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PRODUCTION SHARING CONTRACT


ON COAL BED METHANE GAS OPERATIONS





IN PORTIONS OF PETROLEUM EXPLORATION AREAS


NEMEGT-VI AND BORZON-VII


BETWEEN





THE PETROLEUM AUTHORITY OF MONGOLIA


AND


STORM CAT ENERGY CORPORATION











dated February 26, 2004


 PRODUCTION SHARING CONTRACT





This is a Product Sharing Contract signed by the Petroleum Authority of Mongolia, on the one


side (hereinafter “PAM"), and Storm Cat Energy Corporation, on the other (hereinafter the


“Contractor”) on the day of February 26,2004.





GENERAL PROVISIONS


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


PAM, authorized by the Government of Mongolia to enter on its behalf into Contract related


to Coal Bed Methane gas (CBM) Operations in the territory of Mongolia, and exercise


supervision over implementation thereof.


The Contractor shall have exclusive rights for conducting Coal Bed Methane gas (CBM)


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


made the integral part of the present Contract.


The land, except that privately owned by Mongolian citizens, as well as the subsoil shall be


the property of the State. Mongolia in the interest of all its people may allow foreign


nationals, legal persons to lease land and exploit natural resources for a specified period of


time, purpose, under conditions and procedures as provided for by law.


NOW, THEREFORE, have agreed as follows:


ARTICLE I


REPRESENTATIVES


1.1 DESIGNATION OF REPRESENTATIVES


a) The Government of Mongolia hereby designates Mr. O. Davaasambuu, the Chairman


of the PAM, or any other authorized person, as its representative (the “Government


Representative”) under this Contract.


b) The Contractor hereby designates Mr. Craig Steinke, Manager of Acquisition of


Storm Cat Energy Corporation, as its representative (the “Contractor Representative”)


under this Contract


c) The Government Representative or the Contractor Representative may be changed by


notice to the other party in accordance with Article XXIII hereof.


1.2 GOVERNMENT REPRESENT A TIVE 'S RIGHT OF ACCESS


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


Government Representative) shall have access to the Contract Area and to all


Operations, and the Contractor shall provide all possible assistance to the


Government Representative to exercise such right of access.


b) The local administrative organizations of Mongolia shall visit the site of the


Contractor’s Operations only to gain access.


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


implementation.


ARTICLE II


DEFINITIONS


2. DEFINED TERMS





Page 1


If there is not explanation for certain case, the defined terms and understandings, forms


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


Coal Bed Methane gas (CBM1 means Natural Gas (mainly Methane) contained in coal or


bituminous lignite beds, shales and tight sands under reservoir condition and extracted there '


from during CBM Operations.


“Petroleum” means liquid petroleum and different compounds of hydrocarbons occurring


under the surface of the earth and which may be extracted in liquid, gaseous or solid state


individually or in combination.


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


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


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


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


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


February 13,1991 and any Laws amending or in substitution for, or in lieu of such law.


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


the Petroleum Law of Mongolia adopted by Government of Mongolia /Resolution No.204/ in


1991.


“Rules” mean rules, issued by the Petroleum Authority of Mongolia in accordance with the


Article 5 of the Regulation for Implementing the Petroleum Law of Mongolia should be


followed compulsory in the process of carrying out CBM Operations.


“Coal Bed Methane gas (CBM) Operations” mean operations related to the exploration,


development, protection, production, processing, transportation, storage and marketing of


CBM in scope of this Contract.


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


Mongolia to enter on its behalf into Contract related to CBM Operations in connection with


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


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


or hereafter enacted.


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


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


for conducting CBM Operations in the Contract Area and approved by the Government of


Mongolia.


“Effective Date” means the date on which this Contract is approved by the Government of


Mongolia.


“Exclusive right for conducting CBM Operations” means only the Contractor conduct


exercise special rights provided for in this Contract only for CBM Operations when it is in


effect.


“Subcontractor” means any legal person or individual, which concluded a Contract with the


Contractor to carry out certain portions of the CBM Operations.








Page 2


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


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


accordance with Article VII.


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


of longitude.


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


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


“Appraisal Area” means one or more geological structure(s) or occurrence(s) that the


Contractor determines to be worthy of being appraised by an Appraisal Program.


Field means an Area containing one or more natural reservoirs discovered on one or more


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


developed.


“Appraisal Program" means a work program, submitted by the Contractor, including a


Budget, for the purpose to evaluate and delineate a Commercial Discovery.


“Discovery Well” means a well by which Contractor discovers the existence of a CBM


reservoir, which is determined to require further evaluation for the puipose of determining


whether such reservoir could constitute a Commercial Discovery.


"Commercial Discovery" means a discovery of a reserves of CBM which the PAM and


Contractor determine to be capable of being developed commercially, based on consideration


of all pertinent geological and geophysical data, development costs, transportation and


marketing costs, available markets and other technical and economic factors deemed relevant.


“Operating Costs” means all costs and expenses except Exploration Costs and Development


Costs.


“Development Area” means an area authorized by the Government of Mongolia for CBM


Development within the Contract Area containing a Commercial Discovery.


“Appraisal Development” means a well development during appraisal, as international CBM


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


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


Costs) incurred in respect of Development Operations.


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


Discoveries, including:


1. drilling and producing of development and delineation wells, and


constructing and operating pipelines, terminals and other facilities;


2. separating, treating, dehydrating, compressing, liquefying, storing, flaring,


transporting and otherwise processing and handling CBM ; and


3. re-pressuring, recycling, and conducting pressure maintenance, secondary,


tertiary and other enhanced recovery activities.


“Development Period” means the period during which Development Operations will be


carried out in accordance with this Contract, as specified in Article 5.5


“Development Plan” means a program of work, including a Budget, for Development


Operations in respect of a Commercial Discovery.





Page 3


“Exploration Operations'* means such operations as:


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


and geochemical surveys; drilling and production of exploration and appraisal


wells; petrologic, mineralogical and paleontological studies, interpretations of


data preparing reports on exploration activities;


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


within a Commercial Discovery; and


3. carrying out an Appraisal Program.


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


out in accordance with this Contract.


“Exploration Costs” means all costs and expenses (except Operating Costs and Development


Costs) incurred in respect of Exploration Operations.


“Contract CBM” means CBM which is produced and saved from the Contract Area pursuant


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


rise to the surface and to pass through Production Sharing Measurement facilities, and


“saved” means made available to be taken and disposed of by a party hereto and not:


1. injected into a subsurface stratum within the Contract Area; or


2. used for filling up transferring pipe; or


3. lost through flaring, venting shrinkage, evaporation or otherwise during


Operations.


“Cost CBM*’ means a quantity of Contract CBM for recovering the Contractor’s costs and


expenses pursuant to Article 8.3.


“Production Sharing CBM” means the remaining part of Contract CBM after deducting the


Royalty and Cost CBM.


“Production Sharing measurement" is as in Article 11.1.


“Royalty” means payment in accordance with the Petroleum Law of Mongolia for utilization


of the natural non-renewable resources of Mongolia. Royalty shall be calculated with respect


to total production of Contract CBM at the wellhead.


“Calendar Month” means one (1) of the twelve (12) calendar months according to the


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


month, inclusive.


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


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


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


“Calendar Year” means a year according to the Gregorian Calendar starting on January 1 and


ending on December 31, inclusive.


“Budget” means an estimate of income and expenditures.


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


“Tax” means a non-refundable capital entering to the State or Local budget, by determined


percent calculated to income, estate, goods, service of citizens and enterprises for certain


period, as stated in legislations.





Page 4


“Fee” means a capital received by authorized entity for its each service for citizen and


enterprises, and entering to the State or Local budget, as stated in legislations.


“Payment" means a capital entering to the State or Local budget and special funds, from


citizen and enterprises for utilization of a State property (land except privatized to citizens,


underground, its reserve, forest, water resource and others).


“Land Surface Rental" non-refundable payment to representative of the Government by size


of a contract area as stated in “Regulation for Implementing the Petroleum Law” for


Contractor’s exclusive right only for CBM Operation in the contract area.


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


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








ARTICLE ID


RIGHTS AND OBLIGATIONS OF


GOVERNMENT REPRESENTATIVE AND CONTRACTOR


3.1 GOVERNMENT REPRESENTATIVE’S RIGHTS








The Government Representative shall have the following rights:


a) to inspect CBM Operations of the Contractor;


b) to possess all the original copies of geology, geophysics, petrochemistry ,


geochemistry and other related fields data;


c) to possess copies of documents related to all the Contractors operations,


machinery, equipment, technical definitions, houses, constructions, its drafts and


others;


d) to exercise the right to request the Contractor to supply its share of CBM for


Mongolia’s internal consumption, at fair market value, if Contractors wishes


price of the CBM shall be paid in foreign currency;


e) to use or sell the it’s share of Production Sharing CBM;


f) to exercise other rights provided for in this Contract


3-2 GOVERNMENT REPRESENTATIVE’S OBLIGATIONS


The Government Representative shall assume the following responsibilities:


a) to support CBM operations conducted by Contractor;


b) to inspect and supervise implementation of Mongolian legislation related to


CBM Operations;


c) to exercise other rights provided for in this Contract


3-3 CONTRACTOR SRIGHTS


a) The Contractor shall have the exclusive rights to conduct CBM Operations within


the Contract Area;


b) The Contractor shall have a right to requisite approvals, to construct pipelines,


bridges, roads, storage facilities, houses, landing fields, radio towers and


communication facilities;


c) The Contractor shall have a right to use or sell (both within the Mongolia and


abroad) the Contractor’s share of Production Sharing CBM;


d) The Contractor shall have a right to assign, transfer, or otherwise convey of all or


part of its rights and interests under this Contract to any third party with the prior





Page 5


 written consent of the Government Representative, which will not be


unreasonably withheld;








3.4 CONTRACTOR S OBLIGATIONS





During the conduct the CBM Operations the Contractor shall assume the following


responsibilities:





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


Petroleum Law of Mongolia, which ratified by the authorized body and ail





b) applicable Laws of Mongolia;


CBM Operations will be conducted in accordance with the standards and


regulations that shall comply with the universal practices accepted in the


international CBM industry. It is also understood that the execution of the CBM


c) Operations shall be exercised so as not to conflict with obligations imposed on


the Government of Mongolia by international treaties;


be responsible for the timely preparation and execution of the CBM Operations,


the technology, techniques and equipments are to be used for efficient





d) development of CBM and shall comply with the best practices accepted in the


international CBM industry;


conduct an environmental impact assessment in accordance with current


applicable Laws prior to the beginning of Contractor’s activities


e) to take the following measure necessary to protect human, animals, nature,


national resource, land surface:


1. to prevent hazards to environment, human life or health and property of


others during the conduct of CBM Operations;


2. prior to the Contract expiration or termination, or relinquishment or


abandonment of any part of the Contract Area, remove all equipment and


installations from the area in a manner acceptable to the Government


Representative, and perform all necessary site restoration activities in


accordance with applicable Laws and regulations of Mongolia;


3. include in the annual Budget estimates of the anticipated abandonment and


site restoration costs for each exploratory well;


4. If file Contract Area is located near forbidden for CBM Operations Area take


the necessary precautions for protection of ecological systems, and prevent


pollution of the Contract Area;


0 submit to all original geological, geophysical, geochemical, drilling, production


data, laboratory analysis results and other data and reports as it may compile


g) during the term hereof;


assist the Government Representative in preparing and carrying out plans and


b) programs for training and education of Mongolian nationals;


be responsible for the damages causes by violation of CBM Operations


Regulations.





ARTICLE IV


COSTS AND EXPENSES


Except as otherwise provided herein, the Contractor shall bear all costs and expenses


necessary to conduct CBM Operations. If such CBM Operations result in a Commercial


Discovery of CBM, the Contractor may recover such costs (“CBM Costs”) and 40 (forty)


percent of CBM will be used for cost recovery. Neither party hereto guarantees that any such


discovety will be made, or if made, that it will be Commercial Discovery. Accordingly, there


shall be no guarantee that the Contractor will achieve any reimbursement of any costs and


expenses incurred hereunder.








Page 6


 ARTICLE V


TERM OF EXPLORATION OPERATIONS





5.1 EXPLORATION PERIOD


a) The Exploration Period shall begin on the Effective Date. The Exploration Period


shall be up to five (5) years duration and shall consist of three phases. The


Government Representative might require shortening this term to be less than five (5)


years, depending on the type, amount and cost of minimum work obligations


proposed by the Contractor.


b) The duration of the first phase of the Exploration Period shall be one (1) Calendar


Year, the duration of the second phase shall be two (2) Calendar Years and the


duration of the third phase shall be two (2) Calendar Years respectively.


5.2 EXTENSION OF EXPLORATIONPERIOD


a) The Government Representative shall consider granting an extension of the


Exploration Period, if the Contractor, at least thirty (30) days prior to the expiration of


any phase of the Exploration Period gives written notice to the Government


Representative of the Contractor’s desire to extend the Exploration Period.


b) If the Contractor has fulfilled exploration work programs, Budgets and minimum


work obligations as specified below foT the phase of the Exploration Period, the


Government Representative may, subject to the agreement with the Contractor,


extend the Exploration Period two (2) times for two (2) years duration each. The


Government Representative shall verify exploration work programs and Budgets in


order to extend the Exploration Period.


c) If on the date on which the third Exploration Period would otherwise expire a


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


whether such discovery is a Commercial Discovery, the Exploration Period shall


continue in effect in respect of the Appraisal Area for such Discovery Well until the


first to occur of the following:


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


ii) such Discovery Well is determined not to be a Commercial Discovery;


iii) additional extension shall not be more than one year.


5.3 DISCOVERY AND APPRAISAL OPERATIONS


a) If a well is determined to be a Discovery Well, the Contractor shall within fifteen (15)


days notify in written the Government Representative and the date of such notice


shall be deemed to be the date of such Discovery Well.


b) Within ninety (90) days after the date of each Discovery Well, the Contractor shall


provide to the Government Representative for approval in respect thereof; an


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


appraised (the "Appraisal Area”); and after Government Representative's approval


shall begin to implement the Appraisal Program.


5.4 COMMERCIAL DISCOVERIES


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


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


notify in writing the Government Representative within fifteen (15) days, and the date


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


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


the Contractor shall provide to the Government Representative for approval in respect


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





Page 7


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


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


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


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


approval period for one hundred eighty (180) days if decides that all documents shall


be amended and changed.


c) within ninety (90) days after Government Representative's approval shall commence


Development Operations to implement such Development Plan


5.5 COMMERCIAL DISCOVERY. TESTING. DEVELOPMENT PERIOD


a) the Commercial Discovery establishment period shall be included in Appraisal


Program;


b) the period for Testing the Commercial Discovery establishments shall be


continued for one hundred eighty (180) days.


c) Development Period in respect of each Commercial Discovery shall take effect


on the date of such Commercial Discovery and shall continue for a period of up


to twenty (20) years.


5.6 REVISIONS OF APPRAISAL PROGRAMS. APPRAISAL AREAS.


DEVELOPMENT PUNS AND DEVELOPMENT AREAS


Subject to Government Representative's approval, the Contractor may, on the basis of


additional information or evaluation, revise any Appraisal Program, Appraisal Area,


Development Plan and Development Area; provided, however, that no such revision will add


to an Appraisal Area or Development Area any parts of the Contract Area that have already


been relinquished under Article VII prior to such revision.


5.7 EXTENSION OF DEVELOPMENT PERIOD


The Government Representative may, upon mutual agreement with the Contractor, extend


the Development Period two (2) times, with each extension being up to five (5) years in


duration. The Government Representative shall consider granting an extension of the


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


Development Period gives written notice to the Government Representative of the


Contractor’s desire to extend die Development Period.








ARTICLE VI


EXPLORATION OPERATIONS


6.1 MANDATORY WORK AND OBLIGATIONS


a) Within one hundred eighty (180) days from the Effective Date the Contractor shall


commence the Exploration Operations. The Contractor shall be obliged to perform mandatory


work and undertake minimum work obligation in an amount as specified in Annex C. If the


Contractor did not spend such amount, then the Contractor shall pay die difference to the


Government Representative within thirty days after the end of the Contract Year of the


Exploration Period being undertaken.


b) Should the Contractor undertakes more work than minimum work obligation, the


excess expenditures shall be carried forward to the next Contract Year of the Exploration


Period.


c) In the event the contract is terminated by the Contractor, the only obligation for the


Contractor to spend the minimum work obligation amount for that Contract Year is the


subject of the payment pursuant to the Article 6.1 .a.


Page 8


6.2 DRILLING METHODS





Any exploration well which the Contractor becomes obligated to drill under this paragraph 1


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


international CBM industiy and shall be deemed drilled upon the first to occur of the


following:


a) it reaches the projected depth;


b) it becomes a Discovery Well;


c) it reaches basement rock; or


d) it encounters impenetrable substance or excessive geothermal gradients.





6.3 EXPLORA TION WORK PROGRAMS AND BUDGETS





Within sixty (60) days after the Effective Date, and thereafter at least forty five (45) days


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


work programs and Budgets setting forth the Exploration Operations which die Contractor


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


programs and Budgets for approval to the Government Representative. At least thirty (30)


days prior to the beginning of such Contract Year, the Contractor and Government


Representative shall meet to review and discuss such exploration work program and Budget.


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


Contractor shall promptly provide copies of such revision to the Government Representative


and within fifteen (15) working days following the receipt thereof the Contractor and the


Government Representative shall again meet to review and discuss such changes.











ARTICLE VO


RELINQUISHMENTS


7-1 MANDATORY RELINQUISHMENTS


The Contractor:


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


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


Contract Area;


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


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


Contract Area; and


c) may relinquish at or prior to die expiration of the Exploration Period, all remaining


portions of the original Contract Area, except Appraisal Areas and Developments


Areas.


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


and equipment of any part of the original Contract Area into its original form prior to


relinquishment.


7.2 VOLUNTARY RELINQUISHMENTS


a) the Contractor may voluntarily relinquish all or any part or parts of the Contract


Area under paragraph 1 of Article VI, and any such voluntary relinquishments


shall be credited toward the mandatory relinquishments under paragraph 1 of


Article VII;


b) the Contractor shall make no voluntary relinquishment for the purpose of


reducing or rescinding a minimum work obligation, which the Contractor shall





Page 9





!








have then already become obligated to under paragraph lof Article VI hereof.


The Contractor shall pay to the Government Representative within thirty (30)


days before the relinquishment





7.3 APPRAISAL AREAS


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





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


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


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


Contractor shall pay to Ae Government Representative within Airty (30) days before


relinquishment.





ARTICLE VHl


ROYALTY AND PRODUCTION SHARING





8.1 ROYALTY


1. The Contractor shall pay Ae Royalty based upon Ae price of the Contract CBM for each


Calendar Quarter. The Royalty shall be equal to seven and one half (7.5) percent calculated


with respect to total production of CBM.





2. The Royalty payment shall be determined pursuant to paragraph 5 of Article VIII and such


Royalty payment shall be made before Ae last day of Ae last MonA of each Calendar


Quarter, or as otherwise approved by Ae Government Representative.


8-2 MARKETING OF CBM





a) The Contractor shall have right to market all CBM produced and saved from Ae


Contract Area.


b) If Ae Government of Mongolia decides to take any of its portion of CBM by


calculating in currency from marketed CBM, or in kind from produced and saved


CBM it shall so advise Ae Contractor in writing not less than thirty (30) days prior to


Ae commencement of each Calendar Quarter specifying Ae quantity which it decides


to take.


8.3 COST CBM





a) The Contractor shall have Ae right to take and dispose of Ae certain quantity of


Contract CBM for each Calendar MonA (herein referred to as “Cost CBM”) for Ae


purpose of recovering its costs and expenses incurred in respect of CBM Operations.


The quantity of Cost CBM which Ae Contractor shall have Ae right to take and


dispose of in any Calendar MonA shall be equal to Aat quantity of Contract CBM


which has a value equal to Ae aggregate of all CBM Costs incurred by Ae Contractor


and allowed to be recovered pursuant to this Contract; provided, however, Aat Ae


Contractor shall be entitled to take Cost CBM not exceeding 40 percent of all


Contract CBM for any Calendar MonA. All Operation Costs of Ae Contractor that


remain unrecovered hereunder shall be carried forward until fully recovered in Ae


succeeding Calendar Months.


b) The Parties shall agree on Ae planning and accounting model for Ae CBM


Operations and shall submit to Ae Government Representative a copy of accounts for


CBM Costs. The Contractor shall notify Ae Government Representative of Ae


amount of the CBM Costs and Ae meAod of their recovery.





Page 10


 c) Contractor will classify CBM Cost into Exploration Cost, Operation Cost and


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


by the following stages


1. Exploration Cost,


2. Operation Cost and


3‘. Development Cost


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


Exploration Period and Exploration Cost within Development Period.


d) Notwithstanding the foregoing, the Royalty to be paid under paragraph 1 of Article


VIII and the bonuses and other payments to be paid under Article X shall not be


recoverable and shall not be included in Cost CBM under this paragraph 3 of Article


VIII.








8.4 PRODUCTION SHARING CBM


a) After reduction by the Royalty and the quantity of Cost CBM for each Calendar


Month, the remaining quantity of Contract CBM (herein referred to as “Production


Sharing CBM”) shall be allocated between the Government of Mongolia and the


Contractor in proportion to the percentages set forth below, based upon the average


daily quantity of Contract CBM for a given Calendar Month:





1. If average daily quantity of Contract CBM for any Calendar Month is less than


1.000.000 m3:


Government of Mongolia 20 %


Contractor 80 %


j 2. If average daily quantity of Contract CBM for any Calendar Month equals to or


i exceeds 1.000.001 m3 but is less than 2.000.000 m3:


Government of Mongolia 25 %


j Contractor 75 %


3. If average daily quantity of Contract CBM for any Calendar Month equals to or


exceeds 2.000.001 m3 but is less than 3.000.000 m3:


Government of Mongolia 30 %


Contractor 70 %


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


exceeds 3.000.001 m3 but is less than 4.000.000 m3:


Government of Mongolia 35 %


Contractor 65 %


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


exceeds 4.000.001 m3:


Government of Mongolia 40 %


Contractor 60 %





b) If the balance of unrecovered CBM Costs is less then the forty (40) percent of the


total quantity of Contract CBM, such the difference between die forty (40) percent of


the total quantity of Contract CBM and the balance of unrecovered CBM Costs shall


be calculated as a Production Sharing CBM.


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


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


Month by the total number of days of such Calendar Month.





Page i 1


d) The value of the share of Government of Mongolia of Production Sharing CBM shall


be determined pursuant to paragraph 5 of Article VIII and the payment of the share of


Government of Mongolia of Production Sharing CBM shall be made to the


Government Representative within thirty (30) days from the end of each Calendar


Quarter.


8.5 VALUA TION OF CONTRACT CBM


a) For putposes of determining the value of Royalty to be paid to the Government of


Mongolia pursuant to Article 8.1 and the value of Cost CBM and Production Sharing


CBM to be allocated between the Government of Mongolia and the Contractor


pursuant to paragraph 3 of Articles VIII and paragraph 4 of Article VIII, a Contract


CBM shall be determined at the world market price (each Calendar Month).


b) The exact procedure of determining die value of Contract CBM shall be adopted by


mutual agreement between Government Representative and Contractor prior to


conclusion of any agreements with third parties with regard to marketing of Contract


CBM.


c) In every Calendar Months Contract CBM price will be calculated by arms-length


method price of the Contractor. Transportation costs shall be agreed by Government


Representative and Contractor with respect to the international rates and shall be


included to the Contract CBM price.


8.6 FORECASTS OF PRODUCTION


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


of each Calendar Quarter the Contractor shall furnish to the Government


Representative a forecast setting out the total maximum possible quantity of CBM


that the Contractor estimates to produce and market, price and other relevant factors


according to practices in the international CBM industry.


b) The Contractor’s forecast shall include estimates of Royalty, Cost CBM and the


respective entitlements of the Government of Mongolia and the Contractor to


Production Sharing CBM during such Calendar Quarter. The Contractor shall


endeavor to produce the forecasted quantities.


8.7 UNDERMFT7NG AND OVERLIFTING


It is recognized that any party hereto may, from time to time, fail to take the Ml quantity of


Contract CBM to which such party is entitled (such party being called an “Underlifter”


herein). When that occurs, full production may be continued for the benefit of the other party


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


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


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


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


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


orderly operations for production and sales.


ARTICLE IX


NATURAL GAS, CRUDE OIL A ND OTHER MINERALS


9.1 The Contractor shall promptly report to the Government Representative the presence


of potentially commercial accumulations of minerals, including Crude Oil and Natural Gas


other than CBM Gas which are not associated with CBM but are encountered and recognized


by the Contractor while conducting CBM Operations within the Contract Area.


Such minerals, Crude Oil and Natural Gas shall remain the property of Mongolia.








Page 12


9.2 The Government Representative and Contractor hereby agree on following:


a) In case of Crude Oil: - the Parties shall negotiate on conclusion of a separate Production


Sharing Contract;


b) In case of Natural Gas other than CBM new terms shall be agreed as an amendment to the


present Production Sharing Contract;


9.3 Contractor acknowledges that PAM has retained crude oil and natural gas rights in this


Contract Area during the effective period of this contract except for CBM as defined in this


contract.





ARTICLE X


BONUSES, INCOME TAXES AND OTHER FEES


10.1 SIGNATURE BONUS. PRODUCTION START-UP BONUS AND


PRODUCTION BONUSES


a) The Contractor shall pay to the Government Representative the sum of sixty thousand


US $ (60.000) as a Signature Bonus within 60 days after ratification of this Contract


by the Government of Mongolia.


b) The Contractor shall pay to the Government Representative:


i) the sum of U.S.$ 250,000 (two hundred fifty thousand) as a Production


Bonus upon the first sale of Contract CBM


ii) the sum of U.S.$ 500,000 (five hundred thousand) as the Production Bonus


after average daily quantity of Contract CBM for any Calendar Month


exceeds 1,000,000 meter cubic (m3);


iii) the sum of U.S.$ 750,000 (seven hundred fifty thousand) as the Production


Bonus after average daily quantity of Contract CBM for any Calendar Month


exceeds 2,000,000 meter cubic (m3);


iv) the sum of U.S.$ 1,000,000 (one million) as the Production Bonus after


average daily quantity of Contract CBM for any Calendar Month exceeds


3,000,000 meter cubic (m3); and


v) the sum of U.S.S 1,250,000 (one million two hundred fifty thousand) as a


Production Bonus after average daily quantity of Contract CBM for any


Calendar Month exceeds 4,000,000 meter cubic (m3).


10.2 TRAINING BONUS


The Contractor shall pay to Government Representative the sum of forty thousand U.S. $


(40,000) per year as a Training Bonus annually within thirty (30) days after beginning of each


Contract Year.


10.3 TAXES


The Contractor shall pay taxes levied by the Legislations of Mongolia except as prescribed in


Article XVI.


10.4 LAND SURFACE RENTAL FEE


a) The Contractor shall pay to the Government Representative the Land Surface rental


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





Page 13


Contractor shall pay the following annual surface rentals:


i. For Contract Area during the First phase


of the exploration period per square kilometer


(excluding Development Areas) 1,00 US $


ii. For Contract Area during the Second phase


of the exploration period per square kilometer


(excluding Development Areas) 2.00 US $


iii. For Contract Area during the Third phase and extension


terms of the exploration period per square kilometer


(excluding Development Areas) 4.00 US $


iv. For the Development Area, per square kilometer 50.00 US S


b) The Contractor shall pay such pledge fees within (90) days from the Effective Date


and shall pay such pledge fees annually within thirty (30) days after beginning of each


Contract Year.





10.5 ADMINISTRATIVE SER VICE FEES


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


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


Application for Contract Area, Application for Development Area, Term of Development


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


Contractor shall pay the following Administrative Services Fees:





a) For each Contract Area Application 10.000 US $


b) For each extension of exploration term 25.000 US $


c) For each Development Area permit 50.000 US $





c) For each change or adjustment 25.000 US $


in the Development Area


e) For each extension of Development term 100.000 US S





0 For each application to transfer any rights and


obligations for CBM Operations 100.000 USD





ARTICLE XI


MEASUREMENTS


11.1 PRODUCTION SHARING MEASUREMENTS


a) Measurements made for the purpose of determining the quantities of Contract CBM


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


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


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


other purposes (including meters to test or estimate production rates of individual


wells) and will not necessarily conform to the same standards as the Production


Sharing Measurements.





Page 14


b) Such Production Sharing Measurements shall be made at or near the final outlet


flange or flanges of an export pipeline system or such other facility to which


Contractor delivers CBM under Article VIII or IX. If Contract CBM is allocated to


more than one well or discovery for any purpose, the Contractor shall make such


allocations by methods generally used in the international CBM industry.


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


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


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


been made; provided, however, that nothing herein contained shall limit the right of


the Government of Mongolia to take and dispose of its share of Contract CBM


required to meet demand therefore within Mongolia.


11.2 CORRECTIONS OF MEASUREMENTS


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


Sharing Measurements, the Contractor shall give notice to the Government


Representative and enable the Government Representative to observe such operation.


b) The Government Representative shall be entitled to observe any Production Sharing


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


any such testing reveals that such measurements are not in accordance with generally


accepted methods used in the international CBM industry, the Government


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


Contractor has not commenced and diligently continued remedial action within thirty


(30) days following such request, or it has been commenced but with hold up the


Government Representative may cause the same to be corrected and recover the costs


thereof from the Contractor.


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


efforts to determine the correct production figures for the period during which there


was a measuring error and correct previously used readings. The Contractor shall


submit for the Government’s approval a report on the corrections carried out If it


proves impossible to determine when the measuring error first occurred, the


commencement of the error shall be deemed to be that point in time halfway between


the date of the last previous test and the date on which the existence of the measuring


error was first discovered.


11.3 MEASUREMENT RECORDS


The Contractor shall maintain records of Production Sharing Measurements for a period of at


least five (5) years from the date thereof and the Government Representative shall have access


thereto at all reasonable times.








ARTICLE XII


EXPLORATION, PRODUCTION


AND TECHNICAL DATA OF CBM


12.1 TITLE OF TECHNICAL DATA


The Government Representative shall have title to all original data, including but not limited


to geological, geophysical, petrophysical, geochemical, all well completion reports, drilling,


petrologic, completion status reports and all other original data that Contractor may compile


during the term hereof, provided, however, that such data shall not be disclosed to third


parties without informing the Contractor and giving the Contractor the opportunity to discuss


the disclosure of such data if the Contractor so desires.


12.2 GENERAL ACTIVITIES RECORDS





Page 15





The Contractor shall maintain technical records of its CBM Operations including but not


limited to exploration, development, production and refining operations in accordance with


generally accepted practices in the international CBM industry. Such records shall be in the


English language. The Contractor shall provide all such documents and reports to the


Government Representative on a monthly, quarterly and yearly basis.


12.3 GEOPHYSICAL DATA


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


Representative in accordance with Government Representative’s verified Regulation.


12.4 EXPLORATION. PETROPHYSIC.LABORATORY STUDIES. PRODUCTION AND


PRODUCTION TEST DATA





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


international CBM industry and provide such data to the Government Representative.


Subject to the Government Representative's consent, for the purpose of testing and laboratory


analysis the Contractor shall have the right to take and remove from Mongolia samples of


cores /sample duplicate/, well cuttings /sample duplicate/ and rocks. The Contractor may


dispose of such samples unless the Government Representative requests to return such


samples within three (3) year following die above consent. If the Contractor plans to test a


well, the Contractor shall inform the Government Representative of the time when such well


is scheduled to be tested and expenditure of such tests. Testing period shall be 1-6 months. If


the Government Representative requests, allow him to be present to observe such testing.


12.5 REPORTS ON PROCESSED DATA. EXPLORATION RESULTS AND CBM


RESERVES


The Contractor shall provide to the Government Representative such data and reports in


accordance to the Rules adopted by the Government Representative.


12.6 DEVELOPMENT AND PRODUCTION OPERATIONS


The Contractor shall maintain records showing quantities of CBM produced from each well


and shall provide to the Government Representative such data and reports as outlined in the


Rules adopted by Government Representative.


12.7 JOINT COMMITTEE


a) Upon commencement of the Development Period for the first Commercial Discovery


hereunder, the Contractor and the Government Representative shall form a joint


committee to review data and the production activities of all productive reservoirs,


and co-ordinate administrative matters between the Government Representative and


the Contractor.


b) The joint temporary committee shall be created in accordance with the paragraph 7 of


Article XII if Contractor sells or exploits Contract CBM gained from experimental


Development Period which continued more than a year before term of Development


Operations commences.


12.8 CONFIDENTIALITY


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


throughout the term of this Agreement as confidential and shall not divulge it to any third


party without the consent of the other party hereto. The foregoing confidentiality obligation


shall not apply to:





Page 16


 (i) disclosure by either party hereto to its employees, Affiliates, consultants,


prospective assignees, prospective lenders or Subcontractors to die extent


required for the conduct of Operations; or


(ii) disclosure by either party hereto to the extent required to comply with


applicable Laws, or the rules or regulations of any stock exchange on


which a party’s, or its Affiliate’s, shares are listed.


(iii) disclosure to the Contractor investors or shareholders. The receiving side


shall agree to keep such information confidential.





ARTICLE XHI


ACCOUNTING DATA





13.1 BOOKS OF ACCOUNT


The Contractor shall maintain books of account in respect of Operations in accordance with


the Accounting Procedures attached as Annex C and with generally accepted accounting


procedures as practiced in the international CBM industry. Such books of account shall be in


the English language and in United States Dollars.


13.2 ACCOUNTING REPORTS


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


Government Representative in accordance with the Accounting Procedure attached as Annex


C. After the Contractor opens an office in Mongolia, the Contractor shall maintain copies of


such accounting reports, statements and other information at that office, and the Government


Representative shall have access thereto at any time it desires.


13.3 INSPECTIONS


a) The Government Representative shall have the right to inspect and audit the


Contractor’s books of account and other supporting documents in respect of


CBM Operations.


b) Cost related to die conduct of such inspection shall be bom by the


Contractor.


13.4 AUDIT


a) Auditor, determined in Article 13, has to right to have inspection of financial


accounts, financial reports, inventory and goods, voucher, salary payment,


invoice, a contract directly and indirectly related to this contract, sub-contractor


contract, other agreements, and all documents related to Operation necessary


times with considerable reason. Also, auditor has right to have inspection in sites,


in Mongolia and abroad, related to Operation, facilities, storages, offices, to meet


relative person necessary times with considerable reason.


b) All documents shall be saved for 5 (five) years since its origin, as stated in Law,


has to be ready to be inspected.








ARTICLE XIV


GOVERNMENTAL ASSISTANCE


14.1 GENERAL ASSISTANCE


The parties hereto recognize that Contractor may require assistance from Government


Representative to conduct Operations and to accomplish the objectives of this Contract.





Page 17


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


mutual benefit of Mongolia and Contractor, the Government Representative shall assist


Contractor to the extent reasonably possible to enable Contractor to fulfill its obligations,


exercise its rights, including assistance in obtaining governmental permits, registrations,


licenses, visas, consents and other rights necessary for Contractor to conduct CBM


Operations.


14.2 OTHER ASSISTANCE


The Government Representative may otherwise assist and expedite the Contractor’s execution


of the Operations by providing facilities, supplies and personnel, supplying or otherwise


making available all necessary visas, work permits, transportation, security protection and


rights of way and easements as may be requested by the Contractor and made available from


the resources under the Government Representative's control.


The Parties agree that aforesaid Governmental assistance shall clearly be only at request of


the Contractor.


14.3 GOVERNMENTAL ASSISTANCE CONTRIBUTION


The Contractor shall pay to the Government Representative the sum of twenty thousand US $


20,000 annually within thirty (30) days from the beginning of each Contract year as


Governmental Assistance Contribution.


ARTICLE XV


USE AND OWNERSHIP OF PROPERTY


15.1 EQUIPMENT AND FACILITIES


The Contractor's wholly owned equipment, facilities and supplies used for Operations, the


costs and expenses of which are frilly recovered by Contractor upon the termination of this


Agreement, shall become the state property of the Government of Mongolia at no additional


cost at the time when cost of such equipment, facilities and supplies have been recovered by


Contractor. Notwithstanding any other provision herein, upon the termination of this Contract


all Contractor's wholly owned equipment, facilities supplies and real estate shall become the


state property of the Government of Mongolia at no additional cost. It is understood that this


paragraph 1 of Article XV shall not apply to any item that are leased by the Contractor from


any other party, including Affiliates.





ARTICLE XVI


TAX EXEMPTIONS


16.1 INCOME. CUSTOME. VALUE-ADDED. EXCISE AND OTHER CORPORATE TAX


EXEMPTIONS





It is understood that:


a) pursuant to the Law on Amendments to the Customs Tariff Law of Mongolia,


effective from February 5,2000, the following items shall be exempted from customs


taxes:


i. imports of machinery, equipment, materials, raw materials, spare parts,


gasoline, diesel fuel, foodstuff and personal items of employees necessary for


the conduct of operations in accordance with the contract on principles of


production sharing, concluded with the Government of Mongolia;


ii. exports of machinery, equipment imported on the conditions of re-export for





Page 18


• 1


I








the conduct of operations in accordance with the contract on principles of


production sharing, concluded with the Government of Mongolia; and


iii. exports of contractor's share of CBM.


b) pursuant to the Law on Amendments to the Value Added Taxes Law of Mongolia,


effective from January 8, 1998, machinery, equipment, materials, raw materials, spare


parts, gasoline, diesel fuel, foodstuff and personal items of employees imported for


the conduct of operations in accordance with the contract on principles of production


sharing, concluded with the Government of Mongolia shall be exempted from value


added taxes.


c) pursuant to the Law on Amendments to the Excise Taxes Law of Mongolia, effective





from January 21, 1993, gasoline and diesel fuel imported for the conduct of


operations in accordance with the contract on principles of production sharing,


concluded with the Government of Mongolia shall be exempted from excise taxes.


d) pursuant to the Law on Amendments to the Business Entities Income Tax Law of





Mongolia, effective from January 9,1998, income gained from sold product’s allotted


to foreign entities operating in Mongolia for the conduct of operations in accordance


with the contract on principles of production sharing concluded with the Government


of Mongolia, shall be exempted from business entity income taxes.


16.2 Contractor’s Sub-contractor(s), affiliate(s) and their employees have rights as the


Contractor and its employees as prescribed in Article 16.








ARTICLE XVII


EXCHANGE RIGHTS


17.1 FOREIGN CURRENCIES


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





quoted by the Mongol Bank.


17.2 FOREIGN BANK ACCOUNTS


The Contractor is hereby authorized to open, maintain, control and operate accounts in any


currency in foreign banks outside of Mongolia, to have full and complete control of such


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


17.3 EXCHANGE RIGHTS





The Contractor is hereby granted the following exchange rights:





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


Operations and to convert such currencies to Mongolian currency through any bank


of Mongolia at the exchange rate prescribed in paragraph 1 of Article XVII;


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


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


the export, sale or exchange of it's share of CBM;


d) To repatriate abroad and freely dispose of all proceeds received within Mongolia


from the sale, exchange or export of it's share of CBM;


e) To pay its Subcontractors and expatriate employees in foreign currencies, either


inside or outside of Mongolia; such employees shall only be required to bring into


Mongolia such foreign currencies as are required to meet their personal living


expenses;





Page 19


f) To maintain a special account or accounts in a bank in Mongolia chosen by the


Contractor for non-Mongolian currency which can be disbursed for the purpose of


making payments to the Government Representative or the Government of Mongolia


hereunder, or making other payments required for Operations.


17.4 PAYMENTS UNDER THIS CONTRACT





Any payments made by either party hereto shall be made in U.S. Dollars unless the parties


mutually agree upon another currency.





ARTICLE XVIII


MONGOLIAN SUBCONTRACTORS, MATERIALS AND EMPLOYEES





18.1 SELECTING MONGOLIAN SUBCONTRACTORS. MATERIALS AND


EMPLOYEES





The Contractor and its Subcontractors shall:


a) give preference to Mongolian Subcontractors so long as their prices and performance


are comparable with international prices and performance;


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





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


internationally available materials, equipment, machinery and consumables; and





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


qualified and provided, further, that the Contractor has the right to employ its own


personnel in key positions. The Contractor shall have appropriate approval from


Employment Authority of Mongolia to place its own workers on important positions.


It is recognized that the Contractor may require the assistance of the Government


Representative in order to identify any such prospective Mongolian Subcontractors,


locally manufactured items, and Mongolian employees, and that the Contractor's


obligations under this Article XVHI are accordingly conditioned upon the


Contractor’s having timely knowledge thereof. The Contractor shall pay disability


allowances in accordance with the Laws of Mongolia to those Mongolian national


employees who may temporarily or permanently lose their ability to work as a result


of an accident while performing their duties undo1 this Contract








ARTICLE XIX


EMERGENCIES


19.1 EMERGENCIES IN OPERATIONS





The Contractor may take all actions it deems necessary to meet any emergency. The


Contractor shall promptly notify the Government Representative of any such emergency.





19.2 NATIONAL EMERGENCY


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


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


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


production.


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


opportunity to express its views in respect of such requisition.





Page 20











s' «r


rfrf'-


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


accordance with the applicable Laws of Mongolia, duly notified to the Contractor,


until such national emergency is ceased.


d) The Government of Mongolia shall indemnify the Contractor from all losses which


result from such requisition.








ARTICLE XX


FORCE MAJEURE


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


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


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


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


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


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


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


otherwise allowed therefore hereunder, and to the applicable Exploration Period and/or


Development Period. No action resulting from Force Majeure shall be treated as a breach of


this Contract.


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


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


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


Article V until the quantities that could have been produced and saved therefrom at capacity


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


quantity of CBM that the wells then existing on such Commercial Discovery or Discoveries


could have produced in accordance with generally accepted practices of the international


CBM industry had the interruption of Development Operations not occurred. Within ninety


(90) days following each Calendar Year, the Contractor will notify the Government


Representative of the cumulative quantities of CBM, which are to be made up as herein


provided.





ARTICLE XXI


CANCELLATION


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


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


Representative that this Contract is canceled.


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


twenty (120) days following tile Effective Date, the Government Representative shall cancel


Contract.


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


own Representative’s suggestion if the Contractor knowingly breaks this Contract or commits


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


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


to implement this Contract.


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


Articles XXI or paragraph 3 of Article XXI, the Government Representative shall give the


Contractor written notice. If within thirty (30) days from such notice the Contractor shall not


have commenced to remedy such breach, and if the Contractor shall not have been delayed or





Page 21


prevented therefrom because of Force Majeure, the Government Representative may


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


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


pay to Government Representative for failed budgeted work fees for the Contract Year.


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


from Mongolia all movable property (other than described in paragraph 1 of Article XV) used


in respect of Operations, which is leased or otherwise not wholly owned by the Contractor.


21.6 The Contractor shall have the right to cancel this Agreement for any reason upon 90


(ninety) day notification to the Government Representative, whereupon all obligations of the


Contractor shall terminate except as for minimum work obligation as set forth in Article 6.1.





ARTICLE XXII


ARBITRATION AND LIABILITIES


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


course of CBM operations shall be settled by Mongolian arbitration in accordance with the


laws of Mongolia.


22.2 Upon request of the Party concerned, any dispute related to this Contract, such as


modification of its terms or its cancellation may be settled in accordance with the


UNCITRAL Arbitration Rules.


22.3 If Contractor undertakes any operations in breach of the provisions of the Petroleum


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


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


of Mongolia.


22.4 Any losses resulting from a breach of contractual obligations by either party shall be


recovered from the offending party.


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


goodwill and good faith.





ARTICLE XXIII


NOTICES


23.1 Written notices to the Contractor are effective if:





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


Article XXHI or, after the Contractor opens an office in Mongolia, given to such office, if


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


transmitting facsimile machine; or


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


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


representatives has acknowledged receipt thereof.


23.2 Written notices to the Government Representative are effective if:





a) given by telefax to the Government Representative's office designated in paragraph 3


of Article XXIII, if receipt thereof is acknowledged by answer back or is confirmed as


received by the transmitting facsimile machine; or





Page 22


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


to the Government Representative, if the Government Representative or one of his authorized


representatives has acknowledged receipt thereof.


23.3 Written notices provided for in paragraph lof Article XXIII Article and paragraph 2


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


a. The Government Representative:


Petroleum Authority of Mongolia


Uildverchnii gudamj


P.O.B. 37/81


Ulaanbaatar, MONGOLIA


Attention: Mr. O. Davaasambuu, Chairman


Fax: 976-11-631-239, Tel: 976-11-631208


E-mail: petromontiamagicnet.mn


b. The Contractor Representative:


Storm Cat Energy Corporation


Suite 100 - 521 3rd Avenue SW


Calgary, Alberta T2P 3T3


Canada


Attention: Mr. Craig Steinke


Fax: 1-604-501146, Tel: 1-604-501-1415


E-mail: cschaperon@shaw.ca








23.4 The address at which any party may receive a notice may be changed by thirty (30)


days notice given to the other party.


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





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








ARTICLE XXIV


INSURANCE





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


Contractor shall secure and maintain insurances in accordance with applicable Laws of


Mongolia.





24.2 The Contractor shall require that its Subcontractors procure similar insurances


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


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





24.3 Any insurance taken out by the Contractor and Subcontractors in respect of the


Operations pursuant to this Contract shall be effected with a Mongolian insurance underwriter


company.











Page 23


24.4 Should a Mongolian insurance underwriter company be unable or unwilling to


provide any of all such insurances, the Contractor may obtain the Government


Representative’s agreement to make alternative arrangements.


24.5 Premiums payable for such alternative arrangements shall be admitted for


Cost Recovery.





ARTICLE XXV


GENERAL





25.1 ANNEXES


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


having equal force with the provisions hereof.


25.2 LEGISLATION


This Contract is in accordance with legislations of Mongolia.


25.3 GOOD FAITH


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


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


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


approval required hereunder shall be unreasonably withheld or delayed.


25.4 LANGUAGE


This Contract is written in Mongolian and English languages. In case of conflict of


interpretation of these 2 versions, the English language version will prevail. This Contract and


Annexes attached hereto shall be kept in equal number of copies in Mongolian and English


languages.


25.5 ENTRY INTO FORCE


This Contract shall come into force on the day of approval by the Government of Mongolia.


This is the Effective date of the Contract.


On behalf of On behalf of





STORM CAT ENERGY PETROLEUM AUTHORITY OF


CORPORATION














MR O. DAVAASAMBUU


MANAGER OF ACQUISITION CHAIRMAN

















Page 24


-J


J











ANNEX A





TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


ON COAL BED METHANE GAS OPERATIONS


IN THE PART OF PETROLEUM EXPLORATION AREAS


NEMEGT-VI AND BORZON-VII


BETWEEN


THE PETROLEUM AUTHORITY OF MONGOLIA


AND


STORM CAT ENERGY CORPORATION








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


Contract between the Petroleum Authority of Mongolia and Storm Cat Energy Corporation,


dated February 26,2004.








LOCATION OF CONTRACT AREA




















































































































Page 25














Z'


Tcf 'C V?'





 ANNEX B





TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


ON COAL BED METHANE GAS OPERATIONS


IN THE PART OF PETROLEUM EXPLORATION AREAS


NEMEGT-VI AND BORZON-VII


BETWEEN


THE PETROLEUM AUTHORITY OF MONGOLIA


AND


STORM CAT ENERGY CORPORATION


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


Contract between the Petroleum Authority of Mongolia and Storm Cat Energy Corporation,


dated February 26,2004.








DESCRIPTION OF CONTRACT AREA











Storm Cat Energy Corporation


PSC area




























































































Page 26


 ANNEX €





TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


ON COAL BED METHANE GAS OPERATIONS


IN THE PART OF PETROLEUM EXPLORATION AREAS


NEMEGT-VI AND BORZON-Vn


BETWEEN


THE PETROLEUM AUTHORITY OF MONGOLIA


AND


STORM CAT ENERGY CORPORATION


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


Contract between the Petroleum Authority of Mongolia and Storm Cat Energy Corporation,


dated February 26,2004.





MINIMUM WORK OBLIGATION





Exploration Exploration Expenditure


phase year number (million US S)


1 1 0,82


2 2 1,28


3


3 4 2,7


5


Total 4,8






















































































Page 27


 ANNEX D





TO THAT CERTAIN


PRODUCTION SHARING CONTRACT


between


THE PETROLEUM AUTHORITY OF MONGOLIA


and


STORM CAT ENERGY CORPORATION


FOR CONTRACT AREA Nyalga XVI





ACCOUNTING PROCEDURE








ARTICLE I


GENERAL PROVISIONS





1. DEFINITIONS


Definitions contained in Article II of the Production Sharing Contract dated February 26,


2004 shall apply to this Accounting Procedure and have the same meaning.


2. PURPOSE OF THIS ACCOUNTING PROCEDURE AND


PRECEDENCE OF DOCUMENTS


The purpose of this Accounting Procedure is to establish fair and equitable methods for


determining costs and expenses and inventories under the Contract. If any of such methods


prove unfair or inequitable to the PAM or to Contractor, the PAM and Contractor shall meet


and in good faith endeavor to agree on changes thereof.


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


Procedure and the provisions of the Contract, the provisions of the Contract shall prevail.


3. STATEMENTS OF ACTIVITY


a) During the Exploration Period, Contractor shall supply PAM within thirty (30) days


from the end of each Calendar Quarter:


i. a detailed accounting statement and list of costs and expenses and work performed


during Calendar Quarter in question;


ii. a statement of expenditure and receipts;


iii. summary of the above information on a cumulative basis.


These statements shall be in accordance with this Accounting Procedure. A summary


of this information shall be provided on a yearly basis, within sixty (60) days from the


end of each Calendar Year.


b) During the Development Period, Contractor shall supply PAM within thirty (30) days


from the end of each Calendar Quarter or, in the case of the production statement,


within seven (7) days from the end of each Calendar Month:


i. a production statement;


ii. a value of production statement;


iii. a cost recovery statement;


iv. a statement of expenditure and receipts;


v. a profit oil and lifting’s statement;


vi. a detailed accounting statement and list of costs and expenses and work performed


during Calendar Quarter in question;


vii. summary of the above information on a cumulative basis.





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'1


]





These statements shall be in accordance with this Accounting Procedure. A summary of this


information shall be provided on a yearly basis within sixty (60) days from the end of each


Calendar Year.


4. INSPECTION





a) For the purposes of auditing in accordance with the Article XIII of the Contract, the


auditors may examine and verify at reasonable times and on reasonable notice all


charges and credits relating to the Petroleum Operations such as books of account,


accounting entries, material records and inventories, vouchers, payrolls, invoices,


contracts and sub-contracts of any kind related directly or indirectly to the Contract


and any other documents, correspondence and records of Contractor necessary to


audit and verify charges and credits. Furthermore, the auditors shall have the right in


connection with such audit to visit and inspect at reasonable times and on reasonable


notice all sites, plants, facilities, warehouses and offices of Contractor in Mongolia or


elsewhere serving the Petroleum Operations, including visiting personnel associated


with those operations.


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


five (5) years following their date of issue or such longer period as may be required


under any legislation applicable.


5. CURRENCY EXCHANGE





Contractor's books for Petroleum Operations shall be kept in United States Dollars. All U.S.


Dollar expenditures shall be charged in the amount expended. All expenditures in Mongolian


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


and all other non-U.S. Dollar expenditures shall be converted into U.S. Dollars at the cost of


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


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


the Mongol Bank.


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


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


Subject to PAWs approval, any loss or gain resulting from the exchange of currency shall be





charged or credited to the accounts.


6. BOOKS


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





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


accounting principles prevailing in the international petroleum industry.





7. REVISION OF ACCOUNTING PROCEDURE


By mutual written agreement between PAM and Contractor, this Accounting Procedure may


be revised from time to time in the light of future arrangements.





8. DETAILED OUTLINE OF ACCOUNTING SYSTEM


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


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


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


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


generally accepted accounting systems, normal practices in the international petroleum


Page 29


industry and the Laws and regulations of Mongolia. Following such discussions, after


Government Representative's approval Contractor shall prepare and provide PAM with formal


copies of the comprehensive charts of accounts and the manuals to be used.


ARTICLE II


EXPENDITURES AND RECEIPTS





1. EXPENDITURES


Subject to the provisions of the Contract, Contractor shall bear and directly pay the following


costs and expenses, which costs and expenses shall be classified and recovered by Contractor


in accordance with Article VIII of the Contract.


a) Surface Rights


All direct costs attributable to the acquisition, renewal or relinquishment of surface


rights for the Contract Area.


It is understood that Contractor will acquire surface rights only for those areas required by


Contractor for installations and operations forming part of Petroleum Operations.


c) Labor


i. Gross salaries and wages including cost of holiday, vacation, sickness and disability


benefits applicable to such salaries and wages of Contractor's employees assigned to work


in Mongolia.


ii Cost of living and housing allowances and other customary allowances applicable to


salaries and wages of expatriate employees assigned to work in Mongolia and paid bonuses,


overtime and other customary allowances applicable to salaries and wages of national


employees.


c) Employee Benefits


Cost of established plans and policies for employee life insurance, social security,


hospitalization, pension, retirement, thrift, expatriate tax equalization and other benefits of a


like nature which are applicable to labor cost of salaries and wages of Contractor's expatriate


and national employees, assigned to work in Mongolia. As to Mongolian employees,


severance pay will be charged at a fixed rate applied to payrolls which will equal an amount


equivalent to the maximum liability for severance payments as required under Mongolian


Laws. Severance pay for non-Mongolian employees shall be in line with the practice in Are


international petroleum industry.


d) Material. Equipment and Supplies


Material, equipment and supplies purchased, rented or furnished as such by


Contractor.


i. Purchased


Material, equipment and supplies purchased shall be at the price paid by


Contractor or after deduction of all discounts actually received according to


the valuation principles established in Paragraph 3.a) of this Article II.


ii. Material Furnished bv Contractor or an Affiliate


Material, equipment and supplies required for operations shall be purchased


directly whenever practicable, except that Contractor may furnish such


material, equipment and supplies from its stocks or the stocks of an Affiliate,


provided that the cost of such item shall not materially exceed the cost of a


similar item purchased from third parties under similar conditions of


insurance and delivery. The value of such material, equipment and supplies


shall be established according to the provisions of Paragraph 3.b) of this


Article II.





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iii. Warranty


Contractor does not warrant the material, equipment or supplies furnished


beyond or back of the dealer's or manufacturer's warranty and, in case of


defective material, equipment or supplies credit shall not be recorded until


adjustment has been received by Contractor from the manufacturers or their


agents.


iv. Rentals


Materials, equipment and supplies rented shall be charged at actual cost.





e) Transportation


Business travel and transportation expenses for Contractor's employees assigned to


work in Mongolia and transportation expenses for equipment, materials and supplies


necessary for the conduct of the Petroleum Operations.





f) Services


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


parties, provided, however, that Contractor shall obtain PAM'S prior written approval to


hire such consultants, contract services and utilities and further provided, that that such


costs shall be competitive with those generally charged by international or domestic


suppliers for comparable work and services.


ii. Cost of services, including laboratory analysis, drafting, geophysical treatment and


interpretation, geological interpretation, engineering and data processing performed by


PAM or by Contractor or its Affiliates in facilities inside or outside Mongolia. Use of


PAM's or Contractor’s or an Affiliate's wholly owned equipment shall be charged at a


rental rate commensurate with the cost of ownership and operation and in line with


competitive rates currently prevailing in international petroleum industry, at the time of


usage.


Services rendered to the Petroleum Operations by Contractor or its Affiliates


will be charged on the basis of costs without profits. The charges will be no


higher than the normal prices charged to other Affiliates and to third parties


for comparable services under similar terms and conditions elsewhere.


If necessary, certified evidence regarding die basis of prices charged,


consisting of certification of the amount of such charges which are direct


costs of providing the services concerned and of the amount which contribute


an allocated proportion of the overheads, may be obtained from the auditors


of Contractor or its Affiliate, or, as the case may be, by PAM.


PAM reserves the right to disallow for cost recovery purposes in accordance


with the provision of paragraphs of this Article II, charges for services


rendered by Contractor or its Affiliates if they are higher than the average


overall cost charged by petroleum companies to their Affiliates for similar


services in the international petroleum industry.


g) Damages and Losses





Except as made good by insurance charged under subparagraph (h) below, all costs or


expenses necessary to replace or repair damages or losses incurred by fire, flood, storm or


other causes not controlled by Contractor. Contractor shall furnish PAM written notice of


damages or losses incurred as soon as practicable after report of the same has received by


Contractor.


h) Insurance and Claims





Subject to provisions of Article XXIV, the cost of insurance, including public


liability, property damage and other insurance, including the coverage against liabilities of


Contractor to its employees and/or outsiders as may be carried by Contractor or required by


the Laws of Mongolia or as PAM and Contractor may agree upon. The proceeds of any such


insurance or claim collected shall be credited against the appropriate expenditure account. If,


with the agreement of PAM and Contractor, no insurance is carried for a particular risk, all








Page 31





related actual expenditure incurred and paid by Contractor in settlement of any and all losses,


claims, damages, judgments and any other expenses, including legal services, shall be charged


to the appropriate expenditure account, as provided in sub-paragraph (g) above.


i) Camps. Warehouses and other facilities and systems


Direct costs and expenses incurred in Mongolia in respect of maintaining and


operating of field facilities such as camps, warehouses, transportation systems,


communications systems, water systems and road or other facilities and systems.


j) Legal Expenses


All costs and expenses of litigation or legal services otherwise necessary or expedient


for the protection of die Contract Area, Petroleum Operations and facilities, including


attorney’s fees and expenses and the pro rata portion of in-house counsel’s salaries and


expenses, together with all judgments obtained against the parties or any of them on account


of the operations under the Contract and actual expenses incurred by any party or parties


hereto in securing evidence for the purpose of defending against any action or claim


prosecuted or urged in connection with the operations or the subject matter of the Contract. In


the event actions or claims affecting the interests hereunder shall be handled by the legal staff


of one or more of the parties hereto, a charge commensurate with cost of providing and


furnishing such services may be made to operations.


k) Overhead and administrative expenses


i. Cost of staffing and maintaining Contractor’s head office and other offices


established in or outside of Mongolia (except salaries of employees of Contractor,


charged as provided in paragraph b) above) shall be charged annually in the following


manner, based on the Contractor’s annual expenditures in respect of exploration and


production operations:





For the first US$ 1,000,000 5%


For the next US$ 4,000,000 3%


For the next US$ 5,000,000 1%


over USS 10,000,000 0.25%





Contractor shall make provisional quarterly charges to the accounts based on the above


rate.


ii. Salaries and wages and other costs and expenses related to Contractor's personnel


which are not charged above and, also, salaries and wages and other costs and expenses


related to directing, advising, consulting, controlling and other services, which are not


charged according to paragraph f) above are included in the overhead and administrative


expenses herewith and shall not be charged to other types of expenses.


iii. Such overhead and administrative expenses shall be allocated on a quarterly basis


among Operating Costs, Exploration Costs and Development Costs according to generally


accepted accounting practices used in the international petroleum industry.


l) Taxes


Taxes (except income taxes), duties, levies or any other impost, if any, paid in


Mongolia by Contractor with respect to this Contract.


m) Other Expenditures


Any justifiable costs, expenses or expenditures, other than those which are covered


and dealt with by the foregoing provisions of this Article II, incurred by Contractor for the


necessary and proper conduct of the Petroleum Operations and allowed to be recovered by


Contractor in accordance with this Contract.





Page 32


seventy-five per cent (75%) of the current price of new material, equipment and supplies


defined in (1) above.


(2) Material, equipment and supplies which cannot be classified as Condition B but which:


♦ after reconditioning will be further serviceable for original function as good as second¬


hand material, equipment and supplies (Condition B); or


♦ are serviceable for original function but substantially not suitable for reconditioning, shall


be classified as Condition C and priced at fifty per cent (50%) of the current price of new


material, equipment and supplies as defined in (1) above. The cost of reconditioning shall


be charged to reconditioned material, equipment and supplies provided that the value of


Condition C material, equipment and supplies plus the cost of reconditioning do not


exceed the value of Condition B material, equipment and supplies.


(3) Material, equipment and supplies which cannot be classified as Condition B or C shall be


priced at a value commensurate with its use.


(4) When the use of material, equipment and supplies are temporary and the service to the


Petroleum Operations does not justify the reduction in price provided for in sub-


paragraph b)2)ii) hereof, such material, equipment and supplies shall be priced on a basis


that will result in a net charge to the accounts consistent with the value of the services


rendered.


4. COST CENTRES


In order to provide for an efficient control of the recoverable costs under the Contract, all


costs must be presented for PAM’S review on the basis of cost centres and sub-divisions of


these cost centres.


The detailed division shall be agreed upon pursuant to Article 1.8 of this Annex C. However,


as a minimum the following divisions shall be established.


a) The costs shall be allocated per area in the following manner


i. Exploration area.


ii. Each individual production area.


iii. Costs related to activities outside the Contract Area, such as pipelines.


iv. Costs that cannot be related to a certain area.


b) The costs shall be allocated per Petroleum Operation in the following manner:


i) Exploration Operations, subdivided further into:


(1) Aerial, geological, geochemical, paleontological, topographical and other surveys.


(2) Each individual seismic survey.


(3) Bach individual Exploration or Appraisal Well


(4) Other machinery, equipment, materials, spare parts and other items.


(5) Infrastructure (roads, airstrips, etc.).


(6) Support facilities (warehouses, etc.), including an allocation of common service costs


(costs related to various Petroleum Operations).


(7) An allocation of the administrative overhead and general expenses.


(8) Other costs.


ii) Development Operations, sub-divided further into:


(1) Aerial, geological, geochemical, geophysical and other surveys.


(2) Each individual Development Well.


(3) Gathering lines.


(4) Field facilities.


(5) Tank farms and other storage facilities for Petroleum.


(6) Pipelines, tracks.


(7) Other machinery, equipment, materials, spare parts and other items


(8) Infrastructure.


(9) Support facilities, including an allocation of common service costs (cost related to various


Petroleum Operations).





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i











At reasonable intervals as agreed upon by PAM and Contractor inventories shall be taken by


Contractor of the operations material, which shall include all such material, physical assets


and construction projects.


Written notice of intention to take inventory shall be given by Contractor to PAM at least


thirty (30) days before any inventory is to begin so that PAM and may be represented when


any inventory is taken. Contractor shall take the inventory at least once per year and upon the


termination of the Contract.


2. RECONCILIA TIONAND ADJUSTMENT OF INVENTORIES





Reconciliation of inventory shall be made by PAM and Contractor and a list of shortages and





overages shall be jointly determined and the inventory adjusted by Contractor.


3- INVENTOR Y STA TEMENT





a) Contractor shall maintain detailed records of property in use for the Petroleum


Operations in accordance with normal international petroleum industry accounting


practices.


b) On a quarterly basis Contractor shall supply to PAM an Inventory Statement. Such


Inventory Statement shall contain:


i. The description and codes or identification of all controllable assets and materials.


ii. The amount charged to the accounts for each asset.


in. The date on which such asset was charged to the account; and -


iv. Whether the costs of such assets has been recovered pursuant to Article XV of the


Contract.





4. IDENTIFICATION


To the extent possible and reasonable, in accordance with the agreed procedures under Article





1.8 of this Annex C, all assets shall be identified with the respective codes or identification for


easy Inspection.





ARTICLE IV


MEASUREMENT OF PRODUCTION


AND PRODUCTION STATEMENT





1. The Production Statement shall be prepared in accordance with the following


principles:


a) The Production Sharing Oil or Gas and Cost Oil or Cost Recovery Gas shall be


determined on the basis of all Crude Oil and all Gas produced and saved from the Area as


provided in Articles VIII and IX of the Contract.


b) The production of Crude Oil in barrels per day shall be determined as provided in Article


VIII of the Contract. Where different grades of Crude Oil are being delivered at the


Production Sharing Measurement point(s), the volumes of each grade shall be determined


separately.


c) The total volumes of Crude Oil and Gas produced and saved shall be determined on a


daily basis at the shipment point in each Production Area and, where various grades of


Crude Oil are being delivered at the shipment point(s), the volumes of such grades of


Crude Oil shall be determined separately unless otherwise agreed by PAM and


Contractor. The shipment point shall be the point in the Production Area where the


Petroleum is being metered prior to transport by pipeline, railcar or truck from the


Production Area.


d) The volumes of Crude Oil shall be corrected for water and sediments and shall be


determined on the basis of standard temperatures and pressures. The gravity, sulfur





Page 36


content and other quality indicators of the Crude Oil shall be determined and registered


regularly.


e) The volumes of Gas shall be determined on the basis of standard temperatures and


pressures. The energy content, sulfur content and other quality indicators of the Gas shall


be determined and registered regularly.


f) The volume of Crude Oil 'and Gas used in the Petroleum Operations shall be measured


and registered on a daily basis; such volumes being the volumes used:


1. for reinjection.


ii. for recycling; and


iii. for energy for the exploration, development and field operations as well as for


pipeline pumping requirements.


g) The volumes of Crude Oil burned or Gas flared or vented shall be registered on a


daily basis.


h) The size of the Crude Oil stocks shall be determined as a minimum at the beginning


and the end of each Calendar Month.


2. Following the commencement of initial commercial production from the Contract


Area, Contractor shall submit a monthly Production Statement showing the following


information for each Production Area:


a) The quantity of Crude Oil produced and saved.


b) The quantity of Gas produced and saved.


c) The quantities of Petroleum used for the purposes of carrying on drilling and production


operations and pumping to field storage.


d) The quantities of Gas flared.


e) The size of Petroleum stocks held at the beginning of the month.


f) The size of Petroleum stocks held at the end of the month.








ARTICLE V


VALUE OF PRODUCTION STATEMENT





1. Contractor shall prepare each Calendar Quarter a statement providing calculations of


the value of the Crude Oil and Gas produced and sold in accordance with this


Contract.


This value of Production Statement shall include:


a) The quantities and prices realized by PAM and Contractor as a result of sales of Crude


Oil to third parties during the Calendar Quarter in question.


b) The quantities and prices realized by PAM and Contractor as a result of sales of Crude


Oil during the Calendar Quarter in question to parties other than third parties.


c) If paragraph 4 of Article VIII of the Contract is applicable, information available to


Contractor concerning the prices of Crude Oil produced by the main Petroleum exporting


countries of relevance for the determination of the value of the Crude Oil, including


contract prices, discounts and preemie and prices obtained in the spot market


d) The quantities and prices realized by PAM and Contractor as a result of the sales of Gas.





ARTICLE VI


COST RECOVERY STATEMENT





1. Contractor shall prepare each Calendar Quarter in accordance with its obligations, a


Cost Recovery statement showing:


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


b) Recoverable costs incurred during the Calendar Quarter.


c) Total recoverable costs for the Calendar Quarter.


d) Quantity and value of Cost Oil or Cost Recovery Gas taken and separately disposed of by


CouU actor during the Calendar Quarter.


e) Amount of costs recovered for the Calendar Quarter.





Page 37





0 Amount of recoverable costs to be carried into die succeeding Calendar Quarter, if any.





2. CONTROL STATEMENTS


Contractor will establish a Cost Recovery account and an offsetting contra-account to control


therein the amount of costs remaining to be recovered and the amount of costs recovered;


details of this account will be provided on a quarterly basis to PAM.


ARTICLE VH


STATEMENT OF EXPENDITURES AND RECEIPTS


Contractor shall prepare each Calendar Quarter, in accordance with its obligations, a


Statement of Expenditures and Receipts. This statement shall show the following:


1. The expenditures and receipts contemplated for the Calendar Year in the budget, on the


basis of the cost classification and cost centres as provided for in this Accounting


Procedure.


2. The expenditures and receipts accrued during the Calendar Quarter in question, identified


recoverable pursuant to this Contract.


3. The cumulative expenditures and receipts for the Calendar Year under consideration.


4. Modifications to the budget agreed to in accordance with the Contract.


5. The latest forecast of cumulative expenditures and receipts for year end.


6. Variations between budget forecast (as amended by paragraph (d) hereof, where


applicable) and latest forecast and reasonable explanations thereof.


ARTICLE VDI


PROFIT OIL AND LIFTINGS STATEMENT


Each Calendar Quarter, Contractor shall prepare a Profit Oil and Liftings Statement


containing the following information:


1. Crude Oil and Gas produced during the Calendar Quarter in question.


2. Total cumulative Crude Oil and Gas produced up to the end of the Calendar Quarter.


3. Volume of Profit Sharing Oil and Gas to PAM ami Contractor during the Calendar


Quarter in question.


4. Cumulative volume of Profit Sharing Oil and Gas to PAM and Contractor up to the end of


the Calendar Quarter in question.


5. Volume of Cost Oil and Cost Recovery Gas due to Contractor during the Calendar


Quarter in question.


6. Cumulative volume of Cost Oil and Cost Recovery Gas due to Contractor up to the end of


the Calendar Quarter in question.


7. Liftings by PAM and Contractor during the Calendar Quarter in question.


8. Cumulative liftings by PAM and Contractor up to the end of the Calendar Quarter in


question.


9. Over and under-liftings by PAM and Contractor up to the end of the Calendar Quarter in


question.