and

passenger services, meals, hotels, insurance and other expenditures related to

vacation and transfer travel and authorized under the Contractors standard

personnel policies. The Contractor shall ensure that all expenditures related to

transportation costs are equitably allocated to the activities which have benefited

from the personnel concerned.

g) Reasonable personal expenses of personnel whose salaries and wages are

chargeable to the Hydrocarbons Operations under paragraph 3.2(b) above and for

which expenses such personnel are reimbursed under the Contractor’s standard

personnel policies. In the event such expenses are not wholly attributable to the

Hydrocarbons Operations, the Hydrocarbons Operations shall be charged with

only the applicable portion thereof, which shall be determined on an equitable

basis.

3.3



Transportation and Employee Relocation Costs

The Cost of transportation of employees, equipment, material, supplies other than as

provided in Article 3.2 of this Accounting Procedure necessary for the conduct of the

Hydrocarbons Operations under the Contract along with other related costs, including

duties, customs fees, unloading changes, dock fees, and inland and ocean freight

charges.



3.4



Charges for Services

a) Third Parties

The actual costs of contract services, services of professional consultants, utilities,

and other services necessary for the conduct of the Hydrocarbons Operations

performed by third parties other than an Affiliate of the Contractor.

b) Affiliates of the Contractor

(i)



Professional and Administrative Services Expenses:

Cost of professional and administrative services provides by Affiliates of

the Contractor for the direct benefit of the Hydrocarbons Operations,

including services provided by the production, exploration, legal, financial,

insurance, accounting and computer services divisions other than those

covered by paragraph 3.4(b)(ii) below or Article 3.6 and 3.8(b) below,

which the Contractor may use in lieu of having its own employees.

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Charges shall reflect the cost of providing their services and shall not

include any element of profit and shall be no less favorable than similar

charges for other operations carried on by the Contractor and its Affiliates.

The chargeout rate shall include all costs incidental to the employment of

such personnel.

Where the work is performed outside the home office base of such

personnel, the daily rate shall be charged from the date such personnel

leave the home office base where they usually work up to their return

thereto, including days which are not working days in the location where

the work is performed, excluding any holiday entitlements derived by such

personnel from their employment at their home office base.



3.5



(ii)



Scientific or Technical Personnel:

Cost of scientific or technical personnel services provided by any Affiliate

of the Contractor for the direct benefit of the Hydrocarbons Operations,

which cost shall be charged on a cost of service basis and shall not include

any element of profit. Unless the work to be done by such personnel is

covered by an approved annual Work Programme and Budget, the

Contractor shall not authorize work by such personnel.



(iii)



Equipment and Facilities:

Use of equipment and facilities owned and furnished by the Contractor’s

Affiliates, at rates commensurate with the cost of ownership and operation;

provided, however, that such rates shall not exceed those currently

prevailing for the supply of like equipment and facilities on comparable

terms in the area where the Hydrocarbons operations are being conducted.

The equipment and facilities referred to herein shall exclude major

investment items such as, but not limited to, drilling rigs, producing

platform, oil treating facilities, oil and gas loading and transportation

systems, storage and terminal facilities and other major facilities, rates for

which shall be subject to separate agreement with the Minister.



Communications

Cost of acquiring, leasing installing, operating, repairing and maintaining

communication systems including radio and microwave facilities between the Contract

Area and the Contractor’s nearest base facility.



3.6



Office and Miscellaneous Facilities



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Net cost to the Contractor of establishing, maintaining and operating any office, suboffice, warehouse, housing or other facility in Cyprus directly serving the

Hydrocarbons Operations. If any such office, sub-office, warehouse, housing or other

facility is used for contract areas other than the Contract Area, the net costs thereof

shall be allocated on an equitable basis.

3.7



Ecological and Environmental

a) Costs incurred in the Contract Area as a result of legislation for archaeological

and geophysical surveys relative to identification and protection of cultural sites

or resources.

b) Costs incurred in environmental or ecological surveys required by the Contract or

regulatory authorities.

c) Costs to provide or have available pollution containment and removal equipment.

d) Costs of actual control and clean-up of oil spill, and of such further

responsibilities resulting therefrom as may be required by applicable laws and

regulations.



3.8



Material Costs

Costs of materials and supplies, equipment, machines, tools and any other goods of a

similar nature used or consumed in the Hydrocarbons Operations subject to the

following:

a) Acquisition:

Contractor shall only supply or purchase materials for use in the Hydrocarbons

Operations that may be used in the foreseeable future. The accumulation of

surplus stocks and inventory shall be avoided so far as is reasonably practical and

consistent with efficient and economical operations. Inventory levels shall,

however, take into account the time lag for replacement, emergency needs,

weather conditions affecting operations and similar considerations.

b) Components of costs, arm’s length transactions:

Except as otherwise provided in paragraph 3.8(d) below, material purchased by

the Contractor in arm’s length transactions in the open market for use in the

Hydrocarbons Operations shall be valued to include invoice price less trade and

cash discounts, purchase and procurement fees plus freight and forwarding

charges between point of supply and point of shipment, freight of port of

destination, insurance, taxes, customs duties, consular fees, excise taxes, other

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than items chargeable against important materials and, where applicable, handling

and transportation expenses from point of importation to warehouse or operating

site.

c) Accounting:

Such material costs shall be charged to the accounting records and books based in

accordance with the “First in, First out” (FIFO) method;

d)



Material purchased from or sold to Affiliates of the Contractor of transferred

from other activities of the Contractor to or from the Hydrocarbons Operations

shall be valued and charged or credited at the prices specified in paragraphs (i) to

(v) below.

(i)



New material, including used new material moved from inventory

(Condition “A”), shall be valued at the current international net price

which shall not exceed the price prevailing in normal arm’s length

transactions in the open market.



(ii)



Used material in good condition (Condition “B”):

Material which is in sound and serviceable conditions and is suitable for

re-use without reconditioning shall be classified as Condition “B” and

priced at seventy-five percent (75%) of the current price of new material

defined in paragraph (i) above.



(iii)



Used material in poor condition (Condition “C”):

Material which cannot be classified as Condition “B” but which after

reconditioning will be further serviceable for its function shall be

classified as Condition “C” and priced at not more than fifty percent

(50%) of the current price of new material as defined in paragraph (i)

above. The cost of reconditioning shall be charged to the reconditioned

material provided that the value of Condition “C” material plus the costs

of reconditioning does not exceed the value of Condition “B” material.



(iv)



Scrap and discard (Condition “D”):

Material which cannot be classified as Condition “B” or Condition “C”

shall be classified as Condition “D” and priced at a value commensurate

with its use by the Contractor. If material is not fit for use by the

Contractor it shall be disposed of as junk.



(v)



Material involving erection costs shall be charged at the applicable

conditions percentage of the current knocked-down price of new material

as defined in paragraph (i) above.

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3.9



(vi)



When the use of materials is temporary and its services to the

Hydrocarbons Operations does not justify reduction in price as provided

for in paragraph (iii) above, such material shall be priced on a basis that

will result in a net charge to the accounts under Contract consistent with

the value of the service rendered.



(vii)



Premium prices:

Whenever material is not readily obtainable at published or listed prices

because of national emergencies, strikes or other unusual causes over

which the Contractor has no control, the Contractor may charge the

Hydrocarbons operations for the required material at the Contractor’s

actual costs incurred in providing such material, in making it suitable for

use, and in moving it to the Contract Area; provided notice in writing is

furnished to the Minister of the proposed charge prior to charging the

Hydrocarbons Operations for such material and the Minister shall have

the right to challenge the transaction on audit.



(viii)



Warranty on material furnished by the Contractor:

The Contractor does not warrant the material furnished. In case of

defective material, credit shall not be passed to the Hydrocarbons

Operations until adjustment has been received by the Contractor from the

manufacturers of the material or their agents.



Insurance and Losses

Insurance premiums and costs incurred for insurance pursuant to the Contractor and

the legislation, provided that such insurance is customary, affords prudent protection

against risk and is at a premium no higher than that charged on a competitive basis by

insurance companies which are not Affiliates of the Contractor.

Except in cases of failure to insure where insurance coverage is required pursuant to

the Contract, actual casualty losses incurred and connected costs shall be allowable to

the extent not made good by insurance. Such costs may include repair and replacement

of property in the Contract Area resulting from damages or losses incurred by fire,

flood, storm, theft, accident or such other cause.



3.10



Legal Expenses

All reasonable costs and expenses resulting from the handling, investigating, asserting,

defending, or settling of any claim or legal action necessary or expedient for the

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procuring, perfecting, retention and protection of the Contract Area, and in defending

or prosecuting lawsuits involving the Contract Area or any third party claim arising

out of the Hydrocarbons Operations under the Contract, or sums paid in respect of

legal services necessary for the protection of the joint interest of the Republic and the

Contractor shall be allowed.

Such expenditures shall include attorney’s fees, court costs, costs of investigation, and

procurement of evidence and amounts paid in settlement or satisfaction of any such

litigation and claims, provided such costs are not covered elsewhere in this

Accounting Procedure. Where legal services are rendered in such matter by salaried or

regularly retained lawyers of the Contractor or an Affiliate of the Contractor, such

compensation shall be included instead under Article 3.2 or 3.4(b) above as applicable.

All of the above legal expenses shall be allowable with the consent of the Minister.

3.11



Claims

Expenditures made in the settlement or satisfaction of any loss, claim, damage,

judgment or other expense arising out of or relating to the Hydrocarbons Operations

shall be allowable with the consent of the Minister, except as may otherwise be

covered elsewhere in this Accounting Procedure.



3.12



General and Administrative Costs

The general and administrative costs, other than direct charges included in the

foregoing paragraphs, allowed to be included as Hydrocarbons Costs under the

Contract, shall be determined by a detailed study to be submitted by the Contractor to

the Minister for approval.

In any case, the total general and administrative costs shall be limited each Year to a

percentage of the total recoverable Hydrocarbons Costs agreed upon between the

Contractor and the Minister. Upon the Effective Date such percentage is set at three

per cent (3%) for the Exploration Expenditures. Such limit may be reviewed and

adjusted from time to time where appropriate, in particular for the Development and

Production Expenditures, by mutual agreement in writing between the Minister and

the Contractor.



3.13



Other Expenditures

Other reasonable expenditures not covered or dealt with in the foregoing provisions of

this Article 3 and not excluded under the provisions of Article 3.15 below, which are

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necessarily incurred by the Contractor for the proper, economical and efficient conduct

of the Hydrocarbons Operations shall be allowable with the approval of the Minister.

3.14



Miscellaneous Proceeds

The proceeds received by the Contractor, other than for the sale or other disposal of

Hydrocarbons from an Exploitation Area, which are directly related to the conduct of

the Hydrocarbons Operations, including, but not limited to, the items listed below,

shall be credited to the accounting records.

(a) Proceeds received from the sale or other disposal of Hydrocarbons from

production testing activities performed in exploration and appraisal Wells.

(b) Proceeds received for the disposal, loss or destruction of property, the cost of

which is a Hydrocarbons Cost charged to the accounts,

(c) Proceeds of any insurance or claim or judicial awards in connection with the

Hydrocarbons Operations or any assets charged to the accounts under the Contract

where such Operations or assets has been insured and the premiums charged to the

accounts.

(d) Proceeds received from the hiring or leasing of property or assets, the cost of

which is a Hydrocarbons Cost charged to the accounts.

(e) Proceeds received from any adjustment made by the suppliers or manufacturers or

their agents in connection with a defective material, the cost of which is a

Hydrocarbons Cost charged to the accounts.

(f) Proceeds received from rentals, refunds or other credits which apply to any charge

which has been made to the accounts, but excluding any award granted to the

Contractor under arbitration or sole expert proceedings referred to in Article 3.15

of this accounting procedure.

(g) Costs originally charged to the accounts for material subsequently exported from

Cyprus or transferred to another member state of the European Union without

being used in the Hydrocarbons Operations under the Contract.

(h) Proceeds received from authorized supplying of information obtained from the

Hydrocarbons Operations, the acquisition cost of which has been charged to the

accounts.

(i) Proceeds received for the use of employee amenities, the cost of which has been

charged to the accounts.

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3.15



Duplication of Charges and Credits

There shall be no duplication of charges and credits.



3.16



Expenditures not eligible for cost recovery

The following costs and expenses shall not be eligible as Hydrocarbons Costs for cost

recovery under the Contract:

(a) The bonus and surface fees referred to in Article 30 of the Contract.

(b) Any payments made to the Republic for failure to fulfill the Exploration Work

Obligations.

(c) Costs incurred prior to the Effective Date.

(d) Interest, or any charge or payment in the nature of, in lieu of, or having the

commercial effect of, interest related to the financing of the Hydrocarbons

Operations.

(e) Costs incurred in respect of Hydrocarbons after passing the Delivery Point.

(f) Costs incurred as a result of non-compliance by the Contractor with the legislation

or the Contract, including costs incurred as a result of any negligent act or

omission or willful misconduct of the Contractor, its agents and subcontractors.

(g) Payment or compensation to damage under the Contract.

(h) Costs incurred in respect of arbitration and litigation proceedings under the

Contract.

(i) Costs which are not adequately supported and documented.

(j) Costs incurred without the consent or approval of the Minister where such consent

or approval is required.

ARTICLE 4

INVENTORIES



Inventories of property in use in the Hydrocarbons Operations shall be taken at reasonable

intervals but at least once a year with respect to movable assets and once every three (3) years

with respect to immovable assets.

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The Contractor shall give at least thirty (30) days written notice of its intention to take such

inventory and the Minister shall have the right to be represented when such inventory is taken.

Contractor shall clearly state the principles upon which valuation of the inventory has been

based. The Contractor shall make every effort to provide to the Minister a full report on such

inventory within thirty (30) days of the taking of the inventory.

When an assignment of rights under the Contract takes place, the Contractor may, at the

request of the assignee, take a special inventory provided that the costs of such inventory are

borne by the assignee.

ARTICLE 5

COST RECOVERY STATEMENT

5.1



Quarterly Statement

The Contractor shall prepare a quarterly Cost Recovery Statement containing the

following information with respect to the Contract Area, showing the Hydrocarbons

Costs as classified pursuant to Article 2 of this accounting procedure and separated for

each Field, if any.

(a) The recoverable Hydrocarbons Costs carried forward from the previous Quarter.

(b) The recoverable Hydrocarbons Costs for the Quarter in question.

(c) The Credits under the Contract for the Quarter in question.

(d) The total recoverable Hydrocarbons Costs for the Quarter in question, equal to the

sum of (a) plus (b) less (c).

(e) The quantity and value of the production of Hydrocarbons taken by the Contractor

for cost recovery pursuant to the provisions of Article 8.1of the Contract in the

Quarter in question.

(f) The amount of Hydrocarbons Costs to be carried forward into the next Quarter.

The quarterly statement shall be submitted to the Minister no later than ten (10) days

after the end of each Quarter. In addition, Contractor shall have an audit of

Hydrocarbon Costs conducted by its auditors semi-annually and such report shall be

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provided to the Ministry. The reasonable costs associated therewith shall be costrecoverable.

5.2



Annual Statement

The Contractor shall prepare an annual Cost Recovery Statement containing the same

information, separated into the Quarters of the Year in question, and showing the

cumulative amounts at the opening and closing of the Year in question.

The annual statement shall be submitted to the Minister no later than thirty (30) days

after the end of each Year.



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ANNEX D

EXPLORATION WORK OBLIGATIONS

1.



Attached to and made an integral part of this Contract between the Republic of Cyprus

and the Contractor.

The definitions contained in Article 1 of the Contract shall apply to this Annex D and

shall have the same meaning when used in this Annex D unless otherwise specified

herein.

In the event of any inconsistency or conflict between the provisions of this Annex D

and the provisions of the Contract, then the provisions of the Contract shall prevail.

The Contractor shall start Exploration Operations within thirty (30) days of the

Minister’s approval of the Exploration Work Programme and Budget for the first

Contract Year.



2.



During the Initial Licencing Period of the Exploration Period of ______ (__) Contract

Years , the Contractor shall:

(a) undertake at least ______(__) kilometers of seismic survey;

(b) perform geological and geophysical studies;

(c) evaluate, reprocess, integrate and map all seismic data related to the

Contract Area;

(d) drill at least _____(__) Explorations Well(s); and

(e) establish a technical database for Exploration Operations

The Contractor shall have a minimum expenditure obligation of [x] Euro (EUR [x] )

for the purpose of the Minimum Work Obligations in the Initial Licensing Period.



3.



During the First Renewal Period of the Exploration Period of ______ (__) Contract

Years, the Contractor shall:

(a) undertake at least ______(__) kilometers of seismic survey;

(b) perform geological and geophysical studies;

(c) evaluate, reprocess, integrate and map all seismic data related to the

Contract Area;

(d) drill at least _____(__) Exploration Well(s); and



The Contractor shall have a minimum expenditure obligation of [x] Euro (EUR [x] )

for the purpose of the Minimum Work Obligations in the First Renewal Period.

4.



During the Second Renewal Period of the Exploration Period of ______ (__) Contract

Years, the Contractor shall:

94



(a) undertake at least ______(__) kilometers of seismic survey;

(b) perform geological and geophysical studies;

(c) evaluate, reprocess, integrate and map all seismic data related to the



Contract Area;

(d) drill at least _____(__) Exploration Well(s); and

The Contractor shall have a minimum expenditure obligation of [x] Euro (EUR [x] )

for the purpose of the Minimum Work Obligations in the Second Renewal Period.

5.



Each exploratory well mentioned above shall be drilled to the minimum contractual

depth of ____ (__) meters, or to a lesser depth if authorized by the Republic or if

discontinuing drilling according to good international petroleum industry practice is

justified by one of the following reasons:

(a) basement is encountered at a depth less than the above-mentioned

minimum contractual depth;

(b) continued drilling is clearly dangerous due to abnormal formation pressure;

(c) rock formations are encountered, the hardness of which makes it

impractical to continue drilling with appropriate equipment; or

(d) Hydrocarbons formations are encountered, requiring the installation of

protective casings which prevent reaching the above-mentioned minimum

contractual depth.

In any of the above cases, the Contractor shall obtain prior approval of the Minister,

prior to discontinuing drilling, which approval shall not be unreasonably withheld, and

by this approval, the well in question shall be deemed to have been drilled to the

above-mentioned minimum contractual depth.



6.



If either during the Initial Licencing Period of the Exploration Period or during the

First Renewal Period for the Exploration Period, the Contractor drills a number of

Exploratory Wells greater than the Minimum Drilling Obligations specified in Article

5 of this Annex D, for said period, the excess exploration wells may be carried

forward to the following period(s), and shall be deducted from the Minimum Drilling

Obligations specified for said period(s), provided that at least one Exploration Well

shall be drilled during each renewal of the Exploration Period.

For the purpose of Article 5 of this Annex D, appraisal wells drilled under an

appraisal work program with respect to a Discovery shall not be considered as

exploratory Wells and, in the event of a Hydrocarbons Discovery, only one Well per

Discovery shall be deemed to be an Exploration Well.



7.



As a conditions precedent to the effectiveness of this Contract, upon the Effective

Date, the Contractor shall provide an irrevocable bank guarantee, payable to The

95



Permanent Secretary, Ministry of Commerce, Industry and Tourism, guaranteeing its

minimum Exploration Work Obligations for the Initial Licencing Period of the

Exploration Period provided in this Annex D. The bank guarantee shall be issued by a

bank licensed to operate in any of the following countries: the Republic of Cyprus, any

member state of the European Union, any country of the EEA, any country that had

signed the Government Procurement Agreement (GPA) and any other country that had

signed and ratified Association Agreements or Bilateral Agreements with the

European Union or the Republic of Cyprus and has the right to do so, according to the

legislation of those countries.

In the event of a renewal for the Exploration Period, the Contractor shall also provide

a similar guarantee guaranteeing the Minimum Work Obligations for the renewal.

The amount of the guarantee shall be calculated by using the unit costs per km of

seismic survey and per exploratory well set forth as follows:

(a) Euro ____(__) per km of seismic survey to be performed;

(b) Euro ____(__) million per Exploration Well to be drilled.

Three (3) months after completion of a seismic survey or an Exploration Well drilled

to the minimum contractual depth, the above-mentioned guarantee shall be adjusted in

such a manner as to guarantee the outstanding balance of the minimum Exploration

Work Obligations for the current term of the Exploration Period.

If, upon expiry of the initial term of the Exploration Period or any renewal or

extension thereof, or in the event of whole relinquishment or termination of the

Contract, the exploration work has not reached the minimum obligations prescribed

this Annex D, the Minister shall have the right to call for the guarantee as a

compensation for the non-performance of work commitments entered into by the

Contractor.

After the payment has been made, the Contractor shall be deemed to have fulfilled its

minimum Exploration Work Obligations under Article 5 of the Contract. The

Contractor may, except in the event of termination of the exploration period due to a

material breach of the Contract, continue to benefit from the provisions of said

Contract and obtain the renewal of the Exploration Period, subject to applying therefor

in the appropriate manner.



96



ANNEX E

PERFORMANCE GUARANTEE

The Hon. Minister

Ministry of Commerce, Industry and Tourism

1421 Nicosia

CYPRUS

Our Letter of Guarantee No. ……………..

In consideration of your having contracted by way of an Exploration and Production Sharing Contract

dated............................ (hereinafter called “the Contract”) with ............................, a company formed and existing

in accordance with the Laws of ............................ (hereinafter called “the Contractor”) for the execution of the

minimum work obligations (“The Obligations”) as identified in accordance Article ... of the Contract, the value of

which for purposes of this Guarantee is calculated in accordance with Article ... of the Contract at €

............................ (in words: ............................ Euro) and since it being a condition of the Contract that a

performance Guarantee of .........% of the total amount envisaged to be spent with respect to Applicable Term of

the Exploration Period (as determined by the Contract) (the “Applicable Term”) be established.

We, the undersigned bank, waiving all objections and defences under the aforesaid Contract, hereby irrevocably,

unconditionally and independently guarantee to pay to you without delay on first written demand any amount

claimed by you up to the extent of € ............................ (in words: ............................Euro) against your written

declaration that the Contractor has refused or failed to perform the obligations with respect to the Applicable Term

as set out in Article 3 of the Contract, in accordance with its provisions.

It is understood that any change, modification, addition or amendment, which may be made to the Terms and

Conditions of the Contract or to the payment to be made on account thereof or any extension of the time of

performance of the works or any composition or settlement shall not in any way release us from our irrevocable

and unconditional continuing liability hereunder and we hereby expressly waive our right to consent to our to

receive notice or any such change, modification, addition, composition, settlement or forbearance.

This Performance Guarantee for the Obligations with respect to the Applicable Term is unconditional and

irrevocable and will be discharged not later than thirty (30) days following the date of completion of such

Obligations (“Expiry”), as the same may be extended, as provided for in Article ..., and in any event upon issue of

the Exploitation Licence as provided for under the Contract, by which date we must have received any provided

for under the Contract, by which date we must have received any claim by hand delivery or by registered mail or

by cable.

All stamp duty payable to the Republic of Cyprus under this Guarantee, shall be borne by the Contractor without

reference and/or recourse to the Republic.

This Guarantee shall be construed in accordance with and governed by the Laws of the Republic of Cyprus.



97



It is understood that you will return this guarantee to us on expiry or settlement of the total amount to be claimed

hereunder; and in any event this guarantee will expire on ............................ when the Minister shall return this

Guarantee to the Contractor upon completion of the Obligations with respect to the Applicable Term.

……………………………………………

(Date)



………………………………………………..

(Signature)



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