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PRODUCTION SHARING CONTRACT


BETWEEN





THE REPUBLIC OF EQUATORIAL GUINEA


AND


UNITED MERIDIAN INTERNATIONAL CORPORATION





(AREA B - OFFSHORE NW BIOCO)


 TABLE OF CONTENTS





Section Page








1. SCOPE AND DEFINITIONS ................. 2


2. TERM, TERMINATION, AND CANCELLATION .......... 8


3. EXCLUSION OF AREAS.................. 16


4. WORK PROGRAM AND EXPENDITURES............ 18


5. CONDUCT OF PETROLEUM OPERATIONS BY CONTRACTOR .... 22


6. RIGHTS AND OBLIGATIONS OF THE PARTIES AND


DETERMINATION OF PRODUCTION LEVELS ....... 27


7. RECOVERY OF OPERATING COSTS/ SHARING OF PRODUCTION,


AND HANDLING OF PRODUCTION........... 33


8. VALUATION OF HYDROCARBONS .............. 44


9. BONUSES AND SURFACE RENTALS ............. 47


10. PAYMENTS....................... 50


11. TITLE TO EQUIPMENT.................. 50


12. UNIFICATION..................... 52


13-. ARBITRATION •.-*-/............. 54


14. BOOKS AND ACCOUNTS AND AUDITS............ 57


15. NOTICES....................j . . 58


16. LAWS AND REGULATIONS................. 58


17. FORCE MAJEURE..... 59


18. TEXT......................... 60


19. EFFECTIVENESS.....•............... 60








Exhibit "A” - DESCRIPTION OF CONTRACT AREA........ 62


Exhibit ”B” - MAP OF CONTRACT AREA............ 63


Exhibit "C" - ACCOUNTING PROCEDURE ............ 64








- i £¥'£" 3.\


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 PRODUCTION SHARING CONTRACT


this 2^th day of June





THIS Contract, made and entered into on /


1992, by and between The Republic of Equatorial Guinea (hereinafter


sometimes referred to as the "State”), represented for purposes of


this Contract by the Ministry of Mines and Hydrocarbons of The


Republic of Equatorial Guinea (hereinafter referred to as the


"Ministry”) and United Meridian International Corporation, a


corporation organized and existing under the laws of the State of


Delaware, U.S.A., having its registered office at 1201 Louisiana


Street, Suite 1400, Houston, Texas, U.S.A., hereinafter referred to


as the "Contractor", and represented for purposes of this Contract


by Coy H. Squyres, its President. The State and the Contractor


hereinafter are referred to either individually as "Party" or


collectively as "Parties".





WITNESSETH:


WHEREAS, all Hydrocarbons existing within the territory of The


Republic of Equatorial Guinea, including adjacent submerged lands,


are national resources owned by The Republic of Equatorial Guinea;


and


WHEREAS, the State wishes to promote the development of


Hydrocarbon deposits in and throughout the Contract Area and the


Contractor desires to join and assist the State in accelerating the


exploration and development of the potential resources within the


Contract Area; and


WHEREAS, the Contractor has the financial ability, technical


competence and professional skills necessary to carry out the


Petroleum Operations hereinafter described; and


WHEREAS, in accordance with the Hydrocarbons Law of The


Republic of Equatorial Guinea, agreements in the form of Production


Sharing Contracts may be entered into between the State and foreign


capital investors;


THEREFORE, in consideration of the undertakings and covenants


herein contained, the Parties hereby agree as follows:


 Section 1


SCOPE AND DEFINITIONS





1.1 SCOPE


This Contract is a Production Sharing Contract. In accordance


with the provisions herein contained, the Ministry shall be


responsible for managing the Petroleum Operations contemplated


in this Contract.





The Contractor shall:


(a) be responsibly to the State as an independent contractor


for the execution of the Petroleum Operations in


accordance with the provisions of this Contract, and is


hereby appointed and constituted the exclusive company to


conduct Petroleum Operations in the Contract Area for the


term hereof;


(b) provide all necessary capital, machinery,- equipment,


technology and personnel necessary for the conduct of


Petroleum Operations;


(c) bear the risk of Petroleum Operations Costs required in


carrying out Petroleum Operations and shall therefore


have an economic interest in the rapid development of the


hydrocarbon deposits in the Contract Area. Such costs


shall be included in Petroleum Operations Costs


recoverable as provided in Section 7.


During the term of.this Contract the total production achieved


in the conduct of the Petroleum Operations shall be divided


between the Parties in accordance with the provisions of


Section 7.





1.2 DEFINITIONS


In this Contract, words importing the singular include the


plural and vice versa, and except where the context otherwise








indicates, shall have the meanings set forth in this Section.


Words that are used but not defined herein, but that are


defined in the Hydrocarbons Law, shall have the meanings set


forth in the Hydrocarbons Law. 1/


* /i\ '


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(a) Person means any individual, corporation, partnership


joint venture, association, trust, estate, unincorporated


" organization of government or any agency or political


subdivision thereof.





(b) Affiliated Company or Affiliate of any specified Person


means any other Person directly or indirectly controlling


or controlled 'by or under direct or indirect common


control with such specified Person. For the purposes of


this definition, "control” when used with respect to any


specified Person means the power to direct, administer


and dictate policies of such Person, through the


ownership of fifty percent (50%) or more of such Person's


voting securities; and the terms "controlling” and


"controlled" have meanings correlative to the foregoing.


(c) Crude Oil means Hydrocarbons which are produced at the


wellhead in liquid state at atmospheric pressure, crude


mineral oil, asphalt and ozokerites and the liquid


Hydrocarbons known’ as condensate and Natural Gas Liquids


obtained from Natural Gas.


(d) Natural Gas means all Hydrocarbons that at atmospheric


conditions of temperature and pressure are in a gaseous


phase except for Natural Gas Liquids as defined in


Section 1.2(e). Included in this definition are wet


mineral gas, dry mineral gas, wet gas and residue gas


remaining after the extraction, processing or separation


of liquid Hydrocarbons from wet gas, as well as non-


hydrocarbon gas or gases produced in association with


liquid or gaseous Hydrocarbons.


(e) Natural Gas Liquids means those portions of Natural Gas.


which are liquified at the surface in field separators,


field facilities or Natural Gas processing plants;


Natural Gas Liquids include but are not limited to


ethane, propane, butane and pentane.


(f) Exploration Operations include geological studies;


geophysical studies; aerial mapping; investigations .


rx |p


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relating to the subsurface geology; stratigraphic test


drilling; exploration wells and appraisal wells; and


related activities such as drillsite preparation,


surveying, and all work necessarily connected therewith,


that is conducted in connection with exploration for


Crude Oil and/or Natural Gas.


(g) Development and Production Operations means all


operations other than Exploration Operations conducted to


facilitate extraction and the production of Crude Oil and


Natural Gas.


(h) Exploration Expenditures means direct expenditures on


Exploration Operations and overhead expenses made in


connection with exploration of the Contract Area. These


----a •< *


expenditures shall be determined in accordance with the


Accounting Procedure attached hereto as Exhibit ’• C”, but


expenditures made within the area of a Field after


Commercial Discovery has been declared shall be excluded.


(i) Development and Production Expenditures means direct


expenditures on Development and Production Operations and


overhead expenses made in connection with the development


of a Field, excluding expenditures made within the area


of a Field before Commercial Discovery has been declared,


all as determined in accordance with the Accounting


Procedure attached hereto as Exhibit ”C”.


(j) Petroleum Operations Costs means ‘‘all costs and


expenditures made and obligations incurred in carrying


out Petroleum Operations hereunder, determined in


accordance with the Accounting Procedure attached hereto


as Exhibit ”C” and made a part hereof.


(k) Barrel means a quantity or unit of Crude Oil equal to


158.9874 liters (42 United States gallons) at a


temperature of 15.56 degrees Centigrade (60 ■ degrees


Fahrenheit) under one atmosphere of pressure.


(l) Field means an area within the Contract Area, as


determined in accordance with Section 2.5. i





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(m) Well means any opening in the ground or seabed made or


being made by drilling or boring, or in any other manner,


for the purpose of discovering and/or producing Crude Oil


or Natural Gas, or for the injection of any fluid into an


underground deposit, other than a seismic hole or a


structure test hole or stratigraphic test hole.


(n) Commercial Discovery means a discovery of Hydrocarbons


that, in the judgment of the Contractor, can be produced


commercially based on’ consideration of all pertinent


operating and financial data.


(o) Work Program means an itemized statement of the Petroleum


Operations to be carried out in the Contract Area as set


forth in Section 4.


(p) Budget of Petroleum Operations Costs means the estimate


of the costs of all items included in the Work Program.


(q) Year or Calendar Year means a period of twelve (12)


consecutive months according to the Gregorian Calendar,


with a Calendar Year commencing January 1 and ending on


the following December 31, according to the Gregorian


Calendar.


(r) 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.


(s) Gross Receipts means the sum of all proceeds of sales of


Hydrocarbons from the Contract Area in any given Calendar


Year.


(t) Income Tax means that tax levied on net income of the


Contractor pursuant to the Tax Law.


(u) Calendar Quarter means a period of three consecutive


months beginning January 1, April 1, July 1, or October 1


and ending March 31, June 30, September 30 or


December 31, respectively.


(v) Effective Date means the date of the approval of this


Contract by the State as a law of The Republic of





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Equatorial Guinea in accordance with the provisions of


the applicable law.


(w) Foreign Exchange means currency acceptable to the Parties


other than that of The Republic of Equatorial Guinea.


(x) Hydrocarbons Law means Decree-Law No. 7 of 16 June 1981.


(y) Contract Area means the geographic territory of The


Republic of Equatorial Guinea the subject of this


Contract. Such Contract Area is described in Exhibit "A"


and delineated in Exhibit "B" attached hereto and


incorporated herein.


(z) Royalty means ten percent (10%) of all the Crude Oil, and


ten percent (10%) of all the Natural Gas produced and


saved and sold from the Contract Area and not otherwise


utilized in Petroleum Operations.


(aa) Maximum Efficient Rate means the maximum rate of


production of Hydrocarbons in a Field, without excessive


decline or loss of reservoir pressure, and in accordance


with international petroleum industry practice and


Section 6.3.


(ab) Semester, as used in Section 7.8 means a period of six


(6) consecutive months, commencing the first of January


and the first of July of each Calendar Year.


(ac) Arm's-Length Third-Parties Sales means sales by either


Party under Hydrocarbon sales contracts with third


parties which are not Affiliates of the selling Party and


excluding sales involving all forms of total or partial


non-cash consideration such as, without limitation,


barter, Hydrocarbon exchanges, government-to-government


deals, or restricted or distress transactions.


(ad) Contractor's Share of Hydrocarbons means the aggregate of


the Contractor's share of Net Hydrocarbons (as defined


under Section 7.2) and that portion of Hydrocarbons for


the recovery of the Petroleum Operations Costs.


(ae) Delivery Point means (i) with respect to export sales of


Crude Oil or Natural Gas Liquids the point f.o.b.


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Equatorial Guinean facility at which such Hydrocarbons


reach the inlet flange of the lifting tankship's intake


pipe, (ii) with respect to other sales of Hydrocarbons


the point f.o.b. the Contractor's Equatorial Guinean


facility at which the transfer to the purchaser of such


Hydrocarbons takes place pursuant to the terms of the


applicable sales contract, or (iii) such other point


which may be agreed upon by the Ministry and the


Contractor.


(at) Date of First Commercial Production means the date on


which the first regular sales of Hydrocarbons are made


from a Field.


(ag) Residential Use means Natural Gas delivered in gaseous


state to the domiciles of residents of The Republic of


Equatorial Guinea.


(ah) First Subperiod has the meaning ascribed thereto in


Section 2.1(a).


(ai) Second Subperiod has the meaning ascribed thereto in


Section 2.1(a).


(aj) Third Subperiod has the meaning ascribed thereto in


Section 2.1(a)


(ak) Area of Provisional Discovery has the meaning ascribed


thereto in Section 2.3.


(al) Section means a Section in this Contract unless the


context provides otherwise.


(am) Initial Exploration Period means the period of six (6)


consecutive Contract Years commencing with the Effective


Date.


(an) Facility Rules has the meaning ascribed thereto in.


Section 13.1.


(ao) Center has the meaning ascribed thereto in Section 13.1.


(ap) Convention has the meaning ascribed thereto in


Section 13.1.


(aq) Tax Law means Decree - Law No. 1/1986 as amended by


Decree - Law No. 7/1988.


 (ar) Area of Commercial Discovery means an area designated by


Contractor under Section 2.5 which may contain one or


more discoveries of Hydrocarbons.





Section 2


TERM, TERMINATION, AND CANCELLATION


2.1 The Contractor is authorized to conduct Exploration Operations


during the term of this Contract as hereinafter provided:


(a) During the Initial Exploration Period, the Contractor is


authorized to conduct Exploration Operations. The


Initial Exploration Period shall be divided into three


(3) subperiods. The First Subperiod shall have a term of


one (1) Contract Year commencing with the Effective Date


and shall be called the ’’First Subperiod”. The Second


Subperiod shall have a term of three (3) Contract Years


commencing with the termination of the First Subperiod


and shall be called the ’’Second Subperiod”. The Third


Subperiod shall have a term of two (2) Contract Years


commencing with the termination of the Second Subperiod


and shall be called the ’’Third Subperiod".


(b)(i) If the Contractor has fulfilled it's obligations for the


First Subperiod, the Contractor may elect to proceed into


the Second Subperiod by filing an application to so


proceed with the Ministry not less than ninety (90) days


, prior to the termination of the First Subperiod. If the


Contractor files the application in accordance with this


Section 2.1(b)(i), the Ministry shall grant to the


Contractor the right to proceed into the Second


Subperiod. In the event the Contractor does not file


such application in accordance with this Section


2.1(b)(i), this Contract shall terminate and the


Contractor shall surrender the Contract Area.


(ii) If the Contractor has fulfilled its obligations for the


Second Subperiod, the Contractor may elect to proceed


into the Third Subperiod by filing an application to so





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Period for one (1) Contract Year and has drilled at


least one (1) exploration Well in accordance with ■


said Section, the Contractor may extend the Initial


Exploration Period for a second Contract Year after


the Third Subperiod upon filing an application for


extension with the Ministry not less than thirty


(30) days’prior to the termination of the one (1)


Year extension granted under (i) above and agreeing


to drill at least one (1) exploration Well during


such second extension Year in a portion of the


Contract Area;


(iii) The Contractor may extend the Initial Exploration


Period for two^(2) Contract Years after the Third


Subperiod upon filing an application for extension


with the Ministry not less than ninety (90) days


prior to the termination of the Third Subperiod and


agreeing to drill at least one (1) exploratory Well


during such two (2) Year extension in a portion of


the Contract Area in which the water depth at the


location of the Well is tworhundred (200) meters or


greater;


(iv) The Contractor may extend the Initial Exploration


Period for three (3) Contract Years after the Third


Subperiod upon filing an application for extension I


with the Ministry not less then ninety (90) days /


prior to the termination of the Third Subperiod and I


if during the Initial Exploration Period the I


Contractor has given the Ministry notice that the x


Contractor has encountered indications of a >


substantial accumulation of Hydrocarbons and


designated an Area of Provisional Discovery in


accordance with Section 2.3, but such extension


shall apply only to the Area of Provisional


Discovery; .y /








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(v) The Contractor may extend the Initial Exploration


Period for two (2) Contract Years commencing on the


termination of an extension granted under


Section 2.1(c)(i), Section 2.1(c)(ii) or


Section 2.1(c)(iii), as the case may be, upon


filing an application for extension with the


Ministry not less than thirty (30) days prior to


the termination of an extension granted under


Section 2.1(c)(i), Section 2.1(c)(ii) or


Section 2.1(c) (iii), as the case may be, if the


Contractor has encountered, in a Well drilled


during such extension, indications of a substantial


accumulation of^Hydrocarbons and designated an Area


of Provisional Discovery in accordance with


Section 2.3, but such extension shall apply only to


the Area of Provisional Discovery;


(vi) The Contractor may extend the Initial Exploration


Period for one (1) Contract Year commencing on the


termination of an extension granted under


Section 2.1(c)(i), Section 2.1(c)(ii) or


Section 2.1(c) (iii), as the case may be, if the


Contractor has encountered, in a Well drilled


during any such extension, a show of Hydrocarbons


which the Contractor believes is sufficient to


warrant further exploration drilling and the


Contractor agrees to drill one (1) evaluation Well


at a location mutually acceptable to the Contractor


and the Ministry.


2.2 If no Commercial Discovery has been made:


(a) During the Initial Exploration Period if the Contractor


has not elected to extend the Initial Exploration Period


in accordance with Section 2.1(c); or


(b) During any extension of the Initial Exploration Period


exercised by Contractor in accordance with


Section 2.1(c); • Lr





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this Contract shall terminate automatically in its entirety at


the end of the Initial Exploration Period or at the end of the


extension of the Initial Exploration Period which is the last


to terminate, as the case may be. However, upon the


submission of a request in accordance with the following


sentence, an extension of six (6) months shall be granted by


the Ministry in order that the Contractor may finish drilling


and testing any Well actually being drilled or tested at the


termination of this Initial Exploration Period or at the


termination of any extension of the Initial Exploration


Period, as the case may be. The Contractor shall submit to


the Ministry not less than five (5) days prior to any such


termination a request for ^extension if the Contractor believes


that an operation which will qualify for an extension will be


continuing on the date of termination.


2.3 Upon encountering indications of a substantial accumulation of


Hydrocarbons in the Contract Area, the Contractor as soon as


practicable will notify the Ministry of such indications,


indicating in the notice the particular details of the


location and the nature and indicated size of the


accumulation. After giving such notification to the Ministry,


the Contractor shall as soon as reasonably possible provide


the Ministry a report of the results of any preliminary


production tests carried out, including in the report, when


appropriate, an estimate of the accumulation and the estimated


extension of said discovery in the Contract Area. The


estimated area shall be referred to as an "Area of Provisional


Discovery".


2.4 Within each Area of Provisional Discovery the Contractor shall


carry out evaluation work, including seismic work and


drilling, as may be deemed appropriate by the Contractor. As


soon as possible, but in any case not later than the


termination of the Initial Exploration Period or the


termination of the last extension under Section 2.1(c) to


terminate, as the case may be, the Contractor will determine





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whether the discovery is a Commercial Discovery or whether two


(2) or more of such discoveries may be included together to


form one (1) Commercial Discovery.


2.5 When it is determined that a discovery of Hydrocarbons is a


Commercial Discovery in accordance with Section 2.4, the


Contractor will notify the Ministry and the Contractor will


present to the Ministry for the Ministry's written approval,


which approval will not be withheld unreasonably: (a) a report


including a map showing the -extent of the Area of Commercial


Discovery within the Contract Area, which area, when said


report is accepted by the Ministry, will constitute a Field


notwithstanding that the Field may include one or more


discoveries; (b) a Work Program, for development of the Field,


including an estimate of the Development and Production


Expenditures necessary for the development of the Field;


(c) the Maximum Efficient Rate at which the Contractor intends


to produce the Field; (d) the Contractor's opinion whether the


Field will primarily produce Crude Oil or primarily produce


Natural Gas; and, (e) the schedule of the most accelerated


program consistent with accepted ^international petroleum


industry practice for implementation of the Contractor's Work


Program.


2.6 This Contract will continue in existence with respect to each


Field which primarily produces Crude Oil for a period of


thirty (30) Years from the date on which the Contractor, in


accordance with the provisions of Section 2.5, notifies the


Ministry that the discovery is a Commercial Discovery. This


Contract will continue in existence with respect to each Field


which primarily produces Natural Gas for a period of fifty


(50) Years from the date the Contractor, in accordance with


the provisions of Section 2.5, notifies the Ministry that the


discovery is a Commercial Discovery. In case of one or more


new Commercial Discoveries as a result of new exploratory


drilling into formations which underlie or overlie any of the


formations included in a Field or into other deposits which





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may be encountered within an extension of the area of a Field,


such formations and deposits will constitute only one Field,


and' the Field will be defined or redefined as may be


necessary, to incorporate all of the underlying and overlying


formations and all the deposits located within the extension


of the area of the original Field and the provisions of


Section 2.5 shall apply mutatis mutandis to any such new


Commercial Discovery.


2.7 The Contractor shall have the right to terminate this Contract


totally or partially:


(a) with respect to any part of the Contract Area other than


a Field then producing or that prior thereto had produced


Crude Oil or Natural Gas upon giving ninety (90) calendar


days' written notice of its intention to do so; and


(b) with respect to any Field then producing or that prior


thereto had produced Crude Oil or Natural Gas, upon


giving one hundred eighty (180) calendar days' written


notice of its intention to do so.


2.8 The State shall have the right to cancel this Contract upon


giving sixty (60) calendar days' yritten notice of its


intention to do so specifying the matter causing such right to


arise, if the Contractor:


(a) fails to make any monetary payment required by the laws


of the State or under this Contract for a period of


thirty (30) calendar days after the due date for such


payment;


(b) fails to comply with any other material obligation that


it has assumed under this Contract;


(c) fails to comply with any acts, regulations, orders or.


instructions issued in conformance with this Contract by


the Ministry, or any governmental department or agency of


The Republic of Equatorial Guinea;


(d) suspends its payments under this Contract; or


(e) subject to the provisions of Section 4.5, has not


commenced production from a Field within the period of





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time specified in the development Work Program according


to the terms and conditions specified in Section 2.5.


The State's right to cancel this Contract under this


Section 2.8 shall be suspended when the matter causing such


right to arise is in dispute or in arbitration prior to the


date of the aforesaid State's written notice to the


Contractor.


2.9 If the circumstance or circumstances that result in


cancellation under Sections 2.8(a), 2.8(b), 2.8(c), 2.8(d) or


2.8(e) are remedied by the Contractor within the sixty (60)


calendar day period following the notice of termination as


aforesaid, or if before the expiry date of said sixty (60)


calendar day period the Contractor has notified the Ministry


and/or the State of its intention to submit the matter for


arbitration in accordance with Section 13, ’ then such


termination shall not become effective.


2.10 If the circumstance or circumstances that would otherwise


result in cancellation under Sections 2.8(a), 2.8(b), 2.8(c)


or 2.8(e) are the result of Force Majeure, then cancellation


shall not take place so long as Force Majeure continues and


for such period thereafter as the Ministry and the Contractor


may determine reasonable.


2.11 The termination or cancellation of this Contract, for whatever


reason, shall be without prejudice to the obligations incurred


and not discharged by either Party before the termination of


this Contract.


2.12 In the event of cancellation pursuant to Section 2.8, the


Ministry may require the Contractor to continue for the


account of the State Crude Oil or Natural Gas production


activities under the terms of this Contract until the right to


continue such production has been transferred, to another


Person.


2.13 Within ninety (90) calendar days after the termination of this


Contract, unless the Parties have agreed to an extension of


this period, the Contractor shall have the obligation to take





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any reasonably necessary action as directed by the Ministry,


including the . cessation or continuation of Petroleum


Operations to prevent pollution, environmental damage or a


hazard to human life or third-party property.


2.14 As regards operations of appraisal, development and/or


production in water depth in excess of two hundred (200)


meters and if the Contractor has notified the Ministry that in


its opinion and in accordance with accepted international


petroleum industry practice, technological know-how or


adequate equipment or material are not economically available


for the carrying out of said operations at a cost acceptable


to the Contractor, then the term of this Contract and each of


the periods prescribed .-hereunder shall be extended with


respect to that part of the Contract Area lying in water depth


in excess of two hundred (200) meters by a period of three (3)


Years commencing on the expiry date of the Initial Exploration


Period of this Contract and of each of the extensions provided


for in this Contract unless a longer extension period is


mutually agreed between the Parties,


•r


Section 3


EXCLUSION OF AREAS


3.1 Subject to Section 3.3, on or before the end of the Second


Subperiod of the Initial Exploration Period, the Contractor


shall surrender forty percent (40%) of the original Contract


Area.


3.2 Subject to Section 3.3, on or before the end of the Third


Subperiod, if the Contractor elects to extend the Initial


Exploration Period pursuant to Section 2.1(c), the Contractor


shall surrender an additional area equal to twenty-five


percent (25%) of the original Contract Area.


3.3 The Contractor shall not be obligated to surrender any portion


of the original Contract Area which is included in an Area of


Provisional Discovery or an Area of Commercial Discovery or a


Field. The Contractor's surrender obligations under





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Section 3.1 and Section 3.2 shall apply to the area remaining


after excluding from the original Contract Area the areas


declared to be an Area of Provisional Discovery, an Area of


Commercial Discovery and the area of a Field and, for the


purpose of Section 3.2, areas previously surrendered by the


Contractor pursuant to Section 3.1.


3. 4 That portion of the Contract Area which is not included in an


Area of Provisional Discovery, an Area of Commercial Discovery


or an area of a Field which is remaining after the mandatory


surrenders as set forth in this Section 3, shall remain


subject to this Contract so long as the Contractor maintains


a reasonable exploration effort in respect of such remaining


area. .


3.5 Upon at least thirty (30) calendar days' written notice to the


Ministry prior to the end of the first Contract Year and


similarly prior to the end of any succeeding Contract Year,


the Contractor may surrender any portion of the Contract Area,


and such portion shall then be credited against that portion


of the Contract Area which the Contractor is next required to


surrender under the provisions of Sections 3.1 and 3.2.


3.6 The Contractor shall notify the Ministry at least sixty (60)


calendar days prior to the date of surrender of the


description and area to be surrendered. Each surrender shall


be constituted of no more than two (2) areas of a simple


geometrical shape delineated in degrees and minutes of


longitude and latitude except where the boundaries of the


contract Area or an area designated within the Contract Area


will not permit such degrees and minutes.


3.7 The Contractor shall plug and abandon all Wells on the area to.


be surrendered in accordance with accepted international


petroleum industry practices.


3.8 No surrender made in accordance with this Section 3 shall


relieve the Contractor or its surety of the obligation to pay


surface rentals accrued or making payments due and payable as








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 a result of exploration and development activities conducted


through the date of surrender.





Section 4


WORK PROGRAM AND EXPENDITURES


4.1 The Contractor shall be entitled to employ any person


qualified in the judgment of the Contractor to undertake on


its behalf such geological and geophysical surveys, drilling


or similar investigations as-it may decide to undertake. Any


subcontractor retained by the Contractor shall have the


necessary professional experience to perform the task to be


assigned and shall be required, by written agreement with the


Contractor, to abide by all relevant terms of this Contract


and all applicable laws and regulations of The Republic of


Equatorial Guinea. Within thirty (30) calendar days after a


subcontractor is retained, the Contractor shall advise the


Ministry of the name and address of such subcontractor.


4.2 The Contractor shall commence Petroleum Operations under this


Contract not later than ninety (90) days after the Effective


Date. The Contractor undertakes during the Initial


Exploration Period to carry out the following minimum Work


Program:


(a) Acquire at least four hundred fifty (450) kilometers of


new seismic data, within the Contract Area;


(b) Drill at least one (1) exploratory Well during the Second


Subperiod of three (3) Contract Years;


(c) Drill at least one (1) exploratory Well during the Third


Subperiod of two (2) Contract Years.


If during any Subperiod or Contract Year the Contractor


carries out work in excess of the minimum Work Program for


that Subperiod or Contract Year, then such excess work shall


be offset against the Work Program for the next succeeding


Subperiod or Contract Year or (if necessary) Years but the


costs of such excess work shall however, for the purpose of


bank guarantee yearly adjustments provided for in Section 4.3,





-18-


be credited to the Contract Year during which such costs were


actually incurred.


4.3 The Contractor shall provide a security by means of a bank


guarantee acceptable to the Ministry as follows:


(a) The Contractor shall provide a bank guarantee acceptable


to the Ministry in the amount of Three Million United


States Dollars- (US $3,000,000.00) for the exploratory


Well the Contractor obligates itself to drill in the


Second Subperiod. If the Contractor elects to proceed


into the Third Subperiod, then the Contractor on or


before commencement of the Third Subperiod will provide


a bank guarantee acceptable to the Ministry in the amount


of Three Million United States Dollars (US $3,000,000.00)


for the exploratory Well the Contractor obligates itself


to drill during the Third Subperiod.


(b) If the Contractor extends the Initial Exploration Period


pursuant to Section 2.1(c), then the Contractor on or


before the commencement date of any such extension shall


provide a bank guarantee acceptable to the Ministry


corresponding to Three Million United States Dollars (US


$3,000,000.00) for each Well the Contractor obligates


itself to drill during the period of any such extension.


(c) Upon submission to the Ministry by the Contractor of its


detailed accounts for a ’period since the last such


submission of accounts to the end of the month under


consideration, the applicable bank guarantees shall be


automatically reduced by the Contractor's notice to the


issuing bank on the basis of the amount of expenditures


actually made by the Contractor so as to reflect the


balance of the Contractor's minimum expenditure


obligation

















-19-


required in this Section 4.3. Further, upon completion


by the Contractor of any specific operation included in


the minimum Work Program as provided in Section 4.2, the


remaining balance, if any, of the bank guarantee provided


for the operation concluded, upon the Contractor's notice


to the issuing bank, shall be automatically reduced to


zero. If (i) at the end of any Subperiod of the Initial


Exploration Period, (ii) at the end of any extension of


the Initial Exploration Period, or (iii) upon the date of


termination of this Contract, as the case may be, the


Contractor has not expended a sum of money at least equal


to the total minimum expenditure for Petroleum Operations


required in this Section 4.3 to be expended at the


applicable time, the balance of the security


corresponding to the unexpended minimum expenditure for


Petroleum Operations which this Contract required be


expended at that time automatically shall be paid to the


State, except when the minimum Work Program as provided


under Section 4.2 and annually defined in accordance with


Section 4.4 has been carried put in full. If the


Contractor commences the drilling of a Well which is part


of a minimum Work Program committed to under the


applicable provisions of Sections 4.2 or 2.1(c), prior to


the beginning of the Subperiod or Contract Year, as the


case may be, for which such Well is committed, then the


commitment to provide the bank guarantee corresponding to


such well as set forth in Section 4.3 shall be waived.


(d) Notwithstanding anything to the contrary which may be


contained or implied in this Article 4.3, the Contractor,


shall not be required to provide security by means of a


bank guarantee for operations to be performed in the


Third Subperiod or any extension of the Initial


Exploration Period if production has been obtained.


(e) Unless the Parties otherwise agree in writing, each Well


to be drilled by Contractor that, is a part of a minimum





-20-


 Work Program under this Contract shall be drilled to a


depth not less than the depth for such Well set forth in


the Work Program and Budget of Petroleum Operations


Costs; Provided, a Well may be drilled to a lesser


depth, with the agreement of the Ministry, if the


continuation of drilling in accordance with good


international petroleum industry practice is prevented by


(i) encountering basement,(ii) danger due to the


existence of abnormal formation pressure, (iii) formations


the hardness of which prevent the continuation of


drilling or (iv) petroleum formations the drilling of


which requires, for the protection of such formations,


the setting of casing which will prevent the minimum


depth from being reached.


4.4 Not less than ninety (90) calendar days prior to the beginning


of each Calendar Year or at such other time as otherwise


mutually agreed by the Parties, the Contractor shall prepare


and submit for approval to the Ministry a Work Program and


Budget of Petroleum Operations Costs for the Contract Area


setting forth the Petroleum Operations, the Contractor proposes


to carry out during the ensuing Calendar Year. Approval by


the Ministry of the proposed Work Program and Budget of


Petroleum Operations Costs will not be unreasonably withheld


or delayed and shall be notified to the Contractor not later


ten sixty (60) calendar days prior to the beginning of each


Calendar Year. Failing such notification to the Contractor,


approval by the Ministry shall be deemed given.


4.5 It is recognized by the Parties that the details of a Work


Program may require changes in the light of unforeseen,


circumstances and nothing herein contained shall limit the


right of the Contractor to make such changes, provided such


changes do not alter the general objectives of the Work


Program


4.6 The Parties further recognize that in the event of an


emergency or extraordinary circumstances requiring immediate





-21-


action, either Party may take all actions it deems proper or


advisable to protect its interests and those of its employees


and any costs so incurred by the Contractor shall be included


in the Petroleum Operations Costs. Costs incurred by the


Contractor related to cleaning up pollution or damage shall be


included in Petroleum Operations Costs to the extent such


• costs are not recovered by the Contractor by way of insurance


settlement.


4.7 Within ninety (90) calendar days after the expiration of a


Calendar Year, the Contractor shall submit to the Ministry


detailed accounts showing the Petroleum Operations Costs the


Contractor has incurred during the past Calendar Year. The


accounts shall be certified by an independent outside


accountant acceptable to ‘Soth Parties. It is understood that


the Ministry at its own cost retains the authority to review


and audit occasionally the Contractor's books with respect to


Petroleum Operations conducted hereunder. Such audit right


will terminate two (2) Years after closure of the subject


Year's accounts. Any exceptions to the Contractor's accounts


must be officially communicated to the Contractor within three


(3) Years of the closure of the subject Year's accounts.





Section 5


CONDUCT OF PETROLEUM OPERATIONS BY CONTRACTOR


5.1 The Contractor shall conduct the Petroleum Operations


diligently and in accordance with accepted international


petroleum industry practices designed to enable production of


Crude Oil at the Maximum Efficient Rate and production of


Natural Gas as specified in Section 6.3. The Contractor shall


have the right to set with the agreement of the Ministry the


minimum production level for any Field which the Contractor


has or plans to develop giving due consideration to the


economic factors involved in Field development and in


accordance with this Section-5.1 and Sections 5.2 and 6.3.


The Contractor shall ensure that all equipment, plant and





-22-


installations used by the Contractor comply with generally


accepted engineering norms and are of proper and accepted


construction and are kept in optimal working order.


5.2 The Contractor shall in particular take all reasonable steps


necessary:


(a) to ensure that Crude Oil or Natural Gas discovered and


produced within the Contract Area does not escape or is


not in any other way wasted; except as specified in


Section 5.3;


(b) to prevent damage to adjoining or adjacent Crude Oil or


Natural Gas-bearing strata;


(c) to prevent the unintentional entrance of water through


Wells to Crude Oil or Natural Gas-bearing strata;


(d) to prevent damage t©'“’adjoining or adjacent water bearing


strata;


(e) to conduct all Petroleum Operations under this Contract


in accordance with applicable law and regulations and in


a manner that does not conflict with obligations imposed


on The Republic of Equatorial Guinea by international


law;


(f) to take necessary precautions for protection of


navigation and fishing and to prevent pollution of the


sea or rivers;


(g) to indemnify, defend and save the State harmless against


all claims, losses and damage of any nature whatever,


including without limitation, claims for loss or damage


to property or injury to persons caused by, or resulting


from, any operation in the Contract Area conducted by or


on behalf of the Contractor and any costs so incurred by


the Contractor shall be included in the Petroleum


Operations Costs less any costs recovered by the


Contractor by way of insurance settlement; Provided, that


the Contractor shall not be held responsible to the State


under this subsection for any loss, claim, damage, or*








-23-


injury caused by, or resulting from any negligent action


of personnel of the Ministry and/or the State; and


(hy (i) to drill wells in accordance with good international


petroleum industry practice and, (ii) to produce each


Field at the Maximum Efficient Rate in order to protect


the interest of the State against the drainage of


Hydrocarbons which may occur as a result of the


production of Hydrocarbons by third parties from the


portion of a reservoir of a Field which extends outside


the Contract Area.


5.3 In the event the Contractor makes a Commercial Discovery of


Natural Gas, the Contractor shall undertake a feasibility


study to ascertain the possible commercial uses of such


Natural Gas. All the costs and expenses in respect of such


feasibility study shall be included in Petroleum Operations


Costs. The Ministry shall approve flaring of Natural Gas as


a necessary part of Crude Oil production in accordance with


good international petroleum industry practice or when


existing technical and financial circumstances require the


flaring of Natural Gas. All amounts of Crude Oil and Natural


.r-


Gas Liquids required by Article 15 of Decree Law 7/1981 to be


sold to the State by the Contractor shall be priced in


accordance with Section 8.2(a).


5.4 If the Ministry reasonably determines that any works or


installations erected by the Contractor or any operations


undertaken by the Contractor endanger persons or third-party


property or cause pollution or harm marine life to an


unacceptable degree, the Ministry will order the Contractor to


take opportune remedial measures within a reasonable period


established by the Ministry and to repair any damage to the


environment. If the Ministry deems it necessary, it also will


order the Contractor to discontinue the Petroleum Operations


in whole or in part until the Contractor has taken such


remedial measures or has repaired any damage. /) ,








-24-


5.5 To ensure that the Contractor shall meet its obligations to


third parties or to State agencies that might arise in the


event of damage or injury (including environmental damage or


injury) caused by Petroleum Operations, notwithstanding the


damage is accidental, the Contractor shall maintain in force


a third-party liability insurance policy, the issue, coverage


and terms of which are approved in writing by the Ministry


prior to the Effective Date. To the extent such third-party


liability insurance is unavailable, or is not obtained, or


does not cover part or all of any claim or damage caused by or


resulting from Petroleum Operations, the Contractor shall


defend, indemnify and hold harmless the Ministry and the State


except for loss, claim, damage or injury caused by, or


resulting from, any negligent action of personnel of the


Ministry and/or the State. Any costs so incurred by the


Contractor shall be included in the Petroleum Operations Costs


less any costs recovered by the Contractor by way of insurance


settlement.


5.6 If, after the Effective Date, others are granted permits or


licenses within the Contract ..Area concerning the


exploration/production of any minerals or other substances


other than Crude Oil or Natural Gas, the Contractor shall use


its reasonable efforts to avoid obstruction or interference


with such licensees' operations within the Contract Area. The


Ministry shall use its best efforts to ensure that operations


of third parties do not obstruct the Contractor's Petroleum


Operations within the Contract Area.


5.7 The Contractor shall provide acceptable working conditions and


living accommodations in accordance with generally accepted


petroleum industry practice and access to medical attention


and nursing care for all personnel employed by it or its


subcontractors in Petroleum Operations.


5.8 The Contractor's Well design and conduct of drilling,


including but not limited to the Contractor's casing^








---25---


cementing and drilling programs shall be in accordance with


generally accepted petroleum industry practice.


5.9 Every Well shall be identified by a number, which number shall


be shown on maps, plans and similar records that the


Contractor is required to keep. The Ministry shall at once be


notified of any change of the identification numbers.


5.10 No Well shall be drilled through any vertical boundary of the


Contract Area without the consent of the Ministry. A


directional Well drilled under the Contract Area .from a


surface location on nearby land not covered by the Contract


shall be deemed to have the same effect for all purposes of


the Contract as a Well drilled from a surface location on the


Contract Area. In such circumstances and for purposes of this


Contract, production of Crude Oil or Natural Gas from the


Contract Area through a directional Well surfaced on nearby


land, or drilling or reworking of any such directional Well,


shall be considered production or drilling or reworking


operations (as the case may be) on the Contract Area for all


purposes of this Contract. Nothing contained in this


paragraph is intended or shall be construed as granting to the


Contractor any leasehold interests, licenses, easements, or


other rights which the Contractor may have to acquire lawfully


under the Hydrocarbons Law or from the Ministry or third


parties.


5.11 Before commencing any work on the drilling of any Well covered


by a Work Program and Budget of Petroleum Operating Costs or


recommencing work on any Well on which work has been


discontinued for more than six (6) calendar months, the


Contractor shall give the Ministry not less than seven (7)


calendar days' written notice.


5.12 Subject to the provisions of Section 2.10, before abandoning


any producing or previously producing Field, the Contractor


shall give not less than ninety (90) calendar days' notice to


the Ministry of its intention to abandon. Upon receipt of


such notice, the Ministry may elect pit any time within the





-26-


notice period to assume operation of the Well or Wells


proposed for abandonment. Failure to so elect by notice to


the Contractor in writing within the aforementioned period


shall be deemed approval of the Contractor's proposal to


abandon.


5.13 The Contractor shall securely plug any Well that it intends to


abandon to prevent- pollution, subsea damage and possible


damage to the deposit.


Section 6


RIGHTS AND OBLIGATIONS OF THE PARTIES AND DETERMINATION OF


PRODUCTION LEVELS


6.1 Subject to the provisions of Sections 6.1(e) and (f) which


shall apply to each Person constituting the Contractor, the


Contractor shall:


(a) advance all necessary funds and purchase or lease all


material, equipment and supplies required to be purchased


or leased in connection with the Petroleum Operations;


(b) furnish all technical aid, including foreign personnel,


required for the performance of the Petroleum Operations;


..r


(c) furnish all other funds for the performance • of the


Petroleum Operations as may be required, including


payment to foreign entities that perform services as


subcontractors;


(d) retain control of all leased property paid for with


Foreign Exchange and brought into The Republic of


Equatorial Guinea under the rules of temporary


importation, and as such, shall be entitled to freely


remove same from The Republic of Equatorial Guinea in


accordance with the Law of Hydrocarbons;


(e) have the right to freely sell, assign, transfer, convey


or otherwise dispose of any part or all of the rights and


interest under this Contract to any Affiliated Company;


(f) have the right to sell, assign, transfer, convey or


otherwise dispose of all or any .part of its rights and


-27- (Aa


 interests under this Contract to Persons other than


Affiliated Companies with the prior written consent of


the Ministry which consent shall not be unreasonably


withheld or delayed;


(g) have the right at all times of ingress and egress from


the Contract Area and any facilities used in the


Petroleum Operations, wherever located;


(h) jointly own with the Ministry all data resulting from


Petroleum Operations; •


(i) submit in suitable form to the Ministry copies of all


original geological, geophysical, drilling, Well,


production and other data, reports, interpretations and


maps, and cuttings of all samples that have been obtained


or compiled during the term hereof;


(j) make all reasonable efforts to employ and train citizens


of The Republic of Equatorial Guinea in Petroleum


Operations. The Contractor may employ non-citizens if no


Equatorial Guinea citizens can be found with sufficient


skill and technical qualifications to perform a


particular task or job. The Contractor shall make


similar requirements of any subcontractor. At intervals


of not more than one (1) Year the Contractor shall submit


to the Ministry reports detailing the personnel employed


and their residence when employed. After the Effective


Date,the Ministry may require that the Contractor


ft/ establish a program.to train personnel of the Ministry


and citizens of The Republic of Equatorial Guinea to


undertake skilled and technical jobs in the Petroleum





Operations provided that the costs of such required


programs shall not exceed Fifty Thousand United States


Dollars (US $50,000.00) annually. When a Commercial


Discovery has been determined by the Contractor, the sum


of money to be expended for training may be increased by


the mutual agreement in writing of the Parties. All


costs and expenses of training .citizens of Equatorial





-28-


Guinea for employment in the Contractor's operations, as


well as costs and expenses for a program of training for


the Ministry's personnel, shall be included in Petroleum


Operations Costs;


(k) appoint an authorized representative for The Republic of


Equatorial Guinea with respect to this Contract, who


shall have an office in Malabo;


(l) give preference to goods and services that are produced


in The Republic of Equatorial Guinea or rendered by


citizens of The Republic of Equatorial Guinea, provided


such goods and services are offered at equally


advantageous conditions with regard to quality, price,


and immediate availability in the quantities required;


(m) pay to the State the Income Tax imposed on it pursuant to


the Tax Law existing and in force on the Effective Date;


(n) pay to the State the Royalty imposed upon it pursuant to


the terms and conditions of this Contract;


(o) except as provided in Section 7.10, have the right during


the term hereof to freely lift, dispose of and export its


share of Crude Oil, and retain abroad the Foreign


Exchange proceeds obtained therefrom;


(p) have the right to make direct payments from its offices


for the purchase of goods and services to be imported


into Equatorial Guinea for Petroleum Operations carried


out by the Contractor as well as for the needs of the


Contractor's expatriate employees and foreign


subcontractors;


(q) have the right to borrow money outside of Equatorial


Guinea and to open bank accounts in foreign currencies


outside of Equatorial Guinea for the deposit of its sales


and all other proceeds and to keep, utilize and freely


dispose of funds deposited in such bank accounts; funds


transferred by the Contractor between Equatorial Guinea


■ and other countries shall not be subject to the charges








-29-


on remittances abroad as provided in the Tax Law, and to


the corresponding commissions; and


(r)- any subcontractor of the Contractor and any of the


expatriate personnel of the Contractor or of any of its


subcontractors, shall be entitled to receive in any


currency other than Equatorial-Guinean currency the whole


or any part of its compensation outside The Republic of


Equatorial Guinea.


The provisions of Sections 6.1(p) and 6.1(g) shall also apply


to Affiliates of the Contractor and to the Contractor's


subcontractors’ whose place of business is located outside of


Equatorial Guinea and who are not permanently established in


Equatorial Guinea or do not have established residence in


Equatorial Guinea for providing services to the Contractor as


well as to Persons trading any Crude Oil produced from the


Contract Area.


6.2 The Ministry shall:


(a) except with respect to the Contractor's obligation to pay


Income Tax as set forth in Section 6.1(m), assume and


discharge all other taxes to which the Contractor would


otherwise be subject, including transfer tax, import and


export duties on materials, equipment and supplies


brought into The Republic of Equatorial Guinea by the


Contractor, its contractors and subcontractors; and


exactions in respect of property, capital, net worth,


operations, remittances or transactions under the Tax Law


whether payable by the Contractor or its subcontractors


(whether exacted directly or by the requirement of stamp


taxes on documents or the use of sealed paper), including


any tax or levy on or in connection with operations


performed hereunder by the Contractor and its


subcontractors. The Ministry shall not be obliged to pay


the Contractor's Royalty, Income Tax, nor taxes on


tobaccos, liquor and personnel income tax; nor shall it


be obliged to pay the Income T$x and other taxes not


-M- ■


listed in the preceding sentence payable by the


Contractor's subcontractors. The obligations of the


Ministry hereunder shall be deemed to have been complied


with by the delivery to the Contractor within one hundred


twenty (120) calendar days after the end of each Calendar


Year, of documentary proof in accordance with fiscal laws


of The Republic of Equatorial Guinea that liability for


the above mentioned taxes has been satisfied, except that


with respect to any of such liabilities that the


Contractor may be obliged to pay directly, which the


Ministry shall reimburse to Contractor within sixty (60)


calendar days after the receipt of an invoice therefor.


The Ministry shall be consulted prior to payment of such


taxes by the Contractor or by any other party on the


Contractor's behalf. Subject to the exceptions set forth


in this Contract, the Contractor's subcontractors shall


be individually liable to The Republic of Equatorial


Guinea for the payment of their tax obligations;


(b) otherwise assist and expedite the Contractor's execution


of the Work Program by supplying or otherwise making


available all necessary visas, work permits, import


licenses, and rights of way and easements as may be


required by the Contractor or its subcontractors and made


available from the resources under the Ministry'i


control;


(c) have title jointly with the Contractor to all original


data resulting from the Petroleum Operations including


but not limited to geological, geophysical,


petrophysical, engineering, Well logs, completion logs,


status reports, samples and any other data that the


Contractor may compile or obtain during the term hereof;


Provided, however, that the Contractor may retain copies


of such data and further provided that such date* shall


not be disclosed to third parties without the consent of


the Contractor while this Contract remains in force.


However, for the purpose of obtaining new offers, the


Ministry may show any other Person geophysical and


geological data with respect to that part or parts of the


Contract Area adjacent to the area of such new offers;


(d) have the right at all reasonable times to inspect the


Contractor's Petroleum Operations, Hydrocarbon measuring


devices, logs,' plans, maps, and records relating to


Petroleum Operations and surveys or investigations on or


with regard to the Contract Area. The Ministry shall


make every effort to coordinate inspection activities to


avoid interference with Petroleum Operations;


(e) provide the Contractor with State land for shore


facilities free of ^charge if such land is available.


Such land will remain in State's ownership; and


(f) furnish to Contractor all geological, geophysical,


drilling, Well (including Well location maps), production


and other information held or contractually or otherwise


owned by the Ministry or by any other State agency or


enterprise, or enterprise in which the State


participates, relating to the Contract Area.


6.3 The Contractor shall produce Crude Oil from the Contract Area


at the Maximum Efficient Rate. The Contractor and the


Ministry shall conduct a review of the Contractor's production


programs prior to the commencement of production from any


Field and establish at that time by agreement the Maximum


Efficient Rate and the production rate for Natural Gas and the


dates on which the Maximum Efficient Rate and the production


rate for Natural Gas will be reviewed and established in the


future. In the case of Natural Gas, the production level


shall not be less than that required to satisfy any contracts


then in existence for the sale of Natural Gas or that required


by the Contractor in accordance with Section 5.1.


6.4 Each of the Persons constituting the Contractor shall have the


right to assign all or any portion of its interest under this


Contract to an Affiliate, and each of the Persons constituting





-32-


the Contractor shall have the right to assign all or any


portion of its interest under this Contract to a third party


with the prior written consent of the Ministry which shall not


be withheld unreasonably


Section 7


RECOVERY OF OPERATING COSTS, SHARING OF PRODUCTION, AND HANDLING


OF PRODUCTION


7.1 The respective production shares of the State and the


• t V--* *


Contractor of Hydrocarbons produced and saved shall be


determined in accordance with the definitions and procedures


set forth in this Section 7.


7.2 After making Royalty payments to the State, the Contractor


shall be entitled to recover all Petroleum Operations Costs


out of the sales proceeds or other disposition of Hydrocarbons


produced and saved hereunder and not used in Petroleum


Operations. Any Hydrocarbons remaining after making the


Royalty payments to the State and after all Petroleum


Operations Costs are recovered by the Contractor shall be


referred to hereinafter as "Net Hydrocarbons." Net


Hydrocarbons shall be shared between the State and the


Contractor in accordance with the procedures outlined below,


which are designed to ensure total cost recovery by the


Contractor, followed by an escalation of the State's share


based on increases in the Contractor's pre-tax rate of return,


as set forth in the following tables:


(a) With respect to wellheads located in water depths less


than two hundred (200) meters and production is from a


reservoir all of which is located less than four thousand


(4,000) meters below sea level:














-33-


 Contractor's


Pre-Tax State's Share of Contractor's Share of


Rate of Return . (Net Hydrocarbons) (Net Hydrocarbons)


Up to 30% 0% 100%


Greater than 30% 25% 75%


up to 40%


Greater than 40% 60% 40%


up to 50%


Greater than 50% 80% 20%.





(b) With respect to wellheads located in water depths less


than two hundred (200) meters and production is from a


reservoir of which all or a portion thereof is located


four thousand (4,000J,. meters or more below sea level:





Contractor's


Pre-Tax State's Share of Contractor's Share of


Rate of Return (Net Hydrocarbons) (Net Hydrocarbons)


Up to 30% 0% 100%


Greater than 30% 20% 80%


up to 40%


Greater than 40% 40% 60%


up to 50%


Greater than 50% 70% 30%











(c) With respect to wellheads located in water depths two


hundred (200) meters or greater:





 Contractor's


Pre-Tax State's Share of Contractor's Share of


Rate of Return . (Net Hydrocarbons) (Net Hydrocarbons)








Up to 30% 0% 100%


Greater than 30% 20% 80%


up to 40%


Greater than 40% 40% 60%


up to 50%


Greater than 50% 60% 40% .





7.3 In order to determine the State's share of Net Hydrocarbons,


it shall first be necessary to calculate Net Cash Flow from


Petroleum Operations ("Net Cash Flow”). Net Cash Flow for any


- __*<


given Calendar Year shall be determined by subtracting Royalty


Payments made during such Calendar Year and all Petroleum


Operations Costs incurred in such Calendar Year from Gross


Receipts.


7.4 In order to calculate the State's share of Net Hydrocarbons


produced from the Contract Area, there are hereby established


three (3) accounts: First Share Account ("FSA”); Second Share


Account ("SSA"); and Third Share Account (”TSA").


/r/\















































-35-


 7.4.1 First Share Account


(a) For purposes of the calculation to be made for the





First Share Account, the following formula shall be


used:


FSA(Y) = FSA(Y-l) x (1 + .30


+ i) + NCF(Y)


Where: FSA = First Share Account


Y = the Calendar Year in


question


NCF = Net Cash Flow


i = the percentage change for


the Calendar Year in


question in the index of


U.S. Consumer prices as


reported for the first


time in the monthly


publication


’’International Financial


Statistics” of the


International Monetary


Fund.


(b) In any Calendar Year in which FSA(Y) is negative,


the State's share of Net Hydrocarbons determined


with reference to the First Share Account shall be


zero.


(c) In any Calendar Year in which FSA(Y) is positive,


the Contractor for purposes of this Section shall


be deemed to have earned a pre-tax rate of return


fa/ that is equal to or greater than thirty percent


(30%), and the State's share of Net Hydrocarbons in





respect of the First Share Account shall be an


amount of Net Hydrocarbons, the portion of which


shall be determined by first allocating FSA(Y) to


Sections 7.2(a), 7.2(b) and 7.2(c) by multiplying


the FSA(Y) times a fraction for each applicable


Section, the numerator of which is the amount of


production of Hydrocarbons in the Calendar Year





-36-


attributable to the applicable Section 7.2(a),


7.2(b) and 7.2(c), as the case may be, and the


denominator of which is the total production of


Hydrocarbons in the Calendar Year from the Contract


Area. The resulting portion of FSA(Y) allocated


to each applicable Section shall be multiplied by


the applicable percentage necessary to yield the


State its share of Net Hydrocarbons provided for in


each Section. The applicable percentages are 25%,


20% and 20% for Sections 7.2(a), 7.2(b) and 7.2(c)


respectively.


(d) , In the first Calendar Year and in any Calendar Year


immediately subsequent to a Calendar Year in which


FSA(Y) is positive, for purposes of applying the


formula set forth in subsection (a) of this


Section 7.4.1, FSA(Y-l) shall be equal to zero.






























































-37-


 7.4.2 Second Share Account


(a) For purposes of the calculation to be made for the





Second Share Account, the following formula shall


be used:


SSA(Y) = SSA(Y-l) X (1 + .40


+ i) + (NCF(Y) - GAS


I(Y))


Where: SSA = Second Share Account


Y = the Calendar Year in


question


NCF = Net Cash Flow


GAS I = Value of State Share of


Net Hydrocarbons


determined with reference


to the First Share


Account


i = the percentage change for


the Calendar Year in


question in the index of


U.S. consumer prices as


reported for the first


time in the monthly


publication


"International Financial


Statistics” of the


International Monetary


Fund.


(b) In any Calendar Year in which SSA(Y) is negative,


the State's share of Net Hydrocarbons determined


Ay with reference to the Second Share Account shall be


zero.


(c) In any Calendar Year in which SSA(Y) is positive,


the Contractor for purposes of this Section shall'


be deemed to have earned a pre-tax rate of return


that is equal to or greater than forty percent


(40%), and the State's share of Net Hydrocarbons in


respect of the Second Share Account shall be an


amount of Net Hydrocarbons, the portion of which








-39-


 shall be determined by first allocating SSA(Y) to


Sections 7.2(a), 7.2(b) and 7.2(c) by multiplying





the SSA(Y) times a fraction for each applicable


Section, the numerator of which is the amount of


production of Hydrocarbons in the Calendar Year


attributable to the applicable Section 7.2(a),


7.2(b) and 7.2(c), as the case may be, and the


denominator of which is the total production of


Hydrocarbons in the Calendar Year from the Contract


Area. The resulting portion of SSA(Y) allocated


to each applicable Section shall be multiplied by


the applicable percentage necessary to yield the


State its share of Net Hydrocarbons provided for in


each Section. The applicable percentages are


46.6666%, 25% and 25% for Sections 7.2(a), 7.2(b)


and 7.2(c) respectively.


(d) In the first Calendar Year and in any Calendar Year


immediately subsequent to a Calendar Year in which


SSA(Y) is positive, for purposes of applying the


formula set forth in subsection (a) of this


Section 7.4.2, SSA(Y-l) shall be equal to zero.


(7.4.3) Third Share Account


(a) For purposes of the calculation to be made for the


Third Share Account, the following formula shall be


used:


TSA(Y) = TSA(Y-l) X (1 + .50


+ i) + (NCF(Y) - GAS


h/ I(Y) - GAS II(Y))


Where: TSA = Third Share Account





Y = the Calendar Year in





question


NCF = Net Cash Flow





GAS I Value of State Share of


Net Hydrocarbons


determined with reference





-39-


to the First Share


Account


GAS II = Value of State Share of


Net Hydrocarbons


determined with reference


to the Second Share


Account


i = the percentage change for


the Calendar Year in


question in the index of


U.S. consumer prices as


reported for the first


time in the monthly


publication


’’International Financial


Statistics” of the


International Monetary


: Fund.


(b) In any Calendar Year in which TSA(Y) is negative,


the State's share of Net Hydrocarbons determined


with reference to the Third Share Account shall be


zero.


(c) In any Calendar Year in which TSA(Y) is positive,


the Contractor for purposes of this Section shall


be deemed to have earned a pre-tax rate of return


that is equal to or greater than fifty percent


(50%), and the State's share of Net Hydrocarbons in


respect of the Third Share Account shall be an


amount of Net Hydrocarbons, the portion of which


shall be determined by first allocating TSA(Y) to


Sections 7.2(a), 7.2(b) and 7.2(c) by multiplying


the TSA(Y) times a fraction for each applicable


Section, the numerator of which is the amount of


production of Hydrocarbons in the Calendar Year


attributable to the applicable Section 7.2(a),


7..2(b) and 7.2(c), as the case may be, and the


denominator of which is the total production of


Hydrocarbons in the Calendar Year from the Contract


Area. The resulting portion of TSA(Y) allocated





-40-


to each applicable Section shall be multiplied by


the applicable percentage necessary to yield the


State its share of Net Hydrocarbons provided for in


each Section. The applicable percentages are 50%,


50% and 33.3333% for Sections 7.2(a), 7.2(b) and


7.2(c) respectively.


(d) In the first Calendar Year and in any Calendar Year


immediately subsequent to a Calendar Year in which


TSA(Y) is positive, for purposes of applying the


formula set forth in subsection (a) of this


Section 7.4.3, TSA(Y-l) shall be equal to zero.


7.4.4- Total State Share


The total State Share of Net Hydrocarbons in any


Calendar Year shall be the sum of the State Share of


Net Hydrocarbons determined with reference to the


First Share Account, the Second Share Account and


the Third Share Account for such Calendar Year.


7.4.5 Conversion of Natural Gas


For the sole purpose of making the computation in


Sections 7.4.1(c), 7.4.2(c)tand 7.4.3(c) based upon


the production of Hydrocarbons, the quantities of


Natural Gas included in such total production shall


be expressed as Barrels of Crude Oil by converting


Natural Gas to Crude Oil using a formula under


which six thousand cubic feet of Natural Gas


measured at a temperature of 60 °F and at an


atmospheric pressure of 14.65 psi are deemed to


equal one (1) Barrel of Crude Oil, unless otherwise


agreed in writing by the Parties.


7.5 The Contractor, if so directed by the State, shall be


obligated to market all Crude Oil produced and saved from the


Contract Area subject to the provisions hereinafter set forth.


7.6 Except as provided in Section 7.10, the Contractor shall be


entitled to take and receive and freely export the


Contractor's Share of Hydrocarbons.





-41-


7.7 Title to the Contractor's Share of Hydrocarbons under this


Section 7 shall pass to and absolutely rest in the Contractor


at the Delivery Point.


7.8 If the State elects to take any of its share of Hydrocarbons


in kind, it shall so notify the Contractor in writing not less


than ninety (90) calendar days prior to the commencement of


each Semester of each Calendar Year specifying the quantity


that it elects to take in kind, such notice to be effective


for the ensuing Semester of that Calendar Year (provided,


however, that such election shall not interfere with the


proper performance of any Hydrocarbons sales agreement for


Hydrocarbons produced within the Contract Area that the


Contractor has executed prior to the notice of such election) .


Failure to give such notice shall be conclusively deemed to


evidence the election not to take in kind. Any sale of the


State's portion of Crude Oil shall not be for a term of more


than one Calendar Year without the State's consent.


7.9 If the State elects not to take and receive in kind the


State's share of Crude Oil, then the State may direct the


Contractor to market or buy the State's share of production,


whichever the Contractor shall elect to do; Provided, however,


the price paid the State for its share of production shall be


the market price determined in accordance with Section 8. It


being understood that expenses for selling Jiydrocarbons will


be shared by the State and the Contractor.


If the Contractor acts as the State's selling agent, the


Contractor will pay the State for production sold on the


State's behalf within thirty (30) days after receipt of


payment from the purchaser of the State's production.


7.10 In addition to the State's production share in accordance with


the terms of this Contract, the Contractor is obligated to


sell to the State, if requested in writing, a portion of the


Contractor's share of Net Crude Oil for the final internal


consumption in The Republic of Equatorial Guinea in accordance


with Article 15 of the Hydrocarbons Law. The price paid the,


Contractor for such portion of Crude Oil for final internal


consumption in The Republic of Equatorial Guinea shall be the


market price determined in accordance with Section 8.


Detailed procedures governing sales contemplated in this


Section 7.10 shall be established at a later stage by way of


a separate general agreement between the Parties.


7.11 The Contractor and State shall endeavor to promote and develop


a market for Natural Gas discovered in the Contract Area.


Should a Natural Gas discovery be developed and exploited


pursuant to Section 7.11(a), all sales of Natural Gas,


excluding those covered in Section 5.3, shall be equivalent to


Arm's-Length Third-Parties Sales. Natural Gas pricing will be


agreed upon by Parties pursuant to Section 8.4, and revenues


from such Natural Gas Sales*will be included in Gross Receipts


and divided between State and the Contractor in accordance


with Section 7.4.


(a) In the event that the State and the Contractor consider


a Natural Gas discovery is capable of being exploited


commercially, the State and the Contractor shall, taking


into account all pertinent operating and financial data,


use all reasonable endeavors to reach agreement on the


terms and conditions whereupon the Contractor will carry-


out development and exploitation operations on such


discovery. The basis upon which such development and


exploitation will be carried out, including the method of


valuing and pricing Natural Gas shall be agreed between


the State and the Contractor before the Contractor


initiates the operations contemplated by the foregoing.


(b) In no case shall the Contractor be under the obligation


to carry out appraisal operations of a Natural Gas '


Discovery.


7.12 In the event that the Contractor considers that the processing


and utilization of Natural Gas is not economical, the State


may choose to take and utilize such Natural Gas that would


otherwise be flared, in accordance with the provisions of





-43-


Section 8.4(b). All costs and risk of taking and handling


will be for the sole account and risk of the State.


Section 8


VALUATION OF HYDROCARBONS


8.1 For the purposes of determining the quantity of the


Contractor's Share of Hydrocarbons, such Hydrocarbons shall be


valued at the realized price f.o.b. Delivery Point. The same


market price, which reflects sale realizations, shall also be


used in determining the Royalty and the Contractor's Income


Tax.


8.2 Crude Oil sold in Arm's-Length Third-Parties Sales shall be


valued as follows:


(a) All Crude Oil taken by the Contractor, including its


share and the share for the recovery of. Petroleum


Operations Costs, and sold in Arm's-Length Third-Parties


Sales shall be valued at the net realized price f.o.b.


Republic of Equatorial Guinea received by the Contractor


for such Crude Oil.


(b) All of the State's Crude Oil taken by the Contractor and


sold to third parties shall be valued at the net realized


price f.o.b. Republic of Equatorial Guinea received by


the Contractor for such Crude Oil.


8.3 Crude Oil sold other than in Arm's-Length Third-Parties Sales


shall be valued as follows:


(a) By using the weighted average per unit price received by


the Contractor and the State in Arm's-Length Third-


Parties Sales, net of commissions and brokerages paid in


relation to such Arm's-Length Third-Parties Sales, during


the three (3) calendar months preceding such sale,


adjusted as necessary for quality, grade and gravity, and


taking into consideration any special circumstances with


respect to such sales; and


(b) If no Arm's-Length Third-Parties Sales have been made


during such period of time, then, on the basis used to





-44-


value Crude Oil of similar quality, grade and gravity and


taking into consideration any special circumstances with


respect to sales of such similar Crude Oil.


8.4 Natural Gas shall be valued as follows:


(a) Sales to Third Parties - Price of Natural Gas sold in


Arm's-Length Third-Parties Sales shall be agreed upon by


all Parties giving due consideration to economic,


developmental and financial data as well as the intrinsic


fuel value represented by the Natural Gas. Such Natural


Gas shall be valued at the net realized price at the


Delivery Point received by the Contractor for such


Natural Gas.


(b) The State may take at the Delivery Point any Natural Gas


which would otherwise be flared using the following


schedule and pricing:


(i) Royalty Natural Gas (already belonging to the


State);


(ii) Natural Gas used for generation of electricity for


municipal and residential usage, if available, can


then be taken free of charge;


(iii) Natural Gas used for generation of electricity for


industrial purposes and projects will be priced


equal to fifty percent (50%) of the equivalent fuel


oil value based on import price of fuel oil f.o.b.


Equatorial Guinea, unless otherwise mutually agreed


to by the Contractor and the State. The use of this


Natural Gas, however, should not reduce or interfere


with any higher priced Arm's-Length Third-Parties


Sales. All Arm's-Length Third-Party Sales of.


Natural Gas will be conducted by the Contractor.


8.5 Commissions or brokerages incurred in connection with Arm's-


Length Third-Parties Sales, if any, shall not exceed the


customary and prevailing rate.


8.6 During any given Calendar Year, the handling of production


(i.e., the implementation of the provisions of Section 7. and





-45-


the proceeds thereof shall be provisionally dealt with on the


basis of the relevant Work Program and Budget of Petroleum


Operations Costs based upon estimates of quantities of Crude


Oil to be produced, of internal consumption in The Republic of


Equatorial Guinea, of marketing possibilities, of prices and


other sale conditions as well as of any other relevant


factors. Within sixty (60) calendar days after the end of


said given Calendar Year, adjustments and cash settlements


between the Parties shall be made on the basis of the.actual


quantities, amounts and prices involved, in order to comply


with the provisions of this Contract.


8.7 In the event the Petroleum Operations involve the segregation


of Crude Oils of different quality and/or grade and if the


Parties do not otherwise mutually agree:


(a) any and all provisions of this Contract - concerning


valuation of Crude Oil shall separately apply to each


segregated Crude Oil;


(b) each Crude Oil produced and segregated in a given Year


shall contribute to:


(i) the ’’required quantity” destined in such Year to


the recovery of all Petroleum Operations Costs


pursuant to Section 7;


(ii) the ’’required quantity” of Crude Oil to which a


Party is entitled in such Year pursuant to


Section 7;


with quantities, each of which shall bear to the


respective ’’required quantity” (referred to in (i) or


(ii) above) the same proportion as the quantity of such


Crude Oil produced and segregated in such given Year .


bears to the total quantity of Crude Oil produced in such


Year from the Contract Area.


8-8 The Contractor shall give the Ministry notice as soon as


reasonably possible after each sale by the Contractor of Crude


Oil referred to in Section 8.2(a) and Section 8.2(b) excluding


all sales of the Contractor's Share of Hydrocarbons. Zz





-46-


8.9 The State may direct the Contractor to market all the Crude


Oil produced and saved under this Contract in accordance with


Section 7.5. Under Section 7.8 the State may elect to take a


share of its Hydrocarbons in kind; and if the State elects to


not take any Crude Oil in kind, the State may direct the


Contractor to market or buy the State's share of production in


accordance with Section 7.9. If the State directs the


Contractor to dispose of the State's share of Crude Oil under


this Contract, the Contractor shall (i) advise the State of


the price, terms and conditions of any Crude Oil sales


agreement it is prepared to enter into covering the State's


share of Crude Oil under this Contract and (ii) advise the


State of the period of time during which the State may reply


to the Contractor concerning such proposed Crude Oil sales


agreement. During the period of time for reply specified by


the Contractor, the State shall either agree that the State's


Crude Oil is to be sold under the proposed sales agreement or


it shall notify the Contractor that its share of Crude Oil is


not to be sold under such price, terms and conditions and that


the State will dispose of its share notwithstanding the prior


notice under Section 7.9 that the Contractor should dispose of


the State's share. A failure of the State to give notice to


the Contractor within the stated time period shall be deemed


to be an election by the State that the Contractor is to sell


the State's share of Crude Oil under the notified price, terms


and conditions.








Section 9





BONUSES AND SURFACE RENTALS





9.1 On the Effective Date, the Contractor shall pay the State the





sum of Two Hundred Thousand United States Dollars (U.S.





$200,000.00) as a signature bonus.








-47-


9.2 If the Contractor elects to proceed into the Second Subperiod


and the Ministry .grants to the Contractor the right to proceed


into the Second Subperiod, the Contractor shall pay to the


State on or before the commencement of the Second Subperiod


the sum of One Hundred Thousand United States Dollars


(U.S. $100,000.00).


0 9.3 Within ten (10) days after- the Ministry gives its written


approval to a Commercial Discovery and to the items submitted


to the Ministry in accordance with Section 2.5, the Contractor


shall pay the State the sum of One Million United States


Dollars (U.S. $1,000,000.00).


9.4 The Contractor shall pay the State the sum of Two Million


United States Dollars (U.S. $2,000,000.00) after daily


production of Crude Oil from the Contract Area averages 20,000


Barrels per day for a period of sixty (60) consecutive


calendar days; and the Contractor shall also pay the State the


sum of Five Million United States Dollars (U.S. $5,000,000.00)


after daily production of Crude Oil from the Contract Area


averages 50,000 Barrels per day for a period of sixty (60)


consecutive calendar days. Such payments shall be made within


thirty (30) calendar days following the last day of the


respective sixty (60) calendar days' period.


0 9.5 Within thirty (30) days after the Effective Date, the


Contractor shall pay to the State the sum of Fifty Five


Thousand Three Hundred Forty United States Dollars (U.S.


$55,340.00) as a surface rental for the portion of the fir^t





-48-


Calendar Year remaining after the Effective Date being the


first six (6) months of the First Subperiod. On or before


January 31st of the second Calendar Year, Contractor shall pay


to the State the sum of Fifty Five Thousand Three Hundred


Forty United States Dollars (U.S. $55,340.00) as a surface


rental for the remaining six (6) months of the First


Subperiod. Thereafter, commencing with the remaining portion


of the second Calendar Year and on each subsequent Calendar


Year thereafter during, which the Contractor is conducting


Exploration Operations, the Contractor shall pay to the State


an annual surface rental of One United States Dollar (U.S.


$1.00) per hectare for all parts of the Contract Area located


in water depths less than two hundred (200) meters and Fifty


United States Cents (U.S. $0.50) per hectare for all parts of


the Contract Area located in water depths two hundred (200)


meters or greater within which the Contractor is authorized to


conduct Exploration Operations. For the remaining portion of


the second Calendar Year the surface rentals shall be prorated


from the end of the First Subperiod through December 31st of


that year and shall be paid within thirty (30) calendar days


after the end of the First Subperiod. For the purposes of


this Section 9.5, it is agreed that the original Contract Area


contains 18,251 hectares in which the water depth is less than


Two Hundred (200) meters and 203,109 hectares in which the


water depth is Two Hundred (200) meters or greater. After the


second Calendar Year, the surface rental shall be paid in


• 11


-49- Cv]


advance, not less than thirty (30) calendar days before the


beginning of each Calendar Year.


9.6 All payments required by this Section 9 shall be included in


Petroleum Operations Costs, except those costs defined in


Section 9.3 and 9.5.








Section 10 >


PAYMENTS


10.1 All payments that this Contract obligates the Contractor to


make to the State shall be^made to the Treasury of the State


in United States Dollars currency, or at the Contractor's


election, other currency acceptable to the State.


10.2 All payments due to the Contractor shall be made in United


States Dollars currency, or at the State's election, other


currencies acceptable to the Contractor, at a bank to be


designated by the Contractor.


10.3 Unless otherwise specifically provided herein, any payments


required to be made pursuant to this Contract shall be made


within thirty (30) calendar days following the end of the


month in which the obligation to make such payments occurs.


Section 11


TITLE TO EQUIPMENT


11.1 Fixed installations purchased by the Contractor or any of its


subcontractors for use in Development and Production


Operations will be the property of the State at the end of the





-50-


term of this Contract and title thereto and risk thereof shall


pass to and absolutely vest in the State at the end of the


term of this Contract.


11.2 The provisions of Section 11.1 shall not apply to equipment of


the Contractor or equipment of any of its subcontractors which


is not essential for the production of Hydrocarbons or any


equipment which is leased. Said equipment may be freely


exported from The Republic of Equatorial Guinea.


11.3 Notwithstanding anything to the contrary which may be


contained or implied in this Article 11, the Contractor shall


not less than three (3) Years prior to the anticipated date of


any abandonment of a Field, submit a plan of abandonment of


the area concerned. Such plan shall contain Contractor's


estimate of the costs for such abandonment and the State and


the Contractor shall meet and agree on such abandonment plan


and estimated costs as well as the reserve account into which


the money for estimated abandonment costs shall be deposited.


Such account shall be established as an escrow account in a


bank acceptable to the State and the Contractor. All funds


deposited into the reserve account by the Contractor shall be


deemed to be Petroleum Operations Costs incurred during the


Calendar Year in which the deposit was made. In the event the


actual cost of abandonment is less than the reserve account


balance, the remaining funds shall be deemed to be income


received in the Calendar Year during which abandonment was


completed. A /





-51-


 Section 12





UNIFICATION


12. (a) If a Field is designated within the Contract Area and


such Field extends to other parts of The Republic of


Equatorial Guinea in which other Persons have obtained a








Contract for exploration and production of Crude Oil or


Natural Gas, or in which another Contract has been


granted to the Contractor, the Ministry may demand that


the production of Crude Oil and/or Natural Gas be carried


out in collaboration with the other the Contractors which


own the interests in the other area.


(b) If the Contractor discovers deposits of Crude Oil and/or


Natural Gas within the Contract Area which are not


economically recoverable but which may be declared


commercially exploitable by the Contractor and other


contractors of the State controlling areas in which other


deposits have been found if the production includes those


parts of the deposits which extend to areas controlled by


such other contractors of the State, then the Ministry


shall be entitled to request that the Contractor consult


with such other contractors of the State with a view to


determining in their sole discretion whether common


production of Crude Oil and/or Natural Gas may be carried


out.


12. If the Contractor and the other contractors of the State


determine common commercial production may be carried out, the








-52-


 Contractor shall collaborate with the other contractors of the





State in preparing a collective proposal for common commercial


production of the deposits of Crude Oil and/or Natural Gas for


approval by the Ministry.


12.3 If the proposal for common production has not been presented


within the time period established, or if the Ministry does


not approve that proposal, the Ministry may prepare or cause


to be prepared for the account of the Persons involved, a plan


for common production. If the Ministry adopts such plan, and


the Contractor and other Persons involved reach agreement on


such plan, the Contractor shall comply with all such


conditions as agreed upon in such plan.


12.4 This Section 12 shall also be applicable to discoveries of


deposits of Crude Oil or Natural Gas within the Contract Area


that extend to areas that are not within the dominion of The


.r


Republic of Equatorial Guinea; Provided, that in those cases,


the Ministry shall be empowered to impose the special rules


and conditions which may be necessary to satisfy obligations


under an agreement with international organizations or


adjacent states, with respect to the production of such


deposits' of Crude Oil or Natural Gas.


12.5 Within one hundred eighty (180) calendar days following a


request by the Ministry, the Contractor shall agree and


proceed to operate under any cooperative or unitary plan for


the development and operation of the area, Field or pool, or


a part of the same, which includes areas covered by this


-53-


Contract, which the Ministry deems feasible and necessary or


advisable for purposes of conservation. If a clause of a


cooperative or unitary development plan which has been


approved by the Ministry and which by its terms affects the


Contract Area or a part of the same, contradicts a clause of


this Contract, the clause of the cooperative or unitary plan


shall prevail.


Section 13


ARBITRATION


13.1 The Parties agree to submit any dispute, controversy, claim or


difference arising out of or in connection with this Contract


to arbitration under and in accordance with the Arbitration


(Additional Facility) Rules in force on the Effective Date


(’’Facility Rules”) of the International Center for Settlement


of Investment Disputes ("Center”). As of the Effective Date,


the State is not a Contracting State as that term is defined


in the Convention on the Settlement of Investment Disputes


between States and Nationals of Other States which entered


into force on October 14, 1966 ("Convention”). Under this


Contract, the Parties waive all exemptions with respect to


arbitration and to all proceedings and actions that enforce ,


the arbitral award.


13.2 Each of the Parties agrees to and hereby gives its consent to


the jurisdiction of the Center under Article 25 of the


Convention in the event that the jurisdictional requirements


CF


"ratione personae" of this Article shall have been met at the


time when arbitration proceedings are instituted under this


Contract. In such event,the Parties agree to submit any


dispute, controversy, claim or difference arising out of or in


connection with this Contract to the Center in accordance with


the Arbitration Rules in force on the Effective Date set forth


by the Convention.


13.3 In the event of any dispute, controversy, claim or difference


arising out of or in connection with this Contract, the


Parties shall endeavor to^settle such dispute amicably. If


within three (3) months after a notice of such a dispute the


Parties have not reached a settlement, the dispute shall at


the request of either Party be referred to arbitration in


accordance with this Section 13.


13.4 It is hereby stipulated by the Parties that the Contractor is


.r


a national of United States of America.


13.5 It is hereby agreed that the consent to the jurisdiction of


the Center expressed above shall equally bind, any successor


in interest to the present Government of The Republic of


Equatorial Guinea and to the Contractor to the extent that the


Center can assume jurisdiction over a dispute between such


successor and the other Party.


13.6 It is hereby agreed that the right of the Contractor to


request the settlement of a dispute by the Center or to take


any step as a party to a proceeding pursuant to this Agreement


shall not be affected by the fact that the Contractor has





---55 ---


received partial compensation on the conditional or an


absolute basis,, from any third party (whether a private


person, a state, a government agency or an international


organization) , with respect to any loss or injury that is the


subject of the dispute; Provided, that The Republic of


Equatorial Guinea may require evidence that such third party


agrees to the exercise of those rights by the Contractor.


13.7 Any arbitral tribunal constituted pursuant to this Contract


shall apply the law of The Republic of Equatorial Guinea and


generally accepted principles of international law. Such


arbitral tribunal constituted pursuant to this Contract shall


have the power to decide a dispute ex aequo et bono.


13.8 Any arbitration under this Section 13 shall be conducted by a


tribunal constituted by three (3) arbitrators who shall not


have the same nationality as the Parties. The arbitration


.t


shall be held at a mutually agreeable location using the


.Spanish language. The arbitral tribunal's award shall be


final, and it shall be binding on the Parties and shall be


immediately enforceable.








Section 14





BOOKS AND ACCOUNTS AND AUDITS


14.1 BOOKS AND ACCOUNTS





The Contractor shall be responsible for keeping complete books





and accounts reflecting all Petroleum Operations Costs as well


as monies received from the sale of Crude Oil and Natural Gas,





-56-


 consistent with modern petroleum industry practices and


proceedings as described in Exhibit ”C” attached hereto. Such


books and accounts shall be maintained in United States





Dollars. Should there be any inconsistency between the


provisions of this Contract and the provisions of Exhibit "C",


then the provisions of this Contract shall prevail.


14.2 AUDITS





The State at its sole cost shall have the right to inspect and


audit the Contractor's books and accounts relating to this





7


Contract m accordance with Section 4.J&'. If the Contractor's


,.-*r


books and accounts are not available for inspection in the


Republic of Equatorial Guinea, the State shall have the right


to audit Contractor's books and accounts in the registered


office: in this case, expenses for the audit will be paid by


Contractu. In addition, the State may require the Contractor


to engage the Contractor's independent"accountants to examine,


in accordance with generally accepted auditing standards, the


Contractor's books and accounts relating to this Contract for


any Calendar Year or perform such auditing procedures as


deemed appropriate by the State. A copy of the independent


accountant's report or any exceptions shall be forwarded to


the State within sixty (60) calendar days following the


completion of such audit. Any costs incurred by the


1/^ Contractor in complying with the provisions of this


Section 14.2 shall be included in Petroleum Operations Costs.











-57-


 Section 15





NOTICES


15.1 Any notices required or given by either Party to the other


shall be deemed to have been delivered when properly


acknowledged for receipt by the receiving Party. All such


notices shall be addressed to:


The Ministry of Mines and Hydrocarbons:


With Offices at: Malabo at the


Republic of Equatorial Guinea


Telephone #: 3405


Telex #: 9395405 EG


-Facsimile #:


The Contractor:


With Offices at: 1201 Louisiana, Suite 1400


Houston, Texas, U..S.A. 77002


Telephone #: (713) 654-9110


Facsimile #: (713) 653-5098


Either Party may substitute or change such address on written


notice thereof to the other.


Section 16


LAWS AND REGULATIONS


16.1 For purposes of this Contract the laws of The Republic of


Equatorial Guinea as existing and in force on the Effective


Date shall govern as well as generally accepted principles of


international 1aw.





Section 17


FORCE MAJEURE


17.1 Except as otherwise provided in this Section 17.1, each Party


shall be excused from complying with the terms of this


Contract, except for the payment of monies then due, if any,


* ■ T


-58-


for so long as such compliance is hindered or prevented by


riots, strikes, wars (declared or undeclared), insurrections,


rebellions, terrorist acts, civil disturbances, dispositions


or orders of governmental authority, whether such authority be


actual or assumed, acts of God, inability to obtain labor,


equipment, supplies or fuel, shortages of or delays in


transportation or by act or cause that is reasonably beyond


the control of such Party, such cases being herein sometimes


called ’’Force Majeure.” If any failure to comply is


occasioned by a governmental law, rule, regulation,


disposition or’ order of the Government of The Republic of


Equatorial Guinea as aforesaid and the affected Party is


operating in accordance with accepted international petroleum


industry practice in the Contract Area and is making


reasonable efforts to comply with such law, rule, regulation,


disposition or order, the matter shall be deemed beyond the


control of the affected Party except that the State cannot


claim Force Majeure because of such act of the State. In the


event that either Party hereto is rendered unable, wholly or


in part, by any of these causes to carry out its obligations


under this Contract, it is agreed that such Party shall give


notice and details of Force Majeure in writing to the other


Party within seven (7) calendar days after its occurrence. In


such cases, the obligations of the Party giving the notice


shall be suspended during the continuance of any inability so


caused. Both parties shall do all things reasonably within


their power to remove such cause.


Section 18


TEXT


18.1 This Contract embodies the entire agreement and understanding


between the Contractor and the State relative to the subject


matter hereof, and supersedes and replaces any provisions on


the same subject in any other agreement, whether written or


-59- .


oral, between the Parties, made prior to the date of signature


of this Contract.


18.2 This Contract is drawn up in the English and Spanish


languages. If any question regarding the interpretation of


the two texts arises, then the Spanish text shall prevail.


Section 19


EFFECTIVENESS


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


19.2 This Contract shall not be annulled, amended or modified in


any respect, except by the mutual consent in writing of the


Parties hereto.


19.3 The State shall promptly take all measures necessary to effect


the approval of this Contract by an act having the force of


law thereby providing that this Contract shall have force of


law.


IN WITNESS WHEREOF, the Parties hereto have executed this


Contract, in four (4) originals and in the English and Spanish


languages, as of the day and year first above written.


THE MINISTRY OF MINES AND


HYDROCARBONS OF THE REPUBLIC


OF EQUATORIAL GUINEA























CORPORATION




















-60-


 Exhibit "A”





Description of Contract Area














BLOCKS B-10, B-ll, C-9, C-10 & C-ll





Block B-10 (Triangle)


SW Corner Long. International Border* Lat. 3° 45' N


NE Corner Long. 8° 00 ' e; Lat. International Border*


SE Corner Long. 8° 00' e; Lat. 3° 45' N











Block B-ll


SW Corner Long. 8° 00 ' E; Lat. 3° 45' N


NW Corner Long. 8° 00' E; Lat. International Border*


NE Corner Long. 8° 15 ' e; Lat. International Border*


SE Corner Long. 8° 15 ' e; Lat. 3° 45' N


Block C-9 (Triangle)


SW Corner Long. International Border* Lat. 3° 30' N


NE Corner Long. 7° 45' e; Lat. International. Border*


SE Corner Long. 7° 45' e; Lat. 3° 30' N





Block C-10


SW Corner Long. 7° 45' E; Lat. 3° 30' N





NW Corner Long. 7° 45' e; Lat. International Border*


NE Corner Long. 8° 00' E; Lat. 3° 45' N


SE Corner Long. 8° 00 ' E; Lat. 3° 30' N


.r


Block C- -11


SW Corner Long. 8° 00' E; Lat. 3° 30 ' N


NW Corner Long. 8° 00 ' E; Lat. 3° 45 ' N


NE Comer Long. 8° 15' E; Lat. 3° 45' N


SE Corner Long. 8° 15 ' E; Lat. 3° 30' N














*The northern and/or western boundaries of Blocks B-10, B-ll


C-9 and C-10 coincide with the International Boundary.









































-61-


 US^IC





EQUATORIAL GUINEA





NIGERIA CAME R O O N MAP OF


CONTRACT AREA








0 20,000 40,000


L= __________________1


Scab in Motors











CONTRACT AREA


BLOCK htcTAneo Acnes


8-10 4.236.7 . W. 4 66.4


B-11 48,614.1 110,678.3


c-e 20,763.8 61.307.6


c-» 60,4110 171.616.8


c-n 78,434.1 103,810.6


60m TOTAL 221.360.6 648.070.7





8°m (262.








MmR


200m (656')-


CONTRACT





AREA
































D-10|











G U I N Ej





c->o:








" '°00m <5904‘)








EXHIBIT "B





 Exhibit "C’»





Attached to and made an integral part of the


Production Sharing Contract (the "Contract") between


THE STATE OF THE REPUBLIC OF EQUATORIAL GUINEA


ON THE ONE PART AND


UNITED MERIDIAN INTERNATIONAL CORPORATION, THE CONTRACTOR,


on the other part,


dated the 29th day of June , 1992


ACCOUNTING PROCEDURE


Section 1


General Provisions


1. Purpose


The accounting procedure herein provided for is to be followed


and observed in the performance of either Party's obligations


under the Contract to which this Exhibit is attached.


2. Accounts and Statements


The Contractor's accounting records and books will be kept in


accordance with generally accepted and recognized accounting


systems, consistent with accepted international petroleum


industry practices and procedures. Books and reports will be


maintained and prepared in accordance with methods established


by the Ministry. The chart of accounts and related account


definitions will be prescribed by the Ministry. Reports will


be organized for the use of the Ministry in carrying out its


management responsibilities under the Contract.


Section 2


Petroleum Operations Costs


1. Definition of Petroleum Operations Costs for Purposes of


Recovery


For any Calendar Year in which commercial production occurs,


Petroleum Operations Costs for recovery pursuant Section 7.2


of the Production Sharing Contract consist of:


x (a) current Calendar Year's non-capital costs,


(b) current Calendar Year's capital costs,





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(c) interest as set forth in Section 3.3 below, and


(d) all prior Year's unrecovered Petroleum Operations Costs.


2. Def-inition of Non-capital Costs


Non-capital costs means those Petroleum Operations Costs


incurred that relate to current Calendar Year's operations.


In addition to costs relating only to current operations, the


cost ’ of surveys and the intangible costs of drilling


exploration and development Wells, as described in


Sections 2(c), 2(d) and 2(e) below, will be classified as non-


capital costs. Non-capital costs include, but are not limited


to the following:


(a) Labor, materials and services used in day to day Crude


Oil Well operations, Crude Oil Field production


facilities operations,’ secondary recovery operations,


storage, handling, transportation, and delivery


operations, Natural Gas Well operations, Natural Gas


Field production facilities operations, Natural Gas


transportation, and delivery operations, Natural Gas


processing auxiliaries and utilities, and other operating


activities, including repairs and maintenance.


(b) Office, services and general administration---General


services including technical and related services,


material services, transportation, rental of specialized


and heavy engineering equipment, site rentals and other


rentals of services and property, personnel expenses,


public relations, and other expenses abroad.


(c) Development and Production drilling---Labor, materials and


services used in drilling Wells with the object of


penetrating a proven reservoir, including the drilling of


delineation Wells as well as redrilling, deepening or re-


completing Wells, and access roads, if any, leading


directly to Wells.


9 / (d) Exploratory Drilling---Labor, materials and services used


f in the drilling of Wells; with the object of finding








-64-


unproven reservoirs of Crude Oil and Natural Gas, and


access roads, if any, leading directly to Wells.


(e) -- Surveys---Labor, materials and services used in aerial,


geological, topographical, geophysical and seismic


surveys, and core hole drilling.


(f) Other exploration expenditures---Auxiliary or temporary


facilities having lives of one (1) year or less used in


exploration and purchased geological and geophysical


information.


(g) The signature bonus and production bonuses payable in


T.Z- 4


accordance with Sections 9.1*and 9./ of the Production


Sharing Contract.


3. Definition of Capital Costs


Capital Costs means expenditures made for items that normally


have a useful life beyond the Year incurred. Capital costs


include, but are not limited to, the following:


(a) Construction utilities and auxiliaries---Work shops, power


and water facilities, warehouses, and field roads other


than the access roads mentioned in Sections 2(c) and 2(d)


above. Cost of Crude Oil jetties and anchorages,


treating plants and equipment, secondary recovery


systems, gas plants and steam systems.


(b) Construction housing and welfare---Housing, recreational


facilities and other tangible property incidental to


construction.


(c) Production Facilities---Offshore platforms (including the


costs of labor, fuel, hauling and supplies for both the


offsite fabrication and onsite installation of platforms,


and other construction costs in erecting platforms and


installing submarine pipelines), wellhead equipment,


subsurface lifting equipment, production tubing, sucker


rods, surface pumps, flow lines, gathering equipment,


's' delivery lines and storage facilities.


(d) Movables---Surface and subsurface drilling and production


tools, equipment and instruments, barges, floating craft,





-65-


 automotive equipment, aircraft, construction equipment,


furniture and office equipment and miscellaneous





equipment. ‘


Section 3


Accounting Methods to be Used to Calculate Recovery of Petroleum


Operations Costs and Income Taxes


1. Depreciation


Depreciation will be calculated from the Calendar Year in


which the asset is placed into service, with a full Year's


depreciation allowed the initial Calendar Year. Depreciation


of capital costs only for purposes of Income Tax Calculation


will be calculated over four (4) Calendar Years using the


straight line method.


The un-depreciated balance of assets taken out of service will


not be charged to Petroleum Operations Costs but will continue


to depreciate based upon the lives described above, except


where such assets have been subjected to unanticipated


destruction, for example, by fire or accident.








2. Overhead Allocation


General and administrative costs, other than direct charges,


allocable to this operation should be determined by a detailed


study, and the method determined by such study shall be


applied each Calendar Year consistently. The method selected


must be approved by the Ministry, and such approval can be


reviewed periodically by the Ministry and the Contractor.


3. Interest Recovery


Interest on loans obtained by a Party from Affiliated or


parent companies or from third-party non-Affiliates at rates


not exceeding prevailing commercial rates for investments in


Petroleum Operations may not be recoverable as Petroleum


Operations Costs and may be deducted from income when


calculating the Contractor's Income Tax liability.





-66-


4. Inventory Accounting


The costs of non-capital items purchased for inventory will be


recoverable in the Calendar Year in which the items have been


landed in The Republic of Equatorial Guinea.


5. Insurance and Claims


Petroleum Operations Costs shall include premiums paid for


insurance normally required to be carried for the operations


relating to the Contractor's obligations conducted under the


Contract. All expenditures incurred and paid by the


Contractor in settlement of any and all losses, claims,


damages, judgments, and other expenses, including monies


relating to the Contractor's obligations under the Contract


shall be included in Petroleum Operations Costs less any costs


recovered by the Contractor by way of insurance settlement


provided that such expenditures do not arise or result from


the Contractor's proven gross negligence.


C:\UMC\GUINEA\PSC-ALT.4


















































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