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AGREEMENT ON THE EXPLORATION, DEVELOPMENT

AND PRODUCTION SHARING

FOR THE SHAH DENIZ PROSPECTIVE AREA

IN THE AZERBAIJAN SECTOR

OF THE CASPIAN SEA



BETWEEN



THE STATE OIL COMPANY

OF THE AZERBAIJAN REPUBLIC

AND

SOCAR COMMERCIAL AFFILIATE,

BP EXPLORATION (AZERBAIJAN) LIMITED,

ELF PETROLEUM AZERBAIJAN B.V.

LUKOIL INTERNATIONAL LTD,

OIL INDUSTRIES ENGINEERING AND CONSTRUCTION,

STATOIL AZERBAIJAN A.S,

and

TURKISH PETROLEUM OVERSEAS COMPANY

LIMITED



1



TABLE OF CONTENTS

ARTICLE 1

ARTICLE 2

ARTICLE 3

ARTICLE 4

ARTICLE 5

ARTICLE 6

ARTICLE 7

ARTICLE 8

ARTICLE 9

ARTICLE 10

ARTICLE 11

ARTICLE 12

ARTICLE 13

ARTICLE 14

ARTICLE 15

ARTICLE 16

ARTICLE 17

ARTICLE 18

ARTICLE 19

ARTICLE 20

ARTICLE 21

ARTICLE 22

ARTICLE 23

ARTICLE 24

ARTICLE 25

ARTICLE 26

ARTICLE 27

ARTICLE 28

ARTICLE 29

ARTICLE 30



PARTICIPATING INTERESTS

GRANT OF RIGHTS AND SCOPE

WARRANTIES AND GENERAL RIGHTS AND OBLIGATIONS OF THE PARTIES

EXPLORATION

PERIOD,

ADDITIONAL

EXPLORATION

PERIOD

AND

DEVELOPMENT AND PRODUCTION PERIOD

STEERING COMMITTEE FOR PROJECT MANAGEMENT AND ANNUAL WORK

PROGRAMMES

OPERATING COMPANY, PERSONNEL AND TRAINING

REPORTS AND ACCESS TO PETROLEUM OPERATIONS

USE OF LAND AND SEA BEDS

USE OF FACILITIES

EARLY PETROLEUM PRODUCTION

CONTRACTOR’S RECOVERY OF PETROLEUM COSTS AND PRODUCTION

SHARING

TAXATION

VALUATION OF PETROLEUM

OWNERSHIP, USE AND ABANDONMENT OF ASSETS

NATURAL GAS

FOREIGN EXCHANGE

ACCOUNTING METHOD

IMPORT AND EXPORT

DISPOSAL OF PRODUCTION

INSURANCE, LIABILITIES AND INDEMNITIES

FORCE MAJEURE

VALIDITY, ASSIGNMENT AND GUARANTEES

APPLICABLE LAW, ECONOMIC STABILISATION AND ARBITRATION

NOTICES

EFFECTIVE DATE

ENVIRONMENTAL PROTECTION AND SAFETY

CONFIDENTIALITY

BONUS PAYMENTS AND ACREAGE FEES

TERMINATION

MISCELLANEOUS



APPENDICES

APPENDIX 1

APPENDIX 2

APPENDIX 3

APPENDIX 4

APPENDIX 5

APPENDIX 6

APPENDIX 7

APPENDIX 8

APPENDIX 9

APPENDIX 10



DEFINITIONS

CONTRACT AREA AND MAP

ACCOUNTING PROCEDURE

FORM OF CONTRACTOR PARTY’S ULTIMATE PARENT COMPANY

GUARANTEE

GUARANTEE AND UNDERTAKING OF THE GOVERNMENT OF THE

AZERBAIJAN REPUBLIC

ARBITRATION PROCEDURE

CRUDE OIL AND NATURAL GAS MEASUREMENT AND EVALUATION

PROCEDURE

DESIGN STANDARDS AND SPECIFICATIONS

ENVIRONMENTAL STANDARDS AND PRACTICES

EXPLORATION WORK PROGRAMME



FIRST ADDENDUM - FORMATION OF SOCAR COMMERCIAL AFFILIATE (04.06.1996)

SECOND ADDENDUM – CHANGE IN OEIC PARENT COMPANY (26.07.1996)

THIRD ADDENDUM – NON-ASSOCIATED GAS DEVELOPMENT PROVISIONS. (28.02.2001)

FOURTH ADDENDUM – ENTITLEMENT PROCEDURE (25.02.2003)

FIFTH ADDENDUM – GAS BONUSES (02.07.2008)



2



AGREEMENT ON THE EXPLORATION,

DEVELOPMENT AND PRODUCTION SHARING

FOR THE SHAH DENIZ PROSPECTIVE AREA

IN THE AZERBAIJAN SECTOR

OF THE CASPIAN SEA



THIS AGREEMENT, made and entered into in Baku, the Azerbaijan Republic, this 4 day of June, 1996

by and between:

THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC (“SOCAR”) a Government body on the

one hand; and

SOCAR COMMERCIAL AFFILIATE ("SCA") a company to be formed by SOCAR;

BP EXPLORATION (AZERBAIJAN) LIMITED (“BP”) a company incorporated in England; and

ELF PETROLEUM AZERBAIJAN B.V. ("Elf") a company incorporated in the Netherlands; and

LUKOIL INTERNATONAL LTD. (“LUKoil”) a company incorporated in the Republic of Ireland; and

OIL INDUSTRIES ENGINEERING AND CONSTRUCTION (“OIES”) a company incorporated in the

Islamic Republic of Iran; and

STATOIL AZERBAIJAN A.S (“Statoil”) a company incorporated in Norway; and

TURKISH PETROLEUM OVERSEAS COMPANY LIMITED (“TPAO”) a company incorporated on the

island of Jersey; and

on the other hand, all the Parties being legal persons in accordance with the legislation of the countries

of their registration as confirmed by appropriate documentation thereof.

WITNESSETH

WHEREAS, in accordance with the Constitution of the Azerbaijan Republic, and the Constitutional Act of

State Independence of the Azerbaijan Republic, dated 18 October 1991, and the Law on Ownership in

the Azerbaijan Republic, dated 9 November 1991, ownership of all Petroleum existing in its natural state

in underground or subsurface strata in the Azerbaijan Republic, including the portion of the Caspian Sea

within its jurisdiction, is vested in the Azerbaijan Republic, and based upon the below referenced

authorisations the authority to control and manage said Petroleum has been vested in SOCAR; and

WHEREAS, pursuant to Presidential Edict No 200 concerning the creation of the State Oil Company of

the Azerbaijan Republic dated 13 September 1992 and its Charter, SOCAR is vested with the authority

to carry out the exploration and development of all Petroleum in the Azerbaijan Republic, and pursuant

to Presidential Decree No 222 “On the Exploration and Development of the Shah Deniz field in the

Azerbaijan Sector of the Caspian Sea” dated 4 October 1995, SOCAR is granted the rights to carry out

negotiations and conclude this Agreement; and

WHEREAS, SOCAR has carried out certain work in the Contract Area and now wishes to promote the

exploration for, and subsequent development and production of Petroleum existing in its natural state in,

on or under the Contract Area; and

WHEREAS, the Parties (except Elf, LUKoil, OIEC and SCA) have executed the Agreement on the Basic

Principles and Provisions with respect to the Exploration, Development and Production Sharing



3



Agreement for the Shah Deniz field and such principles and provisions have constituted the framework

of this Agreement; and

WHEREAS, the relations between the Parties before the signature of the Agreement on the Basic

Principles and Provisions with respect to the Exploration, Development and Production Sharing

Agreement for the Shah Deniz field have been governed by the agreement between the Government of

the Azerbaijan Republic and BP Exploration Operating Company Limited and Den norske stats

oljeselskap a.s dated 7th September 1992, and also the Extension Agreement made between SOCAR

and BP Exploration Operating Company Limited and Den norske stats oljeselskap a.s dated February

23rd 1994; and

WHEREAS, Contractor has the technical knowledge and experience, the administrative and managerial

expertise, and financial resources to efficiently develop and produce the Petroleum resources of the

Contract Area, and desires to contract with SOCAR for that purpose.

NOW THEREFORE, for and in consideration of the premises and mutual covenants hereinafter set forth,

the Parties agree as follows:



ARTICLE 1

PARTICIPATING INTERESTS

1.1



The rights and obligations under this Agreement of each of the Contractor Parties shall be held in

the following respective percentage Participating Interests as of the date this Agreement is

executed:

CONTRACTOR PARTIES



PERCENTAGE



SCA



10.0%



BP



25.5%



Elf



10.0%



LUKoil



10.0%



OIEC



10.0%



Statoil



25.5%



TPAO



9.0%



TOTAL



100.00%



1.2



The Contractor Parties agree that their respective percentage Participating Interest shares under

this Agreement, as set forth in Article 1.1 above, replace any rights and obligations which may exist

regarding the Contract Area by virtue of any prior agreement or contract between any of the

Contractor Parties or their Affiliates on the one hand, and any Governmental Authority or SOCAR

on the other hand. The Parties agree that, from the Effective Date, this Agreement constitutes the

sole and complete understanding between SOCAR and the Contractor Parties regarding the

Contract Area.



1.3



Within ninety (90) days of the commencement of the Development and Production Period SCA

shall provide the other Contractor Parties with written evidence in the form of a letter of assurance

from an acceptable bank to establish SCA's financial ability to pay SCA's Participating Interest

share of the costs and expenses as set forth in this Agreement. The expression "acceptable bank"

shall mean a bank whose senior, unsubordinated and unguaranteed debt obligations with initial

maturity of more than one (1) year have been granted a rating of A or better from either Moody´s or

Standard and Poors Corporation.



4



In the event SCA fails to provide such letter of assurance as provided above such failure shall

constitute a breach of this Agreement giving rise to immediate automatic forfeiture of SCA's

Participating Interest and the other Contractor Parties' Participating Interests shall be increased

accordingly in proportion to their Participating Interests.

ARTICLE 2

GRANT OF RIGHTS AND SCOPE

2.1



Grant of Exclusive Right

SOCAR hereby grants to Contractor the sole and exclusive right to conduct Petroleum Operations

within and with respect to the Contract Area in accordance with the terms of this Agreement and

during the term hereof. Except for the rights expressly provided for herein, this Agreement shall not

include rights for any activity other than Petroleum Operations with respect to surface areas and

sea beds, sub-soil or to any other natural resource or aquatic resources.



2.2



Except as expressly provided elsewhere herein, in the event production resulting from Petroleum

Operations, upon completion of commercial production from the Contract Area at the end of the

term of this Agreement, inclusive of all extensions provided in Article 4 is insufficient for full

recovery of Contractor's Capital Costs and Operating Costs as provided hereunder, then

Contractor shall not be entitled to any reimbursement or compensation for any of its costs not

recovered.

ARTICLE 3

WARRANTIES AND GENERAL RIGHTS AND OBLIGATIONS OF THE PARTIES



3.1



Warranties of SOCAR

SOCAR represents and warrants that:

(a) it is duly organised and validly existing in accordance with the terms of its Charter; and

(b) it has full authority under the laws of the Azerbaijan Republic to execute and perform this

Agreement, to grant the rights and interests to Contractor as provided under this Agreement

and to fulfil its obligations under this Agreement.



3.2



General Obligations of SOCAR

(a) Upon the request of Contractor for the implementation of Petroleum Operations, SOCAR within

the full limits of its authority shall use its best lawful endeavours with respect to Governmental

Authorities to assist Contractor to obtain the following:

(i) any necessary Governmental Authority approvals, including but not limited to customs

clearances, visas, residence permits, access to communication facilities, licenses to enter

land or water, import and export licenses, the opening of bank accounts, the acquisition of

office space and employee accommodation, as may be necessary for efficient

implementation of Petroleum Operations; and

(ii) all geological, geophysical, geochemical and technical data (including well data and any

other information) of relevance to the Contract Area not in SOCAR's possession or under its

control.

(b) SOCAR within the full limits of its authority shall also use its best lawful endeavours to assist

Contractor in all other relevant matters as may be necessary for the efficient implementation of

Petroleum Operations.

(c) Contractor shall reimburse SOCAR for any lawful reasonable actual direct costs incurred with

respect to the provision of the foregoing, provided such costs are supported by appropriate

documentary evidence.



5



(d) Upon request of Contractor, SOCAR shall provide to Contractor all geological, geophysical,

geochemical and technical data and information in the possession or control of SOCAR or its

Affiliates of relevance to the Contract Area including all kinds of well data. Contractor shall pay

the actual direct costs incurred by SOCAR in the implementation of this Agreement in gathering

together, handling and delivering any such data or information to Contractor, which costs will be

invoiced to Contractor by SOCAR on the basis that SOCAR is to suffer no loss and obtain no

gain. If Contractor does not accept that any items as invoiced by SOCAR satisfy this

requirement, Contractor shall notify SOCAR of any such objections and SOCAR and Contractor

shall take all necessary steps to mutually resolve all objections raised by Contractor. SOCAR

makes no warranties as to the accuracy or completeness of any such data or information in

connection with the performance of such obligation.

3.3



Warranties and Rights of Contractor Parties

(a) Each Contractor Party represents that it is duly organised and validly existing in accordance

with the terms of its foundation documents and is authorised, subject to governmental

authorisations, to establish and maintain such branches and offices in the Azerbaijan Republic

and elsewhere as may be necessary to conduct Petroleum Operations in accordance with the

terms and conditions of this Agreement.

(b) Each Contractor Party, its Affiliates, and Contractor's Sub-contractors are hereby authorised

throughout the term of this Agreement to establish such branches, permanent establishments,

permanent representation and other forms of business in the Azerbaijan Republic as may be

necessary or appropriate to qualify to do business in the Azerbaijan Republic and to conduct or

participate in Petroleum Operations, including the purchase, lease or acquisition of any

property required for Petroleum Operations, provided such establishments and other forms of

businesses comply with the formalities and procedures of laws of the Azerbaijan Republic in

respect thereof.



3.4



General Obligations of Contractor Parties

The Contractor Parties shall provide the necessary funds during the Exploration Period and the

Additional Exploration Period and also funds to appraise, evaluate and develop the Petroleum

resources within the Contract Area in accordance with the terms and conditions set forth in this

Agreement. Contractor shall conduct Petroleum Operations in accordance with the terms of this

Agreement in a diligent, safe and efficient manner and in accordance with generally accepted

principles of the international Petroleum industry. As regards design standards and specifications

for facilities and equipment the Design Standards shall apply. No Contractor Party shall be required

to act or refrain from acting if to do so would make such Contractor Party or its Ultimate Parent

Company liable to penalization under the laws of any jurisdiction applicable to such Contractor

Party or its Ultimate Parent Company notwithstanding anything to the contrary in this Agreement.

ARTICLE 4

EXPLORATION PERIOD, ADDITIONAL EXPLORATION PERIOD, AND

DEVELOPMENT AND PRODUCTION PERIOD



4.1



Exploration Period

The Exploration Period shall be three (3) years from the Effective Date of this Agreement.



4.2



Work Obligations During the Exploration Period

(a) During the Exploration Period Contractor shall carry out the following work:



6



(i) Shoot, process and interpret a minimum of eight hundred (800) square kilometres of three

dimensional seismic in the Contract Area and carry out an upper section site investigation

survey in the Contract Area to ensure a safe and environmentally sound basis for drilling;

(ii) Drill in the Contract Area at least two (2) exploration wells.

(b) Contractor shall provide SOCAR with all information on operations specified in Article 4.2 (a),

both routine and final, after completion of seismic, drilling of each well and all other work.

(c) Types, methods and scope of work as defined in Article 4.2 (a), methods and list of analyses

including core samplings in the process of drilling and completion of the exploration wells and

also types, volumes and deadlines for provision of information on such work by Contractor to

SOCAR are described in Exploration Work Programme.

(d) Contractor’s failure to perform all or a portion of its obligations as set out in Article 4.2 (a) during

the Exploration Period other than as a result of Force Majeure shall constitute a Material Breach

by Contractor of its obligations under this Agreement. In this case SOCAR shall have the right

at its sole discretion to terminate this Agreement and all costs incurred by Contractor from the

Effective Date during the Exploration Period, including but not limited to bonus payments

(including credit for any earlier bonus payments or other payments of any kind made by

Contractor) and acreage fees, shall not be Cost Recoverable. Termination of this Agreement by

SOCAR pursuant to this Article 4.2(d) shall be SOCAR's sole remedy against Contractor for

Material Breach under this Article 4.2(d). Such termination shall be without prejudice to any

claims either SOCAR or Contractor may have which arose prior to such termination.

Lack and/or unavailability of any rigs, facilities, infrastructure and any other circumstances

caused by the need to co-ordinate infrastructural requirements with the Azerbaijan International

Operating Company's (AIOC) work programme or with other operators in the Azerbaijan

Republic shall not constitute a basis for Contractor to modify and change any work during the

Exploration Period or the Additional Exploration Period or their extensions.

(e) The sole excuse for the failure to carry out the obligations set out in Article 4.2 (a) during the

Exploration Period or additional work, as set out in Article 4.3 during the Additional Exploration

Period shall be the occurrence of Force Majeure circumstances.

4.3



Additional Exploration Period

Subject to complete and timely fulfilment by Contractor of the exploration work as set out in Article

4.2(a) to be performed during the Exploration Period, Contractor may within ninety (90) days before

the end of the Exploration Period, notify SOCAR in writing of its desire to carry out additional

exploration work and provide a list of types and scope of work and justification of such additional

exploration work.

Such notice shall request SOCAR's written approval to the performance by Contractor of additional

exploration work during the Additional Exploration Period and SOCAR shall declare in writing its

approval or disapproval (such approval not to be unreasonably withheld) within ninety (90) days of

receipt of such written request from Contractor and the Exploration Period shall automatically be

extended until such approval has been given by SOCAR. Contractor shall have the right to

proceed to the Additional Exploration Period which shall be twelve (12) months from the end of the

Exploration Period or receipt of SOCAR's approval whichever is later. During the Additional

Exploration Period Contractor shall drill at least one (1) exploration well.

Contractor’s failure to perform the additional exploration work (or any portion thereof) to be

performed during the Additional Exploration Period other than as a result of Force Majeure shall

constitute a Material Breach by Contractor of its obligations under this Agreement. In this case

SOCAR shall have the right at its sole discretion to terminate this Agreement, and costs incurred

by Contractor from the Effective Date during the Exploration Period, and the Additional Exploration

Period including but not limited to bonus payments (including credit for any earlier bonus payments

or any other payments made by Contractor) and acreage fees, shall not be Cost Recoverable.



7



Termination of the Agreement by SOCAR pursuant to this Article 4.3 shall be SOCAR's sole

remedy against Contractor for Material Breach under this Article 4.3. Such termination shall be

without prejudice to any claims either SOCAR or Contractor may have which arose prior to such

termination.

4.4



Discovery

Before the end of the Exploration Period or if Contractor enters the Additional Exploration Period

then before the end of the Additional Exploration Period, Contractor shall notify SOCAR in writing

of a Discovery and its commerciality, summarising relevant information relating to said Discovery,

including but not limited to the following, to the extent same are available: location plan, geological

maps and interpretations, seismic and other geophysical data, drilling reports, well logs, core

samplings, lithologic maps and description of formations, drill stem tests, completion reports,

production tests including quantities of fluids produced, build-up/draw down tests and

pressure analysis, and analyses of oil, gas and water samples and other information consistent

with generally accepted international Petroleum industry practice ("Notice of Discovery and its

Commerciality”).

In the event Contractor does not submit a Notice of Discovery and its Commerciality during the

Exploration Period or if Contractor proceeds to the Additional Exploration Period during the

Additional Exploration Period, this Agreement shall terminate and any costs incurred by Contractor,

including but not limited to bonus payments (including credit for any previous bonus payments and

other payments made by Contractor) and acreage fees shall not be Cost Recoverable.

In the event the appraisal of existing pool/pools and/or a Discovery indicates that the natural

boundary of the existing pool/pools and/or a Discovery extends to areas outside the Contract Area

SOCAR shall be entitled (but not obligated) to grant the additional areas to Contractor and if

granted such additional areas shall become the subject of this Agreement.



4.5



Development and Production Period

The Development and Production Period shall begin from the date of the Notice of Discovery and

its Commerciality submitted by Contractor to SOCAR and shall continue until thirty (30) years after

the date of such Notice of Discovery and its Commerciality of such Discovery and subsequent

Discoveries. After such period of thirty (30) years the Development and Production Period may be

extended by five (5) years subject to SOCAR's approval.



4.6



Development Programme



The Development Programme to be submitted by Contractor pursuant to Article 4.6 of the EDPSA

shall include proposals related to the achievement of all the matters referred to in Article 4.1 of Third

Addendum and also of all the approvals referred to in Article 4.2 of Third Addendum and any

commitments and terms contained in the Development Programme to start commercial production

shall be conditional upon the achievement of such matters and also the approvals referred to in Article

4.2 of Third Addendum. The Development Programme shall be based on a staged development

concept linked to Natural Gas Sale and Purchase Agreements.1

(a)



In the event Contractor submits to SOCAR a Notice of Discovery and its Commerciality before the

end of the Exploration Period or if applicable the Additional Exploration Period, Contractor shall

submit the Development Programme to SOCAR for its approval no later than six (6) months after

the date of such Notice of Discovery and its Commerciality provided that the Development

Programme shall include commitments and terms to start commercial production of Petroleum.

SOCAR shall not unreasonably withhold its approval.

In the event Contractor does not submit the Development Programme within the six (6) months

period referred to above, SOCAR shall have the right to terminate this Agreement by giving written

notice to Contractor within thirty (30) days following expiry of the said six (6) month period, and



1



Third Addendum. Article 5.1.



8



any costs incurred by Contractor, including but not limited to bonus payments (including credit for

any previous bonus payments or other payments made by Contractor) and acreage fees, shall not

be Cost Recoverable.

(b)



The Development Programme shall be a long range plan for the efficient and prompt development

and production of Petroleum from the Contract Area in accordance with generally accepted

international Petroleum industry standards and shall include but not be limited to the following:

(i)



proposals relating to the spacing, drilling and completion of all types of wells; and



(ii)



proposals relating to the production and storage installations, and transportation and

delivery facilities required for the production, storage and transportation of Petroleum; and



(iii) proposals relating to necessary infrastructure investments and use of Azerbaijan materials,

products and services in accordance with Article 18.1(a); and

(iv)production forecasts for formation fluids for the entire Contract Area by reservoir derived from

individual well forecasts and estimates of the investments and expenses involved; and



(c)



(v)



an environmental impact and health and safety assessment and a plan for preventing

environmental pollution and any environmental accident, and for steps to clean-up any

pollution; and



(vi)



estimates of the time required to complete phases of the Development Programme.



Within thirty (30) days of receipt of the Development Programme SOCAR may request Contractor

to provide such further information as is readily available to Contractor and as SOCAR may

reasonably need to evaluate the Development Programme.



Notwithstanding the provisions of Articles 4.6(c) and (d) of the EDPSA, SOCAR and Contractor shall use

all reasonable endeavours to agree a Development Programme and achieve all the matters referred to

in Article 4.1 of Third Addendum by 1st May 2001 with the intent that the Parties be in a position not later

than October 2001 to seek the approval of their respective boards to proceeding with the construction

phase of the development of the Non-associated Natural Gas Discovery in accordance with the

Development Programme.2

(d)



Unless SOCAR requests in writing to Contractor any changes to the Development Programme

within ninety (90) days of receipt thereof, the Development Programme shall be deemed approved

by SOCAR. In the event that SOCAR requests any changes to the Development Programme then

the Parties shall meet within fifteen (15) days of receipt by Contractor of SOCAR’s written

notification of requested changes and shall discuss such request. Any agreed revision to the

Development Programme shall be incorporated into the Development Programme. In the event

that the Development Programme has not been approved by SOCAR within sixty (60) days of the

commencement of such discussion, Contractor may within a further forty (40) days commence

arbitration under the Arbitration Procedure on the question as to whether or not SOCAR's approval

of the Development Programme has been unreasonably withheld. If the decision of the arbitrators

is that approval was withheld by SOCAR unreasonably Contractor shall be entitled to commence

operations in accordance with the Development Programme in all respects as if the Development

Programme had been approved by SOCAR. If Contractor shall fail to commence operations within

one (1) year of the date of the arbitrators' decision SOCAR shall have the right to terminate this

Agreement by giving Contractor notice in writing within sixty (60) days after expiry of the said

period of one (1) year. If the arbitrators' decision is that SOCAR reasonably withheld approval of

the Development Programme submitted by Contractor SOCAR shall have the right in writing to

terminate this Agreement within sixty (60) days after the date of the notification of the decision of

the arbitrators.



(e) Upon approval of the Development Programme by SOCAR the Parties shall use all reasonable

lawful endeavours to obtain any requisite approvals thereof from the relevant Governmental Authorities.

2



Third Addendum. Article 5.2.



9



(f)



Implementation of Petroleum Operations by Contractor shall be through Annual Work Programmes

and Budgets, the approval of which shall be deemed to amend the Development Programme to

the extent necessary.



(g)



Contractor may at any time submit to the Steering Committee proposals to revise the

Development Programme. These proposals shall be consistent with the principles of efficient and

optimum development and production of Petroleum from the Contract Area in accordance with

international Petroleum industry standards and shall be subject to the approval of the Steering

Committee, such approval not to be unreasonably withheld.



4.7



If within three (3) years of the date of approval by SOCAR of the Development Programme the

Crude Oil Discovery development pursuant to the Development Programme has not been

commenced by Contractor, then unless otherwise agreed, SOCAR shall be entitled by giving

written notice to withdraw from the scope of this Agreement Crude Oil resources as defined in the

Development Programme for such a Discovery and any unrecovered costs incurred by Contractor

to the date of such notice with respect to the Discovery of such Crude Oil shall not be Cost

Recoverable.

ARTICLE 5



STEERING COMMITTEE FOR PROJECT MANAGEMENT AND ANNUAL WORK PROGRAMMES

5.1



Steering Committee for Project Management

SOCAR and Contractor shall, not later than thirty (30) days from the commencement of the

Development and Production Period establish the Steering Committee.

The functions of Steering Committee shall include but not be limited to:

(a) overseeing Petroleum Operations;

(b) examination, revision and approval of Contractor’s Annual Work Programmes and Budgets;

(c) supervising the accounting of costs and expenses in accordance with the Accounting

Procedure;

(d) establishing sub-committees of the Steering Committee and reviewing the work of such subcommittees;

(e) reviewing, revising and approving training programmes;

(f) review and approval of the abandonment plan and cost of abandonment operations pursuant to

Article 14.2(g).



5.2



The following rules shall apply with respect to the Steering Committee and meetings thereof:

(a) The Steering Committee shall be comprised of an equal number of members from SOCAR and

Contractor. Initially the Steering Committee shall consist of seven (7) representatives appointed

by SOCAR and seven (7) representatives appointed by Contractor (one (1) representative from

each Contractor Party). A person cannot represent both SOCAR and SCA. If at any time the

number of Contractor Parties increases or decreases the number of representatives to be

appointed by each of SOCAR and Contractor shall be increased or reduced, as the case may

be, to equal the number of Contractor Parties, provided, however, that the number of

representatives to be appointed by each of SOCAR and Contractor shall never be less than

four (4). SOCAR and Contractor shall each be entitled to appoint an alternate for each of their

representatives, who shall be entitled to attend in place of the designated representatives, such



10



alternate to be considered a representative for all purposes at such Steering Committee

meetings. SOCAR and Contractor shall each advise the other of the names of its

representatives and their alternates within twenty (20) days following commencement of the

Development and Production Period. Such representatives and their alternates may be

replaced by SOCAR and Contractor, respectively, upon written notice to the other.

(b) SOCAR and Contractor shall each have one (1) vote to cast on any matter submitted for

approval by the Steering Committee. For this purpose, each of SOCAR and Contractor shall

give written notice to the other specifying the identity of the individual representative (and, if

desired, his alternate), who shall be authorised to cast such vote on its behalf. Such designated

individuals may be changed from time to time upon written notice by SOCAR or Contractor, as

the case may be. No vote cast or purported to be cast by any representative other than said

designated individuals (or, in the absence of either, his designated alternate) shall be

considered as the official vote of either SOCAR or Contractor, as the case may be.

(c) The chairman of the Steering Committee shall be appointed by SOCAR from one of its

appointed representatives to the Steering Committee and shall preside over meetings of the

Steering Committee.

(d) The secretary to the Steering Committee shall be appointed by Contractor from one of its

appointed representatives to the Steering Committee and shall be responsible for:

(i) the production of an agenda before each meeting, such agenda to be agreed between

SOCAR and Contractor; and

(ii) the production and circulation of minutes following each meeting, which minutes shall be

agreed between the representatives of SOCAR and Contractor who are the representatives

authorised to cast the votes in the Steering Committee.

(e) Decisions of the Steering Committee shall require the affirmative vote of both SOCAR and

Contractor.

(f) SOCAR and Contractor shall each be entitled to send advisers and experts to meetings of the

Steering Committee. Unless the Steering Committee agrees, the cost of such advisors and

experts in attending the meetings shall not be Cost Recoverable.

(g) A quorum of the Steering Committee shall consist of at least three quarters (3/4) of the

representatives from each of SOCAR and Contractor, including the two (2) individuals who

have been designated by SOCAR and Contractor, respectively, as authorised to cast votes (or

their alternates).

(h) The Steering Committee will meet at least two (2) times in a Calendar Year. Meetings shall be

held in Baku, unless otherwise agreed. In the event that SOCAR and Contractor agree, the

Steering Committee can take decisions without holding an actual meeting; provided that in the

event of a teleconference or video conference the quorum requirements set forth in Article

5.2(g) have been complied with and in the event of a meeting via exchange of letters, faxes, or

telexes, such letters, faxes and telexes are copied to all Parties. Such decisions shall be

recorded in writing promptly thereafter and signed by the representatives of SOCAR and

Contractor who are authorised to cast the respective votes of SOCAR and Contractor.

(i)

5.3



SOCAR and Contractor shall each have the right to call additional meetings of the

Steering Committee upon fifteen (15) days prior written notice to each other.



Annual Work Programmes and Budgets

(a) Not more than thirty (30) days following the formation of the Steering Committee and thereafter

at least three (3) months before the beginning of each Calendar Year during the Development

and Production Period, Contractor shall prepare and submit, or cause to be prepared and

submitted, to the Steering Committee for approval an Annual Work Programme together with



11



the related Budget in respect of the Petroleum Operations Contractor proposes to be carried

out in such Calendar Year. The Steering Committee shall meet within thirty (30) days of receipt

of the Annual Work Programme and Budget to consider same and any revisions thereto and to

approve the Annual Work Programme and the Budget in its final form. It is agreed by SOCAR

and Contractor that knowledge acquired as the work proceeds or from certain events may

justify changes to the details of the Annual Work Programme; thus Contractor may at any time

propose to the Steering Committee an amendment to the Annual Work Programme and

Budget. Except as provided in this Article 5.3 and in Article 5.4, Contractor shall not conduct

any operations which deviate materially from the applicable Annual Work Programme and

Budget without the prior consent of the Steering Committee. If necessary to carry out an Annual

Work Programme, Contractor is authorised to make expenditures during the relevant Calendar

Year that are in excess of the Budget adopted therefor so long as the aggregate of such excess

expenditures does not exceed ten (10) percent of the Budget unless such expenditures

exceeding ten (10) percent are approved by the Steering Committee, which approval shall not

be withheld where the expenditures have been demonstrated to be reasonable and necessary.

In accordance with the other provisions of this Agreement, after approval of an Annual Work

Programme, Contractor shall conduct the Petroleum Operations in accordance therewith.

(b) In the event the Annual Work Programme and Budget has not been approved by the Steering

Committee in the case of the first Annual Work Programme and Budget within sixty (60) days of

the formation of the Steering Committee and in the case of each subsequent Annual Work

Programme and Budget by the first day of the Calendar Year to which it relates Contractor shall

be entitled (but not obligated) to carry out Petroleum Operations in accordance with some or all

of its proposed Annual Work Programme and Budget until such time as the Annual Work

Programme and Budget is agreed by the Steering Committee or any dispute relating to the

Annual Work Programme and Budget has been resolved by reference to arbitration in

accordance with the Arbitration Procedure. As soon as agreement on an Annual Work

Programme and Budget is reached by the Steering Committee or the decision of the arbitrators

is rendered, Contractor shall amend the then current and/or next following Annual Work

Programme and Budget, as appropriate, to conform with such agreement or decision; provided

that Contractor shall not be obligated to undo work already performed, may complete any work

in progress to the extent Contractor deems necessary and that all costs incurred by Contractor

in performing Petroleum Operations under its proposed Annual Work Programme and Budget

shall be deemed to be Petroleum Costs subject to Cost Recovery under this Agreement. The

foregoing notwithstanding, Contractor shall not be entitled to Cost Recovery of any costs

incurred under any portions of the proposed Annual Work Programme as identified in the

written minutes of the Steering Committee meeting at which the proposed Annual Work

Programme was considered and which were not approved by the Steering Committee and for

which the arbitration award is issued in favour of SOCAR; except that in all cases Contractor

shall be entitled to Cost Recovery of the following items:

(i)



ongoing commitments of Contractor, including contracts entered into prior to the initiation

of any such arbitration; and



(ii) work Contractor considers necessary for the protection of the reservoir and equipment and

facilities; and

(iii) work Contractor considers necessary for the protection of the environment, health and

safety.

5.4



Emergency Measures

Notwithstanding any provision of this Agreement to the contrary, in the case of an accident or other

emergency (or anticipated emergency), Contractor shall take all measures reasonably considered

necessary by Contractor for the protection of life, health, the environment and property. The costs

of taking such measures shall be included automatically as an approved addition to the then

current Budget and shall be deemed to be Petroleum Costs subject to Cost Recovery under this

Agreement, unless such accident or other emergency (or anticipated emergency) was the result of

Contractor's Wilful Misconduct.



12



ARTICLE 6

OPERATING COMPANY, PERSONNEL AND TRAINING

6.1



Operating Company

An Affiliate of BP shall be Operating Company and shall be ready to commence operations in

accordance with the terms of this Agreement after the Effective Date. The Operating Company

shall employ personnel seconded from Contractor Parties and such personnel and Azerbaijani staff

shall work as an integrated team under the management of the Operating Company.

The Operating Company may be incorporated or created outside of the Azerbaijan Republic but

shall be registered to do business in the Azerbaijan Republic in accordance with Azerbaijan law.

Contractor shall have upon the prior agreement of SOCAR the right from time to time to substitute

the Operating Company by appointing in writing another Operating Company provided that such

substitute Operating Company shall be an Affiliate of one of the Contractor Parties. The costs

relating to any such substitution shall not be Cost Recoverable. Contractor Parties shall ensure the

proper and orderly handover of responsibilities from an outgoing Operating Company to an

incoming Operating Company.



6.2



Responsibilities of Operating Company

The responsibilities of the Operating Company shall be the management, co-ordination,

implementation and conduct on behalf of Contractor of the day to day Petroleum Operations, and

such other functions, as may be delegated to it from time to time by Contractor.

The Operating Company shall have, to the extent authorised by Contractor, the ability to

subcontract any day to day work required to implement any Annual Work Programme.



6.3



Organisation

The Operating Company personnel shall be kept to the minimum practicable size, and shall include

management personnel, technical professionals, operating and maintenance personnel and

administrative personnel required to carry out the day to day Petroleum Operations on behalf of

Contractor.



6.4



Decisions

Decisions regarding the conduct of Petroleum Operations shall be made by the Contractor Parties

in accordance with the voting mechanism agreed among them. SCA as a Contractor Party shall

participate at all decision levels in the same way as the other Contractor Parties, including but not

limited to joint operating agreements, committees and management committee.



6.5



Procedures

The Operating Company shall be free to adopt such policies, practices and procedures as it deems

necessary for the conduct of Petroleum Operations in accordance with this Agreement.



6.6



Status of Operating Company

The Operating Company shall be entitled to all of the benefits, waivers, indemnities and

exemptions accorded to the Contractor Parties under this Agreement. The Operating Company

shall own no assets or equipment (though it shall have the right to freely use assets or equipment

owned or used by the Contractor Parties in conducting Petroleum Operations on behalf of the

Contractor Parties); shall act only as operator hereunder upon Contractor Parties’ instructions and

directions; shall not be entitled to any share of Petroleum produced and shall neither make a profit

nor incur a loss. The Operating Company shall record all financial flows or other transactions of the

Contractor Parties as passing through to the Contractor Parties in accordance with this Agreement



13



as though the Operating Company did not exist as a commercial entity, and for all purposes the

amount of its Taxable Profit shall be zero (0). During the Development and Production Period

Contractor shall bear all costs of the Operating Company related to the conduct of internal

inspections, inventories, audits, reorganisations, structural changes and the like and such costs

shall not be Cost Recoverable unless the conduct of such internal inspections, inventories, audits,

reorganisations, structural changes and the like is approved by the Steering Committee.

6.7



Personnel

(a) Contractor and its Sub-contractors and Operating Company and its Sub-contractors shall be

free to employ such personnel as in Contractor’s and its Sub-contractors´ and Operating

Company’s and its Sub-contractors´ respective opinions are required for the purpose of

carrying out Petroleum Operations.

(b) Contractor shall require Operating Company to give preference, as far as is consistent with

efficient operations, to employing citizens of the Azerbaijan Republic in the performance of

Petroleum Operations to the extent reasonably practicable, provided that such citizens have the

required knowledge, qualifications and experience. Such citizens shall be eligible for training in

accordance with Article 6.8. With respect to the employment of citizens of the Azerbaijan

Republic, Contractor agrees as follows:

(i)



the Operating Company shall provide SOCAR from time to time with a list showing the

numbers and job specifications for citizens of the Azerbaijan Republic which it estimates

that it may require. In addition, the Operating Company shall require its Sub-contractors to

provide SOCAR from time to time with a list showing the numbers and job specifications

for employees that they estimate they may require;



(ii) SOCAR shall, within two (2) weeks of receipt of such list, provide the Operating Company

and such Sub-contractors with a list of candidates recommended by SOCAR;

(iii) persons from the list provided by SOCAR shall enjoy a priority right to employment by the

Operating Company and the Sub-contractors if they meet the requirements of the

Operating Company or such Sub-contractors;

(iv) in the event that vacant positions remain in the Operating Company or Sub-contractors´

organisations, SOCAR shall within two (2) weeks of receipt of vacant positions provide

Operating Company or such Sub-contractors an additional list of candidates

recommended by SOCAR and if vacant positions still remain the Operating Company or

such Sub-contractors shall be entitled to fill these vacant positions with such citizens of the

Azerbaijan Republic as the Operating Company or such Sub-contractors choose;

(v)



in the event that the candidates selected independently by the Operating Company and

such Sub-contractors include SOCAR employees, then such persons shall be hired by the

Operating Company or such Sub-contractors after consultation with SOCAR;



(vi) overall target manning levels of citizen employees of the Azerbaijan Republic pertaining to

Petroleum Operations shall be as follows:



Citizens of the Azerbaijan

Republic

Prior to commencement of development

Professionals

Non-professionals



30% - 50%

70%



Upon commencement of

Petroleum production

Professionals



70%



14



Non-professionals



85%



Five (5) years after commencement

of Petroleum production

Professionals

Non-professionals



90%

95%



(c) Subject to Article 6.7(b), Contractor, Operating Company and any Sub-contractors are hereby

authorised and shall be free, throughout the term of this Agreement, to determine the number

and selection of all employees to be hired by them in connection with the conduct of Petroleum

Operations.

All citizens of the Azerbaijan Republic hired by Contractor, Operating Company and any Subcontractors shall be hired pursuant to written employment contracts, which shall specify the hours

of work required of the employee, the compensation and benefits to be paid or furnished by the

employer and all other terms of employment. Such employees may be located wherever

Contractor, Operating Company or Sub-contractors deem appropriate in connection with the

Petroleum Operations in accordance with such written employment contracts entered into with

them. Contractor, Operating Company and Sub-contractors shall be free to implement recruitment,

dismissal, performance review and incentive compensation programmes and practices (both with

respect to foreign expatriate employees and citizens of the Azerbaijan Republic) that are

customary in international Petroleum operations and in Contractor's, Operating Company's and

Sub-contractor's experience and judgement are best able to promote an efficient and motivated

workforce.

6.8



Training

Contractor shall provide training (including retraining) for citizens of the Azerbaijan Republic with respect to

the Petroleum Operations. Expenditures by Contractor pursuant to this Article 6.8 during the Development

and Production Period shall be approved by the Steering Committee as part of the relevant Annual Work

Programme and Budget and shall be included as Petroleum Costs; however the aforesaid expenditures less

than two hundred thousand (200,000) Dollars in any year shall not be Cost Recoverable. Expenditures in

excess of two hundred thousand (200,000) Dollars in any year shall be included as Petroleum Costs and

shall be Cost Recoverable.



ARTICLE 7

REPORTS AND ACCESS TO PETROLEUM OPERATIONS

7.1



Reports and Records

Contractor shall keep and submit reports and records of Petroleum Operations as follows:

(a) Contractor shall record, in an original or reproducible form of good quality and on tape or other

media where relevant, all geological and geophysical information and data relating to the

Contract Area obtained by Contractor in the course of conducting Petroleum Operations

thereon and shall deliver a copy of all such information and data, including the interpretation

thereof and logs and records of wells, and any other information obtained by Contractor

consistent with generally accepted international Petroleum industry standards, to SOCAR as

soon as practicable after the same has come into the possession of Contractor.

(b) Contractor shall keep logs and records of the drilling, deepening, plugging or abandonment of

wells consistent with generally accepted international Petroleum industry practice and

containing particulars of:

(i)



the strata through which the well was drilled;



(ii) the casing, drill pipe, tubing and down-hole equipment run in the well and modifications

and alterations thereof;



15



(iii) Petroleum, water and valuable mineral resources encountered;

and any other information consistent with generally accepted international Petroleum industry

standards.

(c) The information required by Article 7.1(b) above shall be submitted to SOCAR in the form of

well completion reports within ninety (90) days from completion of the well in question.

(d) Contractor may if necessary remove from the Azerbaijan Republic, for the purpose of

laboratory examination or analysis, petrological specimens (including cores and cuttings) or

samples of Petroleum found in the Contract Area and characteristic samples of the strata or

water encountered in a well and seismic data on tape or other media. Upon request, Contractor

will provide such specimens and samples to SOCAR.

(e) Contractor shall supply to SOCAR:

(i)



daily reports on drilling operations and weekly reports on field geophysical surveys as

soon as they are available;



(ii) within fifteen (15) days after the end of each Calendar Quarter, a report on the progress of

Petroleum Operations during the preceding Calendar Quarter covering:

(1) description of the Petroleum Operations carried out and the factual information

obtained including Petroleum production data from the Contract Area overall and on a

well by well basis; and

(2) a description of the area in which Contractor has operated; and

(3) a map indicating the location of all wells and other Petroleum Operations;

(iii) within three (3) months of the end of each Calendar Year, an annual report summarising

the matters specified in paragraph (ii) above for the preceding Calendar Year;

(iv) reports on completion of major elements of Petroleum Operations or unforeseen events

and other reports requested by the Steering Committee. Additionally Contractor will inform

SOCAR of all discoveries other than of Petroleum, such as discoveries of non-Petroleum

natural resources.

The daily and weekly reports required to be submitted to SOCAR pursuant to Article 7.1 (e)(i)

shall be submitted in the original language of the reports and all other reports and records

required to be submitted to SOCAR pursuant to this Article 7.1 shall be submitted to SOCAR in

the English and Azeri languages.

7.2



Access to Petroleum Operations

Duly authorised representatives of SOCAR may on not less than three (3) days notice in writing

inspect at justified intervals, and at reasonable times work, facilities, equipment and materials

relating to the Petroleum Operations, provided that such inspection shall not unreasonably

interfere with or delay the conduct of Petroleum Operations.

ARTICLE 8

USE OF LAND AND SEA BEDS



Subject to Article 28.2 of this Agreement, SOCAR shall make available to Contractor, at no cost to

Contractor, the use of any land and sea beds under its control as necessary to carry out Petroleum

Operations, (provided such use by Contractor does not interfere unreasonably with SOCAR's use

thereof and further provided that if such use by Contractor results in expense for SOCAR, Contractor

shall reimburse SOCAR for such expense, without creating any profit directly or indirectly for SOCAR),



16



and within the full limits of its authority shall use its best lawful endeavours to make available, at no cost

to Contractor, all other land and sea beds necessary to carry out Petroleum Operations including, but not

limited to, the construction, laying, operating and maintaining, both onshore and offshore, of pipelines,

cables and equipment. Contractor shall have the right to construct and maintain, above and below any

such lands and sea beds, the facilities necessary to carry out Petroleum Operations. Land allocation and

location of facilities constructed by Contractor on such land shall be in accordance with Azerbaijan

legislation regarding land use restrictions, except as may be modified by this Agreement.

ARTICLE 9

USE OF FACILITIES

9.1



SOCAR Facilities

Contractor shall have the right to use, at no cost to Contractor, pre-drilled wells in the Contract

Area at the Effective Date if deemed by Contractor to be necessary for the conduct of Petroleum

Operations. In the event that Contractor materially refurbishes, upgrades or improves any facilities,

including but not limited to infrastructure, vessels, rigs, means of transportation, supply bases,

warehouses, port facilities, under SOCAR's direct or indirect ownership or control, then SOCAR

shall ensure that Contractor has prior right to use such facilities as may be necessary for the

purpose of carrying out Petroleum Operations.



9.2



SOCAR Assistance

(a) SOCAR shall within the full limits of its authority use its best lawful endeavours with respect to

Governmental Authorities and Third Parties to provide Contractor access for its share of

Petroleum to all necessary transportation, treatment and export facilities and infrastructure in

the Azerbaijan Republic on terms no less favourable to Contractor than those granted to, or

agreed with, any other bona fide arm's length user of such facilities and infrastructure.

(b) SOCAR shall within the full limits of its authority use all lawful reasonable endeavours, with

respect to Governmental Authorities and Third Parties, to assist Contractor in obtaining such

rights, privileges, authorisations, approvals and other agreements from authorities and

jurisdictions, outside the territory of the Azerbaijan Republic as Contractor shall reasonably

deem necessary for Petroleum Operations and/or as may be required by such authorities and

jurisdictions, but shall not be responsible if such rights, privileges, authorisations and approvals

are not obtained. Such agreements may include, but need not be limited to, such matters as

export pipeline rights of way and operation rights, permits and undertakings with respect to the

transhipment, storage or staging of Petroleum produced and saved from the Contract Area,

materials, equipment and other supplies destined to or from the territory of the Azerbaijan

Republic, and exemptions from national, local and other taxes, transit fees, and other fees and

charges on Petroleum Operations being conducted in such other jurisdictions.

(c) SOCAR shall within the full limits of its authority use all reasonable lawful endeavours with

respect to Governmental Authorities and Third Parties, and shall be obligated with respect to its

Affiliates, joint ventures or enterprises in which it has an interest and the right to control,

manage or direct the action of such companies, ventures or enterprises, to ensure that

Contractor has access to inter alia onshore construction and fabrication facilities, offshore

infrastructures, supply bases and vessels, warehousing, goods, services and means of

transportation in the Azerbaijan Republic provided that those items are not subject to

obligations to Third Parties and that Contractor's use thereof does not interfere with the

operations of SOCAR and/or any Third Party. As used herein, "control" shall mean the

ownership of more than fifty (50) percent of the shares authorised to vote at a general meeting

of shareholders, or the ability to pass or procure the passing of a decision (whether by casting

of votes or otherwise) at a general meeting of shareholders, or at any meeting of the executive

or management body, of the company, venture or enterprise. Such access shall be:

(i) with respect to facilities and services of Third Parties, on terms which are no less favourable

to Contractor than those granted or agreed with any other bona fide arm's length user of

such facilities and services; and



17



(ii) with respect to facilities and services of SOCAR and such Affiliates, joint ventures or

enterprises in which SOCAR has an interest and the right to control, manage or direct the

action thereof, at rates commensurate with the quality and efficiency of such facilities and

services, which rates shall be the same as are available to SOCAR and/or such Affiliates,

joint ventures or enterprises and as regard other terms no less favourable to Contractor

than those granted to or agreed with SOCAR and/or such Affiliates, joint ventures or

enterprises.

9.3



Contractor Facilities

Contractor shall be responsible for the maintenance and repair of all facilities controlled and

operated by Contractor in connection with the Petroleum Operations ("Contractor Facilities"). Fees

from Third Parties' access to Contractor Facilities shall be credited to the Petroleum Operations

Account. SOCAR shall have the right to use excess capacity in Contractor Facilities provided such

use does not interfere with or adversely affect Petroleum Operations. Third Parties may use such

excess capacity on terms agreed with Contractor. Prior to Zero Balance the priority of such use of

Contractor Facilities shall be first Contractor, second Third Parties, and finally SOCAR. SOCAR

shall pay a mutually agreed fee for such use to be credited to the Petroleum Operations Account.

After Zero Balance the priority shall be first Contractor, second SOCAR and finally Third Parties.

SOCAR's use after Zero Balance shall be free of charge, except that maintenance of Contractor

Facilities, for the time being not used by Contractor and being utilised exclusively by SOCAR, shall

be on terms to be mutually agreed. Notwithstanding anything to the contrary in this Agreement,

Contractor shall have the right to dispose of equipment and facilities, which are, either obsolete or

are nearing the end of their useful economic life. Contractor shall notify SOCAR of its intention to

dispose of any such equipment and facilities (except in the case of fixed assets to which the

provisions of Article 14.2(d) shall apply). Unless SOCAR elects, within thirty (30) days to assume

responsibility for and take delivery thereof, Contractor shall be free to dispose of any such

equipment and facilities at the best price obtainable. Funds from such sales will be credited to the

Petroleum Operations Account. Notwithstanding any provision herein to the contrary, SOCAR and

Contractor shall have equal priority to capacity in Contractor Facilities to transport Petroleum

produced from the Contract Area in proportion to their rights to take Petroleum under this

Agreement.

ARTICLE 10

EARLY PETROLEUM PRODUCTION



If before the end of the Exploration Period or the Additional Exploration Period (which period Contractor

shall have the right to proceed to in accordance with Article 4.3) Contractor submits a written Notice of

Discovery and its Commerciality and Contractor’s wish to proceed to early Petroleum production,

Contractor shall submit a development proposal for early Petroleum production for SOCAR’s approval

and perform all other procedures, provided for in Articles 4.6. Approval of the development proposal for

early Petroleum production and its commencement shall not free Contractor from its obligations during

the Exploration Period and Additional Exploration Period and corresponding consequences of a partial or

full failure to fulfil them.

ARTICLE 11

CONTRACTOR'S RECOVERY OF PETROLEUM COSTS AND PRODUCTION SHARING

11.1 Use of Petroleum for Petroleum Operations

Contractor shall have the right to use free of charge Petroleum produced from the Contract Area

for Petroleum Operations in accordance with generally accepted international Petroleum industry

practice, including but not limited to reinjection to preserve the pressure of Petroleum reservoirs in

the Contract Area. Contractor shall endeavour to minimise use of Petroleum for Petroleum

Operations. For planning purposes Contractor shall provide in the Annual Work Programme an

estimate of the amount of Petroleum it anticipates will be used for the optimum implementation of

Petroleum Operations. If during the implementation of the Annual Work Programme Contractor



18



estimates that it will use more than ten (10) percent over and above the amount estimated, the

revised estimate shall be notified by Contractor to the Steering Committee.

11.2 Cost Recovery

(a) Contractor shall be entitled to the recovery of Petroleum Costs as follows:

(i) All Operating Costs shall first be recovered from Total Production;

(ii) All Capital Costs shall then be recovered from a maximum of fifty (50) percent of Crude Oil

and fifty (50) percent of Non-associated Natural Gas remaining out of Total Production after

deduction of Crude Oil and Non-associated Natural Gas required to recover Contractor's

Operating Costs ("Capital Cost Recovery Petroleum").

(b) Cost Recovery in accordance with Article 11.2(a) shall be in a manner consistent with

international accounting principles (including the right of audit) as set out in the Accounting

Procedure.

11.3 Transfer of Title to Cost Recovery Petroleum

Cost Recovery by Contractor shall be achieved by transferring to Contractor title at the Delivery

Point to quantities of Crude Oil and Non-associated Natural Gas from the Contract Area of

equivalent value (as determined pursuant to Articles 13.1) to the Petroleum Costs to be recovered

by Contractor in accordance with Article 11.2 ("Cost Recovery Petroleum").

11.4 Quarterly Accounting

(a) Cost Recovery shall be calculated on a Calendar Quarter basis.

(b) (i)



At the end of each Calendar Quarter, Finance Costs shall be applied to any unrecovered

Capital Costs and/or Operating Costs, including any unrecovered Capital Costs and

Operating Costs carried forward from any previous Calendar Quarter, which have not been

recovered in such current Calendar Quarter;



(ii) Finance Costs in respect of unrecovered Operating Costs for each Calendar Quarter shall,

at the end of each Calendar Quarter, be aggregated with the unrecovered balance of

Operating Costs at that date and thereafter be recovered as Operating Costs;

(iii) Finance Costs in respect of unrecovered Capital Costs for each Calendar Quarter shall, at

the end of each Calendar Quarter, be aggregated with the unrecovered balance of Capital

Costs at that date and thereafter be recovered as Capital Costs.

(c) Contractor shall have the continuing right to carry over to subsequent Calendar Quarters

accumulated Petroleum Costs which are recoverable but which have not been recovered in

previous Calendar Quarters.

(d) To the extent that the unrecovered accumulated Capital Costs and Operating Costs incurred or

carried forward in any Calendar Quarter are less than the value of the Capital Cost Recovery

Petroleum available for Cost Recovery purposes during such Calendar Quarter, then the

unused Capital Cost Recovery Petroleum shall be treated as additional Profit Petroleum.

11.5 Profit Petroleum

The balance of Total Production remaining after deducting the quantities of Crude Oil and Nonassociated Natural Gas necessary to enable recovery of Operating Costs and Capital Costs (as

provided in Articles 11.2 and 11.4 above) ("Profit Petroleum") shall be calculated on a Calendar

Quarter basis and, subject to the provisions of Article 19.5, shall be shared between SOCAR and

Contractor according to the R Factor Model as follows.



19



Beginning at the Effective Date the value of the R Factor in respect of Calendar Quarter (n+1) shall

be determined at the end of Calendar Quarter (n) compounded, and accumulated in accordance

with the procedure below:

R Factor (n + 1) =





( CCRn + PPLn )

CCSn



where:

CCRn means Contractor's Capital Costs (including Finance Costs) recovered in the nth Calendar

Quarter;

CCSn means Contractor's Capital Costs (excluding any Finance Costs) incurred in the nth

Calendar Quarter;

PPLn means the value of Contractor's share of Profit Petroleum lifted in the nth Calendar Quarter;

n



means the index number of the relevant Calendar Quarter;

means the cumulative arithmetic sum of the items to the right of the

including Calendar Quarter (n).



symbol up to and



The R Factor shall be applied to the Petroleum Profit Sharing Table below to find the percentage

split between SOCAR and Contractor of Profit Petroleum in Calendar Quarter (n+1).



Profit Petroleum Sharing Table

R Factor Band

R<1

1≤R<2

2≤R<3

3≤R<4

R≥4



SOCAR

Share (%)



Contractor

Share (%)



45

55

70

80

90



55

45

30

20

10



11.6 Transfer of Title to Profit Petroleum

Title to Contractor's share of Profit Petroleum shall be out of Crude Oil and Non-associated Natural Gas and

shall be transferred to Contractor at the Delivery Point.



ARTICLE 12

TAXATION

12.1 General

(a) It is a condition to the Contractor Parties' obligations under this Agreement that, except for the

Profit Tax obligation described in this Article 12, the Contractor Parties shall not be subject to

any Taxes of any nature whatsoever arising from or related, directly or indirectly, to

Hydrocarbon Activities.

(b) It is acknowledged that Double Tax Treaties shall have effect to give relief from Taxes.

(c) For the purposes of this Article 12 the following expressions shall have the meanings ascribed

to them below:



20



(i)



"State Budget" means consolidated Republican and local budgets.



(ii) "Fixed Assets" shall include all assets which it is usual to include in the Contractor Party's

tax balance sheet under the heading of fixed or intangible asset, the total value of each of

which exceeds a limit and has an anticipated useful life of more than one (1) year. This

limit for the Calendar Year in which this Agreement is executed shall be Dollars five

thousand (5,000). For each subsequent Calendar Year, this limit shall be increased by four

(4) percent over the limit which applied in the previous Calendar Year.

(iii) "Hydrocarbon Activities" means activities relating to the exploitation of the Contract Area,

whether such activities are performed in the Azerbaijan Republic or elsewhere.

(iv) "Tax Inspectorate" means the Tax Inspectorate of the city of Baku or its successors or

assignees.

12.2 Profit Tax.

(a) Each Contractor Party shall be severally liable for Profit Tax in respect of its Hydrocarbon

Activities in accordance with the Law of the Azerbaijan Republic on Taxation of Profit and

Certain Types of Income of Legal Entities, dated 9 November 1991, as enacted, and as

generally applicable and in force in the Azerbaijan Republic on 1 January 1993, and as

amended by the provisions of this Agreement ("Profit Tax"). In the event of any conflict between

the provisions of such Law and those of this Agreement, the provisions of this Agreement shall

govern. Each Contractor Party shall be liable for payment of Profit Tax in connection with its

business activities in the Azerbaijan Republic that are not related to Hydrocarbon Activities,

under the applicable laws and regulations of the Azerbaijan Republic.

(b) It is specifically acknowledged that the provisions of this Article 12 shall apply individually to

each Contractor Party. The individual liability of a Contractor Party for the Profit Tax shall be

based on such Contractor Party's separate share of the items of Sales Income and Other

Income and Deductions consolidated with the profits or losses of its other permanent

establishments in the Azerbaijan Republic.

(c) SOCAR shall in respect of each Calendar Year pay on behalf and in the name of each of the

Contractor Parties Profit Tax to the State Budget in Dollars including estimated Profit Tax, and

any interest, fines or penalties with respect thereto which is attributable to the failure to pay any

such Profit Tax or estimated Profit Tax when it is due (except interest resulting from a

Contractor Party's failure to prepare a required return by the due date therefor). SOCAR hereby

guarantees to Contractor Parties that payment of each of Contractor Parties Profit Tax to the

State Budget including any interest, fines or penalties as aforesaid, shall have first priority upon

the proceeds of sale of Petroleum to which SOCAR is entitled under this Agreement. SOCAR

shall cause the Tax Inspectorate to issue to the appropriate Contractor Party official receipts for

such payments as provided for in Article 12.3(f). Upon request of any Contractor Party, SOCAR

shall provide to such Contractor Party within ten (10) days of such request a document (in a

form acceptable to all Contractor Parties) confirming direct evidence of the actual transfer of

funds to the State Budget in satisfaction of SOCAR's obligation as described in the preceding

sentence. For purposes of computing the liability, if any, of SOCAR for Taxes assessed on

SOCAR's income or profits, SOCAR shall not be entitled to credit against its tax liability the

Profit Tax paid by SOCAR on behalf and in the name of each of the Contractor Parties

pursuant to this Article 12.2(c). SOCAR shall be entitled to receive and retain any Profit Tax

refunds (other than refunds of interest and penalty sanctions paid by a Contractor Party) on

behalf and in the name of each of the Contractor Parties and shall provide to the appropriate

Contractor Parties a statement showing that any such refund has been received.

(d) On not less than thirty (30) days written notice each Contractor Party shall have the right at any

time to have the payment by SOCAR of that Contractor Party's Profit Tax liability from funds

generated by SOCAR's commercial activities for any Calendar Year audited by a firm of

internationally recognised independent accountants selected by the Contractor Party.



21



Contractor Party shall bear the costs of such audit and such cost shall not be Cost

Recoverable. Such audit may not relate to a Calendar Year which has expired three (3) years

prior to the date on which notice of the intended audit is given by the Contractor Party. Such

audit shall be conducted in such a fashion that it does not cause unreasonable inconvenience

to SOCAR. SOCAR shall accord to the auditor reasonable access to such evidence as the

auditor may require to satisfy the auditor as to full payment of Contractor Party's Profit Tax for

any Calendar Year from funds generated by SOCAR's commercial activities. If SOCAR shall

not so pay a Contractor Party's Profit Tax Contractor Party shall make payment of it's Profit Tax

directly to the State Budget and thereupon the Parties shall adjust the terms of the Agreement

to re-establish the economic equilibrium of the Parties.

(e) Taxable Profit, or if such sum is negative Taxable Loss, of a Contractor Party for a Calendar

Year shall be equal to the sum of the Sales Income, the Other Income received by the

Contractor Party during the Calendar Year and Profit Tax Gross Up less Deductions. The terms

Taxable Profit, Taxable Loss, Sales Income, Other Income, Profit Tax Gross Up and

Deductions shall have the meaning ascribed to them in this Article 12.2.

(f) Taxable Losses shall be carried forward to the next Calendar Year and set off against any

available Taxable Profit in that Calendar Year and Taxable Losses shall be reduced

accordingly. Any balance of Taxable Losses not so set off in that Calendar Year shall be

carried forward without limitation to future Calendar Years until fully set off against Taxable

Profit.

(g) Taxable Profit as reduced by Taxable Losses brought forward, shall be subject to Profit Tax at

a fixed rate of twenty-five (25) percent.

(h) Sales Income shall be defined as the amount of income derived during the Calendar Year by

the Contractor Party from sales of Petroleum produced in the conduct of Hydrocarbon

Activities. In the event such Petroleum is exchanged or swapped, then Sales Income shall be

defined as the amount of income derived during the Calendar Year by such Contractor Party

from sales of the Petroleum received in the exchange or swap. For purposes of this Article

12.2(h), Sales Income shall be determined by applying, in the case of arm's length sales (as

defined in Article 13.1(d)(v)), the actual price realised by such Contractor Party, and, in the

case of non arm's length sales, the principles of valuation as set out in Article 13.1 for such non

arm’s length sales.

(i)



Other Income shall be defined as any amounts of cash received by a Contractor Party in the

carrying on of Hydrocarbon Activities including but not limited to the following:

(i)



insurance proceeds; and



(ii) realised exchange gains; and

(iii) amounts received under Article 14.2(d) and (e) from the Abandonment Fund; and

(iv) amounts received under Article 14.2(h) for distributions of excess funds in the

Abandonment Fund; and

(v) interest income; and

(vi) amounts received from suppliers, manufacturers or their agents in connection with

defective materials and equipment; and

(vii) amounts received for the use of facilities or intellectual property, compensation for

services, sales of materials or charter hire.

Provided, however, Other Income shall not include the following amounts received by a

Contractor Party:



22



(1) amounts received from sales of Petroleum; and

(2) except as otherwise provided in Article 12.2(n) and (o) amounts received from sales of

Fixed Assets; and

(3) amounts received as loans, or funds contributed to the Contractor Party; and

(4) amounts received from sales of any of the Contractor Party's rights and obligations arising

under this Agreement; and

(5) amounts received as refunds of Taxes (other than Profit Tax) or as dividends received by

a Contractor Party from an Affiliate of such Contractor Party; and

(6) amounts received in reimbursement of or otherwise in connection with expenditures

incurred by a Contractor Party (or an Affiliate thereof) in excess of the amounts of such

expenditures that have been treated as Deductions by the Contractor Party for purposes of

computing Taxable Profit or Taxable Loss (in which case the amounts of any such excess

shall not thereafter be treated as Deductions by the Contractor Party for such purposes

and corresponding adjustments shall be made to the balance in Article 12.2(m); and

(7) amounts received which are not freely at the disposal of and do not increase the wealth of

the Contractor Party.

(8) income otherwise subject to Profit Tax.

(j) Profit Tax Gross Up shall be defined as an amount equal to the total amount of a Contractor

Party's Profit Tax liability for a Calendar Year which is payable on behalf of the Contractor Party

by SOCAR pursuant to Article 12.2(c) above; such Profit Tax liability being twenty five (25)

percent of Contractor Party's Taxable Profit for such Calendar Year.

(k) For purposes of determining the amount of the Taxable Profit or Taxable Loss of a Contractor

Party for a Calendar Year, Deductions shall include all costs incurred by the Contractor Party in

connection with the carrying on of Hydrocarbon Activities whether incurred in the Azerbaijan

Republic or elsewhere, including but not limited to the following:

(i)



the full amount of wages, salaries, and other amounts paid to all employees of the

Contractor Party together with all costs incurred in connection with the provision of

accommodation, food, public utilities, children's education, and travel to and from home

country for employee and family; and



(ii)



all costs of Azerbaijan State social insurance, including, but not limited to contributions to

the pension fund, to the unemployment fund, to the social insurance fund, to the

employment fund and to the medical insurance fund and all the other social payments for

the employees; and



(iii)



all exploration and appraisal costs; and



(iv)



all costs associated with drilling wells (excluding the costs of any item of equipment or

capital asset which is usually salvaged in accordance with practices generally accepted

and recognised in the international Petroleum industry); and



(v)



all costs of transportation to the Point of Sale and of marketing, including without limitation

pipeline tariffs, commissions and brokerages; and



(vi)



all payments made under a lease agreement for the current year of the lease; and



(vii) all insurance costs; and



23



(viii) all personnel training costs; and

(ix)



all costs connected with the activities of the offices or other places of business of each

Contractor Party including management, research and development, and general

administration expenses; and



(x)



the cost of any item of equipment or asset which is not a Fixed Asset; and



(xi)



all amounts of interest, fees and charges paid in respect of any debt incurred in carrying

out the Hydrocarbon Activities and any refinancing of such debts, excluding (1) in the

case of Affiliate debt, interest in excess of a rate which would have been agreed upon

between independent parties in similar circumstances, and (2) interest which becomes

payable because the debt is repaid after its due date for repayment; and



(xii) an allocable portion covering general administrative support provided by the Contractor's

Affiliates outside of the Azerbaijan Republic which results in an indirect benefit to

Hydrocarbon Activities. Such support will include the services and related office costs of

personnel performing administrative, legal, treasury, tax and employee relations, provision

of expertise and other non-technical functions which cannot be specifically identified or

attributed to particular projects. The allocable portion of such costs with respect to this

Agreement for each Contractor Party for the Calendar Year shall be equal to the amount

determined using the following formula:

a=



(b/c) d



where

a = the allocable portion for a Contractor Party for the Calendar Year;

b = the percentage Participating Interest of that Contractor Party at the end of the

Calendar Year;

c = the sum of the percentage Participating Interests of the Contractor Parties at the end

of the Calendar Year; and

d = the sum of the general and administrative overhead of the Contractor Parties for the

Calendar Year.

The sum of the general and administrative overhead of the Contractor Parties for the

Calendar Year shall be the amount determined using the following formula:

d=w+x+y+z

where

d = the sum of the general and administrative overhead of the Contractor Parties for the

Calendar Year;

w = five (5) percent of the sum of the Contractor Parties' Capital Costs for the Calendar

Year, if any, up to fifteen million (15,000,000) Dollars;

x = two (2) percent of the sum of the Contractor Parties' Capital Costs for the Calendar

Year from fifteen million (15,000,000) Dollars to thirty (30,000,000) million Dollars, if

any;

y = one (1) percent of the sum of the Contractor Parties' Capital Costs for the Calendar

Year in excess of thirty million (30,000,000) Dollars, if any; and



24



z = one point five (1.5) percent of the sum of the Contractor Parties' Operating Costs for

the Calendar Year; and

(xiii) all payments into the Abandonment Fund; and

(xiv) losses of materials or assets resulting from destruction or damage, assets which are

renounced or abandoned during the Calendar Year, bad debts and payments made to

Third Parties as compensation for damage; and

(xv) any other losses, including realised exchange losses, or charges directly related to

Hydrocarbon Activities; and

(xvi) all other expenditures which the Contractor Party incurs in carrying out Hydrocarbon

Activities; and

(xvii) all annual acreage fees payable; and

(xviii) all incidental costs incurred for the acquisition or occupation of land in connection with

Hydrocarbon Activities; and

(xix) amortization calculated as hereinafter provided in this Article 12.2(l).

(l) (i)



In the case of any Fixed Assets, amortisation Deductions shall be calculated as follows:

(aa) Fixed Assets which

are not described in

(bb) or (cc) below



twenty five (25) percent

per Calendar Year

declining balance basis



(bb) Bonus Payments



ten (10) percent per

Calendar Year

straight line basis



(cc) Office buildings,

warehouses and

similar constructions

("Buildings")



two point five (2.5)

percent per Calendar Year

straight line basis



The amount of amortisation for expenditure on a Fixed Asset shall be computed on the

cost of the Fixed Asset exclusive of VAT on goods purchased in Azerbaijan. Any item

which is treated as Deduction under Article 12.2 (k) shall not be amortised under Article

12.2(l).

(ii) All expenditures on Fixed Assets described in Article 12.2 (l)(i) incurred during the

Calendar Year shall be deemed to have been incurred on first (1st) July with the result that

fifty (50) percent of the expenditure shall be added to the balance of the unamortised

amounts brought forward from the preceding Calendar Year. The balance shall then be

reduced by any amounts received from the disposal of Fixed Assets to give an adjusted

balance ("Adjusted Balance") which will then be amortised as follows:

Balance brought forward from preceding Calendar Year



X



Add fifty (50) percent of the expenditure

incurred on Fixed Assets during Calendar Year



X



Less the full amount of the actual proceeds from

sales of Fixed Assets during Calendar Year



(X)



Adjusted Balance



X



25



(iii)



Less amortisation: twenty five (25) percent

of the Adjusted Balance



(X)



Add excluded fifty (50) percent balance of

expenditure incurred on Fixed Assets during the

Calendar Year



X



Balance to carry forward to following Calendar Year



X



If in any Calendar Year, all Fixed Assets in the Azerbaijan Republic used in Hydrocarbon

Activities for the purposes of this Agreement are disposed of (including but not limited to a

transfer pursuant to Article 14) then:

(aa) if the Adjusted Balance plus the "excluded fifty (50) percent balance of expenditure

incurred on Fixed Assets during the Calendar Year" is positive, the full amount shall

be treated as a Deduction in that Calendar Year, or

(bb) if the Adjusted Balance plus the "excluded fifty (50) percent balance of the

expenditure incurred on Fixed Assets during the Calendar Year" is negative, the full

amount shall be treated as Other Income in that Calendar Year.



(iv)



There shall be treated as Other Income or Deductions the amount of gains or losses

recognised by a Contractor Party during the Calendar Year from the sale, disposition or

abandonment ("Disposition") of a Building computed as follows:

Proceeds (if any) from Building Disposition



X



Less: Adjusted Basis of Building



(X)



Gain/(Loss) on Building Disposition



X



The Adjusted Basis of such Building shall be calculated as follows:

Original Cost of the Building



X



Add cost of capitalised improvements



X



Less accumulated amortisation Deductions



(X)



Adjusted Basis of Building



X



(m) For purposes of computing a Contractor Party's Taxable Profit or Taxable Loss, all costs

incurred by the Contractor Party in connection with Hydrocarbon Activities (including but not

limited to costs incurred directly or indirectly in connection with technical work in the Azerbaijan

Republic or elsewhere and costs incurred by representative offices in the Azerbaijan Republic

of the Contractor Party) which were incurred prior to the Effective Date shall be deemed to have

been incurred on such date. Notwithstanding the foregoing, direct or indirect costs of

conducting the negotiation of this Agreement and in supporting medical, cultural or charitable

activities prior to the execution of this Agreement shall not be included in computing the

Contractor Party's Taxable Profit or Taxable Loss.

(n) A Contractor Party has the right to sell or transfer any Fixed Assets which it owns without

regard to book value of the Fixed Assets.

(o) Should any Contractor Party assign all or any part of its interest in the Agreement, the assigning

Contractor Party shall have the option to elect to have the assignee treat as Deductions for the

Calendar Year in which the assignment occurs all, or a proportional part if only part is assigned,

of the Taxable Loss, if any, of the assignor Contractor Party for such Calendar Year.



26



12.3 Profit Tax Accounting and Returns

(a) Each Contractor Party shall:

(i)



maintain its tax books and records, and compute its Taxable Profit and Taxable Loss,

exclusively in Dollars.



(ii) recognise items of Sales Income, Other Income and Deductions in accordance with the

cash receipts and disbursements basis applicable in the Azerbaijan Republic as of the

Effective Date.

(iii) draw up its financial statements and Profit Tax returns in Dollars and submit one set of

accounts for the Calendar Year consisting of a tax balance sheet and profit and loss

account, together with one Profit Tax computation for the Calendar Year reflecting its

Hydrocarbon Activities.

(iv) have its financial statements and Profit Tax return for each Calendar Year audited by an

auditor appointed by the Contractor Party and who has relevant permits (licenses) to carry

out such audits in the Azerbaijan Republic.

(v) submit such tax financial statements and Profit Tax returns for each Calendar Year

together with an appropriate comment from the auditor to the Tax Inspectorate no later

than the fifteenth (15th) April of the following Calendar Year.

(vi) beginning in the first Calendar Year in which it estimates it will earn a Taxable Profit, be

liable for estimated Profit Tax for each Calendar Quarter based upon its estimate of its

Taxable Profit for such Calendar Quarter and for the preceding Calendar Quarters in such

Calendar Year. Estimated Profit Tax shall be paid in accordance with Article 12.2(c) to the

State Budget on or before twenty-five (25) days following the end of the relevant Calendar

Quarter. In calculating the estimated Profit Tax for a Calendar Quarter, each Contractor

Party may utilise the Annual Work Programme along with any other information which it

deems appropriate.

(b) Upon filing the final Profit Tax return for a Calendar Year, estimated Profit Tax paid with respect

to the Calendar Quarters during such Calendar Year shall be credited against the final Profit

Tax as calculated on the final Profit Tax return. Any overpayment shall be refunded by the

State Budget within ten (10) days following the date the Contractor Party's final Profit Tax return

(for such Calendar Quarter's or Quarters' estimated Profit Tax payment(s)) is submitted. Any

underpayment shall be paid by SOCAR to the State Budget in accordance with Article 12.2(c)

within ten (10) days following the date such final Profit Tax return is submitted. In any event, the

final Profit Tax for a Calendar Year as calculated in the Profit Tax return shall be payable no

later than twenty-fifth (25th) April of the following Calendar Year.

(c) All estimated and final payments (and refunds of overpayments) of Profit Tax and any interest

and penalty sanctions thereon as described in Article 12.3(d) below shall be made in Dollars.

(d)



(i) The filing of the Profit Tax returns and payment of Profit Tax thereunder for a Calendar

Year shall be deemed to be a final and conclusive settlement of all Profit Tax liabilities for

that Calendar Year upon the date thirty-six (36) months from the date the Profit Tax return

for such Calendar Year was filed.

(ii) The Tax Inspectorate shall have the authority to conduct an audit of each Contractor

Party’s Profit Tax return for each Calendar Year. Upon completing such audit, the Tax

Inspectorate shall discuss any proposed adjustments with the Contractor Party and, where

appropriate, issue a notice of additional Profit Tax due or a notice of refund. Any agreed

underpayments or overpayments of Profit Tax shall be paid in accordance with Article

12.2(c) within ten (10) days following receipt by the Contractor Party of the appropriate

notice. If the Contractor Party and the Tax Inspectorate are unable to agree upon the



27



amount of Profit Tax underpaid or overpaid, the issue shall be submitted to arbitration

applying the principles contained in Article 23.3.

(iii) Upon a final determination that there has been either an underpayment or overpayment of

Profit Tax on the Contractor Party's final Profit Tax return for a Calendar Year, SOCAR

shall as provided in Article 12.2(c), pay to the State Budget (or, in the case of a refund of

an overpayment, receive from the State Budget) interest on the amount of the

underpayment or overpayment at the rate of LIBOR prevailing on the day before payment

plus four (4) percent. Such interest shall be computed from twenty-fifth (25th) April in the

Calendar Year the final Profit Tax return was filed until the date the Profit Tax is paid or

refunded.

(iv) In addition to interest payable as computed under (iii) above, a Contractor Party shall be

subject to only the following penalty sanctions with respect of Taxes:

(aa) if a Contractor Party fails to file a final Profit Tax return, it shall be liable for a penalty of

one hundred (110) and ten percent of the Profit Tax required to be paid with such Profit

Tax return.

(bb) if the amount of Profit Tax due as shown on the final Profit Tax return for a Calendar

Year was understated due to fraud by the Contractor Party, it shall be liable for a

penalty of two hundred (200) percent of the amount of the understatement.

(e) Each Contractor Party shall submit its financial statements and Profit Tax returns to the Tax

Inspectorate of the city of Baku (or any successor thereto appointed by the Main State Tax

Inspectorate of the Azerbaijan Republic). Estimated and final Profit Tax payments shall be

made to the State Budget.

(f) The Tax Inspectorate will issue to the Contractor Party official tax receipts evidencing the

payment of estimated or final Profit Tax within ten (10) days of any such payment. Such tax

receipts shall state the date and amount of such payment, the currency in which such payment

was made and any other particulars customary in the Azerbaijan Republic for such receipts.

12.4 Taxation of Foreign Sub-contractors

(a) Foreign Sub-contractors shall be taxed as follows:

(i)



Subject to Article 12.4(b) below, Foreign Sub-contractors shall be deemed to earn a

taxable profit of twenty five (25) percent of the payments received in connection with

Hydrocarbon Activities and they shall be further deemed to be subject to tax on this

deemed profit at the rate of twenty-five (25) percent, resulting in a total tax obligation of six

point twenty five (6.25) percent of such payments. Any person making such payments

shall therefore withhold tax from such payments at a rate of six point twenty five (6.25)

percent and shall pay such withheld taxes to the State Budget within thirty (30) days from

the date of payment. Such taxes withheld shall fully satisfy such Foreign Sub-contractor’s

tax compliance, filing obligations and liability for all Taxes.



(ii) a Contractor Party shall have no liability or responsibility for any Taxes which its Subcontractors do not withhold or pay or for any other failure of such Sub-contractors to

comply with the laws of the Azerbaijan Republic.

(iii) no Taxes shall be imposed or withheld with respect to payments to any Foreign Subcontractor other than as provided in this Article 12.4(a).

(b) In accordance with the principles of the OECD Model Tax Convention on Income and Capital,

updated as of 1 March 1994 ("the Convention"):



28



(i)



The business profits of an enterprise, that is not a resident of the Azerbaijan Republic for

the purposes of the Convention, shall only be taxable to the extent that an enterprise

carries on a business in the Azerbaijan Republic. Payments at source which are provided

for in the applicable Double Tax Treaties are subject to withholding under 12.4(a) above.



(ii)



The permanent establishment in the Azerbaijan Republic of such an enterprise shall not be

subjected to taxation in the Azerbaijan Republic that is more onerous than that applied to a

resident of the Azerbaijan Republic.

The tax treatment of Foreign Sub-Contractors shall be confirmed by way of the Tax

Inspectorate issuing a written notice of such treatment within thirty (30) days of a request

by a Foreign Sub-contractor for clearance being submitted in accordance with

administrative procedures to be agreed between the Tax Inspectorate and Contractor

Parties.



In the event that, in accordance with the established practice of the international Petroleum

industry, an Affiliate of any Contractor Party provides in accordance with their ordinary business

activities (and such activities shall not include activities directed towards avoidance of Taxes),

any goods, works or services on a no gain/no loss basis no profit shall be deemed to arise in

the Azerbaijan Republic.

12.5 Employee Taxes

(a) Only employees of each Contractor Party, its Affiliates and the Operating Company shall be

liable to pay the Azerbaijan Republic personal income Tax. Such liability shall arise regardless

of the length of stay and it shall be based only on their income earned as a direct result of their

employment in the Azerbaijan Republic subject to any applicable Double Tax Treaty. For the

avoidance of doubt, in the cases of employees engaged in Hydrocarbon Activities whose

presence in the Azerbaijan Republic is only Incidental (“Incidental” means in this Article 12.5

that no single visit of an employee shall exceed thirty one (31) days of continual presence in the

Azerbaijan Republic) to the exercise of their employment outside of the Azerbaijan Republic no

liability to any Tax in the Azerbaijan Republic shall arise.

(b) Each Contractor Party shall only make contributions of Azerbaijan State social insurance and

similar payments (including but not limited to contributions to the pension funds, the

unemployment fund, the social insurance fund, the employment fund and the medical fund) with

respect to permanent employees who are citizens of the Azerbaijan Republic.

12.6 Tax Exemptions and Other Matters

(a) Each Contractor Party shall be entitled to full and complete exemption from all Taxes in respect

of its Hydrocarbon Activities (except as otherwise provided for in this Agreement).

(b) Except as provided by Article 12.4(a) no Taxes shall be withheld or imposed on payments

made by each Contractor Party or its permanent establishments to any entity incorporated,

legally created or organised outside the Azerbaijan Republic.

(c) Each Contractor Party shall be exempt with credit (zero (0) percent rate) from VAT in

connection with Hydrocarbon Activities on all (i) goods works and services supplied to or by it,

(ii) its exports of Petroleum and all products processed or refined from such Petroleum, and (iii)

imports of goods, works and services acquired by it. In addition, every supplier of goods, works

and services to each Contractor Party in connection with Hydrocarbon Activities shall treat

those suppliers for VAT purposes as being exempt with credit (zero (0) percent rate).

(d) The Tax Inspectorate or other appropriate tax or customs authority shall provide each

Contractor Party and its Foreign Sub-contractors with certificates confirming the exemptions

and/or VAT zero (0) percent rate as provided in this Agreement within thirty (30) days of the

Contractor Party requesting such certificate.



29



12.7 Other

The Contractor Parties shall pay registration or similar fees imposed by a Governmental Authority

to the extent they are nominal and of a non-discriminatory nature.

12.8 The provisions of this Article 12 shall survive the termination of this Agreement until such time as

all matters pertaining to Contractor Parties’ liabilities for Taxes are finally and conclusively

determined.

ARTICLE 13

VALUATION OF PETROLEUM

13.1 Valuation of Crude Oil and Non-associated Natural Gas

(a) The valuation of Crude Oil for purposes of Cost Recovery, sharing of Profit Petroleum and as

otherwise specifically provided in this Agreement in any Calendar Quarter shall be the net back

value calculated as follows:

(i) where there have been export sales of Crude Oil from the Contract Area (or such other

Crude Oil obtained through exchanges or swap agreements which is exchanged or

swapped for Crude Oil from the Contract Area) by any Party in arm's length transactions

during the Calendar Quarter, the weighted average per unit price realised in all such sales

(after deducting commissions and brokerages), at the Point of Sale, adjusted for costs

incurred by the Parties of transporting the Crude Oil to the Point of Sale, including but not

limited to pipeline tariffs, transit fees, Transit Losses, terminal fees, tanker costs and

pipeline taxes to arrive at a value of the Crude Oil at the Delivery Point ("Net Back Value");

provided that the total volume of such arm's length sales made by all Parties exceeds thirtythree and one-third (33 1/3) percent of the total volume of all sales made by all Parties

during the Calendar Quarter; or

(ii) where the total volume of arm's length export sales does not exceed the percentage of

sales referred to in Article 13.1(a)(i) above, the weighted average per unit price of: (A)

Crude Oil sold in arm's length sales (determined as provided in Article 13.1(a)(i) above) and

(B) Crude Oil sold in non-arm's length sales at the average price quoted for such Crude Oil

in Platt's Oilgram during the Calendar Quarter, but if no such price is quoted then the

average of per unit F.O.B. price quotations for three (3) representative crude oils to be

agreed by the Parties, as published in Platt's Oilgram in the Calendar Quarter, adjusted for

quality, grade, quantity, costs of transporting the Crude Oil to the Point of Sale as provided

in (i) above, to arrive at a Net Back Value of the Crude Oil. In the event that Platt’s Oilgram

ceases to be published or is not published for fifteen (15) days in the period required for its

use in this Article 13.1(a)(ii) then the required data shall be taken from an available

alternative publication internationally recognised by the Petroleum industry. If the Parties

cannot agree the three (3) representative crude oils by the date of commencement of

commercial production or fail to agree on any alternative publication the matter shall be

referred for final decision to an internationally recognised expert in accordance with the

provisions of Article 13.1(c) below.

(b) The value of Non-associated Natural Gas in any Calendar Quarter for the purposes of Cost

Recovery, sharing of Profit Petroleum, and as otherwise specifically provided in this Agreement

shall be the actual arm's length sale price realised under a gas sales agreement less costs

incurred by the Contractor Parties of transporting such Non-associated Natural Gas to the Point

of Sale including but not limited to pipeline tariffs, Transit Losses and pipeline taxes ("Net Back

Value").

Where Non-associated Natural Gas is sold by Contractor in non-arm's length sales, Nonassociated Natural Gas shall be valued at a price to be determined by agreement between

SOCAR and Contractor based on pricing principles prevailing internationally, taking into



30



account market, grade, quality and quantity, transportation and other relevant considerations

("Net Back Value").

(c) Within thirty (30) days after the end of the relevant Calendar Quarter, all Parties shall notify

Contractor of the volumes, dates, prices and Point of Sale for all arm's length sales of Crude Oil

and Non-associated Natural Gas during such Calendar Quarter, and Contractor shall notify

SOCAR of valuations of Crude Oil and Non-associated Natural Gas for the purposes of Article

13.1(a) and Article 13.1(b) above, which notice shall specify volumes, dates, prices, and Points

of Sale for all arm's length sales. If any Party does not accept any valuation notified by

Contractor pursuant to Article 13.1(a) or Article 13.1(b) and SOCAR and Contractor cannot

reach agreement on the value of Crude Oil or Non-associated Natural Gas within thirty (30)

days of receipt of notice by SOCAR of Contractor's valuation of Crude Oil or Non-associated

Natural Gas, such determination shall be made by an internationally recognised expert

appointed by Contractor and SOCAR, but if they fail to agree within thirty (30) days from the end

of the thirty (30) days referred to above on the appointment of such expert, then such

appointment shall be made by the President of the Stockholm Chamber of Commerce, Sweden

on the application of SOCAR or Contractor. Such expert shall be a person internationally

recognised as having expertise in the marketing of Petroleum. The English language text of this

Agreement will be utilised by the expert. The expert shall in writing, report his determination

within thirty (30) days of his appointment and his determination shall be final and binding upon

SOCAR and Contractor.

Pending the determination of the Net Back Value of Crude Oil or as the case may be Nonassociated Natural Gas for a given Calendar Quarter, the Net Back Value of Crude Oil or Nonassociated Natural Gas determined for the preceding Calendar Quarter shall be provisionally

applied to make calculation and payment until the applicable Net Back Value for that period is

finally determined. Any adjustment to such provisional calculation and payment, if necessary,

will be made within thirty (30) days after such applicable Net Back Value is finally determined.

(d) In determining the applicable Net Back Value of Crude Oil or Non-associated Natural Gas

pursuant to Articles 13.1(a) and (b) the following shall apply:

(i)



provisions in this Article 13.1 dealing with "sales" shall equally apply to a single sale and

shall be interpreted accordingly; and



(ii)



the point in time at which title in Crude Oil or Non-associated Natural Gas transfers at

the Point of Sale from a Party to the buyer shall be deemed to be the time of sale; and



(iii) "Point of Sale" shall mean the geographical location or locations where title to Crude Oil or

as the case may be Non-associated Natural Gas passes from a seller to a buyer, whether

such sale is F.O.B., C.I.F., C. and F. or any other manner generally recognised by the

international Petroleum industry. Examples of possible Points of Sale include the sales

meter at the outlet of the terminal at the terminus of the export pipeline, the inlet meter at a

refinery, or the inlet flange to a tanker; and

(iv) "Transit Losses" - shall mean losses (other than losses for which Contractor has been

reimbursed from any insurances taken out by Contractor and losses for which Contractor

has been reimbursed from pipeline owners or operators) incurred during the pipeline

transport of Crude Oil and Non-associated Natural Gas from the Delivery Point to the

terminus of the export pipeline, (including, if applicable, any pipeline utilised for

transhipment of the Crude Oil to exit the Black Sea area or in the case of Non-associated

Natural Gas to the Point of Sale) in excess of the normal international pipeline loss

allowance of one-tenth of one (0.1) percent. Transit Losses shall be deducted from Total

Production. Insurance premiums paid by Contractor for insurance taken out by Contractor

covering Transit Losses shall not be Cost Recoverable. Any insurance reimbursements for

such losses shall not be credited to Cost Recovery. Contractor shall be responsible for the

insurance of Transit Losses pursuant to Article 20.1; and



31



(v) an "arm's length sale" is a sale or exchange of Petroleum between a willing and nonaffiliated buyer and seller on the international market in exchange for payment in Foreign

Exchange, excluding a sale involving barter, sales from government to government and

other transactions motivated in whole or in part by considerations other than the usual

economic incentives involved in Petroleum sales on the international market.

13.2 Measurement

(a) The volume and quality of Petroleum produced by Contractor shall be measured by methods

and appliances in accordance with generally accepted international Petroleum industry

practice, and shall be monitored by the Parties in accordance with the Measurement

Procedure.

(b) Contractor shall give prior written notice to SOCAR of any testing and calibration by Contractor

of the appliances used in the measurement and determination of quality of Petroleum pursuant

to the Measurement Procedure. SOCAR, at its cost and risk, shall be entitled to have witnesses

participate at such testing and calibration.

(c) Where the method of measurement, or the appliances used therefor, have caused an

overstatement or understatement of production, the error shall be presumed to have existed

since the date of the last calibration of the measurement devices, unless otherwise proved, and

an appropriate adjustment shall be made to the average value for the period of the error, or by

an adjustment in deliveries in kind over an equivalent period.

(d) Petroleum produced from the Contract Area and not used by Contractor pursuant to Article

11.1 shall be measured at the Delivery Point.

ARTICLE 14

OWNERSHIP, USE AND ABANDONMENT OF ASSETS

14.1 Ownership and Use

Title to the following categories of fixed and moveable assets for use in Petroleum Operations shall

pass to SOCAR in accordance with the following:

(a) When legally permissible to purchase land, any land purchased by Contractor in the Azerbaijan

Republic for Petroleum Operations shall become the property of SOCAR, as soon as it is

purchased.

(b) Title to fixed and moveable assets employed by Contractor in the performance of Petroleum

Operations and the cost of which is claimed as Petroleum Costs shall be transferred to SOCAR

upon the earlier to occur of (i) the end of the Calendar Quarter following the achievement of

Zero Balance or (ii) the termination of this Agreement. In this latter case, without prejudice to

Contractor's rights under Articles 23.3(b) and 29, title to fixed assets will pass to SOCAR

irrespective of whether the costs thereof have been Cost Recovered under this Agreement.

Except in respect of items which have limited residual economic life, fixed and moveable assets

the title to which is transferred to SOCAR following the achievement of Zero Balance shall be in

reasonable working order and shall comply with generally accepted international technical

standards, subject to wear and tear.

(c) Contractor is entitled, at no additional cost, to the full and exclusive use and enjoyment of all

land and fixed and moveable assets acquired for the purpose of Petroleum Operations

throughout the term of this Agreement irrespective of whether title to such asset has passed to

SOCAR in accordance with this Article 14.1.

(d) With respect to any fixed asset Contractor shall, upon agreement of partial relinquishment

pursuant to Article 29.5, give notice of abandonment of such assets in the area to be

relinquished which Contractor does not intend to use or relocate elsewhere in connection with



32



Petroleum Operations. Subject to Article 14.1(f), SOCAR may, within sixty (60) days of receipt

of such notice, elect to assume ownership, possession and custody of such fixed assets.

(e) Data and other information collected and generated by Contractor in the course of Petroleum

Operations shall, during the term of this Agreement, be jointly owned by SOCAR and

Contractor. Following the termination of this Agreement ownership of all such data and

information shall revert to SOCAR. Thereafter, each Contractor Party shall be entitled to

continue to use such data and information in relation to its other Petroleum related activities in

the Azerbaijan Republic. Contractor shall be entitled to trade such data and information in

accordance with the principles set out in Article 27.2 of this Agreement during the term of this

Agreement.

(f)



Except as otherwise provided in Article 14.3 of this Agreement, ownership of leased equipment

shall not transfer to SOCAR at the end of this Agreement, and Contractor shall at such time be

free to export such equipment.



14.2 Abandonment

(a) In order to finance abandonment of all fixed assets (for purposes of this Article 14.2, "fixed

assets" refer to large structures and facilities essential to the conduct of Petroleum Operations

that are located within the Contract Area, such as platforms, gathering facilities, wells, pipelines,

jackets and the like) employed in Petroleum Operations within the Contract Area by Contractor,

the Parties shall open a joint escrow account at a bank of good international repute to be

agreed between SOCAR and Contractor. This account shall be known as the "Abandonment

Fund" and shall be administered for value. The structure of the escrow account and the terms

for the administration of the Abandonment Fund monies shall be mutually agreed between

SOCAR and Contractor. All monies allocated to the Abandonment Fund shall be recoverable as

Operating Costs. In no event shall the Abandonment Fund exceed ten (10) percent of all

Capital Costs.

(b) Contractor shall commence making contributions to the Abandonment Fund in the first

Calendar Quarter following the Calendar Quarter when seventy (70) percent of Petroleum

reserves identified in the Development Programme have been recovered. Should the point be

reached at which payments into the Abandonment Fund have commenced and a Discovery is

made subsequent thereto which increased the total remaining Petroleum reserves in the

Contract Area to a level where less than seventy (70) percent of overall combined reserves

have been recovered, then payments into the Abandonment Fund shall be suspended.

Contractor shall resume payments into the Abandonment Fund when the point is reached

where seventy (70) percent of Petroleum reserves (as increased by such Discovery) have been

recovered. The formula for determining the amount of such payments as set forth in Article

14.2(c) shall be revised to take into account the revised Petroleum reserves. Contractor shall

receive, however, full credit for all payments previously paid into the Abandonment Fund, plus

accrued interest thereon.

(c) Contractor shall transfer funds on a Calendar Quarter basis to the Abandonment Fund

according to the following formula:

QAT = ((COA/ARES) X PARES) - CAF

where:

QAT



is the amount of funds to be transferred to the Abandonment Fund in respect of the

relevant Calendar Quarter;



COA



is the estimated cost of abandonment operations established pursuant to Article

14.2(g), up to the limit established in Article 14.2(a);



ARES



is the estimated Petroleum reserves remaining to be recovered from the end of the

Calendar Quarter in which the Abandonment Fund was opened;



33



PARES is the cumulative production of Petroleum from the end of the Calendar Quarter in

which the Abandonment Fund was opened;

CAF



is the Abandonment Fund balance at the end of the previous Calendar Quarter.



(d) If, at any time, Contractor recommends abandonment of a fixed asset within the Contract Area

prior to the termination of this Agreement, SOCAR may elect, within thirty (30) days of receipt

of Contractor's recommendation, to continue using such fixed asset, in which event SOCAR

shall be responsible for abandoning such fixed asset as and when it decides, and the

appropriate portion of the Abandonment Fund shall be transferred to SOCAR at the time it

commences abandonment of such fixed asset or termination of this Agreement, whichever is

earlier. If SOCAR fails to elect to continue using such fixed asset the Steering Committee shall

determine whether to abandon such asset provided that if the Steering Committee fails to reach

agreement on the abandonment of such fixed asset at the meeting at which Contractor's

recommendation first appears on the agenda then SOCAR shall be deemed to have elected to

continue using such fixed asset and Contractor shall have no further liability of any kind with

respect to such asset. If the Steering Committee decides to abandon such fixed asset, within

thirty (30) days of such decision SOCAR shall notify Contractor whether Contractor or SOCAR

shall be responsible for abandoning such fixed asset. If SOCAR fails to notify Contractor within

such thirty (30) day time period, SOCAR shall be deemed to have decided that Contractor is to

abandon such fixed asset. The appropriate portion of the Abandonment Fund shall be

transferred to the Party responsible for abandoning such fixed asset. Any abandonment

operations, or continued use by SOCAR, shall be conducted in accordance with international

Petroleum industry practice and in such a manner that does not interfere with Petroleum

Operations.

(e) Upon termination of this Agreement, Contractor shall notify SOCAR of all fixed assets employed

in Petroleum Operations within the Contract Area which Contractor intends to abandon.

SOCAR shall, within thirty (30) days of receipt of Contractor's notice, notify Contractor of such

fixed assets which SOCAR elects to continue to use, as well as whether SOCAR elects to

abandon all other fixed assets or have Contractor abandon such other fixed assets. A portion of

the Abandonment Fund commensurate with and attributable to any fixed assets shall be

transferred to Contractor or SOCAR, as the case may be, who is responsible for abandoning

such fixed assets. If SOCAR elects to continue to use or to abandon any fixed assets, SOCAR

may abandon such fixed assets as and when it decides. Abandonment of any fixed assets shall

be in accordance with generally accepted international Petroleum industry practice; provided,

however, in the event there are insufficient funds in the Abandonment Fund to enable

Contractor to complete abandonment operations for which Contractor is responsible, Contractor

shall expend all amounts available in the Abandonment Fund in the performance of its

abandonment operations and shall thereupon cease any further abandonment operations and

have no further liability or obligation to abandon such remaining fixed assets. Any

unabandoned fixed assets shall as part of the abandonment operations be left in a safe

condition.

(f) Upon SOCAR electing to abandon any fixed assets in the Contract Area or electing pursuant to

(d) above, to continue using any such fixed assets, Contractor shall be released from all

responsibility and liability of every kind pertaining to such fixed assets and abandonment

thereof as well as payment of any further funds should there be insufficient funds in the

Abandonment Fund. SOCAR shall indemnify Contractor from and against any loss, damage

and liability of any nature whatsoever, as well as any claim, action or proceeding instituted

against Contractor, or any Contractor Parties, by any person or entity, including, but not limited

to any Governmental Authority, arising from, or in any way connected with, the continued use of

such fixed assets and their ultimate abandonment, as well as any failure by SOCAR to properly

abandon any such fixed assets.

(g) Not later than one (1) year prior to the Calendar Year in which seventy (70) percent of the

Petroleum reserves identified in the Development Programme are expected to be recovered,

Contractor shall prepare an abandonment plan and an estimate of the cost of abandonment



34



operations for approval by the Steering Committee. Annually thereafter Contractor shall

examine the estimated costs of abandonment operations and, if appropriate, revise the

estimate including such revision as may be necessary to take into account subsequent

Discoveries.

(h) In the event that there are excess funds in the Abandonment Fund following completion of all

abandonment operations, then such excess shall be distributed between SOCAR and

Contractor in proportion to the cost of abandonment operations undertaken by Contractor and

SOCAR, but in no event shall Contractor's share exceed an amount it would have received had

the excess funds been distributed in the ratio of the weighted average of the last ten (10) years

Profit Petroleum distribution between SOCAR and Contractor under the provisions of Article

11.5 prior to termination of this Agreement.

(i) No Taxes shall be imposed on any amounts paid into, received or earned by or held in the

Abandonment Fund.

14.3 Leases of Equipment

Each Contractor Party shall have the right to use equipment leased from its Affiliates or Third

Parties in the course of Petroleum Operations. In the case of any equipment, which is on long-term

lease (which for the purposes of this Article 14 shall mean a lease in excess of ten (10) years) to

Contractor, Contractor shall, with respect to such leases from such Affiliates of equipment owned

by such Affiliates, ensure, and with respect to such leases from Third Parties, use reasonable

lawful efforts to procure, that any such lease is transferable to SOCAR when Contractor no longer

wishes to use such equipment for Petroleum Operations and that such lease includes an option to

purchase excercisable by SOCAR.

ARTICLE 15

NATURAL GAS

15.1 Associated Natural Gas

Contractor shall have the right to produce hydrocarbon liquids found within the Contract Area and

to process Associated Natural Gas produced with any such liquids in order to extract such liquids

for sale, provided that such processing can be conducted in a manner that is economically justified

for Contractor. Liquids saved shall be treated as Crude Oil. Subject to Contractor's rights pursuant

to Article 11.1 and Article 15.3, residue Associated Natural Gas from such processing shall be

delivered free of charge to SOCAR at the Delivery Point.

15.2 Non-associated Natural Gas

In the event of a Non-associated Natural Gas Discovery additional terms for commercial

development of such Non-associated Natural Gas shall be agreed between SOCAR and

Contractor. Return on Contractor's investment in the Non-associated Natural Gas Discovery and

development shall be through marketing of Non-associated Natural Gas in accordance with the

mechanism described in Articles 11.2 and 11.5. In the case of a Non-associated Natural Gas

Discovery Profit Petroleum shall be shared through marketing of Non-associated Natural Gas in

accordance with the mechanism described in Article 11.5. Contractor together with SOCAR shall

use full and reasonable endeavours to rapidly conclude terms acceptable to the Parties to develop

the Discovery, and with Third Parties to enter into the necessary long term Non-associated Natural

Gas export sales and pipeline contracts. Contractor shall pursue markets for Non-associated

Natural Gas both within and outside the Azerbaijan Republic.

Failing agreement on additional terms before the end of the Exploration Period or the Additional

Exploration Period then within four (4) years of the date of approval by SOCAR of the Development

Programme SOCAR and/or it's Affiliates shall have the right exercisable at any time before

Contractor has commenced development of the Non-associated Natural Gas Discovery pursuant to

the Development Programme by giving written notice to Contractor to develop at SOCAR's and/or



35



it's Affiliates sole risk and cost and subject to this Article 15.2 such Non-associated Natural Gas

Discovery in accordance with the provisions of the Development Programme related to such Nonassociated Natural Gas Discovery subject to reimbursement in full by SOCAR to Contractor of

costs incurred by Contractor in accordance with the mechanism described in Articles 11.2 and

11.5.

SOCAR and/or it's Affiliates shall conduct Petroleum Operations in a diligent safe and efficient

manner and in accordance with generally accepted principles of the international Petroleum

industry and otherwise in accordance with the terms of this Agreement. SOCAR and/or it's Affiliates

shall conduct Petroleum Operations in the Contract Area in a manner that does not interfere or

hinder the conduct of Petroleum Operations of each other and also in a manner which shall not

directly or indirectly damage the overall reservoir performance.

Articles 4.6(f) and 4.6(g) and Articles 5.3 and 5.4 shall apply to SOCAR's conduct of Petroleum

Operations in all respects as if each reference therein to Contractor were a reference to SOCAR.

At any time prior to the expiry of four (4) years from the date of approval by SOCAR of the

Development Programme Contractor shall be entitled to assume responsibility for and take over

operation from SOCAR and/or it's Affiliates and develop Non-associated Natural Gas and SOCAR

shall thereafter be reimbursed for its costs incurred in connection with such development in

accordance with the mechanism described in Article 11.2.

If within four (4) years of the date of approval by SOCAR of the Development Programme work on

the Non-associated Natural Gas development pursuant to the Development Programme has not

been commenced by Contractor, then unless otherwise agreed, SOCAR shall be entitled by giving

written notice to withdraw from the scope of this Agreement Non-associated Natural Gas reserves

as defined in the Development Programme for such a Discovery and any unrecovered costs

incurred by Contractor to the date of such notice with respect to such Discovery of Non-associated

Natural Gas shall not be Cost Recoverable.

Following the withdrawal of such Non-associated Natural Gas from the scope of this Agreement

each Party shall ensure that it's conduct of exploration, development and production activities in

the Contract Area shall be performed in a manner that does not interfere with or hinder Petroleum

Operations conducted or planned to be conducted by the other Party and also in a manner which

shall not directly or indirectly damage the overall reservoir performance in the Contract Area.

15.3 Flaring or Venting of Natural Gas

(a) Contractor shall have the right to flare or vent the applicable amount of Associated Natural Gas

in the event of emergencies, equipment malfunctions, repairs or maintenance of any facilities,

including delivery systems, or SOCAR's failure to take delivery of Associated Natural Gas to be

delivered to it by Contractor as provided in Article 15.1.

(b) In the case of Non-associated Natural Gas, failure by any buyer thereof to take delivery,

provided however, that in such event Contractor has first offered such Non-associated Natural

Gas to SOCAR on the same terms agreed with such buyer and if SOCAR has refused or has

failed to take delivery thereof, then Contractor shall reduce the production of Non-associated

Natural Gas by the volumes not taken by any buyer or SOCAR. In the event of Contractor's

failure to market its entitlement of Non-associated Natural Gas for any reason Contractor shall

reduce the production of Non-associated Natural Gas by the applicable volumes and shut in

Non-associated Natural Gas wells or restrict its production rate.

ARTICLE 16

FOREIGN EXCHANGE

Contractor and each Contractor Party, and their Affiliates and Sub-contractors, are authorised

throughout the duration of this Agreement and in connection with this Agreement to:



36



(a) Open, maintain and operate Foreign Exchange bank accounts both inside and outside the

Azerbaijan Republic and local currency bank accounts inside the Azerbaijan Republic;

(b) Import into the Azerbaijan Republic funds required for Petroleum Operations in Foreign

Exchange;

(c) Purchase local currency with Foreign Exchange at the most favourable exchange rate legally

available to it (and in any event at a rate of exchange no less favourable than that granted by

the National Bank of the Azerbaijan Republic to other foreign investors), without deductions or

fees other than usual and customary banking charges, as may be necessary for conduct of the

Petroleum Operations and performance of other obligations of Contractor hereunder;

(d) Convert local currency available for use in, or earned in connection with, Petroleum Operations

exceeding their immediate local requirements into Foreign Exchange at the most favourable

exchange rate legally available to it (and in any event at a rate of exchange no less favourable

than that granted by the National Bank of the Azerbaijan Republic to other foreign investors),

without deductions or fees other than usual and customary banking charges;

(e) Export, hold and retain outside the Azerbaijan Republic, or dispose of, all proceeds obtained

under this Agreement, including without limitation all payments received from export sales of

Contractor Parties' share of Petroleum;

(f)



Transfer abroad any Foreign Exchange in excess of their local requirements;



(g) Be exempt from all legally required or mandatory conversions of Foreign Exchange into local or

other currency;

(h) Pay in Foreign Exchange partly or wholly abroad the salaries, allowances and other benefits

received by their expatriate employees working in the Azerbaijan Republic on Petroleum

Operations; and

(i) Pay directly abroad in Foreign Exchange their Foreign Sub-contractors working on Petroleum

Operations.

SOCAR shall within the full limits of authority use all reasonable lawful endeavours with any

Governmental Authorities, in order for Contractor to obtain any of the above authorisations in the

event that Contractor requests it to do so.

ARTICLE 17

ACCOUNTING METHOD

Contractor shall maintain books and accounts of Petroleum Operations in accordance with the

Accounting Procedure.

ARTICLE 18

IMPORT AND EXPORT

18.1 Import and Export Rights

(a) Contractor, its agents and Sub-contractors, shall have the right to import into, and re-export

from the Azerbaijan Republic free of any Taxes and restrictions in their own name the following:

all equipment, materials, machinery and tools, vehicles, spare parts, foodstuff (subject to

compliance with applicable regulations pertaining to the import of foodstuff), goods and

supplies necessary in Contractor's reasonable opinion for the proper conduct and achievement

of Petroleum Operations, provided, however, that with respect to the purchase thereof

Contractor shall give preference to Azerbaijani suppliers in those cases in which such

Azerbaijani suppliers are in all material respects competitive in price, quality and availability

with those available from other sources. For purposes of this Article 18.1 Azerbaijani suppliers



37



shall mean production, economic and other entities registered and incorporated in the

Azerbaijan Republic, regardless of ownership, legally operating in the Azerbaijan Republic.

Notwithstanding the foregoing, (except when necessary for repair or maintenance provided

that, within a reasonable time after completion of the repair or maintenance, such items shall be

re-imported into the Azerbaijan Republic), Contractor shall not have the right to export from the

Azerbaijan Republic any items purchased for Petroleum Operations, the costs of which have

been included in the Petroleum Operations Account.

(b) Contractor, its agents and Sub-contractors, and all of their employees and family members,

shall have the right to import into and re-export from the Azerbaijan Republic, free of Taxes and

restrictions and at any time, all foodstuff (subject to compliance with applicable regulations

pertaining to the import of foodstuff), furniture, clothing, household appliances, vehicles, spare

parts and all personal effects for personal use by the foreign employees and their families

assigned to work in, or travel to, the Azerbaijan Republic. Private sales of imported goods

by Contractor and/or its Sub-contractors and their employees in the Azerbaijan Republic to any

Third Party will be taxable in accordance with Azerbaijan legislation (subject to Article 12).

(c) Any purchase of goods, works and services where the value exceeds one hundred thousand

(100,000) Dollars shall be made on a competitive tender basis (except when only one supplier

is available). SOCAR shall be advised of the results of each tender at every bid stage. The

threshold value of one hundred thousand (100,000) Dollars shall be escalated annually in line

with increases in the GDP Deflator Index. SOCAR's representative with no right to vote shall

participate at every bid stage.

18.2 Petroleum Export

Each Contractor Party, its customers and its and their carriers shall have the right to freely export,

free of all Taxes (except for Profit Tax) and at any time, Petroleum to which Contractor is entitled in

accordance with the provisions of this Agreement.

18.3 Customs Laws

Subject to Articles 12, 18.1 and 18.2, all imports and exports carried out in connection with this

Agreement shall be subject to the procedures and documentation required by applicable customs

laws and regulations, and Contractor shall pay any customs service/documentation fees to the

extent they are nominal and consistent with the actual costs of providing such customs

service/documentation and are of a non-discriminatory nature, but in no event shall the

service/documentation fees exceed the following:

Declared Value

of Shipment

in Dollars



Duty



0 - 100,000



0.15% of value



100,001 - 1,000,000



$ 150 plus 0.10% of value

over $ 100,001



1,000,001 - 5,000,000



$1,050 plus 0.07% of value

over $ 1,000,001



5,000,001 - 10,000,000



$3,850 plus 0.05% of value

over $ 5,000,001



more than 10,000,000



$6,350 plus 0.01% of value

over $10,000,000



38



18.4 Foreign Trade Regulations

Contractor and its Sub-contractors shall also be exempt from the provisions of Azerbaijan foreign

trade regulations concerning the prohibition, limitation and restriction of import and export and

country of origin of those items indicated in Article 18.1 and with respect to the Petroleum allocated

to Contractor pursuant to this Agreement.

18.5 SOCAR Assistance

SOCAR shall, within the full limits of its authority, use all reasonable lawful endeavours, when

requested to do so by Contractor, to ensure that the above mentioned exemptions are applied and

expedite the movement through customs of any equipment or supplies of Contractor, its agents

and Sub-contractors and all of their employees and family members.

ARTICLE 19

DISPOSAL OF PRODUCTION

19.1 Title to Petroleum

Except as expressly provided in Article 13.1(d)(iv) concerning the risk of loss of Petroleum

production, the transfer of title and possession to each Contractor Party and SOCAR of the share

of the Petroleum production to which such Contractor Party and SOCAR is entitled shall be made

at the Delivery Point.

19.2 Overlift and Underlift

Each of SOCAR and Contractor Parties shall have the right and obligation to lift and dispose of the

share of Petroleum to which it is entitled under this Agreement. Such share shall be lifted on as

regular a basis as possible, it being understood that each of SOCAR and Contractor Parties, within

reasonable limits, shall be authorised to lift more (overlift) or less (underlift) than its share of

Petroleum produced and unlifted by the lifting day, to the extent that such overlift or underlift does

not infringe on the rights of the other and is compatible with the production rate and the storage

capacity. SOCAR and Contractor shall establish the rules and procedures to govern the lifting

programme on the basis of the principles described above.

19.3 SOCAR Option to Purchase Crude Oil

(a) During each Calendar Quarter SOCAR shall be entitled to purchase from Contractor a portion

of the Crude Oil allocated to Contractor under the provisions hereof, at the Delivery Point, by

giving ninety (90) days written notice to Contractor of such purchase preceding the Calendar

Quarter in which SOCAR elects to purchase the Crude Oil. Contractor shall initially invoice

SOCAR for such Crude Oil purchased hereunder at the per Tonne price determined in

accordance with Article 13.1 for the last Calendar Quarter preceding the date of lifting in which

the price has been established. At such time that the per Tonne price for the Calendar Quarter

in which such Crude Oil is lifted as determined in accordance with Article 13.1 is known,

Contractor shall issue an amended invoice indicating any monies owed to Contractor or

SOCAR, as the case may be. In no event shall the proportion of Crude Oil so purchased from

Contractor exceed the proportion purchased from Third Parties under similar circumstances

and in no event shall such quantities exceed more than ten (10) percent of Contractor's

entitlement at the Delivery Point during that Calendar Quarter. In the event any Taxes are

levied on such Crude Oil, SOCAR shall be solely responsible for the payment thereof to the

relevant Governmental Authorities and shall indemnify and hold harmless Contractor from any

liability with respect thereto.

(b) SOCAR shall have the additional right to purchase up to an additional ten (10) percent of

Contractor's share of Crude Oil available in any Calendar Quarter at the Point of Sale or at any

other export point located at the terminus when marketing Crude Oil through any other export

alternative. The price for such Crude Oil shall be mutually agreed (using those factors normally

utilised by the international Petroleum industry in determining a fair market price) prior to the

relevant Calendar Quarter, and in the event any Taxes are levied on such Crude Oil, SOCAR



39



shall be solely responsible for the payment thereof to the relevant Governmental Authorities

and shall indemnify and hold harmless Contractor from any liability with respect thereto. In the

event of any failure to agree on the sales price as provided above, SOCAR's right to purchase

such additional Crude Oil from Contractor shall lapse with respect to the relevant Calendar

Quarter.

(c) The quantity of Crude Oil for which SOCAR may exercise its option to purchase pursuant to

Article 19.3(a) and (b) shall be specified in a written notice to Contractor at least ninety (90)

days preceding each Calendar Quarter. SOCAR shall pay for any Crude Oil purchased under

this Article 19.3 in Dollars within thirty (30) days of Contractor's invoice to be issued no earlier

than the date of lifting such Crude Oil. In the event that SOCAR fails to make timely payment of

sums due to Contractor then its right to purchase Crude Oil under this Article 19.3 shall be

suspended until all outstanding sums have been paid. If payment so due is not paid within said

thirty (30) day period, Contractor shall be entitled to lift and export from Crude Oil to which

SOCAR is entitled a quantity of Crude Oil, as is necessary to satisfy sums due to Contractor.

The volume of Crude Oil to which Contractor shall be entitled shall be determined in

accordance with the valuation procedure set forth in Article 13.1 applicable on the date

Contractor lifts such Crude Oil from SOCAR's entitlement.

(d) To the extent that Contractor Parties (or their Affiliates) incur any fees, charges or penalties

under contracts with Third Parties (including but not limited to pipeline and terminaling

agreements) as a result of SOCAR's exercise of its rights pursuant to Article 19.3(a), SOCAR

shall be liable for and shall reimburse Contractor Parties in Foreign Exchange for such fees,

charges and penalties. SOCAR shall have no liability to Contractor Parties for penalties

Contractor Parties (or their Affiliates) may incur under contracts with Third Parties as a result of

SOCAR's exercise of its rights under Article 19.3(b). Contractor to the extent practicable will

from time-to-time notify SOCAR of any anticipated fees, charges and penalties.

19.4 Marketing of Crude Oil for SOCAR

The provisions of this Article 19.4 shall only apply if there is an export pipeline. Only to the extent

that Contractor is not fully utilising its entitlement to throughput capacity in the export pipeline and if

a marketing agreement has been mutually agreed between SOCAR and Contractor, Contractor

shall market for SOCAR, if SOCAR so requests pursuant to the terms of such separate marketing

agreement, all or a portion of SOCAR's share of Crude Oil. The amount of Crude Oil which will be

subject to the foregoing obligation to market shall be stated in a written notice from SOCAR to

Contractor no later than ninety (90) days prior to the beginning of the applicable Calendar Quarter.

Any marketing undertaken by Contractor pursuant to this Article 19.4 shall not affect title to and risk

of loss of SOCAR's share of Total Production which shall remain with SOCAR.

19.5 Maximum Efficient Rate

It is the intention of the Parties that the Petroleum resources of the Contract Area should be

produced at the optimum rate which is to be fully consistent with the then current economic

conditions, and the principles of sound reservoir management according to international Petroleum

industry practice, in order to provide for the most economically efficient recovery of Petroleum

("Maximum Efficient Rate"). Consistent with the foregoing, and taking into account local experience

in managing similar reservoirs, Contractor shall submit for agreement of the Steering Committee, at

the same time as it submits the Annual Work Programme and Budget to the Steering Committee,

Contractor's estimate of the relevant Calendar Year's production volume, but such agreed estimate

shall be used for planning purposes only. However, in the event any Governmental Authority

requires Contractor to produce Petroleum from the Contract Area at less than the Maximum

Efficient Rate Contractor will reduce production, subject to the express condition that such

reduction in Petroleum production shall in no event be greater than can be borne entirely from

SOCAR's share of Petroleum remaining after satisfying all other SOCAR obligations hereunder.

Contractor's total entitlement to Petroleum under this Agreement shall, at no time throughout the

term of this Agreement, be less than it would have been had such reduction not been made. If due

to a declared national emergency Governmental Authority requires an increase in the production

rate above the Maximum Efficient Rate, Contractor shall so increase the production rate for a



40



period of time not to exceed forty-five (45) days in any Calendar Year; provided, however, that in

no event shall Contractor ever be required to increase the production rate to a level which in

Contractor's opinion could possibly cause damage to the reservoir(s).

ARTICLE 20

INSURANCE, LIABILITIES AND INDEMNITIES

20.1 Insurance

Contractor (which for purposes of clarification with respect to this Article 20 shall include the

Operating Company) shall have the freedom to self insure and/or take out and cause to be taken

out by its Sub-contractors, in respect of the Petroleum Operations, insurance of the types and for

such amounts customarily used in the international Petroleum industry to the extent such insurance

coverage is available on reasonable commercial terms. Said insurance may be obtained from such

companies, including Azerbaijani companies, as selected by Contractor. Contractor shall inform

and provide to SOCAR copies of certificates of insurance or other statements from brokers or

underwriters confirming any insurance providing coverage with respect to Petroleum Operations or

procured pursuant to this Article 20.1, including but not limited to the identity of the insurers, types

and amounts of coverage, applicable deductibles, premiums paid and changes thereto. With

respect to any self insurance, Contractor shall notify the Steering Committee of the extent and

coverage applicable to such self insurance, as well as the premium to be associated therewith as

provided under the Accounting Procedure. Such insurance procured pursuant to this Article 20.1

shall extend to Affiliates of Contractor Parties involved in the Petroleum Operations. If the Steering

Committee approves the procurement of any insurance in addition to the coverage procured by

Contractor, Contractor shall procure such additional coverage, if available at reasonable rates, on

such terms as the Steering Committee may determine. Except as provided in Article 13.1(d)(iv), the

premiums for all insurance (excluding premiums for insurance covering the marketing of

Petroleum) obtained by Contractor for Petroleum Operations pursuant to this Article 20.1 shall be

Cost Recoverable. Insurance cover may be denominated in Foreign Exchange.

20.2 Liability for Damages

Contractor shall be liable to SOCAR and/or any Governmental Authority only for any loss or

damage arising from Contractor's Wilful Misconduct or the Wilful Misconduct of Contractor's Subcontractors, their employees, and Contractor's employees acting in the scope of their employment

in the performance of Petroleum Operations. SOCAR shall release Contractor and its Affiliates and

Sub-contractors from all other losses and damages suffered by SOCAR and any of its Affiliates

and shall indemnify and hold harmless Contractor and its Affiliates and Sub-contractors against all

claims, demands, actions and proceedings brought against Contractor and/or any of its Affiliates

and Sub-contractors pertaining to all other losses and damages suffered by SOCAR and/or any

Governmental Authority. Contractor's liabilities to Third Parties (other than Governmental

Authorities) shall be governed by applicable laws of the Azerbaijan Republic, provided that

structures and facilities of SOCAR located in the Caspian Sea outside of the Contract Area shall be

treated as if such structures and facilities were owned by a Third Party.

20.3 Indemnity for Personnel

Notwithstanding the other provisions of this Agreement:

(a) Contractor shall indemnify and hold harmless SOCAR against all losses, damages and liability

arising under any claim, demand, action or proceeding brought or instituted against SOCAR by

any employee of Contractor (or any Affiliate thereof, provided that such Affiliate, at the time of

the injury or damage, is not acting in the capacity of a Sub-contractor) or dependent thereof, for

personal injuries, industrial illness, death or damage to personal property sustained in

connection with, related to or arising out of the performance or non performance of this

Agreement regardless of the fault or negligence in whole or in part of any entity or individual.

(b) SOCAR shall indemnify and hold harmless Contractor against all losses, damages, and liability

arising under any claim, demand, action or proceeding brought or instituted against Contractor



41



by any employee of SOCAR (or any Affiliate thereof, which shall include any Governmental

Authority, provided that such Affiliate, at the time of the injury or damage, is not acting in the

capacity of a Sub-contractor) or dependent thereof, for personal injuries, industrial illness,

death or damage to personal property sustained in connection with, related to or arising out of

the performance or non-performance of this Agreement regardless of the fault or negligence in

whole or in part of any entity or individual. Contractor shall, if requested by SOCAR, use its

reasonable lawful endeavours to assist SOCAR in its obtaining insurance with respect to its

liability under this Article 20.

20.4 Indemnity Prior to Effective Date

SOCAR shall indemnify Contractor and its Affiliates from and against all losses, damages and

liabilities, arising under any claim, demand, action or proceeding instituted against Contractor

and/or any of its Affiliates by any person or entity, including but not limited to Governmental

Authorities, arising out of or in any way connected with any injury, death or damage of any kind

sustained in connection with or arising from the Contract Area any operations of SOCAR or any of

its predecessors, prior to the Effective Date, including but not limited to damage to the

environment.

20.5 Indemnity for Surrendered Areas and SOCAR Operations

SOCAR shall indemnify Contractor and its Affiliates from and against all losses, damages and

liabilities arising under any claim, demand, action or proceeding instituted against Contractor

and/or any of its Affiliates by any person or entity, including but not limited to Governmental

Authorities, arising out of or in any way connected with any injury, death or damage of any kind

sustained in connection with or arising from:

(a) SOCAR’s operations pursuant to Articles 21.3 and 15.2, or as the result of SOCAR access

pursuant to Article 7.2 and

(b) Any portion of the Contract Area surrendered by Contractor pursuant to Articles 29.3 and 29.5

and/or any continued use of any assets, and/or the abandonment of any assets, for which

SOCAR has assumed control and responsibility from Contractor pursuant to Article 14 and

accruing after the date of such surrender and/or SOCAR's assumption of the use of any such

assets and abandonment of any assets, including but not limited to damage to the environment

(but excluding any claim, action or proceeding which results from Contractor's Wilful

Misconduct whether occurring before or after the date of surrender).

In respect of any loss, damage or liability, as well as any claim, demand, action or proceeding

instituted against SOCAR by any person or entity for death or damage of any kind sustained in

connection with or arising from any portion of the Contract Area surrendered by Contractor and

accruing on or before the date of surrender, including but not limited to damage to the environment,

the provisions of this Agreement, and Contractor's obligations hereunder, shall continue to apply.

20.6 Joint and Several Liability

Except as provided under Articles 12 and 27.1 the liability of the Contractor Parties shall be joint

and several with respect to all of the obligations of Contractor under this Agreement.

20.7 Consequential Losses

With respect to indirect or consequential loss arising out of or in connection with this Agreement or

any activities thereunder, notwithstanding anything to the contrary elsewhere in the Agreement the

Parties shall not be liable whether in contract, tort or otherwise and regardless of any negligence

under any circumstances whatsoever for any indirect or consequential loss save that a Party shall

be liable for indirect or consequential loss to the extent that the same arise from any derogation

from the rights and benefits granted by that Party under this Agreement. For the purposes of this

Article 20.7 the expression "indirect or consequential loss" shall mean any indirect or consequential



42



loss or damage including but not limited to inability to produce Petroleum, loss of or delay in

production of Petroleum or loss of profits.

ARTICLE 21

FORCE MAJEURE

21.1 Force Majeure

Non-performance or delays in performance on the part of any Party of its obligations (or any part

thereof) under this Agreement, other than the obligation to pay money, shall be excused if

occasioned or caused by Force Majeure. "Force Majeure" means any event which prevents,

hinders or impedes Petroleum Operations and is beyond the ability of the affected Party to control

such event or its consequences using reasonable efforts, including without limitation, extraordinary

events, natural disasters (for example lighting and earthquake), wars (declared or undeclared) or

other military activity, jurisdictional change with respect to the Contract Area, fire, labour disputes,

insurrections, rebellions, acts of terrorism, riot, civil commotion, sole supplier or limited supply

circumstances (such as non-availability or shortage of equipment, materials, power, fuel or other

supplies or other services, including lack of reasonable access to any canal and waterway system

servicing the Caspian Sea unless there is available to Contractor other means of transportation to

and from the Contract Area which costs no more than such canal and waterway system), and laws,

treaties, rules, regulations, decrees, orders, actions or inactions of any governmental authority

(inside or outside of the Azerbaijan Republic) which prevent hinder or impede Contractor's conduct

of operations or which substantially impairs or threatens Contractor's rights under this Agreement;

provided, however, that laws, treaties, rules, regulations, decrees, orders or other acts of any entity

or agency acting on behalf of, under the auspices of, or at the direction of any Governmental

Authority within the territory of the Azerbaijan Republic shall not constitute Force Majeure with

respect to delay or non-performance on the part of SOCAR. Each Party shall use its reasonable

lawful efforts to prevent the occurrence of Force Majeure events. Upon the occurrence of any

Force Majeure event, the Party affected shall give prompt notice to the other Parties specifying the

event of Force Majeure (and providing evidence thereof) and shall do all things possible using

reasonable lawful efforts to remove or mitigate the effect of the Force Majeure event. If the

government within whose jurisdiction a Contractor Party or its Ultimate Parent Company is

incorporated or is subject takes actions which preclude such Contractor Party from fulfilling its

obligations under this Agreement, the remaining Contractor Parties may not claim such an event as

Force Majeure and shall, consistent with the principles set forth in Article 20.6, continue to fulfil

their obligations under this Agreement.

21.2 Extension of Time

If Petroleum Operations are delayed, curtailed or prevented by Force Majeure, then the time for

carrying out the obligations affected thereby, the duration of the relevant phase of Petroleum

Operations, the term of this Agreement (including any extension period hereof) and all rights and

obligations hereunder shall be extended for a period equal to the delay caused by the Force

Majeure occurrence plus such period of time as is necessary to re-establish operations upon

removal or termination of Force Majeure.

21.3 Post-Production Force Majeure

If at any time after commencement of production from the Contract Area Contractor declares Force

Majeure and such Force Majeure situation has continued for a period of not less than ninety (90)

consecutive days and such Force Majeure did not arise as a result of events within the Azerbaijan

Republic or as a result of any action on the part of Governmental Authority and as a result of such

Force Majeure Contractor has been unable to produce Petroleum under this Agreement then

SOCAR and Contractor shall meet within fifteen (15) days following the expiry of the said period of

ninety (90) days to discuss how best to continue production. Failing agreement on satisfactory

arrangements within ninety (90) days thereafter SOCAR shall have the option of itself or its Affiliate

assuming operations hereunder and continuing production of Petroleum during the period of Force

Majeure at its risk and cost with the possible participation of sub-contractors until Contractor



43



declares the cessation of the Force Majeure circumstance when Contractor shall resume its full

responsibilities for production of Petroleum under this Agreement.

When Contractor declares that the Force Majeure circumstance has ceased SOCAR or its Affiliate

shall be entitled to recover SOCAR's or its Affiliate’s direct costs in accordance with the Cost

Recovery mechanism and shall credit the Petroleum Operations Account for the volumes of

Petroleum delivered whilst the Force Majeure circumstance continued at international prices at the

Points of Sale used prior to commencement of the Force Majeure.

ARTICLE 22

VALIDITY, ASSIGNMENT AND GUARANTEES

22.1 Validity

(a) Except as otherwise provided under Article 22.1(b), this Agreement shall constitute a valid and

binding legal obligation enforceable in accordance with its terms among the Parties and their

respective successors and assigns as of the Effective Date. SOCAR guarantees that as of the

date of execution no other agreement exists with respect to the Petroleum rights within the

Contract Area. SOCAR further guarantees that between the date of execution and the Effective

Date it shall not enter into any negotiations or arrangements with any Third Party for the

granting of rights to explore for, appraise or develop, Petroleum from within the Contract Area

(or any part thereof). From and after the Effective Date this Agreement shall not be cancelled,

amended or modified except in accordance with its terms or by written agreement between the

Parties. The Parties acknowledge the necessity of continuing to work in good faith to resolve

any matters not presently covered by this Agreement.

(b) In recognition by the Parties that certain obligations have to be performed on or before the

Effective Date, it is agreed that the provisions of Articles 25.1(b), and SOCAR's guarantees

under Article 22.1(a) shall come into force on the date of execution of this Agreement.

(c) In the event this Agreement is finally rejected by the Azerbaijan Parliament and Contractor has

notified SOCAR that any further revisions to this Agreement, if any, necessary for ratification

are unacceptable to Contractor, this Agreement shall not become effective, the rights and

obligations of the Parties under this Agreement and any previous agreements pertaining to the

Contract Area shall be extinguished save only for the obligation of SOCAR to make certain

repayments under Article 25.3.

22.2 Assignment

(a) Restriction. No assignment, mortgage, pledge or other encumbrance shall be made by a

Contractor Party of its rights and obligations arising under this Agreement other than in

accordance with the provisions of this Article 22.2. Any purported assignment made in breach

of the provisions of this Article 22.2 shall be null and void. For purposes of this Article 22

transfer of control (as defined in Article 9.2(c)) of a Contractor Party (other than for the

purposes of internal reconstruction or amalgamation) shall be deemed an assignment under

this Agreement. Except in the case of a Contractor Party assigning all of its percentage

Participating Interest, no Contractor Party shall assign less than a five (5) percent percentage

Participating Interest. Within a period of twelve (12) months following the Effective Date no

Contractor Party shall assign a Participating Interest greater than twenty five (25) percent of

total Participating Interests to any one assignee.

(b) By a Contractor Party

(i)



Assignments to Third Parties. Subject to the provisions of this Article 22.2(b) a Contractor

Party shall be entitled to assign all or part of its rights and obligations arising under this

Agreement to any Third Party which:

(aa) has the technical and financial ability commensurate with the responsibilities and

obligations which would be imposed on it hereunder;



44



(bb) as to the interest assigned, accepts and assumes all of the terms and conditions of

this Agreement; and

(cc) is an entity with which SOCAR can legally do business.

(ii) Encumbrance by Contractor Party. Without prejudice to its obligations hereunder, each

Contractor Party shall have the right to freely mortgage, pledge or otherwise encumber its

interests in the Agreement or any property in or outside the Azerbaijan Republic which is

used for Petroleum Operations, provided that any such mortgage, pledge or other

encumbrance shall be made expressly subject to the terms of this Agreement.

(iii) Approval of SOCAR. Any proposed assignment, mortgage, pledge or other encumbrance

by a Contractor Party to a Third Party shall require the prior approval of SOCAR which

approval shall not be unreasonably withheld. If within ninety (90) days following notification

to SOCAR of a proposed assignment accompanied by the relevant information and the

draft deed of assignment, mortgage, pledge or other encumbrance, SOCAR has not given

its decision, such assignment, mortgage, pledge or other encumbrance shall be deemed to

be approved by SOCAR.

(iv) Obligations of Assignee. In the event a Contractor Party assigns all or a portion of its rights

and obligations arising under this Agreement, and the assignment has been approved or

deemed approved by SOCAR, the assignor shall, to the extent of the interest assigned, be

released from all further obligations and liabilities arising under this Agreement after the

effective date of such assignment. The assignee with the remaining Contractor Parties

shall thereafter be jointly and severally liable for the obligations arising from this

Agreement, except to the extent otherwise provided under this Agreement.

(v)



Assignments to Affiliates and Contractor Parties. A Contractor Party shall be entitled at

any time to assign all or part of its rights and obligations arising from this Agreement to

one or more of its Affiliates or to any of the Contractor Parties without the prior consent of

SOCAR; provided, however, that any such Affiliate satisfies the requirements of Article

22.2(b)(i) above, and further provided that the assigning party shall remain liable for

obligations under this Agreement in the same manner as though no assignment had been

made unless and until said assignment is approved or deemed approved by SOCAR, in

the manner provided under Article 22.2(b)(iii).



22.3 No Tax on Assignments

Any assignment or transfer pursuant to Article 22.2 shall be free of Taxes and shall be free of any

cost or charge to Contractor Parties.

22.4 Conditions on Assignment

Any assignment by a Contractor Party shall be expressly conditioned upon the assignee providing

to SOCAR an Ultimate Parent Company Guarantee similar to that referred to in Article 22.5. At the

same time as SOCAR gives approval to a proposed assignment of a Participating Interest or part

thereof or within ten (10) days following a deemed approval of a proposed assignment SOCAR

shall deliver to the assignee an SCA Ultimate Parent Company Guarantee.

22.5 Ultimate Parent Company Guarantees

Each Contractor Party other than SCA shall as soon as practicable after execution of this

Agreement by all Parties, provide to SOCAR an Ultimate Parent Company Guarantee. SOCAR

hereby agrees to guarantee to each Contractor Party other than SCA all funds necessary for SCA

to fulfil all of its obligations, financial or otherwise, under the Agreement as set out in Appendix 4

and such guarantee shall be provided by SOCAR as soon as practicable after execution of this

Agreement by all Parties.



45



22.6 Government Guarantee

Upon the execution of this Agreement by all Parties SOCAR shall procure the execution of the

Government Guarantee. An executed original of the Government Guarantee shall be provided to

each Contractor Party and shall be included in the executed copy of this Agreement to be

submitted to the Parliament of the Azerbaijan Republic. Upon ratification and approval of this

Agreement by the Parliament of the Azerbaijan Republic and publication in the customary manner

the Government Guarantee shall have the force of law.



ARTICLE 23

APPLICABLE LAW, ECONOMIC STABILISATION AND ARBITRATION

23.1 Applicable Law

This Agreement shall be governed and interpreted in accordance with principles of law common to

the law of the Azerbaijan Republic and English law, and to the extent that no common principles

exist in relation to any matter then in accordance with the principles of the common law of Alberta,

Canada (except for laws regarding conflicts of laws). This Agreement shall also be subject to the

international legal principle of pacta sunt servanda (agreements must be observed). Upon approval

by the Parliament of the Azerbaijan Republic of this Agreement, this Agreement shall constitute a

law of the Azerbaijan Republic and shall take precedence over any other current or future law,

decree or administrative order (or part thereof) of the Azerbaijan Republic which is inconsistent

with or conflicts with this Agreement except as specifically otherwise provided in this Agreement.

23.2 Economic Stabilisation

The rights and interests accruing to Contractor (or its assignees) under this Agreement and its

Sub-contractors under this Agreement shall not be amended, modified or reduced without the prior

consent of Contractor. In the event that any Governmental Authority invokes any present or future

law, treaty, intergovernmental agreement, decree or administrative order which contravenes the

provisions of this Agreement or adversely or positively affects the rights or interests of Contractor

hereunder, including, but not limited to, any changes in tax legislation, regulations, or

administrative practice, or jurisdictional changes pertaining to the Contract Area, the terms of this

Agreement shall be adjusted to re-establish the economic equilibrium of the Parties, and if the

rights or interests of Contractor have been adversely affected, then SOCAR shall indemnify

Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or

damages that ensue therefrom. SOCAR shall within the full limits of its authority use its reasonable

lawful endeavours to ensure that the appropriate Governmental Authorities will take appropriate

measures to resolve promptly in accordance with the foregoing principles any conflict or anomaly

between any such treaty, intergovernmental agreement, law, decree or administrative order and

this Agreement.

23.3 Arbitration

(a) Except for any matter to be referred to an expert pursuant to Article 13.1(c) in the event of a

dispute arising between SOCAR and any or all of the Contractor Parties (including matters

which are not resolved at the Steering Committee), the disputing Parties shall meet in an

attempt to resolve the dispute to their mutual satisfaction by reference to the terms of this

Agreement. If satisfactory mutual agreement is not achieved within thirty (30) days after receipt

by a Party of notice of such dispute, such dispute shall be settled in accordance with the

Arbitration Procedure and the applicable law provisions of Article 23.1.

(b) Nothing in this Agreement shall limit the rights of the Contractor Parties pursuant to Articles 11

through 15 of the Law on Protection of Foreign Investment dated 15 January 1992, which rights

shall apply in addition to any other rights Contractor may have under this Agreement

notwithstanding any other law, both current and future, in the Azerbaijan Republic. If any of

Contractor's rights, interests or property are expropriated, nationalised or otherwise taken by

reason of any act or failure to act of any Governmental Authority, then the arbitrators shall



46



apply the principle of indemnification (including prompt, full and effective compensation in

Dollars) at the full market value, on the basis of an on-going concern utilising the discounted

cash flow method, assuming a willing buyer and seller in a non-hostile environment, and

disregarding the unfavourable circumstances under which or following which Contractor shall

be deprived of its rights, interest (including its interest in undeveloped reserves) or property.

The arbitrators shall select an investment bank of good international reputation for purpose of

appraising the full market value of said rights, interest (including its interest in undeveloped

reserves) or property of Contractor.

(c) The rights and obligations under this Article 23.3 shall survive the termination of this

Agreement.

ARTICLE 24

NOTICES

24.1 All notices required to be given pursuant to this Agreement shall be in writing in English and either

Azeri or Russian and may be given by telex or letter to the address set out below for each Party (or

such other address as a Party may notify to the other Parties from time to time) provided, however,

that following the Effective Date any notices required to be given to Contractor Parties hereunder

by SOCAR (except any notice of breach pursuant to Article 29, any notice pursuant to Article 22.2

(b)(iii) and any notice of termination of this Agreement and any notice of arbitration pursuant to

Article 23.3) shall be considered effective as to all Contractor Parties if given to the Operating

Company in accordance with this Article 24.1. Contractor shall advise SOCAR of details of the

name and address of the Operating Company (and of any changes thereto) as soon as practicable.

A notice given by telex shall be deemed to be served on the first working day following the date of

dispatch. A notice sent by letter shall not be deemed to be delivered until received.

SOCAR:



State Oil Company of the Azerbaijan Republic

Baku 370601

Neftchilar Prospecti 73

Telex: Baku 142187 (CWET SU)

Attention: The President



BP:



BP Exploration (Azerbaijan) Limited

370004 Azerbaijan Republic

Baku

Bejuk Gala Kuchasi 41

Attention: BP Chief Representative

and copied for information to:

BP Exploration Operating Company Limited

Uxbridge One

1 Harefield Road

Uxbridge

Middlesex UB8 1PD

Telex: London 888811 (BEE PEE)



Elf:



Attention: Asset Manager, Azerbaijan

Elf Petroleum Azerbaijan B.V.

370004 Azerbaijan Republic

Baku

Bejuk Gala kuchasi 42

Attention: Local Representative

and copied for information to:

Elf Aquitaine – Tour Elf

2.place de la Coupole



47



92078 – PARIS LA DEFENSE. CEDEX

615 400 ELFA

Attention: Senior Vice-President E.P. - OCAL

LUKoil:



LUKoil International Ltd

370004 Azerbaijan Republic

Baku

Sabir Kuchasi 3

Attention: General Manager

and copied for information to:

Lukoil Joint Stock Company

2 bld. 44 Lusinovskaya

113093 Moscow

Russian Federation

Telex: 612553 Luk SU

Attention: The President



OIEC:



Oil Industries Engineering and Construction

Address and Telex to be notified



SCA:



Care of: State Oil Company of the

Azerbaijan Republic

Baku 370601

Neftchiler Prospecti 73

SOCAR

Telex: Baku 142187 (CWET SU)

Attention: The President



Statoil:



Statoil Azerbaijan A.S

370004 Azerbaijan Republic

Baku

Bejuk Gala Kuchasi 41

Attention: Vice President, Statoil Azerbaijan

and copied for information to:

Den norske stats oljeselskap a.s

4035 Stavanger

Norway

Telex: 73600 STAST N

Attention: Vice President E&P International



TPAO:



Turkish Petroleum Overseas Company Limited

370004 Azerbaijan Republic

Baku



48



Shovket Alekperova Kuchasi 7/10

Attention: TPAO Representative

and copied for information to:

Turkiye Petrolleri A.O.

Mustafa Kemal Mahallesi

2 Cadde, No. 86, Esentepe

06520, Ankara Turkey

Telex: 42626 TPGM.TR

Attention: The President

ARTICLE 25

EFFECTIVE DATE

25.1 Effective Date

(a) The Effective Date shall be the date upon which SOCAR delivers to Contractor written

evidence of the enactment by the legislature of the Azerbaijan Republic in full compliance with

the Constitution and all requisite legal formalities and procedures and publication in the

customary manner of legislation giving this Agreement (including the Government Guarantee),

the full force of law in the Azerbaijan Republic, provided, however, that the enactment as

aforesaid shall not be sought by the Parties (and the Effective Date shall not occur) until the

following conditions precedent have been satisfied:

(i)



authorisation to enter into this Agreement by the Boards of Directors of each of the Parties;



(ii) delivery to SOCAR of each of the Ultimate Parent Company Guarantees;

(iii) delivery to each of the Contractor Parties (except SCA) of the SCA Ultimate Parent

Company Guarantee;

(iv) delivery to each of the Contractor Parties of the Government Guarantee;

(b) The Parties shall use their best endeavours to obtain as soon as possible (1) satisfaction of the

conditions referred to in Article 25.1(a)(i) to (iv) and upon satisfaction thereof (2) the enactment

as aforesaid by the legislature of the Azerbaijan Republic giving this Agreement and the said

Government Guarantee the full force of law in the Azerbaijan Republic.

25.2 Pre-Effective Date Petroleum Operations

Notwithstanding the provisions of Article 25.1, in the event that, prior to the Effective Date,

Contractor, with the consent of SOCAR, does conduct Petroleum Operations, the costs incurred by

Contractor in relation to such Petroleum Operations shall be Cost Recoverable.

In the event that, prior to the Effective Date, Contractor, without the consent of SOCAR, does

conduct Petroleum Operations, then the costs incurred by Contractor in relation to such nonconsented Petroleum Operations shall not be Cost Recoverable.

25.3 Reimbursement of Pre-Effective Date Expenses

In the event that this Agreement does not become effective according to this Article 25 the bonus

payment amounting to the sum of ten million (10,000,000) Dollars paid by BP and Statoil or their

Affiliates to the Azerbaijan Republic pursuant to the agreement between the Government of the

Azerbaijan Republic and BP Exploration Operating Company Limited and Den norske stats

oljeselskap a.s dated 7 September 1992 shall be reimbursed in Foreign Exchange by SOCAR to

BP, Statoil and TPAO.



49



ARTICLE 26

ENVIRONMENTAL PROTECTION AND SAFETY

26.1 Environmental Standards

Contractor shall develop jointly with SOCAR and the State Committee of the Azerbaijan Republic

on Ecology and Control over the Use of Natural Resources ("SCE") safety and environmental

protection standards and practices appropriate for the regulation of Petroleum Operations. The

safety and environmental protection standards shall take account of the specific environmental

characteristics of the Caspian Sea and draw, as appropriate, on (i) international Petroleum industry

standards and experience with their implementation in exploration and production operations in

other parts of the world and (ii) existing Azerbaijan safety and environmental legislation. In

compilation of such standards and practices account shall be taken of such matters as

environmental quality objectives, technical feasibility and economic and commercial viability.

Subject to the first sentence of Article 26.4 the standards, which shall apply to Petroleum

Operations from Effective Date shall be the standards and practices set out in part II of Appendix 9

until substituted by new safety and environmental protection standards devised and agreed

between Contractor, SOCAR and SCE. Such substitution shall take effect following the written

agreement between Contractor, SOCAR and SCE on a date agreed between the Parties and SCE

and from such date such agreed standards and practices shall have the force of law as if set out in

full in the Agreement. In the event that safety and environmental protection standards and

practices are imposed otherwise than with the agreement of Contractor it is agreed that the

provisions of Article 23.2 shall apply. The Parties and SCE shall agree a separate protocol for the

detailed implementation of the joint development and definition of the new standards and practices

for safety and environmental protection. The cost to Contractor of such development and definition

shall be Cost Recoverable.

26.2 Conduct of Operations

Contractor shall conduct the Petroleum Operations in a diligent, safe and efficient manner in

accordance with the Environmental Standards and shall take all reasonable actions in accordance

with the Environmental Standards to minimise any potential disturbance to the general

environment, including without limitation the surface, subsurface, sea, air, lakes, rivers, animal life,

plant life, crops and other natural resources and property. The order of priority for actions shall be

the protection of life, environment and property. Contractor shall implement an integrated

management system covering all health, safety and environmental aspects of the activities carried

out in relation to the Petroleum Operations as outlined in part I of Appendix 9.

26.3 Emergencies

In the event of emergency and accidents, including but not limited to explosions, blow-outs, leaks

and other incidents which damage or might damage the environment, Contractor shall promptly

notify SCE (Goskomokhrana) and SOCAR of such circumstances and of its first steps to remedy

this situation and the results of said efforts. Contractor shall use all reasonable endeavours to take

immediate steps to bring the emergency situation under control and protect against loss of life and

loss of or damage to property and prevent harm to natural resources and to the general

environment. Contractor shall also report to SOCAR and appropriate Governmental Authorities on

the measures taken.

26.4 Compliance

Contractor shall comply with present and future Azerbaijani laws or regulations of general

applicability with respect to public health, safety and protection and restoration of the environment,

to the extent that such laws and regulations are no more stringent than the Environmental

Standards. In the event any regional or multi-governmental authority having jurisdiction enacts or

promulgates environmental standards relating to the Contract Area, the Parties will discuss the

possible impact thereof on the project. The provisions of Article 23.2 shall apply to any compliance

or attempted compliance by Contractor with any such standards which adversely affect the rights

or interests of Contractor hereunder.



50



26.5 Environmental Protection Strategy

An environmental protection strategy shall be developed which shall include:

(a) the establishment of an environmental management system as an integral part of Petroleum

Operations and the formation of an environmental sub-committee as described in the

Environmental Standards;

(b) an environmental work programme carried out in sequences appropriate to the normal phases

of Petroleum Operations as described in the Environmental Standards (seismic survey,

exploration drilling, field development and production).

26.6 Environmental Damage

(a) Contractor shall be liable for those direct losses or damages incurred by a Third Party (other

than Governmental Authority) arising out of any environmental pollution determined by the

appropriate court of the Azerbaijan Republic to have been caused by the fault of Contractor. In

the event of any environmental pollution or environmental damage caused by the fault of

Contractor, Contractor shall reasonably endeavour, in accordance with generally acceptable

international Petroleum industry practices, to mitigate the effect of any such pollution or

damage on the environment.

(b) Contractor shall not be responsible and shall bear no cost, expense or liability for claims,

damages or losses arising out of or related to any environmental pollution or other

environmental damage, condition or problems which it did not cause, including but not limited to

those in existence prior to the Effective Date of this Agreement and SOCAR shall indemnify

and hold harmless Contractor, it's Sub-contractor and its and their consultants, agents,

employees, officers and directors from any and all costs, expenses and liabilities relating

thereto.

(c) Any damages, liability, losses, costs and expenses incurred by Contractor arising out of or

related to any claim, demand, action or proceeding brought against Contractor, as well as the

costs of any remediation and clean-up work undertaken by Contractor, on account of any

environmental pollution or environmental damage (except for such pollution or damage

resulting from Contractor’s Wilful Misconduct) caused by Contractor shall be included in

Petroleum Costs.

ARTICLE 27

CONFIDENTIALITY

27.1 (a) Each Party agrees that all information and data of a technically, geologically or commercially

sensitive nature acquired or obtained relating to Petroleum Operations and which on the

Effective Date is not in the public domain or otherwise legally in the possession of such Party

without restriction on disclosure shall be considered confidential and shall be kept confidential

(subject to Contractor's right to use such data and information in accordance with Article

14.1(e) and to trade in such data and information in accordance with Article 27.2) and not be

disclosed to any person or entity not a Party to this Agreement, except:

(i)



To an Affiliate, provided such Affiliate maintains confidentiality as provided in this

Agreement;



(ii) To a Governmental Authority when required by this Agreement;

(iii) To the extent such data and information is required to be furnished in compliance with any

applicable laws or regulations, or pursuant to any legal proceedings or because of any

order of any court binding upon a Party;



51



(iv) Subject to (c) below, to potential Sub-contractors, consultants and attorneys employed by

any Contractor Party where disclosure of such data or information is essential to such

Sub-contractor's, consultant's or attorney's work;

(v) Subject to (c) below, to a bona fide prospective transferee of a Party's Participating

Interest (including an entity with whom a Party is conducting bona fide negotiations

directed toward a merger, consolidation or the sale of a majority of its or an Affiliate's

shares);

(vi) Subject to (c) below, to a bank or other financial institution to the extent appropriate to a

Party arranging for funding for its obligations under this Agreement;

(vii) To the extent such data and information must be disclosed pursuant to any rules or

requirements of any government or stock exchange having jurisdiction over such

Contractor Party, or its Affiliates;

(viii) Where any data or information which, through no fault of a Contractor Party, becomes a

part of the public domain; and

(ix) To the arbitrators in accordance with Article 23 or to any expert in connection with Article

13.1(c) of this Agreement.

(b) Each Party shall take customary precautions to ensure such data and information on Petroleum

Operations is kept confidential by its respective employees.

(c) Disclosure pursuant to Article 27.1(a)(iv), (v), and (vi) shall not be made unless prior to each

such disclosure the disclosing Party has obtained a written undertaking from the recipient Party

to keep the data and information strictly confidential from Third Parties (except for data which is

or becomes in the public domain) and not to use or disclose the data and information except for

the express purpose for which disclosure is to be made without the prior written permission of

the other Parties.

(d) Any Contractor Party ceasing to own a Participating Interest in this Agreement during the term

of this Agreement shall nonetheless remain bound by the obligations of confidentiality set forth

above and any disputes shall be resolved in accordance with the Arbitration Procedure, and the

confidentiality obligations of the Contractor Parties as set forth herein shall survive a period of

five (5) years from the termination of this Agreement.

27.2 Trading of Data

Notwithstanding the foregoing, in accordance with Article 14.1(e), Contractor shall have the free

right to trade with Third Parties all data relating to the Contract Area for other data relating to the

Azerbaijan Republic with the approval of SOCAR, such approval not to be unreasonably withheld.

27.3 Corporate Disclosure

Each Contractor Party, notwithstanding any other provisions in this Article 27 may make

disclosures in annual reports, employee and stockholder newsletters, magazines and the like of

summarisation of a general nature relating to Petroleum Operations, which are customarily or

routinely described or reported in such publications.



ARTICLE 28

BONUS PAYMENTS AND ACREAGE FEES

(please see 5th Amendment for more details on bonus calculations)

28.1 Contractor Bonus Payments



52



The Bonus shall be payable as follows:

(a) Thirty seven million (37,000,000) Dollars shall be paid within thirty (30) days following Effective

Date. BP, Statoil and TPAO shall in total be entitled to credit against this bonus payment the

sum of ten million (10,000,000) Dollars paid prior to the execution of this Agreement under the

agreement made between the Government of the Azerbaijan Republic and BP Exploration

Operating Company Limited and Den norske stats oljeselskap a.s dated 7 September 1992 and

referred to in the Recitals to this Agreement.

(b) One million (1,000,000) Dollars per each one hundred million (100,000,000) Barrels of Crude

Oil or oil equivalent specified to be commercially recoverable in the Development Programme

shall be paid within thirty (30) days following SOCAR’s approval or deemed approval of the

Development Programme.

(c) Fifty million (50,000,000) Dollars shall be paid within thirty (30) days of the later of the following:

(i) the date upon which commercial production conducted by Contractor at a stable average

daily rate of twelve thousand (12,000) Barrels of Crude Oil or oil equivalent has been

sustained for a period of sixty (60) consecutive days or,

(ii) the date upon which commercial production conducted by Contractor from two (2)

production wells has been sustained at a stable production rate for a period of sixty (60)

consecutive days.

For bonus calculation purposes as referred to in (b) and (c) above, the determination of the volume

of Natural Gas equivalent to one (1) Barrel of Crude Oil included in the Development Programme

shall be based on the equivalent energy content of a representative sample of Petroleum from the

Discovery using internationally accepted methods for such conversion calculation.

Subject to Articles 20.6 and 29.2(a) each Contractor Party shall be liable only for its percentage

Participating Interest share of the Bonus.

Bonus payments by Contractor Parties shall be made into SOCAR's nominated account in a bank

of good international repute.

The payments made by the Contractor Parties pursuant to this Article 28 shall not be Cost

Recoverable.

28.2 Acreage Fees

Contractor shall pay annual acreage fees of one thousand two hundred (1,200) Dollars per square

kilometre of the Contract Area during the Exploration Period and the Additional Exploration Period

(if Contractor proceeds to the Additional Exploration Period pursuant to Article 4.3). Acreage fees

shall be paid annually in arrears on each anniversary of the Effective Date.



ARTICLE 29

TERMINATION

29.1 Material Breach

(a) This Agreement may be terminated at any time:

(i) by SOCAR if Contractor commits, or

(ii) by Contractor if SOCAR or any Governmental Authority commits,

a Material Breach of its obligations under this Agreement or the Government Guarantee, as the

case may be, and fails to cure or remedy such Material Breach within ninety (90) days following



53



written notice to it from the other describing the particulars of such Material Breach as well as

its intention to terminate this Agreement on account of such Material Breach; provided

however, that

(aa) if such Material Breach can be cured or remedied but not within ninety (90) days despite

the exercise of reasonable diligence, then there shall be no right to terminate so long as

the Party alleged to be in Material Breach commences within said ninety (90) days actions

reasonably necessary to cure or remedy such Material Breach and diligently pursues such

actions until the Material Breach is cured or remedied, it being understood that in such

instance the Parties shall endeavour to reach mutual agreement on the actions necessary

to cure or remedy the Material Breach; and

(bb) if either Contractor or SOCAR as the case may be within said ninety (90) day period refers

the question of Material Breach to arbitration in accordance with the Arbitration Procedure,

then termination of this Agreement will not occur unless and until (1) the arbitration

proceeding results in a finding that such Material Breach does in fact exist, and (2) the

Party found to have been in breach has had a reasonable opportunity thereafter (but in no

event less than ninety (90) days), but failed, to cure or remedy the Material Breach

identified by the arbitration panel, unless such Party has been diligently pursuing such

actions and continues to do so until such Material Breach is cured or remedied. The

arbitration tribunal's award shall be final and binding on the Parties and shall be

immediately enforceable; and

(cc) as used in this Agreement the term “Material Breach” means a fundamental breach, which,

if not cured, is tantamount to the frustration of the entire Agreement either as a result of

the unequivocal refusal of either Contractor, SOCAR or a Governmental Authority, as the

case may be, to perform its contractual obligations or as a result of conduct which has

destroyed the commercial purpose of this Agreement.

(b) A failure to complete any of the activities listed in Articles 4.2(a) and 4.3, shall be deemed to

constitute a Material Breach of the Agreement by Contractor whereupon SOCAR shall have the

right to unilaterally terminate this Agreement upon giving written notice to Contractor without

Contractor being entitled to any period within which to cure or remedy such Material Breach as

provided in Article 29.1. Termination of the Agreement by SOCAR pursuant to Articles 4.2(d)

and 4.3 and this Article 29.1. shall be SOCAR's sole remedy against Contractor for such

Material Breach and Contractor shall have no claim for reimbursement of any costs incurred by

Contractor with respect to the execution of the said activities.

29.2 Termination By SOCAR

(a) SOCAR may terminate this Agreement by giving Contractor ninety (90) days prior written

notice:

(i)



If any company issuing an Ultimate Parent Company Guarantee on behalf of any

Contractor Party becomes insolvent or goes into liquidation (other than for the purpose of

amalgamation or reorganisation), provided that such notice of termination shall take effect

as soon as the other Contractor Parties because of their insolvency or liquidation, and

subject to the provisions of joint liability are not able to assume such Contractor Party’s

rights and obligations under this Agreement and so notify SOCAR within such ninety (90)

day period.



(ii) If all Contractor Parties collectively become insolvent or go into liquidation (other than for

the purposes of amalgamation or reconstruction).

(iii)



If, for reasons other than Force Majeure production of Petroleum in commercial quantities

shall have permanently ceased.



54



(b) SOCAR may terminate this Agreement by giving Contractor notice in writing as provided in

Articles 4.6(a) and 4.6(d).

29.3 Termination/Relinquishment by Contractor

(a) Contractor may terminate this Agreement with effect on or at any time after the expiry of the

Exploration Period, or if Contractor enters the Additional Exploration Period then with effect on

or at any time after the expiry of the Additional Exploration Period, by giving SOCAR ninety (90)

days prior written notice. Upon such termination, Contractor shall have no further obligations of

any kind whatsoever to SOCAR except for the performance of its obligations under the then

current Annual Work Programme.

(b) Subject to the remaining provisions of this Article 29.3, Contractor may at any time voluntarily

relinquish all of the Contract Area by giving SOCAR not less than ninety (90) days prior written

notice. Such notice shall specify the date upon which the relinquishment is to take effect and

the manner in which Contractor will perform any remaining obligations pursuant to Article

29.3(c). Upon such relinquishment, this Agreement shall terminate. If SOCAR or Contractor

requests, a meeting of the Steering Committee shall be convened to address any questions

which may arise in connection with the relinquishment.

(c) Termination of this Agreement or relinquishment of the entire Contract Area by Contractor

pursuant to Article 29.3(a) or (b) shall not relieve Contractor of any remaining obligations under

the then current Annual Work Programme which Contractor upon the prior agreement with

SOCAR may fulfil at its option:

(i) by performing in full in accordance with their terms or

(ii) by payment in Dollars to SOCAR of the outstanding balance of money stipulated in the

respective Budgets.

(d) In the event of termination of this Agreement or relinquishment of the entire Contract Area

pursuant to Article 29.3(a) or (b), without prejudice to any rights which may have accrued, or

claims which have been made, prior to such termination, Contractor shall have no further rights

to conduct Petroleum Operations or to recover any Petroleum Costs not Cost Recovered by the

date of termination.

29.4 Other Remedies

Subject to Articles 20.7, 29.1(b) and 29.3(b), in the event that Contractor or SOCAR terminates this

Agreement pursuant to the above provisions, such termination shall be without prejudice to

Contractor's or SOCAR's entitlement to sue the other for damages, or to any other remedy

Contractor or SOCAR (as the case may be) may have in law.

29.5 Partial Relinquishment

Contractor shall have no unilateral right to relinquish a part of the Contract Area. In the event

Contractor decides not to develop any portions of the Contract Area, the Parties will discuss the

possibility of partial relinquishment on mutually agreed terms. In the event of partial relinquishment

pursuant to this Article 29.5, Contractor shall have no right to recover out of the production from the

remainder of the Contract Area not relinquished, any amount of Petroleum Costs incurred during

the Development and Production Period in connection with the portion of the Contract Area

relinquished which has not been recovered at the date of such relinquishment. All costs incurred by

Contractor during the Exploration Period and the Additional Exploration Period shall be Cost

Recoverable from production from the remainder of the Contract Area which is not relinquished.

ARTICLE 30

MISCELLANEOUS



55



30.1 This Agreement is executed in the English, Azeri and Russian languages and, subject to the

Arbitration Procedure and Article 13.1(c) all three languages shall have equal force.

30.2 The headings in this Agreement are inserted for convenience only and shall be ignored in

construing this Agreement.

30.3 Unless the context otherwise requires, references to the singular shall include a reference to

the plural and vice-versa; and reference to any gender shall include a reference to all other

genders.

30.4 The Appendices to this Agreement form part of this Agreement. In the event of any conflict

between the provisions of the main body of this Agreement and the Appendices (other than

Appendix 1 which shall be considered part of the main body of the Agreement), then the

provisions of the main body shall prevail.

IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first above

written by their duly authorised representatives.

For and on behalf of

State Oil Company of the Azerbaijan Republic

By:

Title: The President of SOCAR

By:

Title: General Manager

For and on behalf of

BP Exploration (Azerbaijan) Limited

By:

Title:Deputy Chief Executive Officer

By:

Title: Manager (Azerbaijan)

For and on behalf of

Elf Petroleum Azerbaijan B.V.

By:

Title: Chairman and C. E. O.

By:

Title: Senior Vice President

For and on behalf of

LUKoil International Ltd.

By:

Title: First Vice - President

By:

Title: Vice - President

For and on behalf of

Oil Industries Engineering and Construction

By: ___________________________

Title: __Managing Director ________



56



By:

Title: Marketing Director

For and on behalf of

SOCAR Commercial Affiliate

By: ___________________________

Title: __The President of SOCAR___

By:

Title:



General Manager



For and on behalf of

STATOIL Azerbaijan A.S.

By:

Title: Senior Vice President

By:

Title:



Vice-President



For and on behalf of

Turkish Petroleum Overseas company Limited

By:

Title:



General Manager



By:

Title:



Group Manager



57



APPENDIX 1

DEFINITIONS

In this Agreement the following words and expressions shall have the following meanings unless the

context otherwise requires:

"Abandonment Fund" shall have the meaning given to it in Article 14.2(a).

"Accounting Procedure" means the procedures and reporting requirements set forth in Appendix 3.

"Additional Exploration Period" shall have the meaning given to it in Article 4.3.

"Affiliate" means,

(a) in relation to any Party, either

(i)



a company, corporation or other legal entity in which such Party holds directly or indirectly

shares carrying more than fifty (50) percent of the votes at a general meeting of such

company, corporation or other legal entity; or



(ii) a company, corporation or other legal entity holding directly or indirectly shares carrying

more than fifty (50) percent of the votes at a general meeting of such Party; or

(iii) a company, corporation or other legal entity of which shares carrying more than fifty (50)

percent of the votes at a general meeting of such company, corporation or other legal

entity are held directly or indirectly by a company, corporation or other legal entity which

also holds directly or indirectly shares carrying more than fifty (50) percent of the votes at a

general meeting of such Party;

(b) and, furthermore, in relation to SOCAR, any venture or enterprise in which it has an interest

and the right to control (as defined in Article 9.2(c)) manage or direct the action thereof.

"Agreement " means this instrument and its Appendices 1 to 10 attached, together with any written

extension, renewals, replacement or modification hereto which may be mutually agreed and signed by

the Parties.

"AGSC" means Azerbaijan Gas Supply Company Limited, an exempted limited liability company

incorporated under the laws of the Cayman Islands.3

"AGSC GTA" means the "Transportation Agreement relating to quantities of Natural Gas to be received

at Sangachal, Azerbaijan and then transported in the Pipeline and redelivered to various points in

Azerbaijan, Georgia and at the Azeri/Georgian and Georgian/Turkish borders" to be entered into

between AGSC and South Caucasus Pipeline Company Limited for the purposes specified therein.4

"AGSC Operating Costs" has the meaning given such term in the Annual Reserved Capacity Deed.5

"AGSC Shareholders' Agreement" means the agreement to be entered into between AGSC, BP

Exploration (Azerbaijan) Limited, TotalFinaElf E&P Azerbaijan B.V., LUKAgip N.V (for and on behalf of

the Azerbaijan Republic), Statoil Azerbaijan AS, Turkish Petroleum Overseas Company Limited,

Azerbaijan (Shah Deniz) Limited for the purposes specified therein.6



3



Fourth Addendum. 25.02.2003

Fourth Addendum. 25.02.2003

5

Fourth Addendum. 25.02.2003

6

Fourth Addendum. 25.02.2003

4



58



"Annual Reserved Capacity Deed" means the deed to be entered into between AGSC and BP

Exploration (Shah Deniz) Limited (for and on behalf of the Contractor) for the purposes specified

therein.7

"Annual Work Programme" means the document describing, item by item, the Petroleum Operations to

be carried out during a Calendar Year which has been approved by the Steering Committee.

"Arbitration Procedure" means the arbitration procedure set forth in Appendix 6.

"Associated Natural Gas " means Natural Gas which exists in a reservoir in solution with Crude Oil,

such Crude Oil being producible, as initially discovered, at a gas oil ratio of not greater than 10,000

standard cubic feet per Barrel of Crude Oil as measured at the point of separation of gas from oil.

"Barrel" means U.S. barrel, i.e. 42 U.S. gallons (158.987 litres) measured at STP.

"Bonus " means a payment for the right to access Contract Area.

"Budget " means estimates of itemised expenditures of all Petroleum Operations included in an Annual

Work Programme.

"Calendar Quarter" means a period of three (3) consecutive months commencing on the 1st of January,

the 1st of April, the 1st of July, or the 1st of October in any Calendar Year.

"Calendar Year " means a period of twelve (12) consecutive months beginning on the 1st of January

and ending on the following 31st of December according to the Gregorian Calendar.

"Capital Costs" means those costs incurred in or in relation to the Contract Area other than Operating

Costs, together with Finance Costs which have been aggregated with such costs in accordance with

Article 11.4(b).

"Capital Cost Recovery Petroleum" shall have the meaning given to it in Article 11.2(a)(ii).

"Contract Area" means the area (from the surface to any and all depths accessible to drilling technology

as may be developed at any time during the term of this Agreement and as may be extended) as

described and delineated in Appendix 2.

"Contractor" means all of the Contractor Parties collectively.

"Contractor Facilities" shall have the meaning given to it in Article 9.3.

"Contractor Party" means any one of BP, Elf, LUKoil, OIEC, SCA, Statoil and TPAO or any of their

successors or permitted assignees.

"Cost Recovery" means the process by which Contractor is allocated Petroleum production from the

Contract Area for the recovery of its Petroleum Costs. "Cost Recoverable" means such costs to be

recovered in the future and "Cost Recovered" means such costs recovered in the past.

"Cost Recovery Petroleum" shall have the meaning given to it in Article 11.3.

"Crude Oil" means crude mineral oil, condensate, asphalt, ozocerite, and all kinds of hydrocarbons and

bitumen regardless of gravity, either solid or liquid, in their natural condition or obtained from Natural Gas

by condensation or extraction, including Natural Gas liquids at STP and including products refined or

processed from any of the forgoing.

"Cumulative Entitlement to Date" is defined in Schedule 2 to the Fourth Addendum.8



7

8



Fourth Addendum. 25.02.2003

Fourth Addendum. 25.02.2003



59



"Delivery Point" means the custody transfer meter at the outlet flange of the onshore Petroleum

processing and storage terminal and any other place or places between well head and the said outlet

flange as may be decided upon by the Steering Committee from time to time based on recommendations

made by Contractor.

"Design Standards" means the design standards and specifications set forth in Appendix 8.

"Development and Production Period" shall have the meaning given to it in Article 4.5.

"Development Programme" shall have the meaning given to it in Article 4.6.

"Discovery" means a discovery within the Contract Area of an accumulation of Petroleum.

"Dollars" or "$" means the currency of the United States of America.

"Double Tax Treaty" means any treaty or convention with respect to Taxes which is applicable to the

Azerbaijan Republic for the avoidance of double taxation of income.

“EDPSA” means the Agreement on the Exploration, Development and Production Sharing dated June 4,

1996 for the Shah Deniz Prospective Area in the Azerbaijan sector of the Caspian Sea as subsequently

amended.9

"EDPSA" means the Agreement on the Exploration, Development and Production Sharing dated June 4,

1996 for the Shah Deniz Prospective Area in the Azerbaijan sector of the Caspian Sea.10

"Effective Date" shall have the meaning given to it in Article 25.1.

"Entitlement and Accounting Protocol" means Schedule 1 to this Fourth Addendum.11

"Environmental Standards" means the environmental standards and practises set forth in Appendix 9

until substituted by other standards and practices agreed between Contractor, SOCAR and the State

Committee of the Azerbaijan Republic on Ecology and Control over the Use of Natural Resources or its

successor, as provided in Article 26.1.

"Exploration Period" shall have the meaning given to it in Article 4.1.

"Exploration Work Programme" shall mean the exploration work set out in Appendix 10.

"Finance Costs" means a charge of one-quarter of the sum of LIBOR plus four (4) percent multiplied by

the unrecovered balances of Capital Costs and Operating Costs at the end of each Calendar Quarter.

"Force Majeure" shall have the meaning given to it in Article 21.1.

"Foreign Exchange" means Dollars and/or other freely convertible foreign currency generally accepted

in the international banking community.

"Foreign Sub-contractor" means a Sub-contractor which is an entity or organisation which is

incorporated, legally created or organised outside the Azerbaijan Republic.

"GDP Deflator Index" means the Implicit Price Deflator Index for United States Gross Domestic Product

issued by the Bureau of Economic Analysis (BEA) of the United States Department of Commerce, as

reported in the quarterly publication "Survey of Current Business". If this publication ceases to exist the

Parties shall use "International Financial Statistics" of the International Monetary Fund, or other suitable

publication as mutually agreed by the Parties.



9



Third Addendum. 28.02.2001

Fourth Addendum. 25.02.2003

11

Fourth Addendum. 25.02.2003

10



60



"Governmental Authority" or "Governmental Authorities" means the government of the Azerbaijan

Republic and any political or other subdivision thereof, including any local government, or other

representative, agency or authority, which has the authority to govern, legislate, regulate, levy or collect

taxes or duties, grant licenses and permits, approve or otherwise impact (whether financially or

otherwise), directly or indirectly, any of SOCAR's and/or Contractor's rights, obligations or activities

under the Agreement. For the purpose of Articles 20.2 and 26.6(a) only, it is agreed that any state

enterprise, as well as any municipal body, which is engaged solely in the conduct of commercial or other

business activities, (and is not engaged in any act of governing and does not possess any legislative,

regulatory or taxing functions), shall be excluded from the definition of "Governmental Authority".

"Government Guarantee" means the Guarantee and Undertaking of the Government of the Azerbaijan

Republic in the form set forth in Appendix 5.

"Incremental Monthly Charges" has the meaning given such term in the AGSC GTA.12

"LIBOR" means a rate of interest calculated from the arithmetic average over a Calendar Quarter period

of the three (3) month Dollar London Interbank offer rate quoted daily in the London Financial Times (or

in the event that the London Financial Times ceases to be published then such other publication as the

Parties shall agree).

"Material Breach" shall have the meaning given to it in Article 29.1(a).

"Measurement Procedure" means the Crude Oil and Natural Gas Measurement and Evaluation

Procedure set forth in Appendix 7.

"Monthly Minimum Payments" has the meaning given such term in the AGSC GTA.13

"MMP Guarantee" has the meaning given such term in the AGSC Shareholders' Agreement.14

"Natural Gas" means all hydrocarbons that are in a gaseous phase at STP including but not limited to

casing head gas and residue gas remaining after the extraction or separation of liquid hydrocarbons

from wet gas, and all non-hydrocarbon gas or other substances (including but not limited to carbon

dioxide, sulphur and helium) which are produced in association with gaseous hydrocarbons; provided

that this definition shall exclude condensed or extracted liquid hydrocarbons.

“Natural Gas Sale and Purchase Agreement(s)” has the meaning ascribed to that expression in Article

4.1(a) of the Third Addendum.15

"Non-associated Natural Gas" means Natural Gas other than Associated Natural Gas.

"Notice of Discovery and its Commerciality" shall have the meaning given to it in Article 4.4.

"Operating Company" means a company appointed for the time being to conduct Petroleum Operations

on behalf of Contractor in accordance with Article 6.

"Operating Costs" means those costs incurred in day to day Petroleum Operations in or in relation to

the Contract Area whether directly or indirectly incurred, including but not limited to extraction, treatment,

stimulation, injection, gathering, processing, storage, handling, lifting and transportation of Petroleum to

the Delivery Point, maintenance, service, administration, and payments incurred in respect of

abandonment including payments to the Abandonment Fund, together with Finance Costs which have

been aggregated with such costs in accordance with Article 11.4(b).

"Participating Interest" shall have the meaning given to it in Article 1.1.



12



Fourth Addendum. 25.02.2003

Fourth Addendum. 25.02.2003

14

Fourth Addendum. 25.02.2003

15

Third Addendum. 28.02.2001

13



61



"Parties" means SOCAR, BP, Elf, LUKoil, OIEC, SCA, Statoil and TPAO and any of their respective

successors and assigns. The term Party means any of the Parties.

"Petroleum" means Crude Oil and Natural Gas.

"Petroleum Costs" means Operating Costs and Capital Costs and shall include all expenditures actually

incurred by Contractor for the purposes of the Petroleum Operations. Petroleum Costs shall include,

without limitation, (i) the amounts expressly identified in the Agreement as Petroleum Costs (including

but not limited to the amounts identified in Article 18.3) and (ii) the amounts properly debited to the

Petroleum Operations Account in accordance with the Accounting Procedure.

"Petroleum Operations" means all operations relating to the exploration, appraisal, development,

extraction, production, stabilisation, treatment (including processing of Natural Gas), stimulation,

injection, gathering, storage, handling, lifting, transporting Petroleum to the Delivery Point and marketing

of Petroleum from, and abandonment operations with respect to the Contract Area.

"Petroleum Operations Account" shall have the meaning given to it in paragraph 1.2 of the Accounting

Procedure.

“Pipeline Facilities” has the meaning ascribed to that expression in Article 4.1(b) of this Third

Addendum.16

"Point of Sale" shall have the meaning given to it in Article 13.1(d)(iii).

"Profit Petroleum" shall have the meaning given to it in Article 11.5.

"Profit Tax" shall have the meaning given to it in Article 12.2(a).

"Purchase Agreements" means gas purchase agreements entered into by AGSC for the purchase by

AGSC of Non-associated Natural Gas from the parties to the EDPSA to satisfy the obligations of the

Stage 1 Sales Agreements and the Transportation Agreements.17

"Seller Representative Agreement" means the agreement to be entered into between the Contractor,

the Ministry of Fuel and Energy of the Azerbaijan Republic (for and on behalf of the Azerbaijan

Republic), and BP Exploration (Shah Deniz) Limited appointing BP Exploration (Shah Deniz) Limited as

the representative of the Contractor and the State for the purposes specified therein.18

"Shah Deniz JOA" means the Joint Operating Agreement, dated 5 March 1997, between BP Exploration

(Azerbaijan) Limited; Elf Petroleum Azerbaijan B.V.; LUKoil International Ltd; Oil Industries Engineering

and Construction; Statoil Azerbaijan AS; and Turkish Petroleum Overseas Company Limited; and

SOCAR Commercial Affiliate, relating to the Shah Deniz PSA.19

"Shah Deniz Stage 1 Production" means any Petroleum produced using the production capacity (as

may be modified from time to time) of the Stage 1 Platform and any connected sub-sea facilities. 20

"Stage 1 Platform" means the first platform to be installed in the Contract Area as part of the first stage

of development of the Contract Area, as the same may be modified or replaced from time to time. 21

"Stage 1 Sales Agreements" has the meaning given such terms in the AGSC Shareholders'

Agreement.22



16



Third Addendum. 28.02.2001

Fourth Addendum. 25.02.2003

18

Fourth Addendum. 25.02.2003

19

Fourth Addendum. 25.02.2003

20

Fourth Addendum. 25.02.2003

21

Fourth Addendum. 25.02.2003

22

Fourth Addendum. 25.02.2003

17



62



"STP" means the standard temperature and atmospheric pressure of sixty degrees Fahrenheit/fifteen

point five six degrees Centigrade (60°F/15.56°C) and 1.01325 bars.

"Steering Committee" means the committee established pursuant to Article 5.1.

"Sub-contractor" means any natural person or juridical entity contracted directly or indirectly by or on

behalf of Contractor or by or on behalf of the Operating Company, to supply goods, work or services

related to this Agreement.

"Taxable Profit" shall have the meaning given to it in Article 12.2(e).

"Taxes" means all existing or future levies, duties, payments, fees, taxes or contributions payable to or

imposed by any Governmental Authority.

"Tax Inspectorate" shall have the meaning given to it in Article 12.1(c)(iv)

"Third Party" means a natural person or juridical entity, other than a Party hereto or an Affiliate of a

Party.

"Tonne" means metric ton, i.e. one thousand (1000) kilograms as defined by the International Bureau of

Weights and Measures, Sevres, France.

"Total Production" means, for any Calendar Quarter, the total production of Crude Oil and Nonassociated Natural Gas obtained from the Contract Area, less the quantities used pursuant to Article

11.1 for Petroleum Operations.

"Transportation Agreements" has the meaning given such term in the AGSC Shareholders'

Agreement.23

"Transit Losses" shall have the meaning given to it in Article 13.1(d)(iv).

"Ultimate Parent Company" means in relation to BP, BP Exploration Operating Company Limited, a

company incorporated in the United Kingdom of Great Britain and Northern Ireland; in the case of Elf, Elf

Aquitaine, a societe anonyme, registered in France, in the case of LUKoil, LUKoil Joint Stock Company,

a company incorporated in the Russian Federation, in the case of OIEC, National Iranian Oil Company, a

company incorporated in the Islamic Republic of Iran in the case of OIEC, National Iranian Oil

Company, a company incorporated in the Islamic Republic of Iran and Retirement, Savings and Welfare

Funds of the Employees of the Iranian Oil Industry, an entity established in the Islamic Republic of Iran24,

in the case of Statoil, Den norske stats oljeselskap a.s, a company incorporated in Norway; in the case

of SCA, SOCAR, a company incorporated in the Azerbaijan Republic; and in the case of TPAO, Turkiye

Petrolleri A.O., a company incorporated in Turkey; and in the case of any other Contractor Party, such

Contractor Party's ultimate parent company and the successor of any such Ultimate Parent Company.

"Ultimate Parent Company Guarantee" means the guarantee given by an Ultimate Parent Company in

the form set forth in Appendix 4.

"VAT" means the Azerbaijan Republic value added tax.

"Wilful Misconduct" means any unjustifiable act or omission which constitutes an intentional, deliberate

and conscious disregard of good and prudent international oil field practices or the terms of this

Agreement.

"Zero Balance" means the achievement after the commencement of the Development and Production

Period of zero balance in the accounts maintained by Contractor with respect to Capital Costs in

accordance with the Accounting Procedure. After the occurrence of the first Zero Balance for the

purposes of Article 14.1, Capital Costs thereafter will be classified by main budget category.

23

24



Fourth Addendum. 25.02.2003

Second Addendum. 26.06.1996



63



APPENDIX 2

CONTRACT AREA AND MAP

As of the date of execution of the Agreement, the Contract Area is the area inside the perimeter

constituted by the geographical co-ordinates set forth below and as separately identified on the map

attached hereto.

The Contract Area is bounded by straight lines on a Gauss-Kruger projection which is referenced to

Pulkovo 1942 geodetic datum, Krassovski 1940 ellipsoid, and with defining parameters of:

Latitude of Origin:



0 degrees North (the equator)



Longitude of Origin:



51 degrees East (of Greenwich)



Scale Factor at Origin:



1.0



Grid co-ordinates at Origin:



500,000 metres East, 0 metres North



Grid units are meters.

Geographic co-ordinates for the four corners of the Contract Area are:

Pulkova 1942 Datum



Gauss-Kruger grid, Zone 9



Point Latitude (North) Longitude (East)



Easting (X) Northing (Y)



1



40˚ 04' 42"



50˚ 24' 27"



449461 E



4438474 N



2



39˚ 44' 20"



50˚ 40' 31"



472165 E



4400666 N



3



39˚ 38' 55"



50˚ 28' 55"



455534 E



4390720 N



4



39˚ 59' 08"



50˚ 12' 41"



432642 E



4428301 N



The surface of the Contract Area above defined is approximately eight hundred fifty nine and eight

tenths (859.8) square kilometres.

[PICTURE ENCLOSED omitted]



64



APPENDIX 3

ACCOUNTING PROCEDURE

1.



General Provisions

This Appendix 3 establishes a framework of accounting principles as generally accepted within the

international Petroleum industry.

The purpose of this Accounting Procedure is to establish a fair and equitable method for

determining charges and credits applicable to Petroleum Operations under the Agreement and to

provide a method for controlling expenditure against approved budgets. For purposes of this

Accounting Procedure any reference to Contractor shall be deemed to include the Operating

Company, Contractor Parties and their respective Affiliates, as the context may imply. The Parties

agree that if any of such methods prove to be unfair or inequitable to any of the Parties then the

Parties will meet and in good faith endeavour to agree on such changes as are necessary to

correct any unfairness or inequity.



1.1



Definitions

For the purposes of this Accounting Procedure the following terms shall have the following

meanings:

(i)



Accounting Procedure shall mean the accounting principles, practices and procedures set

forth in this Appendix.



(ii) Accepted Accounting Practices shall mean accounting principles, practices and procedures

that are generally accepted and recognised in the international Petroleum industry.

(iii) Accruals means amounts which are expected to be paid or received after the end of an

accounting period as a result of events and transactions prior to the end of the said accounting

period.

(iv) Accruals Basis means the basis of accounting which records the effect of transactions on

financial conditions and income when the transactions take place, not merely when they are

settled in cash.

(v) Cash Basis means the basis of accounting which records the cash flows as they are effected

by the issue of instructions for payment to a bank or payments in cash and recorded in the

cash books of the Operating Company.

(vi) Material and Equipment means property (with the exception of land), including without

limitation all exploration, appraisal and development facilities together with supplies and

equipment, acquired and held for use in Petroleum Operations.

(vii) Controllable Material means Material and Equipment which Contractor subjects to record

control and inventory. A list of types of such Material and Equipment shall be furnished to

SOCAR upon request.

Words and phrases defined in the Agreement but not defined above shall have the same meaning

in this Accounting Procedure as is given to them in the Agreement.

1.2



Accounts

Contractor shall maintain separate books and accounts for Petroleum Operations in accordance

with this Accounting Procedure ("Petroleum Operations Account").

Contractor shall charge to the Petroleum Operations Account only those expenditures incurred for

Petroleum Operations.



65



The Petroleum Operations Account shall be maintained by Contractor in Dollars. Costs incurred in

currencies other than Dollars shall be converted into Dollars using translation rates in accordance

with Accepted Accounting Practices. Any gain or loss resulting from the exchange of currencies

required for Petroleum Operations or from translation shall be charged or credited to the Petroleum

Operations Account.

The Petroleum Operations Account shall be kept in accordance with the standards of international

Petroleum industry practice.

Accounting shall be carried out on an Accruals Basis, provided however that the Cash Basis

principle shall be used to record recovery of the Petroleum Costs.

1.3



Audits

The accounts of the Petroleum Operations, together with the auditors' report thereon, shall be

submitted to SOCAR by Contractor no later than seven (7) months following the end of each

Calendar Year. SOCAR may, by giving notice to that effect to Contractor not later than twelve (12)

months following the end of the subject Calendar Year, request an audit of the accounts for such

Calendar Year. Such audits shall be carried out by a firm of internationally recognised independent

accountants selected by SOCAR. The cost of such audit shall be borne by SOCAR and shall be

conducted in such a manner as not to interfere unduly with ongoing operations. Unless SOCAR

notifies Contractor in writing before twenty-four (24) months following the subject Calendar Year

either that it has an objection to the said accounts or that there is evidence of Contractor's Wilful

Misconduct (details of which shall be included in said notice), the accounts for such Calendar Year

shall be deemed to have been approved as on that date. Any objection to the accounts raised by

SOCAR shall, unless settled by agreement among the Parties, be submitted to arbitration in

accordance with the Arbitration Procedure. In the event the arbitration award sustains any of

SOCAR's objections to the account, the Petroleum Operating Account shall be adjusted

accordingly.

All accounting records, returns, books and accounts relating to Petroleum Operations shall be

maintained by Contractor for a minimum of seven (7) years following the end of the Calendar Year

to which they relate or, in the case where SOCAR alleges Wilful Misconduct the later of (i) a

minimum of seven (7) years following the end of the Calendar Year to which they relate and (ii) a

minimum of one (1) year after resolution of the objections to the accounts made in respect of such

Wilful Misconduct.



2.



Charges And Expenditures

Contractor shall charge the Petroleum Operations Account for all costs incurred after the date of

execution of this Agreement in compliance with the terms of this Agreement or those necessary to

conduct the Petroleum Operations; no cost shall be charged more than once. Chargeable costs

shall include, but not be limited to:



2.1



Labour and Related Costs

(a) Gross salaries, wages, (including amounts imposed by Governmental Authorities) in respect of

employees of Contractor and its Affiliates (except when acting as Sub-contractor) who are

engaged in the conduct of Petroleum Operations whether temporarily or permanently assigned

within the Azerbaijan Republic or located in Contractor's offices elsewhere, as well as personal

expenses incurred in connection therewith.

(b) Costs of all holiday, vacation, sickness, disability and other like benefits applicable to the

salaries chargeable under paragraph 2.1(a) above.



66



(c) Expenses or contributions imposed under the laws of the Azerbaijan Republic which are

applicable to Contractor's cost of salaries and wages chargeable under paragraph 2.1(a) above

or other costs chargeable under this paragraph 2.1.

(d) Cost of established plans for life insurance, hospitalisation, pensions, and other benefits of a

like nature.

(e) Housing and living allowances and related expenses of the employees of Contractor assigned

to Petroleum Operations.

(f) In the event that Contractor is unable to provide continued employment for staff at the end of

their assignment to Petroleum Operations, the proportionate share of termination payments

relating to the employees' period of assignment to Petroleum Operations shall be chargeable.

2.2



Material and Equipment.

Material and Equipment purchased or furnished by Contractor for use in Petroleum Operations as

provided under Section 4 of this Accounting Procedure. So far as it is reasonably practical and

consistent with efficient and economical operation, only such Material and Equipment shall be

purchased or transferred for use in Petroleum Operations as may be required for immediate use or

prudent contingent stock. The accumulation of surplus stocks shall be avoided.



2.3



Transportation and Employee Relocation Costs.

(a) Transportation of Material and Equipment and other related costs such as expediting, crating,

dock charges, inland, air and ocean freight, demurrage, transit fees and unloading at

destination and any duties, licence fees, taxes and any other charges with respect thereto.

(b) Costs incurred for transportation of personnel as required in the conduct of Petroleum

Operations.

(c) Relocation costs of employees permanently or temporarily assigned to Petroleum Operations to

and from their point of origin. Such costs shall include transportation of employees' families and

their personal and household effects.



2.4



Services.

(a) Contract services, professional consultants, and other services procured from outside sources

other than services covered by paragraph 2.14.

(b) Technical services, such as, but not limited to, laboratory analysis, drafting, geophysical and

geological interpretation, reservoir studies, purchasing, drilling supervision, petroleum

engineering, commercial analysis and related computer services and data processing,

performed by Contractor and its Affiliates (except when acting as Sub-contractor) for the direct

benefit of Petroleum Operations. Such charges shall be computed in line with Contractor's

usual accounting policy such that no gain or loss accrues to Contractor.

(c) Business support where the services provided are specifically attributable to Petroleum

Operations, including, but not restricted to legal, purchasing, contracting, treasury, accounting

and administrative services.

(d) Services performed by Contractor and its Affiliates (except when acting as Sub-contractor)

engineering division personnel, as computed and charged by such engineering division.

(e) Marketing services - all fees, commissions and other charges related to the marketing of Nonassociated Natural Gas produced from the Contract Area.



67



(f) Use of equipment and facilities furnished by Contractor at rates commensurate with the cost of

ownership and operation if such use is economically viable. Rates shall include but not be

limited to costs of maintenance, repairs, other operating expenses, insurance, taxes and

interest.

Services performed by Contractor or its Affiliates (except when acting as Sub-contractor) shall be

performed under a work order or service agreement issued by the Operating Company.

2.5



Damages and Losses to Property.

All costs or expenses necessary for the repair or replacement of property resulting from damages

or losses incurred by fire, flood, storm, theft, accident, or any other cause, not recovered from

insurance except where caused by the Wilful Misconduct of Contractor.

Contractor shall furnish SOCAR with written notice of such damages or losses in excess of Dollars

two hundred and fifty thousand (250,000) as soon as reasonably practicable.



2.6



Insurance.

(a) All premiums for insurance carried for the benefit of Petroleum Operations, as well as the

equivalent amount of premiums quoted by an independent underwriter for the risks that are

self-insured by Contractor.

(b) All expenditures incurred and paid in the settlement of any and all losses, claims, damages,

judgements and any other expenses, not recovered from insurance except where caused by

the Wilful Misconduct of Contractor.



2.7



Legal Expenses.

All costs or expenses of handling, investigating and settling litigation or claims arising from

Petroleum Operations or necessary to protect or recover property, including, but not limited to,

lawyers' fees, court costs, cost of investigation of procuring evidence and amounts paid in

settlement or satisfaction of any such litigation or claims except where caused by the Wilful

Misconduct of Contractor.



2.8



Duties and Taxes

All Taxes imposed by Governmental Authorities (except for Profit Tax) (a) with respect to the

employees of Contractor working on Petroleum Operations in the Azerbaijan Republic (or their

families), or (b) paid in excess of those which are reclaimable by Contractor.



2.9



Offices, Camps and Miscellaneous Facilities

The cost of maintaining and operating any offices, sub-offices, camps, warehouses, housing and

other facilities directly serving Petroleum Operations either within the Azerbaijan Republic or

elsewhere with respect to dedicated project groups which are not physically located within the

Azerbaijan Republic.



2.10 Training and Technology Transfer

The costs of the provision of training in accordance with Article 6.8, and the costs of agreed

technology transfer from Contractor to SOCAR.

2.11 Energy Expenses

All costs of fuel, electricity, heat, water or other energy used for Petroleum Operations.

2.12 Communication Charges



68



The costs of acquiring, leasing, installing, operating, repairing and maintaining communication

systems and computer systems.

2.13 Environmental Charges

The costs of environmental programmes, including, but not limited to environmental baseline

studies, ongoing monitoring programmes and remedial work undertaken with respect to Petroleum

Operations (including but not limited to costs incurred to sustain flora and fauna).

2.14 Other Services.

(a) Contractor shall charge an administrative overhead to the Petroleum Operations Account,

covering general administrative support provided by Contractor's Affiliates outside of the

Azerbaijan Republic for the indirect benefit of Petroleum Operations. Such support will include

the services and related office costs of personnel performing administrative, legal, treasury, tax

and employee relations, provision of expertise and other non-technical functions which cannot

be specifically identified or attributed to particular projects.

(b) The charge under (a) above shall be charged at rates on total annual expenditures attributable

to Petroleum Operations as follows:

(i) With respect to Contractor's Capital Costs:

For the first Dollars fifteen million (15,000,000) per Calendar Year - five (5) percent;

For the amount between Dollars fifteen million (15,000,000) and Dollars thirty million

(30,000,000) per Calendar Year - two (2) percent;

For the amount in excess of Dollars thirty million (30,000,000) per Calendar Year - one (1)

percent.

(ii) With respect of Contractor's Operating Costs:

A flat rate of one and a half (1.5) percent per Calendar Year.

2.15 Finance Costs.

All Finance Costs.

2.16 Other Expenditures.

Any other expenditures not covered or dealt with in the foregoing provisions which are incurred by

Contractor and its Affiliates (except when acting as Sub-contractor) for the necessary and proper

conduct of Petroleum Operations (including other activities prior to the Effective Date). These shall

include but not be limited to any expenditures necessary to acquire and maintain rights to the

Contract Area or to implement Petroleum Operations.

3.



Credits

Contractor will credit to the Petroleum Operations Account the net proceeds of the following

transactions:

(a) The net proceeds of any successful insurance claim in connection with Petroleum Operations

where the claim is with respect to operations or assets which were insured and where the

insurance premium with respect thereto has been charged to the Petroleum Operations

Account.



69



(b) Any adjustments received by Contractor from the suppliers/manufacturers (or their agents) in

connection with defective Material and Equipment, the cost of which was previously charged by

Contractor to the Petroleum Operations Account.

(c) The net proceeds of sale on disposal of assets used in Petroleum Operations.

(d) The net proceeds received from Third Parties and/or SOCAR in respect of the use of facilities

pursuant to Article 9.

4.



Material And Equipment.



4.1



Acquisitions

(a) Material and Equipment purchased shall be charged at net cost ("Net Cost") incurred by

Contractor. Net Cost shall include, but shall not be limited to, such items as procurement cost,

transportation, duties, licence fees and applicable taxes.

(b) New Material and Equipment owned by any of the Contractor Parties and transferred to

Contractor for use in connection with Petroleum Operations shall be priced at new purchase

Net Cost determined in accordance with (a) above. Used Material and Equipment shall be

priced at a value commensurate with its use, provided however that this price shall not exceed

seventy five (75) percent of the new purchase Net Cost of such equipment.

(c) Material and Equipment not classified as Controllable Material under Accepted Accounting

Practices shall be charged one hundred (100) percent to Operating Costs.



4.2



Disposal.

Contractor shall have the right to dispose of Material and Equipment it deems to be surplus and

shall advise the Steering Committee of proposed disposals having a value in the Petroleum

Operations Account of Dollars two hundred and fifty thousand (250,000) or more.



4.3



Inventories

(a) Periodic inventories shall be taken by Contractor of all Controllable Material. Contractor shall

give sixty (60) days written notice of intention to take such inventories to allow SOCAR to be

represented. Failure of SOCAR to be represented shall bind SOCAR to accept the inventory

taken by Contractor.

(b) Reconciliation of inventory with the Petroleum Operations Account shall be made. Inventory

adjustments shall be made by Contractor to the Petroleum Operations Account, based on the

inventory report as required by the Parties.



5.



Accounting Reports



5.1



Quarterly Reports

Not later than forty five (45) days after the end of each Calendar Quarter, Contractor shall supply to

SOCAR a Calendar Quarter report reviewing Petroleum Costs, incurred during the preceding

Calendar Quarter, in a form which permits their comparison with the corresponding budgets. Costs

which are common to two or more activities shall be allocated in an equitable manner.



5.2



Annual Reports

During the first Calendar Quarter of each Calendar Year Contractor shall supply to SOCAR an

annual report reviewing Petroleum Costs incurred during the preceding Calendar Year.



70



6.



Cost Recovery And Profit Petroleum Reports.

Not later than forty five (45) days after the end of the Calendar Quarter in which the date of

commencement of commercial production first occurs, and not later than forty five (45) days after

the end of each succeeding Calendar Quarter, Contractor shall supply to SOCAR a Calendar

Quarter Cost Recovery report and Calendar Quarter Profit Petroleum division report showing:

(a) Unrecovered Operating Costs and Capital Costs as at the beginning of the preceding Calendar

Quarter;

(b) Operating Costs and Capital Costs incurred during such preceding Calendar Quarter based on

the Cash Basis principle in accordance with paragraph 1.2 above;

(c) The value and volume of Cost Recovery Petroleum lifted by Contractor during the preceding

Calendar Quarter;

(d) Unrecovered Operating Costs and Capital Costs carried forward for recovery in succeeding

Calendar Quarters;

(e) The value and volume of Petroleum produced, used in Petroleum Operations, available for

lifting and actually lifted by the Parties, as at the end of the preceding Calendar Quarter;

(f) Profit Petroleum allocated to each of the Contractor Parties constituting Contractor, and

SOCAR, during the preceding Calendar Quarter.



71



APPENDIX 4

FORM OF CONTRACTOR PARTY'S ULTIMATE

PARENT COMPANY GUARANTEE

ULTIMATE PARENT COMPANY GUARANTEE

To: SOCAR or each Contractor Party, whichever is applicable

[Date]

Gentlemen



AZERBAIJAN - SHAH DENIZ PROSPECTIVE AREA

We refer to the Agreement on the Exploration, Development and Production Sharing for the Shah Deniz

Prospective Area in the Azerbaijan Sector of the Caspian Sea (the "Agreement") signed on

_____________

between the State Oil Company of the Azerbaijan Republic, SOCAR Commercial

Affiliate, BP Exploration (Azerbaijan) Limited, Elf Petroleum Azerbaijan B.V., LUKoil International Ltd.,

Statoil Azerbaijan A.S and Turkish Petroleum Overseas Company Limited.

[

] being the beneficial owner of [

] hereby guarantees that [ ] will provide

[

] with all

funds necessary for [

| to fulfil all of its obligations, financial or otherwise, under the Agreement.

This guarantee shall enter into force as from the Effective Date of the Agreement.

Payment under this Guarantee shall be made by [

] only after a default by [

] under the

Agreement has been established pursuant to an arbitration award against [

] and a copy of the award

to support the claim has been submitted to [

].

This Guarantee shall be governed by the same law as provided under the applicable law provision in the

Article 23.1 of the Agreement. Any dispute under this Guarantee shall be resolved by arbitration in the

same place and manner as provided in the Agreement.

Yours faithfully

____________________

for and on behalf of



72



APPENDIX 5

GUARANTEE AND UNDERTAKING

OF THE GOVERNMENT

OF THE AZERBAIJAN REPUBLIC

To:

BP Exploration (Azerbaijan) Limited

Elf Petroleum Azerbaijan B.V.

LUKoil International Ltd

Oil Industries Engineering and Construction

Statoil Azerbaijan A.S

Turkish Petroleum Overseas Company Limited

Gentlemen,

AZERBAIJAN - SHAKH DENIZ PROSPECTIVE AREA

We the Government of the Azerbaijan Republic (the "Government") have full knowledge of the

Agreement on the Exploration, Development and Production Sharing for the Shah Deniz Prospective

Area in the Azerbaijan Sector of the Caspian Sea ("Agreement") signed on

day of

1996

between the State Oil Company of the Azerbaijan Republic ("SOCAR"), being a company under the

jurisdiction of and owned by the Government, of the First Part, and SOCAR Commercial Affiliate (“SCA)”,

BP Exploration (Azerbaijan) Limited ("BP"), Elf Petroleum Azerbaijan B.V. (“Elf”), LUKoil International Ltd

(“LUKoil”), Oil Industries Engineering and Construction (“OIEC), Statoil Azerbaijan A.S ("Statoil") and

Turkish Petroleum Overseas Company Limited ("TPAO") (SCA, BP, Elf, LUKoil, OIEC, Statoil and TPAO

together constituting “Contractor”) of the Second Part.

The Government hereby guarantees, undertakes and agrees as to each Contractor Party severally as

follows:

1.



The Government hereby guarantees:

(a) those rights granted or to be granted by SOCAR to the Contractor under the Agreement; and

(b) those obligations undertaken or to be undertaken by SOCAR under the Agreement; and

(c) that the Government has and shall maintain throughout the entire duration of the Agreement

sole and exclusive jurisdiction over the Contract Area and that SOCAR has full authority to

grant the rights and interests to the Contractor as provided in the Agreement; and

(d) that the Government shall at no time during the entire duration of the Agreement enter into any

treaties, intergovernmental agreements or any other arrangements which would, in any

manner, diminish, infringe upon, nullify or derogate from the rights and interests of the

Contractor under the Agreement; and that any treaties, intergovernmental agreements and any

other arrangements which the Government might enter into which would in any way concern

the Contract Area and/or the Contractor's rights and interests under the Agreement will include

an express recognition and preservation of the rights and interests of the Contractor under the

Agreement; and

(e) that none of the Contractor Party's rights, interests or property shall be expropriated,

nationalised or otherwise taken by reason of any act of any authority of the Azerbaijan

Republic. In the event, however, that, notwithstanding the provisions of this Guarantee and

Undertaking ("Guarantee"), any such expropriation, nationalisation or other taking of any of the



73



Contractor Party's rights, interests or property (including undeveloped reserves) occurs, the

Government shall provide full and prompt compensation in Dollars at the full market value

determined on the basis of a going concern utilising the discounted cash flow method,

assuming a willing buyer and a willing seller in a non-hostile environment and disregarding the

unfavourable circumstances under which or following which such Contractor Party has been

deprived of its rights, interests or property. The Government shall submit itself to the jurisdiction

of the arbitration panel as provided in Paragraph 4 below and the arbitration panel shall select

an investment bank of good international reputation for the purpose of appraising the full

market value of said rights, interests and property of each such Contractor Party on the

principles stated herein; and

(f) that no grant of rights to explore for and develop Petroleum reserves in the Contract Area shall

be given or permitted to be given to any parties other than the Contractor during the term of the

Agreement and any extensions thereof, except as otherwise expressly provided in the

Agreement; and

(g) that, to the extent legislation does not already exist in the Azerbaijan Republic, the Government

shall take all measures to enact such legislation as is necessary to enable foreign flag vessels

to be registered under the Azerbaijan flag, without requiring a change in the ownership of such

vessels, so that such vessels qualify to operate in the Caspian Sea without violation of any

treaties; and

(h) that all of the provisions in the Azeri and Russian language versions of the Agreement

accurately convey the same meaning as all of the provisions set forth in the English language

version of the Agreement.

2.



In addition the Government agrees and undertakes that within the framework of its authority all

measures will be taken forthwith to enact the Agreement and this Guarantee into law so as to

ensure that all rights, privileges and exemptions granted under the Agreement and this Guarantee

to the Contractor, Contractor's Affiliates and their Sub-contractors, as well as the Operating

Company and any other entity established by Contractor pursuant to the Agreement, have full legal

force and effect, and in particular:

(a) to provide the Contractor with the necessary licenses, permits and approvals, permissions and

authorisations whether from the Government, its ministries or other official bodies in the

Azerbaijan Republic, required by Contractor to enable it to carry out Petroleum Operations,

exercise its rights and fulfil its obligations in accordance with the provisions of the Agreement;

and

(b) to provide the Contractor with the necessary licenses, permits and approvals, customs

clearances, visas, residence permits, licenses to enter land or water and import and export

licenses, as well as the right to open bank accounts, lease or acquire office space and

employee accommodation, operate communication facilities and to do all other such matters as

may be necessary for efficient implementation of the Petroleum Operations; and

(c) to ensure that the Contractor has, in accordance with the Agreement, access for its share of

Petroleum to all necessary transportation, treatment and export facilities and infrastructure in

the Azerbaijan Republic, as well as access to land required by the Contractor for Petroleum

Operations, and that such access to any such facilities, infrastructure or land owned or

controlled by the Government (other than through SOCAR) is on terms no less favourable to

the Contractor than the best terms granted or agreed with any other bona fide arm's length user

of such facilities and infrastructure; and

(d) to use its best endeavours, whether itself, or with other Azerbaijan authorities or Third Parties,

to ensure that the Contractor has access to, inter alia, onshore construction and fabrication

facilities, supply bases and vessels, warehousing, means of transportation, goods and services

in the Azerbaijan Republic, and that such access is on terms no less favourable to the

Contractor than the best terms granted to or agreed with any other bona fide arm's length user

of such facilities and services, and at rates commensurate with the quality and efficiency of



74



such facilities and services, which shall in no circumstances exceed prevailing international

market rates for such facilities and services outside the Azerbaijan Republic; and

(e) to use its best endeavours, whether itself, with other Azerbaijan authorities or Third Parties, to

assist the Contractor in obtaining such rights, privileges, authorisations, approvals and other

agreements from authorities and jurisdictions outside the territory of the Azerbaijan Republic as

the Contractor shall reasonably deem necessary for the Petroleum Operations. Such

agreements may include, but need not be limited to, such matters as export pipeline rights,

rights of way and operation rights, permits and undertakings with respect to the transhipment,

storage or staging of Petroleum produced and saved from the Contract Area, material

equipment and other supplies destined to or from the territory of the Azerbaijan Republic, and

exemptions from national, local and other taxes, duties, levies, imposts, transit fees, and other

fees and charges on Petroleum Operations being conducted in such other jurisdictions; and

(f) that the only abandonment obligations of the Contractor shall be as set forth in the Agreement

and in particular Contractor shall have no liability for abandonment of any fixed assets which

have been taken over by SOCAR upon Contractor's notice of its intention to abandon them;

and

(g) that liabilities and exemptions of each Contractor Party (and, where relevant, Affiliates, Third

Parties and Operating Company, including employees and Sub-contractors of any of them) with

respect to Taxes shall be as set out in the Agreement, and SOCAR shall not receive from the

Government any funds or other benefit (including without limitation any rebate, refund, tax

credit or deduction, payment or discharge of any obligation) which is determined, directly or

indirectly, by reference either to the amount of Taxes for which any of the Contractor Parties is

liable or by the Taxable Profit(s) of any of the Contractor Parties; and

(h) to ensure the banking and currency exchange rights provided for in the Agreement, including

the granting to Contractor of the right to freely retain, whether in the Azerbaijan Republic or

elsewhere, and dispose of all of the Contractor's proceeds from the export and/or sale of

Petroleum, and the free and unfettered right of repatriation of all proceeds from the Contractor's

activities in relation to Petroleum Operations; and

(i) that the rights and interest accruing to the Contractor (or its assignees) under the Agreement

and the Guarantee shall not be amended, modified or reduced without the prior consent of the

Contractor. In the event any Azerbaijan treaty, intergovernmental agreement, law, decree or

administrative order which contravenes or conflicts with the provisions of the Agreement and/or

this Guarantee or adversely affects the rights or interests of the Contractor thereunder,

including any changes in jurisdiction over the Contract Area, tax legislation, regulations or

administrative practice, then the Government shall indemnify Contractor (and its assignees) for

any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom.

The Government will take appropriate measures to resolve promptly in accordance with the

foregoing principles any conflict or anomaly between the Agreement and/or the Guarantee and

such treaty, intergovernmental agreement, law, decree or administrative order; and

(j) in recognition that continued access to any canal and river system servicing the Caspian Sea

by Contractor is vital to maintain the economic parameters under the Agreement, to use its best

endeavours, whether by itself or with other Azerbaijan authorities, to ensure that the Contractor

and its Sub-contractors have uninterrupted access to transit for its equipment, goods, materials

and supplies through the said canal and river system on terms no less favourable to Contractor

and its Sub-contractors than the best terms granted to or agreed with any other bona fide arm's

length user of the said canal and river system; and

(k) to ensure observance of confidentiality with regard to any confidential information or data

disclosed to the Government and Governmental Authorities; and

(l) to ensure that, upon approval by the Parliament of the Azerbaijan Republic of the Agreement,

the Agreement shall constitute a law of the Azerbaijan Republic and in the event of any conflict



75



or inconsistency with any other law of the Azerbaijan Republic the provisions of the Agreement

shall prevail.

3.



The privatisation, insolvency, liquidation, reorganisation or any other change in the structure or

legal existence of SOCAR shall not affect the obligations of the Government hereunder. The

Government shall, throughout the entire duration of the Agreement, ensure that the rights and

obligations of SOCAR under the Agreement are always vested in and undertaken by an entity

authorised to and capable of performing such obligations, failing which the Government itself shall

perform directly all such obligations of SOCAR under the Agreement.



4.



Any dispute between the Government and the Contractor concerning this Guarantee shall be

resolved by arbitration in the same place and manner and in accordance with the same principles

as provided in the Agreement. For the purposes of allowing such arbitration and enforcement and

execution of any arbitration decision, award, issuance of any attachment, provisional remedy or

other pre-award remedy, the Government hereby waives all rights to claim sovereign immunity.



5.



The rights and interests accorded to a Contractor Party under this Guarantee shall enure for the

benefit of any successor or assignee of such Contractor Party.



6.



This Guarantee shall enter into force upon its execution and shall, unless the Government and the

Contractor agree otherwise, remain in force and apply to the Agreement (as amended from time to

time) for its entire duration and for such longer time as may be necessary for enforcement of any

rights accruing to any of the Contractor Parties hereunder or under the Agreement.



7.



Words and phrases used in this Guarantee and which are defined in the Agreement shall have the

same meaning as in the Agreement.



8.



This Guarantee shall be governed by and interpreted in accordance with the principles of the

applicable law provisions set out in the Agreement.



IN WITNESS WHEREOF the authorised representative of the Government has executed this Guarantee

and Undertaking in Baku on ______________, 1996

For and on behalf of

THE GOVERNMENT OF THE AZERBAIJAN REPUBLIC

_____________________________________________



76



APPENDIX 6

ARBITRATION PROCEDURE

1.1



Except as otherwise provided in this Agreement, all disputes arising between SOCAR and any or

all of the Contractor Parties, including without limitation, any dispute as to the validity, construction,

enforceability or breach of this Agreement, which are not amicably resolved by the Parties in

accordance with the provisions of Article 23.3 (a) shall be finally settled before a panel of three (3)

arbitrators under the Arbitration Rules of The United Nations Commission on International Trade

Law known as UNCITRAL (the "Rules"). In the event the Rules fail to make provision for any matter

or situation the arbitration tribunal shall establish its own rules to govern such matter and

procedure and any such rules so adopted shall be considered as a part of the Rules. For purposes

of allowing such arbitration, and enforcement and execution of any arbitration decision, award,

issuance of any attachment, provisional remedy or other pre-award remedy, each Party waives any

and all claims to immunity, including, but not limited to, any claims to sovereign immunity.



1.2



The arbitration shall be held in Stockholm, Sweden. The language used during the procedure shall

be the English language and the English language text of this Agreement will be utilised by the

arbitrators.



1.3



After providing thirty (30) days prior written notice to the other Party of intent to arbitrate, either

SOCAR or Contractor may initiate arbitration (the Party initiating the arbitration shall hereinafter be

called the "First Party") submitting a request for arbitration to the Secretary General of the

Permanent Court of Arbitration in the Hague, as provided in the Rules, and appointing an arbitrator

who shall be identified in said request. Within thirty (30) days of receipt of a copy of the request the

other Party to the dispute ("Second Party") shall respond, identifying the arbitrator that it has

selected. If the Second Party does not so appoint its arbitrator, the Secretary General of the

Permanent Court of Arbitration in the Hague shall appoint a second arbitrator in accordance with

the Rules. The two arbitrators shall, within thirty (30) days, select a third arbitrator failing which the

third arbitrator shall be appointed by the Secretary General of the Permanent Court of Arbitration in

the Hague, in accordance with the Rules. Unless otherwise agreed in writing by the Parties, the

third arbitrator to be appointed shall not be a citizen of a country in which any Party (including the

Ultimate Parent Company of such Party) is incorporated.



1.4 The Parties shall extend to the arbitration tribunal all facilities (including access to the Petroleum

Operations and facilities) for obtaining any information required for the proper determination of the

dispute. Any Party shall be allowed only one absence or default beyond its reasonable control which

prevents or hinders the arbitration proceeding in any or all of its stages. Additional absences, or

absences which are within a Party's reasonable control, shall not be allowed to prevent or hinder the

arbitration proceeding.

1.5



Without limiting the generality of their powers, the arbitrators shall have the power to award costs

and damages as necessary with respect to the Government Guarantee with respect to Article 23.2.



1.6



The arbitration tribunal's award shall be final and binding on the Parties and shall be immediately

enforceable. Judgement on the award rendered may be entered and execution had in any court

having jurisdiction or application may be made to such court for a judicial acceptance of the award

and an order of enforcement and execution, as applicable.



1.7



Each Party shall pay the costs of its own arbitrator and the costs of the third arbitrator in equal

shares, and any costs imposed by the Rules shall be shared equally by the Parties.

Notwithstanding the above, the arbitrators may, however, award costs (including reasonable legal

fees) to the prevailing Party from the losing Party. In the event that monetary damages are

awarded, the award shall include interest from the date of the breach or other violation to the date

when the award is paid in full. The rate of interest shall be LIBOR plus four (4) percent over the

period from the date of the breach or other violation to the date the award is paid in full. Each Party

waives any and all requirements of any national law relating to notice of a demand for interest or

damage for the loss of the use of funds.



77



APPENDIX 7

CRUDE OIL AND NATURAL GAS MEASUREMENT AND EVALUATION PROCEDURE

1.1



General

This Appendix 7 describes the method of measuring and evaluating the Petroleum produced from

the Contract Area.



1.2



Crude Oil Measurement.

(a) Custody Transfer Meters. Contractor will have custody transfer meters permanently installed at

the Delivery Point. The custody transfer meters will be capable of accurately measuring and

evaluating the specific type and quantity of Crude Oil produced in the Contract Area and will be

comprised of all necessary meters, meter testing devices, instruments, and other associated

equipment necessary to measure, evaluate and record the quantity, quality and physical

characteristics of the Crude Oil from the Contract Area. Contractor will use the custody transfer

meters for measurement and evaluation of the Crude Oil from the Contract Area.

(b) Contractor will also provide necessary tools and instruments to measure BS&W and American

Petroleum Institute ('API') gravity and shall store such tools and instruments in an appropriate

laboratory. Contractor shall test and calibrate the accuracy of the meters being used in

accordance with generally accepted international Petroleum industry practice whenever

necessary and in any event at least once per month. All testing and calibration will be

witnessed both by SOCAR and by Contractor with detailed reports and results signed by two

(2) representatives from each of SOCAR and Contractor.



1.3



Timing of Crude Oil Measurement.

Official meter readings for accounting purposes will be monitored not less than weekly for purposes

of providing production and Crude Oil shipment data. Information obtained from these readings will

be reported to SOCAR and Contractor. The actual times of meter readings will be determined by

Contractor with timely notification to SOCAR. SOCAR and Contractor will each have the right to

have two (2) representatives present to witness meter readings and sign meter tickets.



1.4



Natural Gas Measurement.

The quantity of Natural Gas delivered under this Agreement will be determined from data obtained

from orifice meter runs using API standards and procedures. The type of Natural Gas meters to be

installed will be determined by Contractor. The measurement and evaluation system installed will

be comprised of all the necessary meters, instruments and other associated equipment necessary

to record the quantity, quality and physical characteristics of the Natural Gas. The entire Natural

Gas metering system will have a backup and be capable of continuously recording throughput data

at all times. The Natural Gas meters will be calibrated at least once per month with calibration

records witnessed and signed by representatives of both SOCAR and Contractor.



1.5



Petroleum Measurement Procedures

(a) Unless Contractor and SOCAR agree otherwise, API standards and procedures will be used to

measure and evaluate Petroleum flowing through the equipment. The API standards and

procedures will be taken from or provided by the APl's Standard Method of Sampling and

Manual of Petroleum Measurement Standards. A copy of the standards and procedures (and

updates and reviews thereof) will be provided by Contractor and will be available both to

SOCAR and to Contractor at all times.

(b) Specialists from Contractor and SOCAR shall meet to agree appropriate detailed Petroleum

measurement and evaluation procedures to be implemented as soon as practicable after

approval of the Development Programme.



78



APPENDIX 8

DESIGN STANDARDS AND SPECIFICATIONS

All new production facilities and all new equipment added as part of a modification programme to

existing facilities, will be designed in accordance with current international standards, modified where

appropriate for the specific requirements of the Caspian Sea conditions.

Existing facilities were designed to the standards appropriate at the time of their construction. They will

not be modified to comply with international standards except where determined necessary by

Contractor for the safe operation of new equipment.

The design specifications used will be based on current standards and recommended practice as

published by recognised international engineering organisations and associations, some of which are

listed below. The design specifications may also include additional requirements developed from these

international standards by Contractor.

API

ANSI

ASME

ASTM

BSI

CEN

CENELEC

DIN

IEC

IEEE

IP

ISA

ISO

NACE

NEMA

NFPA

-



American Petroleum Institute

American National Standards Institute

American Society of Mechanical Engineers

American Society for Testing and Materials

British Standards Institution

European Committee for Normalisation

- European Committee for Electrotechnical Standards

The German Institute for Standards

International Electrotechnical Commission

Institute of Electrical and Electronics Engineers (USA)

Institute of Petroleum (UK)

Instrument Society of America

International Organisation for Standardisation

National Association of Corrosion Engineers (USA)

National Electrical Manufacturers Association (USA)

National Fire Prevention Association (USA)



79



APPENDIX 9

ENVIRONMENTAL STANDARDS AND PRACTICES

I.



Integrated Management System

A. Environmental Sub-Committee

1. The formation and organisation of an environmental sub-committee of the Steering

Committee shall be set forth in a proposal of Contractor which will be submitted to SOCAR

for approval. Once approved by SOCAR, the Environmental Sub-Committee shall be

formed in accordance with the approved recommendation and shall be composed of

environmental representatives of Contractor Parties and SOCAR, the State Committee of

the Azerbaijan Republic on Ecology and Control over the Use of Natural Resources,

Azerbaijan Academy of Sciences and other relevant research institutes.

2. Responsibilities of the environmental sub-committee shall be to:

-



design monitoring program for monitoring of selected environmental parameters

co-ordinate monitoring program

review results and propose recommendations

publish annual report



B. Environmental Work Programme

The environmental work programme to be pursued during Petroleum Operations pursuant to

Article 26.2 shall be phased as follows:

1. For seismic surveys

- Environmental impact assessment

- Health, safety and environmental management plan for seismic operations, including

emergency procedures, oil spill contingency plan, waste management plan and an audit

programme

2. For exploration drilling

- Drilling environment impact assessment

- Baseline environmental study

- Environmental monitoring programme

- Health, safety and environment management plan for exploration drilling, including

emergency procedures, oil spill contingency plan, waste management plan (including

drill cuttings disposal) and an audit programme.

3. For development and production

The environmental work programme for the Development and Production Period shall be

submitted together with the Development Programme to SOCAR for approval.

II.



Environmental Standards

The following are general and specific guidelines relating to discharges associated with oil and

natural gas exploration and production activities.

A. General Guidelines

1. There shall be no discharge of waste oil, produced water and sand, drilling fluids, drill

cuttings or other wastes from exploration and production sites except in accordance with

the following guidelines.

2. There shall be no unauthorised discharges directly to the surface of the sea. All discharges

authorised by these guidelines shall be controlled by discharging into a caisson whose



80



open end is submerged, at all times, a minimum of two (2) feet below the surface of the

sea.

B. Discharge Guidelines and Monitoring

1. Produced Water

Contractor will endeavour to utilise produced water for reservoir pressure maintenance if,

through standard compatibility testing with Caspian Sea water, no damage to the reservoir

resulting in a reduction in overall hydrocarbon recovery would occur by mixing the two water

streams. In the event that the two water streams are compatible, Contractor may only

discharge a volume of produced water after treatment to the Caspian Sea that exceeds the

total volume required for reservoir pressure maintenance or in the event of an emergency,

accident or mechanical failure. In the event that the two water streams are not compatible,

Contractor may discharge produced water to the Caspian Sea after treatment in

accordance with generally accepted international Petroleum industry standards and

practices.

2. Drill Cuttings and Drilling Fluids

(a) There shall be no discharge of oil based drilling fluids, other than low toxicity and

biodegradable drilling fluids.

(b) There shall be no discharge of drill cuttings generated in association with the use of oil

based drilling fluids, invert emulsion drilling fluids, or drilling fluids that contain radiation,

if any, waste engine oil, cooling oil, gear oil, or other oil based lubricants, other than

cuttings generated in association with the use of low toxicity and biodegradable drilling

fluids.

(c) There shall be no discharge of drill cuttings or drilling fluids if the maximum chloride

concentration of the drilling fluid system is greater than four (4) times the ambient

concentration of the receiving water.

(d) Prior to the start of the drilling programme, a drilling mud system will be designed and

laboratory tested under the U.S. EPA, 96-hour acute toxicity test using mycid shrimp or

other indicator organisms of the Caspian Sea agreed between Contractor and SOCAR.

Those muds biodegradable and of low toxicity will be authorised for discharge during

the drilling programme.

(e) During drilling operations, mud samples will be collected periodically to determine

toxicity using procedures established for the Caspian Sea.

(f) The composition of the mud system may be altered as necessary to meet changes in

the drilling operations. The modified mud system may be discharged if it has been

shown to meet the above limits for discharge on oil, salinity and toxicity.

3. Other Wastes

(a) Sanitary waste may be discharged from a U.S. Coast Guard certified or equivalent

Marine Sanitation Device (MSD) with total residual chlorine content greater than 0.5 mg/l

but less than 2.0 mg/l as long as no floating solids are observable. The Hach method

CN-66-DPD test shall be used to measure the residual chlorine.

(b) Domestic wastes and gray water may be discharged as long as no floating solids are

observable.

(c) Desalinisation unit wastes shall be discharged.



81



(d) Deck drainage and wash water may be discharged as long as no visible sheen is

observable. Oily and clean drainage or wash water shall be segregated; clean water

shall be discharged to the sea and oily water shall be treated as provided in B.1 above.

(e) Trash shall not be discharged offshore. Trash shall be transported to an appropriate

land-based disposal facility.

4.



Monitoring

(a) Produced water

(1) The volume of produced water discharged and concentration of oil and grease

contained in the discharge will be monitored daily.

(2) The daily and monthly average oil and grease concentration will be reported to the

appropriate environmental authority monthly.

(b) Drill Cuttings and Drilling Fluids

(1) An inventory of drilling fluids additives and their volumes or mass added to the

drilling fluid system will be maintained for each well.

(2) Drilling fluid properties, including volume percent oil and concentration of chlorides,

will be monitored daily for each well.

(3) The estimated volume of drill cuttings and drilling fluids discharged shall be recorded

daily and reported monthly to the appropriate environmental authority.

(c) Other Wastes

The estimated volume of other wastes discharged shall be recorded daily and reported

monthly to include:

(i) Sanitary waste

(ii) Domestic waste

(iii) Deck drainage and wash water



C. Air Emission Guidelines and Monitoring

Contractor is authorised to discharge air emissions. Such discharges will be limited and

monitored in accordance with generally accepted international Petroleum industry standards

and practices.

D. Safety Guidelines

Contractor shall take into account subject to the provisions of Article 26.1 relevant Azerbaijani

regulations and the following international safety and industrial hygiene standards in conducting

its Petroleum Operations under the Agreement:

1. Oil Industry International Exploration and Production Forum (E&P Forum) Reports - HSE

Management

2. International Association of Drilling Contractors (IADC) - Drilling Safety Manual

3. International Association of Geophysical Contractors (IAGC) - Operations Safety Manual

4. Threshold Limited Values for Chemical Substances in the Work Environment - American

Conference of Governmental Industrial Hygienists



82



APPENDIX 10

EXPLORATION WORK PROGRAMME

For the purposes of exploring the oil and gas potential within the Contract Area Contractor shall carry out

a programme of work as described in Article 4 in accordance with the following guidelines:

(i)



Shoot, process and interpret three dimensional seismic which may for operational reasons upon

SOCAR's approval be shot partially outside the Contract Area; and



(ii)



Carry out an upper section site investigation survey to ensure a safe and environmentally sound

base for drilling; and



(iii)



Drill in the Contract Area two (2) exploration (поисковых) wells to ascertain the presence of oil and

gas in the prospective horizons. During the Exploration Period one (1) well shall be drilled to a

depth of fifty (50) metres below the base of the Kalinskaya Suite or to a depth of six thousand five

hundred (6500) metres subsea, whichever occurs first. If in Contractor's opinion the target depth

can not be met due to operational and safety concerns Contractor shall only be obliged to drill to a

maximum depth of six hundred (6000) metres subsea subject to SOCAR's approval which shall not

be unreasonably withheld. The other well shall be drilled to a depth of fifty (50) metres below the

base of the Pereryv Suite or to a depth of five thousand eight hundred (5800) metres subsea,

whichever occurs first.



(iv)



During the Additional Exploration Period, Contractor shall drill one (1) well to a depth of fifty (50)

metres below the base of the Pereryv Suite or to a depth of six thousand (6000) metres subsea,

whichever occurs first.



(v)



Exploratory wells drilled as set out in (iii) and (iv) shall have the objective of further defining the

areal extent, downdip limits and reservoir properties of any Petroleum found within the Contract

Area. Drilling of such wells shall be accomplished with conventional core acquisition techniques

according to international Petroleum industry standards.



(vi)



To evaluate the wells an appropriate logging and testing programme may include but not be limited

to the following:

(a) at the conductor casing point, gamma ray and neutron log (from approximately conductor

setting point to seafloor);

(b) at the surface casing point, gamma ray log, induction logs, sonic log, density and neutron logs,

sidewall cores as appropriate (from approximately surface casing point to conductor casing

shoe through the Surakhanskaya, Akchagyl and Apsheron Suites);

(c) at the intermediate casing point, gamma ray log, induction logs, sonic log, density and neutron

logs, microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as

appropriate (from approximately intermediate casing setting point to surface casing shoe

through the upper Balakhanskaya and Sabunchinskaya Suites);

(d) at the final casing point, gamma ray log, induction logs, sonic log, density and neutron logs,

microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate

(from approximately liner casing point to the intermediate casing shoe through the

Balakhanskaya Suite);

(e) at total drilled depth, gamma ray log, induction logs, sonic log, density and neutron logs,

microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate

(from approximately production casing point to the linear casing shoe through the Pereryv and

lower Balakhanskaya Suites) as well as a vertical seismic profile log (VSP) taken at intervals

between total depth to seafloor;

(f) drill stem tests (DST's) of major productive horizons as appropriate.



(vii) Contractor shall have the right, but not the obligation, to sidetrack any exploration wells, drill to

greater depths or drill additional exploration wells within the Contract Area for the purposes of

obtaining additional geological information.

(viii) All reporting and records pertaining to exploration drilling and evaluation shall be submitted

according to Article 7 of this Agreement.



83



(FIRST ) ADDENDUM

to

Agreement on the Exploration, Development and Production Sharing for the Shah Deniz

Prospective Area in the Azerbaijan Sector of the Caspian Sea

relating to the formation of SOCAR Commercial

Affiliate

between

The State Oil Company of the Azerbaijan Republic

and

BP Exploration (Azerbaijan) Limited,

Elf Petroleum Azerbaijan B.V.,

LUKoil International Ltd,

Oil Industries Engineering and Construction,

Statoil Azerbaiajan A.S.,

Turkish Petroleum Overseas Company Limited

This Addendum is made and entered even date with the Agreement on the Exploration, Development and

Production Sharing for the Shah Deniz Prospective Area in the Azerbaijan Sector of the Caspian Sea

(hereinafter called “EDPSA”) between:

THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC (hereinafter called SOCAR) a Government

body on the one hand and

BP EXPLORATION (AZERBAIJAN) LIMITED, a company incorporated in England, ELF PETROLEUM

AZERBAIJAN B.V., a company incorporated in the Netherlands, LUKOIL INTERNATIONAL LIMITED, a

company registered in the Republic of Ireland, OIL INDUSTRIES ENGINEERING and CONSTRUCTION, a

company incorporated in the Islamic Republic of Iran, STATOIL AZERBAIJAN A.S., a company

incorporated in Norway and TURKISH PETROLEUM OVERSEAS COMPANY LIMITED, a company

incorporated on the Island of Jersey (hereinafter called “the Contractor Parties”) on the other hand.

The entities named above may sometime be referred to individually as “Party” and collectively as “Parties”.

WHEREAS:

1.



SOCAR has informed Contractor Parties that SOCAR Commercial Affiliate (hereinafter called

”SCA”) has not yet been formed; and



2.



SOCAR is willing and fully empowered to assume and be bound by all obligations and liabilities of

SCA under the EDPSA pursuant to the resolutions of the Board of SOCAR dated

a certified

extract of which is attached hereto as Exhibit 1; and



3.



SOCAR and Contractor Parties have agreed that Contractor Parties shall rely upon SOCAR to act

on behalf of SCA pending the formation of the SCA and SCA’s written ratification of the EDPSA as

hereinafter appears.



84



NOW THEREFORE, in consideration of Contractor Parties entering into the EDPSA of even date herewith

the Parties hereby agree as follows:

1.



The Parties agree that SOCAR shall be responsible for all obligations of SCA under the EDPSA and

shall act on behalf of SCA, until such time as: (i) SCA has been duly organised and is validly existing

in accordance with the law of its country of incorporation and with its charter; (ii) SCA has ratified its

participation in the EDPSA and this Addendum through a resolution of its Board of Directors; (iii) SCA

has ratified all actions taken by SOCAR on behalf of SCA and all actions taken by Contractor Parties

pursuant to Paragraph 2 herein; and (iv) SCA delivers to the Contractor Parties all documents

evidencing (i), (ii) and (iii) above. The parties may place reliance on the actions of SOCAR taken on

behalf of SCA and all action taken by Contractor Parties pursuant to Paragraph 2 herein as if taken

by SCA itself until such time as the event and actions required in (i), (ii) and (iii) and (iv) above have

occurred.



2.



The parties agree that pending organization of SCA and pending the occurrence of all the events

and actions (including but not limited to the authorization and ratification of the EDPSA and this

Addendum by SCA) required in Paragraph 1 above, the Contractor Parties shall be entitled to enter

into any agreement which is necessary or expedient for the performance of the EDPSA (such as, but

not limited to the joint operating agreement or any agreement for the purchase of services and

goods). SCA shall be bound by any agreement entered into by the Contractor Parties prior to the

events and actions required in Paragraph 1 above and shall ratify all such actions taken by the

Contractor Parties promptly after it is duly organised and is validly existing and shall in writing agree

to observe and perform all the terms and conditions of any such joint operating agreement.



3.



SOCAR hereby undertakes that: (i) SCA shall be duly organised and validly existing as soon as

possible after the execution of this Addendum; (ii) SOCAR shall ensure that SCA authorises and

ratifies its participation in the EDPSA and this Addendum through a resolution of its Board of

Directors promptly after it is duly organised and is validly existing; (iii) SOCAR shall ensure that SCA

ratifies all actions taken by SOCAR on behalf of SCA and all actions taken by the Contractor Parties

pursuant to Paragraph 2 herein promptly after it is duly organised and validly existing; and (iv)

SOCAR shall ensure that SCA delivers to the Parties all documents evidencing (i), (ii) and (iii)

promptly after it is duly organised and validly existing.



4.



The Parties agree that the condition precedent set forth in Article 25.1 (a)(i) of the EDPSA requiring

authorisation by the Board of Directors of each of the parties to the EDPSA to enter into the EDPSA

has been satisfied in relation to SCA by the issuance of the resolution of the Board of SOCAR dated

attached hereto as Exhibit 1.



5.



SOCAR hereby undertakes to cause SCA to deliver to each of the Contractor Parties SCA’s

Ultimate Parent Company Guarantee promptly after SCA is formed and validly existing and this

undertaking is hereby agreed to satisfy the condition precedent set forth in Article 25.1 (a) (ii) of the

EDPSA.



6.



This Addendum modifies and/or amends the relevant terms and conditions of the EDSA as set forth

herein and shall be considered for all purposes a part of the EDPSA and shall accordingly be given

the full force of law in the Azerbaijan Republic as provided in Article 25.1 of the EDPSA.



7.



Any disputes arising out of or in connection with this Addendum shall be resolved as set forth in

Article 23.3 of the EDPSA and the law governing this Addendum shall be as set forth in Article 23.1 of

the EDPSA.



85



IN WITNESS WHEREOF the Parties have executed this Addendum as of the 4 day of June 1996 by their

duly authorised representatives.

For and on behalf of the

State Oil Company of the Azerbaijan Republic

By ___________________________________

Title ______The President of SOCAR_______



By ______________________________

Title ______General Manager________



For and on behalf of

BP Exploration (Azerbaijan) Limited

By ___________________________________

Title ____Deputy Chief Executive Officer____



By ______________________________

Title ____Manager (Azerbaijan)_______



For and on behalf of

Elf Petroleum Azerbaijan B.V.

By ___________________________________

Title __Chairman and C. E. O._____________



By ______________________________

Title ____Senior Vice President ______



For and on behalf of

LUKoil International Ltd.

By ___________________________________

Title _______ First Vice President _______



By ______________________________

Title _________Vice President________



For and on behalf of

Oil Industries Engineering and Construction

By ___________________________________

Title __Managing Director_________________



By ______________________________

Title ___Marketing Director __________



For and on behalf of

STATOIL Azerbaijan A.S.

By ___________________________________

Title ___Senior Vice President _____________



By ______________________________

Title ____Vice President_____________



For and on behalf of

Turkish Petroleum Overseas Company Limited

By ___________________________________

Title ____ General Manager _______________



By ______________________________

Title ____Group Manager ___________



86



EXHIBIT 1

to Addendum to Agreement on the Exploration,

Development and Production Sharing for the

Shah Deniz Prospective Area in the Azerbaijan

Sector of the Caspian Sea

Extract of Resolutions of the Board of the State Oil Company of the Azerbaijan Republic. A meeting was

held on

day of

1996 by the Board of the State Oil Company of the Azerbaijan

Republic (hereinafter “SOCAR”) WHEREBY IT WAS RESOLVED as follows:

1.



that an affiliated entity of SOCAR be formed as soon as possible to act as the SOCAR

Commercial Affiliate under the Agreement on the Exploration, Development and Production Sharing

for the Shah Deniz Prospective Area in the Azerbaijan Sector of the Caspian Sea (hereinafter “Shah

Deniz EDPSA”).



2.



that SOCAR be responsible for all the obligations of the SOCAR Commercial Affiliate under the

Shah Deniz EDPSA and the Addendum to the Shah Deniz EDPSA relating to the formation of

SOCAR Commercial Affiliate (hereinafter “the Addendum”) and if required by the other parties to the

Shah Deniz EDPSA, shall act on behalf of such entity until such entity has been duly organised and is

validly existing in accordance with the law of its country of incorporation and its charter.



3.



that SOCAR shall ensure that, promptly after the entity to act as SOCAR Commercial Affiliate

has been formed and is validly existing, the Board of Directors of that entity (hereinafter “SCA”) shall:



4.



(i)



pass a resolution ratifying the entry into the Shah Deniz EDPSA and the Addendum on

SCA’s behalf by SOCAR.



(ii)



pass a resolution ratifying all actions taken by SOCAR on SCA’s behalf and all actions

taken by the Contractor Parties on SCA’s behalf.



(iii)



provide each party to the Addendum with written notice of SCA’s unqualified ratification

of the terms of the Shah Deniz EDPSA and the Addendum and documents evidencing

the passing of the resolutions referred to in (i) and (ii) above.



that submission of the following documents be made to the Milli Majlis of the Azerbaijan Republic for

ratification and enactment after the execution thereof:

- The Shah Deniz EDPSA

- The Addendum

- The Government Guarantee in the form appearing in Appendix 5 of the Shah Deniz EDPSA



Certified to be a true copy of the Resolutions of the Board of the State Oil Company of the Republic of

Azerbaijan

By Secretary of State Oil Company Council

Rafig Abdullayev

Baku



1996



I certify the signature performed in my presence

on



1996



Signed by

Title



87



SECOND ADDENDUM

to

Agreement on Exploration, Development and Production Sharing for the Shah Deniz Prospective

Area in the Azerbaijan Sector of the Caspian Sea

between

The State Oil Company of the Azerbaijan Republic

and

SOCAR Commercial Affiliate,

BP Exploration (Azerbaijan) Limited,

Elf Petroleum Azerbaijan B.V.,

LUKoil International Ltd,

Oil Industries Engineering and Construction,

Statoil Azerbaijan A.S.,

Turkish Petroleum Overseas Company Limited,



This Addendum is made and entered among and between:

THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC, a Government body, SOCAR

COMMERCIAL AFFILIATE, a company to be formed by the State Oil Company of Azerbaijan Republic, BP

EXPLORATION (AZERBAIJAN) LIMITED, a company incorporated in England, ELF PETROLEUM

AZERBAIJAN B. V., a company incorporated in Netherlands, LUKOIL INTERNATIONAL LIMITED, a

company registered in the Republic of Ireland, OIL INDUSTRIES ENGINEERING AND CONSTRUCTION,

a company incorporated in the Islamic Republic of Iran, STATOIL AZERBAIJAN A.S., a company

incorporated in Norway and TURKISH PETROLEUM OVERSEAS COMPANY LIMITED, a company

incorporated on the Island of Jersey (hereinafter called “the Parties”).

WHEREAS the Parties wish to amend the Agreement on Exploration, Development and Production Sharing

for the Shah Deniz Prospective Area in the Azerbaijan Sector of the Caspian Sea (hereinafter called

EDPSA) entered 4th June 1996 between the Parties as hereinafter appears.

WHEREBY IT IS AGREED as follows:

1.



The definition of “Ultimate Parent Company” appearing in Appendix 1 to the EDPSA shall be

read as if the words “in the case of OIEC, National Iranian Oil Company, a company

incorporated in the Islamic Republic of Iran” were deleted and substituted by the words “in the

case of OIEC, National Iranian Oil Company, a company incorporated in the Islamic Republic of

Iran and Retirement, Savings and Welfare Funds of the Employees of the Iranian Oil Industry, an

entity established in the Islamic Republic of Iran”.



2.



The Parties shall use all reasonable endeavours to have the enactment giving the EDPSA the

full force of law passed incorporating the said amendment.



3.



Save for the said amendment no further or other amendment is to be constructed hereby and the

Parties hereby confirm the terms and conditions of the EDPSA.



4.



Any dispute arising out of or in connection with this Addendum shall be resolved by arbitration in

the same place and in the same manner as provided in the EDPSA and the law governing this

Addendum shall be as set forth in Article 23.1 of the EDPSA.



88



IN WITNESS WHEREOF the Parties hereto have executed this Addendum as of the 26th day of July 1996

by their duly authorised representatives.

For and on behalf of the

State Oil Company of the Azerbaijan Republic

By ________________________________ By _____________________________

Title ______President_________________ Title ______General Manager________

For and on behalf of

SOCAR Commercial Affiliate

By ______________________________

By _____________________________

Title ___President, SOCAR____________ Title __General Manager, SOCAR ____

For and on behalf of

BP Exploration (Azerbaijan) Limited

By _______________________________ By _____________________________

Title ____Sen. Dev. Mgr._____________ Title ____Senior Legal Advisor_______

For and on behalf of

Elf Petroleum Azerbaijan B.V.

By ________________________________ By _____________________________

Title __Chairman_____________________ Title ____Senior Vice President ______

For and on behalf of

LUKoil International Ltd.

By ______________________________

Title _______первый вице-президент__



By _____________________________

Title ____V. P.____________________



For and on behalf of

Oil Industries Engineering and Construction

By _____________________________

By ____________________________

Title __Managing Director___________

Title ___Marketing Director _________

For and on behalf of

STATOIL Azerbaijan A.S.

By _____________________________

Title ___Commercial Manager _______



By ____________________________

Title ____Lawyer ________________



For and on behalf of

Turkish Petroleum Overseas Company Limited

By ______________________________

By _____________________________

Title _____Director_________________

Title _____Project Advisor__________



89



THIRD ADDENDUM

to

Agreement on the Exploration, Development and Production Sharing for the Shah Deniz

Prospective Area in the Azerbaijan Sector of the Caspian Sea

BETWEEN

THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC

AND

SOCAR COMMERCIAL AFFILIATE,

BP EXPLORATION (AZERBAIJAN) LIMITED,

ELF PETROLEUM AZERBAIJAN B.V.,

LUKAGIP N.V.,

OIL INDUSTRIES ENGINEERING AND CONSTRUCTION,

STATOIL AZERBAIJAN A.S.,

and

TURKISH PETROLEUM OVERSEAS COMPANY LIMITED,



THIS THIRD ADDENDUM to the Agreement dated the fourth day of June 1996 on the Exploration,

Development and Production Sharing for the Shah Deniz Prospective Area in the Azerbaijan Sector of the

Caspian Sea is made and entered into in Baku Azerbaijan this 28 day February, 2001 BY AND BETWEEN:

THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC (hereinafter called “SOCAR”), a

Government body, SOCAR COMMERCIAL AFFILIATE, a company to be formed by the State oil Company

of the Azerbaijan Republic, BP EXPLORATION (AZERBAIJAN) LIMITED, a company incorporated in

England, ELF PETROLEUM AZERBAIJAN B.V., a company incorporated in the Netherlands, LUKAGIP

N.V., a company incorporated in the Netherlands, OIL INDUSTRIES ENGINEERING COMPANY LIMITED,

a company incorporated in the Islamic Republic of Iran, STATOIL AZERBAIJAN A.S., a company

incorporated in Norway and TURKISH PETROLEUM OVERSEAS COMPANY LIMITED a company

incorporated in the Island of Jersey.

WHEREAS a Discovery has been made of potentially commercial quantities of Non-associated Natural Gas

in the Contract Area which SOCAR and Contractor agree, as hereinafter provided, is to be developed as a

Non-associated Natural Gas Discovery subject to Contractor giving Notice of Discovery and its

Commerciality pursuant to Article 4.4 of the EDPSA, and

WHEREAS pursuant to Article 15.2 of the EDPSA SOCAR and Contractor have agreed certain additional

terms as hereinafter appear.

NOW THEREFORE it is hereby agreed as follows:1 DEFINITIONS

Unless the context otherwise requires, expressions defined in the EDPSA shall have the same meaning

where used herein and the following expressions shall have the meanings set out below.

“EDPSA” means the Agreement on the Exploration, Development and Production Sharing dated June 4,

1996 for the Shah Deniz Prospective Area in the Azerbaijan sector of the Caspian Sea as subsequently

amended.



90



“Pipeline Facilities” has the meaning ascribed to that expression in Article 4.1(b) of this Third

Addendum.

“Natural Gas Sale and Purchase Agreement(s)” has the meaning ascribed to that expression in Article

4.1(a) of this Third Addendum.

Reference to an Article is a reference to an Article of this Third Addendum unless specifically provided

otherwise.

2 ADDITIONAL TERMS

The EDPSA, as modified and amended by this Third Addendum shall remain in full force and effect and

shall accordingly be given the full force of law in Azerbaijan as provided for in Article 23.1 of the EDPSA.

SOCAR and Contractor agree that further additional terms may be agreed as activities related to the

matters referred to in Article 4.1 of this Third Addendum are progressed.

3 MARKET OBJECTIVES OF THE PARTIES

SOCAR and Contractor agree that SOCAR and Contractor shall work together in a spirit of co-operation

and good faith in efforts to develop the Non-associated Natural Gas Discovery. SOCAR and Contractor

hereby record that the primary objective for which they shall initially strive shall be to supply Nonassociated Natural Gas to the Turkish market, but that if it appears to SOCAR or Contractor that they will

be unable to do so, SOCAR and Contractor shall continue to work in a spirit as aforesaid to identify

another market for Non-associated Natural Gas from the Discovery.

4 DEVELOPMENT OF NON-ASSOCIATED NATURAL GAS DISCOVERY

4.1 SOCAR and Contractor shall, as part of the development of the Non-associated Natural Gas

Discovery, use full and reasonable endeavours to achieve, on terms and conditions which reflect

those generally accepted in the international petroleum industry for the development of a discovery

of Non-associated Natural Gas such as the Non-associated Natural Gas Discovery and which

render the development of the Non-associated Natural Gas Discovery economically and

commercially acceptable in the view of SOCAR and Contractor, all the matters referred to in

paragraphs a) to g) below and such other matters as may reasonably be considered necessary by

SOCAR or Contractor:(a) the negotiations, execution and entering into force of a full, legally binding and unconditional

long term Natural Gas export sale and purchase agreement or agreements in respect of their

entitlement to Non-associated Natural Gas from the Non-associated Natural Gas discovery

under the EDPSA (“Natural Gas Sale and Purchase Agreement(s));

(b)



the negotiation, execution and entering into force of rights of way, agreements regarding

transportation of gas (including but not limited to throughput and tariff agreements) and other

agreements for the pipe laying, construction, operation and maintenance and repair of all

pipelines, processing and other facilities (“Pipeline Facilities”) necessary to transport Natural

Gas from the Delivery Point to the point of sale and delivery specified in the Natural Gas Sale

and Purchase Agreement;



(c) the grant and issues by each state in which Pipeline Facilities are, or are to be, situated of the

necessary rights, approvals and licenses (including all land use rights) required for the pipe

laying, construction, operation, repair, maintenance and use of Pipeline Facilities and the

enactment by each such state of all legislation considered by SOCAR or Contractor to be

reasonably necessary or expedient for the development of the Non-associated Natural Gas

Discovery;

(d) the grant or transfer by owners of rights in land on which the Pipeline Facilities are, or are to be

situated of all rights necessary for the pipe laying, construction, operation, repair, maintenance

and use of Pipeline Facilities or otherwise the right to require the grant or transfer of such rights;



91



(e) the negotiation, execution and enactment into law and entry into force of multilateral treaties

between all the states in which Pipeline Facilities are, or are to be, situated providing, amongst

other things, for the uninterrupted storage processing and flow of Natural Gas in the Pipeline

Facilities, the fixing of stabilized taxes, levies, duties, payments, fees (including transit fees, if

any) or contributions or exemptions therefrom to which the Petroleum, the owner of the Pipeline

Facilities or shippers through the Pipeline Facilities will be subject;

(f) the negotiation, execution and entry into force of agreements among, as the case may be,

Contractor and SOCAR, the owners of the Pipeline Facilities and the shareholders thereof and

Third Parties relating to the financing of the laying and construction of the Pipeline Facilities, the

return on such investment and

(g) the negotiation, execution and entry into force of agreements relating to the treatment,

transportation and disposal of Crude Oil (including gas liquids).

4.2 SOCAR and Contractor agree that notwithstanding anything else contained in the EDPSA or in this

Third Addendum unless and until all the matters referred to in Article 4.1 of this Third Addendum

have been completed ready for execution, enactment or otherwise entered into force or made

appropriately conditional, as the case may be, and in all respects approved by SOCAR and

Contractor and, where necessary, Third Parties, there shall be no obligation on Contractor to

conduct Petroleum Operations under the EDPSA other than to work with SOCAR and with Third

Parties in accordance with Annual Work Programmes and related Budgets approved by the Steering

Committee to negotiate and seek to achieve the matters referred to in Article 4.1

5. DEVELOPMENT PROGRAMME

5.1 The Development Programme to be submitted by Contractor pursuant to Article 4.6 of the EDPSA

shall include proposals related to the achievement of all the matters referred to in Article 4.1 hereof

and also of all the approvals referred to in Article 4.2 hereof and any commitments and terms

contained in the Development Programme to start commercial production shall be conditional upon

the achievement of such matters and also the approvals referred to in Article 4.2 hereof. The

Development Programme shall be based on a staged development concept linked to Natural Gas

Sale and Purchase Agreements.

5.2 Notwithstanding the provisions of Articles 4.6(c) and (d) of the EDPSA, SOCAR and Contractor shall

use all reasonable endeavours to agree a Development Programme and achieve all the matters

referred to in Article 4.1 hereof by 1st May 2001 with the intent that the Parties be in a position not

later than October 2001 to seek the approval of their respective boards to proceeding with the

construction phase of the development of the Non-associated Natural Gas Discovery in accordance

with the Development Programme.

6 APPLICATION OF THE ADDENDUM

The Parties agree that references to the “EDPSA” in the Addendum made and entered into of even date

with the Agreement on the Exploration, Development and Production Sharing for the Shah Deniz

Prospective Area in the Azerbaijan Sector of the Caspian Sea shall include a reference to that Agreement

as previously modified and/or amended and as modified and/or amended by this Third Addendum.

7 ARBITRATION AND APPLICABLE LAW

Any disputes arising out of or in connection with this Addendum shall be resolved as provided in Article

23.3 of the EDPSA and the law governing this Addendum shall be as set out in Article 23.1 of the EDPSA.



92



IN WITNESS WHEREOF the parties hereto have executed this Addendum as of the day 28 February, 2001

by their duly authorized representatives.

For and on behalf of the

State Oil Company of the Azerbaijan Republic

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



For and on behalf of

SOCAR Commercial Affiliate

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



For and on behalf of

BP Exploration (Azerbaijan) Limited

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



For and on behalf of

Elf Petroleum Azerbaijan B.V.

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



For and on behalf of

LukAgip N.V.

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



For and on behalf of

Oil Industries Engineering and Construction

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



For and on behalf of

STATOIL Azerbaijan A.S.

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



For and on behalf of

Turkish Petroleum Overseas Company Limited

By ___________________________________

Title __________________________________



By ______________________________

Title ____________________________



93



DOCUMENT NO. 3

CONFORMED COPY



FOURTH ADDENDUM

to

Agreement on the Exploration, Development and Production Sharing for the Shah Deniz

Prospective Area in the Azerbaijan Sector of the Caspian Sea

BETWEEN

MINISTRY OF FUEL AND ENERGY OF THE AZERBAIJAN REPUBLIC

AZERBAIJAN (SHAH DENIZ) LIMITED

BP EXPLORATION (AZERBAIJAN) LIMITED

TOTALFINAELF E&P AZERBAIJAN B.V.

LUKAGIP N.V.

NAFTIRAN INTERTRADE CO (NICO) LIMITED

STATOIL AZERBAIJAN AS

TURKISH PETROLEUM OVERSEAS COMPANY LIMITED

THIS FOURTH ADDENDUM to the Agreement dated the fourth day of June 1996 on the Exploration,

Development and Production Sharing for the Shah Deniz Prospective Area in the Azerbaijan Sector of the

Caspian Sea is made and entered into in Baku, Azerbaijan this 25th day of February 2003.

BY AND BETWEEN:

MINISTRY OF FUEL AND ENERGY OF THE AZERBAIJAN REPUBLIC, a state entity organised under the

laws of the Azerbaijan Republic, (for and on behalf of the Azerbaijan Republic) (hereinafter called "State"),

AZERBAIJAN (SHAH DENIZ) LIMITED, an exempted limited liability company incorporated under the laws

of the Cayman Islands, BP EXPLORATION (AZERBAIJAN) LIMITED, a company incorporated in England

and Wales, TOTALFINAELF AZERBAIJAN E&P B.V, a company incorporated in The Netherlands,

LUKAGIP N.V, a company incorporated in the Netherlands, NAFTIRAN INTERTRADE CO (NICO)

LIMITED, a company incorporated in the Island of Jersey, STATOIL AZERBAIJAN AS, a company

incorporated in Norway and TURKISH PETROLEUM OVERSEAS COMPANY LIMITED a company

incorporated in the Island of Jersey.

WHEREAS a Discovery has been made of potentially commercial quantities of Non-associated Natural

Gas and Crude Oil in the Contract Area in respect of which Contractor has given a Notice of Discovery and

its Commerciality pursuant to Article 4.4 of the EDPSA.

WHEREAS, pursuant to Article 4.6 of the EDPSA, Contractor has submitted to the State Oil Company of

the Azerbaijan Republic ("SOCAR"), and SOCAR has approved, a Development Programme which

recognises and agrees the need for a staged development of said Discovery.

WHEREAS Contractor, together with State, are shareholders in Azerbaijan Gas Supply Company Limited,

an exempted limited liability company incorporated under the laws of the Cayman Islands, ("AGSC")

formed, inter alia, for the purpose of purchasing and selling certain quantities of Shah Deniz Stage 1

Production.



94



WHEREAS AGSC shall be required to arrange for transportation by pipeline of certain quantities of Shah

Deniz Stage 1 Production to its buyers at the Points of Sale.

WHEREAS State and Contractor wish to record their agreement on certain additional terms as hereinafter

appear.

NOW THEREFORE it is hereby agreed as follows:

1.



DEFINITIONS



Unless the context otherwise requires, expressions defined in the EDPSA shall have the same meaning

where used herein and the following expressions shall have the meanings set out below.

"AGSC" means Azerbaijan Gas Supply Company Limited, an exempted limited liability company

incorporated under the laws of the Cayman Islands.

"AGSC GTA" means the "Transportation Agreement relating to quantities of Natural Gas to be received at

Sangachal, Azerbaijan and then transported in the Pipeline and redelivered to various points in Azerbaijan,

Georgia and at the Azeri/Georgian and Georgian/Turkish borders" to be entered into between AGSC and

South Caucasus Pipeline Company Limited for the purposes specified therein.

"AGSC Operating Costs" has the meaning given such term in the Annual Reserved Capacity Deed.

"AGSC Shareholders' Agreement" means the agreement to be entered into between AGSC, BP

Exploration (Azerbaijan) Limited, TotalFinaElf E&P Azerbaijan B.V., LUKAgip N.V., Naftiran Intertrade Co.

(NICO) Limited, Ministry of Fuel and Energy of the Azerbaijan Republic (for and on behalf of the Azerbaijan

Republic), Statoil Azerbaijan AS, Turkish Petroleum Overseas Company Limited, Azerbaijan (Shah Deniz)

Limited for the purposes specified therein.

"Annual Reserved Capacity Deed" means the deed to be entered into between AGSC and BP Exploration

(Shah Deniz) Limited (for and on behalf of the Contractor) for the purposes specified therein.

"Cumulative Entitlement to Date" is defined in Schedule 2 to this Fourth Addendum.

"EDPSA" means the Agreement on the Exploration, Development and Production Sharing dated June 4,

1996 for the Shah Deniz Prospective Area in the Azerbaijan sector of the Caspian Sea.

"Entitlement and Accounting Protocol" means Schedule 1 to this Fourth Addendum.

"Incremental Monthly Charges" has the meaning given such term in the AGSC GTA.

"Monthly Minimum Payments" has the meaning given such term in the AGSC GTA.

"MMP Guarantee" has the meaning given such term in the AGSC Shareholders' Agreement.

"Purchase Agreements" means gas purchase agreements entered into by AGSC for the purchase by

AGSC of Non-associated Natural Gas from the parties to the EDPSA to satisfy the obligations of the Stage

1 Sales Agreements and the Transportation Agreements.

"Stage 1 Sales Agreements" has the meaning given such terms in the AGSC Shareholders' Agreement.

"Seller Representative Agreement" means the agreement to be entered into between the Contractor, the

Ministry of Fuel and Energy of the Azerbaijan Republic (for and on behalf of the Azerbaijan Republic), and

BP Exploration (Shah Deniz) Limited appointing BP Exploration (Shah Deniz) Limited as the representative

of the Contractor and the State for the purposes specified therein.



95



"Shah Deniz JOA" means the Joint Operating Agreement, dated 5 March 1997, between BP Exploration

(Azerbaijan) Limited; Elf Petroleum Azerbaijan B.V.; LUKoil International Ltd; Oil Industries Engineering and

Construction; Statoil Azerbaijan AS; and Turkish Petroleum Overseas Company Limited; and SOCAR

Commercial Affiliate, relating to the Shah Deniz PSA.

"Shah Deniz Stage 1 Production" means any Petroleum produced using the production capacity (as may

be modified from time to time) of the Stage 1 Platform and any connected sub-sea facilities.

"Stage 1 Platform" means the first platform to be installed in the Contract Area as part of the first stage of

development of the Contract Area, as the same may be modified or replaced from time to time.

"Transportation Agreements" has the meaning given such term in the AGSC Shareholders' Agreement.

References to any document or agreement shall include references to such document or agreement as

amended, modified, novated or replaced from time to time.

References in this Fourth Addendum to Articles and Schedules are, unless otherwise specified, references

to the articles of, and the schedules to, this Fourth Addendum.

The Schedules to this Fourth Addendum form part of this Fourth Addendum.

Reference to the word "including" where used in this Fourth Addendum shall be deemed to be followed by

the phrase "without limitation".

2.



CONTINUANCE OF EDPSA



The EDPSA, as supplemented and/or clarified by this Fourth Addendum, shall remain in full force and

effect and shall accordingly be given the full force of law in Azerbaijan as provided for in Article 23.1 of the

EDPSA. Nothing in this Fourth Addendum shall be construed to increase or decrease the rights,

obligations and privileges of the Parties in respect of further development of Shah Deniz resources

pursuant to the EDPSA.

3.



ADDITIONAL TERMS IN RESPECT OF SHAH DENIZ STAGE 1 PRODUCTION



The Parties agree that the following provisions shall apply in respect of Shah Deniz Stage 1 Production:

3.1



(a)



The Parties acknowledge that the sale of Non-associated Natural Gas to AGSC under the

Purchase Agreements is not on arm's length terms and, as required pursuant to Article

13.1(b) of the EDPSA, the Parties hereby agree that such quantities of Non-associated

Natural Gas sold to AGSC pursuant to the Purchase Agreements shall for the purposes of

the EDPSA be valued in accordance with the calculation set out in Clause 3.1(b) below. The

value per unit of Natural Gas implicit in the calculation set out in Clause 3.1(b) below shall be

deemed to be the "Net Back Value" (as such term is used in the EDPSA).



(b)



The value of Non-associated Natural Gas sold to AGSC under the Purchase Agreements in

any given Calendar Quarter, shall be calculated as the aggregate of the amounts receivable

(whether or not received) by AGSC in respect of the sale of such Non-associated Natural

Gas pursuant to the Stage 1 Sales Agreements in respect of such Calendar Quarter LESS

(i) the aggregate Incremental Monthly Charges incurred (whether or not paid) by AGSC in

respect of such Non-associated Natural Gas in respect of such Calendar Quarter; and

(ii) any tariff charges incurred (whether paid or not paid) in respect of such Calendar Quarter

pursuant to any transportation agreement (other than the AGSC GTA) that may be entered

into by AGSC (excluding any amount of Monthly Minimum Payments, which form part of any

such tariff charges). For the avoidance of doubt, the value of such Non-associated Natural

Gas shall not include amounts receivable (whether or not received) where such amounts do

not directly relate to the delivery of Natural Gas pursuant to the Stage 1 Sales Agreements

(such excluded amounts shall include, without limitation, (A) interest charges on late

payments and (B) subject to the provisions of paragraph 5 of the Entitlement and Accounting

Protocol, revenues received pursuant to take-or-pay provisions (or similar provisions

pursuant to which payments are received in respect of Natural Gas not taken)).



96



3.2



All costs and expenses of the "Seller Representative" (as defined in the Seller Representative

Agreement) paid by the JOA Parties pursuant to the Seller Representative Agreement shall be

charged to the Petroleum Operations Account as Operating Costs.



3.3



All amounts in respect of Monthly Minimum Payments and AGSC Operating Costs paid by the

Operating Company (for and on behalf of the Contractor) pursuant to the Annual Reserved Capacity

Deed or paid by the Contractor Parties pursuant to the MMP Guarantee shall be charged to the

Petroleum Operations Account as Operating Costs.



3.4



The Delivery Point shall be:

(a)



for Non-associated Natural Gas produced from the Contract Area, the "Entry Point" as

defined in the Purchase Agreements; and



(b)



for Crude Oil produced from the Contract Area, the outlet flange for liquid export from the

Shah Deniz facilities in the Sangachal terminal.



State and the Contractor agree to take all necessary steps to procure formal confirmation of such

Delivery Point by the Steering Committee.

4.



ADDITIONAL TERMS



The Entitlement and Accounting Protocol (attached hereto as Schedule 1) describes an agreed

interpretation in respect of the calculation and practical application of various terms and provisions of the

EDPSA in respect of such Shah Deniz Stage 1 Production as is required to satisfy the obligations of the

Purchase Agreements and, mutatis mutandis, to the balance of any Shah Deniz Stage 1 Production. In

addition, the Parties agree that, notwithstanding anything to the contrary in this Fourth Addendum,

paragraphs 1 and 2 of the Entitlement and Accounting Protocol shall apply, mutatis mutandis, in respect of

all production from the Contract Area (unless otherwise mutually agreed by the Parties).

5.



APPLICATION OF THE ADDENDUM



The Parties agree that references to the "EDPSA" in the Addendum made and entered into of even date

with the Agreement on the Exploration, Development and Production Sharing for the Shah Deniz

Prospective Area in the Azerbaijan Sector of the Caspian Sea shall include a reference to that Agreement

as previously modified and/or amended and as supplemented and/or clarified by this Fourth Addendum.

6.



STATE REPRESENTATIVE



Contractor and State hereby agree that, with effect from the date of this Fourth Addendum, Contractor shall

treat the Ministry of Fuel and Energy of the Azerbaijan Republic rather than SOCAR as Government body

representing State for all purposes under the EDPSA, and Contractor and State agree that the Ministry of

Fuel and Energy of the Azerbaijan Republic shall be entitled to exercise all the rights of State and shall be

obliged to discharge all the obligations of State under the EDPSA as if the Ministry of Fuel and Energy of

the Azerbaijan Republic were a party to the EDPSA.

7.



ARBITRATION AND APPLICABLE LAW



Any disputes arising out of or in connection with this Fourth Addendum shall be resolved as provided in

Article 23.3 of the EDPSA and the law governing this Fourth Addendum shall be as set out in Article 23.1 of

the EDPSA.



97



IN WITNESS WHEREOF the Parties have executed this Fourth Addendum as of the 25th day of February

2003 by their duly authorised representatives.

For and on behalf of

Ministry of Fuel and Energy of the Azerbaijan Republic (for and on behalf of the Azerbaijan Republic)

By

Mejid Kerimov

Title Minister of Fuel and Energy

For and on behalf of

Azerbaijan (Shah Deniz) Limited

By

Valeh Aleskerov

Title Director

For and on behalf of

BP Exploration (Azerbaijan) Limited

By

Robert D. Kelly

Title Director

For and on behalf of

TotalFinaElf E&P Azerbaijan B.V.

By

Jean-Claude Nawrot

Title Director

For and on behalf of

LukAgip N.V.

By

Rustam Tukhbatullin

Title President

For and on behalf of

Naftiran Intertrade Co (NICO) Limited

By

Mohammed Rouhani

Title Director

For and on behalf of

Statoil Azerbaijan AS

By

Georg Gundersen

Title Director

For and on behalf of

Turkish Petroleum Overseas Company Limited

By

Orhan Duran

Title President



98



Schedule 1

Entitlement and Accounting Protocol

1.



ENTITLEMENT SHARE TO TOTAL PRODUCTION



1.1



Not less than ten (10) days prior to the beginning of Calendar Quartern the Operating Company

shall provide to the State (with a copy to each of the then parties to the Shah Deniz JOA) a

statement of the Production Entitlement Shares applicable during such Calendar Quartern, as

calculated in accordance with the provisions of paragraphs 1.2 to 1.4 (inclusive) below. Total

Production in Calendar Quartern shall be split between Contractor and the State in accordance with

the Contractor Production Entitlement Share and the State Production Entitlement Share,

respectively, for such Calendar Quartern. For the avoidance of doubt, when applying the Contractor

Production Entitlement Share in order to determine the split of Total Production (between the State

and Contractor) in any given Calendar Quarter, such Contractor Production Entitlement Share shall

be applied evenly to quantities of both Natural Gas and Crude Oil, such that, the proportion of (a)

Natural Gas and (b) Crude Oil, received by Contractor is the same.



1.2



The "Contractor Estimated Dollar Entitlement" (CEDEn) (expressed in US Dollars) for Calendar

Quartern shall be calculated in accordance with the principles of Article 11 of the EDPSA and shall

comprise the following elements: (a) recovery of Operating Costs; (b) recovery of Capital Costs; and

(c) Profit Petroleum.

CEDEn shall be calculated in accordance with the following formula:

CEDEn = On + Cn + Pn- RAn-1

Where:

On = Operating Company's good faith estimate of total Operating Costs recoverable during

Calendar Quartern (expressed in US Dollars).

Cn = lower of (i) Operating Company's good faith estimate of total Capital Costs recoverable during

Calendar Quartern (expressed in US Dollars); and (ii) (TRn – On) * 0.5 (provided that in no event

shall Cn be less than zero (0)).

Pn = (TRn – On – Cn)* Rn (provided that in no event shall Pn be less than zero (0)).

RAn-1 = the Reconciliation Amount calculated in accordance with Article 2 of this Schedule not later

than twelve (12) days prior to the end of Calendar Quartern-1

TRn = Operating Company's good faith estimate of total revenue for Calendar Quartern (expressed

in US Dollars) calculated as the estimated value of such Total Production during Calendar Quartern

(determined based on the estimated volume of Total Production for Calendar Quartern multiplied by

the estimated average Net Back Value for such Total Production, such Net Back Value: (i) for

Natural Gas sold to AGSC pursuant to the Purchase Agreements, being calculated in accordance

with Article 3.1(b) of this Fourth Addendum, taking into account the provisions of paragraph 5.2

below; (ii) for any other Non-Associated Natural Gas being calculated in accordance with Article 13

of the EDPSA; and (iii) for Crude Oil being calculated in accordance with Article 13 of the EDPSA).

Rn = the applicable "Contractor Share (%)" as shown in the "Profit Petroleum Sharing Table" in

respect of Calendar Quartern determined in accordance with Article 11.5 of the EDPSA.



1.3



The "State Estimated Dollar Entitlement" (SEDEn) (expressed in US Dollars) for Calendar Quartern

shall be calculated in accordance with the principles of Article 11 of the EDPSA and shall comprise

a Profit Petroleum element only.

SEDEn shall be calculated in accordance with the following formula:

SEDEn = TRn – CEDEn .



99



1.4



The product (expressed in the form of a percentage) of (a) CEDEn divided by (b) the sum of SEDEn

plus CEDEn is hereinafter referred to as the "Contractor Production Entitlement Share" (CPESn).

The product (expressed in the form of a percentage) of (a) SEDEn divided by (b) the sum of SEDEn

plus CEDEn is hereinafter referred to as the "State Production Entitlement Share" (SPESn).

"Production Entitlement Shares" means, in relation to a given Calendar Quartern, CPESn and

SPESn.



2.



RECONCILIATION METHOD



2.1



Not later than twelve (12) days before the end of Calendar Quartern, the Operating Company shall

provide to the State (with a copy to each of the then parties to the Shah Deniz JOA) a report relating

to reconciliation between the Production Entitlement Shares used during Calendar Quartern and

Calendar Quartern-1, and the respective Actual Entitlement Shares or Revised Entitlement Shares as

defined below. Such report shall include:

(a)



the CPESn-1 and SPESn-1;



(b)



a calculation of actual entitlement shares ("Actual Entitlement Shares") of the State and

Contractor, respectively, to Total Production for Calendar Quartern-1 based on the actual

numbers for Total Production volumes, Net Back Values, Capital Costs and Operating Costs

(taking into account any adjustments made to such items during Calendar Quartern-1 in

accordance with paragraph 6 below) relating to Calendar Quartern-1;



(c)



a statement of the difference in cumulative values received by the State and Contractor to

the end of Calendar Quartern-1 due to any difference between Actual Entitlement Shares (as

calculated in (b) above) and the CPES and SPES as applied to all Calendar Quarters up to

and including Calendar Quartern-1. This difference in value shall be expressed in US Dollars;



(d)



the CPESn and SPESn;



(e)



a revised estimate of the entitlements of the State and Contractor to Total Production for

Calendar Quartern ("Revised Production Entitlement Shares") based on the actual numbers

for Total Production volumes, Net Back Values, Capital Costs and Operating Costs (taking

into account any adjustments made to such items during Calendar Quartern in accordance

with paragraph 6 below) relating to Calendar Quartern to the extent available (but in any

event for not less than the first two months of Calendar Quartern). Recognising that this

calculation is made twelve (12) days prior to the end of Calendar Quartern, where such

actual information is not available, the calculation shall be made using good faith estimates

for the period for which such actual information is not complete or available. Any such good

faith estimate for Calendar Quartern shall not necessarily be the same as that used in the

original calculation of Production Entitlement Shares for such Calendar Quartern;



(f)



a statement of the difference in value received by the State and Contractor due to any

difference between the Revised Production Entitlement Shares (as calculated in (e) above)

for Calendar Quartern and the Production Entitlement Shares for such Calendar Quartern.

This difference in value shall be expressed in US Dollars;



(g)



if, and to the extent that, the aggregate of items (c) and (f) above show that a reconciliation

is required, the Operating Company shall also provide a statement showing the amount

(expressed in US Dollars) that the Contractor has over or under recovered. This number

shall be positive (in the event of Contractor over recovery) or negative (in the event of

Contractor under recovery) as appropriate to the net position of the Contractor and is

referred to in this Entitlement and Accounting Protocol as the "Reconciliation Amount".



3



FINANCE COSTS ON MONTHLY MINIMUM PAYMENT



3.1



It is acknowledged that the inclusion of the Monthly Minimum Payments as Operating Costs under

the EDPSA may result in such Monthly Minimum Payment amounts incurring Finance Costs if, and

to the extent that, they remain unrecovered by the Contractor during any given Calendar Quarter.



100



3.2



The Contractor hereby agrees to waive any Finance Costs on any such unrecovered Monthly

Minimum Payments until the start of the first Calendar Quarter in which the State is first entitled to

Profit Petroleum (all Calendar Quarters prior to the first Calendar Quarter in which the State is first

entitled Profit Petroleum are hereinafter referred to as the "Initial Quarters"). For the purposes of

calculating the Finance Costs during the Initial Quarters the total amount of unrecovered Operating

Costs shall be calculated. The cumulative amount of Monthly Minimum Payments to date shall then

be deducted from this unrecovered Operating Cost total amount in order to calculate the amount of

unrecovered Operating Costs that shall be subject to Finance Costs in the Initial Quarters; provided

that such amount shall never be less than zero (0). Finance Costs shall then be applied to such

amount pursuant to the terms of the EDPSA and then added to the Petroleum Operating Account.



3.3



For all Calendar Quarters following the Initial Quarters the Contractor hereby agrees to waive any

Finance Costs on any such unrecovered Monthly Minimum Payments up to the amount of the

Contractor Unrecovered MMP Amount. The "Contractor Unrecovered MMP Amount" is calculated

by multiplying the Contractor's Cumulative Entitlement to Date by the amount of such unrecovered

Monthly Minimum Payments. The Cumulative Entitlement to Date to be applied to a given

unrecovered Monthly Minimum Payment shall be the Cumulative Entitlement to Date appropriate for

the period in which an amount in respect of such Monthly Minimum Payment was paid to AGSC

under the Annual Reserved Capacity Deed.



3.3



For the purposes of calculating Finance Costs on unrecovered Operating Costs for all Calendar

Quarters , the Contractor Unrecovered MMP Amount shall first be deducted from the total amount of

unrecovered Operating Costs in order to calculate the amount of unrecovered Operating Costs that

shall be subject to Finance Costs in such Calendar Quarters; provided that the result shall never be

less than zero (0). Finance Costs shall then be applied to the remainder pursuant to the terms of

the EDPSA and then added to the Petroleum Operating Account.



4.



INTEREST RECEIVED UNDER STAGE 1 SALES AGREEMENTS



4.1



Interest for late payment received by AGSC pursuant to the Stage 1 Sales Agreements shall not

have any effect on the entitlement share calculation (estimated or actual) in paragraphs 1.1 to 1.4

(inclusive) above.



5.



PAYMENT FOR NATURAL GAS NOT TAKEN



5.1 Payments received by AGSC or the Parties in respect of take or pay provisions (or similar provisions

pursuant to which payments are received in respect of Natural Gas not taken) shall not be taken into

account for the purposes of paragraphs 1 and 2, nor in the calculation of the R Factor unless and

until, and then only to the extent that, make up gas quantities (corresponding to such take or pay

payments) are subsequently taken. If, and to the extent that, make-up quantities are subsequently

taken, the relevant portion of payments previously received corresponding to such make-up

quantities shall be included in the calculations under paragraphs 1 and 2 as if both (a) such portion

of the initial take or pay payments and (b) the subsequent payments for make-up quantities, were in

each case received in the Calendar Quarter in which such make-up gas quantities were actually

taken.

5.2 For the Stage 1 Sales Agreements, the following specific provisions shall apply:

(a)



payments received by AGSC in respect of take or pay provisions (or similar provisions

pursuant to which payments are received in respect of Natural Gas not taken) under the

Stage 1 Sales Agreements shall be distributed pro rata between the sellers (as described in

the Purchase Agreements) on the basis of each such seller's Cumulative Entitlement to Date

in force on the date that such payments become payable to AGSC;



(b)



if, and to the extent that, make-up quantities are subsequently taken pursuant to the terms of

the Stage 1 Sales Agreements, then the Operating Company shall make a calculation of the

difference between (a) the Cumulative Entitlement to Date applied at the time of distribution

of payments, and (b) the Production Entitlement Shares, in each case for Contractor and the

State, in force for the Calendar Quarter(s) during which such make up gas quantities

(corresponding to such take or pay payments) are taken. The Parties undertake to ensure



101



that the appropriate reconciliation of any difference between such amounts (expressed in US

Dollars) will be effected outside of the provisions of the EDPSA; and

(c)



if, and to the extent that, rights to make-up quantities under a Stage 1 Sales Agreement

expire or are otherwise not used, then, for each of the sellers under the Purchase

Agreements the Cumulative Entitlement to Date upon which any distribution of payments

was based (as contemplated in paragraph 5.2(a) above) shall be deemed to be final and no

reconciliation shall be required in respect of such amounts.



6.



WRITE OFF OF BAD DEBTS



6.1



If, and to the extent, that certain amounts relating to the sale of Petroleum are deemed to be

unrecoverable as advised by AGSC, then such amounts may be written off, in which event the

Operating Company shall make a calculation of the amount of Capital Costs and Operating Costs

unrecovered as a consequence of such write off. Such calculation shall notionally allocate the

amount of such write off between the various elements described in paragraph 1.2 above (recovery

of Operating Costs, recovery of Capital Costs and Profit Petroleum) pro rata on the basis of the

original distribution between such elements in respect of the Petroleum to which such write off

relates. Following such calculation: (a) both the Contractor's and the State's share of any Profit

Petroleum in respect of which such write off relates shall be deemed to have zero value; (b)

Contractor's share of any Cost Recovery Petroleum in respect of which such write off relates shall

be deemed to have zero value; and (c) the amounts of such unrecovered Capital Costs and

Operating Costs shall be re-charged to the Petroleum Operations Account. Any costs re-charged in

accordance with this paragraph 6.1 shall, for the purposes of calculations under paragraphs 1 and

2 above, be deemed to have been incurred (and shall become recoverable) in the Calendar

Quarter in which such re-charge is effected.



6.2



If, and to the extent that, in a given Calendar Quartern refunds are made or allowed (or agreed to be

made or allowed) by AGSC to the purchasers under, and pursuant to the terms of, the Stage 1

Sales Agreements and:

(d)



such refunds relate to specific adjustments to either (i) recorded volumes of Natural Gas

delivered or (ii) the sales price for such delivered volumes of Natural Gas; and



(e)



the amount of revenue associated with such refunds has previously been included in the

calculation of the Actual Entitlement Shares in accordance with paragraph 2 above,



then an amount equal to such refunds shall, for the purposes of calculations under paragraphs 1

and 2 above, be deducted from the total revenue for the applicable Calendar Quarter. The

Operating Company shall, additionally, make a calculation of the amount of Capital Costs and

Operating Costs unrecovered as a consequence of such refunds and such unrecovered Capital

Costs and Operating Costs shall be re-charged to the Petroleum Operations Account applying the

provisions of paragraph 6.1 above, mutatis mutandis.

6.3



The unrecovered Capital Costs and Operating Costs that are re-charged to the Petroleum

Operations Accounts as contemplated in paragraphs 6.1 and 6.2 above shall not include any

Finance Costs for the period between the production allocated for recovery of such costs and the recharging of such Costs to the Petroleum Operations Account.



6.4



In the event that any amount, or part thereof, written off in accordance with paragraph 6.1 above is

eventually recovered, the Operating Company shall allocate such recovered amount in accordance

with applicable Actual Entitlement Share. The Operating Company shall then credit the Petroleum

Operations Account with the amount so recovered, allocated between Capital Costs and Operating

Costs in accordance with the principles set out in paragraph 6.1 above.



7.



PRINCIPLE OF ENTITLEMENT ALLOCATION



7.1



The Parties acknowledge that this Entitlement and Accounting Protocol is not exhaustive and does

not cover every possible eventuality relating to the treatment of entitlements and revenues under the

EDPSA. In the event that there arises a situation that is not anticipated in either the EDPSA or in



102



this Entitlement and Accounting Protocol, then the Parties shall endeavour to resolve the issue in a

manner that is consistent with the underlying principles that (i) the Contractor is entitled to fair

recovery of any costs incurred, or any value or production derived from Total Production that relates

to fair recovery of costs and (ii) the Contractor and the State are jointly entitled to profit, or any value

or production derived from Total Production that relates to such profit, such profit being calculated in

accordance with the provisions of Article 11 of the EDPSA.



103



Schedule 2

Cumulative Entitlement to Date

"Cumulative Entitlement to Date" for Contractor or the State (as applicable) shall be calculated as follows:

=



Ep x 100

TP



CED



=



such party's "Cumulative Entitlement to Date", calculated as a percentage;



Ep



=



the aggregate amount of Total Production produced under the Shah Deniz

PSA to which the relevant party has become entitled in accordance with the

provisions of the Shah Deniz PSA;



TP



=



the aggregate amount of Total Production produced under the Shah Deniz

PSA to which the State and Contractor have, collectively, become entitled in

accordance with the provisions of the Shah Deniz PSA.



CED

where



and in each case, any aggregate amount shall include all amounts of Total Production that

the State and Contractor have, collectively, become entitled to lift from the date of first lifting

pursuant to the Shah Deniz PSA through the end of the Calendar Year immediately prior to

the Calendar Year in which the relevant liability arose;

provided that where "TP" equals zero, Contractor's Cumulative Entitlement to Date shall be

100%. For the avoidance of doubt, the State's Cumulative Entitlement to Date when

calculated in accordance with this proviso shall be zero.



104



FIFTH ADDENDUM

to

Agreement on the Exploration, Development and Production Sharing for the Shah Deniz Prospective

Area in the Azerbaijan Sector of the Caspian Sea

BETWEEN

THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC

AND

AZERBAIJAN (SHAH DENIZ) LIMITED,

BP EXPLORATION (AZERBAIJAN) LIMITED,

TOTAL E&P AZERBAIJAN B.V.,

LUKOIL OVERSEAS SHAH DENIZ LIMITED

NAFTIRAN INTERTRADE CO. (NICO) LIMITED,

STATOIL AZERBAIJAN A.S

and

TURKISH PETROLEUM OVERSEAS COMPANY LIMITED.



105



THIS FIFTH ADDENDUM (the “Fifth Addendum”) to the Agreement dated the fourth day of June 1996

on the Exploration, Development and Production Sharing for the Shah Deniz Prospective Area in the

Azerbaijan Sector of the Caspian Sea is made and entered into in Baku Azerbaijan this 2nd day of July

day 2008

BY AND BETWEEN:

THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC (hereinafter called “SOCAR” a

Governmental body), AZERBAIJAN (SHAH DENIZ) LIMITED, a company incorporated under the laws

of the Cayman Islands, BP EXPLORATION (AZERBAIJAN) LIMITED, a company incorporated under

the laws of England and Wales, TOTAL E&P AZERBAIJAN B.V., a company incorporated under the

laws of the Netherlands, LUKOIL OVERSEAS SHAH DENIZ LIMITED, a company incorporated under

the laws of the British Virgin Islands, NAFTIRAN INTERTRADE CO. (NICO) LIMITED, a company

incorporated under the laws of the Island of Jersey, STATOIL AZERBAIJAN A.S., a company

incorporated under the laws of Norway and TURKISH PETROLEUM OVERSEAS COMPANY

LIMITED, a company incorporated under the laws of the Island of Jersey.



WHEREAS a Discovery has been made of potentially commercial quantities of Non-associated Natural Gas

in the Contract Area in respect of which Contractor has given a Notice of Discovery and its Commerciality

pursuant to Article 4.4 of the EDPSA;



WHEREAS pursuant to Article 4.6 of the EDPSA, Contractor has submitted to SOCAR and SOCAR has

approved a Development Programme which recognises and agrees the need for a staged development of said

Discovery;



WHEREAS Article 15.2 of the EDPSA recognises the necessity of agreeing additional terms for the

commercial development of said Discovery; and

WHEREAS SOCAR and Contractor wish to record their agreement on the application of Article 28.1 (b) in

respect of a staged development of the said Discovery;

NOW THEREFORE it is hereby agreed as follows:



1 DEFINITIONS

Unless the context otherwise requires, expressions defined in the EDPSA shall have the same meaning

where used herein and the following expressions shall have the meanings set out below.

“EDPSA” means the Agreement on the Exploration, Development and Production Sharing dated June 4,

1996 for the Shah Deniz Prospective Area in the Azerbaijan sector of the Caspian Sea as subsequently

amended.

“NGSPA” means any long term Natural Gas sale and purchase agreement(s) entered into by the Contractor

Parties in respect of their entitlement to Natural Gas from the Non-associated Natural Gas Discovery under

the EDPSA and which is economically and commercially acceptable to SOCAR and such Contractor

Parties.

Reference to an Article is a reference to an Article of this Fifth Addendum unless specifically provided

otherwise.

106



2 CONTINUANCE OF EDPSA

The EDPSA, as modified and amended by this Fifth Addendum shall remain in full force and effect and

shall accordingly be given the full force of law in Azerbaijan as provided for in Article 23.1 of the EDPSA.



3 CONTRACTOR BONUS PAYMENTS

3.1



For the purposes of calculating the amount and timing of payment of the Bonus payment referred to

in Article 28.1(b) of the EDPSA and notwithstanding anything to the contrary therein, SOCAR and

Contractor hereby agree that in recognition of the fact that the Discovery is of Non-associated

Natural Gas and not Crude Oil and that reserves of Non-associated Natural Gas are not considered to

be commercial until contracted for under a NGSPA, the Bonus payments referred to in Article

28.1(b) shall be calculated and payable separately in respect of each NGSPA as follows:3.1.1 Subject to Article 3.1.6, Bonus payments shall be calculated on the basis of one million seven

hundred and ninety eight thousand eight hundred and eighty five Dollars (US$1,798,885) per

one (1) tcf of Natural Gas and ten thousand Dollars (US$10,000) per one (1) million Barrels of

Crude Oil (both pro-rated for parts thereof);

3.1.2 An agreed initial Bonus payment has been made by Contractor to SOCAR of US$5,991,011

(five million nine hundred and ninety one thousand and eleven Dollars) based on the

commercially recoverable reserves for Stage 1 as specified in the Development Programme

(being 2.68 tcf of Natural Gas and 117 million Barrels of Crude Oil);

3.1.3 An additional initial Bonus payment shall be made in respect of each NGSPA entered into

during the Development and Production Period (other than the NGSPA between SOCAR and

Botas Petroleum Pipeline Corporation dated 12th March 2001 which is covered by the payment

referred to in Article 3.1.2 ) and shall:

3.1.3.1 be calculated on the lesser of (i) the amount of Natural Gas that Contractor is obliged

to make available under the relevant NGSPA and (ii) the amount of Natural Gas that

the purchaser under the relevant NGSPA is obliged to take and pay for (or pay for if

not taken) if made available, to the extent that such amount is producible within the

remaining duration of the Development and Production Period, together with the

associated Crude Oil expected to be produced in association therewith ; and

3.1.3.2 be payable within thirty (30) days of the latter of (i) the date upon which the relevant

NGSPA enters into full force and effect all conditions precedent having been either

satisfied or agreed to be waived or (ii) the date when the Fifth Addendum is fully

executed;

3.1.4 Except as provided in Article 28.1(c) of the EDPSA, no further Bonus payment shall be made

in respect of an NGSPA until the end of the Calendar Year in which either the actual

cumulative Natural Gas or cumulative Crude Oil production from the Shah Deniz field in

respect of such NGSPA exceeds the amount of Natural Gas or Crude Oil production upon

which the initial Bonus in respect of such NGSPA has been calculated whereupon the

following provisions shall apply in respect of such NGSPA:

3.1.4.1



at the end of said Calendar Year, and at the end of each Calendar Year thereafter the

actual cumulative produced volumes of Natural Gas and Crude Oil shall be

determined in respect of such NGSPA and Contractor shall pay to SOCAR as

additional Bonus (i) an amount equal to the Bonus payable on such cumulative

produced volumes of Natural Gas (calculated in accordance with Article 3.1.1 above)

less any amounts already paid to SOCAR as Bonus in respect of such Natural Gas

pursuant to this Article 3 and (ii) an amount equal to the Bonus payable on such

cumulative produced volumes of Crude Oil (calculated in accordance with Article

3.1.1 above) less any amounts already paid to SOCAR as Bonus in respect of such

Crude Oil pursuant to this Article 3; and



107



3.1.4.2



3.2



any additional Bonus payable to SOCAR pursuant to this Article 3.1.4 shall be

payable within thirty (30) days of the latter of (i) the end of the Calendar Year to

which the payment relates or (ii) the date when the Fifth Addendum is fully executed;

3.1.5 Initial Bonuses shall not be repayable, in whole or in part, if, for any reason, the reserves upon

which they are based are not produced by Contractor.

3.1.6 For the purposes of calculating any additional initial Bonus payment payable pursuant to

Article 3.1.3 and any further Bonus payable pursuant to Article 3.1.4 the Dollar amounts

referred to in Article 3.1.1 shall be escalated at the rate of LIBOR, from the date of payment

referred to in Article 3.1.2 to the date when any additional or further Bonus becomes payable

pursuant to Article 3.1.3.2 or 3.1.4.2.

For the purpose of determining the value of Natural Gas equivalent to one (1) Barrel of Crude Oil, a

conversion factor of 5559 scf/boe has been used and shall also be used for the purposes of Article

28.1(c) of the EDPSA.



4 APPLICATION OF THE ADDENDUM

The Parties agree that references to the “EDPSA” in the Addendum made and entered into of even date with

the Agreement on the Exploration, Development and Production Sharing for the Shah Deniz Prospective

Area in the Azerbaijan Sector of the Caspian Sea shall be deemed to include a reference to the EDPSA as

previously modified and/or amended and as modified and/or amended by this Fifth Addendum.



5 ARBITRATION AND APPLICABLE LAW

Any disputes arising out of or in connection with this Addendum shall be resolved as provided in Article

23.3 of the EDPSA and the law governing this Addendum shall be as set out in Article 23.1 of the EDPSA.

IN WITNESS WHEREOF the parties hereto have executed this Addendum as of the

2008 by their duly authorised representatives.

For and on behalf of

State Oil Company of the Azerbaijan Republic



By

Title

By

Title

For and on behalf of

Azerbaijan (Shah Deniz) Limited

By

Title

By

Title

For and on behalf of

108



day of



BP Exploration (Azerbaijan) Limited

By

Title

By

Title

For and on behalf of

Total E&P Azerbaijan B.V.

By

Title

By

Title



For and on behalf of

Lukoil Overseas Shah Deniz Limited

By

Title

By

Title



For and on behalf of

Naftiran Intertrade Co. (NICO) Limited

By

Title

By

Title



For and on behalf of

Statoil Azerbaijan A.S.

By

Title

By

109



Title

For and on behalf of

Turkish Petroleum Overseas Company Limited

By

Title

By

Title



110