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EX-10.39

21

h23103exv10w39.txt

PRODUCTION SHARING CONTRACT





EXHIBIT 10.39

PRODUCTION SHARING CONTRACT FOR

THE EXPLOITATION OF COALBED METHANE RESOURCES

FOR THE SHOUYANG AREA IN

SHANXI PROVINCE, QINSHUI BASIN,

THE PEOPLE'S REPUBLIC OF CHINA

BETWEEN

CHINA UNITED COALBED METHANE CORPORATION LTD.

AND

PHILLIPS CHINA INC.

BEIJING, CHINA

APRIL 16, 2002



TABLE OF CONTENTS





ARTICLE

PAGE





ARTICLE 1:

DEFINITIONS.........................................................................

1

ARTICLE 2: OBJECTIVE OF THE

CONTRACT...........................................................

5

ARTICLE 3: CONTRACT

AREA.......................................................................

5

ARTICLE 4: CONTRACT

TERM.......................................................................

5

ARTICLE 5: RELINQUISHMENT OF THE CONTRACT

AREA.................................................

7

ARTICLE 6: MINIMUM EXPLORATION WORK COMMITMENT AND EXPECTED MINIMUM EXPLORATION

EXPENDITURES...

8

ARTICLE 7: MANAGEMENT ORGANIZATION AND ITS

FUNCTIONS........................................... 10

ARTICLE 8:

OPERATOR............................................................................

14

ARTICLE 9: ASSISTANCE PROVIDED BY

CUCBM........................................................ 17

ARTICLE 10: WORK PROGRAM AND

BUDGET............................................................. 18

ARTICLE 11: DETERMINATION OF COMMERCIALITY OF

CBM.............................................. 19

ARTICLE 12: FINANCING AND COST

RECOVERY......................................................... 21

ARTICLE 13: CBM PRODUCTION AND

ALLOCATION....................................................... 23

ARTICLE 14: QUALITY, QUANTITY, PRICE, AND DESTINATION OF

CBM.................................... 26

ARTICLE 15: PREFERENCE FOR THE EMPLOYMENT OF CHINESE PERSONNEL, GOODS AND

SERVICES.............. 29



ARTICLE 16: TRAINING OF CHINESE PERSONNEL AND TRANSFER OF

TECHNOLOGY............................ 29

ARTICLE 17: OWNERSHIP OF ASSETS AND

DATA........................................................ 31

ARTICLE 18: ACCOUNTING, AUDITING AND PERSONNEL

COSTS............................................ 31

ARTICLE 19:

TAXATION............................................................................

33

ARTICLE 20:

INSURANCE...........................................................................

34

ARTICLE 21:

CONFIDENTIALITY.....................................................................

35

ARTICLE 22:

ASSIGNMENT..........................................................................

36

ARTICLE 23: ENVIRONMENTAL PROTECTION AND

SAFETY................................................. 37

ARTICLE 24: FORCE

MAJEURE....................................................................... 37

ARTICLE 25: CONSULTATION AND

ARBITRATION........................................................ 38

ARTICLE 26: EFFECTIVENESS AND TERMINATION OF THE

CONTRACT....................................... 39

ARTICLE 27: THE APPLICABLE

LAW.................................................................. 40

ARTICLE 28: LANGUAGE OF CONTRACT AND WORKING

LANGUAGE........................................... 40

ARTICLE 29:

MISCELLANEOUS.......................................................................

40

ANNEX II:

ACCOUNTING

PROCEDURE................................................................ 43





PREAMBLE

This Production Sharing Contract ("the Contract") is entered into in Beijing on

this 16th day of April, 2002 by and between China United CBM Corporation Ltd.

(hereafter abbreviated as "CUCBM"), a company organized and existing under the

laws of the People's Republic of China, having its headquarters domiciled in

Beijing, the People's Republic of China as one part; and Phillips China Inc., a

company organized and existing under the laws of Liberia, having its

headquarters domiciled in Beijing (hereinafter referred to as the "Foreign

Contractor" or "Contractor") as the other part.

WITNESSETH

WHEREAS, all Coalbed Methane resources under the territory and internal waters

of the People's Republic of China and within the limits of national jurisdiction

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

and

WHEREAS, CUCBM shall be responsible for business matters in respect of the

exploitation of Coalbed Methane resources in cooperation with foreign

enterprises, and for negotiating, entering into and implementing contracts for

the exploitation of Coalbed Methane resources in cooperation with foreign

enterprises and has the exclusive right to explore for, develop and produce

Coalbed Methane in cooperation with foreign enterprises in areas approved by the

State Council for exploitation of Coalbed Methane resources in cooperation with

foreign enterprises and the exclusive authority to enter into this Contract as

authorized by the State Council of the People's Republic of China; and

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

its appropriate and advanced technology and managerial experience to cooperate

with CUCBM for the exploitation of Coalbed Methane resources within the Contract

Area and agrees to be subject to the laws, decrees, and other rules and

regulations of the People's Republic of China with respect to the implementation

of the Contract.

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



ARTICLE 1: DEFINITIONS

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

specified herein, the following meanings:

1.1



"Coalbed Methane" or "CBM" means any gas mainly consisting of methane

stored in coal seams and/or adjacent strata (including in the overlying

and underlying strata) within the Contract Area.



1.2



"Coalbed Methane Products" or "CBM Products" means any or all of Coalbed

Methane, methanol, electricity generated by a coalbed methane-fired

generation facility, and other Coalbed Methane derivatives or products

including water and any other product of production.



1.3



"Coalbed Methane Discovery" or "CBM Discovery" means a potential Coalbed

Methane reservoir which, in accordance with Article 11 hereof, is worth

further evaluation by exploration within the Contract Area.



1.4



"Coalbed Methane Field" or "CBM Field" means an accumulation of Coalbed

Methane within the Contract Area which has been determined to be of

commercial value and for which it has been decided to proceed with

development. The accumulation may be bounded by but is not limited to

geologic structures such as fault blocks, coal discontinuities or

topographical features. Fields may also be designated as areas of similar

geologic characteristics including but not limited to coal thickness,

drill depths, and gas content.



1.5



"Coalbed Methane Operations" or "CBM Operations" means the Exploration

Operations, Development Operations, Production Operations, and other

activities related to these Operations carried out under the Contract.







1



1.6



"Liquid Hydrocarbons" means any liquid hydrocarbons extracted from CBM.



1.7



"Exploration Operations" means operations carried out for the purpose of

discovering and evaluating CBM bearing areas by means of geological,

geophysical, geochemical and other methods including exploratory well

drilling; all the work undertaken to determine the commerciality of areas

in which CBM has been discovered including core drilling, modeling, area

selection, feasibility studies, Pilot Development (including production

therefrom), formulation of the Overall Development Program; and activities

related to all such operations including negotiation and signing of

longterm transportation and sales contracts.



1.8



"Development Operations" means operations carried out during the

development period for the realization of CBM production from the date of

approval of the Overall Development Program for any CBM Field, including

planning, design, construction, installation, drilling, developing

transportation systems and markets, and the related research work as well

as production activities, carried out before the Date of Commencement of

Commercial Production.



1.9



"Production Operations" means operations and all activities related

thereto carried out during the production period for CBM production of

each CBM Field from the Date of Commencement of Commercial Production,

including, but not limited to extraction, injection, stimulation,

treatment, storage, transportation and lifting, etc.



1.10 "Contract Area " means a surface area demarcated with geographic

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

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

1.11 "Exploration Area" means the surface area within the Contract Area which

has not been relinquished and which is not included in a Development Area

or Production Area before the expiration of the exploration period hereof

and in which Development Operations and Production Operations have not

begun.

1.12 "Development Area" means a portion of the Contract Area covering a CBM

Field which has been designated for development. The Development Area(s)

shall be proposed by the Operator, demarcated by the Joint Management

Committee ("JMC") and delineated as such in the Overall Development



Program submitted for approval and approved by the Department or Unit.

1.13 "Production Area" means a surface area within any Development Area for the

purpose of the performance of the Production Operations within said

Development Area. The Production Area proposed by the Operator and

approved by JMC shall be submitted to CUCBM for approval before the Date

of Commencement of Commercial Production.

1.14 "Date of Commencement of Commercial Production" means the date of

commencement and delivery of the production of CBM from any CBM Field

proposed and announced by JMC in accordance with the provisions in Article

7.2.5 hereof.

1.15 "Calendar Year" means a period of twelve (12) consecutive Gregorian months

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

ending on the thirty-first day of December in the same year.

1.16 "Contract Year" means a period of twelve (12) consecutive Gregorian months

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

on the Date of Commencement of the Implementation of the Contract or any

anniversary thereof.

1.17 "Production Year" means in respect of each CBM Field, a period of twelve

(12) consecutive Gregorian months under the Gregorian Calendar, beginning

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

any anniversary thereof.

2



1.18 "Calendar Quarter" means a period of three (3) consecutive Gregorian

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

January, the first day of April, the first day of July, or the first day

of October.

1.19 "Exploratory Well" means any well drilled within the Contract Area during

the exploration period for the purpose of searching and evaluating for CBM

accumulations, including wells drilled for the purpose of obtaining

geological and geophysical parameters, any dry hole(s) and discovery

well(s).

1.20 "Pilot Development" means the installation and operation of necessary

equipment within the Contract Area (including wells) aiming at evaluating,

through pilot production of Coalbed Methane, the potential commercial

value of the Coalbed Methane in a specific area.

1.21 "Development Well" means a well drilled after the date of approval of the

Overall Development Program for a CBM Field for the purpose of producing

CBM, increasing production or accelerating extraction of CBM, including

production wells, injection wells and dry holes.

1.22 "Work Program" means all types of plans formulated for the performance of

the CBM Operations, including but not limited to plans for exploration,

development, production, transportation and sales.

1.23 "Overall Development Program" means a plan prepared by the Operator for

the development of a CBM Field or part of a CBM Field (phased development)

which has been reviewed and adopted by JMC, confirmed by CUCBM and

approved by the Department or Unit, and such plan shall include, but not

be limited to, recoverable reserves, the Development Well pattern, master

design, production profile, economic analysis and time schedule of the

Development Operations.

1.24 "Deemed Interest" means interest accruing on the development costs

calculated in accordance with the rate of interest stipulated in Article

12.2.3.2 hereof when the development costs incurred in each CBM Field

within the Contract Area are recovered by the Parties.

1.25 "CBM Field Straddling a Boundary" means a CBM Field extending from the

Contract Area to one or more other contract areas and/or areas in respect

of which no CBM contracts have been signed.

1.26 "Annual Gross Production of CBM" means the total amount of CBM produced

from each CBM Field within the Contract Area considered separately in each



Calendar Year, less the amount of CBM used for CBM Operations in such CBM

Field within the Contract Area and the amount of losses, which is saved

and measured by a measuring device at the Delivery Point as specified in

Article 14.3.1 hereof.

1.27 "Annual Gross Production of Liquid Hydrocarbons" means the total amount of

Liquid Hydrocarbons produced from each CBM Field within the Contract Area

considered separately in each Calendar Year, less the amount of Liquid

Hydrocarbons used for CBM Operations in such CBM Field within the Contract

Area and the amount of losses, which is saved and measured by a measuring

device at the Delivery Point as specified in Article 14.3.1 hereof.

1.28 "Basement" means igneous rocks, metamorphic rocks or rocks of such nature

which, or formations below which, could not contain CBM deposits in

accordance with the knowledge generally accepted in the international

Coalbed Methane industry and shall also include such impenetrable rock

substances as salt domes, mud domes and any other rocks which make further

drilling impracticable or economically unjustifiable by the modern

drilling technology normally utilized in the international Coalbed Methane

industry.

1.29 "Contractor" means the Foreign Contractor specified in the Preamble

hereto, including any assignee(s) pursuant to an assignment made in

accordance with Article 22 hereof.

3



1.30 "Parties" means CUCBM and the Contractor.

1.31 "Party" means either of the Parties.

1.32 "Operator" means the entity responsible for the performance of the CBM

Operations under the Contract.

1.33 "Subcontractor" means any entity which provides the Operator with goods or

services for the purpose of the Contract.

1.34 "Third Party" means any individual or entity except CUCBM, the Contractor

and any of their Affiliates.

1.35 "Chinese Personnel" means any citizen of the People's Republic of China,

including CUCBM's personnel and Chinese citizens employed by the

Contractor and/or the Subcontractor(s) involved in Coalbed Methane

Operations under the Contract.

1.36 "Expatriate Employee" means any person employed by the Contractor,

Subcontractor(s), or CUCBM who is not a citizen of the People's Republic

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

the People's Republic of China and other Chinese abroad, when they are

employed by the Contractor, Subcontractor(s) or CUCBM, shall also be

deemed to be Expatriate Employees within the scope of the Contract.

1.37 "Affiliate" means:

(a)



any entity in which CUCBM or any company comprising Contractor

directly or indirectly holds fifty percent (50%) or more of the

voting rights carried by its share capital; or



(b)



any entity which directly or indirectly holds fifty percent (50%) or

more of the aforesaid voting rights of CUCBM or any company

comprisingthe Contractor; or



(c)



any other entity whose aforesaid voting rights are held by an entity

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



1.38 "Delivery Point" means a point or points agreed upon by the Parties for

the delivery of CBM or Liquid Hydrocarbons located within or outside the

Contract Area and specified in the Overall Development Program.

1.39 "Department or Unit" means the department or unit which is authorized by

the State Council of the People's Republic of China to be responsible for

administration of the Coalbed Methane industry of the People's Republic of

China.



1.40 "Date of Commencement of the Implementation of the Contract" means the

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

received notification from CUCBM of the approval of the Contract by the

Ministry of Foreign Trade and Economic Co-operation of the People's

Republic of China.

1.41 "Pre-Contract Costs" means those costs and expenditures incurred by CUCBM

in respect of the exploration of the Contract Area and prior to the Date

of Commencement of the Implementation of the Contract. Pre-Contract Costs

are agreed to be Two Million Eight Hundred Forty Thousand U.S. dollars

(US$2,840,000). Pre-Contract Costs shall be recovered by CUCBM pursuant to

the provisions of Article 13 hereof.

4



ARTICLE 2: OBJECTIVE OF THE CONTRACT

2.1



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

Coalbed Methane, Liquid Hydrocarbons or Coalbed Methane Products that may

exist in the Contract Area, including all activities necessary to

transport and market CBM, CBM Products and Liquid Hydrocarbons from the

Contract Area.



2.2



The Contractor shall apply its appropriate and advanced technology and

assign its competent experts to perform the Coalbed Methane Operations.



2.3



During the performance of the CBM Operations, the Contractor shall, as far

as practicable and appropriate, transfer its technology used in CBM

Operations hereunder to allow the Chinese Personnel to utilize said

technology and to train such personnel in accordance with Article 16

hereof.



2.4



The Contractor shall bear all the exploration costs required for the

Exploration Operations. In the event that any CBM Field is discovered

within the Contract Area, the development costs of such CBM Field shall be

borne by the Parties in proportion to their participating interests:

thirty percent (30%) by CUCBM and seventy percent (70%) by the Contractor.

In the event that CUCBM opts to participate at a level less than thirty

percent (30%) of the participating interests, or not to participate in the

development of the CBM Field, the Contractor shall bear the remaining

development costs necessary for the development of the CBM Field in

accordance with Article 12.1.2 hereof.



2.5



If any CBM Field is discovered within the Contract Area, the CBM and/or

Liquid Hydrocarbons produced therefrom shall be allocated in accordance

with Articles 12 and 13 hereof.



2.6



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

the Contractor other than those rights expressly granted hereunder.



ARTICLE 3: CONTRACT AREA

3.1



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

total area of one thousand nine hundred sixty two and eight tenths square

kilometers (1,962.80 km(2)), as marked out by the geographic location and

the coordinates of the connecting points of the boundary lines shown on

Annex I attached hereto.

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

with Articles 4, 5 and 11 hereof.

Associated with the Contract Area and included in the grants of rights

hereunder will be a pipeline right-of-way, if required, from the Contract

Area to an interconnection or Delivery Point.



3.2



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

granted in favor of the Contractor to the surface area, subsurface area,

lake bed, stream bed, subsoil and any bodies of water or any natural

resources or aquatic resources other than CBM, CBM Products and Liquid

Hydrocarbons, existing therein and any things under the surface within the

Contract Area.



ARTICLE 4: CONTRACT TERM

4.1



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

development period and a production period.



4.2



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

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

shall consist of five (5) consecutive Contract







5



Years, unless the Contract is sooner terminated, or the exploration period

is extended in accordance with Article 24 hereof and Article 4.3 herein.

The three (3) phases shall be as follows:

the first phase of one (1) Contract Years (the first Contract Year) for

reconnaissance;

the second phase of two Contract Years (the second Contract Year through

the third Contract Year) for core testing

the third phase of two Contract Years (the fourth Contract Year through

the fifth Contract Year) for Pilot Development.

4.3



If the time remaining in the exploration period when a CBM discovery is

made within the Contract Area is not reasonably sufficient to complete the

Pilot Development, or the time period for the Pilot Development of a CBM

discovery extends beyond the expiration of the exploration period under a

Pilot Development Work Program approved by JMC in accordance with Article

11 hereof, subject to CUCBM's approval the exploration period under

Article 4.2 hereof shall be extended to the extent necessary to complete

the Pilot Development.

If there are no channels for transportation or market access or consuming

facilities, or if the Parties have not concluded a long-term

transportation and sales contract in respect of the CBM, CBM Products

and/or Liquid Hydrocarbons during the exploration period or during the

extended exploration period as provided for above, Contractor shall be

granted an additional extension to the exploration period. The period of

extension shall be approved by CUCBM and shall be for a reasonable five

(5) year period in order to complete such long-term transportation and

sales contract and allow transportation and market access and consuming

facilities to develop. If a long-term transportation and sales contract is

not concluded within the reasonable five (5) year extension to the

exploration period, the Contract shall be terminated.

Any extension to the exploration period granted under this Article 4.3

shall be for a period of time reasonably required to complete the above

mentioned work and to develop transportation and market access and

consumption facilities and for the Parties to negotiate long-term

transportation and sales contracts in respect of CBM, CBM Products and/or

Liquid Hydrocarbons in order to enable JMC to make a decision on the

commerciality of the said CBM discovery in accordance with Article 11

hereof and submit an acceptable Overall Development Program to the

Department or Unit for approval.



4.4



The development period of any CBM Field within the Contract Area shall

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

said CBM Field, and end on the date of the entire completion of the

Development Operations set forth in the Overall Development Program (which

may continue beyond the Date of Commencement of Commercial Production),

excluding the time for carrying out other additional development projects

during the production period in accordance with Article 11.10 hereof.



4.5



The production period of any CBM Field within the Contract Area shall be a

period beginning on the Date of Commencement of Commercial Production of

the said CBM Field up to the Date of the expiration of the production

period as specified in the approved Overall Development Program. However,

the production period shall be extended for so long as there exist

commercially recoverable reserves of CBM from the CBM Field. The extension

of the production period shall not exceed the term of this Contract set

forth under Article 4.7 herein.

Under such circumstances as where the construction of a CBM Field is to be



conducted on a large scale, and the time span required therefore is long,

or where separate production of each of the multiple CBM producing zones

of an CBM Field is required, or under other special circumstances, the

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

extended with the approval of the Department or Unit.

6



4.6



Suspension or abandonment of production of a CBM Field.



4.6.1



Suspension of production from a CBM Field within the production period

In the event that the Parties agree to suspend temporarily production

from a CBM Field which has entered into commercial production, the

Production Area covered by the CBM Field shall be retained within the

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

beyond the date of the expiration of the production period of that CBM

Field. The duration of the relevant period of production suspension and

the arrangement for the maintenance operations during the aforesaid

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

decided by JMC through discussion. With respect to the aforesaid CBM

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

the event that production is restored during the period of such

retention, the production period of that CBM Field shall be extended

correspondingly. In the event that the Parties fail to reach an

agreement on the restoration of production by the expiration of the

production suspension period decided by JMC through discussion, the

Party who wishes to restore production shall have the right to restore

production solely. The other Party may later elect to participate in

production by paying to the other Party its participating interest share

of the costs incurred in restoring such production, but shall have no

rights or obligations in respect of such CBM Field for the production

during such solely restored production period.

In any event, the obligation for abandonment and site restoration shall

rest solely with the Party(s) which participate in the restored

production; which shall indemnify and hold harmless any

non-participating Party from any costs, expenses or claims arising out

of such obligation.



4.6.2



Abandonment of production from a CBM Field within the production period.



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

to abandon production from any CBM Field within the Contract Area,

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

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

within ninety (90) days from the date on which the said notice is

received. If the other Party also agrees to abandon production from the

said CBM Field, then abandonment costs shall be paid by the Parties in

proportion to their participating interests in such CBM Field. The

Parties shall abandon such CBM Field in accordance with procedure agreed

on by the Parties. From the date on which the abandonment is completed,

the production period of such CBM Field shall be terminated and such CBM

Field shall be excluded from the Contract Area.

4.6.2.2 If the Contractor notifies CUCBM in writing of its decision to abandon

production from a CBM Field while CUCBM decides not to abandon

production from said CBM Field, then from the date on which the

Contractor receives CUCBM's written response of its aforesaid decision

(the "Abandonment Date"), all of the Contractor's rights and obligations

under the Contract in respect of said CBM Field, including, but not

limited to, any obligation with respect to abandonment and site

restoration in respect of such CBM Field, shall be transferred to CUCBM

and terminated automatically with respect to Contractor, provided that

the Contractor shall not transfer to CUCBM any of the Contractor's

debts, existing liabilities and obligations in respect of the said CBM

Field. In addition, the Contractor shall undertake its existing

liabilities and obligations under the Contract prior to the Abandonment

Date. From the Abandonment Date, the said CBM Field shall be excluded

from the Contract Area.

4.7



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

Contract Years from the Date of Commencement of the Implementation of



the Contract, unless otherwise stipulated hereunder.

ARTICLE 5: RELINQUISHMENT OF THE CONTRACT AREA

5.1



The Contractor shall relinquish a portion or portions of the Contract

Area in accordance with the following provisions:







7



5.1.1 In any of the following cases, the Contractor shall relinquish the

remaining Contract Area, except for any Development Area, a possible or

proposed Development Area and/or Production Area:

(a)



at the expiration of the last phase of the exploration period

(including extensions) as mentioned in Article 4.2 hereof; or



(b)



at the expiration of the said exploration phase if the Contractor

exercises its option under Article 6.3 (b) hereof; or



(c)



at the expiration of the extended period, in the event that the

exploration period is extended in accordance with Article 4.3 or

Article 24 hereof.



5.1.2 In the execution of Article 5.1.1 herein, a Production Area and/or

Development Area or any area proposed by Contractor corresponding to a CBM

Discovery with a possibility of or potential for Pilot Development or

awaiting Pilot Development and/or under a Pilot Development or included in

an Overall Development Program awaiting approval, shall not be regarded as

an area to be relinquished.

5.1.3 At the expiration of the production period of any CBM Field as specified

in Article 4.5 hereof, such CBM Field within the Contract Area shall be

excluded from the Contract Area.

5.2



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

Contract Area, the Contractor shall submit to CUCBM a report on its

completed Exploration Operations on the areas proposed to be relinquished,

including a map showing the proposed areas to be relinquished with the

geographic location and the coordinates of the connecting points of the

boundary lines.



5.3



In the exploration period, the Contractor shall bear the fee for CBM

exploration rights of the Contract Area to be paid in accordance with the

relevant laws and regulations of the People's Republic of China. In the

development period and production period, CUCBM and the Contractor shall,

in proportion to their respective participating interests, bear the fee

for CBM mining rights of the Development Area and Production Area paid in

accordance with relevant laws and regulations of the People's Republic of

China. The fees for CBM exploration and mining rights shall be paid and

are cost recoverable pursuant to Article 5.2.20 of Annex II hereof.



ARTICLE 6: MINIMUM EXPLORATION WORK COMMITMENT AND EXPECTED MINIMUM EXPLORATION

EXPENDITURES

6.1



The Contractor shall begin to perform the Exploration Operations within

six (6) months after the Date of Commencement of the Implementation of the

Contract, unless otherwise agreed upon by the Parties.



6.2



The Contractor shall fulfill the minimum exploration work commitment and

expected minimum exploration expenditures for each phase of the

exploration period in accordance with the following provisions:



6.2.1 During the first phase of the exploration period, the Contractor shall:

Drill one (1) Exploration Well with footage totaling seven hundred

(700) meters estimated to cost three hundred fifty thousand U.S.

dollars (US$350,000), or acquire an equivalent amount of seismic

equal to the estimated cost of drilling one (1) exploration well.

6.2.2 During the second phase of the exploration period, the Contractor shall:

(a)



Drill two (2) Exploration Wells with footage totaling one thousand

four hundred (1,400) meters;



8



(b)



Spend seven hundred thousand (US$700,000) U.S. dollars as its

expected minimum exploration expenditures for such Exploration

Operations.



6.2.3 During the third phase of the exploration period, the Contractor shall:

(a)



drill and complete one (1) Pilot Development consisting of six (6)

wells; and



(b)



spend one million eight hundred thousand (US$1,800,000) U.S. dollars

as its expected minimum exploration expenditures for such

Exploration Operations.



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

the exploration period committed by the Contractor in accordance with

Articles 6.2.1, 6.2.2 and 6.2.3 herein, when calculating whether the

minimum exploration work commitment has been fulfilled, the number of

Exploration Wells and Pilot Development Wells shall be the basis of such

calculation.

6.3



6.4



At the expiration of the first and second phases of the exploration

period, the Contractor has options (a), (b), or (c) and at the expiration

of the third phase of the exploration period options (b) or (c) as

follows:

(a)



to enter the next phase and continue exploration; or



(b)



to conduct Development Operations and Production Operations only on

any CBM discoveries in accordance with the procedures under Article

11 hereof provided, however, that the minimum exploration work

commitments up to the date of such expiration of the said

exploration phase have been fulfilled and the areas specified in

Article 5 hereof have been relinquished; or



(c)



to terminate the Contract.



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

exploration work fulfilled by the Contractor is less than the minimum

exploration work commitment set forth for the said exploration phase, and

if the Contractor opts to enter the next phase and continue exploration

under Article 6.3 (a) herein, the Contractor shall give reasons to CUCBM

for the underfulfillment. The unfulfilled balance of the said phase shall

be added to the minimum exploration work commitment for the next

exploration phase.

At any time within the exploration period, if there is any potential CBM

discovery, JMC shall, at the request of any Party to the Contract, discuss

the possibility of amending the exploration work. Any Exploration Wells

added by any such amendment shall be deducted from and/or credited against

the minimum exploration work commitment.



6.5



Where the Contractor has fulfilled ahead of time the minimum exploration

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

such exploration phase stipulated in Article 4.2 hereof shall not be

shortened thereby, and if the exploration work actually fulfilled by the

Contractor exceeds the minimum exploration work commitment for the said

exploration phase, the excess part shall be deducted from and/or credited

against the minimum exploration work commitment for the next exploration

phase.



6.6



If any addition or deduction is made under Article 6.4 or Article 6.5

herein in regard to the minimum exploration work commitment for any phase

of the exploration period, the increased or reduced exploration work shall

become the new minimum exploration work commitment for the Contractor to

fulfill in the said phase.



6.7



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

exploration work actually fulfilled by the Contractor is less than the

minimum exploration work commitment for such phase

9





or less than the new minimum exploration work commitment in Article 6.6

herein, and if, regardless of whether the expected minimum exploration

expenditures are fulfilled or not fulfilled, the Contractor opts to

terminate the Contract under Article 6.3 (c) herein, or if the said phase

is the last exploration phase, subject to the approval of the Department

or Unit the Contractor shall be allowed to transfer its unfulfilled

minimum exploration work commitment to another Contract Area as agreed by

the Contractor and CUCBM, or the Contractor shall, within thirty (30) days

from the date of the decision of its election to terminate the Contract or

within thirty (30) days from the date of the expiration of the exploration

period, pay CUCBM only any unfulfilled balance of the minimum exploration

work commitment ( or of the new such commitment) in U.S. dollars after it

has been converted into a cash equivalent using the method provided in

Annex II-Accounting Procedure hereto. However, if the minimum exploration

work commitment for the exploration period is fulfilled while its expected

corresponding minimum exploration expenditures are not fulfilled, the

unfulfilled part shall be deemed as a saving and shall not be paid to

CUCBM.

6.8



Contractor shall be allowed the flexibility to transfer all or any part of

the minimum exploration work commitment under this Contract to another

contract area and vice versa. The minimum exploration work commitment

transferred from another contract area to this Contract and vice versa

shall be credited toward the satisfaction of the aggregate exploration

work commitments for both this Contract Area and to the contract area from

which the minimum exploration work commitment was transferred. Nothing

herein contained shall be construed or interpreted to allow any reduction

in the aggregate minimum exploration work commitment for any phase of the

exploration period for this Contract or the contract area from which the

exploration work commitment was transferred.



ARTICLE 7: MANAGEMENT ORGANIZATION AND ITS FUNCTIONS

7.1



For the purpose of the proper performance of the CBM Operations in the CBM

Fields, the Parties shall establish a Joint Management Committee (JMC)

within forty-five (45) days from the Date of Commencement of the

Implementation of the Contract.



7.1.1 CUCBM and the Contractor shall each have the right to appoint an equal

number of representatives (two to five each) to form JMC, and each Party

to the Contract shall designate one of its representatives as its chief

representative. The representative of the Operator among the companies

comprising the Contractor shall be the chief representative of the

Contractor. Either Party may replace any of its representatives, or

designate another representative as its chief representative, by a written

notice to the other Party, pursuant to Article 29.2 hereof. All the

aforesaid representatives shall have the right to present their views on

the proposals at the meetings held by JMC. When a decision is to be made

on any proposal, the chief representative from each Party to the Contract

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

The Chairman of JMC shall be the chief representative designated by CUCBM,

and the Vice-Chairman shall be the chief representative designated by the

Contractor. The Chairman of JMC shall preside over meetings of JMC. In his

absence, one representative present at the meeting from CUCBM shall be

designated to act as the Chairman of the meeting. In the absence of the

Vice-chairman of JMC, one representative present at the meeting from the

Contractor shall be designated to act as the Vice-chairman of the meeting.

The Parties may, according to need, designate a reasonable number of

advisers who may attend, but shall not be entitled to vote at JMC

meetings.

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

and other meetings, if necessary, may be held at any time at the request

of any Party to the Contract, upon giving reasonable notice to the other

Party of the date, time and location of the meeting and the items to be

discussed.

7.2



The Parties shall empower JMC to:

10





7.2.1



Review and approve the Work Programs and budgets proposed by the

Operator and subsequent amendments thereto;



7.2.2



Determine the potential commerciality of each Coalbed Methane Discovery

that has been made in accordance with the Operator's Pilot Development

report and report its decision to CUCBM for confirmation;



7.2.3



Review and approve the Overall Development Program and budget for each

CBM Field and the amendments to the budget;



7.2.4



Approve or confirm the following items of procurement and expenditures:

(a)



approve procurement of any item within the budget with a unit

price exceeding Five Hundred Thousand U.S. dollars (U.S.

$500,000) or any single purchase order of total monetary value

exceeding Two Million U.S. dollars (U.S. $2,000,000);



(b)



approve a lease of equipment, or an engineering subcontract or a

service contract within the budget of a monetary value exceeding

Two Million U.S. dollars (U.S. $2,000,000); and



(c)



confirm excess expenditures pursuant to Article 10.2.1 hereof

and the expenditures pursuant to Article 10.2.2 hereof;



7.2.5



Propose and announce the Date of Commencement of Commercial Production

of each CBM Field within the Contract Area;



7.2.6



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

Third Party in accordance with Article 21.5 hereof;



7.2.7



Approve the boundaries of the Development Area and the Production Area

of each CBM Field;



7.2.8



Review and approve the Joint Operating Agreement in accordance with

Article 8.8 hereof;



7.2.9



Review and approve the insurance program proposed by the Operator and

emergency procedures on safety and environmental protection;



7.2.10 Review and approve personnel training programs;

7.2.11 Review and approve minutes and/or resolutions of JMC meetings, and

discuss, review, decide and approve other matters that have been

proposed by either Party to the Contract or submitted by the expert

groups pursuant to Article 7.4.2 hereof or by the Operator; and

7.2.12 Review and examine matters required to be submitted to relevant

authorities of the Chinese Government and/or CUCBM for approval or

confirmation.

7.3



Decisions of JMC shall be made unanimously through consultation. All

decisions made unanimously shall be deemed as formal decisions and shall

be equally binding upon the Parties. When matters upon which agreement

cannot be reached arise, the Parties may convene another meeting in an

attempt to find a new solution thereto based on the principle of mutual

benefit.



7.3.1



During the exploration period, the Parties shall endeavor to reach

agreement through consultation on exploration programs and annual

exploration Work Programs. If the Parties fail to reach agreement

through consultation within thirty (30) days of first being considered

by JMC, the Contractor's proposal shall prevail, provided that such

proposal is not in conflict with the relevant provisions in Articles 4,

5 and 6 hereof.

11





7.3.2



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

nominees that a matter requires urgent handling or may be decided

without convening a meeting, JMC may make decisions through facsimiles

or the circulation of documents.



7.4



JMC shall establish the following subordinate bodies:



7.4.1



Secretariat

The secretariat shall be a permanent organization consisting of up to

two (2) secretaries. One secretary shall be appointed by each of the

Parties or they may share one. The secretaries shall not be members of

JMC, but may attend meetings of JMC to perform the following duties:



7.4.2



(a)



to keep minutes of meetings;



(b)



to prepare summaries of the resolutions for JMC meetings;



(c)



to draft and transmit notices of meetings; and



(d)



to receive and transmit proposals, reports or plans submitted by

the Operator and/or proposed by any Party to the Contract, that

require discussion, review or approval by JMC.



Expert Groups

Advisory expert groups shall be established in accordance with the

requirements of the Coalbed Methane Operations in various periods. Each

expert group shall consist of an equal number of CUCBM Personnel and the

Contractor's employees, and, with the agreement of JMC, any other

personnel. JMC shall discuss and decide upon their establishment or

dissolution, size, tasks, location of their work and the appointment of

their leaders in accordance with the requirements of their work. The

expert groups which should be of a reasonable size and number shall have

the following functions:



7.5



(a)



to discuss and study matters assigned to them by JMC and

submitted by the Operator to JMC for its review and approval and

any other matter assigned to them by JMC and to make

constructive suggestions to JMC;



(b)



to have access to and observe and investigate the Coalbed

Methane Operations conducted by the Operator without affecting

such Operations at Operator's office and operating sites as work

requires and to submit relevant reports to JMC; and



(c)



to attend meetings of JMC as observers at the request of JMC.



When any of the companies comprising the Contractor acts as the

Operator, CUCBM shall have the right to assign mutually acceptable

qualified professional representatives to the Operator's administrative

and technical departments which are related to the CBM Operations. These

professional representatives from CUCBM shall have specific job duties

and responsibilities in relation to the CBM Operations.

The professional representatives of CUCBM shall have access to the

centers of research, design, and data processing related only to the

execution of the Contract and to the operating sites to observe all the

non-proprietary activities and study all the information with respect to

the CBM Operations. Whether to provide such access to the aforesaid

centers outside the People's Republic of China shall be decided by JMC

through discussion. If the decision is made, such access shall be

arranged by the Operator and the Operator shall use all reasonable

endeavors to assist the professional representatives to have access to

Third Parties' sites. The work of professional representatives of CUCBM

shall be arranged by the manager(s) of the departments of the Operator

in which professional representatives work.

12





Professional representatives of CUCBM, except for CUCBM's procurement

professional representatives who shall undertake their functions in

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

making on relevant matters by departmental manager(s) of the Operator.

However, such professional representatives shall have the right to make

proposals and comments to departmental manager(s) of the Operator or to

report directly to CUCBM's representatives in JMC.



7.5.1



On the principle of mutual cooperation and coordination, the Operator

shall provide the professional representatives with necessary facilities

and assistance to perform office work and to observe the operating

sites.



7.5.2



The number of professional representatives, which shall be a reasonable

number and consistent with accepted international CBM industry practice

and sound economic practice, shall be decided by JMC through

consultations. All professional representatives shall abide by

Operator's health, safety, and environmental guidelines and policies.



7.6



When any of the companies comprising the Contractor acts as the

Operator, in respect of the items listed in the procurement plan, the

procedures and provisions hereunder shall be followed:



7.6.1



The procurement department of the Operator shall inform the procurement

professional representatives appointed by CUCBM of all the items of

procurement and specifications relating thereto.



7.6.2



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

agreement through consultation with the procurement professional

representatives of CUCBM when preparing the procurement plan in

accordance with the Work Program and budget. The Operator and the

procurement professional representatives of CUCBM shall work out an

inventory listing the equipment and materials which can be made and

provided in China and a list of manufacturers, engineering and

construction companies and enterprises in China which are qualified and

can provide acceptable services and undertake subcontracting work.



7.6.3



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

general, make procurement by means of calling for bids and shall notify

at the same time qualified manufacturers and enterprises concerned both

inside and outside China, and the work of calling for bids shall be done

within the territory of China.



7.6.4



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

manufacturers and enterprises in China applying for bidding which the

Parties agree are qualified and are included in a list delivered in

advance to the Operator by the procurement professional representatives

of CUCBM shall be invited to submit bids. The Parties will identify

proposed bidders that are subsidiaries or affiliates of the Parties. The

procurement professional representatives of CUCBM shall have the right

to take part in the work of calling for bids, including examination of

the list of bidders to be invited, preparing and issuing bidding

documents, opening bids, evaluation and normalization of bids, and shall

have the right to consult with the Operator on the determination of

award of contracts and to participate in negotiations for various

contracts.

The professional representatives of CUCBM involved with procurement

shall have the proper authority to evaluate and make decisions on behalf

of CUCBM. When the evaluation of bids and decisions based thereon is not

unanimous, the evaluation of the Operator shall prevail and decisions

shall be based thereon. The foregoing shall be handled in an

expeditious, efficient and timely manner.



7.6.5



With respect to the items of procurement by means other than calling for

bids, the Operator and the procurement professional representatives of

CUCBM shall, in accordance with the provisions

13





specified in Article 7.6.2 herein, define those items which are to be

procured in the People's Republic of China and those items which are to

be procured abroad.

7.7



All salaries, costs and expenses with respect to the staff members of

the Parties in the subordinate bodies of the JMC established in

accordance with Article 7.4 herein, those with respect to the

professional representatives referred to in Article 7.5 herein, and

those with respect to the representatives of JMC referred to in Article

7.1.1 herein while attending JMC meetings, shall be paid by the Operator



and charged respectively to the exploration costs, development costs and

operating costs in accordance with Annex II- Accounting Procedure

hereto. During the exploration period, all salaries, costs and expenses

with respect to the staff members of CUCBM in the subordinate bodies of

JMC, the CUCBM professional representatives and the CUCBM

representatives of JMC shall be paid by the Operator in accordance with

Annex III - Personnel Costs hereto. All salaries, costs and expenses

with respect to the above mentioned personnel to be paid and charged

during the development period and production period shall be determined

by the Parties through consultation. It is understood no salary

duplication for any individual shall be allowed. In the event any

individual occupies more than one chargeable position, then the higher

applicable salary shall be charged to the Joint Account for the period

during which the higher position is occupied.

7.8



The specific responsibilities and working procedures within JMC shall be

proposed by the Parties, and discussed and determined by JMC in

accordance with the relevant provisions herein.



ARTICLE 8: OPERATOR

8.1



The Parties agree that Phillips China Inc. shall act as the Operator for

the CBM Operations within the Contract Area, unless otherwise stipulated

in Article 8.8 herein and Article 29.4 hereof.



8.2



For the implementation of the Contract, each company comprising the

Contractor shall register with the State Administration for Industry and

Commerce of the People's Republic of China, or if any such company is

already registered, such company shall amend its registration to include

the Contract in accordance with the relevant provisions of the State

Administration for Industry and Commerce. CUCBM shall, at the request of

the Contractor, provide assistance for this purpose.

The person designated by Operator to be in charge of CBM Operations

shall have the full right to represent the Contractor in respect of the

performance of the CBM Operations. The names, positions and resumes of

the staff and organization chart of the Operator shall be submitted in

advance to CUCBM and the appointment of the Operator's senior staff must

be subject to the consent of CUCBM.

The parent corporation of each company comprising the Contractor which

is not itself a parent corporation shall, at the request of CUCBM,

provide CUCBM with a written performance guarantee acceptable to CUCBM.



8.3



The Operator shall have the following obligations:



8.3.1



To apply the appropriate and advanced technology and business managerial

experience of the Contractor or its Affiliates to perform the CBM

Operations reasonably, economically and efficiently in accordance with

sound international practice.



8.3.2



To prepare Work Programs and budgets related to the CBM Operations and

to carry out the approved Work Programs and budgets.



8.3.3



To be responsible for procurement of installations, equipment, and

supplies and entering into subcontracts and service contracts related to

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

budgets and the applicable provisions of Articles 7.2.4, 7.6 and 10.2

hereof.

14





8.3.4



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

training program and budget before the commencement of the Exploration

Operations, Development Operations and Production Operations

respectively, and, in accordance with the said program and budget, to be

responsible for preparing an annual personnel training program and

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

JMC.



8.3.5



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

insurance contracts in accordance with Article 20 hereof.



8.3.6



To issue cash-call notices to all the Parties to the Contract to raise

the required funds based on the approved budgets and in accordance with

Article 12 hereof and Annex II - Accounting Procedure hereto.



8.3.7



To maintain complete and accurate accounting records of all costs and

expenditures of the CBM Operations in accordance with the provisions of

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

secure and in good order.



8.3.8



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

in advance to JMC necessary information related to the matters to be

reviewed and approved by JMC.



8.3.9



To inform directly or indirectly all the Subcontractors which render

services for the CBM Operations in China and all the Expatriate

Employees of the Operator and of Subcontractors who are engaged in the

CBM Operations in China that they shall be subject to the laws, decrees,

and other rules and regulations of the People's Republic of China.



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

8.3.11 To research and conduct a CBM transportation and market study to

underpin any determination of commerciality made pursuant to the terms

and provisions of Article 11 hereof. Such costs incurred to perform and

complete such CBM transportation and market study shall be charged to

the joint account and shall be cost recoverable under the terms of this

Contract.

8.4



In the course of the performance of the CBM Operations, any direct

losses, arising strictly out of the gross negligence or willful

misconduct of the Operator, (excluding personnel specified in Article

1.2 of Annex III-Personnel Costs, hereto) shall be solely borne by the

Operator. Losses arising from any cause other than strictly out of the

gross negligence or willful misconduct of the Operator shall be borne by

the Parties in accordance with their respective participating interest.

The Operator shall use reasonable endeavors in accordance with

international CBM industry practice to include provisions similar to

this Article 8.4 herein in related subcontracts and service contracts.

For the purposes of this Article 8.4 "gross negligence" means the

willful and wanton disregard for harmful, avoidable, and foreseeable

consequences.



8.5



In the course of the performance of the CBM Operations, the Operator

shall handle the information, samples and reports in accordance with the

following provisions:



8.5.1



The Operator shall provide CUCBM with various information, samples and

data in accordance with relevant regulations and Annex IV - Data Control

hereto except for proprietary information and data of Operator. The

ownership of all the information, samples and data shall vest in CUCBM;

and the Operator shall have the right to use and handle such

information, samples and data in accordance with Annex IV - Data Control

hereto. The information and data shall be reported to CUCBM at the same

time that the Operator reports them to its parent corporation. Upon

receipt by the Operator of any report from its parent corporation

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

furnished to CUCBM as soon as practicable.

15





8.5.2



The Operator shall furnish CUCBM in a timely manner with reports on

safety, environmental protection and accidents related to the CBM

Operations and with financial reports prepared in accordance with the

provisions of Annex II - Accounting Procedure hereto.



8.5.2.1 The Operator shall conduct regular environmental, health and safety

audits of systems, facilities, seismic, drilling, and production

operations as determined by JMC to ensure compliance with Operator's and

industry standards. All costs for such regular audits shall be charged

to the joint account.

8.5.3



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

copies of the relevant data and reports reasonably required by



non-Operator(s) and referred to in Articles 8.5.1 and 8.5.2 herein.

8.5.4



The Operator shall, at the request of any Party to the Contract, furnish

that Party to the Contract with the following:



8.5.4.1 Procurement plans for purchasing equipment and materials, inquiries,

offers, orders, construction and service contracts;

8.5.4.2 Technical manuals, technical specifications, design criteria, design

documents (including design drawings), construction records and

information, consumption statistics, equipment inventory, and spare

parts inventory;

8.5.4.3 Technical investigation and cost analysis reports; and

8.5.4.4 Other information relating to the CBM Operations in the Contract Area

already acquired by the Operator in the performance of the Contract.

8.6



In the course of performing the CBM Operations, the Operator shall abide

by the laws, decrees, standards and other rules and regulations with

respect to environmental protection and safety of the People's Republic

of China and shall endeavor in accordance with the international CBM

industry practice to:



8.6.1



Minimize the damage and destruction caused by the CBM Operations to the

human and ecological environment;



8.6.2



Control blowouts promptly and prevent or avoid waste or loss of CBM

discovered in or produced from the Contract Area;



8.6.3



Prevent land, forests, vegetation, crops, buildings and other

installations from being damaged and destroyed; and



8.6.4



Minimize the danger to personnel safety and health by developing and

implementing effective systems, policies and procedures.



8.7



Project Management Team

In any CBM Field within the Contract Area where CUCBM has a

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

management team (hereafter referred to as "PMT") shall be established

for the development of such CBM Field in the organization of the

Operator within thirty (30) days from the date of approval of the

Overall Development Program for the said Field. All subsequent CBM

Fields within the Contract Area in which CUCBM has a participating

interest shall be developed by a PMT.

16





PMT shall comprise those personnel designated by the Parties and the

number of CUCBM's personnel shall be no less than one third (1/3) of the

total number of personnel within PMT. The Contractor shall designate a

person acting as the manager of PMT, and CUCBM shall designate a person

acting as the deputy manager of PMT.

PMT shall be located at the Operator's office within the Chinese

territory or as determined by JMC. The working location(s) of the

members of PMT shall be decided according to the need of the work.

The specific organization, staffing and working system of PMT and

responsibilities and competence of various positions, including those of

CUCBM's personnel assigned to PMT, shall be determined by the Parties

through consultation prior to the approval of the Overall Development

Program for the said CBM Field. The PMT shall exist for the period of

the development of said CBM Field.

8.8



Performance of CBM Operations



8.8.1



No later than one (1) year prior to the projected date on which all

development costs and the Deemed Interest thereon have been recovered

("Cost Recovery Date"), the Parties shall commence good faith

negotiations on a joint operating agreement and the organization thereof

in accordance with the Overall Development Program for the first CBM



Field within the Contract Area, the expenses for which shall be charged

to operating costs.

8.8.2



It is the intent of the Contractor and CUCBM that effective no later

than said Cost Recovery Date, all CBM Operations within the Contract

Area shall be conducted jointly by the Contractor and CUCBM as Operators

in accordance with such joint operating agreement.



8.9



The expenses incurred in the transfer and takeover of the CBM Operations

to CUCBM and Contractor as joint Operator shall be approved as budget

items and charged to the operating costs in accordance with Annex IIAccounting Procedure.



8.10



With a view to efficiently conducting Work Programs approved by the JMC,

the Operator shall have the right to use or occupy the land within or

outside the Contract Area, including the right to use or acquire road

transit rights and the right to use or to obtain CBM pipeline rights of

way, inside or outside the Contract Area, subject to promulgated Chinese

laws and regulations.



ARTICLE 9: ASSISTANCE PROVIDED BY CUCBM

9.1



To enable the Contractor to carry out expeditiously and efficiently the

CBM Operations, CUCBM shall have the obligation to assist the Contractor

at its request to:



9.1.1



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

China;



9.1.2



Handle foreign exchange formalities;



9.1.3



Obtain office space, office supplies, transportation and communication

facilities and make arrangements for accommodations as required, all at

reasonable rates;



9.1.4



Handle customs formalities;



9.1.5



Obtain entry and exit visas and residence permits for Expatriate

Employees who will come to China for the performance of the Contract,

and for their dependents who will visit them or reside in China, and

provide assistance for their transportation and moving as well as

medical services and travel in China;

17





9.1.6



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

data and samples for analysis or processing during the performance of

the CBM Operations; and



9.1.7



Maintain liaison with central and local governments, and contact and

coordinate with departments engaged in fishing, aquatic plants, stock

raising, agriculture, meteorology, ocean shipping, civil aviation,

railway, transportation, electric power, communications, and services

for supply bases, for relevant matters and otherwise assist the

Contractor in obtaining on a timely basis all approvals necessary for

the conduct of the CBM Operations under the Contract;



9.1.8



Lease or use warehouses, yards, terminal facilities, barges, aircraft,

pipelines and land, etc., in the implementation of the CBM Operations;

and



9.1.9



Facilitate the Contractor's and Subcontractors' registration in China.



9.1.10 CUCBM shall assist in the development of transportation and marketing

information.

9.2



In accordance with Article 15 hereof, CUCBM shall, at the request of the

Contractor, assist the Contractor with the recruitment of Chinese

Personnel.



9.3



CUCBM shall, at the request of the Contractor, provide the Contractor

with data and samples, if any, from the Contract Area within CUCBM's

and/or its Affiliates' control, at reasonable rates and in accordance



with any relevant rules and regulations, and CUCBM shall also assist the

Contractor to arrange the purchase of any other data including but not

limited to environmental, hydrological, topographical and meteorological

data at reasonable rates.

9.4



CUCBM shall, at the request of the Contractor, also assist the

Contractor with matters other than those under Articles 9.1, 9.2 and 9.3

herein, including, but not limited to, the acquisition, at reasonable

costs where applicable, of any rights of way necessary for

transportation infrastructure, and the facilitation or bringing about of

the granting of all approvals, permits and licenses related to the CBM

Operations.



9.5



All expenses incurred in the assistance provided by CUCBM in accordance

with this Article 9 shall be paid by the Contractor. Such yearly

Assistance Fees shall not exceed the amounts set forth in Article

5.2.14.3(b) and (c) of the Accounting Procedure and shall be handled in

accordance with the provisions of Annex II-Accounting Procedure hereto.



ARTICLE 10: WORK PROGRAM AND BUDGET

10.1







After the Date of Commencement of the Implementation of the Contract,

the Operator shall propose and submit to JMC the annual Work Program and

budget for the remainder of the same Calendar Year at the first regular

meeting of JMC. Before the fifteenth (15th) day of September of each

Calendar Year, the Operator shall complete and submit to JMC for its

review an annual Work Program and budget for the next Calendar Year

except as otherwise agreed by CUCBM. JMC shall either adopt the annual

Work Program and budget as submitted or make such modifications agreed

by the Parties. The adopted annual Work Program and budget shall be

submitted to CUCBM for review and approval within one (l) month as of

the date on which they are submitted to JMC. Within fifteen (15) days

following the receipt of the annual Work Program and budget, CUCBM shall

notify JMC in writing of its approval or disapproval or any

modifications thereto with its detailed reasons. If CUCBM requests any

modifications to the aforesaid annual Work Program and budget, the

Parties shall promptly hold meetings to make modifications and any

modifications agreed upon by the Parties shall be effected immediately.

In case CUCBM fails to notify JMC in writing of its approval or

disapproval or any modification within fifteen (15) days, the annual

Work Program and budget adopted by JMC shall be deemed to have been

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

the CBM Operations in accordance with the approved annual Work Program

and budget. For reviewing Work Program and budget by JMC, the Operator

shall provide to JMC the supporting data when requested. During the

18

exploration period, the budgets so approved by CUCBM shall be sufficient

to allow the Operator to fulfill the Work Programs and its obligations

under the Contract.



10.2



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

excess expenditures or expenditures outside the budget in carrying out

the Work Program and budget, provided that the objectives of the

approved Work Program and budget are not changed.



10.2.1 In carrying out an approved budget for a single item, such as for the

drilling of a well, the Operator may, if necessary, incur excess

expenditures of no more than ten percent (10%) of the budgeted amount

except in the case of emergencies. The Operator shall report the

aggregate amount of all such excess expenditures to JMC for confirmation

on a Calendar Quarter basis.

10.2.2 For the efficient performance of the CBM Operations, the Operator may,

without approval, undertake certain individual projects which are not

included in the Work Program and budget, for a maximum expenditure of

One Hundred Thousand U.S. Dollars (U.S.$100,000), but the Operator

shall, within ten (10) days after such expenditures are incurred, report

to JMC for confirmation. In case of emergency, the Operator may incur

emergency expenditures for the amount actually needed but shall report

such expenditures to JMC as soon as they are made. However, the said

emergency expenditures shall not be subject to Articles 10.2.3 and

10.2.4 herein.



10.2.3 In the event that the aggregate of excess expenditures under Article

10.2.1 herein and expenditures under Article 10.2.2 herein incurred in a

Calendar Year cause the total expenditures of that Calendar Year to

exceed the approved annual budget, such excess shall not exceed five

percent (5%) of the approved annual budget for that Calendar Year. If

the aforesaid excess is expected to be in excess of five percent (5%) of

the annual budget, the Operator shall present its reasons therefore to

JMC and obtain its approval prior to incurring such expenditures.

10.2.4 When JMC confirms the excess expenditures mentioned in Articles 10.2.1

herein, and the expenditures mentioned in Article 10.2.2 herein:

(a)



if expenditures or excess expenditures are determined to be

reasonable, the Operator may incur such expenditures or excess

expenditures again during the same Calendar Year, subject to

Article 10.2 herein; or



(b)



if expenditures or excess expenditures are determined to be

unreasonable, the Operator shall not incur such expenditures or

excess expenditures again during the same Calendar Year and such

unreasonable expenditures or excess expenditures shall be dealt

with in accordance with Article 5.4 of Annex II-Accounting

Procedure hereto. However, with respect to the joint operation

conducted by the Contractor and CUCBM specified in Article 8.8

hereof, this provision shall not be applicable.



ARTICLE 11: DETERMINATION OF COMMERCIALITY OF CBM

11.1



If any CBM Discovery is made within the Contract Area, the Operator

shall promptly report such discovery to JMC. If JMC or the Contractor

makes a decision that a CBM Discovery is worthy of a Pilot Development,

the Operator shall submit to JMC a Pilot Development Work Program which

shall include disposal of any CBM and/or Liquid Hydrocarbons whether by

sale, flaring or otherwise and a timetable for such CBM Discovery as

soon as possible. Such Pilot Development Work Program shall be worked

out no later than ninety (90) days from the date of the aforesaid

decision made by JMC or the Contractor. The Pilot Development Work

Program shall, in so far as is practicable, be based on conducting the

Pilot Development work continuously, with a view to commencing

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

aforesaid decision made by JMC or the Contractor.

19





11.2



After the approval by JMC of the Pilot Development Work Program referred

to in Article 11.1 herein, the Operator shall carry out the operations

as soon as possible without unreasonable delay in accordance with the

timetable set forth in the approved Pilot Development Work Program.



11.3



Unless otherwise specified in the Pilot Development Work Program, within

one hundred and eighty (180) days after the completion of the Pilot

Development, the Operator shall submit to JMC a detailed report on the

evaluation of the potential commerciality of the CBM discovery for

review and discussion. Under special circumstances, the above-mentioned

period may be reasonably extended upon agreement of the Parties.

The Pilot Development report shall include an evaluation of geology,

development, engineering and economics, the Maximum Efficient Rate (MER)

and the estimated duration of the production period determined in

accordance with the international CBM industry practice.



11.4



If JMC decides unanimously that a CBM Discovery is non-commercial, at

the request of the Contractor, the corresponding area covered by the CBM

Discovery may be retained in the Contract Area during the exploration

period. But if, at the expiration of the exploration period, JMC

unanimously still considers the said CBM Discovery to be non-commercial,

the area covered by the CBM Discovery shall be excluded from the

Contract Area. The preceding shall not apply to a CBM Field which in the

opinion of either Party has potential commercial value but which has not

been developed due to a lack of market, a shortage of consuming

facilities or lack of transportation facilities and/or inability to

negotiate long-term transportation and/or sales agreements.



Prior to the expiration of the exploration period, if any Party

considers that a CBM Discovery which has been determined to be

non-commercial needs to be reappraised because of various favorable

factors, the Operator shall work out a new evaluation report on that CBM

Discovery and submit it to JMC for review and approval.

11.5



If the Contractor, prior to the expiration of the exploration period,

advises JMC in writing that any CBM Discovery is non-commercial, the

Contractor shall be deemed to have waived its rights of participating in

the development of that CBM Field, then, CUCBM shall have the right to

solely develop such potential CBM Field.



11.6



When the Parties consider a CBM Discovery to be potentially commercial,

as the Operator, the Contractor shall, within a reasonable amount of

time determined by JMC, prepare and submit to JMC an Overall Development

Program for such CBM Discovery. The Parties shall also negotiate and

enter into a mutually acceptable supplemental agreement in regard to the

development of such CBM Field in a manner that shall not unreasonably

interfere with the planned expansion of coal mining operations in the

relevant coal field. Upon receipt and approval of the Overall

Development Program, JMC shall immediately forward the Overall

Development Program to CUCBM. Within thirty (30) days of the receipt of

the Overall Development Program, CUCBM shall submit the Overall

Development Program and supplemental agreement to the competent

authorities of the Chinese government for review and approval. Such

Overall Development Program and supplemental agreement shall be regarded

as an integral part of the Contract upon the approval of the competent

authorities of the Chinese government.



11.7



Long-term CBM, CBM Products and Liquid Hydrocarbons transportation and

sales agreements shall be concluded prior to the Determination of

Commerciality.



11.8



In the event of a CBM Field Straddling a Boundary or of a potentially

commercial CBM Discovery straddling a boundary of the Contract Area,

CUCBM shall organize the Contractor and the neighboring party(ies)

involved, which may include CUCBM and/or it's Affiliates, to work out a

unitized or new Overall Development Program for such Field or Pilot

Development work program for such CBM Discovery. If such area is

controlled solely by CUCBM and/or its







20

Affiliates, then the Contract Area shall be extended to cover the CBM

Field with the approval of Department or Unit.



11.9



If a CBM Discovery without commercial value within the Contract Area and

a CBM discovery outside the Contract Area can be most economically

developed as a commercial CBM Field by common facilities jointly

constructed; or if a CBM discovery without commercial value within the

Contract Area can be economically developed as a commercial CBM Field by

linking it up with existing facilities located outside the Contract

Area, CUCBM shall organize the Contractor and the neighboring party(ies)

involved, which may include CUCBM and/or its Affiliates, to work out an

equitable agreement for construction or utilization and sharing the

costs relative to said facilities.



11.10



In Article 11 those procedures which reference the Overall Development

Program shall be applied by analogy in the following circumstances:

additional development projects referring to the Overall Development

Program designed either to improve the producing capability of the

reservoir or to substantially increase the recoverable reserves

therefrom through additional investments. Any extension of the

production period of the CBM Field due to such additional development

projects shall be subject to the related provision of Article 4.5

hereof.



11.11



Notwithstanding the Date of Commencement of Commercial Production or

anything else to the contrary herein, the allocation of the production

from a Pilot Development shall be governed by the principles set forth

in Articles 12 and 13 hereof.



ARTICLE 12: FINANCING AND COST RECOVERY



12.1



Funds required for the CBM Operations shall be raised by the Operator in

accordance with Work Programs and budgets determined pursuant to the

relevant provisions of the Contract, the provisions described in Annex

II - Accounting Procedure hereto, and the provisions of this Article

12.1.



12.1.1 All the exploration costs required for Exploration Operations shall be

provided solely by the Contractor. For purpose of the Contract, all

costs incurred during the extended period described in Article 4.3

hereof shall be deemed exploration costs and shall be provided solely by

the Contractor.

12.1.2 The development costs required for Development Operations in each CBM

Field within the Contract Area shall be provided by CUCBM and the

Contractor in proportion to their respective participating interests:

thirty percent (30%) by CUCBM and seventy percent (70%) by the

Contractor, unless CUCBM applies the provisions of the second paragraph

of this Article 12.1.2 herein.

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

the development of a CBM Field or decides to participate in the

development of such CBM Field to an extent of less than thirty percent

(30%) of the participating interest, CUCBM shall notify the Contractor

in writing of its decision of non-participation or a specific lesser

percentage of the participating interests before the Pilot Development

report is reviewed by JMC pursuant to Article 11.3 hereof. In such case,

if CUCBM does not participate in the development of such CBM Field, the

development costs therein shall be borne solely by the Contractor, or in

case CUCBM participates in the development of such CBM Field to an

extent of less than thirty percent (30%) of the participating interests,

such development costs shall be borne by the Parties in proportion to

their actual respective participating interests.

12.1.3 The operating costs incurred for the performance of the Production

Operations of each CBM Field before the Date of Commencement of

Commercial Production shall be considered as development costs. The

operating costs so incurred after the Date of Commencement of





21

Commercial Production shall be paid respectively by CUCBM and the

Contractor in proportion to their participating interests of the said

CBM Field.



12.1.4



The Parties, at each other's request, shall cooperate and assist each

other to facilitate the financing of CBM Operations on the best terms

and conditions available. For the purpose of implementation of the

Contract, CUCBM agrees that the Contractor may, when financing, use the

entitlement of its share of production under the Contract as security

for loans, provided that the Contractor shall advise CUCBM in advance

and the loan application therefore shall be examined by CUCBM, and

provided further that the rights and interests of CUCBM under the

Contract shall not be impaired thereby. If CUCBM does not object to the

loan application within thirty (30) days of the receipt thereof, then

the rights and interests of CUCBM under the Contract shall be deemed

not impaired thereby.



12.2



All the costs and Pre-Contract Costs incurred in the performance of CBM

Operations shall be recovered in accordance with Annex II - Accounting

Procedure hereto and the following provisions:



12.2.1



The operating costs for any given Calendar Year actually incurred by

CUCBM and the Contractor in respect of each CBM Field pursuant to

Article 12.1.3 herein, shall be recovered in kind by the Parties out of

the CBM and Liquid Hydrocarbons produced from the said CBM Field during

that Calendar Year in accordance with Annex II - Accounting Procedure

hereto, after the operating costs have been converted into a quantity

of CBM and Liquid Hydrocarbons on the basis of the CBM price and Liquid

Hydrocarbons price determined in accordance with Article 14 hereof.

Unrecovered operating costs shall be carried forward to the succeeding

Calendar Year(s).



12.2.2



The exploration costs incurred by the Contractor and the Pre-Contract



Costs incurred by CUCBM shall be recovered as follows:

After the Date of Commencement of Commercial Production of a CBM Field

within the Contract Area, the exploration costs incurred by the

Contractor and Pre-Contract Costs incurred by CUCBM in respect of the

Contract Area shall be recovered in kind out of the CBM and Liquid

Hydrocarbons produced from any CBM Field within the Contract Area in

accordance with Article 13.2.2.2 hereof, after the exploration costs

and Pre Contract Costs have been converted into a quantity of CBM and

Liquid Hydrocarbons based on the CBM price and Liquid Hydrocarbons

price determined in accordance with Article 14 hereof. The exploration

costs and Pre-Contract Costs shall be recovered without any Deemed

Interest.

If no CBM Field is discovered within the Contract Area, the exploration

costs incurred by the Contractor and the Pre-Contract Costs incurred by

CUCBM shall be deemed as their loss. Under no circumstances shall CUCBM

reimburse the Contractor for such loss.

12.2.3



The development costs in respect of each CBM Field incurred by CUCBM

and the Contractor and Deemed Interest thereon shall be recovered as

follows:



12.2.3.1 After the Date of Commencement of Commercial Production of any CBM

Field within the Contract Area, the development costs in respect of

such CBM Field incurred by CUCBM and the Contractor and Deemed Interest

thereon calculated in accordance with Article 12.2.3.2 herein shall be

recovered in kind out of the CBM and Liquid Hydrocarbons produced from

such CBM Field in accordance with Article 13.2.2.2 hereof, after the

development costs and Deemed Interest thereon have been converted into

a quantity of CBM and Liquid Hydrocarbons based on the CBM price and

Liquid Hydrocarbons price determined in accordance with Article 14

hereof.

12.2.3.2 Deemed Interest on the development costs incurred by CUCBM and the

Contractor for each CBM Field within the Contract Area shall be

calculated at a fixed annual compound rate of nine percent (9%) from

the first day of the month following the month in which such

development costs expended by each Party to the Contract are actually

recorded in the Joint Account by the Operator.

22



The detailed method of such calculation shall be as provided in Annex

II - Accounting Procedure hereto.

12.2.4



Any CBM and Liquid Hydrocarbons extracted and delivered from a CBM

Field before the Date of Commencement of Commercial Production shall be

allocated in accordance with Article 12 and Article 13 hereof.



ARTICLE 13: CBM PRODUCTION AND ALLOCATION

13.1



The Operator shall, in accordance with the production profile, adjusted

as the case may be, set forth in the approved Overall Development

Program for each CBM Field, work out a CBM production and joint

marketing plan for each CBM Field in each Calendar Year and carry out

CBM production pursuant to such plan. Such plan shall have the Operator

receiving all proceeds from sales and making payments and accounting

for cost recovery as detailed below.



13.2



The Annual Gross Production of CBM and Liquid Hydrocarbons of each CBM

Field within the Contract Area in each Calendar Year during the

production period shall be allocated in accordance with the following

sequence and proportions:



13.2.1



The percentages of the Annual Gross Production of CBM and Liquid

Hydrocarbons specified in paragraphs (a) and (b) hereunder shall be

used for payments of the Value Added Tax and of Royalty respectively

and shall be paid in kind to the relevant authorities of the Chinese

Government through CUCBM.

(a)



Five percent (5%) of the Annual Gross Production of CBM and

Liquid Hydrocarbons shall be paid in kind to the competent



authorities for payment of the Value Added Tax in accordance

with relevant rules and regulations of the People's Republic

of China through CUCBM; and

(b)



13.2.2



Payment of Royalty shall be made pursuant to the relevant

rules and regulations of the People's Republic of China

through CUCBM.



Seventy-five percent (75%) of the Annual Gross Production of CBM and

Liquid Hydrocarbons shall be deemed as the "cost recovery CBM and

Liquid Hydrocarbons" and shall be used for payments or for cost

recovery in the following sequence:



13.2.2.1 Payment in kind for the operating costs actually incurred but not yet

recovered by the Parties pursuant to Article 12.2.1 hereof based on the

price of the said "cost recovery CBM and Liquid Hydrocarbons"

determined in accordance with Article 14 hereof.

13.2.2.2 The remainder of the "cost recovery CBM and Liquid Hydrocarbons" shall,

after payment for operating costs in accordance with Article 13.2.2.1

herein, be deemed as "investment recovery CBM and Liquid Hydrocarbons".

Such "investment recovery CBM and Liquid Hydrocarbons" shall be used

for the recovery of the exploration costs incurred and not yet

recovered by Contractor in respect of the Contract Area and for the

recovery of Pre-Contract Costs incurred and not yet recovered by CUCBM

in respect of the Contract Area.. The "investment recovery CBM and

Liquid Hydrocarbons" shall also be used for the recovery of the

development costs in respect of the CBM Field itself which have been

incurred but not yet recovered by CUCBM and the Contractor in

accordance with Articles 12.2.2 and 12.2.3 hereof, and Deemed Interest

thereon. The method of recovery and the recovery sequence are as

follows:

(a)







Beginning in the Calendar Year during which the production of

any CBM Field within the Contract Area commences, the

"investment recovery CBM and Liquid Hydrocarbons" referred to

in Article 13.2.2.2 herein, based on the price which has been

determined in accordance with Article 14 hereof, shall be paid

in kind simultaneously on a 50% - 50% basis to the Contractor

for the recovery of the exploration costs which have been

incurred

23

in respect of, but have not yet been recovered from, the

Contract Area and to CUCBM for the recovery of Pre-Contract

Costs which have been incurred in respect of, but have not yet

been recovered from, the Contract Area. If CUCBM recovers its

Pre-Contract Costs prior to Contractor's recovery of its

exploration costs, that portion of the "investment recovery

CBM and Liquid Hydrocarbons" previously paid to CUCBM shall

then be paid to Contractor for the cost recovery of

Contractor's unrecovered exploration costs.

The total amount of Pre-Contract Costs that can be recovered

by CUCBM under this Article 13.2.2.2(a) from all CBM Fields in

the Contract Area during the recovery of exploration costs

shall be Two Million Eight Hundred Forty Thousand U.S. dollars

(US$2,840,000).

The unrecovered exploration costs and the unrecovered

Pre-Contract Costs shall be carried forward to and recovered

from the "investment recovery CBM and Liquid Hydrocarbons" in

succeeding Calendar Years until fully recovered by the

Contractor.



(b)



Beginning in the Calendar Year during which the exploration

costs incurred by the Contractor and the Pre-Contract Costs

incurred by CUCBM in respect of the Contract Area have been

fully recovered, the remainder of the "investment recovery CBM

and Liquid Hydrocarbons" of a CBM Field shall be used for the

simultaneous recovery of the development costs incurred and

not yet recovered respectively by CUCBM and the Contractor and

Deemed Interest thereon in respect of such CBM Field in

proportion to their respective participating interests therein



based on the price of such remainder of the "investment

recovery CBM and Liquid Hydrocarbons" determined in accordance

with Article 14 hereof. The unrecovered development costs and

Deemed Interest thereon shall be carried forward to and

recovered from the "investment recovery CBM and Liquid

Hydrocarbons" in succeeding Calendar Years until fully

recovered.



13.2.3



(c)



During the production period of a CBM Field, costs for an

additional development project incurred pursuant to Article

11.9 hereof and Deemed Interest thereon shall be recovered

together with the unrecovered development costs and Deemed

Interest thereon. If the development costs and Deemed Interest

thereon have been fully recovered, then costs for the said

additional development project and Deemed Interest thereon

shall be recovered from the "investment recovery CBM and

Liquid Hydrocarbons" of such CBM Field referred to in Article

13.2.2.2 herein in accordance with the provisions specified in

Article 13.2 herein. The unrecovered costs for the additional

development project and Deemed Interest thereon shall be

carried forward to and recovered in succeeding Calendar Years

until fully recovered.



(d)



After the recovery of a CBM Field's development costs and

Deemed Interest thereon and/or costs for the additional

development project and Deemed Interest thereon from the said

CBM Field by the Parties, the remainder of the "investment

recovery CBM and Liquid Hydrocarbons" shall automatically be

regarded as part of the "remainder CBM and Liquid

Hydrocarbons" referred to in Article 13.2.3 herein. By the

date of expiration of the production period of a CBM Field

pursuant to Article 4.5 hereof, if any development costs and

Deemed Interest thereon and/or costs for the additional

development project incurred in respect of such CBM Field and

Deemed Interest thereon have not yet been fully recovered,

then such unrecovered costs and Deemed Interest thereon shall

be regarded as a loss, and the Parties shall bear the loss in

proportion to their respective participating interests.



The remainder of the Annual Gross Production of CBM and Liquid

Hydrocarbons after the allocation referred to in Articles 13.2.1 and

13.2.2 herein shall be deemed as "remainder CBM and Liquid

Hydrocarbons". Such "remainder CBM and Liquid Hydrocarbons" shall be

divided into "share CBM and Liquid Hydrocarbons" of the Chinese side

and "allocable remainder CBM and Liquid Hydrocarbons". The "allocable

remainder CBM and Liquid Hydrocarbons" of each CBM Field in each

Calendar Year shall be equal to the "remainder CBM and Liquid

24







Hydrocarbons" of that Calendar Year multiplied by the factor (X) for

each CBM Field within the Contract Area in that Calendar Year. The

factor (X) of each CBM Field in each Calendar Year shall be determined

in accordance with the following successive incremental tiers on the

basis of the Annual Gross Production of CBM and Liquid Hydrocarbons

from such CBM Field during that Calendar Year.

Annual Gross Production

of

CBM and Liquid Hydrocarbons

From Each CBM Field

(Million Cubic Meters)



Factors (X) in Percentage

Applicable to Each

Production Tier of

Each CBM Field Within

the Contract Area



equal to or less than 500

over

500 to

800

over

800 to 1,200

over

1,200 to 1,800

over

1,800 to 2,500

over

2,500 to 5,000

over

5,000



X(l) =

X(2) =

X(3) =

X(4) =

X(5) =

X(6) =

X(7) =



100 percent (100%)

99 percent (99%)

98 percent (98%)

95 percent (95%)

93 percent (93%)

91 percent (91%)

90 percent (90%)



In the above table, it is assumed that each cubic meter of CBM has a

heating value of thirty-six thousand and nine hundred sixty (36,960)



BTU approximately. On this basis, a metric ton of Liquid Hydrocarbons

in general will have a heating value of forty- three (43) million BTU,

or equivalent to 1,164 cubic meters of CBM. 1.0 kilo calorie is equal

to 3.97 BTU. Adjustments will be made if actual heating value exceeds

or is less than the above by ten percent (10%) or more.

An example of application in calculating the factor (X):

Assuming that there are two producing commercial CBM Fields A and B

within the Contract Area and the Annual Gross Production of CBM and

Liquid Hydrocarbons from CBM Field A in a Calendar Year is three

thousand and sixty four (3,064) million cubic meters, and that from CBM

Field B is four thousand five hundred and ninety (4,590) million cubic

meters, the factor (X) of CBM Field A in that Calendar Year shall be:

500X(1) + 300X(2) +400X(3) + 600X(4) + 700x(5) + 564X(6)

X = -----------------------------------------------------------X 100%

3,064

and the factor (X) of CBM Field B in that Calendar Year shall be:

500X(1) + 300X(2) + 400X(3) + 600X(4) + 700X(5) + 2090X(6)

X = -----------------------------------------------------------X 100%

4,590

13.2.4







The "allocable remainder CBM and Liquid Hydrocarbons" of each CBM Field

in each Calendar Year referred to in Article 13.2.3 herein shall be

shared by the Parties in proportion to their respective participating

interests in the development costs, thirty percent (30%) for CUCBM and

seventy percent (70%) for the Contractor. In the event that CUCBM does

not participate in the development of an CBM Field within the Contract

Area, the Contractor shall obtain one hundred percent (100%) of the

"allocable remainder CBM and Liquid Hydrocarbons" of that CBM Field. In

the event that CUCBM participates to an extent less than thirty percent

(30%) in the development of an CBM Field within the Contract Area, the

"allocable remainder CBM and

25

Liquid Hydrocarbons" of such CBM Field in that Calendar Year shall be

shared by the Parties in proportion to their actual respective

participating interests in such CBM Field.



13.3



Pursuant to the method of allocation specified in this Article, the

Contractor may obtain an aggregate amount of CBM and Liquid Hydrocarbons

consisting of the following three categories and shall be subject to

Article 1.7 of Annex II.



13.3.1 The total amount of CBM and Liquid Hydrocarbons as converted from the

actual operating costs paid by the Contractor in all CBM Fields in

proportion to its participating interests in the development costs

stipulated in Article 13.2.2.1 hereof when recovering such costs;

13.3.2 The total amount of the "investment recovery CBM and Liquid

Hydrocarbons" from all CBM Fields due to the Contractor provided for in

Article 13.2.2.2 herein; and

13.3.3 The total amount of the "allocable remainder CBM and Liquid

Hydrocarbons" of all CBM Fields due to the Contractor in accordance with

Article 13.2.4 herein.

ARTICLE 14: QUALITY, QUANTITY, PRICE, AND DESTINATION OF CBM

14.1



In accordance with Article 13.3 hereof, the Contractor may obtain the

aggregate amount of three (3) categories of the Coalbed Methane and

Liquid Hydrocarbons referred to in Articles 13.3.1, 13.3.2 and 13.3.3

hereof.



14.2



Quality of the CBM and Liquid Hydrocarbons.



14.2.1 The quality analysis of CBM and Liquid Hydrocarbons produced from each

CBM Field within the Contract Area shall be undertaken at the Delivery

Point. Such analysis shall be carried out on a sample taken by the State

Bureau of Import and Export Commodities Inspection (hereafter referred



to as the "Bureau") or any representative agency authorized by the

Bureau pursuant to standards issued by the State Bureau of

Standardization of the People's Republic of China or by the Department

or Unit. Such procedure shall be implemented in such a manner so as to

avoid any unreasonable delay in the production of such CBM and/or Liquid

Hydrocarbons.

14.3



Quantity of the Coalbed Methane and Liquid Hydrocarbons.



14.3.1 The quantity measurement of the CBM and/or Liquid Hydrocarbons produced

from each CBM Field within the Contract Area, when being lifted, shall

be made at a Delivery Point and with measuring devices both to be agreed

upon by the Parties. A relevant measuring organization of the Chinese

Government or a representative agency authorized thereby shall, at

appropriate regular intervals, calibrate all the measuring devices,

conduct special testing and issue certificates of qualification with

respect thereto or confirm their qualification before the measuring

devices are put into use. The quality and quantity of the CBM and/or

Liquid Hydrocarbons delivered shall be authenticated in accordance with

the commodity quality certificate and weight certificate issued by the

Bureau and such quality and quantity shall be the basis for the

accounting settlement.

14.3.2 If any Party to the Contract believes that the CBM or Liquid

Hydrocarbons measuring devices, sampling or analysis are inaccurate, or

has any objection to the results specified in the above mentioned

certificates, on-site investigations, technical exchanges and

discussions may be conducted by the Parties to resolve the issue in a

manner satisfactory to the Parties.

14.4



Determination of the Coalbed Methane and/or Liquid Hydrocarbons Price.



14.4.1 The price of various grades of the CBM and Liquid Hydrocarbons shall be

expressed as a FOB price at the Delivery Point. Determination of the CBM

and Liquid Hydrocarbons price shall be based on the actual free market

price received by the Parties; and

26



a)



shall be determined each Calendar Quarter by CUCBM and each

Party comprising Foreign Contractor individually; and



b)



shall be the volumetrically weighted average of the following

components:

1.



In arm's length transactions the actual price received;



2.



For other than arm's length transactions, the fair

market price taking into account the prevailing market

conditions.



The aforesaid price in arm's length transactions in this Article 14

refers to a free market price at which a seller sells its CBM and/or

Liquid Hydrocarbons to a buyer who is independent of the seller, but

excluding prices used in government to government transactions or other

fixed or controlled prices which do not reflect the free market price,

and excluding exchange or barter transactions.

The price of the CBM and Liquid Hydrocarbons produced from the Contract

Area shall be determined based on general pricing principles prevailing

internationally taking into consideration such factors as the markets,

quality and quantity of the CBM and Liquid Hydrocarbons and the prices

of alternate non-subsidized energy resources agreed upon by the Parties

with the objective of the Parties being to obtain the best price

possible.

The transportation costs to be used to determine the FOB price at the

Delivery Point shall be agreed to during the negotiation of the

long-term sales and purchase agreements and prior to the determination

of commerciality and prior to the preparation and approval by the

Parties of an Overall Development Program. Such transportation costs

shall be determined in accordance with international petroleum and CBM

industry practice and such transportation costs will only apply to



pipelines not owned under this Contract.

14.4.2 Where the CBM and/or Liquid Hydrocarbons produced from each CBM Field

within the Contract Area differs in quality, the prices of such CBM

and/or Liquid Hydrocarbons with different quality shall if practicable

be individually determined.

14.4.3 The price of the Contractor's share of the CBM and Liquid Hydrocarbons

produced from all the CBM Fields within the Contract Area shall be

denominated in U.S. dollars per cubic meter (based on BTU basis in

accordance with Article 13.2.3), and payment made in U.S. dollars.

14.5



Terms of Payment for the Purchased CBM and Liquid Hydrocarbons.



14.5.1 Before the CBM and Liquid Hydrocarbons price is determined, the time

limit for payment shall be agreed upon by the Parties through

consultation in accordance with the general international practice then

prevailing, and made a part of any sales agreements.

14.5.2 In case any Party is in default of such payment, such Party shall pay

interest on arrears of the payment, starting from the first day of such

default. The interest rate shall be the thirty-day term London

Inter-Bank Offered Rate (LIBOR) for U.S. dollars quoted by Midland Bank

in London at eleven (11:00) a.m. on the first working day following the

due date of payment plus five percent (5%).

14.6



Destination of the CBM and Liquid Hydrocarbons.



14.6.1 The destination of Contractor's CBM, CBM Products, and Liquid

Hydrocarbons obtained under the Contract shall be at the discretion of

the Contractor. The Contractor shall have the following non-exclusive

options:

27



(1)



to join with CUCBM to market a part or all of their respective

shares of CBM and Liquid Hydrocarbons and to sell such CBM and

Liquid Hydrocarbons jointly to prospective purchasers able to

pay in U.S. Dollars;



(2)



to sell directly its share of the CBM and Liquid Hydrocarbons

to the Chinese users subject to the approval of the relevant

government departments if required;



(3)



to sell its share of the CBM and Liquid Hydrocarbons to CUCBM

and/or its Affiliates, CUCBM and/or its Affiliates shall pay

to the Contractor in U.S. Dollars in accordance with Article

14.6.5; or



(4)



to sell its share of the CBM and Liquid Hydrocarbons to any

other lawful destinations or buyers.



14.6.2



Transportation costs shall be determined in accordance with Article

14.4.1 herein.



14.6.3



The CBM and Liquid Hydrocarbons price or value shall be determined in

accordance with this Article 14 with the objective of the Parties being

to produce the CBM and Liquid Hydrocarbons at the MER and to obtain the

best price possible.



14.6.4



Unless otherwise mutually agreed, the Delivery Point shall be the most

economically viable nearby pipeline having available capacity, or the

Delivery Point of the pipeline owned under this Contract or by any of

the Parties.



14.6.5



For the purpose of encouraging the exploration and development of CBM,

CUCBM and/or its Affiliates will, upon request of Contractor, act as a

buyer to purchase all or part of Contractor's share of CBM and Liquid

Hydrocarbons produced from the Contract Area in accordance with the

following provisions:



14.6.5.1 The Parties shall agree upon the volume and rates of delivery of CBM

and Liquid Hydrocarbons by Contractor and to be purchased by CUCBM



and/or its Affiliates.

14.6.5.2 The price of CBM and Liquid Hydrocarbons and other essential terms and

conditions, including but not limited to, Delivery Point and pipeline

costs shall be determined pursuant to the provisions of this Article 14

and shall, unless otherwise mutually agreed, be agreed upon prior to

the determination of commerciality and preparation of the Overall

Development Program.

14.6.5.3 The Purchase of the CBM and Liquid Hydrocarbons produced from the

Contract Area shall be made at the Delivery Point, which unless

otherwise mutually agreed, shall be the most economically viable nearby

Natural Gas pipeline having available capacity.

14.6.5.4 Unless otherwise agreed by the Contractor, payments for CBM and Liquid

Hydrocarbons shall be made in U.S. dollars in the bank account

designated by Contractor, either within or outside the People's

Republic of China at Contractor's election.

14.6.6







In case CUCBM and/or its Affiliates have available capacity in the gas

trunklines and/or pipeline infrastructure, once a CBM transportation

contract with reasonable transportation costs determined in accordance

with Article 14.4.1 has been signed by and between CUCBM and/or its

Affiliates and Contractor, the Contractor shall be guaranteed access

and priority use of such trunkline and/or pipeline infrastructure and

any subsequent CBM or Natural Gas producer shall be subject to

Contractors' guaranteed access and priority use of such trunkline

and/or pipeline infrastructure.

28



ARTICLE 15: PREFERENCE FOR THE EMPLOYMENT OF CHINESE PERSONNEL, GOODS AND

SERVICES

15.1



For the performance of the CBM Operations, the Contractor's procurement

of necessary goods, leasing of equipment and signature of subcontracts

or other construction and service contracts shall be subject to relevant

regulations. The Contractor may give preference to Chinese goods,

equipment and service, provided that they are competitive in terms of

price, quality and terms of delivery.



15.2



The Contractor may give preference to the employment of Chinese

Personnel in the performance of the CBM Operations in accordance with

relevant regulations. For this purpose, the Contractor may submit in

advance to CUCBM and JMC respectively a plan for the employment of

Chinese Personnel listing all the posts and number of the persons

involved. CUCBM shall, at the request of the Contractor and in

accordance with the plan, provide or assist in recruiting Chinese

employee candidates for such employment. The Contractor shall, as the

CBM Operations require, with the approval of CUCBM and JMC, revise the

training and employment plan to make the plan the most efficient and

economical for CBM Operations. For the performance of CBM Operations,

the Contractor may have the obligation to employ competent Chinese

Personnel and to employ those who have become qualified after having

being trained in accordance with the training program. The Contractor

may give preference in employing the Chinese Personnel who have

participated in the training program provided by the Contractor.

It is agreed between CUCBM and the Contractor that total Chinese

Personnel employment levels, including the costs thereof, for the

purpose of conducting CBM Operations, including training therefore,

shall always be consistent with conducting such operations in an

efficient and economic manner in accordance with good and generally

accepted international oil field practices.

All Chinese employees shall sign with the Operator employment contracts

whose terms shall cover hiring, resignation and dismissal, production

and work responsibilities, wages and bonuses, health, safety and

environmental rules, working hours and holidays, labor insurance and

welfare benefits, labor protection and labor discipline. Such contracts

shall include the right of the Operator to dismiss in accordance with

applicable Chinese laws and regulations such employees who do not

observe such contract, Contractor rules, or other rules applicable to

their work.



15.3



The engineering design corporations under or entrusted by CUCBM shall

have the right to participate in the master designs and engineering

designs made by the Contractor for the purpose of the implementation of

the Contract. Qualified engineering design companies within the

territory of the People's Republic of China as determined by the Parties

may be given preference in entering into subcontracts for the aforesaid

master designs and engineering designs, provided that their technical

level, quality, price and delivery time are competitive.



15.4



After the Contractor signs equipment leasing contracts, service

contracts or subcontracts with CUCBM or its Affiliates in accordance

with Article 15.1 herein, the Contractor shall endeavor to provide

technical assistance to CUCBM or its Affiliates, at the request of

CUCBM, so as to enable them to meet the needs of CBM Operations to be

undertaken. The expenses so incurred shall be borne by CUCBM or its

Affiliates.



ARTICLE 16: TRAINING OF CHINESE PERSONNEL AND TRANSFER OF TECHNOLOGY

16.1







The Contractor agrees, in the course of the implementation of the

Contract, to transfer to CUCBM and its Affiliates, the advanced

technology and managerial experience including proprietary technology

e.g. patented technology, know-how or other confidential technology,

used in the performance of the CBM Operations and the necessary data

and/or information for mastering such technology and experience,

provided, however, such technology to be transferred shall be

proprietary to the Contractor and, if the transfer of any of such

technology is restricted in any way during the term of the Contract, the

Contractor shall, to the extent reasonably possible, endeavor to obtain

permission for the transfer of such restricted technology. However,

rights under patents,

29

commercial proprietary information and information covered by

confidentiality agreements, shall not be transferred hereunder, except

in accordance with a licensing agreement which may be negotiated and

entered into between Contractor and CUCBM. The Contractor agrees to

train the Chinese Personnel including workers, technical, economic,

managerial, legal and other professional personnel, in order to improve

their technical and/or managerial capabilities relating to CBM

Operations.



16.2



Within ninety (90) days following the Date of Commencement of the

Implementation of the Contract, the Contractor shall, after consultation

with CUCBM, complete and submit a training and technology transfer

program for a reasonable number of the Chinese Personnel in the

exploration period and the corresponding budget to JMC for review and

approval, and upon approval by JMC, put it into practice. The Contractor

shall, after consultation with CUCBM, complete and submit training and

technology transfer programs and corresponding budgets for a reasonable

number of the Chinese Personnel in the development period and production

period, respectively, to JMC for its review and approval before the

commencement of the Development Operations and Production Operations,

and upon approval by JMC, put them into practice in time so as to have

ample time in advance for such training and technology transfer.



16.3



The expenses and costs incurred for performing the training and

technology transfer program stipulated in this Article 16 shall be

charged to the exploration costs if such costs are incurred before the

date of approval of the Overall Development Program of the first CBM

Field, and shall be charged to the development costs if such costs are

incurred after the date of approval of the Overall Development Program

of the first CBM Field, and before the Date of Commencement of

Commercial Production of the first CBM Field, or shall be charged to the

operating costs if such costs are incurred after the Date of

Commencement of Commercial Production of the first CBM Field.



16.4



In the course of the implementation of the Contract, the Parties shall

have scientific and technical cooperation and academic exchanges in

connection with the CBM Operations. The relevant provisions concerning

the program, participating personnel and type related to the scientific

and technical cooperation and academic exchanges shall be determined by



the Parties. The expenses required by the scientific and technical

cooperation and academic exchanges shall be included in the budget

specified in Article 16.2 herein and charged to the Joint Account. All

inventions, experiments or research results arising from the said

cooperation and academic exchange shall be shared by and belong to the

Parties who, subject to the provisions of Article 21 hereof, shall not

disclose them to any Third Party.

16.4.1 In the course of the implementation of the Contract, those scientific

research projects which are required by the CBM Operations but not

carried out by the Parties may, with the approval of JMC, be

commissioned to, and carried out by, any Third Party. The Operator may

enter into subcontracts or service contracts with relevant scientific

research departments within the territory of the People's Republic of

China, provided that they are competent and competitive. The aforesaid

required expenses shall be included in the budget specified in Article

16.2 herein and charged to the Joint Account. All inventions and

experimental or research results developed from the aforesaid research

projects carried out by a Third Party delegated by the Operator shall

also be shared by and belong to the Parties who, subject to the

provisions of Article 21 hereof, shall not disclose them to any other

Third Parties. The Operator shall endeavor to incorporate the provisions

herein in the subcontracts or service contracts signed with a Third

Party.

16.5



The advanced technology and managerial experience, including proprietary

technology, e.g. patented technology, know-how or other confidential

technology that the Contractor transfers to CUCBM, shall remain the

exclusive property of the Contractor and shall also be subject to the

confidentiality restrictions of Article 21 hereof.



16.6



For the purpose of the implementation of this Article 16 - Training of

Chinese Personnel and Transfer of Technology, the costs and expenditures

incurred by the Contractor annually for







30

training of Chinese Personnel and transfer of technology shall be no

less than sixty thousand ($60,000) U.S. Dollars during the exploration

period and no less than one hundred fifty thousand ($150,000) U.S.

Dollars during the development and production periods unless otherwise

agreed by the Parties.



ARTICLE 17: OWNERSHIP OF ASSETS AND DATA

17.1



All assets purchased, installed and constructed under the Work Program

and budget for each CBM Field within the Contract Area shall be owned by

CUCBM from the date on which all the development costs and Deemed

Interest thereon incurred by the Contractor in the development period of

such CBM Field have been fully recovered or from the date on which the

production period expires, even though the aforesaid costs have not been

fully recovered. The Operator shall be responsible for the acceptance,

inspection or testing of the said assets and CUCBM may, as it deems

necessary, send its experts to participate in such acceptance,

inspection or testing. In the production period, the Operator may use

these aforesaid CUCBM-owned assets free of charge for performing the CBM

Operations. Such assets shall not be used in any operations other than

the CBM Operations or any operations by Third Parties without the

consent of the Parties.



17.2



Equipment and facilities which are owned by a Third Party and are either

leased by the Operator or temporarily brought into the territory of the

People's Republic of China for the performance of the CBM Operations

shall not be deemed as assets owned by CUCBM. Such equipment and

facilities may be exported from the People's Republic of China, and

CUCBM shall assist in handling export formalities.



17.3



The ownership of all data, records, samples, vouchers and other original

data obtained in the course of performing the CBM Operations shall vest

in CUCBM, and the disclosure thereof by CUCBM shall be made in

accordance with Article 21 hereof. However, the Contractor shall,

subject to any necessary approval as may be required and Article 21

hereof, have the right to use inside and outside the People's Republic

of China, and keep samples and copies of all data, records and vouchers



for the purposes of the CBM Operations.

17.4



The facilities constructed for the conduct of CBM Operations hereunder,

whether located within or outside the Contract Area, may be used for the

common benefit of any and all CBM Fields within the Contract Area

("Common Facilities") for so long as any CBM Field in the Contract Area

is utilizing any of the Common Facilities. CUCBM and Contractor shall be

entitled to use, free of charge, excepting Operating Costs, such Common

Facilities to the extent required for CBM Operations hereunder. Such

right of use shall be permitted regardless of whether or not the costs

related to such Common Facilities have been recovered and regardless of

whether or not Production Operations from the relevant CBM Field on

which the Common Facilities are located has been terminated.

The operating costs of the Common Facilities will be allocated to each

CBM Field in proportion to the total Annual Gross Production of CBM and

Liquid Hydrocarbon, i.e., the contribution of each CBM Field to the

total Annual Gross Production of CBM and Liquid Hydrocarbons of all the

CBM Fields within Contract Area utilizing such facilities.



ARTICLE 18: ACCOUNTING, AUDITING AND PERSONNEL COSTS

18.1



Accounting

Annex II - Accounting Procedure hereto contains the guidelines for the

Operator to keep accounting books and records and make financial

settlements. The Operator shall keep and settle the accounts for all the

financial activities in respect of the Contract Area and maintain all

the accounting books and records in accordance with Annex II Accounting Procedure hereto in order to accurately reflect the

exploration costs, development costs with Deemed Interest thereon and

operating costs incurred in the performance of the CBM Operations in

respect of the Contract

31







Area, as well as quantity and monetary value of the production and

allocation of CBM. The Operator shall submit detailed statements and

relevant written reports to JMC and the departments concerned.

18.2



Auditing.



18.2.1



Any non-Operator Party to the Contract shall have the right to audit

all the Operator's Joint Account accounting books and records after the

end of each Calendar Year and shall give the Operator a written notice

of the auditing results. Any such audit shall be completed within

twenty-four (24) months after the end of each Calendar Year. In the

absence of any written notice of an exception in the audit results

given by the non-Operator Party within such period or if the annual

Joint Account accounting books and records of the Operator are not

audited by any non-Operator Party within such period, the Operator's

Joint Account accounting books and records shall be deemed correct. A

special audit of the Operator's Joint Account accounting books and

records may be made if specially required during any such Calendar

Year. Any special audit will be limited to a specific topic and shall

not be a general audit.



18.2.2



Prior to any special audit referred to in Article 18.2.1 hereof, the

non-Operator agrees to furnish the Operator with a letter outlining the

special audit item(s) and reasons for its concern. The Parties agree to

first discuss the areas of concern and attempt to resolve any

outstanding issues. If no resolution is reached, the Operator shall be

given thirty (30) days notice prior to the date of commencement of such

audit. There shall be no impediment to normal CBM Operations during the

period of any audit. Any special audit of the Operator's Joint Account

accounting books and records for a Calendar Year due to various special

circumstances shall require, in addition to the thirty (30) days notice

prior to the date of commencement of such audit, the consent of the

Operator, which consent shall not be unreasonably withheld.



18.2.3



The auditors shall be entitled to access to all relevant Joint Account

records, files and other information including, but not limited to the

salary and wage information of Operator's personnel dedicated to the

CBM Operations, and may inspect such sites and facilities as necessary.



18.2.4



Upon receipt of a notice of the non-Operator Party's exceptions in the

auditing results, the Operator shall use its best efforts to reply in

writing and resolve these matters in due time (no later than ninety

(90) days thereafter).

Exceptions in the auditing results that have not been resolved by the

Parties through consultation within the 90 day period set forth above

may be referred to JMC for discussion and resolution at the request of

any Party to the Contract. Any audit exception that has not been

settled by JMC through consultation within 90 days after having been

referred to JMC for resolution may be referred to a mutually acceptable

independent international Third Party accounting authority for final

review and resolution. Any mutually acceptable independent

international Third Party accounting authority selected for final

review and resolution of any outstanding audit exception(s) shall not

have any economic interests or relationship with the Parties. Any

determination made by such mutually acceptable independent

international Third Party accounting authority in regard to such

unresolved audit exception(s) shall be final and binding upon the

Parties.



18.3



Personnel Costs.



18.3.1



Personnel costs mean the remuneration and other related charges paid in

connection with personnel who are engaged whether temporarily or

permanently in administration, management, accounting, finance, tax,

employee relations, procurement, legal affairs, safety/environmental

affairs, computer services, engineering, geology, geophysics, drilling

and Production Operations as well as all other work for the

implementation of the Contract.



18.3.1.1 The salary or wages of personnel of JMC, the personnel of the various

subordinate bodies of JMC, the professional representatives referred to

in Article 7.5 hereof and all employees engaged in the





32

performance of the CBM Operations shall be included in the personnel

costs as provided in Article 18.3.1 herein.



18.3.1.2 Personnel costs which are classified as the overhead of the superior

management organization pursuant to Article 5.2.18 of Annex II Accounting Procedure hereto shall not be included in the personnel

costs mentioned herein.

18.3.2



After the Date of Commencement of the Implementation of the Contract,

the Operator shall work out a staffing plan for its organization and a

personnel costs plan with respect thereto (including a plan of

personnel costs, such as overseas allowance and area allowance, etc.)

before the beginning of each Calendar Year and submit such plan with

the annual Work Program and budget to JMC for review and examination.

During the exploration period, the Operator shall submit a staffing

plan for its organization and a personnel costs plan with the annual

Work Program and budget to JMC for review and examination.

In the development period and production period, the Operator shall

submit a staffing plan for its organization and a personnel costs plan

with the annual Work Program and budget to JMC for review and approval

and the Contractor shall provide CUCBM with an itemized plan of

personnel costs of the Expatriate Employees. CUCBM shall bear the

obligation of confidentiality for such information provided by the

Contractor.

The Operator shall charge the personnel costs of the Contractor's

personnel actually incurred to the Joint Account.

CUCBM shall have the right to audit the personnel costs charged to the

Joint Account, and when CUCBM and Contractor act together as the joint

Operator, the Contractor shall also have the right to audit such

personnel costs.



18.3.3



The level of the salaries and wages paid to the representatives



appointed by CUCBM to JMC established in accordance with Article 7.1

hereof, the Chinese Personnel working in various subordinate bodies of

JMC established in accordance with Article 7.4 hereof, the professional

representatives appointed in accordance with Article 7.5 hereof and

CUCBM's personnel employed by the Contractor shall be determined

pursuant to the provisions of Annex III - Personnel Costs hereto.

The salaries and wages of the Chinese Personnel other than CUCBM

personnel employed by the Operator shall be determined through

consultations and specified in the individual employment contracts.

The settlement of all charges for the salaries and wages of CUCBM

personnel under this Article 18.3.3, shall be made between CUCBM and

the Operator in accordance with Annex III (Personnel Costs) hereto.

CUCBM personnel shall be responsible for any and all individual income

tax due, including but not limited to, that due in accordance with the

provisions of the Individual Income Tax Law of the People's Republic of

China.

18.3.4



The Operator shall withhold the individual income tax of the Expatriate

Employees that it is required to withhold and is due in accordance with

the provisions of the Individual Income Tax Law of the People's

Republic of China.



ARTICLE 19: TAXATION

19.1



Each of the companies comprising the Contractor shall pay taxes,

including but not limited to, enterprise income taxes, to the

Government of the People's Republic of China subject to the tax laws

and regulations of the People's Republic of China.

33







19.2 The Operator shall advise the Subcontractors who render services for the

Contract that they and their employees shall pay taxes to the Government

of the People's Republic of China subject to the tax laws and regulations

of the People's Republic of China.

ARTICLE 20: INSURANCE

20.1 The Operator shall work out an insurance program for the Exploration

Operations and submit it to JMC for review and approval within one hundred

and twenty (120) days after the Date of Commencement of the Implementation

of the Contract. The Operator shall, on behalf of the Parties, obtain the

insurance contracts in accordance with such program as approved by JMC

before commencement of CBM Operations within the Contract Area.

Similar provisions shall apply in respect of Development Operations and

Production Operations.

20.2 All of the insurance items as approved in the insurance program shall be

insured with insurance companies licensed in accordance with the laws of

the People's Republic of China (hereinafter referred to as Chinese

insurance companies) and shall be insured in accordance with the laws and

regulations of the People's Republic of China and on terms and conditions

competitive with world markets for similar risks.

20.3 The insurance programs worked out by the Operator shall include, but not

be limited to, the following insurance coverage:

(a)



Damages to and expenses of all drilling installations and equipment,

including damages to and expenses of the properties used on

worksites and supply bases for the CBM Operations, while the

equipment and properties owned by Third Party rendering services to

the Operator shall be handled in accordance with Article 20.5

herein;



(b)



Damages to and expenses of any of the equipment or installations for

production, storage and transportation, and buildings in the course

of construction and installation;



(c)



Damages to and expenses for the production installations,

facilities, and equipment in CBM fields;



(d)



Liability to Third Parties;



(e)



Liability for pollution and expenses for cleaning up in the course

of drilling and Production Operations;



(f)



Expenses for extinguishing blowouts;



(g)



Liability incurred by the Operator in hiring land drilling rigs,

vessels and aircraft serving the CBM Operations;



(h)



Liability for cleaning debris; and



(i)



losses and expenses incurred during the transportation and storage

in transit of goods shipped from different parts of the world and

other areas outside the Contract Area to the worksites.



20.4 In any insurance contracts, the deductibles shall be determined by the

Parties through consultation, and losses within the deductible limits

shall be borne by Parties in proportion to their respective participating

interests in the relevant operations, and charged to the Joint Account.





34



20.5 When signing subcontracts or lease contracts, the Operator shall endeavor

to require Subcontractors and lessors to insure their risks under the

relevant subcontracts or lease contracts with Chinese insurance companies

in accordance with the laws and regulations of the People's Republic of

China. The rates, terms and conditions of such insurance shall be

competitive with world markets for similar risks.

20.6 In the course of the CBM Operations, the Parties shall cover separately

personnel accidental death and injury insurance with respect to personnel

whom they have respectively assigned. The premiums in respect thereof

shall be dealt with in the following way: The premiums for personnel

accidental death and injury insurance with respect to personnel whose

costs are charged to the Joint Account pursuant to the provisions of the

Contract shall be charged to the Joint Account, and those with respect to

other personnel shall be borne by the respective Party by which they are

assigned.

20.7 Insurance companies owned by or affiliated with any Party to the Contract,

or the Parties themselves, may reinsure relevant Chinese insurance

companies who have obtained insurance contracts by reaching an agreement

with such companies if they are interested in reinsuring any part of the

insurance program hereunder.

20.8 All motor vehicles used in the CBM Operations shall be insured with

Chinese insurance companies in accordance with the laws and regulations of

the People's Republic of China.

20.9 The premiums of insurance in the exploration period and the development

period shall be charged respectively to the exploration costs and

development costs while those in the production period shall be charged to

the operating costs.

20.10 Any claim under the insurance policies of the agreed insurance program

charged to the Joint Account shall be handled by the Operator and any

recovery made from insurers shall be credited to the Joint Account.

ARTICLE 21: CONFIDENTIALITY

21.1 CUCBM shall, in conformity with applicable laws and regulations of the

Government of the People's Republic of China on confidentiality and by

taking into account international practice, determine in consultation with

the Contractor the confidentiality periods for which the Contract and all

documents, information, data and reports related to the CBM Operations

within the Contract Area shall be kept confidential.

21.2 Without the written consent of the other Party, no Party to the Contract

shall disclose, during such confidentiality periods, the Contract,

documents, information, data and reports referred to in Article 21.1

herein or any other information regarded by JMC as confidential, to any

Third Party except the Third Parties specified in Article 21.5 herein and

to any Affiliate not directly connected with the implementation of the



Contract, and no Party to the Contract shall otherwise transfer, donate,

sell or publish them in any way within the confidentiality periods. CUCBM

shall have the right to disclose confidential information to relevant

Third Parties upon the termination of this Contract.

CUCBM shall, in conformity with relevant provisions of laws and

regulations of the People's Republic of China and lawful requests of

relevant government departments and units, provide them with all

documents, information, data and reports as mentioned herein.

21.3 During the term of the Contract and after the termination of the Contract,

CUCBM shall not disclose to any Third Party any patent, know-how or

proprietary technology transferred to CUCBM by the Contractor without the

written consent of the Contractor except for any technology, the patent of

which has expired and any proprietary and confidential technology which

has entered the public domain.

35





21.4



After the termination of the Contract or after any assignment of rights

and/or obligations of the Contract under Article 22 hereof, the

Contractor and any assignee shall, within the confidentiality periods,

continue to be obligated to keep confidential documents, information,

data and reports mentioned in Article 21.2 herein except for official

documents and information published with the consent of the Parties.



21.5



For the implementation of the Contract, CUCBM and each company

comprising the Contractor may furnish the necessary documents,

information, data and reports to Affiliates related to the CBM

Operations. CUCBM and each company comprising the Contractor may, after

review by JMC and CUCBM, furnish the necessary documents, information,

data and reports to the Third Party related to the CBM Operations. The

Third Parties include:



21.5.1 Banks or other credit institutions from which financing is sought by any

Party to the Contract for the implementation of the Contract;

21.5.2 Third Parties which provide services for the CBM Operations, including

Subcontractors and other service contractors; and

21.5.3 Any assignee or assignees to whom the rights and/or obligations under

the Contract may be assigned.

21.6



Necessary information, documents, data and reports may be furnished by

the Parties or an Affiliate of the Parties related to CBM Operations in

accordance with the laws of their home countries to the governments and

stock exchanges, provided that the Parties report to JMC in advance.



21.7



CUCBM and each company comprising the Contractor when furnishing the

documents, information, data and reports to Third Parties and Affiliates

as mentioned in Article 21.5 herein shall require them to assume the

confidentiality obligations as set forth herein, or shall bear full

responsibility for any violation thereof.



ARTICLE 22: ASSIGNMENT

22.1



Any company comprising the Contractor may, after notice in writing to

CUCBM, assign part or all of its rights and/or obligations under the

Contract to any of its Affiliates. Such assignment, within sixty (60)

days after receiving the notice, shall be approved by CUCBM, provided

that the company comprising the Contractor who assigns, shall perform

the assignment in accordance with the following provisions:

(a)



Any company comprising the Contractor who assigns shall submit

to CUCBM copies of a written agreement on the corresponding part

of its rights and/or obligations to be assigned;



(b)



Any company comprising the Contractor who assigns, shall

guarantee in writing to CUCBM the performance of the assigned

obligations; and



(c)



No such assignment shall interfere with the performance of the

CBM Operations or affect the organizational structure.



22.2



The Contractor may assign part or all of its rights and/or obligations

under the Contract to any Third Party provided that such assignment

shall be agreed by CUCBM in advance and approved by the Ministry of

Foreign Trade and Economic Co-operation of the People's Republic of

China. However, if the conditions offered by CUCBM are the same, CUCBM

shall have the right of first refusal in respect of such assignment to

be exercised by CUCBM in writing within thirty (30) days upon receipt of

notice from the Contractor to assign to a Third Party, unless otherwise

agreed upon by the Parties.

36





22.3



Upon notice to the Contractor, CUCBM may authorize its Affiliates to

implement the Contract, but CUCBM shall remain responsible for the

performance of the Contract.



22.4



With prior consent of the Contractor and subject to the approval of the

Ministry of Foreign Trade and Economic Co-operation of the People's

Republic of China, CUCBM may assign part of its rights and/or

obligations hereunder to any Third Party, provided that such assignment

shall not interfere with the performance of CBM Operations.



ARTICLE 23: ENVIRONMENTAL PROTECTION AND SAFETY

23.1



In the performance of the CBM Operations, the Operator shall be subject

to the laws, decrees, regulations and standards on environmental

protection and safety promulgated by the Chinese Government and carry

out the CBM Operations according to international practice. The Operator

shall use all reasonable endeavors to protect farmland, aquatic

resources, forest reserves and other natural resources, and prevent

pollution and damage to the atmosphere, rivers, lakes, groundwater,

harbors, other land environments and ecological environment and secure

the safety and health of the operating personnel. The Operator shall use

all reasonable endeavors to eliminate promptly any pollution occurring

as a direct result of and in the performance of the CBM Operations and

minimize its consequences. Economic losses caused by any pollution shall

be charged to the Joint Account, unless otherwise provided in Article

8.4 hereof.



23.2



The Operator shall conduct regular audits to ensure compliance with the

Operator's environmental, health and safety standards. All costs for

such regular audits shall be charged to the Joint Account.



23.3



When competent authorities under the Chinese Government assign a person

to inspect environmental protection, health and safety within the scope

of the CBM Operations according to the laws, decrees, rules and

regulations of the People's Republic of China, the Operator shall

provide all necessary access to facilities and assistance to enable the

inspectors to carry out such inspection smoothly.



23.4



The Operator shall, subject to Article 4.6.2, after the completion of

various CBM Operations, to the extent reasonable and practicable, level

or restore or reclaim the land of the operating sites to the condition

existing at the commencement of implementation of the Contract in

accordance with the relevant rules and regulations.



ARTICLE 24: FORCE MAJEURE

24.1



No Party to the Contract shall be considered in default of the

performance of any of its obligations hereunder, if any failure to

perform or any delay in performing its obligations is in conformity with

all the events described as follows:

The performance of any obligations hereunder is prevented, hindered or

delayed because of any event or combination of events which could not be

foreseen and/or which is beyond the control of such Party; and

Any such event or combination of events is the direct cause of

preventing, hindering or delaying of such Party's performance of its

obligations hereunder; and

When any such event or combination of events has occurred, such Party

has taken all reasonable actions to overcome any cause that prevents,

hinders or delays performance of its obligations and shall in so far as



is practicable continue to perform its obligations hereunder.

24.2







Notice of any event of force majeure and the conclusion thereof shall

forthwith be given to the other Party by the Party claiming force

majeure.

37



24.3



In the event of force majeure, the Parties shall immediately consult in

order to find an equitable solution thereto and shall use all

reasonable endeavors to minimize the consequences of such force

majeure.



24.4



If the CBM Operations in the Contract Area are partially or entirely

suspended as a result of the force majeure referred to in this Article

24, the period of the CBM Operations may be extended by a period

corresponding to such suspension. Within fifteen (15) days following

the end of each Calendar Year, the Operator shall report to JMC in

writing on the suspension of the CBM Operations caused by force

majeure, if any, during the preceding Calendar Year.



24.5



Should, however, the force majeure condition continue for a period of

twenty-four (24) consecutive months, then, in such event, Contractor

shall have the option to terminate this Contract without any further

liability.



24.6



The provision of this Article 24 shall not apply in the case of default

in the making of any payment of money under the Contract.



ARTICLE 25: CONSULTATION AND ARBITRATION

25.1



The Parties shall make their best efforts to settle amicably through

consultation any dispute arising in connection with the performance or

interpretation, or validity of any provision hereof.



25.2



Any dispute mentioned in Article 25.1 herein, including without

limitation disputes arising under Article 27.2, that has not been

settled through such consultation within ninety (90) days after the

dispute arises may be referred to arbitration at the request of and by

either Party to the Contract. The arbitration shall be conducted in

accordance with the following provisions:



25.2.1



If agreed upon by the Parties, such dispute shall be referred to

arbitration conducted by the China International Economic and Trade

Arbitration Commission in accordance with the arbitration proceeding

rules thereof.



25.2.2



If the Parties fail to reach an agreement on the arbitration

arrangement mentioned in Article 25.2.1 herein within sixty (60) days

after a Party has requested in writing that a dispute be referred to

arbitration, the Parties shall establish an ad hoc arbitration tribunal

to conduct arbitration in accordance with the following provisions:



25.2.2.1 The ad hoc arbitration tribunal shall consist of three (3) arbitrators.

The Parties shall each appoint an arbitrator and the two (2)

arbitrators so appointed shall designate a third arbitrator. If one of

the Parties does not appoint its arbitrator within sixty (60) days

after the first appointment, or if the two (2) arbitrators once

appointed fail to appoint the third within sixty (60) days after the

appointment of the second arbitrator, the relevant appointment shall be

made by the Arbitration Institute of the Stockholm Chamber of Commerce,

Sweden.

25.2.2.2 The third arbitrator shall be a citizen of a country which has formal

diplomatic relations with both the People's Republic of China and the

home country of any of the companies comprising the Contractor, and

shall not have any economic interests or relationship with the Parties.

25.2.2.3 The place of arbitration shall be determined by the Parties through

consultations or, failing the agreement of the Parties within sixty

(60) days after the appointment of the third arbitrator, by the

majority of arbitrators of the ad hoc arbitration tribunal.

25.2.2.4 The ad hoc arbitration tribunal shall conduct the arbitration in



accordance with the arbitration rules of the United Nations Commission

on International Trade Law ("UNCITRAL") of 1976, as amended. However,

if the above-mentioned arbitration rules are in conflict with the

provisions of





38

this Article 25, including the provisions concerning appointment of

arbitrators, the provisions of this Article 25 shall prevail.



25.3



Both the Chinese and English languages shall be official languages used

in the arbitration proceedings. All hearing materials, statements of

claim or defense, awards and the reasons supporting them shall be

written in both Chinese and English.



25.4



Any award of the arbitration tribunal shall be final and binding upon

the Parties.



25.5



The right to arbitrate disputes under the Contract shall survive the

termination of the Contract.



ARTICLE 26: EFFECTIVENESS AND TERMINATION OF THE CONTRACT

26.1



The Contract shall, after it has been signed, be approved by the

Ministry of Foreign Trade and Economic Co-operation of the People's

Republic of China. The date of such approval shall be the effective date

of the Contract. However, the Contractor's obligations shall begin on

the Date of Commencement of the Implementation of the Contract, as

defined in Article 1, hereinabove. CUCBM shall notify the Contractor of

the said approval in writing as soon as possible. The Parties may agree

after signing this Contract to commence Exploration Operations prior to

the Date of Commencement of the Implementation of the Contract. In such

event, all Exploration Operations prior to the Date of Commencement of

the Implementation of the Contract shall be credited towards the

exploration work commitment under Article 6 hereof and be cost

recoverable.



26.2



All annexes to the Contract shall be integral parts of the Contract. If

there is any inconsistency between the provisions of the annexes and the

main body of the Contract, the main body of the Contract shall prevail.

All references to the Contract herein refer to the main body of the

Contract.



26.3



If in the course of implementation of the Contract, the Parties decide

through consultation to make amendment or supplement any part of the

Contract, a written agreement signed by the authorized representatives

of the Parties shall be required. Such written agreement shall be

subject to the approval of the Ministry of Foreign Trade and Economic

Co-operation of the People's Republic of China should there be any

significant modifications hereof. Such agreement shall be regarded as an

integral part of the Contract.



26.4



The Contract shall terminate under any of the following circumstances:



26.4.1 Exercise of the Contractor's election to terminate the Contract under

Article 6.3 (c) hereof; or

26.4.2 Failure to discover any commercial CBM reservoir within the Contract

Area by the expiration of the exploration period or the extended

exploration period granted under Article 4.3 hereof; or failure to sign

a long-term transportation and sales contract within five (5) years

after the exploration period ends.

26.4.3 If there is only one (l) commercial CBM Field in production in the

Contract Area, on termination of the production period of such CBM

Field; or

26.4.4 If there are two (2) or more commercial CBM Fields and/or CBM Fields in

production in the Contract Area, on termination of the production period

of the CBM Field with the latest termination date; or

26.4.5 At the end of the last day of the thirtieth (30th) Contract Year from

the Date of Commencement of the Implementation of the Contract unless

otherwise extended pursuant to Articles 4.5, 4.6.1, or 24.4 hereof, or



as set forth in the approved Overall Development Program for each

Coalbed Methane Field.





39



26.5 Before the expiration of the first phase of the exploration period as

specified in Article 4.2 hereof, the Contractor shall not propose

termination of the Contract unless the Contractor has fulfilled the

minimum exploration work commitment for the first phase of the exploration

period ahead of time.

26.6 If any Party to the Contract commits a material breach of the Contract,

the other Party to the Contract shall have the right to demand that such

breach be remedied within a reasonable period of time. If such breach is

not remedied satisfactorily within such period of time, the Party damaged

by such breach shall have the right to terminate the Contract by giving

ninety (90) days written notice to the other Party. However, no Party

shall be deemed to have committed a material breach in the performance of

any provision of the Contract concerning which there is any dispute

between CUCBM and the Contractor, until such time as all disputes

concerning such provision, including any contention that a Party is in

material breach, have been settled as provided in Article 25 hereof.

During the time of such dispute, CUCBM and the Contractor shall continue

to carry out their responsibilities pursuant to the Contract, which shall

remain in full force and effect.

ARTICLE 27: THE APPLICABLE LAW

27.1 The validity, interpretation and implementation of the Contract shall be

governed by the laws of the People's Republic of China. Failing the

relevant provisions of the laws of the People's Republic of China for the

interpretation or implementation of the Contract, the principles of the

applicable laws widely used in CBM resources countries acceptable to the

Parties shall be applicable.

27.2 If a material change occurs to the Contractor's economic benefits after

the effective date of the Contract due to the promulgation of new laws,

decrees, rules and regulations or any amendment to the applicable laws,

decrees, rules and regulations of the People's Republic of China, the

Parties shall consult promptly and make necessary revisions and

adjustments to the relevant provisions of the Contract in order to

maintain the Contractor's normal economic benefits hereunder.

ARTICLE 28: LANGUAGE OF CONTRACT AND WORKING LANGUAGE

28.1 The text of the Contract, annexes and supplementary documents attached

hereto shall be written in both Chinese and English, and both versions

shall have equal force and effect.

28.2 The Parties agree that both Chinese and English shall be used as working

languages. After the effective date of the Contract, technical documents

and information concerning the CBM Operations hereunder including Work

Programs and Budgets shall, in general, be written in English except for

technical documents and information available previously and received from

Third Parties.

Unless otherwise agreed by CUCBM, in consultation with the Contractor,

documents and information in respect of administration shall be written in

both Chinese and English. Forms for production and other reports and

records shall be printed with headings in both Chinese and English and may

be filled out in either Chinese or English.

ARTICLE 29: MISCELLANEOUS

29.1 All notices and documents required hereunder shall be deemed to have been

properly given and delivered to either Party to the Contract only when

received.

29.2 Notices and documents shall be delivered by hand or sent by mail,

registered airmail, or facsimile to the address hereunder specified:





40



Address of China United CBM Corporation, Ltd.:

China United Coalbed Methane Corporation, Ltd.

A88, Anwai Ave.,

Beijing 100011

P.R. China

Tel: 86-10-6429-7887

Fax: 86-10-6429-1881

For the attention of: Xin Wenjie

Address of the representative of the Contractor:

Phillips China Inc.

315 S. Johnstone

Plaza Office Building, Suite 1040H

Bartlesville, Oklahoma 74004

USA

Tel.: (918) 661-5129

Fax: (918) 661-4057

For the attention of: T. J. Bogan-Risley

29.3 Either Party to the Contract may change its address or representative by a

written notice to the other Party to the Contract.

29.4 Companies comprising the Contractor have the following percentages of

participating interests as of the effective date of the Contract:

(I) Phillips China Inc.



One hundred percent (100 %);



The rights and obligations of each company comprising the Contractor

hereunder may, as between themselves, be varied by the operating agreement

between such companies and the Contractor shall advise CUCBM in writing of

any expected variation and, thereafter, of the actual variation. If such

variation leads to the transfer of the operatorship, or the companies

comprising the Contractor have made a decision to change the Operator, the

Operator referred to in Article 8.1 hereof may be replaced after obtaining

a written consent from CUCBM.

29.5 The Contractor shall pay CUCBM a signature fee of three hundred thousand

U.S. Dollars (US $300,000) in two installments as follows:

a)



The first installment of one hundred fifty thousand U.S. dollars

shall be paid by Contractor to CUCBM within thirty (30) days after

the Date of Commencement of the Implementation of the Contract;



b)



The second installment of one hundred fifty thousand U.S. dollars

shall be paid by Contractor to CUCBM within thirty (30) days after

approval of the first Overall Development Program for a CBM Field by

the Department or Unit.



Such signature fee shall, in no case, be charged to the Joint Account, nor

be deemed recoverable costs.

29.6 Whenever alternative interpretations of the Contract are possible subject

to Article 27.1 hereof, CUCBM and the Contractor agree that preference

shall be given to interpretations that will facilitate and promote the

intent of the Contract.

29.7 It is the express and agreed intention of CUCBM and the Contractor that

the terms and conditions of the Contract shall be applied, and that the

grant of any consents required hereunder shall be





41



given by the Parties in a manner and under conditions which are at all

times reasonable and in line with international CBM industry practice.

29.8 No waiver by any Party of any one or more defaults by another Party in the

performance of the Contract shall operate or be construed as a waiver of

any preceding or future default or defaults by the same Party, whether of

a like or of a different character. Except as expressly provided in this

Contract, no Party shall be deemed to have waived, released or modified

any of its rights under the Contract unless such Party has expressly

stated, in writing that it does waive, release or modify such right.



IN WITNESS WHEREOF, THIS CONTRACT is signed in Beijing by the authorized

representatives of the Parties hereto on the first above-mentioned date.

CHINA UNITED CBM CORPORATION, LTD.

By:



/s/ Xin Wenjie

-------------------------------------



Name:



------------------------------------



Title:



-----------------------------------



PHILLIPS CHINA INC.

By:



/s/ A. Roy Lyons

-------------------------------------



Name:



A. Roy Lyons

------------------------------------



Title:



President

----------------------------------42







ANNEX II: ACCOUNTING PROCEDURE

CONTENTS





Article



1





General Provisions



2



Definitions



3



Cash Calls



4



Accounting and Management of Material



5



Expense Accounting



6



Recovery of Costs and Deemed Interest



7



Accounting Reports



8



Audit



9





Transfer Procedure of the Joint Account







43

ANNEX II: ACCOUNTING PROCEDURE



ARTICLE 1

GENERAL PROVISIONS

1.1



This Accounting Procedure is an integral part of the Contract.

The definitions set forth in Article 1 of the Contract are equally

applicable to this Accounting Procedure. The definitions and provisions of

this Accounting Procedure shall have the same force and effect as those in

the Contract. If the provisions in this Accounting Procedure are in

conflict with those in the Contract, the provisions in the Contract shall

prevail.



1.2



Purpose: The purpose of this Accounting Procedure is to establish

equitable control methods for determining charges and credits applicable



to the CBM Operations according to the relevant provisions of the

Contract, including the guidelines for accounting settlements in respect

of managing funds and materials, financing and Accounting Records, and for

compiling accounting statements.

The Operator shall neither gain nor lose in relation to the other Parties

to the Contract by means of the fact that it acts as the Operator.

1.3



Accounting methods: The double-entry accrual method of accounting shall be

used in this Accounting Procedure.



1.4



Working language: Chinese or English shall be used as the working

languages for the Accounting Records and analyses of financial conditions

in respect of the Joint Account, at the Operator's option.



1.5



Currency for accounting: U.S. dollars shall be the unit of currency for

accounting in the Joint Account and shall be the currency for the

investments and reimbursements under the Contract. In case currencies

other than U.S. Dollars are used to carry out business activities, the

relevant bank accounts and other current asset and current liability

accounts shall be kept both in U.S. dollars and in the currencies used.



1.6



Currency translation: For the purpose of accounting, currency translation

entered into the Joint Account shall be made in accordance with following

guidelines:

The rate of exchange to be used for the conversion into U.S. dollars of

cash calls received in Renminbi shall be the arithmetic average of the

buying and selling rates of exchange applicable to any individual or

commercial entity quoted by the People's Bank of China at 11:00 a.m. on

the date of receipt of such cash in the Operator's bank account(s). If the

relevant date is a non-business day of the People's Bank of China, the

rate quoted on the previous business day by the People's Bank of China

shall apply.

All other transactions recorded in the Joint Account which are made in

Renminbi shall be translated into and recorded in U.S. dollars at the rate

of exchange as quoted above on the last business day of the previous

month, while those transactions which are made in currencies other than

Renminbi and U.S. Dollars shall be recorded in U.S. dollars at the actual

cost in U.S. dollars of effecting the transaction.

Neither CUCBM nor the companies comprising the Contractor shall experience

an exchange gain or loss, at the expense or benefit of the other Party.

The Operator shall make its best efforts to minimize any exchange loss.

All gains or losses from currency conversion or translation shall be

recorded in the Joint Account.





1.7



44



Foreign exchange business: Foreign exchange business related to the CBM

Operations shall be made in accordance with relevant regulations for

foreign exchange control and rules for the implementation of such

regulations of the People's Republic of China, provided that the

Contractor can:



1.7.1 Open and maintain bank accounts in any currency, both inside and outside

of the People's Republic of China, control and make use such bank accounts

and dispose of the funds therein. Obtain loans, advances or other

financing outside the People's Republic of China for activities in

connection with the Contract, and repay the principal and pay the interest

thereon in foreign exchange.

1.7.2 Buy and sell foreign exchange or Renminbi through banks and other lawful

means within the People's Republic of China at the official foreign

exchange rate applicable to all and any individual or commercial entity

quoted by the State Administration of Foreign Exchange Controls of the

People's Republic of China.

1.7.3 Retain and freely dispose of or exchange Renminbi or foreign exchange

generated from the CBM Operations or other activities or events related to

the Contract, but Contractor must remit back to the People's Republic of



China the amounts needed to pay taxes when they are due and payable

according to the tax laws and regulations of the People's Republic of

China, and other obligations when due and payable in the People's Republic

of China.

Dispose, distribute or retain or remit abroad the proceeds from the

Contractor's sales of CBM, Liquid Hydrocarbons and CBM Products sold in

the People's Republic of China and abroad, but Contractor must pay taxes

when due and payable according to the tax laws and regulations of the

People's Republic of China.

1.7.4 Make disbursements directly from internationally recognized bank accounts

inside or outside of the People's Republic of China for payments of

salaries and wages of Expatriate Employees, purchased materials and

various items of labor and service charges from Affiliates of Contractor

and foreign Subcontractors to carry out the CBM Operations as specified in

the Contract, after taxes are withheld according to the provisions of the

tax laws and regulations of the People's Republic of China.

1.7.5 Transfer Renminbi according to the needs of the CBM Operations between

Renminbi currency accounts opened within the People's Republic of China.

1.7.6 Deposit foreign exchange receipts in the Bank of China in the original

currency and such deposits need not be converted to Renminbi until needed.

1.7.7 Remit abroad excess foreign exchange or Renminbi, after reconversion to

foreign exchange, advanced or generated by the investing Parties and not

expended and held by the Contractor for the investing parties in

proportion to the extent of their respective percentage interests in such

excess, provided that CUCBM's share of such excess shall be returned to

CUCBM.

1.8



Accounting Records and Statements



1.8.1 All Accounting Records related to the CBM Operations shall be established

and maintained by the Operator within the territory of the People's

Republic of China.

1.8.2 All vouchers, accounts, books and statements shall be prepared in

accordance with the CBM Operations Accounting System established by CUCBM

and the Contractor through consultation pursuant to the Accounting

Regulations of the People's Republic of China for Enterprises with Foreign

Investment.





45



1.8.3 Annual accounting statements and important accounting books, including

asset records, cash or bank journals, general and subsidiary ledgers,

balance sheets, and annual gross CBM production allocation statements

shall be maintained for the term of the Contract as specified in Article

4.7 of the Contract, or for any further period if required by the laws and

regulations of the People's Republic of China. Other accounting vouchers

and books shall be kept for fifteen (15) years or as required by the laws

and regulations of the People's Republic of China. Quarterly and monthly

statements shall be maintained for three (3) years or as required by the

laws of the People's Republic of China.

Upon the expiration of the custody period, a list shall be made of the

accounting files which are to be disposed of. Disposal of the accounting

files shall only be made after the approval of CUCBM. The list of the

accounting files disposed of shall be maintained with the annual

accounting statements.

ARTICLE 2

DEFINITIONS

The terms used in this Accounting Procedure shall have the definitions ascribed

to them as follows:

2.1



"Accounting Records" means all accounting books, source documents,

original vouchers, approved documents, analytical data, work papers and

accounting statements maintained for the CBM Operations.



2.2



"Accounting System" means the CBM Operations Accounting System prepared by



CUCBM and the Contractor through consultations pursuant to the Accounting

Regulations of the People's Republic of China for Enterprises with Foreign

Investment, specifying the accounting titles to be used by the Operator

and instructions for implementation, forms and contents of various

accounting statements and their preparation methods, including a material

classification section, a definition of Controllable Material, standards

for itemizing assets and the provisions for fixed asset accounting. If

there is a conflict between the Accounting System and this Accounting

Procedure, then this Accounting Procedure shall prevail.

2.3



"Material" means materials, tools, facilities, equipment and consumables

procured, leased or otherwise acquired and held for the CBM Operations.



2.4



"Joint Account" means accounts established by the Operator for the

implementation of the Contract to record all debts and credits related to

the CBM Operations.



2.5



"Controllable Material" means the Material referred to in the Accounting

System described in Article 2.2 of this Accounting Procedure.



2.6



"LIBOR" means the seven-day term London Inter-Bank Offered Rate for U.S.

dollars for similar amounts to the sums in question, quoted by Midland

Bank in London at 11:00 a.m. on the first business day of the relevant

period. If the Midland Bank is unable or fails to supply such daily

quotation, that of Barclays Bank International Ltd. will be used, and

failing this, National Westminster Bank PLC's quotation will be used.



2.7



"Investing Party" means any party that is contributing funds for the CBM

Operations in accordance with its participating interest determined

pursuant to the relevant provisions of the Contract.



ARTICLE 3

CASH CALLS

3.1



Except as otherwise provided in the Contract, the Contractor shall provide

all the exploration costs for the Exploration Operations according to

Article 12.1.1 of the Contract and all the







46



Investing Parties shall provide the development costs for the Development

Operations in proportion to their respective participating interests as

provided in Article 12.1.2 of the Contract. In accordance with each

approved annual budget, the Operator shall issue monthly cash call notices

to each Investing Party to provide the Operator with funds to cover the

estimated cash requirements of the next month. Whether or not the cash

call notices for the exploration costs are to be issued shall be at the

option of the Operator.

3.2



Development Operations cash call and default



3.2.1 According to the needs of the CBM Operations, the Operator shall regularly

issue monthly cash call notices within the amount of approved annual

budget to request each Investing Party to respectively make advances as

specified by the Operator. The Operator shall, at least twenty (20) days

prior to the commencement of each month, issue cash call notices for the

development costs and each Investing Party shall provide its percentage

share of funds according to the requirements and within the time limit

specified in the cash call notice. However, the payment due date specified

in the cash call notices shall not be earlier than the first working day

of the month for which cash is called. Each Investing Party shall transfer

its percentage share of funds to the Operator's bank account(s)

established by the Operator particularly for the CBM Operations. Such bank

account(s) will be interest bearing account(s), if possible. Such interest

shall be credited directly to the respective CUCBM and Contractor accounts

as applicable, in accordance with their respective percentage of

participating interest.

Any excessive advances made by each Investing Party for any month shall be

adjusted in the next cash call.

In case the Operator, owing to the needs of the Development Operations,

has to incur expenditures which are unforeseen in the cash call for any

month, written notices shall be issued to all the Investing Parties who



shall finance their own shares for the additional amount within ten (10)

days following the receipt of the written notice.

3.2.2 Interest shall be paid by CUCBM or the companies comprising Contractor

failing to pay its share of funds on the due date specified in the cash

call at LIBOR on the delinquent date plus five percent (5%) for a

delinquency of less than one (1) month and thereafter at the average LIBOR

rate ruling throughout each subsequent month plus five percent (5%), such

interest being compounded on a monthly basis throughout the period of the

delinquency. The non-defaulting party or parties shall make up the

delinquent portion on behalf of the defaulting party or parties. When the

defaulting party or parties pay cash to meet both the delinquent portion

and accrued interest thereon, the Operator shall reimburse the

non-defaulting party or parties who made up the delinquent portion.

All amounts advanced by the non-defaulting party or parties plus accrued

interest not reimbursed by the defaulting party shall constitute a debt

due from the defaulting party or parties to the non-defaulting party or

parties who shall be entitled to all remedies at law and equity. The

Operator, or any non-defaulting party, if the Operator is a defaulting

party, on behalf of the non-defaulting party or parties is entitled to

take and sell the defaulting party's or parties' share of the Annual Gross

Production of CBM, Liquid Hydrocarbons and CBM Products and apply the

proceeds of the sale of such CBM, Liquid Hydrocarbons and CBM Products

against all sums due and payable by the defaulting party or parties

including accrued interest. Any excess funds remaining from such proceeds

after deduction of all amounts due, including interest and the costs,

charges and expenses incurred by the Operator, or any non-defaulting

party, if the Operator is a defaulting party, in connection with such

sale, shall be paid over to the defaulting party. Any deficiency remaining

due after deducting the proceeds of any such sale shall remain an

obligation of the defaulting party or parties and may be collected as any

other debt.

3.3



Each monthly cash call notice shall clearly indicate the following

information:







47



3.3.1 Annual development costs to be shared by each Investing Party as shown in

the approved annual budget.

3.3.2 Amount of funds advanced by each Investing Party at the end of the month

prior to the month in which the cash call notice is prepared and the

actual expenditures and the actual balance (i.e. funds unused) recorded in

the Joint Account, accompanied by the bank statements related to the Joint

Account for the previous month.

3.3.3 Amount of funds to be called from each Investing Party in the month for

which the funds will be used and the estimated amounts of funds to be

called in the following two (2) months.

3.3.4 The date when funds are to be provided, the amount of funds, currency,

account number, name of the account, the recipient bank and its address.

3.3.5 Where applicable, the participating Parties shall pay their participating

interest share of such invoice, via wire transfer, within thirty (30) days

of receipt of such invoice ("due date"). In the event a Party falls to pay

such participating interest share by such due date, the Parties shall be

subject to the provisions of Article 3.2.2 of the Annex II and the other

provision of the Contract.

3.4



On the Date of Commencement of Commercial Production of any CBM Field, any

development investment for the CBM Field advanced by the Investing Parties

which has not been expended or will not be expended shall be returned to

each of the Investing Parties in proportion to its share.



3.5



The cash for the Production Operations undertaken by the Parties jointly

and approved by JMC shall be provided by all the Investing Parties to the

Contract in proportion to their respective participating interests in the

development costs and shall bear no Deemed Interest. Based on the needs of

the Production Operations, the Operator may make timely adjustment of the

amount of cash to be provided by all the Investing Parties to the

Contract. The Operator shall issue monthly cash call notices for cash for



the Production Operations. In proportion to its share, each Investing

Party shall respectively provide advances on a monthly basis in accordance

with the requirements and within the time limit specified in the cash call

notice of the current month. The default provision specified in Article

3.2 of this Accounting Procedure shall also apply to any cash calls for

Production Operations.

In case that the Operator, owing to the needs of the Production

Operations, has to incur expenditures which are unforeseen in the cash

call for any month, written notices with explanations shall be issued to

all the Investing Parties who shall finance their own shares for

additional amount within ten (10) days following the receipt of such

written notice.

3.6



According to the requirement of the CBM Operations, the Operator shall

indicate in any cash call notice the U.S. dollar equivalent of the total

cash called. The Operator shall also specify the amounts of Renminbi and

U.S. dollars required as estimated to make payment. CUCBM shall provide

the advance of its own share either in Renminbi or in Renminbi and U.S.

dollars with respect to the amounts called for by the Operator, but

CUCBM's funding in Renminbi shall not exceed the total amount of Renminbi

as indicated and called for by the Operator in any cash call notice. The

Contractor shall provide the advance of its own share in U. S. dollars.



3.7



Provisions for recording the sources of funds:



3.7.1 Funds for exploration costs, development costs and operating costs, when

received, pursuant to each cash call shall be credited against the

relevant accounts of the Investing Parties in the Joint Account.

3.7.2 In case CUCBM decides to develop a CBM Field for its sole account pursuant

to Article 11.5 of the Contract, or undertakes any other operation for its

sole account, the funds required shall be financed and accounted for

separately.





48



3.7.3 In accordance with Article 6.3 of the Contract, if the Contractor opts to

terminate the Contract as provided in Article 6.3(c) of the Contract or if

the phase is the last phase of the exploration period, the Contractor

shall, within thirty (30) days from the date of its decision to terminate

the Contract or thirty (30) days from the date of the expiration of the

exploration period, pay CUCBM in U.S. dollars the unfulfilled balance of

the minimum exploration work commitment (or of the new commitment) for the

exploration phase, converted into cash. The detailed method by which the

unfulfilled balance of the minimum exploration work commitment is

converted into U.S. dollars is that the actual average unit cost of the

last portion of a seismic line shot under the Contract or of the last well

drilled, excluding the abnormal drilling costs such as those of the

sidetrack, fishing, severe loss of mud circulation, etc. (i.e. U.S.

dollars/kilometer of seismic line; U.S. dollars/meter of drilling

footage), is multiplied by the unfulfilled amount of the minimum

exploration work commitment. The formula for such calculation is as

follows:

I = Ac x Pu

in which:

I = converted cash amount of the unfulfilled balance of the minimum

exploration work commitment;

Ac = actual average unit cost of the last portion of a seismic line shot

or of the last well drilled; and

Pu = the unfulfilled amount of the minimum exploration work commitment

(The unfulfilled amount of the seismic line shot is the difference between

the kilometers specified in Article 6.2 of the Contract and actual

kilometers shot. The unfulfilled footage of an unfulfilled Wildcat is the

designed total depth of the Wildcat specified in accordance with Article

6.2 of the Contract or the depth actually drilled).

ARTICLE 4

ACCOUNTING AND MANAGEMENT OF MATERIAL



4.1



Procurement of Material:

The procurement of Material shall be implemented in accordance with the

procedures specified in Articles 15.1 and 7.6 of the Contract. In order to

prevent overstocking of Material, the Operator shall use reasonable

efforts to ensure that the procurement of Material shall be made in

accordance with the Material procurement plans and that the quality of

Material conforms to specifications and prices that are fair and

reasonable. The Operator does not warrant any Materials furnished beyond,

or in disregard of, the supplier's or manufacturer's guarantee.



4.2



Costs of procuring Material:

The costs of Material purchased shall be the invoice prices less discounts

plus related transportation and other expenses, including expenses for

freight to the destination, insurance premiums commensurate with the

Material covered, fees of forwarding agents, duties, fees, handling

expenses from shipside to and within any water or land terminal warehouse

or yard, and any other reasonable expenses actually paid and expenses of

inland transportation.



4.3



The provisions and procedures of Article 15.1 and Article 7.6 of the

Contract and the following provisions shall be applied for pricing

Material furnished from the stocks of the Parties and/or their Affiliates

for use in the CBM Operations:

(1)



New Material:

49







New Material shall be priced on the basis of current market value plus

expenses in moving such Material directly to the job-site where Material

is used.

(2)



4.4



Used Material:

(a)



Material which is in sound and serviceable condition and is

suitable for reuse without reconditioning shall be priced at

seventy-five percent (75%) of the current market value of new

Material.



(b)



Material which, after being reconditioned, will be further

serviceable for its original function shall be priced at fifty

percent (50%) of the current value of new Material.



(c)



Used Material which cannot be classified as (a) or (b) above

shall be priced by the Parties through discussions at a value

commensurate with its use.



(d)



If the Operator wishes to use a method other than the above

for pricing used Material, such other method shall be agreed

upon in advance by the Parties through consultations.



Price determination and leasing expense calculation method for properties

purchased or leased from other contract areas:

The Operator may lease equipment and facilities and purchase Material and

fuel from other contract areas within the People's Republic of China. The

Operator shall charge the leasing expenses or purchase price as agreed

upon by the Operator and its suppliers. Such leasing expenses or purchase

prices shall not exceed those currently prevailing in similar contract

areas.



4.5



For certain Material which is in short supply in the world markets and

difficult to procure at published market prices and the lack of which will

hinder normal operations, the Operator may, after the approval of JMC,

purchase such Material urgently needed by the CBM Operations and charge

actual purchase costs to the Joint Account.



4.6



Disposal of Equipment and Material:

The Operator shall not dispose of or sell Material with book value

exceeding Twenty Thousand U.S. dollars (U.S. $20,000) without the prior



consent of the Parties. The Operator shall use reasonable endeavors to

minimize losses in the disposal of or sales of such Material.

Sales of properties to Third Parties or Affiliates shall be recorded in

accordance with actual sales income. No guaranty or warranty for Material

sold or disposed of under this Article shall be given by the Operator to

any purchaser.

4.7



Accounting for Material:

The costs of Material which is procured by the Operator and is directly

used at the job-site shall be charged to the respective accounts of

exploration costs, development costs or operating costs at actual purchase

prices (as defined in Article 4.2 herein) and on the basis of the use of

Material. Should such Material subsequently be used for other purposes,

the relevant charges shall be transferred from the original cost accounts

to the appropriate cost accounts.

Material for general use which is first stored in warehouses shall be

subject to inventory control procedures. The quantities, unit prices and

total value shall be recorded for Material in inventory using perpetual

inventory methods. Material in stock shall be priced at purchase costs and

the Operator, upon the commencement of or during the Contract period, has

the freedom to choose one of the following pricing methods such as FIFO,

weighted average method and moving

50







average method, etc. for Material to be transferred out of stock. Accounts

for inventory Material shall be regarded as exploration costs, development

costs or operating costs and shall be recovered in accordance with Article

12.2 of the Contract.

At the request of any non-Operator, the Operator shall furnish to the

non-Operator a detailed statement of Controllable Material.

The Operator shall conduct physical inventory of Material in warehouses

prior to the annual final accounts or whenever depending upon the actual

situation. The Operator shall give a written notice to JMC sixty (60) days

before the date of proposed physical inventory in order to allow time for

participation by the non-Operators and failure to participate by any

non-Operator in the physical inventory shall be regarded as approval of

the physical inventory conducted by the Operator.

If any gain or loss is found as a result of the physical inventory, the

Operator shall compile a detailed statement of the gain or loss and attach

to it an explanation for the gain or loss, which shall be submitted to JMC

for examination and approval.

4.8



In accordance with Article 17.1 of the Contract, the Operator shall

exercise strict control over the fixed assets of the CBM Operations and

set up accounts and inventory records, and shall conduct physical

inventory of the fixed assets at the year-end or whenever depending upon

the actual situation to make sure that the accounts, inventory records,

and physical fixed assets are in conformity. In case that any damage or

loss arises to the fixed assets, the Operator shall determine the reasons

and submit them to JMC for examination and approval.



ARTICLE 5

EXPENSE ACCOUNTING

5.1



Rules for accounting



5.1.1



According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of the

Contract, all development costs and operating costs of the Parties as

well as the Contractor's exploration costs shall be recorded in the

Joint Account separately.

The Operator shall establish and maintain three separate accounts,

namely:



5.1.1.1 exploration costs account,

5.1.1.2 development costs account



5.1.1.3 operating costs account

in which all charges and costs as classified pursuant to Articles 5.2

and 5.3 of this Accounting Procedure shall be reflected.

5.1.2



If either CUCBM or the Contractor, in accordance with Article 11.5, or

Article 12.1.2 of the Contract, makes the decision to develop a CBM

Field for its sole account or to undertake any other operation for its

own account, the relevant costs shall be accounted for separately.



5.1.3



All items related to the CBM Operations such as discounts, deductions,

allowances, interest income, gains from various services, indemnities

from insurance and other miscellaneous income by the Operator, shall be

credited to the relevant costs accounts.



5.1.4



All direct services or research work (including personnel) not included

in the approved annual budget provided by the superior organizations or

Affiliates of CUCBM or of the Contractor and







51



by the Third Parties for the CBM Operations shall be subject to the

advance work order procedures on the basis of the annual budget or of the

approval by JMC and shall be charged to the Joint Account after

verification of relevant invoices.

The work order procedure shall be established through consultations at JMC

meetings by both Parties within three (3) months as of the Date of

Commencement of the Implementation of the Contract. The rates charged for

direct services or research work (including personnel cost) provided by

the superior organization or Affiliates of CUCBM or of the Contractor

shall be competitive when compared with the rates of similar services

furnished by the Third Parties. The Operator shall, in accordance with

Article 15 of the Contract, give priority to use direct research work

services (including personnel) provided by CUCBM, provided that their

charges are based upon actual costs and according to international

petroleum practices.

5.2



Cost items:

The following items shall be chargeable to the Joint Account at Operator's

net cost.



5.2.1 Subcontractor charges:

The charges paid to Subcontractors in accordance with contracts signed

between the Operator and Subcontractors.

5.2.2 Personnel expenses:

The contents and control of personnel expenses shall be as stipulated in

Article 18.3 of the Contract.

5.2.3 Travel and living expenses:

Travel and living expenses paid according to Article 18 of the Contract to

the personnel involved in the CBM Operations.

5.2.4 Material and Equipment expenses:

Expenses paid in accordance with Article 4 of this Accounting Procedure to

purchase Material and Equipment for use in the CBM Operations.

5.2.5 Relocation and transportation expenses:

Relocation and transportation expenses for the personnel involved in the

CBM Operations to be relocated into or out of the People's Republic of

China and transferred from job-sites to job-sites within the People's

Republic of China.

5.2.6 Maintenance, repair and leasing expenses:

Expenses for maintenance, repair or replacement of the properties used in



the CBM Operations and the leasing expenses paid for leased properties and

equipment.

5.2.7 Insurance premiums:

Necessary net payment made for the insurance of the CBM Operations and

related costs and expenses, including deductibles paid in the event of

loss pursuant to Article 20.4 of the Contract.

52





5.2.8



Legal expenses:

In order to protect the interests of Parties, all costs or expenses

paid for attorney's fees, litigation or investigation, including

expenses in securing evidences, mediation and settlements. The expenses

for handling legal matters incurred for the interests of any Party

shall be borne solely by such Party.



5.2.9



Taxes:

All taxes paid according to the tax laws of the People's Republic of

China, except for the income taxes, value added tax based on production

and royalty to be paid by the companies comprising the Contractor or

CUCBM and individual income tax to be paid by employees and withheld by

Operator and other related costs.



5.2.10



Energy expenses:

All costs in respect of fuel, electricity, heat, water or other energy

used and consumed for the CBM Operations.

The costs of CBM, Liquid Hydrocarbons and CBM Products produced and

used in the same CBM Field (provided that the Parties have the same

participating interest in such Fields) within the Contract Area by the

Operator for the performance of the Development Operations and the

Production Operations or for well stimulation or for maintaining the

reservoir pressure shall not be charged. However, the costs of

transporting such CBM, Liquid Hydrocarbons and/or CBM Products to their

points of use shall be charged under this item.



5.2.11



Field office facility charges:

The costs and expenses of establishing, maintaining and operating any

offices, camps or housing facilities necessary for the performance of

job-site operations, including a share of the costs of any office used

by staff directing such operations (calculated by apportioning office

costs and expenses on the basis of space occupied by such staff or

other methods).



5.2.12



Communication charges:

The costs of acquiring, leasing, installing, operating, repairing and

maintaining communication systems, including radio and microwave

facilities between the Contract Area and the base facilities.



5.2.13



Ecological and environmental protection charges:

The charges for any ecological and environmental protection measures

undertaken for the CBM Operations within the Contract Area as required

by relevant statutory regulations formulated by the authorities

concerned or pursuant to the programs agreed by the Parties.



5.2.14



Service charges:



5.2.14.1 Technical service charges:

The charges paid for Contractor, Affiliate or Third Party services,

such as rock specimen analysis, CBM or Liquid Hydrocarbons quality

tests, geological evaluation, data processing, design and engineering ,

well site geology, drilling supervision, special research programs and

other technical services.

53





5.2.14.2 General service charges:

Professional consultant charges from Contractor, Affiliates or Third

Parties incurred for the common interests of both Parties and charges

for other services to obtain original data needed for CBM Operations

from outside sources, excluding legal services, unless otherwise

decided by the JMC.

5.2.14.3 CUCBM's assistance charges:



5.2.15



(a)



The charges for the assistance provided by CUCBM for the

Contractor to carry out the CBM Operations in accordance with

Article 9 of the Contract.



(b)



For all assistance to be provided by the head office

organization of CUCBM to the Contractor as set forth in

Article 9 of the Contract in the course of the Exploration,

CUCBM shall charge an administrative fee of fifty thousand

U.S. dollars (US $50,000) for each Calendar Year. If the whole

process of the Exploration Operations conducted for any CBM

Field in any Calendar Year is less than twelve (12) calendar

months, the administrative fee for such Calendar Year shall be

calculated in proportion to the actual calendar month(s) spent

thereon (if the actual time spent thereon in any calendar

month is less than thirty (30) days, the calculation shall be

made based on a full calendar month). The aforesaid

administrative fee shall be paid respectively on June 1st and

December 1st of each Calendar Year, with twenty-five thousand

U.S. Dollars (US $25,000) for each installment.



(c)



For all assistance to be provided by the head office

organization of CUCBM to the Contractor as set forth in

Article 9 of the Contract in the course of the Development

Operations and the Production Operations before the

implementation of a Joint Operating Agreement by the Parties,

CUCBM shall charge an administrative fee of one hundred and

twenty thousand U.S. dollars (U.S. $120,000) for each Calendar

Year. If the whole process of the Development Operations

conducted for any CBM Field in any Calendar Year is less than

twelve (12) calendar months, the administrative fee for such

Calendar Year shall be calculated in proportion to the actual

calendar month(s) spent thereon ( if the actual time spent

thereon in any calendar month is less than thirty (30) days,

the calculation shall be made based on a full calendar month).

The aforesaid administrative fee shall be paid respectively on

June 1st and December 1st each Calendar Year, with sixty

thousand U.S. Dollars (U.S. $60,000) for each installment.



Damages and losses to the assets:

All costs and expenses necessary for the repair, replacement or

supplement of the assets resulting from damages or losses incurred by

fire, flood, storm, theft or any other force majeure causes, excluding

the losses specified in Article 8.4 of the Contract which shall be

borne by the Operator alone.



5.2.16



Personnel training costs:

Costs incurred for personnel training pursuant to Article 16 of the

Contract-Training of Chinese Personnel and Transfer of Technology.



5.2.17



Miscellaneous expenses:

Any reasonable miscellaneous expenses needed for the CBM Operations

excluded in the above items of expenses, such as bank charges, books,

stationery and conference expenses as well as other reasonable

expenses.





5.2.18 Overhead:



54



Overhead refers to the indirect costs for the managerial and operational

services provided by the Operator's superior management organizations for

the CBM Operations, including management, administration, accounting,

treasury, internal company audit, tax, legal matters, employee relations,

financing, the collection of economic data and costs for general

consultation on procurement, planning, design, research and operational

activities, etc. to the extent that these are not chargeable under

Article 5.1.4 of this Accounting Procedure. The overhead for the

Exploration Operations shall be calculated in accordance with the

following tiers and based on the sum of the total actual costs from

Article 5.2.1 through Article 5.2.17 and Article 5.2.18 of this

Accounting Procedure, but not including CUCBM's assistance charges under

Article 5.2.14.3 of this Accounting Procedure.

Direct Costs for Exploration

(U.S. $/Year)



Percentage Rate

%



First Tier: 0 to 5,000,000



5%



Second Tier: 5,000,001 to 15,000,000



3%



Third Tier: 15,000,001 to 25,000,000



2%



Fourth Tier: over 25,000,000



1%



The overhead rates for the Development Operations shall be agreed upon by

the Parties through discussions at the time when the development budget

is being prepared.

When the first budget is prepared for the Calendar Year of Commencement

of Commercial Production from each CBM Field, the overhead rates for

production period and its related calculation method shall be agreed upon

through discussions between the Parties.

The costs and expenses for offices established by the Operator within the

Chinese territory which are not specifically dedicated to the CBM

Operations shall be allocated by the Operator to the CBM Operations

within the Contract Area or to other beneficiary Parties, including the

Contractor, on the basis of actual service time recorded, or may be

allocated by other methods agreed upon by the Parties. The amount of

allocation charged to the CBM Operations within the Contract Area shall

be included in the cost item of Article 5.2.18 of this Accounting

Procedure. The costs and expenses incurred by the offices established by

the Operator and its superior organizations outside the Chinese territory

(excluding costs and expenses chargeable under Article 5.1.4 of this

Accounting Procedure) have been included in the overhead and shall not be

again charged to the Joint Account.

On the last working day of each month, the Operator shall make provision

in the Joint Account for the overhead fees for the current month,

calculated on the basis of cumulative actual expenditure for the Calendar

Year to that date and payment shall be made from the Joint Account on the

last working day of the following month. The final adjustment of the

overhead shall be made at the end of the Calendar Year in respect to any

difference between the actual payment by the Joint Account and the total

overhead for that Calendar Year calculated on the basis of the annual

cumulative actual investment expenditure at the end of such year. Any

excess shall be refunded and deficiencies made good.

5.2.19 General and administrative expenses:

General and administrative expenses refer to the administrative expenses

incurred for any offices established by the Operator within the Chinese

territory and for JMC and its subordinate bodies for the performance of

the CBM Operations.





55



5.2.20 The fees for exploration and mining rights:

The fees for exploration and mining rights refer to the two fees which

CUCBM pays the relevant department of State for owning CBM exploration

right of the Contract Area and CBM mining right of the Development Area

within the Contract Area, and which shall be respectively considered as



the exploration costs and development costs (or operating costs). The

Contractor shall transfer the specified fee to the bank account of CUCBM

within thirty days from the date on receipt of the written notice for the

payments of the exploration right fee or mining right fee from CUCBM. The

fees for exploration and mining rights referred to above shall be cost

recoverable.

5.3



Except as otherwise provided in this Accounting Procedure, the allocation

of common costs and expenses for each item of operations shall be charged

in proportion to the exploration costs, development costs and operating

costs actually incurred in each month.



5.4



With respect to the expenditures or excess expenditures under Article

10.2.4 (b) of the Contract which are determined by JMC to be

unreasonable, JMC will form a joint team for further investigation to

determine whether they shall be charged to the Joint Account or shall be

borne by the Operator alone before the year-end final closing of

accounts.



ARTICLE 6

RECOVERY OF COSTS AND DEEMED INTEREST

6.1



According to the provisions of Article 12.2.2 of the Contract, the

exploration costs incurred by Contractor and the Pre-Contract Costs

incurred by CUCBM in respect to the Contract Area shall bear no interest.



6.2



The calculation of Deemed Interest on the development costs:

Deemed Interest on the development costs shall be calculated at the

specified rate from the first day after the month in which the

development funds of any of the Investing Parties have been received in

the Operator's bank account for the Joint Account in accordance with the

provisions of Article 12.2.3.2 of the Contract.

There are three hundred and sixty-five (365) days in each Calendar Year

for the purposes of interest calculation and the interest shall be

compounded once each Calendar Year on December 31st based on actual

number of days eligible for the interest.

Worked Example

Development costs-- US $100 received on tenth of March

US $100 received on twentieth of March

The aggregate amount received in March is US $200.

Deemed interest shall be calculated from the first of April through the

end of such Calendar Year with a total number of two hundred and

seventy-five (275) days.

275

Formula: Interest = US $200 X 9% X ------------365

At the end of the year interest is added to the capital and interest

thereon accrues until cost recovery is fully achieved, "i.e.," interest

is compounded at year end.



6.3







Recovery of exploration costs, development costs with Deemed Interest

thereon and operating costs.

56



6.3.1 In accordance with the provisions of Article 12.2.2 of the Contract, the

exploration costs shall be recovered from the CBM Fields within the

Contract Area which have been developed and are producing and in which

development the Contractor has participated.

6.3.2 In accordance with the provisions of Articles 12.2.1, 12.2.3.1 and

12.2.3.2 of the Contract, the principal of development costs and Deemed

Interest thereon and operating costs, respectively, of each CBM Field

shall be recovered only from the production of each respective CBM Field.

6.3.3 As at the date of completing sale of CBM, CBM Products, or Liquid

Hydrocarbons the Operator shall make separate records into Joint Account



for the appropriate reimbursement of the principal of the exploration

costs, development costs with Deemed Interest thereon and operating costs

respectively in accordance with Article 12.2 of the Contract. Written

notices shall be sent by the Operator to CUCBM and the Investing Parties

at the same time.

6.4



In accordance with the provisions of Article 18.1 of the Contract, the

Operator shall establish complete books for recording the volume and

value of CBM, Liquid Hydrocarbons and/or CBM Products, precisely

reflecting the production and the disposal of the CBM and/or Liquid

Hydrocarbons within the Contract term.



6.5



CBM, Liquid Hydrocarbons and CBM Products production in each Calendar

Year for each CBM Field within the production period shall be accounted

according to the allocation proportions specified in Article 13 of the

Contract and at the CBM, Liquid Hydrocarbons and CBM Products price

determined pursuant to Article 14.4 of the Contract.



ARTICLE 7

ACCOUNTING REPORTS

7.1



The Operator shall provide relevant accounting reports and statements

based on the Accounting System to CUCBM and each company comprising the

Contractor. Monthly reports shall be submitted within thirty (30) days

after the end of each month, quarterly reports within forty-five (45)

days after the end of each Calendar Quarter and annual reports within

forty-five (45) days after the end of each Calendar Year. Monthly,

quarterly and annual reports shall be submitted in accordance with the

requirements and formats specified in the Accounting System.



7.2



Any Investing Party to the Contract may require the Operator to allow its

staff to have access to the Joint Account Accounting Records relating to

the application of expenses in the stipulated custody period, upon giving

thirty (30) days notice, but such access shall not unduly hinder the

Operator's normal operations.



ARTICLE 8

AUDIT

8.1



Audits shall be carried out in accordance with Article 18.2 of the

Contract.



8.2



The expenses of audits by any non-Operator shall be borne by the

non-Operator which conducts the audit. The expenses for any joint audits

conducted by more than one non-Operator shall be allocated in proportion

to their respective participating interests in the development costs.



ARTICLE 9

TRANSFER PROCEDURE FOR THE JOINT ACCOUNT

9.1







When the Exploration Operations are successful and the Contract Area

enters the development period, the Operator shall conduct an inventory

and check of all the properties and accounts for CUCBM. When each CBM

Field within the Contract Area goes from development into production, or

when the Contractor terminates the Contract, an inventory and check of

all properties and accounts shall be conducted.

57

If the Contract Area has entered into the development period or the

production period, the Operator (after taking an inventory of all

properties taken by all Investing Parties) shall make a proposal to JMC

for its approval listing the remaining equipment and Materials needed for

the CBM Operations for the following period and which shall be carried

forward to the next period in book values in the Joint Account. The

Operator shall be responsible for the disposal of the equipment and

materials not needed for the CBM Operations. The gains or losses derived

from such disposal shall be allocated in accordance with the share of

each Investing Party in proportion to the overall investment amount of

all Investing Parties and be adjusted against the original accounts.

If the Contract terminates, the method of inventory for all of the

remaining equipment and Materials shall be the same as mentioned above,

and the gains and losses derived from such disposal shall be adjusted



against the accounts of the original Investing Party in accordance with

the above mentioned methods.

9.2



In accordance with the provisions of Article 8.8 of the Contract, when

the organization established by the joint operating agreement takes over

and becomes the Operator of all the said CBM Fields within the Contract

Area, the former Operator shall transfer all of the Accounting Records

relating to the Joint Account.



9.3



Upon the termination of the Contract, the Operator shall transfer all the

relevant vouchers, books and statements over to CUCBM for custody.



9.4



In conducting the transfer of the accounting books and inventory and

check of all the properties in accordance with the provisions of this

Accounting Procedure, the implementation procedure for the transfer and

verification, the accounting files to be transferred and accounting

matters to be settled as well as other details shall be agreed upon

through consultation in advance between the Operator and CUCBM. The

transfer procedure shall be completed within the time period agreed upon

by the Parties. Thereafter, owing to the needs of any Investing Party to

the Contract, CUCBM shall allow that Party's staff access to the

Accounting Records within the relevant Accounting Records custody period

and provide them with duplicates, if necessary.









58