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PRODUCTION SHARING AGREEMENT

FOR

PETROLEUM EXPLORATION DEVELOPMENT

AND

PRODUCTION

IN THE

REPUBLIC OF UGANDA

BY AND BETWEEN

THE GOVERNMENT OF THE REPUBLIC OF

UGANDA



AND



TULLOW UGANDA LIMITED

In respect of the Kanywataba Prospect Area



February, 2012



CONTENTS

Preamble

Article



Page



1 DEFINITIONS -----------------------------------------------------------------------------------



2



2 AGREEMENT -----------------------------------------------------------------------------------



8



3 RESPONSIBILITIES AND GRANT OF RIGHTS -----------------------------------------



9



4 EXPLORATION WORK PROGRAMME --------------------------------------------------



11



5 ADVISORY COMMITTEE -------------------------------------------------------------------



14



6 WORK PROGRAMMES AND BUDGETS ------------------------------------------------



17



7 DISCOVERY, DEVELOPMENT AND PRODUCTION ----------------------------------



18



8 RECORDS, REPORTS, DATA AND INSPECTION --------------------------------------



21



9 BONUSES ----------------------------------------------------------------------------------------



25



10 ROYALTY AND ADDITIONAL ROYALTY ---------------------------------------------



26



11 STATE PARTICIPATION ---------------------------------------------------------------------



29



12 COST RECOVERY ----------------------------------------------------------------------------



31



13 PRODUCTION SHARING --------------------------------------------------------------------



32



14 TAXATION --------------------------------------------------------------------------------------



33



15 VALUATION AND MEASUREMENT OF PETROLEUM -----------------------------



34



16 PIPELINE TRANSPORTATION ------------------------------------------------------------



37



17 MARKETING AND LIFTING ---------------------------------------------------------------



39



18 DOMESTIC REQUIREMENTS --------------------------------------------------------------



41



ii



19 NATURAL GAS --------------------------------------------------------------------------------



42



20 PURCHASES IN UGANDA -------------------------------------------------------------------



46



21 TRAINING AND EMPLOYMENT ----------------------------------------------------------



45



22 TITLE TO ASSETS -----------------------------------------------------------------------------



46



23 FOREIGN EXCHANGE CONTROL --------------------------------------------------------



47



24 ASSIGNMENT ----------------------------------------------------------------------------------



48



25 DANGER TO PERSONS, PROPERTY OR ENVIRONMENT --------------------------



49



26 ARBITRATION ---------------------------------------------------------------------------------



55



27 INSURANCE AND INDEMNIFICATION --------------------------------------------------



56



28 FORCE MAJEURE ------------------------------------------------------------------------------



57



29 ANNUAL SURFACE RENTALS -------------------------------------------------------------



58



30 TERMINATION ---------------------------------------------------------------------------------



59



31 ACCOUNTING AND AUDITS ---------------------------------------------------------------



62



32 NOTICES -----------------------------------------------------------------------------------------



63



33 APPLICABLE LAW ----------------------------------------------------------------------------



64



34 ENTIRE AGREEMENT AND AMENDMENTS ------------------------------------------



65



35 WAIVER ------------------------------------------------------------------------------------------



66



36 CONFIDENTIALITY ---------------------------------------------------------------------------



67



37 DISCLAIMER -----------------------------------------------------------------------------------



68



iii



Annexes

A

B-I

B-II

C

D-I



Description and Map of Contract Area -------------------Form of Exploration Licence -------------------------------Form of Production Licence --------------------------------Accounting and Financial Procedure ----------------------Performance Bond --------------------------------------------



iv



70

72

73

74

95



THIS AGREEMENT is made and entered into this 3rd day of February 2012 by and

between the Government of the Republic of Uganda, acting through the Ministry of Energy

and Mineral Development of P.O. Box 7270 Kampala, Uganda (hereinafter referred to as

“Government”) and Tullow Uganda Limited, a company incorporated in the Isle of Man

and having its registered office at Falcon Cliff, Palace Road, Douglas, Isle of Man IM2

4LB and registered under Chapter 110 of the Laws of Uganda (hereinafter referred to as

the “Licensee”).

WHEREAS, Petroleum in or under any land or water in Uganda is the property of the

Republic of Uganda;

WHEREAS, the Petroleum (Exploration and Production) Act Chapter 150 of the Laws of

Uganda 2000 makes provision with respect to exploring for and producing Petroleum and

authorises the Minister responsible for petroleum exploration and production to grant

Exploration and Production Licences to any person or entity, subject to certain limitations

and conditions;

WHEREAS, Section 3 of the Act authorises the Government to enter into an agreement,

not inconsistent with the Act, with any person or entity in respect of, inter alia, the terms

and conditions of the grant of a Licence under the Act;

WHEREAS, Licensee has applied for an Exploration Licence over the area described in,

and shown on the map in Annex A hereof and the Minister, in accordance with Section 9

of the Act, intends to grant the said Licence; and

WHEREAS, Licensee intends, on terms and conditions set out under this Agreement and

has represented that he/she has or can obtain resources, to undertake Petroleum Operations

in the area aforesaid and has for that purpose the necessary financial capacity, technical

competence and professional skill to carry out such Operations;

NOW, THEREFORE, the parties hereto agree as follows:



1



ARTICLE 1

Definition



1.1



In this Agreement, unless the context otherwise requires:

1.1.1 “Act” means the Petroleum (Exploration and Production) Act Chapter 150 of

the Laws of Uganda as amended and in effect from time to time.

1.1.2 “Advisory Committee” means the Committee constituted pursuant to Article 5.

1.1.3 “Affiliated Company” means any entity directly or indirectly effectively

controlling or effectively controlled by, or under direct or indirect effective

common control with a specified entity. For the purposes of this definition

“Control”, when used with respect to any specified entity, means the power to

direct, administer and dictate policies of such entity (it being understood and

agreed that it is not necessary to own directly or indirectly fifty percent (50%)

or more of such entity’s voting securities to have control over such entity, but

ownership, direct or indirect, of fifty percent (50%) or more of such entity’s

voting securities shall automatically indicate control), and the terms

“controlling” and “controlled” have meanings corresponding to the foregoing.

1.1.4 “Agreement” means this instrument and the annexes attached hereto, including

any extensions, renewals or amendments thereof agreed to in writing by the

Parties.

1.1.5 “AlbertineGraben” means that geological entity within the Republic of Uganda

together with such contiguous area or areas of the Democratic Republic of

Conga which together are known collectively as the AlbertineGraben and

recognised as such by the international geological profession.

1.1.6 “Allowable Contract Expenditures” means those expenditures as so described

in Section 3 of Annex “C”.

1.1.7 “Appraisal Programme” means a programme carried out following one or

more Discovery(ies) of Petroleum for the purpose of delineating the Petroleum

Reservoirs(s) to which that discovery or these discoveries relate(s) in terms of

thickness and lateral extent and estimating the quantity of recoverable

Petroleum therein.

1.1.8 “Appraisal Well” means any Well drilled for purposes of an Appraisal

Programme.



2



1.1.9 “Associated Gas” means Natural Gas which is produced in association with

Crude Oil, and includes solution gas or gas cap gas, from a Petroleum

Reservoir recovered as gas at the surface by separation or other primary field

processes.

1.1.10 “Barrel” means a quantity consisting of forty-two (42) United States gallons,

liquid measure, corrected to a temperature of sixty degrees (60) Fahrenheit.

1.1.11 “Calendar Month” means any of the twelve (12) months of a Calendar Year.

1.1.12 “Calendar Quarter” means a period of three (3) consecutive Calendar Months

commencing with first day of January, April, July or October of each Calendar

Year.

1.1.13 “Calendar Year” means a period of twelve (12) Calendar Months according to

the Gregorian Calendar, starting with January 1st and ending with December

31st.

1.1.14 “Commercial Production” means production of Crude Oil or Natural Gas or

both and delivery of the same at the Delivery Point under a programme of

regular production and sale.

1.1.15 “Contract Area” means (a) on the Effective Date, the area described in Annex

A and shown on the map in Annex A; and (b) thereafter, the whole or any part

of such area which, at any particular time, remains subject to an Exploration

Licence granted to Licensee pursuant to Article 3 and/or subject to a

Production Licence granted to Licensee pursuant to Article 7.

1.1.16 “Contract Expenses” means Exploration Expenditures, Development and

Production Expenditures and Operating Expenses incurred by Licensee in

Conducting Petroleum Operations hereunder determined in accordance with

the Accounting and Financial Procedure described in Annex “C”.

1.1.17 “Contract Revenues” means the sum of all proceeds of sales of Petroleum and

monetary equivalent to the value of other dispositions of Licensee's share of

Petroleum produced and saved and not used in Petroleum Operations and any

other proceeds from Petroleum Operations hereunder.

1.1.18 “Contractor” means any person, company or entity employed by or on behalf

of the Licensee for the purpose of carrying out Petroleum Operations.

1.1.19 “Sub-contractor” means any person, company or entity employed by or on

behalf of a Contractor for the purpose of carrying out Petroleum Operations.



3



1.1.20 “Crude Oil” means any hydrocarbon which at atmospheric pressure and a

temperature of between 60 Fahrenheit and 113Fahrenheit is in a liquid state

at the wellhead or gas/oil separator or which is extracted from Natural Gas in a

plant, including distillate and condensate; and has been produced from the

Contract Area.

1.1.21 “Delivery Point” means the point at which Crude Oil passes through the intake

valve of the pipeline or tanker or truck or rail wagon at the terminal or refinery

in Uganda, or such other point which may be agreed to in writing by the

Parties. In respect of Natural Gas, the Delivery Point shall be such point as

may be agreed to in writing by the Parties.

1.1.22 “Development and Production Expenditures” means those expenditures as so

categorised in the Accounting and Financial Procedure described in Annex

“C”.

1.1.23 “Development Area” means an area constituted by a block that is, or by blocks

that are, subjected to a Petroleum Production Licence.

1.1.24 “Development Operations” has the meaning ascribed to it in the Act but does

not include operations beyond the Delivery Point.

1.1.25 “Development Plan” means a development plan referred to in Section 21 (3) of

the Act.

1.1.26 “Discovery” means a discovery of Petroleum within the meaning of the Act.

1.1.27 “Discovery Bonus” means a single, non-recoverable lump sum payment by the

Licensee to Government upon making a Discovery.

1.1.28 “Effective Date” means the date on which this Agreement is signed by all

Parties hereto.

1.1.29 “Exploration Licence” means the petroleum exploration licence referred to in

paragraph 3.1 and granted pursuant to Section 9 of the Act.

1.1.30 “Exploration Expenditures” are all necessary, appropriate and economical,

direct and allocated indirect costs incurred in the search for petroleum and

appraisal of Discoveries in the Contract Area as so categorised in the

Accounting and Financial Procedures described in Annex C.

1.1.31 “Exploration Period” means the Exploration Period referred to in paragraph

3.1.

1.1.32 “Exploration Well” means a Well, other than an Appraisal Well, drilled in the

course of Exploration Operations (as defined in the Act), conducted hereunder.



4



1.1.33 “Good Oilfield Practices” means all of those things that are generally accepted

in the international petroleum industry as good, safe and efficient in the

carrying out of Exploration or, as the case may be, Development Operations

and that an experienced, reasonable and prudent operator, engaged in a similar

activity under similar circumstances elsewhere, would use.

1.1.34 “Government” means the Government of the Republic of Uganda.

1.1.35 “Government Production Share” has the meaning ascribed to it in Article 13.

1.1.36 “Gross Negligence or Willful Misconduct” means any act or failure to act

(whether sole, joint or concurrent) by the senior supervisory personnel of

Licensee which was intended to cause, or which was in reckless disregard of

or wanton indifference to, harmful consequences such person knew, or should

have known, such act or failure would have on the safety or property of

another person or entity.

1.1.37 “Income Tax Act” means the Income Tax Act Chapter 340 of the Laws of

Uganda 2000 as amended and in effect from time to time.

1.1.38 “Joint Venture Agreement” means an agreement, not inconsistent herewith,

between Licensee and the nominee of the Government to be negotiated and

executed pursuant to paragraph 11.1

1.1.39 “Joint Operations” means operations in or relating to a Development Area

carried out under a Joint Venture Agreement.

1.1.40 “Joint Operating Agreement” means the contract between the Licensees, and

its appendices and amendments, relating to the joint conduct of Petroleum

Operations.

1.1.41 “Joint Venture Assets” has the meaning ascribed to it in paragraph 11.2a.

1.1.42 “Joint Venture Interest” has the meaning ascribed to it in paragraph 11.2b.

1.1.43 “Licence” means an Exploration Licence or a Production Licence, as the case

may be.

1.1.44 “Licence Area” means an area over which an exploration or production licence

has been issued.

1.1.45 “Licensee” means Tullow Uganda Limited and includes any other person,

company or entity to whom the said company or any of its approved assignees

or



5



successorsof all or part of its Participating Interests assign directly a

Participating Interest in whole or in part in the Exploration Licence or

Production Licence.

1.1.46 “Market Price” has the meaning ascribed to it in paragraph 15.1.1.

1.1.47 “Maximum Efficient Rate” means the maximum rate of production of Crude

Oil from a Development Area, without excessive decline of production or

excessive loss of reservoir pressure, in accordance with good oilfield practice

and the provisions of paragraph 7.8.

1.1.48 “Natural Gas” means both Associated Gas and Non-Associated Gas and all its

constituent elements produced from any Well in the Contract Area.

1.1.49 “Nominee” means a body corporate established by or under a law in force in

the Republic of Uganda wholly owned or controlled by the Government

pursuant to Article 11, designated for the purpose of holding Joint Venture

Interest in the Joint Venture Assets attributable to a Development Area, and

includes an approved assignee of such body corporate provided such assignee

satisfies the requirements of Article 11.

1.1.50 “Non-Associated Gas” means Natural Gas other than Associated Gas.

1.1.51 “Operating Expenses” means those expenses as so categorised in the

Accounting Procedure described in Annex “C”.

1.1.52 “Operator” means the Licensee charged by the Joint Operating Agreement

with the responsibility of carrying out the Petroleum Operations under the

terms of this Agreement.

1.1.53 “Operatorship” means responsibility assigned to person, company or entity to

conduct Petroleum Operations on behalf of the Licensee in the Licence Area.

1.1.54 “Participating Interest” in relation to any Licence held by Licensee hereunder

means an undivided and unencumbered interest in the rights and obligations

under the Licence.

1.1.55 “Participation Share of Production” has the meaning ascribed to it in paragraph

11.3.

1.1.56 “Party”, or “Parties” means the signatories to this Agreement and any

successors or assignees thereof, either individually or collectively, as the case

may be.

1.1.57 “Petroleum” means “Crude Oil or Natural Gas”.

1.1.58 “Petroleum Operations” means Exploration Operations,

Operations and production operations.



6



Development



1.1.59 “Pipeline Company” means the company referred to in Article 16.

1.1.60 “Production Licence” means a petroleum production licence granted pursuant

to Section 22 of the Act and the provisions of this Agreement.

1.1.61 “Regulations” means “The Petroleum Exploration and Production (Conduct of

Exploration Operations) Regulations, 1993”.

1.1.62 “Seaboard Terminal” means a terminal at any seaport agreed to by the parties

at which crude oil is lifted into the tankers for export.

1.1.63 “Signature Bonus” means a single, non-recoverable lump sum payment by the

Licensee to Government upon the granting of the Exploration Licence.

1.1.64 “Tax Year” shall mean a period of twelve (12) consecutive Calendar Months

commencing on 1st January and ending on the following 31st December,

according to the Gregorian Calendar.

1.1.65 “Uganda Shilling” means the lawful currency of the Republic of Uganda.

1.1.66 “USD” or “US$” means “United States Dollars”

1.1.67 “Venture Assets” means the property whether real or personal owned or

acquired by Licensee in connection with Petroleum Operations hereunder and

includes the Exploration Licence and any Production Licences granted

hereunder.

1.1.68 “Work Programme and Budget” means an itemised statement of Petroleum

Operations to be carried out in the Contract Area and a detailed breakdown of

the Contract Expenses associated therewith, including both capital and

operating budgets, all in a form acceptable to the Government.

1.2



Unlessotherwise defined herein, capitalised terms shall have the meaning

ascribed to them in the Act.



7



ARTICLE 2

Agreement



2.1



This Agreement constitutes an agreement made under Section 3 of the Act.



8



ARTICLE 3

Responsibilities and Grant of Rights



3.1



Contemporaneously herewith, Licensee is granted, under and in accordance with the

Act, an Exploration Licence in respect of the Contract Area in the form set forth in

Annex “A”, which shall take effect on the Effective Date. The said Exploration

Licence shall have a term not exceeding six (6) Calendar Months counted from the

Effective Date. There shall be no renewal for this Exploration Licence.



3.2



Licensee shall, subject to the Act and Regulations and the terms and conditions herein

set forth, have the exclusive right to conduct Petroleum Operations within the

Contract Area for the term of the Exploration Licence and any Production Licence

granted to it in accordance with all applicable legislation and provisions of this

Agreement.



3.3



Licensee, on giving to the Government not less than ninety (90) days notice in writing

(the “Surrender Notice”), may:

3.3.1 Surrender its rights and be relieved of its obligations in respect of the whole of

the Contract Area if its minimum work and financial obligations under Article

4 have been fulfilled in accordance with Section 52 of the Act;

3.3.2 in respect of the Exploration Licence, elect to surrender its rights in respect of

the whole of the Contract Area and be relieved of its minimum work and

financial obligations under Article 4 at any time within sixty (60) days

following the date on which Licensee completes:

a)



the interpretation of seismic works exceeding those provided under

paragraph 4.2.1 and actually being executed; or



b)



the drilling, testing or plugging of any Exploration Well actually being

executed at the end of the preceding Exploration Period in which

event(s) the Surrender Notice shall be reduced to third (30) days; and



9



3.3.3 at any time after the grant of the Exploration Licence, surrender its rights and

be relieved of its obligations in respect of any block or blocks forming part of

the Contact Area provided, however, that no surrender by Licensee of its rights

over any part of the Contract Area shall relieve Licensee of its obligation to

satisfy the minimum work and financial obligations referred to in Article 4

hereof in respect of the Exploration Period during which it gives the Surrender

Notice.

3.4



The Government reserves the right to grant licences to other legal persons to prospect

for, explore for and mine minerals other than petroleum within the Contract Area, and

further reserves to itself the right to so prospect, explore and mine directly. Licensee

shall use its best efforts to avoid obstruction or interference with such Licensees’ or

Government operations and similarly the Government shall use its best efforts to

ensure that its own operations or those of third parties do not obstruct or interfere with

Licensee’s Petroleum Operations within the Contract Area.



3.5



In the event that Licensee discovers minerals other than Petroleum in the Contract

Area which may be of economic value, it shall report such discovery to the

government within thirty (30) days of the making of such discovery and shall supply a

sample of such minerals to the Government.



3.6



If more than one person or entity comprises Licensee, the duties and obligations of the

persons or entities constituting Licensee hereunder shall be joint and several.



3.7



The Government shall in as far as is permitted by the law assist the Licensee to obtain

rights of ingress to and egress from the Contract Area and any petroleum facilities

used in Petroleum Operations and to obtain rights of way and rights to construct

related Petroleum Operations facilities as may be reasonably required by the Licensee.

The Licensee shall meet all the associated costs and expenses.



10



ARTICLE 4

Exploration Work Programme



4.1



Licensee shall commence Exploration Operations in the Contract Area within two (2)

Calendar Months of the Effective Date.



4.2



In discharge of its obligation to carry out Exploration Operations in the Contract Area,

Licensee shall, in accordance with the provisions of this Article, carry out the

following minimum work programmes and shall expend not less than the

corresponding sums specified.

4.2.1 Minimum Work Programme

Preliminary geological and geophysical studies.

The drilling of one (1) well.

4.2.2 Minimum Exploration Expenditure



US$ 3.50 million



Preliminary geological and geophysical studies US$500,000

Drilling

4.3



US$ 3,000,000



For the purpose of this Article, Exploration Wells shall, except as provided in

paragraph 4.2, be drilled on a location determined by Licensee and the Government

and to a depth necessary for the evaluation of the sedimentary section established by

the available data as the deepest objective formation and consistent with Good

Oilfield Practices, unless before reaching the aforementioned depth:

a)



basement is encountered;



b)



further drilling would present a foreseeable danger which cannot reasonably be

contained;



c)



impenetrable formations are encountered;



d)



significant hydrocarbon-bearing formations are encountered which require

protecting, thereby preventing such depth from being reached.



In such circumstances, the drilling of any Exploration Well may be terminated at a

lesser depth and such Well shall, except where the circumstances described in

subparagraphs



11



(a), (b) and (c) immediately above occur before Licensee has attained two thirds of the

target depth provided for in the drilling programme, relating to such well, be deemed

to have satisfied the minimum depth criteria provided for hereunder. In all other

circumstances in which a Well is terminated at a lesser depth, Licensee shall have the

option to either (i) drill a substitute Exploration Well or (ii) pay to the Government the

amount by which the drilling budget for such well on a dry hole basis, pursuant to

paragraph 4.2 exceeds actual expenditures incurred in the drilling thereof.

For the purpose of this paragraph 4.3, the term “Basement” shall mean the

geological basement below which hydrocarbons cannot be found and produced.

4.4



Compliance with the required minimum Exploration Expenditures shall not relieve

Licensee of its obligation to comply with the required minimum Work Programme

nor shall compliance with the required minimum Work Programme relieve Licensee

of its obligation to comply with the required minimum Exploration Expenditures.



4.5



The Exploration Licence issued to Licensee pursuant to Article 3 shall be on terms

and conditions relating to Minimum Work Programmes and Exploration Expenditures

which correspond to the obligations of Licensee under this Article and it is

accordingly understood and agreed that any discharge by Licensee of its obligations

under this Article will discharge the minimum work and expenditure obligations of

Licensee in respect of the Exploration Licence issued pursuant to Article 3 and the

terms and conditions of such Licence shall be drawn accordingly.



4.6



(a)



On or before the Effective Date, the Licensee shall provide a Performance

Security in the form of Insurance Bond or Bank Guarantee in the form set

forth in Annex D-I, and amounting to United States Dollars five hundred

thousand (USD 500,000.00) which shall, inter alia, guarantee the payment by

Licensee of the sums, if any, due and payable to the Government pursuant to

paragraph 4.6(b) and (c) hereunder.



(b)



If, upon the expiration of the Exploration Licence, or upon the date of

termination of this Agreement, or upon surrender of the entire Contract Area

by Licensee pursuant to paragraph 3.3, whichever first occurs, Licensee has

not expended for Exploration Operations sums (including any sums previously

paid pursuant to paragraph 4.6(c)) at least equal to the total minimum

Exploration Expenditures required hereunder for the period in question, the

shortfall amount corresponding to the unexpended minimum Exploration

Expenditures shall be paid by Licensee to the Government.



(c)



If, at the end of the term of the Exploration Licence Licensee has not expended

for Exploration Operations sums at least equal to the minimum Exploration

Expenditures required hereunder, the shortfall amount corresponding to the

unexpended minimum Exploration Expenditures shall be paid by the Licensee

to the Government.



12



4.7



For the purpose of this Agreement, and without prejudice to their recoverability as

Contract Expenses for other purposes under this Agreement, expenditure by Licensee

on the following shall not be treated as Exploration Expenditures for the purpose of

satisfying the minimum Exploration Expenditure obligations set out in paragraph 4.2:

(a)



any Appraisal Programme required to discharge Licensee’s obligations under

Section 18(1)(b) of the Act;



(b)



the value of stock items listed in inventory; provided, however, that any loss

on the disposal of any such stock item, as well as the book value of those stock

items (if any) which become the property of the Government pursuant to

paragraph 22.2, shall be treated as Exploration Expenditure obligations set

forth in paragraph 4.2;



(c)



property purchase or rental in connection with Petroleum Operations;



(d)



the training of Ugandan nationals pursuant to Article 21 of this Agreement;

and



(e)



any annual charges in respect of surface rentals due in accordance with Article

29 of this Agreement.



13



ARTICLE 5

Advisory Committee



5.1



Not later than thirty (30) days after the Effective Date, a Committee shall be

established by the Government and Licensee to be known as the Advisory Committee.

The Advisory Committee shall consist of four (4) members, two (2) of whom shall be

appointed by the Government and two (2) by Licensee. The Chairman of the Advisory

Committee shall be designated by the Government from among the members it has

appointed. The Government and Licensee shall also designate alternate members and

shall have the right to designate an alternate member at any time, which right shall be

exercised by written notification addressed to the other Party hereto. In the case of

absence or incapacity of a member of the Committee, his alternate shall automatically

assume the rights and obligations of the absent or incapacitated member.



5.2



All meetings of the Advisory Committee shall be held in Kampala or such other place

in Uganda or elsewhere as may be unanimously agreed by the members of the

Committee. Ordinary meetings of the Advisory Committee shall be held at least twice

a year during the Exploration period and at least once a Calendar Quarter following

the grant of the first Production Licence. Special meetings of the Advisory Committee

may be called on reasonably notice by either Party for the purposes of reviewing any

major development or problems in Petroleum Operations, and recommending

appropriate action to be taken. Meetings of the Committee shall require a quorum of

all four (4) members. The secretaryship of the Advisory Committee shall be entrusted

to Licensee. Votes at the Advisory Committee meetings shall only be made on matters

included in the respective agenda, unless the members of the Advisory Committee

unanimously agree otherwise. Any member of the Committee may vote by written

and signed proxy held by another member. The Government and Licensee shall have

the right to bring expert advisors to any meeting of the Committee to assist in the

discussion of technical and other matters requiring expert advice provided that they

obtain a pledge of confidentiality from the said experts. It is understood that the

experts giving assistance to the Government must not demonstrate any links with oil

companies which are competing against the interests of the Licensee.



5.3



Without prejudice to the rights and obligations of Licensee for the conduct of the

Petroleum Operations carried out hereunder, the Advisory Committee shall have the

following functions:

5.3.1 to review and approve:



14



(i)



any proposed Exploration Operations contained in the Work

Programmes and Budgets, or any amendment thereto, presented thereto

by Licensee under Article 6; and



(ii)



any Appraisal Programmes, or any amendment thereto, presented thereto

by Licensee under Article 7 until such time as the provisions of

paragraph 5.3.2 are applicable;



5.3.2 at any time after the date on which an application for a Production Licence is

made by Licensee in respect of any part of the Contract Area, and for as long

as there is production from the Contract Area, to review and approve, subject

to such reasonable modifications as the Advisory Committee may consider

necessary, any Appraisal Programmes, or any material amendments thereto,

presented to the Committee by Licensee under Article 7;

5.3.3 to review and approve:

(i)



Work Programmes and Budgets, or any material amendment thereto,

presented to the Advisory Committee by Licensee which relate to

Development Operations; and



(ii)



drilling programmes and related budgets submitted to the Advisory

Committee by Licensee pursuant to, and subject to the conditions

provided in Article 4 in respect of Exploration Wells;



5.3.4 to review and approve the production forecast statements prepared by Licensee

prior to their presentation to the Government pursuant to paragraph 7.8;

5.3.5 to ensure that the accounting of costs and expenses and the maintenance of

operating records and reports for the Petroleum Operations are made in

accordance with this Agreement and the accounting principles and procedures

generally accepted in the international petroleum industry; and



15



5.3.6 to review and make recommendations to Licensee with respect to any

proposals made by Licensee concerning the application for the surrender or

relinquishment of any part of the Contract Area.

5.4



Decisions of the Advisory Committee pursuant to paragraph 5.3 shall be made

unanimously through consultation. All decisions made unanimously shall be equally

binding upon the Government and Licensee. Without limitation to the foregoing, any

Development Plan recommend by the Advisory Committee shall be deemed to have

met the requirements of Section 21(1) of the Act. Regarding the matters on which

agreement cannot be reached, the Government and Licensee may convene another

meeting and shall attempt, in good faith, to find another solution. However, if the

Advisory Committee fails thereafter to reach a decision on the matters specified in

paragraph 5.3 above;

(i)



within thirty (30) days of the date of the Advisory Committee meeting at

which Licensee’s first submission in respect of the matters specified in

paragraphs 5.3.1, 5.3.5 and 5.3.6 above is considered; or



(ii)



within forty-five (45) days of the date of the Advisory Committee meeting at

which Licensee’s first submission in respect of the matters specified in

paragraphs 5.3.2, 5.3.3 and 5.3.4; is considered;



the Parties may refer for matter for determination in accordance with paragraph 26.2.

The determination in accordance with paragraph 26.2shall be final and with this

determination the programme, budget or forecast shall be deemed to have been

approved by the Advisory Committee as determined, except that Licensee, may, in the

case of a determination made concerning matters specified in paragraph 5.3.2, within

thirty (30) days of receipt of such determination notify the Government that the

Discovery to which such programme relates is no longer considered to be of

commercial or potential commercial interest, as the case may be, within the meaning

of proviso (i) to Section 18(1)(b) of the Act. If Licensee so notifies the Government,

the provisions of Section 19 of the Act shall apply.

Licensee’s proposal shall prevail provided that such proposal is not inconsistent with

the relevant provisions of this Agreement and in particular, the minimum work and

expenditure obligations specified in Article 4.

5.5



All costs and expenses associated with the activities of the Advisory Committee

which are borne by Licensee may be treated as Contract Expenses.



16



ARTICLE 6

Work Programmes and Budgets



6.1



So long as any Exploration Licence or Production Licence issued to Licensee herein

remains in force, within thirty (30) days from the Effective Date , Licensee shall

prepare and submit to the Advisory Committee for its review and, where required

pursuant to Article 5, approval, a detailed Work Programme and Budget, setting forth

the Exploration Operations and/or Development Operations which Licensee proposes

to carry out during the licence period and the estimated cost thereof. The Work

Programme and Budget for the period from the date of effectiveness of the

Exploration Licence to the end of the said licence shall be presented to the Advisory

Committee within thirty (30) days of the Effective Date for review in accordance with

paragraph 5.3.1.



6.2



A Work Programme and Budget submitted to the Advisory Committee during the

Exploration Period pursuant to this Article and every revision or amendment thereof

shall be consistent with the requirements set out in Article 4 relating to minimum

work and expenditure for the Exploration Period within which the Work Programme

and Budget will fall.



6.3



After giving notice to the Advisory Committee, Licensee may amend any aspect of

the Work Programme or Budget relating to Exploration Operations submitted to the

Advisory Committee provided such amendment is consistent with Licensee’s

obligations under Article 4. Any notice given pursuant to this paragraph shall state the

reasons why, in the opinion of Licensee, an amendment is necessary or desirable and

the views and recommendations of the Advisory Committee with respect to any such

amendment shall be given due consideration by Licensee. In all other cases where

Licensee wishes to amend the Work Programme and Budget, the amendment shall be

referred to the Advisory Committee for its review and approval, which approval shall

not be unreasonably withheld, before Licensee may proceed with its operations on the

basis of such amended Work Programme and Budget.



17



ARTICLE 7

Discovery, Development and Production



7.1



Where, pursuant to Section 18 of the Act, notice has been given to the Government of

a Discovery in the Contract Area, Licensee shall forthwith inform the Government of

the steps it proposes to take to satisfy the requirements of Section 18(1)(a)(iii) of the

Act.



7.2



Unless, following a Discovery by Licensee in the Contract Area, Licensee gives in

respect of such Discovery a notice to the Minister for the purpose of paragraph (i) of

the provision to Section 18(1)(b) of the Act or unless the provisions of paragraph (ii)

of that proviso are otherwise applicable, Licensee shall promptly after the technical

evaluation of the test results relating to such Discovery has been completed, prepare

and submit for the consideration of the Advisory Committee its proposals for an

Appraisal Programme to meet its obligations as Licensee under the Act.

Notwithstanding the foregoing, in the event that Licensee notifies the Government

within thirty (30) days following the date on which its technical evaluation of the test

results relating to a Discovery has been submitted to the Government, the said

Discovery does not in and of itself warrant immediate appraisal and provides

reasonable justification therefor, an exemption from the requirements of Section

18(1)(b) of the Act may be granted by the Minister, pursuant to paragraph (ii) of the

proviso to that Section, for so long thereafter as Licensee is carrying out continuous

Exploration Operations in the Contract Area.



7.3



As soon as the Advisory Committee has, pursuant to paragraph 5.3.2, reviewed and

approved an Appraisal Programme submitted by Licensee as aforesaid, Licensee shall

promptly thereafter commence implementation thereof.



7.4



(i)



If during the term of any Exploration Licence, Licensee makes a Discovery of

Petroleum in the Contract Area which alone, or in conjunction with other

discoveries previously made in the Contract Area might be developed and

brought into early production with a view to satisfying the internal

consumption requirements of Uganda, the Government may notify Licensee

accordingly upon which the Parties shall meet to determine whether the

development of the said Discovery or Discoveries would be economically and

technically feasible.



(ii)



In determining whether the Discovery or Discoveries as the case may be is

(are) economically and technically feasible, the Parties shall consider



whether an early production scheme would, inter alia, jeopardise the

subsequent recovery of Petroleum from the Petroleum Reservoir(s), create a

health or safety risk or would otherwise involve a departure from the standards

of Good Oilfield Practice.



18



(iii)



In the event that the Parties determine the Discovery or Discoveries as the case

may be to be economically and technically feasible and agree upon the terms

and conditions for the implementation of an early production scheme

(including offtake arrangements), a Production Licence shall be granted to

Licensee in respect of the Discovery Area(s) subject thereto and thereafter

Licensee shall complete the facilities necessary for the Government to take

delivery of production from the said Discovery Area(s) ex-field and all costs

associated with the taking of delivery therefrom shall be for the Government’s

account.

The production shall be sold at Market Price as computed in accordance with

Article 15 and payment shall be made in United States Dollars within sixty(60)

days following the end of the Calendar Month in which deliveries are made.

It is understood, however, that Licensee shall not be required to produce crude

oil at a rate higher than the Maximum Efficient Rate in connection with the

scheme.



(iii)



Any crude oil production delivered to the Government pursuant to the

provisions of this paragraph 7.4 (iii) shall serve to reduce Licensee’s

obligation to otherwise supply crude oil for the internal consumption

requirements of Uganda pursuant to paragraph 18.1 and will not prejudice

Licensee’s rights under paragraph 7.8 thereafter in respect of the subsequent

grant of a Production Licence in relation to a wider Discovery Area(s) which

includes the said Discovery Area(s). It is understood, however, that crude oil

production shall continue to be made available to the Government in

accordance with the terms and conditions agreed to in 7.4 (iii) above.



(iv)



Nothing in this Article shall require Licensee to undertake the completion of

the field facilities required for the early production scheme in the event that

Licensee reasonably determines that such scheme (including the terms and

conditions for the implementation thereof) is not economically or technically

feasible.



7.5



Before applying for a Production Licence pursuant to Section 20 of the Act, Licensee

shall consult with the Advisory Committee in connection with the preparation of a

Development Plan to be submitted by Licensee to the Minister in accordance with

Section 21 of the Act.



7.6



If the Parties are unable to settle amicably any dispute or difference as to whether the

Development Plan meets the requirements of Section 21 of the Act within twelve (12)

Calendar Months of the date of the Minister’s aforesaid notification, either Party may

refer the matter to a sole expert pursuant to Article 26.

If, as a consequence of the said award, Licensee determines that the development

project (in respect of which the Development Plan was submitted) ceases to be

commercially



19



attractive, Licensee may so notify the Government in writing within six (6) Calendar

Months of the date of said award, whereupon the Government shall have the right to

require Licensee to relinquish its rights with respect to the Discovery Areas which are

the subject of such Development Plan and to forfeit its rights to any subsequent

production therefrom.

7.7



Upon submission by Licensee of a Development Plan that meets the requirements of

Section 23 of the Act together with the application for a Production Licence, the

Minister shall promptly issue to Licensee a Production Licence in the form attached

hereto in Annex “B-II” covering the Development Area for a period not exceeding

twenty five (25) years counted from its date of issuance.

A Production Licence shall be renewable upon application, by Licensee in the

prescribed manner, for a term equal to the period between the initial grant of such

Production Licence and the commencement of Commercial Production, but in no

event exceeding five (5) years. The Minister shall not impose conditions for the

granting or renewal of a Petroleum Production Licence under Sections 22(a) and 28 of

the Act which are inconsistent with the terms of this Agreement or the requirements

of the Act.



7.8



Licensee shall use its best efforts to produce Crude Oil from each Development Area

at the Maximum Efficient Rate. The Maximum Efficient Rate of production for Crude

Oil and the production rate for Non-associated Gas shall be estimated in the

Development Plan for each such area.

Such rates shall be reviewed annually at the time of submission by Licensee of the

annual Work Programme and Budget to the Advisory Committee pursuant to

paragraph 5.3.3 and revised, if necessary, by mutual agreement.



7.9



Not less than sixty (60) days prior to the beginning of each Calendar Year following

the commencement of Commercial Production, Licensee shall prepare and furnish to

the Government for its review and approval (which approval shall not be

unreasonably withheld) a forecast statement setting forth by Calendar Quarter, the

total quantity of Crude Oil (by quality, grade and gravity) and Natural Gas that

Licensee estimates can be produced, saved and transported hereunder from each

Development Area during such calendar year in accordance with Good Oilfield

Practices. Licensee shall endeavour to produce in each Calendar Year the forecast

quantity.



7.10



In the event that Licensee wishes to establish a refinery to refine the Crude Oil and

Natural Gas that the Licensee estimates can be produced, Government may grant the

Licensee the right to establish such refinery.



20



ARTICLE 8

Records, Reports, Data and Inspection

8.1



Licensee shall prepare and maintain accurate and current records of Petroleum

Operations and its activities in the Contract Area hereunder. The accounting records

will be maintained in accordance with accepted international petroleum industry

practices and standards. Licensee shall furnish the Government in conformity with the

Act and this Agreement, and as the Government may reasonably require, information,

reports and data concerning its activities and operations under this Agreement.



8.2



The Government and its duly authorised representatives shall have full and complete

access to the Contract Area at all reasonable times with a right to observe Petroleum

Operations and upon at least thirty (30) days advance written notice to the Licensee

shall have the right to inspect all assets, records and Data owned or maintained by

Licensee relating to Petroleum Operations and this Agreement. In doing so, the

Government and its representatives shall not unduly interfere with Licensee’s

Petroleum Operations. Licensee shall provide the Government on a daily basis with

copies of any Data acquired in the Petroleum Operations (including geological and

geophysical reports, logs and well surveys) and information and final interpretations

of such Data in the Licensee’s possession that are acquired during Petroleum

Operations. However, the Government and its representatives may make a reasonable

number of surveys, drawings, tests and copies for the purpose of implementing this

Agreement. In so doing, the Government and its representatives shall be entitled to

make reasonable use of the equipment or instruments of Licensee provided that no

damage to the equipment or instruments or interference with the Petroleum

Operations hereunder shall result after such use. The Government and its

representatives shall be given reasonable assistance by Licensee for such functions,

and Licensee shall afford to the Government and its representatives all facilities and

privileges afforded to its own personnel in the field including the use of office space

and housing free of charge.



8.3



Licensee shall save and keep for the duration of this contract a representative portion

of each sample of cores, cuttings and fluids taken from all Wells drilled which shall

be forwarded to the Government or its representatives at such time and in the manner

directed by the Government. All cores and samplesacquired by Licensee shall be

available for inspection by the government or its representatives at all reasonable

times. Notwithstanding the above, Operator shall supply to the Commissioner,

Petroleum Exploration and Production Department a telefaxed or emailed summary of

field geological, and/or geophysical operations from any field geological or

geophysical survey being carried out including but not limited to: details of locations

sampled, foot traverses measured, kilometers of magnetic, gravity, seismic data

acquired, etc.; an on a daily basis a telefax / email containing details of drilling

operations carried out during the



21



previous 24 hours including but not limited to a summary of lithologies penetrated,

encountered tops encountered, gas and oil shows, tests, cores and logging runs, future

plans (including abandonment plans at least 24 hours prior to inception) and on a

regular basis, and at any rate not later than four months after the conclusion of any

geological, geophysical or drilling operation, reproducible copies and digital tapes of

all surface logs, magnetic gravity, seismic and other records as well as processed data,

and all subsurface information including but not limited to geological, electrical,

mechanical and other logs, surveys, reports, records, from a well on the geology and

drilling operations carried out as well as final well reports and final completion logs,

together with one envelope of washed and dried ditch cuttings and one cloth bag of

unwashed ditch cuttings at all sampling intervals and one half of each core.

8.4



Notwithstanding paragraph 8.3 above, Licensee shall be freely permitted to export

samples for purposes of testing and analysis. Originals of technical data and records

can be exported with the permission of the Government provided that an exact copy

of that data, on a storage media similar to that being exported, is maintained in the

Republic of Uganda and provided that such exported records and data shall be

repatriated to the Republic of Uganda.



8.5



In addition to the material stipulated in paragraph 8.3, supra, Licensee shall provide,

in accordance with the standards and practice of the Petroleum Industry, at no cost to

the Government, in an appropriate and reproducible form and in a prompt and timely

manner all maps, sections, profiles and other representative original and

interpretational geophysical, geological or engineering data (“Data”). Such Data

(which shall include all magnetic tapes and any other storage media, whether raw,

processed or reprocessed) shall be forwarded to the Government or its representatives

in the prescribed manner or otherwise at such time and in the manner directed by the

Government.



22



Subject to the provisions of paragraph 8.6, all original data resulting from Petroleum

Operations are the property of the Republic of Uganda, including, but not limited to,

geological, geophysical, petrophysical, engineering, well logs, magnetic tapes, cuts of

core and cutting samples, production data and completionstatus reports and any other

data which, the Licensee may compile during the term hereof, including all reports,

analyses, interpretations, maps and evaluations thereof prepared by the Licensee and

any sub-licensees or consultants to the Licensee or by Affiliated Companies, and

cuttings of all samples that have been obtained or compiled during the term hereof (in

this Agreement referred to as “Data”).

8.6



Except as provided in paragraphs 8.7 and 8.8, all Data submitted to the Government

by Licensee shall be kept confidential and not reproduced or disclosed to third parties

by any party to this Agreement except, in the case of disclosure by the Licensee, with

the prior written consent of the Government or, in the case of disclosure by the

Government prior to the relinquishment of the area to which they relate, with the prior

written consent of Licensee, which consents (whether of the Government or Licensee)

shall not be unreasonably withheld or delayed.



8.7



The provisions of paragraph 8.6 shall not prevent disclosure by:

(i)



Licensee to an Affiliated Company, its home government or any department,

agency or instrumentality thereof, if required by law, recognised stock

exchanges on which shares of the Licensee or its Affiliated Companies are

traded, financial institutions and professional advisers and arbitrators and

experts appointed pursuant to Article 26 of this Agreement;



(ii)



Licensee to bona fide prospective assignees of a Participating Interest or to a

corporation with which Licensee is conducting bona fide negotiations directed

towards a merger or consolidation, upon fifteen (15) days prior written notice

to the Government indentifying the parties to which disclosure will be made;

provided, however, that the Government may veto any such disclosure where a

party to which such disclosure is proposed is in bona fide discussions with the

Government regarding rights to conduct Petroleum Operations in Uganda;



(iii)



The Government to any agency of the Government, financial institution or

person acting as a consultant or professional adviser to the Government, and

arbitrators and experts appointed pursuant to Article 26 of this Agreement;



(iv)



The Government for statistical purposes or in connection with award of new

acreage, and



23



(v)



The Licensee or one or more of its Affiliated Companies under Applicable

Law or by a government order, decree, regulation or rule of any recognized

stock exchange on which it or its Affiliated Company’s shares are listed.



All Data disclosed to third persons shall be disclosed on terms, which to the extent

possible ensure that the same are treated as confidential by the recipient for so long as

such Data remains subject to the confidentiality undertakings specified in paragraph

8.6.

8.8



Without prejudice to the above provisions, the Government may provide data and

information, that may come into its possession and may be relevant to enable the

Licensee carry out its exploration activities under this Agreement. The Data shall be

treated with confidentiality and shall not be disclosed to third parties without the

written consent of Government.



8.9



None of the Parties hereto shall be bound by the confidentiality undertaking set forth

in paragraph 8.6 with respect to any Data which are or become in the public domain

through no fault of such Party or which were already known by such Party before the

Effective Date or which became known to such Party other than by reason of a breach

of the undertakings in paragraph 8.6.



8.10



Licensee shall disclose to Government the technology necessary for the evaluation

and understanding of any raw data or processed data resulting from Licensee’s work

in the Contract Area.



24



ARTICLE 9

Bonuses



9.1



Upon the signing of this Agreement Licensee shall pay to Government a sum of

United States dollars three hundred thousand (US$300,000.00) as Signature Bonus.



9.2



Upon declaration of any discovery made pursuant to the Exploration Licence,

Licensee shall pay to Government a sum of United States dollars two million

(US$2,000,000) as Discovery Bonus.



25



ARTICLE 10

Royalty and Additional Royalty



10.1



Royalty

10.1.1 In respect of the requirements of Section 47 of the Act, Licensee shall pay to

Government the following Royalty on the Gross Total Daily Production in

Barrels of oil per day (BOPD) for each Contract Area, such Gross Total Daily

Production defined as the total output of crude oil (including liquid petroleum

gas) less all water and sediments produced and all amounts of hydrocarbons

re-injected into the Petroleum Reservoir.

Gross Total Daily Production (BOPD)



Royalty



(i)



Where the production does not exceed 2,500



5%



(ii)



Where the production is

higher than 2,500 but does not exceed 5,000



7.5%



(iii) Where the production is higher

than 5,000 but does not exceed7,500



10%



(iv) Where the production exceeds7,500



12.5%



10.1.2 The Royalty stipulated in paragraph 10.1.1 shall be received by Government

on a monthly basis whether in kind or in cash depending on Government’s

preference. Government shall have the right to receive Royalty in cash US

Dollars, on a Monthly basis, notifying the Licensee of its choice thirty (30)

days in advance. If such notification is not made by Government, the Royalty

shall be collected by Government in kind at the point of collection.

10.1.3 Royalty shall be calculated on a daily basis on an incremental basis and not on

total daily production.

10.1.4 The BOPD calculation shall be done monthly on the basis of daily production.

10.1.5 Save for the Additional Royalty referred to in Article 10.2.1(B), Royalties on

gas (Gas Royalty) will be negotiated upon the discovery of gas.



26



10.2



Additional Royalty

10.2.1 (A) Licensee shall pay to Government the following Additional Royalty as a

percentage of the value of the recovered reserves on the basis of Gross Total

Daily Production in Barrels of oil equivalent per day (BOEPD) for each

Contract Area, such Gross Total Daily Production defined as the total output

of crude oil (including liquid petroleum gasbut excluding gas which is

provided for Article 10.2.1(B)) less all water and sediments produced and all

amounts of hydrocarbons re-injected into the Petroleum Reservoir.

Recovered Cumulative Petroleum (Million Barrels)Additional Royalty

(i)



(ii)



(iii)



(iv)



(v)



(vi)



Where the recovered cumulative Petroleum does not

exceed 50



2.5%



Where the recovered cumulative Petroleum is higher

than 50 but does not exceed 100



5%



Where the recovered cumulative Petroleum is higher

than 100 but does not exceed 150



7.5%



Where the recovered cumulative Petroleum is higher

than 150 but does not exceed 250



10%



Where the recovered cumulative Petroleum is higher

than 250 but does not exceed 350



12.5%



Where the recovered cumulative Petroleum is higher

than 350



15%



(B) Licensee shall pay to Government an Additional Royalty on gas which is

sold to the local market or exploited for export (Sales Gas). Such Additional

Royalty on Sales Gas shall be the percentage shown below and shall be

calculated by reference to the volume of Sales Gas sold by Licensee for each

Contract Area.

Recovered Sales Gas

(i)



(ii)



Additional Royalty



Where the recovered Sales Gas does not

exceed300 billion Cubic Feet (bcf)



2.5%



Where the recovered cumulative Sale Gas is higher

Than300bcfbut does not exceed 600 bcf



5%



27



(iii)



(iv)



(vii)



Where the recovered cumulative Sales Gas is higher

than600bcf but does not exceed 900 bcf



7.5%



Where the recovered cumulative Sales Gas is higher

than900bcf but does not exceed 1.5 trillion

Cubic Feet (tcf)



10%



Where the recovered cumulative Sales Gas is higher

than1.5tcf but does not exceed 2 tcf



12.5%



(viii) Where the recovered cumulative Sales Gas is higher

than2tcf



15%



and Cubic Feet shall mean the volume of gas that occupies one (1)

cubic foot of space as measured at a temperature of sixty degrees

Fahrenheit (60F) and at the absolute pressure of fourteen decimal six

nine six (14.696) pounds per square inch.

10.2.2 The Additional Royaltiesstipulated in paragraph 10.2.1 shall be received by

Government on a monthly basis whether in kind or in cash depending on

Government’s preference. Government shall have the right to receive such

Royalties in cash Dollars, on a Monthly basis, notifying the Licensee of its

choice thirty (30) days in advance. If such notification is not made by

Government, the relevantRoyalty shall be collected by Government in kind at

the point of collection.



10.2.3 The BOEPD calculation pursuant to Article 10.2.1(A) shall be done monthly

on the basis of daily production and the Additional Royalty on Sales Gas

calculation pursuant to Article 10.2.1(B) shall be done monthly on the basis of

the volumes of Sales Gas sold by the licensee multiplied by the gas price.



28



ARTICLE 11

State Participation



11.1



Government or its Nominee may elect to enter into a Joint Venture Agreement with

Licensee thereby allowing for State Participation for no more than fifteen percent

(15%) and Government shall inform Licensee of its decision in writing within 120

days of the receipt of the application for a Production Licence. Government or its

nominee shall be entitled to participate in Development Area by Development Area.

Licensee agrees to carry the costs of Government or its Nominee through

development to production. These costs are recoverable including interest at the

London Inter Bank Offer Rate (LIBOR) quoted at or about 11:00 am on the date next

to when they were incurred by the Licensee. These costs will be repaid out of the

Licensee’s cost recovery oil. Government will be responsible for any taxes arising out

of its share of the Joint Venture.



11.2



(a)



For purposes of this provision the Venture Assets attributable to a

Development Area (hereinafter called the “Joint Venture Assets”) are:

(i)



In case of the first production Licence granted, the Production Licence

and any real or personal property wherever the same may be situated,

acquired for the purpose of carrying on Joint Operations in the

Development Area subject thereto or acquired for the purpose of

carrying on Petroleum Operations in the Contract Area where such

property was acquired before the grant of the first Production Licence;



(ii)



in the case of a second or subsequent Production Licence granted, that

Production Licence and any real or personal property acquired for the

purpose of carrying on Joint Operations in that Development Area or

acquired for the purpose of carrying on Petroleum Operations or Joint

Operations in the Contract Area where such property was acquired after

the date on which a Production Licence was last granted and before the

grant of the second or, as the case maybe the next subsequent Production

Licence.



29



(b)



Immediately following the grant of each Production Licence, Licensee, or each

entity comprising Licensee at that time, willpromptly take such action as may

be necessary to assign to the Nominee of the Government, an undivided

proportionate share in the Venture Assets equal to the Nominee of the

Government’s Participating Percentage Interest with effect that thereafter,

Licensee, or each such entity, shall have an interest in the Joint Venture Assets

(hereinafter referred to as its “Joint Venture Interest”) equal to its Participating

Interest in those Assets immediately before the grant of such Production

Licence reduced by the product of that interest and the Joint Venture Interest

acquired by the Nominee of the Government.



11.3 “Participation Share of Production” means a proportion of the Petroleum produced and

saved from the Contract Area and not used or lost in Joint Operations and such

proportion attributable to Licensee and the Nominee of the Government shall be equal

to their respective Joint Venture Interests in Joint Venture Assets.



30



ARTICLE 12

Cost recovery



12.1



For purposes of cost recovery, ring fencing around each Contract Area shall apply. In

the event that a Licensee has more than one Contract Area, the calculations shall be

done on a contract by contract basis. There shall be no consolidation.



12.2



All Exploration Expenditures, Development and Production Expenditures and

Operating Expenses, as defined in Annex C, incurred by the Licensee shall be

recovered by 60% of gross oil production and 70% for gas after deduction of the

Royalties specified in paragraphs 10.1 and 10.2.



12.3



The Licensee shall carry forward to subsequent years all unrecovered costs until full

recovery is completed.



12.4



Not less than thirty (30) days prior to the beginning of each Calendar Year, Licensee

shall prepare and furnish to the Government for approval, which approval shall not be

unreasonably withheld, an estimate by Calendar Quarters for the forthcoming

Calendar Year of (i) all Contract Revenues and Contract Expenses to be incurred, (ii)

Income Tax of Licensee (or each entity comprising Licensee, as the case may be) in

respect of taxable income derived from Petroleum Operations carried out hereunder,

for such Calendar Year. Such estimate shall be consistent with the forecast statement

furnished pursuant to paragraph 7.9 and the annual Work Programme Budget

approved by the Advisory Committee pursuant to Article 5, and shall set forth the

other assumptions and projections upon which it is based. Calendar Quarterly updates

of such estimate shall be submitted by Licensee to the Government for approval

(which approval shall not be unreasonably withheld) within thirty (30) days after the

end of each Calendar Quarter.



31



ARTICLE 13

Production Sharing



13.1



After the cost recovery specified in paragraph 12.2, the following

Government/Licensee split will apply on the remaining total daily production (Profit

Oil).

Production BOPD



Government

Production Share



Licensee

Production Share



Where production

does not exceed 5,000



46%



54%



Where production

is higher than 5000 but does not

exceed 10,000



48.5%



51.5%



(iii) Where production

is higher than

10,000 but does

not exceed 20,000



53.5%



46.5%



(iv) Where production

is higher than

20,000 but does not

exceed 30,000



58.5%



41.5%



63.5%



36.5%



68.5%



31.5%



(i)



(ii)



(v)



Where production

is higher than

30,000 but does not

exceed 40,000



(vi) Where production

is higher than

40,000

13.2



The Government/Licensee profit oil split is based on incremental production.



13.3



Government shall have the right to receive its share of Profit Oil in cash inUS Dollars

or in kind, on a Calendar Quarter basis, depending on Government’s preference,

notifying the Licensee of its choice thirty(30) days in advance. If suchnotificaion is

not made by Government, the Profit Oil shall be collected by Government in kind at

the point of collection. The valuation shall be in accordance with paragraph 15.1.1.



32



ARTICLE 14

Taxation



14.1



All central, district administrative, municipal and other local administrators’ or other

taxes, duties, levies or other lawful impositions applicable to Licensee shall be paid by

the Licensee in accordance with the laws of Uganda in a timely fashion.



14.2



Any taxdisputes shall be handled in accordance with the dispute resolution

mechanisms stipulatedunder the Laws of Uganda.



33



ARTICLE 15

Valuation and Measurement of Petroleum



15.1



Crude Oil shall, for all purposes of this Agreement, be valued at the end of each

Month as follows:

15.1.1 Except as provided in paragraph 15.1.2, the market price (“Market Price”)

used to value Crude Oil shall, where arm’s length sales transactions is freely

convertible currencies of Crude Oil to third parties have been made during the

preceding month, be the weighted average of the per Barrel net realised price

obtained FOB at the Seaboard Terminal or any other point of export for such

arm’s length third party sales less, in the event that a separate pipeline

company is formed pursuant to paragraph 16.2 the average tariff charge per

Barrel for such month imposed by the pipeline company for transporting the

oil from the Delivery Point to the Seaboard Terminal or any other point of

export.

15.1.2 If less than fifty percent (50%), by volume, of Crude Oil sales from the

Contract Area during such month fall under paragraph 15.1.1, the Market Price

for such month shall be the simple arithmetical average of the prevailing per

Barrel selling prices in such quarter of a basket of the three (3) most similar

internationally trade crude oils listed by the American Petroleum

Institute(API) and chosen from the major crude oil producing countries in the

Arabian Gulf and Africa, taking into account differences in point of sale,

quality, grade, gravity or sulphur content and any special terms and conditions

relating to the sale of such crude oils, less, in the event that a separate pipeline

company is formed pursuant to paragraph 16.2, the average tariff charge per

Barrel for that month imposed by the pipeline company for the transportation

of Crude Oil hereunder from the Delivery Point to the FOB Seaboard Terminal

or any other point of export.

15.1.3 For the purposes of determining the Market Price as described above, no

account shall be taken of Crude Oil sales to Affiliated Companies or restricted

or distress transactions or any transactions not at arm’s length including

government to government, barter or discount deals.

15.1.4 The Market Price shall be determined at the end of each month in United

States Dollars in accordance with paragraph 15.1.



34



15.2



Any disagreement concerning the determination of Market Price under paragraph 15.1

shall be first considered by a pricing committee composed of two (2) representatives

from the Government and two (2) representatives from Licensee. In the event the

pricing committee cannot reach a unanimous decision within thirty (30) days of the

end of the relevant month, either party may refer the matter for determination by an

expert in accordance with paragraph 26.2. During such referral, which shall in no

event take longer than thirty (30) days, the Market Price for the preceding month shall

apply and adjustments, if any, shall be made in the following month based on the

decision of the expert.



15.3



Natural Gas shall be valued in accordance with the provisions of paragraph 19.4.



15.4



Licensee shall install, operate and maintain at the Delivery Point equipment for

measuring the volume and quality of the Petroleum produced and saved hereunder,

including gravity, density, temperature and pressure measuring devices and any other

devices that may be required for the purposes of implementing this Agreement. All

measurement equipment and devices shall, prior to their installation or usage, be

approved by the Government, which approval shall not be unreasonably withheld or

delayed. The Government or its authorised representatives, at its own expense and

risk (Save where injury or damage results from the Gross Negligence or Willful

Misconduct of Licensee), shall have the right to inspect and require Licensee to test in

its presence such equipment and devices at all reasonable times. The equipment and

devices used or installed pursuant to this paragraph shall not be replaced or altered

without the prior approval of the Government, which approval shall not be

unreasonably withheld or delayed; provided, however, that in the case of urgency or

so as to prevent the interruption of ongoing production, Licensee may proceed with

such replacement or alteration without the prior approval of the Government but shall

immediately thereafter notify the Government of such replacement or alteration.



15.5



Licensee shall undertake to measure the volume and quality of the Petroleum

produced and saved hereunder, consistent with generally accepted practices in the

international petroleum industry, with the frequency and according to procedures

which shall be approved by the Government, which approval shall not be

unreasonably withheld or delayed.



35



15.6



If it is determined, following an inspection or test carried out or witnessed by the

Government or its representatives, that the equipment, devices or procedures used for

measurement are inaccurate and exceed the permissible tolerances which shall be

established by agreement between the Government and Licensee with reference to

normal international oil industry standards, and such determination is verified by an

independent surveyor of international repute acceptable to both parties, such

inaccuracy shall be deemed to have existed for one-half of the period since the last

pervious such inspection or test, unless it is proved that such inaccuracy has been in

existence for a longer or shorter period. Appropriate adjusting payments or refunds

covering such period shall be made within thirty (30) days from the date of such

determination.



36



ARTICLE 16

Pipeline Transportation



16.1



Licensee shall have the right to take and transport to an ocean port or other point of

loading for export all Petroleum to which it is entitled hereunder and, in connection

therewith, shall have the right to construct, operate and maintain an export pipeline,

pumping stations, storage and related Seaboard Terminal or other facilities. The

Government shall assist Licensee on matters involving rights of way, licences or other

authorizations required under Uganda law in connection with such facilities and shall

assist Licensee in its negotiations with neighbouring countries regarding rights of way

and other conditions relating to the construction, operation and maintenance of such

facilities in such countries.



16.2



It is understood by the Parties hereto that the construction, financing, operation and

maintenance of an export pipeline, pumping stations and related Seaboard Terminal or

other facilities shall be carried on through a separate pipeline company (“the Pipeline

Company”) which shall be responsible for the handling and transportation of

Petroleum from the Delivery Point in Uganda to the ocean port or other point of

loading. In such event, the operations of the Pipeline Company will not be included

within the meaning of Petroleum Operations under this Agreement and any related

Licences.



16.3



Any Development Plan submitted to the Minister by Licensee pursuant to Section 21

of the Act shall include Licensee’s proposal with regards to the arrangements for the

transportation to the terminal of each of the Parties' production entitlements

hereunder.

In the event the said transportation arrangements involve the formation of a separate

Pipeline Company pursuant to paragraph 16.2, such proposals shall, unless otherwise

agreed, be consistent with the following principles:

(a) each Party shall assume and pay the transportation tariffs charged by the Pipeline

Company related to their respective shares of the Petroleum transported, which

obligation may, in the case of the Nominee or the Government, be discharged by

each of the Nominee and the Government foregoing in favour of the Pipeline

Company a portion of their respective production entitlements so transported

equal in value to the tariffs due in respect of the transportation of such production

entitlements from the Delivery Point to the FOB Seaboard Terminal point of

export;



(b)



the transportation tariff charged, to the extent that the Parties hereto are able to

determine the same, shall be set at a level at which the Pipeline Company will cover

the costs of constructing, financing, operating and maintaining the export pipeline and

related facilities together with a reasonable return thereon; such



37



return will be determined having regard to the risks assumed by shareholders of

the Pipeline Company in outlaying the funds for the construction, operation and

maintenance of such facilities and the cost of borrowing such funds as are

required; and

(c) in the case of proposals by Licensee for the initial construction of the export

pipeline, such proposals shall ensure that the pipeline and related facilities are of

sufficient design capacity to handle and transport to the Seaboard Terminal or

other delivery point, the estimated production entitlements of all Parties hereto

from the Contract Area. If at any time, the throughput capacity of such facilities

should be insufficient to handle and transport the respective production

entitlements of such Parties, available capacity shall be shared between the

Parties in the portion which each Party’s production entitlement bears to the total

quantity of production which would otherwise be available for transportation

hereunder.

16.4



The Government or its Nominee shall be fully involved in the determination of the

tariff charges for the pipeline.



16.5



Transportation tariff charges of the Pipeline Company to the Delivery Point shall be

allowable Contract Expenses hereunder.



16.6



Transportation tariff charges of the Pipeline Company, and any costs incurred beyond

the Delivery Point shall not be allowable Contract Expenses hereunder.



38



ARTICLE 17

Marketing and Lifting



17.1



It is understood that Licensee may itself purchase the Government’s or its Nominee’s

production entitlement made available pursuant to this paragraph in lieu of disposal of

same to third parties, in which event the price at which any such purchase by Licensee

shall be effected shall be determined pursuant to Article 15. In the event that Licensee

elects not to exercise its rights under paragraph 17.2, the Government may, at any

time by notice in writing to Licensee, also require Licensee to assist the Government

in the sale of all or part of the Government Production Share attributable to

Government pursuant to Article 13. The terms and conditions on which Licensee will

so assist the Nominee and/or the Government to any such disposal will be agreed

between the Government and/or the Nominee, as the case may be, and Licensee.



17.2



Licensee shall have the right to purchase all or any part of the Government Production

Share attributable pursuant to Article 13 upon giving written notice to the

Government not less than ninety (90) days prior to the commencement of each six (6)

Calendar Months of each Calendar Year, specifying the quantity which it elects to

purchase, provided, however, that such right of purchase shall not apply in respect of

all or any part of the Government Production Share which may be required to satisfy

the requirements of internal consumption of Uganda or in connection with

government to government sales or with barter transactions and provided further that

the price at which any such purchase by Licensee shall be effected shall be determined

pursuant to Article 15. The Licensee’s right to purchase any part of Government’s

Production Share should not be used in such a manner as to leave Government with

only a small volume of production that is unnecessarily difficult and expensive to

dispose of.



17.3



Not less than twelve (12) Calendar Months prior to the commencement of

Commercial Production from any Development Area, Licensee shall submit to the

Government for approval proposed procedures and related operating regulations and

financial terms covering the scheduling storage and lifting of Crude Oil from each

such Development Area.



39



The procedures, regulations and terms shall comprehend the subjects necessary to

efficient and equitable operations including, but not limited to: rights of Parties,

notification time, maximum and minimum quantities, duration of storage, scheduling,

conservation, spillage, liabilities of the Parties and penalties for over and under-lifting

safety and emergency procedures. To the extent that such procedures, regulations and

terms are consistent with generally accepted practices in the International Petroleum

Industry, the Government may not unreasonably withhold such approval.

17.4



The Parties shall consult together regularly in order to establish a provisional

collection programme. The Parties shall draw up, before the commencement of any

commercial production in the Production Licence, a collection procedure laying down

the methods for applying the present Article.



40



ARTICLE 18

Domestic Requirements



18.1



Out of the total quantity of Crude Oil production to which the Licensee is entitled in

each Calendar Quarter, the Government may elect to take a quantity of Crude Oil, of

the gravity, grade and quality of its choice, that the Government requires to satisfy the

requirements of internal consumption in Uganda for such Calendar Year. The

Government shall reimburse the Licensee for such quantity in United States Dollars at

the price as calculated pursuant to paragraph 15.1 hereof within thirty (30) days after

the end of the Calendar Month in which such delivery takes place, unless otherwise

agreed between the parties. The maximum quantity of Crude Oil that the Government

may take to satisfy the internal consumption requirements of the country shall be

calculated by multiplying the total quantity of Crude Oil produced from the Contract

Area during the period under consideration, less consumption of Crude Oil incidental

to Petroleum Operations, by a fraction, the numerator of which is the internal

consumption requirements of Uganda during the period, and the denominator of

which is the volume of Crude Oil produced by Uganda by all Licensees (including

Licensee). Any Crude Oil production dedicated to an early production scheme in any

such Calendar year pursuant to paragraph 7.4 shall be deducted from the maximum

quantity so determined for such Calendar Year.



18.2



If the Government elects to exercise its rights under paragraph 18.1, it shall notify

Licensee in writing not less than ninety (90) days prior to the commencement of each

six (6) Calendar Months of each Calendar Year specifying the quantity, and

designating the grade and quality, that it elects to take in kind based upon the

production forecasts and annual and quarterly estimates, furnished to the Government

pursuant to paragraphs 7.9and 15.5. Any adjusting payments or refunds shall be made

within ninety (90) days of the end of each Calendar Year on the basis of actual

quantities.



41



ARTICLE 19

Natural Gas



19.1



Licensee shall have the right to use Associated Gas for Petroleum Operations,

including, but not limited to, reinjection for pressure maintenance, and improving the

recovery of Petroleum, power generation and recycling operations. The quantities of

Associated Gas used in this way shall not be subjected to any tax, fee or levy of any

kind.



19.2



Where Non-associated Gas has been discovered in the Contract Area and Licensee has

not pursuant to paragraph 7.2 given in respect of the Discovery a notice to the

Commissionerfor the purpose of Section 18(1)(a) of the Act, the Parties shall, unless

the provisions of Section 18(1)(b) of the Act are otherwise applicable, as soon as

possible after completion by Licensee of an appraisal programme, or sooner if so

agreed, meet together with a view to reaching an agreement on the development,

production, processing and sale of such gas.



19.3



Associated Gas which is not used in Petroleum Operations, and the processing and

utilisation of which, in the reasonable opinion of Licensee is not economical, shall be

returned to the subsurface structure, or may be flared with the consent of the

Government, which consent shall not be unreasonably withheld or delayed. In the

event that Licensee chooses to process and sell Associated Gas, Licensee shall notify

the Government of the same and upon such notification, the Government and

Licensee shall, as soon as practicable thereafter, meet together with a view to reaching

an agreement on the processing and sale of such gas. In the event Licensee chooses

not to process and sell Associated Gas, the Government may elect to offtake at the

outlet flange of the gas-oil separator and use such Associated Gas which is not

required for Petroleum Operations, in which event, Licensee may flare such gas until

such time as the facilities are in place to enable the Government to take delivery

thereof. There shall be no charge to the Government for such Associated Gas,

provided that the cost to gather such Associated Gas at the point of being flared and to

process and utilize it shall be for the account of the Government.



42



19.4



The value to be attributed to Natural Gas shall:

19.4.1 for arm’s length sales to third parties, be equal to the net realised price

obtained for such Natural Gas at the Delivery Point;

19.4.2 for sales other than at arm’s length to third parties, be determined by

agreement between the Government and Licensee, provided, however, that

such price or value shall reflect the following:

(i)



the quantity and quality of the Natural Gas;



(ii)



the price at which arms length sales of Natural Gas from other sources in

Uganda, if any, are then being made;



(iii) the price at which arms length sales, if any, of Natural Gas imported into

Uganda are being made;

(iv) the purpose for which the Natural Gas is to be used; and

(v)



the international market price of competing or alternative fuels or

feedstocks.



19.4.3 Arm’s length third party sales shall not include sales to Affiliated Companies

of Licensee or to the Government, any Ugandan public authority or any other

entity controlled directly or indirectly by the Government.



43



ARTICLE 20

Purchases in Uganda



20.1



In procurement, Licensee shall give preference to goods which are produced or

available in Uganda and services which are rendered by Ugandan citizens and

companies unless such goods and services are offered on terms which are not equal to

or better than imported goods and services with regard to quality, price and

availability at the time and in the quantities required.



20.2



The Licensee shall establish appropriate procedures, including tender procedures, for

the acquisition of goods and services which shall ensure that the suppliers and SubContractors in Uganda are given adequate opportunity to compete for the supply of

goods and services. The tender procedures shall include, inter alia, the financial

amounts or value of contracts which will be awarded on the basis of selective bidding

or open competitive bidding, the procedure for such bidding, and the exception to

bidding in cases of emergency, and shall be subject to the approval of the Advisory

Committee.



20.3



Within sixty (60) days after the end of each Calendar Year, the Licensee shall provide

the Government with a report outlining its achievements in utilising Ugandan goods

and services during that Calendar Year.



20.4



Goods shall include equipment, materials and supplies.



44



ARTICLE 21

Training and Employment



21.1



Licensee agrees to train and employ suitably qualified Ugandan citizens in its

Petroleum Operations and, following the commencement of Commercial Production,

to undertake the schooling and training of Ugandan citizens for staff positions,

including administrative and executive management positions. Licensee will also

require its sublicensees to do the same. Licensee undertakes to gradually replace its

expatriate staff with suitably qualified and experienced Ugandan citizens as are then

available but, if the Licensee satisfies the Advisory Committee that no suitably

qualified and experienced Ugandan citizens are available who are capable of filling

key senior management or technical position, Licensee shall employ expatriate staff in

such positions. An annual programme for training and phasing in of Ugandan citizens

shall be established by Licensee and shall be submitted for approval to the Advisory

Committee, along with the annual Work Programmes and Budgets referred to in

Article 6. Within thirty (30) days of the end of each Calendar Year, Licensee shall

submit a written report to the Government describing the number of personnel

employed, their nationality, their positions and the status of training programmes for

Ugandan citizens.



21.2



Licensee shall also be required to establish an annual programme, satisfactory to the

Government, to train personnel of the Government to undertake skilled and technical

jobs in Petroleum Operations.



21.3



Licensee shall deposit with government, or its Nominee, on the Effective Date and

each anniversary of the Effective Date thereafter, the following amounts for training

of Government personnel selected by the Government and other associated costs for

each Licence for the periods specified below:



21.4



Exploration Period



US $ 37,500 per6 months.



Following the grant of a petroleum

Production Licence



US $ 200,000 per 12 months.



Subject to the provisions of paragraph 21.1, Licensee shall be free to employ foreign

nationals to the extent that suitably qualified and experienced Ugandan nationals

cannot be found to fill a position.

Upon application in the prescribed manner by Licensee, the Government shall

expeditiously provide the necessary work permits and other approvals required for the

employment and residence of expatriate personnel and their families in Uganda by

Licensee or its sublicensees for the purposes of this Agreement.



45



ARTICLE 22

Title to Assets



22.1



All land shall become the property of the Government as soon as it is acquired by the

Licensee, subject to its continue userent-free (save in respect of surface rentals

payable pursuant to Article 29) by Licensee until the date upon which this Agreement

is terminated.



22.2



All equipment and other assets, whether fixed or movable, acquired and owned by

Licensee for use in the Petroleum Operations hereunder shall become the property of

the Government (or the Nominee of the Government), if the Government so desires,

free from all mortgages and other encumbrances upon the earlier of the date upon

which:

(i)



such equipment and assets have been fully depreciated for Income Tax

purposes, or the costs thereof have otherwise been fully recovered, pursuant to

Article 12 hereof; or



(ii)



this Agreement is terminated.



22.3



Licensee shall have unlimited and exclusive use of such equipment and assets where

ownership thereof is transferred pursuant to paragraph 22.2 (i) and shall not be

obligated to make any payment for the use of the same during the term of this

Agreement. Licensee, so long as such equipment and assets are used exclusively for

Petroleum Operations and are in its custody, shall be liable to keep the same in good

repair and working order, normal wear and tear expected.



22.4



The provisions of this Article shall not apply to assets and equipment used in the

Petroleum Operations and owned by third parties, which assets may be freely

exported from Uganda.



46



ARTICLE 23

Foreign Exchange Control



Licensee shall comply with the procedures and formalities required by the laws and

regulations relating to foreign exchange in force from time to time in Uganda.



47



ARTICLE 24

Assignment



24.1



Licensee (which for the purposes of this Article shall include any person or entity

comprising Licensee) may not assign to any person, Affiliated Company, firm or

corporation not party hereto, in whole or in part, any of its rights, privileges, duties or

obligations under this Agreement without the prior written consent of the Minster.



24.2



In the event that Licensee wishes to assign, in whole or in part, any of its rights,

privileges, duties or obligations hereunder or proposes a change of Operatorship as

aforesaid, the written consent thereto of the Minister shall not be unreasonably

withheld or delayed.



24.3



Notwithstanding the provisions of paragraph 24.1, if Licensee assigns in whole or in

part to any Affiliated Company Licensee, as assignor and assignee, shall be fully

jointly and severally liable for the performance of all rights, duties and obligations

under this Agreement and any related Licences and shall be fully liable for the

performance of any such assignee unless the Parties otherwise agree.



24.4



In the case of an assignment to a non-Affiliated Company, the assigning party shall

provide to the Government an unconditional undertaking by the assignee to assume all

obligations of Licensee under this Agreement, including a performance bond or an

Insurance Bond, substantially in the form set forth in Annex D-I.



24.5



The application for assignment shall be made by the Licensee in accordance with the

Act and shall give full information on the proposed assignee as required in respect of

an applicant for an Exploration Licence and such additional information as the

Minister may require.



24.6



Upon assignment of its interest in this Agreement, the assignor shall be fully released

and discharged from its obligations hereunder to the extent that such obligations are

assumed by the assignee.



24.7



Any transfer or assignment of interest shall attract a capital gains tax in accordance

with the law.



48



ARTICLE 25

Danger to Persons, Property or Environment



25.1



If any works or installations erected by Licensee or any operations conducted by

Licensee endanger or may endanger persons or third party property or cause pollution

or harm wildlife or the environment to a degree unacceptable to Government in

accordance with international environmental standards and local circumstances, the

Licensee shall take appropriate remedial measures approved by Government within a

reasonable period and to repair as far as it is reasonably possible any damage to the

environment so caused. If, and to the extent necessary for this purpose, Licensee shall

discontinue Petroleum Operations in whole or in part until Licensee has taken such

remedial measures or has repaired any damage. In the event that Licensee fails to take

the appropriate remedial measures within a reasonable time period, the Government

may, after consultation with Licensee, carry out such remedial measures for

Licensee’s account.



25.2



Before commencing any works or operations hereunder, or recommencing any works

or operations which have been discontinued for more than three (3) Calendar Months,

in any part of the Contract Area which includes the area of a National Park or Game

Reserve (as so designated under applicable Uganda law), Licensee shall consult with

the Government regarding the nature and extent of the work or operations to be

conducted in such areas taking into consideration Good Oilfield Practices. In carrying

out such works and operations in such areas, Licensee shall give due regard to the

importance of minimising the damage and disturbance to the environment and wildlife

and, where any damage or disturbance would result, shall take all reasonable steps to

limit the extent of the damage or disturbance so caused.



25.3



In the event of protest from responsible concerned third parties within or outside

Uganda regarding the conduct of Petroleum Operations in any National Park or Game

Reserve and the consequent effects upon the environment or wildlife, the Government

and Licensee shall meet to determine what if any action should be taken.



49



25.4



25.5



The Licensee shall:

(a)



conduct the Petroleum Operations in a manner likely to promote the

conversation of the natural resources of Uganda and the protection of its

environment;



(b)



employ the most advanced techniques for the prevention of environmental

damage which may be caused by Petroleum Operations, and for the

minimisation of the effect of Petroleum Operations on adjoining or

neighbouring lands; and



(c)



Implement the proposals contained in its Development Plan regarding the

prevention of pollution and take any further action as may be necessary for the

treatment of wastes, the safeguarding of natural resources and the progressive

reclamation and rehabilitation of lands disturbed by petroleum production.



The Licensee undertakes, for the purposes of this Agreement, to take all necessary and

adequate steps:

(a)



to ensure adequate compensation for injury to persons or damage to property

caused by the effect of the Petroleum Operations; and



(b)



to avoid irremediable environmental damage to the Contract Area and

adjoining or neighbouring lands.



25.6



If the Licensee fails to comply with the terms of sub-paragraph 25.5(b) or contravenes

any law on the prevention of environmental damage and such failure or contravention

results in any environmental damage, the Licensee shall take all the necessary and

reasonable measures to remedy such failure or contravention and the effects hereof.



25.7



The measures and methods to be used by the Licensee for purposes of complying with

the terms of sub-paragraph 25.5(b) shall be determined in timely consultation with the

Minister upon the commencement of Petroleum Operations or whenever there is a

significant change in the scope or method of carrying out Petroleum Operations, and

the Licensee shall take into account the international standards applicable in similar

circumstances and the relevant environmental impact



50



study carried out in accordance with Clause 25.8. The Licensee shall notify the

Minister in writing of the nature of the measures and methods finally determined by

the Licensee and shall cause such measures and methods to be reviewed from time to

time in view of prevailing circumstances, provided however, that any consultations or

approval given pursuant to this Agreement shall not be deemed to limit the obligations

of the Licensee as provided herein or the right of the Minster to take appropriate

regulatory or other action where Petroleum Operations pose a material danger to

public health and safety or may result in significant irreversible damage to the

environment.

25.8



25.9



The Licensee shall cause a consulting firm or individuals of international standing to

carry out environmental impact studies (together with the updating of the latter

referred to in paragraph 25.11), in order:

(a)



to determine the prevailing situation relating to the environment, human

beings, wildlife or marine life in the Contract Area and in the adjoining or

neighbouring areas at the time of the studies; and



(b)



to establish what the effect will be on the environment, human beings, wildlife

or marine life in the Contract Area in consequence of the Petroleum

Operations to be undertaken under this Agreement, and to submit for

consideration by the Parties measures and methods contemplated in paragraph

25.7 for minimising environmental damage and carrying out site restoration in

the Contract Area.



The timing of the above studies shall be determined by the Minister.



25.10 Such studies shall be updated and submitted to the Minister:

(i)



with each application for a subsequent Production Licence (such updated

study to form part of its Development Plan relating thereto);



(ii)



not less than three months prior to the termination of the Exploration Licence;

and



(iii)



on such other occasion as the Minister or the Commissioner or a government

environmental protection agency may request in the light of actual or

threatened environmental damage resulting from or relating to the Petroleum

Operations.



51



25.11 The studies mentioned in paragraph 25.8 shall contain proposed environmental

guidelines to be followed in order to avoid irremediable environmental damage and

shall include, but not be limited to:

(a) access cutting;

(b) clearing and timber salvage;

(c) wildlife and habitat protection;

(d) fuel storage and handling;

(e) use of explosives;

(f) camps and staging areas;

(g) liquid and solid waste disposal;

(h) cultural and archaeological sites;

(i) selection of drilling sites;

(j) terrain stabilisation;

(k) protection of freshwater horizons;

(l) blowout prevention plan;

(m) flaring during completion and testing of gas and oil wells;

(n) well abandonment;

(o) rig dismantling and site completion;

(p) reclamation for abandonment; and

(q) noise control.



52



25.12 In addition to the studies mentioned in paragraph 25.8, the Licensee shall include in

each Work Programme and Budget to be submitted annually to the Minister in

accordance with Article 6, and in any amendment thereto, an environmental impact

statement relating to the work to be undertaken as provided in that document and

reporting on work undertaken in accordance with the preceding Work Programme.

The Licensee will also, on a regular basis report how environmental matters are being

addressed with respect to the Environmental Impact Statement and any new aspects

that come up during the operations that may not have been envisaged at the time of

the Environmental Impact Assessment.

25.13 The Licensee shall ensure that:

(a) Petroleum Operations are carried out in an environmentally acceptable and safe

manner consistent with good international industry practice and applicable laws

and that such operations are properly monitored;

(b) the pertinent completed environmental impact studies are made available to its

employees and to its sublicensees to develop adequate and proper awareness of

the measures and methods of environmental protection to be used in carrying out

the Petroleum Operations; and

(c) any agreement entered into between the Licensee and its sublicensees relating to

the Petroleum Operations shall include the terms set out in this Agreement and

any established measures and methods for the implementation of the Licensee’s

obligation in relation to the environment under this Agreement.

25.14 The Licensee shall, before carrying out any drilling, prepare and submit for review by

the Minister an oil spill and fire contingency plan designed to achieve rapid and

effective emergency response in the event of an oil spill or fire.

25.15 In the event of:

(a) an emergency or accident arising from Petroleum Operations affecting the

environment, the Licensee shall forthwith notify the Minister accordingly;

(b) any fire or oil spill, the Licensee shall promptly implement the relevant

contingency plan; and

(c) any other emergency or accident arising from the Petroleum Operations affecting

the environment, the Licensee shall take such action as may be prudent and

necessary in accordance with good international petroleum industry practice in

such circumstances.



53



25.16 If the Licensee fails to comply with any terms contained in this Article within a period

determined by the Minister under any such terms, the Minister may, after giving the

Licensee reasonable notice, take any action which may be necessary to ensure

compliance with such terms, and recover, immediately after having taken such action,

all expenditure incurred in connection with such action from the Licensee together

with such interest as may be determined in accordance with Section 1.4(c) of Annex C

to this Agreement.

25.17 The Licensee shall on the expiration or termination of this Agreement or on

relinquishment of part of the Contract Area:

(a) remove all equipment and installation from the Contract Area or relinquish area in

a manner agreed with the Minister in terms of an abandonment or

decommissioning plan;

(b) take all action necessary to prevent hazards to human life or to property of others

or the environment; and

(c) take all action necessary in accordance with Good Oilfield Practice to reclaim and

rehabilitate all lands disturbed by Petroleum development and production.



54



ARTICLE 26

Arbitration



26.1 Subject to Article 14.2, any dispute arising under the Agreement which cannot be

settled amicably within sixty (60) days, shall be referred to Arbitration in accordance

with the United Nations Commission for International Trade Law (UNCITRAL)

Arbitration Rules. The arbitration shall be conducted by three (3) arbitrators appointed

in accordance with the said Rules. The said arbitration shall take place in London,

England. Judgement on the award rendered may be entered in any court having

jurisdiction or application may be made in such court for a judicial acceptance of the

award and an order of enforcement, as the case may be. The Arbitration award shall be

final and binding on the Parties to this Agreement.

26.2 Any matter in dispute between the Government and Licensee arising under paragraphs

5.4, 7.6, 10.1.3, 10.1.4, 10.2.3, 15.2 and 33.2 may, at the election of either of such

parties by written notice to the other, be referred for determination by a sole expert to

be appointed by agreement between the Government and Licensee. If the Government

and Licensee fail to appoint the expert within sixty (60) days after receipt of such

written notice, either of such parties may have such expert appointed by the then

President of the Institute of Petroleum (London). If the aforesaid President shall be

disqualified to act by reason of professional, personal or social interest or contract with

the parties in dispute or their Affiliated Companies, the next highest officer for the time

being of said Institute of Petroleum, who is not disqualified shall act in lieu of said

President. No person shall be appointed to act as an expert under this section:

(i)



unless he shall be qualified by education, experience and training to determine

the subject matter in dispute; or



(ii)



if at the time of his appointment or at any time before he makes his

determination under such an appointment, he has or may have some interest or

duty which conflicts or may conflict with his function under such appointment.



The expert shall render his decision within sixty (60) days after the date of this

appointment, unless the Parties otherwise agree. In rendering his decision, the expert

shall do so within the context of the provisions of this Agreement, the Act and the

standards of Good Oilfield Practices. The decision of the expert shall be final and

binding on both Licensee and the Government. The expert’s fees and expenses, and the

costs associated with an appointment, if any, made by the President of the Institute of

Petroleum (or the next highest officer thereof), shall be allocated to the Parties in

dispute in such manner as the expert may determine.



55



ARTICLE 27

Insurance and Indemnification



27.1 To ensure that Licensee its Contractors and Sub-contractors meet their obligations to

third parties, or to the Government, that might arise in the event of damage, loss or

injury (including environmental damage or injury, removal of wrecks and cleaning up

caused by accidents) caused by Petroleum Operations, Licensee shall maintain in force

an insurance policy through an international insurance company of good financial

standing covering the activities of itself and its contractors and sub-contractors,

sublicensees and the employees of all such parties. Such insurance policy shall waive

subrogation against the Government, and shall provide that it may not be cancelled

except upon thirty (30) days' prior written notice to the Government. A certificate

giving evidence of such insurance policy shall be furnished to the Government within

ninety (90) days of the Effective Date. The limits, coverage, deductibles and other

terms shall be consistent with accepted practices in the international petroleum

industry. In the event that no response is received by Licensee from the Government

within fifteen (15) days of the submission by Licensee of such insurance terms to the

Government for approval, such approval shall be deemed granted. To the extent that

such third party liability insurance is unavailable or is not obtained, or does not cover

part or all of any claims for damage, loss or injury caused by or resulting from

Petroleum Operations, Licensee shall remain fully responsible and shall defend,

indemnify and hold the Government harmless against all such claims by the

Government arising from any such damage, loss or injury.

27.2 Licensee shall indemnify, defend and hold the Government harmless against all third

party claims for damage, loss or injury, including, without limitation, claims for loss or

damage to property or injury or death to persons, caused by or resulting from any

Petroleum Operations conducted by or on behalf of Licensee.



56



ARTICLE 28

Force Majeure



Except as otherwise provided in this Article, each party shall be excused from complying

with the terms of this Agreement except for the payment of monies due, for so long as such

compliance is prevented or delayed by strikes, wars (declared or undeclared), hostilities,

blockade, embargo, unavailability or rationing of supplies, materials and/or equipment

imposed by law, decree, regulation and/or instruction at the insistence or request of any

Government authority, insurrection, civil disorder, terrorist acts, sabotage, quarantine

restrictions, epidemics, accidents, riots, labour disturbance, any act or failure to act of a

Governmental agency or local body, acts of God, perils of navigation, storm, flood,

earthquake, lightning and other exceptional adverse weather conditions, explosion, fire or by

any act or cause that is reasonably beyond the control of such party, such causes, whether

similar or dissimilar to the events listed above, being herein called “Force Majeure”. In the

event that either party hereto is rendered unable, wholly or in part, by any of these causes to

carry out its obligations under this agreement, such party shall give notice and details of

Force Majeure in writing to other Party within seven (7) days after its occurrence. In such

cases, the obligations of the Party giving the notice shall be suspended during the continuance

of any inability so caused. Such Party shall do all reasonably within its power to remove such

cause. If through Force Majeure, the fulfilment by the Parties of any of the obligations under

this Agreement shall be delayed, the period of such delay, shall be added to the time allowed

under this Agreement for the fulfilment of such obligations or the exercise of any right

dependent thereon.



57



ARTICLE 29

Annual Surface Rentals



29.1 Licensee shall pay a charge in respect of surface rentals for the area subject to a License

hereunder as follows:

(a) annual surface rental for the area which remains subject to the Exploration Licence:

US$7.50 per square kilometre or part thereof; and

(b) annual surface rental in respect of a Development Area subject to a Production

Licence: US$500.00 per square kilometre or part thereof.

29.2 Annual surface rentals payable pursuant to this Article shall be paid to the Government

in advance and without demand commencing with the date on which the Licence is

granted. No rebates of surface rentals shall be made by the Government in respect of

any area which ceases to be subject to a Licence mid-year.

29.3 Annual surface rentals do not replace other charges that may be levied for entry into

parts of the Licence Area arising out of specialized land use, such as national parks or

nature reserves, for purposes other than Petroleum Operations.



58



ARTICLE 30

Termination



30.1 This Agreement shall be deemed to have been terminated if the Exploration Licence

granted to Licensee pursuant to Article 3 and any Production Licence granted to

Licensee under Article 7 have either expired, or have under and in accordance with the

Act, or any relevant provision of this Agreement, been surrendered by the Licensee or

been lawfully cancelled or terminated by the Government, but save as aforesaid shall

continue in full force and effect so long as Licensee continues to hold, or has a pending

application for, any of the said Licences.

30.2 The Government shall have the right to terminate this Agreement and any Exploration

Licence and Production Licences granted hereunder, upon giving thirty (30) days

written notice of its intention to do so, if Licensee:

30.2.1



fails to make any monetary payment required by law or under this Agreement

for a period of thirty (30) days after the due date for such payment unless

Licensee is contesting the obligation to make such payment and has

commenced arbitration proceedings in the respect thereof pursuant to

paragraph 26.1 in which case the period of thirty (30) days after notice shall be

counted from the date of issuance of an arbitration award requiring Licensee to

pay the amount in dispute;



30.2.2



has otherwise committed a material breach of the terms and conditions of his

Agreement or any Licence granted pursuant to Articles 3 and 7;



30.2.3



fails to comply with the Act or any lawful acts, Regulations, orders or

instructions issued by the Government or the terms of this Agreement; or



30.2.4



becomes bankrupt, or goes into liquidation because of insolvency or makes a

composition with its creditors.



30.3 If the circumstances that would result in termination under paragraph 30.2.1 and 30.2.2

are remedied by the Licensee with the thirty (30) day period following the notice of

termination as aforesaid, such termination shall not become effective.



59



30.4 If the circumstance or circumstances that would result in termination under paragraph

30.2.3 and 30.2.4 are remedied by Licensee within the sixty (60) day period following

the notice of termination as aforesaid or where the breach cannot be remedied within a

sixty (60) day period, Licensee has commenced the works or steps necessary to remedy

such breach during such period and is diligently continuing such works thereafter, or,

where it is otherwise impossible to remedy such breach, adequate compensation has

been offered to and accepted by the Government in respect thereof within such sixty

(60) day period, such termination shall not become effective.

30.5 If the circumstance or circumstances that would otherwise result in termination under

paragraph 30.2.3 or 30.2.4 are the result of Force Majeure, then termination shall not

take place so long as such Force Majeure continues and for such period thereafter as

provided in Article 28.

30.6 Where two or more persons constitute Licensee, this Agreement may not be terminated:



30.7



30.6.1



pursuant to paragraphs 30.2.1, 30.2.2 or 30.2.3 above where, in respect of a

liability which is a several liability, one or some only of the persons

constituting Licensee is in breach of the provisions hereof or has so failed in

compliance provided that the Petroleum Operations continue in accordance

with the provisions of this Agreement.; or



30.6.2



pursuant to paragraph 30.2.4 above where the bankruptcy, liquidation or

composition relates to one or some only of the persons constituting Licensee,

provided that the Petroleum Operations continue in accordance with the

provisions of this Agreement.



In any case falling under paragraph 30.6 above, the Government, subject to

paragraphs 30.3, 30.4 and 30.5 may, upon giving thirty (30) days written notice of its

intention to do so, terminate the Participating Interest or Joint Venture Interest herein,

and in any related Licences, or the person or persons in breach, or which have failed

in compliance, or, as the case may be, have become bankrupt, gone into liquidation or

made a composition as aforesaid (“the Defaulting Party”) but nothing in this

paragraph shall affect the rights and obligations of any other person who constitutes

Licensee which shall remain in full force and effect.



60



In such event, the Defaulting Party shall forthwith assign, unconditionally and without

consideration, to the other persons constituting Licensee and, in respect of any

Licence in which the Nominee of the government has a Joint Venture Interest, to the

Nominee of the Government its entire Participating or Joint Venture Interest under

this Agreement and any related Licences.

Such assignment will be made in undivided proportionate shares corresponding to the

undivided proportionate shares in which such other persons and, in respect of any

Licence in which the Nominee has a Joint Venture Interest, the Nominee hold

Participating or Joint Venture Interests in the subsisting Licences.

30.8



On termination of this Agreement and any related Licences or of an interest therein,

the rights thereunder of Licensee or the Defaulting Party, as the case may be, shall

cease but the termination shall not affect any liability incurred before the termination,

and any legal proceedings that might have been commenced or continued against

Licensee or such Defaulting Party may be commenced or continued against him.



61



ARTICLE 31

Accounting and Audits



31.1 Licensee shall be responsible for maintaining complete accounts, books and records

reflecting all revenues, costs and expenses associated with Petroleum Operations under

this Agreement in accordance with the Accounting Procedure set out in our Annex “C”

of this Agreement and accepted international petroleum industry accounting standards

and procedures. The said accounting records shall be kept in Uganda in US Dollars and

in Uganda Shillings.

31.2 Within ninety (90) days after the expiration of each Calendar Year, Licensee shall

submit to the Government detailed accounts showing all Contract Expenses and

Contract Revenues during the past Calendar Year. Before submission to the

Government, the accounts shall be audited and certified by an independent chartered

accountant or certified public accountant of international standing acceptable to both

parties, at the expense of Licensee. It is understood that the Government retains the

authority to review and audit Licensee’s books and records, with respect to Petroleum

Operations conducted here under, either directly or through an independent account of

international standing designated by the Government. Subject to the provisions of the

Accounting procedure set forth in Annex “C”, such audit right will terminate twentyfour (24) Calendar Months after the closure of the subject year’s accounts or such

longer period as may be required in exceptional circumstances. Any exceptions to

Licensee’s accounts must be officially communicated to Licensee within thirty (30)

Calendar Months of the closure of the subject year’s accounts.

31.3 Nothing in this Article shall be construed as limiting the right of Government or any

officer of Government pursuant to any statutory power to audit or cause to be audited

the books of any company.



62



ARTICLE 32

Notices



All notices and other communications required or permitted hereunder or any notices that one

Party may desire to give to the other Party shall be in writing in the English language and

deemed to have been properly delivered if personally handed to an authorised representative

of the Party for whom intended or sent by registered airmail or by cable, or telefax, except as

otherwise provided herein, at or to the address of such Party for whom intended as indicated

below, or such other addresses as any Party may from time to time designate by notice in

writing to the other Party:

(a) Government:

Ministry of Energy and Mineral Development

P.O. Box 7270

Kampala

UGANDA

Attention:



Commissioner for Petroleum Exploration and Production

Telephone No:256-41-320714

Telefax No:



256-41-320437



(b) Licensee:

For TULLOW UGANDA LIMITED:

Tullow Uganda Limited

Plot 15 Yusuf Lule Road

P.O. Box 16644

Nakasero

Kampala

Uganda

Telephone: +256 (0) 414 564 000



Fax: +256 (0) 414 564 066



63



ARTICLE 33

Applicable Law



33.1 This agreement shall be governed by, interpreted and construed in accordance with the

laws of Uganda.

33.2 The Parties agree that the terms and conditions of this Agreement are based on the

existing laws of the Republic of Uganda and the terms contained in this Agreement. If

after the Effective Date, there is any change in any law in Uganda dealing with income

tax which substantially and adversely alters the economic benefits accruing to the

Licensee, the Licensee may within five (5) calendar years from the date on which any

such change has legal effect, notify Government accordingly and thereafter the Parties

shall negotiate in good faith to agree upon the effect of the changes in law and the

necessary adjustments and modifications to the Agreement in order to maintain the

economic benefit of the Licensee which existed at the Effective Date of this Agreement

PROVIDED that the Licensee shall comply with the requirement of the law and then

notify the Government about the substantial and adverse effect of the change in the law.

33.3 In the event that within ninety (90) days of receipt of notification, the parties are unable

to agree that the Licensee’s economic benefits have been substantially and adversely

affected and /or are unable to agree on the modifications required to maintain the

economic benefits of the Licensee which prevailed at the Effective Date, then either

Party may refer to the matter for expert determination pursuant to paragraph 26.2.

33.4 For the avoidance of doubt, the provisions of paragraph 33.2 above are intended for

maintaining the original economic benefits of the Agreement and shall not prevent the

Government from enacting laws intended to levy additional profit tax on additional

profits.

33.5 For purposes of this Article, the term “economic benefits “means the project’s Net

Present Value (NPV) for the Licensee.”



64



ARTICLE 34

Entire Agreement and Amendments



This Agreement embodies the entire agreement and understanding between Licensee and the

Government relative to the subject matter hereof, and supersedes and replaces any provisions

on the same subject in any other agreement between the Parties, whether written or oral prior

to the date of this Agreement. This Agreement may not be amended, modified, varied or

supplemented except by an instrument in writing signed by Licensee and the Government.



65



ARTICLE 35

Waiver



35.1 The performance of any condition or obligation to be performed under this Agreement

shall not be deemed to have been waived or postponed, except by an instrument in

writing signed by the Party, which is claimed to have granted such waiver or

postponement.

35.2 No delay, inaction, omission or other failure of either Party to act upon or enforce any

right, or to seek redress from the other Party of any breach or alleged breach of any

obligation, shall be deemed a waiver of such rights or acceptability of such breach.

35.3 No waiver by any Party or any one or more obligations or defaults by any other Party in

the performance of this Agreement shall operate or be construed as a waiver of any

other obligations or defaults whether of a like or a different character.



66



ARTICLE 36

Confidentiality



36.1 This Agreement and any confidential information of any Party hereto which becomes

known to the other Party in connection with the performance of this Agreement shall

not be published or disclosed to third parties without the former Party’s written consent,

except as otherwise provided herein, and provided however that such other Party may

communicate confidential information to legal counsel, accountants, other professional

consultants, underwriters, lenders, agents, licensees or shipping companies to the extent

necessary in connection with this Agreement, with the obligation of the parties

receiving such information to maintain confidentiality, or to an agency of the

government of the country of Licensee having authority to require such disclosure.

36.2 The terms “confidential information” as used herein shall mean information identified

as “confidential” by the Party originally in possession of it and disclosed to the other

Party, excluding information previously known to the other Party or information which

is publically known (except through disclosure of the other Party in violation of this

Article) or information that comes into the possession of such other Party other than

through a breach of this confidentiality undertaking.

36.3 Except as otherwise provided in Article 8, the confidentiality obligations of this Article

shall expire upon relinquishment of the area to which the information relates.



67



ARTICLE 37

Disclaimer



37.1 Any reviews, provision of data or requests for information, data or otherwise from the

Licensee by the Government or approvals by the Government or its Nominee under this

Agreement is solely for the information of the Government and its satisfaction that the

requirements of the Government as set forth herein have been satisfied by the Licensee.

By making such reviews, requests or approvals, the Government makes no

representation and the Licensee shall in no way so represent to third parties that such

reviews, requests, approvals or otherwise are proof of the economic and technical

viability of the Petroleum Operations to be undertaken by the Licensee.

37.2 The Government shall not be liable to the Licensee for and the Licensee shall defend

and indemnify the Government from any claim, cost, loss, damage or liability arising

out of any contrary representation by the Licensee.

37.3 The Licensee is solely responsible for the economic and technical feasibility, reliability

or in case of discovery, realisation of the viability of the petroleum production and

production activities.



68



IN WITNESS WHEREOF, the Parties hereto have caused this Agreement prepared in the

Republic of Uganda in the English language to be executed in eight(8) originals by their

respective duly authorised representatives as of the day and year first above written.



Signed for and on behalf of

THE GOVERNMENT OF UGANDA



By: ---------------------------------------HON. ENG. IRENE N. MULONI

MINISTER OF ENERGY AND MINERAL DEVELOPMENT



In the presence of: ----------------------------------------------------------------------------



Signed for and on behalf of

LICENSEE:

Tullow Uganda Limited



By:------------------------------------



-------------------------------------



In the presence of: ------------------------------------------------------------------------



69



ANNEX A

Description the Contract Area



The Kanywataba prospect (Contract Area) comprises some 171 square kilometers within the

Kanywataba area. The area is of rectangular shape and is bounded along its outer margin by a

continuous line which runs through the following geographical points and co-ordinates:



From 01 00' 00''N, 30' 25' 00'' E

and thence East to 01 00' 00''N, 30 35' 00'' E

and thence South to 00 55' 0'' N, 30 35' 00'' E

and thence West to 00 55' 00'' N, 30 25' 00'' E

and thence North back to 01 00' 00''N, 30 25' 00'' E



70



MAP SHOWING KANYWATABA AREA

[Image of map]



71



ANNEX B-1

Form of Exploration Licence

I, _____________________, Minister of Energy and Mineral Development, pursuant to the

powers conferred upon me by Section 9 of the Petroleum (Exploration and Production) Act

chapter 150 under the Laws of Uganda 2000 (“the Act”) hereby grant to ______________, a

company duly organised and existing under the laws of __________________, (“Licensee”)

this Exploration Licence to conduct Exploration Operations within and with respect to the

Contract Area described in the Production Sharing Agreement entered into by and between

the Government of the Republic of Uganda and Licensee, dated ___, 201___ (“the

Agreement”), hereby conferring upon Licensee the exclusive right to explore for petroleum in

the said Contract Area and to carry on such operations and execute such works as necessary

for that purpose for a term of [_________] years from the effective date hereof [subject to

renewal] in accordance with the provisions of the Act and the terms and conditions of said

“Agreement, which forms an integral part of this Licence.



IN WITNESS WHEREOF, I have granted the licence aforesaid with effect from ________,

201__ and set out my hand and seal this _____ day of _________ 201__



Minister of Energy and Mineral Development.



Attachments:

- Description of Exploration Area(s)

- Map of Exploration Area(s)



72



ANNEX B-II

Form of Production Licence



I, _____________________, Minister of Energy and Minerals, pursuant to the powers

conferred upon me by Section 22 of the Petroleum (Exploration and Production) Act chapter

150 under the Laws of Uganda 2000 (“the Act”) hereby grant to _________________, a

corporation duly organised and existing under the laws of _____________, (“Licensee” this

Petroleum Production Licence to conduct Development Operations within and with respect to

the Discovery Area(s) described and shown on the map in the attachment to this licence

hereby conferring upon Licensee the exclusive right to develop said areas and produce

petroleum therefrom, and to carry on such operations and execute such works as are

necessary for that purpose for a term of [______________] (__________) years from the

effective date hereof in accordance with the provisions of the Act, the Development Plan

adopted in connection therewith and the terms and conditions of the Production Sharing

Agreement entered into by and between the Government of the Republic of Uganda and

Licensee, dated _________________, 201__, which form an integral part of this Licence.

The subsequent execution of a Joint Operating Agreement by Licensee and [the Nominee of

the Government] in relation to the Discovery Areas(s) subject hereto in accordance with the

terms of said Production Sharing Agreement, is a requirement of this Licence.

IN WITNESS WHEREOF, I have granted the licence aforesaid with effect from ________,

201__ and set out my hand and seal this _____ day of _________ 201______.



Minister of Energy and Minerals



Attachments:

- Description of Discovery Area(s)

- Map of Discovery Area(s)



73



ANNEX C

Accounting and Financial Procedure

SECTION 1

General Provisions



1.1



Definitions

For the purposes of this Accounting and Financial Procedure the terms used herein

which are defined in the Agreement shall have the same meaning when used in this

Accounting and Financial Procedure.



1.2



Statements required to be submitted by Licensee

(a) Within sixty (60) days of the Effective Date, Licensee shall submit to and discuss

with the Government a proposed outline of charts of accounts, operating records

and reports, which outline shall be in accordance with generally accepted and

recognized accounting systems and consistent and normal practice of the

international petroleum industry and the requirements of this Agreement. Within

sixty (60) days of receiving the above submission, the Government shall either

indicate its approval of the proposal or may request revisions to the proposal to

the extent that such outline is not in accordance with generally accepted and

recognized accounting systems and consistent with the normal practices of the

international petroleum industry and the requirements of this Agreement. In the

event that revisions are so requested by the Government, Licensee and the

Government shall within ninety (90) days after the Effective Date of the

Agreement agree on the outline charts of accounts, operating records and reports

which shall describe the basis of the accounting system and procedures to be

developed and used under the Agreement. Following such agreement, Licensee

shall expeditiously prepare and provide the Government with formal copies of the

comprehensive charts of accounts related to the accounting, recording and

reporting functions and allow the Government to examine Licensee’s manuals

and to review procedures which are, and shall be, observed under the Agreement.

(b) All reports, books, accounts and

maintained in accordance with this

provisions in the Agreement, in

international petroleum industry

accounting standards.



records of Licensee will be prepared and

Agreement and, where there are no relevant

accordance with normal practices in the

and generally accepted and recognized



(c) All accounts, books, records and reports of Licensee required hereunder shall be

maintained at Licensee’s business office in the Republic of Uganda and will be



74



available for the inspection and use of the Government and its representatives in

carrying out its supervisory function under this Agreement.

(d) The Licensee shall report to Government on a quarterly basis, all expenditures,

production, prices, sales receipts, cost recovery and production sharing related to

Petroleum Operations in the Licence area.

1.3



Language and Units of Account

(a) Accounts shall be maintained in Uganda Shillings and in United States Dollars.

However, the United States Dollars accounts will prevail in case of conflict.

Metric units and Barrels shall be employed for measurements required under this

Annex. The language employed shall be English. Where necessary for

clarification, Licensee may also maintain accounts and records in other languages,

units of measurement and currencies.

(b) It is the intent of this Accounting and Financial Procedure that neither the

Government nor Licensee should experience an exchange gain or loss at the

expense of, or to the benefit of, the other. However, any gain or loss resulting

from the exchange of currency, will be credited or charged to the accounts.

(i) Amounts received and costs and expenditures made in Uganda Shillings,

United States Dollars or any other currency shall be converted into Uganda

Shillings or United States Dollars, as the case may be, on the basis of the

average of the buying and selling exchange rates between the currencies in

question as published by Bank of Uganda, prevailing on the last BusinessDay

of the Calendar Month preceding the Calendar Month in which such amounts

are received and costs and expenditures are paid.

(ii) In the event of an increase or decrease, one time or accumulative, of ten

percent (10%) or more in the rates of exchange between the Uganda Shilling,

the United States Dollar or the currency in question, during any given

Calendar Month, the following rates will be used:

(1) For the period from the first of the Calendar Month to the day when such

increase or decrease is first reached, the average of the official buying and

selling exchange rates between the United States Dollar, Uganda Shilling

or the currency in question as issued on the last day of the previous

Calendar Month.

(2) For the period from the day on which such increase or decrease is first

reached to the end of the Calendar Month, the average of the official

buying and selling exchange rates between the United



75



States Dollar, the Uganda Shilling or the currency in question as issued on

the day on which such increase or decrease is reached.

(3) A record of the exchange rates used in converting Uganda Shillings,

United States Dollars or any other currency hereunder shall be maintained

by Licensee.

1.4



Payments

(a)



All payments between the Parties shall, unless otherwise agreed, be in United

States Dollars and through a bank designated by each receiving party.

Payments between the Parties may be effected by way of set-off between

mutual and undisputed liabilities as and when such liabilities accrue.



(b)



Discharge of Licensee’s obligation with respect to Income Tax, the Nominee

of the Government’s Participation Share of Production and the Government’s

Production Share shall be made in accordance with the Agreement.



(c)



All sums due by one party to the other under the Agreement during any

Calendar Month shall, for each day such sums are overdue during such month,

bear interest compounded daily at an annual rate equal to the average London

Interbank Offered Rate for six (6) months as quoted at 11.00 a.m. London time

on the first business day of such month by the London Office of Citibank N.A.

plus five (5) percentage points.



76



1.5



Audit and Inspection Rights of Government

(a)



The Government shall have the right, upon fifteen (15) days’ prior written

notice to Licensee, to audit directly or through an independent account, at its

own cost, Licensees’ accounts and records maintained in relation to the

Petroleum Operations carried out hereunder with respect to the Licence period

within twenty four (24) Calendar Months after the closure of the subject year’s

accounts. Notice of any exception to the Licensee’s accounts of any Calendar

Year must be notified to Licensee within thirty (30) Calendar Months of the

closure of the subject year’s accounts.

For purposes of auditing, the Government may examine and verify at

reasonable times all charges and credits relating to the Petroleum Operations

such as books of account, accounting entries, material records and inventories,

vouchers, payrolls, invoices and any other documents, correspondence and

records necessary to audit and verify the charges and credits. Furthermore, the

auditors shall have the right in connection with such audit to visit and inspect

at reasonable times all sites, plants, facilities, warehouses and offices of

Licensee directly or indirectly serving the Petroleum Operations including

visiting personnel associated with those operations.

If the Government desires verification of charges representing a proportionate

share in the cost of Licensee’s activities other than those carried out hereunder,

it may require such verification to the extent Licensee is able to present the

required information without infringing the confidential or proprietary nature

of such information. In the event that such infringement would occur, the

Government may require Licensee (at Licensee’s expense) to obtain an audit

certificate from an independent external auditor of international standing

(selected by Licensee and acceptable to the Government) verifying such

charge(s). If Government desires verification of charges from Affiliated

Companies of Licensee, Licensee shall, upon the Government’s request and at

Licensee’s expense, obtain an audit certification to such effect from the

statutory auditors of the Affiliate concerned attesting that such rates do not

include a profit element and have been consistently and reasonably applied.

However, the percentage rates to be applied pursuant to paragraph 2.5(b) of

this Accounting and Financial Procedure will not be subject to audit.



77



(b)



The Government shall make every reasonable effort to conduct audits in a

manner, which will result in the minimum of inconvenience to Licensee.

Licensee shall make every reasonable effort to co-operate with the

Government and its statutory auditors or the independent auditors, as the case

may be, will provide reasonable facilities and assistance. Subject to the

provisions of paragraph 1.5(c) hereunder, only one audit may be carried out by

the Government in respect of the accounts for any single Calendar Year.



(c)



Any Government audit shall be completed within (6) Calendar Months of its

commencement. At the conclusion of each audit, the Government and

Licensee shall endeavour to settle outstanding matters and a written report will

be circulated to all parties within three (3) Calendar Months of the conclusion

of each audit. The report shall include all claims arising from such audit

together with comments pertinent to the operation of the accounts and records.

Licensee shall reply to the report in writing as soon as possible and in any

event not later than three (3) Calendar Months following receipt of the report.

Should the Government consider that the report or reply requires further

investigation of any items therein, the Government shall have the right to

conduct further investigations in relation to such item notwithstanding that the

said period of twenty-four (24) Months may have expired.

Such further investigation shall be commenced within thirty (30) days and be

concluded within sixty (60) days of the receipt of such reply and the report

related to such further investigation shall be circulated within ninety (90) days

of the conclusion of such further investigation. All adjustments resulting from

an audit, as agreed between Licensee and the Government, shall be made

promptly by Licensee and be reported to the Government. Any unresolved

dispute arising in connection with an audit shall be referred to the Advisory

Committee and if not resolved thereby shall be referred for expert

determination pursuant to paragraph 26 of the Agreement.



1.6



(d)



Without prejudice to the finality of matters as described in subsection 1.5(a),

all documents referred to in that subsection shall be maintained by the

Licensee and made available for inspection by Government for five (5)

Calendar Years following their date of issue.



(e)



All information obtained by the Government pursuant to the provisions of this

paragraph 1.5 shall be subject to the confidentiality requirements specified in

paragraphs 36.1 and 36.2 of this Agreement.



Accrual Basis

All books, accounts and records shall be prepared on an accrual basis. Contract

Revenues shall be attributed to the accounting period in which they are earned, and

costs and expenses to the account period in which they are incurred, without the need

to

78



Distinguish whether cash is received or disbursed in connection with a particular

transaction. Costs and expenses shall be deemed to have been incurred, in the case of

physical items, in the accounting period when Licensee acquires title thereto, and in

the case of services, in the accounting period when such services are performed.

1.7



Arms Length Transactions

Except as may be otherwise agreed in writing between the Government and Licensee

or as may be provided in Article 13 of the Agreement, all transactions giving rise to

revenues, costs or expenses under this Agreement which will be credited or charged to

the books, accounts, records and reports prepared, maintained or submitted hereunder

shall be conducted at arm’s length or on such a basis as will assure that all such

revenues, costs or expenses will not be materially higher or lower, as the case may be,

than would result from a transaction conducted at arms length on a competitive basis

with third parties.



1.8



Allocation of Shared Costs

To the extent that costs and expenses are incurred by Licensee in respect of activities

which would only in part qualify as Contract Expenses hereunder, such costs and

expenses shall be allocated to the books, accounts, records and reports maintained

hereunder in such a manner as to avoid any duplication of cost, to fairly and equitably

reflect the costs attributable to Petroleum Operations carried out hereunder and to

exclude any costs and expenses which should otherwise be allocated to those activities

which would not constitute Petroleum Operations hereunder.

It is understood, however, that any Exploration or Development and Production

Expenditures associated with a unit development involving a Discovery Area, which

extends into a neighbouring country shall be allocated on the basis of the petroleum

reserves attributable to that portion of the Discovery Area located in each country.



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SECTION 2

Classification, Definition and Allocation of Costs and Expenditures



Contract Expenses incurred in connection with Petroleum Operations carried out hereunder

shall be classified, defined and allocated as follows:

2.1



Exploration Expenditures are all necessary, appropriate and economical direct and

allocated indirect costs incurred in the search for Petroleum and the appraisal of

Discoveries in the Contract Area, including:

(a)



aerial, geophysical, geochemical, palaeontological, geological, topographical

and seismic surveys and studies and their interpretation;



(b)



core hole drilling and water well drilling;



(c)



labour, materials and services used in drilling wells with the object of finding

new Petroleum Reservoirs or for the purpose of appraising the extent of or

subsequently producing Petroleum Reservoirs already discovered provided

such wells are dry or are otherwise not completed as producing wells;



(d)



facilities use solely in support of these purposes including access roads and

purchased geological and geophysical information;



(e)



a portion of all Service Costs (as hereinafter defined) allocated to Exploration

Operations on an equitable basis and consistently applied;



(f)



a portion of all General and Administrative Expenses (as hereinafter defined)

allocated to Exploration Operations based on projected budget expenditures

subject to adjustment on the basis of actual expenditure at the end of the

Calendar year concerned; and



(g)



any other Contract Expenses incurred prior to the commencement of

Commercial Production in a Development Area and not otherwise covered by

paragraph 2.2 below subject to paragraph 4.2.



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Development and Production Expenditures shall consist of all necessary, appropriate and

economical expenditures (other than those referred to in paragraph 2.3) incurred in

Development Operations in relation to a Development Area including:

(a)



drilling wells which are completed as producing wells and drilling wells for purposes

of producing Petroleum Reservoir already discovered providing such wells are

completed as producing wells;



(b)



completing those wells described in paragraph 2.1(c) by way of installation of casing

or equipment or otherwise after a well has been drilled for the purpose of bringing the

well into use as a producing well;



(c)



the costs of field facilities including field gathering systems, field production and

treatment units, wellhead equipment, subsurface equipment, Natural gas separation

facilities, enhanced recovery systems, offshore platforms, Petroleum storage facilities

in the field and related facilities, and field access roads for production activities;



(d)



the costs of transportation facilities installed up to the Delivery Point, including but

not limited to pipelines, compressors, and storage facilities;



(e)



engineering and design studies for field facilities;



(f)



a portion of all Service Costs allocated to the Development Operations on an

equitable basis and consistently applied;



(g)



a portion of all General and Administrative Expenses allocated to the Development

Operations based on projected budget expenditures which will be adjusted to actual

expenditures at Calendar Year end; and



(h)



any other expenditure incurred in Development Operations prior to the

commencement of Commercial Production in a Development Area, other than those

incurred in respect of operations carried out beyond the Delivery Point.



Operating Expenses are all necessary, appropriate and economical expenditures incurred in

the Petroleum Operations hereunder after the start of the Commercial Production (but

including intangible drilling costs such as, but not limited to, labour, consumable material and

services having no salvage value which are incurred in the drilling operations related to the

drilling or deepening of producing wells whether incurred before or after the start of

Commercial Production) which are other than Exploration Expenditures, Development and

Production Expenditures and General andAdministrative Expenses and Service Costs

otherwise allocated to Exploration Expenditures or Development and Production



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Expenditures pursuant to subparagraphs 2.1(e) and (f) and 2.2(f) and (g) above;

Operating Expenses shall not, however, include tariff charges, if any, imposed by the

Pipeline Company associated with the transportation of Petroleum from the Delivery

Point to the seaboard terminal point of export.



2.4



Service Costs are all necessary, appropriate and economical direct and indirect

expenditures in support of the Petroleum Operations including, but not limited to,

warehouse, piers, marine vessels, vehicles, motorised rolling equipment, aircraft, fire

and security stations, workshops, water and sewage plants, power plants, housing,

community and recreational facilities and furniture, tools and equipment used in these

activities. Service Costs in any Calendar Year shall include the total costs incurred in

such year to purchase and/or construct said facilities as well as annual costs to

maintain and operate the same. All Service Costs will be regularly allocated as

specified in subparagraphs 2.1(e), 2.2(f) and 2.3 to Exploration Expenditures,

Development Production Expenditures and Operating Expenses.



2.5



General and Administrative Expenses

(a)



All main office, field office and associated general and administrative costs

incurred in relation to Petroleum Operations, including, but not limited to,

supervisory, accounting and employee relations services carried out by

Licensee in Uganda.



(b)



(i) Licensee’s Affiliated Companies' personnel and service costs (other than

those otherwise provided for in paragraph 4.1(e)(ii) of this Annex) incurred in

connection with the Petroleum Operations carried out hereunder. and

(i) Reasonable travel expenses of such Affiliated Companies' personnel in the

general and administrative category listed in subparagraph (i) above, in

connection with the Petroleum Operations carried out hereunder.



(c)



All General and Administrative Expenses shall be necessary, appropriate and

economical and will be regularly allocated as specified in subsection 2.1(f),

2.2(g) and 2.3 to Exploration Expenditures, Development and Production

Expenditures and Operating Expenses.



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SECTION 3

Income Tax and Allowable

Contract Expenditures



IncomeTax shall be in accordance with the Income Tax Act, Cap. 340, Laws of Uganda

2000.

Allowable Contract Expenditures are the recoverable costs as defined in Section 4 of this

Annex C.



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SECTION 4



Cost, Expenses, Expenditures and

Credit of the Licensee



4.1



Costs Recoverable without Further Approval of the Government

Subject to the provisions of Agreement, Licensee shall bear and pay the following

costs and expenses in respect of the Petroleum Operations. These costs and expenses

will be classified under the headings referred to in paragraph 2 of this Annex. They

are recoverable Contract Expenses by Licensee under the Agreement.

(a)



Surface rights

This covers all direct costs attributable to the acquisition, renewal or

relinquishment of surface rights acquired and maintained in force for the

Contract Area.



(b)



Labour and Associated Labour Costs

(i)



gross salaries and wages including bonuses and cost of living, housing

and other customary allowance afforded to expatriate employees in

similar operations elsewhere of Licensee’s employees directly engaged

in the Petroleum Operations, irrespective of the location of such

employees;



(ii)



Licensee’s costs regarding sickness and disability payments applicable to

the salaries and wages chargeable under subparagraph (i) above;



(iii) expenses or contributions made pursuant to assessments or obligations

imposed under the laws of the Republic of Uganda which are applicable

to Licensee’s cost of salaries and wages chargeable under (i) above;



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(iv) Licensee’s cost of established plans for employees' life insurance,

hospitalisation, pensions, stock purchase and thrift plans.

(v)



benefits of a like nature customarily granted to Licensee’s employees;



(vi) reasonable travel and personnel expenses of employees of Licensee and

their families including those made for travel and relocation of the

expatriate employees assigned to the Republic of Uganda, all of which

shall be in accordance with Licensee’s normal practice, provided such is

consistent with generally accepted practices in the international

petroleum industry; and

(vii) any personal income-taxes of the Republic of Uganda incurred by

employees of Licensee and paid or reimbursed by Licensee.



(c)



Offices, Camps, Warehouses and other facilities

The cost of establishing, maintaining and operating any offices, camps,

warehouses, workshops, housing, water systems and other facilities for the

purpose of carrying out the Petroleum Operations. The costs of those facilities,

which are not used for the exclusive purpose of carrying out the Petroleum

Operations, shall be apportioned on a consistent and equitable basis between

the Petroleum Operations and the Licensee’s other operations and those of its

Affiliates.



(d)



Transportation

The cost of transportation of employees, equipment, materials and supplies

necessary for the conduct of the Petroleum Operations.



(e)



Charges for Services

(i)



Third Party Contacts



The actual costs of contracts for technical and other services entered into by

Licensee for the Petroleum Operations, made with third parties other than

Affiliated Companies of Licensee are recoverable, provided that the



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supply and point of shipment, loading and unloading fees, dock charges,

forwarding and documentation fees, packing costs, freight to port of

destination, insurance, taxes, customs duties, consular fees, other items

chargeable against imported material and where practicable handling and

transportation expenses from point of importation to warehouse or operating

site, and its costs should not exceed those currently prevailing in normal arms

length transactions on the open market.



(b)



Materials purchased from Affiliated Companies of Licensee shall be charged

at prices not higher than the following:



(1)



New Material (Condition “A”) shall be valued at the current international price

which should not exceed the price prevailing in normal arms length

transactions on the open market.



(2)



Used Material (Conditions “B” and “C”)

(i)



Material which is in sound and serviceable condition and is suitable for

reuse for its original function without reconditioning shall be classified

as Condition “B” and priced at seventy-five percent (75%) of the current

price of new material defined in subparagraph (1) above.



(ii)



Material which cannot be classified as Condition “B” but which after

repair and reconditioning will be further serviceable for original function

as good secondhand material (Condition “B”) shall be classified as

Condition “C” and priced at fifty percent (50%) of the current price of

new material as defined in subparagraph (1) above.



87



(iii) Material which cannot be classified as Condition “B” or condition “C”

shall be priced at a value commensurate with its use.

(iv) Material involving erection costs shall be charged at the applicable

condition percentage of the current knocked down price of new material

as defined in subparagraph (1) above.

(v)



When the use of material is temporary and its service to the Petroleum

Operations does not justify the reduction in price as provided for in

subparagraph (2)(ii) hereof, such material shall be priced on a basis that

will result in a net charge to the accounts under the Agreement consistent

with the value of the service rendered.



(vi) Stocks and consumables costs shall be charged to the accounts pursuant

to the “Average Cost” method.



(g)



Rentals, taxes, duties, and Other Assessments

All rentals, levies, charges, fees, compensation or other charges in respect of

rights of way, contributions and any other assessment and charges levied by

the Government or any Government or foreign public authority in connection

with the Petroleum Operations, and paid directly or indirectly by Licensee,

other than Income Tax imposed on Licensee (except as provided in Article 14

of the Agreement) and the Government Production Share attributable pursuant

to Article 13 of the Agreement.



(h)



Insurance and Losses

Insurance premia and costs incurred for insurance, provided that if such

insurance is wholly or partly placed with an Affiliated Company of Licensee,

such premia and costs shall be recoverable only to the extent generally charged

by competitive insurance companies other than an Affiliated Company of

Licensee. Costs and losses incurred as a consequence of events which are, and

in so far as, not made good by insurance obtained under the Agreement are

recoverable under the Agreement unless such costs have resulted solely from

an act of Gross Negligence or Willful Misconduct of Licensee.



(i)



Legal Expense

All costs and expenses of litigation and legal or related services necessary or

expedient for the producing, perfecting, retention and protection of the

Contract Area, and in defending or prosecuting lawsuits involving the Area or

any third party claim arising out of activities under the Agreement, or



88



sums paid in respect of legal services necessary or expedient for the protection

of the interest of Licensee are recoverable. Where legal services are rendered

in such matters by salaried or regularly retained lawyers of Licensee or an

Affiliated Company of Licensee, such compensation will be included instead

under subparagraph 4.1(b) or 4.1(d) above, as applicable.

(j)



Training Costs

Except where otherwise provided herein, all costs and expenses incurred by

Licensee in training of its Ugandan employees engaged in the Petroleum

Operations and such other training as required under Article 18 of the

Agreement.



(k)



General and Administrative Expenses

The costs described in subparagraph 2.5(a) and the charge described in

subsection 2.5(b).



(l)



Interest and other financial charges incurred on loans raised by Licensee to

finance Development Operations provided that such interest rates and charges

do not exceed prevailing commercial rates and only to the extent that such

interest and financial charges relate to debt raised by Licensee to finance such

operations (including loans from both Affiliates and Non-Affiliates) do not

exceed fifty per cent (50%) of the total financing requirement. All loans from

Affiliated Companies shall be subject to review and approval of the

Government, which approval shall be given provided that the terms of such

loans are comparable to those which could be obtained on an arms length basis

from a non-Affiliated Company lender.



89



4.2



(m)



Commissions paid to intermediaries by Licensee unless such commissions

exceed the levels usually paid in the international oil industry under similar

conditions in which event the approval of the Government shall be required,

which approval shall not be unreasonably withheld.



(n)



Expenditure on research into and development of new equipment, material and

techniques for use in searching for development and producing Petroleum

directly related to the conduct of Petroleum Operations carried out under this

Agreement.



(o)



Ecological and environmental charges: Costs for all measures taken to avoid

waste and prevent damage or pollution in the conduct of the Petroleum

Operations.



(p)



Leasing expenses: Costs incurred in connection with the leasing of property

and equipment provided that such costs do not exceed prevailing commercial

rates and that any such leasing arrangements are concluded with parties which

are not Affiliated Companies of Licensee.



(q)



Communication charges: Costs of acquiring, leasing, operating and

maintaining communication systems including, but not limited to, radio,

telephone, telecopier and e-mail systems.



Costs not Recoverable under the Agreement

(a)



Costs incurred before the Effective Date.



(b)



Petroleum marketing or transportation tariff charges incurred beyond the

Delivery Point.



(c)



The costs associated with the provision of the Bank Guarantee pursuant to

paragraph 4.6 of the Agreement and any payments made thereunder in respect

of failure by Licensee to comply with its contractual obligations under the

Agreement (and any other amounts spent on indemnities with regard to

fulfilment of contractual obligations by Licensee).



90



4.3



(d)



Legal and other costs of arbitration and the independent expert in respect of

any dispute referred for determination pursuant to Article 26 of the

Agreement.



(e)



Royalty paid pursuant to Article 10.



(f)



Income Tax imposed in accordance with the laws of Uganda



(g)



The Government Production Share determined pursuant to Article 13 of the

Agreement.



(h)



Fines and penalties imposed by Courts of Law of the Republic of Uganda.



(i)



Costs incurred as a result of Gross Negligence or Willful Misconduct of

Licensee; and



(j)



Interest incurred on loans raised by Licensee to finance Exploration

Operations.



Other Costs and Expenses

Other costs and expenses not covered or dealt with in the provisions of this

Sectionand which are incurred by Licensee for the necessary and proper conduct of

Petroleum Operations are recoverableafter written approval of Government.



4.4



Credits Under the Agreement

The net proceeds of the following transactions will be credited to the accounts under

the Agreement:



(c)



(a)



The net proceeds of any insurance or claim in connection with the Petroleum

Operations or any assets charged to the accounts under the Agreement when

such operations or assets were insured and the premia charged to the accounts

under the Agreement.



(b)



Revenue received from outside for the use of property or assets charged to the

accounts under the Agreement.



Any adjustment received by Licensee from the suppliers/manufacturers or their agents

in connection with a defective material the cost of which was previously

charged by Licensee to the accounts under the Agreement.



91



4.5



(d)



Rebates, refunds or other credits received by Licensee which apply to any

charge which has been made to the accounts under the Agreement, but

excluding any awards granted to Licensee under the arbitration or independent

expert proceedings referred to in Subsection 4.2(d) above.



(e)



The actual net proceeds of sale realised from the disposal on arms length basis

of inventory materials originally charged to the accounts under the Agreement

and subsequently exported from the Republic of Uganda without being used in

the Petroleum Operations. In the event that such inventory materials are

exported but not sold by Licensee, or, if sold, are disposed of other than on an

arms length basis, such materials will be valued as used material pursuant to

paragraph 4.1(f)(iii) of this Annex and the value so determined shall be

credited to the Accounts.



Duplication of Charges and Credits

Notwithstanding any provisions to the contrary in this Accounting Financial

Procedure, it is the intention that there shall be no duplication of charges or credits in

the accounts under the Agreement.



92



SECTION 5

Records and Valuation of Assets



Licensee shall maintain detailed records of property and assets in use for the Petroleum

Operations in accordance with the normal practice in exploration and production activities in

the international petroleum industry. At reasonable intervals but at least once a year with

respect to movable assets and once every five (5) years with respect to immovable assets,

inventories of the property under the Agreement shall be taken by Licensee. Licensee shall

give Government at least thirty (30) days written notice of its intention to take such inventory

and Government shall have the right to be represented when such inventory is taken.

Licensee will clearly state the principles upon which valuation of the inventory has been

based. When an assignment of rights under the Agreement takes place, a special inventory

may be taken by Licensee at the request of the Assignee provided that the costs of such

inventory are borne by the Assignee and not charged to Contract Expenses hereunder.



93



SECTION 6



Revision of Accounting and Financial

Procedures and conflicts



6.1



The provisions of this Accounting and Financial Procedure may be amended by

Agreement between Licensee and the Government. The amendments shall be made in

writing and shall state the date upon which the amendments shall become effective.



6.2



In the event of any conflict between the provisions of this Accounting and Financial

Procedure and the Agreement the provisions of the Agreement shall prevail.



94



ANNEX D - I

Performance Bond

(Date)



Ministry of Energy and Mineral Development

P O Box 7270

Kampala

Republic of Uganda

PERFORMANCE BOND NO.-------------------------------



By this Bond we -----------------------------------------------------------------(hereinafter referred

to as the Surety) are held and firmly bound unto the GOVERNMENT OF THE

REPUBLIC OF UGANDA represented by the Ministry of Energy and Mineral

Development of P.O. Box 7270, Kampala (hereinafter referred to as “Government”) in the

full and just sum of United States Dollars ---------------------------------------(US$------------)

only to the payment of which the said sum of money well and truly to be made and done the

Surety bind themselves their successors and assigns jointly and severally firmly by these

presents.



WHEREAS the Government has entered into Production Sharing Agreement (herewith

referred to as the “Agreement “) with -------------------------------(hereinafter referred to as the

“Licensee”) bearing the date of the ---------------------- for, among other things particularly

shown in the written Work Programme for the ---------------------------for Year -----of the

said written Agreement which Work Programme and written agreement with all their

conditions are hereby made a part of these presents to all intents and purposes.

NOW, therefore, the foregoing obligation is such that if the Licensee shall well truly and

faithfully comply with all the terms, covenants and Conditions of the said written Work

Programme on their part to be kept and performed according to the tenor of the said written

Work Programme or if on default by the Licensee they surely shall satisfy and discharge the

damage sustained by the Government thereby not exceeding of United States Dollars ----------------- ------------------(US$ -------------------) only then this obligation shall be null and void

otherwise it shall remain in full force and virtue.



PROVIDE ALWAYS that the Surety shall not be discharge or released from the obligation

by any arrangement made between the Licensee and the Government with or without the

assent of



95



the Surety or by any alteration of the terms and conditions of the said written Work

Programme or by any forbearance whether as to payment time performance or otherwise.

Sealed in the Common Seal of --------------------------------------------of this -------day of -----------------.

In the presence of: -------------------------------------------------------



----------------------------------------------------------------



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