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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
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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/
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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 .
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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,
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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
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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.
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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.
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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
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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
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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.
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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
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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,
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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.
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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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