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EX-10.51 20 exhibit10-51.htm PRODUCTION SHARING CONTRACT FOR CONTRACT









PRODUCTION SHARING CONTRACT FOR CONTRACT 

FOR THE CONTRACT AREA ZUUBAYAN-XIV

BETWEEN

THE MINERAL RESOURCES AND PETROLEUM AUTHORITY

OF MONGOLIA

AND 

'DWM PETROLEUM AG'



Dated     200
PRODUCTION SHARING CONTRACT.............................................................................4


GENERAL PROVISIONS.......................................................................................................4


ARTICLE L REPRESENTATIVE S.........................................


1.1 DESIGNATION OF REPRESENTATIVES..................................................................4


1.2 RIGHTS TO ACCESS AND EXERCISE SUPERVISION OVER CONTRACTORS


TRC n EL M OPERATIONS...............................................................................................4


ARTICLE II. DEFINITIONS


: DM INED II RMS........ ........................


.ARTICLE III. RIGHTS AND OBUGA3 IONS OF THE PAM AND CONTRACTOR .8


3.1 PAM S RIGHTS.........................................................................................................8


PAMSOBUGAITONS............................... s


3.3 CONTRACT! RIGHTS..........................................................................


3.4 CONTRACTOR S OBLIGATIONS..............................................................................9


ARTICLE IV COS I s AND COST RECOVERY 10


ARTICLE V TERM OF EXPLORATION OPERATIONS..............................................11


5.1 EXPLORATION PERIOD.............................................. II


5.2 EXTENSION OF EXP LORA TION PERIOD....................._....................................11


5.3 DISCO VER Y .AND A PPRAISAL OPERA TIONS.......................................................II


5.4 COMMERCIAL DISCOVERIES...............................................................................12


5.5 COMMERCIAL DISCOVERY. TESTING. DEVELOPMENT PERIOD.....................12


5.6 REVISIONS OF APPRAISAL PROGRAMS. APPRAISAL AREAS.............................12


DEVELOPMENT PLANS AND DEVELOPMENT AREAS..................................................12


5.7 EXTENSION OF DE VELOPMENT PERIOD...........................................................13


ARTICLE VI EXPLORATION OPERATIONS...............................................................13


6.1 Mi MX VI OR) m IRE . IND < )BL/< i. 4 ll(I\S. 13


6.2 DRILLING METHODS.............................................................................................13


6.3 EXP LORA TION WORK PROGRAMS AND BUDGETS............................................13


ARTICLE VII. RELINQUISHMENTS...............................................................................14


7.1 RELINQUISHMENTS............................................................................................. 14


7.3 APPRAISAL AREAS.................................................................................................14


ARTICLE VIII. ROYALTY AND PRODUCTION SHARING.........................................14


8.1 ROYALTY.................................................................................................................15


8.2 MARKETING OF CRUDE OIL................................................................................15


PRODUCTION SHARING OIL 15


8.4 VALUA TION OF CONTRACT CRUDE OIL.............................................................16


8.5 FORECASTS OF PRODUCTION.............................................................................16


8.6 UNDERLIFTING AND OVERLIFTING....................................................................17


ARTICLE IX. NATURAL GAS.............................................................................................17


ARTICLE X. BONUSES, FEES AND PAYMENTS..........................................................17


10.1 BONUSES...............................................................................................................17


10.2 TRAINING BONUS......................... IS


10.3 l iNDSl Ri REN1 U FEE......................................................................IS


10.4 ADMINISTRATIVE SERVICE FEES............. IS


10.5 ENVIRONMENTAL REt 'OVERY..............................................................................10


ARTICLE XL MEASUREMENTS........................................................................................19


11.1 PRODUCTION SHARING MEASUREMENTS.........................................................19


11.2 CORRECTIONSOFMEASUREMENTS.......................... ..... 19


ARTICLE XII. EXPLOITATION. PRODUCTION AND TECHNICAL DATA.....................20


ARTICLE XIII ACCOUNTING DATA.................................................................................22


ARTICLE XIV. GOVERNMENTAL ASSISTANCE................................................ 22


ARTICLE XV. USE AND OWNERSHIP OF PROPERTY....................................................23


ARTICLE XVI. TAX.............................................................................................................24


ARTICLE XML EXCHANGE RIGHTS............................................................................24


17.1 FOREIGN CURRENCIES........................................................................................24


17.2 FOREIGN BANK ACCOUNTS.................................................................................24


17.3 EXCHANGE RIGHTS...............................................................................................24


17.4 PA YMF.NTS UNDER THIS CONTRACT...................................................................24


ARTICLE XVIII. MONGOLIAN SUBCONTRACTORS, MATERIALS AND


EMPLOYEES.......................................................................................................................25


18.1 SELECTING MONGOLIAN SUBCONTRACTORS. MATERIALS AND


EMPLOYEES.....................................................................................................................25


ARTICLE XIX. EMERGENCIES.......................................................................................25


19.1 EMERGENCIES IN PETROLEUM OPER4 TIONS...................................................25


19.2 NATIONAL EMERGENCY.......................................................................................25


ARTICLE XX. FORCE MAJEURE....................................................................................26


ARTICLE XXL CANCELLATION....................................................................................26


ARTICLE XXII. ARBITRATION AND LIABILITIES....................................................27


ARTICLE XXIII. NOTICES...............................................................................................28


ARTICLE XXIV. INSURANCE..........................................................................................29


ARTICLE XXV. GENERAL...............................................................................................29


25.1 ANNEXES................................................................................................................29


LEGISLATION............................................................................. 29


25.3 GOOD FAITH..........................................................................................................29


25.4 LANGUAGE.............................................................................................................29


25.5 ENTRY INTO FORCE AND ADOPTING CHANGES IN THE CONTRACT.............30


ANNEX A.............................................................................................................................31


ANNEX B.............................................................................................................................32


ANNEX C.............................................................................................*...............................33










































































3


 PRODUCTION SHARING CONTRACT





This is a Production Sharing Contract signed by the Petroleum Aulhorit> of Mongolia, on


the one side (hereinafter "PAM"), and DWAI Petroleum AG, on the other (hereinafter the


"Contractor") (both sides hereinafter the "Parties") on the...... 200....





GENERAL PROVISIONS





The purpose of this Contract is to establish legal regulation of relations between the


Contractor and the Petroleum Authorit) of Mongolia /PAM/ authorized by the Government of


Mongolia to enter on its behalf into Contract related to Petroleum Operations in the territory of


Mongolia, and exercise supervision over implementation thereof.


The Contractor shall have exclusive rights for conducting Petroleum Operations in the


Contract Area for Exploration as described in Annexes, attached hereto and made the integral


part of the present Contract.


NOW, THEREFORE, it is hereby agreed as follows:





ARTICLE I. REPRESENTATIV ES


/ / DESIGSA TIPS Oh REPRESENT ATlVES


a) The Government of Mongolia hereby designates the Chairman of the PAM. or any other


authorized person, as its representative (the "Mongolian Government Representative")


under this Contract.


b) The Contractor hereby designates, Alexander Becker, on behalf of DWM Petroleum AG.


or any other authorized person, as its representative (the "Contractor Representative")


under this Contract


c) Changes of the Mongolian Government Representative or the Contractor Representative


should be notified to the other party in accordance with Article XXIII hereof.


1.2 RIGHTS TO ACC 'ESS ASP EXERCISE SI ■ PER VIS f OS OVER ('OSTRAC TOR S


PETROLEUM OPERATIONS


a) The Mongolian Government Representative (or any other person assigned and authorized


by the Mongolian Government Representative) shall have access and exercise the


authority granted to him/her hereunder over implementation in the Contract Area and


over Petroleum Operations, and the Contractor shall provide all reasonable assistance to


the Mongolian Government Representative to exercise such right of access. The


Mongolian Government Representative shall not interfere with the operations of the


Contractor without valid reason.


b) Any legally authorized person has a right to access and exercise supervision over


implementation.


ARTICLE II. DEFINITIONS


2. DEFINED TERMS





If there is no other explanation for certain case, the defined terms, understandings, and


forms originating hence shall have the meanings set forth in this Article 2:





4


“PAM” means the Petroleum Authority of Mongolia authorized by the Government of Mongolia


to enter on its behalf into Contract related to Petroleum Operations in connection with petroleum


operations in the territory of Mongolia, and exercise supervision over implementation thereof.


“Arm’s Length Sales” means a sale of Crude Oil by the Contractor to a third party (other than


any affiliates of the Contractor), provided that any such sale:


a) is not part of any collusion intended to. or effectively resulting in. reduction in the


price of such sale;


b) is made in a freely convertible currency; and


c) does not involve barter or price discount or setoffs and. more generally, is not


motivated by considerations other than the usual commercial incentives in petroleum


sales;


“Natural Gas” means hy drocarbons that are in a gaseous phase at atmospheric conditions of


temperature and pressure including wet mineral gas. dry mineral gas. casing-head gas and


residue gas remaining after the extraction or separation of liquid hydrocarbons from wet gas, and


non-hydrocarbon gas produced in association with liquid or gaseous hydrocarbons.


“Barrel” means a quantity or unit of 158.987 liters, at or corrected to a temperature of sixty


degrees Fahrenheit (60° F). at standard atmospheric pressure of 1.01325 bars.


“Accounting Procedure* means procedures and reporting requirements set forth in Annex D.


“Production Sharing Contract” means this Contract executed by the PAM and the Contractor for


conducting Petroleum Operations in the Contract Area and approved by the Government of


Mongolia.


“Petroleum” means liquid petroleum and different compounds of hydrocarbons in a gaseous or


solid state occurring in the entrails of the earth, which may be produced in association w ith


petroleum or separately, including Crude Oil, Natural Gas and Associated Substances.


“Petroleum Law” means the Petroleum Law of Mongolia, which entered into force on January


18, 1991 and any Laws amending or in substitution for. or in lieu of such law.


“Regulation for Implementing the Petroleum Law” means the Regulation for Implementing the


Petroleum Law of Mongolia adopted by the Government of Mongolia Resolution No.2()4/ in


1991 and any Regulations amending or in substitution for. or in lieu of such regulation.


“Petroleum Operations” mean operations related to the exploration, protection, production,


processing, transportation, storage and marketing of Petroleum in scope of this Contract.


Lxclusive right for conducting Petroleum Operations means that only the Contractor has the right


to conduct Petroleum related operations within the Contract area during the effective period of


the Contract.


“Contractor” means DWM Petroleum AG which enters into this Contract to conduct Petroleum


Operations in accordance with the contract regulations and conditions.


“Effective Date” means the date on which the Government of Mongolia approves this Contract.





5


“Contract Year" means any period of twelve (12) consecutive Calendar Months counted from the


Effective Date of this Contract or from the anniversaries of such Effective Date.


“Contract Area" means the area shown on and described in Annexes herein from the Effective


date as such area shall have been reduced from time to time by relinquishments made in


accordance with Article VII.


“Contract Crude Oil” means Crude Oil which is produced and saved from the Contract Area


pursuant to this Contract; and for purpose of this definition, “produced" means caused or allowed


to rise to the surface and passed through Production Sharing Measurement facilities, and “saved"


means made available to be taken and disposed of by a party hereto.


“Associated Natural Gas" means any Natural Gas that may be produced from or in association


w ith Crude Oil and capable of being developed commercially.


“Associated Substances" means any other substances that may be extracted from or in


association w ith Crude Oil or Natural Gas.


“Rules" means methods and procedures to be followed in process of carry ing certain types of


Petroleum Operations.


“Administrative Costs" means all costs and expenses except Exploration Costs and


Development Costs.


"Block Unit” means an area equal to multiplied ten (10) minutes latitude by ten (10) minutes of


longitude.


“Discovery Weir means a well which is determined b\ the Parties to be worthy of further


i .i ■ ..... m ■•---■■■ 9 0


evaluation for the purpose of determining whether such reservoir, alone or with other reservoirs,


could constitute a Commercial Discovery.


f ield means an Area containing one or more natural reservoirs discovered on one or more wells,


and similar in geological structure and stratigraphy, determined to be worthy of being developed.


“Development Costs" means all costs and expenses (except Administrative Costs and


Exploration Costs) incurred in respect of Development Operations.


“Development Area" means an area within the Contract Area containing a Commercial


Discovery.


“Development Operations” means all operations and activities in respect of one or more


Commercial Discoveries.


“Development Period" means the period during which Development Operations will be carried


out in accordance with this Contract, as specified in Article 5.5 and 5.7.


“Development Program" means a program of work, including a Budget, for Development


Operations in respect of a Commercial Discovery .


“Cost Oil” means a quantity of Crude Oil for recovering Contractor's costs and expenses.





6


“Royalty" means payment in accordance w ith utilization of the natural non-renew able resources


of Mongolia.





“Relinquishment of Areas" means relinquishment by Contractor voluntarily or in accordance


w ith Contract some parts of Contract Area at the certain phase of exploration work.


‘Land Surface Rental Fee" means non-refundablc payment to the PAM in each year by size of a


contract area as stated in the “Regulation for Implementing the Petroleum Law * for exercising


the Contractor's exclusive right for Petroleum Operation in the contract area.


“Buduet" means an estimate of money for the work program to be done during the specific


Petroleum Operations phase.


•‘Appraisal Development** means a well development during appraisal, as international petroleum


industry, in purpose to determine Discovery Well or Commercial Discovery Well.


“Subcontractor" means any Legal Person or individual, which concluded a Contract with the


Contractor to carry out certain portions of the Petroleum Operations.


“Crude Oil" means hydrocarbons, which are in liquid state at atmospheric pressure either in a


natural subsurface reservoir or after passing through a separator or other surface processing


facility : Crude Oil also includes asphalt, condensate and natural gas liquids, which arc liquefied


in separators, plants or other surface processing facilities.


“Appraisal Area" means one or more geological structure! s) or occurrence! s) that Parties


determine to be worthy of being appraised by an Appraisal Program.


“Appraisal Program" means a plan of work for the purpose of determining whether the


Discovery made by such Discovery Well constitutes a Commercial Discovery.


“Commercial Discovery " means a reservoir or a group of two (2) or more reservoirs containing


Petroleum, which Parties determines to be worthy of being developed commercially , taking into


consideration relevant technical and economic factors, including Contractor's estimates of


recoverable reserv es, prices of Petroleum and costs of development.


“Exploration Costs" means all costs and expenses (except Operation Costs and Development


Costs) incurred in respect of Exploration Operations.


“Exploration Operations" means such operations as:


1. activ ities in respect of aerial and satellite mapping, geological, geophysical and


geochemical surveys; drilling and production of exploration and appraisal wells:


petrologic, mineralogical and paleontological studies, interpretations of data preparing


reports and other all exploration activities;


2. discovering one or more reservoirs which have not then been proved to be w ithin a


Commercial Discovery : and


3. carry ing out an Appraisal Program.


“Exploration Period" means the period during which Exploration Operations will be carried out


in accordance with this Contract, as specified in Article 5.1 and 5.2.


"Profit 01)“ or “Production Sharing Oil” means a quantity of Contract Crude oil to be allocated


between the Mongolian Government representative and Contractor after the deduction of royalty


and cost oil.


"Calendar Month'* means one (I) of the twelve (12) calendar months according to the Gregorian


calendar, starting on the first day of such month and ending on the last day of such month,


inclusive.


"Calendar Quarter” means a calendar quarter according to the Gregorian Calendar, being cither


the Calendar Months (i) January, February and March, (ii) April. May and June, (iii) July,


August and September, or (iv) October. November, and December.


"Calendar Year" means a year according to the Gregorian calendar starting on January I and


ending on December 31. inclusive.


"Legal Person" means a corporation, company or other entity recognized as such by the Laws.


"l aws” means any applicable Mongolian laws, or any other legal acts, whether now existing or


hereafter enacted.


"Measurement point” means the point of measurement for purpose of marketing after processing


a produced crude oil at the Contract Area.


ARTICLE 111. RIGHTS AND OBLIGATIONS OF THE PAM AND CONTRACTOR


3.1 PAM ’S RIGHTS


The PAM shall have the following rights:


a) To inspect Petroleum Operations and financial statements of the Contractor:


b) To possess all the original copies of geology, geophysics, hydrogeology, petrophysics,


geochemistry, laboratory analysis and other related Petroleum Operations' data:


c) To possess copies of documents related to all the Contractor's operations, machinery,


equipment technical definitions, houses, constructions, its drafts and others;


d) To request the Contractor to supply its share of Petroleum for Mongolia’s domestic


consumption. In this case Government Representative shall make the payment in USD at


world market price.


e) To use or exercise supervision over the marketing of Mongolia’s share of Production


Sharing Oil


t) To exercise other rights provided for in this Contract








3.2 PAM S OBLIGA TIONS


The PAM shall assume the following obligations:


a) To help and support petroleum operations conducted by Contractor;


b) To inspect and supervise the Petroleum Taw of Mongolia, it's Regulations and Rules, and


this Contract’s implementation;


c) To fulfill other obligations prov ided for in this Contract.





8


3.3 CONTRACTOR'S RIGHTS





a) Ihe Contractor shall have the exquisite rights to conduct Petroleum Operations in the


Contract Area with permissions obtained under the Petroleum Law. the Business Entity


Special Permission Law. and in accordance w ith Petroleum Law of Mongolia. Regulation


for Implementing the Petroleum Law of Mongolia, all applicable laws and this Contract:


b) The Contractor shall have a right to construct pipelines, bridges, roads, storage facilities,


houses, landing fields, radio towers and communication facilities in accordance with


requisite approvals;


c) The Contractor shall have a right to access the previously compiled exploration,


geophysical, petrophysical, geochemistry and well data related to the Contract Area at data


center of the PAM and to buv those data if necessary;


d) To use. sell or possess (both within the Mongolia and abroad) the Contractor’s share of


Production Sharing Oil;


e) Ihe Contractor shall enjoy all rights of Mongolian legal person, unless otherwise


specifically provided in Mongolian law or international agreements to which Mongolia is a


party;


0 The Contractor may transfer its rights and obligations under this Contract to any third party


with the prior written consent of the Government of Mongolia.


g) The Contractor shall have a right to request assistance from the Mongolian government if


the Contractor’s employees and Held workers suffer from serious diseases, disasters, illegal


infringement and serious accidents;


h) I he Contractor shall have the right to hire and dismiss its stafT members, to choose and


determine its sub-contractors, and to purchase materials required for implementing the


Contract.


i) To exercise other rights provided for in this Contract.


3.4 CONTRACTOR S OBUGATIOSS


During the conduct of the Petroleum Operations the Contractor shall assume the following


obligations:


a) Comply with existing Petroleum Law of Mongolia, Regulation for Implementing the


Petroleum Law of Mongolia, any changes or amendments in such laws, rule and regulations


for Petroleum Operations ratified by the authorized body and all applicable Laws of


Mongolia and this Contract;


b) Petroleum Operations will be conducted in accordance w ith the Mongolian and international


standard, rule and regulations;


c) Notice to the authorized organizations and PAM immediately if any accidents or failings


related to health, safety and protection of environment are happened, and take necessary


actions.


d) The technology, techniques and equipments imported to Mongolia for Petroleum Operations


are to be used for efficient development of Petroleum;


e) Upon the request of the PAM. the Contractor as a first priority shall supply its share of


Petroleum for Mongolia’s domestic consumption.


f) Conduct an environmental impact assessment prior to the beginning of Contractor's


activities and should submit original reports of environmental impact assessment;


g) To take the following actions necessary to protect human, animals, nature, relics of


historical and cultural importance, land surface;


I. During the conduct of Petroleum Operations. Contractor shall make plans for


preventing hazards to human, animals, nature, relics of historical and cultural


9


importance, land surface and environment, and get approval from the Mongolian


Government Representative and authorized organizations for those plans and


implement:


II. Prior to the Contract expiration or termination, or relinquishment or abandonment


of any part of the Contract Area, remove all equipment and installations from the


area in a manner acceptable to the Mongolian Government Representative, and


perform all necessary site restoration activities in accordance with applicable Laws


and regulations of Mongolia;


III. The estimates of the anticipated abandonment of wells, site restoration program and


Rinding sources for restoration shall be included in the annual Production program;


IV. If the Contract Area is located near forbidden for Petroleum Operations Area take


the necessary precautions for protection of ecological systems, and prevent


pollution of the Contract Area.


V. To conduct any means of transportation due to petroleum operations on the territory


of Mongolia in compliance with the applicable laws and regulations of Mongolia, in


a way of causing no harm to public health and to the environment.


h) All original documents of geological, hydrogeological, geophysical, geochemical


researches, drilling, well and production data, laboratory analysis results, and other data and


reports as it may compile during the term hereof shall be prepared every year in accordance


with approved Rules and submitted to the PAM:


i) Assist the Mongolian Government Representative in preparing and carry ing out plans and


programs for training and education of Mongolian nationals;


j) Be responsible for the damages causes by violation of Petroleum Operations Regulations:


k) Shall include the PAM*$ representatives with rights for tender of choosing or selecting


subcontractors in carry ing out certain portions of the Petroleum Operations. The draft of


contracts shall be amicably agreed by both parties prior to concluding contracts with


subcontractors and a copy of the contract shall be furnished to the Mongolian Government


Representative;


l) Shall include the PAM’s representatives in the process of selecting an authorized company


to carry out detailed environmental appraisal.


m) Within one calendar year, the Contractor shall organize at least two business meetings with


the Mongolian Government Representatives regarding the petroleum operations and shall


bear all expenses arising from the aforementioned business meetings.


n) Within one calendar year, the Contractor shall organize at least one business meeting with


the local administration and citizen’s representatives for the purpose of propagating the


Contractors petroleum operations at the regional level and shall bear all expenses arising


from the aforementioned business meetings.


ARTICLE IV. COSTS AND COST RECOVERY


a) The Contractor shall bear all costs and expenses necessary to conduct Petroleum Operations.


Contractor may recover such costs and 40 (forty) percent of Contract Crude oil will be used


for cost recovery, after the deduction of royalty. Neither party hereto guarantees that any


such Commercial Discovery will be made.


m


b) fhe quantity of Cost Oil which the Contractor shall have the right to take and dispose of in


any Calendar Month shall be equal to the aggregate of all Petroleum Costs incurred by the


Contractor.


c) llie Contractor shall have the right to take and dispose of the certain quantity of Contract


Crude Oil in every trade of Contract Crude oil for the purpose of recovering its costs and


expenses incurred in respect of Petroleum Operations. All Operation Costs of the Contractor





10


that remain unrecovered hereunder shall be carried forward until full) recovered in the


succeeding Calendar Months.


d) The Contractor shall agree with the Mongolian Government Representative on the planning


and accounting model for the Petroleum Operations and shall submit to the Mongolian


Government Representative a copy of accounts for Petroleum Costs. The Contractor shall


notify the Mongolian Government Representative of the amount of the Petroleum Costs and


the method of their recover) .


c) The Contractor will classify Petroleum Cost into Exploration Cost, Operation and


Development Cost, without double concerning. Those Petroleum Costs will be recovered by


the following stages


Exploration Cost:


Administrative Cost; and


Development Cost


For clarification, it is approved possibility that Development Cost can occur within


Exploration Period and Exploration Cost within Development Period.


f) Notwithstanding the foregoing, the Royalty to be paid under paragraph 1 of Article VIII and


the bonuses and other payments to be paid under Article 10 shall not be recovered.


ARTICLE V TERM OF EXPLORATION OPERATIONS


5.1 EXPLORA TIPS PERIOD


The Exploration Period shall begin on the Effective Date of this Contract. The


Exploration Period shall be up to five (5) years in duration and shall consist of three phases: -first


phase I year, second phase 2 years, third phase 2 years.


5.2 EXTENSION OF EXPLORATION PERIOD


a. This extension of exploration period shall be extended in accordance with the Petroleum


Law and its Implementing Regulation.


b. If the Contractor has fulfilled Exploration Work Programs and Budgets and Minimum Work


Obligations as specified below for the phase of the Exploration Period, which it desires to


extend. The Government Representative shall approve the Exploration Work Programs and


Budget of the next phases to extend the Exploration Period.


c. If on the date on which the third Exploration Period would otherw ise expire a Discovery


Well exists in respect of which no determination has then been made as to whether such


discovery is a Commercial Discovery, the Exploration Period shall continue in effect in


respect of the Appraisal Area for such Discovery Well until the first to occur of the


following:


i. such Discovery Well is determined to be a Commercial Discovery;


ii. such Discovery Well is determined not to be a Commercial Discovery :


iii. additional extension shall not be more than 6 months


5.3 DISCOVERY AMD APPRAISAL OPERATIONS


a) If a well is determined to be a Discovery Well in accordance with the following table, the


Contractor shall notify the Mongolian Government Representative within fifteen (15) days


in a written form and the date of such notice shall be deemed to be the date of such


Discovery Well.


9








11


 W ell depth <500 500-1000 1000-2000 >2000


(meter)


Daily recovery' 0.5 1.0 3.0 5.0


(tons/day)





b) W ithin ninety <90) days after the date of each Discover} W ell, the Contractor shall provide


to the Mongolian Government Representative for approval in respect thereof; an Appraisal


Program and Budget; and maps and other descriptions of the area to be appraised (the


‘’Appraisal Area”); and after the Mongolian Government Representative’s approval shall


begin to implement the Appraisal Program.


5.4 COMMERCIAL DISCOVERIES


a) If on the basis of reserves estimates one or more discoveries made by one or more Discovery


Wells are determined to be a Commercial Discovery, the Contractor shall notify in writing


the Mongolian Government Representative within fifteen (15) days, and the date of such


notice shall be deemed to be the date of such Commercial Discovery .


b) W ithin one hundred eighty (180) days after the date of each Commercial Discovery, the


Contractor shall provide to the Mongolian Government Representative for approval in


respect thereof; a Development Plan and Budget; and maps, reserves estimates and other


descriptions of the area to be developed (the ‘Development Area”); Petroleum


Administration shall inspect and revise all the documents within thirty (30) days and if


decides no amendments, no changes shall be made then within ninety (90) days shall


approve such Plan. Petroleum Administration shall have a right to extend the approval


period for one hundred eighty (180) days if decides that all documents shall be amended and


changed.


c) The Contractor shall commence Development Operations within (90) days after the


Mongolian Government Representative’s approval to implement such Development Plan.


5.5 COMMERC L4L DISCOVERY\ TESTIXO. DEVELOP MEM PERIOD


a) Ihe period for each Commercial Discovery establishments shall be continued for three


hundred sixty (360) days including the period of Appraisal Development.


b) Development Period in respect of each Commercial Discovery shall take effect on the date


of approval from an authorized organization that such production can be started from


Commercial Discovery, and it shall continue for a period of up to twenty (20) years.


5.6 REVISIONS OE APPRAISAL PROGRAMS. APPRAISAL AREAS,


DEVELOPMENT PLANS ASP DEVELOPMENT AREAS


Subject to the Mongolian Government Representative’s written approval, the Contractor


may, on the basis of additional information or evaluation, revise any Appraisal Program.


Appraisal Area, Development Plan and Development Area; provided, however, that no such


revision will add to an Appraisal Area or Development Area any parts of the Contract Area that


have already been relinquished under Article VII prior to such revision. In case of revising any


Appraisal Program. Development Plan and Development Area, the Contractor shall notify the


Mongolian Government Representative (15) days prior to the decision making.














12


5.7 EXTEXSIOX OF DEVELOPMENT PERIOD





The Mongolian Government Representative may, extend the Development Period two (2)


times, with each extension being up to five (5) years in duration in case the Contractor builds


refinery, petroleum and natural gas pipeline and other industrial infrastructure. I he Mongolian


Government Representative shall consider granting an extension of the Development Period, if


the Contractor, at least sixty (60) days prior to the expiration of the Development Period, gives


written notice to the Mongolian Government Representative of the Contractor’s desire to extend


the Development Period.


ARTICLE VI EXPLORATION OPERATIONS


61 MAX DATORY WORK AXD OBUGATIOSS


a) Within one hundred twenty (120) days from the Effective Date the Contractor shall


commence the Exploration Operations according to Annex C. In accordance with the


Contract, the Contractor shall perform mandatory work and obligation and shall spend


certain amount at least as included in the Plan (Annex C). If the Contractor did not spend


such amount of capital for the mandatory work then the Contractor shall pay the difference


between the mandatory work and actual invested amount to the PAM w ithin (30) thirty day s


after the end of the Contract Year.


b) If in any Contract Year the Contractor spends more than the Minimum Expenditure Amount,


the extra work expenditure shall be calculated for the following exploration year.


c) Contractor shall place 1.000.000 (one million) US dollars on the escrow account in the


Trade and Development Bank of Mongolia as guarantee of minimum work obligation of the


first contract y ear the Production Sharing Contract. Any issue related to this Guarantee ftind


placed on the Escrow Account shall be decided in accordance with the Escrow Account


Service Agreement concluded between the PAM and Contractor dated May 27h of 2008.


6.2 DRILLING METHODS


Any exploration well which the Contractor becomes obligated to drill under this


paragraph 1 of Article VI shall be drilled in accordance with generally accepted methods used in


the international petroleum industry and shall be deemed drilled upon the first to occur of the


following, the cost shall be recoverable cost.


a) it reaches the projected depth or target bed:


b) it becomes a Discovery Well:


c) it reaches basement rock; or


d) it encounters impenetrable substance or excessive geothermal gradients.


6.3 EXTLUR.-1 TIOX WORK TR(X,RAMS ASP BUDGETS


W ithin sixty (60) days alter the Effective Date, and thereafter at least ninety (90) days


prior to the beginning of each Contract Year, the Contractor shall prepare detailed exploration


work programs and Budgets for each categories setting forth the Exploration Operations which


the Contractor proposes to conduct during such Contract Year in the Contract Area, and provide


such work programs and Budgets for approval to the Mongolian Government Representative.


The Contractor shall submit previous years work program report to the PAM.








13


At least thirty (30) days prior to the beginning of such Contract Year, the Contractor and


the Mongolian Government Representative shall meet to review and discuss such exploration


work program and Budget. If the Contractor thereafter intends to revise such approved work


program and Budget, the Contractor shall promptly provide copies of such revision to the


Mongolian Government Representative and within fifteen (15) working days following the


receipt thereof the Contractor and the Mongolian Government Representative shall again meet to


review and discuss such changes. In the event that obligations exceed approved budget of the


certain year, the Contractor shall include all excessive cost as recoverable cost upon the approval


by the PAM.





ARTICLE VII. RELINQUISHMENTS


7.1 REL/XOLISI IXIF.XTS


The Contractor:


a) may relinquish within thirty (30) days after the expiration of the first phase of the


Exploration Period, a total of twenty five (25) to fifty (50) percent of the original Contract


Area;


b) may relinquish within thirty (30) days after the expiration of the second phase of the


Exploration Period, a total of twenty (20) to thirty (30) percent of the remaining portion of


original Contract Area; and


c) shall relinquish at or prior to the expiration of the Exploration Period, all remaining portions


of the original Contract Area, except Appraisal Areas and Developments Areas. I'he


Contractor is obliged to restore the surface of all or any part of the Contract Area into its


original form prior to relinquishment.


d) is obliged to restore the surface, clean the polluted area, water, remove all machinery and


equipment of any part of Development Area into its original form prior to relinquishment.


e) shall bear all costs related w ith the implementation of paragraph "c” and “d” in this Article.


7.2 VOLUNTARY RELINQUISHMENTS


a) The Contractor may voluntarily relinquish all or any part or pans of the Contract Area in


case the Contractor fulfils the Obligations stated in Annex C. Any such voluntary


relinquishments shall be credited toward the relinquishments under paragraph I of Article


VII.


b) In case the Contractor voluntarily relinquishes the Contract Area stated in Annex C which


the Contractor shall have then already become obligated, the amount for such unfulfilled


obligation shall be paid to the PAM not less than thirty (30) days prior to the relinquishment.


7.3 APPRAISAL AREAS





If, after the conduct of an Appraisal Program, the Contractor determines that the


Appraisal Area does not constitute a Commercial Discovery, the Contractor shall relinquish such


Appraisal Area. If the Contractor w ishes voluntary relinquish the Appraisal Area, which has not


conducted its mandatory work and obligations, in accordance with Appraisal Program the


Contractor shall pay the amount for such unfulfilled obligation to the PAM within thirty (30)


day s before relinquishment.








ARTICLE MIL ROYALTY AND PRODUCTION SHARING





14


8.1 ROYALTY





1, The* Contractor shall pay the Royalty based upon the price of the Contract Crude Oil for


each marketing of Contract crude oil. The Royalty shall be equal to 12.5 /twelve point five/


percent calculated with respect to total production of Contract Crude Oil. The Royalty


should be paid by production /crude oil/ or in cash.


2. The Royalty payment shall be determined pursuant to paragraph 4 of Article VIII and such


Royalty payment shall be made for each marketing of Contract Crude Oil. The Mongolian


Government Representative shall notify the Contractor before (30) days in case the


Mongolian Government Representative sets up any other procedure on the Royalty payment.


8.2 MARKETING OF CRUDE OIL


a) The Contract Crude Oil for the Royalty and share of the Government of Mongolia shall be


calculated from the measurement point. and the marketing of Crude oil shall be decided in


respect with mutually approved and concluded contracts between Parties. The value of


Crude oil shall be determined at the negotiated price with a buyer in the marketing contract


of Crude Oil.


b) If the Government of Mongolia decides to take any of its portion of Crude Oil by calculating


in currency from marketed Crude Oil. or in kind from produced and saved Crude Oil it shall


so advise the Contractor in writing not less than thirty (30) days prior to the commencement


of each Calendar Quarter specifying the quantity which it decides to take.


8.3 PRODUCTIOXSflARIXG OIL


a) After reduction by the Royalty and the quantity of Cost Oil for each Calendar Month, the


remaining quantity of Contract Crude Oil (herein referred to as "Production Sharing Oil")


shall be allocated between the Government of Mongolia and the Contractor in proportion to


the percentages set forth below , based upon the average daily quantity of Contract Crude Oil


for a given Calendar Month:


1. If average daily quantity of Contract Crude Oil for any Calendar Month is


equal or less than 5.000 barrels:


Government of Mongolia 43.5%


Contractor 56.5%


2. If average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds 5001 barrels but is less than 10.000 barrels.


Government of Mongolia 48.5%


Contractor 51.5%


3. If average daily quantity of Contract Crude Oil for any Calendar Month


equals to or exceeds 10.001 barrels but is less than 15.000 barrels.


Government of Mongolia 53.5%


Contractor 46.5%








15


 4. If average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds 15.001 barrels but is less than 20.000 barrels.








Government of Mongolia 58.5%


Contractor 41.5%





5. If average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds 20.000 barrels.


Government of Mongolia 63.5%





Contractor 36.5%








b) When the balance of un-recovered Petroleum Costs is less than the forty (40) percent of the


total quantity of Contract Crude Oil. such the difference between the forty (40) percent of


the total quantity of Contract Crude Oil and the balance of un-reco\ered Petroleum Costs


shall be allocated between Parties in respect with provision *‘a” of Article 8.3 of this


Contract.


c) The average daily quantity of Contract Crude Oil for any Calendar Month shall be


calculated by dividing the total quantity of Contract Crude Oil for each such Calendar


Month by the number of days of production in such Calendar Month.


d) I he value of the share of the Government of Mongolia’s Production Sharing Oil shall be


determined pursuant to paragraph 4 of Article VIII and the payment of the share of the


Government of Mongolia's Production Sharing Oil shall be made to the PAM w ithin thirty


(30) days from the finished marketing date, or as otherwise approved by the Government of


Mongolia.


8.4 VALUATION OF CONTRACT CRUDE OIL


a) For purposes of determining the value of Roy alty to be paid to the Government of Mongolia


pursuant to Article 8.1 and the value of Production Sharing Oil pursuant to paragraph 3 of


Article VIII. the price of Contract Crude Oil shall be determined by the negotiated price


with a buyer in the Crude Oil Sales Contract.


b) If the Contractor intermediates in a marketing of Mongolian share of Contract Crude Oil. the


Contractor shall mutually negotiate and agree with the Mongolian Government


Representative prior to conclusion of agreements among three Parties in respect with the


marketing and transportation of the Mongolian share of Contract Crude Oil and Royalty .


The value of the Contractor’s share of Contract Crude Oil produced from Mongolia shall be


determined by the world market's price of same quality crude oil with the Contract Crude


Oil on the date finished marketing the Contract Crude Oil.


c) Contract Crude Oil price will be calculated by Contractor’s arm’s length sales principle.


8.5 FORECASTS OF PRODUCTIOX


a) For each Commercial Discovery, not less than thirty (30) days prior to the beginning of each


Calendar Quarter the Contractor shall furnish to the Mongolian Government Representative


a forecast setting out the total maximum possible quantity of Crude Oil that the Contractor


estimates to produce and market, price and other relevant factors according to practices in


the international petroleum industry .


b) The Contractor’s forecast shall include estimates of Royalty. Crude Oil value and the


Contractor’s and Mongolian share of crude oil. The Contractor shall endeavor to produce the





16


 forecasted quantities. The Contractor shall estimate collective!} the crude oil production


amount from the several Commercial Discover} Wells.





8.6 USDERLIFTING AMD OlTRLlFTfXG





It is recognized that any part} hereto may. from time to time, fail to take the full quantity


of Contract Crude Oil to which such party is entitled (such party being called an “Underlifter*


herein). W hen that occurs, full production may be continued for the benefit of the other part}


(such party being called an “Overlifter” herein) and the Contractor shall maintain records to


indicate the quantity of Contract Crude Oil which the Underlifter may make up in order to be in


correct balance with the Overlifter. The Underlifter shall be compensated extra quantities of


Contract Crude Oil in order to achieve such balance as soon as practicable; provided, however,


that the Contractor shall make such allocations in such ways so as not to unduly interfere with


orderly operations for production and sales.


ARTICLE IX. NATURAL GAS


The Contractor has exclusive right to mutually negotiate and conclude a new Production


Sharing Contract of Natural Gas with the Mongolian Government Representative if any


discovery which is determined to be a Discovery W ell or a Commercial Discovery is capable of


producing Natural Gas.


ARTICLE X. BONUSES, FEES AND PAYMENTS





10.1 BONUSES


a) Signature Bonus; The Contractor shall pay to the PAM the sum of 100.000 USD (one


hundred thousand) as a Signature Bonus within 60 days after ratification of this Contract by


the Government of Mongolia.


b) Production Bonus; If the Contractor starts up production, the Contractor shall pay to the


Mongolian Government Representative the sum of 500,000 USD (live hundred thousand) as


a Production Start-up Bonus within 30 days after the beginning date of the Production


Operations.


c) The Contractor shall pay to the Mongolian Government Representative 1 /ond time in


follow ing occurrences:


1) the sum of U.S.$ 500.000 (live hundred thousand USD) as a Production Bonus if


average daily quantity of Contract Crude Oil for any Calendar Month is


equal or less than 5,000 barrels:


2) the sum of U.S.S 600.000 (six hundred thousand USD) as a Production Bonus If


average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds 5001 barrels but is less than 10.000 barrels.


3) the sum of U.S.S 700,000 (seven hundred thousand USD) as a Production Bonus If


average daily quantity of Contract Crude Oil for any Calendar Month


equals to or exceeds 10.001 barrels but is less than 15.000 barrels,


4) the sum of U.S.S 800,000 (eight hundred thousand l SD) as a Production Bonus If


average daily quantity of Contract Crude Oil for any Calendar Month equals to or


exceeds 15,001 barrels but is less than 20,000 barrels.


5) the sum of U.S.S 1 000.000 (one million USD) as a Production Bonus after average


daily quantity of Contract Crude Oil for any Calendar Month exceeds 20,001 Barrels.











tod L


10.2 TRAINING BOM US





a) The Contractor shall pay the Training Bonus annually within thirty (30) days after


beginning of each Contract Year as follow:


1) I'1 year 60,000 /sixty thousand/ USD


2) 2nd year 60,000 /sixty thousand/ USD


3) 3'd year 60.000 /sixty thousand/ USD


4) 41h year 60.000 /sixty thousand/ USD


5) 5"1 year 60,000 /sixty thousand./ USD





10.3 USD SURFACE RESTAL FEE


a) The Contractor shall pay to the Government of Mongolia the Land Surface rental fee for the


area within the Contract Area as prescribed in the Petroleum Law of Mongolia.


Contractor shall pay the following annual surface rentals:





L For Contract Area during the First phase


of the exploration work per square kilometer


(excluding Development Areas) 1.00 USD





ii. For Contract Area during the Second phase


of the exploration work per square kilometer


(excluding Development Areas) 2.00 USD





iii. For Contract Area during the Third phase





of the exploration w ork per square kilometer


(excluding Development Areas) 4.00 USD





iv. For Contract Area during the extension terms


of the exploration work per square


kilometer extended by the Government of Mongolia


(excluding Development Areas) 10.00 USD


v) For the Development Area, per square kilometer 50.00 USD








b) ITic Contractor shall pay such pledge fees within sixty (60) days from the Effective Date and


shall pay such pledge fees annually within thirty (60) days after beginning of each Contract


Year. The Mongolian Government Representative shall submit the Contractor the evidence


that the payment has been made. The Land Surface Rental shall not be recovered.


10.4 ADMINISTRATIVE SERVICE FEES


The Contractor shall pay to the Mongolian Government the administrative service fees as


prescribed in the Petroleum Law and/or other applicable Laws. Fees for Term of Exploration.


Application for Contract Area. Application for Development Area. Term of Development


Operations and other Petroleum Operations related activities shall be included as such fees.


Contractor shall pay the follow ing Administrative Serv ices Fees:





18


a) For each Contract Area Application 10.000 USD


b) For each extension of exploration term 25.000 USD


c) For each extension of exploration term by


the decision of the Government of Mongolia 100.000 USD


d) Development Area permission 50.000 USD


e) For each change or adjustment


in the Development Area 25.000 USD


f) For each extension of Development term 100.000 USD


g) For each application to transfer any rights and


obligations for Petroleum Operations 100.000 USD





10.5 ENVIRONMENTAL RECOVERY





The Contractor shall perform following amount of work for environmental recovery:





I / First year USD 20.000


2/ Second year USD 20.000


3/ Third vear USD 60.000


m I SD 60.000


4/ Forth year


5/ Fifth vear USD 00.000


0





ARTICLE XI. MEASUREMENTS





II.1 PRODIK TIPS SH. IR/XG A lEASUREMENTS


a) Measurements made for the purpose of determining the quantities of Contract Crude Oil as


to be allocated between the parties hereto ("Production Sharing Measurements") shall be


made in accordance with generally accepted methods used in the international petroleum


industry , it being mutually agreed, however, that other measurements may be made for other


purposes (including meters to test or estimate production rates of individual wells) and will


not necessarily conform to the same standards as the Production Sharing Measurements.


b) Abovementioned measurement instruments and methodology shall be approved by the


Mongolian authorized organizations.


c) Such Production Sharing Measurements shall be made at the measurement point.


d) It is understood and agreed that neither the Contractor nor the Mongolian Government


Representative shall have the right to take and dispose of its share of Contract Crude Oil


until after the Production Sharing Measurements provided for in this Article XI have been


made.








11.2 CORRECTIONS OF MEASUREMENTS


a) If the Contractor intends to adjust, repair or replace any appliance used for Production


Sharing Measurements, the Contractor shall give notice to the Mongol ian Government


Representative and enable the Mongolian Government Representative to observe such


operation.


b) Ihe Mongolian Government Representative shall be entitled to observe any Production


Sharing Measurement at any time and to conduct tests to determine the accuracy thereof. If


any such testing reveals that such measurement is not in accordance with generally accepted


methods used in the international petroleum industry, the Mongolian Government


Representative may request the Contractor to take appropriate remedial action. If the





19


Contractor has not commenced and diligently continued remedial action within thirty (30)


days following such request, or it has been commenced but with hold up, the Mongolian


Government Representative may stop production, cause the measurements to be corrected


by authorized third parties and recover the costs thereof from the Contractor,


c) In the event a measuring error is discovered, the Contractor shall use all reasonable efforts to


determine the correct production figures for the period during which there was a measuring


error and correct previously used readings. The Contractor shall submit for the PAM's


approval a report on the corrections carried out. If it proves impossible to determine when


the measuring error first occurred, the commencement of the error shall be deemed to be that


point in time halfway between the date of the previous test and the date on which the


existence of the measuring error w as first discovered.


11.3 MEASUREMENT RECORDS


I he Contractor shall submit to the Mongolian Government Representative a copy of


records of produced Contract Crude Oil and Production Sharing Measurements for even


measurement, and maintain those records for a period of at least five (5) years from the date


thereof and the Mongolian Government Representative shall have access thereto at all reasonable


times. The Contractor is obliged to provide access to the Mongolian Government Representative.


ARTICLE XII. EXPLORATION, PRODl CTION AM) TECHNICAL DATA





12.1 TITLE OF TECHNICAL DATA





The Mongolian Government Representative shall have title to the Contractor’s all


original data resulting from the Petroleum Operations program, budget and research results


including but not limited to geological, geophysical, petrophysical, geochemical, hydrological all


well Completion reports, drilling, petrologic, completion status reports and all other original data,


geographical maps, geodesy that the Contractor ma\ compile during the term hereof, provided,


however, that such data shall not be disclosed to third parties without a written approval of the


other party,


12.2 GENERAL ACTUTT1ES RECORDS


In respect with negotiated forms with the PAM. the Contractor shall maintain technical


records of its Petroleum Operations including but not limited to exploration, development,


production and refining operations in accordance with generally accepted practices in the


international petroleum industry. Such records shall be in the English language. The Contractor


shall provide all such documents and reports to the Mongolian Government Representative on a


monthly, quarterly and yearly basis.


12.3 GEOPHYSICAL DATA





The Contractor shall keep the original geophysics data and shall give one copy to the


Mongolian Government Representative in accordance with the Mongolian Government


Representative's verified Regulation.

















20


12.4 EXPLORATION. PETROPHYSIC. LABORATORY STUDIES. PRODUCTION ASP


PRODUCT/OX TEST DATA





The Contractor shall prepare such data as generally accepted methods used in the


international petroleum industry and submit interpretation reports and data in type of digital and


papers to the Mongolian Government Representative.


Subject to the Mongolian Government Representative's consent, for the purpose of petrophysics,


testing and laboratory analysis the Contractor shall have the right to take and remove from


Mongolia samples of cores /sample duplicate/, well cuttings /sample duplicate/, Petroleum and


rocks. The Contractor may dispose of such samples unless the Mongolian Government


Representative requests to return such samples within one (I) year following the above consent.


The Contractor shall submit testing service work, testing production reports of wells and data


within thirty (30) days.


12.5 REPORTS OX PROCESSED DATA. EXPLORATION RESULTS AXD PETROLEUM


RESERVES


The Contractor shall provide to the Mongolian Government Representative the petroleum


exploration's processed data, resource estimation, and appraisal reports in accordance to the


rules and regulations adopted by the Mongolian Government Representative.


12.6 RECORDS Oh DEVELOPMENT AXD PRODVCTIOX OPERATIONS


The Contractor shall maintain records showing quantities of Petroleum, gas produced


from each well and changes in the well’s equipment and shall provide to the Mongolian


Government Representative such data and reports as outlined in the Rules adopted by the


Mongolian Government Representative.


12.7 DATA OF ALTO MOBILES. TECHNIQUES. EQUIPMENTS AXD CONSTRUCTIONS


a) For purpose of Petroleum Operations, the Contractor shall submit to the PAM the


technical documents, designing drawings and other related information of automobiles,


techniques, and equipments for importing before entering into Mongolia.


b) Engineering facilities and structures shall be constructed in accordance with related


Mongolian laws and regulations. Designing drawings of such constructions shall be


submitted to the PAM before beginning of constructions, and other related documents


before commissioning.


12.8 JOINT COMMITTEE


Upon commencement of the Development Period, the Contractor and the Mongolian


Government Representative shall form a joint committee to review data and the production


activities of all productive reservoirs, and co-ordinate administrative matters between the


Mongolian Government Representative and the Contractor.


12.9 OTHER MINERALS


The Contractor shall report within 15 day s to the Mongolian Government Representative


the presence of potentially commercial accumulations of minerals, which are not associated w ith


Petroleum but are encountered and recognized by the Contractor while conducting Petroleum


Operations w ithin the Contract Area. Such minerals shall remain the state property of Mongolia.





21


12.10 CONFIDEXTlAim’





The parties hereto shall maintain all documents and reports referred to in this Article XII


as confidential and shall not divulge it to any third part} without the consent of the other party


hereto. The foregoing confidentiality obligation shall not apply to:


1) disclosure bv either part} hereto to its employees. Affiliates, consultants, prospective


assignees, prospective lenders or Subcontractors to the extent required for the conduct of


Petroleum Operations: or


2) disclosure by either party hereto to the extent required to comply with applicable Laws, or


the rules or regulations of any stock exchange on w hich a party 's, or its Affiliate's, shares


are listed.


3) Contractor shall inform to the PAM about potential investor. The potential investor shall


certify to keep information in confidential.


ARTICLE XIII ACCOUNTING DATA


13.1 BOOKS OF ACCOUNT


Contractor shall maintain books of account in respect of Petroleum Operations in


accordance with the Accounting Law of Mongolia. Accounting Procedures attached as Annex I)


and other applicable laws in Mongolian language and if deemed necessary , to conduct double


bookkeeping in both Mongolian and Lnglish languages.


13.2 ACCOUNTIXG REPORTS


The Contractor shall provide accounting reports, statements and other information to the


Mongolian Government Representative in accordance with the present contract. After the


Contractor opens an office in Mongolia, the Contractor shall maintain copies of such accounting


reports, statements and other information at that office, and the Mongolian Government


Representative shall have access thereto at any time he/she desires.


13.3 FIXAXi 1AL I\SPE( TJOXS


a) The Mongolian Government Representative shall be entitled to have inspection of cost


recovery expenses, fi nancial accounts, financial reports, inventory and goods, voucher,


salar} payment, invoice, a contract directly and indirectly related to this contract, sub¬


contractor's contract, other agreements, and all documents related to Petroleum Operations


in every year. Also, the Mongolian Government Representative has right to have inspection


in sites, in Mongolia and abroad, related to Petroleum Operation, facilities, storages and


offices, and to meet relative person necessary times with considerable reason.


b) All documents shall be saved for 5 (five) years since its origin, or for the required period as


stated in Law and has to be ready to be inspected.


c) Cost related to conducting of such inspection shall be born by the Contractor.





ARTICLE XIV. GOVERNMENTAL ASSISTANCE


14.1 GESERAL ASSISTANCE








The parties hereto recognize that the Contractor may require assistance from the


Mongolian Government Representative to conduct Petroleum Operations and to accomplish the


22


objectives of this Contract. Accordingly, and for the purpose of accomplishing the objectives of


this Contract for the mutual benefit of Mongolia and the Contractor, the Mongolian Government


Representative shall assist the Contractor to the extent reasonably possible to enable the


Contractor to fulfill its obligations and exercise its rights. The Mongolian Government


Representative shall assign one or more of his representatives to assist the Contractor.


14.2 OTHER ASSISTANCE


The Mongolian Government Representative may otherwise assist and expedite the


Contractor's execution of the Petroleum Operations by providing facilities, supplies and


personnel, supplying or otherwise making available all necessary visas, work permits,


transportation, security protection and rights of way and easements as may be requested by the


Contractor and made available from the resources under the Mongolian Government


Representative’s control. In the event such facilities, supplies or personnel are not readily


available, then the Mongolian Government Representative may secure the use of such facilities,


supplies and personnel from alternative sources. Expenses thus incurred by the Mongolian


Government Representative at the Contractors' request shall be reimbursed to the Mongolian


Government Representative by the Contractor. The Contractor shall consider the reimbursement


as an Operating Cost. Such reimbursements shall be made in U.S. dollars computed at the rate


of exchange at the time of conversion.


CONTRIBUTION TO REPRESENTATIVE OFFICE/GOVERNMENTAL ASSISTANCE


CON IR1B1TION


For operation of Representative Office from PAM within Contract Area, the Contractor


shall pay to the PAM the sum of 100.000 USD (one hundred thousand) annually within 30


(thirty) days from the beginning of each Contract year.


LOCAL ASSISTANCE CONTRIBUTION





The Contractor shall pay to the local authorities within contract area the sum of 40,000


(Forty thousand) USD annually w ithin 50,000 USD (fifty thousand) days from the beginning of


each Contract vear as Local Assistance Contribution.


ARTICLE XV. USE AND OWNERSHIP OF PROPERTY


15.1 EQUIPMENT AND FACILITIES


Upon the termination of this Contract, the Contractor's imported equipment, facilities, real


estate and supplies used for Petroleum Operations shall become the state property of the


Government of Mongolia at no additional cost at the time w hen cost of such equipment, facilities


and supplies have been recovered by the Contractor.


It is understood that this paragraph I of Article XV shall not apply to any item that is leased by


the Contractor from any other party, including Affiliates.


15.2 TITLE TO PETROLEUM


Title to Contract Crude Oil to which the Contractor is entitled under Article VIII shall


pass to the Contractor at the points at which the Production Sharing Measurements thereof are


made.








23


15.3 TRANSFER THE RIGHT





The Contractor shall transfer its rights and obligations under the Production Sharing


Contract by resolution of the Government of Mongolia.








ARTICLE XVI. TAX


Contractor s tax, fee and payments in respect with Petroleum Operations shall be


regulated through any applicable Mongolian laws, or any other legal acts, whether now existing


or hereafter enacted. But the contractor shall not be obliged to pay an> other payments not


regulated by any applicable Mongolian laws and this Contract.





ARTICLE XVII. EXCHANGE RIGHTS


17.1 FOREIGN CURRENCIES


Purchase or sale of foreign currencies shall be transacted at the daily prevailing rates as


quoted by the Mongol Bank.


17.2 FOREIGN BANK ACCOl NTS


The Contractor is hereby authorized to open accounts, make transactions in outside or


inside of Mongolia, and to retain abroad and freely dispose of any funds in such accounts.








17.3 EXCHANGE RIGHTS


The Contractor is hereby granted the following exchange rights:


a) To provide in freely convertible foreign currencies all funds needed to conduct Petroleum


Operations and to convert such currencies to Mongolian currency through anv bank of


Mongolia at the exchange rate prescribed in paragraph I of Article XVII:


b) To hold and freely dispose of any funds held outside of Mongolia:


c) To retain abroad and freely dispose of all proceeds received outside of Mongolia from the


export, sale or exchange of its share of Contract Crude oil:


d) To repatriate abroad and freely dispose of all proceeds received w ithin Mongolia from the


sale, exchange or export of its share of Contract Crude oil:


e) To maintain an account in a bank in Mongolia chosen by the Contractor which can be


disbursed for the purpose of making payments to the Government Representative or the


Government of Mongolia hereunder or making other payments required for Petroleum


(Operations.


17.4 PAYMENTS UNDER THIS CONTRACT


The Contractor shall make the payments stated in this Contract in USD.














24


h


 ARTICLE Will. MONGOLIAN SUBCONTRACTORS, MATERIALS AND


EMPLOYEES





18.1 SELECTING MONGOLIAN SUBCONTRACTORS. MATERIALS AND


EMPLOYEES





The Contractor and its Subcontractors shall:


a) Should give preference to Mongolian subcontractors in respect of Mongolian national or


business entity’s proposed price, professional capabilities and performances are satisfying


the requirements set by the Contractor. ITie Contractor shall inform and negotiate with the


Mongolian Government representative in regards to the subcontractors prior to conclusion of


the contract with the Subcontractors.


b) Give preference to material, equipment, machinery and consumables manufactured in


Mongolia so long as their prices, qualities and times of delivery arc comparable to


internationally available materials, equipment, machinery and consumables: and


c) Give preference in employment to Mongolian nationals provided they are suitably qualified


and provided. The Contractor has the right to employ its foreign personnel in special


professional vacancies and key positions upon the approval of the authorized organization


within the quota approved by the Government of Mongolia. It is recognized that the


Contractor may require the assistance of the Mongolian Government Representative in order


to identify any such prospective Mongolian Subcontractors, locally manufactured items, and


Mongolian employees, and that the Contractor’s obligations under this Article XVIII are


accordingly conditioned upon the Contractor's having timely knowledge thereof. The


Contractor shall pay disability allowances in accordance w ith the Laws of Mongolia to those


Mongolian national employees who may temporarily or permanently lose their ability to


work as a result of an accident w hile performing their duties under this Contract.


d) All issues pertaining to the employment shall be governed according to the Law of


Mongolia on Sending labour force abroad and receiving labour force and specialists from


abroad.


e) When hiring Mongolian petroleum professionals, the Contractor shall pay salary that is not


less than the average salary of foreign professionals with the same qualifications hired from


abroad by the Contractor.


0 The Contractor shall give preference to educating and training Mongolian citizens at


Contractor’s costs in order to obtain prepared skilled personnel for all levels of Petroleum


industry.


9





ARTICLE XIX. EMERGENCIES


19.1 EMERGENCIES IX PETROLFA 'M OPERA TJONS


The Contractor may take all actions it deems necessary to meet any emergency, l he


Contractor shall promptly notify the Mongolian Government Representative of any such


emergency.


19.2 NATIONAL EMERGENCY


a) In case of national emergency, the Government of Mongolia may requisite with


compensation all or part of Contractor's share of the Petroleum from the Contract Area and


may require Contractor to increase production of Petroleum to the maximum safe level of


25


zr


production. The maximum level of production shall be determined through negotiation by


the Parties.


b) No such requisition shall be affected except after providing to the Contractor an opportunity


to express its view s in respect of such requisition.


c) Any requisition of Petroleum reserves, or of any related facilities, shall be effected in


accordance w ith the applicable Laws of Mongolia, duly notified to the Contractor, until such


national emergency is ceased.


ARTICLE XX. FORCE MAJEURE


20.1 "Force Majeure" within the meaning of this Article XX shall include fire, epidemics,


unavoidable accidents, declared and undeclared war. strikes, lockouts and other disturbances,


floods, storms, earthquakes and other natural disturbances, insurrections or riots.


20.2 If the Contractor is prevented or delayed by Force Majeure from performing any


obligation, from meeting any condition, or from exercising any right hereunder, an amount of


time equal to the period or periods, plus a reasonable period to prepare for the resumption or


initiation of the actions so prevented or delayed, could be added to any time provided for or


otherw ise allowed therefore hereunder upon the approval of the Government of Mongolia, and to


the applicable Exploration Period and/or Development Period.


20.3 If the quantity of Petroleum being produced, or which could be produced, from one or


more Commercial Discoveries is interrupted or otherwise limited by Force Majeure. then the


Development Period applicable thereto shall be extended beyond the period provided in Article


V until the quantities that could have been produced and saved there from at capacity have been


made up. The term "capacity" for purposes of this provision means the total quantity of


Petroleum that the wells then existing on such Commercial Discovery or Discoveries could have


produced under production plan in accordance with generally accepted practices of the


international petroleum industry had the interruption of Development Operations is not occurred.


Within ninety (90) days following each Calendar Year, the Contractor w ill notify the Mongolian


Government Representative of the cumulative quantities of Petroleum, which are to be made up


as herein provided.


20.4 The Contractor shall submit to the Mongolian Government Representative the evidence


proved by the authorized organization within (30) days from the date of such Force Majeure


stated in Article XX has been occurred.








ARTICLE XXL CANCELLATION


21.1 If the Effective Date does not occur w ithin one hundred eighty (180) days following the


date on which the parties execute this Contract, the Contractor may notify the Mongolia n


Government authorized representative the PAM that this Contract is cancelled.


21.2 If the Contractor fails to commence Exploration Operations within one hundred twenty


(120) days following the Effective Date, the PAM shall cancel Contract.


21.3 The Government of Mongolia shall have the right to cancel this Contract through its own


Representative's suggestion if the Contractor knowingly breaks this Contract or commits a


material breach and if the Contractor fails to remedy or commence to remedy such breach within








26





\


the time hereinafter provided, and if the Contractor fails to commence program and budgeted


work to implement this Contract.


21.4 If the Government of Mongolia determines to exercise its rights under paragraph 2 of


Articles XXI or paragraph 3 of Article XXI. the Mongolian Government Representative shall


give the Contractor written notice. If within thirtv (30) days from such notice the Contractor


shall not have remedied such breach, and if the Contractor shall not have been delayed or


prevented there from because of F orce Majeure. the Mongolian Government Representative may


thereafter issue a decree to cancel this Contract subject to the right of the Contractor to invoke


the arbitration provisions of Article XXII. The Contractor in the event of cancellation shall pa>


to the PAM for failed budgeted work fees for the Contract Year.


21.5 Following cancellation of this Contract, the Contractor shall have the right to remove


from Mongolia ail movable property (other than described in paragraph I of Article 15) used in


respect of Petroleum Operations, which is leased or otherwise not wholly owned by the


Contractor.


21.6 I he Contractor shall be entitled to cancel this Contract on below-mentioned cases and


shall notify the Mongolian Government Representative before (90) days outlining the


cancellation;


a) not to be discovered economical reserv es of petroleum on the Contract Area


b) the production period is terminated





ARTICLE XXII. ARBITRATION AND LIABILITIES


22.1 Any dispute arising between the parties hereto in respect of this Contract (including its


execution, interpretation, application, cancellation, expiration or extension) which is not settled


amicably shall be finally settled by arbitration of Mongolia.


22.2 Unless this Contract provides otherwise, any property dispute arising out of or in the


course of petroleum operations shall be settled by Mongolian Courts in accordance with the laws


of Mongolia.


22.3 Upon request of the parties concerned, any dispute related to this Contract, such as


modification of its terms or its cancellation ma\ be settled in accordance with the UNICITRAI


m


Arbitration Rules.


22.4 If any person conducts petroleum operations arbitrarily or without permission, an


authorized organization of Mongolia shall confiscate in favour of the State the equipment used in


those operations, the property, the petroleum produced and income of the person involved. If


those operations are of a criminal nature, the matter shall be subject to the judicial organization


of Mongolia.


22.5 If Contracting parts undertake any operations in breach of the provisions of the Petroleum


Law of Mongolia or other relevant laws of Mongolia, and such breaches result in losses to an


entity, organizations or individuals, the Contractor shall be liable in accordance with the laws of


Mongolia.











27


22.6 Any losses resulting from a breach of contractual obligations by the Contracting parts


shall be recovered from the offending party in accordance with the laws and regulations of


Mongolia.


22.7 In case of selecting subcontractors for earning out certain portions of the Petroleum


Operations, the Contractor shall be responsible to the Government of Mongolia for any losses


occurred from subcontractor operations.





ARTICLE XXIII. NOTICES


23.1 W ritten notices to the Contractor are effective if:


a) given by telefax to the Contractor's headquarters office designated in paragraph 3 of Article


XXlli or. after the Contractor opens an office in Mongolia, given to such office, if receipt


thereof is acknowledged by answer back or is confirmed as received by the transmitting


facsimile machine: or


b) given by courier with acknowledged receipt or by delivery of such notice in person to the


Contractor Representative, if the Contractor Representative or one of his authorized


representatives has acknowledged receipt and the copy of such notice given by telefax to the


Contractor’s headquarters office designated in paragraph 3 of Article XXIII.


23.2 Written notices to the Mongolian Government Representative are effective if:


a) given by telefax to the Mongolian Government Representative’s office designated in


paragraph 3 of Article XXIII. if receipt thereof is acknowledged b> answer back or is


confirmed as received by the transmitting facsimile machine; or


b) given by courier w ith acknow ledged receipt or by delivery of such notice in person to the


Mongolian Government Representative, if the Mongolian Government Representative or


one of his authorized representatives has acknowledged receipt thereof.


23.3 Written notices provided for in paragraph 1 of Article XXIII Article and paragraph 2 of


Article XXIII above shall be addressed and sent out as follows:


a. The Government Representative:


Petroleum Authority of Mongolia


18080 Ulaanbaatar.


Songinokhairkhan duureg.


Uildverchnii evleliin gudamj 37.


Tel: (976-11 )-631208.fax: (976-11 >-631239


E-mail:


Ulaanbaatar. MONGOLIA


Attention: Mr. D. Amarsaikhan, Chairman


b. The Contractor Representative:


DWM PETROLEUM AG


Bahnhofctr. 9


C’H-6341 Baar.


Switzerland


Tel: 0041-(0) 1-7181030





28


 Fax: 0041-(0)1-7181039


E-Mail: info@dwm-ag.com





Attention: Alexander Becker


23.4 rhe address at which am party may receive a notice may he changed b> thirty (30) days


notice given to the other party.


23.5 No refusal or inability of either party hereto to receive an attempted notice hereunder


shall in any way diminish or prejudice any rights of the other party hereto.


ARTICLE XXIV. INSURANCE


24.1 As to all operations performed by the Contractor under this Contract, the Contractor shall


secure and maintain insurances in accordance with applicable Laws of Mongolia.


24.2 The Contractor shall require that its Subcontractors procure similar insurances to those


required to be procured by the Contractor and such additional insurances as the Contractor shall


deem appropriate, all to be evidenced by Certificates of Insurance.


24.3 Any insurance carried out by the Contractor and Subcontractors in respect to the


Petroleum Operations pursuant to this Contract shall be conducted according to the Insurance


law s and regulations of Mongolia and shall be concluded w ith Mongolian insurance company .


24.4 Should a Mongolian insurance company be unable or unw illing to prov ide any of all such


insurances, the Contractor may obtain the Mongolian Government Representative’s agreement to


make alternative arrangements.


24.5 The losses and expenses, in accordance with the contract concluded between an insurance


organization and the Contractor, shall be resolve according to the Insurance law of Mongolia and


other regulations.





ARTICLE XXV GENERAL





25.1 AXXEYES


Annexes A. B. C and D are hereby made a part of this Contract, and shall be considered as


having equal force with the provisions hereof.


LEG IS Li TlOX


This Contract is in accordance with Mongolian Legislation.


25.3 GOOD FAITH


The parties hereto base their relations in respect of this Contract on the principles of


goodw ill and good faith and shall accordingly cooperate to achieve the mutual objectives hereof


and to resolve amicably any misunderstandings or disputes that may arise, and no consent or


other approval required hereunder shall be unreasonably w ithheld or delay ed.


25.4 LANGUAGE





29


This Contract is written in Mongolian and English languages. The Mongolian and


English versions arc identical in terms of content and principles. In ease of dispute between both


Parties the Mongolian version shall prevail.


25.5 ENTRY INTO FORCE AND ADOPTING CHANGES AV THE CONTRACT


This Contract shall come into force on the day it is ratified by the Government of


Mongolia. This is the Effective date of the Contract.


Parties could make changes in the Contract, and am changes in the Contract shall be adopted


after the ratification by the Mongolian Government.














P

























































































30


T“~


 ANNEX A





TO THAT CERTAIN


PRODUCTION SHARJNG CONTRACT


between


THE PETROLEUM AUTHORITY OF MONGOLIA


and


"DWM PETROLEUM AG"


FOR CONTRACT AREA - XIII


This annex "A" is attached to and made an integral part of the Production Sharing


Contract between the Petroleum Authority of Mongolia and "DWM Petroleum AG",


dated_ _.2009


MAP OF CONTRACT AREA


 ANNEX B








TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


between


THE PETROLEUM AUTHORITY OF MONGOLIA


and


"DWM PETROLEUM AG"





. FOR CONTRACT AREA XIII








This annex "B" is attached to and made an integral part of the Production Sharing


Contract between the Petroleum Authority of Mongolia and "DWM Petroleum AG",


dated .2009




















DESCRIPTION OF CONTRACT AREA











1. Contract Area name: Tsagaan Els - XIII


2. Contract Area size:: 11590 sq.km


3. Coordinates:








Number Longitude Latitude


1 108’19’59'’ 43°50'00M


2 108819'59" 44°10W


3 108a29’59" 44° lOW





4 108°29’59" 44a30'00"


5 108Q49’59" 44°30'00"


6 108°49’59M 44C40W


7 109"29'59" 44c40’00"


8 109"29’59" 44°35'00"


9 109°20'00H 44°35’00"





10 109a20W 44o10’00"


11 109°40W 44°10'00"


12 109°40W 43’55’00"


13 110W00" 43°55'00"


14 now" 44° 10*00"


homo’OO"


15 44°10W





16 110°10’00" 44l,20’00"


17 111e00’00M 44u20'00"


18 111 ’OO'OO" 43°50’00"


 ANNEX C


TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


between


THE PETROLEUM AUTHORITY OF MONGOLLA


and


DWM PETROLEUM AG


FOR CONTRACT .AREA XUI


This annex **C" is attached to and made an integral part of the Production Sharing


Contract between the Petroleum Authority of Mongolia and DWM Petroleum AG dated ....


200...





MINIMUM WORK OBLIGATIONS





Period Contract THE WORK PLAN Cost The y ear


Year Investment


Collection and processing of geological data 150,000


Reconnaissance of work of the block. 4000 km 40,000


Geological Mapping 500 sq.km 50,000


Geological Mapping 100 sq.km 30,000


(icologic structural sections 40(1 km 140,000


I 1 Lithologic-stratigruphical sections 1900m 95.000 625.000


PaJcontolic strati graphical works 40.000


Sampling 300 15,000


Luboratorv analytical works


* + 35.000


Data Processing 30.0HII


Geological Mapping 85()sq.km 85.0(H)


Geological Mapping 400 sq.km 120.000


Lithologic-stratigraphical sections 3200m 160,000


2 Paleontolic strati graphical works 80,000 825.000


Sampling 800 40,000


II Luborators analytical yvorks 75.0(H)


Data Processing 55.000


Data Processing 15.0(H)


3 Topographic geodesic works 50.000 1.740.000


Lxploration seismology 2D. 2(H) km 1.600,0(H)


Exploration seismology 3D, 5 km 75,01 hi


Data Processing 40.0(H)


lopographic geodesic works 20.0(H)


Exploration seismology 2D. 100 km 800,000


III 4 Exploration seismology 3D, 20 km 300,000 4,360,000


Preparation to drilling, well 1 30.000


Well Drilling. 1 well 2.870.000


Log survey. 1 well 300.000


Data Processing 50,000


Preparation to drilling, well 2 60,000


111 5 Well Drilling. 2 well 5.740.000 6,900.000


Log survey, 1 well 600.000


Well test. 3 well 450.000


TOTAL 14,450.000











33


 ANNEX I)


TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


between


THE PETROLEUM AUTHORITY OF MONGOLIA


and


1)\VM PETROLEUM AG


FOR CONTRACT AREA XIII


ACCOUNTING PROCEDURE





ARTICLE I


GENERAL PROVISIONS





1. DEFINITIONS


Definitions contained in Article II of the Production Sharing Contract dated 200...


shall apply to this Accounting Procedure and have the same meaning.


2. PURPOSE OF THIS ACCOUNTING PROCEDURE AND


PRECEDENCE OF DOCUMENTS


The purpose of this Accounting Procedure is to establish accounting reports on


investment costs and inventories incurred by the Contractor and follow an existing Accounting


Law of Mongolia, national and International Standards of Accounting and Reporting and all


other applicable laws and regulations for maintaining books of account


In the event ol any inconsistency or conflict between the provisions of this Accounting


Procedure and the provisions of the Contract common procedures accepted in international


petroleum industry shall be complied.


3. ST A TEMENTS OF ACTIVITY


a) During the Exploration Period, Contractor shall transfer the follow ing statements to the


PAM w ithin thirty (30) days from the end of each Calendar Quarter:


1) accounting statement (with an additional clarification)


2) detailed statement of expenditure (b\ each cost centers)


Above statements shall be made in an ascending order.


b) During the Development Period, Contractor shall supply following statements to the PAM


within thirty (30) days from the end of each Calendar Quarter:


1) accounting statement (with an additional clarification)


2) a production statement:


3) exporting report and statement


4) a profit oil and equilibrium statement


5) detailed statement of expenditure (b> each sections of expenditure)


6) cost recovery statement





34


Above mentioned statements shall be processed in an ascending order. These statements


shall comply this Accounting Procedure and also the International Standards of Accounting and


Reporting and be sent to the PAM within sixty (60) days from the end of each Calendar Year.


4. FINANCIAL INSPECTIONS


a) In order to conduct a financial inspection, as stated in the provision 13 of this Contract the


Mongolian Government Representative shall be entitled to have inspection of reports on


investment and cost recovery expense incurred in respect of Petroleum Operations in


compliance with the Contract and related laws and regulations based on financial accounts,


financial reports, inventory and goods, voucher, salary payment, invoice, a contract directly


and indirectly related to this contract, sub-contractor’s contract, other agreements, and all


documents related to Petroleum Operations in every year. During the conduct of such


inspection, the Mongolian Government Representative has the right to have inspection in all


sites related to Petroleum Operation such as facilities, storages and offices of the Contractor


in Mongolia and abroad, and to request the required documents from the responsible


employ ees on the basis of a sound reasoning.


b) All documents must be maintained and made available for inspection and audit for five (5)


years following their date of issue or such longer period as may be required under any


legislation applicable.


5. CURRENCY EXCHANGE


Contractor’s books for Petroleum Operations shall be kept in United States Dollars. All


U.S. Dollar expenditures shall be charged in the amount expended. All expenditures in


Mongolian currency shall be converted into U.S. Dollars in conformity with Article XVII of the


Contract, and all other non-l .S. Dollar expenditures shall be converted into U.S. Dollars at the


cost of purchase of that currency it such currency was purchased from one of Contractor's U.S.


Dollars accounts and. in any other event, at the then prevailing rate of exchange as quoted by the


Mongol Bank.


A record shall be kept of the exchange rates used in translating Mongolian currency or


other non-U.S. Dollar expenditures to U.S. Dollars.


6. BOOKS


The Contractor shall keep its books in English, using appropriate accounting method. I he


books shall be kept in accordance with the Laws and regulations of Mongolia and generally


accepted accounting principles prevailing in the international petroleum industry.


7. REVISION OF ACCOUNTING PROCEDURE


In light of future arrangements of this contract this Accounting Procedure may be


reviewed and revised by the Mongolian Government Representative on the basis of mutual


written consent between the PAM and the Contractor.


8. DETAILED OUTLINE OF ACCOUNTING SYSTEM


1. Within ninety (90) days after the Effective Date. Contractor shall present to and discuss


with PAM a proposed outline of a chart of accounts, detailed classifications of costs.


 detailed nature of cost centres to be used, operating records and reports to be established


in accordance with the Contract and this Accounting Procedure. Such outline shall he in


accordance with generally accepted accounting systems, normal practices in the


international petroleum industry and the Laws and regulations of Mongolia. Following


such discussions, after the Mongolian Government Representative’s approval the


Contractor shall prepare and provide the PAM with formal copies of the comprehensive


charts of accounts and the manuals to be used.








ARTICLE II


EXPENDITURES AND RECEIPTS


1. EXPENDITURES FOR RECOVERING


The Contractor shall bear and directly pay the following costs and expenses. These costs


and expenses shall be classified and recovered by the Contractor in accordance with Article IV


of the Contract.


a) Surface Rights


It is understood that Contractor shall bear expenses in respect with surface rights only for


those areas required by Contractor to build facilities required for conducting Petroleum


Operations.


b) Labor


1) Gross salaries and wages including cost of holiday, business trip, vacation, sickness


and disability benefits applicable to such salaries and wages of the Contractor's


employees in Mongolia (except for the administrative personnel).


2) Cost of living and housing allowances and other customary allowances of the


Contractor’s foreign employees (except for the administrative personnel) assigned to


work in Mongolia.


3) Cost of expenditures or made pursuant to law or assessments imposed by


governmental authorities which are applicable to the Contractor’s employee’s salaries


and wages.


c) Employee Benefits


Costs applicable to life insurance, social security , pension and retirement for Contractor's


Mongolian and non-Mongolian employ ees working in Mongolia


A severance pay for Mongolia and non-Mongolian employees shall be in the same line


and it shall be regulated by Labor Law of Mongolia.


d) Material. Equipment and Supplies


Material, equipment and supplies purchased, rented or furnished as such by the


Contractor.


I) Purchased


Material, equipment and supplies purchased shall be at the price paid by Contractor or


after deduction of all discounts actually received according to the valuation principles


established in Paragraph 3.1 of Article 11 of this accounting procedure.


 2) Material Furnished bv Contractor or an Affiliate


Material, equipment and supplies required for operations shall be directly purchased from


Mongolian business entities and individuals, except that the Contractor may furnish such


material, equipment and supplies from its stocks or the stocks of an Affiliate, provided


that the cost of such item shall not materially exceed the cost of a similar item purchased


from third parties under similar conditions of insurance and delivery. The value of such


material, equipment and supplies shall be established according to the provisions in


Paragraph 3.2 of Article II of this accounting procedure.








3) Warranty


I he Contractor does not warrant the material, equipment or supplies furnished beyond or


back of the dealer’s or manufacturer's quality warranty and, in case of defective material,


equipment or supplies credit shall not be recorded until adjustment has been received by


the Contractor from the manufacturers or their agents.


4) Rentals


Materials, equipment and supplies rented shall be charged at actual cost.


e) Transportation


Transportation expenses for equipment, materials and supplies necessary for


the conduct of the Petroleum Operations.


f) Services


1) I'he actual cost of consultants, contract services and utilities procured from third


parties, provided, however, that Contractor shall obtain PAM‘s prior written approval to


hire such consultants, contract services and utilities and further provided, that such costs


shall be competitive with those generally charged by international or domestic suppliers


for comparable work and serv ices.


2) Cost of services, including laboratory analysis, drafting, geophysical treatment and


interpretation, geological interpretation, engineering and data processing performed by


the PAM or by the Contractor or its Affiliates in facilities inside or outside Mongolia


shall be in line with competitive rates currently prevailing in international petroleum


industry.


m


Services rendered to the Petroleum Operations by the Contractor or its Affiliates will be


charged on the basis of costs without profits. The charges will be no higher than the


normal prices charged to other Affiliates and to third parties for comparable services


under similar terms and conditions elsewhere.


If necessary, certified evidence regarding the basis of prices charged, consisting of


certification of the amount of such charges which arc direct costs of providing the


services concerned and of the amount which contribute an allocated proportion of the


overheads, may be obtained from the inspectors of the Contractor or its Affiliate, or. as


the case may be. by the PAM.


The PAM reserves the right to allow for cost recovery purposes in accordance w ith the


provision of paragraph 5 of Article 11 of this accounting procedure, to subtract charges for





37


serv ices rendered by the Contractor or its Affiliates if they are higher than the average


overall cost charged by petroleum companies to their Affiliates for similar services in the


international petroleum industry .


g) Damages and Losses


Except as made good by insurance charged under subparagraph (h) below, all costs or


expenses necessary to replace or repair damages or losses incurred by fire. Hood, storm


or other causes not controlled by the Contractor. The Contractor shall furnish the PAM


w ith a w ritten notice of damages or losses incurred as soon as practicable after the report


of the same has been received by the Contractor.


h) Insurance Costs


Subject to provisions of Article XXIV. premiums payable for any alternative


arrangements shall be admitted for Cost Recovery.


i) Camps. Warehouses and other facilities and systems


Direct costs and expenses incurred in Mongolia in respect of maintaining and operating


of field facilities such as camps, warehouses, transportation systems, communications


sy stems, water systems and road or other facilities and systems.


j) Legal Expenses


All costs and expenses of litigation or legal services otherwise necessary or expedient for


the protection of the Contract Area, Petroleum Operations and facilities, including


attorney’s fees and expenses and the pro rata portion of in-house counsel's salaries and


expenses, together with all judgments obtained against the parties or any of them on


account of the operations under the Contract and actual expenses incurred by any party


or parties hereto in securing ev idence for the purpose of defending against any action or


claim prosecuted or urged in connection w ith the operations or the subject matter of the


Contract. In the event actions or claims affecting the interests hereunder shall be handled


by the legal stall'of one or more of the parties hereto, a charge commensurate with cost


of providing and furnishing such services may be made to operations.


k) Administrative expenses


1) Administrative expense shall he processed separately utilizing the method of


distributing the cost of selling by related obligation centers in accordance with the


provision 82 of Section I of the International Standards of Accounting and Reporting.


Cost of staffing and maintaining the Contractor’s head office and other offices


established outside of Mongolia (including shareholders) shall account not more than 5%


of the annual exploration and development costs. Administrative expense shall include


the expenses related to the main administration of the Contractor in Mongolia and abroad


(including the stock holders), and also the administrative personnel who arc responsible


in supervising, serving, and advising. In details, the expenses shall include wage and


salary , vacation pay, bonus, legally imposed tax from government organizations, charges,


office, utilities, furniture, purchase of equipments, rent, gasoline, and training fees. These


aforementioned administrative expenses shall not account for more than 5 per cent of the


total annual exploration and development expenses.


2) Above mentioned administrative expenses shall not be double-counted or mixed with


other expenses specified in Paragraphs a through j of this article of Annex D.











38


2. RECEIPTS


Receipts received by the Contractor as a result of the Petroleum Operations or incidental


thereto shall he credited to the respective accounts. Such receipts shall include the following


transactions:


a) Claims Recovery


I he proceeds of any insurance or claim in connection with the Petroleum Operations or


any assets charged to the accounts.


b) Third Party Revenues


Revenues received from third parties for the use of property or assets, for the delivery of


any sen ices bv the Contractor or for anv information or data.


mm m


c) Adjustments


Anv adjustments received by the Contractor from the suppliers manufacturers or their


agents in connections with defective equipment or materials, costs of which was


previously charged to the accounts.


d) Refunds


Rentals, refunds or other credits received by the Contractor which apply to anv charge


which has been made to the accounts.


e) Sale or Export of Material. Equipment and Supplies


Except as otherwise specifically prov ided in this Contract, in case if the Contractor sells


or exports or transfers to Affiliates or other entities or persons, anv material, equipment


and supplies, the cost of which was previously charged to the accounts, the value of such


transfers shall be credited to the accounts.


3. VALUATION OF MATERIAL. EQUIP MEXTAXD SUPPLIES


Valuation of material, equipment and supplies either charged to the accounts pursuant to


sub-paragraph 1(d) of this Article II or credited to the accounts pursuant to sub-paragraph 2(e) of


this Article II shall be valued in accordance w ith the follow ing principles:


1) Except as otherwise prov ided in sub-paragraph (3Kb) below, the costs of material,


equipment and supplies purchased shall be in line with the international market price for goods


of similar quality supplied on similar terms prevailing in the international market at the time such


goods were contracted by the Contractor. In case of purchasing of material, equipment and


supplies the purchase price shall reflect. where applicable, trade and cash discounts, purchase


and procurement fees, freight, forwarding charges, insurance, taxes, customs duties, consular


fees and other items chargeable against imported material, equipment and supplies to the extent


that these items have not been charged already under other sections of this Accounting


Procedure.


2) Material, equipment and supplies purchased from or sold to Affiliates shall be charged


at the prices specified in (a) and (b) below as follows:


(a) New Material. Equipment and Supplies (Condition A) shall be in line with the


international market price for goods of similar quality supplied on similar terms


prevailing in international market at the time such goods were contracted by the


Contractor.


(b) Used Material. Equipment and Supplies (Conditions B and C)


i) Material, equipment and supplies which are in sound and serv iceable condition


and are suitable for reuse without reconditioning shall be classified as Condition





39


B and priced at seventy-five per cent (75%) of the current price of new material,


equipment and supplies defined in (a) above.


ii) Material, equipment and supplies which cannot lie classified as


Condition B but which:


• after reconditioning will be further serviceable for original function as


good as second-hand material, equipment and supplies (Condition B): or


• are usable for original function but substantially not suitable for


reconditioning, shall be classified as Condition C and priced at fifty


percent (50%) of the current price of new material, equipment and


supplies as detlned in (a) above. The cost of reconditioning shall be


charged to reconditioned material, equipment and supplies provided that


the value of Condition C material, equipment and supplies plus the cost of


reconditioning do not exceed the value of Condition B material,


equipment and supplies.


iii) Material, equipment and supplies which cannot be classified as Condition B


or C shall be priced at a value commensurate w ilh its use.


iv) When the use of material, equipment and supplies are temporary and the


service to the Petroleum Operations does not justify the reduction in price


provided for in sub-paragraph ii)b)2) hereof, such material, equipment and


supplies shall be priced on a basis that will result in a net charge to the accounts


consistent w ith the value of the serv ices rendered.


4. COST CENTERS


In order to provide for an efficient control of the recoverable costs under the Contract, all


costs must be presented for the PAM’s review on the basis of cost centers and sub-divisions of


these cost centers.


The detailed division shall be agreed upon pursuant to Paragraph 8. Article I of this


Annex D. However, as a minimum the following divisions shall be established.


a) The costs shall be allocated per area in the following manner:


i. Exploration area.


ii. Each individual production area.


iii. Costs related to activities outside the Contract Area, such as pipelines.


iv. Costs that cannot be related to a certain area.


v. Allocation of General and Administrative expenses


b) The costs shall be allocated per Petroleum Operation in the following manner:


i) Exploration Operations, subdivided further into:


1. Aerial, geological, geochemical, paleontological, topographical and other


surveys.


2. Each individual seismic survey.


3. Each individual Exploration or Appraisal Well


4. Infrastructure (roads, airstrips, etc.).


40