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Republic of the Philippines

PETROLEUM BOARD

Manila

SERVICE CONTRACT

between

THE PETROLEUM BOARD

and

PHILIPPINES-CITIES SERVICE , INC.

HUSKY (PHILIPPINES) OIL, INC.

ORIENTAL PETROLEUM AND MINERALS
CORPORATION

PHILIPPINE-OVERSEAS DRILLING & OIL

DEVELOPMENT CORPORATION

BASIC PETROLEUM AND MINERALS , INC.

LANDOIL RESOURCES CORPORATION

WESTRANS PETROLEUM, INC.

PHILIPPINE NATIONAL OIL COMPANY

THIS CONTRACT, made and entered into this 17th day of February
1975 in the City of Manila by and between THE PETROLEUM BOARD,
established pursuant to "THE OIL EXPLORATION AND DEVELOPMENT ACT
OF 1972" , as First Party.

and

PHILIPPINES-CITIES SERVICE, INC., a corporation
organized and existing under the laws of the State of
Delaware, U.S.A. , with principal office at Houston,
Texas, U.S.A. (hereinafter called "CITIES").

HUSKY (PHILIPPINES) OIL, INC. , a corporation
organized and existing under the laws of the State of
Delaware, U.S.A. , with principal office at Cody, Wyoming, 
U.S.A., (hereinafter called "HUSKY").

ORIENTAL PETROLEUM AND MINERALS CORPORATION ,
a corporation organized and existing under the laws of the
Philippines, with principal office at Suite 12-E, G.E.
Antonina building, T.M. Kalaw Street, Ermita, Manila,
(hereinafter called "ORIENTAL").





-2-

PHILIPPINE-OVERSEAS DRILLING & OIL DEVELOPMENT
CORPORATION, a corporation organized and existing under
the laws of the Philippines with principal office at Philex
Building, Brixton Road, Pasig, Rizal, (herein called
(“PHILODRIL"). 

BASIC PETROLEUM AND MINERALS, INC. , a corpo-
ration organized and existing under the laws of the
Philippines with principal office at Suite 700, Sarmiento
Building, Ayala Avenue, Makati, Rizal, Philippines (herein
called “BASIC “).

LANDOIL RESOURCES CORPORATION, a corporation
organized and existing under the laws of the Philippines
with principal office at 2nd Floor, Zaragosa Building,
Gamboa Street, Legaspi Village, Makati, Rizal, Philippines,
(herein called “LANDOIL").

WESTRANS PETROLEUM, INC. , a corporation
organized and existing under the laws of the State of
Delaware, United States, with principal office at 250
Park Avenue, New York (herein called "WESTRANS").

PHILIPPINE NATIONAL OIL COMPANY, a corporation
organized and created under the laws of the Philippines,
with principal office at Petrophil Building, Makati Avenue,
Makati, Rizal (herein called "PNOC"),

as second party, whose respective interests are set forth in Annex "A“

attached hereto, hereinafter collectively referred to as "CONTRACTOR" ,

and the PETROLEUM BOARD and CONTRACTOR, hereinafter referred to

collectively as the "Parties".

WITNESSETH:

WHEREAS , The Oil Exploration and Development Act of 1972 (herein-
after called "The Act") declares it to be the policy of the State to hasten
the discovery and production of indigenous petroleum; and

WHEREAS , Under the provision of the Act, the Government of the
Republic of the Philippines may explore for and produce indigenous
petroleum under service contracts as provided in the Act; and

WHEREAS , In the pursuance of its above-stated policy the government
acting through the Petroleum Board wishes to avail itself of the resources
of the Contractor through a service contract under which Contractor will
furnish the necessary services and technology and will provide financing



- 3 - 

WHEREAS , Contractor wishes to enter into such a service contract
covering the Contract Area as hereinafter defined; and

WHEREAS , Contractor has the financial resources, technical com-
petence and professional skills necessary to carry out the Petroleum
Operations;

NOW, THEREFORE, In consideration of the payment of Sixty Thousand
Dollars ($60,000) to be paid by Contractor to The Petroleum Board during
the First Quarter of 1976 for use by Philippine National Petroleum Center,
such amount at the option of the Petroleum Board may be substituted in
materials and equipment of equivalent value, and of the mutual covenants
and conditions herein contained, it is hereby stipulated fend agreed as
follows:

SECTION I
SCOPE

1.1 This Contract is a service contract entered into pursuant to
Section 7 of the Act with all necessary services, technology
and financing to be furnished by Contractor in accordance with
the provisions herein contained. The Contractor shall under-
take and execute the Petroleum Operations contemplated
hereunder.

1.2 Contractor shall be responsible to the Petroleum Board for the
execution of such Operations in accordance with the provisions
of this Contract, and is hereby appointed and constituted the
exclusive party to conduct the Petroleum Operations. The
Petroleum Board shall have the right to require performance of
any or all obligations under this Contract against any or all of
the second parties. Provided that in the event of non-performance
of any of such obligations, the Petroleum Board will have recourse
to the Bond or Guarantee referred to in Section 6.1 and payment to
the Petroleum Board under such Bond or Guarantee shall relieve any





- 4 -

1.3 Contractor shall assume all exploration risks such that if no
Petroleum in Commercial Quantity is discovered and produced,
it will not be entitled to reimbursement.

1.4 During the term of this Contract the total production achieved
in the conduct of such Operations shall be accounted for
between the Parties in accordance with Section VII hereof.

1.5 Pursuant to the provisions of any Operating Agreement which may
be entered into by and among appropriate parties, CITIES shall
be designated as the initial Operator for carrying out the
Petroleum Operations under this Contract in accordance with
the terms of such Operating Agreement. Notices communicated
in accordance with this Contract to the Operator from The
Petroleum Board shall constitute notice to CONTRACTOR. 


- 5 -

SECTION II
DEFINITIONS

In the text of this Contract, the words'and terms defined in Section 3
of the Act shall, unless otherwise specified herein, have meaning in
accordance with such definitions.

2.1 Contract Area means at any time the Area within the mining
territory of the Republic of the Philippines which is the sub-
ject of this Contract. The Contract Area is outlined and more
particularly described in Annex “A" attached hereto.

2.2 Petroleum means any mineral oil, hydrocarbon gas, bitumen,
asphalt, mineral gas and all other similar or naturally asso-
ciated substances with the exception of coal, peat, bituminous
shale and/or other stratified mineral fuel deposits.

2.3 Crude Oil or Crude means oil in its natural state before the
same has been refined or otherwise treated. It does not include
oil produced through destructive distillation of coal, bituminous
shale or other stratified deposits, either in its natural state or
after the extraction of water, and sand or other foreign substances
therefrom.

2.4 Natural Gas means gas obtained from boreholes and wells and
consisting primarily of hydrocarbons.

2.5 Casinghead Petroleum Spirit means any liquid hydrocarbons
obtained from natural gas by separation or by any chemical or
physical process.

2.6 Petroleum Operations or Operations means searching for and
obtaining Petroleum within the Philippines through drilling and
pressure or suction or the like, and all other operations incidental



- 6 - 

(Contd. from page 5 - no. 2.6)

thereto. It includes the transportation, storage, handling and
sale (whether for export or domestic consumption) of Petroleum
so obtained but does not include any: (1) transportation of
Petroleum outside the Philippines; (2) processing or refining at
a refinery; or (3) any transactions in the products so refined.

2.7 Petroleum in Commercial Quantity means Petroleum in such
quantities which will permit its being economically developed
as determined by the Contractor after taking into consideration
the location of the reserves, the depths and number of wells
required to be drilled and the transport and terminal facilities
needed to exploit the reserves which have been discovered.

2.8 Operating Expenses means the total expenditures incurred by
the Contractor both within and without the Philippines in
Petroleum Operations pursuant to this Contract and determined
in accordance with the Accounting Procedure attached hereto
and made part hereof as Annex "B".

These expenses will include but not be limited to the cost of
seismic surveys, geological studies, drilling and equipping
wells, engineering studies, construction of well platforms,
tank batteries, pipelines, systems and terminals and the cost
of operating and maintaining all such facilities.

2.9 Effective Date means the date of the execution of this Contract
by the Parties.

2.10 Foreign Exchange means currency other than that of the Republic
of the Philippines that are freely convertible into gold or curren-
cies eligible to form part of the country's international reserves
or currencies acceptable to the Petroleum Board and to the
Contractor.


- 7 -

2.11 Calendar Year or Year means a period of twelve (12) consecutive
months commencing with January 1 and ending on the following
December 31, according to the Gregorian Calendar.

2.12 Contract Year means a period of twelve (12) consecutive months
according to the Gregorian Calendar counted from the Effective
Date of this Contract or from the anniversary of such Effective
Date.

2.13 Production Area means that portion of the Contract Area where
all reservoirs containing Petroleum in Commercial Quantity are
delineated by the Contractor in consultation with the Petroleum
Board.

2.14 Gross Income means the gross proceeds from the sale of crude,
natural gas or casinghead petroleum spirit produced under the
Contract and sold during the taxable year at posted or market
price, as the case may be, all as determined pursuant to Section
VII, and such other income which are incidental to and arising
from any one or more of the Petroleum Operations of the Contractor.

2.15 Posted Price means the FOB price established by the Contractor
and the Petroleum Board for each grade, gravity and quality of
Crude Oil offered for sale to buyers generally for export at the
particular point of export, which price shall be based upon
geographical location and the fair market export values for Crude
Oil of comparable grade, gravity and quality.

2.16 Market Price means the price which is realized for Petroleum
produced under this Contract if sold in a transaction between
independent persons dealing at arm's length in a free market.

2.17 Barrel means 42 U.S. gallons or 9702 cubic inches at a temperature





 - 8 -

2.18 Government means the Government of the Republic of the
Philippines.

2.19 Filipino Participation Incentive means the allowance of seven
and one-half percent of Posted or Market Price, as the case
may be, which is granted to Contractor to be applied as
provided in Section VIII below.

2.20 Affiliate means (a) a company in which a Contractor holds
directly or indirectly at least fifty percent (50%) of its out-
standing shares entitled to vote; or (b) a company which holds
directly or indirectly at least fifty percent (50%)'of the
Contractor's outstanding shares entitled to vote; or (c) a
company in which at least fifty percent (50%) of its shares
outstanding and entitled to vote are owned by a company which
owns directly or indirectly at least fifty percent (50%) of the
shares outstanding and entitled to vote of the Contractor.

2.21 Crude Oil Exported shall include not only Crude Oil exported
as such but also indigenous Crude Oil refined in the Philippines
for export.

2.22 Contract means this service contract.

2.23 Philippine Corporation means a corporation organized under
Philippine laws at least sixty percent (60%) of the capital of
which is owned and held by citizens of the Philippines.

2.24 Taxable Net Income means the Gross Income less the deductions
provided in Sub-section 8.1 below.

/to page 9/



- 9 -

SECTION III
TERM

3.31 The exploration period under this Contract shall be seven (7)
years from the Effective Date, extendible for three (3) years
if (a) the Contractor has not been in default in its exploration
work obligations and other obligations; (b) has drilled a mini-
mum of 30,000 feet of test wells and (c) has provided a
work obligation for the extension acceptable to the Petroleum
Board, after which time this Contract shall automatically
terminate unless Petroleum has been discovered by the end of
the tenth year and the Contractor requests a further extension
of one (1) year to determine whether the discovery is in
Commercial Quantity, in which event, another extension of
one (1) year for exploration will be granted.

3.2 Where Petroleum in Commercial Quantity is discovered during
the exploration period, this Contract shall, as to any Production
Areas delineated pursuant to sub-section 6.1 (b) below, remain
in force during the balance of the exploration period or an 
extension thereof and for an additional period of twenty-five
(25) years, thereafter renewable for a period not exceeding
fifteen (15} years under such terms and conditions as may be
agreed upon by the Parties at the time of the renewal. 

/to page 10/


- 10 -

SECTION IV

EXCLUSION OF AREAS

4.1 On or before the end of the fifth Contract Year, Contractor shall
surrender twenty-five percent (25%) of the initial Contract Area.

4.2 On or before the end of the initial seven (7) years exploration
period, if Contractor elects to extend the period for an additional
three (3) years, Contractor shall surrender an additional area
equal to twenty-five percent (25%) of the initial Contract Area.

4.3 In the event that Contractor has delineated any Production Areas
pursuant to Sub-section 6.1 (b) below, the extent of such
Production Areas shall be deducted from the initial Contract
Area for the purpose of determining the size of such area that
must be surrendered pursuant to Sub-sections 4.1 and 4.2 above.

4.4 If Petroleum in Commercial Quantity has been discovered during
the exploration period, or any extension thereof, the Contractor
may retain after the exploration period and during the effectivity
of the Contract, twelve and one-half percent (12-1/2%) of the
Initial area in addition to the delineated Production Area:
Provided, however, That the Contractor shall pay annual rentals
on such twelve and one-half percent retained area of twenty
(20) pesos per hectare or fraction thereof: Provided, finally,
That such annual rentals shall be reduced by the amount spent
by Contractor for exploration on such retained area during the
Contract Year.

4.5 Contractor shall have the right, on at least thirty (30) days
written notice to the Petroleum Board, to surrender all or any
portion of the Contract Area 0 Any portion so surrendered shall
be credited against that portion of the Contract Area which
Contractor is next required to surrender under the provisions



-11-

(Contd. from page 10 - no. 4.5)

of Sub-sections 4.1 and 4.2 hereof. The areas being surrendered
shall be of sufficient size and convenient shape to enable
Petroleum operations to be conducted thereon.

4.6 In case the Contractor surrenders or abandons wholly or partly
the area covered by this Contract within two (2) years from its
Effective Date, it shall in respect of the abandoned area pay the
Government the amount it should have spent, but did not, for
exploration work during said two (2) years as specified under
Section 5.1, for which payment, among other obligations, the
performance guarantee posted by the Contractor shall be answer-
able.

4.7 With respect to the mandatory surrenders pursuant to Sub-
sections 4.1 and 4.2 as qualified by Sub-section 4.3, Contractor
shall advise the Petroleum Board of the portion to be surrendered
at least thirty (30) days in advance of the date of surrender.
The areas being surrendered shall each be of sufficient size and
convenient shape to enable the Petroleum Operations to he con-
ducted thereon.

4.8 All areas surrendered shall conform to the Petroleum Board's
blocking system by which this Contract Area was determined.


/to page 12/
-12-

SECTION V

WORK PROGRAM AND EXPENDITURES

During each Contract Year, Contractor shall be obligated to
spend not less than the amounts and fulfill not less than
the Work Commitments as specified below in connection
with Petroleum Operations Including the direct prosecution
of exploration work under this Contract;

CONTRACT YEAR       WORK COMMITMENT            AMOUNT
Years 1 and 2             Drill one (1) well                      US$2,500,000
Year 3                          Drill one (1) well                             2,500,000
Year 4                          Drill one (1) well                             1,500,000
Year 5                          None                                                2,000,000
Year 6                          Drill one (1) well                             2,750,000
Year 7                          Drill one (1) well                             2,750,000

Provided, however, Contractor shall have the right, by giving
written notice to the Petroleum Board at least thirty (30) days
prior to the end of the Second (2nd) Contract Year or any sub-
sequent Contract Year, to surrender the Contract Area and
thereby be relieved of all subsequent obligations, Provided
further, if during any Contract Year, Contractor shall spend
more than the amount of money required to be spent by Con-
tractor or drill more wells than are required to be drilled,
the excess may be credited against the amount of money or
wells required of the Contractor during the succeeding Con-
tract Years and Provided further, That should the Contractor
fails to comply with the work obligations provided for in this
Contract for any Contract Year, it shall pay to the Government
the amount it should have spent but did not in direct prosecu- 
tion of its work obligations. For purposes of this proviso,
failure to meet a commitment to drill a well shall be deemed



- 13 -

(Contd, from page 12 Section V-5, 1)
a failure to spend the amount committed above which is left
unspent or One Million Five Hundred Thousand U.S, Dollars
(US$1,500,000,00) whichever Is higher. Provided, finally,
That the Contractor shall commence drilling within three (3)
months after the effective date of this Contract.

5.2 Within a period of three (3) months after the Effective Date
of this Contract and three (3) months prior to the beginning
of each succeeding Contract Year, Contractor shall prepare
and submit a Work Program and Budget for the Contract Area
setting forth the Petroleum Operations which Contractor
proposes to carry out during the ensuing Contract Year and
shall advise the Petroleum Board of any significant changes
thereon.




- 14 -

SECTION VI

RIGHTS AND OBLIGATIONS OF THE PARTIES

6.1 Contractor shall have the following obligations:

(a) Perform all Petroleum Operations and provide all neces-
sary services, technology and financing in connection
therewith; Provided, That no foreign exchange require-
ments of the Operations shall be funded from the
Philippine banking system.

(b) Upon each discovery of Petroleum in quantities that may
be commercial as determined by the Contractor, delineate
in consultation with the Petroleum Board the reservoir in
a prudent and diligent manner and in accordance with good
oil field practices within a six (6) month period or such
additional period as Contractor may demonstrate to the
Petroleum Board to be reasonably necessary to effect such
delineation. If after such delineation, it is determined
that the reservoir contains Petroleum in Commercial
Quantity, the area so delineated shall constitute a
Production Area.

(c) Be subject to the provisions of laws of general application
relating to labor, health, safety, and ecology;

(d) Once Petroleum in Commercial Quantity is discovered,
operate the field in accordance with accepted good oil
field practices using modern and scientific methods to
enable maximum economic production of Petroleum; avoid-
ing hazards to life, health and waters; and pursuant to an
efficient and economic program of operation; 

(e) Furnish the Petroleum Board promptly with geological and
other information, data and reports relative to the operation
except for proprietory techniques used in developing said
information, data and reports, such information shall remain



-15-

(f) Maintain detailed technical records and accounts of its
operation;

(g) Conform to regulations regarding, among others, safety,
demarcation of the Contract Area, non-interference with
the rights of other petroleum, mineral and natural resources
operators;

(h) Maintain all meters and measuring equipment in good order
and allow access to these as well as to the exploration and
production sites and operations to inspectors authorised
by the Petroleum Board;

(i) Allow examiners of the Bureau of Internal Revenue and other
representatives authorized by the Petroleum Board at all
reasonable times full access to accounts, books, and
records relating to Petroleum Operations hereunder for tax
and other fiscal purposes;

(j) Be subject to Philippine income tax;
(k) Give priority in employment to qualified personnel in the
municipality or municipalities or province where the explor-
ation or production operations are located.

(l) Within sixty (60) days after the Effective Date of the
Contract, post a bond or other guarantee of sufficient
amount in favor of the Government and with surety or
sureties satisfactory to the Petroleum Board, conditioned
upon the faithful performance by the Contractor of any or
all of the obligations under and pursuant to this Contract;
and

(m) After commercial production commences in the Contract
Area, supply from such production a portion of the domestic
requirements of the Republic of the Philippines on a pro-
rata basis, which portion shall be sold at Market Price
and shall be determined as follows; In respect of each



 (Contd. from page 15 - letter (m)

Year multiply the total quantity of Crude Oil required for
domestic consumption by the ratio of the total quantity
of Crude Oil produced from the Contract Area to the entire
Philippine production of Crude Oil.

6.2 Contractor shall have the following rights:
(a) Exemption from all taxes except income tax;

(b) Exemption from payment of tariff duties and compensating
tax on the importation into the Philippines of all machinery,
equipment, spare parts and all materials required for and
to be used exclusively by Contractor or subcontractor in
Petroleum Operations on the conditions that said machinery,
equipment, spare parts and materials of comparable price
and quality are not manufactured domestically, are directly
and actually needed and will be used exclusively by the
Contractor in its operations or in the operations for it by
a subcontractor; are covered by shipping documents in the
name of the Contractor to whom the shipment will be
delivered direct by the customs authorities; and the prior
approval of the Petroleum Board was obtained by the
Contractor before the importation of such machinery, equip-
ment, spare parts and materials which approval shall not
be unreasonably withheld: Provided, however. That the
Contractor or its subcontractor may not sell, transfer, or
dispose of such machinery, equipment, spare parts and
materials within the Philippines without the prior approval
of the Petroleum Board and payment of taxes due the 
Government: Provided, further. That should the Contractor
or its subcontractor sell, transfer or dispose of these
machinery, equipment, spare parts or materials within the


-17-

(Contd. from page 16 - no. 6,2 letter b»)

Philippines without the prior consent of the Petroleum
Board, it shall pay twice the amount of the tax exemption
granted: Provided, finally, That the Petroleum Board
shall allow and approve the sale, transfer, or disposition
of the said items within the Philippines without tax if made
(1) to another contractor; (2) for reasons of technical
obsolescence; or (3) for purposes of replacement to improve
and/or expand operations of the Contractor;

(c)Exemption upon approval by the Petroleum Board from laws
regulations and/or ordinances restricting the (1) construction,
installation, and operation of power plant for the exclusive
use of the Contractor if no local enterprise can supply within
a reasonable period and at reasonable cost the power needed
by the Contractor in its Petroleum Operations, (2) export-
ation of machinery and equipment which were imported solely
for its Petroleum Operations when no longer needed therefor;

(d) Exemption from publication requirements under Republic Act
Numbered Five thousand four hundred fifty-five; and the
provisions of Republic Act Numbered Sixty-one hundred and
seventy-three with respect to the exploration production,
exportation or sale or disposition of Crude Oil discovered
and produced in the Philippines;

(e) Exportation of Petroleum subject to the obligation to supply
a portion of domestic requirement as provided in Section
6.1 (m) above?

(f) Entry, upon the sole approval of the Petroleum Board which
shall not be unreasonably withheld, of alien technical and
specialized personnel (including the immediate members of
their families), who may exercise their professions solely
for the Petroleum Operation of the Contractor: Provided,





 - 18 - 

(Contd, from page 17 - letter f.)

That if the employment or connection of any such alien
with Contractor ceases, the applicable laws and regulations
on immigration shall apply to him and his immediate family:
Provided, further. That Filipinos shall be given preference
to positions for which they have had adequate training: and
Provided, finally, That the Contractor shall adopt and
implement a training program for Filipinos along technical
or specialized lines, in accordance with the provisions of
Section XIII hereof;

(g) Rights and obligations in this Contract shall be deemed as
essential considerations for the conclusion thereof and
shall not be unilaterally changed or impaired;

(h) Be entitled to (1) repatriate over a reasonable period the
capital investment actually brought into the country in
Foreign Exchange or other assets and registered with the
Central Bank; (2) retain abroad all Foreign Exchange
representing proceeds arising from exports accruing to the
Contractor over and above (a) the Foreign Exchange to be
converted into pesos in an amount sufficient to cover the
costs of Contractor's Petroleum Operations payable in
Philippine Currency and (b) revenues due the Government
on such crude; (3) convert into Foreign Exchange and remit
abroad at prevailing rates no less favorable to Contractor
than those available to any other purchaser of foreign
currencies, any excess balances of their peso earnings 
from petroleum production and sale over and above the ,
working current balances they require; and (4) convert
foreign exchange into Philippine currency for all purposes.
in connection with its petroleum operations at prevailing
rates no less favorable to Contractor than those available

 - 19 -

(i) Have at all times the right of ingress to and egress from
the Contract Area and to and from facilities wherever located;

(j) Subject to such restrictions as the Petroleum Board may
impose, have the right to use and have access to all geolo-
gical, geophysical, drilling, well, production and other
information held by the Petroleum Board or by any other
governmental agency, relating to the Contract Area including
well location maps, which Information and maps the Petroleum
Board is not under obligation to keep Confidential.

6.3 In addition to the rights outlined in Section 6,2 above. Contractor
shall have a Filipino Participation Incentive of seven and one-half
(7-1/2%) percent, subject to the provisions of Section 2.19 hereof.

6.4 The Petroleum Board shall assume and pay on behalf of Cities,
Husky and Westrans and their shareholders and the other parties
contractor out of the net proceeds attributable to a portion of the
production which is specifically retained for inclusion in the
Petroleum Board's net proceeds as described in section 7.3 (a)
for that purpose, all income taxes payable to the Republic of the
Philippines based on income or profits and with respect to Cities,
Husky and Westrans, all dividends, withholding, and other taxes
imposed by the Government of the Philippines on the distribution
of income or profits to their respective shareholders, derived from
Petroleum Operations. The Petroleum Board shall furnish to each
of the companies, jointly referred to as Contractor, the respect- 
ive official receipts issued in the name of each company separately
by any duly empowered Government authority, acknowledging the
payment of said taxes.






-20-

SECTION VII

RECOVERY OF OPERATING EXPENSES AND ACCOUNTING
FOR PROCEEDS OF PRODUCTION

7.1 Contractor, if authorized by the Petroleum Board to market the
Petroleum Board's share of Petroleum produced and saved from
the Contract Area, shall account for the proceeds from such
sales as provided in this Section VII. Contractor shall have
the right and privilege of receiving in kind and disposing of
petroleum produced and saved from the Contract Area equal
to the sum of (1) its fee of the net proceeds as provided in
7.3 (a) below and, (2) the Filipino Participation Incentive
Allowance, as well as the Petroleum allocated to the reco-
very of Operating Expenses as described in Section 7.2. 

7.2 In each Year Contractor, will recover from the gross proceeds
resulting from the sale of all Petroleum produced under this
Contract an amount equal to all Operating Expenses; Provided,
That the amount so recovered shall not exceed Sixty (60%)
Per Cent of the gross proceeds from production in any Year:
Provided, further, That if in any year the operating costs exceeds
Sixty (60%) Per Cent of the gross proceeds from the production,
or there are no gross proceeds, then the unrecovered expenses
shall be recovered from the gross proceeds in succeeding years.

7.3 (a) The net proceeds from the Contract Area shall be divided
between the Petroleum Board and Contractor on the basis set
out below:
                                                                        Petroleum Board              Contractor
On Production from
0 to 75,000 BOPD                                         62.5%                                  37.5%

On Production from
75,000 to 125,000 BOPD                             65%                                      35%

On Production above                                   70%                                      30%
125,000 BOPD

- 21 - 

(b) For the purpose of this Section VII, net proceeds means
the difference between gross income and the sum of the
operating expenses recovered pursuant to Section 7.2 and
the Filipino Participation Incentive Allowance.

(c) If the Contractor has been authorized to market the
Petroleum Board's share of production, it shall on or
before the last day of the month following each quarter
remit to the Petroleum Board an amount equal to the
Petroleum Board's net proceeds interest calculated from
(a) above of estimated net proceeds from the Petroleum
Operations in said quarter. This payment shall be cal-
culated in accordance with the U.S. dollar* amounts
recorded In the books and accounts pursuant to Section XV.
The payment corresponding to the first quarter of the
calendar year, shall include any adjustments on Government's
share of the preceding calendar year.

(d) The Petroleum Board shall be entitled to receive in kind
petroleum equal in value to the net proceeds to which they
are entitled by (a) above, Provided, sufficient notice is
given to Contractor so as not to interfere with existing
Crude Sales Contracts.

7.4 If the Petroleum Board and the Contractor elect to take their
respective shares in kind, the Parties to this Contract will
enter into separate agreement providing among others, for the
manner and form of deliveries and appropriate quarterly adjust-
ments.

For the purpose of determining gross proceeds. Petroleum shall
be valued as follows:

(a) All Crude Oil sold for consumption in the Philippines shall
be valued at Market Price for such crude oil.





- 22 -

(b) All Crude Oil exported shall be valued at the Posted Price.

(c) All Natural Gas and/or Casinghead Petroleum Spirit
exported or sold for consumption in the Philippines shall
be valued at the prevailing Market Price thereof. 
(d) Reasonable commissions or brokerages incurred in connection
with sales to third parties, if any; shall be deductible from
gross proceeds but shall not exceed the customary and
prevailing rate.




-23-

SECTION VIII
INCOME TAXES

8.1 Contractor shall be liable each taxable year for Philippine income
tax under the provisions of the National Internal Revenue Code and
the Oil Exploration and Development Act of 1972.

The Contractor’s gross income shall consist of:
(a) Gross proceeds determined in accordance with Section 7.5
above, and

(b) Such other income which is incidental to and/or arising
from any Petroleum Operation or other aspects of the Contract,
In computing the Taxable Net Income, Contractor shall be allowed
the following deductions:

(a) Filipino Participation Incentive, and
(b) Operating Expenses recovered pursuant to Section 7.2
above.

8.2 In ascertaining the Contractor's taxable net income, no deduction
from gross income shall be allowed in respect of any interest or
other consideration paid or suffered in respect of the financing
of its Petroleum Operations.

8.3 Each individual company comprising Contractor shall render to
the Petroleum Board a return for each taxable year in duplicate
in such forms and manner as provided by law setting forth its
gross income and the deductions herein allowed. Provided,
however, that in no event shall the total tax liability of the
companies comprising Contractor be less than if a single return
been filed on behalf of Contractor. The returns shall be filed
by the Petroleum Board with the Commissioner of Internal Revenue
or his deputies or other persons authorized by him to receive
such returns within the period specified in the National Internal.


 - 24 -

8.4 The Petroleum Board, upon payment by it of each company com-
prising Contractor's respective income taxes shall procure
official receipts evidencing such payment. Each of the second
parties shall be subject to tax separately on its share of income
and The Petroleum Board shall supply each with an individual
receipt in its own name.




 - 25 - 

SECTION IX 
PAYMENTS

9.1 All payments which this Contract obligates Contractor to make
to the Petroleum Board shall be in Foreign Exchange at a bank
to be designated by the Petroleum Board and agreed upon by the
Central Bank of the Philippines except that Contractor may make
such payments in Philippine Pesos to the extent that such
currency is realized as a result of the domestic sale of Crude
Oil or Natural Gas. All such payments shall be translated at
the applicable exchange rates as defined in the Accounting
Procedure attached hereto as Annex "B"





 - 26 -

SECTION X

NATURAL GAS

10.1 After meeting requirements for Operations, priority shall be given
to supplying prospective demand for Natural Gas in the Philippines.
Any Natural Gas produced from the Contract Area to the extent not
used in operations hereunder, may be flared if the processing or
utilization thereof is not deemed economical by Contractor or
required by Contractor for secondary recovery operations, including
repressuring and recycling: Provided, That the Petroleum Board
may take and utilize such Natural Gas that would otherwise be
flared, in which event all costs of taking and handling such
Natural Gas will be for the sole account and risk of the Petroleum
Board.




 - 27 -

SECTION XI

ASSETS AND EQUIPMENT

11.1 Contractor shall acquire for the Petroleum Operation? only such
assets as more reasonably estimated to be required in carrying
out the Petroleum Operations.

11.2 All materials, equipment, plants and other installations erected
or placed on the Contract Area of a movable nature by the
Contractor shall remain the property of the Contractor unless
not removed therefrom within one year after the termination of
this Contract in which case, ownership shall be vested with
the Petroleum Board.

11.3 Contractor may also utilize in the Petroleum Operations equip-
ment owned and made available by Contractor and charges to
the Petroleum Operations account for use of such equipment
shall be made as provided in the Accounting Procedure.





 -28-

SECTION XII

CONSOLATION AND ARBITRATION

12.1 Disputes, if any, arising between the Petroleum Board and
Contractor relating to this Contract or the interpretation and
performance of any of the clauses of this Contract, end which
cannot be settled amicably, shall be settled by arbitration.
The Petroleum Board on the one hand and Contractor on the
other hand shall each appoint one arbitrator and so advise the
other Party and these two arbitrators will appoint a third. If
either Party fails to appoint an arbitrator within thirty (30) days
after receipt of a written request of the other Party to do so,
such arbitrator shall, at the request of the other Party, if the
Parties do not otherwise agree, be appointed by the President
of the International Chamber of Commerce. If the first two
arbitrators appointed as aforesaid fail to agree on a third within
thirty (30) days following the appointment of the second arbi-
trator, the third arbitrator shall, if the Parties do not otherwise
agree, be appointed, at the request of either Party, by the
President of the International Chamber of Commerce. If an
arbitrator fails or is unable to act, his successor will be
appointed in the same manner as the arbitrator whom he succeeds.
Unless the Parties agree otherwise, the Philippines shall be the
venue of the arbitration proceedings.

12.2 The decision of a majority of the arbitrators shall be final and
binding upon the Parties. Judgment upon the award rendered
may be entered in any court having jurisdiction or application
may be made to such court for a Judicial acceptance of the
award and an order of enforcement, as the case may be.

12.3 Except as provided in this Section, arbitration shall be conducted
in accordance with the Rules of Arbitration of the International






- 29 -

SECTION XIII
EMPLOYMENT AND TRAINING OF PHILIPPINE PERSONNEL

13.1 Contractor agrees to employ qualified Filipino personnel in the
Operations and after commercial production commences will
undertake, upon prior approval of the Petroleum Board, the
schooling and training of Filipino personnel for labor and staff
position, including administrative, technical and executive
management positions.. Contractor shall undertake upon prior
approval of the Petroleum Board a program of training assistance
for Petroleum Board personnel. 

13.2 Costs and expenses of training Filipino personnel for Contractors
own employment shall be included in Operating Expenses. Costs
and expenses of a program of training for Petroleum Board’s
personnel shall be borne on a basis to be agreed upon by the
Petroleum Board and Contractor.







 - 30 -

SECTION XIV

TERMINATION

This Contract shall be terminated and Contractor shall be relieved
of its obligations:

14.1 As provided In Section 3.1 hereof; or 

14.2 On expiration of the terms, or extension thereof provided
for in Sub-Section 3.2 hereof; or

14.3 Upon surrender by Contractor of the entire Contract Area
pursuant to Sub-Sections 4.5 and 5.1, subject to the
provisions of Sub-Section 4.6 hereof.

14.4 Upon payment under the Bond or Guarantee as referred to
in Sub-Section 1.2 hereof when such payment is required
under the provisions of this Contract.




 - 31 -

SECTION XV

BOOKS AND ACCOUNTS AND AUDITS

15.1 Books and Accounts 
 
Contractor shall be responsible for keeping complete books and
accounts, both in United States and Philippine currency, reflect-
ing all transactions in connection with Petroleum Operations in
accordance with Accounting Procedure attached hereto as Annex
"B"

15.2 Audits

The Petroleum Board shall have the right to inspect and audit
Contractor's books and accounts relating to this Contract for
any Calendar Year within the one (1) year period following the
end of such Calendar Year. Any such audit will be completed
within twelve (12) months after its commencement. Any exception
must be made in writing within sixty (60) days following the
completion of such audit and failure to give such written exception
within such time shall establish the correctness of Contractor's
books and accounts for the period of such audit.



- 32 -

SECTION XVI
OTHER PROVISIONS

16.1 Notices

Any notice required or given by either party to the other party
shall be in writing and shall be effective when a copy thereof
is handed to or served upon the Party's duly designated repre-
sentative or the person in charge of the office or place of
business; or when sent by registered mail, notice shall be
effective upon actual receipt by the addressee, but if he
fails to claim his mail from the post office within five (5)
days from the date of the first notice of the postmaster,
service shall take effect at the expiration of such time.

All such notices shall be addressed to:

To the first Party -
The Chairman of the Petroleum Board
c/o Petrophil Building
Makati Avenue, Makati, Rizal

To the second Party -
Philipptnes-Cities Service, Inc.
2nd floor CMS Building
2293 Pasong Tamo Extension
Makati, Rizal

Any Party may substitute or change such address on written
notice thereof to the others.

Governing Law
The laws of the Republic of the Philippines shall apply to
this Contract*

Suspension of Obligations

(a) Any failure or delay on the part of either Party in the
performance of its obligations or duties hereunder shall
be excused to the extent attributable to Force Majeure.

-33-
(Contd. from page 32, Sec, XVI - 16.3)

(b) If operations are delayed, curtailed or prevented by
such causes, then the time for enjoying the rights
and carrying out the obligations thereby affected,
and fill rights and obligations hereunder shall be
extended for a period equal to the period thus
involved, except that the term of this Contract
as provided in Section III hereof shall not thereby
be extended.

(c) Force Majeure shall Include Acts of God, unavoidable
accidents, acts of war or conditions arising out of
or attributable to war (declared or undeclared), laws,
rules, regulations and orders by any Government or
governmental agency, strikes lockouts and other
labor disturbances, delays in transportation, floods,
storms, and other natural disturbances, insurrections,
riots, and other civil disturbances, and all other
matters beyond the control of the Party concerned
(other than rig availability): Provided , however, 
That as to the Petroleum Board only, laws, rules
and regulations and orders by Government or any
governmental agency of the Republic of the Philip-
pines shall not constitute Force Majeure.

(d) The Party whose ability to perform its obligations
is so affected shall notify the other Party thereof
in writing stating the cause and both Parties shall
do all reasonably within their power to remove
such cause.






-34-

(Contd. from page 33)

16.4 Assignment
The rights and obligations of -Second Party under this Contract
shall not be assigned or transferred without the prior approval
of the Petroleum Board: Provided, That with respect to the
assignment or transfer of such rights and obligations to an
Affiliate of the transferor, the approval thereof by the Petro-
leum Board shall be automatic, if the transferee is as quali- 
fied as the transferor to enter into such contract with the
Government: Provided, further, That the Affiliate relation
ship between the original transferor or a company which holds
at least Fifty (50%) Per Cent of the Contractor's outstanding
shares entitled to vote and each transferee shall be main-
tained during the existence of the Contract: Provided,
finally, That with respect to transfers of rights and oblig-
ations between Second Parties, as contemplated in Annex
"A”, notice to the Petroleum Board shall effect the transfer.

16.5 Petrochemical Facility

At such time as Contractor has established Commercial pro-
duction, as defined in Section 2.7, Contractor will undertake
technical and economic studies as to the feasibility of estab-
lishing a petrochemical facility in the Philippines to utilize
a portion of said production. Contractor will conduct such
studies at its sole cost and expense. To the extent that
it is mutually agreed between all parties that such studies
indicate that such facilities would be technically and econo-
mically feasible, Contractor will finance and construct or
cause to be financed and constructed, such facility.

/to page 35/



 - 35 -

SECTION XVII
PAYMENTS BY CONTRACTOR

17.1 Contractor shall, within sixty (60) days following the declaration
of a discovery of Petroleum in Commercial Quantity, pay to the
First Party the total sum of U.S.$250,000.

17.2 If and when there shall be produced from the Contract Area
Twenty-five Thousand (25,000) barrels of oil per day (BOPD)
at an average rate for thirty (30) consecutive days, Contractor
shall, within a sixty (60) day period thereafter, pay to First
Party the total sum of One Million U.S. Dollars (U, S. $1,000,000)
provided, it is understood that Contractor, In order to sustain
said rate of 25,000 BOPD for said thirty (30) day period, shall
not be required to operate the Contract Area other than as a
reasonably prudent operator following sound oil field practice
prevalent In the industry.

17.3 If and when there shall be produced from the Contract Area
Fifty Thousand (50,000) barrels of oil per day (BOPD) at an
average rate for thirty (30) consecutive days, Contractor shall,
within sixty (60) days following the expiration of said thirty (30)
day period pay to First Party the total sum of One Million U.S.
Dollars (U. S .$ 1,000,000); provided, it is understood that
Contractor, in order to sustain said rate of 50,000 BOPD for
said thirty (30) day period, shall not be required to operate the
Contract Area other than as a reasonably prudent operator follow-
ing sound oil field practice prevalent in the industry.

17.4 If and when there shall be produced from the Contract Area
Seventy-five Thousand (75,000) barrels of oil per day (BOPD)
at an average rate for thirty (30) consecutive days, Contractor
shall, within sixty (60) days following the expiration of said





 (Contd. .  page 35 - no. 17.4)

Two Million U.S. Dollars (U. S. $2,000,000); provided, it is
understood that Contractor, in order to sustain said rate of
75,000 BOPD for said thirty (30) day period, shall not be
required to operate the Contract Area other than as a reasonably
prudent operator following sound oil field practice prevalent in
the industry,

17.5 If and when there shall be produced from the Contract Area
One Hundred Thousand (100,000)barrels of oil per day (BOPD)
at an average rate for thirty (30) consecutive days. Contractor
shall, within sixty (60) days following the expiration of said
thirty (30) day period,pay to First Party the total sum of Three
Million U.S. Dollars (U. S. $3,000,000); provided, it is under-
stood that Contractor, in order to sustain said rate of 100,000
BOPD for said thirty (30) day period, shall not be required to
operate the Contract Area other than as a reasonably prudent
operator following sound oil field practice prevalent in the
industry.





SECTION XVIII

EFFECTIVENESS

18.1 This Contract shall come into effect on the Effective Date.

18.2 This Contract shall not be annulled, amended or modified in any
respect except by the mutual consent in writing of the Parties
hereto.

IN WITNESS WHEREOF, the Parties hereto have executed this Contract
as of the day and year first above written. 

PHILIPPINES-CITIES SERVICE, INC.           THE PETROLEUM BOARD
By:                                                                 By:

HUSKY (PHILIPPINES) OIL, INC.                ORIENTAL PETROLEUM AND MINERALS
                                                                      CORPORATION

By:                                                                 By:

PHILIPPINE-OVERSEAS DRILLING &         BASIC PETROLEUM AND MINERALS, INC.
OIL DEVELOPMENT CORPORATION        

By:                                                                 By:

LANDOIL RESOURCES CORPORATION    WESTRANS PETROLEUM, INC.

By:                                                                 By:

PHILIPPINE NATIONAL OIL COMPANY

By: