NOTICE: The text below was created automatically and may contain errors and differences from the contract's original PDF file. Learn more here

























REPUBLIC OF YEMEN



PRODUCTION SHARING AGREEMENT



BETWEEN



MINISTRY OF OIL AND MINERALS



AND



1- DNO ASA



2- ANSAN WIKFS (HADRAMAUT)LTD



3- TG HOLDINGS YEMEN INC.



4- THE YEMEN COMPANY ( A SUBSIDIARY OF YEMEN OIL AND GAS CORPORATION)



IN THE AL-AIL AREA



BLOCK (72)



HADRAMAUT GOVERNORATE

REPUBLIC OF YEMEN



PRODUCTION SHARING AGREEMENT



BETWEEN



MINISTRY OF OIL AND MINERALS



AND



1- DNO ASA



2- ANSAN WIKFS (HADRAMAUT) LTD



3- TG HOLDINGS YEMEN INC.



4- THE YEMEN COMPANY (A SUBSIDIARY OF YEMEN OIL AND GAS CORPORATION)



IN THE AL-AIN AREA



BLOCK (72)



HADRAMAUT GOVERNORATE



Preamble



This agreement was made and entered into in Sana'a on the --- day of --- 14---H corresponding to the --- day of --- 200---, between the Ministry of Oil and Minerals (hereinafter referred to as "MINISTRY" or "MOM") and DNO ASA (hereinafter referred to as "DNO"), a corporation duly organized and existing under the laws and regulations of Norway, and Ansan Wikfs (Hadramaut) Limited (hereinafter referred to as "ANSAN"), a corporation duly organized and existing under the laws and regulations of the Cayman Islands and TG Holdings Yemen Inc. (hereinafter referred to as "TG") a corporation duly organized and existing under the laws and regulations of Turks & Caicos Islands, British West Indies, and The Yemen Company (hereinafter referred to as the "Yemen Company"), a subsidiary of Yemen Oil and Gas Corporation, organized and existing under the laws of the Republic of Yemen, DNO, ANSAN, TG and the Yemen Company are hereinafter referred to jointly and collectively as the "CONTRACTOR".



WHEREAS, all natural resources including all their types and energy sources existing in the surface or subsurface of the ground, in the territorial waters, or the continental shelf and the entire exclusive economic zone of the REPUBLIC OF YEMEN are the property of the STATE; andWHEREAS, the STATE wishes to promote the development of potential Petroleum resources in the Agreement Area defined in this Agreement and the CONTRACTOR wishes to join and assist the STATE in the Exploration, Development and production of the potential Petroleum resources in the Agreement Area, AL-AIN, BLOCK (72), Hadramaut Governorate, REPUBLIC OF YEMEN; and



WHEREAS, the STATE authorized the MINISTRY to negotiate and execute this Agreement in accordance with terms negotiated herein between the MINISTRY and the CONTRACTOR; and



WHEREAS, a law shall be issued expressly ratifying this Agreement; and



WHEREAS, the CONTRACTOR is willing to undertake the obligations provided under this Agreement as a contractor with respect to the Exploration and Development (including production, storage and transportation of Crude Oil in the Agreement Area) and possesses all the necessary financial resources and the technical and professional competence to carry out the Petroleum Operations described under this Agreement.



NOW, THEREFORE, the Parties hereto agree as to the following:



ARTICLE 1

DEFINITIONS



1 An "Affiliated Company" means a company:



a. in which the share capital conferring a majority of votes at stockholders' meeting of such company is owned directly or indirectly by a Party hereto; or



b. which is the owner directly or indirectly of share capital conferring a majority of votes at stockholders' meetings of a Party hereto; or



c. whose share capital conferring a majority of votes at stockholders' meeting of such company and the share capital conferring a majority of votes at stockholders' meeting of a Party hereto are owned directly or indirectly by the same company; or



d. which directly or indirectly controls, is controlled by, or is under common control with a Party hereto.For the purposes of this definition, the word "control" means the right to exercise more than fifty percent (50%) of the voting rights at shareholders' or partners' meetings. For the purposes of this definition, the term "Party hereto" means the MINISTRY or any of the entities comprising the CONTRACTOR.



1.2 "Agreement" shall mean this Production Sharing Agreement and the attached Annexes.



1.3 "Agreement Area" means the area as described in Annex "A" and shown on the map labeled Annex "B" which are attached to this Agreement. This area may be reduced from time to time in accordance with Article 5 of this Agreement.



1.4 "Associated Gas" means the Gas which is associated with Crude Oil when it is produced from any well in the Agreement Area, or can be acquired after separation at the lease separators. The aforesaid description includes all the elements that are components of the Associated Gas prior to its processes through the extraction, condensation, distillation and liquification facilities.



1.5 "Barrel" or "BBL" consists of forty-two (42) US gallons measuring a liquid at a temperature of sixty degrees Fahrenheit (60° F) and atmospheric pressure of 14.70 PSIA.



1.6 "Commercial Discovery" means a discovery which the CONTRACTOR determines to be worthy of commercial Development, as set forth in Article 3.5 of this Agreement.



1.7 "Commercial Gas Well" means the first well on any geological feature which, after testing for a period of not more than thirty (30) consecutive Days where practical, and in accordance with sound and accepted Petroleum Industry production practices and verified by MOM, is found to be capable of producing Gas at a rate that, in the CONTRACTOR'S opinion economically justifies the undertaking of appraisal work. The date of discovery of a Commercial Gas Well is the date on which such well is tested and completed, according to the above. Written notice of such discovery shall be given to the MINISTRY, together with a report of the test results and other information available from the well, no later than thirty (30) Days following the conclusion of such testing.1.8 "Commercial Oil Well" means the first well on any geological feature which, after testing for a period of not more than thirty (30) consecutive Days in accordance with sound and accepted Petroleum Industry production practices, is capable of producing Oil at a rate that, in the CONTRACTOR's opinion, economically justifies the undertaking of appraisal work. The date of establishment of a Commercial Oil Well is the date on which the CONTRACTOR notifies the MINISTRY in writing that such well has been completed and tested according to the above. Such notice is to be given, together with a report of the test results and other information available from the well, no later than thirty (30) Days following the conclusion of such testing.



1.9 The "CONTRACTOR" means the companies set forth in the preamble to this Agreement and any of their assignees, as provided for in Article 20 of this Agreement.



1.10 "Cost Oil" means the Crude Oil allocated for cost-recovery as defined in Article 7.1 of this Agreement.



1.11 "Customs Duties" means the customs duties referred to in Article 12 of this Agreement.



1.12 "Dependent Unit" means any corporation, authority, board, company, or directorate of the MINISTRY, authorized by the MINISTER according to Article 31 of this Agreement to undertake the rights and obligations of the MINISTRY concerning this Agreement.



1.13 "Development" means, but is not limited to, all the operations and activities pursuant to approved Work Programs and Budgets under this Agreement, including, but not limited to, the drilling, deepening, plugging back, side tracking, redrilling, completing and equipping of all types of development wells, the design, construction, installation, commissioning, operation, servicing and maintenance of equipment, lines, systems, facilities, plants and related operations in connection with all types of development wells, production, saving, treating, processing and handling of Petroleum; the taking, saving, storing, transporting and delivering of Petroleum for export, and the undertaking of re-pressuring, recycling and other secondary recovery projects.1.14 "Development Area" means the entire Development Block or Development Blocks covering the entire geological structure capable of production, as defined in a Request for Conversion to Development Area signed by the CONTRACTOR and approved by the MINISTER.



1.15 "Development Block" means an area, the corner points of which have to be coincident with six (6) minutes by six (6) minutes latitude and longitude divisions according to the "International Grid System" except where limited by the existing boundaries of the Agreement Area.



1.16 "Development Expenditures" means all costs, expenses and expenditures for Development operations with the exception of Operating Expenses.



1.17 "Development Period" means the period for conducting Development operations as provided in Article 3.4.2 of this Agreement.



1.18 "Dry Gas" is a non-Associated Gas, or the natural gas that exists in any geological reservoir that does not include Oil. The above definition is applied to all natural gas that is produced to the surface not in association with Crude Oil or condensates.



1.19 "Effective Date" means the date of the issuance of the law ratifying this Agreement as provided in Article 33 of this Agreement.



1.20 "Exploration" shall include but not be limited to such geological, geochemical, geophysical, aerial and other surveys, and interpretation thereof, as may be contained in the approved Work Programs and Budgets, and the drilling of such shot holes, core holes, stratigraphic tests, holes for the discovery of Petroleum or the appraisal of Petroleum discoveries and other related holes and wells, and the purchase or acquisition of such supplies, materials, services and equipment thereof, as may be contained in the approved Work Programs and Budgets.



1.21 "Exploration Advisory Committee" means the committee that is designated by both Parties during the Exploration Period as provided for and defined in Article 4.3 of this Agreement.



1.22 "Exploration Expenditures" means all expenditures, costs and expenses incurred for Exploration activities after the Effective Date of this Agreement and those incurred after the signature of this Agreement if approved by the MINISTRY.1.23 "Exploration Period" and "First Exploration Period" and "Second Exploration Period" mean the periods of Exploration as defined in Article 3.4.1.



1.24 "Exploration Work Program and Budget" means Work Program and Budget for Exploration as defined in Article 4 and described in Annex "C".



1.25 "Gas" means Dry Gas and/or Associated Gas.



1.26 "Initial Commercial Production" means the first date upon which regular production of Crude Oil from the first Development Area is transported from such Development Area for the purpose of sale, export, or processing at a refinery.



1.27 "Liquid Crude Oil" or "Crude Oil" or "Oil" means any hydrocarbon produced from the Agreement Area in a liquid state at the wellhead or lease separators, and existing in a liquid form at a temperature of sixty degrees Fahrenheit (60° F) and atmospheric pressure of 14.70 PSIA.



1.28 "Minimum Work Obligation" means the minimum Exploration work to be performed by the CONTRACTOR with respect to the First Exploration Period or the Second Exploration Period, as applicable, as described in Annex "C".



1.29 "MINISTER" means the Minster of Oil and Minerals or any other Minister designated from time to time by the STATE to represent the STATE with respect to this Agreement.



1.30 "MINISTRY" or "MOM" means the Ministry of Oil and Minerals of ROY.



1.31 "Minimum Expenditure Obligation" means the minimum expenditures to be paid by the CONTRACTOR for Exploration with respect to the First Exploration Period or the Second Exploration Period, as applicable, as described in Annex "C".



1.32 "Month" or "Calendar Month" means a calendar Month, according to the Gregorian calendar, starting on the first Day of the calendar Month, unless another starting date is indicated in the applicable provision of this Agreement. The term "Day" means a day according to the Gregorian calendar.1.33 "Monthly Average Daily Net Production" means the total volume in Barrels of Liquid Crude Oil produced and saved from all the Development Area(s) or Development Block(s) and not used in Petroleum Operations during any Month, divided by the number of Days in such Month.



1.34 "Operating Expenses" means all costs, expenses and expenditures incurred on and after Initial Commercial Production, which costs, expenses and expenditures are not normally depreciable.



1.35 "Operator" means DNO which is designated to conduct the Petroleum Operations as specified in Articles 3.1.



1.36 "Operating Committee" means the committee established pursuant to Article 6 and Annex "E" of this Agreement.



1.37 "Parties" means the MINISTRY and the CONTRACTOR and "Party" means either the MINISTRY or the CONTRACTOR, as the context requires.



1.38 "Petroleum" means Liquid Crude Oil of various densities, asphalt, Dry Gas, Associated Gas, and all other hydrocarbon substances that may be found in, and produced, or otherwise obtained and saved from the Agreement Area, and all substances that may be extracted therefrom.



1.39 "Petroleum Industry" means the international petroleum industry.



1.40 "Petroleum Operations" means Exploration, Development and production operations and all other operations authorized or contemplated under this Agreement.



1.41 "Production Sharing Oil" means the Crude Oil to be shared between the MINISTRY and the CONTRACTOR as described in Article 7.3 of this Agreement.



1.42 "Quarter" or "Calendar Quarter" means a period of three (3) consecutive Months beginning on January 1st, April 1st, July 1st, and October 1st of each Year.



1.43 "Request for Conversion to Development Area" means the request signed by the CONTRACTOR and approved by the MINISTER for the purpose of defining the Development Area with respect to aCommercial Discovery of oil. The form of such request is attached to this Agreement as Annex "H".



1.44 "Royalty" means the royalty to which the STATE is entitled in accordance with Article 3.2 of this Agreement.



1.45 "ROY Income Taxes" means the taxes defined in Article 9.1.2 of this Agreement.



1.46 "SCF: means the amount of Dry Gas necessary to fill one (1) cubic foot of space at atmospheric pressure of 14.70 PSIA and at a base temperature of sixty degrees Fahrenheit(60 O F).



1.47 "Working Day" means a Day on which banks in YEMEN are customarily open for business.



1.48 "Work Program and Budget" means the annual work program and budget for Exploration and/or Development under this Agreement.





1.49 "Year" or "Calendar Year" or "Tax Year" of "Financial Year" means a period of twelve (12) consecutive Months, according to the Gregorian calendar, starting on January 1st, unless another starting date is indicated in the applicable provision of this Agreement.



1.5 "YEMEN" or "ROY" or "STATE" means the Republic of Yemen, and "GOVERNMENT" means the Government of the Republic of Yemen as defined in the constitution of ROY.





ARTICLE 2

ANNEXES



2.1 Annexes "A","B","C","D","E","F"."G", and "H" attached to this Agreement are hereby made part hereof and they shall be considered as having equal force and effect with the provisions of this Agreement, provided that if there is a conflict between any Annex and the provisions of the main body of this Agreement, the provisions of the main body of this Agreement shall prevail.



2.1.1 Annex "A" is a description of the Agreement Area.





























































2.1.2 Annex "B" is an illustrative map indicating the Agreement Area. In the event of any inconsistency between the contents of Annex "A" and Annex "B", the content of Annex "A" shall prevail.



2.1.3 Annex "C" sets out the Minimum Work Obligation and the Minimum Expenditure Obligation during the Exploration Period(s), and extensions thereof.



2.1.4 Annex "D" is the Form of the irrevocable Letter of Credit.



(a) The Operator on behalf of the Contractor shall deliver to the MINISTRY, within thirty (30) working Days from the Effective Date, an irrevocable letter of credit in substantially the form attached as Annex "D" ("Letter of Credit") issued by a Yemeni bank selected by the Operator on behalf of the Contractor and acceptable to the Central Bank of Yemen in an amount of Four million United States Dollars (U.S$4,000,000) which corresponds with the Minimum Expenditure Obligation for the First Exploration Period or anther form of Guarantee acceptable to MOM. The Letter of Credit shall remain valid and effective for six (6) Months after the end of said period. Within thirty (30) working Days after the end of the First Exploration Period, the CONTRACTOR shall, if the CONTRACTOR has elected to enter into the Second Exploration Period, deliver to the MINISTRY a second Letter of Credit, in the form and on the same conditions as the first Letter of Credit, in the amount of the Minimum Expenditure Obligation for the Second Exploration Period which is equal to Three million United States Dollars (U.S$3,000,000) or another form of Guarantee acceptable to MOM less any credits for excess work previously carried out by the CONTRACTOR in the first Exploration Period. If within fifteen (15) Working Days after the thirty (30) Working Days specified in either case above the CONTRACTOR fails to deliver to the MINISTRY the required Letter of Credit, this Agreement shall be considered null and void without any further procedure or notices.



(b) If, at the end of the First Exploration Period or the Second Exploration Period or at the termination of this Agreement, the CONTRACTOR has failed to fulfill itsMinimum Work Obligation for the applicable period, and neither the CONTRACTOR nor the bank under the applicable Letter of Credit has paid the entire amount corresponding to the amount of the applicable Letter of Credit (reduced as provided below), then the MINISTRY shall be entitled to draw the amount of said Letter of Credit against the bank in accordance with its terms.



(c) As to each Exploration Period, the amount of the Letter of Credit shall be reduced as and when each part of the Minimum Work Obligation is performed by the amount corresponding to the work as specified in Annex "C". Each reduction shall be effected by a letter signed by the MINISTRY and delivered to the issuing bank in substantially the form attached as Exhibit II to Annex "D". Provided, however, if the Operator on behalf of the CONTRACTOR delivers such a letter to the MINISTRY for its signature, specifying the amount of the reduction, and no objection



to such letter is received by the Operator on behalf of the CONTRACTOR and the issuing bank from the MINISTRY within sixty (60) Days after said delivery, then the relevant reduction may be effected by the Operator on behalf of the CONTRACTOR sending to the issuing bank a copy of the letter delivered to the MINISTRY, as aforesaid certifying that:



(i) a letter in such form was delivered to the MINISTRY and



(ii) the MINISTRY did not object to the letter within sixty (60) Days after such delivery; and instructing the issuing bank to effect the reduction stated in said copy of the letter.



2.1.5 Annex "E" is the Form of the Charter of the Operating Committee to be formed as provided for in Article 6 of this Agreement.



2.1.6 Annex "F" is the Accounting Procedures.



2.1.7 Annex "G" is a Sample Calculation of Royalty, Cost Oil and Production Sharing Oil.



2.1.8 Annex "H" is the Form of Request for Conversion to Development Area.ARTICLE 3

GRANT OF RIGHTS AND TERM



3.1 Grant of Rights

The STATE hereby grants to the CONTRACTOR and the MINISTRY the exclusive right to conduct Petroleum Operations in the Agreement Area subject to the terms, covenants and conditions set out in this Agreement. The Operator shall conduct the Petroleum Operations Only as operator under this Agreement.



This Agreement shall henceforth govern all the interests, rights and obligations of the Parties, and the STATE shall in its name retain the title to the Agreement Area. Except as expressly provided by this Agreement, no other rights or privileges are granted to the CONTRACTOR with respect to either the Agreement Area, Petroleum produced from the Agreement Area or any other mineral resources in the Agreement Area. In the event of any change in the Operator, such change shall be subject to the prior approval of the MINISTRY.



3.2 Royalties

The STATE shall own and be entitled to take as Royally from the total Crude Oil produced and saved from the Development Area(s) and not used in Petroleum Operations prior to the deduction of Cost Oil, a non-recoverable amount of the Monthly Average Daily Net Production ("MADNP") commencing with the first Barrel produced and saved from the Development Area(s) and not used in Petroleum Operations the following percentages:



3.2.1 Three percent (3%) of the portion or increment of production up to and including twenty five thousand (25,000) Barrels of Monthly Average Daily Net Production;



3.2.2 Five percent (5%) of that additional portion or increment of production which exceeds twenty five thousand (25,000) Barrels of Monthly Average Daily Net Production up to and including fifty thousand (50,000) Barrels of Monthly Average Daily Net Production;



3.2.3 Six percent (6%) of that additional portion or increment of production which exceeds fifty thousand (50,000) Barrels of Monthly Average Daily Net Production up to and including seventy five thousand (75,000) Barrels of Monthly Average Daily Net Production;3.2.4 Eight percent (8%) of that additional portion or increment of production which exceeds seventy five thousand (75,000) Barrels of Monthly Average Daily Net Production up to and including one hundred thousand (100,000) Barrels of Monthly Average Daily Net production:



3.2.5 Ten percent (10%) of that additional portion of increment of production which exceeds on hundred thousand (100,000) Barrels of Monthly Average Daily Net Production.



3.3. The MINISTRY's Participating Carried Interest



3.3.1 The MINISTRY's operating arm, the Yemen Company, shall acquire as of the Effective Date of this Agreement a carried Ten percent (10%) of the CONTRACTOR's rights and working interests under this Agreement. The entities constituting the CONTRACTOR (other than the Yemen Company) shall acquire the remaining Ninety percent (90%) of the CONTRACTOR's rights and working interests under this Agreement and shall fund, bear and pay all costs, expenses and expenditure of Petroleum Operations conducted according to the provisions of this Agreement on behalf of the CONTRACTOR.



3.3.2 (a) Upon Initial Commercial Production, the entities constituting the CONTRACTOR (except the Yemen Company) shall collectively receive one hundred percent (100%) of the Cost Oil allocated to recover all costs, expenses and expenditures incurred and paid by them in conducting Petroleum Operations under this Agreement on behalf of the CONTRACTOR.



3.3.2 (b) The Yemen Company shall receive Ten percent (10%) of the CONTRACTOR's share of Production Sharing Oil allocated to the CONTRACTOR as provided for in Article 7.3 of this Agreement, and the entities constituting the CONTRACTOR (other than the Yemen Company) shall collectively receive Ninety percent (90%) of the full CONTRACTOR's share of Production Sharing Oil. 3.3.3 The entities comprising the CONTRACTOR (including the Yemen Company) shall not later than sixty (60) Days after the signing of this Agreement enter into an agreement among themselves to provide for the procedures whereby they shall exercise their rights and fulfill their obligations as CONTRACTOR (such agreement being hereinafter referred to as the "Joint Operating Agreement").



3.4 Term

The term of this Agreement shall include an Exploration Period and a Development Period as follows:

3.4.1 Exploration Period and Extension

(a) The Exploration Period shall consist of the First Exploration Period of Thirty (30) Months, commencing on the Effective Date, and at the CONTRACTOR'S election, a Second Exploration Period of Thirty (30) Months commencing on the Day next following the end of the First Exploration Period or any extension thereof if the CONTRACTOR elects to enter into such extension and such extension is approved by the MINISTRY.



The First and Second Exploration Periods may each, at the CONTRACTOR'S election, be extended for six (6) Months upon prior request to the MINISTRY and its approval. The CONTRACTOR shall have the right to elect to enter into the second Exploration Period by providing written notice to the MINISTRY at least thirty (30) Days prior to the end of the First Exploration Period or its extension then in effect therein, provided the MINISTRY agrees that the CONTRACTOR has fulfilled all its obligations under this Agreement for the First Exploration Period or its extension.



(b) Subject to approval of the MINISTRY, the First Exploration Period and/or the Second Exploration Period, or extension(s) thereof may be extended for appraisal and evaluation, if the CONTRACTOR has fulfilled the obligations for that period but needsmore time to evaluate or appraise the results of the Exploration work performed, and requests in writing an extension for a term not to exceed nine (9) Months by written request to the MINISTRY at least thirty (30) Days prior to the end of such period. Such written request shall include the results of the Exploration work performed and the evaluation or appraisal work to be accomplished during the appraisal extension.



(c) The MINISTRY may during the Exploration Period at its sole discretion, give due consideration to ongoing Petroleum Operations and give reasonable extensions to allow the CONTRACTOR to fulfill its remaining Work Programs under this Agreement.



3.4.2 Development Period

The Development Period shall commence on the date of the first Commercial Discovery of Oil and shall continue for a period of twenty (20) Years and may be extended by up to five (5) Years upon the written request of the CONTRACTOR six (6) Months prior to the expiry of the Development Period and the approval of the MINISTRY of such extension shall be subject to new terms and conditions mutually agreed by the MINISTRY and the CONTRACTOR within the specified six (6) Month period.



3.5 Commercial Discovery of Oil

3.5.1 A Commercial Discovery of Oil may consist of one producing reservoir or of a group of producing reservoirs worthy of being developed commercially. After drilling a Commercial Oil Well, the CONTRACTOR shall undertake as part of its Exploration program the appraisal of the discovery by drilling one or more appraisal wells to determine whether such discovery is worthy of being developed commercially, taking into consideration the recoverable reserves and all other relevant technical and economic factors.



3.5.2 The CONTRACTOR shall give written notice of a Commercial Discovery of Oil to the MINISTRY immediately after the discovery is considered by the CONTRACTOR to be worthy of commercial Development. Notice of a Commercial Discovery of Oil may be given by the CONTRACTOR at any time during the Exploration Period.

With respect to a Commercial Oil Well drilled after the Exploration period, the CONTRACTOR shall give such notice of Commercial Discovery of Oil, not later than thirty (30) Days following the completion of any relevant appraisal well(s) or nine (9) Months following the date of completion of such commercial Oil Well, whichever is earlier. The CONTRACTOR shall also have the right and obligation to give a notice of Commercial Discovery of Oil even if the discovery well or wells are not Commercial Oil Wells within the definition of Commercial Oil Well but is in the CONTRACTOR's opinion, a reservoir or a group of reservoirs considered collectively worthy of commercial Development.

The CONTRACTOR shall also give notice of a Commercial Discovery of Oil in the event it wishes to undertake a Gas recycling project, unless such project is already a part of the Development of a previously declared Commercial Discovery of Oil.



The date of a Commercial Discovery of Oil will be the date on which the CONTRACTOR gives notice to the MINISTRY of the declaration of such Commercial Discovery.



3.5.3 Following the notice of any Commercial Discovery of Oil as provided for in Article 3.5 of this Agreement, the MINISTRY and the CONTRACTOR, within thirty (30) Days, shall sign the Request for Conversion to Development Area in the form set forth in Annex "H", which will identify the Development Area. Simultaneously, the CONTRACTOR shall submit to the MINISTRY a preliminary development plan.



3.5.4 The provisions set forth herein contemplate the unity and the indivisibility of the concepts of Commercial Discovery and Development Area and they shall apply to Oil unless otherwise specified.



3.6 Sole Risk Project

If crude Oil is discovered but is not deemed by the CONTRACTOR to be a Commercial Discovery of Oil under the above provisions of Article 3.5, the MINISTRY shall, after one (1) Month from the expiry of the period specified above within which the CONTRACTOR can give notice of a Commercial Discovery of Oil, have the right after sixty (60) Days from providing a written notice to the CONTRACTOR, and at the MINISTRY's sole risk and expense, to develop, produce and dispose of all Crude Oil from the geological feature in which said Crude Oil was discovered as aforesaid. Said notice shall state the specific area (the "Proposed Sole Risk Area") covering said geological feature to be developed, the wells to be drilled, the production facilities to be installed and the MINISTRY's estimated cost thereof, provided however that, within thirty (30) Days after receipt of said notice, the CONTRACTOR may, in writing, elect to develop the Proposed Sole Risk Area as provided for in this Agreement in the case of a Commercial Discovery, in which event, all terms of this Agreement shall continue to apply to the Proposed Sole Risk Area.



If the CONTRACTOR elects not to develop such Proposed Sole Risk Area, the said area (thenceforth the "Sole Risk Area") covering said geological feature shall be set aside for sole risk operations by the MINISTRY. The Sole Risk Area shall be mutually agreed upon by the MINISTRY and the CONTRACTOR on the basis of good Petroleum Industry practices. The MINISTRY shall be entitled to have the Operator or a third party perform such operations for it at the MINISTRY's sole risk and expense, provided that such third parties's operations shall not interfere with the Contractor's Petroleum Operations and should be conducted according to the good international petroleum industry practices. When the MINISTRY has recovered from the Crude Oil produced from the Sole Risk Area a quantity of Crude Oil equal in value to three hundred percent (300%) of the cost it has incurred in carrying out the sole risk operations, the CONTRACTOR shall have the option, only in the event there has been a separate Commercial Discovery of Oil or Gas elsewhere within the Agreement Area, to share in further Development of the Sole Risk Area upon paying the MINISTRY one hundred percent (100%) of the costs incurred by the MINISTRY in conducting the sole risk operations. At least one (1) Month prior to the estimated recovery date, the MINISTRY shall give written notice to the CONTRACTOR and allow the CONTRACTOR access to the data to evaluate the option, as may be requested by the CONTRACTOR. The one hundred percent (100%) payment shall not be recovered by the CONTRACTOR.Immediately following such payment the Sole Risk Area shall either (1) revert to the status of an ordinary Development Area under this Agreement and thereafter shall be operated in accordance with the terms hereof; or (2) alternatively, in the event that at such time the MINISTRY or its Dependent Units are conducting Development operations in the Sole Risk Area at its or their sole expense and the MINISTRY elects to continue operating the Sole Risk Area, that area shall remain set aside and the CONTRACTOR shall only be entitled to its percentage of the Production Sharing Oil as specified in Article 7.3 below. The Crude Oil from the Sole Risk Area shall be valued in the manner provided in Article 7.4. In the event of any termination of this Agreement under the provisions of Article 3.4.1 or Article 3.4.2 above, this Agreement shall, however, continue to apply to the MINISTRY'S operation of any sole risk project.



ARTICLE 4



WORK PROGRAM(S) AND BUDGET(S) FOR THE EXPLORATION PERIOD



4.1 Exploration Work Program and Budget



A. Subject to the provisions of this Agreement, the CONTRACTOR agrees and commits to undertake in the Agreement Area during the Exploration Period a program of Exploration work as a Minimum Work Obligation as set out in Annex "C" which cannot be changed or amended without the approval of the MINISTRY. The Exploration work should be fulfilled notwithstanding the Minimum Expenditure Obligation. The first Exploration Work Program and Budget should be prepared and submitted to the MINISTRY for its approval not later than three (3) Months after the Effective Date.



B. During the First Exploration Period, and any extension thereof the CONTRACTOR enters into, the CONTRACTOR shall meet the respective Minimum Work Obligation for such period as set forth in Annex "C" of this Agreement. In. the event that the CONTRACTOR timely gives the required written notice to the MINISTRY to enter into the Second Exploration Period, the CONTRACTOR shall meet the respective Minimum Work Obligation for such period, and any extension thereof the CONTRACTOR enters into, as set forth in Annex "C" of this Agreement.C. The CONTRACTOR shall have the right to withdraw before the end of the First Exploration Period or any extension thereof the CONTRACTOR enters into, and this Agreement shall terminate on the date a written notice of such withdrawal is received by the MINISTRY from the CONTRACTOR; provided that the CONTRACTOR has fulfilled the Minimum Work Obligation for the applicable period in effect at the time of withdrawal. In the event the CONTRACTOR withdraws having expended less than the Minimum Expenditure Obligation allocated for the Minimum Work Obligation required for the First Exploration Period, and any extension the CONTRACTOR enters into, the CONTRACTOR shall pay to the MINISTRY an amount equal to the difference between such Minimum Expenditure Obligation and the amount actually spent on Exploration activities, such payment to be made at the time of the withdrawal, but in no event later than three (3) Months after the expiry of the First Exploration Period or such extension, as the case may be. Any shortfall in aggregate Exploration activity expenditure by the CONTRACTOR at the end of the Second Exploration Period or any extension thereof the CONTRACTOR enters into, shall oblige the CONTRACTOR to pay the amount of such shortfall to the MINISTRY within three (3) Months after the expiry of the Second Exploration Period or such extension, as the case may be.



D. Excess work in any portion of the Exploration period (including extensions) may be carried forward to satisfy the work in a subsequent portion of the Exploration Period (including extensions).



4.2 Subject to Article 4.1A, at least three (3) Months prior to the beginning of each Financial Year or at such other times as may mutually be agreed to by MOM and the CONTRACTOR, the CONTRACTOR shall prepare an Exploration Work Program and Budget for the Agreement Area setting forth the Exploration operations which the CONTRACTOR proposes to carry out during the ensuing Year. During each Exploration Period or extension, such Work Programs and Budgets taken together shall be at least sufficient to satisfy the CONTRACTOR's Minimum Work Obligation and Minimum Expenditure Obligation for the period it covers, taking into account any credits for excess work previously carried out by the CONTRACTOR in prior portions of the Exploration Period. 4.3 Exploration Advisory Committee

The Exploration Work Program and Budget shall be reviewed by a joint committee to be established by MOM and the CONTRACTOR after the Effective Date. This committee, hereinafter referred to as the "Exploration Advisory Committee", shall consists of six(6) members, three (3) of whom shall be appointed by MOM and three (3) by the CONTRACTOR. The Chairman of the Exploration Advisory Committee shall review and give such advice as it deems appropriate with respect to the proposed Work Program and Budget. Following review by the Exploration Advisory Committee, the CONTRACTOR shall make such revisions as it thinks appropriate and submit the Exploration Work Program and Budget to MOM for its approval. Following such approval, the CONTRACTOR shall not substantially revise of modify the Work Program and Budget without the approval of the MINISTRY. The MINISTRY or its authorized representative(s) shall have fourteen(14) Days within which to communicate its approval of such Work Program and Budget, failing such communication approval shall be deemed to have been given. In the event of no approval, the Exploration Advisory Committee shall meet in an attempt to resolve the issue.



The CONTRACTOR shall advance all necessary funds for all materials, equipment, supplies, personnel administration and operations pursuant to the Exploration Work Program and Budget and MOM shall not be responsible to bear or repay any of the aforesaid costs. The CONTRACTOR shall be responsible for the preparation and performance of the Exploration Work Program and Budget which shall be implemented in a workmanlike manner consistent with good Petroleum Industry practices. All contracts for amounts greater than one hundred thousand United States Dollars(U.S.$1,00,000) related to the performance of Work Program should be approved by the MINISTRY or its duly authorized representative(s). The MINISTRY or its authorised representative(s) shall have fourteen(14) Days within which to communicate its written approval or disapproval of such award, failing such communication approval shall be deemed to have been given. In the event that the MINISTRY or its authorised representative(s) shall disapprove the award, the Exploration Advisory Committee shall meet in an attempt to resolve the issue.









































The CONTRACTOR shall entrust the management of, Exploration operations in the ROY to its technically competent General Manager and Deputy General Manager. The names of such General Manager and Deputy General Manager shall, upon appointment, be forthwith notified to the MINISTRY, accompanied by curriculum vitae of such General Manager and Deputy General Manager. The General Manager and, in his absence, the Deputy General Manager shall be entrusted by the CONTRACTOR with sufficient powers to carry out immediately all lawful written directions given to them by the MINISTRY or its representative(s) under the terms of this Agreement. All lawful regulations of ROY issued or hereafter to be issued which are applicable hereunder and not in conflict with this Agreement shall apply to the CONTRACTOR.



4.5 Statement of Expenditure;

The CONTRACTOR shall supply MOM, within thirty (30) Days from the end of each Calendar Quarter, with a statement of Exploration activity showing costs incurred by the CONTRACTOR during such Quarter. The CONTRACTOR's records and necessary original supporting documents shall be available for inspection by the MINISTRY at any time during regular working hours, for three (3) Months from the date of the MINISTRY receiving each statement.



Within three (3) Months from the date of receiving such statement, the MINISTRY shall advise the CONTRACTOR in .writing if it considers:



a. that the record of costs is not correct; or



b. that the costs of goods or services supplied are not in line with international market prices for goods or services of similar quality supplied on similar terms prevailing at the time such goods or services were supplied, provided however, that purchases made and services performed within ROY shall be subject to Article 26 of this Agreement; or



c. that the "Condition" (as defined in paragraphs 2.4.2, 2.4.3 and 2.4.4 of the Accounting Procedures in Annex "F" of the materials furnished by the CONTRACTOR does not agree with their prices set forth in the said Annex; or



d. that the costs incurred are not reasonably required for Petroleum Operations. The CONTRACTOR shall confer with MOM in

connection with any problem arising under this

Article 4.5, and the Parties hereto shall attempt to

reach a settlement which mutually satisfactory.

If within the time limit of the three (3) Month period

provided for in this Article 4.5 the MINISTRY has not

advised the CONTRACTOR of its objection to any

statement, such statement shall be considered as

preliminarily approved, subject to audit by the

MINISTRY according to paragraph 1.4 of the

Accounting Procedures of Annex "F" of this

Agreement.



ARTICLE 5

RELINQUISHMENTS



5.1 Mandatory Relinquishments

-------------------------



5.1.1 At the end of the First Exploration Period, and

any extension(s) thereof the CONTRACTOR

enters into, the CONTRACTOR shall not be

required to relinquish any part of the original

Agreement Area, provided that if the

CONTRACTOR does not elect to enter into

the Second Exploration Period or any

extension set forth in Article 3 then the

CONTRACTOR shall relinquish the

Agreement Area, except those then converted

to a Development Area or Development Areas

or for which the CONTRACTOR has applied

to the MINISTRY for approval for conversion

to a Development Area.



5.1.2 At the end of the Second Exploration Period

or any extension(s) thereof, the

CONTRACTOR shall relinquish the whole

Agreement Area except those then converted

to a Development Area or Development Areas

pursuant to this Agreement or for which the

CONTRACTOR has applied to the

MINISTRY for approval for conversion to a

Development Area.





5.2 Voluntary Relinquishments



The CONTRACTOR may voluntarily relinquish all

or any part of the Agreement Area subject to having

fulfilled all of its obligations at that time required

to be performed under Article 4.1 of this Agreement.

Any voluntarily relinquishment shall be credited

toward the mandatory relinquishments required

under Article 5.1 above.5.3 Requirements for Relinquishments

The size and shape of the relinquishments made under this Article 5 shall be determined by mutual agreement, provided that, unless otherwise agreed, all areas relinquished shall, at a minimum, be contiguous and reasonably accessible for, and capable of, further Exploration and Development. Any part of the Agreement Area shall be considered subject to relinquishment, including any such part corresponding to a geological feature in which Petroleum may be present or has been determined to be present after drilling a well, provided that notwithstanding the foregoing the CONTRACTOR shall not be obliged to relinquish any part of the Agreement Area corresponding to a Development Area(s) or to the surface area of any geological feature in which a Commercial Oil Well has been established, unless the time provided for establishing a Commercial Discovery has expired pursuant to Article 3 of this Agreement.



5.4 Notice of Relinquishment

At least thirty (30) Days' prior to the date of each relinquishment, the CONTRACTOR shall submit to the MINISTRY a report of its completed Exploration activities on the area proposed to be relinquished and the coordinates of the connecting points of the boundary line of such area.



ARTICLE 6



OPERATIONS AND DEVELOPMENT PERIOD



6.1 Operating Committee

6.1.1 Within thirty (30) Days of a Commercial Discovery, the Exploration Advisory Committee shall be dissolved and an Operating Committee shall be established.



6.1.2 The Operating Committee shall consist of six (6) representatives, three (3) representatives appointed by the MINISTRY and three (3) representatives appointed by the CONTRACTOR. The Chairman of the Operating Committee shall be a representative of the MINISTRY. The Vice-Chairman of the Operating Committee shall be a representative of the CONTRACTOR.



6.1.3 The responsibilities of the Operating Committee are as follows: 6.1.3.1 Generally rewview and supervise the implementation of the Development and production operations under this Agreement;



6.1.3.2 Consider and approve the Work Programs and Budgets presented to it by the Operator on behalf of the CONTRACTOR and the Work Program and Budget Subcommitee.



6.1.3.3 Receive proposals from the Operating Subcommittees;



6.1.3.4 Endorse or suggest changes to the proposals refered to in Article 6.1.3.3 and submit same to the MINISTRY and the Operator on behalf of the CONTRACTOR; and



6.1.3.5 Assist the MINISTRY and the Operator on behalf of the CONTRACTOR in carrying out their respective duties and obligations under this Agreement.



6.1.4 The following Operating Subcommittees shall be established contemporaneously with the formation of the Operating Committee :



6.1.4.1 Work Program and Budget Subcommittee;

6.1.4.2 Technical/Operations Subcommitee;

6.1.4.3 Contracting and Procurement Subcommittee; and

6.1.4.4 Yemenization and Training Subcommittee.



6.1.5 The Operator shall as appropriate form "Project Teams" to which the MINISTRY's employee(s) may be seconded upon approval of the Operating Committee. The secondments shall be effected as contemplated in Article 17.1.4 of this Agreement.



6.1.6 The Operating Committee, Operating Subcommittees and Project Teams shall conduct their business in accordance with the provisions set forth and described in Annex "E", Operating Committee Charter.



[signature]6.2 Work Program and Budget



Ninety (90) Days after the date that the Operating

Committee comes into existence in accordance with

Article 6.1.1 above, the Operator, in consultation

with the Work Program and Budget Subcommittee, shall

prepare a Work Program and Budget for further

Exploration and Development for the remainder of the

Financial Year in which the Commercial Discovery of

Oil is made, and not later than three (3) Months

before the end of the current Financial Year (or

such other date as may be agreed upon by the

Operating Committee), the Operator, in consultation

with the Work Program and Budget Subcommittee, shall

prepare an annual “Production Schedule”, Work

Program and Budget for further Exploration and

Development for the succeeding Financial Year. The

Operating Committee shall review and give such

directions as it deems appropriate with respect to

the proposed' Work Program and Budget and/or

Production Schedule, as the case may be. The

CONTRACTOR shall consider changes proposed by the

Operating Committee and will make such changes in

the proposals as it deems appropriate. Thereafter,

the Work Program and Budget and/or Production

Schedule, as the case may be, as endorsed or

amended, will be presented to the MINISTRY for its

final approval. The MINISTRY or its authorized

representative(s) shall have fourteen, (14) Working

Days within which to communicate its final approval

of such Work Program and Budget and/or Production

Schedule, as the case may be, failing such

communication approval shall be deemed to have

been given. In the event of no (approval the

Operating Committee shall meet in an attempt to

resolve the issue.



6.3 The CONTRACTOR shall advance all necessary funds for

all materials, equipment, supplies, personnel

administration and operations pursuant to the Work

Program and Budget and MOM, shall not be responsible

to bear or repay any of the aforesaid costs. The

Operator, on behalf of the CONTRACTOR, subject to

Annex “E”, shall be responsible for the preparation

and performance of the Work Program and Budget which

shall be implemented in a workmanlike manner and in

accordance with good Petroleum Industry practices.

With the involvement of the Contracting and

Procurement Subcommittee as set forth in Annex "E,”

the Operator shall provide written notice to the

MINISTRY or its authorized representative(s) for any

service contract (not including individual labour

contracts) award in excess of fifty thousand United

States Dollars (U.S.$50,000), where such award is to

be made on the basis of a sole source or to be made

to a bidder other than the lowest bidder. The MINISTRY or its authorized representative(s)

shall have fourteen (14) Days within which to

communicate its written approval of such award,

failing such communication, approval shall be

deemed to have been given. Furthermore, with the

involvement of the Contracting and Procurement

Subcommittee as set forth in Annex "E", the

Operator shall provide written notice to the

MINISTRY or its authorized representative(s) for

any service contract (not including individual labour

contracts) award, even if to the lowest bidder, with a

value in excess of Two Hundred and Fifty thousand

United States Dollars (U.S.$250,000). The

MINISTRY or its authorized representative(s)

shall have fourteen (14) Days within which to

communicate its written approval of such award,

failing such communication, approval shall be

deemed to have been given. In the event of no

approval as a aforesaid, the Operating Committee

shall meet in an attempt to resolve the issue.



The CONTRACTOR shall entrust the management

of Development and production operations in the

ROY to its technically competent General Manager

and Deputy General Manager. The name of such

General Manager and Deputy General Manager

shall, upon appointment, be forthwith notified to the

MINISTRY, accompanied by the curriculum vitae of

such General Manager and Deputy General Manager

The General Manager and, in his absence, the

Deputy General Manager shall be entrusted by the

CONTRACTOR with sufficient powers to carry out

immediately all lawful written directions given to

them by the MINISTRY or its representative(s)

under the terms of this Agreement.



6. Statement of Expenditure

________________________



The CONTRACTOR shall supply MOM, within

thirty (30) Days from the end of each Calendar

Quarter, with a "Statement of Expenditures" as

referred to in paragraph 1.2 of the Accounting

Procedures in Annex "F" showing costs incurred and

paid by the CONTRACTOR during such Quarter.

The CONTRACTOR's records and necessary

original supporting documents shall be available for

review by the MINISTRY at any time during regular

working hours for three (3) Months from the date of

receiving such Statements of Expenditures. Within

the three (3) Months from the date of receiving such

Statements of Expenditures, the MINISTRY shall

advise the CONTRACTOR in writing if its considers:



i. that the record of costs is not correct; orii. that the costs of goods or services supplied are not in line with the international market prices for goods or services of similar quality supplied on similar terms prevailing at the time such goods or services are supplied, provided however, that purchases made and services performed within ROY shall be subject to Article 26 of this Agreement; or



iii. that the "Condition" (as defied in paragraphs 2.4.2, 2.4.3 and 2.4.4 of the Accounting Procedures in Annex "F") of the materials furnished by the CONTRACTOR does not agree with their prices as set forth in the said Annex; or



iv. that the costs incurred are not reasonably required for Petroleum Operations.



The CONTRACTOR shall confer with MOM in connection with any problem arising under this Article 6.4., and the Parties hereto shall attempt to reach a settlement which is mutually satisfactory.



IF within the time limit of the three(3) Month period provided for in this Article 6.4 the MINISTRY has not advised the CONTRACTOR of its objection to any Statement of Expenditures, such Statement shall be considered as preliminary approved, subject to audit by the MINISTRY according to paragraph 1.4 of the Accounting Procedures in Annex "F" of this Agreement.





Facilities



6.5.1 The CONTRACTOR shall have the right to construct and operate facilities for the processing, transport, storage and shipment or Petroleum in the ROY and the MINISTRY shall render all assistance to the CONTRACTOR on matters involving Yemeni laws and with obtaining any necessary approvals from the competent Yemeni authorities.



6.5.2 IF, during the term of this Agreement, the CONTRACTOR and the MINISTRY agree that the CONTRACTOR has no forseeable need for part or all of the unused capacity in the Petroleum Operations facilities such as a pipeline or Crude Oil storage or export terminal facility forming part of Petroleum.











































Operations, and that in the CONTRACTOR's

opinion such capacity can be used for Petroleum

Operations conducted by the MINISTRY or

anyone acting on behalf of the MINISTRY,

including persons having rights under any other

"Production Sharing Agreements" in YEMEN,

without interfering with the CONTRACTOR's

Petroleum Operations and the MINISTRY's

Petroleum Operations under this Agreement, and if

the MINISTRY determines a need for such part or

all of such unused capacity for such operations in

YEMEN, then the MINISTRY and the

CONTRACTOR shall meet to negotiate mutually

satisfactory terms covering such use (including a

proportional per Barrel charge representing

unrecovered capital costs of the CONTRACTOR

for such unused capacity), provided always that the

CONTRACTOR shall have priority to use the

above mentioned facilities for the Petroleum

Operations.

.



6.5.3 If the CONTRACTOR should determine and

advise the MINISTRY that it needs part or

all of the unused capacity in Petroleum

Operations facilities such as a pipeline or

crude oil storage or export terminal facility

in YEMEN which are not subject to this

Agreement, the MINISTRY shall, to the

extent that it has the right to do so, cause

such unused capacity to be made available

for the CONTRACTOR's use for Petroleum

Operations on mutually satisfactory terms,

including reasonable payment by the

CONTRACTOR for such use (including a

proportional per Barrel charge representing

unrecovered capital costs of such unused

capacity).





ARTICLE 7



RECOVERY OF COSTS AND



PRODUCTION SHARING



1 Cost Recovery Crude Oil

-----------------------



Subject to the auditing provisions under this

Agreement, the CONTRACTOR shall recover all

costs, expenses and expenditures incurred for all

Petroleum Operations out of and to the extent of a

maximum of fifty percent (50%) per Quarter of all

the Crude Oil produced and saved from the

Agreement Area and not used in Petroleum

Operations and after Royalty payments to the

STATE according to Article 3.2 of this Agreement.

Such maximum of Crude Oil is hereinafter referred

to as "Cost Oil".All such costs, expenses and expenditures shall be recovered from Cost Oil in the following manner:



7.1.1 Operating Expenses incurred and paid on and after

Initial Commercial Production shall be

recoverable in the Tax Year in which such costs

and expenses are incurred and paid.



7.1.2 Exploration Expenditures including, but not

limited to, those accumulated prior to the

commencement of Initial Commercial Production

shall be recoverable at the rate of fifty percent

(50%) per Year starting either in the Tax Year in

which such expenditures are incurred and paid or

the Tax Year in which Initial Commercial

Production occurs, whichever is the later.



7.1.3 Development Expenditures, including, but not

limited to, those accumulated prior to the

commencement of Initial Commercial Production

shall be recoverable at the rate of fifty percent

(50%) per Year starting in the Tax Year in which

such expenditures are incurred and paid or the

Tax Year in which Initial Commercial Production

occurs, whichever is the later.



7.1.4 The recovery of costs and expenses, based upon

the rates referred to in Articles 7.1.2 and 7.1.3

above, shall be allocated to each Quarter

proportionately (one fourth to each Quarter). Any

recoverable costs and expenses not recovered in

one Quarter as thus allocated, shall be carried

forward for recovery in the next Quarter.



7.1.5 If all costs, expenses and expenditures that are

recoverable in any Quarter, including, but not

limited to, such costs, expenses and expenditures

carried forward from previous Quarters pursuant

to Article 7.1.4, exceed the value of the maximum

amount of Cost Oil ("Maximum Cost Oil") that can

be taken by the CONTRACTOR in such Quarter, as

provided in Article 7.1 above, then the

unrecovered excess amount shall be carried

forward for recovery in the next succeeding

Quarter or Quarters until fully recovered, but in

no case shall they be recovered after the

termination of this Agreement. However, if such

recoverable costs, expenses and expenditures are

less than the value of the Maximum Cost Oil, then

the value of the Crude Oil taken as Cost Oil by

the CONTRACTOR shall be equal to such recoverable

costs,



1 expenses and expenditures. The difference

between the Maximum Cost Oil and the Cost Oil

actually taken by the CONTRACTOR during such

Quarter shall be included in the Production

Sharing Oil and shall be taken and disposed of

separately by the MINISTRY and the CONTRACTOR

pursuant to Article 7.3 below.



7.2 Non-Recoverable Costs and Expenses;

In addition to any non-recoverable costs and

expenses provided for in this Agreement or in the

Accounting Procedures in Annex “F” of this

agreement, the below-mentioned costs and expenses

are not recoverable from Cost Oil or otherwise under

this Agreement:



2.1 Costs and expenses not related directly or

indirectly to Petroleum Operations in the

Agreement Area.



7.2.2 That portion of the costs and expenses in

excess of the limitations set forth in the

Accounting Procedures in Annex “F” or other

provisions of this Agreement.



7.2.3 Expenses incurred, paid, and carried forward,

prior to the Effective Date of this Agreement,

except for Exploration Expenditures incurred

after signature of this Agreement if approved by

the MINISTRY.



7.2.4 All taxes in YEMEN or in other countries except

as specifically provided for in this Agreement.



7.2.5 Losses which are recovered through insurance,

any contract of indemnity or otherwise from a

third party.



7.2.6 Bonuses paid to the STATE or to the MINISTRY.



7.2.7 Interest, fees and commissions on loans and

guarantees.



7.2.8 Expenses or payments for education and training

pursuant to this Agreement, except for costs and

expenses for training of ROY employees of the

CONTRACTOR provided such costs and expenses are

included in an approved Work Program and Budget.

expenses incurred and paid for the marketing of Crude Oil from the Agreement Area outside YEMEN and the cost of transporting, storing, handling and exporting of Petroleum beyond the point of export in YEMEN.



7.2.10 Foreign exchange losses.



7.3 Production Sharing Oil

The Crude Oil remaining after deducting Royalty and Cost Oil from the total Crude Oil produced and saved from the Agreement Area, and not used in Petroleum Operations, shall be taken and disposed of separately by the MINISTRY and the CONTRACTOR in accordance with the sample calculation in Annex "G" and as follows:





7.3.1 For the portion or increment of production up to and including twenty five thousand (25,000) Barrels of Monthly Average Daily Net Production:





Sixty Four percent (64%) to the MINISTRY, and Thirty Six percent (36%) to the CONTRACTOR



7.3.2 For that additional portion or increment of production which exceeds twenty five thousand(25,000) Barrels of Monthly Average Daily Net Production up to and including fifty thousand (50,000) Barrels of Monthly Average Daily Net Production:



Sixty Seven Percent(67%) to the MINISTRY, and Thirty Three percent(33%) to the CONTRACTOR



7.3.3 For that additional portion or increment of production which exceeds fifty thousand(50,000) Barrels of Monthly Average Daily Net Production up to and including seventy five thousand(75,000) Barrels of Monthly Average Daily Net Production:



Seventy percent(70%) to the MINISTRY, and Thirty percent(30%) to the CONTRACTOR



7.3.4 For that additional portion or increment of production which exceeds seventy-five thousand (75,000) Barrels of Monthly Average Daily Net Production up to and including one hundred thousand(100,000) Barrels of Monthly Average Daily Net Production:



Seventy percent(75%) to the MINISTRY, and Twenty five percent (25%) to the CONTRACTOR





















































7.3.5 For that additional portion or increment of

production which exceeds one hundred thousand

(100,000) Barrels of Monthly Average Daily Net

Production:



Eighty Two percent (82%) to the MINISTRY, and

Eighteen percent (18%) to the CONTRACTOR



7.4 Valuation of Crude Oil

7.4.1 It is the intent of the Parties that the value

of the Cost Oil (and the CONTRACTOR'S

Production Sharing Oil for the purpose of ROY

Income Taxes as provided in Article 9.1.2

below) shall reflect the prevailing market

price for Crude Oil. For the purpose of

evaluating the prevailing market value of the

quantity of Cost Oil to which the CONTRACTOR

is entitled hereunder during each Calendar

Quarter, the weighted average price realized

in freely convertible currency, from F.O.B.

point of export sales to non-Affiliated

Companies during any such Quarter at arms

length by either the MINISTRY or the

CONTRACTOR under all such Crude Oil sales of

the Crude Oil from the Agreement Area then in

effect, but excluding any government to

government sales that do not reflect

international oil market prices and any Crude

Oil sales contracts involving barter,

whichever is higher, shall be used. Prices

shall be appropriately adjusted to credit

terms providing for payment within thirty (30)

Days from the date of bill of lading.

Currencies other than United States Dollars

shall be converted into United States Dollars

at the rate for buying United States Dollars

with such currencies as quoted by Citibank

London, at 10:30 a.m. London time, on the bill

of lading date for any such sales, and if this

is not a banking Day in London, on the next

succeeding banking Day in London.



It is understood that in the case of C.I.F. or

other sales on delivered bases, appropriate

deductions shall be made for applicable

freight and insurance charges to calculate the

F.O.B. point of export price.



7.4.2 If, during any Calendar Quarter there are no

such sales by the MINISTRY or the CONTRACTOR

then in effect, the MINISTRY and the

CONTRACTOR shall meet as soon as practicable,

but no later than ten (10) Days after the end

of such Quarter, and mutually agree upon the

price of CrudeOil to be used in determining the value mentioned in Article 7.4.1 above taking into 4 account prevailing market prices for crude oil of similar grade, quality, quantity, sales' terms in similar geographical markets during that period. Pending such mutual agreement the provisional price used shall be the last price determined pursuant to Article 7.4.1 or under this Article 7.4.2 and appropriate adjustment will be made thereto after determination of a mutually agreed price by the MINISTRY and the CONTRACTOR.



7.5 Tanker Lifting

At a reasonable time prior to Initial Commercial Production, the CONTRACTOR shall submit for consideration to the MINISTRY a procedure for scheduling tanker liftings from the agreed upon point(s) of export and shall negotiate with the MINISTRY acceptable provisions relating to underlifting and overlifting of production. Such provisions shall include periodic and at least Quarterly settlement of overlifts and underlifts in cash or in kind at the Option of the MINISTRY.



7.6 Optional Purchase of Crude Oil

The STATE shall have the option, to be exercised upon at least ninety (90) Days' written notice to the CONTRACTOR to purchase from the CONTRACTOR up to fifty percent (50%) of the CONTRACTOR's Production Sharing Oil.



The price for the Production Sharing Oil purchased by the STATE shall be as mutually agreed by the MINISTRY and the CONTRACTOR. If no agreement is reached then the price applied shall be the weighted average price received by the CONTRACTOR for its sales to non-Affiliated Companies as calculated in Article 7.4.1 above during the applicable Quarter. If there have been no such sales then the price reached under Article 7.4.2 for the applicable Quarter shall apply.



All purchases by the STATE pursuant to this option shall be on credit terms providing for payment within thirty (30) Days from the bill of lading date for sales by tanker shipments, and from invoice date for other sales.



7.7 Production Forecast

The CONTRACTOR shall prepare and furnish to the MINISTRY not less than thirty (30) Days prior to the start of each Year and updated quarterly in that Year, yearly and quarterly production forecast report(s) and setting out the^ total quantity(ies) of thePetroleum that the CONTRACTOR estimates can be used in Petroleum Operations, and produced, saved and transported according to this Agreement in the Year and in each Quarter in accordance with good Petroleum Industry practices.



The CONTRACTOR shall use its best efforts to produce the forecast quantity in each Quarter, as updated from time to time.



The CONTRACTOR shall, in accordance with good Petroleum Industry practices, store the Crude Oil in storage tanks constructed and maintained by the CONTRACTOR in the Agreement Area or each Development Area, as applicable.



Measuring and volumetric determination of Crude Oil shall take place for the purpose of this Agreement at the point of custody transfer such as:

(i)The tie-in point where the Crude Oil is delivered to any third party for transportation or sale; or



(ii)The point where the MINISTRY takes possession of its share of Crude Oil; or



(iii) The export flange of the storage tanks located at the agreed upon points of export.



The MINISTRY shall take Royalty and title to its share of Production Sharing Oil (in accordance with Articles 3.2 and 7.3 respectively), and the CONTRACTOR shall take title to Cost Oil and its share of Production Sharing Oil (in accordance with Articles 7.1 and 7.3 respectively) as provided for in this Agreement at a metering point at the storage tanks or at a point mutually agreed upon by the CONTRACTOR and the MINISTRY.



ARTICLE 8

TITLE TO ASSETS



8. MOM shall become the owner of all assets acquired and owned by the CONTRACTOR in connection with the Petroleum Operations carried out by the CONTRACTOR in accordance with the following:



8.1.1 Land shall become the property of the MINISTRY as soon as it is purchased or obtained.8.1.2 Title to fixed and movable assets shall be

transferred automatically and gradually from the

CONTRACTOR to the MINISTRY as they are recovered

in accordance with the provisions of Article 7 of

this Agreement, so that the full title to fixed

and movable assets shall have been transferred

automatically from the CONTRACTOR to the MINISTRY

when its total cost has been recovered by the

CONTRACTOR in accordance with the provisions of

Article 7 or at the time of termination of this

Agreement with respect to all assets chargeable to

the Petroleum Operations whether recovered or not,

whichever occurs first.



The book value of such assets so transferred in

each Calendar Quarter shall be communicated by the

CONTRACTOR to the MINISTRY within thirty (30) Days

after the end of each Calendar Quarter.



8.2 During the term of this Agreement, the CONTRACTOR

is entitled to the full use of all the fixed and

movable assets referred to above in connection

with the Petroleum Operations hereunder or under

any other petroleum operation entered into by the

Parties. The CONTRACTOR shall not dispose of such

assets except with the written approval of the

MINISTRY and subject to Articles 12.5, 12.6 and

12.7 below.



8.3 The CONTRACTOR may freely import into the ROY and

use therein and freely export at the end of such

use, machinery and equipment which they either

rent or lease in accordance with good Petroleum

Industry practices including, but not limited to,

the leasing of computer hardware and software.

ARTICLE 9

TAXES AND BONUSES



9.1 Taxes



9.1.1 (a) The CONTRACTOR shall pay a fixed percentage tax("fixed tax") equivalent to three percent(3%) of all its actual Exploration Expenditures incurred and paid in conducting its Exploration operations. This fixed tax shall be paid within three (3) Months after the Tax Year in which the relevant Exploration Expenditures are incurred and paid. Such payments shall be made to the ROY tax authorities and shall be accompanied by statements authenticated by the MINISTRY setting out the relevant Exploration Expenditures in reasonable detail. Within one hundred fifty(150) Days after the end of each Tax Year for which this fixed tax is paid, the MINISTRY shall furnish to the CONTRACTOR official receipts evidencing the payment of such tax.



9.1.1(b) Expatriate employees of the CONTRACTOR, its contractors and their subcontractors working in Exploration operations shall be exempt from all personnel income taxes and similar taxes in the ROY during Exploration operations on all income or reimbursements paid by the CONTRACTOR, its contractors and subcontractors on all income from any sources outside or inside of the ROY.



9.1.1.(c) Expatriate employees of the CONTRACTOR, its contractors and their subcontractors working in Development and production income taxes and similar taxes in the ROY as if the date of the first conversion of the Agreement Area to a Development Area and thereafter on all and any personnel income paid by the CONTRACTOR, its contractors and their subcontractors in respect of Development and production Operations from any sources outside or inside of the ROY according to the income tax law in force in ROY.



9.1.2 Income Tax



Any and all taxes to which the CONTRACTOR is subject under the laws of the ROY that are measured by income, profit or turnover are hereinafter by income, profit or turnover are hereinafter referred to as "ROY Income Taxes". For the purpose of ROY Income Taxes, the total





















































































ARTICLE 9



TAXES AND BONUSES





9.1 Taxes



9.1.1 (a) The CONTRACTOR shall pay a fixed

percentage tax ("fixed tax") equivalent to

three percent (8%) of all its actual

Exploration Expenditures incurred and paid

period of thirty (30) consecutive Days.



Three million United States Dollars

(U.S.$3,000,000) within thirty (30) Days after

the first date whoration Expenditures are

incurred and paid. Such payments shall be made

to the ROY tax authorities and shall be

accompanied by statements authenticated by the

MINISTRY setting out the relevant Exploration

Expenditures in reasonable detail. Within one

hundred fifty (150) Days after the end of each

Tax Year for which this fixed tax is paid, the

MINISTRY shall furnish to the CONTRACTOR

official receipts evidencing the payment of

such tax.



9.1.1 (b) Expatriate employees of the CONTRACTOR,

its contractors and their subcontractors

working in Exploration operations shall be

exempt from all personnel income taxes and

similar taxes in the ROY during Exploration

operations on all income or reimbursements

paid by the CONTRACTOR, its contractors and

subcontractors on all income from any sources

outside or inside of the ROY.



9.1.1 (c) Expatriate employees of the CONTRACTOR,

its contractors and their subcontractors

working in Development and production

operations shall be subject to all personnel

income taxes and similar taxes in the ROY as

of the date of the first conversion of the

Agreement Area to a Development Area and

thereafter on all and any personnel income

paid by the CONTRACTOR, its contractors and

their subcontractors in respect of Development

and production Operations from any sources

outside or inside of the ROY according to the

income tax law in force in ROY.



9.1.2 Income Tax



Any and all taxes to which the CONTRACTOR is

subject under the laws of the ROY that are

measured by income, profit or turnover are

hereinafter referred to as "ROY Income Taxes".

For the purpose of ROY Income Taxes, the total

taxable income of the CONTRACTOR with respect to any Tax Year shall be an amount calculated as follows:



(i) The total value of all Crude Oil (determined as

provided in Article 7.3 above) received by the

CONTRACTOR in such Tax Year pursuant to Article 7;

plus



(ii) An amount equal to the CONTRACTOR'S ROY Income

Taxes.



If the total value of such Crude Oil received in

any Tax Year by the CONTRACTOR as set out in

Article 9.1.2 (i) above is equal to zero, then the

CONTRACTOR shall not be required to pay any ROY

Income Taxes for such Tax Year.



9.1.3 The MINISTRY shall assume, pay and discharge on

behalf of the CONTRACTOR, the CONTRACTOR'S ROY

Income Taxes out of the MINISTRY'S share of

Crude Oil under this Agreement.



9.1.4 Within one hundred fifty (150) Days after the

end of each Tax Year, the MINISTRY shall furnish

to the CONTRACTOR official receipts evidencing

the payment of the CONTRACTOR'S ROY Income Taxes

for such Tax Year. Such receipts shall be issued

by the proper tax authorities and shall state

the amount and other particulars customary for

such receipts.





9.1.5 In calculating its ROY Income Taxes, the

MINISTRY shall be entitled to deduct the ROY

Income Taxes of the CONTRACTOR paid by the

MINISTRY on the CONTRACTOR'S behalf.



9.1.6 The CONTRACTOR, its Affiliated Companies and

their contractors and subcontractors are exempt

from all ROY Income Taxes and all other taxes

and related taxes of any nature whatsoever

payable in ROY with the exception of the fixed

tax as stated in Article 9.1.1(a) and the ROY

Income Taxes as stated in Article 9.1.2 above.



9.1.7 Tax Statements



The CONTRACTOR shall provide the statements

concerning the calculation of the fixed tax

stated in Article 9.1.1 above, within thirty

(30) Days after each Quarter

commencing after the Effective Date of this Agreement, and shall provide statements concerning the ROY Income Taxes according to Article 9.1.2 above, within thirty (30) Working Days after each Tax Year commencing after Initial Commercial Production, and shall provide statements concerning the personnel income tax as stated in Article 9.1.1.(c) above, within fifteen (15) Working Days following the end of due Month.



9.2 Bonuses

9.2.1 Signature Bonus

The CONTRACTOR shall pay to the MINISTRY as a signature bonus, One Million and fifty thousand United States Dollars (U.S.$1,050,000). Within Two weeks after the signing of this Agreement the CONTRACTOR shall provide to the MINISTRY an irrevocable Letter of Credit issued by any bank in ROY, using the form set out in Exhibit III of Annex "D", covering the full amount of the signature bonus, payable on the Effective Date of this Agreement.



9.2.2 Training Bonus

The CONTRACTOR shall pay to the MINISTRY, within thirty (30) Days after the start of each Year starting on the Effective Date and each anniversary thereof during the term of this Agreement, and any extension thereto, a lump sum of One Hundred thousand United States Dollars (U.S.$100,000) for the purpose of training Yemeni employees of the MINISTRY and its Dependent Units.



9.2.3 Institutional Bonus

The CONTRACTOR shall pay to the MINISTRY, within thirty (30) Days after the start of each Year starting on the Effective Date and each anniversary thereof during the term of this Agreement, and any extension thereto, a lump sum of One Hundred thousand United States Dollars (U.S.$100,000) as an "Institutional Bonus".



9.2.4 Social Development Bonus

The CONTRACTOR shall pay to the MINISTRY, within thirty (30) Days after the start of each year starting on the Effective Date and each anniversary thereof during the term of this Agreement, and any extension thereto, a lump sum of One hundred thousand United States Dollars (U.S.$100,000) as a "Social Development Bonus".9.25 Production Bonus



The CONTRACTOR shall pay to the MINISTRY the following production bonuses. The rates of production specified below shall not include production from any sole risk projects of the MINISTRY except if the CONTRACTOR exercises its option to share in such sole risk production, and only from the initial date of sharing.



(a) One Million United States Dollars (U.S.$1,000,000)

within Thirty (30) Days after the first lifting of

crude oil.



(b) One million and half United States Dollars

(U.S.$1,500,000) within thirty (30) Days after the

first date when die total average daily production

of Crude Oil produced and saved from the Agreement

Area, and not used in Petroleum Operations, has been

sustained at the rate of Twenty five thousand

(25,000) Barrels per Day for a period of thirty (30)

consecutive Days.



(c) Two million United States Dollars (U.S.$2,000,000)

within thirty (30) Days after the first date when

the total average daily production of Crude Oil

produced and saved from the Agreement Area, and not

used in Petroleum Operations, has been sustained at

the rate of fifty thousand (50,000) Barrels per Day

for a period of thirty (30) consecutive Days.



(d) Three million United States Dollars (U.S.$3,000,000)

within thirty (30) Days after the first date when

the total average daily production of Crude Oil

produced and saved from the Agreement Area, and not

used in Petroleum Operations, has been sustained at

the rate of Seventy five thousand (75,000) Barrels

per Day for a period of thirty (30) consecutive

Days.



(e) Four million United States Dollars (U.S.$4,000,000)

within thirty (30) Days after the first date when

the total average daily production of Crude Oil

produced and saved from the

Agreement Area, and not used in Petroleum Operations, has been sustained at the rate of one hundred thousand (100,000) Barrels per Day for a period of thirty (30) consecutive Days.



(f) Six million United States Dollars (U.S.$6,000,000) within thirty (30) Days after the first date when the total average daily production of Crude Oil produced and saved from the Agreement Area, and not used in Petroleum Operations, has been sustained at the rate of one hundred fifty thousand (150,000) Barrels per Day for a period of thirty (30) consecutive Days.



Each of the production bonuses are to be paid ones only.



9.3 All taxes and bonuses referred to above in this Article 9 are not recoverable from the Cost Oil under Article 7 of this Agreement.



ARTICLE 10

OFFICE AND SERVICE OF NOTICE



During the period of this Agreement, the CONTRACTOR shall maintain an office in the ROY starting within thirty (30) Days after the Effective Date of the Agreement.



All matters and notices shall be deemed to be validly settled on the CONTRACTOR if in writing and delivered to the office of the CONTRACTOR'S General Manager against receipt or which are sent to him by registered mail, talefax or telex.



All matters and notices shall be deemed to be validly settled on the MINISTRY if in writing and delivered to the MINISTER'S office in Sana'a during regular office hours or which are sent to it by registered mail, telefax or telex.



Any changes in the address of the CONTRACTOR's office or in the individual empowered as General Manager shall be notified to the MINISTRY at least ten (10) Days prior to the changing date. ARTICLE 11

CONSERVATION, PREVENTION OF

LOSS AND ENVIRONMENTAL SAFETY



11.1 The CONTRACTOR shall take all proper measures,

according to generally accepted methods in the

Petroleum Industry to prevent loss or waste of

Petroleum above or under the ground in any form

during drilling, producing, gathering,

transporting, distributing and storage operations.



The test Crude Oil produced from any well(s) in

the Agreement Area is the property and the

responsibility of the MINISTRY who will dispose of

it freely and separately.



The MINISTRY has the right to prevent any

operation on any well that it might reasonably

expect would result in loss or damage of the well

or the Oil or Gas field.



11.2 Upon completion of the drilling of a productive

well, the CONTRACTOR shall inform the MINISTRY or

its representative(s) of the time when the well

will be tasted and of the production rate

ascertained.



11.3 Except in instances where multiple producing

reservoirs (not in pressure communication with

each other) in the same well can only produce

Economically through a single tubing string,

Petroleum shall not be produced from multiple Oil

bearing zones through one string of tubing at the

same time, except with the prior approval of the

MINISTRY or its representative(s).



11.4 The CONTRACTOR shall record data regarding the

quantities of Petroleum and water produced monthly

from each Development Area. Such data shall be

sent to the MINISTRY or its representative(s) on

the special forms provided for that purpose. A

report to that effect must be submitted daily.

Daily or weekly statistics regarding the

production from the Development Area shall be

Available at all reasonable times for examination

by authorized representatives of the MINISTRY.



11.5 Daily drilling records and the graphic well logs

must show the quantity and type of cement and the

amount of any other materials used in the well for

the purpose of protecting Petroleum, Gas bearing

or fresh water strata.



11.6 Any fundamental mechanical operation on a well

after its completion, must be approved by

representative(s) of the MINISTRY.11.[illegible] In the course of performing the Petroleum Operations, the CONTRACTOR and its contractors and subcontractors shall be subject to the laws, decrees, other rules and regulations with respect to environmental protection and safety and shall conduct its operations in accordance with accepted Petroleum Industry practices.



ARTICLE 12

CUSTOMS EXEMPTIONS AND EXCHANGE

CONTROL



12.1 The MINISTRY, the CONTRACTOR, its contractors and their subcontractors shall be permitted to import from abroad, and shall be exempt from all Customs Duties and related taxes with respect to the importation of machinery, equipment, vehicles, materials, supplies, consumables, and moveable properties, to be used solely in the carrying out of Petroleum Operations, under this Agreement.



Foodstuffs may also be imported, provided their Customs Duties are fully paid.



12.2 The exemption stated in Article 12.1 does not apply to any imports of materials if these or comparable materials are manufactured in the ROY and may be purchased locally at a rate which does not exceed ten percent (10%) of the cost of the imported goods prior to the addition of the Customs Duties, but after adding the cost of transport and insurance.



12.3 The CONTRACTOR, its contractors and Their subcontractors shall have the right to export free of Customs Duties and related taxes any material, equipment and goods which are imported to ROY for the purpose of the Petroleum Operations irrespective of whether they were exempt or not from Customs Duties and related taxes according to this Agreement, provided the CONTRACTOR notifies the MINISTRY of such exportation.



12.4 There shall be no license required, and the CONTRACTOR and the MINISTRY and their respective customers shall be exempt from any duty, tax, fee or any other financial impost in respect to the export of Crude Oil under this Agreement. Subject to any obligation under this Agreement to sell Petroleum to the STATE, the CONTRACTOR shall have the right to freely (except for those fees and charges which are normally paid to the GOVERNMENT agencies for actual services rendered by the GOVERNMENT agencies) export and sell the Cost Oil and its share of Production Sharing Oil.12.5 The CONTRACTOR, its contractors and their subcontractors shall have the right after receiving approval form the MINISTRY to sell any materials or equipment or goods which were damaged or used and thereby became non-serviceable, and which the CONTRACTOR or its contractors and their subcontractors respectively classify as scrap or junk, in the ROY without paying Customs Duties and related taxes.



12.6 New materials, equipment and goods, or used but serviceable material, equipment and goods, that are surplus to the Petroleum Operations under this Agreement may be sold outside the ROY after the MINISTRY's approval following exportation or may be sold with the ROY provided that for any sale in the ROY the purchaser shall pay the applicable Customs Duties, taxes, or imposts, if any, expect if sold to the MINISTRY or one of its Dependent Units or, with the MINISTRY's approval to other companies enjoying substantially the same customs exemption as the CONTRACTOR.



12.7 In the event of such sale under Article 12.5 or Article 12.5 above, the proceeds from such sales shall be divided in the following manner:



The CONTRACTOR shall be entitled to reimbursement of its unrecovered costs, if any, in such material or equipment, and the excess, if any, shall be paid to the MINISTRY. The CONTRACTOR's unrecovered costs shall be reduced by the amount of such reimbursement paid to the CONTRACTOR.



12.8 For the purpose of implementing this Article 12, the Customs Duties include all the imposts and taxes (except those fees and charges which are normally paid to the GOVERNMENT agencies for actual services rendered by the GOVERNMENT agencies) levied for importing (or exporting, if applicable) the said materials, equipment and goods.



12.9 The CONTRACTOR, its contractors and their subcontractors are exempt from the need to obtain import and export permits for materials, equipment, machinery, and goods required for their activities, and they will be exempt from paying concession royalties to Yemeni corporations or companies.



12.9.1 Every foreign employee of the CONTRACTOR or its Affiliated Companies or its contractors and subcontractors are permitted to import from abroad, exempt from Customs Duties, a reasonable quantity



[Illegible scribble cut of by page]of household goods, personal belongings, and a car to be used only for his personal and family use. Whatever an employee imports may not be sold in the ROY except and after Customs Duties and related taxes are properly paid, unless sold to another foreign employee of the CONTRACTOR.



12.9.2 In order to implement Article 12.9.1 above, Customs Duties shall have the meaning stated in Articles 12.4 and 12.8 of this Agreement.



The CONTRACTOR, its contractors and their subcontractors shall be exempt from foreign exchange controls in the Roy, with respect to their activities under this Agreement.



12.10.1 The CONTRACTOR, its non-ROY contractors and their subcontractors shall supply all funds necessary for their operations in the ROY under this Agreement in freely convertible currency from abroad. The CONTRACTOR, its non-ROY contractors and their subcontractors shall have the right to buy Yemeni currency whenever required, and the conversion shall be made at Yemeni banks according to the official ROY rate of exchange at the best rate officially prevailing in the ROY, which rate shall be at least as favorable as the rate available to any other international petroleum company conducting similar activity in YEMEN. The CONTRACTOR, its non-ROY contractors and their subcontractors shall have the right to make payments directly abroad in foreign currencies for goods and services obtained abroad for their operations in the ROY under this Agreement and to make such payments in accordance with the provisions of this Agreement without having first to transfer to the ROY the funds for such payments. The CONTRACTOR shall have the right to maintain abroad one (1) or more convertible currency accounts in international credit institutions of its selection. The CONTRACTOR shall have right to pay abroad principal and interest on borrowings to finance any of its Petroleum Operations without having first to transfer to the ROY the funds for such payments.





2.10.2 The CONTRACTOR shall have the right to hold United States Dollars and other freely convertible currency in a bank account in the ROY if a bank account of that kind is made







































available to any international petroleum company for any purpose.



12.10.3 Subject to Article 17.1.1 below and Article 9.1.1(b) of this Agreement, the CONTRACTOR shall have the right to pay its expatriate employees working in YEMEN in foreign currencies outside of YEMEN. Such employees shall only be required to bring into YEMEN such foreign exchange as required to meet their personal living and other expenses in YEMEN.



12.10.4 The CONTRACTOR shall have the right to receive and retain abroad and freely use all funds received by it abroad and freely use all funds received by it abroad, including, without limitation, any sales proceeds from an authorized assignment of its interests in this Agreement, the proceeds from the sales of its share of Crude Oil exported, and proceeds received by the CONTRACTOR from any sale of equipment, materials and goods permitted as described in Article 12.7.



12.10.5 The MINISTRY or the GOVERNMENT, or their designated purchasers in the ROY, shall pay the CONTRACTOR abroad in United States Dollars for any Crude Oil purchased from the CONTRACTOR, including Crude Oil that is requisitioned by the GOVERNMENT pursuant to Article 19 below. The term "abroad", as used in this Agreement, means outside the ROY.



2.11 The CONTRACTOR, its contractors and Their subcontractors shall pay Yemeni contractors and suppliers of materials manufactures in the ROY, as well as importers of equipment, machines, and consumable goods, in Yemeni currency, which may be obtained according to provision of Article 12.10.1 of this Agreement except in a case where the payment should be paid by foreign currency for the need of services and procurement.



2.12 The CONTRACTOR, its foreign contractors and subcontractors, as well as their resident foreign staff, shall have access to the duty free shops in the ROY.









































































ARTICLE 13

ACCOUNTING BOOKS; ACCOUNTING AND

PAYMENTS





3.1 The CONTRACTOR shall maintain at its business

offices in the ROY books of account, in accordance

with the Accounting Procedures in Annex “F” of this

Agreement and according to the accepted accounting

practices generally used in the Petroleum Industry.

The CONTRACTOR must keep such other books and

records as may the necessary to show the work

performance under this Agreement, including the

amounts and value of all Petroleum produced and

saved, the CONTRACTOR shall keep its books of

account and accounting records in United States

dollars, which shall be the controlling currency of

this Agreement for cost recovery, taxes and other

purposes, and in Yemeni currency for information.

The CONTRACTOR shall furnish to the MINISTRY or its

representative(s) monthly returns showing the

amount of petroleum produced and saved. Such

returns shall be prepared in the form required by

the MINISTRY or its representative(s) and shall be

signed by the General Manager or by the Deputy

General Manager or by a duly designated deputy, and

delivered to the MINISTRY or its representative(s)

within thirty (30) Days after tie end of the Month

that covers the return.



3.2 The aforesaid books of account and other books and

records referred to in Article 13.1, shall be

available at all reasonable times for inspection

by duly authorized representatives of the MINISTRY.





ARTICLE 14

RECORDS, REPORTS AND INSPECTION





.1 The CONTRACTOR shall accurately prepare and keep at

all times, while this Agreement is in force, the

current records of the Petroleum Operations in the

Agreement Area, according to this Agreement.



.2 The CONTRACTOR shall furnish the MINISTRY of its

representative(s), in conformity with applicable

regulations or as the MINISTRY or its

representative(s) may reasonably require,

information data concerning its Petroleum

operations under this Agreement. The CONTRACTOR

will perform the functions indicated in this

Article 14.2 in accordance with its role as

specified in this Agreement.



4.3 The CONTRACTOR shall save and keep for a

reasonable period of time a representative portion

of each sample of cores and cuttings taken from

drilling wells, to be disposed of, or forwarded to

the MINISTRY or its representative(s) in the manner

directed by the MINISTRY. All such samples retained

by the CONTRACTOR for the Petroleum Operations

shall be considered available for inspection at any

reasonable time by the MINISTRY or its

representative(s)



4.4 Unless otherwise agreed to by the MINISTRY, in

case of exporting any rock samples outside the ROY,

samples equivalent in size and quality shall,

before such exportation, be delivered to the

MINISTRY.



4.5 Original records are the property of the

GOVERNMENT. They can only be exported with the

permission of the MINISTRY provided, However, that

magnetic tapes and other data which must be

processed or analyzed outside the ROY may be

exported if a monitor or comparable record, if

available, is maintained in the ROY and provided

that such exports shall be repatriated to the ROY

promptly after processing or analysis.



4.6 During the period the CONTRACTOR performs the

Exploration operations, the MINISTRY'S duly

authorized representative(s) or employees shall

have the right to full and complete access to the

Agreement Area at all reasonable times with the

right to observe the Petroleum Operations being

conducted and to inspect all assets, records, and

data kept by the CONTRACTOR. The CONTRACTOR all

provide the MINISTRY with copies of any and data

including, but not limited to, geological and

geophysical reports, logs, and well surveys,

information, and interpretation of such data, and

other information in the CONTRACTOR'S possession.



4.7 [--] the purpose of obtaining new offers, the

MINISTRY may show any other party uninterpreted

basic geophysical and geological data (such data to

be not less than two (2) Years old unless the

CONTRACTOR agrees to a shorter period, which

agreement shall not be unreasonably withheld) with

respect to the Agreement Area.4.8 All available technical data concerning the Agreement Area including the geological, geophysical and drilling data and any rock or hydrocarbon rock samples shall be made available to the CONTRACTOR free of charges except of copying within thirty (30) Days from the Effective Date.



ARTICLE 15

RESPONSIBILITIES FOR DAMAGES



The CONTRACTOR shall entirely and solely be responsible before the law towards third parties for any damage caused by the CONTRACTOR in the conduct of Petroleum Operations and shall indemnify the MINISTRY against all damages for which it may be held liable to third parties on account of any such operations.



ARTICLE 16

PRIVILEGES OF THE MINISTRY'S REPRESENTATIVES



Duly authorized representative(s) of the MINISTRY shall have access to the Agreement Area and to the Petroleum Operations conducted thereon. Such representative(s) may examine the books, registers, and records of the CONTRACTOR and make a reasonable number of surveys, drawings, and tests for the purpose of enforcing this Agreement. They shall, for this purpose, be entitled to make reasonable use of the machinery and instruments of the CONTRACTOR on the condition that no danger or impediment to the Petroleum Operations hereunder shall arise directly or indirectly from such use. Such representative(s) shall be given reasonable assistance by the agents and employees of the CONTRACTOR so that none of the activities shall endanger or hinder the safety or the efficiency of the Petroleum Operations. The CONTRACTOR shall offer such representative(s) all privileges and facilities accorded to its own employees in the field and shall provide them, free of charge, with the use of reasonable office space, and of adequately furnished housing while they are in the field, for the purpose of facilitating the objective of their assignments. The CONTRACTOR shall not be responsible for any liability resulting from the injury to or death of or damage to the property of any such representative(s) or employees, unless caused by the gross negligence or willful misconduct of the CONTRACTOR.



[signature] [signature]



ARTICLE 17

EMPLOYMENT PRIVILEGES AND THE

TRAINING OF ROY PERSONNEL





17.1 It is the desire of the MINISTRY and the

CONTRACTOR that Petroleum Operations

hereunder be conducted in a businesslike and

efficient manner:



17.1.1 A minimum of fifteen percent (15%) of the

combined salaries and wages (excluding the

leave pay and non recurring bonuses) of each

of the resident expatriate administrative,

professional and technical personnel

employed by the CONTRACTOR, its

contractors and subcontractors that are

resident in YEMEN shall be paid monthly in

Yemeni Currency.



17.1.2 The CONTRACTOR shall select its

employees and determine their numbers to

be used for the Petroleum Operations

hereunder, subject to Article 6 above.



17.1.3 The CONTRACTOR shall, after consultation

with the MINISTRY, prepare and carry out

specialized training programs for its Yemeni

employees engaged in Petroleum Operations

according to this Agreement and with respect

to applicable aspects of the Petroleum

Industry, such training programs should be

in line and satisfy the requirements of the

Yemenisation Plan prepared jointly and

approved by the MOM. The

CONTRACTOR shall undertake to replace

gradually its staff by qualified Yemeni

nationals in full coordination with the

MINISTRY and in accordance with the

approved Yemenisation Plans.



17.1.4 The CONTRACTOR shall use its best efforts

to include in its organization, throughout the

Exploration Period and the Development

Period and, when appropriate to the nature of

the Petroleum Operations, the maximum

number of graduates seconded by the

MINISTRY and selected by mutual

agreement, such as geologists, geophysicists,

drilling engineers and production engineers.



17.1.5 All Yemeni personnel employed by the

CONTRACTOR, its contractors and

subcontractors shall be paid, according to their

employment terms, salaries, wages, benefits

and allowances according to their technical,

administrative and professional abilities.



ARTICLE 18

LAWS AND REGULATIONS



8.1 General

Except as provided in this Agreement, the CONTRACTOR

shall be subject to all the laws of YEMEN and

regulations issued for the implementation thereof,

including, without limitation, any regulations for

the safety, environment, health, labor and efficient

performance of Petroleum Operations carried out

pursuant to this Agreement and for the conservation

of the Petroleum resources. The CONTRACTOR, its

contractors and subcontractors shall be subject to

the provisions of his Agreement which affect them,

and to all regulations which are duly issued by the

GOVERNMENT or the MINISTRY from time to time, except

those regulations and laws that are inconsistent

with this Agreement.





8.2 Rights Controlled by this Agreement

Interests, rights and obligations of the GOVERNMENT

that are represented by the MINISTRY and of the

CONTRACTOR under this Agreement, shall be solely

governed by the provisions of this Agreement and may

be altered or amended only by the mutual agreement

of the Parties, which will be subject to approval

according to the constitutional procedures in the

ROY.



ARTICLE 19

RIGHTS OF REQUISITION



9.1 General

In case of national emergency, the GOVERNMENT has

the right to requisition all or part of the

petroleum produced from the Development Area or

development Areas during the period of such

emergency, and has the right to instruct the

CONTRACTOR to increase the production to the maximum

rate achievable in accordance with Petroleum

Industry standards. The GOVERNMENT is also such

right to requisition to the Development Area itself

and, any related facilities, during the period of

such emergency.



9.1.1 The GOVERNMENT has the right of final requisition

to any Development Area if it is proved to the

GOVERNMENT that the CONTRACTOR has caused, by

its grossnegligence or wilful misconduct, a material and substantial damage to any Oil field or any relevant facilities in the aforementioned Development Area provided that such damage so caused shall be determined by a neutral third party selected by the MINISTRY and the CONTRACTOR to assist them in reaching a mutual agreement on the right of final requisition.



19.1.2 In no case shall a requisition, as provided for herein, be implemented prior to adequate written notice to the CONTRACTOR so that it shall be able to express its views with respect to such claim of a requisition.



19. Notice of Requisition

The requisition of Petroleum production shall be carried out through a "Ministerial Order". Any requisition of the Development Area itself, or any related facilities, shall be carried out through a "Republican Resolution", duly notified to the CONTRACTOR.



19. Indemnification

In the event of any requisition, except a final requisition referred in Article 19.1.1, the GOVERNMENT shall indemnify the CONTRACTOR for the period during which the requisition is verified, including:



19.3.1 Damages if any from any such requisitions, except for any damages resulting from enemy attack on any Development Area or to the ultimate recovery of Crude Oil from any Development Area.



19.3.2 Full payment each Month for the CONTRACTOR's share in all Petroleum extracted by the GOVERNMENT less the Royalty, the MINISTRY's Production Sharing Oil, and the operating costs of such production.





ARTICLE 20

ASSIGNMENT



20. General

Neither the CONTRACTOR nor any of the entities comprising the Contractor may (except to an Affiliated Company) sell, assign, transfer, convey, or otherwise dispose of to any person, firm or corporation, in whole or in part, directly of indirectly, any of its rights, privileges, duties of obligations under this Agreement without the prior



































written approval of the MINISTRY. The CONTRACTOR shall guarantee the performance of such assignee, in accordance with the terms of this Agreement. An entity comprising the CONTRACTOR shall give to the MINISTRY a prompt written notice of any assignment to an Affiliated Company.



20.2 Approval of the MINISTRY



Within ninety (90) Days from the date of the fulfillment of the last condition under this Article 20.2 as required by the Ministry by any entity constituting the CONTRACTOR of a proposed assignment under this Article 20, the MINISTRY shall give its approval to the assignment by any entity constituting the CONTRACTOR of all or part of its rights, privileges, duties or obligations under this Agreement only if the following conditions are met:



20.2.1 The obligations of the assignor deriving from this Agreement must have been dully fulfilled as of the date such request is made and remain fulfilled on the date of the assignment.



20.2.2 The proposed assignee or assignor must produce reasonable evidence to the MINISTRY of the assignee's financial and technical competence.



20.2.3 The instrument of assignment must include provisions stating precisely that the assignee is bound by all covenants contained in this Agreement and any modifications or additions, in writing, that up to such time have been made.



A draft of the proposed assignment and all relevant documents supporting the request, shall be submitted to the MINISTRY prior to the date of the proposed assignment, for the purpose of official approval.



20.2.4 As long as the assignor shall hold any interest under this Agreement the assignor together with the assignee shall be jointly liable for all duties and obligations of the CONTRACTOR under this Agreement.



20.3 Any assignment by any entity constituting the CONTRACTOR of all or part of its interests under this Agreement shall be free of any taxes and fees of any nature whatsoever applicable in the ROY including, but not limited to, taxes on any sales proceeds and transfer taxes, chargesand fees, except tor the payment to the MINISTRY of fifteen percent (15%) of the Net Sales Proceeds, as defined below. The term "Net Sales Proceeds" means the amount resulting from the following calculation:



20.3.1 The total consideration paid to the respective assignor(s) in convertible currency in the form of cash, check, or other readily negotiable instruments for any interest under this Agreement that is assigned to any person, firm, or corporation other than to an Affiliated Company of such assignor(s) in accordance with the provisions of this Article 20, less the sum of (i) and (ii) below:



(i) all costs, expenses, bonuses paid to the STATE, fees and expenditures of any nature whatsoever incurred by the assignor(s) with respect to the interest so assigned prior to the date of said assignment, and



(ii) all taxes of any nature whatsoever (except the said fifteen percent (15%) of Net Sales Proceeds itself) of any taxing authorities whatsoever that are incurred by the assignor(s) with the respect to said assignment. The aforesaid fifteen percent (15%) of Net Sales Proceeds shall not apply to any consideration received by the assignor(s) for said assignment where such consideration is in the nature of work and/or expenditures to be performed and/or paid by the assignee with respect to the Petroleum Operations under this Agreement.



20.4 The CONTRACTOR shall, with the approval of the MINISTRY have the right to freely mortgage, pledge or otherwise encumber its interest under this Agreement for the purpose of obtaining financing for the Petroleum Operations which mortgage, pledge or other encumbrances shall be without prejudice to the MINISTRY's right under this Agreement. ARTICLE 21

BREACH OF AGREEMENT AND POWER OF

CANCELLATION





21.1 The GOVERNMENT has the right to cancel this

Agreement by a Republican Resolution with respect

to the CONTRACTOR, in the following instances:



21.1.1 If the CONTRACTOR has knowingly submitted

any false statements to the MINISTRY which

were of a material consideration for the

execution of this Agreement.



21.1.2 If the CONTRACTOR assigns any interest

hereunder contrary to the provisions of

Article 20 hereof.



21.1.3 If the CONTRACTOR is adjudicated

bankrupt by a court of competent

jurisdiction.



21.1.4 If the CONTRACTOR does not comply with

the final decision reached as a result of

arbitration proceedings conducted under

Article 23 hereunder.



21.1.5 If the CONTRACTOR intentionally extracts

any mineral other than Petroleum not

authorized by this Agreement without the

authorisation of the GOVERNMENT, except

such extractions as may be unavoidable as

the result of Petroleum Operations conducted

hereunder in accordance with accepted

Petroleum Industry practices and which shall

be notified to the MINISTRY or its

representative(s) as soon as possible.



21.1.6 If the CONTRACTOR commits any material

breach of this Agreement.



21.1.7 If the CONTRACTOR causes, by its gross

negligence or wilful misconduct, material or

substantial damage to any Oil and/or Gas

field or any relevant facilities.



Such cancellation shall take place without

prejudice to any right which may have

accrued to the GOVERNMENT against the

CONTRACTOR in accordance with the

provisions of this Agreement and, in the

event of such cancellation, the

CONTRACTOR shall have the right to

remove from the Agreement Area all its

personal property.21.2 If the GOVERNMENT deems that one of the aforesaid causes (other than a Force Majeure cause referred to Article 22 hereof) exists to cancel this Agreement, the GOVERNMENT shall give to the CONTRACTOR ninety (90) Days' written notice personally served on the CONTRACTOR's General Manager in a legally official manner and receipt of which is acknowledged by him or by his legal agent, to remedy and remove such cause; but if for any reason such service is impossible due to unnotified Gazette of the GOVERNMENT of such notice shall be considered as validly served upon the CONTRACTOR. If at the end of the said ninety (90) Days' notice period such cause has not been remedied and removed, this Agreement may be cancelled forthwith by a Republican Resolution, as aforesaid.



ARTICLE 22

FORCE MAJEURE



22.1 The non-performance or delay in performance by the MINISTRY or the CONTRACTOR of any obligation under this Agreement other than the obligation to pay any amounts due or giving notices shall be excused if, and to the extent that, such non-performance or delay is caused by Force Majeure. The period of any such non-performance or delay, together with such period as may be necessary for the restoration of any damage done during such delay shall be added to the time given in this Agreement for the performance of such obligation and for the performance of any obligation dependent thereon and consequently, to the term of this Agreement, but only if the extension of the term of this Agreement is relevant to the performance of such obligation.



22.2 "Force Majeure", within the meaning of this Agreement, shall be any order, regulation or direction of the GOVERNMENT, or (with respect to the CONTRACTOR) of the government of the country in which any of the entities comprising the CONTRACTOR is incorporated, whether promulgated in the form of law or otherwise, or any act(s) of God, insurrection, riot, war, strike (or other labor disturbances), fires, floods or any cause not due to the fault or negligence of the Party invoking Force Majeure, whether or not similar to the foregoing, provided that any such cause is beyond the reasonable control of the party invoking Force Majeure.22.3 Without prejudice to the foregoing provisions and

except as may be otherwise provided herein,

neither the GOVERNMENT nor the MINISTRY shall

incur any responsibility whatsoever to the

CONTRACTOR for any damages, restrictions or loss

arising in consequence of such cause of Force

Majeure.



22.4 If the Force Majeure event occurs during either

the First Exploration Period or the Second

Exploration Period or any extension(s) thereof and

continues in effect for a period of six (6)

Months, thereafter the CONTRACTOR shall have the

option upon ninety (90) Days prior written notice

to the MINISTRY to terminate its obligations

hereunder without further liability of any kind

except for those payments accrued under this

Agreement.





ARTICLE 23

DISPUTES AND ARBITRATION



23.1 In case a dispute arises under this Agreement

between the MINISTRY and the CONTRACTOR with

respect to interpretation, application or its

validity, the Parties to the dispute shall use

their good faith efforts to settle their

differences by mutual agreement. Otherwise, the

said Parties shall submit their dispute to

arbitration as provided in this Article (23).



23.2 Unless otherwise agreed by the Parties to the

dispute, the arbitration shall be held in Paris,

France, and conducted in the English language in

accordance with the Rules of Conciliation and

Arbitration of the International Chamber of

Commerce (the “Rules”). In the event of no

specific provisions being provided under the

Rules, the arbitration tribunal shall establish

their own procedure.



23.3 The arbitration shall be initiated by either Party

to the dispute ("First Party") giving written

notice to the other Party to the dispute ("Second

Party") that it elects to refer the dispute to

arbitration and has appointed an arbitrator who

shall be identified in said notice. The Second

Party shall notify First Party in writing within

forty-five (45) Days identifying the arbitrator

that has been selected and appointed by such

Party.

23.4 If the Second Party does not so appoint its arbitrator, the First Party shall have the right to apply to the Court of Arbitration of the International Chamber of Commerce to appoint a second arbitrator. The two (2) arbitrators shall, within thirty (30) Days, select a third arbitrator failing which the third arbitrator shall be appointed by the Court of Arbitration of the International Chamber of Commerce at the request of either the First Party or the Second Party.



23.5 The third arbitrator shall not be a citizen of the ROY or of a country in which any of the entities comprising the CONTRACTOR is incorporated, but shall be a citizen of a country which has diplomatic relations with the aforesaid countries, and shall not have any economic interest in the oil business of the ROY or of any party to the dispute.



23.6 The Parties hereto shall extend to the arbitration tribunal all facilities (including access to the Petroleum Operations) for obtaining any information required for the proper determination of the dispute. The absence or default of any Party to the arbitration shall not be permitted to prevent or hinder the arbitration proceeding in any or all of its stages.



23.7 Pending the decision or award of the arbitration tribunal, the Petroleum Operations or activities which have given rise to the arbitration need not be discontinued. In the event the decision or award recognizes that the complaint was justified, provisions may be made therein for such reparation as may be appropriately made in favor of the complainant.



23.8 Judgement on the award rendered may be entered in any court having jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be.





23.9 The provisions of this Agreement relating to arbitration shall continue in force notwithstanding the termination of this Agreement.









































































































23.10 The Parties hereto base their relationship under this Agreement on the principles of goodwill and good faith. The interpretation and application of the provisions of this Agreement with respect to the arbitration shall be in accordance with the Yemeni laws that are outlined in Article 24 of this Agreement.



ARTICLE 24

GOVERNING LAW



This Agreement, its Annexes, and any modification, will be governed and interpreted according to Yemeni laws, except the laws which are inconsistent with this Agreement.



ARTICLE 25

STATUS OF PARTIES



25.1 The rights, duties, obligations and liabilities with respect to the MINISTRY and the CONTRACTOR, shall be several and not joint or collective, it being understood that this Agreement shall not be construed as constituting an association or corporation or partnership.



25.2 The entities comprising the CONTRACTOR shall be subject to the laws of the place where they are incorporated regarding their legal status or creation, organization, charter and bylaws, share holding and ownership.



25.3 The CONTRACTOR companies' respective shares of capital which are entirely held abroad shall not be negotiable and shall not be offered for public subscription in the ROY.



25.4 The entities comprising the CONTRACTOR shall be jointly and severally liable for the performance of the obligations of the CONTRACTOR under this Agreement to the MINISTRY.



25.5 This Agreement shall continue the authority for the CONTRACTOR and the MINISTRY to conduct all activities as are necessary to carry out the Petroleum Operations as contemplated by this Agreement.ARTICLE 26

LOCAL CONTRACTORS AND LOCALLY

MANUFACTURED MATERIALS



26.1 The CONTRACTOR, its contractors and subcontractors shall:



26.1.1 Give priority to local contractors and subcontractors including MOM's Dependent Unites as long as their performance is comparable to international standards and quality, their terms and conditions are competitive with those of other contractors and subcontractors tendering for work, and the prices of their services are not higher than the prices of such other contractors and subcontractors by more than ten percent (10%). The CONTRACTOR shall, following consultation with the MINISTRY, invite local contractors to bid when it requests bids for any required services.



26.1.2 Give preference to locally manufactured materials, equipment machinery and consumable so long as their quality, quantity and time of delivery is comparable to internationally available materials, equipment, machinery and consumables. However, such material, equipment, machinery and consumables may be imported for Petroleum Operations conducted hereunder if the local price of such items at the CONTRACTOR's operating base in the ROY is more than ten percent (10%) higher than the price of such imported items before Customs Duties, but after transportation and insurance costs have been added.



ARTICLE 27

GAS



27.1 The Associated Gas and Dry Gas produced from the Agreement Area are the property of the STATE. If the CONTRACTOR needs part of the separated Associated Gas and/or Dry Gas for the purpose of utilizing it in the Petroleum Operations or for re-injection to preserve the pressure of the reservoirs,



the CONTRACTOR must submit to the

MINISTRY a request for such utilisation

free of charge together with

documentation to support the request.

Approval of such request shall not be

unreasonably withheld



27.2 Associated Gas

--------------



(a) The CONTRACTOR shall deliver the

Associated Gas to the STATE at the point

where it is separated from the Crude Oil.

Any costs with respect to such delivery to

the STATE, including but not limited to,

any increase in the CONTRACTOR's costs

as a result of such delivery shall be paid by

the STATE to the CONTRACTOR. Any

Associated Gas that is not taken by the

STATE or that is not utilized in the

Petroleum Operations, as aforesaid may be

treated by the CONTRACTOR in

accordance with good Petroleum Industry

practices.



(b) Subject to Article 27.1, if the STATE

considers the possibility of entering into an

agreement with any party for the export

and sale of the Associated Gas and/or its

delivery to the MINISTRY for local

consumption (the "Gas Development

Agreement"), the MINISTRY and the

CONTRACTOR shall meet and discuss in

good faith for the purpose of reaching a

mutual agreement on the terms and

conditions of the Gas Development

Agreement. Any such Gas Development

Agreement shall be based on the following

principles:



(i) The STATE'S share in the Gas

Development Agreement shall not be

less than sixty percent (60%).



(ii) The CONTRACTOR shall initially bear

all costs and expenses related to the Gas

project including those related to the

construction and operation of the

facilities and shall be reimbursed from

the "Annual Gas Revenue" according to

the terms of the Gas Development

Agreement.(iii) If the terms of the Gas Development

Agreement could not be agreed as

contemplated above within a six (6) Month

period from the first meeting devoted to

that purpose between the MINISTRY and

the CONTRACTOR, and unless such

period is extended by mutual agreement,

the MINISTRY shall have the right to

conduct negotiations with any third party

and to conclude an agreement on the Gas

project, provided that the operations under

such Agreement shall not interfere with the

Contractor's Petroleum Operations in the

Agreement Area. In that context and as a

third party, the CONTRACTOR may,

alone or together with any other party,

submit a new proposal to the MINISTRY

for the establishment of the Gas project.

Provided, however the MINISTRY shall be

completely free to select the best proposal

according to its own discretion without

assuming any liability whatsoever to the

CONTRACTOR or any other party, and

the CONTRACTOR shall be entitled only

to recover its exploration and appraisal

expenditures pursuant to Article 7 of this

Agreement.



27.3 Dry Gas

-------



(a) The CONTRACTOR shall notify the

MINISTRY of any discovery of Dry Gas on

any separate geological feature within the

Agreement Area. The CONTRACTOR and

the MINISTRY shall promptly meet for the

purpose of discussing whether there is a

basis for the CONTRACTOR and the

MINISTRY to mutually agree on the terms

and conditions under which the

CONTRACTOR shall diligently undertake

in accordance with good Petroleum Industry

practices, the appraisal and development

thereof, if feasible and economical, of the

discovery (the "Project"). Provided this

Agreement is in effect, any "Gas Project

Agreement" relating to the Project shall be

based on the following principles:



(i) Unless otherwise agreed, the appraisal

program shall be in stages taking into

account the market for such Dry Gas, the

prices to be received therefor, the marketsthen available, the fiscal conditions and such other factors as may be reasonably required to make such decision with the first stage being preliminary feasibility study and each subsequent stage being dependent on the successful completion of the previous one.



(ii) All costs, expenses and expenditures of the appraisal program shall be recoverable from Oil as Exploration Expenditures, or in the absence of a Crude Oil production, from the "Annual Gas Revenue" in accordance with the Gas Project Agreement.



(b) If the MINISTRY and the CONTRACTOR fail to reach an agreement on the Gas Project Agreement, within the six (6) Month period from the first meeting devoted to that purpose between the MINISTRY and the CONTRACTOR, and unless such period is extended by mutual agreement, the MINISTRY shall have the right to develop such Dry Gas discovery on its own or in collaboration with any third party. In such an event the CONTRACTOR shall relinquish to the MINISTRY the area covering said geological feature provided the CONTRACTOR shall not be obliged to relinquish any part of the Agreement Area Corresponding to a Development Area(s) or to the surface area of any geological feature in which a Commercial Oil well has been established. Such area shall be mutually agreed upon between the MINISTRY and the CONTRACTOR on the basis of good Petroleum Industry practices. Provided, however, the CONTRACTOR shall not be entitled to any compensation for that relinquishment and shall be entitled only to recover its expenditures related to the exploration and appraisal program in accordance with Article 7 of this Agreement.



27.4 Financial Terms:

The Gas Project Agreement shall provide for the financial terms and conditions as follows:



(i) All the sharing and the cost recovery shall be effected on the basis of the annual revenue of the Project. (ii) There should be specified the following:



- Bonuses to the MINISTRY,

- Royalties which the STATE shall receive

from the Project,

- Cost Recovery limit,

- Profit sharing provisions.





ARTICLE 28

CONFIDENTIALITY



28.1 General:



Except as specifically provided in this Agreement,

the CONTRACTOR, its contractors and their

subcontractors shall not at any time during the term

of this Agreement or for a period of four (4) Years

thereafter, use for their benefit or disclose to or use

for the benefit of any other person whatsover,

including, but not limited to, any company, firm,

corporation, institution or government any

information acquired during the Term of this

Agreement as a result of the Petroleum Operations

hereunder. For purposes of this Article 28,

information shall include, without limitation, data,

designs, methods, formulas, processes, reserves and

any other technical, financial or trade information.



28.2 Use or Disclosure by the CONTRACTOR



28.2.1 The CONTRACTOR may freely use

information for all purposes necessary to

meet its obligations under this Agreement.



28.2.2 The CONTRACTOR may disclose

information to others (including to Affiliated

Companies):



(i) to the extent necessary to permit others to

perform any of the obligations under this

Agreement:

(ii) in connection with the arranging of

financing or assignment; and



(iii) to the extent required by any applicable

law or regulation in accordance with good

Petroleum Industry practices, provided

that such disclosure will not cause any

damage or prejudice the MINISTRY's

rights under this Agreement. Provided, however, any disclosure under

Article 28.2.2 (i) or Article 28.2.2(ii),

above shall require the third party to

which the disclosure is made to agree in

writing to maintain the same

confidentiality requirements applied to

the CONTRACTOR hereunder.



28.3 Approval of the MINISTRY

Any use or disclosure not specifically authorized

under Article 28.2 above, shall be subject to the

written authorization of the MINISTRY.



28.4 Exemption



This Article 28 shall not apply to any information

which the CONTRACTOR acquired or acquires

from any source other than from the performance of

this Agreement or from the MINISTRY or which is

considered to be in the public domain.



ARTICLE 29



ANCILLARY RIGHTS OF CONTRACTOR



29.1 For the purpose of its Petroleum Operations under

this Agreement and subject to the laws and

regulations at the time in force and subject to the

approval of the GOVERNMENT, the

CONTRACTOR shall have the right to take free of

cost any stone, sand or other building materials from

land not privately occupied or owned and to drill for

and take any water which may be available and may

be required for Petroleum Operations, provided that

the inhabitants are not prevented from taking their

usual requirements of such materials and that the

water supply of the local inhabitants and nomad

population is not endangered.



29.2 Radio, telephone and other communication facilities

maintained by the CONTRACTOR shall be for its

exclusive use for purposes of its activities under this

Agreement, shall be subject to all governmental

regulations and shall be available for reasonable or

emergency use by the GOVERNMENT free of

charge. Such facilities shall be so constructed and

operated as not to interfere with similar installations

which exist or with the permission of the

MINISTRY may be established in YEMEN for

public use or for the purpose of defense.



29.3 The CONTRACTOR shall have the right to use

without payment and in a safe manner existing roads

within YEMEN and shall permit free public use of

the roads constructed and maintained by it, except

such roads as the CONTRACTOR may with theconsent of the MINISTRY declare to be for its exclusive private use.



29.4 The CONTRACTOR shall have the right to use existing public harbor and airports in YEMEN upon payment of the port and harbor dues or landing or other fees generally applicable in accordance with applicable regulations, provided that such use is not so extensive to interfere with the right of the public to use such harbors and airports.



29.5 Subject to the approval of the appropriate GOVERNMENT authorities, the CONTRACTOR shall have the use and occupation of surface rights over the lands and buildings owned by the GOVERNMENT in YEMEN which they may reasonably require for Petroleum Operations under this Agreement subject to an agreed upon rental payment which shall not be less favorable than available to any other international petroleum company operating in the ROY. When land, surface rights or buildings required by the CONTRACTOR for the Petroleum Operations under this Agreement are privately occupied or owned, their purchase, lease or clearance shall be effected on terms to be negotiated by the CONTRACTOR with the owner or occupier but such terms shall not be substantially more onerous to the CONTRACTOR than those normally offered currently for similar transactions in the locality concerned. The GOVERNMENT shall, upon request by the CONTRACTOR assist in the negotiations with the owner and occupier and shall use the power of eminent domain when necessary after the payment of reasonable compensation to the owner in compelling cases.



29.6 The CONTRACTOR shall have the right to incur and pay costs and expenses pertaining to any emergency affecting safety to person or property in the Petroleum Operations and such costs and expenses shall be recoverable under this Agreement provided that the MINISTRY shall be notified of any such emergency as soon as practicable.



29.7 The CONTRACTOR shall have the right to incur and pay costs and expenses for any item of an approved Work Program and Budget for an amount in excess of the budget for such item and such costs and expenses shall be cost recoverable under this Agreement to the extent that they do not exceed ten percent (10%) of the budget for such item. The CONTRACTOR shall, with the approval of the MINISTRY, have the right to revise any approved Work Program and Budget. ARTICLE 30

MISCELLANEOUS



30.1 The headings or titles to each of the Articles and

paragraph of this Agreement are solely for the

convenience of the Parties hereto and shall not be

used with respect to the interpretation or construction

of the provisions of this Agreement.



30.2 Entire Agreement



This Agreement and the Annexes attached hereto

represent the entire agreement between the Parties

hereto with respect to the subject matter hereof,

superseding all other previous oral and written

communications, representations, and agreements

with respect thereto. This Agreement and its

Annexes may be modified only by all the Parties

hereto and ratified in accordance with constitutional

procedures in the ROY.



30.3 All items of archeological value that the

CONTRACTOR encounters are the sole property of

the STATE. The CONTRACTOR should notify the

MINISTRY's representative(s) of such find as soon

as it encounters such items. The CONTRACTOR

must take all necessary precautions for the safety of

the find during the execution of the Petroleum

Operations. The CONTRACTOR shall abide by the

laws of YEMEN and lawful instructions in this

regard.



30.4 Considering that the Parties hereto base their

relationship under this Agreement on good will and

good faith, the Parties hereto agree that in those

provisions of this Agreement where a Party hereto is

required to obtain the consent, approval,

determination or agreement of the other Party

hereto such consent approval determination or

agreement shall not be unreasonably withheld.



30.5 The MINISTRY, on behalf of the Government, shall

coordinate the CONTRACTOR's Petroleum

Operations conducted in accordance with this

Agreement. ARTICLE 31

ASSIGNMENT AND AUTHORIZATION BY THE MINISTRY



The MINISTRY reserves the right to assign part or the whole of its rights and obligations in this Agreement to any of its Dependent Units in the ROY during any period when the Agreement is in effect, and reserves the right to recover all of its rights and its obligations at any time it desires to do so. The MINISTRY has the right to assign to and/or to deputize more than one (1) Dependent Unit to exercise its rights and perform its obligations under this Agreement throughout all the stages of the execution of this Agreement. Any such transfer of rights and obligations shall not be binding on the CONTRACTOR until the MINISTRY has delivered to the CONTRACTOR the document effecting such transfer.



ARTICLE 32

THE OFFICIAL TEXT



This Agreement is written in the Arabic and English Languages both of which shall have equal legal force and effect, provided, however, before GOVERNMENT authorities in the ROY, the Arabic version shall be referred to in interpreting this Agreement; and in any arbitration proceedings under this Agreement the Arabic and English versions shall be referred to in interpreting this Agreement.



ARTICLE 33

GOVERNMENTAL APPROVAL



This Agreement, signed by the MINISTRY and the CONTRACTOR, shall not be binding upon either of the Parties hereto, until the issuance of the law approving this Agreement according to the constitutional procedures in the ROY and giving the provisions of this Agreement, including the Annexes, full force and effect of law notwithstanding any contradictory GOVERNMENT enactment.

ARTICLE 34



THE SIGNATURES





Certifying the foregoing, the Parties hereby sign this

Agreement on the date which appears in the Preamble

of this Agreement:



MINISTRY OF OIL AND MINERALS



By:...Dr. Rasheed S. Baraba ......



Signature: ........................



Title Minister of Oil and Minerals .....



Date: 19 December 2004







THE CONTRACTOR:



1-DNO ASA



for



By: ...LOLIN KRAMER ...



Signature:................... DNO ASA, YEMEN

P.O. Box 16133 Sana'a

ROY

Title: ...................... Tel. 440 591



Date:..... 19.12.04 ............





2- ANSAN WIKFS (HADRAMAUT) LTD



for



By: .....................



Signature: ................



Title:.....................



Date:... 17.12.04 .........



3- TG HOLDINGS YEMEN INC.



for



By: ..........................



Signature: ...................



Title: .......................



Date: ....19.12.04 ..........





4- YEMEN GENERAL CORPORATION FOR

OIL & GAS





By:......................



Signature: ................



Title General Manager of YOG. .......



Date: ....19 December 2004 ........









ARTICLE 34

THE SIGNATURES



Certifying the foregoing, the Parties hereby sign this

Agreement on the date which appears in the Preamble of this Agreement.



MINISTRY OF OIL AND MINERALS



By:...............................

Signature:........................

Title:............................

Date:.............................



THE CONTRACTOR:

1-DNO ASA



By:...............................

Signature:........................

Title:............................

Date: ............................



2- ANSAN WIKFS (HADRAMAUT) LTD





By:...............................

Signature:........................

Title:............................

Date: ............................



3- TG HOLDINGS YEMEN INC



By:...............................

Signature:........................

Title:............................

Date: ............................



4-THE YEMEN COMPANY



By:...............................

Signature:........................

Title:............................

Date: ............................ ANNEX “A”

DESCRIPTION OF THE AGREEMENT AREA

Al-AIN Area, Hadramout Governorate,

(BLOCK 72)

REPUBLIC OF YEMEN



The Agreement Area measures approximately 1821 square kilometres and is defined by the comer points numbered from “A” through B, C,D,E,F,G,H, and I, closing at (A) connected by straight lines as shown in Annex "B". The co-ordinates of such comer points are given in the following table:



AI-AIN Area:



A E: 48.2000

N: 15.6184



B E: 48.4542

N: 15.6184



C E: 48.4542

N: 15.5000



D E: 48.6000

N: 15.5000



E E: 48.8222

N: 15.3833



F E: 48.8223

N: 15.1663



G E: 48.5292

N: 15.1663



H E: 48.5292

N: 15.3833



I E: 48.2000

N: 15.3833



And closing at (A)

E: 48.2000

N: 15.6184



ANNEX "B"



AN ILLUSTRATIVE MAP OF THE AGREEMENT

AREA



“Annex “B” is an illustrative Map of the Agreement Area, “Al-ain, Hadramout Governorate, (BLOCK 72) REPUBLIC OF YEMEN”, which outlines the Area covered by this Agreement and defined and bound by the points A,B,C,D,E,F,G,H, and I closing at “A”.







Block (72), Ain

ANNEX "C"



THE MINIMUM WORK OBLIGATION AND MINIMUM EXPENDITURE OBLIGATION DURING THE EXPLORATION PERIOD



1. The First Exploration Period(Obligatory)



1.1 The First Exploration Period is Thirty (30) Months starting on the Effective Date.



1.2 The CONTRACTOR is obligated to conduct the following minimum Exploration work during the First Exploration Period:



(a) Reprocess available seismic data related to Block (72).



(b) Conduct, acquire, process and interpret a minimum (150) kilometres of 2-D seismic lines, of an equivalent amount of 3-D seismic.



(c) Drill and evaluate Two (2) exploration wells with a minimum depth 200 metres in the Basement(Basement target is optional).



Minimum financial commitment for such Exploration work:



(a) Reprocess available seismic data and



Conduct, acquire, process and interpret

a minimum (150) kilometres. U.S.$1,000,000



(b) Drill One (1) Exploration well U.S.$1,500,000



(C) Drill one (1) Exploration well U.S.$1,500,000

Total U.S.$4,000,000





1.3 The CONTRACTOR is obligated to spend a minimum of Four million United States Dollars (U.S.$4,000,000) on Exploration work during the First Exploration Period.



2. The Second Exploration Period(Optional)

2.1 The Second Exploration Period is Thirty (30) Months starting on the Day after the end of the First Exploration Period, or any extension thereof the CONTRACTOR so elects pursuant to the Agreement.



2.2 The CONTRACTOR is obligated to conduct the following Exploration work during the Second Exploration Period.

(a) Conduct, acquire, process and interpret a minimum

of (100) kilometres of 2D seismic lines, or an

equivalent amount of 3-D seismic.



(b) Drill and evaluate One (1) exploration well with a

minimum depth of 200 meters in the Basement (The

basement target is optional)



Minimum financial Commitment for such Exploration work:



(a) Conduct, acquire, process and

interpret 100 kilometres of

2D seismic lines. U.S.$1,000,000



(b) Drill and evaluate One(l)

exploration well U.S.$2,000,000



2.2 The CONTRACTOR is obligated to spend a minimum

of Three million United States Dollars

(U.S.$3,000,000) on Exploration work during the

second Exploration Period.



3. Excess work in any portion of the Exploration Period

(including extensions) may be carried forward to

satisfy the work in a subsequent portion of the

Exploration Period (including extensions). ANNEX "D"

FORM OF IRREVOCABLE LETTER OF CREDIT



DATE:

MINISTRY OF OIL AND MINERALS

(Address)

(Attention)



Re: OUR IRREVOCABLE LETTER OF CREDIT

No.:......................



Gentlemen:

By order of our client, (name of company)(hereinafter referred to as the "CONTRACTOR") we hereby establish this irrevocable Letter of Credit No.:______________ in your favour, according to which we hereby undertake and guarantee to pay you unconditionally the amount hereinafter referred to, without any question and reference to the CONTRACTOR, in the event that the CONTRACTOR has failed to fulfill its technical or financial obligations (including the clean up of work sites) under the Production Sharing Agreement for ----------- Area, ----------- Governorate (Block-------), Republic of Yemen (the "PSA") entered into between the Ministry of Oil and Minerals (the "MINISTRY") of the first part, and DNO, ANSAN WIKFS, TG and the Yemen company of the other part, effective as of (date) and its Annex "C" (hereto attached), which specifies the Minimum Work Obligation and Minimum Expenditure Obligation during the Exploration Period.



The amount guaranteed hereunder is ---------- million United States Dollars (U.S.$-----------) for the CONTRACTOR's commitments during the First Exploration Period.



1. Payments under the Letter of Credit

Payments under this Letter of Credit are available to you against presentation of a request by you for payment in the form of Exhibit I hereto, and a copy of the notice given to the CONTRACTOR notifying it that the Minimum Work Obligation has not been performed.



2. Reduction of the Letter of Credit Amount

The total amount available hereunder shall be reduced automatically by the amount stated in a signed notice from the MINISTRY in the form of Exhibit II hereto, or as otherwise prescribed in Article 2.1.4 (c) of the PSA.



3. Validity of this Letter of Credit

This irrevocable Letter of Credit is and continues to be valid as from the Effective Date of the PSA and until the earlier of:(a) Six (6) Months after the end of the First

Exploration Period or any extension thereto or (6)

Months after the termination of the PSA; or



(b) The total reductions or payments for the total

amount of this Letter of Credit (after reductions

as referred to above) for the relevant Exploration

Period.



4. Extension of Letter of Credit

The term of this Letter of Credit shall be

automatically extended for a period equivalent to

any extension period granted by the MINISTRY to the

CONTRACTOR under the PSA or any extension as a

result of Force Majeure under the PSA after the

issuing bank has received instructions to that

effect from the MINISTRY.



The defined terms in this Letter of Credit

(including Exhibits I, II and III as well as

Appendix I to Exhibit III) shall have the same

meanings as specified in the PSA.



5. Suspension:

During the Force Majeure the Letter of Credit shall

be suspended and continue in force thereafter

during such period of Force Majeure.



If the Force Majeure event continues for a period

of six (6) Months, and the CONTRACTOR terminates

its obligations in accordance with the Production

Sharing Agreement this Letter of Credit shall

automatically be cancelled according to its terms.



We hereby guarantee the payment of all amounts not

having been reduced in accordance with the above

within ten (10) Days of receipt by us of your

written notice, without further juridical

procedures.



(Name of Issuing Bank)

By:____________________

Signature:____________________



Title:____________________

Date :____________________

EXHIBIT 1



NOTICE FOR PAYMENT UNDER IRREVOCABLE LETTER OF CREDIT NO.:



DATE:

[NAME AND ADDRESS OF ISSUING BANK]



Re: Irrevocable Letter of Credit No.:



Gentlemen:

Please be advised that we hereby request payment under the above referenced Letter of Credit and that:



1.(Name of Company) (the "CONTRACTOR") has not completed its obligations under the Production Sharing Agreement for ---- Area, ---- Governorate (Block----), Republic of Yemen (the "PSA"), effective as of (date) entered into between the Ministry of Oil and Minerals ("the MINISTRY") of the first part, DNO, ANSAN WIKFS, TG and the Yemen Company of the other part, with respect to the Minimum work Obligaion or the clean up of work sites in relinquished areas according to good Petroleum Industry practices for the current Exploration Period of the PSA within the period specified therein and we are entitled to request payment under the Letter of Credit.



2. We certify that in respect of the obligations not performed, the notice of payment made under the Letter of Credit is the sum agreed between us and the CONTRACTOR in the PSA as corresponding to the costs of such work as provided in the Minimum Work Obligation and Minimum Expenditure Obligation under the PSA for the relevant Exploration Period.



3. The MINISTRY has notified the CONTRACTOR at least fourteen (14) Days before the date hereof of the work that has not been performed and the CONTRACTOR has subsequently not performed such work. A copy of the written notice to the CONTRACTOR is attached hereto.



4. This notice for payment is in the amount of ---------- United Sates Dollars (U.S.$--------). Please transfer these funds to our Account No ........... in ........ Bank within ten (10) Days of receiving this notice.





MINISTRY OF OIL & MINERALS,

By:

Signature:

Title:

Copy to the CONTRACTOR

(Address)











































EXHIBIT II



NOTICE OF REDUCTION OF IRREVOCABLE LETTER OF CREDIT NO.:





DATE:

(Name and address of Bank issuing Irrevocable Letter of Credit)



Re:Irrevocable Letter of Credit

No.:



This is to notify you that in accordance with the Production Sharing Agreement entered into between the Ministry of Oil and Minerals (the "MINISTRY") of the first part, and DNO, ANSAN WIKFS, TG and the Yemen Company on the other part, for --------- Area, ------ Governorate (Block -----), Republic of Yemen (the "PSA"), effective as of (date), the undersigned have signed this notice on the date hereof to reflect the completion by (name of company) (the "CONTRACTOR") of the work corresponding to the amount stated below. You are hereby authorized and instructed to reduce the amount of the Letter of Credit by the amount of --------------- United States Dollars (U.S.$ ..........) and to notify the CONTRACTOR of this reduction.





MINISTRY OF OIL & MINERALS



By:



Signature:



Title: EXHIBIT III



FORM OF IRREVOCABLE LETTER OF CREDIT





DATE:

MINISTRY OF OIL AND MINERALS, REPUBLIC

OF YEMEN

(Address)

(Attention)

Re: OUR IRREVOCABLE LETTER OF CREDIT

NO: ..................





Gentlemen:

By order of our client, (name of company) (hereinafter referred to as the “CONTRACTOR”), we hereby establish

this irrevocable Letter of Credit No.:............in your favour, according to which we hereby undertake and guarantee to pay to you unconditionally without any

question the amount of--------------United States Dollars (U.S.$ ----------) (the “Guaranteed Amount” to cover as the signature bonus) as required under the Production Sharing Agreement for .....— Area, ----------

Govemorate (Block -----), Republic of Yemen (the

“PSA”) entered into between the Ministry of Oil and Minerals (the “MINISTRY”) of the first part, and DNO, ANSAN WIKFS, TG and the Yemen Company of the other

part, dated ..................2004 under the terms and

conditions stipulated below:





1. Validity

This Letter of Credit shall be effective from 08.00 a.m. (date) and expires on earlier of the following:



i. immediately upon payment of the signature bonus by

the CONTRACTOR as required under the PSA; or



ii. immediately upon payment by the Bank to the

MINISTRY under this Letter of Credit: or



iii. on the thirtieth (30 ) calendar day from the

date of issuance of the law approving the PSA;

or



iv. (date) (being six (6) months from the effective

date of this Letter of Credit).



All claims must be submitted to the Bank before 5.00 p.m. on the appropriate expiry date mentioned herein failing which this Letter of Credit shall become null and void.2. Payment Instruction



Payment under this Letter of Credit is available to you against a written request from the MINISTRY for payment in the form attached hereto as Appendix I stating that the CONTRACTOR has failed to pay the signature bonus as required under the PSA on the Effective Date.



3. Return to the Bank



On the relative expiry date pursuant to paragraph 1 above or upon receipt of a claim for full payment under this Letter of Credit or upon early payment and termination of the Letter of Credit, the original of this Letter of Credit must be returned immediately to the Bank.



4. Renewal of Irrevocable Letter of Credit



The validity of this Letter of Credit shall be extended upon a written request from the MINISTRY to the Bank provided that the CONTRACTOR has consented to such request from the MINISTRY.



(Name of Issuing Bank)



By:.............................



Signature:.........................



Title:............................

Appendix (1)



NOTICE OF DRAWING THE LETTER OF CREDIT

NO.:...........



DATE:

To: (Name of Issuing Bank)

From:THE MINISTRY OF OIL AND MINERALS

Re:Irrevocable Letter Of Credit No:..........



We, the Ministry of Oil and Minerals (the “MINISTRY”) certify that (name of company) (the “CONTRACTOR”)

has failed to pay the signature bonus of--------------

United States Dollars (U.S.$ -------------) (the

“Guaranteed Amount”) within ............ ( .....) Days

from the date of issuance of the law approving the

Production Sharing Agreement for --------Area,----------

Governorate (Block—), Republic of Yemen (the “PSA”) entered into between the MINISTRY of the first part, and DNO ANSAN WIKFS, TG and the Yemen Company of the other part, effective as of (date), as required under the PSA.



We hereby claim under your Irrevocable Letter of Credit

No: .......... for the Guaranteed Amount payable to the

MINISTRY.



Please transfer the Guaranteed Amount to our Account

No.: ...........in.................Bank within ten (10) Days of receiving this notice.





MINISTRY OF OIL AND MINERALS

By:....................

Signature:........................

Title:..................







Copy to the CONTRACTOR

(Address)

ANNEX “E”

FORM OF CHARTER OF THE OPERATING

COMMITTEE



ARTICLE 1

OPERATIONS AND DEVELOPMENT PERIOD



All provisions of this Charter shall be subject to

provisions of Article 6 of the Agreement.



ARTICLE 2

OPERATING COMMITTEE



2.1: Operating Committee meetings shall be held at any time at the request of either the MINISTRY or the CONTRACTOR, upon at least thirty (30) Days notice in writing to the other Party, but in any event shall be held at least once per Calendar Quarter.



2.2: Any notice for any meeting shall include the date, time and location of such meeting, along with a list of the items to be discussed. The Vice Chairman shall be responsible for preparing the final agenda for any meeting, which shall include all matters proposed to be discussed by the Chairman and the Vice Chairman. Agendas shall be provided to the Parties at least seven (7) Days prior to the meeting.



2.3: A quorum shall be deemed to exist if each Party has one representative present.



2.4: All Operating Committee meetings shall be held in Sana’a, the ROY or at such location as the Chairman and the Vice Chairman may otherwise agree upon.



2.5: All resolutions of the Operating Committee must be approved unanimously. If matters arise which cannot be unanimously agreed the Chairman and Vice Chairman shall meet, in an attempt to reach such agreement. Failing such agreement, the CONTRACTOR shall consult directly with the MINISTRY to resolve any outstanding matter.



2.6: As soon as possible, but in any event not later than forty-five (45) Days, after each Operating Committee meeting, the Vice Chairman shall submit to the Parties draft minutes of the meeting summarizing the results of such meeting. Unless approved earlier by the Parties, the minutes shall be presented at the next meeting of the Operating Committee for consideration and approval. Such approval shall be evidenced by the signature of the Chairman and the Vice Chairman. Thereafter, the minutes shall









constitute conclusive evidence of resolutions

adopted at such meeting.





ARTICLE 3



OPERATING SUBCOMMITTEES





3.1: Each Subcommittee shall consist of four (4)

representatives, two (2) representatives appointed by

the MINISTRY and two (2) representatives

appointed by the CONTRACTOR. Each

subcommittee shall receive information from the

Operator, and shall make all necessary reports and

proposals requested by the Operating Committee.



3.2: Subcommittee meetings shall be held at any time at

the request of either the MINISTRY or the

CONTRACTOR, upon at least ten (10) Days notice

in writing to the other Party, but in any event shall be

held at least once per Calendar Quarter. Any notice

for a meeting shall include the date, time and

location of such meeting, along with a list of the

items to be discussed. The CONTRACTOR's

representative shall prepare all agendas and minutes

of Operating Subcommittee. A quorum

shall be deemed to exist if each Party has one (1)

representative present. All Subcommittee meetings

shall be held Sana's in the ROY or at such other

location as the representatives agree upon. Any

recommendations or proposals of the

Subcommittees, whether unanimous or not, shall be

duly recorded in an appropriate report and

communicated to the Operating Committee by the

CONTRACTOR's representative.



3.3: The Work Program and Budget Subcommittee shall

liaise with the Operator and report to the Operating

Committee with respect to the following:



3.3.1: preparation and implementation of Annual

Work Program for:



* Exploration, and



* Development and production operations



3.3.2: preparation of current Work Program outlook;



3.3.3: Crude Oil marketing and entitlements; and



3.3.4: The form of Statements of Expenditure and

statements of Liquid Crude Oil production.



3.4: The Technical/Operations Subcommittee shall liaise

with the Operator and reports to the Operating

Committee with respect to the following:3.4.1: technical aspects of the Development Work Program for development, production, maintenance and other production development activities concerning:



geological and geophysical programs;



drilling locations; and



major facilities projects,



3.4.2:field and marine operating activities.



3.5: The Contracting and Procurement Subcommittee shall liaise with the Operator and report to the Operating Committee with respect to the following:



3.5.1:Implementation of pre-qualification process, when appropriate;



3.5.2: review of bid lists;



3.5.3:preparation of bid solicitations;



3.5.4:review of bid evaluations and recommended awards.



3.6:The Yemenization and Training Subcommittee shall liaise with the Operator and report to the Operating Committee with respect to the following:



3.6.1:review of the CONTRACTOR's organization charts;



3.6.2: training and Yemenization plans presented by the Operator; and



3.6.3: recommendations for Project Team Secondees, as set forth in Article 5 of this Annex "E"; and



3.6.4: in connection with annual Work Program and Budget, review and recommend training for Yemeni employees and a schedule (which schedule of schedules shall be consistent with international Petroleum Industry practices) for training of specialized Yemeni personnel to replace expatriates.





ARTICLE 4



EXPENSES





Reasonable out of pocket costs and expenses of Operating Committee representatives and Subcommittee representatives, incurred traveling to and from meetings outside Sana'a, the ROY shall be reimbursed by the CONTRACTOR according to the same policy the CONTRACTOR applies to its own employees, Project Team Secondees shall have all reasonable out of pocket costs and expenses reimbursed by the CONTRACTOR according to the same policy the CONTRACTOR applies























































to its own employees. Such costs and expenses shall be cost recoverable.



ARTICLE 5

PROJECT TEAM SECONDEES



The Yemenization and Training Subcommittee shall recommend to the Operating Committee, for its approval, a MINISTRY employee for secondment to each of the following Project Teams of the CONTRACTOR:



5.1 “Production Schedule”, Work Program and Budget;



5.2 Technical/Operations;



5.3 Contracting and Procurement; and



5.4 Yemenization and Training



The Yemenization and Training Subcommittee shall review the performance of any such secondees and shall have the right to recommend to CONTRACTOR disciplinary actions, including dismissal, if appropriate.



ARTICLE 6

CONFIDENTIALITY



It is understood and agreed that each of the Operating Committee representatives, Subcommittee representatives and MINISTRY Project Team Secondees shall treat all information obtained through the performance of their duties in strict confidence and shall not disclose same to any person, whether verbally or in writing, without the other Party’s consent. All such representatives (of the CONTRACTOR’S and the MINISTRY’S) and secondees shall be required to execute a confidentiality undertaking to the foregoing effect. Any breach of the aforesaid confidentiality obligations shall result, inter alia, in the removal of said representative or secondees, if mutually agreed by the MINISTRY and the CONTRACTOR.



ARTICLE 7



FINAL AGREEMENT



This charter is the final, complete and sole agreement between the MINISTRY and the CONTRACT OR with respect to the formation and regulation of the Operating Committee and the Operating Subcommittees, provided that the Operating Committee may approve more detailed procedures for the Operating Subcommittees, as deemed necessary, in order to fulfill their responsibilities under this Charter.

ANNEX “F”

ACCOUNTING PROCEDURES



Definitions

The definitions contained in Article 1 of the Agreement shall apply to this Accounting Procedures and have the same meanings.



1.1 Purpose of the Accounting Procedures



1.1.1 The purpose of this Accounting Procedures is

to establish methods and rules of accounting

for the Petroleum Operations under this

Agreement.



1.1.2 Any procedures established hereto may be

modified by mutual agreement of both Parties

hereto subject to future arrangement.



1.1.3 No charge shall be made or accounted for the

Petroleum Operations unless it is related to

the Petroleum Operations covered by the

Agreement.



1.2 Statement of Expenditures



1.2.1 The CONTRACTOR shall, pursuant to Article 13

of the Agreement, which this Annex is made a

part of, render to the MINISTRY within thirty

(30) Days after the end of each Calendar

Quarter a Statement of Expenditures reflecting

all charges or credits related to the

Petroleum Operations for the period,

summarized by appropriate classifications

indicative of the nature thereof together with

the summary of such information on a

cumulative basis from the Effective Date as

well as Year-to-date.



1.2.2 The CONTRACTOR shall render to the MINISTRY

within thirty (30) Days after the end of each

Quarter a Statement of Expenditures reflecting

all charges and credits related to the

Development and Exploration operations for

that Quarter summarized by appropriate

classifications indicative of the nature

thereof except those items of controllable

material and unusual charges and credits shall

be detailed.



1.2.3 The statement of estimated expenditures shall

be sent to the CONTRACTOR according to

approved Work Program and Budget, at least

thirty (30) Days prior to the beginning of

each Quarter, and a copy of such statement

will be transmitted to the MINISTRY. The

estimated expenditures







to be made in each Month of the Quarter

are the estimated cash outlay for such Month,

including any payment for liability incurred

during previous Months. The estimate for the

first such Month shall, at the Operator's

option, constitute a request for advance. The

estimates for the second and third succeeding

Months shall be tentative only and may be

revised in the subsequent submittal. The

aforesaid statement shall indicate the

currencies in which sums are needed for the

Petroleum Operations.



1.2.4 In case funds provided by the

CONTRACTOR for the given Month are not

sufficient to cover the cash requirements

(within the limits of the approved budget or

authorized overrun), the Operator shall

transmit to the CONTRACTOR with a copy

to the MINISTRY supplementary statements

showing such additional amounts to be

advanced, and the date the funds are required.



1.2.5 The Operator shall keep records of funds

advanced and expended in all currencies and

submit a statement to each Party hereto

showing such advances and expenditures.







1.2.6 Within thirty (30) Days after the end of each

Calendar Quarter, the Operator shall submit to

each Party hereto a statement of the charges

and credits (including any payment for

liabilities incurred during previous Calendar

Quarter) for Exploration, appraisal,

Development and other Petroleum Operations.

Such statements shall be in Yemeni currency

and United States Dollars.



1.3 Records



1.3.1: The Operator on behalf of the

CONTRACTOR, shall open and maintain in

the ROY original and supporting documents

for all the accounts and records, unless the

MINISTRY agrees otherwise, to record in

sufficient detail and in separate accounts the

transactions relating to Exploration operations and

other Petroleum Operations, in accordance

with generally accepted and recognized

accounting principles consisted with modern

Petroleum Industry practices all in accordance

with and subject to the provisions of the

Agreement.

















1.3.2: The Operator shall maintain appropriate cost control records as required to meet requirements and obligations under the Agreement.



1.4 Adjustments and Audits

Each Statement of Expenditures for any Quarter shall conclusively be presumed to be true and correct according to paragraph 1.2 of this Annex "F", twenty-four (24) Months following its submission to the MINISTRY, unless within the said twenty four (24) Month period, the MINISTRY takes written exception thereto. During the said twenty four (24) Month period, the MINISTRY shall have the right to audit the Operator's or the CONTRACTOR's accounts, records and supporting documents for such Quarter during regular business hours upon reasonable notice in YEMEN and, if necessary, abroad. In addition, the MINISTRY may require the CONTRACTOR to engage an international independent auditing firm selected by the CONTRACTOR and the MINISTRY to verify, in accordance with generally accepted international auditing standards, the charges for the CONTRACTOR's Affiliated Companies, such as charges for expatriate employees under paragraph 2.2.1 of this Annex "F", insofar as such charges are included in recoverable costs. The MINISTRY shall, in connection with its audit, specify in writing the charge or charges to be verified. Such specification shall constitute a written exception, as provided above, pending verification. The cost of the independent auditors shall be paid by the CONTRACTOR as a recoverable cost.



1.5 Currency Exchange

The Operator's and the CONTRACTOR's books for Petroleum Operations shall be kept in United States Dollars and in the English language. All United States Dollar expenditures shall be charged in the amount expended. All Yemeni currency expenditures shall be translated into United States Dollars at the official buying rate of exchange quoted by the Central Bank of Yemen on the fifteenth (15th) day of the Month in which the relevant expenditure is paid. All other non-United States Dollar expenditures shall be translated into United States Dollars at the rate for buying United States Dollars with such currency as quoted by Citibank London, England at 10:30 a.m., London time, on the fifteenth (15th) day of the Month in which the relevant expenditure is paid, and if this is not a banking day in London, on the next succeeding banking day. A record shall be kept of the exchange rates used in translating Yemeni currency or other non-United States Dollar expenditures to United States Dollars.1.6 Precedence of Documents



In the event of any inconsistency or conflict between the provisions of this Accounting Procedures and the provisions of the main body of the Agreement treating the same subject differently, then the provisions of the main body of the Agreement shall prevail.



1.7 No Charge for Interest on Investment



Interest on investment or any bank fees, charges or commissions related to any bank guarantees (including Letters of Credits) to finance the Petroleum Operations shall not, at any time, be charged as recoverable costs under the Agreement.



ARTICLE 2

COSTS, EXPENSES AND EXPENDITURES



The CONTRACTOR shall alone bear and pay directly during the Exploration Period and after the Commercial Discovery of Oil, the costs and expenses, which costs and expenses shall be classified and be allocated to the activities according to generally accepted accounting principles and treated and recovered in accordance with Article 7.1 of the Agreement.



2.1 Surface Rights



All direct costs attributable to the acquisition, renewal or relinquishment of. surface rights acquired and maintained in force for the Agreement Area.



2.2 Labor and Related Costs



2.2.1 Salaries and wages, in accordance with Petroleum Industry standards, which are approved by the MINISTRY as well as any subsequent changes to the salaries of CONTRACTOR’S employees directly engaged in the various activities under the Agreement including salaries and wages paid to geologists and other employees who are temporarily assigned to and employed in such activities in YEMEN.



2.2.2 Cost of living and housing allowances, and other customary allowances applicable to salaries and wages of expatriate employees chargeable under this Annex “F”.



2.2.3 Cost of expenditures or contributions made pursuant to law or assessments imposed by GOVERNMENT authority which are applicable to labor cost of salaries and wages as provided under this Annex “F”.

2.3 Employee Benefits

The MINISTRY’s approved costs of established plans

which include customary benefits in accordance with

Petroleum Industry standards for employees such as

group life assurance, hospitalization, pension,

retirement, thrift and other benefits of a like

nature which are applicable to labor cost of

salaries and wages of expatriate employees, and for

Yemeni employees, all as chargeable under this Annex

“F”. Severance pay will be charged at a fixed rate

applied to payrolls which will equal an amount

equivalent to the actual liability for severance as

required under Yemeni labor law and the CONTRACTOR's

established policies.



2.4 Materials

Materials, equipment and supplies purchased or

furnished as such by the CONTRACTOR.



2.4.1 Purchases

Materials, equipment and supplies purchased shall

be charged at the price paid by the CONTRACTOR

after deduction of all discounts actually

received. Such purchases shall be concluded

through the CONTRACTOR's customary bid procedures

in agreement with the MINISTRY.



2.4.2 Materials Furnished by CONTRACTOR

Materials required for Petroleum Operations shall

be purchased directly whenever practicable, except

that the CONTRACTOR may, after the MINISTRY's

approval, furnish such material from the

CONTRACTOR's Affiliated Companies stocks outside

YEMEN under the following conditions:



2.4.3 New Material ( Condition "A")

New material transferred from the CONTRACTOR'S or

its Affiliated Companies' warehouse(s) or other

properties shall be priced at cost, provided that

the cost of material supplied is no higher than

international prices for material of similar

quality supplied on similar terms prevailing at

the time such material was supplied.



2.4.4 Used Material (Conditions “B” and “C”)

i. Material which is in sound and serviceable

condition and is suitable for re-use without

reconditioning shall be classed as Condition

“B" and priced at seventy-five percent (75%) of

the price of new material.



ii. Material which cannot be classified as

Condition "B" but which is serviceable for

original function but substantially not

suitable for reconditioning, shall be classed

as Condition "C" and shall be priced at a value

commensurate with its use. Cost





shall be charged at applicable percentage of knocked-down new price.



iii.Tanks, buildings and other equipment involving erection cost shall be charged at applicable percentage of knocked-down new price.



2.4.5 Warranty of Materials Furnished by the CONTRACTOR



The CONTRACTOR does not warrant the materials furnished beyond the dealers' or break of the dealer's or manufacturer's warranty and in case of defective material, credit shall not be recorded until adjustment has been received by the CONTRACTOR from manufacturers or their agents. The CONTRACTOR shall ensure that materials purchased are warranted by the dealers or manufacturers in accordance with good Petroleum Industry practices.



2.5. Transportation

Transportation of the CONTRACTORS employees, equipment, materials, and supplies necessary for the conduct of activities. Employees' transportation cost to the extent covered by established policies of the CONTRACTOR will include but not be limited to travel expenses for employee's point of origin at the time of employment at time of separation and for vacations, rest leaves and traveling expenses for employees and their families incurred as a result of transfer from one location to another.



2.6 Services



2.6.1 Outside Services

The cost of consultants, contract services and utilities procured from third parties.



2.6.2 Cost of services performed by the MINISTRY or by the CONTRACTOR, or by their respective Affiliated Companies, in facilities inside or outside YEMEN. Regular, recurring and routine services, such as processing seismic tapes, interpreting seismic, geological and engineering data and/or other analyses, shall be performed and charged by the MINISTRY, the CONTRACTOR, or their respective Affiliated Companies, at a piece agreed to by the CONTRACTOR and the MINISTRY. Major projects involving engineering and design services shall be performed by CONTRACTOR or its Affiliated Companies, at a contract amount agreed to by the MINISTRY. The price and contract amount to agreed upon as provided above shall be at rates commensurate with the cost of such services but not in excess of































































































































competitive rates for the same quality and quantity of such services. Use of the CONTRACTOR's or its Affiliated Companies, wholly-owned equipment shall be charged at a rental rate agreed to by the MINISTRY commensurate with the cost of ownership and operation, but not in excess of competitive rates currently prevailing in YEMEN.



2.7 Damages and Losses

All costs or expenses necessary to replace or repair

damages or losses incurred by fire, flood, storm,

theft, accident or any other cause not controlled by

the CONTRACTOR through the exercise of reasonable

diligence. The CONTRACTOR shall furnish the MINISTRY

written notice of damages or losses incurred in

excess of fifty thousand United States Dollars

(U.S.$50,000) per occurrence, as soon as practicable

after report of the same has been received by the

CONTRACTOR.



2.8 Insurance and Claims

The cost of any public liability, property damage

and other insurance against liabilities of the

CONTRACTOR to its employees and third parties as may

be required by the laws, rules and regulations of

the STATE or as the Parties hereto may agree upon.

The proceeds of any such insurance or claims

collected shall be credited against Petroleum

Operations. If no insurance is carried for a

particular risk, all related actual expenditures

incurred and paid by the CONTRACTOR in settlement of

any and all losses, claims, damages, judgments, and

any other expenses, including legal services shall

not be charged be to Petroleum Operations.



2.9 Head Office and Field Expenses in YEMEN



2.9.1 The cost of staffing and maintaining the

CONTRACTOR'S head office in YEMEN.



2.9.2 Camp overhead and facilities such as shore base,

warehouses, water systems, road systems, salaries

and expenses of field supervisory personnel,

field clerks, assistants, and other general

employees indirectly serving the Agreement Area.



2.10 Legal Expenses



All costs and expenses of litigation, or legal

services otherwise necessary or expenditures for

the protection of the Agreement Area, with

respect to third parties including attorney fees

and expenses as hereinafter provided, together

with all judgments obtained against the parties

hereto or

any of then on account of the Petroleum Operations under the Agreement, and actual expenses incurred by any Party or Parties hereto in securing evidence for the purpose of defending against any action or claim prosecuted or urged against the Petroleum Operations or the subject matter of the Agreement. In the event actions or claims regarding the protection of interests here under shall be handled by the legal staff of one or more of the Parties hereto, a charge at a rate commensurate with cost of providing and furnishing such services may be made to the Petroleum Operations.



2.11 Administrative Overhead and General Expenses

2.11.1 The CONTRACTOR's administrative overhead outside YEMEN applicable to the Petroleum Operations under the Agreement shall be charged quarterly at the percentages of the total of Exploration and Operating Expenses for the Year ("Total Expenditures"), as specified below:



(i) Three percent (3%) of Total Expenditures not exceeding One Million United States Dollars (U.S.$1,000,000).

(ii) One and half percent(1.5%) of Total Expenditures in excess of One million United States Dollars (U.S.$1,000,000), but less Five Million United States Dollars(U.S.$5,00,000).

(iv) One percent (1%) of Total Expenditures in excess of five Million United States Dollars (U.S.$5,000,000).



2.11.2: No other direct charges as such for the CONTRACTOR's administrative overhead outside YEMEN will be applied against the Petroleum Operations. Examples of the types of costs CONTRACTOR is incurring and charging here under due to the activities under the Agreement and covered by said percentages are:



(i) Management - Cost of executive officers. This includes Directors, Presidents, Vice Presidents, Managers and their support staff, in addition to General Administration.



(ii) Financial-All Financial services.



(iii) Purchasing-Procuring materials, equipment and supplies, together with any related costs.







































































































(iv) Exploration, Development and production

-Directing, advising and controlling the

entire project.



(v) Other departments such as legal,

comptroller and engineering which

contribute time, knowledge and experience

to the Petroleum Operations.



2.12 Taxes



All taxes, duties or levies, if any, paid in YEMEN by the CONTRACTOR with respect to the Agreement, other than those paid in accordance with Article 9 of the Agreement.



2.13 Other Expenditures



2.13.1 Any costs, expenses or expenditures, other



than those which are covered and dealt with by the foregoing provisions of this paragraph 2 of this Annex “F”, incurred by the CONTRACTOR under approved Work Programs and Budgets and after consultation with the MINISTRY.



2.13.2 The CONTRACTOR shall have the right to



incur and pay costs and expenses pertaining to any emergency affecting safety to person or property in the Petroleum Operations and such costs and expenses shall be recoverable under this Agreement provided that the MINISTRY shall be notified of any such emergency as soon as practicable. The CONTRACTOR shall have the right to incur and pay costs and expenses for any item of an approved Work Program and Budget for an amount in excess of the budget for such item and such costs and expenses shall be cost recoverable under the Agreement to the extent that they do not exceed ten percent (10%) of the budget for such item.



2.14 Continuing CONTRACTOR’S Costs



Costs of the CONTRACTOR'S activities required under the Agreement and incurred exclusively in the ROY provided that costs of the CONTRACTOR'S expatriate employees and ROY employees engaged in such activities in YEMEN shall include those costs specified in paragraphs 2.2.1, 2.2.2, 2.2.3, and 2.5 of this Annex “F”.

ARTICLE 3

INVENTORIES



3.1 Periodic Inventories Notice and Representation



At reasonable intervals as good upon by the MINISTRY and the CONTRACTOR, inventories shall be taken by the CONTRACTOR of the Petroleum Operations material, which shall include all such material, physical assets and construction projects. Written notice of intention to take inventory shall be given by CONTRACTOR to the MINISTRY at least thirty(30) Days before any inventory is to begin so that the MINISTRY may be represented when any inventory is taken. Failure of the MINISTRY to be represented at an inventory shall bind it to accept the inventory taken by the CONTRACTOR, who shall, in that event, furnish the MINISTRY with a copy thereof. Such inventories shall take place annually or as otherwise agreed.



3.2 Reconciliation and Adjustment of Inventories

Reconciliation of inventory shall be made by the CONTRACTOR and the MINISTRY, and a list of overages and shortages shall be jointly determined and the inventory accordingly adjusted by the CONTRACTOR.



3.3 After the first Commercial Discovery of Oil the CONTRACTOR shall carry out the foregoing inventory obligations of CONTRACTOR.



ARTICLE 4

COST RECOVERY



4.1 Statement of Recovery of Costs and Cost Recovery Crude Oil



The CONTRACTOR shall, pursuant to Article 7 of the Agreement, render to the MINISTRY not later than thirty (30) Days after each Quarter a statement for that Quarter showing:



a. Recoverable costs carried forward from the previous Quarter, if any.



b. Recoverable costs incurred during that Quarter.



C.Total recoverable costs for the Quarter(the sum of the amounts in paragraphs 4.1 (a) and (b)) above.



d.Quantity and value of Cost Oil taken and separately disposed of by the CONTRACTOR for that

Quarter.





























































e. Amount of costs recovered for that Quarter.



f. Amount of recoverable costs to be carried into the succeeding Quarter, if any.



g. Excess, if any, of Cost Oil taken by the CONTRACTOR over costs recoverable for the Quarter. If such statement shows an excess amount of cost recoveiy payments, the excess amount shall be paid in United States Dollars by the CONTRACTOR to the MINISTRY at the time of presentation of such statement.



4.2 Costs, expenses and expenditures that are incurred and paid prior to the Year in which they are recoverable under the Agreement shall be allocated to the first Quarter of such Year. All other costs, expenses and expenditures that are recoverable in such Year shall be allocated to the Quarter in which they are incurred and paid.



4.3 For the purpose of calculating book value, the costs of such fixed and removable assets shall be recovered in the order in which they are incurred per Quarter. The costs incurred in the same Quarter shall be recovered proportionally.



4.4 Audit Rights



The MINISTRY shall have a period of twenty-four (24) Months from receipt of any statement under this paragraph 4 of this Annex “F” in which to audit and raise objection to any such statement. The MINISTRY and' the CONTRACTOR shall agree on any required adjustment. Supporting documents and accounts will be available to the MINISTRY during said twenty-four (24) Month period.



ARTICLE 5

CONTROL STATEMENT AND MAJOR

ACCOUNTS



5.1 Exploration Obligations Statements



The CONTRACTOR shall annually prepare from the Statements of Expenditures prepared pursuant to paragraph 1 of this Annex “F”, a statement showing for such Year the excess or deficit in Exploration Expenditures compared to the Minimum Expenditure Obligation. Such statement shall be rendered to the MINISTRY not later than thirty (30) Days following the end of such Year.











5.2 Major Accounts

--------------





For the purposes of classifying costs, expenses and

expenditures for cost recovery as well as for the purpose

of establishing when the Exploration obligation has been

met, costs, expenses and expenditures shall be recorded in

major accounts including the following:



a. Exploration Expenditures

b. Development Expenditures other than Operating

Expenses

c. Operating Expenses



Necessary sub-accounts shall be used in coordination

with the MINISTRY.

Revenue accounts shall be maintained by the

CONTRACTOR to the extent necessary for the

control of recovery of costs and the treatment of Cost

Oil.

Cash and accrual accounts shall be maintained as

coordinated with the MINISTRY.







ARTICLE 6





TAX IMPLEMENTATION PROVISIONS





It is understood that the CONTRACTOR shall be subject

to ROY Income Tax Laws except as otherwise provided

in the Agreement, that any ROY Income Taxes paid by

the MINISTRY on the CONTRACTOR's behalf

constitutes additional income to the CONTRACTOR, and

this additional income is always subject to ROY Income

Taxes, that is "grossed-up".



The CONTRACTOR's annual income, as determined in

Article 9.1.2 of the Agreement, less the amount equal to

CONTRACTOR's grossed-up Yemen income taxes liability,

shall be CONTRACTOR's "Provisional Income".



The "grossed-up value" is an amount added to Provisional

Income to give "Taxable Income", such that the gross-up

value is equivalent to ROY Income Taxes.



Therefore:



Taxable Income = Provisional Income Plus Gross

-up



and



Gross-up Value = ROY Income Tax on Taxable

Income



Combining the first and last equations above,



Gross-up Value =



Provisional Income X Tax Rate.

_____________________________

1-Tax Rate



where the tax rate is expressed as a decimal.



The above equations are illustrated by the following numerical example. Assuming that the Provisional Income is Ten United States Dollars(U.S.$10), and that pursuant to Article 9.1.3 of the Agreement that ROY Income Taxes rate as applied to the CONTRACTOR would be sixty percent(60%), then the Gross-up Value is equal to:



U.S.$10X0.6 = U.S.$15.00

------------------------

1-0.6





Therefore:

U.S.$



Provisional Income 10.00

Plus Gross-up Value 15.00

------

Taxable Income 25.00

Less:ROY Income Taxes at 60% 15.00

------

CONTRACTOR's Income after taxes 10.00 ANNEX G

SAMPLE CALCULATION OF ROYALTY, COST

OIL, AND PRODUCTION SHARING OIL



Assuming that the Monthly Average Daily Net Production ("MADNP") is 80, 000 BBL, then calculation of the shares of MINISTRY and CONTRACTOR would be as follows:



1. Deduction of Royalty owned by the STATE from the

total amount of 80, 000 BBL according to Article 3.2

of this Agreement.



ROYALTY - Royalty is calculated on the basis of the percentages provided in Article 3.2 of the Agreement as follows:



3% of first 25,000BBL = 750BBL



5% of next 25,000BBL = 1250BBL



6% of next 25,000BBL = 1500BBL



8% of next 5,000BBL = 400BBL

___________________________________



Royalty = 3,900-BBL



And the remaining amount of MADNP after the deduction of Royalty would come to be:

80,000 BBL - Royalty of 3,900 BBL = 76,100 BBL



2. From the remaining amount of MADNP calculated above

we deduct the Cost Oil as follows:



a. Assuming the daily recoverable costs exceed the

value of the maximum Cost Oil calculated at the

percentage stated in Article 7.1. of this

Agreement ("maximum percentage")



Cost Oil = 50 x 76.100 = 38,050 BBL

____________

100



b. Assuming the daily recoverable costs are $300,000

and are less than the value of the maximum Cost

Oil calculated at the maximum percentage; and

assuming the Cost Oil value is $20 /BBL.



Cost Oil = Daily Recoverable Costs

_________________________________



Value (per barrel) of the Cost Oil

under Article 7.3 of the Agreement



Cost Oil = $300,000

________



$20/BBL





Cost Oil = 15,000 BBL





Note:



For the purpose of this Annex G, "daily recoverable cots" means the recoverable costs allocated to the applicable Quarter divided by the number of days in such Quarter,



3.The remaining MADNP ("Production Sharing Oil"), i.e MADNP after deduction of (i) Royalty and (ii) Cost Oil (2a or 2b above, as applicable), according to Article 7.2 of this Agreement.



MINISTRY'S Share = The Production Sharing Oil multiplied by the MINISTRY'S percentage of Production Sharing Oil calculated as the weighted average of the percentages provided in Article 7.2 of this Agreement as follows:





64% of first 25,000 BBL = 16,000

67% of next 25,000 BBL = 16,750

70% of next 25,000 BBL = 17,500

75% of next 5,000 BBL = 3,750



(16,000+16,750+17^500+3,750)BBL = MINISTRY"S PERCENTAGE%

_______________________________ (GP)



80,000 BBL



= 54000 BBL

_________ = 67,5% GP



80,000 BBL



MINISTRY'S Share = GP x Production Sharing Oil



PRODUCTION SHARING OIL = MADNP minus Royalty minus Cost Oil (either 2a or 2b)



Production Sharing Oil=



=80,000BBL - 3,900BBL - 38,050BBL (2a)



Or



Production Sharing Oil =



= 80,0()0BBL- 3,900BBL - 15,000BBL (2b)



Production Sharing Oil = 38,050 BBL (2a)



Or



Production Sharing Oil = 61,100BBL (2b) MINISTRY’S Share= 67.5% X 38,050 BBL (2a)



Dr



MINISTRY'S = Share67.5% X 61,100BBL (2b)

MINISTRY'S Share = 25,683.75BBL (2a) or



= 41,242.5BBL(2b)

CONTRACTOR's Share of Production Sharing Oil = Production Sharing Oil less MINISTRY'S Share of Production Sharing Oil



CONTRACTOR's Share = 38,050BBL - 25,683.75BBL (2a) or 61,100BBL - 41,242.5BBL (2b)



CONTRACTOR's Share = 12,366.25BBL (2a) or 19,857.5BBL (2b)ANNEX H



FORM OF REQUEST FOR

CONVERSION TO DEVELOPMENT AREA



Name of the CONTRACTOR:

Address:



Date: / /



H.E.MINISTER OF OIL AND MINERALs



Honorable Minister:



We, the CONTRACTOR, hereby declare that a Commercial Discovery of Oil has been notified to the MINISTRY on -------------------------------. The Declaration follows as a result of the appraisal program consisting of the drilling of ---------------------- Exploration Wells to date, and including geologic, geophysical and engineering studies that indicate the size of the structure in which the Commercial Discovery of Oil was made. The summary of the appraisal program is as follows:



Well No.1 Well N.2 (etc.)



Thickness of Pay:

Zone No.1 Gross -------- ft. -------ft.

Net ---------- ft. -------ft.



Zone No.2 Gross -------- ft. -------ft.

Net ---------- Ft. -------ft.



Summary of Test Result:



Zone No.1 ---------------- -------------------



Zone No.2 ---------------- --------------------



Range of Estimated Reserves for Development Area:



--------------- Million BBL to -------- Million BBL



(Summary of any other relevant information)



Based on the structural interpretation resulting from the geologic, geophysical and engineering studies, the structure in which the Commercial

Discovery of Oil has been made is located in (number of blocks) Development Blocks comprising a total Development Area of --------------- Km2.



























The corner coordinates of Development Area are as follows:

1. _____________________ 4. ______________________

2. _____________________ 5. ______________________

3. _____________________ 6. ______________________



Therefore, in accordance with Article 3.5 of the Production Sharing Agreement we confirm our intention to convert the above described Development Block(s) into a Development Area with respect to the Commercial Discovery of Oil notified to the MINISTRY as aforesaid.



This Request for Conversion to Development Area shall be subject to the following conditions:



1. The provisions of the Production Sharing Agreement under which this Commercial Discovery of Oil was notified to the MINISTRY shall apply to the Petroleum Operations in respect of the Development Area hereby established.



2. This Development Area may be revised, during or after the Exploration Period, by the CONTRACTOR after the approval of the MINISTRY if supported by additional technical information resulting from future Petroleum Operations by an amendment to this Request for Conversion to Development Area provided that any proposed extension area shall not extend beyond the original Agreement Area or into any area under a Production Sharing Agreement with third parties.



3. If future Exploration in the Development Area, during or after the Exploration period, results in a discovery of Oil in a separate geological structure that extends beyond the Development Area, CONTRACTOR shall have the right, after the approval of the MINISTRY, to appraise such discovery by drilling one or more Exploration Wells outside the Development Area, provided that such outside area is within the original Agreement Area and is not under a Production Sharing Agreement with third parties. CONTRACTOR shall have the right to declare such discovery a Commercial Discovery of Oil. In such case the MINISTRY and CONTRACTOR shall sign an amendment of this Request for Conversion to the Development Area to extend the Development Area to include the geological structure in which such Commercial Discovery was made.



4. If the production doesn't Commence regularly without any technical reasons or economical reasons or force majeure within 5 years from the date of acceptance by the Ministry of the request for conversion to development area. Then the Ministry shall request the Contractor to resolve such issue and give the Contractor 2 years extension to resolve such.



Then if the production doesn't Commence regularly after such extension then the Contractor shall be obligated to relinquish the Development area and return it back to the Ministry at request.



Consequently, we respectfully request the MINISTRY's acceptance of, and agreement to, this Request for Conversion to Development Area to be evidenced by your signature below.



Respectfully Submitted, ______________________



CONTRACTOR ________________________________



Name: _____________________________

Title:



Signed this________ day of____________________, 200



H.E. MINISTER OF OIL AND MINERAL RESOURCES



___________________________________