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’• . • ' . ' •. . . ^. s


PETROLEUM CONTRACT


;. ' FOR ■


KONGNAN BLOCK, DAGANG OILFIELD


OF





THE PEOPLE’S REPUBLIC OF CHINA



































SEPTEMBER, 1997


BEIJiNG, CHINA


 PETROLEUM CONTRACT


BETWEEN


CHINA NATIONAL PETROLEUM CORPORATION


AND


PAN-CHINA RESOURCES LTD.


FOR


PETROLEUM DEVELOPMENT AND PRODUCTION


IN KONGNAN BLOCK, DAGANG OILFIELD


THE PEOPLE’S REPUBLIC OF CHINA























SEPTEMBER, 1997





BEIJING, CHINA


 Contents








1 Definitions


2 Objective of the Contract


3 Contract Area


4 Contract Term


5 Relinquishment of Contract Area


6 Minimum Pilot Test Work Commitment and Expected Minimum Pilot Test Expenditures


7 Management Organization and Its Functions


8 Operator


9 Assistance Provided by CNPC





10 Work Program and Budget


11 Preparation of the Overall Development Program


12 Financing and Cost Recovery


13 Crude Oil Production and Allocation


14 Quality, Quantity, Price and Destination of Crude Oil


15 Preference to the Employment of Chinese Personnel, Goods and Services


16 Training of Chinese Personnel and Transfer of Technology


17 Ownership of Assets and Data


18 Associated Natural Gas


19 Accounting, Auditing and Personnel Costs


20 Taxation


21 Insurance


22 Confidentiality


23 Assignment





2


Article 24 Environmental Protection and Safety


Article 25 Force Majeure


Article 26 Consultation and Arbitration


Article 27 Effectiveness and Termination of the Contract


Article 28 The Applicable Law





Article 29 Language of the Contract and Working Language


Article 30 Miscellaneous





Annexes





Annex I


Geographical Location and Coordinates of Turning Points of the Boundary Lines


of Kongnan Block, Dagang Oil Field


Annex II Accounting Procedure


Annex HI Personnel Costs


Annex IV Training of Chinese Personnel and Transfer of Technology





Annex V Data Control


 Preamble








This Contract is entered into in Beijing on this 8th day of September, 1997, by and between


China National Petroleum Corporation (hereinafter abbreviated as “CNPC”), a company organized


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


Beijing, the People’s Republic of China as one part; and the following company:


Pan-China Resources Ltd., a company organized and existing under the laws of the British


Virgin Islands, having its headquarters domiciled in Calgary, Canada; (hereinafter referred to as the


“Foreign Contractor”) as the other part.





WITNESSETH








WHEREAS, all Petroleum resources under the territory, internal waters, territorial sea, and


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


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


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


land Petroleum resources in cooperation with foreign enterprises, and for negotiating, entering into


and implementing Contracts for the exploitation of land Petroleum resources in cooperation with


foreign enterprises and to have the exclusive right to explore for, develop and produce the Petroleum


in cooperation with foreign enterprises in areas approved by the State Council with the “Regulations


of the People's Republic of China Concerning the Exploitation of Onshore Petroleum Resources in


Cooperation with Foreign Enterprises” (hereafter referred to as the “Petroleum Regulations”),


promulgated by the State Council of the People's Republic of China on Oct. 7,1993;


WHEREAS, CNPC has performed exploration work and has had a potential commercial


discovery in the Contract Areas; and


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


appropriate and advanced technology and managerial experience to cooperate with CNPC for the


exploitation of Petroleum resources within the Contract Area and agrees to be subject to the laws,


decrees, and other rules and regulations of the People’s Republic of China in the implementation of


the Contract.





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


 Article 1





Definitions





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


herein, the following meanings:


1.1 “Petroleum” means Crude Oil and Natural Gas deposited in the subsurface and being


extracted or already extracted, including any valuable non-hydrocarbon substances produced in


association with Crude Oil and/or Natural Gas separated or extracted therefrom.


1.2 “Crude Oil” means solid and liquid hydrocarbons in their natural state, including any


liquid hydrocarbons extracted from Natural Gas but excluding liquefied methane (CH4).


1.3 “Natural Gas” means Non-associated Natural Gas and Associated Natural Gas in their


natural state.


1.4 “Associated Natural Gas” means all gaseous hydrocarbons produced in association


with Crude Oil from oil reservoirs, including residue gas remaining after the extraction of liquid


hydrocarbons therefrom.


1.5 “Oil Field” means an accumulation of Petroleum within the Contract Area composed


of one or several overlapping oil-bearing zones, within one trap or within associated traps of the same


independent geological structure, which may or may not be complicated by faulting, and which has


been determined to be of commercial value.


1.6 “Petroleum Operations” means the Pilot Test Operations, the Development


Operations, the Production Operations, and other activities related to these Operations carried out


under the Contract.


1.7 “Pilot Test Operations” means study and operations conducted for the purpose of


determining the economical efficiency for the reservoir(s) or payzone(s) within the Contract Area and


production activities conducted within the Pilot Test Area, including drilling, side tracking,


recompletion, stimulation and injectivity test, well group pilot displacement test and evaluations on


development geology of the reservoirs) or payzone(s) and reservoir engineering within the Contract


Area.





1.8 “Development Operations” means operations carried out for the realization of


Petroleum production from the date of approval of the Overall Development Program for the Oil Field


by the Department or Unit, including design, construction, installation, drilling, and the related


research work as well as production activities carried out before the Date of Commencement of


Commercial Production.


1.9 “Production Operations” means operations and all activities related thereto carried out


for Petroleum production of the Oil Field in the Contract Area from the Date of Commencement of


Commercial Production, such as extraction, injection, stimulation, treatment, storage, transportation,


lifting, etc.


1.10 “Contract Area” means a surface area demarcated with geographic coordinates for the


cooperative exploitation of Petroleum resources, and in the Contract, means the surface area stipulated


in Article 3.1 hereof.


1.11 “Pilot Test Area” means the surface area within the Contract Area where Pilot Test


Operations are conducted in accordance with Article 3.2 hereof.


1.12 “Development Area” means a portion of the Contract Area covering the Oil Field


which has been designated for development, and delineated as such in the Overall Development


Program approved by the Department or Unit. The Development Area shall automatically cease to be


in force as of the date of approval of the Production Area by CNPC.


1.13 “Production Area” means a surface area within the Development Area for the purpose


of the performance of the Production Operations within the said Development Area after completion


of the Development Operations. The Production Area proposed by the Operator, demarcated by JMC


shall be submitted to CNPC for approval before the Date of Commencement of Commercial


Production.


1.14 “Date of Commencement of Commercial Production” means the date of


commencement of the production period for Crude Oil and/or Natural Gas from the Oil Field


announced by JMC in accordance with the provisions of Article 7.2.6 hereof after the completion of


the Development Operations as provided for in the approved Overall Development Program for the


said Oil Field, and after approval by CNPC.


1.15 “Calendar Year” means a period of twelve (12) consecutive Gregorian months under


the Gregorian Calendar, beginning on the first day of January and ending on the thirty-first day of


December in the same year.


1.16 “Contract Year” means a period of twelve (12) consecutive Gregorian months under


the Gregorian Calendar, within the term of the Contract, beginning on the Date of Commencement of


the Implementation of the Contract or any anniversary thereof.


1.17 “Production Year” means in respect of the Oil Field, a period of twelve (12)


consecutive Gregorian months under the Gregorian Calendar, beginning on the Date of


Commencement of Commercial Production of such Oil Field or any anniversary thereof.





1.18 “Calendar Quarter” means a period of three (3) consecutive Gregorian months under


the Gregorian Calendar, beginning on the first day of January, the first day of April, the first day of


July, or the first day of October.


1.19 “Development Well” means a well drilled after the date of approval of the Overall


Development Program for the Oil Field for the purpose of producing Petroleum, increasing


production or accelerating extraction of Petroleum, including production wells, injection wells and


dry holes.





1.20 “Work Program” means all types of plans formulated for the performance of the


Petroleum Operations, including plans for development and production.





1.21 “Overall Development Program” means a plan prepared by the Contractor for the


development of the Oil Field which has been reviewed and adopted by JMC, confirmed by CNPC and


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


recoverable reserves, the Development Well pattern, master design, production profile, economic


analysis and time schedule of the Development Operations.


1.22 “LIBOR” means the seven-day term London Inter-Bank Offered Rate for U.S.


Dollars for similar amounts to the sums in question, quoted by Midland Bank in London at 11:00 a.m.


on the first business day of the relevant period.


1.23 “Pilot Test Costs” means the expenses incurred for the completion of the Pilot Test


Operations and the activities related to the Pilot Test Operations, including the evaluations on the


detailed development geology of the reservoirs) or payzone(s) and the reservoir engineering within


the Contract Area, and the expenses incurred for preparation and application for approval of the


Overall Development Program.


1.24 “Development Costs” means the expenses incurred for the design, construction and


installation of the equipment and facilities within the Contract Area and drilling of the development


wells, as well as the Operating Costs incurred before the Date of Commencement of Commercial


Production after the approval of the Overall Development Program by the Department or Unit.


1.25 “Operating Costs” means the expenses incurred for the petroleum production from


the Date of Commencement of the Commercial Production, such as the expenses incurred for


extraction, injection, stimulation, disposal, storage, transportation and lifting, etc.


1.26 “Oil Field Straddling a Boundary” means the Oil Field extending from the Contract


Area to one or more other contract areas and/or areas in respect of which no Petroleum contracts have


been signed.


1.27 “Annual Gross Production of Natural Gas” means the total amount of Natural Gas


produced from the Oil Field within the Contract Area considered separately in each Calendar Year,


less the amount of Natural Gas used for Petroleum Operations and the amount of losses, which is


saved and measured by a measuring device at the Delivery Point as specified in Article 14.2.1 hereof.





1.28 “Annual Gross Production of Crude Oil” means the total amount of Crude Oil


produced from the Oil Field within the Contract Area considered separately in each Calendar Year,


less the amount of Crude Oil used for Petroleum Operations and the amount of losses, which is saved


and measured by a measuring device at the Delivery Point as specified in Article 14.2.1 hereof.





1.29 “Contractor” means the Foreign Contractor specified in the Preamble hereto,


including assignee(s) in accordance with Article 23 hereof.


1.30 “Parties” means CNPC and the Contractor.


1.31 “Party” means either of the Parties.


1.32 “Operator” means the entity responsible for the performance of the Petroleum


Operations under the Contract.





1.33 “Subcontractor” means an entity, which provides the Operator with goods or services


the purpose of the Contract.





1 *34 “Third Party” means any individual or entity except CNPC, the Contractor and any of


fteir Affiliates.





7


1.35 “Chinese Personnel” means any citizen of the People's Republic of China, including


CNPC personnel and Chinese citizens employed by the Contractor and/or the Subcontractors),


involved in Petroleum Operations under the Contract.


1.36 “Expatriate Employee” means any person employed by the Contractor,


Subcontractor(s), or CNPC who is not a citizen of the People's Republic of China. Overseas Chinese


who reside abroad and have the nationality of the People's Republic of China and other Chinese


abroad, when they are employed by the Contractor, Subcontractor(s) or CNPC, shall also be deemed


to be Expatriate Employees within the scope of the Contract.


1.37 “Affiliate” means in respect of the Contractor:


(a) any entity in which any company comprising the Contractor directly or indirectly


holds fifty percent (50%) or more of the voting rights carried by its share capital; or


(b) any entity which directly or indirectly holds fifty percent (50%) or more of the


aforesaid voting rights of any company comprising the Contractor; or


(c) any other entity whose aforesaid voting rights are held by an entity mentioned in (b)


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


“Affiliate” means, in respect of CNPC, any subsidiary, branch, or regional corporation of


CNPC and any entity in which CNPC directly or indirectly holds fifty percent (50%) or more of the


voting rights carried by its share capital.


1.38 “Delivery Point” means a point or points agreed upon by the Parties for the delivery


of Petroleum located within or outside the Contract Area and specified in the Overall Development


Program.


1.39 “Department or Unit” means the department or unit, which is authorized by the State


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


industry of the People's Republic of China.


1.40 “Date of Commencement of the Implementation of the Contract” means the first day


of the month following the month in which the Contractor has received the notification from CNPC of


the approval of the Contract by the Ministry of Foreign Trade and Economic Cooperation of the


People's Republic of China.


 Article 2





Objective of the Contract





2.1 The objective of the Contract is to develop and produce Petroleum with proved


commercial value in the Contract Area.


2.2 The Contractor shall apply its appropriate and advanced technology and assign its


competent experts to perform the Petroleum Operations.


2.3 During the performance of the Petroleum Operations, the Contractor shall transfer its


technology to the Chinese Personnel and train them in accordance with Article 16 hereof and Annex


IV- Training of Chinese Personnel and Transfer of Technology.


2.4 The Contractor shall bear all the costs required for the Pilot Test Operations. If the


Contractor opts to enter into the development period, the Contractor shall bear all the costs required


for the Development Operations.


2.5 The Petroleum produced from the Oil Field within the Contract Area shall, from the


Date of Commencement of the Commercial Production, be allocated in accordance with Articles 13,


and/or 18 hereof.


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


Contractor other than those rights expressly granted hereunder.


 Article 3





Contract Area








3.1 The Contract Area as of the date of signature of the Contract, includes Zi Lai Tun


Block, Xi Xie Po Block, Shen Jia Pu Block of Zao Yuan Oil Field, Xi Bei Block of Xiao Ji Oil Field,


Duan Nan Block of Duan Liu Bo Oil Field, and Ye San Bo Oil Field, covering a total area of Ninety


Point Five (90.5) square kilometers, as marked out by the geographic location and the coordinates of


the connecting points of the boundary lines shown on Annex I attached hereto.


3.2 Within the pilot test period, the Pilot Test Area and the specific location map of the


Pilot Test Area will be shown on the pilot test program.


Any change in the Pilot Test Area shall be proposed by the Contractor, adopted by JMC


through discussions and determined upon CNPC's approval. The area other than die Pilot Test Area


shall continue to be managed by CNPC itself and shall be retained for the Contractor until the


expiration of the pilot test period.


Within the development period and production period as specified in Article 4.4 and Article


4.5 hereof, the Development and the Production Area shall be reduced in accordance with Article 5


under this Contract.


3.3 In respect of cooperative exploration, development and production for unknown


and/or newly-discovered reservoir(s) or payzone(s) below the base of the Kongdian group within the


Contract Area, after the approval of the Department or Unit, the Parties sliall hold friendly


negotiations in accordance with the principles of the Model Contract for the Risk Exploration Blocks


for the Second Round of Invitation for Bids for the Exploitation of Land Petroleum Resources of the


People’s Republic of China in Cooperation with Foreign Enterprises to sign another Petroleum


contract after reaching agreement.


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


favor of the Contractor to the surface area, subsurface area, lake bed, stream bed and subsoil or any


natural resources other than Petroleum existing therein, and any things under the surface within the


Contract Area.


 Article 4





Contract Term








4.1 The term of the Contract shall include a pilot test period, a development period and a


production period.





4.2 The pilot test period shall be three (3) consecutive Contract Years, beginning on the


Date of Commencement of Implementation of the Contract.


4.3 Where time is insufficient to complete the evaluation work and/or the preparation and


application for approval of the Overall Development Program before the expiration of the pilot test


period, the pilot test period as described in Article 4.2 herein shall be extended. The period of


extension shall be subject to the approval of CNPC and shall be a reasonable period of time required


to complete the above-mentioned evaluation work and/or the preparation for the Overall Development


Program until the Department or Unit approves or finally rejects the Overall Development Program.


The period of extension shall not exceed six (6) months unless otherwise agreed by the Parties.


4.4 The development period of the Oil Field shall begin on the date of approval by the


Department or Unit of the Overall Development Program of the said Oil Field, and end on the date of


the entire completion of the Development Operations set forth in the Overall Development Program.


The development period shall not include the time for carrying out additional development


projects in the production period in accordance with Article 11.5 hereof.


4.5 The production period of the Oil Field shall be twenty (20) consecutive production


years beginning on the Date of Commencement of Commercial Production of the said Oil Field,


unless otherwise provided in Article 4.6.1 herein or Article 25 hereof. Under such circumstances as


where the construction of the Oil Field is to be conducted on a large scale, and the time span required


therefore is long, or where separate production of each of the multiple oil producing zones of the Oil


Field is required, or under other special circumstances, the production period thereof shall, when it is


necessary, be properly extended with the approval of the Department or Unit.


4.6 Suspension or abandonment of production of the Oil Field


4.6.1 Suspension of production from Oil Field within the production period





In the event that the Parties agree to suspend temporarily production from the Oil Field which


has entered into commercial production, the Production Area covered by that Oil Field may be


retained within the Contract Area. In no event shall the period of such retention exceed two (2) years


£and be extended beyond the date of the expiration of the production period of that Oil Field except as


| Otherwise provided in Article 25.4 hereof. The duration of the relevant period of production


" suspension and the arrangement for the maintenance operations during the aforesaid period of


Suspension shall be proposed by the Operator, and shall be decided by JMC through discussion. With


respect to the aforesaid Oil Field which has been suspended and retained within the Contract Area, in


e event that production is restored during the period of such retention, the production period of that


Pfl Field shall be extended correspondingly. In the event that the Parties fail to reach an agreement on


^restoration of production by the expiration of the production suspension period decided by JMC


ugh discussion, the Party who wishes to restore production shall have the right to restore





11


production solely. The other Party may later elect to participate in production but shall have no rights


or obligations in respect of such Oil Field for the solely restored production period.


4.6.2 Abandonment of production from the Oil Field within the production period


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


production from the Oil Field within the Contract Area, provided, however, that prior written notice


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


within ninety (90) days from the date on which the said notice is received. If the other Party also


agrees to abandon production from the said Oil Field, the abandonment costs shall be paid by the


Parties in accordance with their proportions stipulated in Article 13.2.2.2 hereof in such Oil Field.


The Parties shall abandon such Oil Field in accordance with procedure agreed on by the Parties.


From the date on which the abandonment is completed, the production period of such Oil Field shall


be terminated and such Oil Field shall be excluded from the Contract Area.


4.6.2.2 If the Contractor notifies CNPC in writing of its decision to abandon production from


an Oil Field, while CNPC decides not to abandon production from such Oil Field, then from the date


on which the Contractor receives CNPC’s written response of its aforesaid decision, namely


Abandonment Date, all of the Contractor’s rights and obligations under the Contract in respect of the


said Oil Field, including, but not limited to, the responsibilities for payment of abandonment cost in


respect of such Oil Field, shall be terminated automatically, provided that the Contractor shall not


transfer to CNPC any of the Contractor's debts, liabilities and obligations in respect of the said Oil


Field. In addition, the Contractor shall undertake its debts, liabilities and obligations under the


Contract prior to the Abandonment Date. From the Abandonment Date, the production period of the


said Oil Field shall be terminated and the said Oil Field shall be excluded from the Contract Area.


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


from the Date of Commencement of the Implementation of the Contract, unless otherwise stipulated


hereunder.

































































12


 Article 5





Relinquishment of the Contract Area





5.1 The Contract Area excluding the Development Area shall be relinquished on the date


of approval of the Overall Development Program.


5.2 The Contract Area excluding the Production Area shall be relinquished on the Date of


Commencement of Commercial Production.


5.3 Within ninety (90) days prior to date of each relinquishment of the Contract Area, the


Contractor shall submit to CNPC a report on the areas to be relinquished, including a map showing


the areas to be relinquished with the geographic location and the coordinates of the connecting points


of the boundary lines. The final map shall be submitted to CNPC on or before the date of


relinquishment.


 Article 6





Minimum Pilot Test Work Commitment


and Expected Minimum Pilot Test Expenditures





6.1 The Contractor shall prepare the pilot test program within forty-five (45) days after


the Date of Commencement of the Implementation of the Contract, shall begin to perform the Pilot


Test Operations within three (3) months after the Date of Commencement of the Implementation of


the Contract and shall begin the site operation within six (6) months after the Date of Commencement


of the Implementation of the Contract unless otherwise agreed by the Parties.


6.2 The Contractor shall fulfill the minimum pilot test work commitment and expected


minimum pilot test expenditures in accordance with the following provisions:


6.2.1 The minimum pilot test work commitment includes the items as follows:


(1) In the Duan Nan Block, drill, complete and equip three (3) wells for production; re¬


enter and recomplete well Guan 167 as a production well; drill and complete one well for water


injection purposes; design and carry out two well fracture stimulation programs and construct surface


production testing and treating facilities.


(2) Inject water and produce the four (4) production wells to establish as a minimum,


benchmark rates of production and decline, injectivity rates and pressures, and treating and gathering


criteria.





(3) Complete an evaluation of the detailed geology and reservoir engineering for the


reservoirs or payzones to determine the optimal production method, including oil analysis by a


qualified agency to determine true wax content expressed as a weight percent.





(4) In each of the Shen Jia Pu, Zi Lai Tun, Xiao Ji and Ye San Bo Blocks, commit to an


expenditure in aggregate of Seven Hundred Thousand U.S. Dollars (US$700,000) for engineering,


pressure or pump tests, seismic shooting or reprocessing or other technical evaluations as may be


required to further evaluate each block. Minimum individual block expenditure will not be less than


One Hundred and Twenty-five Thousand U.S. Dollars (US$125,000).





(5) Evaluate the latest methods of non-damaging drilling and within fourteen (14) months


"of commencing Pilot Test Operations, program and commence to drill, complete and test one (1) well


in Xi Xie Po Block, with a minimum expenditure of Six Hundred Thousand U.S. Dollars


(US$600,000).





(6) At the expiration of the pilot test period, the pilot test appraisal report shall be


ibmitted to JMC.





6.2.2 Prior to the expiration of the pilot test period, if the Contractor opts to enter into the


.elopment period, the Contractor shall formulate the Overall Development Program and complete


^application for its approval. This program will also outline the Contractor’s onward commitments


flic other blocks.














14


6.2.3 The expected minimum pilot test period expenditures shall be Seven Million Five


Hundred Thousand U.S. Dollars (US$7,500,000).


6.2.4 During the pilot test period, the Contractor shall complete the stipulations of Articles





6.2.1 and 6.2.3 and Article 6.2.1 dominates.





6.3 At the expiration of the pilot test period, the Contractor shall have the following


options:


(1) to enter into the development period; or





(2) to terminate the Contract.





. 6.4 If, at the expiration of the pilot test period, the actual pilot test work commitment and


the relevant pilot test expenditures the Contractor has fulfilled exceeds the minimum pilot test work


and the pilot test expenditures stipulated in Articles 6.2.1 and 6.2.3 herein, the Contractor shall bear


the excess part of the pilot test expenditures.





6.5 At the expiration of the pilot test period, if the pilot test work commitment actually


fulfilled by the Contractor is less than the minimum pilot test work commitment set forth, regardless


of whether the expected minimum pilot test expenditures are fulfilled or not fulfilled, whether the


Contractor opts to enter into die development period under Article 6.3(1) herein or to terminate the


Contract under Article 6.3(2) herein, the Contractor shall, within thirty (30) days from the date of the


expiration of the pilot test period, pay CNPC only any unfulfilled balance of the minimum pilot test


work commitment in U.S. Dollars after it has been converted into a cash equivalent using the method


provided in Annex II-Accounting Procedure hereto. However, if the minimum pilot test work


commitment for the pilot test period is fulfilled while its expected corresponding minimum pilot test


expenditures are not fulfilled, the unfulfilled part shall be deemed as a saving and shall not be paid to


CNPC.







































































15


 Article 7





Management Organization and Its Functions





7.1 For the purpose of the proper performance of the Petroleum Operations, the Parties


shall establish a Joint Management Committee (JMC) within forty-five (45) days from the Date of


Commencement of the Implementation of the Contract.


7.1.1 CNPC and the Contractor shall each appoint an equal number of representatives,


three (3). to form JMC, and each Party to the Contract shall designate one of its representatives as its


chief representative. Each company comprising the Contractor may appoint one (1) representative.


Either Party may replace any of its representatives, or designate another representative as its chief


representative, by a written notice to the other Party, pursuant to Article 8.2 hereof. All the aforesaid


representatives shall have the right to present their views on the proposals at the meetings held by


JMC. When a decision is to be made on any proposal, the chief representative from each Party to the


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


The chairman of JMC shall be the chief representative designated by CNPC, and the vice


chairman shall be the chief representative designated by the Contractor. The chairman of JMC shall


preside over meetings of JMC. In his absence, one representative present at the meeting from CNPC


shall be designated to act as the chairman of the meeting. In the absence of the vice chairman of JMC,


one representative present at the meeting from the Contractor shall be designated to act as the vice


chairman of the meeting. The Parties may, according to need, designate a reasonable number of


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


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


meetings, if necessary, may be held at any time at the request of any Party to the Contract, upon


giving reasonable notice to the other Party of the date, time and location of the meeting and the items


to be discussed. JMC representatives may attend meetings of the JMC by telephone conference call.


7.2 The Parties shall empower JMC to:


7.2.1 review and adopt the Work Programs and budgets proposed by the Operator and


subsequent amendments thereto;





7.2.2 review and adopt the pilot test program and submit it to CNPC for confirmation;





7.2.3 review and adopt the appraisal reports of the development geology and reservoir


^engineering for the reservoirs or payzones within the Contract Area provided by the Operator;





7.2.4 review and adopt the Overall Development Program and budget for the Oil Field and


the amendments to the budget;


7.2.5 approve or confirm the following items of procurement and expenditures:





(a) approve procurement of any item within the budget with a unit price exceeding Five


dred Thousand U.S. Dollars (U.S.$500,000) and any single purchase order of total monetary


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








16


 (b) approve a lease of equipment, or an engineering subcontract or a service contract


within the budget of a monetary value exceeding One Million U.S. Dollars (U.S.$ 1,000,000); and


(c) confirm excess expenditures pursuant to Article 10.2.1 hereof and the expenditures


pursuant to Article 10.2.2 hereof.





7.2.6 propose and announce the Date of Commencement of Commercial Production of the


Oil Field within the Contract Area;


7.2.7 determine the type and scope of information and data provided to any Third Party and


Affiliate in relation to the Petroleum Operations in accordance with Article 22.5 hereof;


7.2.8 demarcate boundaries of the Development Area and the Production Area of the Oil


Field;


7.2.9 review and approve the insurance program proposed by the Operator and emergency





procedures on safety and environmental protection;


7.2.10 review and approve personnel training programs;





7.2.11 review and approve minutes and/or resolutions of JMC meetings, and discuss, review,


M- decide and approve other matters that have been proposed by either Party to the Contract or submitted


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


7.2.12 review and examine matters required to be submitted to relevant authorities of the


Chinese Government and/or CNPC for approval.


7.3 Decisions of JMC shall be made unanimously through consultation. All decisions


made unanimously shall be deemed as formal decisions and shall be equally binding upon the Parties.


When matters upon which agreement cannot be reached arise, the Parties may convene another


meeting in an attempt to find a new solution thereto based on the principle of mutual benefit. If it is


considered by the chairman and/or the vice chairman or their nominees that a matter requires urgent


jjandiing or may be decided without convening a meeting, JMC may make decisions through telexes,


les or the circulation of documents.


7.4 JMC shall establish the following subordinate bodies:





7.4.1 Secretariat


The secretariat shall be a permanent organization consisting of two (2) secretaries. One


taiy shall be appointed by each of the Parties. The secretaries shall not be members of JMC, but


attend meetings of JMC as observers. The duties of the secretariat are as follows:





f (a) to keep minutes of meetings;


to prepare summaries of the resolutions for JMC meetings;





to draft and transmit notices of meetings; and





to receive and transmit proposal, reports or plans, etc. submitted by the Operator


‘sed by any Party to the Contract, that require discussion, review or approval by JMC.








17


yd





7.4.2 Expert Groups


Advisory expert groups shall be established in accordance with the requirements of the


Petroleum Operations in various periods. Each expert group shall consist of an equal number of


CNPC Personnel and the Contractor’s employee, and with the agreement of JMC, any other


personnel. JMC shall discuss and decide upon their establishment or dissolution, size, tasks, location


of their work and the appointment of their leaders in accordance with the requirements of their work.


The expert groups shall have the following functions:


(a) to discuss and study matters assigned to them by JMC and submitted by the Operator


to JMC for its review and approval and any other matter assigned to them by JMC and to make


constructive suggestions to JMC;


(b) to have access to and observe and investigate the Petroleum Operations conducted by


the Operator at its office and operating sites as work requires and to submit relevant reports to JMC;


and,





(c) to attend meetings of JMC as observers at the request of JMC.


7.5 When one of the companies comprising the Contractor acts as the Operator, CNPC


shall have the right to assign five (5) professional representatives to the Operator's administrative and


technical departments which are related to the Petroleum Operations, who may work at length


together with the Operator's staff. The Operator's staff shall regularly discuss their work with the


professional representatives of CNPC.


The professional representatives shall have access to the centers of research, design, and data


processing related only to the execution of the Contract and to the operating sites to observe all the


activities and study all the information with respect to the Petroleum Operations. Whether to provide


such access to the aforesaid centers outside the People's Republic of China shall be decided by JMC


through discussion. If the decision is made, such access shall be arranged by the Operator and the


Operator shall use all reasonable endeavors to assist the professional representatives to have access to


Third Parties' sites. The work of professional representatives of CNPC shall be arranged by the


manager(s) of the departments of the Operator in which professional representatives work.


Professional representatives of CNPC, except for the professional representatives in charge of


procurement who shall undertake their functions in accordance with Article 7.6 herein, shall not


interfere in the decision making on relevant matters by departmental managers) of the Operator.


However, such professional representatives shall have the right to make proposals and comments to


departmental managers) of the Operator or to report directly to CNPC's representatives in JMC.


When CNPC acts as the Operator, the Contractor may also assign professional representatives


including professional representatives in charge of procurement.


7.5.1 On the principle of mutual cooperation and coordination, the Operator shall provide


the professional representatives with necessary facilities and assistance to perform office work and to


observe the operating sites, etc.


7.5.2 The number of professional representatives shall be decided by JMC through


consultations.








18


7.6 When one of the companies comprising the Contractor acts as the Operator, in respect


of the items listed in the procurement plan, the procedures and provisions hereunder shall be


followed:


7.6.1 The procurement department of the Operator shall inform the professional


representatives appointed by CNPC in charge of procurement of all the items of procurement and


specifications relating thereto.


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


through consultation with the professional representatives of CNPC in charge of procurement when


preparing the procurement plan in accordance with the Work Program and budget. The professional


representatives of CNPC in charge of procurement shall work out an inventory listing the equipment


and materials which can be made and provided in China and a list of manufacturers, engineering and


construction companies and enterprises in China which can provide services and undertake


subcontracting work.


7.6.3 Unless otherwise agreed upon by the Parties, the Operator shall, in general, make


procurement by means of calling for bids and shall notify at the same time manufacturers and


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


within the territory of China.


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


and enterprises in China applying for bidding which are included in a list delivered in advance to the


Operator by the professional representatives of CNPC in charge of procurement shall be invited. The


professional representatives of CNPC in charge of procurement shall have the right to take part in the


work of calling for bids, including examination of the list of bidders to be invited, preparing and


issuing bidding documents, opening bids, evaluation of bids, and shall have the right to consult with


the Operator on the determination of award of contracts and to participate in negotiations for


subcontracts and services contracts.


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





Operator and the professional representatives of CNPC in charge of procurement sliall, in accordance


with the provisions specified in Article 7.6.2 herein, define those items which are to be procured in


the People's Republic of China and those items which are to be procured abroad.





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


subordinate bodies of JMC, established in accordance with Article 7.4 herein, and those with respect


to the professional representatives of JMC referred to in Article 7.5 herein, and those with respect to


the representatives of JMC referred to in Article 7.1.1 herein shall be paid by the Operator and


charged to the Pilot Test Costs, the Development Costs and Operating Costs in accordance with


Annex E-Accounting Procedure hereto.


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





bodies of JMC, the professional representatives of CNPC and the CNPC representatives of JMC shall


be paid by the Operator in accordance with Annex IE Personnel Costs hereto.





The Operator shall provide office facilities and administrative expenses for CNPC Personnel


referred to in Article 1.2 of Annex IE - Personnel Costs hereto.











19





n V


7.8 The specific responsibilities and working procedures within JMC shall be discussed


and determined by JMC in accordance with the relevant provisions herein.


 Article 8





Operator








8.1 The Parties agree that Pan-China Resources Ltd. shall act as the Operator for the


Petroleum Operations within die Contract Area, unless otherwise stipulated in Article 8.9 herein and


Article 30.5 hereof.


The Operator shall start to deal with the relevant matters concerning the site operation within


thirty (30) days before the commencement of the pilot test site operations and the relevant matters


concerning the Development Operations within forty-five (45) days before the beginning of the


Development Operations; and shall reach agreements with CNPC's relevant departments respectively


and jointly make corresponding arrangements.


8.2 The names, positions and resumes of the staff and organization chart of the Operator


shall be submitted in advance to CNPC and the appointment of the Operator's senior staff must be


subject to the consent of the Parties.


8.3 The Operator shall have the following obligations:


8.3.1 To apply the appropriate and advanced technology and business managerial


experience to perform the Petroleum Operations reasonably, economically and efficiently in


accordance with sound international practice.


8.3.2 To prepare Work Programs and budgets related to the Petroleum Operations and to


carry out the approved Work Programs and budgets.


8.3.3 To be responsible for procurement of installations, equipment, and supplies and


entering into subcontracts and service contracts related to the Petroleum Operations, in accordance


with the approved Work Programs and budgets and the applicable provisions of Articles 7.2.5,7.6 and


10.2 hereof.


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


program and budget before the commencement of the Pilot Test Operations, the Development


Operations and Production Operations respectively, and, in accordance with the said program and


budget, to be responsible for preparing an annual personnel training program and budget and carrying


out die annual program and budget after approval by JMC.


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


contracts in accordance with Article 21 hereof.


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


based on the approved budgets and in accordance with Article 12 hereof and Anaex II-Accounting


Procedure hereto.


8.3.7 To maintain complete and accurate accounting records of all the costs and


expenditures of the Petroleum Operations in accordance with the provisions of Annex II -Accounting


Procedure hereto and to keep the accounting books secure and in good order.








21


8.3.8 To make necessary preparation for regular meetings of JMC and to submit in advance


to JMC necessary information related to the matters to be reviewed and approved by JMC.


8.3.9 To inform directly or indirectly all the Subcontractors which render services for the


Petroleum Operations in China and all the Expatriate Employees of the Operator and of


Subcontractors who are engaged in the Petroleum Operations in China that they shall be subject to the


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


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





8.4 In the course of the performance of the Petroleum Operations, any loss arising out of


the gross negligence or willful misconduct of the Operator or the employees of the Operator shall be


borne solely by the Operator. The Operator shall make its best efforts in accordance with international


petroleum industry practice to include provisions similar to this Article 8.4 herein in related


subcontracts and service contracts.


8.5 In the course of the performance of the Petroleum Operations, the Operator shall


handle the information, samples or reports in accordance with the following provisions:


8.5.1 The Operator shall provide CNPC with various information, samples and data, which





are obtained in the course of the Petroleum Operations in accordance with Articles 19 and 25 of the


Petroleum Regulations and Annex V - Data Control hereto. The ownership of all the information,


samples and data shall vest in CNPC; and the Operator shall have the right to use and handle such


information, samples and data in accordance with Annex V - Data Control hereto. The Contractor


shall have the right to obtain the copies of the aforesaid information, samples and data. The


information and data shall be reported to CNPC at the same time that the Contractor reports them to


its parent corporation. Upon receipt by the Contractor of any report from its parent corporation


concerning such information and data, a copy of such report shall be furnished to CNPC as soon as


practicable.


8.5.2 The Operator shall furnish respectively CNPC and the Contractor in a timely manner


with reports on safety, environmental protection and accidents related to the Petroleum Operations


and with financial reports prepared in accordance with the provisions of Annex II - Accounting


Procedure hereto.


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


the Contract with the following:


8.5.3.1 procurement plans for purchasing equipment and materials, inquiries, offers, orders


and service contracts, etc.;


8.5.3.2 technical manuals, technical specifications, design criteria, design documents





(including design drawings), construction records and information, consumption statistics, equipment


inventory, spare parts inventory, etc.





8.5.3.3 technical investigation and cost analysis reports; and


8.5.3.4 other information relating to the Petroleum Operations already acquired by the


Operator in the performance of the Contract.











22 1


8.6 In the course of performing the Petroleum Operations, the Operator shall abide by the


laws, decrees, standards and other rules and regulations with respect to environmental protection and


safety of the People's Republic of China and shall endeavor in accordance with the international


petroleum industry practice to:


8.6.1 minimize the damage and destruction caused by the Petroleum Operations to


environments, community and ecological environment, and prevent land, forests, vegetation, crops,


buildings and other installations from being damaged and destroyed;


8.6.2 control blowouts promptly and prevent or avoid waste or loss of Petroleum


discovered in or produced from the Contract Area;


8.6.3 prevent Petroleum from flowing into low pressure formations or damaging adjacent


petroleum-bearing formations, and prevent water from flowing into petroleum-bearing formations


through dry holes or other wells, except for the purpose of secondary recovery; and


8.6.4 minimize the danger to personnel safety and health.


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


Operator may lease and/or use land with compensation therefore and to obtain rights of way subject to


Chinese laws and regulations. Any costs incurred by the Operator for this purpose shall be


respectively charged to Development Costs and Operating Costs having regard to the date on which


the same are actually incurred.


8.8 Project Management Team


For the development of the Oil Field within the Contract Area, a project management team


(hereafter referred to as “PMT”) may be established after mutual discussion for the development of


such Oil Field in the organization of the Operator within thirty (30) days from the date of approval of


the Overall Development Program for the said Field by the Department or Unit. PMT shall exist for


the period of the development of the said Oil Field.


PMT shall comprise those personnel designated by the Parties and the number of CNPC's


personnel shall be no less than one third (1/3) of the total number of personnel within PMT. The


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


acting as the deputy manager of PMT.


PMT shall be located at the Operator's office within the Chinese territory. The working


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


The specific organization, staffing and working system of PMT and responsibilities and


competence of various positions including those of CNPC's personnel assigned to PMT shall be


determined by the Parties through consultation prior to the approval of the Overall Development


Program for the said Oil Field.


All costs for PMT shall be borne by the Operator, and shall be charged to the Development


Costs.





8.9 Transfer and take over of the Production Operations











\


23


Before the full recovery of the Development Costs actually incurred in accordance with the


Overall Development Program of the Oil Field within the Contract Area, CNPC may, after agreement


reached through consultations of JMC, take over the Production Operations of that Oil Field, if


conditions permit. After the full recovery of the Development Costs actually incurred in accordance


with the Overall Development Program of the Oil Field within the Contract Area, CNPC shall, at any


time, have the right by giving a written notice to the Contractor to take over the Production


Operations. Both aforesaid cases shall be effected in accordance with the procedures described


hereunder.


8.9.1 The Contractor acting as the Operator shall submit a transfer plan of the Production


Operations to CNPC and JMC respectively within sixty (60) days following the date of receiving the


written notice from CNPC. Such transfer plan shall include, but not be limited to, a list of various


posts to be taken over by CNPC, a schedule of transfer by stages, inventories of the relevant facilities


and equipment and an inventory of all documents, manuals, data and information necessary for the


Production Operations. Where the transfer of some of the Production Operations involves any Third


Party, the Contractor acting as the Operator shall consult with CNPC in advance and propose a


solution thereto in the transfer plan, however, this situation shall not be taken by the Contractor acting


as the Operator as an excuse to delay and hinder the transfer of the Production Operations.


JMC shall, within thirty (30) days after receiving the said plan, review and approve it.


8.9.2 CNPC shall, within sixty (60) days from the date of receiving the transfer plan of the


Production Operations approved by JMC, submit to the Contractor and JMC respectively the lists and


resumes of CNPC's personnel who will take over the posts. The personnel named in the lists shall be


persons who have been trained by the Contractor in accordance with the provisions set forth in Article


16 hereof or personnel who are considered by CNPC to be competent. Within one hundred and eighty


(180) days from the date of receiving CNPC's lists of the personnel who will take over the posts, the


Contractor acting as the Operator shall arrange for such personnel to undergo step by step practical


training for the posts to be taken over by them and shall assist CNPC to administer a qualification test


for such personnel.


8.9.3 Within three hundred and thirty (330) days from the date of receiving the written


notice from CNPC, the Contractor acting as the Operator shall submit to JMC a report on the


completion of preparations for the transfer of the Production Operations. Such report shall include the


results of the qualification test for CNPC's personnel who will take over the Production Operations


and shall be confirmed by JMC within thirty (30) days after the receipt of the said report. The transfer


of the Production Operations shall begin on the date when JMC makes such confirmation.


8.9.3.1 When the completion of preparations for the transfer of the Production Operations is


confirmed by JMC, the Contractor acting as the Operator shall, in accordance with the transfer


schedule by stages, transfer to CNPC’s take-over personnel control of all facilities and equipment


relating to the Production Operations in the Oil Field, and all documents, manuals, data and


information regarding the use and operation of such facilities and equipment, so that CNPC's


personnel are able to manage and handle such facilities and equipment.


8.9.3.2 If JMC believes that preparations for the transfer of the Production Operations have


not been completed and sets another deadline for the completion of preparations for the transfer of the


Production Operations, the preparations for the transfer shall be completed prior to the deadline and


the transfer shall begin thereafter.


8.9.4 The transfer in respect of the accounting and financial aspects shall be handled in


accordance with Annex II-Accounting Procedure hereto.


8.9.5 During the preparation for the transfer of the Production Operations and in the course


of the actual transfer, the Contractor acting as the Operator shall perform the functions and obligations


provided for in Articles 8.3,8.4,8.5 and 8.6 herein in respect of the Oil Field undergoing the transfer of


the Production Operations, until the date when CNPC has completely assumed control of and taken


over the Production Operations of the Oil Field. Thereafter, the functions and obligations of the


Operator provided for in Articles 8.3,8.4,8.5 and 8.6 herein shall be by analogy applicable to CNPC.


8.9.6 After CNPC has taken over the Production Operations and become the Operator of


the Oil Field, the Contractor shall still have the obligation, pursuant to Article 2 hereof to provide


CNPC with the relevant technical and personnel training assistance, and the costs incurred thereby


shall be charged to the Operating Costs in accordance with the provisions of Annex II-Accounting


Procedure hereto.


8.9.7 When CNPC takes over the Production Operations in the Oil Field, the CNPC


personnel employed by the Contractor acting as the Operator for the Production Operations of the said


Oil Field shall be transferred to CNPC's employment. If CNPC needs to retain the service of any of


the Expatriate Employees employed by the Contractor acting as the Operator or the Contractor still


needs to keep some of CNPC Personnel in its employment, an agreement shall be reached through


consultation between the Parties prior to the transfer.


8.9.8 The expenses incurred in the transfer and takeover of the Production Operations shall


be charged to the Operating Costs.










































































25


 Article 9





Assistance Provided by CNPC





9.1 To enable the Contractor to carry out expeditiously and efficiently the Petroleum


Operations, CNPC shall have the obligation to assist the Contractor at its request to:


9.1.1 obtain the approvals or permits needed to open accounts with Bank of China;


9.1.2 go through the formalities of exchanging foreign currencies;


9.1.3 obtain office space, office supplies, transportation and communication facilities and


make arrangements for accommodation as required;


9.1.4 go through the formalities of Customs;


9.1.5 obtain entry and exit visas for the Expatriate Employees who will come to China for


the performance of Contract and for their dependents who will visit them or reside in China for a long


period and provide assistance for their transportation and moving as well as medical services and


travel in China;


9.1.6 obtain necessary permission to send abroad, if necessary, documents, data, oil, and


other samples for analysis or processing during the performance of the Petroleum Operations; and


9.1.7 contact and coordinate with departments engaged in fishing, aquatic product, stock


raising, agriculture, meteorology, ocean shipping, civil aviation, railway, transportation, electric


power, communication and services for supply bases, etc. for relevant matters and otherwise assist the


Contractor in obtaining on a timely basis approvals necessary for the conduct of the Petroleum


Operations under the Contract;


9.1.8 lease or use warehouses, yards, terminal facilities, barges, aircraft, pipelines and land,


etc. in the implementation of the Petroleum Operations; and


9.1.9 facilitate Contractor’s and the Subcontractors' registration in China.


9.2 In accordance with Article 15 hereof, CNPC shall, at the request of the Contractor,


assist the Contractor with the recruitment of Chinese Personnel.


9.3 CNPC shall, at the request of the Contractor, sell to the Contractor all available data


and samples, including oil samples for export, concerning the Contract Area other than those


produced as a result of Petroleum Operations hereunder in accordance with any relevant rules and


regulations and CNPC shall also assist the Contractor to arrange the purchase of any environmental,


hydrological, meteorological data, etc. from the relevant departments in China for reasonable prices.


9.4 CNPC shall, at the request of the Contractor, also assist the Contractor with matters


other than those under Articles 9.1, 9.2 and 9.3 herein if possible, including, but not limited to


assisting the Contractor to obtain favorable treatments that may be available from time to time from


the relevant tax, customs, investment, registration and other governmental authorities of China.








26


9.5 All expenses incurred in the assistance provided by CNPC in accordance with this


Article 9 shall be paid by the Contractor and shall be handled in accordance with the provisions of


Annex E-Accounting Procedure hereto. The Contractor shall pay to CNPC One Hundred Thousand


US Dollars (US$100,000) per year during the pilot test period for the assistance provided by CNPC.


During the development period and the production period, the Contractor shall pay to CNPC for the


assistance provided by CNPC in accordance with Article 5.2.14.3 of Annex E-Accounting Procedure


hereto.


















































































































































27


 Article 10





Work Program and Budget








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


Operator shall propose and submit to JMC the annual Work Program and budget for the remainder of


the same Calendar Year at the first regular meeting of JMC. Before the fifteenth (15th) of September


of each Calendar Year, the Operator shall complete and submit to JMC for its review an annual Work


Program and budget for the next Calendar Year except otherwise agreed by CNPC. JMC shall either


adopt the annual Work Program and budget as submitted or make such modifications agreed by the


Parties. The adopted annual Work Program and budget shall be submitted to CNPC for review and


approval within one (1) month as of the date on which they are submitted to JMC. Within fifteen (15)


days following the receipt of the annual Work Program and budget, CNPC shall notify JMC in writing


of its approval or disapproval or any modifications thereto with its detailed reasons. If CNPC requests


any modifications to the aforesaid annual Work Program and budget, the Parties shall promptly hold


meetings to make modifications and any modifications agreed upon by the Parties shall be effected


immediately. In case CNPC fails to notify JMC in writing of its approval or disapproval or any


modification within fifteen (15) days, the annual Work Program and budget adopted by JMC shall be


deemed to have been approved by CNPC. The Operator shall make its best efforts to perform the


Petroleum Operations in accordance with the approved or modified annual Work Program and budget.


As required for reviewing Work Program and budget by JMC, the Operator shall submit to


JMC the supporting data as detailed as possible.


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


expenditures or expenditures outside the budget in carrying out the Work Program and budget,


provided that the objectives of the approved Work Program and budget are not changed.


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


Operator may, if necessary, incur excess expenditures of no more than ten percent (10%) of the


budgeted amount. The Operator shall report quarterly the aggregate amount of all such excess


expenditures to JMC for confirmation.


10.2.2 For the efficient performance of the Petroleum Operations, the Operator may, without


approval, undertake certain individual projects which are not included in the Work Program and


budget, for a maximum expenditure of One Hundred Thousand U.S. Dollars (U.S.$100,000), but the


Operator shall, within ten (10) days after such expenditures are incurred, report to JMC for


confirmation. In case of emergency, the Operator may incur emergency expenditures for the amount


actually needed but shall report such expenditures to JMC as soon as they are made. However, the


said emergency expenditures shall not be subject to Articles 10.2.3 and 10.2.4 herein.


10.2.3 In the event that the aggregate of excess expenditures under Article 10.2.1 herein and


expenditures under Article 10.2.2 herein incurred in a Calendar Year cause the total expenditures of


that Calendar Year to exceed the approved annual budget, such excess shall not exceed five percent


(5%) of the approved annual budget for that Calendar Year. If the aforesaid excess is expected to be


in excess of five percent (5%) of the annual budget, the Operator shall present its reasons therefore to


JMC and obtain its approval prior to incurring such expenditures.


10.2.4 When JMC confirms the excess expenditures mentioned in Articles 10.2.1 herein and


the expenditures mentioned in 10.2.2 herein:


(a) if expenditures or excess expenditures are determined to be reasonable, the Operator


may incur such expenditures or excess expenditures again during the same Calendar Year subject to


Article 10.2 herein; or


(b) if expenditures or excess expenditures are determined to be unreasonable, the


Operator shall not incur such expenditures or excess expenditures again during the same Calendar


Year and such unreasonable expenditures or excess expenditures shall be dealt with in accordance


with Article 5.4 of Annex H-Accounting Procedure hereto;











































































































29


 Article 11





Preparation of the Overall Development Program








11.1 During the pilot test period, if the Operator opts to enter into the development period,


the Operator shall complete the preparation of the Overall Development Program and submit to JMC


and CNPC for confirmation. CNPC shall submit the Overall Development Program of the Oil Field


to Department or Unit for approval as soon as possible.


11.2 Prior to the submission of the Overall Development Program, the Operator shall


submit to CNPC the report of oil-in-place of the Oil Field and the Environment Impact Statements,


which shall be entrusted to and prepared by a qualified organization. The aforesaid reports and


statements shall be submitted to the competent authorities of the Chinese Government through CNPC


for review and approval.


11.3 The Operator shall perform the Development Operations in accordance with the


Overall Development Program of the Oil Field approved by the Department or Unit If the Contractor


acting as the Operator, without adequate justification, fails to commence such Development


Operations within ninety (90) days after the date of approval of the Overall Development Program of


the Oil Field by the Department or Unit, or if an unreasonable delay caused unilaterally by the


Contractor acting as the Operator results in a suspension or a halt of ninety (90) continuous days in


the Development Operations of the Oil Field, CNPC has the right to request the Contractor to resume


the Development Operations within a reasonable period of time set forth by CNPC; and if the


Development Operations fail to be resumed within such period, CNPC has the right to request the


Contractor to give up all its rights in the said Oil Field. If CNPC so requests the Contractor, pursuant


to the provisions of this Article 11.3 herein, to give up all of its rights in the said Oil Field, the


Contractor shall waive all of its rights in the said Oil Field from the date of receipt by the Contractor


of the written notice in that regard from CNPC.


11.4 In the event of the Oil Field Straddling a Boundary, CNPC shall arrange for the


Contractor and the neighboring parties involved to work out a unitized Overall Development Program


for such Oil Field and to help negotiate the relevant provisions thereof.


11.5 The procedures specified in this Article 11 shall be applied, by analogy, to


determination of additional development projects in the Oil Field within the Contract Area during the


production period, such projects being designed as a supplementary to and/or an adjustment of the


existing Overall Development Program for such Oil Field.


11.6 If the Parties deem that it is necessary to have appraisal trial production for


preparation of the Overall Development Program for the Oil Field within Contract Area, the Parties


shall reach a written agreement through negotiation on terms and conditions of appraisal trial


production which shall be attached hereto as a supplementary document.


























30


 Article 12





Financing and Cost Recovery








12.1 Funds required for the Petroleum Operations shall be raised by the Operator in


accordance with Work Programs and budgets determined pursuant to the relevant provisions of the


Contract, the provisions described in Annex II - Accounting Procedure hereto, and the provisions


described here below.


12.1.1 All the Pilot Test Costs required in the Pilot Test Area shall be provided solely by the





Contractor. However, the costs required for the fulfillment of the minimum pilot test work


commitment shall be deemed the equity capital of the Contractor.


12.1.2 All the Development Costs required in the Oil Field within the Contract Area shall be


provided solely by the Contractor.


12.1.3 The Operating Costs incurred for the performance of the Production Operations of the





Oil Field before the Date of Commencement of Commercial Production shall be considered as


Development Costs. The Operating Costs so incurred after the Date of Commencement of


Commercial Production shall be paid respectively by CNPC and the Contractor in accordance with


the Parties' proportion of the “investment recovery oil” stipulated in Article 13.2.2.2, namely in


proportion of eighteen percent (18%) by CNPC and eighty-two percent (82%) by the Contractor.


After the “investment recovery oil” changes into the “allocable remainder oil”, the Operating Costs


shall be paid respectively by CNPC and the Contractor in accordance with the Parties' proportion of


the “allocable remainder oil” stipulated in Article 13.2.3, namely in proportion of fifty-one percent


(51%) by CNPC and forty-nine percent (49%) by the Contractor. However, the Parties agree that


CNPC's Operating Costs shall be firstly paid by the Contractor for CNPC and the said proportion of


the Operating Costs to be recovered by CNPC pursuant to Article 13.2.2.1 under this Contract shall be


recovered by the Contractor.





12.1.4 For the purpose of implementation of the Contract, CNPC shall agree that the


Contractor may, when financing, use the entitlement of its share of production under the Contract as a


security for loans, provided that the Contractor shall apply to CNPC in advance and the application


therefore shall be examined by CNPC, and provided further that the right and interests of CNPC under


the Contract shall not be impaired thereby.


12.2 The Operating Costs for any given Calendar Year actually incurred by CNPC and the


Contractor in respect of the Oil Field pursuant to Article 12.1.3 herein, shall be recovered in kind by


the Parties out of the Crude Oil produced from the said Oil Field during that Calendar Year in


accordance with Annex II - Accounting Procedure hereto, after the Operating Costs have been


converted into a quantity of Crude Oil on the basis of the Crude Oil price determined in accordance


with Article 14 hereof. Unrecovered Operating Costs shall be carried forward to the succeeding


Calendar Year(s).


12.3 The Pilot Test Costs and the Development Costs incurred by the Contractor in


accordance with Articles 12.1.1 and 12,1.2 hereof, and all the costs (referred to as Pre-development


Costs hereinafter) spent by CNPC for exploration and proving the potential commerciality of the


Petroleum discovery within the Contract Area and for the wells drilled and surface production .


facilities constructed therein before the date of signing of the Contract, shall be recovered in kind out





31


of the Crude Oil produced from such Oil Field by the Contractor and CNPC in accordance with


Article 13.2.2.2 hereof after the Pilot Test Costs, Development Costs and Pre-development Costs have


been converted into a quantity of Crude Oil based on the Crude Oil price determined in accordance


with Article 14 hereof.


12.4 If the Contractor fails to enter into the development period after the Pilot Test


Operations, the unrecovered Pilot Test Costs incurred by the Contractor shall be deemed as its loss.


Under no circumstances shall CNPC reimburse the Contractor for such loss.





























































































































32


 Article 13





Crude Oil Production and Allocation








13.1 The Operator shall, in accordance with the production profile, adjusted as the case


may be set forth in the Overall Development Program for the Oil Field as approved by the Department


or Unit, work out a Crude Oil production plan for the Oil Field in each Calendar Year and carry out


Crude Oil production pursuant to such plan.


13.2 The Annual Gross Production of Crude Oil of the Oil Field within the Contract Area


in each Calendar Year during the production period shall be allocated in accordance with the


following sequence and proportions:


13.2.1 The percentages of the Annual Gross Production of Crude Oil specified in paragraphs


(a) and (b) hereunder shall be used for payments of the Value Added Tax and of Royalty respectively


and shall be paid in kind to the relevant authorities of the Chinese Government through CNPC.


(a) Value Added Tax shall be paid in accordance with relevant regulations of the People's


Republic of China; and


(b) Royalty shall be paid in accordance with relevant regulations of the People's Republic


of China.


13.2.2 The Annual Gross Production of Crude Oil shall, after payment for Value Added Tax


and Royalty in accordance with Article 13.2.1 herein, be firstly deemed as the “cost recovery oil” and


shall be used for payment or for cost recovery in the following sequence:


13.2.2.1 Payment in kind for the Operating Costs actually incurred but not yet recovered by


the Parties pursuant to Article 12.1.3 hereof after the price of the said “cost recovery oil” has been


determined in accordance with Article 14 hereof.





13.2.2.2 The remainder of the “cost recovery oil” shall after payment for Operating Costs in


accordance with Article 13.2.2.1 herein be deemed as “investment recovery oil”. Such “investment


recovery oil” pursuant to the Crude Oil price determined in accordance with Article 14 shall be used


for the simultaneous recovery of the Pilot Test Costs and the Development Costs incurred by the


Contractor in accordance with Articles 12.1.1 and 12.1.2 and the Pre-development Costs spent by


CNPC as stipulated in Article 12.3 in proportion of eighty-two percent (82%) by the Contractor and


eighteen percent (18%) by CNPC. The unrecovered costs of the Parties shall be carried forward to


and recovered from the “investment recovery oil” in succeeding Calendar Years until fully recovered.


The date that the said Pilot Test Costs and Development Costs have been recovered by the Contractor


shall be deemed as the date that the investment recovery period has ended. By the date of expiration


of the production period pursuant to Article 4.5 hereof, if the said costs incurred by the Parties have


not been fully recovered, then such unrecovered costs shall be regarded as a loss and the Parties shall


respectively bear the loss.





13.2.3 At the end of the investment recovery period, the remainder of the Annual Gross


Production of Crude Oil after the allocation referred to in Articles 13.2.1 and 13.2.2 herein


(hereinafter referred to as “allocable remainder oil”) shall be allocated in proportion of CNPC fifty-


one percent (51%), the Contractor forty-nine percent (49%).





33


13.3 CNPC and each company comprising the Contractor shall, throughout the entire


Contract Term, have the right and obligation in each Calendar Quarter, to lift and take, and separately


dispose of their respective full shares of all Crude Oil produced, and determined pursuant to Articles


13.2.2 and 13.2.3 herein.





In the event that the Crude Oil production of the Oil Field is reduced because CNPC or any


company comprising the Contractor does not lift and take its full share of Crude Oil or lifts nothing,


then, such reduction in Crude Oil production shall not affect the total amount of Crude Oil due to each


of the other Parties or the amounts of Crude Oil available to be lifted and disposed by each of the


other Parties as provided in Article 13.4 (c) herein.





13.4 A Crude Oil lifting procedure shall be agreed upon by the Parties no later than six (6)


months prior to the Date of Commencement of Commercial Production of the Oil Field within the


Contract Area and shall include, but not be limited to:


(a) the Operator's notification of Crude Oil production to CNPC and each company


comprising the Contractor;


(b) notification by CNPC and each company comprising the Contractor of its expected





offtake to the Operator;


(c) the Operator's notification to CNPC and each company comprising the Contractor of


the final Crude Oil lifting schedule prepared by the Crude Oil lifting coordination group in accordance


with Article 13.5 herein, which shall be binding on CNPC and each company comprising the


Contractor;





(d) limitation and calculation of overlift and underlift of CNPC and each company


comprising the Contractor; and provisions to ensure timely and ratable lifting of Crude Oil;


(e) determination of allowable operational tolerance on lifting; and





(f) other terminal procedures as may be required to reflect the particular circumstances.





13.5 For the purpose of implementing the procedures as described in Article 13.4 herein,


CNPC and each company comprising the Contractor shall jointly set up a Crude Oil lifting


coordination group consisting of representatives, one each appointed by CNPC and each company


comprising the Contractor, with the representative of CNPC as the chairman, and one representative


of the Contractor or each company comprising the Contractor as the vice chairman. Such group shall


be responsible for the preparation of Crude Oil lifting plans for each Calendar Year, for Calendar


Quarter and for calendar month and shall also be responsible for the reasonable and unified


arrangements and adjustments of the aforesaid Crude Oil lifting plans through close contact with any


operator in charge of the storage and loading facilities.





13.6 The Contractor shall have the right to export from China all Crude Oil which it


obtains as set forth in Article 13.2.2 and 13.2.3 herein. The Contractor shall obtain, with the


assistance of CNPC, any export license or other permit that may be required in order for the


Contractor to export from China all Crude Oil which it obtains as set forth in Article 13.2.2 and 13.2.3


herein.


<5








34


13.7 At the expiration of the pilot test period, if the Contractor opts to terminate the


Contract, the amount of Crude Oil extracted from the Oil Field during the pilot test period shall be


allocated in proportion of CNPC sixty percent (60%), the Contractor forty percent (40%); if the


Contractor opts to enter into the development period, the amount of Crude Oil extracted from the Oil


Field during the pilot test period shall be allocated in accordance with Article 13.2.2.2 herein. The


amount of Crude Oil extracted from the Oil Field within the Contract Area from the date of the


approval of the Overall Development Program to the Date of Commencement of Commercial


Production shall be allocated in accordance with Article 13.2.2.2 herein.












































































































































35


 Article 14





Quality, Quantity, Price and Destination of Crude Oil








14.1 Quality of the Crude Oil


14.1.1 The quality analysis of Crude Oil produced from the Oil Field within the Contract


Area shall be undertaken at the Delivery Point. Such analysis shall be carried out on a sample taken


by the State Bureau of Import and Export Commodities Inspection (hereafter referred to as the


“Bureau”) or any representative agency authorized by the Bureau pursuant to standards issued by the


State Bureau of Standardization of the People's Republic of China or by the Department or Unit.


14.1.2 The Crude Oil quality analysis referred to in Article 14.1.1 above shall include the


following:


(a) density at 20 degree centigrade, in grams per cubic centimeter;


(b) sulfur content, in weight percentage;


(c) water content, in weight percentage; and


(d) basic sediment content, in weight percentage


14.2 Quantity of the Crude Oil


14.2.1 The quantity measurement of the Crude Oil produced from the Oil Field within the


Contract Area, when being lifted, shall be made at a Delivery Point and with measuring devices both


to be agreed upon by the Parties. A relevant measuring organization of the Chinese Government or a


representative agency authorized thereby shall, at appropriate regular intervals, calibrate all the


measuring devices, conduct special testing and issue certificates of qualification with respect thereto


or confirm their qualification before the measuring devices are put into use. The quality and quantity


of the Crude Oil delivered shall be authenticated in accordance with the commodity quality certificate


and weight certificate issued by the Bureau and such quality and quantity shall be the basis for the


accounting settlement.


14.2.2 If any Party to the Contract believes that the Crude Oil measuring devices, sampling


or analysis are inaccurate, or has any objection to the results specified in the above mentioned


certificates, on-site investigations, technical exchanges and discussions may be conducted by the


Parties to resolve the issue in a manner satisfactory to the Parties.


14.3 Determination of the Crude Oil Price


14.3.1 The price of various grades of the Crude Oil shall be expressed as a FOB price at the


Delivery Point. Determination of the Crude Oil price shall be made with reference to the prevailing


price in arm's length transactions of similar quality Crude Oil on the main world oil markets and the


adjustment in such price shall be made in accordance with such determinants as the quality of the


Crude Oil, the terms of delivery, transportation and payment and other terms.











36


The aforesaid price in arm's length transactions in this Article refers to a price at which a


seller sells its crude oil to a buyer who is independent of the seller, but not including the prices used


by them for government to government transactions which do not reflect international oil market


price, Crude Oil exchange, or barter transactions.


14.3.2 Subject to the agreement of Parties, where the Crude Oil produced from the Oil Field


within the Contract Area differs in grades, the prices of such Crude Oil with different quality will be


individually determined.


14.3.3 The price of the Crude Oil produced from the Oil Field within the Contract Area shall


be denominated in U.S. Dollars per metric ton. However, if an international currency other than the


U.S. Dollar prevails on the main world oil markets as the pricing unit of Crude Oil, the Parties may


also use that international currency therefore upon mutual agreement.


14.3.4 Procedure for the Determination of the Crude Oil Price


14.3.4.1 The Crude Oil price shall be determined once each Calendar Quarter. In case


the Crude Oil price prevailing on most world oil markets fluctuates, CNPC and the Contractor each


shall have the right to propose, at any time, that a new Crude Oil price be negotiated and determined.


14.3.4.2 The Contractor shall, no later than forty-five (45) days prior to the


commencement of any Calendar Quarter, notify CNPC of its proposed price for Crude Oil to be lifted


in such Calendar Quarter (for the purpose of this Article hereafter referred to as the said Calendar


Quarter).


14.3.4.3 CNPC shall notify the Contractor of its decided price within ten (10) days


after the receipt of the aforesaid proposed price notified by the Contractor. In the absence of a


different price notified by CNPC to the Contractor within ten (10) days after the receipt of the


aforesaid notification, the proposed price notified by the Contractor as referred to in Article 14.3.4.2


herein shall be applied to the Crude Oil to be lifted in the said Calendar Quarter.


14.3.4.4 The Contractor shall, within five (5) days following its receipt of notice of a


price decided by CNPC, state to CNPC whether the price is acceptable. If it is acceptable, then the


said decided price shall be regarded as the price agreed upon by the Parties for the said Calendar


Quarter. If it is not acceptable, the Parties shall, within ten (10) days, carry out further negotiation in


an amicable manner to determine the price for the said Calendar Quarter.


14.3.4.5 In the event that the Parties still cannot reach an agreement on the Crude Oil


price for the said Calendar Quarter through further negotiations by the Parties, the Contractor may lift


the Crude Oil in accordance with the quota specified for the said Calendar Quarter in Article 13.2


hereof, and the Crude Oil price for the preceding Calendar Quarter shall apply provisionally to the


Crude Oil of such quota and the payment shall be made accordingly. Then, the Parties shall negotiate


further on the Crude Oil price for the said Calendar Quarter, taking into account relevant independent


and non-proprietary market data on Third Party sales of Crude Oil in substantial quantities on the


main world oil markets, adjusted for quality, transportation and other applicable differentials. The


Parties shall each take into account the information supplied and discussed and attempt to agree on a


Crude Oil price based upon such information by the end of the said Calendar Quarter.


(1) In the event that the Parties still cannot reach an agreement in Crude Oil price by the


end of the said Calendar Quarter, then the Crude Oil price shall be the weighted average FOB price of


the Crude Oil of the same or similar quality sold by CNPC and/or the Contractor to a Third Party or








37


Third Parties and produced in the said Calendar Quarter from the Oil Fields described hereafter,


adjusted for such differences as the quality, delivery, transportation, payment and other terms, but


excluding the government to government transactions which do not reflect international oil market


price, Crude Oil exchange, barter or spot transactions.





The application of the above-mentioned price of Crude Oil sold to a Third Party or Third


Parties shall be in the following sequence:


(i) Firstly, the price, calculated and determined in accordance with the above mentioned


stipulations, of the Crude Oil produced from the relevant Oil Field or Oil Fields in the Contract Area


and sold to a Third Party or Third Parties shall be applied;





(ii) In the event no sales as referred to in paragraph (i) above were made in the said


Calendar Quarter, the price, calculated and determined in accordance with the above mentioned


stipulations, of the Crude Oil produced from other Oil Field in the Contract Area and sold to a Third


Party or Third Parties shall be applied; and


(iii) In the event no sales mentioned in paragraphs (i) and (ii) above were made in the said


Calendar Quarter, the price, calculated and determined in accordance with the above-mentioned


stipulations, of the Crude Oil produced from the Oil Fields of other contract areas for Chinese-foreign


cooperative exploitation of Petroleum resources and sold to a Third Party or Third Parties shall be


applied;





(2) In the event there are no such Third Party sales of the Crude Oil as referred to in Article


14.3.4.5(1) herein during the said Calendar Quarter, then the Crude Oil price for the said Calendar


Quarter shall be equal to the same Crude Oil price of the preceding Calendar Quarter adjusted by the


differences in the arithmetic average of the average daily selling price for a basket of three or more


internationally traded Crude Oils in the said Calendar Quarter compared with that for such basket of


Crude Oils for the preceding Calendar Quarter. The adjusted price shall be the Crude Oil price for the


said Calendar Quarter. The Crude Oils selected for the basket shall each be similar in quality to the


Crude Oil from the Contract Area and chosen from different countries and shall have prices which


reflect the conditions of the main world oil markets and shall be mutually agreed by the Parties in the


Overall Development Program. Any Crude Oil selected for the basket may be substituted at any time


by another Crude Oil upon agreement by the Parties.


(3) If the Parties are unable to agree on a Crude Oil price for a Calendar Quarter in which


Crude Oil is first produced and delivered from or the production of Crude Oil is restored in the Oil


Field in the Contract Area, then the Crude Oil for the Calendar Quarter shall be priced and/or paid in


accordance with the arithmetic average price of the prices finally proposed by the Parties in the


Calendar Quarter. Based on the Crude Oil price agreed upon by the Parties for the succeeding


Calendar Quarter, the Crude Oil price for the Calendar Quarter shall be determined by adjusting


retroactively by the difference between the arithmetic average prices of the basket of the Crude Oils


for the Calendar Quarter and the succeeding Calendar Quarter in accordance with the calculation


method referred to in Article 14.3.4.5(2) herein.





14.3.4.6 If, due to the delayed announcement of crude oil prices by the main world


oil-producing countries or the main world oil markets, or if, as agreed by CNPC and the Contractor,


an unstable main world oil market exists, then, the period for the determination of the price referred to


in Article 14.3.4.2 herein may be extended to the end of the said Calendar Quarter in question.





rf





38


14.3.4.7 If the Crude Oil prices in the international oil markets or the Crude Oil prices


quoted in the main oil-producing countries change materially, then the Parties wiU meet and agree to


adjust the Crude Oil price retroactively. The period for such retroactive adjustment shall not exceed


the previous Calendar Quarter.


14.3.5 The Crude Oil for each Calendar Quarter due to CNPC pursuant to Article 13 hereof


shall be converted into an amount of money in the currency utilized pursuant to Article 14.3.3 herein


based on the Crude Oil price for that Calendar Quarter finally determined in accordance with the


aforesaid provisions specified in Article 14.3 herein and such amount of money shall be entered into


the Joint Account as of the date on which such Crude Oil is lifted.


14.3.6 The Crude Oil for each Calendar Quarter due to the Contractor pursuant to Article 13


hereof shall be converted into an amount of money in the currency utilized pursuant to Article 14.3.3


herein based on the Crude Oil price for that Calendar Quarter finally determined in accordance with


the aforesaid provisions specified in Article 14.3 herein and such amount of money shall be entered


into the Joint Account as of the date on which the Crude Oil is lifted.


14.4 Destination of the Crude Oil


14.4.1 The destination of Contractor's Crude Oil obtained under the Contract shall be at the


discretion of the Contractor, except as stipulated in Article 14.4.2 herein.


14.4.2 In accordance with the decisions of the Chinese Government, CNPC shall notify the


Contractor of any prohibited destinations, which infringe on the political interests of the People's


Republic of China. The Contractor shall not deliver the Crude Oil to the prohibited destinations as


notified.




































































39


 Article 15





Preference to the Employment of the


Chinese Personnel, Goods and Services








15.1 For the performance of the Petroleum Operations, the Contractor's procurement of


necessary goods, leasing equipment and signature of subcontracts or other service contracts shall be


subject to Article 22 of the Petroleum Regulations. The Contractor shall give preference to Chinese


goods, equipment and service provided that they are competitive in terms of price, quality and term of


delivery.


15.2 The Contractor shall give preference to the employment of Chinese Personnel in the


performance of the Petroleum Operations in accordance with Article 18 of the Petroleum Regulations.


For this purpose, the Contractor shall submit in advance to CNPC and JMC respectively a plan for the


employment of Chinese Personnel listing all the posts and number of the persons involved. CNPC


shall, in accordance with the plan, provide or assist in recruiting Chinese employee candidates for


such employment. For the performance of Petroleum Operations, the Contractor shall have the


obligation to employ competent Chinese Personnel and to employ those who have become qualified


after being trained in accordance with the training program. The Contractor shall give preference in


employing the Chinese Personnel who have participated in the training program provided by the


Contractor.


15.3 The engineering design corporations under or entrusted by CNPC shall have the right


to participate in the master designs and engineering designs made by the Contractor for the purpose of


the implementation of the Contract. Engineering design companies within the territory of the People's


Republic of China shall be given preference in entering into the subcontracts for the aforesaid master


designs and engineering designs, provided that their technical level, quality, price and delivery time


are competitive.


15.4 After the Contractor signs equipment leasing contracts, service contracts or


subcontracts with CNPC or its Affiliates in accordance with Article 15.1 herein, the Contractor shall


endeavor to provide technical assistance to CNPC or its Affiliates, at the request of CNPC, so as to


enable them to meet the needs of operations to be undertaken. The expenses so incurred shall be borne


by CNPC or its Affiliates.















































40


 Article 16





Training of Chinese Personnel


and Transfer of Technology








16.1 Contractor agrees, in the course of the Petroleum Operations, to transfer to CNPC and


its Affiliates, the advanced technology and managerial experience including patented technology,


know-how or other confidential technology, etc. used in the performance of the Petroleum Operations


and the necessary data and/or information for mastering such technology and experience in


accordance with Article 18 of the Petroleum Regulations, provided, however, such technology to be


transferred shall be proprietary to the Contractor and if the transfer of any of such technology is


restricted in any way during the term of the Contract, the Contractor shall, to the extent reasonably


possible, endeavor to obtain permission for the transfer of such restricted technology. The Contractor


agrees to train the Chinese Personnel including workers, technical, economic, managerial, legal and


other professional personnel, in order to improve their technical and/or managerial capabilities.


Details of training of Chinese Personnel and transfer of technology are described in Annex IV -


Training of Chinese Personnel and Transfer of Technology hereto.


16.2 Within ninety (90) days following the Date of Commencement of the Implementation


of the Contract, the Contractor shall, after consultation with CNPC, complete and submit a training


and technology transfer program for the Chinese Personnel in the pilot test period and the


corresponding budget to JMC for review and approval, and upon approval by JMC, put it into


practice. The Contractor shall, after consultation with CNPC, complete and submit training and


technology transfer programs and corresponding budgets for the Chinese Personnel in the


development period and the production period, respectively, to JMC for its review and approval


before the commencement of the Production Operations, and upon approval by JMC, put them into


practice in time so as to have ample time in advance for such training and technology transfer.


16.3 The purpose, requirement, fields of specialization, scope of personnel, specific job


categories, type, method, etc. in respect of training of Chinese Personnel and transfer of technology


shall be determined in Annex IV -Training of Chinese Personnel and Transfer of Technology hereto.


16.4 The expenses and costs incurred for performing the training and technology transfer


program stipulated in this Article shall be borne by the Contractor.


16.5 In the course of the implementation of the Contract, the Parties shall have scientific


and technical cooperation and academic exchange in connection with the Petroleum Operations. The


relevant provisions concerning the plan, participating personnel and type related to the scientific and


technical cooperation and academic exchange shall be determined by the Parties. The expenses


required by the scientific and technical cooperation and academic exchange shall be included in the


budget specified in Article 16.2 herein and charged to the Joint Account. All inventions, experiments


or research results arising from the said cooperation and academic exchange shall be shared by and


belong to the Parties who, subject to the provisions of Article 22 hereof, shall not disclose them to any


Third Party.


16.5.1 In the course of the implementation of the Contract, those scientific research projects


which are required by the Petroleum Operations but not carried out by the Parties may, with the


approval of JMC, be commissioned to, and carried out by, any Third Party. The Operator shall enter


into subcontracts or service contracts with relevant scientific research departments within the territory








41


of the People's Republic of China, provided that they are competent and competitive. The aforesaid


required expenses shall be included in the budget specified in Article 16.2 herein and charged to the


Joint Account. All inventions and experimental or research results developed from the aforesaid


research projects carried out by a Third Party delegated by the Operator shall also be shared by and


belong to the Parties who, subject to the provisions of Article 22 hereof, shall not disclose any of them


to any other Third Parties. The Operator shall endeavor to incorporate the provisions herein in the


subcontracts or service contracts signed with a Third Party.


16.6 The advanced technology and managerial experience, including patented technology,


know-how or other confidential technology that the Contractor transfers to CNPC, shall remain the


exclusive property of the Contractor and also be subject to the confidentiality restrictions of Article 22


hereof.





16.7 For the purpose of the implementation of Article 16 herein and Annex TV-Training of


Chinese Personnel and Transfer of Technology hereto, the costs and expenditures incurred by the


Contractor annually for training of Chinese Personnel and transfer of technology shall be: Seventy-


five Thousand U.S. Dollars (US$75,000) per year during the pilot test period; Two Hundred


Thousand U.S. Dollars (US$200,000) per year during the development period; One Hundred and


Sixty-five Thousand U.S. Dollars (US$165,000) per year for the first fifteen (15) years of the


production period and One Hundred Thousand U.S. Dollars (US$100,000) per year for years sixteen


(16) to twenty (20) of the production period.































































































42


 Article 17





Ownership of Assets and Data








17.1 All assets purchased, installed and constructed under the Work Program and budget


for the Oil Field within the Contract Area shall be owned by CNPC from the date on which the


production period expires or if the Contractor opts to terminate the Contract at the expiration of the


pilot test period, from the date on which the pilot test period expires. The Operator shall be


responsible for the acceptance inspection or testing of the said assets and CNPC may, as it deems


necessary, send its experts to participate in such acceptance inspection or testing. Such assets shall


not be used in any operations other than the Petroleum Operations or any operations by Third Parties


without the,consent of the Parties.


17.2 Equipment and facilities which are owned by a Third Party and are either leased by


the Operator or temporarily brought into the territory of the People's Republic of China for the


performance of the Petroleum Operations shall not be deemed as assets owned by CNPC. Such


equipment and facilities may be exported from the People's Republic of China, and CNPC shall assist


in handling export formalities.


17.3 The ownership of all of the data, records, samples, vouchers, and other original data


obtained in the course of performing the Petroleum Operations shall vest in CNPC. For the purpose


of implementation of the Contract, the availability and sale of all the data related to the Contract


owned by CNPC required by the Contractor shall be made through CNPC.










































































43


 Article 18





Associated Natural Gas





18.1 Associated Natural Gas


18.1.1 The Associated Natural Gas produced from the Oil Field within the Contract


Area shall be primarily used for purposes related to the operations of production and production


enhancement of Oil Fields such as gas injection, gas lifting, steam and heat generation and power


generation.


18.1.2 Based on the principle of full utilization of the Associated Natural Gas and


with no impediment to normal production of the Crude Oil, the Overall Development Program of the


Oil Field shall include a plan of utilization of the Associated Natural Gas. If there is any excess


Associated Natural Gas in the Oil Field after utilization pursuant to Article 18.1.1 herein (hereafter


referred to as “excess Associated Natural Gas”), the Operator shall carry out a feasibility study


regarding the utilization of such excess Associated Natural Gas of such Oil Field. Such feasibility


study, if carried out before the Development Operations of the Oil Field, shall be included as part of


the feasibility study on the development of the Oil Field. With respect to the Oil Field already under


commercial production, if a further feasibility study on the utilization of its excess Associated Natural


Gas is required, such study shall be carried out by the Operator and a report thereon shall be submitted


to JMC for review and discussion. If the Parties decide to utilize the excess Associated Natural Gas


of the Oil Field, the construction of facilities for such utilization and the production of the excess


Associated Natural Gas shall be carried out at the same time as the Oil Field construction and


production.


18.1.2.1 If the Parties agree that the excess Associated Natural Gas of the Oil Field


has no commercial value, then such gas shall be disposed of by the Operator subject to relevant


regulations concerning the environmental protection, provided that there is no impediment to normal


production of the Crude Oil.


18.1.2.2 If any Party to the Contract considers unilaterally that the excess Associated


Natural Gas of the Oil Field has commercial value, such gas may be utilized by that Party at its own


expense without affecting timing and optimal development of the Oil Field concerned, the amount of


“cost recovery oil” and “allocable remainder oil” due to the other Party to the Contract which does not


invest in such utilization.


18.1.2.3 If the Parties agree that excess Associated Natural Gas of the Oil Field has


commercial value, the Contractor shall make further investment in its utilization, and the aforesaid


new investment shall not affect either the proportion of “cost recovery oil” by the Parties stipulated in


Article 13.2.2 hereof or the proportion of the “allocable remainder oil” by the Parties stipulated in


Article 13.2.3 hereof. If the Parties disagree on the commercial utilization of such excess Associated


Natural Gas of that Oil Field, they shall, guided by the principle of mutual benefit, carry out further


negotiations to reach an agreement in writing.


If the Parties fail to reach agreement through negotiations, CNPC shall reserve the right to


dispose of the excess Associated Natural Gas of the said Oil Field unilaterally. If CNPC decides to


utilize the said excess Associated Natural Gas, the Contractor shall have the right to join in the


utilization of the said excess Associated Natural Gas within three (3) years after the facilities for








44


utilizing the said excess Associated Natural Gas are completed unilaterally by CNPC in accordance


with an Associated Natural Gas utilization program formulated by CNPC. If the Contractor decides in


writing to participate in the utilization of the said excess Associated Natural Gas within the three (3)


years mentioned above, then, the Contractor shall pay CNPC an amount of money, in addition to the


cost spent by CNPC on the said utilization of excess Associated Natural Gas up to the date of


Contractor's submission of the written notice to CNPC. Such amount shall be equal to two times


(200%) of the foregoing costs for utilization of the excess Associated Natural Gas and such amount of


money shall not be charged into the Joint Account. Thereafter, the costs to be: incurred in such


utilization of excess Associated Natural Gas shall be provided by the Contractor solely in accordance


with the provisions herein.


If the Contractor decides, after the three (3) years mentioned above, not to participate in the


utilization of the excess Associated Natural Gas, the Contractor shall be deemed to have waived all its


rights to use the said excess Associated Natural Gas.


18.1.3 Expenses incurred in the utilization of the Associated Natural Gas of the Oil


Field as stipulated in Article 18.1.1 herein, and those incurred in carrying out a feasibility study on the


utilization of the excess Associated Natural Gas after commencement of commercial production of the


Oil Field referred to in Article 18.1.2 herein shall be charged to the Development Costs of the Oil


Field.





Royalty and Value Added Tax of the production of the excess Associated Natural Gas shall


be paid to die Chinese Government through CNPC.


All remaining excess Associated Natural Gas after the deduction of Value Added Tax and


Royalty shall be allocated to CNPC and the Contractor by analogy in accordance with the proportion


stipulated in Article 13 herein.


18.2 If CNPC unilaterally utilizes the excess Associated Natural Gas of the Oil Field and


requires to apply the Contractor's appropriate and advanced technology and managerial experience,


the Parties shall negotiate terms and conditions related thereto and the Operator shall carry out the


operations if an agreement is reached on such terms and conditions.
























































45


 Article 19





Accounting, Auditing and Personnel Costs








19.1 Accounting


Annex II - Accounting Procedure hereto contains the guidelines for the Operator to keep


accounting books and records and make financial settlements. The Operator shall keep and settle the


accounts for all the financial activities in respect of the Contract Area and maintain all the accounting


books and records in accordance with Annex II - Accounting Procedure hereto in order to accurately


reflect the Pilot Test Costs and the Development Costs thereon and Operating Costs incurred in the


performance of the Petroleum Operations in respect of the Contract Area, as wrell as quantity and


monetary value of the production and allocation of Crude Oil and Natural Gas. The Operator shall


submit detailed statements and relevant written reports to JMC and the departments concerned.


19.2 Auditing


19.2.1 Any Party to the Contract shall have the right to audit all the Operator's Joint


Account accounting books and records after the end of each Calendar Year and give die Operator a


written notice of the auditing results. The auditing shall be completed within twenty-four (24) months


after the end of each Calendar Year. In the absence of any written notice of the exception to the


auditing results given by such Party within such period or if the annual Joint Account accounting


books and records of the Operator are not audited by any non-Operator Party within such period, the


Operator's Joint Account accounting books and records shall be deemed correct A special auditing of


the Operator's Joint Account accounting books and records may be made due to some special


requirements during a Calendar Year.


19.2.2 If the auditing referred to in Article 19.2.1 herein is conducted, the Operator


shall be given thirty (30) days' notice prior to the date of commencement of such awiiting. There shall


be no impediment to normal Petroleum Operations during the period of any audit.


19.2.3 The auditors shall be entitled to access to all relevant Joint Account records,


files and other information and may inspect such sites and facilities as necessary.


19.2.4 Upon receipt of a notice of any Party’s exceptions to the auditing results, the


Operator shall resolve these matters in due time (no later than sixty (60) days thereafter).


19.3 Personnel Costs


19.3.1 The personnel costs mean the remuneration and other related charges paid on


the basis of the working time spent by personnel who are engaged in administration, management,


accounting, finance, tax, employee relations, procurement, legal affairs, computer services,


engineering, geology, geophysics, drilling and Production Operations as well as all other work for the


implementation of the Contract.


19.3.1.1 The salaries or wages of personnel in various subordinate bodies of JMC and


of all employees engaged in the performance of the Petroleum Operations shall be included in the


personnel costs as provided in Article 19.3.1 herein.


19.3.1.2 Personnel costs which are classified as the overhead of the superior


management organization pursuant to Article 5.2.18 of Annex II - Accounting Procedure hereto shall


not be included in the personnel costs mentioned herein.


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


Operator shall work out a staffing plan for its organization and a personnel costs plan with respect


thereto (including an itemized plan of personnel costs, such as basic salary or wage, overseas


allowance and area allowance, etc.) before the beginning of each Calendar Year and submit such plan


with the annual Work Program and budget to JMC for review and approval.


The Contractor shall provide CNPC with itemized information of personnel costs of the


Expatriate Employees. CNPC shall bear the obligation of confidentiality to such information


provided by the Contractor.


The Operator shall charge the personnel costs of the Contractor’s personnel actually incurred


to the Joint Account. CNPC shall have the right to audit the personnel costs charged to the Joint


Account.


19.3.3 The settlement of all charges for the salaries and wages of CNPC personnel


mentioned in the second paragraph of Article 7.7 hereof shall be made between CNPC and the


Operator, and CNPC personnel shall be responsible for all individual income tax in accordance with


the provisions of the individual income tax law of the People's Republic of China.


19.3.4 In the pilot test period and the development period, the level of the salaries


and wages and other related charges paid to the Expatriate Employees shall be made by the Contractor


through consultation with CNPC. After the Date of Commencement of Commercial Production of the


Oil Field, the level of the salaries and wages and other related charges paid to the Expatriate


Employees shall be discussed and agreed by the Parties, pursuant to Article 19.3.2 herein. The


Operator’s employees shall pay any individual income tax due in accordance with the provisions of


the individual income tax law of the People's Republic of China.
























































47


 Article 20





Taxation








20.1 The Contractor shall pay taxes to the Government of the People's Republic of China


subject to the tax laws and regulations of the People's Republic of China.


20.2 The Operator shall advise the Subcontractors who render services for the Contract


that they and their employees shall pay taxes to die Government of the People's Republic of China


subject to the tax laws and regulations of the People's Republic of China.











































































































48


 Article 21





Insurance








21.1 The Operator shall work out an insurance program for the Pilot Test Operations and


submit it to JMC for review and approval within one hundred and twenty (120) days after the Date of


Commencement of the Implementation of the Contract. The Operator shall, on behalf of the Parties,


obtain the insurance contracts in accordance with such program as approved by JMC before


commencement of Petroleum Operations within the Contract Area.


Similar provisions shall apply in respect of Development Operations and Production


Operations.


21.2 All of the insurance items as approved in the insurance program shall be insured with


the People's Insurance Company of China or other insurance companies established within the


territory of the People's Republic of China.


21.3 The insurance programs worked out by the Operator shall include, but not be limited


to, the following insurance covering:


(a) damages to and expenses of all drilling installations and equipment, including


damages to and expenses of the properties used on worksites and supply bases for the Petroleum


Operations while the equipment and properties owned by Third Party rendering services to the


Operator shall be handled in accordance with Article 21.5 herein;


(b) damages to and expenses of any of the equipment or installations for production,


storage and transportation, and buildings in the course of construction and installation;


(c) damages to and expenses of the Crude Oil and/or Natural Gas production


installations, facilities, equipment and pipelines;


(d) liability to Third Parties;





(e) liability for pollution and expenses for cleaning up in the course of drilling and the


Production Operations;


(f) expenses for killing blowouts;





(g) liability incurred by the Operator in hiring land drilling rigs, vessels and aircraft


serving the Petroleum Operations;


(h) liability for cleaning the remains; and


(i) losses and expenses incurred during the transportation and storage in transit of goods


shipped from different parts of the world and other areas outside the Contract Area to the worksites.





21.4 In any insurance contracts, the deductibles shall be determined by the Parties through


consultation, and losses within the deductible limits shall be borne by Parties in proportion to their


respective participating interests in the relevant operations.








n /


21.5 When signing subcontracts or lease contracts, the Operator shall endeavor to require


Subcontractors and lessors to insure their risks under the relevant subcontracts with the People's


Insurance Company of China or other insurance companies as mentioned in Article 21.2 hereof and


ask these Subcontractors or lessors to contact the People's Insurance Company of China or other


insurance companies as mentioned in Article 21.2 hereof for arrangement of the necessary insurance.


21.6 In the course of the Petroleum Operations, the Parties shall cover separately personnel


accidental death and injury insurance with respect to personnel assigned by them respectively. The


premiums in respect thereof shall be dealt with in the following way: the premiums for personnel


accidental death and injury insurance with respect to personnel whose costs are charged to the Joint


Account pursuant to the provisions of the Contract shall be charged to the Joint Account, and those


with respect to other personnel shall be borne respectively by the Parties by which they are assigned.


21.7 Insurance companies owned by or affiliated with any Party to the Contract, or the


Parties themselves, may reinsure the People's Insurance Company of China or other insurance


companies as mentioned in Article 21.2 herein by reaching an agreement with such company if they


are interested in covering any part of the insurance program hereof.


21.8 All motor vehicles used in the Petroleum Operations shall be insured with the


People's Insurance Company of China or other insurance companies as mentioned in Article 21.2


hereof.





21.9 The premiums of insurance in the pilot test period and the development period shall


be charged to the Pilot Test Costs and the Development Costs and while those in the production


period shall be charged to the Operating Costs.


21.10 Any claim under the insurance of the agreed insurance program charged to the Joint


Account shall be handled by the Operator and any recovery made from insurers shall be credited to


the Joint Account.



























































50


 Article 22





Confidentiality








22.1 CNPC shall, in conformity with applicable laws and regulations of the Government of


the People's Republic of China on confidentiality and by taking into account international practice,


determine the confidentiality periods for which the Contract and all documents, information, data and


reports related to the Petroleum Operations within the Contract Area shall be kept confidential.


22.2 Without the written consent of the other Party, no Party to the Contract shall disclose,


during such confidentiality periods, the Contract, documents, information, data and reports referred to


in Article 22.1 herein or any other information regarded by JMC as confidential, to any Third Party


except the Third Parties specified in Articles 22.5 and 22.6 herein and to any Affiliate not directly


connected with the implementation of the Contract, and no Party to the Contract shall otherwise


transfer, donate, sell or publish them in any way within the confidentiality periods. However, if the


Department or Unit decides to invite any Third Party to conduct cooperative exploration and


development of Petroleum in the sedimentary basin in which the Contract Area is located and/or other


adjacent areas, CNPC may furnish the following original data and information or interpretation


thereof with respect to the Contract Area to the relevant Third Parties:


(a) original data and information held by CNPC for over two (2) years; and


(b) interpretations to the original data and information held by CNPC for over three (3)


years.





CNPC shall require relevant Third Parties to undertake to keep confidential the aforesaid data,


information, and interpretations thereof furnished to them by CNPC.


CNPC shall, in conformity with relevant provisions of laws and regulations of the People's


Republic of China and requests of relevant government departments and units, provide them with all


documents, information, data and reports as mentioned herein.


22.3 During the term of the Contract and after the termination of the Contract, CNPC shall


not disclose to any Third Party any patent, know-how or proprietary technology transferred to CNPC


by the Contractor without the written consent of the Contractor except for any technology, the patent


of which has expired and any proprietary and confidential technology which have entered the public


domain.





22.4 After the termination of the Contract or after any assignment of rights and/or


obligations of the Contract under Article 23 hereof, the Contractor and any assignee shall, within the


confidentiality periods, continue to be obligated to keep confidential documents, information, data and


reports mentioned in Article 22.2 herein except for official documents and information published with


the consent of the Parties.


22.5 For the implementation of the Contract, CNPC and each company comprising the


Contractor may, after review by JMC and CNPC, furnish the necessary documents, information, data


and reports to Third Parties and Affiliates related to the Petroleum Operations. The Third Parties and


Affiliates include:











51


22.5.1 Potential investors,, banks or other credit institutions from which financing is sought


by any Party to the Contract for the implementation of the Contract;


22.5.2 Third Parties and Affiliates which provide services for the Petroleum Operations,


including Subcontractors and other service contractors; and


22.5.3 An assignee or assignees to whom the rights and/or obligations under the Contract


may be assigned.


22.6 Necessary information, documents, data and reports may be furnished by the Parties


in accordance with the laws of their home countries to the governments and stock exchanges,


provided that the Parties report to JMC in advance.


22.7 CNPC and each company comprising the Contractor when furnishing the documents,


information, data and reports to Third Parties and Affiliates as mentioned in Article 22.5 herein shall


require them to assume the confidentiality obligations as set forth herein, or shall bear full


responsibility for any violation thereof.
















































































52


 Article 23





Assignment





23.1 The Contractor may assign part or all of its rights and/or obligations under the


Contract to any of its Affiliates with the prior consent of CNPC and in accordance with the following


provisions:





(a) The Contractor shall submit to CNPC copies of a written agreement on the


corresponding part of its rights and/or obligations to be assigned;


(b) The Contractor shall guarantee in writing to CNPC the performance of the assigned


obligations; and


(c) No such assignment shall interfere with the performance of the Petroleum Operations


or affect the organizational structure.


23.2 The Contractor may assign part or all of its rights and/or obligations under the


Contract to any Third Party, provided that such assignment shall be agreed by CNPC in advance and


approved by the Ministry of Foreign Trade and Economic Cooperation of the People's Republic of


China. However, CNPC shall have the right of first refusal in respect of such assignment provided


that the conditions offered by CNPC are comparable.


23.3 CNPC may authorize its Affiliates to implement the Contract, but CNPC shall remain


responsible for the performance of the Contract.


23.4 CNPC may assign part of its rights and/or obligations hereunder to a Chinese


Government controlled Third Party, provided that prior written consent of the Government of the


People's Republic of China shall be obtained. CNPC shall guarantee the performance of the assigned


obligations and that such assignment shall not interfere with the performance of Petroleum


Operations.















































53


 Article 24





Environmental Protection and Safety








24.1 In the performance of the Petroleum Operations, the Operator shall be strictly subject


to the laws, decrees, regulations and standards on environmental protection and safety promulgated by


the Chinese Government and carry out the operations according to international practice. The


Operator shall make its best efforts to protect farmland, aquatic resources, forest reserves and other


natural resources, and prevent pollution and damage to the atmosphere, rivers, lakes, groundwater,


harbors, other land environments and ecological environment and secure the safety and health of the


operating personnel. The Operator shall use all reasonable endeavors to eliminate promptly any


pollution occurring in the performance of the Petroleum Operations and minimize its consequences.


Economic losses caused by any pollution shall be charged to the Joint Account, unless otherwise


provided in Article 8.4 hereof.


24.2 When competent authorities under die Chinese Government assign a person to inspect


environmental protection and safety within the scope of the Petroleum Operations according to the


laws, decrees, rules and regulations, the Operator shall provide all necessary facilities and assistance


to enable the inspectors to carry out such inspection smoothly.


24.3 In the performance of the Petroleum Operations in any fixed fishing net casting area


and/or aquatic breeding area, the Operator shall make prior contact with the relevant authorities of the


Chinese Government.


24.4 Before the commencement of Pilot Test Operations, the Operator shall provide CNPC


with documentation on the possible impact by the Pilot Test Operations on the environment and


measures to be adopted to prevent pollution.


24.5 The Operator shall, after the completion of various Petroleum Operations, level or


restore or reclaim the land of the operating sites in accordance with the relevant local rules and


regulations, provided that CNPC shall be responsible for any environmental damage caused and any


restoration required, as a result of any work performed in the Contract Area prior to the effective date


of this Contract.















































54


 Article 25





Force Majeure








25.1 No Party to the Contract shall be considered in default of the performance of any of


its obligations hereunder, if any failure to perform or any delay in performing its obligations is in


conformity with all the events described as follows:


The performance of any obligations hereunder is prevented, hindered or delayed because of


any event or combination of events which could not be foreseen and/or which is beyond the control of


such Party;


Any such event or combination of events is the direct cause of preventing, hindering or


delaying of such Party's performance of its obligations hereunder; and


When any such event or combination of events has occurred, such P

reasonable actions to overcome any cause that prevents, hinders or delays performance of its


obligations and shall in so far as is practicable continue to perform its obligations hereunder.


25.2 Notice of any event of force majeure and the conclusion thereof shall forthwith be


given to the other Party by the Party claiming force majeure.


25.3 In the event of force majeure, the Parties shall immediately consult in order to find an


equitable solution thereto and shall use all reasonable endeavors to minimize the consequences of


such force majeure.


25.4 If the Petroleum Operations in the Contract Area are partially or entirely suspended as


a result of the force majeure referred to in Article 25.1 herein, the period of the Petroleum Operations


may be extended by a period equal to the corresponding period of such suspension. Within fifteen


(15) days following the end of each Calendar Year, the Operator shall report to JMC in writing on the


suspension of the Petroleum Operations caused by force majeure, if any, during the preceding


Calendar Year.


25.5 The provisions of this Article 25 shall not apply in the case of default in the making


of any payments of money.






































55


 Article 26





Consultation and Arbitration








26.1 The Parties shall make their best efforts to settle amicably through consultation any


dispute arising in connection with the performance or interpretation of any provision hereof.


26.2 Any dispute mentioned in Article 26.1 herein that has not been settled through such


consultation within ninety (90) days after the dispute arises may be referred to arbitration at the


request of and by either Party to the Contract. The arbitration shall be conducted in accordance with


the following provisions:


26.2.1 If agreed upon by the Parties, such dispute shall be referred to arbitration conducted


by the China International Economic and Trade Arbitration Commission in accordance with the


arbitration proceeding rules thereof.


26.2.2 If the Parties fail to reach an agreement on the arbitration arrangement mentioned in


Article 26.2.1 herein, the Parties shall establish an ad hoc arbitration tribunal to conduct arbitration in


accordance with the following provisions:


26.2.2.1 The ad hoc arbitration tribunal shall consist of three (3) arbitrators The Parties shall


each appoint an arbitrator and the two arbitrators so appointed shall designate a third arbitrator. If one


of the Parties does not appoint its arbitrator within sixty (60) days after the first appointment, or if the


two arbitrators once appointed fail to appoint the third within sixty (60) days after the appointment of


the second arbitrator, the relevant appointment shall be made by the Arbitration Institute of the


Stockholm Chamber of Commerce, Sweden.


26.2.2.2 The third arbitrator shall be a citizen of a country which has formal diplomatic


relations with both the People’s Republic of China and the home country of any of companies


comprising the Contractor, and shall not have any economic interests or relationship with the Parties.


26.2.2.3 The place of arbitration shall be determined by the Parties through consultations or,


failing the agreement of the Parties within sixty (60) days after the appointment of the third arbitrator,


by the majority of arbitrators of the ad hoc arbitration tribunal.


26.2.2.4 The ad hoc arbitration tribunal shall conduct the arbitration in accordance with the


arbitration rules of the United Nations Commission on International Trade Law (;‘UNCITRAL”) of


1976. However, if the above-mentioned arbitration rules are in conflict with the provisions of this


Article 26, including the provisions concerning appointment of arbitrators, the provisions of this


Article 26 shall prevail.


26.3 Both the Chinese and English languages shall be official languages used in the


arbitral proceedings. All hearing materials, statements of claim or defense, awards and the reasons


supporting them shall be written in both Chinese and English.


26.4 Any award of the arbitration tribunal shall be final and binding upon the Parties.


26.5 The right to arbitrate disputes under the Contract shall survive the termination of the


Contract.








56


 Article 27





Effectiveness and Termination of the Contract








27.1 After it is signed, the Contract shall be approved by the Ministry of Foreign Trade


and Economic Cooperation of the People s Republic of China. The date of such approval shall be the


effective date of the Contract. However, the Contractor's obligations shall begin on the Date of


Commencement of the Implementation of the Contract, as defined in Article 1.40, herein above.


CNPC shall notify the Contractor of the said approval in writing as soon as possible.


27.2 All annexes to the Contract shall be regarded as integral parts of the Contract. If there


is any inconsistency between the provisions of the annexes and the main body of the Contract, the


main body of the Contract shall prevail. All references to the Contract hereof refer to the main body


of the Contract.


27.3 If in the course of implementation of the Contract, the Parties decide through


consultation to make amendment or supplement to any part of the Contract, a written agreement


signed by the authorized representatives of the Parties shall be required. Such written agreement shall


be subject to the approval of the Ministry of Foreign Trade and Economic Cooperation of the People's


Republic of China should there be any significant modifications hereof. Such agreement shall be


regarded as an integral part of the Contract.


27.4 The Contract shall terminate under any of the following circumstances;


27.4.1 The Contractor opts to terminate the Contract in accordance with Article 6.3 (2)


herein; or


27.4.2 on the termination date of the production period of the Oil Field; or


27.4.3 at the end of the last day of the thirtieth (30th) Contract Year from the Date of


Commencement of the Implementation of the Contract, unless the production period is extended by


the approval of the Department or Unit under Article 4.3 hereof or unless otherwise stipulated in


Articles 4.6.1 or 25.4 hereof.


27.5 If either Party to the Contract commits a material breach of the Contract, the other


Party to the Contract shall have the right to demand that such breach be remedied within a reasonably


specified period of time. If such breach is not remedied within such period of time, the complaining


Party shall have the right to terminate the Contract by giving ninety (90) days written notice to the


defaulting Party. However, such material breach of the Contract and unremedied material breach


shall have been judged by a final award of arbitration in accordance with Article 26 hereof.


























57


 Article 28





The Applicable Law








28.1 The validity, interpretation and implementation of the Contract shall be governed by


the laws of the People's Republic of China. Failing the relevant provisions of the laws of the People's


Republic of China for the interpretation or implementation of the Contract, the principles of the


applicable laws widely used in Petroleum resource countries acceptable to the Parties shall be


applicable.


28.2 If a material change occurs to the Contractor's economic benefits after the effective


date of the Contract due to the promulgation of new laws, decrees, rules and regulations or any


amendment to the applicable laws, decrees, rules and regulations made by the People's Republic of


China, the Parties shall consult promptly and make necessary revisions and adjustments to the


relevant provisions of the Contract in order to maintain the Contractor's reasonable economic benefits


hereunder.


































































































58


 Article 29





Language of Contract and Working Language





29.1 The text of the Contract, annexes and supplementary documents attached hereto shall


be written in both Chinese and English, and both versions shall have equal force and effect.


29.2 The Parties agree that both Chinese and English shall be used as working languages.


After the effective date of the Contract, technical documents and information concerning the


Petroleum Operations hereunder shall, in general, be written in English except for technical


documents and information available previously and received from Third Parties.


Unless otherwise agreed by CNPC, documents and information in respect of administration


shall be written in both Chinese and English. Forms for production and other reports and records


shall be printed with headings in both Chinese and English and may be filled out in either Chinese or


English.

























































































59


 Article 30





Miscellaneous








30.1 All notices and documents required hereunder shall be deemed to have been properly


given and delivered to either Party to the Contract only when received.





30.2 Notices and documents shall be delivered by hand or sent by mail, registered airmail,


facsimile, telex or cable to the address hereunder specified:





Address of CNPC: Address of the representative of the Contractor:





Liu Pu Kang Suite 315, China World Tower


Beijing 100724, P. R. China # 1 Jian Guo Men Wai Ave.,


P.O. Box 766 Beijing, China 100004


Tel. 86-10-6505-1516/1517/1518





Fax: 86-10-6209-6006 Fax: 86-10-6505-5259


For the attention of: Mr. Zeng Xing Qiu For the attention of: Mr. Gerald G. Moench


30.3 Either Party to the Contract may change its address or representative by a written


notice to the other Party to the Contract.


30.4 For the implementation of the Contract, each company comprising the Contractor


shall register with the State Administration for Industry and Commerce of the People’s Republic of


China in accordance with the relevant provisions of the said State Administration for Industry and


Commerce and shall obtain the necessary approval from CNPC.


30.5 Companies comprising the Contractor have the following percentages of participating


interests as of the effective date of the Contract:


(1) Pan-China Resources Ltd. One Hundred percent (100%)


Subject to Article 30.8 herein, the rights and obligations of each company comprising the


Contractor hereunder may, as between themselves, be varied by the operating agreement between


such companies and the Contractor shall advise CNPC in writing of any expected variation and,


thereafter, of the actual variation.


If such variation leads to the transfer of operatorship, such variation shall obtain in advance


the written approval of CNPC.


30.6 The parent corporation of each company comprising the Contractor which is not itself


a parent corporation shall, at the request of CNPC, provide CNPC with a written performance


guarantee acceptable to CNPC.


 30.7 The Contractor shall pay CNPC a lump-sum signature fee as follows: (a) Three


Hundred Thousand U.S. Dollars (US$300,000) within thirty (30) days from the effective date of the


Contract; and (b) Two Hundred Thousand U.S. Dollars (US$200,000) within thirty (30) days from the


date on which the Overall Development Program of the Oil Field within the Contract Area is


approved by the Department or Unit. Such signature fee shall, in no case, be charged to the Joint i


Account, nor be deemed recoverable costs. 1


30.8 Companies comprising the Contractor signing the Contract with CNPC agree to





undertake the obligations of the Contractor under the Contract jointly and severally. i








In witness whereof, THIS CONTRACT is signed in Beijing by the authorized representatives


i


of the Parties hereto on the first above-mentioned date. l


i





CHINA NATIONAL PETROLEUM PAN-CHINA RESOURCES LTD.


CORPORATION (CNPC)




















Mr. Zeng Xing Qiu, Mr. Pat Chua,


Vice President Chairman


China National Oil & Gas Exploration


and Development Corporation (CNODC)














I






























































i 61








i








 Annex I r


Geographical Location and Coordinates of Turning Points of the Boundary Lines i


of Kongnan Block, Dagang Oil Field I;


























&


























1








-X





;.










62


63


COORDINATES OF THE TURN ING POI NTS OF THE BOUNDARY LINES


OF KONGNAN BLOCK DAGANG OILFIELD m ,.2





ANNEX 1-2





4|iS 'J'-X im ’A- itm


POINT EAST LONGITUDE NORTH LATITUDE . POINT EAST LONGITUDE NORTH LATITUDE


A 11 73 00T41" 38° 20'30" KK 116’ 53*09" 38’ 08*53"


B 117° 02’45" 38° 20'30" LL 116’ 55*54" 38’ 08*53"





C 117° 02'45” 38° 19'09" MM 116’ 55*54" 38’ 07*15"


D 117° or22n 38° 19'09" NN 116° 52'49" 38’ 07*15"


E 117° 01’22" 38° 18'20" 116’ 52*49" 38° 06'43"


00


F 117° 01*02" 38’ 18’20" PP 116’ 50*25" 38’ 06*43"


G .117° 01*62" 38° 17'15" QQ 116’ 50*25" 38’ 07*15"


H 117° 00'4r .38° 17'15" RR 116’ 49*24" 38’ 07*15"





1 117° 00’4r 38° 16'27" S$ 116’ 49*24*' 38'° 08*20"


J 116° 59*19" 38’ 16’27" TT 116’ 53*09" 38’ 08*20"


K 116° 59*19" 38° 14'0r UU 116° 59'19" 38’ 08*04"





L 116° 58*58" 38’ 14*01" VV 117’ 00*41" 38’ 08*04"


M 116’ 58*58" 38’ 13*45" WW 117’ 00*41" 38’ 07*32"


N 116° 58*38" 38’ 13‘45" XX 117? 00*21" 38’ 07*32"





0 116° 58'38" 38° 13"l 2" - YY 117’ 00*21" 38’ 07'15"


P 116° 57'57" 38° 13'12" ZZ 117’ 00*00" 38’ 07*15"


Q 116’ 57'57” 38’ 12’56" AAA 117° 00*00" 38’ 07*04"





R 116° 57'36" 38’ 12’56" BBB .116’ 58*58" 38’ 07*04"


S 116’ 57*36" 38’ 12’07" ccc 116’ 58*58'* 38’ 06*59"


T 116° 57'16" 38’ 12‘07" DDD 116’ 57*57" 38’ 06*59"





U 116° 57'16" 38’ 11'35" EEE 116’ 57*57" 38’ 06*24"


V 1163 55*53" 38’ ir35” FFF 116’ 58*38" 38’ 06*24"





w 116° 55*53" 38’ 12*40" GGG 116’ 58*38" 38’ 04*50"


X 1163 56'34" 38° 12'40" HHH 116’ 58*17" 38’ 04*50"


Y 1163 56'34" 38’ 13*12" I I I 116’ 58*17" 38’ 04*01"





Z 116" 57'16" 38’ 13* 12" JJJ 116’ 57*36" 38° 04'01"


AA 116" 57*16" 38’ 13*45" KKK 116’ 57*36" 38’ 03*28*'


BB 1163 57'57" 38’ 13*45" LLL 116’ 54*32" 38’ 03*28"





CC 116’ 57'57" 38’ 14*50" MMM 116’ '54*32" 38’ 04*01"


DD 116’ 58'38” 38’ 14*50" NNN 116’ 53*51" 38° 04'01"


EE 116° 58*38" 38’ 17*32" 116’ 53*51" 38’ 04*33"


000


FF 116" 59'19" 38’ 17*32" PPP 116’ 56*35" 38’ 04*33"


GG 116’ 59'19" 38" 1837" QQQ 116’ 56*35" 38’ 05*22"


HH 117’ OO'OO" 38° 18'37" RRR 116’ 57*16" 38’ 05*22'*





II 117’ OO’OO" 38’ 19*41" SSS-; 116° 57'16" 38° 07'40"


JJ 117’ 00'41" 38’ 19*41" TTT 116’ 59*19" 38° 07'40"





 Annex II





Accounting Procedure








Contents








Article 1 General Provisions


Article 2 Definitions





Article 3 Cash Calls





Article 4 Accounting and Management of Material





Article 5 Expense Accounting





Article 6 Recovery of Costs


Article 7 Accounting Reports





Article 8 Audit





Article 9 Transfer Procedure of the Joint Account





















































65


 Annex II





Accounting Procedure











Article 1 General Provisions








1.1 This Accounting Procedure is an integral part of the Contract.


• s


The definitions set forth in Article 1 of the Contract are equally applicable to this Accounting





Procedure. The definitions and provisions in this Accounting Procedure have the same force and


effect as those in the Contract. If the provisions in this Accounting Procedure are in conflict with


those in the Contract, the provisions in the Contract shall prevail.


ii


m 1.2 Purpose: The purpose of this Accounting Procedure is to establish equitable control i


i


n ■ methods for determining charges and credits applicable to the Petroleum Operations according to the


•4 j relevant provisions of the Contract, including the guidelines for accounting settlements in respect of


managing funds and materials, financing and Accounting Records, and for compiling accounting


statements.








1.3 Accounting methods: The double-entry method of accounting shall be used in this


Accounting Procedure.





1.4 Working language: Chinese or both Chinese and English shall be used as the working


languages for the Accounting Records and analyses of financial conditions in respect of the Joint


Account, at the Operator's option.





1.5 Currency for accounting: U.S. Dollars shall be the unit of currency for accounting in


the Joint Account and shall be the currency for the investments and reimbursements under, the


Contract. In case currencies other than U.S. Dollars are used to carry out business activities, the


relevant bank accounts and other current asset and current liability accounts shall be kept both in U.S.


Dollars and in the currencies used.





1.6 Currency translation: For the purpose of accounting, currency translation entered


into the Joint Account shall be made in accordance with following guidelines:





The rate of exchange to be used for the conversion into U.S. Dollars of cash calls received in


Renminbi shall be the arithmetic average of buying and selling rates of exchange applicable to any


individual or commercial entity quoted by Bank of China at 11:00 a.m. on the date of receipt of such








66


cash in the Operator's bank account(s). If the relevant date is a non-business day of the Bank of


China, the rate quoted on the previous business day by the Bank of China shall apply.


All other transactions recorded in the Joint Account which are made in Renminbi shall be


translated into and recorded in U.S. Dollars at the rate of exchange as quoted above on the last


business day of the previous month, while those transactions which are made in currencies other than


Renminbi and U.S. Dollars shall be recorded in U.S. Dollars at the actual cost in U.S. Dollars of


effecting the transaction.


Neither CNPC nor the companies comprising the Contractor shall experience an exchange


gain or loss, at the expense or benefit of the other Party.


The Operator shall make its best efforts to minimize any exchange loss.


All gains or losses from currency conversion or translation shall be recorded in the Joint


Account.


1.7 Foreign exchange business: Foreign exchange business related to the Petroleum


Operations shall be made in accordance with “Regulations for Exchange Control of the People's


Republic of China” and “Rules for the Implementation of Exchange Control Regulation Relating to


Enterprises with Overseas Chinese Capital, Enterprises with Foreign Capital, and Chinese and


Foreign Joint Ventures.”


1.8 Accounting Records and statements:


1.8.1 All Accounting Records related to the Petroleum Operations shall be established and


maintained by the Operator within the territory of the People's Republic of China.


1.8.2 All vouchers, accounts, books and statements shall be prepared in accordance with


the Petroleum Operations Accounting System established by CNPC and the Contractor through


consultation pursuant to the “Accounting Regulations of the People's Republic of China for


Enterprises with Foreign Investment”.


1.8.3 Annual accounting statements and important accounting books, including asset


records; cash or bank journals, general and subsidiary ledgers, balance sheets, and annual gross oil


production allocation statements shall be maintained for the term of the Contract as per Article 4.7 of


the Contract, or for any further period if required by the laws and regulations of the People's Republic


of China. Other accounting vouchers and books shall be kept for fifteen (15) years. Quarterly and


monthly statements shall be maintained for five (5) years.








67


 Upon the expiration of the custody period, a list shall be made of the accounting files to be





disposed of. Disposal of the accounting files shall only be made after the approval of CNPC. The list


of the accounting files disposed of shall be maintained with the annual accounting statements.





i






































i


i


I








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I


i l








i 68








i





 Article 2 Definitions





The terms used in this Accounting Procedure shall have the definitions ascribed to them as


follows:





2.1 “Accounting Records” means all accounting books, source documents, original


vouchers, approved documents, analytical data, work papers and accounting statements maintained


for the Petroleum Operations.


2.2 “Accounting System” means the Petroleum Operations Accounting System prepared


by CNPC and the Contractor through consultation pursuant to the “Accounting Regulations of the


People's Republic of China for Enterprises with Foreign Investment”, specifying the accounting titles


to be used by the Operator and instructions for implementation, forms and contents of various


accounting statements and their preparation methods, including a material classification section, a


definition of Controllable Material, standards for itemizing assets and the provisions for fixed asset


accounting.


2.3 “Material” means materials, tools, facilities, equipment and consumables procured,


leased or otherwise acquired and held for the Petroleum Operations.


2.4 “Joint Account” means accounts established by the Operator for the implementation


of the Contract to record all debts and credits related to the Petroleum Operations.


2.5 “Controllable Material” means the Material referred to in the Accounting System


described in Article 2.2 of this Accounting Procedure.


2.6 “LIBOR” means the seven-day term London Inter-Bank Offered Rate for U.S.


Dollars for similar amounts to the sums in question, quoted by Midland Bank in London at 11:00 a.m.


on the first business day of the relevant period


2.7 “Investing Party” means any party that is contributing the funds for the Petroleum


Operations in accordance with its participating interest determined pursuant to the relevant provisions


of the Contract.























69


 Article 3 Cash Calls





3.1 Except as otherwise provided in the Contract, the Contractor shall solely provide all


the Pilot Test Costs and all the Development Costs according to the provision of Articles 12.1.1 and


12.1.2 of the Contract. In accordance with each approved annual budget, the Operator shall issue


monthly cash call notices to each company comprising the Contractor to provide the Operator with


funds to cover the planned expenditures of the next month. Whether or not the cash call notices for


the Pilot Test Costs are to be issued shall be at the option of the Operator.


3.2 Development Operations cash call and default


3.2.1 According to the needs of the Petroleum Operations, the Operator shall regularly


issue monthly cash call notices within the amount of approved annual budget to request each company


comprising the Contractor to respectively make advances as specified by the Operator. The Operator


shall, before twenty (20) days prior to the commencement of each month, issue cash call notices for


the Development Costs and each company comprising the Contractor shall provide its percentage


share of funds according to the requirement and within the time limit specified in the cash call notice.


However the payment due date specified in the cash call notices shall not be earlier than the first


working day of the month for which cash is called. Each company comprising the Contractor shall


transfer its percentage share of funds to the Operator's bank accounts) established by the Operator


particularly for the Petroleum Operations. Such bank account(s) will in all cases be interest bearing


accounts).


Any excessive advances made by each Company comprising the Contractor for any month


shall be adjusted in the next cash call.


In case that the Operator, owing to the needs of the Development Operations, has to incur


expenditures which are unforeseen in the cash call for any month, written notices shall be issued to all


the companies comprising the Contractor who shall finance their own shares or additional amount


within ten (10) days following die receipt of the written notice.


3.2.2 Interest shall be paid by the companies comprising the Contractor failing to pay its


share of funds on the due date specified in the cash call at LIBOR on the delinquent date plus five


percent (5%) on the delinquency of less than one (1) month and thereafter at the average LIBOR rate


ruling throughout each subsequent month plus five percent (5%), such interest being compounded on


a monthly basis throughout the period of the delinquency. The non-defaulting party or parties shall


make up the delinquent portion on behalf of the defaulting party or parties. When the defaulting party


or parties pay cash to meet both the delinquent portion and accrued interest thereon, the Operator shall


reimburse the non-defaulting party or parties who made up the delinquent portion.











70


All amounts advanced by the non-defaulting party or parties plus accrued interest not


reimbursed by the defaulting party shall constitute a debt due from the defaulting party or parties to


the non-defaulting party or parties who shall be entitled to all remedies at law and equity. Any non¬


defaulting party shall, on behalf of the non-defaulting party or parties be entitled to take and sell the


defaulting party’s or parties’ share of the Annual Gross Production of Crude Oil and apply the


proceeds of the sale of such Crude Oil against all sums due and payable by the defaulting party or


parties including accrued interest. Any excess funds remaining from such proceeds after deduction of


all amounts due, including interest and the costs, charges and expenses incurred by any non-defaulting


party, in connection with such sale, shall be paid over to the defaulting party. Any deficiency


remaining due after deducting the proceeds of any such sale shall remain an obligation of the


defaulting party or parties and may be collected as any other debt.


3.3 Each monthly cash call notice shall clearly indicate the following information:


3.3.1 Annual Development Costs to be shared by each company comprising the Contractor


as shown in the approved annual budget.


3.3.2 Amount of funds advanced by each company comprising of the Contractor at the end


of the month prior to the month in which the cash call notice is prepared and the actual expenditures


and the actual balance (i.e. funds unused) recorded in the Joint Account, accompanied by the bank


statements related to the Joint Account for the previous month.


3.3.3. Amount of funds to be called from each company comprising the Contractor in the


month for which the funds will be used and the estimated amounts of funds to be called in the


following two (2) months.


3.3.4 The date when funds are to be provided, the amount of funds, currency, account


number, name of the account, the recipient bank and its address.


3.4 On the Date of Commencement of Commercial Production of the Oil Field,.any


development investment for the Oil Field advanced by the company comprising the Contractor which


has not been expended or will not be expended shall be returned to each of the companies in


proportion to its share.


3.5 The cash for the Production Operations undertaken by the Parties jointly and


approved by JMC shall be provided by all the Investing Parties to the Contract according to Article


12.1.3 of the Contract, but the Contractor shall, in accordance with Article 12.1.3 of the Contract, pay


for CNPC the Operating Costs which shall be paid by CNPC. Based on the needs of the Production


Operations, the Operator may make timely adjustment of the amount of cash to be provided by all the


Investing Parties to the Contract. The Operator shall issue quarterly cash call notices to call for cash


for the Production Operations. In proportion to its share, each Investing Party shall respectively





71


provide advances on a monthly basis in accordance with the requirement and within the time limit


specified in the cash call notice of the current month.


In case that the Operator, owing to the needs of the Production Operations, has to incur


expenditures which are unforeseen in the cash call for any month, written notices with explanations


shall be issued to all the Investing Parties who shall finance their own shares for additional amount


within ten (10) days following the receipt of such written notice.


3.6 According to the requirement of the Petroleum Operations, the Operator shall indicate


in any cash call notice the U.S. Dollar equivalent of the total cash called. The Operator shall also


specify the amounts of Renminbi and U.S. Dollars required as estimated to make payment.


3.7 Provisions for recording the sources of funds:


3.7.1 Funds for Pilot Test Costs, Development Costs and Operating Costs, when received,


pursuant to each cash call shall be credited against the relevant accounts of the Investing Parties in the


Joint Account.


3.7.2 In case either Party to the Contract decides to develop excess Associated Natural Gas


for its sole account pursuant to Article 18.1.2.3 of the Contract, or undertakes any other operation for


its sole account, the funds required shall be financed and accounted for separately.


3.7.3 The Contractor shall, within twenty (20) days after the date of submission to CNPC


of a written notice expressing its decision to participate in the utilization of the excess Associated


Natural Gas of the Oil Field undertaken solely by CNPC, pay CNPC in cash the amounts stipulated in


Article 18.1.2.3 of the Contract.


3.7.4 In accordance with Article 6.5 of the Contract, if the Contractor opts to terminate the


Contract as provided in Article 6.3 (2) of the Contract, the Contractor shall, within thirty (30) days


from the date of the expiration of the pilot test period, pay CNPC in U.S. Dollars the unfulfilled


balance of the minimum pilot test work commitment stipulated in the pilot test period, converted, into


cash. The detailed method by which the unfulfilled balance of the minimum pilot test work


commitment is converted into U.S. Dollars is that the actual average unit cost of the last portion of the


work under the Contract or of the last well drilled, excluding the abnormal drilling costs such as those


of fishing, severe loss of mud circulation, etc. is multiplied by the unfulfilled amount of the minimum


pilot test work commitment. The formula for such calculation is as follows:


I = Ac x Pu


in which:


f





72


I = converted cash amount of the unfulfilled balance of the minimum pilot test work


commitment;


Ac = actual average unit cost of the last portion of the work or of the last well drilled (If there is


no average unit cost, the estimated unit costs or expenses in the pilot test program shall be applied for


calculating); and


Pu = the unfulfilled amount of the minimum pilot test work commitment (The unfulfilled


amount of the work is the difference between the work specified in Article 6.2.1 of the Contract and


actual work.)
















































































73


 Article 4 Accounting and Management of Material





4.1 Procurement of Material:


The procurement of Material shall be implemented in accordance with the procedure specified


in Articles 15.1 and 7.6 of the Contract. In order to prevent overstocking of Material, the Operator


shall use all reasonable best efforts to ensure that the procurement of Material shall be made in


accordance with the Material procurement plans and that the quality of material conforms to


specifications and prices are fair and reasonable. The Operator does not warrant the Materials


furnished beyond, or back of, the supplier's or manufacturer's guarantee.


4.2 Costs of procuring Material


The costs of Material purchased shall be the invoice prices less discounts plus related


transportation and other expenses, including expenses for freight to the destination, insurance


premiums commensurate with the material covered, fees of forwarding agents, duties, fees, handling


expenses from shipside to and within any water or land terminal warehouse or yard, and any other


reasonable expenses actually paid and expenses of inland transportation.


4.3 The provisions and procedures of Article 15.1 and Article 7.6 of the Contract and the


following provisions shall be applied for pricing Material furnished from the stocks of the Parties


and/or their Affiliates for use in the Petroleum Operations:


(1) New Material:


New Material shall be priced on the basis of current market value plus expenses in moving


such Material directly to the job-site where Material is used.


(2) Used Material:


(a) Material which is in sound and serviceable condition and is suitable for reuse without


reconditioning shall be priced by the Parties, and the ceiling price shall not exceed seventy-five


percent (75%) of the current market value of new Material.


(b) Material which, after being reconditioned, will be further serviceable for its original


function shall be priced by the Parties, and the ceiling price shall not exceed fifty percent (50%) of the


current value of new Material.


(c) Used Material which cannot be classified as (a) or (b) above shall be priced by the


Parties through discussions at a value commensurate with its use.





74


(d) If the Operator wishes to use a method other than the above for pricing used Material,


such other method shall be agreed upon in advance by the Parties through consultations.


4.4 Price determination and leasing expense calculation method for properties purchased


or leased from other contract areas:


The Operator may lease equipment and facilities and purchase Material and fuel from other


contract areas within the People's Republic of China. The Operator shall charge the leasing expenses


or purchase price as agreed upon by the Operator and its suppliers. Such leasing expenses or purchase


prices shall not exceed those currently prevailing in similar contract areas.


4.5 For certain Material which is in short supply in the world markets and difficult to


procure at published market prices and the lack of which will hinder normal operations, the Operator


may, after the approval of JMC, purchase such Material urgently needed by the Petroleum Operations


and charge actual purchase costs to the Joint Account.


4.6 Disposal of Equipment and Material:


The Operator shall not dispose of or sell Material with book value exceeding Ten Thousand


U.S. Dollars (U.S.$ 10,000) without the prior consent of the Parties. The Operator shall use all


reasonable endeavors to minimize losses in the disposal of or sales of such Material.


Sales of properties to Third Parties or Affiliates shall be recorded in accordance with actual


sales income. No guaranty or warranty for Material sold or disposed of under this Article shall be


given by the Operator to any purchaser.


4.7 Accounting for Material:


The costs of Material which is procured by the Operator and is directly used at the job-site


shall be charged to the respective accounts of Pilot Test Costs, Development Costs or Operating Costs


at actual purchase prices (as defined in Article 4.2 herein) and on the basis of the use of Material.


Should such Material subsequently be used for other purposes, the relevant charges shall be


transferred from the original cost accounts to the appropriate cost accounts.


Material for general use which is first stored in warehouses shall be subject to inventory


control procedures. The quantities, unit prices and total value shall be recorded for Material in


inventory using perpetual inventory methods. Material in stock shall be priced at purchase costs and


the Operator, upon the commencement of or during the Contract period, has the freedom to choose


one of the following pricing methods such as FIFO, weighted average method and moving average











75


method, etc. for Material to be transferred out of the stock. Accounts for inventory Material shall be


regarded as Pilot Test Costs, Development Costs or Operating Costs.


At the request of any Party of the Contract, the Operator shall furnish to such Party a detailed


statement of Controllable Material.


The Operator shall conduct a physical inventory of Material in warehouses prior to the annual


final accounts or whenever depending upon the actual situation. The Operator shall give a written


notice to JMC sixty (60) days before the date of proposed physical inventory in order to allow time


for participation by each Party of the Contract and failure to participate by any Party of the Contract


in the physical inventory shall be regarded as approval of the physical inventory conducted by the


Operator.


If any gain or loss is found as a result of the physical inventory, the Operator shall compile a


detailed statement of the gain or loss and attach to it an explanation for the gain or loss, which shall be


submitted to JMC for examination and approval.


4.8 In accordance with Article 17.1 of the Contract, the Operator shall exercise strict


control over the fixed assets of the Petroleum Operations and set up accounts and record cards, and


shall conduct a physical inventory of the fixed assets at the year-end or whenever depending upon the


actual situation to make sure that the book records, card records and physical fixed assets are in


conformity. In case that any damage or loss arises to the fixed assets, the Operator shall determine the


reasons and submit them to JMC for examination and approval.















































76


 Article 5 Expense Accounting


5.1 Rules for accounting





5.1.1 According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of the Contract, all





Pilot Test Costs, Development Costs and Operating Costs incurred shall be recorded in the Joint


Account separately.


! ■■ The Operator shall establish and maintain three separate accounts, namely:


i ..


5.1.1.1 Pilot Test Costs account;


5.1.1.2 Development Costs account;





5.1.1.3 Operating Costs account.





j In which all charges and costs as classified pursuant to Articles 5.2 and 5.3 of this Accounting


Procedure shall be reflected.








5.1.2 If either CNPC or the Contractor makes the decision to develop excess Associated


Natural Gas for its sole account in accordance with Article 18 of the Contract or to undertake any


% -4 other operation for its own account, the relevant costs shall be accounted for separately. i


!





5.1.3 All items related to the Petroleum Operations such as discounts, deductions,


allowances, interest income, gains from various services, indemnities from insurance and other


miscellaneous income by the Operator, shall be credited to the relevant expense accounts.





5.1.4 All direct services or research work (including personnel) provided by the superior


organizations or Affiliates of CNPC or of the Contractor and by the Third Parties for the Petroleum


i Operations shall be subject to the advance work order procedures on the basis of the annual budget or


of the approval by JMC and shall be charged to the Joint Account after verification of relevant


i invoices.


I


The work order procedure shall be established through consultations at JMC meetings by both


Parties within three (3) months as of the Date of Commencement of the Implementation of the


Contract. The rates charged for direct services or research work (including personnel cost) provided


! by the superior organization or Affiliates of CNPC or of the Contractor shall be competitive when


compared with the rates of similar services furnished by Third Parties. The Operator shall, in


accordance with Article 15 of the Contract, give priority to use direct services or research work


(including personnel) provided by CNPC.


i





77





1


i


In order to protect the interests of Parties, all costs or expenses paid for attorney's fees,


litigation, investigation, including expenses in securing evidence, mediation and settlements. The


expenses for handling legal matters incurred for the interests of any Party to the Contract shall be


borne solely by such Party.


5.2.9 Taxes:


All taxes paid according to the tax laws of the People's Republic of China, except for the


income taxes, Value Added Tax and Royalty to be paid by the companies comprising the Contractor


or CNPC.


5.2.10 Energy expenses:


All costs in respect of fuel, electricity, heat, water or other energy used and consumed for the


Petroleum Operations.


5.2.11 Field office facility charges:


The costs and expenses of establishing, maintaining and operating any offices, camps or


housing facilities necessary for the performance of job-site operations, including a share of the costs


of any office used by staff directing such operations (calculated by apportioning office costs and


expenses on the basis of space occupied by such staff).


5.2.12 Communication charges:


The costs of acquiring, leasing, installing, operating, repairing and maintaining


communication systems, including radio and microwave facilities between the Contract Area and the


base facilities.


5.2.13 Ecological and environmental protection charges:


The charges for any measures undertaken for the Petroleum Operations within the Contract


Area as required by relevant statutory regulations formulated by the authorities concerned or pursuant


to the programs agreed by the Parties.


5.2.14 Service charges:


5.2.14.1 Technical service:


The charges paid for services, such as rock specimen analysis, oil quality tests, geological


evaluation, data processing, design and engineering, well site geology, drilling supervision, special


research programs and other technical services.





79


 5.2 Cost items:





The following items shall be chargeable to the Joint Account at Operator's net cost.


5.2.1 Subcontractor charges:


The charges paid to Subcontractors in accordance with contracts signed between the Operator


and Subcontractors.


5.2.2 Personnel expenses:


The contents and control of personnel expenses including but not limited to reimbursable


individual income taxes, provided that Contractor will supply supporting information for such taxes,


shall be stipulated in Article 19.3 of the Contract.


5.2.3 Travel and living expenses:


Travel and living expenses paid according to Article 19 of the Contract to the personnel


involved in the Petroleum Operations.


5.2.4 Material expenses:


Expenses paid in accordance with Article 4 of this Accounting Procedure to purchase


Material for use in the Petroleum Operations.


5.2.5 Relocation and transportation expenses:


Relocation and transportation expenses for the personnel involved in the Petroleum


Operations to be relocated into or out of the People's Republic of China and transferred from job-sites


to job-sites within the People's Republic of China.


5.2.6 Maintenance, repair and leasing expenses:


Expenses for maintenance, repair or replacement of the properties used in the Petroleum


Operations and the leasing expenses paid for leased properties and equipment.


5.2.7 Insurance premiums:


Necessary net payment made for the insurance of the Petroleum Operations and related costs


and expenses, including deductibles paid in the event of loss pursuant to Article 21.4 of the Contract.


5.2.8 Legal expenses: 1





78


 5.2.14.2 General service charges:





Professional consultant charges incurred for the common interests of both Parties and charges


for other services to obtain original data needed for Petroleum Operations from outside sources,


except legal service.


5.2.14.3 CNPC’s assistance charges:


(a) The charges for the assistance provided by CNPC for the Contractor to carry out the


Petroleum Operations in accordance with Article 9 of the Contract.


(b) For all assistance to be provided by the head office organization of CNPC to the


Contractor in the course of the Development Operations, CNPC shall charge an administrative fee of


One Hundred and Seventy-five Thousand U.S. Dollars (US$175,000) for each Calendar Year. The


aforesaid administrative fee shall be paid respectively on June 1st and December 1st each Calendar


Year, with Eighty-seven Thousand and Five Hundred U.S. Dollars (US$87,500) for each time.


(c) For all assistance to be provided by the head office organization of CNPC to the


Contractor in the course of the Production Operations before CNPC takes over the said Production


Operations, CNPC shall charge an administrative fee of: Two Hundred and Fifty Thousand U.S.


Dollars (US$250,000) for each Calendar Year from the first year (1st) to the third year (3rd) of the


production period; One Hundred and Seventy-five Thousand U.S. Dollars (US$175,000) for each


Calendar Year from the fourth year (4th) to the ninth year (9th) of the production period and One


Hundred Thousand U.S. Dollars (US$100,000) for each Calendar Year from the tenth year (10th) to


the twentieth year (20th) of the production period. The aforesaid administrative fee will be paid in


two equal installments on the first of June and first of December of each Calendar Year.








5.2.15 Damages and losses to the assets:


All costs and expenses necessary for the repair, replacement or supplement of the assets


resulting from damages or losses incurred by fire, flood, storm, theft or any other force majeure


causes, excluding the losses specified in Article 8.4 of the Contract which shall be borne by the


Operator alone.


5.2.16 Personnel training costs:


Costs incurred for personnel training pursuant to Article 16 of the Contract and Annex IV-


Training of Chinese Personnel and Transfer of Technology.








80


 5.2.17 Miscellaneous expenses:





Any reasonable miscellaneous expenses needed for the Petroleum Operations excluded in the


above items of expenses, such as bank charges, books, stationery and conference expenses as well as


other reasonable expenses.


5.2.18 Overhead:


Overhead refers to the indirect costs for the managerial and operational services provided by


the Operator's superior management organizations for the Petroleum Operations, including


management, administration, accounting, treasury, inter-company audit, tax, legal matters,


procurement, employee relations, financing, the collection of economic data and costs for general


consultation on such planning, design, research and operational activities, etc. to the extent that these


are not chargeable under Article 5.1.4 of this Accounting Procedure. The overhead for the Pilot Test


Operations shall be calculated in accordance with the following tiers and based on the sum of the total


actual costs from Article 5.2.1 through Article 5.2.17 and Article 5.2.19 of this Accounting Procedure,


but not including CNPC's assistance charges under Article 5.2.14.3 of this Accounting Procedure.





Direct Costs for Pilot Test Percentage Rate


(U.S. S/Year) (%)


First Tier: 0 to 5,000,000 5%


Second Tier: 5,000,001 to 15,000,000 3%


Third Tier: 15,000,001 to 25,000,000 2%


Fourth Tier: Over 25,000,000 1%





The overhead rates for the Development Operations shall be agreed upon by the Parties


through discussions at the time when the development budget is being prepared. However, direct


costs for development shall not include investments on special items of construction which shall


include, but not be limited to, gas processing facilities, terminal loading and other facilities of which


the overhead rates shall be agreed upon through discussions between the Parties at the time when the


development budget is being made.


When the first budget is prepared for the Calendar Year of commencement of commercial


production from the Oil Field, the overhead rates for production period and its related calculation


method as well as the utilization method shall be agreed upon through discussions between the


Parties.








On the last working day of each month, the Operator shall make provision into the Joint


Account for the overhead fees for the current month, calculated on the basis of cumulative actual


expenditure for the Calendar Year to that date and payment shall be made from the Joint Account on


the last working day of the following month. The final adjustment of the overhead shall be made at








81


the end of the Calendar Year in respect to any difference between the actual payment by the Joint


Account and the total overhead for that Calendar Year calculated on the annual cumulative actual


investment expenditure at the end of such year. Any excess shall be refunded and deficiencies made


good.





5.2.19 General and administrative expenses:


General and administrative expenses refer to the administrative expenses incurred for the


offices established by the Operator within the Chinese territory and for JMC and its subordinate


bodies for the performance of the Petroleum Operations not otherwise directly chargeable pursuant to


Article 5.2 of the Accounting Procedure in accordance with the provisions of the Contract. Such


expenses shall be classified according to minor accounts.


5.3 Except as otherwise provided in this Accounting Procedure, the allocation of common


costs and expenses for each item of operations shall be provided by the Contractor if they are the Pilot


Test Costs and Development Costs and shall be charged in proportion to the Operating Costs actually


incurred in each month if they are the Operating Costs.


5.4 With respect to the expenditures or excess expenditures as mentioned in Article


10.2.4 (b) of the Contract which are determined by JMC to be unreasonable, JMC will form a joint


team for further investigation to determine whether they shall be charged to the Joint Account or shall


be borne by the Operator alone before the year-end final closing of accounts.
























































82


 Article 6 Recovery of Costs





6.1 In accordance with the provisions of Article 12.2 of the Contract, the Operating Costs of


the Oil Field shall be recovered from the production of the Oil Field. In accordance with the


provisions of Article 12.3 of the Contract, the Pilot Test Costs and the Development Costs incurred by


the Contractor and the Pre-development Costs incurred by CNPC shall be recovered from the


production of the Oil Field.


6.2 At the date of completing each lifting of Crude Oil, the Operator shall make separate


records into the Joint Account for the appropriate reimbursement of the Operating Costs in


accordance with Article 12.2 of the Contract. Written notices shall be sent by the Operator to CNPC


and the Investing Parties at the same time.


6.3 In accordance with the provisions of Article 19.1 of the Contract, the Operator shall


establish complete books for recording the volume and value of Crude Oil and/or Natural Gas,


precisely reflecting the production and the disposal of the Crude Oil and/or Natural Gas within the


Contract Term.


6.4 Crude Oil production in each Calendar Year for the Oil Field within the production


period shall be accounted according to the allocation proportions specified in Article 13 of the


Contract and at the Crude Oil price determined pursuant to Article 14.3 of the Contract.


















































1





83


 Article 7 Accounting Reports








7.1 The Operator shall provide relevant accounting reports and statements based on the


Accounting System to CNPC and each company comprising the Contractor. Monthly reports shall be


submitted within thirty (30) days after the end of each month, quarterly reports within forty-five (45)


days after the end of each Calendar Quarter and annual reports within forty-five (45) days after the


end of each Calendar Year. Monthly, quarterly and annual reports shall be submitted in accordance


with requirements and formats specified in the Accounting System.


7.2 Any Investing Party to the Contract may require the Operator to allow its staff to have


access to the Joint Account Accounting Records relating to the application of expenses in the


stipulated custody period, upon giving thirty (30) days notice but such access shall not unduly hinder


the Operator’s normal operations.

























































































84


 Article 8 Audit


, I. )


' s


8.1 Audits shall be carried out in accordance with Article 19.2 of the Contract.


8.2 The expenses of audits by any Party of the Contract shall be borne by such Party





which conducts the audit.


is






















































































atv •


m 85


 Article 9 Transfer Procedure for the Joint Account





9.1 If, at the expiration of the pilot test period, the Contractor opts to enter into the


development period, or when the Oil Field within the Contract Area goes from development into


production, or when the Contractor terminates the Contract, an inventory and check of all properties


and accounts shall be conducted.


If the Contract has entered into the development period or the production period, the Operator


(after taking an inventory of all properties taken by all Investing Parties) shall make a proposal to


JMC for its approval listing the remaining equipment and Materials needed for the Petroleum


Operations for the following period and which shall be carried forward to the next period in book


values in the Joint Account. The Operator shall be responsible for the disposal of the equipment and


materials not needed for the Petroleum Operations, the gains or losses derived from such disposal


shall be allocated in accordance with the share of each Investing Party in proportion to the overall


investment amount of all Investing Parties and be adjusted against the original accounts.


If the Contract terminates, the method of an inventory to all of the remaining equipment and


Materials shall be the same as mentioned above, and the gains and losses derived from such disposal


shall be adjusted against the accounts of the original Investing Party in accordance with the above


mentioned methods.


9.2 In accordance with the provisions of Article 8.9 of the Contract, when CNPC


becomes the Operator of the Oil Fields within the Contract Area, the former Operator shall transfer to


CNPC all the Accounting Records relating to the Joint Account.


9.3 Upon the termination of the Contract, the Operator shall transfer all the relevant


vouchers, books and statements over to CNPC for custody.


9.4 In conducting the transfer of the accounting books and inventory and check of all the


properties in accordance with the provisions of this Accounting Procedure, the implementation


procedure for the transfer and verification, the accounting files to be transferred and accounting


matters to be settled as well as other details shall be agreed upon through consultation in advance


between the Operator and CNPC. The transfer procedure shall be completed within the time period


agreed upon by the Parties.











'1





86


 Annex III





Personnel Costs








Table of Contents





Article 1 General Provisions


Article 2 Employment of Chinese Personnel


Article ■3 Salaries and Wages of Personnel


Article 4 Other Expenses


Article 5 Settlement of Personnel Costs
















































































87


 Annex III








Personnel Costs





Article 1 General Provisions








1.1 This Annex is an integral part of the Contract. The definitions set forth in Article 1 of


the Contract are applicable to this Annex. If the provisions in this Annex are in conflict with those in


the Contract, the provisions of the Contract shall prevail.


1.2 The provisions in this Annex with respect to personnel costs shall only be applicable


to the following personnel:





(1) representatives of JMC appointed by CNPC referred to in Article 7.1.1 of the


Contract;


(2) personnel of CNPC in the subordinate bodies of JMC referred to in Article 7.4 of the


Contract;


(3) professional representatives assigned by CNPC to the Operator’s (Contractor's)


organizations referred to in Article 7.5 of the Contract; and


(4) personnel furnished by CNPC to the Contractor for employment (not including


personnel recruited by CNPC for the Contractor) referred to in Article 2 hereof.


1.3 Personnel costs referred to in this Annex shall include salaries and wages of


personnel specified in Article 3 hereof and other expenses specified in Article 4 hereof.


1.4 There is a table attached to this Annex, i.e. Table of Salary and Wage Standards of


Chinese Personnel.























88


 Article 2 Employment of Chinese Personnel





2.1 The Contractor shall employ the Chinese Personnel in accordance with Article 15.2


of the Contract.


2.1.1 When employing the Chinese Personnel, the Contractor shall submit to CNPC a


personnel employment plan, which shall specify specialties, number of personnel necessary to be


employed, and such requirements as to technique, experience and education, etc. with respect to the


personnel to be employed.


2.1.2 CNPC shall, within sixty (60) days from the date on which it receives the personnel


employment plan submitted by the Contractor, notify the Contractor in a written form of the


following:


(1) names and specialties of employee candidates which will be furnished by CNPC, as


well as their health conditions, working experience and education; and


(2) specialties and number of employee candidates to be recruited by CNPC for the


Contractor and provided by the Chinese organizations other than CNPC, as well as recruitment


arrangements with respect thereto.


2.1.3 The employee candidates furnished and recruited by CNPC for the Contractor shall


be employed by the Contractor only when they have passed tests conducted by the Contractor or


become qualified after being trained by the Contractor. The Contractor shall notify CNPC in writing


of the name list of the employee candidates whom it has decided to employ and whom it has decided


not to employ promptly after the tests or training have been conducted. The Contractor shall explain


the reason to CNPC with respect to the employee candidates whom it has decided not to employ. If


the explanation given by the Contractor is reasonable, CNPC shall promptly furnish or recruit


additional employee candidates.


2.2 The employment contract(s) shall be signed by the Parties for employment of


personnel furnished by CNPC who have passed the tests conducted by the Contractor or become


qualified after being trained by the Contractor. The said employment contract(s) shall include


provisions with respect to employees, such as employment, dismissal, resignation, production and


working assignments, salaries or wages and other expenses, awards and penalties, working time and


vacations, labor insurance and welfare, labor protection and labor discipline, etc. In addition, the


Parties shall work out specific stipulations with regard to the term of the employment contract(s),


conditions of termination and modification of employment contract(s), responsibilities in the case of


violation of the contract, and rights and obligations of the Parties.








89


2.3 The Contractor shall notify CNPC in writing thirty (30) days before dismissing or


replacing any personnel furnished by CNPC and employed by the Contractor.




































































































































































90


 Article 3 Salaries and Wages of Personnel








3.1 Salaries and wages of the personnel referred to in Article 1.2 hereof (hereinafter


referred to as “CNPC Personnel”) shall be dealt with in accordance with the following provisions:


3.1.1 CNPC Personnel shall be divided into two parts, i.e. personnel of JMC and


employees. Personnel of JMC shall fall into two categories and employees shall fall into four


categories. The salaries and wages of the personnel in each category shall be classified as three


levels. The levels of the personnel in each category shall be determined in accordance with the


number of years of working experience they have. Those who have less than three (3) years of


working experience shall be determined as Level One; those who have three (3) to ten (10) years of


working experience shall be determined as Level Two; and those who have more than ten (10) years


of working experience shall be determined as Level Three. The salary and wage standards with


respect to Levels One, Two and Three of each category of personnel are specified in the Table of


Salary and Wage Standards of Chinese Personnel.


3.1.2 The salary and wage standards specified in the Table of Salary and Wage Standards


of Chinese Personnel, which are expressed in 1997 U.S. Dollars shall be increased annually in the


same percentage as the average annual increase percentage in base salaries granted to Expatriate


Employee.


3.1.3 The salary and wage standards of personnel at each level in each category specified in


the Table of Salary and Wage Standards of Chinese Personnel divided by twenty-one point five (21.5)


shall be the daily salary and wage standards of personnel at such level in such category.


3.2 Those CNPC Personnel who have worked for full eighteen (18) days shall be paid in


accordance with the monthly salary and wage standards; those CNPC personnel who have worked for


less than full eighteen (18) days shall be paid in accordance with the daily salary and wage standards.


3.3 CNPC's chief representative of JMC shall always be paid in accordance with the


salary and wage standards with respect to representatives of JMC. Other CNPC’s representatives of


JMC shall be paid, for the period in which he or she attends JMC meetings, in accordance with the


salary and wage standards with respect to representatives of JMC. If any professional representative


(including the secretary) of CNPC or any CNPC expert working in expert group(s) is concurrently a


representative of JMC (other than CNPC's chief representative of JMC), then he or she shall be paid,


for the period in which he or she attends JMC meetings, in accordance with the salary and wage


standards with respect to representatives of JMC, and for the rest of the period in accordance with the


salary and wage standards with respect to his or her actual post, i.e. the professional representatives


(including the secretary) shall be paid in accordance with the salary and wage standards with respect


to the professional representatives, and CNPC experts working in expert group(s) shall be paid in











91


accordance with salary and wage standards with respect to the employees specified in the Table of


Salary and Wage Standards of Chinese Personnel.


3.4 The initial determination and any subsequent modification with respect to any post


and level of representatives of JMC appointed by CNPC, secretaries, experts and professional


representatives of CNPC shall be made by CNPC in accordance with the number of years of working


experience and capabilities they have.


The levels of the personnel furnished by CNPC and employed by the Contractor shall be


determined in accordance with Article 3.1.1 herein, the posts of such personnel shall be determined by


the Contractor on the basis of assessment, and the subsequent promotion and demotion with respect to


the posts or levels of such personnel shall be determined by the Contractor. The aforesaid personnel


shall be paid in accordance with the salary and wage standards corresponding to their new posts from


the month following the month in which their posts or levels are promoted or demoted.


3.5 The working time of the secretary, professional representatives and experts assigned


by CNPC to the subordinate bodies of JMC shall be determined in accordance with the working


system of JMC. However, the professional representatives of CNPC shall work for no more than five


(5) days per week and eight (8) hours per day.






























































92


 Article 4 Other Expenses





4.1 CNPC Personnel shall be paid, in addition to the salaries and wages as stipulated in


Article 3 hereof, the following expenses.


4.1.1 Expenses for working meals and transportation are as follows:


Four Hundred and Thirty (430) U.S. Dollars each month for each CNPC Personnel, of which:


(1) Ten (10) U.S. Dollars per day for each CNPC Personnel for working meals, Two


Hundred and Fifteen (215) U.S. Dollars for each month;


(2) Ten (10) U.S. Dollars per day for each CNPC Personnel for transportation, Two


Hundred and Fifteen (215) U.S. Dollars for each month.


Those CNPC Personnel who have worked for eighteen (18) days in a month shall be paid in


accordance with the monthly expenses for working meals and transportation; those CNPC Personnel


who have worked for less than eighteen (18) days in a month shall be paid in accordance with the


daily expenses for working meals and transportation.


4.1.2 Allowance


Any CNPC Personnel, who work on operating sites or on supporting base in desert, Gobi and


offshore areas for performance of the Contract, shall obtain an allowance from thirty percent (30%) to


fifty percent (50%) of the daily salary or wage standards as stipulated in Article 3.1.3 hereof.


4.1.3 Expenses for visiting family:


4.1.3.1 Any CNPC Personnel whose cumulative working time in a Calendar Year reaches six


(6) calendar months or more may enjoy a thirty (30) calendar day home leave with pay.


4.1.3.2 Standards of home leave expenses for CNPC Personnel:


Three Hundred and Fifty (350) U.S. Dollars for each CNPC Personnel each time.


The home leave frequency and the standards of expenses for any CNPC Personnel who work


in remote area, desert, Gobi or offshore areas for the purpose of performance of the Contract shall be


decided through consultation between the Parties in view of the actual conditions.





93


4.1.4 Premiums for accidental personal injury and death insurance and the expenses


incurred in dealing with injuries or death of CNPC Personnel, which shall include:


(a) Premiums for accidental personal injury and death insurance calculated in accordance


with insured amount and insurance premium rate with respect to CNPC Personnel in each category;


and





(b) Expenses actually incurred in dealing with injuries or death in the event that


accidental injuries to or death of CNPC Personnel occur.


4.1.5 Expenses for CNPC Personnel on business trips.


4.1.6 Lodging expenses for CNPC Personnel working in the Petroleum operating area or


the area where the JMC will locate for the purpose of performance of the Petroleum Operations if they


are not local residents there.


4.2 In the event that commodity prices or transportation fees increase, the standards of


expenses referred to in Articles 4.1.1, 4.1.2 and 4.1.3.2 herein shall be adjusted accordingly through


consultation by the Parties.
























































94


 Article 5 Settlement of Personnel Costs








5.1 Salaries and wages of personnel stipulated in Article 3 hereof and the expenses


stipulated in Articles 4.1.1, 4.1.2 and 4.1.3 hereof shall all be settled by the Operator with CNPC. If


the Operator has provided CNPC Personnel with working meals and transportation, no expenses


specified in Article 4.1.1 hereof shall be paid to CNPC.





5.2 The expenses referred to in Article 4.1.4 and Article 4.1.5 hereof shall be provided by


the Operator or reimbursed based on receipts, bills or vouchers.








Table of Salary and Wage Standards of Chinese Personnel





Category Ordinal Personnel Monthly Salary & Wage Standards


_ai-S.3r>_


No. Level One Level Two Level Three


JMC 1 Representative of JMC 1,800 2,640 3,600


Appointed by CNPC


JMC 2 Professional Representative 1,440 2,040 2,640


(including Secretary)


Employee 1 Senior Technical 1,440 2,040 2,640


Personnel


Employee 2 Middle Level Technical 1,200 1,500 1,800


Personnel


Employee 3 Ordinary Technical and 900 1,000 1,200


Administrative Personnel


Employee 4 Worker 650 750 950





















































95


 Annex IV


Training of Chinese Personnel and Transfer of Technology





Table of Contents


Use of Appropriate and Advanced Technology


Article 1


Article 2 Objectives and Requirements of Training and Transfer of Technology


Article 3 Program of Training and Transfer of Technology


Article 4 Scope of Training and Transfer of Technology -


Article 5 Type of Training and Transfer of Technology





Article 6 Scientific and Technical Cooperation and Exchange


Article 7 Miscellaneous









































96


 Annex IV





Training of Chinese Personnel and Transfer of Technology











Article I Use of Appropriate and Advanced Technology











Subject to the Contract, the Contractor agrees, in the implementation of Petroleum Operations,


to apply its appropriate and advanced technology and managerial experience including proprietary


technology, e.g. patented technology, know-how or other confidential technology, etc., and according


to the requirement of the progress of Petroleum Operations, the parties shall have scientific and


technical cooperation and academic exchange of views. The Contractor shall, at the request of JMC


according to the requirements of the Pilot Test Operations, Development Operations and Production


Operations, propose in advance the aforesaid specific items and submit them to JMC for discussion


and review.






















































































97


 Article 2





Objectives and Requirements of Training and Transfer of Technology








In accordance with Article 16 of the Contract, the Contractor shall train the Chinese


Personnel, transfer its technology and managerial experience to CNPC and its Affiliates so as to


enable the Chinese Personnel to learn the use of the appropriate and advanced technology and


managerial experience including proprietary technology, e.g. patented technology, etc. and to master


the knowledge and skill in the course of Petroleum Operations according to an agreed program, and to


obtain all the information and/or data needed for the performance of the Petroleum Operations, to


develop a competent, matured and well-trained Chinese Petroleum team. In the course of such


training and transfer of technology, any proprietary technology and/or information including


systematized technical data, information, software, specifications, manuals, operating procedure, etc.,


of the Contractor or its Affiliates, which are required in the Petroleum Operations hereunder, and


which involve royalty, may be used by CNPC and its Affiliates without royalty. However, CNPC


shall not disclose any proprietary technology and/or information to any Third Party without the


written consent of the Contractor.






















































































98


 Article 3 Program of Training and Transfer of Technology





3.1 Respectively before the commencement of the Pilot Test Operations, Development


Operations and Production Operations, the Contractor shall, in advance, consult with the


representatives of CNPC in JMC and prepare a draft program of personnel training and transfer of


technology and managerial experience respectively for the aforesaid three periods and submit them to


JMC for discussion and approval. After approval by JMC, the Contractor shall put them into practice.


3.2 In accordance with the aforesaid program approved by JMC and actual requirement of


the Petroleum Operations, the Contractor shall work out a plan for each year respectively during pilot


test, development and production periods. After such plan is approved by JMC, in accordance with the


provisions of Article 7.2.10 and Article 10 of the Contract, it shall become an integral part of the


Contractor's annual Work Program and the Contractor shall be responsible for its implementation,


including trainee study inspection, test and certification.


3.3 The program and plan submitted by the Contractor for the training of the Chinese


Personnel and transfer of technology shall include at least the fields of specialization, specialized


technology, scope of personnel, specific job categories, type, method, the number of personnel, timing,


location, budget and objective to be reached, as well as the method of inspection of the trainee's


progress, examination, and certification of course completion.





















































99


 Article 4 Scope of Training and Transfer of Technology





4.1 Subject to the Contract, the Parties agree that the Contractor shall, according to the


requirements of the Petroleum Operations under the Contract, train the Chinese Personnel and transfer


its technology and managerial experience to CNPC, including, but not limited to, the following fields


of specialization:


A. Petroleum geology, geochemistry, geophysical data collection, conventional and


special processing and interpretation, well logging data, conventional and special processing and


interpretation, well testing and the evaluation of oil and gas resources;


B. Development geology, digital simulation and physical modeling of Oil Field


development, development seismic data collection, conventional and special processing and


interpretation, reservoir and development engineering, feasibility study and evaluation of Oil Field


development, formulation of the Overall Development Program, the evaluation of early production or


appraisal trial production;


C. Environmental conditions for construction, engineering project management,


engineering planning, design, construction and installation, pipeline laying technique, oil and gas


gathering and processing, transportation of Crude Oil;


D. Oil and/or gas recovery technology including production automation, remote sensing


and control, and technology of secondary and tertiary recovery;


E. Directional drilling procedures, optimum drilling, formation pore pressure estimation


and blowout control;


F. Economic evaluation, finance and control, procurement, sales, development of


personnel ability and contract administration;


G. Laws, safety, fire fighting and lifesaving, environmental protection, communications


and other fields of specialization related to the Contract.





4.2 The Parties agree that during the pilot test period the Contractor shall, in accordance


with the fields of specialization specified in Article 4.1 herein, transfer systematically and in complete


sets to CNPC the Contractor's specialized technology and managerial experience, which include, but


are not limited to the following:


A. Pumping recovery,








100


B. Secondary and tertiary recovery; and


C. Petrology and physical properties of reservoir rocks.


During the development period and production period, the specialized technology and


managerial experience transferred to CNPC from the Contractor shall be proposed by the Contractor


prior to the approval of the Overall Development Program of the Oil Field and the commencement of


commercial production therefrom respectively, and be included in the phase plan after a decision is


made thereupon by the Parties through consultation.


4.3 Subject to the Contract, the Parties agree that the Contractor shall train Chinese


Personnel, transfer technology and teach managerial knowledge to CNPC including, but not limited to,


the following personnel areas:


4.3.1 The Contractor shall transfer its technology to the Chinese Personnel who have been


assigned to work in subordinate bodies of JMC and teach them managerial experience.


4.3.2 The Contractor shall train the Chinese Personnel who have been assigned to the


Contractor including the Chinese Personnel who have been employed by the Contractor for the


performance of the Contract and transfer technology to them in order to improve their technical and/or


managerial capabilities.


4.3.3 The Contractor shall in advance train the Chinese Personnel who will be employed by


the Contractor for development and production of the Oil Fields.


4.3.4 The Contractor shall train the Chinese Personnel who work in the departments of


CNPC which are directly related to, or provide directly various services for the performance of the


Contract, and transfer technology to them.


4.4 Within the fields of specialization specified in Articles 4.1 and 4.2 herein, as required


for the performance of the Petroleum Operations under the Contract, the Chinese Personnel referred to


in Article 4.3 may include, but shall not be limited to, the following specific job categories;


A. Geologists, geophysicists, geochemists, petroleum engineers, paleontologists, seismic


data collection and conventional and special processing and interpretation engineers, well logging data


conventional and special processing and interpretation engineers;


B. Development geologists, reservoir and development engineers, experts for digital


simulation and physical modeling of the Oil Field development, engineers for development seismic


data collection, conventional and special processing and interpretation engineers, formulation of


Overall Development Program engineers;


C. Experts for engineering geology, engineering construction managers and supervisors,


engineering design, construction and installation engineers, pipeline laying engineers, oil and/or gas


gathering and processing engineers;








D. Production engineers, automation engineers, remote sensing and control engineers,


secondary and tertiary recovery, production and maintenance personnel and supervisors;





E. Drilling engineers, mud engineers, drilling managers and supervisors;





F. Petroleum economists, accountants, auditors, finance managers, planning managers,


procurement managers, oil and gas sales managers;





G. Computer hardware engineers, computer software engineers, laboratory engineers and


operators, communication engineers, safety engineers, pollution prevention engineers, experts working


in business transactions, material and warehouse engineers;


All the training or employment candidates for the aforesaid job categories shall be selected in


accordance with the requirements of various periods of the Petroleum Operations under the Contract


The Contractor shall propose the criteria for the selection, and CNPC shall, pursuant to such criteria,


provide a list of candidates. If such candidates are not able to meet the requirements of the Contractor,


CNPC shall provide additional candidates. The Parties shall discuss and decide who will finally be


selected.

































































102


 Article 5 Type of Training and Transfer of Technology





5.1 The Contractor agrees to train Chinese Personnel in various and efficient ways and to


transfer its technology and managerial experience to CNPC to the extent reasonably possible pursuant


to a program agreed by JMC, including but not limited to the following:


5.1.1 With the consent of JMC, the Contractor shall provide necessary training equipment


and training materials so as to give the Chinese Personnel the technology, management and language


training, and all the expenditures hereunder shall be within the spending limitation for training of


Chinese Personnel. When necessary, the Contractor shall send its experts to the People’s Republic of


China to give special training courses.


5.1.2 The Contractor shall send the Chinese Personnel to study in training centers, training


schools and institutes inside or outside the People's Republic of China, as well as in some special


scientific research institutes, computer centers, and engineering design companies. Some of them


shall have the opportunity to be able to obtain certain technical qualifications or academic degrees.


5. 1. 3 The training and the transfer of technology and managerial experience shall be


realized through working together with Contractor's experts in offices and on operating sites of the


Contractor inside or outside the People's Republic of China.


5.1. 4 The Contractor shall endeavor to persuade the Subcontractors to train the Chinese


Personnel and transfer technology to them.


5.1.5 With respect to any specialized technology and managerial experience to be


transferred by the Contractor to CNPC, the Parties shall organize special personnel to be responsible


for its execution and realization in accordance with the schedule.






































103


 Article 6 Scientific and Technical Cooperation and Exchange








6.1 The Parties agree, in accordance with the requirements of Petroleum Operations


under the Contract, to have scientific and technical cooperation and academic exchange of views,


within the fields of specialization specified in Article 4.1 of this Annex. The Parties shall discuss and


propose a plan, items, personnel and type of scientific and technical cooperation and academic


exchange of views for each year in a phased manner, and submit them to JMC for discussion and


approval. After approval by JMC, the Contractor shall incorporate them in the phased plans and put


them into practice.


6.2 The personnel participating in the scientific and technical cooperation and academic


exchange of views shall be experts, engineers and technicians from scientific research and designing


departments related to the Contract. The Parties shall provide them with necessary facilities and


assistance for scientific researches, as required to carry out any plan approved by the JMC for


scientific and technical cooperation.


6.3 The Contractor shall furnish CNPC worldwide information concerning Petroleum


science and technology, economics, legal and managerial topics. According to the requirement of


Petroleum Operations, scientific and technical seminars shall be jointly held by the Parties through


consultation. The Contractor shall invite the Chinese Personnel to attend relevant scientific and


technical seminars organized solely by the Contractor or jointly with others and shall assist the


Chinese Personnel to get permits to attend international conferences relating to Petroleum technology,


economics and legal topics and to participate in other relevant activities.





















































104


 Article 7 Miscellaneous





7.1 All obligations imposed upon Contractor under the provisions of this Annex IV shall


be limited to those required for the conduct of Petroleum Operations under the Contract, unless


otherwise agreed by the Parties.


7.2 This Annex is an integral part of the Contract. The definitions set forth in Article 1 of


the Contract are applicable to this Annex.




























































































105


 Annex V





Data Control


Table of Contents


Article 1 General Provisions


Article 2 Ownership of the Data


Article 3 Control and Use of the Data


Article 4 Scope of the Data Provided for CNPC

































































106


 Annex V





* Data Control )


?








Article 1 General Provision











This Annex V is an integral part of the Contract. The definitions set forth in Article 1 of the


Contract are equally applicable to this Annex. If the provisions in this Annex are in conflict with


those in the Contract, the provisions in the Contract shall prevail.











1











r

























































































107


 Article 2 Ownership of the Data





2.1 The ownership of all of the data, records, vouchers and other original data obtained


and/or acquired by the Contractor in the implementation of the Contract shall vest in CNPC.


2.2 The ownership and right of use of cores, rock samples, oil samples and other samples


obtained and/or acquired by the Contractor from the Contract Area shall vest in CNPC.


2.3 Within the validity period of the Contract, after the termination of the Contract and


after the Contractor assigns its rights and obligations, no data, information and samples mentioned in


Articles 2.1 and 2.2 hereof shall be disclosed in any way to a Third Party except as stipulated in


Articles 3.4 and 3.5 hereof or be transferred, donated, exchanged, sold, or published in any form


without the permission in writing of CNPC.







































































108


 Article 3 Control and Use of the Data








3.1 During the implementation of the Petroleum Operations, the Contractor shall be


responsible to keep in good order, all the data, information and samples stipulated in Articles 2.1 and


2.2 hereof within the territory of the People's Republic of China and shall furnish CNPC in a timely


manner with such data, information and samples for use and turn them over to CNPC in a step-by-step


or phase-by-phase manner.


3.2 The Contractor shall have the right to use or duplicate the data and information


mentioned in Article 2.1 hereof and use samples referred to in Article 2.2 hereof within and outside


China and the results of research, interpretation, analysis and chemical examination shall be submitted


or reported to CNPC in a timely manner. The Contractor shall not use the above-mentioned data,


information and samples for purposes other than those related to the implementation of the Contract.


3.3 Any shipment abroad for use of the original data and information (such as original


magnetic tapes, original recordings, etc.) referred to in Article 2.1 hereof and of the samples referred


to in Article 2.2 hereof shall be subject to the consent in writing of CNPC. Unless otherwise agreed by


CNPC, the size of any piece of core or amount of any batch of rock cuttings and samples to be


shipped abroad shall not be greater than one half (1/2) of the total size or amount of the original piece


or batch. The original data and information shipped abroad shall, upon completion of the use or


duplication thereof, be shipped in a timely manner back to and be kept in China.


3.4 If, for the purpose of implementation of the Contract, the Contractor needs to provide


the data and information for such Third Parties as banks or other credit institutions, Subcontractors


and potential assignees to which the rights and interests under the Contract are assigned, the type and


scope of the data and information to be provided shall be subject to consent by CNPC and the


Contractor shall obtain from such Third Parties a written undertaking that they shall have the


obligation to keep the provided data and information confidential.


3.5 The Contractor may provide such data and information as may be requested by their


parent corporations or Affiliates relating to the implementation of the Contract or by securities and


exchange organizations or the governments of the Contractor’s home countries, subject to the prior


reporting thereof to CNPC. The Contractor shall inform the aforesaid parent corporations or


Affiliates which receive the data and information that they shall be obligated to keep such data and


information confidential and shall request the security and exchange organizations or the governments


of their home countries to keep such data and information confidential subject to international


practice.


3.6 Release of the data and information to the press shall be subject to the consultation


and agreement between the Parties.


 Article 4 Scope of the Data Provided for CNPC





In carrying out the Petroleum Operations, the Contractor shall provide CNPC with data and


information, including, but not limited to the following:


4.1 Overall programs and plans of operations and information and documents of designs


of an individual project:


4.1.1 Pilot test program of the Contract Area;


4.1.2 Annual operational plans for pilot test;


4.1.3 Pilot test program;


4.1.4 Designs for sidetrack, well repair, well recompletion and single well injectivity test


and designs for single well new technique test and well groups displacement tests for the purpose of


pilot test;


4.1.5 Early development programs, overall development programs and adjusted


development programs of Oil Fields;


4.1.6 Plans for production and production testing of wells and Oil Fields;


4.1.7 The content and general schedules of engineering projects;


4.1.8 Basic designs of engineering projects (e.g. oil, gas and water treatment facility,


modules and pipelines);


4.1.9 Annual and monthly operational progress charts for engineering projects;


4.1.10 Procurement plans and schedules for engineering projects;


4.1.11 Test-run and commissioning schedules for engineering projects.


4.2 Information and documents on the progress of all operations:


4.2.1 Daily, monthly and annual reports on well drilling and production testing;


4.2.2 Daily, monthly and annual reports on production testing and production of wells and


Oil Fields;


4.2.3 Monthly and annual reports on operational progress of engineering projects;


4.2.4 Other operational progress reports;


4.2.5 Operational rules and unpatented technical manuals of petroleum operations.


4.3 Original data and information of Petroleum Operations:


4.3.1 Original magnetic tapes, original records, data, seismic sections, drawings and other


relevant data and information of geophysical surveys;


4.3.2 Original records, data, drawings and other relevant data and information of


geochemical survey;


4.3.3 Original records, data, drawings, samples and other relevant information of well


drilling, mud, well logging, cementing, well completion, production testing and workover operations;


4.3.4 Original records, data, drawings and other relevant information of production testing,


production, injection and stimulation of wells and Oil Fields;


4.3.5 Original records, data and automatic recording cards of Crude Oil and Natural Gas


metering;


4.3.6 Original data and recording cards of Crude Oil and Natural Gas transportation,


storage and marketing;


4.3.7 All the samples (including cores, cuttings, oil, gas and water samples and mud


samples) and results of analysis and chemical examination thereon;


4.3.8 Data on physical properties of payzones;


4.3.9 Data on environment, hydrology and meteorology.


4.4 Basic information of engineering projects:


4.4.1 Instructions on design calculations and detailed design drawings of engineering


projects.





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4.4.2 Technical specifications and standards of design, manufacture and installation, safety


rules, environmental protection rules and operational rules;


4.4.3 Construction records of individual projects and order slips on design and construction


alterations;


4.4.4 Project commissioning drawings and manuals and original records or reports on


project acceptance.


4.5 Summary reports on operational results and reports on specialized research and


comprehensive study of each Petroleum Operation:


4.5.1 Reports on locations of geophysical survey, geochemical survey, well drilling and


other operations;


4.5.2 Operational reports on data processing and interpretation of geophysical and


geochemical survey;


4.5.3 Summary reports on drilling geology;


4.5.4 Summary reports on production testing;


4.5.5 Reports on physical properties study of oil or gas reservoirs and reports on reservoir


simulation and analyses;


4.5.6 Summary reports on geological structure drilling, reserves calculations of Crude Oil


or Natural Gas and reports on feasibility study on Oil Field geology, development, engineering and


economic, evaluations;


4.5.7 Reports on specialized and comprehensive studies on problems arising in the course


of the Oil Field development;


4.5.8 Reports on experiment and research for engineering designs.


4.6 Data and information on economic and planning:


4.6.1 General budgets for basic development plans of Oil Field and calculation basis


thereon;


4. 6. 2 Data on production of Crude Oil and Natural Gas, output value and productivity of


Oil Field;


4.6. 3 Well drilling work and budgets of Oil Field, as well as economic, technical and


energy consumption data and information;


4.6.4 Data on production, marketing, distribution and transportation of production from Oil


Field;


4.6.5 Information on investment and financing and accounting for engineering projects;


4.6.6 Other financial data specified in the Accounting Procedure of the Contract.

































































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